barclays fx weekly brief 20100902

8/3/2019 Barclays FX Weekly Brief 20100902

1/18

FOREIGN EXCHANGE RESEARCH 2 September 20

PLEASE SEE ANALYST CERTIFICATIONS AND IMPORTANT DISCLOSURES STARTING AFTER PAGE 16

FX WEEKLY BRIEF

Widening peripheral bond spreads:Is this time different?

Although peripheral euro area sovereign yield spreads have widened to levels last reached

at the peak of the fiscal crisis earlier this year, the EUR has not weakened significantly. In

our view, the banking stress tests are the main reason why this time is different.

A not-too-different world 9

The BISs triennial survey of FX markets allows a comparison of the pre- and post-crisis

world. FX markets seem unchanged, but there are early signs of some new trends.

Figure 1: Currency performance against the EUR in the two episodes of peripheral

spread widening

-2% 0% 2% 4% 6% 8% 10%

NZD

JPY

AUD

NOK

SEK

April 12-May 10 August 5 - August 26

Source: Barclays Capital

Editorial

FX Short-term and Technical Strategy View

Open Trade Recommendations

Closed Trade Recommendations and OPERA

Forecasts

EM FX Views on a Page

Weekly performance of currencies versus th

USD

2.5%

2.2%1.8%

1.7%1.6%

1.2%1.2%

1.1%

0.9%0.8%

0.6%

0.3%0.1%

0.0%-0.3%

-0.8%

0.3%

2.7%AUD

NOK

SEK

NZD

PLNBRL

ZAR

CHFKRWTRY

EUR

CAD

JPY

INRMXNRUBCNY

GBP

Note: Based on Thursday 4pm London rates.Source: Bloomberg

BarCap forecasts

3mforecast

Returns

againstforwards

USD Index 84.24 2.1%

EUR/USD 1.25 -2.5%

USD/JPY 87.00 3.4%

GBP/USD 1.58 3.0%

USD/CAD 1.06 0.7%

AUD /USD 0.88 -2.1%

NZD /USD 0.70 -1.5%

EUR index 102.54 -1.9%

EUR/GBP 0.79 -5.3%

EUR/CHF 1.40 8.0%

EUR/SEK 9.30 -0.3%

EUR/NOK 7.90 -0.4%

Major EM

USD/CNY 6.71 -1.1%

USD/INR 47.0 -0.6%

USD/KRW 1125 -5.0%

USD/RUB 30.3 -1.9%

USD/ZAR 7.55 2.5%

USD/BRL 1.80 1.5%

USD/MXN 12.85 -2.3%



2/18

Barclays Capital | FX Weekly Brief

2 September 2010 2

EDITORIAL

Beware of changing tides

It started off as a ripple, with singular economic data releases surprising to the upside of the

consensus, but now has market participants wondering whether it portends a change in thetide in so far as market sentiment and risk aversion are concerned. That market moves have

been large could be explained by either the fact that investor positions had become overly

bearish or that key economic releases have come at a time when liquidity conditions have

worsened with this past week having been sandwiched between a UK bank holiday and

the US Labor Day weekend. On the former, our measures of positioning suggest that

although FX investors have been less bullish about risky assets, they are by no means

overwhelmingly bearish. Indeed, the larger positions may have been in other asset markets,

such as US fixed income. As these are squared up, the ensuing move in US interest rates

could well support the USD and temper any rally in risky assets.

In the very near term, the recovery in market sentiment could be held up by the crucial US

non-farm payroll report and ISM non-manufacturing surveys. Consensus expectations donot appear overly pessimistic, looking for a gain to private payrolls, with only two out of 51

economists polled by Bloomberg actually calling for a decline. However, the weakness in

other measures of employment point to potential downside risks. Although much has been

said and written about the strong ISM manufacturing numbers, it is the services sector, not

manufacturing, that is the primary employer and the bigger contributor to US GDP (in terms

of Gross Value Added). Our expectation for the ISM non-manufacturing trails consensus

forecasts, as well. As a result, gains for risky currencies may be muted.

One of the bigger stories to have developed recently has been the widening of European

government bond spreads in the euro area periphery close to levels last reached during the

euro area sovereign debt crisis. While the EURs recovery appears to have hit a road bump,

falling sharply against safe haven currencies, all is not exactly the same. Despite its recent

weakness and the increase in spreads, EUR/USD is more than 7% higher than its trough in

June. In Widening peripheral bond spreads: Is this time different?, we examine why the

EURs response to increased worries about peripheral Europe has not matched its

experience during the sovereign debt crisis.

The sovereign debt crisis and the grand-daddy of them all the global financial crisis circa

2008 showed how important liquidity can be during periods of market turmoil. The

relative simplicity of the FX market, its large size and the variety of participants made it

especially attractive to non-traditional FX investors in search of macro hedges for their asset

portfolios. The BISs Triennial Central Bank Survey of foreign exchange activity provides a

good opportunity to view how FX markets have changed in the pre- and post-global

financial crisis world. We discuss the survey results in A not-too-different world.


3/18


2 September 2010 3

FX SHORT-TERM VIEWS AND TECHNICAL STRATEGY

Week-ahead views, confidence levels and OPERA allocation

Currency Bias Weekly view Allocation

EUR BullishWe expect few surprises from the US employment report, which may, given the recent data flow, feel

like good news.0.36%

JPY BearishAfter payrolls tomorrow, the data schedule is relatively light in the US. JPY should be more influencedby US Treasury auctions and the risk of intervention by Japanese authorities.

