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22 March 2017

Global
Fixed Income Research
Foreign Exchange

FX Compass: Not Fade Away


Research Analysts
Shahab Jalinoos
212 325 5412
shahab.jalinoos@credit-suisse.com Figure 1: EURUSD and USDJPY at key technical levels
Ray Farris EURUSD USDJPY (right) 120
65 6212 3412
1.12
ray.farris@credit-suisse.com 115
Alvise Marino
212 325 5911
110
alvise.marino@credit-suisse.com 1.07
Trang Thuy Le
852 2101 7426
105
trangthuy.le@credit-suisse.com
Honglin Jiang 1.02 100
44 20 7888 1501 Jul-16 Nov-16 Mar-17
honglin.jiang@credit-suisse.com
Source: Credit Suisse, the BLOOMBERG PROFESSIONAL service
Bhaveer Shah
44 20 7883 1449 Falling volatility has been a key feature across asset markets in the aftermath
bhaveer.shah@credit-suisse.com
of last week's FOMC. In the FX space, as would be expected, this has led to a
weaker USD and fresh legs for risky currencies in the EM space. For the time
being we see no reason yet to fade this story, and retain positions that are
ultimately long currencies like MXN in our trade portfolios.
Highlighting the greenback's malaise is the rally in EURUSD to test 2017 highs
near 1.0830. Where do we stand on this? Given that our 3m forecast has for
some time been 1.0300, we should be approaching levels that are a sell level
for EURUSD. Despite this, we do not see the stars as aligned for such a trade.
2m EUR implied volatility remains high vs. both realised volatility and other FX
vols, suggesting that French election risk remains priced in. This takes on
added force from the fact that the 25-delta risk reversal skew in the 2m tenor
remains well bid for EUR puts, despite the rally in spot. To us, this means
EURUSD has room to run still higher, and ideally we would like to see these
metrics soften up before looking to short it.
From the opposite perspective, why are we not jumping to raise our EUR
forecasts? On the US side, we are still waiting for more colour on tax reform
odds, which could come as soon as Thursday, when the House of
Representatives is likely to vote on healthcare reform. If healthcare reform
does pass the House this week, the market will likely have higher expectations
for the wider agenda being activated too, which should in principle boost the
USD (especially if expectations increase regarding the implementation of
border-adjusted taxation). We accept, though, that if a) healthcare reform
passes the House and b) the USD still gets no lift or weakens further, we may
need to think again with respect to our current modestly bullish forecast profile.
In this issue of the FX Compass, we state that todays budget announcement
could provide the catalyst for a new leg higher in USDCAD. As a contrarian
short EM trade, we recommend buying a 1-month USDRUB 59.4 call for
0.61% of notional (spot ref 57.6, maximum loss is limited to the premium paid)
and revise our 12m USDRUB forecast higher from 58 to 60. We also highlight
recent trading themes in GBP, turn more bullish on most non-Japan Asian
currencies, and review recent capital flow dynamics in China.

DISCLOSURE APPENDIX AT THE BACK OF THIS REPORT CONTAINS IMPORTANT DISCLOSURES, LEGAL ENTITY
DISCLOSURE AND ANALYST CERTIFICATIONS.
22 March 2017

Macro Overview: Not Fade Away


Shahab Jalinoos Falling volatility has been a key feature across asset markets in the aftermath of last
212 325 5412
shahab.jalinoos@credit-suisse.com
week's FOMC. The message the market appears to have taken is that slow-but-steady will
Honglin Jiang
remain the Fed's preferred trajectory, with very limited appetite to try to jump the gun
44 20 7888 1501 ahead of potential fiscal expansion. And while our rates strategists disagree with this
honglin.jiang@credit-suisse.com assessment medium term (link), the market has been willing to run with a pro-carry, pro-
risk assessment. In FX space, as would be expected, this has led to a weaker USD and
fresh legs for risky currencies in EM space. MXN continues to lead the pack against a
backdrop of more conciliatory messages on future trade policy from all key US officials bar
President Trump himself, but a wider group of currencies including the likes of ZAR to BRL
to INR are performing well, in many cases boosted also by positive domestic news.
In general we see no reason yet to fade this story, and retain positions that are ultimately
long currencies like MXN in our trade portfolios. But this week we do recommend a tactical
RUB short vs. USD on a 1m horizon for contrarians looking for an EM short full details
follow later on in this week's FX Compass.
Highlighting the greenback's malaise is the rally in EURUSD to test 2017 highs near
1.0830. This reflects a perception that the ECB has taken a hawkish tilt just as French
political risk seems to be waning (helped by the market-friendly outcome of last week's
Dutch election and a perception that Marine Le Pen performed poorly in a televised
debate). A breach of this level opens up room for a test of the 4-month high near 1.0880
seen in December. Meanwhile USDJPY is closing in on 2017 lows near 111.50 a breach
of this level opens up room for a potentially large retracement given the pair rallied from
near 101 to 111 in less than 2 weeks in November with no pause (Figure 2). We have
been cautious on the widely-held long USDJPY trade for some time, seeing levels above
115 as a sell. But given that JPY is rallying in what is still a low volatility environment, the
current price action is very concerning. If yesterday's US equities slide were to continue, a
deeper retracement than we had envisioned would be possible.

Figure 2: Both EURUSD and USDJPY are near Figure 3: EURUSD 2m skews are still elevated in
important technical levels favour of EUR puts
1.14 120 14 EURUSD 2m implied vol 1.00
EURUSD USDJPY (right)
118 13 EURUSD 2m risk reversal skew (RHS) 0.50
1.12
116 12
114 11 0.00
1.10
112 10
-0.50
1.08 110 9
108 -1.00
8
1.06
106 7 -1.50
104 6
1.04
-2.00
102 5
1.02 100 4 -2.50
Jul-16 Nov-16 Mar-17 Jan-16 May-16 Sep-16 Jan-17
Source: Credit Suisse, the BLOOMBERG PROFESSIONAL service Source: Credit Suisse, the BLOOMBERG PROFESSIONAL service

Where do we stand on this? Given that our 3m forecast has for some time been 1.0300,
we should be approaching levels that are a sell level for EURUSD. And with the market in
mean-reversionary mode in G10 space (as per GBPUSD, USDJPY among others in the
past week following periods where breakouts looked possible), fading the impulsive move
higher in EURUSD should be in our thoughts. Despite this, we do not see the stars as

FX Compass: Not Fade Away 2


22 March 2017

aligned for such a trade. As we have discussed at length in recent weeks, 2m EUR implied
volatility remains high vs. both realised volatility and other FX vols, suggesting that French
election risk remains priced in. This takes on added force from the fact that the 25-delta
risk reversal skew in the 2m tenor remains well bid for EUR puts, despite the rally in spot
(Figure 3). To us, this means EURUSD has room to run still higher, and ideally we would
like to see these metrics soften up before looking to short it. As for EURJPY, we have
been sellers for choice in the 120-125 range. The pair has been trendless, but we suspect
any move higher in realised FX volatility would see JPY outperform.
From the opposite perspective, why are we not jumping to raise our EUR forecasts? On
the European side, we remember how Donald Trump was also perceived to have
performed badly in televised debates, yet emerged victorious. On the US side, we are still
waiting for more colour on the likelihood of tax reform, which could come as soon as
Thursday when the House of Representatives is likely to vote on healthcare reform.
Market bullishness on US equities, the USD and higher US rates since Trump's November
election win has been based above all else on the idea that meaningful pro-market tax and
regulatory reform would materialize in the US, together with substantial fiscal stimulus and
infrastructure spending. The Trump administration has suggested it wants to have the
blueprint for this plan ready within its first 200 days, and healthcare reform has been top of
the agenda.
The House healthcare vote is critical in that a) it is the first Congressional vote on a key
policy issue and b) the wider tax reform agenda requires healthcare to pass before other
aspects can follow. If healthcare reform does pass the House this week, the market will
likely have higher expectations for the wider agenda being activated too, which should in
principle boost the USD (especially if expectations increase regarding the implementation
of border-adjusted taxation). The Senate leadership wants to vote on any House bill before
its recess on April 10-21, so the agenda could speed up materially in coming weeks. We
accept though that if a) healthcare reform passes the House and b) the USD still gets no
lift or weakens further, we may need to think again with respect to our current modestly
bullish forecast profile.

