24jun2011 - FX Weekly Complete

Foreign Exchange
24 June 2011
FX Weekly: Get us to the Greek (Budget)

Currency Summary FX Forecast Revisions Rumours of AUD Demise Much Exaggerated BoE Minutes Suggest More GBP Weakness Disinflation Expectations to Spur USD CEEMEA: FX Forecast Revisions Asia Trip Report in Asia, Europe and US Medium Term Recommendations Volatility Cones Correlation Economic Calendar FX Forecast Contacts 2 4 6 8 10 12 15 18 20 21 22 24 25
Greek Budget vote, and public response, all that really matters for all things EUR in coming week. USDJPY downside at risk again if latest Treasury yield drop holds. Local market currencies will remain highly exposed to swings in global sentiment.
FX Weekly Strategy: G10 Summary

We head into a new week still some way off knowing whether the tin can that is the Greek fiscal crisis will be successfully kicked down the road, in which case EURUSD could be looking up to and through 1.45, or we are headed for a tragedy where Greece refuses to sign up for the EU/IMF medicine, EU policy makers turn their attentions to protecting their own banking systems directly rather than via assistance to Greece and EURUSD plummets down into the 1.30s. News headline-driven volatility in all things EUR is set to persist until we first see the outcome of the Greek Budget vote following news Friday of at least one more Pasok deputy planning to vote against the new five-year austerity plan, and too the Greek publics response should the Budget pass. With polls suggesting 75% opposition to the planned austerity measures, it is not beyond the imagination that the worlds media portrays Greece as descending into anarchy before next week is out. We hold to our view that we will see successful (for now) closure on the Greek fiscal crisis, and if so then combined with our view that the market has become far too complacent on future ECB tightening risks, EURUSD could soon be back in the ascendancy. If EURUSD remains a highly news-driven currency pair, USDJPY remains largely flows-driven. However if the latest drop in US Treasury yields, now pressuring 2011 lows, is not quickly reversed than this could test the faith of those believing that the Y79.50 support area was starting to look much more secure. How oil trades in the aftermath of last Thursdays surprise decision by the IEA to release 60 mn. barrels of oil from strategic reserves will have major bearing on NOK and CAD in particular. After a strong run higher helped by a more hawkish Norges Bank, further oil price slippage could see NOK set back, while to the extent that softer oil and a firmer USD should go hand in hand (EUR travails notwithstanding) USDCAD could move to test the upper bound of its 0.97-0.99 effective range.
Local Markets Strategy

This week saw a broad-based sell-off in local market currencies and while some consolidation is likely, we think the following week will continue to be volatile and dependent on news-flow from Greece. In light of the high degree of uncertainty with regards to how the next two weeks will pan out, as well as an expected further moderation in activity (PMI indices to be released next week should highlight the slowdown in manufacturing), it is not surprising that CEEMEA central banks are sticking with their wait-and-see policy stances. While this is increasingly perceived as a policy mistake in the case of Turkey, we think that central banks in Israel, Romania, and Russia will be following suit next week by also leaving rates on hold. The outlook is similar for Mexico, where subdued price pressures mean the central bank will remain on hold in the coming months. Brazilian inflation on the other hand warrants further tightening by the BCB. In the FX space, we like short EURPLN positions and would stick with short EURILS, short CZKHUF, and short RUB versus the basket.
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.
www.GlobalMarkets.bnpparibas.com
Weekly Currency Summary

Europe
EUR CHF GBP NOK SEK
We head into a new week not knowing whether the tin can that is the Greek fiscal crisis will be successfully kicked down the road, in which case EURUSD could be looking up to and through 1.45, or we are headed for a tragedy where Greek refuses to sign up for the EU/IMF medicine, EU attention turns to protecting their own banking systems directly rather than via assistance to Greece and EURUSD plummets into the 1.30s. Another week another new record low in EURCHF. If the coming weeks Swiss KoF reading mimics weakness in German PMIs then SNB attitude towards CHF strength could harden; but if a Greek tragedy is not averted in coming days EURCHF is inevitably headed lower. If it is, EURCHF should rise as some safe haven flows are unwound. Latest Bank of England minutes tended to confirm that the dovish contingent on the MPC is gaining the upper hand, consistent with our view there will likely be no rate increase through 2012 (and as BoEs Fisher notes, more QE is not ruled out). Flows into gilts should the Eurozone fiscal crisis take an ugly turn could support GBP in coming days but if the Greece fiscal crisis is resolved for the time being, EURGBP should rise rapidly alongside EURUSD. NOK has been a start performer with specific NOKSEK flows as SEK suffers on risk/global growth worries and against a more hawkish Norges Bank backdrop. But weaker oil and a stronger NOK do not readily go hand to hand and if the IEAs release of reserves succeeds in holding down prices NOK may struggle from here, for the time being at least. After GBP, SEK has been the biggest loser in the past week as global growth worries are elevated by Eurozone and China PMI data and risk takes a turn for the worse amid ongoing high anxiety on Greece and after a less dovish than anticipated FOMC outcome. If these multiple anxieties ease back, SEK will quickly bounce back.
Converging Europe, Russia and Israel

