FX Monthly Report

April 2017

EUR/USD 1M EUR/USD 1Y

1.1000 1.1800
1.1600
1.0800 1.1400
1.1200
1.0600
1.1000
1.0800
1.0400
1.0600
1.0200 1.0400
1.0200
1.0000 1.0000
3 - Apr 10 - Apr 17 - Apr 24 - Apr May Jun Jul Aug Sep Oct Nov Dec Jan Feb Mar Apr

MARKET ANALYSIS

Fundamental Analysis Calendar

In April, the EUR/USD showed an upward trend. The month started with the 3rd May - FOMC Statement; Federal Funds Rate
ISM Manufacturing PMI, showing a downturn leading to the pair to reach 1.0669.
5th May - Unemployment Rate; Fed Chair Yellen Speaks
On the 5th April, the FOMC Meeting Minutes was released, showing that FED
intends to start to reduce the size of its balance sheet. On the same day, Oil 7th May - French Presidential Election
Inventories showed a better result than the forecast, with the pair closing at
10th May - ECB President Draghi Speaks
1.0662. On the 7th, the unemployment Rate in the US showed a good result at
4.5%, leading to a bearish movement closing at 1.0590. On the 12th April, 11th May - EU Economic Forecasts
President Trump declares the US Dollar is getting too strong, starting a bullish
12th May - G7 Meetings; CPI m/m
movement. April 14th was marked by the fall of the US CPI, recording a negative
value of -0.3%, less than the predicted, leading to the depreciation USD (1.0610). 16th May - German ZEW Economic Sentiment
On the 24th, the pair opened at 1.0915 after the result of the French Elections 17th May - Crude Oil Inventories
that confirmed Emmanuel Macron as front runner for Presidency of France. On
the 27th, the ECB kept unchanged its monetary policy with the Minimum Bid 23rd May - German Ifo Business Climate;
Rate remaining at 0.00%. with the EUR/USD closing at 1.0871. In the last day of 24th May - Crude Oil Inventories; FOMC Meeting Minutes
the month the release of the Advance GDP q/q, shown a worst result than the
forecast, a follow-on to an appreciation of the pair closing at 1.0897. 30th May - CB Consumer Confidence

Technical Analysis
April was marked by an uptrend. The month started at 1.0662 with an appreciation of the USD until the 9th. After reaching a support on the 9th
Crude Oil Inventories
at 1.0574, the EUR started appreciating until it broke a resistance of 1.0602. The upward momentum proved itself strong as price broke through
the resistance area, at the same time that the MACD crossed above the signal line, followed by a strong appreciation of the EUR on the 12 th until
it found a resistance at 1.0678 on the 13th day of the month. The price then bounced between said resistance and a support of 1.0602, which was

previously a resistance, until it finally broke the resistance on the 18th. Then the price started floating between 1.0678, now a support, and 1.0777
(resistance). On the 21st, the price jumped from 1.0723 and reachedv 1.0868 on the 23rd, the appreciation happened as the SMA 5 crossed up
the SMA 20 and the MACD crossed above the signal line. In the last days of April, the price bounced between a support at 1.0851 and a resistance
at 1.0944 ending the month at 1.0904.

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 Czech Republic ends Exchange Rate commitment

On the 6th April, the Czech Republic Central Bank (CNB), after the extraordinary monetary policy meeting decided to cease its exchange rate
commitment and let the Czech currency, Czech Koruna (CZK), float freely. Before the decision, the parity was at 1=27.000 K. The CNB returned
to the conventional monetary policy regime, in which interest rates are the main instrument. The Bank Board did not discuss interest rate settings,
remaining unchanged at 0.05% since 2013. (Source: CNB)

The Czech Republic is a small developed country and a European union member since 2004, although it
had not integrated the Euro-area. In this way, the Czech National Bank has been independently
conducting its national Monetary Policy regarding the two banks objectives: Price and Financial Stability.
Until 6th April, CZK had a stabilized arrangement to the Euro. Stabilized arrangement is an exchange
arrangement system where the national currency does not float more than 2% (+/- 1% from the target)
from a specific single currency (EUR, in this case), or a basket of currencies, during at least six months,
however despite this requirement there is not an official commitment from the national authorities
regarding it. Now the CZK has a free float exchange system and this decision led the EUR to depreciate Exchange rate EURCZK. Source: BiGlobal
against the CZK from 27.00 at the beginning of the day of the decision to 26.60 at its ending. In the next Trade Platform
days, the appreciation of the CZK was inverted, with EURCZK registering values near the original ones.
(Source: AREAER 2014, IMF)