-0.36%

GBP BearishMore data are to be released in the UK than in other major economies this week. The BoE is unlikely to

do anything market-moving, but we think the risks to the data are to the downside-0.36%

CHF NeutralThe CHF has been the star currency of the summer, which has led it to become firmly overvalued. It

may be too soon for its rise against the EUR to reverse, but it is likely to slow.0.00%

CAD Bearish Weakness in US and Canadian economic data could lead to a potential softening of the BoCs stance. -0.36%

AUD Bullish

US payrolls data could be a modest positive for risk. We expect the RBA to remain on hold next week

and think it could continue to talk down the prospects for further rate hikes this year. Local labourmarket data also hold downside risks.

0.36%

NZD Bullish A return from summer holidays could lead to higher trading volumes and investors putting on risk. 0.36%

SEK Bullish

The Swedish economy remains buoyant and any rally in risky assets is likely to lead to SEK

outperformance. 0.36%

NOK Neutral EUR/NOK has been going sideways recently. We see little reason for this to change in the very near term. 0.00%

Note: We use these views as inputs to our OPERA portfolio. High confidence views are signified by an asterisk. All views expressed relative to the USD.Source: Barclays Capital

Technical strategy

The secular trend for USD/CHF is down. While that move has paused during the past two years, an unfolding bearish Pennant

formation suggests it is far from over. Recent CHF strength on the crosses is driving USD/CHF closer to the edge of the pattern.

Although current price action is benign and we expect further range trading in the months ahead, it is worth noting that 0.9915

may be an important tipping point. A close below 0.9915 would complete the formation, signal that the secular downtrend has

resumed, turn our long-term outlook bearish (targeting 0.9500 on a near-term horizon) and suggest a growing risk for a return

to trendline support at 0.8560 in the coming years. This is a heads up to that long-term risk.

Source: CQG


4/18


2 September 2010 4

Open trades, as of 2 September 2010

Original Mark to market

Trade/date/macro views

Spot

reference

% of

notional Expiry

Current spot

reference

Net profit

since

inception

Profit change

(since 26/8)

Initial rationale: In the short run, we think that EUR/GBP is likely to continue to range trade but that the second half of the year should see

general GBP strength once the UK election is over and the MPC comes closer to tightening policy.Long 7m EUR/GBP 1x2 put spread(0.88 and 0.83 strikes), 18/03/10

0.8955 0.95% 18/10/10 0.8325 +2.55% +0.48pp

Initial rationale: Both carry and value look attractive, but returns will likely depend heavily on the various risk scenarios vis--vis higher USinterest rates, China tightening, and sovereign fiscal issues. As a result, we recommend being long a less regime-dependent strategy VECTOR(for details and a description of current allocation, please see VECTOR: Value Enhanced Carry Trading of Exchange Rates, 15 October 2009 andVECTOR Monthly Rebalancing Update, 15 July 2010).

Long VECTOR strategy, 18/03/10 219.8156 - - 216.5243 -1.50% -0.43pp

Initial rationale: The spread between EUR/AUD and EUR/GBP implied vols is near historical lows, and our analysis suggests the spread tends towiden under various risk scenarios, including a repricing of the risk premium associated with China.

Long 0.55 vega of 1y 12.1%EUR/AUD vol swap, short 0.45 vega

of 1y 11.35% EUR/GBP vol swap,17/03/10

EUR/AUD vol:11.7%

EUR/GBP vol: 10.9%

- 17/3/11 EUR/AUD vol:12.74%

EUR/GBP vol:11.02%

+1.64% -0.18pp

Initial rationale: Implied volatility curves are significantly upward sloping, suggesting that the market believes volatility has already bottomed,although we are just a few months into the recovery. We think this steepness is unlikely to persist. Although the trade did not reflect our initialrationale once the first leg expired, we decided to keep it because it is consistent with our bullish EUR/JPY view.

Long 3m 132.50 EUR/JPY straddle,short 2y EUR/JPY strangle(strikes: 155.50 and 109.25), 25/9/09

132.90 0% 24/12/09(expired)27/09/11

107.93 -5.56% +0.33pp

Initial rationale: The volatility spread between USD/CAD and EUR/USD is at historically low levels, and this represents a true mispricing basedon the risk scenarios considered. Furthermore, the themes considered in FX Quarterlysupport a rise in USD/CAD volatility and a fall inEUR/USD volatility, thereby implying a widening of the spread.

Long 6m USD/CAD volswap at13.80%, short 6m EUR/USD volswapat 13.75%, 25/06/10

USD/CAD vol:12.90%

EUR/USD vol:

14.35%

- 27/12/10 USD/CAD vol:12.11%

EUR/USD vol:

12.46%

+1.30% +0.36pp

Initial rationale: A relative ranking of currency performance based on Barclays Capitals views for various asset classes and alternative riskscenarios suggests that the SEK will do well, while the JPY will not.

Long 3m SEK/JPY call spread (12.4

and 13 strikes), 25/06/1011.51 1.01% 27/9/10 11.59 -0.88% -0.04pp

Initial rationale: As fiscal adjustments become the major issue among the G4 economies, the GBP is in relatively better shape than the G3, with abudget proposal that has laid out an aggressive plan for fiscal consolidation and a weaker exchange rate to assist in the adjustment process.

Long 6m worst of GBP call, EUR, USD

and JPY put 2% OTM (strikes:0.8080,1.5203,136.29), 25/06/10

EUR/GBP: 0.8242

GBP/USD: 1.4905

GBP/JPY: 133.62

0.75% 23/12/10 EUR/GBP: 0.8326

GBP/USD: 1.5397

GBP/JPY: 129.69

-0.32% -0.25pp

Initial rationale: A high inflation environment is likely to be associated with strong commodity prices CAD upside. Low inflation and globalgrowth concerns may lead to an increase in risk aversion and another flight to quality USD upside. And a mixed picture could result in USmonetary policy remaining very loose while the BoC tightens. USD/CAD is likely to move outside the 1.00-1.10 range it has been in sinceOctober 2009.

