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RBA minutes - a slightly harder attitude towards currency strength

-->RBA minutes - a slightly harder attitude towards currency strength       
  • AUD: RBA minutes from the February 2 meeting are largely optimistic with the Australian unemployment rate expected to decline to around 6% by the end of 2021 before reaching around 5.25% by mid-2023 but with inflation only approaching 2% by the end of the forecast period (mid 2023). As a result, the RBA judges to extend the bond purchase program beyond April for a further 6 months and could potentially roll over its asset purchase program for a further 6 months again at October - end. On the exchange rate, RBA acknowledges the rise in commodity prices has put upward pressure on AUD that has now appreciated back to around 2018 levels in trade-weighted terms but also reminds investors that the additional monetary policy stimulus taken in November has contributed to AUD being noticeably lower than it would otherwise be. RBA suggests that bond purchases are contributing to a lower exchange rate but more importantly in the minutes, mentions that were the Bank to cease bond purchases in April, it would likely contribute to an unwelcome significant upward pressure on the exchange rate. Comment referencing upward pressure on the exchange rate as “unwelcome” should be a reminder of RBA’s concerns on AUD strength.            


Asia EM: Singapore MAS normalization more likely in 2022 than 2021   

  • SGD: Singapore’s 4Q20 GDP is revised up to -2.4% YoY, 3.8% QoQ SA, above consensus (-3.6% YoY). 2020 GDP is revised up to -5.4% (previous: -5.8%) and the rebound in 2H20 has now recovered 87% of the lost output in 2Q20. Folding in the higher starting point for 2021, Citi analysts upwardly revise their 2021 GDP forecast to 5.7% (previous: 5%).  The Singapore budget yesterday sees a significantly smaller overall deficit of $11bn in FY21 (2.2% of GDP) and a FY20 overall deficit of S$64.9bn (13.9% of GDP) that is smaller than earlier projections of S$74.2bn (15.9% of GDP). The overall fiscal stance is still deemed expansionary that should render growth to be manageable

  • SGD: MAS normalization more likely in 2022 than 2021 - with the output gap still negative, the negative fiscal impulse necessitates monetary policy staying accommodative in 2021, especially with core inflation averaging below 1%. Thus, any expectations for monetary policy normalization to commence within 2021 would seem premature. Still, MAS could possibly adjust the degree of policy accommodation by “steering the NEER” within the band as the outlook evolves. Based on Citi analysts’ current core forecasts, maintaining the same average 140bps real rate of NEER depreciation seen between March-20 to December-20 would put the target path of the NEER averaging around 10-20bps below the mid-point in 1H21, and around 20-30bps above the mid in 2H21.


Data overnight: Better European data still leaves economy lagging

  • EUR: Euro area 4Q-20 GDP is revised up to -0.6% QQ from the previously reported -0.7% drop in the flash estimate according to Eurostat while employment gains by 0.3% QQ (-2.0% YY) in 4Q-20 after rising 1.0% (-2.3% YY) QQ in 3Q-20. COMMENT - the small upward revision to Q4 GDP is generally expected but the level of GDP is still some 5% below the pre-Covid norm. Ample losses are still being accumulated as large sectors of the euro area economy remain closed and Citi analysts do not expect much improvement in  1H-21 – the team’s baseline anticipates another likely decline in 1Q GDP.

  • EUR: German ZEW - the first set of February sentiment data for Europe, suggests a more resilient economy with German ZEW expectations climbing for a third successive month to 71.2 vs 59.5 consensus and 61.8 prior. The current situation index though (a proxy for the output gap) falls to -67.2, missing consensus forecasts for -66.5 and the lowest since August last year (-81.3 then). COMMENT - ZEW is based on equity investor sentiment rather than purchasing managers and the euro area and German Markit PMIs to be released on Friday will likely garner more attention.       


Week Ahead               

  • USD: FOMC Meeting Minutes - Minutes from the January 29th FOMC meeting are likely to reflect Chair Powell’s admonition that it is “premature” to talk about tapering of asset purchases. But Citi analysts warn not to underestimate the extent to which rapidly shifting economic conditions might lead to shifts in Fed rhetoric as soon as Q2 and tapering of asset purchases as early as Q4    

  • USD: US Retail Sales – Citi: 1.8%, median: 0.8%, prior: -0.7%; Retail Sales ex Auto – Citi: 1.7%, median: 0.8%, prior: -1.4%; Retail Sales ex Auto, Gas – Citi: 1.4%, median: 0.3%, prior: -2.1%; Retail Sales Control Group – Citi: 1.5%, median: 0.7%, prior: -1.9% - Citi analysts expect a strong 1.8% bounce-back in headline retail sales in January after two months of declining sales, with a 1.5% increase in sales in the retail control group even as headwinds remain for services sectors.

