Daily Currency Briefing

July 20, 2011

Restraint ahead of EU summit

G10 Currencies
EUR-USD: As sentiment on the financial markets has improved slightly since yesterday EURUSD has recovered and trades around 1.4150 early this morning. Stock markets in the US and Asia were friendly overnight and added to the positive sentiment. Moreover, an agreement on the debt-ceiling problem in the US seems to become more likely, since President Barack Obama welcomed a debt-cutting plan by a bipartisan group of senators. The $3.7 trln debtcutting plan combines tax increases and spending cuts. But FX markets remain sceptical about the outcome of tomorrows EU summit. Therefore uncertainty and nervousness on the markets remain high, which in turn is reflected in volatilities (chart) and makes the euro vulnerable. On the backdrop of widely differing views among the parties there are doubts, shared by Chancellor Angela Merkel, whether a comprehensive and long term solution will be found. On the other hand slightly more positive news and sentiment quickly act to support the euro. Market participants obviously do not want to run into the EU summit with large EUR shorts, as there is still the possibility that officials may yet come up with a big solution. We therefore expect to see rather directionless trade in thin markets today as those who do not have to get active on the FX markets will probably display reserve ahead of the important event. Uncertainty ahead of the EU summit keeps volatilities high EUR-USD 1 month-ATM implied volatility
15 14 13 12 11 10 9 8 Ja n-1 1

Antje Praefcke +49 69 136 43834 antje.praefcke@commerzbank.com

Fe b -11

M rz-1 1

A pr-1 1

M a i-11

Ju n-1 1

Ju l-11

Quelle: Bloomberg, Commerzbank Research

GBP: Later this morning we will receive the minutes from the BoEs July meeting where the MPC left rates on hold and did not increase the asset purchase programme (QE). Market participants are likely to focus upon the comments relating to the possibility of increasing the asset purchase programme. In contrast with previous sessions that have been dominated by the risk on / risk off sovereign debt dilemma, these comments should have some bearing upon the short term direction of GBP. Should the committee indicate a preference to undertake or postpone further asset purchases, the pound should weaken or strengthen respectively. The latest economic data releases from the UK have indicated a marked slowdown in consumer activity and consumer sentiment along with declining PMI indices. Although manufacturing data have surprised to the upside recently (May Manufacturing production surprised to the upside printing +2.8% yoy against expectations of +2.1%) this rebalancing is not enough to add significantly to overall growth for the economy. The comments surrounding the asset purchase programme will be all the more interesting in light of next weeks Q2 GDP release. Levels to watch in EUR-GBP

Peter Kinsella +44 20 7475 3959 peter.kinsella@commerzbank.com

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Daily Currency Briefing

on the downside are the 200-day moving average around 0.8660 and the 55-day moving around 0.8835. CAD: Yesterday, the Bank of Canada kept the key rate on hold at 1% as expected but it sounded a little bit more certain about possible rate increases than at its last meeting back in May. Instead of "some of the considerable monetary policy stimulus currently in place will be eventually withdrawn" the BoC now noted that stimulus "will be withdrawn. The BoC noted a slower pace of economic growth in the US, as we had suggested. Despite the slightly slower rotation of demand in Canada as previously anticipated, the Bank of Canada expects growth to reaccelerate in the second half of 2011. The Banks' projections for growth remain roughly unchanged, but core inflation is slightly firmer than anticipated and expected to remain above 2% over the projection horizon back in May, the BoC had stated that core inflation remained subdued. Overall, the BoC takes into account weaker exports (due to sluggish US demand and a strong CAD) but higher core inflation and stronger household spending, which means that over time the necessity of a rate hike rises, especially since with the key rate at 1% monetary policy is still stimulative. We still see chances of a rate hike in autumn and even a hike in September is possible. Since the main views of the BoC are known by now, the publication of the new Monetary Policy Report today shouldnt unfold too much market impact. In case market sentiment remains friendly, a test of the April low at 0.9450 is on the agenda in USD-CAD. However, we think it is too early for a break ahead of the EU summit and ahead of Canadian CPI and retail sales data on Friday.
Antje Praefcke +49 69 136 43834 antje.praefcke@commerzbank.com

Emerging Market Currencies

ZAR: Junes consumer prices have limited potential to support the rand today. It is expected that the inflation rate will rise from 4.6% previously to 5.0% yoy, which is towards the upper end of the central banks target corridor, but in addition to the currently high risk aversion the strike of the oil refinery workers is also putting pressure on the rand. So far it is difficult to predict how long the strike and thus the fuel shortages at the petrol stations will go on. As a result concerns are growing that economic growth of the largest African economy might be under threat. A further reason for the central bank to leave key rates unchanged on Thursday. Short term the bottom end in USD-ZAR is limited. PLN: Industrial production in June disappointed massively yesterday with a growth rate of only 2% yoy, as opposed to the expected 5.7%. So the weaker than expected consumer price inflation (June: 4.2% yoy) was immediately followed by another factor supporting the current central bank rate break. Todays core inflation data is likely to have little impact unless it comes in well above expectations, which we do not foresee. As a result the zloty remains victim of market sentiment. CZK: The pending disagreement within the coalition government on the VAT rise is having an effect on the koruna. Following EM currency gains yesterday as a result of improved market sentiment the koruna recorded the smallest gains against the US dollar by regional comparison. EUR-CZK also remains in the range between 24.10 and 24.59, which is unlikely to be breached before Thursday. HUF: The forint remains the most unstable currency in Eastern Europe. The Hungarian CDS spreads are approaching the crisis levels seen last year at extraordinary speed and the event risk of the EU summit is particularly high. If the outcome of Thursdays meeting disappoints we might see renewed all-time highs in CHF-HUF. BRL: The Brazilian central bank will decide on key rates tonight. Everything but a further rate hike from 12.25% to 12.50% would constitute a major surprise. In July inflation reached 6.7% and so far there are few signs that price pressure is easing. In June unemployment remained on a low level at 6.2% and private consumption remains strong. As a result it is still too early for a break in the rate hike cycle. This is also what the central bank is likely to signal in its statement. As we do not expect to see a surprise, the decision is unlikely to affect the real. Instead general market sentiment will probably be the main driver.
Thu Lan Nguyen +49 69 136 82878 thulan.nguyen@commerzbank.com

