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Foreign Exchange

15 July 2011

FX Weekly: EUR Struggles to Rally


Currency Summary FX and the US Debt Ceiling EUR Rebound Requires Bond Market Solution Opposing QE mindsets to weigh on USDJPY Asian Financial Decoupling Brazil: The Inefficiency of FX Measures Weekly FX Global Bias Indicators Medium Term Recommendations Volatility Cones Correlation Economic Calendar FX Forecast Contacts 2 4 6

Eurozone bond market concerns have dominated markets this week and will present barriers to EUR rallies. The potential for QE3 in the US will refocus attention on US economic data with slower growth equalling a lower USD. Trading in local market assets will continue to be determined by developments in the US and the eurozone. FX Weekly Strategy: G10 Summary
Foreign exchange markets have this week needed to balance the debt crisis in Europe against renewed expectations that the Fed stands ready to implement QE3 if required by the US economy. Of the two issues, we attach greater weight to concerns surrounding the eurozone bond market, suspecting that further bond market disruption will weigh on the EUR. The potential for QE3 in the US will refocus attention on US economic data, with slower growth equalling a lower USD. Foreign exchange markets remain very event focused, seeking an official policy response from European officials to stem the involvement of Italy in the bond market malaise and to reduce, or preferably arrest, the risk of contagion to other eurozone countries. Until a credible policy response calms market fears, we expect the EUR to remain under pressure and believe that rallies will not extend far. The surge in safe haven currencies, especially JPY and CHF, reflects these fears. These currencies are now at levels where official currency intervention is a risk. If unilaterally implemented, we believe that such action is unlikely to produce a sustained weakening of these currencies until a successful policy response is implemented to the eurozone bond market malaise. Against the backdrop of joint EU and US woes markets continue to seek alternatives. In addition to the two main safe-haven currencies already mentioned, AUD and NZD have held up well. This pairs link to commodity prices will likely continue to lend support although emerging concerns about the Australian economy may present a near-term risk. Our economists continue to expect further tightening from the RBA, which if implemented, should lend further support. In the current uncertain environment we continue to favour short EUR crosses (short EURCAD, short EUR/JPY), long NOKSEK and short GBPAUD.

9 11 13 16 19 20 21 22 23

Local Markets Strategy


Given quite an eventful week in both Europe and the US, CEEMEA assets have been quite volatile lately. As such, there has been a great deal of focus shifting to the CEE region where concern is growing over credit. We think that the risk in the coming days will continue to come from debt issues in Europe and the US which could feed through to a further sell-off in local market assets. We think that both the PLN and the RON offer value at these levels but given the external uncertainty, we think that risk-reward in the near term is not favourable. Despite this however, funds continue to flow into emerging market assets which has helped to contain the sell-off in EM currencies seen thus far. Also, few signs of a hard landing for Chinese growth have helped to push Asian currencies to new highs against the USD. In Latam, growth remains robust as a whole although Mexico is emerging as a weak spot with growth moderating. We therefore see potential for MXN underperformance against the CLP. We also like to resume short USD/PEN ahead of the expected nomination of market-friendly names at the end of the month.
IMPORTANT NOTICE. Please refer to important disclosures found at the end of this report. Some sections of this report have been written by our strategy teams (shown in blue). Such reports do not purport to be an exhaustive analysis and may be subject to conflicts of interest resulting from their interaction with sales and trading which could affect the objectivity of this report.

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Weekly Currency Summary


Europe
EUR CHF GBP NOK SEK
EUR remains hostage to developments in peripheral Europe. Negative headlines have weighed on peripheral CDS and bonds pushing EUR lower. Rumours of a European Summit on Monday and Tuesday may allay some concerns, but the market is looking for a resolution on Greece and Italy. Uncertainty means that the EUR remains vulnerable. The strength of CHF against both the USD and EUR has sparked concerns that the SNB would intervene or introduce capital concerns. However, our view is that neither is likely. CHF serves as the safe haven, i.e. anti EUR and USD, trade. As long as there is little progress made on the European debt crisis, then EURCHF will remain under pressure. Despite the weak data out of the UK, GBP has held up well against both USD and EUR. This has been a function of the concerns surrounding the US and Europe. GBP may come back under pressure this week with the release of the MPC minutes on Wednesday, which is likely to tilt to the dovish end. With no data out this coming week, EURNOK will remain dependent on developments within the eurozone. However, if risk sentiment takes a turn for the worse, we would prefer to be long NOKSEK. SEK has also been driven by risk appetite and eurozone concerns. The domestic outlook overall looks favourable. The recent EURSEK high of 9.27 is within sight.

Converging Europe, Russia and Israel


PLN CZK HUF RON RUB TRY ILS
The zloty lost more than 2% against euro this week on the back of domestic factors such as declining inflation and renewed eurozone debt worries. The week ahead will also be eventful for the zloty as employment, wages, industrial output and PPI data are scheduled for 18, 19 and 20 July respectively. The koruna was also weak, sliding 1.4% against the euro to 24.485. The CPI growth slowed down to 1.8%, and the industrial PPI declined to 5.5%, which caused the rate hike bets to be scaled back. The fundamentals of the economy are solid, but the growth outlook is bleaker. The EURCZK will remain range-bound on lack of new data. The forint was sold-off this week, and EURHUF jumped 2.65% this week to 270.75. Headline inflation in Hungary also eased-off to 3.5% y/y; however, we dont think that the rate cuts that are currently priced in are an option given the worsening risk assessment (as implied by the jump in CHFHF above 230). We think EURHUF, however, will be capped at 275 for the time being. The RON has weakened on the back of problems in Italy. Italian banks presence in the country has compounded already high exposure to Greece. 4.30/EUR is a very strong resistance, which we think will be reinforced by the NBR, if reached. Yet, given a lot of event risks on the horizon, we do not think it is the right time to enter leu longs. The RUB has not been very volatile in the last couple of weeks, considering whats been happening to EURUSD. This could create a sense of stability encouraging long positions, but we remain worried about capital outflows, which continued in H1. We expect the RUB to be range-bound in the coming weeks, and we would buy USDRUB around 27.75 for a target of 28.40. The TRY continued to decline at the same pace as the last couple of weeks, losing 1.3% against the USD. The current account deficit remains at the highs for May, whereas the budget accumulated a healthy surplus of USD 3.1bn. The CBRT is likely to remain on the dovish side on 21 July, putting further pressure on the lira for the time-being. The ILS weakened 0.85% against the dollar as the developments in Europe continued to weigh on the risk appetite for emerging market assets. The CPI for June was broadly in line with expectations, which could allow the central bank to stay on hold for another month.

America
USD CAD
USD should remain under pressure as the 2 August deadline nears. Rumours of USD 1.5trn in spending cuts were not enough for the markets as US Treasuries sold off. Politicians will have to come up with a more credible package to help USD regain momentum. This will be hard given the weak US data. While the CAD has generally benefited from underlying USD weakness, the BoC meeting on 19 July will be crucial for CAD for any change in rhetoric. The market is currently pricing in about 45bps over the next 12 months. Nevertheless, CAD will remain dependent on the performance of equities, oil and overall sentiment.

EMK America
BRL CLP MXN COP PEN VEF ARS
Afters weeks of speculation, the government finally announced more FX measures to further limit banks short USD position in the spot market. We reinforce our view this will not affect BRL on a fundamental level but will artificially create lower volatility in the BRL. Option structures designed to take advantage of the large carry is recommended. Despite BCChs decision to pause the hiking cycle, the tightening bias was maintained. CLP is likely to remain bid. Copper prices have rebounded recently and are holding firmly. We like short MXN/CLP. With several uncertainties surrounding the US economic outlook, a more structural MXN appreciation trend will be postponed. In fact, we would expect some underperformance of MXN against its Latam peers in the coming weeks. COP strength this week was surprising. We expect intervention to intensify, starting with verbal intervention and then more effective actions. We like COP fundamentally and wait for a correction to sell USD/COP. Fundamentals remain favourable for PEN. Foreigners exposure is extremely light in PEN, and odds of a marketfriendly cabinet of the president-elect Humala are high. We sell USD/PEN. The current level of oil prices is enough to give the government some extra time before announcing another devaluation of the VEF, which we expect to take place at the beginning of 2013, following presidential elections in December 2012. As the election approaches, we would expect the BCRA to intensify its intervention in the spot market to assure just a gradual ARS nominal depreciation. Private sector USD outflow gains momentum ahead of elections. We are neutral ARS.

