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China PMIs Affirm Broad-based Slowdown in Activities

China’s PMI readings eased further in February, signalling that economic growth is losing steam. However, vaccination program worldwide is sending hopes that global economic recovery will accelerate later in the year. This would benefit China which is the world's largest exporter. Caixin’s services PMI slipped -0.5 point to 51.5 in...

RBA Board Holds the Line – No Material Change in Policy Stance

As expected the RBA holds the line on current policy settings and guidance. Any response to the housing boom will depend on lending standards; smoothing of bond markets, if necessary, will continue while forecasts and guidance remain consistent with current policy settings in 2021. As we expected the Reserve Bank...

Global Yields Catch Up With US Treasuries; Has the Dollar’s Rebound Been Thwarted?

A battle of the yields is underway as the returns on long-dated government bonds recover to pre-pandemic levels, undermining the allure of riskier assets such as stocks. The rally in bond yields is being led by US Treasuries, as the American economy shines the brightest in the Western sphere....

Resolute – Review Of The RBNZ Monetary Policy Statement, February 2021

As expected, the RBNZ left all monetary policy settings unchanged today. The RBNZ resolutely expects to keep policy stimulatory for an extended period. Inflation is rising right now, but the RBNZ thinks this is temporary. The RBNZ wants to see the whites of the eyes of sustained inflation...

RBNZ Upgraded Economic Forecasts, NZD Shot Higher

The RBNZ delivered a more upbeat statement at today meeting. While leaving the monetary policy measures unchanged and warned of the uneven economic recovery, the staff upgraded the economic projections significantly. Policymakers also introduced a new forward guidance which suggests that policy adjustment will only be made until the...

Fed Powell Cautioned about Uneven Recovery, Pledged to Maintain Stimulus

At the testimony before the Senate, Fed Chair Jerome Powell cautioned that the economic recovery is uneven. He pledged to maintain sufficient support to achieving the employment and inflation targets. Concerning economic developments, Powell refrained from sending a too optimistic message. He affirmed that the recovery highly depends on the...

Longer-Term Demand/Supply Outlook Remains Supportive of Copper Strength

Breaching the US9000/tonne benchmark, LME copper price skyrocketed to the highest level since 2011. The recent rally in copper price has been driven by hopes of stronger demand as global economic recovery accelerates and concerns over supply tightness in the metal. While the demand/supply looks positive for the metal...

U.K. and Japan: Steady Finish to 2020, Uncertain Start to 2021

Summary The U.K. economy outperformed expectations in Q4, growing 1.0% quarter-over-quarter; however, some of the underlying details of the GDP report were less favorable. Government spending was largely responsible for the outperformance, while consumer spending turned negative in Q4, an unwelcome decline. With COVID restrictions reimposed for most of...

What’s Behind the Mania in Stocks?

There's something different about this booming stock market, especially when one looks at all the madness under the hood in small-cap and penny stocks. Several reasons have been floated to explain this phenomenon, from cheap money policies to massive government spending to the rise of small investors. It looks...

Awaiting Overdue Rebound in USDCNY

Strengthening against US dollar for 8 consecutive months, Renminbi (Chinese yuan) has accumulated gains of about 10% since June 2020. We believe the rally is overextended as China's economic recovery has shown signs of losing steam while yield differential between US and China has narrowed over the past few...

Is the Global Vaccination Race the New Force in FX Markets?

The global campaign to vaccinate people against Covid-19 began in earnest in December, marking a historic milestone in the fight to bring an end to the pandemic. However, as governments scramble to get their hands on a limited supply of Covid vaccines, the disparity in the immunization rate between...

Silver is Preferred to Gold as Global Economy Recovers and Green Energy Gains Attention

While silver’s retreat from the 8-year high suggests that the media-inspired short squeeze has failed and further correction is likely, the metal should benefit from the global economic recovery and the new US fiscal stimulus package in the longer-term. Although both are in the precious metal category, silver will...

Crude Oil Rallies, but Upside is Limited as Russia to Increase Output while Uncertainty to Recovery Still High

Crude oil prices rallied last week, with the front-month WTI and Brent contracts gaining +8.9% and 7.8% respectively. The market was thrilled by Saudi Arabia's voluntary output cut and increase in export prices. Stabilization in the pandemic also added optimism.However, producers such as Russia are likely to expand production...

BOE Upbeat about Inflation Outlook. Negative Rate Seems Unlikely although It is Not Ruled Out

As expected, BOE left the Bank rate unchanged at 0.1%. Meanwhile, the QE program also remains at 875B pound worth of government bonds, and 20B pound of corporate debt. The economic projections reveal that policymakers are more optimistic about inflation projecting it to reach the +2% target this year....

RBA Extends QE With a Further AUD100 billion; Sentiment is Supportive of Current Stimulatory Stance

In deciding to announce the extension of the QE program in February rather than March the RBA is emphasising its confidence in the need to maintain a very stimulatory policy despite the recent faster than expected recovery. The Bank’s forecasts are now in line with the Westpac forecasts which...

