daily fx str europe 11 july 2011

8/6/2019 Daily FX Str Europe 11 July 2011

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Foreign Exchange London 08:00

FX Daily Strategist: Europe

US Budget deficit as % of GDP vs. USTWI

80 85 90 95 00 05 10

I n d e x

70

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-17.5

-15.0

-12.5

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-7.5

-5.0

-2.5

0.0

2.5

5.0

7.5

US Budget Deficit as% of GDP

USD TWI

Source: Reuters Ecowin Pro. With Congressnearing the August 2nd deadline and the potential for a legitimate budget deal in theworks, the scenario may prove to be USD positive as the US gains credibility on the fiscal front. An improvement in the fiscal budget could be long term USD positive.

This is not classified as objective research. Please refer to important information at the end of the report.http://www.globalmarkets.bnpparibas.com London: +44(0)20 7595 8086 NY : +1 212 841 2408 Sing.: +65 6210 3263/3347

GMT Country Release Mkt Last08:00 NO (Jun) CPI % (nsa m/m) -0.208:00 NO (Jun) PPI % (nsa m/m) -2.108:00 NO (Jun) PPI % (nsa y/y) 18.0

08:00 NO (Jun)CPI-ATE % (nsay/y)

1.0 1.0

08:00 NO (Jun) CPI % (nsa y/y) 1.8 1.612:15 CA (Jun) Housing Starts K 185.0

12:45 BEEurogroup meeting of EMU FinanceMinisters

15:00 EU Finance Ministers Meet

15:00 EUECB’s Bini Smaghi Speaks atConference in Milan

23:01 GB (Jun) RICS House Pric -2823:01 GB (Jun) BRC Retail Sale % (y/y) -0.3

Risk pressured by US jobs, China growth, Euro concerns

Chairman Bernanke´s testimony to Congress will be

especially important this week

EUR seeks reassurance from FinMins, Italian government

Risk-off today – and for good reason, with trouble building in allthree timezones. A disappointing US NFP report showed the USeconomy adding only 18k jobs vs. consensus of 105k in June. Theresulting sell off in equities and rally in US treasurys kept a bidunder USD, with only the safe havens of CHF and JPY gainingsignificantly against USD. The weak data raises the possibilityof a change in tone from Chairman Bernanke at his semi-annualmonetary policy testimony before Congress on Wednesday and

Thursday. At the June FOMC press conference, ChairmanBernanke argued that the US economy would push on and thatgrowth was within reach, implying a high bar for QE3. While itmight seem premature to reverse course and put QE3 on thetable, the prospect of fiscal tightening from a budget deal mayleave Bernanke with little option but to leave the door open. Wecontinue to see any agreement on a legitimate budget deal as aUSD positive – but especially if a second Homeland InvestmentAct forms part of the deal. (See Market focus for more details)Chinese data over the weekend has done little to reassure onglobal growth. CPI at 6.4% was above expectations; and whilereaction has been muted as the PBoC hiked in advance last week,the trade numbers suggest that Chinese growth is alreadyedging lower in response to previous tightening moves. Whilethere are few signs of a hard landing - we still expect GDP

numbers for Q2 to confirm that growth is well above 9% - it is clear that China cannot be the engine of growth that it has beenover the last couple of years.Meanwhile events in Europe are in danger of turning for the worse.Concerns look to be spreading to Italy, where open discordbetween PM Berlusconi and his austerity-minded FinMin Tremontirisks undermining market confidence in Italian assets.Spreads of Italian 10yr debt to Bunds widened by 23bp on Friday;and Italian bank shares have been hit hard; the Italian regulator over the weekend imposed new reporting requirements for equityshort-sellers. Top European officials will meet ahead of aEurogroup meeting this morning. Headlines out of these meetingswill be expected to be supportive, but markets will also look for reassurance on Tremonti's position from the Italian

government. Meanwhile, the FT reports that the focus of talks over private-sector involvement in any new funding deal for Greece hasonce again shifted, with the French plan now seemingly out of favour and the German debt-swap one back in. A debt-swapwould clearly constitute the default that the ECB remains soadamantly against: the stand-off between the key players showsno sign of resolution.Clearly the risks are to the downside for the EUR today, with anumber of key levels within sight: EURUSD at 1.4000, theprevious low in EURCHF at 1.1806; and support at EURJPY113.50. For now, risk currencies in general have held up well butlook likely to be under pressure, with only a stellar US corporateearnings season looking capable of turning sentiment around.Aside from the Eurogroup meeting, we expect Norwegian CPI to

tick slightly higher to 1.7%y/y (in line with consensus) in June. Ahigher number suggests that the Norges Bank could hike as earlyas August especially since the data confirms that the economyremains robust. We like short EURNOK positions and longNOKSEK positions - especially if risk remains under pressure.

