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FX

A key week for the Bank of Canada

A key week for the Bank of Canada              

  • CAD: Citi analysts expect the April BoC meeting this week will likely see a number of moving parts as the recent set of lockdown measures across provinces raises uncertainty surrounding the Bank’s decision to taper its QE program. Nevertheless, the team still expects BoC will taper its QE program - asset purchases to slow to C$3bn per week (down from C$4bn), with a dovish characterization around the start of tapering. However, in policy guidance, the team expects removal of reference to closing output gap in 2023, which could be taken as slightly hawkish.                      

  • CAD: In current BoC projections, the Canadian output gap is not expected to close until H1-2023. This is a significant disconnect from market pricing which sees 65bps of hikes by March-2023. BoC is also expected to update its forecasts for the Canadian economy in its Monetary Policy Report, where there are likely to be substantial upward revisions to growth and potential growth estimates. Together, these updates could potentially point to an earlier close of the output gap than BoC’s current projections of H1’2023. Citi analysts’ base case is for reference to the output gap closing in 2023 to be removed, which would likely be taken as a more hawkish signal of the BoC expecting the output gap to close earlier.   

 

ECB meeting preview -  how long until a PEPP taper?   

  • EUR: ECB’s PEPP pace is likely to remain the hot topic in the weeks and months ahead. Weekly data shows a ‘significant increase’ – and the pace appears to be gravitating towards Citi analysts’ expectations for €90bn/month. Any discussion on pace at this week’s ECB meeting though is likely to be brief, with the ECB only due to review the decision quarterly, “based on joint assessments of financing conditions and inflation outlook”.  
  • EUR: That said, investor conversations are already turning to the timing of an ECB taper. The PEPP envelope allows the ECB flexibility in timing and this current ‘significant increase’ in PEPP purchases could prove temporary for just one quarter should market conditions remain stable. But there is ample space to keep a higher pace for longer in which a higher pace lasts until September - it would still leave enough of the envelope to revert to a pace of €65bn/month, similar to H2 2020. This may be the crux of the decision - should the ECB end the ‘significant increase’ pace in June and leave ample room to increase again should it be needed or take out insurance against higher yields over the summer by not considering tapering until at least September?   

 

Week Ahead: Key data/ events – ECB and BoC meetings         

  • EUR: ECB meeting – refer to the piece “ECB meeting preview -  how long until a PEPP taper?”.   
  • EUR: Euro area Manufacturing PMI, April Flash Forecast: 61.0 Prior: 62.5; Services PMI, April Flash Forecast: 47.2 Prior: 49.6; Composite PMI, April Flash Forecast: 51.0 Prior: 53.2 – For services, Citi analysts expect rate of contraction worsened in April to a 2-month low of 47.2, while pace of expansion for manufacturing likely moderated from the all–time high of 62.5 in March.      
  • GBP: UK CPI Inflation, March Forecast: 0.7% YY Prior: 0.4% YY; CPI Core, March Forecast: 1.1% YY Prior: 0.9% YY - the key question is how much of the inflation undershoot in February is now transferred into stronger M/M inflation over coming months. As such, Citi analysts expect a moderate pickup in UK inflation this month and then a further boost in April. 
  • GBP: UK employment, Dec-Feb Forecast: -152k 3M/3M Prior: -147k 3M/3m; Unemployment Rate, Dec-Feb Forecast: 5.0% 3M Avg; Prior: 5.0% 3M Avg; Average Weekly Earnings, Dec-Feb Forecast: 4.5% 3M YY Prior: 4.8% 3M YY; AWE Ex-Bonus, Dec-Feb Forecast: 4.1% 3M YY Prior: 4.2% 3M YY – Citi analysts expect the UK labor market to brush off re-imposition of lockdown restrictions in January and expect the unemployment rate to remain steady.
  • GBP: Manufacturing PMI, April Flash Forecast: 48.1 Prior (Mar F): 58.9; Services PMI, April Flash Forecast: 61.8 Prior (Mar F): 56.3 – Citi analysts expect manufacturing PMI to remain relatively robust in the first weeks of April while also expecting UK services PMI to rebound above its 60 threshold for the first time since the start of the pandemic. The key question will be how long this can be sustained. Citi analysts’ bias remains for a rapid but incomplete recovery.
  • GBP: UK Retail Sales, March Forecast: 2.5% MM, 4.2% YY Prior: 2.1% MM, -3.7% YY; Ex Auto Fuels, March Forecast: 2.1% MM, 4.9% YY Prior: 2.4% MM, -1.1% YY - Timelier data points to further improvements in retail spending in March. These data are likely to recover further in April.
  • AUD: Citi analysts raise their quarterly Q1 inflation forecast for Australia from 0.4% to 1.0%, which takes headline inflation to 1.5% YoY and their quarterly forecast for underlying inflation is also revised higher from 0.4% to 0.5% QoQ (1.3% YoY). The team see risks as skewed to the upside, though the inflation dynamics may begin to normalize in the second half of the year.
  • CAD: Bank of Canada Rate Decision – Citi: 0.25%, median: 0.25%, prior: 0.25% - refer to the piece on page one “Bank of Canada meeting preview”. 
  • CAD: CPI NSA MoM (Mar) – Citi: 0.6%, prior: 0.5%; CPI YoY – Citi: 2.3%, prior: 1.1% - Citi analysts expect a strong 0.6%MoM increase in CPI in March that would push the Y/Y reading above the BoC’s 2% target at 2.3%. Further increases in headline CPI are likely in the coming months. Indications of some capacity constraints and rising inflation expectations in the Q1 Business Outlook Survey suggest core inflation measures rising back closer to 2% later in the year.                

 

This is an extract from the Daily Currency Update, dated April 20, 2021. Please approach a Citigold Relationship Manager if you would like more information. For the latest updated CitiFX house views and strategy (updated every Monday) please click here - 

https://asia.citi.com/wealthinsights/citifx-house-views-and-strategy