Moscow - June 2014
G10 FX Outlook: Policy Divergence Starts to Drive FX
Steven SaywellGlobal Head of FX Strategy
22
FX Themes
USD: Tapering should support a stronger USD against the other lower-yielding G10 currencies. Long USD
positioning has not fully recovered, which provides scope for upside despite for consensus for USD strength.
EUR: Further ECB policy easing is increasingly likely and we forecast QE during H2 2014. EUR will suffer
from this while support from inflows is also fading. We forecast 1.30 EURUSD by end-2014.
Asia: Growth in the region to remain robust, but Fed tapering expectation to impact USD vs Asia. Asian
currencies may struggle in 2014.
JPY: USDJPY to rise as the BoJ remains committed to very loose policy, in contrast to a Fed that is heading
towards the exit. Domestic investors to continue to be crowded out of the JGB market and allocating funds abroad. We forecast 110 USDJPY by end-2014.
GBP: The recovering in UK economy to continue to underpin the GBP. Market positioning is extremely long
but it remains cheap vs long-term valuation. We forecast 0.76 EURGBP by end-2014.
CHF: EURCHF to rally as global growth recovers, but further ECB easing will provide a headwind. As the
Swiss begin to recycle large current account surplus we forecast a gentle rise to 1.25 EURCHF by end-2014.
AUD, NZD, CAD: Pockets of EM resilience + local growth will be enough to shield commodity currencies
strong as Chinese growth remains robust.. Our ranking for the bloc is Cad, then AUD & NZD.
NOK, SEK: Scandinavian currencies appear oversold currently, in particular the NOK should recover against
the SEK in 2014.
May 2014
Germany has fallen from Grace, UK & US now on top
May 2014 3
Comparison of major countries PMI readings (Manufacturing)
UK and US now outpace the rest, eurozone and China lag
4
US data disappoints, but is not terrible
US data has surprised to the downside, but the strength of the data is in line with its long-run average
May 2014
US Data Surprise Index
The USD continues to diverge from US yields
May 2014 5
The USD continues to takes its lead from yields. USD is now lagging the yield pick-up
DXY (USD Index) vs US 2 yr swap spread - DXY components
66
Largest FX market positions are long GBP & short EUR/CHF
MethodologyBNP Paribas FX Positioning Analysis is a broad gauge of positioning that combines the following factors:
• Client Exposure – Internal sales desks’ estimate of FX investor exposure
• IMM – The Commitment of Traders (CFTC) is a widely used proxy for US-based hedge-fund/CTA activity.
• Risk reversals – Risk reversals indicate the relative price of calls relative to puts, and thus incorporate a option “market sentiment” function.
• Beta – Decomposition of the BTOP managed currency index.
• BNPP Trending Indicator. - A technical measure of the strength of a currencies momentum.
The overall currency score is then calculated as the equally weighted sum of the components
Source : BNP Paribas
May 2014
EUR and CHF shorts are on a par, while GBP remains the largest long positioning
BNP Paribas Estimate of FX Market Positioning
-20
-12
-10
-7
-5
1
6
6
20
29
-50 -40 -30 -20 -10 0 10 20 30 40 50
EUR
SEK
CAD
JPY
CHF
USD
AUD
NZD
NOK
GBP
16-Jun-2014
10-Jun-2014
SHORT LONG
77
FX participants finally shift to a long USD exposure
FX investors generally establish USD shorts during QE. But the more data contingent nature of QE3 has made markets less
comfortable funding in USDs.
BNP Paribas Estimate of FX Market Positioning for USD
Methodology•Client Exposure – Internal sales desks’ estimate of FX investor exposure
•IMM – The Commitment of Traders (CFTC) is a widely used proxy for US-based hedge-fund/CTA activity. •Risk reversals – Risk reversals indicate the relative price of calls relative to puts, and thus incorporate a option “market sentiment” function. •Beta – Decomposition of the BTOP managed currency index.
•BNPP Trending Indicator. - A technical measure of the strength of a currencies momentum.
The overall currency score is then calculated as the equally weighted sum of the components
May 2014
Overall FX positioning is low
May 2014 8
Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec
-20
-15
-10
-5
0
5
10
15
20
*Seasonal factor is the typical percentage increase or decrease in positioning during the month
% BNP Paribas Positioning AnalysisSeasonal Factors for G10 FX
Positioning *
Total G10 positions Positions typically build in Oct. and Nov.
