Daily Currency Update - 14 November 2014 DAILY CURRENCY UPDATE 14 November 2014 Price Action MARKET SUMMARY MACRO OVERVIEW: European markets finish modestly higher while US stocks are mixed. US stocks see divergent performance across sectors. Crude oil prices are down sharply and Brent futures are over 30% lower than their recent peak in June. The S&P 500 energy sector falls over 2%, reflecting lower oil prices, while a better-than-expected earnings report from Wal-Mart helps to boost the S&P 500 consumer staples sector. Small caps also underperform with the Russell 2000 small caps index down 0.9%. Moves in major European sovereign bonds are muted with a mild fall in yields seen in German and French bonds, while UST yields decline 2-4bps across the curve. CABLE SEES FRESH LOWS: The previous day’s dovish Bank of England Quarterly Inflation report continues to keep sterling under pressure and GBP/USD declines to a new low for the year. G10 FX Strategist Valentin Marinov believes the BoE will welcome this latest sterling weakness. “The November QIR indicated that BoE's main concern remains imported disinflation…past GBPUSD appreciation could be among the key FX drivers of weak UK inflation in recent months”, he says. There is little response on markets to the slightly disappointing US initial jobless claims data. Meanwhile, NY Fed president Dudley hits the wires overnight, saying that lifting US interest rates too soon poses a bigger risk than raising them too late. Although a known dove, his comments help the NZD and AUD gain some traction overnight. BRENT FUTURES AT FOUR YEAR LOWS: The mood in iron ore remains bearish, with prices continuing to breach support levels previously thought strong. Opportunistic Chinese steel mill restocking is not occurring at low prices and highlights how difficult near-term steel conditions must be on the ground. Metal markets are weaker, with China’s gold jewelry, coin and bar demand falling nearly 40% in the third quarter according to the World Gold Council. Crude oil markets fall heavily with WTI crude oil trading below USD75/bbl, down USD2.50/bbl overnight, despite US crude inventories falling 1.7 million barrels in the week to 7 November. 1 Year Forward Spot 1M High 1M Low EUR/USD 1.2474 1.2886 1.2358 USD/JPY 115.77 116.10 105.23 GBP/USD 1.5703 1.6227 1.5694 USD/CHF 0.9637 0.9742 0.9368 USD/CAD 1.1378 1.1467 1.1082 AUD/USD 0.8708 0.8911 0.8541 AUD/JPY 100.81 101.21 91.76 NZD/USD 0.7871 0.8034 0.7661 USD/SGD 1.2921 1.2977 1.2676 USD/TWD 30.62 30.67 30.33 Onshore Offshore 30.05 30.37 USD/KRW 1097 1103 1046 1099 1106 USD/CNY 6.1261 6.1446 6.1083 6.2639 6.2846 USD/INR 61.56 61.93 60.91 66.19 65.09 USD/IDR 12205 12282 11974 13035 13055 USD/PHP 44.86 45.13 44.54 45.36 45.27 Source: Bloomberg CHINA’S DATA POINTS TO SOFT Q4 GROWTH: China’s activity data remains weak in October, suggesting that the downward trend in growth is unlikely to change in Q4. Industrial production increases 7.7% y/y in October, down from 8% in September, pointing to a sluggish heavy industry activity owing to the slowdown in the property sector. Fixed asset investment and retail sales also slow modestly. Economic fundamentals suggest that the potential growth of the economy is slowing. It is reported that China’s top leadership may lower the growth target of next year to 7.0% in the Central Economic Work Conference in December. This might be a wise policy move to achieve a balanced and sustainable growth model and to pave the way for structural reforms. Looking ahead, let’s end the week some volatility with flash Q3 GDP prints across the Eurozone, along with the US retail sales report for October. USD & JPY USD USD/JPY High Low Chart Key Events In the Past 24 Hours – Fed’s Dudley More Positive 115.78 Says expects Fed to start raising rates sometime in 2015 though urges