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FX

Risk Sentiment Remaining Weak

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Citi analysts outline that we are cautious on risk, tactically bullish USD. Citi analysts noted recently the upside risks for the greenback and have pointed to downside risks for EURUSD for several weeks. Since the near-term picture has become more adverse for risk appetite, Citi analysts see broader near-term upside for USD, including vs the risk currencies, while remaining bearish EURUSD.

 

USD: Fed Vice Chair Clarida has joined the dovish chamber of Fed speakers that have spoken this week. Pre-released remarks offered a very strong parallel to comments made by Chair Powell previously. Clarida emphasized the nature of upcoming inflation would be transitory; however, he did outline that he expects “inflation to return to—or perhaps run somewhat above—our 2 percent longer-run goal in 2022 and 2023.”

 

USD: Yesterday, the White House announced that President Biden will be set to speak on March 31. The event should see Biden give an outline of his “economic vision.” That vision is most likely alluding to an up to USD3tn infrastructure package. Details so far have been thin, however, this event could shed more light.

 

USD: US initial jobless claims came in at 684k (730k expected, 770k prior) and continuing claims arrived at 3870k (4000k expected, 4124k prior). Citi analysts highlight that while the data is positive, it can be characterized as mainly outlier-state driven. 29 states showed a decline on the week, with Illinois and Ohio exhibiting large declines of -56k and -47k. This represents a very large portion of the overall drop on the week. As these declines are unlikely to continue at this pace, it will be important to see if the drop in claims is sustained over the coming releases.

 

Oil: Oil prices have almost completely reversed Wednesday’s losses in an impressive rally on Thursday. Citi analysts believe this confirms that the European lockdowns were not the only driver of the move. According to Citi analysts, "The 15% drop in Brent prices was likely far more a function of financial flows than a substantial change in supply vs. demand balances." .

 

Citi analysts also note that any uncertainty about the OPEC+ meeting next Thursday has been dissipated too. Indeed, four OPEC+ sources told Reuters they expect a similar decision to the last meeting.

 

EUR: EURUSD weakened -0.4% to close below the 1.1800 handle at 1.1770. Citi analysts flag that “Resurging Covid-19 cases are a reminder that we are not out of the woods. Immediate virus risks means that more lockdowns are likely, especially into Easter for Europe and Latam.” For Europe, the lockdowns represent a dampening of the economic recovery in Q2 so Citi analysts see scope for further EUR downside

 

 

Asia and Commodity Currencies

CHF: Citi analysts noted earlier this week that we see upside in USDCHF, based on i) rising US rates, even if more gradually, with CHF rates lagging, ii) benign risk appetite, including further upside in commodity prices. CHF is also likely weighed down somewhat by EUR headwinds. Finally, Citi analysts think that USD may hold up fairly well in a risk-off scenario vs CHF despite CHF being a safe haven.

 

The SNB left rates unchanged. Despite an improving global backdrop and a weaker Franc, the SNB left growth and long-term inflation forecasts unchanged, as well as all policy settings. This comes as a dovish surprise to Citi analysts.

 

CNH: USDCNH has broken through 6.5280 which is the March 6 high. Citi analysts are not entirely surprised to see this, as broader risk sentiment remains fragile. In addition, Chinese equities are underperforming peers thanks to the latest developments. The Securities and Exchange Commission adopted regulation aimed at removing Chinese companies from US exchanges if they fail to comply with US auditing standards for three years in a row.

 

PHP: The BSP held rates as expected at 2%. Governor Diokno said that inflation may breach the upper end of the bank’s 2-4% target band in 2021, with the bank now forecasting 2021 inflation at 4.2%, and 2022 inflation at 2.8%. Diokno and the bank appear to be looking inflation though, commenting that maintaining a supportive monetary stance is “important” given any recovery still in its “nascent stage”.  As a reminder, resurgent COVID-19 cases and a poor vaccine rollout locally has seen new local lockdowns, however, FX impact could be limited given it might reduce import demand as seen in previous lockdown episodes.

 

THB: A large miss in Thailand’s February trade balance, which came in at a surplus of USD7mn as opposed to market forecasts for a print of USD1.54bn. A rise in imports looks to have driven this (+22%YoY vs 11% expected).

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