Figure 4: Equity and rates vol is near the lows Figure 5: G10 ad EM vols have fallen aggressively
US Swaption Vol, 1m10y normalised bp/yr 17.5%
Average G10 3m vol
140 Vix Index (RHS) 45
130 Average EM 3m vol
40 15.0%
120
35
110
30 12.5%
100
90 25
10.0%
80 20
70
15
60 7.5%

50 10

40 5 5.0%
2010 2011 2012 2013 2014 2015 2016 2017 2011 2012 2013 2014 2015 2016
Source: Credit Suisse, the BLOOMBERG PROFESSIONAL service Source: Credit Suisse, the BLOOMBERG PROFESSIONAL service

Turning to developments down under, the RBAs March minutes underscored how recent
growth in investor housing credit demand (albeit concentrated in eastern cities), combined
with weak wage growth and investment demand, is likely to keep rates on hold over the
foreseeable future (disappointing traders who had begun pricing in hikes). Instead, the
policy focus will shift to enhanced macro-prudential measures, which have the support of

FX Compass: Not Fade Away 3


22 March 2017

the Australian Treasury and financial regulators, and have already begun being proactively
implemented by major banks through targeted rate hikes and more stringent lending
standards. While the development is marginally negative for the AUD as it cools the
property market and loosens constraints on monetary policy, we expect its effect will be
limited by the RBAs noted reluctance to cut rates from these historically low levels.
Previewing the upcoming RBNZ meeting, we do not anticipate any major innovations in
Governor Wheelers messaging. He is likely to continue enforcing a dovish tone, especially
in light of disappointing 4Q16 GDP data, but this is already largely priced by NZD falling
~4% from its Feb highs (on a trade weighted basis). No doubt that outcome is giving the
RBNZ some relief, and they will take care not to distract from their prior messaging.
Meanwhile in Norway, the Norges Bank delivered a dovish monetary policy meeting
(relative to market expectations) by pushing back their longer term rate hike assumptions
by two quarters. This came in recognition of the severe disappointments in inflation
readings over recent months, which spilled over into their forecast inflation path. However,
their short term rate outlook was largely balanced out by financial stability concerns and a
more positive growth forecast, cushioning the impact on NOK.
More importantly for the longer term, NOK outlook was that the Norges Bank downgraded
its forecast for fiscal spending and the structural non-oil budget deficit in response to the
revised fiscal rule (restricting withdrawals from the GPFG to 3% of assets). As we stated
last week, the new fiscal rule will begin binding this year, raising the likelihood that fiscal
policy may become capped in a downturn, and shift more of the burden of a policy
response to monetary policy and currency depreciation. Under such circumstances, NOK
should reasonably be expected to depreciate even more than usual, and is one factor that
underpins our bullish 12m EURNOK forecast of 9.50.

FX Compass: Not Fade Away 4


22 March 2017

CAD: Budgeting for more weakness


Alvise Marino We stay bearish on the Canadian dollar despite the improvement in data, as
212 325 5911
alvise.marino@credit-suisse.com competitiveness issues remain paramount

With oil stuck in a range, markets have lacked a catalyst for adjustment. Todays
budget announcement could change that

We are long USDCAD via call RKOs, and we think outright vanilla calls are
starting to look attractive
The Canadian dollar has been relatively unaffected by the broad wave of USD weakness
that has dominated FX price action in 2017 so far, ranking as the worst performing G10
currency against the USD on a year-to-date basis. This weakness has however been very
gradual affair, lacking a specific catalyst. The outcome has been a steady decline in
implied volatility. We see potential for the latter to change in the near-term.

Figure 6: USDCAD is still inexpensive vs. interest rate differentials


1.50 USDCAD 0.90
USD-CAD 1y2y fwd rate differential (%, right)
1.45 0.70

1.40 0.50

1.35 0.30

1.30 0.10

1.25 -0.10

1.20 -0.30
Sep-15 Dec-15 Mar-16 Jun-16 Sep-16 Dec-16 Mar-17
Source: Credit Suisse, the BLOOMBERG PROFESSIONAL service

In this piece we restate our case for a weaker Canadian dollar, and highlight
potential catalysts for a fresh move higher in USDCAD. Specifically, we look at
potential risks associated with todays budget release, and evaluate their expected impact
on CAD price action. The announcement of a tax on foreign buyers of housing in particular
could in our view lead to a repricing of BOC expectations.
We are long USDCAD via an 11 April 2017 expiry 1.35 call RKO 1.40 (link), and while
we hold on to the position, we think exposure to USDCAD upside via outright vanilla calls
is attractive at current levels for the first time in several months.

The competitiveness challenge


The key tenet of our long-standing bearish view on the loonie is that the Canadian
economy is fundamentally not internationally competitive at current FX levels. Despite the
recent improvement in high frequency data, we think the issue remains pressing, as
suggested by the still unimpressive performance of non-energy exports (Figure 7). The
underlying story remains the same we have been highlighting for a number of years now
(link) i.e., that a large portion of Canadas non-energy industrial capacity has been wiped
by the 2008/09 crisis and subsequent twin rise in oil prices and in the Canadian dollar. The
recent improvement in manufacturing sales is a constructive development, but hardly a
game changer on this front (Figure 8).

FX Compass: Not Fade Away 5


22 March 2017

Figure 7: The recovery in non-energy exports Figure 8: Manufacturing sales have rebounded, but
remains totally elusive the gap from pre-crisis levels remains large
15% Exports ex oil & mining, 2007 C$, y/y 53.0
Imports ex oil & mining, 2007 C$, y/y Sales of manufactured goods
51.0
(Constant 2007 C$ bn)
10%
49.0

5% 47.0

45.0
0% 43.0

41.0
-5%
39.0

-10% 37.0
Jan-11 Feb-12 Mar-13 Apr-14 May-15 Jun-16 2005 2006 2007 2009 2010 2012 2013 2014 2016
Source: Credit Suisse, the BLOOMBERG PROFESSIONAL service Source: Credit Suisse, the BLOOMBERG PROFESSIONAL service

As a result, the divergence between leading indicators of US demand and demand for
Canadian exports has widened sharply over the past few months (Figure 9). Expectations
of changes to the NAFTA framework and the looming threat of border adjustment taxes,
as we highlighted in the macro section, likely represent an additional motive for
underperformance.

Figure 9: The US demand - Canadian exports link appears to be broken


70 20%

65 15%

60 10%
5%
55
0%
50
-5%
45
-10%
40 US ISM New Orders
-15%
35 Canadian Exports (RHS, SA, YoY %)
-20%
30 -25%
Jan-08 Feb-09 Mar-10 Apr-11 May-12 Jun-13 Jul-14 Aug-15 Sep-16
Source: Credit Suisse, the BLOOMBERG PROFESSIONAL service

This challenge means that recent stronger data prints are likely to be overlooked at the
Bank of Canada. As per its latest statement, the BOC views the recent pickup in inflation
as temporary, and is unlikely in our view to be swayed in the opposite direction by this
Fridays CPI data as long as underlying data about wages and earnings remains poor. The
latest set of employment data failed to assuage concerns on this front (Figure 11).

FX Compass: Not Fade Away 6


22 March 2017

Figure 10: This BOC views the uptick in inflation as Figure 11: Average earnings have failed to rebound
temporary, Fridays data likely inconsequential from all-time lows
5.00 CPI headline y/y % 6.00
Average hourly earnings of
CPI core common y/y %
permanent workers % yoy
CPI core trim y/y %
4.00 5.00

3.00 4.00

2.00 3.00

1.00 2.00

0.00 1.00

-1.00 0.00
2005 2006 2007 2009 2010 2012 2013 2014 2016 2005 2006 2007 2009 2010 2012 2013 2014 2016
Source: Credit Suisse, the BLOOMBERG PROFESSIONAL service Source: Credit Suisse, the BLOOMBERG PROFESSIONAL service

In the meanwhile, markets have shifted back to pricing a small probability of a hike by the
Bank of Canada this year, with OIS markets pricing in a ~40% likelihood of a hike by year
end. The local swap curve has steepened considerably (Figure 13), and yields in the belly
of the curve have moved higher in line with the global sell off in rates of the past few
months (Figure 12). We would be inclined to fade this move in policy expectations, in line
with our call for USDCAD to trade at 1.35 in 3 months.

Figure 12: The global sell off in yields has pushed Figure 13: The market has started to price in a
Canadian yields higher tighter policy outlook for the BOC
Swap curves

2.50 1.00
Canada 5yr yield (%) 3m2y

0.80 2y5y
BoC Overnight Target Rate (%)
2.00
0.60

1.50
0.40

0.20
1.00

0.00
0.50
-0.20

0.00 -0.40
Jan-13 Jan-14 Jan-15 Jan-16 Jan-17 2011 2012 2013 2014 2015 2016 2017
Source: Credit Suisse, the BLOOMBERG PROFESSIONAL service Source: Credit Suisse, the BLOOMBERG PROFESSIONAL service

Where is the catalyst?


To a certain extent, the bearish story above is not particularly new. We think it is
interesting to the extent that it goes against the more constructive tone emerging from
recent data, but it is not new. The Bank of Canada has repeatedly stressed the
competitiveness challenges the economy faces, while at the same time highlighting the
constraints to additional easing prospects posed by a stretched household leverage. In
absence of a very meaningful improvement in the data from current levels, we do not
foresee major changes in stance at the Bank of Canada at the 12 April meeting.