China Monetary Tightening? Not so Fast

Summary For the past week or so, the People's Bank of China (PBoC) seems to have engaged in sporadic operations that effectively tighten monetary policy in China. Pulling liquidity out of China's financial system has pushed short-term borrowing rates higher, and supported the renminbi as well as other emerging Asian...

We Have Raised Our Forecasts for AUD and Bond Rates

The RBA Board meets next week on February 2. Earlier this week in an extensive report "What Next for the RBA" we made the following points: RBA will extend the Quantitative Easing (QE) program by a further $100 billion with the announcement coming at either the February Board meeting or,...

The Economic Outlook: What Could Possibly Go Wrong? Part III

Part III: Supply Constraints Drive Inflation Higher Summary In the second report of our series on economic risks in the foreseeable future, we looked at how demand-side factors could potentially lead to significantly higher inflation in the United States in coming years. In this third installment, we extend our analysis to...

Dollar Remains Overvalued; Can America’s Twin Deficits Still Sink It?

The US dollar ended a volatile 2020 down 6.5% against a basket of currencies, underlining the dramatic turnaround in risk appetite from the depths of the March virus crisis. That risk rally is showing no sign of abating anytime soon, driving bearish bets against the dollar to near-decade highs....

Fed Indicated that QE Tapering is Premature and Bar to Adjust Policy is High

The December FOMC meeting contained little news. However, Chair Powell sent a clear indication that tapering is “premature” for the time being and that the bar to adjust the monetary policy is higher. The Fed left all measures unchanged at the meeting. The Fed funds rate stays at 0-0.25%...

Thoughts on the January 27 FOMC Meeting

Committee to Remain in an Accommodative Stance for the Foreseeable Future As expected, the FOMC made no major policy changes at today's meeting. That said, the committee did note that the recovery has moderated in recent months and stressed that the outlook remains critically dependent on the course of the...

Next Steps For The RBA

Markets are closely scrutinising the next moves from the RBA. It is important to recall that the key lesson of recent years for central banks and the likely current thinking of the RBA as expressed last year by the Deputy Governor is that it is better to err on the...

The Economic Outlook: What Could Possibly Go Wrong?

Part II: Poking the Inflation Bear Summary In the second installment of our series on economic risks in the foreseeable future, we analyze the potential for higher inflation in coming years stemming from excess demand. Our base case looks for the rate of PCE inflation to rise to 1.9% in 2021...

ECB Gets Slightly More Hawkish, Revealing that it might Not Use All of PEPP Envelope

The ECB left its powder dry in January. While continuing to warn of the downside risks on the Eurozone and global economy, the central bank delivered a hawkish tweak about operation of the Pandemic Emergency Purchase Program (PEPP). On the monetary policy measures, the central bank left the size...

Update To Westpac’s RBNZ OCR Forecast – Enough Is Enough

We now expect the OCR to remain on hold for the foreseeable future (previously we expected two cuts this year). The OCR needs to remain very low due to low inflation and high unemployment. But recent strong GDP and housing data suggests that the OCR is now low...

January Flashlight for the FOMC Blackout Period

Executive Summary The January 26-27 meeting of the Federal Open Market Committee (FOMC) is now eleven days away, and we have entered the blackout period when committee members refrain from public comments. Notably, this will be first meeting to occur during the Biden administration, and in keeping with schedule, the...

CAD to Gain Further On Risk Appetite and Higher Crude Oil Price, Upside Limited by BOC Actions

Similar to Australian dollar, Canadian dollar this year should continue to benefit from broad-based USD weakness, global recovery, and rebound in commodity, in particular crude oil, prices. However, with the US as its largest trading partner, BOC should track the Fed’s monetary policy closely, and avoid excessive appreciation of...

China’s Inflation Surprised to Upside in December. Outlook Moderates amidst Fall in Pork Price

China’s inflation surprised to the upside in December. Thanks to food price, headline CPI improved to +0.2% y/y in December, compared to deflation of -0.5% a month ago. Food inflation rebounded to +1.2% y/y, after contracting -2% a month ago, as pork price deflation narrowed to -1.3% from November’s...

Aussie to Gain Further from Global Reflation Theme, Limited Impact from China’s Boycott

The global reflation theme of 2021 should continue to support AUDUSD. With the cash rate at the effective lower bound, RBA also extended asset purchases worth of AUD100B until mid-2021. Yet, it appears that there is little the central bank can do to curb the currency strength. Risks from...

JPY to Continue Grind against USD on Policy Convergence, Reduced Capital Outflow and Current Account Surplus

Japanese yen gained +5% against US dollar last year. The strength was only modest, compared with about +9% gains of AUD, EUR and CHF. Notwithstanding the lackluster improvement in Japan’s inflation outlook and exhaustion of BOJ’s stimulus, we expect Japanese yen to extend its modest gain against the greenback...