Fx markets weekly

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FX Markets Weekly John Normand AC (44-20) 7325-5222 [email protected] Paul Meggyesi (44-20) 7859-6714 [email protected] Tohru Sasaki (81-3) 6736-7717 [email protected] Arindam Sandilya (1-212) 834-2304 [email protected] Niall O’Connor (1-212) 834-5108 [email protected] www.morganmarkets.com/GlobalFXStrategy J.P. Morgan Securities Ltd. The certifying analyst is indicated by an AC. See page 42 for analyst certification and important legal and regulatory disclosures. FX Outlook: Hedging a trade war As the dollar declines, the G-20’s unwritten currency accord becomes clearer: QE will weaken the dollar indirectly, and the rest of the world will manage the consequences through whatever tactics suit domestic circumstances. An unintended consequence may be a trade war – a low probability event but one which previously exacerbated declines in USD/JPY (autos) and rallies in EUR/USD (steel). The most effective hedges for serious trade conflict in 2011 would be short USD/JPY and USD/CHF, or long USD/CNY. The euro and commodity currencies are the wrong hedges for this tail risk. FX Derivatives The dollar will remain front and center of FX markets, which bodes well for long USD-correlation trades. Stay long USD-vol vs. short EUR-cross vol in CHF, but take profits on AUD and NZD. Options are not re-rating G10 skews in favor of USD puts at the same rate as before. High and rising USD-correlations also suggest caution around an unfettered extension of the dollar downtrend. CAD/JPY vs. USD/CAD is on our radar as a long/short gamma spread; entry levels are 0.7-0.8 vols way. CAD/JPY is an interesting wing option buy in its own right, with var swap vs. vol swap strike differentials at historical lows. Trade Recommendations The prospect of QE-II is proving more toxic for the dollar than QE-I. Stay short against a broad basket of currencies (AUD, EUR, SEK, INR and KRW) to reflect the Fed’s willingness to debase its currency. Similar arguments justify a broad short in GBP vs CHF, EUR, NOK and SEK, especially as fiscal reality bites through next week’s Comprehensive Spending Review. Technical Strategy The USD bear trend has broken through the next line of key supports suggesting further weakness. Importantly, the trend has broadened as laggards such as USD/CAD and NZD/USD have pushed through important levels. The key focus is now on the 1.4375 area for EUR/USD and the 76 zone for the DXY which should define the next extension. Asia FX trends are approaching a number of critical resistance levels, but corrective retracements remain buying opportunities. Stay short USD/JPY, USD/KRW, GBP/JPY, EUR/PLN and long EUR/GBP. FX alpha strategies & manager performance Rate momentum has become mixed for the dollar after a month of recommending an across-the-board sell. Currency and global macro funds are having a strong October, up 0.25% to 1% so far. Research note US-Japan trade war and USD/JPY – implications for USD/CNY (Tohru Sasaki and Junya Tanase) Contents FX Outlook 2 Global FX carry trade monitor 8 FX Derivatives 10 Trade Recommendations 14 Technical Strategy 22 FX alpha strategies & performance 24 Research Notes 26 Market movers 30 Event risk calendar 32 J.P. Morgan Forecasts FX vs forwards & consensus 34 Rates, credit, equities & commodities 35 Global growth and inflation forecasts 36 Global central bank forecasts 37 Sovereign credit ratings and actions 38 Government bond and bank redemptions 39 Research Notes on morganmarkets.com 40 Global FX Strategy contact page 44 Global FX Strategy October 18, 2010

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Transcript of Fx markets weekly

Page 1: Fx markets weekly

FX Markets Weekly

John NormandAC

(44-20) 7325-5222 [email protected]

Paul Meggyesi (44-20) 7859-6714 [email protected]

Tohru Sasaki (81-3) 6736-7717 [email protected]

Arindam Sandilya

(1-212) 834-2304 [email protected]

Niall O’Connor (1-212) 834-5108 [email protected]

www.morganmarkets.com/GlobalFXStrategy J.P. Morgan Securities Ltd.

The certifying analyst is indicated by an AC. See page 42 for analyst certification and important legal and regulatory disclosures.

• FX Outlook: Hedging a trade war As the dollar declines, the G-20’s unwritten currency accord becomes clearer: QE will weaken the dollar indirectly, and the rest of the world will manage the consequences through whatever tactics suit domestic circumstances. An unintended consequence may be a trade war – a low probability event but one which previously exacerbated declines in USD/JPY (autos) and rallies in EUR/USD (steel). The most effective hedges for serious trade conflict in 2011 would be short USD/JPY and USD/CHF, or long USD/CNY. The euro and commodity currencies are the wrong hedges for this tail risk.

• FX Derivatives The dollar will remain front and center of FX markets, which bodes well for long USD-correlation trades. Stay long USD-vol vs. short EUR-cross vol in CHF, but take profits on AUD and NZD. Options are not re-rating G10 skews in favor of USD puts at the same rate as before. High and rising USD-correlations also suggest caution around an unfettered extension of the dollar downtrend. CAD/JPY vs. USD/CAD is on our radar as a long/short gamma spread; entry levels are 0.7-0.8 vols way. CAD/JPY is an interesting wing option buy in its own right, with var swap vs. vol swap strike differentials at historical lows.

• Trade Recommendations The prospect of QE-II is proving more toxic for the dollar than QE-I. Stay short against a broad basket of currencies (AUD, EUR, SEK, INR and KRW) to reflect the Fed’s willingness to debase its currency. Similar arguments justify a broad short in GBP vs CHF, EUR, NOK and SEK, especially as fiscal reality bites through next week’s Comprehensive Spending Review.

• Technical Strategy The USD bear trend has broken through the next line of key supports suggesting further weakness. Importantly, the trend has broadened as laggards such as USD/CAD and NZD/USD have pushed through important levels. The key focus is now on the 1.4375 area for EUR/USD and the 76 zone for the DXY which should define the next extension. Asia FX trends are approaching a number of critical resistance levels, but corrective retracements remain buying opportunities. Stay short USD/JPY, USD/KRW, GBP/JPY, EUR/PLN and long EUR/GBP.

• FX alpha strategies & manager performance Rate momentum has become mixed for the dollar after a month of recommending an across-the-board sell. Currency and global macro funds are having a strong October, up 0.25% to 1% so far.

• Research note US-Japan trade war and USD/JPY – implications for USD/CNY (Tohru Sasaki and Junya Tanase)

Contents FX Outlook 2 Global FX carry trade monitor 8 FX Derivatives 10 Trade Recommendations 14 Technical Strategy 22 FX alpha strategies & performance 24 Research Notes 26 Market movers 30 Event risk calendar 32 J.P. Morgan Forecasts FX vs forwards & consensus 34 Rates, credit, equities & commodities 35 Global growth and inflation forecasts 36 Global central bank forecasts 37 Sovereign credit ratings and actions 38 Government bond and bank redemptions 39 Research Notes on morganmarkets.com 40 Global FX Strategy contact page 44

Global FX StrategyOctober 18, 2010

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Global FX Strategy FX Markets Weekly October 18, 2010 John Normand (44-20) 7325-5222 [email protected] J.P. Morgan Securities Ltd.

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FX Outlook: Hedging a trade war • As the dollar declines, the G-20’s unwritten

currency accord becomes clearer: QE will weaken the dollar indirectly, and the rest of the world will manage the consequences through whatever tactics suit domestic circumstances.

• An unintended consequence may be a trade war – a low probability event but one which previously exacerbated declines in USD/JPY (autos) and rallies in EUR/USD (steel).

• The most effective hedges for serious trade conflict in 2011 would be short USD/ JPY and USD/CHF, or long USD/CNY. The euro and commodity currencies are the wrong hedges for this tail risk.

• Strategy: stay short baskets of USD and GBP

• Trades: In cash, stay short USD vs EUR, SEK, AUD, INR and KRW; stay short GBP vs EUR, CHF, SEK & NOK.

• Next week: US earnings, European PMIs, UK spending review, G-20 build-up

With each week that the dollar declines, the G-20’s unwritten currency agreement becomes more apparent. The US will weaken its currency indirectly though Fed easing, and the rest of the world will manage the consequences through whatever policies suit domestic circumstances (acquiescence, intervention, rate cuts or transaction taxes). The only rule of the road is that countries cannot peg their currencies or drive the dollar higher, since doing so could invite a trade war. (See Consequences of a unilateral Plaza Accord, FXMW, October 8). Since core views are unchanged this week, the Outlook examines how to hedge tail risk around a trade war in 2011.

War is rare, conflict is a constant

Trade wars are very black swans. If trade wars are defined as unilateral restrictions on economically significant goods which impact growth and financial markets, then the world has not experienced one since the Smoot-Hawley tariffs of 1930. The closest approximation would be the US-Japan auto dispute twenty years ago, and prior to that, the Nixon Administration’s tariff hikes of 1971. But trade conflict, defined as restrictions on narrower classes of goods with no market impact, are always underway. Countries have lodged

Chart 1. Global trade disputes have been ebbing over the past decade but are always in play Number of trade disputes filed annually with World Trade Organisation vs global real GDP growth

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Source: J.P.Morgan, WTO

Chart 2. USD/JPY’s undershoots of fair value in 1993 and 1995 could reflect a risk premium for auto dispute Actual USD/JPY rate vs predicted (model) based on regressing spot on US –Japan rate spreads (1-mo rates 12 months forward), daily data, 1990-95 sample period

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over 400 trade disputes with the WTO since its launch in 1995 (chart 1) and the US has been involved in half of those, equally as plaintiff and defendant. These cases range from the universally memorable (US vs Japan on autos) to the seemingly trivial (US vs EU over bananas). Most fail to impact major asset classes since they concern a minor product, or because they are settled before escalating into broader categories or retaliatory actions.

Probably the most significant cases of the past twenty years are the US-Japanese auto dispute and the US-EU steel conflict, because they involved iconic sectors and because the US threatened or imposed unilateral sanctions. Table 1 lists the key events in each saga, from which a simple point emerges: trade conflict does not erupt suddenly. Trade relations deteriorate over several years starting with investigations, the proceeding through negotiation, threat of

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Global FX Strategy FX Markets Weekly October 18, 2010 John Normand (44-20) 7325-5222 [email protected] J.P. Morgan Securities Ltd.

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sanction, sanction then dispute resolution (within or outside the WTO).

Isolating a trade war’s impact on FX

Isolating the currency impact of a trade war requires separating the dispute from the cyclical trend. Consider the case of USD/JPY. As discussed in the research note US-Japan trade war and USD/JPY on page 26 (Sasaki and Tanase), US-Japan trade tensions persisted from the mid-1980s to mid 1990s, when Japan constituted 40% to 60% of the US’s total trade deficit. Over those ten years USD/JPY declined every year but one (1989), which should be unsurprising in view of cyclical conditions and G-7 policy. 1985 to 1986 delivered the Plaza Accord to weaken the dollar; 1989 to 1992 was a major Fed easing cycle; 1993 was the year of a near-record Japanese trade surplus; and 1994 to early 1995 was a period of broad dollar weakness due to dislocations from unexpected Fed tightening and the Mexican peso crisis. As an attempt to isolate the trade war’s impact on USD/JPY, chart 2 regresses USD/JPY on rate spreads as a proxy for cyclical conditions. There are two major undershoots: January to August 1993 (Clinton’s inauguration through his G-7 summit proposing targets for

Japanese purchases of US goods), and February to May 1995, the months between the US’s proposed tariffs and an eventual compromise. Although another factor may explain the residual, a risk premium for trade conflict could account for the divergence. In some months this premium was as high at 15%. The same modeling exercise for EUR/USD during the 2002 steel dispute also yields a decent residual – the euro was some 6% stronger than cyclical conditions would have predicted. This overshoot could also reflect the US accounting scandals which unfolded over the same period, but trade frictions may have aggravated the trend. Note that now, neither the trade-weighted dollar nor individual dollar pairs are far from fair value, suggesting little risk premium for possible trade conflict.

Hedging the next trade war

Whether 2011 delivers a trade war is largely conjectural, but there are four reasons why China looks the likely target for any serious conflict: (1) it accounts for the majority of the US’s trade deficit (chart 4); (2) the US and China have been involved in at least 20 low-level tariff confrontations over the past two years; (3) China’s exchange rate is the most managed of any major trading partner; and (4) its retaliatory weapon of selling – or not buying – US Treasuries is less effective when the Fed substitutes as a

Table 1: Characteristics of US-Japan auto and US-EU steel disputes Product Countries

involved Key dates Economic significance of

products

autos US vs Japan January 1993: Clinton inaugurated and raises trade issues as a means of boosting the US economy.

July 1993: Clinton announces at G-7 summit the Framework for a New Economic Partnership to open Japanese markets for autos and auto parts, as well as insurance and telecoms.

February 1994: Talks deadlock over US demands that Japan commit to quantitative targets for US goods.

Oct 1994: US proposes 100% tariffs on Japanese autos to retaliate for alleged unfair trade practices in Japanese auto parts market

May 1995: Japan files claim with WTO.

June 1995 Compromise agreement reached under which Japan agrees to increase purchases of autos and auto parts

In 1993 US exported $50bn of autos and auto parts and imported $100bn. The $50bn annual trade deficit in autos was the second highest sectoral deficit, after the $75bn annual deficit in consumer goods.

steel EU (later joined by Japan, Korea, Brazil and others) vs US

2000: Presidential candidate Bush promises voters in Ohio and West Virginia that his Administration would aid the steel industry.

June 2001: US launches investigation into European trade practices for steel sector.

October 2001: US publishes preliminary findings.

Feb 2002: US publishes final report.

March 2002: US imposed 8% to 30% tariffs on steel imports for three years. EU immediately requests WTO consultation. Five other countries join EU complaint against US.

July 2003: WTO rules against US.

December 2003: US repeals tariffs.

In 2002, US imported $12bn and exported $8bn of steel and steel products. The deficit in steel

Source: J.P.Morgan

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Global FX Strategy FX Markets Weekly October 18, 2010 John Normand (44-20) 7325-5222 [email protected] J.P. Morgan Securities Ltd.

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buyer of last resort. The obvious currency hedge would be to buy USD/CNY, since the market discounts 3.3% appreciation over the next near when the authorities would probably fix the currency if subjected to excessive US pressure. Due to hedging demand forwards and vols would move significantly even without a change in spot, as occurred in 2008 when forward points moved from discount to premium and vols spiked from 5% to 25%.

The difficulty with this position is highlighted by the US-Japan and US-EU disputes, however. Hedging directly though the currency in conflict must respect cyclical conditions, since trade wars can require years to evolve, even once specific sanctions are mentioned. In the US-Japan and US-EU cases, cyclical conditions favored a higher yen and euro as tensions built. In China’s case, cyclicals favour a weaker USD/CNY for the next several months, resulting in losses on the hedge if trade war is a very long term event risk.

As a proxy hedge, the best options are to sell USD/JPY or USD/CHF. These currencies are biased lower in any event due to cyclical conditions (QE in the US, trade surpluses in Japan and Switzerland), and would benefit from any investor deleveraging which accompanies an escalation in trade tensions. Owning the euro or commodity currencies are poor hedges since both would decline with equities. This impact would counter any bid for euros which might come from China’s shift away from Treasuries during trade conflict. We are not tactical sellers of either USD/JPY or USD/JPY today given how far the dollar has moved (see Trade Recommendation on page 14), but we intend to add on pullbacks.

Next week: US earnings, European PMIs, G-20 build-up, UK CSR Next week is heavy on all fronts: earnings, data and policy announcements. Nearly 20% of the S&P500 reports earnings next week (see Earnings calendar on page 6), and we expect this week’s string of better-than-expected releases to extend into November. So if QE were not sufficient propellant for non-dollar currencies, earnings would be.

In the US, the key data releases are the TIC and industrial production on Monday, housing starts on Tuesday and the Philadelphia Fed on Thursday. In the Euro area, watch the Zew on Tuesday, flash PMIs on Thursday and Ifo and BNB on Friday. The monthly batch of Chinese data due Thursday – GDP, CPI, retail sales and industrial products – will be scrutinised given hopes that China will reaccelerate into 2011 after its apparent soft landing.

In the UK, retail sales prints on Thursday, but it will be anticlimactic following release of the Chancellor’s Comprehensive Spending Review on the day before.

Osborne laid out the broad deficit targets in his June emergency budget (£149bn in FY 2010-11, £116bn in 201-12, £89bn in 2012-13), and his speech Wednesday should focus on departmental details. There is some risk that he backs away from the previously-proposed broad targets in view of the economy’s slowdown, though we doubt he would tempt the gilt market vigilantes so carelessly.

Three central banks meet next week: the Bank of Canada on Tuesday and the central banks of Brazil and Thailand on Wednesday. We expect Canada and Brazil to stay on hold until Q1 2011, but the BoT should hike 25bp next week.

G-20 finance ministers gather on Friday in Seoul ahead of the leader’s summit on November 11. Within such a diverse group, the only likely consensus is their opposition to volatility, an expression which accommodates the US desire for a weaker currency and the rest of the world’s burden of managing that decline. A communiqué could lift this language from previous G-7 statements, but should not have much market impact other than confirming that countries will continue to conduct smoothing operations in the forex market as the Fed’s QE program sustains excessive capita flows.

Chart 3. The US’s trade deficit with China exceeds that of Japan, Mexico and Canada combined US trade deficit by major trading partner, $bn, 12-mo rolling sum

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Source: J.P.Morgan

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Global FX Strategy FX Markets Weekly October 18, 2010 John Normand (44-20) 7325-5222 [email protected] J.P. Morgan Securities Ltd.

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Main recommendations Closed/new trades ⎯ None.

Existing trades ⎯ In cash, stay long AUD/USD from 0.9385 opened

September 17, and short GBP/SEK from 11.19, opened September 10.

⎯ Stay long EUR/USD from 1.3720, long EUR/GBP from 0.8680, short USD/SEK from 6.7100 and short USD/KRW from 1130, all opened October 1.

⎯ Stay short GBP/ CHF from 1.5479, and short GBP/NOK from 9.3081, all opened September 24.

⎯ Stay short USD/INR from 46.17 opened June 18. ⎯ In options, keep a 12-mo at-expiry EUR/CHF

1.25 digital.

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Global FX Strategy FX Markets Weekly October 18, 2010 John Normand (44-20) 7325-5222 [email protected] J.P. Morgan Securities Ltd.

