Barclays Global FX Quarterly Brief Break in The USD Uptrend

Foreign Exchange Research
March 2015
Global FX Quarterly
Brief break in the USD uptrend
Jose Wynne
+1 212 412 5923
jose.wynne@barclays.com
Marvin Barth
+44 (0)20 313 43355
marvin.barth@barclays.com
Aroop Chatterjee
+1 212 412 5622
aroop.chatterjee@barclays.com
Mitul Kotecha
65.6308.3093
mitul.kotecha@barclays.com
PLEASE SEE ANALYST CERTIFICATION(S) AND IMPORTANT DISCLOSURES BEGINNING ON LAST PAGE.
Barclays | Global FX Quarterly
CONTENTS
Top Trades .................................................................................................... 3
Our top thematic trades are short EURUSD spot, long USDCAD spot, and long USDCNH
spot. Our top relative value trades are long INRTWD and short SGDPHP.
Overview ....................................................................................................... 4
Slower US growth and softer inflation have given the Fed reasons to delay and flatten its
rate hiking path. These developments have caught the USD a bit ahead of itself, but given
the recent correction, we expect it to stabilize around current levels. We think the USD is
likely to take a break before resuming its uptrend at a slower pace. We forecast 5% USD
REER appreciation by year-end.
Theme 1: EUR ............................................................................................10

Taking depth soundings
Two-way risks have increased but the two key drivers of the multi-year downtrend in the
EUR remain in force. In our view, a stabilization or turn in the EUR will require a sustained
and convincing pickup in real investment or an acceleration in core inflation. Neither looks
likely to be on offer anytime soon.
Theme 2: JPY ..............................................................................................15

Range-bound
The yen will likely remain range-bound against the USD in the year ahead amid
countervailing factors. Expected USD strength into the Feds first hike may continue to exert
upward pressure on USDJPY, although we have delayed our expectation of a Fed rate hike to
September, which could reduce some of the upward momentum in the USD in the near term.
Theme 3: GBP ............................................................................................17

Unprecedented political uncertainty
Growing political risk premium ahead of the particularly uncertain 7 May general election
should put downward pressure on GBP. Beyond the election, economic outperformance
relative to the euro area should see continued GBP appreciation versus the EUR. However, very
low UK inflation and risks of an extended period of unchanged BoE policy are likely to temper
the degree of sterling outperformance and contribute to significant GBPUSD depreciation.
Theme 4: SEK and CHF ...........................................................................20

Club sub-zero
Unwanted currency strength, in anticipation of or as a result of ECB QE, has forced smaller
G-10 central banks like the SNB and the Riksbank to ease policy recently, cutting rates
below zero and announcing QE. We expect both central banks to keep an easing bias, at
least in the short term.
Theme 5: CAD and NOK .........................................................................23

Yet to price the oil slippage
Lower oil prices have weakened fundamentals and widened output gaps in oil-producing
Canada and Norway. We believe the effect of lower oil will be pervasive in 2015, and we
remain negative on both CAD and NOK.
26 March 2015
Theme 6: CNY ............................................................................................25

More flexibility, less complexity
We expect China to take steps to accommodate greater CNY flexibility this year, through a
combination of more volatile but modestly higher USDCNY fixings and a widening of the
trading band.
Theme 7: AUD and NZD .........................................................................28

More room to fall
Although both AUD and NZD have depreciated in recent months, we think there is scope for
further depreciation versus USD given contrasting monetary policy stances and a firm USD.
However, we do see some scope for AUDNZD to move higher, with the currency pair
bottoming out around current levels.
Theme 8: EM Asia .....................................................................................32

Exploiting divergence within the pack
Asian currencies have outperformed during Q1 2015 but it has not been an easy ride. Given
the headwinds from expected Fed rate hikes and a strong USD, we expect Asian currencies
to depreciate against the greenback to varying degrees.
Theme 9: BRL .............................................................................................36

BCB behind the curve
BRL offers value, but we suggest staying on the sidelines waiting for the central bank to get
ahead of the curve. High risk premia on domestic assets, along with a weaker BRL, would
ordinarily make being long the currency an inviting proposition. We are not constructive,
however.
Theme 10: TRY ..........................................................................................38

Less negative, but still on the sidelines
TRY may find some stability in Q2 15 as the USD rally takes a breather. Although TRY
provides attractive carry, we think idiosyncratic risks make it an unattractive long. We
maintain our fundamentally negative view on TRY into H2 15 (Q4 15: 2.75 and Q1 16: 2.85).
Theme 11: RUB..........................................................................................40

Weaker spot but inside USD forwards
The RUB looks set for modest depreciation in 2015 on lower oil prices, persistent
geopolitical risks around Ukraine and broad USD strength. Additionally, with the CBR having
turned more growth-oriented amid high inflation, monetary policy support for the currency
is likely to wane.
FX Views for the Year Ahead .................................................................43

Open Trades ...............................................................................................48
FX Closed Trades ......................................................................................49
FX Forecast Tables ...................................................................................52
26 March 2015
FX STRATEGY
Top trades
Aroop Chatterjee
+1 212 412 5622
Thematic trades
1. Short EURUSD spot
We now forecast that EURUSD will be below parity by year-end. Although the broad USD
rally may slow in Q2, a strengthening US outlook and stable euro area interest rates (backed
by a highly elastic supply of euros from the ECB) imply that short EURUSD remains the best
way of expressing the long USD view.
2. Long USDCAD spot

We believe the market is underpricing rate cuts by the Bank of Canada. Lower oil prices
have finally begun feeding through into activity data and we expect the BoC to cut rates by
50bp over the next 3-6 months.
3. Long USDCNH spot

We expect Chinas weaker growth trajectory to be consistent with further depreciation in the
CNY. To avoid significant REER appreciation to an already strong currency, in the face of a
strong USD, we expect the authorities to condone a move higher in USDCNY.
Relative value trades

1. Long INRTWD
INR remains one our favoured currencies because of improved fundamentals and reform
prospects and, unlike in the past, it appears far less susceptible to capital outflows. We find
TWD to be an attractive funding currency as policymakers provide room for further weakness.
2. Short SGDPHP
In our view, PHPs fall versus the USD will be more modest given its solid current account
surplus, low external borrowings and relatively low foreign ownership of local assets. SGD is
another attractive regional funding currency given the appetite of the MAS for currency
weakness.
26 March 2015
OVERVIEW

Jose Wynne
+1 212 412 5923
Aroop Chatterjee
+1 212 412 5622
Slower US growth and softer inflation have given the Fed reasons to delay and
flatten its rate hiking path. These developments have caught the USD a bit ahead of
itself, but given the recent correction, we expect it to stabilize around current levels.
We think the USD is likely to take a break before resuming its uptrend at a slower
pace. We are forecasting 5% USD REER appreciation by year-end.
Features of the liquidity facilities introduced by the ECB suggest selling EURUSD is
the best way to express a long USD view, when the trend resumes. The Eonia curves
insensitivity to positive European growth surprises suggests there is a highly elastic
supply of euros in place, at the ECB refi rate. This implies that EURUSD volatility will
come mostly from the US side. We also think that even positive growth surprises in
EA could be negative for the EUR, against common wisdom, if inflation expectations
rise and send real rates lower.
A USD breather is likely to benefit EM carry in the near term. Unfortunately, some of
these currencies fundamentals have deteriorated and therefore we remain selective
in spite of the positive global backdrop for this class. The INR remains our preferred
carry long, funded out of TWD. While we expect the TRY and RUB to trade inside the
forwards the risks are too substantial. BRL offers value but we are waiting for the
Central Bank of Brazil to get ahead of the curve.
Sterling is likely to remain under downward pressure and see volatility ahead of the
May 7 general election, but it is well priced by options in our view. Post-election
volatility, however, likely is underpriced.
Stay long USDCAD and cautious on NOK as central banks need to ease beyond what
is priced in. Lower oil prices are only starting to permeate through their economies.
We continue to believe the BoJ will avoid pursuing further yen weakness given the
unintended contractionary consequences, and instead encourage wage policies to
boost demand and inflation in the medium term. Topside volatility in yen crosses
also seems too elevated, in our view.
We remain long USDCNH in spot as we believe a lower EUR, and weak domestic
demand and softer inflation in China may lead authorities to mitigate the steep REER
appreciation implied by an otherwise stable USDCNY. We also think Chinas fears of
floating are overblown.
An enticing global backdrop for FX

The macro backdrop poses an
enticing environment for
FX markets
A remarkably desynchronized global recovery, volatile oil markets, unconventional and

heterogeneous monetary stimulus, and vulnerable emerging markets continue to offer a
fascinating landscape for FX markets in 2015. As if this backdrop were not attractive enough
for FX investors, we think tail risks are also interesting, mildly fading on global disinflation
concerns, providing a better backdrop for risky assets, and regionally mutating away from
Greek exit into a more serious Chinese slowdown than we and markets may be anticipating.
The Fed change of stance and

the softer US outlook left the
USD trading ahead of itself
The Fed has paused the USD rally after expressing its concerns about the greenbacks rapid
strengthening, acknowledging a slower underlying growth trend, and by revising its NAIRU
estimate lower. In other words, the FOMC has shifted the unemployment threshold
necessary for a rates liftoff, which, together with a slower pace of job creation, should delay
the beginning and flatten the path of the eventual US hiking cycle. This softer outlook for
26 March 2015

the US economy has left the recent USD strength trading ahead of itself and likely prone to
consolidation around current levels during the early part of Q2. However, we look for the
uptrend to resume once lower oil prices are clearly proving beneficial to global consumer
spending, and hence expect the USD to catch up to our latest set of forecasts by year end,
starting as soon as it becomes evident that the Fed is indeed ready to hike in September
(previously expected for June).
How high can the USD go?

We look for near-term
consolidation of the USD, but
still see it strengthening 5% in
REER terms by year-end
Against this backdrop, market participants want to know whether the bulk of the USD rally
now stands behind us. We acknowledge that the risk-reward in long USD positions has
deteriorated, but we believe there is still substantial room for further upside in the USD as its
valuation is far from stretched and cyclically the US economy is still poised to outperform.
Figure 1 shows three alternative measures of USD valuation: REER relative to its average,
unit labour cost relative to US trading partners, and our measure of currency misalignment
relative to the USD long run fair value (see the description of our BEER model here). While
our BEER model suggests that the USD is 9.6% overvalued, equivalent to a 0.9 standard
deviation move relative to fair, we anticipate that the misalignment could move into the 1.52.0 standard deviation range relative to fair value as the US business cycle continues to
improve ahead of a sluggish world. Indeed the USD REER seems to be strongly correlated
with the US output gap relative to its trading partners (Figure 2). Under all other valuation
metrics, the USD seems to have even more room for appreciation, which should ease
valuation concerns from the USD path in the near term, in our view.
Three features of this recovery

suggest the USD appreciation
will be more limited this time
While we think the USD has room to rally on valuation grounds, we expect a milder appreciation
trend relative to what has already taken place since July 2014. Beyond our expectation of a slower
US hiking path for the reasons mentioned above, we have reasons to believe that two features of
this global recovery may slow the USD uptrend once it resumes, and hence we are only
forecasting 5% of REER appreciation by year-end, after the 10% move observed since July 2014.
First, the USD appreciation

may be more disinflationary for
the US
The first feature is that, this time around, the USD rally may have a more disinflationary impact
on the US economy than in the past, which will impede a fast normalization of US rates. Figure 3
shows US import prices by origin since the 1990s. While the data are incomplete, it seems that
US import prices were much less volatile during the 1990s and, hence, more muted to USD
swings. In other words, inflation in the US was more shielded to USD fluctuations during the
1990s and was much more Asian focused. US import prices have been much more flexible since
FIGURE 1
USD, far from expensive yet
40
FIGURE 2
US relative output gap, closely linked to USD REER
4
% misval.
30
Index
-1
128
123
118
-2
-10
-20
Mar-86
Mar-92
vs. BEER
Source: Bloomberg, Barclays Research
26 March 2015
Mar-98
Mar-04
vs. REER ave
Mar-10
vs. ULC
143
133
10
148
138
20
-30
Mar-80
% potential
GDP
113
-3
108
-4
103
-5
Jan-91
98
Jan-96
Jan-01
USD rel. OG (LHS)
Jan-06
Jan-11
Jan-16
USD REER (RHS)
Source: Barclays Research

the early 2000s for most countries, with the exception of those in Asia. Given our view that USD
appreciation is likely to come primarily from outside Asia, mainly from a weaker EUR and EMEA
FX, we suspect that we may see a more significant pass-through from a stronger USD into US
inflation this time around. Thus, while the USD has room for appreciation on valuation
considerations, we think the scope for steep appreciation may be more limited this time.
Second, EM FX will not melt
versus the USD, as ECB funding
will still be available for EM
The second feature of this recovery that will slow the USD appreciation is that the world is
likely to continue to enjoy a major source of cheap liquidity for years, as per the ECBs easing
measures. We believe this feature will go a long way in keeping a big part of emerging
markets well funded and, therefore, less vulnerable to Fed tightening relative to past USD
rallies. For this reason, potential USD appreciation may be more subdued, contained by a
more limited EM REER depreciation.
ECB liquidity features and why these matter

How fungible the ECB liquidity
is relative to that of the Fed is
something to learn about in
the coming months
Beyond the desynchronized recovery that we expect to keep the USD trend alive, FX markets
will need to learn to trade the idiosyncratic features of the ECB liquidity facilities as the Fed
prepares to withdraw USD funding globally. Just a few questions hold the key to excess returns
in FX markets in the upcoming months: how fungible is the Fed versus ECB liquidity as sources
of global funding? What are the differences, and why do they matter for FX markets?
We think that the liquidity facilities put in place by the ECB differ from those of the Feds in
three important aspects with direct relevance for FX markets. First, the impact on global
interest rates of US quantitative easing, for an equivalent size, is likely much more significant
than that of the ECB. When the Fed eases, many central banks follow either via cutting
overnight rates or by defending their own currencies, particularly in EM, which adds
downward pressure on longer-end rates. In other words, the Fed drives the pulse of global
rates much more than the ECB, maybe because global capital markets are much more
integrated into the US and reliant on USD funding (the amount of USD funding taken by EM
sovereigns and corporates is substantially greater than that in EUR). On the same logic, Fed
easing should have a more muted impact on interest rate differentials and therefore the
USD. In contrast, the recent QE easing by the BoJ had a substantial impact on onshore JPY
rates, but only a more muted impact on global rates, hence, the impact on interest rate
differentials and the JPY was large. We should expect the ECB QE programme to have
greater impact on the EUR than similar Fed moves on the USD, although admittedly a much
more muted impact than that of the BoJ on the JPY.
FIGURE 3
US import prices by origin
200
180
160
140
120
100
80
Jun-92
Dec-94
Jun-97
Dec-99
Jun-02
EC
Pacific Rim
Industrialized
Dec-04
Jun-07
Dec-09
Jun-12
Dec-14
Latam
Asian NICs
Other
Source: Haver Analytics
26 March 2015
TLTRO: All you can eat

The supply of EUR is highly
elastic at the refi rate; positive
EUR demand shocks (portfolio
inflows, EA growth surprises),
should not drive the EUR higher
Second, the ECBs TLTRO has profound implications for FX markets because the programme
essentially commits to an infinitely elastic supply of EUR. In contrast, when central banks set
an overnight target rate, they essentially commit to fund the market at that rate only until the
next monetary policy meeting. In developed markets, a positive growth or inflation surprise
would then tend to appreciate the value of the currency as participants anticipate a tighter
future monetary policy stance. This behaviour also manifests itself through selloffs in domestic
rates, proving that the supply of liquidity is not infinitely elastic at the current overnight rate
(as supply shrinks in response to a demand shock).
5y Eonia rates do not react to

growth surprises anymore
But given that TLTROs essentially fund the system at the refinancing rate for several years,
locking in future funding costs, fluctuations in EUR demand exert virtually no pressure on
the Eonia curve, and therefore on the EUR. Figures 4 and 5 show the year-to-date ranges for
USD OIS and Eonia, respectively. The highest 5y Eonia rate this year has been only 9bp
higher than the lowest, while the equivalent range in 5y OIS rates has been 54bp.
In other words, this feature of the ECBs liquidity provision essentially makes the supply of
euro infinitely elastic at the refi rate. Because of this, positive growth or inflation surprises in
the euro area (EA), or stronger inflows into equities, or any other source of demand for EUR
are unlikely to lead to a stronger EUR (as supply would respond). In fact, we think positive
growth surprises could actually be EUR negative if they increase inflation expectations, as
nominal rates would remain unchanged while onshore real rates would likely go lower.
Selling EUR is the best way to

express a long USD view
We think these features suggest that selling EUR will continue to be the best way to express
a long USD view. In this respect, we think it should be noted that positive US growth
surprises tend to coincide with higher US rates. Given that a positive US growth has positive
global growth spillovers, we would also expect to see a coincidental selloff in other
countries rates, albeit by a much lesser extent. But for as long as the perception of this
infinite EUR supply remains in place, this is unlikely to be the same for EA rates. Hence, a
positive US growth surprise is likely to have a more severe impact on interest rate
differentials against the EUR than, say, the CAD or MXN or any other cross.
EA growth surprises do not

pose risks to our short EURUSD
view
In other words, these features of the ECBs funding facilities make EURUSD mostly
insensitive to data surprises in EA, but overly sensitive to growth or inflation surprises in the
US. This is the main reason why EURUSD remains our preferred long for the USD when the
FIGURE 4
USD OIS curve range YTD
FIGURE 5
Eonia curve range became insensitive to positive EA growth
surprises
3.00
1.40
1.20
2.50
1.00
2.00
0.80
0.60
1.50
0.40
1.00
0.20
0.00
0.50
-0.20
0.00
-0.40
3m
1Y
2Y
3Y
5Y
7Y
Highest, YTD
26 March 2015
10Y
15Y
30Y
Lowest, YTD
3m
1Y
2Y
3Y
5Y
7Y
Highest, YTD
10Y
15Y
30Y
Lowest, YTD

latter resumes its uptrend. Indeed, the recent retracement in EURUSD has not been driven
by the EA positive growth surprises, but has more stemmed from disappointing growth and
inflation data in the US, backed by a still patient Fed. Indeed, we think more positive EA
growth surprises could significantly damage the value of the EUR as they could send EA real
rates even lower, as has been seen lately (Figure 6).
EM fear of floating
The USD rally may be more
limited by the CNY peg, or fear
of floating, to the USD
The third feature of this recovery that may limit the USD rally relates to Chinas fear of
floating, a concern about FX volatility versus the USD, not versus the EUR. Thus, from this
perspective, the flow of EUR funding should not be completely fungible relative to USD
funding. The fear of floating argument is that central banks prefer to curb the volatility of
their currencies for three widely cited reasons: asset/liability mismatches, which due to
funding positions in EM is related to the value of the USD in local currency terms;
contractionary depreciation caused by a confidence shock on investment induced by sudden
moves in the value of the USD; and credibility concerns that tend to erode public confidence,
via rising inflation expectations, when USD moves push a central bank to hike rates.
This issue is particularly sensitive in China at the moment, a reason why our USDCNY
forecasts are more stable than the macro backdrop would suggest. Chinas fear of floating
is limiting the much-needed monetary policy easing, as authorities find it hard enough to
cut rates and/or reserve requirements without adding pressures on the currency, which is
already trading at the top of the band. The lack of USDCNY flexibility implies that the world
faces one large USD block composed of the US and China. Given Chinas size, if its growth
slows significantly, the pegging to the USD would be a drag on the value of the USD itself,
much as the EA periphery limited the value of the EUR, despite Germanys stronger outlook.
In other words, this time around, the US may grow without accelerating Chinas growth,
and the fact the CNY is practically pegged should impose headwinds on the USD.
Top FX views and positions

