121216 Currencies, Interest Rates and Market (Citi)

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  • 7/30/2019 121216 Currencies, Interest Rates and Market (Citi)

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    Currencies and Interest Rates

    (CitiFXs view)A Little Perspective on What Lies Ahead

    http://www.investlogic.ch

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    Forever and Ever ?

    The worlds economies have been fostered and sustained since 2008 by thecentral banks of the planet working in tandem to make sure that the entireglobe did not slide into the hellhole of Depression. To that extent the concepthas worked but we are still on the lifeline to date and no one seems to want toget off of it. It is similar to a person being hooked on heroin with the inabilityto withdraw and so the habit continues.

    There are consequences of this behavior of course including irrationalbehavior, overblown promises and the increase of the risk that whenwithdrawal comes that the patient slips into convulsions. Those, however, arelong term and systemic problems that will continue to haunt us but in themeantime more mundane issues abound.

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    What Do We Believe For 2013 ?

    Initial claims will follow a similar path to that seen in the 1970s and begin to movehigher in 2013. This will be the first indication that further trouble lies ahead. The 2s 5s curve will eventually move higher also but not before posting one last move down.

    U.S. 10 year yields will have one final push down towards 1%-1.2% at which point theycould bounce up like a beach ball let go underwater.

    EURUSD will fall towards 1.20 in Q1 2013 and possibly even 1.10-15 with parity a realpossibility in 2 years. We also expect a rally on the USD Index this year of about 15%

    which suggests that this move will be predominately driven by EURUSD (57.6% of theUSD-Index). Banking crises and collapses were not uncommon during the period.

    USDJPY will eventually move higher as the interest rate dynamic kicks in and wewould not be surprised to see a move into the low 90s over the course of the year.

    We expect Gold to move to $2,055 -$2,060 in the first quarter of 2013 a and ultimatelya rally towards $2,400 in 2013.

    Crude Oil (Brent) should rally to the 2011/2012 highs around $125 and possibly moveto all time highs in 2013.

    The DJIA will drop over 20% towards the 10,000-10,500 area.

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    The dynamic in this cycle is similar to 1973-1978 albeit at higher nominal levels. In 1978 this was a turningpoint which then saw these numbers head significantly higher again. However that, as well as a deterioration

    in economic activity and housing, was partially induced by a tightening Fed which given the present debt/housing/employment dynamic is highly unlikely even if we see some inflation in the system. However we thinkthere is a real danger that higher yields (Bond markets) and a tighter fiscal dynamic could induce this move.

    Bottom line we think the best may be behind us for now on this chart and expect reneweddeterioration in 2013

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    This chart has been in our view, the best interest rate chart in the World for the last quarter century.

    Our bias is that we have limited downside left here before we pop

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    Where initial claims go... the yield curve will follow.

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    We did not quite reach this base in late 2008 when it stood at 1.89%. It now stands at 1.05%. As yet we havenot regained any levels of importance on the topside.

    While we do not for a moment suspect that we would stay down there for long, we do think a danger remainsfor one last move lower as seen in previous trends. IF so, that low could be subject thereafter to a sharpbounce as seen in prior instances.

    There are currently many scenarios at play which could be the catalyst to such a move. Candidates? 1.Fiscal Cliff and/or debt ceiling negotiations; 2. Europes sovereign debt crisis; 3. Middle East turmoil;4. China slowdown

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    A little lower then a lot higher - for Treasury yields.

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    EURUSD set to weaken

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    USD strength is on its way

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    The trend is clearly higher.

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    The present dynamic in Crude continues to remind us of the 1970s when we got 2 supply shock moves. Thefirst came in 1973-1974 at the same time as we had a collapse in the Equity market (1973-1974); a collapse inhousing activity (1973-1975) and a sharp fall in economic activity (1973-1974). During the 1973-1974 periodCrude pretty much tripled in price (low to high) over 18 months.

    Then about 5 years after the 1973-1974 surge it did it again and once again virtually tripled in price in1978-1979 over 18 months (backdrop here was the Iranian revolution and the Iran-Iraq war).

    In 2007-2008 Crude virtually tripled in price over 18 months and we saw an equity, housing and economicdynamic very reminiscent of 1973-1975. Now as we head towards 2013 could we be setting up for anothertripling in price over 18 months to 2 years? We hope not as that would put Crude close to $200.

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    Stay Far Away From Equities...

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    Every bounce off this trend line on the VIX since 2007 has been followed by a sharp move lower in theS&P (average 23% over 4 months)

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    The current price action in the S&P 500 is eerily similar to the movement leading up to the collapse in

    1987... (via Bloomberg)

    "History does not repeat, but it does rhyme" Mark Twain

    The Dow is also tracking this move almost perfectly over the last two years...

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    It's not just 1987... Here is the Dow analog again the 1977-78 period and 1905-1910 period... (via Citi)

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    And a Bonus Chart - for those who prefer to look at Bond Analogs... Here is the current move in 10YUS Treasury yields overlaid on 1992's movement... spooky no? and somewhat fits with a view ofweakness into year-end, downgrade on debt-ceiling and collapse... (via Citi)

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    Thank you

    "The idea is there, locked inside. All you have to do is to remove the excess stone." Michelangelo.

    http://www.investlogic.ch