Foreign Exchange Forecasts $ Still Slumped in Smile

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1 July 2017* CGMS <GO> Foreign Exchange Forecasts $ Still Slumped in Smile G10 Jeremy Hale AC Managing Director jeremy.hale@citi.com Amir Amin AC Strategist amir.amin@citi.com Maximilian Moldaschl AC Director maximilian.moldaschl@citi.com Jamie Fahy AC Senior Associate jamie.fahy@citi.com Dirk Willer AC Managing Director dirk.willer@citi.com Next issue expected to be published approximately 18 August See Appendix A-1 for Analyst Certification, Important Disclosures and non-us research analyst disclosures Citi Research is a division of Citigroup Global Markets Inc. (the "Firm"), which does and seeks to do business with companies covered in its research reports. As a result, investors should be aware that the Firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their investment decision. Certain products (not inconsistent with the author s published research) are available only on Citi's portals. This presentation was approved for distribution on 14 July 2017; the disclosures in Appendix A1 are current as of the same date. EM

2 2 Table of Contents Citi Foreign Exchange Forecasts 3 Forecast Paths 4 Overview: $ Still Slumped in Smile 5 G10 Currencies 6 EUR: Elevated Now, Lower Later Probably 7-8 JPY: Relative Monetary Policy and Yields Key Driver 9 AUD: Cross-Currents 10 NZD: Supported by Terms of Trade 11 CAD: Big Revisions Near Term 12 GBP: Uncertainty Persists 13 SEK: Cheap to Rates and CB Turning Less Dovish 14 NOK: Cheap, But Delta One To Oil 15 CHF: Political Risk Keeps CHF Strong Medium Term 16 EM Currencies 17 Asia: Bullish Focus on MYR 19 CEEMEA: CEE Overall Flatish against EUR in 3m 20 LATAM: BRL at Risk from Politics 21 Appendix Charts and Forecast Interpolations 22

3 3 Citi Foreign Exchange Forecasts Sources: Bloomberg and Citi Research Market data* Forecasts Returns*** spot 3m Fwd 12m Fwd 0-3 mos 6-12 mos long-term 3 mos rtn 12 mos rtn G10 Euro EURUSD % -6.4% Japanese yen USDJPY % 5.4% British Pound GBPUSD % -7.7% Swiss Franc USDCHF % 3.9% Australian Dollar AUDUSD % -2.9% New Zealand Dollar NZDUSD % 0.5% Canadian Dollar USDCAD % 2.5% Dollar Index** DXY % 6.2% G10 Crosses Japanese yen EURJPY % -1.4% Swiss Franc EURCHF % -2.8% British Pound EURGBP % 1.3% Swedish Krona EURSEK % -2.4% Norwegian Krone EURNOK % -5.4% Norwegian Krone NOKSEK % 3.1% Australian Dollar AUDNZD % -3.5% Australian Dollar AUDJPY % 2.3% Asia Chinese Renminbi USDCNY % 0.9% Hong Kong Dollar USDHKD % 0.9% Indonesian Rupiah USDIDR % -4.2% Indian Rupee USDINR % -2.2% Korean Won USDKRW % 4.6% Malaysian Ringgit USDMYR % -5.7% Philippine Peso USDPHP % -1.8% Singapore Dollar USDSGD % -1.2% Thai Baht USDTHB % 0.6% Taiwan Dollar USDTWD % 2.6% EMEA Czech Koruna EURCZK % -1.8% Hungarian Forint EURHUF % 1.2% Polish Zloty EURPLN % -3.6% Israeli Shekel USDILS % 1.6% Russian Ruble USDRUB % 1.8% Russian Ruble Basket % -1.4% Turkish Lira USDTRY % -4.4% South African Rand USDZAR % -3.3% LATAM Brazilian Real USDBRL % -1.7% Chilean Peso USDCLP % 0.1% Mexican Peso USDMXN % 0.2% Colombian Peso USDCOP % -2.4% * market data including spot as of 1:19 PM London time on 14-Jul-2017 ** The DXY forecasts are implied from the forecasts of the constituent crosses. *** Returns are relative to forwards

4 Forecast Paths 4 DM & EM Forecasts Paths Chart shows GDP weighted baskets. Today = 100 EM Regions Forecasts Paths Chart shows GDP weighted baskets. Today = DM (vs USD) EM (vs USD) Asia (vs USD) CEEMEA (vs USD) Latam (vs USD) USD stronger USD weaker USD stronger USD weaker Sources: Bloomberg and Citi Research

5 5 Overview: $ Still Slumped in Smile The $ is about 2% weaker on a global basis than when the Fed began its tightening cycle in late 2015, with high carry Latam and CEEMEA currencies leading the way and G10 and Asian FX lagging. Even higher UST yields over the past month have failed to support the $ $ vs. LATAM (Red), CEEMEA (Green) G10 (Blue), Asia (Black), World (Grey Dash) As we have often stressed, for the $ to break out of this range trading, US economics likely have to get either a lot worse or a fair bit better. Worse implies higher recession risks where we would probably see safe haven/ reserve currency demand for $ with funding shortages and repatriation risks also supporting the currency. Better, and US cyclical outperformance could drive materially wider rates/ yield differentials and asset flows into the $. Instead we languish in the lower part of the $ smile given a broadening of the economic expansion to Europe, EM and Japan and disappointment about policy action from the new US Administration In a low volatility environment across most asset classes, carry is attractive and this has driven the outperformance of higher yielding EM FX which we forecast to continue but in more muted fashion Most G10 FX is rather rangebound in our forecasts. For example, pivotal EUR strength recently has been helped by EA cyclical performance and equity inflows but speculative positions are also high and EUR is trading better than yield differentials would normally imply Around the turn of the year, we do expect to see tax cuts emerge in the US, giving a moderate stimulus to a somewhat flagging US economy and a boost to yields and the $. This implies $ weakness over 0-3m gives way to a modest recovery over 6-12m Sources: Bloomberg and Citi Research

