Friday, 23rd July 2010

FX Strategy Weekly Market Strategy

• Market Outlook
Kenneth Broux Tactical view:
Senior Market Economist
= Carry trade sought
0207 158 1750
A decline in US 3-month libor below 0.50% coupled with solid Q2 company earnings have
kenneth.broux@lloydsbanking.com buoyed demand for carry trade strategies, driving high yielding and commodity currencies
through key resistance levels vs the USD. It is debateable how long momentum can be
sustained in a context of faltering momentum in the US. The idea that additional policy
stimulus by the Fed could be required and would re-flate risk assets appears misplaced
when elsewhere fiscal stimulus is withdrawn and liquidity is unwound. With the EU bank
stress tests finally behind us, we look ahead to a G10 calendar next week dominated by
the MPC testimony to the TSC and the first estimates of US Q2 GDP. Month-end implies
currency and bond portfolio rebalancing. In five of the last six months, the re-weighting
resulted in EUR/USD firming an average 0.5%. In contrast, GBP/USD only gained in
month-end fixings in March and May.
• Recap
Weekly • The recap for fx this week reads very similar to that of two weeks ago. A rally in global
Close Change equities propelled the AUD to the top of the G10 table, helping the currency to gains of
FX % 3.3% vs EUR, 2.6% vs USD and 2.5% vs GBP. A 1.1% q/q jump in UK Q2 GDP boosted GBP
GBP/EUR 1.1998 1.39% and helped the pound to record a 1.3% gain vs the JPY and 1.2% vs the EUR. GBP/USD
GBP/USD 1.5417 0.76% ended the week above 1.5350, having traded as high as 1.5450. EUR/USD was equally
GBP/JPY 134.67 1.71% unable to cling on to the best levels above 1.29 as profit taking emerged on the release of
GBP/CHF 1.6237 0.97% the EU bank stress tests following earlier bidding on a 3-year high for the German IFO.
GBP/AUD 1.7257 -2.00%
• UK Q2 GDP surpassed the most bullish estimates as the ONS reported a 1.1% q/q jump
GBP/NZD 2.1212 -1.47%
in output vs 0.3% in Q1. This still leaves the economy 4.7% below the starting pointof the
GBP/CAD 1.5999 -1.20%
recession in 2008, and will not tempt the MPC to change its view that the economy may
GBP/NOK 9.5644 -0.19% weaken in the second half of 2010. The MPC minutes were remarkably more dovish on
GBP/SEK 11.34 1.09% growth and members Posen and Dale did not hold back to warn of the dangers ahead.
Retail sales also beat consensus estimates by climbing 1% in June. A marked decline in the
EUR/USD 1.2865 -0.50% retail deflator to 1.3% and a fall in inflation expectations back below 3% will comfort the MPC
USD/JPY 87.33 0.88% about the inflation outlook. Public finances recorded a bigger deficit in June, with borrowing
AUD/USD 0.8934 2.82% reaching £14.5bln and data for May revised up to £17.0bln.
NZD/USD 0.7268 2.27%
USD/CAD 1.0377 -1.94% • A good start to the week for UK rates reversed on Friday on the strong GDP release,
USD/SEK 7.3572 0.32% causing yields to end the week on a high. 5y swaps climbed to 2.47%, up 6bp on the
USD/NOK 6.2040 -0.97%
week. 10y yields rose above 3.40% to a 3.43% high. A deceleration in inflation pressures
should keep yields capped going into August, with downside risk to the US macro data
USD/CHF 1.0531 0.20%
providing better levels to buy. The 3mth Libor/Ois spread widened one bp to 24bp. The
2y/10y swap spread widened 2bp to 198bp, and 10y swap spreads stayed flat at 2bp.
Swaps % bp A disappointing 2016 gilt sale drew lower than previous cover of 1.38x (1bp tail) .
2yr 1.466 9.1
5yr 2.505 10.0 Contents Page
10yr 3.453 12.2 Market Outlook, GBP/USD update ................................................................................. 2
Equities % Quantitative Market Analysis .............................................................................................. 4
FTSE100 5312.62 2.98%
FX & commodity futures positioning ............................................................... 5
FX options: Risk reversal skews ...................................................................... 6
FX options: Implied volatility ............................................................................ 7
Economic data surprises ................................................................................. 8
Interest rate spreads vs. FX ............................................................................. 9
S&P500 vs. FX ................................................................................................ 10
Commodities vs. FX ........................................................................................ 11
Market Review .................................................................................................................. 12
Disclaimer ......................................................................................................................... 15

Lloyds TSB Corporate Markets Economic Research, 10 Gresham Street, London, EC2V 7AE, Switchboard: 0207 626 1500.
1
 Market Strategy
Kenneth Broux - Senior Market Economist 23 July 2010
contact: +44 207 158 1750
G10 FX - GBP/USD, ST trend still bullish
Back in June we noted that by flirting with a return to the 1.4784- Data surprises: UK outperforming the US
1.55 trading range in place between February and May, GBP/
USD had approached a crossroads, and how an improved US UK
40 140
technical picture and a rebound in correlations with equities and
commodities pointed to further upside in the short-term (1.54 30
120
topside). This week we review our call and state that even though 20
100
GBP/USD has posted impressive gains in July, there is no 10
compelling case to drop the bullish near-term picture. Though the 0 80
correlation of GBP/USD has eased back to statistically insignificant -10 60
levels since the June comment (see chart), the divergence between
-20
UK and US macro indicators (see chart) brings the potential of 40
-30
further upside over the coming weeks before potential profit 20
-40
taking sets in ahead of the August MPC meeting and the Inflation
Report on August 11. -50 0