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Earnings calendar Date Time Company Name Company Ticker Estimate-JPM Estimate-Cons

Oct 18 (Mon) 13:00 Citigroup C US n.a. 0.06Aft-mkt IBM IBM US n.a. 2.74

Apple AAPL US n.a. 4.07Oct 19 (Tue) Bef-mkt Coca-Cola Co/The KO US n.a. 0.90

11:30 Bank of New York Mellon BK US n.a. 0.5512:00 Bank of America BAC US n.a. 0.1413:00 Goldman Sachs GS US n.a. 2.25 Occidental Petroleum Corp OXY US n.a. 1.38 EMC Corp/Massachusetts EMC US n.a. 0.30 Johnson & Johnson JNJ US n.a. 1.15

Yahoo! Inc YHOO US n.a. 0.15Oct 20 (Wed) Bef-mkt Abbott Laboratories ABT US n.a. 1.04

Bef-mkt US Bancorp USB US n.a. 0.43Bef-mkt United Technologies Corp UTX US n.a. 1.2812:00 Altria Group Inc MO US n.a. 0.5212:30 Boeing BA US n.a. 1.0013:00 Wells Fargo & Co WFC US n.a. 0.5621:15 Fidelity National Financial FNF US n.a. 0.30

eBay EBAY US n.a. 0.37US Airways LCC US n.a. 1.11SanDisk Corp SNDK US n.a. 1.05

Oct 21(Thu) Bef-mkt United Parcel Service UPS US n.a. 0.88Bef-mkt Freeport-McMoRan FCX US n.a. 1.94Bef-mkt McDonald's Corp MCD US n.a. 1.24Bef-mkt United Parcel Service UPS US n.a. 0.88Bef-mkt SunTrust Banks Inc STI US n.a. -0.0212:00 Philip Morris International PM US n.a. 1.0112:15 Xerox XRX US n.a. 0.2112:30 Caterpillar CAT US n.a. 1.0913:00 AT&T T US n.a. 0.56

Aft-mkt American Express AXP US n.a. 0.83Swedbank SWEDA SS n.a. 1.22Morgan Stanley MS US n.a. 0.22Credit Suisse CS US n.a. 1.03

Eli Lilly & Co LLY US n.a. 1.15 Union Pacific Corp UNP US n.a. 1.48 Credit Suisse CS US n.a. na

Oct 22 (Fri) 11:00 Schlumberger SLB US n.a. 0.71 Verizon Communications VZ US n.a. 0.54 Amazon.com Inc AMZN US n.a. 0.48 Bristol-Myers Squibb BMY US n.a. 0.53

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Global FX Strategy FX Markets Weekly October 18, 2010 Yoonyi Kim (81-3) 6736-7729 [email protected] JPMorgan Chase Bank NA

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Global FX carry trade monitor Chart 1: Japanese retail -- market capitalisation of 100 largest FX-denominated ITs

Chart 2: Japanese retail -- aggregate retail margin shorts in JPY

¥trn; market capitalization of 100 largest investment trusts excluding funds investing in equities; ranked in the order of total asset as of Nov 17th 09

¥trn, Japanese retail measured by positions in USD, NZD, EUR, GBP and AUD on Tokyo Financial Exchange; positive indicates shorts in JPY

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Source: J.P. Morgan, Bloomberg Source: J.P. Morgan, TFE;

• Japanese retail exposure to foreign currency investment trusts slightly declined from ¥17.3 trn as of Oct 7th to ¥17.1 trn as of Oct 8th and has stabilized. This is 11% below this year’s high at ¥19.2trn and 29% below the record high at ¥24.1trn marked in Aug 08.

• Japanese aggregate margin shorts in JPY reached ¥5.2 trn as of Oct 12, the largest since Sep 14th. However, it declined to ¥4.3 trn as of Oct 14th. This is still 32% and 39% below this year’s peak at ¥6.3trn and record peak at ¥7.1trn respectively.

Chart 3: Japanese retail -- margin position in JPY vs USD, EUR, AUD

Chart 4: CTAs -- aggregate IMM position in USD

mln local currency. positive indicates long in local currency/short in JPY $ bn as the sum of net speculative positions on the IMM in AUD, NZD, CAD, EUR, GBP, JPY, CHF and MXN.

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• Margin longs in USD/JPY marked a new record high at $35.5bn as of Oct 12, before modestly declining to $33.1bn as of Oct 14th. Short EUR/JPY increased by €1.2 bn to €3.7 bn in the past week while long AUD/JPY was largely unchanged at around A$12 bn.

• Aggregate IMM shorts in USD have hit a new all-time high of $35.9bn as of the October 8 report. Longs are almost evenly spread across euros ($8bn), yen ($8bn) and Australian dollars ($7b). Swiss longs total $3bn.

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Global FX Strategy FX Markets Weekly October 18, 2010 Yoonyi Kim (81-3) 6736-7729 [email protected] JPMorgan Chase Bank NA

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Chart 5: Market capitalisation of US-listed currency ETFs Chart 6: Currency managers and global macro hedge funds -- Beta

with trade weighted USD Weekly data, $bn. Positive value indicates longs in foreign currency and shorts in USD

HFR used for global macro hedge funds. Barclay BTOP Index used for currency managers.

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• US retail exposure to foreign currencies via ETFs was unchanged at $3.3bn, which is just a tad lower than the year-to-date high at $3.4bn. Compared to the pre-Lehman peak, however, it is still 35% below.

• The returns beta for macro funds with the dollar was stable at around -0.2 for global macro funds, indicating a small short. The beta for currency managers held around -0.4, indicating a moderate short. Note that betas are still well shy of their 2007/08 lows.

Chart 7: Currency managers and global macro hedge funds -- Beta with G-10 carry strategies

Chart 8: Currency managers and global macro hedge funds -- Beta with emerging markets carry strategies

Positive beta implies a long in carry, a short in dollars HFR used for global macro hedge funds. Barclay BTOP Index used for currency managers.

Positive beta implies a long in carry, a short in dollars HFR used for global macro hedge funds. Barclay BTOP Index used for currency managers.

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• Both returns beta for macro funds and currency managers with G-10 carry continued to show little change with the beta for former staying flat since mid-July and the latter since mid-July.

• Macro funds’ returns beta with EM carry jumped notably to +0.1 from close to year-to-date low at -0.5, turning positive for the first time since early June. The beta for macro funds also advanced further to record a new year-to-date high at +0.3. Historical high for each beta stands at +1.8 and +0.8 respectively.

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Global FX Strategy FX Markets Weekly October 18, 2010 Arindam Sandilya (1-212) 834-2304 [email protected] JPMorgan Chase Bank NA

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FX Derivatives • The dollar will remain front and center of FX

markets, which bodes well for long USD-correlation trades. Stay long USD-vol vs. short EUR-cross vol in CHF, but take profits on AUD and NZD.

• Options are not re-rating G10 skews in favor of USD puts at the same rate as before. High and rising USD-correlations also suggest caution around an unfettered extension of the dollar downtrend.

• CAD/JPY vs. USD/CAD as a long/short gamma RV is beginning to look interesting. Entry levels are 0.7-0.8 vols away from current implied spreads.

• CAD/JPY is an interesting wing option buy in its own right, with var swap vs. vol swap strike basis at historical lows.

Another week, another bout of dollar selling. Dovish Fed minutes on Tuesday nipped any impending trend correction in the bud, and the surprise MAS move to increase the slope and width of the SGD NEER policy band on Thursday accelerated the downdrift in the greenback. Option markets have however not re-rated the dollar’s prospects lower with as much enthusiasm lately as spot markets. Chart 1 highlights this nascent divergence by overlaying the beta of average G10-USD skews wr.t. DXY on the dollar index itself. Even as the DXY has pushed lower, the rate at which G10 skews have re-priced in favor of USD puts has come off the boil over the past week. This dovetails well with a prior analysis that suggested dollar bearishness as measured by option skews was approaching a historical extreme, a set-up that has typically preceded a 1%-2% correction in the DXY over the following month (FXMW, Oct 8). While this does not in itself mark the end of the spot trend, it does suggest that gains for dollar shorts could come at a diminishing pace in the days ahead.

A similar read is provided by the relationship between the USD-based G10 correlations and the DXY. Intuitively, since the dollar explains around 60% of the variation in all majors taken together, pronounced dollar trends should drag USD-based correlations higher as they gather steam, before eventually exhausting themselves and causing correlations to top out. Empirical analysis lends some credence to this hypothesis. Chart 2 and 3 plot the average ex-post returns from entering long DXY positions contingent on various levels of ex-ante USD-based correlations – defined as the average pairwise 3M implied correlation between USD-majors within G10 – using either a threshold drop in corrs (chart 2) or fixed holding periods (chart 3) to mark exit points from trades. The inference is identical from both: high regimes of USD-correlations have typically preceded

Chart 1. Option markets are currently not re-rating USD-skews in favor of USD-puts at the pace at which it was in previous weeks USD-skews defined as average 3M 25D USD call vol – USD put vol across 9 G10-currencies. Beta is calculated as the slope of regressing hourly vol pt. changes in the average USD-skew on hourly % changes in DXY over rolling 1-week windows.

-0.15

-0.10

-0.05

0.00

0.05

0.10

0.15

15-Sep 20-Sep 26-Sep 2-Oct 8-Oct 14-Oct

76

77

78

79

80

81

82DXY

Rolling 1-w eek beta of av g. G10 USD-skew s w .r.t. DXY

Beta (vol pts per 1% DXY move)

Source: Bloomberg

Chart 2. Higher ex-ante USD-based correlations have historically yielded larger returns from long DXY positions, whether the exit point is determined by a threshold drop in correlation… Average ex-post returns (since ‘99) from long DXY positions contingent on various ex-ante USD-based correlation buckets, where corrs are computed as the average pairwise 3M implied correlation between USD-majors within G10. Exit points from DXY longs are marked by a threshold drop in USD-corrs. This is a low-frequency signal, with the average holding period corresponding to a 5% drop being a year.

-2%

0%

2%

4%

6%

8%

40% 43% 45% 48% 50% 53% 55% 58% 60% 63% 65% 68%

1.0% 2.5% 5.0%

Av g. long DXY returns

Correlation bucket mid

Ex it DXY longs w hen correlation drops:

Current correlation bucket

Source: J.P. Morgan

Chart 3. … or by a pre-defined holding horizon

-3%

-1%

1%

3%

5%

40% 43% 45% 48% 50% 53% 55% 58% 60% 63% 65% 68%

2 w eeks 1 month 2 months

Av g. long DXY returns

Correlation bucket mid

Ex it DXY longs after holding for:Current correlation bucket

Source: J.P. Morgan

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Global FX Strategy FX Markets Weekly October 18, 2010 Arindam Sandilya (1-212) 834-2304 [email protected] JPMorgan Chase Bank NA

11

3-4 % corrections in the dollar trend. In light of this, the current correlation level of 57% – at 0.7 std. devs above a long run mean, not quite at a historical peak – does not justify positioning for a trend reversal in the DXY the way 65%+ buckets do. But the empirical pattern does suggest some deceleration in the dollar downtrend going forward, even if a complete reversal maybe some way off.

Regardless of direction though, the dollar will remain front and center of FX markets for some time now – despite all indications that the Fed is set to announce LSAPs on Nov 3, any disappointments on this front could turn out to be explosive for markets given current positioning – which bodes well for long USD-correlation trades. Our proxy correlation longs in the portfolio in the form of USD-vol vs. EUR-cross vol spreads have finally gained traction of late after more than a month of frustrating price action. A number of USD-vols – most notably AUD, EUR and the USD/Scandis – have now transitioned to the rich end of the vol scale after a sharp uptick in implieds over the past two weeks. The move is almost certainly an artifact of directional option demand given that realized vols have not firmed up nearly enough to justify the move, and has led our vol spreads to reprice to levels where taking profits on some of them seems prudent (chart 4). That still leaves us with one finger in the long USD-corr. pie through a long USD/CHF vol vs. short EUR/CHF vol spread initiated last week – the only trade of its ilk that still offers value given its stark cheapness in the context of generally elevated dollar corrs. Admittedly, the richening of EUR/CHF vols owes much to the antics of the SNB in the first half of the year and the enormous amount of levered capital that the bullish CHF trade attracted to fade CB intervention. But with the SNB having now stepped aside, the broad dollar trend should re-assert its influence on the spread and force a relative reassessment higher of USD/CHF vols.

In relative value space, one trade that we have begun to track closely is buying CAD/JPY gamma as a spread to USD/CAD gamma. Generally speaking, we have been loath to buy yen-cross vols against USD-vols given the grind lower in USD/JPY over the last 3-4 months. The latter has meant that yen-crosses have underperformed dollar pairs in the direction of currency strength/USD- or JPY-weakness, thereby reducing the incentive to own the more expensive JPY-cross vol over the USD vol on at least one side of the spot distribution (FXMW, September 17). That said, the one currency to which the argument probably does not apply as forcefully as it does to others, and where by extension the reverse trade is not overly onerous, is CAD. This can be attributed to the fact that a dollar downtrend does not usually elicit the kind of runaway moves that one usually associates with other commodity bloc currencies such as AUD, largely on account of economic linkages between US and Canada that tend to act as automatic trend

Chart 4. Long USD-vol vs. short EUR-cross vol spreads in AUD and NZD have re-priced to levels where taking profits looks prudent

-2.0Jun 10Apr 10

1.0

0.5

0.0

-0.5

-1.0

-1.5

Aug 10 Oct 10

NZD/USD - 1.2*EUR/NZD 6M 25D strangle spread

vol pts. AUD/USD - 1.2*EUR/AUD 6M 25D strangle spread

Source: Bloomberg Chart 5. CAD/JPY is a better gamma buy relative to USD/CAD

Apr-10 Oct-10

20

Oct-07 Apr-08 Oct-08 Apr-09 Oct-09

15

10

-5

0

5

CAD/JPY - 1.3*USD/CAD 3M Implied Vol SpreadCAD/JPY - 1.3*USD/CAD 1M Realized Vol SpreadCAD/JPY - 1.3*USD/CAD 3M Realized Vol Spread

vol pts.

Source: J.P. Morgan

stabilizers, absent a large and diverging policy differential between the two central banks; the latter is likely to be less of an issue over the next quarter with our economists pushing back the date of the next BoC hike to March 2011. More critically from the standpoint of trade optics, vol compression over the past month has pushed implied spreads down to levels that are approaching '09 lows, and are significantly under trailing realized vols (chart 5). This should place a floor under the spread if the softness in the greenback extends further, while exposing the trade to greater upside in the event of a trend correction, or less likely, another round of BoJ intervention. Historical stats suggest we are 0.7-0.8 vols of cheapening in the beta weighted spread away from pulling the trigger on the trade, and will remain on our radar for the next couple of weeks.

That CAD/JPY turns up as the long leg of the vol RV above is interesting in the light of a rich/cheap analysis of wing options. One approach to gauging value in owning wings is to consider the attractiveness of owning variance swaps over vol swaps. Because the vol swap product is linear in

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Global FX Strategy FX Markets Weekly October 18, 2010 Arindam Sandilya (1-212) 834-2304 [email protected] JPMorgan Chase Bank NA

12

realized vol at expiry while the variance swap payout is in terms of vol squared, the net P/L from a vega-neutral long/short spread between the two is quadratic in at-maturity realized vol (chart 6), with long var/short vol combinations out-performing in outsized or extremely muted market moves when delivered vols end up beyond the two roots of the quadratic. Currency pairs that usually deliver vol outside these roots should rank as good wing option longs, and CAD/JPY ranks as one of the few that qualify as attractive variance buys on this gauge (chart 7). In addition, the absolute level of the var swap – vol swap strike basis in CAD/JPY is plumbing historical lows (chart 8), which buttresses the case for overweighting OTM strikes in the cross. In contrast, a number of EUR/high beta crosses (EUR/BRL, EUR/MXN, EUR/NZD) require generously wide thresholds of realized vols to be breached before wing longs can begin to deliver positive P/L, and therefore appeal as variance sells. Even though the market for flat vega products such as vol and var swaps has widened out considerably from their pre-crisis days and trading spreads between the two is transaction cost prohibitive, rich/cheap rankings like these are useful to track even if the actual trade implementation is via simple delta-hedged vanilla butterflies.

Chart 6. P/L from long var swap vs. short vol swap is quadratic w.r.t. the realized vol at expiry

P/L at ex piry

Realized v ol at ex piry

Root1 Root2

Root1 = KVAR - √[2*KVAR*(KVAR-KVOL)]Root2 = KVAR + √[2*KVAR*(KVAR-KVOL)]

Source: J.P. Morgan Chart 7. CAD/JPY has more often than not clocked realized vols outside the current roots of a long 1Y var /short 1Y vol swap spread Fraction of time since 2002 that 1Y realized vols have ended up within the current lower and upper roots of a long 1Y var swap vs. short 1Y vol swap spread. Rolling 1Y realized vols computed off 252 WMR fixings.

0%

20%

40%

60%

80%

100%

USD/

CZK

USD/

HUF

EUR/

CHF

CHF/

JPY

USD/

SEK

USD/

SGF

EUR/

JPY

GBP/

JPY

USD/

NOK

CAD/

JPY

USD/

TRY

EUR/

NZD

EUR/

MXN

EUR/

CZK

EUR/

ZAR

USD/

CHF

USD/

CLP

EUR/

BRL

USD/

ZAR

CAD/

MXN

Wings richWings cheap

Source: J.P. Morgan Chart 8. CAD/JPY var swap strikes are trading at a historically low premium to vol swap strikes, making long wing positions attractive CAD/JPY 1Y var swap – vol swap (mid) strike differential. No transaction costs.

-0.2

0.2

0.6

1.0

1.4

1.8

Feb-07 Nov -07 Jul-08 Apr-09 Jan-10 Oct-10

v ol pts.

