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8 March 2012
FX talkING
INGs view on the major bullish and bearish currency themes
The flood of liquidity from G3 central banks has re-kindled fears of a currency war. EM markets are bracing for an inflow of funds, prompting some into more aggressive rate cuts. We doubt the inter-play of G3 currencies will have much impact on broad investment trends, where high yield will still be favoured.
ING FX forecasts
EUR/USD 1M 3M 6M 12M 1.27 1.22 1.22 1.30 EUR/NOK 1M 3M 6M 12M 7.40 7.30 7.60 7.90 USD/RUB 1M 3M 6M 12M
Source: ING
USD/JPY 82 83 85 88 AUD/USD 1.08 1.08 1.05 1.00 USD/BRL 1.78 1.84 1.80 1.75
EUR/GBP 0.82 0.80 0.77 0.75 EUR/CZK 25.3 25.5 25.3 24.9 USD/CNY 6.30 6.27 6.22 6.13
FX performance
EUR/USD %MoM %YoY 0.6 -4.6 EUR/HUF %MoM %YoY
Source: Reuters, ING
0.5 7.9
FX Strategy
Chris Turner
Head of Foreign Exchange Strategy London +44 20 7767 1610 chris.turner@uk.ing.com
Tom Levinson
Foreign Exchange Strategy London +44 20 7767 8057 Htom.levinson@uk.ing.comH View all our research on Bloomberg at ING5<GO>
research.ing.com
1 SEE THE DISCLOSURES APPENDIX FOR IMPORTANT DISCLOSURES & ANALYST CERTIFICATION
FX talkING
March 2012
Developed markets
EUR/USD
Buffeted by cross currents, but EUR should fall
1.60 1.50 1.40 1.30 1.20 Mkt Fwds 1.60 1.50 1.40 1.30 1.20
The Feds promise of low interest rates and the improving global
growth story retain the dollars status as a funding currency and has provided EUR/USD with a bid during the global equity rally. Not until the Fed is ready to start talking about withdrawing liquidity will the USD start to benefit from strong US data and such a discussion looks unlikely to take place before November elections.
ING f'cast
1.10 1.10 Jan08 Jul08 Jan09Jul09 Jan10 Jul10 Jan11 Jul11 Jan12Jul12 Jan13
Source: Reuters, ING
USD/JPY
Major forecast change
110 100 90 80 70 ING f'cast 110 100 90 80 70
Mkt Fwds
60 60 Jan08 Jul08 Jan09 Jul09 Jan10 Jul10 Jan11 Jul11 Jan12 Jul12 Jan13
Source: Reuters, ING
GBP/USD
More QE from the BoE in May?
2.20 2.00 1.80 1.60 1.40 ING f'cast Mkt Fwds 2.20 2.00 1.80 1.60 1.40
1.20 1.20 Jan08 Jul08 Jan09Jul09 Jan10 Jul10 Jan11 Jul11 Jan12Jul12 Jan13
Source: Reuters, ING
FX talkING
March 2012
EUR/JPY
EUR/JPY should ultimately trade higher
175 155 135 115 95 Mkt Fwds ING f'cast 175 155 135 115 95
Neither the EUR nor the JPY look particularly attractive this year.
Both have policy rates on the floor and are undertaking exceptional measures to stabilise the banking system and promote lending. Despite recent strong gains in EUR/JPY, the Eurozone still has some major headwinds in the first half of the year. Peripheral Europe looks set to undergo a heavy contraction and Northern Europe seems reluctant to commit to any more bailouts, should peripheral budget deficits prove larger than planned.
