Daily Currency Update - 21 October 2014 DAILY CURRENCY UPDATE 21 October 2014 MARKET SUMMARY USD: A much calmer day on markets overnight although European equities fail to hang onto Friday’s gains with the Euro Stoxx ending the session 1.2% lower and the FTSE 100 down 0.7% while periphery yields widen further (most notably in Portugal). Movements in oil and fixed income suggest concerns about global growth persist while USD loses some ground across the board except versus the Yen even as stocks rally modestly in the US (on anticipation of a strong earnings report from Apple) and Japan (GPIF comments) that drives JPY crosses higher JPY: Japanese shares rally and the Yen weakens strongly after the Japan Government Pension Investment Fund indicates that it would lift its allocation to domestic shares (from 12 to 25%) and offshore bonds and stocks from around 23% to around 30%. EUR: The ECB begins to buy short-dated euro area covered bonds (French, Belgian and Spanish short-dated covered bonds) as it starts its ABS and covered bond buying program. Also in the euro zone, the August current account surplus amounts to EUR18.9bn to leave the surplus for the 12 months to August at EUR242.9bn or 2.5% of euro area GDP. Portfolio outflows on the other hand amount to EUR28bn in August but are partly offset by direct investment of EUR9bn. AUD | NZD | CAD: In commodities, iron ore prices gain about 1% on the session though nickel and copper are weaker as investor sentiment remains nervous on both the supply and demand situation in China (last week copper inventories rise 17.5% on the Shanghai Futures Exchange while a Reuters poll shows expectations for China’s third quarter economic growth to slow the most in five years). Crude oil markets also end the session weaker. Price Action Spot 1M High 1M Low EUR/USD 1.2794 1.2997 1.2500 USD/JPY 106.91 110.09 105.19 GBP/USD 1.6158 1.6526 1.5874 USD/CHF 0.9433 0.9689 0.9301 USD/CAD 1.1288 1.1386 1.0887 AUD/USD 0.8788 0.9218 0.8642 AUD/JPY 93.95 98.35 91.76 NZD/USD 0.7975 0.8268 0.7708 USD/SGD 1.2700 1.2826 1.2590 USD/TWD 30.37 30.53 29.94 1 Year Forward (Bid) Onshore Offshore Fwd Onshore Fwd Fwd 30.07 30.08 USD/KRW 1057 1080 1031 1069 1066 USD/CNY 6.1230 6.1568 6.1171 6.2592 6.2747 USD/INR 61.13 62.45 60.56 65.92 65.06 USD/IDR 12035 12325 11767 12865 12715 USD/PHP 44.84 45.12 43.75 45.19 45.1 Source: Bloomberg USD & JPY: Moderate bias to sell USD across the board as concerns about further market volatility persists USD: Key Events Over The Past 24 hours: Fed President Rosengren (non voter and dovish)   Says conditions are right for Fed to end QE after the October 29 meeting, but does not rule out extending QE if there are severe problems. Also says the timing of liftoff from the zero lower bound could easily be shifted by a quarter or two, given the uncertainty around forecasts for employment and inflation, according to MNI. Fed's Fisher –    USD/JPY High Low Chart Recent market volatility has not changed his outlook 'one iota' Underlying economy is improving, I don't see any need to not curtail QE3 at the October meeting No slide to downside on inflation, no pressure on the upside either 106.91 105.19 110.09 USD & JPY:  Global FX investors ease back into the trading week overnight with a moderate bias to sell USD across the board except versus JPY on strong turnover, still coming to grips with the volatility seen in recent trading sessions. USDJPY gains following the GPIF headlines (refer Macro Wrap) though runs out of steam after hitting the 107.30s in the London session that sees it trade back to the 106.80s. CitiFX traders in NY point out that “Another top Monday confirms 107.40/50 as the level to watch topside in USDJPY. We’ve tested this region multiple times and most notably, pre-retail sales. The short-term range is 105.00/107.50 going forward. Below 105.00 will seriously jeopardize long term bullish sentiment while a break above 107.50 should get the market thinking about new highs for 2014.” What’s happening in the next 24 hours US Indicator Citi Consensus Prior Existing Home Sales, mn 5.1 5.1 5.05 USDJPY still holds the breakout levels as supports     The rally into the October high was extremely similar to that seen going into the January high in terms of both time and magnitude. From the Jan high we corrected down 469 pips and marginally overshot the 50% retracement of the rally This time we corrected down 489 pips and marginally overshot the 50% retracement of the previous rally We are now beginning to turn up just as we did in early February after posting a weekly hammer pattern (also seen in February). To us, the similarities in price action and the levels that have held (remember we have basically retested the previous high from January which was the breakout level) strongly indicate a rally ahead. Page 1 Daily Currency Update - 21 October 2014 EUR, GBP, CHF: EUR gains on weaker USD sentiment, GBP continues to consolidate EUR/USD High Low Chart 1.2793 EUR 1.25 1.2997  EURUSD rallies from 1.2740 in London towards 1.2815/20 as the spot move follows the broad weaker USD sentiment. Following on from reports from Friday’s session, a spokesperson for the ECB confirms that it has begun purchasing covered bonds with the first round of notes acquired including short-dated French notes. Meanwhile, Klaus Regling, GBP/USD High Low Chart 1.6158 head of the European Stability Mechanism, says that the ECB’s asset quality review (AQR), due October 26, should 1.6526 1.5874 bring clarity on Greece’s funding needs. The CitiFX Strategist team suggests that contagion remains a non-negligible risk given the recent sharp deterioration in Euro zone fundamentals while the CitiFX Flows team points out that while accounts have been buying back EUR and CHF all of last week, they appear to be losing interest in EUR buybacks and USD/CHF High Low Chart CHF looks overbought. And while data has not yet captured an aggressive return to selling, weaker demand for EUR 0.9433 implies a loss of momentum. 