With this framework in mind, we explain why we still hold high conviction in staying short
EURUSD in Theme 1, even as we acknowledge more two-way risks. In Theme 2 we provide
an update on the yen and support our arguments for a stable yen versus even the USD. We
believe this provides room for investors to consider short EURJPY positions as a serious
FIGURE 6
ECB is finally impacting EA breakevens, maintaining
downward pressure on EURUSD
1.00
FIGURE 7
Largest stocks of external borrowings are in Latin America
and EEMEA
% GDP
25
0.50
0.00
20
-0.50
15
-1.00
10
-1.50
5
0
Apr-12
Apr-13
UST 5y real rates

26 March 2015
Apr-14
Bunds 5y real rates
TWD
PLN
RON
INR
KRW
THB
EM
COP
ILS
PHP
IDR
TRY
CNY
RUB
CZK
BRL
MXN
HUF
ZAR
MYR
CLP
-2.00
Apr-11
Current
Note: These are non-fin foreign-currency borrowings from banks and through
international debt issuance as a percentage of GDP. We adjusted Chinas external
borrowing to include 80% of bank borrowing from abroad following this
methodology. Source: BIS, Haver Analytics, Barclays Research

contender to the short EURUSD or EURGBP. The wide range of outcomes in the upcoming
UK elections make us think that post-election option implied volatility may be too low for
the risks, as we argue in Theme 3. We discuss our bias to be short CHF and SEK, on
deflation concerns, in Theme 4. In Theme 5 we also explain that we retain a negative view
on NOK and CAD, due to still underpriced oil concerns.
China seems to be struggling with its own rebalancing act, as activity is slowing more than
markets expected, but monetary policy seems still too tight for the circumstances. In Theme
6, we explain why we believe fears of letting the currency weaken and adjust to a stronger
USD environment may be constraining policy, and why we still see interesting optionality in
staying long USDCNH in spot, even though our 12-month forecasts remain inside the
forwards. This troubled outlook is likely to exert further weakening pressures on both AUD
and NZD, as we discuss in Theme 7. The rest of EM Asia FX will likely see divergence from
the bottom up, as the strong USD environment should not pose too much trouble for those
with better idiosyncratic stories, as presented in Theme 8. Indeed, we suggest being long
INRTWD and short SGDPHP, funding the good stories within Asia with regional funding
currencies to avoid USD or EUR funding volatility for now.
The brief break in the USD uptrend should also present a supportive backdrop to high carry
EM currencies other than INR. For these reasons we have turned less negative RUB, TRY,
and BRL at current levels, as we argue in Themes 9, 10, and 11. These currencies
fundamentals have deteriorated from the bottom up, however, making us retain our
cautious stance. Among the three, BRL offers the most attractive opportunity given the
large premia build in local currency bonds, nominal and inflation linked. We would look for a
stronger message from the central bank with regard to its commitment to keep inflation
expectations well anchored, however, before engaging in outright longs.
26 March 2015
THEME
EUR: Taking depth soundings

Marvin Barth
+44 20 3134 3355
Two-way risks for the EUR are

increasing, but its downtrend
still is in place
How much lower can the EUR fall? By our soundings, a lot. Two-way risks have increased
but the two key drivers of the multi-year downtrend in the EUR remain in force. In
particular, as long as the ECB is committed to highly elastic provision of liquidity, the
EURUSD will struggle to find its footing and risks come primarily from the US economy. In
our view, a stabilization or turn in the EUR will require a sustained and convincing pickup
in real investment or acceleration in core inflation that all into question the ECBs
commitments. Neither appears on offer anytime soon.
After plunging 23% in 10 months, the question of how much further EURUSD can drop has
moved to the fore. The question is redoubled by market expectations of sizeable foreign
purchases of euro area equities and by the shift in market expectations to a slower pace of
Federal Reserve policy tightening. Two-way risks almost certainly have risen and we do not
expect the torrid pace of EUR depreciation to be sustained. But the two drivers of EUR
weakness that we identified last summer low economic returns to capital and the European
Central Banks (ECB) Odyssian commitment to lower rates for longer appear strong,
suggesting to us that the EUR still has much further to fall in its multi-year downtrend. We
now expect EURUSD to fall to parity by Q3 15 and to 0.95 by end Q1 16.
Two primary drivers of EUR weakness:

The two key drivers of EUR
weakness we identified last
summer low returns to
capital and the ECBs Odyssian
commitment to easy policy
persist
Many have attributed EURUSDs decline to expectations of Fed policy tightening, but internal
drivers of EUR weakness have been just as important, as confirmed by its significant
underperformance within a trend of USD appreciation. EURUSD downside is merely the
clearest manifestation of euro area weakness because the cyclical divergence is most extreme
versus the US. The main internal drivers of broad-based EUR weakness, in our view, remain the
two that we identified last summer: 1) persistently low expected returns to capital in the euro
area due to its relatively larger output gap and its structural impediments to growth; and 2) an
Odyssian commitment by the ECB to a long period of low (or negative) interest rates (see EUR:
Have faith The ECB delivers, rewards believers, 27 March 2014; EUR: Extending the downside,
10 September 2014). Both forces continue to augur for a much lower EUR, despite an
encouraging pick-up in euro area economic indicators and a likely slowing in the pace of Fed
tightening.
Low returns to capital

The euro areas output gap
relative to its trading partners
remains at a historical wide,
depressing returns to capital
The euro area output gap is at its widest recorded level relative to its trading partners and is
unlikely to narrow soon (Figure 1). The large utilization gap means there is little return to
capital expenditure beyond modernization and needed equipment upgrades. Deviations from
trend investment in the euro area and its predecessor economies have been tightly correlated
with the relative output gap since at least the early 1990s as capacity constraints have driven
rapid investment growth and economic slack has led to weak investment.
The EUR continues to

reallocate capital to economies
with greater investment
demand
Exchange rates play a primary role in reallocating capital and production across economies,
shifting capital from economies with excess slack to those with capacity constraints, and
production in the opposite direction. The EUR REER (synthetic before 1999) has a long and
persistent correlation with both detrended investment growth and the relative output gap of
the euro area and its predecessor economies going back to 1980 (Figure 1). The portfolio
rebalancing following the launch of the euro in 1999 is the only notable deviation. Historically,
the EUR and its predecessors have bottomed only when the investment cycle has turned.
26 March 2015
10
FIGURE 1
EUR vs relative output gap and real investment
95
Index
90
85
80
75
70
65
FIGURE 2
Euro area excess capacity and real investment
%pts
3
2
1
0
-1
-2
60
-3
1980 1984 1988 1992 1996 2000 2004 2008 2012
EUR real effective exchange rate
Euro area output gap relative to trading partners (RHS)
Gross fixed capital formation* (RHS)
Note: *Log deviation from Hodrick-Prescott trend scaled by 10 for ease of
visualization. Note: Euro area relative output gap is the difference of its output
gap from the trade-weighted average of its trading partners respective output
gaps. Source: Haver Analytics, OECD, EcoStat, Barclays Research
50
45
40
% balance:
SufficientInsufficient
Log trend
deviation
0.15
0.10
35
30
0.05
25
20
0.00
15
10
-0.05
5
0
-0.10
Capacity
Gross Fixed Capital Formation (RHS)
Note: Gross fixed capital formation is the log difference of actual GFCF from its
Hodrick-Prescott trend. Source: Haver Analytics, European Commission, Barclays
Research
With little sign of a sustained

investment boom in the euro
area, the EUR will likely remain
under downward pressure
Yet despite the pickup in euro area activity, there is little indication that the euro area is
facing capacity constraints or needs a sustained acceleration in investment. The European
Commissions industrial survey shows still-high capacity (Figure 2) and that demand and
financing remain the primary constraints on production, not equipment (Figure 3). With so
large an output gap relative to its trading partners, this situation is unlikely to change soon.
Until it does, the EUR likely will remain under broad-based pressure to depreciate as capital
shifts to more constrained economies. The US economic recovery began in mid-2009, but
the USD continued its nine-year downtrend for another two years, until, coincidentally, the
US output gap relative to its trading partners bottomed in 2011.
Similarly, the ECBs Odyssian

commitment to low rates for
the foreseeable future has
been strengthened and made
more attractive
Similarly, the ECBs Odyssian commitment to low interest rates for the foreseeable future has
been strengthened and, as we expected, appears to be driving an extension of EUR hedging
activity among longer-term FX market participants and increased use as a funding vehicle by
shorter-term participants. As we noted in June, TLTROs are a strong Odyssian commitment
to low future rates as the ECB, like Odysseus strapped himself to the mast of his ship, ties itself
to 0.25% rates on 400bn in contractual loan commitments for four years. Since then, the
ECB has strengthened the obligation by lowering the interest rate to 0.05% and augmented it
with an open-ended Odyssian commitment to buy European government bonds until inflation
and inflation expectations return to mandate-consistent levels. As a result, euro interbank
rates now are negative through five years, and the curve beyond is much flatter.
This has led to a further

decline in the EURUSD basis,
extending further out the curve
As we expected, the strong commitment to low rates for the foreseeable future has led to an
ongoing extension of hedging maturities. Not only have EURUSD basis swap rates fallen
sharply EUR lenders must discount offshore interest rates they have fallen more at longer
tenors (5 and 10 years) than at shorter tenors, suggesting strong pressure from EUR lenders
extending their maturities (Figure 4). Negative deposit rates further out the EONIA swaps
curve have encourage banks to lend offshore further out the curve, but a large surge has come
from foreign issuers of EUR-denominated notes swapping EUR proceeds into USD.
Foreign issuers are borrowing

more in the euro area at longer
maturities
EUR IG issuance by non-euro area entities, especially non-financial issuers, has surged to its
highest level since the 2005-07 credit boom (see Figure 5 and Supply Monthly: Here today,
gone tomorrow, 5 February 2015). One difference with the prior boom is a significant
lengthening of maturities (see Supply Monthly: Index ex-tender, 4 March 2015). But the key
And a credible commitment to lower for longer
26 March 2015
11
FIGURE 3
Factors limiting production in euro area industry
70
% balance
60
50
% balance
FIGURE 4
EURUSD basis swap rates by tenor
18
16
14
12
40
10
30
20
10
Source: Haver Analytics, European Commission
-5
-10
-15
-20
-25
-30
-35
-40
0
0
1990 1993 1995 1998 2001 2004 2007 2010 2012
Demand
Equipment (RHS)
Financial (RHS)
bps
-45
Jan-14
Apr-14
1yr
Jul-14
Oct-14
5yr
Jan-15
10yr
Source: Bloomberg
difference has been that the current surge is occurring alongside a dearth of euro area
investment activity. The funds raised by foreign corporates are not being used for domestic
investment, but for repayment of USD debt or capex in more capital-constrained
economies.
Sometimes swapped to USD
and sometimes not as
companies extend the
maturities of their hedges
Most of this debt appears to be swapped into USD, putting pressure on EURUSD basis; but
not all of it. Some issuance is being used by non-euro area corporates to hedge their euro
area receivables. More significantly, the downward pressure on offshore EUR rates relative
to USD makes more attractive extended hedging of EUR receivables and long-lived assets
through more traditional instruments like forwards and options. As we noted in September,
the incentive to extend hedges is increased by a tipping point in expectations for EUR
depreciation that is reinforced by its sustained resource underutilization.
Without inflation pressure

which is not apparent euro
area rates will likely remain
attractive for extended
hedging
The ECBs commitment is not unbreakable, however. Just as the Fed has developed
mechanisms to overcome the Odyssian commitment of its large balance sheet interest on
excess reserves and reverse repos the ECB can offset both its contractual TLTRO
commitment and its balance sheet expansion. However, it has credibly committed to raising
inflation and likely will not untie itself from that mast before that obligation is fulfilled. The ECB
forecasts a return to 2% by the end of 2016, but that appears overly optimistic given recent
inflation dynamics, the euro area output gap and persistent downward pressure on inflation
globally. Accordingly, we see little prospect of higher euro-area interest rates for the
foreseeable future and continued incentive for FX market participants to extend their hedges.
We see little prospect for

portfolio inflows into euro area
equities to offset the broader
drivers of EUR weakness
Although returns to physical capital remain low, many observers have pointed to the
portfolio returns likely on European equities given EUR depreciation and upward pressure on
asset prices from the ECBs QE program. Euro area equities seem attractive (see the Asset
Allocation chapter in the Global Outlook), but we do not expect foreign portfolio inflows into
them to support the EUR. As Figure 6 shows, there is no clear relationship between net
portfolio inflows into the euro area and the EUR. Indeed, the correlation is often negative.
This is even more likely in the current circumstance with unusually attractive conditions for
hedging portfolio purchases of euro area assets due to the highly elastic provision of
liquidity by the ECB. As a result, we do not expect demand for euro area equities to offset
the two key drivers of EUR weakness noted above.
Can the EUR float on equities?
26 March 2015
12
FIGURE 5
Euro area investment grade bond issuance by nonresidents
70
bns
Log trend
deviation
60
0.15
0.10
50
40
0.05
30
0.00
FIGURE 6
European net equity inflows and the EUR
90
Index
bns
200
85
100
80
75
-100
-200
70
20
-0.05
10
0
2005 2006 2007 2008 2009 2011 2012 2013 2014
Financial
Nonfinancial
-0.10
GFCF (RHS)
Note: GFCF is log gross fixed capital formation deviation from its HodrickPrescott trend.
300
-300
65
-400
60
-500
2000 2001 2003 2005 2007 2008 2010 2012 2014
EUR REER
Net equity inflows, 12mms (RHS)
Source: Haver Analytics, ECB, Barclays Research.
Source: Haver Analytics, EuroStat, Dealogic, Barclays Research
Nevertheless, two-way risks have increased

In the near term, ECB
commitments imply that risks
to EURUSD come primarily
from the US
Although we expect significant further downside for the EUR, we also see rising two-way
risks. Euro area economic activity has accelerated just as the Fed has taken some of the
wind out of the USDs sails by pushing back the schedule of policy tightening. As long as the
ECB continues to commit to unlimited liquidity over the medium term, however, we see this
risks as tied to the USD side. We see little prospect for this to change this year.
But in the medium term, the

success of ECB policies may
present a more serious risk of
EUR upsidei
Longer term, convincingly sustainable growth in the euro could present a more significant
risk. The factors that we are watching closely are money and credit growth, both of which
already may be reflecting better-than-expected success of ECB policies. Money growth has
accelerated sharply and even lending growth has become significantly less negative (Figure
7), although this appears to be mostly financial lending that may reflect the hedging activity
noted above (Figure 8). Perhaps most hopeful, the third TLTRO auction had an uptake more
than twice as large as expected (see Larger-than-expected TLTRO3, 19 March 2015). As we
highlighted in Three Questions: Quantum Evolution, 27 January 2015, the best prospects for
a sustained pickup in euro area activity and inflation likely come from its credit easing
FIGURE 7
Euro area money and credit growth, y/y
20
%pa
15
FIGURE 8
Euro area MFI lending growth, by type, y/y
30
25
%pa
20
15
10
5
0
-5
2006 2007 2008 2009 2010 2011 2012 2013 2014 2015
M1
M3
Credit to private sector
Source: Haver Analytics, ECB
26 March 2015
10
5
0
-5
-10
-15
2006 2007 2008 2009 2010 2011 2012 2013 2014 2015
Lending to nonfinancial corporates
Lending to households
Lending to nonmonetary financial intermediaries
Source: Haver Analytics, ECB
13

measures like the TLTRO. A sustained pickup in both activity and inflation are precisely the
ingredients we identify above as necessary for a stabilization or reversal of the EUR, but we
are doubtful the signs will be convincing enough to change the EURs trend in the near
term.
as does the swift descent of
the EUR to cheaper valuations
Yet another risk comes from valuation. The EUR is currently 9% below its fundamental longterm equilibrium value on a trade-weighted basis, on our calculations. Given the euro areas
large output gap and historic cyclical divergence from its global trading partners (particularly
the US) we believe even greater undervaluation is justified and likely before the EUR turns. But
the case is less compelling now following the euros swift fall over the past 10 months. As a
result, the pace of longer-term hedging may begin to slow and with it the pace of EUR
depreciation. Already we are seeing larger retracements in the pattern of EUR depreciation as
position-squaring by shorter-term FX market participants meets with less USD supply from
longer-term participants.
Thus, our high conviction in a

lower EURUSD is balanced by a
greater appreciation of its risks
We still think EUR trend depreciation has much further to go and is not significantly
threatened in the near term. But the pace likely will slow in the year ahead and retracements
on the path lower likely will increase. Accordingly, although we retain high conviction in a
lower EURUSD, trading it has become more difficult.
26 March 2015
14
THEME
JPY: Contained on both sides

Range-bound
Shinichiro Kadota
The yen will likely remain range-bound against the USD in the year ahead due to
countervailing factors, as we argued in our last FX Mid-Quarterly Update. On the one hand
expected USD strength into the Feds first hike may continue to exert upward pressure on
USDJPY, although we have delayed expectations of a Fed rate hike to September, which
could reduce some of the upward momentum in the USD over the near term.
+81 3 4530 5038

shinichiro.kadota@barclays.com
Yuki Sakasai
+1 212 412 5652
In addition, portfolio rebalancing outflows from Japan are likely to support USDJPY. Indeed,
Japanese investors have accelerated their cross-border investment, led by pension funds
after the GPIF announced its new benchmark portfolio in October 2014 (Figure 1). Going
into the new fiscal year in April, we believe that external investment will likely continue at its
recent solid pace, led by both portfolio investment and cross-border M&As.
yuki.sakasai@barclays.com
Jose Wynne
+1 212 412 5923
However, it will not be a one-sided story for USDJPY by any means. Already extended valuations
of the yen (yen stands 32% or 2.1 standard deviations below its long-term fair value, according
to our BEER model), Japans improving current account due to lower energy prices, and recent
political rhetoric against sharp yen depreciation should limit the upside in the currency pair.
Admittedly, the currency pair remains prone to a temporary sharp correction lower in
reaction to deterioration in risk sentiment, as seen earlier this year due to rising
uncertainties over Greek political developments. Moreover, a bout of surprise monetary
policy easing by various central banks around the world has already resulted in lower crossyen rates, resulting in an appreciation of trade-weighted JPY since the beginning of the year,
despite the move higher in USDJPY (Figure 2).
More QQE to have a limited effect on JPY

Core inflation dynamics
deteriorated further
Inflation dynamics deteriorated further in the recent months. Core CPI (excluding fresh food
decelerated to mere +0.2% y/y in February 2015 from its peak at +1.4% in June 2014. We
revised our core inflation forecast further down and now expect that core CPI will turn
negative around summer 2015 (Figure 3). If the actual negative reading on core inflation
results in nonlinear downward adjustment on inflation expectations, it may exert greater
pressure on the BoJ. Core inflation is unlikely to reach the BoJ price stability target of 2%
even at the beginning of 2017, despite closing output gap by mid-2016, in our view.
FIGURE 1
Portfolio rebalancing flows accelerated since mid-2014
JPY trn/
4Qma
4
Non-bank deposit inst