Long 4m USD/CAD put at 1.00 andKO for the first 2m at 0.99, and Long

4m USD/CAD call spread 1.10 and1.1250, with the second leg KI at1.15, 25/6/10

1.0450 0.90% 28/10/10 1.0530 -0.37% -0.06pp

Note: Closed recommendations are at the end of this publication. Source: Barclays Capital
https://live.barcap.com/go/research/content?contentPubID=FC1501653https://live.barcap.com/go/research/content?contentPubID=FC1501653https://live.barcap.com/go/research/content?contentPubID=FC1615081https://live.barcap.com/go/research/content?contentPubID=FC1609974https://live.barcap.com/go/research/content?contentPubID=FC1609974https://live.barcap.com/go/research/content?contentPubID=FC1615081https://live.barcap.com/go/research/content?contentPubID=FC1501653


5/18


2 September 2010 5

FOCUS: EUR AND SOVEREIGN RISK

Widening peripheral bond spreads: Is this timedifferent?

Although peripheral euro area sovereign spreads have widened to levels last reached atthe peak of the fiscal crisis earlier this year, the EUR has not weakened significantly. We

believe that the banking stress tests are the main reason why this time is different.

It has been dj vu all over again for global asset markets European government bond

spreads in the euro area (EA) periphery have widened close to levels last reached during the

euro area sovereign debt crisis circa three months ago, while the EURs recovery appears to

have hit a road bump, falling sharply against the likes of the JPY, CHF and USD over the recent

past. However, all is not exactly the same: the recent widening in peripheral bond spreads

differs in some ways, and despite its recent weakness and the increase in spreads, EUR/USD is

more than 7% higher than its trough in June. What explains the dampened response of the

EUR to the increased worries about peripheral Europe, and how are things likely to develop?

In our view, there were several important reasons why the EUR weakened so significantly in

the earlier period. First, monetary policy expectations changed. Part of the reason was that

fiscal policy was expected to be tighter, especially, but not only, in the peripheral economies.

The natural corollary is somewhat looser monetary policy than would otherwise be the

case. As the exchange rate is more closely linked with monetary policy, this would typically

lead to a weaker real exchange rate. But part was also because the relationship between the

ECB and the euro area governments had also appeared to change most notably when the

ECB announced that it would start purchasing government bonds.

The risk premium on the EUR also increased significantly. Again, there were several

aspects to this, in particular:

The EA appeared more vulnerable to weaknesses in global growth. Prior to the crisis, theEA had increasingly become a two-state economy. Some economies, notably

Germanys, ran large current account surpluses and had relied to a large extent on

Figure 1: The recent rise and fall of EUR/USD coincided withchanges in the real yield differential

Figure 2: Currency performance versus the EUR

-0.6

-0.4

-0.2

0

0.2

0.4

0.6

0.8

Sep-07 Mar-08 Sep-08 Mar-09 Sep-09 Mar-10

1.1

1.2

1.3

1.4

1.5

1.6

1.7

Real yield differential (LHS) EUR/USD (RHS)

pp

April 12 - May 10 August 5 - August 26

-2 0 2 4 6 8 10

NZD

USD

JPY

CAD

AUD

GBP

NOK

CHF

SEK

-2 0 2 4 6 8 10

NZD

USD

JPY

CAD

AUD

GBP

NOK

CHF

SEK

Note: The real interest rate differential is that implied by 10y swap rates.Source: Barclays Capital


Aroop Chatterjee+1 212 412 5622

[email protected]

Paul Robinson

+44 (0) 20 7773 0903

[email protected]

Raghav Subbarao

+44 (0) 20 7773 4144

[email protected]


6/18


2 September 2010 6

exports to drive growth, while others, for example Spain, had had booming domestic

demand driven by credit and a large current account deficit. Following the crisis, it

appeared likely that the German part of the EA would carry on saving but the

Spanish part would increase its savings rate significantly. The result would be that a

large part of demand for EA goods and services would need to come from outside the

EA, and therefore a global slowdown would lead to a weak EUR at the same time as

underperformance of global risky assets. This correlation would be expected to lead toan increased risk premium.

The way the EA would work in the future had become less clear, to the point wheremany were wondering whether it would continue to exist. What was clear was that

some important issues needed to be addressed and that the uncertainties that this

brought about increased market nervousness about holding the EUR.

The health of the EA banking system came into focus. There was widespreaduncertainty about how exposed the banks were to EA sovereign debt, but the prospect

of a vicious circle between the public finances and banks became a concern.

So what has changed so that increased spreads have less effect on the EUR? An important

factor has been the softening economic picture in the US, which has led to an increase in

the perceived likelihood of future monetary easing from the Fed. As Figure 1 shows, the

recent path of EUR/USD has moved with relative interest rates in the two economies.

The weaker outlook for the US economy has been a key driver of the recent increase in

global risk aversion. The increase in sovereign risk spreads has reflected the weakness of

risky assets across markets falling equity prices, widening corporate credit spreads, rising

implied volatilities etc. Previously, the sovereign issues had driven the risk aversion.

Consistent with that, as Figure 2 shows, the EURs decline has been concentrated against

the safe-haven currencies; the broad decline seen during the previous episode has not

been repeated.

There has been some negative news on the peripheral economies. S&P downgradedIreland's sovereign credit rating one notch (to AA from AA-, outlook negative) on concerns

about the rising cost of supporting the country's banks, and there was a weakerthan-

expected Q2 GDP print in Greece (alongside the media reports of increasing internal tension

Figure 3: Benchmark equity index correlations with the DAX

Figure 4: Dispersion of sovereign yields and changes insovereign yields

0% 20% 40% 60% 80% 100%

Greece

France

Spain

Italy

Portugal

07 Jun 10 02 Sep 10

0

50

100

150

200

250

300

350

Sep-09 Dec-09 Mar-10 Jun-10 Sep-10

0

20

40

60

80

100

120

140

160

Dispersion in euro area soveregeign bond yields (bp, left)

Dispersion in the daily changes of euro area sovereign

bond yields (bp, right)

Source: Bloomberg Source: Bloomberg, Barclays Capital


7/18


2 September 2010 7

in Greece on the fiscal austerity measures). But compared with the May episode, these

events were relatively minor. This is reflected in the relatively higher (more positive)

correlation between various European country benchmark equity indices and the German

DAX equity index compared with the low levels during the April-May episode (Figure 3).

