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WHAT ARE THE CHANCES Risk Insight Volume 6, Issue 10-16 March 2015..that EURUSD will touch 1.0 within the next 3 months? 31.

how stressful currency volatility can be. With GBPUSD consolidating below 1.50 and GBPEUR rallying higher on the euro weakness, both pairs are converging on 1.45 (chart 1).

The FOMC meeting this Wednesday is set to be a key determinate of directional Chart 1: Convergence of GBPUSD and GBPEUR bias for the dollar in the months ahead.

1 WHAT ARE THE CHANCES Risk Insight Volume 6, Issue March that EURUSD will touch 1.0 within the next 3 months? 31.0% The Big Picture FOMC meeting shaping the direction of the currency markets he developments in the currency markets over the past weeks T with intra-day jumps of 2-3 cents have reminded everyone how stressful currency volatility can be. With GBPUSD consolidating below 1.50 and GBPEUR rallying higher on the euro weakness, both pairs are converging on 1.45 (chart 1). In other words, this would imply EU- RUSD reaching parity. The FOMC meeting this Wednesday is set to be a key determinate of directional Chart 1: Convergence of GBPUSD and GBPEUR bias for the dollar in the months ahead. The Chairman of the Federal Reserve, Janet Yellen, continued the previous approach of Ben Bernanke in terms of tapering QE3. However, Janet Yellen has shifted from Bernanke s date dependant approach to data dependant approach. Over the past months, despite inflationary pressures on the..that GBPUSD will be above 1.50 by the end pf Q %..that US interest rates will remain unchanged at 0.25% in June? 50.6% *The above probabilities have been calculated using market data derived from the currency options market and interest futures market. This does not necessarily reflect the directional view of Validus Risk Management. Validus Risk Management Ltd (FRN: is authorised and regulated by the FCA)

back of oil price, the overall US data flow has been positive. The Fed avoided a mistake of the past when it defined specific thresholds (i.e. unemployment 6.

2 back of oil price, the overall US data flow has been positive. The Fed avoided a mistake of the past when it defined specific thresholds (i.e. unemployment 6.5%) in its forward guidance and kept the framework for assessing the timing of the first rate hike more open-ended. However, with unemployment at 5.5% and inflation picking up, it might become more challenging to push back the rate hike without losing credibility. FOMC: Deciphering the terminology Since the beginning of this year the Fed has been signalling that it is preparing to raise interest rates sooner rather than later. It is fascinating how the central banks press conferences have become a stage where coded messages are passed on to market participants. More specifically, the message involving extended period of time is deciphered as we are working with a 6 month framework to raise interest rates. This was eventually replaced by patient in January which most analysts have read as for the next two FOMC meetings we won t raise rates. Everyone is expecting Janet Yellen to indicate that rates will rise this June by dropping the code patient from its vocabulary, and potentially introducing new terminology. If the Fed provides implies that it will begin normalising the monetary policy in June, we expect the USD bullish case to continue. The dollar index has already rallied sharply in recent months, reaching the highest level since 2003 of 100 (chart 2). Being the reserve currency of the world comes with both its (exorbitant) privileges and detriments. Should the US raise rates while the rest of the world is heading in the opposite direction, the detrimental effect will be felt in the emerging markets, Europe and elsewhere. The influx of capital to the US will cause currencies across emerging markets and Europe to tumble, magnifying the diverging trend between the US and the rest of the world. Janet Yellen is likely to be questioned during the press conference about the dampened net exports and wider global implications on the back of dollar strength. Her response is likely to be similar to the Fed vice-chairman Stanley Fischer s one, who (quite rightly to some extent) pointed out that the dollar strength is, to a large extent, the result of devaluation strategies of other central banks. However, the second question is a bit trickier and in our view, there are two reasons why the Fed might reconsider raising rates when looking at the big picture: Domestic: Dollar Strength will significantly 1 damage exports In the environment where the euro, the second most liquid currency, is in the process of QE and the rest of the world is cutting rates we can ex- Chart 2: Dollar Index (DXY) 2

pect the dollar to strengthen unprecedently. This will make the US exports entirely uncompetitive, which will eventually filter through into real economy putting pressure on growth.