Pension funds
Households
Life insurance
Nonfinancial corp
FIGURE 2
Yen appreciated on trade-weighted basis in early 2015
JPY NEER (LHS)
USDJPY (RHS)
84
125
86
120
88
2
1
0
90
115
92
110
94
-1
105
96
-2
04
05
06
07
08
09
10
11
12
13
14
Note: Sum of external portfolio investment, foreign-currency investment funds

and deposits, and external FDI. Source: Bank of Japan, JITA, Barclays Research
26 March 2015
98
14/9
100
14/10
14/11 14/12
15/1
15/2
15/3
Source: Bank of Japan, Barclays Research
15

BoJ also recognized such a trend by making the third consecutive downgrading of its
assessment on inflation. The March BoJ statement said that the core CPI ex-VAT effects is
in the range of 0.0-0.5% after around 0.5% in February and in the range of 0.5-1.0% in
January statements. BoJ also revised its outlook for core inflation to expected to be about 0
percent for the time being, down from is likely to slow for the time being. Against this
backdrop, we continue to expect that the BoJ will step up its annual pace of ETF purchases
to JPY5trn from the current JPY3trn at the July meeting, but its effect on the JPY should be
more limited than the past expansions of QQE due to limited adjustment in terms of
quantity and the muted relative effect given wave of easing globally, in our view.
Subdued inflation dynamics will keep the JPY weak

Major manufacturers response to the 2015 annual spring wage negotiations (i.e., shunto)
has been generally positive. Large auto and electronics companies whose earnings have
improved on the back of yen weakness responded with a larger increase in base pay than
last year. On the other hand, wage increases by non-manufacturing companies were
relatively modest. This may be due to some adverse effect of the weak yen and limited wage
pressure given increasing participation of women and the elderly in the non-manufacturing
sectors. However, all-in-all, we expect this years shunto will result in a wage increase of
+2.35%, further above 15-year high increase of +2.19% agreed last year.
Some positive developments

on wage front
This years shunto developments are encouraging, especially for manufacturers, and tight
labor markets should continue to put upward pressure on wages (Figure 4). Yet, we note
that shunto decisions affect only a small portion of the Japanese workforce and it remains to
be seen if non-manufacturers and SMEs follow suit. In Japan, labor mobility is low and labor
force adjustments tend to occur through participation over time rather than short-term
movement. Hence, we think third arrow structural reform of Abenomics to boost labor
mobility and steepen Philips curve will hold the key for longer term outlook for inflation.
Yen to stay weak in the year
ahead
Having said that, subdued core inflation dynamics suggest that the BoJ will maintain its
aggressive easing policy for an extended period, keeping the yen weak in the year ahead
despite its overshot valuations. We expect the USDJPY to trade in the current range at about
120 throughout 2015. The outlook for the BoJ and the yen beyond 2016 depends largely on
core inflation dynamics. If there are signs of a pick up inflation dynamics it may finally allow
the JPY to correct for its sharp undervaluation, but this seems a long way off at present.
FIGURE 3
Inflation outlook deteriorated further
FIGURE 4
Tight labor markets to support wage growth
y/y%
3
DI
Scheduled earning (LHS)
y/y%
4
-20
Employment DI (RHS)
-15
2%
-10
-5
5
-2
-1
Core CPI ex-VAT

Barclays current forecast
Previous forecast (30 Jan 15)
-2
10
15
-4
20
25
-6
-3
08
09
10
11
Source: MIC, Barclays Research
26 March 2015
12
13
14
15
16
17
30
96
98
00
02
04
06
08
10
12
14
Source: BoJ, MHLW, Barclays Research
16
THEME
GBP: Unprecedented political uncertainty

Growing political risk premium ahead of the particularly uncertain 7 May general
election should place downward pressure on GBP, in our view. Near-term GBP implied
volatility is appropriately elevated but we think post-election volatility is underpriced.
Beyond the election, economic outperformance relative to the euro area should see
continued GBP appreciation versus the EUR. However, very low UK inflation and risks of
an extended period of unchanged Bank of England policy are likely to temper the degree
of sterling outperformance and contribute to significant GBPUSD depreciation.
Hamish Pepper
+ 44 (0)20 7773 0853
hamish.pepper@barclays.com
Uncertainty is the only known

Election uncertainty to support
currency volatility and weigh
on GBP
A likely hung parliament leaves

a broad spectrum of policy
outcomes
Growing political risk premium ahead of the 7 May general election should support high
levels of currency volatility and place downward pressure on GBP, in our view. This years UK
general election is probably the least predictable in a generation and, combined with a lack
of a defined process for forming a government following a likely hung parliament, means
GBP volatility may remain elevated well after the election a scenario that continues to be
underpriced by FX markets, in our view (UK Elections Series: Pride and precedent: GBP
volatility, 18 March 2015). As such, the confidence intervals around our GBP forecasts are
much larger than usual. We forecast further GBPUSD depreciation to 1.42 in Q2 2015 and
modest EURGBP appreciation towards 0.74 over the next one to two months as political risk
premium increases. Further ahead, our expectations for economic outperformance relative
to other European economies lead us to expect GBP to be the strongest of European
currencies over the year ahead. However, very low inflation and risks of an extended period
of unchanged Bank of England policy is likely to temper the degree of outperformance and
should support significant GBPUSD depreciation. As such, we now forecast EURGBP and
GBPUSD to reach 0.70 and 1.36 in Q1 2016, respectively.
FIGURE 1
1-month relative GBP volatility
1.6
FIGURE 2
3-month relative GBP volatility ahead of key political events
Relative vol
Relative vol
1.5
1.2
1.4
1.0
1.3
1.2
0.8
1.1
0.6
1.0
0.9
0.4
0.8
0.7
0.2
0.6
Jan-14 Mar-14 May-14 Jul-14 Sep-14 Nov-14 Jan-15 Mar-15
Election window
Post election window
Spot
Notes: Measures represent the average 1-month (forward or spot) volatility for
GBPUSD and EURGBP divided by the average volatility for the same 1-month
window in EURUSD, USDJPY, AUDUSD, and USDCAD.~
View historical spot levels and implied or realized volatility in Oasis on Barclays
Live. Click here to view basket volatilities for EURGBP and GBPUSD vs EURUSD,
USDJPY, AUDUSD, and USDCAD. Source: Bloomberg, Barclays Research.
26 March 2015
0.0
2015 elec. 2010 elec. Scottish
ref.
Average 2001 elec. 2005 elec.
Notes: Measure represents the average 3-month implied volatility for GBPUSD
and EURGBP divided by the average volatility for the same 3-month volatility in
EURUSD, USDJPY, AUDUSD, and USDCAD 32 trading days prior to 7 June 2001
election, 5 May 2005 election, 6 May 2010 election, 18 September 2014 Scottish
Referendum and 7 May 2015 election. Average captures the average of this
measure between January 2000 and 16 March 2015.
View historical spot levels and implied or realized volatility in Oasis on Barclays
Live. Click here to view basket volatilities for EURGBP and GBPUSD vs EURUSD,
USDJPY, AUDUSD, and USDCAD. Source: Bloomberg, Barclays Research
17

Ahead of the May general election, the rise of alternative parties has eroded support for the
traditionally dominant Labour and Conservative parties, making plausible an unusually wide
set of outcomes. Most election projections continue to indicate a hung parliament is highly
likely. Taking an average of the latest UK election forecasts from Elections Etc, Election
Forecast, May 2015, and the Guardian, the Conservatives and Labour are currently projected
to achieve about 280 seats each. Based on projections for other parties, neither is likely to be
able to form a coalition government with less than two partners, much less secure an outright
majority where 326 seats are needed. Accordingly, the resultant range of policy implications is
broad, including political deadlock, EU referendum and variations around the fiscal
consolidation path which is important for the pace of Bank of England (BoE) policy
normalisation (for further discussion see UK 2015 general election: Unprecedented political
fragmentation fuels uncertainties, 23 February 2015).
Post-election uncertainty
remains underpriced by FX
markets
GBP implied volatility around the election continues to be consistent with a highly unclear
outcome but post-election uncertainty remains underpriced by FX markets, in our view.
Updating the analysis we presented earlier this year, Figure 1 plots three measures of 1month GBP volatility, scaled by broader G10 volatility. The dark line represents a rolling time
series of the forward volatility straddling the election on 7 May; the blue line is the rolling
forward volatility immediately after but not including the election, and the grey line is spot
1-month volatility. One-month forward volatility including the election continues to trade
close to the levels around last years Scottish referendum. However, post-election volatility,
while higher than earlier this year, remains relatively contained.
Historical precedent suggests

growing political risk premium
should place further downward
pressure on GBP
We continue to think FX represents the cleanest expression of UK election risk in asset

markets. We think high GBP implied volatility and growing political risk premium should place
further downward pressure on GBP as we approach Election Day. A comparison of current
GBP implied volatility with relevant historical political events yields some interesting results.
The UK election is about 30 trading days away. Figure 2 plots 3-month GBP relative implied
volatility the same number of days prior to other key political events. The current measure is
appropriately above average (GBP implied volatility tends to trade at a discount to other G10
implied volatility) and at higher levels than the Scottish referendum; but surprisingly, it is also
at comparable levels to the more-certain 2010 election. Indeed, 30 trading days out from the 6
May 2010 general election, polls suggested an average Conservative lead over Labour of 5-10
percentage points. Furthermore, in the lead-up to both the 2010 election and the Scottish
Referendum, GBP implied volatility was relatively slow to respond, not trading at a premium
over other G10 implied volatility until the month before each event.
FIGURE 3
UK CPI inflation should pick up sharply at the end of this
year
FIGURE 4
Significant fiscal consolidation is a key downside risk to GBP
5.5
5.0
4.5
4.0
3.5
3.0
2.5
2.0
1.5
1.0
0.5
0.0
-0.5
4
3
Change in cyclically-adjusted primary balance

(end FY, % of GDP)
2
1
0
-1
-2
07
08
09
BoE Feb IR
10
11
12
BoE Nov IR
Source: Haver Analytics, Barclays Research
26 March 2015
13
14
15
CPI (%y/y)
16
17
18
Barclays
-3
OBR
Forecast
-4
90 92 94 96 98 00 02 04 06 08 10 12 14 16 18
Source: Office for Budget Responsibility, Haver Analytics, Barclays Research
18
Relative UK economic performance remains the basis for our GBP forecasts
Superior UK economic growth
should support medium-term
EURGBP depreciation
With the election outcome highly uncertain and the most probable outcomes involving
weak coalitions that are unlikely to meet ambitious fiscal consolidation plans, our forecasts
remain driven by our expectations for the relative path of the UK economy. Our forecast of
economic outperformance relative to other European economies leads us to expect GBP to
be the strongest of European currencies over the year ahead but depreciate significantly
against the broad-based strength of the USD.
Robust economic activity

should support GBP
The strong pace of UK economic growth remains consistent with an ongoing tightening in
the labour market and an eventual pickup in inflation. We think a combination of lower oil
prices and continued wage growth should support a recovery in investment and
consumption growth after Q4 weakness. Indeed, BoE Governor Carney has consistently
emphasised that a supply-driven fall in oil prices is unambiguously positive for the UK
economy, increasing household disposable incomes and supporting wider business
margins. This was reflected in the BoEs February Inflation Report which, despite sizeable
downward near-term revisions, incorporated higher 2017 inflation forecasts (Figure 3). In
the context of a stabilisation in euro area activity, the UKs largest trading partner, we expect
robust activity and a likely re-emergence of inflation towards the end of this year to support
continued GBP outperformance versus the EUR.
But downside GBP risks include

low inflation
We continue to expect the BoE to leave its policy settings unchanged until Q4 this year but
there are emerging risks that policy could remain unchanged for longer. Recent currency
strength, combined with lower energy prices, will likely add further downward pressure to
UK inflation, which we expect to bottom at -0.1% y/y this month. GBP appreciation of
almost 20% on a trade-weighted basis since Q1 2013 has weighed heavily on already-low
import prices over the past year and this is likely to persist. Indeed, the BoEs March MPC
meeting minutes indicated growing concern within the MPC that recent EURGBP
depreciation had the potential to prolong the period for which CPI inflation would remain
below the target and exacerbate the risk that lower expectations of inflation might become
more persistent.
and fiscal consolidation
The risks associated with the 7 May election suggest that confidence intervals around our
GBP forecasts are larger than usual. Indeed, with both the Conservative and Labour parties
promising substantial fiscal consolidation, a majority victory, while unlikely, may represent a
particularly negative scenario for GBP. Details of Labours policies are yet to be revealed but
the recent Budget confirmed the Conservative governments intention to return the headline
current budget deficit of 5.6% of GDP to surplus by FY2018/19. Based on forecast changes
in the cyclically adjusted primary balance, this represents aggressive fiscal tightening of
1.2% of GDP per year on average for the next five years. If this occurs, it will be the most
significant period of fiscal consolidation in close to 20 years and likely holds important
implications for the pace of BoE rate hikes (Figure 4).
26 March 2015
19
THEME
SEK and CHF: Club sub-zero

Unwanted currency strength, in anticipation, or as a result of ECB QE, has forced smaller
G-10 central banks like the SNB and the Riksbank to ease policy recently, cutting rates
below zero and announcing QE. We expect both central banks to keep an easing bias, at
least in the short term. We expect negative interest rates and SNB FX interventions to
maintain EURCHF stability. We forecast EURCHF to appreciate to 1.08 in Q2 before
depreciating to 1.05 by Q1 2016. On the other hand, we expect moderate EURSEK
appreciation in H1 2015 and expect the cross to reach 9.50 by Q2 2015. From there on,
we think the SEK may reach a turning point as fundamentals strengthen and inflation
stabilizes further. We expect EURSEK to depreciate to 8.90 by Q1 2016.
Nikolaos Sgouropoulos
+44 (0)20 3555 1578
nikolaos.sgouropoulos@barclays.
com
CHF: SNB welcomes CHF weakness

Negative rates still a
meaningful disincentive to hold
large CHF deposits
In the short term, we expect the SNB to preserve its easing bias, with negative interest rates
providing a meaningful disincentive to hold large CHF deposits. Negative rates and the
downside risks to inflation and growth from an overvalued CHF imply significant CHF
depreciation in effective exchange rate terms, in our view. Further out, we think that the SNB
may allow some EURCHF depreciation under our baseline of a multi-year EUR downtrend.
We now expect EURCHF to appreciate to 1.08 in Q2 before depreciating to 1.05 by Q1 2016.
The CHF remains an important

policy tool for the SNB besides
negative rates, which are
expected to persist
Since the SNB abandoned the EURCHF floor, the CHF has retraced about 50% of the roughly
20% REER appreciation, driven primarily by broad-based EUR weakness. Nonetheless, the
CHF remains more than 20%overvalued according to our BEER model and remains at the
heart of the SNBs decision process. Indeed, the SNB has repeatedly stated that the CHF
remains an important policy target and that it may continue to intervene in FX markets if
necessary. We model the SNBs reaction function using a simple forward-looking Taylor rule
that includes inflation, output and exchange rate deviations from target. We use the SNBs
forecasts and an inflation target of 1% in our calculations. We use OECD estimates for the
Swiss output gap and our BEER misevaluation for the exchange rate deviation.
FIGURE 1
Forward-looking Taylor rule implies negative rates for the
rest of the year
3.0
FIGURE 2
KOF indicator suggests downside risks to economic activity
in coming quarters
120
2.5
% y/y
5
4
110
2.0
1.5
3
2
100
1.0
0.5
1
0
90
0.0
-1
-2
80
-0.5
-1.0
Mar-04
Index
-3
Mar-06
Mar-08
Policy rate
Mar-10
Mar-14
Taylor rule estimate
Source: SNB, Haver Analytics, Barclays Research
26 March 2015
Mar-12
70
Mar-00
Mar-03
Mar-06
KOF
Mar-09
Mar-12
-4
Mar-15
GDP
20

CHF depreciation to help
alleviate downward pressures
to inflation
Our model fits history adequately and forecasts negative rates throughout 2015 (Figure 1).
Moreover, further CHF depreciation would help improve a rather grim economic outlook.
Consumer prices dropped further into negative territory in February, whereas the effect of
the latest CHF appreciation has yet to be fully reflected in the inflation data. The recent
sharp drop in the KOF leading indicator for growth poses downside risks to GDP in the
forthcoming quarters (Figure 2).
The SNB is likely to allow some

CHF appreciation vis--vis the
EUR as the single currency
depreciates further
The exchange rate remains the most important intermediate policy target for the SNB. The
market has been speculating that the current EURCHF target range is 1.05-1.10. We would
caution making such conclusions, however. The expansion in the ECBs asset purchase
program implies that the SNB may not be solely focused on the EURCHF exchange rate
despite the euro areas importance as its largest trading partner. If the EUR weakens further
owing partly to ECB QE (also against USD), we would expect the SNB to accommodate
some further appreciation against the EUR, before intervening in FX markets again.
SEK Recommend buying, but not just yet

Recent focus on SEK strength
likely keeping the Riksbank on
an easing bias
A highly pro-active Riksbank with a strong easing bias is likely to keep SEK under pressure in
the short term. The recent shift towards targeting a weaker SEK suggests that the risks for
further easing, in the form of further negative rates and/or expansions in the existing QE
program, remain high for now. Nonetheless, once inflation stabilises, we think strong
fundamentals will help support the SEK against other European currencies like the EUR and
the NOK. Furthermore, SEK undervaluation of about 16% suggests room for a medium-term
correction higher, in our view. We expect EURSEK to appreciate to 9.50 in Q2 but see a likely
turning point towards the second half of the year as positive fundamentals support the SEK.
Too early to call for

stabilization in inflation,
keeping us skeptical about
sustained SEK appreciation in
the near term
Loose monetary policy will likely keep the SEK under pressure in H1 2015. Citing a strong
SEK, particularly against the EUR, the Riksbank decided to make its monetary policy even
more expansionary in March to support the recent upturn in inflation. Indeed, the Riksbank
re-iterated that it was too early to call a bottom in inflation, despite its recent stabilization,
highlighting that a stronger currency continues to pose downside risks to the inflation
outlook. On this basis, we remain sceptical about sustained SEK appreciation in the near
term and see limited scope for a significant shift in the Riksbanks reaction function, which
will likely remain sensitive to economic and political developments in the euro area. We
think risks of further repo rate cuts and/or greater expansion on the Riskbanks QE program
remain high, but we continue to assign a low probability to FX interventions.
FIGURE 3
Swedens relative output gap to turn positive in 2015
4
FIGURE 4
as savings decline and consumption is boosted
% GDP
7.00
% y/y
% income
6.00
2
14
5.00
12
4.00
10
3.00
-2
2.00
1.00
-4
0.00
-6
1991
4
2000
1995
1999
EUR
2003
SEK
Source: OECD, Haver Analytics, Barclays Research
26 March 2015
2007
NOK
2011
DKK
2015
16
2003
2006
2009
2012
Consumption
2015
Real disposable income
Saving ratio (RHS)