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MARKET:

G10FX: EURUSD opened the week under pressure asthe market focussed on the emergency meeting in

Brussels today called by EU's Van Rompuy on Sunday.Fell from around $1.4240/45 towards $1.4200 beforereports in the FT discussing a possible Greek defaultapplied additional pressure to a low of $1.4187; justahead of stops at $1.4185. Reasonable bids from Asianand possibly sovereign names are talked about later,shoring up the base. Cable was rather more sidelinedopening at $1.6021 and trading a $1.6006/42 range butdragged towards the lower end of the range. The yencomplex was still reeling after Friday's very weak USNFP data release, with the dollar continuing on a weakfooting as cross sales continue to weigh on EUperipheral debt woes and today's extraordinary meetingcalled over the weekend by EU's Van Rompuy. USDJPYfell to early lows of Y80.50 finding Japanese bids and

later picking up to Y80.78. EURJPY slipped fromY114.90 to Y114.41, but managed a weak recovery later to Y114.77. [MNI] Asian equities all in the red exceptfor China; declines led by Australia (-1.50% plus) thenKOSPI (-1.15%).

Data/Events for the day ahead (MNI news)

There are less US data items that will be of particular interest to markets in the coming week. The release of earnings reports for the second quarter will getunderway in earnest on Monday with numbers fromAlcoa. That company data is expected after markethours.

Also in the US this week, the Fed will release the FOMCmeeting minutes on Tuesday in advance of FedChairman Ben Bernanke's scheduled semi-annualmonetary policy testimony before the House FinancialServices Committee, which is due on Wednesday andSenate Banking Committee on Thursday. The two mainUS data reports likely to define the July 11 week arethose for June retail sales on Thursday and theConsumer Price Index on Friday.

European data for Monday starts at 0645GMT withFrance industrial output, while UK data at 0830GMTincludes BoE Quoted Rates data. The May EMU OECD

leading indicator data is also due, at 1000GMT. At1200GMT, ECB Nowotny is due to speak at the 50-year anniversary of the OECD, in Vienna.

At 1300GMT the Eurogroup (EMU finance ministers)start their key meeting in Brussels to discuss thesecond Greece bailout package. Also at 1500GMT, ECBBini Smaghi takes part on a panel on "Where is theeconomy going? The challenges ahead", in Milan.

At 1500GMT, US President Obama holds a pressconference on the status of budget talks withCongressional leaders.

NEWS

Europe:

Italy's Market Regulator Consob imposes measuresto curb speculation after a selling wave hit Italianbanks Friday. New measures oblige market operatorsto disclose short-selling moves above certain levelseffective starting Monday and remain in force until Sept.9. New rules: traders must disclose to Consob any short-selling order involving shares that represent 0.2% or more of the capital of the company and shorting ordersvalued at 0.1% or more of the company's capital.(Reuters)

EU Calls New Meeting on Greece. European UnionPresident Herman Van Rompuy has called a meeting of top EU policy makers Monday to discuss plans for asecond bailout package for Greece, EU officials said onSunday. The gathering comes as Europe continues tostruggle with a contentious issue: whether and howGreece's private-sector creditors should share theburden when the anticipated second aid package is

doled out to the debt-burdened country. Germany andother euro-zone nations are pushing for some form of burden-sharing—for instance, delaying repayments toprivate-sector bondholders whose debt is about tomature. The European Central Bank is opposed. (WSJ)

EU Stance Shifts on Greece Default. European leadersare for the first time prepared to accept that Athensshould default on some of its bonds as part of a new bail-out plan for Greece that would put the country’s overalldebt levels on a sustainable footing. The new strategy, tobe discussed at a Brussels meeting of eurozone financeministers on Monday, could also include newconcessions by Greece’s European lenders to reduce

Athens’ debt, such as further lowering interest rates onbail-out loans and a broad-based bond buybackprogramme. It also marks the possible abandonment of aFrench-backed plan for banks to roll-over their Greekdebt. (FT)

