Foreign Exchange Outlook

Safety, Liquidity & Return …

Chris Turner
Head of Foreign Exchange Strategy London +44 20 7767 1610 christopher.turner@uk.ing.com

Tom Levinson
Foreign Exchange Strategist London +44 20 7767 8057 tom.levinson@uk.ing.com

FX Strategy
March 2012

Key currency attributes in 2012
Safety
JPY CHF GBP USD CNY NOK AUD SEK ASIA ex CNY NZD EUR CAD
Year-to-date vs. USD (% chg) JPY GBP EUR SEK CAD CHF AUD NZD NOK -6 -4 -2 0 2 4 6 8

Liquidity

Return

LATAM EMEA

• Very few currencies demonstrate all the attributes of safety, liquidity and return
March 2012

1

Pillar I …
Safety …
• The known unknowns • … Debt sustainability • … EMU break-up risk • … Oil • … Elections • … Dollar performance

March 2012

2

EUR/USD … the known unknowns
High

US elections/ protectionism

PROBABILITY

Fed QE3 Eurozone hard-landing Early Fed tightening Chinese hard landing Iran Conflict Eurozone breaks up Greece leaves EMU

EUR/USD Positive factors Negative factors

Low 0% Low
March 2012

15% IMPACT
3

30% High

Oversized debt baggage in G10
120 100 80 M aastricht Criteria 60 40 20 0 Japan NZ Australia EU17 Canada Sweden US UK Norway Switz
(188, 233, 250)

General government gross debt (% of GDP)
2007 2011 2015

• Financial sector reliant, indebted G10 transfer debt from private to public sector … • … with the fiscal metrics of the ‘Big 4’ badly compromised vs. the rest of the G10 • EZ → 60% Maastricht Criteria a distant memory • US → 100% threshold fast approaching … unlikely to turn before 2015 • Deficit start points key determinant of fiscal scope & downgrade risk
March 2012

4

Exclusive AAA club – shrinking …
US
(Aug11)

‘Big 4’

Japan
(Feb01)

Asia/$-bloc

Canada

Australia

HK

Singapore

Europe

UK

Switz.

Sweden

Norway

Denmark

Germany

N’lands

Finland

L’bourg

Spain
(Jan09)

Ireland
(Mar09)

Austria
(Jan12)

France
(Jan12)

Eurozone

March 2012

5

What if EMU broke up? Scenario analysis
1.60 1.50 1.40 1.30 1.20 1.10 1.00 0.90 0.80 90 95 00 05 10 15
Total break-up Greek exit

EUR/USD - scenario analysis

1.60 1.50 1.40 1.30 1.20 1.10 1.00 0.90 0.80

Baseline

March 2012

6

Eurozone internal imbalances exposed
10 Undervalued currencies 5 0 -5 -10 Overvalued currencies -15 Ireland Italy France Finland Greece Spain Austria Luxembourg Portugal Belgium Netherlands Germany

Current Account Balance (% of GDP, 2008-2010 average) Change in C/A Balance 1998-2010 (% of GDP)

March 2012

7

… and competitiveness in focus
20 15 10 5 0 -5 -10 -15 -20 Greece Ireland Italy Austria France Spain Portugal Belgium Netherlands Germany Finland More competitive Less competitive

REER (% Change 1999-2008, using export price deflator) REER (% Change, 1999-2008, using Unit Labour Costs) REER (% Change, 1999-2010, using Unit Labour Cost)

March 2012

8

A new Greek drachma - hello and good-bye
FX performance after failed FX regimes
120 Mexico 1994 Thailand 1997 Indonesia 1997 Korea 1997 Russia 1998 Brazil 1998 Turkey 2000 120

100

100

80

Jan 1st of crisis year = 100

80

• Greek exit and a return of the Drachma is now on the table • The implementation challenge huge • We can only guess as to how it could be re-introduced ... • … but on arrival we would expect it to fall up to 80% vs. EUR • … generally at the lower end of performances of failed FX regimes
March 2012

60

60

40

40

20

20

0 1 51 101 151 201 251 301 351 401 451 501 Days after January 1st of crisis year

0

9

EMU break-up - List of shame
DEM / break-up FX (T-1 to break-up DEM/Lcl = 1.00) 1.00 1.00 Aus, Fin, Lux, Neth 0.90 Belg, Fra Ire, Ita 0.70 0.70 0.90

• Rock solid • Germany • Almost safe – 5-10% weakness vs. DEM • Netherlands, Austria, Finland, Luxembourg • On the edge – 10-20% weakness vs. DEM • France, Belgium • Vulnerable – 20-30% weakness vs. DEM • Italy, Ireland • Casualties – 50% weakness vs. DEM • Portugal, Spain • Worst offender – 80% weakness vs. DEM • Greece
0.20 Jan12 0.40 0.60

