CitiFX Technicals: The 12 Charts of Christmas December 2015 A very warm Season s greetings to all our readers and best wishes for a healthy and prosperous 2016
Overview of 2015 results How did our 2015 views (December 2014 s 12 Charts of Christmas) pan out? EURUSD: Bearish trend remains intact and we expect to see 1.10-1.15 levels in the first half of 2015 with parity or below possible over the year. Full QE from the ECB is likely early in the New Year Result: Although we did not see parity, EURUSD fell to 1.0458 during Q1 2015 with full ECB QE and could still set new lows in the trend this year Grade: A European Bank Stocks Index: May be the outperformer as the ECB further expands its balance sheet, with a move to at least 163 on the Index likely and an extension to the 240 area possible Result: The high in 2015 at 162.42 was close to our minimum target of 163. It did not extend higher from there. While at just over 1% up on the year it compares reasonably to the major US markets (S&P 500 and DJIA). Better returns were seen in a host of European markets and on a FX adjusted basis it also underperformed major US markets Grade: B- USDJPY: Trend looks bullish with levels above 130 likely in 2015 Result: The high in USDJPY in 2015 so far has been 125.85. While our directional bias was correct we have fallen short of our overall target Grade: B Consumer Confidence (U.S.): Looks set to continue to move higher as the economy improves. A robust U.S. economy will likely propel US Equity markets to new highs in 2015. Another double digit percentage return here would not be surprising in 2015 Result: Consumer confidence did set new highs in the trend this year (albeit in January) while the major indices did peak in May (DJIA and S&P). At this point a double digit percentage return looks unlikely on either index albeit an up year remains our base case Grade: B- We expect to see NFP numbers head towards or above 400k, the Unemployment Rate decline towards 5%, and an elevated Core PCE potentially printing near 2.5% Result:. The high posted for NFP this year was 271k (although the November 2014 number was subsequently revised up to 423k). Unemployment did in fact drop to 5%. Core PCE never went higher than 1.35% with a falling oil price likely a factor here Grade: B+ 2 year yields (U.S): Will break the cycle of lower lows and lower highs and the Fed will start to normalize rates by June at the latest. The 2 s versus 5 s curve will bear flatten as the market anticipates this normalization of monetary policy Result:. 2 year yields did in fact break the cycle of lower highs and lower lows. The start of Fed normalization now looks likely in December. The 2 s versus 5 s curve has flattened about 26 basis points on the year Grade: B Crude Oil (WTI): Should regain some of its recent losses and could quite possibly head back towards $90 or above Result: Went on to new lows in the trend by August 2015 and while we believe that may actually be the turn we were obviously way too early in this view Grade: D USDBRL: Looks likely to complete the double bottom around 2.62 and target as high as 3.70 Result: USDBRL reached and exceeded this aggressive target this year Grade: A+ Overall: We see a backdrop where the repair process of recent years continues at a slow pace but where the US continues to look like the best house on a bad street when it comes to the major developed nations. This should also benefit the USD and keep the relative picture for yields (monetary policy) in favour of the US Result: The US did continue to look to be the best house on a bad street with the USD and relative yields benefitting Overall grade for 2015 views: B+ (Note: All expectations in this document for 2015 were the views of the CitiFX Technicals team. They in no way constituted official Citigroup views.) 2