Consistent with the above factors, the speed of the deterioration in the prospects for the

peripheral economies has been much more muted. Figure 4 shows the evolution of EAgovernment bond yields over the past year. The rise in spreads in May happened very quickly,

and though the spreads have risen back to similar levels at the peak, the move this time has

been much more orderly and come as much less of a surprise. And though the correlation

between increased sovereign risk and increased demand for USDs is still intact in the currency

forwards and money market as shown by the highly negative correlation between the

dispersion of sovereign bond yields and the EUR/USD 1y basis swap (Figure 5) the widening

of the EUR/USD basis swap has been much more modest this time around.

One way to illustrate the reduced importance of the sovereign issues on the EUR during the

current episode is to use our Financial Fair Value (FFV) model. Whereas EUR crosses were

extremely undervalued with respect to our short-term fair value model for exchange rates in

May, the current level of undervaluation is much smaller (Figure 6). Some of the

undervaluation was clearly due to sovereign risk (which is not included in the FFV model): a

framework similar to the FFV model incorporating sovereign risk shows that much of the

undervaluation was clearly driven by a risk premium associated with the euro area.

However, Figure 5 also shows that even after accounting for the sovereign risk effect, the

undervaluation of EUR crosses has been much smaller this time around.

The results from the FFV analysis suggest that sovereign risk has less of a negative effect on

the EUR. In our view, an important reason why has been the calming effect of the bank

stress tests. The fears of financial contagion emerging as a result of the increase in

sovereign risk appear to have reduced. During the previous flare-up in fiscal risks,

counterparty risk and the demand for dollars were key ingredients in transforming the flare-

up into a crisis. However, despite the increase in sovereign spreads, Libor-OIS spreads

have been declining steadily since July, while demand for dollars at the ECB's auctions has

been conspicuously tiny the most recent auction had only one bank bidding for $60mn for

dollar funding, while the first USD auction, held on May 12, attracted seven bidders for

Figure 5: Basis swaps are negatively correlated with

sovereign yield spreads

Figure 6: Deviations from fair value based on the financialfair value model

-120%

-100%

-80%-60%

-40%-20%

0%

20%

40%60%

80%

100%

Feb-10 Apr-10 Jun-10 Aug-10

-55

-50

-45

-40

-35

-30

-25

-20

-15

Correlation between the sovereign bond yield dispersion

and EUR/USD 1y basis swap (left)EURUSD 1y basis swap (bp, right)

-9

-8

-7

-6

-5-4

-3

-2

-1

0

1

2

EUR/USD EUR/CHF EUR/GBP EUR/NOK EUR/SEK

FFV May FFV Aug

FFV with sovereign risk May FFV with sovereign risk Aug

Source: Bloomberg, Barclays Capital Source: Barclays Capital


8/18


2 September 2010 8

$9.2bn of funding. This is clearly a reflection of the stabilizing influence of the facilities put

in place by the ECB, EU and the IMF some of which provide various EA sovereigns the

ability to lend directly to their banks.

We think there remains some EUR downside. Pessimism about the US economy appears

overdone, and we think that the strength of the EA data in Q2 is highly unlikely to persist.

However, while sovereign concerns are not likely to go away, risk appetite may return to themarkets, which should buoy the EUR, and we think that it is unlikely that the sovereign

concerns are going to escalate significantly. Add to that, we expect the US mid-term

elections, which loom ever larger, to lead to increased concern about the US fiscal position.

This is likely to become an increasingly important USD negative over the next few quarters.

EUR/USD risks remain to the downside in the short run, but we may see a period of range

trading while each currencys weak points battle it out.


9/18


2 September 2010 9

FOCUS: BIS REPORT

A not-too-different world

The BISs Triennial survey of foreign exchange activity1 provides a good opportunity to

view FX markets in a pre- and post-global financial crisis world. While FX markets do notlook all that different, there are early signs of important long-term trends in FX markets.

FX investment is still healthy

The BIS survey points to FX turnover growing by 20% over the 2007-10 period. While this is

significantly less than the 50-70% growth witnessed over the 2001-04 and 2004-07

periods, we do not think that this drop-off in growth signals a decline in investor interest in

FX or investors confidence. Unlike the period following the dot.com bubble bust in 2000, FX

turnover is still growing rather strongly, especially FX spot trading (Figure 1).

Most of the drop-off in turnover growth could also be considered more structural than

cyclical. The lions share of the decline in FX turnover growth was driven by a large decline

in the growth in FX swap transactions. We think this is due to tighter controls on credit linesduring and after the financial crisis, especially to corporates, which fits well with the (small)

decline in FX turnover going through non-financial customers. The slower growth in FX

swap transactions also possibly reflects a decline in the demand for investor hedging of

foreign asset holdings via swaps.

A not too different world, but change is coming

The USD is still the number one currency in terms of market share. It held an 84.9% share in

average daily FX turnover in April 2010, down from 85.6% in April 2007. Note that the BISs

shares in turnover sum to 200% rather than 100% as two currencies are involved in each

transaction. The G3 currencies (USD, EUR and JPY) also remain strongly favoured with the

EUR and JPY experiencing large increases in their shares of FX turnover to 39% and 19%,

1 Triennial Central Bank Survey of Foreign Exchange and Derivatives Market Activity (www.bis.org). The surveys areconducted in April every three years with the latest two surveys being conducted in April 2007 and 2010.

