Friday, 2nd July 2010

FX Strategy Weekly Market Strategy

• Market Outlook
Kenneth Broux Tactical view:
Senior Market Economist
= USD still on the back foot
0207 158 1750
The Swiss franc has replaced the USD as preferred store of refuge in the G10 as the US
kenneth.broux@lloydsbanking.com economy clouds over and global equity benchmarks sink to the lowest levels for the year.
With risk aversion stepped up and US short-term yields sinking to new historic lows, we
look for the USD to stay under pressure over the coming week and the dollar index to
close in on key support in the 83.19 area. The aggressive unwinding of short EUR and GBP
positions is likely to slow ahead of the BoE and ECB meetings though no policy changes are
anticipated. The ECB weekly refinancing operation is set to attract close scrutiny after the
expiry of the one-year tender and the smooth transition to 3-month funding. We look to the
RBA and Canadian jobs data for guidance on AUD and CAD, though feel defensive
strategies are advised as the CRB and S&P eye pivotal support levels.

• Recap
• A broad-based retreat in global equities and an unrelenting run of weak US macro data
boosted demand for the Swiss Franc and the JPY, propelling both currencies to the top of
Weekly
the weekly G10 rankings. USD/CHF has now extended its slump to 10 big figures since
Close Change
mid-June, sliding below 1.06. GBP enjoyed a mixed week, posting gains vs the high
yielding and commodity currencies, but losing ground vs the Franc, EUR and SEK. The US
FX %
employment report for June the June 17 SNB meeting, and progressed to below 1.35 vs
GBP/EUR 1.2156 1.60%
the EUR. USD/CHF slipped below 1.10.
GBP/USD 1.4985 1.09%
GBP/JPY 133.86 -0.45% • UK macro data brought news of slowing housing market activity and confirmation of a
GBP/CHF 1.6398 -0.21% rebound in business investment in Q1 (+7.8% q/q). The latest credit conditions survey from
GBP/AUD 1.7268 1.57% the BoE presented a sobering picture for Q3, with credit availability of secured credit to
GBP/NZD 2.1106 0.62% households set to decline, but to increase slightly to corporates. The manufacturing and
GBP/CAD 1.5550 2.64% construction PMI were steady in June, holding at 57.5 and 58.4, respectively vs May. MPC
members Miles and Posen made no judgement on whether further asset purchases will be
GBP/NOK 9.6862 2.70%
necessary and reiterated that credit developments in the euro zone pose a challenge for the
GBP/SEK 11.60 1.30%
UK economy. The US unemployment rate fell to 9.5% in June from 9.7% in May.
EUR/USD 1.2328 -0.48%
USD/JPY
• UK rates extended their bullish run backed by flight-from-risk and weak US macro data.
89.33 -1.52%
10y yields hit a 3.30% low, supporting the bullish flattening influence in 2s/10s (255bp). 5y
AUD/USD 0.8678 -0.48%
swaps fell to a 2.41% low but ended the week at 2.48%. Trendline resistance runs at
NZD/USD 0.7100 0.44% 2.55%. The 3mth Libor/Ois spread held steady at 24bp in contrast to the widening in EUR
USD/CAD 1.0377 1.56% (+6bp to 33bp). The ECB switched successfully from a one-year to a 3-month tender,
USD/SEK 7.7440 0.21% attracting bids of ‘only’ 132bln eur. The special 6-day fine tuning operation attracted bid of
USD/NOK 6.4643 1.62% 111.2bln eur, leaving the ECB with excess liquidity of 289bln eur. Gilt sales (IL 2047) and the
USD/CHF 1.0943 -1.28% syndicated 2040 deal attracted very solid demand.

Swaps % bp Contents Page

2yr 1.439 -7.9 Market Outlook, IMF Cofer reserve comment ................................................................. 2
5yr 2.472 -14.3 Quantitative Market Analysis .............................................................................................. 4
10yr 3.418 -13.3
FX & commodity futures positioning ............................................................... 5
Equities %
FTSE100 5046.47 -3.89%
FX options: Risk reversal skews ...................................................................... 6
FX options: Implied volatility ............................................................................ 7
Economic data surprises ................................................................................. 8
Interest rate spreads vs. FX ............................................................................. 9
S&P500 vs. FX ................................................................................................ 10
Commodities vs. FX ........................................................................................ 11
Market Review .................................................................................................................. 12
Disclaimer ......................................................................................................................... 15

Lloyds TSB Corporate Markets Economic Research, 10 Gresham Street, London, EC2V 7AE, Switchboard: 0207 626 1500.
1
Kenneth Broux - Senior Market Economist
Market Strategy
contact: +44 207 158 1750 July 2010

G10 FX - Q1 currency reserves: EUR below 30% in EM, ‘others’ gain

The IMF earlier this week published its latest quarterly update of the composition of official foreign exchange reserves (Cofer
data). Concentrating on the allocated reserves at the World level, the share of the USD fell marginally to 61.55% in Q1-10 from
62.17% in Q4-09. The share of EUR edged lower to 27.2% from 27.3%. Gains were noted for GBP (4.34% vs 4.29%), the JPY (3.14%
vs 3.01%) and the Swiss Franc (0.12% vs 0.11%). The biggest increase, however, was recorded for the so-called ‘others’. These
include G10 currencies like the NOK, SEK CAD, AUD and NZD, which saw their share climb to 3.65% from 3.12%. In dollar terms,
this is equivalent to a rise of roughly $24bln.

