WEDNESDAY

Reduced tail-risks lessen safe-haven attractiveness? 23 JANUARY 2013

During the past three years we have expressed a continuing bias for smaller, peripheral EDITOR
currencies at the expense of their far less attractive G4 counterparts. Large central banks Carl Hammer
continue to expand their balance sheets to reflate their respective economies, trying to + 46 8 506 231 28
counter the underlying debt related problems. This still contributes to a negative score for G4
currencies. Financial markets however are finally recovering and market risk premia decreasing.
So long as these improvements are maintained, arguably the need to diversify into smaller,
safer currencies becomes less urgent, especially when several appear expensive. Furthermore,
their central banks have been forced to cut rates as their strong exchange rates have depressed
import prices even further, while bond markets have rallied to rich levels. In our SEB FX
Scorecard we reduce both the weighting and importance of Fundamentals and Flows, and
increase them for Valuation. Nevertheless, markets remain at the mercy of politicians and
central banks, implying ongoing potentially major event risks and policy errors. Consequently,
although the allure of strong fundamentals is decreasing leaving cheaper alternatives more
attractive, we are still not prepared to recommend outright long G4 positions vs. peripherals
(apart from short-term correction trades). Our currency ranking suggests Scandies are still of
interest (we raise slightly our 6-12 months EUR/SEK and EUR/NOK forecasts) while their
commodity currency counterparts are overvalued and therefore rated neutral. While an end to
dollar depreciation is now in sight, a stronger greenback is a case for 2014 when Fed policy is
likely to become more hawkish. We therefore retain a small upward bias in our EUR/USD
forecasts for H1 2013. JPY has depreciated substantially during the past three months, even
beyond the bearish projections made in our last CS (September 2012). Following room for
short-term profit-taking, we expect additional downside. Finally, GBP will weaken as the UK
economy is far from rebalanced and likely to loose its AAA-rating soon.

BUY THE CS BASKET We recommend buying a G10 SEB FX Scorecard
currency overlay basket with the following composition Total weighted score, 3-6 mth outlook
(based on the SEB FX Scorecard). Long NOK (34%), NZD
KRW
(19%), SEK (19%), AUD (17%), CAD (6%), EUR (5%) vs TRY
short USD (13%), JPY (24%), GBP (28%), CHF (35%). NOK
RUB
SELL G2 VS SCANDIES Although the grading differencies
PLN
are now smaller as the demand for quality is fading, NOK SEK
and SEK scores are still far above G2. Scandies have NZD
furthermore weakened in the past few weeks making AUD
current levels more attractive. CNY
CAD
BUY EUR/CHF The decline in market risk premia / lower EUR
intra-euro interest rate spreads are signs that the large DKK
capital inflows to Switzerland is abating. FX Reserves have USD
also failed to increase in the last 2 months. We expect the JPY
SNB-floor to remain at 1.20 in EUR/CHF and that the GBP
overvalued Swiss franc continues to depreciate as investors CHF
seek better yielding alternatives.
-1,5 -1 -0,5 0 0,5 1 1,5

You can also find our research materials at our website: www.mb.seb.se. This report is produced by Skandinaviska Enskilda Banken AB (publ) for institutional investors only. Information and
opinions contained within this document are given in good faith and are based on sources believed to be reliable, we do not represent that they are accurate or complete. No liability is
accepted for any direct or consequential loss resulting from reliance on this document. Changes may be made to opinions or information contained herein without notice.

Currency Strategy

Forecasts and FX Scorecard
FX forecasts SEB Consensus* Contents
21-jan Q1 13 Q2 13 Q4 13 Q1 13 Q2 13 Forecasts 2
EUR/USD 1,33 1,35 1,36 1,28 1,30 1,29 The big picture 5
EUR/JPY 118 120 124 120 114 113 USD 10
EUR/GBP 0,84 0,85 0,86 0,83 0,81 0,81 EUR 12
EUR/CHF 1,24 1,27 1,29 1,30 1,21 1,22 JPY 14
EUR/SEK 8,70 8,65 8,55 8,40 8,63 8,60 GBP 16
EUR/NOK 7,45 7,35 7,25 7,25 7,36 7,31 CAD 18
EUR/DKK 7,46 7,47 7,47 7,46 7,46 7,46 AUD 20
USD/RUB 30,2 29,8 29,1 29,6 30,5 30,8 NZD 22
EUR/PLN 4,17 4,10 4,05 3,09 4,13 4,10 CHF 24
Cross rates SEK 26
USD/JPY 89 89 91 94 87 88 NOK 28
GBP/USD 1,59 1,58 1,57 1,55 1,60 1,60 DKK 30
USD/CAD 0,99 0,99 0,98 0,98 0,98 0,98 RUB 32
USD/CHF 0,93 0,94 0,95 1,02 0,93 0,95 PLN 34
AUD/USD 1,06 1,07 1,08 1,06 1,05 1,05 TRY 36
NZD/USD 0,84 0,86 0,87 0,85 0,83 0,82 KRW 38
USD/SEK 6,52 6,41 6,29 6,56 6,62 6,67 CNY 40
GBP/SEK 10,35 10,12 9,89 10,17 10,65 10,62 Guide to indicators 42
JPY/SEK 7,36 7,20 6,91 6,98 7,57 7,61 Seasonal patterns 43
CHF/SEK 7,02 6,81 6,63 6,46 7,13 7,05 SEB Quant 44
NOK/SEK 1,17 1,18 1,18 1,16 1,17 1,18 Contacts 45
USD/NOK 5,58 5,44 5,33 5,66 5,65 5,64
USD/CNY 6,22 6,19 6,17 6,10 6,21 6,17
USD/KRW 1062 1045 1030 1000 1067 1072
USD/TRY 1,77 1,74 1,72 1,68 1,79 1,80
*Bloomberg survey FX forecasts.

SEB FX G10 Scorecard, Medium Term
Weights USD EUR JPY GBP CAD AUD NZD CHF SEK NOK DKK
Fundamentals 10,0% -1 0 0 -1 0 0 +1 0 0 0 0
Carry 12,5% -1 -1 -1 -1 0 +2 +2 -1 0 +1 -1
Monetary policy 15,0% 0 0 -2 -1 0 -1 0 0 0 0 +1
Flows 10,0% -1 +1 -1 -2 -2 0 -2 0 -1 +1 -2
Valuation 20,0% +1 0 0 0 -2 -3 -3 -3 0 -1 0
Positioning 7,5% 0 -1 +4 -1 -1 0 +2 -1 -1 -1 -
Technicals 7,5% 0 0 -3 -3 +2 +2 +1 0 +2 +2 0
Liquidity 0,0% +4 +2 +4 +2 -1 -2 -3 0 -3 -3 -3
Event risk 5,0% -1 -1 +2 -1 0 0 0 0 0 0 0
Global cycle 12,5% -2 +1 -1 +1 +4 +3 +4 0 +2 +2 +1
Total weighted score -0,4 -0,0 -0,6 -0,7 -0,0 +0,2 +0,2 -0,8 +0,2 +0,4 -0,2

G10 FX Scorecard - Contributions to total score
SEK Weighted score: 0,2 NOK Weighted score: 0,4
Fundamentals Fundamentals
Carry Carry
Monetary policy Monetary policy
Flows Flows
Valuation Valuation
Positioning Positioning
Technicals Technicals
Liquidity Liquidity
Event risk Event risk
Global cycle Global cycle

-0,8 -0,6 -0,4 -0,2 0,0 0,2 0,4 0,6 0,8 -0,8 -0,6 -0,4 -0,2 0,0 0,2 0,4 0,6 0,8

2

Currency Strategy

USD Weighted score: -0,4 EUR Weighted score: 0
Fundamentals Fundamentals
Carry Carry
Monetary policy Monetary policy
Flows Flows
Valuation Valuation
Positioning Positioning
Technicals Technicals
Liquidity Liquidity
Event risk Event risk
Global cycle Global cycle

-0,8 -0,6 -0,4 -0,2 0,0 0,2 0,4 0,6 0,8 -0,8 -0,6 -0,4 -0,2 0,0 0,2 0,4 0,6 0,8

JPY Weighted score: -0,6 GBP Weighted score: -0,7
Fundamentals Fundamentals
Carry Carry
Monetary policy Monetary policy
Flows Flows
Valuation Valuation
Positioning Positioning
Technicals Technicals
Liquidity Liquidity
Event risk Event risk
Global cycle Global cycle

-0,8 -0,6 -0,4 -0,2 0,0 0,2 0,4 0,6 0,8 -0,8 -0,6 -0,4 -0,2 0,0 0,2 0,4 0,6 0,8

CAD Weighted score: 0 CHF Weighted score: -0,8
Fundamentals Fundamentals
Carry Carry
Monetary policy Monetary policy
Flows Flows
Valuation Valuation
Positioning Positioning
Technicals Technicals
Liquidity Liquidity
Event risk Event risk
Global cycle Global cycle

-0,8 -0,6 -0,4 -0,2 0,0 0,2 0,4 0,6 0,8 -0,8 -0,6 -0,4 -0,2 0,0 0,2 0,4 0,6 0,8

AUD Weighted score: 0,2 NZD Weighted score: 0,2
Fundamentals Fundamentals
Carry Carry
Monetary policy Monetary policy
Flows Flows
Valuation Valuation
Positioning Positioning
Technicals Technicals
Liquidity Liquidity
Event risk Event risk
Global cycle Global cycle
-0,8 -0,6 -0,4 -0,2 0,0 0,2 0,4 0,6 0,8 -0,8 -0,6 -0,4 -0,2 0,0 0,2 0,4 0,6 0,8

3

Currency Strategy

DKK Weighted score: -0,2
Fundamentals
Carry
Monetary policy
Flows
Valuation
Positioning
Technicals
Liquidity
Event risk
Global cycle

-0,8 -0,6 -0,4 -0,2 0,0 0,2 0,4 0,6 0,8

PLN Weighted score: 0.4
SEB FX EM Scorecard, Medium Term Fundamentals
Weights PLN RUB TRY CNY KRW
Carry
Fundamentals 10,0% 0 +2 +2 +2 +1
Monetary policy
Carry 12,5% +3 +5 +5 -1 +2
Monetary policy 15,0% 0 -1 -3 -1 -1 Flows
Flows 10,0% +2 +2 +2 +2 +2 Valuation
Valuation 20,0% -1 -2 -2 +1 +1 Positioning
Positioning 7,5% -2 -1 +1 +3 -5
Technicals
Technicals 7,5% 0 -2 +1 +2 +3
Liquidity 0,0% -4 -4 -4 0 -3 Liquidity
Event risk 5,0% 0 0 0 0 -2 Event risk
Global cycle 12,5% +2 +1 +2 +1 +2 Global cycle
Total weighted score +0,4 +0,4 +0,5 +0,0 +0,5
-0,8 -0,6 -0,4 -0,2 0,0 0,2 0,4 0,6 0,8

TRY Weighted score: 0.5
RUB Weighted score: 0.4
Fundamentals
Fundamentals
Carry
Carry
Monetary policy
Monetary policy
Flows
Flows
Valuation
Valuation
Positioning
Positioning
Technicals
Technicals
Liquidity
Liquidity
Event risk
Event risk
Global cycle
Global cycle
-0,8 -0,6 -0,4 -0,2 0,0 0,2 0,4 0,6 0,8
-0,8 -0,6 -0,4 -0,2 0,0 0,2 0,4 0,6 0,8

KRW Weighted score: 0.5
CNY Weighted score: 0
Fundamentals
Fundamentals
Carry
Carry
Monetary policy
Monetary policy
Flows
Flows
Valuation
Valuation
Positioning
Positioning
Technicals
Technicals
Liquidity
Liquidity
Event risk
Event risk
Global cycle
Global cycle
-0,8 -0,6 -0,4 -0,2 0,0 0,2 0,4 0,6 0,8
-0,8 -0,6 -0,4 -0,2 0,0 0,2 0,4 0,6 0,8

4

the market outlook depends very much on the actions of politicians and central banks. and to permit provide upside potential (housing. while European growth is bottoming. we expect the economic recovery scenario. Underlying Conversely. The 5 . otherwise absent in 2013. However.9% y/y). REFLATION AND STABILISING GROWTH. Currency Strategy Big Picture: Economic recovery -> lower demand for “Quality”? At long last. Assuming US politicians successfully complete upcoming debt ceiling negotiations. This adds positively to the euro outlook. as we expect). we think it questionable whether it will prove possible to inflate the Japanese economy simply by adopting a higher inflation target. government has also promised to establish a large fund to buy foreign assets. given “unlimited” support from policymakers. we still forecast a cautious recovery in global growth prospects in H1 2013. positively. new liberal government led by PM Abe is pressuring Moreover. for a fifth (!) consecutive year. Unemployment given current unit labour cost and current account continues to increase. Recent SEB Research Macro updates (released Jan 2013) contain relatively few changes to growth projections. global markets look set to reflate. previous MOF/BOJ promises have been poorly fulfilled. several sectors within the economy BOJ to adopt a 2% inflation target. at least for now (Q4 2012: +7. Consequently. Japan’s growth fairly close to trend over the next two years. with sentiment and consensus agree to the political changes necessary to make the growth expectations (2013: -0. it reflecting the current poor outlook. recent months. Indeed. euro-zone political risks remain high and are likely to become of interest to markets later this year. developments.2%) already adequately EMU an optimal currency union. while over the next six months the US economy looks likely to expand slightly NO END IN SIGHT TO MAJOR CENTRAL BANKS slower than had originally been expected. increasingly discounted by financial markets. based on our internal leading indicator. to continue. However. However. Global leading indicators show signs of bottoming while. Nevertheless. the global economy is beginning to recover. albeit very gradually (and with it financial markets generally) as record loose G4 central bank policies gain traction in the real economy. Further. we see a small would be extremely premature to rule out further upside bias to European data surprises during H1 negative headlines from Europe. imbalances within the euro-zone continue to decrease we expect only a sluggish recovery. though very few of its citizens will to nearly 12%. such that we forecast continue to operate with a clear easing bias. further depreciation of the JPY. in other words their events rather than general macroeconomic drivers will remain most important for investors (provided. The employment and Fed policy). its outlook PRINTING MACHINES YET. Asia is leading the recovery while growth in China has bottomed. of course. The most recent particularly those where a growing labour force central bank comment suggests it will continue to (construction) may add significantly to NFP going print money until USD/JPY trades at 95-100 and forward (see below for further details regarding inflation reaches its newly adopted target. All major central banks remains relatively satisfactory. investments). the growth recovery scenario remains intact. Still.

