FX 20140918

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FX CONCEPTS FX CONCEPTS

GLOBAL MACRO RESEARCH
To contact FX CONCEPTS New York: 1 (347) 846-0087, 1 (347) 846-0097 or 1 (347) 846-0103. mbryan@fxconceptsnews.com
CURRENCIES INTEREST RATES EQUITIES COMMODITIES

WEEKLY INDEX

MARKET INSIGHT REPORT............................................................. 2
Too Close for Comfort ................................................................ 2

CURRENCY Europe Long-Term View.......................................... 3
Russia Loves Putin, but Will It Next Year?............................... 3

CURRENCY Asia Long-Term View............................................... 4
Abenomics Is Getting a Bad Name the Yen Is Too............... 4

INTEREST RATES Long-Term View............................................. 5
While the US Shines, Rates Will Climb, but then................. 5

Under no circumstances should any material in this newsletter be used or considered as an offer to sell or a solicitation of any offer to
buy an interest in any security or investment managed by FX Concepts or its affiliates or any other product or service to any person in
any jurisdiction where such offer, solicitation, purchase or sale would be unlawful under the laws of such jurisdiction. Access to
information about specific products are limited to investors who, among other requirements, either qualify as "accredited investors"
within the meaning of the Securities Act of 1933, as amended, or who meet any other eligibility and investment requirements and
generally are sophisticated in financial matters, such that they are capable of evaluating the merits and risks of prospective
investments.
September 18, 2014

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MARKET INSIGHT REPORT
Too Close for Comfort
September 18, 2014
By John R. Taylor, Jr.
Chief Investment Officer

A bad weekend is to be expected on the streets of Glasgow and Edinburgh, as the yes vote
loses in a close call. With the pubs open all night, there could be rampaging in the street and
powerful bursts of anger expressed as the drinking goes on into the wee hours. Unfortunately
this vote has been too close, a rout would have been much better. Now, with lots of would-of
and could-of thoughts and blame to go all around for the loss, scapegoats will be found and
social harmony will suffer in the aftermath. As we see it the result will open up hard-to-close fault
lines within Scottish and United Kingdom society for years to come. The separation between the
lowlands Scots and the Highlands and Island Scots will be very apparent as well because the
vote looks to be splitting on the rural-urban vector and on the working-upper class one as well.
Another fault line will widen as it is being made clear that the upper crust of the Home Counties
dont give much of a damn how the vote goes. A tight 'no' victory could be creating a new
Quebec, Flemish-Walloon split, or an ongoing agony like Lebanon. The history of Scotland will
be interpreted differently and more divisively for years to come. We could all soon wish the yes
vote had won.

Brussels will be happy with the results and the political elite of Europe will see this as a slap
down of Catalonia and the Basque region. A 'yes' vote would have compounded the EU
problems, as the new Scotland would have raised thorny currency and sovereign debt issues
over the one-year negotiation period that would have been a sure volatility magnet. The 'no' vote
and the raw nerves exposed should cause the Tories to have second thoughts about their
promised up or down vote on UK membership in the EU, but it won't. Rebellious thoughts are
about in the land and another vote like this would be a real shock.

As Sterling rates react to the employment numbers on Wednesday while the status quo is
preserved, as all the Scottish issues are shelved, the City will put the whole issue in the rear view
mirror and rates will rise for the next month or two. The possibility of an early 2015 rate rise has
increased and a few more positive surprises could raise the odds dramatically. For the pound,
the short-term impact will be positive, sending the euro sharply lower, as Sterling treads water or
slides gloriously lower against the now very powerful dollar. As the vote is over, the pound has
the two things that guarantee a strong currency - a stingy fiscal policy and a tighter monetary
policy than the other guys. As the US seems to score higher on these measures thanks to its
divided Congress and economic growth, the pound will have to settle for being the strongest
currency in Europe. From our point of view, the longer-term picture is not pretty. With the UK
economy as heavily oriented toward the financial side - banking, insurance, asset management,
and investment banking - it suffers badly in financial downturns. In the 2008 episode, the City
survived relatively unscathed (despite several catastrophes and many daring rescues). Smaller
countries with banking liabilities in the UK's league were blown away: Ireland, Cyprus, and
Iceland, but this next time it will hit the grand dames of this business as well: the UK,
Switzerland, Hong Kong and Singapore.