n
ay

8-Jun

6-Jul

l
20-Ju
p

22-Ju
23-A

10-M

24-M
The retreat of USD crosses since June has been led by a net
change in speculative positioning and is marked by a net reduction
in short JPY, EUR and GBP contracts. Disappointing US macro
data since June has added downside USD pressure and is fuelling
talk that the Fed may engage in a new round of policy stimulus in
Q3/Q4 to prevent the economy from losing further steam. Though Correlation with S&P, CRB: not statistically significant
the jury is out whether the Q2 slowdown is a blip or start of a
CRB S&P 500
downtrend, a decline in US 3-mth libor below 0.50% and a rally
1
in short-dated FF futures curve indicates that the market is taking
0.8
a more pessimistic view. Additional US measures would threaten
0.6
to drag the USD lower vs non-QE currencies or currencies where
0.4
exceptional measures are gradually phased out.
0.2
0
Though strong UK Q2 GDP (+1.1% q/q) took the market off guard -0.2
and lifted GBP/USD above 1.54, one cannot ignore the dovish -0.4
observations by the MPC and individual comments by members -0.6

Posen and Dale. This could lead investors to re-engage in -0.8

accumulating GBP short positions into early August. To what extent -1

pr
pr
y

ay
1-Ap r

n
n
r

n
ay

ay
3- Jun

the Budget will bear down on the Bank’s growth and inflation
1-Jul
8-Jul

l
l
15-Ju
15-Ap

22-Ju
8- Ap

6-Ma

10-Ju
17-Ju
24-Ju
22-A
29-A

13-M
20-M
27-M

forecasts will become clear in the next Inflation Report. Minutes

from the July MPC meeting hint that growth prospects may be
scaled back. Depending on whether inflation and inflation
expectations also recede, talk of additional policy loosening (a
greater than 50% probability accordng to MPC member Posen)
would cloud the outlook for GBP vs other G10 currencies, especially
those where performance is linked to positive interest rate spreads
and elevated correlation with equities and commodities. Speculative GBP shorts: lowest since January

GBP SHORTS, RHS GBP/USD, LHS

20 1.70
Based on our quantitative metrics, the correlation of GBP/USD
with risk assets has receded markedly to the point that price 0 1.65
action in stocks has become statistically insignificant for short
-20 1.60
term direction. Rate differentials between the US and the UK
have also faded as a driver for GBP/USD, offering no clear sense -40 1.55
of direction for the cross. Though we are tracking changes in -60 1.50
correlations closely, this means is that markets are inclined to put
more weight at present on corporate flows and a divergence -80 1.45

between US and UK macro indicators, but with confidence about -100 1.40
deficit reduction equally playing a part.
-120 1.35
n
t
4-Sep

n
r
ec

y
v
l

l
13-Oc
24-Ju

20-Ju
2-Ma

6-Ap

11-Ma
17-No

26-Ja

15-Ju
22-D

Technically, to sustain the upward short-term move GBP/USD

has to overcome 1.5454, the July 15 high. Beyond 1.55 lies a cluster
of resistance at 1.5524 and 1.5578. A breakout of the February-
May range would bring 1.5814 into play.
 GBP/USD: technicals still bullish; 1.5500-1.5578 within reach
Daily QGBP= 05/11/09 - 28/07/10 (GMT)
Price
USD
1.7
1.69

1.68

1.67

1.66

1.65

1.64

1.63

1.62

1.61

1.6
1.59
1.5814 1.58

1.57

1.5578 1.56
1.5524
1.55

1.54

1.53

1.52

1.51

1.5
1.49

1.48

1.47

1.46

1.45

1.44

1.43

1.42

.1234
09 16 23 30 07 14 21 28 04 11 18 25 01 08 15 22 01 08 15 22 29 05 12 19 26 03 10 17 24 31 07 14 21 28 05 12 19 26
November 2009 December 2009 January 2010 February 2010 March 2010 April 2010 May 2010 June 2010 July 2010

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Quantitative Market Analysis
• Shift in CAD and AUD positioning
• No key observations for GBP/USD

Contrarian Indicators

Risk Reversal Skews (based on options prices, see page 7) Table 1: 1-month rolling correlations
and IMM data (highlighting speculative positioning, see page
AUDUSD USDCAD EURUSD GBPUSD USDJPY AUDJPY EURJPY
6) are used to analyse foreign exchange to understand how
stretched currencies may have become.
2 YR SPD 0.80 0.77 0.91 0.78 0.62 0.72 0.82

Speculative short GBP positions fell for a 5th successive week in

the week to July 13th, with the a 4,000 drop in short reported 10 YR SPD 0.28 0.25 0.65 0.57 0.54 0.52 0.67