FX Compass: Not Fade Away 7


22 March 2017

Fiscal and external developments present in our view a more likely potential source of
negative surprises for the Canadian dollar. At the external level, we already highlighted in the
macro section the possibility that early progress on ACA repeal might pave the way for a
more open debate about tax reform in the US, potentially with references to border
adjustment taxes. We think the initial reaction would likely be negative for Canadian assets.
At the domestic level, we will be paying close attention to todays national budget
announcement. We see scope for negative surprises on the following points:
1. A potential increase in capital gains tax would likely prove negative for sentiment in
the near-term. The net long-term impact of an increase in capital gains tax rates would
of course need to be gauged against the potential improvements in growth
expectations created by the likely increase in fiscal spending. As such, beyond the
immediate likely negative risk response to the measure, we would expect limited near-
term impact.
2. The possibility of a national tax on foreign buyers of real estate, along the lines of
the 15% levy introduced in British Columbia, has also been the matter of speculation
in national media after Ontario Finance Minister Sousa explicitly called for such a
measure in a letter to national Finance Minister Tourneau. In this case, we would
expect a mixed near-term impact, but with potential for a meaningful long-term impact,
as tighter macro prudential standards would likely give the Bank of Canada leeway to
remain accommodative despite financial stability risks.

How to trade it
We are long USDCAD via a 11 April 2017 expiry 1.35 call RKO 1.40. The short vol bias of
the trade was the main driver behind our decision to express the view via RKOs.

Figure 15: The move in the risk reversal skew


Figure 14: Implied vol is trading at a discount to makes owning outright vanilla USDCAD calls
delivered for the first time since December 16 attractive
12.0 Implied - delivered (%, right) 2.0 1.50
USDCAD 3m implied vol (%) USDCAD 3m risk
1.5 1.40 reversal skew (%)
USDCAD 3m delivered vol (%)
11.0
1.30
1.0
1.20
10.0
0.5 1.10

9.0 0.0 1.00


0.90
-0.5
8.0 0.80
-1.0 0.70
7.0
-1.5 0.60
0.50
6.0 -2.0
Sep-15 Dec-15 Mar-16 Jun-16 Sep-16 Dec-16
Mar-16 Jun-16 Sep-16 Dec-16
Source: Credit Suisse, the BLOOMBERG PROFESSIONAL service Source: Credit Suisse, the BLOOMBERG PROFESSIONAL service

Since then, however, implied vols have collapsed and are trading below delivered vols for
the first time since December 2016 (Figure 14) and the risk reversal skew has moved
aggressively in favor of USDCAD puts (Figure 15), with calls still priced at a premium to
puts. The move in implied vols and in the riskie suggests, in our view, that outright vanilla
calls are becoming an attractive expression of the view for the first time in several months.

FX Compass: Not Fade Away 8


22 March 2017

RUB: Tactically buy 1m USDRUB upside


Nimrod Mevorach Recent rouble outperformance against oil prices increases the likelihood of a
44 20 7888 1257
nimrod.mevorach@credit-suisse.com higher USDRUB move in the coming weeks

We recommend buying a 1-month USDRUB 59.4 call for 0.61% of notional (spot
ref 57.6), maximum loss of this trade is limited to the premium paid

We revise our 12-month forecast higher to 60.00 (from 58.00 previously)


The rouble has outperformed oil prices quite significantly. In contrast to its historical
highly correlated trading with oil prices, the rouble has outperformed oil prices since
around 7 March (Figure 16). Furthermore, during this period the rouble has also
outperformed many oil currencies such as CAD and NOK suggesting that domestic
factors have been exceptionally supportive for the rouble (Figure 17). We attribute this
performance to strong local demand on the back of sizable current account seasonality
and to Russian exporters demand for roubles ahead of their end-month tax payments. In
addition, the divergence from oil prices was probably also driven by portfolio inflows amid
strong EM sentiment. For example, our Russian bond desk estimates that so far this
month internationals bought local currency bonds (OFZ) in the amount equivalent to about
$1.0bn. We believe that most of these inflows are not FX hedged.

Figure 16: Rouble has outperformed oil prices Figure 17: and most oil currencies
$ per barrel Spot performance (31/12/2016=100)

70 35 108

106
40
67
104
45
64 102

50 100
61
98
55
USDRUB RUBNOK
96
58 RUBCAD
60
Oil, Brent (RHS and inverted) 94 RUBCOP
55 65 RUBKZT
92
Mar-16 Jun-16 Sep-16 Dec-16 Mar-17 01/01/2017 01/02/2017 01/03/2017
Source: Credit Suisse, the BLOOMBERG PROFESSIONAL service Source: Credit Suisse, the BLOOMBERG PROFESSIONAL service

We see emerging upside risks to USDRUB over the coming weeks. While we overall
remain constructive on the rouble due to strong fundamentals, and by extension on
Russian assets, we think that a combination of factors are likely to push USDRUB
tactically higher in the near-term:
First, the decoupling from oil prices does not seem sustainable. As Figure 16 shows,
the rouble and oil prices tend to converge quite quickly after periods of divergence. We do
not see any special reason to think this time is different. In fact, the setup of the ministry of
finances FX intervention scheme makes such convergence more likely (intervention
volumes decline when oil prices fall). To put in other words, unless oil prices rebound to
their pre-selloff levels (i.e. around $55/bbl for Brent) we would expect the natural direction
of USDRUB to be higher.

FX Compass: Not Fade Away 9


22 March 2017

Second, downside risks to oil prices have increased. Recent signals from the oil
market have been mixed. For example, Saudi Arabia increased its production in February
but it made clear that it is committed to the OPEC deal. Without taking a view on the
directionality of oil prices in the very near-term, we argue that the downside risk to oil
prices has increased partly because investors are much more vigilant following the abrupt
re-pricing earlier this month. Furthermore, we are concerned about market dynamics
under which a potential downward move in oil feeds expectations for a break-down of the
OPEC deal. This could lead to a vicious self-fulfilling bearish price action.
Third, Russian authorities are not pleased with the current levels of the rouble. Two
recent official comments highlight that. First, finance minister Siluanov said on Monday
(20 March) that the rouble is overvalued by 10%-12%. Second, CBR officials said that the
CBR could resume FX intervention (on top of the ministry of finance scheme) if inflation
continues to fall towards the CBRs 4.0% inflation target. Although we do not think that the
government or the CBR would deliver a game-changer policy any time soon on that front,
investors should expect verbal intervention to intensify if USDRUB falls further.
Fourth, geopolitics have become a two-way risk. A potential removal of the US (or the
EU) sanctions has become very unlikely scenario. That is no news. However, as the
Russia-US relationship cools down again, we suspect that the risk of an actual escalation
in tension has increased. Specifically, we think that Russian assets underprice a scenario
where Russia, for example, recognizes the independence of the Donbass territory in
eastern Ukraine. Although this is not a base case or necessarily a near-term risk it does
poses an upside risk to USDRUB, which is arguably not in the price.

Figure 18: Current account flows to become less Figure 19: The Russian government sees risks to
rouble supportive in 2Q non-energy exports from strong rouble
Average current account surplus 2007-2016 ($bn) Energy includes crude, petroleum products and natural gas
30
500 Exports (12-month rolling, $bn) 250

25
400 200

20
300 150
15

200 100
10

Energy Non-energy (RHS)


5 100 50

0 0 0
1Q 2Q 3Q 4Q Jan-11 Jan-13 Jan-15 Jan-17
Source: Credit Suisse, the BLOOMBERG PROFESSIONAL service Source: Credit Suisse, Haver

Policy rate, however, is likely to stay supportive despite of a potential cut on Friday
(24 March). Our economist is calling for a 50bp cut (to 9.50%) against consensus call for
no change. Yet, our base case is that the CBRs post-meeting communication is unlikely to
guide markets to price more aggressive easing cycle in a meaningful way. We expect this
combination would be marginally negative for the rouble but not a game-changer.
Against these risks, we think it makes sense to take advantage of low vols to buy
1m USDRUB upside. Relatively low vols suggest to us that buying 1-month options offers
a better risk-reward than short rouble via forwards currently. We think that markets
currently underprice the upside asymmetry in USDRUB. This is evident from the decline in

FX Compass: Not Fade Away 10


22 March 2017

1m risk reversals over the past two weeks at a time when the rouble outperformed oil
prices significantly (Figure 21). We specifically like buying 1-month USDRUB 25 delta call
(strike: 59.4; spot ref 57.6, forward ref: 58.0). The downside of this trade is limited to the
upfront premium which is 0.61% of the notional. We like the 1-month contract given that
we expect USDRUB to converge with oil prices over a relatively short period of time, and
given that it is much cheaper than the 2-month and the 3-month contracts on an implied
volatility basis (Figure 20). The 1-month tenor is probably cheaper also because the 2-
month tenor also includes the French election risk (23 April and 7 May) while the 3-month
tenor also includes the OPEC meeting (25 May).

Figure 21: A decline in risk reversal skews at a time


Figure 20: The decline in front-end vols offers a when rouble outperformed oil suggests to us
good opportunity to enter 1m USDRUB upside markets underprice USDRUB upside
USDRUB vol curve (%) Risk reversals (pp)

15.0 12.0

10.0
14.0
USDRUB 1m RR
8.0
13.0 USDRUB 3m RR

6.0
12.0
21/03/2017 4.0
1-week ago
11.0
1-month ago 2.0

10.0 0.0
1w 2w 1m 2m 3m 6m 9m 1y Mar-15 Sep-15 Mar-16 Sep-16 Mar-17
Source: Credit Suisse, the BLOOMBERG PROFESSIONAL service Source: Credit Suisse, the BLOOMBERG PROFESSIONAL service

Lastly, we also revise our 12-month USDRUB forecast higher to 60.00 (from 58.00
previously). This new forecast is still bullish against forwards. The rationale behind our
upward revision is as follows:

The forecast revision largely reflects a change in the balance of risks around oil
prices. We previously were more confident about the bullish outlook to oil. However,
we have become more concerned about supply-demand rebalancing given the
abrupt increase in production from the US. We still expect oil prices to rise in 2H as a
base case, but downside risks to this outlook have arguably increased. Our new
USDRUB reflects this.