The picture at the World level is representative of the changes in Emerging and developing economies where most of the
international reserves are currently managed. Though the share of unallocated reserves rose by approx. $50bln to $3.305trln,
changes in the individual composition in emerging markets have a major influence at the global level simply because emerging
markets currently hold 66% of the world’s total currency holdings. Whereas the share of EUR in Emerging economies rose in Q1 to
25.15% from 24.81% (+$13bln), the contribution of the EUR fell back below the 30% threshold to 29.5%. Though swings on this scale
are hardly alarming, they are significant in the context of and back up the bearish price action in EUR crosses over Q1.

How the EU debt crisis plays out, the outcome of the EU bank stress tests, and the shift to a mindset where the USD is no longer
considered an attractive safe-haven play as the economy slows (see separate note: ‘safe haven flows desert the USD’) will be
instructive as to how reserves are managed during the second half of 2010. A fading of risk appetite and growing doubts over
the pace of the US and euro zone economic recoveries y may thwart demand for non-G3 currencies, with GBP potentially set to
increase its appeal in the wake of the fiscal policy objectives set out in the June 22 Budget. A stalling of rate hike expectations in
Sweden, Norway, Canada and Australia may also temper diversification flows into the ‘other’ currencies, though this should be
offset by unrelenting growth rate in Chinese exports (+48.5% y/y in May).

A further sell-off in EUR crosses in Q2 implies that EUR holdings were probably cut back further in Q2. The weak performance of
the EUR and commodity and high yield currencies in Q2 (AUD, CAD, NOK) as a result of sovereign debt jitters in the euro zone and
the rotation out of risk assets into government bonds implies that the USD probably saw its account in global reserves improve
from the 61.5% rate at the World level and 58% in Emerging markets. The explosion in SNB currency reserves to SwF232bln
between April and May implies that greater swings should transpire in the Q2 data, especially with regard of the EUR. The
substitution of the USD as the safe-haven by the Swiss franc means that the allocation of the latter at the World level to 2008 highs.
Allocated reserves - World Allocated reserves - Advanced economies
% Q 4-09 Q 1- 10 %
70 Q 4-09 Q 1-10
70

60 60

50 50

40 40

30 30

20 20

10 10

0 0
U SD G BP JP Y CHF EUR O TH ERS U SD G BP JP Y CHF EU R O TH ERS

Allocated reserves - Developing economies Rise in unallocated reserves is stabilising

% Q 4-09 Q 1- 1 0 A l l o c a te d re s e rv e s U n a l l o c a te d re s e rv e s
70 100

60
80
50
60
40

40
30

20
20

10 0
1995

1 998

2 004
2 001

-q1
2 007

201 0

0
USD GB P JP Y C HF E UR O T H ER S
Allocated reserves - World, % Allocated reserves - Advanced economies, %
Q4-09 Q1-10 Q4-09 Q1-10
USD 62.17 61.55 USD 65.39 64.66
GBP 4.29 4.34 GBP 2.83 2.79
JPY 3.01 3.14 JPY 4.10 4.28
CHF 0.11 0.12 CHF 0.17 0.17
EUR 27.30 27.20 EUR 24.81 25.15
OTHERS 3.12 3.65 OTHERS 2.69 2.96

Allocated reserves - Emerging economies, %

Q4-09 Q1-10
USD 58.51 58.04
GBP 5.93 6.10
JPY 1.78 1.86
CHF 0.03 0.05
EUR 30.13 29.51
OTHERS 3.61 4.43
Quantitative Market Analysis
• GBP/USD correlation slumps with stocks, commodities
• EUR/CHF 1y vol hits new high

Contrarian Indicators

Risk Reversal Skews (based on options prices, see page 7) Table 1: 1-month rolling correlations
and IMM data (highlighting speculative positioning, see page AUDUSD USDCAD EURUSD GBPUSD USDJPY AUDJPY EURJPY
6) are used to analyse foreign exchange to understand how
stretched currencies may have become. 2 YR SPD 0.89 0.86 0.69 0.43 0.87 0.89 -0.22

Market participants reduced speculative short GBP positions

10 YR SPD 0.32 -0.18 0.65 0.50 0.70 0.85 0.18
to -62,100 contracts over the past week to the lowest level
since April 20. By contrast, short EUR positions were boosted
S&P500 0.51 -0.89 0.11 -0.28 0.61 0.90 0.85
to -81,200, causing the short EUR/GBP spread to widen to -
19,100 contracts. An unwinding of EUR short contracts is likely
Gold 0.45 -0.34 0.01 0.07 -0.04 0.39 -0.03
to have taken place over the last trading sessions as EUR/
GBP firmed back over 0.82. Separately, the impressive rally
Oil 0.91 -0.65 0.51 0.51 -0.22 0.71 0.23
in GBP/USD through 1.52 points to a further reduction in GBP
short positions to below 60,000 contracts.
Relative Yield Curve 0.88 0.87 0.18 -0.29 -0.15 0.49 -0.64

