Foreign Exchange

29 July 2011

FX Weekly: Dollar Ambiguities Amplified

Currency Summary AUD: The Future is Rosy Factors Behind The Soaring Birds Set to Hold So What if The US Loses Its AAA Status? Little Justification For BoJ intervention Medium Term Recommendations Volatility Cones Correlation Economic Calendar FX Forecast Contacts 2 4 6

Dollar implications of ongoing debt ceiling impasse remain highly ambiguous EURUSD range set to expand; USDJPY, USDCHF and EURCHF to plumb new depths but risk of defensive policy actions rising Local markets have remained resilient to debt woes across the Atlantic but USD liquidity squeeze is the most important risk. FX Weekly Strategy: G10 Summary Political and economic uncertainties impinging on G10 FX markets could hardly be greater. Both sides of the recent 1.4250-1.4500 effective range on EURUSD are likely to be expanded and USDJPY and USDCHF to plumb yet new depths. We are confronting the interplay of many conflicting forces: rising risk that August 2 will pass without the debt ceiling having been raised and how that will play out for risk sentiment in general and dollar funding pressures specifically; the potential for enduring downward pressure on the USD (USDJPY especially) from the fresh downward pressure on US Treasury yields following latest US GDP data; renewed threats by Japanese officials to intervene; rising risk that Swiss authorities follow Brazil down the path of capital controls via taxing foreign inflows; the persisting market uncertainty/scepticism regarding the veracity of the recent EU summit agreement; etc etc. On the latter, we look to Mr. Trichet at the post-ECB meeting press conference on Thursday to offer enthusiastic endorsement of the EU agreement but hopes Mr. Trichet might explicitly commit to expanding use of the securities market programme (SMP) to buy Euro-peripheral debt ahead of the legislative changes necessary for the EFSF to take on this role (and which would likely boost the Euro as a result) may be disappointed. Run of the mill data and events cannot be overlooked. The RBA meeting outcome on Tuesday will be important, and where any explicit re-instatement of a tightening bias will add further support to AUD (or undermine recent gains if not); PMI data from Switzerland on Monday (and CPI on Friday) that may add to evidence that the economy is now starting to suffer a vice-like grip from CHF strength; UK PMI on Monday and Wednesday that may undermine the (hard to believe) message from the Q2 GDP report and bring the more QE debate back to life to the detriment of GBP; the ECB press conference and the choice of words on the ECBs state of alertness in the context of the recent poor run of activity data; and of course Fridays US payrolls and which we expect will be poor. Local Markets Strategy Local markets are facing significant headwinds but, so far, they have managed to maintain their composure, as evidenced by the ongoing inflows into local markets debt funds. That said, widening BOR/OIS spreads in the US are by far the biggest near-term risk for local markets. In the unlikely event of the US moving into a technical default, the impact on local markets would be significant and negative. The first group of countries to be hit would be those countries holding USTs. This applies mostly to Asia, where positioning is quite heavy. The second group would be those countries that have significant short-term external funding needs. CEE stands out here, particularly if one assumes that access to the CHF becomes more difficult. Turkey fits well here, too given its substantial current account deficit. Thirdly, the expected slowdown in growth would be a drag on commodity producers (Russia and Mexico being at the forefront). Finally, while GCC currencies would probably remain pegged (for now), balance sheets in the Gulf could also be under threat. There would probably be no clear winners but, on a relative basis, we would assume that the likes of Israel, Singapore and the Czech Republic would perform better given their healthy external balances.
IMPORTANT NOTICE. Please refer to important disclosures found at the end of this report. Some sections of this report have been written by our strategy teams (shown in blue). Such reports do not purport to be an exhaustive analysis and may be subject to conflicts of interest resulting from their interaction with sales and trading which could affect the objectivity of this report.

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Weekly Currency Summary

Europe
With peripheral bond spreads widening, peripheral concerns are re-emerging and weighing on EUR. Also, if the US debt ceiling lingers into this coming week, we could see a further risk-off move and USD liquidity issues emerging, benefiting USD. Yet, weak US data could help EUR regain momentum against USD. Thus, we see risk of EURUSD extending the past weeks range of 1.4250-1.4500 - quite possibly from both sides. CHF continues to soar against both the USD and EUR. Recent data are starting to show the impact of the strength of CHF on the economy, and so, Mondays PMI will be important. But as debt issues linger, CHF could see further gains, meaning officials could start making louder noises about implementing capital controls. A surprisingly strong Q2 GDP number seems a bit unconvincing in light of other Q2 data. This weeks PMI numbers will be crucial to providing insight as to how Q3 is shaping up. Barring any downside surprise in PMI, EURGBP is likely to head lower if EURUSD does as well and vice versa . NOK has remained under the cosh on the back of the US debt downgrade/default risks. While it may remain under pressure against EUR and USD as the issue lingers, NOK is likely to gain against SEK in a broader risk-off move. Despite strongerthan-expected Swedish GDP, SEK remained under pressure as the US debt ceiling issues add to concerns over USD liquidity and a broader risk-off move. SEK will remain hostage to the US budget debate.

EUR CHF GBP NOK SEK

Converging Europe, Russia, Israel and South Africa

PLN CZK HUF RON RUB TRY ILS ZAR
PLN eased off 0.6% against EUR this week in relatively-less volatile trading due to intervention by the state-owned BGK and comments from several NBP representatives. Retail sales growth slowed in June; this is likely to be followed by a decline in the July PMI on Monday. PLN will depend on government agencies, but market sentiment is not very positive, and the EURPLN is unlikely to go below 3.96. CZK was, once again, the safe haven currency in the region. The decline in money supply growth in June is likely to reflect negatively on retail sales, which are expected to decline to 1.5% y/y on Thursday. EURCZK will continue to trade between 24.1 24.4 as the CNB is likely to remain on hold, contingent on further developments in Europe. Sluggish retail sales growth prevented the NBH from sounding more dovish as external risks and a strong CHF are keeping the central bank on high alert. The week ahead is likely to present mixed data as the PMI and IP could decline and sour any positive news about the trade balance on Wednesday. We expect EURHUF to trade in 267-271 range. There were no surprises from the budget performance and the IMF visit. On Wednesday, the NBR is expected to leave rates unchanged and reiterate the expectation that inflation will come off in the coming months. If the central bank decides to express less concern about global risks, EURRON should continue grinding higher. The CBR continued to accumulate reserves in the same proportions and reaffirmed its plan to move towards a free float. The July PMI and CPI releases due next week are unlikely to change our view that the central bank will not tighten in Q3. USDRUB is likely to be capped at 27.4. The CBRT scrapped its daily purchases of USDs and cut the RRR on FX liabilities. It also sounded more concerned about TRY depreciation in the inflation report. The CPI and PPI on Wednesday will be closely watched by the market to see whether more measures are needed. Given the shift in CBRT rhetoric towards TRY, we could see some unwinding of short TRY positions in intra-regional crosses, but it is too early to herald the triumph of CBRTs policies. The BoI continued to revise down its expectations on inflation and the normalisation path of interest rates. The BoI was seen intervening around 3.38/USD. USDILS, however, remains a sell around 3.45. The slightly higher PPI was overshadowed by the up-tick in the unemployment rate and slower credit growth. These developments weighed on ZAR. PMI on Monday is likely to decline yet again, but ZAR will remain supported by the record-high gold prices and the strong interest of foreign investors for long-dated government bonds.

