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Covid-19 infections accelerate sharply in euro zone & UK – impacts Bund and Gilt yields the most but EUR & GBP also fall versus USD

-->Covid-19 infections accelerate sharply in euro zone & UK – impacts Bund and Gilt yields the most but EUR & GBP also fall versus USD                
  • EUR & GBP: Covid infection rates accelerate in Europe - Belgium and the Netherlands now sit at the top of the ranking in terms of infection rates (above 250 per 100K), followed by France which also shows a sharp acceleration over the past 2 weeks. Italy reports the single-day biggest jump in cases on Wednesday (7.3K) since the start of the pandemic while Germany remains the least affected among the major European countries, although cases also rise meaningfully last week. Meanwhile, the national incidence of infections in UK overtakes Spain

  • EUR & GBP: New restrictions announced – London goes into stage 2 restrictions effective today with households now no longer able to mix with others indoors and UK may even consider local circuit break lockdowns next week. France announces a 9PM-6AM curfew for a minimum of 4 weeks in cities/regional in the maximum alert category – from Saturday, impacting ~20m people with a new rule of a maximums of 6 for gatherings. Italian government says it will not rule out national lockdown after Covid infections jump by the fastest daily rate since the start of the pandemic on Wednesday and it is only Germany that seems to be taking a piecemeal approach for now but indicates it will not hesitate to implement broader restrictions if improvements in the infection rate data aren’t made.              

 

RBA Governor Lowe’s dovish speech at 12th Annual Australia and New Zealand Citi Investment Conference 2020            

  • AUD: A clarification to forward guidance - In past policy statements, the RBA has committed to “not increase the cash rate target until progress is being made towards full employment and is confident that inflation will be sustainably within the 2–3 percent target band’. Yesterday, the Governor clarifies that given the higher level of uncertainty, the Board will be looking at actual inflation, and not the RBA’s inflation forecasts. This implies that the cash rate could be lower for longer, and as the Governor mentions,  “won’t increase for at least three-years”.      
  • AUD: But Governor Lowe is equally in no rush to cut the policy rate – Citi analysts maintain their call that the Bank is unlikely to cut the cash rate again in 2020 (though a number of domestic banks and RBA watchers think the RBA will cut 15bp in November as are markets that are also pricing a 15bp cut – both OIS and the RBA overnight cash rate currently at 0.13%). The team thinks the RBA will consider buying more longer dated bonds instead to flatten the yield curve. Either way, this is likely to posed headwinds to AUD sentiment in the weeks ahead   

 

Data/ event releases overnight

  • USD: Continuing claims continue to point to still strong hiring in the US in Q4’20 - During the week of October 3, US seasonally adjusted continuing claims decline 1.1 million to 10 million, at a more rapid pace than in early September. NSA continuing claims also decline from 10.8 million to 9.6 million. Meanwhile, initial claims increase to 898k on the week of October 13 after holding steady around 840k for the past two weeks. The decline in claims over the past few weeks is encouraging, pointing to still-robust rehiring in late September, and should continue into Q4.    
  • AUD: Australian jobs report - RBA may revise down its peak unemployment rate forecast but still add monetary stimulus - net employment change in September is -29.5k, less than consensus for a -40k fall while the unemployment rate rises from 6.8% to 6.9% but also less than the 7.0% consensus forecast despite the participation rate increasing from 64.8% to 64.9%. August data is also revised upward (originally reported at +111k but now at  +129.1k). Citi analysts estimate that the Australian economy has so far recovered 51% of jobs lost and their base case now is for the unemployment rate to peak at 7.4%, with no upside risks to this forecast. As a result, the RBA may also need to revise down its peak unemployment rate forecast from 10% closer to 8% in the November SMP, though still leaving open the possibility of further RBA monetary stimulus.
  • CNY: China’s CPI miss impacts longer dated bond yields rather than FX - China’s September CPI prints at 1.7%YoY vs 1.9% expected (2.4% prior) with a decline in food inflation likely the driver of the bulk of a miss. Citi analysts had anticipated a print of 1.6%YoY but overall, the data holds minimal implications for FX and more relevant for Chinese longer dated bonds.   

 

Data releases for tonight

  • USD: Retail sales, industrial production and University of Michigan consumer confidence - Retail Sales – Citi: 1.2%, median: 0.8%, prior: 0.6%, Retail Sales ex Auto – Citi: 0.3%, median: 0.4%, prior: 0.7%, Retail Sales ex Auto, Gas – Citi: 0.4%, median: 0.5%, prior: 0.7%, Retail Sales Control Group – Citi: 0.2%, median: 0.3%, prior: -0.1% - Citi analysts expect another solid increase in retail sales in September partly due to another strong increase in auto sales. Sales in the retail control group should rise modestly following a slight decline in August.  
  • USD: Industrial Production – Citi: 0.6%, median: 0.6%, prior: 0.4%, Manufacturing Production – Citi: 0.7%, median: 0.7%, prior: 1.0%, Capacity Utilization – Citi: 71.8%, median: 71.9%, prior: 71.4% - Industrial production should rise with a slightly stronger increase in manufacturing production. Citi analysts expect largely across the board moderate increases in production with a renewed increase in auto production after a modest decline in August.  
  • USD: University of Michigan Consumer Sentiment – Citi: 79.8, median: 80.5, prior: 80.4, U of Michigan 1y Inflation Expectation – Citi: 2.6%, median: NA, prior: 2.6% - Citi analysts expect a modest pullback in the University of Michigan consumer sentiment indicator in the preliminary October reading largely led by a drop in the current conditions index, potentially reflecting the still-high virus case counts and political volatility and fiscal stimulus uncertainty in the US.  

 

This is is an extract from the Daily Currency Update, dated October 16, 2020. Please approach a Citigold Relationship Manager if you would like more information.

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