Foreign Exchange

01 July 2011

FX Weekly: Is It Safe?
Currency Summary Dont Bank on HIA II to Help the Dollar Why We Like Being Short Cable Greek Votes And Swiss Havens IMF COFER Q1 Update EUR Conundrum Thai Election Scenarios & Market Impact Weekly FX Global Bias Indicators Medium Term Recommendations Volatility Cones Correlation Economic Calendar FX Forecast Contacts 2 5 6 8 10 11 13 16 18 19 20 22 23

Risk appetite to allow EUR upside to extend this week We stay long EURCHF; and long SEK in front of Riksbank Return in risk appetite to support local markets in coming week FX Weekly Strategy: G10 Summary
After the positive outcome from this week's Greek budget vote, attention turns elsewhere for the time being at least. We see the shift in focus supporting further medium-term gains in EUR, and indeed, a broadly weaker USD. The ECB meeting now looms large. The easing of euro-peripheral stress should allow markets to reprice further policy moves from the central bank: OIS markets still price in less than three 25bp hikes over the coming 12 months, including the 25bp to be delivered on Thursday. As such, we expect dips in EURUSD to remain shallow. While global reserve managers may have been less active euro buyers than we had supposed (through Q1 at least), we expect to see willingness by real-money investors to add to their euro exposure, while leveraged accounts may, we suspect, soon start participating in upside EUR risk if dips prove to be shallow. From a broader risk perspective, concerns about the state of global growth persist. While Fridays softer-than-hoped-for China PMI plays to this grain, the unexpected bounce in US manufacturing ISM offers genuine hope than the US soft patch is just that. The combination ostensibly plays to a lower AUDCAD, though any such move may not survive Tuesdays RBA meeting if, as a result of easing euro-peripheral stresses, the RBA sounds more hawkish than last month. The key US-specific event risks that will now drive the dollar side of the FX equation should be Fridays employment report, where a meager 85k is expected (BNPP +75k, and progress or otherwise on the US debt ceiling. Here, the effective deadline for action given the time necessary for legislation is mid-July. As well as needing to see progress towards a deal, size also matters given the overhanging threat of negative ratings actions if any agreement is deemed to be too small to matter with respect to longer-term fiscal consolidation. We look for a further unwinding of CHF safe-haven longs allowing EURCHF to trade up towards 1.2500 in coming weeks. We also stay long SEK ahead of what we expect will be the delivery of a further 25bp rise in the Riksbanks repo rate on Tuesday, to 2.0%.

Local Markets Strategy

The first day of H2 has seen a return in risk appetite in local markets and we remain positive towards risk in the next week. Continued flows into EM funds will prove supportive for risky assets, particularly given the reduced threat from Greece for the time-being and given that local markets have sailed through the end of QE2 relatively unscathed. The upcoming ECB meeting and the expected rate hike should not bear too much weight on CEE markets. We dont think the CZK will suffer substantially from the widening rate differential and would look to sell EURCZK into rallies. We think that the improved risk assessment in Romania following the relief with regards to the Greek vote should feed into the currency and we would position ourselves in short EURRON looking for a move to 4.16 in the coming days. We also remain short EURPLN ahead of the NBP meeting next week as M&A flows and NBP/FinMin activity should keep the zloty supported. In Latam however the near term picture is more mixed despite the underlying trend of growth. While growth in Brazil could moderate in H2, that of Mexico is expected to pick up and we would recommend short USDMXN via 2-month riskreversals.
IMPORTANT NOTICE. Please refer to important disclosures found at the end of this report. Some sections of this report have been written by our strategy teams (shown in blue). Such reports do not purport to be an exhaustive analysis and may be subject to conflicts of interest resulting from their interaction with sales and trading which could affect the objectivity of this report.

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Weekly Currency Summary

Europe
EUR
The Eurogroup expected to approve the next tranche of aid for Greece over the weekend, and focus should quickly turn to the ECB. There is little doubt that a rate hike will be delivered, but the question is what signals will be sent about subsequent moves. Our view is that the ECB will deliver more hikes and at a faster pace than is currently priced in. Investors are not long EUR; we expect dips to be shallow and look for further gains in the week ahead. The unwind of the CHF safe haven trade was very much in evidence Thursday and with the EcoFin likely to approve the next 12bn tranche of aid over the weekend, we see scope for EURCHF to extend gains well beyond the two big figures seen so far. The same goes for various CHF crosses vs. risk/commodity currencies, including an extension of the downside on CHFSEK. Softer Swiss Manufacturing PMI @53.40 in June (57.80 tipped) down from 59.20 in May plays to the grain of long CHF unwinds via perceptions the SNB will still be seriously lagging the ECB. We like EURCHF higher for now. UK manufacturing PMI details were very weak; lowest manufacturing PMI since Sept 2009, slowest input price inflation since Dec 2009, and playing to a host of other slowing growth indicators. Our economists dovish BoE view (no policy change though 2012, or if there is, probably via more QE, is gaining traction with more BoE members talking about the possibility. While this weeks BoE meet will be a non-event, watch out for softer PMI services. The NOK should continue to recover strongly as a fiscal safe haven to the extent they had been dogged by liquidity tensions in the weeks leading to the Greek vote. NOKSEK has fallen back and could consolidate lower down to 1.1630 support though we would expect the cross to remain biased higher rather than lower on a medium term view. Norway PMI fell in June like elsewhere. The week brings May industrial production figures. SEK is the top performing currency in G10 as liquidity tensions abated significantly with the Greek vote on austerity measures having averted a Greek default and hence a potential funding crisis. This has been reflected in some calming visible in cross-cc basis swaps and should see the USDSEK fall maintain traction. Sweden PMI fell in June like elsewhere. An expected Riksbank rate hike to 2.00% next week could add to SEKs gains.

CHF

GBP

NOK

SEK

Converging Europe, Russia and Israel

PLN CZK HUF RON RUB TRY ILS
We expect the NBP to leave rates on hold next week, in line with the consensus view and expect the banks inflation projection to be revised lower. M&A activity in the past week will prove to be net positive for the zloty. We stick to our short EURPLN position, looking for a move to 3.90 in the coming weeks. EURCZK is trading well within the range and we do not see a real reason to bet on a break out. For the medium term, we remain bullish on the koruna due to the general positive macro outlook but next week could prove a bit more volatile around the ECB meeting. However we think the CZK has proved to be quite resilient to the widening rate differential and so we prefer to sell EURCZK on rallies. Our recommendation to sell CZKHUF has reached its target. We take profits at 10.90 as we believe the EURHUF down move is close to an end. That said, we would suggest observing the 263 support level as any break would lead to further HUF strength. The NBR left rates on hold and sounded dovish in its statement. That said, current inflation does not permit any policy easing. Romanias risk assessment has improved following the Greek vote and EURRON tends to be well correlated with credit spreads. We would therefore be inclined to enter short EURRON positions at this juncture, targeting 4.16. The CBR left rates on hold as expected and CPI readings have moderated lately. We are neutral towards Russian markets but given the recovery in risk appetite, we would expect the basket to test the 33.35 support next week. Q1 GDP figures have challenged the CBRTs view of an existence of a negative output gap and inflation to be released on Monday will provide a further test to the CBRTs credibility. We may well see some relief rally in TRY on the back of increased risk appetite but would stay cautious for the time being. Our short EURILS position has been stopped out following the spike in EURUSD on the back of the approval of the Greek austerity plan. While the BoI left rates on hold, we think that they will likely continue with their tightening cycle in the coming months although we expect a less aggressive approach in 2012. We remain positive on the shekel at this stage.

America
USD
The debt ceiling negotiations are heating up, with just a few short weeks left before agreement must be reached. Failure to agree is likely to see investors grow nervous ironically leading to a stronger USD but this is unlikely to be the case just yet. The stronger than expected ISM may raise expectations for Fridays NFP, but in the meantime the USD is likely to remain under pressure as the rebound in risk continues. Stronger domestic CPI along with some support for oil prices have helped the CAD, and USDCAD has broken sharply lower down to below 0.9650 and is currently threatening the 0.9600 level. The week ahead brings June Ivey PMI and employment, former expected to moderate though the stronger US ISM may have reduced that risk. CAD should continue to remain supported.

