Daily FX Str Europe 27 July 2011

8/6/2019 Daily FX Str Europe 27 July 2011

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Foreign Exchange London 08:00

FX Daily Strategist: Europe

AUDUSD vs. AUD rate expectations

06 07 08 09 10 11

0.60

0.65

0.70

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0.95

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AUD rateexpectations (12m)

AUDUSD (RHS)

Source: Reuters Ecowin Pro. Australian Q2 CPIthis morning has the potential to throw up achallenge to current RBA easing expectations. Inany event, we are not expecting the currentdisconnect between the rates curve andAUDUSD to re-connect via a drop in the currencyand which is being supported by more thaninterest rates. Australias solid AAA status is

particularly relevant at this juncture.

This is not classified as objective research. Please refer to important information at the end of the report.http://www.globalmarkets.bnpparibas.com London: +44(0)20 7595 8086 NY: +1 212 841 2408 Sing.: +65 6210 3263/3347

GMT Country Release Mkt Last08:00 EU (Jun) M3 % (y/y) 2.4 2.408:00 IT (Jul) ISAE Business C 99.9 100.508:00 EU (Jun) M3 3m % (y/y) 2.3 2.209:30 CH (Jul) KoF Leading Ind 2.09 2.2310:00 GB (Jul) CBI Monthly Ind -2 1

12:30 US (Jun)Durable Goods O% (m/m)

0.3 2.1

12:30 DE (Jul) CPI (Prel) % (y/y) 2.3 2.3

12:30 DE (Jul)CPI (Prel) %(m/m)

0.3 0.1

12:30 DE (Jul)HICP (Prel) %(y/y)

2.4 2.4

12:30 DE (Jul)HICP (Prel) %(m/m)

0.3 0.1

14:30 US EIA Oil Invento USD -3700000

16:00 CA GoC 10-Year Bond Auction16:00 FR (Jun) Jobseekers (ILO % (m/m)16:00 FR (Jun) Jobseekers (ILO % (y/y)17:00 US Treasury Auctions 5-Year Notes18:00 US Beige Book

21:00 NZRBNZ Monetary Policy Statement%

Solid AAA G10 credits to be bid given US ratings risk

AUDUSD soars after strong CPI reverses rate cut view.Potentially hawkish RBNZ next on tap

Frictions within the US Lower House complicate US debtceiling negotiations, weakening the USD

Price action in currency markets continue to be driven by the USdebt and the dawning realisation that, while a deal may eventuallyget done and avert a debt default, it is probably not going to satisfyS&P and hence a downgrade of US AAA status. It may be no co-incidence that the top-three performing currencies yesterday wereSEK, NOK and AUD, all solid AAA credits and which we wouldexpect to receive additional inflows form the full spectrum of

investor classes in the event of a US downgrade. New Zealand,where Fitch has the current AAA domestic rating on negativeoutlook and Canada, that tends to get tarred with a weak-USDbrush, fared relatively less well.

AUDUSD rallied in Asia breaking through the prior 1.1012 highafterQ2 core CPI measures came in stronger than expected(2.7% y/y up from 2.2% in Q1 and versus 2.5% y/y tipped) and theOIS market has reduced its expectation of rate cuts (from 50bpscuts to 20bps cut). BNP Paribas has reiterated its call for a Q4rate hike as the next move from the RBA. RBA GovernorStevens speech Tuesday, which suggested no inclination torespond to current evidence of weaker consumption, also plays toat least a more neutral RBA policy bent. A further reversal of theRBA rate cut view (following a leading Australian Banks market

moving call for the same) should see the AUD continue to movehigher, in addition to the force of reserve manager demandalready in place. Beyond 1.1000, the next major medium termresistance is not until the 1.1500 level. We still like carryinglong NZD positions into Thursdays RBNZ rates decision.While rates will likely remain unchanged (as per the economistsconsensus), we note that the majority (10/15) economists stillexpect rates to be on hold until December. The post earthquakeemergency rate setting amid signs of strength (businessconfidence coming in at 14 month highs) appears inconsistent.Hence, our bias is for the statement to come in on the hawkishside, thus promoting NZD higher looking ahead.