PLN CZK HUF RON RUB TRY ILS
The data releases were broadly in line with expectations, except for core inflation, which accelerated to 2.4% y/y in May. Robust retail sales growth confirmed the resilience of the Polish consumer, but we still expect inflation to decelerate in the coming months. We expect PMI to moderate further, confirming the slowdown in manufacturing. The revision of CA for 2010 on 29 July will be crucial but we dont expect NBP to make any sizable changes. The CZK weakened 1.15% against the euro as the EURCZK bounced off the strong support at 24.05. The CNB held rates at 0.75% and indicated that there is currently no pressure to raise them. PMI could dip further to 55 as the slow down in core Europe hits the Czech economy with some lag. We stay short CZKHUF. The HUF suffered this week with the poor overall environment and CHFHUF has hit new highs which is concerning given high levels of foreign indebtedness of households. The NBH stayed on hold and the indicated that supply side inflation appears to be transitory. We expect inflation to accelerate in the coming months however. The RON actually strengthened over the week as most of the pain from the Greek exposure was priced in the week before. We expect the NBR to stay on hold on 29 June, although they are likely to adopt more hawkish language. The central bank will express discomfort with the recent RON volatility in a bid to support the currency without having to raise rates. EURRON could retreat to 4.195. The rouble lost 0.75% against the dollar as the Europes debt worries were compounded by lower growth projections from the Fed. The unemployment and GDP surprised positively but were not enough to offset the declines in the oil price. The decline against the euro/dollar basket was only 0.35% but hints at more rouble weakness in coming weeks. The TRY weakened another 2.2% against the dollar to 1.63 as CBRT stayed on hold despite the rising inflation and a widening current account deficit. In the coming week we could see more negative surprises in terms of Q1 GDP and trade balance. The lira thus could weaken further as officials seem to be determined to stay with unorthodox policies. The shekel finished roughly flat on the week as the early gains were pared by the losses on Thursday. The industrial output growth on a monthly basis was a negative 1.6%. The money supply also slowed down in May, increasing the probability that the BoI stays on hold at its 27 June meeting. USDILS could decline to 3.40 after the BoI meeting, as the statement is likely to remain hawkish.
America
In themselves, lower oil prices should equate to a firmer dollar but whether oil stays down as a result of the IEAs reserve release remains to be seen. Effective removal of QE3 risk and ongoing uncertainties over Greece has seen USD trade with a firmer footing in recent days and this may well continue unless or until we get some sort of successful closure for now on Greece. We continue to expect USD weakness to resume if and when Greece stops dominating the news headlines and given our view the market is now seriously underestimating ECB tightening risks. After NOK, CAD is the most sensitive G10 currency you oil hence if the release of IEA reserves succeeds in having meaningful impact on oil CAD will be back as an underperformer even in a firmer USD environment. CAD now looks entrenched in a 0.9700-0.9900 broader range; key support holds at 0.9683, the 50-day moving average. Next key local event risk comes from CPI on Wednesday.
USD
CAD
EMK America
BRL CLP MXN COP PEN
FX Weekly
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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 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
Friday, 24 June 2011 http://www.GlobalMarkets.bnpparibas.com
VEF ARS
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. 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.
Asia
YEN
USDJPY has found a firmer footing above 80.00 as the Fed chairman in his post FOMC press conference appeared to lay any prospect of QE3 to rest. Providing Treasury yields now hold at or above current levels, USDJPY should remain supported, with a good depth of bids still noted down to the Y79.50 area. Resistance currently seen in the 81.05/10 region could likely be tested on a broader based USD rally. JPY still a very flows-driven market
EMK Asia
USDSGD consolidated within the 1.2300-1.2400 range, with direction still largely dictated by EURUSD moves. May CPI printed at 4.5% YoY, a tad higher than market expectations; but industrial production disappointed, hence we do not expect further tightening in the MAS meeting in October. We stay with our USDSGD short position entered at 1.2410, with a stop at 1.2550. If a positive outcome is delivered on Greeces parliament vote on the austerity package on 28 June, we expect USDSGD to break sharply below the 1.2300 support, with the potential to test the years low at 1.2213; else the pair is likely to retest its 1.2400 resistance. May bank lending data is due on Thursday. USDMYR was trapped between its 100-day and 200-day MA at 3.0253 and 3.0617 respectively. Exporter selling, coupled with fresh foreign bond inflows capped the topside in USDMYR while short-covering and corporate overseas investment plans prompted USD buying. Technically, we expect that as long as the 200-day MA resistance at 3.0635 holds, USDMYRs downside bias remains intact. We thus stay short from 3.0700 with a stop at 3.0900. Despite the fresh equity and bond foreign inflows, USDIDR was trapped in a range as market uncertainties ahead of Greeces parliamentary vote on the austerity package on 28 June limited IDR gains. A positive outcome would translate into an approval of the next tranche of aid by the IMF/EU, in turn prompting a risk rally. If so, USDIDR is likely to ease back to the 8500 support. May trade and June CPI data are due on Friday. Spot USDTHB continued to head higher, with the BoT not intervening as much although forward positions continue to be rolled over. News remains thin with flows driving the market. Talk of USD demand due to gold investments is boosting USDTHB. The technical view is bullish with a test of 31.00 likely. The data calendar is chock-a-block next week with the monthly data set including manufacturing production, business sentiment, current account and CPI data. Fitchs surprise upgrade of the countrys sovereign rating to BB+ with a stable outlook pushed the PHP firmer and away from the weeks low of 43.80. The continuing positive story on Philippines should maintain the steadiness in the currency, especially as data in the week ahead including budget numbers and trade balance reinforce the positive macros in this country. We see a slow drift towards 43.00. CPI inflation rose to the highest level in May since August 2008. Market was quiet the week past and spot stuck in a tight range with a slight biddish tone. Forwards traded in a range with selling interest on concerns over USD funding. We see an upward bias in swap points on paying interest seen across the curve. External trade data and money supply will be released this coming week. A lower flash manufacturing PMI confirmed a further slowdown in the economy. IRS curve and FX swap points traded lower on Friday as liquidity conditions eased and PM Wen declared victory on inflation control. Pilot RMB FDI and prospective RMB QFII could support CNH interest rates and swap points over medium term. Official launch of USDCNH fixing on 27 June will boost development in CNH market. We favour paying CNH CCS for the coming MoF CNH bond issuance. Official manufacturing PMI is due on Friday. Growth in export orders and industrial production accelerated last month on strong external demand. USDTWD traded in line with market risk sentiment and local equity performance. We maintain a technical short position established at 28.70 with a stop at 29.20. Reportedly, the CBC is still paying 1M to 3M FX swaps. Lifers sold some 1M and 9M tenors while some players bought 1Y to 2Y outright forwards for equity hedging. The central bank is expected to hike policy rates by 12.5bp on Thursday. Consumer confidence retreated from a three-month high. MSCI kept the emerging-market status for Korea. We maintain our short USDKRW position at 1087 with a stop at 1105. A string of data such as CPI inflation and trade balance is due this coming week. Continuing stubborn WPI prices placed the INR under pressure, as more RBI tightening increased growth worries and weighed on the INR. Although stocks made a rebound on Friday, USDINR traded firmer, crossing above 45.00 within the broad range of 44.50-45.50. WPI prints continue to shape RBI rate expectations as well the coming monsoon. We maintain a technical short USDINR position at 44.48 with a stop at 45.58. Alls quiet on the VND front. The SBV added USD 3bn to fx reserves according to the Ministry of Planning and Investment in a six-month report to the National Assemblys Economic Committee. In terms of USD credit growth, a reduction in USD loans will reduce the dependency on USD and support the VND. We remain positive on VND over the medium-term as structural changes continue to be rolled out.
SGD
MYR
IDR
THB
PHP
HKD
CNY
TWD
KRW INR
VND
Oceania/Africa
AUD NZD ZAR
AUD continues to function as a barometer of risk, and on the assumption that a Greece meltdown is averted next week the bias should be for a higher AUDUSD. Chinese Premier Wen suggests that the battle with inflation is close to being won, in turn implying that further tightening measures are likely to be limited. A hawkish Deputy Governor Lowe argues for a repricing of rate hike expectations if risk appetite allows. The AUDNZD cross has come under pressure as risk aversion took hold but has held well around the 1.2900 level. NZ trade figures early on Monday will set the tone for the week, but there is room to the upside if a Greek tragedy can be averted on Tuesday; topside resistance comes in around the 1.3170-80 region. The current account deficit for Q1 widened to 3.1% of GDP. The acceleration in the CPI was attributed to transitory supply side factors and did not change significantly the rates outlook. The M3 money supply and the credit growth data on 30 July could disappoint further, sending the USDZAR back towards the previous highs registered in June.
FX Weekly
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FX Forecast Revisions
EURUSD seen trading 1.50-1.60 in H2 2011 USDJPY pinned down lower for longer STRATEGY: favourite trades through Q3 are long EURUSD & NOKSEK, short GBPAUD
EURUSD USDJPY USDCHF GBPUSD USDCAD AUDUSD NZDUSD EURJPY EURGBP EURCHF EURSEK EURNOK
Chart 1:BNP Paribas End-Quarter FX forecasts

Spot* 1.44 80 0.84 1.61 0.97 1.06 0.82 115 0.89 1.21 9.16 7.86 Q3 2011 1.50 78 0.83 1.65 0.98 1.09 0.82 117 0.91 1.25 8.90 7.47 Q4 2011 1.55 83 0.83 1.68 0.93 1.13 0.84 129 0.92 1.28 8.50 7.40 Q1 2012 1.45 85 0.90 1.59 0.95 1.07 0.81 123 0.91 1.30 8.60 7.35 Q2 2012 1.40 90 0.93 1.56 0.97 1.04 0.80 126 0.90 1.30 8.70 7.37 Q4 2012 1.35 95 1.00 1.53 1.01 0.99 0.76 128 0.88 1.35 9.00 7.50
Dollar to stay lower for longer Changes to our G10 FX forecasts from those published in our March Global Outlook are quite modest. They entail slight upward revisions to our EURUSD forecasts (EURUSD now seen peaking between 1.50 and 1.60 and not starting to turn lower until well into 2012). USDJPY stays lower for longer as does USDCHF. We continue to work on the assumption that the second act of the Greek fiscal drama will be resolved in a manner that will be positive for EUR. This, then, begs the question "what, other than the return of extreme risk aversion, will stop the dollar rot?" The most commonly heard responses are "The end of Fed QE2" and "the onset of Fed policy normalisation". We doubt that the end of QE2 will have significant implications for USD unless it presages a much deeper sell off in risk assets and the return of US capital back home. This is possible, but we think QE2 has been sufficiently well-anticipated to pass without major disruption. Also, since US banks have been reducing rather than increasing their USD lending abroad since QE2 commenced, there is no basis for supposing that USD liquidity will be much less plentiful once QE2 ends. This has already been happening. And (or if) QE has worked to suppress USD via lowering US Treasury (USTs) yields (the Fed estimates that 10yr bonds yields are 30bp lower as a result of QE), then the effect should remain in place until the Fed starts shrinking its balance sheet and selling USTs back to the market. This is unlikely to occur on a meaningful scale for a year or more. Also, we expect that the onset of Fed policy normalisation will not commence in earnest at least until H2 2012, while the ECB, in our current forecast, is seen lifting rates somewhat faster and further than currently discounted. Consequently, relative ECB and Fed policy dispositions are not going to be riding to USDs rescue anytime soon.
Source: Bloomberg, BNP Paribas *as of June 20
Chart 2: EURUSD vs. Asian Reserves + US M1

1 .6 0 1 .5 5 1 .5 0 1 .4 5 1 .4 0 1 .3 5 1 .3 0 1 .2 5 % Y o Y C h g . o f A s ia n r e s e r ve s + U S D M 1 1 .2 0 06 07 08 09 10 11 2 .5 E U R /U S D ( L H S ) 2 2 .5 2 0 .0 1 7 .5 1 5 .0 1 2 .5 1 0 .0 7 .5 5 .0
Source: Reuters Ecowin Pro, BNP Paribas
This leaves us searching for other catalysts that might at least bring about a stabilisation in USD earlier than 2012. Our prime suspect would be a slowing in the pace of global FX reserves growth, and hence, declines in the demand for alternatives to USD as reserves are recycled. However, the timing of this is highly uncertain and does not provide a reliable basis for forecasting a meaningful turn in USD in H2 2011. Even if reserves growth slows, this may finally provide an opportunity for reserve managers to start actively reducing the USD share of total holdings (they have been at a stand-still in the past few years). There may be no meaningful let up in the supply of USD from official sources. As for USDJPY, it looks likely to remain weak. USDJPY will continue to be driven by the evolution of the spread between Japanese and overseas bond yields, USTs in particular. This has put renewed pressure on the pair as US yields fell to re-price the
Ray Attrill FX Weekly
US growth outlook. When US yields start to rise as Fed policy normalisation starts to be priced in with greater confidence, USDJPY gains are likely to be amplified by the incentives this creates for a reduction in hedge ratios on foreign bond holdings by Japanese investors. This process, however, looks to be at least six months away, and so, a recovery in USDJPY appears unlikely before very late in 2011 at the earliest. Perceptions of the CHF as the only true safe-haven currency have made it the most attractive "anti-USD"
and "anti-EUR" trades; driving the currency up to an extreme level in REER terms. Yet the economy has not suffered. Rising incomes in local markets, and the strength of the German economy, have seen the income effect on demand for Swiss exports dominate the substitution effect from higher prices. We expect the SNB to tolerate CHF strength, particularly after the costs of its ill-fated 2010 interventions. EURCHF should nevertheless derive some benefit from the anticipated resumption of EURUSD appreciation.
Rumours of AUD Demise Much Exaggerated

