7 July 2010

FX Top Trades
EUR/USD 1.55 1.45 1.35 1.25 1.15 Jan-10 Mar-10 May-10 Jul-10 U SD/JPY (rhs) 95 93 91 89 87 85

Relative value trades for 2H10
1H10 has been characterised by ‘fragile and uneven’ growth in major economies. The Greek debt crisis has brought fiscal consolidation to Europe one year ahead of schedule. And in the US, fears are growing that more monetary stimulus may need to be employed to ensure a sustainable recovery. EM continues to grow strongly. Here we recommend a variety of FX relative value trades. Some seek to take advantage of high yielding and heavily controlled currencies. Others try to benefit from a slowdown in activity and deflation fears. And we also look to find value in some currencies that have been slow to normalise after the 2008/09 financial crisis.
US deflation scare Concerns are growing that the US has yet to deliver a self-sustaining recovery. With government spending restrained, the Fed may need to ease policy further. Sell USD/JPY. Cautious optimism on India 8% Indian growth, an expected improvement in the budget deficit and a further 75bp of rate hikes should see persistent INR demand. Buy USD/INR downside structures.

Source: EcoWin

Best/worst performing vs USD
(YT D, %) 10 5 0 -5 -10 -15 JPY EUR CAD CHF NOK GBP BEST WORST

Source: Bloomberg

Carry trade performance, YTD
106 103 100 97 (1 Jan = 100) 94 Jan-10 Mar-10 May-10 Jul-10 94 Equally weighted BRL, TRY, 106 ZAR vs. USD, JPY, CH F 103 100 97

Credibility issues: SNB vs ECB Since last year the SNB has been concerned about the quality of its balance sheet and has been making greater provisions – in stark contrast to the ECB. Sell EUR/CHF. USD/UAH: On a tight NBU leash The NBU appears to have USD/UAH under control and is now in the process of rebuilding reserves, aided by an improved C/A position. Collect carry in UAH NDFs. Capital flows favour Russia Recovery in Russia should mean that banks and corporates will need to rebuild external debt. Abundant liquidity will deter the CBR from heavy FX intervention. Buy RUB/PLN. Canada: G-7’s leading light Canada has emerged from the financial crisis with a financial system reasonably intact. We see the CAD as a store of value, while UK activity may slow in 2H10. Sell GBP/CAD. IDR: Asia’s top carry trade Bank Indonesia’s signal achievement in 2009 was to crush inflation. We believe this will remain its priority and it has the resources to limit IDR volatility. Pick up carry in IDR. Double dip: Too bullish Australia China set to slow into 2011 and there are very early signs that inventory levels may be too high. That will weigh on production and demand for natural resources. Sell AUD.

Source: Bloomberg

Chris Turner
London +44 20 7767

Tom Levinson
London +44 20 7767 View all our research on Bloomberg at ING5<GO>

Confidence in ZAR to ebb As in many EM countries, South Africa is expected to see a widening C/A deficit. Slowing global activity and a more left-leaning President Zuma may weigh on equity flows. Sell ZAR. Riksbank plays catch-up The Riksbank has just started tightening. Norges Bank is worried about private consumption and has cut its forecast tightening profile. Sell NOK/SEK.


FX Top Trades

July 2010

US deflation scare Cautious optimism on India Credibility issues: SNB vs ECB USD/UAH: On a tight NBU leash Capital flows favour Russia Canada: G-7’s leading light IDR: Asia’s top carry trade Double dip: Too bullish Australia Confidence in ZAR to ebb Riksbank plays catch-up Top trades summary table Top trades 1H10 – review Research analyst contacts 3 4 5 6 7 8 9 10 11 12 13 15 18


FX Top Trades

July 2010

US deflation scare
Sell USD/JPY via boosted forward options strategy
The trade
Buy 6m USD put/JPY call, strike 90.00, Down and Out Barrier (American) 75.75 Sell 6m USD call/JPY put, strike 90, Down and Out Barrier (American) 75.75 Target spot on expiry Entry: Zero cost

It is not clear that US activity can eat into spare capacity quickly enough to lift US inflation away from the danger-zone. With the scope for government spending curtailed, the Fed may be forced to add more liquidity. USD/JPY should fall. Having originally thought the Fed might be tightening in 3Q/4Q this year and that USD/JPY would end the year at 100, we have been forced to change our views. We now do not see the Fed withdrawing liquidity and tightening until 3Q11. Indeed, the market is now starting to question whether US authorities have sufficient tools to fend off a slowdown. After all the Congressional Budget Office estimates that peak fiscal stimulus was seen in 1Q10 and there seems little appetite in Congress to enact fresh fiscal stimulus with the US budget deficit seen at 10% of GDP this year and next. Instead, the market is turning to the view that the Fed may have to do more to ensure that the US does not join Japan in a decade of deflation. In extreme circumstances the Fed could return to policies of the 1950s and formally target Treasury bond yields. Investors are responding to this by driving the US 10-year yield below 3.00% and with the Fed’s own view for core PCE at just 0.9-1.2% YoY this year and not much higher in 2011, there is little margin for error.


We now do not see the Fed withdrawing liquidity and tightening until 3Q11

The prospect of the Fed remaining on hold for another year, potentially battling deflation, recalls events in 2003

While the USD is seen to have performed strongly this year, this largely reflects weakness in European currencies on the back of the debt crisis in southern Europe. And the prospect of the Fed remaining on hold for another year, potentially battling deflation, recalls events in 2003. Back then Japan’s Ministry of Finance, up until September that year, tried to hold support in USD/JPY at 115 with US$200bn of USD buying intervention. Under pressure from the US at the G-7 meeting in Dubai, Japan was forced to accept a lower USD/JPY in the spirit of exchange rate flexibility.
Fig 2
10 8 6 4 2 0 2 1 0 -1

Fig 1
5 4 3 2 1 0 Jan-89

Little margin for error with US inflation
US core PCE (% YoY) Fed funds rate (%, rhs)

P/L of boosted forward strategy to sell USD/JPY
2 1 0 -1 -2 -3


-2 -3 70 75 80 85 90 95 100 105









P/L on expiry of US$10mio invested in Boosted Forward Strategy

Source: EcoWin

Source: ING

We doubt the international environment would allow massive Japanese intervention to support USD/JPY

