Barclays Fx Quarterly

FOREIGN EXCHANGE RESEARCHMarch 2012 GLOBAL FX QUARTERLY RESURGENT USD IN CALMER WATERS PLEASE REFER TO THE LAST PAGE FOR ANALYST CERTIFICATION(S) AND IMPORTANT DISCLOSURES. Barclays | Global FX Quarterly CONTENTS OVERVIEW 2 Resurgent USD in calmer waters Stronger growth and improving relative structural issues in the US are USD positives relative to the majors, but less so against the rest of the world’s currencies. THEME 1: USD PROSPECTS 3 The comeback kid The move in US yields is critical for the USD. A cyclical upturn and relative outperformance of the US economy to the rest of the world is not necessarily a USD positive. THEME 2: OIL AND FX 7 A slippery slope Our analysis shows long NOK/CHF, RUB/TRY and MYR/TWD are attractive in terms of currency vulnerability to higher oil prices, carry and valuations. THEME 3: EUROPEAN CURRENCIES 11 Navigating unchartered waters We think the NOK, SEK and PLN are better placed in post-3Y LTRO Europe, given economic fundamentals and global risk factors. THEME 4: JPY AND CURRENT ACCOUNT 15 Deteriorating undercurrent The risk of a structural current account deficit in Japan sooner than expected has been a big part of recent JPY depreciation and prospects for it will remain crucial. THEME 5: MULTILATERAL PERSPECTIVE 19 Positioning for tectonic shifts Applying a multilateral approach to currency values since July 2011, we think the TRY looks too expensive and the BRL too cheap against their trading partners. G10 FX MOVES OVER THE PAST QUARTER AND SUMMARY OF KEY DRIVERS FOR G10 FX .....................................................................................................................................22 G10 FX VIEWS ON A PAGE .............................................................................................................23 EM FX VIEWS ON A PAGE ...............................................................................................................24 OPEN TRADES ...................................................................................................................................26 FX CLOSED TRADES ........................................................................................................................27 FX FORECAST TABLES.....................................................................................................................28 22 March 2012 1 Barclays | Global FX Quarterly OVERVIEW Resurgent USD in calmer waters Guillermo Felices +44 (0)20 3555 2533 [email protected] Paul Robinson +44 (0)20 7773 0903 [email protected] Key themes for the quarter USD strength against the other finding currencies, but not across the board: EM prospects remain bright (see “The comeback kid”). JPY weakness has further to go; current account dynamics are crucial. We are targeting 90 in 6m (see “Deteriorating undercurrent”). EUR will also weaken, even if risk is not “off”. A weaker EUR and continued equity price strength is good for the smaller European currencies (see “Navigating unchartered waters”). CAD prospects brightest of the G10 commodity currencies: A stronger US and ongoing concerns about China. EM still attractive but Asia-Pac currencies may have a breather. EMEA is becoming more attractive and LatAm strength has further to go. Higher oil prices are the biggest risk to the nascent recovery in confidence. G10 commodity currencies are more attractive than EM if there is a significant supply shock, rather than oil prices increasing due to robust demand (see “A slippery slope”) Implied vol is unlikely to increase across the board, partly because US developments will be a stabilising factor. But there are attractive relative value trades (see below). Major forecast changes None in this publication. Relative to last quarter, the big change is USD/JPY. Favoured trades Long MYR/TWD in spot (ref: 9.589, target: 9.80, stop-loss: 9.50): MYR/TWD benefits from high oil prices, positive carry and insulation from regional shocks (see “A slippery slope”). Short CHF/NOK in spot (ref: 6.336, target 5.880, stop-loss 6.437): The NOK is supported by oil and risk and the CHF remains our favourite funding currency in Europe (see “A slippery slope” and “Navigating unchartered waters”). Long a 3m GBP/USD straddle at 3.45% USD (spot ref: 1.5812) and short a 3m USD/JPY straddle at 4.25% USD (spot ref: 82.46). GBP volatilities are low, while those for the JPY have moved higher recently due to its sell-off (see Global Outlook, March 2012). Short TRY/BRL via 3m NDFs at 1.006 (target: 0.925; stop-loss: 1.025): The TRY looks too expensive and the BRL too cheap. (see “A multilateral perspective”). Hold on to or add to long CAD/JPY via call options (see open trades for details): Oil and US strength versus loose Japanese monetary policy and a deteriorating current account balance. Hold on to long USD/CHF (see open trades for details): Easy ECB policy to keep downward pressure on EUR/USD. Reduced euro area risks should allow EUR/CHF to move higher. 22 March 2012 2 Stronger growth but little change in Fed policy should lead to a gradual increase in longterm yields: helpful for the USD relative to the JPY and EUR. But many clients who expect little upside think that the risks of a bond market sell-off have increased.Barclays | Global FX Quarterly THEME 1: USD PROSPECTS The comeback kid Paul Robinson +44 (0)20 7773 0903 paul. Yields are highly likely to pick up at some point. and cyclical growth affects the expected policy stance.com The improvement in US economic prospects has continued.75% by year-end. And even if yields remain constrained. though not particularly strong. In our recent Global Macro Survey. There are four main drivers of longer-term yields. but not a large enough change to lead to a widespread sell-off of commodity or EM currencies. we do not think that balance sheet issues will lead to Japanese-style prolonged deflation. There appears to be little conviction that a major bond sell-off is imminent. they remain close to their lowest level for decades 18 16 14 12 10 8 6 4 2 0 1962 1968 1974 1980 1986 1992 1998 2004 2010 US benchmark 10y yield Source: Reuters EcoWin Jan-07 Jan-08 Jan-09 US Jan-10 Euro area Jan-11 Jan-12 Source: Bloomberg 22 March 2012 3 .com Yuki Sakasai +1 212 412 5652 yuki.robinson3@barcap. in our view. there will be plenty of room for yields to move (Figure 2). super-loose US monetary policy Figure 1: Unemployment rates are moving in opposite directions in the euro area and US 12 10 8 6 4 2 0 Jan-06 % Figure 2: Despite the recent pickup in US 10y yields. the USD will be viewed as an increasingly unattractive funding currency. EUR and CHF.sakasai@barcap. But we think that USD strength is unlikely unless longer-term US yields rise meaningfully. mainly via shorter-term growth expectations. The employment situation in particular has improved significantly (Figure 1). Eventually. Longer-term USD prospects brighten The US economy is in a sustainable. despite the recent rise. news about the factors that drive them matters enormously for global FX. And when they do. compared with the JPY. with differing implications for the USD: Expected growth: Trend growth is an important determinant of the longer-term real interest rate. which should support yields and the USD. only 4% of respondents thought the 10y government yield would be above 2. recovery. but the USD remains weak. In our view. It is difficult to imagine forecasts of trend growth being revised up significantly in the short run. Common factors affect both them and the USD. We expect prospects to continue to brighten relative to the rest of the world. Inflation breakevens: Our rates strategists do not think that breakevens are likely to increase significantly. have picked up. and therefore rapid USD appreciation is unlikely. but there is no indication that it will happen yet. This matters directly for USD/JPY but also because they are the two leading safe-haven currencies.0 0. The factors that may lead to some pickup – stronger growth and improving relative structural issues – are USD positives relative to the majors. But there are signs that the safe-haven status of the JPY may be eroding. Treasuries have shown no sign of losing their safe-haven status. The weakest currencies of note in Q1 were the USD and JPY. the FOMC is unlikely to change its stance rapidly. Overall. And of course Figure 3: The AUD and NZD remain very strongly correlated with global equities… 1. though.4 MXN JPY NOK GBP KRW SGD SEK AUD CAD NZD CHF EUR BRL ZAR Figure 4: …and both remain significantly overvalued relative to our BEER model 40% 30% 20% 10% 0% -10% -20% -30% EUR USD GBP JPY AUD CAD CHF SEK NOK NZD BRL CLP MXN HKD IDR INR KRW MYR PHP THB TWD ILS PLN RON RUB TRY ZAR Misvaluation relative to longer-term fair value Source: Barclays Research G4 Smaller G10 Lat am EM Asia EEMEA Since Jan 2008 Source: Barclays Research Since last GO 22 March 2012 4 . implied by fixed income markets. The BoJ clearly wants higher inflation.8 0. as discussed above.4 0. If anything. Inflation expectations. Prospects for the other majors have deteriorated JPY We now expect further weakness of the JPY. when premature tightening led to a fairly severe recession in 1937-38.6 0. but we suspect that investors read too much into its February statement and action. but less so against the rest of the world’s currencies. longer-term real yields remain at extremely low levels (Figure 3) and there is significant room to the upside. Low actual and expected inflation has strengthened the JPY directly and via the effect on real interest rates. The major risk to this is the oil price. Risk has been more important. has been learnt. Nonetheless. In the short run.Barclays | Global FX Quarterly may lead to a more marked increase. especially if risk appetite continues to pick up.2 -0. Fed policy: This is the factor that eventually will lead to a large move. consistent with previous patterns relative to global equities (Figure 3). in our view. which we discuss below. we think that US Treasury yields are unlikely to increase quickly. The attractiveness of US Treasuries: For all the concerns about the longer-term fiscal position in the US. Higher oil prices and the change in energy usage in Japan have exacerbated the current account deterioration. the USD has become more of a safe-haven currency in light of the problems in the euro area and the combination of a deteriorating Japanese trade balance and serious Japanese fiscal and demographic issues. but that is also true for the US and Europe. Prospects for the USD have improved. though some of the factors which have led to a persistently low level of USD/JPY are likely to stay in place. Japanese inflation is probably not a significant JPY negative yet.0 -0. The lesson from the 1930s.2 0. The AUD and NZD continue to be the highest-beta currencies in global FX (Figure 3).6 1. although developments may be a little calmer.4 1. Despite the record current account deficit in January. 3) Will elections in Greece and France lead to increased political instability? Difficult to call.4 -0. but the CAD looks set to outperform the rest of the G10 currencies. The recent depreciation of the NZD and AUD since early March may extend somewhat in the near term. 2) Will Portugal need to restructure its debt? Probably not. ongoing weak growth and a more attractive USD. at least during the coming quarter. The crisis has had no clear long-term effect on EUR/USD. we do not believe that it will move to a prolonged deficit until later this decade (Figure 5). there are likely to be periods of further investor disquiet. Any move is likely to be gradual because of the historically low level of USD/CAD. Figure 6: US cyclical outperformance needs higher Treasury yields to be a true USD positive 1. We continue to expect gradual depreciation of the EUR in light of looser monetary conditions. EUR The euro area crisis has calmed somewhat but is far from over. Select commodity and EM currencies remain attractive G10 commodity currencies Commodity prices are likely to remain strong and risk appetite robust.6 0.0 0.6 MXN NOK KRW AUD CAD GBP NZD TWD USD NEER SGD EUR ZAR CHF PLN 5 Figure 5: We do not expect the Japanese current account to move to a structural deficit until 2018 (% of GDP) 16 12 8 4 0 -4 -8 -12 -16 70 75 80 85 90 95 00 05 10 15 Households General govt Current account Source: Barclays Research Simulated JPY Non-financials Financials 20 (FY) US cyclical outperformance US cyclical outperformance + US10Y up over 25bp per month Source: Barclays Research 22 March 2012 SEK . but certainly a risk.8 0. especially if oil prices rise for reasons other than strong Asian growth. but there is unlikely to be a full-blown crisis. so the medium-term prospects for commodity prices are fairly bright. The BoC’s sensitivity to the real exchange rate may lessen if the US recovery persists and there is more upside for Canadian rates in the longer term. Confidence in the EUR is unlikely to improve significantly in