Foreign Exchange

08 July 2011

FX Weekly: Shark Infested Waters

Currency Summary JPY - Eternal Equilibrium? Chinas Delicate Balancing Act Higher USDCAD Volatility Set to Persist Reasons for SEK Underperformance Our Take on Chinese Bad Debt Medium Term Recommendations Volatility Cones Correlation Economic Calendar FX Forecast Contacts 2 4 6 8 10 12 15 18 19 20 22 23

Ratings agencies have sabotaged hopes for sustained improvement in EUR sentiment; we cant be long here. Fate of budget talks key for USD, but implications of a deal are highly ambiguous. Local markets are set for another volatile week as mixed news-flow is likely to continue next week. FX Weekly Strategy: G10 Summary
Fridays US employment report was distressing in all respects. For FX markets, it makes even more complex what was already a complicated equation. Our presumption, at the end of last week, that the passage of the Greek austerity measures heralded a period of sustained improvement in risk appetite could not have been more wrong, the ratings agencies quickly sabotaging any hopes that the market might be able to leave the Greek (and broader euro-peripheral) crisis behind for a while. The Troika that had agreed the outline of a new deal for Greece is now redefined to mean the ECB, the ratings agencies and those EU governments insistent on significant private-sector involvement (PSI) in any new funding deal for Greece. How this plays out is absolutely crucial for the fate of the euro, much more so in the short term than whether the ECB remains hawkish in its approach to monetary policy. Our call for EURUSD at 1.50 in Q3, and possibly 1.55 before year-end, is currently in suspense and we are very reluctant to recommend long EUR positions either versus USD or on crosses. Also complicating our USD view is the rising expectation of a substantial and credible US budget deal. The potential for such an occurrence to restore confidence in US risk-free assets, and at time when the completion of QE2 has brought an end, for now, to an era of perceived currency debasement, has the potential to be USD positive even if a budget deal is supportive of risk. This would especially be the case if any accord includes a commitment to a new version of the 2005 Homeland Investment Act, bringing with it the prospect of significant repatriation flows by US corporates in 2012 (and which will inevitably be front run by the risk-taking FX community). The barrier to HIA2 may not be as high as we previously supposed. At the same time, meaningful fiscal contraction in 2012 arising from a budget deal will and all the more so in the wake of the latest employment numbers inevitably resurrect speculation that the Fed will have to do more. The bar for QE3 may remain high but might not be insurmountable in these circumstances. Risk will be better expressed via AUD (including short EURAUD), NZD, CAD, NOK and SEK than EUR. We also favour fading Fridays GBP rally, on our view that the bar to more QE from the BoE is much lower than at the Fed.

Local Markets Strategy

Local markets have seen a volatile trading week as a four-notch downgrade of Portugal, monetary tightening by China, and very weak NFP data countered the improvement in risk sentiment following the better-thanexpected ADP print. Given the ongoing concerns regarding the eurozone periphery, we are fairly cautious on risky assets in the upcoming week. CEEMEA currencies have been testing well-established ranges, but we expect to see some retracement in the coming days. Inflation figures to be released in the Czech Republic and in Poland should vindicate the respective central banks dovish stances. In Latam, central bank policy continues to diverge with Brazil expected to press ahead with tightening while Banxico remains firmly on hold. We expect the Chilean central bank to hike rates next week and like being short USDCLP on the back of higher copper prices.
IMPORTANT NOTICE. Please refer to important disclosures found at the end of this report. Some sections of this report have been written by our strategy teams (shown in blue). Such reports do not purport to be an exhaustive analysis and may be subject to conflicts of interest resulting from their interaction with sales and trading which could affect the objectivity of this report.

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Weekly Currency Summary

Europe
EUR CHF GBP NOK SEK
The ECB rate hike failed to prop up EURUSD by the end of the week as ratings agency actions on Portugal (and now Italy) as well as their ongoing threat to issue an SD verdict on currently Greek PSI plans dominated proceedings. The latter left the ECB and German government at loggerheads. The Euro FinMin meeting on Monday and Tuesday will be carefully watched. Thus, EUR remains vulnerable to any further negative peripheral headlines. The downgrade of Portuguese bonds to junk status by Moodys and its view that a second bail-out will be needed reversed much of the EURCHF prior weeks relief rally. We remain short EURCHF in case of any further bad news on peripheral Europe especially ahead of the FinMin meeting this coming week. Mixed nature of data out of the UK fails to provide any clear support for GBP. As expected, the BoE left rates unchanged, but the BoE minutes on July 20 will be key, especially as the BoE seems to be shifting to a more dovish stance. This may be helped by CPI this week, which should show a moderation in inflation. Data out of the UK this week are likely to augment the weakness in the UK economy. We continue to recommend fading GBPAUD rallies. IP numbers out of Norway were weaker than the previous month. However, the economy overall is performing well. CPI data this week are likely to show an uptick in inflation highlighting that the CB could hike as early as August. We favour short EURNOK positions. IP data out of Sweden surprised to the upside. June Inflation numbers this week should be marginally higher than Mays figures. With robust fundamentals and risk appetite in tact, SEK should perform well. However, if risk appetite deteriorates, then we recommend long NOKSEK.

Converging Europe, Russia and Israel

PLN CZK
PLN benefited from the improvement in sentiment towards the end of the week, and our short EURPLN position has performed well; however, we could see some profit-taking going into next week which could take the pair back to 3.95. We would use this to re-establish downside positions. CZK was relatively unfazed by the ECB rate hike this week, despite the widening rate differential between the Czech Republic and the eurozone. Inflation next week should affirm the lack of demand side pressures in the economy, implying that rate hikes will remain off the table for a while. We see potential for EURCZK to move lower and test the 24.10 support level, particularly if nervousness over eurozone debt resurfaces next week. HUF has held up particularly well this week despite a re-widening in Hungary CDS on the back of the downgrade in Portugal. Nonetheless, we think HUF is vulnerable at current levels to shifts in global risk sentiment. EURHUF has broken below the bottom of the range seen since the start of Q2, but we think that this is looking stretched and would err on the side of EURHUF upside in the coming week. Romanian assets received a boost on the back of a ratings upgrade by Fitch to BBB-, bringing it back to investment grade. CDS tightened substantially on the back of the news, and given the correlation with the currency, our short EURRON position performed well. We remain short EURRON into next week, targeting 4.16 in the short term. RUB strengthened on the back of the improvement in risk appetite and the move higher in oil prices during the week, breaking through the 33.35 support against the basket. However, we think that political risks remain elevated and capital outflows ahead of the elections later this year will prevent the currency from strengthening substantially. We remain neutral on RUB at this stage, and we expect to see some profit taking next week. While risk-taking activity at the end of the week helped to bring the level of TRY/basket to below 1.97, we think that it is still difficult at this stage to be outright bullish TRY, particularly as current account data on Monday could spark another bout of nervousness with regards to Turkish assets. Also, the CBRT is due to meet on 22 July and to publish the new inflation report shortly after this, which will likely serve to propagate the banks excessively dovish stance. BoI Governor Fischer sounded relatively hawkish this week, highlighting that inflation remains a concern as levels are still too high. On the currency front, ILS gained on the back of Fischers comments; however, the BoI has been seen intervening in USDILS below 3.40. We are, therefore, neutral towards the shekel at current levels.

HUF RON RUB

TRY ILS

America
Fridays employment report massively disappointed, leading to a rally in US Treasury yields and taking a toll on risk appetite overall. The US budget talks this week will be important. A credible budget deal could restore confidence in US assets and has the potential to be USD positive but supportive for risk. Bernankes testimony to Congress on Wednesday will be crucial following the weak employment data. US retail sales this week will continue to emphasise the weak consumer sector. CAD found some support against the USD on the improvement in the US ADP numbers, but it failed to maintain its strength after weak NFP. US retail sales as well as UMich Consumer Confidence numbers this upcoming week will be important for CAD given its reliance on the US consumer, as well as oil and equities.