3 pect the dollar to strengthen unprecedently. This will make the US exports entirely uncompetitive, which will eventually filter through into real economy putting pressure on growth. Global: Spillover effects are likely to come 2 in place A bit of a cliché: we live in a globalised, interconnected world. This puts the US economic recovery into question, stressing the cross-border spillover effects that could dampen the optimism in the US. Hence, diverging even further from the rest of the world via a rate hike is unlikely to be sustainable. Overall, the dollar is the reserve currency of the world and the actions of the Fed have an impact far beyond their own territory. Although this is not something that stopped them in the past (i.e. announcement of tapering December 2013 and emerging markets currency sell-off), Janet Yellen might want to weight all the potential side -effects the rate hike might cause. As of now, the dollar is over-valued on a fundamental basis, and further adding to USD bullish momentum might stretch things just a bit too far. As always in the markets, large and sudden swings in one direction tend to lead to an equally fast and even larger correction in the opposite direction. Author: Zarina Nasib 3

4 GBPUSD terling came under heavy pressure against the dollar last week, falling to its lowest level since June S 2010 on expectations of diverging monetary policy between the Bank of England and the Federal Reserve. With this in mind, Wednesday s FOMC meeting will be key to gauging the timing of the first rate hike. Key Influences Support Resistance Level Level Technical View Last week s break through the psychological 1.50 level is looking increasingly like it will be sustained and thus near term risks continue to point lower. While there may be some GBP buying interest ahead of Friday s low at , there is little in the way of comparable levels until the May 2010 low at On the upside, the market needs to recover back above the psychological 1.50 level to ease downside pressure and signal a further period of consolidation. British manufacturing production figures take an unexpected dip January s latest manufacturing production figures, released last week, showed an unexpected decline of 0.5% in output compared with December s figures. The unexpected fall stemmed from a dip in the output of high-tech equipment. However these monthly readings, that are historically known to be quite volatile, should not be read into too deeply since the year on year figures continue to show growth for the manufacturing sector; albeit a slower growth than anticipated. US retail sales fall unexpectedly in February Last week s US retail sales numbers showed a drop of 0.6% against a consensus forecast for a gain of 0.4%. While it could be argued that the disappointing reading was down to poor weather, particularly in the second half of the month, there is a worrying trend emerging after a decline of 0.8% in January and a reading of -0.9% in December. Over the past three months, sales are down 1.2% on the previous three months. While the core reading (excluding gasoline, food, and building materials) makes slightly better reading, it still only shows a gain of 0.1% on the quarter. Fortunately, other data suggests that the US economy remains in reasonable health and thus there remains scope for the Fed to begin tightening policy later this year, but higher rates are by no means a certainty. Short-term Risk Factors FOMC Interest Rate Decision (Wednesday) The main highlight on this week s calendar is Wednesday FOMC meeting where the Fed is expected to provide further insight into the timing of when it will begin raising rates. The focus will be on the detail and the use of the word patience which most analysts have decided means no rate rise for at least the next two meetings. Removal of this term suggests that the committee may raise rates as soon as June. UK ILO Unemployment Rate (3M) (Wednesday) Quarterly figures to be released on Wednesday are expected to continue to decline and fall 0.1% to 5.6% compared to last quarter, thus signifying steady progress in the British economy. Also on Wednesday the UK Chancellor of the Exchequer, George Osborne, will be announcing his final budget before the general election on 7 th May. 4

5 GBPEUR Support he euro continued to remain heavily pressured against the pound last week, even in the light of better T than expected industrial production figures. Key Influences Resistance Level Level Technical View Although the pair continues to remain in overbought territory, there is little sign of a meaningful correction at this stage. Short momentum continues to point to a further strengthening of sterling against the euro. At this stage, only a sustained move back below 1.37 will bring this bullish view into question British manufacturing production figures take an unexpected dip January s latest manufacturing production figures, released last week, showed an unexpected decline of 0.5% in output compared with December s figures. The unexpected fall stemmed from a dip in the output of high-tech equipment. However these monthly readings, that are historically known to be quite volatile, should not be read into too deeply since the year on year figures continue to show growth for the manufacturing sector; albeit a slower growth than anticipated. Eurozone economy shows signs of recovery Industrial production in the Eurozone for January compelled economists to be more upbeat about the health of the economy. Although the figures showed a 0.1% slump in production from December, this translated to a 1.2% increase compared to January last year. This beat market expectations by almost 1% and are the best year on year figures for the Eurozone to witness since July This stability of industrial production points towards signs of a recovering Eurozone economy. Short-term Risk Factors UK ILO Unemployment Rate (3M) (Wednesday) Quarterly figures to be released on Wednesday are expected to continue to decline and fall 0.1% to 5.6% compared to last quarter, thus signifying steady progress in the British economy. Also on Wednesday the UK Chancellor of the Exchequer, George Osborne, will be announcing his final budget before the general election on 7 th May. Eurozone Consumer Prices Index (Tuesday) At first glance the CPI figures for the Eurozone this week are expected to remain unchanged at -0.3% year-on-year. However, with the revision of the last figure from - 0.3% down to -0.6%, the forecasted figures exhibit signs of a recovering economy in the Eurozone. 5

