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China’s Monetary Policy Exit Dilemma

-->China’s Monetary Policy Exit Dilemma                   
  • CNH: Citi analysts - China’s monetary policy exit this round will not be easy as the previous round post the Global Financial Crisis. At present, there is not a strong case for the PBoC to exit its pandemic policies. Given there have been significant structural changes taken place, the eventual policy exit will require a holistic approach so as to avoid unpleasant financial fallouts.
  • CNH: Financial risks on the rise along with expected PBoC policy exit — markets are taking the view that China’s monetary policy exit is underway and will accelerate in H2. Meanwhile, financial fragility has risen, represented by prospects of property bubbles, elevated debt and enhanced default risk. Citi analysts think a hasty stimulus withdrawal may also bring new financial risks.
  •  CNH: PBoC’s policy exit won’t be easy this round, thus requiring a careful policy calibration to avoid unpleasant fallouts — unlike the policy exit post GFC in 2010, China’s economy, financial markets and external monetary conditions have experienced significant structural changes, namely, high national debt level, rising property bubble risks, largely opened financial markets, reduced monetary policy independence, and extremely relaxed external monetary conditions.
  • CNH: A holistic approach to China’s policy exit needed — Citi analysts point to containing the housing bubble can’t rely solely on traditional monetary policy tools. The pace of policy exit will also need to take into consideration both domestic and external conditions as well as addressing future default risks. Finally, China will also need to re-examine its fiscal rules it upholds and use a variety of policy measures to gradually lower the very high and unsustainable level of corporate debt.              


Data releases overnight – US durable goods orders rebound; Germany – lockdown halts ifo rebound

  • USD: US durable goods orders rise 0.5%MoM in March following a 0.9% decline in February, a softer increase than consensus expectations at 2.3%. Durable goods orders excluding transportation however gain more strongly, up 1.6%, with core capital goods orders (nondefense, excluding aircraft) rising 0.9% while core capital goods shipments rise 1.3%. This rebound is already seen in manufacturing production data for March, with potential further upside again in April. Durable goods orders excluding more volatile transportation goods remain very elevated and continue to signal support for future manufacturing activity, even if various supply chain disruptions and delivery delays still persist in the coming months.      
  • EUR: The German Ifo business climate for April comes in at 96.8 (versus consensus for 97.8) and represents a modest gain from the prior months’ 96.6. Expectations drop to 99.5 (consensus 101.2) versus prior at 100.4 while the current assessment shows a modest gain in April to  94.1 (consensus 94.4) from 93.0 prior. The drop in Ifo expectations likely reflects the third wave of the pandemic weighing on Germany’s short-term economic prospects. Citi analysts point to the key condition for a self-sustained recovery for the German economy in H2’2021 would require internal demand to match external demand and therefore whether manufacturing resilience remains an exception or becomes a blueprint for the rest of the economy remains to be seen.  
  • EUR: Germany’s economy minister sees higher growth than forecast and expects GDP growth to exceed the 3% forecast for 2021 and the economy to reach pre-crisis levels of output “in 2022 at the latest”. Citi analysts on the other hand, revise down their 2021 German GDP growth forecast from 2.9% to 2.3% on account of weaker than expected Q1 data (flash estimate of Q1 GDP growth to be released on Friday) and the extended lockdown even as the team acknowledges manufacturing resilience as well as he continued build up in household (and possibly corporate) savings during the lockdown, which could boost growth, but much later in H2’2022.  


Week Ahead               

  • USD: The most watched event this week will be the FOMC meeting. There is a small probability the committee gives more decisive guidance toward tapering of asset purchases. However, the much more likely scenario is the statement will be tweaked to reflect a cautiously more optimistic outlook and Chair Powell will await more evidence that robust rehiring is continuing. More formal guidance “well ahead” of tapering may emerge at or before the June FOMC meeting, when officials will have had two more monthly jobs reports to assess the pace of rehiring. President Biden will also address a joint session of Congress and is expected to detail his “American Families Plan” proposal including increases in personal taxes and an extension of the enhanced child tax credit.        

  • USD: US Core PCE MoM Citi: 0.3%, median: 0.3%, prior: 0.1%; Core PCE YoY Citi: 1.8%, median: 1.8%, prior: 1.4% - Core PCE inflation should rise a strong 0.30%MoM in March based on elements of CPI and PPI which should push the Y/Y reading to 1.8%. While base effects will send core PCE well above 2% over the next few months, strength in these components of underlying inflation will be key to maintaining above 2% inflation into the end of the year after base effects pass.  

  • AUD : Citi analysts raise their Q1 inflation forecast for Australia from 0.4% to 1.0%, which takes headline inflation to 1.5% YoY and underlying inflation is also revised higher from 0.4% to 0.5% QoQ (1.3% YoY) Australia’s Q1 CPI print will likely show a 1.0% increase in headline inflation over the quarter. Citi analysts see the risks as skewed to the upside. However, the team expects supply chains to adjust and inflation dynamics to begin normalizing in the second half of the year
  • CAD: BoC Governor Macklem will speak before the House of Commons Standing Committee on Finance on Tuesday, giving an update on the current economic situation and recent actions taken by the BoC. Citi analysts do not expect much deviation from the BoC’s recently more optimistic outlook for economic growth expressed at the April meeting.


This is an extract from the Daily Currency Update, dated April 27, 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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