seb report: investors to move away from dollar, euro

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You can also find our research materials at our website: www.mb.seb.se. This report is produced by Skandinaviska Enskilda Banken AB (publ) for institutional investors only. Information and

opinions contained within this document are given in good faith and are based on s ources believed to be reliable, we do not represent that they are accurate or complete. No liability is

accepted for any direct or c onsequential loss resulting from reliance on this document. Changes may be made to opinions or information contained herein without notice.

The good, bad and uglyTUESDAY

13 SEPTEMBER 2011

EDITORCarl Hammer+ 46 8 506 231 28

Downside risks have clearly materialized with growth in both the US and Europe well belowexpectations during the second quarter. Currently, markets discount a fairly high probability ofa double dip recession with fiscal and monetary policy having very little left to offer andpolitical uncertainties increasing. Lack of political support has driven the euro risk premiumsignificantly higher with politicians facing increasing difficulties persuading markets that thesituation in Europe is under control and that the euro will continue to exist in its current form.

In the US political turbulence regarding negotiations over long-term measures to improve thebudget has made US politics far less predictable than usual. Furthermore, the Fed has alreadysignaled strongly the possibility of further easing. Simultaneously growing current accountdeficit imply a persistent need to attract capital inflows to the US. Consequently, given theuncertain outlook for the world’s two most liquid currencies investors are likely to continue todiversify away from them towards fundamentally stronger peers. Over the past year, we haveemphasized that we regard this as a key driver for FX markets and see little reason why itshould not continue to be so. Therefore, provided financial market stress remains undercontrol and the euro continues to exist, consistent with our main scenario, we remainoptimistic concerning currencies with strong internal and external fundamentals, whichshould attract further capital inflows. With the SNB seeking to limit the effects of capitalinflows on the CHF, pressure on the quality currencies has increased/will increase further.

BASKET TRADE: BUY TOP 3 VS BOTTOM 3 We usually recommend buying the top-rated currencies vs.the lowest-rated currencies. Amongst the top-picks weprefer AUD, SEK and CNY, all traditionally offensivecurrencies but less so in current environment.

RELATIVE QUALITY TRADEBuy NOK and SEK vs CAD and NZD. With superiorfundamentals the Scandies should outperform their piers in

Asia and North America as investors consider alternatives toweaker currencies.

SELL CAD/NOK

One important FX market theme is the external balanceoutlook: in this respect we clearly see more support for NOKvs. CAD. Canada also appears to suffer more from anovervalued currency.

VOLATILITY SKEW TRADE: BUY AUD/JPY 6M UPSIDE RR85.0 CALL VS 69.0 PUT, ZERO COST After the decision by SNB to intervene the pressure on theJPY has increased. The scew in the 6m risk reversal is

currently around 8% in favour of the AUD. Hence the soldput is placed below levels most likely triggering newintervention by the BOJ.

+5

+3

+3

+3

+2

+1

+1

0

0

-1

-2

-2

-2

-2

-3

-4

-4

KRW

AUD

SEK

NOK

CNY

NZD

DKK

CHF

CAD

RUB

JPY

PLN

HUF

TRY

EUR

USD

GBP

Currency outlook (end Q4)



Currency Strategy

Forecasts

FX forecasts

12-sep Q4 11 Q1 12 Q4 11 Q1 12 Forecasts 2

EUR/USD 1.3662 1.38 1.43 1.42 1.43 The big picture 3EUR/JPY 105.32 105 113 113 114 USD 6

EUR/GBP 0.8608 0.87 0.90 0.87 0.87 EUR 8

EUR/CHF 1.2057 1.20 1.25 1.15 1.17 JPY 10

EUR/CAD 1.3648 1.34 1.36 1.39 1.40 GBP 12

EUR/AUD 1.3214 1.28 1.30 1.34 1.36 CAD 14

EUR/NZD 1.6653 1.64 1.70 1.69 1.70 AUD 16

EUR/SEK 9.0194 8.80 8.75 9.00 8.92 NZD 18

EUR/NOK 7.6085 7.45 7.50 7.70 7.65 CHF 20

EUR/DKK 7.4469 7.44 7.45 7.45 7.45 SEK 22

EUR/RUB 41.33 40.8 40.8 39.5 39.9 NOK 24

EUR/PLN 4.3174 4.30 4.10 3.93 3.86 DKK 26

EUR/HUF 281.65 282 275 269 268 RUB 28

Cross rates PLN 30USD/JPY 77.09 76 79 78 80 HUF 32

GBP/USD 1.587 1.59 1.59 1.64 1.65 TRY 34

USD/CAD 0.9990 0.97 0.95 0.98 0.98 KRW 36

USD/CHF 0.8825 0.87 0.87 0.81 0.82 CNY 38

AUD/USD 1.0339 1.08 1.10 1.06 1.05 Summary ranking 40

NZD/USD 0.8204 0.84 0.84 0.84 0.84 Seasonal patterns 41

USD/SEK 6.6018 6.38 6.12 6.34 6.24 Guide to indicators 42

USD/NOK 5.5691 5.40 5.24 5.42 5.35 Contacts 43

USD/RUB 30.25 29.6 28.5 29.0 28.8

USD/PLN 3.1602 3.12 2.87 2.77 2.70

USD/HUF 206.16 204 192 189 187

USD/TRY 1.7923 1.80 1.72 1.75 1.70

USD/CNY 6.4040 6.30 6.18 6.30 6.24USD/KRW 1093 1020 985 1043 1025* Bloomberg survey FX forecasts.

ContentsSEB Consensus*

SEB policy rate forecasts sep 12, 2011

RB NB FED ECB BOE BOJ BOC SNB RBA RBNZ

Current 2.00% 2.25% 0.0-0.25% 1.50% 0.50% 0.10% 1.00% 0.0-0.25% 4.75% 2.50%

End-10 1.25% 2.00% 0.0-0.25% 1.00% 0.50% 0.10% 1.00% 0.0-0.75% 4.75% 3.00%

Jun 22 Jun* 22 Jun 9 Jun 9 Jun 14 Jun 16 Jun 7 Jun 9 Jun*Jul 5 Jul* 7 Jul 7 Jul 12 Jul 19 Jul 5 Jul 28 JulAug 10 Aug 9 Aug 4 Aug 4 Aug 5 Aug 2 AugSep 7 Sep 21 Sep 20 Sep 8 Sep 8 Sep 7 Sep 7 Sep 15 Sep 6 Sep 15 Sep*

Oct 27 Oct* 19 Oct* 6 Oct 6 Oct 7 & 27 Oct 25 Oct 4 Oct 27 OctNov 2 Nov 3 Nov 10 Nov 16 Nov 1 NovDec 20 Dec 14 Dec 13 Dec 8 Dec 8 Dec 21 Dec 6 Dec 15 Dec 6 Dec 8 Dec*

End-11 2.00% 2.50% 0.0-0.25% 1.50% 0.50% 0.10% 1.00% 0.0-0.25% 4.75% 2.75%

Jan 25 Jan 12 Jan 5 Jan 24 Jan 17 Jan 26 JanFeb 16 Feb 9 Feb 9 Feb 14 Feb 7 FebMar 14 Mar* 13 Mar 8 Mar 8 Mar 13 Mar 8 Mar 6 Mar 8 Mar*

Apr 19 Apr 25 Apr 4 Apr 5 Apr 10 & 27 Apr 17 Apr 3 Apr 26 AprMay 10 May 3 Maj 10 Maj 23 May 1 MayJun 20 Jun* 20 Jun 6 Jun 7 Jun 15 Jun 5 Jun 5 Jun 14 Jun*

H1-12 2.00% 3.00% 0.0-0.25% 1.50% 0.50% 0.10% 1.25% 0.0-0.25% 5.25% 3.25%

End-12 2.00% 3.25% 0.0-0.25% 1.50% 0.50% 0.10% 2.00% 0.25% 5.75% 3.75%

Inflation target 2.0% 2.5% ~1.8% ~1.8% 2.0% 0-2% 2.0% 2.0% 2-3% 1-3%

50bps hike 25bps hike 25bps cut 50bps cut >50bps cut Italics indicate past decisions * = Strategic policy meetings

2



Currency Strategy

The Big Picture

In our last Currency Strategy entitled Dollar Duality we

argued that the USD would continue to depreciate,

possibly even more rapidly, against Asian currencies. OurCNY forecasts were stronger than consensus expectingChinese authorities to allow it to appreciate more rapidlythan the market anticipated. This scenario has provedcorrect, especially after US credit ratings weredowngraded, a process which probably caused Asianreserve managers to take more urgent steps to diversifyat least part of their USD holdings into other currencies.At the same time we also argued that Asian countries hada good domestic reason to allow their own currencies toappreciate more quickly to cap imported inflation. Now,we still expect Asian currencies to strengthen although

the near-term is clouded by the poor risk appetite.

The US dollar duality scenario also stipulated that the

currency would trade satisfactorily against its G10counterparts, an expectation based on its cheapvaluation, stable deficit outlook and our belief that theFed would cautiously trim its extended balance sheetbefore subsequently raising interest rates. In part, thisassumption has proved correct with the USD strongeragainst all currencies except the JPY and NZD during thepast four months. However, the fundamental outlookfor the greenback has deteriorated. The flowoutlook is weaker than originally anticipated (chart

below), the Fed has resumed its easing bias andgrowth has been far worse than expected. As of today,we forecast a continued flight to fundamentally strongcurrencies. The USD meanwhile is no longer regarded asthe safe-haven it once was: current “strength” is relatedto euro-worries and the USD being the worlds mostliquid currency. FX markets we think will continue to becharacterised by a flight to quality. Against this back-ground, Scandies stand out as strong alternatives forinvestors seeking to continue diversify currency reservesalthough they will clearly fall back if financial marketsdestabilize or macroeconomic concerns resurface.