Markets complacent on RBA tightening risk
6 2 .5
Chart 1: AUDUSD versus China PMI

1 .1 0 1 .0 5 C h in a P M I 1 .0 0 0 .9 5 0 .9 0 0 .8 5 0 .8 0 0 .7 5 AUDUSD 0 .7 0 0 .6 5 0 .6 0 07 08 09 10 11 6 0 .0 5 7 .5 5 5 .0 5 2 .5 5 0 .0 4 7 .5 4 5 .0
China slowdown could be quickly reversed STRATEGY: Buy 3m RKO GBP Put/AUD Call Strike at 1.5350, Knocks Out at 1.4500. Sell 3m GBP Call/AUD Put Strike at 1.6400. Zero Cost Structure (Spot Ref: 1.5300 on June 21)
RBA has not done a complete back-flip AUD has been subject to a series of "wobbles" in recent weeks. If it wasn't affected by periods of "risk-off" market sentiment centred on Greek fiscal travails, then it was affected by episodes of oil and other commodity price weakness associated in part with fears that Chinese growth, and hence commodity demand, will slow significantly. We have also witnessed an apparent change of tune by the RBA between its May and June meetings. In May, the RBA signalled that a resumption of monetary policy tightening may not be far off, but in June, it appeared to soften its stance. The Board cited evidence that some parts of the economy were experiencing softer growth (partly a result of past exchange-rate appreciation and prior RBA rate rises) as well as somewhat more elevated concerns about global growth risks, centred on European sovereign debt problems. We suspect markets are too complacent about the risks of the RBA resuming policy tightening in coming months. We are also less concerned than many in the market about a Chinese growth slowdown dragging commodity prices sharply lower and bringing renewed pressure to bear on commodity currencies. In particular, our commodity analysts consider that demand and supply conditions across a range of commodities (copper, aluminium and zinc in particular) will warrant higher, not lower, prices later this year and in 2012. In addition, the limited likelihood of any early resumption of full-scale Libyan oil production will likely keep oil prices at or above current levels for the remainder of 2011. Our China economists meanwhile, acknowledge that growth has slowed in Q2, and partly as the result of past monetary tightening measures (qualitative restrictions on bank lending in particular), they consider it likely that some current lending restraints will be relaxed as early as Q3 to ensure that growth remains close to 9% in 2011 overall and through 2012.
4 2 .5 4 0 .0 3 7 .5
Source: Bloomberg, BNP Paribas
Chart 2: AUD TWI versus Terms of Trade

1 .7 1 .6 1 .5 1 .4 1 .3 1 .2 1 .1 1 .0 0 .9 0 .8 0 .7 97 99 00 01 02 03 04 05 06 07 08 09 10 A U D T W I (rh s ) A u s tr a l ia T o T 115 110 105 100 95 90 85 80 75 70 65
The RBAs growth and inflation forecasts foresee the recent fall in growth from the devastating floods and other climatic events as giving way to growth at or above trend during its forecast horizon. It also considers that inflation is likely to rise in underlying terms from here, potentially threatening the top of the 2-3% inflation target range towards the end of the forecast horizon. It is, therefore, implicit in the Boards forecasts that interest rates will need to be higher at some point, yet money markets currently price in virtually zero chance of a rate rise in the coming twelve months. During a Q&A session after a speech on 15 June, RBA governor Stevens drew attention to the importance of upcoming (Q2) inflation data due at the end of July as bearing on the RBAs policy thinking. Were this to show a significant rise in the RBA's preferred underlying measures, expectations for an early resumption of tightening could quickly surface. As a result of the June minutes, we have pushed our next tightening call out to October, but this is still a more hawkish view than priced by money markets. On our current working assumption that Greece will buy-in to the outline agreement for a new aid package, which
would then be expected to see the euro rally, we are not expecting the recent dip in AUDUSD to extend much further. During Q3 and into Q4, we look for AUDUSD to strengthen back towards its previous highs around 1.10 and for this level to be exceeded during Q4. From a trading perspective, we particularly favour GBPAUD retesting its prior low of 1.5040 during Q3 and foresee a new low in the mid/high 1.40s in coming months. As a footnote, the Russian central bank (CBR) announced its intention to include AUD in FX reserves from September (to the equivalent of about
1% or USD 5bn.). This could provide some additional support to AUD versus some existing CBR reserve currencies, which currently includes GBP. Trade idea: 1) Buy 3m RKO GBP Put/AUD Call Strike at 1.5350, Knocks Out at 1.4500. 2) Sell 3m GBP Call/AUD Put Strike at 1.6400. Zero Cost Structure (Spot Ref: 1.5300)
BoE Minutes Suggest More GBP Weakness

June MPC minutes show concerns trumping inflation worries economic Chart 1: UK contributions to GDP (pp y/y)
More chance of QE3 than early rate rise STRATEGY: We still favour strategic GBP shorts on various crosses
On hold for a long time The BoE minutes reaffirmed our expectation that the Bank will keep rates on hold for a long time (through 2012). Following the departure of the most hawkish BoE member, Andrew Sentance, the overall tone of the BoEs discussion has become more dovish. Recently, the BoEs King and Fisher have both expressed more dovish views, with Fisher suggesting more QE is not ruled out. Inflation is rising but the economic recovery has been lacklustre, to say the least. Signs of improvement look to be far out of sight. And so, with the BoE on hold for a long time, GBP weakness is likely to take hold mostly on the crosses. We suggest long EURGBP and short GBPNOK positions. We also reiterate our short GBPAUD view. The divergence in central bank policy should keep the GBP under pressure against these currencies. The BoE is facing high inflation and low growth. Business investment remains weak and the government continues to cut spending. Net trade seems to be the saving grace and the main driver of the UK economy, contributing 1.7pp to GDP in Q1 2011. This is the highest contribution from net trade to GDP since the quarterly national accounts were introduced in the 1950s. As for spending, nominal indicators show that it has been robust despite the weakness in money and credit growth. The minutes noted that M4 lending had not grown at all since the beginning of 2010, while lending to private nonfinancial companies had continued to fall. It was not yet clear whether the reported increase in nominal spending in Q1 had been associated with a reduction in saving or increased income. With M4 subdued, the fear is that nominal GDP growth will decelerate. The key remedy for weak M4 growth would be more QE. While this may be considered blasphemy given high inflation, QE would compensate for the lack of lending. Concerns over M4 growth, muted wage growth and nominal GDP all suggest that another round of QE by the BoE cannot be ruled out. While it is too early to make such a judgement call, it is clear that a rate hike is far off. Thus, GBP weakness is
Mary Nicola FX Weekly
Chart 2: GBPNOK vs. Relative Rate Expectations
almost inevitable and the export sector, which has been buffering the economy, will receive an added boost. Thus, the divergence in monetary policy between the BoE and other central banks such as the ECB, RBA and Norges Bank implies that relative rate expectations should work in favour of the EUR, AUD and NOK against the GBP. We expect the ECB to hike 25bp every quarter, the RBA to hike in October and the Norges Bank to hike in September with a risk it delivers in August. Such actions are not fully priced into local money markets, while a rise in UK interest rates within the next year is unlikely. While all roads seem to point to a weaker GBP, there are three main risks to this view: lower EURUSD, higher inflation expectations and FDI flows. While we expect EURUSD to rally to 1.55 by year-end, any weakness on the back of peripheral news could trigger a lower EURUSD. With EURGBP and EURUSD so strongly correlated, any downside to EURUSD could drag EURGBP lower.
The BoE noted that inflation would "probably rise above 5% before subsiding". This could push inflation expectations up, forcing the MPC to act sooner than desired. However, in the context of ongoing economic weakness, higher rates dont guarantee a stronger currency. Finally, there is talk of the government selling its stakes (or at least part of its stakes) in RBS and
Lloyds Banking Group. The Kuwaiti Sovereign Wealth Fund (KIA) has said it may be interested; however, UK Chancellor Osborne has said any sale of bank assets will have to wait until the Independent Commission on Banking completes its final report (not due until the end of September). So, any support for the GBP from FDI inflows would not come until Q4 at the very earliest.
Mary Nicola FX Weekly
Disinflation Expectations to Spur USD