However. were around 150bps and 125bps. We still the OMT to restrict. so may continue to purchase GIIPS bonds as risk premia continued supportive portfolio flows are less euro contract. produced a similar study where the estimated real consequently Euribor moves probably only reflect sovereign bond yield spreads for Spain and Italy vs. the announcement of the Outright deterioration in the Japanese external surplus. The IMF banks will continue to depend on cheap financing. most of this particular move euro over the longer term. Its most recent minutes suggest clear differences of opinion within the FOMC board.. Continued spread tightening has therefore given current poor growth and rising some way to run still being so far the main driver for a unemployment. ECB POLICY FADING AS EURO-POSITIVE. Nevertheless. FED OUTLOOK STILL USD NEGATIVE.5% before leaving the “zero-interest-rate-policy” justifies a Fed funds rate of 0-0. the Bank of Italy* produced a term refinancing operations have pulled Euribor and regression model that sought to estimate the fair value for intra-euro spreads. Currency Strategy BOJ is already running a zero interest rate policy with WHAT ARE REASONABLE EMU RISK PREMIA? In additional Quantitative Easing (QE) purchases August and September. given certain underlying other short-term euro interest rates higher – fundamentals including debt/GDP and public budget potentially providing additional support for the euro. This has produced a virtuous circle of portfolio flows. probably intra-euro in nature (like the origin of the spread widening trade). Monetary policy must remain loose respectively. this ensures the euro itself enjoys a small upside potential as global investors seek yield. rising global interest rates and a gradual up fears. the recently adopted implicit unemployment target of 6. and Over the past few days. implementation risk is proclaimed the ECB would “do whatever it takes to save substantial given rapid JPY depreciation in recent the euro”. and remove that part of the intra- expect a lower JPY attributable to improving risk euro rate spread / risk premia that reflected such break- appetite. deficit/GDP ratios. We also believe the unemployment rate must fall to 7. stop-loss activity connected with bets on negative Germany. Mr Draghi aimed to use failure to deliver on its verbal promises). news and rumours of changed contributing to a stronger euro. Sept 2012. Consequently. deposit rates. investors has already occurred judging by “fair-value levels”. So far. YIELD. HUNGRY INVESTORS MAY BOOST EURO FURTHER. seeking to benefit from previously high rates. Based on our own labour market / inflation forecasts however.0% or below before the central bank will consider an end to the current 6 . Monetary Transactions programme has proved successful despite Spain (and Italy) remaining outside it.. European Italian bonds is 200bps (today 260 bps). ECB governor Draghi conducted. In a study published in collateral rule for ECB loans and even an end to long. The study concluded that a fair We think it bizarre to speculate on an end to the ECB’s rate spread between 10yr German bunds and 10yr current relaxed monetary policy stance. and despite the fact most such flows are positive at present. September 2012. At that time. Still. a situation likely to weigh on the stronger euro. intra-euro spreads were very months (we have added a positive grade to JPY high reflecting very real fears the entire currency union under Event Risk due to the risk of central bank’s might break down. In particular. * Bank of Italy: Recent estimates of sovereign risk premia for euro-area countries #128.25% to 2015.

the European developments are surely moving below radar and will surface again. While we believe monetary policy will be should a rating agency decide to downgrade the negative for the currency in H1 2013.e. In 2014 the US economic recovery is flows are also rising. We therefore remain negative regarding the outlook for GBP. There is also a risk the BOE will need to add further QE to its APF programme. stabilizing growth. from 2014). Furthermore. non-farm payrolls will be even more important for the However. adopt a progressively tighter monetary position. Although it remains very hard to pinpoint exactly when and what the trigger is. and promises of “tightening” cycle. applies. external deficit (CA deficit is now approx 3%/GDP). The USD consequences: euro area austerity measures are analysis is fairly clear and dependent on the following now yielding limited positive results including factors: 1) Fed will continue to stimulate the economy lower ULC/Current account (CA) imbalances. Over negotiations on the debt ceiling. supporting the USD outlook. somewhat lower intra-euro rate spreads and 7 . hence in relative Indeed. IS “QUALITY” LESS IMPORTANT NOW? Over the next six months we expect FX markets to be impacted by reflationary monetary policy. NFP data credit rating due to a failure of upcoming may “potentially” strengthen it temporarily. the CA 2012 annual rate of change (see terms monetary policy will be even looser compared to graph below) is positive. As regards the flow outlook. the external outlook for the UK is still finally breaking the negative correlation to risk poor. subject to which the currency still trades. the IMF the longer term (i. Currency Strategy QE3 programmes. portfolio ECB in 2013. the CA continues weaker Euro in H2 2013 based on rising European to deteriorate. trying to push unemployment lower. with sterling depreciation now necessary if appetite. G4 developments during the past 12 months also suggest several interesting LONG-TERM USD OUTLOOK IS POSITIVE. the overall US situation remains weak USD now. Furthermore. …. We expect these to increase H2 2013 contributing to a weaker euro / stronger USD. 2) We have long awaited a unprecedented stimulus measures. political risks. However.AND US DEFICITS NEEDS MORE ADJUSTMENTS TO FULLY RESTORE CONFIDENCE. in Japan the converse opening up for and end of QE3 asset purchases. They will return we think on rising political risk and lack of democratic support for the necessary political integration to make EMU an “optimal currency union”. Given the on-going US economic The US has moved towards a more sustainable recovery and the Fed’s implicit unemployment target. While the weak JPY-trend clearly depends this will be bearish for EUR/USD as ECB will lag this mostly on “verbal intervention” so far. this has the potential to Finally. Current Fed policy and US debt ceiling negotiations (add the ECB OMT program as well) has masked the underlying fundamentals problems of EMU. efforts are to continue to rebalance the economy. we expect the Fed to also expects the US CA to widen once again.

Peripherals became clear beneficiaries of we have reduced the weights for both fundamen- loose monetary policies being pursued by G4 central tals and capital flows (enjoying large external banks. we forecast only modest upside in commodity currencies. which general market risk premia continue lower. While Global cycle: 12. a more hawkish Fed policy is more likely.5%) discussed earlier. the position. albeit more gradually. Like AUD.5% (12. The long-term Signs that quality is becoming less important include bullish technical triangle in AUD/USD is worth the appreciation in EUR/CHF above the SNB-induced monitoring (confirmed if AUD/USD closes above 1. Scorecard weights and grades continue to forecast a small upside bias over the next 3-6 months. At the same time.5% (5%) continued cyclical recovery may not benefit the usual Technicals: 7. we still project EUR/SEK to Capital flows: 10% (15%) depreciate towards 8. a dovish RBA and improving Asian/Chinese growth prospects. determining the overall score for each currency. higher. slow internal devaluation makes a weak euro necessary for Europe. in the near- Our 6-12 months FX forecasts have been adjusted as term we expect the JPY to correct higher. peripherals still receives higher grades. which now has a with investors. FX FORECASTS FROM SCORECARD. and other better valued. Once again. will remain weak over the next six months. In the near-term.5% (0%) we continue to set higher scores for them. certainly proved accurate: on a trade weighted basis. Furthermore. commodity currencies should only outperform the there may be a case for such currencies becoming USD slightly. As discussed earlier. 1.5% (25%) later this year. over the past 6-12 months. In 2014.30/40 longer-term. all factors which boosted their popularity the weighting for Valuation. Currently. Based on a scenario in theme we expect will impact markets this year. a probable and continued outcome of intra. We expect scorecard projection that NOK would strengthen has EUR/CHF to continue higher. As we expect the euro to weaken again Monetary policy: 27. CAD. Compared to our last Currency Strategy we have made SEK is now trapped between its cyclical dependency various changes: (positive) and waning attraction as a safe-haven for Fundamentals: 10% (20%) portfolio flows. they have also enjoyed. Further. While GBP and JPY attractive (the euro and selected EM currencies).5%) suspects (currency wise). we have raised outlooks. Despite progress being made. the NOK is the favourite G10 unfashionable. causing us to revise higher our attach to each rating category represent key inputs in bearish EUR/NOK projections. surpluses is not as important as it is when market risk strong debt/GDP ratios and positive fiscal deficit premia decline).0625 on a monthly basis). However. GBP and JPY are likely to 8 . The September euro rate spread “improvements”. In this environment. EUR/SEK is expected to trade sideways. During the past 3-4 months we have targeted a move higher in EUR/USD towards current spot levels.20-floor. prefer to await better entry levels for a short JPY Although generally small grading differences now. Currency Strategy improving risk appetite. inter alia. also supporting the USD. We have long been bullish Liquidity: 0% (0%) the G10 peripheral currencies (AUD. The weights we euro is strong. However. long time. a Positioning: 7. with last week’s depreciation making a long yielding alternatives become increasingly NOK position attractive once again. the SEB FX SCORECARD AND WEIGHTS. NOK and Event risk: 5% (10%) SEK) on the expense of their G4 counterparts. currency. despite the reflationary progressively overvalued. we retain our preference for a weaker euro in H2 2013 as a result of increasing political risks in Europe. significant bearing on both the monetary policy their central banks have become increasingly outlook and investor appetite for currencies. As Valuation: 20% (12. We therefore the Scorecard signals Quality is less important. scorecard Since there is a case for lower demand for differences are now smaller than they have been for a alternative reserve currencies based on “Quality”. AUD is trapped between a high valuation. The concerned that their currencies are becoming effect on the scorecard is that. the NOK trades at new record highs.

September 2012 we have. with the country Sep 12 until today. GBP) have done so. Meanwhile. the 45% of total weighting. of those currencies intend to capture what we believe will be the most we expected would outperform the dollar all except important FX market themes and drivers.4% return with a Sharp ratio at 3. By sharply. impact of global risk appetite because: (a) we had a neutral view ahead of fiscal cliff negotiations although FX Scorecard portfolio return our general expectation was improvement in risk Accumulated return since May 2012: 9. being total return is 9.5% loss. calculated monetary policy loose. 9 . we raised the generated a 5. In other particularly negative for JPY. and (b) the traditional relationship between currencies and risk appetite was clearly 10% 10% breaking down. CHF and GBP. We forecast additional expected would underperform against the USD (JPY. Two of the three currencies we set to lose its AAA-rating. In addition. 6% 6% SEB FX Scorecard 4% 4% Performance vs USD since CS Sep-12 2% 2% NOK 0% 0% SEK -2% -2% 13 j p n kt n l 15 l ec 28 v ug 19 v CAD p a -ju ju ja no o -se -ju se -m -o -d 4- -n -a 9- 25 5- 7- 17 26 23 AUD EUR Other trade ideas included in last September’s NZD Currency Strategy have performed in line with the GBP scorecard outcome. USD and CHF. making it hard to predict the effects of 8% 8% changes in the latter. AUD vs. and poor fundamentals. CHF SEK. for example. CHF. words. NOK. Conversely. as previously. Currency Strategy underperform. September last year we thought monetary policy Based on the scorecard and relative scores we also would be an even more important FX market driver proposed a portfolio alongside our trading with. the scorecard still finds few To evaluate the Currency strategy scorecard from positive factors for the UK with the flow outlook weak. so far the scorecard approach has proved fairly Moreover we decided to attach a zero weight to the successful. which generated a JPY 2. these recommendations have yielded a significant positive return due to a stronger NOK and -14 -12 -10 -8 -6 -4 -2 0 +2 +4 +6 +8 SEK and weaker JPY. with the JPY depreciating EVALUATION OF THE SCORECARD APPROACH. CAD and finally CHF and JPY vs. upside in EUR/GBP. monetary policy and fundamentals received when the new scorecard approach was introduced. GBP.85% 12% 12% appetite over time. we suggested selling GBP vs. an unusually high share.85% with low volatility. Moreover. Despite our AUD/CAD trade. a valuation less attractive than each currency’s performance against the USD from it appears. In particular. on the Currency Strategy scorecard from May last year Overall. the Fed apparently likely to recommendations on the first page of our September continue to ease monetary policy by further expanding Currency Strategy. the CHF trades largely unchanged reconsidering and changing scorecard weights we against the greenback. Back in the CAD have appreciated against it since then.63. Since Sep 12 this portfolio has bond purchase programmes. weight for fundamentals to reflect the ongoing theme Including the return on the proposed portfolio based that they would continue to attract FX related inflows.

 -1 10 . Although most members supported the December decision Minutes from the meeting revealed several FOMC-members discussed the possibility that the bond purchase programmes would end already sometimes this year.4 -0. The political turbulence may trigger additional downgrades which could make it more difficult to attract inflows.35 0 E U R /U S D 10 0 to be around 1. Hence.29-area be revisited.6 0.30 0 75 neither address the spending side.8 -0.15 0 S peculative positions -2 5 use the debt ceiling as leverage in negotiations on 04 05 06 07 more spending cuts President Obama has said that he The lack of significant upside progress in won’t negotiate over it. Republicans are successful the fiscal drag in 2013 could be somewhat higher than assumed while confidence and growth will continue to suffer until a solution has been reached. Monetary policy which eventually will support the USD.4 US dollar Although the US economy moves slowly in the right Fundamentals direction growth remains to slow to change the near Carry term outlook on monetary policy and investments. Should could cause further rating downgrades. Hence. near term head winds from capital flows could increase.  0 FLOWS The flow situation remains negative for the USD and stronger US growth is likely to add to the US trade deficit making the US economy more dependent on foreign capital inflows. The deal did 1.25 0 50 which has to be raised before end of February to shun 1. However most taxpayers U S D /C A D 12 5 Contracts (thousands) will face a higher tax burden and we expect fiscal drag 1. currently we believe there is little scope for monetary policy to support the USD.4 0. Hence short Flows term it is difficult to have an optimistic outlook on the Valuation USD as reflected by the current score remaining below Positioning average. If the the sub-1. -1 MONETARY POLICY In December the Fed introduced an additional QE-programme including USD 45bn per month of treasury bond purchases in addition to the USD 40bn QE3-programme related to mortgage bonds announced in September.2 0. Hence. Technicals ECONOMIC FUNDAMENTALS Although growth in Q4 Liquidity probably was weak and signals on the economy from the Beige book only indicates moderate growth there Event risk are several positive signs from the US economy Global cycle indicating growth should improve going forward. As we believe the labour market recovery will be very gradual with unemployment likely to remain above 7% at least well into 2014 bond purchases are likely to be more protracted than indicated by the December Minutes.2 0.Currency Strategy USD Weighted score: -0.20 0 25 0 a technical default. Both programmes are open- ended and will probably continue as long as US unemployment remains at least above 7% given inflation expectations are reasonable. The -0. positions appear even EUR/USD makes the current substantial net more polarized today than back in summer 2011 and long speculative position a burden.6 -0.0 0. While Republicans probably will 1.5% of GDP this year.8 deal in Congress just before year-end also averted the E U R speculative positio ns full impact of the fiscal cliff. nor the debt ceiling 1. speculative longs will have to be reduced.