In addition, roubles high-carry status is likely to be eroded somewhat over a 12-


month horizon. Our economist expects cumulative 125bp cuts in the policy rate this
year. That should also push real rates down to 4.6% in end-2017 from 5.6% currently
(measured as the policy rate minus actual year-on-year inflation). That being said,
carry and real rates will remain a key element behind our expectations that the rouble
will outperform forwards.

The forecast revision also reflects, to a lesser extent, the risk that Russian authorities
will increase their FX intervention in a meaningful way.

FX Compass: Not Fade Away 11


22 March 2017

GBP: Filtering out the noise


Bhaveer Shah We keep our GBPUSD forecasts unchanged at 1.20 in 3 and 12 months.
44 20 7883 1449
bhaveer.shah@credit-suisse.com
GBPUSD may remain choppy within the 1.20-1.30 range, but ultimately little has
fundamentally changed in the factors we see as important.
The choppy GBP price action of the past fortnight raises the question of whether anything
fundamental has changed. We dont believe so. The core themes that have characterized
the pounds behavior since the UK voted to leave the EU remain intact, and continue to
offer convincing explanations for GBPUSD price action.
GBPUSD strength witnessed last week was likely a result of widening rate spreads and a
supportive low-vol environment narratives that time well with intraday price action too.
Its not that Scottish referendum issues did not matter, or indeed that sterling is any less
sensitive to politics than it used to be. But markets may have struggled to see the
immediate relevance of a Scottish referendum that could be more than two years away,
especially when its unclear how such an event could complicate Brexit matters.
From a trading perspective, we had already expressed the idea of a rangebound pound
through a EURGBP double no touch structure in our 2017 trades of the year (see here).
The trade remains active, with EURGBP below our upper strike of 0.8870.
1. Despite politics grabbing more headlines, macro factors remain important. The
pound has again proved its high sensitivity to rate spreads over the past week, with
GBPUSD supported by a hawkish MPC and the USD selloff after the Fed. As Figure
22 shows, GBPUSD has moved closely with rate spreads over the past month.
Similarly, its an unlikely coincidence that GBP has rallied at a time when EM assets
have been supported and implied volatility has declined across the board. Historically
GBP TWI tends to appreciate in such environments perhaps due to the perception
that GBP is a pseudo risk currency, given the UKs large stock of foreign liabilities and
its high gearing towards the financial sector. Figure 23 shows this tendency.

Figure 22: GBPUSD has followed rate spreads Figure 23: GBP is typically supported in low vol periods
-0.90 10yr GBP-USD Gvmt Bond Spread (LHS) 1.28 18 G10 FX vol (CVIX, rhs) 95

-0.95 GBPUSD (RHS) GBP TWI


1.27 16 90
-1.00
1.26
-1.05 14
85
-1.10 1.25
12
-1.15 1.24 80
10
-1.20 1.23
75
-1.25 8
1.22
-1.30
6 70
-1.35 1.21

-1.40 1.20 4 65
1-Jan 16-Jan 31-Jan 15-Feb 2-Mar 17-Mar 2010 2011 2012 2013 2014 2015 2016 2017
Source: Credit Suisse, the BLOOMBERG PROFESSIONAL service Source: Credit Suisse, the BLOOMBERG PROFESSIONAL service

FX Compass: Not Fade Away 12


22 March 2017

2. Markets are still wedded to the notion of a rangebound cable. Stubborn thinking
on this front is not only evident through spot price action, but also in GBPUSD risk
reversals approaching post-referendum highs (Figure 24), just as spot reached
recent lows. Whether such logic holds to the upside remains to be tested at the
post-October high of 1.27, but both technical and fundamental factors seem to
underpin such thinking.

Figure 24: GBPUSD 3m risk reversals are at highs Figure 25: The MPCs narritive has oscillated
GBPUSD
1.34 GBPUSD 3m risk reversal skew (RHS) -0.50
-0.70
1.32
-0.90
1.30 -1.10
-1.30
1.28
-1.50
1.26
-1.70

1.24 -1.90
-2.10
1.22
-2.30
1.20 -2.50
Jul-16 Oct-16 Jan-17 Apr-17
Source: Credit Suisse, the BLOOMBERG PROFESSIONAL service Source: Credit Suisse, the BLOOMBERG PROFESSIONAL service

This rangebound dynamic in GBP is rooted in fundamentals.


The MPCs rhetoric continues to oscillate: The BoE remains competent at tilting
the dial back whenever market expectations shift too forcefully in either direction.
Enough hawks surfaced within the MPC last week, after GBPUSD reached recent
lows and pricing for the next BoE hike wandered as far as Dec 19. But Carneys
dovish hint following yesterdays inflation print also proved that the needle can spin
just as quickly. The circularity between GBP strength and the MPCs rhetoric was also
evident in the February inflation report, when the MPC managed to keep its forecast
subdued due to TWI appreciation since November. And with markets now pricing 50%
odds of a hike by year-end, the MPC might feel comfortable it has communicated a
balanced rhetoric.
Data surprises exhibit a mean-reversion tendency: With UK economic data
surprise indicators already stretched at highs, the risk is that data is peaking. Such a
dynamic could be a force that caps GBP strength the upside, but eventually rescues
GBP at the lows too. Thursdays UK retail sales may provide an important cue in that
respect, especially after a particularly weak previous print. At the other end of cables
range, markets remain hesitant shorting GBPUSD below 1.22. The still stretched short
GBP positioning offers one explanation for this. But investors might also be reluctant
to turn bearish at the lows without clearer signs that Brexit is taking a systemic toll. For
example, recent stability in the London property market certainly seems surprising,
especially if such indicators can be trusted to be a tell-tale bellwether of broader
sentiment about Brexit.

FX Compass: Not Fade Away 13


22 March 2017

Figure 26: UK data surprises may now be stretched Figure 27: Bellwether UK assets continue to rally
20% UK retail sales ex fuel, sa, %3mma ann. 150 650 UK Homebuilders Index
UK Economic Data Surprises RHS
15%
600
100
10%
550
50
5%
500
0%
0
450
-5%
-50
-10% 400

-15% -100 350


08 10 12 14 16 Jan-16 Apr-16 Jul-16 Oct-16 Jan-17
Source: Credit Suisse, the BLOOMBERG PROFESSIONAL service Source: Credit Suisse, the BLOOMBERG PROFESSIONAL service

3. Recent Scottish headlines have been difficult to decipher. As for politics, matters
have been complicated one notch further by louder calls for another Scottish
independence referendum. Two factors may explain why GBPUSD price action hasnt
been forceful on this front as many might have initially expected.
Firstly, the potential date for a Scottish referendum seems so far away right now that
markets may only be keeping one eye on the issue. Both Sturgeon and May appear
to have reluctantly agreed to wait until the completion of Brexit talks in Spring 2019.
This could fall as far as the 3 year implied volatility tenor before which EU/UK
Brexit negotiations will provide ample entertainment for the pound. Moreover,
markets have also traditionally waited as close to six months before political events
before pricing kinks for such events let alone two years. A lot can change over
such long periods of time.
Secondly, markets may be divided about how the risk of Scottish exit feeds through
into the pound conventionally or indeed how the issue intertwines with Brexit. We
present just some of the wide schools of thought on this matter.

For some, the scenario of a UK breakup is an even more worrying prospect than the
small print about Brexit. Firms may find the added uncertainty associated with both
risks too difficult to weather.
For others, the jury is still out about whether independence necessarily needs to be a
net bearish force for GBP, at least in the long run. A fiscally stronger and less politically
divided nation may be the only sustainable way forwards.
Some believe the risk of Union breakup would be so damaging for PM Mays legacy
that she may be shaken from initial vision about Brexit. Perhaps Scottish cries have
succeeded in decreasing the odds of a very hard Brexit a net positive for GBP.
Polls would suggest Sturgeon faces a crucial problem winning a second referendum -
Euroscepticism in Scotland. As shown by Exhibit 4, many believe the SNP would not
win another referendum despite current polling.
Some believe the cards are now in Europes hands, irrespective of noise generated by
headlines at home. But opinions are just as scattered between those in this camp too.
Pessimists argue that the EU has gained bargaining power with UK fearing breakup.
Optimists believe the G3 leaders wouldnt see it in their personal interests to
encourage a precedent for regional independence. Rationalists see no material

FX Compass: Not Fade Away 14


22 March 2017

difference between the situation now and before as Sturgeon had already ignited the
fires of Scottish independence last June. For all the talk of the EU welcoming Scotland
with open arms, rationalists may believe the EU simply distances itself any Scottish
controversy until it receives a formal ascension request. After all, why should Scotland
receive favourable treatment compared to the long list of countries that are in
ascension talks already including bigger politically heavyweights like Turkey.