0.80

0.80

0.60 Port, Spa

0.50

0.50

0.40

0.30 Greece Jan13 Jan14 Jan15 Jan16

0.30

0.20 Jan17

Almost Safe (7.5%) Casualties (50%)

On the Edge (15%) Worst Offender (80%)

Vulnerable (25%)

March 2012

10

EMU break-up - Some views from corporates
Corporates are treating risks seriously • Some treasurers spending one day per week on this Limiting net exposures • Once net exposures have been identified, try to reduce them where possible e.g. more frequent cash sweep How to hedge • Not much interest in proxy hedges, e.g. DKK, assumption that EUR continues in some form, even as a ECU II Match assets with liabilities • This is the purest hedge. Consensus did seem to be heading towards drawing down on lines of local bank credit, in which countries the assets located Capital controls • Illegal under Lisbon treaty… but desperate times call for desperate measures?
March 2012

11

Higher oil - Winners & losers in FX world
(YoY%)

Brent oil, global growth, US recessions Global growth

(US$/bbl)

10 Brent oil price (right) - US recessions

150 130 110 90 70

8

6

4 50 2 30
15

Net oil exports as a % of GDP (2009-11 average)
10 5 0

10 0 -10 -2 70 75 80 85 90 95 00 05 10 -30

-5 -10 -15 Winners Losers Russia Norway Canada Mexico Brazil UK Indonesia Australia Switzerland Romania US NZ Sweden Turkey China Japan Hungary Czech Rep South Poland India Philippines Thailand Taiwan Korea Singapore

March 2012

12

Middle East risk – Iran vs. Iraq
OPEC oil supply (bbl per day / Jan 2012)
Libya, 1.0 Algeria, 1.2 Angola, 1.7 S Arabia, 9.6 Qatar, 0.8 E'dor, 0.5

Nigeria, 2.1

Venezuela, 2.4

UAE, 2.6

• OPEC represents 1/3 of global oil production • Oil prices are the highest since 1Q11 … • … driven by Iran-related concern • … risk of supply side shock is a concern
Iraq, 2.7

Iran, 3.5 Kuwait, 2.8

• Military conflict would result in a far higher oil price than Iran’s supply suggests • Although Iraq is set to increase production 2m/bpd
March 2012

13

2012 - a year of election risk
29 April or 6 May … 22 April / 6 May … 6 November …

11 10 9 8 7 6 5 4 3 80 83
Reagan

Unemployment in US election year
Reagan -UE rate f ell f rom 10.8 to 7.2% coul d the sa me ha ppen i n 2012?

11 10 9 8

Full EUR/USD %chg after Election Date President Senate House mandate 1mth 3mth 6mth 12mth 02-Nov-76 Carter (D) D D Yes 0.5 0.6 1.8 5.3 04-Nov-80 Reagan (R) R D No -2.3 -8.5 -13.3 -17.6 06-Nov-84 Reagan (R) R 08-Nov-88 Bush Sn (R) D 03-Nov-92 Clinton (D) D 05-Nov-96 Clinton (D) R 07-Nov-00 Bush Jn (R) Hung 02-Nov-04 Bush Jn (R) R 04-Nov-08 Obama (D) D 06-Nov-12 ??? D Yes = all 3 same party, No* - S D No -4.5 -8.9 -6.1 11.8 D No* 1.7 -4.9 -6.4 -5.5 D Yes -0.7 -5.1 -0.8 -9.3 R No* -1.8 -7.1 -10.9 -9.5 R No* 3.1 7.8 3.6 4.1 R Yes 3.9 1.3 0.9 -6.7 D Yes -0.8 0.6 2.9 15.7 R & H aligned, but not President, No = S & H different

Clinton Obam a

7 6

Bus h Sn Clinton

Bus h Bus h

5 4 3

86

89

92

95

98

01

04

07

10

13
14

March 2012

Safe-haven flows - USD desire
120 100 80 60 40 20 0 -20 -40 -60 06 Net purchases US T-Bills 07 08 09 10 USD Index (rhs) 11 12
2007+

Safe-haven US Treasury Bill flow s (US$bn, 3m MA) Inflow

95

1.00 0.50

G10 - VIX correlation 2007+ Greece I (Apr-May10) GFC (Aug-Oct08) Greece II (Jul-Sep11)

90

0.00 -0.50

85

-1.00 EUR JPY GBP CHF NOK SEK CAD AUD NZD

80

0.00 -0.25

EMEA - VIX correlation

75

-0.50 -0.75

70

-1.00 PLN CZK HUF RON RUB TRY ZAR ILS
GFC (Aug-Oct08) Greece I (Apr-May10) Greece II (Jul-Sep11)

• During crisis US asset demand surges • Correlation between equity market volatility and FX increases • Although signs of Greece-related fatigue
March 2012