FX Weekly
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Asia
YEN
A perceived lowering of the barrier to QE3 has seen the yen break lower to mark a post-intervention low. The authorities will not be happy, but any intervention will have to be solo given the improving situation in Japan and the troubles in Europe and the US. Record retail account short yen positions raise the stakes particularly if a move below the 78 level coincides with low liquidity on Mondays Japanese holiday.

EMK Asia
SGD
SGD was well in-demand acting as a safe-haven currency. This was evident by the SDG 1bn bond sale of Cheung Kong Holdings & Wharf Holdings, which was snapped up within a day. A weak Q2 GDP failed to reverse the strength of SGD, as USDSGD fell to a new historic low. Data in the week ahead include June NoDX. We maintain a short tech USDSGD position from 1.2410 with a trailing stop at 1.2250. USDMYR swung between 3.0000 to 3.0400 this past week. Political protests failed to have any lasting impact on MYR. The week ahead sees June CPI and mid-July FX reserves, both of which should be positive for MYR as a higher CPI supports a stronger MYR with more monetary policy tightening a possibility. We took profit on our short USDMYR tech position at 3.0250. The 200-day MA provides a good cap, and we look to resell USDMYR on rallies to this level, currently at 3.0563. IDR is much preferred in these uncertain times; high yields, a stable economy and positive credit story propels foreign investors to increase their holdings in Indon bonds, unhedged. A reduction in foreigners limits on Indon banks make for headline grabbing news, but the impact on the IDR is expected to be limited as foreign sales will likely be spread over two years when the decision is announced. We have taken profit on our short USDIDR position at 8560. We see consolidation between 8500 to 8600 but would buy IDR on a rally above 8600. USDTHB sank in a holiday-shortened week, as the BoT delivered a 25bp rate hike and hawkish comments kept open the door to more rate hikes. Thai stocks remain firm. June trade data is due in the week ahead. Key support is at 30.00, where the central bank was reported to have stepped in to support USD. A break is technically bearish, restarting the USDTHBs bearish trend. Strong fundamentals driving PHP remain solidly in place: the BSP revealed that some USD 9.1bn of hot money flowed into the country in H1 2011, more than double the USD 4.4bn posted a year ago. In addition, OFW inflows rose a robust 4.5% m/m, 6.9% y/y to USD 1.69bn in May, Strong capital inflows will continue to support PHP, which remains well-capped by the 100-day MA, currently at 43.27. June BoP and budget deficit are scheduled next week. USDHKD continues to move inversely to the Hang Seng Index; risk aversion is leading to a stock sell-off, driving USDHKD higher. FX flows were light this past week. Unemployment rate and CPI will be released this week. China posted stronger-than-expected growth and higher inflation in June, abating fears of a hard landing. No signs of any significant slowing, combined with hot money inflows and FX reserve accretion soaring USD 150bn in Q2, suggests that more credit tightening measures cannot be ruled out. Fast money bought 1x6M NDF and sold some 3M NDF while real money sold 1M NDF. Oil companies buying of USDCNH persists. We stay with our short 1Y CNH DF vs. 1Y CNY NDF. HSBC flash manufacturing PMI will be released next Thursday. USDTWD traded in line with the equity market where foreign investors were net-sellers month-to-date. The pair met strong resistance at 29.00 and the 100-day MA at 29.02. We maintain a technical short position established at 28.70 with a stop at 29.20. Reportedly, the CBC is still paying 1M to 3M FX swaps while lifers rolled over their FX swap positions in 2M to 6M tenors. Data due this week include export orders and unemployment rate. Fundamentals for the economy remain solid as the unemployment rate held at a six-month low of 3.3% last month. Mortgage loans were robust while household loans jumped to a seven-month high in June. KRW hit a fresh high. We maintain our short USDKRW tech position with a protective stop at 1070. Potential intervention could slow KRW gains below 1050, but as the risks for the USD grow, KRW will benefit at its expense. It was a choppy week for USDINR given external uncertainties. With WPI expected to stay firm as fuel price hikes lift prices, OIS yields softened on the back of the global flight to safety. With no data due in the week ahead apart from the weekly WPI prints, the INR will depend on external developments with 44.00 to 45.50 staying intact. Gold exports helped to reduce the trade deficit in H1 by 16%. We expect VND to hold strong against USD given the uncertainty surrounding the US debt negotiations. State-owned firms remain reluctant sellers of USD, preventing VND gains. As such, expect USDVND to remain range bound in the week ahead.

MYR

IDR

THB

PHP HKD CNY

TWD

KRW INR VND

Oceania/Africa
AUD NZD ZAR
AUD remains somewhat vulnerable to bouts of risk aversion, but medium term,m we remain optimistic. The travails of the globe's two most important currencies mean that investors are increasingly running out of places to park their cash. We continue to see inflows into commodity currencies, and we expect dips in AUD to remain shallow as it remains supported by the sovereign bid and by mining investment inflows. Kiwi continues to outperform its cross-Tasman cousin as relative expectations for rate hikes are repriced. While NZDUSD remains at risk from further risk aversion, we continue to see outperformance against AUD and European currencies as insurance and sovereign inflows lend support. ZAR was one of the worst-performing currencies this week, losing 3.1% against the dollar, mostly on the back of risk aversion and weaker-than-expected manufacturing and mining growth numbers. CPI for June and retail sales for May on 20 July will be crucial ahead of the SARBs meeting on 21 July. Dovish stance could weaken ZAR further.

FX Weekly
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FX and the US Debt Ceiling


Moodys has followed through on its threat to place the USs AAA rating on review by midJuly, again highlighting the severity of the consequences of not reaching an agreement to raise the debt ceiling. We examine the likely consequences on FX markets both of a deal and the failure to agree. We see agreement as broadly positive USD; but the real impact on FX markets would come from inclusion of a second Homeland Investment Act as part of an agreement. Chart 1: USD Debt-to-GDP Projections (%)
200 175 150 125 100 75 E xte nded-B aseline S cen ario 50 25 0 2000 2005 2010 2015 202 0 202 5 203 0 50 25 0 203 5 A lternative Fisc al S cenario A c tual P rojected 200 175 150 125 100 75

FX and the US debt ceiling With time ticking away towards 2 August, when the US Treasury runs out of cash, the negotiations over the US debt ceiling are finally getting serious. Talks continue this week, with Moodys adding to the pressure to reach agreement. We examine the currency implications of a deal and of a failure to arrive at one. Scenario 1: No deal In short, potentially disastrous. Ironically, the USD would likely benefit as investors dump risk assets on uncertainty, possibly also driven by huge deleveraging of positions as the collateral system falls apart. Other safe-haven currencies would also benefit, but perhaps the clearest winner would be gold. A failure to honour debt commitments would lead to a downgrade of the US, with implications for funds that are restricted to AAA. The combination of higher yields, deleveraging, volatility and economic uncertainty certainly has the potential to derail the US recovery and indeed the global one. A less calamitous scenario would see the Treasury pay investors but stop other payments, but the politics of such a decision means this could not be sustained for more than a few days. Thankfully, both sides seem to have recognised the dangers of not reaching a deal and this scenario now seems highly unlikely. Scenario 2: Postponement If no long-term agreement is possible, the most likely path would now seem to be a postponement of the issue despite Obama's stated opposition. This would see the debt ceiling raised by a relatively small amount, and the decision could be put off until the end of year. This would likely be the most negative outcome for the USD: the risks would be
Robert Ryan FX Weekly