CAD

EMK America
BRL CLP MXN COP
FX Weekly
2
As we approach month-end, market will start to move on the expectations that the BCB may do what it did last month and not roll-over the USD 1.7bn maturing on July 1. That would imply strong USD selling pressure. There is almost USD 3bn of equity issuances in the pipeline to be settled in early July. BRL has room to appreciate in the short-term. BCCh is turning more dovish and may pause hiking rates, reducing the appetite for CLP on the margin. However, carry remains favourable for long CLP positions (just behind BRL) and fundamentals for copper support higher prices. MXN remains cheap vis--vis its Latam peers. The US growth is key for MXN performance, but also the changes in technicals, which have turned much lighter recently. We like long MXN positions using options. While fundamentals call for robust USD inflow with S&Ps upgrade of Colombia to the IG criteria, Banrep is also

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PEN VEF ARS

opening the door for a pause and National Treasury may prevent COP from moving higher. We stay neutral. BCRP was more dovish than expected, keeping rates unchanged in June. Fundamentals are favorable for PEN, but we prefer to wait for the new president-elect, Humala, to announce his economic team before suggesting a bullish PEN strategy. The announcement should take place close to July 28, when Humala effectively takes office. The current level of oil prices is enough to give the government some extra-time before announcing another devaluation of the VEF, which we expect to take place at the beginning of 2013, following presidential elections in December 2012. President Cristina Kirchner announced this week that she will run for re-election. Some rumours that she could not run may prompt some under-performance of Argentinean assets. We are neutral ARS.

YEN

Despite its reputation as a fear gauge, the Yen remains oblivious to the panic and euphoria of recent weeks. Indeed, it now seems to be able to shake off even significant movements in US Treasuries. Ultimately this has to change, but there is little to suggest that must be soon; implied volatility has to fall a lot further before complacency can be said to have set in. Meanwhile, the threat of a more significant rating agency move continues to grow while politicians fiddle.

SGD

MYR

IDR

THB

PHP

HKD

CNY

TWD

KRW

INR

VND

USDSGD finally moved out of its consolidation range (1.2300-1.2450) as the positive outcome on Greeces parliament vote sent USDSGD below its 1.2300 support, opening a test of the years low at 1.2213. The robust monetary data also lent support to the SGD. The upper band of the S$NEER lies at 1.2226. We stay with our USDSGD short position entered at 1.2410 with a stop lowered to breakeven at 1.2410. The week ahead sees manufacturing PMI. Failure to sustain the break above the 200-day MA resistance at 3.0600 saw USDMYR fall sharply lower on the back of fresh inflows into longer-tenored MYR-bonds. Externally, the passage of the Greek austerity package led to a rebound in risk sentiment and the pair broke through its 100-day MA support at 3.0248, opening the 3.0000 psychological support. We stay short from 3.0700 with a stop lowered to 3.0700. May trade data is due on Tuesday and BNM meets on Thursday. Our economist expects the BNM to hike policy rates by 25 bp to 3.25%. USDIDR traded off the highs of 8632 as the positive outcome in Greece spurred risk-taking. The pair broke through its 50-day MA support at 8568 on the back of heavy foreign selling, eyeing a re-test of the 8500 support. On the topside, we expect the 100-day MA resistance at 8657 to be well respected as IDR continues to gain support from offshore inflows into IDR equities and bonds. The higher than expected headline inflation print in June also suggests that a strong IDR would be the favoured strategy of the BI to ward off imported inflation. We maintain our technical shorts at 8690, with a stop at break-even. Election uncertainties pushed USDTHB up towards 31.00. The failure to cross this level and an improved sentiment in Europe on the back of the Greece vote saw USDTHB ease off towards 30.70 by the weeks end. Whatever the outcome of the elections, history has shown that politics matter little to the currency. More so are the countrys macro fundamentals, especially its positive BoP surplus that has supported the THB. We favour buying the THB on weakness towards USd 31.20 with a stop above. Strong fiscal balance sheets and an even stronger external balance sheet continue to buffer the peso against external volatility. Once the latter improved, market players resumed their long PHP bias, buying the currency and bringing it towards 43.00 again. CPI and FX reserves will be the focus next week. The grind higher in inflation should keep the BSP on its tightening path and the pesos yield attraction favouring more currency gains. The trade deficit narrowed on better-than-expected export and import growth. The inverse relationship between USDHKD spot and Hang Seng Index persisted, with the risk-off sentiment expressed via a weaker HSI pushing USDHKD higher. A return of risk appetites and better performance in equities could cap the topside on the currency pair. Forwards traded higher on easing concerns over USD liquidity with forwards up to 1Y supported. Retail sales and PMI will be released this week. Both leading index and manufacturing PMI declined. USDCNY fixing fell by 57 pips the week past while USDCNH fixing fell below its onshore counterpart finally, a trend we thought would be re-established. DBS Bank has applied to the Monetary Authority of Singapore (MAS) to tap the bilateral currency swap agreement to provide RMB financing to a Singapore-based exporter. Front-end NDFs up to 3M is supported. We like to sell CNH DF vs. CNY NDF on a 9M or 1Y tenor. The central bank raised policy rate by 12.5 bp as widely expected. The central reckoned that a strong currency could help ease imported inflation, supporting the TWD. We maintain a technical short position established at 28.70 with a stop at 29.20 as we see strong resistance at 29.00 and the 100-day MA at 29.07. Reportedly, the CBC is still paying 1M to 3M FX swap. NDFs are expected to trade in a range in the coming summer holidays. CPI, WPI, FX reserves and external trade are due this week. Korea posted a strong trade surplus and industrial production. The won will stay supported on capital inflows and mounting inflationary pressure as the governments pledge to fight inflation even at the cost of economic growth favours a stronger currency. The KRW rallied to a 34-month high on Friday before giving up most of the days gains on possible intervention. We maintain our short USDKRW position at 1087 with a break-even stop. Data due this week includes FX reserves, PPI and FDI. A surprise change in USDINR fix methodology caused panic in the offshore markets, where the lack of appetite to rollover long NDF trades caused swap points to shift left. Spot USDINR was heavy to in the risk-on mood after the positive votes in Greece. Softer WPI prints provided some relief to Indian asset markets with Indian stocks surging. Exports, imports and WPI are the next data prints to watch. Technically, a break of 44.50 opens a return to 44.00. We maintain a technical short USDINR position at 44.48 with a stop at 45.58. More regulations designed to prevent USD hoarding has made its impact on the VND. The sale of foreign currency as stated in Circular 13 dated 31 May requiring banks to sell currencies from 1 July prompted more exposure in Viet bonds, unhedged. The improvement in sentiment is evident in Viet CDS spreads, tightening 26bp in the week to close at 324bp. We remain positive on developments so far, and by implication the VND.

AUD
FX Weekly

After a few weeks of pressure in nervous markets, AUD has been released by the Greek budget vote and has reverted to its natural state of buoyancy. We expect the risk rally to continue into next week as markets remove the pricing of

Friday, 01 July 2011 http://www.GlobalMarkets.bnpparibas.com

3

NZD ZAR

rate cuts, but there will be plenty of action: on top of Tuesdays RBA decision, there is a full data calendar next week. The Kiwi continues to mark all-time highs against the USD, likely aided by reserve manager inflows and insurance payments related to the earthquakes. We see little to suggest that this will change next week, seeing further gains as likely on strong Q1 GDP and the NZIER business survey. The ZAR has benefited from the improvement in sentiment towards the end of the week but overall we still see it as range-bound. 6.74/USD is the first support and it would take a few releases suggesting a more hawkish approach from the central bank to break it. That being said, credit growth remains fairly subdued and so it is tough to expect any inflationary pressures.