US Hedge Funds Bet Against Italian Bonds. US hedgefunds are placing large bets against the value of Italiangovernment debt, directly shorting the bonds of theeurozone’s third-largest economy. The funds haveincreased the size of short positions in the last month,speculating that investor concerns over the country’sability to fund itself may spread from Europe’s peripheryto Italy, according to investors in the funds briefed on the

strategy. (FT)

Trichet Urges More Regulation. The global economy isstill fragile and more work needs to be done in terms of strengthening economic governance in the EuropeanUnion and coordinating policies among its 17 membersto avoid future crises, European Central Bank PresidentJean-Claude Trichet said Sunday. (WSJ)

70% Germans opposed to tax cuts and want thegovernment to focus on cutting debt rather thanreducing taxes, according to respected Emnidpolling institute. Germany's fiscal deficit will sink below2 percent of gross domestic product (GDP) this year from

3.3 percent in 2011 and the government aims to have anearly balanced budget by 2016. Its debt is expected toslip to 81 percent of GDP in 2012 from 82 percent thisyear. (Reuters)

Foreign Exchange Strategy Monday, 11 July 2011

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German paper Die Welt quotes ECB sources: rescuefund not big enough for Italy, never designed to provide acredible defensive wall for Italy. The newspaper said thatthe rescue fund might have to be doubled to up to 1.5trillion euros. But it was not clear if it was the central banksource calling for the increase. (Reuters)

German president Wulff: Greece will need a lot longer to resolve its debt problems than many people in Europeare now acknowledging, a need for "an overall concept"for resolving Europe's debt crisis, banks and ratingsagencies should be held more accountable for their rolein the European debt crisis. (Reuters)

IMF Chief Lagarde: Can't imagine for a second that theU.S. would default, but if lawmakers fail to reach anaccord, that would be a real shock and it would be badnews for the U.S. economy and would certainly

jeopardize the stability of the global economy. (Reuters)

ECB Trichet calls for stronger EU governance amidglobal economic fragility, advances in regulating systemicinstitutions, stronger coordination needed on publicspending among EU members, reiterates call for federalminister in future. (Reuters)

Van Rompuy calls emergency debt crisis talks withTrichet, Juncker, Barroso and Rehn to discuss efforts toassemble a second rescue package for Greece andgrowing concerns about market pressure on Italy, forge aclearer consensus among policymakers before euro zonefinance ministers meet later on Monday to discussGreece and the results of stress tests on Europeanbanks, which are scheduled for release on July 15.(Reuters)

IMF Advisor Min Zhu: EU protectionism blockingbank recapitalization and stabilisation of the financialsector, EU banks should be able to raise capital moreeasily, Europe needs growth to stabilize financialsector, confident of stabilizing Greece’s situation.IMF sources say Zhu, a Chinese national who was aspecial adviser to former IMF Managing Director Dominique Strauss-Kahn, was expected to fill a newdeputy managing director post to be created by theFund's new chief, Christine Lagarde. (Reuters)

Reuters reported that European countries will support

banks that fail the stress tests if those lenders cannotraise capital from investors within six months.

Moody’s questions if Italy can implement austeritymeasures.

According to the WSJ, a senior figure in discussionsbetween governments and the private sector about howto deal with Greece’s debt problems said talks hadbroadened to look at ways of cutting Greece’s stock of debt.

UK:

Hundreds of billions of pounds of additional debt will

appear on the government's books on Wednesday

when the Treasury publishes accounts drawn up on the

same basis as those of companies, the FT says.After

years of delay, the government will give the first glimpse

of what the UKs public finances would look like if the UK

were a listed company, the paper says.

George Osborne will fail in his ambition to create the

most competitive corporate tax system in the G20 on

current plans, according to analysis by Oxford University,

the FT says. But the Treasury dismissed the research

that showed the UK was set to take fifth place by 2014 in

a league table of effective tax rates as taking too narrow

a view of competitiveness, the paper says.

The tough conditions faced by high-street retailers

were thrown into sharp relief during the first six months

of the year as the number of profit warnings soared,

according to new figures published today, the

Independent says. The accountancy firm Ernst & Youngsaid Britain's listed retailers issued 26 profit warnings

between January and June, more than those issued

during the whole of 2010 and almost twice the number in

2009, the paper says.

National debt could rise towards 100 per cent of GDP

if future governments do not boost tax revenues and

slash public spending to defuse the fiscal time bomb of

an ageing population, the Office for Budget

Responsibility will warn this week, the Times says.