Source: Congressional Budget Office

Chart 2: USD TWI versus US FDI flows

Source: Reuters Ecowin Pro

averted (at least temporarily) but the US would appear indecisive and unwilling to tackle the fiscal issues. Scenario 3: Agreement reached The FX implications of a deal will depend upon what makes up the agreement. One element will be the degree of near-term fiscal tightening (whether through spending cuts or tax hikes): the more tightening, the more likely the Fed will have to step in with QE3. This aspect is clearly USD negative, risk positive. But this needs to be offset by the extent to which the agreement credibly addresses the longterm fiscal issues confronting the US particularly Medicare and Social Security. If the deal is seen as restoring the sustainability of American finances, renewed confidence in US assets as a long-term store of value will benefit the USD. We would expect the biggest loser in this case to be the EUR as FX reserve diversification slows. But from an FX perspective, the most important element of any agreement, far outweighing any sentiment factors or economic implications, will be
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whether it includes a second Homeland Investment Act. Political opposition to this seems to have evaporated, and we no longer see this as farfetched. We would expect a re-run of the 2005 tax holiday to see repatriation flows at least match the USD 300bn estimated last time. And given the nearzero returns on the USD and the weaker USD trend, we would expect a significant portion of this cash to be held in foreign currencies. Passage of "HIA II" would be enough to have us revise our call for EURUSD at 1.50+ in H2 2011, suspecting it could be worth as much as a 5% lift for the dollar versus our current baseline forecasts. Although actual corporate FX flows would likely not occur before 2102, FX risk takers would likely move well ahead of this.

Robert Ryan FX Weekly

Friday, 15 July 2011 http://www.GlobalMarkets.bnpparibas.com

EUR Rebound Requires Bond Solution


The relatively large size of Italian government debt creates a far greater challenge for officials. In the absence of a credible policy response, yield valuation signals the EUR will stay weak. STRATEGY: Until European officials successfully contain fears of further contagion on euro debt, we recommend selling rallies in the EUR. We favour short EUR/JPY and EUR/AUD. Chart 1: Gross Government Debt (EUR bn)

Developments in European bond markets, especially Italy, remain the principle driver of the EUR so far this week. This situation will likely continue until a return to orderly bond market conditions encourages a refocus on the tight relationship between relative yields and EURUSD that has dominated over recent months. The FX markets shift to focus on Italy creates a greater challenge for policymakers in allaying concerns given the significantly larger size of Italian general government debt relative to Greece, or even Spain. According to 2010 data Greeces total stood at EUR 329 billion, Spains at EUR 638 billion while Italys total is several times larger at EUR 1.83 trillion (Chart 1). Italy stands second only to Germany in the eurozone and is far larger than Spain. This difference highlights the escalation of the problem compared to the recent focus on Greece. We, like most market participants, are awaiting a response from European policymakers but the silence is disappointing. Of particular concern is the gulf between official comments that still relate to Greece and the markets need for reassurance on Italy and potential further contagion. We wonder whether the escalation of concern now requires strong action such as an expanded role for the EFSF perhaps entailing buying bonds on the secondary market. Reflecting the concerns in the peripheral eurozone bond market, safe-haven demand for core European bonds (namely Germany) has reduced core Europes short-term yield advantage relative to the US. Our short-term valuation indicator now suggests that EURUSD is fairly valued at close to 1.40 (Chart 2). Accordingly, if eurozone concerns are successfully allayed by policymakers over coming sessions, there will likely be an unwinding of these flows from Germany back to the periphery members.
Steven Saywell FX Weekly

Source: Reuters Ecowin Pro

Chart 2: EURUSD vs. EU US 2y Swap Spread

Source: Reuters Ecowin Pro

For EURUSD, and related EUR crosses, near-term rallies are unlikely to run far in the absence of a policy solution to the situation. We remain sceptical of such a near-term solution being implemented given the discomfort that several member states have with the concept of combining fiscal responsibilities or fiscal union. Indeed, comments on the sidelines of this weeks Eurogroup meeting of finance meetings have been contradictory. The Luxembourg finance minister said that a selective Greek default is not an option while EU Commissioner Olli Rehn signalled agreement on investor participation in a second Greek bailout.

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Opposing QE Mindsets to Weigh on USDJPY


The BoJ continues to dismiss the option of QE while the Fed is keeping its options open. This influences Japanese behaviour, suggesting further downside looms. hedging USDJPY Chart 1: JPY NEER and long-dated US money market futures rally in tandem
9 9 .5 99 9 8 .5 98 9 7 .5 97 9 6 .5 96 9 5 .5

U S 6 Q tr A h e ad rate fu tu re 6 q tr a h ea d rallie s...

120 115 110 105 100 95

A coordinated G3 policy response remains unlikely as the JPY in real terms is far from extreme levels. Japan may have to tolerate further USDJPY declines.

a s d o es JP Y N E E R

90 85 80

BoJ vs. the Fed: opposing mindsets on QE Raising inflation expectations would appear to be desirable for both the BoJ and the Fed. Japan remains plagued by deflation while the US has managed to reverse its core-disinflationary trend. However, policymakers attitudes towards solving their respective problems differ immensely. Even with Japan experiencing an economic shock on account of the earthquake/tsunami in March, Bank of Japan Governor Shirakawa continues to oppose QE. He claims that quantitative easing cannot tackle the associated supply shock. Shirakawa on Tuesday reiterated to a parliamentary committee that the central bank should not monetise debt in other words, print money to finance fiscal spending. It seems clear that Shirakawa believes Japans prior experiment with QE failed to produce a sustainable positive effect on the economy although the weaker JPY may have been beneficial. Still, as USDJPY breaks below 79, Shirakawa argues that while a stronger JPY may hurt in the short run, it actually helps the economy in the longer run. However, things are very different in the US. This weeks FOMC minutes and Chairman Bernankes report to Congress have been interpreted by market participants as more dovish than previous rhetoric. Markets are reassessing the view that the bar to QE3 has been set extremely high. While our economists continue to see prospects for QE3 as significantly less than 50%, even the Feds indication that it remains a potential policy option stands at odds with the Bank of Japans stance. We believe that this divergence of attitude towards QE will exert further downward pressure on USDJPY, especially by influencing the hedging behaviour of Japanese investors. Chart 1 compares interest rate futures (six quarters ahead 3-month Eurodollar contracts) set against the JPY nominal effective exchange rate (NEER) index. The chart
Kiran Kowshik FX Weekly

O c t- A p r- S e p - F e b - J ul07 08 08 09 09

J an- J un- N o v- M ay- O c t10 10 10 11 11

Source: Bloomberg, BNP Paribas

Chart 2: USDJPY plunges to new record lows even as JPY REER is still weak
170 160 150 140 130 120 110 100 90 80 135 155 115 55

JP Y B o J R E E R S till very w eak (R H S In verse S cale) .

75 95

as U S D JP Y p lu n g es to n ew d ep th s
175 A p r-9 7 A ug -0 0 D e c -0 3 A p r-0 7 A ug -1 0

70 A ug -9 0 D e c -9 3

Source: Bloomberg, BNP Paribas

suggests that, since the Fed finished lowering interest rates towards the zero bound and moved to QE at the end of 2008, the JPY has been influenced by US interest rate expectations some two years out. As interest rate expectations move further into the future, Japanese investors can continue to cheaply hedge USD investments (selling USDJPY forward). This action will likely prevent independent JPY weakness such as that seen before 2008. Chart 2 demonstrates that much of this USDJPY decline is attributable to independent USD weakness. Even as USDJPY breaks below 80, the JPY remains well below recent highs in real trade weighted terms. The difference is the appreciation of neighbouring Asian currencies that have become more significant to Japan in trade-weighted terms. Asian FX weightings in the JPY REER have risen by 10 percentage points since 2000.

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Assuming Asian currencies continue to appreciate as we expect, Japan may be insulated from the full effects of a lower USDJPY. What can Japanese authorities do about it? Japans hands seem tied. With the Japanese finance minister accepting the BoJs view that debt monetisation by the central bank (i.e. JPY-weakening QE) should not be allowed, FX intervention remains the clear policy alternative. However, unilateral intervention tends not be successful unlike coordinated attempts such as in March. However, with the US maintaining the policy option of QE3 and the eurozone suffering from debt market woes, coordinated intervention does not seem to be a likely option. Further USDJPY downside seems highly likely.