And that same spirit of exchange rate flexibility exists to this day. After a two-year hiatus China has recently accepted the need for a modestly more flexible CNY and we doubt the international environment would allow massive Japanese intervention to support USD/JPY. Instead Japanese policymakers, as was the case last December, would demand much more aggressive easing from the BoJ to counter JPY strength. We therefore see a trade in being short USD/JPY for the next six months with a boosted forward strategy, which benefits from a lower USD/JPY as long as 75.75 never trades. This is a trade for professional investors only, given the risk of unlimited losses were USD/JPY to trade higher. Chris Turner, Head of FX Strategy, London +44 20 7767 1610

FX Top Trades

July 2010

Cautious optimism on India
Buy USD/INR downside seagull with KO
The trade
Buy 6m 46.00 to 42.00 USD/INR put spread, RKO 40.00 Sell USD call/INR put, strike 49.50 Target spot on expiry Entry: Zero cost 44.00

Despite bouts of short-term volatility, we believe the INR will continue its appreciation trend. 8% growth, a narrowing fiscal deficit and what should be widening interest rate differentials should send USD/INR to 44/45 over the coming six to twelve months. The recovery in Indian activity looks resilient. Driven by services and a V-shaped revival in investment, India is likely to record 8% plus growth in 2010-11. Double-digit growth in IP and a revival in consumer non-durables, following normal monsoons, will also help. While India may be the only Asian economy struggling with twin deficits, we believe there

Driven by services and a Vshaped revival in investment, India is likely to record 8% plus growth in 2010-11

is scope for the fiscal deficit to narrow from 6.7% of GDP in FY10 to 5.5% this year. This should be driven by two developments: 1) deregulation of long-subsidised and politically sensitive petrol and diesel prices. Subsidies have been a chronic burden on Indian government having accounted for 13-15% of government expenditure in the last few years and a move towards market-driven prices is a positive and 2) windfall gains in the 3G spectrum auction. While the government had budgeted for INR350bn as non-tax revenue from this auction, the amount garnered topped INR1000bn. Growth reaching trend and an upward shift in the inflation trajectory following domestic fuel price deregulation has prompted the RBI to hike key rates 75bp this year. This makes the RBI one of the fastest moving central banks in the world. We expect RBI to hike another 75bp over the remaining financial year, with a next 25bp in late July.

Fig 3

INR should continue to trend firmer
Extreme risk aversion likely to impact INR adversely, though the long-term trend is upwards

Fig 4

P&L of 46-42 USD/INR put spread, RKO 40
1000 500 0 -500 Profit/Loss ('000 USD) -1000 39 40 41 42 43 44 45 46 47 48 49 50 51 52 53 54 Spot on expiry

Profit/(Loss) 1000
53 50 47 44 41

4 3 2 1 0 -1 Feb08

500 0 -500 -1000

ING Global Risk Index Jun08 Oct08 Feb09 Jun09

USD/INR (rhs) Oct09 Feb10 Jun10


Source: EcoWin, ING

Source: ING

Portfolio outflows from India in the recent risk aversion bout have been limited

Strong medium-term growth prospects, a commitment towards fiscal consolidation, rising interest rate differentials and more policy flexibility should contribute to long-term INR appreciation. Also supportive has been the resilience of portfolio flows. Portfolio outflows from India in the recent risk aversion bout have been limited. In spite of the current volatility and depreciation bias, cumulative net foreign institutional flows in equity during last two months have been a small positive (as against outflows of USD4.5bn in the two months post Lehman collapse). In all we look for USD/INR to break down to 44. In line with the above view we propose a seagull structure. The structure gives participation in the INR appreciation up to 42. The advantage is knocked out in case 40 (15% move from current spot) is seen, which we expect to be highly unlikely in the coming six months. The downside is if the spot ends higher than 49.5 at expiry. The OTM call at 49.50 gives good value since risk-reversals are favouring USD calls and the knockout is expected to decay faster and can be bought out during the life of the trade. Deepali Bhargava, Mumbai +91 22 2499 8114

In all we look for USD/INR at 44

FX Top Trades

July 2010

Credibility issues: SNB vs ECB
Sell EUR/CHF 6-month forward: Scale in
The trade
In 50% of the position. Sell EUR/CHF six month forward at current level Add remaining 50% of position, selling EUR/CHF forward for same trade date should spot trade at 1.36 Target Spot: 1.25 Entry: 1.33

The SNB remain very much focused on the quality of their balance sheet and are increasing provisioning against larger FX exposure. The ECB balance sheet looks more leveraged and contains riskier assets. Investors will continue to sell EUR/CHF. Perhaps the market should have paid more attention to the comments of SNB board member, Jean-Pierre Danthine. Back in March he said that households and businesses should prepare themselves for market-driven exchange rates. Since those comments, EUR/CHF has fallen nearly 10%, with the SNB intervening intermittently in massive amounts and slowly softening its resistance to CHF appreciation against the EUR. Clearly the loss of confidence in the EUR has been one of the most important factors driving the EUR/CHF bear trend. And credibility issues may be playing a role here. Since last December the SNB has been concerned with the growth of its balance sheet and intends to increase provisioning against potential market losses coming through from its growing holdings of foreign exchange reserves. Previously the SNB had increased annual provisioning by the five-year average of nominal GDP growth. It now plans to double that provision for the sake of balance sheet credibility. We have yet to hear the ECB express much concern over its growing balance sheet. Capital and reserves make up under 4% of the ECB’s balance sheet and the ECB’s holdings of peripheral Eurozone debt are fast approaching its level of core capital. Should concerns build over a possible restructuring of Greek debt, we expect the ECB will be forced to address issues of balance sheet credibility more forcefully.