America
As the US political theatrics plays on, concerns over USD liquidity may rise which may work in favour of USD. Nevertheless, the weak Q2 GDP and downward revision of Q1 GDP led to a rally in US Treasuries keeping USD under pressure. Heading into next week with no resolution on the debt ceiling at hand, USD funding stresses is likely to increase, in which case the USD will benefit from a flight to quality. NFP on Friday will likely be weak, and another surprisingly weak number will lead to a further risk-off move. Weak GDP numbers on Friday led to significant underperformance by CAD. While CAD will be hostage to market sentiment, the local labour market report on Friday will be key. We do expect a weaker number, which could send CAD lower still.

USD

CAD

EMK America
BRL CLP MXN COP PEN VEF
FX Weekly
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The newly announced measures targeting the derivative market are likely to lead to a more pronounced BRL correction. The legal framework is setup for the executive power to do more if needed. We like long USD/BRL positions in the near term. Despite BCChs decision to pause hiking rates, the tightening bias was maintained. CLP is likely to remain on the bid. Copper prices have rebounded recently and are holding firmly. We like short MXN/CLP. With several uncertainties still surrounding the US economic outlook, a more structural MXN appreciation trend will be postponed. In fact, we would expect some underperformance of MXN against its Latam peers in the coming weeks. COP is suffering not only from external uncertainties but also from sizeable USD outflow related to local M&A activity. We would prefer to wait for USD/COP to reach the 1780/90 levels before reassessing short USD/COP positions. Fundamentals remain favourable for PEN. Foreigners exposure to PEN is light, and we are remain short USD/PEN. The current level of oil prices is enough to give the government some extra-time before announcing another devaluation

Friday, 29 July 2011 http://www.GlobalMarkets.bnpparibas.com

ARS

of VEF, which we expect to take place at the beginning of 2013, following presidential elections in December 2012. As elections approach, we would expect the BCRA to intensify its intervention in the spot market to ensure gradual ARS nominal depreciation. Historically, private sector USD outflow gains momentum ahead of elections. We are neutral ARS.

Asia
YEN SGD
With the US debt issues unresolved and USTs falling following weak GDP, JPY strength will likely persist. While Japanese officials will continue to make noise about the strength of the yen, chances of intervention are slim as long as the moves in USDJPY remain orderly. The fact remains that JPY appreciation is driven by external factors. USDSGD continues to fall to new lows, testing the 1.2000 psychological support. Despite the SGD hitting the upper band of the S$NEER, the market still favours buying SGD on dips. Higher CPI coupled with rebounding IP also proved supportive for more SGD gains. A break of 1.2000 is in the pipeline, after its current consolidation between 1.20001.2050. We maintain our short USDSGD position entered at 1.2410 with a protective stop lowered to 1.2250. USDMYR broke below the key 2.9500 support to a low of 2.9335. However, as the risk of precautionary global USD hoarding rose ahead of the US debt vote, we expect some paring of USDMYR shorts to support the pair in the near term, where we look to sell USDMYR on rallies to 2.9860 with a stop at 3.0200 as the longer-term picture remains constructive for further MYR gains. On Thursday, trade data will be released. USDIDR broke below the key 8500 support to a low of 8476 on the back of fresh new foreign bond inflows. The pair regained the 8500 level on Friday as players locked in profits as the market is overly short USDIDR. However, we expect any pullbacks to be limited as IDR fundamentals remain supportive of more IDR gains. We maintain our short USDIDR position entered at 8537 with a stop at 8680. A break of the 8500 critical support opens the way for 8380, last seen in February 2004. Inflation and export data are due. A current account surplus in June and rising FX reserves support the THB. We maintain our technical short USDTHB position established at 29.90 with a stop at 30.40. CPI is the key datum next week where a firmer reading could return the bid tone on THB rates. Technical resistance is seen at 30.00. The BSP left its overnight borrowing rate unchanged at 4.5% but hiked the RRR by another 1% to 21%, in an effort to remove excess liquidity. BSP lowered its 2012 inflation forecast to 4.7% from 5.1% and said that inflation will peak in Q4 2011, keeping Phili assets and PHP on a strong footing. In addition, a credible fiscal performance ytd should maintain the bullishness on PHP. Data in the coming week include the June budget statement, July CPI and July FX reserves. We like selling USDPHP on rallies to 42.50 with a stop at 43.20. Export growth slowed in June on weak demand from the US, China and Germany even though shipments to India jumped. USDHKD spot continues to trade in a tight range with moves inversely correlated with equity performance. We saw some 1Y forwards selling and expect more downside movement. However, the front end is firm as long positions provide some positive carry. Retail sales and PMI will be released in the coming week. USDCNY fix was below 6.4500 most of this week. Both DF and NDF moved higher after the HKMA eased rules on net open positions, suggesting that there is more room for cheap CNH funding via sell/buy CNH FX swap for CNH bond investment. We like short PV in the medium term. With net inward payments to the Mainland from Hong Kong increasing - the increase in CNH deposit was only RMB 4.8bn in June vs. the average monthly increase of RMB 46bn in January-May we need to monitor the liquidity of CNH. PMI manufacturing is due on 1 August. Growth in IP slowed last month on weak external demand. However, Taiwanese fundamentals remain solid as June leading index continued climbing on a monthly basis. USDTWD has been stuck in a range of 28.50 to 29.00. The pair met strong resistance at 29.00 and the 100-day MA at 28.93. We maintain a technical short position established at 28.70 with a stop at 29.20. Reportedly, the CBC is still paying 1M to 3M FX swaps, while lifers rolled over their FX swap positions in 5M and 6M. Data due include PMI manufacturing, CPI and FX reserves. GDP growth eased in the second quarter, but the current account surplus widened to an eight-month high. The KRW is expected to stay supported with the strong surplus and capital inflows. We maintain our short USDKRW entered at 1087 with a trailing stop at 1070. Potential intervention could slow won appreciation as the BoK reportedly acted to support the USD at the 1050 level. We saw small liability swap flows early last week against forward selling from heavy industry names. Data scheduled this week are CPI, PMI manufacturing, external trade and FX reserves. The RBIs unexpected 50bp rate hike left the door open to more hikes boosting INR to rally past USD 44.00 briefly. Another important development was the RBIs new direction to encourage INR for trade settlements. This will enhance the liquidity of both onshore and offshore markets. With offshore INR liquidity improving, this could benefit the INR. Data due in the week ahead include trade data and weekly WPI. With the debt situation in the US uncertain, the flight to Asian assets could keep the USD heavy. Resistance is seen at 44.50 with support below 44.00 at 43.50. It remains quiet on the VND front as focus turned to more liquidity and tradable markets in Asia with players betting on a USD collapse as US debt talks failed to progress. A rise in July CPI to another high at 22.1% y/y, although the m/m growth was stable, showed that the economy is not out of the woods. We stay neutral on this currency for now.

MYR

IDR

THB

PHP

HKD

CNY

TWD

KRW

INR

VND

Oceania
AUD NZD
Stronger-than-expected CPI helped lift AUD above 1.10. The focus this week will be on the RBA meeting; while the market is not pricing in a hike this week, we could see the RBA leaning on the hawkish side. However, a broader riskoff move given the global backdrop could cap AUD gains even with a hawkish RBA. The RBNZ signalled its intentions to remove the emergency rate cut from March 2011 and keep rates on hold thereafter. The market has not fully priced in the removal of the emergency cuts by the next meeting. As such, a hawkish RBA could result in a higher AUDNZD.