6 6 G10 Currencies Jeremy Hale and the Global Macro Strategy Team

7 EUR Elevated Now, Lower Later Probably Our EUR/$ forecasts assume further near term upside for the single currency. EUR/$ is lower in ranges than the NEER and so is the REER. US uncertainty adds to upwards pressure near term on EUR. 0-3 month forecast: 1.16 Key Drivers Relative cyclical strength in the EA has encouraged equity inflows and an increase in net speculative length in EUR FX positions to relatively stretched levels Expectations for some removal of accommodation by the ECB, even if only lower net purchases of assets, have added to the move EUR/$ (Red) and EA Less US Citi Data Change Index Although the nominal effective EUR is now the highest since 2014Q3, the pivotal EUR/$ is only at one year highs and the real effective is still below the historical mean and around 17% below the historical REER highs. REER mean reversion expectations may also explain long speculative positioning Expectations for US fiscal policy /tax reform remain low and markets price only around a 50% probability of a further hike by the Fed this year which has weakened the $ United States F 2018F 2019F Citi 1.6% 2.2% 2.6% 2.4% GDP (real, % YoY) Consensus 1.6% 2.2% 2.3% 2.2% PCE Deflator (% YoY) Current Account Balance (% of GDP) Citi 1.1% 1.7% 1.9% 2.0% Consensus 1.1% 1.9% 2.0% 2.1% Citi -2.6% -2.7% -2.7% -3.4% Consensus -2.6% -2.6% -2.7% -2.7% Equity Inflows Speculative Positioning Sources: Bloomberg, EPFR and Citi Research

8 EUR Elevated Now, Lower Later Probably Extended speculative length suggests an EUR/$ pull back medium term with the pair rich to yield differentials and US tax cuts in 2018 potentially boosting UST yields and the $ month forecast: 1.09 Key Risks Upside risks for EUR: Currently, the broad balance of payments is negative (current account+ FDI+ portfolio flows because bond outflows> equity inflows). Bond outflows could slow following a rise in Bund yields post an ECB 2018 taper. Speculative length may hold or rise further near term. US political news flow remains negative Bond Outflows> Current A/C+FDI+Equity Inflows Downside risks for EUR: Despite negative press, Trump/ Congress should produce modest tax cuts for 2018, boosting US yields and the $. EUR is rich to current yield spreads. ECB taper may be negative via a rise in risk aversion/ periphery spreads. EUR/$ is near the top of the range and speculative length may be close to a peak. EA inflation undershoot prevents ECB tightening. Italian Elections in 2018Q1 could elect anti EUR elements EUR/$ (Red) and 10y Bund Less UST Yield Spread Overall Assessment: Upside EUR/$ pressure short term likely fades over 6-12m as $ supportive US factors kick in Eurozone F 2018F 2019F Citi 1.7% 2.1% 1.9% 1.8% GDP (real, % YoY) Consensus 1.7% 1.9% 1.6% 1.4% CPI Inflation (% YoY) Current Account Balance (% of GDP) Citi 0.2% 1.5% 1.3% 1.7% Consensus 0.2% 1.6% 1.5% 1.6% Citi 3.3% 3.3% 3.1% 3.0% Consensus 3.3% 3.1% 2.9% 2.7% Sources: Bloomberg, CFTC and Citi Research

9 9 JPY Relative Monetary Policy and Yields Key Driver $/JPY is likely heavily influenced over time by relative monetary policy (including balance sheet) and yield moves between the US and Japan month forecast: 117 Key Drivers & Risks $/JPY looks low ($ cheap) given where Japanese and global equities are trading, the overall elevated level of risk appetite and the ongoing relatively rapid pace of Japanese broad money growth. And while the JPY REER remains low in a long term historical context, it is above the three year rolling average More generally, relative monetary policy, and expectations thereof, remains a major driver for $/JPY. A gradual decline in the US Fed balance sheet vs. ongoing expansion in the BoJ balance sheet is a likely medium term positive for high $/JPY levels though in the short term spot is also tracking 10y yield differentials closely. We think US yields may have peaked near term, possibly driving some consolidation in spot $/JPY vs. NKY & JP Broad Money Growth JPY REER Further out, tax cuts in the US may again put upwards pressure on real US yields leading to some further $/JPY upside Upside Risks: $/JPY could rise faster on even higher US yields, faster Fed balance sheet reduction Downside risks: Weaker US yields. BoJ normalisation earlier Japan F 2018F 2019F Citi 1.0% 1.6% 1.4% 1.0% GDP (real, % YoY) Consensus 1.0% 1.3% 1.0% 0.7% CPI Inflation (% YoY) Current Account Balance (% of GDP) Citi -0.1% 0.6% 0.6% 0.7% Consensus -0.1% 0.6% 0.8% 1.0% Citi 3.7% 4.2% 4.4% 3.5% Consensus 3.7% 3.8% 3.8% 3.7% $/JPY 10y UST Sources: Bloomberg, Macrobond and Citi Research