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CURRENCY Europe Long-Term View

Russia Loves Putin, but Will It Next Year?

Vladimir Putins approval has dropped from almost
90% several months ago to 84% last week.
Numbers that only seem to come in wars, but the
aftertaste is not so great. George Bush had numbers
around 90% as well when the first Gulf War proved a
roaring media success. That was in the first quarter
of 1991, but in the following year he lost his bid for
re-election. That cant happen to Putin, but the odds
say his position will be far less comfortable next year.
Maintaining the Crimean peninsula and the Donbass
region whether fighting for it or possessing it will
prove very expensive in a budget sense, not to mention the trade and sanction sense. We think
we can see Putin has no choice but to find some way to bring the Russian speakers and
the industrial heartland of the Eastern Ukraine into the Russian orbit, but it is going to be
either expensive or a failure. We have not expected him to fail even from day 1 but the
cost is getting higher and higher.

The Russian economy and the ruble will suffer. In three to five years this might have all blown
over, but right now the situation looks grim to us. The price of oil is headed below $100 and we
think it is headed below $80 and that is a very conservative view as it could go a lot lower
and many base metals will drop as well. This will put the Russian trade balance in a hole, but far
more important it will destroy the tax base of the government. Russia must go to the markets in
London and they will not be well received, even if there is no sanction problem, as Russias
deficits will seem to go on forever. Borrowings will be very expensive and a major credit crisis
next year would fit our 17.5-year cycles just about perfectly. That is not a prediction, we only see
weakness and cant forecast disaster, but it would fit the cycles to a T. The Chinese / Hong
Kong / Far East market will not be able to tide Russia over this gap, even if they wanted to. The
ruble should be very weak for a long time, and the weakness has already started. Even if
Putin and the West come to a deal, it is too late to help Russia. In a major sense, if peace is
declared, wait two weeks and then sell rubles aggressively.

We think the ruble started a two-year decline in July, and so far USD/RUR has moved from 33.5
to almost 38 at one point on Friday. The chart above shows several red boxes from our recent
analyses in August. We have called the cycles, but were way under the level of dollar strength
that we are seeing. We have not changed our forecast of 38.20 plus or minus about 20 kopeck,
but if there is any mistake here it is that we have underrated Russian weakness again. There is
not much resistance ahead as we are past every previous high, but a move to 39.50 fits some
measuring techniques. After some weakness to the second half of October we expect a rally
to the 42 .00 level at the start of December.

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CURRENCY Asia Long-Term View

Abenomics Is Getting a Bad Name the Yen Is Too

More and more, the mainline press and
economists from major financial
institutions are feeling free to cast
aspersions on the underlying principles of
the three arrows of Abes plan, to decry
the poor execution of arrows two and
three, and to even doubt the wisdom of
weakening the currency in the first place.
The Sony news on Wednesday, it
dropped its dividend for the first time
since going public in 1958, is a shock for
those older than 40 who remember it as
the best name in consumer electronics, a
reputation long gone among those who know. Economic obsolescence and inertia is Abes
dilemma now, as it has been the problem for all leaders over the past 15 years since the
Asian recovery of 1999, which the Japanese economy missed. How does one jumpstart an
economy of rapidly aging people, with a declining workforce and with semi-sacred economic
bottlenecks at every turn? Even the well-protected export companies are struggling look at
Sony. And Toyota is looking to build yet another offshore manufacturing hub in Mexico to
service North America. The final conclusion of the Abe attempt and the distant conclusion to
Japans societal distress is beyond the scope of this letter, but whatever thoughts the world has
held in the past 22 months are turning less rosy. So far the yen is bearing the brunt of this
negative shift, but the JGB market and the equity market could join in this re-pricing of the
Japanese future in the next month or next year we will be watching for it.