  • USD: US Industrial Production – Citi: 0.2%, median: 0.4%, prior: 1.6%; Manufacturing Production – Citi: 0.5%, median: 0.7%, prior: 0.9%; Capacity Utilization – Citi: 74.6%, median: 74.9%, prior: 74.5% - Citi analysts expect more modest increases of 0.2% in industrial production and 0.5% in manufacturing production in January following a larger increase in production in December.

  • USD: PPI Final Demand MoM – Citi: 0.5%, median: 0.4%, prior: 0.3%; PPI Final Demand YoY – Citi: 0.9%, median: 0.8%, prior: 0.8%; PPI ex Food, Energy MoM – Citi: 0.2%, median: 0.2%, prior: 0.1%; PPI ex Food, Energy YoY – Citi: 1.0%, median: 1.1%, prior: 1.2% - Citi analysts expect a strong increase in PPI final demand in January, led by strength in food and energy prices while excluding food and energy prices and trade services prices, PPI should rise a more modest 0.2%.

  • EUR: Euro Area: Manufacturing PMI, February Flash 56.0, Prior 54.8; Services PMI, February Flash 47.5, Prior 45.4; Composite PMI, February Flash 49.7, Prior 47.8 – An eighth month of expansion in services while the contraction in manufacturing is likely to continue but at a slower pace. The Composite euro area PMI is likely to post a marginal contraction but is seen at a 4-month high.

  • EUR: German Manufacturing PMI, February Flash Forecast: 57.5 Prior: 57.1; Services PMI, February Flash Forecast: 45.0 Prior: 46.7 – the ongoing lockdown, emergence of virus mutations and disappointing vaccination campaign so far are all likely to weigh on service sector confidence. Citi analysts expect supply disruptions in manufacturing to lead to a higher manufacturing PMI in February.

  • GBP: UK CPI Inflation, January Forecast: 0.7% YY Prior: 0.6% YY; CPI Core, January Forecast: 1.4% YY Prior: 1.4% YY – Citi analysts expect CPI inflation to accelerate further this month due to less price discounting and higher import costs – in part as a result of the acute border disruption observed over recent weeks. Citi analysts expect UK inflation to pick up notably from April this year.

  • GBP: Retail Sales, January Forecast: -6.1% MM, -4.1% YY Prior: -3.8% MM, 2.4% YY; Ex Auto Fuels, January Forecast: -5.4% MM, -0.8% YY Prior: -2.6% MM, 5.6% YY – Citi analysts expect UK retail sales to have been hit hard by the recent national lockdown and expect negative Y/Y growth for the first time since May-20.  

  • GBP: UK Manufacturing PMI, February Flash Forecast: 53.2 Prior (Jan Final): 54.1 - headline UK manufacturing PMI in January was inflated by the 2nd largest increase in supplier lead times on record. Citi analysts expect some pressure to have eased with output stronger but the index still a little weaker.

  • GBP: UK Services PMI, February Flash Forecast: 44.5 Prior (Jan Final): 39.5 - January’s PMI suggested the sharpest decline in output since May 2020 due to tightened lockdown restrictions. This month, Citi analysts expect a rebound, largely reflecting the sequential change in output for many firms is likely to be steady. However the team still expects these data to remain below the 50-no-change mark.

  • AUD: Australia January Labor Force: Citi employment; +20k, Previous; +50k; Citi unemployment rate forecast; 6.6%, Previous; 6.6% - Citi analysts expect labor market to continue recovering in 2021 despite JobKeeper wage subsidy ending in March though excess spare capacity is expected to persist.

  • AUD: Australia January Preliminary Retail Trade - Citi forecast; 1.0%, Previous; -4.1% - Retail trade likely recovered by 1% in January after a 4.1% fall in December. This would imply retail sales are up 11.2% on a year-ago basis, thanks to fiscal stimulus.

  • CAD: Canada CPI NSA MoM (January) – Citi: 0.4%, median: NA, prior: -0.2%; CPI YoY – Citi: 0.9%, median: NA, prior: 0.7% - Following a much weaker than expected headline December print, Citi analysts expect a more solid 0.4%MoM increase in January CPI with the Y/Y reading rising to 0.9%. Meanwhile, continued activity restrictions could keep average core CPI measures on the softer side again in January, although Citi analysts expect a climb back towards the 2% target later in the year.

  • CAD: Canada Retail Sales (December) – Citi: -3.1%, prior: 1.3%; Retail Sales ex Auto – Citi: -2.0%, prior: 2.1% - retail sales are expected to decline in December though is an incomplete picture for consumption in as some sales at large online retailers based outside Canada might not be captured.


This is an extract from the Daily Currency Update, dated February 17, 2021. Please approach a Citigold Relationship Manager if you would like more information.





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