FX Compass: Not Fade Away 15


22 March 2017

Asian FX: Stronger into the summer


Ray Farris We have gotten USD-Asia directionality wrong so far this year and are adjusting our
65 6212 3412
ray.farris@credit-suisse.com
thinking accordingly. Much of our view for USD-Asia came from an expectation for Fed
Trang Thuy Le
hikes to drive USD-G10 higher, but the opposite is happening. The DXY is down 2% year-
852 2101 7426 to-date and threatening to break below support at 100 (Figure 28). This is allowing robust
trangthuy.le@credit-suisse.com global growth data to drive flows into EM carry, and net foreign buying of Asian equities is
$13.7bn year-to-date for the countries that report data, up sharply from $5.5bn for the
same period last year (Figure 29).

Figure 28: Asian FX is recoupling with stronger Figure 29: Net foreign buying of Asian equities has
Asian equities risen strongly this year
Cumulative net foreign buying, US$bn year-to-date for the sum of
India, Indonesia, Korea, Malaysia, the Philippines, Taiwan, and
Thailand

96 15

625
MSCI Asia ex-Japan 94 2016
10
Asia vs. USD (RHS) 2017
575 92
5
90
525
0
88

475 -5
86

425 84 -10
Jan-15 Jun-15 Nov-15 Apr-16 Sep-16 Feb-17 1 6 11 16 21 26 31 36 41 46 51 56
Source: Credit Suisse, the BLOOMBERG PROFESSIONAL service Source: Credit Suisse, the BLOOMBERG PROFESSIONAL service.

These flows seem likely to continue somewhat longer. Our technical analysts are bullish
on EM equities and particularly Asian equities (see EM Update: Still Bullish). Our global
equity strategists also argue that equities can rally further, in part given that they believe
that retail participation is in its early stages (see Global Equity Strategy). Low volatility
levels are also encouraging flows into carry and fixed income plays.
Fundamental risks exist, of course, but we think the most likely case is that these will not
challenge the momentum trade in the next month or so. Specifically:

Opinion polls continue to suggest that Marie Le Pen is unlikely to win the French
elections.

US protectionism seems less likely soon. The tone of US rhetoric about imposing tariffs
on China and Asia more generally has softened. Equally important, we think that
Chinese President Xi Jinpings willingness to meet recently with US Secretary of State
Rex Tillerson suggests to us that Xi will play his meeting with US President Trump in
April cautiously rather than confrontationally.

The recent US manufacturing data and the rise in metals prices suggest that the
slowing in global growth momentum we expect over the next few months is likely to
be modest.

FX Compass: Not Fade Away 16


22 March 2017

We argued in our 28 February FX Strategist that absent broad USD-G10 strength,


fundamentals argue for most Asian currencies to appreciate vs. the USD, with the
exception of the CNY and arguably the PHP. Recapping:

Korea, Taiwan, and Thailand run very large current account surpluses which their
private sectors struggle to recycle effectively. All have also experienced some
improvement in growth that has encouraged capital inflows.

In India and Indonesia, hawkish monetary policy shifts in January have defended
historically high real yields. These have discouraged resident flight to dollars and
encouraged foreign portfolio inflows.

Singapores inflation cycle currently implies that the SGD nominal effective exchange
rate should trade in the upper half of its policy bands and that the Monetary Authority of
Singapore will keep policy unchanged in April (see here).
Chinas successful defense of the CNY earlier this year is also helping Asian FX by taking
away what was a driver of long USD-Asia proxy trades (see China capital flow monitor:
February too good to be true?). Ironically, Chinas choice over the past few days to
respond to USD weakness by holding up the USDCNY fix in order to weaken the CNY
against its basket probably implies a constraint on the potential for USD-Asia to fall at
some point. However, we think that Chinas government will reverse some of this recent
CNY fall vs. its basket if the USD recovers later this year as we forecast. We are
maintaining the CNY outlook we discuss in our 8 March FX Compass.

Figure 30: Opportunistic depreciation of the CNY vs. its basket should
constrain USD-Asia at some point
USDCNY fix CNY CFETS basket (RHS)
6.95 97.5

6.85 96.5

6.75 95.5

6.65 94.5

6.55 93.5

6.45 92.5
May-16 Jul-16 Sep-16 Nov-16 Jan-17 Mar-17
Source: Credit Suisse, the BLOOMBERG PROFESSIONAL service

Yet, the recent outperformance of most Asian countries exports against Chinese
exports and levels of real effective exchange rates shown in Figures 31 and 32 suggest
that most Asian currencies can probably appreciate more against the CNY before it
becomes a hard constraint.

FX Compass: Not Fade Away 17


22 March 2017

Figure 31: But most Asian countries exports are Figure 32: And only Koreas REER looks like it is
growing robustly relative to Chinas exports beginning to become rich to its history vs. China
15.0%
130
Exports, USD, seasonally adjusted, 3m avg,
REER deviation from 10y average, %
4Q 2015 = 100
120 10.0%

110 5.0%

100 0.0%

90
-5.0%

80
-10.0%

70
MYR
TWD
IDR

INR

KRW

THB

PHP
SGD

CNY -15.0%
CNY KRW TWD PHP INR IDR SGD THB MYR
Source: Credit Suisse, the BLOOMBERG PROFESSIONAL service Source: Credit Suisse, the BLOOMBERG PROFESSIONAL service

Putting it all together, we have cut our USD-Asia forecasts as we show in Figure 33. Our
message is that for short term of the next few months USD rallies should be sold. We are
relatively more bullish IDR and INR near term, while we maintain a bearish outlook on
CNY and PHP. We have also incorporated a stronger profile for the SGDNEER in
3 months, forecasting the NEER to trade around 1% above the midpoint, before
weakening to mid in 12 months.

Figure 33: Credit Suisse FX forecasts


Spot 3m forecast 12m forecast
3/21/2017 New Old New Old
USDCNY 6.899 6.98 6.98 7.18 7.18
USDCNH 6.891 6.99 6.99 7.19 7.19
USDINR 65.28 64.8 67.4 67.0 69.5
USDIDR 13319 13100 13500 13600 13900
USDKRW 1120 1100 1190 1170 1225
USDMYR 4.428 4.35 4.45 4.50 4.55
USDPHP 50.18 50.8 50.0 51.8 50.5
USDSGD 1.398 1.410 1.470 1.445 1.480
USDTWD 30.42 30.0 31.3 32.0 32.5
USDTHB 34.75 34.6 35.7 35.5 35.9

Source: Credit Suisse, the BLOOMBERG PROFESSIONAL service

Looking beyond the early summer, we maintain an outlook for a USD recovery over the
next year. One reason is that our Global FX Strategy team continues to forecast a USD
recovery led by EUR weakness over the next year. Fed hikes combined with ECB
dovishness should gradually give the USD traction. Another is that we expect US trade
policy toward Asia to turn more protectionist, even if this is difficult to quantify, and we see
the potential for US protectionism and a shift to border tax adjustment in US corporate tax
remaining high.

FX Compass: Not Fade Away 18


22 March 2017

China capital flow monitor: February too


good to be true?
Ray Farris
65 6212 3412 China's capital flow turns balanced in February
ray.farris@credit-suisse.com
Trang Thuy Le
Is the CNY about to repeat the path it took in the first half of last year a bout of policy
852 2101 7426 induced stability followed by trend depreciation vs. its basket? In our March 8 FX Compass
trangthuy.le@credit-suisse.com we cut our forecasts for CNY depreciation vs. the basket and lowered our USDCNY
forecasts to 6.98 and 7.18 in 3 and 12 months respectively.
We also joked that in doing so we might be grabbing defeat from the jaws of victory
relative to our previous, more CNY bearish forecast set. We certainly see risk that broad
USD weakness might allow the CNY to weaken more against its basket than our new
forecasts suggest. But we still think that the governments focus on financial market
stability implies that if the USD recovers, China will work to limit the extent to which
USDCNY rises, even if this comes at the cost of the CNY retracing higher vs. its basket.
To be sure, the sharp reversal in capital flows in Chinas favor in February says to us that
Chinas government is highly likely to remain in control of the yuan exchange rate this
year. The indicators we monitor suggest Chinas capital flows (which we define as all FX
flows excluding trade) turned balanced or even marginally positive in February following
outflows of about $70bn to $112bn in January, depending on the indicator for capital flows
one uses (Figure 34).