Ahead of the report's publication on Wednesday, Robert

Chote, the head of the OBR, told The Times that

demographic pressures would intensify over the next 50

years as the population ages, pushing up spending on

health, long-term care and pensions.

Britain's manufacturers are increasingly downbeat

about the economy, with confidence in the sector

plummeting to a two-year low, according to a new

survey, the Independent reports. Optimism has been hit

by both weak trends at home and by the global slowdown

as sentiment across the eurozone fell in response to the

ongoing debt crisis, the accountancy firm BDO said. As a

result, its business confidence index for the

manufacturing sector dropped to 90.1 in June, equatingto a 26-point fall over the span of four months, with the

index standing at 116.4 back in February.

China:

China to keep policy tight, avoid big growth swingsChina's central bank will maintain a "prudent policy" tofight stubbornly high inflation, but will try to avoid causingbig swings in economic growth, central bank chief ZhouXiaochuan said in comments published on Monday.(Reuters)

CME to launch new Yuan FX futures contracts U.S.derivatives exchange CME Group Inc said it will launchnew yuan foreign currency futures contracts in August to







meet growing global customer demand for investmentproducts denominated in the Chinese currency. (Reuters)

Nestle to buy 60 pct of Chinese candy maker for $1.7bln Nestle, the world's largest food company, offered to

buy 60 percent of Chinese candies and pastries groupHsu Fu Chi International for about $1.7 billion to expandin one of the world's biggest consumer markets.(Reuters)

China will invest over CNY 1.5tn (USD 232bn) in theaviation industry in the next five years and will pushconsolidation among airlines to hone their internationalcompetitiveness, the official Shanghai Securities Newsreported on Monday. (Reuters)

China's Hunger for Corn Turns Market on Ear AChinese buying spree for U.S. corn is putting on displaythe ability of Beijing to reshape grain markets as well asthe cost of food globally. (China this past week bought540,000 metric tons of U.S. corn for delivery after August, according to the U.S. Department of Agriculture,more than the 500,000 tons the agency forecast thatnation would buy in an entire year.) (WSJ)

China offers aid to Libyan people China announcedMonday to provide humanitarian materials worth 50million yuan ($7.73 million) to the Libyan people. (ChinaDaily)

China Boosts Lead in Global Exports. More than ayear after China started letting its currency climb againstthe dollar, the nation is a bigger force in exports thanever, adding to its dominance as a trading power andcomplicating efforts by other nations to wrest awaymanufacturing jobs. The latest evidence of China'sprowess came Sunday, when it reported that exports hit$162 billion in June and $874 billion in the first half of theyear, both records, up nearly 20% from the year-earlier periods. (WSJ)

CPI inflation hits 36-month high. China's CPI inflationclimbed to a 36-month high of 6.4% YoY in June from5.5% in May vs. market expectations of 6.2%(Bloomberg) or 6.3% (Reuters). On the month, CPIclimbed 0.3% in June after a 0.1% gain in May.Commodity currencies such as AUD could beundermined on this print. (Bloomberg)

Trade Data Show China Economy Slowing. Chinesetrade figures for June provided fresh evidence that theworld’s second-largest economy was slowing even asinflation hit a three-year high, according to data releasedover the weekend. The contradictory readings will further complicate Beijing’s attempts to maintain rapid economicgrowth while tackling price increases that have stokeddiscontent in the country. (FT)

Prices Force Blackstone to Drop China Stake.Blackstone pulled out of its investment in a Chineseagricultural company earlier this year after the mainlandgroup warned the buy-out firm that its involvement would

complicate moves to raise prices, according to threepeople familiar with the matter. The case offers a starkillustration of the sensitivity surrounding rising prices as

China seeks to combat inflation running at a three-year high. (FT)

Australia/ New Zealand/

Australian Home-Loan Approvals Increased 4.4% inMay. Australian home-loan approvals rose for a secondstraight month in May as construction of new dwellingsand demand from investors increased. The number of loans granted to build or buy houses and apartmentsgained 4.4 percent from April, when they increased arevised 4.6 percent, the statistics bureau said in Sydneytoday. That compares with the median estimate for approvals to rise 4.5 percent in a Bloomberg Newssurvey of 15 economists. (Bloomberg)

Other Asia:

Investors Weigh the Risks of Heading into India. For

much of the corporate world, news of a fresh probe inIndia represents just the latest example of how multiplecorruption cases, bureaucracy and ambiguous regulationis unsettling sentiment towards the country. The mostrecent blow, a few weeks ago, came from a draft reportfrom India’s national auditor alleging that oil and gasgroups – including two foreign companies – hadpotentially cost the exchequer millions of dollars in lostrevenue. The news sparked another media frenzy, a fallin energy stocks and a round of analysis about what itwould all mean. (India)

S.Korea to invest $9.5 bln by 2020 to boost grainsupply South Korea, the world's fourth-largest grainimporter, will invest some 10 trillion won ($9.5 billion)between 2012 and 2020 to boost grain supply, theagriculture ministry said in a statement on Monday.(Reuters)

Malaysian Production Shrinks a Second Month asExports Falter. Malaysia’s industrial production fell asecond straight month in May as export growth eased,supporting the central bank’s decision to refrain fromraising interest rates last week. Production at factories,utilities and mines fell 5.1percent from a year earlier after declining a revised 1.7percent in April, the Putrajaya-based statistics department said in a statement today.That compares with the median estimate for a 2.7percent drop in a Bloomberg News survey of 15

economists. (Bloomberg)

US/Canada:

US Leaders Still Confident of Debt Deal. The WhiteHouse and congressional leaders expressed confidencethey could still reach a deal to raise the US borrowinglimit and avert a default, even after talks to strike anambitious plan to cut $4,000bn from the country’s deficitbroke down over disagreements on tax cuts for thewealthy. New pressure to strike a deal could come thisweek from Wall Street. Moody’s Investors Service haswarned it could place America’s triple-A credit rating onreview for downgrade by mid-July in the absence of a

deal. (FT)







Debt Talks Back to Square One. The White House andRepublican leaders in Congress embarked on a neweffort Sunday to cut the federal deficit, one that nowappears to have been shorn of its most ambitiouselements, including revamping the tax code andsignificantly reducing growth in benefit programs.President Barack Obama and the top eight congressionalleaders from both parties met at the White HouseSunday night in attempt to piece together a scaled-downpackage. The leaders are under pressure to show theycan reach a deal that will win support from conservativesopposed to tax increases and liberals opposed toMedicare cuts. (WSJ)

US Banks Set for Lacklustre Reporting Season. Tepidtrading activity, low interest rates and mounting legalcosts have all weighed on the profitability of US bankssuch as JPMorgan Chase and Bank of America, leavinginvestors in search of fresh signs of optimism as the bigbanks’ quarterly reporting season kicks off on Thursday.

In a June 29 preliminary report of its results, BofA saidtrading revenue fell in the second quarter from the firstand that net interest income – the amount banks earn onloans – would also decline. (FT)

Geithner: 'US Not Going To Default' -NBC TV, economicrebound is a ‘long-term’ recovery, economic recovery hasnot stalled, no creditable way to give Congress more timeon budget talks, sees higher debt rates as Aug 2deadline approaches, Obama standing tough on notcutting entitlement programs, administration pushing for biggest budget deal possible. (Reuters)

Obama prepared to meet every day this week to hash

out a deal to cut the federal budget and raise thedebt limit, pressed Republicans at a White Housemeeting to aim for a broad, $4 trillion deficit-reductionpackage rather than a more modest one. (Reuters)

RECAP: US NFP payroll numbers massivelydisappoint increasing 18k vs. consensus of 105k. Inaddition, the May employment figures were revised downto 25k from 54k. Private payrolls also came in at ameagre 57k vs. consensus of 132k. The May numberswere revised 10k lower. US unemployment rateunexpectedly ticked up 0.1% to 9.2%. Average hourlyearnings were flat in June on a m/m basis. Consensuswas looking for a 0.2% increase m/m.

House of Representatives Speaker John Boehner saidthe two sides must overcome serious disagreements ontaxes and spending cuts. Boehner and President BarackObama are trying to agree on a budget deal that wouldensure the national debt remains at a sustainable levelby cutting $4 trillion from budget deficits over 10 years.







FX and the US Debt CeilingWith time ticking away towards the August 2 date whenthe US Treasury runs out of cash, the negotiations over the US debt ceiling are finally getting serious. OnThursday, House Speaker Boehner rated the chances of

a deal in the next few days as 50:50; further talks arereportedly set for this Sunday at the White House. Weexamine the currency implications of a deal – and of afailure to arrive at one.