Source: J.P. Morgan

Page 13: Fx markets weekly

Global FX Strategy FX Markets Weekly October 18, 2010 Arindam Sandilya (1-212) 834-2304 [email protected] JPMorgan Chase Bank NA

13

Implied volatilities

1M 3M 1Y 1M 3M 1Y 1M 3M 1YAUDJPY 16.3 17.0 19.3 24.1 23.9 24.0 -0.88 -1.01 -1.08AUDUSD 14.4 14.5 15.5 17.7 17.6 17.4 -0.56 -0.69 -0.71CADJPY 15.6 16.1 17.9 21.1 20.9 20.8 -0.87 -0.98 -0.92CHFJPY 11.1 11.9 13.9 15.6 15.5 15.7 -1.07 -1.12 -0.85EURAUD 10.9 11.6 13.1 13.4 13.7 14.0 -0.58 -0.63 -0.42EURCAD 11.2 11.5 12.6 13.1 13.2 13.5 -0.52 -0.56 -0.39EURCHF 10.7 10.3 9.9 7.3 7.0 6.6 1.08 1.26 1.72EURGBP 10.1 10.4 11.4 12.2 12.5 12.8 -0.53 -0.64 -0.58EURJPY 13.3 14.1 16.4 17.7 17.8 18.1 -0.77 -0.80 -0.55EURNOK 8.7 8.6 8.9 10.9 10.6 10.1 -0.58 -0.62 -0.53EURNZD 11.0 11.6 13.2 14.1 14.3 14.6 -0.88 -0.96 -0.77EURSEK 8.1 8.1 8.5 11.5 11.1 10.5 -0.89 -0.93 -0.88EURUSD 13.5 13.5 13.6 13.7 14.0 14.2 -0.05 -0.18 -0.26GBPJPY 13.2 14.2 16.6 20.0 19.9 20.1 -1.04 -1.10 -1.01GBPUSD 10.9 11.3 12.3 14.3 14.5 14.7 -0.83 -0.95 -1.05NZDUSD 14.3 14.5 15.6 18.3 18.4 18.3 -0.82 -1.00 -1.10USDCAD 12.4 12.5 13.2 14.7 14.8 14.9 -0.57 -0.69 -0.68USDCHF 12.9 12.9 12.8 12.6 12.9 13.0 0.08 -0.02 -0.07USDJPY 12.2 12.5 13.4 14.4 14.3 14.3 -0.62 -0.74 -0.87USDNOK 15.7 15.7 15.8 17.4 17.3 17.1 -0.38 -0.46 -0.59USDSEK 15.8 15.7 15.7 18.0 17.6 17.3 -0.50 -0.54 -0.68USDARS 5.0 8.0 15.8 10.2 15.7 26.2 -0.49 -0.80 -1.12USDBRL 12.8 14.4 16.5 19.8 19.5 19.6 -0.81 -0.79 -0.77USDCLP 13.2 12.6 12.5 16.3 16.4 17.0 -0.58 -0.76 -0.98USDM XN 12.3 13.2 14.2 17.8 17.5 17.6 -0.70 -0.66 -0.64EURCZK 5.8 6.3 6.8 11.0 10.2 9.3 -1.03 -1.03 -1.07EURHUF 10.1 11.2 13.0 15.6 15.2 14.9 -0.95 -0.89 -0.58EURPLN 10.5 11.3 12.3 16.8 15.9 14.9 -0.88 -0.85 -0.75USDRUB 12.1 12.1 12.5 14.2 15.5 18.4 -0.43 -0.67 -1.05USDTRY 12.7 12.8 13.6 15.5 15.8 16.8 -0.47 -0.63 -1.01USDZAR 14.3 14.5 15.0 20.7 20.7 20.7 -0.98 -1.10 -1.41USDIDR 6.5 8.5 11.9 16.8 17.8 19.8 -0.95 -0.96 -0.92USDINR 10.5 10.9 11.5 11.5 12.3 13.3 -0.27 -0.38 -0.46USDKRW 14.8 15.0 15.3 20.2 19.2 17.7 -0.46 -0.46 -0.43USDPHP 8.5 8.6 9.7 10.3 11.2 12.6 -0.46 -0.65 -0.74USDSGD 7.5 7.6 7.9 7.7 8.1 8.6 -0.09 -0.19 -0.34USDTWD 6.7 6.9 7.3 7.0 7.7 8.6 -0.16 -0.40 -0.60

Z-Score Implied VolsAvg. Implied VolsCurrent Implied Vols

Biggest 3M Implied Volatility Movers Weekly Changes Monthly Changes

-1.0 -0.6 -0.2 0.2 0.6 1.0

GBPJPYEURJPYCHFJPYAUDJPYEURCADEURSEK

USDCADAUDUSDEURCZKUSDINR

USDPHPUSDTRYUSDARSUSDSGDUSDRUBUSDJPY

USDM XNUSDKRWUSDCLP

Vol Vol

-1.0 -0.2 0.6 1.4 2.2 3.0

GBPJPYCADJPYEURNZDEURJPYUSDCLPEURAUDEURHUFEURCZKUSDIDR

AUDJPYEURUSDAUDUSDUSDPHPUSDSEKUSDNOKUSDSGDUSDTWDUSDKRWUSDINR

Vol

Vol

Source: J.P. Morgan

Front-End Vol Rankings In order of Normalized Volatility Risk Premium*

*Normalized Volatility Risk Premium = 1M Implied Vol / 1M Realized Vol - 1

0.0 0.6 1.2 1.8 2.4 3.0

EURNZDEURCHFEURCADUSDTWDEURGBPEURUSDEURHUFUSDNOKUSDZARUSDSEKUSDBRLGBPJPYUSDJPY

USDM XNEURCZKUSDSGDAUDJPYUSDARS

Vols RICH

Vols CHEAP

Source: J.P. Morgan

Open Trades

Entry Entry* Current P/L P/Ldate mid Units

Sandilya 09/07/10 0.2 -0.2 -0.4 vol pts. Vol spread proxy for a defensive long CAD/USD vs. CAD/EUR correlation trade

Sandilya 23/07/10 -3.6 -1.7 1.9 vol pts. Vol spread proxy for a defensive long MXN/JPY vs. MXN/EUR correlation trade

Sandilya 30/07/10 -0.8 0.7 1.5 vol pts. Profit taking on realized correlation

Sandilya 13/08/10 0.0 0.5 0.5 vol pts. Profit taking on realized correlation

Sandilya 13/08/10 12.4 10.7 -1.7 vol pts. Attractive valuations on GBP volsSandilya 10/09/10 1.6 0.7 0.8 vol pts. Riskies rich vs. history,ATMs and realized skews

Sandilya 10/09/10 0.7 0.2 -0.5 vol pts. Relative value in gamma

Sandilya 17/09/10 16.0 16.4 -0.4 vol pts. Short yen vol theme, back-end vols rich to frontSandilya 24/09/10 16.6 17.2 -0.6 vol pts. Historically steep vol curve, contained vol levels

Sandilya 08/10/10 1.5 0.7 -0.8 vol pts. USD/CHF vols underpriced vs. EUR/CHF vols in a high dollar-based correlation environment

Sell EUR/SEK 3M 25D Risk Reversals

Sell USD/BRL 6M6M FVAs

Buy 2M AUD/USD straddes vs. Sell 2M AUD/CAD straddles, 100:120 AUD vega ratioSell EUR/JPY 1Y 25D strangles

Buy 6M 25D USD/CHF strangles vs. Sell 6M 25D EUR/CHF strangles, 100:120 vega ratio

Analyst Description

* For delta-hedged straddles and vol products, P/L is in vol points; for directional trades, bp of notional; negative indicates a net credit at inception

Remarks

Buy 6M 25D USD/CAD strangles vs. Sell 6M 25D EUR/USD strangles, equal USD vega on both legs

Buy 6M 25D AUD/USD strangles vs. Sell 6M 25D EUR/AUD strangles, 100:120 AUD vega ratio

Buy GBP/USD 6M straddles

Buy 6M 25D NZD/USD strangles vs. Sell 6M 25D EUR/NZD strangles, 100:120 NZD vega ratio

Buy 6M 25D MXN/JPY strangles vs. Sell 6M 25D EUR/JPY strangles, 100:140 JPY vega ratio

Page 14: Fx markets weekly

Global FX Strategy FX Markets Weekly October 18, 2010 Paul Meggyesi (44-20) 7859-6714 [email protected] J.P. Morgan Securities Ltd.

14

FX trade recommendations Trade recommendations in this section are mostly spot, for easier incorporation into the monthly Global Markets Outlook & Strategy (GMOS), which outlines J.P. Morgan’s flagship model portfolio across bonds, credit, equities, fx and commodities. Some directional option trades are included here as alternatives to cash position, and as a complement to relative value trades discussed in FX Derivatives section of this publication (p. 10).

Current recommendations are marked to market at Friday afternoon London time. A complete inventory of closed trades is presented at the end of this section along with performance statistics such as success rates and average returns per trades.

Trade Recommendations • The prospect of further QE is proving more toxic

for the dollar than QE1.

• Stay short against a broad basket of currencies to reflect the Fed’s willingness to debase its currency.

• Similar arguments justify a broad short in GBP, especially as fiscal reality bites

• Closed trades: None

• New trades: None.

• Existing trades: Stay short USD versus AUD, EUR, SEK, INR and KRW (all cash). Stay short GBP versus CHF, EUR, NOK and SEK. Hold short EUR/CHF via a 1-yr at-expiry digital.

The overarching theme for FX remains the growing divide between the developed world’s central banks, between the happy debasers on the one hand (the Fed and the BoE) and those with either an economic or philosophical objection to a more explicit pursuit of inflation. It is not necessary to make a normative judgement about which central bank course is correct; merely to recognise that nominal exchange rates will adjust to reflect the varying inflation preferences of individual central banks. A credible commitment to inflate is a credible commitment to devalue.

The question for us is not whether the theme will change – monetary divergence seems entrenched for a further one-two quarters at least, even if the political frictions created by monetary and exchange rate policies are more unpredictable – but whether QE2 is yet discounted in the dollar and in sterling. This is hard to answer with precision, not least because the Fed has offered little if any guidance about the magnitude or timing of additional large scale asset purchases. But on reasonable assumptions a $500bn asset purchase programme would depress 10-year Treasury yields to the low 2.00s, some way below their current 2.50%. On a yield basis, therefore, it would seem that the dollar has some way yet to decline. Another way to consider this is to compare the response of the dollar following the launch of QE1 last March with its performance since August 27 when Bernanke set out the case for additional stimulus (chart 1). The dollar is certainly trading as though QE2 is a reality, and at 5% its trade-weighted depreciation is some 2% greater than at a similar stage of QE2. Ultimately, however, QE1 led to a near 10% drop in the dollar, so on this basis we doubt QE2 is yet close to being played out. Meanwhile,

Chart 1: The QE2 heralded by Bernanke at his Jackson Hole speech is having a more adverse effect on the dollar than QE1 USD trade-weighted index set to 100 at the time of the QE announcement. For 2009 we use the March 18 announcement of Treasury purchases, for 20010 we use Ben Bernanke’s Jackson Hole speech on Aug 27 when he set out the case for further easing.

92

94

96

98

100

102

104

-10 0 10 20 30 40 50

Mar-09 Aug-10

Day s before/after Fed QE announcement

Fed QE 'announcement'

Source: J.P. Morgan

Chart 2: USD depreciation is also more evenly spread than with QE1 FX appreciation vs USD 30 days following an ‘announcement’ of QE by the Fed.

-2

0

2

4

6

8

10

12

JPY EUR CHF NOK SEK CAD GBP NZD AUD

Mar-09 Aug-10

Source: J.P. Morgan

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Global FX Strategy FX Markets Weekly October 18, 2010 Paul Meggyesi (44-20) 7859-6714 [email protected] J.P. Morgan Securities Ltd.

15

Chart 3: Credibly irresponsible – the Fed yet again succeeds in boosting inflation expectations US 10Y breakeven inflation rate. Net change in % from the time at which the Fed ‘announced ‘ QE. For 2009 we use the March 18 announcement of Treasury purchases, for 20010 we use Ben Bernanke’s Jackson Hole speech on Aug 27 when he set out the case for further easing.

-0.4

-0.2

0

0.2

0.4

0.6

0.8

-10 0 10 20 30 40 50

Mar-09 Aug-10

Day s before/after Fed QE announcement

Fed QE 'announcement'

Source: J.P. Morgan

neither the average level of dollar correlations or skew yet signal a mature trend ripe for correction (see FX Derivatives on page 8).

Aside from the overall trend in the dollar, it is instructive to consider the cross-sectional nature of the dollar’s decline. As chart 2 shows, whereas QE1 was felt most keenly in dollar depreciation versus high-beta currencies, the dollar’s decline in the early stages of QE2 has been much more evenly distributed, with funding currencies and most notably the European currencies doing far better than they did during QE1. This does not come as a surprise to us. First time around the markets may have hoped that QE would prove a panacea for the global economy. The fact that the Fed is considering QE2 only a year and a half later means that these hopes were unfounded, hence the inability of the high-beta currencies to replicate their outperformance of QE1. Secondly, there is a more overt inflationary motivation for QE2 than for QE1, which translates to a broader debasement in the dollar. Finally, there is far less participation in QE2 from other central banks than there was in QE1. Indeed, most European central banks with the singular exception of the BoE are indicating their preference to normalize monetary policy (the Riksbank is expected to deliver its third rate increase in two next week). QE1 could be characterized as a global effort to relate; QE2 should be seen rather as a unilateral US effort to inflate. The distinction matters for how one positions for dollar depreciation – QE1 heavily favoured cyclical currencies, QE2 is more about relative central bank credibility, hence

Chart 4: Not all central banks are happy debasers Monetary base (bank deposits at the central banks plus notes and coins in circulation). Jan 2008=100

100

150

200

250

300

Jan-08 Jul-08 Jan-09 Jul-09 Jan-10 Jul-10

BoE

BoJ

Fed

ECB

Source: J.P. Morgan

the outperformance of currencies with the most orthodox, least inflationist central banks.

Trades

• Bearish USD: Stay short AUD, EUR, SEK, INR and KRW in cash.

Having trimmed short USD exposure last week we are content to hold the current basket of dollar shorts going into next weekend’s key G20 finance ministers’ meeting. Monetary policy may be the pivotal factor in the dollar’s decline but the political frictions that predatory monetary and FX policies give rise to can only reinforce the general negativity towards the dollar. Economically there are no winners from a trade war but as the major international debtor the US is vulnerable to the financial retaliation that may follow a spillover from currency wars to an outright trade war.

As discussed above, we believe that relative central bank credibility is playing a greater role in shaping the contours of dollar deprecation as we approach QE2. The optimal trade for QE1 was to sell dollars against the most cyclical currencies, to benefit from expected global reflation. The optimal trade for QE2 is to position for a more even rate of dollar deprecation. Cyclical/commodity currencies will still benefit from expectations of nominal reflation but European currencies should keep pace as investors reward more the conservative central bank practises in mainland Europe. The Riksbank meets in two weeks, and while a rate hike is fully discounted, such a decision can only help reinforce the sense of division between the Fed and European central banks. Sweden has a larger output gap than the US but unlike the Fed the Riksbank is sensitive to the risks from maintaining an emergency setting of policy long after the economic emergency (i.e. fear of depression) has receded.

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Global FX Strategy FX Markets Weekly October 18, 2010 Paul Meggyesi (44-20) 7859-6714 [email protected] J.P. Morgan Securities Ltd.

16

Meanwhile, the ECB may not be tightening official policy in the same way as the Riksbank but excess liquidity in the eurosystem continues to decline, which translates to a de facto tightening in money market conditions (chart 4). De facto and de jeure tightening constitute a bullish backdrop for EUR and SEK.

In addition to the general dollar-trend, INR has been a beneficiary of IPO-related inflows from foreign investors. In our estimation probably slightly less than half of the flow has been done so far (2-3 billion USD), so we will look to run this position for another week before covering as the unsuccessful IPO bidders will be refunded eventually and part of the inflow into INR will be reversed.

Chart 5: As the Fed moves to ease, the ECB presides over a de-facto tightening in money market conditions

0.00.10.20.30.40.50.60.70.80.91.0

May -09 Aug-09 Nov -09 Feb-10 May -10 Aug-10

EUR 1M EONIA

USD 1M OISFirst ECB 1Y repo

ECB repo drain

Source: J.P. Morgan

⎯ Stay long EUR/USD. Bought Oct 1 at 1.3720, marked at 2.6%. Raise stop to 1.3450.

⎯ Stay short USD/SEK. Sold Oct 1 at 6.7100, marked at 2.4%.

⎯ Stay long AUD/USD. Bought Sept 17 at 0.9385. Current mark 6.0%. Raise stop to 0.9750.

⎯ Stay short USD/KRW. Sold Oct 1 at 1130, marked at 1.7%.

⎯ Hold short USD/INR. Sold June 18, marked at +4.8% Cut stop to 44.60.

• Stay short GBP vs EUR, CHF, NOK and SEK.

Sterling remains overshadowed by the dominant focus on the dollar. Nonetheless, as a candidate for additional quantitative easing of its own, GBP remains vulnerable against the harder currencies of mainland Europe. Unlike the Fed, the BoE lacks any inflation pretext for additional easing. Indeed, the UK has suffered a singularly bad inflation performance over the past decade (chart 6), as a

result of which the BoE is starting to play a little fast and loose with its credibility. To get the UK price level back on track, consistent with a 2% inflation target, the BoE would need to target annual deflation of -1% for the next five years. Next week the focus will fall squarely on the government’s long-awaited announcement of its detailed medium-term spending plans on Wednesday. The government has to find some £80bn over five years to match its budget commitments, a tall-orders that risks further undermining economic confidence as the populace digest the personal implications (non-protected budgets will need to be slashed by some 25% in real terms over this period).

⎯ Stay long EUR/GBP. Bought Oct 1 at 0.8680, marked at 0.7%.

⎯ Stay short GBP/CHF. Sold Sept 24 at 1.5479. Current mark 1.0%.

⎯ Stay short GBP/NOK. Sold Sept 24 at 9.3081; marked at 1.0%.

⎯ Stay short GBP/SEK. Opened Sept 10. Current mark 6.3%. Cut stop to 10.66.

Chart 6: BoEs credibility as an inflation-targeter is on weak ground GDP deflator, Q1 200=100.

80

90

100

110

120

130

00Q1 02Q1 04Q1 06Q1 08Q1 10Q1

UKUS

Japan

EUR

Price lev el consistent w ith 2% inflation target

Source: J.P. Morgan

• Stay short EUR/CHF via options

The tactical outlook for EUR/CHF is neutral/moderately higher as the ECB effectively tightens policy and the SNB tries to justify still near-zero rates for an economy with no output gap. The SNB can maintain this policy pretence for a while but ultimately it risks being surprised once more by an economy that refuses to follow its bearish script.

⎯ Hold a 1-yr 1.250 at-expiry digital in EUR/CHF. Bought on June 8 for 13%. Currently 15.2%

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Global FX Strategy FX Markets Weekly October 18, 2010 Paul Meggyesi (44-20) 7859-6714 [email protected] J.P. Morgan Securities Ltd.

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Table 1.Current FX spot recommendations and P&L Active trades are marked to market on Friday afternoon London time. Long Short Entry Entry Current Stop Comments

date level level lossEUR USD 01/10/10 1.37 1.41 1.35 2.6% holdSEK USD 01/10/10 6.71 6.55 6.93 2.4% holdAUD USD 17/09/10 0.9385 0.9950 0.9750 6.0% stop raisedKRW USD 01/10/10 1130.0 1111.5 1158.0 1.7% holdINR USD 18/06/10 46.17 44.06 44.60 4.8% stop loweredCHF GBP 24/09/10 1.55 1.53 1.59 1.0% holdEUR GBP 01/10/10 0.868 0.874 0.858 0.7% holdSEK GBP 10/09/10 11.19 10.53 10.66 6.3% stop loweredNOK GBP 24/09/10 9.31 9.22 9.33 1.0% stop lowered

P&L since entry, %

Table 2. Current FX derivatives (directional/non-RV) recommendations and P&L Active trades are marked to market on Friday afternoon London time.

Entry Expiry Days to Spot Entry Current P&L since Commentsdate date expiry reference offer entry

08/06/10 08/06/11 236 1.3438 13.0% 15.2% 2.2% hold

Description

Buy a 1Y EUR/CHF 1.2500 at-expiry digital put

Page 18: Fx markets weekly

Global FX Strategy FX Markets Weekly October 18, 2010 Paul Meggyesi (44-20) 7859-6714 [email protected] J.P. Morgan Securities Ltd.

