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Dollar poised to benefit as China economic growth takes virus hit – Citi

  
  Analysis
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The firm says that the dollar is well placed to benefit from the situation compared to other G-10 currencies in the market

Dollar

Citi’s currency strategist, Adam Pickett, says that “consensus expectations have not yet fully adjusted to the reality of weaker Chinese growth that will result from efforts to contain COVID-19”.

Adding that the market is underpricing the possibility of China’s economy being dealt a blow and overvaluing the prospects of recent stimulus measures. As such, Pickett argues that the dollar stands to benefit and outperform in this scenario.
Noting that the greenback should outperform against open manufacturing economies such as the NOK, NZD and EUR. Although safe havens may perform better, the US economy and key trading partners are “likely to be insulated”, he argues.
Additionally, he points out that market hopes for meaningful Chinese stimulus to ensure a V-shaped recovery are overblown – saying that the current Chinese administration “still prefers slower, sustainable growth than previous cycles”.
This adds to the NAB dollar call earlier in the day here but again, I would say it is conditional upon which currencies you’re looking at and on what scenario.
A highly risk-off landscape would still favour the yen more so than the greenback but against the likes of the kiwi and euro, the dollar definitely will shine if the situation plays out as what is described by Pickett above.

Coronavirus FX implications: The good, the static, & the bad

  
Analysis, Forex
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What to watch for in the outbreak

 3 scenarios for Coronavirus and its FX implications.

“Coronavirus was unknown to asset markets two months ago, may disappear as a factor within a few months, but may also evolve into a major global supply shock if it spreads and intensifies. We lay out the alternative scenarios on how the disease could evolve and what the short-medium term FX responses might be. Our subjective assessment is that current asset market pricing probably lies somewhat closer to the static than good scenarios,” SC notes.

“FX winners (W) and losers (L) under our good scenario where the disease abates:

•   W: CAD, CNY, MXN, KRW, IDR, RUB

•   L: USD, CHF, JPY

FX winners (W) and losers (L) under our static scenario of neither major intensification nor elimination:

•   W: USD, JPY, CHF, MXN

•   L: KRW, TWD, THB, SGD, MYR, AUD, NZD, EUR, CNY, CAD

FX winners (W) and losers (L) under our bad scenario where the disease intensifies and spreads:

•   W: JPY, USD

•   L: KRW, TWD, THB, SGD, MYR, IDR, INR, AUD, NZD, EUR, CNY, CAD,”

EUR/CHF threatens a three-year low as some risk aversion creeps in

  
Analysis, Forex
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The euro is soft on all fronts

The euro is the laggard today as the pain trade continues for euro bulls.
EUR/CHF is no exception as the pair threatens the low of the year at 1.0663. We’re just 5 pips from there now and if that breaks, the next big support level is the 2017 low of 1.0632.
The euro is soft on all fronts

More risk aversion is creeping in today as the minutes tick by. Stocks in the US are holding up but Treasury yields are sliding and gold is climbing.

Key takeaways from the BOE policy statement today

  
  Analysis
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Where does the pound go from here?

The most significant change in the statement is the forward guidance. Let’s take a look at the changes as per below.

December policy statement:

“Monetary policy could respond in either direction to changes in the economic outlook in order to ensure a sustainable return of inflation to the 2% target. The Committee will, among other factors, continue to monitor closely the responses of companies and households to Brexit developments as well as the prospects for a recovery in global growth. If global growth fails to stabilise or if Brexit uncertainties remain entrenched, monetary policy may need to reinforce the expected recovery in UK GDP growth and inflation. Further ahead, provided these risks do not materialise and the economy recovers broadly in line with the MPC’s latest projections, some modest tightening of policy, at a gradual pace and to a limited extent, may be needed to maintain inflation sustainably at the target.”

January policy statement:

“Monetary policy will be set to ensure a sustainable return of inflation to the 2% target. Policy may need to reinforce the expected recovery in UK GDP growth should the more positive signals from recent indicators of global and domestic activity not be sustained or should indicators of domestic prices remain relatively weak. Further ahead, if the economy recovers broadly in line with the MPC’s latest projections, some modest tightening of policy may be needed to maintain inflation sustainably at the target.”

I’ve marked in bold the key changes. So, what are they saying?

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“Global standard” gauge of currency misalignment has GBP 22% undervalued against the USD

  
Analysis, Forex
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Here’s a bit of (useful) fun, The Economist’s “Big Mac index” to gauge whether currencies are at their “correct” level against the US dollar.

Its based on the currency valuation model of purchasing-power parity (PPP), i.e. that “in the long run exchange rates should move towards the rate that would equalise the prices of an identical basket of goods and services (in this case, a burger) in any two countries”.Says the magazine (link here, may be gated(

  • Burgernomics was never intended as a precise gauge of currency misalignment, merely a tool to make exchange-rate theory more digestible. Yet the Big Mac index has become a global standard, included in several economic textbooks and the subject of dozens of academic studies. 