patience Says inflation expectations to move up towards Fed's 2% target October statement shows policy to be data dependent 105.23 116.1 Price Action Dudley’s comments appear more positive on the US economy with labor market slack now ‘meaningful’ rather than ‘significant’. There is much less emphasis on impediments to growth. However, he still remains dovish on rates and USD shows little reaction to his comments. JPY USDJPY trades around the 115.55 level when the headline "JAPAN LDP SENIOR OFFICIAL SAYS IT APPEARS ABE HAS DECIDED TO CALL ELECTION" (JIJI news) hits the wires. USDJPY trades higher to the 115.85 level on the report with renewed interest seen in topside USDJPY options from macro funds. Later on, Governor Kuroda points the oil price fall as an overall plus for the Japanese economy. Since this year's highs, despite the weaker JPY, oil in JPY terms has fallen some 20% (18% on WTI and just over 20% on Brent). Prior to the BoJ easing on October 31st, such comments may have caused a selloff in USDJPY. But the markets ignore the comments made overnight as they are not seen getting in the way of BoJ easing. The sharp rise in USD/JPY is making it difficult for lifers to buy Australian bonds that have in the past looked at the 95 level in AUD/JPY or lower to buy. Indeed, a sharp rise above 100 in AUD/JPY could trigger knock-out options embedded in annuity insurance products. The medium-sized lifers that sell annuity insurance for individuals now have a total JPY3.9trn in AUM (as of March), which surpasses that of the nine major lifers (JPY2.6trn). Considering that assets held in AUD-denominated annuity insurance products are not currency-hedged, this would require monitoring trends among medium-sized lifers. CitiFX Technicals USDJPY – As The JPY Story Unfolds The USDJPY rally remains similar to that seen in late 2012 / early 2013. It suggests we could see 125+ by the end of January 2015. The events in relation to the price action are also similar (not the same) now that we entertain the possibility of another election in Japan. JPY crosses are also trending higher and we refresh charts to include the major levels to watch. Beyond Japan, we are focused on developments in US fixed income markets where higher yields may once again play an important role for USDJPY as we move to 2015. Page 1 Daily Currency Update - 14 November 2014 What happened in the past 24 hours US US Japan Japan Japan Indicator Actual Citi Initial Jobless Claims, thou Beneficiaries, mn Industrial production, %MoM, SepF PPI %YoY, Oct Machine Orders %MoM, Sep 290 2.39 2.9 2.9 2.9 275 2.37 ---- Consensus Prior 280 2.349 -3.3 -1.0 278 2.35 2.7 3.6 4.7 What’s happening in the next 24 hours US US Indicator Citi Import Prices, %MoM, Oct Retail Sales, %MoM, Oct -1 0.1 Consensus Prior -1.5 0.2 -0.5 -0.3 EUR, GBP, CHF EUR EUR/USD High Low Chart Key Events In the Past 24 Hours – The ECB’s Survey of Professional Forecasters for Q4 Growth and Inflation 1.2474 Long-term inflation forecast (for 2019) fall from 1.9% to 1.8%, back to the level seen in Q2, which matches some readings for 200001 as the lowest in this dataset (which began in 1999); 2015: 1.0% from 1.2% and 2016: 1.4% from 1.5%. Growth forecasts are also revised down (from 1% to 0.8% for 2014, 1.5% to 1.2% for 2015, 1.7% to 1.5% for 2016). 1.2358 1.2886 GBP/USD High Low Chart Price Action EUR though still remains fairly bid overnight after not being able to sustain moves below 1.2400. The price action continues to see consolidation after making the low post-NFP last Friday, with higher lows and lower highs on the hourly chart with support seen around 1.2390 and next resistance at 1.2515. Cross/EUR also remains bid, with the best EUR performances seen against NZD and JPY while turnover in EURGBP is seen above average overnight with CitiFX flows showing a large 59% bias towards the upside. Despite the supply however, EURGBP trades bid overnight back above 0.7900 to around 0.7950. 