the short run. Our technical strategists’ view is that the JPY has weakened through key levels against a number of currencies (the USD and GBP being particularly important examples). leading to worries of further restructuring? Probably.4 0. Overall.2 1. France’s downgrade and Greek CDS contracts being triggered).2 -0.0 -0. The CAD continues to have the most potential upside of the G10 commodity currencies. but it has been associated with deteriorating relative prospects for the euro area economy and. oil prices are a more direct positive and US growth is likely to surprise to the upside relative to China in 2012. this has had important psychological implications. But short-term risks remain: 1) will Greek growth continue to disappoint. a change in the ECB approach. The LTROs were a significant success and a number of the events that market participants were most worried about have taken place with little disruption to global markets (eg. though valuation remains stretched for both (Figure 4). Nonetheless.Barclays | Global FX Quarterly the fiscal situation has been a concern for a long time. Valuation is less stretched. more recently.2 0. EM continues to offer an interest rate advantage to attract carry trades and further portfolio inflows as well. Our results supports our view that the move in US yields is critical for the prospect of the USD. it may be less of a USD-negative than many assume. The USD has been the weakest global currency in months since 2000 when both the oil and equity prices increase. and a cyclical upturn and relative outperformance of the US economy to the rest of the world is not necessarily a USD positive. though less so than in 2007-08. PEN). It should be noted. large current account deficits and or/sticky inflation (TRY. RUB. that the US has a smaller petroleum trade deficit relative to GDP than the euro area or Japan. The Fed has typically “looked through” rapid commodity price moves to a much larger extent than European central banks. it is worth looking at the historical performance of the USD when the US economy has a cyclical upturn with above-trend growth and is outperforming the rest of the world (adjusting for different trend rates of growth). The picture dramatically changes when the US cyclical upturn/relative outperformance accompanies a more than significant rise in US 10y yields during the month (we use a 25bp rise as criteria which is a one standard deviation move over our sample period).12% per month in trade-weighted terms. Lower taxes on energy mean that changes in the underlying oil price are felt more directly. Past relationships While history does not necessarily repeat itself. though.Barclays | Global FX Quarterly EM currencies The strong performance of EM FX this year (the GEMS index has appreciated 6. repositioning by portfolio investors and the covering of EEMEA shorts all point to less helpful positioning technicals. In EM FX.7% per month in trade-weighted terms and USD strength is more broad-based. Figure 6 shows that cyclical outperformance of the US does not generally lead to broad-based USD strength: during these episodes. even then the USD tends to underperform other G10 currencies. ZAR. Perhaps most important now is the general pattern that the “winners” from high oil prices (eg. The big risk: Oil The biggest risk to this USD view is a further significant rise in the oil price. The effect on US consumers and producers may be larger. So if higher oil prices are a result of supply-side disturbances. In such periods. it tends to outperform EUR and CHF but underperform notably against AUD and CAD. Nonetheless.6% versus the dollar). but tends to appreciate against many of the EM currencies if equities are falling while oil prices rise. the USD appreciated only 0. The analysis discussed in “A slippery slope” suggests that the G10 commodity currencies – whether or not they produce oil – may perform well in such an environment. MYR). Middle Eastern countries) tend to diversify into EUR-denominated assets. We forecast a further 2-5% of spot gains over the next 12 months. Within the G10. The reasons why a higher oil price is generally a USD negative all continue to hold. but prospects for EM FX remain bright. 22 March 2012 6 . stay neutral currencies with the potential for intervention (CLP. The USD’s performance varies significantly across currencies. COP. We identify the US relative cyclical outperformance episodes using OECD composite leading indicators since 1993. the ECB in particular. we highlight the following favoured broad strategies: be long high-carry and commodity currencies (BRL. INR). What is driving oil prices matters. and short currencies most exposed to high oil prices. the USD appreciated 0. have led to markedly higher oil prices since the start of the year. CZK. Correlations to oil prices are higher for most currencies (G10 and EM) in our sample during periods when oil and equities are going up. however. and Iran to the imposition of sanctions by the international community in January 2012. especially in the EM economies (Figure 1)[email protected] Raghav Subbarao +44 (0)20 7773 4144 raghav. These periods of improving market risk appetite correspond to demand shocks – an increase in global growth prospects that pushes up all risky/pro-cyclical asset prices. Barclays Research Note: Libya refers to the uprising that began in February 2011. On the other hand. correlations between oil and FX vary substantially depending on whether equity prices (growth expectations) are going up or down. Historical data suggest that currency performance in an actual supply contraction would see greater differentiation between currencies on the basis of their relative vulnerabilities. Source: OECD. The historical relationship between oil prices and FX is not clear cut. in our view. oil has outperformed other commodity prices much the same way as it did after the start of the Libyan uprising in early 2011 (Figure 2). Barclays Research 22 March 2012 7 . PLN. Figure 3 shows the correlations between oil and other currencies (USD crosses) over the past 10 years. Such episodes would be consistent with a supply shock – one in which supply Figure 1: Leading indicators for economic activity in EMs continue to be subdued 110 105 100 95 90 85 2004 2005 2006 2007 2008 2009 G10 EM Figure 2: Oil and non-oil commodity performance in the days around recent geopolitical episodes 135 125 115 105 95 85 -40 -30 -20 -10 0 10 20 30 40 2010 2011 Iran episode: Oil Libya episode: Oil