barclays fx quarterly

PLEASE REFER TO THE LAST PAGE FOR ANALYST CERTIFICATION(S) AND IMPORTANT DISCLOSURES.

FOREIGN EXCHANGE RESEARCH March 2012

GLOBAL FX QUARTERLYRESURGENT USD IN CALMER WATERS

Barclays | Global FX Quarterly

22 March 2012 1

CONTENTS

OVERVIEW 2

Resurgent USD in calmer waters Stronger growth and improving relative structural issues in the US are USD positives relative to the majors, but less so against the rest of the world’s currencies.

THEME 1: USD PROSPECTS 3

The comeback kid The move in US yields is critical for the USD. A cyclical upturn and relative outperformance of the US economy to the rest of the world is not necessarily a USD positive.

THEME 2: OIL AND FX 7

A slippery slope Our analysis shows long NOK/CHF, RUB/TRY and MYR/TWD are attractive in terms of currency vulnerability to higher oil prices, carry and valuations.

THEME 3: EUROPEAN CURRENCIES 11

Navigating unchartered waters We think the NOK, SEK and PLN are better placed in post-3Y LTRO Europe, given economic fundamentals and global risk factors.

THEME 4: JPY AND CURRENT ACCOUNT 15

Deteriorating undercurrent The risk of a structural current account deficit in Japan sooner than expected has been a big part of recent JPY depreciation and prospects for it will remain crucial.

THEME 5: MULTILATERAL PERSPECTIVE 19

Positioning for tectonic shifts Applying a multilateral approach to currency values since July 2011, we think the TRY looks too expensive and the BRL too cheap against their trading partners.

G10 FX MOVES OVER THE PAST QUARTER AND SUMMARY OF KEY DRIVERS FOR G10 FX .....................................................................................................................................22

G10 FX VIEWS ON A PAGE .............................................................................................................23

EM FX VIEWS ON A PAGE ...............................................................................................................24

OPEN TRADES...................................................................................................................................26

FX CLOSED TRADES ........................................................................................................................27

FX FORECAST TABLES.....................................................................................................................28


22 March 2012 2

OVERVIEW

Resurgent USD in calmer waters

Key themes for the quarter

USD strength against the other finding currencies, but not across the board: EM prospects remain bright (see “The comeback kid”).

JPY weakness has further to go; current account dynamics are crucial. We are targeting 90 in 6m (see “Deteriorating undercurrent”).

EUR will also weaken, even if risk is not “off”. A weaker EUR and continued equity price strength is good for the smaller European currencies (see “Navigating unchartered waters”).

CAD prospects brightest of the G10 commodity currencies: A stronger US and ongoing concerns about China.

EM still attractive but Asia-Pac currencies may have a breather. EMEA is becoming more attractive and LatAm strength has further to go.

Higher oil prices are the biggest risk to the nascent recovery in confidence. G10 commodity currencies are more attractive than EM if there is a significant supply shock, rather than oil prices increasing due to robust demand (see “A slippery slope”)

Implied vol is unlikely to increase across the board, partly because US developments will be a stabilising factor. But there are attractive relative value trades (see below).

Major forecast changes

None in this publication. Relative to last quarter, the big change is USD/JPY.

Favoured trades Long MYR/TWD in spot (ref: 9.589, target: 9.80, stop-loss: 9.50): MYR/TWD benefits from high oil prices, positive carry and insulation from regional shocks (see “A slippery slope”).

Short CHF/NOK in spot (ref: 6.336, target 5.880, stop-loss 6.437): The NOK is supported by oil and risk and the CHF remains our favourite funding currency in Europe (see “A slippery slope” and “Navigating unchartered waters”).

Long a 3m GBP/USD straddle at 3.45% USD (spot ref: 1.5812) and short a 3m USD/JPY straddle at 4.25% USD (spot ref: 82.46). GBP volatilities are low, while those for the JPY have moved higher recently due to its sell-off (see Global Outlook, March 2012).

Short TRY/BRL via 3m NDFs at 1.006 (target: 0.925; stop-loss: 1.025): The TRY looks too expensive and the BRL too cheap. (see “A multilateral perspective”).

Hold on to or add to long CAD/JPY via call options (see open trades for details): Oil and US strength versus loose Japanese monetary policy and a deteriorating current account balance.

Hold on to long USD/CHF (see open trades for details): Easy ECB policy to keep downward pressure on EUR/USD. Reduced euro area risks should allow EUR/CHF to move higher.

Guillermo Felices +44 (0)20 3555 2533

[email protected]

Paul Robinson +44 (0)20 7773 0903

[email protected]

https://live.barcap.com/go/publications/content?contentPubID=FC1804200�


22 March 2012 3

THEME 1: USD PROSPECTS

The comeback kid The improvement in US economic prospects has continued, but the USD remains weak. Stronger growth but little change in Fed policy should lead to a gradual increase in long-term yields: helpful for the USD relative to the JPY and EUR, but not a large enough change to lead to a widespread sell-off of commodity or EM currencies. In our view, the USD will be viewed as an increasingly unattractive funding currency, compared with the JPY, EUR and CHF.

Longer-term USD prospects brighten The US economy is in a sustainable, though not particularly strong, recovery, in our view. The employment situation in particular has improved significantly (Figure 1). But we think that USD strength is unlikely unless longer-term US yields rise meaningfully. Common factors affect both them and the USD. Yields are highly likely to pick up at some point; we do not think that balance sheet issues will lead to Japanese-style prolonged deflation. And when they do, there will be plenty of room for yields to move (Figure 2). There appears to be little conviction that a major bond sell-off is imminent. In our recent Global Macro Survey, only 4% of respondents thought the 10y government yield would be above 2.75% by year-end. But many clients who expect little upside think that the risks of a bond market sell-off have increased. And even if yields remain constrained, news about the factors that drive them matters enormously for global FX.

There are four main drivers of longer-term yields, with differing implications for the USD:

Expected growth: Trend growth is an important determinant of the longer-term real interest rate, and cyclical growth affects the expected policy stance. We expect prospects to continue to brighten relative to the rest of the world, which should support yields and the USD, mainly via shorter-term growth expectations. It is difficult to imagine forecasts of trend growth being revised up significantly in the short run.

Inflation breakevens: Our rates strategists do not think that breakevens are likely to increase significantly, despite the recent rise. Eventually, super-loose US monetary policy

Paul Robinson +44 (0)20 7773 0903

[email protected]

Yuki Sakasai +1 212 412 5652

[email protected]

Figure 1: Unemployment rates are moving in opposite directions in the euro area and US

Figure 2: Despite the recent pickup in US 10y yields, they remain close to their lowest level for decades

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1962 1968 1974 1980 1986 1992 1998 2004 2010

US benchmark 10y yield

Source: Bloomberg Source: Reuters EcoWin


22 March 2012 4

may lead to a more marked increase, but there is no indication that it will happen yet. The major risk to this is the oil price, which we discuss below.

Fed policy: This is the factor that eventually will lead to a large move, in our view. In the short run, though, the FOMC is unlikely to change its stance rapidly. The lesson from the 1930s, when premature tightening led to a fairly severe recession in 1937-38, has been learnt. Nonetheless, longer-term real yields remain at extremely low levels (Figure 3) and there is significant room to the upside, especially if risk appetite continues to pick up.

The attractiveness of US Treasuries: For all the concerns about the longer-term fiscal position in the US, Treasuries have shown no sign of losing their safe-haven status. If anything, the USD has become more of a safe-haven currency in light of the problems in the euro area and the combination of a deteriorating Japanese trade balance and serious Japanese fiscal and demographic issues.

Overall, we think that US Treasury yields are unlikely to increase quickly, and therefore rapid USD appreciation is unlikely. The factors that may lead to some pickup – stronger growth and improving relative structural issues – are USD positives relative to the majors, but less so against the rest of the world’s currencies.

Prospects for the other majors have deteriorated We now expect further weakness of the JPY, though some of the factors which have led to a persistently low level of USD/JPY are likely to stay in place. Prospects for the USD have improved, as discussed above. This matters directly for USD/JPY but also because they are the two leading safe-haven currencies. Low actual and expected inflation has strengthened the JPY directly and via the effect on real interest rates. The BoJ clearly wants higher inflation, but we suspect that investors read too much into its February statement and action. Inflation expectations, implied by fixed income markets, have picked up, but that is also true for the US and Europe. Japanese inflation is probably not a significant JPY negative yet.

Risk has been more important. The weakest currencies of note in Q1 were the USD and JPY, consistent with previous patterns relative to global equities (Figure 3). But there are signs that the safe-haven status of the JPY may be eroding. Higher oil prices and the change in energy usage in Japan have exacerbated the current account deterioration. And of course

Figure 3: The AUD and NZD remain very strongly correlated with global equities…

Figure 4: …and both remain significantly overvalued relative to our BEER model

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1.0

JPY

CH

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GBP

EUR

KRW

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NO

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Since Jan 2008 Since last GO

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EUR

USD GBP JP

YA

UD

CA

DC

HF

SEK

NO

KN

ZD

BRL

CLP

MX

NH

KD IDR

INR

KRW

MYR

PHP

THB

TWD

ILS

PLN

RO

NR

UB

TRY

ZA

R

Misvaluation relative to longer-term fair value

G4 Smaller G10

Latam

EM Asia EEMEA

Source: Barclays Research Source: Barclays Research

JPY


22 March 2012 5

the fiscal situation has been a concern for a long time. Despite the record current account deficit in January, we do not believe that it will move to a prolonged deficit until later this decade (Figure 5). Nonetheless, this has had important psychological implications. Our technical strategists’ view is that the JPY has weakened through key levels against a number of currencies (the USD and GBP being particularly important examples).

The euro area crisis has calmed somewhat but is far from over. The LTROs were a significant success and a number of the events that market participants were most worried about have taken place with little disruption to global markets (eg, France’s downgrade and Greek CDS contracts being triggered). But short-term risks remain: 1) will Greek growth continue to disappoint, leading to worries of further restructuring? Probably, but there is unlikely to be a full-blown crisis, at least during the coming quarter. 2) Will Portugal need to restructure its debt? Probably not. 3) Will elections in Greece and France lead to increased political instability? Difficult to call, but certainly a risk. Overall, although developments may be a little calmer, there are likely to be periods of further investor disquiet. Confidence in the EUR is unlikely to improve significantly in the short run.

The crisis has had no clear long-term effect on EUR/USD, but it has been associated with deteriorating relative prospects for the euro area economy and, more recently, a change in the ECB approach. We continue to expect gradual depreciation of the EUR in light of looser monetary conditions, ongoing weak growth and a more attractive USD.