Since the middle of July, the dollar has been rallying against the yen, more and more powerfully
as the weeks move ahead. Our targets for the middle of December, where we see a cyclical
high, have climbed from the 107 area, to 110, to 113 and now we see it at 117. A close over the
108.00 resistance on the day if continued on Thursday could push our target to 120. Our
target for the week of October 6 has been moved from the purple box centered at 110.00,
last weeks target, to the red box centered at the 111.50 level this week. This acceleration is
not absurd as the Gann lines and volatilities are just moving back into the range they occupied
for much of the past 40 years. The impetus behind these changes has been the rate of change
and the volatility of daily movements. The move on Wednesday afternoon in New York
establishes a two year high for movement with the trend a far more important number than
movement against the trend (as profit taking from an overbought position is often more violent).
A move like the one in New York from 107.20 in its morning to 108.40 after the Fed news
conference shows a tremendous need to eliminate yen long positions plus a very large desire to
establish shorts. The Bank of Japan and the other central banks have slowly increased their
control of global market conditions, but the last month or so seems to indicate an unraveling of
that control.

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INTEREST RATES Long-Term View

While the US Shines, Rates Will Climb, but then
By Joseph Palmisano

It has only been a few weeks since FX Concepts turned into Bond bears, reversing the bullish stance we
had maintained since the third week of January. We had been arguing that the US 10- and 30-year
markets would rally even though the 2-year market was not and the 5-year market seemed to have a
severe case of anxiety, before the market turned down in August (rates up). Obviously this implied a
flattening of the curve earlier this year, alerting us that the US economy was finally in a self-sustaining
upmove, something we had not seen since 2009 and 2010. This is wonderful, but our very major cycles
are warning us that this economic upmove is already near its conclusion. Therefore, this is not the
early part of the upmove, but the end and Bond prices should not go down for long. We see this recent
growth period as having started sometime between June and November of 2012 and the latest we would
be expecting the peak in US economic performance is in Q1 2015. At this point, early in the month of
November, looks to be the best spot for a peak in rates, but it could come as early as the first days of
October. What we are saying is: do not get comfortable with a bearish position in US bonds.
Furthermore, our mega cycles still call for another multi-year drop in long-term rates into the spring
of 2016. We are aware this is a dangerous forecast that we will have to wear if we are wrong, but
everything looks like new low yields are coming. Expecting yields to go below those of 2012 (10-yr below
1.38%) will be a shock to most analysts, but that is where we see the US heading.

This weeks letter is very cyclically driven and technical in some sense, but we feel it is important to let our
readers know exactly where we stand. The decline in prices and the rise in rates we are seeing is
probably just a several month affair. We are saying it is not going to be with us for long. The German,
British, and Canadian markets all show the same cyclical picture, but only the gilts show a chance the rise
in rates could continue into Q1 2015. As the British and the US are generally considered as the closest to
raising rates, this does make sense, but as the hikes are definitely data dependent according to the
countrys respective central banks, we are watching that data very closely. Of course, we are more
interested in market prices and cycles than government data, but many things could supply the critical
number. If the equity markets manage to climb out of their latest dip moving to new highs, as we expect,
then interest rates should rise as well. We expect equities to begin a new rally, starting today, carrying on
into the week of September 29, and Bond prices should decline into the same week as well.

The European equity markets have a peak at the start of November and as they are usually well correlated
with the US and other global markets, we are generally expecting a further high about four to five weeks
after the one we should see at the start of October. As the Europeans look as though this will be their final
high, we would expect Bund yields to begin a further decline in November. As US equities look as though
they could see a further high in February, we see a possibility of rates climbing into the same timeframe.
Once yields turn down, they should decline into late spring of next year before they bottom for a while.
This could be one of the more exciting bond market rallies of the past few years, driven by the stops of the
many who will be forced to abandon their view of rising rates.

FX 20140918

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