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A sharp rally in risk assets as Biden’s inauguration fuels hopes for US fiscal stimulus and vaccine rollout but note the warnings

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A sharp rally in risk assets as Biden’s inauguration fuels hopes for US fiscal stimulus and vaccine rollout but note the warnings     

  • USD: Risk – on sentiment fuels a sharp rally in risk assets overnight but leaves the broad based USD Index flat around 90.50 – Biden’s inauguration as US President fuels optimism in his  USD1.9tn stimulus plan. However, Citi analysts warn of risks in getting Congressional approval, given significant Republican opposition and expect a much less $500bln-$1trln in new COVID-19 relief while also emphasizing the considerable uncertainty around any bipartisan agreement.  
  • USD: Investor optimism also grows with regards to vaccine rollout in the US and its implications for a speedier recovery. But  mutations and potential pitfalls around vaccine rollout suggest risks remain to 2021 recovery. The key test of vaccine rollouts is whether countries can avoid lockdown measures in Q4. Citi analysts are also caution on the speed of any US recovery. The team warns that strong manufacturing PMIs relative to services is not evidence by itself of robust growth and is likely insufficient to boost growth through trade. Because the bulk of the COVID shock hit in Q2-2020, YoY comparison will yield a commensurate positive shock in GDP and inflation for Q2-2021. However, this appears to be a false signal for a sustained recovery or reflation.        

 

EUR & GBP: Extending lockdown measures in Europe while UK inflation surprises on the upside - EURGBP falls sharply as a result 

  • EUR: Germany - soft lockdown means long lockdown? – Chancellor Merkel extend the lockdown to 14 February, Citi analysts expect further extensions. France – a third lockdown looks possible by the end of January, according to government sources, especially when faced with more virulent virus strains. Netherlands - tougher measures likely to include curfew and stay-at-home order – the main worry seems to be about a rise in the percentage of people (around 10%) with a more transmissible variant, which health experts expect to represent 50% of the cases by mid-February.
  • GBP: UK inflation jumps in December, resilience to continue in Q1 - a notable jump in headline CPI targeted by the BoE, rising to 0.6% YY in December, up from 0.3% in November (consensus 0.5% YY). The increase is driven by a strong rebound in core inflation – rises to 1.4% YY (consensus 1.3%YY) while BoE had expected CPI inflation of 0.6% YY over the quarter as a whole. Citi analysts expect a stronger pick-up in 2021 – UK headline CPI is likely to edge up further in Q1 before rebounding more strongly in April. Citi analysts also point to imported inflation and upside risks to household inflation expectations as risks for stronger price growth even as growth remains subdued.

CAD: No change in BoC policy to start 2021; Canada CPI weakens

  • CAD: BoC board meeting - BoC leaves the policy rate unchanged at 0.25% and maintains the current pace of government bond purchases of at least C$4 billion/week. Both growth and inflation forecasts are upgraded in the Monetary Policy Report, partly reflecting an earlier than previously expected vaccine rollout. BoC expands guidance in the policy statement to state that “as the Governing Council gains confidence in the strength of the recovery, the pace of net bond purchases will be adjusted as required” though noting that “the resurgence of cases and the reintroduction of lockdown measures are a serious setback.” Citi analysts maintain their base case for further slowing of asset purchases by the BoC in April but also note that date-based guidance for a sustainable return to target inflation is not brought forward and is left unchanged at 2023. Markets await Governor Macklem’s press conference later today for any comments on the strength of the currency.
  • CAD: Canada’s December CPI declines -0.2%MoM, weaker than consensus for a +0.1% increase which brings the year-on-year reading to 0.7% from 1.0%. Core inflation measures also slow to 1.6% on average. Weakening core measures highlights still-notable downward pressures on inflation, but remains within the recent range and does not change Citi analysts’ outlook for a firming in Canada’s core inflation later in the year.

 

Key data/ events tonight and Friday   

  • EUR: ECB Monetary Policy meeting – Refi Rate Forecast: 0.00% Prior: 0.00%; Deposit Facility Forecast: -0.50% Prior: -0.50%; Marginal Lending Facility Forecast: 0.25% Prior: 0.25% - Citi analysts do not expect any changes on policy or communication but it is of interest to see what message President Lagarde sends with respect to the near-term outlook and risks surrounding the baseline and current strength in EUR and impact on euro area’s longer term inflation outlook.  

  • EUR: Euro area Manufacturing PMI, January Flash Forecast: 57.0 Prior: 55.2; Services PMI, January Flash Forecast: 43.0 Prior: 46.4;  Composite PMI, January Flash Forecast: 47.5 Prior: 49.1 – Citi analysts estimate the flash composite PMI will fall in January, by around 1.5, signaling economic activity is contracting due to lockdowns but the impact is smaller than in November, let alone spring.      

  • GBP: Manufacturing PMI, January Flash Forecast: 52.5 Prior (Nov Final): 57.5 – Citi analysts expect the UK headline manufacturing PMI to fall back sharply this month as recent data has been flattered by both Brexit stockpiling effects and growing pressure on supply chains. 

  • GBP: Services PMI, January Flash Forecast: 40.3 Prior (Nov Final): 49.4 – Citi analysts expect UK services sector to be hit hard by the move on 4 January back into a national lockdown.  