FX Weekly
4

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Dont Bank on HIA II to Help the Dollar

HIA I saw about USD 300bn repatriated in 2005, with meaningful support for USD A repeat as part of a US fiscal/debt ceiling deal could see even bigger return flows; but we are sceptical HIA II will be agreed. Chart 1: USD TWI versus US FDI flows
125 120 115 110 105 100 95 0 -25 -50 F D I flo w s ( U S D ) ( 2 Q m a v) ( r h s ) -75 98 00 02 04 06 08 10 H IA r e la te d F D I flo w s U S D - T W I ( lh s ) 100 75 50 25 billions

USD (billions)

New HIA important if it flies, but we doubt it will One of the arguments being advanced in favour of a dollar revival in coming quarters is that the United States Congress and President may be about to rerun the 2004 Homeland Investment Act (which allowed US corporations to bring profits back from overseas at a highly preferential 5.25% corporation tax rate). This could form part of an eventual budget deal between Democrats and Republicans that allows the debt ceiling to be raised ahead of the early August deadline, after which the government is at risk of defaulting on its obligations. Lobbyists pushing for a repeat are very hard pressed to credibly justify a rerun as liable to create employment. The evidence from 2004 Act is that more than 90% of the estimated USD 300bn of profits repatriated by US corporations from overseas the next year either went to share buybacks (most of it) or extraordinary dividend payments. (See: Watch What I Do, Not What I Say: The Unintended Consequences of the Homeland Investment Act, by the National Bureau of Economic Analysis, June 2009). This was despite the legislated purposes of the HIA: job creation, business investment or R&D expenditure. Lobbyists' strongest (only?) argument is that a return of HIA would boost share prices of companies repatriating profits (either because of higher dividend payments or accelerated share buybacks). This may, then, have an indirect benefit on consumer spending via the wealth affect of higher share prices, while the government would benefit both from the tax take it will get from repatriated profits as well as the tax due on higher dividend payouts. The impact on share prices is, nevertheless, ambiguous; ratings agencies have previously warned that by reducing cash buffers in the form of retained earnings overseas, some companies are at risk of suffering downgrades to their financial strength ratings. While we dont expect HIA II to fly, its worth remembering the Acts impact, since the scale of return flows was large and the FX impact significant. Data from the Bureau of Economic Analysis suggest that about USD 300bn was repatriated from
Ray Attrill FX Weekly

90 85 80 75

Source: Reuters Ecowin Pro

Chart 2: US FDI Abroad Total vs. EU

400 300 200 100 0 -10 0 -20 0 -30 0 -40 0 -50 0 -60 0 00 01 02 03 04 05 06 07 08 09 10 T o ta l U S F D I a broa d US FDI in to E U

Source: Reuters Ecowin Pro

overseas that year. Prior to the 2005 repatriations, survey evidence drawn from major corporations suggested that perhaps half of the funds likely to be repatriated were held in foreign currencies. HIA flows showed up in national accounts as a reduction in US FDI abroad (see Chart 1); hence, a big swing from negative to positive occurred in 2005, concentrated in the second half of the calendar year. Of the total amount, the bulk was seen to have been held within the EU (see Chart 2) and mostly in euros (Sterling and some Asian local currencies were also in the mix). In excess of USD 100bn of additional EURUSD demand was likely to have occurred in 2005. This had meaningful FX market impact, temporarily breaking the entrenched USD downtrend. Were HIA II to come into effect, we would be quick to suggest it could again have an impact, all the more so in so far as estimates of accumulated US corporate profits held overseas since 2005 suggest flows could be at least as large as in 2005 and possibly as much as USD 600bn.
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Why We Like Being Short Cable

Our bearishness towards the GBP, prominent since May on weaker growth indicators, has dialled up a notch following the weaker C/A data in the Q1 UK GDP release. Rising credit risks against the backdrop of an even bigger C/A with the financial account sinking even further into deficit spell trouble for sterling. STRATEGY: We remain short GBPUSD in the medium term, targeting 1.5350 with a stop at 1.6285. While a EUR-led USD sell-off may delay this gaining traction, we remain comfortable being short GBPUSD. Chart 1: Financial Account vs. GBPUSD

Source: Reuters Ecowin Pro. The financial account (sum of portfolio investments and other Investments) is starting to turn south, consistent with GBP weakness.

Bearish GBP stance underpinned We have long been sterling bears, further convinced of our view when leading indicators for growth started rolling over around May. Now, with Q1 GDP data and revised Q4 data showing a sorry current-account picture over the past six months, our bearish GBP stance still holds. We have been watching the recent uptick in UK sovereign CDS rates, which coincides with a rolling over of leading growth indicators. This suggests that the credibility of the governments fiscal consolidation plan is under threat. Recall how credit markets late last year showed their appreciation for the fiscal consolidation plan, leading to a fall in 5Y UK CDS rates and a rebounding GBP. However, it seems that the plan was based on overly optimistic growth forecasts, in turn explaining the turnaround in UK sovereign CDS. While this in itself should be of concern for sterling, Q1 data released yesterday showed that the current account deficit failed to narrow nearly as much as thought (GBP 9.4bn deficit) with a GBP 2.5bn downward revision to the Q4 deficit to GBP -13bn. This implies that the hole to be filled by the financial account is even bigger than initially thought. FDI inflows (which come to under GBP 2bn on a four-quarter basis) make up only a small part of shortfall. Chart 1 shows the sum of portfolio investment plus other investment in green (the two big-ticket items seen from UK financial account data) set against GBPUSD. The recent data showed this sum adding to the deficit. Rising credit risks against the backdrop of an even bigger current account deficit with the financial account already in the red raises the question of where the inflows can come from. The implication is one that spells trouble for sterling.
Kiran Kowshik FX Weekly

Chart 2: Inflation expectations have been one driver of GBPUSD post crisis

Source: Bloomberg, BNP Paribas

The second point worth noting from the weak external balance data is the indirect implication for monetary policy, which in turn feeds into views about the future GBP exchange rate. If one assumes that the UKs fiscal tightening programme is kept on track, then for an already weak economy not to go into a tailspin would require overall monetary conditions to remain easy or even be relaxed further. This implies a need for one or both of the following: (a) easing monetary policy by lowering bond yields further (QE); (b) encouraging a weaker GBP in the hope of improving export-led growth prospects. In practice, these are two sides of the same coin. With policy rates effectively at the zero bound, a weaker GBP would need to be the result of either lower longer-term rates or higher inflation expectations one or other of which is achievable with more QE. In this context, it should not be surprising that we now have more MPC members talking about the potential need for more QE down the road. While our economists forecast unchanged policy through 2012,
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having already-negative UK yields becoming even more negative will surely hurt the GBP even more. Chart 2 shows that bond market implied inflation expectations may have already begun to price a greater potential for UK QE relative to US QE. It compares the US-UK 10Y bond implied inflation expectations spread set against GBPUSD. We assume that one side-effect of extraordinary easing measures is to raise inflation expectations. The chart shows that GBPUSD gains in recent months have coincided with the US being more successful in engineering a rise in inflation expectations. We note that this is the reverse of the mechanism seen over the 2004-2006 period, when higher

inflation expectations in the UK relative to the US implied a higher GBPUSD (via the anticipated monetary policy response). This overplayed relationship reversed post the financial crisis, and now falling US inflation expectations warn of a stronger USD relative to the GBP. Strategy: Last week, we recommended a short Cable position in our medium-term recommendations on a break of 1.5930, targeting 1.5350 with a stop at 1.6285. While a EUR-led USD sell-off may support the GBP in the weeks ahead, we remain comfortable being short GBPUSD.