It seems quite clear that 130 the deviation between the indicated fair value and 120 actual dollar index coincides with the time when the 110 euro emerged as an alternative global reserve 100 currency.30 0 75 depreciate. We have already observed this type of brief USD strength on the back of positive data surprises and it might be become more prolonged.35 0 E U R /U S D 10 0 accounts is net short the USD. Recently there has been an 0 1. 140 SEBEER.25 0 short position is far from being excessively (and thus 25 1. In addition we have added a -1 on USD-related event risk to capture the risk for a failure in the debt ceiling negotiations which we believe would be USD-negative as it would hurt capital inflows from overseas. though this trend is 04 05 06 07 not strong enough to render a negative score.  0 LIQUIDITY.29-area be revisited. On the other hand we expect it to partly be driven by stronger growth in the US after politicians have solved the debt ceiling issue currently weighing on sentiment. USD Index 150 VALUATION Our internal long-term fair value model. in a two year perspective.01-78. Unless breaking this mentioned reference Technical view: USD INDEX level.and extension below 78.10 is in all honesty needed for a convincing bearish case – but then “only” for 76 before higher. but while holding from significantly breaking support in the 79. speculative to live up to (bullish) expectations and the market longs will have to be reduced.  0 The lack of significant upside progress in TECHNICALS The expected short-term recovery to EUR/USD makes the current substantial net and beyond the Nov’12 high of 81.60 area there is also a bullish alternative possible . 2000 2002 2004 2006 2008 2010 2012 term valuation (deviation from the long-term average USD Long-term Fair value in a real trade weighted index) indicate the dollar is closer to a reasonable valuation. We expect risk appetite to continue to improve over the next three to six months which traditionally would weigh on the USD against most other currencies. triggering structural rebalancing flows out of 90 the USD and into the euro. However.20 0 unsustainably) large. indicates the USD trade weighted index has been undervalued since 2003.Currency Strategy US dollar SEBEER Long-term Fair value. EVENT RISK AND GLOBAL CYCLE With its superior liquidity the USD traditionally is negatively correlated to risk appetite although the correlation is weaker than what we normally find. Should the sub-1.46 has so far failed long speculative position a burden. seems to like it better below the yearly average than above it. 11 . there is an inherent downside risk. the net 50 1.  +1 E U R speculative positio ns U S D /C A D 12 5 POSITIONING The net positioning among speculative Contracts (thousands) 1. However uncertainty related to the euro has supported the USD until 80 recently and although our internal model indicates a 70 substantial undervaluation other measures for long. indicating a belief it will 1. In such scenario stronger US growth may also spill over into a labour market improvement which eventually and temporarily could change expectations on Fed policy in a more hawkish direction.15 0 S peculative positions -2 5 increase of the net short positions.

there is no need for the introduction of additional non-standard measures.0 0. After months of deep Fundamentals pessimism investors have turned more positive on the Carry currency. Event risk markets could soon turn their focus back onto politics. The IMF forecasts the surplus in the euro zone current account to reach 1. In addition.  0 FLOWS.4 -0. the ECB didn’t follow other major central banks in printing more money which would have put downward pressure on the currency. the euro zone continues to face no external imbalance which could put downward pressure onto the currency. the sub-1.8 -0. -0. A The lack of significant upside progress in EUR/USD makes the current substantial net change in the Italian government could also result in long speculative position a burden. The improving trend in the current account is likely to continue in coming months and will be supportive for the euro. We expect GDP to contract by 0. On the political side.8 ECONOMIC FUNDAMENTALS Recent economic data and leading indicators point to a very weak E U R speculative positio ns U S D /C A D 12 5 performance of the economy in the fourth quarter of Contracts (thousands) 1. Thus.Currency Strategy The euro EUR Weighted score: 0 The euro is back in fashion.9% of GDP.3% of GDP in 2013. In the twelve months until Oct 2012 the current account surplus accounted to 0.4 0. The Oct BoP data shows that foreign investors have increased their exposure to euro area financial assets considerably .25 0 50 thereafter. It didn’t follow other central banks in easing monetary Valuation policy again. Should some winding back of recently implemented reforms.  +1 12 .35 0 E U R /U S D 10 0 2012. The political event risk is negative for the euro. On the other hand. Weakness is likely to persist throughout the first 1. Flows Furthermore the ECB seems to be sidelined for now.6 0. Thus.29-area be revisited. We think the ECB will keep its monetary strategy unchanged in coming months. Both the Italian election and the bailout package for Global cycle Cyprus have the potential to weigh on the currency. speculative longs will have to be reduced. Thus.2% in 25 1.an indication of increased confidence that the euro area will solve its debt problem.15 0 -2 5 remain a big challenge.20 0 2013.2 0.30 0 75 half of 2013 followed by a moderate recovery 1. upcoming 04 05 06 07 elections in Italy (Feb) and Germany (Sep) could lead to a delay in urgently needed structural reforms.2 0. All forecasts point to a very Technicals bumpy road in the economy in the first half of 2013 Liquidity before a cautious recovery should set in.  0 MONETARY POLICY In January the Governing Council unanimously decided to keep record low policy rates on hold and gave no hints about additional expansionary measures. Signs of relief in the debt crisis led to a return Monetary policy of financial investors onto the euro capital market. Positive portfolio flows are likely to continue. With the announcement of its OMT programme the ECB has increased confidence in financial markets which leads to more favourable monetary conditions. In this environment budget consolidation will S peculative positions 0 1. we see no signs of Positioning relief in the real economy.6 -0.

reducing the misalignment with our 110 valuation.  0 E U R speculative positio ns U S D /C A D 12 5 Contracts (thousands) 1.29-area be revisited. Above those would increase a bullish score for the euro while a counterbreak back under the yearly average.25 0 25 positive positioning as market has been net short the 1.51 would significantly raise the downside risk and bring a large negative score into the equation. the risk for a break-up has declined.  0 LIQUIDITY.50 area.15 0 S peculative positions -2 5 couple of weeks have been quite mixed with a small tilt 04 05 06 07 to the downside. speculative TECHNICALS The EUR index has come out strongly longs will have to be reduced. But there are hurdles also creating resistance not far above. From a very negative -4 in May we today attach a -2 grade related to the risk for a break-up in the score card. liquidity can hardly be described as very positive now.90 would take back what just has been gained.Currency Strategy SEBEER Long-term Fair value. though the currency must still be considered 100 as slightly undervalued according to our models. Liquidity does work in a positive way for the euro but since the global crisis is about the future of the euro- project. coming with Fibo retracement. EUR Long-term Fair value weighted depreciation of around 20-30% in order to restore competitiveness. 90 Worth pointing out is that obviously the internal 80 competitiveness is very different within the euro zone. Positioning changes the last 1. the euro is one of the currencies that is less prone to follow the global business cycle to any significant degree. now at 97.30 0 75 neutral among speculative accounts. With the massive amount of short The lack of significant upside progress in contracts now neutralized changes in positioning EUR/USD makes the current substantial net long speculative position a burden. Should should not be a major driver of the EUR. EUR Index The euro 150 VALUATION The debt crisis pushed the euro towards 140 undervalued levels last year as investors scaled back 130 on their exposures in euro assets.& extension refs as well as the high end of the early 2012 range in the 99. However after 120 Draghi “saved the euro” last year things have improved. 70 hence the current problems. from a Q3 12 downside overstretch and has even been allowed to extend well above the fast flattening yearly Technical view: ECB EUR index average and short-term price action has become increasingly bullish in little time.  -1 the sub-1. In a two year 50 perspective this should actually be considered a EUR 1.40 or higher whilst the GIIPS-countries would need another trade. GLOBAL CYCLE Although the risk for a break-up of the euro project remains. 13 . Back under 96. EVENT RISKS.80-101.35 0 E U R /U S D POSITIONING Net positioning in the euro is almost 10 0 1.20 0 0 euro since mid-2011. The global cycle is judged to be neutral to the currency. German exports could 2000 2002 2004 2006 2008 2010 2012 most likely tolerate a EUR/USD at 1. new measures as the fiscal compact and just recently ECB’s Outright monetary transactions program (OMT) suggest.

We even added a Carry +0. speculative the JPY and bring back inflation. Following some near-term Technicals consolidation/profit-taking (on disappointment from Liquidity the latest BOJ-meeting) we expect additional Event risk depreciation. boost nominal growth but also weaken the fundamentals additionally as debt/GDP is approaching 250%. Global cycle ECONOMIC FUNDAMENTALS Growth contracted -0.29-area be revisited.8 U S D /C A D 0.8 -0. However over time open-ended purchases contributes to a very negative score for the currency.2 0.20 0 0 S peculative positions months have shown a trade deficit) and there seems to 1.6 0. although open-ended asset purchases were introduced (JPY 13trn/month).35 0 E U R /U S D consecutive (albeit) small decline in Q4. However.  -1 14 .6 E U R-0. Although unlikely to produce an overall deficit soon (as net investment income will continue to provide Japan with a very sizable net inflows) the risk of moving towards external capital dependence with rates below 1% and debt/GDP towards 250% will over time also provide a substantial headwind for JPY.15 0 -2 5 04 05 06 07 be a more structural shift in the trade balance unlikely to only be dependent on increasing commodity The lack of significant upside progress in imports.5 grade as we thought the Scorecard painted a too negative picture for the JPY. These policies will longs will have to be reduced.30 0 75 with China are clearly putting its toll on exports and 50 1.Currency Strategy Japanese yen JPY Weighted score: -0. the message failed to meet elevated expectations as they commence only after the current program is completed (Jan 2014).  0 MONETARY POLICY The new government has made a return to inflation and weaker JPY a very clear policy objective.  -2 FLOWS. The failure to meet elevated expectations may strengthen the JPY short-term.6 JPY was projected to be the weakest currency in the Fundamentals September 2012 Currency Strategy. BOJ is hence looking to buy time to evaluate current monetary policy expansion program.4 -0. The new liberal government under PM Abe EUR/USD makes the current substantial net long speculative position a burden. At the BOJ-meeting on Jan 22nd. the much anticipated 2% inflation target was adopted.9%q/q in Q3 2012 and is expected to show a 12 5 Contracts (thousands) 1.0positio speculative 0. The country has good arguments for running Positioning this policy on very poor economic outlook and a still overvalued currency. The underlying developments in the Current account are clearly negative for the JPY and give “evidence” that the currency is (still) overvalued.2 ns0.25 0 the trade balance developments have clearly added to 25 the on-going JPY weakening trade (9 of the last 12 1. Trade frictions 10 0 1. The currency has since Monetary policy then depreciated far beyond our bearish forecasts as Flows Japan is gearing-up for massive monetary and fiscal Valuation stimulus. Should has announced an “unprecedented” drive to weaken the sub-1.4 0.

But there is as said also a Technical view: BOE JPY index severe short-term overstretch to consider after such a sharp drop.20 0 positioning score. JPY Index 150 VALUATION The rapid depreciation during Q4 2012 140 has moved JPY valuation into a more neutral territory: our own SEBEER model still paints JPY among the most 130 expensive G10 currencies (together with CAD and 120 CHF).  -3 LIQUIDITY. EVENT RISK AND GLOBAL CYCLE Liquidity is judged to be of no importance this time in the Scorecard (0% weight). As regards event risks there are large and significant risks providing both up- and downside potential for JPY. so a recoil as high as 168. speculative longs will have to be reduced. Should keeps hitting the market regardless a prevailing the sub-1.35 0 E U R /U S D 10 0 net short has decreased.90 can’t be ruled out before heading lower.25 0 positions are unwound) rendering a positive 25 1. 80 0 70 2000 2002 2004 2006 2008 2010 2012 POSITIONING The net JPY position among speculative JPY Long-term Fair value accounts is massively short the currency. shows that heavy supply long speculative position a burden.90 and at 160. The move lower over the past few months have been induced by promises and expectations on potentially very large monetary and fiscal expansionary measured aimed at boosting inflation / weaken the JPY. since then the net short has been E U R speculative positio ns U S D /C A D somewhat normalized.  +4 0 1. For five consecutive weeks the 12 5 Contracts (thousands) 1. 15 . In Dec 2012 it was the shortest since the end of the carry trade era in 2007. downside stretch. Pronounced bearish price action through refs EUR/USD makes the current substantial net both at 168.Currency Strategy Japanese yen SEBEER Long-term Fair value.29-area be revisited.15 0 S peculative positions -2 5 TECHNICALS Losses have been accelerated through 04 05 06 07 the latter half of last year and into the beginning of The lack of significant upside progress in this. Our best estimate for JPY valuation is that the currency is still overvalued. The 161. However.30 0 75 changes is thus clearly for a stronger JPY (as short 50 1. The deviation from long-term nominal trend 110 however is now actually signalling a substantial 100 undervaluation whilst the real effective exchange rate 90 trend is close to current spot level. Clearly the upside risks to the JPY are predominant should policy makers fail to deliver on that promise.8% extension indicates that something bigger likely is in the making and which is probably so far is incomplete.70. The trend in positioning 1.

2 0. but exports so far have been equally or even more affected due to the Eurozone crisis. after three quarters with negative growth.29-area be revisited. MONETARY POLICY After the BOE reached the GBP 375bn target by the end of November last year the bank has stopped buying bonds.  -2 16 . Unemployment -0. Should outlook on the UK and a downgrade is not unlikely. Only one member has repeatedly argued and voted for further expansion.0 0.6 0. This year we however expect the British economy to Event risk improve slowly although there are still several head Global cycle winds holding back the economy.6 -0. One would have expected the weak domestic growth to reduce the trade related deficits. speculative The first decision is expected already in Q1.8 -0.Currency Strategy GBP Weighted score: -0.4 -0.4 0. rather the opposite as trade generates close to record large deficits and portfolio flows contribute negatively as well. Last year the Eurozone debt crisis Flows probably generated GBP-positive flows as the GBP was Valuation considered a safer alternative. In addition E U R speculative positio ns U S D /C A D contraction from fiscal policy will continue as the 12 5 Contracts (thousands) 1. However we believe it is still too early to fully discard the idea that the BOE could expand its bond purchase programme later this year if growth fails to recover in H1. indicating the currency should be among the weakest in the FX scorecard. the sub-1. it has proved Monetary policy remarkably strong.2 0. These head winds are currently 50 1. In addition several members appear increasingly uncertain additional bond purchases would support the British recovery. Hence.20 0 0 S peculative positions likely to fall back in 2013.15 0 -2 5 04 05 06 07 improvement of the public deficit goes slower than expected pushing public debt beyond previous The lack of significant upside progress in forecasts. there is no immediate need to expand the programme further.25 0 weighing on household sentiment and spending. With growth recovering in Q3.  -1 longs will have to be reduced. Technicals ECONOMIC FUNDAMENTALS Growth was probably Liquidity weak or even negative in the final quarter of 2012. house prices have stabilized and inflation is 1. Instead the bank has attached increased hope to the FLS-scheme to improve the credit conditions and reduce costs of credit. 25 However.8 remains high and will probably rise even further as productivity growth should improve.30 0 75 consolidation. Nevertheless to us the Positioning GBP remains too strong and should weaken.35 0 E U R /U S D 10 0 public sector not yet is nearly done with its 1. Despite large reforms the 1. Rating agencies currently hold a negative EUR/USD makes the current substantial net long speculative position a burden.7 British pound sterling Fundamentals Although GBP continues to receive very low grades Carry across the board. so far there are virtually no signs that the British economy has started to rebalance towards external demand. and with job creation being surprisingly resilient last year. Therefore.  -1 FLOWS Trade deficits and portfolio outflows continue to generate GBP-negative flows. near-term it appears unlikely the BOE would change its current stance.

