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The case for EUR underperformance

-->The case for EUR underperformance      
  • EUR: Euro area Covid underperformance worsening: German border controls raise growth risks – Over the weekend, Germany announces border closures against the Czech republic and parts of Austria until further notice, due to the spread of coronavirus mutations. The measure prompt warnings from the German automotive industry federation VDA that supply chain disruptions could bring production to a standstill as early as this week. Border closures are probably the most disruptive measure for Germany’s industrial backbone short of outright factory closures which have so far not been used. The Czech Republic and Austria are Germany’s 7th and 9th largest sources of imports respectively, accounting for 4% of German imports each in 2019. The closures make Citi analysts cautious on German automotive production for February and March and reinforces their outlook for German GDP to drop by around 3% QQ in Q1’21.          

  • EUR: French R0 falls below 1 again, but worries remain about variants the good news is the continued decline in the estimated Covid-19 reproduction rate to below 1 in early February, according to the latest data from Public Health France. The not so good news” is the steady but still slow increase in share of ICU beds occupied by Covid patients. The consensus among French epidemiologists seems to be that more contagious variants (accounting for around 20-25% of new cases for the UK strain and between 4-5% for the South African and Brazilian strains) will likely become the dominant strain by the middle of March. Note that in March and November 2020, the activation of these protocols preceded the announcement of a French lockdown by a few weeks. This adds to uncertainty about French household or business confidence being able to improve until economic agents can be convinced that a third lockdown can be avoided entirely.

  • GBP: UK vaccination outperformance versus euro area - UK government confirms it has reached its first vaccination target, offering all over-70s at least one dose of a Covid vaccine. Over 15 million have now received the jab, covering 90% of the over-70s and the jab will now be rolled out to all the over-65s over coming days. The government is continuing to target the beginning of May as a deadline to offer a first dose to all over-50s. Case numbers also continue to improve, with the R-number now estimated to be between 0.7 and 0.9. Speculation over the potential easing of restrictions has also featured heavily in reporting over the weekend with both the Sunday Times and Telegraph announcing that the first easing of restrictions may now be announced on 8 March with some reports suggesting the UK government may set out its ‘easing plan’ as early as 22 February.     


Week Ahead               

  • USD: Fed speak - Fed’s Rosengren takes part in panel discussion, FOMC Meeting Minutes release, Fed’s Brainard speaks at IIF Climate Finance Summit, Fed’s Bostic discusses educational Inequality.    

  • USD: US Retail Sales – Citi: 1.8%, median: 0.8%, prior: -0.7%; Retail Sales ex Auto – Citi: 1.7%, median: 0.8%, prior: -1.4%; Retail Sales ex Auto, Gas – Citi: 1.4%, median: 0.3%, prior: -2.1%; Retail Sales Control Group – Citi: 1.5%, median: 0.7%, prior: -1.9% - Citi analysts expect a strong 1.8% bounce-back in headline retail sales in January after two months of declining sales, with a 1.5% increase in sales in the retail control group even as headwinds remain for services sectors.

  • USD: US Industrial Production – Citi: 0.2%, median: 0.4%, prior: 1.6%; Manufacturing Production – Citi: 0.5%, median: 0.7%, prior: 0.9%; Capacity Utilization – Citi: 74.6%, median: 74.9%, prior: 74.5% - Citi analysts expect more modest increases of 0.2% in industrial production and 0.5% in manufacturing production in January following a larger increase in production in December.

  • USD: PPI Final Demand MoM – Citi: 0.5%, median: 0.4%, prior: 0.3%; PPI Final Demand YoY – Citi: 0.9%, median: 0.8%, prior: 0.8%; PPI ex Food, Energy MoM – Citi: 0.2%, median: 0.2%, prior: 0.1%; PPI ex Food, Energy YoY – Citi: 1.0%, median: 1.1%, prior: 1.2% - Citi analysts expect a strong increase in PPI final demand in January, led by strength in food and energy prices while excluding food and energy prices and trade services prices, PPI should rise a more modest 0.2%.

  • EUR: Euro area GDP, 4Q, 2nd Flash Estimate Forecast: -0.6% QQ Prior: 12.4% QQ - A likely small upward revision to the GDP data in 4Q-20, from -0.7% QQ in the flash estimate. However, ample losses are still seen as large sectors of the euro area economy remain closed and Citi analysts do not expect much improvement in 1H-21 with another likely decline in 1Q.

