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Currencies - Daily Update

Commodity central bank meetings (RBA and BoC) this week - preview

RBA December Policy Board Meeting  

  • AUD: Citi analysts do not expect the RBA to make any significant policy shifts in its final meeting of 2021 this week, after having dropped the yield target and updating the economic outlook in November. This means that the cash rate will likely remain at 0.1%, and the Board will persist with purchasing $AU4bn worth of bonds per week, until its next review in February 2022. Citi analysts believe the domestic outlook has broadly improved but recent communication from Board Members confirms that the Board still isn’t too concerned about inflation. Thus, a hawkish tilt from the RBA seems unlikely. ​ 
  • AUD: Other data such as the wage price index has also been in-line with the Bank’s view, and thus Citi analysts do not expect the Board to change its communication in the final paragraph of the statement, after dropping the forward guidance last month. The only downside risk is the threat of the new COVID-19 variant, Omicron. But the RBA’s downside scenario does incorporate a mutated variant risk that leads to a slower recovery and  any mention of Omicron therefore, will likely be in the context that while the domestic outlook has improved, there’s still ongoing uncertainty from the pandemic.   

 

Bank of Canada December Policy Board Meeting

  • CAD: Citi analysts expect BoC to leave rates unchanged at 0.25% at its meeting this week though the team will watch for signs the BoC could be considering a rate rise even earlier than the latest guidance for the “middle quarters of 2022”. After the hawkish October surprise, Citi analysts expect a slightly hawkish tone to this meeting with risks tilted to an even more hawkish shift, with BoC perhaps signaling openness to a Q1 hike.   

  • CAD: The BoC statement could highlight risks and uncertainties due to new COVID variant but Citi analysts do not expect a material change to the outlook yet based on Omicron. The most important changes to the policy statement will likely be in the last paragraph on policy guidance. Citi analysts’ base case is that the timeline for the closing output gap remains unchanged for the “middle quarters of 2022”, but with other hawkish adjustments such as indicating that the economy will require less monetary policy support over time. However, Citi analysts do not expect another pulling-forward of the closing output gap though there is a non-negligible risk of this happening given the substantial drop in the unemployment rate in November. More recent BoC communications also seem increasingly concerned with persistently elevated inflation. Markets are currently pricing a ~50% probability of a hike at the next meeting in January, earlier than the output gap-based guidance would suggest. However, Citi analysts’ base case remains that the BoC will need to see a few months more of much stronger wage growth, likely in Q1 data, before raising rates in April.              

 

PBoC cuts RRR by 50bps  

  • CNH: The PBoC cuts the reserve requirement ratio for banks by 50bps effective December 15, which is expected to release CNY1.2tn of liquidity according to Citi analysts that had flagged the possibility of a cut sooner rather than later, though their base case was for implementation in January. PBoC says that banks will use part of the funds from the RRR cut to repay MLF loans and that the cut should not be seen as an attempt to flood the economy with liquidity. The move sees a sharp rally in Chinese fixed income with yields seeing the largest one-day drop since July. USDCNH however moves little on the cut.    

 

Week Ahead   

  • USDUS November CPI MoM – Citi: 0.9%, median: 0.7%, prior: 0.9%; CPI YoY – Citi: 6.9%, median: 6.7%, prior: 6.2%; CPI ex Food, Energy MoM – Citi: 0.7%, median: 0.5%, prior: 0.6%; CPI ex Food, Energy YoY – Citi: 5.1%, median: 4.9%, prior: 4.6% - Citi analysts again expect a strong increase in prices in November with services prices likely to pick up broadly over the course of the next ~6 months that would reflect elevated inflation expectations and a persistently tight labor market putting upward pressure on wages. 
  • USD: University of Michigan Sentiment – Citi: 66.9, medina: 68.0, prior: 67.4; 1Yr Inflation Expectations – Citi: 4.9%, prior: 4.9% - Citi analysts expect the University of Michigan’s 1Yr-ahead inflation expectations to be unchanged while the more important 5- to 10Yr expectations are likely to move closer to 3.5% over coming months - a signal of the increasingly embedded high inflation likely to prompt more hawkish Fed policy. 
  • AUD: RBA Board Meeting: Citi cash rate forecast: no change, Previous: no change – Citi analysts do not expect RBA to make any policy shifts in its final meeting of 2021. This means the cash rate will remain at 0.1%, and the Board will persist with purchasing $AU4bn worth of bonds per week, until its next review in February 2022 (refer to the piece “Commodity central bank meetings (RBA and BoC) this week – preview” on PP1). 
  • CAD: BoC Rate Decision – Citi: 0.25%, median: 0.25%, prior: 0.25% - Citi analysts expect the BoC to leave rates unchanged at 0.25% although will be watching for signs that the Governing Council could be considering a rate increase even earlier than the latest guidance for the “middle quarters of 2022” (refer to the piece “Commodity central bank meetings (RBA and BoC) this week – preview” on PP1).
  • EUR: German ZEW Expectations, December: Citi Forecast 24.0, Consensus 25.2, Previous 31.7 (Omicron risk); ZEW Current Assessment, December: Citi Forecast 8.0, Consensus 6.3, Previous 12.5.
  • GBP: UK GDP Quarterly Estimate, August-October: Citi Forecast 1.0% 3M/3M, Consensus 1.1% 3M/3M, Previous 1.3% 3M/3M (Continued moderation); GDP Monthly Estimate, October: Citi Forecast 0.3% MM, Consensus 0.3% MM, Previous 0.6% MM (some support from business and public services).
  • CNH: China trade data: Exports (%YoY) November: Citi Forecast 15.0, Consensus 18.0, Prior 27.1; Imports (%YoY): Citi Forecast 18.0, Consensus 21.5, Prior 20.6; Trade Balance (US $bn): Citi Forecast 79.4, Consensus 80.8, Prior 84.5 – China’s export growth might have decelerated in Nov-21. Together with a high base, Citi Research expect export growth to decelerate from 27.1%YoY previously to 15%YoY in Nov-21, though still robust. On imports, lead indicators also suggest momentum has softened and Citi analysts expect import growth to decelerate from 20.6%YoY to 18%YoY, leaving the trade surplus at US$79.4bn (prev.: US$84.5bn). 

 

This is an extract from the Daily Currency Update, dated December 7, 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 - 

 https://asia.citi.com/wealthinsights/citifx-house-views-and-strategy

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