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China - better-than-expected June credit data and RRR cut reaffirm a dovish monetary policy tone ahead

China - better-than-expected June credit data and RRR cut reaffirm a dovish monetary policy tone ahead                                     

  • CNH: PBoC announces a 50bps RRR cut on Friday, effective on July 15th — as indicated at the State Council meeting, the PBoC cuts RRR two days later and would inject RMB1trn permanent funds to financial institutions (except those whose RRR rate is already at 5%). After this cut, the weighted average RRR ratio will be at 8.9%. This broad-based RRR cut is stronger than expected and could infer China’s 2Q GDP growth  disappoints, though it could also signal dovish monetary policy ahead, which bodes well for China’s continued growth recovery and financial stability and risk assets. June credit data also alleviates some fear of further quantity of money tightening in 2H. M2 growth picks up further in June by 0.3 ppt to 8.6%YoY, much higher than consensus (Mkt: 8.2%) while M0 growth also accelerates by 0.6 ppt to 6.2%YoY, but M1 growth slows 0.6 ppt to 5.5%YoY. The RRR cut however also does little to change the Citi analysts outlook for a strengthening of RMB later this year.      


Data released Friday      

  • CNH: China: Inflation divergence poses policy challenge - CPI inflation lowers from 1.3%YoY in May to 1.1%YoY in June while sequential CPI deflation widens from -0.2%MoM to -0.4%MoM. Meanwhile, PPI inflation comes off from 9%YoY in May to 8.8%YoY in June and sequential PPI inflation pulls back sizably from 1.6%MoM to 0.3%MoM due to metals prices correcting. PPI inflation may have peaked but PPI-CPI divergence remains a policy concern though last week’s RRR cut does not represent the start of another round of policy easing.    
  • GBP: UK May GDP is up 0.8% MM in May, a disappointment to both Citi and consensus (Citi 2.1%, Consensus 1.5%). This leaves UK GDP 3.1% below the pre-pandemic level (Feb-2020) with services the main downside surprise but manufacturing and construction also contracting for the 2nd month in a row. Downside risks loom – Citi analysts had expected growth of 5.7% QQ in Q2; this now looks optimistic. Instead, the team now expects growth of 4.8% in Q2 and 2.0% in Q3 – implying growth of 6.4% for 2021.  That said, BoE forecasts for Q2 may still be too pessimistic at 4.2% QQ but with recovery momentum faltering, this sees downside risks medium term. 
  • CAD: Canadian June jobs report - strong start to recovery period job growth - Canadian economy adds 231k jobs in June, stronger than consensus for a 175k increase. The unemployment rate declines to 7.8%, while the participation rate rises to 65.2%. The 231k increase in employment in June is a strong start to the summer recovery period and Citi analysts expect further strong rehiring, with around 400-500k jobs possibly regained from June through August. Following the June report, the benchmark for employment gains set by the BoC for raising rates stands at around 540k jobs and Citi analysts still see this goalpost met sometime around Q2-2022.        


Week Ahead         

  • USD: Fed Chair Powell testifies to Congress this week and Citi analysts think there is some chance the current fall in UST yields may accelerate taper discussions. The team is interested to see whether – (1) Whether the move lower in long-term yields has changed Powell's monetary policy views; (2) Powell's reaction to Tuesday's CPI inflation report; and (3) Any updated guidance on "substantial further progress" toward the employment objective. 
  • USD: CPI MoM – Citi: 0.5%, median: 0.5%, prior: 0.6%; CPI YoY – Citi: 5.0%, median: 4.9%, prior: 5.0%; CPI ex Food, Energy MoM – Citi: 0.5%, median: 0.4%, prior: 0.7%; CPI ex Food, Energy YoY – Citi: 4.1%, median: 4.0%, prior: 3.8% - The most important components of CPI over coming months will be shelter prices that currently contribute less to Y/Y core CPI than a year ago. However, as shelter prices tend to be more indicative of economic conditions, consistent strength over coming months would be a sign of underlying inflation running above 2%.  
  • USD: PPI Final Demand MoM – Citi: 0.6%, median: 0.5%, prior: 0.8%; PPI Final Demand YoY – Citi: 6.8%, median: 6.8%, prior: 6.6%; PPI ex Food, Energy MoM – Citi: 0.4%, median: 0.4%, prior: 0.7%; PPI ex Food, Energy YoY – Citi: 4.9%, median: NA, prior: 4.8%; PPI ex Food, Energy, Trade Services MoM – Citi: 0.5%, median: 0.5%, prior: 0.7% - Citi analysts are particularly interested in goods prices in PPI, which have led goods prices in CPI by a few months this year and would suggest further upside to CPI if price increases continue. 
  • USD: University of Michigan Sentiment – Citi: 83.9, median: 86.5, prior: 85.5; University of Michigan Inflation Expectations 1Yr – Citi: 4.1%, prior: 4.2% - The most important part of the University of Michigan consumer survey report are inflation expectations and Citi analysts expect a modest decline in the one-year ahead inflation expectations to 4.1%, but attention will be more on the 5-10 year measure. Citi analysts expect a continued increase would support the start of QE tapering later in H2 ahead of the first Fed rate hike by the end of 2022.
  • NZD: NZ RBNZ July Monetary Policy Preview: Citi forecast; 0.25%, Previous; 0.25% - There has been an ongoing shift in OCR pricing since the last MPS at the end of May, where the Bank’s forecast implied an OCR hike in H2 2022. Citi analysts also bring brought forward their view that the RBNZ will begin its hiking cycle in Q3 2022 but push back against the view of an earlier rate hike because it would cause a tightening in financial conditions.
  • AUD: June Labor Force Survey: Citi employment forecast; +5k, Previous; +115.2k; Citi unemployment rate forecast; 4.9%, Previous; 5.1%; Citi participation rate forecast; 66.0%, Previous; 66.2% - following the extended Sydney lockdown, Citi analysts see greater volatility across the labor force surveys in the next few months.
  • CAD: BoC meeting – Citi: 0.25%, median: 0.25%, prior: 0.25% - Citi analysts expect another taper in asset purchases at this week’s meeting, with the weekly pace reduced from C$3bn per week to C$2bn. In the team’s base case, the pace is slowed further to C$1bn at the October meeting, with a December meeting announcement to reach net zero by the end of 2021. However, markets have already come to expect a hawkish BoC and are currently pricing substantial rate hikes in 2022 and a “neutral” statement could be a somewhat dovish surprise
  • SGD: Singapore GDP (%QoQ sa) 2Q A: Citi -1.0, Consensus -2.0, Previous 3.1; GDP (%YoY): Citi 15.4, Consensus 14.6, Previous 1.3 - Apr-May data points to a relatively mild 1% QoQ SA contraction (+15.4% YoY) for 2Q21E GDP Advance Estimates, far smaller than the 13.1% QoQ SA contraction from the Circuit Breaker in 2Q20, as strength in trade related sectors offset mild contractions in consumer facing sectors on tighter restrictions.        


This is an extract from the Daily Currency Update, dated July 12, 2021. Please approach a Citigold Relationship Manager if you would like more information. For the latest updated CitiFX house views and strategy (updated every Monday) please click here -

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