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Market Commentary │ November 20, 2014

Weekly Roundup
Tom Fitzpatrick
1-212-723-1344
thomas.fitzpatrick@citi.com

Shyam Devani
65-6657-2964
shyam.devani@citi.com

Dan Tobon
44-020-7986-3453
daniel.tobon@citi.com

Jay Bishen
1-212-723-7057
jay.bishen@citi.com

For recent commentary or to access archived publications, visit our CitiFX Technicals website: Click here

Chart of the Week – Shades of 1998 - Give “thanks” to the strong USD trade at the end of
November but look for “Santa” to deliver further on the Oil and Equity trends into Christmas


We retain our strongly bullish medium term view for the USD. At the same time our road map for where we
are today remains our piece from 16 October titled Weekly Roundup: Is 2014 - "1998 Lite"? In that respect
we suspect that we could see some more USD strength into the end of this month but that December could
see this trade “flattening out”/ correcting before a resumption in January.



Looking at Oil (WTI) and the Equity markets we suspect the existing trends (Oil lower and Equity markets
higher) will likely continue into year end.



In Fixed Income we may also see a consolidation period before yields head higher again.

EURUSD- August-November 1998
EURUSD peaks during
the “carnage” in October
1998

Subsequent down move hits
it’s low at Thanksgiving
before a correction higher
into year end.

Source: Aspen graphics/Bloomberg November 19, 2014.



Between August and October 1998 USDDEM collapsed (EURUSD surged) as huge positioning to “hedge” the
Russian crisis was unwound. As things “blew up” in October 1998 the result was that “anything that was
owned” was cut. This led to a EURUSD move (As its components that were entering the EURO in January
1999) from 1.08 to a peak of 1.22 in October 1998.



Thereafter the trend lower in EURUSD resumed until 27 November (Day after Thanksgiving) hitting a low of
1.1450. That was it for the year and EURUSD went into a correction/consolidation for the month of December
providing better levels to sell on the first trading day of 1999.That saw EURUSD head lower in a very steady
trend for the first half of 1999.(From above 1.18 in January to 1.01 by July)

Market Commentary – for Institutional Client Use
Only. Refer to informational disclosures and
qualifications at the end of this publication.

Weekly Roundup
November 20, 2014

1

Market Commentary │ November 20, 2014
EURUSD - October 2014

Source: Aspen graphics/Bloomberg November 19, 2014.



In 2014 the “carnage” was quicker and less deep than that seen across markets in August-October 1998.As
we saw major moves in the Equity market, volatility, fixed income and commodities EURUSD squeezed up a
paltry 3% over a few weeks with a big portion of that move taking place on one day (15 October)



This was a much less aggressive move than that seen in 1998 and also much less in magnitude than seen in
other markets.



To us that suggests that in reality the short EURUSD position was much less “owned” than people thought. It
seems that sentiment was much more extreme than positioning. Since then we have moved to new lows in the
trend at 1.2358.



We continue to hold the view that a move to the 200 month moving average before year end (possibly even
next week) is a possibility.

EURUSD-Monthly chart

Source: Aspen graphics/Bloomberg November 19, 2014.



The 200 month moving average has held all major corrections lower in EURUSD since 2005. While we do
expect it to ultimately give way this time, we suspect that will be a 2015 story.



For now we think there is the potential for one more low on EURUSD this year close to that average (1.2223)
before a pause and resumption of the trade in 2015, as we saw in 1998-1999.

Market Commentary – for Institutional Client Use
Only. Refer to informational disclosures and
qualifications at the end of this publication.

Weekly Roundup
November 20, 2014

2

Market Commentary │ November 20, 2014
USDJPY- August-November 1998

Source: Aspen graphics/Bloomberg November 19, 2014.