The USD may be broadly stronger vs. G10 in the weeks ahead as the FX market has no clarity on what the Fed will do after the QE2 winddown. The latest FOMC statement has made this judgement all the more confusing: economic growth forecasts were downgraded but the Fed refrained from employing a duration effect for the balance sheet. Further disappointment and continual unwinding of inflation expectations in the weeks ahead could support the USD by default. We hold on to our AUDUSD put spread. Chart 1: Real US Yield vs. Fed Balance Sheet
The 22 June FOMC statement and ensuing press conference from Chairman Bernanke only underlined our economists view that the bar for QE3 remains very high. The committee disappointed those hoping for a stronger commitment to the current policy stance once QE2 ends next week. There was no application of the duration effect (extended period language) to the size of the Feds balance sheet size, let alone a commitment to extend the average duration of bond holdings as maturing assets are reinvested. On the one hand, the Fed lowered its growth forecasts for the next two years. On the other, it still sees the recent slowdown as being partially driven by temporary factors. The uncertainty over growth indicators has prevented the Fed from making any big move one way or the other. Should forwardlooking indicators of growth remain soft, disinflationary expectations could take further hold. We note with interest that the US 5Y TIPS inflation expectation has already broken out of its recent uptrend, just as occurred last year between QE1 and the signalling of QE2. This at the margin increases the conviction of a USD rebound. USD corrects higher as US inflation expectations correct lower? We can reasonably clearly link the rally in the US dollar between the end of QE1 and the signalling of QE2 over the second quarter of 2010 to US inflation expectations. Having suffered a disinflationary shock from the financial crisis in 2008, the Fed decided to expand its balance sheet by initially buying mortgage backed assets in 2008, moving on to purchases of US Treasuries in early 2009. As the Fed did QE1 and thereafter signalled QE2 in l ate August 2010
Kiran Kowshik FX Weekly
Source: Bloomberg, BNPP. The chart shows US inflationadjusted yield set against the Feds balance sheet (the US condition of all Fed Reserve total bank assets), shown here in inverse. As the Fed began expanding its B/S after the financial crisis in end 2008, the US 5Y real yield steadily declined. This was even the case when Bernanke signalled a B/S expansion three months in advance in August 2010. Lower real yields hurt the USD given that inflows matter for financing its C/A deficit.
Chart 2: Inverse Relationship between USD and Inflation Expectations Not New
Source: Bloomberg, BNPP. The chart shows the Feds TW broad USD index set against 1Y-ahead inflation expectations from the University of Michigan survey from 1997. It shows a reasonably strong inverse relation between the USD and inflation expectations. With survey measures of inflation looking jittery at elevated levels in the transition period from QE2 wind-down in June to the unknown, USD could certainly garner much support based on this, as happened in previous cycles (dotted in red).
before following up on it in November 2010, nominal yields continued to fall. However, inflation expectations continued to rally in a big way, taking real yields closer to zero (Chart 1). Falling real yields tend to undermine currencies of countries operating C/A deficits, such as the USD, as they require an attractive real rate of return to lure financing. Chart 2 demonstrates that this relationship has been in place for close to 15 years by comparing the Feds broad measure of the real
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USD and 1Y University of Michigan survey measure of inflation expectation. The latest reading showed inflation expectations at 4.0% in June, down from 4.6% in April. Recall that this measure dropped from 3.2% in May 2010 to 2.2% in September 2010 before moving higher following the QE2 signal from Bernanke. Why USD can correct by default even if the Feds balance sheet remains large The Federal Reserve subscribes to the stock view, whereby even maintaining the size of the Feds balance sheet will keep nominal bond yields low. While this may be true, what matters for the US dollar is the markets expectations on future monetary policy and whether the Fed will do more (rather than less). This link comes through inflation expectations; this time last year, when the market was jittery over what would happen after QE1, note that US 5Y inflation expectations corrected from over 2% at the end of April to a low of 1.11% on 25 August just two days before Chairman Bernankes landmark Jackson Hole speech in which he signalled the need for QE2. Returning to the present, a similar correction has begun with the 5Y TIPS falling about 60bp since the end of April. This has coincided with a USD rebound which under this framework makes already-negative real US yields less negative. Chart 2 shows this using 2Y real yields and the dollar index. STRATEGY: Stick with July 21 1.05/1.01 AUDUSD Put Spread While the fear of the unknown has become priced into several prominent G10/USD crosses, the relative steepness of the AUDUSD implied volatility curve has us feeling very uncomfortable in the current environment, where the provision of USD liquidity could slow. As a consequence, while we dislike being bearish towards the AUD on a standalone basis (seeing GBPAUD lower for instance), AUDUSD could struggle and indeed come under pressure should the USD firm up in the next few weeks. We stick with our 21 July 1.05/1.01 AUDUSD put spread in our medium-term recommendations list. The position marks to market positively at 1.08% AUD with 28 days left to maturity (spot ref 1.0510). The trade needs to end at 1.0390 at maturity to break even. This is plausible even if we believe the USD will regain some of its lost ground in the weeks ahead.
Chart 3: DXY Trough Coinciding with US Real Yield Trough?
Source: BBG, BNPP. Chart 3 plots the US 2Y real yield and the dollar index from mid-2010 on a daily basis. It shows that both troughed around the same time in end-April; the yield at -2.05%, and the DXY below 73. Both have been rising ever since, and with signs of weakness in several soft commodities, lower inflation expectations even as US nominal yields remain stationary suggest that the USD can continue to gain ground by default.
Kiran Kowshik FX Weekly
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CEEMEA: FX Forecast Revisions

Since our last quarterly publication, we have made some slight revisions to our CEEMEA FX forecasts in line with the new challenges and opportunities facing global and local markets. The main modifications have been made to the TRY, RUB, EGP and RON. In Turkey, while we remain positive on the currency in the coming quarter, we have adjusted our forecasts to give an overall weaker picture given risks to the current account and the onset of the hiking cycle. Capital outflows in Russia present a risk to the rouble ahead of the elections. We have adjusted our EGP forecasts for the next quarter to account for the moderation in capital outflows seen. Romanias exposure to Greece and a weak performance of CDS argue for less appreciation than we expected previously.
Source: Reuters EcoWin Pro, BNP Paribas
Chart 1: TRY the Regional Underperformer
Chart 2: Capital Outflows Pressure RUB