75 75 Jan08 Jul08 Jan09 Jul09 Jan10 Jul10 Jan11 Jul11 Jan12 Jul12 Jan13
Source: Reuters, ING
EUR/GBP
Frustrating stability
1.00 0.95 0.90 0.85 0.80 0.75 ING f'cast Mkt Fwds 1.00 0.95 0.90 0.85 0.80 0.75
0.70 0.70 Jan08 Jul08 Jan09Jul09 Jan10 Jul10 Jan11 Jul11 Jan12Jul12 Jan13
Source: Reuters, ING ING forecasts (mkt fwd) 1M 0.82 (0.839)
EUR/CHF
SNB to re-assess monetary policy on 15 March
1.70 1.60 1.50 1.40 1.30 1.20 1.10 ING f'cast Mkt Fwds 1.70 1.60 1.50 1.40 1.30 1.20 1.10
1.00 1.00 Jan08 Jul08 Jan09Jul09 Jan10 Jul10 Jan11 Jul11 Jan12Jul12 Jan13
Source: Reuters, ING
FX talkING
March 2012
EUR/NOK
NOK star quality
10.0 9.5 9.0 8.5 8.0 7.5 Mkt Fwds ING f'cast 10.0 9.5 9.0 8.5 8.0 7.5
7.0 7.0 Jan08 Jul08 Jan09Jul09 Jan10 Jul10 Jan11 Jul11 Jan12Jul12 Jan13
Source: Reuters, ING
1M 7.40 (7.41)
EUR/SEK
SEK - too good to be true
12.0 11.5 11.0 10.5 10.0 9.5 9.0 8.5 ING f'cast 12.0 11.5 11.0 10.5 10.0 9.5 9.0 8.5
At times it seems the SEK cannot lose gaining when good EU17
data bodes well for Swedish exports and benefiting from a newly assumed safe-haven status when sovereign stress rises.
Mkt Fwds 8.0 8.0 Jan08 Jul08 Jan09Jul09 Jan10 Jul10 Jan11 Jul11 Jan12Jul12 Jan13
Source: Reuters, ING
1M 8.80 (8.89)
EUR/DKK
Can DKK stability absent intervention last?
7.48 7.47 7.46 7.45 7.44 7.43 7.42 7.41 ING f'cast Mkt Fwds 7.48 7.47 7.46 7.45 7.44 7.43 7.42 7.41
Data on the economy is mixed. 4Q GDP rose only 0.2% QoQ, but
was offset by a revision higher to 3Q11. Consumption rose a decent 1.3% QoQ. Against earlier expectations, Denmark has so far avoided recession while targeted stimulus, like a DKK30bn initiative to help small firm access to funding, should also help.
7.4 7.4 Jan08 Jul08 Jan09Jul09 Jan10 Jul10 Jan11 Jul11 Jan12Jul12 Jan13
Source: Reuters, ING
1M 7.43 (7.434)
3M 7.43 (7.432)
6M 7.42 (7.430)
FX talkING
March 2012
USD/CAD
CAD lags but for how long
1.30 1.20 1.10 ING f'cast 1.00 0.90 Mkt Fwds 1.00 0.90 1.30 1.20 1.10
At its 8 March meeting the BoC held rates at 1%, but indicated a
slightly more upbeat outlook for growth, including private demand, this year (in Jan it forecast 2012 GDP at 2%). This though was not sufficient to alter its neutral policy stance. Persistent strength of CAD is again referenced, but Canadas trade surplus is its best in three years, helped by auto and energy sectors contributing 15% and 25% of exports respectively.
0.80 0.80 Jan08 Jul08 Jan09Jul09 Jan10 Jul10 Jan11 Jul11 Jan12Jul12 Jan13
Source: Reuters, ING
AUD/USD
Volume surge underlines AUD popularity
1.20 1.10 1.00 0.90 0.80 0.70 0.60 ING f'cast Mkt Fwds 1.20 1.10 1.00 0.90 0.80 0.70 0.60
0.50 0.50 Jan08 Jul08 Jan09Jul09 Jan10 Jul10 Jan11 Jul11 Jan12Jul12 Jan13
Source: Reuters, ING
NZD/USD
NZD strength set to scupper rate hike in 2012
1.05 0.95 0.85 0.75 0.65 0.55 Mkt Fwds ING f'cast 1.05 0.95 0.85 0.75 0.65 0.55
0.45 0.45 Jan08 Jul08 Jan09Jul09 Jan10 Jul10 Jan11 Jul11 Jan12Jul12 Jan13
Source: Reuters, ING
NZD still offers a decent yield in G10 terms, but its illiquidity
makes it susceptible to any change in the broad risk environment. NZD/USD above 0.90 risks some sort of RBNZ counter measure.
