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FX

Fed likely to change the parameters of its USD FX swap lines as demand for dollar liquidity returns to more normal levels

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Fed likely to change the parameters of its USD FX swap lines as demand for dollar liquidity returns to more normal levels                  

  • USD: Fed balance sheet decreased last week for the first time since March due to $92bn in cross-currency swaps not being rolled over as USD liquidity conditions start to normalize. Looking ahead, Citi analysts expect domestic borrowers to find alternate sources of USD liquidity from main street and muni lending facilities rather than depend on the Fed’s FX swap lines. A similar outlook for offshore as ECB, BoE, SNB, and BOJ, in consultation with the Fed change the frequency of their 7d swap tenors to 3 times per week from daily.  The tweaks, to commence on July 1, are a reaction to reduced demand for offshore USD liquidity. Reports suggest the Fed now wants to see its FX swap lines used as a backstop only rather than a regular source of USD funding. Bottom Line - The Fed actions may slow the pace of decline in USD but unlikely to change the trend or cause the type of spikes seen during the GFC and in mid March this year as the measures are a reaction to more normal USD funding conditions.     

 

GBP hit on QE disappointment as UK drives record fiscal spending   

  • GBP: BoE board meeting - BoE only adds GBP100bn more to its QE to GBP745bn (vs consensus for GBP200bn) and also cautions on lower rates. The Bank does however recognize markets are pricing in further rate cuts and that commercial banks have yet to pass on lower rates fully. In cautioning about lowering rates, BoE flags a stronger international recovery and evidence of resilient consumer spending even as it notes the risk of ‘higher and more persistent unemployment’.  Sterling though takes this badly as the increase in QE is only half of consensus (GBP100bn) and will not be able to stem the sharp QE pace reduction that risks narrowing the fiscal space for the UK government (BoE buying less Gilts means there is less fiscal space for the UK government to issue debt). Citi analysts expect a 10bp rate cut and a £50bn QE top-up by November, as well as negative Bank rate and further QE next summer.   
  • GBP: A record fiscal expansion – Public Sector Net Borrowing rise by GBP55bn in May 2020, by far the largest M-o-M increase on record (before Covid, the record monthly borrowing had been GBP22bn in Apr’12). Y-o-Y growth in public borrowing is up 870%, up from the 338% increase in April.  More fiscal easing to come - Citi analysts expect further fiscal easing in July and October. The team had assumed GBP18bn in additional fiscal spending later in 2020 but risks are now likely to the upside in the face of a slow recovery and Brexit related disruption. It is now up to BoE to create the additional fiscal space required, though additional QE.      

 

Data releases – Pace of job improvement slowing      

  • USD: Continuing claims failing to decline further is perplexing - During the week of June 6, continuing claims fail to decline further, stabilizing at 20.5 million on a seasonally adjusted basis and 18.5 million on non-seasonally adjusted basis. Meanwhile, initial claims decline slowly to 1.51 million the week ending June 13 from 1.56 million. Citi analysts think the failure of continuing claims to fall further in recent weeks, after declining about 4.3mln from their high in early May, is perplexing. However, the team still expects 5mln+ job gains in the US in June.    
  • AUD: Australia May Unemployment Rate 7.1% (consensus 7.0%), employment -227700 (consensus -75000) - Employment conditions would likely have bottomed in April in Australia with the ABS survey of payroll data implying job losses have slowed down in late May.  But the worse than consensus May jobs report suggests a much slower pace of job recovery to September when the Job keeper program to subsidize company payrolls ends.

 

Data releases – retail sales recover but largely led by stockpiling

  • AUD: Australian retail trade recovers strongly in May -  Volatility in the retail trade data continues in May thanks to a record 16.3% increase, that even with the record 17.7% decline in April, sees yearly retail trade growth jump by 5.3% in May though largely due to  COVID-19 panic stockpiling. Importantly though, the data shows considerable pent-up demand by households.
  • CAD: Canadian retail sales fall 26.4%MoM in April, weaker than consensus for -15.1%. Excluding autos, sales fall 22%, also below consensus at -12%. The decline in April retail sales is significant but unsurprising. Statistics Canada provided a preliminary estimate of a 19.1% bounce-back in sales in May. Therefore, April data should reflect the worst of the drop in activity.
  • GBP: UK retail sales bounce - sales excluding auto fuel are up 10.2% MM (consensus 4.1%) following a 15.0% fall in April while retail sales including auto-fuel grow 12.0% MM (consensus 6.3%) following a 18.1% fall in April. While indicative of stronger initial consumer sentiment, the data may have also been buoyed by very good weather in May. 