The loss of confidence in the EUR has been one of the most important factors driving the EUR/CHF bear trend

We have yet to hear the ECB express much concern over its growing balance sheet

Fig 5
350 300 250 200 150 100 50

SNB balance sheet soars

Fig 6 Foreign banks rein in CHF lending
150 Swiss banks cross border CHF lending Foreign banks cross border CHF lending EUR/CHF (rhs) 1.70 1.60 1.50 1.40 Cumulative CHF lending (USD bn) since 2000 00 01 02 03 04 05 06 07 08 09 10 1.30

Total assets Provisions and equity capital 100 50 0 -50 Dec-98 Dec-00 Dec-02 Dec-04 Dec-06 Dec-08

0 Dec-96

Source: SNB

Source: BIS, EcoWin

It seems that foreign banks (who undertook the majority of cross border CHF lending last decade) are still paying those CHF loans down

In the meantime, we see no let up in the demand for CHF. Trade trends are supportive and somewhat surprisingly the SNB jettisoned concerns over CHF strength in its June policy statement, having spent a substantial EUR56bn in trying to limit that appreciation just a month earlier. At the same time, it seems that foreign banks (who undertook the majority of cross border CHF lending last decade) are still paying those CHF loans down and the EUR/CHF bear trend will continue. Earlier this year we estimated that EUR/CHF at 1.25 would equate to the strongest levels of the real CHF TWI seen in 1995. 1.25 thus remains our target even though short EUR/CHF is clearly a very crowded trade. Chris Turner, Head of FX Strategy, London +44 20 7767 1610


FX Top Trades

July 2010

USD/UAH: On a tight NBU leash
Sell USD/UAH 6-month outright NDF
The trade
Sell USD/UAH six month outright Entry: NDF 8.20 Target spot on expiry 7.90

Having been forced to accept a weaker UAH in 2H08 on the back of the financial crisis and a weak BoP position, the National Bank of Ukraine (NBU) now seem to have USD/UAH under control at 7.90. UAH implied yields near 9% pa are attractive. After the sharp UAH devaluation and abrupt economic decline in 2H08, Ukraine’s balance of payments (BoP) position is much improved this year and points to a stable UAH in 2H10, with the possibility of UAH strength in 2011-12. At the same time, the NBU is managing USD/UAH very tightly – a policy we believe is designed to restore confidence and reduce UAH devaluation expectations amongst households and businesses.

The NBU is currently replenishing its FX reserves

The BoP has remained positive for a second month in a row, allowing the NBU to manage USD/UAH a little lower from March – ie, the period when new president Viktor Yanukovich’s Regions Party came to power. Thus the excess supply of foreign currency that is coming mostly from rising export relative to import growth is allowing the NBU to replenish its FX reserves. As of the middle of June, NBU FX reserves exceeded USD29bn – thus raising the level of import coverage to 7.5 months. Recent UAH stability and modest strength has helpfully removed the weaker UAH trend on the cash exchange market – the key gauge of local household sentiment.

Fig 7

Ukraine’s BoP better balanced than in 2008
Current account FDI Other financing (% of GDP) 25 15 5 -5 -15 -25

Fig 8
8.80 8.60 8.40

Opportunities in UAH NDFs
(USD/UAH) 8.80 8.60 8.40 8.20 8.00 ING forecast 0 2 4 NDF 6 8 Months 10 12 14 7.80 7.60

(% of GDP) 25 15 5 -5 -15 -25 1Q05 1Q06 1Q07

8.20 8.00 7.80 7.60





Source: EcoWin

Source: Bloomberg

The risk of large capital flight from Ukraine is reduced

Although we expect a moderately negative BoP this year on the need for the corporate sector to repay more of its external debt than it is able to borrow, we believe it should not impact UAH stability considerably. Additionally the readiness of the NBU to suppress any large fluctuations in the market suggest a maximum UAH weakening this year of no more than 1.5% – to 8.02/USD. We also believe the NBU has much greater control of USD/UAH than it did in 2008. First of all, the gap in both the current and capital accounts should not be as wide as they were in 2008. Back then Ukraine ran a 7% of GDP current account deficit. The current account should show a small surplus this year. Secondly, foreign portfolio investments in Ukraine are significantly lower now than in 2008. Thus the risk of large capital flight is reduced. In fact, this year’s BoP gap of USD2.8bn is less than 10% of current NBU FX reserves. Thus fundamentals do not provide clear reasons why UAH should depreciate this year. We see value in selling the USD/UAH NDF six months forward, benefiting from a near 9% UAH implied pa yield and on the assumption NBU has USD/UAH under control. Alexander Pecherytsyn, Kyiv +38 044 230 3017

Near 9% UAH implied pa yield


FX Top Trades

July 2010

Capital flows favour Russia
Sell PLN/RUB 6-month forward
The trade
Sell PLN/RUB six month forward Target Entry: 9.58 Spot: 9.00

RUB remains one of the cheapest commodity currencies and strengthening looks hard to avoid once capital flows turn more favourably to Russia. We look to fund the RUB trade out of PLN, which remains a proxy for East European budget woe. We think RUB can gain by more than 8% versus the USD:EUR basket by end 4Q10. Economic growth is gaining momentum and we look for 2010 GDP growth of 5.1% (-7.9% in 2009). Taking into account the commitment of policymakers to a more flexible FX regime, positive capital inflows in 2H10 together with a current account surplus (5.4% of GDP in 2010) should drive the RUB stronger. In terms of inflation, the current low rate of 5.8% YoY is not likely to persist. We look for a sharp pick-up to 6.8% by 4Q10. This together with excess RUB liquidity suggests the CBR’s preferred escape valve will be to allow a stronger RUB, beyond the current strong side limit of 33.4 vs the basket. A positive capital dynamic is already in view. The recovery is forcing corporates to rebuild the external debt that contracted USD25bn between Sept 2008 and April 2010. Having reduced net foreign liabilities by USD100bn, we also look for local banks to re-leverage. Renewed capital inflow into the banking sector should be helped both by the growth in bank external debt and the decrease in a still excessive FX liquidity position. Similarly, in the aftermath of the 2008 RUB devaluation, households increased hard currency holdings by more than USD$50bn – a significant FX supply that should return to the market. Away from fundamentals, RUB continues to be the cheapest commodity currency, trading at a 15-20% discount to its peers. We doubt that this is sustainable. In the past the RUB has moved in line with other commodity currencies, but with a lag.