Kiran Kowshik FX Weekly

Friday, 15 July 2011


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Asian Financial Decoupling


Both USD and EUR are suffering from a lack of credibility. Asian, AUD and NZD currencies may represent a different sort of safe haven and continue to outperform as a consequence. Chart 1: EURUSD vs AUD, KRW

We note with interest the remarkable resilience of traditional risk currencies, particularly the AUD, NZD and Asian currencies, in the face of recent stresses. Whereas in the past a risk-off moment such as this week's Italy-related stress would have been expected to result in a more significant position unwind, there has been little evidence of rushed selling this time. Indeed, both SGD and NZD made new all-time highs against the USD yesterday. Stillstrong Chinese growth supports the well-worn theme of Asian economic decoupling. But the solid balance sheets rebuilt after and in response to the Asian crisis, offer a reassurance sorely lacking in the G4 currencies. Perhaps what we have witnessed over the past few weeks is supportive of the notion of financial decoupling. Flows into the region remain robust as evidenced both by measures of hot money into China, but also from more respectable sources such as EPFR. But with investable assets thin on the ground, real money managers have been reluctant to disengage from the one major region that offers both yield and growth. Regional central banks have helped ease the decision: periods of stress earlier in the year saw authorities dampen volatility on the topside the message has been that while rapid appreciation may not be allowed, neither will rapid depreciation. Massive reserve holdings back up that compact. And those reserve holdings have a second part to play. Against the backdrop of joint EU and US woes, the traditional reserve currencies are increasingly questioned. The role of the EUR as the globes antiUSD is undermined by the current debt crisis and by the weak policy response from European politicians. So while the USD looks unattractive as the Fed edges towards yet another currency-debasing round of QE, market appetite to assume yet more Eurozone risk appears limited, hawkish EBC notwithstanding. These two currencies make up 87.3% of those global reserves for which breakdowns are provided to the IMF; indeed the currencies of the UK and Japan hardly in better fiscal shape and, in the case of the UK, just as exposed to a Euro-calamity make up another 7.9%. Where does a Reserve Manager in search of safety go? Alternatives are limited by lack of depth
Robert Ryan FX Weekly

Source: Reuters EcoWin Pro. Reactions in AUD and KRW markets to eurozone stresses have so far been relatively contained this time around in contrast to the reaction in May last year. Both Korea and Australia have made efforts to wean their banking systems off short-term financing over the past year, but the greater factor behind the resilience is likely that the USD in he meantime has initiated and completely QE2 and may now be headed for QE3. In the meantime the growth and stability of Asia continues to attract investors.

Chart 2: FX Reserve Shifts

Source: Reuters EcoWin Pro. The IMFs COFER data detail shifts in the currency composition of official reserves at least for those reserves whose composition is disclosed to the IMF. A slow fall in USD holdings in favour of the EUR was evident for much of the last decade after the introduction of the EUR. However since the financial crisis, that shift has been not into EUR but into other currencies (which does not include GBP, JPY and CHF these are also broken down separately). We assume that AUD and CAD make up a large portion of these others, with NZD also featuring.

and liquidity in many markets, but since mid-2009, the Other Currencies component of reserves has jumped from 2.2% of the total to 4.7% in Q1 this year. AUD, and indeed NZD backed in some sense by the hard currency that is commodities have undoubtedly benefited. Against this background of stable growth and stable financial markets, investors may be re-examining the concept of the traditional safe haven. Certainly the CHF, JPY and Gold are likely to continue to
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outperform in periods of financial stress. And a more significant event shock along the lines of the Lehman crisis would probably still see USD benefit from a large deleveraging-driven bid. But in the meantime, with both USD and EUR suffering from a lack of credibility, Asian, AUD and NZD currencies may represent a different sort of safe haven and continue to outperform as a consequence.

Robert Ryan FX Weekly

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Brazil: The Inefficiency of FX Measures


Despite several measures and actions announced by Brazilian authorities, BRL kept its firm appreciation trend over the past year. In fact, it is also hard to say that any kind of underperformance in such appreciation trend was seen against other EM currencies. Capital mobility was maintained, even if at higher costs, which keeps BRL trending in line with fundamentals. More FX measures should be expected if USD/BRL keeps breaking lower, reducing a bit the pace of BRL appreciation in the near term. STRATEGY: We recommend a bullish BRL strategy using options. We like a combination of long 2-month USD/BRL 1.620 put RKO 1.5250 with a short 2-month USD/BRL 1.632 call. This is a zero-cost strategy based on the spot ref. at 1.575. Why doesnt BRL weaken after all those FX measures and capital controls? Since October 2010 (Table 1), Brazil took the lead on the currency war and announced several measures with the clear objective to weaken the BRL (or at least, to reduce the BRL appreciation trend). The macro-prudential adjective was used to classify basically all of them. The inefficiency of those measures to produce any sort of BRL underperformance was clear (Chart 1), but authorities continue to announce more measures. Our base scenario is that the outcome will be just the same as the one in the past. This means BRL will continue to trade on fundamentals connected to the international environment as we wrote in the article Capital Account Flows Pushing BRL Higher in the Local Markets Mover edition of 10 June 2011. Not all of the measures announced were designed to block the USD flow in the Brazilian balance of payments. The measures just increased the cost of transaction for certain assets, like purchasing domestic bonds, or when a Brazilian company issues short-term debt abroad. The capital mobility was preserved, and that is the simple and objective reason why BRL continued to move in tandem with fundamentals. The increased cost to sell USD/BRL was counterbalanced by the hiking cycle by the BCB. The comparison with the implied 1-month annualized yield in the NDF USD/BRL curve and the base rate Chart 1: BRL and Selected Peers Performances against USD (12-month change, %)
AUD 21 .8

CLP

1 5.6

BRL

1 .7 1

ZAR

1 0.6

MXN

8.5

COP

6.5

Source: Bloomberg, BNP Paribas

Chart 2: USD/BRL NDF Implied Yield vs. Base Rate Differential Between Brazil and US (%)
35 30 25 20 1 5 1 0 5 0 Jan-05 A pr-06 Jul-07 Oct-08 Implied 1 NDF -m USD/B RL Yield Jan-1 0 A pr-1 1 Selic Rate minus Fed Funds

Source: Bloomberg, BNP Paribas

differential between Brazil and US helps to illustrate that (Chart 2). In the end, the maximum the government did was to prevent an additional increase in the attractiveness of the BRL. As for direct intervention in the FX market, BCB resumed buying USD/BRL in the derivative market via reverse currency swaps (a.k.a. SCC). The inefficiency of this instrument is explained by its simple nature. It is a currency swap, and in the future, BCB will have to deal with the rollover pressure of this instrument. If nothing is done, it will work as if the BCB were selling USD/BRL back to the market. The maximum one could argue is that BCB would be able to rollover this instrument forever, which is not a plausible assumption, actually. The example of the USD 1.7bn maturing on 1 June is perfect. BCB did not roll it over and the USD/BRL just collapsed from 1.63 to 1.58 in the last week of May.
Friday, 15 July 2011 http://www.GlobalMarkets.bnpparibas.com

FX Weekly

11

Summary and Strategy Capital controls are ineffective in changing the fundamental trend of the currency when they keep capital mobility, even if at a higher cost. We should continue to expect the government to introduce more measures if the USD/BRL breaches the 1.55 handle to limit the pace of BRL appreciation. We recommend a bullish BRL strategy using options. We like a combination of long 2-month USD/BRL 1.620 put RKO 1.5250 with a short 2month USD/BRL 1.632 call. This is a zero-cost strategy based on the spot ref. at 1.575.