0.50 0.00 -0.50 -1.00

Asia & Latam - VIX correlation 2007+ GFC (Aug-Oct08) Greece I (Apr-May10) Greece II (Jul-Sep11)

SGD

MYR

TWD

15

KRW

MXN

INR

IDR

THB

PHP

CNY

BRL

USD - Crisis is the dollar’s only friend
120

DXY 200 day MA USD Index 200 day m.a.
Greek Debt Cris is (s tart) (GDC)

120

110

Hom eland Inves tm ent Act (HIA)

Global Financial Cris is (GFC)

110

100

100

90

90

80

80

70 02 03 04 05 06 07 08 09 10 11 12

70

• Crisis would seem to be the US dollar’s only friend • It is simple but we see value in looking at the USD Index (DXY) 200 day moving average • Breaches signal crisis and saw DXY rally 25% during the 2H08 GFC & 20% during the 1H10 Greek crisis … • … DXY broke through the 200 day m.a. in September 2011
March 2012

16

Safety …
Safety Liquidity

Return

AUD SEK NZD Vulnerable Safe CAD NOK EUR GBP CHF JPY USD

March 2012

17

Pillar II …
Liquidity …
• Market characteristics … • … DM vs. EM trade off • … Latest volume surveys • … FX reserve managers as a guide • … Too much liquidity is a ‘problem’

March 2012

18

The old rules still apply …
FX volatlity (implied) (%)

35

35

• In times of crisis the ‘old rules still apply’ … • … Emerging mkt volatility spikes far more than Developed mkt • In calmer times increasingly liquid EM trades are similar to DM … • In 2011 EM volatility even traded below DM for a period • This highlights that much of the world’s woes are concentrated in the EU17, US & Japan

30

G7 FX vol EM FX vol

30

25

25

20

20

15

15

10

10

5 08 09 10 11 12

5

March 2012

19

Global safe havens – surpluses help
Current accounts in G20 in 2012 (% of GDP)

15 10

5 0

-5 -10

IMF forecasts

Norway

Switzerland

Mexico

Germany

Brazil

US

UK

EU17

Sweden

Japan

Indonesia

India

Italy

NZ

Argentina

S Africa

France

S Arabia

Canada

• A current account deficit means a country is a net borrower and relies on inward foreign investment in the form of either of FDI or portfolio investment
March 2012

20

Australia

Turkey

China

Russia

Korea

AUD volumes are surging …
590
200 150 100 50 0 USD/JPY EUR/JPY EUR/USD AUD/USD EUR/CHF USD/CHF EUR/GBP USD/CAD GBP/USD

FX 'spot' daily turnover (US$bn) - October 2011

USD/MXN

NZD/USD

USD/RUB

EUR/NOK

USD/SGD

USD/NOK

EUR/CAD

USD/CNY

USD/ZAR

EUR/PLN

EUR/AUD

USD/TRY

EUR/SEK

USD/SEK

USD/KRW

USD/BRL

USD/INR

• EUR/USD and the G10 still dominate global FX trading • Latest turnover surveys show AUD/USD activity surging … • … taking it ahead of GBP/USD and USD/JPY • Greater FX flexibility would help emerging market volume to increase

March 2012

21

Others

Where do FX reserve managers place funds?
FX Liquidity 100 80 60 40 JPY 20 GBP 0 A+ AAAA AA+ AAA LT Debt Rating

Developed Markets … Big 4
USD

FX Liquidity 100 80

Eurozone breakdown

G3
EUR

60 Belgium 40 Italy 20 Finland 0 A+ AAAA AA+ AAA LT Debt Rating Spain France Germ any Neth.

Size of bubbles represents debt market liquidity
FX Liquidity 8

… and all the rest

AUD

6

S3

CHF CAD

4 HKD 2 BRL TRY INR 0 BB BB+ BBBRUB BBB BBB AMXN ZAR PLN A A+ AAAA KRW SEK NZD NOK AA+ SGD DKK AAA LT Debt Rating

March 2012

22

Too much liquidity can start to hit FX
Central Bank asset purchases (% of GDP)
24 22 20 18 16 14 12 10 8 6 4 2 0 Bank of England Federal Reserve Bank of Japan ECB
LTRO 1&2 QE still to come

• The Fed & BoE undertook large scale QE in early 2009 … • … and the BoE continues to do so • While the primary monetary objective was to address fears of deflation … • … the by-product was large scale currency weakness • Is the ECB undertaking QE? • If ECB created money is used to buy sovereign debt – even for a three year period – then the answer is yes • And even Japan has turned more aggressive this year … • … adopting a 1% inflation target and increasing its own QE
23

March 2012

ECB catch-up with Fed to weigh on EUR/USD
EUR/USD vs. monetary base ratio 300 250 200 1.40 150 100 50 08 09 10 11 12 EUR/USD (right) 1.30 1.60

1.50 1.45 1.40 1.35 1.30 1.25

EUR/USD vs. overnight rate spreads

140 120 100 80 60 40 20 0

1.50

1.20

1.20 Jan-10 Jul-10 Jan-11 Jul-11 Jan-12
EUR /USD

US:Eurozone monetary base ratio

EON IA :Fed Funds spread (R H S bp, 10 day m .a.)