We think RUB can gain by more than 8% versus the USD:EUR basket by end4Q10

Having reduced net foreign liabilities by USD100bn, we also look for local banks to re-leverage

Fig 9
120% 110% 100% 90% 80% 70%

RUB vs commodity currencies
(Jul='08=100%) RUB ZAR BRL IDR AUD CAD NZD 120% 110% 100% 90% 80%

Fig 10 Poland, struggling with its budget deficit
(% of GDP) 0 -1 -2 -3 -4 -5 -6 70% 60% -7 -8 2009 2010 2011 2012 HU RU CZ RO PL


60% 08/06








Source: EcoWin

Source: EcoWin, ING

Over recent years PLN has underperformed other CEE currencies during wider market sell-offs

Hungary or Romania are more likely to step in to defend their currencies than Poland

The PLN is not an obvious funding currency and many fundamental factors support the widely held view that the zloty is cheap. Yet over recent years it has underperformed other CEE currencies during wider market sell-offs. This should still likely be the case. The zloty remains the most liquid currency, least likely to see FX/interest rate intervention and could yet again be used as a proxy to express the negative view on the region. Investors will probably assume Hungary or Romania are more likely to step in to defend their currencies than Poland. Eurozone risk scenarios would see fiscal positions in focus, where Poland fares relatively badly. Its budget position is comparable with Romania, where GDP is expected to shrink up to 3% this year and much worse than the Czech Republic or Hungary, both recording lower growth rates than Poland. Though our baseline scenario sees a lower EUR/PLN, we believe short PLN/RUB is a viable trade.

Stanislav Ponomarenko, Moscow +7 495 755 54 80 Agata Urbanska, London +44 20 7767 6970

FX Top Trades

July 2010

Canada: G-7’s leading light
Sell GBP/CAD 6-month forward
The trade
Sell GBP/CAD six month forward Target Entry: 1.6025 Spot: 1.50

Canada has started to tighten policy rates, which is an expression of confidence over the US economic recovery. Loose Fed policy supports CAD outperformance, as does Canada’s superior fiscal position. A stronger GBP is the last thing the UK needs. In relative terms, Canada emerged from recession in a stronger position within the G-7. It endured the mildest of economic contractions (GDP fell just 3% from its peak) and stands today with the best fiscal position. We look for this to count in CAD’s favour in 2H10.

US monetary policy is a strong positive for CAD

No doubt Canada’s recovery is heavily reliant on the US. While US economic data has softened of late, the Bank of Canada’s (BoC) 1 June first interest rate hike can be considered a vote of confidence on growth momentum rather than a policy error. We forecast BoC rates to rise at least 50bp (to 1%) by year-end, leaving Canada as the only G-7 central bank to be reducing monetary policy stimulus. Our US economists do not anticipate FOMC hikes until 3Q11. The Fed mood will remain one orientated toward protecting the US economy and safeguarding a still impaired financial system. This should ensure a steep US yield curve for some time, helping to deliver vanilla profits for US banks. As Fig 11 shows, stimulative US monetary policy is a strong positive for CAD.
Fig 12
(C$m) 40000
(vs. USD, since 1 Jan 2009)

Fig 11
1.0 0.8 0.6 0.4 0.2 0.0

Correlation with 10-2Y Treasury yield spread

Current a/c, net FDI and USD/CAD
Current a/c Net FDI USD/CAD (rhs, inverted)

0.95 1.05 1.15 1.25 1.35 1.45 1.55 1.65

30000 20000 10000 0 -10000 -20000 -30000























Source: EcoWin, ING

Source: EcoWin

There is also scope for foreign direct investment to increase into Canada

Put subtlety, CAD requires more the maintenance of expansive US policy than strong US growth in order to appreciate. Yet there is also scope for foreign direct investment to increase (Fig 12). Government comment indicates there will be announcements on privatisations of state entities, with a strategic review underway. Consultation is also due to be completed by the end of July on a lifting of overseas investment restrictions in the telecoms industry (currently set at 20% of voting and 47% of actual control). Overall, we view CAD as a store of value in 2H10. The BoC warns that there is ‘no preordained’ path for interest rates, but our conviction on a widening of BoC-Fed rate differentials is strong. Fiscal discipline remains a key theme from which the CAD should gain, while the health of its banking system has been widely hailed.

August’s BoE Inflation Report will provide another opportunity for the BoE to talk GBP down

We choose to express a bullish CAD view against GBP. GBP rallied in June as a tight UK budget reduced the risk premium associated with the potential loss of the UK’s AAA status. Yet with UK GDP growth struggling to break 1.0% this year and 1.5% next year, we believe a stronger GBP is the last thing policymakers will want. The August BoE Inflation Report will provide another opportunity for the BoE to talk GBP down with another very subdued CPI forecast two years forward. Look for GBP/CAD to fall to 1.50/52. Tom Levinson, FX Strategist, London +44 20 7767 8057

FX Top Trades

July 2010

IDR: Asia’s top carry trade
Sell USD/IDR 3-month outright NDF
The trade
In 50% of the position. Sell USD/IDR three month NDF Add remaining 50% of the NDF position, selling USD/IDR forward for the same trade date should spot trade 9200 Target spot on expiry 9000 Entry: 9218

The crushing of inflation pressure in 2009 and BI’s ability and willingness to curb excessive exchange rate volatility make the rupiah Asia’s top carry trade, one we think will be resilient in all but the most stressful scenarios.

• A jump in food prices drove Indonesia’s CPI inflation above 5% in June. We expect
seasonal factors, especially the Ramadan fasting month, to keep inflation elevated in 3Q before it recedes in 4Q. Our full-year forecast is 4.4%, toward the low end of Bank Indonesia’s 4-6% target range (Fig 13). Inflation in Indonesia, like elsewhere, accelerated in 2008 when commodity prices spiked. Rising fuel subsidies forced the authorities to hike administered fuel prices by 29% in May 2008, pushing inflation into the double-digit danger zone where it remained all year. The commodity price crash of 2H08 slowed food price component inflation, pulling headline inflation to a record low in 2009. It also obviated administered fuel price hikes.