Table 1: Summary of Brazil FX Measures since October 2010


Date 4-Oct-10 Measures Description IOF tax was hiked from 2% to 4% for foreign investments in fixed-income assets

18-Oct-10 IOF tax was hiked from 4% to 6% for foreign investments in fixed-income assets 18-Oct-10 IOF tax rose from 0.38% to 6% on non-residents margin deposits for derivative contracts 6-Jan-11 BCB introduced limits to banks' USD short exposure in the spot market (minimum amount between USD 3bn and banks' net equity) - starting on April 4

14-Jan-11 BCB resumed intervening in the derivative market, buying USD in reverse currency swaps 29-Mar-11 IOF was hiked from zero to 6% for external loans up to 360 days 6-Apr-11 8-Jul-11 IOF was hiked from zero to 6% for external loans up to 720 days BCB limited further the banks' USD short exposure in the spot market (minimum amount between USD 1bn and banks' net equity)

Source: BCB, Ministry of Finance

FX Weekly

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Friday, 15 July 2011 http://www.GlobalMarkets.bnpparibas.com

BNP Paribas Weekly FX Global Bias Indicator*


Chart 1 : Weekly Global Bias Indictor
10 8 6 4 2 0 -2 -4 -6 -8 -10 BNP Paribas 2011 - All Rights Reserved

Chart 2 : Weekly Global Bias - Momentum


6 4 2 0 -2 -4 -6 -8 JPY GBP USD EUR CHF AUD CAD SEK NOK
+16 equals strongest reading/-16 equals weakest reading

BNP Paribas 2011 - All Rights Reserved

CHF JPY CAD USD AUD EUR GBP NOK SEK +8 equals strongest reading/-8 equals weakest reading

Weekly Global Bias Indicator SEK reclaimed its position at the bottom of the rankings Last week the weekly Bias Indicator gave the first hint of renewed SEK selling. These bearish signals have continued this week with the SEK having now reclaimed its extreme bearish position within our medium term trading systems. Although the SEK is approaching a bearish extreme, the medium term models are still giving a negative momentum reading. This negative picture is also reflected within the readings of the Daily Bias Indicator, which shows the SEK as the overall weakest currency within the system of short term models. Hence would now expect the SEK to resume its recent downtrend over the coming week. NOK sliding down the rankings The NOK has declined sharply in the overall rankings of both the Weekly and Daily Bias Indictors. The NOK is now also starting to develop strong negative momentum within our medium term models, suggesting this decline looks set to continue over the coming week. Hence, we expect the NOK to remain under broad based pressure. CHF still the overall strongest The CHF has maintained its position as the strongest currency within our system of medium term models, within the Weekly Bias Indicator close to a bullish extreme. Although the Weekly Bias Indicator is showing some slight negative momentum currently for the CHF, it is interesting to note that the CHF is now developing renewed bullish signals within our system of short term models. We expect the CHF to maintain its bullish trend. Bullish momentum supports further JPY buying The JPY is developing some of the most bullish momentum within our system of medium term models. Also the JPY has moved rapidly up the overall rankings within the Weekly Bias Indicator, from a neutral position seen last week to a relatively bullish position currently. But the extent of bullish momentum suggests the JPY may move into a stronger positive position in the overall rankings in the coming week. This implies some further gains in the near-term at least. Indeed, the Daily Bias Indicator is also giving JPY bullish signals. GBP looks set to extend its recent rally over the coming week. Our Daily Bias Indicator had been showing sterling developing positive momentum while also recovering up the overall rankings to give a short term buy signal. These recent short term positive signals are now being reflected within the Weekly Bias Indicator suggesting the medium term outlook for the GBP is also positive.

These readings suggest long GBPNOK, GBPSEK, NOKJPY and SEKJPY over the course of the week.

*BNP Paribas FX Strategy Global Bias Indicators are derived from our system of technical trading models and are designed to provide an indication of the overall strength of individual currencies. Bias Indicators at extreme bullish or bearish levels have historically proved to be good leading indicators of corrections or turning points in the underlying spot rate.

FX Weekly
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Friday, 15 July 2011 http://www.GlobalMarkets.bnpparibas.com

BNP Paribas Weekly FX Global Bias Indicator


Chart 3 : EUR Bias Indicator and EURUSD
8 6 4 2 0 -2 -4 -6 1.41
Bearish Extreme Bullish Extreme

Chart 4 : GBP Bias Indicator and EURGBP


2

1.49 1.47 1.45 1.43

1 0 -1 -2 -3 -4 -5 -6 -7 -8 -9

Bullish Extreme

0.860

0.870

0.880

0.890

0.900
Bearish Extreme

-8 Mar-11

1.39 May-11

0.910 May-11

Mar-11

BNP Paribas EUR Indicator

EURUSD (rhs)

BNP Paribas GBP Indicator

EURGBP (rhs)

Chart 5 : JPY Bias Indicator and EURJPY


8 6 4 2 0 -2 -4 -6 -8 121.00
Bearish Extreme Bullish Extreme

Chart 6 : CHF Bias Indicator and EURCHF


9 8 7 6 5 4 Bullish Extreme 1.14 1.16 1.18 1.20 1.22 1.24 1.26 1.28 Bearish Extreme May-11 1.30 1.32

109.00 111.00 113.00 115.00 117.00 119.00

3 2 1 0

-10 Mar-11

123.00 May-11

-1 Mar-11

BNP Paribas JPY Indicator

EURJPY (rhs)

BNP Paribas CHF Indicator

EURCHF (rhs)

Chart 7 : AUD Bias Indicator and EURAUD


8 6 4 2 0 -2 -4 -6
Bearish Extreme Bullish Extreme

Chart 8 : CAD Bias Indicator and EURCAD


5 3 1 -1 -3 -5 -7
Bearish Extreme Bullish Extreme

1.31 1.32 1.33 1.34 1.35 1.36 1.37 1.38 1.39 1.40 1.41 May-11

1.34 1.35 1.36 1.37 1.38 1.39 1.40 1.41 1.42 1.43 1.44 May-11

-9 Mar-11

Mar-11

BNP Paribas AUD Indicator

EURAUD (rhs)

BNP Paribas CAD Indicator

EURCAD (rhs)

FX Weekly
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Chart 9 : CEEMEA Weekly Global Bias Indictor


5 4 3 2 1 0 -1 -2 -3 -4 -5 -6 ZAR BNP Paribas 2011 - All Rights Reserved
6 4 2 0 -2 -4 -6 -8 -10

Chart 10 : CEEMEA Weekly Global Bias Momentum


BNP Paribas 2011 - All

CZK

RON

HUF

RUB

TRY

PLN

ILS

RON

CZK

ZAR

RUB

TRY

HUF

PLN

ILS

Chart 11 : LATAM Weekly Global Bias Indictor


6 5 4 3 2 1 0 -1 -2 -3 -4 -5 CLP BNP Paribas 2011 - All Rights Reserved
6 4 2 0 -2 -4

Chart 12 : LATAM Weekly Global Bias Momentum


BNP Paribas 2011 - All Rights Reserved

MXN

BRL

COP

PEN

ARS

COP

ARS

CLP

PEN

BRL

MXN

Chart 13 :Asia Weekly Global Bias Indictor


8 6 4 2 0 -2 -4 -6 KRW SGD THB IDR PHP INR MYR TWD BNP Paribas 2011 - All Rights Reserved

Chart 14 : Asia Weekly Global Bias Momentum


8 6 4 2 0 -2 -4 THB SGD MYR KRW PHP TWD IDR INR BNP Paribas 2011 - All Rights Reserved

FX Weekly
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Medium Term FX Recommendations


Short EURJPY Spot Target Met
Sold at 115.10 targeting 112.00, multiweek, stop-loss at 117.15 With the trade being recommended on July 8th, the target was met on July 12 as EURJPY plunged sharply to a low of 109.58 following Moodys downgrade of Portugal and political uncertainty within Italy. We still remain negative on the EUR going ahead given a lack of ideology on private sector participation within Europe likely to stall any progress on the second Greek package. On the other hand, despite verbal intervention threats, we see little chance of immediate intervention with the stance inconsistent with monetary policy with the BoJ remaining staunchly against debt monetisation as they upgrade their economic assessment. Moreover, the more effective coordinated intervention card remains unlikely with the Europe and the US preoccupied in dealing with problems of their own. 08 July 2011