Source: Riksbank, Haver Analytics, Barclays Research
21

We believe that accommodative monetary policy, a weaker SEK, lower oil prices, and the
incipient euro area recovery will provide a supportive environment for growth and inflation. In
the context of significant SEK undervaluation of about 16% according to our BEER model and
our expectations for further EUR depreciation, we expect the Riksbank to tolerate some SEK
strength once further signs of stabilizing inflation are realized.
We expect a turning point in
the SEK towards the end of
year as the currency trades in
line with positive economic
fundamentals
26 March 2015
We expect the SEKs depreciation trend to turn around during Q3-Q4 of this year, by which
time both our and the Riksbanks estimates suggest further stabilization in inflation and
improving economic growth. Using OECD estimates and our BEER weights, we calculate a
measure of Swedens output gap relative to its trading partners (Figure 3). According to our
estimates, Swedens relative output gap is expected to turn positive by the end of 2015, in
line with the Riksbanks estimates of increasing consumption growth driven by a reduction
in the rate of savings (Figure 4).
22
THEME
CAD and NOK: Yet to price the oil slippage

Aroop Chatterjee
+1 212 412 5622
+44 (0)20 3555 1578
nikolaos.sgouropoulos@barclays.
com
Lower oil prices have weakened fundamentals and widened output gaps in oilproducing Canada and Norway. We believe the effect of lower oil will be pervasive in
2015, and we remain negative on both CAD and NOK. The prospect of rate cuts in
Canada, which we believe the market is underpricing, suggests that the CAD is a more
reliable short. Further downside in NOK likely will have to wait until the Norges Bank is
more comfortable with domestic financial stability issues.
Underpriced BoC rate cuts increase CAD downside

We continue to think that the market is significantly underpricing the risks of additional
stimulus from the Bank of Canada. After falling by 10% on a NEER basis between mid-2014
and January 2015, the CAD NEER has been in a tight range and USDCAD has largely been
responding to broad USD movements. USDCADs sharp rise in recent months has mirrored
moves in the relative rate expectations for the US versus Canada (Figure 1). We expect the
divergence in Fed/BoC monetary policy to intensify in the months ahead.
We think the BoC has yet to respond to the economic effects of the nearly 60% decline in oil
prices (Western Canada Select) since September 2014. Lower oil prices will reduce
investment and weigh on consumption as aggregate income and wealth fall on the negative
terms-of-trade shock. Our hypothesis that oil prices may remain volatile is an additional
negative for investment in a Canada where production tends to be capital intensive (see Oil
Special Report: The Volatility Hypothesis, 12 March 2015). Furthermore, we think that the
recent decline in CAD and the BoCs January rate cut will not be enough to offset these
negative growth dynamics.
Without additional monetary easing, BoC projections suggest growth could undershoot its
baseline by 1.4pp over the next two years. However, its official growth forecasts are only
0.2pp lower over the same period. We see this as indicating its intention to cut rates to
offset the disappointment. We estimate that at least 50bp of cuts will be needed over the
next 3-6 months, significantly more than priced (Figure 2). As such, the movement in
relative output gaps between the US and Canada is likely to become more supportive for
USDCAD. Our Q4 15 and Q1 16 forecasts are 1.32 and 1.36, respectively,
FIGURE 1
Fed-BoC policy divergence has been crucial for USDCAD
FIGURE 2
Barclays forecasts for the Fed and BoC expect this to
intensify, pushing USDCAD higher
1.0%
1.30
1.00
1.25
0.50
1.20
0.00
1.15
1.10
-0.50
1.05
-1.00
1.00
0.95
0.90
Jan-10
Jan-11
Jan-12
USDCAD Curncy
26 March 2015
Jan-13
Jan-14
0.9%
Policy rates
0.8%
0.7%
0.6%
0.5%
0.4%
0.3%
0.2%
-1.50
0.1%
-2.00
0.0%
Q1 15
Jan-15
US-CA 1y1yf nominal (RHS)
Q2 15
USD FF futures
Fed: Barclays forecast
Q3 15
Q4 15
Q1 16
CAD OIS
BoC: Barclays forecast
23

We think the recent retracement in rate cut expectations in Canada and rate hike expectations
in the US is an opportunity to buy USDCAD. We remain long USDCAD spot (FX Focus: CAD:
Downside ahead, 25 February 2015).
NOK is a lower conviction short now

Our expectation of rising oil imbalances in the near term, coupled with likely lower-for-longer
oil prices, imply more NOK downside, in our view. Despite the lack of proactive central bank
policy in March, we maintain our view that further easing will eventually materialise. Although
we still like long USDNOK spot positions and see upside risk for EURNOK, the NOK has become
a lower-conviction short in the near term as financial stability concerns delay easing.
We expect the NOK to remain an underperformer in 2015 given our expectations of material
demand-supply oil imbalances in the short term, lower-for-longer oil prices further out and
elevated oil price volatility weighs on energy investment. In this environment, we think the
Norges Bank will likely keep a strong easing bias and cut by at least 50bp in 2015.
Norwegian output growth is expected to slow and was revised lower by both Norway
Statistics in its Outlook Survey and the Norges Bank at its 19 March meeting. At the same
time, the sharp decline in oil prices implies that activity in the petroleum industry is declining
more rapidly than previously envisioned (Figure 3). Employment growth is expected to
slacken; as a result, the Norges Bank has revised the path of the policy rate significantly lower
and signalled rate cuts as soon as lower oil prices start to materially affect the data, which we
expect as early as Q2 2015 (Figure 4). Any further easing will likely be against a backdrop of
elevated concerns about financial stability linked to the Norwegian housing market, with the
central banks reaction function likely, in our view, to start weighting expected capacity
underutilization more heavily than concerns about an overheating housing market.
The main risk scenario for the economy and the NOK, however, is a prolonged period of low
oil prices, materially exposing the economys structural reliance on the oil sector. Under this
scenario, we see scope for looser monetary policy initially, though incremental rate cuts would
likely exhibit diminishing efficacy. During the global financial crisis, when oil prices last
plunged, the Norges Bank cut rates by 4.5pp in nine months. But the level of rates was
markedly higher then and the economic outlook materially gloomier, allowing for more
aggressive monetary policy adjustments. With the Norges Bank now significantly nearer its
lower bound, room for large manoeuvres may be limited, though we still think monetary
policy easing will be the first line of defence. Under the scenario of lower-for-longer oil prices,
we see more reason for a weaker NOK to provide some protection for local-currency exports.
FIGURE 3
Lower oil prices weighing on confidence and investment
Expected
growth (%)
Index
5.00
0.00
4
2
0
0.40
Costs
Exchange rate
0.20
0.00
-5.00
-0.20
-10.00
-0.40
-15.00
-2
Demand
Interest rates abroad
Change in rate
10.00
-0.60
-0.80
Source: Norges Bank, Barclays Research
26 March 2015
Dec-17
Sep-17
Jun-17
Mar-17
Dec-16
Consumer confidence (RHS)
-1.00
Sep-16
Aggregated
Oct-13
Jun-16
Apr-12
Mar-16
Oil
Oct-10
-20.00
Apr-15
Dec-15
-4
Apr-09
Sep-15
10
FIGURE 4
signaling potential rate cuts
Source: Norges Bank, Haver Analytics, Barclays Research
24
THEME
CNY: More flexibility, less complexity

Mitul Kotecha
+65 6308 3093
Dennis Tan
+65 6308 3065
dennis.tan@barclays.com
Recent developments
increasingly point to the
reduced need for China to
maintain a strong currency
We expect China to take steps to accommodate greater CNY flexibility this year, through
a combination of more volatile but modestly higher USDCNY fixings and a widening of
the trading band. We think this reflects Chinas recognition of the increasing costs
associated with limiting the exchange rates ability to respond to changes in external
and domestic economic conditions. We maintain our year-end 2015 forecast of USDCNY
at 6.40.
The cost of restricting greater USDCNY flexibility is rising

We believe China has the capacity to maintain exchange rate stability. Even if selling
pressures on the CNY were to intensify, Chinas large FX reserve holdings (of around
USD3.8trn) should allow the authorities to engage in FX intervention for a prolonged period
to limit the CNYs decline. However, as we discussed in CNY: Deflation, downturn and the
deepening monetary dilemma, 12 February 2015, recent developments increasingly point to
a reduced need for China to maintain a strong currency, especially on a trade-weighted
basis:
First, inflation in China is less of a concern, in our view, while deflation risks have risen.
Pre-emptive moves to allow for greater flexibility in the USDCNY to help dampen the
CNY REERs appreciation would be desirable, in our view, as studies have shown that the
exchange rate has a significant impact on inflation in China.
Second, CNY overvaluation is getting more extreme, with USDCNY remaining relatively
stable while trade partner currencies fall sharply versus the USD. Our BEER model
estimates that the CNY is around 20% overvalued, making it one of the most expensive
currency globally.
Third, FX intervention to limit CNY depreciation pressure would dampen the

effectiveness of liquidity-easing efforts. Economic activity at the start of this year was
weaker than expected (our China Economists have downgraded their 2015 GDP
forecast to 6.8% from 7.0%) and monetary easing efforts are not helping to lower
market interest rates. However, FX intervention to limit CNY weakness (ie, selling USD)
FIGURE 1
CNY REER has appreciated sharply, up more than 17% since
July 2014
Index
70
65
CNY REER
CNY REER (rolling 10-yr average)
+17.3%
FIGURE 2
USDCNY has pulled away from the top of the band
6.40
USDCNH
Upper band
6.35
USDCNY fix
Lower band
6.30
60
6.25
55
6.20
50
6.15
6.10
45
6.05
40
6.00
35
00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15
Source: Barclays Research, Bloomberg
26 March 2015
5.95
Jan-14
Jul-14
Jan-15
Source: Barclays Research, Bloomberg
25

is having the effect of tightening domestic CNY liquidity. The PBoC does have room to
cut the reserve requirement ratio (RRR) rate to offset the liquidity impact of FX
intervention, as the current RRR level of 19.5% is high by historical standards the ratio
was as low as 6% in 2002. However, a further drain of liquidity may not be appropriate if
a step-up in monetary easing is needed to counter a sharper growth slowdown and to
bring down elevated funding costs.
Fourth, the global recovery remains uneven and desynchronized, with the US being the
sole engine of growth. While Chinas exports are so far performing better than other EM
Asian economies, the recent sharp CNY REER appreciation might have a dampening
effect on Chinese exports to countries apart from the US.
The government does not seem overly concerned about capital outflows
Capital outflows are
accelerating but official
comments suggest that the
PBoC is not overly concerned
Chinas capital outflows are accelerating. The monthly trade surplus has risen to a record
high this year, but we view the surge in FX deposits as a sign that Chinese corporates are
keeping their export proceeds in USD, possibly in anticipation of greater CNY adjustments
ahead (see CNY: Unprecedented surge in FX deposits, 6 March 2015). Commentators have
often cited hot money outflows as a factor preventing China from allowing greater
currency weakness. However, recent comments by the PBoC governor Zhou Xiaochuan and
PBoC adviser Yi Gang at the National Peoples Congress (NPC) seem to suggest that the
government is not overly concerned about the increase in capital outflows and CNY
volatility.
Recent pullback in USDCNY

from close to the top of the
band could present an
opportunity to make policy
changes
China has typically refrained from making policy adjustments when selling pressures on the
CNY are heaviest. However, the recent softening in the USD post-FOMC and the pullback in
USDCNY from levels near the top band may present an opportunity for Chinese policy
makers to make changes should USDCNY long liquidation extend further. USDCNY has
moved sharply away from the top of the band (Figure 2), while the spread between
USDCNH and USDCNY has narrowed (Figure 3), suggesting less bearishness in the offshore
market relative to onshore. USDCNY fixings have also been moved lower as the authorities
appear to be dampening expectations that they would like to engineer a weaker currency.
This, in our view, could provide a suitable backdrop for a band widening as the risk that
USDCNY moves to the top of the wider band has receded.
FIGURE 3
USDCNH USDCNY spread narrows, suggesting bearishness
in the offshore yuan market is easing
No of pips
400
Spread between USDCNH - USDCNY spot

spread (5-day avg)
300
FIGURE 4
Hot money' outflows are persisting, but official comments
suggest the government is not overly concerned
USD bn
Estimated 'hot money' inflows*
100
3M chg in CNY vs. USD (RHS)
80
200
60
5%
4%
3%
100
40
20
2%
1%
-20
0%
-100
-200
-40
-300
-400
Jan-13
-60
Jul-13
Jan-14
.Source: Haver Analytics, Barclays Research
26 March 2015
Jul-14
Jan-15
-1%
-80
-2%
-100
-3%
Note: *Net FX purchases of financial institutions less the sum of the sum of the
trade balance, net FDI flows and portfolio flows.
26

China appears to recognise the
increasing costs associated
with limiting the exchange
rates ability to respond to
changes in external and
domestic economic conditions
26 March 2015
We believe a move to adjust currency settings should not be seen as a sign of capitulation
on the part of China under the pressures of slowing economic growth and growing capital
outflows. Instead, against the backdrop of an intensifying currency frictions externally and
growing growth headwinds domestically, we think China may be recognising the increasing
costs associated with limiting the ability of the exchange rate to respond to changes in
external and domestic economic conditions. Refinements to the existing framework to allow
for greater flexibility and to allow a greater role of market forces in determining the value of
the CNY is a step in the right direction, in our view. We maintain our year-end 2015 forecast
for USDCNY of 6.40. We also tighten the stop-loss on our long USDCNH recommendation
initiated on 24 September 2014 (see CNY: No longer a one-way trade in Global FX
Quarterly: ECB says EURs, 24 September 2014) to our entry level of 6.1414 from 6.0450
previously.
27
THEME
AUD and NZD: More room to fall

Mitul Kotecha
+65 6308 3093
Hamish Pepper
+ 44 (0)20 7773 0853
Although both AUD and NZD have depreciated in recent months, we think there is scope
for further depreciation versus USD given contrasting monetary policy stances and a
firm USD. However, we do see some scope for AUDNZD to move higher, with the
currency pair bottoming out around current levels.
Closer to fair value?

AUD has declined steadily since September 2014, dropping around 20% versus the USD. It
has also fallen sharply against the NZD, dropping around 8% since the end of October 2014.
A number of factors have weighed on the AUD, including the RBAs active encouragement
of a weaker FX trajectory, narrowing yield differentials and declining commodity prices, all
against the background of a strong USD. Moreover, the decline in AUD continues to track
the deterioration in Australias terms of trade, with little sign yet that the worsening in the
terms of trade is close to ending.
The drop in AUD has helped to

reduce some of the currencys
overvaluation
Nonetheless, the drop in AUD has helped to reduce some of the currencys overvaluation.
Indeed, the AUD REER deviation with its long-term (20 year) average has now declined to
around 2.6%, while the RBAs own fair value model estimates also put the currency at
around 2% expensive earlier in Q1 (our own version of the same model shows that the AUD
is 4% expensive in Q1 to date). However, our BEER model estimate suggests that the AUD is
around 14% overvalued, implying scope for further depreciation on this measure.
The RBA has reframed its

criticism of the exchange rate
Given the sharp depreciation in the AUD in recent months, the RBA no longer argues that
the exchange rate is significantly overvalued relative to fundamentals; instead, it has
reframed its criticism of the high exchange rate, with Assistant Governor Kent arguing that
the exchange rate remains relatively high given the state of our overall economy. This
suggests to us that the RBA would be comfortable if the AUD were to overshoot fair value.
We think this implies that a potential move to around 0.70 cents would not fuel any
discomfort from the RBA. Indeed, our revised forecast now looks for a drop to close to this
level to 0.72 cents by end-2015, versus our previous forecast of 0.75.
FIGURE 1
AUD REER close to its 20-year average
145
135
125
FIGURE 2
AUDUSD increasingly tracking yield differentials
4.00
1.10
3.50
1.05
1.00
3.00
115
0.95
2.50
105
0.90
95
2.00
85
1.50
0.80
75
1.00
0.75
AUD REER
AUD REER (rolling 20 year average)
26 March 2015
AU-US 2 year yield differential (%)
Jan-15
Oct-14
Jul-14
Apr-14
Jan-14
Oct-13
Jul-13
Apr-13
Jan-13
Oct-12
Jul-12
Apr-12
Jan-12
01 02 03 04 05 06 07 08 09 10 11 12 13 14
Oct-11
65
0.85
AUDUSD (RHS)
28
Yielding to the inevitable

We expect the RBA to cut rates
by 25bp again in May
We expect the RBA to cut rates by 25bp again in May, lowering the cash rate to 2%, with
risks of a sub 2% rate further out (see Australia: RBA Board Minutes, Mar 2015: Considered
Cutting, Decided to Wait, 17 March 2015). The market is even more dovish, pricing in close
to 50bp of easing by year-end. Given the potential for further easing, AUD is unlikely to
garner any support from interest rate expectations, especially given that in contrast to the
RBA, the Fed is expected to hike rates in September. Perhaps the only relief for AUD in this
respect is that the market has already priced in further rate cuts in Australia. Nonetheless,
we see little scope for any hawkish shift in interest rate expectations, and even the strength
in house prices, something that could prove to be barrier to much lower rates, is likely to be
combated by tougher macroprudential measures rather than higher interest rates.
The narrowing Australia/US

yield differential is increasingly
weighing on AUD
To its detriment, AUDUSD has become increasingly sensitive to yield differentials. In

particular, the currency is sensitive to 2-year US/Australia bond yield differentials. In this
respect, the narrowing in Australias yield advantage over the US has played negatively on
the currency, with the yield gap narrowing by around 80bp since November 2014. Given
that US 2-year yields are likely to continue to move higher (the Barclays Q4 15 forecast is
1.4%), we think there will be a further narrowing in Australia/US yield differentials, leaving
the AUD exposed to further weakness. One hurdle to further AUD depreciation may be the
large overhang of short AUD positioning. Net AUD short positioning has reached an
extreme level relative to net open interest according to CFTC IMM data. However, we think
this may slow the pace of AUD depreciation rather than stem it.
NZD: Downward adjustment required

