Barclays FX Quarterly

FOREIGN EXCHANGE RESEARCH
March 2012
GLOBAL FX QUARTERLY
RESURGENT USD IN CALMER WATERS
PLEASE REFER TO THE LAST PAGE FOR ANALYST CERTIFICATION(S) AND IMPORTANT DISCLOSURES.
Barclays | Global FX Quarterly
CONTENTS
OVERVIEW 2
Resurgent USD in calmer waters Stronger growth and improving relative structural issues in the US are USD positives relative to the majors, but less so against the rest of the worlds currencies. THEME 1: USD PROSPECTS 3
The comeback kid The move in US yields is critical for the USD. A cyclical upturn and relative outperformance of the US economy to the rest of the world is not necessarily a USD positive. THEME 2: OIL AND FX 7
A slippery slope Our analysis shows long NOK/CHF, RUB/TRY and MYR/TWD are attractive in terms of currency vulnerability to higher oil prices, carry and valuations. THEME 3: EUROPEAN CURRENCIES 11
Navigating unchartered waters We think the NOK, SEK and PLN are better placed in post-3Y LTRO Europe, given economic fundamentals and global risk factors. THEME 4: JPY AND CURRENT ACCOUNT 15
Deteriorating undercurrent The risk of a structural current account deficit in Japan sooner than expected has been a big part of recent JPY depreciation and prospects for it will remain crucial. THEME 5: MULTILATERAL PERSPECTIVE 19
Positioning for tectonic shifts Applying a multilateral approach to currency values since July 2011, we think the TRY looks too expensive and the BRL too cheap against their trading partners. G10 FX MOVES OVER THE PAST QUARTER AND SUMMARY OF KEY DRIVERS FOR G10 FX .....................................................................................................................................22 G10 FX VIEWS ON A PAGE .............................................................................................................23 EM FX VIEWS ON A PAGE ...............................................................................................................24 OPEN TRADES ...................................................................................................................................26 FX CLOSED TRADES ........................................................................................................................27 FX FORECAST TABLES.....................................................................................................................28
22 March 2012
OVERVIEW
Resurgent USD in calmer waters

Guillermo Felices +44 (0)20 3555 2533 guillermo.felices@barcap.com Paul Robinson +44 (0)20 7773 0903 paul.robinson3@barcap.com
Key themes for the quarter

USD strength against the other finding currencies, but not across the board: EM prospects remain bright (see The comeback kid). JPY weakness has further to go; current account dynamics are crucial. We are targeting 90 in 6m (see Deteriorating undercurrent). EUR will also weaken, even if risk is not off. A weaker EUR and continued equity price strength is good for the smaller European currencies (see Navigating unchartered waters). CAD prospects brightest of the G10 commodity currencies: A stronger US and ongoing concerns about China. EM still attractive but Asia-Pac currencies may have a breather. EMEA is becoming more attractive and LatAm strength has further to go. Higher oil prices are the biggest risk to the nascent recovery in confidence. G10 commodity currencies are more attractive than EM if there is a significant supply shock, rather than oil prices increasing due to robust demand (see A slippery slope) Implied vol is unlikely to increase across the board, partly because US developments will be a stabilising factor. But there are attractive relative value trades (see below).
Major forecast changes

None in this publication. Relative to last quarter, the big change is USD/JPY.
Favoured trades
Long MYR/TWD in spot (ref: 9.589, target: 9.80, stop-loss: 9.50): MYR/TWD benefits from high oil prices, positive carry and insulation from regional shocks (see A slippery slope). Short CHF/NOK in spot (ref: 6.336, target 5.880, stop-loss 6.437): The NOK is supported by oil and risk and the CHF remains our favourite funding currency in Europe (see A slippery slope and Navigating unchartered waters). Long a 3m GBP/USD straddle at 3.45% USD (spot ref: 1.5812) and short a 3m USD/JPY straddle at 4.25% USD (spot ref: 82.46). GBP volatilities are low, while those for the JPY have moved higher recently due to its sell-off (see Global Outlook, March 2012). Short TRY/BRL via 3m NDFs at 1.006 (target: 0.925; stop-loss: 1.025): The TRY looks too expensive and the BRL too cheap. (see A multilateral perspective). Hold on to or add to long CAD/JPY via call options (see open trades for details): Oil and US strength versus loose Japanese monetary policy and a deteriorating current account balance. Hold on to long USD/CHF (see open trades for details): Easy ECB policy to keep downward pressure on EUR/USD. Reduced euro area risks should allow EUR/CHF to move higher.
22 March 2012
THEME 1: USD PROSPECTS
The comeback kid

Paul Robinson +44 (0)20 7773 0903 paul.robinson3@barcap.com Yuki Sakasai +1 212 412 5652 yuki.sakasai@barcap.com
The improvement in US economic prospects has continued, but the USD remains weak. Stronger growth but little change in Fed policy should lead to a gradual increase in longterm yields: helpful for the USD relative to the JPY and EUR, but not a large enough change to lead to a widespread sell-off of commodity or EM currencies. In our view, the USD will be viewed as an increasingly unattractive funding currency, compared with the JPY, EUR and CHF.
Longer-term USD prospects brighten

The US economy is in a sustainable, though not particularly strong, recovery, in our view. The employment situation in particular has improved significantly (Figure 1). But we think that USD strength is unlikely unless longer-term US yields rise meaningfully. Common factors affect both them and the USD. Yields are highly likely to pick up at some point; we do not think that balance sheet issues will lead to Japanese-style prolonged deflation. And when they do, there will be plenty of room for yields to move (Figure 2). There appears to be little conviction that a major bond sell-off is imminent. In our recent Global Macro Survey, only 4% of respondents thought the 10y government yield would be above 2.75% by year-end. But many clients who expect little upside think that the risks of a bond market sell-off have increased. And even if yields remain constrained, news about the factors that drive them matters enormously for global FX. There are four main drivers of longer-term yields, with differing implications for the USD: Expected growth: Trend growth is an important determinant of the longer-term real interest rate, and cyclical growth affects the expected policy stance. We expect prospects to continue to brighten relative to the rest of the world, which should support yields and the USD, mainly via shorter-term growth expectations. It is difficult to imagine forecasts of trend growth being revised up significantly in the short run. Inflation breakevens: Our rates strategists do not think that breakevens are likely to increase significantly, despite the recent rise. Eventually, super-loose US monetary policy Figure 1: Unemployment rates are moving in opposite directions in the euro area and US
12 10 8 6 4 2 0 Jan-06 %
Figure 2: Despite the recent pickup in US 10y yields, they remain close to their lowest level for decades
18 16 14 12 10 8 6 4 2 0 1962 1968 1974 1980 1986 1992 1998 2004 2010 US benchmark 10y yield
Source: Reuters EcoWin
Jan-07
Jan-08
Jan-09 US
Jan-10 Euro area
Jan-11
Jan-12
Source: Bloomberg
22 March 2012
may lead to a more marked increase, but there is no indication that it will happen yet. The major risk to this is the oil price, which we discuss below. Fed policy: This is the factor that eventually will lead to a large move, in our view. In the short run, though, the FOMC is unlikely to change its stance rapidly. The lesson from the 1930s, when premature tightening led to a fairly severe recession in 1937-38, has been learnt. Nonetheless, longer-term real yields remain at extremely low levels (Figure 3) and there is significant room to the upside, especially if risk appetite continues to pick up. The attractiveness of US Treasuries: For all the concerns about the longer-term fiscal position in the US, Treasuries have shown no sign of losing their safe-haven status. If anything, the USD has become more of a safe-haven currency in light of the problems in the euro area and the combination of a deteriorating Japanese trade balance and serious Japanese fiscal and demographic issues. Overall, we think that US Treasury yields are unlikely to increase quickly, and therefore rapid USD appreciation is unlikely. The factors that may lead to some pickup stronger growth and improving relative structural issues are USD positives relative to the majors, but less so against the rest of the worlds currencies.
Prospects for the other majors have deteriorated

JPY
We now expect further weakness of the JPY, though some of the factors which have led to a persistently low level of USD/JPY are likely to stay in place. Prospects for the USD have improved, as discussed above. This matters directly for USD/JPY but also because they are the two leading safe-haven currencies. Low actual and expected inflation has strengthened the JPY directly and via the effect on real interest rates. The BoJ clearly wants higher inflation, but we suspect that investors read too much into its February statement and action. Inflation expectations, implied by fixed income markets, have picked up, but that is also true for the US and Europe. Japanese inflation is probably not a significant JPY negative yet. Risk has been more important. The weakest currencies of note in Q1 were the USD and JPY, consistent with previous patterns relative to global equities (Figure 3). But there are signs that the safe-haven status of the JPY may be eroding. Higher oil prices and the change in energy usage in Japan have exacerbated the current account deterioration. And of course
Figure 3: The AUD and NZD remain very strongly correlated with global equities
1.0 0.8 0.6 0.4 0.2 0.0 -0.2 -0.4 MXN JPY NOK GBP KRW SGD SEK AUD CAD NZD CHF EUR BRL ZAR
Figure 4: and both remain significantly overvalued relative to our BEER model
40% 30% 20% 10% 0% -10% -20% -30% EUR USD GBP JPY AUD CAD CHF SEK NOK NZD BRL CLP MXN HKD IDR INR KRW MYR PHP THB TWD ILS PLN RON RUB TRY ZAR Misvaluation relative to longer-term fair value
Source: Barclays Research
G4
Smaller G10
Lat am
EM Asia
EEMEA
Since Jan 2008

Since last GO
22 March 2012
the fiscal situation has been a concern for a long time. Despite the record current account deficit in January, we do not believe that it will move to a prolonged deficit until later this decade (Figure 5). Nonetheless, this has had important psychological implications. Our technical strategists view is that the JPY has weakened through key levels against a number of currencies (the USD and GBP being particularly important examples).
EUR
The euro area crisis has calmed somewhat but is far from over. The LTROs were a significant success and a number of the events that market participants were most worried about have taken place with little disruption to global markets (eg, Frances downgrade and Greek CDS contracts being triggered). But short-term risks remain: 1) will Greek growth continue to disappoint, leading to worries of further restructuring? Probably, but there is unlikely to be a full-blown crisis, at least during the coming quarter. 2) Will Portugal need to restructure its debt? Probably not. 3) Will elections in Greece and France lead to increased political instability? Difficult to call, but certainly a risk. Overall, although developments may be a little calmer, there are likely to be periods of further investor disquiet. Confidence in the EUR is unlikely to improve significantly in the short run. The crisis has had no clear long-term effect on EUR/USD, but it has been associated with deteriorating relative prospects for the euro area economy and, more recently, a change in the ECB approach. We continue to expect gradual depreciation of the EUR in light of looser monetary conditions, ongoing weak growth and a more attractive USD.
Select commodity and EM currencies remain attractive