USD

CAD

EMK America
BRL CLP MXN COP
After the downward pressure in USD/BRL due to the month-end fixing formation, the key focus is on the sizeable USD inflow related to equity issuance and FDI in the second half of July. Talks on potential additional FX measures were downplayed by President Rousseff. Inflation remains a key problem for the current administration. The stream of betterthan-expected activity numbers in Chile and globally pushed copper prices higher. As such, CLP is moving in tandem. Ahead of next weeks rates decision, expected to be another 25bp hike, we see USD/CLP testing new lows. We sell USD/CLP. Even though we took profit on the short USD/MXN options position we opened in mid-June, technicals are still light, but US numbers have been mixed. MXN is a buy-on-dips story in Latam. While fundamentals call for robust USD inflow (due to the S&Ps upgrade of Colombia to the IG criteria), Banrep is opening the door for a pause in rate hikes, and the National Treasury still has ammo to prevent COP to move higher.

FX Weekly
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PEN VEF ARS

We remain neutral for now, waiting for a better entry level to establish short USD/COP. Fundamentals remain favorable for PEN, and we are inclined to add short USD/PEN positions next week, after the expected punctual USD buying pressure caused by the maturity of USD 250mn in CDRs. The current level of oil prices is enough to give the government some extra-time before announcing another devaluation of the VEF, which we expect to take place at the beginning of 2013, following presidential elections in December 2012. As elections approach, we expect the BCRA to intensify its intervention in the spot market to assure just a gradual ARS nominal depreciation. Historically, private sector USD outflow gains momentum ahead of elections. We are neutral ARS.

YEN

USDJPY collapsed back into the all-too familiar range on Friday following the weak US employment report as US Treasuries rallied. USDJPY may reverse its course if a favourable US budget deal is reached. However, the performance of JPY will depend on overall risk appetite and any news out of Europe.

SGD

MYR

IDR

THB

PHP HKD CNY

TWD

KRW

INR VND

The SGD made a new historic high as real and leveraged accounts jumped back into the Asian currency play as debt woes in the eurozone and US made major currencies even less appealing. A slowdown in PMI in June failed to dampen enthusiasm for the SGD, as details were comforting. Data in the week ahead include advance Q2 GDP, retail sales and NoDX, which should confirm the slowdown in Q2. Investors, however, expect a recovery in H2. We continue to run with our tech short USDSGD positions with a protective stop lowered to 1.2320. USDMYR broke the key 3.0000 level after PM Tun Razak shifted Malaysias Economic Transformation Programme (WTP) into higher gear with the governments six Strategic Reform Initiatives (SRI) and GLC divestment. The KLCI made fresh highs. Industrial production and manufacturing sales this week are expected to be weak, reflecting the soft patch of growth in Q2. BNM failed to hike policy rates last week and, instead, hiked SRR by 1% to 4%. June CPI data will be watched for guidance on the timing of the next rate hike. We maintain our USDMYR tech shorts with a stop lowered to 3.0250 to profit profits. USDIDR is approaching a key support at 8500, a break here opens the way to 8300, a level last seen in January 2004. Indo bonds and stocks remain well in demand, as the BI is seen keeping rates unchanged at its meeting on 12 July. We maintain our technical short positions with a stop lowered to 8560 to protect profits. Aggressive buying in Thai assets after the landslide win by the Puea Thai Party prompted a 1.7% appreciation in THB the past week. Whilst the PTPs populist economic policies could lead to higher inflation and a wider fiscal deficit, the market is relieved over the militarys and peoples acceptance of the results, and a return of political calm could restore investor confidence. Data in the coming week, especially weekly FX reserves, will be watched for the level of intervention as THB surged. The BoT meets next week where we expect a 25bp rate hike. Trendline support for USDTHB is at 29.95. After the sharp rally, we expect 30.00 to act as a strong floor and consolidation between 30.0030.50. USDPHP slumped over the last week, as robust risk taking sentiment fed rallies in Phil stocks and bonds. Both headline and core CPI continue to rise, nudging towards the top end of the BSPs target range of 3-5%. We expect another 25bp rate hike at the next meeting on 28 July, which should add to the PHPs high-yield appeal. USDPHP is hovering above trendline support at 42.70. A break is needed to push further peso gains to 42.60. The data calendar is heavy in the week ahead with bank lending, exports, OFW, BoP and budget data. Retail sales remained strong on tourism spending and rising wages. Forwards traded higher on easing concerns over USD liquidity with forwards up to 1Y supported. Retail sales and PMI will be released this week. We are close to the end of this tightening cycle after the PBoC delivered a long-awaited 25bp rate hike last Wednesday. We saw heavy buying of onshore FX swaps ahead of the rate hike while reaction in the NDF market to the rate hike was muted. Fast money continues rolling short USDCNY NDF position such as 1M while oil companies buying of USDCNH persists. We stay with our short 1Y CNH DF vs. 1Y CNY NDF. Growth in exports and imports slowed in June due to weak external demand. But a wider trade surplus and increasing FX reserves could provide support to TWD. USDTWD has met strong resistance at 29.00 and the 100-day MA at 29.04. We maintain a technical short position established at 28.70 with a stop at 29.20. Reportedly, the CBC is still paying 1M to 3M FX swap. FX reserves slid marginally in June, but a strong KOSPI sent USDKRW lower. The pair broke 1063 to trade to a low of 1056. The sale of KB Financial Holdings and foreigners purchase worth some USD 1.2bn aided the KRW rally. Whilst we stay cautious on possible intervention, we maintain our short USDKRW position at 1087 with a protective stop lowered to 1070. Data due this week include FDI, unemployment rate, bank lending and money supply. USDINR fell back below 44.50 on better-than-expected US data before the disappointing NFP on Friday. Stronger WPI prints in the coming weeks due to fuel price hikes should keep interest rate expectations alive. The underperformance of Indian stocks should limit any gains in the INR where the range will remain in play. May IP and June WPI are the key data to watch in the week ahead. A surprise cut in the repo rate by 1% to 14% on 4 July provided a leg-up to Viet bonds. USDVND continues to trade below the ceiling rate. Stability in the Viet CDS shows the improved confidence in both the country and currency.

AUD NZD ZAR

AUD remained resilient despite the policy rate hikes in China, negative news on China local debt and the downgrade of Portugal. AUD lost ground against USD after the horridly weak US employment report. Aussie employment numbers were strong indicating a robust domestic economy. Thus, we like short EURAUD positions. As risk appetite holds steady, NZDUSD continues to gain ground and may push to new highs. AUDNZD continues to trade within a tight range and will remain dependent on AUD. USDZAR broke below 6.70 on the back of an improvement in risk appetite; however, we think that current levels are looking stretched, and we expect to see some profit-taking next week. Manufacturing data to be released on Tuesday should confirm the moderation in activity.

FX Weekly
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JPY: Eternal Equilibrium?

The recent extremely tight USDJPY spot trading range can be quite readily justified, but shouldnt last. The breakout when it comes could (almost) as easily be down as up. Buy 1m (Aug 5) USDJPY 80.00/82.00 Strangle for 1.03% [Spot ref 81.00, vol ref 8.95%]. Chart 1: USDJPY vs. 2y Yield Differential

USDJPY: time for a breakout? The recent extremely tight USDJPY spot trading range can be quite readily justified, but shouldnt last The breakout when it comes could (almost) as easily be down as up. USDJPY has been seemingly oblivious to the waves of fear and euphoria coursing though markets of late, holding a ridiculously tight 187-pip range since the start of June. Despite its reputation as a gauge of fear, the JPY was little moved on the Greek cliffhanger vote; and the correlation with US Treasuries seems to have evaporated almost entirely. What explains this lack of activity? The JPYs traditional fear-gauge characteristic was, to a large extent, based on the yen carry trade: as fear and volatility rose, risk positions would be unwound, strengthening the yen. But the yen carry trade is no longer: with cross-yen volatility higher and the cost of funding no cheaper, the JPY has lost out, in large part, to the USD. On the JPYs correlation with Treasuries, the ultralow cost of hedging means that there is little incentive for portfolio managers to be anything but fully currency hedged: we assume that most purchases of USD-denominated bonds are matched with an offsetting forward sale of USD, eliminating the impact on the currency markets. Thus moves in the Treasury market no longer impact USDJPY in the same way. Recent data have shown a better correlation with the 2y Treasury yield. But, with it below 50bp, this has now fallen so low that small moves no longer have a major bearing on the pair. Post the Japanese earthquake, the trade balance has shifted into a deficit and, in any case, exporters are in no hurry to hedge so early in the financial year. But, in a new development, the lack of alternatives has seen reserve manager inflows offset stronger importer flows. Meanwhile Japanese retail
Robert Ryan FX Weekly