The move from April 1995-August 1998 was much more aggressive that we saw from the October 2011 lows
to the October 2014 high (85% versus 46%)



Similarly the fall was also much more aggressive into the 08 October 1998 lows versus that seen into the 15
October 2014 lows.(24% versus a benign 4%)



Again, this is because the trade was much more owned and leveraged then. The US began a tightening cycle
in 1994 when short term rates were at 3% and long term rates at 6%. With short term Japanese rates at
effectively Zero this strongly encouraged Japanese investors looking for yield overseas to take FX risk as they
were handsomely rewarded to do so. This time around that has not been the case. With short-term US rates at
zero and no tightening from the Fed Japanese investors do not get paid to take FX risk and can hedge very
cheaply. Hence their more limited involvement. In addition, the much lower level of overall yields in the US
provided a less attractive option to leverage heavily.



After the sharp squeeze lower in USDJPY into 08 October 1998 it then bounced sharply. That bounce “ran out
of steam on 30 November 1998 (The Monday after Thanksgiving) and USDJPY then corrected lower again
into the first week of January 1999.(Setting a lower low than in October). Again we would not necessarily
expect such a strong move lower this time as the trade seems “less owned” However; we would not be
surprised if this rally did in fact lose steam in the period from Thanksgiving to the end of the year like it did in
1998.

Market Commentary – for Institutional Client Use
Only. Refer to informational disclosures and
qualifications at the end of this publication.

Weekly Roundup
November 20, 2014

3

Market Commentary │ November 20, 2014
USDJPY - October 2014

Source: Aspen graphics/Bloomberg November 19, 2014.



The fall into the October 15 low at just over 4% was much less than that seen during the August-October 1998
meltdown. This validates the view that this position is much less “owned” than in 1998.



USDJPY has subsequently moved higher again (with likely low ownership) .In 1998 the subsequent bounce
before consolidating again was 12.26 big figures. That would equate to 117.49 this time (High so far 117.94)



So where does that leave us?



Once again we suspect that this trade (USDJPY) could get choppy from Thanksgiving onwards into January
before once again seeing the uptrend resume

Market Commentary – for Institutional Client Use
Only. Refer to informational disclosures and
qualifications at the end of this publication.

Weekly Roundup
November 20, 2014

4

Market Commentary │ November 20, 2014
Oil - 1998 saw a sharp fall

Source: Aspen graphics/Bloomberg November 19, 2014.



For pretty much all of 1998 Crude fell sharply as the “Russian crisis” raged.



While the Equity market “bottomed out”; yields hit their low and the USD correction ended (All in October
1998) that was not the case in Oil.



It did bounce off the October 1998 low but then fell again setting the trend low in December – about 21%
below the October low.



The evidence from 1998 to 1999 supports the view that the Oil provided a strong “fiscal boost” to an already
good economic backdrop in the US. This led to the start of a tightening cycle in June 1999 (Despite the
apparent horrific headwinds in EM; Russia and the Equity market (22% fall) in 1997-1998).The stresses seen
in 2013-2014 “pale into insignificance” compared to that period. At the same time US economic growth;
improvement in the unemployment rate and the level of inflation are all similar to that seen in late 1998.

Market Commentary – for Institutional Client Use
Only. Refer to informational disclosures and
qualifications at the end of this publication.

Weekly Roundup
November 20, 2014

5

Market Commentary │ November 20, 2014
Oil in 2014

Source: Aspen graphics/Bloomberg November 19, 2014.



The price action in Oil developed in a classic technical fashion over the course of this year.


Following the fall into the January low it bounced sharply and posted a near perfect 76.4% pullback into the
June high.



It then proceeded to head lower despite stronger US growth/employment dynamics; concerns over the
Russian-Ukraine conflict; concerns over the progress of ISIS etc.



Then after a number of weeks testing the support around $96 (200 week moving average and head and
shoulders neckline) we saw a weekly close below followed by a sharp acceleration lower the following
week. The minimum target on this break was for a move below $76.