10 10 AUD Cross-Currents Driven by ADXY and real rate differentials in the near-medium term month forecast: 0.75 Key Drivers & Risks Although there are signs of a pick-up in economic growth in Q2, this doesn t necessarily change the bigger picture for the RBA. The consumer and the housing market continue to face a range of headwinds, not least being tighter financial conditions independently of the RBA Domestic inflation and wage growth is expected to remain stable but subdued. However, risks are perhaps to the downside given global inflation surprises are turning over. The RBA is expected to remain on hold until mid AUD/USD (Red) vs. ADXY (Green) In terms of fair value metrics, there are conflicting signals. AUD/USD looks in-line with FV vs. ADXY, but is slightly cheap to real rate differentials and also it s terms of trade index. Although the beta to the latter has decreased markedly in recent months. Should the low volatility environment remain, AUD could benefit, however with developed market Central Banks becoming less accommodative, we harbour concerns for risk assets and higher beta currencies Australia F 2018F 2019F Citi 2.5% 2.1% 2.7% 2.7% GDP (real, % YoY) Consensus 2.5% 2.3% 2.7% 2.9% CPI Inflation (% YoY) Current Account Balance (% of GDP) Citi 1.3% 2.4% 2.6% 2.2% Consensus 1.3% 2.2% 2.2% 2.2% Citi -2.6% -1.7% -2.6% -2.7% Consensus -2.6% -1.5% -1.7% -1.0% 10y Real Rate Differentials (Blue) vs. AUDUSD (Red) Sources: Bloomberg and Citi Research

11 11 NZD Supported by Terms of Trade Support for NZD/USD comes through positive terms of trade tailwinds month forecast: 0.73 Key Drivers & Risks NZD/USD (Red) vs. Milk Index (Black) New Zealand s economy continues to perform solidly whilst business confidence and sentiment remains buoyant. Current measures of domestic trading activity are consistent with GDP growth of ~4%, with upside risks to this Indeed, Citi s underlying macro data index for New Zealand remains close to multi-year highs, with Citi economists believing the OCR rate should start normalizing in H However, in the near term, it s likely that the RBNZ will remain neutral - dovish, in order to stem significant currency appreciation and also due to the continued low inflation and wage pressures domestically The currency remains supported by robust milk prices and improving terms of trade, with Citi s terms of trade index close to it s highest level since the index began. Furthermore, the domestic picture is goldilocks and with global volatility still relatively subdued, New Zealand should continue to attract inflows, therefore we d expect dips in the currency to be bought as long as risk appetite remains buoyant Support for NZD/USD comes in ~0.72c and then ~ whilst the next key resistance comes in ~0.74 New Zealand F 2018F 2019F Citi 3.3% 2.9% 3.1% 3.5% GDP (real, % YoY) Consensus 3.3% 3.0% 2.9% 2.5% CPI Inflation (% YoY) Current Account Balance (% of GDP) Citi 0.6% 1.9% 2.0% 1.9% Consensus 0.6% 1.9% 2.0% 1.8% Citi -2.8% -3.2% -3.7% -4.0% Consensus -2.8% -2.7% -3.0% -2.8% Macro Data (Blue) vs. Consensus (Red), Economic Surprise (Black) Sources: Bloomberg and Citi Research

12 12 CAD Big Revisions Near Term Hawkish BoC + bullish oil price forecast = large revisions to our near term forecasts month forecast: 1.30 Key Drivers & Risks The BoC have delivered their first hike this month, and the market currently prices two more in the next 6 months. Citi economists believe this dramatic shift in monetary policy stance is likely a twostep process to unwind emergency stimulus implemented back in However, they only expect one other 25 basis point increase in October at the next MPR/press conference meeting. Once the 50 basis points of insurance implemented amid the oil price shock in 2015 is reversed, they expect no additional increases in interest rates until 2H 2018 see Canada Economics View - BoC Policy Reaction Bank Hikes To Reverse Insurance USD/CAD Daily Candles With such a large scale shift in monetary policy expectations since our last forecasts, we have had to significantly revise lower our USD/CAD forecast path. But given the OIS market has already priced further tightening, we think CAD strength will also resume a high beta to directionality of oil prices in our assumptions. Citi s bullish oil forecasts likely mean that USD/CAD trades lower in the near term to trend support at WTI: Citi Forecasts vs. Consensus vs. Forwards More medium term, with USD aggregate positioning now more or less neutral, and the prospects for Trump to deliver $ positive policies, we see USD/CAD back at Canada F 2018F 2019F Citi 1.5% 2.6% 2.0% 2.0% GDP (real, % YoY) Consensus 1.5% 2.5% 2.0% 1.9% CPI Inflation (% YoY) Current Account Balance (% of GDP) Citi 1.4% 1.5% 1.8% 2.0% Consensus 1.4% 1.9% 2.0% 2.0% Citi -3.3% -2.8% -2.7% -2.4% Consensus -3.3% -2.6% -2.1% -2.2% Sources: Bloomberg and Citi Research