1M 0.83 (0.821)
3M 0.83 (0.818)
6M 0.81 (0.812)
FX talkING
March 2012
Emerging markets
EUR/PLN
Consolidating while growth stays OK
5.0 4.5 4.0 3.5 5.0 ING f'cast 4.5 Mkt Fwds 4.0 3.5
3.0 3.0 Jan08 Jul08 Jan09 Jul09 Jan10 Jul10 Jan11 Jul11 Jan12 Jul12 Jan13
Source: Reuters, ING
EUR/HUF
Some progress on NBH law keeps IMF deal hopes alive
340 320 300 280 260 240 ING f'cast Mkt Fwds 340 320 300 280 260 240
220 220 Jan08 Jul08 Jan09 Jul09 Jan10 Jul10 Jan11 Jul11 Jan12 Jul12 Jan13
Source: Reuters, ING
1M 300 (294.9)
EUR/CZK
CZK likely to return above 25/EUR in short term
30 29 28 27 26 25 24 23 Mkt Fwds ING f'cast 30 29 28 27 26 25 24 23
22 22 Jan08 Jul08 Jan09 Jul09 Jan10 Jul10 Jan11 Jul11 Jan12 Jul12 Jan13
Source: Reuters, ING
1M 25.3 (24.8)
FX talkING
March 2012
EUR/RON
Waiting for the next decision?
4.75 4.45 4.15 3.85 3.55 ING f'cast Mkt Fwds 4.75 4.45 4.15 3.85 3.55
3.25 3.25 Jan08 Jul08 Jan09Jul09 Jan10 Jul10 Jan11 Jul11 Jan12Jul12 Jan13
Source: Reuters, ING
1M 4.35 (4.37)
EUR/HRK
CNB liquidity management & bond issuance helps HRK
7.80 7.70 7.60 7.50 7.40 7.30 7.20 7.10 ING f'cast Mkt Fwds 7.80 7.70 7.60 7.50 7.40 7.30 7.20 7.10
A foreign bond may be issued in April according to MinFin. Modest HRK appreciation has been helped by tight CNB liquidity
management and FX-linked sovereign bond issuance (EUR funds partially converted to HRK). The attractiveness of FX-linked bonds increased with the widening spread over Euribor. Improving global risk appetite following the ECB liquidity injection also spurred stronger demand for HRK bonds. HRK appreciation potential is limited by continued corporate FC demand due to deleveraging.
3M 7.57 (7.619) 6M 7.56 (7.631) 12M 7.58 (7.778)
7.00 7.00 Jan08 Jul08 Jan09Jul09 Jan10 Jul10 Jan11 Jul11 Jan12Jul12 Jan13
Source: Reuters, ING
1M 7.57 (7.574)
EUR/RSD
RSD to remain vulnerable, FX reserves important
120 110 Mkt Fwds 100 90 80 100 90 80 ING f'ca st 120 110
70 70 Jan08 Jul08 Jan09 Jul09 Jan10 Jul10 Jan11 Jul11 Jan12 Jul12 Jan13
Source: Reuters, ING
FX talkING
March 2012
USD/RUB
Is it taking a breath after strong rally?
37.5 35.0 32.5 30.0 27.5 25.0 Mkt NDF ING f'cast 37.5 35.0 32.5 30.0 27.5 25.0
We stick to our view that under current oil prices and gradual
easing in capital outflows the basket may easily test 32.40-32.80 levels in 1H12 barring a scenario of plunging global markets. With the election cycle being over now and no deterioration in stateopposition tensions, the new cabinet structure is the only unknown variable. Yet, we dont think it will hit capital flows.