Figure 35: Net change in PBoC FX assets a close


Figure 34: Capital outflows seem to have stopped in proxy to PBoC intervention was largely balanced on
February, according to a range of indicators the month
Capital flow estimated, excluding trade balance, $bn 100
100

50 50

0
0
-50
-50
-100

-150 -100
From FX reserves Capital flows, $bn
-200
From PBoC foreign assets -150 Trade balance, $bn
-250 From PBoC FX assets
Net change in PBoC FX assets, $bn
From FX settlement
-200
-300
Jun-13 Apr-14 Feb-15 Dec-15 Oct-16
Jan-13 May-14 Sep-15 Jan-17
Source: Credit Suisse, the BLOOMBERG PROFESSIONAL service, CEIC Source: Credit Suisse, the BLOOMBERG PROFESSIONAL service, CEIC

Figure 35 shows Chinese New Year seasonality likely explains some of this change in
flows. The swing in the trade balance during the month reduced funding for capital
outflows and the shortened working days in the month restricted the time that the public
could access banks to engage in flows.
Nonetheless, we see several other drivers of capital flow improvement that are likely to
remain intact in the coming months:
1. The government is likely to maintain its recently stricter implementation of capital
controls and restrictions on cross border yuan flows that we outlined in reports CNY:
tightening policy to stay in control and China tightened its checks on personal forex

FX Compass: Not Fade Away 19


22 March 2017

purchase. In particular, the governments crackdown on Chinese outward M&A has


contributed to Chinese outbound investment falling 39%yoy in December and
36%yoy in January.
2. USD-G10 now looks more likely to range trade rather than rise significantly. This has
reduced fears of CNY weakness due to broad USD strength and so speculative
demand for USDCNY.
3. The PBoC seems likely to continue to creep interbank rates higher in line with US
money market rates, at least over the next few months. Figure 36 shows that the 7-
day repo rate is trending higher and yesterday the PBoC increased its open market
operation reverse repo rate by 10bps (see our Asian Daily and our report China, a
nominal sweet spot?).

Figure 36: 7 day repo rate is trending higher


3.1
7-day, vol weighted, 20 day avg, %
3.0
2.9 7-day fixing, 20 day avg, %

2.8
2.7
2.6
2.5
2.4
2.3
2.2
Jun-16 Aug-16 Oct-16 Dec-16 Feb-17
Source: Credit Suisse, the BLOOMBERG PROFESSIONAL service, CEIC

We continue to expect Chinas balance of payments to remain in deficit in the sense that
the PBoCs reserves fall on a trend basis. We believe that monetary policy is too easy for
trend stability of the CNY, even after the recent rise in interest rates. However, the factors
above suggest that the pace of capital outflows and reserve losses should remain at
modest levels that allow the government to continue to dictate the path the CNY takes.
The broad USD remains the main risk we see to our outlook. A sharp USD rally, perhaps
because of a Fed shift to a faster pace of rate hikes or passage of the Destination Based,
Cash Flow Tax proposal, would create new incentives for larger capital outflows from
China (see US Economy Notes: Dont be a border adjustment loser).

China's capital flow indicators compare and


contrast
Before we examine commonly use indicators, it is important to note that it has become a
market practice to estimate "capital flows" on a monthly basis by subtracting the trade
balance from some measure of the change in FX reserves. The resulting variable is not
strictly capital flow because it includes the services and income components of the
current account. However, these current account variables tend to be much less volatile
on a monthly basis than capital flows, implying that such practice captures the essence
of swings in the magnitude of capital flow pressure on the CNY. We follow the same
calculation here to derive our monthly capital flow estimates. In Figure 38, we compare
the correlation of each derived capital flow estimate with the equivalent Balance of
Payments flows.

FX Compass: Not Fade Away 20


22 March 2017

China publishes four main indicators from which one could estimate the monthly change in
FX reserves, and hence capital flows:
1. SAFE's FX reserves. SAFE's FX reserve is the most direct measure, and tends to be
released first in the month, usually in the first week around the 6th or 7th. However,
several problems exist with using the headline change in the value of FX reserves as
a guide to capital flows. One is that assumptions about the currency and asset
structure of reserves need to be made in order to adjust for valuation effects. Another
is that the PBOC engages in intervention in forward markets, but releases data on this
with a lag. We note that the correlation of changes in FX reserves to changes in
balance of payments flow has been falling (Figure 38).
2. PBoC total foreign assets position. Foreign assets on the PBoC's balance sheet are
valued at cost, in RMB. The monthly change can be understood as the PBoC's RMB
cost of acquiring new foreign assets. The total foreign assets position covers all PBoC
foreign assets, including FX, gold and "other" foreign assets. It captures PBoC
intervention as well as other activity in foreign assets. Unlike FX reserves data, the
change in PBoC foreign assets position is not subject to valuation effect. PBoC
balance sheet data are typically released around the 14th to 17th of the month.
3. PBoC foreign assets position FX component. Changes in the FX component of
PBoC's foreign assets above (excluding gold, or "other foreign assets") are the
balance sheet item most directly related to PBoC FX intervention. This indicator has
historically had the highest correlation to change in reserves asset in BoP, although its
correlation has fallen slightly more recently (Figure 38).
4. Commercial banks' net FX settlement. FX settlement refers to the exchange
transactions between RMB and foreign currencies that banks conduct for their clients.
The time of conversion between the RMB and the foreign currency is regarded as the
time-point for the statistics. Unlike the three indicators above, FX settlement includes
both spot and forward transactions. We view this as a more timely and broader
measure of FX market pressure.
FX settlement is closely related to the change in reserves. A settlement deficit would
usually be offset by a fall in PBoC FX reserves. However, commercial banks can also
manage their own FX position in the short term. For instance, in the case of net demand
for FX from clients, banks may cut their own FX positions and become a direct source of
FX provision to clients, eliminating the need for PBoC FX reserves to fall to clear the
market at the prevailing exchange rate. In August 2015, the FX settlement deficit was
much larger than implied by the change in PBoC balance sheet or FX reserves, partly due
to the combination of commercial banks running down on their own FX position and PBoC
forward intervention.
FX settlement statistics are not prepared based on the principle for transactions between
residents and non-residents that governs Balance of Payment statistics. In addition, FX
settlement data are not subject to the accrual accounting basis required in the preparation
of the BoP statistics. As such, its correlation to BoP reserves asset is high, but still not
quite as high as PBoC foreign assets.
FX settlement data are usually released on the third week of the month.

FX Compass: Not Fade Away 21


22 March 2017

Figure 37: China's capital flow indicators tracking Figure 38: PBoC foreign FX assets generally have
BoP flows high and stable correlations to BoP flows
Monthly change in USD, minus trade balance. FX reserves are Monthly change in USD, minus trade balance. FX reserves are
adjusted for valuation effect adjusted for valuation effect
Correlation to BoP flows excluding goods trade balance
300 Monthly non trade flows vs. BoP flows, $bn
and reserves assets
200 PBoC
foreign PBoC foreign Net FX FX
100
assets FX assets settlement reserves
0 From 2006 97.5% 97.7% 95.4% 94.8%
From 2010 98.1% 98.5% 95.9% 95.1%
-100
From 2012 98.0% 98.1% 94.9% 93.2%
-200 From 2014 97.6% 97.5% 92.8% 85.4%

-300
Net change in reserves adjusted
-400 From PBoC foreign assets
PBoC foreign FX assets
-500
FX settlement
-600 BoP non trade flows, $bn
Mar-10 Nov-14
Source: Credit Suisse, the BLOOMBERG PROFESSIONAL service Source: Credit Suisse, the BLOOMBERG PROFESSIONAL service

FX Compass: Not Fade Away 22


22 March 2017

EURUSD is testing a key resistance zone


EUR TWI continues to
Christopher Hine EURUSD has been trapped in a sideways range since December last year. However, it
212 538
hold 5727
a top
christopher.hine@credit-suisse.com
has now rallied up to test a key resistance zone starting at the top of its range at
1.0792/0829 the potential trendline from the November last year, the February high and
a cluster of retracement levels, one of which includes the 38.2% retracement of the entire
2016/17 fall. We would look for selling to show here and prices to try and turn lower again
from it. However, if the 1.0829 level is overcome this would warn of a larger base and turn
attention to 1.0874/91 the December 2016 spike high and the falling 200-day average.
Follow through above this latter area is needed to confirm that a larger base is in place
and would then see a significant change of price structure to then aim at 1.0979 next then
the 61.8% retracement of the 2016/17 fall at 1.1129 with a major resistance at 1.1300
November 2016 high.
EURUSD is testing a Support moves to 1.0719 with a break below 1.0706 needed to ease immediate upside
key resistance zone pressure. Removal of 1.0640/00 is required to turn the trend lower again in the range to
starting at 1.0821/29 test price and trendline support at 1.0543/25. Capitulation below the 1.0494 March 2016
low is required to retarget the 1.0341 low from the beginning of the year.
On a broader basis the EUR TWI (BoE) has seen a sharp recovery since the end of
February. This has seen it break above price resistance at 89.22/24 which has eased
immediate downside risks. Resistance is seen next at 89.57 above which can provide a
better foundation on which to rally up to a bigger resistance zone at 90.63/95 the 50%
retracement of the 2014/15 fall and the October 2016 high. With the potential falling trendline
from October 2009 just above at 91.60 we would look for this area to provide a ceiling.
Extension above this latter level is needed to signal a more substantial move higher.
EUR TWI (BoE) has set Support moves to 88.37 with a break below the February 2017 low at 87.65 needed to turn
a small base the trend lower again for the 50% retracement of the 2015/16 rise at 87.24. Solid levels
are seen at 86.68/37 the 61.8% retracement level and the June 2016 low.

EURUSD - Daily EUR TWI (BoE) - Weekly

Source: CQG, Credit Suisse Source: CQG, Credit Suisse

FX Compass: Not Fade Away 23


22 March 2017

Vanilla Portfolio Recap


This week's updates
We purchase a 1m USDRUB 59.35 call (spot ref 57.60) for 0.61% of notional. The
maximum loss to the trade is limited to the premium paid.