40 20 0
Q1'09 Q3'09 Q1'10 Q3'10 Q1'11 Q3'11 Q1'12 Q3'12 CurrentaccountSurplus(USDbn)
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Since our last quarterly publication, we have made some slight revisions to our CEEMEA FX forecasts in line with the new challenges and opportunities facing global and local markets. CE3 currencies are broadly unchanged from our previous forecasts and this is also the case with the Israeli shekel and the South African rand. The main modifications have been made to the TRY, RUB, EGP and RON. We outline the reasoning and assumptions behind the changes in the following sections. Global outlook Along with the individual idiosyncrasies of each country within the CEEMEA region, our forecasts have been conducted in line with our house view of the global economy. Namely, the current economic slowdown seen across regions is perceived as a temporary soft patch with global growth expected to start picking up towards the end of the year. With regard to inflation, we believe that supply-side shocks from energy and food will diminish in the second half of the year. With regard to a resolution to the Greek crisis, we work with the assumption that a deal will eventually be agreed and that the eurozone will be able to buy itself some more time although still not addressing the underlying problem. We also think that the end of
Dina Ahmad FX Weekly
40 60 80
Source: BNP Paribas
NetCapitalOutFlow(USDbn)
Chart 3: Romania CDS versus EURRON
QE2 has been well anticipated by markets. Therefore our house view doesnt forecast a significant sell-off in risk assets.
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Turkey The bulk of the changes to our forecasts involve the Turkish lira although these are not drastic amendments. We have opted for a slightly weaker projection over the next couple of years than our previous forecasts although we expect an appreciation in the lira versus the US dollar for the next couple of quarters from the current level (1.60). The lira has been one of the main underperformers in the region in Q2. This is particularly due to the CBRT being perceived to be falling further behind the curve as well as the still-gaping current account deficit. It has become evident that the authorities are committed to tackling the gap, along with soaring credit growth, but are opting to do so via macroprudential measures such as increased costs for banks that exceed a certain threshold for consumer loans. Nonetheless, we still expect the CBRT to begin its tightening cycle in Q3 via more orthodox measures. The risk is that it will not deliver the 125bp in rate hikes that we expect by the end of the year. The central bank has also said that it would not hesitate to shore up the lira if it were to come under significant weakening pressure again (e.g. by stopping its daily USD purchases and/or rate hikes). As such, we remain positive on the currency for the coming quarter, acknowledging that the current account remains an issue in the medium term. Russia Ahead of the elections in Russia (set to take place in December 2011 and March 2012), sizable capital outflows have served to keep a lid on rouble appreciation in the second quarter. We expect further outflows (we forecast a USD 30bn total for the year) to keep the currency under pressure in the next couple of quarters. This should also counter the effects of the higher oil prices we expect in the next quarter. Additionally, we expect inflation to slow significantly in the second half of the year on the back of base effects; this will probably prompt the CBR to delay aggressive tightening yet again. In light of this, we have revised the rouble weaker against the 45:55 EURUSD basket for H2 2011 and now expect it to end the year at 34.00/basket.
Egypt Given the political turmoil in Egypt seen from the start of the year, we revised our profile for the EGP lower last quarter, foreseeing sizable capital outflows and current account deterioration putting pressure on the currency. While there was significant pressure on the CBEs FX reserves from foreign investors pulling out of Egyptian equities, this abated faster than we expected. Also, in light of the recently arranged IMF programme, the CBE is now in a stronger position to counter substantial EGP weakness. In this respect, we no longer see the EGP finishing above 6.00/USD next quarter. But we do expect some pressure on the currency along with increased volatility ahead of the September elections. We continue to see an appreciation in the currency in 2012 and 2013 as foreign investment and economic growth return to the country. Romania We have adjusted the profile for EURRON to be slightly weaker in 2012 than our previous forecast although we still expect appreciation in the leu versus the EUR in H2 2011. The NBR had said that it was comfortable with a stronger currency earlier this year. However, nervousness over Greek debt left the leu particularly vulnerable in Q2 given Romanias exposure to Greek banks as well as relative positioning in the currency. The countrys exposure to Greek banks represents a significant weakness in its financial sector. Note that banks with Greek capital comprise approximately 17% of assets in the Romanian banking sector. Greek subsidiaries have a higher-than-average solvency ratio in Romania but we have seen, through the performance of Romanian CDS over the last quarter, that Romanian assets remain vulnerable to shifts in market sentiment particularly on Greece. Chart 3 shows that the correlation between Romanian CDS and EURRON is significant. Sovereign CDS in Romania (as well as Bulgaria) has underperformed that of the rest of the CEEMEA region and this can be partly attributed to exposure to Greek debt. As such, we foresee less appreciation in the RON than we did in our previous forecasts and look for a weaker profile overall in 2012.
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EURPLN EURPLN* EURRON EURRON* EURCZK EURCZK* EURHUF EURHUF* USDILS USDILS* USDTRY USDTRY* USDZAR USDZAR* RUB Basket RUB Basket* USDEGP USDEGP*
* - Q3 FX forecasts
Q2 2011 3.95 3.98 4.05 4.25 24.5 24.2 280 267 3.40 3.42 1.54 1.60 6.90 6.80 32.50 33.46 6.10 5.95
Q3 2011 3.90 3.90 4.20 4.20 24.3 24.3 275 275 3.45 3.45 1.46 1.52 6.80 6.80 33.00 33.70 6.20 6.00
Q4 2011 3.80 3.85 4.15 4.15 24.5 24.5 275 275 3.50 3.50 1.52 1.50 6.60 6.60 33.30 34.00 5.95 5.95
Q1 2012 3.90 3.90 4.25 4.20 24.1 24.1 269 269 3.55 3.55 1.58 1.56 6.55 6.55 33.50 33.50 5.85 5.85
Q2 2012 3.85 3.85 4.15 4.25 23.9 23.9 265 265 3.48 3.48 1.64 1.59 6.60 6.60 32.50 33.00 5.80 5.80
Q3 2012 3.80 3.80 4.10 4.15 23.8 23.8 265 265 3.45 3.45 1.62 1.63 6.50 6.50 32.50 32.50 5.75 5.80
Q4 2012 3.75 3.75 4.05 4.10 23.5 23.5 260 260 3.40 3.40 1.60 1.65 6.50 6.50 32.00 32.00 5.65 5.75
Q1 2013 3.70 3.70 4.20 4.20 23.7 23.7 260 260 3.40 3.40
Q2 2013 3.60 3.60 4.20 4.20 24.0 24.0 255 255 3.40 3.40
Q3 2013 3.70 3.70 4.10 4.10 23.5 23.5 260 260 3.40 3.40
Q4 2013 3.70 3.70 3.95 3.95 23.3 23.3 260 260 3.45 3.45
1.65 7.20 7.00 32.00 32.00 5.60 5.70
1.67 7.10 7.10 31.50 31.50 5.50 5.60
1.69 7.00 7.00 33.00 33.00 5.50 5.60
1.69 6.90 6.90 31.50 31.50 5.50 5.50
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Asia Trip Report in Asia, Europe and US

Almost four weeks of marketing in Asia, Europe, London and the US has come to an end and it is safe to say that the wide ambit of clients we saw -- from corps to leverage to real money to sovereign wealth funds (as well as central banks and governments) -- are neither risk-on nor risk-off but are, generally speaking, risk-NON right now. No one seems to be at defcon one; but everyone concedes the one thing to fear most is the lack of fear itself. Positioning in risk is light. Fear of the gamma overhang from Europe to the US to China is definitional in portfolio management across the board, both on our books and the books of the market practitioners with whom we met. FX Exposure: We discussed at length in almost every visit the seasonality in Asia FX positioning and how this year is mapping much like last year -- not to mention five-year trend. There was strong agreement that functional out-return in the long Asia FX (much less the long EM Complex FX) trade was vitally dependent on getting the funding currency (or currencies) correct -- and right now, there is no north star to follow reliably down the funding currency path. A few were using Euro shorts, agreeing with our contention that Euro had seen the ranges (1.301.50) for the year in all probability. But with Sharpe Ratios generally negative to laggardly in directionless Northern Hemisphere summer months as it is, there was quite a lot of interest in our intraregional carry approach. Long ATMF INR v TWD puts for carry despite having to pay upfront premium -- with realized vol at 6 to 7% -- was well-received. Similarly so was long 3M MYR NDFs v CNY 3M NDFs, as correlation mapped so well between the currency pair. We discussed the use of DNTs in EURAUD as a good blow-up trade, especially as AUD will move in synch with EUR in most cases. Most liked paying AUD put spreads v AUD calls at zero cost as risk-on trades, though we relayed our cautiousness on this at present considering the recent global equity downdraft -- even if AUD OIS are still getting paid away and have tended to correlate well with an AUD bid. Paying USDKRW straddles at wide breakevens found a strong audience, as did payers in USDIDR straddles. IDR: There was quite a lot of discussion with real money managers over how to hedge their IDR bond holdings against capacity-short bogies, especially as rising onshore investor hurdle rates have augmented the onshore bid as yields have compressed. Most seemed to be still using NDFs to hedge their
Chart 1: MYRCNY 3M NDF vs MYRCNY Spot
Sources: BNP Paribas and Bloomberg
Chart 2: CNY 2-5Y ND IRS Flattened
Chart 3: HK-based CNY Deposit Base Outstanding and as % of Total HK Deposit
positions -- that is, buying USD v IDR. But they all noted how head-shakingly strong the onshore bid remains in Indonesia no matter. We pitched using 5Y IDR NDS -- ideally if yields approach 8% -- as an alternative to the likes of recaps, particularly with basis running as wide as -200 bp. The trouble here was that too few in the real money space have swap discretion -- their mandates often viewed swap
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usage as implicit leverage. Buying cheap protection - -133 to -135 were deemed good levels -- was discussed as an alternative hedge, too. Rates: On rates, we pushed butterflies and dislocation trades. Paying the belly in 2Y5Y10Y Korea or Singapore generally were liked, perhaps especially so in Singapore it seemed. Most concurred that the plumbing in Singapore is complicating curve mechanics. Short ends are compressed by MAS amidst their forward FX book activities -- a lot of clients, in fact, asked us to elaborate on our pet theory that the SGD NEER model is broken in a zero bound monetary policy world. The 5Y area is well-paid as banks hedge corporate issuance and the 10Y is received in synch with the US. The positive carry fly was well noted. We discussed at length 2-5Y CNY ND IRS curve dynamics and the liquidity dislocation there from May and continuing into this month. We discussed the dynamics of this as well, with corporate tax payments and bank RRR payments elevating the 7day Repo as the May risk-off trade saw the 5Y compress -- and causing curve flattening in tow. How to figure the right sequencing to put on a steepener has been the trick of the trade, however. China: A lot of inquiry arose during the trip re Beijing's recently reported absorption of bad loans from the provinces in the wake of the 2008 CNY 4tn stimulus package. Our head of NE Asia Trading, Stephane Houriez, provocatively wondered whether the recent days' bond sell-off might be related to that: Was Beijing quietly issuing non-tradable bonds as it did in the wake of the 1998-2005 bank NPL mess, he wondered? (Alas we may never know as those bonds have yet to appear in any government ledger in China!) China was, as always, a prominent point of discussion. The problematic provincial lending, reportedly geeked up with CNY 10tn in property borrowing, had a lot of people wondering whether a harder-than-soft China landing might be in prospect. We relayed that our discussions with Asian governments strongly suggested that they are quite concerned with weaker-than-not Anglo-Saxon growth going forward. That this prospect complicates their task of offloading a capacity build (both in terms of capital capacity and microeconomic capacity, i.e. inventory) down the line was complimented by a variety of anecdotes. Several senior real money managers relayed they'd heard from US retailers just these sorts of problems out of China for their businesses as well. The ramifications of all this for FX markets is no small matter. We pointed out -- as we have warned in our publications -- that China's efforts to "reflate" the globe by continually bidding against itself in markets from commodities to US Treasuries could be setting the stage for possibly weaker currencies down the line -- if not a moderated pace of FX appreciation -- especially if the overcapacity has to be offloaded into a slow-
growth West. Though not a base case for us now, we floated the notion that weaker Asia FX could prove a shock to a market system that has operated against a long-only Asia FX metric for a decade. (Consider alone the tactical effect on currencies if corporates alter at the margins their long Asia FX dynamic hedging.) We offered that this story could well unfold over the next 18 months; and that the lodestone that is the Chinese Renminbi was the kicker here as no one in Asia wanted to outpace Chinese currency valuation for fear of losing market share to the Peoples Republic. Other China Questions: How disinflationary Chinas over capacity build might be? Or how problematic and overstretched its shadow banking system the countrys closed capital account notwithstanding -- is, proved big questions on the minds of not a few of the investors with whom we met -- and especially so as China embarks on a political transition next year. (Indeed, on this front, we noted that post-Mao political transitions have not always been as smooth as the market may think, as Hua Guofeng's hand-off to Deng Xiaoping was contentious; Deng's hand-off to Jiang Zemin saw months of delay before Jiang assumed leadership over the military; and Jiang's hand-off to Hu Jintao saw significant internal party haggling between Jiang's shanghai interests and those outside of shanghai.) Our clients know well our long-held theme of finite investment capacity in the region; they were in agreement with us that there is an ongoing risk-free asset shortage across the globe, too. Interestingly, the risks derived from this state of play seemed a bit less thought through, however. We discussed at length how Asia's central banks sometimes seem to work overtime to compress vol across asset classes, again noting how often they end up bidding against themselves. That the effort has turned them into classic real money funds where they seek in almost all instances to absorb risk found strong agreement. (Asian central banks are 'PIMCO's without the profit motive', we often joke.) That the process of absorbing vol increases leverage on state balance sheets, however, is very worrying -a point several very senior hedge fund managers pointed out. The risk of market upset out of Asia, and particularly china, should not be ignored as such. CNH: Finally, we found strong interest in the evolution of the CNH market and its portents down the line for HKD. We went through the technicals of trading the market; we detailed the trades we like and the sort of trading we see. For what it is worth, few clients seemed concerned that a HKD depeg to the USD -- or repeg to a convertible FX basket, as the basic law prohibits pegs to inconvertible currencies like the CNY -- was imminent, much less in prospect. We outlined our theories on the use of the CNH market as a toll booth of sorts to help manage and better monitor offshore Chinese
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corporate cash flow back into the mainland. We discussed the benign effects of reducing sterilization costs for Beijing by establishing a deliverable market in CNY in Hong Kong. And we pointed out how, through the evolution of a HK-based CNY deposit base and market, Beijing shrewdly sets the stage for HK citizens to vote with their cash over time to use the CNY as a means of settlement in HK rather than the HKD. That this will see HKD deposits stagnate and fall over time was well understood, possibly stressing HKD-dependent parts of HKs banking sector. That it presents a prisoner's dilemma of sorts for Beijing to continue developing the CNH market was less understood -- even if not a few investors in Europe and the US thought the CNH market a bit "overhyped". We told clients to watch for CNY consumer lending to emerge in the territory before long; we suggested CNY-denominated mortgages in HK were not that far behind, either. Like the Asia market itself, the story was evolving; we are lucky to be working in markets like these at this point in history.
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Medium Term FX Recommendations