Seasonal analysis shows that October and November are when FX positioning is usually highest
Source : Ecowin Reuters, BNP Paribas
Dislocation between market views and positioning
May 2014 9
Market consensus is bullish USD, but investors have only started to put on the position
EURUSD Implied Positioning
US TIC capital flow data
May 2014 10
US TIC capital flow data broken down by asset type
Inflows into US Treasuries and Agency debt have returned since Summer
US investors starting to repatriate funds
May 2014 11
There is a reduction in US investor appetite for foreign securities, with 3-month average net flows switching from
outflow to repatriation in March.
US investors’ purchases of foreign securities, USD billions 3m average
EUR strength is starting to wane: EURUSD to fall further
May 2014 1313
EURUSD has now diverged from interest rate spreads
EURUSD vs. 2-yr euro–US swap spread
US fiscal stress has pushed EURUSD way beyond fundamentals
May 2014 1414
EURUSD has been tracking real interest rate spreads
EURUSD vs. 2-yr euro–US 2-year real rates
EUR has tracked real rates so ECB needs to boost inflation expectations to contain currency
May 2014 1515
ECB needed to act to ensure EUR is viewer as an FX funder
Money market rate divergence suggests ECB action will contain EUR gains
EUR 3m Euribor starts to fall Large divergence in inflation expectations
May 2014 1616
Eurozone inflation expectations appear to have based
Large divergence in inflation expectations
EU inflation expectations have fallen but may be exhibiting signs of rising in the wake of ECB action
May 2014 1717
EUR yields fall following ECB action
Comparison of 2yr Swap Rates
EUR has become more JPY-like as an FX funder
Eurozone inflation undershoots sharply
May 2014 18
The sharp undershoot in inflation increases prospects for ECB easing. We forecast a refi rate cut in December
Eurozone Inflation CPI (HICP) y/y % change
1919
Market Positioning is only moderately short EUR
The market was moderately short EUR when dovish ECB action and rhetoric emerged
EUR Market Positioning
Methodology•Client Exposure – Internal sales desks’ estimate of FX investor exposure
•IMM – The Commitment of Traders (CFTC) is a widely used proxy for US-based hedge-fund/CTA activity.
•Risk reversals – Risk reversals indicate the relative price of calls relative to puts, and thus incorporate a option “market sentiment” function.
•Beta – Decomposition of the BTOP managed currency index.
•BNPP Trending Indicator. - A technical measure of the strength of a currencies momentum.00
The overall currency score is then calculated as the equally weighted sum of the components
Source : BNP Paribas
May 2014
Market long high-yielders, short funders (7 May)
Sep
10
Jan
11
May Sep Jan
12
May Sep Jan
13
May Sep Jan
14
May
-50
-40
-30
-20
-10
0
10
20
30
40
50EUR net positioning
BNP Paribas FX Positioning Analysis
2020
EURUSD trades very close to its fair value
EURUSD FEER is estimated at 1.32, so EURUSD is only slightly overvalued
Source : BNP Paribas
BNP Paribas FEER for EURUSDBNPP FEER (Fundamental Equilibrium Exchange Rate) is the value of an exchange rate when an economy is operating with an internal
balance (i.e. output in line with potential output, full employment and inflation in line with central bank’s target) and a sustainable current account balance.
May 2014
0.65
0.85
1.05
1.25
1.45
1980 1985 1990 1995 2000 2005 2010
BNP Paribas FEER EURUSD
OECD "Synthetic" EUR prior to 1999
2121
EURUSD CLEER™ Forecasting Model
Our own EURUSD CLEER model signals EURUSD downside
Source : BNP Paribas
BNP Paribas CLEER™ for EURUSDBNP Paribas CLEER (CycLical Equilibrium Exchange Rate) provide a fair value for a currency based on the relative economic fundamentals
May 2014
0.84
0.94
1.04
1.14
1.24
1.34
1.44
1.54
1.64
1.74
01-Jan-1995 01-Jan-2005 01-Jan-2015
CLEER EURUSD
Model based projections
22
Our STEER™ model signals EURUSD trades below its fair value
May 2014
BNP Paribas STEER™ fair value model EURUSD*BNPP STEERs are regression based short-term fair-values based on relationships between exchange rates, interest rate markets, equity
markets and commodity markets.
