RECAP: Citi's preliminary estimate of.........>

FOREX: RECAP: Citi's preliminary estimate of month-end FX hedge rebalancing

flows points to JPY selling and roughly balanced flows in other currencies.

- Citi notes that "most equity indices have gained month-to-date while

government bond indices have fallen. While higher equity prices would normally

lead the model to issue a sell-signal for USD, the out-performance of major

European markets and Japan relative to the US means that estimated net flows are

fairly balanced this month. This is because US investors also need to buy USD to

hedge increased foreign asset values (larger gains on smaller foreign holdings),

offsetting foreigners' needs to sell USD (smaller gains on larger US asset

holdings). The underperformance of US fixed income relative to the Euro Area and

Japan also adds to likely USD buying."

- Citi believes that "the imbalance of JPY flows is caused by our hedge ratio

assumptions, which conjecture that Japanese investors have traditionally hedged

their foreign assets less than other major investors. This leaves foreign JPY

selling to hedge the +2.78% gain in Japanese equities to dominate the signal."