• For a change, EU17 base money has been growing faster than the US … • … Fed balance sheet has been flat since mid-2011 while ECB’s is up 40% • Greater base money expansion should ultimately prove a EUR negative • Look for overnight Eurozone rates to drift to the 0.25% floor
March 2012

24

Liquidity
Safety Liquidity

Return

NZD NOK SEK CHF

AUD CAD

GBP JPY EUR USD

Illiquid

Liquid

March 2012

25

Pillar III …
Return …
• Identifying the investment environment … • … Carry trade • … Policy mix in DM vs. EM space • … Identifying the returns • … Prospect for equity inflows • … Two versions of fair value

March 2012

26

How are we feeling today?

2012?

2005-2007 2008, 2011

Safety/Liquidity
March 2012

Return
27

Framework for 2012
Debt & Deficit Dynamics (2012)
2 0 -2
Russia
11.2%

Growth & Interest Rates (2012)
10
Interest Rate (%)

General deficit (% GDP)

Sweden Switzerland

Norway

Brazil India Russia

8
Germany Italy Brazil Canada Spain
EU17
121%

China Australia NZ SA

6
EU17

SA Germany Sweden Australia NZ Canada UK Norway
GDP gowth (%)

-4 -6

Portugal France
189%

4
France Spain

China

India

UK US

Greece

-8 -10 0 20

2 Portugal
Japan 240%

Greece Italy Switzerland

General government gross debt (% GDP)

0 -4

40

60

80

100

120

-2

0

Japan US

2

4

6

8

10

• The Big 4 of the US, Japan, EU17 & UK • In terms of interest rates the developed have unfavourable debt/deficit dynamics market offers very little … • The BRIC nations look good … • … as do Sweden, Norway & the $-bloc
March 2012

• … but where there is yield it is away from the QE/zero rate dependent Big 4

28

G10 composite leading indicators
(Jan08=100) 110 G10 OECD Composite Leading Indicators 110

105

105

100

100

95

95

90 Canada France 85 Japan UK 80 07
March 2012

90 Eurozone Germany Sweden US 80 08 09
29

85

Switzerland 10 11

US rates at 0% until 2014 – if you believe Fed
USD TW I Majors versus 2 year yield spread
88 85 82 79 76 73 70 67 Dec-04 (%) 2.0 1.5

rising US yield spead & USD

1.0 0.5 0.0

falling US yield spread & USD

-0.5 -1.0 -1.5

Sep-05

Jun-06

Mar-07

Dec-07

Sep-08

Jun-09

Mar-10

Dec-10

Sep-11

USD TWI Majors

US:Major trading partners two year yield s pread

• Fed pledge to maintain current interest rates until at late 2014 is no guarantee • … the FOMC most divided since 1992 (3 dissenters on 9 Aug) • If/when the Fed signals an end to zero interest rates Treasury yields will move sharply higher … • … probably triggering strong USD appreciation
March 2012

30

Carry trade will be popular
1800 1600 1400 1200 1000 800 600 400 200 0 90 92 94 96 98 00 02
S&P500 Carry Trade (rhs, Jan1990=100) (Long AUD, NZD, NOK vs. Short USD, JPY, CHF) S&P500 vs. Carry Trade

220 200 180 160 140 120 100 80

04

06

08

10

12

• Carry trade strategies are high return and high risk … • … 50% of gains between 2002-09 were wiped out in a matter of weeks
March 2012

31

Return - yields point to Australia …
Nominal and risk-adjusted yields in G10 space
5.00 4.50 4.00 3.50 3.00 2.50 2.00 1.50 1.00 0.50 0.00 AUD NZD NOK SEK CAD GBP EUR USD JPY CHF 3 month rates Risk-adjusted yields 0.45 0.40 0.35 0.30 0.25 0.20 0.15 0.10 0.05 0.00

• If the risk environment does allow investors to chase yield … • … Australia could attract the lion’s share of the flows

• Both in terms of nominal yields and yields adjusted by expected volatility AUD stands out • Closer to home and in a European world of low returns, NOK & SEK are our high yielders

March 2012

32

BRIC+EM Composite leading indicators
(Jan08=100)