Source: BNP Paribas

Chart 2: USDJPY Implied Volatility

Source: BNP Paribas

accounts have been building substantial positions on dips and unloading them on any rallies, further depressing volatility. Added to this mix is a general lack of interest from hedge funds over May and June; the assumption of semi-official bids below 80; and significant technical resistance to the topside. Implied volatility had remained relatively high until recently, but over the past couple of months it has fallen fast. 1-month volatility now trades at levels not seen since pre-Lehman. Two implications arise from this. First, the supply of vol is likely to dry up given that there is little to gain from selling it at current levels. Second, with spot having been in such a tight range for so long, the vol sellers are probably clustered around strikes that are close by. A break through this sticky level of excess gamma would likely see an area where gamma is much more bid. Against that backdrop, the coming month will be very important for USDJPY. The period to 5 August covers two non-farm payroll prints, when the most important measure of the US recovery will support or detract from our view that
Friday, 08 July 2011 http://www.GlobalMarkets.bnpparibas.com

the current downturn represents just a temporary soft patch. The same period will also see some clarification of the impact of the end of QE2; and the outcome of the US debt ceiling negotiations, potentially involving a USD-supportive HIA 2. On Japans domestic front, politics continue to frustrate as the focus remains on the timing of PM

Kans departure and with the ratings agencies seemingly working overtime, the risk of further downgrades is ever-present. Strategy: Buy 1m (Aug 5) USDJPY 80.00/82.00 Strangle for 1.03% [Spot ref 81.00, vol ref 8.95%].

Robert Ryan FX Weekly

Friday, 08 July 2011 http://www.GlobalMarkets.bnpparibas.com

Chinas Delicate Balancing Act

Chinese policymakers appear to be toying with a dangerous balancing act in monetary policy by going gradual on lending rate hikes. Whether or not they succeed depends on how far inflation moderates in H2 and whether Europe as a whole manages to hold up. This in turn will likely determine the fate of the AUD. However, with the market beginning to believe that China could be winning the inflation fight after all and now eyeing easing measures in Q3, the AUDs tone may improve. EURAUD sees further downside.
Source: Bloomberg, BNP Paribas

Chart 1: Real Deposit Rates and Savings

Chart 2: China Benefits from a Higher EUR Chinese policymakers dangerous balancing act Chinese policymakers appear to be toying with a dangerous balancing act in monetary policy. Whether or not they succeed depends on how far inflation moderates in H2 and whether Europe as a whole manages to hold up. This in turn will likely determine the fate of the AUD. China had raised lending rates only three times in the current prudent monetary tightening cycle just before announcing a further 25bps hike this week. The focus has instead been on relying on softer measures such as immediate controls on lending practices and hikes in reserve requirement ratios. China has already raised the RRR to 21.50% in multiple steps since November. The current level is a full 4.5 percentage points over the RRR peak seen in the prior hiking cycle (which ended mid-2008). Its as if the Chinese were intending to use lending rates to tighten policy having reached the prior peak in RRR but then changed their minds (perhaps fearful of the consequences for hot money inflows). Even after accounting for the latest rise, lending rates have not been moved to the extent seen in the last cycle. At present, the nominal 1Y lending rate stands at 6.56%, still well below the 7.50% peak in 2008. As a consequence, depositors have been losing out to rising inflation, even accounting for the fact deposit rates have risen by 25bp more than lending rates in this cycle. It makes sense that, to ward off speculative investments in asset markets such as property, savers ought to get a decent enough return on their deposits. Chart 1 compares the real deposit rate (nominal minus inflation) set against saving deposits
Kiran Kowshik FX Weekly

Source: Bloomberg, BNP Paribas

as a proportion of overall money supply. The current level of real deposit rates is deeply negative now at -2.00%, well below pre-crisis levels of +2.00%. However, for the real deposit rate to be raised, we would either need rate increases, or inflation moderating sharply, or a combination of both. It appears that the Chinese have been relying more on the latter i.e. hoping that inflation peaks by mid-year, thereafter moderating and hence by default taking real rates higher- thus explaining their strategy of appearing behind the curve. This came through in comments from Chinese Premier Wen Jiabao as he stressed that stabilisation of prices remained a top priority. Notably, he pointed out that some of the factors driving up inflation in particular, pork prices had been reined in by government measures to boost supply. The potential for falling soft commodity prices in the months ahead may also help. However, a moderation in inflation in H2 might not be enough to take real rates high enough and our economists see on balance the risk of one more 25bps rate hike over the remainder of the year. However, in what appears
Friday, 08 July 2011 http://www.GlobalMarkets.bnpparibas.com

odd at first glance, overall monetary conditions (access to credit) is seen as being too tight considering the faster slippage seen in growth; our economists expect selective easing measures in July/August. At the same time, if China is going slower on pushing the rate hike pedal, we expect to see a quickening in CNY appreciation back to the 5% rate last seen when there was an inflation problem in 2007-08. This, in turn, could add a fresh layer of support to the AUD, given its status as the quasiChina trade. However, as the Chinese look to guide monetary policy so as to prompt a slow landing while keeping inflation expectations in check, Europe also remains a key risk and China may want to ensure that the euro holds its value.

Chart 2 plots the EURCNY against the Shanghai Composite Index with a lead of 14 days. It displays a fairly tight lead-lag relationship, playing to the view that apart from having a viable investment alternative to the USD China wants a strong EURCNY to maintain strong exports to Europe as it attempts to juggle monetary levers. If this works, Chinese asset prices and by extension the Australian dollar will hold up better. EURAUD should continue to see further downside and a renewed break down towards 1.3000 multi-week seems likely, especially as the market looks toward the easing in Chinese monetary policy. Maybe we would need to take the downward break in EURAUD option risk reversals (to 3-year lows) more seriously as the period of EURAUD range-trading looks like it could end.

Kiran Kowshik FX Weekly

Friday, 08 July 2011 http://www.GlobalMarkets.bnpparibas.com

Higher USDCAD Volatility Set to Persist

STRATEGY: Buy 1mo 25d strangle, indicative cost 0.80% (strikes 0.9445 and 0.9755, vol offer 8.85). Chart 1: USDCAD vs. DJIA
-6000 -7000 -8000 -9000 D JIA (inverted) 1.35 1.30 1.25 1.20 1.15 1.10 1.05 1.00 U SDC AD (rhs) 05 06 07 08 09 10 0.95 0.90

Having traded within an effective 0.97-0.99 range during most of June, USDCAD has since exhibited much more extreme volatility, breaking above 0.99 (and to above its 200-day moving average) only to test and break 0.9600 shortly thereafter. The cross currents buffeting the Canadian dollar are quite intense. They include oil and other hard commodity prices, global risk appetite, Bank of Canada policy and the strength of demand for the Canadian dollar by global reserve managers. The significance of the latter should not be understated. The IMFs latest update on FX reserves confirms central banks to still be scaling up their holdings of other currencies, a category that includes mostly CAD, AUD, SEK and NOK. In Q1, the sub-group of central banks who reveal the breakdown of their reserves raised the value of their 'other holdings by some USD 23bn. A good part of this will have been FX valuation effects, but over the past year, it looks like this group added close to USD 70bn worth of other currencies to reserves. If this behaviour has been replicated among countries who dont report their currency breakdown (most notably China), the addition will be more like USD 150bn. CAD is likely to account for at least quarter of this, and we envisage CB demand providing ongoing and meaningful support for the CAD. The Bank of Canada, meanwhile, is likely to remain a benign influence on the currency through Q3 and possibly Q4. While the latest CPI reading was somewhat disconcerting, core inflation (more important than headline CPI for BoC operational purposes) remains at 1.8%, below the mid-point of the 1-3% target band. Growth has undoubtedly slowed off the 3.9% annualized Q1 pace, and Bank of Canada Governor Carney in late June indicated the need for continued accommodative policy in order to close the output gap. We, therefore, see no urgency on the central banks part to adjust rates from their current 1%. As a result, interest rate spreads between the United States and Canada are unlikely to be exerting significant influence on near term USDCAD volatility. In contrast, oil/commodity price volatility and risk appetite both have potential to push USDCAD to or through both sides of the recently expanded trading
Ray Attrill FX Weekly

