DXY holds at 93.00 with stalled US fiscal talks (USD negative) offset by PBoC’s bid to support USD and pare back CNH gains

DXY holds at 93.00 with stalled US fiscal talks (USD negative) offset by PBoC’s bid to support USD and pare back CNH gains              

• RMB: PBoC’s reduction of FX risk reserve sees RMB reverse its gains versus USD - over the weekend, PBoC announces it will reduce FX reserves of local banks’ forward FX sales business from 20% to zero, effective October 12. The risk reserve requires banks to freeze 20% of the notional total size of a bank’s FX forward sales book for one year with no interest paid on those reserves. Banks typically pass on the costs to clients, which dampens clients’ demand for forward FX purchases onshore (there purchases being to buy USD/ sell CNY) and therefore the decision to relax the reserve requirement to zero is seen as a macro-prudential FX tool by the PBoC to encourage USD buying to help pare back rapid RMB gains. PBoC first announced the 20% risk reserve in August 2015, it was reduced to zero in September 2017 to slow the pace of sharp RMB appreciation but was raised to 20% again in August 2018 when RMB started to depreciate sharply.                          

• RMB: What is the policy signal here? The move to zero likely signals a policy bias to slow the pace of RMB appreciation. PBoC has also utilized the Counter-Cyclical Factor in USDCNY midpoint fixing as another macro-prudential FX tool to slow the pace of RMB appreciation but it appears that this may not be enough in itself to slow the pace of USD depreciation/ RMB strength as markets start to price in a Biden US election victory/ contested election.             

• RMB: Potential market impact? After the removal of FX risk reserve in September 2017, USDCNY/CNH jumped close to 2000pips. This time around, the market impact may be less. Mechanically, the removal of FX risk reserve reduces the cost of forward FX (USD) purchases by importers. As a result, after the reserve was adjusted to zero in September 2017, importers’ forward hedging ratio increased from 6% to 15% by 1Q18. However this year, the additional charge on corporates related to FX risk reserve has declined to ~60pips, per Citi analysts estimate, compared to ~300pips in September 2017, largely due to the sharp fall in USD interest rates. Thus the removal of FX risk reserve may not have as large an impact as in September 2017.

• USD: US fiscal hopes likely dashed this side of the US presidential election - while the Senate Judiciary Committee begins its four day confirmation of Judge Amy Coney Barrett this week to join the Supreme Court, House Speaker Nancy Pelosi on Sunday calls the White House offer on fiscal stimulus a “miserable and deadly failure.” Bloomberg sources say several GOP senators participating in a Saturday conference call tell Treasury Secretary Mnuchin and White House Chief of Staff Meadows that any agreement that ends with USD2tn in stimulus is probably too much.    

Data/ events for the week ahead   

• USD: CPI MoM – Citi: 0.2%, median: 0.2%, prior: 0.4%, CPI YoY – Citi: 1.4%, median: 1.4%, prior: 1.3%; CPI ex food, energy MoM – Citi: 0.2%, median: 0.2%, prior: 0.4%, CPI ex food, energy YoY – Citi: 1.8%, median: 1.8%, prior: 1.7% - Following a few months of much stronger-than-usual increases in core CPI, Citi analysts expect a more typical 0.21%MoM increase in September, although with still a high degree of uncertainty around some price components. 

• USD: 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 rise in auto sales. Sales in retail control group should rise more modestly however with risks to the downside.

• 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% - US industrial production should rise 0.6%MoM with a slightly stronger 0.7% increase in the largest subset of manufacturing production. Citi analysts expect largely across the board moderate increases in production across most manufacturing subsectors, 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, 1y Inflation expectations – Citi: 2.6%, prior: 2.6% - Citi analysts expect a modest pullback in the consumer sentiment indicator for October (preliminary) with inflation expectations also seen unchanged. 

• EUR: German ZEW Expectations, October: Forecast: 76, Prior: 77.4; ZEW Current Assessment, October: Forecast: -60, Prior: -66.2 – Citi analysts expect expectations to plateau as investors await the US election and Brexit and as 2nd wave of Covid-19 infections spike across Europe.

• AUD: Australian jobs: Citi forecast -25k, Previous 111k, Citi unemployment rate forecast 6.9%, Previous 6.8%, Citi participation rate forecast; 64.7%, Previous; 64.8% - Citi analysts expect continued job losses in Victoria to offset job increases elsewhere.  

• SGD: MAS Policy Decision -  Citi analysts expect MAS to stand pat (70 -80%) given the likely  upgrade in 2020E core CPI forecast to upper half of the -1 to 0% range. Still, with larger downside risks, especially from rising job market slack, further easing in Apr-21 cannot be ruled out.      

• CNY: Exports (%YoY) September: Citi Forecast 10.6, Consensus 10.0, prior 9.5; Imports (%YoY): Citi forecast 2.1, Consensus -0.3, Prior -2.1; Trade Balance (US$bn): Citi Forecast 58.4, Consensus 59.2, Prior 58.9 - China’s exports may have improved further in September having outperformed market consensus for six consecutive months. Citi analysts see export growth accelerating in September while on imports, Citi analysts expect import growth to turn positive to 2.1%YoY, from -2.1%YoY last month. As a result, the trade balance may stay stable at US$58.4bn.   

This is is an extract from the Daily Currency Update, dated October 13, 2020. Please approach a Citigold Relationship Manager if you would like more information.