0.9301 0.9689 GBP  GBPUSD mirrors the EUR’s footsteps overnight and opens in Asia this morning testing 1.6170/80. Sterling seems to be consolidating its recent gains with the main action seen in the EURGBP cross where downward pressure continues. The recent highs of 0.8040/50 on EURGBP appears to provide a solid cap while near term support lies at 0.7900/10 for now and 0.7875 below that. What happened in the past 24 hours Euro zone Euro zone Indicator Actual Citi Consensus Prior Euro zone Current Account SA (Aug) Euro zone Current Account NSA (Aug) EUR18.9bn EUR15.1bn N/A N/A N/A N/A EUR21.6bn EUR32.8bn What’s happening in the next 24 hours Switzerland UK Euro Area Indicator Citi Consensus Prior Trade Balance, CHFbn PSNB ex Banking Groups, GBPbn Gen. Govt. Debt to GDP Ratio (2nd Notification) -10.5 -- 2.49 10.1 -- 1.33 10.4 92.6 AUD/USD High Low Chart AUD, NZD, CAD: AUD consolidates ahead of RBA minutes and Q3 CPI (later this week) 0.8787 0.8642 0.9218 AUD and NZD  AUD and NZD also seem to be consolidating for now with the 0.8650 - 0.8900 range defining the movement in NZD/USD High Low Chart AUDUSD ahead of today's RBA Minutes and Australia Q3 CPI later this week. Also released this week is NZ Q3 CPI 0.7975 which will be the key domestic driver for NZD. The AUDNZD cross remains at an interesting stage, caught between 0.7708 0.8268 stale positioning and lack of fresh interest with short term support seen around the current 1.1000 area while resistance is at 1.1120. Positioning wise, both our Citi Positioning indicators and the CFTC note that there has been an increase in short AUD positioning as well as a reduction in long NZD. USD/CAD High Low Chart 1.1288 CAD 1.0887 1.1386  USDCAD opens in Asia slightly higher this morning than where it closes in NY on Friday around the 1.1285-95 area and coming ahead of Wednesday's Canadian retail sales and the Bank of Canada rate meeting. Meanwhile, our CitiFX positioning indicators show CAD positioning has moved aggressively towards the "short CAD" end of the spectrum and point to active currency managers having increased their short positioning in CAD further this past week. The Positioning Indicator value is now at 3, indicating short CAD at 3x normal exposure. Active managers have clearly benefited from the recent USDCAD gains as they have been mostly long this pair since June, but this latest positioning level has rarely been reached in its 3year historical series and could potentially be crowded. Short term resistance in USDCAD lies at the 1.1300 level with larger resistance seen towards the highs of last week - 1.1375/85 while some small support is seen below at 1.1250 and more significantly at 1.1210/20. On crosses, CitiFX Technicals note that while trading through 94.00 (even down to 93.00), CADJPY has failed to close below that level and has bounced higher and the 95.35 level (which is the 100d MA) will serve as short term resistance. Meanwhile, EURCAD remains in no-man's land trading between the 50 and 100d MA with the 1.4450 area providing decent near term resistance. GOLD  Gold passes the USD1,240 mark overnight and is approaching its month-high level of the middle of last week. Despite mild price losses at the end of the week, it ends the second consecutive week with overall gains, having risen 5% from its lows at the beginning of the month due to safe haven demand in response to the recent turmoil in stocks. Meanwhile, Gold ETFs see a net influx last week of 5 tons, likely the first weekly rise for five weeks, and the biggest since mid-July. A little past the mid-month mark, gold coin sales in the US also reach 42.5 thousand ounces. This figure is only a little short of that reached in all of October last year, and could prove to be the best since January, traditionally a strong time. Moreover, money managers are also increasingly betting on the price of gold rising with net long positions in Comex in the week to 14 October up a good 12k contracts to 42.2k, the highest level seen for five weeks. It remains to be seen however how strong physical demand will be in India following the Diwali holidays this week. Australia Indicator Citi Consensus Prior RBA Minutes of October meeting 0 0 0 ASIA: What’s happening in the next 24 hours China China China Indicator Citi Consensus Prior Retail sales, YTD, %YoY IP, YTD, %YoY GDP, YTD, %YoY ---- 12.1 8.4 7.4 12.1 8.5 7.4 Page 2 Daily Currency Update - 21 October 2014 DISCLAIMER “Citi analysts” refers to investment professionals within Citi Research (“CR”), Citi Global Markets Inc. (“CGMI”) 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. Such information is based on sources CGMI believes to be reliable. CGMI, however, does not guarantee its accuracy and it may be incomplete or condensed. All opinions and estimates constitute CGMI's judgment as of the date of the report and are subject to change without notice. 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