We regard the crushing of CPI inflation in 2009 as a signal achievement

• We regard the crushing of CPI inflation in 2009 as a signal achievement. Bank
Indonesia is an inflation-targeting central bank and bitter experience has taught the authorities that, outside administered fuel price hikes, rupiah depreciation is the main inflation threat. BI Deputy Governor Darmin Nasution said he expects the rupiah to average between 9100 and 9200 this year. Wide swings in BI’s foreign reserves demonstrate its commitment to stabilising the exchange rate. The constraint on the policy is the stock of foreign reserves, which at USD75bn in May were up USD20bn YoY (Fig 14). We think the constraint would become binding at USD50bn.
Fig 14
20 15 10 5 0
90 80

Foreign reserves at USD75bn

Fig 13
20 15 10 5 0 Jan-05

Indonesia: CPI inflation and forecast
ING forecast Actual

Indonesia: Foreign reserves
(USDbn) 90 80 70 60 50 40 30 Jul-07 Jan-08 Jul-08 Jan-09 Jul-09 Jan-10 Jul-10


70 60 50 40 30 Jan-07






Source: CEIC, ING Bank

Source: CEIC, ING Bank

BI has the commitment and foreign exchange reserves to defend the 9400 level in USD/IDR

We expect USD/IDR to trade close to 9000 apart from spikes in risk aversion, during which we believe BI has the commitment and foreign exchange reserves to defend 9400. For this reason the rupiah is our top pick among Asian FX in 2H10. We recommend scaling into a short USD/NDF position via 3-month NDFs, taking advantage of implied IDR yields above 5%. We look to put on 50% of the position at current levels and add the remainder, should spot USD/IDR trade 9200. The 80bp fall in the 10-year government bond (FR31) yield in the past month puts it through our year-end target of 8%. Government bonds are vulnerable to a spike in global risk aversion but we recommend a buy-on-dips approach on the view that structurally lower inflation will see the yield fall to 7%. Tim Condon, Singapore +65 6232 6020

FX Top Trades

July 2010

Double dip: Too bullish Australia
Sell AUD/USD 6-month forward: Scale in
The trade
In 50% of the position. Sell AUD/USD six month forward at current level Add remaining 50% of position, selling AUD/USD forward for same trade date should spot trade at 0.87 Target Spot: 0.77 Entry: 0.8400

China is attempting to slow the domestic economy at the same time as fiscal stimulus is expiring in major export destinations. Chinese inventory levels are rising and new orders are falling. Chinese demand for Australia’s exports and the AUD may slow. Roughly 45% of China’s exports go to Asia, while around 20% go both to the EU and US. Asia looks to be enjoying a little more domestic demand this year, but both the EU and US have already seen peak fiscal stimulus, with fears now building that weak credit growth and more urgent fiscal restraint could deliver a double-dip recession. ING’s house view is more for anaemic western growth into 2011, rather than a double-dip per se, but softer external demand stands to weigh on the Chinese economy and its export machine. That is not good news for Australia. The breakdown of the Chinese PMI data shows some very early signs of a slowing economy. Having crashed in 2008, the Chinese new orders sub index rose to a peak of 61 in December 2009, before sinking back to 52 in June. And the stock of finished goods, or a gauge of inventory levels, has recently started expanding again, according to the PMI data – the only time it did this over the last five years was in the autumn of 2008. Using new orders and stocks of finished goods, we have created a quasi sales-toinventory ratio. This seems to have a decent six-month lead on total Australian exports and preliminary readings suggest high inventory levels may start to weigh on industrial production and the inputs to that production process – Australian natural resources.
Fig 16
26 22 18 14 10 0.80 0.70 0.60 Jan-08 Oct-08 Jul-09 Apr-10 120 60 -

Softer external demand stands to weigh on the Chinese economy and its export machine

High inventory levels may start to weigh on Chinese industrial production … … and the inputs to that production process
Fig 15
120 100 80 60 40 06 07 08 09

China’s inventory rise to weigh on Australia?
(3mth ave, A$bn)

Japanese retail limit long AUD
AUD/USD (000s contracts) 240 180

(Jan 2006 = 100)

Net Long AUD/JPY (rhs) 1.00 0.90



China new orders versus inventories ratio (6m lead) Au exports (rhs)

Source: EcoWin, ING calculations

Source: TFX, EcoWin

Chinese growth should slow from 11% in 2010 to 9% in 2011

In aggregate we look for Chinese growth to slow from 11% in 2010 to 9% in 2011 and presume that the external environment will not be so supportive of the AUD. Having hiked rates 150bp since last October, the RBA now says interest rates are “around their average levels”. And having made the correct, early call on the global recovery in 2009, some concerns over the strength of Asian activity would be a useful validation by the RBA of our trade idea. So far that has not been the case. At the same time, it seems the market may still be reasonably long AUD. Even though the Commodity Trading Advisor (CTA) community looks to have substantially cut AUD/USD speculative long positions over the last two to three months, Japanese retail investors are still substantially long. We see a re-assessment of Chinese growth prospects and its impact on Australia as the catalyst for a position unwind and thus want to scale into a short AUD/USD position for a drop to a 0.77 target. Chris Turner, Head of FX Strategy, London +44 20 7767 1610

Japanese retail investors are still substantially long AUD

Scale into a short AUD/USD position for a drop to a 0.77 target

FX Top Trades

July 2010

Confidence in ZAR to ebb
Buy TRY/ZAR 6-month forward
The trade
Buy TRY/ZAR six month forward Target Entry: 4.90 Spot: 5.40

We look for investors to lose confidence in the ZAR in 2H10. The current account deficit is widening again, as it will for many EM countries, but President Zuma may be forced to move to the left to appease his union backers. TRY looks relatively stable. We believe the ZAR is probably trading too expensive to its EM carry peers for the following three reasons: a) its growing current account deficit, b) insufficient risk premium priced in for President Zuma to shift to the left and c) the risk of capital flight.

