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Case for EUR underperformance vs risk currencies

-->Case for EUR underperformance vs risk currencies             
  • EUR: ECB minutes concerned about EUR strength and the outlook - Minutes of the ECB’s monetary policy meeting on January 20-21 released overnight confirm there have been discussions about the importance of monitoring the recent increase in nominal risk-free rates and developments in the exchange rate. More discussions are likely at the March 10-11 Governing Council meeting given the sizeable gap between the euro area projected inflation path and ECB’s price stability objective. Concerns are voiced over developments in the euro exchange rate that might have negative implications for euro area financial conditions and, ultimately, consequences for the inflation outlook. Therefore, the Governing Council needs to stress no room for complacency and should reiterate its vigilance with regard to developments in the exchange rate and implications for inflation.   

  • EUR: ECB more successful than the Fed in keeping real rates low – ECB officials note euro area real yields are at historical lows while in the US, fiscal support has led to a steepening of the Treasury yield curve, which has only affected yields in the euro area to a limited extent, as a significant “decoupling” of yields could be observed (therefore euro real yields have risen less relative to US real yields) in the current rising nominal yield environment. ECB’s main priority remains on delivering a sizeable degree of monetary policy accommodation. The degree of policy support could be increased if, at a time when inflation expectations recover a little, support is extended to contain the drift in nominal yields, resulting in a further decline in euro area real yields [relative to the US].               


AUD: Australian labor market continues recovery in January despite restrictions – AUD resilience   

  • AUD: Australia’s unemployment rate falls to 6.4% thanks to a drop in the participation rate but with employment also rising by 29.9k, in-line with consensus (+30k). This means the economy has almost recovered jobs lost during 2020 even as the participation rate still remains at elevated levels.     

  • AUD: Citi analysts expect jobs growth to continue in February despite less wage subsidy support – the labor market recovery continues to surprise on the upside despite sporadic lockdowns. And while localized COVID-19 breakouts and lockdowns remain the biggest threat to the recovering labor market, one avenue of greater confidence should be the labor market has recovered despite JobKeeper tapering. Citi analysts expect that the risk to their unemployment rate forecast of 6% by year’s end is for a lower, not higher number 



Data due today                  

  • 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: 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 year-on-year growth for the first time since May-20. However, the extent of the shortfall is likely to be substantially less than in the first lockdown, given adjustments to working and consumption patterns.

  • GBP: UK Manufacturing PMI, February Flash Forecast: 53.2 Prior (Jan Final): 54.1 - The headline UK manufacturing PMI in January was inflated by the second largest increase in supplier lead times on record. In normal times, these are an indication of robust demand. However, in this case  they are likely indicative of acute supply pressures. Citi analysts expect some pressure to have eased in recent weeks, with output a little stronger but the aggregate 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 these data to rebound, largely reflecting the fact that 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 as the impact of lockdowns continue to percolate through.

  • 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 that retail sales would be up 11.2% on a year-ago basis, thanks to fiscal stimulus that increased household’s disposable income during 2020.

  • CAD: Canada Retail Sales (December) – Citi: -3.1%, median: NA, prior: 1.3%; Retail Sales ex Auto – Citi: -2.0%, median: NA, prior: 2.1% - Canadian retail sales are widely expected to decline in December, Citi analysts expect a decline of 3.1% in total sales with a more moderate decline of 2.0% in sales excluding autos. The drop in retail sales, however, represents an incomplete picture for consumption in Q4/Q1, as some sales at large online retailers based outside of Canada might not be captured in retail sales, but still will be incorporated in consumption in GDP. 


This is an extract from the Daily Currency Update, dated February 19, 2021. Please approach a Citigold Relationship Manager if you would like more information.

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