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ECB's Strategy Review - lower for longer, not average inflation targeting

ECB's Strategy Review - lower for longer, not average inflation targeting                                    

  • EUR: ECB surprises by announcing the outcome of their Strategy Review overnight, rather than at the July 22 meeting. The outcome though is seen to be less dovish than expected with the only notable inclusion being a soft reference to the possibility of moderate inflation overshoots in the spirit of ‘lower for longer’ but short of Fed or BoJ’s versions.  That said, the Review reinforces ECB’s overall laggard status in the current hawkish tilt seen by some CBs (Fed, Commodity Bloc, MAS etc), which has contributed to EUR’s headwinds in recent weeks.     

  • EUR: The ECB amends its price stability objective to a symmetric inflation target of 2% over the medium term from ‘below but close to 2%’ previously. The Review notes that certain circumstances ‘may imply a transition period in which inflation is moderately above target.” That is a soft nod to inflation averaging or inflation overshooting. But the ECB does not further clarify the definition of “medium-term” or “transition period” and therefore falls short of the Fed’s flexible average inflation targeting framework or the BoJ’s inflation-overshooting commitment. Added to that is the above-target inflation for the ECB is not directly tied to previous undershoots, but rather reinforces ‘lower for longer policy’. ECB also adds costs related to owner-occupied housing to its measure of HICP that would boost headline inflation and partly nullify the dovish bias of the Review.
  • EUR: The new framework will apply from the July 22 ECB meeting but Citi analysts see the outcome of the  Review mainly codifying present policy and the broader implications are therefore relatively minor, even if they  make the ECB’s orientation towards a 2% symmetric target more robust. The outcome also removes the risk of a more extensively dovish Strategy change this year. Looking ahead, bigger practical policy questions loom, notably whether ECB will reduce asset purchases into Q4 and future of PEPP (to be discussed at the September meeting).                 


Key data releases Friday     

  • CNH: China CPI (%YoY) June: Citi 1.3, Prior 1.3; PPI (%YoY): Citi 8.9, Prior 9.0 - CPI inflation might remain flattish at 1.3%YoY, and PPI inflation may edge down to 8.9%YoY in June. Services should see modest price reflation on gradual recovery while in the industrial space as the price crackdown measures appear to be exhibiting their impact on industrial commodities, though oil prices have gained materially.  
  • CAD: Net Change in Employment June – Citi: 270k, median: 40k, prior: -68k; Unemployment Rate – Citi: 7.4%, median: 8.1%, prior: 8.2% - for the first month of what will hopefully be the final reopening in Canada, Citi analysts expect a strong increase in employment of 270k jobs. Citi analysts’ projections have the BoC’s ~770k job growth goal (before it considers raising rates) met by Q2-2022.      


Gold – 2Q Gold rebound likely ‘transitory’ but sell-off is no slam dunk     

  • GOLD: Citi analysts have recently tweaked their 3Q average Gold price forecast $50/oz higher to $1,750/oz, consistent with their previously published 0-3m point-price level. 2021E was raised 2% to $1,760/oz but the team has also maintained a bearish 6-12m target at $1,575/oz albeit with low conviction, due to macro market uncertainty following a hawkish June FOMC. Citi analysts believe that the Gold price rebound in 2Q is likely transitory and markets will fail to revert north of $2,000/oz in their base case outlook. Yet a bullion price crash also seems unlikely this summer. Rather, the expectation is for a moderate decline for Gold in a lower volatility environment into end-2021/2022.
  • GOLD: Inflation hedge demand for Gold spiked in 2Q but buying sentiment is still generally soft. The S&P 500/Gold price ratio is now at its highest since 4Q’18, and likely cyclically bottomed in mid-2020. Reduced portfolio hedge demand for Gold may be reflective of a macro recovery that favors crude oil, copper, and other industrial commodities vis-à-vis Gold. Real rates remain the primary driver for Gold in this environment alongside the USD. But both could be moderate headwinds for Gold over the next 6-12m if Citi house views on the Fed and USD are correct (Fed tapering in 4Q’21 communicated at the September FOMC and Fed lift-off in late 2022).  The USD could also turn from a tailwind to a headwind for bullion prices as a result of tighter US monetary policy and as crude prices moderate in 2022.
  • GOLD: Investment demand—particularly as observed in the bullion ETF market—is weakening this year compared to robust 2019 and 2020 net purchases, with Gold ETF buying closing 1H’21 with a net outflow of over 30t/month - more than a 130t/month Y/Y negative swing not observed since the great 2013 bullion market sell-off when prices fell more than 28%. Since the October 2020 peak over 3,450t, physically backed ETFs have shed more than 325t with numerous monthly outflow totals in excess of 75t since November 2020. Citi analysts pencil-in modest further net redemptions for the balance of 2021 with larger outflows in 2022 estimated at 350t and 450t, respectively (annually). Retail FOMO for Gold in 2019 and 2020 has also largely dissipated,  instead shifting to stocks.
  • GOLD: While Gold financial investment has taken a hit, the 2021 outlook for jewelry consumption is shining and Gold jewelry demand and official sector purchases should rebound sharply in 2021 versus 2020, albeit lagging the 2018-2019 highs. Citi analysts project 486t of world jewelry demand for 2Q’21 and 2,000t for 2021 annually, rising further to 2,100t in 2022. Bullion bar/coin demand also looked promising in early 2021, although the 2Q (temporary) price spike might hit retail and private bank purchases during a weak seasonal period. Q1’2021 also showed a 20% Q/Q jump in central bank Gold purchases (though still down 23% y/y) to 95t. There is likely to be more purchases this year versus 2020 as governments start to exit COVID. But the unprecedented official sector Gold buying spree of 2018 and 2019 seems to have been scaled back to a slower trend.       


This is an extract from the Daily Currency Update, dated July 9, 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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