1.5703 1.6227 1.5694 USD/CHF High Low Chart 0.9637 0.9368 0.9742 GBP The dovish BoE inflation report released this week dominates sentiment in sterling as the June 2013 high at 1.5750 is taken out as is the 1.5722 level which is the 61.8% Fib of the rally from 1.4814 to 1.7192 with cable making fresh lows at 1.5690/ 57. The market looks to sell rallies to 1.5850 for now as the November QIR indicates that the BoE's main concern lies with imported disinflation. CitiFX flows show a small net demand for cable, but selling accounts for 59% of the CitiFX flows activity on the EURGBP cross. Next major support lies at 1.5500/50 on GBPUSD as leveraged and real money accounts lead the selling while demand for cable seems more one-off. What happened in the past 24 hours Germany Germany Switzerland Indicator Actual Citi HICP Final, %YoY, OctF Consumer Prices, %YoY, OctF Producer & Import Prices, %MoM, Oct 0.7 0.8 -0.1 0.7 0.8 -- Consensus Prior 0.7 0.7 -0.3 0.7 0.8 -0.1 What’s happening in the next 24 hours Germany UK Euro Area Euro Area Euro Area Indicator Citi GDP Flash, %QoQ Construction Output, %MoM, Sep GDP Flash, %QoQ HICP, Final, %YoY Core CPI, %YoY 0.2 -0.1 0.4 0.7 Consensus Prior 0.1 4 0.1 0.4 0.7 -0.2 -3.9 0.1 0.3 0.8 AUD, NZD, CAD AUD AUD/USD High Low Chart Key Events In the Past 24 Hours – RBA's Kent comments on AUD AUD remains above most estimates of its fundamental value and doesn’t rule out intervention, particularly given the substantial declines in commodity prices over the course of this year. RBA sees Australian growth picking up to above-trend pace by 2016 bit mining investment to fall more rapidly in coming year while non-mining investment may not pick up as strongly as in past economic cycles Low interest rates should spur household spending growth and ultimately non-mining investment 0.8707 0.8541 0.8911 NZD/USD High Low Chart 0.7872 Price Action 0.7661 AUDUSD drops lower on RBA Kent’s comments on intervention but steadies just above the 0.8700 level and just above significant support at 0.8670/80. Resilience of AUD suggests that are currently in a period of consolidation that may see it re-test 0.8800 level. On crosses, investors are eyeing GBPAUD that has collapsed through significant support levels (100 and 200 DMAs). 0.8034 USD/CAD High Low Chart 1.1378 CAD 1.1082 1.1467 USDCAD trades as high as 1.1328 and then goes lower to test the (reloaded) bids at 1.1300 that holds firmly after which it breaks above 1.1355/60 even as CitiFX flows show a 54% bias to selling USDCAD led by real money and bank names. Canadian new housing price index up 1.6% YoY in September though a touch lower than 1.7% expected, is encouraging for CAD bulls but the market trades to fresh session highs in USDCAD for 2 reasons: Reuters reports a delay in the US House plan to vote on the Keystone Pipeline project to tonight. This was expected last night. Traders also think that the oil price action and FX positioning in CAD are playing a factor. What happened in the past 24 hours New Zealand New Zealand Canada Indicator Actual Citi Business Manufacturing PMI, Oct Food Prices, %MoM, Oct New Housing Price Index, %MoM, Sep 59.3 0.0 0.1 ---- Consensus Prior --0.2 58.1 -0.8 0.3 What’s happening in the next 24 hours Canada Indicator Citi Manuf. Shipments, %MoM, Sep -- Consensus 1 Prior -3.3 ASIA What happened in the past 24 hours China China China Indicator Actual Citi Fixed assets ex rural, YTD %YoY, Oct Retail Sales, %YoY. Oct Industrial Production, %YoY, Oct 15.9 12.0 7.7 15.7 -7.9 Consensus 16..0 12.0 8.0 Prior 16.1 12.0 8.0 Page 2 Daily Currency Update - 14 November 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. 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