l Global Research l The Morning Call | 22:00 GMT 16 October 2011

17 Oct 11 G20 presses euro area for decisive action

Key events and data
China New rules for CNY FDI to cement HKs role as the key funding hub for CNH India As expected, WPI was still at an elevated level in September Thailand BoT may cut GDP forecast due to the impact of the flooding Philippines Remittances likely to keep supporting domestic spending US Empire State survey is expected to move up to -2.0 from -8.8 prior Market is giving the Euro the benefit of the doubt
1.50 1.46 1.42 1.38 1.34 1.30 1.26 1.22 1.18 Mar-10 Jul-10 Nov-10 Mar-11 Jul-11 Close

Market focus G20 finance ministers warn the euro area that action is needed to avoid contagion The focus is now on the 23 October euro area summit FX Strategy We see the bounce in EUR-USD as temporary; we stay Underweight EUR
Sarah Hewin, +44 20 7885 6251, Sarah.Hewin@sc.com Ned Rumpeltin, +44 20 7885 5558, Ned.Rumpeltin@sc.com

Sources: Bloomberg, Standard Chartered Research

The euro-area crisis dominated the agenda at the G20 finance ministers meeting, held in Paris over this past weekend, with euro area leaders being urged swiftly to maximize the impact of the EU bailout facility (EFSF) in order to avoid contagion. Discussions also centred on the need for G20 countries to cut imbalances through policy co-ordination. An action plan to be presented at the G20 Cannes summit (3-4 November) will commit advanced economies to rebalancing through managing domestic demand and national savings. The communiqu indicated that surplus emerging market economies will acceleratestructural reforms to rebalance demand toward more domestic consumption, supported by continued efforts to move toward more market-determined exchange rate systems. Proposals to boost the IMFs capital were in the end watered down, with the communiqu merely committing that the IMF should have adequate resources to fulfil its systemic responsibilities.

Key data releases/events

SC Singapore NODX, y/y - Sep Electron. exports, y/y Sep Philippines Remittance, y/y Aug Turkey Unemployment rate Jul US Empire manufacturing Industrial production, m/m 1.8% -12.3% 8.0% 9.2% -2.0 0.2 Cons 3.5% -14.7% -9.2% -4.0 0.2

Risk Appetite Measure (SCRAM)

Risk seeking

Risk aversion

Oct-09

Apr-10

Oct-10

Apr-11

Oct-11

Pressure was brought to bear on euro area leaders to finalise a crisis resolution plan for sovereigns and banks at the 23 October euro-area summit. Three key issues remain to be resolved. The first is to increase the capacity of the EFSF in order to ring-fence countries like Italy and Spain in the event of a deterioration in the Greek situation. The second is to recapitalise Europes banks, which now may be required to move to a minimum core Tier 1 capital ratio of as high as 9% by mid-2012. Third, policy makers must finalise Greeces new medium-term financing package; in particular, they must agree on the level of the haircut (up to 50%) which will be applied to private holdings of Greek debt under the voluntary debt restructuring deal. The euro (EUR) has seen a considerable amount of volatility in recent weeks and EUR-USD spot has retraced fully 50% of its losses since its end-August peak. While some observers suggest that this reflects a durable rebound in risk appetite, we remain cautious and see the recent bounce as a consequence of short covering. We see significant implementation risks in any plan to rescue Europe; the recent focus on bank recapitalisations still deals with the symptoms rather than the cause. Central bank liquidity injections have helped boost sentiment, but global growth concerns will persist, keeping investor confidence fragile and prone to episodes of risk aversion. We maintain our Underweight FX rating on the EUR as euro-area sovereign and financial sector risks will continue to be a main feature of currency markets in the coming weeks. We see EUR-USD resuming its decline to finish 2011 at 1.28.
Important disclosures can be found in the Disclosures Appendix All rights reserved. Standard Chartered Bank 2011
10Y UST ID 10Y KR 5Y ZA 10Y BR Jan12 JACI /$ $/ $/KRW $/IDR $/INR $/CNY 3mL-OIS 1Y KRW basis S&P500 EMFree

Market pricing
1Y history Last 2.25 6.35 3.54 8.20 11.19 363 1.388 77.20 1156 8846 49.02 6.380 1d 6bp (6bp) 1bp 0bp (4) 0.8% 0.4% 0.0% (0.3%) (0.2%) (0.1%) Min 1.72 6.35 3.40 7.53 Max 3.74 9.20 4.51 8.90

11.04 12.62 215 466

1.291 1.483 76.24 85.49 1050 8464 1197 9125

44.08 49.58 6.348 6.691

0.3192 0.00bp 0.1006 0.3192 -184 1225 930 16bp 1.7% 0.8% -266 1099 831 -99 1364 1206

Source: Standard Chartered Research

research.standardchartered.com

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Table 1: Standard Chartered Research trading portfolios FX (live positions)

Trade No live trades Instrument Current Entry Entry date Target Stop Analyst

Source: Standard Chartered Research

Table 2: Standard Chartered Research trading portfolios Rates (paper portfolio)