13 13 GBP Uncertainty Persists Back to square one in terms of uncertainty, again, for both businesses and consumers. No definitive plan for the Brexit negotiations starting in coming days. An increased likelihood that we see another Tory leadership contest, leading to yet another general election; we reiterate our belief that in the near to medium term, the risks to GBP are asymmetrically skewed to the downside month forecast: GBP/USD:1.20 & EUR/GBP: 0.90 Key Drivers & Risks Ceteris paribus, a weaker UK government should increase risk premia in UK assets including, i.e. lower or higher carry needed. Nonetheless, medium to long term, we acknowledge that the risks to an outright no deal or hard Brexit have probably reduced, perhaps eliminating any further material declines in the GBP REER which remains close to historical lows The long run equilibrium for could even be higher as a result of the election though this is highly uncertain. It may also depend on whether the government could change colour with significantly less business friendly policies under a Corbyn government, not necessarily very friendly either given ambitious fiscal spending plans Citi UK Macro Data Change Index Moreover, Citi s underlying UK data change index has fallen from cyclical highs and is rapidly falling to zero. Spikes in uncertainty are more often than not interpreted as sentiment negative. We attribute this as the main reason why recent hawkish BoE rhetoric is not really helping the that much United Kingdom F 2018F 2019F Citi 1.8% 1.7% 1.5% 1.6% GDP (real, % YoY) Consensus 1.8% 1.6% 1.3% 1.6% CPI Inflation (% YoY) Current Account Balance (% of GDP) Citi 0.6% 2.7% 3.3% 2.7% Consensus 0.6% 2.7% 2.6% 2.3% Citi -4.4% -3.0% -2.6% -2.3% Consensus -4.4% -3.4% -3.1% -1.9% Sources: Bloomberg, Macrobond and Citi Research

14 SEK Cheap to Rates and CB Turning Less Dovish 14 Scandi FX weakness seen in recent months has been more a story of EUR strength, with USD/Scandi actually trading lower on trend. Recently, EUR/SEK has started trading lower from the short term resistance levels we highlighted last month and we continue to feel risks are tilted towards SEK rallies medium term month forecast: 9.30 Key Drivers & Risks Swedish economy doing ok, with macro momentum robust and Citi s economic forecasts looking strong. Inflation/inflation surprises finally showing signs of life too SEK is slightly cheap to rate differentials Citi economists see the stage set for a gradual removal of policy stimulus. Their output gap analysis supports this. Recent (less dovish/at the margin hawish) Riksbank commentary, and inflation prints, are along the same theme SEK Inflation Surprises (Blue) vs. Global (Red) EUR/SEK has rallied in recent months, but very recently is not breaking above the resistance at ~9.80 we highlighted previously. We have lowered our short term EUR/SEK forecasts to show a slight extension of the SEK rally of late Business Cyclical Position and Trajectory And more medium term too, we see SEK strengthening, pencilling in a move back to the lower ends of the 2015/ 2016 EUR/SEK range Sw eden F 2018F 2019F Citi 2.9% 2.6% 2.5% 2.1% GDP (real, % YoY) Consensus 2.9% 2.6% 2.3% 1.9% CPI Inflation (% YoY) Current Account Balance (% of GDP) Citi 1.0% 1.8% 2.0% 2.0% Consensus 1.0% 2.2% 1.9% 2.2% Citi 4.5% 5.4% 5.6% 5.6% Consensus 4.5% 5.1% 5.3% Sources: Macrobond and Citi Research

15 NOK Cheap, But Delta One To Oil 15 NOK has continued trading softly and as a result the Norwegian Krone is still cheap against it s main drivers. But oil remains very influential and energy price action will present the key for allowing (or not) this cheapness to transpire to NOK gains over the medium term. Our NOK forecast take into account the bullish oil views of our commodity specialists month forecast: 9.00 Key Drivers & Risks The Krone remains quite obviously undervalued against rate differentials, and also on a REER basis Economic backdrop looks ok, especially with the diminishing drag from the oil sector, after the sharp downsizing of the past three years, supporting GDP growth in mainland Norway. Sentiment indicators also robust Citi economists therefore believe that the Norgesbank is biased to become less dovish from here EUR/NOK vs. 2y Rate Differentials Clearly oil price action is exerting large pressures on NOK in short term trading, with NOK weakness of late delta one to energy prices moving south. This large beta likely lasts and the economic/cb outlook is also somewhat hostage to commodity performance EUR/NOK (Inverse, Red) vs. Oil (Brent, Blue) Factoring in Citi s bullish energy price forecast, we still pencil in EUR/NOK to trade back to YTD lows over 6-12m Norw ay F 2018F 2019F Citi 0.8% 2.1% 2.2% 2.3% GDP (real, % YoY) Consensus 0.8% 1.6% 1.9% 2.0% CPI Inflation (% YoY) Current Account Balance (% of GDP) Citi 3.5% 1.9% 2.0% 2.2% Consensus 3.5% 2.1% 2.0% 1.9% Citi 4.8% 9.3% 9.9% 10.3% Consensus 4.8% 6.1% 6.4% Sources: Bloomberg, Macrobond and Citi Research

16 CHF Political Risk Keeps CHF Strong Medium Term 16 Continued event risk in Europe and comparatively depressed positioning in CHF likely see EUR/CHF lower medium term month forecast: 1.07 Key Drivers & Risks 0-3 months we see EUR/CHF trading up to 1.11 given its recent gains and the absence of immediate significant risk events SNB rates are expected to be unchanged given disinflation is still a risk (inflation was only 0.2% in June) Recent weak data (1Q17 GDP 0.3% QQ) has led Citi economists to lower their 2017 GDP forecast to 1.2%; however, they still expect the economy to be a beneficiary of robust global growth 6-12 months the pair is expected to trade down to 1.07, as recurrent longer term political risks in Europe, including the Italian election, German election results and ECB taper risks put upward pressure on the franc While long positions in both currencies has increased recently, CHF net positioning is still negative, making EUR positioning look elevated in comparison The pace of SNB reserve buying has noticeably stalled in the last two months, a trend the central bank appears set to maintain Sw itzerland F 2018F 2019F Citi 1.3% 1.2% 1.7% 1.7% GDP (real, % YoY) Consensus 1.3% 1.4% 1.7% 1.6% CPI Inflation (% YoY) Current Account Balance (% of GDP) Citi -0.4% 0.4% 0.6% 0.8% Consensus -0.4% 0.5% 0.6% 0.9% Citi 10.7% 11.0% 10.4% 9.7% Consensus 10.7% 10.3% 10.2% 10.5% EUR/CHF Spot EUR Positioning Elevated in Comparison to CHF EUR (Blue LHS) & CHF (Red RHS) Sources: Bloomberg and Citi Research

