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USD modestly weaker (-0.15%) on dovish comments from Fed Chair Powell and Biden’s fiscal headlines

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USD modestly weaker (-0.15%) on dovish comments from Fed Chair Powell and Biden’s fiscal headlines             

  • USD: Fed Chair Powell on inflation overshoots and QE tapering - Powell overnight confirms the dovish overtones of some of the recent Fed speak, saying the Fed would tolerate a sustainable overshoot of its 2% inflation target, and would not seek to “hike rates anytime soon.” Powell also emphasizes that the Fed’s approach would be less mathematical and focused more on qualitative judgements. This would imply that the Fed is likely to give a buffer to metrics like overemployment, or high transient inflation rather than undertake a quick reaction. Dovish overtones are also noted on tapering, with Powell stating that markets would be given a clear signal ahead of potential changes to the pace of asset purchases (though he is evasive on the timing).  The current equation on tapering stands as follows - Harker, Kaplan, Evans and Bostic retain the option of a 2021 taper in line with the Citi analysts view (Citi expects the Fed to announce QE tapering at the September FOMC meeting to commence in October). On the other side, Clarida, Bullard, Mester, Rosengren and Brainard suggest it might be premature to discuss taper timing. Powell remains somewhere in the middle – dovish but evasive on the likely timing of QE.    

    USD: President – elect Biden’s fiscal stimulus headlines - Bloomberg sources report overnight that President-Elect Joe Biden will seek to pursue a USD1.9tn fiscal stimulus proposal. Of that figure, about USD1trln will go directly to individuals through upsized $2k stimulus checks and enhanced unemployed benefits through Q3. Citi analysts however expect headline stimulus would likely need to be cut by least half to garner bipartisan Senate support 

     

Chinese trade data  - export growth ends 2020 on a positive note  

  • CNY: Chinese exports beat expectations again in December — in USD terms, exports are up 18.1%YoY in December (consensus +15%) but lower than 21.1%YoY in November while import growth improves modestly from 4.5%YoY one month earlier to 6.5%YoY in December, beating expectations (consensus +5.7%). As a result, the trade surplus further widens from US$75.4bn in November to US$78.2bn in December. For the year 2020, exports are up 4%YoY, much higher than 0.5%YoY in 2019 and amid expectations formed at the beginning of the year. Meanwhile, import growth is -0.9%YoY in 2020 versus -2.7%YoY in 2019 leading to a much higher annual trade balance from US$421.0bn in 2019 to US$538.1bn. During 2020, commodities imports decline by 11.8%YoY, more than the 6.6%YoY decline previously, possibly owing to the high level of inventory. In volume terms, imports of iron ore, crude petroleum and copper decelerates more than 10ppts.    

     

Fall of Italian government holds few implications for EUR but pace of EUR strength becomes a more relevant concern for the ECB   

  • EUR: Italian bond spreads widen out to German Bunds overnight following this week’s resignation of Italia Viva’s ministers within the Italian government; Citi analysts though see an Italian snap election as still unlikely - the small coalition party Italia Viva pulls out of Italy’s government coalition, as largely pre-announced. A government reshuffle, possibly also replacing PM Conte, but supported by roughly the same coalition parties seems the most likely route out of the crisis. However, risks of alternative outcomes have increased - a technocratic government supported by a large grand coalition (including center-right/right-wing forces) is being discussed, but looks unlikely. Meanwhile, snap elections remain in no one’s interest and hence also quite unlikely. Excluding these more extreme scenarios, implications of the current political turmoil on the direction of policy may, in the end, be small. Italy’s request for pandemic ESM funding (up to EUR36bn) would remain an option only in the event of market turbulence, not at current yield levels. However, lack of visibility may last a few days.

  • EUR: But Italian political turbulence this time around holds little implications for EUR -  Unlike August 2019, when Italian deputy PM Salvini’s far-right League filed a no-confidence motion to bring down the government it formed with the anti-establishment 5-Star Movement, leading to concerns about Italy leaving the EU (which rattled European bond markets and EUR), this time around, the ECB via its PEPP continues to backstop Italian bond yields while the EU’s Recovery Fund commits all EU members to the euro area project and especially Italy which is one of the prime beneficiaries from the Recovery Fund. Chances of Italy threatening to leave the EU under a new coalition now are likely nil

    EUR: What likely matters for EUR in the short term is the growing concern from ECB officials about the pace of EUR strength as euro area inflation remains at historically weak levels. ECB President Lagarde in a Reuters interview overnight says she is watching exchange rate movements very closely as distance to inflation targets remains considerable and downside risks to economic activity grow for 1H-21. She reiterates that the ECB is very attentive to exchange rate movements. Her comments follow those from the powerful Bank of France Governor and ECB Council member Villeroy earlier in the week saying the ECB remains committed to its 2% inflation target and is closely watching the impact of FX. 

  • EUR: Also note the ECB’s December minutes released overnight where the exchange rate is mentioned 10 times with key comments as follows (1) Concerns are voiced over risks related to developments in the exchange rate that might have negative consequences for inflation outlook; and (2) All members agree that, in view of the economic fallout from the resurgence of the pandemic, the downward revision to the projected inflation path, and the resulting risks of an un-anchoring in inflation expectations, additional monetary policy measures are necessary to preserve favorable financing conditions over the pandemic period, thereby supporting the flow of credit to all sectors of the economy and underpinning the economic recovery

 

This is an extract from the Daily Currency Update, dated January 15, 2021. Please approach a Citigold Relationship Manager if you would like more information.

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