positions reducing the total number of shorts to -46,600

contracts. The rally in GBP/USD over 1.54 indicates that shorts S&P500 0.93 -0.85 0.34 0.12 0.23 0.90 0.74
have been whittled back even further over the last few trading
sessions, potentially helping GBP positioning to catch up with Gold -0.17 -0.23 -0.85 -0.71 0.83 0.31 -0.55
the EUR. Short EUR contracts fell in the latest week below 40,000
to -34,900 contracts, the lowest since January 19. This puts the Oil 0.84 -0.69 0.18 0.10 0.20 0.81 0.47
short EUR/GBP spread at 11,700. Drawing information from
the price action in the currency pair we infer that spread
Relative Yield Curve 0.81 0.76 0.64 0.20 -0.25 0.34 0.53
probably stabilised around that level over the past week.
CRB 0.86 -0.67 0.35 0.25 0.06 0.74 0.60
The most interesting development in the IMM data is the reversal
in CAD and AUD positioning, where a rise in long speculative
positioning marks a reversal from the trend of recent weeks.
Long CAD contracts rose by 16,300 to 42,800. Long AUD positions FX correlations
more than doubled to 28,600. The bullish price action in USD/ Market correlations are shown on pages 10-12. 1-month rolling
CAD and AUD/USD this week points to a further increase in correlations are plotted for G-10 FX against interest rate
CAD ad AUD allocations, backed by sinking US Treasury yields spreads, S&P 500 and commodities (represented through the
and a widening in respective CA/US and AU/US spreads. The CRB index).
question we ask is whether the CAD and AUD but also the NOK
can sustain their bullish run as confidence in the US recovery Correlation of G10 pairs with 2y spreads is holding up at
falters and investors price in higher probability of additional Fed statistically significant levels for the direction in EUR/USD, EUR/
measures to ease policy. Speculative flows in to CAD and AUD JPY and AUD/USD. The drop to a new record low for US 2y
longs also draw good support from upbeat US earnings results, yields and resulting return of USD weakness testify to the
but to date has not challenged the established long JPY significance of short-end rates in the present environment.
positioning. Interestingly, long JPY were added to the tune of
9,700 and now stand at 52,500, perhaps a indication of Correlation with equities is still insignificant for GBP/USD (0.12)
underlying scepticism towards the bounce in risk. and EUR/USD (0.34) but continues to be elevated for AUD/
USD, AUD/JPY and USD/CAD (inversely correlated). With the
A bounce in the USD index fell flat on Thursday and additional exception of oil and the CRB index for AUD/USD, the correlation
selling saw the index fall back below 82.50 on Friday. We hold of commodities remains fairly insignificant. The exception is the
out for a short-term move up to 84.0 but are a realistic and link between gold and USD/JPY (0.83) and EUR/USD (-0.85).
aware of the headwinds from a deteriorating US macro Rallies in gold translate in a weaker USD vs EUR and JPY but
backdrop. Technical support is situated at 82.085. The Fed not dramatically so vs other G7 currencies..
Beige Book and preliminary estimate of Q2 GDP may prove
decisive for near-term direction. We observed recently that macro data surprises have started
to play a more important role and this was certainly the case
Risk reversal skews remain near recent highs for GBP/USD this week as stronger UK Q2 GDP (+1.1%) and a 3-year high
but have drifted lower for EUR/USD, perhaps related to for the German IFO bolstered GBP/USD and EUR/USD. The
position squaring but indicative of a reduced appetite for EUR release of the EU bank stress tests has clouded the
calls. Risk reversals for AUD/USD have ticked up in line with picture. The US releases of consumer confidence and
spot, showing greater appetite for near-term upside in the Q2 GDP will test our assertion next week. The danger
AUD. The same applies for NZD/USD and USD/CAD (inverse of a disappointing data will boost speculation of the
skew). Implied volatility rose in the front end for EUR/USD and Fed deploying additional policy easing and could
GBP/USD, causing a flatter vol curve. heighten the influence of 10y yields.

4
FX & Commodity Futures Positioning
Data from the major US futures & options exchanges are released each Friday evening and report positions up to
the close of business on the previous Tuesday. Traders are classified as either commercial or non-commercial. The
positioning of the non-commercial traders can be used as a proxy for the speculative side of the market. Extreme
net long or net short positions are taken as an indication of the market’s vulnerability to a sharp reversal. For a
squeeze to occur, however, a separate catalyst such as a piece of fundamental news or a breach of a key technical
level is usually required.

$ EUR/USD cont r act s $ GBP/USD cont ract s SFr USD/CHF cont ract s
60,000 1.80 0 1.20 20,000
1.53 40,000
1.48 20,000 1.70 -20,000 10,000
0 1.15
1.43
- 20,000 1.60 -40,000 0
1.38 - 40,000 1.10
1.33 - 60,000
1.50 -60,000 - 10,000
1.28 - 80,000
- 100,000 1.05
1.23 - 120,000 1.40 -80,000 - 20,000
1.18 - 140,000
1.30 -100,000 1.00 - 30,000
10-09 01-10 04- 10 07-10
10-09 01-10 04- 10 07-10 10-09 01-10 04-10 07-10

Net -Long Non- Commercial Posit ions ( CME) Spot Rat e Net -Long Non-Commercial Posit ions (CME) Spot Rat e Net - Long Non-Commercial Posit ions (CME) Spot Rat e

JPY USD/JPY cont r act s C$ USD/CAD cont ract s $ AUD/USD cont ract s
1.20 0 0.95 100,000
100 80,000
-10,000
1.15 80,000
40,000 -20,000 0.90
95 1.10
-30,000 60,000
0 1.05 0.85
-40,000
90 -50,000 40,000
-40,000 1.00
-60,000 0.80
0.95 20,000
85 -80,000 -70,000
10-09 01-10 04-10 07-10 0.90 -80,000 0.75 0
10-09 01-10 04-10 07-10 10-09 01-10 04-10 07-10
Net -Long Non- Commercial Posit ions ( CME) Spot Rat e
Net -Long Non-Commercial Posit ions (CME) Spot Rat e Net - Long Non-Commercial Posit ions (CME) Spot Rat e

£ cont ract s SFr cont ract s

$ bn USD POSITIONING EUR/GBP (derived) EUR/CHF (derived)
0.94 160,000 1.54 50,000
40 90 0.92 1.52
120,000
1.50 0
20 85 0.90
80,000 1.48
0.88 -50,000
0 80 40,000 1.46
0.86
1.44 -100,000
-20 75 0.84 0
1.42
-40 70 0.82 -40,000 1.40 -150,000
07-07 01-08 07-08 01-09 07-09 01-10 07-10 10-09 01-10 04-10 07-10 10-09 01-10 04-10 07- 10
SUM (INDIVUAL CURRENCY PAIRS) - LHS
DXY - spot (RHS) Net -Long Non- Commercial Posit ions (CME) Spot Rat e Net -Long Non-Commercial Posit ions (CME) Spot Rat e