Figure 39: Vanilla portfolio cumulative percent returns (Since 1 Sep 2014)
Indicative Vanilla portfolio return based on a starting notional capital of $10mn on 01 Sep 14,
$11.3mn on 1/1/15, $12.5mm on 1/1/16, $13.0mm on 1/1/17 .
35
30
25
20
15
10
5 Vanilla Portfolio YTD 2017: -0.3%

0
Sep-14 Jan-15 May-15 Sep-15 Jan-16 May-16 Sep-16 Jan-17

Source: Credit Suisse

Figure 40: Current vanilla recommendations


Entry Entry Current P&L (% of
Expiration Trade Details Notional CCY P&L USD
Date Cost/Level Value notional)
21-Mar-17 18-Apr-17 Buy 1m USDRUB call Buy 1m 59.35 call 0.61% 0.61% 0.00% 5,000,000 USD 0
Buy 10m USDHKD call spread Buy 7.75 call, sell 7.85 call 0.37% 0.32% (0.05%) 15,000,000 USD -7,500
14-Feb-17 14-Dec-17 Buy 10m 7.75 USDHKD call 0.70% 0.52% (0.18%) 15,000,000 USD -27,000
14-Feb-17 14-Dec-17 Sell 10m 7.85 USDHKD call 0.33% 0.20% 0.13% -15,000,000 USD 19,500
Buy 3m 1x1.5 AUDUSD put spread Buy 12mm 0.7350, Sell 18mm 0.7150 0.50% 0.17% (0.30%) 12,000,000 AUD -27,962
10-Jan-17 11-Apr-17 Buy 6m 0.7350 AUDUSD put 2.04% 0.23% (1.71%) 12,000,000 AUD -158,918
10-Jan-17 11-Apr-17 Sell 6m 0.7150 AUDUSD put 1.03% 0.04% 0.94% -18,000,000 AUD 130,955

Past performance should not be taken as an indication or guarantee of future performance, and no representation or warranty, express or implied, is made regarding future performance.
Information, opinions and estimates contained in this report reflect a judgment at the original date of publication by CS and are subject to change without notice. The price, value of and income
from any of the securities or financial instruments mentioned in this report can fall as well as rise. The value of securities and financial instruments may be subject to exchange rate fluctuation
that may have a positive or adverse effect on the price or income of such securities or financial instruments. The P&L results shown do not include relevant costs, such as commissions, interest
charges, or other applicable expenses.

Source: Credit Suisse

FX Compass: Not Fade Away 24


22 March 2017

Exotic Portfolio Recap


This week's updates
No new trades this week.

Figure 41: Exotic portfolio cumulative percent returns (Since 1 Sep 2014)
Indicative portfolio return based on a starting notional capital of $10mn on 01 Sep 14, $10.8mn
on 1/1/15, $10.8mm on 1/1/16, $10.7mm on 1/1/17
12
10
8
6
4
2
0
-2
-4 Exotic Portfolio YTD 2017: -2.4%
-6
Sep-14 Jan-15 May-15 Sep-15 Jan-16 May-16 Sep-16 Jan-17

Source: Credit Suisse

Figure 42: Current exotic recommendations


Entry Entry Current P&L (% of
Expiration Trade Details Notional CCY P&L USD
Date Cost/Level Value notional)
07-Mar-17 06-Jun-17 Buy 3m USDMXN put DKO USDMXN 19.745 put, KO 18.00, 22.00 1.40% 1.53% 0.13% 5,000,000 USD 6,500
10-Jan-17 11-Apr-17 Buy 6m USDCAD call RKO USDCAD 1.35 call, 1.40 ko 0.20% 0.31% 0.11% 10,000,000 USD 11,000
04-Oct-16 04-Apr-17 Buy 6m EURUSD one touch EURUSD 1.00 strike one touch 9.89% 1.00% (9.25%) 200,000 EUR -19,979
12-Jul-16 12-Jul-17 Buy 1y USDJPY one touch Long 130 strike one touch 8.43% 1.50% (6.93%) 1,000,000 USD -69,300

Past performance should not be taken as an indication or guarantee of future performance, and no representation or warranty, express or implied, is made regarding future performance.
Information, opinions and estimates contained in this report reflect a judgment at the original date of publication by CS and are subject to change without notice. The price, value of and income
from any of the securities or financial instruments mentioned in this report can fall as well as rise. The value of securities and financial instruments may be subject to exchange rate fluctuation
that may have a positive or adverse effect on the price or income of such securities or financial instruments. The P&L results shown do not include relevant costs, such as commissions, interest
charges, or other applicable expenses.

Source: Credit Suisse

FX Compass: Not Fade Away 25


22 March 2017

Trades of the Year 2017


As recommended in the Top Trades for the 2017 Outlook: A New Narrative (Not a
New Normal)

Figure 43: Trades of the year


Entry Current
Expiration Trade Details Entry Price P&L (%) Status
Date Price
05-Jan-17 05-Jul-17 Buy EURGBP 6-month double no touch 0.8120 / 0.8870 strikes, spot ref 0.8489 15.00% 16.00% 1.00% Active
05-Jan-17 05-Jul-17 Sell CADRUB 6m forward Target 42.75, stop loss 47.00, spot ref 45.39 47.09 44.23 6.06% Active
05-Jan-17 05-Jul-17 Sell MXNRUB 6m forward Target 2.60, stop loss 3.00, spot ref 2.8390 2.8590 3.0000 (4.93%) Stopped out
05-Jan-17 05-Jul-17 Buy USDCNH 6m forward Target 7.40, stop loss 6.80 (fwd), spot ref 6.8274 7.0440 6.9339 (1.56%) Active
05-Jan-17 05-Jul-17 Buy USDTWD 6m NDF Target 33.50, stop loss 31.25 (fwd), spot ref 31.93 31.79 31.25 (1.70%) Stopped out

Past performance should not be taken as an indication or guarantee of future performance, and no representation or warranty, express or implied, is made regarding future performance.
Information, opinions and estimates contained in this report reflect a judgment at the original date of publication by CS and are subject to change without notice. The price, value of and income
from any of the securities or financial instruments mentioned in this report can fall as well as rise. The value of securities and financial instruments may be subject to exchange rate fluctuation
that may have a positive or adverse effect on the price or income of such securities or financial instruments. The P&L results shown do not include relevant costs, such as commissions, interest
charges, or other applicable expenses.

Source: Credit Suisse

FX Compass: Not Fade Away 26


22 March 2017

FX Forecast Recap
Figure 44: CS FX Forecasts
Major Currencies
vs. USD EURUSD USDJPY GBPUSD USDCHF USDCAD AUDUSD NZDUSD USDSEK USDNOK
3m 1.030 115.00 1.200 1.024 1.350 0.720 0.664 9.029 9.029
12m 1.000 112.00 1.200 1.060 1.370 0.700 0.673 9.150 9.500
vs. EUR EURJPY EURGBP EURCHF EURCAD EURAUD EURNZD EURSEK EURNOK
3m 118.45 0.858 1.055 1.391 1.431 1.552 9.300 9.300
12m 112.00 0.83 1.060 1.370 1.429 1.486 9.150 9.500
Emerging Currencies
vs. USD USDCNY USDHKD USDINR USDIDR USDKRW USDMYR USDPHP USDSGD USDTHB
3m 6.980 7.750 64.80 13100 1100 4.350 50.80 1.410 34.60
12m 7.180 7.750 67.00 13600 1170 4.500 51.80 1.445 35.50
vs. USD USDRUB USDTRY USDZAR EURHUF USDBRL USDMXN USDCLP USDCOP USDTWD
3m 58.00 3.800 13.50 313 3.200 19.00 670 3100 30.00
12m 60.00 4.100 14.25 313 3.500 22.00 680 3150 32.00

Source: Credit Suisse, the BLOOMBERG PROFESSIONAL service

FX Compass: Not Fade Away 27


22 March 2017

GLOBAL FIXED INCOME AND ECONOMIC RESEARCH


James Sweeney, Managing Director Dr. Neal Soss, Managing Director
Head of Fixed Income and Economic Research Vice Chairman, Fixed Income Research
+1 212 538 4648 1 212 325 3335
james.sweeney@credit-suisse.com neal.soss@credit-suisse.com

US / GLOBAL ECONOMICS AND STRATEGY


James Sweeney
Chief Economist Xiao Cui Zoltan Pozsar Jeremy Schwartz Sarah Smith Wenzhe Zhao
+1 212 538 4648 +1 212 538 2511 +1 212 538 3779 +1 212 538 6419 +1 212 325-1022 +1 212 325 1798
james.sweeney@credit-suisse.com xiao.cui@credit-suisse.com zoltan.pozsar@credit-suisse.com jeremy.schwartz@credit-suisse.com sarah.smith@credit-suisse.com wenzhe.zhao@credit-suisse.com
Praveen Korapaty
Head of Interest Rate Strategy Jonathan Cohn William Marshall
212 325 3427 212 325 4923 212 325 5584
praveen.korapaty@credit-suisse.com jonathan.cohn@credit-suisse.com william.marshall@credit-suisse.com