3M 30.6 (29.7) 6M 31.0 (30.1) 12M 30.9 (30.8)
22.5 22.5 Jan08 Jul08 Jan09Jul09 Jan10 Jul10 Jan11 Jul11 Jan12Jul12 Jan13
Source: Reuters, ING
1M 29.7 (29.5)
USD/UAH
UAH on stable track ahead of October elections
10 9 8 7 6 5 ING f'cast Mkt NDF 10 9 8 7 6 5
Seasonal factors and the high grain harvest last year will stabilise
the FX market in 1H12 thus reducing the probability of UAH weakness. The risks of UAH devaluation in 4Q12 remain high on the back of an expected negative current account balance and a barely positive capital account.
4 4 Jan08 Jul08 Jan09 Jul09 Jan10 Jul10 Jan11 Jul11 Jan12 Jul12 Jan13
Source: Reuters, ING ING forecasts (mkt fwd) 1M 8.03 (8.08)
USD/KZT
Still a low-beta play
155 150 145 140 135 130 125 120 ING f'cast Mkt NDF 155 150 145 140 135 130 125 120
The KZT has been relatively resilient over the last month or so. It
gained from 148.6/USD to 147.60/USD by the end of February before stabilizing at around 148/USD recently.
115 115 Jan08 Jul08 Jan09 Jul09 Jan10 Jul10 Jan11 Jul11 Jan12 Jul12 Jan13
Source: Reuters, ING
1M 147 (148.0)
FX talkING
March 2012
USD/TRY
CBT moves from tight to cautious stance
2.1 Mkt Fwds 1.9 1.7 ING f'cast 1.5 1.3 1.5 1.3 1.9 1.7 2.1
1.1 1.1 Jan08 Jul08 Jan09 Jul09 Jan10 Jul10 Jan11 Jul11 Jan12 Jul12 Jan13
Source: Reuters, ING
We still think that downside in EUR/USD along with high oil prices
might keep TRY relatively weaker in the near term. But the CBT is likely to remain on guard against excessive moves too.
1M 1.80 (1.79)
3M 1.84 (1.81)
6M 1.82 (1.84)
USD/ZAR
SARB trapped by high inflation, soft growth
11 10 9 8 7 6 Mkt Fwds ING f'cast 11 10 9 8 7 6
Unlike other EM nations that are easing policy in 2012, the SARB
is somewhat trapped. Cost-push inflation has driven CPI to 6.3% YoY in January and is expected to hold above the SARBs 3-6% CPI target range all year. That means that rate cuts are unlikely and if activity actually surprises on the upside, the market might start to price rate hikes.
Latest activity data tends to support this view. 4Q GDP was better
than expected, private sector credit growth is picking up, as is business confidence.
5 5 Jan08 Jul08 Jan09 Jul09 Jan10 Jul10 Jan11 Jul11 Jan12 Jul12 Jan13
Source: Reuters, ING
1M 7.50 (7.56)
USD/ILS
Iran is the clear and present danger
4.5 4.2 ING f'cast 3.9 3.6 3.3 Mkt Fwds 3.9 3.6 3.3 4.5 4.2
3.0 3.0 Jan08 Jul08 Jan09 Jul09 Jan10 Jul10 Jan11 Jul11 Jan12 Jul12 Jan13
Source: Reuters, ING
1M 3.80 (3.78)
3M 3.85 (3.79)
6M 3.90 (3.79)
FX talkING
March 2012
Latam
USD/BRL
Focus on fighting abundant liquidity abroad
2.6 2.4 2.2 2.0 1.8 1.6 ING f'cast NDFs 2.6 2.4 2.2 2.0 1.8 1.6
A less supportive risk appetite environment has hurt the BRL but
the currency is also under pressure due to renewed government efforts to prevent FX strength. Acute IP weakness is seen as direct result of the competitiveness lost due to a strong Real.
1.4 1.4 Jan08 Jul08 Jan09 Jul09 Jan10 Jul10 Jan11 Jul11 Jan12 Jul12 Jan13
Source: Reuters, ING
1M 1.78 (1.79)
USD/MXN
Locally driven MXN weakness
16.5 15.5 14.5 13.5 12.5 11.5 10.5 Mkt Fwds ING f'cast 16.5 15.5 14.5 13.5 12.5 11.5 10.5
The USD/MXN was not able to break below the 12.65 despite the
relative improvement in global sentiment, but rather remained stubbornly trading north around the 12.75-12.90. We have identified two local factors behind the MXN tendency towards weaker readings and expect them to prevail.
