Favour USD over EUR & GBP; PBoC to ignore elevated CPI

The US dollar has potential to further recover ground this week. The PBoC is expected to ignore elevated CPI.
Philip Wee, Nathan Chow11 Nov 2019
    Photo credit: AFP Photo

    FX: Relative value favours USD over EUR and GBP

    The US dollar has potential to further recover ground this week. Fed Chairman Jerome Powell is likely to tell the US Joint Economic Committee on November 13 that the mid-adjustment cycle has been completed after the third rate cut on October 30. Two Fed Presidents (Chicago and New York) did not see the need for more rate cuts. The USD Index (DXY) will get a lift from its largest and weakest component, the euro. Germany is expected to report a mild technical recession on November 14. Consensus expects real GDP growth to come in at -0.1% QoQ saar in 3Q19, the same as the prior quarter. If so, this should help vindicate the ECB’s decision to restart its asset purchase programme.

    The UK election on December 12 is negative for the British pound. First, opinion polls have pointed to another hung parliament. The lead the ruling Conservative Party has over the opposition Labour Party has continued to narrow. Second, Moody’s has placed the country’s Aa2 debt rating under negative watch. In their bid to win voter support, the main political parties have pledged to step up fiscal spending and government borrowing without plans to finance them. Third, the Bank of England has leaned towards monetary easing; two of nine members voted for a cut at last week’s meeting. Don’t discount negative surprises in today’s preliminary 3Q19 GDP release. Put simply, Brexit is no longer the only threat to the pound.

    China: PBoC to ignore elevated CPI

    October’s consumer price index (CPI) rose 3.8% YoY, the most since January 2012. Once again, disruption to pork supply caused by African swine flu was mostly to blame. Pork prices surged 101.3%, accounting for over 60% of the CPI’s spike. However prices of nonfood items and factory-gate prices continued to show signs of softness, pointing to a weakened domestic demand. In particular, core inflation remained benign at 1.5%, the 14th consecutive month of a reading below 2%. Producer price index (PPI) dropped 1.6% after declining 1.2% previous month. The contraction was largely attributed to falling raw material prices, including in the oil and gas extraction as well as ferrous metal smelting industries. It aligns with other indicators showing shrinking domestic activities. Imports growth fell 6.4% in October, whilst the official PMI contracting for a sixth straight month.

    Looking ahead, CPI will likely stay above 3% in Q4, and could rise to 4-5% around the Lunar New Year holiday. Yet PPI is expected to stay within a negative growth range amid lackluster industrial production. The People’s Bank of China will thus keep the credit tap open to bolster growth. In line with our expectations, PBoC injected RMB400bn of medium-term lending facility (MLF) into the interbank market last week. It also lowered the one-year MLF rate by 5bp to 3.25%. The move paves the way for a reduction in the loan prime rate on 20 November.

    Philip Wee

    FX Strategist - G3 & Asia

    Nathan Chow


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