BRIC +EM Composite Leading Indicators
170
Czech Rep. Poland Turkey China

170
India

160 150 140 130 120 110 100 90 80 07

Hungary Russia Brazil

160 150 140 130 120 110 100 90 80

08

09

10

11

March 2012

33

Select EM destinations for the carry trade
Nominal and risk adjusted yields: EMEA 10 9 8 7 6 5 4 3 2 1 0 UAH TRY ZAR RUB HUF PLN RON KZT CZK 3 month implied yields Risk-adjusted yields
Nominal and risk adjusted yields: Asia
6 5 4 3 2 1 0 -1 -2 IDR KRW THB PHP SGD Risk-adjusted yields CNY TWD
0.7 0.6 0.5 0.4 0.3 0.2 0.1 0 -0.1 -0.2

1.2 1 0.8 0.6 0.4 0.2 0

Nominal and risk adjusted yields: Latam 10 9 8 7 6 5 4 3 2 1 0 BRL COP CLP MXN Risk-adjusted yields PEN 3 month implied yields
March 2012
0.8 0.7 0.6 0.5 0.4 0.3 0.2 0.1 0

3 month implied yields

34

EM market sizing - Big is beautiful
THAILAND 2% INDONESIA 3% MALAYSIA 3% MEXICO 5% RUSSIA 7% BRAZIL 15% CHILE 2% POLAND 1% TURKEY 1% Other 3% CHINA 17%

MSCI EM Weightings

INDIA 7%

SOUTH AFRICA 8% TAIWAN 11%

KOREA 15%

1600 1200 800 400 0 Mexico

Size of EM local debt markets (US$ bn)

Russia

Colombia

March 2012

35

S. Africa

Romania

Brazil

Turkey

Poland

Czech Rep.

Hungary

Equity flows to return to Asia?
Cumulative equity flows since 2007 (US$bn)
40 40

Equity inflows to return on lower CPI 15 10
30

EMEA
30

(3m sum / $bn)

(YoY%) -2 0 2 4 6 8

LATAM ASIA

5
20

20

0
10 10

-5 -10 -15 06 07 Net inflow into EM Asia equity funds China CPI (rhs, inverted) 08 09 10 11 12

-

-

-10 07 08 09 10 11 12

-10

10

• Higher growth rates in Asia have typically attracted the lion’s share of global emerging market equity portfolio flows … • … but not in 2011
March 2012

• Typically higher inflation in China (and presumably the rest of Asia) has discouraged equity inflows • A decline in China CPI to 3.5% this year and looser PBOC policy should help

36

US equity strength = USD strength
Foreign purchases of US equities vs. USD Index
200 150 100 50 0 -50 -100 Jan-89 Jan-91 Jan-93 Jan-95 Jan-97 Jan-99 Jan-01 Jan-03 Jan-05 Jan-07 Jan-09 Jan-11
To tal Fo reign P urchases o f US Equities (US$ bn, 1 sum) 2m USD Index

125 115 105 95 85 75 65

March 2012

37

Global FX - pain thresholds vary
Currency pain thresholds
Brazil Australia Russia China Singapore Switzerland Indonesia Canada Japan NZ Thailand Malaysia Turkey India Sweden Norway South Africa Hungary Eurozone US South Korea Mexico UK -15 -10 -5 0 5 10 15 20 25 30 35

Percent of REER index above/below 10-year average

• With the exception of JPY, the ‘Big 4’ of USD, EUR & GBP are weak
March 2012

38

March 2012

Baskets purchased per €100 0.6 Mexico Poland Bulgaria Hungary China Ukraine Romania India South Africa Czech Rep Mar-11 Russia Slovakia Philippines Indonesia Kazakhstan Brazil Turkey Singapore Argentina South Korea Expensive End-11 Cheap 0.7 0.8 0.9 1.0 1.1 1.2 1.3

Purchasing Power - What’s cheap

EM average

• EM currency valuations are converging with those in the developed world
39

Spain US UK Hong Kong

High per capita income

Return
Safety Liquidity

Return

CHF

JPY

USD

EUR

GBP

CAD

SEK NOK

NZD

AUD

QE

Return

March 2012

40

Appendix

March 2012

41

G10 FX & rates
160 G10/USD (Jan08 = 100) USD CHF CAD JPY NOK AUD GBP SEK NZD 160
%

G10 policy rates (%)
Forecast line

9 8

%

9 8 7 6 5 4 3 2 1 0

140

140

7 6

120

120

5 4

100

100

3 2

80

80

1 0 08 09
GBP NOK

10
USD CAD

11
CHF

12
SEK

13
AUD

14
NZD

60 08 09 10 11 12

60

EUR JPY

• Safety, liquidity, return all important since 2008 crisis … • … hence varied characteristics of top performers over last 5 years • But whatever way we slice it … GBP is the worst performer … • … constantly misfires and too many false dawns
March 2012