On the US debt ceiling issue, there appears to be some frictions

within parties making things all the more complicated, with theRepublican controlled House of Representatives opting to delayvoting on Boehners plan to Thursday. Meanwhile, the WhiteHouse has said it is working towards a Plan B with Congress.Looking ahead, a two-step deal (similar to that currently proposedby the House ) remains our base case scenario which means thatthe debt ceiling may well not be raised enough to get us throughthe 2012 Presidential elections. In such circumstances we thinkS&P will downgrade the US, and that one or both of Fitch andMoody's may well follow suit next year. Under such a scenarioand given that a Reuters poll published Tuesday shows only 30economists (BNP Paribas included) out of 53 expect a downgrade,we see potential for some further sticker shock from the newsof a downgrade that would mean additional knee-jerk dollar

weakness. For today, data wise the Swiss KOF (anticipatedweaker to 2.11 from 2.23) and German CPI (where accelerationabove 2.3% could challenge current ECB thinking) will dominate.
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Australia/ New Zealand/Canada

Australias RBA trimmed mean CPI rose by 0.9% qoq,against forecast of 0.7%. On a yoy basis, the RBA

trimmed mean CPI rose by 2.7%, beating forecasts of2.5% and up from 2.3% in Q1. The headline numbercame in at 0.9% q/q vs consensus of 0.7% with the y/y at3.6% vs f/c of 3.4%. This data along with RBA GovStevens speech yesterday that there will be a revival inAust consumption has probably put any hopes of a ratecut on the backburner.

NZ FinMin: New Zealand seen as a safe-haven,supporting NZD; makes rebalancing economydifficult

NBNZ business confidence data came in better thanexpected with the business outlook up to 47.6% inJuly vs 46.5% in June while the business ownactivity outlook rose to 43.7% vs 38.7%. (IGM)

China

PBOC fixes yuan mid-point at record high of6.4426/dollar The People's Bank of China fixed theyuan's mid-point at a record high of 6.4426 against thedollar on Wednesday, slightly stronger than Tuesday'shistorical high of 6.4470 and reflecting an overnight lossin the U.S. Dollar Index. (Reuters)

China should gradually make real bank deposit ratespositive and continue to use open market operations

and bank reserve requirements to slow money supply, anacademic adviser to the People's Bank of China said incomments published on Wednesday. (Reuters)

China's fiscal revenue will increase at a slower pacein the second half of this year, following an array oftax cuts, the Ministry of Finance (MOF) said onTuesday. Reductions in personal income tax, value-added tax, sales tax, and small business tax will lead toslowing growth, the ministry said in a statement on itswebsite. Fiscal revenue rose 31.2 percent year-on-yearto 5.69 trillion yuan ($875.5 billion) in the first half of thisyear, boosted by the country's fast economic growth andrising consumer prices, it said. (ChinaDaily)

Chinas sovereign wealth fund has revealed that itwas essentially fully invested at the end of 2010,underscoring its need for a fresh injection of cashfrom the government if it is to further expand itsreach overseas. China Investment Corp should havelittle trouble making the case for extra capital after it alsodisclosed in its annual report that it earned an 11.7 percent return on its global investment portfolio last year, thesame gain, to the decimal point, as in 2009. (FT)

China Investment Corp. said it earned an 11.7%return on its overseas portfolio last year, boosting itsassets to $409.6 billion, as the Chinese sovereign-wealth fund deployed almost all of its capital andaccelerated investments into higher-risk assets. (WSJ)

PBOC Advisor: Slowing growth does not mean Chinawill face a hard landing, China faces structural andcyclical difficulties, long term outlook remainsoptimistic. (Reuters)

China's Sun Art surges 25 pct on trading debut after$1.1 bln IPO China's top hypermarket operator Sun ArtRetail Group Ltd jumped 25 percent on its trading debuton Wednesday following a $1.1 billion Hong Kong IPO asinvestors bid up the shares, betting on strong growth inChina's consumer demand. (Reuters)

China unlikely to raise bank reserve ratio in AugChina may refrain from raising banks' reserverequirement ratios (RRR) this month and in August ascapital inflows lose steam alongside a decline in theamount of maturing bills and repos, the China SecuritiesJournal reported on Wednesday. (Reuters)

China in top five of global ODI table China climbed upthe world rankings to fifth-largest outbound direct investorlast year and there is still huge potential for a higherplacing, the United Nations Conference on Trade andDevelopment (UNCTAD) and economists said. (ChinaDaily)

China Makes Milestone Dive: Submersible ReachesUltradeep, Overtaking U.S. in Hunt for UnderseaResources China surpassed current U.S. capabilities ina race to explore resources in the deepest parts of theworld's oceans and set its sights on beating world leaderJapan next year. (WSJ)

