-->US exceptionalism remains the guiding light for USD in Q2’2021
USD: President Biden’s infrastructure and additional fiscal spending proposals - White House recently, announces $2.25trn in new infrastructure spending proposed over eight years to be financed in part by raising the US corporate tax rate from 21% to 28% over 15 years and imposing a minimum tax on foreign earnings. Citi analysts expect an additional $1-2trn of proposed spending in mid-April. Reportedly, House Speaker Pelosi sets a goal of July 4 for passage of the new spending bill in the House which would make the earliest possible passage in the Senate (via reconciliation) prior to the August recess but Citi analysts think passage is more likely in the fall.
USD: Data shows US economy already on the cusp of booming – US manufacturing activity continues to rapidly advance with the strongest overall ISM reading since 1983 at 64.7 and strongest new orders since 2004 at 61.5 while supplier deliveries are at their slowest since 2004, leading prices paid to rise rapidly to as high as 85.6. Citi analysts view the much stronger than expected ISM manufacturing survey confirming a picture of strong US demand for manufactured goods and supply chain disruptions leading to substantial input-price pressures. Citi analysts point to rapid rehiring and prospects for higher inflation, at least in the manufactured goods sector, which is likely to ultimately lead to “substantial further progress” toward the Fed’s dual objectives.
USD: Citi analysts expect “substantial further progress” to be reached in the relative near-term and Fed to begin tapering toward the end of 2021 – Rehiring accelerates as the solid March jobs report on Friday comes in above Citi and consensus estimates with the US economy adding 916K jobs in March, above consensus for 660K and Citi at 600K and the previous month is also revised up to 468K from 379K. The unemployment rate falls from 6.2% to 6.0% as household employment increases 609K and the participation rate remains low moving from 61.4% to 61.5% though average hourly earnings fall 0.1%MoM, but this is largely due to compositional issues. The year-on-year reading falls to 4.2%YoY due to base effects and the work-week increases to 34.9 from 34.7. Citi analysts expect the US unemployment rate to continue to fall rapidly and income growth in March to strengthen significantly due to the large payroll addition and longer average work week, and that’s before taking into account the $1400 stimulus checks that were distributed later in the month. Payrolls now average 500K+/month, leaving the Fed clearly on-track to give guidance that “substantial further progress” may be reached in the relative near-term and to begin tapering asset purchases toward the end of 2021. Citi analysts continue to expect a first Fed rate hike in December 2022.
Euro Bloc: Euro zone battling a 3rd Covid wave vs a resilient UK
EUR: The third wave of the Covid-19 pandemic that is spreading across EU member states already sees governments introducing more restrictions in coming weeks/months and poses significant short-term downside risks to euro area GDP in 2Q-21. Only an acceleration of the vaccination campaign and an extension of government support measures would be able to provide the necessary impetus for a recovery – but this is likely a story for later in 2H-21. In the interim, there are 4 factors to watch — (1) more transmissible variants, (2) insufficient restrictions, (3) low level of vaccination progress, and (4) ICU spare capacity - the previous tendency of an exponential increase in ICU occupancy does not bode well, likely pointing to more restrictions during Q2.
GBP: Why February CPI undershoot in UK is unlikely last – February UK CPI inflation data delivers a notable downside surprise, undershooting consensus expectations by 0.4pp but Citi analysts see the effects weighing on CPI to prove largely transitory, with a large rebound expected through Q2’2021. Like the US, Citi analysts expect UK inflationary pressures to continue to build through 2021 as trade disruption with the EU drive costs higher. Base effects will likely offset some of these impacts through March and April, but underlying resilience should show through. Citi analysts continue to expect UK CPI to hit 2% in Q2’2021.
Contrasting CB stances – BoC hawkish, SNB dovish, BoJ neutral
CAD: BoC gives strongest hint toward April taper yet - a recent speech by BoC Deputy Governor Gravelle lays out plans on how the BoC will approach tapering its QE purchases, giving a strong signal that purchases will start to slow at the next meeting in April, which is also the Citi analysts base case.