Strong economic growth has
helped support the NZD
despite neutral RBNZ
rhetoric
Despite increasingly neutral RBNZ rhetoric, the NZD has remained stubbornly high on a
trade-weighted basis in recent months and we estimate it is currently 22.5% overvalued on
a real effective exchange rate basis. The New Zealand economy continues to be supported
by strong growth in residential investment and consumption given an environment of
historically low interest rates, high confidence and the ongoing rebuilding of Christchurch.
Extremely high rates of permanent and long-term net immigration are also adding upward
pressure to already-high house prices (see Figure 3). Indeed, the New Zealand economy
grew 3.4% y/y in Q4 14, above the RBNZs potential growth estimate of 3.0%, and will likely
experience above-potential rates of GDP growth for the next two years.
FIGURE 3
Historically-high net immigration is supporting continued
house price growth
FIGURE 4
Drought is further reducing dairy exporter incomes
Annual
total, 000's
% y/y
30
60
25
50
20
40
15
30
10
5
0
-5
-10
-15
26 March 2015
Drought declared in large

parts of South Island
1,500
1,400
70
60
1,300
50
1,200
40
1,100
20
1,000
30
20
10
900
800
-10
700
-20
600
Jan-14
93 94 95 96 98 99 00 01 03 04 05 06 08 09 10 11 13 14
National house prices
1,600
Net immigration (RHS)
10
0
Apr-14
Jul-14
Oct-14
Quantity sold (MT, 000's, RHS)
Jan-15
GDT Price Index
Source: Global Dairy Trade, Barclays Research
29

but the prospect of RBNZ
rate cuts could weigh on the
NZD this year
However, rising downside risks to growth and falling inflation expectations suggest the
possibility of RBNZ rate cuts this year, likely placing significant downward pressure on the
NZD. In the context of a likely Fed rate hike in September and associated outperformance of
the USD, and considering that the recent bounce higher in the NZD is likely to be short lived,
we are maintaining our 2015 year-end NZDUSD forecast at 68 cents.
Drought represents a
downside risk to growth
through lower exporter
incomes
Drought represents an emerging risk to New Zealands growth outlook and the NZD,
through a reduction in agricultural export revenue. Agricultural exports made up more than
half of merchandise exports and 10-15% of GDP as of the end of 2014. After several
months of unusually dry weather for most of the country, on 15 February 2015 drought was
officially declared in large parts of the South Island, an area that produces about 40% of
NZs total dairy milk solids. This is particularly concerning for the dairy sector, where
exporter incomes are already under pressure from the large price declines since early 2014.
While Global Dairy Trade online auction dairy prices have recently been supported by the
associated reduction in supply, overall dairy export revenue continues to decline (Figure 4).
There are also negative implications for New Zealand meat producers as slaughter is
brought forward in response to drought, weighing on prices there.
Falling inflation expectations

may prompt RBNZ rate cuts
Falling inflation expectations may see the RBNZ switch to an easing bias in the coming
months, providing further downward pressure on the currency. Headline New Zealand CPI
inflation is currently very low, at just 0.8% y/y in Q4 14, and could decline to 0.0% this
quarter in response to weak global inflation, the recent decline in oil prices and a still-high
NZD. Worryingly, the drop in headline inflation has started to impact inflation expectations,
with the RBNZs own two-year ahead measure falling sharply this quarter to 1.8% y/y from
2.06% y/y in December 2014, its lowest level since mid-1999 (see Figure 3). As one of the
RBNZs preferred measures of future core inflation pressure, we think this is starting to
concern the central bank and our economist thinks the RBNZ has opened the door for a
June rate cut by saying in its 11 March Monetary Policy Statement that a significant
reduction in inflation expectations would warrant an easing (see New Zealand: RBNZ cash
rate decision, Mar 2015: The RBNZ opens the door for a rate cut, 12 March 2015). Indeed,
the March MPS presented an alternative scenario that assumed inflation expectations
continue to decline to 1.0% y/y over the coming year. The corresponding policy reaction
shows a 25bp cut to the Official Cash Rate before year-end and a further 25bp reduction
before the middle of next year (see Figure 4).
FIGURE 5
Inflation expectations are starting to respond to lower prices
RBNZ target range
2-year ahead inflation expectations
Headline CPI inflation
RBNZ forecast
%
5
FIGURE 6
Continued falls in inflation expectations may result in RBNZ
rate cuts
%
10
90-day interest rate
9
8
5
4
3
0
2
02 03 04 05 06 07 08 09 10 11 12 13 14 15 16 17
-1
92 93 94 96 97 98 00 01 02 04 05 06 08 09 10 12 13 14 16 17
26 March 2015
Alternative scenario
Mar MPS
Dec MPS
Source: Reserve Bank of New Zealand, Barclays Research
30
AUDNZD bottoming out?

Growing scope for AUD to
outperform NZD
After a steep fall in recent months it appears that AUDNZD is finding a bottom, and we think
there is growing scope for AUD to outperform NZD even on its way down versus USD.
Firstly, while market positioning appears to be short in both currencies, relative positioning
is more bearish AUD than NZD. This suggests that there is less scope for a further
deterioration in AUD positioning relative to NZD and perhaps even scope for short covering
(Figure 7). Secondly, AUD valuation is less expensive compared to NZD (our BEER estimate
reveals a 14% overvaluation for AUD compared to 22.5% for NZD), while the deviation of
AUD from its long-term average REER is less than for NZD (2.6% versus 12.5%) (Figure 8).
Thirdly, the RBA has become less aggressive in its rhetoric on AUD overvaluation compared
to the NZD, as the former has moved towards the RBAs measure of fair value. As such, our
revised forecasts look for some mild appreciation in AUDNZD over the coming months.
FIGURE 7
Relative positioning shift has been more bearish AUD
% of total
interests
FIGURE 8
NZD deviation from long-term REER (20 year) far higher
than AUD
Net speculative AUDNZD positioning

80th percentile
20th percentile
60%
40%
30
25
20
15
10
20%
0%
0
-5 01 02 03 04 05 06 07 08 09 10 11 12 13 14
-20%
-10
-40%
-15
-20
-60%
04
05
06
07
08
26 March 2015
09
10
11
12
13
14
15
NZD
AUD
31
THEME
Asia: Exploiting divergence within the pack

Asian currencies have outperformed during Q1 2015 but it has not been an easy ride.
Given the headwinds from expected Fed rate hikes and a strong USD, we expect Asian
currencies to depreciate against the greenback to varying degrees. However, we would
not paint Asian currencies with a broad brush, as we expect some to continue
outperforming (ie, INR, PHP) even if the environment becomes tougher. That said, we
see other currencies as vulnerable to potential changes in policymakers appetites for
FX weakness (SGD, CNY, TWD), monetary easing (KRW), and renewed pressures on
terms of trade (MYR and IDR). Against this backdrop, we recommend two trades, short
SGDPHP and long INRTWD.
Mitul Kotecha
+65 6308 3093
Dennis Tan
+65 6308 3065
Asian currencies have

outperformed in REER terms
despite challenging external
conditions and strong USD
Although EM FX performed poorly during Q1 2015, Asian currencies have outperformed.

However, it has not been an easy ride. As with other EM FX, Asian currencies face many
headwinds, not least of which is the prospect of higher policy rates in the US. On the other
side of the coin, low oil prices have been a major boon for Asia, fuelling an improvement in
external balances as relatively stronger growth in the region has provided a strong buffer
even as Chinese growth has slowed (see Asia-Pacific Macro Themes: Oil low for longer
transforms Asia outlook, 4 February 2015).
But REER appreciation has not

been welcomed by Asian
central banks
Asian FX outperformance has not only been registered versus the USD but also in real
effective exchange rate (REER) terms (Figure 1). Chinas reluctance to allow a significant
move in the CNY versus USD has seen its currency appreciate the most while the MYR has
recorded the biggest depreciation. However, REER appreciation has not been welcomed by
Asian central banks at a time when many of them would prefer stable or even weaker
currencies. Some Asian central banks have actively resisted REER appreciation through FX
intervention (eg, India, Korea and Taiwan), and by taking the opportunity to cut interest
rates where growth-inflation dynamics allow.
Chinas influence on Asia should not be ignored and slowing growth in its economy is
acting as an additional headwind that could chip away at Asian economic outperformance
in the months ahead. That said, the rise in the CNY REER has, in effect, been an important
FIGURE 1
Most Asian REER flat or stronger since the USD began its
appreciation trend
120
CNY
KRW
SGD
INR
MYR
TWD
IDR
PHP
THB
5%
110
0%
105
-5%
100
-10%
95
-15%
Sep-14
Nov-14
26 March 2015
FX reserves accumulation* as a % of GDP

(Jul 2014 - Feb 2015)
15%
10%
115
90
Jul-14
FIGURE 2
Diverging trends in FX reserves accumulation pattern
Jan-15
Mar-15
IN
TW
KR
PH
ID
TH
CN
MY
SG
Note: *Excluding valuation effects and including changes in FX forward books.

January and February figures for China are estimates.
32

factor for regional currencies. A stronger CNY has alleviated some of the urgency for other
Asian currencies to weaken against the background of a strong USD. In this respect, Chinas
reaction function to slowing domestic growth will be particularly important for the region.
If, as we discuss in the CNY Theme article, China allows only a moderate weakening in the
CNY versus USD, then its REER is likely to rise. Such relative CNY strength would remove
more of the competitive pressures on other Asian currencies even as the USD strengthens,
although we doubt this would be sufficient for Asian central banks to accept a
strengthening in their real exchange rates.
Fighting REER appreciation tool #1: FX intervention

Several central banks have
been soaking up USD inflows
Despite the strengthening in many Asian REERs, several central banks in the region have
been soaking up USD inflows. In particular, India, Taiwan, Korea, the Philippines and, to a
lesser extent, Indonesia have all registered increases in their net FX reserves as a percentage
of GDP (taking into account valuation changes) since mid-2014 (the beginning of the USD
rally) as they have actively sought to prevent their currencies from appreciating. This is
remarkable considering that this period has coincided with the sharp uptrend in the USD, as
shown by the 11% appreciation in the Barclays USD REER appreciating over this period.
Increase in FX reserves
highlights continued
strengthening in capital inflows
and current account positions
This expansion in FX reserves highlights the dilemma facing Asia from continued capital
inflows and the strengthening of current account surpluses at a time of a rising USD.
Indeed, Asia has registered large portfolio inflows over the past few months (Figure 3).
Equity portfolio flows have totalled around USD10.4bn year to date, which is stronger than
the inflows registered at the same time last year. Taiwan and India have enjoyed the biggest
inflows of portfolio capital, with only Thailand registering net outflows. In terms of bond
inflows, India has been the biggest recipient, with such inflows seemingly restrained only by
official quotas. For the six countries that we have data for in Asia, they have collectively
received more than USD8bn in bond inflows year to date.
At the other end of the scale, Singapore and Malaysia seen declines in their FX reserves as
they have been buying their own currencies to prevent sharper depreciation. Singapore is
bound by its mandate to maintain the credibility of the SGD NEER framework, and in order
to maintain the SGD within its band as selling pressures mount, this has seen the MAS
drawing down on its reserves. But even this activity has not prevented the SGD REER from
falling. Meanwhile, the MYR has come under pressure due to worsening domestic factors
and the fact that Malaysia is Asias only net oil exporter. Even so, BNMs USD selling has
been fairly mild, in our view, and aimed mainly at slowing but not halting the fall in the MYR.
FIGURE 3
Asian equity inflows have been healthy year to date
FIGURE 4
India leads the way in bond inflows
Cumulative foreign debt inflows (USD bn)
USD bn
60
80
40
70
20
60
50
-20
40
-40
30
IN
ID
KR
PH
TH
MY
20
-60
10
-80
Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec
2008
2012
2014
2015
26 March 2015
2013
0
-10
09
10
11
12
13
14
33

India, Korea, Taiwan and the
Philippines will likely continue
to limit currency appreciation
arising from stronger external
balances
Looking ahead, we doubt that the FX intervention activity of Asian central banks will change
much. For some countries with stronger current account positions due to lower oil prices
(India, Korea, Taiwan and the Philippines), we expect them to continue soaking up USD
flows. The RBI has said that an excessively strong rupee is undesirable, especially as its
version of the INR REER is near the top end of its 10-year range. The BoK remains watchful
over the JPYKRW rate, while the CBC has tended to limit TWD appreciation when exports
and inflation are weak, even if portfolio inflows and domestic growth prospects are strong.
Moreover, moderating growth in China will create a downdraft while competitive pressures
from a weak JPY are also likely to limit the CBCs tolerance for a stronger TWD.
IDR and MYR are likely to be

among the worst performers
over coming months due to
terms of trade pressures and
central bank tolerance of FX
weakness
We do not expect countries with pressures on their external balances due to lower
commodity prices (Malaysia and, to some extent, Indonesia) to stand in the way of currency
weakness, should capital outflows accelerate or if their terms of trade weaken further. As
we argued in EM FX/Local Markets: Assessing FX reserves adequacy in EM, 19 January
2015, a low level of FX reserves (relative to potential outflows) in Malaysia and Indonesia
means that their two central banks are unlikely to want to draw a line in the sand in terms of
FX intervention. While we are relatively constructive on the Indonesian economy (see
Indonesia: A virtuous cycle in the making, 12 February 2015), the authorities appear keen to
maintain currency competiveness to boost exports. In the case of the MYR we do not expect
the authorities to stand in the way of a further weakening if market forces push the
currency that way.
SGD and CNY are vulnerable to

policy changes that could
allow greater FX flexibility
We view both the SGD and CNY are being vulnerable to potential changes in policymakers
intervention behaviour. With stretched currency valuations, weaker growth and inflation
momentum lately, amid a persistent drawdown in FX reserves, we see the policy risk in
Singapore as biased towards greater accommodation of SGD volatility. In this respect, the
MASs policy review in April will be closely watched by the market. For the CNY, we think
that authorities could widen the trading band to allow greater USDCNY flexibility (see CNY
section).
Fighting REER appreciation tool #2: monetary easing

Asian central banks are front
loading rate cuts ahead of Fed
rate hikes
Lower inflation has given Asian central banks room to ease monetary policy, and most, with
the exceptions of Malaysia and the Philippines, have taken advantage and cut policy rates in
recent months. We think the main disinflationary impulse, which has come from lower
commodity and oil prices in particular, is unlikely to dissipate soon our commodities team
expects Brent to slide further and average USD51/bbl this year. This implies a window of
opportunity for Asian central banks to front-load rate cuts ahead of the Feds tightening
cycle later this year (we forecast the first Fed hike in September).
The KRW and, to some extent,

the THB and the CNY, are
vulnerable to lower rates
According to our economists, only India and China are expected to cut policy rates in the
coming months. However, we think that the risk is that, if the USD continues its uptrend and
Asian REERs come under more appreciation pressure, lower policy rates become the
another tool to counter currency strength, even if this is not explicitly stated as an intention
by the authorities. As such, we believe that the KRW is the most vulnerable in this respect.
For the CNY, lower domestic rates, along with tighter regulations, will likely continue to lead
to a slowdown in the illicit carry trades that have helped support the currency in recent
years.
It is, however, important to highlight that rate cuts should be seen as positive for the INR,
rather than the opposite, considering the potential boost of lower rates to investment and
growth in Indias economy. Since Indias equity market is also more open to foreign
participation than the local bond market, monetary easing would likely support portfolio
inflows into India.
26 March 2015
34
Scope for differentiation remains

Differences in capital inflows
and reserves growth highlight
the differing idiosyncratic
stories in the region. INR and
PHP are likely to outperform
The difference both in terms of the destination of portfolio capital inflows and subsequent
reserves growth highlight the divergent idiosyncratic stories in the region. In this respect,
while we expect the USD to strengthen against all Asian currencies over coming months, we
continue to look for relative outperformance of some currencies relative to others. For
example, the INR remains one our favoured currencies due to the improvement in
fundamentals and reform prospects in India. Unlike in the past, India and the INR now both
appear far less susceptible to capital outflows (see India: BoP stays on a strong footing, 10
March 2014). Indeed, our economists believe that Indias current account is likely to have
turned into a surplus in Q1 15 and maintain their forecast of a small current account surplus
in FY 15-16.
We also think the PHPs fall versus the USD should be less rapid than for other regional
currencies, given a solid current account surplus, low level of external borrowings and
relatively low foreign ownership of local assets. The BSP governor has also hinted that the
central bank may not cut rates, considering the relatively robust growth outlook in the
Philippines.
We recommend a short
SGDPHP trade and long
INRTWD trade
26 March 2015
Our analysis points to relative value opportunities in Asia, given our contrasting views on
currency outlooks. Both the SGD and TWD have the advantage that they are relatively cheap
to utilise as funding currencies, while at the same time vulnerable to policymakers giving
more room for currency weakness. Meanwhile, we expect the INR and PHP to be among the
top performers. As such, we recommend initiating a short SGDPHP (entry spot ref: at
32.6835, entry 6m NDF ref: 32.7229, targeting 30.8000, stop loss 33.6550 trade and long
INRTWD trade (entry spot ref, 0.50164; entry 6m NDF ref: 0.48588, targeting 0.53450, stop
loss 0.48520).
35
THEME
BRL: BCB behind the curve

BRL offers value, but we suggest staying on the sidelines waiting for the central bank to
get ahead of the curve. High risk premia on domestic assets, along with a weaker BRL,
would ordinarily make being long the currency an inviting proposition. We are not
constructive, however. Despite elevated inflation expectations, we believe the BCB is
close to ending its hiking cycle. A central bank that is behind the curve on inflation,
against a backdrop of weak growth, elevated domestic political uncertainty, increasing
tolerance for currency depreciation, and tightening global funding conditions, is likely
to pressure the BRL lower in coming months. We expect USDBRL to be at 3.45 by Q4
2015 and 3.45 by Q1 2016.
Aroop Chatterjee
+1 212 412 5622
Bruno Rovai
+ 1 212 412 5762
bruno.rovai@barclays.com
The sharp decline in the BRL 17% versus the USD and 6% versus the EUR since the end of
2014 has put it close to its BEER fair value. In addition, the risk premium on local bonds, net
of credit risk, remains one of the highest in emerging markets (Figure 1). Although this would
normally make the BRL attractive, we believe the risk that the central bank could lose control
of inflation expectations is elevated enough to suggest that investors remain on sidelines.
Medium-term inflation expectations are above target

Inflation expectations (2y and 5y) remain elevated and above the central banks target band
(Figure 2). With another 130bp of rate hikes priced until September 2015, the market is
already signaling a central bank at risk of being behind the curve. The market may be
further disappointed if our economists are correct and the BCB ends the hiking cycle in April
with a 50bp increase.
In the near term, the continued regulated price adjustments have also led our economists to
increase their inflation forecast for 2015 to 8.2%, from 7.2% previously, based on energy
price increases. Our estimates show that the IPCA should be, on average, 8.1% this year and
begin to decline because of base effects only by January 2016.
The BCB ended its currency swap program in March and alongside the governments
sanguine stance on currency depreciation may add further upside risks to inflation as the USD
FIGURE 1
Brazil assets look attractive on a relative basis in EM (10y
local rates 10y breakevens 10y CDS vs the US)
FIGURE 2
Inflation expectations have stabilized but remain above the
BCBs target band
8
7
-2
-4
-6
10 bond risk premium vs. US

26 March 2015
BRL
MXN
INR
CLP
IDR
PLN
CNY
MYR
KRW
ZAR
HUF
TRY
THB
CZK
RUB
-8
2
Feb-14
Jun-14
2y
Target mid
Oct-14
5y
Lower bound
Feb-15
Upper bound
36

rally resumes in H2 2015. Although the pass-through of FX to inflation has historically been
modest (0.4pp for a 10% currency depreciation) and front loaded (concentrated in the first
three months following the FX move), this may not be a guide for future pass-through if the
central bank begins to tolerate above-target inflation. Indeed, if it weakens its inflationtargeting credibility by getting behind the curve, pass-through could increase, putting more
downward pressure on the currency.
Finally, the strong positive correlation between local rates and FX is likely to complicate the
governments intentions to allow the currency to depreciate in a weak growth environment
(Figure 3). We would expect domestic investment and consumption to suffer as external
borrowings become difficult to roll over (these add up to about 12-13% of GDP for nonfinancial private borrowers) and declining confidence and higher local market rates constrain
local borrowing.
A positive fiscal story may be a risk to our bearish BRL view