EURUSD trades towards the lower end of its +/- 1.5 std. dev. corridor
May 2014 23
QE will cause a re-pricing of assets in the equity space
Under ECB QE, equities can rally and the EUR call fall…just like the Fed experience
Source : Reuters EcoWin, BNP Paribas
The S&P 500 vs the Fed Balance Sheet (under QE)
0 8 0 9 1 0 1 1 1 2 1 3 1 4
6 0 0
7 0 0
8 0 0
9 0 0
1 0 0 0
1 1 0 0
1 2 0 0
1 3 0 0
1 4 0 0
1 5 0 0
1 6 0 0
1 7 0 0
1 8 0 0
1 9 0 0
2 0 0 0th
ou
sa
nd
bill
ions
0 . 5
1 . 0
1 . 5
2 . 0
2 . 5
3 . 0
3 . 5
4 . 0
4 . 5
F e d . B a l a n c e S h e e t ( U S D , t r n )
O p e r a t i o nT w i s t
S & P 5 0 0 ( R H S )
Q E 1Q E 3Q E 2
May 2014 24
EURUSD’s sensitivity* to stocks varies
The EUR is adjusting to life as a funding currency
Source : Reuters EcoWin, BNP Paribas *Derived from the correlation of
EURUSD to the S&P over previous 12-month period captured by BNP
Paribas STEER™
0 0 0 2 0 3 0 4 0 5 0 6 0 7 0 8 0 9 1 0 1 1 1 2 1 3
- 0 . 6
- 0 . 4
- 0 . 2
0 . 0
0 . 2
0 . 4
0 . 6
0 . 8
1 . 0
1 . 2
1 . 4C o e f f i c i e n t , i m p a c t o f g l o b a l e q u i t i e s o n E U R U S D
Coefficient, impact of global equities on EURUSD
May 2014 25
Demand for eurozone assets peaking
EZ current account, broad basic balance and portfolio flows are showing signs of peaking
Eurozone Portfolio Flows (monthly): EUR billions 3MMA
May 2014 26
Other investment drives outflows to recycle current account
Eurozone Portfolio Flows (monthly): EUR billions
The offsetting outflow necessary to equilibrate the balance of payments has stemmed from a combination of ‘other investment’
and FDI.
FX Reserve Diversification
Global FX Reserve Accumulation
May 2014 28
China’s reserve accumulation has continued apace since the start of last year.
Monthly Valuation-adjusted FX Reserve Accumulation
Source : BNP Paribas
* Comprised of country level data provided by the largest reserve accumulators. COFER percentage allocations used to calculate the
exchange rate valuation impact and estimates for direction of diversification flows
Estimated Diversification Demand for EUR
May 2014 29
Estimated demand for EUR from EM reserve managers has shown signs of topping out at the start of last year
Estimated diversification demand for EUR vs. eurozone portfolio inflows
Source : BNP Paribas
* Comprised of country level data provided by the largest reserve accumulators. COFER percentage allocations used to calculate the
exchange rate valuation impact and estimates for direction of diversification flows
30
Estimates of China’s Reserve Holdings
Source : BNP Paribas, Peterson Institute for International Economics
Using bilateral portfolio data, China’s estimated holdings of EUR reserves are just under 25% of accounted reserves*.
Chinese Official Foreign Asset Holdings
May 2014
Estimated Shares of Allocated Reserves
* Approximately USD 2.2 trillion OF China’s official foreign assets can be accounted for, out of USD 3.5 trillion, as of 2012. Source: US
Treasury, Bank of Japan, Japan Ministry of Finance, Financial Supervisory Service of Korea, Australian National Statistics, Canada
Statistics, Deutsche Bundesbank, European Central Bank, International Monetary Fund.
Asian demand supporting core EUR liquid paper
� Asian demand for EUR core liquid assets is being fuelled by
rising FX reserves.
� World international asset reserves rose from USD 2300bn in
2003 to USD 11500bn in December 2013, with Asian reserves
(China, Japan, Taiwan, Hong Kong & Korea) accounting fro
53% of the total.
� Asian foreign-exchange reserves rose from USD 1.2trn in 2003
to USD 5.9trn in December 2013.
European Government Bond (EGB) Holdings
Structural demand from Asian CBs due to rising reserves China: Stable USD reserve demand
� There has been a structural Asian buying flow into the
Eurozone (Bunds & OATs mostly).
� The will to diversify from USD assets into EUR assets also
explains the recurring demand fro core EGBs.