42

Central Europe – FX & interest rates
CEE/EUR (Jan08 = 100)
130 120 110 100 90 80 70 60 08 CZK 09 HUF PLN 10 RON 11 RUB TRY 12 ZAR
Stronger CEE FX

CEE policy rates (%)
130 120 110 100 90 80 70 60

14 12 10 8 6 4 2 0 08 CZK 09 HUF PLN 10 RON 11 RUB TRY 12

14 12 10 8 6 4 2 0 ZAR

• Since 2008 the very low yielding CZK has been the top EMEA performer

March 2012

43

EMEA - most vulnerable?
Vulnerability reflects Trade openness and FX borrowing

100% 90% Exports/G D P (2010) 80% 70% 60% 50% 40% 30% 20% 10% 0% 0% 20% 40% 60% 80% Private Sector FX loans/ Total loans (end-08) 100% Russia Turkey Czech Rep. Kazakh. Poland Bulgaria Ukraine Romania Latvia Hungary Most Vulnerable

• In EMEA, the most open economies are suffering from the Eurozone slow down … • … although so far it is mild in Germany (which accounts for up to 1/3 exports from Czech Rep, Hungary and Poland) • Those countries that have more foreign bank and FX loan exposure may suffer a continued draw down of loan books. • Russia & Turkey are relatively insulated

March 2012

44

CEE … the known unknowns
High 30%

UAH

PROBABILITY

TRY
PM leans on CBT

No IMF deal after elections

CEE HUF Negative factors

15%
Bank asset sell-off by owners Pension fund assets grab

IMF deal fails

CZK BGN
Deposit run on Greece

PLN

Deposit run on Greece RUB Investor flight

RON

Low

0% 0% Low 15% IMPACT
45

30% High

March 2012

Latam – FX & interest rates
LATAM/USD (Jan08 =100) 120
Stronger LATAM

120

14 12

Latam policy rates (%)

14 12 10 8 6 4 2 0

110

110

10
100 100

8 6 4 2

90

90

80

80

70 08
MXN

70 09
CLP

10
COP

11
BRL

12
ARS

0
08

MXN

09

CLP

10

COP

11

BRL

12

• Ongoing attempts to prevent BRL appreciation leaves USD/BRL little altered since 2008
March 2012

46

Asia – FX & interest rates
ASIA/USD (Jan08 =100) 120 Stronger ASIA FX 120

Asia Policy Rates (%) 10 9
100

10 9 8 7 6 5 4 3 2 1 0
08 09 10 11 12

110

8 7

100

80

6 5

90

60

4 3 2

80 CNY IDR PHP THB 08 09 10 HKD KRW SGD INR MYR TW D

40

70

20

1 0

60

0 11 12

HKD THB

IDR PHP

KRW CNY

MYR INR

TW D

• In Asia the high yielding INR is also the worst performer
47

March 2012

Greece … planned debt burden reduction
New debt restructuring deal •Further haircuts to private sector Greek bondholders who hold €206bn in Greek debt. •Bondholders to receive new debt with lower interest rates of 2% for 2012-15, 3% for 2016-21 and 4.3% thereafter. An approximate NPV loss of 75% for investors €130bn rescue plan •Official lenders agree to increase their debt burden to get Greek levels to 120.5% of GDP by 2020. •Interest rates lowered on bail-out loans to Greece. This will cut €1.4bn from the bail-out package •€23bn will be contributed from the IMF. Greek debt levels will be lowered by 2.8% of in 2020 ECB/ Central Bank •ECB to redistribute profits on its €40bn of Greek debt to national central banks •Central banks that hold €12bn in Greek bonds will contribute all debt interest to Greece until 2020. •This will cut €1.8bn from the bail-out package •.Greek debt levels will be lowered by 1.8% in 2020.
48

Source: FT
March 2012

Can a voluntary haircut work for Greece?

To tal Greek debt: 352bn euro Total Greek debt (€352bn) o thers 20% IM F 6%

Greek debt by private sector (€205bn) Greek debt held held by private secto r: 205bn euro Euro bailo ut 1 5% o thers 34% o ther lo ans 5%

Greek banks 24%

Euro p insurances 4% Greek so cial insurance 9%

ECB 1 6% Euro p banks 1% 1

Euro p banks 20% Euro p insurances 7%

Greek banks 1 4%

Greek so cial insurance 1 5%

March 2012

49

Liquidity fuelled optimism …
6 5 4 3 2 1 0 08
1600 (bp)
(%) Euribor back below ECB rates

6 5 4 3 2 1 0

30 0 -30 -60 -90 -120 -150

EUR/USD CC basis sw ap & risk reversal

(bp)

(%)

1 0 -1 -2 -3

ECB policy rate 3mth EURIBOR

1Y EUR/USD basis swap 1Y risk reversal (rhs) 08 09 10 11 12

-4 -5

09

10

11

12
(bp) 1600

10Y spread over bunds Ireland

800 600 400 200 0 08 09

BBB corporates spreads

800 600 400 200 0

US
1200

1200

Portugal Spain Italy

Europe

800

800

400

400

0 08
March 2012

0 09 10 11 12
50

10

11

12

Oil - Will Iran derail the recovery?