-10000 -11000 -12000 -13000 -14000 -15000

Source: Reuters Ecowin Pro

Chart 2: USDCAD vs. Oil

30 40 50 60 70 80 90 100 110 120 130 140 150 05 1.30 W T I (inverted) 1.25 1.20 1.15 1.10 1.05 1.00 USDCAD (rhs) 06 07 08 09 10 11 0.95 0.90

Source: Reuters Ecowin Pro

range. USDCAD continues to rank among the top three G10 currency pairs in terms of positive correlation with the S&P500 (alongside AUD and SEK). Risk appetite and the US dollar have, in recent years, been highly negatively correlated; if this relationship holds and we have significant riskpositive event such as meaningful and credible agreement on a long term US fiscal reform/deficit reduction, USDCAD could quickly extend through its recent lows. Alternatively, such an event might (and especially in the context of ongoing eurozone fiscal travails) prove dollar positive, in which case, USDCAD could move to retest the recent highs above 0.99. There are many variants on this theme, including a breakdown in deficit talks or a further turn for the worse (or better) in eurozone fiscal stresses that could have dramatic impact on risk sentiment with ambiguous USD implications, but they are all likely to entail the maintenance of higher levels of USDCAD volatility. Lastly, the added volatility in oil prices engendered by the IEA decision to release 60 mn barrels of oil
Friday, 08 July 2011 http://www.GlobalMarkets.bnpparibas.com

from strategic reserves, accounts for a significant portion of recent USDCAD volatility. USDCAD correlations with oil on any time frame longer than month run consistently above 50% (daily % changes), but CAD has underperformed the recent rebound. If oil prices hold current levels, USDCAD

should (broader risk appetite themes aside) extend through its recent lows. Another sharp fall, in contrast, would likely be associated with USDCAD moving to retest the top side of the range and bringing parity back under discussion.

Ray Attrill FX Weekly

Friday, 08 July 2011 http://www.GlobalMarkets.bnpparibas.com

Reasons for SEK Underperformance

The SEKs decline over the past month seems related to concerns over liquidity tightening. Eventually, we expect the SEKs status as a fiscal safe haven to come back to the fore, spurring a recovery. We still like EURSEK lower and expect this to gain further traction once it becomes clear that the scope for a liquidity crisis is slim. Chart 1: USDSEK vs. Cross-Ccy Swap

Identifying reasons for the SEKs underperformance The SEKs decline over the past month appears related to concerns over liquidity tightening. The hope is that these concerns will eventually be put to rest once a viable Greek debt rollover plan is finalised. Eventually, we expect the SEKs status as a fiscal safe haven to come back to the fore and spur a recovery, with the recent Riksbank hike helping further. We still like EURSEK lower. The Riksbank earlier in the week hiked rates by 25bp to 2.00% as expected, and broadly stuck with its more hawkish interpretation of the labour market. Our economists reckon that, despite some caution on the external environment displayed in the statement, the rate profile remains consistent with rates at 2.50% by the year end. This rate advantage should bode well for the SEK which until very recently was a notable underperformer. Note that the SEK has lost 2.15% against the USD over the past month, the steepest decline of all G10 currencies. However, timing is everything. Unless we have a clear and timely resolution to the Greek debt rollover situation, the concern is that the SEK could remain on the back foot especially against the US dollar. However, what exactly drove the SEKs obvious underperformance within G10 FX in June? We believe that in addition to the tail risk of a sharp manufacturing slowdown, fears of a liquidity crisis hurt the SEK in a big way. It is well known that Swedish banks though well capitalised and with minimal exposure to GIIPS rely on funding in other currencies. However, with the passing of the Greek vote on austerity measures and implementation, we have averted the tail risk of a funding crisis.

Source: Bloomberg, BNP Paribas.

Chart 2: SEK-DEM CDS Leading EURSEK

Source: Bloomberg, BNP Paribas.

Even ahead of the Greek vote, we saw signs of central bankers taking pre-emptive measures against the potential for a default-led liquidity crisis with the Feds extension of USD swap line agreements by a year (they were originally due to expire on 1 August). We point out that this is a contingency measure, not directly contributing to USD liquidity. However, that didnt prevent the markets from believing that it will. After the measure had been announced, some easing of tensions in EURUSD cross currency basis swaps (swapping of EUR LIBOR for USD LIBOR) was seen consistent with a sharp fall in USDSEK However, following this weeks rating announcements, this has reversed once again. (Chart 1 compares the EUR 1Y basis swap with USDSEK cross). We had previously laid out some reasons for our constructive SEK view see EURSEK Lower, Barring Liquidity Stress, Market Mover, 12 May. As the title suggests, the SEKs performance over the past two years appears to be strongly explained by its status as a fiscal safe haven, with an ongoing focus on the medium-to-longer term sovereign debt
Friday, 08 July 2011 http://www.GlobalMarkets.bnpparibas.com

Kiran Kowshik FX Weekly

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concerns in Europe. Chart 2 shows that the spread of Sweden 5Y CDS over its German counterpart has led EURSEK by about a month. In other words, the SEK is being judged relative to one of the soundest sovereigns in Europe. It suggests that EURSEK looks a little over the top and should at least be closer to 9.00. In terms of risk factors to our constructive SEK view, we have to acknowledge that the currency of Sweden, being a small and open economy exposed

to the global IP cycle, could be vulnerable in the context of globally falling PMIs. However, just as Japanese data (recent IP) have rebounded from supply shortages following the 11 March disaster with these being mirrored in stronger PMIs in the US, it plays to our economists view that much of what we are seeing could be temporary. This in turn implies that a reversal in the other factor hurting the SEK i.e. fears of a liquidity shortage could see the krona recover as its fiscal safe-haven status returns as the dominant driver of the currency.

Kiran Kowshik FX Weekly

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Our Take on Chinese Bad Debt

Moodys report on Chinese debt identified another potential RMB 3.5trn (USD 540bn) of such loans that the Chinese auditors did not discuss in their report. The scale of the bad debt at the banks is the biggest unknown we confront from a riskmanagement perspective, no matter the amount of bad debt Beijing chooses to absorb from the provinces onto its balance sheet. Systemic risk amongst Chinas banks is clearly worth monitoring. According to Fitch, Chinas bank sector is one of the most thinly capitalized within emerging markets just as its disclosed off-Balance Sheet exposures rise while undisclosed items remain difficult to track. For now, the nervous risk-manager reading this might take solace in the fact that China is not Greece or Spain; has little foreign borrowing; runs with an inconvertible currency; works behind the Great Wall that is its closed capital account and has tons of cash at hand. What is the globes most liquid financial institution, we like to quiz clients? The answer: The Chinese Communist Party. It is not by chance that this is so. This is from the 4 July Moodys report on Chinese local government bad debt: "Moody's Investors Service says that the potential scale of the problem loans at Chinese banks may be closer to its stress case than its base case, according to an assessment that the rating agency conducted following the release of new data by China's National Audit Office (NAO). When considering the apparent absence of a clear master plan to deal with this issue, Moody's also views the credit outlook for the Chinese banking system as potentially turning to negative. "We assume that the majority of loans to local governments are of good quality, but based on our assessment of the loan classifications and risk characteristics, as provided by the NAO and other Chinese agencies, we conclude that the banks' exposure to local government borrowers is greater than we anticipated," says Yvonne Zhang, a Moody's Vice President and one of the authors of the report. Of the RMB 10.7 trillion (about $1.6 trillion) of local government debt examined by the Chinese audit agency, RMB 8.5 trillion ($1.3 trillion) was funded by
Source: Fitch report: EM Banking System Datawatch

