Daily Currency Briefing

July 12, 2011

Euro under fire

G10 Currencies
EUR-USD: There only seems to be one direction in EUR-USD at present and that is down. This morning the currency pair slipped well below 1.40. Efforts to try and produce a bailout package for Greece more quickly now do not seem to convince the financial markets. And why should they? All the parties seem to produce are declarations of intent while the contentious issues have not been clarified. In the case of Greece this is the involvement of the private sector. Moreover yesterdays Eurogroup statement made it clear once again that the Ministers of Finance continue to assume (at least officially) that Greece will be able to pay back all its debt. The financial markets increasingly seem to interpret this optimism as helplessness. Market participants have already made it clear that they do not believe in a long term rescue of Greece. The probability of a default based on credit default swaps has risen to above 87%. The insurance against a default of Greek bonds over the next 5 years costs almost 24% per annum of the total sum insured and therefore more than the total nominal over the entire period. Financial markets are now homing in on Italy. That illustrates that the current EFSF funds would be insufficient even following the recent top-up. As those responsible seem to struggle to come to an agreement regarding Greece the markets are sceptical whether it would be possible to find a solution for Italy at all should the situation deteriorate. As a result the danger of a collapse of the euro has increased considerably. EUR-USD risk reversals (the price difference between a EUR-USD call and a EUR-USD put) temporarily fell to the lowest level of all times last night. Hedges to the downside in EUR-USD are getting increasingly expensive. There is little hope at present that the crisis of confidence in Europe will be solved any time soon. As a result the euro is likely to remain under pressure. Protection against EUR-USD weakness is getting increasingly expensive EUR-USD, 1M risk reversals, 25Delta, annualized volatility in percentage points
Lutz Karpowitz +49 69 136 42152 lutz.karpowitz@commerzbank.com

2,5 1,5 0,5 -0,5 -1,5 -2,5 -3,5 Jan 07

Source: Bloomberg

Jul 07

Jan 08

Jul 08

Jan 09

Jul 09

Jan 10

Jul 10

Jan 11

Jul 11

CHF: It hardly comes as a surprise that the Swiss franc marked a new high against the euro yesterday. Since the weekend the risk of interventions should be off the agenda as SNB president Philipp Hildebrand said he saw no necessity to take action against the strong franc. That makes sense as the only reason why the SNB intervened on the markets in 2009/2010 was the risk of deflation. As there are no such dangers for the Swiss economy at present there is no necessity to intervene on the markets. As long as market sentiment remains depressed, there is a risk of the franc marking new highs.

You-Na Park +49 69 136 42155 you-na.park@commerzbank.com

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Daily Currency Briefing

GBP: The past 2 trading sessions have seen relentless selling of EUR-GBP alongside heavy selling pressure against most EUR crosses. As the Eurozone lurches from crisis to resolution and back again, sterling begins to look like a safe haven. However such an impression is incorrect and data released later this morning should give us an idea why. The trade balance for May is expected at -27 billion along with an expected CPI reading for June at +0.2% month on month and +4.5% year on year. Poor data prints should continue to underpin broader GBP weakness and the recent bout of GBP strength is again a reflection of investor concerns about the Eurozone rather than a vote of confidence in the UK economy. An important level to watch in EUR-GBP is 0.8720 on the downside. AUD: The AUD is not having a totally easy time at present. First of all concerns about the debt crisis are putting pressure on general market sentiment and the AUD is always quite sensitive towards a rise in risk aversion. The Julia Gillards government is planning to introduce a very contentious carbon tax in July 2012 which will have to be paid by roughly 500 Australian companies and this has put pressure on the share prices of large Australian companies. Moreover inflation in China rose more notably than projected causing concerns about a continued rise of interest rates in the country and that the economy in the China therefore could cool down, which in turn could affect the Australian economy negatively. The negative factor of deteriorating market sentiment is not going to disperse that quickly. And there is likely to be more trouble on the horizon in the form of the data publications tonight: FX markets expect growth rates of +9.3% qoq in Q2 in China, but in our view there is potential for disappointment as falling import figures and a small fall in the PMI and industrial production point towards weakening growth momentum in China (albeit on no account towards a hard landing). As a result the AUD might come under renewed selling pressure. We therefore urge caution with new long positions in AUD-USD short term, as a test of the area at 1.0500-50 seems likely. SEK: The current market environment with its risk off attitude is clearly poison for the SEK which reacts sensitively to a deterioration in market sentiment, just like the AUD. The Swedish inflation data for June is unlikely to support SEK today. First of all economic data has taken the back seat compared with market sentiment and secondly CPI data is likely to have fallen, which in turn is likely to put a question mark over current rate expectations. A renewed test of the upper end in EUR-SEK at 9.24 and in case of continued bad market sentiment even of 9.27 is therefore well within the realms of possibility. In line with that NOK-SEK is likely to once again test the level of 1.19. However, we stick to our view that such levels in SEK are not justified from a fundamental point of view and if anything we are thinking of SEK longs.

