-->EUR and GBP underperformance overnight on emerging prospects of a full European national lockdown yet to be fully discounted
EUR: The broad based USD Index (DXY) finds a safety bid overnight resulting in decent losses in EM and G10 FX (with EUR and GBP bearing the brunt). Sentiment is blamed on confirmation of further lockdowns throughout Europe. Euro assets have been relatively resilient to the Covid-19 negative news flow so far, barring the prospect of a full European national lockdown. But as moves by France and Germany this week now potentially raise the prospect of full lockdowns across EU member states, European assets are starting to race to multi month lows as the VIX Index spikes to the 40% handle that sees a flight to safety bid into German Bunds (10y yields fall 2.4bps to -64bps), DAX selling off as much as 5% (worst single day loss since mid-March) and EURUSD falling to near 1.1750 (down nearly a big figure over the past 3 trading sessions).
EUR: A worsening Covid-19 situation in Europe leads to rising prospects of full national lockdowns across member states that are yet to be fully discounted - France has already announced a one month lockdown starting midnight. Belgium, which sees the highest rate of infections within the EU this week, is pondering a new national lockdown while the Dutch PM mulls stricter measures, including a full lockdown. Germany, least impacted by the new Covid-19 spike so far, also announces a possible 2nd semi-lockdown overnight that would include closing bars, restaurants and leisure facilities through the end of November (though yet to be officially confirmed).
EUR: Key metrics for assessing lockdown risk – new cases adjusted for population and hospitalizations – are trending higher in Europe albeit at varying paces. As a result, the nascent economic recovery from the initial outbreak is increasingly under question. Therefore, tonight’s ECB meeting will see added interest even if there are no plans to change policy settings at this meeting.
ECB meeting tonight - Signals for further easing in December
EUR: Citi analysts see the shock caused by the pandemic is likely deeper and more protracted than European policy-makers expected. At tonight’s ECB meeting, the team expects (1) no decision of substance (though the Governing Council is likely to hint at policy easing later on); (2) in December the Governing Council increases both the overall residual envelope of the PEPP (a minimum EUR500bn) and its timeline (by another 6 months); (3) that in the course of the first half of 2021, ECB policy drifts towards the more explicit form of yield curve control. But with prospect of national lockdowns rising across Europe, there is some risk the ECB could move tonight on some of the proposals.
Citi analysts - RBA seen gearing itself for further policy easing
- AUD: RBA will likely move down the path of initiating a LSAP (longer dated asset purchases) program which might serve to lower longer term yields and potentially weaken AUD as a consequence of expanding the RBA balance sheet - Citi analysts expect that the RBA could reasonably position itself to own between A$200-250bn of Australian sovereign bonds (ACGBs) through an LSAP program - The risk is that a smaller amount is initially targeted but Citi analysts still believe that something in region of A$150-200bn could still wield a significant market impact. It is worthwhile noting that in previous instances where LSAP was introduced, there has generally been an upsize of the initial program that was announced. Citi analysts pencil additional easing in February 2021 - this will likely include a cut to the cash rate, the 3-yr yield target and the rate charged on the TFF, down from 25bps to 10bps. Citi analysts believe February would be a better potential window for these measures given the timing for the removal of remaining significant government fiscal stimulus.
AUD: However, the biggest risk to the view is if the RBA believes that an “all in” policy strike was required – therefore, despite the domestic outlook looking relatively better now than at any stage during the pandemic and the RBA likely to revise up some of its growth forecasts in the November SMP, Citi analysts acknowledge that the Bank could introduce its policy easing package in November.
Data/ events overnight
AUD: Normal CPI dynamics to return in Q4 but unlikely to move above RBA’s target band until 2022 - end - Australian headline CPI rebounds to 1.6%, stronger than consensus and prior (+1.5%) though the print is noisy because of missing prices in Melbourne due to the Stage 3 and Stage 4 lockdowns. Citi analysts expect normal inflation dynamics to return in Q4. Implications for monetary policy – Citi analysts think the stronger than expected Q3 CPI result will do little to help RBA steer inflation back to the target band. Although trimmed mean inflation is up 0.4%, in yearly terms, at 1.2%, it is the same result recorded in Q2 and is the early pick for what is expected in Q4. The RBA’s forecast for Q4 is 1%, but even if they revise it upwards to 1¼% in the November SMP, the forward trajectory is still likely to show it remaining below the bottom of the 2% target band over the forecast horizon to the end of 2022.
- CAD: BoC board meeting - level of accommodation unchanged but details of QE purchases changed - BoC leaves rates unchanged at 0.25%, but makes slight adjustments to its QE program. Forecasts in the Monetary Policy Statement reflect a stronger bounce-back in Q3 GDP, but a much slower future pace of growth. Current projections suggest rates will remain low until 2023. BoC will likely shift to purchasing more longer-term bonds to keep borrowing rates low, but says it may reduce size of purchases from at least C$5bn per week to C$4bn. Governor Macklem mentions that buying longer-term bonds provides more “stimulus per dollar”, allowing the BoC to reduce the size of purchases while providing the same level of accommodation. The comments suggest potentially hawkish risks from a faster end of balance-sheet expansion.
This is an extract from the Daily Currency Update, dated October 29, 2020. Please approach a Citigold Relationship Manager if you would like more information.