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Latest monetary/ fiscal developments – Fed to add more facilities; EU yet to deliver joint fiscal response; RBA/ RBNZ happy with their QE programs

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Latest monetary/ fiscal developments – Fed to add more facilities; EU yet to deliver joint fiscal response; RBA/ RBNZ happy with their QE programs           

  • USD: Fed facilities may grow further – Fed hawk Mester overnight says the Fed can take more risk amid reports the US Senate is looking to up relief loans by USD250bn. New Fed data shows the amount of commercial and industrial loans outstanding jumped by USD365bn between March 11 and March 25. This 15.4% jump over two weeks is a record, though notably, household lending isn’t moving. Fed Chair Powell speaks Thursday – most interest will be on the US Treasury’s new SME lending facility that the Fed can lever up 10 – 1 (that is now delayed).   
  • EUR: New decision - ECB adopts a general reduction of collateral valuation haircuts…and will issue a waiver to accept Greek sovereign debt instruments as collateral in Euro system credit operations. Pending -  still awaiting results of the Eurogroup meeting on a joint fiscal response that is now some four hours past what was communicated. EURUSD bounces off pivotal support, suggesting the delay is being taken as a positive sign.  Meanwhile, Italy issues new guarantees for €400bn loans, liquidity-boosting measures now total €750bn (~50% of GDP) with its 2nd fiscal package geared towards liquidity to businesses, after the first package targeted jobs and household incomes. Germany also issues new 100% guarantees as a further step towards “full fiscal” by fully guaranteeing firms’ Covid-19 revenue losses. 
  • AUD: RBA board meeting - expects QE down-under to look different to overseas while the PM outlined the basis for the 6-month virus time-frame - RBA seems satisfied that that the 3-year government bond yield is around the 25bp target level that is expected to remain in place until progress is made towards the goal for full employment and inflation” – Citi analysts do not expect progress until early to mid-2022 while Governor Lowe has noted that he does not expect the cash rate to increase for ‘about three-years’. No new economic point forecasts, but the RBA is bracing for a big GDP hit in Q2 and the unemployment rate is expected to increase to its highest level for many years” (Citi analysts expect a 5.7% GDP contraction in Q2 and a peak unemployment rate of 8.4% early in Q3 assuming the virus and social distancing last for around 6 months – the timeline flagged by Australian PM Scott Morrison yesterday).
  • NZD: RBNZ announces about a 10% increase from the existing purchase program, noting that purchases have worked well. RBNZ mentions it will review the LSAP (size of its QE program and daily purchases level) at the next meeting on May 13.                   

 

Overnight data releases: US main street sentiment souring as US Treasury/ Fed SME lending facility yet to begin            

 

  • USD: NFIB reflects main street sentiment souring - the NFIB small business optimism index declines by 8.1 points in March, the most in monthly data going back to 1986. The headline drops to 96.4 which is unsurprising given the current situation while several sub-indices fall into negative territory - net percentage of firms planning to boost inventory, those expecting better sales and seeing easier credit conditions and firms expecting positive earnings trends falls to -6%.    

 

This Week: OPEC (Thursday) now the key event                     

  • COMMODITIES: Oil shock risks remain high given OPEC's uncertain playbook along with timing for both Thursday’s OPEC+ gathering and the extraordinary energy ministers meeting Friday. Bottom line – the oil market is going into a highly uncertain situation with a new format and demands for US participation when risk is already biased towards “too little, too late” given ongoing demand destruction.  Citi analysts point out that what’s required is a good 10mn bpd immediate reduction in oil supply that is needed to prevent inventories globally from reaching tank tops. But the risk is that even if OPEC+ delivers the best case deal, rallies will likely prove short-lived  on the view that (1) inventory builds will persist amid deal implementation alongside (2) further demand destruction (estimated 35mn bpd).         
  • G10 DATA/ EVENTS: ECB minutes on Thursday might feel stale. European data releases include monthly GDP data for February in the UK on Thursday. US data this week includes March core CPI deflation (Citi at –0.17%MoM) while initial jobless claims (due Thursday) may have peaked and could decline to “only” 3.5 million. Citi analysts see potential for both US core and headline inflation to be negative month-on-month again in April. Thursday also sees the release of the University of Michigan consumer sentiment survey. In Canada, the March employment report could show the worst of the declines in employment with Citi analysts expecting 1.1 million jobs lost and for the unemployment rate to rise to 9.7%.  

 

FX Outlook: USD underperforms as upside momentum fades ahead of Easter break   

  • USD: Citi analysts - Recent Fed action sees the release of excess USDs via swap lines, repo and unlimited QE. This is occurring at a time where bullish factors for the Greenback appear to be eroding due to compressing yield spreads between the US and rest of the world. As the Fed continues to aggressively expand its balance sheet and inject large USD liquidity provisions into the money market system, moderating funding strains should eventually weigh on sentiment – the pivotal point is when markets get to see details (and commencement) of the Fed’s “Main Street Lending” facility – markets await Chair Powell’s speech Thursday.     
  • Safe Havens (JPY, CHF & EUR): As the risk backdrop continues to remain challenged on disappointment to speedy recovery expectations and potential demand-side disruptions, demand for Safe Havens is likely extend especially against risk currencies (Commodity/ EM FX). 

 

This is an extract from the Daily Currency Update, dated April 8, 2020. Please approach a Citigold Relationship Manager if you would like more information.

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