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Dovish RBA policy expected to relieve upside pressure on AUD

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Dovish RBA policy expected to relieve upside pressure on AUD 

  • AUD: Further dovishness from RBA Governor Lowe in address to the Australian parliament - RBA Governor Lowe rounds out a busy week by addressing two key issues that the Bank is paying close attention to – (1) how households respond to the tapering of fiscal stimulus, and (2) the housing market. The RBA is particularly focused on when the government’s wage subsidy program (JobKeeper) finishes at the end of Q1. Governor Lowe sees enough strength in the local economy for unemployment rate to continue to fall and while he would expect some job losses, over time these losses would likely be offset by the ongoing recovery. Importantly, the Governor does not rule out a further extension of asset purchases (LSAP) after the second round expires in November. Recall that in the RBA meeting last week, Governor Lowe attempted to link the decision to bring forward the announcement on extending RBA’s LSAP by 6 months to the currency. RBA estimates that, so far, LSAP has lowered bond yields by around 30bps and that further LSAP purchases, in theory, could help lower bond yields and the currency even further. The Governor would also tolerate inflation above 3% if it was temporary as his concern primarily is with accelerating employment growth and getting inflation within the target band. But he does not expect inflation to be sustainably within the target band during his term as Governor that ends in 2023. 
  • AUD: Where does the RBA go in 2021 and beyond? - the RBA Governor concedes that it will take years before it achieves its inflation and employment goals. Despite the meaningful upgrade to the activity outlook, underlying inflation—at 1.25% in 2021 and 1.5% in 2022—is expected to remain below the Bank’s 2%-3% target through the forecast horizon. Moreover, there’s still excess spare capacity in the labor market; the unemployment rate forecast of 5.25% by the end of next year is still above the Bank’s NAIRU (natural rate of unemployment) estimate of 4.5%. RBA’s balance sheet is set to expand further...the total size of the RBA’s balance sheet is set to increase from its current level of $AU330bn to around AU$600bn by November, or close to 30% of nominal GDP with Citi analysts expecting the LSAP to be extended by a further A$100bn in November, probably for a further A$6m to April 2022. At some point the RBA might choose to initiate a tapering, but the risk in so doing would be that other DM central banks are still likely to be expanding their own QE program into 2022, potentially risking adverse FX consequences if the RBA were to lead the way in any tapering exercise. Citi analysts now expect the eventual start of the next RBA tightening cycle occurring in Q1 2024.          

 

EA pandemic assumptions beyond Q1’21 – 2 months vaccine delay 

  • EUR: Citi analysts find vaccine supply in EA is significantly lower than expected for 1Q and the gap is unlikely to be closed before 3Q. Based on reported information, enough supply for 20% of the EA population will only become available in early 2Q and for 70-80% in mid-3Q, assuming no further delays. That is about 2 months later than Citi analysts had previously projected. In the plausible worst case, the EU is unlikely to reach herd immunity supply levels before end-2021.        

 

Data releases Friday          

  • USD: Nonfarm payrolls - fewer new jobs leave markets pricing a bigger fiscal expansion – US economy adds just 49K jobs in January, sharply weaker than consensus for 105K. But hiring as measured in the household survey shows employment up by 201K, leading the unemployment rate to decline from 6.7% to 6.3%. Average hourly earnings rise 0.2%MoM. Market react to the weaker jobs  report (higher US yields and weaker USD) by pricing an increased probability of a larger US fiscal package. Citi analysts now expect a ~$1.5trln package in March and raising US nominal GDP by 0.7pp with about 2/3 of that showing up as real growth and 1/3 in faster inflation. Citi analysts expect 5.4%YoY real US GDP growth in 2021 and 2.1-2.2%YoY core PCE inflation at year-end.            
  • CAD: Extent of Canadian job losses in January is much larger than expected, but does not change Citi analysts view for a stronger rebound later in the year. Employment declines by 212.8k jobs in January, a much larger drop than the 20k loss expected though entirely part-time employment driven. Unemployment rate rises from 8.8% to 9.4% but hours worked rise and together with solid estimates for December GDP, Citi analysts see supportive signs for Q1 GDP despite new lockdowns. 

 

Week Ahead           

  • USD: Fed speak includes Fed’s Mester discussing the US economy and Fed Chair Powell speaking to the Economic Club of New York; US CPI MoM – Citi: 0.3%, median: 0.3%, prior: 0.4%; CPI YoY – Citi: 1.5%, median: 1.5%, prior: 1.4%; CPI ex Food, Energy MoM – Citi: 0.1%, median: 0.2%, prior: 0.1%; CPI ex Food, Energy YoY – Citi: 1.5%, median: 1.5%, prior: 1.6% - Citi analysts expect a slightly firmer increase in core CPI, consistent with a slightly stronger rise in core PCE.   

  • USD: University of Michigan Sentiment – Citi: 79.4, median: 80.9, prior: 79.0; University of Michigan 1Yr Inflation Expectations – Citi: 3.0%, prior: 3.0% - sentiment survey should reflect increased optimism over recently falling virus cases while inflation expectations are likely to remain relatively more-elevated - a key factor the Fed will watch to assess inflationary pressures.

  • GBP: UK First Quarterly GDP Estimate, 4Q Forecast: 0.7% QQ 3Q: 16.0% QQ; GDP Monthly Estimate, December Forecast: 1.8% MM Prior: -2.6% MM – the December’s GDP print will likely be buffeted by - (1) deterioration in public health outlook due to tightened restrictions; (2) Brexit stockpiling effects; and (3) acute border disruption associated with the closure of the Channel crossing between 20-23 December. From here, Citi analysts think the outlook for Q1-2021 remains highly challenged, with timelier indicators pointing to a level of services output similar to that observed in June.           

 

This is an extract from the Daily Currency Update, dated February 8, 2021. Please approach a Citigold Relationship Manager if you would like more information.

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