What do we believe for 2016? Outlook for 2016 In the rest of this note we give you our 12 Charts of Christmas. These are the 12 most important charts (in our view) that establish a starting point for our outlook on markets as we head into 2016 As always this will continue to be a work in progress over the course of 2016, but the pages ahead give you a sense of our strongest core views as we head into next year USD Index We continue to expect further gains in the DXY Index towards at least 110 and possibly 115 EURUSD A move below parity is still expected with an ultimate target of 0.9000 likely (albeit possibly in 2017) USDJPY We expect a move to new trend highs in 2016, with close to 130 a definite possibility US 2 Year Yield We expect a higher yield (well above 1%) with spreads to Germany and Japan likely to widen even further during the course of the year T-Bond Chart Lower price/higher yield like in 1998-1999 is our base case with a move towards 4% a real danger over 2016 Techamentals Higher core CPI to at least 2.4% and possibly 2.7-2.8% and improved housing activity looks likely Oil The set up is very like that going into late 1998/early 1999 suggesting that we could see WTI move towards or above $70 CCI Index Still looks set for losses towards 337-341 ADXY Index long term chart A break of 107 decisively would suggest a move towards 101 DJIA Higher levels again in 2016 look likely, with a 20,000 print a distinct possibility Overall Our financial market and Techamental charts suggest that the US economy is developing a more self sustaining recovery. This should allow the Fed to normalise more normally. Higher US yields, a higher USD and a constructive performance in the US Equity market should be the result of this over 2016. The other major economies (Europe, Japan, China) are still struggling in some shape or form and are in need of a weaker currency. Europe is effectively going the route of Japan whereby a weaker currency will be part of the solution (and probably the only option). The economic troubles in Asia, centred on China, may well continue into 2016 before signs of stabilization down the line. The US, being internally/demand driven and in a position of relative economic strength, can afford a stronger currency. Thus the best way forward for the world economy at this stage is a rally in the USD. 3 (Note All expectations in this document for 2016 are the views of the CitiFX Technicals team and in no way constitute official Citigroup views.)
The 1 st chart of Christmas truly says to me - higher levels on the USD Index will be 5 years up 7 years down 5 years up 8 years down??? 7 years down 2 years sideways 3 years sideways 3 years sideways 4 Source: Aspen Graphics /Bloomberg December 02, 2015. The USD (DXY) Index cycle has been closely tied to major US housing/banking crises and recessions (1973-1975,1989-1991, and 2006-2008) From an FX perspective we are more focused on the period 1989-1991 onwards Following its bullish outside year in 2014 (the first ever) the USD Index has performed well this year and looks likely to reap further gains (as it did in 1999 as the ECB eased rates and the Fed raised rates). 1999 saw a low to high move in excess of 10% for the USD-Index and we would not be surprised to see something similar. Overall we still believe that the bull market in the USD Index, which began in earnest in 2011, has at least 12-24 months to run in a set up similar to 1995-2001. Given that the EURO is 57.6% of this index it will not be surprising to learn that we expect a significantly lower EURUSD in 2016 also
The 2 nd chart of Christmas truly says to me - below parity on EURUSD we will see (still) EURUSD rallies into October 1998 before turning sharply lower for the next 2 years Source: Aspen Graphics /Bloomberg November 30, 2015. The chart above (right) clearly shows that a lower EURO is needed to stimulate monetary conditions in the Eurozone Combined with the compelling comparison between 1992-1999 and 2008-2015 it still suggests that a much lower EURUSD is both likely and needed. This is in addition to the fact that European and U.S. monetary policy is diverging just as it was in the late 90 s. We believe a move to and possibly below parity can be seen in 2016. Ultimately we conservatively expect a move towards 0.88-0.90 in EURUSD in the next 12-24 months As the Real Interest Rate (RIR) continues to rush side wards the only stimulation in the MCI comes from a lower exchange rate (REER) 5