South Africa’s current account deficit looks set to re-widen through 5% into 2011

The current account deficit has traditionally been the Achilles’ heel of South Africa. Having narrowed to 4.0% of GDP in 2009, the deficit looks set to re-widen through 5%. Unless massive FDI materialises, portfolio flows will again be critical to finance the current account gap. Potential ‘big’ FDI deals, such as the sale of Nedbank or MTN to foreign investors, are set to face growing political resistance. And with foreign purchases of equities comprising a relatively high 34% of portfolio inflows, slower global activity could weigh. Politics in South Africa is set to come into the limelight again in 2H10. Tensions that the ruling coalition witnessed in 1Q10 with ANC Youth League leader Malema and trade unions openly criticising their ‘champion’ President Zuma have been temporarily brushed off by the World Cup euphoria. But with the latter all but over, chances are former grievances will reappear sooner rather than later. Zuma also faces a critical ANC meeting in September. Here he will likely re-discover his leftist tendencies in order to re-stabilise the coalition. This could translate into a more populist tone, including more social spending and perhaps even embracing calls for a more competitive ZAR. Foreigners have been pouring money into ZAR assets like it was 2006/07. Back then, however, South Africa was growing 5-6%. It is now growing closer to 3% and any reassessment of global growth prospects leave the ZAR more exposed to capital flight.

President Zuma will likely rediscover his leftist tendencies ahead of the ANC meeting in September

Fig 17
150,000 100,000 50,000 0 -50,000

Foreigners strong buyers of SA assets in 2010
2009 2007 2008 2006 2010 2005 150,000 100,000 50,000 0 -50,000 (ZARm) -100,000

Fig 18
7.50 7.00 6.50 6.00 5.50 5.00 4.50 4.00 Jan-06

ZAR is already much stronger than TRY
TRY/ZAR 7.50 7.00 6.50 6.00 5.50 5.00 4.50 Oct-06 Jul-07 Apr-08 Jan-09 Oct-09 4.00 Jul-10


Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec

Source: SARB, JSE

Source: EcoWin

The Turkish government look set to enact the Fiscal Rule Law in July …

… paving the way for a sovereign upgrade

We therefore prefer to be short ZAR through 2H10. Yet with 6m Jibar at 6.82%, selling the ZAR is expensive. We therefore need to hold a high yield currency against it, and while it is a close call, we prefer TRY over BRL. The Turkish government should enact the Fiscal Rule Law in July, which could pave the way for Moody’s to shift to a positive ratings outlook and a move to investment grade status over coming years. At the same time we have more faith in the CBT maintaining TRY in a 1.72-1.82 range against the 50:50 EUR:USD basket. And the Turkish Treasury has already undertaken all of its external financing for 2010 and FX reserves more than cover external short-term debt.

Dorothée Gasser-Châteauvieux, London +44 20 7767 6023: Sengül Dağdeviren, Istanbul +90 212 329 0752

FX Top Trades

July 2010

Riksbank plays catch-up
Sell NOK/SEK 6-month forward
The trade
Sell NOK/SEK six month forward Target Entry: 1.18 Spot: 1.13

EUR/NOK & EUR/SEK underperformance is set to continue in 2H10. An accelerating Swedish economy justifies a Riksbank moving up through its monetary policy gears and stands in contrast to a Norges Bank that has shifted into neutral. Sell NOK/SEK. It is easy to condemn the Norwegian krone and Swedish krona to the same fate. Both fell sharply in late 2008 as less liquid currencies suffered, but the NOK has since recovered more quickly than the SEK. At 1.20 NOK/SEK remains at a premium to pre-crisis levels and we look for this premium to dissipate in full through 2H10.
Fig 20 NOK/SEK vs Latvia’s 5Y sovereign CDS
(%) 6 1.35 1.30 1.25 1.20 NOK/SEK Latvia 5Y CDS (rhs) (bp) 1200 1000 800 600 400 200 0 Jul08 Jan09 Jul09 Jan10 Jul10

At 1.20 NOK/SEK remains at a premium to pre-crisis levels
Fig 19
(%) 6 5 4 3 2 1 Mar08 Sep08 Mar09 Sep09 Mar10 Jun-09 Mar-10

Norges Bank interest rate projections

Oct-09 Jun-10

5 4 3 2 1

1.15 1.10 1.05 Jan08




Source: Norges Bank, ING

Source: Bloomberg, EcoWin

Norges Bank cites that private consumption has evolved ‘considerably lower’ than anticipated

With intense market scrutiny of fiscal discipline Norway, with its natural oil wealth, is held up as beacon of safety for government finance. There is no reason for this to change for the foreseeable future. Instead, it is the direction of monetary policy that has been subject to review. On 23 June Norges Bank completed a full pullback from a position as the only European central bank raising interest rates (75bp to 2%). New projections confirm further hikes are postponed for the rest of the year. Back in October interest rates were seen at 2.75% by end-2010. Amongst other factors, Norges Bank cites that private consumption has evolved ‘considerably lower’ than anticipated. This is in stark contrast to the situation in Sweden, where a domestic-led upswing saw the Riksbank begin removing monetary policy stimulus on 1 July with a 25bp hike to 0.50%. Of particular worry is record lending to households, accelerating house prices and an earlier than anticipated peak in unemployment. Having upgraded its forecast for 2010 GDP growth to 3.8% from 2.2% (with private consumption now seen at 3.5% YoY), Swedish rates are now seen ending the year at 1%, alongside further SEK appreciation. Also, Baltic-led downside risk for SEK is subsiding. In a sign of confidence, credit agency Moody’s moved Lithuania, Latvia and Estonia to a ‘stable outlook’ in late March, while in last month’s Financial Stability Report the Riksbank lowered Swedish bank loan loss estimates by SEK48bn to SEK61bn for 2011-12. Although SEK-positive we caution that event risk might stem from elections in Latvia this October.

Having upgraded its forecast for 2010 GDP growth to 3.8%, the Riksbank expects to be hiking rates another 50bp this year

The Swedish debt office has a short ‘strategic’ position in EUR/SEK

Directional support for our bearish NOK/SEK view comes from the fact that Sweden’s debt office has a short ‘strategic’ position in EUR/SEK (entered into above 11.00). This position will only be unwound gradually so as not to impact the spot market. Tom Levinson, FX Strategist, London +44 20 7767 8057


FX Top Trades

July 2010

Top trades summary table
Top trades performance
1H10 The trade 1 2 3 4 SELL USD/KZT 6mth NDF SELL GBP/NOK 6mth fwd SELL USD/INR 6mth NDF – scale in** BUY Down-and-In EUR 6mth option. Barrier 1.46 Entry 148.4 9.56 47.4 27% Target 140.0 8.85 44.5 1.46, 100% Spot 146.9 9.30 47.10 100% Profit/loss 1.1% 2.7% 0.3% 270% of initial premium 3.2% 2.0% 0.2% 6.5% 70bp 1.8% Follow-up strategy CLOSE POSITION - 27 May CLOSE POSITION – 28 Jan CLOSE POSITION - 5 Feb CLOSE POSITION - 5 Feb