LIQUIDITY AND GLOBAL CYCLE Traditionally changes in the sterling exchange rate has been almost fully uncorrelated with changes in global risk sentiment but lately there is actually a small positive correlation.70 The lack of significant upside progress in EUR/USD makes the current substantial net hosts the next objective somewhere below the 82. Thus the score is -1 signifying a 50 continuation of speculators scaling down on the net 1. have moved the GBP towards its estimated long-term fair value 110 where it has remained quite stable for more than a 100 year.20 0 0 1.29-area be revisited. the combination of falling long-term fair value 120 and a rebound in the nominal GBP-index. Further ongoing progress through an “Equality point” at 82.30 – then with 77. As such it tends to be almost unaffected when financial markets focus on liquidity. speculative timeframe outlook is even more bearish.50) fully in sight.30 would pull the rug under a bearish case as it would strongly argue for a +84. This also fits with other 80 measures of valuation as the deviation from a long- 70 term average in nominal or real trade weighted indices. ultimately longs will have to be reduced.75/81. Large financial markets and tradition as a reserve currency still serve the sterling with large capital flows putting the GBP among the most liquid currencies in the world.15 0 S peculative positions -2 5 TECHNICALS: A significant lower break materialized 04 05 06 07 below 83. Should handle (81.25 0 25 long positions.10 during the week ending Jan11. GBP Index British pound sterling 150 VALUATION After a significant depreciation in 140 2007/08 pushing GBP towards clearly undervalued 130 levels.30 0 75 normalize.  0 POSITIONING By the end of 2012 the positioning in E U R speculative positio ns U S D /C A D GBP was the longest since May 2011.  -3 EVENT RISK. since 12 5 Contracts (thousands) 1. This time we have attached a -1 on event risk for the GBP reflecting the risks for downgrades of the UK’s top debt rating.40 as important hurdles to pass on the Technical view: BOE GBP index way.70 move instead.  -1 1. long speculative position a burden. currently the GBP appears reasonably 90 valued according to SEBEER. Nevertheless we do not think changes in market risk appetite will be a major driver for the GBP and the currency therefore should belong among the currencies underperforming if global sentiment continues to improve. 17 .50/76. Back over 84. However. Hence. 2000 2002 2004 2006 2008 2010 2012 Based on valuation we therefore would not expect any GBP Long-term Fair value substantial changes for the GBP.35 0 E U R /U S D then that excessive positioning has started to 10 0 1. targeting levels below the 2009 low of 73. The main rating agencies today have a negative outlook for the UK and the first downgrade could well happen already in Q1 this probably weighing on the currency.Currency Strategy SEBEER Long-term Fair value. A broader the sub-1.

15 0 -2 5 mortgage credit growth has begun to moderate which 04 05 06 07 may lead to lower household demand going forward.6 -0. Thus the score has become lower compared to the latest report. as there is less demand for safer Event risk alternatives to major currencies.8 -0. Should the US economy (74% of exports) a US recovery would the sub-1. However.20 0 25 0 before the financial crisis in 2008. Foreign portfolio bond inflows have partially been compensating this.25 0 50 falling unemployment. being one few G10-economies with ok Flows fundamentals as a economic growth.29-area be revisited.4 0.35 0 E U R /U S D 10 0 weak in the third quarter. With its close links to long speculative position a burden. currently the lowest since 1. Household demand remains 1. These seem to be the Monetary policy biggest threats against the currency long-term. The current account deficit has been Liquidity balanced by portfolio inflows but these have decreased. speculative longs will have to be reduced. 2010 keeping the policy rate at 1% to support economic growth and prevent the currency from getting too strong.  -2 18 . If so. given Global cycle Canada’s close link to the US economy the flow situation may improve as exports should pick up given -0.2 0.30 0 75 a positive contributor to Canadian growth driven by 1. The hawkish tone in the statement from the April meeting has become more subdued after growth has slowed while household credit demand lately has shown signs of easing. In its latest MPR the BOC projected inflation to increase towards the 2% target over the next 12 months.0 0. other parts of the economy (mainly exports) have The lack of significant upside progress in EUR/USD makes the current substantial net to increase or growth will slow. BOC still has a tightening bias but rate hikes should not be expected in the near term.Currency Strategy Canadian dollar CAD Weighted score: 0 Our measures continue to indicate that the Canadian Fundamentals dollar probably is overvalued while the capital flow Carry situation has deteriorated. However.  0 FLOWS Weak competitiveness continues to generate trade deficits. the Positioning high valuation may not be an obstacle to the currency Technicals near term.8 when the US economy recovers.2 0. residential S peculative positions 1.6 0. E U R speculative positio ns U S D /C A D 12 5 Contracts (thousands) ECONOMIC FUNDAMENTALS Economic activity was 1. but given the easing of troubles in the Euro-zone such financial flows have started to decline and this process will probably continue in 2013. a fairly small Valuation public deficit and a firm demand from households.4 -0. However. Recent business surveys show a slightly mixed picture with business sentiment declining in Q4 below the historical average while investment intentions indicate continued capital spending. contribute positively although weak productivity growth and an overvalued currency weigh on Canada’s competitiveness.  0 MONETARY POLICY BOC has remained on hold since Sep.

valuation remains a long-term caveat for the 100 CAD which eventually will weigh on the currency.  -2 E U R speculative positio ns U S D /C A D POSITIONING The net long CAD positioning still 12 5 Contracts (thousands) 1.Currency Strategy SEBEER Long-term Fair value. CAD Index Canadian dollar 150 VALUATION In trade weighted terms the Canadian 140 dollar appears substantially overvalued from a long- term perspective. A 116-118 high ought to be traced out but later with an increased risk for a sharp setback.  -1 The lack of significant upside progress in EUR/USD makes the current substantial net TECHNICALS The index has for Q3-Q4’12 and so far long speculative position a burden. short- 2000 2002 2004 2006 2008 2010 2012 term Canada is likely to continue to attract foreign portfolio inflows and valuation is therefore unlikely to CAD Long-term Fair value weaken the CAD near term. 2011-2013 advance still looks correctional compared to the paced 2011 drop prior to this correctional Technical view: BOE CAD index looking move higher. The most 1. speculative This renders a positive grade for the loonie. There are now specific events related to Canada but events having an impact on the US economy may also impact the Canadian situation. Hence.25 0 25 extreme positioning has partly normalized and recent 1. Our internal long-term fair value 130 model indicates the CAD currently is around 20% 120 overvalued against its trade weighted index and the 110 BIS real effective exchange rate gives a similar picture.  +2 EVENT RISK. However. Should this year held above a positively sloped yearly average. but the longs will have to be reduced. As risk appetite is likely to continue to improve over the next 3-6 months this should support the CAD. LIQUIDITY AND GLOBAL CYCLE Historically the Canadian dollar has correlated positively with general risk appetite and the performance of the US equity market.30 0 75 risk appetite improved and BOC was sounding more 50 hawkish than most G10 central banks.35 0 E U R /U S D remaining saw a rapid increase in H2 2012 as general 10 0 1. the sub-1.15 0 S peculative positions -2 5 long position which is a factor pointing towards more 04 05 06 07 CAD weakness going forward. appreciating with improving risk appetite. However. The 90 strong currency has also contributed to Canada’s 80 persistent current account deficits. we have not included any currency specific negative event risk to the CAD.20 0 0 positioning changes have been a reduction of the net 1.29-area be revisited. 19 .

6 -0.20 0 0 expansion has stalled since mid-2012. going -0. Should the sub-1.4 0. the RBA has raised some concerns regarding this issue with lower commodity prices which will weigh on terms-of-trade going forward. All together these inflows have more than fully compensated for a persistent current account deficit largely related to substantial net investment outflows.30 0 75 50 labour market gives little support to households as 1.25 0 25 unemployment slowly grinds higher and employment 1.  0 longs will have to be reduced. On the other hand the AUD can offer a positive carry which could attract additional capital inflows. we would not fully rule out the possibility for additional cuts.10 against the USD.29-area be revisited. Hence. are likely to be less important going forward. especially if the AUD would appreciate towards previous highs around 1.  0 20 .2 0. With risks related to the global economy currently easing flight-to-quality related flows. however. However. On the other 1.4 -0.2 Australian dollar Fundamentals Carry With its rich valuation we are more cautious on the outlook for the AUD although the currency receives a Monetary policy score above the average for the currencies included in Flows the scorecard.0% as growth in labour costs has slowed substantially and the labour market has softened. speculative global growth picks up again. MONETARY POLICY In December the central bank decided to reduce the cash rate by 0.8 forward the contribution from commodity related investments would gradually have to be replaced by E U R speculative positio ns stronger contributions from other sectors of the U S D /C A D 12 5 Contracts (thousands) 1.15 0 S peculative positions -2 5 hand lower rates have helped the housing market to 04 05 06 07 recover and house prices have started to rise again. currently the 1. However.8 -0. Nonetheless we expect capital flows to be less of a positive factor for the AUD going forward. the RBA has raised concern Valuation on the impact of a strong currency and a significant Positioning appreciation from current levels would probably Technicals render a response from the central bank capping the Liquidity upside potential.25% to 3. Event risk ECONOMIC FUNDAMENTALS With global demand for Global cycle commodities growing more slowly mining related investments probably have peaked. From previously being relaxed with the strong currency.0 0. Current market pricing indicates expectations for approximately 1-2 additional rate cuts during the next 6 months.6 0. -1 FLOWS With its strong fundamentals Australia has been a popular destination for safe haven flows. Although the probability for further monetary policy easing has declined lately after signs that the Chinese recovery is gaining traction and the Eurozone crisis has eased.35 0 E U R /U S D economy such as household consumption and exports 10 0 outside the mining sector.Currency Strategy AUD Weighted score: 0.2 0. The lack of significant upside progress in With its large exposure towards the commodity sector EUR/USD makes the current substantial net Australia would be one of the strongest beneficiaries if long speculative position a burden.

70.29-area be revisited.Currency Strategy SEBEER Long-term Fair value. As long as the strong currency was 80 matched by increased commodity prices the high 2000 2002 2004 2006 2008 2010 2012 valuation was less of a problem. the relationship has.  -3 POSITIONING The net long positioning in the AUD has E U R speculative positio ns U S D /C A D gone from being very small in the beginning of the 12 5 Contracts (thousands) 1. Considering the last two months however. 21 . Currently there is no major event risk related to the AUD specifically.25 0 25 the neutral positioning score.00-110. +2 EVENT RISK. This shows demand and buyers’ initiative The lack of significant upside progress in EUR/USD makes the current substantial net despite elevated levels. 110 In addition high commodity prices have attracted foreign investment inflows. A normalization 10 0 1. been re-established and the AUD appears to track changes in global risk appetite fairly closely again. LIQUIDITY AND GLOBAL CYCLE With its Technical view: BOE AUD INDEX massive exposure towards the commodity sector the AUD has traditionally been the prime example of a pro- cyclical currency tracking risk appetite closely.  0 1.35 0 E U R /U S D summer 2012 to become excessively. However.20 0 0 1. speculative longs will have to be reduced. In index terms it looks like an long speculative position a burden. lower commodity prices have increased focus on valuation AUD Long-term Fair value and which limits the upside potential. AUD Index 150 Australian dollar 140 VALUATION Being one of few currencies with strong fundamentals also offering some carry “the aussie” has 130 attracted large capital inflows in the ongoing process 120 of rebalancing out of fundamentally weak currencies.15 0 S peculative positions -2 5 TECHNICALS The aussie index was allowed to press 04 05 06 07 into a fresh all-time high during the week ending Jan11 this year. lately this relationship has been less clear and as the correlation broke down. Should extension into the 114-115 is possible. around prior tops at 111. Altogether this has pushed 100 the AUD to a stretched valuation compared to most 90 other currencies. However.30 0 75 has already started and positioning has the last couple 50 of weeks been fairly unchanged which is reflected in 1. Support likely the sub-1.

35 0 E U R /U S D 10 0 2.6 0. speculative longs will have to be reduced. 0 FLOWS The latest (Jan 10) data from statistics New Zealand showed a marked decline of exported goods (- 2. construction sector pick up and falling excess capacity during 2013 as reasons to expect inflation returning to the 2% mid area by the end of 2013.15 0 -2 5 levels. reduced EZ stress & Chinese Carry recovery). rising unemployment and a strong currency.4 -0. fiscal consolidation. Foreign holdings of NZ government securities have continued its slow but steady increase (Nov 2012 estimate 61. low inflation falling towards or below the low end of the 1 – 3% comfort zone (RBNZ estimate for 2013 at 1. The new RBNZ governor Mr Wheeler however sounded a tad more Technicals hawkish at the banks latest OCR meeting in December Liquidity making a cut less likely.2 0.2 a less challenging international environment (US Fundamentals passing the 1st cliff.0positio speculative 0. The surge in 2012 The lack of significant upside progress in EUR/USD makes the current substantial net residential housing activity (sales up 24% y/y and long speculative position a burden. The Bank however remains firm with its view that it is appropriate for the OCR to remain at 2.4% to 1. rising unemployment and 04 05 06 07 an elevated currency. should the development turn slightly more positive.29-area be revisited. Hence we expect Global cycle to see the NZD remaining at elevated levels. it could be argued that there is room for the bank to reassess its current stance. high household debt S peculative positions 1.9% 2013 and so is the terms of trade.4% yoy).4 0. The economy remains fragile 1. -0.Currency Strategy New Zealand dollar The NZ economy is muddling through underpinned by NZD Weighted score: 0.50% since the spring of 2011.30 0 75 along (RBNZ forecast).25 0 50 due to still persisting international challenges.8 ECONOMIC FUNDAMENTALS Estimated GDP growth U S D /C A D 12 5 Contracts (thousands) for 2013 was adjusted lower during Q4 (from 2.2 ns0. Flows The strong NZD on the other hand is a real headwind Valuation to the NZ economy making exports deteriorating Positioning pressuring domestic production. Higher dairy prices have mainly been offset by the stronger NZD. a 25bps hike late 2013/early 2014 is a viable option.8 -0.6 E U R -0. In fact in the latest MPS the bank mentions future stronger domestic demand. improve the construction sector (on top of the already ongoing Canterbury reconstruction).  +1 MONETARY POLICY RBNZ has remained on hold at 2. The trend for exports has been declining in recent months whereas imports remain basically flat. Should prices up 7% y/y) is however expected to further the sub-1. expected at -4. expectations of an improving construction sector (not only Canterbury Monetary policy repairs) but also increased residential housing activity.2%).1%).2%) but the economy is still expected to sputter 1. With persisting global risks.  -2 22 . rising dairy prices. 1. Continued foreign demand for Event risk NZ bonds remains a positive factor.5 percent. The CA deficit is deteriorating. We consider the latest policy assessment a tad more hawkish than the preceding one. hence making a cut less likely and.20 0 25 0 reluctant domestic consumers.

Rising prices and a growing long position makes the advance looking well underpinned. EVENT RISK AND GLOBAL CYCLE Turnover in the foreign exchange markets have 100 decreased during 2012 (measured as the turnover on electronic trading platforms). Despite 12 5 Contracts (thousands) 1. with the NZD BOE index adding another five 2000 2002 2004 2006 2008 2010 2012 index units since the September Currency Strategy.29-area be revisited.  +1 110 LIQUIDITY. The CoT (commodity of traders) report shows that the market again is adding on to a long position albeit not yet at the record long position registered in December. thus the 25 1. Thereafter a more profound Technical view: BOE NZD index reaction expected to occur. points of attraction.Currency Strategy SEBEER Long-term Fair value. NZD Index New Zealand dollar 120 VALUATION A still persisting diversification trend in 115 the FX markets has continued to favour the NZD as 110 being one of the fundamentally stronger currencies 105 100 (growth and no quantitative measures).70 and the 2007 peak at 121 being two obvious longs will have to be reduced. NZD Long-term Fair value  -3 POSITIONING The NZD positioning has gone from a net short position at the beginning of the summer E U R speculative positio ns U S D /C A D 2012 to a relatively large net long positioning. The large portion of the government (in excess of 60%) debt held by foreign accounts of course impose a future risk for the NZD should monetary policy elsewhere starting to be less accommodative (as a result of a better global economic outlook). decreasing liquidity in 90 the marketplace hence increasing the magnitude of event driven moves. 23 .30 0 75 rebuilt a long position in close proximity to the 50 1. speculative at 118.25 0 2011/2012 maximum long NZD positions. with a high 95 rating (AA+). Should the sub-1. Accordingly the inflow to NZ government 90 securities continues supporting the financing of a 85 widening CA deficit. On the other hand the plentiful liquidity offered by major CB’s continues to seek “safe 80 havens” and particular those offering positive returns. The 75 result has become an even further overvalued 70 currency. bringing the NZD back to Price its yearly average. The price action argues for more strength EUR/USD makes the current substantial net during the months to come with an estimated top line long speculative position a burden.15 0 S peculative positions -2 5 TECHNICALS The market has since the Sept CS both 04 05 06 07 broken up from the bullish triangle and printed a fresh The lack of significant upside progress in cycle high.20 0 positive score. 2007 2008 2009 2010 2011 2012 2013 In NZ this can be seen by a still persisting appetite for 2000 2010 NZ government bonds and bills. The OCR at 2.5% also helps 80 attracting inflows in a yield starving environment. +2 0 1.35 0 E U R /U S D 10 0 the correction in December the market has quickly 1.