Kiran Kowshik FX Weekly

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Greek Votes And Swiss Havens

With the successful passage of the Greek budget, the threat of imminent catastrophe is sharply reduced. EURCHF has come under sustained pressure as investors sought the safety of the Swiss Franc; and EURCHF risk reversals have been extremely well bid for puts. We expect the easing of concerns to lead to a rebound in EURCHF and a normalisation of the risk reversals. On Wednesday we recommended buying a 3-month EURCHF 1.2200 Call with Knock-In at 1.28, Knock-out at 1.17. The risk reversal overprices the chance of Knock-Out; and underprices the chance of Knock-In.
1.20 1.25 1.30 1.35 1.40 1.45 1.50 1.55 1.60 1.65 1.70 Ja n-2007 Ja n-2008 GDP W eig hted EU CDS(bp) (RHS) Ja n-2009 Ja n-2010 Ja n-2011 EURCHF (LHS Inverted)

Chart 1: EURCHF vs Eurozone GDP-Weighted CDS Spreads

180 160 140 120 100 80 60 40 20 0

Catastrophe Averted Wednesdays Greek drama failed to result in financial Armageddon as the budget vote passed with relative ease; and Thursday saw the smooth approval of the associated implementation legislation. The result should be a rubber-stamping of the next EUR 12bn tranche of aid at the 3 July EcoFin. Meanwhile, progress towards agreement on private investor participation suggests the political opposition to the next bailout will not be insurmountable. Certainly a number of significant hurdles remain. The ECBs hard-line approach to any reprofiling that would trigger a Greek default could still derail the Greek banking system. The German Constitutional Court is due to rule on the constitutionality of the first bailout package on 5 July. And it could be reasonably argued that while one of the EU/IMF conditions for a second bailout was 'national unity, yesterdays tally of 155 votes hardly meets that standard. But the Greek bailout is ultimately a political decision. It is difficult to see the ECB choosing to bring down the Greek banking system against the wishes of the politicians. There was a somewhat ironic note to protests yesterday from the ECBs Stark, who said the French investor participation plan would violate the Maastricht nobailout clause this after EUR 110bn has already been sent to Greece, not to mention Ireland and Portugal. More likely the ECBs rules will be changed or bent if the ratings agencies dont cooperate. The future of Greece and the Euro cannot be seen to depend on the judgement of a few private ratings agencies. Similarly the German Constitutional Court will not want to be cast into the
Robert Ryan FX Weekly

Source: BNP Paribas. The chart shows how EURCHF has come under pressure as the average CDS of Eurozone sovereigns has risen. Concerns over banks safety have also played a part as investors moved deposits out of European banks and into the relative safety of Swiss accounts. But if the Greek budget vote removes the risk of imminent disaster, these pressures should begin to ease.

Chart 2: EURCHF Risk Reversals vs. Global Hazard Index

40 35 30 25 20 15 10 5 0 EURCHF Risk Reversa ls (RHS Inverted) Dec-2007 Jun-2009 Dec-2010 -0.3 0.7 Glo ba l Ha zza rd index -3.3 -2.3 -1.3 -5.3 -4.3

Jun-2006

Source: BNP Paribas. EURCHF risk reversals are currently extremely well bid for puts. While this is usual in times of general market stress, the current levels reflect the extent to which the skew is the result of idiosyncratic Eurozone stress.

history books as the destroyers of 61 years of political integration. Demands for Greek national unity will have to be sacrificed on the altar of pragmatism. The second bailout package is coming. Investors Sidelined Investors are not long risk. Hedge funds have been waiting for the next move, not wanting to waste the few remaining bullets they have. And real money investors have been wary of investing ahead of the crucial vote. But focus should now shift to the inflation pressures in the euro core and what that means for ECB policy. OIS markets still price in less than 50bp of tightening 1 year out, including the 25bp to be delivered next week. Broader concerns
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about the state of global economy remain, but a set of decent PMIs on Friday would take the risk of a global slowdown off the table. In this regard both the Chinese PMI and the US ISM will be very important. The greatest risk may be that another rally in risk develops but that investors are left waiting to buy dips that do not materialize - and then must chase it higher. EURCHF Spot, Skew to Normalise The search for safety in the face of Eurozone debt crisis has seen EURCHF come under sustained pressure (Chart 1); but with imminent disaster now much less likely, some of that pressure should

subside. At the same time, EURCHF risk reversals have been extremely well bid for puts (Chart 2); this stress should also normalise. On Wednesday we recommended combining the two dynamics through the following strategies: (1) Buy a 3-month EURCHF 1.2200 Call with Knock-In at 1.28, Knock-out at 1.17. The risk reversal over-prices the chance of Knock-Out; and under-prices the chance of Knock-In. Cost is 0.88% against a vanilla price of 1.53% (2) Buy A 3-month EURCHF 1.22 Call with Knock out 1.17. Cost is 1.08% [Both NY Cut, Spot 1.2000]

Robert Ryan FX Weekly

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IMF COFER Q1 Update EUR Conundrum

Q1 reserves surge flattered by valuation effects EUR demand may have stalled, unlike GBP, JPY and others (mostly AUD and CAD) Begging the question of whether RM demand is even necessary to sustain EURUSD gains. Our first blush take of the IMF's latest update on the Composition of Global Foreign Exchange Reserves (COFER) published Thursday was that it corroborated the view that amidst rapidly rising reserves growth, efforts to prevent the dollar proportion of reserves from rising meant that Reserve Mangers (RMs) were heavy buyers of euros and other non-ISD G10 currencies during Q1 2011. However when we properly adjust for exchange rate changes over the quarter the picture looks quite different: RMs - at least those who report the breakdown of their reserves look to have been net euro sellers in the quarter, with efforts to prevent the dollar proportion of total reserves from rising reflected mostly in a pick up in demand for GBP, JPY and other (non-EUR and non-CHF) G10 currencies. Total global FX reserves as reported to the IMF expanded by $435bn in Q1, some $164bn more than the Q4 210 increase. However, of the $182bn increase among those central banks who report the breakdown in reserves, almost half the increase looks to have come from valuation changes stemming from the 6% rise in the euro. This though assumes that interest receipts on the stock of reserves and local currency valuation changes on that stock were negligible. Interest rate receipts, at least on bonds held with more than one year duration, add significantly to reserves each quarter, while valuation effects in Q1 will likely have been negative given the back up in bond yields during the quarter. This makes it impossible to accurately remove valuation effects from volume effects. On the (heroic) assumption of no significant interest receipts/asset valuation effects and just adjusting for FX valuation change, we see that there were net euro sales of some EUR16bn in Q1 (of which about EUR12bn came from Emerging and Developing Economies and the rest from Advanced countries. In contrast, RMs who report their currency composition were net buyers of about GBP6bn (most of this coming from Developing and Emerging Economies) and JPY909bn (of which JPY547bn was from this latter group). In percentage terms, the
Ray Attrill FX Weekly

Chart 1: Total reserves

12,000,000 10,000,000 8,000,000 6,000,000 4,000,000

T otal

EM
2,000,000 0 Ma r-99
Source: BNP Paribas

Mar-02

Ma r-05

Mar-08

Mar-11

Chart 2: Non USD, EUR reserves in EM

400,000 350,000 300,000 250,000 200,000 150,000 100,000 50,000 0 Ma r-99
Source: BNP Paribas

GBP

JPY

CHF

Other

Mar-02

Ma r-05

Ma r-08

Mar-11

QoQ changes in reserve holdings among the allocated portion of total reserves amount to +2.4% for USD, +4.7% for GBP, +5.7% for JPY, -1.6% for EUR and a whopping +12.6% for other, which we assume is heavily concentrated in AUD and CAD. It is entirely possible that these composition changes are not readily extrapolate to the $4.39tn of unallocated reserves of which China makes up the bulk ($3tn). If it were, that means there may have been net sales of euros by central banks in Q1 of some EUR40bn, despite which EURUSD rallied by over 6%! As well as challenging our prior notion about why EURUSD appear to have sustained levels above that implied by interest rate differentials (including the negative impact of euro-peripheral stress) in Q1, one conclusion is that may not need an ongoing strong Reserve Manager bid to sustain euro strength. Another is that demand for other (commodity) currencies as reserve assets, and too the yen, remains very strong.
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10