Peter Kinsella +44 20 7475 3959 peter.kinsella@commerzbank.com

Antje Praefcke +49 69 136 43834 antje.praefcke@commerzbank.com

Antje Praefcke +49 69 136 43834 antje.praefcke@commerzbank.com

Emerging Market Currencies

CZK: Against the background of the Eurozone debt crisis todays inflation data is likely to become a non-event. It is expected that the inflation rate will have risen slightly from 2.0% to 2.1% yoy. As a result the inflation environment in the Czech Republic still remains the most benign in the region. The central bank is therefore likely to wait until Q4 before raising interest rates. For now the koruna is likely to remain in the wake of the debt crisis. In the process it is likely to live up to its reputation as a safe haven in Eastern Europe. Its losses against the euro yesterday were relatively small compared with PLN, HUF and RON. At the same time the appreciation potential is limited in case of a drop in risk aversion. At the lower end 24.04 should provide support in EUR-CZK short term. BRL: Brazil seems to be unwilling to completely abandon the fight against a strong real. The central bank has announced that Brazilian banks will have to submit a deposit with the central bank for dollar shorts above a volume of USD 1bn. whereas previously the threshold had been USD 3bn. At the start of trade the real depreciated notably, which was however mainly due to the deteriorating sentiment on the financial markets. In the past the dampening effect of measures such as these only had a temporary effect on the real. Over the coming days the real is however likely to struggle as market uncertainty is probably going to continue.
Thu Lan Nguyen +49 69 136 82878 thulan.nguyen@commerzbank.com

You-Na Park +49 69 136 42155 you-na.park@commerzbank.com

12 July 2011

Daily Currency Briefing

Todays Events
Time 00:01 05:20 07:00 08:00 08:00 08:30 09:30 12:00 13:30 19:00 Region Indicator GBP JPY GER CZK HUF SEK GBP ZAR USD USD RICS housing market index Interest rate decision Consumer prices Consumer prices Consumer prices Consumer prices Consumer prices ex energy, food alcohol Industrial production Trade balance Fed minutes Period Jul Jul Jul Jul Jun Jun Jun Jun Jun Jun Jun Jun May May May % mom yoy mom yoy yoy mom yoy mom yoy mom yoy bn USD Actual
-27,0 0,10

Our Forecast
0,10

Survey
-24,5 0,10

Last
-28,0 0,10

Direction

Cross

+0,1 +2,3 +0,1 +2,1

+0,2

+0,1 +2,3 +0,5 +2,0

+0,2

+0,2

-44,0

+3,8 -0,1 +3,2 +0,2 +3,3 +1,4 +2,4 -43,8

+3,9 +0,2 +3,3 +0,2 +3,3 -3,7 +0,4 -43,7

Important Market Data

FX Current Change (%) Last trading day's high Last trading day's low FX Current Change (%) Last trading day's high Last trading day's low FX Current Change (%) Last trading day's high Last trading day's low FX Current Change (%) Last trading day's high Last trading day's low Forwards / Options EUR-USD 3M Money Market Rate (%) Bonds / Bond Futures Yield (%), Price Equity Indices Closing Change Change (%) Oil / Prec.Metals $ per unit EUR-USD 1,3958 -2,14 1,4289 1,3987 EUR-SEK 9,2308 +1,38 9,2068 9,0826 EUR-AUD 1,3164 -0,84 1,3300 1,3142 EUR-RUB 39,5404 -0,92 39,9319 39,5481 Fwd 3M -34,2600 EURIBOR 1,60 10Y Bund 2,67 EuroStoxx50 2709,14 -80,95 -2,90 Oil, Brent 116,18 EUR-JPY 111,82 -2,80 115,19 112,40 EUR-NOK 7,7581 +0,49 7,7616 7,6973 EUR-NZD 1,7018 -0,25 1,7101 1,6859 EUR-RON 4,2531 +0,99 4,2529 4,1904 Fwd 6M -67,1800 $ LIBOR 0,25 10Y T-Note 2,88 DAX 7230,25 -172,48 -2,33 Oil, Nymex 94,61 EUR-GBP 0,8800 -1,09 0,8907 0,8796 EUR-DKK 7,4582 -0,01 7,4605 7,4573 EUR-BRL 2,2017 -1,34 2,2349 2,1974 EUR-CNY 9,0341 -2,01 9,1968 9,0469 Fwd 12M -128,8800 LIBOR 0,20 10Y JGB 1,11 Dow Jones 12505,76 -151,44 -1,20 Gold 1551,25 EUR-CHF 1,1689 -2,08 1,1966 1,1673 EUR-HUF 267,25 +1,19 267,20 263,13 EUR-MXN 16,4552 -0,75 16,6230 16,4203 EUR-SGD 1,7147 -1,58 1,7459 1,7176 Vol 1M 14,76 LIBOR 0,83 EUR-CAD 1,3563 -1,07 1,3736 1,3546 EUR-CZK 24,218 +0,25 24,213 24,056 EUR-TRY 2,3027 -0,92 2,3275 2,3002 EUR-KRW 1488,9498 -1,15 1508,4576 1479,5201 Vol 3M 14,18 $ index 76,29 +1,48 76,16 75,23 EUR-PLN 4,0042 +1,26 3,9871 3,9467 EUR-ZAR 9,5734 -0,01 9,6045 9,5153 EUR-THB 42,4836 -1,46 43,3674 42,4253 Vol 12M 13,88

CHF LIBOR CAD LIBOR 0,18 1,17 10Y T-Note 10Y Gilt Bund Future Future 3,09 129,14 124,75 Nikkei 225 9935,48 -134,05 -1,33 Palladium 764,75 Zinc 2295,0 FTSE 100 5929,16 -61,42 -1,03 Platinum 1719,80 Tin 26355,0 1319,49 -24,31 -1,81 Silver 35,80

S&P 500

Industrial Metals Aluminium Lead Copper Nickel $ per ton 2452,0 2650,5 9556,0 23410,0 Sources: Bloomberg L.P., European Banking Federation, British Bankers Association, Dow Jones, Xetra, S&P, TSE, LSE, LME.

12 July 2011

Daily Currency Briefing

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