Little reaction from USD to the dovish US events overnight

Little reaction from USD to the dovish US events overnight    

• USD: US January core CPI softer on pandemic-impacted components - US core CPI disappoints, coming in flat on the month in January (0.03% unrounded) and weaker than Citi analysts’ expectations for a 0.13% increase and consensus at 0.2%. Meanwhile, headline CPI rises a more solid 0.26%. Citi analysts expect the relatively soft January core CPI to keep the Fed dovish, yet it does not change their view for firming inflation later in the year. The team however think it is too soon to see any signs of sustainably higher inflation, especially as a result of the sizable but yet-to-be-passed fiscal spending package.      

• USD: Fed Chair Powell continues to stress patience - speaking at the Economic Club of New York, Chair Powell stresses patience will be required, saying – “also important is a patiently accommodative monetary policy stance that embraces the lessons of the past—about the labor market in particular and the economy more generally." In the Q&A, Powell indicates that US inflation may rise from two sources this year - (1) base effects in coming months, and (2) on economic re-opening but stresses these will likely be more temporary than structural and wants to see actual inflation materialize rather than just inflation expectations or indicators. On fiscal policy, Chair Powell notes that it remains the purview of Congress not the Fed but the federal budget will play no role in Fed deliberations. On the Fed balance sheet, Powell suggests there is no immediate reason to taper. And finally, on the US output gap that has gained more attention following a recent piece from US economist and Harvard professor Larry Summers, Powell notes the output gap is hard to estimate so does not put much emphasis on it with respect to policy.  

China CPI miss overshadowed by PBoC’s monetary policy report

• CNH: China CPI comes in weaker at -0.3%YoY vs 0% expected. There is little reaction as it is overshadowed by PBoC’s Q4 Monetary Policy report. Key takeaways include – (1) Keeping the economy close to potential output. With Q4 GDP at 6.5%, fundamentals do not support further monetary policy easing; (2) CPI expected to rebound and stabilize while PPI can potentially turn positive in the short term; (3) Contain leverage in property and household sectors to prevent financial sector risks (potential asset bubbles). The PBoC MPR also looks to enhance its expectation management on RMB and issue more measures to encourage capital outflow. This is deemed more desirable to slow the pace of RMB appreciation than lowering domestic interest rates or outright intervention – the latter in particular goes against PBoC’s objective of further capital market liberalization.   

JPY’s fall on reports BoJ may deepen negative rates is short lived    

• JPY: The Asian session yesterday sees USDJPY spike some 25 pips to the 104.75 level on headlines that the BoJ may clarify its position on whether it has room to deepen negative interest rates at its March policy review. However, investors fade the USDJPY spike just as quickly as it started as this runs counter to statements by BoJ Governor Kuroda in the past who has indicated that the Bank’s current quantitative and qualitative monetary easing (QQE) with yield curve control (YCC) is functioning well and is here to stay. He has also stated that the March policy framework assessment will instead focus on a review of YCC operations and asset purchase methods, leading Citi analysts to expect only minor tweaks to BoJ’s March Monetary  policy report (MPR).         

Citi analysts - Brent prices likely to hit $70 than $40 by year-end       

• COMMODITIES: The recent oil price rebound since November is no accident. Even with the extended pandemic, OPEC+ discipline and Saudi Arabia’s decision to reduce output by 1-m b/d through March have accelerated the erosion of record inventories, pointing to an earlier re-balancing. Demand looks stronger than expected too. Citi analysts revise up their oil price by $5 to $64 in 2021, with point prices for Brent and WTI in 6-12 months to $70 and $68, respectively. This comes as physical markets have been reflecting tighter fundamentals, with strengthening backwardation.

• COMMODITIES: Structural backwardation likely further encourages financial flows to crude oil. At the same time, financial positioning looks neutral rather than overstretched to the long side, pointing to more upside room for prices. As opposed to getting “ahead of itself,” markets appear to be more accurately anticipating constructive demand and supply conditions well into, if not through, 2021 though there also appears to be risk of significant disruption to further price upside.   

Data releases for the remainder of this week             

• USD: University of Michigan Sentiment – Citi: 79.4, median: 80.9, prior: 79.0; University of Michigan 1Yr Inflation Expectations – Citi: 3.0%, prior: 3.0% - the University of Michigan consumer sentiment survey should rise slightly to 79.4 in February from 79.0 in January, potentially reflecting increased optimism over recently falling virus cases. Citi analysts also expect the inflation expectations components of the University of Michigan to remain relatively more-elevated in coming months as businesses reopen. Consumer inflation expectations measures are one key factor the Fed will be watching to assess inflationary pressures.   

• GBP: UK First Quarterly GDP Estimate, 4Q Forecast: 0.7% QQ 3Q: 16.0% QQ; GDP Monthly Estimate, December Forecast: 1.8% MM Prior: -2.6% MM – the December’s GDP print will likely be buffeted by - (1) deterioration in public health outlook due to tightened restrictions; (2) Brexit stockpiling effects; and (3) acute border disruption associated with the closure of the Channel crossing between 20-23 December. For the quarter as a whole, Citi analysts expect downward revisions to November to temper the more resilient data for December. From here, Citi analysts think the outlook for Q1-2021 remains highly challenged, with timelier indicators pointing to a level of services output similar to that observed in June.        

This is an extract from the Daily Currency Update, dated February 11, 2021. Please approach a Citigold Relationship Manager if you would like more information.