FOREX WEEKLY. Weekly information issued by the FOREX Advisory Team. Trader view in 2 snapshots. 29 June Global Forex Sentiment

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1 FOREX WEEKLY 29 June 2017 Weekly information issued by the FOREX Advisory Team Global Forex Sentiment The pound soared by the most in two months and U.K. bonds slumped as Bank of England Governor Mark Carney said the Monetary Policy Committee may need to begin removing stimulus. The comments marked a shift in emphasis for the governor, who signalled last week that now was not yet the time to start the tightening process. The yield on two-year gilts touched the highest in more than a year as money markets adjusted to the change in language. For several weeks, central banks have been making the case for a change in monetary policy in reaction to the stronger growth being recorded in their own country and, more generally, the improvement in global growth that has been fuelled by more vigorous world trade. The unemployment rate has declined to alltime lows in many countries, raising concerns this will lead to tensions over wages and salaries. In the wake of the Federal Reserve, several central banks now seem prepared therefore to embark on a normalisation of their monetary policy. The German yield curve steepened through the short end after the ECB clarified the earlier statement by Mario Draghi. Peripheral debts outperformed, in particular Spanish and Portuguese debts. At 104bp, the SPGB-Bund spread is at its tightest since October In Brazil, President Temer s administration promised reforms (labour and pension), but the recent corruption charges are at best a significant distraction to achieving these prior to the 2018 elections and at worst will result in another round of political upheaval. It is difficult to envision political allies supporting Temer given such a low public approval rating that could stoke further voter backlash. Furthermore, with Lula leading in the polls for next year s election, there are risks that the reform process could be impaired for longer. BRL shall remain under pressure vs USD, Targeting 3.48 and 3.60 area. Trader view in 2 snapshots EUR USD Full view: page 2 EUR JPY Full view: page 3 Plan the Trade and Trade the Plan, part III The EURO Finally Breaking Free vs JPY! Buy EUR on dips around area Build a long Cash Fwd position in EUR A publication of the FOREX Advisory Team Banque SYZ SA Tel. +41 (0) fxtrading@syzgroup.com Contacts: José-Manuel Luna Pier-Luigi Bonelli Ugo Biancaniello Table of contents (click on hyperlinks) Trader view Bloomberg FX Forecasts... 4 IMM Positioning... 4 Global Market Focus... 5 Disclaimer at the end of the document.

2 TRADER VIEW: EUR USD: Plan the Trade and Trade the Plan! Keep Buying EUR on dips! Trading Idea & Hedging Solution We like to keep buying EUR vs USD on any dips towards area through the following Bullish EUR Risk Reversal strategy, Spot Ref : Buy EUR Call X & Sell EUR Put X Premium Investment of 0.20% EUR Nominal Objective followed by Place a Stop Loss at Support II Support I Spot Resist ance I Resist ance II Technical The single currency remains in a bullish mood even though capping forces are refraining the ceiling. Overbought slow stochastic/rsi conditions are receding and opening a new likely up move towards Market Update Investors have been speculating that Tuesday evening Draghi s speech was an indication for paring monetary stimulus without tightening policy. He recognised that economic strength was finally looming ahead but that monetary support would still be needed. The EURUSD squeezed investors towards key resistance. Many investors argue that QE will have to end because there will be no more bonds to buy. One could argue that it is the wrong way to think about the ECB s asset purchase program. If the monetary policy stance requires further purchases, assets that cater for this approach will have to be found, either by adjusting the constraints or by creating new assets such a bank bonds. It is likely that next September the ECB will decide on another step change to EUR40bn a month for the first half of the year. This will be portrayed as recalibration rather than tapering and there will continue to be no end date for QE. The Italian elections in April or May will be seen as a material risk to the outlook. However, peripheral spreads should remain contained, as there is a chance that the capital key will be violated at least temporarily. We remain very constructive on the single currency upside potential, even without monetary policy support, as the fundamental and political backdrop would arguably justify EURUSD levels of over the next few weeks. Page 2

3 TRADER VIEW: EUR JPY: The EURO is finally breaking free vs JPY and opens the way towards 140 area! Trading Idea & Hedging Solution Our overall view on the EURO remains constructive and we keep buying dips. EUR vs JPY has broken free above key resistance at and is pointing towards potential moves towards and in the medium term. We recommend investing in a long 3 mths Cash Forward strategy as follow, expected Spot ref : Buy ½ EUR Cash Position on spot, Forward 3 mths (+0.12 points fwd) Buy the 2 nd ½ at fwd 3 mths Buy a protective EUR Put Strike , premium = 0.69% EUR Max Loss -3.20% / Potential Profit 9.51% Support II Support I Spot Resist ance I Resist ance II Technical Key support is situated at the area with psychological level found at Key resistances are found at and followed by psychological ceiling at Market Update Key Political events are on the wire for M. Abe. The Tokyo metropolitan assembly elections will take place on 2 July 2017, where all 127 seats for the legislative body will be elected. The event has gathered more attention than usual following political noise surrounding the Kake Educational Institution and parliament adopting a bill to prematurely end the debating session. The Tokyo elections will be the first 'hard piece' of information after these events and may help determine how quickly the Abe-led government can press ahead with its planned reforms under the Third Arrow. More recently, there have been further hints that the policy balance has shifted more in favour of sustaining the momentum in the economic recovery rather than dealing with long-term structural issues. The media reported (Reuters, 27 June) potential plans to drop the pledge for a balanced budget by fiscal year 2020, which could pave the way for another delay in the scheduled sales tax hike in October This would also imply that the fiscal policy stance could stay more accommodative, and thus result in further borrowing from domestic bond markets. For the BoJ, this would mean that the Bank has more space to maintain its expansionary stance for a longer. Indeed, recent debates have revolved around whether the BoJ can maintain its current pace of balance sheet expansion, given that it already holds 39.5% of the JGB market as of March 2017, leaving only JPY655trn outstanding outside the Bank Page 3