The main risk to our bearish BRL view comes from tighter fiscal policy, which could move
the central bank from its stance and make local assets attractive again. This would tighten
the market pricing of credit risks - 5y sovereign CDS currently stands at 283bp, vs a 163
average in 2014 (Figure 4).
Indeed, the recent approval of the 2015 budget suggests that there may be scope for such
an improvement. We believe that better coordination between the government and
Congress could be in the works as President Rousseff becomes less isolated and
increasingly hands off economic policy to Ministers Levy and Barbosa. We remain confident
that the fiscal adjustment will continue, as 83% of the fiscal measures envisaged thus far do
not depend on Congressional approval.
For now, however, scepticism remains, as evident from the yield differential between
onshore and offshore BRL bonds (NTN-F 2023s at 13.16%, vs 9.38% for Global BRL 2022s,
likely reflecting the threat of a re-imposition of capital controls).
FIGURE 3
Rates and FX tend to become more correlated on extreme
currency moves
FIGURE 4
Brazil 5y CDS is far above levels seen over the past five years
350
%
0.45
300
0.40
0.35
250
0.30
200
0.25
150
0.20
0.15
100
0.10
50
0.05
0.00
<-4%
[-4%,-2%] [0%,-2%]
[2%,4%]
>4%
Correlation between change in USDBRL and Brazil 2y rates

Note: We condition the correlation on the size of the currency move.
26 March 2015
0
Jan-10
Jan-11
Jan-12
Jan-13
Jan-14
Jan-15
Brazil 5y CDS
37
THEME
TRY: Less negative, but still on the sidelines

Durukal Gun
+44 (0)20 3134 6279
durukal.gun@barclays.com
Aroop Chatterjee
+1 212 412 5622
TRY may find some stability in Q2 15 as the USD rally takes a breather. Although TRY
provides attractive carry, we think idiosyncratic risks make it an unattractive long. Nearterm risks include an escalation of political noise around the upcoming parliamentary
elections and a resurfacing of political pressures on the CBT to cut rates. Medium-term
risks include the risks of a sovereign ratings downgrade along with challenging external
vulnerabilities, which may once again become exposed on Fed tightening later this year.
We maintain our fundamentally negative view on TRY into H2 15 (Q4 15: 2.75 and Q1
16: 2.85).
TRY stability increases the risk of further CBT rate cuts

Pressures on CBT to ease will
likely resurface given slowing
growth and higher
unemployment.
A period of sharp TRY depreciation versus the USD and a likely pause in broader USD
strengthening in the near term will likely give way to a more stable exchange rate in Q2 15.
We envisage heightened pressures on the CBT to ease on account of a slowing growth
momentum and higher unemployment (Figure 1). Politicians are unlikely to be patient of tight
monetary policy against a backdrop of an extended election cycle which includes a potential
referendum for a new constitution.
The recent easing cycle has not really delivered the desired effect on the economy, as CBT kept
liquidity tight due to currency weakness (Figure 3). Indeed, the CBTs decision to keep policy
rates unchanged in March was motivated by a need for cautious monetary policy due to
emerging inflation risks (owing to a weaker TRY) and rising market uncertainty. A likely delay of
Fed rate hikes to September may provide a period of FX market stability for the CBT to cut ahead
of local elections in June. We pencil in a 50bp rate cut and expect this to pressure the currency.
External funding still challenging despite CA improvement

The tightening in USD liquidity presents a difficult environment for the TRY in H2 15
considering the large external funding needs of Turkey. Even though the current account
deficit is expected to improve to 4.5% of GDP in 2015, primarily on lower oil prices, we note
that it represents less than 20% of its overall external financing requirement. The maturing
short-term external debt, mainly of the private sector, is large. The CBT estimates USD
166bn of maturing external debt in the next twelve months from January 2015. External
PMI (SA)
-10
Sep-14
-20
Jan-13
-15
Nov-13
10
Jul-10
-5
Feb-15
Industrial Production (%, y/y - 3mma) RHS
Source: Haver, Barclays Research
26 March 2015
Feb-14
20
Mar-12
Feb-13
0
-5
May-11
Feb-12
30
Sep-09
45
Feb-11
39
Jan-08
40
Nov-08
50
34
40
Mar-07
50
15
46 10
50
47
May-06
55
GDP growth (%)
60
Jul-05
10
AKP vote
Sep-04
15
Jan-03
60
FIGURE 2
against this backdrop pressures on the CBT to ease are
likely resurface
Nov-03
FIGURE 1
Indicators suggest a continuation of slowing growth
momentum into Q1 15
Mar-02
External financing requirement

of 25% of GDP dwarfs the
improvement in the CA deficit
Real GDP (%, y/y)

AKP's vote, LHS
4 per. Mov. Avg. (Real GDP (%, y/y))
Source: Haver, Barclays Research
38

financing needs of around USD200bn (or 25% of GDP) will keep Turkey exposed to
refinancing risk, which depends not only on global financial conditions but also on
investors perceptions of Turkey-specific risks.
Elections to refocus scrutiny of sovereign ratings

The rating outlook revolves around the question of whether political risks, policy
uncertainties and government effectiveness could discourage capital inflows, thereby
exposing Turkeys well-known external vulnerabilities. Rating agencies expressed concern
about the quality and predictability of policymaking in Turkey, which would be key to
containing the economys vulnerability should the external environment deteriorate.
Election process and its

outcome will continue to be
focus of rating agencies
We believe the risks to Turkeys IG rating could move back into focus again with the election
cycle: a potential revamping of economic management after the June elections and
outcome leading to redistribution of legislative power could continue to be a focal point for
rating agency scrutiny. While we do not see a significant risk of AKP losing its single-party
government status, the election process (June 7) will be a reminder of unresolved tensions
in society. The main opposition partys plans to emphasise economic themes in the election
campaign is likely to put further pressure on support for AKP given weaker growth outlook.
The June parliamentary election is also critical for President Erdogans plans to amend the
constitution to allow for an empowered presidency.
We remain on the sidelines on TRY for now

The extent to which this some of these external pressures may be alleviated depends on the
substitutability of tightening USD liquidity for rapidly expanding EUR liquidity. This issue will
warrant scrutiny in the coming months and suggests funding any future TRY longs in the EUR.
We think it is still wise to wait on the sidelines as Turkeys idiosyncratic stories play out.
FIGURE 3
CBTs cuts have not have translated into lower market
interest rates
FIGURE4
Large external financing needs leave Turkey exposed to the
external environment
Turkey - External Financing Needs
14
Total
12
10
200
C/A deficit
34
External debt falling due in next 12 months

CBT
166
1.2
Government
Non-financial corporates
(of which trade credit)
Financial institutions
(of which non-resident deposits)
8
6
4
Mar-11
Mar-12
Mar-13
TL Deposit
Interbank O/N (eop)
26 March 2015
Mar-14
1-week repo
2y bond yield
USD bn
4.6
52
30
109
49
Memo item:
CBT gross reserves
(of which FX RR & ROM)
106
68
39
THEME
RUB: Weaker spot but inside USD forwards

The RUB looks set for modest depreciation in 2015, due to lower oil prices, persistent
geopolitical risks around Ukraine and broad USD strength. Additionally, with the CBR
having turned more growth-oriented amid high inflation, monetary policy support for the
currency is likely to wane. These negatives outweigh the improvement in its external
accounts, in our view. We forecast USDRUB at 64.00 by end 2015 and 66.00 by Q1 16.
Eldar Vakhitov
+44 (0)20 7773 2192
eldar.vakhitov@barclays.com
Durukal Gun
+44 (0)20 3134 6279
We think RUB is likely to be only moderately lower in 2015, and a repeat of the mid-December
crisis is unlikely, barring a significant decline in oil prices and a resumption of war in Eastern
Ukraine. The RUB weakened a whopping 47% from peak to trough in 2014 driven by a threefold setback of elevated geopolitical risks surrounding Ukraine, lower oil prices and external
funding pressures. The moves in H2 2014 were enough to reduce the RUBs significant
overvaluation and we now see it close to fair value on an effective exchange rate basis (Figure
1). We do not see compelling reasons for the RUB to sustainably strengthen, however.
Aroop Chatterjee
+1 212 412 5622
We expect oil prices to slightly decline in the coming quarters, eroding support for the RUB.
Geopolitical issues surrounding Ukraine are likely to linger and the central banks switch to a
growth-friendly stance amid high inflation also presents downside risks for the currency. An
improvement in Russias external accounts may cushion its moves as the Fed normalizes
policy in H2 15. However, this is likely to be more than offset by aggressive CBR policy rate
cuts (400bp are expected for the remainder of 2015). Taking into account all of the above,
we expect the RUB to moderately weaken over the coming quarters.
Geopolitical risks on the backburner for now

Following the Minsk peace agreement in February, the situation in Eastern Ukraine has
stabilised in recent weeks. The ceasefire is holding with occasional violations, but almost no
progress has been made towards a resolution of the conflict, which, in our view, maintains
risks of a re-escalation. Russias push for Ukrainian federalization remains a sticking point
and we expect that finding an eventual compromise on the issue will be challenging. An
extension of EU sanctions appears likely and sanctions could be also stepped up if the war
resumes or Russia recognizes the independence of rebel-controlled areas.
FIGURE 1
RUBs sharp decline only puts it at its BEER fair value
FIGURE 2
Poor growth-inflation trade-off complicates the CBRs
monetary policy
Index
18%
340
16%
14%
290
12%
240
10%
190
8%
6%
140
4%
90
40
1996
2%
0%
2001
2011
RUB REER
RUB BEER
(-2SD)
(+2SD)
26 March 2015
2006
-2%
Feb-11
Feb-12
Feb-13
Real GDP (% y/y)
Feb-14
Feb-15
Inflation (% y/y)
Source: Rosstat, Haver Analytics, Barclays Research
40
Slow growth and elevated inflation present a policy dilemma for CBR
The Russian economy is likely to slide deeper into a recession in 2015 (-4% y/y) and remain
there in 2016 (-1% y/y). Although the hydrocarbon sector only has a 20-25% direct weight
in the economy, oils broader economic effects are significantly larger through its effect on
investment (public and private) and consumption (through its effect on incomes and
government spending). Further, the fall in the RUB has had an additional effect on
investment (by constraining external funding) and consumption (by reducing real wages).
Finally, the CBRs 2014 rate hikes are likely to further restrain growth, especially amid a
tightening in bank credit standards.
The policy dilemma is apparent given that inflation is expected to peak above 18% y/y in the
summer (Figure 2). We expect it to moderate only to 14% by year-end, as the impact of the
RUB weakness and food import restrictions continue to be felt but a significant recession takes
its toll on consumer demand. The risks to this path are to the upside from high inflation
expectations, higher-than-expected tariff increases and fiscal policy relaxation.
We believe that the CBR cutting its policy rate further against a background of high inflation
remains risky. The CBRs recent shift to a more growth-friendly policy in cutting its policy rate
by 300bp in Q1 15 has been as a result of government and banking sector pressure.
We think the CBR will likely look through the inflation developments, and continue its cutting
cycle in the coming months, with the aim of bringing the policy rate below 10% by year-end.
This is likely to push real rates in Russia significantly lower on a relative basis versus those in
other EMs and in the major funding currencies (USD and EUR), weighing on the currency.
External accounts show improvement

Russias external accounts have improved as a weaker RUB boosts the C/A surplus (to
USD75bn in 2015 from USD57bn in 2014), capital flight has eased (household and corporate
FX conversions have stabilized) and the bulk of external maturities is already behind us. The
remaining external redemptions for 2015 amount to about USD74bn (USD35bn was already
repaid/rolled over). This has alleviated some of the pressure on the exchange rate along with
the central banks FX liquidity provision through its FX repo operations.
FIGURE 3
Inflation will likely peak in the coming months as sharp RUB
weakness seems to be over, allowing for further rate cuts
68
62
18
56
15
50
44
12
9
6
Mar-13
Sep-13
Mar-14
CPI (% y/y)
USD/RUB, avg (RHS)
Source: CBR, Bloomberg, Barclays Research
26 March 2015
%
3
2
1
0
-1
-2
38
-3
32
-4
26
Sep-14
Mar-15
1w auction repo (%)
-5
RUB
MYR
THB
COP
TWD
PLN
ZAR
HUF
ILS
KRW
CNY
CZK
BRL
TRY
INR
PHP
MXN
IDR
CLP
HKD
21
FIGURE 4
Change in real policy rates by Q4 15 based on Barclays
forecasts compared to the US and euro area
Change in real rates
EUR
USD
41

As the CBR cuts real policy rates in 2015, it is likely that more external borrowings will be
rolled over in the local market, putting further downward pressure on the RUB and upward
pressure on local rates. Although further instability is likely later this year as USD liquidity is
tightened (with the Fed normalizing policy), improved external balances may cushion the
RUB to some extent.
26 March 2015
42
FX VIEWS FOR THE YEAR AHEAD

Currency
G10 views
USD
20
Q2 15
Q3 15
Q4 15
Q1 16
15
Slower US growth and softer inflation have given the Fed reasons to delay and flatten its rate hiking path.
These developments have caught the USD a bit ahead of itself, but given the recent correction, we expect it
to stabilize around current levels. We think the USD is likely to take a break before resuming its uptrend in
H2 or maybe late Q2, albeit at a slower pace. We forecast 5% USD REER appreciation by year-end.
10
5
0
AUD
GBP
JPY
EUR
-5
EUR
5
Q2 15
Q3 15
Q4 15
Q1 16
0
-5
-10
We continue to think that persistently low expected returns on capital and the ECBs commitment to a long
period of low (or negative) interest rates augur for a much lower EUR despite the recent encouraging pickup
in euro area economic indicators. We believe that the euro areas large utilization gap implies that there is
little return on capital expenditure, whereas low-for-longer rates will continue to drive an extension of EUR
hedging activity among longer-term FX market participants and increased use of the currency as a funding
vehicle by short-term participants. Thus, we believe that the EUR has much further to go in its trend
depreciation, albeit at a slower pace and with two-way risks attached.
-15
Q3 15
CHF
JPY
Q2 15
GBP
USD
-20
JPY
20
Q4 15
Q1 16
15
10
5
0
AUD
GBP
EUR
USD
-5
GBP
10
Q2 15
Q3 15
Q4 15
Q1 16
5
0
The yen will likely remain range-bound against the USD in the year ahead because of countervailing factors. On
the one hand, expected USD strength and portfolio rebalancing outflows from Japan may exert upward
pressure. On the other hand, already extended valuations, Japans improving current account, and recent
political rhetoric against sharp yen depreciation should limit the upside. We expect an expansion of ETF
purchases by the BoJ in July, but teh effect on the yen will likely be limited.
While there have been some positive developments on the wage front, subdued inflation dynamics suggest
that the BoJ will maintain its aggressive easing policy for an extended period, keeping the yen weak in the year
ahead despite its overshot valuations. We expect the USDJPY to trade in the current range around 121
throughout 2015. If there are signs of a pickup in inflation dynamics, it may finally allow the JPY to correct for
its sharp undervaluation, but this seems a long way off.
The growing political risk premium ahead of the particularly uncertain 7 May general election should
support higher levels of GBP volatility and place downward pressure on GBP, in our view. This years
election is probably the least predictable in a generation and, combined with a lack of a defined process for
forming a government following a likely hung parliament, means GBP volatility may remain elevated long
after the event a scenario that continues to be underpriced by FX markets, in our view
Economic outperformance relative to the euro area should support continued GBP appreciation versus the
EUR, but significant GBPUSD depreciation is likely in the context of very low inflation and risks of an
extended period of unchanged Bank of England policy.
-5
-10
EUR
JPY
Q3 15
Q4 15
EUR
JPY
CHF
USD
Q2 15
USD
-15
CHF
5
Q1 16
0
-5
We continue to expect significantly negative rates to be a strong disincentive for CHF ownership over the
coming quarters. With the CHF still significantly overvalued according to our BEER model, we expect
deflationary pressures to have a negative effect on inflation and growth. In the short term, we think the SNB
is likely to keep an easing bias, cutting rates and intervening in the FX market if the CHF appreciates
significantly. We forecast EURCHF to appreciate to 1.08 in Q2 before depreciating toward 1.05 by Q1 2016.
-10
-15
GBP
-20
Note: Charts represent expected return of each currency against major crosses based on our FX forecast. Spot reference as of 25 March 2015.
26 March 2015
43

Currency
G10 views
CAD
10
Q2 15
Q3 15
Q4 15
Q1 16
5
0
-5
-10
Oil prices and their effect on Canadas terms of trade are a key determinant of the CADs medium-term fair
value. Although some stabilization in oil prices is expected in coming months, we expect negative terms of
trade to offset some of the CADs cheapness per our BEER model. The negative terms of trade effect of
falling oil prices is likely to hold down income growth and wealth along with slowing investment activity in
Canada. We expect the BoC to keep a dovish bias while it assesses these effects, and further cheapness in
CAD is likely given the divergence in monetary policy expected between the Fed and BoC in coming months.
The prospect of rate cuts in Canada, which we believe the market is under-pricing, suggests that the CAD is
a more reliable short.
AUD
JPY
EUR
USD
-15
AUD
10
Q2 15
Q3 15
Q4 15
Q1 16
5
0
Moderating growth momentum in China, falling commodity prices, and broad USD strength have led to
downward pressures on the AUD. After having declined more than 25% versus the USD since 2013, the
RBA no longer argues that the exchange rate is significantly overvalued relative to fundamentals the RBAs
own fair value model estimates also put the currency at around 2% expensive earlier in Q1. However, we
think that the RBA would be comfortable if the AUD were to overshoot fair value.
AUDUSD has also become increasingly sensitive to yield differentials, and a further narrowing in
Australia/US yield differentials, albeit at a more gradual basis, would leave the AUD exposed to further
weakness. With the RBA likely to cut interest rates by 25bp in May and be open to more easing if needed,
we expect the AUDUSD to extend its decline to 0.72 by year-end (from 0.75 previously).
-5
-10
NZD
JPY
EUR
USD
-15
NZD
5
Q2 15
Q3 15
Q4 15
Q1 16
0
-5
Both AUD and NZD are set to extend their declines, but we expect the latter to fall more quickly than the
former over the coming months. The RBNZ has shifted from a tightening to a neutral stance, and we think
rising downside risks to growth and falling inflation expectations have raised the possibility of RBNZ rate
cuts this year. The ongoing drought in New Zealand represents an emerging risk to the growth outlook and
the NZD, through a reduction in agricultural export revenues.
Considering that the RBNZ has long been frustrated that the exchange rate has not played its usual role in
buffering the economy from lower commodity prices, continued strength in the NZD TWI would mean that
the RBNZ would be more ready to cut rates should growth and inflation weaken more than expected. We
see NZDUSD at 0.68 at end-2015.
-10
-15
AUD
JPY
EUR
USD
-20
SEK
10
Q2 15
Q3 15
Q4 15
Q1 16
5
0
-5
A highly proactive Riksbank with a strong easing bias is likely to keep SEK under pressure in the short term.
The recent shift toward targeting a weaker SEK suggests that the risks of additional easing, in the form of
further negative rates and/or expansions in the existing QE program, remain high for now. Nonetheless,
once inflation stabilizes further, we think strong fundamentals will help support the SEK against other
European currencies such as the EUR and the NOK. Furthermore, SEK undervaluation of about 16%
suggests room for a medium-term correction higher, in our view. We expect EURSEK to increase to 9.50 in
Q2 but see a likely turning point toward the end of the year.
-10
NOK
JPY
EUR
USD
-15
Q2 15
Q3 15
Q4 15
JPY
EUR
USD
NOK
Q1 16
-5
Our expectations for material demand-supply oil imbalances in the near term, coupled with likely lower-forlonger oil prices in the future, imply more downside for the NOK, in our view. Despite the lack of proactive
central bank policy in March, we maintain our view that further easing will eventually have to be delivered
against the backdrop of elevated concerns about financial stability linked to the housing market. We have
raised our Q2 and Q3 forecast for EURNOK to 9.00 and 8.90, respectively.
-10
-15
SEK
-20
26 March 2015
44