The fading in USD safe haven flows has been reflected in a

shift in IMM positions for most currencies, with changes in JPY
positioning standing out. Short JPY positions were reduced to
-4,000 (+12,800 net change) and probably moved into positive
territory as USD/JPY revisits sub 88.0 territory. Momentum
also favours the CHF, backed by a slide in USD/CHF below
1.08 to a 1.0583 low. Short CHF positions remain significant
though at -17,700, but should be subject to a further short
covering when the next set of IMM data are published. Long
CAD and AUD positions stabilised at 47,600 and 15,600
contracts respectively, showing no major variation vs the USD.
The RBA rate decision and Canadian employment stats are
due next week and may cause momentum to shift, though
we suspect that equity markets and commodity prices remain
pivotal to near-term direction as central banks in both regions
may choose to pause their tightening strategies.
The US DXY remains under pressure as clouds continue to
gather over the US economy and investors abandon the
USD as a safe haven destination. A break below 85.0 cleared
the way for a decline towards trendline support in the 83.13
area, a level that may come under scrutiny next week as
markets take stock of mixed June employment report and
the S&P gravitates closer towards 1,000.
Risk reversals moved quite sharply this week illustrating the
swing in sentiment away from the USD. Moves in USD/CHF
and USD/JPY specifically are venturing into extreme levels
and point to the danger of a counter-trend move as percentile
ranks of 20% or lower are reached. EUR/USD and GBP/USD
reversals moved further into territory last seen in late April
and early May. Both risk reversals for EUR/USD and GBP/
USD broke above -2.0. Implied 1mth/1y vol curves stayed
within tight ranges observed since mid-June for EUR/GBP
and EUR/USD. Volatility perked up in dramatic fashion across
CRB 0.94 -0.63 0.70 0.59 -0.28 0.69 0.33
the curve for EUR/CHF crosses, reaching new all time-highs
in the 1-year maturity (10.43).
FX correlations
Market correlations are shown on pages 10-12. 1-month rolling
correlations are plotted for G-10 FX against interest rate
spreads, S&P 500 and commodities (represented through the
CRB index).
G10 correlations with 2y interest rate differentials stayed at
statistically significant levels for AUD/JPY and USD/CAD and
rose markedly for AUD/USD. The fall in US 2y yields to new
historic lows below 0.60% is weighing on the USD. With the
exception of AUD/JPY, 10y spreads are statistically irrelevant.
The correlation of GBP/USD with the S&P sank below zero to
-0.28, but stayed elevated for EUR/JPY and AUD/JPY. A decline
in the correlation of GBP/USD with the CRB index has also
been observed and is a key development to bear in mind as
we weigh up the market and macro factors for short-term
direction of the cross. The downtrend for the CRB index was
re-established and puts a test of 250 on the radar next week,
potentially diverting flows from AUD/USD.
We saw confirmation of our observation here last week that
the USD is showing increased sensitivity to weak macro
data. Plunging home sales, weak consumer confidence
and factory orders point to a stalling of economic
momentum in late Q2, a development that has left the
USD bruised against some of its main G10 peers, and
sparking an unwinding of long speculative USD
positions. Next week brings the ISM non-manufacturing
index for June, forecast at 55.0 vs 55.4 last.

4
FX & Commodity Futures Positioning
Data from the major US futures & options exchanges are released each Friday evening and report positions up to
the close of business on the previous Tuesday. Traders are classified as either commercial or non-commercial. The
positioning of the non-commercial traders can be used as a proxy for the speculative side of the market. Extreme
net long or net short positions are taken as an indication of the market’s vulnerability to a sharp reversal. For a
squeeze to occur, however, a separate catalyst such as a piece of fundamental news or a breach of a key technical
level is usually required.

$ cont r act s
EUR/USD $ GBP/USD cont ract s SFr USD/CHF cont ract s
60,000 1.80 0 1.20 20,000
1.53 40,000
1.48 20,000 1.70 -20,000 10,000
0 1.15
1.43
- 20,000 1.60 -40,000 0
1.38 - 40,000 1.10
1.33 - 60,000
1.50 -60,000 - 10,000
1.28 - 80,000
- 100,000 1.05
1.23 - 120,000 1.40 -80,000 - 20,000
1.18 - 140,000
1.30 -100,000 1.00 - 30,000
09- 09 12-09 03- 10 06-10
09-09 12- 09 03- 10 06-10 09-09 12-09 03-10 06-10

Net -Long Non- Commercial Posit ions ( CME) Spot Rat e Net -Long Non-Commercial Posit ions (CME) Spot Rat e Net - Long Non-Commercial Posit ions (CME) Spot Rat e

JPY USD/JPY cont r act s C$ USD/CAD cont ract s $ AUD/USD cont ract s
1.20 0 0.95 100,000
100 80,000
-10,000
1.15 80,000
40,000 -20,000 0.90
95 1.10
-30,000 60,000
0 1.05 0.85
-40,000
90 -50,000 40,000
-40,000 1.00
-60,000 0.80
0.95 20,000
85 -80,000 -70,000
09-09 12-09 03-10 06-10 0.90 -80,000 0.75 0
09-09 12-09 03-10 06-10 09-09 12-09 03-10 06-10
Net -Long Non- Commercial Posit ions ( CME) Spot Rat e
Net -Long Non-Commercial Posit ions (CME) Spot Rat e Net - Long Non-Commercial Posit ions (CME) Spot Rat e

£ cont ract s SFr cont ract s

$ bn USD POSITIONING EUR/GBP (derived) EUR/CHF (derived)
0.94 160,000 1.54 50,000
40 90 0.92 1.52
120,000
1.50 0
20 85 0.90
80,000 1.48
0.88 -50,000
0 80 40,000 1.46
0.86
1.44 -100,000
-20 75 0
0.84 1.42
-40 70 0.82 -40,000 1.40 -150,000
06-07 12-07 06-08 12-08 06-09 12-09 06-10 09-09 12-09 03-10 06-10 09-09 12-09 03-10 06- 10
SUM (INDIVUAL CURRENCY PAIRS) - LHS
DXY - spot (RHS) Net -Long Non- Commercial Posit ions (CME) Spot Rat e Net -Long Non-Commercial Posit ions (CME) Spot Rat e