Thai Election Scenarios & Market Impact

Thais will go to the polls on July 3 for a general election that Prime Minister Abhisit Vejjajiva hopes will settle a long-running political conflict in the deeply divided country. A close fight between the Democrat Party and the Pheu Thai Party is certain. Less certain is the outcome. We list two main scenarios: A Democrat-led or a Pheu Thai-led Coalition Government. Whichever scenario eventuates, the political landscape will remain weak, something which investors have gotten accustomed to. A refocus back on economic fundamentals post-elections argue for the THB to maintain its ground. We list two possible election scenarios courtesy of the head of our Thai equity research, Chutima Woramontri: Scenario 1: Democrat leads government: Democrat (200) + Bhum Jai Thai (60) + Chart Thai Pattana (25) + Chart Pattana Puea Pandin (20) = 305 For this scenario, our equity strategists have a neutral weighting and a SET index target of 1,200, offering 16% upside potential from current levels. We believe that the USDTHB will fall under this scenario, towards the 30.30 level. Scenario 2: Phue Thai leads government: Phue Thai (250) + Chart Thai Pattana (25) + Chart Pattana Puea Pandin (20) = 295 For this scenario, our equity strategists see further downside on the SET due to rising political risks. A 1% rise in the WACC would lower our SET index target by 10% to 1,080. Foreign ownership currently stands at 35% in the year to June, with foreign investors selling out USD 652mn so far, overturning the net buying position in the first five months of 2011, bringing ytd foreign net sell positions of USD 252mn. In 2010, foreigners were net buyers to the tune of USD 2.7bn. We believe the USDTHB would rise under this scenario, towards 31.21, the pivot level. Because
Box 1: Factsheet on Thai Elections DEMOCRATIC UPHEAVAL Election will be Thailand's 26th since it became a democracy in 1932. Thailand is governed by 17 constitutions and has experienced 18 military coups -- actual and attempted -- the latest in 2006, which overthrew tycoon Thaksin Shinawatra and his Thai Rak Thai party (TRT). TRT the only Thai political party to win a second term in office and dissolved for electoral fraud after 2006 coup. Latest incarnation is the Puea Thai Party, which remains under Thaksin's control from exile. KEY FIGURES 47 million eligible voters among Thailand's estimated 67 million people. Turnout in recent polls has been relatively high at 74.5 percent (2007), 60 percent (2005) and 70 percent (2001). 557 polling stations across the country. Some 2.6 million people applied to cast votes in advance. 42 parties will take part in this election7 of them won parliamentary seats in the 2007 poll. Lawmakers elected for 4 years. 500 seats in play. 375 constituency seats total from 76 provinces Bangkok has 33 seats. THE BALLOT Voters will tick two boxes on their ballots, one for their preferred constituency candidate and another for their preferred party at a national level; the latter decides who gets "party list" seats, allocated according to the percentage of votes each party gets. Each has nominated a list of candidates for their party list quotas. There is no minimum percentage required to win one of these 125 party list seats. Polling stations will be open from 0100-0800 GMT on Sunday, July 3. A clear indication of which party will finish first should be known by about 1300 GMT. FORMING A GOVERNMENT Entire process is normally completed within one month of the poll. If no party wins a majority of more than 250 seats, the party with most seats, or a plurality, will be given first chance to form a coalition government. If the party that wins a plurality is unable to form a coalition, the second-placed party gets a chance. Source: Reuters

FX Weekly

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market players have priced in to some degree the potential for this poorer outcome, USDTHB may not break this level. Historically, it has been shown that political outcomes have no lasting impact on USDTHBs trend. Hence, we maintain our downside targets on USDTHB at 29.50 by end-2011. In any scenario, we note that the Thai political landscape will remain weak, something which investors have gotten accustomed to. In either case, a victory led by either PT or Democrats will unlikely sit through its four years in office. Thus we expect the market to refocus back on fundamentals. Our improved outlook for the Thai economy in H2, and the continued robustness of private consumption, will keep the Thai economy afloat. Coupled with a positive balance of payments surplus, the moderate appreciation trend in the THB remains intact, albeit with bumps like these along the way.

Chart 1: Composition Of Thai Parliament

Source: The Nation.com

Chart 2: Thai BOP Surplus Supports THB

Sources: BNP Paribas and Bloomberg

FX Weekly

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BNP Paribas Weekly FX Global Bias Indicator*

Chart 1 : Weekly Global Bias Indictor
10 8 6 4 2 0 -2 -4 -6 -8 CHF EUR JPY AUD NOK CAD USD SEK GBP +8 equals strongest reading/-8 equals weakest reading BNP Paribas 2011 - All Rights Reserved

Chart 2 : Weekly Global Bias - Momentum

6 4 2 0 -2 -4 -6 CAD SEK EUR CHF AUD NOK USD GBP JPY
+16 equals strongest reading/-16 equals weakest reading

BNP Paribas 2011 - All Rights Reserved

Weekly Global Bias Indicator Caution required with the CHF long positions and SEK short positions After spending a prolonged period of time as the strongest currency within our system of medium term models, the CHF is now showing the first signs of weakening. Although the Weekly Bias Indicator still shows the AUD ranked overall as the strongest currencies, the Daily Bias Indicator is now showing a different picture, with the CHF having declined sharply down the rankings from a near extreme bullish position to a relatively negative position, implying that we are now starting to see consolidation in the CHF. Thus we recommend caution with medium term CHF long positions similarly the Weekly Bias Indicator continues to show the SEK as one of the weakest currencies but as with the CHF is now starting to show signs of turning. Hence we also recommend caution with medium term SEK short positions. GBP continues to triggers bearish signals Following the negative GBP signals triggered last week, the Weekly Bias Indicator shows the GBP moving into a extreme bearish position, while the Daily Bias Indicator now also shows the GBP as the weakest currency overall within our system of short term models. With the GBP developing continued bearish momentum within the Weekly Bias Indicator we would now expect some further GBP losses. Weekly and Daily Bias Indicators give strong CAD buy signals and strong JPY sell signals Over the past few days we have seen the CAD climb the ranking in the Daily Bias Indicator from a position deep in negative territory to a relatively neutral position. This is also consistent with the readings from the Weekly Bias Indicator, which shows the CAD having now recovered from the position as the weakest currency into a slight negative position as well as developing strong medium term positive momentum. Further CAD gains would now be expected over the short and medium term JPY on the other hand is developing the most bearish momentum within our system of medium term models. Also the JPY has moved rapidly down the overall rankings within the Weekly Bias Indicator, from the strongest currency last week to a moderately positive position currently. But the extent of bullish momentum suggests the JPY will move much deeper into negative territory in the overall rankings in the coming week. This implies some further losses in the near-term at least. Indeed, the Daily Bias Indicator is also giving JPY bearish signals.

These readings suggest long SEKJPY and CADJPY positions and GBPCAD and GBPSEK short positions over the coming week.

*BNP Paribas FX Strategy Global Bias Indicators are derived from our system of technical trading models and are designed to provide an indication of the overall strength of individual currencies. Bias Indicators at extreme bullish or bearish levels have historically proved to be good leading indicators of corrections or turning points in the underlying spot rate.

FX Weekly
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BNP Paribas Weekly FX Global Bias Indicator

Chart 3 : EUR Bias Indicator and EURUSD
8 6 1.47 4 1.45 2 0 -2
Bearish Extreme Bullish Extreme

Chart 4 : GBP Bias Indicator and EURGBP

2 0.830
Bullish Extreme

1.49

1 0 -1 -2 -3

0.840 0.850 0.860 0.870 0.880 0.890

Bearish Extreme

1.43 1.41 1.39 1.37 May-11

-4 -5 -6 -7 -8 -9 Mar-11 May-11

-4 Mar-11

0.900

BNP Paribas EUR Indicator

EURUSD (rhs)

BNP Paribas GBP Indicator

EURGBP (rhs)

Chart 5 : JPY Bias Indicator and EURJPY

8 6 4 2 0 -2 -4 -6 -8 -10 Mar-11
Bearish Extreme Bullish Extreme

Chart 6 : CHF Bias Indicator and EURCHF

10 8 6 4 2 0 -2 -4 -6 Bearish Extreme -8 Mar-11 1.30 1.32 May-11 1.22 1.24 1.26 1.28 Bullish Extreme 1.18 1.20

105.00 107.00 109.00 111.00 113.00 115.00 117.00 119.00 121.00 123.00 May-11

BNP Paribas JPY Indicator

EURJPY (rhs)