17 17 EM Currencies Dirk Willer and Team

18 EM FX: Stronger with Weaker USD and Lower US Rates 18 EMFX has depreciated around 0.4% since mid June, on the back of higher US rates and a stronger EUR month forecast: 2-3% EMFX downside vs. USD EM FX Regional Forecast Paths Key Drivers & Risks The top-down drivers for EM currencies suggest a moderate appreciation in the near-term spot and depreciation over a 12-month horizon This is mainly the result of a stronger EUR in the next three months (1.16) before weakening to 1.09 in 12 months time Our equity forecast is for stronger equities over the next year. The implicit assumption that investors will buy the dip in the S&P is also supportive for EMFX This is assumed to take place against the backdrop of moderately higher US rates, consistent with Citi US economists call for one more rate hike from the Fed in December this year EM 5y Rates (Red) vs. Weighted Index EM FX vs. USD Given this drivers, going forward we think that EMFX will appreciate by 0.7% in spot terms in the 3 month timeframe, and expect a 2.8% depreciation in the 12m timeframe Sources: Bloomberg and Citi Research

19 EM FX: Asia Bullish Focus on MYR 19 EM Asia appreciated around 0.9% since mid June, given its low beta status. Outperformers were CNY, INR and SGD month forecast : 1% Asia FX downside vs. USD Key Drivers & Risks CNY remained in the spotlight, with the introduction of a counter-cyclical factor in the fixing model (according to Citi strategists, this applies a one-sided dampening to spot and overnight changes when USDCNY goes higher, and reduces such impact on next day fixing). While renewed capital flows are likely to lead to an appreciation bias in H2, PBoC will probably not tolerate a fast appreciation and keep the CNY between 6.7 and 6.9 in H2 Our most bullish call in the region remains on MYR, where we now see 4.10 in 12m. This is based on the positive growth backdrop, improved financial account flows (including a structural increase in FDI inflows from China), and incremental support from a CA surplus should remain positive for MYR demand. Moreover, requirement for corporates to convert 75% of their export proceeds also helps the ringgit China: One-step linear dampening model reduces fixing error Moody's downgraded China on May 24th -300 Apr-17 May-17 Jun-17 Jul-17 Fix error of old model Fix error of new model Malaysia Appreciation Story Intact 3.5 Jan-15 Apr-15 Jul-15 Oct-15 Jan-16 Apr-16 Jul-16 Oct-16 Jan-17 Apr-17 Jul-17 MYR Sources: Bloomberg and Citi Research

20 EM FX: CEEMEA CEE Overall Flatish against EUR in 3m 20 CEEMEA stronger since mid May, with the ZAR outperforming month forecast: 4-5 % CEEMEA FX spot depreciation vs. USD Key Drivers & Risks We CEE overall flattish against the EUR over the next three months, but see the CZK and PLN roughly 2% stronger. In the Czech Republic, CPI data was mixed this month, with total and core tradable CPI decelerating but non-tradable core inflation reaching 3.5% y/y. Also, industrial wages stayed strong and overall economic activity surprised on the upside. With still relatively loose monetary conditions, this raises the risks of tightening and should support the CZK South Africa has short-term appreciation potential While ZAR is one of our most bullish short-term calls in the region. We now see in 3m, but we do see risks in 12 months time given our bearish view on politics and downgrades. H is a busy season in ANC politics, and this we expect further political flare ups, as radical policies and comments are made. Citi economists see a Dlamini- Zuma ANC president in December, which is not supportive for the ZAR Jan-15 Apr-15 Jul-15 Oct-15 Jan-16 Apr-16 Jul-16 Oct-16 Jan-17 Apr-17 ZAR GRAMI Risk Appetite (Black Dash) vs. EUR/USD (Red), EUR/HUF(Green), EUR/PLN (Grey) and EUR/CZK (Blue) Sources: Bloomberg and Citi Research

21 EM FX: LATAM BRL at Risk from Politics 21 Latam FX weaker since mid May, largely given the BRL move weaker month forecast: 3-4 % Latam FX depreciation vs. USD Key Drivers & Risks The recent rise in commodity prices directly related to Brazilian exports (e.g. iron ore and soybean) support a stronger BRL in the near term (3.20 in 3m). Meanwhile, political turmoil will keep delaying the approval of social security reform in the medium term, raising the risks of not addressing the current large fiscal accounts imbalances. This, along with a stronger dollar, point to a forecast of 3.35 in 12m We see the MXN flat over the next three months and weakening the most in LatAm over the next twelve months. The MXN is the most exposed to a hawkish Fed and political risk is expected to heighten with presidential elections next year We see the COP weakening over the next twelve months (we see USDCOP at 3100 in 12m). Our commodities team thinks oil will rebound from here, but sentiment has been damaged and risks are to the downside. Current account improvement has ended and the economy is weak Latam FX outperformed this past month Jan-16 Mar-16 May-16 Jul-16 Sep-16 Nov-16 Jan-17 Mar-17 May-17 Jul-17 Colombia: Trade balance momentum rolling over doesn t bode well for COP USD bn LatAm FX EM FX (RHS) Trade balance, 6m change If trade balance stays flat COP / EMFX, deviation from 12mma (RHS) Dev from 12mma % 5% 0% -5% -10% -15% -20% Sources: Bloomberg and Citi Research