$ cont r act s
GOLD $ SILVER cont ract s $ OIL (NYMEX WTI) cont ract s
1300 300,000 20 60,000 90 160,000
19 85 140,000
1200 250,000 50,000
18 80 120,000
200,000 40,000
1100 17 75 100,000
150,000
16 30,000 70 80,000
1000
100,000 15 65 60,000
20,000
900 50,000 14 60 40,000
13 10,000 55 20,000
800 0
09-09 12-09 03-10 06-10 12 0 50 0
09- 09 12-09 03-10 06- 10 09-09 12-09 03-10 06-10
Net -Long Non- Commercial Posit ions ( CME) Spot Rat e
Net -Long Non-Commercial Posit ions (CME) Spot Rat e Net - Long Non-Commercial Posit ions (CME) Spot Rat e

cont r act s cont ract s cont ract s

S&P 500 Future 124
10-YR TREASURY NOTES 0 99.8
3-m onth Eurodollar Future 1,400,000
1300 20,000
122 -50,000 99.7 1,200,000
1200 0
99.6 1,000,000
120 -100,000
1100 -20,000 99.5 800,000
118 -150,000
1000 -40,000 99.4 600,000
116 -200,000
900 -60,000 99.3 400,000
114 -250,000 99.2 200,000
800 -80,000
09-09 12-09 03-10 06-10 112 -300,000 99.1 0
09-09 12-09 03- 10 06-10 09- 09 12-09 03-10 06-10
Net -Long Non- Commercial Posit ions ( CME) Spot Rat e
Net -Long Non-Commercial Posit ions (CME) Spot Rat e Net - Long Non-Commercial Posit ions (CME) Spot Rat e

5
FX Options: Risk Reversal Skews
The risk reversal skew is the difference in volatility between similar out-of-the-money call and out-of-the-money put
options. A positive risk reversal means that the implied volatility (used for pricing) of the call is greater than that of
the put. In this section, the skew is based on 1-month 25 delta call and put options. The skew has been analysed over
a one-year period, with the positioning ranked and charted (in red) underneath the skew. If the skew and positioning
are towards an extreme (we use above 75% or below 25% for the percentile rank), the risk of a contra-trend move
in the underlying spot rate is high.

EURUSD GBPUSD AUDUSD

1.0 0.0 0.0

0.0
25 delta skew

-1.0 -2.0
25 delta skew

25 delta skew
-1.0
-2.0 -4.0
-2.0

-3.0 -6.0
-3.0

-4.0 -4.0 -8.0

01 Sep 09

01 Nov 09

01 Jan 10

01 Mar 10

01 May 10

01 Jul 10

01 Sep 09

01 Nov 09

01 Jan 10

01 Mar 10

01 May 10

01 Jul 10

01 Sep 09

01 Nov 09

01 Jan 10

01 Mar 10

01 May 10

01 Jul 10
100% 100% 100%
percentile rank

80% 80% 80%

percentile rank

percentile rank
60% 60% 60%
40% 40% 40%
20% 20% 20%
0% 0% 0%

NZDUSD USDCAD USDCHF

0.00 4.00 2.00

1.50
3.00
-2.00
25 delta skew

25 delta skew

25 delta skew

1.00
2.00
-4.00 0.50
1.00
0.00
-6.00
0.00
-0.50

-8.00 -1.00 -1.00

01 Sep 09

01 Nov 09

01 Jan 10

01 Mar 10

01 May 10

01 Jul 10

01 Sep 09

01 Nov 09

01 Jan 10

01 Mar 10

01 May 10

01 Jul 10

01 Sep 09

01 Nov 09

01 Jan 10

01 Mar 10

01 May 10

01 Jul 10
100% 100% 100%
percentile rank

percentile rank

percentile rank

80% 80% 80%

60% 60% 60%
40% 40% 40%
20% 20% 20%
0% 0% 0%

USDSEK USDNOK USDJPY

4.00 4.00 0

3.00 3.00 -1
-1
25 delta skew

25 delta skew

25 delta skew

2.00 2.00
-2
1.00 1.00
-2
0.00 0.00
-3
-1.00 -1.00 -3
-2.00 -2.00 -4
-3.00 -3.00 -4
01 Sep 09

01 Nov 09

01 Jan 10

01 Mar 10

01 May 10

01 Jul 10

01 Sep 09

01 Nov 09

01 Jan 10

01 Mar 10

01 May 10

01 Jul 10

01 Sep 09

01 Nov 09

01 Jan 10

01 Mar 10

01 May 10

01 Jul 10

100% 100% 100%

80% 80% 80%
percentile rank

percentile rank

percentile rank

60% 60% 60%

40% 40% 40%

20% 20% 20%

0% 0% 0%

6
FX Options: Implied volatility
Implied volatility is an input that is required when an option has to be priced. A higher implied volatility would result
in a higher option price, if other factors were unchanged. Implied volatility is traded in the markets and is therefore
also dependent upon supply and demand for options. In periods of uncertainty or illiquidity, implied volatility will climb
higher. One-month and one-year implied volatility is shown in the charts below.