Iran episode: Non-oil Libya episode: Non-oil Note: Both G10 and EM LIs are GDP-weighted. for more details) have kept oil from declining despite a softening in economic prospects. Long NOK/CHF.com Concerns about future [email protected] | Global FX Quarterly THEME 2: OIL AND FX A slippery slope Aroop Chatterjee +1 212 412 5622 aroop. calculated over the complete sample period and also during two particular regimes for oil and growth expectations. During periods when oil prices are going up. KRW. as well as an improvement in risk appetite. key determining factors of which include oil’s impact on the external balance. RUB/TRY and MYR/TWD are attractive trades. Higher oil prices have implications for economic growth/market risk appetite for a country’s external balance as well as for inflation and these various channels often have opposing effects on FX. Indeed. growth and monetary policy. CNY. EM includes BRL. Haver Analytics. Geopolitical tensions (Iran and Syria) and a fundamentally tight oil market with OECD inventories at five-year lows and low spare capacity (see Energy Flash. Source: Bloomberg. 8 March 2012. RUB. periods when oil prices increase and equity prices decrease constitute episodes when oil prices are elevated due to idiosyncratic reasons. INR. ZAR and TRY. 50 0. Haver Analytics.00 0.00 -2. Figure 4: Information ratios of G10 USD crosses during positive price and negative supply shocks IR: Positive price shock 2.00 -4.1 -0. 22 March 2012 MYR ZAR INR KRW .00 CLP BRL TRY PHP ILS MYR TWD ZAR THB HUF MXN SGD HKD PLN RUB IDR SAR CZK -1. TWD.Barclays | Global FX Quarterly Figure 3: Currency return (vs USD) correlation with oil prices (since 2003) 0.50 INR -3. EIA.00 -0. Barclays Research 1 IR Negative supply shock Source: Bloomberg. KRW and PHP). demand and price (using data from 1973 onwards) and determine the portion of each that is unexplained by the estimated relationship.2 -0.5 0.50 -1.00 AUD 1. Instead.50 CAD 1.3 0. An increase in oil supply/demand/price by more than one standard deviation from the estimated relationship is flagged as a positive shock and vice versa.50 0. THB.4 0. it is difficult to determine the nature of the oil shock by merely looking at oil supply. As a result.3 MXN RON PLN JPY NOK CNY CZK TRY SEK COP KRW AUD CAD NZD SGD THB RUB GBP PHP CLP ILS TWD 1. we estimate a relationship1 between oil supply.00 0. we find the correlations with oil prices changing signs for a number of currencies (most notably INR.50 1. equities up Oil up. for supply we use the monthly global oil production data and our price variable is the IMF's average crude oil price backfilled before 1980 with the refiner's acquisition cost of crude oil.00 -2. Currency performance and oil shocks Oil and equity price regimes are only a rough way of determining whether oil prices are being driven by demand or supply shocks. EIA.00 -0.00 2. Barclays Research constraints boost oil prices at the cost of (more vulnerable) risky asset prices. For supply we used the OECD+ Major 6 non-members leading indicator. Market clearing in oil implies that supply. Indeed. demand or prices by themselves. we look at weeks when the MSCI World went up or down and oil went up.00 IR Negative supply shock Source: Bloomberg.1 0 -0.00 -1.2 0.00 0.50 -1.00 JPY CHF EUR USD SEK GBP NZD NOK Figure 5: Information ratios of EM USD crosses during positive price and negative supply shocks IR: Positive price shock 1.00 0.00 1. For the two sub-samples. equities down Note: We calculate weekly correlations here. demand and prices adjust very quickly to each other.00 -1. Haver Analytics.00 -2. Source: Bloomberg. demand and oil price variables.00 8 HKD CHF BRL HUF EUR IDR Full Sample Oil up. Barclays Research We estimated a VAR with four lags for supply. the external balance and monetary policy (Figures 6-8). both higher inflation pass– through and a larger Taylor rule coefficient on inflation would typically lead to a stronger tendency to tighten monetary policy (Figure 8).Barclays | Global FX Quarterly We consider two types of shocks – a positive price shock (oil price increase unexplained by actual expansion in supply or demand. however. eg.0 0. ie. which is the relative price of money.5 0. From a growth perspective. Additionally. UN Comtrade. which is positive for a currency since it implies a positive wealth effect (Figure 6). would tend to appreciate with higher oil prices for central banks. In EM. G10 commodity currencies (excluding NOK) are the most attractive in both types of shocks.0 -0. In terms of the impact on monetary policy. the relative dovishness of the BoJ and SNB are apparent as well as a number of countries in EM Asia and EMEA. A higher petroleum balance goes hand in hand with the positive trade balance impact of higher oil prices. NOK and CAD have large positive coefficients. GBP and NOK) don’t perform quite as well during the supply shock. which relates closely to their vulnerabilities to an oil price increase. BRL and RUB would tend to respond more strongly to oil shocks. however. We see some of the usual suspects having a larger coefficient on oil prices. while in EM. few currencies perform well in both shock periods. The USD strengthens in a negative supply shock while weakening in a positive price shock. TRY and CLP. The MXN is a notable outperformer in the price shock.0 -2.0 1. Figure 6: Oil’s impact on the external balance Change in trade balance (% GDP.0 -1. There are a few key exceptions. Non oil producing commodity currencies such as the AUD have a negative petroleum trade balance but a positive trade balance impact reflecting the case of the demand shock when demand and price of all commodities tend to go up.5 -2. Currency vulnerability to higher oil prices The major G10 and EM currencies vary in their vulnerabilities with respect to oil’s impact on economic growth. a more negative elasticity of oil consumption would imply a slowdown in economic activity with higher oil prices. There are. a number of significant underperformers in EM such as INR. due to fears of future supply restrictions and/or increased market risk appetite) as well as during negative supply shock episodes (periods when supply actually contracted unexpectedly).5 -8000 -6000 NOK COP SGD CHF INR KRW THB PHP CLP JPY -4000 -2000 0 2000 4000 Net oil consumption/GDP Source: Haver Analytics. Barclays Research 22 March 2012 9 . PLN. larger net oil consumption would mean that an oil price increase cannot be easily offset by domestic production (Figure 7). 