DAILY CURRENCY UPDATE 28 September 2021 Citi analysts’ commodities outlook for Q4’2021 Bifurcating risks for Gold but base case trends lower on Fed tightening cycle • Gold has consolidated in a narrow mid$1,700/ low$ 1,800 range for several months with no clear bullish or bearish impulse. Nevertheless, bullion ETFs continue to show a net outflow bias — capping prices. Citi analysts mark-to- market Q3 Gold prices to $1,800/oz and forecast 4Q average prices at $1,700/oz but are bearish 2022 as a base case suggesting 8-10% downside versus Q3’21 levels, albeit with moderate conviction (60% probability) given uncertainty about global growth, inflation outlook, and rich valuations in equities and credit. The team assigns a fat tail risk of Gold retesting $2,000/oz in H1’22 if inflation is persistent, the Fed falls behind the curve, and stagflation fears rise just as US GDP forecasts peak. Yet, the bullish Gold narrative of 2019 and 2020 seems to have turned and has failed to generate any clear upside traction. The supply/ demand equation also remains unfavorable with a rebound in gold jewelry and official sector physical demand still off 2018/2019 levels and with downside risks for 2022 while mine supply and production growth seems more robust in 2021/22. Iron Ore – base case for prices to bottom in Q4 and rebound in Q1’2022 • One of the reasons for the Australian dollar’s decline has been iron ore prices falling sharply from their all-time highs of $230/t (May 10th, 2021) to $94/t due to strict Chinese steel production cuts and weakening Chinese steel demand. But physical steel demand should not collapse immediately while Citi analysts expect a rebound in prices into 2022 based on a “China put” (policy easing - both fiscal and monetary). The team’s base case (60% probability) is for prices to drop to $90/t in 4Q’21 before bouncing to $120/t in mid-2022. The bull case (20%) is for iron ore prices to rally back to $130/t during 4Q’21 and average $150/t in 2022, based on the assumption that Beijing immediately loosens up steel production cuts and mandates major infrastructure expansions while the bear case (also 20%) is for prices to continue the current freefall towards $70/t in 4Q’21 towards an average of $60/t in 2022. This assumes a sooner than expected rollover of China’s property and infrastructure construction. Oil – prices supported into Q4’21/ Q1’22 but a bearish outlook thereafter • A reason for Canadian dollar’s resilience has been resilience in oil prices as global inventories are low and likely heading lower through 1Q’22. US Gulf Coast hurricane season has already tightened markets, with further storms possible and geopolitical supply risks could also keep markets tight. Meanwhile, a cold snap could boost heating oil and kerosene demand, not to mention spillover from tight natural gas and power markets in Europe and Asia, which could trigger a gas-to-oil switch. But Citi analysts suggest fading the 4Q’22 price gains, with the outlook for Q4’22 at $62 for Brent and 2023 prices at $55 as pandemic-related demand recovery likely eases while energy transition factors weigh, with supply continuing to grow in the background from both OPEC+ and non-OPEC+ producers. Meanwhile, an Iran nuclear deal might take time, but could return by end-2022 to add to oil supply. CURRENCY UPDATE – PAGE 1 INVESTMENT PRODUCTS: NOT A BANK DEPOSIT. NOT GOVERNMENT INSURED. NO BANK GUARANTEE. MAY LOSE VALUE. DAILY CURRENCY UPDATE Data releases overnight – US durable goods orders and shipments elevated • USD: US orders for durable goods in August advance a strong 1.8%MoM and are up 0.2%MoM excluding transportation. The level of US orders ex-transport is now over 12% above the pre-pandemic peak in 2018 while shipments of capital goods are also running at high levels but decline 0.1%MoM. Nondefense ex-aircraft shipments, a better measure of the underlying trend in investment spending, is up 0.7%MoM. The data shows strong demand, but also supply-side constraints that are in some cases restraining final consumption of durables. The elevated level of unfilled orders across categories for instance, shows that some of these orders are being left in the queue as an indication that as supply-chain issues ease the economy will remain supported by a backlog of demand. Overall, the durables report paints a by now familiar picture of an US economy with demand for goods that is running above the capacity to meet that demand. Week Ahead • USD: Fed speak - Evans and Governor Brainard speak at Annual NABE conference, Williams discusses the economic outlook, Chair Powell and Treasury Secretary Yellen appear before senate banking panel, Bostic discusses economic outlook, Bullard discusses U.S. economy and monetary policy, Williams discusses Fed’s pandemic response, Harker discusses the economic outlook, Mester discusses inflation and employment • USD: US August Personal Income – Citi: 0.3%, median: 0.2%, prior: 1.1%; Personal Spending – Citi: 0.4%, median: 0.6%, prior: 0.3%; Core PCE MoM – Citi: 0.3%, median: 0.2%, prior: 0.3%; Core PCE YoY – Citi: 3.6%, median: 3.5%, prior: 3.6% - despite a soft 0.10% increase in core CPI in August, Citi analysts expect a much stronger 0.26% increase in core PCE inflation leaving the Y/Y measure elevated, rising closer to 4.0% by year-end. • USD: US September ISM Manufacturing – Citi: 58.9, median: 59.5, prior: 59.9 - ISM manufacturing should fall to 58.9 in September from 59.9 in August as supply issues constrain production and employment. In particular, the employment component is likely to remain in contractionary territory, in line with persistent labor shortages. • EUR: Euro area HICP Inflation, September Flash – Citi: 3.2% YY, prior: 3.0% YY - the sizable increase in electricity and gas prices will contribute to push headline inflation again higher in September, adding around 0.2pp to the YY rate. Core inflation should also edge higher still, from 1.6% to 1.7% YY. Citi analysts still pencil in further above- trend growth in core goods prices, reflecting supply chain disruptions and strong demand for durable goods and see euro area inflation peaking in November probably above the team’s current forecast of 3.5% YY. • AUD: Australia August Retail Trade Citi forecast; -3.0%, Previous; -2.7% - the August retail trade data will bear the full impact of Greater Sydney’s lockdown and the return of lockdown conditions in Melbourne. August has also recorded a large drop in employment and reductions in take-home pay will weigh on discretionary spending. In total, Citi analysts forecast a 3.0% decline in retail trade in the month, the lowest reading since April 2020. • CNH: China Manufacturing PMI September: Citi 50.2, Prior -- 50.1 – China’s official manufacturing PMI might stay above the 50 mark in Sep-21 due to seasonality. Blast furnace operating rates by steel mills have weakened somewhat nationwide due to tighter environmental policy, but impact of the flooding in some parts of China should have diminished. Meanwhile, new orders could hold up if export orders are supported by production disruptions by the pandemic outside China. Price indices though are likely to remain elevated due to tight supply constraints CURRENCY UPDATE – PAGE 2 All forecasts are expressions of opinion, are not a guarantee of future results, are subject to change without notice and may not meet our expectations due to a variety of economic, market and other factors. Likewise, past performance is no guarantee of future results. DAILY CURRENCY UPDATE Disclaimer “Citi analysts” refer to investment professionals within Citi Research (“CR”), Citi Global Markets Inc. (“CGMI”), Citi Private Bank (“CPB”) and voting members of the Citi Global Investment Committee. Citibank N.A. and its affiliates / subsidiaries provide no independent research or analysis in the substance or preparation of this document. The information in this document has been obtained from reports issued by CGMI and CPB. Such information is based on sources CGMI and CPB believe to be reliable. 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