6 EURUSD Support Resistance Level Level he euro continued to weaken drastically against the dollar last week, falling to new lows of the past T decade and ending the week below $1.05. Technical View After breaking through the 1.10 level last week, the pair has continued to trend lower in recent sessions. The pair hit lows of this morning; the lowest they have seen in over 10 years Near term risks continue to point to a further weakening of the euro. Key Influences Eurozone economy shows signs of recovery Industrial production in the Eurozone for January compelled economists to be more upbeat about the health of the economy. Although the figures showed a 0.1% slump in production from December, this translated to a 1.2% increase compared to January last year. This beat market expectations by almost 1% and are the best year on year figures for the Eurozone to witness since July This stability of industrial production points towards signs of a recovering Eurozone economy. US retail sales fall unexpectedly in February Last week s US retail sales numbers showed a drop of 0.6% against a consensus forecast for a gain of 0.4%. While it could be argued that the disappointing reading was down to poor weather, particularly in the second half of the month, there is a worrying trend emerging after a decline of 0.8% in January and a reading of -0.9% in December. Over the past three months, sales are down 1.2% on the previous three months. While the core reading (excluding gasoline, food, and building materials) makes slightly better reading, it still only shows a gain of 0.1% on the quarter. Fortunately, other data suggests that the US economy remains in reasonable health and thus there remains scope for the Fed to begin tightening policy later this year, but higher rates are by no means a certainty. Short-term Risk Factors FOMC Interest Rate Decision (Wednesday) The main highlight on this week s calendar is Wednesday FOMC meeting where the Fed is expected to provide further insight into the timing of when it will begin raising rates. The focus will be on the detail and the use of the word patience which most analysts have decided means no rate rise for at least the next two meetings. Removal of this term suggests that the committee may raise rates as soon as June. Eurozone Consumer Prices Index (Tuesday) At first glance the CPI figures for the Eurozone this week are expected to remain unchanged at -0.3% year-on-year. However, with the revision of the last figure from -0.3% down to -0.6%, the forecasted figures exhibit signs of a recovering economy in the Eurozone. 6

USDCAD he USD was once against the dominant force over its Canadian namesake last week, closing Friday s T session within touching distance of January s high at 1.2799.

7 USDCAD he USD was once against the dominant force over its Canadian namesake last week, closing Friday s T session within touching distance of January s high at A weaker oil price, coupled with softer than expected Canadian employment data on Friday were key catalysts, together with the impact of a broadly stronger USD. For now the pair remains range bound between and 1.28, but a sustained move through the latter will open up risk towards the psychological 1.30 level. Key Influences Support Resistance Level Level Technical View Despite last week s rally, USD/CAD continues to trade within its broad range and thus there is little change to the technical outlook. As previously highlighted, overall risk continues to remain skewed to the upside (the current flat pattern suggests a continuation of the longer term trend) and a sustained break of will confirm this. On the downside, expect dips to begin to find support at , but at this stage, only a sustained move back below will suggest that maybe an interim top is in place. CAD slips on Canadian jobs report The Canadian dollar closed last week under pressure after the February employment report showed a jump in the unemployment rate in the mining and energy sector, coupled with a disappointing reading in the manufacturing sector. On a more positive note, the education and construction sectors both showed steady gains, but overall, the news added to the perception that the Bank of Canada will continue with its ultra-loose stance on monetary policy and potentially ease further in the months ahead. With oil prices coming under pressure again last week, it seems unlikely that employment in the energy sector will make a significant recovery anytime soon although the weaker CAD should begin to benefit US retail sales fall unexpectedly in February Last week s US retail sales numbers showed a drop of 0.6% against a consensus forecast for a gain of 0.4%. While it could be argued that the disappointing reading was down to poor weather, particularly in the second half of the month, there is a worrying trend emerging after a decline of 0.8% in January and a reading of -0.9% in December. Over the past three months, sales are down 1.2% on the previous three months. While the core reading (excluding gasoline, food, and building materials) makes slightly better reading, it still only shows a gain of 0.1% on the quarter. Fortunately, other data suggests that the US economy remains in reasonable health and thus there remains scope for the Fed to begin tightening policy later this year, but higher rates are by no means a certainty. Short-term Risk Factors Canadian Inflation (Friday) While the CAD s fortunes are likely to be determined by the oil price throughout the early part of this week, Friday s inflation figures will be a key influence on the Bank of Canada when determining its outlook for monetary policy. A lower than expected reading will fuel speculation of a another rate cut in the months ahead. FOMC Interest Rate Decision (Wednesday) The main highlight on this week s calendar is Wednesday FOMC meeting where the Fed is expected to provide further insight into the timing of when it will begin raising rates. The focus will be on the detail and the use of the word patience which most analysts have decided means no rate rise for at least the next two meetings. Removal of this term suggests that the committee may raise rates as soon as June. 7

