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A tumultuous week this past week, what possibly gives this coming week?

-->A tumultuous week this past week, what possibly gives this coming week? 
  • USD: Risk sentiment is mixed Friday as US equities decline sharply while the VIX Index (measure of equity market volatility) closes at the 2nd highest level for January at 33.09% (previous high was 37.21% on January 27). S&P closes -1.9% lower at 3714 while risk currencies such as AUD follow equities lower but to a lesser degree with month end and positioning dynamics likely playing into Friday’s risk divergence. Nonetheless, a continuation of de-risking in equities (if seen), could be a prelude to greater risk aversion within FX markets in the coming weeks.  
  • EUR: Vaccine supplies - it's complicated - Friday sees Germany recommending a major Covid-19 drug should be administered to 18-64 year olds only as health authorities conclude there is insufficient data to prove effectiveness for those 65 and above. The decision could potentially create a supply gap for older populations that would need to be compensated with additional orders from other producers. This comes after earlier headlines from the EU seeking to limit export of vaccines in a bid to reduce supply shortages. Meanwhile, the “good news” on vaccines Friday comes from trial results from 2 other key manufacturers yet to enter the race. Both report relatively strong efficacy rates above 70% in places like the US and UK but both also showcase lower efficacy throughout areas dealing with new strains in Latin America and South Africa. This still leaves significant tail-risks attributed to variants and mutations. 
  • USD: US fiscal stimulus - looking for “substantial further progress” for a delayed “watered down” package - US fiscal stimulus headlines reappear Friday with President Biden announcing he would seek to avoid passage of his $1.9tn stimulus plan via piecemeal legislation. The figure is lofty and Citi analysts ultimately expect the spending package to be watered down to $1trln+ with legislation likely headed toward a “budget reconciliation” process. This would allow the fiscal stimulus package to pass along party lines with a simple majority in the Senate of 50 Democrat votes with VP Harris acting as the tie-breaking vote (as opposed to needing a standard 60 vote threshold to overcome a Republican filibuster). But such a move would also likely  increase focus on which portions of the Biden proposal can be included (resulting in a watered down bill) and whether they will gain support from moderate Democrats. And with Trump’s impeachment trial set to begin February 9 and reconciliation typically taking multiple weeks, Citi analysts think March is the most likely timing for passage of the fiscal package - which also lines up with the expiration of enhanced unemployment benefits at the end of Q1, creating a natural deadline.             



Data releases Friday – Inflationary pressures building in US and UK   

  • USD: US nominal spending declines -0.2%MoM in December, but less negative than -0.4% consensus forecast. Meanwhile real spending falls 0.6%MoM, matching expectations as prices increase faster than expected. Core PCE deflator gains 0.305%MoM, stronger than consensus for 0.1%MoM as does the employment cost index to a stronger-than-expected 0.7%QoQ reading, leaving the US economy on track to achieve stronger spending and inflation in 2021.    
  • GBP: Citigroup/YouGov Inflation Tracker shows 1 year ahead households’ expectations of price changes falling to 3.3% in January, below December (3.8%) while household inflation expectations in 5-10 years’ time are steady but at an elevated 3.4% and above the 2.9-3.1% corridor since August 2019 and also at the top end of the 2.4% to 3.4% range observed since 2016. Elevated longer term inflation expectations makes it more difficult for the BoE to contemplate rate cuts.   
  • CAD: Canada’s GDP by industry rises 0.7%MoM in November, stronger than consensus for 0.4% and brings the Y/Y reading to -2.8%. The key development in the report is the continued positive signal for growth into 2021 with both goods and services output continuing to rise despite new activity restrictions. Citi analysts now see upside risks to Canada’s Q4/Q1 GDP growth relative to BoC’s forecasts to solidify expectation for a slowing of BoC QE purchases in April.         


Week Ahead – US nonfarm payrolls, BoE and RBA meetings      

  • USD: January Nonfarm Payrolls – Citi: 250k, median: 50k, prior: -140k; Private Payrolls – Citi: 300k, median: 30k, prior: -95k; Manufacturing Payrolls – Citi: 60k, median: 30k, prior: 38k; Average Hourly Earnings YoY – Citi: 5.2%, median: 5.0%, prior: 5.1%; Unemployment Rate – Citi: 6.8%, median: 6.7%, prior: 6.7% -– Citi analysts expect a solid 250k rebound in employment in January. Average hourly earnings should rise 0.3%MoM while the unemployment rate is expected to increase slightly in January, largely reflecting softer employment in the household survey.   

  • GBP:  At this week’s BoE meeting, sharp downward revisions to the growth forecast for 2021 are unavoidable, but Citi analysts still expect the Bank to remain relatively optimistic on the recovery, forecasting the dissipation of excess supply by mid-2022. The Bank Rate is expected to stay at 0.1% and asset purchases at £895bn. Citi analysts still expect a 20bp rate cut to -0.1% but in August at the earliest. For now, it seems the MPC’s main aim is to guard against a premature rise in yields in the front-end – by keeping negative rate possibilities alive (but not necessarily implementing them).

  • AUD:  RBA Board Meeting: Citi cash rate target forecast; +10bps, Previous; +10bps; Citi 3-year yield target forecast; +10bps, Previous; +10bps - RBA Board is likely to bring forward its forecast on GDP to attain end-2019 levels - from 2021 end to Q3 2021. Improvement should also extend to the labor market but the outlook is still likely to indicate a significant degree of spare capacity and inflation should remain anchored below the bottom of the RBA’s target band until late 2022. The Board is unlikely to raise the cash rate until actual inflation is sustainably within the 2 – 3% target range”. Citi analysts base case also remains for RBA to roll forward its QE program by another $AU100bn for a further 6 months while unlikely to change its yield curve control (YCC) strategy.      


This is an extract from the Daily Currency Update, dated February 1, 2021. Please approach a Citigold Relationship Manager if you would like more information.

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