FX Weekly
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Friday, 29 July 2011 http://www.GlobalMarkets.bnpparibas.com

AUD: The Future is Rosy

The robustness of AUD despite the diminishing of its yield advantage suggests the real drivers lie elsewhere. The key drivers appear to be robust sovereign demand, its role as a proxy for Asian FX appreciation and the terms of trade improvement. STRATEGY: We believe that AUDUSD will appreciate further towards 1.15. Chart 1: AU-US 2y Yield Spread
5 .5 5 .0 4 .5 4 .0 3 .5 3 .0 2 .5 2 .0 1 .5 1 .0 0 .5 Jul A U D U S D (R H S ) A U - U S 2 y S p re a d 1 .1 0 1 .0 5 1 .0 0 0 .9 5 0 .9 0 0 .8 5 0 .8 0 0 .7 5 0 .7 0 0 .6 5 0 .6 0 N ov 08 Mar Jul 09 N ov M ar Jul 10 N ov M ar 11 Jul

The outperformance of AUDUSD relative to expected interest rate differentials is not likely to be the catalyst for a sustained pullback on AUD. There has been much market discussion on the breakdown of this traditional relationship (Chart 1). We suggest that interest rate markets are not pricing in sufficient tightening from the RBA. Our economists are calling for a 25bp hike in Q4 assuming that global downside risks do not crystallise. Further tightening is also likely in 2012 if the same conditions hold in contrast to almost flat market expectations. This weeks upside surprise to Q2s CPI revealed an acceleration in underlying inflation to 2.7% y/y and it is likely to nudge higher over the balance of the year. In contrast, recent weak data in the US suggest little potential for a near-term increase in market expectations for Fed tightening. Accordingly, we believe there are prospects for the benchmark 2-year yield spread to move in favour of AUD over coming weeks. Still, the robustness of AUD, despite the diminishing of its yield advantage, suggests the real drivers lie elsewhere. The strong trend higher in Australias terms of trade appears consistent with the appreciation of AUD (Chart 2). The commodities boom continues to support the rise in prices of exports relative to imports while ongoing strong demand from Australias major trading partners, including China, should see this trend persist. This data series is only released quarterly but more recent CRB data is consistent with the terms of trade remaining at elevated levels. It is interesting to note that the moderation in Chinas growth indicators since the second half of 2010, especially the PMI, has not produced a pullback in AUD. Such a divergence suggests that the improvement in Australias terms of trade is more broadly based that merely being a reflection of Chinese growth prospects.

Source: Reuters EcoWin Pro

Chart 2: AUD TWI vs. Terms of Trade

130 80 120 75

110 A U D T W I (R H S ) 100

70

65

90

60

80

55

70 T e r m s o f t r a d e , In d e x , 2 0 0 8 - 2 0 0 9 = 1 0 0 60 01 02 03 04 05 06 07 08 09 10 11

50

45

Source: Reuters EcoWin Pro

Chart 3: AUDUSD vs. CNY 12m NDFS

1 .1 5 1 .1 0 U S D C N Y 1 2 m N D F ( R H S in v e r te d ) 1 .0 5 1 .0 0 0 .9 5 0 .9 0 0 .8 5 0 .8 0 0 .7 5 0 .7 0 0 .6 5 0 .6 0 0 .5 5 Jul AUDUSD 6 .4 6 .5 6 .6 6 .7 6 .8 6 .9 7 .0 7 .1 7 .2 7 .3 7 .4 N ov 08 M ar Jul 09 N ov M ar Jul 10 Nov M ar 11 Jul 6 .2 6 .3

Source: BNP Paribas

AUD may have become an FX proxy for general Asian currency appreciation. AUDUSD appears very closely linked to USDCNY 12-months NDFs and does not appear to have outpaced CNY appreciation (Chart 3). This link seems reasonable given Australias geographic location and its exposure to emerging Asian economies. Specifically, as official intervention remains a significant risk from
Friday, 29 July 2011 http://www.GlobalMarkets.bnpparibas.com

Steven Saywell FX Weekly

many of the regions central banks there has been very little verbal opposition from Australian officials. The RBA has been capitalising on recent AUD strength to build official reserve assets but the rise has been moderate in recent months standing at AUD 41.1bn as at the end of June. In our opinion, the strongest rationale behind AUD appreciation remains demand form sovereign funds and central banks. In a world where both EUR and USD have faced debt market issues, alternatives such as AUD, CAD, GBP, JPY and SEK continue to benefit. Data on specific AUD demand is scarce. The official IMF COFER data for Q1 (IMF COFER Q1 Update EUR Conundrum) reveals the largest rise by category among countries that do report reserve breakdown by currency was among the nonspecific other group of currencies at 12.6% q/q. This category relates to non-USD, EUR, JPY, CHF and GBP G10 holdings. We assume this group pertains mainly to AUD and CAD but a breakdown is unavailable and also excludes holdings from the largest foreign exchange reserve holder China. Separately, monthly data from the RBA report a sharp increase in total foreign ownership of Commonwealth Securities (Chart 4). The total has surged from AUD 57.8bn at the end of 2008 to AUD 191.3bn as at June 2011. This data series probably underreports total foreign held securities as purchases through local subsidiaries in Australia are likely excluded from the foreign total. Accordingly, the trend of rising holdings of AUD assets by foreign reserve managers appears clear.

Chart 4: Foreign Ownership of Commonwealth AUS Government Securities. (AUD mn)

200000 180000 160000 140000 120000 100000 80000 60000 40000 Jun-94
Source: RBA

Jun-98

Jun-02

Jun-06

Jun-10

In summary, we do not believe the divergence between AUDUSD and relative near-term interest rate expectations will be a catalyst for a sustained AUD pullback. Indeed, the robustness of AUD despite the pullback in its yield advantage suggests the real drivers lie elsewhere. In contrast, the ongoing rise in Australias terms of trade supports the currencys appreciation while the likely role of AUD as a proxy for Asian appreciation presents strong prospects for further appreciation. Finally, reserve manager demand is rising and should continue to remain strong. Strategically, we believe that AUDUSD will continue to appreciate beyond new multi-decade highs above 1.10 towards 1.15.