10% oil increase) 12 RUB NOK 10 8 6 4 JPY COP 2 CHF 0 ILS -2 HKD -4 THB KRW TRY -6 -15 -10 -5 0 5 10 15 Petroleum trade balance (% GDP) Source: Haver Analytics.5 -1. FX. Figures 4 and 5 show FX performance versus the USD (since 1989) in quarters where negative supply and positive price shocks were seen. A number of G10 currencies that benefit during the positive price shock (SEK. which are more sensitive to inflationary pressures. Barclays Research Figure 7: Oil’s impact on growth Elasticity of oil consumption (10% oil increase) 2. At the other end of the spectrum. the increase in oil prices has typically led to higher rates – in G10.5 RUB 1. suggesting a relative dovishness during periods of oil price increases.” Our analysis on currency performance during oil shocks shows that this trade should also do well in an environment where risk appetite remains high and worries about future supply remain elevated (positive price shock. we like long RUB/TRY and long MYR/TWD on account of their differing vulnerabilities to higher oil prices (Figure 9). CZK and TWD.5890.0 -0.5 0. SGD.1% (as of 21 March) since inception.0 1. a number of these currencies (TRY. A long NOK/CHF position also looks attractive based on a fundamental analysis of the two economies and a trade recommendation can be found in “Navigating unchartered waters. March 2012). From an intra-regional perspective. USD) 10 . stop-loss: 9. TRY’s higher vulnerability to oil prices.6 Effect on annual headline inflation (10% oil increase) Source: Haver Analytics.2 0. target: 9. In G10. expectations of oil price increases can be expressed through relative value trades which are neutral to other risks. Barclays Research Note: Higher scores indicate greater vulnerability to oil prices relative to the USD. and we still like the fundamentals around this trade. TWD and INR) also have central banks which don’t respond particularly strongly to inflation increases. the RUB. and may also be supported by other fundamental factors.4 INR PLN Figure 9: Aggregate vulnerability to an oil price increase 15 10 5 0 -5 -10 -15 -20 -25 0. On the flip side.80. Trade recommendation Putting our analysis on vulnerabilities together with other measures of currency attractiveness such as carry and valuation. Alternatively. Source: Barclays Research 22 March 2012 THB KRW PHP INR TWD ILS TRY SGD JPY CHF HKD USD EUR HUF CZK PLN GBP ZAR CLP SEK NZD MYR BRL IDR AUD CAD DKK NOK COP MXN RUB Risk score (vs. long positions in MXN and NOK look attractive on account of their lower vulnerability levels. a limited growth impact and more proactive monetary policy in the event of an oil price increase.5 -0. Figure 4). higher carry and favourable valuations versus the likes of the SGD. We recommend going long MYR/TWD in spot (ref: 9. In addition.0 SGD RUB BRL NOK CAD CHF JPY TWD 0.0 0.50) Figure 8: Oil’s impact on monetary policy Coeff of inflation in Taylor Rule 2.5 1. We have previously recommended a short CHF/MXN position which is up 4. MXN and NOK stand out with positive impacts on their external balances. these currencies show up as being the most vulnerable to an oil price increase. MYR’s higher carry would also support it in the more benign environment where risk appetite is high and worries about future supply remain.Barclays | Global FX Quarterly A simple way to determine the aggregate FX exposure to oil is to use a scoring approach as shown in Figure 9 (all scores are reported versus the USD). In addition to the beneficial impact of oil for the MYR versus the TWD. CHF. the CHF and the JPY appear more vulnerable than others. Oil importing currencies in EM Asia and EMEA are the most vulnerable from both the economic growth and external perspectives. large current account financing needs and sticky inflation makes it an attractive short versus the RUB (The Emerging Markets Quarterly. As a result.2 TRY 0. com Sara Yates +44 (0)20 777 33937 sara. A weak EUR and buoyant equity market is not a common occurrence.0 -0.5 2.0 -0.0 2. Moreover. we assess the prospects for European currencies by considering country-specific factors such as macro policy and the likely effect of market factors such as risk appetite and oil prices.0 0. When equities rally and the EUR is weak. it is the USD that generally outperforms. We assess which European currencies are better placed to appreciate versus the EUR in this new environment given economic policy drivers and market drivers such as oil and global risk. most of the region’s G10 currencies outperform the EUR.com The actions of the ECB have broken the link between the EUR’s performance and global risk appetite. Over the past decade EUR/USD weakness has only been associated with a rally in global equities around 20% of the time.0 0.5 1. What does this new world mean for European currency performance? Past experience suggests this environment is positive for European currencies versus the EUR (Figure 1). Second. Policymakers’ attempts to address the debt crisis more decisively. Given that we are navigating through somewhat unchartered waters in Europe.5 3.5 1. Barclays Research EUR/USD weak. Figure 1: European currencies do well when risk is on and the EUR weak (average monthly returns vs EUR since 2000) 3.0 1.5 -1. the state of the world matters.5 0.0 1. the relative performance within Europe has been very similar to what history suggests. equities rally EUR/USD weak. equities sell-off Since Dec 2011 22 March 2012 11 . The euro area is facing a new environment. These relationships have mostly held true since December 2011. First.yates@barcap. This gives us some confidence that if equities remain supported and EUR weakness continues. Two points are worth highlighting. when the fiscal compact and the 3y LTROs were introduced.0 Since 2000 2. have decoupled the prospects of the EUR and global risk appetite. European currencies should continue to outperform the EUR with emerging Europe seeing some of the largest gains. alongside substantial loosening by the ECB. Barclays Research Figure 2: Most currencies have rallied in line with historical averages since Dec 2012 (avg monthly returns vs EUR) 3. in periods of equity and EUR weakness only the liquid safe havens and oil related currencies outperform. in neither state is European currency performance spectacular.0 -1.5 0.5 USD CHF NOK CZK SEK GBP HUF PLN RUB TRY Source: Bloomberg.5 2.Barclays | Global FX Quarterly THEME 3: EUROPEAN CURRENCIES Navigating unchartered waters Guillermo Felices +44 (0)20 355 52533 guillermo. Our analysis shows that NOK.felices@barcap. SEK and PLN are better placed to do well in the months ahead. Whereas.5 USD CHF NOK CZK SEK GBP HUF PLN RUB TRY Source: Bloomberg. 