9.5 9.5 Jan08 Jul08 Jan09 Jul09 Jan10Jul10 Jan11Jul11 Jan12Jul12 Jan13
Source: Reuters, ING
USD/CLP
Balance of risks remains unfavourable for the CLP
700 650 600 550 500 450 ING f'cast NDFs 700 650 600 550 500 450
The CLP selloff over the past week has reduced the risk of FX
intervention noise but we continue to see the balance of risks for the currency as less favourable.
Chile is a major oil importer, and the recent spike in oil prices has
materially dented the countrys terms of trade in recent weeks, and the currency has yet to reflect that deterioration.
400 400 Jan08 Jul08 Jan09 Jul09 Jan10 Jul10 Jan11 Jul11 Jan12 Jul12 Jan13 Source: Reuters, ING
1M 490 (487)
FX talkING
March 2012
USD/ARS
Changes to central bank charter calls for caution
6.0 5.5 5.0 4.5 4.0 3.5 3.0 2.5 ING f'cast NDFs 6.0 5.5 5.0 4.5 4.0 3.5 3.0 2.5
At least for the near term, BCRA has enough tools to prevent a
disorderly FX move, as those measures should be successful at curbing FX volatility and at preventing a drop in FX reserves.
2.0 2.0 Jan08 Jul08 Jan09 Jul09 Jan10 Jul10 Jan11 Jul11 Jan12 Jul12 Jan13
1M 4.36 (4.38)
3M 4.46 (4.49)
6M 4.67 (4.69)
11
FX talkING
March 2012
Asia
USD/CNY
Real GDP growth forecast downgrade roils markets
7.00 6.80 6.60 NDFs 6.40 6.20 6.00 Jan09 Jul09 Jan10 Jul10 Jan11 Jul11 Jan12 Jul12 6.40 6.20 6.00 7.00 6.80 6.60
ING f'cast
1M 6.3500 (6.3498)
3M 6.3300 (6.3680)
6M 6.3000 (6.3755)
USD/INR
Oil prices pose a serious risk
52 50 48 46 44 42 40 38 Jan08 Jul08 Jan 09 Jul 09 Jan10 Jul10 Jan11 Jul11 Jan12 ING f'cast NDFs 52 50 48 46 44 42 40 38
Higher oil prices have further limited the scope for the RBI to
adopt easy monetary policy stance anytime soon. We expect RBI to maintain a pause in the forthcoming meeting. However, tight liquidity conditions may force the RBI to reduce the reserve requirement ratio by 50bp.
3M 51.00 (51.10) 6M 49.50 (51.81) 12M 48.50 (52.98)
1M 50.50 (50.46)
USD/IDR
IDR An Asian underperformer
13000 12000 11000 10000 9000 8000 ING f'cast NDFs 13000 12000 11000 10000 9000 8000 7000
7000 Jan09 Jul09 Jan10 Jul10 Jan11 Jul11 Jan12 Jul12 Jan13
1M 9100 (9154)
FX talkING
March 2012
USD/KRW
KRWs VIX currency status temporarily suspended
1600 1500 1400 1300 1200 1100 1000 ING f'cast NDFs 1600 1500 1400 1300 1200 1100 1000 900
900 Jan09 Jul09 Jan10 Jul10 Jan11 Jul11 Jan12 Jul12 Jan13
1M 1120.0 (1121.6)
USD/MYR
BNM-BOJ parallels
3.90 3.70 3.50 3.30 3.10 2.90 ING f'cast NDFs 3.90 3.70 3.50 3.30 3.10 2.90 2.70
2.70 Jan09 Jul09 Jan10 Jul10 Jan11 Jul11 Jan12 Jul12 Jan13
1M 3.0120 (3.0210)
USD/PHP
The light is green for more BSP rate cuts
50.00 48.00 46.00 44.00 42.00 NDFs 50.00 48.00 46.00 44.00 42.00 40.00
February CPI inflation was 2.7% YoY, the lowest since October
2009 and well below the 3.3% consensus forecast. The dark clouds in the silver lining were the large, oil-related sequential increases in the utilities and transport components.