EURUSD GBPUSD AUDUSD

% % %
21 21 28
26
19 19 24
17 17 22
20
15 15 18
16
13 13 14
11 11 12
10
9 9 8
02 J ul 09

02 O ct 09

02 J an 10

02 Apr 10

02 J ul 10

02 Jul 09

02 O c t 09

02 Jan 10

02 Apr 10

02 Jul 10

02 J ul 09

02 O c t 09

02 J an 10

02 Apr 10

02 J ul 10
1-month 1-yr 1-month 1-yr 1-month 1-yr

NZDUSD USDCAD USDCHF

% % %
29 21 16
27 15
19
25
14
23 17
21 13
15
19 12
17 13
11
15
11 10
13
11 9 9
02 J ul 09

02 O c t 09

02 J an 10

02 Apr 10

02 J ul 10

02 J ul 09

02 O ct 09

02 J an 10

02 Apr 10

02 J ul 10

02 J ul 09

02 O ct 09

02 J an 10

02 Apr 10

02 J ul 10

1-month 1-yr 1-month 1-yr 1-month 1-yr

USDSEK USDNOK USDJPY

% % %
26 20 19
24 19 18
18 17
22
17 16
20 15
16
18 14
15
16 13
14 12
14 13 11
12 12 10
10 11 9
02 J ul 09

02 O ct 09

02 J an 10

02 Apr 10

02 J ul 10

02 J ul 09

02 O ct 09

02 J an 10

02 Apr 10

02 J ul 10

02 J ul 09

02 O ct 09

02 J an 10

02 Apr 10

02 J ul 10

1-month 1-yr 1-month 1-yr 1-month 1-yr

7
Economic Data Surprises
The charts below show relative economic data surprises against historical FX spot rates. The economic data surprises
indice are provided by Citigroup. They are defined as weighted standard deviations of data surprises – actual
releases vs. Bloomberg survey median. Relative data surprises between two countries have been calculated and
graphed below.

EURUSD GBPUSD AUDUSD

150 1.80 200
1.00 250
1.48 1.75
100 150 0.95 200
1.43 1.70 0.90
50 100 150

Surprise Index
Surprise Index

Spot Rate

Surprise Index
0.85
Spot Rate

1.65

Spot Rate
1.38
0.80 100
0 1.60 50
1.33 0.75 50
1.55
-50 0 0.70
1.28 0
1.50
0.65
1.23 -100 -50 -50
1.45 0.60
1.18 -150 1.40 -100 0.55 -100
15 J ul 09

11 Sep 09

10 Nov 09

07 J an 10

08 Mar 10

05 May 10

02 J ul 10

15 J ul 09

11 Sep 09

10 Nov 09

07 J an 10

08 Mar 10

05 May 10

02 J ul 10
15 Jul 09

11 Sep 09

10 Nov 09

07 Jan 10

08 Mar 10

05 May 10

02 Jul 10

Economic Data Surprise Spread (RHS) Spot Rate (LHS) Economic Data Surprise Spread (RHS) Spot Rate (LHS) Economic Data Surprise Spread (RHS) Spot Rate (LHS)

NZDUSD USDCAD USDCHF

1.18 250 1.18 100
0.80 150
1.16 200 1.16 50
0.75 100 1.14 150 1.14
100 0
0.70 1.12 1.12
Surprise Index

Surprise Index
Spot Rate

50
Surprise Index

50
Spot Rate

Spot Rate
0.65 1.10 1.10 -50
0
0 1.08 1.08
0.60 -50 -100
-50 1.06 -100 1.06
0.55 -150
1.04 -150 1.04
0.50 -100 -200
1.02 -200 1.02
0.45 -150 1.00 -250 1.00 -250
15 J ul 09

11 Sep 09

10 Nov 09

07 J an 10

08 Mar 10

05 May 10

02 J ul 10

15 J ul 09

11 Sep 09

10 Nov 09

07 J an 10

08 Mar 10

05 May 10

02 J ul 10

15 Jul 09

11 Sep 09

10 Nov 09

07 Jan 10

08 Mar 10

05 May 10

02 Jul 10
Economic Data Surprise Spread (RHS) Spot Rate (LHS) Economic Data Surprise Spread (RHS) Spot Rate (LHS) Economic Data Surprise Spread (RHS) Spot Rate (LHS)

USDSEK USDNOK USDJPY

8.5 150 6.9 150 99 250
200
100 6.7 97
8.0 100 150
50 6.5 95 100

Surprise Index
Surprise Index

Surprise Index

Spot Rate
Spot Rate

Spot Rate

7.5 50 93 50
0 6.3
0
-50 6.1 91 -50
7.0 0
89 -100
-100 5.9
-150
6.5 -50 87
-150 5.7 -200
85 -250
6.0 -200 5.5 -100
15 J ul 09

11 Sep 09

10 Nov 09

07 J an 10

08 Mar 10

05 May 10

02 J ul 10
15/07/09

11/09/09

10/11/09

07/01/10

08/03/10

05/05/10

02/07/10

15/07/09

11/09/09

10/11/09

07/01/10

08/03/10

05/05/10

02/07/10

Economic Data Surprise Spread (RHS) Spot Rate (LHS) Economic Data Surprise Spread (RHS) Spot Rate (LHS) Economic Data Surprise Spread (RHS) Spot Rate (LHS)

8
Interest Rate Spreads vs. FX
The charts below show interest rate spreads plotted against historical FX spot rates. The spreads are calculated
using two-year interest rate swaps. A one-month rolling correlation (between the spot rate and the interest rate
spread) is shown to identify time periods when interest rate spreads are driving FX movements.