� China: Holdings of US Treasuries have been stable since Q2
2011, while total foreign reserves have kept on rising (relativeweight of US Treasuries has fallen by 10% since its August
2010 peak).
0
2000000
4000000
6000000
8000000
10000000
12000000
14000000
Jan-03 Jul-04 Jan-06 Jul-07 Jan-09 Jul-10 Jan-12 Jul-13
World Japan China Main Asia
World: USD 11.5 Tr
Asia: USD 5.9 Tr
China: USD 3.7 Tr
Japan: USD 1.2 Tr
0
500
1000
1500
2000
2500
3000
3500
4000
Jan-06 Jan-07 Jan-08 Jan-09 Jan-10 Jan-11 Jan-12 Jan-13
25%
30%
35%
40%
45%
50%
Holdings of Treasuries from China Total Int. Res. China Holdings of US Tr. from China %
Source : BNP Paribas
May 2014 31
USDJPY to be driven higher by “Abenomics.”
3333
The BOJ undertakes a dramatic increase in policy
Japanese monetary base projections (JPY trillions)
Source : BoJ, BNP Paribas
The policy shift under Governor Kuroda is dramatic
0
50
100
150
200
250
300
07 08 09 10 11 12 13 14
JPY 138 tr
Year end 2012
JPY200 tr
(BOJ target)
Year end 2013
JPY270 tr
(BOJ target)
Year end 2014
May 2014
USDJPY is highly correlated to Nikkei 225
34
USDJPY vs. Nikkei 225
The close link between Japanese equities and the JPY is policy driven by “Abenomics”
May 2014
3535
JPY short exposure had fallen to 0…
BNP Paribas FX Positioning Analysis (JPY)
BNP Paribas JPY positioning indicator signals that investors’ short JPY exposure has reversed.
May 2014
3636
Domestic investors are starting to buy foreign assets
Japanese investors’ net purchases of foreign assets
Source : Ecowin Reuters, BNP Paribas
Japanese investors have turned net long JPY over Q1. Most of this is driven by repatriation.
May 2014
Aggregate demand-supply balance for JPY
May 2014 37
Evidence has yet to emerge of large-scale JPY outflows but the net inflows are falling
Source : Ecowin Reuters, BNP Paribas
S o u r c e : R e u t e r s E c o W in
0 3 0 4 0 5 0 6 0 7 0 8 0 9 1 0 1 1 1 2 1 3
tho
usa
nd
bill
ions
- 8
- 7
- 6
- 5
- 4
- 3
- 2
- 1
1
2
3
4
5 I n f l o w F D I + P o r t f o l io in v e s t m e n t + s h o r t - t e r m J P Y lo a n s C u r r e n t a c c o u n t J P Y d e m a n d - s u p p l y b a l a n c e ( S u m o f b o t h s e r ie s )
O u t f l o w
R e c y c l i n g o f C / A s u r p l u sv i a c a p i t a l o u t f l o w s
. . . h a s n o t b e e n t a k i n g p la c e i n 2 0 1 3
3838
USDJPY long-term fair value is now 74
Source : BNP Paribas
Our estimate of long-term fair value (BNP Paribas FEER) continues to fall and now stands at 74
BNP Paribas FEER for USDJPYBNPP FEER (Fundamental Equilibrium Exchange Rate) is the value of an exchange rate when an economy is operating with an internal
balance (i.e. output in line with potential output, full employment and inflation in line with central bank’s target) and a sustainable current account balance.
May 2014
50
100
150
200
250
1980 1985 1990 1995 2000 2005 2010
BNP Paribas FEER USDJPY
3939
USDJPY CLEER™ Forecasting Model
USDJPY CLEER™
Source : BNP Paribas
BNP Paribas CLEER™ for USDJPYBNP Paribas CLEER (CycLical Equilibrium Exchange Rate) provide a fair value for a currency based on the relative economic fundamentals
May 2014
74
84
94
104
114
124
134
144
154
01-Jan-1995 01-Jan-2005 01-Jan-2015
CLEER USDJPY
Model based projections
GBP: Economic recovery to provide ongoing support
May 2014 41
Economic data is finally strong enough for the output gap to start to narrow
Recovery in UK Data is Different This Time
BNP Paribas Positioning Analysis
Source : BNP Paribas
UK economic dataflow
Jun
10
Oct
11
Feb Jun Oct
12
Feb Jun Oct
13
Feb Jun Oct
14
Feb
-1.00
-0.75
-0.50
-0.25
0.00
0.25
0.50
0.75
1.00
BNPP Data Surprise Index*
BNPP Economic Strength Index**
* zero indicates that the releases are in line with expectations
** zero indicates the releases are in line with their long-term averages
4242
We favour EURGBP downside
Source : Ecowin Reuters, BNP Paribas
We expect the GBP to recover against the EUR, targeting 0.80 EURGBP
May 2014
UK growing much faster than eurozone EURGBP shorts far from extreme level
4343
EURGBP is significantly above long-term fair value estimates
Source : BNP Paribas
EURGBP overvalued on longer term valuation estimates (0.76) and has plenty of scope to decline
BNP Paribas FEER for EURGBPBNPP FEER (Fundamental Equilibrium Exchange Rate) is the value of an exchange rate when an economy is operating with an internal
balance (i.e. output in line with potential output, full employment and inflation in line with central bank’s target) and a sustainable current account balance.