  • NZD: Q4 CPI: Citi forecast QoQ; 0%, Previous; +0.7, Citi forecast YoY; 0.9%, Previous; +1.4% -  Citi analysts expect a flat reading for NZ Q4 CPI, driven by reduction in food prices but stronger Black Friday sales. Moreover, relative strength of NZD means that tradeable inflation is muted; Citi analysts expect a 0.8% drop in tradeable items which offsets a 0.5% rise in non-tradeable items.

 

This is an extract from the Daily Currency Update, dated January 21, 2021. Please approach a Citigold Relationship Manager if you would like more information.

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(a) Individuals who have a minimum net worth (or joint net worth with their spouse) of USD 25 million or more

(b) Companies, partnerships, trusts or other commercial undertakings, which have financial assets available for investment of not less than USD 25 million; or

(c) Governments, supranational organisations, central banks or other national monetary authorities, and state organisations whose main activity is to invest in financial instruments (such as state pension funds).

GLOBAL CONSUMER BANK (ASIA PACIFIC AND EMEA):

“Citi analysts” refer to investment professionals within Citi Research (“CR”), Citi Global Markets Inc. (“CGMI”), Citi Global Wealth Investments (“CGWI”) and voting members of the Citi Global Investment Committee.
Citibank N.A. and its affiliates / subsidiaries provide no independent research or analysis in the substance or preparation of this document.

The information in this document has been obtained from reports issued by CGMI and CGWI. Such information is based on sources CGMI and CGWI believe to be reliable. CGMI and CGWI, however, do not guarantee its accuracy and it may
be incomplete or condensed. All opinions and estimates constitute CGMI and CGWI's judgment as of the date of the report and are subject to change without notice. This document is for general information purposes only and is not intended
as a recommendation or an offer or solicitation for the purchase or sale of any security or currency. No part of this document may be reproduced in any manner without the written consent of Citibank N.A. Information in this document has been prepared without taking account of the objectives, financial situation, or needs of any particular investor. Any person considering an investment should consider the appropriateness of the investment having regard to their objectives, financial situation, or needs, and should seek independent advice on the suitability or otherwise of a particular investment. Investments are not deposits, are not obligations of, or guaranteed or insured by Citibank N.A., Citigroup Inc., or any of their affiliates or subsidiaries, or by any local government or insurance agency, and are subject to investment risk, including the possible loss of the principal amount invested. Investors investing in funds denominated in non-local currency should be aware
of the risk of exchange rate fluctuations that may cause a loss of principal. Past performance is not indicative of future performance, prices can go up or down. Investment products are not available to US persons. Investors should be aware
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Citi Research (CR) is a division of Citigroup Global Markets Inc. (the "Firm"), which does and seeks to do business with companies covered in its research reports. As a result, investors should be aware that the Firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their investment decision.

For more information, please refer to https://www.citivelocity.com/cvr/eppublic/citi_research_disclosures.

MARKET SPECIFIC DISCLOSURES

Market Specific Disclosures

Hong Kong: This communication is distributed in Hong Kong by Citibank (Hong Kong) Limited ("CHKL") and/or Citibank, N.A., Hong Kong Branch (“CBNA HK”, Citibank, N.A. is organized under the laws of U.S.A. with limited liability). CHKL and CBNA HK provide no independent research or analysis in the substance or preparation of this communication. Although information in this communication has been obtained from sources believed to be reliable, CHKL and CBNA HK do not guarantee its accuracy or completeness and accept no liability for any direct or consequential losses arising from its use.

This communication is for general information only, is not intended as a recommendation or an offer or solicitation for the purchase or sale of any products or services and should not be relied upon as financial advice. The information herein
has not taken account of the objectives, financial situation or needs of any particular investor. Any person considering an investment should consider the suitability of the investment having regard to their objectives, financial situation and needs,
and should seek independent advice before making an investment decision. You should obtain and consider the relevant product terms and conditions and risk disclosure statement, and consider if it’s suitable for your objectives, financial situation or needs before making any investment decision. Investors are advised to obtain independent legal, financial and taxation advice prior to investing. Investments are not deposits, are not protected by the Deposit Protection Scheme in Hong Kong
and are subject to investment risk including the possible loss of the principal amount invested.

This communication does not constitute the distribution of any information in any jurisdiction in which it is unlawful to distribute such information to any person in such jurisdiction.

CHKL does not provide discretionary portfolio management services.

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the provisions of the Deposit Insurance and Policy Owners’ Protection Schemes Act of Singapore and are not eligible for deposit insurance coverage under the Deposit Insurance Scheme.

This communication is for general information only and should not be relied upon as financial advice. The information herein has no regard to the specific objectives, financial situation and particular needs of any specific person and is not intended to be an exhaustive discussion of the strategies or concepts mentioned herein or tax or legal advice. Any person interested in the strategies or concepts mentioned herein should consult their independent tax, legal, financial or other advisors,
as appropriate. This communication does not constitute the distribution of any information or the making of any offer or solicitation by anyone in any jurisdiction in which such distribution or offer is not authorized or to any person to whom
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Before making any investment, each investor must obtain the investment offering materials, which include a description of the risks, fees and expenses and the performance history, if any, which may be considered in connection with making
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themselves. Although information in this document has been obtained from sources believed to be reliable, CSL does not guarantee its accuracy or completeness and accept no liability for any direct or consequential losses arising from Its use.

CSL does not provide discretionary portfolio management services.

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