Along the way there was strong interim support at $91.24 (The January low off which the 76.4% bounce
was posted) It took 4 weeks of testing before we saw a weekly close below here. Thereafter we once again
accelerated to the down side and reached our minimum target ($75.62) last week.



On reaching that target we have adopted a “neutral” outlook as this is a strong area of support between
$74.95 and $77.28 (2011 and 2012 lows). A weekly close below here, if seen, would re-establish the
bearish dynamic and suggest the potential for the move to once again accelerate lower.



This would open up the way for an extended target around $64 (2010 low and rising trend line from the
December 1998 low)



Interestingly that is about 20% below the lows set in October which is exactly the incremental move we
saw into December 1998

Market Commentary – for Institutional Client Use
Only. Refer to informational disclosures and
qualifications at the end of this publication.

Weekly Roundup
November 20, 2014

6

Market Commentary │ November 20, 2014
S&P 500 and the “October effect”


Below, we look at periods (Going back to 1987) where the Equity market peaks and falls into October (10%
or more) and what happens next.



In particular (As per our weekly of 16 October week titled Weekly Roundup: Is 2014 - "1998 Lite"? )we
focus on the dynamics of what happened into and subsequently out of October 1998.



The conclusions reached from this overview are that investors may end up “chasing” the Equity market
higher before year end

th

Source: Aspen graphics/Bloomberg November 19, 2014.



As we can see from above, the bounces before year end after October lows were posted ranged from 13% to
35% (Average was just over 20%)



In 1998 (As we saw this year) the percentage fall pretty much equaled what had been the year to date
performance. That was followed with a bounce that was 1.6 times the percentage fall (setting new trend highs).
A similar dynamic here would suggest a low to high bounce before year end of 15-16% (well within the realm
of these prior instances and in fact below the average)



Such a bounce, if seen, would give us levels around 2,100+ before the end of the year and possibly a
move close to 2,200

Note: While the fall this time is technically 9.84% we look at it as to all intents and purposes 10% (the future fell
9.97%)
Why are we so focused on the “similarities” with 1998?

Market Commentary – for Institutional Client Use
Only. Refer to informational disclosures and
qualifications at the end of this publication.

Weekly Roundup
November 20, 2014

7

Market Commentary │ November 20, 2014
th
Extract from the 16 October Weekly Roundup: Is 2014 - "1998 Lite"?





“While history does not repeat itself it often “rhymes” and today is rarely as “different this time” as people
tend to think.



1989-1991: This was the period where we saw a housing and banking (Savings and loan) crisis in the US. This lead to
a sharp economic contraction and a major easing cycle from the Fed (Fed funds rate was lowered from 9.75% to 3%).



1992-1994 (into early 1995): This period saw the “falling apart” of the existing financial architecture in Europe (The
ERM - Exchange Rate Mechanism) and the subsequent rebuilding of this financial architecture to form the EURO (A
fixed exchange rate still pretending to be a single currency)



1995-1998: We saw the convergence trade in Europe. That time it was threefold:


Bond yield convergence between the periphery (which had seen 10 year yields close to 13%) and Germany.



FX convergence, as about half of the devaluations were unwound into the fixing rates for the EURO in early 1999.
This still left currencies like the Spanish peseta and Italian Lire with about a 15% devaluation (stimulative)



Short-term interest rate convergence as the ECB came into existence and the Eurozone had a single short-term
rate.



1997: Emerging market jitters as the Fed “tinkered” by raising rates 25 basis points in March. Money had flowed in
these markets in a search for yield, with a lot of funding in the USD. This move was “one and done” but caused jitters
for the rest of the year. While the worst of the move for Asian currencies was seen in 1997, Latam (where some
countries had their own issues) remained under pressure into and through 1998.