The 3 rd chart of Christmas truly says to me - new highs in USDJPY look easy USDJPY multiyear rally begins in Oct. 1978 USDJPY multi-year rally begins 16 years and 6 months later in Apr. 1995 USDJPY multiyear rally begins 16 years and 6 months later in Oct. 2011 Source: Aspen Graphics /Bloomberg November 30, 2015. In 1995 and 2011 the lows in USDJPY were put in on the back of a natural disaster in Japan (Kobe earthquake in 1995 and Fukushima disaster in 2011). This yielded a policy response from the Bank of Japan/Finance Ministry Unlike the prior 2 cycles the rally in USDJPY this time has been more QE driven (foreigners buying USDJPY). In the 1978 and 1995 cycles Japanese investors would have received good rewards in their search for yield (US 10 year yield level versus JGB yields) but would have lost that and more if the investments were hedged (Due to the large short term interest rate differential dynamic). So far in this cycle as US and Japanese short term rates remained zero bound there was little incentive to Japanese investors to take FX risk All that changes as short term US rates start to rise. We believe this can be an important catalyst in sending USDJPY above 130 in this cycle 6
The 4 th chart of Christmas truly says to me - higher 2 year yields as far as the eye can see High Lower high Low Lower high Lower high Lower low Lower high Higher high Lower low Lower low Lower low Higher low Source: Aspen Graphics /Bloomberg November 30, 2015. After nearly 9 ½ years the US 2 year yield broke the trend of lower highs and lower lows by getting a weekly close above the 89 basis point high, posted in March 2011 (2 weeks ago) This effectively ends the downtrend and suggests higher levels are now likely in the year ahead. Initial targets would be at least 1.17-1.23% and possibly 1.43% (2008-2009 levels) with initial resistance around the June 2003 lows at 1.05% (Low of last easing cycle - not shown) 7
The 5 th chart of Christmas truly says to me - wider spreads in favour of the USD Source: Aspen Graphics /Bloomberg November 30, 2015. Good support has given way decisively on Germany-US 2 year yield spread with no strong support now until around -184 basis points At the same time major resistance on the US-Japan 2 year yield spread is nearby at 103 basis points. Above here would suggest levels as high as 200 basis points These moves, if seen, should also be very supportive for the USD against both currencies (as we expect) 8
The 6 th chart of Christmas truly says to me - a lower T-Bond follows history Source: Aspen Graphics /Bloomberg November 30, 2015. The US T-Bond (30 year in price terms) is one of our favourite interest rate charts. Price has turned off the top of the channel in 2015 just as it did in 1998. A move similar to that dynamic as we move towards a Fed cycle change (as we saw in 1999) would suggest that the price could move towards the base of the channel and see a 30 year yield a lot closer to 4% than 3% at that point. 9
The 7 th chart of Christmas truly says to me - a higher core CPI by mid-year can be Source: Aspen Graphics /Bloomberg December 02, 2015. The present pattern on Core CPI looks to be a clear double bottom with a neckline at 2% A break above here would suggest a move towards at least 2.4% (double bottom target) with further good resistance in the 2.7%-2.8% area A rise on base effects looks likely and, if our Oil view is right (this year unlike last), that would likely further add to the upside pressure and question whether the Fed is getting behind the curve This dynamic would fit well with our interest rate view 10
The 8 th chart of Christmas truly says to me - housing gains we will continue to see Months supply including shadow inventory Housing starts Plenty of scope for further gains Mortgage loan applications Rising. Double bottom? 11 Source: Aspen Graphics /Bloomberg December 02, 2015. The present path of recovery in housing as shown on the charts above has not differed greatly from that seen after the 1989-1991 downturn (albeit from a lower starting point) While some short term pause is logical we continue to expect the positive dynamic to continue to be supported by low yields (albeit rising from present levels), an improving employment picture (qualitatively and quantitatively), low oil prices (money in people s pockets) and the dynamic we have seen of rising rental costs (leading people to re-think the buying versus renting dynamic?) All of the above could feasibly see a push of people back into the housing market that have been renting in recent years (for various reasons). Such a push could, at the margin, move the needle on the supply/demand ratio as well as house building activity itself and possibly housing related employment. Total home inventory plus estimated shadow inventory stands at 8.66 months supply (trend low) compared to 22.86 months 5 years ago. In addition Mortgage loan applications are rising and look like they could rise further.