FUNDAMENTALS RULE: SEB FX STYLES For more than a

year we argued that fundamentally strong currencieswould benefit as investors continued to diversify out oftwin deficit currencies such as the USD and EUR. So farthis year, with political uncertainties increasing, theperformance of our FX styles indicates that the principalFX market driver is now fundamentals, rather than (aspreviously) interest rates and especially changedexpectations concerning future rate hikes which was thekey driver when Trichet began preparing markets forhikes. Going forward, we expect continued politicaluncertainty both in Europe and the US with further

lacklustre global growth. Fundamentals will thereforeprobably remain the key market driver as investors

continue to diversify away from inherently weakcurrencies. However, if clear signs of a recovery in

global growth emerge, central bank expectations andvaluation factors are likely to become increasinglyimportant as FX market drivers.

SEB FX investment styles 2011

-15%

-10%

-5%

0%

5%

10%

15%

20%

d e c

j a n

f e b

m a r

a p r

m a j

j u n

j u l

-15%

-10%

-5%

0%

5%

10%

15%

20%

Va lua ti on G rowt h R at e cha ng e F unda me nt al s C ar ry

FURTHER RISK AVERSION With no near-term solution tothe euro debt crisis and uncertainties surrounding thepolitical process, risk appetite will continue to decrease incoming weeks with substantial set-backs on equitymarkets. Such factors are driving business and consumerconfidence even further down although growthprojections have already been lowered considerably. Ourcurrent GDP projections indicate that the world willenter a “growth recession” (significant slowdown)rather than an outright recession (two consecutivequarters of negative growth). In this situation leadingindicators will bottom sometime this fall (with the ISMremaining at or above 40/45). If these assumptions arecorrect then risk appetite should stabilize afterdeteriorating further in coming weeks. According to ourequity research some equity markets (incl. OMX)already discount a growth recession. Absent acomplete euro-collapse we expect a cautious recovery in

risk appetite sometime in Q4 2011.

3



Currency Strategy

USD PRESSURE MAINTAINED ON POOR FLOW

OUTLOOK. Historically, the USD has generally performedwell during periods of financial stress, as in 2008,reflecting its status as the global reserve currency andthe world leading liquidity of US financial markets.However, more recently the USD has failed to strengthen

as rapidly as it has previously.

There are several reasons why this may be so. The S&P

credit downgrade and political turbulence concerningnegotiations over long-term measures to improvethe budget and increased polarization betweenRepublicans and Democrats has created considerablepolitical instability and made US politics less predictable.In addition the Fed has signalled the possibility offurther easing using additional balance sheetexpansion. With US bond yields already depressed themain reason for doing so may be to support risk appetiteand depreciate the dollar. Investors have signalled theirincreasing reluctance to continue to finance the UStwin deficits with foreign investors becoming netsellers of long-term securities in June for the firsttime since early 2009 (chart above). In addition the USeconomy depends on external finance with the currentaccount deficit once again increasing with a furtherdeterioration probably based on the latest USD 450bn job plan and persistent high budget deficit.

OUR ASSUMPTIONS ON THE EURO DEBT CRISIS. For some time we have argued there will be substantial

write-downs on Greek, Irish and Portuguese bondholdings. As regards Greece, the bond market largelydiscounts this scenario. The remaining question now ishow/when the write-down will be carried out? At theEU summit on 21 Jul the EU decided to extend the EFSFmandate enabling it to direct funds to recapitalizedbanks and buy sovereign bonds in the secondarymarket. These funds (EUR 440bn) are howeverinsufficient if either Spain or Italy requires financialassistance. EFSF amendments do not yet have the fullforce of law pending ratification by Germany (29 Sep)and the Netherlands. Currently, a significant increasein the size of the fund is unlikely. We think it more

likely that the ECB will continue to be forced to buymainly Spanish and Italian bonds. At presentpurchases are sterilized and amount to only 1.5% ofGDP, a minor sum compared to expansionarymeasures already taken by the Fed and BOE. Whilehowever such actions have met with resistance fromthe Bundesbank bond purchases will remain the firstand only line of defence given current restrictions onthe political process. Trying to forecast the outlook forthe euro is very uncertain. We do not expect acomplete currency collapse, flows into the Euro-zoneremains remarkable positive. The ECB is likely to

remain on hold at 1.5% while the Fed may try toexpand its balance sheet further. Therefore, trying to

make sense of where the euro will trade largelydepends on how to attach a reasonable risk premiumto it. With the ECB buying bonds we prefer to beguided by CDS prices. The biggest problem for theeuro is political uncertainty surrounding the problem.Although not an optimal currency union (rather the

contrary) present problems could have been managedsuccessfully given the modest size of the smallercountries in trouble. Most currency unions without apolitical union (and also common fiscal policies) haveeventually collapsed. Sooner or later the EMU musteither integrate or disintegrate: there is no middleground for it to exist in, and there is very littlepolitical support currently for fiscal union. Proposals presented during the crisis all indicate closerscrutiny and coordination of fiscal policy. If the eurosurvives the present crisis further steps must be takenin these areas to avoid a future recurrence. This need

not of course imply a common detailed EMU-widefiscal policy, but only that the respective fiscalpositions of member countries will need to beconsistent with what the EMU as a whole regards assustainable. So far, political peer group pressure hasnot worked. If the euro is abandoned we make thefollowing assumptions concerning the levels at whichcurrencies will be floated (although changes inexchange rates are likely to be much greater).

Currency move towards the EUR to

neutralize ULC discrepancies

17%

12%

11%

11%

11%

9%

4%

2%

1%

1%

-7%-16%

1%

Greece

Portugal

Luxembourg

Spain

Italy

Irland

Netherlands

Belgium

France

Sweden

Finland

AustriaGermany

DevaluationAppreciation

FX WAR – POSSIBLE AGAIN. As risk-seeking capitalflows pushed several EM currencies higher against mostmajor counterparts in 2010 these economies respondedby imposing various measures including FX intervention,capital controls and taxes to prevent appreciation –otherwise known as an FX war. The trigger was the Fed’sdecision to launch a second round of QE to add liquidity

to markets. Given increasing expectations of furthermoves by the central bank to ease liquidity and debt

4



Currency Strategy

crisis concerns causing investors to diversify out of majorcurrencies into quality counterparts, these fundamentallystrong currencies have appreciated. With the SNB’spatience regarding CHF overvaluation finallyexhausted and the central bank at last intervening,this may have become the trigger for the next round

of currency manipulation to prevent the fundamentallystrongest from appreciating. This situation may wellexert enormous pressure on the few remainingquality currencies still free floating. The key to a morepermanent solution to this issue will probably lie in afreer floating and significantly stronger CNY (i.e. surpluscurrencies), easing pressure on other counterparts.

Valuation

FED UndervaluedECB FairBOJ OvervaluedBOE Undervalued

SNB OvervaluedRBA Overvalued

BOC OvervaluedRBNZ Overvalued

RIX Fair

NB Fair

Relaxed "This is expected"

Concerned Incr. FX purchases?

Concerned Competitiveness USAConcerned Overvalued

Aggress ive Depreciate! !Relaxed Cap on inflation

Aggressive Depreciate

Relaxed Inflation vs. rebalance

Relaxed Weakening bias

Relaxed Maintain Purch Power

G10 central bank tolerance towards FX appreciation

Official attitude Unofficial attitide

SCANDIES ATTRACTIVE AS “FLIGHT TO QUALITY”

CURRENCIES. For some time now we have argued thatthe krona should be re-priced as a substantially less pro-cyclical currency. The arguments for doing so are fairlystraightforward: Sweden has rebalanced its economyduring the past 15 years with steady improvements in competitiveness helping to achieve a prolonged large

current account surplus.

E U R / S E K

The target surplus in the fiscal budget implemented afterthe financial crisis in the early 1990s forced the govern-ment to control spending. As a result, Sweden iscurrently one of only a very few developedeconomies enjoying a current account surplus. Prudent fiscal spending has resulted in a declining debtto GDP ratio with present forecasts indicating that theratio may reach below 30% during 2013-14 throughgrowth and state asset privatization. External surpluseshave also enabled Sweden to enjoy a positive

international investment position (a primecharacteristic for defensive currencies such as the CHF).

Therefore, it is not surprising that Swedish interest rateshave continued to attract strong buying interest as globalreserve managers regard Swedish assets attractive.

Domestic

fundamentals

Resilience to

global growth Liquidity

External

Balance/ NIIP

CHFGood Fair Fair Excellent

JPY Bad Bad Excellent Good

NOK Excellent Fair Bad Excellent

SEK Good Poor Poor Good

USD Poor Good Excellent Bad

Safe-haven currencies?

WHY SCANDIES ARE NOT PERFECT SAFE-HAVENS. Thedecision by the SNB to cap the Swiss franc vs. the euro at1.20 has had rapid, far-reaching implications mainly forcurrencies we would have regarded as fundamentallystrong (SEK, NOK, AUD, CAD). The spontaneousreaction by so-called fast money accounts followingthe SNB decision has been to sell EUR/Scandies. Ourlong-held arguments for repricing the SEK (and NOK)

have been embraced by global fund managers. However,we caution against treating Scandies as new safe-havens.First and foremost liquidity is poor. Currently Swedishcorporates face slower demand for their goods which willexacerbate lower turnover in the SEK (as hedging activityalso slows). Consequently, liquidity is, if anythingdeteriorating. Rather than regard Scandies as safe-havens, we would characterise them as part of the“Flight to Quality” process. On that basis the SEK willremain vulnerable (albeit less than previously) if theworld encounters a new recession.

Currency 1998 2001 2004 2007 2010

US dollar 86.8 89.9 88.0 85.6 84.9

Euro ... 37.9 37.4 37.0 39.1

JPY 21.7 23.5 20.8 17.2 19.0

GBP 11.0 13.0 16.5 14.9 12.9

AUD 3.0 4.3 6.0 6.6 7.6

CHF 7.1 6.0 6.0 6.8 6.4

CAD 3.5 4.5 4.2 4.3 5.3

HKD 1.0 2.2 1.8 2.7 2.4

SEK 0.3 2.5 2.2 2.7 2.2

NZD 0.2 0.6 1.1 1.9 1.6

KRW 0.2 0.8 1.1 1.2 1.5

SGD 1.1 1.1 0.9 1.2 1.4

NOR 0.2 1.5 1.4 2.1 1.3

MXN 0.5 0.8 1.1 1.3 1.3

Currency distribution of global foreign exchangePercentage shares of average daily turnover in April

Source: BIS Triennial FX survey 2010

CONCLUSIONCONCLUSIONCONCLUSIONCONCLUSION.... G4 currencies all have their own

problems to deal with. Clearly, the FX market continuesto focus on buying sound, fundamentally strongcurrencies. However, in the near-term majoruncertainties and lack of political unity/coordination interms of how to deal with the EU debt crisis will furtherweigh on risk appetite. In this situation, the USD willprobably benefit from its status as the world’s safe-havencurrency, especially given its liquidity. In the longer-termwe are almost equally bearish on both the euro and the

USD and expect continued respective trade-weightedweakness.

