Citi‘s Most Read – FICC

Research evidence excerpt

Citi‘s Most Read – FICC

Global FX Strategy - EURGBP at key levels into catalysts, but gilt flows may be

the key driver

We have had a bullish EURGBP bias – where recent indicators have been

suggesting EURGBP should already be higher – yet price is again re-testing the

bottom of the range around 0.86. We attribute this to overseas buying of gilts. The

main question for GBP is whether such buying will continue, or whether it was

opportunistic given aggressively hawkish BoE pricing (which has since retraced).

This upcoming BoE meeting is only part of the story, though, with UK data and the

by-election this week also important for the next leg in EURGBP. But with flows

and fundamentals at odds, our directional bias conviction has weakened. Low vol

makes straddles/strangles attractive here.

Daniel Tobon | Brian Levine | Osamu Takashima

Overseas demand for gilts has increased …as do relative terms of trade as energy

recently continues to sell-off

Japan FX - Recent changes in USD/JPY price formation

Our model-based fair value estimates are c¥161/$ for the model based on the

period of 2017 through 2025 and c¥159/$ for the model based on 2023 through

2025. There is currently no marked distortion in market pricing for the USDJPY. It

appears downward pressure on the JPY due to the historical strength of Japanese

equities has offset the upward pressure due to contraction in the interest rate

spread. We put the long-term ceiling at around ¥160/$ and expect a correction to

below ¥155/$ by year-end. However, if there is no change in the risk-on

environment, we think the normalization of BoJ monetary policy will be insufficient

to control occasional short-term JPY weakness and believe ongoing intervention

to buy the JPY by Japanese authorities remains necessary for now.