EURUSD GBPUSD AUDUSD

1.53 0.8 1.75 0.9 1.00 4.5

1.48 0.7 1.70 0.8 0.95 4.0

0.6 1.65 0.7 0.90
1.43 3.5

2Y Rate Spread

2Y Rate Spread

2Y Rate Spread
0.5 1.60 0.6 0.85
Spot Rate

Spot Rate

Spot Rate
1.38 0.4 1.55 0.5 0.80 3.0
1.33 0.3 1.50 0.4 0.75 2.5
2Y Rate Spread (RHS) 0.2 1.45 0.3 0.70
1.28 2.0
0.1 1.40 2Y Rate Spread (RHS) 0.2 0.65 2Y Rate Spread (RHS)
Spot Rate (LHS)
1.23 0.0 1.35 0.1 0.60 Spot Rate (LHS) 1.5
Spot Rate (LHS)
1.18 -0.1 1.30 0.0 0.55 1.0
03 Jul 09

15 Sep 09

26 Nov 09

08 Feb 10

21 Apr 10

02 Jul 10

03 Jul 09

15 Sep 09

26 Nov 09

08 Feb 10

21 Apr 10

02 Jul 10

03 Jul 09

15 Sep 09

26 Nov 09

08 Feb 10

21 Apr 10

02 Jul 10
1 1 1

0 0 0

Correlation Correlation Correlation

-1 -1 -1

NZDUSD USDCAD USDCHF

0.80 4.0 1.20 0.4 1.30 1.0
0.75 0.2 2Y Rate Spread (RHS) 0.9
3.5 1.15 1.25
0.0 Spot Rate (LHS) 0.8
0.70 1.20
2Y Rate Spread

2Y Rate Spread
3.0 1.10 0.7

2Y Rate Spread
Spot Rate

Spot Rate

-0.2
0.65 0.6

Spot Rate
1.15
2.5 1.05 -0.4 0.5
0.60 1.10
-0.6 0.4
2.0 1.00
0.55 1.05 0.3
2Y Rate Spread (RHS) 2Y Rate Spread (RHS) -0.8
0.50 1.5 0.95 0.2
Spot Rate (LHS) Spot Rate (RHS) -1.0 1.00
0.1
0.45 1.0 0.90 -1.2
0.95 0.0
03 Jul 09

15 Sep 09

26 Nov 09

08 Feb 10

21 Apr 10

02 Jul 10

03 Jul 09

15 Sep 09

26 Nov 09

08 Feb 10

21 Apr 10

02 Jul 10

03 Jul 09

15 Sep 09

26 Nov 09

08 Feb 10

21 Apr 10

02 Jul 10
1 1 1

0 0 0

Correlation Correlation
Correlation
-1 -1 -1

USDSEK USDNOK USDJPY

8.5 0.2 7.5 -1.0 99 2Y Rate Spread (RHS) 1.2
0.1 2Y Rate Spread (RHS) -1.2
8.0 7.0 97 Spot Rate (LHS) 1.0
0.0
Spot Rate (LHS) -1.4
2Y Rate Spread
-0.1 95
2Y Rate Spread

2Y Rate Spread

7.5 6.5 0.8

Spot Rate
Spot Rate

-0.2 -1.6
Spot Rate

93
-0.3
7.0 6.0 -1.8 0.6
-0.4 91
-2.0 1
6.5 -0.5 5.5 0.4
-0.6 89
-2.2
6.0 2Y Rate Spread (RHS) -0.7 5.0 0.2
-2.4 87
Spot Rate (LHS) -0.8
5.5 -0.9 4.5 -2.6 85 0.0
03 Jul 09

15 Sep 09

26 Nov 09

08 Feb 10

21 Apr 10

02 Jul 10
03 Jul 09

15 Sep 09

26 Nov 09

08 Feb 10

21 Apr 10

02 Jul 10
03 Jul 09

15 Sep 09

26 Nov 09

08 Feb 10

21 Apr 10

02 Jul 10

1 1 1

0 0 0

Correlation Correlation Correlation

-1 -1 -1

9
S&P500 vs. FX
The charts below show the S&P500 plotted against historical FX spot rates. A one-month rolling correlation (between
the spot rate and equity index) is shown to identify time periods when the two series are moving in tandem.

EURUSD GBPUSD AUDUSD

1.53 1300 1.75 1300 1.00 1300
1.48 1200 1.70 1200 0.95 1200
1.43 1100 1.65 0.90
1100 1100
Spot Rate

1.60 0.85

Spot Rate

Spot Rate
1.38 1000

S&P500
1000 1000

S&P500
1.55 0.80

S&P500
1.33 900 1.50 900 0.75 900
1.28 800 1.45 0.70
800 800
S&P500 1.40 S&P500 0.65 S&P500
1.23 700 700 700
Spot Rate (LHS) 1.35 0.60 Spot Rate (LHS)
Spot Rate (LHS)
1.18 600 1.30 600 0.55 600
02 Jul 09