$ cont r act s
GOLD $ SILVER cont ract s $ OIL (NYMEX WTI) cont ract s
1300 300,000 20 60,000 90 160,000

250,000 19 85 140,000
1200 50,000
18 80 120,000
200,000 40,000
1100 17 75 100,000
150,000
1000 16 30,000 70 80,000
100,000 15 65 60,000
20,000
900 50,000 14 60 40,000
13 10,000 55 20,000
800 0
10-09 01-10 04-10 07-10 12 0 50 0
10-09 01-10 04-10 07- 10 10-09 01-10 04-10 07-10
Net -Long Non- Commercial Posit ions ( CME) Spot Rat e
Net -Long Non-Commercial Posit ions (CME) Spot Rat e Net - Long Non-Commercial Posit ions (CME) Spot Rat e

cont r act s cont ract s cont ract s

S&P 500 Future 124
10-YR TREASURY NOTES 0 99.8
3-m onth Eurodollar Future 1,400,000
1300 20,000
122 -50,000 99.7 1,200,000
1200 0
99.6 1,000,000
120 -100,000
1100 -20,000 99.5 800,000
118 -150,000
1000 -40,000 99.4 600,000
116 -200,000
900 -60,000 99.3 400,000
114 -250,000 99.2 200,000
800 -80,000
10-09 01-10 04-10 07-10 112 -300,000 99.1 0
10-09 01-10 04- 10 07-10 10-09 01-10 04-10 07-10
Net -Long Non- Commercial Posit ions ( CME) Spot Rat e
Net -Long Non-Commercial Posit ions (CME) Spot Rat e Net - Long Non-Commercial Posit ions (CME) Spot Rat e

5
FX Options: Risk Reversal Skews
The risk reversal skew is the difference in volatility between similar out-of-the-money call and out-of-the-money put
options. A positive risk reversal means that the implied volatility (used for pricing) of the call is greater than that of
the put. In this section, the skew is based on 1-month 25 delta call and put options. The skew has been analysed over
a one-year period, with the positioning ranked and charted (in red) underneath the skew. If the skew and positioning
are towards an extreme (we use above 75% or below 25% for the percentile rank), the risk of a contra-trend move
in the underlying spot rate is high.

EURUSD GBPUSD AUDUSD

1.0 0.0 0.0

0.0
25 delta skew

-1.0 -2.0
25 delta skew

25 delta skew
-1.0
-2.0 -4.0
-2.0

-3.0 -6.0
-3.0

-4.0 -4.0 -8.0

22 Sep 09

22 Nov 09

22 Jan 10

22 Mar 10

22 May 10

22 Jul 10

22 Sep 09

22 Nov 09

22 Jan 10

22 Mar 10

22 May 10

22 Jul 10

22 Sep 09

22 Nov 09

22 Jan 10

22 Mar 10

22 May 10

22 Jul 10
100% 100% 100%
percentile rank

80% 80% 80%

percentile rank

percentile rank
60% 60% 60%
40% 40% 40%
20% 20% 20%
0% 0% 0%

NZDUSD USDCAD USDCHF

0.00 4.00 2.00

1.50
3.00
-2.00
25 delta skew

25 delta skew

25 delta skew

1.00
2.00
-4.00 0.50
1.00
0.00
-6.00
0.00
-0.50

-8.00 -1.00 -1.00

22 Sep 09

22 Nov 09

22 Jan 10

22 Mar 10

22 May 10

22 Jul 10

22 Sep 09

22 Nov 09

22 Jan 10

22 Mar 10

22 May 10

22 Jul 10

22 Sep 09

22 Nov 09

22 Jan 10

22 Mar 10

22 May 10

22 Jul 10
100% 100% 100%
percentile rank

percentile rank

percentile rank

80% 80% 80%

60% 60% 60%
40% 40% 40%
20% 20% 20%
0% 0% 0%

USDSEK USDNOK USDJPY

4.00 4.00 0

3.00 3.00 -1
-1
25 delta skew

25 delta skew

25 delta skew

2.00 2.00
-2
1.00 1.00
-2
0.00 0.00
-3
-1.00 -1.00 -3
-2.00 -2.00 -4
-3.00 -3.00 -4
22 Sep 09

22 Nov 09

22 Jan 10

22 Mar 10

22 May 10

22 Jul 10

22 Sep 09

22 Nov 09

22 Jan 10

22 Mar 10

22 May 10

22 Jul 10

22 Sep 09

22 Nov 09

22 Jan 10

22 Mar 10

22 May 10

22 Jul 10

100% 100% 100%

80% 80% 80%
percentile rank

percentile rank

percentile rank

60% 60% 60%

40% 40% 40%

20% 20% 20%

0% 0% 0%

6
FX Options: Implied volatility
Implied volatility is an input that is required when an option has to be priced. A higher implied volatility would result
in a higher option price, if other factors were unchanged. Implied volatility is traded in the markets and is therefore
also dependent upon supply and demand for options. In periods of uncertainty or illiquidity, implied volatility will climb
higher. One-month and one-year implied volatility is shown in the charts below.