Select commodity and EM currencies remain attractive Commodity prices are likely to remain strong and risk appetite robust, so the medium-term prospects for commodity prices are fairly bright. The AUD and NZD continue to be the highest-beta currencies in global FX (Figure 3), though valuation remains stretched for both (Figure 4). The recent depreciation of the NZD and AUD since early March may extend somewhat in the near term, especially if oil prices rise for reasons other than strong Asian growth. The CAD continues to have the most potential upside of the G10 commodity currencies. Valuation is less stretched, oil prices are a more direct positive and US growth is likely to surprise to the upside relative to China in 2012. The BoC’s sensitivity to the real exchange rate may lessen if the US recovery persists and there is more upside for Canadian rates in the longer term. Any move is likely to be gradual because of the historically low level of USD/CAD, but the CAD looks set to outperform the rest of the G10 currencies.

Figure 5: We do not expect the Japanese current account to move to a structural deficit until 2018

Figure 6: US cyclical outperformance needs higher Treasury yields to be a true USD positive

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70 75 80 85 90 95 00 05 10 15 20(FY)Households Non-financials

General govt FinancialsCurrent account

(% of GDP) Simulated

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USD

NEE

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EUR

JPY

AU

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CH

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US cyclical outperformance

US cyclical outperformance + US10Y up over 25bp per month


EUR

G10 commodity currencies


22 March 2012 6

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

The big risk: Oil The biggest risk to this USD view is a further significant rise in the oil price. The reasons why a higher oil price is generally a USD negative all continue to hold, though less so than in 2007-08. The Fed has typically “looked through” rapid commodity price moves to a much larger extent than European central banks, the ECB in particular. The effect on US consumers and producers may be larger. Lower taxes on energy mean that changes in the underlying oil price are felt more directly. It should be noted, though, that the US has a smaller petroleum trade deficit relative to GDP than the euro area or Japan. Perhaps most important now is the general pattern that the “winners” from high oil prices (eg, Middle Eastern countries) tend to diversify into EUR-denominated assets.

What is driving oil prices matters. The USD has been the weakest global currency in months since 2000 when both the oil and equity prices increase, but tends to appreciate against many of the EM currencies if equities are falling while oil prices rise. So if higher oil prices are a result of supply-side disturbances, it may be less of a USD-negative than many assume. Nonetheless, even then the USD tends to underperform other G10 currencies. The analysis discussed in “A slippery slope” suggests that the G10 commodity currencies – whether or not they produce oil – may perform well in such an environment.

Past relationships While history does not necessarily repeat itself, it is worth looking at the historical performance of the USD when the US economy has a cyclical upturn with above-trend growth and is outperforming the rest of the world (adjusting for different trend rates of growth). We identify the US relative cyclical outperformance episodes using OECD composite leading indicators since 1993. Figure 6 shows that cyclical outperformance of the US does not generally lead to broad-based USD strength: during these episodes, the USD appreciated only 0.12% per month in trade-weighted terms. The USD’s performance varies significantly across currencies. Within the G10, it tends to outperform EUR and CHF but underperform notably against AUD and CAD.

The picture dramatically changes when the US cyclical upturn/relative outperformance accompanies a more than significant rise in US 10y yields during the month (we use a 25bp rise as criteria which is a one standard deviation move over our sample period). In such periods, the USD appreciated 0.7% per month in trade-weighted terms and USD strength is more broad-based. Our results supports our view that the move in US yields is critical for the prospect of the USD, and a cyclical upturn and relative outperformance of the US economy to the rest of the world is not necessarily a USD positive.

EM currencies


22 March 2012 7

THEME 2: OIL AND FX

A slippery slope Concerns about future supply, as well as an improvement in risk appetite, have led to markedly higher oil prices since the start of the year. Historical data suggest that currency performance in an actual supply contraction would see greater differentiation between currencies on the basis of their relative vulnerabilities, key determining factors of which include oil’s impact on the external balance, growth and monetary policy. Long NOK/CHF, RUB/TRY and MYR/TWD are attractive trades, in our view.

Geopolitical tensions (Iran and Syria) and a fundamentally tight oil market with OECD inventories at five-year lows and low spare capacity (see Energy Flash, 8 March 2012, for more details) have kept oil from declining despite a softening in economic prospects, especially in the EM economies (Figure 1). Indeed, oil has outperformed other commodity prices much the same way as it did after the start of the Libyan uprising in early 2011 (Figure 2).

The historical relationship between oil prices and FX is not clear cut, however. Higher oil prices have implications for economic growth/market risk appetite for a country’s external balance as well as for inflation and these various channels often have opposing effects on FX. Figure 3 shows the correlations between oil and other currencies (USD crosses) over the past 10 years, calculated over the complete sample period and also during two particular regimes for oil and growth expectations. During periods when oil prices are going up, correlations between oil and FX vary substantially depending on whether equity prices (growth expectations) are going up or down.

Correlations to oil prices are higher for most currencies (G10 and EM) in our sample during periods when oil and equities are going up. These periods of improving market risk appetite correspond to demand shocks – an increase in global growth prospects that pushes up all risky/pro-cyclical asset prices. On the other hand, periods when oil prices increase and equity prices decrease constitute episodes when oil prices are elevated due to idiosyncratic reasons. Such episodes would be consistent with a supply shock – one in which supply

Aroop Chatterjee +1 212 412 5622

[email protected]

Raghav Subbarao +44 (0)20 7773 4144

[email protected]

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

Figure 2: Oil and non-oil commodity performance in the days around recent geopolitical episodes

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Libya episode: Oil Libya episode: Non-oil

Note: Both G10 and EM LIs are GDP-weighted. EM includes BRL, CNY, CZK, INR, KRW, PLN, RUB, ZAR and TRY. Source: OECD, Haver Analytics, Barclays Research

Note: Libya refers to the uprising that began in February 2011, and Iran to the imposition of sanctions by the international community in January 2012. Source: Bloomberg, Barclays Research



22 March 2012 8

constraints boost oil prices at the cost of (more vulnerable) risky asset prices. Indeed, we find the correlations with oil prices changing signs for a number of currencies (most notably INR, THB, TWD, KRW and PHP).

Currency performance and oil shocks Oil and equity price regimes are only a rough way of determining whether oil prices are being driven by demand or supply shocks. Market clearing in oil implies that supply, demand and prices adjust very quickly to each other. As a result, it is difficult to determine the nature of the oil shock by merely looking at oil supply, demand or prices by themselves. Instead, we estimate a relationship1 between oil supply, demand and price (using data from 1973 onwards) and determine the portion of each that is unexplained by the estimated relationship. An increase in oil supply/demand/price by more than one standard deviation from the estimated relationship is flagged as a positive shock and vice versa.

1 We estimated a VAR with four lags for supply, demand and oil price variables. For supply we used the OECD+ Major 6 non-members leading indicator, for supply we use the monthly global oil production data and our price variable is the IMF's average crude oil price backfilled before 1980 with the refiner's acquisition cost of crude oil.

Figure 3: Currency return (vs USD) correlation with oil prices (since 2003)

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Full Sample Oil up, equities up Oil up, equities down

Note: We calculate weekly correlations here. For the two sub-samples, we look at weeks when the MSCI World went up or down and oil went up. Source: Bloomberg, Barclays Research

Figure 4: Information ratios of G10 USD crosses during positive price and negative supply shocks

Figure 5: Information ratios of EM USD crosses during positive price and negative supply shocks

EUR USD

AUD

CAD

CHF

GBP

JPY

SEK NOKNZD

-1.00

-0.50

0.00

0.50

1.00

1.50

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-2.00 -1.00 0.00 1.00 2.00

IR Negative supply shock

IR: Positive price shock

BRLCLP

CZKHKD

HUF

IDR

ILS

INRKRW

MXN

MYR

PHP

PLN

RUB

SARSGD

THBTRY

TWDZAR

-2.00

-1.50

-1.00

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1.50

-4.00 -3.00 -2.00 -1.00 0.00 1.00

IR Negative supply shock

IR: Positive price shock

Source: Bloomberg, Haver Analytics, EIA, Barclays Research

Source: Bloomberg, Haver Analytics, EIA, Barclays Research


22 March 2012 9

We consider two types of shocks – a positive price shock (oil price increase unexplained by actual expansion in supply or demand, eg, due to fears of future supply restrictions and/or increased market risk appetite) as well as during negative supply shock episodes (periods when supply actually contracted unexpectedly). Figures 4 and 5 show FX performance versus the USD (since 1989) in quarters where negative supply and positive price shocks were seen. G10 commodity currencies (excluding NOK) are the most attractive in both types of shocks. The USD strengthens in a negative supply shock while weakening in a positive price shock. A number of G10 currencies that benefit during the positive price shock (SEK, GBP and NOK) don’t perform quite as well during the supply shock. In EM, few currencies perform well in both shock periods. The MXN is a notable outperformer in the price shock. There are, however, a number of significant underperformers in EM such as INR, TRY and CLP, which relates closely to their vulnerabilities to an oil price increase.

Currency vulnerability to higher oil prices The major G10 and EM currencies vary in their vulnerabilities with respect to oil’s impact on economic growth, the external balance and monetary policy (Figures 6-8). A higher petroleum balance goes hand in hand with the positive trade balance impact of higher oil prices, which is positive for a currency since it implies a positive wealth effect (Figure 6). There are a few key exceptions, however. Non oil producing commodity currencies such as the AUD have a negative petroleum trade balance but a positive trade balance impact reflecting the case of the demand shock when demand and price of all commodities tend to go up.

From a growth perspective, larger net oil consumption would mean that an oil price increase cannot be easily offset by domestic production (Figure 7). Additionally, a more negative elasticity of oil consumption would imply a slowdown in economic activity with higher oil prices. In terms of the impact on monetary policy, both higher inflation pass–through and a larger Taylor rule coefficient on inflation would typically lead to a stronger tendency to tighten monetary policy (Figure 8). FX, which is the relative price of money, would tend to appreciate with higher oil prices for central banks, which are more sensitive to inflationary pressures. We see some of the usual suspects having a larger coefficient on oil prices, ie, the increase in oil prices has typically led to higher rates – in G10, NOK and CAD have large positive coefficients, while in EM, PLN, BRL and RUB would tend to respond more strongly to oil shocks. At the other end of the spectrum, the relative dovishness of the BoJ and SNB are apparent as well as a number of countries in EM Asia and EMEA.