G10 commodity currencies
Commodity prices are likely to remain strong and risk appetite robust, so the medium-term prospects for commodity prices are fairly bright. The AUD and NZD continue to be the highest-beta currencies in global FX (Figure 3), though valuation remains stretched for both (Figure 4). The recent depreciation of the NZD and AUD since early March may extend somewhat in the near term, especially if oil prices rise for reasons other than strong Asian growth. The CAD continues to have the most potential upside of the G10 commodity currencies. Valuation is less stretched, oil prices are a more direct positive and US growth is likely to surprise to the upside relative to China in 2012. The BoCs sensitivity to the real exchange rate may lessen if the US recovery persists and there is more upside for Canadian rates in the longer term. Any move is likely to be gradual because of the historically low level of USD/CAD, but the CAD looks set to outperform the rest of the G10 currencies. Figure 6: US cyclical outperformance needs higher Treasury yields to be a true USD positive
1.6 1.4 1.2 1.0 0.8 0.6 0.4 0.2 0.0 -0.2 -0.4 -0.6 MXN NOK KRW AUD CAD GBP NZD TWD USD NEER SGD EUR ZAR CHF PLN
5
Figure 5: We do not expect the Japanese current account to move to a structural deficit until 2018
(% of GDP) 16 12 8 4 0 -4 -8 -12 -16 70 75 80 85 90 95 00 05 10 15 Households General govt Current account
Simulated
JPY
Non-financials Financials
20 (FY)
US cyclical outperformance US cyclical outperformance + US10Y up over 25bp per month

22 March 2012
SEK
EM currencies
The strong performance of EM FX this year (the GEMS index has appreciated 6.6% versus the dollar), repositioning by portfolio investors and the covering of EEMEA shorts all point to less helpful positioning technicals, but prospects for EM FX remain bright. We forecast a further 2-5% of spot gains over the next 12 months. EM continues to offer an interest rate advantage to attract carry trades and further portfolio inflows as well. In EM FX, we highlight the following favoured broad strategies: be long high-carry and commodity currencies (BRL, ZAR, RUB, COP, MYR); stay neutral currencies with the potential for intervention (CLP, PEN); and short currencies most exposed to high oil prices, large current account deficits and or/sticky inflation (TRY, INR).
The big risk: Oil

The biggest risk to this USD view is a further significant rise in the oil price. The reasons why a higher oil price is generally a USD negative all continue to hold, though less so than in 2007-08. The Fed has typically looked through rapid commodity price moves to a much larger extent than European central banks, the ECB in particular. The effect on US consumers and producers may be larger. Lower taxes on energy mean that changes in the underlying oil price are felt more directly. It should be noted, though, that the US has a smaller petroleum trade deficit relative to GDP than the euro area or Japan. Perhaps most important now is the general pattern that the winners from high oil prices (eg, Middle Eastern countries) tend to diversify into EUR-denominated assets. What is driving oil prices matters. The USD has been the weakest global currency in months since 2000 when both the oil and equity prices increase, but tends to appreciate against many of the EM currencies if equities are falling while oil prices rise. So if higher oil prices are a result of supply-side disturbances, it may be less of a USD-negative than many assume. Nonetheless, even then the USD tends to underperform other G10 currencies. The analysis discussed in A slippery slope suggests that the G10 commodity currencies whether or not they produce oil may perform well in such an environment.
Past relationships
While history does not necessarily repeat itself, it is worth looking at the historical performance of the USD when the US economy has a cyclical upturn with above-trend growth and is outperforming the rest of the world (adjusting for different trend rates of growth). We identify the US relative cyclical outperformance episodes using OECD composite leading indicators since 1993. Figure 6 shows that cyclical outperformance of the US does not generally lead to broad-based USD strength: during these episodes, the USD appreciated only 0.12% per month in trade-weighted terms. The USDs performance varies significantly across currencies. Within the G10, it tends to outperform EUR and CHF but underperform notably against AUD and CAD. The picture dramatically changes when the US cyclical upturn/relative outperformance accompanies a more than significant rise in US 10y yields during the month (we use a 25bp rise as criteria which is a one standard deviation move over our sample period). In such periods, the USD appreciated 0.7% per month in trade-weighted terms and USD strength is more broad-based. Our results supports our view that the move in US yields is critical for the prospect of the USD, and a cyclical upturn and relative outperformance of the US economy to the rest of the world is not necessarily a USD positive.
22 March 2012
THEME 2: OIL AND FX
A slippery slope
Aroop Chatterjee +1 212 412 5622 aroop.chatterjee@barclays.com Raghav Subbarao +44 (0)20 7773 4144 raghav.subbarao@barclays.com
Concerns about future supply, as well as an improvement in risk appetite, have led to markedly higher oil prices since the start of the year. Historical data suggest that currency performance in an actual supply contraction would see greater differentiation between currencies on the basis of their relative vulnerabilities, key determining factors of which include oils impact on the external balance, growth and monetary policy. Long NOK/CHF, RUB/TRY and MYR/TWD are attractive trades, in our view. Geopolitical tensions (Iran and Syria) and a fundamentally tight oil market with OECD inventories at five-year lows and low spare capacity (see Energy Flash, 8 March 2012, for more details) have kept oil from declining despite a softening in economic prospects, especially in the EM economies (Figure 1). Indeed, oil has outperformed other commodity prices much the same way as it did after the start of the Libyan uprising in early 2011 (Figure 2). The historical relationship between oil prices and FX is not clear cut, however. Higher oil prices have implications for economic growth/market risk appetite for a countrys external balance as well as for inflation and these various channels often have opposing effects on FX. Figure 3 shows the correlations between oil and other currencies (USD crosses) over the past 10 years, calculated over the complete sample period and also during two particular regimes for oil and growth expectations. During periods when oil prices are going up, correlations between oil and FX vary substantially depending on whether equity prices (growth expectations) are going up or down. Correlations to oil prices are higher for most currencies (G10 and EM) in our sample during periods when oil and equities are going up. These periods of improving market risk appetite correspond to demand shocks an increase in global growth prospects that pushes up all risky/pro-cyclical asset prices. On the other hand, periods when oil prices increase and equity prices decrease constitute episodes when oil prices are elevated due to idiosyncratic reasons. Such episodes would be consistent with a supply shock one in which supply
Figure 1: Leading indicators for economic activity in EMs continue to be subdued

110 105 100 95 90 85 2004 2005 2006 2007 2008 2009 G10 EM
Figure 2: Oil and non-oil commodity performance in the days around recent geopolitical episodes
135 125 115 105 95 85 -40
-30
-20
-10
10
20
30
40
2010 2011
Iran episode: Oil Libya episode: Oil
Iran episode: Non-oil Libya episode: Non-oil
Note: Both G10 and EM LIs are GDP-weighted. EM includes BRL, CNY, CZK, INR, KRW, PLN, RUB, ZAR and TRY. Source: OECD, Haver Analytics, Barclays Research
Note: Libya refers to the uprising that began in February 2011, and Iran to the imposition of sanctions by the international community in January 2012. Source: Bloomberg, Barclays Research
22 March 2012
Figure 3: Currency return (vs USD) correlation with oil prices (since 2003)
0.5 0.4 0.3 0.2 0.1 0 -0.1 -0.2 -0.3 MXN RON PLN JPY NOK CNY CZK TRY SEK COP KRW AUD CAD NZD SGD THB RUB GBP PHP CLP ILS TWD
1.00
8
HKD
CHF
BRL
HUF
EUR
IDR
Full Sample
Oil up, equities up
Oil up, equities down
Note: We calculate weekly correlations here. For the two sub-samples, we look at weeks when the MSCI World went up or down and oil went up. Source: Bloomberg, Barclays Research
constraints boost oil prices at the cost of (more vulnerable) risky asset prices. Indeed, we find the correlations with oil prices changing signs for a number of currencies (most notably INR, THB, TWD, KRW and PHP).
Currency performance and oil shocks

Oil and equity price regimes are only a rough way of determining whether oil prices are being driven by demand or supply shocks. Market clearing in oil implies that supply, demand and prices adjust very quickly to each other. As a result, it is difficult to determine the nature of the oil shock by merely looking at oil supply, demand or prices by themselves. Instead, we estimate a relationship1 between oil supply, demand and price (using data from 1973 onwards) and determine the portion of each that is unexplained by the estimated relationship. An increase in oil supply/demand/price by more than one standard deviation from the estimated relationship is flagged as a positive shock and vice versa. Figure 4: Information ratios of G10 USD crosses during positive price and negative supply shocks
IR: Positive price shock 2.00 AUD 1.50 CAD 1.00 0.50 0.00 -0.50 -1.00 -2.00 JPY CHF EUR USD SEK GBP NZD NOK
Figure 5: Information ratios of EM USD crosses during positive price and negative supply shocks
IR: Positive price shock 1.50 1.00 0.50 0.00 -0.50 -1.00 -1.50 INR -3.00 -2.00 -1.00 0.00 CLP BRL TRY PHP ILS MYR TWD ZAR THB HUF MXN SGD HKD PLN RUB IDR SAR CZK
-1.00
0.00
1.00
2.00
-2.00 -4.00
IR Negative supply shock

Source: Bloomberg, Haver Analytics, EIA, Barclays Research
1
IR Negative supply shock

Source: Bloomberg, Haver Analytics, EIA, Barclays Research
We estimated a VAR with four lags for supply, demand and oil price variables. For supply we used the OECD+ Major 6 non-members leading indicator, for supply we use the monthly global oil production data and our price variable is the IMF's average crude oil price backfilled before 1980 with the refiner's acquisition cost of crude oil.
22 March 2012
MYR
ZAR
INR
KRW
We consider two types of shocks a positive price shock (oil price increase unexplained by actual expansion in supply or demand, eg, due to fears of future supply restrictions and/or increased market risk appetite) as well as during negative supply shock episodes (periods when supply actually contracted unexpectedly). Figures 4 and 5 show FX performance versus the USD (since 1989) in quarters where negative supply and positive price shocks were seen. G10 commodity currencies (excluding NOK) are the most attractive in both types of shocks. The USD strengthens in a negative supply shock while weakening in a positive price shock. A number of G10 currencies that benefit during the positive price shock (SEK, GBP and NOK) dont perform quite as well during the supply shock. In EM, few currencies perform well in both shock periods. The MXN is a notable outperformer in the price shock. There are, however, a number of significant underperformers in EM such as INR, TRY and CLP, which relates closely to their vulnerabilities to an oil price increase.
Currency vulnerability to higher oil prices