Solid growth in private and public U S D /C A D 12 5 Contracts (thousands) 1. risks of deflation persist in an environment of moderate growth of 1. Fundamentals remain long speculative position a burden. after contracting by 0. The relief rally in the euro has erased safe-haven flows and put Monetary policy downward pressure on the Swiss franc.2bn.8 -0. Lifting the minimum exchange rate is not a policy option.20 0 0 slowing GDP growth during Q4 2012/Q1 2013. In the last months of 10 0 2012 the KOF economic leading indicator deteriorated.35 0 E U R /U S D consumption was the key driver. the Swiss government estimates GDP 04 05 06 07 to grow by 1. Positioning Therefore the SNB will keep its monetary policy strategy unchanged.4bn in the first three quarters of 2012.30 0 75 50 falling to 1. 1.6 -0. Switzerland posted a surplus of CHF 58.  0 FLOWS At the end of 2012 SNB’s foreign currency reserves totalled CHF 427.8 economy grew by 0. cutting the EUR/USD makes the current substantial net debt level to 45. The minimum EUR/CHF 1. slightly down from CHF 429.6 0.20 exchange rate unchanged throughout 2013.5% this year. The conditional outlook for inflation suggests that the general price level will continue to decline throughout H1 2013 and to rise only gradually thereafter. Regarding the current account.28 in December which is well below the 1. But downside Flows risks to the economy dominate as it is still far too early Valuation to give an all clear signal on the European debt crisis.20 Technicals exchange rate will remain in place throughout 2013. The three month LIBOR target range will stay at 0. Reversing save haven flows due to the euro’s rally in recent weeks eased pressure on the SNB to intervene in the currency markets. The public budget is expected to The lack of significant upside progress in show a surplus of 0.5bn at the end of Sep 2012.1% E U R speculative positio ns q/q in Q2.4 0.25 0 25 yearly high of 1.0% to 1.4 -0.  0 longs will have to be reduced. MONETARY POLICY In its December meeting the SNB decided to keep its monetary policy strategy unchanged. The SNB regards the CHF as still highly valued and sees an appreciation of the currency as a threat to price stability and economic performance. speculative neutral/slightly favourable for the Swiss franc. For 1. Global cycle ECONOMIC FUNDAMENTALS In Q3 2012 the Swiss -0.00% to 0. The bank will continue to keep the minimum EUR/CHF 1.29-area be revisited.0 0.Currency Strategy CHF Weighted score: -0.68 reached in September.  0 24 . a supportive factor fort he currency.25% in coming quarters. the Swiss franc has started to weaken related Carry to declining European market risk premium. Liquidity Both a balanced budget and the huge surplus in the Event risk current account are supportive to the Swiss franc.2 0.6% q/q.3%.8 Swiss franc Fundamentals Finally. This point to 1.5% of GDP.2 0.5% of GDP in 2013. Hence. a significant improvement compared with the surplus of CHF 34bn in the same period 2011. Should the sub-1.15 0 S peculative positions -2 5 2013 as a whole.

However. speculative lost its small positive grade for a more neutral stance longs will have to be reduced.29-area be revisited.  -1 1.30 0 75 The change in positioning in recent weeks has lately 50 been a slight reduction of the net long position which 1.20 0 0 1. SEBEER has a fair value 130 estimate of USD/CHF and EUR/CHF at 1. 10 0 1. The caveat to this “consensus” view of franc 100 overvaluation is that Switzerland continues to 90 generate massive current account surpluses.20 and it is highly unlikely that the floor will be raised anytime soon. while inside 141-144. year after 80 year.  0 Technical view: BOE CHF index LIQUIDITY. However as the Eurozone crisis has eased the 2000 2002 2004 2006 2008 2010 2012 appreciation pressure on the CHF has also moderated CHF Long-term Fair value and recently weakening the currency.44 120 respectively. The deviations from long-term averages 110 are also very substantial both in nominal and in real terms. in a 12 5 Contracts (thousands) 1. Should SNB EUR/CHF 1. EVENT RISKS AND GLOBAL CYCLE The Swiss franc remains a prime destination for capital as long as there is no definite end to the debt crisis in Europe. 25 . Fundamental data are as sound as ever.12 and 1.20 floor.25 0 25 is reflected in the score. though the move higher came to an abrupt end after new year The lack of significant upside progress in EUR/USD makes the current substantial net with a sharp drop following the impulsive rise off the long speculative position a burden. The SNB will maintain its monetary strategy and it will continue to defend the EUR/CHF minimum exchange rate of 1. The overall CHF outlook has the sub-1.Currency Strategy SEBEER Long-term Fair value.  -3 POSITIONING The CHF speculative position is net long E U R speculative positio ns U S D /C A D which is the first time since mid 2011. CHF Index Swiss franc 150 VALUATION The Swiss franc is one of the most 140 overvalued G10 currency according to our three different valuation methods.15 0 S peculative positions -2 5 TECHNICALS The swissy was on a positive footing 04 05 06 07 against its basket since a low early Q3 last year.35 0 E U R /U S D two year perspective the level is far from excessive. underscoring the role of the CHF as a safe haven.

monetary policy will not be a negative for SEK during 2013. Net investment income also resulted in a SEK 25bn surplus.0 0. Q4 2012 will mark the trough in the 1.5% mid-13. Net portfolio flows are notoriously volatile but generated a positive SEK 97bn inflow in Q3 2012.15 0 -2 5 rising joblessness and 2013 will be a crucial year for 04 05 06 07 assessing whether the housing market will correct record high prices.3% in 2013. GDP will expand 1. We have lowered the grade for flows as the search for quality may decline further. the fixed income trade going forward is to position for higher rates 2014/15. we expect Riksbank to be a neutral factor for SEK.20 0 25 0 8. speculative longs will have to be reduced.35 0 E U R /U S D 10 0 business cycle. Nevertheless. fundamentals may be a handicap should markets trade less on “flight to quality”.2 0.30 0 75 improvement in Q1 2013 of 0. As regards portfolio flows it remains to be seen in official statistics whether foreign investors are less eager buyers of SEK-denominated assets (their ownership rate has decreased from record-high levels E one mid-2012).Currency Strategy Swedish krona SEK Weighted score: 0. We expect a moderation of 5-10% The lack of significant upside progress in EUR/USD makes the current substantial net still but the effect on the consumer spending will likely long speculative position a burden. Global cycle ECONOMIC FUNDAMENTALS The growth outlook -0.2 0. Strong the sub-1. as tightening is a story for 2014 at the earliest. The market is adequately pricing the risk for a final rate cut as inflation will be sufficiently below target when unemployment continues higher.6 0. Still total trade balance for 2012 is likely to land above SEK 200bn driven by the net surplus in the services industry.4 0.  0 MONETARY POLICY Riksbank has conducted monetary policy with a relatively transparent easing bias (cuts at every second meeting during H2 2012). SEB expects -0.  -1 26 . Should be marginal.2 SEK has been weaker than what we anticipated as the Fundamentals economy has slowed rapidly and some safe-haven Carry flows likely left Swedish asset markets.29-area be revisited.  0 FLOWS The external balance remains SEK positive as Sweden continues to show a Current account surplus of 6-8%/GDP.8 -0.8 worsened dramatically during fall and some leading E U R speculative positio ns indicators are not much above the historical lows set U S D /C A D 12 5 Contracts (thousands) four years ago. The recovery 1. the trade balance in Q3 2012 weakened as exports to EMU collapsed 10% compared to Q3 2011. Currently the Monetary policy krona is facing headwind from still weak Swedish Flows export markets and improving euro outlook. The greatest risk to this call is Liquidity ironically rapidly increasing investor “europhoria” Event risk which may bring profit taking on low-yielding Swedish assets leaving for EUR-denominated markets. However more traditionally positive drivers for SEK such as risk Valuation appetite and a gradually improving global economic Positioning outlook should strengthen the currency modestly in Technicals the coming 6 months. The consumer outlook is decent despite S peculative positions 1.5% q/q with a small 1. Although obviously not a carry currency.25 0 50 will be slow and unemployment should rise towards 1.4 -0. However. But.6 -0.2% q/q.

the high export dependence will ensure a positive correlation to risk appetite going forward. +2 LIQUIDITY. A significant price decline (very unlikely as residential investments are structurally at too low levels as percentage of GDP) could bring closure of the large foreign ownership of covered bonds. However: when we look at the 80 underlying data development for the SEBEER model. We currently fail to identify a meaningful event risk for SEK. SEK Index Swedish krona 150 VALUATION In trade-weighted terms the SEK is 140 currently not far from our estimated long-term fair 130 value. now at 120. If SEK support around 118.30-8. SEK is E U R speculative positio ns U S D /C A D 12 5 substantially undervalued as manifested by the 6- Contracts (thousands) 1.60-119.  -1 longs will have to be reduced. Liquidity is not judged to be of importance in H1 2013.50 which is SEK Long-term Fair value also still the long-term level we expect will trade. consensus amongst foreign banks/investors 110 seems to suggest SEK is currently overvalued -> could 100 be a risk for SEK in addition to profit-taking on “safe.Currency Strategy SEBEER Long-term Fair value.25 0 25 the SEK indicates that speculators are very long SEK. Should the sub-1. Looking only at the external surplus. the biggest domestic risk is correcting house prices – SEB forecast a decline of 5-10% but that should have very limited macroeconomic effects. The important late Sep’12 low of 117. We have raised the importance of valuation in 120 the FX scorecard and although our model is neutral for SEK.25 traded again. Despite a “repricing” of SEK as a less pro-cyclical currency. comes back in focus again.60. The yearend gap is now closed amid a correctively looking advance higher.00 gives way the falling yearly average. TECHNICALS The krona was late last year saved from breaking above the still (index) negatively sloped Technical view: TCW index yearly average and during the turn of the year the krona strengthened notably.29-area be revisited. normalizing the 04 05 06 07 quite excessive positioning. 90 haven” trades.30 must be broken to improve the chance to see the summer low of 115.30 0 75 50 POSITIONING The proxy for speculative positioning in 1. EVENT RISK AND GLOBAL CYCLE. speculative slightly negative score. 27 .35 0 E U R /U S D 10 0 8%/GDP Current account surplus. Probably this The lack of significant upside progress in normalization will continue for some time adding EUR/USD makes the current substantial net downside pressure on the SEK which is reflected in a long speculative position a burden.20 0 0 The most recent changes in the proxy position indicate 1.15 0 S peculative positions -2 5 a reduction of the long net position. Global cycle is the currency correlation to global risk appetite and we expect a general sentiment improvement which is SEK positive over the medium-term. 70 the very low inflation outcome in Sweden 2012/2013 2000 2002 2004 2006 2008 2010 2012 will again move SEK valuation higher: SEBEER for EUR/SEK is likely to land again at 8.  0 1. 1.

00 1. the Contracts (thousands) 1. Global cycle -0.30 0 75 weakness in recent domestic data.50 high private debt.50 1.50 March MPR. Norges Bank’s FX purchases will be manageable with an expected average of NOK 500m/day in 2013.50 3. Rate spreads rather than NOK should therefore become a more important 12/12 06/13 12/13 05/14 11/14 05/15 11/15 trigger for rate hikes.  +1 28 . Carry Although our expected EUR/NOK test of 7.50 2. Momentum in 50 1. reflecting Norges Bank’s focus on global rates and NOK.  0 FLOWS Foreign investors are expected to increase long-term exposure to Norwegian financial assets.2 0. 0 1.20. With rising risk appetite and Norges Bank Oct12 rate path Implied market pricing cautiously higher rates abroad we expect the bank to hike rates during this autumn at the latest.6 -0.6 0. strong economic outlook is unlikely to boost the currency in a meaningful way in the near term.00 2.4 0.00 didn’t Monetary policy materialize the import-weighted NOK has gained some 2% printing new all-time-lows in the I44 index and Flows outperformed all G10 currencies.2 0. speculative triggering expectations of rate hikes the relatively longs will have to be reduced. However. The NOK has however taken little notice of downside data The lack of significant upside progress in surprises and we expect growth momentum to pick-up EUR/USD makes the current substantial net long speculative position a burden.29-area be revisited. However.20 0 reflecting the slide in business indicators.4 -0. NOK is overshooting the Q1 forecast by 2.8 -0.00 factors beyond the bank’s control.00 3. The NOK will remain strong but driven by 1. Solid fundamentals Valuation will continue to attract investors to increase exposure Positioning to Norwegian assets.25 0 manufacturing outside the oil sector has slowed 25 1.4 In the previous Currency Strategy the NOK was the Fundamentals outstanding best ranked currency in our scorecard. Should again during Q1. Private con.00 only enhance the bank’s tough dilemma and little suggests the bank will change focus in the upcoming 2.35 0 E U R /U S D 10 0 growth outlook has been revised a tad lower following 1.8 ECONOMIC FUNDAMENTALS Fundamentals remain strong with an expected budget surplus of 12% and E U R speculative positio ns U S D /C A D 12 5 trend-growth this year (close to 3%). Near term developments will 3. as diversification flows Technicals will be less of a driver for currencies we expect only Liquidity modest import-weighted NOK gains until market Event risk revises its cautious rate expectations which will trigger EUR/NOK to again flirt with all-time-lows around 7. We see a 15-20% upside potential on Oslo Stock Exchange for 2013 with the foreign ownership rate rising to ~38% after having hovering around 36% over the past year. domestic demand is temporarily weak and inflation is still not showing any clear sign of trending 1.50 higher.  0 MONETARY POLICY Expectations for rate hikes are Market expectations on Norges Bank modest despite a closed output gap and troublesome 3. as long as data doesn’t the sub-1.00 ~1%.0 0.15 0 S peculative positions -2 5 sumption also downshifted late last year contradicting 04 05 06 07 strong income growth and labour markets. However.Currency Strategy Norwegian krone NOK Weighted score: 0. Market discounts nothing until mid-2014 but we expect no re- pricing of expectations until summer. Demand for NOK-denominated bonds has picked up helping to put a floor on the NOK.