5



Currency Strategy

US dollarThe political turbulence in US has increased the politicaluncertainty. In addition the agreed package with budgetimprovements well below what probably will be required

to stabilize the US debt has increased uncertainty. TheFed remains with an easing bias and further quantitativemeasures, e.g. additional bond purchases, are now in ourforecast. As a consequence the risk premium attached tothe USD has increased. With the twin deficits the US isdependent on attracting foreign capital while these flowshave deteriorated. The outlook for the USD henceremains uncertain, most likely we will continue to seerebalancing out of the USD.

MONETARY POLICY At the August meeting the FOMCannounced that the key interest rate will remain close tozero until mid-2013. In addition some of the members

argued for further action as additional bond purchases. Ifgrowth continues to disappoint in coming months Fed islikely to launch a third round of bond purchases in Q42011. Hence, the Fed is one of few central banks with aclear easing bias. Further QE and zero interest rates for an

extended period is likely to weaken the dollar. -1

ECONOMIC FUNDAMENTALS US growth hasdisappointed in the first two quarters. Most likely growthfor this year will be around 1.5%. The labour marketshows very few signs of recovering and unemploymenthas increased in recent months as job creation hasslowed. Weak labour market, continued weakness in the

housing market and high gasoline prices has underminedhousehold sentiment now back on 2009 levels. Inaddition business sentiment has dropped to levelsnormally associated with very weak or zero growth.Usually the current state of the economy would renderpolicy action from fiscal and monetary policy to supportthe recovery. However, with interest rates already athistorically low levels, gross public debt at 90% of GDPand substantial deficits, policy options are limited. Henceit seems as if the economic recovery this time will have torely on a recovery in private demand and therefore will be

slow. -1

FLOWS Trade deficit has widened in recent months asexports have declined more rapidly than imports. That isone reason why the current account deficit is expected toincrease from 3.5%/GDP in Q1 11, despite weak USgrowth. That means a growing need for US to attractforeign capital inflows. However, in June foreigners netsold US long-term securities for the first time since 2009,which may be a sign that current yields are too low to

attract foreign capital with rising risk premiums.-2

TECHNICALS & POSITIONING: There is a clear similaritybetween the current setup and the sharp upturn seen

post Lehman 2008. The break above 76.72 is clearlybullish but still needs a second close above it to confirm

the change of trend. 0

EUR sp eculative positions

04 05 06 07

C o n t r a c t s ( t h o u s a n

d s )

-2 5

0

25

50

7510 0

12 5

1.150

1.200

1.250

1.300

1.350

Speculative positions

EUR/USD

The lack of significant upside progress inEUR/USD makes the current substantial netlong speculative position a burden. Shouldthe sub-1.29-area be revisited, speculativelongs will have to be reduced.

-1

0

-2

-1Monetary pol.

Fundamentals

Flows

Technicals

-4Total

USD speculative positions

May

10

Aug Nov

11

Feb May Aug

C o n t r a c t s

t h o

u s a n d s

-20

-15

-10

-5

0

510

15

20

25

30

67.5

70.0

72.5

75.0

77.5

80.0

82.5

Speculative positionsUSD indexSpeculative positionsUSD index

D e t b t o G D P ,

%

C u r r e n t a c c .

& b u d g e t b a l . % o f

G D P

Technical view: USD Index

Price

USD

72

76

80

84

2008 2009 2010 2011

2000 2010

6



Currency Strategy

UNITED STATES

7



Currency Strategy

The euroGiven the magnitude of the debt crisis in the euro areathe euro remains remarkably steady. It indicates thatinvestors distinguish between the debt problems of the

euro member states and the overall solid fundamentals ofthe currency. Looking ahead, a still possible worsening ofthe crisis remains the major downside risk to the euro.Despite that the currency should hold up ok.

MONETARY POLICY. The ECB’s rate hike cycle is alreadyover. ECB staff reduced their growth projections for 2012in September; the outlook for inflation has improvedmaking additional rate hikes unnecessary. Recently bankswere increasingly reluctant to lend to each other.Therefore the ECB was forced to increase its efforts toimprove the functioning of the money market. Allrefinancing operations until year-end are conducted with

full allotment. Due to the banks behaviour the moneymarket is drowned in excess liquidity which pushedmarket rates well below the ECB’s interest rate of themain refinancing operations. Rates will stay there for a

long time making the euro less attractive. 0

ECONOMIC FUNDAMENTALS Latest leading indicators

as well as economic data now turned south and point to aslowdown in the moderate recovery in the euro area. Theexpansion remains uneven with the core EMU memberstates still growing slowly while some smaller countriescontinue to face severe headwinds from their fiscal crises.

Due to increased market tensions governments havespeed-up measures to consolidate budgets and tointroduce structural reforms which will continue tohamper growth in coming quarters. More importantly,markets will focus closely on the ratification process onthe changes to the mandate of the European FinancialStability Facility in EMU member states. The political riskpremia on the euro is substantial and it is currently hardto predict how the debt crisis will be solved. This

constitutes the major head-wind for the currency. -3

FLOWS The flow picture improved in past months

despite the discussion in markets about a break up of the

euro. In the 12 months ending June 2011, the euro areareported net combined foreign direct and portfolioinvestments of EUR 333bn compared with net inflows ofEUR 107bn a year earlier. That is more than enough tofinance the 12m cumulated seasonally adjusted current

account deficit of EUR 59.9bn in June 2011. +1

TECHNICALS & POSITIONING The ECB eur index tookanother beating last week, falling and closing below thesupport line of the bear flag. The break does furtherenhance a bearish case and we do accordingly expect theeuro to continue to weaken, eyeing the 100 medium term

key support as the next main attractor. -1


04 05 06 07


d s )

-2 5

0

25

50

7510 0

12 5

1.150

1.200

1.250

1.300

1.350


EUR/USD


-3

-1

+1

0Monetary pol.

Fundamentals

Flows

Technicals

-3Total

EUR speculative positions

Jun

10

Sep Dec

11

Mar Jun Sep

-125

-100

-75

-50

-25

025

50

75

100

1.15

1.20

1.25

1.30

1.351.40

1.45

1.50

Speculative positionsEUR/USDSpeculative positionsEUR/USD

D e t b t o G D P ,

%


& b u d g e t b a l . % o

f G

D P

Technical view: ECB EUR Index

Price

90

95

100

105

110

115

2004 2006 2008 2010 2012

2000 2010

8



Currency Strategy

EURO-ZONE

9



Currency Strategy

Japanese yenRisk aversion and rapidly falling equity markets haveagain produced a strong demand for JPY and in trade-weighted terms the currency is now more expensive

compared to the time of the coordinated G7 interventionin March 2011. Subdued risk appetite over the comingweeks on continued uncertainties as regards the EU debtcrisis will likely strengthen the JPY further. We dohowever expect a weaker JPY 2012 based on poorfundamentals and expensive valuation.

MONETARY POLICY Bank of Japan continues to run veryeasy monetary policy, and we would expect an eveneasier stance if anything. BOJ has added JPY 5000bn forasset purchases to the JPY 50000bn facility. BOJ will alsoassign USD 100bn of FX reserves to support exports andinvestments abroad. The current level of the JPY further-

more warrants caution for JPY longs as the BOJ will likelyintervene on further strength. The interventions andtarget set for EUR/CHF by the SNB validate the questionwhether the BOJ will also try to peg the currency? Wedisagree as the JPY is not nearly as expensive as the CHF.However, monetary policy will continue to be highly

negative for the JPY. -2

ECONOMIC FUNDAMENTALS The earth quake and

tsunami and their effects on the Japanese economy havebeen more severe than anticipated. The economy wasvery weak even before the natural disaster and Q2 2011

was the third quarter in a row with falling GDP. For 2011we forecast GDP to contract by 0.6% before growth willrebound by 2.9% (2012) as rebuilding takes place. Thefinance-minister Noda is expected to strike a moreprudent fiscal policy approach. Japan nevertheless isincreasingly vulnerable as debt/GDP is substantiallyabove 200% with no prospect on turning soon.Fundamentals continue to be a clear negative for the

Japanese yen. -2

FLOWS The large positive net international investment

position will support the JPY in times of stress. Thecurrent account and the basic balance have deteriorated

during Q2, however that is partly related to the naturaldisaster and a temporary need for increasing imports. Stillwe would keep a close eye on net exports as the tendencyis clear and Japanese exporters are now pushing hard forcontinued JPY interventions in order to weaken the

expensive currency. +1

TECHNICALS & POSITIONING The post earthquakedecline didn’t last for long given that the market soonagain started to accumulate yen. The up-trend remains inforce and a new trend high is sought during the autumn.The positioning could be of some concern should the

market turn down. +1


04 05 06 07


d s )

-2 5

0

25

50

7510 0

12 5

1.150

1.200

1.250

1.300

1.350


EUR/USD


-2

+1

+1

-2Monetary pol.

Fundamentals

Flows

Technicals

-2Total

% of GDP

Current account and budget balance

Source: IMF

90 95 00 05 10 150

50

100

150

200

250

-12.5

-10.0

-7.5

-5.0

-2.5

0.0

2.55.0

Current account balanceBudget balancePublic debt

Technical view: BOE JPY Index

Price

140

150

160

170

180

2009 2010 2011 2012

2000 2010

10



Currency Strategy

JAPAN

11



Currency Strategy

British pound sterlingWe continue to expect the pound to be an under-performer as the economy is focused on an ambitiousausterity program. We see a clear risk for additional

stimulus through bond purchases (QE2) should inflationfinally start to move back towards the BOE target. Thevery swift and resolute act of the government to quicklyimplement the substantial fiscal savings program hasmade the UK less vulnerable to a credit downgrade. Theonly argument however for buying the pound is itsrelatively cheap level vs most G10 currencies, we don’tforesee valuation however to be a major theme forinvestors in the coming 6 months.