Figure 6: Oil’s impact on the external balance

Figure 7: Oil’s impact on growth

TRYTHB

RUB

KRW

ILSHKD

COP

NOK

JPYCHF

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1012

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Petroleum trade balance (% GDP)

Change in trade balance (% GDP, 10% oil increase)

CHF

JPY

NOK

CLP

COPINRKRW

PHP

RUB

SGD

THB

-2.5-2.0-1.5-1.0-0.50.00.51.01.52.0

-8000 -6000 -4000 -2000 0 2000 4000

Net oil consumption/GDP

Elasticity of oil consumption (10% oil increase)

Source: Haver Analytics, UN Comtrade, Barclays Research Source: Haver Analytics, Barclays Research


22 March 2012 10

A simple way to determine the aggregate FX exposure to oil is to use a scoring approach as shown in Figure 9 (all scores are reported versus the USD). Oil importing currencies in EM Asia and EMEA are the most vulnerable from both the economic growth and external perspectives. In addition, a number of these currencies (TRY, SGD, TWD and INR) also have central banks which don’t respond particularly strongly to inflation increases, suggesting a relative dovishness during periods of oil price increases. As a result, these currencies show up as being the most vulnerable to an oil price increase. In G10, the CHF and the JPY appear more vulnerable than others. On the flip side, the RUB, MXN and NOK stand out with positive impacts on their external balances, a limited growth impact and more proactive monetary policy in the event of an oil price increase.

Trade recommendation Putting our analysis on vulnerabilities together with other measures of currency attractiveness such as carry and valuation, long positions in MXN and NOK look attractive on account of their lower vulnerability levels, higher carry and favourable valuations versus the likes of the SGD, CHF, CZK and TWD. We have previously recommended a short CHF/MXN position which is up 4.1% (as of 21 March) since inception, and we still like the fundamentals around this trade. A long NOK/CHF position also looks attractive based on a fundamental analysis of the two economies and a trade recommendation can be found in “Navigating unchartered waters.” Our analysis on currency performance during oil shocks shows that this trade should also do well in an environment where risk appetite remains high and worries about future supply remain elevated (positive price shock, Figure 4).

Alternatively, expectations of oil price increases can be expressed through relative value trades which are neutral to other risks, and may also be supported by other fundamental factors. From an intra-regional perspective, we like long RUB/TRY and long MYR/TWD on account of their differing vulnerabilities to higher oil prices (Figure 9). TRY’s higher vulnerability to oil prices, large current account financing needs and sticky inflation makes it an attractive short versus the RUB (The Emerging Markets Quarterly, March 2012). In addition to the beneficial impact of oil for the MYR versus the TWD, MYR’s higher carry would also support it in the more benign environment where risk appetite is high and worries about future supply remain. We recommend going long MYR/TWD in spot (ref: 9.5890, target: 9.80, stop-loss: 9.50)

Figure 8: Oil’s impact on monetary policy Figure 9: Aggregate vulnerability to an oil price increase

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INR

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Effect on annual headline inflation (10% oil increase)

Coeff of inflation in Taylor Rule

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Risk score (vs. USD)

Source: Haver Analytics, Barclays Research Note: Higher scores indicate greater vulnerability to oil prices relative to the USD. Source: Barclays Research



22 March 2012 11

THEME 3: EUROPEAN CURRENCIES

Navigating unchartered waters The actions of the ECB have broken the link between the EUR’s performance and global risk appetite. We assess which European currencies are better placed to appreciate versus the EUR in this new environment given economic policy drivers and market drivers such as oil and global risk. Our analysis shows that NOK, SEK and PLN are better placed to do well in the months ahead.

The euro area is facing a new environment. Policymakers’ attempts to address the debt crisis more decisively, alongside substantial loosening by the ECB, have decoupled the prospects of the EUR and global risk appetite. A weak EUR and buoyant equity market is not a common occurrence. Over the past decade EUR/USD weakness has only been associated with a rally in global equities around 20% of the time. What does this new world mean for European currency performance?

Past experience suggests this environment is positive for European currencies versus the EUR (Figure 1). Two points are worth highlighting. First, the state of the world matters. When equities rally and the EUR is weak, most of the region’s G10 currencies outperform the EUR. Whereas, in periods of equity and EUR weakness only the liquid safe havens and oil related currencies outperform. Second, in neither state is European currency performance spectacular; it is the USD that generally outperforms.

These relationships have mostly held true since December 2011, when the fiscal compact and the 3y LTROs were introduced. Moreover, the relative performance within Europe has been very similar to what history suggests. This gives us some confidence that if equities remain supported and EUR weakness continues, European currencies should continue to outperform the EUR with emerging Europe seeing some of the largest gains.

Given that we are navigating through somewhat unchartered waters in Europe, we assess the prospects for European currencies by considering country-specific factors such as macro policy and the likely effect of market factors such as risk appetite and oil prices.

Guillermo Felices +44 (0)20 355 52533

[email protected]

Sara Yates +44 (0)20 777 33937

[email protected]

Figure 1: European currencies do well when risk is on and the EUR weak (average monthly returns vs EUR since 2000)

Figure 2: Most currencies have rallied in line with historical averages since Dec 2012 (avg monthly returns vs EUR)

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1.5

2.0

2.5

3.0

3.5

USD CHF NOK CZK SEK GBP HUF PLN RUB TRY

EUR/USD weak, equities rally

EUR/USD weak, equities sell-off

-0.5

0.0

0.5

1.0

1.5

2.0

2.5

3.0

USD CHF NOK CZK SEK GBP HUF PLN RUB TRY

Since 2000 Since Dec 2011

Source: Bloomberg, Barclays Research Source: Bloomberg, Barclays Research


22 March 2012 12

Policy responses: sailing into unchartered waters

(1) Monetary policy and attitude towards FX appreciation

In order to gauge the current monetary policy stances in Europe we estimated country-specific Taylor rules. These typically relate interest rates to the amount of spare capacity in an economy and inflationary pressures. With many central banks seemingly mindful of the strength of their currency, we extended the model to estimate the sensitivity of policy rates to movements in the real exchange rates. We used out of sample estimates throughout, as the co-efficient were calculated using monthly data from 2000-2007.

Our analysis suggests that monetary policy in the G10 European countries is looser than the model would suggest (see Figure 3). The Norges Bank and the Riksbank remain substantially behind the curve in terms of rate hikes, whereas in the UK, euro area and Switzerland, policy rates appear more in line with the model predictions. However, non-standard measures mean that monetary policy in these countries is actually much looser than that suggested by both policy rates and the model. This discrepancy suggests that in the latest cycle central banks have responded more aggressively than normal. This is likely to reflect the fact that central banks have put more weight on the downturn in economic conditions given the downside risks associated with financial stability concerns.

We expect loose G10 European monetary policy to remain for some time. This has several implications for currency performance in the region. First, interest rates remain important drivers of currencies even for countries taking non-standard measures (Figure 6). Second, as the risk environment strengthens and the market is more comfortable searching for carry, the high yielders within Europe will look more attractive. But, as long as some G10 central banks maintain a more dovish than normal stance, their currency appreciation versus the EUR may be capped. Whereas, with many EM central banks facing relatively high inflation and in some cases large liabilities in foreign currency, they are likely to be more tolerant of FX appreciation.

(2) Fiscal policy and sovereign risk: which boats are in good shape?

The fiscal stance is generally tight as European countries try to reduce indebtedness. However, some countries have been benefiting from relatively healthier fiscal outlooks. These are the likes of CHF, NOK and SEK. For all of these countries, sovereign 5y CDS are trading tighter than Germany’s 5y CDS (Figure 4).

The UK 5y CDS is also trading tighter than Germany. However, it is a special case because its fiscal fundamentals are not great, but the commitment to fiscal consolidation and admittedly, the liquidity and depth of its financial markets, has benefited GBP.

Figure 3: Actual interest rates and those suggested by an open-economy Taylor rule

Figure 4: CDS trading tighter than Germany in G10 and wider in EM (5y CDS vs Germany, bp)

-0.5%

0.0%

0.5%1.0%

1.5%

2.0%

2.5%3.0%

3.5%

4.0%

GBP CHF EUR NOK SEK

Actual policy rate Estimate

-100

-50

0

50

100

150

200

NOK USD CHF SEK GBP CZK RUB PLN TRY

bps

Source: Barclays Research Source: Bloomberg, Barclays Research


22 March 2012 13

Fiscal austerity is a risky strategy as tight fiscal policy could result in even weaker growth and higher debt/GDP ratios. Indeed, two rating agencies expressed concerns about the UK’s triple-A rating in February and March. However, this week’s fiscally-neutral budget showed the government continues to keep a tight reign on its fiscal position. In addition, with the OBR marginally reducing its forecast for government borrowing for the 2011/2012 financial year despite surprisingly weak public finance data for February, it suggests that the UK’s reputation will not be tarnished just yet.

A ranking of currency prospects: who’s sailing will excel in the current conditions?

As currency performance depends on a mix of factors, we combined indicators of carry, fiscal concerns, attitudes of central banks towards FX appreciation, sensitivity to global risk and oil, to see what this suggests for intra European currency performance. Figure 7 shows indicators that proxy these factors. The higher the indicator the more supportive they are for currencies, except for the last two (CDS versus Germany and attitudes towards appreciation) where a higher number means worse prospects.

We rank these indicators and aggregate them into a summary ranking from 1 to 10, where 10 means the ‘best placed to outperform versus. EUR’ (eg, SEK) and 1 is the least likely currency to perform well (eg, CHF). Figure 8 combines this ranking with the currency’s performance since December 2011. Since that date we observe a positive relationship between FX performance versus EUR and our ranking. NOK, SEK and PLN, which rank highly, have outperformed CHF, GBP and CZK. We expect this to continue. Figure 8 highlights dislocations: PLN has performed much better than what its rank would indicate while SEK has rallied by less than the trendline would suggest.

Figure 5: Markets perception of UK vs Germany’s sovereign risk has supported GBP vs EUR

Figure 6: Lower Interest differentials since end-2011 likely reflect 3y LTROs and weigh on EUR/GBP

-40

-20

0

20

40

60

80

Aug-08 Aug-09 Aug-10 Aug-110.74

0.78

0.82

0.86

0.90

0.94

0.98

UK - Germany 5y CDS EUR/GBP (RHS)

-0.4

-0.2

0.0

0.2

0.4

0.6

0.8

1.0

1.2

Jul-09 Jan-10 Jul-10 Jan-11 Jul-11 Jan-120.80

0.84

0.88

0.92

0.96Germany - UK 1y yields diff

EURGBP (RHS)

Source: Bloomberg, Barclays Research Source: Bloomberg, Barclays Research


22 March 2012 14

Figure 7: Ranking of European currency prospects

Figure 8: European currency performance vs ranking of currency prospects (10 = best prospects)

Corr. MSCI Corr. oil Carry vs. EUR 5y CDS vs. FX strength Overall

World* prices* (3m ann.

