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Risk appetite up overnight even as data highlights reality of Coronavirus; EU to consider more fiscal measures at April 23 meeting

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Risk appetite up overnight even as data highlights reality of Coronavirus; EU to consider more fiscal measures at April 23 meeting         

  • USD: There are tentative gains in risk appetite overnight amid Trump guidelines to restart the American economy amid progress on Coronavirus and ahead of today’s economic data from China. President Trump issues guidelines for a phased reopening from May 1 in a document titled “Opening up America” – with criteria based around symptoms, cases, and hospitals. States will be announcing measures around this but NY decides to extend its home order to at least May 15. Bloomberg also brings fresh news post the NY close on drug trials related to Coronavirus that appear to be showing “rapid recoveries in fever and respiratory symptoms” on severe COVID-19 patients (according to STAT).  ü 
  • EUR: There is progress on lockdowns in Europe with Germany seen easing its lockdown as activity data suggests upside risk to forecasts – some factories and shops will re-open from 20 April, schools from 4 May, earlier than assumed. Daily truck toll data suggests production is down 15-20%, not 25%. That said, market have expressed disappointment with the recent joint fiscal response out of the EU so far (that continues to weigh on EUR). But there is now talk of a “Recovery Fund” – French Finance Minister Le Maire hints at Franco-German plan for a fund which would borrow in the financial markets to on-lend to corona-hit EU member states. This would constitute joint issuance by EU member states but not with joint liability. Ahead of the April 23 Eurogroup meeting, estimates are the EU recovery fund could raise up to EUR1tn.
  • EUR: France unveils one-year (2020) Stability Program with an updated €110bn package (5% of GDP), and 315bn (13.9% of GDP) of guarantees. Additional debt issuance is split equally between medium- and long-term debt (+€35bn to €245bn) and short-term (+€34.6bn to €62.1bn).
  • EUR: Italian government may lift its budget deficit target to 7%-8% of GDP, thus raising pressure to access ESM as the new stimulus measures are worth EUR60bn, bigger than expected. Senior coalition party M5S still opposes accessing ESM loans while junior parties now favor utilizing ESM. However, no decisions is likely before the EU Council meeting on 23 April.      

 

Economic data continues to highlight the reality of Coronavirus        

  • USD: US jobless claims moderate slightly but still extremely high - New jobless claims for the week of April 11 are slightly lower than the past two weeks, at 5,245k, adding to a total of 21 million jobless claims over the past four weeks. Continuing claims are 12 million through April 4th, about 3 million below cumulative (NSA) initial jobless claims over the three weeks through April 4. At face value, the total 21.5 million jobless loss in the past four weeks is about a 13pp (21.5 million / 165 million of labor force) increase in the unemployment rate, implying unemployment around 17%. However, many will no longer be looking for a job and not show up as “unemployed” in the household survey, suggesting an unemployment rate from 10-15% in April.
  • USD: Philly Fed manufacturing activity survey is down -56.6 vs -32 consensus with weakness widespread but with future indicators - 6 months out – still up for now (the diffusion index for future general activity rises 8 points to 43.0, mostly offsetting a 10 point decline last month).        
  • USD: President Trump is now said to abandon his idea for creating a taskforce for COVID-19, and instead, holds a series of meetings overnight with business leaders who in turn stress more robust testing is the key. Meanwhile, NY Governor Cuomo says places will reopen based on (1) how essential a business is and (2) how risky is spread in that business.
  • USD: Housing Starts pull back in March, likely to fall more in April - Starts fall to 1216k in March from a downwardly-revised 1564k in February (-22.3%MoM) while Building Permits also decline but by a more moderate 6.8%MoM, to 1353k from 1452k. Citi analysts expect larger decline in April. 
  • AUD: Australia’s March employment comes in better than expected at +5.9k versus consensus looking for a -30k drop with full time employment down only -400. Meanwhile, the unemployment rate ticks up moderately to 5.2% from 5.1% prior (consensus 5.4%).  Citi analysts though see much sharper declines (900k job losses in April) though point to the Australian  government’s JobKeeper program as responsible for the better outcomes seen in March and which could potentially mitigate some of the deterioration in job conditions in the months ahead.
  • EUR: German inflation drops due to energy and package holidays – Germany’s statistical office confirms that CPI inflation dropped from 1.7% YY in January and February to 1.4% YY in March.     

 

USD: Upside momentum seen fading but ride likely bumpy near term                                 

  • USD:  Citi analysts point to the spread between Citi’s Economic Data Change Index for the US versus the other remaining G9 economies has turned negative as of last week. This ends a period of relative US growth out-performance that started in August 2019. Current economic forecasts suggest that the spread between US and G9 economic data is likely to deteriorate significantly further (against US), mainly due to a bearish outlook on the US. The team suggests that the Citi Data Change Indices have historically given good signals for USD vs other G10 currencies and is currently signaling a bearish USD outlook.     
  • USD: However, against that are signs of domestic USD funding stress that do show signs of subsiding (and which likely argues for USD weakness). But the market is still quite a long way from reverting to normality before domestic funding stress recedes significantly enough for USD momentum to turn more negative.        

       

This is is an extract from the Daily Currency Update, dated April 17, 2020. Please approach a Citigold Relationship Manager if you would like more information.

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