25 0 25 1. NOK Index Norwegian krone 150 140 VALUATION Various corporations argue that the 130 Norwegian currency is overvalued and trading at very rich levels. The NOK is thus in a good position to benefit from gradual rise in risk appetite while at the same time being favour from strong fundamentals in times of weaker sentiment driven by intensified political risks in the euro zone.  -1 1. which is reflected in the slightly negative 50 score. Most uncertainty is currently related to Norges Bank and the rate outlook. eric 29 .29-area be revisited. The most recent changes have been towards E U R speculative positio ns U S D /C A D normalization. the move The lack of significant upside progress in anyway looks like an extended wedge formation. for a more lasting index low in place.30 0 75 currency. The EUR/USD makes the current substantial net wedge is ultimately a trend ending structure. EVENT RISK AND GLOBAL CYCLE The krone has again become positively correlated to risk appetite (graph to the right). Over 86. 70  -1 2000 2002 2004 2006 2008 2010 2012 NOK Long-term Fair value POSITIONING The speculative proxy for NOK positioning indicates the market is fairly long the NOK. the currency is attractive 80 compared to most other fundamentally strong commodity currencies such as NZD.35 0 E U R /U S D positioning could add some downside pressure on the 10 0 1. Considering our long-term fair-value 100 model the NOK currently appears just below its long 90 term fair value.15 would further dent the current positive grade. AUD and CAD. Hence.Currency Strategy SEBEER Long-term Fair value. We see no clear domestic event risks in the coming 6 months.20 0 0 TECHNICALS The krone remains on its grinding 1. There was a stretch created by the sheer distance to the yearly Technical view: NOK Index (I44) average but the market is on the way to neutralize this and in the meantime this reduces a technical score a notch.75\87. FX interventions to weaken the NOK are highly unlikely and neither do we believe in rate cuts as it would push real rates to negative when the economy is operating at full capacity. but more long speculative position a burden. Such action wouldn’t be credible and only very temporarily hurt the krone. speculative longs will have to be reduced. +2 LIQUIDITY. Should than NOK bearish price action of late is needed to call the sub-1. Measured as the real effective exchange 120 rate the NOK is indeed stretched from a valuation 110 perspective. Liquidity remains a challenge but a less stretched positioning in the NOK makes it less of a headwind at the moment.15 0 S peculative positions -2 5 strengthening path and even though any attempt to 04 05 06 07 conduct a short-term wave count is difficult. A continued reduction in the long 12 5 Contracts (thousands) 1.

8 bust has left consumers stretched and revealed pockets of weakness among banks. Should by +/. If flows escalate it could go to zero again (closing the negative spread to ECB). from around 7. The foreign purchases of Danish bonds also picked up.2 0.2 0.4 0.  0 The lack of significant upside progress in MONETARY POLICY EUR/DKK is allowed to fluctuate EUR/USD makes the current substantial net long speculative position a burden.2 Fundamentals The DKK has depreciated vs. speculative practice DNB has maintained a much tighter range longs will have to be reduced.25% around its central parity (7.35 0 E U R /U S D 10 0 wealth of Danish households is respectable in an 1. Public debt is low with the 50 1.30 0 75 international comparison.46038).425.8 -0. The fundamental problem in Event risk the Danish economy is the aftermath of the private Global cycle debt accumulation during the housing bubble.25 0 gross number of 48% to GDP including pre-funding 25 1.6 -0.  -2 30 . Another factor has been the Flows easing of Eurozone tensions affecting portfolio flows. We expect Liquidity growth to pick up to 0. The -0. Valuation ECONOMIC FUNDAMENTALS Growth disappointed in Positioning 2012 turning negative as public spending lagged Technicals budgets and imports outpaced exports. but there is a possibility that DNB will introduce a new operational range with a higher top given the structural downward pressure. In the sub-1. November saw significant foreign bond buying by domestic investors suggesting that recent DKK weakness was related to portfolio flows on the back of lower Eurozone uncertainty. A continued fall in Eurozone tensions would maintain the upward pressure and eventually lead to an increase in the deposit rate (which is the de-facto policy rate given large deposits and few loans at the central bank) to -10bp in the first half of the year. EUR/DKK has since risen and for the last four months the intervention has been reversed to support DKK. E U R speculative positio ns U S D /C A D 12 5 Denmark is net creditor vs. Given the main scenario of further progress E one in the Eurozone these portfolio trends are likely to continue.4 -0.465 to around 7. We expect 7.0 0.6 0.465 to remain the top of the operational range. On the other hand.15 0 S peculative positions -2 5 fundamentals look very strong compared to most 04 05 06 07 Western peers with current growth less so. the world and the net Contracts (thousands) 1.  +1 FLOWS The current account set a new record in June and remains at an elevated level. Last summer DNB intervened heavily selling DKK and reduced the interest rate spread towards the bottom of this range. but the amounts are small suggesting that an interest rate hike is not imminent. but net exports should rise again this year. EUR in the second half of 2012 to around the parity of the peg. The negative Carry deposit rate (in effect since July) has had a marked Monetary policy effect on the currency. The pace picked up in December. The trade balance has come down as imports outpaced exports. the 0 1. DNB has been less aggressive than we expected letting EUR/DKK drift over the highs from 2012.29-area be revisited. Hence.7% this year on the back of the gradual global recovery.Currency Strategy Danish krone DKK Weighted score: -0.2. but not to the same extent.20 0 (cash) to the equivalent of 12% of GDP.

If the expected improvement does not materialize or specific events cause a negative dynamic in the Eurozone to resurface.  0 The lack of significant upside progress in LIQUIDITY. the change is unlikely to make a difference with policy being as mechanical as before.15 0 S peculative positions -2 5 what the euro scores at current levels.20 0 anything the krone gets a notch weaker grade than 0 1. EVENT RISK AND GLOBAL CYCLE EUR/USD makes the current substantial net DKK is a less liquid market while the global cycle is long speculative position a burden. In our view.42 Rohde was CEO at ATP.45 to foreign investors repatriating investments putting -10 upward pressure on EUR/DKK.  0 POSITIONING With its narrow band to the euro positioning for DKK is the same as for the euro.25 0 a test of 2008 & 2005 tops at 7. and has been outspoken in the public Interventions EUR/DKK (right) Source: Danmarks Nationalbank and Bloomberg debate in the past.35 0 E U R /U S D 10 0 euro. However. There is the off chance of the new chairman setting deeper monetary policy changes in motion. Should the sub-1. 31 . this is Central bank FX interventions likely to put downward pressure on EUR/DKK as local FX purchases (DKK bn. In terms of monetary policy.29-area be revisited.. speculative likely to be neutral to DKK (same score as EUR).43 -50 Bernstein as chairman of the board at the central bank. -60 7.  -1 TECHNICALS For purposes in the Currency Strategy Technical view:EEUR/DKK U R speculative positio ns U S D /C A D context the krone gets a grading equivalent to the 12 5 Contracts (thousands) 1. -20 7. In later longs will have to be reduced.4700.44 -30 On February 1st Lars Rohde takes over from Nils -40 7. So if 25 1. years EUR/DKK has been negatively correlated to Eurozone uncertainty.30 0 75 hold an upper hand with price action pointing towards 50 1. but in the EUR/DKK cross DKK sellers currently 1. On the other hand.46 falling housing prices picked up traction it could lead 0 7. 30 20 if the negative spiral of higher unemployment and 10 7. monthly) Monthly investors reduce investments abroad and foreign 40 7.47 purchases of Danish assets pick up.4650 7. without better 04 05 06 07 indications that those tops won’t be tested. the chronic trade and current account surplus suggests that DKK is undervalued and that part of the conclusion from the real effective DKK is due to measurement problems with productivity and relative import and export prices (Danish exports have had larger price increases than imports). Mr Rohde might be more explicit than his predecessor about the inconsistency of having a chronic current account surplus as well as a currency peg.Currency Strategy Danish krone VALUATION According to nominal valuation DKK is slightly undervalued with the opposite conclusion coming from real effective DKK (the two measures used in the ranking). This could lead to the central bank leaning in a more growth-friendly direction in the public debate. the large semi-public Danish jan-99 jan-01 jan-03 jan-05 jan-07 jan-09 jan-11 pension fund.

4 -0. Credit growth will ease but remain strong.8 -0. A further widening of the fluctuation band (31.35 0 E U R /U S D high 7% in Nov. The transition to inflation targeting by 2015 Positioning implies a need to build credibility for the central bank. Meanwhile. With Brent oil expected at USD 107. Credibility in forming inflation expectations is crucial as ever.20 0 0 S peculative positions 4. we think. faded while rising CPI has E U R speculative positio ns U S D /C A D cut real wage growth from around 11% in H1 to a still 12 5 Contracts (thousands) 1.4 0.6% in December and may rise further near term due to excise duties on alcohol and tobacco and adverse base effects.25 0 2013 lifting full year GDP by 3.2 0. we expect 1.65-38. Investments. and the market. Transparency and stability will improve if the new fiscal rule is applied. Fiscal The lack of significant upside progress in policy will be less supportive while private investments EUR/USD makes the current substantial net long speculative position a burden. Technicals FX interventions may slow the pace but not prevent the trend of rouble appreciation ahead. the basket) by 1 rouble is likely in H1 2013. the central bank is closer to another hike than to Valuation a cut.4 Growth slowed sharply last year but is set to recover Fundamentals during 2013 and will be among the strongest in the Carry region. interest rates are attractive and with inflation likely to rise near Flows term.  +2 MONETARY POLICY CPI bounced from a record low 3. GDP growth fell from 4. Should should benefit from an improved global cycle. the growth outlook is good in a 10 0 1. Still.9% in Q3 and probably further during Q4. in particular. High and stable oil prices will support robust Monetary policy public finances and capital flows. similar 25 to the 3. Advances on privatisation. We expect a recovery during 50 1. In 2014.0% growth.6 0. the C/A will remain in a healthy surplus. Meanwhile. progress has been made. we expect growth to bottom currently at 2% y/y and the Government openly argues for a softer monetary policy stance.4% in real terms.30 0 75 regional comparison.  +2 32 . We expect rates on hold with upside risks near term and downside risks in H2 2013. interventions have resumed to prevent a too fast RUB appreciation but not to stop it.0 0. pension reform and anti-corruption would come as a positive surprise to both media. Carry in the RUB is excellent. This month.  -1 FLOWS.5 p/b in 2013.6% in May to 6.15 0 -2 5 04 05 06 07 inflation will reverse in H2 supporting private consum- ption.9% in -0.Currency Strategy Russian rouble RUB Weighted score: 0. The impact on disposable income from 1. speculative banks and reduced political risks.2 0. liquid the sub-1.6 -0. Base effect will support disinflation in H2 2013 but the CPI targets (5-6% in 2013 and 4-5% in 2014) are at risk. Liquidity Event risk ECONOMIC FUNDAMENTALS Public finances are Global cycle strong.5% expected for 2012.8 Q1 2012 to 2. This is challenging given plans to adopt a pure inflation target by 2015. This will continue in 2013 leading to RUB supportive capital flows.65 vs.29-area be revisited. Capital outflows fell already in Q4 2012 as political risks eased and sentiment improved. Some reform longs will have to be reduced.

35 0 E U R /U S D 10 0 diversification and will require much more far reaching 1.25 would heat short-term conditions up for extension towards more important topside refs located at 35. weighing on RUB.00-35. This would be aggravated if oil prices (and the RUB) were to rise further and especially so as the central bank is moving towards a pure inflation target and a free E U R speculative positio ns U S D /C A D 12 5 floating currency. the economy is suffering the so called Dutch Disease. the REER is too strong for the remainder of the economy that is exposed to international competition. speculative trend ending move) is now crowned by a potentially longs will have to be reduced. the damaging effects on the global economy would spill over to Russia and inflict significant damage also on the rouble.15 0 S peculative positions -2 5 very long but has recently stated to normalize. a sudden rise in oil prices appear to be a greater risk however. However.20 0 0 POSITIONING The RUB proxy speculative position is 1. Indeed. LIQUIDITY AND GLOBAL CYCLE The key event risk for the rouble is if oil prices would fall sharply. Given the gradual stabilisation and recovery in the global economy and ongoing tensions in various parts of the Middle East. is expected  -1 EUR/USD makes the current substantial net long speculative position a burden. The long term remedy involves Contracts (thousands) 1. 50 1.25 0  -2 25 1.  -2 EVENT RISK. However. They are price takers on the global market and the sell all they produce.85 the key ref at 36. the USD are far below their heights.35 would become seriously exposed. We do not see any significant domestic political risks in the near or medium term. The rising revenue that would follow for an oil exporting country like Russia would be supportive to the rouble. A bullish looking move through the yearly average and the above the drawn line of (index) resistance at 35. Thus 04 05 06 07 the negative score indicate that a continued The lack of significant upside progress in normalization. Should TECHNICALS The 2012-2013 wedge (weak trend or the sub-1. The high real value of the rouble is not a problem for the natural resource extracting businesses. A strengthening global cycle is impacting the rouble positively both via higher commodity prices and portfolio flows.Currency Strategy Russian rouble VALUATION Although both the nominal rouble effective exchange rate and the rouble vs. the real effective exchange rate (REER) is trading just shy of the peaks in July 2011 and March 2012. however eased recently.75-35. Rouble correlations to risk metrics such as the S&P 500 have.30 0 75 structural reforms than the ones currently under way.29-area be revisited. Episodes of flight to liquidity typically damages the rouble significantly which is aggravated by concomitant increases in capital outflows. bullish weekly “Spring-bottom” on the week ending Jan11 this year. 33 .

A potential reversal of recent. speculative longs will have to be reduced. Public investments fell back E U R speculative positio ns after the UEFA Euro Cup while private ditto seem to U S D /C A D 12 5 Contracts (thousands) have taken the Euro zone crisis into account a fair bit 1.30 0 75 meanwhile. Monetary policy bottoming out and will gradually recuperate. Global cycle ECONOMIC FUNDAMENTALS Economic activity lost -0.6 0. we expect the driving forces in the FX market to be Flows conducive to the zloty.6 -0. With a C/A deficit at 3.9% in June to 2. especially bonds. The C/A deficit is fully financed by EU-funds and net FDI.4 -0. We have cut our GDP growth forecasts to 2. The 1. Some The lack of significant upside progress in EUR/USD makes the current substantial net public investment schemes are also at play and as the long speculative position a burden.25 0 50 and rising unemployment.4 The repercussions from the Euro zone crises are hitting Fundamentals the Polish economy with a lag compared to most other Carry emerging markets. add to a positive flow picture.Currency Strategy Polish zloty PLN Weighted score: 0. the sub-1. EU fund flows may fall a bit this year. The market is pricing slightly more.00 – 4.2 0.20 0 25 0 first half of 2013 will remain soft but a gradual rebound S peculative positions 1. we expect the EUR/PLN to move Event risk towards the bottom of the familiar 4. 1. large.5%.0% since November. If global risk sentiment would worsen. We stick to our view of one more cut in Q1 and one in Q2 taking the policy rate to 3.4% in Dec. this would weigh on the zloty. while core CPI dropped from 2.15 0 -2 5 over the course of the year lies in the cards.8 speed rapidly during 2012.4%.1% this year with downside risks given the weak finish of 2012.4 0. A reversal of foreign bond purchases is a key risk for the zloty. suffered from real wages turning negative 1.20 range. The economy is. Exports are doing OK but imports have fallen sharply with domestic demand. however.29-area be revisited. Consumers. Carry is supportive and the non- interventionist stance is attractive when risk is on. The latest cut came with a statement indicating a pause may come but more easing is to follow. inflows Liquidity to the local bond market constitutes a key risk to the zloty. On balance. The policy rate has been cut by 75bps to 4.2 0.3% to 1. Poland may struggle to meet the 3% budget deficit threshold but overall the fiscal house is in order and public debt is decent at about 55% of GDP.  +2 34 .0 0. ►0 FLOWS The trade balance has improved markedly since mid-2012 but unfortunately for the wrong reason.5%/GDP and a high external financing need.8 -0. Sentiment 04 05 06 07 indicators are low but have improved lately. This is priced in by now. Lower inflation and interest rates will be supportive. Portfolio flows. benefiting from decent Valuation fundamentals and carry and capital flows that will Positioning remain supportive as the global cycle continues to Technicals improve. Overall. Should global economy recovers and Euro zone risk moderate. Polish investments may well be reinvigorated too. focus would likely be reoriented towards external balances. ►0 MONETARY POLICY CPI fell fast from 4.35 0 E U R /U S D 10 0 later than in most other places.

