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Australia - weak retail trade tip of the iceberg; RBA set to double-down on dovish policy messaging

Australia - weak retail trade tip of the iceberg; RBA set to double-down on dovish policy messaging                                                

  • AUD: Australia’s preliminary retail trade for June declines -1.8%, much weaker than consensus and Citi analysts’ forecast of -0.7%. The -1.8% monthly decline erases gains from the previous three months, taking the level of retail trade below that recorded in March. Nearly half of the Australian population is now in strict lockdown – 3 Australian states are now in lockdown with NSW having extended its lockdown to the end of July which will likely persist into August, VIC has extended its lockdown until late July, while SA has entered a 7-day lockdown.     

  • AUD: The negative June retail trade result is unlikely to be the last with retail trade growth for July and GDP growth for Q3 likely to be negative too. Citi analysts do not rule out weakness extending through August and as  for Australian Q3 GDP growth, this could print at -0.5%, a far cry from Citi’s pre-lockdown estimate of +0.8%. Mechanically, this would likely reduce the Citi analysts forecast for 2021 average GDP growth from 5.7% to 4.9% and may see RBA delaying bond tapering without losing credibility. Indeed, recent reports suggest that the Bank could be considering delaying its tapering, which is scheduled to begin in September. The July Board minutes noted “members agreed that there should be flexibility to increase or reduce weekly bond purchases”. This is now indeed the risk scenario; even if the Bank doesn’t delay, it’s unlikely to taper further in November.           


Singapore COVID-19 restrictions further tightened, but with smaller sequential drags than in May/June                      

  • SGD: Singapore’s COVID-19 restrictions for 22 July to 18 August will be tightened further. Citi analysts however expect these should exert a far smaller sequential drag on growth than in May/June, given lower starting point, while any disinflationary impact on core CPI will likely be limited. The latest restrictions should affect around 8% of the economy. Moreover, the temporary drag on 2021 could be cushioned by unleashed pent-up demand once restrictions are lifted. For now, Citi analysts maintain their Singapore 2021 GDP forecast of 7%, which requires 2H21 sequential growth to average 2.3% QoQ SA. And notwithstanding the latest measures, the hurdle for more stringent restrictions could be raised further once 75% of the population is fully vaccinated (likely by late August).        

  • SGD: While some temporary disinflation in consumer services (24% of the core CPI basket) on latest restrictions remains possible, May CPI data suggests that the overall impact could be smaller. Citi analysts maintain their Singapore 2021 average core CPI forecast of 0.7-0.8% for now but await June CPI (23 July) before making a fuller assessment. Beyond these transitory factors, risks to inflation remain tilted to the upside and the impact of nearly 2% headline inflation (May: 2.4%) and the spillover impact on inflation expectations should be closely watched, with the latest SMU Index of one-year core inflation expectations rising to 3.2% in 2Q21 (1Q21: 2.7%).   


SGD nominal effective exchange rate (NEER) likely to remain sensitive to news flow, with a return to policy neutrality likely upon reopening           

  • SGD: In response to the latest restrictions, SGD NEER has fallen further to around 0-10bps above the mid-point, from 70-80bps a week ago and 100-110bps on 30 June (after the release of the MAS Annual Report). Should the growth/inflation impact of the current measures be mild, as expected, then such a loose level of monetary accommodation may not be warranted, according to Citi analysts and a higher equilibrium real exchange rate path would likely be needed to be accommodated via a stronger NEER. As such, Citi analysts expect the SGD NEER to revert to a path consistent with policy neutrality (similar YoY rate of appreciation to core CPI) upon reopening. Overall, Citi analysts maintain their base case (75% probability) of a MAS April 2022 normalization (including possible upward re-centering), with a risk scenario (25% probability) of an Oct. 2021 normalization.               


Data/ events for the remainder of this week                        

  • USD: This week’s focus in US will likely turn to fiscal negotiations and fate of the bipartisan infrastructure bill. It may also not be too early to begin speculating about the outcome of the July 28th FOMC.  
  • USD: Existing Home Sales – Citi: 6.05m, median: 5.88m, prior: 5.80m; Existing Home Sales MoM – Citi: 4.3%, median: 1.3%, prior: -0.9% - existing home sales have been at strong levels through the pandemic though like housing starts, supply has likely been a significant factor holding back existing home sales in recent months
  • EUR: ECB Monetary Policy Outcome – On interest rate guidance, Citi analysts expect some adjustments to reflect conclusions of the recent Strategy Review and look for the ECB to link rate hikes to the achievement of price stabilitywhile allowing for some temporary overshooting of the target. Citi analysts also expect some reference to a consistent rise in underlying inflation dynamics though it is much less clear that there will be a consensus on the immediate need for the calibration of asset purchases. It might be easier for the Governing Council to wait until September when updated ECB staff economic projections become available to fine tune the calibration response, or even December when the first estimate of 2024 HICP will show whether the post-pandemic rebound and forward guidance adjustments have been sufficient to help with the re-anchoring of inflation expectations.       

  • EUR:  Euro area Manufacturing PMI, July Flash Forecast: 63.5 Prior: 63.4; Services PMI, July Flash Forecast: 56.5 Prior: 58.3; Composite PMI, July Flash Forecast: 58.5 Prior: 59.5 – Citi analysts estimate the flash composite PMI will likely fall slightly in July, from the 15-year high of 59.5 seen in June. This would be the first small decline in 6 months. Risks to this forecast are probably also skewed to the downside. 
  • GBP: UK Manufacturing PMI, July Flash Forecast: 62.3 Prior (Final): 63.9 – Citi analysts expect export orders to have improved once again, with new business overall still growing at near record rates. But supply disruption is also likely to have worsened. This could mean a slight moderation in the rate of input cost inflation – though the team expects  selling prices to exhibit strong ongoing growth in July with a further record high possible.
  • GBP: UK Services PMI, July Flash Forecast: 61.9 Prior (Final): 62.4 – Citi analysts expect the rate of growth of UK’s services sector to have fallen back in July. Business services may have picked up marginally, buoyed by further investment among consumer services, however exports are likely to remain a notable weak spot. The team expects these effects to hold back part of the recovery over summer, with wage pressures also likely to have grown further.


This is an extract from the Daily Currency Update, dated July 22, 2021. Please approach a Citigold Relationship Manager if you would like more information. For the latest updated CitiFX house views and strategy (updated every Monday) please click here -

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