1998: The main story here was in one word “Russia”. Stress right across the Russian economy, Russian Bond
market, a collapse in Oil and ultimately a full blown Russian default. In addition LTCM (Long Term Capital
Management) failed as the crisis created a forced liquidation of its leveraged positions



While the scenario today is not identical to that period, it is very similar in a lot of ways. In 1998 the culmination of
these market dynamics pretty much ran its course by October. Then, the World did not end, the US economy did not
downturn, and by June of 1999 the Fed began a tightening cycle that saw rates rise from 4.75% to 6.5% 11 months
later”

In terms of market moves (FX, Interest rates, Equity markets, Russia ,Oil etc the moves this year have been
far less in depth than seen then i.e. it has not been as bad. In addition the US economic dynamics of Growth,
employment improvement and inflation are quite similar. In Europe however, those dynamics are significantly
worse.

Market Commentary – for Institutional Client Use
Only. Refer to informational disclosures and
qualifications at the end of this publication.

Weekly Roundup
November 20, 2014

8

Market Commentary │ November 20, 2014
Fixed income: We saw a sharp fall in yields into October 1998 also: US 10 year yield chart

Source: Aspen graphics/Bloomberg November 19, 2014.



Between July and October 1998 we saw the US 10 year yield fall from 5.52% to 4.16% (136 basis points)
before the low was put in and yields began a move higher that eventually peaked in Jan. 2000 close to 7%.



Between Sept and October 2014 the US 10 year yield fell from 2.65% to 1.86% (79 basis points) before
bouncing sharply.



The peak of the first subsequent bounce took place in the week of 02 Nov 1998 (bounce of 84 basis points)
while the first bounce this time peaked in the week of 03 November 2014 (bounce of 54 basis points). After a
consolidation in December 1998-January 1999 yields headed higher again as it became obvious that the US
economy was in good shape. By June 1999 the Fed began a tightening cycle.



Over the next 13 months US 10 year yields returned to the top of the 2 decade down channel. The top of that
channel will be around 3.5% by the end of 2015.



That tightening cycle BEGAN with a Fed funds rate standing at 4.75% and a core PCE inflation rate of 1.39%
(Over 300 basis points real yield).What happened to the argument that this inflation rate today is a “new
normal” Today core PCE stands at 1.48% (Above where it was when the tightening cycle in 1999) and the
Fed funds rate stands at 0% (Negative 150 basis points real yield)



How on earth can anybody believe that this makes sense at this point?

Market Commentary – for Institutional Client Use
Only. Refer to informational disclosures and
qualifications at the end of this publication.

Weekly Roundup
November 20, 2014

9

Market Commentary │ November 20, 2014

Conclusions:




The period from May 2013 to now is similar in a lot of ways to that seen from March 1997 to the end of
1998…..but everything about it is less concerning now than then


March 1997 to the end of the year: Fed raises rates 25 basis points in March causing jitters in emerging
markets. Asia in particular implodes as leverage, USD funding, the carry trade etc. blow up.



May 2013 to the end of the year: Fed announces tapering causing jitters in emerging markets. Asia
shows stress but the ADXY (Asia USD Index) only goes back to the lows seen in 2012. So far in 2014 that
low has not been revisited.



1998: While Asia stabilizes LATAM stays under pressure. The LACI(Latin American currency index
continues to fall throughout 1998. The 16.5% rally in European currencies “vis a vis” the USD comes to an
end and the Dollar begins a 2 year rally versus the Euro. The low in the USD is put in as peripheral yields in
Europe converge to the US. Oil falls sharply and the Russian bond market and economy implode resulting
in default. USDRUB multiples by over threefold. Long term capital fails.



2014: While Asia stabilizes LATAM stays under pressure. The LACI goes to new lows in its 2 decade+
history. The low to high rally in EURUSD peaks in May at 1.3995 (A move of 16.2%) as peripheral yields in
Europe converge to US yields. Oil falls sharply and Russia comes under stress (Albeit no economic
collapse, no default and a USDRUB move of just 45% or so.)



The economic data improvement in the US is similar to 1998 (Growth, inflation and unemployment) but
much worse in Europe.