5% 2. whereas in the UK. it is a special case because its fiscal fundamentals are not great.0% 0. Second. This has several implications for currency performance in the region. as the risk environment strengthens and the market is more comfortable searching for carry. bp) 200 bps Actual policy rate Source: Barclays Research NOK USD CHF SEK GBP CZK RUB PLN TRY Source: Bloomberg. We expect loose G10 European monetary policy to remain for some time. Our analysis suggests that monetary policy in the G10 European countries is looser than the model would suggest (see Figure 3). nonstandard measures mean that monetary policy in these countries is actually much looser than that suggested by both policy rates and the model. First. The Norges Bank and the Riksbank remain substantially behind the curve in terms of rate hikes. as long as some G10 central banks maintain a more dovish than normal stance. Whereas. (2) Fiscal policy and sovereign risk: which boats are in good shape? The fiscal stance is generally tight as European countries try to reduce indebtedness. the high yielders within Europe will look more attractive.5% 3. NOK and SEK. These are the likes of CHF. However. This discrepancy suggests that in the latest cycle central banks have responded more aggressively than normal.0% 3. However. These typically relate interest rates to the amount of spare capacity in an economy and inflationary pressures. but the commitment to fiscal consolidation and admittedly. policy rates appear more in line with the model predictions. sovereign 5y CDS are trading tighter than Germany’s 5y CDS (Figure 4). The UK 5y CDS is also trading tighter than Germany.0% -0. with many EM central banks facing relatively high inflation and in some cases large liabilities in foreign currency. With many central banks seemingly mindful of the strength of their currency. some countries have been benefiting from relatively healthier fiscal outlooks. But. For all of these countries.5% 0. has benefited GBP. Figure 3: Actual interest rates and those suggested by an open-economy Taylor rule 4. we extended the model to estimate the sensitivity of policy rates to movements in the real exchange rates. Barclays Research 22 March 2012 12 .0% 2. their currency appreciation versus the EUR may be capped. as the co-efficient were calculated using monthly data from 2000-2007.Barclays | Global FX Quarterly Policy responses: sailing into unchartered waters (1) Monetary policy and attitude towards FX appreciation In order to gauge the current monetary policy stances in Europe we estimated countryspecific Taylor rules. the liquidity and depth of its financial markets. they are likely to be more tolerant of FX appreciation.5% 1. This is likely to reflect the fact that central banks have put more weight on the downturn in economic conditions given the downside risks associated with financial stability concerns. We used out of sample estimates throughout. interest rates remain important drivers of currencies even for countries taking non-standard measures (Figure 6).5% GBP CHF EUR NOK Estimate SEK 150 100 50 0 -50 -100 Figure 4: CDS trading tighter than Germany in G10 and wider in EM (5y CDS vs Germany. euro area and Switzerland. However.0% 1. 2 0.6 0. A ranking of currency prospects: who’s sailing will excel in the current conditions? As currency performance depends on a mix of factors. which rank highly. where 10 means the ‘best placed to outperform versus.74 Aug-11 0.8 EURGBP (RHS) 0.Germany 5y CDS -40 Aug-08 Aug-09 Aug-10 EUR/GBP (RHS) 0.80 Jan-10 Jul-10 Jan-11 Jul-11 Jan-12 0. However. The higher the indicator the more supportive they are for currencies.92 0.2 -0. fiscal concerns. to see what this suggests for intra European currency performance. Figure 8 combines this ranking with the currency’s performance since December 2011.94 Figure 6: Lower Interest differentials since end-2011 likely reflect 3y LTROs and weigh on EUR/GBP 1.98 0. Since that date we observe a positive relationship between FX performance versus EUR and our ranking. We rank these indicators and aggregate them into a summary ranking from 1 to 10. this week’s fiscally-neutral budget showed the government continues to keep a tight reign on its fiscal position. it suggests that the UK’s reputation will not be tarnished just yet.4 Jul-09 0. CHF). with the OBR marginally reducing its forecast for government borrowing for the 2011/2012 financial year despite surprisingly weak public finance data for February. Indeed.0 -0.78 0. EUR’ (eg.84 0. 22 March 2012 13 . two rating agencies expressed concerns about the UK’s triple-A rating in February and March.4 0. Barclays Research Fiscal austerity is a risky strategy as tight fiscal policy could result in even weaker growth and higher debt/GDP ratios. have outperformed CHF. We expect this to continue. sensitivity to global risk and oil.90 0. we combined indicators of carry.86 0. attitudes of central banks towards FX appreciation.UK 1y yields diff 1. Barclays Research Source: Bloomberg. Figure 8 highlights dislocations: PLN has performed much better than what its rank would indicate while SEK has rallied by less than the trendline would suggest.88 Source: Bloomberg.82 0.2 Germany . SEK) and 1 is the least likely currency to perform well (eg. Figure 7 shows indicators that proxy these factors.0 0. In addition. GBP and CZK.96 0. NOK. except for the last two (CDS versus Germany and attitudes towards appreciation) where a higher number means worse prospects. SEK and PLN.Barclays | Global FX Quarterly Figure 5: Markets perception of UK vs Germany’s sovereign risk has supported GBP vs EUR 80 60 40 20 0 -20 UK . 01 -0.20 0. In European EM FX. 22 March 2012 14 . **From FX forwards. 