ING f'cast
40.00 Jan09 Jul09 Jan10 Jul10 Jan11 Jul11 Jan12 Jul12 Jan13
1M 42.70 (42.71)
13
FX talkING
March 2012
USD/SGD
High inflation despite the strong Sing $
1.60 1.50 1.40 1.30 1.20 Fwds ING f'cast 1.60 1.50 1.40 1.30 1.20 1.10
January CPI inflation was 4.8% YoY and 0.9% MoM NSA. The
seasonal spike in food prices was expected. However, the large sequential increases in the accommodation, healthcare and education components will keep headline inflation elevated for some time. Core inflation accelerated to 3.5% from 2.6%.
We think the data will worry the MAS. Despite appreciating the
Sing $ by over 8% in 2011 the most in Asia inflation was over 5%. The January CPI data indicated the man in the street thinks inflation is high.
1.10 Jan09 Jul09 Jan10 Jul10 Jan11 Jul11 Jan12 Jul12 Jan13
1M 1.2550 (1.2565)
USD/TWD
CBC looking to claw back TWDs appreciation vs. JPY
37.00 35.00 33.00 31.00 29.00 ING f'cast 37.00 35.00 33.00 31.00 29.00 27.00
NDFs
27.00 Jan09 Jul09 Jan10 Jul10 Jan11 Jul11 Jan12 Jul12 Jan13
1M 29.60 (29.49)
USD/THB
Activity snaps back from the flood damage
38.00 36.00 34.00 32.00 30.00 ING f'cast 28.00 Jan09 Jul09 Jan10 Jul10 Jan11 Jul11 Jan12 Jul12 Jan13 28.00 Fwds 38.00 36.00 34.00 32.00 30.00
1M 30.70 (30.69)
3M 30.50 (30.80)
6M 30.00 (30.96)
14
FX talkING
March 2012
Spot 1.33 108.0 0.84 1.21 7.40 8.89 7.435 1.32 1.25 1.61 4.11 294 24.8 4.36 7.56 111 39.0 10.55 194.5 2.36 9.97 5.01 2.36 16.95 643 5.75
1M 1.27 104 0.82 1.20 7.40 8.80 7.430 1.26 1.18 1.53 4.15 300 25.3 4.35 7.57 111 37.7 10.2 186.7 2.3 9.5 4.8 2.3 16.5 622.3 5.5
3M 1.22 101 0.80 1.20 7.30 8.70 7.425 1.20 1.13 1.47 4.17 290 25.5 4.30 7.57 112 37.3 9.8 178.7 2.2 9.8 4.7 2.2 16.4 597.8 5.4
6M 1.22 104 0.77 1.20 7.60 9.10 7.420 1.22 1.16 1.51 4.30 286 25.3 4.25 7.56 115 37.9 9.8 180.0 2.2 10.1 4.8 2.2 16.6 610.0 5.7
12M USD cross rates 1.30 114 0.75 1.20 7.90 9.40 7.445 1.33 1.30 1.67 4.10 280 24.9 4.25 7.58 115 40.1 11.1 191.1 2.2 11.1 5.1 2.3 17.8 630.5 6.4
Spot
1M
3M
6M
12M
USD/JPY GBP/USD USD/CHF USD/NOK USD/SEK USD/DKK USD/CAD AUD/USD NZD/USD USD/PLN USD/HUF USD/CZK USD/RON USD/HRK USD/RSD USD/RUB USD/UAH USD/KZT USD/TRY USD/ZAR USD/ILS USD/BRL USD/MXN USD/CLP USD/ARS
81.4 1.58 0.91 5.58 6.70 5.606 0.993 1.061 0.823 3.10 221.4 18.7 3.28 5.69 83.4 29.4 8.02 148 1.78 7.52 3.78 1.78 12.79 485 4.33 6.32 7.76 9130 50.17 1117 3.01 42.55 1.25 29.5 30.6
82 1.55 0.94 5.83 6.93 5.85 0.99 1.08 0.83 3.27 236 19.92 3.43 5.96 87.40 29.7 8.03 147 1.80 7.50 3.80 1.78 13.00 490 4.36 6.30 7.76 9100 50.50 1120 3.01 42.7 1.26 29.6 30.7
83 1.53 0.98 5.98 7.13 6.09 0.98 1.08 0.83 3.42 238 20.90 3.52 6.20 91.80 30.6 8.03 146.5 1.84 8.00 3.85 1.84 13.45 490 4.46 6.27 7.76 9100 51.00 1120 3.00 42.4 1.25 29.8 30.5