Chart 1: Total Assets at end-2010

Source: Fitch report: EM Banking System Datawatch

Chart 2: Cumulative Loan Growth end-08-end-2010

Source: Fitch report: EM Banking System Datawatch

Chart 3: Equity/Assets at end-2010

Source: Fitch report: EM Banking System Datawatch

Chart 4: Off-Balance Sheet exposures rise

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banks. However, Moody's has identified another potential RMB 3.5 trillion ($540 billion) of such loans that the Chinese auditors did not discuss in their report. "When cross-examining the findings by the June 27 NAO report -- in conjunction with reports from Chinese banking regulators -- we find that the Chinese audit agency could be understating banks' exposures to local governments by as much as RMB 3.5 trillion," says Zhang. "Since these loans to local governments are not covered by the NAO report, this means they are not considered by the audit agency as real claims on local governments. This indicates that these loans are most likely poorly documented and may pose the greatest risk of delinquency," the analyst adds. Moody's report estimates that the Chinese banking system's economic non-performing loans could reach between 8% and 12% of total loans, compared to 5% to 8% in the rating agency's base case, and 10% to 18% in its stress case. In the report, the rating agency examines various scenarios as to how banks could tackle problem loans, including some where the government provides assistance, but Moody's generally expects the Chinese authorities to implement gradual discipline. The following is culled from our June 30 Asia at the Open feature Of China, Debt and the Worlds Most Liquid Financial Institution. It seems right to run part of the article here again now. The scale of the bad debt at the banks is the biggest unknown we confront from a risk-management perspective, no matter the amount of bad debt Beijing chooses to absorb from the provinces onto its balance sheet. The ratings agency Fitch tackled some of the numbers at a recent bank conference in Singapore, too. First, note in chart 1, the enormity of Chinas banking sector itself it equals all 42 other Emerging Markets under Fitchs purview combined! Now note, in chart 2, that China has one of the fastest growing banking systems in the EM Complex. In chart 3, Chinas bank sector is one of the most thinly capitalized just as, at least by Fitchs reckoning in chart 4, its off-Balance Sheet exposures rise. That Chinese Banks Disclosed Off-Balance Sheet Items (chart 5) are sizeable and fast-growing is hardly solace to the aggrieved particularly since undisclosed items remain difficult to track as it is (chart 6). We arent bank system experts here, but Fitch argues in chart 7 that Systemic Risk amongst Chinas banks is clearly worth monitoring.

Chart 5: Disclosed Off-Balance Sheet Items of 16 Rated Banks (% of total assets)

Source: Fitch report: EM Banking System Datawatch

Chart 6: Cumulative Loan Growth end-08-end-2010

Source: Fitch report: EM Banking System Datawatch

Chart 7: Summarising Bank System Risk

Source: Fitch report: EM Banking System Datawatch

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How will China go about managing its debt overhang? Well, the machinery to remove bad loans from the banking system is already in place. In 1999, Beijing created four Asset Management companies (AMCs) to acquire non-performing loans bad banks essentially which were supposed to exist of only 10 years. The AMCs alas were able to achieve only a 20% recovery rate across their portfolios, almost entirely in loans to state enterprises. But rather than writing-off the remaining debt, the government decided to extend financing to the AMCs for another decade in 2009. Beijing could also avail Co-Managed Accounts to deal with the problem loans. In the restructuring of the Agricultural Bank of China, these special accounts acquired at face value the bad loans, using only the Ministrys IOU as payment. Today, these loans are carried as restructuring receivables on bank balance sheets.

Chart 8: China Gross Domestic Savings as % of GDP vs. FX Reserves

Source: Bloomberg, World Bank, BNPP

Whatever the case, the fact that China may have wasted some CNY 10 trillion in cash has to be sobering for Beijings economic planners. If the money had been added to the National Social Security Fund which runs unfunded to the tune of a 100% of GDP the Peoples Republic might have been several steps further along the path of creating an economy driven by domestic consumption rather than infrastructural development. For now, the nervous risk-manager reading this might take solace in the fact that China is not Greece or Spain; has little foreign borrowing; runs with an inconvertible currency; works behind the Great Wall that is its closed capital account and has tons of cash at hand, as per chart 8. What is the globes most liquid financial institution, we like to quiz clients? The answer: The Chinese Communist Party. It is not by chance that this is so.

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Medium Term FX Recommendations

Go Short EURJPY Spot
08 July 2011 Sell at market targeting 112.00, multiweek, stop-loss at 117.15

EURJPY 115.10

Despite the ECB having played to our economist view that we are more likely than not to see rate hikes every quarter, there are signs of contagion from the periphery and Italian bonds continued their recent sell-off, with spreads vs. bunds widening to higher highs. With no signs of any resolution as yet on PSI issue, EUR should continue to remain under downward pressure. On the other hand, on the heels of a disastrous US non-farm payrolls report, the decline in yields should see upward pressure on the JPY especially ahead of next weeks Bernanke testimony. A likely upgrade to the economic view from the Bank of Japan at this weeks meeting may only promote this further, with any aggressive easing (beyond routine crisis specific lending) now increasingly off the table.

Look to Enter Short EURCAD Spot

Sell on up tick to 1.3850, target 1.3400 multi-week, stop-loss at 1.3950.

08 July 2011

EURCAD 1.3760

The tone of the commodity currency complex has improved markedly following Chinas lending rate hike last week, with the consensus now having moved towards a neutral/easy policy bias with the decline in soft commodity prices helping. Our economists now look toward selective easing measures into Q3 just as it becomes clearer that the down move in PMIs appeared substantially related to temporary factors relating to the Japanese earthquake. While the CAD is dependent on the US economy, we believe that further support for oil prices should see the Canadian dollar find favour. On the other hand, there are signs of contagion from the periphery in Europe with risk premiums on EUR assets increasing. The double top on spot adds some more technical conviction that further EURCAD spot downside seems likely.

Look to Enter Long USDJPY Strangle

08 July 2011 Look to enter long 1m strangle USDJPY has been holding a ridiculously tight 187 pip range since the start of June. However, the period to August 5 covers two NFP prints, where the most important measure of the US recovery will support or detract from our view that the current downturn represents just a temporary soft patch. The same period will also see some clarity on the impact of the end of QE2 given Bernanke testimonies; and the outcome of the US debt ceiling negotiations, potentially involving a USDsupportive HIA 2. The wide range of factors suggest that we could get a breakout eventually. Implied volatility has remained relatively elevated until recently, but over the past couple of months has fallen fast. 1-month volatility now trades at levels not seen since pre-Lehman.

USDJPY 80.60

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Short GBPUSD Spot

24 June 2011 Sold on a break of 1.5930, target 1.5350 multi-month, stop-loss at 1.6285.

GBPUSD 1.6018

Our short position in Cable was activated on June 27th however given predominant price action emphasised in EURUSD and EURGBP given the focus on the European debt crisis, GBPUSD has traded in a narrow 1.5930-1.6150 range. A likely unchanged June CPI print this week should not detract from the view that the bias for the BoE remains one where the cash rate could be lower for longer. On the other hand, the USD could begin to garner support if Fed Chairman Bernanke reiterates an unwillingness to undertake a QE3, even after the dismal June NFP print. This should put further pressure on GBPUSD especially when the focus moves tactically away from European debt crisis to issues in the US. Our measures of real rates has plunged (see chart alongside)

Hold Short GBPAUD Via Options

24 June 2011 Long Sep 23 1.53 put 1.45 RKO Vs. Short 1.63 Call.

GBPAUD 1.4964

The position, now marks to market at 0.39% up from nil. Keeping in mind the choppiness that a carry trade like short GBPAUD can face on rising volatility, we opted to use options to play for a grind lower (using RKO to cut cost) and further sell a very OTM call to make it zero entry cost. We hold the position as we feel that GBPAUD could continue to move lower with spot breaking down to levels last seen in Q1 1985. The tone of the AUD has improved significantly after Chinas lending rate hike with a growing consensus that the tightening cycle is over. Locally, a solid June employment report helped though this has not impacted RBA pricing which would need a strong CPI print come end July. On the other hand, we continue to remain negative sterling.

