Friday central bank developments – USD funding stress recedes; BoC joins RBA/ RBNZ in cutting rates to its lower bound and starting QE

Friday central bank developments – USD funding stress recedes; BoC joins RBA/ RBNZ in cutting rates to its lower bound and starting QE                                   

• USD: Congress passes USD2trn stimulus bill & Trump signs into law, USD weakens - A USD2trn fiscal package (9.2% of GDP) with about ~$1.2trln (5.5% of GDP) in direct stimulus is approved by the US Congress on Friday. The package also gives Fed the ability to lever (10 – 1) new USD454bn Treasury equity capital to make loans through existing facilities and a new “Main Street Lending” program. This adds to the raft of liquidity measures introduced by the Fed over the past fortnight to ease USD funding conditions, both onshore and offshore which is already seeing a fairly sharp drop in USD this past week.            

• USD: FX swap lines between the Fed and global central banks appear to be increasingly effective in mitigating pressures on accessing USD liquidity offshore with the biggest improvements seen in Japan (hence the sharp drop in USDJPY). However, USD funding pressures onshore appear to be lagging as the Fed likely takes some time to be able to lever up its new USD454bn Treasury equity capital to make loans through existing facilities. That said, given the Fed’s recently announced measures together with the US Treasury’s backstop for the Fed contained in the fiscal stimulus bill passed Friday, USD funding markets could recover quickly (and USD potentially weaken more sharply) as the macro outlook stabilizes.     

• CAD: BoC joins RBA & RBNZ - cuts 50bp to 0.25%, starts asset purchase program. BoC will also purchase a minimum of C$5 billion per week of Canadian sovereign debt as part of its QE program.  When asked about possibility of negative rates though, Governor Poloz says the Governing Council considers the current rate of 0.25% as the effective lower bound. Citi analysts estimate purchases of C$5 billion per week until year end would imply a total size of C$200 billion at the upper end of the possible range for the QE program.   

Week Ahead – US March payrolls and Canada January GDP

• USD & CAD: Citi analysts expect job growth in the US will likely be negative in March in data released Friday but even worse readings are expected in April as weekly jobless claims (Thursday) stay in the millions. Meanwhile, ISM non-manufacturing is also likely to plunge and the Fed is likely to detail its “Main Street” lending program. In Canada, January GDP by industry should be flat on the month but, as with most of the hard data releases in the next few weeks, will likely not reflect economic impacts from COVID-19.   

Data releases – China job sentiment worsens further in March     

• Citi China Job Sentiment Index (CCJSI) falls further in March following a sharp monthly drop in February. The official surveyed unemployment rate, urban and 31-city, jumps 1.0ppt and 0.5ppt to 6.2% and 5.7% in February, respectively, the highest on record, from December even as the Chinese economy appears to be normalizing. The lingering effects of COVID-19 are likely to remain as a potential downside risk to economic data for March, such as PMI employment component and retail sales though Citi analysts do expect China headline manufacturing PMI to rebound in March, potentially leading to job market conditions bottoming in the near future.

FX Outlook: USD likely to continue weakening as liquidity conditions ease

• USD: Is likely to extend this past week’s losses as the Fed sheds light on its USD454bn “Main Street” lending program this week that it can lever to as much as 10 -1 (up to USD4.5trn in additional USD liquidity). With the Fed balance sheet now likely at $5.2trn, further Fed purchases and leveraging of its “Main Street” lending program could potentially raise the balance sheet size to $6trn in the next month or two and $7trn by June and approaching USD10trn in H2 – this would be way above that seen during the GFC.       

• Safe Havens (JPY, CHF & EUR): An easing of USD liquidity funding conditions and Coronavirus – led economic uncertainty is likely to retain demand return for Safe Havens amid the challenging risk backdrop and risk of disappointment to speedy recovery expectations and potential demand-side disruptions in the US and Europe. We would note that much of the move lower in USDJPY (and higher in EURUSD) this past week can be attributed to easing USD funding conditions offshore (particularly Japan) as dollar liquidity makes its way into Japanese hands. 

• Commodity Bloc (AUD, NZD & CAD): More resilient versus USD as liquidity conditions ease but likely underperforming on non USD crosses (Safe Havens & Sterling) - All 3 currencies have performed strongly this past week even as BoC cut rates and announced QE. Easing USD liquidity conditions appear responsible for this resilience but the RBA’s Japanese – style yield curve control (targeting 0 – 3Yr rates at 0.25% “for some years”), depressed commodity prices (oil) and extremely weak domestic fundamentals is likely to limit the upside potential in all 3 currencies.      

• GBP: Solid medium to longer term fundamentals as BoE moves towards “full fiscal absorption” - Citi analysts expect UK Treasury and BoE to continue to work in concert with the focus on ‘fiscal absorption’ over coming years, with monetary-fiscal coordination (low rates and QE) facilitating fiscal expansion. This is likely to boost already elevated inflation expectations in the UK that in turn could lift sterling against most G10/ Asian FX.    

• SGD: Likely to underperform G10 (ex USD) ahead of MAS meeting - Citi analysts now expect MAS to flatten the 12m forward slope back to 0% at the April meeting and re-center the band downwards by 200bps with dovish forward guidance (70% base case). Citi analysts do not expect MAS to widen the band. With SGD ending Friday around 100bps below the mid, this opens up the prospects of further weakness and relative underperformance versus G10 FX (ex USD).        

This is an extract from the Daily Currency Update, dated March 30, 2020. Please approach a Citigold Relationship Manager if you would like more information.