5 6 7 8 9 10

SELL EUR/AUD 6mth fwd SELL EUR/CZK 6mth fwd – scale in** BUY USD/JPY 6mth fwd – scale in SELL USD/OITP & BUY USD/Majors BUY 3Y KTB & swap into USD BUY CAD/ZAR 6mth fwd – scale in**

1.65 26.2 & 26.1 89.7 100.0 120bp 7.24

1.50 24.6 100.0 5% 50bp 7.50

1.597 25.7 89.5 1.0649 50bp 7.50


2H09 The trade 1 2 3 4 5 6 7 8 9 SELL RON/PLN 6mth fwd SELL USD/INR 3mth NDF SELL EUR/GBP 6mth fwd SELL USD/UAH 2mth NDF vs BUY 6mth NDF SELL NOK/SEK 6mth fwd USD/JPY seagull with barriers EUR/CHF butterfly – 6mth BUY AUD/CAD 6mth fwd SELL NZD/RUB 6mth fwd Entry 0.9901 48.35 0.865 3mth @ 8.15 6mth @ 9.55 1.204 Premium cost US$9.2k Premium cost CHF23.9k 0.9135 20.5 4.03 Target 0.93 46.5 0.8 6mth NDF to 10.50 1.15 500% return 50% return 0.98 18 4.3 Spot 0.98 49.15 0.891 9.5 1.19 Premium US$21.5k Premium CHF23k 0.963 22.2 4.21 Profit/loss 1.0% -1.6% -3.0% -8.9% 1.0% Loss US$27.5k Loss CHF12.3k 7.5% -8.3% 4.5% Follow-up strategy CLOSE POSITION – 16 Dec STOP LOSS – 17 Aug CLOSE POSITION – 16 Dec CLOSE POSITION – 16 Dec TAKE PROFIT - 28 Sep CLOSE POSITION – 16 Dec CLOSE POSITION – 16 Dec CLOSE POSITION – 16 Dec STOP LOSS – 11 Aug TAKE PROFIT – 25 Aug

10 BUY BRL/ZAR 6mth fwd 1H09 The trade 1 2 3 4 5 6 7 8 SELL USD/JPY 6mth fwd SELL CZK/HUF 6mth fwd BUY USD/SGD 6mth fwd BUY CHF/SEK 6mth fwd BUY USD/SAR 12mth fwd SELL CAD/NZD 6mth forward SELL USD/TRY 6mth fwd BUY EUR/DKK 12mth fwd

Entry 90.74 10.36 1.485 6.87 3.765 1.503 1.67 7.5

Target 80 9.7 1.6 7.60 (7.30) 3.83 1.35 1.45 8.2

Spot 96.6 10.4 1.45 7.1 3.75 1.37 1.53 7.45

Profit/loss -0.7% -3.8% -1.5% 7.3% -0.5% 0.5% -5.1% -0.5%



FX Top Trades

July 2010


SELL USD/MXN 6mth fwd

14.05 0.897

12.5 0.83

13.1 0.86

-2.9% -2.6%

STOP LOSS – 30 Jan STOP LOSS – 22 Jan

10 SELL EUR/GBP 6mth fwd 2H08 The trade 1 2 3 4 5 6 7 8 9 SELL USD/UAH 6mth fwd SELL GBP/AUD SELL TRY/BRL BUY USD/JPY 6mth 104-112 strangle SELL ‘Big 3’ NZD TWI SELL EUR/PLN BUY RUB 6mth fwd vs 55USD:45EUR basket BUY USD/SGD BUY USD/CAD

Entry 4.89 2.07 1.31 2.83% 100 3.36 29.58/29.77 1.365 1.01/1.0450 1.62

Target 6% 1.95 1.2 5% 90 3.1 2% 1.39 1.08 1.67

Spot 4.95 2.55 1.5 6.18% 97.67 3.59 30.86 1.48 1.195 1.587

Profit/loss -1.2% -6.2% -6.4% 118% of premium 1.2% 2.3% -3.8% -0.7% 17.3% -1.3%


10 BUY EUR/CHF 1H08 The trade 1 2 3 4 5 6 7 8 9 BUY 8mth vega-neutral EUR/SKK butterfly BUY GBP/USD 6mth one touch option, barrier 1.91 BUY AUD/CAD SELL TRY/RUB SELL USD/AED SELL EUR/PLN BUY BRL/RON BUY 3x12 USD/SGD fwd/fwd swap SELL NOK/SEK



Spot 0.97 19.3 3.67 3.36 1.46 1.18 1.62

Profit/loss €185k 7.5% of payout 2.4% 7.0% -0.3% 4.1% 8.5% -2.9% 2.8%


Cost €135k Payout €400k 25% 0.88 20.73 3.66 3.615 1.33 -160 1.158 1.658 1.91/100% 0.96 16.75 3.56 3.36 1.5 -130 1.12 1.54

10 SELL EUR/CHF Total profit/loss*


* Since inception. Does not include profit/loss from option positions Source: Bloomberg, ING


FX Top Trades

July 2010

Top trades 1H10 – review
Fig 21
149 USD/KZT 148 148


KZT to benefit from FX regime change

Sell USD/KZT 6-month outright NDF

Dec09: ‘KZT will likely embark on a gradual strengthening path vs USD in 2010. The authorities are considering a change in FX regime to allow more KZT flexibility’. Now: Local authorities started the year embracing more KZT strength, but look as though they got scared when the Eurozone debt crisis took off. Currently they are managing USD/KZT in a very tight range. We made 1.1% on the NDF trade.