1 = worst prospects for currencies vs EUR.6 1. target 5. ***Based on our current assessment of CBs’ attitudes. %)** 0.14 0.3 1.22 0.25 0.Barclays | Global FX Quarterly Figure 7: Ranking of European currency prospects Corr. Source: Barclays Research Source: Barclays Research FX implications: looking for safe ports to anchor Two G10 currencies stand out against all of these criteria: NOK and SEK.2 FX strength 10 9 8 7 6 5 4 3 2 1 0 0 % chg vs. oil Carry vs. Trade ideas: Sell CHF/NOK at 6.09 Germany concerns*** rank**** -9 -30 -24 -42 45 448 99 93 143 1 5 1 4 1 1 1 2 3 2 1 9 7 3 6 8 4 5 RUB TRY HUF SEK GBP NOK CHF CZK 2 4 6 8 Rank 10 Note: *Monthly changes since 2000.05 0.336.30 0.36 0.10 0.6 0. While they have appreciated already versus EUR they continue to be well placed to perform.18 -0.437.3 4.45 0.23 0.8 4.21 0.31 prices* 0. EUR 5y CDS vs. MSCI Figure 8: European currency performance vs ranking of currency prospects (10 = best prospects) Overall Corr. 1 = hands-off approach to appreciation.04 0.4 8. We recommend being long these currencies versus low yielders like the EUR. We expect further upside for GBP versus EUR in our 1 year forecasts. the CHF.880. ****10 = best prospects.0 5. EUR since Dec 11 PLN World* GBP CHF SEK NOK CZK HUF PLN RUB TRY -0. (3m ann.13 0.4 -0. or with even higher conviction.43 -0. according to our ranking of prospects in the current environment for Europe. S/L 6. but its indicators of near-term prospects are nowhere near as strong as the Scandinavian currencies. our ranking favours PLN. 5 = intolerant to appreciation. Furthermore. in our view.0 Jan-06 Jan-07 Jan-08 Jan-09 Jan-10 Jan-11 Jan-12 00 01 02 03 04 05 06 07 08 09 10 11 Goods&services. Japan’s C/A has been on a deteriorating trend since 2008 due to a widening trade deficit. and prospects for it will remain crucial. Our economics team expects the trade deficit to continue into 2014. However. which have reduced market expectations for additional easing.0 trillion yen 0.4 0. and for the JPY’s status as a safe-haven currency during the financial crisis. January Source: Bloomberg C/A. The changing C/A in Japan is of particular importance.0 2. First. Japan’s trade deficit continued to widen due to strong imports and led to the record current account (C/A) deficit in January.0 -1.com The risk of a structural current account deficit in Japan sooner than expected has been a big part of recent JPY depreciation.6 -0. The depreciation was partly due to US prospects: better data and an improved economic assessment by the FOMC. The Noda Administration is aiming to pass a bill to raise the consumption tax to ensure future revenue. NSA C/A. While the record C/A deficit was in part due to seasonal factors and our Japan economists do not forecast a structural deficit until 2018. SA rank correl FX-CA rank correl FX-GDP Source: Haver Analytics rank correl FX-Fiscal 22 March 2012 15 . in our view.2 0. CNY. Focus on long-term trend deterioration and ‘twin deficits’ JPY underperformance driven by Japanese factors JPY underperformed all major currencies during Q1. We recommend being long USD/JPY and also see the chance of JPY underperformance versus some Asiapac currencies like AUD. In Figure 2: Rank correlation between G10 NEER performance and C/A has been very unstable 0. but internal objections within the ruling DPJ party and its minority in the Upper House make the bill’s passage uncertain.2 -0.8 rank correlation coefficient -2. what makes this JPY depreciation different from similar falls over the past two years. is that Japanese factors were at the forefront of investor sentiment towards JPY. while the income surplus remains almost flat (Figure 1).6 0.0 1. we think that the risk of more rapid deterioration is likely to linger for a while. A strong C/A balance has been crucial for Japan.4 -0.yamamoto@barcap. NSA C/A.0 3. together with a re-emphasis on overcoming deflation.0 0. both for stable financing of its huge JGB supply. and might have an even more important impact given that sovereign debt concerns in the euro area have lessened somewhat. a surprise easing by the BoJ in February.8 surplus C/A deterioration – a game changer for JPY Figure 1: C/A deterioration is not just a seasonal phenomenon 4.0 -0. is keeping market expectations of additional easing alive. which is a potentially powerful bearish factor for JPY. looking through the seasonal fluctuation. The risk of a sovereign downgrade for Japan looms.Barclays | Global FX Quarterly THEME 4: JPY AND CURRENT ACCOUNT Deteriorating undercurrent Masafumi Yamamoto +81 3 4530 5038 masafumi. IDR and MYR. the reconstruction efforts should increase investment.Barclays | Global FX Quarterly addition. Compensation for larger risk premiums.000 1. In H2 12. is now applicable to JPY. has been very unstable (Figure 2). Among the G10 countries.000 500 0 -500 -1. than when they have only a C/A deficit (Figure 3). We thus think that the downward pressure on JPY due to a deteriorating C/A will likely remain intact over the coming quarters. Indonesia. The C/A matters for FX when associated with a fiscal deficit Trading opportunities lie in the regional breakdown Japan is registering an increasing C/A deficit vs some Asia Pac countries There are a number of countries with which Japan is already recording an expanding C/A deficit. and its deficits versus Australia. As for the JPY. However. Indeed. The fear of so-called ‘twin deficits’.Africa 2011 16 2010 Source: Haver Analytics 22 March 2012 . the risks to Japan’s trade deficit are tilted to the upside (larger deficit) due to rising oil and commodity import prices. Japan’s deficit versus oil producing Middle East countries stems from oil imports.000 -2. the Great Tohoku earthquake caused net savings to shrink further because of the shift of energy demand from nuclear energy (uranium) to more expensive fossil fuels such as crude oil and liquefied natural gas (LNG). in both the household and corporate sectors. Malaysia and Brazil has also increased (Figure 4).500 billion yen Figure 3: G10 NEER performance during C/A and fiscal deficit 1 0 -1 -2 -3 -4 -5 -6 -7 USD AUD NZD GBP CAD SEK FX return during C/A deficit FX return during C/A & fiscal deficit Source: Haver Analytics %yoy Japan's deficit Middle East +US China Chile Australia Indonesia Malaysia Russia S. there have been limited prospects for the former given the political instability and lack of a long-term growth strategy. However. it underperformed despite a chronic C/A surplus before the outbreak of the financial crisis. in the form of higher interest rates. But its deficit with Australia. thanks to the favourable financing conditions for JGBs. a theme for the USD in the 1980s. past cases show that G10 FX performances are worse when the countries have both C/A and fiscal deficits. Not surprisingly. due to an ageing population and production being moved abroad. Many countries that have both C/A and fiscal deficits can enjoy a stronger currency if they can attract foreign money with strong growth or high interest rates. the rank correlation between the C/A balance as a percentage of GDP and the annual NEER performance. in