4 SYZ ANALYSTS FORECASTS Ccy Pairs 6M 1Y EUR/USD GBP/USD USD/JPY USD/CHF USD/CAD AUD/USD EUR/JPY EUR/GBP USD/CNY USD/ZAR USD/TRY USD/MXN USD/BRL USD/RUB June BLOOMBERG FX FORECASTS Mat urit y EURUSD EURCHF USDCHF Q Q Q Mat urit y EURJPY USDJPY AUDUSD Q Q Q Mat urit y EURGBP GBPUSD USDCAD Q Q Q IMM POSITIONING June 2017 Cont ract size Posit ion Non-commercial Commercial Last Act ual Last Act ual EUR 100K JPY 12'500K CHF 125K GBP 62.5K AUD 100K CAD 100K Short 85' ' ' '994 Long 164' ' ' '839 Net 79'053 44'852-89'928-60'155 Short 84'713 89'457 83'337 44'243 Long 34'160 39' ' '255 Net -50'553-49'959 60'896 68'012 Short 22'978 14'257 16'355 7'052 Long 8'518 11'275 31'071 9'507 Net -14'460-2'982 14'716 2'455 Short 79'993 88' '420 68'958 Long 40'552 50' ' '234 Net -39'441-37'604 43'892 42'276 Short 34'645 27'239 59'467 26'545 Long 33'134 42'272 65'992 12'348 Net -1'511 15'033 6'525-14'197 Short 115' '388 36'156 70'708 Long 26'781 28' ' '474 Net -88'595-82'881 98'093 85'766 Page 4

5 GLOBAL MARKET FOCUS Are falling oil price (WTI Crude) good for the markets? Investors could easily get confused about the impact of oil-price rises on the economy and markets. The story seemed to be clear: high prices bad, low prices good. The two great oil shocks in the 1970s were unambiguously bad for Western economies ushering in stagflation and transferring spending power to the oil-producing countries. In turn, low oil prices in the late 1990s coincided with the dotcom boom. But when oil fell in the second half of 2015, that was seen as a bearish sign for the global economy and markets. Now oil is falling again, with both Brent crude and West Texas intermediate dropping more than 20%. But the decline has barely made a dent in the upward march of the S&P 500 index. The key to the differing market reaction is why the oil price is falling. Back in 2015, the fear was falling demand. Investors worried in particular that the Chinese economy was slowing. If that assumption had been right, demand for much more than oil would have suffered. The equity markets did not rebound property until the spring of This time round, the issue seems to be excess supply. OPEC, a cartel of oil-producing countries, has been attempting to cut production. But its output increased in May, thanks extra activity in Libya, Nigeria and Iraq. Meanwhile, the attempts of the Saudis to cripple America s fracking production seem to have failed; figures from Baker Hughes show that the number of American oil rigs has increased for 22 consecutive weeks. American oil producers, which had financial problems in 2015, seem to have reorganised themselves and can cope with a lower oil price. The oil price slump in 2015 caused a sell-off in bonds issued by those American producers. If cheap oil is caused by excess supply, it is the equivalent of a tax cut for Western consumers; that ought to be good for equities. It also means lower headline inflation, which may explain why Treasury bond yields have been drifting down; the ten-year yield is 2.15%. It seems like a big but is needed and here it comes. Any price is the balance between supply and demand and it is hard to tell which is the dominant force. Other commodity prices have also been weak; the Bloomberg commodity index is at a 12-month low. The Chinese authorities are tightening monetary policy again; the Federal Reserve is pushing up interest rates; hopes of a fiscal stimulus from President Donald Trump may have to wait until Low bond yields (and a flattening yield curve) are often seen as indicating a weaker economy. Markets could yet decide a weak oil price is a bad sign after all. Page 5

6 DISCLAIMER This document is for distribution to professional or institutional clients or counterparties only and is not intended for distribution to or use by, retail customers or any person or entity who is a citizen or resident of or located in any locality, state, country or other jurisdiction where the distribution, publication, availability or use of such document would be contrary to law or regulation. This publication is for information only and does not constitute a contractual document, an offer, or a solicitation of an offer, to buy or sell any investment or other financial product. The analysis contained herein is based on numerous assumptions. Different assumptions could result in materially different results. Any opinion is valid only as of the date of this publication and may be changed at any time without prior warning. Past performance is not an indication of future results. All information and opinions expressed in this document were obtained from sources believed to be reliable and in good faith, but no representation or warranty, express or implied, is made as to its accuracy or completeness. Banque SYZ SA disclaims liability for any and all forms of loss or damage arising out of the use of them. Before any investment, the recipient of this document has to consult with your own legal, financial and/or tax adviser. This document may not be reproduced or distributed, either in part or in full, without the prior authorisation of Banque SYZ SA. These opinions reflect the short term views of the FOREX TRADING team and can differ from the long term investment policy of Banque SYZ SA. Page 6