14 Sep 09

25 Nov 09

05 Feb 10

20 Apr 10

01 Jul 10

02 J ul 09

14 Sep 09

25 Nov 09

05 Feb 10

20 Apr 10

01 J ul 10

02 Jul 09

14 Sep 09

25 Nov 09

05 Feb 10

20 Apr 10

01 Jul 10
1 1 1

0 0 0

Correlation Correlation Correlation

-1 -1 -1

NZDUSD USDCAD USDCHF

14 Sep 09

25 Nov 09

14 Sep 09

25 Nov 09
05 Feb 10

20 Apr 10

05 Feb 10

20 Apr 10
0.80 1300
02 J ul 09

01 J ul 10

02 J ul 09

01 J ul 10
0.75 1200

0.70 1100
1.18 600 1.30 600
Spot Rate

0.65 1000
S&P500

1.16 S&P500 700 1.25 700

S&P500
0.60 900 1.14 Spot Rate (RHS)
800 Spot Rate (LHS)
S&P500 inverted

1.20 800

S&P500 inverted
1.12
Spot Rate

0.55 S&P500 800

900
Spot Rate

1.10 1.15 900

0.50 Spot Rate (LHS) 700 1.08 1000 1.10 1000
0.45 600 1.06
1100 1.05 1100
02 J ul 09

14 Sep 09

25 Nov 09

05 Feb 10

20 Apr 10

01 J ul 10

1.04
1.02 1200 1.00 1200
1.00 1300
0.95 1300
1 1 1
Correlation Correlation

0 0 0

Correlation
-1 -1 -1

USDSEK USDNOK USDJPY

14 Sep 09

25 Nov 09

14 Sep 09

25 Nov 09
14 Sep 09

25 Nov 09

05 Feb 10

20 Apr 10

05 Feb 10

20 Apr 10
05 Feb 10

20 Apr 10

02 J ul 09

01 J ul 10

02 J ul 09

01 J ul 10
02 Jul 09

01 Jul 10

8.5 600 7.5 600 99 600

8.0 700 700 97 700

7.0
S&P500 inverted

800 800 95 800

S&P500 inverted

S&P500 inverted

7.5
Spot Rate
Spot Rate

6.5
Spot Rate

900 900 93 900

7.0
1000 6.0 1000 91 1 1000
6.5 1100 89 1100
1100
S&P500 5.5 S&P500
6.0 1200 S&P500 1200 87 1200
Spot Rate (LHS) Spot Rate (LHS) Spot Rate (LHS)
5.5 1300 5.0 1300 85 1300
1 1 1
Correlation Correlation

0 0 0

Correlation
-1 -1 -1

10
Commodities vs. FX
The charts below show oil prices plotted against historical FX spot rates. A one-month rolling correlation (between
the spot rate and the commodity series) is shown to identify time periods when the two series are moving in tandem.

EURUSD GBPUSD AUDUSD

1.53 100 1.75 100 1.00 100

1.48 90 1.70 90 0.95 90

80 1.65 80 0.90 80
1.43
1.60 0.85
Spot Rate

Spot Rate

Spot Rate
70 70 70
1.38 1.55 0.80

O IL

O IL
60 60 60

O IL
1.33 1.50 0.75
50 50 Oil (RHS) 50
1.45 0.70
1.28
40 1.40 Oil (RHS) 40 0.65 Spot Rate (LHS) 40
Oil (RHS)
1.23 30 1.35 30 0.60 30
Spot Rate (LHS) Spot Rate (LHS)
1.18 20 1.30 20 0.55 20
03 Jul 09

15 Sep 09

26 Nov 09

08 Feb 10

21 Apr 10

02 Jul 10

03 Jul 09

15 Sep 09

26 Nov 09

08 Feb 10

21 Apr 10

02 Jul 10

03 J ul 09

15 Sep 09

26 Nov 09

08 Feb 10

21 Apr 10

02 J ul 10
1 1 1

0 0 0

Correlation Correlation Correlation

-1 -1 -1

NZDUSD USDCAD USDCHF

15 Sep 09

26 Nov 09

15 Sep 09

26 Nov 09
08 Feb 10

21 Apr 10

08 Feb 10

21 Apr 10
0.80 100
03 Jul 09

02 Jul 10

03 Jul 09

02 Jul 10
0.75 90

0.70 80
1.18 20 1.30 20
Spot Rate

70
0.65 1.16 Oil (RHS)
30 1.25 30
60 Oil (RHS)
O IL

1.14 Spot Rate (LHS)

0.60 40 40
50 Spot Rate (RHS) 1.20
1.12
Spot Rate

0.55 Oil (RHS) 50 50

40
Spot Rate

1.10 1.15
Spot Rate (LHS) 60
O IL

0.50 60

O IL
30 1.08
70 1.10
0.45 20 1.06 70
80 1.05
03 Jul 09

15 Sep 09

26 Nov 09

08 Feb 10

21 Apr 10

02 Jul 10

1.04 80
1.02 90 1.00 90
1.00 100
0.95 100
1 1 1
Correlation Correlation

0 0 0

Correlation
-1 -1 -1

USDSEK USDNOK USDJPY

15 Sep 09

26 Nov 09

15 Sep 09

26 Nov 09
15 Sep 09

26 Nov 09

08 Feb 10

21 Apr 10

08 Feb 10

21 Apr 10
08 Feb 10

21 Apr 10

03 Jul 09

02 Jul 10

03 Jul 09

02 Jul 10
03 J ul 09

02 J ul 10

8.3 20 7.5 20 99 20
8.1 30 30 97 Oil (RHS) 30
Oil (RHS) 7.0
7.9 40 40 Spot Rate (LHS) 40
Spot Rate (LHS) 95
7.7
Spot Rate

50
Spot Rate

50 6.5 50
Spot Rate

93
O IL

7.5
O IL

60 60
O IL

60
7.3 91 1
70 6.0 70 70
7.1 89
80 80 80
6.9 5.5
90 90 87 90
6.7 Oil (RHS)
6.5 100 5.0 Spot Rate (LHS) 100 85 100
1 1 1
Correlation Correlation

0 0 0

Correlation
-1 -1 -1

*All charts are sourced to Lloyds TSB Corporate Markets Research, Bloomberg, Datastream and Citigroup.

