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20110728 C FX Weekly Roundup

20110728 C FX Weekly Roundup

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Published by: stojepatrze on Aug 02, 2011
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CitiFX Technicals
July 28, 2011
Market Commentary -
for Institutional Client use only. Refer to information, disclosures and qualifications at the end of thispublication.
Weekly Roundup 1
Weekly Roundup
Tom Fitzpatrick1-212-723-1344thomas.fitzpatrick@citi.com Shyam Devani44-207-986-3453shyam.devani@citi.com Alex Good1-212-723-3469alexander.good@citi.com 
Chart of the Week
What are the interest rate markets telling us? 
As we head to the end of the month we cannot help but be a littleconcerned about the way fixed income markets and curves aretrading.
The set ups here seems to us to be a classic “anti-risk/ anti carrytrade” environment. From an anti risk dynamic that would supportour concerns about the Equity market. From an anti carry tradedynamic that would support our concerns about what we think hasbecome the World’s largest carry trade – The USD as a fundingcurrency.Foreign Exchange
Our favourite charts still suggest that the USD-index is set for a bounce andEURUSD set for a fall in the weeks ahead.
Chart included: USD Index, EURUSD
 Page 13Equities
We remain concerned here and still believe that a correction lower remains asignificant danger.
Chart included: Dow Industrials, S&P 500, VIX Index, Dow Transports
 Page 18Commodities
Gold continues to perform strongly.
Chart included: Gold
 Page 22Emerging Markets
We have early warning signs that the rally in the ADXY is running out of steamand may be approaching an end
Equity Indices in India, Brazil, Chile and Poland all look bearish
Chart included: ADXY, Sensex, Bovespa, USDBRL, IPSA, WIG
 Page 23
Market Commentary -
for Institutional Client use only. Refer to information, disclosures and qualifications at the end of thispublication.
Weekly Roundup 28 July 2011 2
Chart of the Week:What are the interest rate markets telling us?
As we head to the end of the month we cannot help but be a little concerned about the wayfixed income markets and curves are trading.U.S. 2’s versus 5’s curve
Source: Aspen Graphics / Bloomberg 27 July 2011.
While the World holds it breath and waits for a resolution to the “U.S. debt crisis” the 2’s versus 5’shas resumed its bull flattening dynamic. Amazingly it sits today (27th July) at 108 basis points which isexactly the same level as we were at on 28
July 2010 having flattened from a level of 161 basispoints in January 2010. This time around we have flattened from 156 basis points in February 2011.
Further flattening then continued in August, 2010 as the Equity market “swooned” and the S&P fellfrom 1,129 on 04 August to 1,040 (Down 8%) just 3 weeks later.
Of course we know that this slide was arrested by the increasing guidance that QE2 was on the way.That is just not going to happen this time in our view. We are still 16% above that August high and afull 26% above the low that was posted in August last year at 1,040.
By the time we reached that low in the S&P this curve had flattened to 85 basis points. That iscertainly more than we would have expected to see this time, but not by any means impossible.
However, if support around 104-107 basis points was to give way we would be concerned about anacceleration to the downside (Albeit we do not expect a move as far as we saw in 2010 – to 70 b.p.’s)
One might almost be inclined to believe that this curve was now showing more concerns abouteconomic slowdown/recession than debt concerns. (As in Europe, debt concerns would more likelysee the curve bear flatten). However when this flattening began in Feb this year, 5 year yields were at2.42% and are now at 1.53% and just 18 basis points of the years low.
So what we actually have is a dynamic where:
Q.E. has ended and that increased stimulus is no longer “feeding” through to the economyand asset markets.
The chance of a U.S. Govt. debt downgrade has risen sharply. While in the near term thismay well be a non-issue (The U.S. debt remains firmly investment grade) it is a “shot acrossthe bow” with regard to fiscal responsibility. It is a warning that we have no choice but to cutback on the policies of recent years and start taking the fiscal imbalance seriously.
Crude Oil remains firmly wedged at the moment close to $100
Growth has been slower than expected in H1 and the unemployment picture has shown somedanger of deteriorating again.
In effect the “patient” (U.S.A) has been continually on life support for the past 2 ½+ years and wehave run out of money to pay the electricity bills.
Market Commentary -
for Institutional Client use only. Refer to information, disclosures and qualifications at the end of thispublication.
Weekly Roundup 28 July 2011 3
It is very hard to look at this dynamic and see how it can be positive for either the economy orthe Equity market.
On top of this the Global economy (Excluding the 2 huge developed zones of Europe and the U.S.)has to be getting a little worried. The game plan was that the developing World was in better shape to“weather the storm” while it waited for the inevitable return to health of these 2 major economic zones.Well guys, we hope you have a plan B because it looks like you might be waiting a lot longer than youthought. With these zones now having little choice but to show a greater level of fiscal and monetaryresponsibility that growth dynamic might be a lot more sluggish and the recovery a lot further downthe line than previously thought. Once we stop fooling ourselves that these dynamics aretechnicalities caused by “snow” and the tragedy in Japan the lights are likely to go on that theeconomic dynamic remains stressed. When that happens the next realisation is likely to be that in aGlobal economy where the developed nations of the U.S.A., Japan as well as the Euro zone have a“fever”, then the rest of the World is likely to “catch a cold”
At some stage we may even have to entertain the possibility that with the “taps” of monetary andfiscal stimulus being turned off at the same time as the “fiscal drag/cost push effect” of Oil and other commodities are kicking in, the bar to a “new recession” is getting lower from month to month.
2’s minus Fed funds rate over Fed funds rate
Source: Aspen Graphics / Bloomberg 27 July 2011.
This spread is back close to where it was in Oct-Nov last year just ahead of QE2 and has so far heldthat 8 basis point support area. This may well be the support area for a bounce with a double bottomforming (and we hope it is, because if 8 basis points were to give way there is no way that you couldpaint a positive dynamic on the back of that development).

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