BNP Paribas CHF Indicator

EURCHF (rhs)

Chart 7 : AUD Bias Indicator and EURAUD

8 6 4 2 0 -2 -4 -6 -8 -10
Bearish Extreme Bullish Extreme

Chart 8 : CAD Bias Indicator and EURCAD

5 3 1 -1 1.36 -3 1.38 -5 -7
Bearish Extreme Bullish Extreme

1.29 1.31 1.33 1.35 1.37 1.39 1.41 1.43 1.45

1.28 1.30 1.32 1.34

1.40 1.42 1.44 May-11

-9

Mar-11

May-11

Mar-11

BNP Paribas AUD Indicator

EURAUD (rhs)

BNP Paribas CAD Indicator

EURCAD (rhs)

FX Weekly
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Chart 9 : CEEMEA Weekly Global Bias Indictor

3 2 2 1 1 0 -1 -1 -2 -2 -3 CZK ZAR HUF PLN RUB TRY ILS RON BNP Paribas 2011 - All Rights Reserved
3 2 1 0 -1 -2 -3 -4 -5 -6 -7

Chart 10 : CEEMEA Weekly Global Bias Momentum

BNP Paribas 2011 - All

RON

CZK

PLN

ZAR

HUF

RUB

TRY

ILS

Chart 11 : LATAM Weekly Global Bias Indictor

4 3 2 1 0 -1 -2 -3 -4 -5 PEN BRL ARS MXN CLP COP -4 -2 0 2 BNP Paribas 2011 - All Rights Reserved 4

Chart 12 : LATAM Weekly Global Bias Momentum

BNP Paribas 2011 - All Rights Reserved

BRL

MXN

CLP

COP

PEN

ARS

Chart 13 :Asia Weekly Global Bias Indictor

8 6 4 2 0 -2 -4 -6 -8 KRW SGD PHP IDR INR MYR TWD THB BNP Paribas 2011 - All Rights Reserved

Chart 14 : Asia Weekly Global Bias Momentum

6 4 2 0 -2 -4 SGD MYR KRW PHP INR THB TWD IDR BNP Paribas 2011 - All Rights Reserved

FX Weekly
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Medium Term FX Recommendations

Short GBPUSD Spot
Sold on a break of 1.5930, target 1.5350 multi-month, stop-loss at 1.6285. Our short position in Cable was activated on June 27th though GBPUSD has backed up a bit on the coattails of the EURUSD rally following the passing of the Greek vote. However, this is more of a USD move to us with GBP weaker on several other crosses. We have long been Sterling bears, but our bearish belief was invigorated with last weeks Q1 GDP data and revised Q4 data showing a sorry current account picture over the past 6 months. Rising credit risks against the backdrop of an even bigger current account deficit - with the financial account already in deficit begs the question of where the inflows can come from. The implication is one that spells trouble for Sterling. We still favour GBPUSD breaking lower in the weeks and months ahead. Our measures of real rates has plunged (see chart alongside) 24 June 2011

GBPUSD 1.6018

Short GBPAUD Via 3m Options

Long 1.53 put RKO at 1.45 Vs. Short 1.63 Call. The position, now despite a lower spot is marking to market pretty much flat as the moment with gains on the short call eroded equally by losses as the RKO put loses value as spot gets closer to the trigger. Keeping in mind the choppiness that a carry trade like short GBPAUD can face on rising volatility, we opted to use options to play for a grind lower (using RKO to cut cost) and further sell a very OTM call to make it zero entry cost. We hold the position as we feel that GBPAUD could continue to grind lower. China PMI did come in weaker but thankfully managed to hold above to 50 boom-bust mark. Along with the input prices dropping sharply which plays to lower imported inflation pressure, this goes to the China press reports suggesting a tad less aggressive monetary policy. On the other hand, we dislike GBP as articulated in our short Cable trade. 24 June 2011

GBPAUD 1.4964

Go Long EURCHF Via Options

01 July 2011 Long 3m 1.22 Call, 1.28 KI, 1.17 KO

EURCHF 1.2260

The passing of Greek austerity measures reduced the tail risk of immediate default. The search for safety in the face of Eurozone debt crisis has seen EURCHF come under sustained pressure (Chart 1); but with imminent disaster now much less likely, some of that pressure should subside. At the same time, EURCHF risk reversals have been extremely well bid for puts (Chart); this stress should also normalise. We suggest combining the two dynamics: Buy a 3-month EURCHF 1.2200 Call with Knock-In at 1.28, Knock-out at 1.17. The risk reversal over-prices the chance of Knock-Out; and underprices the chance of Knock-In. Cost is 0.88% against a vanilla price of 1.53%

FX Weekly
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July 21 1.05/1.01 AUDUSD Put in the red

Jul 21 1.05/1.01 put spread bought at 1.05% Having marked to market positively at 1.10% AUD just last week with spot closer to 1.0500, the situation has completely changed following the passage of Greece vote on austerity measures and their implementation. The position is now marking to market at 0.5250% AUD with 20 days left.AUDUSD has reversed sharply higher and 1.06 channel down trend resistance has been broken. With the immediate Greek default and potential liquidity crisis averted, the USD has come under pressure once again. China PMI did come in weaker but thankfully managed to hold above to 50 boom-bust mark. Along with the input prices dropping sharply which plays to lower imported inflation pressure, this goes to the China press reports suggesting a tad less aggressive monetary policy stance. 20 May 2011

AUDUSD 1.07

NOKSEK RKO MTM at breakeven; Still Hold

NOKSEK 1.1700

Suggested Aug 4 1.1485 RKO Call (barrier at 1.1905) now maps at 0.4995% NOK with 34 days left, versus 0.5000% at inception, which also the entry cost of option. Trade was recommended at over a 50% discount relative to the vanilla alternative. The NOK, like the SEK should continue to recover strongly to the extent they had been dogged by liquidity tensions in the weeks leading to the Greek vote. With the somber threat of a liquidity crisis (on bond haircuts) having been averted, NOK should once again gain given its status as the most superior "fiscal" safe haven. NOKSEK has fallen back and could consolidate lower down to 1.1630 support though we would expect the cross to remain biased higher rather than lower on a medium term view.

FX Weekly
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Implied Option Volatility Analysis

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

USDJPY Implied Volatility Curve and 1y highs & lows

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

Current Imp. Vol.

Last Week Imp. Vol.

Current Imp. Vol.

Last Week Imp. Vol.

USDCHF Implied Volatility Curve and 1y highs & lows

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

GBPUSD Implied Volatility Curve and 1y highs & lows

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

Current Imp. Vol.

Last Week Imp. Vol.

Current Imp. Vol.

Last Week Imp. Vol.

AUDUSD Implied Volatility Curve and 1y highs & lows

21 18 16

USDCAD Implied Volatility Curve and 1y highs & lows

15 13 11

13

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

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

Current Imp. Vol.

Last Week Imp. Vol.