Hold July 21 1.05/1.01 AUDUSD Put
20 May 2011 Jul 21 1.05/1.01 put spread bought at 1.05%
AUDUSD 1.0560
ositively at 1.10% AUD with 27 days left to maturity. While we like nce via short GBPAUD- AUDUSD could still come under further USD rally in the weeks ahead. This as the FOMC pretty much s very high with core inflation rising (and not falling like last year), ding their growth forecasts over the coming two years. The ative steep consider the delicate balancing act in China on a bigger shakeout before considering booking profits on this rity is 1.0390.
Take Profit on Long GBPUSD-GBPJPY Vol

20 May 2011 Spread entered 4.4, 2.5 2nd target met
USDJPY 80.30
We are taking profit on our long GBPUSD-GBPJPY vol idea. Sold at 4.4 vols (6M GBPUSD Vol at 10.35%, GBPJPY Vol at 14.75%) the spread currently maps at 2.30 (GBPUSD at 10.59%, GBPJPY at 12.89 %), versus 2.99 (GBPUSD at 10.35%, GBPJPY at 13.34 %) last week. The spread has now taken out our 2.50 vol (second) target. The realised spread is currently at 4.09, and we note that in the past five years, the realised spread has never traded under 1.80 vols. While GBPUSD implied volatility could gain further on the coattails of EURUSD as the USD broadly rallies, we cant dismiss the risk of further Greek tension leading to a rout in JPY crosses either.
Short GBPAUD Via 3m Options

Long 1.53 put RKO at 1.45 Vs. Short 1.63 Call. Keeping in mind the choppiness that a carry trade like short GBPAUD can face on rising volatility, we opt 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. While wary of the vulnerability of the AUD to negative surprises from China, Premier Wens declaration of having vanquished the inflation bug along with the sharp uptick in the SHCOMP have us wanting to get long AUD selectively. Also, we suspect that markets may be too complacent of the risk of the RBA resuming its tightening cycle in coming months. This dovetails with our view that the potential of further QE in the UK may be under appreciated after last weeks very dovish BoE minutes release. 24 June 2011
GBPAUD 1.5165
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Long NOKSEK RKO MTM in the red as barrier closer

3 June 2011 Buy 2m 1.1485 call with 1.1905 RKO Suggested Aug 4 1.1485 RKO Call (barrier at 1.1905) now maps at 0.3000% with 40 days left, down from 0.5000% last week, which also the entry cost of option. After the Norges Banks relatively hawkish policy statement, not even yesterdays sharp slide in oil prices could derail enthusiasm for all things NOK. If oil price weakness can't hurt NOK, and with 1.18 taken out on NOKSEK, only periodic bouts of profit taking present downside risk. With 1.20 now a viable target, this in turn means that there is a sizeable risk of the 1.1905 KO being triggered on our moderately bullish NOKSEK options trade. We would look to book profits on any moderate correction. Trade was recommended at over a 50% discount relative to the vanilla alternative.
NOKSEK 1.1790
Sell GBPUSD Spot on a break

Sell on a break of 1.5930, target 1.5350 multi-month, stop-loss at 1.6285. We favour GBPUSD breaking sharply lower in the weeks and months ahead. Keeping in mind the choppiness that short GBP versus higher yielding currencies could face on rising volatility, short GBP versus USD, CHF and JPY come to mind as the few spot trades to more safely have on- even if we are faced with rising market volatility. Fundamentally, it also seems appealing to be long of a currency where further QE hopes look more distant (USD), and short the GBP just as in the UK, our economists while not forecasting more QE, see the risk as worth considering in light of very dovish BoE minutes released last week. We also note rising credit risks, with UK SOV CDS having sold off 10bps as forward looking growth indicators, like June CBI orders, continue to fall off a cliff. Our measures of real rates has plunged (see chart alongside) 24 June 2011
GBPUSD 1.6010
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Implied Option Volatility Analysis

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

23 22 20 19 18 16 15 14 13 11 10 9 7 6 1w 1m 2m 3m High/Low 6m 9m 12m
Current Imp. Vol.
Last Week Imp. Vol.
Current Imp. Vol.
Last Week Imp. Vol.
USDCHF Implied Volatility Curve and 1y highs & lows

17 15 14 13 12 11 9 8 7 1w 1m 2m 3m High/Low 6m 9m 12m
GBPUSD Implied Volatility Curve and 1y highs & lows

14 12 11 9 8 6 1w 1m 2m 3m High/Low 6m 9m 12m
Current Imp. Vol.
Last Week Imp. Vol.
Current Imp. Vol.
Last Week Imp. Vol.
AUDUSD Implied Volatility Curve and 1y highs & lows