Scenario 1: No deal

In short, potentially disastrous. Ironically, USD wouldlikely benefit as investors dump risk assets onuncertainty, possibly also driven by huge deleveraging of positions as the collateral system falls apart. Other safehaven currencies would also benefit, but perhaps theclearest winner would be Gold.

A failure to honour debt commitments would lead to adowngrade of the US; with implications for funds that arerestricted to AAA. The combination of higher yields,deleveraging, volatility and economic uncertaintycertainly has the potential to derail US recovery – andindeed the global one. A less calamitous scenario wouldsee the Treasury pay investors but stop other payments,but the politics of such a decision means this could notbe sustained for more than a few days. Thankfully bothsides seem to have recognised the dangers of notreaching a deal and this now seems highly unlikely.

Scenario 2: Postponement

If no long-term agreement is possible, the most likely

path would now seem to be a postponement of the issue – despite Obama's stated opposition. This would see thedebt ceiling raised by a relatively small amount, and thedecision could be put off until the end of year. This wouldlikely be the most negative outcome for the USD: therisks would be averted (at least temporarily) but the USwould appear indecisive and unwilling to tackle the fiscalissues.

Scenario 3: Agreement reached

The FX implications of a deal will depend upon whatmakes up the agreement. One element will be thedegree of near-term fiscal tightening (whether through

spending cuts or tax hikes): the more tightening, themore likely the Fed will have to step in with QE3. Thisaspect is clearly USD negative, risk positive. But thisneeds to be offset by the extent to which the agreementcredibly addresses the long-term fiscal issuesconfronting the US – particularly Medicare and SocialSecurity. If the deal is seen as restoring the sustainabilityof American finances, renewed confidence in US assetsas a long-term store of value will benefit the USD. Wewould expect the biggest loser in this case to be EUR asFX reserve diversification slows.

But from an FX perspective, the most important elementof any agreement, far outweighing any sentiment factors

or economic implications, will be whether it includes asecond Homeland Investment Act. Political opposition tothis seems to have evaporated, and we no longer see



Chart 1: USD Debt-to-GDP Projections (%)

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Source: Congressional Budget Office

Chart 2: USD TWI versus US FDI flows

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Source: Reuters Ecowin Pro

this as far-fetched. We would expect a re-run of the 2005tax holiday to see repatriation flows at least match theUSD 300bn estimated last time. And given the near-zeroreturns on USD and the weaker USD trend, we wouldexpect a significant portion of this cash to be held in

foreign currencies. Passage of "HIA II" would beenough to have us revising our call for EURUSD at 1.50+in H2 2011, suspecting it could be worth as much as a5% lift for the dollar versus our current baselineforecasts. Though actual corporate FX flow would likelynot occur before 2102, FX risk takers are likely to movewell ahead of this.





Daily Currency SummaryG3

EURUSD

Last week's interest in ECB's monetary policy now looks quaintly irrelevant as concerns spread to Italy. Open discordbetween PM Berlusconi and his austerity-minded FinMin Tremonti risks undermining the market's confidence inItalian assets; Italian spreads widened sharply on Friday; and in response to a sharp fall in Italian bank shares, theItalian regulator over the weekend imposed new reporting requirements for short-sellers of equities. Top Europeanofficials will meet ahead of a scheduled Eurogroup meeting this morning. Headlines out of these meetings will beexpected to be supportive, but markets may also look for reassurance on Tremonti's position from the Italiangovernment. Aside from Italy, the FT reports that the focus of talks over private-sector involvement (PSI) in any newfunding deal for Greece has once again shifted towards the German debt-swap plan. A debt-swap would clearlyconstitute the default that the ECB remains so adamantly against: the stand-off between the key players shows nosign of resolution. We like EURUSD lower.

USDJPY

USDJPY reversed its upward trend after the US employment report significantly disappointed. US Treasuries ralliedhard with the 10yr yields falling almost 13bps. USDJPY could rally if a favourable US budget deal is reached, but inthe meantime, the risk-off environment risks pushing the pair lower. Comments from FinMin Noda today do not

suggest the authorities are overly concerned at this stage.

JPY CrossesWith USDJPY still in the 80.50-81.50 range, EURJPY remains predominately a EURUSD trade. With concernsbuilding about Eurozone contagion, certainly EURJPY remains vulnerable But if the Eurozone crisis turns into abroader risk-off move, JPY crosses may be similarly vulnerable.