EURUSD GBPUSD AUDUSD

% % %
21 21 28
26
19 19 24
17 17 22
20
15 15 18
16
13 13 14
11 11 12
10
9 9 8
23 Jul 09

23 O c t 09

23 Jan 10

23 Apr 10

23 Jul 10

23 J ul 09

23 O c t 09

23 J an 10

23 Apr 10

23 J ul 10

23 J ul 09

23 O c t 09

23 J an 10

23 Apr 10

23 J ul 10
1-month 1-yr 1-month 1-yr 1-month 1-yr

NZDUSD USDCAD USDCHF

% % %
29 21 16
27 15
19
25
14
23 17
21 13
15
19 12
17 13
11
15
11 10
13
11 9 9
23 Jul 09

23 O c t 09

23 Jan 10

23 Apr 10

23 Jul 10

23 J ul 09

23 O c t 09

23 J an 10

23 Apr 10

23 J ul 10

23 J ul 09

23 O c t 09

23 J an 10

23 Apr 10

23 J ul 10

1-month 1-yr 1-month 1-yr 1-month 1-yr

USDSEK USDNOK USDJPY

% % %
26 20 19
24 19 18
18 17
22
17 16
20 15
16
18 14
15
16 13
14 12
14 13 11
12 12 10
10 11 9
23 J ul 09

23 O c t 09

23 J an 10

23 Apr 10

23 J ul 10

23 J ul 09

23 O c t 09

23 J an 10

23 Apr 10

23 J ul 10

23 J ul 09

23 O c t 09

23 J an 10

23 Apr 10

23 J ul 10

1-month 1-yr 1-month 1-yr 1-month 1-yr

7
Economic Data Surprises
The charts below show relative economic data surprises against historical FX spot rates. The economic data surprises
indice are provided by Citigroup. They are defined as weighted standard deviations of data surprises – actual
releases vs. Bloomberg survey median. Relative data surprises between two countries have been calculated and
graphed below.

EURUSD GBPUSD AUDUSD

150 1.80 200
1.00 250
1.48 1.75
100 150 0.95 200
1.43 1.70 0.90
50 100 150

Su rp ris e In d ex
Su rp ris e In d ex
0.85

S p o t R a te

S u rp rise In d e x
1.65
S p o t R a te

S p o t R at e
1.38
0.80 100
0 1.60 50
1.33 0.75 50
1.55
-50 0 0.70
1.28 0
1.50
0.65
1.23 -100 -50 -50
1.45 0.60
1.18 -150 1.40 -100 0.55 -100
0 5 A ug 0 9

02 O c t 09

01 D ec 09

2 8 J an 1 0

29 M ar 10

26 M ay 10

2 3 J ul 10

0 5 A ug 0 9

02 O c t 09

01 D ec 09

2 8 J an 1 0

29 M ar 10

26 M ay 10

2 3 J ul 10
0 5 Au g 0 9

02 O c t 09

01 Dec 09

28 Jan 10

29 Mar 10

26 May 10

2 3 J u l 10

Economic Data Surprise Spread (RHS) Spot Rate (LHS) Economic Data Surprise Spread (RHS) Spot Rate (LHS) Economic Data Surprise Spread (RHS) Spot Rate (LHS)

NZDUSD USDCAD USDCHF

1.12 250 1.18 100
0.80 150
200 1.16
1.10 50
0.75 100 150 1.14
100 0
0.70 1.08 1.12
S u rp rise In d e x

S u rp rise In d e x
50
S p o t R at e
S u rp rise In d e x

50
Sp o t R a te

-50

S p o t R a te
0.65 1.10
1.06 0
0 1.08
0.60 -50 -100
-50 1.04 -100 1.06
0.55 -150
-150 1.04
0.50 -100 1.02
-200 1.02 -200

0.45 -150 1.00 -250 1.00 -250

0 5 A ug 0 9

02 O c t 09

0 1 D ec 0 9

2 8 J an 1 0

29 M ar 10

26 M ay 10

2 3 J ul 10

0 5 A ug 0 9

02 O c t 09

0 1 D ec 0 9

2 8 J an 1 0

29 M ar 10

26 M ay 10

2 3 J ul 10

0 5 Au g 0 9

02 O c t 09

01 Dec 09

2 8 J an 1 0

29 Mar 10

26 May 10

2 3 J ul 10
Economic Data Surprise Spread (RHS) Spot Rate (LHS) Economic Data Surprise Spread (RHS) Spot Rate (LHS) Economic Data Surprise Spread (RHS) Spot Rate (LHS)

USDSEK USDNOK USDJPY

8.5 150 6.9 150 99 250
200
100 6.7 97
8.0 100 150
50 6.5 95 100

Su rp ris e In d ex
S u rp rise In d e x

S u rp rise In d e x

S p o t R a te

50
S p o t R at e

S p o t R at e

7.5 0 6.3 50 93
0
-50 6.1 91 -50
7.0 0
89 -100
-100 5.9
-150
6.5 -50 87
-150 5.7 -200
85 -250
6.0 -200 5.5 -100
05 A ug 09

02 O c t 09

01 D ec 09

28 J an 10

29 M ar 10

26 M ay 10

23 J ul 1 0
05/08 /09

02/10 /09

01/12 /09

28/01 /10

29/03 /10

26/05 /10

23/07 /10

05/08 /09

02/10 /09

01/12 /09

28/01 /10

29/03 /10

26/05 /10

23/07 /10

Economic Data Surprise Spread (RHS) Spot Rate (LHS) Economic Data Surprise Spread (RHS) Spot Rate (LHS) Economic Data Surprise Spread (RHS) Spot Rate (LHS)

8
Interest Rate Spreads vs. FX
The charts below show interest rate spreads plotted against historical FX spot rates. The spreads are calculated
using two-year interest rate swaps. A one-month rolling correlation (between the spot rate and the interest rate
spread) is shown to identify time periods when interest rate spreads are driving FX movements.