18

I. Performance statistics 2008 – 2010

2010 YTD 2009 20082008-2010

weighted avgI. Trade Recommendations portfolio

Cash# of trades 69 61 85 215Success rate 52% 64% 59% 58%Average return per trade (%, unweighted) -0.1% 1.0% 2.0% 1.0%Average holding period (days) 19 20 31 24

Derivatives (non-digital)# of trades 29 21 3 53Success rate 55% 62% 0.0% 55%Average return per trade (%, unweighted) 0.2% 0.5% -0.6% 0.3%Average holding period (days) 55 59 66 57

Derivatives (digital)# of trades 4 21 5 30Success rate 25% 38% 20% 33%Average return per trade (%, unweighted) -6.7% -4.7% -3.6% -4.7%Average holding period (days) 60 55 54 56

II. FX Derivatives portfolio (relative value)

Vol r.v# of trades 36 32 13 81Success rate 72% 63% 77% 69%Average return per trade (unweighted)* 0.8 0.1 0.3 0.5Average holding period (days) 100 73 53 82

Vol plus directional r.v# of trades 2 NA NA 2Success rate 50% NA NA 50%Average return per trade (unweighted)* 24 NA NA 24Average holding period (days) 50 NA NA 50

Digital# of trades - NA 3 3Success rate - NA 33% 33%Average return per trade (%, unweighted) - NA 8% 8%Average holding period (days) - NA 33 33

III. Technical Strategy portfolio

# of trades 34 46 87 167Success rate 41% 57% 43% 46%Average return per trade (%, unweighted) -0.1% 0.1% 0.2% 0.1%Average holding period (days) 32 10 9 14*P&L in vol points for 2010

Chart 1: 2008-2010 performance summary: Average returns per trade

0.2%

-3.6%

-0.6%

2.0%

0.1%

-4.7%

0.5%

1.0%

-0.1%

-6.7%

0.2%

-0.1%

-10% -8% -6% -4% -2% 0% 2% 4%

Technical

Digital

Non-digital

Cash

201020092008

Chart 2: 2008-2010 Performance summary: Success rate by type of trade

43%

77%

20%

0%

59%

57%

63%

38%

62%

64%

41%

72%

25%

55%

52%

0% 20% 40% 60% 80% 100%

Technical

RV (non-digital)

Digital

Non-digital

Cash 201020092008

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Global FX Strategy FX Markets Weekly October 18, 2010 Paul Meggyesi (44-20) 7859-6714 [email protected] J.P. Morgan Securities Ltd.

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II. Closed trades 2010

Trade Recommendations cash portfolio Trade Entry Date Entry level Exit date Exit level P&LShort NZD vs CHF 22/01/10 1.3504 09/02/10 1.3545 0.3%Long CHF vs NOK 05/02/10 5.5750 10/02/10 5.520 -1.0%Long CHF vs SEK 05/02/10 6.9490 10/02/10 6.7840 -2.4%Long USD vs SEK 05/02/10 7.4820 17/02/10 7.1630 -4.3%Short EUR vs USD 19/02/10 1.3520 05/03/10 1.3583 -0.5%Long USD vs NOK 05/02/10 6.0030 05/03/10 5.9173 -1.4%Short NZD vs USD 05/02/10 0.6910 05/03/10 0.6890 0.3%Short GBP vs USD 19/02/10 1.5400 05/03/10 1.5023 2.5%Short GBP vs CHF 22/01/10 1.6760 05/03/10 1.6200 3.5%Short EUR vs PLN 15/01/10 4.0400 05/03/10 3.8771 4.2%Short AUD vs USD 05/02/10 0.8670 03/03/10 0.8670 -4.5%Long EUR vs GBP 10/02/10 0.8775 12/03/10 0.9082 3.5%Short GBP vs CHF 19/03/10 1.6050 26/03/10 1.5859 1.1%Short GBP vs CAD 05/03/10 1.5525 26/03/10 1.5231 1.9%Short EUR vs CHF 05/03/10 1.4630 26/03/10 1.4281 2.4%Long AUD vs NZD 11/03/10 1.3090 26/03/10 1.2845 -1.1%Long NOK vs SEK 10/03/10 1.2132 24/03/10 1.1965 -1.3%Long EUR vs USD 12/03/10 1.3740 22/03/10 1.3500 -1.3%Long CHF vs JPY 12/03/10 85.65 26/03/10 85.37 1.3%Short AUD vs CAD 05/02/10 0.9270 06/04/10 0.9240 0.3%Long EUR vs JPY 26/03/10 123.95 06/04/10 125.5000 1.3%Long EUR vs GBP 26/03/10 0.9000 06/04/10 0.8800 -2.2%Short USD vs CNY 26/03/10 6.6720 09/04/10 6.6204 0.8%Long CAD vs NZD 19/02/10 0.7280 16/04/10 0.7153 1.5%Long CHF vs USD 12/03/10 1.0610 16/04/10 1.0580 0.4%Long PLN vs CZK 05/03/10 6.6420 12/04/10 6.4800 -1.3%Long CAD vs NZD 23/04/10 0.7155 30/04/10 0.7380 -3.0%Long CAD vs USD 16/04/10 1.0040 06/05/10 1.0400 -2.8%Long IDR vs EUR 16/04/10 12217 06/05/10 11680 4.8%Long CAD vs JPY 23/04/10 93.50 06/05/10 89.90 -2.8%Long INR vs EUR 23/04/10 59.30 06/05/10 57.72 3.0%Short JPY vs KRW 30/04/10 11.76 06/05/10 12.30 -4.5%Short EUR vs CAD 23/04/10 1.3380 07/05/10 1.3200 1.3%Short GBP vs USD 07/05/10 1.4690 14/05/10 1.5000 -2.1%Short EUR vs CHF 16/04/10 1.4330 20/05/10 1.4400 -0.5%Short EUR vs INR 14/05/10 56.45 20/05/10 58.00 -2.6%Short EUR vs IDR 14/05/10 11375 21/05/10 11700 -2.6%Short EUR vs USD 14/05/10 1.2450 21/05/10 1.2565 -0.3%Short GBP vs CHF 07/05/10 1.6350 24/05/10 1.6725 -2.3%Short NOK vs SEK 11/06/10 1.2239 22/06/10 1.1972 2.2%Long CHF vs EUR 04/06/10 1.3935 02/07/10 1.3392 3.9%Long EUR vs AUD 09/07/10 1.4850 12/07/10 1.4400 -3.0%Long EUR vs JPY 09/07/10 111.70 16/07/10 112.30 0.5%Long EUR vs GBP 02/07/10 0.8290 23/07/10 0.8338 0.6%Long SEK vs GBP 09/07/10 11.34 23/07/10 11.31 0.3%Long EUR vs USD 16/07/10 1.2960 13/08/10 1.2815 -1.1%Long EUR vs NZD 30/07/10 1.8020 13/08/10 1.8058 0.2%Long CHF vs USD 30/07/10 1.0422 20/08/10 1.0320 1.0%Long CHF vs NOK 20/08/10 6.0175 27/08/10 6.1500 2.2%Long JPY vs NZD 30/07/10 62.40 03/09/10 61.30 1.8%Long CHF vs EUR 30/07/10 1.3555 10/09/10 1.3010 4.2%Long JPY vs USD 06/08/10 85.20 10/09/10 83.96 1.5%Long AUD vs EUR 10/09/10 1.3740 24/09/10 1.4037 -2.1%Long AUD vs GBP 10/09/10 1.6650 24/09/10 1.6473 1.1%Long CHF vs USD 24/09/10 0.9801 01/10/10 0.9760 0.4%Long SEK vs EUR 10/09/10 9.2100 01/10/10 9.2200 -0.1%Long CHF vs EUR 24/09/10 1.3191 01/10/10 1.3500 -1.8%Long NOK vs USD 17/09/10 6.1200 08/10/10 5.8140 5.3%Long CHF vs NZD 24/09/10 0.7204 08/10/10 0.7200 0.1%

Trade Recommendations derivatives (directional) Entry date Entry level Exit date Exit level P&L (bps)

Non-Digital Options

Buy a 6-mo USD put/worst-of basket call where the basket comprises CHF, AUD and JPY. Strikes are 0.9762, 0.9426 and 85.21 (35 delta).

24/11/09 0.83% 05/02/10 0.03% -0.8%

Buy a 6-mo 1.30 AUD call/NZD put, RKO 1.41 24/11/09 0.68% 05/02/10 0.34% -0.3%

Buy 2m 7.15-7.35 CHF call/SEK put spread 05/02/10 0.47% 12/02/10 0.16% -0.3%

Buy 2-mo 1.60-1.55 GBP put/USD call spread 29/01/10 0.89% 12/02/10 1.55% 0.7%

Buy 1-mo 0.73-0.71 NZD put/CHF call spread 22/01/10 0.68% 12/02/10 0.12% -0.6%

Buy a 12-month 10.00-9.60 EUR put/SEK ratio call spread 24/11/09 0.88% 19/02/10 1.28% 0.4%

Buy a 2-mo 7.75-8.00 USD call / SEK put spread 05/02/10 0.51% 26/02/10 0.15% -0.4%

Buy a 6-mo 3.90/3.60 NZD put/NOK ratio call spread in 1x1.5 notional 24/11/09 1.50% 26/03/10 0.08% -1.4%

Buy a 3-month 1.4550-1.4250 EUR put/CHF call spread, sell a 1.4750 call 12/03/10 0.17% 26/03/10 1.75% 1.6%

Buy a 3 month 1.3150 AUD call/NZD put, RKO 1.3650 11/03/10 0.30% 09/04/10 0.35% 0.05%

Buy a 1 month 1.39/1.42 EUR call/USD put spread 12/03/10 0.37% 12/04/10 0.00% -0.4%

Buy a 1 month 1.05/1.02 USD put/CHF call spread 12/03/10 0.38% 12/04/10 0.00% -0.4%

Buy a 3mth 1.22/1.25 NOK call/SEK put spread 10/03/10 0.65% 29/04/10 1.00% 0.4%

'Sell 3m EUR/USD vs USD/CAD volatility via vol swaps 30/04/10 0.36% 07/05/10 -0.44% 0.80%

Buy a 3-month 1.3200/1.2800 EUR put/CAD call spread and sell a 1.40 EUR call/CAD put 23/04/10 0.17% 14/05/10 2.18% 2.01%

Buy a 3-month 0.9900/0.9600 USD put/CAD call spread and sell a 1.0400 USD call/CAD put 23/04/10 0.11% 14/05/10 -1.21% -1.32%

Buy a 6-mo 95-100 CAD call/JPY put spread; sell a 6-mo 80 CAD put/JPY call, RKI 70 15/01/10 0.23% 14/05/10 0.50% 0.27%

Buy a 6-mo 1.60-1.50 GBP put/CHF call spread with a 1.45 RKI 24/11/09 1.35% 24/05/10 0.00% -1.35%

Buy 3-month 1.4350-1.3900 EUR put/CHF call spread and sell a 1.4450 EUR call/CHF put 09/04/10 0.10% 04/06/10 1.95% 1.85%

Sell 6M GBP/USD vs USD/CHF vol via vol swaps 09/04/10 1.90% 16/06/10 0.10% 1.80%

Buy 3-month 1.3825-1.3400 EUR put/CHF call spread and sell a 1.4300 EUR call/CHF put 04/06/10 0.20% 02/07/10 2.42% 2.22%

Buy a 3-month 1.02-0.98 USD put/CAD call spread and sell a 3-month 1.0586 USD call/CAD put 18/06/10 0.00% 30/07/10 0.12% 0.12%

Buy a 2-month 85 USD put/JPY call in 1x notional, sell a 2-month 82 USD put/JPY call in 1.5x notional 17/09/10 0.60% 08/10/10 1.66% 1.06%

Entry date Entry level Exit date Exit level P&L (bps)Digital Options

Buy a 6-mo 123-142 EUR/JPY range binary 24/11/09 23.3% 22/01/10 31% 8.1%

Buy a 3-mo USD put/CAD call one-touch with a 0.95 barrier 09/10/09 18.6% 11/01/10 0.00% -18.6%

Buy 6-mo 0.8900 USD/CHF one-touch 24/11/09 16.7% 05/02/10 1.21% -15.5%

Buy a 1Y 92 strike USD call/JPY put with a 3M 86/94 window DKO 19/03/10 0.9% 01/04/10 0.0% -0.9%

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Global FX Strategy FX Markets Weekly October 18, 2010 Paul Meggyesi (44-20) 7859-6714 [email protected] J.P. Morgan Securities Ltd.

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FX Derivatives portfolio (vol relative value)

Trade Entry date Entry level Exit date Exit level P&L*

Buy USD/JPY 5Y vs sell EUR/JPY 5Y vol 21/08/08 -1.9 08/01/10 -1.3 0.6

Buy USD/JPY 2Y vs sell USD/SEK 2Y vol 11/09/08 -2.9 08/01/10 -4.2 -1.3

Buy 50D EUR/USD call vs sell 10D call 31/03/09 3.3 08/01/10 2.3 -1.0

Buy 3M CAD/JPY straddles vs. Sell 3M CHF/JPY straddles 18/09/09 4.4 08/01/10 2.3 -2.1

Sell 3M USD/BRL vol swap 09/10/09 18.2 08/01/10 12.5 5.7

Buy 3M GBP/USD v EUR/USD vol swap 16/10/09 1.1 15/01/10 0.5 -0.6

Sell 3M3M EUR/USD FVA 04/12/09 13.3 15/01/10 11.5 1.8

Long 35D strangle v short NZD/USD 1M1M FVA 18/12/09 -2.2 15/01/10 -1.3 0.9

Long USD/CHF v GBP/USD 3M3M FVA 15/01/10 3.5 05/02/10 4.8 0.7

Short EUR/GBP 3M3M FVA 08/01/10 11.6 19/01/10 10.6 1.0

Long 2M AUD/USD v AUD/CAD straddles 29/01/10 0.7 05/03/10 1.2 0.5

Buy 1Y GBP/JPY v USD/JPY straddles 14/10/09 -3.3 19/03/10 -2.6 0.7

Sell 3M3M USD/JPY vol 19/02/10 13.6 19/03/10 12.6 1.0

Sell 1M 25D EUR/JPY calls (delta-hedged) 12/03/10 11.5 14/04/10 12.3 -0.8

Buy 2M NZD/USD vol vs sell 2M EUR/USD vol 19/02/10 1.1 23/04/10 0.2 -0.9

Sell 3M USD/BRL vol swap 02/02/10 17.1 07/05/10 11.6 5.5

Buy 2M USD/SEK v 2M GBP/USD vol swap 03/03/10 1.0 07/05/10 0.5 -0.5

Long 2Y AUD/USD v USD/JPY straddles 27/01/10 -2.0 21/5/10 -1.6 0.4

Buy 2M 35D NZD/USD strangles vs sell 2M2M FVA 18/03/10 0.4 21/5/10 -2.6 -3.0

Buy 6M AUD/JPY skew vs sell 3M3M FVA 09/04/10 -2.1 21/5/10 0.2 2.3

Buy 2M USD/SEK v 2M GBP/USD vol swap 23/04/10 0.4 21/5/10 0.7 0.3

Buy 1Y Silver v sell 1Y Gold vol swap 03/06/09 9.5 04/06/10 17.6 8.9

Buy 1Y AUD/CAD v sell 1Y USD/CAD 10/06/09 -1.9 04/06/10 -1.1 -2.0

Sell GBP/AUD 6M 25D strangles 12/05/10 12.7 04/06/10 16.6 -3.9

Sell USD/CAD 3M 25D Risk Reversals 04/06/10 3.0 09/07/10 1.4 1.6

Buy CAD/JPY vs. Sell EUR/JPY 3M 25D strangle spread 11/06/10 2.3 09/07/10 5.0 2.7

Buy AUD/USD vs Sell EUR/USD 6M 25D strangle spread 25/06/10 2.8 09/07/10 3.8 1.0

Buy 6M EUR/BRL v 6M USD/BRL vol swap 12/01/10 -2.5 12/07/10 -1.6 0.9

Buy 1M1M FVAs vs. Sell USD/MXN 1M vol swaps 02/07/10 -0.7 05/08/10 1.4 2.0

Buy USD/CHF 6M6M FVAs 15/07/10 11.2 27/08/10 12.7 1.3Sell USD/BRL 3M 25D Risk Reversals 20/08/10 4.5 10/09/10 3.6 0.9Sell EUR/JPY 3M3M FVAs 09/07/10 17.4 17/09/10 15.2 2.2Sell USD/JPY 6M 25D strangles 20/08/10 12.9 17/09/10 12.2 0.7Sell USD/MXN 1M1M FVAs 20/08/10 12.0 22/09/10 11.4 0.6

Buy 6M AUD/USD vs EUR/AUD strangles 30/07/10 -0.8 15/09/10 0.7 1.5

Buy 6M NZD/USD vs EUR/NZD strangles 13/08/10 0.0 15/09/10 0.5 0.5

*P&L in vol points

(vol relative value plus directional) Technical Strategy portfolio Trade Entry Date Entry level Exit date Exit level P&LLong EUR vs JPY 07/01/10 133.950 15/01/10 131.000 -0.6%Long EUR vs USD 17/12/09 1.432 19/01/10 1.441 0.3%Long CHF vs GBP 14/12/09 1.678 18/01/10 1.678 0.0%Long NOK vs GBP 30/10/09 9.351 19/01/10 9.303 0.1%Long AUD vs JPY 07/01/10 85.890 20/01/10 82.800 -0.9%Long EUR vs USD 21/01/09 1.4074 28/01/10 1.3950 -0.22%Long NOK vs NZD 05/10/09 4.156 19/02/10 4.161 -0.03%Long USD vs GBP 05/02/10 1.568 01/03/10 1.486 1.31%Long NZD vs AUD 25/02/10 1.284 02/03/10 1.297 -0.26%Long USD vs NOK 19/02/10 6.001 12/03/10 5.823 -0.7%Short GBP vs CHF 01/03/10 1.628 22/03/10 1.585 0.7%Long EUR vs GBP 25/02/10 0.886 22/03/10 0.900 0.4%Short EUR vs MXN 24/11/09 19.337 24/03/10 16.700 3.4%Short EUR vs CHF 01/04/10 1.4180 10/04/10 1.4300 -0.2%Long EUR vs JPY 31/03/10 125.500 08/04/10 123.980 -0.3%Short EUR vs USD 05/02/10 1.3687 12/04/10 1.3570 0.2%Short EUR vs CZK 18/03/10 25.315 19/04/10 25.270 0.0%Short NZD vs CAD 12/03/10 0.715 30/04/10 0.732 -0.6%Long USD vs JPY 24/03/10 92.400 06/05/10 92.610 0.1%Short EUR vs TRY 02/04/10 2.042 06/05/10 2.035 0.1%Short EUR vs GBP 05/05/10 0.855 07/05/10 0.880 -1.5%Short EUR vs USD 07/05/10 1.2848 10/05/10 1.305 -0.8%Short GBP vs USD 07/05/10 1.475 10/05/10 1.500 -0.9%Short EUR vs CAD 11/05/10 1.3056 20/05/10 1.3053 0.0%Short EUR vs AUD 13/05/10 1.402 19/05/10 1.4455 -0.8%Short GBP vs CAD 13/05/10 1.4906 20/05/10 1.5354 -0.8%Short GBP vs USD 17/05/10 1.45 16/06/10 1.49 -1.1%Long AUD vs USD 15/06/10 0.8644 29/06/10 0.8502 -0.4%Short GBP vs USD 29/06/10 1.506 27/07/10 1.555 -0.8%Long EUR vs SEK 02/07/10 9.533 02/08/10 9.376 -0.4%Long EUR vs ZAR 01/07/10 9.494 13/08/10 9.290 -0.54%Long EUR vs AUD 02/07/10 1.480 23/08/10 1.417 -1.1%Short EUR vs CHF 19/08/10 1.323 16/09/10 1.317 0.10%Short GBP vs NOK 22/09/10 9.324 01/10/10 9.210 1.2%

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Global FX Strategy FX Markets Weekly October 18, 2010 Paul Meggyesi (44-20) 7859-6714 [email protected] J.P. Morgan Securities Ltd.