The major G10 and EM currencies vary in their vulnerabilities with respect to oils impact on economic growth, the external balance and monetary policy (Figures 6-8). A higher petroleum balance goes hand in hand with the positive trade balance impact of higher oil prices, which is positive for a currency since it implies a positive wealth effect (Figure 6). There are a few key exceptions, however. Non oil producing commodity currencies such as the AUD have a negative petroleum trade balance but a positive trade balance impact reflecting the case of the demand shock when demand and price of all commodities tend to go up. From a growth perspective, larger net oil consumption would mean that an oil price increase cannot be easily offset by domestic production (Figure 7). Additionally, a more negative elasticity of oil consumption would imply a slowdown in economic activity with higher oil prices. In terms of the impact on monetary policy, both higher inflation pass through and a larger Taylor rule coefficient on inflation would typically lead to a stronger tendency to tighten monetary policy (Figure 8). FX, which is the relative price of money, would tend to appreciate with higher oil prices for central banks, which are more sensitive to inflationary pressures. We see some of the usual suspects having a larger coefficient on oil prices, ie, the increase in oil prices has typically led to higher rates in G10, NOK and CAD have large positive coefficients, while in EM, PLN, BRL and RUB would tend to respond more strongly to oil shocks. At the other end of the spectrum, the relative dovishness of the BoJ and SNB are apparent as well as a number of countries in EM Asia and EMEA. Figure 6: Oils impact on the external balance
Change in trade balance (% GDP, 10% oil increase) 12 RUB NOK 10 8 6 4 JPY COP 2 CHF 0 ILS -2 HKD -4 THB KRW TRY -6 -15 -10 -5 0 5 10 15 Petroleum trade balance (% GDP)
Source: Haver Analytics, UN Comtrade, Barclays Research
Figure 7: Oils impact on growth

Elasticity of oil consumption (10% oil increase) 2.0 1.5 RUB 1.0 0.5 0.0 -0.5 -1.0 -1.5 -2.0 -2.5 -8000 -6000
NOK
COP
SGD CHF INR KRW THB PHP
CLP JPY
-4000
-2000
2000
4000
Net oil consumption/GDP

Source: Haver Analytics, Barclays Research
22 March 2012
A simple way to determine the aggregate FX exposure to oil is to use a scoring approach as shown in Figure 9 (all scores are reported versus the USD). Oil importing currencies in EM Asia and EMEA are the most vulnerable from both the economic growth and external perspectives. In addition, a number of these currencies (TRY, SGD, TWD and INR) also have central banks which dont respond particularly strongly to inflation increases, suggesting a relative dovishness during periods of oil price increases. As a result, these currencies show up as being the most vulnerable to an oil price increase. In G10, the CHF and the JPY appear more vulnerable than others. On the flip side, the RUB, MXN and NOK stand out with positive impacts on their external balances, a limited growth impact and more proactive monetary policy in the event of an oil price increase.
Trade recommendation
Putting our analysis on vulnerabilities together with other measures of currency attractiveness such as carry and valuation, long positions in MXN and NOK look attractive on account of their lower vulnerability levels, higher carry and favourable valuations versus the likes of the SGD, CHF, CZK and TWD. We have previously recommended a short CHF/MXN position which is up 4.1% (as of 21 March) since inception, and we still like the fundamentals around this trade. A long NOK/CHF position also looks attractive based on a fundamental analysis of the two economies and a trade recommendation can be found in Navigating unchartered waters. Our analysis on currency performance during oil shocks shows that this trade should also do well in an environment where risk appetite remains high and worries about future supply remain elevated (positive price shock, Figure 4). Alternatively, expectations of oil price increases can be expressed through relative value trades which are neutral to other risks, and may also be supported by other fundamental factors. From an intra-regional perspective, we like long RUB/TRY and long MYR/TWD on account of their differing vulnerabilities to higher oil prices (Figure 9). TRYs higher vulnerability to oil prices, large current account financing needs and sticky inflation makes it an attractive short versus the RUB (The Emerging Markets Quarterly, March 2012). In addition to the beneficial impact of oil for the MYR versus the TWD, MYRs higher carry would also support it in the more benign environment where risk appetite is high and worries about future supply remain. We recommend going long MYR/TWD in spot (ref: 9.5890, target: 9.80, stop-loss: 9.50) Figure 8: Oils impact on monetary policy
Coeff of inflation in Taylor Rule 2.0 1.5 1.0 0.5 0.0 -0.5 -0.2 TRY 0.0 SGD RUB BRL NOK CAD CHF JPY TWD 0.2 0.4 INR PLN
Figure 9: Aggregate vulnerability to an oil price increase

15 10 5 0 -5 -10 -15 -20 -25
0.6
Effect on annual headline inflation (10% oil increase)

Source: Haver Analytics, Barclays Research
Note: Higher scores indicate greater vulnerability to oil prices relative to the USD. Source: Barclays Research
22 March 2012
THB KRW PHP INR TWD ILS TRY SGD JPY CHF HKD USD EUR HUF CZK PLN GBP ZAR CLP SEK NZD MYR BRL IDR AUD CAD DKK NOK COP MXN RUB Risk score (vs. USD)
10
THEME 3: EUROPEAN CURRENCIES
Navigating unchartered waters

Guillermo Felices +44 (0)20 355 52533 guillermo.felices@barcap.com Sara Yates +44 (0)20 777 33937 sara.yates@barcap.com
The actions of the ECB have broken the link between the EURs performance and global risk appetite. We assess which European currencies are better placed to appreciate versus the EUR in this new environment given economic policy drivers and market drivers such as oil and global risk. Our analysis shows that NOK, SEK and PLN are better placed to do well in the months ahead. The euro area is facing a new environment. Policymakers attempts to address the debt crisis more decisively, alongside substantial loosening by the ECB, have decoupled the prospects of the EUR and global risk appetite. A weak EUR and buoyant equity market is not a common occurrence. Over the past decade EUR/USD weakness has only been associated with a rally in global equities around 20% of the time. What does this new world mean for European currency performance? Past experience suggests this environment is positive for European currencies versus the EUR (Figure 1). Two points are worth highlighting. First, the state of the world matters. When equities rally and the EUR is weak, most of the regions G10 currencies outperform the EUR. Whereas, in periods of equity and EUR weakness only the liquid safe havens and oil related currencies outperform. Second, in neither state is European currency performance spectacular; it is the USD that generally outperforms. These relationships have mostly held true since December 2011, when the fiscal compact and the 3y LTROs were introduced. Moreover, the relative performance within Europe has been very similar to what history suggests. This gives us some confidence that if equities remain supported and EUR weakness continues, European currencies should continue to outperform the EUR with emerging Europe seeing some of the largest gains. Given that we are navigating through somewhat unchartered waters in Europe, we assess the prospects for European currencies by considering country-specific factors such as macro policy and the likely effect of market factors such as risk appetite and oil prices.
Figure 1: European currencies do well when risk is on and the EUR weak (average monthly returns vs EUR since 2000)
3.5 3.0 2.5 2.0 1.5 1.0 0.5 0.0 -0.5 -1.0 -1.5 USD CHF NOK CZK SEK GBP HUF PLN RUB TRY
Source: Bloomberg, Barclays Research
Figure 2: Most currencies have rallied in line with historical averages since Dec 2012 (avg monthly returns vs EUR)
3.0 Since 2000 2.5 2.0 1.5 1.0 0.5 0.0 -0.5 USD CHF NOK CZK SEK GBP HUF PLN RUB TRY
EUR/USD weak, equities rally EUR/USD weak, equities sell-off
Since Dec 2011
22 March 2012
11
Policy responses: sailing into unchartered waters

(1) Monetary policy and attitude towards FX appreciation In order to gauge the current monetary policy stances in Europe we estimated countryspecific Taylor rules. These typically relate interest rates to the amount of spare capacity in an economy and inflationary pressures. With many central banks seemingly mindful of the strength of their currency, we extended the model to estimate the sensitivity of policy rates to movements in the real exchange rates. We used out of sample estimates throughout, as the co-efficient were calculated using monthly data from 2000-2007. Our analysis suggests that monetary policy in the G10 European countries is looser than the model would suggest (see Figure 3). The Norges Bank and the Riksbank remain substantially behind the curve in terms of rate hikes, whereas in the UK, euro area and Switzerland, policy rates appear more in line with the model predictions. However, nonstandard measures mean that monetary policy in these countries is actually much looser than that suggested by both policy rates and the model. This discrepancy suggests that in the latest cycle central banks have responded more aggressively than normal. This is likely to reflect the fact that central banks have put more weight on the downturn in economic conditions given the downside risks associated with financial stability concerns. We expect loose G10 European monetary policy to remain for some time. This has several implications for currency performance in the region. First, interest rates remain important drivers of currencies even for countries taking non-standard measures (Figure 6). Second, as the risk environment strengthens and the market is more comfortable searching for carry, the high yielders within Europe will look more attractive. But, as long as some G10 central banks maintain a more dovish than normal stance, their currency appreciation versus the EUR may be capped. Whereas, with many EM central banks facing relatively high inflation and in some cases large liabilities in foreign currency, they are likely to be more tolerant of FX appreciation. (2) Fiscal policy and sovereign risk: which boats are in good shape? The fiscal stance is generally tight as European countries try to reduce indebtedness. However, some countries have been benefiting from relatively healthier fiscal outlooks. These are the likes of CHF, NOK and SEK. For all of these countries, sovereign 5y CDS are trading tighter than Germanys 5y CDS (Figure 4). The UK 5y CDS is also trading tighter than Germany. However, it is a special case because its fiscal fundamentals are not great, but the commitment to fiscal consolidation and admittedly, the liquidity and depth of its financial markets, has benefited GBP. Figure 3: Actual interest rates and those suggested by an open-economy Taylor rule
4.0% 3.5% 3.0% 2.5% 2.0% 1.5% 1.0% 0.5% 0.0% -0.5% GBP CHF EUR NOK Estimate SEK
150 100 50 0 -50 -100
Figure 4: CDS trading tighter than Germany in G10 and wider in EM (5y CDS vs Germany, bp)
200 bps
Actual policy rate

NOK USD
CHF
SEK
GBP
CZK RUB
PLN
TRY
22 March 2012
12
Figure 5: Markets perception of UK vs Germanys sovereign risk has supported GBP vs EUR
80 60 40 20 0 -20 UK - Germany 5y CDS -40 Aug-08 Aug-09 Aug-10 EUR/GBP (RHS) 0.74 Aug-11 0.98 0.94
Figure 6: Lower Interest differentials since end-2011 likely reflect 3y LTROs and weigh on EUR/GBP
1.2 Germany - UK 1y yields diff 1.0 0.8 EURGBP (RHS) 0.92 0.96
0.90 0.86 0.82 0.78
0.6 0.4 0.2 0.0 -0.2 -0.4 Jul-09 0.80 Jan-10 Jul-10 Jan-11 Jul-11 Jan-12 0.84 0.88
Fiscal austerity is a risky strategy as tight fiscal policy could result in even weaker growth and higher debt/GDP ratios. Indeed, two rating agencies expressed concerns about the UKs triple-A rating in February and March. However, this weeks fiscally-neutral budget showed the government continues to keep a tight reign on its fiscal position. In addition, with the OBR marginally reducing its forecast for government borrowing for the 2011/2012 financial year despite surprisingly weak public finance data for February, it suggests that the UKs reputation will not be tarnished just yet.
A ranking of currency prospects: whos sailing will excel in the current conditions?
As currency performance depends on a mix of factors, we combined indicators of carry, fiscal concerns, attitudes of central banks towards FX appreciation, sensitivity to global risk and oil, to see what this suggests for intra European currency performance. Figure 7 shows indicators that proxy these factors. The higher the indicator the more supportive they are for currencies, except for the last two (CDS versus Germany and attitudes towards appreciation) where a higher number means worse prospects. We rank these indicators and aggregate them into a summary ranking from 1 to 10, where 10 means the best placed to outperform versus. EUR (eg, SEK) and 1 is the least likely currency to perform well (eg, CHF). Figure 8 combines this ranking with the currencys performance since December 2011. Since that date we observe a positive relationship between FX performance versus EUR and our ranking. NOK, SEK and PLN, which rank highly, have outperformed CHF, GBP and CZK. We expect this to continue. Figure 8 highlights dislocations: PLN has performed much better than what its rank would indicate while SEK has rallied by less than the trendline would suggest.
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Figure 7: Ranking of European currency prospects