Thu Lan Nguyen +49 69 136 82878 thulan.nguyen@commerzbank.com

Carolin Hecht +49 69 136 41505 carolin.hecht@commerzbank.com

Carolin Hecht +49 69 136 41505 carolin.hecht@commerzbank.com

You-Na Park +49 69 136 42155 you-na.park@commerzbank.com

20 July 2011

Daily Currency Briefing

Todays Events
Time 06:00 07:00 09:00 09:30 12:00 13:00 15:00 15:00 Region Indicator JPY GER ZAR GBP USA PLN EUR USA Leading Index CI Coincident Index CI Producer price index Consumer prices BoE Minutes MBA Mortgage Applications Core rate Consumer confidence Existing Home Sales Period May May Jun Jun Jun Jun Jul Jul Jun Jun Jul Jun Jun Actual 99,6 106,3 +0,1 +5,6 Our Forecast Survey Last 99,8 106,0 +0,0 +6,1 +0,5 +4,6 -5,10 +0,4 +2,4 -9,8 +4,81 -3,8 Direction Cross

mom yoy mom yoy % mom yoy mom yoy

+0,0 +5,5 +0,4 +5,0

-10,5 +4,80

+0,2 +2,5 -10,2 +4,90 +1,9

Important Market Data

FX Current Change (%) Last trading day's high Last trading day's low FX Current Change (%) Last trading day's high Last trading day's low FX Current Change (%) Last trading day's high Last trading day's low FX Current Change (%) Last trading day's high Last trading day's low Forwards / Options EUR-USD 3M Money Market Rate (%) Bonds / Bond Futures Yield (%), Price Equity Indices Closing Change Change (%) Oil / Prec.Metals $ per unit EUR-USD 1,4186 +0,87 1,4217 1,4051 EUR-SEK 9,1964 -0,71 9,2684 9,1977 EUR-AUD 1,3215 -0,60 1,3321 1,3205 EUR-RUB 39,7592 +0,27 39,8782 39,6322 Fwd 3M -37,2900 EURIBOR 1,61 10Y Bund 2,71 EuroStoxx50 2657,45 +35,09 +1,34 Oil, Brent 118,04 EUR-JPY 112,01 +0,68 112,32 111,11 EUR-NOK 7,8132 -0,84 7,8884 7,8223 EUR-NZD 1,6607 -0,46 1,6733 1,6534 EUR-RON 4,2438 -0,53 4,2698 4,2507 Fwd 6M -69,4700 $ LIBOR 0,25 10Y T-Note 2,91 DAX 7192,67 +84,75 +1,19 Oil, Nymex 98,55 EUR-GBP 0,8802 +0,33 0,8809 0,8759 EUR-DKK 7,4553 -0,02 7,4579 7,4545 EUR-BRL 2,2180 -0,34 2,2402 2,2149 EUR-CNY 9,1588 +0,67 9,1906 9,0901 Fwd 12M -129,0100 LIBOR 0,20 10Y JGB 1,09 Dow Jones 12587,42 +202,26 +1,63 Gold 1589,88 EUR-CHF 1,1682 +1,57 1,1673 1,1488 EUR-HUF 270,43 -1,03 273,38 269,94 EUR-MXN 16,5342 -0,16 16,6240 16,5082 EUR-SGD 1,7223 +0,50 1,7287 1,7120 Vol 1M 13,58 LIBOR 0,83 EUR-CAD 1,3472 -0,29 1,3584 1,3442 EUR-CZK 24,470 -0,11 24,551 24,407 EUR-TRY 2,3493 +0,54 2,3558 2,3343 EUR-KRW 1495,8612 +0,17 1506,1709 1490,2906 Vol 3M 13,56 $ index 75,02 -0,61 75,50 74,90 EUR-PLN 4,0078 -0,77 4,0431 4,0112 EUR-ZAR 9,8072 -0,22 9,8782 9,8157 EUR-THB 42,3756 +0,38 42,5492 42,1392 Vol 12M 13,68

CHF LIBOR CAD LIBOR 0,18 1,17 10Y T-Note 10Y Gilt Bund Future Future 3,05 128,79 124,72 Nikkei 225 10005,90 +116,18 +1,17 Palladium 794,63 Zinc 2438,0 FTSE 100 5789,99 +37,18 +0,65 Platinum 1772,10 Tin 27555,0 1326,73 +21,29 +1,63 Silver 39,21

S&P 500

Industrial Metals Aluminium Lead Copper Nickel $ per ton 2482,0 2741,5 9755,0 23955,0 Sources: Bloomberg L.P., European Banking Federation, British Bankers Association, Dow Jones, Xetra, S&P, TSE, LSE, LME.

20 July 2011

Daily Currency Briefing

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