MONETARY POLICY Inflation continues to be a problemfor the Bank of England. In its latest Aug Inflation Reportthe central bank projects CPI to reach 5% by year-end

before heading below the 2% target in 2013. The CPItrajectory coupled with the unanimous vote for anunchanged rate in Aug (rather than a few membersvoting for a hike) shows the MPC has adopted an easingbias. Adding the very weak money growth (M4 -1.5% y/y)we see a significant risk for further bond purchases (QE2)sometimes in late Q4-2011. Monetary policy hence is still

a drag for GBP. -1

ECONOMIC FUNDAMENTALS The recovering economy

has been weaker than initially thought as GDP growth exstock-building contracted Q1 2009 – Q1 2011 (in y/y

terms). We forecast UK growth to continue to remainbelow trend (1.1% 2011 and 1.6% 2012) and henceunemployment looks likely to rise further. Consumers arealso facing a very adverse environment with falling realwages and lower house prices. The austerity programfurthermore will trim GDP substantially. Despite themassive savings debt/GDP looks set to rise close to 100%2012. On the positive side, UK will keep its AAA creditrating for now due to the extensive (planned) budget

improvements. -1

FLOWS Twin deficits will continue to weight on Sterling.

Despite poor growth and a weak currency, the UK

economy has not managed to rebalance away from thelarge external deficits. In the first quarter 2011 the currentaccount deficit improved somewhat on weaker importsbut judging by monthly trade data the C/A deficit haswidened to 3% of GDP during Q2. Basic balance is evenweaker as portfolio flows are negative and may reach -

5% of GDP in Q2. -1

TECHNICALS & POSITIONING The market has recentlybeen back testing and validating the exit from the beartriangle, hence Sterling should now be in a rathervulnerable position and a move below the July low will

intensify selling activity.-1


04 05 06 07


d s )

-2 5

0

25

50

7510 0

12 5

1.150

1.200

1.250

1.300

1.350


EUR/USD


-1

-1

-1

-1Monetary pol.

Fundamentals

Flows

Technicals

-4Total

GBP speculative positions

Jun

10

Sep Dec

11

Mar Jun Sep

-75

-50

-25

0

25

50

75

1.425

1.450

1.475

1.500

1.525

1.5501.575

1.600

1.625

1.650

1.675

Speculative positionsGBP/USDSpeculative positionsGBP/USD

D e t b t o G D P ,

%


& b u d g e t b a l . % o f G D P

Technical view: BOE GBP Index

Price

75

80

85

90

2008 2009 2010 2011 2012

2000 2010

12



Currency Strategy

UNITED KINGDOM

13



Currency Strategy

Canadian dollarWith the close relationship between Canadian and USeconomies, and the high correlation between stockmarket performance and the Canadian currency, the CAD

currently faces several head-winds which could slowdown the appreciation in the short term. However, theCanadian economy and the flow outlook will continue tobe supported by high commodity prices, lately thehistorical relationship with the CAD as a pro-risk currencyhas been more ambiguous as well. Being one of fewcurrencies with acceptable fundamentals we expect theCAD to continue to strengthen medium-term.

MONETARY POLICY With the policy rate at 1% monetarypolicy is very accommodative. Inflation peaked earlier thisyear and has lately declined towards the central bank’sforecasts. Wage pressure has increased as the labour

market has recovered, in Q1 labour costs rose by 2.6%from a year ago. In July the BOC seemed to signal acoming hike with a small hawkish change in thestatement. However, the latest statement was once againmore dovish indicating BOC will remain on hold as long asglobal growth uncertainties persist. Market is currently

pricing one 25 bps cut over the next 6 months. 0

ECONOMIC FUNDAMENTALS In Q2 GDP was basically

unchanged from the previous quarter with the domesticeconomy contributing positively to growth, while netexport had a substantial negative contribution. Business

spending remains the most important driver for Canadiangrowth. However, with disposable income growing andrenewed pick-up in mortgage credit growth householdspending surprised on the upside in Q2, with a markedimprovement in retail sales towards its long-termaverage. The strong links to the struggling US economywill have a negative impact on Canadian growth goingforward while high commodity prices are likely to support

domestic demand.=+1

FLOWS The Current account deficit widened in Q2

towards historically highs. The deficit is related todeteriorating competitiveness due to a stronger currency,

weak productivity growth and slowing US growth. On theother hand Canada continues to attract foreign capitalinflows, primarily foreigners buying bonds thatcompensate for the current account deficit. These inflowswill probably remain as investors continue to diversify out

of US and European assets. 0

TECHNICALS & POSITIONING The exit down from therising wedge (wedge = ending pattern) has put somepressure on the CAD. If following the textbook the marketshould over the coming months take aim at the origin ofthe wedge i.e. the 106/107-area. The recent round of

strength didn’t attract speculators to any larger extentsomething that adds further credibility to a weakening

Loonie. -1


04 05 06 07


d s )

-2 5

0

25

50

7510 0

12 5

1.150

1.200

1.250

1.300

1.350


EUR/USD


+1

-1

0

0Monetary pol.

Fundamentals

Flows

Technicals

0Total

C o n t r a c t s ( t h o u s a n d s )

% of GDP


Source: IMF

90 95 00 05 10 150

20

40

60

80

100

-15.0

-10.0

-5.0

0.0

5.0

Current account balanceBudget balancePublic debt

Technical view: BOE CAD INDEX

Price

90

95

100

105

110

115

Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3

2009 2010 2011

14



Currency Strategy

CANADA

15



Currency Strategy

Australian dollarThe AUD is one of a few fundamentally strong currencieswith a central bank that has refrained from intervening toweaken the currency despite a stretched valuation. In

contrast the RBA previously welcomed a strongercurrency. The Australian economy is still strong and willcontinue to attract capital inflows. In addition marketcurrently prices several cuts by the central bank, whichmost likely has to be reversed. A combination ofcontinued inflows and revised expectations on the centralbank will support the AUD going forward.

MONETARY POLICY Since the latest rate hike in

November 2010 the Australian central bank has left itskey interest rate unchanged at 4.75%. In the last twostatements the RBA has expressed concern for themedium-term inflation outlook as underlying measures of

inflation are running at around 2.5%. As cost pressure inthe economy has increased substantially with high wagegrowth and weak productivity growth we don’t expect thecurrent tightening bias to shift towards easing, but ratherthe RBA will remain on hold until uncertainty regardingglobal growth fades. With the set-back in global growth,market pricing currently indicates expectations for 2-3cuts over the next 6 months. As we do not agree withmarket pricing, monetary policy may be supportive for

the currency when RBA expectations are re-priced. +2

ECONOMIC FUNDAMENTALS Australia continues to

benefit from strong growth in Asia and persistent dema-nd for commodities supporting exports, and is currentlygenerating the largest surpluses on record. Higher com-modity prices have also improved Australia’s terms oftrade (ToT). Despite unemployment around 5% andgrowing household income, household confidence hasdropped well below its long term average. Cautioushouseholds have continued to save a substantial part oftheir growing income with modest growth in retail salesand slow credit growth as a result. Hence, householdbalance sheets improve and that should spill over into

higher spending eventually.+1

FLOWS Capital flows were less AUD supportive in Q1 asequity flows and direct investment flows were neutral.High commodity prices still have a positive effect on ToTand the external trade is generating the largest surpluseson record. That is however not enough to generatecurrent account surpluses as persistent outflows from netinvestment income continues to grow. To summarize thepersistent deficit in Australia’s C/A is historically smalland more than fully compensated for by portfolio inflows.

0

TECHNICALS & POSITIONING The AUD struggles tomaintain its uptrend. The 1

stattempt to exit below the

wedge so far seems to have failed, giving the AUD somerespite. The wedge is however normally a trend endingpattern so great caution is urged. Abandon any remaininglongs if breaking below the Aug low. Speculators have

already sharply trimmed longs during the summer. 0


04 05 06 07


d s )

-2 5

0

25

50

7510 0

12 5

1.150

1.200

1.250

1.300

1.350


EUR/USD


+1

0

0

+2Monetary pol.

Fundamentals

Flows

Technicals

+3Total

C o n t r a c t s ( t h o u s a n d s )

D e t b t o G D P ,

%



f G D

P

Technical view: BOE AUD INDEX

Price

70

80

90

100

2008 2009 2010 2011

16



Currency Strategy

AUSTRALIA

17



Currency Strategy

New Zealand dollarIt is a fast changing world. Just a month ago, RBNZ, at itslatest policy meeting sounded hawkish enough to makethe market more or less fully price the removal of the

March 2011 50 bps emergency cut. Now, with renewedglobal recession fears, sovereign debt focus and aslowing Australian economy, the probability of aSeptember 15 (next OCR announcement) hike is justabout down to zero. Short-term, the current turmoil willlikely see the NZD trade sideways to lower vs. the USD.

MONETARY POLICY RBNZ struck a hawkish tone at itslatest OCR meeting (July 28) stating that “the Bank seeslittle need for the March 2011 insurance cut to remain inplace much longer”. Since then the short end of the yieldcurve has flattened and no hike is currently priced in untila potential 25 bps hike in October or more likely

December. Inflation continues to be above the Bank’s 1-3% target band but is expected to moderate as the Oct2010 VAT hike disappears from the data. Also theincreased credit premiums (~100 bps) for the banks givenglobal credit issues acts effectively as a tightening (80%of households are at floating mortgage rates). Given thecurrent global uncertainty we expect RBNZ at least to be

on hold (2.50%) until its December meeting. +1

ECONOMIC FUNDAMENTALS Economic growth will slow

as a result of weaker global outlook, an elevated level ofthe NZD and easing commodity prices. The cost of the

Canterbury earthquake, with damages more severe thanestimated, has pushed the budget deficit to a historicalhigh. Fears of a possible downgrade will keep thegovernments focus on fiscal consolidation for the

foreseeable future. 0

FLOWS The C/A deficit for the full year 2011 is expected

to basically be in line with 2010, the best reading in 20years. The very strong NZD is slowing export growth butat the same time making imports cheaper. The balance oftrade deteriorated for the third consecutive month in July.The latest statistics shows on the other hand that termsof trade continues to be in a positive trend albeit at a

slower pace. 0

TECHNICALS & POSITIONING Speculators’ long positionremains large which is a risk should the NZD weakenfurther. Technically we are closely watching the oldceiling line which was bullishly broken late Q2. Returnback below that line would likely trigger a rapid declinestraight through the previous range (exactly the opposite

to the “false” break lower late Q1). 0


04 05 06 07


d s )

-2 5

0

25

50

7510 0

12 5

1.150

1.200

1.250

1.300

1.350


EUR/USD


0

0

0

+1Monetary pol.