Long EURCHF KIKO Call Working

01 July 2011 Long Sep 30 1.22 Call, 1.28 KI, 1.17 KO Position now MTM at 0.5024% EUR versus entry cost of 0.88%. Trade was recommended at a significant discount to its vanilla counterpart following the passing of Greek austerity measures which reduced the tail risk of immediate default. But renewed uncertainty followed after credit rating pronouncements last week has shown up in signs of contagion, with renewed widening in Italy-German spreads and consequent EURCHF pressure (Chart alongside). While any further delays on any resolution could prevent trade from working, we expect that eventually downward pressure will abate and with SNB likely to lag the ECB on its tightening cycle, the cross could drift higher. The risk reversal could normalise from downwardly stretched levels.

EURCHF 1.1925

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Hold NOKSEK RKO Call

03 June 2011 Buy Aug 4 1.1485 Call 1.1905 RKO

Suggested Aug 4 1.1485 RKO Call (barrier at 1.1905) now maps at 0.5540% NOK versus 0.5000% entry cost of option. Trade was recommended at over a 50% discount relative to the vanilla alternative. The NOK, like the SEK should continue to recover strongly to the extent they had been dogged by liquidity tensions in the weeks leading to the Greek vote. With the sombre threat of a liquidity crisis (on bond haircuts) having been averted, NOK should once again gain given its status as the most superior "fiscal" safe haven. ON the data calendar, we have June CPI for both Scandinavian cousins, though are economists flag Norway CPI to accelerate more. Having fallen back after the end-June rise to 1.1900, NOKSEK has recovered and we expect further gains into next week.

July 21 1.05/1.01 AUDUSD Put in the red

Jul 21 1.05/1.01 put spread bought at 1.05% The position MTM in the red at 0.2000% AUD. While AUDUSD did manage to correct down to 1.04 late June deeming the trade in the money, the tone of the AUD has improved significantly 20 May 2011

AUDUSD 1.0725

after Chinas lending rate hike with a growing consensus that the tightening cycle is over. Locally, a solid June employment report helped though this has not impacted RBA pricing which could be more dependent on the CPI print would need come end July. On the other hand, we point out that that the USD could come back in favour

should Chairman Bernanke fail to sympathise with the doves even after the extremely weak NFP print when he meets next week. This could put AUDUSD back under some pressure (even as AUD outperforms vs. EUR and GBP) and we will try to offload position at a smaller loss in the days to come.

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Implied Option Volatility Analysis

EURUSD Implied Volatility Curve and 1y highs & lows
18 16 14 13 11 10 8 1w 1m 2m 3m High/Low 6m 9m 12m

USDJPY Implied Volatility Curve and 1y highs & lows

23 22 20 19 18 16 15 14 13 11 10 9 7 6 1w 1m 2m 3m High/Low 6m 9m 12m

Current Imp. Vol.

Last Week Imp. Vol.

Current Imp. Vol.

Last Week Imp. Vol.

USDCHF Implied Volatility Curve and 1y highs & lows

17 15 14 13 12 11 9 8 7 1w 1m 2m 3m High/Low 6m 9m 12m

GBPUSD Implied Volatility Curve and 1y highs & lows

14 12 11 9 8 6 1w 1m 2m 3m High/Low 6m 9m 12m

Current Imp. Vol.

Last Week Imp. Vol.

Current Imp. Vol.

Last Week Imp. Vol.

AUDUSD Implied Volatility Curve and 1y highs & lows

21 18 16

USDCAD Implied Volatility Curve and 1y highs & lows

15 13 11

13

9
11 8 1w 1m 2m 3m High/Low 6m 9m 12m

8 6 1w 1m 2m 3m High/Low 6m 9m 12m
Current Imp. Vol. Last Week Imp. Vol.

Current Imp. Vol.

Last Week Imp. Vol.

*BNP Paribas FX Strategy: The above charts show the current volatility curves (1-week through to 1-year) for the major currency pairs in relation to the 1-year highs and lows for each of the tenor. FX Weekly
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Majors
EURUSD GBPUSD USDCHF OIL
0.52 0.47 0.09 0.33 0.2 0.04 0.87 0.8 0.68 0.5 0.48 0.33 0.09 0.4 0.15 0.03 0.81 0.71 0.49 0.58 0.25 0.25 0.56 0.5 0.16 0.38 0.36 0.38 0.64 0.64 0.02 0.17 0.39 0.14 0.01

Emerging Markets
AUDUSD USDCAD USDZAR
0.64 0.58 0.04 0.45 0.37 0.11 0.84 0.6 0.34 0.62 0.47 0.17 0.88 0.65 0.32 0.7 0.61 0.2 0.34 0.22 0.01 0.71 0.57 0.2 0.75 0.51 0.16 0.56 0.27 0.81 0.88 0.2 0.08 0.55 0.74 0.01 0.3 0.35 0.29 0.53 0.68 0.15 0.34 0.49 0.45 0.05 0.38 0.56 0.07 0.23 0.41 0.23 0.5 0.66 0.04 0.27 0.48 0.33 0.63 0.78 0.29 0.52 0.61 0.13 0.22 0.3 0.2 0.49 0.66 0.19 0.43 0.64 0.16 0.64 0.07 0.41 0.68 0.01 0.35 0.5 0.37 0.06 0.36 0.18 0.14 0.34 0.09 0.09 0.2 0.22 0.23 0.22 0.08 0.33 0.01 0.09 0.21 0.26 0.3 0.22 0.0 0.32 0.01 0.14 0.21 0.53 0.53 0.26 0.26 0.36 0.43 0.69 0.03 0.08 0.14 0.22 0.29 0.54 0.59 0.09 0.52 0.69 0.05 0.19 0.24 0.29 0.52 0.62 0.03 0.54 0.71 0.04 0.77 0.43 0.47 0.36 0.11 0.41 0.73 0.27 0.17 0.54 0.42 0.51 0.75 0.78 0.27 0.14 0.47 0.27 0.63 0.68 0.26 0.55 0.59 0.1

USDJPY
0.51 0.11 0.19 0.32 0.09 0.31 0.02 0.33

USDTRY USDHUF
0.23 0.42 0.64 0.01 0.06 0.04

USDPLN
0.01

Commodities

COPPER

0.44 0.47 0.08 0.2 0.37 0.55

0.52 0.56 0.03 0.23 0.34 0.57 0.72 0.85 0.27 0.17 0.57 0.34 0.62 0.76 0.29 0.54 0.62 0.11

CRB

0.84 0.09 0.24 0.58 0.34 0.05 0.5 0.27 0.06

GOLD

0.17 0.4 0.64 0.56 0.18 0.52 0.45 0.05 0.23 0.11 0.14 0.5 0.42 0.02 0.54 0.51

0.77 0.18 0.04 0.58 0.7 0.22 0.09 0.52 0.16 0.08 0.36 0.14 0.17 0.56 0.15 0.06 0.68

US 10Y EURO NIKKEI FTSE 100 SP 500 Yields NEXT 100 225

Equities

0.03 0.35 0.11 0.07 0.42 0.4

0.42 0.22 0.0 0.14 0.32 0.07

0.65 0.7 0.05 0.17 0.33 0.19 0.68 0.74 0.05 0.66 0.8 0.04 0.5 0.58 0.13 0.18 0.42 0.16 0.03 0.34 0.19 0.07

0.12 0.51 0.36 0.15 0.45 0.35 0.01 0.18 0.04

0.3 0.57 0.16 0.32 0.45 0.03

Bonds & Rates

EU 10Y Yields

0.17 0.52 0.52

0.28 0.27 0.54

JP 10Y Yields

0.06 0.29 0.23

0.22 0.29 0.02

0.15 0.12 0.44 0.06 0.13 0.25 0.04 0.22 0.08

0.09 0.41 0.04 0.22 0.29 0.05 0.21 0.2 0.08

0.43 0.47 0.33 0.12 0.45 0.17 0.14 0.21 0.24 0.09 0.14

0.55 0.57 0.19

US 3m LIBOR

0.33 0.36 0.06 0.25 0.29 0.13 0.01

0.28 0.31 0.05 0.17 0.24 0.1 0.08

0.15 0.18 0.06 0.23 0.17 0.03 0.28

EU 3m LIBOR

0.3

0.27

0.18

0.17

High Current Low

3 Month log daily return correlation. High and lows over the past 12 months Different colours highlight the proximity to the extremes (dark red close to extreme)