*BNP Paribas FX Strategy: The above charts show the current volatility curves (1-week through to 1-year) for the major currency pairs in relation to the 1-year highs and lows for each of the tenor. FX Weekly
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Majors
EURUSD GBPUSD USDCHF
0.52 0.5

Emerging Markets
AUDUSD USDCAD USDZAR
0.64 0.57 0.04 0.45 0.37 0.11 0.84 0.62 0.34 0.62 0.5 0.17 0.88 0.64 0.32 0.7 0.61 0.2 0.34 0.22 0.01 0.71 0.56 0.2 0.75 0.49 0.16 0.56 0.29 0.8 0.88 0.2 0.64 0.7 0.05 0.16 0.33 0.19 0.67 0.74 0.05 0.65 0.81 0.04 0.51 0.58 0.13 0.21 0.42 0.16 0.06 0.34 0.19 0.08 0.17 0.3 0.2 0.5 0.66 0.19 0.41 0.66 0.16 0.64 0.07 0.39 0.69 0.01 0.36 0.5 0.37 0.14 0.36 0.18 0.05 0.34 0.09 0.15 0.2 0.21 0.23 0.23 0.22 0.05 0.33 0.01 0.1 0.1 0.14 0.28 0.28 0.22 0.02 0.32 0.01 0.15 0.21 0.08 0.54 0.74 0.01 0.26 0.35 0.29 0.53 0.68 0.18 0.39 0.49 0.45 0.05 0.37 0.56 0.07 0.19 0.41 0.23 0.49 0.66 0.04 0.29 0.48 0.33 0.62 0.78 0.29 0.54 0.61 0.13 0.2 0.26 0.36 0.42 0.77 0.43 0.48 0.69 0.03 0.06 0.13 0.22 0.29 0.53 0.59 0.09 0.51 0.69 0.05 0.18 0.24 0.29 0.49 0.62 0.03 0.54 0.71 0.04 0.36 0.11 0.42 0.73 0.27 0.25 0.54 0.42 0.48 0.76 0.78 0.27 0.21 0.47 0.27 0.63 0.68 0.26 0.55 0.59 0.1

USDJPY
0.51 0.1 0.19 0.32 0.01 0.31 0.03 0.3

USDTRY USDHUF
0.23 0.43 0.64 0.01 0.06 0.04

USDPLN
0.01

OIL

0.48 0.37 0.09 0.4 0.1

0.02 0.17 0.39 0.14 0.07 0.38 0.65 0.66

Commodities

COPPER

0.09 0.33 0.2 0.04 0.87 0.79 0.68 0.5

0.47 0.47 0.08 0.16 0.37 0.55

0.54 0.56 0.03 0.2 0.34 0.57 0.73 0.85 0.27 0.25 0.57 0.34 0.61 0.76 0.29 0.53 0.62 0.11

0.03 0.81 0.66 0.49 0.58 0.31 0.25 0.56 0.51 0.16 0.38 0.36

CRB

0.84 0.09 0.2 0.58 0.34 0.02

GOLD

0.22 0.4 0.64 0.59 0.18 0.52 0.46 0.05 0.23 0.12 0.14 0.5 0.42 0.02 0.54 0.5

0.77 0.18 0.08 0.58 0.71 0.2 0.09 0.52 0.2 0.08 0.36 0.06 0.17 0.56 0.18 0.06 0.68

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

0.5 0.27 0.08

Equities

0.03 0.35 0.06 0.07 0.42 0.39

0.42 0.22 0.03 0.14 0.32 0.05

0.12 0.53 0.39 0.15 0.45 0.35 0.01 0.18 0.04

0.3 0.57 0.1

EU 10Y Yields

0.17 0.52 0.52

0.32 0.45 0.01

0.310.31 0.54

Bonds & Rates

JP 10Y Yields

0.06 0.29 0.27

0.22 0.29 0.01

0.16 0.14 0.44 0.07 0.13 0.25 0.07 0.22 0.08 0.18 0.21

0.09 0.41 0.04 0.22 0.29 0.05 0.21 0.2 0.12 0.18

0.44 0.47 0.33 0.16 0.45 0.17 0.1 0.21 0.24

0.53 0.53 0.26

0.54 0.57 0.19

US 3m LIBOR

0.33 0.36 0.07 0.25 0.29 0.14 0.01

0.28 0.31 0.12 0.17 0.24 0.12 0.08

0.15 0.18 0.11 0.23 0.17 0.05 0.28

High Current Low

EU 3m LIBOR

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

FX Weekly

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Economic Calendar: 4 - 8 July

GMT Mon 04/07 01:30 01:30 09:00 09:00 Local 13:30 13:30 11:00 11:00 Australia Eurozone US Tue 05/07 01:30 04:30 07:30 08:00 08:00 09:00 09:00 08:30 14:00 Wed 06/07 07:00 09:00 09:00 10:00 10:00 11:30 14:00 23:50 (06/07) 01:30 01:30 06:45 07:15 07:15 07:30 07:30 08:00 08:00 08:30 08:30 08:30 08:30 11:00 10:00 10:00 11:45 12:30 12:15 12:30 15:00 16:30 23:50 (07/07) 06:00 06:30 06:45 07:30 07:30 13:30 14:30 09:30 10:00 11:00 11:00 10:00 09:30 10:00 09:00 11:00 11:00 12:00 12:00 07:30 10:00 08:50 11:30 11:30 08:45 09:15 09:15 09:30 09:30 10:00 10:00 09:30 09:30 09:30 09:30 12:00 12:00 12:00 13:45 14:30 08:15 08:30 11:00 12:30 08:50 08:00 08:30 08:45 09:30 09:30 Australia Sweden Eurozone Retail Sales m/m : May Retail Sales y/y : May PPI m/m : May PPI y/y : May Public Holiday Previous 1.1% 3.3% 0.9% 6.7% Forecast 0.6% 3.5% -0.1% 6.3% Consensus n/a n/a -0.1% 6.3%

UK US Spain Eurozone Germany US

Trade Balance : May AUD1597mn RBA Rate Announcement Riksbank Rate Announcement & Monetary Policy Report PMI Services (Final) : Jun 54.2 (p) PMI Composite (Final) : Jun 53.6 (p) Retail Sales (sa) m/m : May 0.9% Retail Sales (ca) y/y : May 1.1% CIPS Services : Jun 53.8 Factory Orders m/m : May -1.2% Industrial Production (wda) y/y : May GDP (Final) q/q : Q1 GDP (Final) y/y : Q1 Factory Orders m/m : May Factory Orders y/y : May Challenger Layoffs : Jun ISM Non-Manufacturing : Jun Machinery Orders (sa) m/m : May Unemployment Rate : Jun Employment Change : Jun Trade Balance : May CPI m/m : Jun CPI y/y : Jun CPI m/m : Jun CPI y/y : Jun Manufacturing Prod (sa) m/m : May Manufacturing Prod (nsa) y/y : May Industrial Production m/m : May Industrial Production y/y : May Manufacturing Production m/m : May Manufacturing Production y/y : May BoE Rate Announcement Industrial Production m/m : May Industrial Production y/y : May ECB Rate Announcement ECB Press Conference ADP Labour Change : Jun Initial Claims EIA Oil Inventories Feds Hoenig Speaks in Iowa Current Account (nsa) : May Trade Balance (sa) : May BdF Business Survey (Prel) : Jun Budget Balance (Cumulative) : May Industrial Production (sa) m/m : May Industrial Production (nsa) y/y : May -1.6% 0.8% (p) 2.5% (p) 2.8% 10.5% 54.6 -3.3% 4.9% 7.8k EUR-7.1bn 0.0% 0.4% 0.1% 2.3% -1.1% 0.6% -1.7% -1.2% -1.5% 1.3% -0.6% 9.6%

AUD1277mn

n/a

54.2 53.6 -1.0% -0.6% 53.2 0.9%

54.2 n/a -1.0% -0.6% 53.3 1.0%

0.8% 2.5% -1.0% 9.0% 53.0 3.5% 4.9% 27.5k EUR-6.4bn -0.1% 0.8% -0.4% 2.4% -0.5% 2.1% 1.3% -0.3% 1.4% 2.5% -0.3% 6.2%

n/a n/a 0.1% 10.0% 53.5 3.0% n/a n/a n/a n/a n/a n/a n/a n/a n/a 1.0% -0.6% 1.0% 1.8% 0.5% 7.0%

Thu 07/07

Japan Australia France Switz Neths Norway UK

Germany Eurozone US

38k 428k

100k 410k

70k n/a

Fri 08/07

Japan Germany France Sweden

JPY406bn EUR14.0bn 103.1 EUR-67.9bn -0.7% 12.0%

JPY498bn EUR11.0bn 102.0 EUR-69bn 0.2% 10.1%

JPY388bn EUR11.0bn n/a n/a n/a n/a

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GMT 07:30 07:30 08:00 08:00 08:30 08:30 08:30 11:00 11:00 12:30 12:30 12:30 14:00 19:00 During Week 04-07