Japan

Interbank Loan Probe Focuses on Yen Rates:Regulators probing alleged manipulation of interbanklending rates have expanded their investigation into yenrates in London and a separate rate-setting process inTokyo. Led by the US Department of Justice, regulatorsfrom the European Union, the UK, the US and Japanhave been examining whether the London interbankoffered rate, the reference point for $350,000bn(213,000bn) in contracts, was rigged at the height of thefinancial crisis. Lawyers involved in the case haverecently warned their clients, which include the biggestnames in banking, to prepare for possible dawn raids by

regulators. (FT)

Japan Officials Watch Yen Amid Intervention Calls:Amid escalating calls from Japanese manufacturers forofficial action to weaken the yen, Japan's financeminister pledged vigilance Tuesday, though hisassurance failed to stop the currency from touching afour-month high. (WSJ)

Bank of Japan board member Hidetoshi Kamezakisaid on Wednesday that global economic growth isslowing and there is strong uncertainty about itsoutlook. (Reuters)

Japan sees potential power shortage next summerJapan could face a 9.2 percent power shortage nextsummer if all the nation's nuclear reactors are shut

Foreign Exchange Strategy Wednesday, 27 July 2011

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according to a government simulation although theestimate does not take into account the effect of powersavings, the Asahi newspaper said. (Reuters)

Other Asia:

The Korean economy expanded by 3.4% yoy in Q2, alittle weaker than forecast of 3.5% and down from4.2% in Q1. On a qoq basis, the economy grew at0.8%, down from 1.3% in Q1. A breakdown of GDP byindustry on a qoq annualised basis shows a sharprebound in the agriculture/forestry/fishing industries(+37.0% reversing the -16.7% contraction in Q1) withmanufacturing growth halving to 6.3% in Q2 from 12.9%in Q1. A positive sign was the coming out of the red ofthe construction sector, expanding 1.2% after fourconsecutive quarters of negative growth.

On the back of global economic uncertainties, theKorean government has revised down its GDP

forecast for 2011 to 4.5% from 5.0%. The BoK has aforecast of 4.3%, also cut from its earlier predictionof 4.5%.

BOK officials comments on GDP number that 1.Despite a bit lower GDP, export has been good. 2. Lessthan expected government expenditure is one of reasonsfor low GDP but the figure is expected to be better in 2Hdue to better performance in construction sector. 3.expert appears to be in good shape given IT cycle.

Minutes of the June BoK meeting where they hikedby 25bp were fairly hawkish with BoK membersfearing that inflation could get structural and the BoK

behind the curve.

The Korean government Tuesday said it will raiseelectricity charges by 4.9% on average from Aug. 1 tohelp the nation's electricity provider pay for fuel. (WSJ)

Taiwan: Yen 19.8bn Wisdom Marine ship financinglaunched: Mandated lead arranger and bookrunnerTaiwan Cooperative Commercial Bank has launched theYEN 19.8bn-equivalent 8.5-year ship financing forWisdom Marine Lines SA, banking sources said.(Reuters)

Sony denies report it may exit LCD JV with Samsung:

Japan's Sony Corp, struggling with a lossmakingtelevision business, on Wednesday denied a mediareport it was considering pulling out of its LCD jointventure with South Korea's Samsung Electronics.(Reuters)

US:

The U.S. Congress and world markets faced moreuncertainty on Tuesday as Republican leaders delayedaction on a plan to raise the government's $14.3 trillionborrowing limit, narrowing the chances for a deal to averta debt default. serious discussions looked to be delayedfor several days after Republicans pushed back a House

of Representatives vote on their plan originally expectedfor Wednesday.. Vote on Boehner plan delayed toThursday at earliest. "We're still at at least 50 percentpossibility of a downgrade," David Beers, managing

director of Sovereign and International PublicFinance Ratings at credit ratings agency Standard &Poor's told CNBC's "The Kudlow Report".

Democrats and their Republican were further apart

than ever on Tuesday in an impasse over America'sdebt limit as Wall Street braced for a looming U.S.default and credit downgrade. One week before adeadline to act, the two sides pursued competing budgetplans that appeared to have little chance of winningbroad congressional approval. There was nocompromise in sight to raise the nation's $14.3 trilliondebt ceiling by Aug. 2 to avert a default that could triggerglobal financial chaos.