May 2014
0.50
0.60
0.70
0.80
0.90
1.00
1980 1985 1990 1995 2000 2005 2010
BNP Paribas FEER EURGBP
4444
GBPUSD CLEER™ Forecasting Model
EURGBP CLEER™
Source : BNP Paribas
BNP Paribas CLEER™ for EURGBPBNP Paribas CLEER (CycLical Equilibrium Exchange Rate) provide a fair value for a currency based on the relative economic fundamentals
May 2014
1.20
1.40
1.60
1.80
2.00
2.20
01-Jan-1995 01-Jan-2005 01-Jan-2015
CLEER GBPUSD
Model based projections
4545
EURGBP tracking real yield differentials
EURGBP vs. 5 year yield spreads
Real rates maybe a better indicator as central bank policy is now impacting FX through the inflation expectations
channel.
May 2014
4646
EZ-UK rates moving in the GBP’s favour
EURGBP vs. 2-year Eurozone-UK swap differential
May 2014
Nominal yields still working well on EURGBP
4747
BoE Credibility Gap
BoE credibility gap – GBP 2y swap rate versus unemployment rate
Source : Ecowin Reuters, BNP Paribas
Is the BOE at risk of falling behind the curve?
May 2014
0 1 0 2 0 3 0 4 0 5 0 6 0 7 0 8 0 9 1 0 1 1 1 2 1 3 1 4
4 .5
5 .0
5 .5
6 .0
6 .5
7 .0
7 .5
8 .0
8 .50
1
2
3
4
5
6
1 s t s t a g e
I L O J o b le s s r a te ( R H S in v e r s e ) G B P 2 Y in te r e s t r a te s w a p
2 n d s t a g e
F o r w a r d g u id a n c e
Easing of eurozone stress now suggests durable Swiss Franc
reversal
4949
Easing of eurozone stress key for durable Swiss Franc reversal
EURCHF vs. Weighted Peripheral Spreads
Source : Ecowin Reuters, BNP Paribas
Easing eurozone stress now signals EURCHF upside
1 0 1 1 1 2 1 3 1 4
0 . 2 5
1 . 2 5
2 . 2 5
3 . 2 5
4 . 2 5
5 . 2 5
6 . 2 5
7 . 2 50 . 9 0
0 . 9 5
1 . 0 0
1 . 0 5
1 . 1 0
1 . 1 5
1 . 2 0
1 . 2 5
1 . 3 0
1 . 3 5
1 . 4 0
1 . 4 5* A v e r a g e o f 2 , 5 , 1 0 y r s o v e r e i g n s p r e a d s
f o r S p a i n , I t a l y , I r e l a n d a n d P o r t u g a l v s G e r m a n y
E U R C H F
W e i g h t e d P e r i p h e r a l S p r e a d s( % , R H S ) *
May 2014
Swiss investment outflows
50
0 5 0 6 0 7 0 8 0 9 1 0 1 1 1 2 1 3
bill
ions
- 5 0
- 2 5
0
2 5
5 0
7 5
1 0 0 * P o r t f o l i o i n v e s t m e n t , d i r e c t i n v e s t m e n t s a n d l o a n s a n d d e p o s i t s
I n f l o w s
S w i s s I n v e s t m e n t F l o w s ( B n C H F , 4 q u a r t e r a v e r a g e )O u t f l o w s
S w i s s I n v e s t m e n t F l o w s * ( B n C H F , Q u a r t e r l y )
Source : Ecowin Reuters, BNP Paribas
Total net financial inflows peaked in Q2 2012 at the same time eurozone stress peaked. Outflows are now taking
off.