21 18 16
USDCAD Implied Volatility Curve and 1y highs & lows
15 13 11
13
9
11 8 1w 1m 2m 3m High/Low 6m 9m 12m
8 6 1w 1m 2m 3m High/Low 6m 9m 12m
Current Imp. Vol. Last Week Imp. Vol.
Current Imp. Vol.
Last Week Imp. Vol.
*BNP Paribas FX Strategy: The above charts show the current volatility curves (1-week through to 1-year) for the major currency pairs in relation to the 1-year highs and lows for each of the tenor. FX Weekly
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Majors
EURUSD GBPUSD USDCHF OIL
0.52 0.48 0.48 0.34 0.09 0.4 0.11 0.03 0.81 0.65 0.49 0.58 0.3 0.25 0.56 0.51 0.16 0.38 0.36 0.02 0.19 0.39 0.14 0.09 0.38 0.65 0.74 0.84 0.09 0.21 0.58 0.34 0.05 0.5 0.27 0.11 0.05 0.23 0.11 0.07 0.14 0.5 0.38 0.02 0.54 0.45 0.17 0.5 0.47 0.07 0.42 0.4 0.03 0.35 0.42 0.22 0.01 0.14 0.32 0.01 0.12 0.53 0.35 0.15 0.45 0.3 0.01 0.06 0.29 0.25 0.01 0.18 0.01 0.33 0.36 0.04 0.25 0.29 0.15 0.01 High Current Low 0.13 0.17 0.24 0.12 0.08 0.28 0.31 0.05 0.15 0.18 0.11 0.23 0.17 0.02 0.28 0.22 0.29 0.22 0.14 0.44 0.15 0.13 0.25 0.05 0.22 0.08 0.08 0.21 0.18 0.3 0.57 0.1 0.32 0.45 0.350.35 0.54 0.58 0.71 0.23 0.09 0.52 0.24 0.08 0.36 0.14 0.17 0.56 0.22 0.06 0.68
Emerging Markets
AUDUSD USDCAD USDZAR
0.64 0.54 0.04 0.45 0.35 0.11 0.84 0.55 0.34 0.62 0.5 0.17 0.88 0.65 0.32 0.7 0.61 0.2 0.34 0.19 0.01 0.71 0.53 0.2 0.75 0.46 0.58 0.16 0.56 0.23 0.09 0.41 0.02 0.22 0.29 0.01 0.21 0.2 0.1 0.34 0.19 0.06 0.17 0.81 0.04 0.41 0.58 0.13 0.15 0.42 0.16 0.11 0.37 0.68 0.16 0.38 0.47 0.33 0.12 0.45 0.17 0.07 0.21 0.24 0.09 0.14 0.39 0.69 0.01 0.34 0.5 0.37 0.06 0.36 0.18 0.03 0.34 0.13 0.14 0.2 0.2 0.2 0.22 0.0 0.33 0.05 0.13 0.21 0.23 0.24 0.22 0.03 0.32 0.07 0.14 0.21 0.49 0.5 0.26 0.46 0.69 0.05 0.53 0.71 0.04 0.5 0.57 0.19 0.64 0.74 0.05 0.77 0.88 0.2 0.62 0.7 0.05 0.13 0.33 0.19 0.3 0.2 0.46 0.66 0.19 0.64 0.07 0.08 0.49 0.74 0.01 0.21 0.35 0.29 0.51 0.68 0.18 0.36 0.49 0.45 0.05 0.34 0.56 0.07 0.15 0.41 0.23 0.49 0.66 0.04 0.28 0.48 0.33 0.59 0.78 0.29 0.5 0.61 0.13 0.18 0.26 0.36 0.39 0.69 0.03 0.04 0.77 0.43 0.46 0.36 0.11 0.39 0.73 0.27 0.24 0.54 0.42 0.49
USDJPY
0.51 0.11 0.19 0.32 0.0 0.31 0.1 0.31 0.77 0.18 0.07
USDTRY USDHUF
0.23 0.41 0.64 0.01 0.01 0.04 0.43 0.53 0.08 0.15 0.37 0.55 0.7 0.78 0.27 0.2 0.47 0.27 0.62 0.68 0.26 0.53 0.59 0.1 0.16 0.22 0.29 0.5 0.59 0.09
USDPLN
0.01
Commodities
COPPER
0.09 0.33 0.18 0.04 0.87 0.78 0.68 0.5
0.52 0.57 0.03 0.17 0.34 0.57 0.7 0.85 0.27 0.25 0.57 0.34 0.59 0.76 0.29 0.51 0.62 0.11 0.13 0.24 0.29 0.46 0.62 0.03
GOLD
CRB
0.22 0.4 0.64 0.55 0.18 0.52 0.44
Bonds & Rates
EU 3m LIBOR
US 3m LIBOR
JP 10Y Yields
EU 10Y Yields
US 10Y EURO NIKKEI FTSE 100 SP 500 Yields NEXT 100 225
Equities
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
21
Economic Calendar: 27 June - 1 July

GMT Mon 27/06 08:00 08:00 10:30 12:30 12:30 15:00 17:00 23:50 (27/06) 06:00 Local 10:00 10:00 12:30 08:30 08:30 11:00 13:00 08:50 08:00 Italy Eurozone US Previous Forecast Consensus Wages m/m : May 0.1% 0.1% n/a Wages y/y : May 1.8% 1.8% n/a ECBs Stark Speaks in Berlin Personal Income m/m : May 0.4% 0.4% 0.4% Personal Spending m/m : May 0.4% -0.1% 0.1% Feds Kocherlakota Speaks on Leverage in Montana Feds Hoenig Speaks at Pew Charitable Trusts Financial Reform Project in Washington Retail Sales y/y : May GfK Consumer Confidence : Jul CPI (Prel) m/m : Jun CPI (Prel) y/y : Jun HICP (Prel) m/m : Jun HICP (Prel) y/y : Jun Housing Starts (3-mths) y/y : May Job Seekers (ILO def. sa) : May Retail Sales (sa) m/m : May Retail Sales (nsa) y/y : May PPI m/m : May PPI y/y : May ISAE Business Confidence Survey : Jun GDP (Final) q/q : Q1 GDP (Final) y/y : Q1 CPI m/m : Jun CPI y/y : Jun S&P/Case-Shiller Home Price Index : Apr Consumer Confidence : Jun Feds Fisher Speaks in Texas ECBs Trichet Speaks at Brussels Conference Industrial Production (Prel, sa) m/m : May -4.8% 5.5 0.0% 2.3% -0.1% 2.4% 27.6% -11k 1.6% 5.2% 0.6% 5.2% 101.3 0.5% (p) 1.8% (p) 0.3% 3.4% 60.8 -2.6% 5.2 0.1% 2.3% 0.1% 2.5% 11.0% -10k 0.9% 3.0% 0.1% 4.7% 100.5 0.5% 1.8% 0.2% 3.5% 58.0 -2.1% 5.3 0.1% 2.3% 0.2% 2.6% n/a n/a n/a n/a n/a n/a 100.5 0.5% 1.8% n/a n/a 61.5
Tue 28/06
Japan Germany
06:45 16:00 07:30 07:30 08:00 08:00 09:00 08:30 08:30 09:15 09:15 13:00 14:00 16:00 18:45
08:45 18:00 09:30 09:30 10:00 10:00 11:00 09:30 09:30 11:15 11:15 09:00 10:00 12:00 20:45
France Sweden Italy
UK Belgium US
Eurozone
Wed 29/06
23:50 (28/06) 05:30 05:30 07:00 08:10 09:00 09:00 09:00 08:30 08:30 09:30 11:00 11:00 14:00 14:30 23:01 (29/06) 06:45 06:45 06:45 06:45 07:00
08:50
Japan
1.6% 1.0% (p) 2.2% (p) -2.0% 48.8 105.5 4 -10 GBP0.5bn 45.2k 2.30 0.3% 3.3%
5.0% 1.0% 2.2% -3.5% 50.0 104.5 2 -10 GBP0.5bn 42.0k 2.23 0.3% 3.3%
5.5% n/a n/a n/a n/a 105.1 3 -10 GBP0.4bn 46.8k n/a 0.3% 3.3%
07:30 France GDP (Final) q/q : Q1 07:30 GDP (Final) y/y : Q1 09:00 Spain Retail Sales (Adjusted) y/y : May 10:10 Eurozone Retail PMI : Jun 11:00 Economic Sentiment : Jun 11:00 Industrial Sentiment : Jun 11:00 Consumer Sentiment : Jun Net Consumer Credit : May 09:30 UK Mortgage Approvals : May 09:30 11:30 Switzerland KOF Leading Indicator : Jun 07:00 Canada CPI m/m : May 07:00 CPI y/y : May 10:00 US Pending Home Sales : May 10:30 EIA Oil Inventories 00:01 08:45 08:45 08:45 08:45 09:00 UK France GfK Consumer Survey : Jun Household Consumption m/m : May Household Consumption y/y : May PPI m/m : May PPI y/y : May HICP Flash y/y : Jun
Thu 30/06
-21 -1.8% -0.1% 0.8% 6.4% 3.4%
-20 -0.3% -1.3% -0.1% 6.4% 3.4%
-24 n/a n/a n/a n/a n/a
Spain
FX Weekly
22
GMT 30/06 (contd) 07:00 07:30 08:00 08:00 09:00 07:55 07:55 08:00 08:00 09:00 09:00 09:00 09:00 12:30 12:30 13:00 13:45 17:00 Fri 01/07 23:30 23:30 23:30 23:30 23:30 23:30 23:50 (30/06) 07:00 07:30 08:00 08:00 09:00 08:30 13:55 14:00 14:00
Local 09:00 09:30 10:00 10:00 11:00 09:55 09:55 10:00 10:00 11:00 11:00 11:00 11:00 08:30 08:30 09:00 09:45 13:00 08:30 08:30 08:30 08:30 08:30 08:30 08:50 Eurozone ECBs Trichet Speaks at European Parliament Eurocoin : Jun M3 y/y : May M3 3m y/y : May HICP (Flash) y/y : Jun Unemployment (Chg, sa) : Jun Unemployment Rate : Jun Retail Sales (sa) m/m : May Retail Sales (nsa) y/y : May CPI (NIC, Prel) m/m : Jun CPI (NIC, Prel) y/y : Jun HICP (Prel) m/m : Jun HICP (Prel) y/y : Jun GDP m/m : Apr Initial Claims Feds Bullard Speaks on QE in St Louis Chicago PMI : Jun Feds Hoenig Speaks in Iowa CPI National y/y : May Core CPI National y/y : May CPI Tokyo y/y : Jun Core CPI Tokyo y/y : Jun Household Consumption y/y : May Unemployment Rate (sa) : May Tankan (Large Manufacturers DI) : Jun
Previous
Forecast
Consensus
Germany Norway Italy
0.62 2.0% 2.1% 2.7% -8k 7.0% 0.0% 11.4% 0.1% 2.6% 0.2% 3.0% 415k 56.6
0.50 2.3% 2.2% 2.8% -30k 6.9% 0.4% 10.3% 0.1% 2.7% 0.1% 3.0% 420k 53.0
n/a 2.2% 2.1% 2.8% -13k 7.0% 0.5% n/a n/a n/a n/a n/a n/a 54.0
Canada US
Japan
0.3% 0.6% -0.1% 0.1% -3.0% 4.7% 6 2.5% 59.2 8.5% 52.0 (p) 9.9% 52.1 74.3 0.4% 53.5
0.1% 0.5% 0.0% 0.4% -2.0% 4.6% -3 2.6% 58.0 8.3% 52.0 9.9% 53.0 72.0 -0.4% 51.0
0.1% 0.5% -0.1% 0.2% -1.8% 4.8% -7 n/a n/a n/a 52.0 n/a 52.5 72.0 0.1% 52.0
09:00 Norway Unemployment Rate (sa) : Jun 09:30 Switzerland PMI Manufacturing : Jun 10:00 Italy Unemployment Rate : Q1 10:00 Eurozone PMI Manufacturing (Final) : Jun 11:00 Unemployment Rate : May 09:30 UK CIPS Manufacturing : Jun 09:55 US Michigan Sentiment (Final) : Jun 10:00 Construction Spending m/m : May 10:00 ISM Manufacturing : Jun Eurozone Finance Ministers Meet re Greece Nationwide House Prices Index m/m : Jun Nationwide House Prices Index y/y : Jun
Sun 03/07 During Week 27-30
UK
0.3% -1.2%
0.2% -1.0%
n/a n/a
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
FX Weekly
23
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 Q2 '11 1.45 80 0.84 1.63 0.97 1.07 0.84 6.28 5.36 Q2 '11 116 0.89 1.22 9.10 7.77 7.46 Q2 '11 2.72 24.5 280 6.90 1.59 4.25 27.86 3.95 7.9 102 Q2 '11 1.23 3.00 8600 30.00 43.00 7.80 6.47 28.50 1070 45.00 20500 Q2 '11 4.10 1.60 465 11.70 1770 4.29 2.75 Q2 '11 74.21 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
FX Weekly
24
FX Global Strategy Contacts