David Forrester

+65 6308 [email protected]

The slower rate of growth in FX

turnover was driven by weak

growth in FX swaps turnover

Figure 1: Change in FX trading volumes (3 years to April %)*

Figure 2: Change in share of FX turnover 2007-10 pp

-30

-20

-10

0

10

20

30

40

50

60

70

80

2001 2004 2007 2010

Spot transactions Outright forwardsForeign exchange swaps Currency swapsOptions and other products

-3

-2

-1

0

1

2

3

EUR

JPY

CAD

AUD

TRY

KRW

BRL

SGD

INR

HUF

NZD

HKD

CHF

SEK

USD

NOK

GBP

Other

Note: * Currency swaps are an exchange of a stream interest rate payments indifferent currencies, while foreign exchange swaps are an agreement to

exchange of two currencies (principal only) at a time in the future. Source: BIS

Source: BIS


10/18


2 September 2010 10

respectively, this more than offsetting the decline in the USDs share (Figure 2). The G3s

overall market share grew to 143% from 140%.

But there has been some drift toward G10 peripheral currencies, especially the AUD and

CAD as well as EM currencies such as the TRY and KRW and BRL. (Turkey and Brazil have

also seen a rise in their shares of global FX turnover within their borders.) These gains, along

with the gains in the EUR and JPYs shares in turnover, were at the expense of the othercurrencies category, but also the GBP, USD, SEK, NOK and CHF. We think that there are a

few interesting observations to be made here.

1. We believe that the modest shift toward the smaller G10 currencies as well as EMcurrencies is beginning to reflect the shift in the main drivers of global growth EM

countries and the commodity producers that are helping to fuel their growth. This is a

trend that we expect to continue into the future. The prominence of carry trades has also

contributed to the rising market shares of TRY, BRL and AUD. The significantly higher

interest rates in Turkey, Brazil and Australia that attract these carry trades are also likely to

continue as long as EM growth outpaces growth in the G4 by a large margin.

2. The growing share in turnover of the AUD and CAD is reflected in their improving levelsof liquidity, according to our measures of liquidity. While the USD/JPY and EUR/USD

remain by far the most liquid currencies (consistent with the G3s growing market

share), the liquidity of the CHF and GBP have fallen to below or level with the liquidity in

of the AUD and CAD (Figure 3).

3. We wrote in Are peripheral currencies reserve worthy?, FX Special, 8 July, 2010, that itis worthwhile for reserve managers to consider diversifying their baskets with the AUD

and the CAD. The AUD and CAD represent good stores of value given their credible-

inflation-targeting central banks, low levels of public debt relative to the G4 and their

ability to act as hedges against commodity-based inflation. The AUDs and CADs lower

levels of liquidity relative to larger G10 currencies may hold reserve managers back, but

BIS survey data along with our own liquidity indicators suggest that this may be

becoming less of an issue, especially relative to the GBP and CHF. The AUD overtook theCHF to become the fifth most-traded currency in the world in 2010.

4. The IMF COFER data suggest that the USD maintains a dominant share (61.5%) incentral banks FX reserves and that this is down only modestly since 2007 (from 65.3%)

Large currencies such as the

USD, GBP and CHF have not only

lost ground to the EUR and JPY,

but also smaller commodity andEM currencies

Higher levels of FX turnover are

coinciding with higher levels of

liquidity, which is making

currencies such as the AUD and

CAD even more attractive for

inclusion in central bank reserves

Figure 3: FX spot liquidity Figure 4: Currency shares in central bank FX reserves

0.0

0.2

0.4

0.6

0.8

1.0

1.2

1.4

1.6

07/01/08 04/08/08 02/03/09 28/09/09 26/04/10

AUD CAD GBP CHF

0

10

20

30

40

50

60

70

USD GBP JPY CHF EUR Others

% share Q1 2007 % share Q1 2010

Source: Barclays Capital Source: IMF COFER data
https://live.barcap.com/go/research/content?contentPubID=FC1613239https://live.barcap.com/go/research/content?contentPubID=FC1613239


11/18


2 September 2010 11

- Figure 4. The USD has made room in FX reserves for the EUR and other currencies.

We believe that other currencies consist mainly of peripheral G10 currencies such as the

AUD and CAD. The COFER data suggest that there is still a lot of diversifying away from

USDs to be done by central banks.

The bottom line

Large currencies such as the CHF, GBP and USD are losing market share not only to the EUR

and JPY, but also to smaller currencies such as the AUD, CAD, KRW, TRY and BRL. We

expect this trend to continue and to be a long-term positive for these smaller currencies.

The gains in FX liquidity these smaller currencies are experiencing make them more

attractive for inclusion in central banks reserves. We think that this will be particularly

important for the AUD and CAD. Along with improving liquidity, the AUD and CAD also act

as good stores of value, which further increases their attractiveness for being included in

central bank reserves.


12/18


2 September 2010 12

FX CLOSED TRADE RECOMMENDATIONS & OPERA

Closed portfolio trades 2010

Original Mark to market at time of closing

Trade/Date Spot reference

Cost as %

of notional Expiry Current spot

Profit as %

of notional

Long 8m 1.70 GBP call/USD put,

short 8m 1.90 GBP call/USD put, 19/5/2009

1.5480 1.06% 19/1/10 1.6128 -1.06%

Long worst of 4m ATM spot AUD, CAD and

NOK calls/CHF put, 9/12/2009

AUD/CHF: 0.9287CAD/CHF: 0.9659

CHF/NOK: 5.6388

0.80% 9/4/10 AUD/CHF: 0.9717CAD/CHF: 1.0427

CHF/NOK: 5.5016

+1.83%

Short EUR/SEK, target: 9.65, stop-loss: 10:30,

9/12/2009

10.4907 - - 9.7244 +7.23%

Long 6m 1x1.5 USD/JPY call spread (89 and

95 strikes), 9/12/09

87.79 1.54% 9/6/10 94.55 +2.06%

Short AUD/CAD, target: 0.91, stop-loss: 0.98,

9/12/2009

0.9629 - - 0.9190 +3.60%

Long 3m 1.2630 AUD/NZD put, 4/3/10 1.3110 0.47% 4/6/10 1.2490 +1.23%

Long USD vs basket of JPY and AUD (50:50),stop-loss: -1.5%, target: +3.0%, 18/03/10