Corr. MSCI
Figure 8: European currency performance vs ranking of currency prospects (10 = best prospects)
Overall
Corr. oil Carry vs. EUR 5y CDS vs. (3m ann. %)** 0.4 -0.3 1.6 1.6 0.3 4.8 4.0 5.4 8.2
FX strength
10 9 8 7 6 5 4 3 2 1 0 0
% chg vs. EUR since Dec 11 PLN
World* GBP CHF SEK NOK CZK HUF PLN RUB TRY -0.18 -0.30 0.45 0.14 0.10 0.36 0.43 -0.04 0.31
prices* 0.01 -0.13 0.21 0.25 0.20 0.22 0.23 0.05 0.09
Germany concerns*** rank**** -9 -30 -24 -42 45 448 99 93 143 1 5 1 4 1 1 1 2 3 2 1 9 7 3 6 8 4 5
RUB
TRY HUF SEK
GBP
NOK
CHF
CZK 2 4 6 8
Rank 10
Note: *Monthly changes since 2000. **From FX forwards. ***Based on our current assessment of CBs attitudes. 5 = intolerant to appreciation. 1 = hands-off approach to appreciation. ****10 = best prospects, 1 = worst prospects for currencies vs EUR. Source: Barclays Research
FX implications: looking for safe ports to anchor

Two G10 currencies stand out against all of these criteria: NOK and SEK. While they have appreciated already versus EUR they continue to be well placed to perform, according to our ranking of prospects in the current environment for Europe. We recommend being long these currencies versus low yielders like the EUR, or with even higher conviction, the CHF. We expect further upside for GBP versus EUR in our 1 year forecasts, but its indicators of near-term prospects are nowhere near as strong as the Scandinavian currencies. In European EM FX, our ranking favours PLN. Trade ideas: Sell CHF/NOK at 6.336, target 5.880, S/L 6.437.
22 March 2012
14
THEME 4: JPY AND CURRENT ACCOUNT
Deteriorating undercurrent
Masafumi Yamamoto +81 3 4530 5038 masafumi.yamamoto@barcap.com
The risk of a structural current account deficit in Japan sooner than expected has been a big part of recent JPY depreciation, and prospects for it will remain crucial. We recommend being long USD/JPY and also see the chance of JPY underperformance versus some Asiapac currencies like AUD, CNY, IDR and MYR.
Focus on long-term trend deterioration and twin deficits

JPY underperformance driven by Japanese factors
JPY underperformed all major currencies during Q1. The depreciation was partly due to US prospects: better data and an improved economic assessment by the FOMC, which have reduced market expectations for additional easing. However, what makes this JPY depreciation different from similar falls over the past two years, in our view, is that Japanese factors were at the forefront of investor sentiment towards JPY. Japans trade deficit continued to widen due to strong imports and led to the record current account (C/A) deficit in January. The risk of a sovereign downgrade for Japan looms, and might have an even more important impact given that sovereign debt concerns in the euro area have lessened somewhat. The Noda Administration is aiming to pass a bill to raise the consumption tax to ensure future revenue, but internal objections within the ruling DPJ party and its minority in the Upper House make the bills passage uncertain. Furthermore, a surprise easing by the BoJ in February, together with a re-emphasis on overcoming deflation, is keeping market expectations of additional easing alive, which is a potentially powerful bearish factor for JPY. The changing C/A in Japan is of particular importance, in our view. A strong C/A balance has been crucial for Japan, both for stable financing of its huge JGB supply, and for the JPYs status as a safe-haven currency during the financial crisis. While the record C/A deficit was in part due to seasonal factors and our Japan economists do not forecast a structural deficit until 2018, we think that the risk of more rapid deterioration is likely to linger for a while. First, looking through the seasonal fluctuation, Japans C/A has been on a deteriorating trend since 2008 due to a widening trade deficit, while the income surplus remains almost flat (Figure 1). Our economics team expects the trade deficit to continue into 2014. In Figure 2: Rank correlation between G10 NEER performance and C/A has been very unstable
0.8
surplus
C/A deterioration a game changer for JPY
Figure 1: C/A deterioration is not just a seasonal phenomenon
4.0 3.0 2.0 1.0 0.0 -1.0
trillion yen
0.6 0.4 0.2 0.0 -0.2 -0.4 -0.6 -0.8
rank correlation coefficient
-2.0 Jan-06
Jan-07
Jan-08
Jan-09
Jan-10
Jan-11
Jan-12
00
01
02
03
04
05
06
07
08
09
10
11
Goods&services, NSA C/A, January

Source: Bloomberg
C/A, NSA C/A, SA
rank correl FX-CA rank correl FX-GDP

Source: Haver Analytics
rank correl FX-Fiscal
22 March 2012
15
addition, the risks to Japans trade deficit are tilted to the upside (larger deficit) due to rising oil and commodity import prices.
Faster shrinkage of net savings is behind the C/A deterioration
The long-term deterioration of Japans C/A reflects shrinking net savings, in both the household and corporate sectors, due to an ageing population and production being moved abroad. In addition to this long-term trend, the Great Tohoku earthquake caused net savings to shrink further because of the shift of energy demand from nuclear energy (uranium) to more expensive fossil fuels such as crude oil and liquefied natural gas (LNG). In H2 12, the reconstruction efforts should increase investment, further diminishing net savings and implying a larger trade deficit. We thus think that the downward pressure on JPY due to a deteriorating C/A will likely remain intact over the coming quarters. The relationship between the C/A and FX performance has not been straightforward. Among the G10 countries, the rank correlation between the C/A balance as a percentage of GDP and the annual NEER performance, has been very unstable (Figure 2). As for the JPY, it underperformed despite a chronic C/A surplus before the outbreak of the financial crisis, and performed strongly only when the crisis occurred. However, past cases show that G10 FX performances are worse when the countries have both C/A and fiscal deficits, than when they have only a C/A deficit (Figure 3). The fear of so-called twin deficits, a theme for the USD in the 1980s, is now applicable to JPY. Many countries that have both C/A and fiscal deficits can enjoy a stronger currency if they can attract foreign money with strong growth or high interest rates. However, in Japans case, there have been limited prospects for the former given the political instability and lack of a long-term growth strategy. Compensation for larger risk premiums, in the form of higher interest rates, is not in sight either, thanks to the favourable financing conditions for JGBs, at least in the short run.
The C/A matters for FX when associated with a fiscal deficit
Trading opportunities lie in the regional breakdown

Japan is registering an increasing C/A deficit vs some Asia Pac countries
There are a number of countries with which Japan is already recording an expanding C/A deficit. Not surprisingly, the largest deterioration of the C/A has been versus the oil producing Middle East countries. But its deficit with Australia, China, Indonesia, Malaysia and Brazil has also increased (Figure 4). Indeed, Japans deficits versus Australia and China are significantly larger than the Middle East and US combined (which can be thought of as a dollar block). This suggests that net demand for AUD and CNY could be larger than the USD relating to Japans C/A linked flows. Japans deficit versus oil producing Middle East countries stems from oil imports, and its deficits versus Australia, Malaysia and Indonesia are mainly attributable to the rising Figure 4: Japans largest C/A deficit by country
2,000 1,500 1,000 500 0 -500 -1,000 -1,500 -2,000 -2,500 billion yen
Figure 3: G10 NEER performance during C/A and fiscal deficit

1 0 -1 -2 -3 -4 -5 -6 -7 USD AUD NZD GBP CAD SEK FX return during C/A deficit FX return during C/A & fiscal deficit
%yoy
Japan's deficit Middle East +US China Chile Australia Indonesia Malaysia Russia S.Africa 2011
16
2010
22 March 2012
imports of LNG. As the Japanese government is putting more emphasis on LNG due to its lower CO2 emissions than crude oil, the volume and share of LNG in total imports may continue to increase. This suggests favourable flows for LNG exporters to Japan, like Malaysia (share in Japans LNG import: 20% in 2011), Australia (18%) and Indonesia (12%).
Increasing FDI outflow holds key as counterweight of income surplus
One of the major reasons why the implication of Japans C/A balance for the JPY has not been clear in the past is that there are many other cross-border flows in the Balance of Payments (BoP) which affect FX, eg, portfolio and direct investments. The cumulative flows from FX transactions correlate well with recent JPY NEER developments (Figure 5). The breakdown shows that the large inflow into Japanese short-term notes has been the major driver of a stronger JPY, together with steady inflow from income surplus (Figure 6). On the negative side, despite the JPYs latest retreat, the increase in net FDI outflows could be the key driver for the currencys weakness, especially compared with the amount of surplus income. According to our analysis, outward M&A activity by Japanese firms this year outpaces past years. This, together with the still-strong nominal JPY versus historical levels and the significant liquidity held by Japans corporate sector, should lead to further outflows from the country (see FX Instant Insight: JPY: Increased pace in outward M&A likely a further yen negative). Also in the past, outward FDI tends to increase when the Japanese economy is strengthening, suggesting that the Japanese corporate sector expands aggressively overseas when the domestic economic backdrop is supportive (Figure 7). This could be the case for the rest of this year, when Japans GDP growth is expected to rise from Q1 to Q3 this year thanks to the reconstruction demand. Looking at the regional breakdown of Japans FDI balance, the country had the largest deficit versus US and China, followed by the UK, Australia and Brazil in 2011. Aside from the US and UK, where Japan records a larger C/A surplus than FDI deficit, its FDI deficit versus China and Australia adds to the overall C/A deficit (Figure 8). Japans combined C/A and FDI deficit versus Australia was larger than the deficit versus virtual USD economies (the Middle East and the US). This implies more of a steady demand for AUD from the Japanese corporate sector than the USD, followed by the CNY, IDR and MYR.
Improving Japanese economy should encourage outward M&A activity
Japanese FDIs go to the Asiapac countries where Japan registers a C/A deficit
Figure 5: Cumulative BoP flows accompanying FX transactions and JPY NEER

10 5 0 -5 -10 -15 -20 -25 -30 Jan-08 Jan-09 Jan-10 Jan-11 trillion yen 190 180 170 160 150 140 130 120 110 Jan-12
Figure 6: Breakdown of BoP flows accompanying FX transactions

