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FX

Citi Macro Strategy - A View From 10,000 Feet

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Citi Macro Strategy -  A View From 10,000 Feet Citi Macro Strategy -  A View From 10,000 Feet             

  • USD: Since the turn to Q2, despite some impressive economic data releases, the US Treasuries (UST) rates sell-off has taken a pause, causing some market participants to question how much good news is in the price. Fundamentals still suggest that 10y USTs can trade in a 2-2.5% range with Citi analysts thinking the current cycle is beginning to look like the post-dotcom cycle that began in 2003. On this basis, equities and bond yields can still have further upside.                    

  • USD: UST Pause - Positioning and technical indicators have been suggesting a pause in the rates sell-off for the past few weeks. Some of these indicators have not yet normalized. Away from technical factors, Citi analysts’ long term macro models still suggest a range of 2-2.5% for the 10Yr UST is more appropriate than a range of 1.5-2%.  

  • USD: Implications for USD - In the short-term, Citi analysts accept that if US rates refuse to sell-off, and European growth momentum (as measured by Citi’s data change indices) remains above that of the US, then EURUSD can continue to appreciate. This is not the Citi analysts’ medium term macro view however, but is a dynamic the market is currently exhibiting.  

  • USD: Where Are We in the Cycle? Citi analysts have normalized time as a function of the unemployment rate to compare what market performance looks like in the current cycle relative to history. For the current cycle, the team assumes that the trough in US unemployment will likely be 3.5%, whereas the peak occurred in April 2020 at 14.8%. With the current level at 6% this implies the US may be already >75% of the way through the current recovery.

  • USD: Portfolio Adjustments – Citi analysts take profit on their short 10Yr UST vs German Bund positon and long AUD/JPY spot FX trade but remain short 5Yr UST both outright and versus AUD and NZD (the team expects further yield divergence between the US and the antipodeans). In FX, the team sees a break of 1.2050 on the upside in EURUSD as enough to stop out of their current short EURUSD position via options and they would look to stand aside until a convincing outlook from the signal reasserts once again (growth and rates in conjunction to renew US growth and yield divergence versus the rest of the world).   

 

Data releases overnight   

  • USD: Strong March retail sales boosted by stimulus checks - US retail sales are up a massive 9.8%MoM in March, stronger than consensus for 5.8%. Sales in the retail control group also rise 6.9% and in the retail control group, sales are now up 17.8% compared to pre-COVID levels. The rise partly reflects a bounce-back from a dip in February but also captures a spending boost following the latest round of $1.4k stimulus checks distributed during the month. While it is unlikely that such strong increases in retail sales will repeat in coming months, Citi analysts expect substantial savings to keep overall goods spending elevated at well above pre-COVID levels.
  • USD: Industrial production (IP) bounces back after weather drag, with still more upside to go - US industrial production (IP) gains 1.4%MoM in March, a smaller increase than consensus looking for 2.5%.. The largest subset of manufacturing production is up 2.7% and the bounce-back in March is across many sub-industries and there is likely still further upside in coming months. The less-than-full rebound in March IP however is partly a result of ongoing supply chain issues that have affected availability of inputs of various goods and has slowed final production. These challenges could remain for some time. Overall, despite supply chain issues, strong underlying global demand for goods should continue to support manufacturing throughout the rest of this year and into 2022.    
  • AUD: Australian March jobs boost shows no JobKeeper concerns but April/ May data more important - Both employment and the number of hours worked come in above pre-COVID-19 levels from March 2020 - employment gains (+70.7k) once again beating consensus estimates and highlighting the impressive and better-than-expected recovery in Australia’s labor market. The unemployment rate also ticks down by 0.2ppt to 5.6% and suggests the end of JobKeeper is unlikely to cause major disruptions. That said, excess spare capacity persists and wage growth is unlikely to accelerate meaningfully, implying the RBA will be in no rush to change policy direction.   

 

 

Key data releases today       

  • CNH: China GDP (%YoY) 1Q: Citi 16.0, Consensus 18.9, Previous 6.5 – Citi analysts maintain their growth forecast for China at 16%YoY for 21Q1 with risks tilted to the upside.  
  • CNH: China Fixed Assets Ex Rural (%YoY YTD) March: Citi 28.0, Consensus 27.0, Previous 35.0 – FAI growth may post above 28%YoY in March. In light of the recent PMI and profit data, Citi Research thinks the industrial upcycle should still support a continued recovery of manufacturing investment.    
  • CNH: China Retail Sales (%YoY): Citi 31.0, Consensus 28.5, Previous 33.8 - Retail sales may grow by about 31%YoY in March due to surging auto sales while catering firms should see an obvious sequential revenue improvement after the recent COVID-19 wave ended.
  • CNH: China Industrial Production (%YoY): Citi 20.0, Consensus 18.0, Previous 35.1 – Industrial production growth may moderate to around 20%YoY in March on a rising base. But solid domestic and external demand should help uphold the production momentum.              

 

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

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MARKET SPECIFIC DISCLOSURES

Market Specific Disclosures

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