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Is the RBA ready to taper?

 

-->Is the RBA ready to taper?                      

 

  • AUD: Citi analysts maintain their base case for the RBA to likely announce another round of LSAP (bond) purchases worth up to $AU100bn and roll forward to purchasing the Nov-24 bond (thereby retaining duration of its yields curve control) at the June meeting today. But the team acknowledges risks to this view have grown, which means that the Bank could announce a taper of its bond purchases and signal more confidence in the economic recovery at the July meeting.   
  • AUD: Risks have grown for the RBA to announce a tapering in July by not rolling forward to the Nov-24 bond, or taper the pace of asset purchases from AU$100bn to a lower amount, or even across a longer time horizon that 6 months Ultimately though, ongoing stimulus is a low cost option and delays in vaccine rollouts imply that Covid-19 community transmission could occur anytime and lead to lockdowns, as evidenced by the 7-day lockdown announced in Melbourne last week. With herd immunity not expected until early next year, Citi analysts believe this likely reinforces the case for RBA to maintain its dovish policy settings even if risks have grown towards a less dovish stance.         

    

PBoC hikes RRR for FX deposits – mixed messaging for RMB    

  • CNH: PBoC announces that it will adjust FX deposit required reserves ratio (RRR) from 5% to 7%, effective 15 June. As banks have about $1tn in FX deposits, the 2% higher RRR marginally reduces the market’s FX supply. A higher RRR may also limit banks’ ability to extend FX loans and reduce banks’ FX asset returns. This would likely dis-incentivize banks from attracting FX deposits and discourage excessive USD inflows but might also mean holders of the $1tn FX deposit (mainly corporates)  convert to RMB faster – a mixed message for RMB.            

  • CNH: The move follows mixed messaging on the currency with China’s state owned Economic Daily last week saying RMB gains may not in line with the general direction of FX market reforms though seeing recent gains in line with the sustained economic recovery in China. Over the weekend, PBOC’s former statistics chief Songcheng suggests RMB’s rapid rise probably won't last as gains appear to be driven by short-term speculation. PBoC’s Financial News also says RMB may depreciate in future due to potential Fed tightening (Bloomberg). Citi analysts see the policy move as a signal the PBoC does not want to see a too-rapid an appreciation of RMB but also note the policy’s success may not be assured, given attractive returns on RMB assets and still ample liquidity abroad. However, such signals from Chinese regulators could potentially create more volatility in the currency near term.   

 

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 Manufacturing – Citi: 62.3, median: 61.0, prior: 60.7 weaker-than-expected ISM manufacturing last month was the first sign that supply constraints were more binding. Thus, the May ISM manufacturing report will be key - activity and employment components of most regional indicators have softened modestly but prices paid & received continue to rise to new recent highs in May.
  • 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.
  • EUR: Euro area HICP Inflation, May Flash: Forecast: 1.9% YY, Prior: 1.6% YY - base effects and the recent strength in oil prices will continue to push headline inflation higher in May. Core HICP inflation will also edge up again, from 0.7% YY to 0.8%, before falling to around 0.2% in July. Citi analysts see euro area core inflation at around 1.5% by 4Q-21 and headline at 2.5%, before falling back in 2022.  
  • AUD: June RBA Board Meeting; Citi cash rate forecast; 10bps (unchanged), Previous; 10bps (unchanged); Citi 3-year yield target forecast; 10bps (unchanged), Previous; 10bps (unchanged) – in the May Policy Board Meeting, the Bank flagged that it will decide in July whether to roll forward purchasing the Nov-24 bond as part of its yield target and if it will extend its LSAP program after the current allotment expires in September. Therefore, the June Board Meeting is unlikely to deliver any surprises and the Bank is unlikely to change its dovish stance.
  • 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. 
  • CNH: China Manufacturing PMI May: Citi 51.3, Consensus 51.1, Previous 51.1 – Citi analysts expect China’s manufacturing PMI to remain above 51 in May. Blast furnace operating rates by steel mills picked up amid the strong price rally, likely boosting manufacturing production. Exports likely  continued to prove resilient and new orders should be supported by the domestic recovery under way.

 

 

This is an extract from the Daily Currency Update, dated June 1, 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 - 

 https://asia.citi.com/wealthinsights/citifx-house-views-and-strategy

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