EUROPEAN ECONOMICS AND STRATEGY


Neville Hill
Head of European Economics & Strategy Anais Boussie Peter Foley Sonali Punhani Veronika Roharova Giovanni Zanni
+44 20 7888 1334 +44 20 7883 9639 +44 20 7883 4349 +44 20 7883 4297 +44 20 7888 2403 +44 20 7888 6827
neville.hill@credit-suisse.com anais.boussie@credit-suisse.com peter.foley@credit-suisse.com sonali.punhani@credit-suisse.com veronika.roharova@credit-suisse.com giovanni.zanni@credit-suisse.com
David Sneddon
Head of Technical Analysis Christopher Hine
44 20 7888 7173 212 538 5727
david.sneddon@credit-suisse.com christopher.hine@credit-suisse.com
William Porter
Head of European Credit Chiraag Somaia
+44 20 7888 1207 +44 20 7888 2776
william.porter@credit-suisse.com chiraag.somaia@credit-suisse.com

GLOBAL FX / EM ECONOMICS AND STRATEGY


Shahab Jalinoos
Head of Global FX Strategy Honglin Jiang Trang Thuy Le Alvise Marino Bhaveer Shah
212 325 5412 44 20 7888 1501 +852 2101 7426 212 325 5911 44 20 7883 1449
shahab.jalinoos@credit-suisse.com honglin.jiang@credit-suisse.com trangthuy.le@credit-suisse.com alvise.marino@credit-suisse.com bhaveer.shah@credit-suisse.com
Kasper Bartholdy
Head of Global EM Strategy Ashish Agrawal Daniel Chodos Nimrod Mevorach Martin Yu
+44 20 7883 4907 +65 6212 3405 +1 212 325 7708 +44 20 7888 1257 +65 6212 3448
kasper.bartholdy@credit-suisse.com ashish.agrawal@credit-suisse.com daniel.chodos@credit-suisse.com nimrod.mevorach@credit-suisse.com martin.yu@credit-suisse.com
Berna Bayazitoglu
Head of EEMEA Economics Alexey Pogorelov Carlos Teixeira
+44 20 7883 3431 +44 20 7883 0396 +27 11 012 8054
berna.bayazitoglu@credit-suisse.com alexey.pogorelov@credit-suisse.com carlos.teixeira@credit-suisse.com
Alonso Cervera Juan Lorenzo Maldonado
Head of Latin America Economics +1 212 325 4245 Casey Reckman Alberto Rojas
+52 55 5283 3845 juanlorenzo.maldonado@credit- +1 212 325 5570 +52 55 5283 8975
alonso.cervera@credit-suisse.com suisse.com casey.reckman@credit-suisse.com alberto.rojas@credit-suisse.com
Nilson Teixeira
Head of Brazil Economics Paulo Coutinho Iana Ferrao Leonardo Fonseca Lucas Vilela
+55 11 3701 6288 +55 11 3701-6353 +55 11 3701 6345 +55 11 3701 6348 +55 11 3701-6352
nilson.teixeira@credit-suisse.com paulo.coutinho@credit-suisse.com iana.ferrao@credit-suisse.com leonardo.fonseca@credit-suisse.com lucas.vilela @credit-suisse.com

ASIA PACIFIC DIVISION


Ray Farris, Managing Director
Head of Fixed Income Research and Economics, Asia Pacific Division
+65 6212 3412
ray.farris@credit-suisse.com
EMERGING ASIA ECONOMICS
Dr. Santitarn Sathirathai Vincent Chan
Head of Emerging Asia Economics Head of China Macro Deepali Bhargava Weishen Deng Christiaan Tuntono Michael Wan
+65 6212 5675 +852 2101 6568 +65 6212 5699 +852 2101 7162 +852 2101 7409 +65 6212 3418
santitarn.sathirathai@credit-suisse.com vincent.chan@credit-suisse.com deepali.bhargava@credit-suisse.com weishen.deng@credit-suisse.com christiaan.tuntono@credit-suisse.com michael.wan@credit-suisse.com

JAPAN ECONOMICS
Hiromichi Shirakawa
Head of Japan Economics Takashi Shiono
+81 3 4550 7117 +81 3 4550 7189
hiromichi.shirakawa@credit-suisse.com takashi.shiono@credit-suisse.com

FX Compass: Not Fade Away 28


22 March 2017

Disclosure Appendix
Analyst Certification
Shahab Jalinoos, Ray Farris, Alvise Marino, Trang Thuy Le, Honglin Jiang and Bhaveer Shah each certify, with respect to the companies or
securities that the individual analyzes, that (1) the views expressed in this report accurately reflect his or her personal views about all of the subject
companies and securities and (2) no part of his or her compensation was, is or will be directly or indirectly related to the specific recommendations or
views expressed in this report.
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Credit Suisse's policy is to publish research reports as it deems appropriate, based on developments with the subject issuer, the sector or the market
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The analyst(s) involved in the preparation of this research report received compensation that is based upon various factors, including Credit Suisse's
total revenues, a portion of which are generated by Credit Suisse's Investment Banking and Fixed Income Divisions.
Credit Suisse may trade as principal in the securities or derivatives of the issuers that are the subject of this report.
At any point in time, Credit Suisse is likely to have significant holdings in the securities mentioned in this report.
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For the history of trade ideas suggested by the Fixed Income Research department over the previous 12 months, please view the document at
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the history of trade ideas suggested by Emerging Markets Strategy Research, please see the latest Emerging Markets Strategy Weekly report on
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For a history of recommendations for the financial instrument(s) featured in this report, disseminated within the past 12 months, please refer to
https://rave.credit-suisse.com/disclosures/view/reportfi?i=290381&v=-1llwqhq72z6mdjbza4i88ese4 .
This research report is authored by:
Credit Suisse (Hong Kong) Limited ....................................................................................................................................................Trang Thuy Le
Credit Suisse Securities (USA) LLC .........................................................................................Shahab Jalinoos ; Alvise Marino ; Christopher Hine
Credit Suisse AG, Singapore Branch ....................................................................................................................................................... Ray Farris
Credit Suisse International .......................................................................................................... Honglin Jiang ; Bhaveer Shah ; Nimrod Mevorach
Structured Securities, Derivatives, Options, and Futures Disclaimer
General risks: Structured securities, derivatives, options (OTC and listed), and futures (including, but not limited to, commodity, foreign exchange,
and security futures) are complex instruments that are not suitable for every investor, may involve a high degree of risk, may be highly illiquid, and
may be appropriate investments only for sophisticated investors who are capable of understanding and assuming the risks involved. There is a risk
of unlimited, total, or significant loss resulting from the use of these instruments for trading and investment.
Before entering into any transaction involving these instruments, you should ensure that you fully understand their potential risks and rewards and
independently determine that they are appropriate for you given your objectives, experience, financial and operational resources, and other relevant
circumstances. For options, please ensure that you have read the Options Clearing Corporation's disclosure document, available at:
http://www.optionsclearing.com/publications/risks/riskchap1.jsp.
Risk of losses on options: The maximum potential loss on buying a call or put option is the loss of total premium paid. The maximum potential loss
on selling a call option is unlimited. The maximum potential loss on selling a put option is substantial and may exceed the premium received by a
significant amount. There are many other options combinations that entail significant risks and transaction costs: you should ensure they are
appropriate for your situation and that you understand the risks.
Risk of losses on futures: The maximum potential loss on buying a futures contract is substantial (the loss of the value of the contract) and can be
amplified by leverage. The maximum potential loss on selling a futures contract is unlimited.
OTC options and other derivatives: In discussions of OTC options and other derivatives, the results and risks are based solely on the hypothetical
examples cited; actual results and risks will vary depending on specific circumstances. Investors are urged to consider carefully whether these
products, as well as the products or strategies discussed herein, are suitable to their needs. While some OTC markets may be liquid, transactions in
OTC derivatives may involve greater risk than investments in exchange-listed derivatives because there is no exchange market on which to liquidate
a position and it may be very difficult to assess the value of the position because bid and offer prices need not be quoted.

FX Compass: Not Fade Away 29


22 March 2017

Structured products: These products often have a derivative component. As a result, they carry not only the risk of loss of principal, but also the
possibility that at expiration the investor will own the reference asset at a depressed price. Even if a structured product is listed on an exchange,
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Taxation: Because of the importance of tax considerations for many option and other derivative transactions, investors considering these products
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as spreads and straddles. Commissions and transaction costs may be a factor in actual returns realized by the investor and should be taken into
consideration.
Trading on margin: Margin requirements vary and should be determined before investing as they can impact your profit potential. If the market
moves against your position, you may be called upon by your broker to deposit a substantial amount of additional margin funds, on short notice, in
order to maintain your position. If you do not provide the required funds within the time required by your broker, your position may be liquidated at a
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Further information: Supporting documentation for any claims, comparisons, recommendations, statistics or other technical data in this material will
be supplied upon request. Any trade information is preliminary and not intended as an official transaction confirmation. If you have any questions
about whether you are eligible to enter into these transactions with Credit Suisse, please contact your sales representative.

FX Compass: Not Fade Away 30


22 March 2017

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