The 9 th chart of Christmas truly says to me - a move higher in Oil we will finally see Crude Aug 2013 Crude Aug 2015 Hits a trend low 10% below the prior low set 6 months previously Bounces 34% Retraces 76.4% of that bounce Begins a major rally? Crude Dec 1996 Crude Dec 1998 Hits a trend low 9% below the prior low set 6 months previously Bounces 33% Retraces 76.4% of that bounce Begins a major rally Source: Aspen Graphics /Bloomberg December 02, 2015. The move lower in WTI Crude from August 2013 to August 2015 has closely followed the pattern seen from December 1996 to the December 1998 low Since the August low the price action has remained very similar to that seen in late 1998/early 1999 If this was to continue then history suggests that we could be looking at an Oil price closer to $70/bbl than the current $40/bbl 12
The 10 th chart of Christmas truly says to me - a lower CCI and Aussie Source: Aspen Graphics /Bloomberg December 01, 2015. Following its break below 500 the target on the CCI Index was (and still is) 337-341 As can be seen from the charts above the AUD is very closely tied to the CCI index and a move of that magnitude would suggest an AUDUSD rate close to 0.60 Interestingly the long term AUDUSD chart targets 0.60 (Head and shoulders top) AUDUSD moved to this level in both 1986 and 2008 (Both periods of sharply falling commodity prices) 13
The 11 th chart of Christmas truly says to me - further losses on the ADXY we may well see Source: Aspen Graphics /Bloomberg December 02, 2015. Major support on the ADXY Index stands around 107. This is the trend lines off the 1998 low (Asian crisis); 2001 low (Nasdaq meltdown); the 2009 low (Financial/economic/housing crises and Equity market meltdown), and the 200 month moving average). While a break of this level should not be pre-empted, the index is so far struggling to bounce decisively off this support area. A decisive break, if seen, would suggest extended losses towards 101 (2009 support area). As can be seen above the price action on the CCI index and the ADXY are also very closely correlated further warning of this danger. Given that the CNY and HKD form almost 50% of this index a break would also suggest implications for USDCNY in particular 14
The 12 th chart of Christmas truly says to me - a higher DJIA we will see Source: Aspen Graphics /Bloomberg December 01, 2015. The DJIA has continued to follow a pattern similar to that seen into and out of Q4,1998 A continuation of this would suggest that we could see North of the magic 20,000 level on the DJIA in 2016 15
Summary of our strong conviction 2016 views Instrument View for 2016 Comment Current Level USD Index/EURUSD Bullish USD We remain bullish the USD and expect at least 110 in the USDindex and possibly 115. This suggests a EURUSD below parity and moving towards 0.90 USD index 99.97 and EURUSD 1.0607 USDJPY Bullish We expect new trend highs and a possible test of 130 123.10 US Fixed Income Bearish Techamentals (U.S.) Bullish We expect higher yields across the curve with 2 year yields well north of 1% and 30 year yields heading towards 4% We also expect spreads to widen versus Germany and Japan We expect core CPI to head towards at least 2.4% and possibly 2.7-2.9%. We also expect a continued recovery in the housing market 2y.94% 30y 2.99% Core CPI 1.9% Oil Bullish We expect WTI to move materially higher, possibly testing/exceeding $70 $41.26 Commodities overall Bearish We expect more losses in the CCI in the first half of 2016 towards 337-341 (losses of over 10%) 381.30 USD against non Japan Asia (ADXY) Bearish Asian currencies We still need a decisive break of the pivotal 107 area on the ADXY. If seen it would suggest broad based Asian currency losses of 5-6% against the USD as it heads towards 101 (And possibly further CNY depreciation) 107.49 US equity market Bullish We expect the DJIA to finally exceed the magic 20,000 level 17,720 Source: Aspen Graphics /Bloomberg December 01, 2015. 16
Contacts Tom Fitzpatrick Chief Technical Strategist 1-212-723-1344 thomas.fitzpatrick@citi.com Shyam Devani Senior Technical Strategist 65-6657-2964 shyam.devani@citi.com Dan Tobon Technical Strategist 44-207-986-3453 daniel.tobon@citi.com Gregory Marks Analyst 1-212-723-7057 gregory.marks@citi.com 17
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