Trade Short 3Y Korea Treasury Bond Short MYR 3Y/5Y/10Y bond fly (short belly, long wings) Short SGD 2Y/5Y/10Y bond fly (short belly, long wings) Long UST 2Y/5Y/10Y fly (long belly, short wings) Long ZMK 5Y bonds Current 3.42% -13bps -73bps -20bps 15.75% Entry 3.55% -11bps -70bps -40bps 16.0% Entry date 4 Oct 16 Sept 16 Sept 16 Sept 9 June Target 3.85% +20bps -40bps -75bps 14.0% Stop 3.25% -25bps -90bps -15bps 18.0% Analyst Suwanapruti Suwanapruti Suwanapruti Fernandez Arrighi

Source: Standard Chartered Research

Asia
CNH Rules finalised on CNY-denominated FDI flows into China
Kelvin Lau, +852 3983 8565
Kelvin.KH.Lau@sc.com

Chinas Ministry of Commerce (MOFCOM) last week formalised and published rules on CNY-denominated FDI flows into China (CNH FDI), with immediate effect. The rules are closely in line with the draft versions released in August for consultation. The only major difference is that the use of CNH FDI for repayment of domestic or international loans is no longer explicitly prohibited (securities and financial derivatives, however, are still out-of-bounds). Note that the standard case-by-case FDI approval approach remains in place. The Peoples Bank of China also issued a complementary set of rules on CNH FDI, with detailed guidelines on account-, remittance-, and other operation-related aspects of the new scheme. A standardised framework for CNY-denominated FDI remittance will promote greater use of Chinas currency offshore, cementing Hong Kongs status as the key capitalraising hub for CNH. The rules provide greater clarity on the ease with which a corporation can remit funds it raises back to the mainland; in our view, this removes a major deterrent to the further development of the Dim Sum bond market. While the external risk environment looks set to dominate investor appetite for CNH in the near term, we believe that structurally, the market is evolving in the right direction.

Philippines Stable remittance to support domestic consumption

Betty Rui Wang, +852 3983 8564
Betty-Rui.Wang@sc.com

Overseas workers remittances for August Remittance is likely to remain steady are due to be released on 17 October. We USD mn (LHS), % y/y (RHS) 12 expect an 8.0% y/y increase, partly thanks 2,000 y/y Remittance 10 to favourable base effects. Overseas Filipino 1,500 8 Workers remittances are generally resilient 6 throughout the economic cycle and we 1,000 expect them to perform consistently amid 4 500 the current global turmoil. These stable cash 2 inflows should be one of the main factors 0 0 supporting domestic consumption, which, in Jan-10 Jul-10 Jan-11 Jul-11 turn, has been the biggest contributor to Sources: CEIC, Standard Chartered Research GDP growth in the past few years.

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Thailand BoT expected to lower growth forecast following floods

Danny Suwanapruti, +65 6596 8262
Danny.Suwanapruti@sc.com

The Bank of Thailand (BoT) governor said Thai 2/10Y bond spread is very narrow on Friday that he expects the Monetary (bps) Policy Committee to revise down its 4.1% 100 80 GDP growth forecast for 2011 at its 60 19 October meeting in response to the worst flooding in decades, according to Dow 40 Jones. The BoT estimates that the flooding 20 has caused economic losses of THB 100bn. 0
-20

We maintain our view (held since March Jan-11 Mar-11 May-11 Jul-11 Sep-11 2011) that the BoT will keep the policy rate Source: Standard Chartered Research on hold at 3.50%, underpinned by external risks and the impact of the flooding. Foreigners were once again net buyers of Thai government bonds in the first week of October, after being net sellers from 7-30 September. We maintain an Underweight duration outlook on the Thai government bond market and favour confining risk to the 1-2Y sector of the curve. A possible tail-risk event is that Q1-2012 bond supply turns out to be very large (as Q4-2011 supply is very small), which could prompt significant curve steepening. In addition, market participants are turning increasingly bearish on growth following the floods, which will support the front end of the curve.

Latin America
Mexico Banxico leaves rates unchanged at 4.5%
Bret Rosen, +1 212 667 0386
Bret.Rosen@sc.com

On Friday, Banxico left rates unchanged at 4.5%, as expected. We see the statement as dovish. It appears that Banxico is signalling its intention to lower the benchmark rate at its next meeting. Particularly noteworthy are the statement about the passthrough from MXN weakness to inflation and the mention of a possible easing. Highlights of its policy statement include: (1) The global economic outlook is troubling. (2) Domestically, economic activity continues to increase, but with some deceleration. Exports, imports and industrial production are particularly weak lately. Forward-looking perspectives are being revised downwards. (3) Inflation and core inflation remain well behaved. Services inflation, in particular, is historically low. (4) The Mexican peso (MXN) is weakening, but inflation expectations have not been adjusted on this basis. In recent years, pass-through from MXN depreciation to inflation has been low. MXN depreciation is a risk for inflation as is a potential rebound in agricultural prices. (5) The balance of risks for economic growth has worsened. (6) The current monetary stance is consistent with a 3% inflation target. Monetary policy could be relaxed in the context of easier global monetary conditions and if the global economic situation worsens substantially.