Feds Hoenig: Monetary policy shouldnt target assetbubbles, dollar to remain dominant currency forsome time; Markets at this point have view thatthere will be a solution to the debt ceiling problem,have remained calm; there is nothing guaranteed aboutdollars status- could change based on fiscal, monetarypolicy choices. (Reuters)

Geithner: Must lift the cloud of default hanging overour economy to preserve financial stability; USregulatory framework must keep pace with globaleconomy. (Reuters)

FSOC report: US dollar status as reserve currencyheightens global interconnectedness, reflects USstability; US economy, credit conditions significantlyimproves from crisis; lowering US long-term budgetdeficits crucial to maintaining global confidence inUS treasury securities; EU faces significant marketuncertainty, impact on US depends on how muchEuropean debt crisis evolves; monitoring EU crisescarefully; capital, liquidity of biggest US banks improvedsubstantially but Fed sees some weaknesses in bankcapital planning; US regulators making sure financialcompanies held to high standard; recommendselimination of intraday credit exposure in tri-party repofinancing market. (Reuters)

Dealers submitted $10.58bn of treasuries forconsideration in Fed purchase; Federal Reservebuys $3.12 bln Treasuries. (Reuters)

US SEC adopts new large-trader reporting system US

securities regulators adopted rules on Tuesday that couldhelp them investigate a future flash crash by bettertracking the activities of large traders like banks, hedgefunds and big proprietary trading companies.

US House to vote on faster oil sands pipeline reviewUS lawmakers will vote on legislation on Tuesday thatwould set a firm deadline for the Obama administration todecide the fate of a proposed $7 billion pipeline thatwould transport Canadian oil sands crude to the US Gulfcoast.

Dollar Dives on US Debt Impasse: Traders in Asia soldthe U.S. dollar against nearly every currency in the hours

after speeches by President Barack Obama and HouseSpeaker John Boehner highlighted how far apart the twosides remain in crafting a compromise that would enablethe U.S. to raise its debt ceiling and create a plan to




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reduce the government's borrowing needs over the longterm. The dollar hit all-time lows against the Swiss francand the Singapore dollar and fell against the euro andthe Australian and Canadian dollars. It was near a 14-year low against the Malaysian ringgit. And it was at ornear post-financial-crisis lows against the South Koreanwon, the Thai baht, and the Philippine peso, promptingcentral banks in those countries to intervene in currencymarkets to stem the tide, according to traders familiarwith the matter. (WSJ)

Christine Lagarde, the new head of the InternationalMonetary Fund, said on Tuesday that the US debtceiling must be raised immediately and admitted someinvestors had doubts about the financial rescue forGreece announced last week. In her first major publicappearance as managing director of the fund after takingover on July 5, Ms Lagarde told the Council on ForeignRelations in New York that the US authorities shouldfollow the lead shown by the eurozone in ramping up

their support for Athens. (FT)

US money market funds are stockpiling cash in caseCongress fails to raise the debt ceiling, distorting theshort-term market for US government debt andraising borrowing costs for banks and other financialinstitutions. While the funds will continue to hold USTreasuries in the event of a downgrade or default, theyare building up liquidity and shunning certain securitiesdue to fears that a failure to raise the debt ceiling couldtrigger client redemptions. (FT)

Europe:

Noyer: ECB in state of 'grande vigilance'; Bank ofFrance: translation should be 'strong alertness.(Reuters)

ECBs Smaghi: Urges leadership from US on debtceiling issue, Banks not committed to rate path, EUrecovery not very strong. (Reuters)

Lagarde: IMF May Need More Financial Resources ToTackle Crises; IMF members will likely need to soondiscuss boosting fund resources; Expanding IMF cashbase likely to face opposition in the U.S.; Questionablewhether the IMF's resources can handle escalation of thesovereign debt crisis. (Reuters)

IMF Chief Urges Immediate US, EU Action to SolveDebt Crises; US must solve debt ceiling impasseimmediately to avoid damaging global consequences;Europe must act promptly to implement promisedfinancial and economic restructuring. (Reuters)

Irish FinMin: Ireland could use contingency EU/IMFfunds even if it were knocked back out of debtmarkets after market return. (Reuters)

ECB Lipstok: Restructuring Should Be "A LastResort"; ECB rates "very low"; sees realistic possibilityof growth exerting upward pressure on prices in EU.(Reuters)