EURJPY 111.80

Short EURCAD Spot on a break


Sell on a break of 1.3440, target 1.3000, stop-loss at 1.3708. Our recommendation to sell EURCAD on an up tick on July 8th did not materialise given the sharp sell off in EUR. However, with spot still in a consolidation phase with the CAD temporarily weakening in tandem with the USD following the dovish FOMC minutes, we recommend sticking with the bearish EURCAD view. Consensus on Chinese monetary policy now has moved towards a neutral/easy policy bias with the decline in soft commodity prices helping. Our economists now look toward selective easing measures into Q3/ even as GDP/IP data shows China managing a soft landing. On the other hand, we continue to remain negative on the EUR going ahead with the Germans having put their foot down in negotiating a second Greek package, and consequently any resolution could take weeks- as opposed to days. Sell on a break of 1.3440. 15 July 2011

EURCAD 1.3520

Long USDJPY Strangle Opportunity Missed


08 July 2011 Look to enter long 1m strangle Trade was placed on a to do list in the first week of July however, entry was postponed after the nasty US non-farm payrolls report saw 1m implied vols fall further down to 8.0%. However, sure enough, volatility soared a good 2 percentage points in the following week following the contagion in Europe seeing safe haven flows flock to the JPY. We will continue to keep this trade on our radar as we feel that evolving market dynamics will continue to favour a USDJPY break out. We still have one more NFP print ahead of August 5 which will make or break whether the weakness seen in the labour market is temporary, or something more sinister. On the other hand, should USD weakness resume, we see little chance of intervention given FX policy at odds with BoJ policy views.

USDJPY 79.02

FX Weekly
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Remain Short GBPUSD Spot


Sold on a break of 1.5930, target 1.5350 multi-month, stop-loss at 1.6285. Our short position in Cable was activated on June 27th and gained traction at the begging of July breaking down to 1.5800. However, like other currencies Sterling has over the past week done well in terms of both EURGBP and GBPUSD given the problems in Europe and with the market having rushed to assumed a US QE3 following the FOMC minutes. However, with Bernanke having nuanced the debate, it suggests that QE3 while possible is not probable given the uptrend underway in US core CPI. In contrast UK CPI came in much softer than expected in June with core CPI declining from 3.3% to 2.8%. This plays to the BoE doves views that if anything, the risk for more QE seems greater than that of a rate hike. Cable should decline from the top of 1.5755-1.6180 down channel in place since end May. 24 June 2011

GBPUSD 1.6138

Book small gain on Short GBPAUD Options


Long Sep 23 1.53 put 1.45 RKO Vs. Short 1.63 Call. The position, now marks to market at 0.25% GBP notional (with 70 days left), down from 0.39% last week, though still above water. We opted to use a zero entry cost options structure in order to play a bearish GBPAUD view. However, the problem with this trade is it is fundamentally a carry trade, explaining the near 2 figure tick up in GBPAUD over the past week despite softer UK CPI figures. The 1.4500 KO was used to cheapen the entry cost assuming a grind lower (as opposed to a plunge). However, given wider signs of risk aversion, we would feel uncomfortable holding even the very OTM 1.6300 call option assuming scope for GBPAUD spot to extend further higher into next week. As a consequence, we opt to book a minor 0.2500% profit now and look at better levels to consider bearish GBPAUD trade opportunities. 24 June 2011

GBPAUD 1.5150

Long EURCHF Call Knocked Out


01 July 2011 Long Sep 30 1.22 Call, 1.28 KI, 1.17 KO Trade was recommended following the passing of Greek austerity measures in June end which had reduced the tail risk of immediate default. But renewed uncertainty followed after credit rating pronouncements on Portugal and political uncertainty within Italy resulted a breakout of contagion, seeing th the lower KO barrier taken out on Monday, July 11 . Moreover, in negotiating a second Greek package, the Germans have put their foot down and any resolution could take weeks- as opposed to days. With much damage already done with ItalianGerman spreads widening out (Chart alongside) and EURCHF will likely continue to remain under downward pressure. Risk reversals can continue to remain at 2.5 year lows, as fear continues to remain on the downside.

EURCHF 1.1525

FX Weekly
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Friday, 15 July 2011 http://www.GlobalMarkets.bnpparibas.com

Hold NOKSEK RKO Call Knocked Out


03 June 2011 Buy Aug 4 1.1485 Call 1.1905 RKO While the trade was making progress, the rampant risk aversion last week saw the SEK lose out disproportionately with the markets pricing in a liquidity squeeze. NOKSEK rallied to 1.1912 on August 12th, thus knocking out our call option. Option structure was recommended at over a 50% discount relative to the vanilla alternative. While we generally like the Scandies given their good fundamental characteristics, given we still have no clarity whether the sovereign crisis morphs into a liquidity crisis (with the Germans insisting on private sector participation), both SEK and NOK can under perform given their proximity to Europe.

NOKSEK 1.1685

July 21 1.05/1.01 AUDUSD Put to expire with loss


Jul 21 1.05/1.01 put spread bought at 1.05% The position MTM in the red at 0.16% with only six days left. While AUDUSD did manage to correct down to 1.04 late June deeming the trade in the money, the tone of the AUD has improved significantly after Chinas lending rate hike with a growing consensus that the tightening cycle is over. Locally, a solid June employment report helped though this has not impacted RBA pricing which could be more dependent on the CPI print would need come end July. 20 May 2011

AUDUSD 1.0650

Short NOKJPY Spot


Sell at market, target 13.50 with stop loss at 14.60. Look to trail stop. While we generally like the Scandies given their good fundamental characteristics, given we still have no clarity whether the sovereign crisis morphs into a liquidity crisis (with the Germans insisting on private sector participation), both can under perform given their proximity to Europe. However while SEK had borne the brunt, we suspect that NOK could be next should contagion persist in the Euro zone. On the other hand, we remain constructive on the JPY despite verbal intervention threats. We see little chance of immediate intervention with the stance inconsistent with monetary policy with the BoJ remaining staunchly against debt monetisation. Moreover, Japanese retail continue to remain very short JPY. 15 July 2011

NOKJPY 14.21

FX Weekly
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Friday, 15 July 2011 http://www.GlobalMarkets.bnpparibas.com

Implied Option Volatility Analysis


EURUSD Implied Volatility Curve and 1y highs & lows
18 16 14 13 11 10 8 1w 1m 2m 3m High/Low 6m 9m 12m

USDJPY Implied Volatility Curve and 1y highs & lows


23 22 20 19 18 16 15 14 13 11 10 9 7 6 1w 1m 2m 3m High/Low 6m 9m 12m

Current Imp. Vol.

Last Week Imp. Vol.

Current Imp. Vol.

Last Week Imp. Vol.

USDCHF Implied Volatility Curve and 1y highs & lows


17 15 14 13 12 11 9 8 7 1w 1m 2m 3m High/Low 6m 9m 12m

GBPUSD Implied Volatility Curve and 1y highs & lows


14 12 11 9 8 6 1w 1m 2m 3m High/Low 6m 9m 12m

Current Imp. Vol.

Last Week Imp. Vol.

Current Imp. Vol.

Last Week Imp. Vol.

AUDUSD Implied Volatility Curve and 1y highs & lows


21 18 16

USDCAD Implied Volatility Curve and 1y highs & lows

15 13 11

13

9
11 8 1w 1m 2m 3m High/Low 6m 9m 12m

8 6 1w 1m 2m 3m High/Low 6m 9m 12m
Current Imp. Vol. Last Week Imp. Vol.

Current Imp. Vol.

Last Week Imp. Vol.