85 1.58 0.98 6.23 7.46 6.08 1.00 1.05 0.81 3.52 234 20.74 3.48 6.20 94.26 31.0 8.03 147.5 1.82 8.25 3.90 1.80 13.60 500 4.67 6.22 7.76 9100 49.50 1120 2.99 43.25 1.25 30.0 30.0
88 1.73 0.92 6.08 7.23 5.73 1.02 1.00 0.78 3.15 215 19.15 3.27 5.83 88.46 30.9 8.51 147 1.72 8.50 3.90 1.75 13.67 485 4.95 6.13 7.76 9100 48.50 1120 2.96 42.0 1.23 30.0 30.0
8.37 8.0 7.6 7.6 8.0 USD/CNY 10.29 9.9 9.5 9.5 10.1 USD/HKD 11927 11557.0 11102.0 11102.0 11830.0 USD/IDR 66.53 64.1 62.2 60.4 63.1 USD/INR 1481 1422.4 1366.4 1366.4 1456.0 USD/KRW 3.99 3.8 3.7 3.6 3.8 USD/MYR 56.4 54.2 51.7 52.8 54.6 USD/PHP 1.66 1.6 1.5 1.5 1.6 USD/SGD 39.1 37.6 36.4 36.6 39.0 USD/TWD 40.5 39.0 37.2 36.6 39.0 USD/THB
15
FX talkING
March 2012
FX derivatives idea
Using a Butterfly Plus Call Strategy to hedge EUR/RUB upside
Protecting against a RUB sell-off with a nine month options hedge
Spot ref: 38.95. Nine month forward ref: 40.50. Vladimir Putin has just won a third term as Russian President. So far opposition demonstrations have not been large enough to seriously threaten Putins grasp on power. While tensions look set to remain, our base case assumes that politics will not lead to large scale capital flight and that firm oil prices can see the RUB appreciating towards the 32.40/32.80 area against the EUR:RUB basket. Based on our EUR/USD forecasts, that would put EUR/RUB not too far away from current spot levels at the end of the year. But what would happen if opposition demonstrations grew in number and the Putin administration employed far more aggressive measures to crack down on the opposition? We propose an options hedging strategy that protects the corporate with RUB receivables against a sharp sell off in the RUB, but allows the corporate to partially benefit if the RUB continues to strengthen modestly. Strategy: Butterfly Plus Call: All legs in this option structure are nine month maturities and this structure is zero cost. Client buys EUR put/RUB call, strike 39.00 in EUR 10 million notional. Client sells EUR put/RUB call, strike 40.50 in EUR 10 million notional. Client sells EUR call/RUB put, strike 40.50 in EUR 10 million notional. Client buys EUR call/RUB put, strike 42.00 in EUR 20 million notional.
Rationale
This strategy is effectively a butterfly position around a 40.50 EUR/RUB central pair of strikes, with the outer boundaries at 39.00 and 42.00.
Thus the potential maximum cost of this structure is 1.5 RUB big figures. This structure allows the corporate to participate if EUR/RUB spot grinds lower through the year, but limits the worst case rate to sell RUB should political unrest deliver massive capital flight not our base case. The worst case rate to sell RUB would be 43.50 ie, the top strike at 42.00 plus the 1.5 big figure maximum cost of the structure, given spot would be trading away from the 40.50 central strikes.