USD/JPY: 90.01AUD/USD: 0.9212

- - USD/JPY: 90.10AUD/USD: 0.8240

+5.00%

Long 1m 1.27 EUR/USD put and short 1.23EUR/USD put with a RKI at 1.19, 10/05/10

1.2925 0.72% 10/06/10 1.2192 +3.10%

Long AUD, NZD, NOK versus USD, EUR and JPYbasket, 25/6/10

AUD/USD: 0.8646

NZD/EUR: 0.5740

NOK/JPY: 13.7667

- - AUD/USD: 0.9009

NZD/EUR: 0.5560

NOK/JPY: 13.8188

0.90%


BarCap OPERA Recommended portfolio allocation (left) and cumulative returns (right)

Note: BarCap OPERA (Optimised Exchange Rate Allocation) represents an optimal portfolio allocation for the week ahead that best takes advantage of our short-term views

and the associated confidence levels. Cumulative excess returns since 3 October 2008, when OPERA was launched. See Behind the scenes of the BarCap OPERA for details.Source: Barclays Capital

-1%

0%

1%

USD

EUR

JPY

GBP

CHF

CAD

AUD

NZD

SEK

NOK

Weights

0.00%

0.05%

0.10%

0.15%

0.20%

0.25%

0.30%

0.35%

0.40%0.45%

0.50%

1-Jun-09 29-Sep-09 27-Jan-10 27-May-10
https://live.barcap.com/go/research/content?contentPubID=FC1230025https://live.barcap.com/go/research/content?contentPubID=FC1230025


13/18


2 September 2010 13

FORECAST TABLES

Forecasts Forecast vs Outright Forward

Spot 1 Month 3 Month 6 Month 1 Year 1 Month 3 Month 6 Month 1 Year

EUR/USD 1.28 1.27 1.25 1.30 1.30 -1.0% -2.5% 1.4% 1.5%

USD/JPY 84 83 87 89 92 -1.5% 3.4% 5.9% 9.8%

GBP/USD 1.54 1.57 1.58 1.67 1.67 2.0% 3.0% 8.5% 8.7%

USD/CHF 1.01 1.07 1.12 1.09 1.12 5.9% 10.8% 8.2% 10.8%

USD/CAD 1.05 1.05 1.06 1.08 1.10 -0.2% 0.7% 2.4% 3.9%

AUD/USD 0.91 0.90 0.88 0.84 0.82 -0.6% -2.1% -5.6% -5.8%

NZD/USD 0.72 0.72 0.70 0.69 0.67 0.8% -1.5% -2.1% -3.4%

EUR/JPY 108 105 109 116 120 -2.4% 0.8% 7.4% 11.4%

EUR/GBP 0.83 0.81 0.79 0.78 0.78 -2.9% -5.3% -6.6% -6.6%

EUR/CHF 1.30 1.36 1.40 1.42 1.45 4.9% 8.0% 9.7% 12.4%

EUR/SEK 9.31 9.50 9.30 9.25 9.20 2.0% -0.3% -1.0% -2.0%

EUR/NOK 7.89 8.00 7.90 7.85 7.80 1.2% -0.4% -1.5% -3.0%


Long-term FX forecasts (Majors)