Currency
Major EM views
INR
15
Q2 15
Q3 15
Q4 15
Q1 16
10
The INR will remain an attractive proposition to yield-searching investors. In addition, the decline in oil
prices has been a major boon for India, fueling improvements in the fiscal and current account balances
while helping facilitate the policy easing from the RBI. Improving economic and political fundamentals
should also sustain capital inflows to India.
The RBI is mindful of INRs strength on a REER basis and is, thus, likely to limit INR gains against the USD
even as capital inflows persist. But with attractive carry, INR longs still offer a healthy carry and risk-adjusted
return, especially when with a lower yielder such as TWD. We expect the INR to remain an EM FX
outperformer on a total return basis. As such, we recommend a long INRTWD trade.
5
0
-5
GBP
JPY
EUR
USD
-10
TWD
10
Q2 15
Q3 15
Q4 15
Q1 16
5
0
-5
CNY
JPY
EUR
USD
-10
CNY
15
Q2 15
Q3 15
Q4 15
Q1 16
10
We look for spot depreciation of the TWD to 32.80 by end-2015, in line with the move higher in the USD
against regional currencies. However, total TWD returns are also likely to be low, as NDF yields are low. We
recommend being short TWD against the higher-yielding INR.
Pressure on the CNY is likely to remain in place as the USD continues to strengthen and competitor
currencies weaken. Moderating growth in China and further likely monetary policy easing suggest that the
impetus will be for further FX depreciation to complement such policy. The CNY REER has been on an
appreciating trend even as spot USDCNY has moved higher, implying growing competitive pressures.
We continue to look for a combination of higher fixings and band widening in the months ahead. However,
we are cognizant of the fact that China may not widen the band when market speculation is more intense.
The recent pullback in USDCNY may give Chinese authorities an opportunity to enact a policy change. As
such, we continue to recommend being long USDCNH and maintain our end-2015 USDCNY forecast of
6.40.
5
0
-5
TWD
JPY
EUR
USD
-10
KRW
15
Taiwan has seen strong equity inflows this year due to a positive growth outlook based on tech sector
strength, a tourism boom, and a growing current account surplus. However, against the backdrop of
continued USD strength, concerns about export competitiveness will likely drive the CBC to continue FX
intervention to limit TWD gains. Like Korea, Taiwan competes closely with Japan in key export markets such
as the US and China. Meanwhile, resident portfolio outflows in Taiwan are accelerating, with the broad USD
strength leading asset managers to reduce FX hedge ratios (ie, sell USDTWD forward) on their overseas
investments.
Q2 15
Q3 15
Q4 15
Q1 16
10
5
0
We see risk of further KRW weakness versus the USD. Weak external demand for Korean exports and a
sluggish recovery in domestic activity are driving the government to adopt more policy easing, including
risks of BoK rate cuts in coming months. KRW strength will likely continue to be resisted by authorities as
the JPY and other trade partner currencies remain weak versus the USD. Koreas current account has
widened because of lower oil imports, but the surplus is increasingly being recycled overseas through
resident portfolio outflows as the US-Korea yield gap narrows. We forecast that the USDKRW will reach
1140 by end-2015.
-5
CNY
JPY
EUR
USD
-10
MYR
10
Q2 15
Q3 15
Q4 15
Q1 16
5
0
-5
-10
SGD
JPY
EUR
USD
-15
Although the MYR has fallen sharply alongside the drop in the terms of trade, our commodities team sees
risk of a renewed drop in oil prices with the fading of recent transient factors. We thus expect Malaysias
current account surplus to narrow to 2.3% of GDP in 2015, a severe deterioration from past years when the
current account hit a peak of near 18% of GDP. The MYR is more vulnerable to capital outflows as the Fed
tightens, given a relatively higher share of foreign ownership in local fixed income compared with regional
peers.
Authorities are monitoring the MYRs move closely and are taking measures (FX intervention and GLCs
putting on hold overseas asset purchases) to slow its decline. However, given falling FX reserves (USD109),
they do not seem inclined to draw a line in the sand in FX intervention to put a halt to the MYRs fall. We
forecast that USDMYR will increase to 3.95 by end-2015.
26 March 2015
45

Currency
Major EM views
SGD
10
Q2 15
Q3 15
Q4 15
Q1 16
The MAS was, in recent years, highly concerned about sticky core inflation, as Singapores ongoing
restructuring drive to reduce dependence on foreign labor was pushing up wage inflation while weighing on
manufacturing exports at the same time. However, core inflation (excluding transport and housing prices)
has softened of late because of lower oil prices. This drove the MAS to announce an intra-meeting policy
easing to reduce the slope of its SGD NEER policy band.
The market is cautious about further easing by the MAS in April, and we think the SGD NEER is likely to trade
close to the lower band ahead of the policy review. We view the policy risk in Singapore as slightly biased
toward greater accommodation of SGD volatility, and as such, we recommend being short SGD against PHP.
0
-5
MYR
JPY
EUR
USD
-10
MXN
5
Q2 15
Q3 15
Q4 15
Q1 16
0
-5
The MXN will remain under pressure derived from the normalization of monetary policy in the United States
combined with the quantitative easing process in Europe. The USD will likely grow stronger against the
euro, and the Mexican peso should reflect this performance. In that sense, we estimate that the USDMXN
will reach 16.50 by year-end, implying an additional 8% nominal depreciation from current levels. We will
likely see additional FX pass-through to the CPI, but this will be reflected later in 2016 and should be limited
and add no more than an additional 20-25bp to inflation.
-10
EUR
JPY
Q3 15
Q4 15
EUR
JPY
CAD
USD
Q2 15
USD
-15
BRL
10
Q1 16
5
0
BRL offers value, but we will wait for the central bank to place itself ahead of the curve. High risk premia on
domestic assets, along with a weaker BRL, would ordinarily be an inviting proposition to be long the
currency. We are not constructive, however. Despite elevated inflation expectationsand the conclusion of its
currency swap program, we believe the BCB is close to ending its hiking cycle. A central bank that is behind
the curve on inflation, against a backdrop of weak growth and elevated domestic political uncertainty, is
likely to pressure the BRL lower in coming months. We expect USDBRL to be at 3.45 by Q4 2015.
-5
-10
AUD
-15
RUB
5
Q2 15
Q3 15
Q4 15
Q1 16
RUB might have turned the corner, and a repeat of the mid-December crisis is unlikely barring a significant
decline in oil prices and a resumption of war in Eastern Ukraine. Policymakers focus on financial stability
and improvement in its external accounts should also remain supportive. We forecast a modest
depreciation in USDRUB, as monetary policy support will gradually fade given CBRs growth bias.
-5
-10
-15
GBP
JPY
EUR
USD
-20
ILS
10
Q2 15
Q3 15
Q4 15
Q1 16
We maintain our bias for USDILS to go higher, although we would wait for better entry levels given a likely
deceleration in the pace of broader USD strength in 2Q15. While recovery in economic growth and current
account surplus could re-ignite appreciation pressures, the BoIs bias is for a weaker shekel, and it could
potentially initiate QE in order to engineer ILS depreciation, in our view, in addition to cutting rates further
and possible negative interest rates.
0
-5
GBP
JPY
EUR
USD
-10
26 March 2015
46

Currency
Major EM views
PLN
0
Q2 15
Q3 15
Q4 15
Q1 16
-5
PLN is benefiting from ECB asset purchases, and NBP cut its policy rate again after a delay in Q1 2015 that
followed PLN strengthening. Once again, further cuts appear unlikely unless deflation is extended beyond
current estimates, growth slows further, and PLN strength versus the EUR persists. We expect the PLN to
stabilize and expect modest weakness versus the EUR and, therefore, continue to see USDPLN directionality
higher in line with our bearish EUR/USD view.
-10
-15
CZK
JPY
EUR
USD
-20
Q2 15
Q3 15
Q4 15
Q1 16
EUR
JPY
GBP
USD
ZAR
0
-5
-10
-15
HUF
5
Q2 15
Q3 15
Q4 15
Q1 16
We favor fading ZAR rallies over the medium term, because as a high-yielding, commodity-based currency
with a large current account deficit, the ZAR is particularly vulnerable to looming US policy rate increases
and associated broad-based USD strength. SA real interest rates are expected to start declining again in the
coming months as inflation heads higher because of increased food, administrative, and fuel price
pressures. We do not expect the SARB to stand in the way of extended ZAR depreciation, partly because SA
has relatively low foreign debt exposure and also because of countrys moderate FX reserve levels.
Downside risks to SAs growth outlook, due to mounting electricity supply constraints and heightened
concerns of another sovereign credit rating downgrade in June, would also be conducive to a weaker ZAR
environment in the coming months. We do not believe that market positioning is exceptionally short ZAR
yet, but market valuations and the fact that many local asset managers will need to repatriate some of their
offshore allocations to comply with onshore excon regulations could help restrict ZAR weakness.
We expect EURHUF to be stable in the near term, which dovetails nicely with our view of a likely pause in
broad-based USD strengthening in 2Q15. Hungary will likely benefit from QE flows, as fundamentals have
improved (as confirmed by the recent positive rating action) and current yield levels offer an attractive entry
point within the context of the broader European region, which should provide some support.
-5
-10
-15
PLN
JPY
EUR
USD
-20
TRY
10
Q2 15
Q3 15
Q4 15
Q1 16
5
0
TRY may find some stability in Q2 2015 as the USD rally takes a breather. Although TRY provides attractive
carry, we think idiosyncratic risks make it an unattractive long. Near-term risks include an escalation of
political noise about the upcoming parliamentary elections and a resurfacing of political pressure on the
CBT to cut rates. Medium-term risks include the risks of a sovereign ratings downgrade, along with
challenging external vulnerabilities, which may once again become exposed on Fed tightening later this
year. We maintain our fundamentally negative view on TRY into H2 2015 (Q4 2015: 2.75)
-5
-10
GBP
JPY
EUR
USD
-15
CZK
5
Q2 15
Q3 15
Q4 15
Q1 16
Growth has been a little disappointing, and inflation remains muted. The EURCZK has appreciated on
speculation that the CNB might abandon the peg following CHF appreciation. We think this is unlikely. The
CNB appears determined to keep the one-sided currency peg in place until inflation rises toward the 2%
target midpoint. The CNB might possibly consider increasing the peg to 28 if it comes under further
speculative attacks.
-5
-10
-15
PLN
JPY
EUR
USD
-20
26 March 2015
47
OPEN/CLOSED TRADES
Open trades, as of 25 March 2015

Original
Trade/date/macro views
Long USDCNH targeting 6.3615 (stop loss: 6.1414), 24/9/2014
Mark to market
Spot
reference
%
of notional
Expiry
Current
spot
reference
6.1414
6.2112
Net profit
since
inception
Net
profit
(since
30/1)
+0.84%
+1.89%
Initial rationale: We expect Chinas weaker growth trajectory to be consistent with some depreciation in the CNY. To avoid significant REER
appreciation to an already strong currency, in the face of a strong USD, we expect the authorities to condone a move in USDCNY to 6.35 in 12m,
breaking the trend of multi-year appreciation of the CNY.
Short EURUSD target 1.00 (stop loss: trailing 50-day moving
average), 29/9/2014
1.2787
1.0985
+13.39%
+2.69%
Initial rationale: A worsening economic outlook and more rapid disinflation in the euro area imply that ECB accommodation will be kept for
longer and perhaps be increased in scale, opening further downside potential in the common currency. The broad-based USD rally looks set to
continue as robust US growth shines amid a softening global economy, and upside risks to the Feds policy path make it the best strategic long.
Long USDCAD spot (target: 1.3050, stop: 1.2210), 25/2/2015
1.2460
1.2519
0.61%
We see significant unpriced risks of additional, much needed stimulus from the BoC. We believe the recent retracement in rate cut expectations
is an opportunity to buy USDCAD.
Short SGDPHP 6-month NDF (target: 30.8000, stop: 33.6550),
26/3/2015
32.6835
32.6835
The SGD is one of the most vulnerable currencies, with relatively low interest rates and the prospect of further monetary policy accommodation.
In contrast, PHP is expected to be among the top performers, given a solid current account surplus, low level of external borrowings, and
relatively mild foreign ownerships in local assets.
Long INRTWD 6-month NDF (target: 0.53450, stop: 0.48520),
26/3/2015
0.50164
0.50164
The TWD is one of the most vulnerable Asia currencies, with moderating growth in China a negative development and competitive pressures
from a weak JPY likely limiting the central banks tolerance for a stronger TWD. In contrast, the INR remains one our favored currencies because
of the improvement in fundamentals and reform prospects.
26 March 2015
48
FX closed trade recommendations, as of 25 March 2015

Original
Trade, Date
Long MXN/JPY, 11/12/2012
Spot
reference
Mark to market at time of closing
Cost as %
of notional
Closed on
Closing spot
Profit as a %
of notional
6.48
03/06/2013
7.8764
+22.29%
610 pips
12/06/2013
6.1432
-1.48%
Short USD/MYR 6m forward, stop-loss at 3.05, 9/5/2013
3.013
23/05/2013
3.05
-1.33%
Short ZAR/INR, stop-loss at 6.20, 9/5/2013
6.02
31/05/2013
5.60
+7.27%
Long BRL/TRY, 3/19/2013
0.9192
6/20/2013
0.8585
-6.804%
Long USD/JPY, 3/5/2013
98.95
3/6/2013
99.80
+0.86%
Short GBP/USD, 21/3/2013
1.5164
14/6/2013
1.5679
-3.40%
Long EUR/USD spot, stop-loss: 1.34, target: 1.28, 20/6/2013
1.3225
11/7/2013
1.3100
+0.95%
Long USD/JPY spot, stop-loss: 94.00, target: 103, 20/6/2013
97.44
22/7/2013
99.50
2.11%
Long USD/ILS, stop-loss: 3.55, target: 3.70, 18/06/2013
3.5909
6/8/2013
3.5500
-1.14%
Short AUD/USD spot, stop: 0.9350, target: 0.88, 11/7/2013
0.921
8/8/2013
0.905
+1.74%
Short AUD/MXN spot, stop: 11.70, 18/7/2013
11.45
26/7/2013
11.7
-2.18%
Short USD/CNH 12m-3m forward spread, stop-loss at

900 pips, 9/05/2013
USD/CNH via a 1m ATM-F USD/CNH call option

(strike 6.1613), 18/06/2013
0.25%
18/7/2013
-0.25%
Long MXN/SGD, stop-loss: 0.0940, target: 0.100,

18/06/2013
0.0978
18/7/2013
0.1013
+3.58%
Short EUR/USD spot, stop: 1.3275, 30/7/2013
1.3066
26/7/2013
1.3275
-1.60%
Short SGD/INR by through a 1m risk reversal

(strikes: 45.0 and 49.0) for zero cost, 18/06/2013
46.6128
0%
18/7/2013
47.09
0%
Long GBP/USD 6m/6m FVA, 21/02/2013
10.05%
22/08/2013
7.92%
-2.13%
2m ATMF GBP put/USD call (1.4892 strike, 1x notional),

selling a 2m 1.45 strike GBP put/USD call (1.5x notional),
5/7/13
1.4892
0.52%
5/09/2013
1.5526
-0.52%
Short EURUSD target: 1.28, stop: 1.3450, 30/7/2013
1.3266
20/08/13
1.3450
-1.39%
Short EURPLN, target: 4.15, stop: 4.32, 1/8/2013
4.26
22/08/13
4.23
+0.70%
1119.40
ATM vol: 7.24%
0%
26/09/2013
0%
Short TWD/PHP, stop-loss: 1.47, target:1.36, 18/06/2013
1.4428
22/08/2013
1.467
-1.89%
Long PEN/COP, stop-loss: 670, target: 730, 18/06/2013
687.288
08/09/2013
670
-2.54%
Long 1w GBP put / USD call
1.5599
0.29%
29/8/2013
1.5507
+0.05%
Short 1m NDF SGD/MYR, stop-loss: 2.60. 27/09/2013
2.5680
1/10/2013
2.60
-1.25%
Short AUD/CNH spot, stop-loss: 5.88, target: 5.40,

25/9/2013
5.72
22/10/2013
5.88
-2.80%
Long BRL/JPY spot, stop-loss: 44.00, target: 47.00,

22/10/2013
45.16
1/1/2013
44.00
-2.60%
Short 1m NDF SGD/MYR, stop-loss: 2.60. 27/09/2013
USDKRW 6wk risk-reversal (strikes: 1140 and 1111)

15/8/13
2.5680
1/10/2013
2.60
-1.25%

25/9/2013
5.72
22/10/2013
5.88
-2.80%
Long BRL/JPY spot, stop-loss: 44.00, target: 47.00,

22/10/2013
45.16
1/1/2013
44.00
-2.60%
497.41
4/11/2013
515
+2.38%
Short SGD/MYR spot, stop-loss: 2.58, target: 2.50,

4/11/2013
2.557
28/11/2013
2.58
-0.90%

22/10/2013
5.88
4/12/2013
5.50
+6.46%
USD/ARS: 5.0955
24/6/2013
USD/ARS: 5.342
+5.81%
USD/COP: 1890
8/11/2013
USD/COP: 1937
+2.21%
Long USD/CLP spot, stop-loss: 492, target: 515,

26/09/2013
Sell 3m USD/ARS NDF (ref. 5.65), 3/19/13

Long USD/COP, 9/26/13 (target: 1937; stop: 1870)
26 March 2015
49

Original
Spot
reference
Cost as %
of notional
Closed on
Closing spot
USDZAR: 9.9916
USDTRY:1.8863
USDMXN: 12.8955
USDPHP: 43.115
9/12/2013
USDZAR: 10.3844
USDTRY :2.0133
USDMXN: 12.8720
USDPHP: 44.1300
+2.53%
Long GBP/USD put spread 1.60-1.55, 25/9/2013
1.6050
1.05%
9/12/2013
1.6426
-0.65%
Short AUD/NZD spot (target: 1.10, stop: 1.1670),