Spanish and Italian Borrowing Costs Soar: Spain andItaly once again paid sharply higher yields than a monthago to sell short-term debt, indicating that euro-zone

bond markets remain fragile despite last week'sagreement on a second bailout for Greece. Treasury-billauctions in both countries were closely watched Tuesdayfor clues about the likely level of demand as Italyauctions bonds on Thursday and Spain sells debt nextweek. (WSJ)

Greece expects to implement a deal with privatecreditors to swap their holdings of Greek bonds withlonger-dated securities next month, the country'sdeputy finance minister said in a television interviewTuesday. Speaking on the privately owned Megatelevision channel, Deputy Finance Minister PhilipposSachinidis said bond holders would be offered fourchoices for trading in their existing Greek governmentbonds for 30-year debt. (WSJ)

ECB Balance Sheet Exceeds EUR 2tn In WeekEnding July 22, highest level since the week endingFebruary 4. Net lending to credit institutions increased by

EUR21.4 billion to EUR401.3 billion last week.(Reuters)Last Wednesday a main refinancing operationof EUR153.6 billion matured and a new one of EUR197.0billion settled. Earlier Tuesday, the ECB announced thata total of EUR164.200 billion was lent to banks in seven-day funds, as concerns over the euro zone's peripheryeased somewhat compared with one week ago.(Reuters)

The risk of a breakup in the euro area is lower than ayear ago, Nouriel Roubini, the economist who predictedthe global financial crisis, said. The risk of deflation inadvanced economies has also fallen, he added. [BBG]

British household finances have deteriorated to thelowest point since the depths of the recession,heightening concerns that the economy may be slippingback into a double-dip downturn, the Telegraph says.

Others:

Fresh foreign investment in Brazilian stocks plunged70 per cent in the first half of 2011, dragging down amarket that had been one of the hottest last year.Rising inflation, political interference in key sectors andmeasures to slow credit growth have all damped foreigninvestor sentiment towards Brazils equity market, forcingsome companies to scrap public offerings despite thestrength of the countrys economy. (FT)

George Soros, the billionaire hedge fund manager, isclosing his Quantum fund to outside investors andreturning their money. Quantum, which will continue tomanage about $24.5bn of Soros family money, blamedthe decision on new financial regulations requiring hedgefunds to register with the Securities and ExchangeCommission. (FT)

IMF chief Christine Lagarde on Tuesday raised thepossibility that the organization will need morefinancial resources to tackle ongoing economiccrises and will likely have to discuss the issue soon.The IMF lifted its resources several times since the 2007

economic crisis, most recently last year when it doubledthe size of its special pool of funds to help it providefinancial support to countries in peril. (WSJ)




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Little Justification for BoJ interventionStrength of JPY driven more by concerns over US debtceiling deadlock than internal factors

Odds of BoJ intervention are low unless USDJPY moves

become disorderlyFocus on the US debt ceiling has kept safe havencurrencies like the JPY and CHF very well bid againstthe USD. USDCHF has reached an all time low whileUSDJPY is well below 80, the once perceived line in thesand for Japanese officials. As USDJPY continues totrade below 80.00, speculation of intervention from theBoJ is rising. But in our view, the likelihood ofintervention is very slim; barring any disorderly moves inUSDJPY. While the motive for intervention is there forJapan as it continues to recover from the devastatingearthquakes earlier this year, the reasoning is ratherweak.

For one, the intervention in March was the result ofinternal factors, the Japan earthquake. With JPY flowsflooding back home, JPY made significant gains againstthe majors: USDJPY fell from a high of 79.75 to 76.25while EURJPY dropped to 106.61 from 111.27 on March17. The G7 countries acted in solidarity via acoordinated intervention to mitigate the strength of thecurrency and help allay one of Japans key concerns.This time around, JPY strength has been mostly againstthe USD on the back of the stalemate on the US debtceiling. With the US deep in its fiscal mess and theEurozone mending its own fiscal issues, a coordinatedintervention would be a hard sell. In addition, FXintervention would likely prove to be unsuccessful as it

would have to be accompanied by complementary BoJpolicy (further monetary easing). The last interventionhad a very limited impact on the JPY because while theBoJ initially expanded its balance sheet (to new recordhighs) it shrank it back down once the new fiscal yearbegan in April. This undermined efforts to weaken theJPY. With the BoJ showing little inclination to embark onfresh balance sheet expansion (let along JGBmonetisation) unilateral intervention could quickly turninto an expensive policy mistake.

