A series of modest USD negatives overnight add up to more substantially weaken USD

A series of modest USD negatives overnight add up to more substantially weaken USD   

• USD: US fiscal stimulus talks finally appear to be near passage ahead of a December 18 (Friday) deadline. The date marks when the broader omnibus spending bill will need to be passed, with both the Republicans and Democrats having outlined previously that COVID relief funds would be tagged along. The Citi base case is for a USD750-900bn stimulus bill to be added to the budget though a temporary extension could be seen if details need to be finalized. The building optimism for a successful passage of the fiscal stimulus bill adds to list of drivers that takes USD a leg lower overnight.      

• JPY: BoJ to buy USD from MoF (USD negative/ JPY positive at the margin) – the BoJ overnight says it will buy USD from Japan’s MoF to probably reduce the risk of a USD liquidity squeeze at the end of Japan’s fiscal year (March 2021). The move does not alter the size of FX reserves held in total by the MoF and BoJ and the likely aim of the measure is to lower dependence on the Fed’s swap line for USD. To the extent that this helps BoJ to adequately supply the local banking system with USD liquidity at Japan’s FY end in March 2021, this is modestly USD bearish.        

• CHF: Switzerland is named currency manipulator in the US Treasury FX report (modestly CHF positive vs USD) - SNB responds by saying it does not engage in FX manipulation and remains willing to intervene in FX markets. The US Treasury report may provide some further tactical upside for CHF especially as SNB has not been actively intervening in recent weeks. Medium-term though, there is little impact from the manipulator status as SNB is committed to intervention especially against EUR. However, the release makes tonight’s SNB meeting more interesting.    

• USD: December FOMC meeting - a slightly more hawkish tilt but overall still dovish – the slight hawkish tilt comes from forward guidance on asset purchases that changes to a more qualitative outcome-based assessment and from Fed dots for 2023 that sees hikes up to 5 from 4 in September. There is also no extension of asset purchases and economic forecasts show more optimism. Nonetheless, the Fed remains vigilant in the face of any challenges and explicitly mentions potential to expand asset purchases amongst other options, if necessary (forcefully dovish). Bottom line - Fed’s decision to not make tapering contingent on financial conditions partially offsets the cautious QE guidance and is distinct from the ECB’s less dovish approach, supporting the case for further medium term USD weakness. Citi analysts pencil a likely announcement of Fed tapering QE in September 2021 and see Fed rate hikes possible as early as late 2022.                     

Data releases overnight           

• USD: US retail sales decline -1.1%MoM, weaker than consensus for -0.3%MoM while the control group sees a -0.5%MoM decline versus consensus looking for a gains. But on a Y/Y basis, US retail spending still remains quite strong with overall sales up 7.1%YoY and online sales up 29.2%YoY.      

• USD: The US Markit Manufacturing PMI indicator falls modestly to 56.5 in the preliminary December release, higher than consensus for 55.8. Meanwhile, the Services PMI measure falls from 58.4 in November to 55.3 in December. Given a backdrop of rising virus cases and subsequent business closures, Citi analysts see it as a positive sign for still-rising activity. 

• EUR: Euro area flash composite PMI rises strongly in December, almost back to 50 – the December euro area Composite PMI gains 4.7pt to 49.8 (Mkt. 45.7, Citi 48.0) with Services PMI rebounding 6.0pt to 47.3 (Mkt. 42.0, Citi 45.3) but Manufacturing PMI dropping 2.3pt to 55.5 (Mkt. 53.0, Citi 54.4). Markit notes that future output expectations jump to a 32-month high (Apr-18), as prospects brighten amid recent news on vaccine developments while employment falls at the slowest rate since the pandemic began. Germany and France see large gains in December and the readings are consistent with only a slight drop in economic activity in the euro area due to more stringent restrictions placed by most governments. Citi analysts see H1’21 as still challenging for the euro area but H2’21should likely see a strong increase in economic activity.  

• GBP: UK manufacturing PMI inflated, services still weak – the flash services PMI for December prints at 49.9 (consensus 50.7, Citi 51.0), recovering somewhat from the move down in November. Meanwhile, UK’s flash manufacturing PMI improves further, printing at 57.3 (consensus 56.0, Citi 55.9), with the manufacturing output index robust, printing at 55.3. Brexit is reportedly boosting UK exports and domestic industrial production, as firms seek to complete orders beyond the end of the transition period. These effects are likely to reverse in early 2021 though vaccine optimism is expected to contribute to a boost in business sentiment for the next 12 months. 

• GBP: UK headline CPI, targeted by the BoE falls sharply in November to 0.3% YY from 0.7% in October (Citi 0.6% YY, Consensus 0.7% YY). Core CPI also falls to 1.1% YY, 0.4pp below consensus (Citi 1.4%, Consensus 1.4%YY). The Bank had expected inflation of 0.6% over the quarter as a whole and the near term bias is now seen to be disinflationary as the month to month inflation prints likely remain noisy into 2021. But Citi analysts see imported inflation and upside risks to household inflation expectations risking higher inflation from mid 2021. 

• CAD: Canadian headline CPI rises 0.1%MoM in November, just above consensus for flat on the month leaving Y/Y CPI up at 1.0%. The core measures however are unchanged. Citi analysts point to a few surprises in the November CPI report, which, if anything, show a bit more strength in components most impacted by COVID-related disruptions and expect headline CPI to remain below-2%YoY through the first months of 2021, before rising back toward target in Q2 while core inflation measures are likely to remain around the current 1.7% average before rising back toward target next year. This would likely help BoC to gradually start removing monetary accommodation later in 2021.      

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