%)** Germany concerns*** rank****

GBP -0.18 0.01 0.4 -9 1 2

CHF -0.30 -0.13 -0.3 -30 5 1

SEK 0.45 0.21 1.6 -24 1 9

NOK 0.14 0.25 1.6 -42 4 7

CZK 0.10 0.20 0.3 45 1 3

HUF 0.36 0.22 4.8 448 1 6

PLN 0.43 0.23 4.0 99 1 8

RUB -0.04 0.05 5.4 93 2 4

TRY 0.31 0.09 8.2 143 3 5

0

1

2

3

4

5

6

7

8

9

10

0 2 4 6 8 10

PLN

RUB

SEK

NOK

HUFTRY

GBP

CHF CZK

% chg vs. EUR since Dec 11

Rank

Note: *Monthly changes since 2000. **From FX forwards. ***Based on our current assessment of CBs’ attitudes. 5 = intolerant to appreciation. 1 = hands-off approach to appreciation. ****10 = best prospects, 1 = worst prospects for currencies vs EUR. Source: Barclays Research

Source: Barclays Research

FX implications: looking for safe ports to anchor

Two G10 currencies stand out against all of these criteria: NOK and SEK. While they have appreciated already versus EUR they continue to be well placed to perform, according to our ranking of prospects in the current environment for Europe. We recommend being long these currencies versus low yielders like the EUR, or with even higher conviction, the CHF. We expect further upside for GBP versus EUR in our 1 year forecasts, but its indicators of near-term prospects are nowhere near as strong as the Scandinavian currencies. In European EM FX, our ranking favours PLN.

Trade ideas:

Sell CHF/NOK at 6.336, target 5.880, S/L 6.437.


22 March 2012 15

THEME 4: JPY AND CURRENT ACCOUNT

Deteriorating undercurrent The risk of a structural current account deficit in Japan sooner than expected has been a big part of recent JPY depreciation, and prospects for it will remain crucial. We recommend being long USD/JPY and also see the chance of JPY underperformance versus some Asiapac currencies like AUD, CNY, IDR and MYR.

Focus on long-term trend deterioration and ‘twin deficits’ JPY underperformed all major currencies during Q1. The depreciation was partly due to US prospects: better data and an improved economic assessment by the FOMC, which have reduced market expectations for additional easing. However, what makes this JPY depreciation different from similar falls over the past two years, in our view, is that Japanese factors were at the forefront of investor sentiment towards JPY. Japan’s trade deficit continued to widen due to strong imports and led to the record current account (C/A) deficit in January. The risk of a sovereign downgrade for Japan looms, and might have an even more important impact given that sovereign debt concerns in the euro area have lessened somewhat. The Noda Administration is aiming to pass a bill to raise the consumption tax to ensure future revenue, but internal objections within the ruling DPJ party and its minority in the Upper House make the bill’s passage uncertain. Furthermore, a surprise easing by the BoJ in February, together with a re-emphasis on overcoming deflation, is keeping market expectations of additional easing alive, which is a potentially powerful bearish factor for JPY.

The changing C/A in Japan is of particular importance, in our view. A strong C/A balance has been crucial for Japan, both for stable financing of its huge JGB supply, and for the JPY’s status as a safe-haven currency during the financial crisis. While the record C/A deficit was in part due to seasonal factors and our Japan economists do not forecast a structural deficit until 2018, we think that the risk of more rapid deterioration is likely to linger for a while. First, looking through the seasonal fluctuation, Japan’s C/A has been on a deteriorating trend since 2008 due to a widening trade deficit, while the income surplus remains almost flat (Figure 1). Our economics team expects the trade deficit to continue into 2014. In

Masafumi Yamamoto +81 3 4530 5038

[email protected]

JPY underperformance driven by Japanese factors

Figure 1: C/A deterioration is not just a seasonal phenomenon

Figure 2: Rank correlation between G10 NEER performance and C/A has been very unstable

-2.0

-1.0

0.0

1.0

2.0

3.0

4.0

Jan-06 Jan-07 Jan-08 Jan-09 Jan-10 Jan-11 Jan-12

Goods&services, NSA C/A, NSA

C/A, January C/A, SA

surplus

trillion yen

-0.8

-0.6

-0.4

-0.2

0.0

0.2

0.4

0.6

0.8

00 01 02 03 04 05 06 07 08 09 10 11

rank correl FX-CA rank correl FX-Fiscal

rank correl FX-GDP

rank correlationcoefficient

Source: Bloomberg Source: Haver Analytics

C/A deterioration – a game changer for JPY


22 March 2012 16

addition, the risks to Japan’s trade deficit are tilted to the upside (larger deficit) due to rising oil and commodity import prices.

The long-term deterioration of Japan’s C/A reflects shrinking net savings, in both the household and corporate sectors, due to an ageing population and production being moved abroad. In addition to this long-term trend, the Great Tohoku earthquake caused net savings to shrink further because of the shift of energy demand from nuclear energy (uranium) to more expensive fossil fuels such as crude oil and liquefied natural gas (LNG). In H2 12, the reconstruction efforts should increase investment, further diminishing net savings and implying a larger trade deficit. We thus think that the downward pressure on JPY due to a deteriorating C/A will likely remain intact over the coming quarters.

The relationship between the C/A and FX performance has not been straightforward. Among the G10 countries, the rank correlation between the C/A balance as a percentage of GDP and the annual NEER performance, has been very unstable (Figure 2). As for the JPY, it underperformed despite a chronic C/A surplus before the outbreak of the financial crisis, and performed strongly only when the crisis occurred. However, past cases show that G10 FX performances are worse when the countries have both C/A and fiscal deficits, than when they have only a C/A deficit (Figure 3). The fear of so-called ‘twin deficits’, a theme for the USD in the 1980s, is now applicable to JPY. Many countries that have both C/A and fiscal deficits can enjoy a stronger currency if they can attract foreign money with strong growth or high interest rates. However, in Japan’s case, there have been limited prospects for the former given the political instability and lack of a long-term growth strategy. Compensation for larger risk premiums, in the form of higher interest rates, is not in sight either, thanks to the favourable financing conditions for JGBs, at least in the short run.

Trading opportunities lie in the regional breakdown There are a number of countries with which Japan is already recording an expanding C/A deficit. Not surprisingly, the largest deterioration of the C/A has been versus the oil producing Middle East countries. But its deficit with Australia, China, Indonesia, Malaysia and Brazil has also increased (Figure 4). Indeed, Japan’s deficits versus Australia and China are significantly larger than the Middle East and US combined (which can be thought of as a dollar block). This suggests that net demand for AUD and CNY could be larger than the USD relating to Japan’s C/A linked flows. Japan’s deficit versus oil producing Middle East countries stems from oil imports, and its deficits versus Australia, Malaysia and Indonesia are mainly attributable to the rising

Faster shrinkage of net savings is behind the C/A deterioration

Figure 3: G10 NEER performance during C/A and fiscal deficit

Figure 4: Japan’s largest C/A deficit by country

-7

-6

-5

-4

-3

-2

-1

0

1

USD AUD NZD GBP CAD SEK

FX return during C/A deficit

FX return during C/A & fiscal deficit

%yoy

-2,500-2,000-1,500-1,000

-5000

5001,0001,5002,000

Aus

tral

ia

Chi

na

Mid

dle

East

+U

S

Indo

nesi

a

Mal

aysi

a

Chi

le

Rus

sia

S.A

fric

a

2010 2011

billion yen

Japan's deficit

Source: Haver Analytics Source: Haver Analytics

The C/A matters for FX when associated with a fiscal deficit

Japan is registering an increasing C/A deficit vs some Asia Pac countries


22 March 2012 17

imports of LNG. As the Japanese government is putting more emphasis on LNG due to its lower CO2 emissions than crude oil, the volume and share of LNG in total imports may continue to increase. This suggests favourable flows for LNG exporters to Japan, like Malaysia (share in Japan’s LNG import: 20% in 2011), Australia (18%) and Indonesia (12%).

One of the major reasons why the implication of Japan’s C/A balance for the JPY has not been clear in the past is that there are many other cross-border flows in the Balance of Payments (BoP) which affect FX, eg, portfolio and direct investments. The cumulative flows from FX transactions correlate well with recent JPY NEER developments (Figure 5). The breakdown shows that the large inflow into Japanese short-term notes has been the major driver of a stronger JPY, together with steady inflow from income surplus (Figure 6). On the negative side, despite the JPY’s latest retreat, the increase in net FDI outflows could be the key driver for the currency’s weakness, especially compared with the amount of surplus income.

According to our analysis, outward M&A activity by Japanese firms this year outpaces past years. This, together with the still-strong nominal JPY versus historical levels and the significant liquidity held by Japan’s corporate sector, should lead to further outflows from the country (see FX Instant Insight: JPY: Increased pace in outward M&A likely a further yen negative). Also in the past, outward FDI tends to increase when the Japanese economy is strengthening, suggesting that the Japanese corporate sector expands aggressively overseas when the domestic economic backdrop is supportive (Figure 7). This could be the case for the rest of this year, when Japan’s GDP growth is expected to rise from Q1 to Q3 this year thanks to the reconstruction demand.

Looking at the regional breakdown of Japan’s FDI balance, the country had the largest deficit versus US and China, followed by the UK, Australia and Brazil in 2011. Aside from the US and UK, where Japan records a larger C/A surplus than FDI deficit, its FDI deficit versus China and Australia adds to the overall C/A deficit (Figure 8). Japan’s combined C/A and FDI deficit versus Australia was larger than the deficit versus virtual USD economies (the Middle East and the US). This implies more of a steady demand for AUD from the Japanese corporate sector than the USD, followed by the CNY, IDR and MYR.