18m 2 yrs 3 yrs 4 yrs 5 yrs

EUR 1.29 1.28 1.28 1.27 1.26

JPY 94 94 96 97 98

GBP 1.67 1.67 1.67 1.67 1.67

CHF 1.14 1.15 1.16 1.18 1.19

CAD 1.11 1.11 1.12 1.13 1.14

AUD 0.81 0.80 0.79 0.78 0.78

NZD 0.66 0.65 0.64 0.63 0.63EUR/JPY 121 121 122 123 123

EUR/GBP 0.77 0.77 0.76 0.76 0.75

EUR/CHF 1.47 1.47 1.48 1.49 1.51

EUR/SEK 9.02 8.96 8.83 8.71 8.59

EUR/NOK 7.85 7.87 7.91 7.94 7.98



14/18


2 September 2010 14

CE4 and emerging markets forecasts

Emerging Markets FX Forecasts Forecast vs Outright Forward

Spot 1 Month 3 Month 6 Month 1 Year 1 Month 3 Month 6 Month 1 Year

USD/CNY 6.81 6.78 6.71 6.63 6.48 -0.3% -1.1% -1.9% -3.4%

USD/HKD 7.77 7.77 7.77 7.80 7.80 0.0% 0.1% 0.5% 0.6%

USD/INR 46.71 46.0 47.0 47.5 46.5 -1.9% -0.6% -0.5% -4.2%USD/IDR 9010 8950 8900 8900 8800 -0.8% -2.3% -3.4% -6.9%

USD/KRW 1181 1150 1125 1075 1025 -2.6% -5.0% -9.6% -14.4%

USD/MYR 3.13 3.12 3.10 3.08 3.05 -0.3% -1.2% -2.3% -4.0%

USD/PHP 44.90 45.00 45.00 44.50 44.00 0.1% -0.3% -2.2% -4.7%

USD/SGD 1.35 1.35 1.35 1.35 1.34 0.3% 0.3% 0.4% -0.4%

USD/THB 31.14 31.25 31.00 30.75 30.50 0.3% -0.5% -1.4% -2.4%

USD/TWD 31.99 31.75 31.40 30.75 30.00 -0.6% -1.4% -3.0% -4.5%

USD/ARS 3.95 3.94 4.05 4.30 4.60 -0.7% 0.7% 4.3% 5.3%

USD/BRL 1.74 1.85 1.80 1.75 1.75 5.7% 1.5% -3.1% -7.0%

USD/COP 1807 1790 1750 1700 1700 -0.9% -3.3% -6.3% -7.9%

USD/CLP 495 500 490 480 480 1.1% -1.1% -3.6% -4.9%

USD/MXN 13.03 12.80 12.85 12.90 12.90 -2.1% -2.3% -2.9% -4.8%USD/PEN 2.80 2.80 2.74 2.68 2.75 0.4% -1.6% -3.8% -1.8%

EUR/CZK 24.72 24.67 24.50 25.40 24.29 -0.2% -0.9% 2.8% -1.7%

EUR/HUF 285 285 285 285 280 -0.2% -0.8% -1.8% -5.3%

EUR/PLN 3.97 3.95 3.88 3.85 3.80 -0.8% -2.9% -4.2% -6.4%

EUR/RON 4.27 4.25 4.30 4.30 4.20 -0.7% -0.4% -1.8% -6.7%

USD/RUB 30.68 30.80 30.30 29.50 29.50 0.2% -1.9% -5.4% -7.3%

BSK/RUB 34.58 33.57 33.03 32.82 32.82 -0.29% -3.03% -4.76% -6.72%

USD/TRY 1.51 1.50 1.50 1.50 1.50 -1.4% -2.4% -3.9% -7.1%

USD/ZAR 7.26 7.40 7.55 7.75 7.90 1.5% 2.5% 3.8% 2.9%

USD/ILS 3.78 3.75 3.70 3.70 3.70 -0.9% -2.3% -2.5% -2.6%

USD/EGP 5.70 5.68 5.65 5.65 5.60 -0.9% -2.5% -4.1% -7.8%

USD/UAH 7.89 7.90 7.90 7.80 7.80 0.0% -0.8% -4.3% -7.4%

Policy rate forecasts (%, end of quarter)

Current 2010Q3 2010Q4 2011Q1 2011Q2

FOMC 0.00-0.25 0.00-0.25 0.00-0.25 0.00-0.25 0.00-0.25

BoJ 0.10 0.10 0.10 0.10 0.10

MPC 0.50 0.50 0.50 1.00 1.50

ECB 1.00 1.00 1.00 1.00 1.25

Riksbank 0.50 0.75 1.00 1.25 1.50

Norges Bank 2.00 2.00 2.25 2.50 2.75

SNB 0-0.75 0.25 0.25 0.25 0.50

BoC 0.75 0.75 1.00 1.25 1.50

RBA 4.50 4.50 4.75 5.00 5.25

RBNZ 3.00 3.25 3.25 3.50 3.50

Percent deviation from PPP (+ overvaluation/- undervaluation)

As of 02/09/10 EUR USD AUD CAD CHF GBP JPY SEK NOK NZD

vs. EUR 0% -5% 19% 5% 17% -11% 14% -15% 3% 16%

vs. USD 5% 0% 23% 10% 22% -6% 19% -10% 8% 21%

Note: Daily updates for this table is available on Barclays Capital Live: https://live.barcap.com/BC/barcaplive?menuCode=MENU_FI_FX_GLB_FXH.

Source for all tables: Barclays Capital


15/18


2 September 2010 15

EM FX VIEWS ON A PAGE

Currency

Tactical

bias Strategic directional view Current strategy/trades we like

Vol adj

6m

returns

Score

(1-5)

Emerging Asia

TWD Bullish The Cross-Strait agreement is still one of our favourite structuraltransformation stories. 0.41 4.25

CNY Bullish We expect an increase in two-way variations in the CNY exchangerate, along with moderate appreciation.

Sell 4m USD/CNY NDF0.53 4.20

KRW Bullish Although still bullish, we are slightly more cautious on the KRWowing to a smaller financial account surplus that reflects a moretepid interest rate outlook and tighter FX regulations.

Sell USD/KRW via 1m NDF outright0.52 3.65

IDR Bullish Structural reforms, putting the country on track to get toinvestment grade, and robust BoP suggest IDR strength.

Buy 20y IDR bonds, FX unhedged0.24 3.20

THB Bullish Thai rate normalization will likely continue to help modest THBappreciation.

0.20 3.15

MYR Bullish We remain bullish as the government pursues its multi-yearrestructuring programme, with the key catalyst being privatizations.

Buy 3m USD/MYR put spreads0.19 3.05

HKD Neutral Local equities markets and potential large IPOs will likely drive HKD. -0.60 3.00

PHP Bullish Robust BoP and strong growth outlook indicate PHP strengthdespite recent underperformance.

Sell USD/PHP 3m NDF0.19 2.80

INR Bullish The longer term outlook for INR is increasingly clouded on accountof elevated REER and the rising current account deficit. However,the short-term outlook is positive, supported by a weaker dollar andstrong equity inflows.

Buy 1m USD/INR ATMF put

0.05 2.60

SGD Bearish SGD is now trading at the top end of the NEER. We like using it as afunding currency for going long other Asians.

Sell SGD/MYR spot-0.03 2.30

Latin America

COP Bullish COP is not misaligned with fundamentals and intervention risks arenot as significant as historical valuations suggest, in our view.

0.37 3.20

CLP Bullish Strong domestic demand outlook and hawkish monetary policy. Short EUR/CLP 0.24 2.75

MXN Neutral Growth peaking already; more a global beta play now. 0.15 2.70

BRL Bearish Bad technicals, potential political noise ahead, higher intervention

risks.