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Economic Calendar: 11-15 July

GMT Mon 11/07 23:50 (10/07) 06:45 06:45 06:45 06:45 08:00 08:00 08:00 08:00 08:00 15:00 15:00 23:01 23:01 (11/07) 08:30 08:30 08:30 08:30 08:30 08:30 23:50 23:50 (11/07) 00:30 00:30 05:30 05:30 05:30 05:30 05:30 06:45 06:00 06:00 06:00 06:00 07:00 07:30 07:30 07:30 11:30 12:30 18:00 Wed 13/07 00:30 07:00 07:00 07:00 07:00 08:00 08:30 08:30 08:30 09:00 09:00 Local 08:50 08:45 08:45 08:45 08:45 10:00 10:00 10:00 10:00 10:00 17:00 17:00 00:01 00:01 09:30 09:30 09:30 09:30 09:30 09:30 08:50 08:50 Japan France M2 y/y : Jun Industrial Production m/m : May Industrial Production y/y : May Manufacturing Production (sa) m/m : May Manufacturing Production (sa) y/y : May CPI m/m : Jun CPI y/y : Jun CPI-ATE y/y : Jun PPI m/m : Jun PPI y/y : Jun Finance Ministers Meet ECBs Bini Smaghi Speaks at Conference in Milan RICS House Price Balance : Jun BRC Retail Sales Monitor : Jun DCLG House Prices : May Visible Trade Balance : May CPI m/m : Jun CPI y/y : Jun RPI y/y : Jun RPIX y/y : Jun CGPI y/y : Jun Tertiary Index (sa) m/m : May BoJ Rate Announcement NAB Business Confidence : Jun NAB Business Conditions : Jun CPI m/m : Jun CPI y/y : Jun HICP m/m : Jun HICP y/y : Jun Ex-Tobacco CPI (nsa) : Index Jun Current Account : May CPI (Final) m/m : Jun CPI (Final) y/y : Jun HICP (Final) m/m : Jun HICP (Final) y/y : Jun EU Finance Ministers Meet CPI m/m : Jun CPI y/y : Jun CPIF y/y : Jun NFIB Small Business Optimism : Jun Trade Balance : May FOMC Minutes Westpac Consumer Confidence : Jul CPI (Final) m/m : Jun CPI (Final) y/y : Jun HICP (Final) m/m : Jun HICP (Final) y/y : Jun Unemployment Rate (nsa) : Jun Unemployment Change : Jun Unemployment Rate (Claimant) : Jun Average Earnings (3m y/y) : May Industrial Production (sa) m/m : May Industrial Production (wda) y/y : May Previous 2.7% -0.3% 2.6% 0.2% 4.1% -0.2% 1.6% 1.0% -2.1% 18.0% Forecast 2.5% -0.2% -0.2% -0.5% 2.6% 0.0% 1.7% 1.0% -0.1% 15.3% Consensus 2.7% 0.5% n/a n/a n/a n/a n/a n/a n/a n/a

Norway

Eurozone

Tue 12/07

UK

-28 -2.1% -0.3% GBP-7.4bn 0.2% 4.5% 5.2% 5.3% -0.1% 2.6%

-25 -1.5% -0.1% GBP-7.2bn 0.2% 4.5% 5.2% 5.2% -0.1% 1.2%

n/a n/a n/a GBP-7.5bn 0.3% 4.5% 5.2% 5.3% -0.1% 0.5%

Japan

12:30 12:30 07:30 07:30 07:30 07:30 07:30 08:45 08:00 08:00 08:00 08:00 09:00 09:30 09:30 09:30 07:30 08:30 14:00 12:30 09:00 09:00 09:00 09:00 10:00 09:30 09:30 09:30 11:00 11:00

Australia

6 1 0.1% 2.0% 0.1% 2.2% 122.40 EUR-4.8bn 0.1% (p) 2.3% (p) 0.0% (p) 2.4% (p) 0.2% 3.3% 1.7% USD-43.7bn

6 0 0.1% 2.1% 0.1% 2.3% 122.52 EUR-5.5bn 0.1% 2.3% 0.0% 2.4% 0.1% 3.4% 1.8% USD-43.7bn

n/a n/a n/a n/a 0.1% 2.3% n/a n/a 0.1% 2.3% 0.0% 2.4% n/a n/a n/a USD-44.2bn

France

Germany

Eurozone Sweden

US

Australia Spain

Sweden UK

Eurozone

101.2 0.0% 3.5% -0.1% 3.4% 3.8% 19.6k 4.6% 1.8% 0.2% 5.2%

102.8 -0.3% 3.0% -0.2% 3.0% 4.1% 22.2k 4.6% 2.0% 0.4% 4.5%

n/a n/a n/a n/a n/a n/a 15.0k 4.7% 2.1% 0.4% 4.7%

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GMT 12:30 12:30 14:00 14:30 17:20 18:00 Thu 14/07 07:30 08:00 09:00 09:00 09:00 09:00 09:00 08:00 08:00 08:00 08:00 12:30 12:30 12:30 12:30 12:30 12:30 12:30 14:00 Fri 15/07 06:00 09:00 08:00 12:30 12:30 12:30 12:30 12:30 13:15 13:15 13:55

Local 08:30 08:30 10:00 10:30 13:20 14:00 US

Previous

Forecast

Consensus

Import Prices m/m : Jun 0.2% -0.7% -0.7% Import Prices Ex-Petroleum m/m : Jun 0.4% 0.2% n/a Feds Bernanke Gives Semi-Annual Monetary Policy Report to House of Representatives EIA Oil Inventories Feds Fisher Speaks on Economy in Dallas Treasury Statement : Jun USD-57.6bn Public Holiday Retail Sales y/y : May ECB Monthly Bulletin HICP (Final) m/m : Jun HICP (Final) y/y : Jun HICP Core m/m : Jun HICP Core y/y : Jun Ex-Tobacco Index : Jun CPI (Final) m/m : Jun CPI (Final) y/y : Jun HICP (Final) m/m : Jun HICP (Final) y/y : Jun PPI (sa) m/m : Jun PPI (sa) y/y : Jun PPI Core (sa) m/m : Jun PPI Core (sa) y/y : Jun Retail Sales m/m : Jun Retail Sales Ex-Autos m/m : Jun Initial Claims Business Inventories : May BoJ Minutes EU25 New Car Registrations : Jun Foreign Trade Balance (sa) : May EU Trade Balance : May CPI m/m : Jun CPI y/y : Jun Core CPI m/m : Jun Core CPI y/y : Jun Empire State Survey : Jul Industrial Production m/m : Jun Capacity Utilisation Rate : Jun Michigan Sentiment (Prel) : Jul

09:30 10:00 12:00 12:00 12:00 12:00 12:00 10:00 10:00 10:00 10:00 08:30 08:30 08:30 08:30 08:30 08:30 08:30 10:00

France Neths Eurozone

3.4% 0.0% 2.7% 0.0% 1.5% 112.74 0.1% (p) 2.7% (p) 0.1% (p) 3.0% (p) 0.2% 7.0% 0.2% 2.1% -0.2% 0.3% 418k 0.8%

1.5% 0.0% 2.7% 0.0% 1.5% 112.75 0.1% 2.7.% 0.1% 3.0% -0.1% 7.3% 0.2% 2.2% -0.7% -0.8% 435k 0.4%

n/a 0.0% 2.7% n/a 1.5% n/a 0.1% 2.7% 0.1% 3.0% -0.2% 7.4% 0.2% 2.1% 0.1% 0.4% n/a 0.8%

Italy

US

08:00 12:00 10:00 08:30 08:30 08:30 08:30 08:30 09:15 09:15 09:55

Japan Eurozone Italy US

EUR-2.9bn EUR-0.7bn 0.2% 3.6% 0.3% 1.5% -7.8 0.1% 76.7% 71.5

EUR-5.0bn EUR-0.8bn -0.1% 3.5% 0.2% 1.6% 1.0 0.3% 76.8% 72.5

n/a n/a -0.1% 3.7% 0.2% 1.6% 4.1 0.4% 77.0% 72.5

Release dates and forecasts as at c.o.b. prior to the date of publication: See Daily Economic Spotlight for any revision