Turkey

Turkmenistan

Syria Tunisia Morocco Algeria 1.2m/bpd Libya 1.0m/bpd Egypt 0.8m/bpd Lebanon Israel Jordan Kuwait 2.8m/bpd Bahrain Saudi Arabia 9.6m/bpd Qatar 0.9m/bpd Mali Niger Chad Sudan Eritrea Nigeria 2.1m/bpd Yemen 0.3m/bpd UAE 2.6m/bpd Pakistan Iraq 2.7m/bpd Iran 3.5m/bpd Afghanistan

Mauritania

Oman 0.8m/bpd

Orange countries are OPEC members

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51

Fed - Rate hikes deferred to 2014
Fed member assessment for appropriate interest rate 5
(%)

US CPI - MoM% vs. YoY% 0.7 0.6 0.5 0.4 0.3 0.2 0.1 0.0 -0.1 -0.2 -0.3 Jan-11 5 F'casts 4 3 2 1 0 MoM% YoY%, (rhs) Jul-11 Jan-12 Jul-12 Jan-13 Jul-13 -1 -2

4 3 2 1 0 2012 2013 2014 Longer run

• The Fed has is now releasing individual member interest rate projections … • … added transparency probably forced the ‘exceptionally low’ rates pledge to be moved from ‘mid-2013’ to ‘late 2014’ • This looks merely like an exercise in expectations management.
March 2012

• However, the Fed’s inflation-fighting credentials look safe for 1H2012. • Base effects from last year’s energy surge look set to drag headline CPI below 2% this summer. • The Fed’s position may be tougher to hold if inflation picks up towards year-end.
52

GBP retains safe-haven appeal
Foreign ow nership of gilts rising 1200 (£bn) 1000 Non-BoE domestic 800 BoE Overseas 600 400
3 3 4 4 6

AAA - 10Y safe-haven yields (% )
6

5

5

2

2

200

1

0 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11

0 10

Sw Ne Sz

No Fi Ca

Ge UK Au 11 12

1

0

• In an ever decreasing AAA sovereign world GBP is attractive … • … especially when liquidity/safety takes precedent over return • Foreign investors have shifted European demand from EU17 to UK
53

March 2012

EUR/CHF ... top 5 risks for 2012
High

PROBABILITY

Collapse in Swiss exports Severe deflation & SNB raises floor Greece leaves EMU Government curtails SNB powers

EUR/CHF Positive factors Negative factors

Hungarian default/debt crisis

Iran Conflict Swiss housing bubble bursts

Eurozone breaks up

Low 0% Low
March 2012

10% IMPACT
54

20% High

Global research capabilities
Our analysts around the world produce group research reports that brief on global developments

Economic Calendar Published each week, the calendar tells you what’s due when and what we expect. MONTHLY ECONOMIC FORECAST UPDATES Each month we update our main forecasts on the major economies of the US, Eurozone, UK, Japan and China in our Monthly Forecast Update. This serves as a base to update forecasts on the other markets we cover, which is published shortly after in ING Economic Forecasts.

Prophet – OUR GLOBAL DAILY Co-published with our Developed and Emerging Markets team, provides daily analysis of upcoming economic releases and recent data.

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Developed Markets Economics and Strategy
Financial Markets Outlook Our weekly discusses recent themes and market movements in Developed Markets.

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Quarterly Economic Updates
These quarterlies take an in-depth look at the US, Eurozone and UK economies with a themed introduction, substantial chart pack section, and detailed forecasts.

Our US Economics Team headed by Rob Carnell has been ranked by Bloomberg as the most accurate forecasters of US GDP for 2006/7 and 2007/8 and in 2008/9 came in second.

Other ad hoc reports, weeklies, and dailies provide more in-depth analysis on specific markets.
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Emerging Markets Economics and Strategy
A complement of emerging markets economists rounds out our global vision. EMBR – OUR EM BIWEEKLY The EMBR includes our recent views on the many emerging markets we cover, with recommendations for FX, money markets, Sovereigns and Corporates.

ING economists and analysts are positioned around the globe, in London and in major emerging markets, and other smaller markets where ING has a local presence.

EM Debt Strategy provides trade ideas and outlines global debt market trends with recommendations and ING-developed models.

