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Euro Remains Unimpressed by Cyclical Tailwinds

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Fundamental analysis of Forex market

Market movers today

  • As the festive season approaches and Christmas calm settles in the markets, the data flow in Europe and the US will slow this week.
  • In the UK, PM Boris Johnson continues to aim to get his Brexit bill through Parliament ahead of the 31 January deadline.
  • In the US, core capital goods orders and new home sales for November are released. The former showed a surprising rise in October and the November data will shed light on how robust this trend is and whether the worst of the capital spending cutbacks are behind for the US economy. We remain sceptic about a marked rebound in capex investment, despite the recent accord around a ‘phase one’ deal (see also US macro outlook: Two pace economy).

Selected market news

Following the US-China phase-one deal, the IMF is set to revise its China GDP forecast higher for 2020 to around 6% from 5.8%. This was the message from the new IMF Director Kristalina Georgieva in an interview with Caixin. Consensus seems to be forming around 6% growth in 2020. The signal coming out of the recent China Economic Work Conference was also that the new growth target for 2020 will be around 6%. It will not be revealed officially, though, until the National People’s Congress starting on 5 March.

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EUR/USD took a step lower on Friday from having hovered above 1.11 to now being slightly below. Although we recently took our 12M forecast to 1.15, we still believe the lack of rate support for EUR caps upside in the pair, i.e. the ECB is essentially a constant in FX markets for now. Improving global growth expectations, rising commodity prices, inflation expectations and broadly rising equity prices continue to have little to no correlation to moves in the EUR but have been quite supportive for SEK and NOK, on the other hand. We thus look for EUR/USD to trade close to 1.11 on 1-3M.

UK consumer and business confidence rose marginally in December but both remain subdued. Both surveys were conducted before the election so based on these numbers we cannot say anything about consumers/business sentiment after the clear victory by Boris Johnson. Looking ahead, continued weakness or slightly improving sentiment data will be highly important for whether and/or when Bank of England will cut interest rates, though we expect such to happen in Q1.

Emerging market currencies continue to appear solid, with notably the Russian Ruble and Latin America in the lead, whereas PLN, CZK and HUF have not strengthened much. The lag in Eastern Europe is likely a result of German data continuing to be less-than-impressive and EUR/USD remaining flat. Turkey’s Lira is the underperformer in Emerging Markets which in our view is likely due to the rising oil price and increased FX fragility from interest rates having been lowered significantly in the past year.

Fixed income markets

We are approaching the holiday season and activity is going to be low until next year. There are no major key economic data releases from the Eurozone or Scandinavia today, but we have an Italian auction today, where the Italian debt office will sell up to EUR 2bn in a 2Y 0%-coupon bond.

Most of the European government debt agencies have released their funding plans for 2020. On Friday, we got details from Finland and Italy. Finland plans to sell some EUR 14bn in long-term bonds (RFGBs and EMTNs) as they plan to finance 60% of the gross funding need of EUR 23.2bn by RFGBs an EMTNs. They plan a new 10Y benchmark bond in Q1, 2029 as well as a 5Y or a 15Y benchmark later in 2020. The second action normally takes place by the end of August. Hence, there was no big surprises in the funding statement relative to the investor relationship presentation released at an earlier stage.

Italy will also become a Green bond issuer in 2020 according to their funding plan for 2020. Italy will sell EUR 240-245bn in medium to long-term bonds. This is more or less unchanged from 2019 and in line with our own estimate. They plan to sell in the 50Y segment if the market conditions allow for it. This will be the first time in four years that they look at issuing in the 50Y segment.

The rating agencies have issued all issued their rating calendar dates for 2020.

FX markets

EUR/USD took a step lower on Friday from having hovered above 1.11 to 10.82. Although we recently took our 12M forecast to 1.15, we still believe the lack of rate support for EUR caps upside in the pair, i.e. the ECB is essentially a constant for FX markets for now and thus look for EUR/USD to trade close to 1.11 on 1-3M.

The CNY has traded in close correlation with developments in the US-China trade war. When Trump pushed the tariff button once again over the summer, USD/CNY jumped higher from below 6.90 to close to 7.20. But since the phase-one talks starting in the autumn the CNY has regained some of the lost territory. Following the announcement of the phaseone deal USD/CNY dropped but has since been treading water around the 7-level awaiting further developments. We look for further downside in USD/CNY towards 6.8 in 2020 due to our view of easing trade tensions and moderate recovery in China. It will probably not be such a straight line, though, as we expect bumps in the road in trade talks. See more in the China Weekly Letter, Growth on track for 6% in 2020.