Fundamentals

Flows

Technicals

+1Total

D e t b t o G D P ,

%



f G

D P

Technical view: BOE NZD INDEX

Price

80

85

90

95

100

105

Q4 Q1 Q 2 Q3 Q4 Q1 Q2 Q3 Q4 Q 1 Q2 Q3 Q4

2008 2009 2010 2011

18



Currency Strategy

NEW ZEALAND

19



Currency Strategy

Swiss francWith setting a minimum exchange rate for the francagainst the euro, the Swiss National Bank has brought therise in the currency against the euro to a halt. But the

franc remains overvalued and the economy will feel thepain in coming quarters. Switzerland must hope for asustainable solution to Europe’s debt crisis to ease capitalinflows into Switzerland. As there is no easy solutionpossible, investors may continue to look for save havens.

MONETARY POLICY With the decision to set a minimumexchange rate at CHF 1.20 per euro, the SNB tookmassive action to end the rise of the Swiss franc againstthe euro. The SNB stressed that it will defend thisboundary with unlimited amounts of monetary liquidity.This decision could become very costly and could createenormous additional permanent liquidity in the Swiss

money market. Over the medium term it could createupside risks to inflation. Over the next months, the SNBfaces increased risks to deflation as well as downsiderisks to growth due to the strong currency. Therefore theSNB will stand ready to implement additional measures tofight those downside risks to inflation. Monetary policy

remains the major threat to the CHF. -3

ECONOMIC FUNDAMENTALS The KOF leading indicator

fell sharply in August. At 1.61 points, it has reached itslowest level since November 2009. This suggests thatSwiss recovery will considerably lose steam in coming

months as it faces a strong headwind from the currencyappreciation. We therefore expect GDP growth to slow to1.7% in 2011, down from 2.7% in 2010. For 2012 another

slowdown to only 1.0% looks likely. 0

FLOWS In the past four quarters up to March 2011

Switzerland posted a current account surplus ofCHF83.49bn, up from CHF 71.33bn in the previousperiod. Safe-haven flows remain the major driver of theCHF. Since a lot of these trades take place in internationalmarkets Swiss statistics give no hint of increased inflows

into the franc. +3

TECHNICALS & POSITIONING Speculative involvementhas been mediocre and the answer must be searchedelsewhere. The recent SNB inspired move lower has atlarge neutralized the prior notable stretch. Further lossesmay well unfold, at least towards possibly 142.50 or evena 140-test. Above 160 would be needed to jeopardize the

recent record high. 0


04 05 06 07


d s )

-2 5

0

25

50

7510 0

12 5

1.150

1.200

1.250

1.300

1.350


EUR/USD


0

0

+3

-3Monetary pol.

Fundamentals

Flows

Technicals

0Total

% of GDP


Source: IMF

90 95 00 05 10 150

10

20

30

40

50

60

70

80

-5.0

0.0

5.0

10.0

15.0Current account balanceBudget balancePublic debt

Technical view: BOE CHF Index

Price

130

140

150

160

J F M A M J J A S

Q1 2011 Q2 2011 Q3 2011

20



Currency Strategy

SWITZERLAND

21



Currency Strategy


04 05 06 07


d s )

-2 5

0

25

50

7510 0

12 5

1.150

1.200

1.250

1.300

1.350


EUR/USD


Swedish kronaUnder normal circumstances, the krona would alreadyhave weakened substantially more than experienced.Given the Swedish export dependence, SEK has been ahighly pro-cyclical currency as can be seen in the chart

“PMI and EUR/SEK”. This tendency has diminished duringthe past year and for good reasons as the krona isrepriced as a more defensive currency. Strongfundamentals and a solid balance sheet explains thetransformation although we would caution chasing SEKhigher near-term as world growth slows.

MONETARY POLICY The monetary policy outlook haschanged markedly the last couple of months. At the startof the year it was reasonable to expect Riksbank tocontinue to hike rates at every meeting this year. Giventhe abrupt slowing of economic growth and projected

slowdown on the labour market coupled with clearlyslowing house prices, Riksbank is now expected toremain on hold for long. The revised repo path from themeeting in September however still forecasts rate hikes in2012 and 2013. Markets however are discounting ratecuts, an outlook we disagree with. Hence, we see

monetary policy as a small positive for SEK.+1

ECONOMIC FUNDAMENTALS Economic projections

have been cut substantially – SEB now expects GDP togrow 2012 by 1.4% vs 2.6% previously. With growthbelow trend the positive labour market developments willlevel out and unemployment will stay above 7%

throughout the forecast horizon. This will also havenegative implications for the budget outlook although weexpect a small surplus 2012. Debt/GDP will fall graduallybut at a slower pace (reaching 30% by 2013). This is still avery positive development for Sweden relative to mostother G10 countries. We will watch the development ofSwedish export orders extra carefully now as the appetitefor Swedish export goods is still the best barometer forSEK developments. Corporates and pension funds arepositioned for a weaker krona and are assumed to be SEK

buyers on additional krona weakness.+1

FLOWS The current account continues to show asubstantial surplus of 6-7%/GDP. In the second quarterthe balances of services produced a surplus of SEK40.3bn whilst goods saw a SEK 20bn surplus. As regardsinvestment income record high Swedish dividendscontributed to a net outflow of SEK 14.2bn. FDI saw a netoutflow of SEK 10.9bn whilst portfolio flows saw a netinflow of SEK 34bn as foreigners continued to pile up onSwedish fixed income instruments. The overall flow

outlook is expected to be SEK positive.+1

TECHNICALS The break below the multiyear floorbecame short lived as the market soon returned up.

Higher highs and higher lows makes the risk somewhatskewed for a weaker SEK but on the other hand theresponse to moves above 124 in the index has so far been

to buy the SEK. 0

+1

0

+1

+1Monetary pol.

Fundamentals

Flows

Technicals

+3Total

PMI and EURSEK

04 05 06 07 08 09 10 11

D i f f u s i o n i n d e x

30

35

40

45

50

55

60

65

70

E U R / S E K ( r e v .

s c a l e )

8.5

9.0

9.5

10.0

10.5

11.0

11.5

PMI (monthly)EUR/SEK (rev. scale)

D e t b t o G D P , %

C u r r e n t a c c . & b u d g e t b a l . % o

f G

D P

TECHNICAL VIEW: SEK TCW INDEX

Price

SEK

120

130

140

2006 2008 2010 20122000 2010

22



Currency Strategy

SWEDEN

23



Currency Strategy

Norwegian kroneWith defensive fundamentals still in fashion, it’s hard tonot be optimistic on the krone in the longer term. The oilrich economy is less dependent on global growth and a

superb fiscal situation makes additional stimulus possibleif needed. At such, foreign appetite for the NOK isexpected to remain high painting a rather positive flowoutlook in the medium term while gradual rate hikes fromNorges Bank also will support the currency.

MONETARY POLICY Norges Bank has argued for over ayear now that the domestic economy calls for higherrates but a strong krone and global factors have hinderedthe bank from hiking too much ahead of peers. Risinginflationary pressure from wage increases and acontinued acceleration in house prices will force NorgesBank to hike rates gradually once the renewed market

turbulence settles. However, in the near term the kroneappreciation will result in Norges Bank revising its optimalrate path lower in the October MPR while still signallinggradual rate hikes. This is not reflected in market pricingwhich currently discount rate cuts. We disagree withmarket pricing viewing risks as skewed to unchanged(rather than lower) rates. Continued verbal warnings from

the central bank will keep monetary policy neutral. 0

ECONOMIC FUNDAMENTALS We expect close to trend-

growth in mainland GDP for 2011-2012 as stronginvestments in the oil sector (which is less affected by the

global cycle in the near term) will increasingly drivegrowth. Private consumption should be strong backed bysolid income growth and high savings. This will also dentany unexpected downturn in the housing market. Fiscalpolicy is currently neutral and the spending of oil moneyis below the 4% fiscal policy rule. Norway has ample

resources to stimulate the economy if needed. +2

FLOWS Norges Bank’s NOK selling of 400-500m/day has

been offset by foreign purchases of triple-A rated bonds.Both the ownership rate in government bonds andforeign issuance of NOK-denominated bonds haveincreased reflecting diversification of global reserve

managers into fiscally sound currencies. This trendhas/will accelerate following the SNB announcement topeg EUR/CHF as the world will seek other safe-havens. Inthe nearest term however, the flow outlook for the kroneis expected to be less positive as FX purchases shouldincrease to NOK 700-800m/day by November. Lookingbeyond that, the appetite for Norwegian krone should behigh based on a positive outlook for OBX (supported bythe oil sector), expected Brent oil price above $100/barrel

in 2012 and continued NOK bond buying. +1

TECHNICALS & POSITIONING The index broke below

the 2003 & 2008 lows but without finding staying powerbeneath. The spike below the prior low points is a clearwarning of an overextended move and a potential

upward reaction. 0


04 05 06 07


d s )

-2 5

0

25

50

7510 0

12 5

1.150

1.200

1.250

1.300

1.350


EUR/USD


+2

0

+1

0Monetary pol.