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Covering Russia, Ukraine, Kazakhstan, Turkey, Hungary, Poland, Czech Republic, Slovakia, Bulgaria, Romania, Croatia…

Emerging Europe Quarterly Outlook Encompasses ING forecasts for all Emerging European markets under our coverage, with updates on the situation in each country

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FX Strategy Research
Our FX Strategy team is based in London FX research is tailored to ING’s base of corporate and institutional customers FX views published in conjunction with our local economists provide strategies and trades in a global and local context
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Year-to-date ING's foreign exchange strategists are ranked by Reuters in the Top 5 for FX accuracy

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ING FX Strategy placed 3rd in the 2010 Reuters Accuracy Poll for foreign exchange forecasting.

ING FX Strategy placed at the top for many currency pairs in Bloomberg’s 2009 rankings: 1st for EUR/GBP, 4th for EUR/USD, 3rd for GBP/USD

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Regular Research
Dailies:
Prophet Market snaps/reactions Daily FX Strategy Technical Trend Monitor Credit Morning Notes Rates Strategy Good Morning Asia EM Debt Closing Prices Romania Daily Snapshot Ukraine Market Snapshot

Monthlies:
Global Monthly Economic Update

Weeklies:
Financial Markets Outlook Global Economic Calendar Tradewise EM debt fund flows Emerging Markets Biweekly Report
Included in the EMBR but also published separately -- Local currency and debt products strategy -- External debt strategy

ING Global Economic Forecasts FX talkING European Debt Supply Update Fed Preview ECB Preview Bulgaria Monthly Ukraine Monthly

Quarterlies and Other:
Directional Economics/CEE Forecast Update FX Top Trades Foreign Exchange Focus FX Flash US Economics Quarterly Update Eurozone Economics Quarterly Update Swiss Economics Quarterly UK Economics Quarterly Update Portfolio Strategy Emerging Europe Quarterly Outlook Romania Local Focus Global Presentations

EMBR Quantitative Supplement EMEA Weekly Outlook Slovakia Local Focus Turkey Local Focus Talking Korea

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Disclaimer
All charts sourced from EcoWin or Bloomberg unless stated otherwise.
Certain of the statements contained in this release are statements of future expectations and other forward-looking statements. These expectations are based on management’s current views and assumptions and involve known and unknown risks and uncertainties. Actual results, performance or events may differ materially from those in such statements due to, among other things, (i) general economic conditions, in particular economic conditions in ING’s core markets, (ii) changes in the availability of, and costs associated with, sources of liquidity such as interbank funding, as well as conditions in the credit markets generally, including changes in borrower and counterparty creditworthiness, (iii) the frequency and severity of insured loss events, (iv) mortality and morbidity levels and trends, (v) persistency levels, (vi) interest rate levels, (vii) currency exchange rates, (viii) general competitive factors, (ix) changes in laws and regulations, and (x) changes in the policies of governments and/or regulatory authorities. ING assumes no obligation to update any forward-looking information contained in this document. This presentation is intended for general information purposes. It does provide basic information concerning individual Commercial Banking products, insurance products or related services. However none of the information should be interpreted as an offer to sell securities or as investment advice of any kind. Queries concerning these topics should be addressed to the individual business units and/or companies of ING Groep N.V. ("ING Group"). No warranty or representation, express or implied, is given as to the accuracy or completeness of that information. In no event will ING Group, nor any of its directors, employees or advisors accept any liability with regard to the information contained in the individual ING companies', business unit or product group's presentation. ING Group comprises a broad spectrum of companies (the "ING companies"), many of them operating under their own brand names. Almost every ING company, business unit or product group, has its own website on the internet where it offers information about its products and services. Reference is made to those websites for further details and hyperlinks have been provided from this website to those ING companies, business units and product groups, if available. It is prohibited to modify, copy, distribute, transmit, display, publish, sell, license, create derivative works or use any content for any other purposes than that of this presentation, i.e. providing information about ING Group and its lines of business. No Liability While ING Group and ING companies use reasonable efforts to include accurate and up-to-date information in this presentation, errors or omissions sometimes occur. ING Group and ING companies expressly disclaim any liability, whether in contract, tort, strict liability or otherwise, for any direct, indirect, incidental, consequential, punitive or special damages arising out of or in any way connected with your access to or use of this presentation, and/or any other ING companies' presentations whether or not ING Group and/or ING companies were aware of the possibility of such damages. All information in this presentation, including but not limited to graphics, text and links to other communication means, is provided "as is" and is subject to change without prior notice. Such information is provided, to the fullest extent permissible pursuant to applicable law, without warranty of any kind express or implied, including but not limited to implied warranties of merchantability, fitness for a particular purpose, non-infringement from disabling devices. ING Group does not warrant the adequacy, accuracy or completeness of any information in this presentation and expressly disclaim any liability for errors or omissions therein. Users are responsible for evaluating the accuracy, completeness or usefulness of any information or other content available in this presentation.

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