Fed, BoC & RBNZ push back on negative rates; Australia – China tensions escalate

Fed, BoC & RBNZ push back on negative rates; Australia – China tensions escalate   

• USD: FOMC Minutes – More guidance on rates, purchases coming - The April 29th FOMC minutes contain little new information but strongly suggest that more explicit guidance on the pace of Treasury and MBS purchases and level of rates would be coming, perhaps later this summer by further clarifying its intentions by making its forward guidance for the path for the federal funds rate more explicit.  There is brief mention of yield control through Federal Reserve purchases of Treasuries on a scale necessary to keep yields at short- to medium-term maturities capped at specified levels for a period of time.                           

• USD: The Fed’s Open Market Desk survey suggests that market participants anticipate a sharp near-term decline in economic activity, followed by some recovery later this year. Against this backdrop, market participants generally expect the target range for the federal funds rate to remain at the effective lower bound for the next couple of years. Respondents to Desk surveys attach almost no probability to the FOMC implementing negative policy rates.         

• NZD: RBNZ Governor also downplays negative rates – says “we don’t want to go negative at this point; we’re prepared to if we have to but not until a lot later…..It’s got to jump the hurdles. It’s got to be seen to be necessary. It’s got to be seen to be effective, efficient and operationally capable. Why remove options from your table if they can be of use?” Orr says. Meanwhile, RBNZ economist Ha says he expects the OCR to be on hold until March 2020.

• CAD: Meanwhile, BoC member Lane also pushes back on further rate cuts overnight even as he sees post-crisis sectoral adjustments as likely to cause damage to Canadian productive capacity that may be profound and long-lasting.   

Further escalation in Australia – China tensions                     

• AUD: Reports yesterday of China trade retaliation following the 80% tariff on barley imports from Australia for the next 5 years with Chinese officials having drawn up a list of potential goods including seafood, oatmeal and fruit that could be subject to stricter quality checks, anti-dumping probes, tariffs or customs delays. Major items such as iron ore, coal and natural gas are excluded though reports suggest coal imports from Australia could be tightened, according to a daily note from China Coal Market, affiliated with China Coal Transport and Distribution Association.              

UK and Canada headline CPI drop sharply, core CPI less so     

• GBP: UK headline CPI inflation (targeted by the BoE) falls sharply to 0.8% YY in April (consensus 0.9%, Citi 0.8%) compared to 1.5% YY in March and 1.7% QQ over  Q1 as a whole with energy weighing sharply. However, core inflation is once again somewhat stronger than expected, growing at 1.4% YY (Consensus 1.4% YY, Citi 1.2% YY) and RPI also falls by less than expected  –  printing at 1.5% YY (consensus 1.6% YY, Citi 1.3% YY). Citi analysts still expect excess capacity to weigh further on UK inflation, driving headline CPI lower over Q2 and Q3.    

• CAD: Canada headline declines as demand softens - headline CPI in April declines 0.7%MoM, just-below consensus  for -0.6% with the year-on-year reading below zero for the first time since 2009, to -0.2%YoY. Core measures are also lower on average, but with the median and trim measures unchanged at 2.0% and 1.8% respectively, but the common measure falling to 1.6% from 1.7%.  

UK – EU Brexit talks still deadlocked for now   

• GBP: UK yesterday publishes 10 technical drafts to operationalize its proposals for a future UK-EU trade agreement. The UK plan for a free  trade agreement is mostly based on EU agreements with Canada and Japan, but appears to include some notable extensions beyond existing EU precedents. A final round of talks are scheduled for 1st June before a stocktaking summit later in the month. Cabinet Minister Michael Gove blames Chief EU negotiator Michel Barnier for the breakdown in recent talks that raises market concerns about  “No Deal” risk. Note that June 30 is the deadline for UK to ask for an extension to Article 50.  

Euro area and UK manufacturing and services (flash) PMIs for May due tonight; BoJ to hold unscheduled meeting Friday                       

• EUR & GBP: German Manufacturing PMI, May Flash Citi: 38.0 from 34.8; Services PMI Citi: 35.0 from 16.2 – PMIs seen rising as lockdown eases but still well in contractionary territory; Euro Area: Manufacturing PMIs May Flash Citi: 40.0 from 33.6; Services PMI Citi: 25.0 from 12.0; Composite PMI Citi: 24.0 from 13.6 – Modest gain for manufacturing PMI with bigger uptick for services PMI; UK Manufacturing PMI, May Flash Citi: 44.5 from 32.6; Services PMI Citi:41.1 from 13.4; Composite PMI Citi: 41.8 from 13.8; UK Retail Sales, April Citi: -12.1% MM, -18.4% YY from -5.1% MM, -5.8% YY. ECB will also publish minutes of the April meeting and BoE Governor Bailey will testify before UK Parliament.  

• JPY: BoJ to hold unscheduled meeting Friday - meeting will likely discuss new measures to provide funds to banks and echo guidance around the last MPC. BoJ Governor Kuroda has reiterated his pledge earlier to do whatever the central bank can to support the economy and indicated he would introduce another new lending program for small companies and could unveil details via an emergency meeting before the next meeting on June 16.  

This is is an extract from the Daily Currency Update, dated May 21, 2020. Please approach a Citigold Relationship Manager if you would like more information.