Steven Saywell FX Weekly

Friday, 29 July 2011 http://www.GlobalMarkets.bnpparibas.com

Factors Behind The Soaring Bird Set to Hold

Increasing demand from China for dairy products to keep NZD on strong footing RBNZ to remove emergency rate cuts from March 2011; mispricing between rate hike from RBA vs. RBNZ to work in favour of AUD STRATEGY: Buy AUDNZD on dips, targeting 1.30 Chart 1: NZDUSD vs. NZ Terms of Trade

NZDUSD continues to soar to new highs despite the recent rise in volatility in G10 FX markets, conjuring up questions as to whether such moves are overextended and whether this move is in fact warranted. First and foremost, New Zealand is experiencing a significant positive terms-of-trade shock as trade with China and emerging Asia has soared in recent years along with food prices including those for dairy products, which account for about 22% of exports. Second, reconstruction is underway as New Zealand rebuilds after the Christchurch earthquakes. Third, NZD is gaining ground in this low-rate environment not only because of absolute rate differentials but also because markets are pricing in further rate hikes from the RBNZ as the economy rebounds. As a soft commodity exporter, New Zealand is benefiting from the surge in food prices. Earlier this year, the IMF noted that the world would have to get used to higher food prices given the rise in demand for food commensurate with global income growth and other structural factors. The IMF argues that this phenomenon is not going away anytime soon, a sentiment with which we broadly agree. But more specific to NZD is the surge in exports to China and emerging Asia. Following the 2008 milk scandals in China when some 300,000 children fell ill from drinking melamine-contaminated milk, a general distrust of Chinese-produced dairy products led to an increase in imports. New Zealand benefited greatly from this, and it is now Chinas second largest trading partner (after Australia). The demand for dairy products has risen not only for this reason but also because of a rising middle class in China and emerging Asia. Demand for dairy produce in China among high-income households is twice as strong as among low-income ones. We also find that the price elasticity of export demand for dairy products is very low; this means that higher dairy prices arising from both the ongoing appreciation of
Mary Nicola FX Weekly

Source: BNP Paribas

Chart 2: AUDNZD v. Relative Rate Expectations

Source: BNP Paribas

the NZD and the rising trend in (NZD-constant) prices is not impacting negatively on overall demand. As such, the positive terms-of-trade shock seen in New Zealand will likely persist. The devastating earthquakes in Christchurch, New Zealands second largest city, in September 2010 and February 2011 require enormous reconstruction, with an estimated building cost of USD 20bn. Rebuilding efforts now look to be starting to have a positive impact on the economy via a surge in construction investment, after Q1 (earthquake affected) GDP data surprised significantly to the upside with a gain of 0.8%. NZD is also benefiting in this low-rate environment as one of the higher yielding currencies in the G10 space. Even at the post-earthquake emergency level of 2.5%, money market rates remain favourable with respect to most other G10 currencies. And, we should soon see RBNZ reverse its emergency rate cut. While the RBNZ left rates unchanged in July, they were optimistic on the economic recovery and noted that they see little need to maintain the emergency rate setting from back in March. This statement was followed by concerns over the
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strength of NZD and that if its strength persists, then it is likely to reduce the need for further OCR increases in the short term. The key phrase here is further OCR increases, which is interpreted to mean they would soon get rid of the emergency 50bp cut from back in March but with limited tightening thereafter assuming NZD remains so strong. After the meeting, a Reuters poll showed that the consensus now expects the RBNZ to raise rates by 50bp at the next meeting on 15 September. After that, consensus is looking for rates to rise to 3.25% by March 2012 and then 3.5% by June 2012. The market is now pricing in about 111bp of rate rises over the next 12 months, a view with which we are in broad agreement.

While the market is fully pricing in the removal of the RBNZ emergency cut and looking for more rate hikes from the RBNZ further down the road, we think the market is significantly under-pricing tightening risks from the RBA. Currently, the market is looking for about 19bp in cuts over the next 12 months, but a 15% chance of a rate hike at the upcoming meeting. In our view, the uncomfortably high Q2 CPI outcome will, at the very least, see the RBA shifting its rhetoric at the upcoming (2 August) meeting. We expect a hike from the RBA to come in Q4. Thus, in the short term, this disconnect in rate pricing will work in favour of AUD v. NZD. AUDNZD could rally back up to 1.30 on a hawkish RBA.

Mary Nicola FX Weekly

Friday, 29 July 2011 http://www.GlobalMarkets.bnpparibas.com

So What if the US Loses its AAA Status?

Under a scenario of a US ratings downgrade with no default, USD may not come to any (sustained) great harm Assuming default is avoided and the debt ceiling raised, focus may quickly turn to the scale of 2012 fiscal drag Fiscal headwinds keeping growth subdued in 2012 plays to extension of USD downside risk through 2011. Chart 1: Japan Downgrade implications for FX and JGBs

US debt downgrade shouldnt harm USD Despite the absence as yet of any agreement on US deficit reduction, we continue to assume that the default scenario will be avoided. Even if this is so, the chances of Standard & Poors electing to strip the US sovereign of its AAA status remains high since the agency (in contrast to Fitch and Moodys) has made plain that in the absence of a credible 10yr deficit reduction agreement totalling something close to USD 4trn, a downgrade is likely. As the clock ticks down towards an August drop-dead date (albeit perhaps a bit beyond 2 August) so the chances of a deal that gets the debt ceiling lifted without satisfying S&P in terms of scale and substance, increases. Under downgrade not default and especially if a downgrade is confined to a single agency (S&P), it is not clear that major flows out of US Treasuries will necessarily result. While the knee-jerk reaction will almost certainly be USD negative, there will likely need to be evidence of large-scale physical selling of Treasuries in favour of non-dollar denominated AAA securities for there to be a sustained negative dollar impact. Our analysis and investigations suggests that across the broad spectrum of bond portfolio managers (money market funds, bond mutual funds, money managers, insurance companies, official institutions and central banks), few if any will be compelled to sell (for example many are mandated only to hold Tier 1 assets not necessarily AAA assets Tier 1 encompassing paper rated as much as 6-notches below AAA). Though we have seen evidence of money market funds starting to hoard liquidity as a precaution against redemption demand, we believe this provisioning is linked more to insurance against a debt default rather than downgrade scenario. In the case of the larger foreign holders of Treasuries (China, Japan, OPEC nations, other Asian monetary authorities), any large-scale selldown of Treasury debt may be viewed by these holders as a case of cutting off your nose to spite
Ray Attrill FX Weekly

S o u rc e : R e u te rs E co W in

Source: BNP Paribas. Neither JGB yields not JPY came to any sustained harm after Japan was first stripped on its AAA rating by one agency (Moodys) in late 1998. Limited foreign ownership of JGBs makes comparisons with the US Treasury market and the dollar specious, but the observation is nevertheless worth noting.

Chart 2: US Projected Deficit Reduction under Gang of 6 Proposals

0 -100 -200 -300 -400 -500 -600 -700 -800 -900 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021

Total Projected Deficit Reduction Total ExTax Reform

Source: BNP Paribas: Deficit reduction/implied fiscal tightening in 2012 shown here are in addition to whatever tightening is slated to occur anyway. Much depends on the extent to which tax breaks and benefit extensions currently in place are rolled forward into 29012, but we currently assume that we will get an implied fiscal tightening of some 1.8% of GDP independent of what falls out of the current deficit/debt ceiling process.

your face prone to weakening the value of existing asset holdings both directly, and indirectly via weaker USD valuations. At a time when investors central banks and otherwise remain hesitant to add to euro-denominated debt holdings until greater clarity is provided on the substance of the new EU agreement on Greek funding and expanded EFSF remit, it is not clear funds will flow from US Treasuries to AAA-rated eurozone debt on any significant scale. Meanwhile, UK (AAA) debt is already under the ratings spotlight while non-US and European AAA-rated sovereign credit markets
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(Australia, Canada, Sweden and Norway) are simply too small to accommodate inflows on the scale that would make an appreciable difference to total US Treasury holdings. Comparisons with Japans 1998 experience of losing their AAA status, initially from just from one ratings agency (Moodys) are not that relevant give the limited foreign ownership of the JGB market, though it is worth noting that neither JGB yields nor the JPY came to any sustained harm (see Chart 1). Also important to keep in mind are the circumstances under which S&P issues a downgrade. This will be because of the absence of an agreement to medium term deficit reduction on a sufficient scale to convince the agency that US debt is being put on a sustainable footing. However as

far as 2012 is concerned, it is highly probable that this will be the first time for many years that fiscal policy is acting as a headwind rather than tailwind on the economy. As such, any growth acceleration in 2012 versus what we expect will be something close to 2% in 2011 may be modest at best and conceivably non-existent. As and when we get through the current debt ceiling debacle and assuming default is avoided but not an S&P downgrade, then markets are likely to quickly refocus on the implications of fiscal policy for the 2012 growth outlook. To the extent this will play to the view that the Fed will be easier for longer, then even in the absence of moves to price in QE3, the more likely it is that dollar remains on a weakening trend though the remainder of 2011.