10000 billion yen 8000 Inflow into Japan 6000 4000 2000 0 -2000 -4000 -6000 -8000 Jan-08 Jan-09
Retail outflow Trade Balance long term bond inflow Equity inflow
Outflow from Japan Jan-10 Jan-11 Jan-12

FDI Balance Income Balance short term note inflow Trust account outflow
Total balance, cumulative

JPY NEER(Right)
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Figure 7: Japans net FDI balance and coincidence indicator

500 0 -500 -1,000 -1,500 -2,000 Jan-85 Outflow from Japan Economic improvement billion yen 70 80 90 100 110 120 130 140 Jan-90 Jan-95 Jan-00 Jan-05 Jan-10 FDI(3MMA, Left)
Source: Bloomberg, Reuters ECOWIN
Figure 8: Japans largest C/A & FDI deficit by country
500 0 -500 -1,000 -1,500 -2,000 -2,500 -3,000
billion yen
billion yen
500 0 -500 -1,000 -1,500 -2,000 -2,500 -3,000
Japan's deficit Middle East +US Chile Australia Indonesia Vietnam China Russia S.Africa Malaysia Canada Brazil
Coicidence Indicator
FDI balance C/A yoy change (Right)
Trade implications
We started recommending USD/JPY one touch at 88
While Japans record C/A deficit in January was in part attributable to seasonal factors and we may yet see a setback in the February and March data, we think the C/A deterioration story is a long-lasting JPY-negative theme, helped by other JPY-bearish factors such as fiscal problems, political instability, a dovish BoJ and increasing FDI outflows. We expressed our bearish JPY view by recommending a USD/JPY 3m one touch at 88 yen which we initiated on 14 March 2012. In addition, as an alternative, a regional breakdown of both the C/A and FDI deficits suggests potential opportunities in JPY short versus AUD, CNY, IDR and MYR, for instance, as Japans increasing C/A and FDI deficits versus these countries should lead to JPY underperformance against their currencies.
Risk to our JPY bearish view

Risk resides mainly at home
Our conviction for a JPY bearish view is high for the above reasons, and the risk factors are relatively weak, in our view. Risks reside mainly with Japan, including the (unexpected) improvement in Japans trade deficit, either by a clear recovery in exports, a fall in imports due to lower oil and other commodity prices, a delay in reconstruction, or the restart of its nuclear power plants. None of these appears very likely.
22 March 2012
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THEME 5: A MULTILATERAL PERSPECTIVE
Positioning for tectonic shifts

Jose Wynne +1 212 412 5923 jose.wynne@barcap.com
Applying a multilateral approach to currency values since before the EU sovereign woes escalated last year suggests that China is getting expensive and Europe cheap, that oil has turned into a key driver of global currencies, and that the USD is gaining strength. We expect these themes to remain in place. This approach highlights that the TRY looks too expensive and the BRL too cheap against their trading partners for this environment. We recommend short TRY/BRL positions via the 3m NDF at 1.006 (target: 0.925; stop: 1.025).
Think (multi)laterally
The ups and downs of global stock markets paint a misleading picture of symmetry in the responses to the European events of the past nine months. In contrast, looking at multilateral real exchange rates suggests interesting tectonic shifts have taken place in the world economy since the European problems began. Figure 1 presents the changes in the relative value of each currency versus its trading partners (REER) since July 22, 2011, before the market downdraft. The first important lesson is that China has gotten expensive and Europe cheap since last summer. The CNY has appreciated over 8%, and countries in the eurozone have cheapened 1.8-5.5%. Interestingly, the European periphery, notably Greece, Ireland and Spain have depreciated more than the core eurozone countries. This suggests capital markets seem to be chasing growth stories despite the disruptions generated by bouts of risk-off and exacerbated by credit market inefficiencies (more below). A second lesson is that oil has turned into a key driver of global currency values. We see oil prices as largely responsible for placing the RUB second in terms of REER appreciation since July, in addition to offering support for the COP and NOK. For the same reason, we believe higher oil prices triggered the depreciation in the JPY (4.2% in REER terms). The third lesson is that the USD is getting meaningfully stronger. Growth has surprised on the upside and the recovery seems to be on its way, suggesting that the countrys lingering structural issues are likely not viewed that negatively by markets, at least from a relative Figure 1: REER appreciation since last summer suggests tectonic shifts are underway
8 6 4 2 0 -2 -4 -6 -8 CNY RUB TRY ARS HKD USD COP GBP SGD NOK PHP MYR CLP THB AUD CZK PRT FIN PLN DEN ITL AUS IDR NLD TWD SEK FRC CAD RON NZD KRW BLG GER ZAR MXN JPN HUF ESP IRL GRC INR CHF ILS BRL REER appreciation Jul 22 - present
22 March 2012
19
perspective. Such a perspective is more important than ever, as we believe the USD should continue to gain when the EUR has room to weaken. Furthermore, a higher oil price, historically a negative for the USD, is losing its bite, as the US structural oil deficit is waning. The fourth lesson involves significant dislocations. The BRL has depreciated nearly 8% in REER terms, for no good reason, in our view, other than central bank intervention. Growth, carry, sound public and private balance sheets and low external vulnerability suggest the BRL should have become more expensive in this environment. The current BRL REER may prove inflationary if China manages to a soft landing. Tolerance to inflation may have little room; hence, this angle supports our positive take on the BRL at current levels. The TRYs REER performance since last summer highlights another key dislocation, in our view. Turkeys current account deficit remains vulnerable, particularly given current oil prices. The TRYs depreciation against the USD of 9.4% since July is misleading, as Turkey has lost competitiveness against its other important trading partners. Given that we expect a weaker EUR, a combination of factors, including oil prices, the current account deficit and EU stagnation, are likely to prove too much for the TRY to handle. In fact, we would have expected markets to treat the TRY as they did the INR in this environment. Both are oilsensitive currencies with current accounts deficits, and the INR has depreciated 6.1% in multilateral terms (helped by a stronger CNY and USD).
REER, after growth stories

The analysis suggests that REER dynamics have been driven by growth differentials to a great extent, with input from such factors as oil prices and central bank intervention. If that is the case, global equity returns should display a positive correlation with REER changes. Recent moves suggest this is indeed the case. Figures 2 and 3 show the correlation between changes in multilateral real exchange rates and relative performance of equities during two periods of acute change in the global growth outlook (between July 22 and December 22 2011, and the period since December 22, 2011, when the first 3y LTRO was launched). Relative equity performance is measured by the USD return of a countrys stock market relative to the USD equity return of its trading partners (using the same weights used in our REER measure). Measuring equity performance in relative terms sharply increases the correlation with REER. This exercise offers interesting insights. First, REER changes and relative equity performance correlate positively during both the market downturn and subsequent upturn. Second, in both the upside and downside elasticities are very similar: for every percentage point of REER exchange rates appreciation, equities (in USD terms) outperformed those of trading partners by over 40bp. This suggests that multilateral REERs are a key adjustment mechanism for tectonic shifts in global growth outlooks (in comparison with the relative value of equities).
Where is growth not fully priced?

We continue to believe that EM will lead global growth in the years to come, and according to equity prices, this view is not fully priced. Figure 4 shows our latest estimate of the equity risk premia (ERP) according to the Gordon model relative to its range since 2005 (see Chapter 2 of the Equity Gilt Study 2011). This valuation model computes estimates of the excess return offered by equities relative to bonds using our assumptions for earnings growth (which are based on our long-term growth forecasts for each country).
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Figure 2: Multilateral FX vs relative equity performances during H2 11 market downdraft

y = 0.4319x - 1.2422 R = 0.1208
Equity performance in USD relative to that of trading partners
2
Figure 3: Multilateral FX vs relative equity performance during recent market recovery

Since Dec 22
Equity performance in USD relative to that of trading partners
Jul 22 - Dec 22 12 PHP USD y = 0.4641x + 0.1879 10 2 R = 0.164 RON 5 SEK JPN -8 EUR -3 0 USD GBP -5 ARS IDR ILS -10
TRY RUB
MYR 7 GBP THB CHF AUD IDR ZAR JPN 2 NZD COP NOK SEK EUR MXN HKD -14 -9 CLP -4 1 TRY 6 -3 BRL KRW DKK SGD CAD -8 ILS TWD RUB INR RON -13 CZK HUF PLN -18 REER changes
DKK PLN PHP CLP NZD TWD THB SGD HUF HKD CZK INR NOK ZAR COP KRW 3 8 CHF AUD MYR CNY CAD MXN
BRL
CNY
ARS
REER changes
EM equity risk premia are elevated in most EM countries, but equities offer excess returns of nearly 10% relative to bonds in many Asian countries. This approach suggests that EM equity risk premia are not fully pricing our growth outlook for EM, which supports the idea that the tectonic shifts away from the eurozone periphery (and from the EUR) into Asia, including China, has not run its course. Figure 4: EM equity risk premia remain elevated; EM equity rally has legs
16% 12% 8% 4% 0% -4% Chile Singapore Hungary Turkey Czech South Peru Taiwan Poland Thailand Mexico Philippines Egypt Russia Indonesia China Colombia Malaysia Korea Brazil Hong
21
Min
Source: Barclays research
Israel
Max
Tectonic trade ideas

This multilateral perspective offers support to directional trades we have outstanding such as our short CHF/MXN, our long USD/CHF and USD/JPY (in different structures), and long BRL, ZAR, RUB, MXN, COP and MYR (see The Emerging Markets Quarterly, March 2012). We also believe the BRL is likely to benefit relative to the RY for the abovementioned reasons. We suggest using BRL, TRY, USD, EUR and CNY to express this multilateral view but our optimal weightings estimate boils down to a short TRY/BRL.
22 March 2012
India
Last
G10 FX MOVES OVER THE PAST QUARTER

Key themes over the past quarter: Sustained momentum from the US and China supported global risk appetite; progress over the Greek bailout reduced the risk premium on all European currencies; soaring oil prices supported commodity currencies; and central banks continued to loosen policy.
Data continued to show resilient global growth, and the markets perceptions about US monetary policy turned from considering an extension of QE to wondering if the Fed will bring forward its guidance on when policy may be tightened. This environment was generally supportive of high beta risk currencies and has lately prompted a nascent recovery in the USD. The February agreement over the second bailout for Greece meant a messy default would be avoided. Since then, the market has taken the ISDAs proclamation of a CDS event in its stride. And while Greek implementation risks remain high, the reduction in euro area risk (and large EUR shorts) helped European currencies perform during the quarter. A cold snap in Europe, geopolitics and supply constraints combined to push the oil price sharply higher. As a result, the NOK and CAD were two of the strongest performing currencies in the quarter. Despite a generally improving economic backdrop, many G10 central banks loosened policy further. The Bank of Japan surprised the market with an expansion of its asset purchase fund, the MPC increased asset purchases to 325bn and the Norges Bank cut the policy rate despite strong domestic fundamentals. While these events prompted a sell-off in their respective currencies, we expect further depreciation of the JPY against the USD.
SUMMARY OF KEY DRIVERS FOR G10 FX