146 18Dec 18Jan 18Feb 18Mar 18Apr 18May 18Jun


Fig 22
10.00 9.75 9.50 9.25 9.00

10.00 GBP/NOK 9.75 9.50 9.25 9.00 8.75 18Jan 18Feb 18Mar 18Apr 18May 18Jun

Sifting through the wreckage

Sell GBP/NOK 6-month forward

Dec09: ‘2010 may be the year when those who spent too heavily pay a price. GBP is in the front line, with its fiscal credentials brought into focus by a weak AAA-rating and an election. Backed by a potent monetary/fiscal policy mix, NOK is a willing partner’. Now: GBP/NOK fell to a new low in March allowing us to pick up a 2.7% profit. However, UK activity data has not been as bad as first feared and a tight UK budget on 22 June assuaged some of the fears over a UK debt downgrade.

8.75 18Dec

Fig 23


Playing the ‘I’ in BRIC

Sell USD/INR 6-month outright NDF: scale in





Dec09: ‘Like many emerging market economies, India suffered from the collapse in global trade flows in late 08/early 09. However, growth rates in India are picking up again, investor flows are returning and the RBI is getting ready to tighten’. Now: We managed to squeeze out a small profit in this trade before the Eurozone debt crisis spilled over into global equity markets and saw international investors retreat from Asian FX and equity plays.



44 18Dec 18Jan 18Feb 18Mar 18Apr 18May 18Jun


Fig 24
1.52 1.47 1.42 1.37 1.32

1.52 1.47 1.42 1.37 1.32 EUR/CHF 1.27 18Jan 18Feb 18Mar 18Apr 18May 18Jun

Cracks appearing in the SNB’s 1.50 floor

Buy Down-And-In EUR 6-month option, Barrier 1.46

Dec09: ‘At its December meeting, the SNB subtly changed its mission statement from preventing any CHF appreciation against the EUR to preventing any excessive appreciation. Cracks are appearing in the SNB’s 1.50 floor in EUR/CHF’. Now: This trade worked out well and perhaps we should have been more ambitious in our downside targets. Having undertaken massive FX intervention, the SNB have slowly stepped back from the market and have so far let EUR/CHF trade down to 1.30.

1.27 18Dec

All sources: EcoWin, Bloomberg


FX Top Trades

July 2010

Fig 25

1.65 EUR/AUD 1.60 1.55 1.50 1.45 1.40 1.35 18Jan 18Feb 18Mar 18Apr 18May 18Jun

Advance Australia Fair

Sell EUR/AUD 6-month forward: scale in

1.60 1.55 1.50 1.45 1.40 1.35 18Dec

Dec09: ‘AUD has been a crowded trade since equity markets marked a low in March. Yet, much like Australia’s national anthem, conditions look ripe for AUD to sustain its advance in 2010, even should a trend USD recovery take hold’. Now: The trend call was right on this one. Unfortunately we were stopped out for only a 3.2% profit rather than the 10% decline seen by EUR/AUD.

Fig 26

26.5 EUR/CZK 26.2 25.9 25.6 25.3 25.0 18Jan 18Feb 18Mar 18Apr 18May 18Jun

Trade trends favour CZK

Sell EUR/CZK 6-month forward: scale in

26.2 25.9 25.6 25.3 25.0 18Dec

Dec09: ‘The expected further increase of the Czech foreign-trade surplus should fuel appreciation of the koruna over a 12-month horizon. And authorities will find it hard to argue with trade-driven CZK strength’. Now: We secured a 2% gain on this trade, with the trend working well until the Greek crisis triggered a broader bout of risk aversion in April. The theme of a strong Czech trade balance played out, with higher exports and slower imports.

Fig 27

96 USD/JPY 94 92 90 88 86 18Jan 18Feb 18Mar 18Apr 18May 18Jun

Tokyo see cents

Buy USD/JPY 6-month forward: scale in

94 92 90 88 86 18Dec

Dec09: ‘Having initially shown benign neglect, the new Japanese administration was forced to address JPY strength in December. Limited JPY upside and the prospect of the Fed withdrawing liquidity suggest USD/JPY rallies in 2010’. Now: This trade never really got off the ground, this we were lucky to secure a small profit. Our view had been premised on the Fed ready to tighten policy. We were premature with this call and don’t see the Fed tightening until 3Q11 now.

Fig 28

USD Majors & OITP
137 USD Majors USD OITP (rhs) 135 133 131 129 127 18Jan 18Feb 18Mar 18Apr 18May 18Jun

Rebalancing: Solutions to old problems

Sell USD/OITP and buy USD/Majors

80 78 76 74 72 18Dec

Dec09: ‘Calls for global rebalancing are not new, but have been formalised at the G20 summit in Pittsburgh. A dollar adjustment is seen as central to this objective, but in 2010 this will have to come against EM not DM currencies’. Now: This happened to secure a very large 6% profit for us. We knew the USD had fallen too far against the majors and looked for USD/EM to catch up. However, the gains came from the Majors falling, rather than EM strengthening against the dollar. Thus we were right for the wrong reasons.

All sources: EcoWin, Bloomberg


FX Top Trades

July 2010

Fig 29

KTB bond swap
180 KTB bond swap 150 120 90 60 30 Jan10 Feb10 Mar10 Apr10 May10 Jun10

KTB bond swap: Asia’s best carry trade

Buy 3Y KTB and swap into USD

150 120 90 60 30 Dec09

Dec09: ‘The Lehman panic caused CCS rates to plunge and KTB yields to spike. These now are slowly normalising. They remain historically wide, however, which makes swapping KTBs into USD Asia’s top carry trade’. Now: Improved market conditions into March allowed us to take a 70bp profit on this swap position.

Fig 30
7.5 7.4 7.3 7.2 7.1

7.5 7.4 7.3 7.2 7.1 CAD/ZAR 7.0 6.9 18Jan 18Feb 18Mar 18Apr 18May 18Jun

Hedging the portfolio

Buy CAD/ZAR 6-month forward: scale in

Dec09: ‘Our Top Trade portfolio leans towards a ‘risk-on’ stance, generally favouring Asia and EM, while allowing for a slightly firmer dollar against the majors. We also add a small hedge in CAD/ZAR should the risk environment deteriorate’. Now: We earned a small profit on this trade – this being seen as our hedge trade under a risk-off scenario. ZAR did fall marginally more than CAD when equities markets turned lower in 2Q.

7.0 6.9 18Dec

All sources: EcoWin, Bloomberg


FX Top Trades

July 2010

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FX Top Trades

July 2010

Disclosures Appendix
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FX Top Trades

July 2010

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