22 22 Appendix Charts and Forecast Interpolations

23 Citi Economic Forecast Highlights 23 GDP Growth (%) CPI Inflation (%) Current Balance (% GDP) Fiscal Balance (% GDP) F 2018F F 2018F F 2018F F 2018F Global Developed Countries United States Japan Euro Area Australia Canada Sweden Norway Switzerland United Kingdom Emerging Markets China India Russia Brazil Forecasts as of 21 June 2017 Sources: National Sources and Citi Research

24 24 CFTC FX Positioning CFTC USD (Equal Weighted Positioning) USD Net Positioning (bn USD) DXY Index (RHS) CFTC DXY Futures Contract Sources: Macrobond, Bloomberg, CFTC and Citi Research CFTC Net Speculative Positioning (Futures & Options) Latest Weekly Change 1 Year Rolling Average Z-Score Zero Mean Z-Score EUR GBP JPY CHF AUD NZD CAD Synthetic* Latest Weekly Change 1 Year Rolling Average Z-Score Zero Mean Z-Score USD** EURUSD GBPUSD USDJPY USDCHF AUDUSD NZDUSD USDCAD EURGBP EURJPY EURCHF EURAUD EURNZD EURCAD GBPJPY GBPCHF GBPAUD GBPNZD GBPCAD CHFJPY CADJPY CADCHF AUDJPY AUDCHF AUDCAD AUDNZD NZDJPY NZDCHF NZDCAD * using synthetic USD contracts As of 04 July 2017 ** aggregated USD positioning based on synthetic USD contracts Data as of 04/07/2017

25 25 CFTC FX Positioning EUR JPY GBP CHF Sources: Macrobond, CFTC and Citi Research

26 26 CFTC FX Positioning AUD NZD CAD MXN Sources: Macrobond, CFTC and Citi Research

27 27 IDR NZD INR TRY AUD ZAR BRL NOK COP RUB CAD MYR GBP MXN CNH SEK CLP PLN JPY THB KRW EUR TWD HUF CHF CZK G10 & EM FX: Carry & Vol Compared Carry / Realised Vol Carry / Implied Vol Carry / Realised Vol Carry / Implied Vol Sources: Bloomberg and Citi Research

28 G10 Valuation: Real Effective Exchange Rates Current REER Max Min Average 30 AUD CAD EUR JPY NZD NOK SEK CHF GBP USD AUD CAD EUR JPY NZD NOK SEK CHF GBP USD % to Average REER 11% -3% -8% -26% 11% -10% -12% 7% -14% 5% % to REER Historical Low 47% 17% 11% 10% 53% 6% 6% 22% 6% 22% % to REER Historical High -15% -21% -17% -51% -6% -22% -27% -11% -26% -12% Calculated from the latest BIS REER print (31/05/2017). The most recent weights are based on trade in Rebase: 2010 = 100 Spot as of 14 July Latest Inflation print as of May History since Sources: Bloomberg, BIS and Citi Research 28

29 EM Valuation: Real Effective Exchange Rates Current Using Spot Moves Max Since 2010 Min Since 2010 Average Since BRL MXN CLP COP INR CNY HKD KRW MYR SGD PHP IDR TWD THB TRY RUB ZAR CZK ILS HUF PLN % to Average Since % -10% -3% -19% 7% 4% 13% 7% -10% -1% 1% 1% 6% 2% -16% -9% -6% -2% 9% -4% -3% % to Low Since % 19% 8% 9% 23% 21% 33% 18% 2% 11% 12% 14% 11% 8% 3% 32% 27% 8% 18% 4% 6% % to High Since % -20% -12% -30% -1% -9% -3% -2% -17% -6% -8% -8% -1% -7% -28% -21% -25% -11% 0% -14% -11% Calculated from the latest BIS REER print (31/05/2017). The most recent weights are based on trade in Rebase: 2010 = 100 Spot as of 14 July Latest Inflation print as of May History since Sources: Bloomberg, BIS and Citi Research

30 30 G10 REER Time Series: 3Y Rolling Average +/- 1StDev EUR GBP USD JPY SEK NOK AUD NZD CAD CHF Sources: Bloomberg, BIS and Citi Research

31 31 EM REER Time Series (1/2): 3Y Rolling Average +/- 1StDev BRL MXN COP CLP INR KRW CNY THB TWD IDR Sources: Bloomberg, BIS and Citi Research

32 32 EM REER Time Series (2/2): 3Y Rolling Average +/- 1StDev MYR RUB CZK HUF ILS PLN ZAR TRY SGD PHP HKD Sources: Bloomberg, BIS and Citi Research

33 33 Implied Forecast Paths BIS Nominal Exchange Rates EUR BIS NEER 0-3m estimate 6-12m estimate Long-term estimate WERM estimate JPY BIS NEER 0-3m estimate 6-12m estimate Long-term estimate WERM estimate GBP BIS NEER m estimate 6-12m estimate 90 Long-term estimate 85 WERM estimate CHF BIS NEER 0-3m estimate 6-12m estimate Long-term estimate WERM estimate Sources: Bloomberg, BIS and Citi Research

34 34 Implied Path BIS Nominal Exchange Rates AUD BIS NEER 0-3m estimate 6-12m estimate Long-term estimate WERM estimate CAD BIS NEER 0-3m estimate 6-12m estimate Long-term estimate WERM estimate NZD BIS NEER 0-3m estimate 6-12m estimate Long-term estimate WERM estimate Sources: Bloomberg, BIS and Citi Research

