Download USD may remain in a Correction Phase amid a Tug of War

November • 2009
Source: Investment Strategy and Research, Global Consumer Group, Citibank (Hong Kong) Limited
USD may remain in a Correction
Phase amid a Tug of War
With the onset of November, the ups and downs of the US economic data, together with the monetary
policy stance of the Federal Reserve (Fed), have become a barometer for the foreign exchange market.
Although the US economy had a 3.5% positive growth in the third quarter, its new home sales and
consumer confidence, as well as the US Institute for Supply Management’s non-manufacturing index all
came out worse than expected. The above has rocked investor confidence in the recovery prospects for the
US economy. As such, the equity market has turned volatile, and the foreign exchange market has also got
caught by the whirlwinds.
Nevertheless, in the November Fed meeting minutes, the
remarks on ”keeping interest rates at a low level for an extended
period of time” remain intact. This is taken as a hint that the low
interest environment will go on and the exit strategy may only
come gradually, relieving the stress on foreign exchange investors.
Citi analysts believe that as the tug of war between positive and
negative factors may continue for some time, the USD may remain
in a correction phase in the near term. Yet, once the uptrend
of asset prices resumes, and investors shift their focus back to
the double deficit conundrum in the US, there may be another
extended period of a weak dollar.
Chart 1: Interest rate trends and forecasts for USA, Australia
and New Zealand in 2008 and 2009
Australia Target Rate (%)
US Fed Funds Rate (%)
New Zealand Official Cash Rate (%)
Moving into the fourth quarter of 2009, asset prices have
turned volatile and major currencies capricious. Will the USD
continue with the downtrend? Read on to find out the answer.
Overview of Major Economies in the Region
The AUD and the NZD may hold up in interest rate
differentials
USD – Due to the rapid deterioration of the US economic
prospects, Citi analysts anticipate that the Fed Funds Rate may
remain at zero for the rest of 2009.
AUD – With the Chinese economy sustaining rapid growth, Citi
analysts anticipate the Australian economy to outperform other
major countries. This, coupled with the possibility that the Reserve
Bank of Australia (RBA) has started its rate hike cycle, suggests that
interest differentials may benefit the AUD.
%
NZD – As New Zealand has come out of recession and its interest
rate seems to have hit bottom, a Kiwi rate hike cycle may come
in the first quarter of 2010. As such, the relative edge in interest
differentials over other major currencies may lend support to
the NZD.
6
5
5
4.25
4
3.75
3.25
3
3
3
3
2.5
2.5
2.5
2
Moreover, Citi analysts anticipate that the worldwide bailout
measures are likely to gradually restore financial market stability.
Subsiding market risks may benefit the AUD and NZD.
1
0.5
0.13
0.13
0.13
0.13
Q1 2009
Q2 2009
Q3 2009
Q4 2009F
0
Q4 2008
Source: Citigroup, Bloomberg LP. As of November 5, 2009.
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November • 2009
Source: Investment Strategy and Research, Global Consumer Group, Citibank (Hong Kong) Limited
Chart 2: Movements of AUD/USD
(November 2008 - October 2009)
Will the AUD extend its rally as global equities
continue to stabilize?
Citi analysts forecast that the RBA may raise its interest rate to
3.75% for the rest of this year while that of the US may stay at
1.0
AUD/USD
200-day moving average
55-day moving average
AUD/USD
0.9
0%. Hence, the interest differentials between the AUD and the
USD may widen to as much as 3.75%.
If by the end of this year stability returns to financial markets and
0.8
positive signs come from the global economy, asset prices may
reflect investment value again. This may favor a steady rally of
0.7
the AUD for the rest of 2009.
Besides, the Australian economy remains relatively solid. Citi
0.6
analysts anticipate that its economic growth may reach 2.8% in
10/2009
09/2009
08/2009
07/2009
06/2009
05/2009
04/2009
03/2009
02/2009
01/2009
12/2008
11/2008
0.5
2010, which is likely to outperform most major countries and
may be positive for the long term outlook of the AUD.
Source: Bloomberg LP
Forecast by Citi analysts^:
AUD/USD Short-term technical movement forecast: 0.8960 - 0.9401
Chart 3: Movements of NZD/USD
(November 2008 - October 2009)
^ Forecast up to November 23, 2009. All views, forecasts and estimates are based on Citi’s opinions
on or before this date, and are subject to change without further notice. Past performance is not
indicative of future performance.
With the economic recession over, is the NZD about
to rebound?
Citi analysts anticipate that the Reserve Bank of New Zealand
may not reduce its interest rate any more. Now that the interest
0.85
0.75
NZD/USD
rates in other major countries are approaching zero, the NZD
NZD/USD
200-day moving average
55-day moving average
may be able to maintain its edge in interest rate differentials,
which may help the currency’s performance down the road.