Financial account moves from inflow to outflow
May 2014
5151
Easing of Eurozone stress key for durable Swiss Franc reversal
EURCHF v. 2-year swap spread
Source : Ecowin Reuters, BNP Paribas
CHF appears extremely overvalued vs relative interest rates
0 8 0 9 1 0 1 1 1 2 1 3 1 4
- 1 . 0 0
- 0 . 7 5
- 0 . 5 0
- 0 . 2 5
0 . 0 0
0 . 2 5
0 . 5 0
0 . 7 5
1 . 0 0
1 . 2 5
1 . 5 0
1 . 7 5
2 . 0 0
2 . 2 5
1 . 0 0
1 . 0 5
1 . 1 0
1 . 1 5
1 . 2 0
1 . 2 5
1 . 3 0
1 . 3 5
1 . 4 0
1 . 4 5
1 . 5 0
1 . 5 5
1 . 6 0
1 . 6 5
1 . 7 0
1 . 7 5
1 . 8 0
E U R C H F ( L H S )
2 y r E U R - C H F s w a p s p r e a d ( r h s )
S N B F l o o r a t 1 . 2 0 o n E U R C H F I n t r o d u c e d
May 2014
5252
EURCHF is undervalued relative to its long term fair value
Source : BNP Paribas
EURCHF trades significantly below its FEER of 1.40
BNP Paribas FEER for EURCHFBNPP FEER (Fundamental Equilibrium Exchange Rate) is the value of an exchange rate when an economy is operating with an internal
balance (i.e. output in line with potential output, full employment and inflation in line with central bank’s target) and a sustainable current account balance.
May 2014
0.70
1.20
1.70
2.20
2.70
1980 1985 1990 1995 2000 2005 2010
BNP Paribas FEER USDCHF
5353
EURCHF CLEER™ Forecasting Model
EURCHF CLEER™
Source : BNP Paribas
BNP Paribas CLEER™ for EURCHFBNP Paribas CLEER (CycLical Equilibrium Exchange Rate) provide a fair value for a currency based on the relative economic fundamentals
May 2014
1.09
1.19
1.29
1.39
1.49
1.59
1.69
1.79
01-Jan-1995 01-Jan-2005 01-Jan-2015
CLEER EURCHF
Model based projections
5454
Market has turned short CHF from neutral
Market positioning has turned back to short CHF
May 2014
BNP Paribas Positioning Analysis for CHF
RUB –More weakness ahead
Emerging weak from the 08/09 crisis
� Russia has seen its macroeconomic fundamentals deteriorate sharply since
the 2008/09 financial crisis. These have been further impacted by the geopolitical
situation.
� The fiscal situation has worsened (also
in underlying terms).
� Potential growth rate has declined.
� Current account will soon turn into a deficit.
� Oil prices are not expected to race higher
anymore.
� The main things helping Russia are:
� Relatively high yield
� Low debt to GDP
� Fairly liquid local market.
� However, the outlook is clearly
deteriorating and we do not advise strategic longs.
56
Changes
between 2008
and 2014
Changes
between 2008
and 2014
Deteriorating fundamentals57
Worsening C/A Falling potential growth
� Russia’s fundamentals have weakened since the global financial crisis, with the economy steadily more dependent on the oil and gas sectors and on the price of energy commodities. Their share of
exports has risen above 60% and real output growth has barely exceeded 2-3% in the last few years.
� In light of this and of Russia’s adverse demographic trends, the country’s potential growth rate has
fallen below 3%. Investment-to-GDP ratio is falling again and the labour force is ageing and shrinking. Medium term prospects are soft, at best.
� Russia’s low public and external debt means we are less worried about the near-term outlook but the
country’s deteriorating fundamentals point to growing risks down the line.
CBR to cut?58
GDP prospects are soft, labour market is weak Rate expectations being revised
� A stabilisation in the situation in Ukraine, coupled with moderating inflation, could
see the CBR reverse the 200bp hikes implemented at the start of 2014, later on in
the year.