35 35 Implied Path BIS Nominal Exchange Rates NOK BIS NEER m estimate m estimate Long-term estimate WERM estimate SEK BIS NEER 0-3m estimate 6-12m estimate Long-term estimate WERM estimate Sources: Bloomberg, BIS and Citi Research

36 36 Quarterly Interpolated Forecasts USD Crosses Currency Spot Sep-17 Dec-17 Mar-18 Jun-18 Sep-18 Dec-18 Mar-19 Jun-19 Sep-19 G10 Euro EURUSD Japanese yen USDJPY British Pound GBPUSD Swiss Franc USDCHF Australian Dollar AUDUSD New Zealand Dollar NZDUSD Canadian Dollar USDCAD Swedish Krona USDSEK Norwegian Krone USDNOK EM Asia Chinese Renminbi USDCNY Hong Kong Dollar USDHKD Indonesian Rupiah USDIDR Indian Rupee USDINR Korean Won USDKRW Malaysian Ringgit USDMYR Philippine Peso USDPHP Singapore Dollar USDSGD Thai Baht USDTHB Taiwan Dollar USDTWD EM Europe Czech Koruna USDCZK Hungarian Forint USDHUF Polish Zloty USDPLN Israeli Shekel USDILS Russian Ruble USDRUB Turkish Lira USDTRY South African Rand USDZAR EM Latam Brazilian Real USDBRL Chilean Peso USDCLP Mexican Peso USDMXN Colombian Peso USDCOP Sources: Bloomberg and Citi Research

37 37 Quarterly Interpolated Forecasts EUR Crosses Currency Spot Sep-17 Dec-17 Mar-18 Jun-18 Sep-18 Dec-18 Mar-19 Jun-19 Sep-19 G10 Euro EURUSD Japanese yen EURJPY British Pound EURGBP Swiss Franc EURCHF Australian Dollar EURAUD New Zealand Dollar EURNZD Canadian Dollar EURCAD Swedish Krona EURSEK Norwegian Krone EURNOK EM Asia Chinese Renminbi EURCNY Hong Kong Dollar EURHKD Indonesian Rupiah EURIDR Indian Rupee EURINR Korean Won EURKRW Malaysian Ringgit EURMYR Philippine Peso EURPHP Singapore Dollar EURSGD Thai Baht EURTHB Taiwan Dollar EURTWD EM Europe Czech Koruna EURCZK Hungarian Forint EURHUF Polish Zloty EURPLN Israeli Shekel EURILS Russian Ruble EURRUB Turkish Lira EURTRY South African Rand EURZAR EM Latam Brazilian Real EURBRL Chilean Peso EURCLP Mexican Peso EURMXN Colombian Peso EURCOP Sources: Bloomberg and Citi Research

38 38 Quarterly Interpolated Forecasts Other Currency Spot Sep-17 Dec-17 Mar-18 Jun-18 Sep-18 Dec-18 Mar-19 Jun-19 Sep-19 Others Dollar Index* DXY Norwegian Krone NOKSEK Australian Dollar AUDNZD Australian Dollar AUDJPY Russian Ruble Basket Equally Weighted Regional Baskets vs. USD** World G EM EM Asia CEEMEA Latam GDP Weighted Regional Baskets vs. USD** World G EM EM Asia CEEMEA Latam * The DXY forecasts are implied from the forecasts of the constituent crosses. ** Weighted Index Forecasts (Higher = USD Higher) Sources: Bloomberg and Citi Research

39 39 Annual Interpolated Forecasts USD Crosses Sources: Bloomberg and Citi Research Currency Spot 2017* 2018* 2019* 2020* 2021* G10 Euro EURUSD Japanese yen USDJPY British Pound GBPUSD Swiss Franc USDCHF Australian Dollar AUDUSD New Zealand Dollar NZDUSD Canadian Dollar USDCAD Swedish Krona USDSEK Norwegian Krone USDNOK EM Asia Chinese Renminbi USDCNY Hong Kong Dollar USDHKD Indonesian Rupiah USDIDR Indian Rupee USDINR Korean Won USDKRW Malaysian Ringgit USDMYR Philippine Peso USDPHP Singapore Dollar USDSGD Thai Baht USDTHB Taiwan Dollar USDTWD EM Europe Czech Koruna USDCZK Hungarian Forint USDHUF Polish Zloty USDPLN Israeli Shekel USDILS Russian Ruble USDRUB Turkish Lira USDTRY South African Rand USDZAR EM Latam Brazilian Real USDBRL Chilean Peso USDCLP Mexican Peso USDMXN Colombian Peso USDCOP * Averages of end-quarter data shown in quarterly interpolation table.

40 40 Annual Interpolated Forecasts EUR Crosses Sources: Bloomberg and Citi Research Currency Spot 2017* 2018* 2019* 2020* 2021* G10 Euro EURUSD Japanese yen EURJPY British Pound EURGBP Swiss Franc EURCHF Australian Dollar EURAUD New Zealand Dollar EURNZD Canadian Dollar EURCAD Swedish Krona EURSEK Norwegian Krone EURNOK EM Asia Chinese Renminbi EURCNY Hong Kong Dollar EURHKD Indonesian Rupiah EURIDR Indian Rupee EURINR Korean Won EURKRW Malaysian Ringgit EURMYR Philippine Peso EURPHP Singapore Dollar EURSGD Thai Baht EURTHB Taiwan Dollar EURTWD EM Europe Czech Koruna EURCZK Hungarian Forint EURHUF Polish Zloty EURPLN Israeli Shekel EURILS Russian Ruble EURRUB Turkish Lira EURTRY South African Rand EURZAR EM Latam Brazilian Real EURBRL Chilean Peso EURCLP Mexican Peso EURMXN Colombian Peso EURCOP * Averages of end-quarter data shown in quarterly interpolation table.