5/12/2013
1.1490
5/12/2013
1.10
+4.26%
Short AUD/CNH spot (target: 5.00, stop: 5.75), 5/12/2013
5.499
5/2/1014
5.3530
+2.66%
Short USD/BRL (target: 2.25, stop: 2.43), 6/12/2013
2.35
24/1/2014
2.43
-2.12%
Short USD/MXN (target: 12.70, stop: 13.12), 6/12/2013
13.00
2/1/2014
13.12
-0.74%
Long RUB/CZK spot (target: 0.64, stop: 0.60), 07/11/2013
0.620
21/1/2014
0.60
-1.64%
Short EUR/PLN spot (target: 4.25, stop: 4.05), 25/9/2013
4.22
31/1/2014
4.25
-1.91%
Long EUR/USD put spread 1.3680-1.32, 21/10/2013
1.3677
1.04%
21/1/2014
1.3536
+0.01%
Short EUR/USD spot (target: 1.34, stop: 1.38), 28/1/2014
1.3670
28/2/2014
1.3800
-0.95%
Short THB/KRW spot (target: 31.50, stop: 33.35),

10/12/2013
32.675
33.35
-1.89%
Short AUD/USD spot (target: 0.86, stop: 0.91) , 7/2/2014
0.8950
7/3/2014
0.91
-1.68%
Short EUR/GBP spot (target: 0.80, stop: 0.85), 9/12/2013
0.8364
0.8305
+0.75%
Long 3m USD/JPY 1x2 call spread 102.90-107, 2/12/2013
102.30
0.70%
28/2/2013
102.22
-0.70%
Long PLN/HUF spot (target: 74.0, stop: 69.0), 22/10/2013
70.40
10/2/2013
74.00
+5.16%
Short USD/BRL spot (target: 2.28 , stop: 2.46),

10/2/2014
2.41
2.30
+5.30%
Long USD/ZAR spot (target: 11.60, stop: 10.90)

10/2/2014
11.14
10.90
-2.16%
Short EUR/long PLN spot (target: 4.10, stop: 4.28)

10/2/2014
4.183
4.2018
-0.20%
Long USDZAR spot (target: 11:50, stop: 10.80), 20/3/2014
10.94
25/3/2014
10.80
-1.28%
Long USDTRY spot (target: 2.35, stop: 2.15), 10/2/2014
2.21
31/3/2014
2.15
-2.71%
Long USDRUB spot (target: 38.0, stop: 35.25), 20/3/2014
36.1545
31/3/2014
35.25
-2.50%
Short AUDNZD spot (target: 1.03, stop: 1.0765), 20/3/2014
1.0591
2/4/2014
1.0765
-1.64%
Long USDJPY spot (target: 105, stop: 102.60), 7/2/2014
102.30
8/4/2014
102.60
+0.29%
Short USDINR spot (target: 59.0, stop: 62.5), 10/2/2014
62.5
14/4/2014
60.18
+3.72%
Short USDBRL spot (target: 2.1740, stop: 2.26), 3/21/2014
2.33
8/5/2014
2.2126
+6.43%
Long MYRTHB spot (target: 10.19, stop: 9.75), 20/3/2014
9.8273
2/6/2014
10.19
+3.66%
Trade, Date
Short basket of ZAR and TRY vs MXN and PHP
(target: 105, stop: 97), 18/6/2013
Profit as a %
of notional
Long USDJPY spot (target: 105, stop: 101.30) , 8/4/2014
102.10
19/5/2014
101.30
-0.79%
Short 3m USDINR strangle 59-62, 8/5/2014
59,9750
-2.08%
28/5/2014
58.9361
+0.62%
13.33
25/6/2014
13.0121
+3.40%
NDF: 12300
2/6/2014
NDF: 12500
-1.63%
Short EURIDR (target: 15905, stop: 16,650), 25/6/2014
16437
7/7/2014
15905
+3.24%
Short TRYRUB spot (target 15.0, stop 16.30), 26/5/2013
15.8256
17/7/2014
16.47
-3.00%
Short EURPLN spot (target 4.05, stop 4.190), 26/6/2014
4.1424
31/7/2014
4.1785
-0.66%
Short EURBRL spot (target: 2.9360, stop 3.0793), 8/5/2014
3.0672
8/8/2014
3.0793
+2.24%
Long 3m AUDUSD ATMF (0.9332)-0.91 1x1 put spread,

8/5/2014
0.9391
0.83%
8/8/2014
0.9313
+0.20%
Long AUDNZD spot (target: 1.1085, stop: 1.0609),

25/6/2014
1.0740
20/8/2014
1.1085
+3.21%
Short EURJPY spot (target: 133.50, stop: 142.57)
139.80
21/8/2014
137.92
+1.34%
Short SGDMYR spot (target: 2.5277, stop: 2.5961),

25/6/2014
2.5777
28/8/2014
2.5277
+1.94%
Short USDMXN spot (target: 12.75, stop: 13.60), 10/2/2014

Short USDIDR 12m NDF (strike: 12300, target: 11200,
stop: 12500), 20/3/2014
Short EURGBP (stop: 0.8040)
0.8004
8/9/2014
0.8000
+0.05%
Long EURCHF spot (target 1.26, stop 1.1990), 25/9/2013
1.2300
23/9/2014
1.2074
-1.84%
26 March 2015
50

Original
Spot
reference
Cost as %
of notional
Closed on
Closing spot
Profit as a %
of notional
Long USDPLN targeting 3.32 (stop loss: 3.16), 4/9/2014
3.220
30/9/2014
3.32
+2.05%
Short EURUSD targeting 1.2815 (stop loss: 1.3438).

21/8/2014
1.3280
29/9/2014
1.2815
+3.53%
Short TRYBRL targeting 0.9829 (stop loss: 1.0870),

8/8/2014
1.0643
1/10/2014
1.0870
-3.48%
Short SGDPHP spot (target: 34.3784, stop: 35.3727),

27/6/2014
35.0121
1/10/2014
35.3727
-1.03%
Long USDSGD (target:1.2870, stop: 1.2577), 24/9/2014
1.2652
4/11/2014
1.2870
+1.71%
Long TWDKRW (target 35.6000, stop: 33.9700), 24/9/2014
34.4586
6/11/2014
35.6000
+3.26%
Long AUDNZD targeting 1.1380 (stop loss: 1.0870),

20/11/2014
1.0960
26/11/2014
1.0960
-0.82%
Short EURJPY spot (target: 142.10, stop 148.50),

26/11/2014
146.75
12/12/2014
148.50
-1.19%
Short EURIDR targeting 14815 (stop loss: 15920),

10/10/2014
15547
12/12/2014
1544.4
+1.87%
Short EURINR targeting 74.437 (stop loss: 82.519),

28/8/2014
79.673
12/12/2014
79.673
+4.24%
Trade, Date
Short EURTRY targeting 2.60 (stop loss: 2.86). 20/11/2014
2.80
12/12/2014
2.60
-1.55%
Long THBTWD targeting 0.9765 (stop loss: 0.9140),

20/11/2014
0.9346
13/1/2015
0.9765
+3.80%
Long USDCHF spot, 21/03/2013
0.9464
15/1/2015
0.8500
-6.76%
Long USDHUF targeting 260 (stop loss: 237), 24/9/2014
241.6
26/12/2014
260
+7.25%
Long USDNOK spot (target: 8.2900, stop: 7.5420),

30/1/2015
7.7291
2/3/2015
7.5420
-2.42%
Long USDSEK spot (target: 9.0150, stop: 8.4800),

30/1/2015
8.2859
18/3/2015
8.4800
2.34%
Long USDNOK risk reversal (call purchase/put sale)

13/3/2015
8.2111
24/3/2015
7.8572
-0.50%
Short EURJPY risk reversal (call sale/put purchase),

11/2/2015
1.3655
25/3/2015
131.30
0.31%
26 March 2015
51
FORECAST TABLES
Forecasts
EUR/USD
Forecast vs Outright Forward
Spot
Q2 15
Q3 15
Q4 15
Q1 16
Q2 15
Q3 15
Q4 15
Q1 16
1.10
1.05
1.00
0.98
0.95
-4.4%
-9.1%
-11.2%
-14.1%
USD/JPY
120
121
121
121
118
1.3%
1.5%
1.7%
-0.5%
GBP/USD
1.49
1.42
1.39
1.38
1.36
-4.5%
-6.6%
-7.2%
-8.8%
USD/CHF
0.96
1.03
1.07
1.08
1.11
7.6%
12.4%
14.2%
17.3%
USD/CAD
1.25
1.28
1.30
1.32
1.36
2.1%
3.6%
5.2%
8.4%
AUD/USD
0.79
0.77
0.73
0.72
0.72
-1.5%
-6.2%
-7.1%
-6.8%
NZD/USD
0.76
0.73
0.70
0.68
0.67
-3.6%
-6.8%
-8.8%
-9.4%
EUR/JPY
131
127
121
119
112
-3.2%
-7.8%
-9.6%
-14.5%
EUR/GBP
0.74
0.74
0.72
0.71
0.70
0.1%
-2.7%
-4.3%
-5.8%
EUR/CHF
1.05
1.08
1.07
1.06
1.05
2.9%
2.2%
1.5%
0.8%
EUR/SEK
9.31
9.50
9.30
9.10
8.90
2.0%
-0.1%
-2.2%
-4.3%
EUR/NOK
8.60
9.00
8.90
8.80
8.70
4.3%
2.8%
1.4%
0.0%
USD/CNY
6.21
6.27
6.38
6.40
6.42
1.2%
1.9%
1.3%
0.8%
USD/HKD
7.76
7.76
7.76
7.76
7.76
0.0%
0.0%
0.0%
0.0%
USD/INR
62.25
63.20
64.50
64.50
64.50
-0.5%
-0.1%
-1.6%
-3.0%
USD/KRW
1105
1110
1130
1140
1150
0.6%
2.2%
3.0%
3.8%
USD/SGD
1.37
1.39
1.42
1.44
1.45
1.4%
3.3%
4.6%
5.2%
USD/TWD
31.32
32.00
32.70
32.80
32.90
2.6%
4.9%
5.2%
5.6%
USD/BRL
3.14
3.17
3.35
3.45
3.45
-2.3%
0.4%
1.0%
-1.2%
USD/MXN
14.92
15.50
16.13
16.50
16.50
3.3%
6.8%
8.5%
7.8%
EUR/CZK
27.39
27.50
27.60
27.70
27.80
0.5%
1.0%
1.5%
2.1%
EUR/PLN
4.08
4.12
4.14
4.16
4.18
0.4%
0.5%
0.5%
0.6%
USD/RUB
57.92
59.00
62.00
64.00
66.00
-0.6%
1.2%
1.6%
2.0%
BSK/RUB
59.60
60.33
62.00
63.42
64.52
-2.7%
-3.2%
-3.8%
-4.8%
USD/TRY
2.56
2.55
2.65
2.75
2.85
-2.6%
-0.8%
0.9%
2.7%
USD/ZAR
11.80
12.40
12.80
13.00
13.15
3.5%
5.2%
5.2%
4.8%
Percent deviation from PPP (+ overvaluation/- undervaluation)

As of 25/3/15
EUR
USD
AUD
CAD
CHF
GBP
JPY
SEK
NOK
NZD
vs EUR
0%
14%
21%
5%
30%
7%
-8%
-17%
-7%
38%
vs USD
-14%
0%
7%
-9%
16%
-8%
-23%
-31%
-21%
24%
Note: Daily updates for this table are available on Barclays Live: https://live.barcap.com/BC/barcaplive?menuCode=MENU_FI_FX_GLB_FXH.
Source for all tables: Barclays Research
20%
20%
21%
CNY
CHF
PHP
23%
16%
TRY
22%
14%
AUD
NZD
14%
HUF
RON
13%
SGD
6%
ILS
11%
6%
CZK
11%
5%
RUB
4%
PLN
10%
2%
IDR
GBP
THB
1%
-1%
1%
-1%
BRL
DKK
HKD
-1%
MXN
-3%
-4%
MYR
-6%
CAD
KRW
-7%
COP
-9%
-16%
-12%
-17%
SEK
INR
-20%
ZAR
NOK
EUR
-22%
-70%
JPY -32%
-50%
ARS
-30%
TWD
10%
-10%
0%
30%
CLP
50%
USD
Percent deviation from BEER (+ overvaluation/- undervaluation)
Note: Spot data are as of 24 March 2015. For the details of our BEER model, see Currency valuation from a macro perspective, 14 June 2011.
26 March 2015
52

Other FX forecasts
Emerging Markets FX Forecasts
Forecast vs Outright Forward
Spot
Q2 15
Q3 15
Q4 15
Q1 16
Q2 15
Q3 15
Q4 15
Q1 16
USD/IDR
12912
13250
13800
14100
14120
-0.2%
1.8%
2.1%
0.5%
USD/MYR
3.65
3.76
3.90
3.95
3.97
1.5%
4.5%
5.1%
5.0%
0.1%
2.1%
2.9%
3.0%
USD/PHP
44.67
45.00
46.00
46.50
46.70
USD/THB
32.50
33.00
34.00
34.50
34.70
0.8%
3.2%
4.0%
3.9%
USD/ARS
8.79
9.34
10.11
11.56
14.74
-0.6%
0.5%
1.7%
16.5%
USD/COP
2514
2550
2550
2550
2500
-0.4%
-1.3%
-2.1%
-4.8%
USD/CLP
622
630
665
675
675
1.0%
5.7%
6.5%
5.7%
USD/PEN
3.06
3.10
3.16
3.20
3.23
0.1%
0.6%
0.8%
0.6%
EUR/HUF
298
298
300
302
304
-0.4%
0.0%
0.3%
0.6%
EUR/RON
4.42
4.42
4.44
4.46
4.48
-0.1%
0.0%
0.0%
0.0%
USD/ILS
3.92
3.90
4.15
4.20
4.25
-1.2%
5.3%
6.9%
8.5%
USD/EGP
7.63
7.63
7.84
7.91
7.95
-3.0%
-4.1%
-6.4%
-8.9%
Long-term FX forecasts
18 Month
2 Year
3 Year
4 Year
5 Year
0.98
1.01
1.04
1.07
1.10
EUR
JPY
116
114
111
109
107
GBP
1.38
1.41
1.43
1.46
1.48
CHF
1.11
1.11
1.11
1.11
1.11
CAD
1.34
1.32
1.29
1.27
1.25
AUD
0.70
0.71
0.71
0.71
0.72
NZD
0.64
0.64
0.63
0.63
0.62
EUR/JPY
113
114
115
115
116
EUR/GBP
0.71
0.72
0.73
0.73
0.74
EUR/CHF
1.09
1.12
1.16
1.19
1.23
EUR/SEK
8.79
8.69
8.58
8.48
8.37
EUR/NOK
8.63
8.56
8.49
8.42
8.35
2Q 15
3Q 15
4Q 15
Policy rate forecasts (%, end of quarter)

Current
FOMC
BoJ
1Q 15
0-0.25
0-0.25
0-0.25
0.25-0.50
0.50-0.75
0.10
0-0.10
0-0.10
0-0.10
0-0.10
MPC
0.50
0.50
0.50
0.50
0.75
ECB
0.05
0.05
0.05
0.05
0.05
RBA
2.25
2.25
2.00
2.00
2.00
RBNZ
3.50
3.50
3.50
3.50
3.50
Source for all tables: Barclays Research
26 March 2015
53
GLOBAL FOREIGN EXCHANGE RESEARCH

Global
Jose Wynne
Head of FX Research
+1 212 412 5923
Global FX
Marvin Barth
Head of European FX Strategy
+44 (0)20 313 43355
Aroop Chatterjee
Head of FX Quantitative Strategy
+1 212 412 5622
David Fernandez
Head of FICC Research, Asia Pacific
+65 6308 3518
david.fernandez@barclays.com
Durukal Gun
EM/FX Strategist
+44 (0)20 313 46279
Hamish Pepper
FX Strategy
+ 44 (0)20 777 30853
Shinichiro Kadota
FX Strategy
+81 3 4530 1881
shinichiro.kadota@barclays.com
Michael Keenan
South Africa FX Strategist
+27 (0) 11 895 5513
mike.keenan@absacapital.com
Mitul Kotecha
Head of FX Strategy, Asia Pacific
+65 6308 3093
Ndzutha Mngqibisa
South Africa FX Strategist
+27 (0)11 895 5345
ndzutha.mngqibisa@barclays.com
Dennis Tan
FX Strategist, Asia-Pacific ex-Japan
+65 6308 3065
Yuki Sakasai
FX Strategy
+1 212 412 5652
yuki.sakasai@barclays.com
FX Strategy
+ 44 (0)20 355 51578
nikolaos.sgouropoulos@barclays.com
Technical Strategy
Lynnden Branigan
Technical Strategy Europe
+44 (0)20 3134 3017
lynnden.branigan@barclays.com
26 March 2015
Judy Padayachee
Technical Strategy South Africa
+ 27 21 927 6435
Judy.padayachee@absacapital.com
54
Analyst Certification
We, Aroop Chatterjee, Jose Wynne, Yuki Sakasai, Hamish Pepper, Nikolaos Sgouropoulos, Bruno Rovai, Durukal Gun, Eldar Vakhitov, Shinichiro Kadota,
Mitul Kotecha, Dennis Tan and Marvin Barth, hereby certify (1) that the views expressed in this research report accurately reflect our personal views about
any or all of the subject securities or issuers referred to in this research report and (2) no part of our compensation was, is or will be directly or indirectly
related to the specific recommendations or views expressed in this research report.
Important Disclosures:
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Barclays Global FX Quarterly Brief Break in The USD Uptrend

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Foreign Exchange Research

Barclays | Global FX Quarterly

Theme 1: EUR ............................................................................................10

Theme 2: JPY ..............................................................................................15

Theme 3: GBP ............................................................................................17

Theme 4: SEK and CHF ...........................................................................20

Theme 5: CAD and NOK .........................................................................23

Barclays | Global FX Quarterly

Theme 6: CNY ............................................................................................25

Theme 7: AUD and NZD .........................................................................28

Theme 8: EM Asia .....................................................................................32

Theme 9: BRL .............................................................................................36

Theme 10: TRY ..........................................................................................38

Theme 11: RUB..........................................................................................40

FX Views for the Year Ahead .................................................................43

Barclays | Global FX Quarterly

2. Long USDCAD spot

3. Long USDCNH spot

Relative value trades

Barclays | Global FX Quarterly

Brief break in the USD uptrend

An enticing global backdrop for FX

A remarkably desynchronized global recovery, volatile oil markets, unconventional and

The Fed change of stance and

Barclays | Global FX Quarterly

How high can the USD go?

Three features of this recovery

First, the USD appreciation

vs. REER ave

USD rel. OG (LHS)

USD REER (RHS)

Source: Barclays Research

Barclays | Global FX Quarterly

ECB liquidity features and why these matter

Source: Haver Analytics

Barclays | Global FX Quarterly

TLTRO: All you can eat

5y Eonia rates do not react to

Selling EUR is the best way to

EA growth surprises do not

Source: Bloomberg, Barclays Research

Barclays | Global FX Quarterly

Top FX views and positions

UST 5y real rates

Barclays | Global FX Quarterly

Barclays | Global FX Quarterly

EUR: Taking depth soundings

Two-way risks for the EUR are

Two primary drivers of EUR weakness:

Low returns to capital

The EUR continues to

Barclays | Global FX Quarterly

Gross Fixed Capital Formation (RHS)

With little sign of a sustained

Similarly, the ECBs Odyssian

This has led to a further

Foreign issuers are borrowing

And a credible commitment to lower for longer

Barclays | Global FX Quarterly

Source: Haver Analytics, European Commission

Without inflation pressure

We see little prospect for

Can the EUR float on equities?