 

It is the euro area where the story continues to improve

  • EUR: France INSEE revises up Q2 GDP to -17% QQ up from -20% QQ two weeks ago – the bi-weekly Covid-19 business cycle monitor argues that the loss of economic activity compared to a ‘normal’ situation was around 29% in April, 22% in May and 12% in June. Citi analysts note the clear short-term upside bias that could see a smaller drop in French GDP than 15% QQ. 
  • EUR: Germany: Citi analysts point to Germany having had a relatively benign COVID-19 outbreak. As a result, the data shows a milder drop in German consumer activity and a swifter recovery. The picture is less benign for Germany’s core manufacturing sector, but Citi analysts  expect a sharp rebound there once more data becomes available. Bottom Line - US is enjoying more of a monetary tailwind, as Fed has more scope to ease than the ECB. But Citi analysts think there is little to pick a winner between the bold fiscal responses on either side.                

 

Week Ahead – US consumer strength, EZ & UK PMIs, RBNZ meeting

  • USD: Personal Income – Citi: -7.5%, median: -6.0%, prior: 10.5%; Personal Spending – Citi: 14.2%, median: 8.9%, prior: -13.6%; Core PCE MoM – Citi: 0.1%, median: 0.0%, prior: -0.4%; Core PCE YoY – Citi: 1.0%, median: 1.0%, prior: 1.0% - Personal income should fall 7.5%MoM in May while spending should bounce-back significantly in May. This will mechanically result in a decline in the savings rate from 33% in April to around 11% in May. Meanwhile, core PCE should rise 0.05%MoM though likely to remain well below target for much of this year.    
  • USD: Initial Jobless Claims – Citi: 1300k, median: 1300k, prior: 1508k; Continuing Claims – Citi: 19200k, median: NA, prior: 20544k – initial jobless claims should decline to 1300k for the week of June 20, continuing a gradual decline lower, but remaining elevated above 1 million claims per week. Continuing claims will continue to be important than initial claims, although Citi analysts are surprised that these have not fallen further in recent weeks.     
  • EUR: Euro area Manufacturing PMI, June Flash - Forecast: 50.3, Prior: 39.4; Services PMI, June Flash - Forecast: 46.0, Prior: 30.5; Composite PMI, June Flash - Forecast: 45.5, Prior: 31.9 – Citi analysts estimate euro area flash composite PMI will increase further in June. For the manufacturing sector, the gain will probably be around twice as large as in May, pushing the index above the 50.0 threshold for the first time since Jan-19. For services, a bigger uptick is likely, worth around 15 points, but still falling short of 50, a level that will likely be achieved in 3Q-20.
  • EUR: German Ifo index, June Forecast: 86.0, Prior: 79.5; Ifo Expectations, June Forecast: 88.0, prior: 80.1; Ifo Current Expectations, June - Forecast: 84.0, Prior: 78.9 –  Expectations should improve more than current assessment as economy moves towards recovery quadrant.
  • GBP: UK Manufacturing PMI, June Flash - Forecast: 46.0, Prior: 40.7; Services PMI, Jun Flash - Forecast: 45.0, Prior: 29.0 - Citi analysts expect widespread (if incremental) improvements in both manufacturing and services PMI – though both indexes are still short of the crucial 50 mark.
  • NZD: RBNZ policy meeting - Citi forecast; no change, Previous; 0.25% - Citi analysts expect the OCR will remain unchanged at 0.25% until 2021. The committee has left the option for negative interest rates open in the future as RBNZ believes it’s a credible policy tool.
  • CNY: China 1-Year Loan Prime Rate (%) - Citi 3.65, Consensus 3.83, prior 3.85 – Citi analysts expect the PBoC’s 1-year Loan Prime Rate (LPR) to reduce by 20 bps to 3.65%. PBoC has created two new facilities to support SMEs with a total funding of RMB440bn that is equivalent to a targeted RRR cut oriented to MSBs. As a result, Citi analysts now call off the RRR cut expected in June and expect another 20 bps MLF rate cut in June or Q3.
  • SGD: Singapore CPI (%MoM) May – Citi 0.5, Consensus 0.4, Previous -0.9; CPI (%YoY) – Citi -0.8, Consensus -0.9, Previous -0.7; CPI Core (%YoY) – Citi -0.2, Consensus -0.4, Prior  -0.3 - On a MoM basis, core CPI is likely to fall 0.1% (Apr: -0.1%). On a YoY basis, this translates to -0.2%.     

 

This is is an extract from the Daily Currency Update, dated June 22, 2020. Please approach a Citigold Relationship Manager if you would like more information.

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