FX Market Headlines Global growth outlook still faces risks USD reached the highest net long position since January 2012 Spain grabs more attention in eurozone UK not excluding further QE The Long Path Back To Fiscal Sustainability for UK Important Disclosure This document is based on information provided by Citigroup Investment Research, Citigroup Global Markets, Citigroup Global Wealth Management and Citigroup Alternative Investments. It is provided for your information only. It is not intended as an offer or solicitation for the purchase or sale of any security. Information in this document has been prepared without taking account of the objectives, financial situation or needs of any particular investor. Accordingly, investors should, before acting on the information, consider its appropriateness, having regard to their objectives, financial situation and needs. 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FX Forecasts Global growth outlook still faces risks - This month Citi global team again edged up global growth forecasts, and now expect global GDP to rise by 2.5% this year (up from 2.4% last month), while Citi forecasts for 2013 and 2014 remain at 3.0% and 3.5% respectively. PPP-weighted Citi expect global GDP to rise by 3.1% in 2012 (from 3.0% last month), by 3.5% in 2013 and 3.9% in 2014 (2013 and 2014 forecasts unchanged from last month). However, Citi economists also note the near term economic outlook remains for below trend global growth and there are many headwinds to recovery: First, Citi believe that the EMU sovereign debt crisis is not over, and financial market strains probably will increase again. Indeed, in recent days risk appetite has retreated and the latest PMIs in Europe point to a deeper recession. Second, the recent rise in oil prices will probably hit growth, because oil consumers (whose real incomes fall) will adjust faster and further than oil producers. The two prior occasions when oil prices hit $125-$130/barrel, in mid- 08 and mid- 11, were both followed by marked downturns in the CESIs and consensus growth forecasts. Third, China’s Citi Economic Surprise Index has turned negative and activity clearly is weakening as last year’s policy tightening slows housing activity and credit growth. Further monetary loosening is likely, via continued RRR cuts, and growth probably will rebound later this year, but the extent of the near-term slowdown remains unclear for now. The latest PMI reading for early March highlights the downside risks if the authorities are slow to ease policies. Fourth, there remain major uncertainties about US fiscal policy for 2013 and beyond. At present, broad tax hikes and spending cuts that could stall recovery are on tap for 2013 but forestalling action is unlikely before late this year or next. Fifth, as in 2010 and 2011, the recent rallies in risk assets may peter out – hitting confidence – if central banks stop adding further stimulus. Private debts remain high in the US and Europe, creating an ongoing bias to high savings that could reassert itself. Given these headwinds, the main central banks probably will continue to maintain a loose policy stance, and will be ready to loosen further if downside risks escalate again. USD has seen a $5.1bn rise in net long positioning up to Tuesday, reaching a net long position of $18.3bn. This is the longest net position seen in USD since the week ending 24 January and sits somewhat at odds with Fed Chairman Bernanke’s recent more dovish take on labour market developments last week that represented a significant shift in the Fed’s view and as a pre-cursor to expectations for further accommodation. Citi FX Technical team points out that the USD Index has held the 76.4% retracement against the Feb 29th low (i.e. of the rally from 78.09 to 80.73) and a continued hold of 78.71 be needed to set the Index for a decent rally ahead and especially if it breaks above 80.73 (high from March 15th). However, given the narrow range bound sentiment in most units right now, any sustained gains above this level would are difficult to see right now. The key points in the UK Budget matched the advance leaks: a roughly neutral package that leaves intact the existing fiscal tightening of 5-6% of GDP (in terms of the cyclically adjusted primary balance) over the next 5 years. The high deficit and OBR scrutiny should ensure that Budgets are a zero-sum fiscal game — with every tax cut for some group balanced by offsetting pain elsewhere. This is on top of the tightening of about 3½% of GDP that already occurred in the 2010/11 and 2011/12 fiscal years. The OBR's near term fiscal forecasts (£126bn in 2011/12, £120bn in 2012/13 excluding the transfer of the Royal Mail pension fund) are disappointing, but realistic in Citi view. Beyond 2012/13, Citi expect that real and nominal GDP will undershoot the OBR’s forecasts, hence leading to repeated revenue undershoots and deficit overshoots. The general government debt/GDP ratio is likely to rise to about 100% in coming years, having been around 40% a few years ago. Citi regard the UK as a relatively weak AAA. Citi assume that S&P will put the UK on negative outlook at some stage (as Moody’s and Fitch already have done). Citi do not expect that a negative outlook — or indeed a ratings downgrade — would seriously derail gilts, given the sluggish economy and falling inflation, plus the government’s strong commitment to fiscal consolidation. The Week Ahead USD: Apr 2, Fed releases March 28th remarks of President Bullard to a monetary policy conference in Beijing. Apr 2, Fed President Pianalto to speak to the Economic Roundtable of the Ohio Valley. Apr 3, Fed President Williams to participate in a San Francisco University Symposium simulation of an FOMC meeting. Apr 4, Fed President Williams speaks to San Francisco Planning and Urban Research business breakfast. Apr 5, Fed President Bullard to speak to the 13th Annual InvestMidwest Venture Capital Forum. Apr 2, March ISM Manufacturing Activity Index: Citi. 52.5, Feb. 52.4, Jan. 54.1, Dec. 53.1, Nov. 52.2, Oct. 51.8 - Citi expects the ISM manufacturing index was unchanged at a modest level in March.