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Commodity central banks moving to a hawkish pivot to drive convergence with the Fed

RBNZ ready to commence rate hikes by end of 2021                                           

  • NZD: RBNZ surprisingly ends its asset purchases (LSAP), by 23 July 2021, one year ahead of schedule on concerns about the risk of inflation overshooting from the 1%-3% target range. The hawkish hard taper now implies that the Bank is gearing itself for a rate hike this year,  on the back of improving economic conditions and minimizing risk of not meeting its mandate. The significant hawkish tilt means that Citi analysts now expect the removal of highly accommodative monetary support via the cash rate (OCR) to come sooner and  therefore move their OCR lift-off date from Q3 2022 to Q4 2021, for a 1.25% OCR by Q4 2022 and 2.25% in Q4 2023. Citi analysts’ terminal OCR of 2.5% remains unchanged but occurs by Q1 2024.    

  • NZD: RBNZ states that activity has been “persistently stronger than anticipated”, while removing the previous reference to “domestic activity remains uneven across sectors of the economy”. This new view is consistent with the Citi analysts outlook for 2021 average NZ GDP growth at 5.3%. On inflation risks, the MPC says “more persistent consumer price inflation pressure is expected to build over time due to rising domestic capacity pressures and growing labor shortages”. This is a more hawkish assessment compared to the May MPC  that also characterizes recent NZ house price growth as “unsustainable”, which was not in the previous assessment.


BoC meeting review - tapers as expected, but July too soon for a hawkish shift   

  • CAD: BoC tapers the pace of its QE purchases to C$2 billion/week as widely expected, in a policy decision that is largely neutral, if not slightly dovish with emphasis on a full recovery that is still a ways off. The policy guidance is little changed, with the output gap still estimated to close in H2 2022. Citi analysts’ base case is for another tapering in October, with net zero purchases by year end with a strong rebound expected in H2-2021. Forecasts in the BoC’s Monetary Policy (MPR) report reveal lower GDP growth in 2021 at 6.0% but stronger growth in 2022 of 4.6%. The MPR and Governor Macklem though highlight still substantial labor market slack to be absorbed and MPR reinstates the ~550k job gain benchmark as signaling a return to a pre-COVID level of the employment-population ratio as a necessary goal before considering raising rates (Citi analysts expect this by Q2-2022).

  • CAD: Inflation projections and characterization of inflation are perhaps the most useful part of the policy decision and MPR. The CPI forecast is raised to 3.0% in 2021, with later years also showing an inflation overshoot before 2% is sustainably achieved only in 2024. This allowance for an overshoot of target is somewhat dovish and could allow the BoC to highlight its flexibility with regards to the level of inflation (or employment) when it restates its inflation targeting framework later this year, without necessitating an explicit change in the framework.


Fed Chair Powell’s testimony to Congress – holding the line    

  • USD: Fed Chair Powell’s testimony to the House of Representatives is largely as expected, sticking to a familiar script and maintaining the Fed’s still dovish paradigm. Powell’s Q&A highlights – (1) Acknowledges the latest spike in US CPI was “tied to a small group” of items, affected by supply-constraint issues; (2) “If inflation expectations move up in a way that is troubling - materially above and for an extended period - we would respond to that”. Powell alludes to a sustained rise over 2% as being a signpost for worrisome price pressures.  Nonetheless, it will take time for the ‘transitory’ vs. sticky’ inflation debate to decisively lean in any particular direction; (3) While reaching the standard of ‘substantial further progress’ is still a ways off, participants expect that progress will continue.” Progress alludes to national job gains. The upcoming fall season will offer a better litmus test for labor markets given the end of enhanced Federal benefits (September).     


Data releases overnight – but inflation data continues to show resilience    

  • USD: US PPI - Goods prices still rising in PPI, but details suggest softer PCE - US PPI final demand rises 1.0%MoM in June, another stronger-than-expected monthly increase, and up 7.3%YoY. PPI excluding food and energy also rises 1.0%, while the core measure which additionally excludes trade services is up 0.5%. The  strong increase in producer prices in June is largely due to goods prices continuing to climb while most service prices stayi subdued. Overall, based on elements of CPI and PPI, Citi analysts expect a 0.38% increase in core PCE in June, a much softer gain than 0.9% core CPI given weaker medical services prices. This should keep the Y/Y reading at 3.4%.        
  • GBP: UK headline CPI, targeted by BoE, accelerates in June to 2.5% YY from 2.2% in May (consensus 2.2% YY). This  is now 0.8% above BoE’s May forecast. Meanwhile, core CPI (ex. food and energy) rises to 2.3% YY, also overshooting consensus at 1.9%YY. M/M increases are broad based, with supportive base effects combining with robust ongoing price gains following the economic reopening. Citi analysts expect price growth in the UK is likely to accelerate further in H2’ 2021, with CPI inflation peaking at 3.5% YY in Nov/Dec before easing back thereafter. 


Key data releases for the remainder of this week            

  • USD: Retail Sales – Citi: -1.1%, median: -0.5%, prior: -1.3%; Retail Sales ex Auto – Citi: 0.9%, median: 0.4%, prior: -0.7%; Retail Sales ex Auto, Gas – Citi: 0.8%, median: 0.2%, prior: -0.8%; Retail Sales Control Group – Citi: 0.4%, median: 0.5%, prior: -0.7% - With the level of control group (and total) retail sales well-above pre-COVID levels, Citi analysts would not be concerned by a further decline in sales as spending shifts back towards services.
  • 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.
  • 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.
  • 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.        


This is an extract from the Daily Currency Update, dated July 15, 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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