11
Market Review
Short-term G-10 FX Charts

GBP/USD EUR/USD
1.54 1.26

1.25
1.52

1.24
1.50
1.23
1.48
1.22

1.46
1.21

1.44 1.20

1.42 1.19
01/06/10 08/06/10 15/06/10 22/06/10 29/06/10 01/06/10 08/06/10 15/06/10 22/06/10 29/06/10

EUR/GBP USD/JPY
0.84 93

0.84
92
0.83
91
0.83

0.82 90

0.82
89
0.81
88
0.81

0.80 87
01/06/10 08/06/10 15/06/10 22/06/10 29/06/10 01/06/10 08/06/10 15/06/10 22/06/10 29/06/10

AUD/USD NZD/USD
0.89 0.72

0.88
0.71
0.87

0.86 0.70

0.85
0.69
0.84

0.83 0.68

0.82
0.67
0.81

0.80 0.66
01/06/10 08/06/10 15/06/10 22/06/10 29/06/10 01/06/10 08/06/10 15/06/10 22/06/10 29/06/10

USD/NOK USD/SEK
6.73 8.10

6.68 8.05

6.63 8.00

7.95
6.58
7.90
6.53
7.85
6.48
7.80
6.43
7.75
6.38
7.70
6.33 7.65

6.28 7.60
01/06/10 08/06/10 15/06/10 22/06/10 29/06/10 01/06/10 08/06/10 15/06/10 22/06/10 29/06/10

USD/CHF USD/CAD
1.18 1.07

1.16
1.06

1.14
1.05

1.12
1.04
1.10

1.03
1.08

1.02
1.06

1.04 1.01
01/06/10 08/06/10 15/06/10 22/06/10 29/06/10 01/06/10 08/06/10 15/06/10 22/06/10 29/06/10

12
Medium-term G-10 FX Charts

GBP/USD EUR/USD
1.75
1.53

1.70
1.48

1.65
1.43

1.60 1.38

1.55 1.33

1.50 1.28

1.45 1.23

1.40 1.18
Jul-09 Sep-09 Nov-09 Jan-10 Mar-10 May-10 Jul-10 Jul-09 Sep-09 Nov-09 Jan-10 Mar-10 May-10 Jul-10

EUR/GBP USD/JPY
0.96 101

0.94 99

0.92 97

0.90 95

0.88 93

0.86 91

0.84 89

0.82 87

0.80 85
Jul-09 Sep-09 Nov-09 Jan-10 Mar-10 May-10 Jul-10 Jul-09 Sep-09 Nov-09 Jan-10 Mar-10 May-10 Jul-10

AUD/USD NZD/USD
0.95 0.78

0.93 0.76
0.91 0.74
0.89
0.72
0.87
0.70
0.85
0.68
0.83
0.66
0.81

0.79 0.64

0.77 0.62

0.75 0.60
Jul-09 Sep-09 Nov-09 Jan-10 Mar-10 May-10 Jul-10 Jul-09 Sep-09 Nov-09 Jan-10 Mar-10 May-10 Jul-10

USD/NOK USD/SEK
6.85
8.10
6.65
7.90

6.45 7.70

6.25 7.50

7.30
6.05
7.10
5.85
6.90
5.65
6.70

5.45 6.50
Jul-09 Sep-09 Nov-09 Jan-10 Mar-10 May-10 Jul-10 Jul-09 Sep-09 Nov-09 Jan-10 Mar-10 May-10 Jul-10

USD/CHF USD/CAD
1.18 1.20

1.16

1.14 1.15

1.12

1.10 1.10

1.08

1.06 1.05

1.04

1.02 1.00

1.00

0.98 0.95
Jul-09 Sep-09 Nov-09 Jan-10 Mar-10 May-10 Jul-10 Jul-09 Sep-09 Nov-09 Jan-10 Mar-10 May-10 Jul-10

13
FX Snapshot

Currency performance vs. USD

Weekly Currency Performance vs. USD Monthly Currency Performance vs. USD 12month Currency Performance vs. USD

CHF 2.50 CHF 7.52 NZD 10.23

JPY 1.55 GBP 3.55 CAD 8.83

GBP 1.34 JPY 3.52 JPY 8.45

EUR 1.27 NZD 1.88 AUD 6.65

SEK 0.83 EUR 1.85 CHF 1.55

NOK 0.01 SEK 1.73 SEK 1.25

CAD -2.12 AUD 0.96 NOK -0.58

NZD -2.47 NOK -0.06 GBP -7.38

AUD -2.61 CAD -0.97 EUR -10.77

-3 -2 -1 0 1 2 3 -2 0 2 4 6 8 -15 -10 -5 0 5 10 15
% % %

Currency performance vs. GBP

Weekly Currency Performance vs. GBP Monthly Currency Performance vs. GBP 12 month Currency Performance vs. GBP

CHF 1.22 CHF 4.26 NZD 15.99

JPY 0.23 JPY 0.10 CAD 15.56

EUR -0.07 EUR -1.61 JPY 15.20

SEK -0.45 NZD -1.63 AUD 13.16

NOK -1.33 SEK -1.72 CHF 8.82

USD -1.34 AUD -2.55 SEK 8.51

CAD -3.47 USD -3.55 USD 7.38

NZD -3.89 NOK -3.61 NOK 6.86

AUD -4.05 CAD -4.54 EUR-3.66

-5 -4 -3 -2 -1 0 1 2 -6 -4 -2 0 2 4 6 -5 0 5 10 15 20
% % %

Currency performance vs. EUR

Weekly Currency Performance vs. EUR Monthly Currency Performance vs. EUR 12 month Currency Performance vs. EUR

CHF 1.29 CHF 5.82 NZD 19.06

JPY 0.31 JPY 1.75 CAD 18.65

GBP 0.07 GBP 1.61 JPY 18.32

SEK -0.44 NZD 0.04 AUD 16.35

NOK -1.26 SEK -0.10 CHF 12.17

USD -1.27 AUD -0.87 SEK 11.87

CAD -3.40 USD -1.85 USD 10.77

NZD -3.82 NOK -1.91 NOK 10.28

AUD -3.97 CAD -2.83 GBP 3.66

-5 -4 -3 -2 -1 0 1 2 -4 -2 0 2 4 6 8 0 5 10 15 20 25
% % %

14
DISCLAIMER

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15