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Page 22: Fx markets weekly

Global FX Strategy FX Markets Weekly October 18, 2010 Niall O’Connor (212) 834-5108 [email protected] JPMorgan Chase Bank NA

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Technical Strategy • Another week, another round of key USD supports

have given way as the bear trend is expected to continue; the focus is on 1.4375 EUR/USD and the 76 area for the DXY.

• As the trend persists, note the USD has yet to reach an oversold extreme consistent with previous cycle lows.

• Asia FX trends are approaching the next line of key levels which can allow for some pause, but retracements are viewed as buying opportunities.

• Stay short USD/JPY, GBP/JPY, USD/KRW EUR/PLN and long EUR/GBP.

USD: the bear trend broadens

The USD bear trend continued over the past week leading to a violation of another round of critical support levels. Importantly, the trend broadened as a number of pairs finally extended through key supports adding to the overall bearish theme. As the decline continues to develop, the inevitable question of whether the USD is at an oversold extreme setup must be asked. We do not believe that is the case at this time. As outlined in recent updates (see Oversold USD? Not there yet. October 6), our short term studies suggest the USD is oversold and can allow for some pause, but appear to be overwhelmed by the strong trending bias. Moreover, the more important medium term metrics have yet to reach an extreme condition consistent with previous cycle lows (Chart 1). We also note that our trend

Chart 1: DXY – Weekly Chart – The decline maintains a strong trending bias as weekly momentum metrics have yet to reach an oversold extreme consistent with previous lows.

indicators and moving average signals still maintain a bearish bias for the USD and have yet to reach an extreme. As such, while some consolidation to the one-way decline can develop particularly as the DXY approaches key support near 76, retracements should continue to be used as opportunities to add, or establish short positions.

The broader USD weakness over the past week is an important development and another factor that argues for additional weakness. In this regard, two currencies that have lagged over the past month finally broke through important USD supports implying a higher risk for additional follow-through. USD/CAD broke down below the critical 1.01 medium term range lows. In turn, we see a higher risk for additional downside follow-through which should allow

Chart 2: USD/JPY – Daily Chart – The violation of the intervention day low affirms the medium term bearish setup; the focus is now on the 79.92 all-time low.

for a closer test, if not break of the important .9930 low from April. Moreover, NZD/USD extended above the key .7637 October 2009 high while suggesting further upside should develop in the coming weeks. Note that while we see room for an extension in these pairs, prices are still expected to lag particularly given the setup in the crosses as there is still little evidence of a reversal pattern in the likes of AUD/NZD and AUD/CAD.

Still, the trends for other USD pairs remain intact and are expected to continue. With EUR/USD pushing through the key 1.40 area, the focus is now on the critical 1.4375 resistance area which represents the 76.4% retracement of the decline from the November 2009 cycle high. Importantly, this level should define whether a closer test of the 2009 highs is underway. Following the break through the key .9920 zone for AUD/USD, the upside bias should now allow for a more sustained break of the key 1.00 area and closer test of the next zone of important resistance near

Page 23: Fx markets weekly

Global FX Strategy FX Markets Weekly October 18, 2010 Niall O’Connor (212) 834-5108 [email protected] JPMorgan Chase Bank NA

23

1.0220 zone- the 61.8% retracement from the 1981 cycle high.

In line with the broad-based USD weakness theme, we continue to see downside risks for USD/JPY despite the short term oversold framework The violation of the 82.87 intervention day low is consistent with this view and suggests a closer test, if not break of the critical 79.92 low from 1995 is in the offing (Chart 2).

Asia FX: key levels in focus but trends remain strong and incomplete

The price action for Asia FX over the past few weeks has confirmed the medium term bullish bias. As outlined in recent updates (see Asia FX trends picking up momentum, FXMW, October 1), the price action has clearly shifted into a trending bias which is incomplete at the moment. Still, we do note that a number of key levels are now in focus which can allow for some pause to the one-way outperformance trend that has developed since early-September.

Chart 3: ADXY – Daily Chart – The index is extending into the critical 2008 highs; while some pause cannot be ruled out, the trending bias argues for a more sustained breakout.

In this regard, the ADXY Index is quickly approaching critical resistance at the 2008 highs near 116.20/116.35 (Chart 3). While we sense the index will eventually break through this key zone of resistance, some initial pause can develop. Note this setup lines up with the critical 1100 support area for USD/KRW which represents the April low (Chart 4). Moreover, USD/INR has thus far held the April

Chart 4: USD/KRW - Daily Chart – With the decline extending into the 1100 area, some near term pause can develop, but the overall bias suggests an eventual downside break.

low near 44 support area while leading to the current bounce. We currently hold a short position in USD/KRW and will look to add to this trade on corrective retracements. Similarly, the bounce in USD/INR over the past week reflects a corrective bias which is consistent with the view for additional weakness and sustained break of the key 44 support zone. The 45.50/46.00 zone should continue to act as a short term ceiling and maintain the bias for new lows while presenting another shorting opportunity. Importantly, the price action in USD/SGD and USD/THB continue to reflect a clear trending bias with strong momentum in line with the view that Asia FX can maintain the outperformance bias.

Trade details P&L CommentsLong Short Entry Entry Current Stop since entry

date level level loss %EUR GBP 23/09/10 0.8487 0.8794 0.8690 0.89% Bullish breakouts suggesting a broader up-swingJPY GBP 15/10/10 130.34 130.64 132.00 -0.06% Resuming the medium term declinePLN EUR 14/10/10 3.9150 3.9065 3.9800 0.05% Breakdown below 1140 support suggests renewed trending biasJPY USD 20/09/10 85.75 81.34 83.30 1.29% Resumption of the broader downtrend indicatedKRW USD 04/10/10 1128.0 1110.1 1164.0 0.40% Breakdown below 1140 support suggests renewed trending biasNOK GBP 22/09/10 9.3240 9.2100 9.2100 0.61% Closed Oct 15

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FX alpha strategies & manager performance • Alpha strategies: Carry

Carry strategies are up another 0.8% on the G-10 basket and 1.3% on the EM basket, for year-to-date returns of 1.3% and 12.6%, respectively. The G-10 basket is long AUD, NZD and NOK vs USD, while the EM basket is long ARS, BRL and TRY.

• Alpha strategies: Forward Carry (trade FX on rates spread movements) Rate momentum has become mixed for the dollar after a month of recommending an across-the-board sell. The forward carry model is now long USD vs AUD and NZD, and short USD vs JPY, EUR, GBP and CAD. Year-to-date the signals have returned over 16%.

• Alpha strategies: Forward Momentum Overlay (buy currencies with momentum in spot FX and in rate spreads) The price momentum strategy continues to recommend selling USD vs CAD and JPY.

• Currency, global macro and EM fund performance Global macro funds are having a strong October – they are up 1.1% through this week. Currency managers are generating 0.25% to 0.8% (depending on composite), which is high once adjusted for the lower volatility of their performance.

Table 1: Performance of FX alpha strategies

CurrentProduct Positions level 1W 1M 3M 12M YTD

Alpha strategies

G-10 carry (IncomeFX) IncomeFX Long AUD/USD, NZD/USD; Short EUR/NOK, USD/NOK 126.4 3.1% 6.6% 13.1% 7.3% 9.8%G-10 carry (unlevered) NA Long AUD/USD, NZD/USD; Short EUR/NOK, USD/NOK 201.9 0.8% 3.4% 9.0% -0.8% 1.2%Emerging Markets carry (IncomeEM) IncomeEM Short USD vs ARS, TRY & BRL. Long USD vs CNY. 113.3 1.3% 5.5% 9.4% 13.5% 12.6%

Forward Carry (9 USD pairs) NA Short USD vs CAD; EUR, GBP, SEK & JPY. Long USD vs. NOK, CHF, AUD & NZD. 311.8 0.2% 2.6% 4.3% 15.9% 16.8%

Forward Carry (22 Major pairs) NA As above, plus long EUR vs GBP, NOK, CHF, AUD and NZD. 298.8 0.2% 1.5% 2.0% 6.6% 5.9%

G-10 carry with Forward Carry overlay NA Short USD vs. CAD, AUD & SEK; Long EUR vs CHF 270.0 0.8% 4.9% 8.6% 1.3% 4.9%

Returns

Source: J.P. Morgan

Chart 1: Performance of FX alpha strategies Chart 2: Performance of FX alpha strategies

75100125150175200225250275300325

00 01 02 03 04 05 06 07 08 09 10 11

G-10 CarryG10 Carry (Unlevered)EM Carry

90

105

120

135

150

165

180

195

210

225

00 01 02 03 04 05 06 07 08 09 10 11

Forward Carry (9 USD pairs)Forward Carry OverlayForward Momentum Overlay

Source: J.P. Morgan Source: J.P. Morgan

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Table 2: Long-term performance of FX alpha strategies, currency managers and global macro funds

2010 YTDYTD return 9.8% 1.2% 12.6% 16.8% 5.9% 4.9% 2.1% 0.4% 2.2% 1.6% -1.8% 7.1%Std dev 18.7% 11.1% 19.2% 7.4% 4.5% 9.2% NA 3.7% 2.9% 5.4% 6.1% 9.6%IR 0.52 0.11 0.66 2.27 1.30 0.54 NA 0.10 0.75 0.30 -0.29 0.74

2009Avg annual return 57.9% 20.6% 10.2% 7.9% 3.0% 21.8% 0.9% 5.1% -1.2% 0.0% 4.3% 35.0%Std dev 28% 14% 8% 8.6% 5.6% 13% 1.5% 9.0% 2.8% 2.1% 6.3% 10.0%IR 2.09 1.51 1.34 0.92 0.53 1.64 0.61 0.57 -0.41 0.00 0.69 3.50

2005 - 2009 (5 years)Avg annual return 4.8% -0.1% 7.3% 9.4% 8.1% 2.6% 1.1% 6.7% 3.2% 0.7% 7.0% 10.6%Std dev 32% 16% 14% 3.6% 6.1% 15% 1.9% 11.6% 3.0% 3.4% 2.7% 30.0%IR 0.15 -0.01 0.51 2.61 1.33 0.18 0.58 0.58 1.09 0.20 2.56 0.35

2000 - 2009 (10 years)Avg annual return 9.0% 4.2% 10.2% 6.2% 5.7% 4.2% 3.2% NA NA NA 7.6% 10.8%Std dev 22% 12% 16% 5.2% 5.1% 11.5% 3.5% NA NA NA 6.1% 23.5%IR 0.41 0.35 0.63 1.18 1.12 0.37 0.92 NA NA NA 1.26 0.46

HFR emerging markets hedge

funds*

Currency manager and hedge fund performance

HFR global macro hedge

funds**Barclay Group

BTOP FX**

Parker Blacktree

CMI**

Barclay Currency

Traders Index*

HFR currency

index*

FX alpha strategies

Forward Carry (22 Major pairs)

G-10 carry with Forward Carry

overlayG-10 carry (unlevered)

Emerging Markets carry (IncomeEM)

Forward Carry (9 USD pairs)

G-10 carry (IncomeFX)

* monthly return composites ** daily return composites

Strategy descriptions

G-10 and emerging markets carry strategies select four currencies with highest ratio of carry (1-mo rate differential) to volatility (annualized spot vol over past 30 days).

Forward Carry buys the currency in whose favor rate expectations have moved over the past month. Expectations are based on 1mo rates 3mos forward.

Forward Carry Overlay only buys high yield currencies if rate expectations are also moving in that currency’s favor, so combines standard carry and Forward Carry concepts.

Forward Momentum Overlay only buys currencies which have appreciated in spot terms over the past year and are experiencing rising rate expectations relative to another currency over the past month. Thus it combines the standard price momentum framework with Forward Carry.

All strategies are described in Alternatives to Standard Carry and Momentum in FX (Normand and Ghia, August 8, 2008) posted on www.morganmarkets.com/GlobalFXStrategy.

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Research Note US-Japan trade war and USD/JPY: implication for CNY• Despite series of media sources reporting that a

currency war has intensified, we believe that is still not the case at this point.

• The real matter at hand is not a currency war but the tension between DM and EM countries about how they share the burden of USD weakness. Should this tension intensify, an eruption of a trade war or currency war comes into play.

• Trade dispute between the US and Japan stemmed from bilateral trade imbalance led to a sharp decline in USD/JPY between late 1980s and early-1990s.

• Current US-China relationship looks similar to the US-Japan relationship in the early 90s. If the ratio of the trade deficit with China increases by 10-20% points within the overall US trade deficit, the risk of bilateral trade dispute could heightens

Currency war has yet to begin: the real problem is USD weakness

At the moment, tension concerning currency policies seems to be at the highest levels witnessed within the last few years. Amid a flurry of international conferences between October and November, market participants’ attention has been focused on whether G-20 countries will reach some kind of accord over the currency policy or not. A plethora of comments from global institutions, such as the Brazilian Finance Minister Guido Mantega (“We are in the midst of an international currency war”) and the IMF's managing director Dominique Strauss-Kahn (“Using currencies as a weapon of economic policy is negative for the global economy”), reiterate the amount of attention this topic has gained as of late. Media coverage both in Japan and abroad makes it seem as though a currency war was indeed unfolding.

But then we ask – is this really happening? Given that no industrial country has intervened in the FX markets with the exception of a unilateral JPY-selling intervention by Japanese MoF/BoJ on Sep 15th, declaring the beginning of a currency war seems to be a bit of a stretch. What is the situation in emerging countries?

Some may site the fact that some emerging countries, China in particular, have been conducting USD-buying/domestic currency-selling intervention as evidence of a “currency war”. However, considering that many emerging countries have adopted regimes that control FX volatility on an on-

going basis (like managed float, currency peg, etc.), we find this hard to agree with. Emerging countries with such regimes have regularly intervened in FX markets. To believe that they have started to sell their domestic currencies only recently is clearly a misperception. Indeed, most emerging currencies have risen against USD since June this year when USD started its downtrend and many currencies have appreciated even in trade-weighted terms. Thus, there has been no evidence so far suggesting that emerging countries have strengthened their bias for a weak currency.

Although the problem stems from differences between currency regimes, it may be inevitable for industrial countries to claim that emerging countries are not carrying a sufficient share of the burden of a cheap USD. Therefore, the real issue at hand is not a currency war, but rather how the burden of USD weakness should be distributed between industrial countries and emerging countries. If they fail to find an equilibrium point, there remains a possibility that industrial countries intensify their protectionist stance, which could result in a trade war and/or a currency war. From this perspective, we believe it useful to review the developments surrounding the trade war between the US and Japan through late 80s and early 90s along with USD/JPY movements during the period.

The Plaza Accord: Policy coordination lets USD/JPY plunge

In the early 1980s, the Reagan administration simultaneously adopted expansionary fiscal and restrictive monetary policies to coax the stagflationary US economy back onto a recovery path. Although these combined policies managed to curb inflation, it also caused interest rates to rise to abnormal levels while simultaneously triggering a dollar-rally. Subsequently, between 1981 and 1984, the U.S. current account deteriorated rapidly from a narrow surplus to a deficit of $100billion.

Although the Reagan administration initially saw no problem in the soaring dollar, complaints from struggling U.S. manufacturers gradually heightened, while opinion that the undervalued yen was the main reason for the swelling US trade deficit became increasingly main-stream. However, it is important to note that the Japan-US trade friction was nothing new. Starting from escalated conflict over textile trades started in the 1960-70s, trade friction further intensified throughout the mid-1980s as the U.S. trade deficit with Japan continued to grow mainly through surging exports of Japanese color TVs and automobiles (Chart 1). As the US administration sought financial liberalization and relaxation of capital regulations in order

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to hoist up the value of the yen, this led to the inception of “the US-Japan Yen Dollar Committee” in November 1983.

Amidst this environment, the Plaza Accord was signed in September 1985. With participating countries coordinating dollar-selling intervention, USD plunged across the board, lowering USD/JPY by 50% from 240 yen to 121 yen at the end of 1987 in a matter of two years (Chart 2).

Chart 1: US trade deficit with Japan

-10000

-8000

-6000

-4000

-2000

0

2000

1974 1978 1982 1986 1990 1994 1998 2002 2006 2010

$ million

Sep 1985 Plaza Accord

Source: U.S. Census

Chart 2: USD/JPY long-term chart

50

100

150

200

250

300

350

400

1971 1975 1979 1983 1987 1991 1995 1999 2003 2007

Sep 1985 Plaza Accord

Source: Bloomberg

US-Japan trade dispute of the early 1990s: Bilateral friction boosts the yen Despite the rapid yen appreciation against the dollar after the Plaza Accord, the US trade deficit with Japan failed to shrink, much to the betray of expectations; contrarily, it increased its weight in the overall US trade deficit (Chart 3 in next page). As a result, US criticism of Japan accumulated, eventually leading to the enactment of the U.S. Omnibus Foreign Trade and Competitiveness Act in 1988 (of which Section 301, also known as Super 301, allows for appropriate retaliatory measures against trade

partners if US industries sustain losses from unfair trade practices) and the Structural Impediments Initiative (SII) of 1989 in which the US demanded further market-opening from Japan. During the four years beginning in 1989 until the end of 1992, however, USD/JPY traded in a 120-160 range as the US-Japan trade friction smoldered.

With the inauguration of the Clinton administration in January 1993, revitalizing the US economy became a top-priority, bringing forth a tougher stance against Japan that brought US-Japan trade tensions up by another notch. At the time, the Clinton administration strongly demanded quantitative targets for US trade with Japan without specifically mentioning exchange rates. In response, the Japanese government not only refused a public commitment to quantitative targets for increased imports from the US in March 1993, but also decided against establishing even indicative targets. USD/JPY embarked on a protracted descent after a remark made by President Clinton after a US-Japan head-of-state meeting in April the same year, noting that a strong yen would be helpful to correct the trade imbalance.

In 1994, the US administration tightened its stance against Japan once again. When a head-of-state US-Japan meeting in February ended bearing no fruit, President Clinton signed a presidential order the following month to reactivate Super 301. Resignation of Japan’s Prime Minister Hosokawa in April subsequently pointed to Japanese political instability, delaying a solution to the trade dispute, sending USD/JPY lower below 100 in June. USD/JPY remained unable to rise from that level, and after Japan-US automotive trade negotiations failed in April 1995 amidst ensuing hints of US sanctions, USD/JPY posted a post WWII low of 79.75 on April 19th. Thus, within the approximately two years since April 1993, USD/JPY had fallen by more than 30%.