We have developed a set of six metrics to quantify the main thematic drivers behind currency moves (see Its not just risk on/risk off, FX Monthly, 22 July 2011). These quantitative measures provide guidance on how to understand currency drivers better. They may not always match our forecasts, which include factors such as event risk and policy response. Subjective views on market themes, combined with objective currency ranks, based on attractiveness with respect to each driver, current (Q2 12) versus previous quarter (Q1 12)*
Importance of driver Carry Valuation Positioning Market risk Idiosyncratic risk Momentum Overall *** [***] *** [-] * [***] * [-] * [***] * [***] Current quarter rank [Last quarter rank] EUR 7 [6] 5 [6] 3 [1] 3 [5] 1 [7] 1 [5] 3 [4] AUD 1 [1] 10 [10] 1 [5] 9 [9] 6 [4] 9 [4] 6 [2] CAD 5 [5] 7 [7] 9 [2] 6 [6] 4 [3] 5 [1] 8 [1] CHF 10 [10] 9 [9] 7 [7] 5 [3] 5 [6] 1 [2] 10 [6] GBP 6 [7] 2 [2] 5 [9] 4 [4] 8 [10] 5 [10] 4 [10] JPY 9 [9] 3 [4] 2 [3] 1 [2] 10 [8] 10 [5] 7 [6] SEK 3 [4] 4 [3] 4 [4] 7 [8] 9 [1] 1 [5] 2 [2] NOK 4 [3] 1 [1] 8 [6] 8 [10] 3 [2] 5 [8] 1 [4] NZD 2 [2] 8 [8] 6 [8] 10 [7] 2 [9] 5 [8] 5 [9] USD 8 [8] 6 [5] 10 [10] 2 [1] 7 [5] 4 [3] 9 [8]
Note: We rank currencies such that a higher rank (lower number) implies greater attractiveness. The importance of each driver this quarter is determined by our currency views, while importance last quarter is obtained from the cross-sectional correlation of currency ranks and currency performance since last quarter. Carry attractiveness is measured by the 3m IR diff vs US/3m vol. Valuation is % over (+)/under(-) valuation versus BEER. Positioning in 20-day cumulative flows is standardised by its volatility. Market risk is the 60-day beta to MSCI World. Idiosyncratic risk is the difference between 3m implied and realised vol. Momentum is % positive returns. Source: Bloomberg, Barclays Research
22 March 2012
22
G10 FX VIEWS ON A PAGE

3m Forecast vs USD
Currency USD
Central scenario Continued US economic resilience supports a rise in US yields and the USD. Loose monetary policy, very weak economic prospects and lingering concerns about the periphery weigh on the EUR. Japanese negative factors like trend C/A deterioration, fiscal and potential additional easing by the BoJ should weigh on the JPY versus USD. The UKs growth outlook is weak relative to the US, weighing on GBPUSD. Prospects remain brighter relative to the EUR. The CHF remains our favourite short as euro area safe haven lessens and concerns over the countrys fundamentals increase. A robust US economy and high oil prices will continue to support the Canadian economy and the currency. However, relatively loose monetary policy will cap the upside. While expected gains in commodity prices, robust trading partner growth and continued yield advantage will likely support the AUD, valuation is a concern. As such we expect the AUD to move largely sideways. Domestic activity likely to strengthen as Canterbury reconstruction picks up later this year. Exporters currently benefiting from high world prices With RBNZ expected to raise rates by year-end, its yield advantage over most other G10 economies is likely to increase, Despite Swedens strong fundamentals, monetary policy remains relatively loose. We expect this to contain SEK strength against non European currencies. We expect the NOKs performance to be negatively affected by a weakening EUR as well as the Norges Banks desire to limit the strength of its currency.
Risks Downside: A spike in oil prices and/or a fall in economic momentum would reinvigorate the debate over QE, weighing on the USD.
EUR
1.30
Downside: An oil supply shock as well as a re-escalation of concerns over Greece would increase the downside for the currency. Upside: Increased concerns about global prospects, leading to a risk-off environment would support the JPY. Downside: Increased concerns about Greece would increase the risk premium on GBP. A downgrade of the UKs sovereign credit rating would undermine GBPs safehaven support. Downside: Should deteriorating Swiss fundamentals prompt the SNB to raise the floor versus the EUR, it would imply larger underperformance versus the USD. Balanced: A contraction in oil supply would pressure CAD higher; however, local fundamentals have been weakening recently along with growing concerns about the Canadian housing sector. Downside: Increased concerns about global growth, and Chinese economic activity in particular, would weigh on the AUD. Downside: Increased concerns about global growth, weaker Chinese economic activity and delays in Canterbury reconstruction would weigh on the NZD.
JPY
88
GBP
1.55
CHF
0.96
CAD
0.98
AUD
1.05
NZD
0.83
SEK
6.77
Downside: Should an oil price spike constrain global activity and risk appetite, the SEK is likely to underperform. Downside: As oil revenues are largely held offshore, the countrys link to oil would provide minimal support should a risk-off environment resume. i
NOK
5.95
22 March 2012
23
EM FX VIEWS ON A PAGE
Currency Tactical bias Strategic directional view Current strategy/trades we like Vol adj 6m returns Score (1-5)
Emerging Asia CNY MYR Neutral Bullish Ebbing inflationary pressures augur for a less marked pace of currency appreciation over the coming quarter. We expect the current account to benefit from rising commodity prices and portfolio flows to be supported by the governments divestment program. Ongoing reconstruction efforts following the 2011 floods, supported by expansionary monetary and fiscal policy, should bolster the economy and the THB. Persistent current account and fiscal deficits, sticky inflation, and subdued domestic demand point to INR underperformance. Economic growth remains firm against the backdrop of relatively benign inflationary pressures. Large equity inflows year-to-date point to upward pressure on the TWD. Factors including firm export growth and a still-strong labor market in the context of an undervalued tradeweighted exchange rate point to steady KRW appreciation. A paucity of portfolio inflows in the context of a broad USD uptrend is likely to cap IDR upside near term. The central banks preference for the PHP not to be an outlier in terms of regional performance points to only modest currency appreciation. The dominant theme remains rising onshore CNY deposits. We expect MAS to maintain its bias towards currency appreciation when it convenes in April, with the slope and band of the SGD NEER being left unchanged at 2% and +/-275bp on our estimates, respectively. The MXN continues to price rather high risk premium, positioning is not crowded and intervention risks are small. Sell EUR/MXN (3m target: 16); sell CHF/MXN (3m target: 12.80) Short 6m USD/CNY NDF (6m target: 6.21) 0.47 0.42 3.80 3.80
THB
Bullish
0.42
3.75
INR
Bearish
0.38
3.75
TWD
Bullish
0.35
3.70
KRW
Bullish
0.32
3.40
IDR PHP
Bearish Neutral
0.23 0.25 -0.24
3.25 3.10 3.00
HKD SGD
Neutral Bullish
0.18
2.30
Latin America MXN Bullish 0.27 2.95
BRL
Bullish
Policy instability and FX intervention has added excessive risk Sell EUR/BRL (3m target: 2.25); premium to BRL. We see potential, albeit capped at around buy 2m USD put/BRL call (1.75) 1.70. and sell USD put/BRL call (1.71) Slow appreciation potential, managed by the central bank. Supportive global environment (commodities), but the risk premium priced in is small. FX intervention is a risk at 465. The COP has overreacted to the supportive global environment of late, but limited downside to oil prices and FDI inflows is positive for it. FX intervention risks increase below 1,750. Sell EUR/COP on spikes targeting 2,260 in 3m
0.33 0.14 0.19
2.85 2.60 2.30
PEN CLP
Neutral Bullish/ neutral Bullish/ neutral
COP
0.15
1.90
22 March 2012
24
Currency
Tactical bias
Strategic directional view
Current strategy/trades we like
Vol adj 6m returns
Score (1-5)
Emerging EMEA EGP Neutral The likelihood of a deal with the IMF by April has increased and repatriation flows look firm for the next 23 months. Devaluation is probably unavoidable, but it could still be a controlled process. RON stability since October suggests that policymakers are keen to keep the exchange rate cheap and might allow depreciation if global climate turns more negative again. Low FX implied yields make RON a cheap short. Despite the positive returns this year and that there are likely no more shorts to unwind, we are modestly bullish on the PLN, and inflow momentum should be sustained. Turkeys large external financing needs and current account adjustment keep us cautious on the lira in the current environment of high oil prices. The YTD rally in Hungarian assets, compressed risk premia, and the current positioning technicals leave the HUF vulnerable to corrections. Slow progress in EU/IMF negotiations are also likely to weigh on the HUF High commodity prices, high yields and attractive positioning technicals argue for ZAR gains. Capital outflows and deteriorating C/A balance have kept the ILS under pressure since the beginning of the year. We do not see this ending until later this year. The Czech economy is in a recession, implying a decrease in FDI and portfolio flows. With the election uncertainties behind us, the RUB should Long RUB vs basket and vs TRY continue to enjoy support from solid growth, lower inflation and high oil prices. The UAH quasi-peg can be maintained until the October elections, but the risks of an earlier devaluation (the Ukraine continues to experience adverse balance-ofpayments pressures) make the risk/reward unappealing for UAH longs. The KZT, like the RUB, benefits from high oil prices, but the currency is tightly managed. Our bias would still to be long, though. Stay short RON/long EUR 0.31 Long a 1x2 2m ratio PLN call / EUR put spread (4.10 and 4.00 strikes) Short TRY/long RUB 0.19 Short HUF/long EUR spot together with 3m HUF call/EUR put spread at 289-279 3.25 3.65 0.52 3.70
RON*
Bearish
PLN*
Bullish
0.30
3.35
TRY
Bearish
HUF*
Bearish
-0.01
3.00
ZAR ILS
Bullish Neutral
0.21 0.17 0.02 0.01
2.80 2.55 2.00 1.85
CZK* RUB
Neutral Bullish
UAH
Neutral
KZT
Bullish
Note: * Versus the EUR. The variable score is an index which ranks EM currencies according to the vol-adjusted returns, PPP valuation, carry, systemic risk, basic balance/GDP and reserves accumulated over the past 5y/GDP. For more details on the trade recommendations, please see the EM Dashboard. Source: Barclays Research
22 March 2012
25
OPEN TRADES, AS OF 22 MARCH 2012