Source: BNP Paribas

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FX Forecasts*
USD Bloc EUR/USD USD/JPY USD/CHF GBP/USD USD/CAD AUD/USD NZD/USD USD/SEK USD/NOK EUR Bloc EUR/JPY EUR/GBP EUR/CHF EUR/SEK EUR/NOK EUR/DKK Central Europe USD/PLN EUR/CZK EUR/HUF USD/ZAR USD/TRY EUR/RON USD/RUB EUR/PLN USD/UAH EUR/RSD Asia Bloc USD/SGD USD/MYR USD/IDR USD/THB USD/PHP USD/HKD USD/RMB USD/TWD USD/KRW USD/INR USD/VND LATAM Bloc USD/ARS USD/BRL USD/CLP USD/MXN USD/COP USD/VEF USD/PEN Others USD Index *End Quarter Q3 '11 1.50 78 0.83 1.65 0.98 1.09 0.82 5.93 4.98 Q3 '11 117 0.91 1.25 8.90 7.47 7.46 Q3 '11 2.60 24.3 275 6.80 1.52 4.20 27.51 3.90 7.8 100 Q3 '11 1.22 2.95 8500 29.80 42.50 7.80 6.40 28.00 1060 45.50 20500 Q3 '11 4.18 1.58 450 11.40 1730 4.29 2.70 Q3 '11 72.30 Q4 '11 1.55 83 0.83 1.68 0.93 1.13 0.84 5.48 4.77 Q4 '11 129 0.92 1.28 8.50 7.40 7.46 Q4 '11 2.48 24.5 275 6.60 1.50 4.15 27.25 3.85 7.8 100 Q4 '11 1.21 2.90 8400 29.50 42.00 7.80 6.31 27.50 1050 45.00 20000 Q4 '11 4.25 1.55 435 11.10 1690 4.29 2.65 Q4 '11 70.76 Q1 '12 1.45 85 0.90 1.59 0.95 1.07 0.81 5.93 5.07 Q1 '12 123 0.91 1.30 8.60 7.35 7.46 Q1 '12 2.69 24.1 269 6.55 1.56 4.20 27.86 3.90 7.5 98 Q1 '12 1.21 2.87 8300 29.30 41.50 7.80 6.25 27.00 1040 44.50 20000 Q1 '12 4.34 1.53 425 11.00 1690 4.29 2.63 Q1 '12 74.87 Q2 '12 1.40 90 0.93 1.56 0.97 1.04 0.80 6.21 5.26 Q2 '12 126 0.90 1.30 8.70 7.37 7.46 Q2 '12 2.75 23.9 265 6.60 1.59 4.25 27.97 3.85 7.5 97 Q2 '12 1.20 2.85 8200 29.00 41.00 7.80 6.21 26.70 1030 44.00 20000 Q2 '12 4.43 1.55 430 10.90 1700 4.29 2.63 Q2 '12 77.62 Q3 '12 1.35 95 1.00 1.53 1.01 0.99 0.76 6.67 5.56 Q3 '12 128 0.88 1.35 9.00 7.50 7.46 Q3 '12 2.81 23.8 265 6.50 1.63 4.15 28.08 3.80 7.5 96 Q3 '12 1.19 2.83 8100 28.70 40.50 7.80 6.17 26.50 1020 43.50 20000 Q3 '12 4.51 1.56 435 11.00 1710 4.29 2.64 Q3 '12 80.72 Q4 '12 1.35 95 1.00 1.53 1.01 0.99 0.76 6.67 5.56 Q4 '12 128 0.88 1.35 9.00 7.50 7.46 Q4 '12 2.78 23.5 260 6.50 1.65 4.10 27.65 3.75 7.5 95 Q4 '12 1.18 2.80 8000 28.50 40.00 7.80 6.13 26.00 1010 43.00 20000 Q4 '12 4.60 1.58 440 11.10 1720 4.29 2.66 Q4 '12 80.72 Q1 '13 1.30 95 1.04 1.53 1.04 0.96 0.74 6.92 5.77 Q1 '13 124 0.85 1.35 9.00 7.50 7.46 Q1 '13 2.85 23.7 260 7.20 1.65 4.20 28.19 3.70 7.5 93 Q1 '13 1.17 2.77 7900 28.30 39.50 7.80 6.23 26.00 1000 43.00 20000 Q1 '13 4.69 1.59 442 11.10 1725 8.80 2.67 Q1 '13 82.99 Q2 '13 1.30 95 1.04 1.53 1.04 0.96 0.74 6.92 5.77 Q2 '13 124 0.85 1.35 9.00 7.50 7.46 Q2 '13 2.77 24.0 255 7.10 1.67 4.20 27.75 3.60 7.5 92 Q2 '13 1.16 2.75 7800 28.00 39.00 7.80 6.20 26.00 1000 42.50 20000 Q2 '13 4.78 1.60 445 11.17 1730 8.80 2.68 Q2 '13 82.99 Q3 '13 1.30 95 1.04 1.53 1.04 0.96 0.74 6.92 5.77 Q3 '13 124 0.85 1.35 9.00 7.50 7.46 Q3 '13 2.85 23.5 260 7.00 1.69 4.10 29.07 3.70 7.5 91 Q3 '13 1.15 2.73 7800 28.00 39.00 7.80 6.17 26.00 1000 42.50 20000 Q3 '13 4.86 1.61 447 11.25 1740 8.80 2.69 Q3 '13 82.99 Q4 '13 1.30 95 1.04 1.53 1.04 0.96 0.74 6.92 5.77 Q4 '13 124 0.85 1.35 9.00 7.50 7.46 Q4 '13 2.85 23.3 260 6.90 1.69 3.95 27.75 3.70 7.3 90 Q4 '13 1.14 2.70 7800 28.00 39.00 7.80 6.15 26.00 1000 42.00 20000 Q4 '13 4.95 1.62 450 11.30 1750 8.80 2.70 Q4 '13 82.99 Q1 '14 1.34 114 1.09 1.70 1.21 0.78 0.56 6.94 5.07 Q1 '14 153 0.79 1.46 9.30 6.80 7.46 Q1 '14 2.65 23.1 250 6.69 1.54 3.90 27.75 3.55 7.4 85 Q1 '14 --------------------------------------------Q1 '14 ----------------------------Q1 '14 83.88

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FX Global Strategy Contacts

Foreign Exchange
Raymond Attrill James Hellawell Kiran Kowshik Mary Nicola Drew Brick Chin Loo Thio Robert Ryan Jasmine Poh Gao Qi Bartosz Pawlowski Elisabeth Gruie Dina Ahmad Diego Donadio Senior FX Strategist Quantitative Strategist FX Strategist FX Strategist Head of FX & IR Strategy Asia FX & IR Asia Strategy FX & IR Asia Strategy FX & IR Asia Strategy FX & IR Asia Strategy Head of FX & IR Strategy CEEMEA FX & IR CEEMEA Strategist FX & IR CEEMEA Strategist FX & IR Latam America Strategist New York London London New York Singapore Singapore Singapore Singapore Shanghai London London London Sao Paulo 1 212 841 2492 44 20 7595 8485 44 20 7595 1495 1 212 841 2492 65 6210 3262 65 6210 3263 65 6210 3314 65 6210 3418 86 21 2896 2876 44 20 7595 8195 44 20 7595 8492 44 20 7595 8620 55 11 3841 3421 raymond.attrill@americas.bnpparibas.com james.hellawell@uk.bnpparibas.com kiran.kowshik@uk.bnpparibas.com mary.nicola@americas.bnpparibas.com drew.brick@asia.bnpparibas.com chin.thio@asia.bnpparibas.com robert.ryan@asia.bnpparibas.com jasmine.poh@asia.bnpparibas.com gao.qi@asia.bnpparibas.com bartosz.pawlowski@uk.bnpparibas.com elisabeth.gruie@uk.bnpparibas.com dina.ahmad@uk.bnpparibas.com diego.donadio@br.bnpparibas.com

Emerging Markets FX & IR Strategy

Production and Distribution please contact: Roshan Kholil, Foreign Exchange, London. Tel: 44 20 7595 8486, Email: roshan.kholil@uk.bnpparibas.com

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