Some of the results (more at that link)

The Economist's "Big Mac index" currencies US dollar

Big week coming up for the pound

  
Analysis, Forex
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The near-term sentiment in the pound continues to be driven by odds of a BOE rate cut ahead of the 30 January policy meeting

  • 21 January – UK November average weekly earnings, unemployment rate
  • 21 January – UK December jobless claims change, claimant count rate
  • 24 January – UK January flash manufacturing, services, composite PMI
It is all about data, data, data for the pound this week. With the hot topic being a possible rate cut by the BOE, all eyes will turn towards the labour market report tomorrow and post-election PMI data later on Friday (⬆️).
Currently, odds of a 25 bps rate cut by the BOE on 30 January sit at ~70% – a key threshold that has historically seen the central bank take action when it comes to rate decisions.
GBP

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US Treasury says real dollar is 8% above its 20 year average

  
  Analysis
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Treasury’s semi-annual report does not list China as a currency manipulator

US Treasury:
  • says currency practices of 10 countries require close attention, but no major US trade partner met criteria for currency manipulation
  • Says China made ‘enforceable commitments to refrain from competitive devaluation’ in phase 1 trade deal withUS
  • says China should ‘no longer be designated as a currency manipulator’ in semi-annual currency report
  • China needs to take necessary steps to avoid a persistently weak currency
  • China also agreed in trade deal to publish relevant data on exchange rates and external balances
  • Says improved economic fundamentals and structural policy reforms would underpin stronger Chinese yuan over time
  • Says continuing to monitor currency practices of China, Germany, Ireland, Italy, Japan, South Korea, Malaysia, Singapore, Vietnam and Switzerland
  • China must take decisive steps to further rebalance economy, allow greater market openness to strengthen long-term growth prospects
  • Switzerland should use ample fiscal space to more forcefully support domestic activity – treasury
  • Japan should enact bolder structural reforms to strengthen domestic demand
  • Germany’s current account surplus remains largest in world, sees urgent need for Germany to cut taxes, boost domestic investment
  • Ireland only meets one of three criteria to be on monitoring list, would be removed in next report if that remains the case
  • Taiwan, Thailand close to triggering thresholds to be added to currency monitoring list
  • continued dollar strength is “concerning” given INF’s judgment that dollar is overvalued on a real effective basis
  • Says real dollar remains about 8% above its 20-year average; sustained dollar strength would likely exacerbate persistent trade, current account imbalances

I wonder if politics played a role in removing the currency manipulator label from China? LOL, I’m kidding. I am not wondering at all.

Treasury's semi-annual report does not list China as a currency manipulator 

EUR/USD sits slightly lower near 1.10, what levels to look out for today?

  
Analysis, Forex
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The dollar is keeping a little more firm in the European morning so far

EUR/USD H1 27-11

And that is helping to see EUR/USD linger near the 1.1000 handle with the low today reaching 1.1003. Sellers remain in near-term control of the pair but trading may be a bit more tepid for now as we look towards a barrage of data to come from the US later.
That will be the key risk event for the dollar and also for EUR/USD in trading today.
But let’s take a look at what are the key levels that buyers and sellers may look to lean on should we see price action move around later on.
The 1.1000 level in itself is already a key one to watch but add in large expiries rolling off today around 1.0995-00, it only makes the figure level more of a magnet for now.
Below that, the 14 November low @ 1.0989 will be a notable one to watch as well. A fall below that will accelerate momentum to the downside for sellers.
Meanwhile, for buyers, any move higher needs to work towards breaking the 100-hour MA (red line) @ 1.1032 first before challenging the 200-hour MA (blue line) @ 1.1049.
A break above those two levels will see buyers reclaim near-term control before potentially moving towards a test of the 100-day moving average @ 1.1080 with further swing region resistance seen around 1.1090-00 next.
Those will be the key technical levels to watch out for now but how price action will play around these levels will depend on how the slate of data from the US plays out later today.

Wall Street hits new record as takeovers help spark rally

  
Analysis, US Market
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Investors gobbled up US stocks to begin the Thanksgiving week, as trade optimism and a flurry of corporate dealmaking pushed all three major indices to new record highs. The S&P 500 surpassed its peak set one week ago, with technology shares leading the way amid renewed hope the US and China can reach a preliminary trade agreement. The benchmark index climbed 0.8 per cent, ending the day near its session high.

The tech-heavy Nasdaq Composite locked up a record closing high of its own, rising 1.3 per cent. Semiconductor groups — seen as a benefactor from warmer trade relations — helped spark gains in the tech sector. The Philadelphia semiconductor index, which tracks 30 companies in the industry, leapt 2.4 per cent, its best performance in a month. The Dow Jones Industrial Average was back above the 28,000 threshold, as it added 0.7 per cent. Investors’ hopes for a thaw in the US-China trade dispute have helped stoke a record run on Wall Street in recent weeks.

The S&P 500 has traded higher in six of the past seven weeks and has gained more than 3 per cent this month. New guidelines from Beijing on strengthening intellectual property safeguards gave Wall Street renewed confidence on Monday that a “phase one” deal could materialise before December 15, when new American tariffs on Chinese goods are due to begin. China’s alleged theft of intellectual property has been a sticking point in negotiations with Washington.

A series of big deals, including LVMH’s planned $16.6bn takeover of Tiffany and Charles Schwab’s $26bn deal to combine with TD Ameritrade, also gave a boost to stocks. The rally followed on the heels of gains around the world. The Europe-wide Stoxx 600 was up 1 per cent.

The Hang Seng surged 1.5 per cent. Some safe-haven assets took a hit amid the shift to equities. Gold fell 0.5 per cent, and the Japanese yen weakened by 0.3 per cent against the US dollar. The dollar index edged fractionally higher. The yield on the 10-year Treasury note fell 1.4 basis points to 1.7603 per cent.

Argentina to limit USD purchases for individuals to $200 a month (down from $10,000)

  
Analysis, Economy
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Argentina’s central bank has adjusted its currency controls to limit dollar purchases for individuals

  •  to $200 a month, down from $10,000
The President of the central bank to speak Monday
  • at 8:30 am local time
Headlines via Reuter.
This is one way to attempt to control capital flight. The controls come as Argentina elects Alberto Fernandez its new president. Voters tired of economic austeity.
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