At first glance, it seems as though USD/JPY declined suddenly on speculations that the US would condone the yen’s rise out of exasperation over the slow progress in resolving the US trade imbalance. In reality, US authorities bought the dollar as part of a coordinated currency market intervention in April and August 1993, and again in April 1994. Around that time, some US authorities came to the realization that sudden yen appreciation could deliver a huge blow to the Japanese economy, which conceivably may have persuaded the US administration to support the dollar-buying intervention. Also of note is that a multilateral joint intervention involving 17 central banks was also conducted on May 4, 1994.

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Chart 3: Share of deficit with China and Japan of total US trade deficit

0%

10%

20%

30%

40%

50%

60%

70%

1986 1990 1994 1998 2002 2006

Japan

China

Source: J.P.Morgan Differences between the late 1980s and the early 1990s

FX movements are always the result not of a single factor but a combination of factors. Therefore, a USD/JPY decline between late-1980s and early-1990s was clearly affected by several macro events other than the US-Japan trade dispute. These include aggressive monetary easing by the Fed between 1989 and 1992, the ERM crisis in 1992 and 1993 and the Mexican peso crisis at the end 1994 – all of which affected USD/JPY movements to a certain extent. However, we believe that it is safe to claim that one of the major reasons accounting for the massive drops in USD/JPY over the period was the notion (and an actual utterance to that effect) that the US government, was condoning a weak dollar (and a strong yen) against a backdrop of escalating trade friction. Put more assertively, one could also say that one trade war lead to a currency war, in which the US claimed victory. In a sense, this is most natural – from a current account balance perspective, if a country with a huge current account deficit talks down its own currency, capital flows into these countries will decrease and financing the current account deficit will become difficult, resulting in further significant decline in the currency.

Interestingly, there is a striking difference in the ways USD/JPY declined in the late 1980s compared to the late 1990s. The drop in USD/JPY in the late 1980s after the Plaza Accord was caused off the back of a USD weakness and a JPY strength. By comparison, the drop in USD/JPY in the late 1990s was largely due to JPY strength. From an effective exchange rate basis, the yen during that time was at an abnormal high unseen between 1970 and now (today’s effective yen rate is not far from the levels witnessed at the end of 1997, shown in chart 4). While the aforementioned may not be sufficient to draw conclusions, the USD/JPY decline in the early 1990s led by

JPY strength suggest that it is relatively easy to talk-up a currency in a country with a current account surplus, based off of the same mechanics that facilitate talking-down a currency with a current account deficit. Under the condition where a currency with a current account surplus is widely expected to appreciate due to political reasons, there is a sharp decline in the tendency of domestic investors to sell their home currency to invest in foreign assets, which leads to an abnormal level of currency appreciation disconnected from fundamentals. Once such developments are set in motion, the experiences in the early 90s imply that countries may already be at the point-of-no-return only to consequent in a market rampage, even if trade-deficit countries were to participate in joint interventions and support the buying of their home currencies.

Chart 4: Real effective exchange rate of USD and JPY

70

80

90

100

110

120

1980 1982 1984 1986 1988 1990 1992 1994 1996

JPY

USD

Source: J.P.Morgan

Implication for China

The current relation of the US with China bears resemblance to the time when the US was facing a ballooning trade deficit with Japan, in which the US advocated for a correction of the imbalance through a revaluation of the trading partner’s currency. Since today’s situation is not one of USD strength, it cannot be positioned as a precursor of another Plaza Accord. Rather, the current situation seems closer to the situation in the early 90s.

Opinion that the significant differences between the US-Japan trade war and the US-China trade war is a valid and persuasive voice of dissent. Indeed, the main problem during the US-Japan trade dispute was the fact that US products, including color TVs, cars and semiconductors, lost their competitiveness. Trade dispute in the auto industry, a key-industry at the time, became the most heated source of tension. Meanwhile, there have been no cases in the US-China trade war where Chinese products have posed a threat to any integral industries in the US.

However, it is worthy to note that the US stance against Japan changed as the significant USD/JPY decline post-

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Plaza Accord failed to cut, and even widened, the US’s trade deficit with Japan. The US originally attempted to correct the trade imbalances by reducing Japan’s exports to the US. However, this strategy morphed into asking for increased regulation leniency and heightened openness of the Japanese market after the Plaza Accord, due to a changing perception that the Japanese market exclusivity was the main culprit behind the trade imbalance. This suggests that since trade disputes and any relevant actions are purely political issues, even if the form of the US-China dispute is different from the US-Japan dispute, it is possible that there will not be much difference in the types of actions that the US could take.

With the presumption that trade disputes and any relevant actions are purely political issues, highly visible figures like the ratio of a certain country’s trade deficit within the total US deficit become important. The US’s trade deficit with China in the 1990s accounted for roughly 20-30% of the total US trade deficit. Over the last few years , this ratio has increased rapidly to reach 45.1% in 2009, closely resembling the heightened levels during the US-Japan trade friction in the late 1980s (Chart 3 on the previous page). Based on the Japanese experience, a rule of thumb would suggest that if the US trade deficit with China expands to account for 60% of the total US trade deficit, US pressure on China will intensify. Moreover, it also suggests that when a currency with a current account surplus like CNY is talked up, there is risk that the currency will be pushed up to levels disconnected from fundamentals.

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Market movers (all times BST; +9hrs for Sydney, +8hrs for Tokyo, -5hrs for New York) Date Country Data/Event

JPM ConsensusOct 17 (Sun) NZ 22:45 CPI (%oya) 3Q 1.2 1.5 1.8Oct 18 (Mon) Japan 00.50 Tertiary sector activity index (%m/m, sa) Aug 0.3 -0.5 (Jul) 1.6

Euro area 11.00 Netherlands to sell up to EUR 7.5bn of bills14.00 France to sell bills (BTF)

US 14.00 TIC long-term net flows ($ bn) Aug n/a (Jul) 61.214.15 Industrial production (%m/m, sa) Sep 0.2 (Aug) 0.214.15 Capacity utilization (%bal, sa) Sep 74.8 (Aug) 74.715.00 NAHB housing market index (index, sa) Oct 14 (Sep) 1313.00 Citigroup 0.05 0.055Aft-mkt IBM 2.76 2.75

Apple 4.38 4.09Oct 19 (Tue) Australia 01.30 RBA minutes Oct

Euro area 09.00 Current account (EUR bn, sa) Aug n/a (Jul) -3.810.00 Germany ZEW business survey (Index) Oct -8.0 (Sep) -4.309.30 Spain to sell 12, 18-month bills10.00 Greece to sell EUR900mn of 13 week bill

UK 11.00 CBI industrial trends survey (%bal) Oct 10 9 (Sep) 10US 11.30 Bank of NY Mellon 0.56 0.54

12.00 Bank of America 0.15 0.1413.00 Goldman Sachs n/a 2.2513.30 Housing starts (000s, saar) Sep 583 (Aug) 59813.30 Building permits (000s, saar) Sep 575 (Aug) 571rBef-mkt Coca-Cola 0.88 0.88

Johnson & Johnson 1.15Yahoo! Inc 0.17 0.15

Canada 14.00 Bank of Canada rate announcement Oct 1.00 1.00 (Sep) 1.00Oct 20(Wed) Australia 00.30 Westpac Leading Index Aug n/a n/a 0.4

Euro area 07.00 Germany PPI (%oya) Sep 3.8 (Aug) 3.2UK 09.30 Bank of England releases Minutes of Monetary Policy Committee

09.30 Public sector finances (GBP bn) Sep 14.7 14.6 (Aug) 15.309.30 M4 (%oya) Sep n/a 1.5 (Aug) 1.9

US Bef-mkt US Bancorp 0.42812.30 Boeing Co 1.18 1.0612.30 Morgan Stanley n/a 0.2213.00 Wells Fargo 0.56 0.5619.00 Fed releases Beige Book

eBay Inc 0.39 0.37Canada 15.30 Bank of Canada releases Monetary Policy ReportThailand Bank of Thailand rate announcement 2.00 2.00 1.75Brazil COPOM announcement 10.75 10.75 10.75

Forecast Previous

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Market movers (all times BST; +9hrs for Sydney, +8hrs for Tokyo, -5hrs for New York) Date Country Data/Event

JPM ConsensusOct 21 (Thu) China 03.00 GDP (%oya) 3Q 9.3 9.5 10.3

03.00 PPI (%oya) Sep 4.4 4.1 4.303.00 CPI (%oya) Sep 3.5 3.6 3.503.00 Retail Sales (%oya) Sep 18.4 18.5 18.403.00 Industrial production (%oya, sa) Sep 13.3 14.0 13.903.00 Fixed Assets Inv Urban YTD (%oya) Sep 24.5 24.6 24.8

Japan 05.30 All sector activity index (%m/m, sa) Aug 0.0 -0.4 (Jul) 1.0Sweden 08.30 Unemployment rate (%) Sep 7.6 (Aug) 7.4Euro area 08.30 Germany PMI mfg. flash (index, sa) Oct 54.6 (Sep)

08.30 Germany PMI services flash (index, sa) Oct 54.9 (Sep)09.00 PMI composite flash (index, sa) Oct 53.7 (Sep)09.00 PMI mfg flash (index, sa) Oct 53.2 (Sep)09.00 PMI services flash (index, sa) Oct 53.7 (Sep)15.00 Consumer confidence prelim(%bal of responses, sa) Oct -11 (Sep) -1109.30 Spain to sell 4.65% 2025 bonds10.00 France to sell fixed notes and/or I/L notes

UK 09.30 Retail sales (%m/m, sa) Sep 0.3 0.3 (Aug) -0.5Canada 13.30 Leading indicators (%m/m, sa) Sep 0.1 (Aug) 0.5US 12.30 Caterpillar 1.09 1.09

13.00 AT&T 0.55013.30 Initial jobless claims (000s, sa) 16-Oct 453 46215.00 Leading indicators (%m/m, sa) Sep 0.3 (Aug) 0.315.00 Philadelphia Fed index (DI, sa) Oct 0.0 (Sep) -0.7Aft-mkt American Express Co 0.835

Amazon.com Inc 0.477Oct 22 (Fri) Euro area 09.00 Germany IFO business survey (Index, sa) Oct 106.5 (Sep) 106.8

Canada 12.00 CPI (%oya) Sep 1.9 (Aug) 1.712.00 CPI core (%oya) Sep 1.6 (Aug) 1.613.30 Retail sales (%m/m, sa) Aug -0.1 (Jul) -0.113.30 Retail sales less autos (%m/m, sa) Aug 0.4 (Jul) -0.4

Forecast Previous

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Event risk calendar Month Date Country EventOctober 2010 18 Euro area Eurogroup meeting

19 Euro area Ecofin meeting20 Canada BoC Monetary Policy Report20 United Kingdom UK Government comprehensive spending review for 2011-1521 Global G20 Deputy Finance Ministers and Deputy Central Bank Governonrs meeting in Korea22 Spain Budget release for September22-23 Global G20 Finance Ministers and Central Bank Governors Meeting in Korea28 Spain Budget release for September29 Norway Norges Bank foreign exchange purchases

November 2010 2 New Zealand Fonterra Dairy Auction2 United States Midterm elections2 Ireland Budget release for October5 Australia RBA's Quarterly Statement of Monetary Policy6 Global APEC Finance Ministers' meeting in Japan10 United Kingdom Bank of England Inflation Report10-11 Global 2011 APEC Finance Ministers Meeting in Japan11-12 Global G20 Leaders' summit in Seould, Korea13-14 Global APEC summit in Yokohama, Japan19 Spain Budget release for October30 Portugal Budget release for October30 Norway Norges Bank foreign exchange purchases

December 2010 1 New Zealand Fonterra Dairy Auction2 Ireland Budget release for November6 Euro area Eurogroup meeting7 Euro area Ecofin meeting9 New Zealand RBNZ Monetary Policy Statement16 Switzerland SNB Quarterly Monetary Policy Assessment 21 Spain Budget release for November23 Portugal Budget release for November

January 2011 1 Euro area Estonia joins the Euro zone from Jan 1stMarch 2011 10 Australia RBA's Quarterly Statement of Monetary PolicyApril 2011 16-17 Washington, DC IMF/World Bank spring meetingsJune 2011 9 Australia RBA's Quarterly Statement of Monetary PolicySeptember 2011 15 Australia RBA's Quarterly Statement of Monetary Policy

24-26 Washington, DC IMF/World Bank annual meetingsDecember 2011 8 Australia RBA's Quarterly Statement of Monetary Policy

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Central bank announcement dates in 2010-2011 2010 2011OCT NOV DEC JAN FEB MAR APR MAY JUN JUL AUG SEP

United States 3 14 26 15 27 22 9 20Euro area 7 4 2 13 3 3 7 5 9 7 4 8Japan 5, 28 16 21 25 17 15 7,28 20 14United Kingdom 7 4 9 13 10 10 7 5 9 7 4 8Switzerland 16 17 16 15Canada 19 7 18 1 12 31 19 7Australia 5 2 7 1 1 5 3 7 5 2 6New Zealand 28 9 27 10 28 9 28 15Norway 27 15 26 16 12 22 10 21Sweden 26 15 15 20 5Poland 27 24 22Hungary 25 29 20Czech Republic 4 22Israel 25 22Turkey 14 11 16South Africa 18Brazil 19 7Mexico 15 26India 2Indonesia 5 4 3Korea 14 16 9Thailand 1Philippines 4 15 28

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J.P. Morgan FX forecasts vs. forwards & consensus

CurrentMajors Oct 15 Dec 10 Mar 11 Jun 11 Sep 11 Dec 11 forward rate Consensus** Past 1mo YTD Past 12mos

EUR 1.41 1.30 1.30 1.30 1.30 1.25 -10.7% -4.5% 8.3% -1.8% -5.5%JPY 81.2 79 81 83 85 88 -8.3% 2.6% 5.3% 14.7% 12.0%GBP 1.61 1.49 1.48 1.48 1.49 1.47 -8.0% -7.3% 2.8% -0.6% -1.8%AUD 0.99 0.93 0.95 0.99 1.01 0.98 4.2% 6.9% 5.9% 10.8% 8.5%CAD 1.01 1.03 1.02 0.99 0.97 0.99 2.9% 3.7% 2.2% 3.9% 3.1%NZD 0.76 0.71 0.72 0.76 0.77 0.74 1.4% 3.9% 3.2% 4.3% 2.3%

JPM USD index 80.2 82.0 82.1 81.9 81.5 83.1 -4.3% -4.5% -3.2%DXY 77.1 81.6 81.9 81.9 81.9 84.7 -5.4% -1.0% 1.9%

Europe, Middle East & AfricaCHF 0.95 0.99 0.98 0.96 0.96 1.00 -5.0% 2.8% 5.1% 8.5% 6.8%ILS 3.57 3.75 3.75 3.75 3.75 3.75 -3.9% 1.6% 5.2% 6.3% 4.0%

SEK 6.56 6.92 6.92 6.88 6.88 7.20 -7.3% -4.2% 8.1% 9.2% 6.1%NOK 5.74 6.00 5.92 5.92 5.85 6.08 -3.3% -3.4% 6.0% 0.8% -2.3%CZK 17.40 18.85 18.65 19.23 18.85 19.20 -8.6% -3.3% 8.9% 5.6% -0.3%PLN 2.78 3.00 2.96 2.92 2.88 2.96 -2.8% -3.4% 9.1% 3.1% 1.7%HUF 195 212 212 208 206 212 -3.6% -3.7% 11.2% -3.5% -8.2%RUB 30.20 29.66 29.21 28.99 29.36 29.74 6.5% 0.6% 2.6% -0.6% -2.6%TRY 1.41 1.50 1.50 1.49 1.48 1.41 7.9% 8.9% 6.0% 6.6% 3.9%ZAR 6.82 7.00 7.15 7.30 7.70 8.10 -10.0% -5.2% 4.0% 8.2% 7.7%

Americas ARS 3.95 4.05 4.15 4.15 4.25 4.25 5.0% 2.7% 0.0% -3.8% -3.3%BRL 1.66 1.70 1.80 1.82 1.83 1.85 -1.7% -1.9% 3.9% 5.1% 3.0%CLP 478.8 480 505 500 500 500 -1.4% 0.9% 3.3% 6.0% 14.4%COP 1802 1800 1830 1850 1880 1900 -3.4% -0.4% 0.3% 13.4% 2.3%MXN 12.79 12.50 12.50 12.25 12.25 12.25 5.8% 3.3% 3.2% 5.6% 5.8%PEN 2.79 2.78 2.84 2.82 2.79 2.78 1.2% 0.5% -0.1% 3.5% 2.3%VEF 4.29 4.30 5.50 5.50 5.50 5.50 -21.9% -14.8% 0.1% -49.9% -49.9%

LACI 115.32 113.80 110.48 110.90 110.37 109.91 2.8% 4.9% 4.5%

Asia CNY 6.64 6.60 6.50 6.40 6.30 6.20 3.3% 2.1% 1.6% 2.8% 2.8%HKD 7.76 7.78 7.78 7.79 7.80 7.80 -0.7% -0.4% 0.1% -0.1% -0.1%IDR 8920 8700 8600 8550 8500 9200 1.9% -3.8% 0.8% 5.4% 5.4%INR 44.1 45.5 44.5 44.0 43.5 42.0 10.9% 4.9% 5.0% 5.4% 4.9%

KRW 1110 1150 1180 1140 1100 1100 2.3% -3.2% 4.6% 4.9% 4.9%MYR 3.08 3.10 3.07 3.04 3.02 3.02 3.7% -0.6% 1.1% 11.2% 9.4%PHP 43.28 43.25 42.75 42.25 42.00 42.25 4.8% 1.7% 2.3% 6.7% 7.8%SGD 1.30 1.32 1.30 1.29 1.28 1.33 -2.5% -3.2% 3.2% 8.4% 7.4%TWD 30.61 31.20 31.00 30.75 30.50 30.50 -2.5% -0.6% 3.8% 4.5% 5.4%THB 29.80 30.25 30.10 30.00 29.70 30.80 -2.3% -2.3% 3.6% 12.0% 12.1%

ADXY 115.8 114.8 115.6 117.1 118.7 118.7 2.4% 4.7% 4.7%

Exchange rates vs EuroJPY 114 103 105 108 111 110 2.7% 7.5% -2.8% 16.8% 18.5%GBP 0.88 0.87 0.88 0.88 0.87 0.85 3.0% -3.0% -5.1% 1.2% 3.9%CHF 1.34 1.29 1.27 1.25 1.25 1.25 6.4% 7.7% -3.0% 10.4% 13.0%SEK 9.23 9.00 9.00 8.95 8.95 9.00 3.9% 0.3% -0.3% 11.1% 12.3%NOK 8.09 7.80 7.70 7.70 7.60 7.60 8.4% 1.2% -2.2% 2.6% 3.4%CZK 24.51 24.50 24.25 25.00 24.50 24.00 2.4% 1.3% 0.5% 7.5% 5.4%PLN 3.91 3.90 3.85 3.80 3.75 3.70 8.9% 1.2% 0.7% 5.0% 7.6%HUF 275 275 275 270 268 265 8.0% 0.8% 2.7% -1.8% -2.8%RON 4.28 4.15 4.10 4.05 4.00 3.90 16.6% 5.6% -0.9% -1.1% 0.2%TRY 1.98 1.95 1.95 1.94 1.92 1.76 20.8% 14.1% -2.1% 8.3% 9.9%RUB 42.53 38.56 37.98 37.69 38.17 37.18 19.3% 5.4% -5.3% 1.7% 3.1%

↑ indicates revision resulting in stronger local FX , ↓ indicates revision resulting in weaker local FX* Negative indicates JPM more bullish on USD than consensus,** Consensus Economics Publication: Foreign Exchange Consensus Forecasts October 2010

Source: J.P.Morgan

JPM forecast gain/loss vs Dec-11* Actual change in local FX vs USD

Actual change in local FX vs EUR

Page 35: Fx markets weekly

Global FX Strategy FX Markets Weekly October 18, 2010 Grace Koo (44-20) 7325-1362 [email protected] J.P. Morgan Securities Ltd.