EURUSD GBPUSD AUDUSD

1.53 0.8 1.75 0.9 1.00 4.5

1.48 0.7 1.70 0.8 0.95 4.0

0.6 1.65 0.7 0.90
1.43 3.5

2Y R ate Sp read

2Y R ate Sp read
0.5 1.60 0.6 0.85

2Y R ate Sp read
Sp o t R ate

Sp o t R ate

Sp o t R ate
1.38 0.4 1.55 0.5 0.80 3.0

1.33 0.3 1.50 0.4 0.75 2.5

2Y Rate Spread (RHS) 0.2 1.45 0.3 0.70
1.28 2.0
Spot Rate (LHS) 0.1 1.40 2Y Rate Spread (RHS) 0.2 0.65 2Y Rate Spread (RHS)
1.23 0.0 1.35 0.1 0.60 Spot Rate (LHS) 1.5
Spot Rate (LHS)
1.18 -0.1 1.30 0.0 0.55 1.0
24 J ul 09

06 O c t 09

17 D ec 09

01 M ar 10

12 M ay 10

23 J ul 10

24 J ul 09

06 O c t 09

17 D ec 09

01 M ar 10

12 M ay 10

23 J ul 10

24 J ul 09

06 O c t 09

17 D ec 09

01 M ar 10

12 M ay 10

23 J ul 10
1 1 1

0 0 0

Correlation Correlation Correlation

-1 -1 -1

NZDUSD USDCAD USDCHF

0.80 4.0 1.15 0.4 1.30 1.0
0.75 0.2 2Y Rate Spread (RHS) 0.9
3.5 1.25
1.10 0.8
0.0 Spot Rate (LHS)
0.70 1.20
2Y R ate Sp read

2Y R ate Sp read
0.7

2Y R ate Sp read
3.0
Sp o t Rate

Sp o t Rate

1.05 -0.2
0.65 Sp o t Rate 1.15 0.6
2.5 -0.4 0.5
0.60 1.00 1.10
-0.6 0.4
2.0
0.55 0.3
2Y Rate Spread (RHS) 2Y Rate Spread (RHS) -0.8 1.05
1.5 0.95 0.2
0.50 Spot Rate (LHS) -1.0
Spot Rate (RHS) 1.00
0.1
0.45 1.0 0.90 -1.2
0.95 0.0
24 J ul 09

06 O c t 09

17 D ec 09

01 M ar 10

12 M ay 10

23 J ul 10

24 J ul 09

06 O c t 09

17 D ec 09

01 Mar 10

12 May 10

23 J ul 10

24 J ul 09

06 O c t 09

17 D ec 09

01 M ar 10

12 M ay 10

23 J ul 10
1 1 1

0 0 0

Correlation Correlation
Correlation
-1 -1 -1

USDSEK USDNOK USDJPY

8.5 0.2 7.5 -1.0 99 2Y Rate Spread (RHS) 1.2
2Y Rate Spread (RHS) -1.2 97 Spot Rate (LHS)
8.0 0.0 7.0 1.0
Spot Rate (LHS) -1.4
2Y Rate Sp read

95
2Y R ate Sp read

2Y R ate Sp read

7.5 -0.2 6.5 0.8

Sp o t R ate

-1.6
Sp o t Rate

Sp o t R ate

93
7.0 -0.4 6.0 -1.8 0.6
91 1
-2.0
6.5 -0.6 5.5 0.4
89
-2.2
6.0 2Y Rate Spread (RHS) -0.8 5.0 0.2
-2.4 87
Spot Rate (LHS)
5.5 -1.0 4.5 -2.6 85 0.0
24 J ul 09

06 O c t 09

17 D ec 09

01 M ar 10

12 M ay 10

23 J ul 10
24 J ul 09

06 O c t 09

17 D ec 09

01 Mar 10

12 May 10

23 J ul 10
24 J ul 09

06 O c t 09

17 D ec 09

01 M ar 10

12 M ay 10

23 J ul 10

1 1 1

0 0 0

Correlation Correlation Correlation

-1 -1 -1

9
S&P500 vs. FX
The charts below show the S&P500 plotted against historical FX spot rates. A one-month rolling correlation (between
the spot rate and equity index) is shown to identify time periods when the two series are moving in tandem.

EURUSD GBPUSD AUDUSD

1.53 1300 1.75 1300 1.00 1300
1.48 1200 1.70 1200 0.95 1200
1.43 1100 1.65 0.90
1100 1100
Spot Rate

1.60 0.85

Spot Rate

Spot Rate
1.38 1000

S&P500
1000 1000

S&P500
1.55 0.80

S&P500
1.33 900 1.50 900 0.75 900
1.28 800 1.45 0.70
800 800
S&P500 1.40 S&P500 0.65 S&P500
1.23 700 700
Spot Rate (LHS) 1.35 0.60 Spot Rate (LHS) 700
Spot Rate (LHS)
1.18 600 1.30 600 0.55 600
23 Jul 09

05 O ct 09

16 Dec 09

26 Feb 10

11 May 10

22 Jul 10

23 Jul 09

05 Oct 09

16 Dec 09

26 Feb 10

11 May 10

22 Jul 10

23 Jul 09

05 O ct 09

16 Dec 09

26 Feb 10

11 May 10

22 Jul 10
1 1 1

0 0 0

Correlation Correlation Correlation

-1 -1 -1

NZDUSD USDCAD USDCHF

11 May 10

11 May 10
16 Dec 09

16 Dec 09
26 Feb 10

26 Feb 10
0.80 1300
05 Oct 09

05 Oct 09
23 Jul 09

22 Jul 10

23 Jul 09

22 Jul 10
0.75 1200
0.70 1100
1.12 600 1.30 600
Spot Rate

0.65 1000
S&P500

S&P500 700 1.25 S&P500 700

1.10
0.60 900 Spot Rate (RHS)
800 Spot Rate (LHS)
S&P500 inverted
1.20 800

S&P500 inverted
1.08
Spot Rate

0.55 S&P500 800

Spot Rate
900 1.15 900
0.50 Spot Rate (LHS) 700 1.06
1000 1.10 1000
0.45 600 1.04
1100
23 Jul 09