CHF: A dovish SNB poses upside risks to USDCHF – the March SNB meeting proves to be more dovish than Citi analysts expectations with the SNB leaving growth and long-term inflation forecasts unchanged (instead of an upgrade), as well as all policy settings. SNB also retains its assessment of the Franc as “highly valued“, “despite the recent weakening“ and remains ready to intervene in FX markets while supplying the banking system with liquidity “on generous terms”. The dovish message suggests the SNB is serious about ending the frequent deflation bouts which means that the pain threshold for FX interventions is likely to remain well above parity to EUR. On this evidence, it would take more than the Swiss Franc staying above 1.10 to the euro for the SNB to start considering its exit strategy (i.e., whether to hike the policy rate or sell FX assets first) in 2022 and rate lift-off before the ECB remains unlikely. However, Citi analysts do not expect the SNB to go as far as introducing a symmetric inflation target or average inflation targeting or formalize its FX targets.
JPY: One-off bond purchasing size reduction by the BoJ fails to strengthen Yen - BoJ announces its bond buying (rinban) schedule for April by reducing the number of JGB buying operations across the curve, while offer sizes per operation are increased. Still, total monthly JGB purchasing sizes will be lower across the curve. It seems the BoJ is committed to keeping short- to medium-term rates low under the YCC (yield curve control) framework but for the 10Yr sector, less support from the BoJ may push yields slightly higher. Having said that, YCC will likely cap yields at around +25bp. JPY though, seems little impacted by the announcement.
- USD: FOMC Minutes from March 17th – US economic forecasts are raised but median “dots” continues to signal no rate hikes through 2023 – the Minutes may provide some further insight into Fed thinking about the conditions necessary for tapering of asset purchases and eventually raising rates by laying out a range of views on the committee regarding what would be required to conclude “substantial further progress” had been made toward the dual objective and that tapering of asset purchases can commence. Comments will also be interesting in the wake of Friday’s strong jobs report which will likely have some officials seeing a 2021 taper as increasingly likely.
- USD: US ISM Services – Citi: 59.5, median: 58.5, prior: 55.3 - after a somewhat surprising drop in the ISM services index in February despite increasing activity with easing virus-related restrictions, Citi analysts expect a bounce-back in the index in March to 59.5. The team expects strength in March across all key components of new orders, business activity, and employment. The prices paid index will be key as further increases would suggest more broad-based price pressures.
- USD: PPI Final Demand MoM – Citi: 0.4%, median: 0.5%, prior: 0.5%; PPI Final Demand YoY – Citi: 3.7%, median: 3.8%, prior: 2.8%; PPI ex Food, Energy MoM – Citi: 0.2%, median: 0.2%, prior: 0.2%; PPI ex Food, Energy YoY – Citi: 2.7%, median: 2.6%, prior: 2.5%; PPI ex Food, Energy, Trade Services MoM – Citi: 0.3%, median: NA, prior: 0.2% - Citi analysts expect a solid 0.4% increase in total producer prices, with a 0.3% increase in the core measure. Increased focus on PPI could come over the coming months, as producer prices are one of the first inflation measures to reflect higher prices related to capacity constraints or higher input prices seen in survey measures such as ISMs and PMIs.
- AUD: Citi cash rate target forecast; +10bps, Previous; +10bps; Citi 3-year yield target forecast; +10bps, Previous; +10bps - Since the March meeting, the key upside surprise has been the labor market, with the unemployment rate falling to 5.8%, below the Bank’s year-end 6% forecast. The Statement will therefore likely acknowledge these better-than-expected outcomes, but also highlight that the end of JobKeeper in March means that there is still uncertainty on the labor market outlook. Citi analysts also expect the RBA to continue pushing back against sustained inflationary pressures and expect the Bank will likely provide a third-round of LSAP (asset purchases) with another $AU100bn worth of purchases from October onwards. Citi analysts also expect the RBA to retain its forward guidance that it is unlikely to commence raising rates until 2024 at the earliest.
- CAD: Canada’s Net Change in Employment (March) – Citi: 175k, median: 75k, prior: 259.2k; Unemployment Rate – Citi: 7.6%, median: 8.0%, prior: 8.2%; Hourly Wage Rate Permanent Employees – Citi: 1.7%, median: NA, prior: 4.3% - Citi analysts expect a strong 175k increase in employment in March following a ~260k job gain in February. This would put employment at its highest level since pre-pandemic employment levels, with around 425k jobs still lost compared to February 2020. Citi analysts continue to see risks for a faster normalization of employment levels than currently suggested by the BoC’s assessment of the labor market. Ahead of the April BoC meeting, this would likely make the Governing Council more confident that the economy can withstand a smaller degree of new monetary accommodation with smaller weekly asset purchases.
This is an extract from the Daily Currency Update, dated April 5, 2021. Please approach a Citigold Relationship Manager if you would like more information.