Fundamentals

Flows

Technicals

+3Total

I n d e x

N O K m i l l i o n s

Technical view: NOK Index (I44)

Price

85

90

95

100

2002 2004 2006 2008 2010 2012

2000 2010

24



Currency Strategy

NORWAY

25



Currency Strategy

Danish kroneFundamentals, flows and technicals point to a strongerDKK vs. EUR. DNB has recently sold DKK and loweredrates. With Euro zone worries to culminate in the fall, a

further fall in EUR/DKK towards the lower end of thecurrent band at 7.44 is likely before a reversal. Adisorderly Euro-zone development could test 7.44.

MONETARY POLICY Officially EUR/DDK is allowed tofluctuate by +/- 2.25% around its central parity rate(7.46038). However, in reality DNB maintains a muchtighter range, recently 7.44 to 7.46 with the mid of therange triggering policy reversal. During August DNBbought 11bn euro as the 7.45 level was breached. Alsothe deposit rate was cut lowering the spread to the Eurozone. Further strengthening will lead to interventionputting downward pressure on DKK with determination

increasing as the 7.44 level is approached.= -1

ECONOMIC FUNDAMENTALS We expect 1.4% growththis year mainly driven by exports. Next year the growthbaton will be passed on the domestic economy as fiscalpolicy and pent-up demand lifts growth to 1.7% - higherthan the Euro zone. The public deficit will increase in2012, but this should not be a concern for financialmarkets given the large current account surplus and lowpublic debt level. Confidence should remain regardless ofthe outcome of the national elections on September 15.The fundamental problem in the Danish economy is the

aftermath of the private debt accumulation during thehousing bubble. The bust has left consumers stretchedand revealed pockets of weakness among banks. This hascaught international attention as failures lead to losseson senior debt. The FSA has signalled that further writedowns are in the pipeline. However, outlines for a “BankBill 4” encourage consolidation in the sector beforefailures and DNB will start accepting less liquid collateraladdressing liquidity problems. Hence, the toolkit fordealing with the situation will improve and speedierconsolidation is likely. With the current focus on public

balances, we find fundamentals net positive. +1

FLOWS Positive spreads to Germany makes Danish AAAgovernment bonds attractive. However, recentdowngrades of Danish mortgage bonds from AAA hasdented foreign investor appetite somewhat. The currentaccount surplus leads to a general inflow. With exportsslowing in the second half of the year, this flow couldmoderate towards year-end. In the past year, riskaversion has lead to upward pressure on DKK vs. EUR.This pressure is likely to be strong until the Euro situationis resolved. Our main scenario is a resolution andstabilization in leading indicators later this year. Bottomline, flows are positive short-term, with moderation more

likely as the year nears it’s end. +1

TECHNICALS & POSITIONING The cross is headed south

within parameters set by a broader range. 0


04 05 06 07


d s )

-2 5

0

25

50

7510 0

12 5

1.150

1.200

1.250

1.300

1.350


EUR/USD


+1

0

+1

-1Monetary pol.

Fundamentals

Flows

Technicals

+1Total

D e t b t o G D P ,

%



f G

D P

Technical view: EUR/DKK

Price

7.44

7.445

7.45

7.455

7.46

2007 2008 2009 2010 2011 2012

2000 2010

26



Currency Strategy

DENMARK

27



Currency Strategy

Russian roubleWe are moderately constructive on the outlook for theRUB against the basket by the end of the year and moreso by the end of Q1. Two crucial flows and two key risks

are at the centre of our analysis. Oil prices are expectedto remain elevated thus maintaining a large currentaccount surplus. Meanwhile, we expect capital outflowsto increase, as political uncertainty escalates in the run-up to elections. Near term, downside risks dominateemanating from the oil price and the European debtcrisis. The rouble may well weaken before it startsrecovering towards year end.

MONETARY POLICY The Central Bank of Russia (CBR)has hiked the reference rate by 50bps to 8.25%. The 1Wdeposit rates, which is more important from a currency/carry perspective, has been raised by 75bps to 3.5%.

Inflation has fallen from a peak around 9.5% in earlysummer to 8.2% (target 7%). Given this and theincreased uncertainty about the global economicenvironment, we expect the CBR to remain on hold forthe foreseeable future. Although carry is unlikely to be animportant FX driver for now, monetary policy must beseen as RUB supportive, especially in view of therelatively high policy rate in conjunction with an FXreserves rich central bank ready to intervene if/when therouble against a basket (55% USD, 45% EUR) risesfurther within the fluctuation band (currently at 32.25-

37.25). +1

ECONOMIC FUNDAMENTALS GDP growth so far this

year has disappointed, dropping from 4.1% in Q1 to 3.4%in Q2. We expect some acceleration backed by highcommodity prices and supported by an expectedsupplementary budget in the run-up to elections(Parliament in Dec-11. and President in Mar-12). Althoughgrowth will be high compared to developed countries, itwill not come back to pre-crisis level as potential growthhas shrunk due to worsening demographics andinsufficient renewal of the capital stock. Meanwhile,public debt to GDP is below 10% and the C/A to GDP will

be about 4% this year but is set to become lower next. +1

FLOWS The C/A surplus has supported a steady increasein the FX reserves of about USD 2bn/week YTD to 543bnnow. The surge would have been larger were it not forprivate capital outflows ( >USD 30bn in H1). Theseoutflows are likely to increase with political uncertaintiesas elections come closer and more so if risk aversion

eventually would hit oil prices. -2

TECHNICALS The market has for months been parked ontop of the yearly average, consolidating the prior surge.

The longer the market remains above the 52w movingaverage the greater the probability of a sustained move

higher towards the ceiling of the 2010/2011 range -1


04 05 06 07


d s )

-2 5

0

25

50

7510 0

12 5

1.150

1.200

1.250

1.300

1.350


EUR/USD


+1

-1

-2

+1Monetary pol.

Fundamentals

Flows

Technicals

-1Total

D e t b t o G D P , %


& b u d g e t b a

l . % o

f G D P

Technical view: RUBLE BASKET

Price

32

33

34

35

36

Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1

2010 2011

28



Currency Strategy

RUSSIA

29



Currency Strategy

Polish zlotyThe zloty is among the more vulnerable currencies tocontinued/deepened turbulence in financial markets.Near term risks are skewed to the downside with the

weak spots on the fundamental score card (twin deficits)likely to attract more attention than the strengths.Growth will remain strong in a regional comparison,partially supported by the weak zloty.

MONETARY POLICY The next move in policy rates by theNational Bank of Poland will be down, in our view. Havingfrontloaded 100bps of policy rate hikes to 4.5%, focushas shifted from elevated food and energy price risks to aslowing growth trajectory abroad and at home. But a nearterm rate cut may be seen as premature for two reasons.Headline CPI is unlikely to start falling before year endfrom around 4% currently towards the 2.5% target and

the zloty is weak and vulnerable to further marketturbulence. We expect one cut by 25bps each in Q1 andQ2 next year. The FinMin will exchange all the EU-fundson the market and the NBP is likely to mark its presencein the market if the zloty would suffer continued sharp

losses however not by drawing a “line in the sand”. +2

ECONOMIC FUNDAMENTALS will, in our view, remain a

crucial driver for currencies. If GDP growth was the onlyparameter investigated, the zloty should do OK (stillstrong at +4.3% in Q2). But it isn’t. Investors have duringrecent years learnt to scrutinise internal and external

balances and Poland currently suffers twin deficits -public budget and current account - and financing of thelatter is predominantly with short term or debt generatingcapital (see Flows below). These deficiencies are eyecatching especially during periods of market stress whenfundamental strengths such as moderate levels ofindebtedness, a strong banking system and stable politics(likely to remain after the October 9 parliamentaryelection) are out of investors’ focus. Overall and in thecurrent environment we give a small negative score for

fundamentals. -1

FLOWS The annualised basic balance has stabilised just

below zero. The current account deficit is set to reachalmost 5% of GDP (after the revision) but is fullyfinanced. The quality of financing has however,deteriorated with net FDI now flat with an increasingdependence on portfolio flows. For next year, the plan isto issue public external bonds worth EUR 4.5bn. Polandhas a flexible credit line of USD 30bn with the IMF which

would be drawn upon only in a very dire situation. -1

TECHNICALS The large “round-bottom” type of turn

indicates a more lasting upturn, so does also the breakabove the 2010 high point, 4.24, do. With the market

moving away from its yearly average, a sing of goodmomentum, new highs (4.36, 4.50?) looks increasingly

likely. -2


04 05 06 07


d s )

-2 5

0

25

50

7510 0

12 5

1.150

1.200

1.250

1.300

1.350


EUR/USD


-1

-2

-1

+2Monetary pol.

Fundamentals

Flows

Technicals

-2Total

GDP and economic sentiment

98 00 02 04 06 08 10

-4

-2

0

2

4

6

8

75

80

85

90

95

100

105

110

115

120 Economic Sentiment, SA, ECFINGDP growth

D e t b t o G D P ,

%



f G D P

Technical view: EUR/PLN Price

3.2

3.6

4

4.4

2009 2010 2011

2000 2010

30



Currency Strategy

POLAND

31



Currency Strategy

Hungarian forintNumber crunching the forint foundations in 2011 is achallenging task. On the one hand, the forint enjoys twinsurpluses and very high carry. On the other, these

supports are partially the fruits of short sighted fiddlingwith public finances and of a depressed private sector. Alack of political will or capability (or both) to understandthe market’s reaction to political initiatives adds to thevulnerability of HUF. Near term; risks clearly lie on thedownside. By year end, however, a recovery to currentlevels is likely given our expectation for an orderlysolution of the European debt crisis despite its severity.