Original Mark to market Net profit since inception +4.77% Profit change (since 23/2) -0.96pp
Trade/date/macro views Sell EUR/SEK spot, 23/09/10
Spot reference 9.1895
% of notional -
Expiry -
Current spot reference 8.9319
Initial rationale: A continuation of structural issues for the larger economies, with very loose policy in the majors and global growth remaining reasonably buoyant, should support global equities and the SEK. Ongoing peripheral issues should keep pressure on the EUR. Long VECTOR strategy, 18/03/10 219.8156 192.62 -12.37% 1.46pp Initial rationale: Carry and value look attractive, but returns are likely to depend heavily on the various risk scenarios. As a result, we recommend being long a less regime-dependent strategy VECTOR (for details please see VECTOR: Value Enhanced Carry Trading of Exchange Rates, 15 October 2009). Long USD/CHF, 23/6/11 0.8388 0.9135 +8.37% 0.83pp Initial rationale: As concerns about the periphery decrease, we expect the CHF to receive less support from safe-haven flows. Alternatively, if the situation worsens and global financial markets are affected significantly, we expect the USD to outperform the CHF. Short EUR/CHF 1y/1y FVA and long XAU/EUR for 20 times the vega amount, 23/6/11 XAU/EUR: 1081.58 EUR/CHF FVA: 11.9% 23/6/2012 XAU/EUR: 1242.31 EUR/CHF FVA: 6.62% +16.78% -7.85pp
Initial rationale: EUR/CHF volatility is extremely high because of safe-haven flows. Either peripheral concerns decrease which lowers EUR/CHF volatility or things worsen, in which case the upside for gold should be higher than for the CHF. Long CAD vs a 50/50 basket of EUR and GBP, 28 October 2011, stop loss at 0.657 CADEUR: 0.7111 CADGBP: 0.6267 EUR/CAD: 1.3191 GBP/CAD: 1.5806 +4.01% -0.10pp
Initial rationale: The EUR and GBP are facing weak growth and loose monetary policy, while more positive cyclical data from the US and higher oil prices are likely to support the CAD. Long SGD/TWD, 23/11/11, target 24.2, stop loss at 22.8 Long SGD vs USD and EUR (60/40), 6/12/11 23.1723 23.3849 -0.49% -1.71pp
Initial rationale: Relative central bank responses to divergent inflation and growth developments should be supportive of the SGD versus the TWD. USDSGD: 1.2839 EURSGD: 1.7207 EUR/AUD: 1.3035 GBP/USD: 1.5631 USD/SGD: 1.2662 EUR/SGD: 1.6709 EUR/AUD: 1.2712 GBP/USD: 1.5813 +2.08% -0.40pp
Initial rationale: With inflation slowing only gradually, we see the MAS maintaining its bias towards slow SGD appreciation. Long AUD, USD vs EUR, GBP basket, 8/12/11 +1.21% -1.30pp
Initial rationale: A gradual reduction in euro area risks would be positive for market risk appetitive. For investors looking to be long carry currencies but to hedge out euro area risks, we recommend funding these positions in the EUR and GBP. Short AUD/BRL 3m forward, USD/BRL 3m at 1.878 and AUD/USD 3m at 1.017, 5/1/12 USD/BRL: 1.843 AUD/USD: 1.027 USD/BRL:1.8245 AUD/USD: 1.0381 +0.45% -3.45pp
Initial rationale: Relative monetary policy prospects (a less dovish BCB and more aggressive RBA), attractive carry and Brazils proximity to the US versus Australias to China makes selling AUD/BRL an attractive relative value trade. Higher oil prices on global supply disturbances also supports BRL. Short CHF/MXN CHF/MXN: 14.4 14.0541 +2.93% +1.03pp Initial rationale: The CHF is our favourite short among the majors due to our expectations for a weaker EUR and the EUR/CHF floor while robust growth prospects in the US should be supportive of the MXN. 6m CAD/JPY call at 83.0, 23/2/2012 CAD/JPY: 80.17 1.95% 23/8/2012 CAD:JPY: 82.5021 +0.96% Initial rationale: Evidence of stronger growth in the US and higher oil prices should be supportive of the CAD while weighing on the JPY. An increasingly dovish BoJ and the low levels of implied volatility also make this position attractive. 3m 1.30-1.25 EUR/USD put spread, 29/2/2012 EUR/USD: 1.3445 0.61% 31/5/2012 EUR/USD: 1.3196 +0.12% Initial rationale: The ECB is likely to keep monetary conditions in the euro area extremely loose which will be the main driver of the EUR lower. Brightening prospects for growth in the US and implementation concerns from the fiscal austerity plans in the euro area should limit EUR/USD upside. 3m USD/JPY 88.0 one-touch, 14/3/2012 USD/JPY: 82.90 28.9% 14/6/2012 USD/JPY: 82.50 -6.35% Initial rationale: We expect the strong upward momentum in USD/JPY to remain intact due to the focus on the fiscal issues in Japan, a widening CA deficit and relative monetary policy. 1m 7.50-7.40 EUR/NOK put spread, 14/3/2012 EUR/NOK: 7.5865 0.23% 12/4/2012 EUR/NOK: 7.6329 +0.15% Initial rationale: The surprise rate cuts by the Norges Bank dont change our bullish view on EUR/NOK as we expect the ECB to continue to keep monetary policy extremely loose while domestic credit conditions will stay the Norges Banks hand. Oil prices are also likely to support the NOK.
Note: Closed recommendations are at the end of this publication. Source: Barclays Research
22 March 2012
26
CLOSED TRADE RECOMMENDATIONS

Closed portfolio trades 2011-2012
Original Cost as % of notional 0% -1.21% 0.32% 16.25% -0.10% 0.43% 0.84% -1.07% Mark to market at time of closing Profit as a % of notional +3.2% -0.54% -0.7% 1.01% 0.0% 0.0% +42.25% 0.10% -9.46% -12.71% +0.39% +0.10% -2.95%
Trade/Date Short EUR/AUD, 21/1/2011 Long 3m 132.50 EUR/JPY straddle, short 2y EUR/JPY strangle (strikes: 109.25 and155.50), 25/9/09 Long GBP/JPY spot, 13/1/11 Long GBP/USD straddle struck at 1.6358, short USD/JPY straddle struck at 82.71, 20/4/11 Buy 9m 1x2 EUR/USD put spread (1.37,1.2875 strikes), 7/10/10 1x2 EUR/GBP call spread at 0.92 and 0.95, 5/7/11 1m USD/JPY one-touch at 75, 21/7/11 1x2 EUR/USD 3m 1.47-1.50 call spread Short AUD, NZD vs USD, 17/2/11 Short NZD/CAD, 24/3/2011 Long 6m EUR/USD 1.50 call, short 1m EUR/USD 1.44 call Long GBP/CHF 1.41-1.46 call spread Long EUR/SEK 1m/1m FVA at 13.5% and short USD/JPY 1m/1m FVA at 11.9% Long AUD/USD 3m vol swap, short USD/CHF 3m vol swap, 15/8/11 Long 3m/3m USD/CAD FVA, short 3m/3m USD/CHF FVA, 19/8/11 Long TRY (50%), NOK (25%) and NZD(25%) against the CHF and long 50% of 3m USD/ZAR call struck at 7.35, 28/10/10 Long EUR/NZD, 23/6/11 Short 60% AUD and 40% NZD against the JPY EUR/USD 3m 1.33-1.27 put spread, 21/9/11 Long AUD/USD 6m/6m FVA, short USD/JPY 6m/6m FVA, 23/6/11
Spot reference 1.3631 132.90 131.16 GBP/USD: 1.6357 USD/JPY: 82.82 1.3925 0.9036 75.82 1.4282 AUD/USD: 1.0119 NZD/USD: 0.7589 0.7344 1.4405 1.4004 EUR/SEK: 13.50% USD/JPY: 11.90% AUD/USD: 16.7% USD/CHF: 16.0% USD/CAD: 11.925% USD/CHF: 13.70% CHF/TRY:1.4556 CHF/NOK:5.9647 NZD/CHF:0.7398 USD/ZAR:7.0770 1.7515 AUD/JPY: 75.109 NZD/JPY: 57.369 1.3699 AUD/USD: 15.45% USD/JPY: 12.80%
Closed on 24/12/09 27/09/11 7/10/11 8/7/11 8/5/11 11/8/11 19/8/11 24/8/11 24/8/11 21/9/11 24/10/11 25/10/11 10/11/11 21/11/11 8/12/11
Closing spot 1.3370 116.22 130.16 GBP/USD: 1.6064 USD/JPY: 81.11 1.4265 0.8712 76.86 1.4397 AUD/USD: 1.0510 NZD/USD: 0.8307 0.8189 1.3699 1.4114 EUR/SEK: 8.72% USD/JPY: 10.07%
USD/CAD: 12.92% USD/CHF: 16.70% CHF/TRY: 2.0287 CHF/NOK: 6.3447 NZD/CHF: 0.6822 USDZAR: 8.4798 1.7146 AUD/JPY: 79.084 NZD/JPY: 60.021 1.4187 AUD/USD vol: 16.35% USD/JPY vol: 10.04% USD/SEK: 6.7315 USD/PLN: 3.2791 1205 1.2804 1.0695 EUR/USD: 1.3205 CHF/JPY: 89.30 EUR/AUD: 1.2277 AUD/USD: 1.0756 EUR/CAD: 1.3184 EUR/JPY: 108.04 USD/SEK: 6.6944
-1.95% -12.58%
1.03% -
8/12/11 8/12/11 21/12/11 22/12/11
-1.94% -4.69% -0.04% +3.66%
Long USD against an equal weighted basket of SEK and PLN, 23/11/11 Short AUD/KRW 1m forward, 6/1/12 Long AUD/NZD 3m strangle at 1.2490 and 1.3141 AUD/USD upside through 6m 1.10/0.9150 risk reversal, 24/8/11 Long USD, JPY vs EUR and CHF equal-weighted spot basket, 23/09/10 Long AUD against an equal weighted basket of EUR and USD, 12/9/11 EUR/CAD upside via a 3m 25-delta risk reversal, 8/12/11 Long 3m EUR/JPY delta neutral straddle at 103.57 and short USD/SEK delta neutral straddle at 6.7264, 8/12/11
USD/SEK: 6.9073 USD/PLN: 3.3615 1181 AUD/NZD: 1.2892 1.0510 EUR/USD: 1.3333 CHF/JPY: 85.63 EUR/AUD: 1.3193 AUD/USD: 1.0320 EUR/CAD: 1.3514 EUR/JPY:103.57 USD/SEK: 6.7264
1.14% 0% 0% 0.90%
23/1/12 8/2/12 20/2/12 23/2/12 2/3/12 2/3/12 8/3/12 8/3/12
-2.48% -1.55% -0.43pp 0% -2.8% 7.3% 0% 5.93%
22 March 2012
27
FORECAST TABLES
Forecasts Spot EUR/USD USD/JPY GBP/USD USD/CHF USD/CAD AUD/USD NZD/USD EUR/JPY EUR/GBP EUR/CHF EUR/SEK EUR/NOK
Source: Barclays
Forecast vs Outright Forward 6 Month 1.25 90 1.52 1.04 0.96 1.06 0.84 113 0.82 1.30 8.70 7.32 1 Year 1.20 90 1.50 1.08 0.95 1.07 0.86 108 0.80 1.30 8.50 7.30 1 Month 0.4% 1.3% -0.5% 1.7% -0.1% 0.7% 0.6% 1.7% 0.8% 2.1% -1.0% -2.4% 3 Month -1.2% 6.2% -1.9% 5.0% -2.2% 2.4% 3.5% 4.9% 0.8% 3.8% -1.7% -4.0% 6 Month -5.0% 8.7% -3.3% 13.7% -4.4% 4.4% 5.4% 3.2% -1.8% 8.0% -3.2% -4.7% 1 Year -9.0% 9.1% -4.7% 18.9% -6.3% 7.4% 9.3% -0.7% -4.5% 8.2% -6.0% -5.7%
1 Month 1.32 84 1.57 0.93 1.00 1.04 0.81 111 0.84 1.23 8.85 7.45
3 Month 1.30 88 1.55 0.96 0.98 1.05 0.83 114 0.84 1.25 8.80 7.35
1.31 83.0 1.58 0.92 1.00 1.04 0.81 109 0.83 1.21 8.92 7.63
Long-term FX forecasts
18 Month EUR JPY GBP CHF CAD AUD NZD EUR/JPY EUR/GBP EUR/CHF EUR/SEK EUR/NOK
Source: Barclays Capital
2 Year 1.20 93 1.54 1.12 0.99 1.00 0.80 112 0.79 1.35 8.40 7.47
3 Year 1.21 94 1.55 1.14 1.01 0.97 0.78 114 0.78 1.38 8.34 7.56
4 Year 1.21 96 1.57 1.16 1.04 0.93 0.75 115 0.77 1.40 8.29 7.64
5 Year 1.21 97 1.59 1.18 1.06 0.90 0.72 117 0.76 1.43 8.24 7.73
1.20 92 1.53 1.11 0.98 1.02 0.82 111 0.79 1.34 8.42 7.43
22 March 2012
28
Emerging markets forecasts