In 1999:


EURUSD closed down over 17%



Oil doubled in price after putting in the trend low in December 1998



The Equity market continued higher (S&P closed up nearly 20%)



Yields moved higher (10 year yield moved up 179 basis points)



The Fed started raising rates in June 1999

History is unlikely to repeat as we head into the end of 2014/ start of 2015 but it sure looks like it is
“rhyming”

Market Commentary – for Institutional Client Use
Only. Refer to informational disclosures and
qualifications at the end of this publication.

Weekly Roundup
November 20, 2014

10

Market Commentary │ November 20, 2014

Portfolio update:
Position,
Instrument and
date
Short EURUSD
21 Oct 2014




Long USDSEK
28 Oct 2014


Short EURUSD
30 Oct 2014


Short EURGBP
18 Nov 2014

Entry
price, stop

Target

Exit date
and price

Profit/Loss

% of
Capital
used

Bounce looks to have lost
momentum and run its
course

1.2771
S/L 1.3010

1.2050-1.22

----

----

20%

Break above the 76.4%
retracement pivot and
recent highs suggests the
next leg higher has begun

7.3590
S/L 7.05

8.10+

----

----

20%

Bearish key day and head
and shoulders top
suggests the downtrend
has resumed

1.2570
S/L 1.2790

1.2050-1.22

----

----

15%

Approaching key
resistance that it has
tested and failed to breach
in the past

0.8000
S/L 0.8115

Low .70s

----

----

20%

Comment

Total Capital Used

75%

Source: Aspen Graphics / Bloomberg November 20, 2014.

YTD performance through 20 November 2014: 2.23%

Fees, transaction costs, and other expenses reduce returns.
The total impact of the spreads and fees may be significant and may make it more difficult for you to realize a profit from trading if replicating
“Short Term Conviction views”, “Long Term Conviction views”, “CitiFX Technicals Portfolio”, “Strategic Portfolio”, and “Tactical Portfolio”
trades. Over the Counter (“OTC”) trades in the CitiFX® Technicals Portfolio are established at market prices from independent trading desks in
the sales and trading department of Citigroup Global Markets Inc. or one of its affiliates (collectively, “Citi”). Contract market positions in the
CitiFX® Technicals Portfolio are established on the listing exchange. OTC Positions are priced to market using bid/offer prices from
independent Citi sources at time of publication. Contract market positions are priced at end of day settlement or current disseminated prices
on the listing exchange at the time of publication. When OTC market prices are not readily available, positions are priced to fair market value,
using techniques such as model or matrix pricing at time of publication. Examples of products that are priced to fair market value include
certain contractual commitments (e.g. interest rate swaps, options, NDFs).

Market Commentary – for Institutional Client Use
Only. Refer to informational disclosures and
qualifications at the end of this publication.

Weekly Roundup
November 20, 2014

11

Market Commentary │ November 20, 2014

Contacts

FX Technicals
Tom Fitzpatrick

New York

1-212-723-1344

thomas.fitzpatrick@citi.com

New York

1-212-723-3211

steven.englander@citi.com

London

44-20-7986-3032

kristjan.kasikov@citi.com

New York

1-212-723-6014

nicolas.thomet@citi.com

FX Strategy
Steve Englander

Quantitative Investor Solutions
Kristjan Kasikov
Value Added Products
Nicolas Thomet

Published by: CitiFX Wire
20 November 2014
Contact: CitiFXTechnicals@citi.com
https://icg.citi.com/data/documents/S&T_ExternalDiscl_0209.pdf
© 2014 Citigroup Inc. All rights reserved. CITI and Arc Design is a registered service mark of Citigroup Inc.

Market Commentary – for Institutional Client Use
Only. Refer to informational disclosures and
qualifications at the end of this publication.

Weekly Roundup
November 20, 2014

12

Market Commentary │ November 20, 2014

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Weekly Roundup
November 20, 2014

13



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