  • EUR: German ZEW Expectations, February Forecast: 64.0 Prior: 61.8; ZEW Current Assessment, February Forecast: -69.0 Prior: -66.4 - equity markets, timelier at reflecting investors’ economic expectations – have continued to rise and Citi analysts expect ZEW expectations component to follow. However, Citi analysts expect economies where vaccination progress has been faster, such as the UK and US, to post bigger gains (a potential signal of impending USD and GBP outperformance vs EUR). 

  • EUR: Euro Area: Manufacturing PMI, February Flash 56.0, Prior 54.8; Services PMI, February Flash 47.5, Prior 45.4; Composite PMI, February Flash 49.7, Prior 47.8 – An eighth month of expansion in services while the contraction in manufacturing is likely to continue but at a slower pace. The Composite euro area PMI is likely to post a marginal contraction but is seen at a 4-month high.

  • EUR: German Manufacturing PMI, February Flash Forecast: 57.5 Prior: 57.1; Services PMI, February Flash Forecast: 45.0 Prior: 46.7 – the ongoing lockdown, emergence of virus mutations and disappointing vaccination campaign so far are all likely to weigh on service sector confidence. Citi analysts expect supply disruptions in manufacturing to lead to a higher manufacturing PMI in February.

  • GBP: UK CPI Inflation, January Forecast: 0.7% YY Prior: 0.6% YY; CPI Core, January Forecast: 1.4% YY Prior: 1.4% YY – Citi analysts expect CPI inflation to accelerate further this month due to less price discounting and higher import costs – in part as a result of the acute border disruption observed over recent weeks. Citi analysts expect UK inflation to pick up notably from April this year.

  • GBP: Retail Sales, January Forecast: -6.1% MM, -4.1% YY Prior: -3.8% MM, 2.4% YY; Ex Auto Fuels, January Forecast: -5.4% MM, -0.8% YY Prior: -2.6% MM, 5.6% YY – Citi analysts expect UK retail sales to have been hit hard by the recent national lockdown and expect negative Y/Y growth for the first time since May-20.  

  • GBP: UK Manufacturing PMI, February Flash Forecast: 53.2 Prior (Jan Final): 54.1 - headline UK manufacturing PMI in January was inflated by the 2nd largest increase in supplier lead times on record. Citi analysts expect some pressure to have eased with output stronger but the index still a little weaker.

  • GBP: UK Services PMI, February Flash Forecast: 44.5 Prior (Jan Final): 39.5 - January’s PMI suggested the sharpest decline in output since May 2020 due to tightened lockdown restrictions. This month, Citi analysts expect a rebound, largely reflecting the sequential change in output for many firms is likely to be steady. However the team still expects these data to remain below the 50-no-change mark.

  • AUD: Australia January Labor Force: Citi employment; +20k, Previous; +50k; Citi unemployment rate forecast; 6.6%, Previous; 6.6% - Citi analysts expect labor market to continue recovering in 2021 despite JobKeeper wage subsidy ending in March though excess spare capacity is expected to persist.

  • AUD: Australia January Preliminary Retail Trade - Citi forecast; 1.0%, Previous; -4.1% - Retail trade likely recovered by 1% in January after a 4.1% fall in December. This would imply retail sales are up 11.2% on a year-ago basis, thanks to fiscal stimulus.

  • CAD: Canada CPI NSA MoM (January) – Citi: 0.4%, median: NA, prior: -0.2%; CPI YoY – Citi: 0.9%, median: NA, prior: 0.7% - Following a much weaker than expected headline December print, Citi analysts expect a more solid 0.4%MoM increase in January CPI with the Y/Y reading rising to 0.9%. Meanwhile, continued activity restrictions could keep average core CPI measures on the softer side again in January, although Citi analysts expect a climb back towards the 2% target later in the year.

  • CAD: Canada Retail Sales (December) – Citi: -3.1%, prior: 1.3%; Retail Sales ex Auto – Citi: -2.0%, prior: 2.1% - retail sales are expected to decline in December though is an incomplete picture for consumption in as some sales at large online retailers based outside Canada might not be captured.

  • SGD: Singapore 2021 budget preview - fiscal tapering amidst recovery signs - Citi analysts expect a small fiscal deficit of 2% of GDP in FY21E (FY20E: 14.5% of GDP), with a negative fiscal impulse likely. Targeted measures could be rolled out to “smoothen” the policy cliff, with greater emphasis placed on job creation and economic restructuring.         


This is an extract from the Daily Currency Update, dated February 16, 2021. Please approach a Citigold Relationship Manager if you would like more information.

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