FX Monthly Report

October 2015

EUR/USD 1M

EUR/USD 1Y

1,1600

1,4000

1,1400

1,3500

1,1200

1,3000

1,1000

1,2500

1,0800

1,2000

1,0600

1,1500

1,0400

1,1000

1,0200

1,0500
1,0000

1,0000
5- Oct

12-Oct

19-Oct

Nov Dec Jan Feb Mar Apr May Jun Jul Aug Sep Oct

25-Oct

MARKET ANALYSIS
Technical Analysis
On the first half of October the market observed an uptrend of the EUR/USD which quickly developed into a downwards trend for
the second half of the month. On the 15th of October, when the MACD fell below the signal line, it shaped a downward cross,
interpreted by the market as a strong bearish signal. At that time the MACD was very high (0.005152), so there was a risk of the
EUR/USD being overbought. Despite these early signs, it only fell greatly (2%) on the 22 nd of October. Applying a Fibonacci
Retracement on the downtrend, an important support at 23.6% of the starting point can be observed. This corresponds to a quotation
of, approximately, 1.100 EUR/USD. After the fall, the quotation recovered back to this support line, which should persist in the future.
We predict that the EUR/USD find important resistances at 1.105, 1.111 and 1.116.

Calendar

Fundamental Analysis
In October, the EUR/USD started bullish making a rally towards
1.15 driven by the disappointing figures from the other side of
the Atlantic, especially the weaker than expected change in the
non-farm employment and the bad performance of the US
Trade Balance. This sentiment was boosted when the FED
minutes revealed that the economic conditions are not yet ideal
to warrant an increase in the funds rate, postponing further
analysis to December. However, as inflation remained in
negative territory (in Europe), the idea that it would be
necessary to somehow reinforce the asset purchase program,
confirmed by Mario Draghi on the ECBs monthly press
conference, made the euro erase all the previous gains against
the dollar and hit a two month low at 1.09. Regarding this, the
ECB President scheduled further decisions to December but
assured that the QE is set to run until 2016 or beyond if
necessary.

November 4th US Trade Balance

November 5th EU Economic Forecasts; US
Unemployment Claims
November 6th US Unemployment Rate
November 13th German Prelim GDP; EU Flash GDP;
US Retail Sales and PPI MoM
November 16th EU Final CPI YoY
November 17th German ZEW Economic Sentiment;
US CPI
November 18th FOMC Meeting Minutes
November 20th German and French Flash PMI
November 24th US Prelim GDP q/q; CB Consumer
Confidence
November 26th German Prelim CPI YoY

Financial Markets Department | fm@fepfinanceclub.org | http://www.fepfinanceclub.org/

Tumbling China
On the 24th of August, China's "Black Monday, the Shanghai Stock Exchange
plunged 40%, since its peak on June 12 at 5,166.350 points, losing all ground gained since the
beginning of the year. Attractive margins, combined with the easy credit (6%) led many
private Chinese investors to enter the capital markets and to overvalue assets. The
government, who declared to informally hold debt obligation on the stock markets future,
covering any bets with its own considerable assets overvaluation, contributed to this
development: price-to-earnings ratios for Chinese stocks averaged an astounding 70-to-1,
against a worldwide average of 18.5 to 1(Source: REUTERS).Ordinary Chinese people had
become so intoxicated by bull-market euphoria that stories began to proliferate about
people leaving their jobs, and even their families, to become day traders, often using funds
borrowed from high-interest rate shadow banks or loans taken out against their homes.
In July, margin borrowing surpassed $320bn, representing almost 10% of the total market
capitalisation of all stocks being traded. Outstanding borrowing surged by two-third to 208
% of GDP compared to 2008 (Source: Bloomberg). Producer prices have slumped for 43
consecutive months and the consumer price index began a downward trajectory in the
middle of last year. The risk was a vicious downward spiral that infected companies, as their
assets lose value at the same time as real financing costs rise, forcing them to borrow more
to stay afloat in a cascading downward plunge.
From its highest value, the Shanghai Stock Exchange Composite Index has since been falling.
Among the companies affected are some who recently invested in Portugal. This is the case
of Fosun, owner of Fidelidade, which lost over 7% market value, a decrease by 6.8 billion
euros since June. Shares of Haitong, which bought BESI, fell 20 % market value, contributing
to a reduction in market cap in 2.5 billion since June 12 (Source: Jornal de Negcios).
Side effects of the stock market decline extended to the commodity sector. China is the
world's largest consumer of most raw materials (between 50% and 100% of global
consumption) (Source: Business Insider). Especially oil prices declined since mid-June, also
because of diminishing demand from the world largest oil importer, China. The reduced
forecasted demand by China furthermore, pressured copper and aluminium prices by 27%
and 19% respectively since August 2015.
For years, the central banks of emerging market countries (China, Brazil, Russia and Taiwan)
have devoured U.S. debt in order to bolster their foreign currency reserves. Now, amid a
global economic slowdown spurred by China, these purchasers of U.S. Treasury bonds opted
for the sale of US government bonds to increase government revenue. They sold $123 billion
in U.S. Treasury debt maturing within a year over the period of 12 months until July. This
must be put into comparison to the peak of $230 billion in purchases of U.S. debt January
2013 (Source: Wall Street Journal). The International Business Times stated it to be the
biggest decline in foreign official demand for U.S. notes and bonds since records began in
1978,causing a slowdown in emerging economies threatening the US economy. While central
banks have been selling, other buyers have stepped in, including U.S. and foreign firms. That
buying, driven in large part by worries about the worlds economic outlook, has helped keep
bond yields at low levels from a historical standpoint.
To counter this fall, the monetary authorities in China cut the interest rates by 25 basis
points to 1-year loans to 4.6%, a decision that is repeated for the fifth time since November
2014. The central bank cut by 25 basis points the interest rate on deposits of one year to
1.75%. Chinese authorities have also decided to decrease by 0.5 %-points the amount of
money banks must keep in reserves.
The implementation of new reforms is also a solution, perhaps the most needed. Wang Tao,
Chinas economist at UBS Group AG in Hong Kong, said China needs to embark on more
structural reforms to unleash new sources of growth, to retire excess capacity and close
"zombie" companies and write off bad debt on banks balance sheets". "All the old growth
engines are dead, just like the cyclical fixes they are using to address demand. This year,
export growth is zero, property investment is zero, heavy industry and commodity
producers have slumped (Source: Wall Street Journal).

Financial Markets Department | fm@fepfinanceclub.org | http://www.fepfinanceclub.org/

Contacts FEP Finance Club FX Team

Charlotte Hoefner
Director of Financial Markets, Head of FX

Pedro Guimares
Analyst & Trader

lvaro Leal

Rui Ramos

Analyst & Trader

Analyst & Trader

Financial Markets | fm@fepfinanceclub.org | http://www.fepfinanceclub.org/

Hugo Sanches
Analyst & Editor

Joana Silva
Analyst & Trader

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Financial Markets Department | fm@fepfinanceclub.org | http://www.fepfinanceclub.org/