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J.P. Morgan forecasts: rates, credit, equities & commodities Interest rates Current Dec-10 Mar-11 Jun-11 Sep-11 YTD Return*United States Fed funds rate 0.125 0.125 0.125 0.125 0.125

10-year yields 2.35 2.25 2.25 2.25 2.25 9.5%Euro area Refi rate 1.00 1.00 1.00 1.00 1.00

10-year yields 2.26 2.30 2.20 2.30 2.40 9.3%United Kingdom Repo rate 0.50 0.50 0.50 0.50 0.50

10-year yields 2.86 3.00 3.00 3.10 3.25 9.7%Japan Overnight call rate 0.10 0.10 0.10 0.10 0.10

10-year yields 0.86 0.80 0.80 0.90 0.95 3.6%GBI-EM hedged in $ Yield - Global Diversified 6.19 7.90 10.1%

Credit Markets Current Index YTD Return*US high grade (bp over UST) 158 JPMorgan US Index (JULI) i-spread 11.7%Euro high grade (bp over Euro gov) 168 iBoxx Euro Corporate Index 5.4%USD high yield (bp vs. UST) 649 JPMorgan Global High Yield Index 12.6%Euro high yield (bp over Euro gov) 596 iBoxx Euro HY Index 13.1%EMBIG (bp vs. UST) 299 EMBI Global 15.3%EM Corporates (bp vs. UST) 336 JPM EM Corporates (CEMBI) 14.7%

Quarterly AveragesCommodities Current 10Q4 11Q1 11Q2 11Q3 GSCI Index YTD Return*WTI ($/bbl) 82.8 81.0 78.0 81.0 83.0 Energy -7.4%Gold ($/oz) 1345 1350 1425 1425 1450 Precious Metals 21.1%Copper ($/metric ton) 8087 8200 8600 8500 8750 Industrial Metals 4.0%Corn ($/Bu) 5.28 5.25 5.30 5.15 5.10 Agriculture 7.2%

YTD Return* Foreign Exchange Current Dec-10 Mar-11 Jun-11 Sep-11 in USDEUR/USD 1.39 1.30 1.30 1.30 1.30 EUR -2.0%USD/JPY 81.9 79 81 83 85 JPY 13.5%GBP/USD 1.59 1.49 1.48 1.48 1.49 GBP -0.6%USD/BRL 1.68 1.70 1.80 1.82 1.83 BRL 10.7%USD/CNY 6.67 6.60 6.50 6.40 6.30 CNY 1.3%USD/KRW 1120 1150 1180 1140 1100 KRW 6.0%USD/TRY 1.41 1.50 1.50 1.49 1.48 TRY 10.7%

3m cash index

YTD Return

Equities Current (local ccy)S&P 1164 6.0%Nasdaq 2394 6.9%Topix 839 -5.6%FTSE 100 5658 7.4%MSCI Eurozone* 156 0.7%MSCI Europe* 1134 3.8%MSCI EM $* 1103 13.8%Brazil Bovespa 70264 2.4%Hang Seng 22944 7.9%Shanghai SE 2739 -16.4%*Levels/returns as of Oct 7, 2010Local currency except MSCI EM $

US Europe Japan EMSector Allocation * YTD YTD YTD YTD ($)Energy 2.1% -4.4% -1.7% 1.9%Materials 5.2% 4.3% -10.0% 13.7%Industrials 15.8% 11.8% -0.3% 24.0%Discretionary 15.2% 22.1% -13.3% 27.2%Staples 8.4% 9.7% -1.7% 26.1%Healthcare -0.1% 1.3% -4.6% 24.6%Financials 2.7% -1.3% -9.3% 16.5%Information Tech. 0.6% 6.2% -3.4% 4.1%Telecommunications 11.8% 8.0% 13.5% 15.3%Utilities 5.5% -7.5% -5.8% 10.6%Overall 6.0% 3.8% -5.6% 13.8%

Source: Bloomberg, Datastream, IBES, Standard & Poor's Services, J.P. Morgan estimates

Page 36: Fx markets weekly

Global FX Strategy FX Markets Weekly October 18, 2010 David Hensley (1-212) 834-5516 Carlton Strong (1-212) 834-5612 JPMorgan Chase Bank NA

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Global growth and inflation forecasts

2009 2010 2011 1Q10 2Q10 3Q10 4Q10 1Q11 2Q11 3Q11 2Q10 4Q10 2Q11 4Q11The AmericasUnited States -2.6 2.6 2.4 3.7 1.7 1.5 2.0 2.5 2.5 3.0 1.8 0.9 1.2 1.1Canada -2.5 3.1 2.2 5.8 2.0 2.2 2.0 2.3 2.0 2.4 1.4 1.9 2.1 2.1Latin America -2.4 5.7 4.1 4.9 9.0 1.0 2.7 4.4 6.0 3.5 6.6 7.1 7.2 ↓ 7.3

Argentina -2.0 8.5 5.5 13.4 12.6 0.0 2.0 6.0 8.0 8.0 10.6 10.5 11.0 12.0Brazil -0.2 7.5 4.5 11.3 5.1 2.3 3.2 5.7 4.7 5.0 5.1 5.0 5.1 5.1Chile -1.5 5.5 6.0 -6.0 18.4 11.0 6.0 4.0 4.0 4.0 1.2 3.8 3.6 3.4Colombia 0.8 4.5 4.1 3.3 3.9 3.7 4.0 4.0 4.1 5.0 2.1 2.6 ↓ 3.1 ↓ 4.0Ecuador 0.4 2.5 3.0 2.1 7.7 2.5 3.0 3.0 2.5 2.5 3.2 3.6 3.8 3.8Mexico -6.5 4.5 3.5 -2.5 13.5 -3.6 3.1 2.9 9.2 -0.1 4.0 5.1 4.5 4.0Peru 0.9 8.2 6.0 8.0 12.7 4.8 3.5 5.8 6.7 7.2 1.2 2.6 2.2 2.7Venezuela -3.3 -2.2 1.0 -2.0 5.2 3.0 -5.0 2.0 1.0 1.5 31.9 31.6 34.7 35.1

Asia/PacificJapan -5.2 2.9 0.9 5.0 1.5 2.5 -1.5 0.5 1.5 1.8 -0.9 -0.8 -0.2 -0.3Australia 1.2 3.2 ↑ 3.6 ↑ 2.7 4.9 3.3 ↑ 2.4 ↓ 3.4 ↑ 4.9 ↑ 3.2 ↑ 3.1 3.3 3.8 3.4New Zealand -1.7 2.0 2.8 2.2 0.7 2.5 2.5 2.6 3.1 4.2 1.8 4.9 5.6 3.2Asia ex Japan 5.6 8.7 7.0 10.5 7.4 5.5 6.4 7.4 7.3 7.5 4.5 4.1 3.9 3.9

China 9.1 9.8 8.6 10.8 7.2 7.5 8.1 9.1 8.9 9.1 2.9 2.8 2.7 2.6Hong Kong -2.8 6.6 4.1 8.7 5.7 3.0 3.5 4.2 4.3 4.7 2.6 2.5 2.2 2.4India 7.4 8.3 8.5 9.2 8.5 8.0 8.9 8.0 8.5 8.6 13.7 11.0 10.1 10.2Indonesia 4.5 6.0 5.4 3.0 7.5 4.5 5.0 5.3 5.2 5.0 4.4 6.1 ↓ 5.6 ↓ 4.8Korea 0.2 6.1 4.0 8.8 5.8 2.5 3.8 4.0 4.0 4.5 2.6 2.9 3.4 3.4Malaysia -1.2 7.2 4.6 4.8 7.2 3.0 3.5 4.9 4.9 4.5 1.6 1.1 1.4 ↑ 2.4Philippines 0.9 ↓ 7.0 3.9 11.9 7.7 0.8 1.6 4.9 4.9 4.9 4.2 2.7 ↑ 1.9 ↑ 2.7 ↓

Singapore -1.3 14.8 4.2 45.7 24.0 -11.5 -2.0 8.7 6.6 7.4 3.1 3.5 ↑ 1.8 ↑ 1.6Taiwan -1.9 9.9 4.1 10.9 7.2 1.5 2.3 4.2 4.6 5.5 1.1 2.0 1.8 1.7Thailand -2.2 8.5 4.0 ↓ 13.9 0.6 2.8 2.8 4.9 ↓ 4.9 ↓ 4.9 ↑ 3.2 2.0 ↑ 2.5 ↑ 1.8

Africa/Middle EastIsrael 0.8 3.5 4.5 3.8 4.6 3.0 3.0 4.0 5.0 5.5 2.8 2.6 3.0 2.8South Africa -1.8 2.9 3.1 4.6 3.2 3.1 3.2 3.1 3.1 3.4 4.5 4.5 4.7 5.9

EuropeEuro area -4.0 1.7 1.5 1.4 ↑ 3.9 2.0 1.0 1.0 1.0 1.8 1.5 1.7 1.1 1.0

Germany -4.7 3.3 2.4 1.9 9.0 3.0 2.0 2.0 1.5 2.0 1.0 1.2 0.6 0.7France -2.5 1.6 1.5 0.7 2.8 2.0 1.5 1.0 1.0 1.5 1.8 1.3 0.7 1.1Italy -5.1 1.2 1.3 1.7 1.8 2.0 1.0 1.0 1.0 1.5 1.6 1.7 1.4 1.5

Norway -1.2 1.5 2.3 0.7 1.9 3.0 2.5 2.0 2.0 2.5 2.6 2.1 1.3 1.3Sweden -5.1 4.5 3.1 6.0 8.0 4.5 3.0 2.3 2.3 2.8 1.0 1.5 1.6 1.8Switzerland -1.9 2.9 2.0 4.2 3.5 2.5 2.0 1.5 1.5 2.3 1.0 0.4 0.1 0.7United Kingdom -4.9 1.7 2.2 1.3 4.9 2.5 1.5 1.0 2.5 3.0 3.5 2.6 1.9 2.1Emerging Europe -5.3 4.1 ↑ 4.1 ↓ 2.7 3.8 2.4 3.8 3.9 4.2 4.6 5.7 6.4 6.5 5.6

Bulgaria -5.0 -0.5 4.0 … … … … … … … … … … …Czech Republic -4.1 2.0 3.2 1.5 3.8 2.5 2.3 2.5 3.0 5.0 1.2 2.8 2.7 2.6Hungary -6.3 1.0 2.8 2.4 0.0 2.0 2.0 2.0 3.0 3.5 5.4 4.4 3.4 3.6Poland 1.7 3.5 3.8 2.8 4.5 3.5 3.5 3.0 3.5 4.0 2.3 2.6 2.7 2.9Romania -7.1 -2.0 1.5 … … … … … … … 4.4 8.0 7.2 4.0Russia -7.9 4.3 4.7 3.3 4.3 2.5 5.0 5.0 5.0 5.0 5.9 7.6 8.4 7.1Turkey -4.7 7.1 ↑ 4.3 ↓ … … … … … … … 9.2 7.5 7.0 6.2

Global -2.2 3.6 2.9 4.2 3.9 2.5 2.2 2.8 3.1 3.4 ↑ 2.5 2.3 2.3 ↑ 2.1Developed markets -3.5 2.3 1.9 3.0 2.8 2.0 1.2 1.6 1.9 2.4 1.5 1.2 1.1 1.0Emerging markets 1.3 6.9 5.6 ↓ 7.7 7.1 3.8 5.0 6.0 6.4 5.9 5.2 5.3 5.2 5.1

Memo:Global — PPP weighted -0.8 4.6 ↑ 3.8 5.3 ↑ 4.7 3.1 3.1 3.8 4.0 4.2 3.2 3.0 3.0 2.8 ↓

% over a year agoConsumer prices

% over previous period, saar Real GDP

% over a year ago Real GDP

Source: J.P. Morgan

Page 37: Fx markets weekly

Global FX Strategy FX Markets Weekly October 18, 2010 David Hensley (1-212) 834-5516 [email protected] JPMorgan Chase Bank NA

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Global central bank forecasts Change from Forecast

Official interest rate Current Aug '07 (bp) Last change Next meeting next change Dec 10 Mar 11 Jun 11 Sep 11 Dec 11

Global GDP-weighted average 1.76 -319 1.81 1.86 1.93 1.97 2.04 excluding US GDP-weighted average 2.39 -241 2.45 2.53 2.63 2.68 2.78Developed GDP-weighted average 0.60 -358 0.62 0.63 0.65 0.68 0.72Emerging GDP-weighted average 5.00 -210 5.14 5.28 5.51 5.59 5.75 Latin America GDP-weighted average 7.22 -218 7.29 7.79 8.38 8.42 8.42 CEEMEA GDP-weighted average 4.08 -294 4.10 4.11 4.17 4.36 4.85 EM Asia GDP-weighted average 4.55 -170 4.76 4.83 4.99 5.04 5.12

The Americas GDP-weighted average 1.28 -453 1.29 1.38 1.49 1.52 1.56United States Federal funds rate 0.125 -512.5 16 Dec 08 (-87.5bp) 3 Nov 10 On hold 0.125 0.125 0.125 0.125 0.125Canada Overnight funding rate 1.00 -325 8 Sep 10 (+25bp) 19 Oct 10 1 Mar 11 (+25bp) 1.00 1.25 1.50 1.75 2.25Brazil SELIC overnight rate 10.75 -125 21 Jul 10 (+50bp) 20 Oct 10 Jan 11 (+25bp) 10.75 11.50 12.50 12.50 12.50Mexico Repo rate 4.50 -270 17 Jul 09 (-25bp) 15 Oct 10 On hold 4.50 4.50 4.50 4.50 4.50Chile Discount rate 2.50 -250 16 Sep 10 (+50bp) 14 Oct 10 14 Oct 10 (+25bp) 3.25 4.00 4.50 4.50 4.50Colombia Repo rate 3.00 -600 30 Apr 10 (-50bp) 29 Oct 10 1Q 11 (+50bp) 3.00 4.00 5.00 5.50 5.50Peru Reference rate 3.00 -150 9 Sep 10 (+50bp) 11 Nov 10 7 Oct 10 (+25bp) 3.50 4.25 4.50 4.50 4.50

Europe/Africa GDP-weighted average 1.44 -322 1.45 1.46 1.47 1.52 1.63Euro area Refi rate 1.00 -300 7 May 09 (-25bp) 4 Nov 10 On hold 1.00 1.00 1.00 1.00 1.00United Kingdom Repo rate 0.50 -500 5 Mar 09 (-50bp) 4 Nov 10 On hold 0.50 0.50 0.50 0.50 0.50Sweden Repo rate 0.75 -275 2 Sep 10 (+25bp) 26 Oct 10 26 Oct 10 (+25bp) 1.25 1.25 1.25 1.50 2.00Norway Deposit rate 2.00 -250 5 May 10 (+25bp) 27 Oct 10 3Q 11 (+25bp) 2.00 2.00 2.00 2.25 2.75Switzerland 3-month Swiss Libor 0.25 -225 12 Mar 09 (-25bp) 4Q 10 Jun 11 (+25bp) 0.25 0.25 0.50 0.75 1.00Czech Republic 2-week repo rate 0.75 -200 6 May 10 (-25bp) 4 Nov 10 2Q 11 (+25bp) 0.75 0.75 1.00 1.25 1.75Hungary 2-week deposit rate 5.25 -250 26 Apr 10 (-25bp) 25 Oct 10 3Q 11 (+25bp) 5.25 5.25 5.25 5.50 5.75Israel Base rate 2.00 -200 27 Sep 10 (+25bp) 25 Oct 10 22 Nov 10 (+25bp) 2.25 2.50 2.75 3.25 3.50Poland 7-day intervention rate 3.50 -100 24 Jun 09 (-25bp) Oct 10 2Q 11 (+25bp) 3.50 3.50 3.75 4.00 4.25Romania Base rate 6.25 -75 4 May 10 (-25bp) 2 Nov 10 3Q 11 (+25bp) 6.25 6.25 6.25 6.50 6.75Russia 1-week deposit rate 2.75 -25 31 May 10 (-50bp) Oct 10 3Q 11 (+25bp) 2.75 2.75 2.75 3.00 3.50South Africa Repo rate 6.00 -350 9 Sep 10 (-50bp) 18 Nov 10 On hold 6.00 6.00 6.00 6.00 6.00Turkey 1-week repo rate 7.00 -1050 - 14 Oct 10 4Q 11 (+50bp) 7.00 7.00 7.00 7.00 8.00

Asia/Pacific GDP-weighted average 2.90 -129 3.04 3.10 3.20 3.25 3.31Australia Cash rate 4.50 -175 4 May 10 (+25bp) 1 Nov 10 1 Nov 10 (+25bp) 4.75 5.00 5.25 5.50 5.75New Zealand Cash rate 3.00 -500 29 Jul 10 (+25bp) 27 Oct 10 10 Mar 11 (+25bp) 3.00 3.25 3.50 3.75 4.00Japan Overnight call rate 0.05 -48 5 Oct 10 (-5bp) 28 Oct 10 On hold 0.05 0.05 0.05 0.05 0.05Hong Kong Discount window base 0.50 -625 17 Dec 08 (-100bp) 4 Nov 10 On hold 0.50 0.50 0.50 0.50 0.50China 1-year working capital 5.31 -126 22 Dec 08 (-27bp) 4Q 10 4Q 10 (+27bp) 5.58 5.58 5.85 5.85 5.85Korea Base rate 2.25 -225 9 Jul 10 (+25bp) 14 Oct 10 4Q 10 (+25bp) 2.50 2.75 2.75 2.75 3.00Indonesia BI rate 6.50 -200 5 Aug 09 (-25bp) 4 Nov 10 2Q 11 (+25bp) 6.50 6.50 6.75 6.75 6.75India Repo rate 6.00 -175 16 Sep 10 (+25bp) 2 Nov 10 2 Nov 10 (+25bp) 6.25 6.50 6.50 6.75 7.00Malaysia Overnight policy rate 2.75 -75 8 Jul 10 (+25bp) 12 Nov 10 On hold 2.75 2.75 2.75 2.75 2.75Philippines Reverse repo rate 4.00 -350 9 Jul 09 (-25bp) 18 Nov 10 2Q 11 (+25bp) 4.00 4.00 4.25 4.50 4.50Thailand 1-day repo rate 1.75 -150 26 Aug 10 (+25bp) 20 Oct 10 20 Oct 10 (+25bp) 2.00 2.00 2.00 2.00 2.00Taiwan Official discount rate 1.50 -163 30 Sep 10 (+12.5bp) 23 Dec 10 3Q 11 (+12.5bp) 1.50 1.50 1.50 1.625 1.75Bold denotes move since last GDW and forecast changes. Underline denotes policy meeting during upcoming week.

