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A cleaner risk – on outlook for 2021 but short term competing narratives likely to leave FX sentiment mixed to year-end

-->A cleaner risk – on outlook for 2021 but short term competing narratives likely to leave FX sentiment mixed to year-end               
  • USD: 2021 is likely to offer a cleaner and comparatively more risk positive outlook to 2020 likely on the back of – (1) vaccine optimism prevailing over Covid-19; (2) an ultra-dovish Fed potentially engineering even lower US real yields and underwriting any fiscal disappointment arising from gridlock between President Biden and a Republican Senate; (3) China’s sustained recovery; (4) absence of the Trump unpredictability factor; and (5) a potentially more benign relationship between US and China under a Biden administration. But, to year-end, there remain a mix of competing narratives that could keep sentiment mixed at best.                

  • USD: These include the positives – (1) Vaccination optimism with reports overnight that Covid-19 vaccinations in the U.S. will “hopefully” start in less than three weeks, according to Moncef Slaoui, chief science adviser to the US Operation Warp Speed program. This is followed by a 3rd major drug manufacturer reporting interim efficacy data from phase 3 clinical trials at around 70%. (2) Brexit optimism from UK Chancellor Sunak and the Irish premier overnight with some reports suggesting that 95% of a Brexit trade deal has likely been agreed upon and its outline might be clear by the end of this week. (3) Improved potential for US fiscal stimulus with a NYT article pointing to scope for more flexibility from Democrats around a smaller but quicker fiscal package ahead of Biden’s inauguration.        

  • USD: The negatives (1) Rising US Treasury – Fed tensions as the Fed readies to comply with Treasury Secretary Mnuchin’s request to return USD455bn of unused facility funds allocated under the CARES Act. While this may reinforce scope for fiscal stimulus (as Treasury Secretary Mnuchin says he wants to re-deploy the money towards a fiscal package) to appease Republican budget hawks, it also leaves little in terms of buffer for the Fed if it wants to add funds to its corporate/ main street lending facilities in 2021. However, news overnight of President-elect Joe Biden’s likely cabinet pick of former Fed Chair Janet Yellen to the Treasury Secretary position may eventually calm such tensions. (2) Escalation in US - China tensions until year-end on  Reuters reports that the Trump administration may push ahead with restricting various Chinese aerospace companies and others with ties to the Chinese military from buying a range of US goods and technology. Bloomberg sources also report that the Trump administration may be mulling the advancement of several other new economic hardline measures against Beijing that include an informal coalition for joint retaliation in the event of Chinese trade disputes. The coalition could mandate intra-purchases of any goods boycotted by China, and could also outline tariffs in response to compensate for lost trade gains  


Data/ events overnight – US, euro zone and UK PMIs           

  • USD: Stronger US November PMIs as expansion continues in Q4 - The US Markit Manufacturing PMI indicator rises to 56.7 in November with output up to 58.7 and new orders rising to 57.4. Meanwhile, the Services PMI measure gains to 57.7. Another upside surprised to US PMI data indicates that both manufacturing and services sectors continue to expand at a solid pace into Q4 despite rising virus case counts. Citi analysts maintain their stronger-than-consensus expectation for US Q4 GDP growth of around 5-6% annualized.             

  • EUR: Euro area flash PMIs – Smaller hit in Oct/Nov than during the first lockdown – the euro area flash composite output index falls by 4.9 points to a six-month low of 45.1 (Mkt. 45.6, Citi 40.0). Looking at the components, the flash services PMI activity index loses 5.6 points to a six-month low of 41.3 (Mkt. 42.0, Citi 33.0) and the flash manufacturing PMI declines by 1.2 points to a three-month low of 53.6 (Mkt. 53.2, Citi 51.0). With an average of 47.6 in October and November, the scale of the decline in the composite PMI suggests that the euro area GDP fall in 4Q-20 could be around 4.5% QQ. Citi analysts however see manufacturing outperforming while the fall in services PMI is somewhat less severe than anticipated and the extent of the hit to economic activity likely to be not as severe as in spring. That said, recovery is likely to be slow and 4Q-20 may see a meaningful double-dip recession in the euro area that will likely prompt the ECB to respond at its meeting in December.          

  • GBP: UK services hard hit by lockdown mark 2 - UK flash services PMI for November prints at 45.8 (Consensus 42.8, Citi 39.1), sharply down on levels in October (51.4) while manufacturing continues to exhibit robust growth, printing at 55.2 (Citi 51.0, Consensus 50.5). Vaccine optimism seems to contribute to a boost in business sentiment with respect to the outlook for next 12 months.

  • NZD: New Zealand Retail Sales Surge 28.0% In Q3 - retail sales volumes in New Zealand soar 28.0% Q-o-Q in Q3’2020, recovering from the 14.6% drop in the previous three months. On a yearly basis, retail sales volume advance 8.3% after sinking 14.2% in the three months prior with 12 of the 15 industries reporting higher sales volumes on a yearly basis. Value of retail sales is up 7.4% on year in Q3, with 14 of the 16 regions showing higher sales values.

  • SGD: October core CPI surprises negatively - Singapore’s October core CPI comes in below expectations for the first time since Jan-20 at -0.2% YoY (Citi: -0.1%, Consensus: 0%, Sep: -0.1%), though details are less negative with no strong evidence of broadening disinflationary pressures. Meanwhile, the MAS/MTI outlook remains identical to the October MPS - external inflation is expected to remain “low”, and domestic cost pressures to stay “subdued”, with mildly positive core inflation forecast for 2021. All in, core CPI is seen at -0.5% to 0% in 2020E (Citi: -0.2%) and rising to 0 to 1% in 2021E (Citi: +0.6%) while headline inflation is seen at -0.5 to 0% in 2020E (Citi: -0.1%), and at -0.5 to +0.5% in 2021E (Citi: 0.5%).  Another MAS easing in April-21 not completely ruled out - Citi analysts expect MAS to keep policy accommodative and further easing cannot be completely ruled out should inflation persistently surprise on the downside, either because of weaker than expected growth or the job market. In coming weeks, the team will keep an eye on October Industrial Production (26th November), unemployment (possibly end-November) and consumer spending (4th December).


This is an extract from the Daily Currency Update, dated November 24, 2020. Please approach a Citigold Relationship Manager if you would like more information.

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