Ray Attrill FX Weekly

Friday, 29 July 2011 http://www.GlobalMarkets.bnpparibas.com

Little Justification For BoJ Intervention

Strength of JPY driven more by concerns over US debt-ceiling deadlock than internal factors Odds of BoJ intervention are low unless USDJPY moves become disorderly Chart 1: JPY REER v. JPY REER LT Avg.
160 150 140 130 120 110 JPY REE R Long Term A vg

Focus on the US debt ceiling has kept safe-haven currencies like the JPY and CHF very well bid against the USD. USDCHF has reached an all-time low while USDJPY is well below 80, the once perceived line in the sand for Japanese officials. As USDJPY continues to trade below 80.00, speculation of intervention from the BoJ is rising. But in our view, the likelihood of intervention is very slim, barring any disorderly moves in USDJPY. While the motive for intervention is there for Japan as it continues to recover from the devastating earthquakes earlier this year, the reasoning is rather weak. For one, the intervention in March was the result of internal factors, chiefly the Japan earthquake. With JPY flows flooding back home, JPY made significant gains against the majors: USDJPY fell from a high of 79.75 to 76.25 while EURJPY dropped to 106.61 from 111.27 on 17 March. The G7 countries acted in solidarity via a coordinated intervention to mitigate the strength of the currency and help allay one of Japans key concerns. This time around, JPY strength has been mostly against the USD on the back of the stalemate on the US debt ceiling. With the US deep in its fiscal mess and the eurozone mending its own fiscal issues, a coordinated intervention would be a hard sell. In addition, FX intervention would likely prove to be unsuccessful as it would have to be accompanied by complementary BoJ policy (further monetary easing). The last intervention had a very limited impact on the JPY because while the BoJ initially expanded its balance sheet (to new record highs), it shrank it back down once the new fiscal year began in April. This undermined efforts to weaken the JPY. With the BoJ showing little inclination to embark on fresh balancesheet expansion (let alone JGB monetisation), unilateral intervention could quickly turn into an expensive policy mistake. Second, while the JPY may look expensive in comparison to USD in nominal terms, the picture is quite different in real terms and against an average of its trading partners. The JPY remains undervalued versus its trading partners on a REER basis, being well below its long term average. Since the start of 2011, the currencies of some of Japans
Mary Nicola FX Weekly

100 90 80 JPY RE ER 70 94 95 96 97 98 99 00 01 0 2 03 04 05 06 07 08 09 10 11

Source: BNP Paribas

Chart 2: USDJPY v. 10yr Yield Differential

95.0 92.5 U SD /JPY 90.0 87.5 85.0 82.5 80.0 77.5 Nov Jan 09 10y U S T v. JG B (R H S ) M ar M ay Jul 10 Sep N ov Jan M ar M ay 11 Jul 2.6 2.5 2.4 2.3 2.2 2.1 2.0 1.9 1.8 1.7 1.6 1.5 1.4

Source: BNP Paribas

key trading partners including EUR, KRW, and SGD have outperformed the JPY. Although the MYR has underperformed the JPY in recent months, it has since made a comeback. The USD has been the only big and consistent underperformer against JPY (China, Japans largest trading partner, has also underperformed but to a much lesser extent given the 5% drop in USDCNY in the past year.) In general, Japan maintains its competitiveness against its key trading partners on a REER basis and on a NEER basis against both Europe and some of its key Asian export competitors. The key positive spin on the strength of the currency against the USD is that raw materials and other commodities priced in USD have become markedly cheaper at a time when Japan begins its reconstruction efforts, something that Japanese officials have acknowledged as beneficial. Based on the JPY REER, the BoJ should not be too alarmed by the moves in USDJPY unless it begins to freefall. USDJPY will remain hostage to the progress (or lack thereof) on the US debt negotiation. Our
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10

base-case scenario is that the US comes to a twostage deal at the 11th hour which may not please S&P resulting in a downgrade. The knee-jerk reaction will likely be a sell-off in the back end of the UST curve but potentially a rally in the front end of the curve as the markets start pricing in further US

economic weakness from the implied 2012 fiscal drag. Thus, the net impact on USDJPY may be limited given USDJPY is more highly correlated with yield spreads at the front end of the respective curves than at the longer end.

Mary Nicola FX Weekly

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Medium Term FX Recommendations

Short USDSEK Via Options Working
22 July 2011 Buy 3m 6.28 put, Sell 6.78 call for 1.00% USD net

USDSEK 6.326

Given choppy price action and still bid USDSEK risk reversals, we opted to play for a lower USDSEK view using option; selling a 6.78 call and buying a 6.28 put Oct 24 NY cut for a 1% USD entry cost. The position now markets to market higher at 1.232% USD. We like USDSEK lower multi-month though acknowledge near term risks as US money markets show signs of stress to which the Swedish Banking system is susceptible. Longer term, SEK has strong FX fundamentals and with a stronger Q2 GDP, ultimately rate tightening expectations could provide an additional support.

Short EURCAD Stopped Out.

Sell on a break of 1.3440, target 1.3000, stop-loss at 1.3708.

15 July 2011

EURCAD 1.3763

Our recommendation to sell EURCAD was activated on July 18th. However, the EU Summit and the headlines leading to it were a sea change triggering a EURCAD rally with the cross following EURUSD higher. At the same time, while the BoC MPS was rather hawkish, the sharp fall in Canada CPI has crushed this view. The trade was stopped out on July 25th though the CAD could continue to remain under independent pressure given its still large dependence on the US economy, especially after much weaker US Q1, Q2 GDP figures.

FX Weekly
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Implied Option Volatility Analysis

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

USDJPY Implied Volatility Curve and 1y highs & lows

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

Current Imp. Vol.

Last Week Imp. Vol.

Current Imp. Vol.

Last Week Imp. Vol.

USDCHF Implied Volatility Curve and 1y highs & lows

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

GBPUSD Implied Volatility Curve and 1y highs & lows

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

Current Imp. Vol.

Last Week Imp. Vol.

Current Imp. Vol.

Last Week Imp. Vol.

AUDUSD Implied Volatility Curve and 1y highs & lows

21 18 16

USDCAD Implied Volatility Curve and 1y highs & lows

15 13 11

13

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

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

Current Imp. Vol.

Last Week Imp. Vol.