*BNP Paribas FX Strategy: The above charts show the current volatility curves (1-week through to 1-year) for the major currency pairs in relation to the 1-year highs and lows for each of the tenor. FX Weekly
19

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Majors
EURUSD GBPUSD USDCHF OIL
0.52 0.46 0.09 0.33 0.25 0.04 0.87 0.78 0.68 0.5 0.48 0.3 0.09 0.4 0.26 0.03 0.81 0.75 0.49 0.58 0.22 0.23 0.56 0.49 0.16 0.38 0.33 0.03 0.35 0.08 0.14 0.51 0.51 0.07 0.42 0.4 0.02 0.17 0.39 0.14 0.07 0.38 0.63 0.65

Emerging Markets
AUDUSD USDCAD USDZAR
0.64 0.54 0.04 0.45 0.42 0.08 0.54 0.74 0.01 0.05 0.37 0.55 0.07 0.22 0.11 0.84 0.63 0.34 0.62 0.4 0.16 0.88 0.68 0.32 0.7 0.63 0.2 0.34 0.19 0.01 0.71 0.59 0.2 0.74 0.49 0.16 0.56 0.36 0.81 0.88 0.2 0.64 0.7 0.05 0.12 0.33 0.19 0.68 0.74 0.05 0.62 0.8 0.04 0.5 0.58 0.13 0.21 0.37 0.16 0.02 0.34 0.19 0.03 0.17 0.3 0.2 0.54 0.66 0.19 0.42 0.62 0.16 0.67 0.77 0.29 0.54 0.61 0.13 0.19 0.26 0.36 0.47 0.64 0.07 0.43 0.66 0.01 0.41 0.5 0.37 0.13 0.36 0.18 0.14 0.34 0.09 0.06 0.2 0.3 0.3 0.22 0.01 0.33 0.01 0.04 0.21 0.35 0.35 0.22 0.0 0.32 0.01 0.06 0.21 0.63 0.63 0.09 0.55 0.66 0.05 0.6 0.62 0.03 0.57 0.69 0.04 0.58 0.68 0.12 0.3 0.32 0.35 0.29 0.41 0.23 0.54 0.66 0.04 0.21 0.48 0.33 0.36 0.11 0.44 0.73 0.27 0.13 0.54 0.42 0.54 0.77 0.43 0.49 0.69 0.03 0.07 0.19 0.22 0.29 0.19 0.24 0.29 0.67 0.68 0.26 0.68 0.76 0.29

USDJPY
0.51 0.06 0.19 0.32 0.06 0.31 0.01 0.27 0.77 0.18 0.03 0.58 0.69 0.23 0.09 0.52 0.18 0.08 0.36 0.16 0.17 0.56 0.18 0.06 0.68 0.35 0.27 0.54 0.28 0.12 0.43 0.15 0.13 0.25

USDTRY USDHUF
0.23 0.42 0.64 0.01 0.1 0.04

USDPLN
0.01 0.47 0.56 0.03 0.29 0.34 0.57 0.68

Commodities

COPPER

0.45 0.47 0.08 0.25 0.37 0.55 0.73 0.78 0.25 0.11 0.47 0.27

CRB

0.84 0.06 0.28 0.58 0.34 0.02 0.5 0.27 0.07

0.85 0.27 0.08 0.57 0.34

GOLD

0.12 0.37 0.64 0.63

US 10Y EURO NIKKEI FTSE 100 SP 500 Yields NEXT 100 225

0.49 0.45

0.18 0.52 0.51

Equities

0.05 0.23 0.12

0.42 0.22 0.0 0.14 0.32 0.04

0.61 0.61 0.1

0.59 0.62 0.11

0.02 0.56 0.53

0.12 0.5 0.31 0.15 0.45 0.41

0.3 0.57 0.18 0.3 0.45 0.01

Bonds & Rates

EU 10Y Yields

0.17 0.6 0.6

JP 10Y Yields

0.06 0.29 0.28

0.01 0.18 0.11 0.28 0.31 0.05 0.17 0.24 0.04 0.08

0.22 0.29 0.04

0.09 0.36 0.06 0.22 0.29 0.08

0.48 0.49 0.33 0.2 0.44 0.17 0.07 0.21 0.24 0.07 0.14

0.64 0.64 0.26

0.66 0.66 0.19

US 3m LIBOR

0.33 0.36 0.11 0.25 0.28 0.05 0.01

0.15 0.18

EU 3m LIBOR

0.29 0.29 0.17 0.04

0.27 0.28 0.08 0.19

0.21 0.2 0.05

0.23

0.3

0.18

High Current Low

3 Month log daily return correlation. High and lows over the past 12 months Different colours highlight the proximity to the extremes (dark red close to extreme)

FX Weekly

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Friday, 15 July 2011 http://www.GlobalMarkets.bnpparibas.com

Economic Calendar: 18 - 22 July


GMT Mon 18/07 23:01 (17/07) 07:30 13:00 14:00 Tue 19/07 01:30 09:00 09:00 12:30 13:00 06:00 06:00 07:30 08:00 08:30 13:00 14:00 14:30 22:15 14:30 23:50 (20/07) 07:30 08:00 08:00 08:00 08:00 08:30 08:30 08:30 08:30 09:00 12:30 14:00 14:00 14:00 Fri 22/07 06:45 07:00 07:00 08:00 08:00 08:00 08:00 09:00 11:00 11:00 00:01 09:30 09:00 10:00 13:30 11:00 11:00 08:30 09:00 08:00 08:00 09:30 10:00 09:30 15:00 10:00 10:30 18:15 10:30 08:50 09:30 10:00 10:00 10:00 10:00 09:30 09:30 09:30 09:30 11:00 08:30 10:00 10:00 10:00 08:45 09:00 09:00 10:00 10:00 10:00 10:00 11:00 07:00 07:00 Local Japan UK Sweden US Public Holiday Rightmove House Price Index : Jul Riksbank Minutes TICS Data : May NAHB Housing Market Index : Jul RBA MPC Minutes ZEW Expectations : Jul ZEW Current Assessment : Jul Housing Starts : Jun BoC Monetary Policy Announcement Previous Forecast Consensus USD68.2bn 13 USD35.0bn 15 n/a 15

Australia Germany US Canada Germany Neths Italy UK Belgium US

-9.0 87.6 560k

-21.0 84.6 580k

-11.0 85.3 575k

Wed 20/07

Canada Japan Neths Eurozone

PPI m/m : Jun 0.0% PPI y/y : Jun 6.1% Consumer Confidence : Jul -11.0 Industrial Orders y/y : May 5.8% BoE MPC Minutes Consumer Confidence : Jun -3 Existing Home Sales : Jun 4.81mn EIA Oil Inventories Feds Sack Speaks to Money Marketeers in New York BoC Monetary Policy Report Trade Balance (nsa) : Jun JPY-854bn

0.0% 5.5% -11.0 4.5% -2 4.90mn

0.0% 5.5% n/a n/a n/a 4.95mn

Thu 21/07

JPY25bn 5.2% 51.5 52.7 52.5 EUR-5.0bn

JPY-175bn n/a 51.5 53.3 n/a n/a

UK

Italy US

Unemployment Rate : Jun 5.1% PMI Manufacturing (Flash) : Jul 52.0 PMI Services (Flash) : Jul 53.7 PMI Composite (Flash) : Jul 53.3 Current Account (sa) : May EUR-5.1bn ECB Governing Council Meeting (No Rate Announcement) PSNCR : Jun GBP11.1bn PSNB : Jun GBP15.2bn Retail Sales inc Auto Fuel m/m : Jun -1.4% Retail Sales inc Auto Fuel y/y : Jun 0.2% Non-EU Trade Balance : Jun EUR-1.9bn Initial Claims 405k Philadelphia Fed Survey : Jul -7.7 FHFA HPI : May Leading Indicators m/m : Jun 0.8% Industry Survey : Jul PPI m/m : Jun PPI y/y : Jun Retail Sales y/y : May IFO Business Climate : Jul IFO Current Conditions : Jul IFO Expectations : Jul Industrial Orders m/m : May CPI m/m : Jun CPI y/y : Jun 109 -0.3% 6.7% 2.5% 114.5 123.3 106.3 0.8% 0.7% 3.7%

0.5% 0.3% EUR-2.1bn 415k 5.0 0.1% 106 0.0% 6.7% 3.3% 113.0 121.8 104.8 0.4% 0.0% 3.8%

0.5% 0.3% n/a n/a 4.8 0.2% n/a n/a n/a n/a 113.6 122.2 105.0 1.0% n/a n/a

France Spain Italy Germany

Eurozone Canada

Release dates and forecasts as at c.o.b. prior to the date of publication: See Daily Economic Spotlight for any revision