Foreign Exchange
Raymond Attrill James Hellawell Kiran Kowshik Mary Nicola Drew Brick Chin Loo Thio Robert Ryan Jasmine Poh Gao Qi Bartosz Pawlowski Elisabeth Gruie Dina Ahmad Diego Donadio Senior FX Strategist Quantitative Strategist FX Strategist FX Strategist Head of FX & IR Strategy Asia FX & IR Asia Strategy FX & IR Asia Strategy FX & IR Asia Strategy FX & IR Asia Strategy Head of FX & IR Strategy CEEMEA FX & IR CEEMEA Strategist FX & IR CEEMEA Strategist FX & IR Latam America Strategist New York London London New York Singapore Singapore Singapore Singapore Shanghai London London London Sao Paulo 1 212 841 2492 44 20 7595 8485 44 20 7595 1495 1 212 841 2492 65 6210 3262 65 6210 3263 65 6210 3314 65 6210 3418 86 21 2896 2876 44 20 7595 8195 44 20 7595 8492 44 20 7595 8620 55 11 3841 3421 raymond.attrill@americas.bnpparibas.com james.hellawell@uk.bnpparibas.com kiran.kowshik@uk.bnpparibas.com mary.nicola@americas.bnpparibas.com drew.brick@asia.bnpparibas.com chin.thio@asia.bnpparibas.com robert.ryan@asia.bnpparibas.com jasmine.poh@asia.bnpparibas.com gao.qi@asia.bnpparibas.com bartosz.pawlowski@uk.bnpparibas.com elisabeth.gruie@uk.bnpparibas.com dina.ahmad@uk.bnpparibas.com diego.donadio@br.bnpparibas.com
Emerging Markets FX & IR Strategy
Production and Distribution please contact: Roshan Kholil, Foreign Exchange, London. Tel: 44 20 7595 8486, Email: roshan.kholil@uk.bnpparibas.com
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.
BNP Paribas (2011). All rights reserved.
FX Weekly
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Foreign Exchange

FX Weekly: Get us to the Greek (Budget)

FX Weekly Strategy: G10 Summary

Local Markets Strategy

Weekly Currency Summary

Converging Europe, Russia and Israel

Friday, 24 June 2011 http://www.GlobalMarkets.bnpparibas.com

Friday, 24 June 2011 http://www.GlobalMarkets.bnpparibas.com

Chart 1:BNP Paribas End-Quarter FX forecasts

Source: Bloomberg, BNP Paribas *as of June 20

Chart 2: EURUSD vs. Asian Reserves + US M1

Source: Reuters Ecowin Pro, BNP Paribas

Ray Attrill FX Weekly

Ray Attrill FX Weekly

Friday, 24 June 2011 http://www.GlobalMarkets.bnpparibas.com

Rumours of AUD Demise Much Exaggerated

Chart 1: AUDUSD versus China PMI

Source: Bloomberg, BNP Paribas

Chart 2: AUD TWI versus Terms of Trade

Source: Reuters Ecowin Pro, BNP Paribas

Ray Attrill FX Weekly

Ray Attrill FX Weekly

Friday, 24 June 2011 http://www.GlobalMarkets.bnpparibas.com

BoE Minutes Suggest More GBP Weakness

Source: Bloomberg, BNP Paribas

Chart 2: GBPNOK vs. Relative Rate Expectations

Source: Reuters Ecowin Pro, BNP Paribas

Mary Nicola FX Weekly

Friday, 24 June 2011 http://www.GlobalMarkets.bnpparibas.com

Disinflation Expectations to Spur USD

Chart 3: DXY Trough Coinciding with US Real Yield Trough?

Kiran Kowshik FX Weekly

Friday, 24 June 2011 http://www.GlobalMarkets.bnpparibas.com

CEEMEA: FX Forecast Revisions

Chart 1: TRY the Regional Underperformer

Chart 2: Capital Outflows Pressure RUB

Chart 3: Romania CDS versus EURRON

Source: Bloomberg, BNP Paribas

Friday, 24 June 2011 http://www.GlobalMarkets.bnpparibas.com

Dina Ahmad FX Weekly

Friday, 24 June 2011 http://www.GlobalMarkets.bnpparibas.com

1.65 7.20 7.00 32.00 32.00 5.60 5.70

1.67 7.10 7.10 31.50 31.50 5.50 5.60

1.69 7.00 7.00 33.00 33.00 5.50 5.60

1.69 6.90 6.90 31.50 31.50 5.50 5.50

Dina Ahmad FX Weekly

Friday, 24 June 2011 http://www.GlobalMarkets.bnpparibas.com

Asia Trip Report in Asia, Europe and US

Sources: BNP Paribas and Bloomberg

Chart 2: CNY 2-5Y ND IRS Flattened

Sources: BNP Paribas and Bloomberg

Chart 3: HK-based CNY Deposit Base Outstanding and as % of Total HK Deposit

Sources: BNP Paribas and Bloomberg

Friday, 24 June 2011 http://www.GlobalMarkets.bnpparibas.com

Medium Term FX Recommendations

Take Profit on Long GBPUSD-GBPJPY Vol

Short GBPAUD Via 3m Options

Friday, 24 June 2011 http://www.GlobalMarkets.bnpparibas.com

Long NOKSEK RKO MTM in the red as barrier closer

Sell GBPUSD Spot on a break

Friday, 24 June 2011 http://www.GlobalMarkets.bnpparibas.com

Implied Option Volatility Analysis