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Citi analysts - understanding PBoC’s FX toolbox

Citi analysts - understanding PBoC’s FX toolbox       

  • CNH: In this round of RMB appreciation, PBoC’s policy actions have so far centered on preventing risks from pro-cyclical FX debt buildup. In previous depreciation episodes, more focus was on combating pro-cyclical speculative trading behavior. Current setup suggests less draconian policy measures and more market-oriented FX moves. Citi analysts stay constructive on RMB fundamentals while monitoring signals and identify 3 themes from PBoC’s past FX measures – (1) preventing pro-cyclical FX debt/asset buildup, (2) preventing pro-cyclical speculative trading behavior, and (3) pushing reforms to encourage counter-balancing flows.        
  • CNH: Preventing pro-cyclical FX debt buildup appears to be the most prominent theme currently and is unlike the post-2015 and post-2018 depreciation episodes, where the focus was to combat pro-cyclical speculative trading behavior. This suggests more market-oriented FX moves and less draconian policy measures, supported by less acute signs of pro-cyclical speculative behavior, more private FX reserves that balance the inflow pressure, and a high bar for PBoC to deviate from progress made in having a more market-oriented FX determination.   
  • CNH: Citi analysts stay constructive on RMB while monitoring signals - at levels close to before US-China trade escalation in 2018, more policy signals could emerge, pace of appreciation could slow and volatility may rise. But with the mild policy responses so far, the team remains constructive on RMB based on China’s fundamental BoP strength, while monitoring policy signals and indicators.            


What are the various employment indicators pointing to tonight’s pivotal US May jobs report         

  • USD: The miss in the employment subcomponent of the US May manufacturing ISM report earlier this week to 50.9 from 55.1 in April and the May services sub component down to 55.3 from 58.8 in April raises concerns about a weaker May jobs report tonight. However, this appears to have been countered by the much stronger ADP print overnight (a 978k increase in jobs) which has raised the so called “whisper number” to level significantly higher than the Bloomberg median forecast of economists at 661K for the headline. ADP has a relatively poor correlation with nonfarm payrolls but the overall result now sees asymmetric risks to tonight’s nonfarm payrolls print – now likely to see a larger reaction in FX in the event of a miss, rather than a beat. For the record, Citi analysts continue to forecast an increase of 760k jobs, but with substantial uncertainty.                   


US ISM services shows rising activity, but headwinds from supply constraints remain  

  • USD: The US ISM services index suggests activity picks up slightly in May, although supply shortages are still constraining activity and putting upward pressure on prices. The index rises to 64.0 from 62.7 in April, stronger than consensus for 63.2. Both new orders and business activity components rise to 63.9 and 66.2 respectively but like the ISM May manufacturing report, the employment component declines from 58.8 to 55.3. Meanwhile, supplier deliveries increase to 70.4 while the prices index also rises, from 76.8 to 80.6. The moderate increase in the ISM services index reflects a backdrop consistent with the story told in the ISM manufacturing release earlier this week – that activity has increased slightly in May given still strong demand, but the full strength of potential activity likely remains constrained by supply shortages across both goods inputs and labor.     


Australia: Positive retail and external trade data flow continued in April, but risks ahead

  • AUD: Australia’s trade surplus widens in April from AU$5.8bn to AU$8.0bn with exports rising 3% while imports fall 3.2%. Iron-ore prices remain at record high levels and Australia’s trade surplus remains buttressed by iron-ore exports due to continued demand for steel production in China. However, there are risks with Citi analysts expecting some correction in iron ore prices in H2 while also still believing that net imports would contribute negatively to growth this year as exports peak and imports rise in H2. Citi analysts expect Australia’s trade surplus could narrow in H2 if imports rise further and iron-ore exports peak. Therefore, the team maintains that net exports are unlikely to contribute positively to growth this year; indeed, net exports shaved 0.6ppts from GDP growth in Q1.

  • AUD: Australia’s retail trade in April remains solid but impacted by lockdowns - final retail trade rises by 1.1% in April with no change from the earlier released preliminary result and all major retail trade categories are now back above their pre-pandemic level…however, the data is displaying unusual noise and could get more volatile due to Victoria’s current lockdown that is now scheduled to go for 14 consecutive days, which could imply further volatility in the data in May and June.    


Data due tonight – US and Canadian nonfarm payrolls                   

  • USD:  US May nonfarm payrolls report key input to Fed tapering decision – Citi: 760k, median: 665k, prior: 266k; Private Payrolls – Citi: 700k, median: 600k, prior: 218k; Average Hourly Earnings MoM – Citi: 0.3%, median: 0.2%, prior: 0.7%; Average Hourly Earnings YoY – Citi: 1.7%, median: 1.2%, prior: 0.3%;  Unemployment Rate – Citi: 5.9%, median: 5.9%, prior: 6.1% - Citi analysts expect Fed officials will want to see ~750K to keep a robust discussion of tapering over the summer months (June/ July FOMC). A weaker reading (sub-500K) could have them waiting until Jackson Hole in late-Aug.
  • CAD: May Net Change in Employment – Citi: -80k, median: NA, prior: -207.1k; Unemployment Rate – Citi: 8.4%, median: NA, prior: 8.1% - after a 207k decline in Canadian employment in April, employment should decline by a further 80k jobs but with re-openings in some regions set to begin as early as this week, Citi analysts expect the June employment report to reveal substantial job gains. 


This is an extract from the Daily Currency Update, dated June 4, 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 -