MONETARY POLICY A policy rate at 6% and a realinterest rate of almost 3% is definitively too much forthe domestic economy. Other EM central banks have

or will cut rates as growth and inflation eases. TheNational Bank of Hungary is unlikely to have the luxuryof responding in that manner due to the privatesector’s heavy foreign indebtedness. Any rate cut thatweakens the HUF will raise repayment costs to theextent that it becomes counter productive. Hence, weexpect policy rates on hold for now. The excessive

policy rate level is a key supporter for the forint. +2

ECONOMIC FUNDAMENTALS Twin surpluses look fine,

on paper but this year’s 2% budget surplus largely restsupon the nationalisation of private pension funds. Theweak 2Q GDP growth (1.5% y/y vs. 2.5% expected) anddwindling outlook for exports have put next year’s budgetdeficit target in doubt (2.5% of GDP). The governmenthas re-committed to the target and it has a very strongposition in parliament. But the Fidesz has a tainted trackrecord and has already decided upon sensitive spendingcuts (financially rational given a public debt/GDP close to80% but politically challenging) for 2012. The C/A surplusreflects a strong export sector but also four years ofdecline in retail sales. The fundamental weaknesses willbe more in focus than the structural progress achieved,

especially in the near term. -2

FLOWS The trade balance surplus is a massive 7-8% ofGDP. However, the income account is weighed down byhigh external private and public sector debt and highinterest rates. De-leveraging of the high FX debts alsoweigh on the HUF. This would intensify if new proposalsto repay FX loans at preferential rates become law. Still,

the C/A surplus is a positive. -1=TECHNICALS The market is currently moving towards atest of the upper boundary of the two year long broadrange. Only a successful break out of the box will call for anew trend to have emerged. The fact that the 2011 low(so far) became higher than the 2010 one makes an

upside exit more likely. -1


04 05 06 07


d s )

-2 5

0

25

50

7510 0

12 5

1.150

1.200

1.250

1.300

1.350


EUR/USD


-2

-1

-1

+2Monetary pol.

Fundamentals

Flows

Technicals

-2Total

5 Y H G B s p r e a d v s .

B u n d , p e r c e n t

S t o c k m a r k e t i n d e x ( H U F )

% of GDP


Source: IMF

98 00 02 04 06 08 10 12 14 160

10

20

30

40

50

60

70

80

-17.5

-12.5

-7.5

-2.5

2.5

7.5 Current account balanceBudget balancePublic debt

Technical view: EUR/HUF Price

240

260

280

300

2009 2010 2011

2000 2010

32



Currency Strategy

HUNGARY

33



Currency Strategy

Turkish liraThe lira remains at risk of further losses, especially in thenear term when liquidity and current accountcomparisons look set to weigh heavier than carry and

other fundamentals. The current account deficit is aboutto fall substantially but remains large and financing isvulnerable to market stress. A hard landing after recentsuper strong growth cannot be ruled out. The centralbank has, however, followed through on verbalinterventions with action as the lira has already weakenedenough. While the near term risks are clearly tiltedtowards further lira losses the outlook next year looksmuch better.

MONETARY POLICY Although carry is not expected to bean important driver for FX markets in coming months, itappears likely that the lira would have been significantly

weaker was it not for the high interest rate. The surprisecut in the 1W rate to 5.75 and the rise in the O/N rate to5.0 early August has been coupled with dovish rhetoric inview of a deteriorating global backdrop. However, the CBalso signals that there is a limit to how much liraweakness it accepts. It has hence switched from dailyUSD purchases to sales among other measures. Weexpect the global backdrop to weaken further near term,but with the lira risking to fall further and inflation wayabove target (core at 6.2% vs. the 5.0% target for Dec.2012) there will not be room to cut rates further for now.Reductions in RRR are more likely. The 5.75% do lend the

lira crucial support. +2

ECONOMIC FUNDAMENTALS: The domestically driven

rapid growth in recent quarters widened the currentaccount deficit to 12% of GDP in 1H12. This is a keyreason for TRY underperformance. Growth will howeverfall fast from 11% in Q1 and 8.8% in Q2 to perhaps 3%next year. The external deficit will drop from about 10%of GDP to 6-7% as imports slow, the lira is morecompetitive and energy imports are cheaper. The currentaccount deficit will still remain a key risk especially givenits short term financing structure (see below). Other

crucial fundamentals such as internal and external debtlevels, banking system health and political decisivenesslook much stronger but are not likely to come to the

forefront for now. -1

FLOWS: Only 15% of the current account deficit is

covered by FDI. The rest comes from banks’ foreignborrowing and portfolio inflows, both of which may dryup if the financial stress increases. We expect govern-ment bonds to be rather sheltered in this environmentbut worry more about the maintenance of adequate roll

over ratios in bank’s foreign borrowing. -1

TECHNICALS The impulsive advance unfolds in a trend-shaping wave pattern. In this context the next target(however not the end of the trend) should be sought

around 1.88. -2


04 05 06 07


d s )

-2 5

0

25

50

7510 0

12 5

1.150

1.200

1.250

1.300

1.350


EUR/USD


-1

-2

-1

+2Monetary pol.

Fundamentals

Flows

Technicals

-2Total

P e r c e n t

y / y

D e t b t o G D P ,

%



f G D P

Technical view: USD/TRY Price

1.2

1.3

1.4

1.5

1.6

1.7

2009 2010 2011 2012

2000 2010

34



Currency Strategy

TURKEY

35



Currency Strategy

Korean WonBroadly speaking, in our experience we find thatEmerging Market investors view KRW as a proxy forinvesting in Asia. This is due to the idea that Korea has

very liquid and deep bond and equity markets on a cashand derivatives basis. Given our view of a rebound ineconomic activity in Asia sometimes in Q4 2011, theAsian currency appreciation theme will at first materializevia a rally in KRW against the USD.

MONETARY POLICY We believe that the current stanceof monetary policy is still loose, given that the real 91 dayCD rate (which is our measure of real interest rates inKorea) is negative and the second round effects of pastcommodity price increases on core inflation has yet toend. As a result, we expect processed goods prices to risefurther and add pressure on core inflation to further

accelerate in Q4 12. We believe the base policy interestrate may rise by 50-75 bps by end-2011 from the current3.25%. In our view, the neutral base policy interest rate isaround 4-4.5%. The risks to our aggressive view onmonetary policy is that if US data shows further signs ofslowing in the next few months and global financial

market turbulence is sustained. +1

ECONOMIC FUNDAMENTALS Our leading indicatorsanalysis suggests a rebound in economic activity bySeptember. As a result, we forecast Q3 11 GDP growth tobe around 3% y/y versus 3.3% in Q2 11. We expect Q4 11

GDP growth of around 4%. In our view, the contributionfrom investment spending to growth may accelerate inQ4 11 as the uncertainty on global macro and marketconditions diminishes. In addition, the US holiday seasoneffect on Korean exports should be positive for largercapacity utilization rates and inventory build up in Koreain our view. As a result, the output gap may remain

positive in Q4 11. +2

FLOWS With the exception of the possibility of a marginal

current account deficit in August, we expect currentaccount surpluses in Q4 11 driven by goods trade

surpluses emanating from exports for the US holidayseason. In addition, we expect portfolio flows toaccelerate in Q4 11 into the bond and equity markets asAsia growth and currencies outperform comparables in

developed economies. +2

TECHNICALS USD/KRW keeps trading in an overalldowntrend below the negatively sloped yearly average.The break above the upper boundary of what appears tobe a falling wedge is however a warning sign of

potentially an upside reaction in the making. 0


04 05 06 07


d s )

-2 5

0

25

50

7510 0

12 5

1.150

1.200

1.250

1.300

1.350


EUR/USD


+2

0

+2

+1Monetary pol.

Fundamentals

Flows

Technicals

+5Total

Effective exchange rate & USD/KRW

00 01 02 03 04 05 06 07 08 09 10 11

U S D / K R W ( r e v e r s e d )

700

800

900

10001100

1200

1300

1400

1500

1600

N E E R I n d e x ( B

I S )

65

70

75

80

85

90

95

100

105

110

115

120Effective exchange rateUSD/KRW (reversed)

% of GDP


Source: IMF

90 95 00 05 10 150

5

10

15

20

25

30

3540

-5.0

-2.5

0.0

2.5

5.0

7.5

10.0

12.515.0 Current account balance

Budget balancePublic debt

Technical view:

Price

/USD

1,050

1,100

1,150

1,200

Q3 Q4 Q1 Q2 Q3 Q4

2010 2011

36



Currency Strategy

SOUTH KOREA

37



Currency Strategy

Chinese RenminbiWe expect Q3 11 GDP to bottom at around 9.2% y/yversu s 9.5% in Q2 11, and rebound to 9.5% in Q4 11. CPIinflation may hit 6.8-7% y/y by November 2011 versus

July 6.5%. As a result, we expect policy makers to use aplethora of tools to tighten monetary conditions further,which we believe is only close to neutral and not tightaccording to our proprietary monetary conditions index.On an annual basis, we expect currency appreciation torise to 6-7% from the last few years average of 5-6% inorder to temper inflationary pressures and geopoliticalconsiderations in the developed economies.

MONETARY POLICY We believe that our monetaryconditions index should be at least 3% versus end-July0.9%. This is based on our H2 11 GDP growth forecast ofaround 9.4% and CPI inflation of 6.8-7% by November

2011. With policy interest rates rising by 50-75 bps byend-2011 as our base case scenario, USDCNY will fall to6.3 and potentially lower by end-2011 in order for ourmonetary conditions index to approach 3% by end-2011.By end 2012, we expect USDCNY at 5.90. Price pressuresin the utility, transport, and food sectors seem to berobust and show limited signs of moderating, e.g.services CPI which lags goods CPI in our view mayaccelerate over the next few months. Wages seem to belagging productivity and inflation. From previousbusiness cycles, we note that the gap between real wagesand productivity will have to narrow via further increases

in nominal wages. -3

ECONOMIC FUNDAMENTALS We expect economic

activity to rebound by September as indicated by ourproprietary leading indicator analysis. Investmentspending is already showing signs of revival. The mainsectors where investment spending may accelerate arecement, chemicals, and capital goods. Overall investmentspending will be driven by capacity additions in thesesectors and movement of factories from coastal tointerior regions as cost and wage pressures have been

becoming prohibitive in these areas. +2

FLOWS Due to loose monetary conditions in the G3economies, we are observing large net FDI and portfolioinflows. In addition, current account surpluses remainintact as trade surpluses continue to remain high on backof strong exports of intermediate and capital goods.Continued foreign exchange management policies havekept the pace of FX reserves growth robust. These trendsare likely to continue in the next 1-3 quarters in our view.