Second, while the JPY may look expensive incomparison to USD in nominal terms, the picture is quitedifferent in real terms and against an average of its

trading partners. The JPY remains undervalued versusits trading partners on a REER basis, being well below itslong term average. Since the start of 2011, thecurrencies of some of Japans key trading partnersincluding EUR, KRW, and SGD have outperformed theJPY. Although the MYR has underperformed the JPY inrecent months it has since made a comeback. The USDhas been the only big and consistent underperformeragainst JPY (China, Japans largest trading partner, hasalso underperformed but to a much lesser extent giventhe 5% drop in USDCNY in the past year.) In generalJapan maintains its competitiveness against its keytrading partners on a REER basis and on a NEER basisagainst both Europe and some of its key Asian export

competitors. The key positive spin on the strength of thecurrency against the USD is that raw materials and othercommodities priced in USD have become markedly



Chart 1: JPY REER v. JPY REER LT avg.

94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11

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JPY REER Long Term Avg

JPY REER

Source: BNP Paribas

Chart 2: USDJPY v. 10yr yield differential

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Mar May Jul Sep Nov Jan

11

Mar May Jul

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USD/JPY

10y UST v. JGB (RHS)

Source: BNP Paribas

cheaper at a time when Japan begins its reconstructionefforts, something that Japanese officials haveacknowledged as beneficial.

Based on the JPY REER, the BoJ should not be too

alarmed by the moves in USDJPY unless it begins tofreefall. USDJPY will remain hostage to the progress (orlack of) on the US debt negotiation. Our base casescenario is that the US comes to a two stage deal at the11th hour which may not please S&P resulting in adowngrade. The knee jerk reaction will likely be a sell-offin the back end of the UST curve but potentially a rally inthe front end of the curve as the markets start pricing infurther US economic weakness from the implied 2012fiscal drag. Thus, the net impact on USDJPY may belimited given USDJPY is more highly correlated with yieldspreads at the front end of the respective curves than atthe longer end.


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Daily Currency SummaryG3

EURUSD

EURUSD has soared to a high of 1.4536 with price action continuing to be almost fully driven by the lack of progresson the US debt ceiling promoting a view that while a default could be somehow averted, a ratings downgrade maynot. There appears to be some frictions within parties making things all the more complicated, with the Republicancontrolled House of Representatives opting to delay voting on Boehners plan to Thursday. Meanwhile, the WhiteHouse has said it is working towards a "Plan B" with Congress. Meanwhile, for EUR ECB commentary has begun toget hawkish with ECBs Noyer yesterday fairly hawkish- stating that the ECB was in a state of strong vigilance oninflation. Todays German July CPI release will be important and acceleration above 2.3% may see EURUSDhigher. 1.4550 will likely be breached in short order.

USDJPY

We have had continued verbal intervention from Japanese policy makers with USDJPY now below 78.00 for asecond session. Finance Minister Noda once again says JPY moves are one sided, while BoJ official Kamezaki saidthe CB was prepared to proactively take policy action should the JPY advance threaten growth. However, we seeanything other than a coordinated action as having no lasting impact, and see no reason for the US or Europe to bewilling at this juncture. Solo intervention could only intermittently stall the USDJPY decline, which should remain in a

wave of broad USD weakness, especially with JPY vols (1m sub 10%) still well behaved. BoJ Governor Shirakawasrejection of QE as a measure will itself fail to promote independent JPY weakness. As such, USDJPY remainsbiased lower with only semi-official bids likely to slow the move.

JPY CrossesEURJPY managed to rally up to 113.50 late last week but has since fallen back and now remains in a 112.00-113.50range with broader USD weakness at play hence impacting EURUSD and USDJPY.

EUR Bloc

EURGBP

UK GDP up 0.2% q/q and 0.7% y/y/ in line with consensus, and better than some had feared. With the market havinglikely positioned for a weaker reading, GBP rallied and gilts were pressured following the outcome. EURGBPs runup above 0.8880 was completely reversed, with spot now near term channel support of 0.8820. If the latter holds thecross may resume its move higher with hawkish noises resuming from the ECB already. A softer forward looking JulyCBI orders report on Wednesday (-3 tipped versus +1 in June) would be needed to add further pressure on GBP. Welike GBP lower versus commodity FX and Scandies on a multi-week basis.

EURCHF

The gridlock on the US debt ceiling among Congressional officials and the President leaves the timing andsubstance of a US deficit/debt ceiling agreement in complete abeyance. Markets outside the USD axis appear to bepricing in sovereign default risk with gold marking a new high and CHF outperforming. USDCHF has broken down toa fresh all time low at 0.7996. Down channel support kicks in around 0.7820. The July KoF leading indicator is on taptoday and is expected to weaken to 2.11 from 2.23 in June.