30 0 75 possible Q3-Q4’12 triangle or bullish flag could also be 1. Although Poland is far less trade dependent compared to the Czech Republic and Hungary. exports of goods and services still accounts for 38% of GDP.1930 & 4. It is slightly on the weak side in relation to the nominal effective (NEER) average. financial linkages are strong. but this could also be a 25 1.  0 the sub-1. Should grade must be kept neutral. Poland has run current account deficits since 1996 which cannot be explained as the result of a temporary investment boom building productive capacity to repay the borrowed foreign savings afterwards. Furthermore. The zloty is positively correlated with the global cycle although the strength of this correlation has moderated lately. A sharp drop in risk appetite typically lifts flight to liquidity to becoming the sole driver in FX markets.15 0 -2 5 difficult to firmly lean towards one outcome or the 04 05 06 07 other. Through 4.  -2 E U R speculative positio ns U S D /C A D 12 5 TECHNICALS EUR/PLN likes it below the negatively Contracts (thousands) 1.0480 would display demand and The lack of significant upside progress in EUR/USD makes the current substantial net argue for fresh lows. Hence we set the valuation score at:  -1 POSITIONING The proxy speculative positioning for PLN is in a clear downward trend rendering a negative score.35 0 E U R /U S D 10 0 sloped yearly average and this is PLN bullish. A 1.20 0 broader bottom formation and at this stage it is S peculative positions 0 1.29-area be revisited. Still. 35 .Currency Strategy Polish zloty VALUATION The zloty has recently been trading at a level that is fairly well aligned with the 10 years average of its real effective exchange rate (REER). In what we call “the liquidity paradox” the zloty often suffers disproportionally during such periods since it is the most liquid of the CEE region’s illiquid currencies and hence becomes a popular proxy trade for bearish positions on the region. EVENT RISK. Until any of those unfold the long speculative position a burden.2180 would show PLN supply while under 4. LIQUIDITY AND GLOBAL CYCLE The most pressing event risks for the Polish economy and currency emanates from the Euro zone as it strives to tackle its deep rooted and complex challenges. speculative longs will have to be reduced.25 0 50 interpreted as PLN bullish.

5 The economy as well as the lira is at crossroads.4 -0.8%. pre-announced hard currency purchases.8 -0. the central bank (CBT) is in a dilemma.8 ECONOMIC FUNDAMENTALS GDP growth slowed from 8.0 0. continued disinflation will be 1. With recovering domestic demand adding to price pressures and the lira strengthening while the CA deficit remains large. Should MONETARY POLICY Inflation fell from 9.2 0. 04 05 06 07 Still. 10 0 20% range is on the rise again. We had expected the CBT to cut the lower end of the interest rate corridor (O/N borrowing rate) to reduce TRY-carry and already yesterday they did reduce it by 25 bps to 4.6 -0.29-area be revisited. which 12 5 Contracts (thousands) 1. The Fundamentals economy because it is revering up after policy makers Carry successfully engineered a soft landing to bring Monetary policy inflation and the current account deficits down from Flows double digit levels. Core CPI ended 2012 at 5. This Event risk will slow.Currency Strategy Turkish lira TRY Weighted score: 0. Financing will continue to be abundant but of low quality. Global cycle -0. above the 5% target. but not nullify. But the economy has turned the corner. we expect lira appreciation pressure to also force the CBT to restart daily. +2 EUR/USD makes the current substantial net long speculative position a burden.5% in 2011 to 3% of just below last year. While carry will be a strong TRY- positive. We also expect more hikes of the Reserve Option Coefficient (allowing banks to use more FX in reserves) and rising RRR to keep credit growth from rising (too much) above 20% y/y. speculative longs will have to be reduced. +2 36 .5%. September to 6.6 0.4 0. We expect GDP 1.20 0 0 driver. We expect 75bps more in coming moths. We are bullish on growth and these Valuation imbalances may now grow again.30 0 75 50 growing by 4.2 0.25 0 25 domestic demand taking over from net exports as key 1. The O/N lending rate was also cut.2% y/y in the sub-1.2% in December. these measures will counterbalance and the score on monetary policy expectations is: -3 FLOWS: Cutting the CA deficit from 10% to 7% of GDP has buoyed TRY sentiment. Manufacturing E U R speculative positio ns U S D /C A D PMI is at a 15-month high and credit growth. lira appreciation.15 0 S peculative positions -2 5 harder to achieve and the CA deficit will rise again. We expect the 1W repo to remain on hold at 5.35 0 E U R /U S D was compressed from over 40% y/y growth to the 15. Net FDI is low while portfolios flows and private sector foreign loans (not in the graph on the right) are large implying rising risks of reversals. In our scenario. Consequently.5% and 5% this and next year with 1. Recent weeks’ TRY gains probably imply that the CBT’s REER measure has risen to the 120-130 “intervention zone”. fiscal policy is prudent and a second investment The lack of significant upside progress in grade rating is likely soon.75%. The lira has been historically stable at a weak level in 2012 but strong Positioning flows are now pushing it higher to levels in REER terms Technicals where the central bank is likely to apply the breaks via Liquidity interest rates as well as interventions we think.

This earns a small bullish TRY grade. characterised by quite a lot of short spikes. The massive external financing need in relation to rising. now at 1.15 0 S peculative positions -2 5 04 05 06 07 POSITIONING The proxy for speculators positioning is in line with appreciating TRY becoming longer which is The lack of significant upside progress in EUR/USD makes the current substantial net reflected in the positive score. However note that with long speculative position a burden.7170 area. +1 EVENT RISK. event risks are clearly present. at least. this need not be a problem. the country has a “chronic” C/A deficit.25 0 25 CBT’s REER measure with the “intervention zone” at 1.Currency Strategy Turkish lira VALUATION The demographic structure is one factor behind Turkey’s prime position in terms of growth prospects in the coming decade in Europe.35 0 E U R /U S D weaker than its 10 year NEER trend and somewhat 10 0 stronger than its REER trend but given the above we 1. we suspect. The domestic political scene is rather stable with presidential and parliamentary elections due in 2014 and 2015 respectively. the C/A deficit and its financing is a key challenge for Turkey. speculative longs will have to be reduced. but since this in a larger timeframe looks like an extended correction.7940 would fast turn attention to key levels above at 1. Indeed.20 0 0 120 . +1 TECHNICALS USD/TRY retains a cautious negative downtrend under a negatively (lira positive) sloped yearly average. 37 . Keep in mind. the lira did not under perform E U R speculative positio ns other high beta currencies. though still small. As long as financing is sound and investments are productive (and partially. LIQUIDITY AND GLOBAL CYCLE Being located in a geo-politically instable part of the world and with Kurdish resistance in the eastern part of the country. Should the slow and quite choppy appreciation. however. The large share of young people. This is especially true given the still high CA deficit and its vulnerable financing.30 0 75 50 set a valuation score of -2. The graph also shows the 1. positioning is the sub-1. though. however.8350.7520/1. The CBT managed to get TRY-volatility down significantly last year and it is less of a high beta currency now. FX reserves. This may. change again.  -2 1. the savings ratio is a mere 15% of GDP and with investments at a much higher level. The lira is somewhat U S D /C A D 12 5 Contracts (thousands) 1.29-area be revisited.130 (strong response above 125). With equity and bond flows making out a large share of overall flows. continues to be a potential major risk for the lira. But in our view.8325-1. that even after the Lehman crash. the grade is kept low with a warning of a possible turnaround from levels not far below in the 1. Bullishly back above the yearly average. Turkey’s high oil import dependence implies a high vulnerability for sharp spikes in the oil price. in the exports sector). has a lower propensity to save. the lira is positively correlated to the global cycle.

2 0.4 0. speculative MONETARY POLICY Korea is one of the outliers in -4 longs will have to be reduced. as usual.  -1 1 FLOWS The current account has supported KRW and a 0 recovery in the export cycle will keep the current 09 10 11 12 13 account in ample surplus of around 3% of GDP. the central bank will be intervening to 2 reduce volatility and slowdown momentum. Over the course of Flows 2013.5 Within Asia.4% while the policy rate remains higher at 2.35 0 Korea RealE UGDP R /U% S Dy/y 10 0 14 are highly indebted. house prices have 1.0 0.30 0 75 12 2013 Forecast53. Historically. Exports bottomed in July of last Global cycle year and stabilization in G3 economies should see d propel exports to continued improvement in 2013.9% been steadily falling. the main driver of flows was equity flows but that hasn’t been a big driver of KRW 0 lately. 2 The lack of significant upside progress in EUR/USD makes the current substantial net  +1 0 long speculative position a burden. which places a heavier burden on 1. CPI % yoy Policy Rate % Capital flows will also support KRW.  +2 -8 -10 E one 00 01 02 03 04 05 06 07 08 09 10 11 12 13 Current Account Equity Inv Debt Inv 38 .2 0. Furthermore. The new President Park S peculative positions 1.8 -0. The theme in the last several years has been a surge in demand for Current Account and Capital Flows % of GDP 8 Korean government bonds. especially Monetary policy into the bond market.29-area be revisited. In Korea.6 -0. we expect a hiking cycle to 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13 commence in Q4.1% vs USD in 2012. in addition to India where we see policy easing -6 this year. government 4 debt remains low and healthy and rates are relatively 2 high in Korea.25 0 0 10 household’s and SME’s balance sheets and dampens 1. Liquidity ECONOMIC FUNDAMENTALS The overall growth Event risk outlook is improving. We think this trend will 6 continue since unlike the private sector. The central bank. 5 Korea Inflation and Policy Rate With a weak domestic economy and house prices falling. the same trend should continue and move Valuation USD/KRW lower.20 0 25 8 0 consumption and investment. In addition. equity inflows will return -6 and further support the currency. -0.75%.15 0 -2 5 has promised to deliver supportive fiscal policy but the 6 04 05 06 07 amounts are too little to make an impact on growth or 4 Korea’s healthy public debt levels at just 36% of GDP.4 -0. inflation has eased to 1.6 0. Should -2 the sub-1. A cut will weigh on 3 KRW. Bank of Korea will likely cut interest rate in 1H 4 to support growth. were strong. In rest of Asia. KRW was the best performing currency Fundamentals appreciating 8. will be intervening to prevent KRW strength but the Positioning operations will be to smooth out volatility rather than Technicals stop outright appreciation. which will be another headwind for KRW. Markets are pricing in a 25bp cut but with less than 50% probability.8 E U R speculative positio ns The flip side is that domestic demand will remain more U S D /C A D 12 5 Contracts (thousands) subdued than usual since households and corporates 1.Currency Strategy Korean won KRW Weighted score: 0. However. going forward with an economy -2 recovery and an equity market filled with companies -4 geared to the global cycle. faced with a rapid downward move in USD/KRW. Asia. The move was helped by improved economic fundamentals where Carry exports started recovering and capital flows.

The Korean economy is still export led and the equity 10 1050 market is dominated by large companies who benefit 0 1000 from better global demand. KRW has recently moved to fair value because of its outperformance in 2012 in an environment of falling inflation.35 0 E U R /U S D 10 0 who have piled into buying Korean government bonds 1. and is weaker relative to history (USD/KRW reached 900 in 2007) the currency still can be considered under-valued. +3 LIQUIDITY.Currency Strategy Korean won VALUATION According to NEER and REER models. has forced many investors to be long KRW.30 0 75 still only own a small proportion of the market at 17% 50 1.15 0 -2 5 TECHNICALS The 1mt USD/KRW remains in a steady 04 05 06 07 decline. which may reduce event risks.29-area be revisited. The pair has passed an ideal turning point for The lack of significant upside progress in a larger 2011-2013 correctional sequence. So the reaction risk is moderate to high. surprisingly. the won earns a decent positive grade. Korea is vulnerable to risk off and liquidity events and history is a very good guide. speculative corresponding to a lesser albeit alternative 127.20 0 Australia (78%) and Indonesia (30%). Another event risk is indirect but 40 1200 a rise in tensions between China and Japan will also 30 1150 destabilize the Korean economy. Lastly. Fibo extension ref likely to add weight to KRW resistance at/just below at 1050. North Korean leader Kim Jong-un made a favourable comment to improve relations with South Korea at the beginning of 60 USDKRW and VIX 1300 the year. The increase in bond flows relative to equity may dampen some of this impact but does not change the direction of the currency. But this low is also long speculative position a burden.2% longs will have to be reduced. Other survey indicators such as Reuters FX Positioning polls show KRW the most favored currency in Asia as of Jan 17. accumulates FX reserves through invention from the central bank. Korea is heavily geared towards the global cycle and a cyclical 20 1100 recovery in the global economy will be positive. but as long as the grind south in the pair remains undisrupted by any bullish candle formation. We advise not taking comments from North Korea too seriously and 50 1250 would like to see it turned into actions before eliminating this risk. Jan-10 Jul-10 Jan-11 Jul-11 Jan-12 Jul-12 Jan-13 Vix USDKRW (RHS) 39 . However. +1 POSITIONING Positioning is a headwind for KRW. With that said. North Korea tensions still loom and the risk of nuclear tests is again on the rise. E U R speculative positio ns U S D /C A D The one positive side to positioning is that foreigners 12 5 Contracts (thousands) 1. leaving the EUR/USD makes the current substantial net Q3’11 low fully in sight.  -5 S peculative positions 0 1. Should the sub-1.25 0 compared to other places that are much higher such as 25 1. Stellar performance in 2012 with a strong trend. The recent sharp weakness in JPY will also make KRW feel stronger empirically and politically. since KRW runs a current account surplus. EVENT RISK AND GLOBAL CYCLE.