As New Zealand has come out of recession, Citi analysts
0.65
anticipate that its economic performance in 2010 may achieve a
growth of 2.5%, which may be far better than other industrial
0.55
markets, such as Europe, the UK and Japan. The long term
picture appears to be more positive for the NZD.
10/2009
09/2009
08/2009
07/2009
06/2009
05/2009
04/2009
03/2009
02/2009
01/2009
12/2008
11/2008
0.45
Source: Bloomberg LP
^ Forecast up to November 23, 2009. All views, forecasts and estimates are based on Citi’s opinions
on or before this date, and are subject to change without further notice. Past performance is not
indicative of future performance.
Forecast by Citi analysts^:
NZD/USD Short-term technical movement forecast: 0.7115 - 0.7526
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November • 2009
Source: Investment Strategy and Research, Global Consumer Group, Citibank (Hong Kong) Limited
US Stocks Likely to Rebound
After Corrections
Highlights:
• With a mixed bag of economic data and a price-to-earnings (P/E) ratio hovering at around 21 times, US stocks
may stay in a correction cycle in the near term.
• The outlook for US stocks may be positive as inflation is not yet a risk, the employment market remains fragile
and the Federal Reserve (Fed) is anticipated to keep going with the low interest policy.
• Potential support may also come from the earnings recovery cycle kick-started by an improving economy.
• Historical data suggest that small and mid-cap stocks may outperform as US equities rally amid its economic recovery.
US Stocks Weighed Down by Mixed Data
Since October, US stocks have been lackluster. The Dow Jones
Industrial Average Index has lost ground at the 10,000 level, while
the Standard & Poor’s 500 (S&P 500) Index bade farewell to 1,100.
It all came down to the mixed economic data. In the third quarter,
confronting the 3.5% positive growth in the US economy, and the
US Institute for Supply Management’s manufacturing index staying
above 50, were the worse-than-expected consumer confidence,
new home sales and personal spending. No wonder investors are
skeptical about the recovery prospects.
Meanwhile, the underperformance of US stocks is also
attributed to investors’ worries that with the Fed’s exit strategy
around the corner, the US economic growth may not be
sustainable. Citi analysts anticipate that US stocks may stay in a
correction cycle for the rest of the year, but may have the potential
to turn around in the first half of next year under the support of
the low interest environment and earnings recovery.
Market Outlook Looks Good on Low Inflation and Low Interest
Investors are increasingly concerned about an early rate
hike from the Fed. In the past, a policy shift towards monetary
tightening was typically based on two key factors: inflation and
employment. In September, the US Consumer Price Index dropped
by 1.3% year on year (YoY) (see Chart 1), suggesting that there
is still a risk of deflation. The chance for high inflation seems to
be too far fetched. Besides, although the consumer market is
gradually reviving, its foundation is not solid enough, and the
“money multiplier” is yet to pick up. In other words, the extremely
loose liquidity has yet to work its way through the real economy,
pointing to a remote chance for inflation to get fierce in the short
term. Hence, Citi analysts reckon that the Fed may maintain a low
interest rate policy until the second half of 2010, which may help
US stocks to resume their rally.
Support May Also Come from Earnings Recovery
Moreover, as green shoots continue to thrive in the economy,
US corporate earnings growth may recover, which is likely to be
positive for US stocks. In fact, among the S&P 500 constituent
stocks, over 80% reported better-than-expected results in the
third quarter. On this basis, Citi analysts see that the US corporate
earnings recovery cycle may be already under way. In their view,
US stock prices may move ahead before any improvement on the
earnings and economic fronts, which may in turn come to push
stock prices higher. Given this “virtuous cycle”, Citi analysts believe
that the outlook for US stocks looks positive in the first half of the
coming year.
Small and Mid-Cap Stocks May Be Considered for
Potential Outperformance
Based on historical data, small and mid-cap stocks tend to
outperform as the market rallies amid an economic recovery. As
such, they may help investors to better capture the investment
opportunities from the potential rebound of US stocks. Yet, as their
P/E ratio (based on the S&P 500 Index) is hovering at around 21
times (see Chart 2), and their earnings revision ratio has also reached
70% or so, the correction cycle may continue in the near term.
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Chart 1: US Consumer Price Index
Chart 2: S&P 500 Index P/E Ratio
%
times
6
5
29
S&P 500 Index P/E Ratio (times)
4
3
24
2
1
19
0
US Consumer Price Index (YoY changes)
-1
14
-2
-3
Source: Bloomberg LP. As of September 2009.
To find out more about our Audio Daily FX Commentary &
Latest Market Information, please visit www.citibank.com.hk
£ Investments £ Market Information.
Source: Bloomberg LP. As of October 30, 2009.
