-->USD rebounds late last week in spite of more US fiscal stimulus talk
USD: Talk of additional US fiscal stimulus on the back of the blue wave sweep fails to weaken USD - Friday sees USD bid across the G10 FX space with higher US yields and general repositioning (leveraged players have been near record USD shorts) appearing to be the tactical drivers for a move in DXY back above 90.00. US fiscal stimulus headlines gather pace with talk that the Democrat control of the Senate now likely means an additional ~$500bln in near-term stimulus followed by perhaps another sub-$1 trillion package passed through reconciliation later in the year. USD’s failure to weaken however suggests markets may have already priced excessive optimism following the Democrat’s new found congressional control post-Georgia elections.
USD: US jobs decline on COVID-19, cold weather but USD ignores the weaker data - The US economy loses 140K jobs in December, below expectations for a 50K gain and Citi’s +120K, though the loss is mostly offset by a 135K upward revision to past months. The unemployment rate is close to unchanged at 6.686% as the household survey adds 21K jobs and the participation rate remains unchanged while average hourly earnings increase 0.8%MoM as lower-wage workers drive the jobs loss. Citi analysts though still see scope for renewed jobs gains over H1 2021.
USD: Fed Vice Chair Clarida sticks to script for now and notes - "While the recent surge in new COVID cases and hospitalizations is cause for concern and a source of downside risk to the very near-term outlook, the welcome news on the development of several effective vaccines indicates to me that the prospects for the economy in 2021 and beyond have brightened and the downside risk to the outlook has diminished." Clarida follows up with a slightly dovish Q&A on Fed purchases, suggesting that it could be "quite some time" before the Fed begins tapering and the time to slow pace of bond buying is "well down the road". Other comments though are slightly hawkish when he says the level of rates is not a concern, though need to know why yields are rising. Note that Citi analysts expect the Fed to announce the start of QE tapering at the September 2021 FOMC meeting.
EUR: Covid-19 risks mount in Europe, perhaps helping to add a bid back to USD - France extends lockdown restrictions for at least another 2 weeks – restaurants will not reopen before mid-February at the earliest and PM Jean Castex warns that further national restrictions could be imposed in coming weeks in case of a further rise in new Covid-19 cases, even as Health Minister Veran reaffirms the target of 1mn vaccine shots administered to patients by the end of January.
Citi analysts: Saudi, OPEC+ actions should accelerate, deepen stock draws, pushing Brent crude above $60/bbl by late 2021
- Commodity FX: Saudi’s voluntary cut of 1-m b/d through 1Q’21 and most of remaining OPEC+ freezing production, tightens global balances by 1.1-m b/d more than Citi analysts previously forecast, with the cut concentrated in 1H’21. One factor behind these decisions is perceived market weakness due to the continuing strength of the COVID-19 pandemic. Citi analysts believe the overall cut in producer output will be significantly greater than demand reduction. Citi analysts also see, as a result, a deeper and faster draw on global inventories, with inventories in terms of days of demand cover returning to normal levels by end-May ’21 and therefore revise their oil price outlook, raising Brent and WTI by $5/bbl through 1Q’22 and by $4 in 2Q’22 and with an average Brent – WTI spread of $3. Brent is expected to average $59 in 2021 and hit $60 before year-end before easing by end-2022 to $56.
- USD: Market attention will remain on prospects for further stimulus with President-elect Biden set to detail his economic proposal on Thursday. But attention will also be paid to a series of Fed speak starting with Bostic followed by Kaplan, Rosengren and Harker speaking on the US economic outlook and monetary policy before the Federal Reserve releases its Beige Book . Finally, Fed Chair Powell takes part in Princeton webinar late in the week.
- USD: December CPI MoM Citi: 0.4%, median: 0.4%, prior: 0.2%; CPI YoY Citi: 1.4%, median: 1.3%, prior: 1.2%; CPI ex food, energy MoM Citi: 0.2%, median: 0.1%, prior: 0.2%; CPI ex food, energy YoY Citi: 1.7%, median: 1.6%, prior: 1.6% Citi analysts expect Fed’s preferred core PCE measure to return more sustainably to 2% by 2021 end. Firmer inflation is likely to solidify expectations for the start of Fed QE tapering in H2’21 with Citi analysts expecting the first Fed hike at 2022 end.
- USD: December Retail Sales Citi: 0.4%, median: 0.0%, prior: 1.1%; Retail Sales ex Auto Citi: 0.1%, median: 0.2%, prior: 0.9%; Retail Sales ex Auto, Gas Citi: 0.3%, median: 0.7%, prior: 0.8%; Retail Sales Control Group Citi: 0.8%, median: 0.2%, prior: 0.5% - Citi analysts expect a solid 0.4% increase in total retail sales , with a stronger 0.8% increase in sales in the retail control group though with substantial downside risks around the estimates.
- CNY : China Exports (%YoY) December: Citi 11.2, Consensus 14.7, Prior 21.1; Imports (%YoY): Citi 5.1, Consensus 5.4, Prior 4.5; Trade Balance ( US$bn ): Citi 64.2, Consensus 70.0, Prior 75.4 Citi analysts expect exports to decelerate from 21.1%YoY previously to 11.2%YoY and envisage import growth to improve by 0.5ppt to 5.1%YoY in December.
- CAD: BoC Business Outlook Survey (Q4) - BoC’s Q4 Business Outlook Survey comes this week comes ahead of the January BoC meeting the following week. Citi analysts expect to see a continued but modest improvement in both the overall BOS indicator and in key measures such as future growth expectations, expected employment levels, and business investment intentions. Some details of the survey around labor and capacity constraints (ability to meet demand) would be particularly useful leading indicators for the possible path of inflation in 2021.
This is an extract from the Daily Currency Update, dated January 11, 2021. Please approach a Citigold Relationship Manager if you would like more information.