Emerging Markets FX Forecasts Spot USD/CNY USD/HKD USD/INR USD/IDR USD/KRW USD/MYR USD/PHP USD/SGD USD/THB USD/TWD USD/ARS USD/BRL USD/COP USD/CLP USD/MXN USD/PEN EUR/CZK EUR/HUF EUR/PLN EUR/RON USD/RUB BSK/RUB USD/TRY USD/ZAR USD/ILS USD/EGP 6.30 7.77 51.21 9188 1130 3.08 43.01 1.27 30.85 29.55 4.36 1.82 1761 487 12.84 2.67 24.75 294 4.17 4.37 29.43 33.60 1.81 7.73 3.75 6.03 1 Month 6.34 7.78 52.00 9250 1120 3.03 43.00 1.250 30.50 29.50 4.36 1.77 1750 483 12.50 2.67 24.60 305 4.15 4.35 29.20 33.40 1.80 7.33 3.71 6.00 3 Month 6.30 7.78 51.00 9150 1110 3.01 42.50 1.240 30.20 29.30 4.49 1.73 1740 475 12.30 2.66 24.65 305 4.04 4.38 28.70 32.57 1.80 7.00 3.77 6.20 6 Month 6.21 7.78 49.00 9000 1075 2.90 42.30 1.230 29.75 28.50 4.68 1.74 1750 477 12.25 2.66 24.50 297 4.02 4.30 28.70 31.93 1.80 7.40 3.70 6.50 1 Year 6.09 7.78 48.00 8800 1025 2.84 42.00 1.210 28.50 27.50 5.15 1.75 1750 480 12.20 2.64 24.25 290 3.95 4.25 28.60 31.17 1.80 7.60 3.65 7.00 1 Month 0.4% 0.2% 0.4% 0.6% -1.5% -2.1% -0.1% -1.4% -1.3% -0.4% -1.0% -3.6% -1.0% -1.1% -2.9% 0.0% -0.6% 3.4% -0.8% -0.7% -1.2% -0.4% -1.5% -5.6% -1.2% -1.4% Forecast vs Outright Forward 3 Month -0.3% 0.2% -2.8% -1.1% -2.8% -3.0% -1.4% -2.2% -2.5% -0.9% -0.4% -6.8% -2.1% -3.4% -4.9% -0.4% -0.4% 2.7% -4.0% -0.4% -3.7% -2.2% -2.7% -10.7% 0.1% -1.3% 6 Month -1.9% 0.3% -8.1% -3.8% -6.3% -6.9% -2.2% -2.9% -4.4% -3.3% -0.6% -7.9% -2.4% -4.0% -6.0% -0.6% -1.1% -1.2% -5.4% -2.9% -4.9% -4.4% -4.5% -6.8% -2.0% -1.6% 1 Year -3.9% 0.3% -12.0% -8.1% -11.1% -9.5% -3.5% -4.3% -9.1% -6.2% -0.5% -9.9% -4.1% -5.1% -7.9% -1.9% -2.2% -5.4% -8.5% -5.4% -7.6% -7.1% -7.9% -6.8% -3.8% -1.4%
Policy rate forecasts (%, end of quarter)

Current FOMC BoJ MPC ECB Riksbank Norges Bank SNB BoC RBA 0-0.25 0.10 0.50 1.00 1.50 1.50 0-0.25 1.00 4.25 2Q 12 0-0.25 0-0.10 0.50 1.00 1.50 1.50 0-0.25 1.00 3.75 3Q 12 0-0.25 0-0.10 0.50 1.00 1.50 1.50 0.25 1.00 3.75 4Q 12 0-0.25 0-0.10 0.50 1.00 1.50 1.50 0.25 1.00 3.75 1Q 13 0-0.25 0-0.10 0.50 1.00 1.50 1.50 0.25 1.00 3.75
Percent deviation from PPP (+ overvaluation/- undervaluation)

As of 22/3/12 vs EUR vs USD EUR 0% 6% USD -6% 0% AUD 29% 36% CAD 9% 15% CHF 20% 26% GBP -8% -2% JPY 8% 14% SEK -11% -5% NOK 5% 11% NZD 27% 34%
Note: Daily updates for this table are available on Barclays Capital Live: https://live.barcap.com/BC/barcaplive?menuCode=MENU_FI_FX_GLB_FXH. Source for all tables: Barclays Research
22 March 2012
29
GLOBAL FOREIGN EXCHANGE RESEARCH

Global
Piero Ghezzi Head of Global Economics, Emerging Markets and FX Research +44 (0)20 3134 2190 piero.ghezzi@barclays.com
G10 FX
Paul Robinson Head of FX Research +44 (0)20 777 30903 paul.robinson3@barclays.com Yuki Sakasai FX Strategy +1 212 412 5652 yuki.sakasai@barclays.com Aroop Chatterjee Chief FX Quant Strategist +1 212 412 5622 aroop.chatterjee@barclays.com Raghav Subbarao FX Strategy +44 (0)20 7773 4144 raghav.subbarao@barclays.com Bill Diviney FX Strategy +81 3 4530 5026 bill.diviney@barclays.com Jose Wynne Head of North American FX Strategy +1 212 412 5923 jose.wynne@barclays.com Guillermo Felices Head of European FX Strategy +44 (0)20 355 52533 guillermo.felices@barclays.com Masafumi Yamamoto Chief FX Strategist, Japan +81 3 4530 5038 masafumi.yamamoto@barclays.com
Sara Yates FX Strategy +44 (0)20 777 33937 sara.yates@barclays.com
Emerging Markets
Michael Gavin Head of International Macro Strategy +1 212 412 5915 michael.gavin@barclays.com Alejandro Grisanti Chief Economist Latin America Ex-Brazil, Mexico +1 212 412 5982 alejandro.grisanti@barclays.com Christian Keller Head of Emerging EMEA Research +44 (0)20 7773 2031 christian.keller@barclays.com Koon Chow Senior EMEA Strategist +44 (0)20 777 37572 koon.chow@barclays.com Olivier Desbarres Head of FX Strategy, Asia-Pacific ex-Japan +65 6308 2073 olivier.desbarres@barclays.com Nick Verdi FX Strategist, Asia-Pacific ex-Japan +65 6308 3093 nick.verdi@barclays.com
Hamish Pepper FX Strategist, Asia-Pacific ex-Japan +65 6308 2220 hamish.pepper@barclays.com
Marcelo Salomon Chief Economist Brazil, Chile, Mexico +1 212 412 5717 marcelo.salomon@barclays.com
22 March 2012
30
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Barclays FX Quarterly

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Barclays FX Quarterly

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FOREIGN EXCHANGE RESEARCH

Barclays | Global FX Quarterly

Barclays | Global FX Quarterly

Resurgent USD in calmer waters

Key themes for the quarter

Major forecast changes

Barclays | Global FX Quarterly

THEME 1: USD PROSPECTS

The comeback kid

Longer-term USD prospects brighten

Jan-10 Euro area

Barclays | Global FX Quarterly

Prospects for the other majors have deteriorated

Since Jan 2008

Barclays | Global FX Quarterly

Select commodity and EM currencies remain attractive

US cyclical outperformance US cyclical outperformance + US10Y up over 25bp per month

Barclays | Global FX Quarterly

The big risk: Oil

Barclays | Global FX Quarterly

THEME 2: OIL AND FX

Figure 1: Leading indicators for economic activity in EMs continue to be subdued

Iran episode: Oil Libya episode: Oil

Iran episode: Non-oil Libya episode: Non-oil

Barclays | Global FX Quarterly

Oil up, equities up

Oil up, equities down

Currency performance and oil shocks

IR Negative supply shock

IR Negative supply shock

Barclays | Global FX Quarterly

Currency vulnerability to higher oil prices

Figure 7: Oils impact on growth

SGD CHF INR KRW THB PHP

Net oil consumption/GDP

Barclays | Global FX Quarterly

Figure 9: Aggregate vulnerability to an oil price increase

Effect on annual headline inflation (10% oil increase)

Barclays | Global FX Quarterly

THEME 3: EUROPEAN CURRENCIES

Navigating unchartered waters

EUR/USD weak, equities rally EUR/USD weak, equities sell-off

Since Dec 2011

Barclays | Global FX Quarterly

Policy responses: sailing into unchartered waters

Actual policy rate

Source: Bloomberg, Barclays Research

Barclays | Global FX Quarterly

0.90 0.86 0.82 0.78

Source: Bloomberg, Barclays Research

Source: Bloomberg, Barclays Research

Barclays | Global FX Quarterly

Figure 7: Ranking of European currency prospects

% chg vs. EUR since Dec 11 PLN

Germany concerns*** rank**** -9 -30 -24 -42 45 448 99 93 143 1 5 1 4 1 1 1 2 3 2 1 9 7 3 6 8 4 5

TRY HUF SEK

Source: Barclays Research

FX implications: looking for safe ports to anchor

Barclays | Global FX Quarterly

THEME 4: JPY AND CURRENT ACCOUNT

Focus on long-term trend deterioration and twin deficits

C/A deterioration a game changer for JPY

Germany concerns* rank** -9 -30 -24 -42 45 448 99 93 143 1 5 1 4 1 1 1 2 3 2 1 9 7 3 6 8 4 5