05 O ct 09

16 Dec 09

26 Feb 10

11 May 10

22 Jul 10

1.05 1100
1.02 1200 1.00 1200
1.00 1300
0.95 1300
1 1 1
Correlation Correlation

0 0 0

Correlation
-1 -1 -1

USDSEK USDNOK USDJPY

11 May 10

11 May 10
11 May 10

16 Dec 09

16 Dec 09
16 Dec 09

26 Feb 10

26 Feb 10
26 Feb 10

05 Oct 09

05 Oct 09
05 O ct 09

23 Jul 09

22 Jul 10

23 Jul 09

22 Jul 10
23 Jul 09

22 Jul 10

8.5 600 7.5 600 99 600

700 97 S&P500 700

8.0 700 S&P500
7.0 Spot Rate (LHS)
S&P500 inverted

800 Spot Rate (LHS) 800 95 800

S&P500 inverted

S&P500 inverted

7.5
Spot Rate
Spot Rate

6.5
Spot Rate

900 900 93 900

7.0
1000 6.0 1000 91 1 1000
6.5 89 1100
1100 1100
S&P500 5.5
6.0 1200 1200 87 1200
Spot Rate (LHS)
5.5 1300 5.0 1300 85 1300
1 1 1
Correlation Correlation

0 0 0

Correlation
-1 -1 -1

10
Commodities vs. FX
The charts below show oil prices plotted against historical FX spot rates. A one-month rolling correlation (between
the spot rate and the commodity series) is shown to identify time periods when the two series are moving in tandem.

EURUSD GBPUSD AUDUSD

1.53 100 1.75 100 1.00 100

1.48 90 1.70 90 0.95 90

80 1.65 80 0.90 80
1.43
1.60 0.85
Spot Rate

Spot Rate

Spot Rate
70 70 70
1.38 1.55 0.80
60 60 60

O IL

O IL

O IL
1.33 1.50 0.75
50 50 Oil (RHS) 50
1.45 0.70
1.28 40 40
Oil (RHS) 1.40 Oil (RHS) 0.65 Spot Rate (LHS) 40
1.23 30 1.35 30 0.60 30
Spot Rate (LHS) Spot Rate (LHS)
1.18 20 1.30 20 0.55 20
24 Jul 09

06 O ct 09

17 Dec 09

01 Mar 10

12 May 10

23 Jul 10

24 Jul 09

06 O ct 09

17 Dec 09

01 Mar 10

12 May 10

23 Jul 10

24 Jul 09

06 O ct 09

17 Dec 09

01 Mar 10

12 May 10

23 Jul 10
1 1 1

0 0 0

Correlation Correlation Correlation

-1 -1 -1

NZDUSD USDCAD USDCHF

12 May 10

12 May 10
17 Dec 09

17 Dec 09
0.80 100
01 Mar 10

01 Mar 10
06 O c t 09

06 O c t 09
24 Jul 09

23 Jul 10

24 Jul 09

23 Jul 10
0.75 90
80
0.70
1.12 20 1.30 20
Spot Rate

70
0.65 Oil (RHS)
60 Oil (RHS) 30 1.25 30
O IL

1.10 Spot Rate (LHS)

0.60 40 40
50 Spot Rate (RHS) 1.20
1.08
Spot Rate

0.55 Oil (RHS) 50 50

40
Spot Rate

1.15
Spot Rate (LHS)
O IL

1.06 60

O IL
0.50 30 60
70 1.10
0.45 20 1.04 70
1.05
24 Jul 09

06 O ct 09

17 Dec 09

01 Mar 10

12 May 10

23 Jul 10

80 80
1.02
90 1.00 90
1.00 100
0.95 100
1 1 1
Correlation Correlation

0 0 0

Correlation
-1 -1 -1

USDSEK USDNOK USDJPY

12 May 10

12 May 10
12 May 10

17 Dec 09

17 Dec 09
17 Dec 09

01 Mar 10

01 Mar 10
01 Mar 10

06 O c t 09

06 O c t 09
06 O ct 09

24 Jul 09

23 Jul 10

24 Jul 09

23 Jul 10
24 J ul 09

23 J ul 10

8.3 20 7.5 20 99 20
8.1 Oil (RHS) 30 30 97 Oil (RHS) 30
7.9 7.0
Spot Rate (LHS) 40 40 Spot Rate (LHS) 40
95
7.7
Spot Rate

50 50
Spot Rate

50 6.5
Spot Rate

93
O IL

7.5
60 60
O IL

O IL

60
7.3 6.0 91 1
70 70 70
7.1 89
80 80 80
6.9 5.5
90 87 90
6.7 90 Oil (RHS)
6.5 100 5.0 Spot Rate (LHS) 100 85 100
1 1 1
Correlation Correlation

0 0 0

Correlation
-1 -1 -1

*All charts are sourced to Lloyds TSB Corporate Markets Research, Bloomberg, Datastream and Citigroup.