7/2009
10/2008
1/2008
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7/2006
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1/2005
4/2004
7/2003
10/2002
1/2002
4/2001
7/2000
10/1999
7/2009
4/2009
1/2009
10/2008
7/2008
4/2008
1/2008
10/2007
7/2007
4/2007
1/2007
10/2006
9
November • 2009
Source: Investment Strategy and Research, Global Consumer Group, Citibank (Hong Kong) Limited
Looking ahead to December 2009, there are key economic
data to watch locally and around the world (see Table 1). Market
attention may focus on the policy meetings of central banks
worldwide. Given that the global economic recovery seems to be
gathering speed, investors are still all eyes on whether or not other
central banks will follow suit after the Reserve Bank of Australia
(RBA) has taken the lead in the rate hike cycle.
China Hong Kong Dynamics
Data has come out to suggest that China’s economic growth is
accelerating, with a third quarter gain of 8.9%. Its Manufacturing
Purchasing Managers Index also pushed further ahead to hit 55.2
in October. Citi analysts anticipate that China has the potential to
achieve an 11.3% economic growth in the first quarter of 2010.
The increasing certainty about the country’s economic outlook,
coupled with renewed market expectations for a stronger yuan,
may attract a sustainable inflow of funds into China. As such, Citi
analysts hold the view that the RMB is likely to regain its upward
momentum, with a chance for the USD/RMB to reach 6.62 by the
end of next year.
Global Trends
EUR May Catch up with Gold as Outperformers
Table 1: Hong Kong & Major Countries’ Economic Data/Event in December 2009
Country/Date
Important Economic Data/Event
Hong Kong/China
12/11
CH
Trade Balance
12/11
CH
CPI
12/17
HK
Unemployment Rate
12/4
US
Unemployment Rate
12/17
US
FOMC Announces Interest Rates
12/22
US
GDP
12/9
JN
GDP
12/18
JN
BoJ Announces Interest Rates
12/25
JN
Unemployment Rate
12/3
EC
ECB Announces Interest Rates
12/3
EC
GDP
12/16
EC
Consumer Price Index
US
Japan
Euro-zone
UK
Against a weak dollar, the EUR may hold up with more
favorable prospects. History tells us that more likely than not, the
price of gold and EUR tend to move together. Yet, November has
come to see the EUR falling behind gold, which has pushed close
to USD1,100, while the EUR is range-bound below 1.50 against
the dollar. Therefore, Citi analysts believe that the EUR may catch
up down the road.
12/10
UK
BoE Announces Interest Rates
12/16
UK
Unemployment Rate
12/22
UK
GDP
12/1
AU
RBA Announces Interest Rates
On the other hand, the Euro-zone economy has been
improving. Both its Manufacturing and Non-manufacturing Indices
continue to stay above 50, indicating that the economy may be
making its way out of recession. Such a backdrop may help give
a boost to investment sentiment for the EUR. In addition, one
significant recent development, which may have been missed out
by some investors, is that Czechoslovakia, an Eastern European
country, has become a signatory to the Lisbon Treaty. This new
milestone in the European unification is anticipated to be positive
for the EUR in the long run. Citi analysts believe that the EUR/USD
may revisit 1.59 in the next 6-12 months, though, technically, it
may be range-bound in the short term between 1.477 and 1.500,
above its 55-day moving average line. On the whole, the uptrend
of the EUR appears to be sustainable.
12/16
AU
GDP
12/10
NZ
Unemployment Rate
Interest Spreads and China Factor May Support the AUD
While the AUD/USD has failed to break through the trading
range of 0.88-0.93, a number of positive factors may help the AUD
gain more ground in the mid to long term. To begin with, interest
spreads are often in favor of the Aussie. After its 50 basis points
Australia/NZ
Source: Bloomberg LP
(bps) rate hike earlier, Citi analysts reckon that the RBA may raise its
policy rate by another 25 bps in December. The widening interest
spreads, as anticipated, may buoy the outlook of the AUD.
In addition, the China factor also plays a key role. In October,
the country’s Manufacturing Purchasing Managers Index rose to
55.2, staying above 50 for eight months in a row. In view of this,
Citi analysts anticipate that China may be able to maintain its rapid
economic growth, which may lend support to Australian exports,
and in turn benefit the AUD. Technically, the AUD/USD may remain
range-bound above its 55-day moving average line in the short
term. However, on the whole, it has the potential to keep going on
the upward track. After consolidation in range-bound trading at
0.896-0.933, it may charge towards 0.98 in the next 6-12 months.
This document is based on the information as of November 5, 2009 provided by Citi Investment Research, Citigroup Global Markets, Citi Global Wealth Management and
Citigroup Alternative Investments. All information, views and estimates are based on the opinions on or before this date, and are subject to change without further notice. Past
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