*BNP Paribas FX Strategy: The above charts show the current volatility curves (1-week through to 1-year) for the major currency pairs in relation to the 1-year highs and lows for each of the tenor. FX Weekly
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Majors
EURUSD GBPUSD USDCHF OIL
0.52 0.43 0.09 0.33 0.23 0.04 0.87 0.8 0.68 0.5 0.49 0.58 0.13 0.2 0.56 0.49 0.16 0.38 0.37 0.48 0.28 0.09 0.4 0.24 0.03 0.81 0.79 0.02 0.12 0.39 0.14 0.01 0.38 0.63 0.65

Emerging Markets
AUDUSD USDCAD USDZAR
0.64 0.51 0.04 0.45 0.4 0.11 0.84 0.59 0.34 0.62 0.29 0.11 0.88 0.56 0.32 0.7 0.55 0.2 0.34 0.07 0.01 0.71 0.51 0.2 0.71 0.47 0.16 0.56 0.33 0.66 0.74 0.05 0.56 0.75 0.04 0.51 0.58 0.13 0.23 0.32 0.16 0.03 0.34 0.19 0.03 0.12 0.18 0.17 0.55 0.66 0.19 0.4 0.59 0.16 0.64 0.07 0.35 0.64 0.01 0.25 0.5 0.54 0.33 0.23 0.4 0.17 0.02 0.21 0.24 0.03 0.14 0.5 0.37 0.08 0.36 0.18 0.14 0.34 0.09 0.01 0.2 0.34 0.34 0.22 0.01 0.33 0.07 0.07 0.37 0.37 0.22 0.0 0.32 0.05 0.05 0.66 0.67 0.26 0.66 0.67 0.19 0.62 0.64 0.09 0.52 0.63 0.05 0.57 0.62 0.03 0.54 0.67 0.04 0.08 0.51 0.74 0.01 0.05 0.34 0.54 0.07 0.19 0.32 0.35 0.29 0.6 0.68 0.06 0.26 0.49 0.45 0.81 0.88 0.2 0.64 0.7 0.05 0.13 0.33 0.19 0.3 0.2 0.48 0.33 0.6 0.77 0.29 0.53 0.61 0.13 0.18 0.26 0.28 0.28 0.77 0.32 0.32 0.64 0.68 0.26 0.41 0.23 0.57 0.66 0.04 0.1

USDJPY
0.42 0.05 0.19 0.32 0.13 0.31 0.06 0.35

USDTRY USDHUF
0.23 0.35 0.64 0.01 0.09 0.36 0.11 0.38 0.73 0.27 0.06 0.54 0.37 0.37 0.75 0.78 0.24 0.06 0.47 0.27 0.04

USDPLN
0.01 0.45 0.56 0.03 0.27 0.34 0.57 0.72 0.85 0.27 0.05 0.57 0.34 0.66 0.76 0.29 0.57 0.62 0.11 0.17 0.24 0.29

Commodities

COPPER

0.43 0.47 0.08 0.23 0.37 0.55

CRB

0.84 0.04 0.33 0.58 0.34 0.11 0.5 0.27 0.01

0.77 0.18 0.05 0.58 0.69 0.23

GOLD

0.08 0.37 0.64 0.59 0.18 0.52 0.47 0.05 0.23 0.07 0.14 0.52 0.46 0.02 0.56 0.51

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

0.09 0.52 0.15 0.08 0.36 0.17 0.17 0.56 0.15

Equities

0.03 0.35 0.01 0.07 0.43 0.42

0.42 0.22 0.05 0.14 0.32 0.12 0.3 0.57 0.12 0.2 0.45 0.06

0.69 0.03 0.02

0.6 0.61 0.1 0.16 0.22 0.29

0.12 0.5 0.24

0.06 0.68

Bonds & Rates

EU 10Y Yields

0.17 0.6 0.58

0.15 0.47 0.44

0.250.25 0.54 0.17 0.12 0.4 0.07 0.13 0.25

JP 10Y Yields

0.06 0.32 0.32

0.01 0.18 0.16

0.2 0.29 0.04

0.09 0.3 0.07 0.22 0.29 0.08

US 3m LIBOR

0.33 0.36 0.08 0.25 0.28

0.28 0.31 0.04 0.17 0.24

0.15 0.18 0.2 0.29 0.17 0.09 0.22

EU 3m LIBOR

0.33 0.33 0.08 0.08 0.3

0.21 0.2

0.05 0.05

0.09 0.09

0.21

0.21

High Current Low

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

FX Weekly

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Economic Calendar: 01 - 05 Aug

GMT Mon 01/08 07:30 08:00 09:00 08:30 14:00 14:00 Tue 02/08 01:30 04:30 09:00 09:00 12:30 12:30 01:30 01:30 01:30 08:00 08:00 10:00 10:00 08:30 11:30 12:15 14:00 14:00 14:30 07:30 07:30 08:00 10:00 10:00 11:00 11:45 12:30 12:30 Local 09:30 Switzerland PMI Manufacturing : Jul 10:00 Eurozone PMI Manufacturing (Final) : Jul 11:00 Unemployment Rate : Jun 09:30 UK CIPS Manufacturing : Jul Canada Public Holiday 10:00 US Construction Spending m/m : Jun 10:00 ISM Manufacturing : Jul 11:30 14:30 11:00 11:00 08:30 08:30 11:30 11:30 11:30 10:00 10:00 12:00 12:00 09:30 07:30 08:15 10:00 10:00 10:30 09:30 09:30 10:00 12:00 12:00 12:00 13:45 14:30 08:30 Australia Eurozone US House Price Index q/q : Q2 RBA Rate Announcement PPI m/m : Jun PPI y/y : Jun Personal Income m/m : Jun Personal Spending m/m : Jun Trade Balance : Jun Retail Sales m/m : Jun Retail Sales y/y : Jun PMI Services (Final) : Jul PMI Composite (Final) : Jul Retail Sales (sa) m/m : Jun Retail Sales (ca) y/y : Jun CIPS Services : Jul Challenger Layoffs : Jul ADP Labour Change : Jul Factory Orders m/m : Jun ISM Non-Manufacturing : Jul EIA Oil Inventories CPI m/m : Jul CPI y/y : Jul Unemployment Rate (sa) : May Factory Orders m/m : Jun Factory Orders y/y : Jun BoE Rate Announcement ECB Rate Announcement ECB Press Conference Initial Claims BoJ Rate Announcement RBA Policy Statement Trade Balance : Jun Industrial Production (wda) y/y : Jun CPI m/m : Jul CPI y/y : Jul Industrial Production m/m : Jun Industrial Production y/y : Jun Industrial Production m/m : Jun Industrial Production (wda) y/y : Jun GDP (Prel) q/q : Q2 GDP (Prel) y/y : Q2 Manufacturing Prod (sa) m/m : Jun Manufacturing Prod (nsa) y/y : Jun Input PPI (nsa) m/m : Jul Output PPI (nsa) y/y : Jul Output PPI (Ex-FDT, sa) y/y : Jul Industrial Production m/m : Jun Industrial Production y/y : Jun Unemployment Rate : Jul Previous 53.4 50.4 (p) 9.9% 51.3 -0.6% 55.3 -1.7% -0.2% 6.2% 0.3% 0.0% AUD2333mn -0.6% 2.2% 51.4 (p) 50.8 (p) -1.0% -1.8% 53.9 157k 0.8% 53.3 Forecast 52.0 50.4 9.9% 50.0 -0.3% 54.5 -1.0% 0.1% 6.0% 0.1% 0.0% AUD2000mn 1.0% 2.9% 51.4 50.8 0.5% -1.3% 53.1 100k -1.0% 52.5 Consensus 52.8 50.4 9.9% 51.0 -0.1% 55.2 n/a 0.1% 6.0% 0.2% 0.2% n/a n/a n/a 51.4 n/a 0.5% -0.9% 53.5 105k -0.5% 54.0