8 FX Forecasts $ / / 3M 6M 1Y GBPUSD Validus Bloomberg GBPEUR Validus Bloomberg EURUSD Validus Bloomberg USDCAD Validus Bloomberg

9 Economic Data & Market Indicators Economic Matrix GDP CPI Unemployment Industrial Production Retail Sales Current Account Budget Balance 10 Year Yield US 2.20% -0.10% 5.50% 3.47% 1.7% -2.21% -2.80% 2.074% EUR 0.90% -0.30% 11.20% 1.20% 3.7% 2.34% -2.60% 0.270% UK 2.70% 0.30% 5.70% 1.3% -0.70% -5.55% -5.24% 1.670% CAN 2.44% 1.00% 6.80% 0.78% 4.00% -2.20% -0.26% 1.415% Sentiment & Positioning Currency (vs. USD) Speculative Positioning 3 Month Trend Risk Reversals (1 Month, 25d) 3 Month Trend Momentum EUR -0.18M Lower (EUR Negative) Lower Bearish UK -33K Lower (GBP Negative) Neutral Neutral CAD -39K Lower (CAD Negative) Neutral Neutral Country Current Rate Last Change Date of Change Next Meeting UK 0.50% -0.50% 5 th March 09 9 th April 15 US % -0.75% 16 th December th March 15 CAN 1.00% +0.25% 21 st January th April 15 EUR 0.05% -0.10% 4 th September th April

10 Weekly Economic Calendar Date Location Time Indicator For Previous Forecast 16/03/15 UK 12.01am Rightmove House Prices (m/m) Mar 2.1% 1.0% UK 12.01am Rightmove House Prices (y/y) Mar 6.6% 5.4% US 12.30pm Empire Manufacturing Survey Mar US 1.15pm Industrial Production (m/m) Feb 0.2% 0.1% US 1.15pm Manufacturing Production (m/m) Feb 0.2% -0.2% US 8.00pm Net Long-Term TIC Flows Jan $35.4bn n/a 17/03/15 EZ 10.00am German ZEW Survey Mar EZ 10.00am CPI (m/m) Feb -1.6% 0.6% EZ 10.00am CPI (y/y) Feb -0.3% -0.3% CA 12.30pm Manufacturing Sales (m/m) Jan 1.7% -1.2% US 12.30pm Housing Starts Feb 1065k 1040k US 12.30pm Building Permits Feb 1053k 1065k 18/03/15 UK 9.30am Jobless Claims Change Feb -38.6k -30.0k UK 9.30am Average Weekly Earnings (3m avg. y/y) Jan 2.1% 2.2% UK 9.30am ILO Unemployment Rate Jan 5.7% 5.6% UK 9.30am Bank of England Minutes EZ 10.00am Trade Balance NSA Jan 24.3bn 15.0bn US 6.00pm FOMC Rate Decision 0.25% 0.25% 19/03/15 US 12.30pm Initial Jobless Claims (w/e 7 th March) 289k 292k 20/03/15 EZ 9.00am Current Account NSA Jan 29.2bn n/a UK 9.30am Public Sector Net Borrowing Feb - 9.4bn 7.7bn CA 12.30pm CPI (m/m) Feb -0.2% 0.7% CA 12.30pm CPI (y/y) Feb 1.0% 1.0% CA 12.30pm Retail Sales (m/m) Jan -2.0% -0.5% Note: Figures in red have already been released. 10

Risk Insight. Are the high costs of hedging for euro investors coming to a turning point? What are the chances... Volume 9, Issue th March 2017

Risk Insight. Are the high costs of hedging for euro investors coming to a turning point? What are the chances... Volume 9, Issue th March 2017 Inside this issue Big Picture... 1-2 GBPUSD... 3 GBPEUR... 4 Risk Insight Volume 9, Issue 11 13 th March 2017 Are the high costs of hedging for euro investors coming to a turning point? As far as hedging