Citi on what CNB means for the world and G10 currencies
In the aftermath of the move in Chinese FX policy, Citi outlines its expectations and the implications for G10 currencies.
"While FX so far seems to be reflecting a shift in potential inflation drags, we think it is demand policymakers will care more about and that will matter longer term. Regional data continues to undershoot, weighing on commodity prices/currencies and raising the burden on exposed central banks," Citi argues.
"For the Macro section we come to the conclusion that JPY and AUD still have room to fall. While markets are right to put a higher uncertainty on monetary policy of the US and UK, our expectation for gradual and measured CNY depreciation suggests policymakers can look through it so long as domestic demand remains resilient," Citi projects.
"For European currencies, though the respective central banks are likely to lean against currency appreciation and debate softer external demand, smaller trade weights suggest the currencies could be more insulated," Citi adds.
"The views come together short Asian currencies and long those where tightening still looks in prospect (USD and GBP). EUR and JPY could be carrying a safe have bid which fades once the dust settles. With recent flows pointing to JPY buying and still room for EM Asia and CNY to depreciate, it looks a standout sell," Citi advises.
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