Source: J.P. Morgan

Page 38: Fx markets weekly

Global FX Strategy FX Markets Weekly October 18, 2010 Yoonyi Kim (81-3) 6736-7729 [email protected] JPMorgan Chase Bank NA

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Sovereign credit ratings and actions Rating View Rating View Rating View Action Date Action Date Action Date

United States AAA Aaa AAA Affirmed, O/L stable 10-Jan-08 Affirmed, O/L stable 15-Nov-03 Affirmed, O/L stable 9-May-08Canada AAA Aaa AAA Affirmed, O/L stable 18-May-07 Affirmed, O/L stable 24-May-06 Affirmed, O/L stable 22-May-07Germany AAA Aaa AAA Affirmed, O/L stable 14-Jun-07 Affirmed, O/L stable 24-May-06 Affirmed, O/L stable 6-Nov-07France AAA Aaa AAA Affirmed, O/L stable 28-Feb-06 Affirmed, O/L stable 24-May-06 Affirmed, O/L stable 30-Mar-10Austria AAA Aaa AAA Affirmed, O/L stable 12-Feb-07 Affirmed, O/L stable 24-May-06 Affirmed, O/L stable 15-Feb-08Netherlands AAA Aaa AAA Affirmed, O/L stable 24-Jan-06 Affirmed, O/L stable 15-Nov-03 Affirmed, O/L stable 26-Oct-07Sweden AAA Aaa AAA Affirmed, O/L stable 22-Jan-07 Affirmed, O/L stable 15-Nov-03 Affirmed, O/L stable 18-Dec-07Norway AAA Aaa AAA Affirmed, O/L stable 28-May-09 Affirmed, O/L stable 15-Nov-03 Affirmed, O/L stable 18-Dec-07Switzerland AAA Aaa AAA Affirmed, O/L stable 1-Dec-03 Affirmed, O/L stable 15-Nov-03 Affirmed, O/L stable 11-Jun-07Australia AAA Aaa AAA Affirmed, O/L stable 6-Sep-10 Affirmed, O/L stable 24-May-06 Affirmed, O/L stable 22-May-08Singapore AAA Aaa AAA Affirmed, O/L stable 1-May-08 Upgrade, O/L stable 14-Jun-02 Affirmed, O/L stable 18-Aug-10New Zealand AAA Aaa AAA (-) Affirmed, O/L stable 28-May-09 Upgrade, O/L stable 21-Oct-02 O/L changed to (-) ↓ 15-Jul-09United Kingdom AAA (-) Aaa AAA Affirmed, O/L (-) 29-Mar-10 Affirmed, O/L stable 15-Nov-03 Affirmed, O/L stable 18-Jan-05Belgium AA+ Aa1 AA+ Affirmed, O/L stable 21-May-07 O/L changed to stable ↓ 13-Jan-09 Affirmed, O/L stable 25-May-07Spain AA (-) Aa1 AA+ Downgrade, O/L (-) 29-Apr-10 Downgrade, O/L changed to stable ↑ 30-Sep-10 Downgrade, O/L stable 28-May-10Japan AA (-) Aa2 AA- O/L changed to (-) ↓ 26-Jan-10 upgrade, O/L stable 18-May-09 Affirmed, O/L stable 3-Sep-09Ireland AA- (-) Aa2 A+ (-) Downgrade, O/L (-) 24-Aug-10 Downgrade, O/L stable 19-Jul-10 Downgrade, O/L (-) ↓ 6-Oct-10Italy A+ Aa2 AA- Affirmed, O/L stable 23-Oct-07 Affirmed, O/L stable 19-Oct-06 Affirmed, O/L stable 6-Dec-07China A+ A1 (+)* A+ Upgrade, O/L stable 31-Jul-08 On review positive 8-Oct-10 Upgrade, O/L stable 6-Nov-07Czech Republic A A1 A+ (+) Affirmed, O/L stable 27-Nov-08 O/L changed to stable ↓ 8-Dec-08 O/L changed to (+) ↑ 4-Jun-10Korea A A1 A+ Affirmed, O/L stable 12-Jan-10 Upgrade, O/L stable 14-Apr-10 O/L changed to stable ↑ 2-Sep-09Portugal A- (-) A1 AA- (-) Downgrade, O/L (-) 27-Apr-10 Downgrade, O/L changed to stable ↑ 13-Jul-10 Downgrade, O/L (-) 24-Mar-10Poland A- A2 A- O/L changed to stable ↓ 27-Oct-08 Affirmed, O/L stable 24-May-06 Affirmed, O/L stable 10-Nov-08South Africa BBB+ (-) A3 BBB+ (-) O/L changed to (-) ↓ 11-Nov-08 Upgrade, O/L changed to stable ↓ 16-Jul-09 O/L changed to (-) ↓ 9-Nov-08Russia BBB Baa1 BBB (+) O/L changed to stable ↑ 21-Dec-09 O/L changed to stable ↓ 12-Dec-08 O/L changed to (+) ↑ 8-Sep-10Mexico BBB Baa1 BBB Downgrade, O/L changed to stable ↑ 14-Dec-09 Affirmed, O/L stable 24-May-06 Downgrade, O/L changed to stable ↑ 23-Nov-09Hungary BBB- Baa1 (-)* BBB (-) O/L changed to stable ↑ 2-Oct-09 On review negative 23-Jul-10 O/L changed to (-) ↓ 2-Mar-09Brazil BBB- Baa3 (+) BBB- (+) Upgrade, O/L stable 30-Apr-08 Upgrade, O/L (+) 22-Sep-09 O/L changed to (+) ↑ 28-Jun-10India BBB- Baa3 BBB- O/L changed to stable ↑ 18-Mar-10 Upgrade, O/L changed to stable ↓ 22-Jan-04 Affirmed, O/L stable 9-Feb-09Iceland BBB- (-) Baa3 (-) BB+ (-) O/L changed to stable ↑ 23-Apr-10 O/L changed to (-) ↓ 6-Apr-10 Downgrade, O/L changed to (-) ↓ 5-Jan-10Greece BB+ (-) Ba1 (-) BBB- (-) Downgrade, O/L (-) 27-Apr-10 Downgrade, O/L (-) 14-Jun-10 Downgrade, O/L (-) 9-Apr-10Latvia BB Baa3 BB+ (-) O/L changed to stable ↑ 12-Feb-10 O/L changed to stable ↑ 31-Mar-10 Affirmed, O/L negative 6-Oct-09Turkey BB (+) Ba2 (+) BB+ Upgrade, O/L changed to (+) ↑ 19-Feb-10 O/L changed to (+) ↑ 5-Oct-10 Upgrade, O/L changed to stable ↓ 3-Dec-09Ukraine B+ B2 (-) B Upgrade, O/L stable 29-Jul-10 Downgrade, O/L changed to (-) ↓ 12-May-09 Upgrade, O/L stable 6-Jul-10Argentina B B3 B Affirmed, O/L stable 13-Sep-10 O/L changed to stable ↓ 14-Aug-08 Upgrade, O/L stable 12-Jul-10 Source: Ratings agencies Note that ratings refer to foreign currency denominated long term debt for EM countries and domestic currency denominated long term debt for others; * indicates ratings on review/credit watch/rating watch (+/-)

S&P ratings vs fiscal balance as % of GDP in 2010 S&P ratings vs gross government debt as % of GDP in 2010

US CAGEFR SWNOSZAUNZUK

SPJP

IRIT CH

SKPO PD

SARU MX

HUBZ

INICGR TU

AR

-14% -9% -4% 1% 6%

AAA

A+

BBB

BB-

CCC+

C

USCAGE FRSWNOSZAU NZ UK

SP JP

IRITCH

SKPOPD

SARU MX

HUBZIN ICGR

TU

AR

0% 40% 80% 120% 160% 200%

AAA

A+

BBB

BB-

CCC+

C

Source: J.P.Morgan, OECD, S&P *JPM forecast for 2010 used for EM and OECD forecast used for DM

Source: J.P.Morgan, OECD, S&P *JPM forecast for 2010 used for EM and OECD forecast used for DM

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Government bond and bank redemptions

Euro area €bn

Govt Banks Govt Banks Govt Banks Govt Banks Govt Banks Govt Banks Govt Banks Govt Banks Govt Banks Govt BanksSep-10 26 6 29 7 55 2 7 9 24 0 1.0 1.1 3.7 0.6 0.0 8.1 54 13 67 21Oct-10 29 14 42 8 17 3 9 2 2 2 5.3 0.5 1.3 0.0 1.0 1.6 71 22 34 7Nov-10 4 4 8 5 40 3 8 4 2 3 0.1 0.1 3.1 0.7 0.2 0.7 12 8 50 9Dec-10 15 8 9 2 29 5 8 4 3 1 0.1 0.5 0.0 0.0 0.0 0.7 24 9 36 10Jan-11 43 18 35 4 8 1 10 6 2 6 3.4 0.0 2.9 2.1 1.8 1.0 78 23 26 10Feb-11 4 13 9 5 36 8 4 7 2 3 0.1 0.7 2.3 2.3 0.0 1.7 14 17 43 19Mar-11 19 17 8 4 40 5 5 16 19 4 10.8 1.5 2.8 0.9 1.7 0.2 28 21 60 23Apr-11 26 13 99 10 9 8 6 16 2 4 1.3 1.5 5.4 0.7 1.3 0.0 125 23 23 26May-11 0 17 0 6 23 2 21 5 0 0 8.6 1.9 0.0 1.0 0.0 0.6 0 23 53 11Jun-11 15 9 0 7 19 4 4 10 0 5 0.4 1.3 6.8 1.0 0.3 0.5 15 15 30 17Jul-11 36 8 42 9 0 3 10 6 0 1 2.8 1.0 0.0 0.8 0.0 0.3 78 17 13 12

Aug-11 0 6 0 4 30 1 19 1 0 1 8.4 0.0 0.0 0.2 0.0 0.5 0 10 58 3Sep-11 16 11 19 3 51 5 0 5 16 3 0.8 0.9 0.4 0.6 0.0 3.2 35 14 53 15Oct-11 19 5 28 2 1 3 21 4 0 6 1.1 1.6 1.3 0.3 1.1 0.1 47 7 26 9Nov-11 0 5 0 2 19 7 0 3 0 1 0.1 2.3 0.0 0.0 4.6 0.9 0 7 23 13Dec-11 18 3 0 10 1 2 3 6 1 0 5.8 0.1 0.0 1.4 0.0 0.0 19 13 10 10

* Government redemptions cover bonds and bills

Core PeripheryIrelandGermany France Italy Spain Belgium Greece Portugal

Other countries Bn of local currency*

Japan Canada Australia NZ Norway Sweden Swiss HungaryGovt Banks Govt Banks

Sep-10 14.8 9.7 227 99 14.3 25.9 0.6 1.4 12.0 27.5 0.0 220Oct-10 9.5 6.3 164 90 5.9 12.9 0.9 1.3 0.0 3.5 0.3 778Nov-10 7.4 6.3 107 68 2.6 5.7 1.6 8.5 0.0 0.0 0.0 55Dec-10 6.4 4.8 87 90 9.9 23.5 0.7 0.2 12.0 9.8 0.0 177Jan-11 1.6 3.5 102 78 2.5 0.0 0.0 0.0 0.0 0.0 0.8 165Feb-11 0.9 7.2 142 80 2.5 0.0 0.4 0.0 0.0 0.0 0.5 432Mar-11 32.5 8.4 92 89 12.3 1.0 0.3 0.0 0.0 59.5 0.2 0Apr-11 0.2 8.5 112 80 2.5 0.0 0.9 0.8 0.0 0.3 0.3 617May-11 0.5 10.9 84 118 0.0 0.0 1.0 0.0 10.8 5.1 0.2 0Jun-11 6.4 6.8 64 98 9.3 27.3 11.2 0.0 0.0 0.0 1.0 248Jul-11 8.9 2.1 69 89 0.0 0.0 0.1 0.0 0.0 1.2 0.1 0

Aug-11 0.9 6.9 119 88 0.0 0.0 0.4 0.0 0.0 4.2 0.0 0Sep-11 8.3 8.2 67 117 9.4 19.3 0.3 0.0 0.0 0.0 0.0 1Oct-11 0.2 11.3 67 55 0.0 0.0 0.9 0.0 0.0 3.5 0.0 463Nov-11 0.5 28.8 117 71 0.0 0.0 1.0 0.0 0.0 0.0 0.0 53Dec-11 22.2 16.4 95 112 9.6 15.3 0.4 0.0 0.0 9.8 0.0 2

* Except for Japan which is expressed in Trillions. Government redemptions cover bonds and bills

UK US

Chart 1: Euro area: core vs. periphery govt. and bank redemptions Chart 2: Spain, Portugal and Hungarian govt. redemptions €bn € Bn

0

20

40

60

80

100

120

Sep 10 Oct 10 Nov 10 Dec 10 Jan 11 Feb 11

Core - Gov t Core - Bank Periph. Gov t Periph. Bank

Core Periphery

0

5

10

15

20

25

Sep 10 Dec 10 Mar 11 Jun 11 Sep 11 Dec 11

Portugal Spain Hungary

Source: J.P. Morgan Source: J.P. Morgan

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Prior Research Notes available on www.morganmarkets.comPrecious metals: an immensely supportive backdrop, Jansen, Oct 8, 2010

G-3 corporate hedging survey: year-ahead hedge ratios reach record high, Kim & Normand, Oct 1, 2010

Valuation update – NOK & JPY move to further extremes, Gabriel de Kock, Sep 24, 2010

“Quasi” unsterilized intervention by MoF/BoJ Junya Tanase, Sep 24, 2010

Market impact of the DPJ leadership election, Tanase, Kim, Yamawaki, Kuroda, Sept 10, 2010

Fall in USD/JPY can be positive for Japanese firms, Sasaki, Aug 20, 2010

The weight of Washington - quantifying the impact of politics on the economy and the dollar, de Kock, Aug 13, 2010

No compelling reason for Japanese lifers to change their FX-hedging strategy in the near future Tanase & Kim, Aug 6, 2010

The knowns, unknowns and unknowables about reserve diversification, de Kock, Jul 9, 2010

Euro depreciation widely spread but narrowly felt Hensley & Lupton, Jul 9, 2010

The impact of Japan’s Upper House elections Tanase & Kim, Jul 9, 2010

How far can the yen appreciate from here? Sasaki, Tanase & Kim, Jul 2, 2010

G-10 fair value update: EUR & USD fair, Scandies & GBP still cheap, de Kock, Jun 25, 2010

Corporate Hedging Survey: Corporates expect EUR to remain under pressure but not collapse, de Kock, Kim, Sharma & Tanase, Jun 25, 2010

CHF and the SNB’s ballooning balance sheet Meggyesi, Jun 25, 2010

UK: Previewing the emergency budget, Barr & Monks, Jun 18, 2010

UK: Previewing the coming fiscal drama, Barr, Jun 11, 2010

How lite is the ECB’s QE-lite?, Meggyesi, Jun 4, 2010

Naoto Kan as Prime Minister does not imply a weaker yen, Sasaki and Tanase, Jun 4, 2010

Managing FX hedge ratios: A framework for strategic and tactical decisions, Normand, De Kock, Franklin-Lyons & Sandilya, May 26, 2010

Reflections on negative interest rates in Switzerland, Meggyesi, May 14, 2010

The Nikkei’s impact on Japanese investment in foreign securities, Tanase, Apr 30, 2010

Would the ECB ever intervene in EUR/USD?, Normand, Apr 30, 2010

Picking winners among the G-10 high-beta currencies, de Kock, Apr 9, 2010

Corporate hedging recommendation: Hedging against a EUR/JPY rally, Sharma, Mar 26, 2010

China revaluation wouldn't mean much for G-10, Normand, Mar 19, 2010

Corporate Hedging Survey: More hedging, less hiring, Franklin-Lyons, de Kock, Sharma, Mar 19, 2010

G10 fair value update: EUR and USD fair, Scandies and Swissie cheap, de Kock, Mar 19, 2010

BoJ’s monetary policy has little impact on USD/JPY, Sasaki, Tanase, Kim, Mar 12 2010

Corporate hedging recommendation: participating in GBP downside, Franklin-Lyons, Feb 26, 2010

The real impact of JPY/KRW, Tanase and Kim, Feb 26, 2010

Exiting EMU: The legal, the likely, and the ludicrous Normand, Feb 19, 2010

Public debt is a minor concern for JPY, Sasaki, Tanase & Kim, Feb 12, 2010

How do expectations of a CNY revaluation affect JPY? Tanase & Kim, Feb 5, 2010

Cross-currency basis likely to normalize further Franklin-Lyons, Jan 29, 2010

Japanese FX special account now at record-low net worth Sasaki, Tanase & Kim, Jan 29, 2010

Examining the link between foreign demand for Japanese stocks and USD/JPY, Tanase & Kim, Jan 22, 2010

G-10 fair value update: NOK and CAD still cheap De Kock, Jan 8, 2010

Corporate Hedging Survey: increasing cross-country divergences in hedging behavior, Franklin-Lyons, Sharma & Tanase, Dec 18, 2009

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J.P. Morgan Global FX Strategy

London John Normand MD Head, Global FX Strategy (44-20) 7325-5222 [email protected] Paul Meggyesi MD FX Strategy (44-20) 7859-6714 [email protected] Thomas Anthonj ED Technical Strategy (44-20) 7742-7850 [email protected] Matthias Bouquet VP Derivatives Strategy (44-20) 7777-5276 [email protected] Sunil Kavuri Associate FX Strategy (44-20) 7777-1729 [email protected]

New York Ken Landon MD FX Strategy (1-212) 834-2391 [email protected] Niall O’Connor ED Technical Strategy (1-212) 834-5108 [email protected] Arindam Sandilya ED Derivatives Strategy (1-212) 834-2304 [email protected] Justin Kariya Analyst FX Strategy (1-212)-834-9618 [email protected]

Tokyo Tohru Sasaki MD FX Strategy (81-3) 6736-7717 [email protected] Junya Tanase ED FX Strategy (81-3) 6736-7718 [email protected] Yoonyi Kim Analyst FX Strategy (81-3) 67367729 [email protected]