11
Market Review
Short-term G-10 FX Charts

GBP/USD EUR/USD
1.56 1.31

1.54 1.29

1.52
1.27

1.50
1.25
1.48
1.23
1.46

1.21
1.44

1.42 1.19
22/06/10 29/06/10 06/07/10 13/07/10 20/07/10 22/06/10 29/06/10 06/07/10 13/07/10 20/07/10

EUR/GBP USD/JPY
0.86 91

0.85
90

0.84
89

0.83

88
0.82

87
0.81

0.80 86
22/06/10 29/06/10 06/07/10 13/07/10 20/07/10 22/06/10 29/06/10 06/07/10 13/07/10 20/07/10

USD/NOK USD/SEK
6.53 7.90

6.48 7.80

6.43
7.70
6.38
7.60
6.33
7.50
6.28

7.40
6.23

6.18 7.30

6.13 7.20
22/06/10 29/06/10 06/07/10 13/07/10 20/07/10 22/06/10 29/06/10 06/07/10 13/07/10 20/07/10

USD/CHF USD/CAD
1.12 1.07

1.11
1.06
1.10
1.05
1.09

1.08 1.04

1.07
1.03
1.06
1.02
1.05

1.04 1.01
22/06/10 29/06/10 06/07/10 13/07/10 20/07/10 22/06/10 29/06/10 06/07/10 13/07/10 20/07/10

12
Medium-term G-10 FX Charts

GBP/USD EUR/USD
1.75
1.53

1.70
1.48

1.65
1.43

1.60 1.38

1.55 1.33

1.50 1.28

1.45 1.23

1.40 1.18
Jul-09 Sep-09 Nov-09 Jan-10 Mar-10 May-10 Jul-10 Jul-09 Sep-09 Nov-09 Jan-10 Mar-10 May-10 Jul-10

EUR/GBP USD/JPY
0.96 101

0.94 99

0.92 97

0.90 95

0.88 93

0.86 91

0.84 89

0.82 87

0.80 85
Jul-09 Sep-09 Nov-09 Jan-10 Mar-10 May-10 Jul-10 Jul-09 Sep-09 Nov-09 Jan-10 Mar-10 May-10 Jul-10

AUD/USD NZD/USD
0.95 0.78

0.93 0.76
0.91 0.74
0.89
0.72
0.87
0.70
0.85
0.68
0.83
0.66
0.81

0.79 0.64

0.77 0.62

0.75 0.60
Jul-09 Sep-09 Nov-09 Jan-10 Mar-10 May-10 Jul-10 Jul-09 Sep-09 Nov-09 Jan-10 Mar-10 May-10 Jul-10

USD/NOK USD/SEK
6.85
8.10
6.65
7.90

6.45 7.70

6.25 7.50

7.30
6.05
7.10
5.85
6.90
5.65
6.70

5.45 6.50
Jul-09 Sep-09 Nov-09 Jan-10 Mar-10 May-10 Jul-10 Jul-09 Sep-09 Nov-09 Jan-10 Mar-10 May-10 Jul-10

USD/CHF USD/CAD
1.18 1.13

1.16 1.11
1.14 1.09
1.12
1.07
1.10
1.05
1.08
1.03
1.06
1.01
1.04

1.02 0.99

1.00 0.97

0.98 0.95
Jul-09 Sep-09 Nov-09 Jan-10 Mar-10 May-10 Jul-10 Jul-09 Sep-09 Nov-09 Jan-10 Mar-10 May-10 Jul-10

13
FX Snapshot

Currency performance vs. USD

Weekly Currency Performance vs. USD Monthly Currency Performance vs. USD 12month Currency Performance vs. USD

AUD 2.67 SEK 5.66 NZD 9.91

NZD 2.12 CHF 5.45 AUD 9.07

NOK 1.41 EUR 5.01 JPY 8.21

CAD 1.21 NOK 4.27 CAD 4.06

GBP 0.90 GBP 3.98 CHF 2.18

CHF 0.68 JPY 3.78 SEK 1.73

SEK 0.48 NZD 2.54 NOK 1.33

EUR 0.05 AUD 1.67 GBP -6.74

JPY -0.60 CAD -1.93 EUR -9.28

-1 0 1 2 3 -4 -2 0 2 4 6 8 -15 -10 -5 0 5 10 15
% % %

Currency performance vs. GBP

Weekly Currency Performance vs. GBP Monthly Currency Performance vs. GBP 12 month Currency Performance vs. GBP

AUD 1.72 SEK 1.90 NZD 15.16

NZD 1.21 CHF 1.69 AUD 14.50

NOK 0.52 EUR 0.99 JPY 14.40

CAD 0.31 NOK 0.45 CAD 10.52

CHF -0.20 JPY -0.07 CHF 8.78

SEK -0.36 NZD -1.42 SEK 8.35

EUR -0.82 AUD -2.26 NOK 7.96

USD -0.90 USD -3.98 USD 6.74

JPY -1.52 CAD -5.98 EUR -2.71

-2 -1 0 1 2 -8 -6 -4 -2 0 2 4 -5 0 5 10 15 20
% % %

Currency performance vs. EUR

Weekly Currency Performance vs. EUR Monthly Currency Performance vs. EUR 12 month Currency Performance vs. EUR

AUD 2.53 SEK 0.94 NZD 17.47

NZD 2.03 CHF 0.71 AUD 16.81

NOK 1.36 NOK -0.53 JPY 16.72

CAD 1.13 GBP -0.99 CAD 12.94

GBP 0.82 JPY -1.05 CHF 11.25

CHF 0.62 NZD -2.41 SEK 10.85

SEK 0.42 AUD -3.27 NOK 10.49

USD -0.05 USD -5.01 USD 9.28

JPY -0.67 CAD -7.05 GBP 2.71

-1 0 1 2 3 -8 -6 -4 -2 0 2 0 5 10 15 20
% % %

14
DISCLAIMER

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15