EUR Bloc

EURGBP

Data on PPI Core came in line with expectations. While we are negative on Sterling, we stay away completely fromEURGBP reasoning that further downside remains likely given contagion seen in the European bond markets andwith a delay in any resolution on PSI for Greece debt package adding to jitters. We focus GBP shorts against thecommodity currencies and note the downward break in GBPAUD to levels not seen since Q1 1985. GBP has further downside potential this week if CPI does in fact moderate.

EURCHF

EURCHF once again broke below 1.200 as European peripheral concerns continue to dominate. Not only are

Greece and Portugal in focus but also Italy; the previous low of 1.1806 is the next target. USDCHF fell under significant downside pressure as the US employment figures were much weaker than expected. A potentialagreement on the US budget should garner some support for USDCHF.

EURNOK

NOK should continue to find support against EUR as European peripheral concerns continue to cast a dark cloudover EUR. NOKSEK held up well despite a decline in oil prices, but the risk-off sentiment following US payrolls keptNOK supported. Norwegian CPI data this week are likely to show an uptick in inflation highlighting that the CB couldhike as early as August.

EURSEK

SEK is vulnerable to a further risk-off sentiment. We may have to wait some more for opportunities to play more SEKupside pending some clarity on resolution to Greece debt rollover plans. On EURSEK, the "Golden cross" (50day mamoving above the 100day) may also have been a factor holding the pair up, and we wonder if this will survive thecontinued rise in European SOV CDS. We would, however, refrain from playing USDSEK from the short side with theUSD catching a bid.

USD Bloc

USDCAD

While Canadian employment data surprised to the upside, the US employment data disappointed keeping risk under pressure. A sell-off in oil and a lacklustre performance in equities kept USDCAD above 0.9600. This week’s USconsumer data will be highly important for USDCAD. An improvement in US retail sales and consumer confidenceshould push USDCAD back towards the 0.9550 level.

AUDUSDAUDUSD has held up well, despite the barrage of negative catalysts from Chinese inflation and trade figures; fromEurozone contagion fears; and from disappointing US employment figures. But as overall risk appetite heads south,there will be limits to this resilience.

NZDUSDThe performance of NZD against USD remained relatively unscathed despite the disappointing US employmentfigures. As such, we could see NZDUSD rise to new highs. As for AUDNZD, it retraced its entire post-Australianemployment data rally, reinforcing the sanctity of the 1.2780-1.3050 range.







FX Forecasts*USD Bloc Q3 '11 Q4 '11 Q1 '12 Q2 '12 Q3 '12 Q4 '12 Q1 '13 Q2 '13 Q3 '13 Q4 '13 Q1 '14

EUR/USD 1.50 1.55 1.45 1.40 1.35 1.35 1.30 1.30 1.30 1.30 1.34

USD/JPY 78 83 85 90 95 95 95 95 95 95 114

USD/CHF 0.83 0.83 0.90 0.93 1.00 1.00 1.04 1.04 1.04 1.04 1.09

GBP/USD 1.65 1.68 1.59 1.56 1.53 1.53 1.53 1.53 1.53 1.53 1.70

USD/CAD 0.98 0.93 0.95 0.97 1.01 1.01 1.04 1.04 1.04 1.04 1.21

AUD/USD 1.09 1.13 1.07 1.04 0.99 0.99 0.96 0.96 0.96 0.96 0.78

NZD/USD 0.82 0.84 0.81 0.80 0.76 0.76 0.74 0.74 0.74 0.74 0.56

USD/SEK 5.93 5.48 5.93 6.21 6.67 6.67 6.92 6.92 6.92 6.92 6.94

USD/NOK 4.98 4.77 5.07 5.26 5.56 5.56 5.77 5.77 5.77 5.77 5.07

EUR Bloc Q3 '11 Q4 '11 Q1 '12 Q2 '12 Q3 '12 Q4 '12 Q1 '13 Q2 '13 Q3 '13 Q4 '13 Q1 '14

EUR/JPY 117 129 123 126 128 128 124 124 124 124 153

EUR/GBP 0.91 0.92 0.91 0.90 0.88 0.88 0.85 0.85 0.85 0.85 0.79

EUR/CHF 1.25 1.28 1.30 1.30 1.35 1.35 1.35 1.35 1.35 1.35 1.46

EUR/SEK 8.90 8.50 8.60 8.70 9.00 9.00 9.00 9.00 9.00 9.00 9.30EUR/NOK 7.47 7.40 7.35 7.37 7.50 7.50 7.50 7.50 7.50 7.50 6.80