CNY –Curb your enthusiasm
USDCNH is range bound – not trending60
Chart 1: USDCNH spot, fixing and onshore trading band NDF yields are now lower than onshore
� With NDF yields now falling below onshore forwards, sentiment is starting to look a
little stretched
5.9
6.0
6.1
6.2
6.3
6.4
6.5
Jan-12 Jul-12 Jan-13 Jul-13 Jan-14
CNH Curncy
CNY Fixing
Upper band
Lower Band
-2
0
2
4
6
8
Jun-12 Dec-12 Jun-13 Dec-13 Jun-14
%
3m onshore DF yield
3m NDF yield
Investors were too bearish on the RMB when it was weak; now they are too bullish when it's strong. This is actually a range
market, not trend of appreciation.
6161
Forecasts*
May 2014
* End of quarter
USD Bloc Q2 '14 Q3 '14 Q4 '14 Q1 '15 Q2 '15 Q3 '15 Q4 '15
EURUSD 1.35 1.32 1.30 1.28 1.27 1.26 1.26
USDJPY 108 109 110 112 115 120 124
USDCHF 0.92 0.94 0.95 0.98 0.98 0.99 0.99
GBPUSD 1.69 1.69 1.71 1.71 1.72 1.73 1.75
USDCAD 1.09 1.10 1.10 1.10 1.10 1.11 1.12
AUDUSD 0.92 0.92 0.92 0.93 0.93 0.92 0.90
NZDUSD 0.84 0.83 0.83 0.82 0.82 0.81 0.80
USDSEK 6.67 6.78 6.85 6.95 6.93 6.83 6.90
USDNOK 5.93 5.91 6.00 6.02 6.06 6.03 5.95
EUR Bloc Q2 '14 Q3 '14 Q4 '14 Q1 '15 Q2 '15 Q3 '15 Q4 '15
EURJPY 146 144 143 143 146 151 156
EURGBP 0.80 0.78 0.76 0.75 0.74 0.73 0.72
EURCHF 1.24 1.24 1.24 1.25 1.25 1.25 1.25
EURSEK 9.00 8.95 8.90 8.90 8.80 8.60 8.70
EURNOK 8.00 7.80 7.80 7.70 7.70 7.60 7.50
EURDKK 7.46 7.46 7.46 7.46 7.46 7.46 7.46
E. Eur Bloc Q2 '14 Q3 '14 Q4 '14 Q1 '15 Q2 '15 Q3 '15 Q4 '15
EURPLN 4.15 4.07 4.12 4.15 4.00 3.95 4.00
EURCZK 27.00 27.00 27.00 26.50 26.00 25.50 25.00
EURHUF 305 302 312 305 295 295 295
EURRON 4.45 4.37 4.50 4.50 4.45 4.40 4.45
USDZAR 10.30 10.00 10.95 10.50 11.00 11.20 11.50
USDRUB 34.56 35.84 37.00 37.30 37.00 38.94 37.15
USDTRY 2.07 2.11 2.15 2.17 2.20 2.22 2.22
Asia Bloc Q2 '14 Q3 '14 Q4 '14 Q1 '15 Q2 '15 Q3 '15 Q4 '15
USDSGD 1.24 1.26 1.28 1.30 1.35 1.35 1.40
USDMYR 3.20 3.35 3.40 3.40 3.42 3.45 3.50
USDIDR 11800 12000 12000 12000 12250 12500 12800
USDTHB 32.00 32.40 33.00 33.00 33.00 33.30 33.50
USDPHP 43.60 44.40 44.80 45.00 45.00 45.50 46.00
USDHKD 7.80 7.80 7.80 7.80 7.80 7.80 7.80
USDRMB 6.19 6.25 6.20 6.17 6.25 6.21 6.15
USDTWD 30.00 29.80 29.80 29.70 29.70 29.60 29.50
USDKRW 1020 1010 1000 1000 980 980 950
USDINR 58.00 58.00 60.00 61.00 62.00 63.00 63.00
USDVND 21100 21300 21300 21300 21300 21600 21600
Latam Bloc Q2 '14 Q3 '14 Q4 '14 Q1 '15 Q2 '15 Q3 '15 Q4 '15
USDARS 8.28 9.00 10.95 12.65 12.75 13.95 15.00
USDBRL 2.28 2.38 2.45 2.45 2.48 2.50 2.55
USDCLP 538.00 543.00 555.00 555.00 550.00 550.00 545.00
USDMXN 13.00 12.90 12.85 12.80 12.80 12.75 12.75
USDCOP 1925.00 1940.00 1950.00 1967.00 1985.00 1980.00 2000.00
USDVEF 6.30 13.80 13.80 13.80 25.60 25.60 25.60
6262
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