Dollar bloc
Australia Backing up a more neutral stance
Kelvin Lau, +852 3983 8565
Kelvin.KH.Lau@sc.com

The Reserve Bank of Australia (RBA) will release its October monetary policy meeting minutes on Tuesday (18 October). We expect the minutes to shed light on changes to some of the wording in the post-meeting statement, in particular the acknowledgement that near-term growth is not as strong as earlier expected, the labour market is now a little softer, and inflation may now be more consistent with the 2-3% target in 2012 and 2013. The market will be looking for hints of whether a rate cut is imminent. To maintain a flexible approach in view of the highly uncertain
3

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external outlook, we believe that the minutes could adopt a more neutral tone, as opposed to being outright dovish. But this is unlikely to change the inherently dovish market sentiment towards the RBA, and hence should continue to be a key factor weighing on the Australian dollar (AUD).

IMM data
Mike Moran, +1 212 667 0294
Mike.Moran@sc.com

Speculators increased their net USD long positions against the six major currencies (EUR, JPY, GBP, CHF, CAD and AUD) to USD 14.24bn from USD 13.77bn, according to the latest IMM Commitments of Traders data through 11 October. Please note that the latest data capture shows positioning from Tuesday 11 October and will not reflect the more pronounced moves in G7 currency markets from 12-14 October, when crosses such as EUR-USD, AUD-USD and GBP-USD made clean breaks out of recent ranges. Among the more notable changes in positioning were reduced net shorts in the euro (EUR), particularly among leveraged funds that had been adding shorts since early September. Asset managers and leveraged funds also heavily shorted the British pound (GBP) following the Bank of Englands latest round of asset purchases; however, leveraged funds have begun to reduce modestly their existing net shorts. The Australian and Canadian dollars (AUD, CAD) saw heavy net selling among asset managers over the week; although overall positioning in the AUD is still net long, these positions are near 52-week lows.

Table 1: IMM Commitment of Traders data (net no. of contracts)

Currency Non-commercial positions -69,831 +9,066 +34,149 -8,348 -61,634 +7,377 +145 +1,750 -22,922 -8,035 +11,836 -1,036 +6,838 +1,272 -24,878 +553 Asset Managers -13,093 +2,927 +51,618 +19,364 -50,869 -15,215 -1 -391 -11,464 -21,364 -35,495 -20,267 -47 -27 +19,768 +6,051 Leveraged Funds -27,654 +10,014 +45,457 -386 -50,973 +5,892 +4,006 +1,743 -28,371 -4,092 +11,924 -34 +5,232 +1,477 -22,248 -7,461 Other Non-commercial 52-wk high +96,219 3-May-11 +59,028 2-Aug-11 +51,192 15-Feb-11 +27,694 15-Mar-11 +77,163 8-Mar-11 +91,518 5-Apr-11 +24,126 2-Aug-11 +134,129 19-Apr-11 Non-commercial 52-wk low -79,643 27-Sep-11 -54,396 19-Apr-11 -69,011 4-Oct-11 -1,605 4-Oct-11 -22,922 11-Oct-11 +5,922 27-Sep-11 -2,809 15-Mar-11 -25,431 4-Oct-11

EUR-USD Weekly change JPY-USD Weekly change GBP-USD Weekly change CHF-USD Weekly change CAD-USD Weekly change AUD-USD Weekly change NZD-USD Weekly change MXN-USD Weekly change

-3,379 -591 -743 -10 -1,553 +1,665 0 -21 +11,012 -451 +6,455 +1,451 +5 +168 -1,845 +193

Note: all contract data is from futures-and-option combined reports Sources: CFTC, Bloomberg
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Standard Chartered Research publications for 14 October 2011

On the Ground - Brazil Revising down economic forecasts
Bret Rosen | Italo Lombardi https://research.standardchartered.com/ResearchDocuments/Pages/ResearchArticle.aspx?R=85794

Recent economic data has trended weaker in Brazil We lower our GDP forecasts for 2011 and 2012 COPOM will continue to lower rates, in an aggressive fashion

On the Ground - Singapore MAS lowers policy band slope

Edward Lee Wee Kok | Tai Hui | Thomas Harr https://research.standardchartered.com/ResearchDocuments/Pages/ResearchArticle.aspx?R=85767

Advance Q3-2011 GDP growth came in at 5.9% y/y due to surge in pharmaceutical output MAS reduces slope of SGD NEER policy band but keeps gradual and modest appreciation of policy band We estimate that the MAS reduced the slope of the SGD NEER policy band to 2% per annum from 3.25% There is no change to the width or centre of the policy band

Oil Products Insight European refinery run rates are down, echoing demand
Priya Balchandani https://research.standardchartered.com/ResearchDocuments/Pages/ResearchArticle.aspx?R=85770 Oil product stocks are down 3% y/y in EU-16, but gloomy outlook tempers upside Chinas September refinery runs are expected to be healthy, even with outages Shell refinery is partially restarted, but refinery margins will likely be supported near-term

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Data available as of

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Sarah Hewin Regional Head of Research, UK and Europe

GR11SE | 17 October 2011

22:00 GMT 16 October 2011

22:00 GMT 16 October 2011