As an alternative, a corporate could just buy a nine month EUR call/RUB put at 42.00, which would cost 1.07 RUB big figures. The worst
case effective hedge rate then becomes 43.07. Our graph below highlights the relative trade off of using: a) the Butterfly Plus Call strategy, b) purely a 42.00 EUR/RUB call or c) merely hedging at the prevailing forward of 40.50. Chris Turner, London +44 20 7767 1610
For more detailed discussions on corporate FX hedging strategies, prices and other trade specific requirements, please contact in the first instance your local FX Trading and Sales teams or the following; Alexander Schreuder Goedheijt, Fahd El Habti and Michel Hensen, Product Specialists/FX Derivatives FM Sales Amsterdam +31 20 563 8171
45
Effective Hedge Rate
44 43 42 41 40 39 38 37 37.5 38 38.5 39 39.5 40 40.5 41 41.5 42 42.5 43 43.5 44 44.5 45 Spot at Expiry Butterfly Plus Call Call Forward
Source: ING
16
FX talkING
March 2012
Milan
+39 02 89629 3630 paolo.pizzoli@ing.it Telephone +1 646 424 6464 +1 646 424 6465 Email david.spegel@americas.ing.com gustavo.rangel@americas.ing.com
Emerging Markets New York London Bulgaria H David Spegel Gustavo Rangel Simon Quijano-Evans Elena Ganeva
Czech Rep Vojtech Benda Hungary India Mexico David Nemeth Upasna Bhardwaj Debora Luna Ezequiel Garcia
+91 22 3309 5718 upasna.bhardwaj@ingvysyabank.com +52 55 5258 2095 debora.luna@americas.ing.com +52 55 5258 2064 ezequiel.garcia@americas.ing.com +632 479 8855 +48 22 820 4698 +48 22 820 4696 +48 22 820 4608 +40 21 209 1393 +40 21 209 1290 +7 495 771 7994 +7 495 755 5480 +65 6232 6020 +65 6232 6181 joey.cuyegkeng@asia.ing.com mateusz.szczurek@ingbank.pl rafal.benecki@ingbank.pl grzegorz.ogonek@ingbank.pl vlad.muscalu@ing.ro ana.morarescu@ing.ro dmitry.polevoy@ingbank.com egor.fedorov@ingbank.com tim.condon@asia.ing.com prakash.sakpal@asia.ing.com
Philippines Joey Cuyegkeng Poland Mateusz Szczurek Rafal Benecki Grzegorz Ogonek Vlad Muscalu Ana-Maria Morrescu Dmitry Polevoy Egor Fedorov
Romania Russia
Singapore Tim Condon Prakash Sakpal Slovakia Turkey Eduard Hagara Sengl Dadeviren Muhammet Mercan mer Zeybek Alexander Pecherytsyn Halyna Antonenko
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Ukraine
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Disclosures Appendix
ANALYST CERTIFICATION The analyst(s) who prepared this report hereby certifies that the views expressed in this report accurately reflect his/her personal views about the subject securities or issuers and no part of his/her compensation was, is, or will be directly or indirectly related to the inclusion of specific recommendations or views in this report. IMPORTANT DISCLOSURES Company disclosures are available from the disclosures page on our website at http://research.ing.com. The remuneration of research analysts is not tied to specific investment banking transactions performed by ING Group although it is based in part on overall revenues, to which investment banking contribute. Securities prices: Prices are taken as of the previous days close on the home market unless otherwise stated. Conflicts of interest policy. ING manages conflicts of interest arising as a result of the preparation and publication of research through its use of internal databases, notifications by the relevant employees and Chinese walls as monitored by ING Compliance. For further details see our research policies page at http://research.ing.com. FOREIGN AFFILIATES DISCLOSURES Each ING legal entity which produces research is a subsidiary, branch or affiliate of ING Bank N.V. See back page for the addresses and primary securities regulator for each of these entities.
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