9m USD call/BRL put spread0.17 2.05

Emerging EMEA

EGP Bullish Attractive vol-adjusted carry, low beta to global drivers, lighterpositioning and solid fundamentals are supportive of EGP.

Long EGP via 3m T-bills (USDfunded)

0.85 3.70

ILS Neutral Benign inflation and recent shekel appreciation may make BoI lesstolerant to much more shekel strength, especially if global riskconcerns were to pick up.

2m USD put/ILS RKO call (strike3.79, RKO 3.69) 0.26 3.55

PLN* Neutral Better than expected Q2 GDP is positive for the currency but fiscalchallenges and intervention risks remain.

0.25 3.35

RON* Neutral With a difficult political agenda this autumn and asymmetricintervention risks, we prefer to remain on the sidelines for now.

0.16 3.00

RUB Neutral With global growth momentum slowing and a less bullish outlook foroil, we see limited upside for further RUB strength in the short run.

0.35 2.95

HUF* Neutral/bearish

With no imminent reversal of Fidesz policies vis--vis IMF/EUnegotiations, we still remain cautious on the HUF.

6m 290-310 EUR call/HUF put (tailrisk trade/hedge)

0.11 2.80

TRY Bullish A robust recovery, light positioning and actively managed FXdeposits suggest the TRY will outperform during sell-offs.

Long TRY Mar12s/short EUR (0.5),USD (0.5), long TRY/short ZAR

0.22 2.65

CZK* Neutral Recent positive economic data suggest that the recovery is takinghold a positive for the currency.

-0.26 2.10

ZAR Neutral Current aggressive reserve purchases are likely to make way forother measures to weaken the ZAR.

-0.19 1.85

UAH Bullish New IMF funds are positive for Ukraine assets and will mean anadditional powerful support for FX reserves positive for UAH

Long UAH via 6m T-bills

KZT Neutral FX intervention remains a big obstacle to appreciation.

Note: *Versus EUR. Changes in tactical bias denoted in bold. The variable score is an index that ranks EM currencies according to the vol-adjusted returns, PPPvaluation, carry, systemic risk, basic balance/GDP and reserves accumulated over the past 5y/GDP (5 is the best possible score). For more details on the trade

recommendations, please see the EM Dashboard. Source: Barclays Capital


16/18


2 September 2010 16

GLOBAL FOREIGN EXCHANGE RESEARCH

Global

Piero GhezziHead of Global Economics, Emerging Markets and FX Research+44 (0)20 3134 2190

[email protected]

G10 FX

Aroop ChatterjeeChief FX Quant Strategist+1 212 412 [email protected]

Giulia ComottiFX Strategy+44 (0)20 313 [email protected]

David ForresterFX Strategy+65 6308 [email protected]

Paul RobinsonHead of European FX Strategy+44 (0)20 777 [email protected]

Yuki SakasaiFX Strategy+81 3 4530 [email protected]

Raghav SubbaraoFX Strategy+44 (0)20 7773 [email protected]

Masafumi YamamotoChief FX Strategist, Japan+81 3 4530 [email protected]

Mathieu ZaradzkiChief FX Options Strategist+33 (0) 1 4458 [email protected]

Emerging Markets

Michael GavinHead of EM Strategy+1 212 412 [email protected]

Guillermo MondinoHead of Latin American Research+1 212 526 [email protected]

Peter RedwardHead of Emerging Asia Research+65 6308 [email protected]

Matthew VogelHead of Emerging EMEA Research+44 (0)20 7773 [email protected]


17/18

Analyst Certification(s)We, Raghav Subbarao, Aroop Chatterjee, Paul Robinson, George Christou, Alanna Gregory and David Forrester, hereby certify (1) that the views expressed

in this research report accurately reflect our personal views about any or all of the subject securities or issuers referred to in this research report and (2) nopart of our compensation was, is or will be directly or indirectly related to the specific recommendations or views expressed in this research report.

Important DisclosuresFor current important disclosures regarding companies that are the subject of this research report, please send a written request to: Barclays Capital

Research Compliance, 745 Seventh Avenue, 17th Floor, New York, NY 10019 or refer to https://ecommerce.barcap.com/research/cgi-bin/all/disclosuresSearch.pl or call 212-526-1072.Barclays Capital does and seeks to do business with companies covered in its research reports. As a result, investors should be aware that Barclays Capital

may have a conflict of interest that could affect the objectivity of this report. Any reference to Barclays Capital includes its affiliates. Barclays Capital and/oran affiliate thereof (the "firm") regularly trades, generally deals as principal and generally provides liquidity (as market maker or otherwise) in the debt

securities that are the subject of this research report (and related derivatives thereof). The firm's proprietary trading accounts may have either a long and /or short position in such securities and / or derivative instruments, which may pose a conflict with the interests of investing customers. Where permittedand subject to appropriate information barrier restrictions, the firm's fixed income research analysts regularly interact with its trading desk personnel to

determine current prices of fixed income securities. The firm's fixed income research analyst(s) receive compensation based on various factors including,but not limited to, the quality of their work, the overall performance of the firm (including the profitability of the investment banking department), theprofitability and revenues of the Fixed Income Division and the outstanding principal amount and trading value of, the profitability of, and the potentialinterest of the firms investing clients in research with respect to, the asset class covered by the analyst. To the extent that any historical pricing information

was obtained from Barclays Capital trading desks, the firm makes no representation that it is accurate or complete. All levels, prices and spreads arehistorical and do not represent current market levels, prices or spreads, some or all of which may have changed since the publication of this document.Barclays Capital produces a variety of research products including, but not limited to, fundamental analysis, equity-linked analysis, quantitative analysis,

and trade ideas. Recommendations contained in one type of research product may differ from recommendations contained in other types of researchproducts, whether as a result of differing time horizons, methodologies, or otherwise.


18/18

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