Figure 5: Cumulative BoP flows accompanying FX transactions and JPY NEER

Figure 6: Breakdown of BoP flows accompanying FX transactions

-30

-25

-20

-15

-10

-5

0

5

10

Jan-08 Jan-09 Jan-10 Jan-11 Jan-12110

120

130

140

150

160

170

180

190

Total balance, cumulative JPY NEER(Right)

trillion yen

-8000-6000-4000-2000

02000400060008000

10000

Jan-08 Jan-09 Jan-10 Jan-11 Jan-12Retail outflow FDI BalanceTrade Balance Income Balancelong term bond inflow short term note inflowEquity inflow Trust account outflow

billion yen

Inflow into Japan

Outflow from Japan

Source: Haver Analytics Source: Haver Analytics

Increasing FDI outflow holds key as counterweight of income surplus

Improving Japanese economy should encourage outward

M&A activity

Japanese FDIs go to the Asiapac countries where Japan registers

a C/A deficit




22 March 2012 18

Trade implications While Japan’s record C/A deficit in January was in part attributable to seasonal factors and we may yet see a setback in the February and March data, we think the C/A deterioration story is a long-lasting JPY-negative theme, helped by other JPY-bearish factors such as fiscal problems, political instability, a dovish BoJ and increasing FDI outflows. We expressed our bearish JPY view by recommending a USD/JPY 3m one touch at 88 yen which we initiated on 14 March 2012. In addition, as an alternative, a regional breakdown of both the C/A and FDI deficits suggests potential opportunities in JPY short versus AUD, CNY, IDR and MYR, for instance, as Japan’s increasing C/A and FDI deficits versus these countries should lead to JPY underperformance against their currencies.

Risk to our JPY bearish view Our conviction for a JPY bearish view is high for the above reasons, and the risk factors are relatively weak, in our view. Risks reside mainly with Japan, including the (unexpected) improvement in Japan’s trade deficit, either by a clear recovery in exports, a fall in imports due to lower oil and other commodity prices, a delay in reconstruction, or the restart of its nuclear power plants. None of these appears very likely.

Figure 7: Japan’s net FDI balance and coincidence indicator

Figure 8: Japan’s largest C/A & FDI deficit by country

-2,000

-1,500

-1,000

-500

0

500

Jan-85 Jan-90 Jan-95 Jan-00 Jan-05 Jan-10

70

80

90

100

110

120

130

140

FDI(3MMA, Left) Coicidence Indicator

Outflow from JapanEconomic improvement

billion yen

-3,000

-2,500

-2,000

-1,500

-1,000

-500

0

500

Aus

tral

ia

Mid

dle

East

+U

S

Chi

na

Indo

nesi

a

Mal

aysi

a

Rus

sia

Chi

le

Braz

il

S.A

fric

a

Vie

tnam

Can

ada

-3,000

-2,500

-2,000

-1,500

-1,000

-500

0

500

FDI balanceC/Ayoy change (Right)

billion yen

Japan's deficit

billion yen

Source: Bloomberg, Reuters ECOWIN Source: Haver Analytics

We started recommending USD/JPY one touch at 88

Risk resides mainly at home


22 March 2012 19

THEME 5: A MULTILATERAL PERSPECTIVE

Positioning for tectonic shifts Applying a multilateral approach to currency values since before the EU sovereign woes escalated last year suggests that China is getting expensive and Europe cheap, that oil has turned into a key driver of global currencies, and that the USD is gaining strength. We expect these themes to remain in place. This approach highlights that the TRY looks too expensive and the BRL too cheap against their trading partners for this environment. We recommend short TRY/BRL positions via the 3m NDF at 1.006 (target: 0.925; stop: 1.025).

Think (multi)laterally The ups and downs of global stock markets paint a misleading picture of symmetry in the responses to the European events of the past nine months. In contrast, looking at multilateral real exchange rates suggests interesting tectonic shifts have taken place in the world economy since the European problems began. Figure 1 presents the changes in the relative value of each currency versus its trading partners (REER) since July 22, 2011, before the market downdraft.

The first important lesson is that China has gotten expensive and Europe cheap since last summer. The CNY has appreciated over 8%, and countries in the eurozone have cheapened 1.8-5.5%. Interestingly, the European periphery, notably Greece, Ireland and Spain have depreciated more than the core eurozone countries. This suggests capital markets seem to be chasing growth stories despite the disruptions generated by bouts of risk-off and exacerbated by credit market inefficiencies (more below).

A second lesson is that oil has turned into a key driver of global currency values. We see oil prices as largely responsible for placing the RUB second in terms of REER appreciation since July, in addition to offering support for the COP and NOK. For the same reason, we believe higher oil prices triggered the depreciation in the JPY (4.2% in REER terms).

The third lesson is that the USD is getting meaningfully stronger. Growth has surprised on the upside and the recovery seems to be on its way, suggesting that the country’s lingering structural issues are likely not viewed that negatively by markets, at least from a relative

Jose Wynne +1 212 412 5923

[email protected]

Figure 1: REER appreciation since last summer suggests tectonic shifts are underway

-8

-6

-4

-2

0

2

4

6

8

CN

YR

UB

TRY

AR

SH

KDU

SDC

OP

GBP

SGD

NO

KPH

PM

YR CLP

THB

AU

DC

ZK

PRT

FIN

PLN

DEN IT

LA

US

IDR

NLD

TWD

SEK

FRC

CA

DR

ON

NZ

DKR

WBL

GG

ERZ

AR

MX

NJP

NH

UF

ESP

IRL

GR

CIN

RC

HF

ILS

BRL

REER appreciation Jul 22 - present



22 March 2012 20

perspective. Such a perspective is more important than ever, as we believe the USD should continue to gain when the EUR has room to weaken. Furthermore, a higher oil price, historically a negative for the USD, is losing its bite, as the US structural oil deficit is waning.

The fourth lesson involves significant dislocations. The BRL has depreciated nearly 8% in REER terms, for no good reason, in our view, other than central bank intervention. Growth, carry, sound public and private balance sheets and low external vulnerability suggest the BRL should have become more expensive in this environment. The current BRL REER may prove inflationary if China manages to a soft landing. Tolerance to inflation may have little room; hence, this angle supports our positive take on the BRL at current levels.

The TRY’s REER performance since last summer highlights another key dislocation, in our view. Turkey’s current account deficit remains vulnerable, particularly given current oil prices. The TRY’s depreciation against the USD of 9.4% since July is misleading, as Turkey has lost competitiveness against its other important trading partners. Given that we expect a weaker EUR, a combination of factors, including oil prices, the current account deficit and EU stagnation, are likely to prove too much for the TRY to handle. In fact, we would have expected markets to treat the TRY as they did the INR in this environment. Both are oil-sensitive currencies with current accounts deficits, and the INR has depreciated 6.1% in multilateral terms (helped by a stronger CNY and USD).

REER, after growth stories The analysis suggests that REER dynamics have been driven by growth differentials to a great extent, with input from such factors as oil prices and central bank intervention. If that is the case, global equity returns should display a positive correlation with REER changes.

Recent moves suggest this is indeed the case. Figures 2 and 3 show the correlation between changes in multilateral real exchange rates and relative performance of equities during two periods of acute change in the global growth outlook (between July 22 and December 22 2011, and the period since December 22, 2011, when the first 3y LTRO was launched). Relative equity performance is measured by the USD return of a country’s stock market relative to the USD equity return of its trading partners (using the same weights used in our REER measure). Measuring equity performance in relative terms sharply increases the correlation with REER.

This exercise offers interesting insights. First, REER changes and relative equity performance correlate positively during both the market downturn and subsequent upturn. Second, in both the upside and downside elasticities are very similar: for every percentage point of REER exchange rates appreciation, equities (in USD terms) outperformed those of trading partners by over 40bp. This suggests that multilateral REERs are a key adjustment mechanism for “tectonic” shifts in global growth outlooks (in comparison with the relative value of equities).

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



22 March 2012 21

Figure 2: Multilateral FX vs relative equity performances during H2 11 market downdraft

Figure 3: Multilateral FX vs relative equity performance during recent market recovery

Jul 22 - Dec 22

EUR

JPN

GBP

USD

CNY

HKD

INR

IDR

KRW

MYR

PHP

SGD

TWD

THB

ARS

BRLCLP

COP

MXN

CZKHUF

ILS

PLN

RONRUB

ZAR

TRY

AUD

CAD

DKK

NZD NOK SEKCHF

y = 0.4319x - 1.2422

R2 = 0.1208

-18

-13

-8

-3

2

7

12

-14 -9 -4 1 6

REER changes

Equi

ty p

erfo

rman

ce in

USD

re

lativ

e to

that

of t

radi

ng

part

ners

Since Dec 22

EURJPN

GBP

USD

CNY

HKD INR

IDR

KRW

MYR

PHP

SGDTWD

THB

ARS

BRL

CLP

COP

MXN

CZK HUF

ILS

PLNRON

RUB

ZAR

TRY

AUDCAD

DKK

NZD

NOKSEK

CHF

y = 0.4641x + 0.1879

R2 = 0.164

-10

-5

0

5

10

-8 -3 3 8

REER changes

Equi

ty p

erfo

rman

ce in

USD

rela

tive

to

that

of t

radi

ng p

artn

ers


EM equity risk premia are elevated in most EM countries, but equities offer excess returns of nearly 10% relative to bonds in many Asian countries. This approach suggests that EM equity risk premia are not fully pricing our growth outlook for EM, which supports the idea that the tectonic shifts away from the eurozone periphery (and from the EUR) into Asia, including China, has not run its course.

Figure 4: EM equity risk premia remain elevated; EM equity rally has legs

-4%

0%

4%

8%

12%

16%

Braz

il

Chi

le

Col

ombi

a

Mex

ico

Peru

Cze

ch

Egyp

t

Hun

gary

Isra

el

Pola

nd

Rus

sia

Sout

h

Turk

ey

Chi

na

Indi

a

Indo

nesi

a

Kore

a

Mal

aysi

a

Phili

ppin

es

Sing

apor

e

Taiw

an

Thai

land

Hon

gMin Max Last

Source: Barclays research

“Tectonic” trade ideas This multilateral perspective offers support to directional trades we have outstanding such

as our short CHF/MXN, our long USD/CHF and USD/JPY (in different structures), and long BRL, ZAR, RUB, MXN, COP and MYR (see The Emerging Markets Quarterly, March 2012).

We also believe the BRL is likely to benefit relative to the RY for the abovementioned reasons. We suggest using BRL, TRY, USD, EUR and CNY to express this multilateral view but our optimal weightings estimate boils down to a short TRY/BRL.



22 March 2012 22

G10 FX MOVES OVER THE PAST QUARTER

Key themes over the past quarter: Sustained momentum from the US and China supported global risk appetite; progress over the Greek bailout reduced the risk premium on all European currencies; soaring oil prices supported commodity currencies; and central banks continued to loosen policy.