EURNOK

The rebound in risk appetite has helped the Scandies make a comeback against both EUR and USD. NOK hadbeen under the cosh of late given its relatively less-liquid nature and proximity to Europe, but the outcome of lastweeks EU Summit has improved the near term tone on the Scandies significantly, and they are gaining as the fiscalsafe havens once again. USDNOK has further to run to the downside on broader USD weakness.

EURSEK

EURSEK should continue to decline with the SEK likely to significantly outperform the EUR even in a broader USDweaker environment. A break of major 100-200 dma support in the 9.0200 area should see the cross fall back to the8.95/9.00 region. Short USDSEK will work well, with a move down to 6.1500 likely in the weeks ahead. Locally, JunePPI today was softer than expected (-0.2% y/y vs. -0.1% tipped) yesterday.

USD Bloc

USDCAD

USD remains broadly weaker following the US debt agreement gridlock, keeping CAD well bid against USD despiteCAD crosses generally performing badly with the CAD following the broader USD trend. The much weaker June CPIrelease Friday (headline 3.1% y/y down from 3.7% y/y in May) supports our view that the BoC will remain on hold tillDecember at least, and could reverse pricing in of a hike by Q3 further.

AUDUSD

AUDUSD rallied in Asia breaking through the prior 1.1012 high after Q2 core CPI measures came in stronger thanexpected (2.7% y/y up from 2.2% in Q1 and versus 2.5% y/y tipped) and the OIS market has reduced its expectationof rate cuts (from 50bps cuts to 20bps cut). BNP Paribas has reiterated its call for a Q4 rate hike as the next movefrom the RBA. Beyond 1.1000, the next major medium term resistance is not until the 1.1500 level.

NZDUSD

We still like carrying long NZD positions into Thursdays RBNZ rates decision. While rates will likely remainunchanged (as per the economists consensus), we note that the majority (10/15) economists still expect rates to beon hold until December. The post earthquake "emergency" rate setting amid signs of strength (business confidencecoming in at 14 month highs) appears inconsistent. Hence, our bias is for the statement to come in on the hawkish

side, thus promoting NZD higher looking ahead.




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FX Forecasts*USD Bloc Q3 '11 Q4 '11 Q1 '12 Q2 '12 Q3 '12 Q4 '12 Q1 '13 Q2 '13 Q3 '13 Q4 '13 Q1 '14

EUR/USD 1.50 1.55 1.45 1.40 1.35 1.35 1.30 1.30 1.30 1.30 1.34

USD/JPY 78 83 85 90 95 95 95 95 95 95 92

USD/CHF 0.83 0.83 0.90 0.93 1.00 1.00 1.04 1.04 1.04 1.04 0.97

GBP/USD 1.65 1.68 1.59 1.56 1.53 1.53 1.53 1.53 1.53 1.53 1.70

USD/CAD 0.98 0.93 0.95 0.97 1.01 1.01 1.04 1.04 1.04 1.04 1.00

AUD/USD 1.09 1.13 1.07 1.04 0.99 0.99 0.96 0.96 0.96 0.96 0.95

NZD/USD 0.82 0.84 0.81 0.80 0.76 0.76 0.74 0.74 0.74 0.74 0.76

USD/SEK 5.93 5.48 5.93 6.21 6.67 6.67 6.92 6.92 6.92 6.92 6.94

USD/NOK 4.98 4.77 5.07 5.26 5.56 5.56 5.77 5.77 5.77 5.77 5.07

EUR Bloc Q3 '11 Q4 '11 Q1 '12 Q2 '12 Q3 '12 Q4 '12 Q1 '13 Q2 '13 Q3 '13 Q4 '13 Q1 '14

EUR/JPY 117 129 123 126 128 128 124 124 124 124 123

EUR/GBP 0.91 0.92 0.91 0.90 0.88 0.88 0.85 0.85 0.85 0.85 0.79

EUR/CHF 1.25 1.28 1.30 1.30 1.35 1.35 1.35 1.35 1.35 1.35 1.30

EUR/SEK 8.90 8.50 8.60 8.70 9.00 9.00 9.00 9.00 9.00 9.00 9.30EUR/NOK 7.47 7.40 7.35 7.37 7.50 7.50 7.50 7.50 7.50 7.50 6.80