In 2016, Czech Republic had an economic growth of 2.4% (2.7% and 4.5% in 2014 and 2015, respectively).
Last year, inflation reached 2.0% (monthly YoY average) and unemployment stayed at 4.0%. (Source:
Trading Economics). The Czech Republic has been facing low unemployment rate and increasing exports
to some European countries specially Germany which are recuperating, increasing domestic and
external demand and therefore generating higher prices and economic growth. This is reflected in
inflation, that has been continuously growing near its target of 2% since 2016. Therefore, the national
bank believes that it does not any longer need an exchange rate commitment which remained CZK
undervalued (boosting exports and contracting imports). On the other hand, this could carry the so-
called anti-inflation effect driven by low inflation in euro-area countries that can be transmitted to the
Forecast vs Actual Inflation. Source: Inflation
Czech Republic by exchange rate channel. (Source: CNB and Bloomberg)
Report - 2017, CNB
After the decision, Czech Republic 10Y-bonds yields raised from 0.918 to 1.051 in the hours
following the decision. The 2Y yields also reacted with a hike, hitting positive ground, but
remaining sober as well and negative afterwards; SE PX (Czech Stock Index) raised up from
979.97 points to 984.05 points on that day, continuing the up movement in the following days.
(source: Investing and Bloomberg). Leonid Bershidsky, Bloomberg columnist, says that can this
decision may appear good to the country as it shows a distancing from the euro-area and as
some way it was inevitable because the CNB had to do something as its international reserves
soared by 59 percent in the 12 months ending Feb 29, but in the long term the result can be like
Czech Republic Government Bond 10Y. Source: Switzerlands after similar decision in 2015: decreasing economic growth and increasing
Tradingeconomics unemployment rate. Floating Exchange Rate Regime will lead to an appreciate and therefore
decreased exports, which have a significant impact in economies export-oriented like these
countries (in 2015 and 2016 exports represent about 83% of Czech GDP (World Bank)), defends Bershidsky. (Source: Bloomberg).

Historically, Czechoslovakia had a conventional fixed exchange rate to a basket peg to the currencies of key commercial allies, with almost no
floating (margin of +/- 0.5%). In 1993, Czechoslovakia was separated into the Czech Republic and Slovakia and therefore monetary connection
disappeared; Czech Republic decided to rearrange the currency basket and limited it to the German and USD. In 1996, Czech Republic substituted
its exchange rate regime from conventional fixed to an intermediate regime in the form of the corridor with +/- 7% variation margin. Simultaneously,
the monetary monitoring (M2 notes and coins, overnight deposits, deposits with an agreed maturity of up to two years and deposits redeemable
at notice of up to three months) was added to exchange rate driven Monetary Policy. In 1997, the Czech koruna significantly depreciated, and along
with other warning economic data, the monetary authorities decided to adopt managed floating regime and, by the end of the year, a new monetary
strategy of inflation targeting was officially recognized. After this, the regime was stable for a long time, however with a small nuance: in 1997-2001
there was a nominal exchange rate depreciation tendency and the second one 2001-2009 a nominal exchange rate appreciation tendency. In 2014,
CNB had an Other Managed Arrangement system (This category is a residual and is used when the exchange rate arrangement does not meet the criteria
for any of the other categories, IMF); in 2015, it had a Stabilized Arrangement system until the day of the decision here addressed. (Source: Kosta
Josifidis, Jean-Pierre Allegret and Emilija Beker Pucar Scientific Paper, Bloomberg and IMF).

The koruna exchange rate may now fluctuate in either direction depending on demand and supply. However, the CNB claims it stands ready to use
its instruments to mitigate potential excessive exchange rate fluctuations. After the room for easing monetary policy by cutting interest rates has
been exhausted, this might force the CNB to use the exchange rate as a monetary policy instrument again or to apply another unconventional
instrument. A return to the exchange rate commitment is highly unlikely soon, as inflation is above the CNBs 2% target in an environment of solid
growth of the Czech economy, rising wages and related robust domestic and overall inflation pressures.

DID YOU KNOW

FOMCs voting rights have a partially rotating scheme?

In fact, besides the seven members of the board of governors of the Federal Reserve System plus the president of New Yorks Federal Reserve
Bank, the remaining four voters are so for only one straight year, giving up their voting rights after that period, however, they do continue to
attend FOMCs meetings. The non-permanent voters are the Presidents of the remaining reserve banks. Each of the four voters comes from one
of the following groups: Minneapolis, Kansas City and San Diego; Cleveland and Chicago; Boston, Philadelphia and Richmond; Atlanta, St. Louis and
Dallas. (Source: Federal Reserve)

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Financial Markets | fm@fepfinanceclub.org | http://www.fep.up.pt/skillsacademy/fepfinanceclub
 Contacts FEP Finance Club FX Team

Franklin Carneiro da Silva Joana Silva

Director of Financial Markets Analyst & Trader, Head of FX

Bruno Veiga Gonalo Santos Nuno Teixeira Rodrigo Camacho

Analyst & Trader Analyst & Trader Analyst & Trader Analyst & Trader

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MARKETANALYSIS

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