Interest rate liberalization is opening up new lending channels New Total Financing New Bank Lending and acting as monetary stimulus. Non- 0.  +2 40 . Capital outflows continue driven by -6 uncertainty over the leadership change and poor asset 03 04 05 06 07 08 09 10 11 12 price performance.5 bigger driver of monetary stimulus recently and a key theme for 2013 is the rise in non-bank lending. Initially. Fundamentals weakening in H1 and strengthening in H2.8%. 50 % yoy 3mma SEB China construction E U R speculative positio nsindicator ECONOMIC FUNDAMENTALS Growth outlook is U S D /C A D 12 5 Contracts (thousands) improving as China’s two engines of growth. More The lack of significant upside progress in -10 EUR/USD makes the current substantial net importantly.8 -0. long speculative position a burden.0 0. The improving export outlook should keep China -4 in a surplus.30 0 75 30 was one of the worst years in over a decade where 1. Our year end USD/CNY forecast is 6. Exports bottomed in August at 04 05 06 07 1% y/y growth and rebounded to above 10% y/y 0 recently. For China the Curreant account and Capital flows % of GDP 12 total monetary policy score is negative since the 10 central bank will continue to intervene in the market to 8 prevent CNY from moving to its fundamental value.10. speculative longs will have to be reduced.2 0. a 0. we expect capital Current Account Portfolio Inv Other flow s flows E oneto return as political transition ends and see some recovery in asset prices. exports 40 1.2 0. banks will get a full annual lending quota and credit growth momentum will return.0 bank lending are other financing channels such as Jan-11 May-11 Sep-11 Jan-12 May-12 Sep-12 Jan-13 Jan-09 May-09 Sep-09 Jan-10 May-10 Sep-10 corporate bond market and trust products.Currency Strategy Chinese yuan CNY Weighted score: 0 CNY exhibited two-way movement last year. However. The upward trend should continue. we think interest rate hikes will start in Q4. SEB China construction indicator.  +2 Monetary Policy . Should construction. Technicals Our CNY trading strategy is to be long CNH or CNY Liquidity onshore since they provide positive carry vs USD and Event risk we are anticipating a widening of the daily trading band from +/-1% to +/-1. With the New 1.35 0 E U R /U S D 10 0 and construction continue their steady rebound.5% as of December and it has allowed the central bank to keep an accommodative policy stance. the economy has bottomed in H2 S peculative positions 10 1. Flows USD/CNY should be relatively stable going into the Valuation government transition in March but the downtrend Positioning should accelerate in H2 as inflation pressures build. 6  -1 4 2 FLOWS The external balance remains CNY positive as 0 China runs a current account surplus of around 3% of -2 GDP.4 -0.6 0. CNY appreciation should continue in 2013.5 MONETARY POLICY Inflation remains benign at 2. 2012 1.15 0 -2 5 2012 and is recovering.25 0 50 GDP was only 7. With Carry economic fundamentals improving plus a current Monetary policy account surplus. the lowest since 7.20 0 25 0 1999. Inflation is low but with growth recovering and lending increasing. which should benefit the Global cycle spot sensitive onshore CNY and CNH more than CNY -0.6 -0. has been picking up as evident by the -20 the sub-1. the driver of domestic demand.5%. pick up in 07 08 09 10 11 12 13 infrastructure spending helped construction activity but what will keep the recovery going are increase in property prices and monetary stimulus.29-area be revisited.4 0.RMB trn 3mma 1.6% growth in 20 1.8 NDF (fixing driven).0 Year starting. Going forward. However.

0 markets that these new lending channels come with 6.6 growth.35 0 E U R /U S D 50 10 0 of their USD holdings.8 6. the CNY can sell off quite a bit and lose value.1 the government may want to send a signal to the 7. we think the 7.2 6. But since long speculative position a burden. the authorities 450 70 allowed for USD/CNY to move lower and have caught E U R speculative positio ns U S D /C A D 60 the long USD/CNY holders. the reaction risk is also notable and only a moderately positive grade for the yuan seems warranted at the time of writing. foreign currency holdings onshore surged in the beginning of 2012 as CNY Foreign Currency Deposits depreciated. the implied carry on USD/CNY NDFs is negative. as long as CNY runs a healthy current account surplus.4 6. there is a risk that 7.15 0 S peculative positions -2 5 10 TECHNICALS The 12mt NDF contract has recently 04 05 06 07 200 0 been sent tumbling down to a multi-year low area. for forward investors.1 Apr-08 Apr-09 Apr-10 Apr-11 Apr-12 41 . Second. which will be negative to China’s domestic 6. FX reserves are rising and official fixing on USD/CNY remains higher than the more market driven forward markets. A convincing breach below mentioned support would sharpen the positive CNY grade to +3 or even +4. Hence. we think CNY is undervalued. EVENT RISK AND GLOBAL CYCLE.2 7. which means that offshore investor positioning favour USD/CNY higher.3 to take over the payments.20 0 20 neutral view on positioning. the sub-1. we hold a relatively 300 25 1. First.  +3 250 0 1. +2 LIQUIDITY. in relation to the global cycle.5 remains the dominant “factory of the world” and the 6.7 this market. Our base case is for non-bank lending to continue rising and act as a monetary stimulus. They have yet to move out 400 12 5 Contracts (thousands) 1. 6. The yuan is often seen as a strong currency to hold in liquidity crisis since CNY pegs to the USD in times of stress. Jan-12 Mar-12 May-12 Jul-12 Sep-12 Nov-12 Jan-11 Mar-11 May-11 Jul-11 Sep-11 Nov-11 The lack of significant upside progress in Price action of late posts a real threat to this support EUR/USD makes the current substantial net and lower levels can no longer be excluded. since August. However.29-area be revisited.4 USDCNY NDF 12M Forward Outright government. a large bank or asset manager will step in 7. If there are defaults. However. +1 POSITIONING Positioning differs by market. which means that onshore 350 1.9 risk and allow it to default or delay the development in 6. However. However.30 0 75 40 positioning is opposite to offshore and favour 50 1. CNY is over-valued since CNY has appreciated considerably over the last 5 years. The key risk for China this year is a heavy crackdown on non-bank lending.3 currency will benefit from a more positive global cycle. in net. New regulations will be to only increase transparency and disclosure.%Should Total USD bn yoy (RHS) sharp U-turns have emerged in this area in the past.25 0 30 USD/CNY lower. Lastly. China 6. speculative longs will have to be reduced.Currency Strategy Chinese yuan VALUATION According to NEER and REER models.

different months as explanatory variables. Each currency is given a weight that reflects its relative importance in the country’s trade flows. An increase (decrease) in the BoE index reflects an appreciation (depreciation) of the currency. 42 . must state whether their trading purposes comprise either commercial hedging or speculation. the last 10 years. We have calculated the seasonal effects using a We present and analyse the positioning of large regression approach. deviations. Values in excess of +/-3 are to be considered over-stretched and often signal an increased EFFECTIVE EXCHANGE RATE (ER) reaction/reversal risk. In the regression we have used the speculators in order to understand sentiment in the monthly percentage change in the exchange rate as the currency. BASIC BALANCE SEB STRETCH-O-METER The basic balance is a flow indicator that includes the This indicator shows how stretched a currency pair is by current account balance and net flows from both direct. Speculators SEASONAL PATTERN are regarded as either large (non-commercials) or small. measuring the distance between the current rate and and equity investments. A nominal effective exchange rate is the value of a currency against a basket of currencies. Reuters Graphics and the Reuters Mercantile Exchange. positioning in a currency future on the Chicago national sources. Our dataset For those currencies not available in the CoT report we consists of end of the month daily close FX rates over have created a proxy (see FX Ringside 2006-04-04). The Exchange’s trading members Ecowin. The Bank of England calculates the ER using IMF-provided weights.Currency Strategy Guide to indicators COMMITMENT OF TRADERS (COT) REPORT EXTERNAL DATA SOURCES The CoT report (weekly) seeks to describe market The main data providers used in this report are: SEB. The broad basic balance also the 200 day moving average expressed in standard includes the private sector’s net trade in debt securities. The chart presents the net open position dependent variable and dummy variables for the (non-commercial longs less non-commercial shorts).

0 0.1 0.2 -0.6 1.0 1.9 -0.6 -1.0 0.7 -0.1 0.0 0.1 1.5 0.3 0.0 0.6 1.0 EUR/SEK EUR/SGD -1.8 0.2 -0.0 -0.4 1.5 EUR/NOK EUR/NZD -1.2 1.6 1.1 EUR/AUD EUR/CAD -0.2 1.3 -0.3 1.5 -0.1 -0.8 1.4 1.4 2.7 USD/NZD USD/PLN -1.5 0.7 -0.3 0.6 -0.7 -0.3 0.8 0.0 -1.1 EUR/PLN EUR/SEK -0.6 -0.0 -0.2 0.4 1.8 -1.3 0.3 0.5 USD/AUD USD/CAD -0.3 0.0 -0.5 0.8 -0.4 2.7 0.5 0.1 2.6 0.1 1.3 -0.4 0.4 0.3 -0.5 -0.9 0.9 0.4 -1.9 0.2 USD/SEK USD/SGD 0.8 -0.0 -0.1 0.1 0.2 0.6 -0.2 0.8 0.1 -0.8 -1.2 0.0 USD/CHF USD/GBP 0.8 0.1 -0.3 0.7 0.2 2.9 0.1 0.5 -0.2 -0.6 -0.3 0.6 -1.8 -0.2 -0.8 0.4 EUR/HUF EUR/JPY -1.3 1.2 USD/CAD USD/CHF -0.0 -0.5 -1.4 0.2 EUR/NZD EUR/PLN 0.0 1.4 -0.9 -1.9 -0.1 0.2 0.5 -0.4 0.6 -1.3 1.1 -0. SEB FX Stretch-o-meter JPY CHF GBP CAD SEK High reaction High reaction risk risk NOK USD AUD EUR NZD -3 -2 -1 0 1 2 3 Seasonal currency patterns Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec USD/AUD -0.3 0.4 0.0 -0.7 0.4 1.2 -0.2 0.1 -0.7 0.1 0.0 0.1 1.4 -0.4 -0.8 -0.0 -1.2 -1.4 0.9 1. Higher absolute values indicate more stretched values.4 0.5 -0.5 0.8 2.6 0.6 0.9 1.0 -0.6 -0.2 0.0 -0.0 EUR/GBP EUR/HUF 1.1 1.6 -1.7 -1.2 0.9 -0.6 0.8 0. Currency Strategy Stretch-o-meter & Seasonality The stretch-o-meter tells us how many standard deviations away currently the exchange rate is from the 200-day moving average.4 0. 43 .5 -0.3 0.9 2.4 0.4 0.4 -0.2 -3.4 0.2 -1.3 -1.9 -1.8 USD/NOK USD/NZD 1.3 0.0 -0.1 -0.7 4.7 -0.6 USD/GBP USD/HUF -1.7 1.2 -0.6 -0.5 -0.6 0.0 0.1 1.4 0.7 0.8 1.1 USD/JPY USD/NOK -0.4 -0.1 -2. Roughly only values of at least +/-1% (bolded) are statistically significant.2 0.6 0.4 0.2 0.9 1.4 1.1 -0.2 0.9 0.6 -1.2 1.2 0.0 -0.6 0.8 0.9 USD/HUF USD/JPY 0.5 0.2 -0.9 1.1 0.6 0.9 0.1 0.1 USD/PLN USD/SEK -0.7 1.8 -1.0 USD/SGD Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec EUR/AUD -0.2 0.5 -0.1 0.2 EUR/SGD EUR/USD -0.3 0.5 EUR/JPY EUR/NOK -0.6 -0.8 -0.3 1.8 0.4 -2.3 0.9 -0.0 0.3 0.3 1.1 -0.2 -0.2 -0.5 -0.5 1.3 0.2 -0.1 1.4 0.4 1.9 -0.2 2.3 1.5 0.6 0.0 0.9 1.8 2.5 1.6 0.3 1.8 0.2 0. A positive value indicates that the currency pair tends to rise and vice versa.0 0.7 0.7 1.5 -0.9 0.3 -0.0 -0.6 1.6 -0.1 EUR/CAD EUR/CHF 0.9 0.4 EUR/USD The table show the monthly seasonal effects (in %) that the quoted currency pairs historically have experienced.4 -0. The calculations are done using data over the last 10 years.2 -0.0 0.3 0.2 -0.1 -1.7 -0.1 0.2 0.9 1.6 EUR/CHF EUR/GBP -1.7 -0.

all indicators fell to low levels in October 2012 and stayed there until around mid December 2012. In such a market environment range trading strategies should be favored to momentum based strategies.2 received a negative treatment of speculators. such as JPY (and USD) have -0. if risk Positioning Weekly. as we expect. The report contains FX analyses currencies and sell “risk-off” currencies.25 0. (2) speculative Speculative positioning development positioning. the Speculative Positions but as it contains more than the general pattern seen lately ought to continue analysis of speculators positioning the new title better indicating that speculators will buy “risk-on” captures its content.6 0. in the risk adverse zone. the rise will as market environment.30 0. Some bets are now 44 .20 0.6 such as AUD and NZD.8 0. However. We expect the uptrend to Using our FX-o-meters we analyze the general FX continue in Q1 and Q2 2013.15 0. based on (1) historical prices.0 -0. In December 2012 RAI managed to break into the neutral zone and have so far had better staying Market environment power than previously.05 1.8 EUR and a negative one for USD.00 1. Below is a summary of the main findings in the latest report. For example. However.0 positioning has lately shown a positive sentiment for -0. In this market environment momentum strategies should be applied again. The trough in RAI was at the end of May. Now all the variables have come back to higher levels which indicate that the market is less range bound. strength of mean reversion of the main contributors in the index (VIX) is at an tendencies and realized volatility for individual extremely low level (positive for RAI) but a mean currencies in three standardized measures. We do this reverting process will most likely soon set in and bring for 17 currencies and the average scores (expressed in it higher. Risk appetite Our risk appetite index (RAI) is constructed so that 100 represent a neutral (long-term average) level with a neutral zone between 96 and 104. the high stretch score (measuring mean reversion tendencies) is also a warning that some trends are getting ripe for consolidations. “Risk-on” currencies. However.15 Our analysis of positioning is based on speculative Trend (LHS) 1. This indicates a mostly ranging market. -0. since then the trend has turned on improving growth and even more expansionary central bank policy. have also seen net purchases -0. Market environment based on FX-o-meters Positioning 1. This would cause a temporary setback in RAI. (3) SEB risk appetite index.10 (non-commercial accounts) actors positioning in the Stretch (LHS) 1. The report was previously called appetite continues to increase.35 line with the increase in risk appetite which we have 6/4 7/4 8/4 9/4 10/4 11/4 12/4 1/4 2/4 seen (as illustrated by our RAI).10 0. Currency Strategy SEB FX Quantitative analyses and Positioning On a weekly basis we analyse the FX G10 universe on a crowded which tend to lead to a correction quantitative basis in our publication FX Quant and (normalization) of positioning. standard deviations) of these currencies tell us SEB Risk appetite index something about the market condition. (4) volatility and (5) correlation.4 while “risk-off” currencies. 2012 RAI was below 96. The FX-o-meters captures the usual show some volatility. As may be seen in the chart below. currently one strength of trends.4 Vol (RHS) 0. The development of Standard deviations Excess volatility -0. This is in -0.05 FX futures market as reported by CFTC in their weekly 0.2 Commitment of traders report. most of the time.

blomgren@seb.se karl.se Anders Söderberg +46 8 506 230 21 anders.muller@seb.se SINGAPORE Sean Yokota Karl Steiner +65 6505 0500 +46 8 506 231 04 sean.de Dag Müller +46 8 506 231 29 OSLO dag.hammer@seb.dk Richard Falkenhäll FRANKFURT +46 8 506 231 33 Thomas Köbel richard.koebel@seb.steiner@seb.no +46 8 506 232 62 mats.yokota@seb. Currency Strategy Contacts STOCKHOLM COPENHAGEN Carl Hammer (editor) Jakob Lage Hansen +46 8 506 231 28 +45 33 28 14 69 carl.falkenhall@seb.se +49 69 97 27 12 45 thomas.olausson@seb.lage.hansen@seb.se jakob.se 45 .se Erica Blomgren +47 22 82 72 77 Mats Olausson erica.soderberg@seb.

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Currency Strategy Notes This page has been left blank on purpose 47 .

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