41 41 Annual Interpolated Forecasts Other Currency Spot 2017* 2018* 2019* 2020* 2021* Others Dollar Index** DXY Norwegian Krone NOKSEK Australian Dollar AUDNZD Australian Dollar AUDJPY Russian Ruble Basket Equally Weighted Regional Baskets vs. USD*** World G EM EM Asia CEEMEA Latam GDP Weighted Regional Baskets vs. USD*** World G EM EM Asia CEEMEA Latam * Averages of end-quarter data shown in quarterly interpolation table. ** The DXY forecasts are implied from the forecasts of the constituent crosses. *** Weighted Index Forecasts (Higher = USD Higher) Sources: Bloomberg and Citi Research

42 42 Contributors: For informational purposes only Global Macro Economics Research Jeremy Hale 1 (Head, Macro Strategy) jeremy.hale@citi.com Maximilian Moldaschl 1 (Macro Strategy) maximilian.moldaschl@citi.com Amir Amin 1 (Macro Strategy) amir.amin@citi.com Jamie Fahy 1 (Macro Strategy) jamie.fahy@citi.com Dirk Willer 2 (EM Strategy) dirk.willer@citi.com Kenneth Lam 2 (EM Strategy) kenneth1.lam@citi.com Willem Buiter 1 (Chief Economist) willem.buiter@citi.com Kiichi Murashima 3 (Head, Japan Economics) kiichi.murashima@citi.com Guillaume Menuet 1 (European Economics) guillaume.menuet@citi.com Dana Peterson 2 (Canada Economics) dana.peterson@citi.com David Lubin 1 (Head, EM Economics) david.p.lubin@citi.com Johanna Chua 3 (Head, EM Economics - Asia) johanna.chua@citi.com Paul Brennan 4 (Australian Economics) paul.brennan@citi.com Josh Williamson 4 (Australian Economics) josh.williamson@citi.com Michel Nies 1 (EM Economics) michel.nies@citi.com 1 Citigroup Global Markets Ltd.; 2 Citigroup Global Markets Inc.; 3 Citigroup Global Markets Asia; 4 Citigroup Pty Limited NON-US RESEARCH ANALYST DISCLOSURES: The non-us research analysts listed above (i.e., the research analysts listed above other than those identified as employed by Citigroup Global Markets Inc.) are not registered/qualified as research analysts with FINRA. Such research analysts may not be associated persons of the member organization and therefore may not be subject to the NYSE Rule 472 and NASD Rule 2711 restrictions on communications with a subject company, public appearances and trading securities held by a research analyst account. Unless indicated in Important Disclosures of this document or any of the referenced documents, the analysts listed above have not contributed to this document or any of the referenced documents. Sources: Bloomberg and Citi Research

43 43 Appendix A-1 Analyst Certification The research analysts primarily responsible for the preparation and content of this research report are either (i) designated by AC in the author block or (ii) listed in bold alongside content which is attributable to that analyst. If multiple AC analysts are designated in the author block, each analyst is certifying with respect to the entire research report other than (a) content attributable to another AC certifying analyst listed in bold alongside the content and (b) views expressed solely with respect to a specific issuer which are attributable to another AC certifying analyst identified in the price charts or rating history tables for that issuer shown below. Each of these analysts certify, with respect to the sections of the report for which they are responsible: (1) that the views expressed therein accurately reflect their personal views about each issuer and security referenced and were prepared in an independent manner, including with respect to Citigroup Global Markets Inc. and its affiliates; and (2) no part of the research analyst's compensation was, is, or will be, directly or indirectly, related to the specific recommendations or views expressed by that research analyst in this report. IMPORTANT DISCLOSURES Citigroup Global Markets Inc. owns a position of 1 million USD or more in the debt securities of COLOMBIA, REPUBLIC OF (GOVERNMENT) Citigroup Global Markets Inc. owns a position of 1 million USD or more in the debt securities of Mexico Alejandra Bautista, Administrative Assistant, holds a short position in the securities of Mexico. Citigroup Global Markets Inc. owns a position of 1 million USD or more in the debt securities of Chile Citigroup Global Markets Inc. owns a position of 1 million USD or more in the debt securities of Turkey Citigroup Global Markets Inc. owns a position of 1 million USD or more in the debt securities of Israel Citigroup Global Markets Inc. owns a position of 1 million USD or more in the debt securities of Philippines Citigroup Global Markets Inc. owns a position of 1 million USD or more in the debt securities of Indonesia Citi India is a Market Maker in Rupee FX Forwards, Dollar- Rupee Spot FX and Fixed Income Sovereign Bonds. Citigroup Global Markets Inc. owns a position of 1 million USD or more in the debt securities of China Citibank (China) Co., Ltd is a Bond Market Maker, a Spot FX Market Maker and a Forward & Swap FX Market maker in the interbank market. Citigroup Global Markets Inc. owns a position of 1 million USD or more in the debt securities of Brazil Citigroup Global Markets Inc. owns a position of 1 million USD or more in the debt securities of Malaysia Citigroup Global Markets Inc. owns a position of 1 million USD or more in the debt securities of Switzerland Citigroup Global Markets Inc. owns a position of 1 million USD or more in the debt securities of CANADA (GOVERNMENT) Citigroup Global Markets Inc. owns a position of 1 million USD or more in the debt securities of Australia