Local 09:30 09:30 10:00 10:00 09:30 09:30 09:30 07:00 07:00 08:30 08:30 08:30 10:00 15:00 Neths Italy UK Industrial Production (sa) m/m : May Industrial Production (nsa) y/y : May Industrial Production m/m : May Industrial Production (wda) y/y : May Input PPI (nsa) m/m : Jun Output PPI (nsa) y/y : Jun Output PPI (Ex-FDT, sa) y/y : Jun Unemployment Rate : Jun Payroll Jobs y/y : Jun Non-Farm Payrolls (Chg) : Jun Unemployment Rate : Jun Average Hourly Earnings m/m : Jun Wholesale Inventories m/m : May Consumer Credit : May Halifax House Prices m/m : Jun Halifax House Prices y/y : Jun

Previous -0.3% 0.8% 1.0% 3.7% -2.0% 5.3% 3.4% 7.4% 22.3k 54k 9.1% 0.3% 0.8% USD6.2bn 0.1% -4.2%

Forecast -0.5% 0.9% 0.0% 2.7% 0.5% 5.3% 3.4% 7.4% 10.0k 75k 9.1% 0.1% 0.6% USD-3.0bn 0.0% -4.0%

Consensus n/a n/a 0.0% 2.7% 0.1% 5.5% 3.3% 7.4% 10.0k 85k 9.1% 0.2% 0.7% USD5.0bn n/a -4.2%

Canada US

UK

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

Source: BNP Paribas

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

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FX Global Strategy Contacts

Foreign Exchange
Raymond Attrill James Hellawell Kiran Kowshik Mary Nicola Drew Brick Chin Loo Thio Robert Ryan Jasmine Poh Gao Qi Bartosz Pawlowski Elisabeth Gruie Dina Ahmad Diego Donadio Senior FX Strategist Quantitative Strategist FX Strategist FX Strategist Head of FX & IR Strategy Asia FX & IR Asia Strategy FX & IR Asia Strategy FX & IR Asia Strategy FX & IR Asia Strategy Head of FX & IR Strategy CEEMEA FX & IR CEEMEA Strategist FX & IR CEEMEA Strategist FX & IR Latam America Strategist New York London London New York Singapore Singapore Singapore Singapore Shanghai London London London Sao Paulo 1 212 841 2492 44 20 7595 8485 44 20 7595 1495 1 212 841 2492 65 6210 3262 65 6210 3263 65 6210 3314 65 6210 3418 86 21 2896 2876 44 20 7595 8195 44 20 7595 8492 44 20 7595 8620 55 11 3841 3421 [email protected] [email protected] [email protected] [email protected] [email protected] [email protected] [email protected] [email protected] [email protected] [email protected] [email protected] [email protected] [email protected]

Emerging Markets FX & IR Strategy

Production and Distribution please contact: Roshan Kholil, Foreign Exchange, London. Tel: 44 20 7595 8486, Email: [email protected]

Important Disclosures
This report has been written by our strategy teams. Such reports do not purport to be an exhaustive analysis and may be subject to conflicts of interest resulting from their interaction with sales and trading which could affect the objectivity of this report. (Please see further important disclosures in the text of this report). This report is a marketing communication. It is not independent investment research. It has not been prepared in accordance with legal requirements designed to provide the independence of investment research, and is not subject to any prohibition on dealing ahead of the dissemination of investment research. The information and opinions contained in this report have been obtained from, or are based on, public sources believed to be reliable, but no representation or warranty, express or implied, is made that such information is accurate, complete or up to date and it should not be relied upon as such. This report does not constitute a prospectus or other offering document or an offer or solicitation to buy or sell any securities or other investment. Information and opinions contained in the report are published for the assistance of recipients, but are not to be relied upon as authoritative or taken in substitution for the exercise of judgement by any recipient, are subject to change without notice and not intended to provide the sole basis of any evaluation of the instruments discussed herein. Any reference to past performance should not be taken as an indication of future performance. To the fullest extent permitted by law, no BNP Paribas group company accepts any liability whatsoever (including in negligence) for any direct or consequential loss arising from any use of or reliance on material contained in this report. All estimates and opinions included in this report are made as of the date of this report. Unless otherwise indicated in this report there is no intention to update this report. BNP Paribas SA and its affiliates (collectively BNP Paribas) may make a market in, or may, as principal or agent, buy or sell securities of the issuers mentioned in this report or derivatives thereon. BNP Paribas may have a financial interest in the issuers mentioned in this report, including a long or short position in their securities and/or options, futures or other derivative instruments based thereon, or vice versa. BNP Paribas, including its officers and employees may serve or have served as an officer, director or in an advisory capacity for any issuer mentioned in this report. BNP Paribas may, from time to time, solicit, perform or have performed investment banking, underwriting or other services (including acting as adviser, manager, underwriter or lender) within the last 12 months for any issuer referred to in this report. BNP Paribas may be a party to any agreement with the issuer relating to the production of this report. BNP Paribas, may to the extent permitted by law, have acted upon or used the information contained herein, or the research or analysis on which it was based, before its publication. BNP Paribas may receive or intend to seek compensation for investment banking services in the next three months from or in relation to an issuer mentioned in this report. Any issuer mentioned in this report may have been provided with sections of this report prior to its publication in order to verify its factual accuracy. BNP Paribas is incorporated in France with limited liability. Registered Office 16 Boulevard des Italiens, 75009 Paris. This report was produced by a BNP Paribas group company. This report is for the use of intended recipients and may not be reproduced (in whole or in part) or delivered or transmitted to any other person without the prior written consent of BNP Paribas. By accepting this document you agree to be bound by the foregoing limitations.

Certain countries within the European Economic Area

This report is solely prepared for professional clients. It is not intended for retail clients and should not be passed on to any such persons. This report has been approved for publication in the United Kingdom by BNP Paribas London Branch, a branch of BNP Paribas, 10 Harewood Avenue, London NW1 6AA, which is regulated by the Financial Services Authority for the conduct of its investment business in the United Kingdom and registered in England & Wales under No. FC13447. This report has been approved for publication in France by BNP Paribas, a credit institution licensed as an investment services provider by the CECEI and the AMF, whose head office is 16, Boulevard des Italiens 75009 Paris, France. This report is being distributed in Germany either by BNP Paribas London Branch, or by BNP Paribas Niederlassung Frankfurt am Main, regulated by the Bundesanstalt fr Finanzdienstleistungsaufsicht (BaFin). United States: This report is being distributed to US persons by BNP Paribas Securities Corp., or by a subsidiary or affiliate of BNP Paribas that is not registered as a US broker-dealer to US major institutional investors only. BNP Paribas Securities Corp., a subsidiary of BNP Paribas, is a broker-dealer registered with the Securities and Exchange Commission and a member of the National Association of Securities Dealers, the New York Stock Exchange and other principal exchanges. BNP Paribas Securities Corp. accepts responsibility for the content of a report prepared by another non-US affiliate only when distributed to US persons by BNP Paribas Securities Corp. Japan: This report is being distributed to Japanese based firms by BNP Paribas Securities (Japan) Limited, Tokyo Branch, or by a subsidiary or affiliate of BNP Paribas not registered as a financial instruments firm in Japan, to certain financial institutions defined by article 17-3, item 1 of the Financial Instruments and Exchange Law Enforcement Order. BNP Paribas Securities (Japan) Limited, Tokyo Branch, a subsidiary of BNP Paribas, is a financial instruments firm registered according to the Financial Instruments and Exchange Law of Japan and a member of the Japan Securities Dealers Association. BNP Paribas Securities (Japan) Limited, Tokyo Branch accepts responsibility for the content of a report prepared by another non-Japan affiliate only when distributed to Japanese based firms by BNP Paribas Securities (Japan) Limited, Tokyo Branch. Some of the foreign securities stated on this report are not disclosed according to the Financial Instruments and Exchange Law of Japan. Hong Kong: This report is being distributed in Hong Kong by BNP Paribas Hong Kong Branch, a branch of BNP Paribas whose head office is in Paris, France. BNP Paribas Hong Kong Branch is regulated as a Registered Institution by Hong Kong Monetary Authority for the conduct of Advising on Securities [Regulated Activity Type 4] under the Securities and Futures Ordinance.

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