− Data continued to show resilient global growth, and the market’s perceptions about US monetary policy turned from considering an extension of QE to wondering if the Fed will bring forward its guidance on when policy may be tightened. This environment was generally supportive of high beta risk currencies and has lately prompted a nascent recovery in the USD.

− The February agreement over the second bailout for Greece meant a messy default would be avoided. Since then, the market has taken the ISDA’s proclamation of a CDS event in its stride. And while Greek implementation risks remain high, the reduction in euro area risk (and large EUR shorts) helped European currencies perform during the quarter.

− A cold snap in Europe, geopolitics and supply constraints combined to push the oil price sharply higher. As a result, the NOK and CAD were two of the strongest performing currencies in the quarter.

− Despite a generally improving economic backdrop, many G10 central banks loosened policy further. The Bank of Japan surprised the market with an expansion of its asset purchase fund, the MPC increased asset purchases to £325bn and the Norges Bank cut the policy rate despite strong domestic fundamentals. While these events prompted a sell-off in their respective currencies, we expect further depreciation of the JPY against the USD.

SUMMARY OF KEY DRIVERS FOR G10 FX

We have developed a set of six metrics to quantify the main thematic drivers behind currency moves (see “It’s not just risk on/risk off,” FX Monthly, 22 July 2011). These quantitative measures provide guidance on how to understand currency drivers better. They may not always match our forecasts, which include factors such as event risk and policy response.

Subjective views on market themes, combined with objective currency ranks, based on attractiveness with respect to each driver, current (Q2 12) versus previous quarter (Q1 12)*

Current quarter rank [Last quarter rank]

Importance

of driver EUR AUD CAD CHF GBP JPY SEK NOK NZD USD

Carry *** [***] 7 [6] 1 [1] 5 [5] 10 [10] 6 [7] 9 [9] 3 [4] 4 [3] 2 [2] 8 [8]

Valuation *** [-] 5 [6] 10 [10] 7 [7] 9 [9] 2 [2] 3 [4] 4 [3] 1 [1] 8 [8] 6 [5]

Positioning * [***] 3 [1] 1 [5] 9 [2] 7 [7] 5 [9] 2 [3] 4 [4] 8 [6] 6 [8] 10 [10]

Market risk * [-] 3 [5] 9 [9] 6 [6] 5 [3] 4 [4] 1 [2] 7 [8] 8 [10] 10 [7] 2 [1]

Idiosyncratic risk * [***] 1 [7] 6 [4] 4 [3] 5 [6] 8 [10] 10 [8] 9 [1] 3 [2] 2 [9] 7 [5]

Momentum * [***] 1 [5] 9 [4] 5 [1] 1 [2] 5 [10] 10 [5] 1 [5] 5 [8] 5 [8] 4 [3]

Overall 3 [4] 6 [2] 8 [1] 10 [6] 4 [10] 7 [6] 2 [2] 1 [4] 5 [9] 9 [8] Note: We rank currencies such that a higher rank (lower number) implies greater attractiveness. The importance of each driver this quarter is determined by our currency views, while importance last quarter is obtained from the cross-sectional correlation of currency ranks and currency performance since last quarter. Carry attractiveness is measured by the 3m IR diff vs US/3m vol. Valuation is % over (+)/under(-) valuation versus BEER. Positioning in 20-day cumulative flows is standardised by its volatility. Market risk is the 60-day beta to MSCI World. Idiosyncratic risk is the difference between 3m implied and realised vol. Momentum is % positive returns. Source: Bloomberg, Barclays Research



22 March 2012 23

G10 FX VIEWS ON A PAGE

Currency Central scenario

3m Forecast vs

USD Risks

USD Continued US economic resilience supports a rise in US yields and the USD.

Downside: A spike in oil prices and/or a fall in economic momentum would reinvigorate the debate over QE, weighing on the USD.

EUR Loose monetary policy, very weak economic prospects and lingering concerns about the periphery weigh on the EUR.

1.30 Downside: An oil supply shock as well as a re-escalation of concerns over Greece would increase the downside for the currency.

JPY Japanese negative factors like trend C/A deterioration, fiscal and potential additional easing by the BoJ should weigh on the JPY versus USD.

88 Upside: Increased concerns about global prospects, leading to a risk-off environment would support the JPY.

GBP The UK’s growth outlook is weak relative to the US, weighing on GBPUSD. Prospects remain brighter relative to the EUR.

1.55 Downside: Increased concerns about Greece would increase the risk premium on GBP. A downgrade of the UK’s sovereign credit rating would undermine GBP’s safe-haven support.

CHF The CHF remains our favourite short as euro area safe haven lessens and concerns over the country’s fundamentals increase.

0.96 Downside: Should deteriorating Swiss fundamentals prompt the SNB to raise the floor versus the EUR, it would imply larger underperformance versus the USD.

CAD A robust US economy and high oil prices will continue to support the Canadian economy and the currency. However, relatively loose monetary policy will cap the upside.

0.98 Balanced: A contraction in oil supply would pressure CAD higher; however, local fundamentals have been weakening recently along with growing concerns about the Canadian housing sector.

AUD While expected gains in commodity prices, robust trading partner growth and continued yield advantage will likely support the AUD, valuation is a concern. As such we expect the AUD to move largely sideways.

1.05 Downside: Increased concerns about global growth, and Chinese economic activity in particular, would weigh on the AUD.

NZD Domestic activity likely to strengthen as Canterbury reconstruction picks up later this year. Exporters currently benefiting from high world prices With RBNZ expected to raise rates by year-end, its yield advantage over most other G10 economies is likely to increase,

0.83 Downside: Increased concerns about global growth, weaker Chinese economic activity and delays in Canterbury reconstruction would weigh on the NZD.

SEK Despite Sweden’s strong fundamentals, monetary policy remains relatively loose. We expect this to contain SEK strength against non European currencies.

6.77 Downside: Should an oil price spike constrain global activity and risk appetite, the SEK is likely to underperform.

NOK We expect the NOK’s performance to be negatively affected by a weakening EUR as well as the Norges Bank’s desire to limit the strength of its currency.

5.95 Downside: As oil revenues are largely held offshore, the country’s link to oil would provide minimal support should a risk-off environment resume. i



22 March 2012 24

EM FX VIEWS ON A PAGE

Currency Tactical bias

Strategic directional view Current strategy/trades we like Vol adj 6m returns

Score (1-5)

Emerging Asia

CNY Neutral Ebbing inflationary pressures augur for a less marked pace of currency appreciation over the coming quarter.

Short 6m USD/CNY NDF (6m target: 6.21) 0.47 3.80

MYR Bullish We expect the current account to benefit from rising commodity prices and portfolio flows to be supported by the government’s divestment program.

0.42 3.80

THB Bullish Ongoing reconstruction efforts following the 2011 floods, supported by expansionary monetary and fiscal policy, should bolster the economy and the THB.

0.42 3.75

INR Bearish Persistent current account and fiscal deficits, sticky inflation, and subdued domestic demand point to INR underperformance.

0.38 3.75

TWD Bullish Economic growth remains firm against the backdrop of relatively benign inflationary pressures. Large equity inflows year-to-date point to upward pressure on the TWD.

0.35 3.70

KRW Bullish Factors including firm export growth and a still-strong labor market in the context of an undervalued trade-weighted exchange rate point to steady KRW appreciation.

0.32 3.40

IDR Bearish A paucity of portfolio inflows in the context of a broad USD uptrend is likely to cap IDR upside near term.

0.23 3.25

PHP Neutral The central bank’s preference for the PHP not to be an outlier in terms of regional performance points to only modest currency appreciation.

0.25 3.10

HKD Neutral The dominant theme remains rising onshore CNY deposits.

-0.24 3.00

SGD Bullish We expect MAS to maintain its bias towards currency appreciation when it convenes in April, with the slope and band of the SGD NEER being left unchanged at 2% and +/-275bp on our estimates, respectively.

0.18 2.30

Latin America

MXN Bullish The MXN continues to price rather high risk premium, positioning is not crowded and intervention risks are small.

Sell EUR/MXN (3m target: 16); sell CHF/MXN (3m target: 12.80) 0.27 2.95

BRL Bullish Policy instability and FX intervention has added excessive risk premium to BRL. We see potential, albeit capped at around 1.70.

Sell EUR/BRL (3m target: 2.25); buy 2m USD put/BRL call (1.75) and sell USD put/BRL call (1.71)

0.33 2.85

PEN Neutral Slow appreciation potential, managed by the central bank. 0.14 2.60

CLP Bullish/ neutral

Supportive global environment (commodities), but the risk premium priced in is small. FX intervention is a risk at 465.

0.19 2.30

COP Bullish/ neutral

The COP has overreacted to the supportive global environment of late, but limited downside to oil prices and FDI inflows is positive for it. FX intervention risks increase below 1,750.

Sell EUR/COP on spikes targeting 2,260 in 3m 0.15 1.90


22 March 2012 25

Currency Tactical bias

Strategic directional view Current strategy/trades we like Vol adj 6m returns

Score (1-5)

Emerging EMEA

EGP Neutral The likelihood of a deal with the IMF by April has increased and repatriation flows look firm for the next 2-3 months. Devaluation is probably unavoidable, but it could still be a controlled process.

0.52 3.70

RON* Bearish RON stability since October suggests that policymakers are keen to keep the exchange rate cheap and might allow depreciation if global climate turns more negative again. Low FX implied yields make RON a cheap short.

Stay short RON/long EUR

0.31 3.65

PLN* Bullish Despite the positive returns this year and that there are likely no more shorts to unwind, we are modestly bullish on the PLN, and inflow momentum should be sustained.

Long a 1x2 2m ratio PLN call / EUR put spread (4.10 and 4.00 strikes)

0.30 3.35

TRY Bearish Turkey’s large external financing needs and current account adjustment keep us cautious on the lira in the current environment of high oil prices.

Short TRY/long RUB 0.19 3.25

HUF* Bearish The YTD rally in Hungarian assets, compressed risk premia, and the current positioning technicals leave the HUF vulnerable to corrections. Slow progress in EU/IMF negotiations are also likely to weigh on the HUF

Short HUF/long EUR spot together with 3m HUF call/EUR put spread at 289-279 -0.01 3.00

ZAR Bullish High commodity prices, high yields and attractive positioning technicals argue for ZAR gains.

0.21 2.80

ILS Neutral Capital outflows and deteriorating C/A balance have kept the ILS under pressure since the beginning of the year. We do not see this ending until later this year.