EUR/DKK 7.46 7.46 7.46 7.46 7.46 7.46 7.46 7.46 7.46 7.46 7.46

Central Europe Q3 '11 Q4 '11 Q1 '12 Q2 '12 Q3 '12 Q4 '12 Q1 '13 Q2 '13 Q3 '13 Q4 '13 Q1 '14

USD/PLN 2.60 2.48 2.69 2.75 2.81 2.78 2.85 2.77 2.85 2.85 2.65

EUR/CZK 24.3 24.5 24.1 23.9 23.8 23.5 23.7 24.0 23.5 23.3 23.1

EUR/HUF 275 275 269 265 265 260 260 255 260 260 250

USD/ZAR 6.80 6.60 6.55 6.60 6.50 6.50 7.20 7.10 7.00 6.90 6.69

USD/TRY 1.52 1.50 1.56 1.59 1.63 1.65 1.65 1.67 1.69 1.69 1.54

EUR/RON 4.20 4.15 4.20 4.25 4.15 4.10 4.20 4.20 4.10 3.95 3.90

USD/RUB 27.51 27.25 27.86 27.97 28.08 27.65 28.19 27.75 29.07 27.75 27.75

EUR/PLN 3.90 3.85 3.90 3.85 3.80 3.75 3.70 3.60 3.70 3.70 3.55

USD/UAH 7.8 7.8 7.5 7.5 7.5 7.5 7.5 7.5 7.5 7.3 7.4

EUR/RSD 100 100 98 97 96 95 93 92 91 90 85

Asia Bloc Q3 '11 Q4 '11 Q1 '12 Q2 '12 Q3 '12 Q4 '12 Q1 '13 Q2 '13 Q3 '13 Q4 '13 Q1 '14

USD/SGD 1.22 1.21 1.21 1.20 1.19 1.18 1.17 1.16 1.15 1.14 -----

USD/MYR 2.95 2.90 2.87 2.85 2.83 2.80 2.77 2.75 2.73 2.70 -----

USD/IDR 8500 8400 8300 8200 8100 8000 7900 7800 7800 7800 -----

USD/THB 29.80 29.50 29.30 29.00 28.70 28.50 28.30 28.00 28.00 28.00 -----

USD/PHP 42.50 42.00 41.50 41.00 40.50 40.00 39.50 39.00 39.00 39.00 -----

USD/HKD 7.80 7.80 7.80 7.80 7.80 7.80 7.80 7.80 7.80 7.80 -----

USD/RMB 6.40 6.31 6.25 6.21 6.17 6.13 6.23 6.20 6.17 6.15 -----

USD/TWD 28.00 27.50 27.00 26.70 26.50 26.00 26.00 26.00 26.00 26.00 -----

USD/KRW 1060 1050 1040 1030 1020 1010 1000 1000 1000 1000 -----

USD/INR 45.50 45.00 44.50 44.00 43.50 43.00 43.00 42.50 42.50 42.00 -----

USD/VND 20500 20000 20000 20000 20000 20000 20000 20000 20000 20000 -----

LATAM Bloc Q3 '11 Q4 '11 Q1 '12 Q2 '12 Q3 '12 Q4 '12 Q1 '13 Q2 '13 Q3 '13 Q4 '13 Q1 '14

USD/ARS 4.18 4.25 4.34 4.43 4.51 4.60 4.69 4.78 4.86 4.95 -----

USD/BRL 1.58 1.55 1.53 1.55 1.56 1.58 1.59 1.60 1.61 1.62 -----

USD/CLP 450 435 425 430 435 440 442 445 447 450 -----

USD/MXN 11.40 11.10 11.00 10.90 11.00 11.10 11.10 11.17 11.25 11.30 -----

USD/COP 1730 1690 1690 1700 1710 1720 1725 1730 1740 1750 -----

USD/VEF 4.29 4.29 4.29 4.29 4.29 4.29 8.80 8.80 8.80 8.80 -----

USD/PEN 2.70 2.65 2.63 2.63 2.64 2.66 2.67 2.68 2.69 2.70 -----

Others Q3 '11 Q4 '11 Q1 '12 Q2 '12 Q3 '12 Q4 '12 Q1 '13 Q2 '13 Q3 '13 Q4 '13 Q1 '14

USD Index 72.30 70.76 74.87 77.62 80.72 80.72 82.99 82.99 82.99 82.99 83.88

*End Quarter







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daily fx str europe 11 july 2011

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