Wed 03/08

Australia

Eurozone

UK US

Thu 04/08

Neths Norway Germany UK Eurozone US

-0.5% 2.3% 3.4% 1.8% 12.2%

-0.1% 2.4% 3.4% -2.5% 5.1%

n/a n/a n/a -0.2% 6.8%

398k

415k

n/a

Fri 05/08 06:45 07:00 07:15 07:15 07:30 07:30 08:00 08:00 09:00 09:00 08:00 08:00 08:30 08:30 08:30 10:00 10:00 11:00

Japan Australia 08:45 France 09:00 Spain 09:15 Switzerland 09:15 09:30 Neths 09:30 10:00 Italy 10:00 11:00 11:00 10:00 Norway 10:00 09:30 UK 09:30 09:30 12:00 Germany 12:00 07:00 Canada

EUR-7.4bn 0.8% -0.2% 0.6% 0.3% 2.6% -0.6% 1.8% 0.1% 1.0% 2.4% 5.6% 0.4% 5.7% 3.2% 1.2% 7.6% 7.4%

EUR-6.9bn -0.6% 0.7% -1.5% 1.1% -0.2% 1.2% 0.2% 0.7% 1.0% 2.0% 0.6% 5.8% 3.2% -0.5% 7.8% 7.5%

EUR-6.1bn n/a -0.6% 0.7% n/a n/a n/a n/a n/a n/a n/a n/a 0.6% 5.8% 3.2% 0.1% 8.1% 7.5%

FX Weekly

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GMT 11:00 12:30 12:30 12:30 19:00 During Week 1-5

Local 07:00 08:30 08:30 08:30 15:00 US Payroll Jobs y/y : Jul Non-Farm Payrolls (Chg) : Jul Unemployment Rate : Jul Average Hourly Earnings m/m : Jul Consumer Credit : Jun Halifax House Prices m/m : Jul Halifax House Prices y/y : Jul

Previous 28.4k 18k 9.2% 0.0% USD5.1bn 1.2% -3.5%

Forecast 13.0k 50k 9.3% 0.1% USD5.0bn 0.0% -2.8%

Consensus 20.0k 100k 9.2% 0.2% USD5.1bn 0.0% -2.8%

UK

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

Source: BNP Paribas

FX Weekly

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FX Forecasts*
USD Bloc EUR/USD USD/JPY USD/CHF GBP/USD USD/CAD AUD/USD NZD/USD USD/SEK USD/NOK EUR Bloc EUR/JPY EUR/GBP EUR/CHF EUR/SEK EUR/NOK EUR/DKK Central Europe USD/PLN EUR/CZK EUR/HUF USD/ZAR USD/TRY EUR/RON USD/RUB EUR/PLN USD/UAH EUR/RSD Asia Bloc USD/SGD USD/MYR USD/IDR USD/THB USD/PHP USD/HKD USD/RMB USD/TWD USD/KRW USD/INR USD/VND LATAM Bloc USD/ARS USD/BRL USD/CLP USD/MXN USD/COP USD/VEF USD/PEN Others USD Index *End Quarter Q3 '11 1.50 78 0.83 1.65 0.98 1.09 0.82 5.93 4.98 Q3 '11 117 0.91 1.25 8.90 7.47 7.46 Q3 '11 2.60 24.3 275 6.80 1.52 4.20 27.51 3.90 7.8 100 Q3 '11 1.20 2.95 8400 29.50 42.00 7.80 6.40 28.00 1040 44.00 20500 Q3 '11 4.18 1.58 450 11.40 1730 4.29 2.70 Q3 '11 72.30 Q4 '11 1.55 83 0.83 1.68 0.93 1.13 0.84 5.48 4.77 Q4 '11 129 0.92 1.28 8.50 7.40 7.46 Q4 '11 2.48 24.5 275 6.60 1.50 4.15 27.25 3.85 7.8 100 Q4 '11 1.19 2.90 8300 29.30 41.50 7.80 6.31 27.50 1030 43.50 20000 Q4 '11 4.25 1.55 435 11.10 1690 4.29 2.65 Q4 '11 70.76 Q1 '12 1.45 85 0.90 1.59 0.95 1.07 0.81 5.93 5.07 Q1 '12 123 0.91 1.30 8.60 7.35 7.46 Q1 '12 2.69 24.1 269 6.55 1.56 4.20 27.86 3.90 7.5 98 Q1 '12 1.18 2.87 8200 29.00 41.00 7.80 6.25 27.00 1020 43.00 20000 Q1 '12 4.34 1.53 425 11.00 1690 4.29 2.63 Q1 '12 74.87 Q2 '12 1.40 90 0.93 1.56 0.97 1.04 0.80 6.21 5.26 Q2 '12 126 0.90 1.30 8.70 7.37 7.46 Q2 '12 2.75 23.9 265 6.60 1.59 4.25 27.97 3.85 7.5 97 Q2 '12 1.17 2.85 8100 28.70 40.50 7.80 6.21 26.70 1010 42.50 20000 Q2 '12 4.43 1.55 430 10.90 1700 4.29 2.63 Q2 '12 77.62 Q3 '12 1.35 95 1.00 1.53 1.01 0.99 0.76 6.67 5.56 Q3 '12 128 0.88 1.35 9.00 7.50 7.46 Q3 '12 2.81 23.8 265 6.50 1.63 4.15 28.08 3.80 7.5 96 Q3 '12 1.16 2.83 8000 28.50 40.00 7.80 6.17 26.50 1000 42.00 20000 Q3 '12 4.51 1.56 435 11.00 1710 4.29 2.64 Q3 '12 80.72 Q4 '12 1.35 95 1.00 1.53 1.01 0.99 0.76 6.67 5.56 Q4 '12 128 0.88 1.35 9.00 7.50 7.46 Q4 '12 2.78 23.5 260 6.50 1.65 4.10 27.65 3.75 7.5 95 Q4 '12 1.15 2.80 7900 28.30 39.50 7.80 6.13 26.00 990 41.50 20000 Q4 '12 4.60 1.58 440 11.10 1720 4.29 2.66 Q4 '12 80.72 Q1 '13 1.30 95 1.04 1.53 1.04 0.96 0.74 6.92 5.77 Q1 '13 124 0.85 1.35 9.00 7.50 7.46 Q1 '13 2.85 23.7 260 7.20 1.65 4.20 28.19 3.70 7.5 93 Q1 '13 1.14 2.77 7800 28.00 39.00 7.80 6.23 26.00 980 41.00 20000 Q1 '13 4.69 1.59 442 11.10 1725 8.80 2.67 Q1 '13 82.99 Q2 '13 1.30 95 1.04 1.53 1.04 0.96 0.74 6.92 5.77 Q2 '13 124 0.85 1.35 9.00 7.50 7.46 Q2 '13 2.77 24.0 255 7.10 1.67 4.20 27.75 3.60 7.5 92 Q2 '13 1.13 2.75 7700 27.70 38.50 7.80 6.20 26.00 970 41.00 20000 Q2 '13 4.78 1.60 445 11.17 1730 8.80 2.68 Q2 '13 82.99 Q3 '13 1.30 95 1.04 1.53 1.04 0.96 0.74 6.92 5.77 Q3 '13 124 0.85 1.35 9.00 7.50 7.46 Q3 '13 2.85 23.5 260 7.00 1.69 4.10 29.07 3.70 7.5 91 Q3 '13 1.13 2.73 7600 27.50 38.00 7.80 6.17 26.00 960 41.00 20000 Q3 '13 4.86 1.61 447 11.25 1740 8.80 2.69 Q3 '13 82.99 Q4 '13 1.30 95 1.04 1.53 1.04 0.96 0.74 6.92 5.77 Q4 '13 124 0.85 1.35 9.00 7.50 7.46 Q4 '13 2.85 23.3 260 6.90 1.69 3.95 27.75 3.70 7.3 90 Q4 '13 1.13 2.70 7500 27.50 38.00 7.80 6.15 26.00 950 41.00 20000 Q4 '13 4.95 1.62 450 11.30 1750 8.80 2.70 Q4 '13 82.99 Q1 '14 1.34 92 0.97 1.70 1.00 0.95 0.76 6.94 5.07 Q1 '14 123 0.79 1.30 9.30 6.80 7.46 Q1 '14 2.65 23.1 250 6.69 1.54 3.90 27.75 3.55 7.4 85 Q1 '14 --------------------------------------------Q1 '14 ----------------------------Q1 '14 79.73