0.17 2.55

CZK* Neutral The Czech economy is in a recession, implying a decrease in FDI and portfolio flows.

0.02 2.00

RUB Bullish With the election uncertainties behind us, the RUB should continue to enjoy support from solid growth, lower inflation and high oil prices.

Long RUB vs basket and vs TRY 0.01 1.85

UAH Neutral The UAH quasi-peg can be maintained until the October elections, but the risks of an earlier devaluation (the Ukraine continues to experience adverse balance-of-payments pressures) make the risk/reward unappealing for UAH longs.

KZT Bullish The KZT, like the RUB, benefits from high oil prices, but the currency is tightly managed. Our bias would still to be long, though.

Note: * Versus the EUR. The variable score is an index which ranks EM currencies according to the vol-adjusted returns, PPP valuation, carry, systemic risk, basic balance/GDP and reserves accumulated over the past 5y/GDP. For more details on the trade recommendations, please see the EM Dashboard. Source: Barclays Research


22 March 2012 26

OPEN TRADES, AS OF 22 MARCH 2012

Original Mark to market

Trade/date/macro views Spot

reference % of

notional Expiry Current

spot reference

Net profitsince

inception

Profit change (since 23/2)

Sell EUR/SEK spot, 23/09/10 9.1895 - - 8.9319 +4.77% -0.96pp

Initial rationale: A continuation of structural issues for the larger economies, with very loose policy in the majors and global growth remaining reasonably buoyant, should support global equities – and the SEK. Ongoing peripheral issues should keep pressure on the EUR.

Long VECTOR strategy, 18/03/10 219.8156 - - 192.62 -12.37% 1.46pp

Initial rationale: Carry and value look attractive, but returns are likely to depend heavily on the various risk scenarios. As a result, we recommend being long a less regime-dependent strategy – VECTOR (for details please see VECTOR: Value Enhanced Carry Trading of Exchange Rates, 15 October 2009).

Long USD/CHF, 23/6/11 0.8388 - - 0.9135 +8.37% 0.83pp

Initial rationale: As concerns about the periphery decrease, we expect the CHF to receive less support from safe-haven flows. Alternatively, if the situation worsens and global financial markets are affected significantly, we expect the USD to outperform the CHF.

Short EUR/CHF 1y/1y FVA and long XAU/EUR for 20 times the vega amount, 23/6/11

XAU/EUR: 1081.58 EUR/CHF FVA: 11.9%

- 23/6/2012 XAU/EUR: 1242.31 EUR/CHF FVA: 6.62%

+16.78% -7.85pp

Initial rationale: EUR/CHF volatility is extremely high because of safe-haven flows. Either peripheral concerns decrease – which lowers EUR/CHF volatility – or things worsen, in which case the upside for gold should be higher than for the CHF. Long CAD vs a 50/50 basket of EUR and GBP, 28 October 2011, stop loss at 0.657

CADEUR: 0.7111 CADGBP: 0.6267

- - EUR/CAD: 1.3191 GBP/CAD: 1.5806

+4.01% -0.10pp

Initial rationale: The EUR and GBP are facing weak growth and loose monetary policy, while more positive cyclical data from the US and higher oil prices are likely to support the CAD.

Long SGD/TWD, 23/11/11, target 24.2, stop loss at 22.8

23.1723 - - 23.3849 -0.49% -1.71pp

Initial rationale: Relative central bank responses to divergent inflation and growth developments should be supportive of the SGD versus the TWD. Long SGD vs USD and EUR (60/40), 6/12/11 USDSGD: 1.2839

EURSGD: 1.7207 - - USD/SGD: 1.2662

EUR/SGD: 1.6709 +2.08% -0.40pp

Initial rationale: With inflation slowing only gradually, we see the MAS maintaining its bias towards slow SGD appreciation. Long AUD, USD vs EUR, GBP basket, 8/12/11 EUR/AUD: 1.3035

GBP/USD: 1.5631 - - EUR/AUD: 1.2712

GBP/USD: 1.5813 +1.21% -1.30pp

Initial rationale: A gradual reduction in euro area risks would be positive for market risk appetitive. For investors looking to be long carry currencies but to hedge out euro area risks, we recommend funding these positions in the EUR and GBP. Short AUD/BRL 3m forward, USD/BRL 3m at 1.878 and AUD/USD 3m at 1.017, 5/1/12

USD/BRL: 1.843 AUD/USD: 1.027

- - USD/BRL:1.8245 AUD/USD: 1.0381

+0.45% -3.45pp

Initial rationale: Relative monetary policy prospects (a less dovish BCB and more aggressive RBA), attractive carry and Brazil’s proximity to the US versus Australia’s to China makes selling AUD/BRL an attractive relative value trade. Higher oil prices on global supply disturbances also supports BRL. Short CHF/MXN CHF/MXN: 14.4 - - 14.0541 +2.93% +1.03pp

Initial rationale: The CHF is our favourite short among the majors due to our expectations for a weaker EUR and the EUR/CHF floor while robust growth prospects in the US should be supportive of the MXN. 6m CAD/JPY call at 83.0, 23/2/2012 CAD/JPY: 80.17 1.95% 23/8/2012 CAD:JPY: 82.5021 +0.96% -

Initial rationale: Evidence of stronger growth in the US and higher oil prices should be supportive of the CAD while weighing on the JPY. An increasingly dovish BoJ and the low levels of implied volatility also make this position attractive. 3m 1.30-1.25 EUR/USD put spread, 29/2/2012 EUR/USD: 1.3445 0.61% 31/5/2012 EUR/USD: 1.3196 +0.12% -

Initial rationale: The ECB is likely to keep monetary conditions in the euro area extremely loose which will be the main driver of the EUR lower. Brightening prospects for growth in the US and implementation concerns from the fiscal austerity plans in the euro area should limit EUR/USD upside. 3m USD/JPY 88.0 one-touch, 14/3/2012 USD/JPY: 82.90 28.9% 14/6/2012 USD/JPY: 82.50 -6.35% -

Initial rationale: We expect the strong upward momentum in USD/JPY to remain intact due to the focus on the fiscal issues in Japan, a widening CA deficit and relative monetary policy.

1m 7.50-7.40 EUR/NOK put spread, 14/3/2012 EUR/NOK: 7.5865 0.23% 12/4/2012 EUR/NOK: 7.6329 +0.15% -

Initial rationale: The surprise rate cuts by the Norges Bank don’t change our bullish view on EUR/NOK as we expect the ECB to continue to keep monetary policy extremely loose while domestic credit conditions will stay the Norges Bank’s hand. Oil prices are also likely to support the NOK.

Note: Closed recommendations are at the end of this publication. Source: Barclays Research

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22 March 2012 27

CLOSED TRADE RECOMMENDATIONS Closed portfolio trades 2011-2012

Original Mark to market at time of closing

Trade/Date Spot reference Cost as %

of notional Closed on Closing spot Profit as a % of notional

Short EUR/AUD, 21/1/2011 1.3631 - - 1.3370 +3.2%

Long 3m 132.50 EUR/JPY straddle, short 2y EUR/JPY strangle (strikes: 109.25 and155.50), 25/9/09

132.90 0% 24/12/09 27/09/11

116.22 -0.54%

Long GBP/JPY spot, 13/1/11 131.16 - - 130.16 -0.7%

Long GBP/USD straddle struck at 1.6358, short USD/JPY straddle struck at 82.71, 20/4/11

GBP/USD: 1.6357 USD/JPY: 82.82

-1.21% 7/10/11 GBP/USD: 1.6064 USD/JPY: 81.11

1.01%

Buy 9m 1x2 EUR/USD put spread (1.37,1.2875 strikes), 7/10/10

1.3925 - 8/7/11 1.4265 0.0%

1x2 EUR/GBP call spread at 0.92 and 0.95, 5/7/11 0.9036 0.32% 8/5/11 0.8712 0.0%

1m USD/JPY one-touch at 75, 21/7/11 75.82 16.25% 11/8/11 76.86 +42.25%

1x2 EUR/USD 3m 1.47-1.50 call spread 1.4282 -0.10% 19/8/11 1.4397 0.10%

Short AUD, NZD vs USD, 17/2/11 AUD/USD: 1.0119 NZD/USD: 0.7589

- 24/8/11 AUD/USD: 1.0510 NZD/USD: 0.8307

-9.46%

Short NZD/CAD, 24/3/2011 0.7344 - 24/8/11 0.8189 -12.71%

Long 6m EUR/USD 1.50 call, short 1m EUR/USD 1.44 call

1.4405 0.43% 21/9/11 1.3699 +0.39%

Long GBP/CHF 1.41-1.46 call spread 1.4004 0.84% 24/10/11 1.4114 +0.10%

Long EUR/SEK 1m/1m FVA at 13.5% and short USD/JPY 1m/1m FVA at 11.9%

EUR/SEK: 13.50% USD/JPY: 11.90%

- 25/10/11 EUR/SEK: 8.72% USD/JPY: 10.07%

-2.95%

Long AUD/USD 3m vol swap, short USD/CHF 3m vol swap, 15/8/11

AUD/USD: 16.7% USD/CHF: 16.0%

- 10/11/11

Long 3m/3m USD/CAD FVA, short 3m/3m USD/CHF FVA, 19/8/11

USD/CAD: 11.925%USD/CHF: 13.70%

- 21/11/11 USD/CAD: 12.92% USD/CHF: 16.70%

-1.95%

Long TRY (50%), NOK (25%) and NZD(25%) against the CHF and long 50% of 3m USD/ZAR call struck at 7.35, 28/10/10

CHF/TRY:1.4556 CHF/NOK:5.9647 NZD/CHF:0.7398 USD/ZAR:7.0770

-1.07% 8/12/11 CHF/TRY: 2.0287 CHF/NOK: 6.3447 NZD/CHF: 0.6822 USDZAR: 8.4798

-12.58%

Long EUR/NZD, 23/6/11 1.7515 - 8/12/11 1.7146 -1.94%

Short 60% AUD and 40% NZD against the JPY AUD/JPY: 75.109 NZD/JPY: 57.369

- 8/12/11 AUD/JPY: 79.084 NZD/JPY: 60.021

-4.69%

EUR/USD 3m 1.33-1.27 put spread, 21/9/11 1.3699 1.03% 21/12/11 1.4187 -0.04% Long AUD/USD 6m/6m FVA, short USD/JPY 6m/6m FVA, 23/6/11