+2

TECHNICALS The contract trades comfortably lowerbelow the negatively sloped yearly average. Last month

saw an impulsive drop, now partially being correctedtowards the middle (maximum the 52w ma and ceilingline) of the falling range, before the downtrend expected

to resume. +1


04 05 06 07


d s )

-2 5

0

25

50

7510 0

12 5

1.150

1.200

1.250

1.300

1.350


EUR/USD


+2

+1

+2

-3Monetary pol.

Fundamentals

Flows

Technicals

+2Total

Policy Rates / Reserve requirement

96 98 00 02 04 06 08 100.0

2.5

5.0

7.5

10.0

12.5

15.0

17.5

20.0

0.0

2.5

5.0

7.5

10.0

12.5

15.0

17.5

20.0 Lending Rate, 0-1 Year Deposit Rate, 1 Year RR2 - Reserve Require

D e t b t o G D P ,

%



f G D P

Technical view: CNY 1Y NDF Price

6.4

6.6

6.8

7

7.2

2009 2010 2011 2012

2000 2010

38



Currency Strategy

CHINA

39



Currency Strategy

Currency ranking summaryThe chart shows the ranking of individual currencies using each of our four evaluation criteria. A positive (negative) valuemeans we expect that particular criterion to have a strengthening (weakening) impact on the currency.

Monetary policy2 2 2 2

1 1 1 1

0 0 0

-1 -1 -1

-2

-3

AUD PLN HUF TRY NZD SEK RUB KRW EUR CAD N OK USD G BP DKK JPY CHF

Economic fundamentals2 2 2

1 1 1 1 1

0 0

-1 -1 -1 -1

-2 -2NOK KRW CNY CAD AUD SEK DKK RUB CHF NZD USD GBP PLN TRY JPY HUF

Flows3

2 2

1 1 1 1 1

0 0 0

-1 -1 -1 -1CHF KRW CNY EUR JPY SEK NOK DKK CAD AUD NZD GBP PLN HUF TRY USD

Technicals & Positioning

1 1

0 0 0 0 0 0 0 0

-1 -1 -1 -1 -1

-2

JPY CNY USD CHF AUD NZD SEK NOK DKK KRW EUR GBP CAD RUB HUF PLN

40



Currency Strategy

Stretch-o-meter & Seasonality

The stretch-o-meter tells us how many standard deviations away currently the exchange rate is from the 200-day movingaverage. Higher absolute values indicate more stretched values.

SEB FX Stretch-o-meter

-4.00 -3.00 -2.00 -1.00 0.00 1.00 2.00 3.00 4.00

EURPLN

NOKSEK

USDCAD

USDSEK

AUDUSD

GBPSEK

USDCHF

USDNOK

EURCAD

EURCHF

EURGBP

EURSEK

EURUSD

GBPUSD

USDJPY

EURJPY

EURNOK

High reaction

risk

High reaction

risk

Seasonal currency patternsJan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec

USD/ AUD -0.4 1.0 -0.1 2.3 0.7 0.3 0.5 -0.8 1.2 0.6 0.3 1.4 USD/ AUD

USD/ CAD -0.3 0.0 0.2 1.4 2.1 -0.3 0.0 0.1 1.6 -0.2 -0.1 0.1 USD/ CAD

USD/ CHF -1.4 0.3 0.4 0.1 0.3 0.7 0.3 0.3 1.5 0.1 0.7 2.7 USD/ CHF

USD/ GBP -0.1 -0.8 -0.5 1.2 0.5 1.0 0.6 -1.1 0.5 0.1 -0.5 -0.1 USD/ GBP

USD/ HUF -3.3 0.2 0.2 1.4 0.8 0.0 1.2 -0.9 2.2 -0.5 0.3 2.7 USD/ HUF

USD/ JPY 0.3 -0.3 -0.7 -0.1 0.8 -0.4 0.1 1.7 0.5 1.2 0.8 0.0 USD/ JPY

USD/ NOK -1.1 0.3 0.6 2.3 0.2 -0.6 1.2 -0.4 1.6 -0.7 -0.1 1.5 USD/ NOK

USD/ NZD 1.0 0.1 -3.5 -0.5 1.3 -2.1 2.1 -0.7 -0.2 -0.7 -1.6 3.2 USD/ NZD

USD/ PLN -2.5 0.3 0.2 1.7 0.0 -0.5 2.0 -1.2 1.4 0.2 0.8 1.9 USD/ PLN

USD/ SEK -1.4 -0.3 0.4 1.5 0.1 -0.3 1.1 -0.4 1.8 -0.9 0.6 1.8 USD/ SEK

USD/ SGD -0.1 0.1 -0.1 0.8 0.3 -0.4 0.7 0.1 0.5 0.2 0.0 1.2 USD/ SGD

Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec

EUR/ AUD -0.9 -1.0 0.6 -1.5 -0.5 0.0 0.1 0.6 0.3 -0.7 0.2 0.6 EUR/ AUD

EUR/ CAD -0.9 0.0 0.2 -0.6 -2.0 0.5 0.7 -0.3 -0.1 0.0 0.6 2.0 EUR/ CADEUR/ CHF -0.1 -0.2 -0.1 0.6 -0.2 -0.4 0.3 -0.5 0.1 -0.5 -0.2 -0.6 EUR/ CHF

EUR/ GBP -1.4 1.0 0.8 -0.5 -0.5 -0.6 0.0 0.8 1.1 -0.5 1.0 2.2 EUR/ GBP

EUR/ HUF 2.1 0.0 0.1 -0.6 -0.6 0.4 -0.6 0.7 -0.5 0.3 0.3 -0.7 EUR/ HUF

EUR/ JPY -1.8 0.5 1.2 0.8 -0.7 0.7 0.5 -1.9 1.0 -1.4 -0.2 2.1 EUR/ JPY

EUR/ NOK -0.4 -0.2 -0.3 -1.5 -0.1 1.0 -0.5 0.2 0.0 0.3 0.7 0.5 EUR/ NOK

EUR/ NZD -2.2 -0.1 4.5 1.4 -1.2 2.3 -1.5 0.7 2.1 0.4 2.3 -1.0 EUR/ NZD

EUR/ PLN 1.3 -0.2 0.3 -0.9 0.3 0.6 -1.0 0.7 0.4 -0.5 -0.2 0.0 EUR/ PLN

EUR/ SEK -0.1 0.5 0.0 -0.8 -0.1 0.6 -0.4 0.2 -0.2 0.5 -0.1 0.2 EUR/ SEK

EUR/ SGD -1.3 0.1 0.5 -0.1 -0.1 0.4 0.2 -0.5 1.1 -0.6 0.5 0.6 EUR/ SGD

EUR/USD -1.5 0.1 0.5 0.7 0.2 0.0 0.9 -0.5 1.7 -0.4 0.5 2.1 EUR/USD

Roughly only values of at least +/-1% (bolded) are statistically significant.

The table show the monthly seasonal effects (in %) that the quoted currency pairs historically have experienced. A positive value

indicates that the currency pair tends to rise and vice versa. The calculations are done using data over the last 10 years.

41



Currency Strategy

Guide to indicators

SEB CURRENCY RANKING SYSTEM

Each currency is ranked according to four potential

drivers; Technicals & Positioning, Monetary policy ,Economic fundamentals and Flows. Each of thesedrivers is given a grade to reflect how important wedeem it for the currency from a 3 month perspective.The grades used are 0=no impact, 1=small impact,2=medium impact, and 3=strong impact. To indicatewhether the factor will have a positive or negativeimpact on the currency a (+) or (-) sign is used. Forexample, +1 for flows connected with the CHF meanswe expect the flow situation to be a slightly positivefactor for the Swiss franc during the coming 3 months.The sum of the grades for the four different driversresults in the overall score for the currency which is

printed in the top left corner of the graph.

COMMITMENT OF TRADERS (COT) REPORT

The CoT report (weekly) seeks to describe market

positioning in a currency future on the ChicagoMercantile Exchange. The Exchange’s trading membersmust state whether their trading purposes compriseeither commercial hedging or speculation. Speculatorsare regarded as either large (non-commercials) or small.We present and analyse the positioning of largespeculators in order to understand sentiment in thecurrency. The chart presents the net open position

(non-commercial longs less non-commercial shorts).For those currencies not available in the CoT report wehave created a proxy (see FX Ringside 2006-04-04).

BASIC BALANCEThe basic balance is a flow indicator that includes thecurrent account balance and net flows from both direct-and equity investments. The broad basic balance alsoincludes the private sector’s net trade in debt securities.

EFFECTIVE EXCHANGE RATE (ER)

A nominal effective exchange rate is the value of a

currency against a basket of currencies. The Bank ofEngland calculates the ER using IMF-provided weights.Each currency is given a weight that reflects its relative

importance in the country’s trade flows. An increase(decrease) in the BoE index reflects an appreciation(depreciation) of the currency.

EXTERNAL DATA SOURCES

The main data providers used in this report are: SEB,

national sources, Reuters Graphics and the ReutersEcowin.

SEASONAL PATTERN

We have calculated the seasonal effects using a

regression approach. In the regression we have used themonthly percentage change in the exchange rate as thedependent variable and dummy variables for thedifferent months as explanatory variables. Our datasetconsists of end of the month daily close FX rates overthe last 10 years.

SEB STRETCH-O-METERThis indicator shows how stretched a currency pair is bymeasuring the distance between the current rate andthe 200 day moving average expressed in standarddeviations. Values in excess of +/-3 are to be consideredover-stretched and often signal an increasedreaction/reversal risk.0

0

+1

-2Monetary pol.

Fundamentals

Flows

Technicals

-1Total

42



Currency Strategy

Contacts

STOCKHOLM

Carl Hammer (editor)

+46 8 506 23128

[email protected]

Richard Falkenhäll

+46 8 506 23133

[email protected]

Dag Müller

+46 8 506 23129

[email protected]

Mats Olausson

+46 8 506 23262

[email protected]

Anders Söderberg

+46 8 506 23021

[email protected]

FRANKFURT

Thomas Köbel

+49 69 97271245

[email protected]

OSLO

Erica Blomgren

+47 22827277

[email protected]

COPENHAGEN

Jakob Lage Hansen

+45 33281469

[email protected]

SINGAPORE

Sailesh Jha Kumar

+65 65050583

[email protected]

43



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seb report: investors to move away from dollar, euro

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