FX Weekly
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FX Global Strategy Contacts

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

Emerging Markets FX & IR Strategy

Production and Distribution please contact: Roshan Kholil, Foreign Exchange, London. Tel: 44 20 7595 8486, Email: roshan.kholil@uk.bnpparibas.com

Important Disclosures
This report has been written by our strategy teams. Such reports do not purport to be an exhaustive analysis and may be subject to conflicts of interest resulting from their interaction with sales and trading which could affect the objectivity of this report. (Please see further important disclosures in the text of this report). This report is a marketing communication. It is not independent investment research. It has not been prepared in accordance with legal requirements designed to provide the independence of investment research, and is not subject to any prohibition on dealing ahead of the dissemination of investment research. The information and opinions contained in this report have been obtained from, or are based on, public sources believed to be reliable, but no representation or warranty, express or implied, is made that such information is accurate, complete or up to date and it should not be relied upon as such. This report does not constitute a prospectus or other offering document or an offer or solicitation to buy or sell any securities or other investment. Information and opinions contained in the report are published for the assistance of recipients, but are not to be relied upon as authoritative or taken in substitution for the exercise of judgement by any recipient, are subject to change without notice and not intended to provide the sole basis of any evaluation of the instruments discussed herein. Any reference to past performance should not be taken as an indication of future performance. To the fullest extent permitted by law, no BNP Paribas group company accepts any liability whatsoever (including in negligence) for any direct or consequential loss arising from any use of or reliance on material contained in this report. All estimates and opinions included in this report are made as of the date of this report. Unless otherwise indicated in this report there is no intention to update this report. BNP Paribas SA and its affiliates (collectively BNP Paribas) may make a market in, or may, as principal or agent, buy or sell securities of the issuers mentioned in this report or derivatives thereon. BNP Paribas may have a financial interest in the issuers mentioned in this report, including a long or short position in their securities and/or options, futures or other derivative instruments based thereon, or vice versa. BNP Paribas, including its officers and employees may serve or have served as an officer, director or in an advisory capacity for any issuer mentioned in this report. BNP Paribas may, from time to time, solicit, perform or have performed investment banking, underwriting or other services (including acting as adviser, manager, underwriter or lender) within the last 12 months for any issuer referred to in this report. BNP Paribas may be a party to any agreement with the issuer relating to the production of this report. BNP Paribas, may to the extent permitted by law, have acted upon or used the information contained herein, or the research or analysis on which it was based, before its publication. BNP Paribas may receive or intend to seek compensation for investment banking services in the next three months from or in relation to an issuer mentioned in this report. Any issuer mentioned in this report may have been provided with sections of this report prior to its publication in order to verify its factual accuracy. BNP Paribas is incorporated in France with limited liability. Registered Office 16 Boulevard des Italiens, 75009 Paris. This report was produced by a BNP Paribas group company. This report is for the use of intended recipients and may not be reproduced (in whole or in part) or delivered or transmitted to any other person without the prior written consent of BNP Paribas. By accepting this document you agree to be bound by the foregoing limitations.

Certain countries within the European Economic Area

This report is solely prepared for professional clients. It is not intended for retail clients and should not be passed on to any such persons. This report has been approved for publication in the United Kingdom by BNP Paribas London Branch, a branch of BNP Paribas, 10 Harewood Avenue, London NW1 6AA, which is regulated by the Financial Services Authority for the conduct of its investment business in the United Kingdom and registered in England & Wales under No. FC13447. This report has been approved for publication in France by BNP Paribas, a credit institution licensed as an investment services provider by the CECEI and the AMF, whose head office is 16, Boulevard des Italiens 75009 Paris, France. This report is being distributed in Germany either by BNP Paribas London Branch, or by BNP Paribas Niederlassung Frankfurt am Main, regulated by the Bundesanstalt fr Finanzdienstleistungsaufsicht (BaFin). United States: This report is being distributed to US persons by BNP Paribas Securities Corp., or by a subsidiary or affiliate of BNP Paribas that is not registered as a US broker-dealer to US major institutional investors only. BNP Paribas Securities Corp., a subsidiary of BNP Paribas, is a broker-dealer registered with the Securities and Exchange Commission and a member of the National Association of Securities Dealers, the New York Stock Exchange and other principal exchanges. BNP Paribas Securities Corp. accepts responsibility for the content of a report prepared by another non-US affiliate only when distributed to US persons by BNP Paribas Securities Corp. Japan: This report is being distributed to Japanese based firms by BNP Paribas Securities (Japan) Limited, Tokyo Branch, or by a subsidiary or affiliate of BNP Paribas not registered as a financial instruments firm in Japan, to certain financial institutions defined by article 17-3, item 1 of the Financial Instruments and Exchange Law Enforcement Order. BNP Paribas Securities (Japan) Limited, Tokyo Branch, a subsidiary of BNP Paribas, is a financial instruments firm registered according to the Financial Instruments and Exchange Law of Japan and a member of the Japan Securities Dealers Association. BNP Paribas Securities (Japan) Limited, Tokyo Branch accepts responsibility for the content of a report prepared by another non-Japan affiliate only when distributed to Japanese based firms by BNP Paribas Securities (Japan) Limited, Tokyo Branch. Some of the foreign securities stated on this report are not disclosed according to the Financial Instruments and Exchange Law of Japan. Hong Kong: This report is being distributed in Hong Kong by BNP Paribas Hong Kong Branch, a branch of BNP Paribas whose head office is in Paris, France. BNP Paribas Hong Kong Branch is regulated as a Registered Institution by Hong Kong Monetary Authority for the conduct of Advising on Securities [Regulated Activity Type 4] under the Securities and Futures Ordinance.

BNP Paribas (2011). All rights reserved.

FX Weekly
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Friday, 29 July 2011 http://www.GlobalMarkets.bnpparibas.com