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RBA maintains dovish stance ahead of decision around QE in July

-->RBA maintains dovish stance ahead of decision around QE in July     
  • AUD: RBA maintains its dovish policy messaging at its meeting yesterday ahead of the decision around its QE program in July Policy Board Meeting. The meeting retains current monetary parameters - keeping the cash rate and the 3Yr yield target unchanged at 10bps, while maintaining the parameters of its bond purchasing program which is set to expire in September. The Board will decide next month whether to add a third round of LSAP (asset purchases) and if it rolls forward purchases of the April-24 to November-24 bond (to maintain duration of its yield curve control).    
  • AUD: RBA notes some labor shortages in parts of the economy and Statement reinforces that the recovery “is stronger than earlier expected and is forecast to continue”. Citi analysts expect this may lead to the Australian unemployment rate to fall to 5.1% towards year-end. Australian May jobs report next month therefore will be crucial on what the RBA decides to do in July. But Citi analysts’ base case remains for ongoing dovishness and more stimulus. RBA notes the “ongoing source of uncertainty is the possibility of significant outbreaks of the virus” and that Melbourne’s current 7-day lockdown could be extended because of rising unknown community transmission.          


China’s PMI’s details weaker than headline    

  • CNH: China’s May manufacturing PMI is inflated by gains in prices - headline edges down by -0.1pp from April to 51.0, slightly below market expectations (Citi/Mkt: 51.1/51.3). Production gains 0.5pp to 52.7, following upbeat industrial production data in April but new orders decline led by a drop in new export orders back to a contractionary 48.3 while imports print  higher at 50.9, partly due to higher commodity prices. Manufacturing employment also weakens -0.7pp to 48.9. The gains come in the producer price index with purchasing prices jumping to their highest since late 2010 and resulting in a squeeze of midstream manufacturers. Meanwhile, non-manufacturing PMI expansion gains momentum in May, up 0.3pp from April to 55.2 vs consensus at 55.1 with employment improving but services edging down -0.1pp to a still robust 54.3 due to weaker business expectations.             

  • CNH: Citi analysts see some worrying signs behind May’s manufacturing PMI data including – (1) weakness of SMEs and exports; (2) rising cost pressures on manufacturers and given the uneven recovery, the team still thinks China’s growth momentum will peak around the mid-year. Citi analysts see stable monetary policy at least until July and believe supply-driven inflation will likely be further addressed by the NDRC’s targeted measures.  


USD: Supply constraints still prevalent in US May ISM manufacturing


  • USD: ISM manufacturing rises modestly in May to 61.2 from 60.7 in April. The new orders component gains to 67.0 while production and employment both decline, to 58.5 and 50.9 respectively. Meanwhile, the supplier deliveries index is up at 78.8, while the prices index pulls back modestly to a still elevated level of 88.0. While activity continues to rise, with most subsectors across manufacturing reporting growth in May, supply constraints that limited overall activity in April for the most part seem to persist into May. 

  • USD: A further slowing of supplier delivery times as well as the drop in production and employment indices are all consistent with various supply shortages limiting activity. Citi analysts point to US manufacturing sectors facing supply shortages both of materials inputs and of labor, which has also impacted services sectors. While still at expansionary levels, the decline in the ISM manufacturing employment index suggests downward risk for manufacturing employment in May. Many anecdotes in the ISM report reaffirm difficulty finding workers.

  • USD: The most positive aspect of the May ISM manufacturing report is that demand generally remains strong despite supply issues limiting activity. The new orders component rises again and remains at very elevated levels. Strong demand should help support continued activity as supply issues are eventually resolved.    


Week Ahead                   

  • USD:  US May nonfarm payrolls report key input to Fed tapering decision – Citi: 760k, median: 665k, prior: 266k; Private Payrolls – Citi: 700k, median: 600k, prior: 218k; Average Hourly Earnings MoM – Citi: 0.3%, median: 0.2%, prior: 0.7%; Average Hourly Earnings YoY – Citi: 1.7%, median: 1.2%, prior: 0.3%;  Unemployment Rate – Citi: 5.9%, median: 5.9%, prior: 6.1% - Citi analysts expect Fed officials will want to see ~750K to keep a robust discussion of tapering over the summer months (June/ July FOMC). A weaker reading (sub-500K) could have them waiting until Jackson Hole in late-Aug.
  • USD: May ISM Services – Citi: 63.5, median: 62.6, prior: 62.7 – Citi analysts will pay particular attention to prices components of ISM services, as further price pressures outside of just goods-producing industries would be a sign of potentially more persistent inflation.
  • AUD: Q1 GDP Citi forecast; +0.3%, Previous; +3.1% - the headline rate of Australian economic growth probably slowed abruptly in Q1 from the very strong 3.1% pace recorded in Q4 of 2020 and would keep yearly GDP growth negative at -0.5%. But Citi analysts expect Australia to reach this milestone (growth back above the pre-pandemic level) in Q2 rather than Q1. 
  • CAD: May Net Change in Employment – Citi: -80k, median: NA, prior: -207.1k; Unemployment Rate – Citi: 8.4%, median: NA, prior: 8.1% - after a 207k decline in Canadian employment in April, employment should decline by a further 80k jobs but with re-openings in some regions set to begin as early as this week, Citi analysts expect the June employment report to reveal substantial job gains. 


This is an extract from the Daily Currency Update, dated June 2, 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 -

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