Source: BNP Paribas

FX Weekly

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Friday, 15 July 2011 http://www.GlobalMarkets.bnpparibas.com

FX Forecasts*
USD Bloc EUR/USD USD/JPY USD/CHF GBP/USD USD/CAD AUD/USD NZD/USD USD/SEK USD/NOK EUR Bloc EUR/JPY EUR/GBP EUR/CHF EUR/SEK EUR/NOK EUR/DKK Central Europe USD/PLN EUR/CZK EUR/HUF USD/ZAR USD/TRY EUR/RON USD/RUB EUR/PLN USD/UAH EUR/RSD Asia Bloc USD/SGD USD/MYR USD/IDR USD/THB USD/PHP USD/HKD USD/RMB USD/TWD USD/KRW USD/INR USD/VND LATAM Bloc USD/ARS USD/BRL USD/CLP USD/MXN USD/COP USD/VEF USD/PEN Others USD Index *End Quarter Q3 '11 1.50 78 0.83 1.65 0.98 1.09 0.82 5.93 4.98 Q3 '11 117 0.91 1.25 8.90 7.47 7.46 Q3 '11 2.60 24.3 275 6.80 1.52 4.20 27.51 3.90 7.8 100 Q3 '11 1.22 2.95 8500 29.80 42.50 7.80 6.40 28.00 1060 45.50 20500 Q3 '11 4.18 1.58 450 11.40 1730 4.29 2.70 Q3 '11 72.30 Q4 '11 1.55 83 0.83 1.68 0.93 1.13 0.84 5.48 4.77 Q4 '11 129 0.92 1.28 8.50 7.40 7.46 Q4 '11 2.48 24.5 275 6.60 1.50 4.15 27.25 3.85 7.8 100 Q4 '11 1.21 2.90 8400 29.50 42.00 7.80 6.31 27.50 1050 45.00 20000 Q4 '11 4.25 1.55 435 11.10 1690 4.29 2.65 Q4 '11 70.76 Q1 '12 1.45 85 0.90 1.59 0.95 1.07 0.81 5.93 5.07 Q1 '12 123 0.91 1.30 8.60 7.35 7.46 Q1 '12 2.69 24.1 269 6.55 1.56 4.20 27.86 3.90 7.5 98 Q1 '12 1.21 2.87 8300 29.30 41.50 7.80 6.25 27.00 1040 44.50 20000 Q1 '12 4.34 1.53 425 11.00 1690 4.29 2.63 Q1 '12 74.87 Q2 '12 1.40 90 0.93 1.56 0.97 1.04 0.80 6.21 5.26 Q2 '12 126 0.90 1.30 8.70 7.37 7.46 Q2 '12 2.75 23.9 265 6.60 1.59 4.25 27.97 3.85 7.5 97 Q2 '12 1.20 2.85 8200 29.00 41.00 7.80 6.21 26.70 1030 44.00 20000 Q2 '12 4.43 1.55 430 10.90 1700 4.29 2.63 Q2 '12 77.62 Q3 '12 1.35 95 1.00 1.53 1.01 0.99 0.76 6.67 5.56 Q3 '12 128 0.88 1.35 9.00 7.50 7.46 Q3 '12 2.81 23.8 265 6.50 1.63 4.15 28.08 3.80 7.5 96 Q3 '12 1.19 2.83 8100 28.70 40.50 7.80 6.17 26.50 1020 43.50 20000 Q3 '12 4.51 1.56 435 11.00 1710 4.29 2.64 Q3 '12 80.72 Q4 '12 1.35 95 1.00 1.53 1.01 0.99 0.76 6.67 5.56 Q4 '12 128 0.88 1.35 9.00 7.50 7.46 Q4 '12 2.78 23.5 260 6.50 1.65 4.10 27.65 3.75 7.5 95 Q4 '12 1.18 2.80 8000 28.50 40.00 7.80 6.13 26.00 1010 43.00 20000 Q4 '12 4.60 1.58 440 11.10 1720 4.29 2.66 Q4 '12 80.72 Q1 '13 1.30 95 1.04 1.53 1.04 0.96 0.74 6.92 5.77 Q1 '13 124 0.85 1.35 9.00 7.50 7.46 Q1 '13 2.85 23.7 260 7.20 1.65 4.20 28.19 3.70 7.5 93 Q1 '13 1.17 2.77 7900 28.30 39.50 7.80 6.23 26.00 1000 43.00 20000 Q1 '13 4.69 1.59 442 11.10 1725 8.80 2.67 Q1 '13 82.99 Q2 '13 1.30 95 1.04 1.53 1.04 0.96 0.74 6.92 5.77 Q2 '13 124 0.85 1.35 9.00 7.50 7.46 Q2 '13 2.77 24.0 255 7.10 1.67 4.20 27.75 3.60 7.5 92 Q2 '13 1.16 2.75 7800 28.00 39.00 7.80 6.20 26.00 1000 42.50 20000 Q2 '13 4.78 1.60 445 11.17 1730 8.80 2.68 Q2 '13 82.99 Q3 '13 1.30 95 1.04 1.53 1.04 0.96 0.74 6.92 5.77 Q3 '13 124 0.85 1.35 9.00 7.50 7.46 Q3 '13 2.85 23.5 260 7.00 1.69 4.10 29.07 3.70 7.5 91 Q3 '13 1.15 2.73 7800 28.00 39.00 7.80 6.17 26.00 1000 42.50 20000 Q3 '13 4.86 1.61 447 11.25 1740 8.80 2.69 Q3 '13 82.99 Q4 '13 1.30 95 1.04 1.53 1.04 0.96 0.74 6.92 5.77 Q4 '13 124 0.85 1.35 9.00 7.50 7.46 Q4 '13 2.85 23.3 260 6.90 1.69 3.95 27.75 3.70 7.3 90 Q4 '13 1.14 2.70 7800 28.00 39.00 7.80 6.15 26.00 1000 42.00 20000 Q4 '13 4.95 1.62 450 11.30 1750 8.80 2.70 Q4 '13 82.99 Q1 '14 1.34 114 1.09 1.70 1.21 0.78 0.56 6.94 5.07 Q1 '14 153 0.79 1.46 9.30 6.80 7.46 Q1 '14 2.65 23.1 250 6.69 1.54 3.90 27.75 3.55 7.4 85 Q1 '14 --------------------------------------------Q1 '14 ----------------------------Q1 '14 83.88

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FX Global Strategy Contacts


Foreign Exchange
Raymond Attrill Steven Saywell James Hellawell Kiran Kowshik Mary Nicola Drew Brick Chin Loo Thio Robert Ryan Jasmine Poh Gao Qi Bartosz Pawlowski Dina Ahmad Diego Donadio Head of FX Strategy North America Head of FX Strategy Europe Quantitative Strategist FX Strategist FX Strategist Head of FX & IR Strategy Asia FX & IR Asia Strategy FX & IR Asia Strategy FX & IR Asia Strategy FX & IR Asia Strategy Head of FX & IR Strategy CEEMEA FX & IR CEEMEA Strategist FX & IR Latam America Strategist New York London London London New York Singapore Singapore Singapore Singapore Shanghai London London Sao Paulo 1 212 841 2492 44 20 7595 8487 44 20 7595 8485 44 20 7595 1495 1 212 841 2492 65 6210 3262 65 6210 3263 65 6210 3314 65 6210 3418 86 21 2896 2876 44 20 7595 8195 44 20 7595 8620 55 11 3841 3421 raymond.attrill@americas.bnpparibas.com steven.saywell@uk.bnpparibas.com james.hellawell@uk.bnpparibas.com kiran.kowshik@uk.bnpparibas.com mary.nicola@americas.bnpparibas.com drew.brick@asia.bnpparibas.com chin.thio@asia.bnpparibas.com robert.ryan@asia.bnpparibas.com jasmine.poh@asia.bnpparibas.com gao.qi@asia.bnpparibas.com bartosz.pawlowski@uk.bnpparibas.com dina.ahmad@uk.bnpparibas.com diego.donadio@br.bnpparibas.com

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