AUD/USD: 15.45%USD/JPY: 12.80%

- 22/12/11 AUD/USD vol: 16.35%

USD/JPY vol: 10.04%

+3.66%

Long USD against an equal weighted basket of SEK and PLN, 23/11/11

USD/SEK: 6.9073 USD/PLN: 3.3615

- 23/1/12 USD/SEK: 6.7315 USD/PLN: 3.2791

-2.48%

Short AUD/KRW 1m forward, 6/1/12 1181 - 8/2/12 1205 -1.55%

Long AUD/NZD 3m strangle at 1.2490 and 1.3141 AUD/NZD: 1.2892 1.14% 20/2/12 1.2804 -0.43pp AUD/USD upside through 6m 1.10/0.9150 risk reversal, 24/8/11

1.0510 0% 23/2/12 1.0695 0%

Long USD, JPY vs EUR and CHF equal-weighted spot basket, 23/09/10

EUR/USD: 1.3333 CHF/JPY: 85.63

- 2/3/12 EUR/USD: 1.3205 CHF/JPY: 89.30

-2.8%

Long AUD against an equal weighted basket of EUR and USD, 12/9/11

EUR/AUD: 1.3193 AUD/USD: 1.0320

- 2/3/12 EUR/AUD: 1.2277 AUD/USD: 1.0756

7.3%

EUR/CAD upside via a 3m 25-delta risk reversal, 8/12/11

EUR/CAD: 1.3514 0% 8/3/12 EUR/CAD: 1.3184 0%

Long 3m EUR/JPY delta neutral straddle at 103.57 and short USD/SEK delta neutral straddle at 6.7264, 8/12/11

EUR/JPY:103.57 USD/SEK: 6.7264

0.90% 8/3/12 EUR/JPY: 108.04 USD/SEK: 6.6944

5.93%



22 March 2012 28

FORECAST TABLES

Forecasts Forecast vs Outright Forward

Spot 1 Month 3 Month 6 Month 1 Year 1 Month 3 Month 6 Month 1 Year

EUR/USD 1.31 1.32 1.30 1.25 1.20 0.4% -1.2% -5.0% -9.0%

USD/JPY 83.0 84 88 90 90 1.3% 6.2% 8.7% 9.1%

GBP/USD 1.58 1.57 1.55 1.52 1.50 -0.5% -1.9% -3.3% -4.7%

USD/CHF 0.92 0.93 0.96 1.04 1.08 1.7% 5.0% 13.7% 18.9%

USD/CAD 1.00 1.00 0.98 0.96 0.95 -0.1% -2.2% -4.4% -6.3%

AUD/USD 1.04 1.04 1.05 1.06 1.07 0.7% 2.4% 4.4% 7.4%

NZD/USD 0.81 0.81 0.83 0.84 0.86 0.6% 3.5% 5.4% 9.3%

EUR/JPY 109 111 114 113 108 1.7% 4.9% 3.2% -0.7%

EUR/GBP 0.83 0.84 0.84 0.82 0.80 0.8% 0.8% -1.8% -4.5%

EUR/CHF 1.21 1.23 1.25 1.30 1.30 2.1% 3.8% 8.0% 8.2%

EUR/SEK 8.92 8.85 8.80 8.70 8.50 -1.0% -1.7% -3.2% -6.0%

EUR/NOK 7.63 7.45 7.35 7.32 7.30 -2.4% -4.0% -4.7% -5.7%

Source: Barclays

Long-term FX forecasts

18 Month 2 Year 3 Year 4 Year 5 Year

EUR 1.20 1.20 1.21 1.21 1.21

JPY 92 93 94 96 97

GBP 1.53 1.54 1.55 1.57 1.59

CHF 1.11 1.12 1.14 1.16 1.18

CAD 0.98 0.99 1.01 1.04 1.06

AUD 1.02 1.00 0.97 0.93 0.90

NZD 0.82 0.80 0.78 0.75 0.72

EUR/JPY 111 112 114 115 117

EUR/GBP 0.79 0.79 0.78 0.77 0.76

EUR/CHF 1.34 1.35 1.38 1.40 1.43

EUR/SEK 8.42 8.40 8.34 8.29 8.24

EUR/NOK 7.43 7.47 7.56 7.64 7.73

Source: Barclays Capital


22 March 2012 29

Emerging markets forecasts

Emerging Markets FX Forecasts Forecast vs Outright Forward

Spot 1 Month 3 Month 6 Month 1 Year 1 Month 3 Month 6 Month 1 Year

USD/CNY 6.30 6.34 6.30 6.21 6.09 0.4% -0.3% -1.9% -3.9%

USD/HKD 7.77 7.78 7.78 7.78 7.78 0.2% 0.2% 0.3% 0.3%

USD/INR 51.21 52.00 51.00 49.00 48.00 0.4% -2.8% -8.1% -12.0%

USD/IDR 9188 9250 9150 9000 8800 0.6% -1.1% -3.8% -8.1%

USD/KRW 1130 1120 1110 1075 1025 -1.5% -2.8% -6.3% -11.1%

USD/MYR 3.08 3.03 3.01 2.90 2.84 -2.1% -3.0% -6.9% -9.5%

USD/PHP 43.01 43.00 42.50 42.30 42.00 -0.1% -1.4% -2.2% -3.5%

USD/SGD 1.27 1.250 1.240 1.230 1.210 -1.4% -2.2% -2.9% -4.3%

USD/THB 30.85 30.50 30.20 29.75 28.50 -1.3% -2.5% -4.4% -9.1%

USD/TWD 29.55 29.50 29.30 28.50 27.50 -0.4% -0.9% -3.3% -6.2%

USD/ARS 4.36 4.36 4.49 4.68 5.15 -1.0% -0.4% -0.6% -0.5%

USD/BRL 1.82 1.77 1.73 1.74 1.75 -3.6% -6.8% -7.9% -9.9%

USD/COP 1761 1750 1740 1750 1750 -1.0% -2.1% -2.4% -4.1%

USD/CLP 487 483 475 477 480 -1.1% -3.4% -4.0% -5.1%

USD/MXN 12.84 12.50 12.30 12.25 12.20 -2.9% -4.9% -6.0% -7.9%

USD/PEN 2.67 2.67 2.66 2.66 2.64 0.0% -0.4% -0.6% -1.9%

EUR/CZK 24.75 24.60 24.65 24.50 24.25 -0.6% -0.4% -1.1% -2.2%

EUR/HUF 294 305 305 297 290 3.4% 2.7% -1.2% -5.4%

EUR/PLN 4.17 4.15 4.04 4.02 3.95 -0.8% -4.0% -5.4% -8.5%

EUR/RON 4.37 4.35 4.38 4.30 4.25 -0.7% -0.4% -2.9% -5.4%

USD/RUB 29.43 29.20 28.70 28.70 28.60 -1.2% -3.7% -4.9% -7.6%

BSK/RUB 33.60 33.40 32.57 31.93 31.17 -0.4% -2.2% -4.4% -7.1%

USD/TRY 1.81 1.80 1.80 1.80 1.80 -1.5% -2.7% -4.5% -7.9%

USD/ZAR 7.73 7.33 7.00 7.40 7.60 -5.6% -10.7% -6.8% -6.8%

USD/ILS 3.75 3.71 3.77 3.70 3.65 -1.2% 0.1% -2.0% -3.8%

USD/EGP 6.03 6.00 6.20 6.50 7.00 -1.4% -1.3% -1.6% -1.4%

Policy rate forecasts (%, end of quarter)

Current 2Q 12 3Q 12 4Q 12 1Q 13

FOMC 0-0.25 0-0.25 0-0.25 0-0.25 0-0.25

BoJ 0.10 0-0.10 0-0.10 0-0.10 0-0.10

MPC 0.50 0.50 0.50 0.50 0.50

ECB 1.00 1.00 1.00 1.00 1.00

Riksbank 1.50 1.50 1.50 1.50 1.50

Norges Bank 1.50 1.50 1.50 1.50 1.50

SNB 0-0.25 0-0.25 0.25 0.25 0.25

BoC 1.00 1.00 1.00 1.00 1.00

RBA 4.25 3.75 3.75 3.75 3.75

Percent deviation from PPP (+ overvaluation/- undervaluation)

As of 22/3/12 EUR USD AUD CAD CHF GBP JPY SEK NOK NZD

vs EUR 0% -6% 29% 9% 20% -8% 8% -11% 5% 27%

vs USD 6% 0% 36% 15% 26% -2% 14% -5% 11% 34%

Note: Daily updates for this table are available on Barclays Capital Live: https://live.barcap.com/BC/barcaplive?menuCode=MENU_FI_FX_GLB_FXH. Source for all tables: Barclays Research

https://live.barcap.com/BC/barcaplive?menuCode=MENU_FI_FX_GLB_FXH�


22 March 2012 30

GLOBAL FOREIGN EXCHANGE RESEARCH

Global

Piero Ghezzi Head of Global Economics, Emerging Markets and FX Research +44 (0)20 3134 2190 [email protected]

G10 FX

Paul Robinson Head of FX Research +44 (0)20 777 30903 [email protected]

Aroop Chatterjee Chief FX Quant Strategist +1 212 412 5622 [email protected]

Bill Diviney FX Strategy +81 3 4530 5026 [email protected]

Guillermo Felices Head of European FX Strategy +44 (0)20 355 52533 [email protected]

Yuki Sakasai FX Strategy +1 212 412 5652 [email protected]

Raghav Subbarao FX Strategy +44 (0)20 7773 4144 [email protected]

Jose Wynne Head of North American FX Strategy +1 212 412 5923 [email protected]

Masafumi Yamamoto Chief FX Strategist, Japan +81 3 4530 5038 [email protected]

Sara Yates FX Strategy +44 (0)20 777 33937 [email protected]

Emerging Markets

Michael Gavin Head of International Macro Strategy +1 212 412 5915 [email protected]

Christian Keller Head of Emerging EMEA Research +44 (0)20 7773 2031 [email protected]

Koon Chow Senior EMEA Strategist +44 (0)20 777 37572 [email protected]

Olivier Desbarres Head of FX Strategy, Asia-Pacific ex-Japan +65 6308 2073 [email protected]

Alejandro Grisanti Chief Economist – Latin America Ex-Brazil, Mexico +1 212 412 5982 [email protected]

Hamish Pepper FX Strategist, Asia-Pacific ex-Japan +65 6308 2220 [email protected]

Marcelo Salomon Chief Economist – Brazil, Chile, Mexico +1 212 412 5717 [email protected]

Nick Verdi FX Strategist, Asia-Pacific ex-Japan +65 6308 3093 [email protected]

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