EUR/DKK 7.46 7.46 7.46 7.46 7.46 7.46 7.46 7.46 7.46 7.46 7.46

Central Europe Q3 '11 Q4 '11 Q1 '12 Q2 '12 Q3 '12 Q4 '12 Q1 '13 Q2 '13 Q3 '13 Q4 '13 Q1 '14

USD/PLN 2.60 2.48 2.69 2.75 2.81 2.78 2.85 2.77 2.85 2.85 2.65

EUR/CZK 24.3 24.5 24.1 23.9 23.8 23.5 23.7 24.0 23.5 23.3 23.1

EUR/HUF 275 275 269 265 265 260 260 255 260 260 250

USD/ZAR 6.80 6.60 6.55 6.60 6.50 6.50 7.20 7.10 7.00 6.90 6.69

USD/TRY 1.52 1.50 1.56 1.59 1.63 1.65 1.65 1.67 1.69 1.69 1.54

EUR/RON 4.20 4.15 4.20 4.25 4.15 4.10 4.20 4.20 4.10 3.95 3.90

USD/RUB 27.51 27.25 27.86 27.97 28.08 27.65 28.19 27.75 29.07 27.75 27.75

EUR/PLN 3.90 3.85 3.90 3.85 3.80 3.75 3.70 3.60 3.70 3.70 3.55

USD/UAH 7.8 7.8 7.5 7.5 7.5 7.5 7.5 7.5 7.5 7.3 7.4

EUR/RSD 100 100 98 97 96 95 93 92 91 90 85

Asia Bloc Q3 '11 Q4 '11 Q1 '12 Q2 '12 Q3 '12 Q4 '12 Q1 '13 Q2 '13 Q3 '13 Q4 '13 Q1 '14

USD/SGD 1.20 1.19 1.18 1.17 1.16 1.15 1.14 1.13 1.13 1.13 -----

USD/MYR 2.95 2.90 2.87 2.85 2.83 2.80 2.77 2.75 2.73 2.70 -----

USD/IDR 8400 8300 8200 8100 8000 7900 7800 7700 7600 7500 -----

USD/THB 29.50 29.30 29.00 28.70 28.50 28.30 28.00 27.70 27.50 27.50 -----

USD/PHP 42.00 41.50 41.00 40.50 40.00 39.50 39.00 38.50 38.00 38.00 -----

USD/HKD 7.80 7.80 7.80 7.80 7.80 7.80 7.80 7.80 7.80 7.80 -----

USD/RMB 6.40 6.31 6.25 6.21 6.17 6.13 6.23 6.20 6.17 6.15 -----

USD/TWD 28.00 27.50 27.00 26.70 26.50 26.00 26.00 26.00 26.00 26.00 -----

USD/KRW 1040 1030 1020 1010 1000 990 980 970 960 950 -----

USD/INR 44.00 43.50 43.00 42.50 42.00 41.50 41.00 41.00 41.00 41.00 -----

USD/VND 20500 20000 20000 20000 20000 20000 20000 20000 20000 20000 -----

LATAM Bloc Q3 '11 Q4 '11 Q1 '12 Q2 '12 Q3 '12 Q4 '12 Q1 '13 Q2 '13 Q3 '13 Q4 '13 Q1 '14

USD/ARS 4.18 4.25 4.34 4.43 4.51 4.60 4.69 4.78 4.86 4.95 -----

USD/BRL 1.58 1.55 1.53 1.55 1.56 1.58 1.59 1.60 1.61 1.62 -----

USD/CLP 450 435 425 430 435 440 442 445 447 450 -----

USD/MXN 11.40 11.10 11.00 10.90 11.00 11.10 11.10 11.17 11.25 11.30 -----

USD/COP 1730 1690 1690 1700 1710 1720 1725 1730 1740 1750 -----

USD/VEF 4.29 4.29 4.29 4.29 4.29 4.29 8.80 8.80 8.80 8.80 -----

USD/PEN 2.70 2.65 2.63 2.63 2.64 2.66 2.67 2.68 2.69 2.70 -----

Others Q3 '11 Q4 '11 Q1 '12 Q2 '12 Q3 '12 Q4 '12 Q1 '13 Q2 '13 Q3 '13 Q4 '13 Q1 '14

USD Index 72.30 70.76 74.87 77.62 80.72 80.72 82.99 82.99 82.99 82.99 79.73

*End Quarter




8/8

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Daily FX Str Europe 27 July 2011

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