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USD drops as liquidity conditions ease; Singapore’s MAS on course to ease policy; More QE likely for BoE; “No limits” on ECB bond buying

-->USD drops as liquidity conditions ease; Singapore’s MAS on course to ease policy; More QE likely for BoE;  “No limits” on ECB bond buying                               
  • USD: Drops 1.5% as Fed Chair Powell hammers home the “1 – 10” leverage message; Says  - “$1 of backstop from Treasury is enough to support $10 in loans…..Will not run out of ammunition and only limit on the Fed’s spending will be how much backstop the Fed gets from the Treasury ….We can continue to make loans to support households and businesses”. Bottom Line - recall that the Fed can lever USD54bln to lend to medium sized businesses under phase 3 of the US fiscal stimulus plan to provide credit to US businesses, states and municipalities. Injection of more equity capital for Fed lending programs implies substantially more capacity (more than $4 – 5 trillion if levered 10-to-1) for existing and new facilities – more USD liquidity potentially available than during GFC if Fed applies full leverage.          
  • SGD: MAS likely to ease policy by flattening slope and re-centering band in April  - Following a larger and wider Singapore MTI 2020 GDP forecast downgrade to -4% to -1% (from -0.5% to 1.5% previously, Citi: -2.8%), and with a wider 3%-pt forecast range uncertainty (with risks to the downside), Citi analysts now see concurrent MAS slope flattening and downward re-centering of the Nominal Effective Exchange Rate (NEER) band as their base case (70%). The team estimates SGD NEER is currently hovering closer to 100bps below the mid-point and although MAS has typically re-centered “at the prevailing level” of the NEER in the past, it could still opt to re-center 200bps downwards with further dovish forward guidance likely opening the door to more easing. Citi analysts are less convinced about the need for a band widening.   
  • GBP: BoE – More asset purchases the only option now? BoE votes unanimously overnight to keep Bank rate unchanged at 0.1% and makes no changes to its £200bn asset purchase program. The Board also makes no new growth forecasts but still expects the impact of the crisis to be ultimately temporary if job losses can be prevented. There is also no guidance on the future policy path nor does the Bank mention lower/negative rates or alternative strategies.
  • EUR: ECB – issuer limits do not apply to bond purchases under its new PEPP program - ECB commences bond purchases under its new EUR750bn Pandemic Emergency Purchase Program (PEPP), saying it will explore all options and all contingencies to support the economy to counter the extraordinary coronavirus shock. ECB also releases a legal text saying the so-called individual country issuer limits (that apply to the ECB’s traditional QE program) do not apply to the PEPP.          

 

Data releases – US weekly jobless claims in millions, likely technical recession in Singapore, UK retail sales, French business confidence drop   

  • USD: US jobless claims for week of March 21 rise to their highest ever with more likely to come - While slightly below Citi expectations, the rise in initial jobless claims to 3.283 million (above consensus for 1.700 million but closer to Citi at 4.000 million) is a clear sign of significant job losses in upcoming monthly employment reports. Citi analysts expect US job losses to reach close to 10 million over March and April. These multi-millions job losses are unlikely to be reflected until April data released in May.   
  • SGD: Deeper 2020 recession likely on Singapore 1Q GDP drop - Q1’20AE GDP comes in below expectations at -10.6% QoQ SAAR, -2.2% YoY (consensus: -8.2% QoQ SAAR, -1.4% YoY,; Citi: -5% QoQ SAAR, -0.8% YoY). Services and construction drop sharply by 15.9% and 22.9% QoQ SAAR respectively while manufacturing is relatively resilient at +4.2% QoQ SAAR. Larger and wider MTI 2020 forecast downgrade to -4% to -1% (from -0.5% to 1.5% previously, Citi: -2.8%), with greater uncertainty and risks to the downside MTI’s forecast likely assumes a 1H20 technical recession, with -4% likely implying the recession extends into 3Q. Given the larger than expected 1Q contraction, Citi analysts cut their 2020 forecasts further to -2.8% (from -1%). This assumes a 1H20 technical recession, but YoY fall will trough only in 3Q. Expect a second stimulus package of around S$15-20bn (3-4% of GDP) - With S$7.8bn of surpluses remaining in the current term of the government, this will require a drawdown of around S$7-12bn from past reserves, on top of the S$10.95bn (2.1% of GDP) deficit for Budget 2020. Implications for MAS easing
  • GBP: UK retail sales fall markedly in February, further weakness likely - Retail sales shrink significantly in February, with sales excluding auto fuel declining by 0.5% MM (consensus -0.2, Citi -0.1) while retail sales including auto fuel fall by 0.3% MM (Consensus 0.2%, Citi 0.0%) compared to growth of 1.1% MM in January. Widespread weakness with a weak backdrop and downside risks –  Citi analysts expect domestic containment measures associated with the COVID outbreak to depress the index overall. As such, moving into Q2, the risks to these data are skewed to the downside. 
  • EUR: French business confidence collapses in March – 35% hit to GDP says INSEE - French composite business climate measure falls 10 points to 95 (Mkt. 97, Citi, 99), the worst monthly drop since the series began in 1980, exceeding the previous record of a 9-point fall in Oct-08. Most affected sectors are:- 14 points to 92 in services, and -13 points in retail trade to 92 while the least affected sectors include: -3 points to 98 in manufacturing , unchanged in building construction at 112. Overall employment climate measure: -9pt to 96, biggest ever, exceeding the 8-pt fall in Nov-08. In terms of the immediate impact on activity, INSEE estimates French GDP is falling at an annualized rate of around 35% and would subtract 12pp from quarterly GDP (and therefore 3ppts from annual GDP).      

 

This is an extract from the Daily Currency Update, dated March 27, 2020. Please approach a Citigold Relationship Manager if you would like more information.

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