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No signs of consolidation - USD extends losses post a dovish FOMC

No signs of consolidation - USD extends losses post a dovish FOMC   

  • USD: Fed holds rates unchanged as widely expected but its decision to extend extraordinary swap and repo operations from September 2020 to March 2021 is a minor surprise, given that the FX basis market (a barometer of onshore and offshore demand for USD liquidity) has completely normalized. The move highlights a cautious Fed, willing to keep USD liquidity ample for longer which helps to break the link between risk-off and USD outperformance in periods of economic duress.      
  • USD: No decision is made regarding forward guidance changes but a range of options, including language about leaving rates at the zero bound until inflation reaches or exceeds 2% for a considerable period of time is likely to be contained in the upcoming minutes (August 19) and adopted more formally at the September FOMC (Citi analysts).          
  • USD: Chair Powell’s comments in the Q & A reveal his concerns about risks to the US recovery, emphasizing the big shock to demand as US core inflation drops to 1% and that the US will be struggling against disinflationary pressures for quite some time. His  economic outlook seems biased toward the pessimistic end of the forecast range, saying  “the path forward for the economy is extraordinarily uncertain and will depend on our success in keeping the virus in check... full recovery is unlikely until people are confident that it's safe to reengage in a broad range of activities. Indicators of business fixed investment have yet to show a recovery while unemployment has declined in May and June but at 11.1% remains far above before the outbreak and greater than the global crisis".
  • USD: Chair Powell also provides an update on the Fed's monetary policy framework saying there will be a delay in delivery due to the pandemic but possible enhancements to the Fed’s statement on longer run goals and monetary policy strategy will likely be delivered “in the near future.”                 

 

Australian CPI in line; Weak jobs in Singapore retain odds of MAS easing            

  • AUD: Australian Q2 CPI is in-line with Citi analysts call and slightly above consensus - Headline CPI falls by -1.9% Q-o-Q in Q2 (consensus -2.0%) while in yearly terms is down -0.3%. The data has little if any implications for the RBA given Q2 captures peak lockdown in Australia.           
  • SGD: Singapore 2Q Job Losses Surge to Record High; Unemployment Rates Highest Since GFC - Net job losses (ex-FDW) rise sharply to -121.8k, more than four times the previous quarterly high in 1Q (-25.6k). Business closures, resident unemployment rate and retrenchments to see further upward pressure - with the phasing out of generous fiscal support from 2H20, business closures, which remained fairly stable in 2Q (avg: 3.7k, 1Q: 3.8k), could pick up in 2H, alongside job losses. Such pressures could persist into 2021 as a negative fiscal impulse might be difficult to avoid given the constraints under the Balanced Budget Rule. Citi analysts base case is for the resident unemployment rate (1H: 3.6%) to rise above 4% through 2021. Another MAS downward re-centering in October cannot be ruled out (30–40% chance) as the extent that job losses exerts a disinflationary impact, especially into 2021 and given the jobs report suggests that losses may be advancing faster than the April MR’s expectations.        

 

US income/ spending, euro zone HICP and China manufacturing PMI data yet to come this week       

  • USD: US Personal Income – Citi: -0.2%, median: -0.5%, prior: -4.2%; Personal Spending – Citi: 6.6%, median: 5.5%, prior: 8.2%; Core PCE YoY – Citi: 1.0%, median: 1.0%, prior: 1.0%  - Personal income should decline a modest 0.2%MoM in June, as an increase in labor incomes offsets further declines in government transfers. Meanwhile, spending should rise 6.6% in June, in line with retail sales while core PCE inflation should rise 0.28%MoM (0.3% rounded) though Citi analysts still see core PCE remaining below 2% through the end of this year and into 2021.                          
  • US Initial Jobless Claims – Citi: 1500k, median: NA, prior: 1416k; Continuing Claims – Citi: 16200k, median: NA, prior: 16197k - Citi analysts again expect another increase to 1500k in weekly claims for the week of July 25. However, this increase in initial claims is not a clear sign of rising unemployment, instead, seasonal patterns around the 4th of July holiday result in very unfavorable seasonal factors. Similarly, continuing claims are likely to rise modestly to 16.2 million for the week of July 18 due to seasonal factors (and which is the payrolls survey reference week). However, Citi analysts still expect hiring of at 1 million workers again in July   
  • Euro zone HICP Inflation, July Flash Forecast: 0.2% YY, Prior: 0.3% YY - Despite sizable base effects, a likely sharp drop in core HICP from 0.8% YY in June to 0.4% YY in July should push the headline inflation rate lower. The 3pp temporary VAT rate cut in Germany appears to be the main culprit, as it will likely shave around 0.25pp off core euro zone HICP.  
  • CNY: China Manufacturing PMI July – Citi 51.5, Prior 50.9 – China’s manufacturing PMI could continue to inch up in July. The better than expected 2Q GDP, more fiscal transfers flowing to local government, bull capital market and RMB strength could boost sentiment.          

 

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

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