Japan’s case.500 -2. and performed strongly only when the crisis occurred. Japan’s deficits versus Australia and China are significantly larger than the Middle East and US combined (which can be thought of as a dollar block). the largest deterioration of the C/A has been versus the oil producing Middle East countries. Malaysia and Indonesia are mainly attributable to the rising Figure 4: Japan’s largest C/A deficit by country 2. Faster shrinkage of net savings is behind the C/A deterioration The long-term deterioration of Japan’s C/A reflects shrinking net savings. In addition to this long-term trend. China. The relationship between the C/A and FX performance has not been straightforward.500 1. is not in sight either.000 -1. at least in the short run. further diminishing net savings and implying a larger trade deficit. This suggests that net demand for AUD and CNY could be larger than the USD relating to Japan’s C/A linked flows. the volume and share of LNG in total imports may continue to increase. The cumulative flows from FX transactions correlate well with recent JPY NEER developments (Figure 5). when Japan’s GDP growth is expected to rise from Q1 to Q3 this year thanks to the reconstruction demand. Japan’s combined C/A and FDI deficit versus Australia was larger than the deficit versus virtual USD economies (the Middle East and the US). eg. outward M&A activity by Japanese firms this year outpaces past years. Also in the past. This. despite the JPY’s latest retreat. followed by the UK. the country had the largest deficit versus US and China. Improving Japanese economy should encourage outward M&A activity Japanese FDIs go to the Asiapac countries where Japan registers a C/A deficit Figure 5: Cumulative BoP flows accompanying FX transactions and JPY NEER 10 5 0 -5 -10 -15 -20 -25 -30 Jan-08 Jan-09 Jan-10 Jan-11 trillion yen 190 180 170 160 150 140 130 120 110 Jan-12 Figure 6: Breakdown of BoP flows accompanying FX transactions 10000 billion yen 8000 Inflow into Japan 6000 4000 2000 0 -2000 -4000 -6000 -8000 Jan-08 Jan-09 Retail outflow Trade Balance long term bond inflow Equity inflow Source: Haver Analytics Outflow from Japan Jan-10 Jan-11 Jan-12 FDI Balance Income Balance short term note inflow Trust account outflow Total balance. suggesting that the Japanese corporate sector expands aggressively overseas when the domestic economic backdrop is supportive (Figure 7). the increase in net FDI outflows could be the key driver for the currency’s weakness. cumulative Source: Haver Analytics JPY NEER(Right) 22 March 2012 17 . its FDI deficit versus China and Australia adds to the overall C/A deficit (Figure 8). According to our analysis. followed by the CNY. Australia (18%) and Indonesia (12%). This suggests favourable flows for LNG exporters to Japan. IDR and MYR. where Japan records a larger C/A surplus than FDI deficit. On the negative side.Barclays | Global FX Quarterly imports of LNG. The breakdown shows that the large inflow into Japanese short-term notes has been the major driver of a stronger JPY. As the Japanese government is putting more emphasis on LNG due to its lower CO2 emissions than crude oil. like Malaysia (share in Japan’s LNG import: 20% in 2011). Aside from the US and UK. especially compared with the amount of surplus income. together with steady inflow from income surplus (Figure 6). This implies more of a steady demand for AUD from the Japanese corporate sector than the USD. Australia and Brazil in 2011. Increasing FDI outflow holds key as counterweight of income surplus One of the major reasons why the implication of Japan’s C/A balance for the JPY has not been clear in the past is that there are many other cross-border flows in the Balance of Payments (BoP) which affect FX. Looking at the regional breakdown of Japan’s FDI balance. This could be the case for the rest of this year. together with the still-strong nominal JPY versus historical levels and the significant liquidity held by Japan’s corporate sector. outward FDI tends to increase when the Japanese economy is strengthening. portfolio and direct investments. should lead to further outflows from the country (see FX Instant Insight: JPY: Increased pace in outward M&A likely a further yen negative). either by a clear recovery in exports. including the (unexpected) improvement in Japan’s trade deficit. as Japan’s increasing C/A and FDI deficits versus these countries should lead to JPY underperformance against their currencies.000 -1. Reuters ECOWIN Figure 8: Japan’s largest C/A & FDI deficit by country 500 0 -500 -1.000 -2. we think the C/A deterioration story is a long-lasting JPY-negative theme.500 -2. for instance. Left) Source: Bloomberg. CNY.Barclays | Global FX Quarterly Figure 7: Japan’s net FDI balance and coincidence indicator 500 0 -500 -1. In addition.500 -3. a fall in imports due to lower oil and other commodity prices.000 -1.500 -3.000 -2.000 billion yen billion yen 500 0 -500 -1.500 -2. 22 March 2012 18 . and the risk factors are relatively weak. None of these appears very likely. a regional breakdown of both the C/A and FDI deficits suggests potential opportunities in JPY short versus AUD. as an alternative. a delay in reconstruction. a dovish BoJ and increasing FDI outflows. political instability.Africa Malaysia Canada Brazil Coicidence Indicator FDI balance C/A yoy change (Right) Source: Haver Analytics Trade implications We started recommending USD/JPY one touch at 88 While Japan’s record C/A deficit in January was in part attributable to seasonal factors and we may yet see a setback in the February and March data.000 Jan-85 Outflow from Japan Economic improvement billion yen 70 80 90 100 110 120 130 140 Jan-90 Jan-95 Jan-00 Jan-05 Jan-10 FDI(3MMA. We expressed our bearish JPY view by recommending a USD/JPY 3m one touch at 88 yen which we initiated on 14 March 2012. Risks reside mainly with Japan. or the restart of its nuclear power plants. Risk to our JPY bearish view Risk resides mainly at home Our conviction for a JPY bearish view is high for the above reasons. IDR and MYR. helped by other JPY-bearish factors such as fiscal problems.000 Japan's deficit Middle East +US Chile Australia Indonesia Vietnam China Russia S. in our view.500 -2.000 -1. wynne@barcap. the European periphery.5%. Ireland and Spain have depreciated more than the core eurozone countries.025). The third lesson is that the USD is getting meaningfully stronger. at least from a relative Figure 1: REER appreciation since last summer suggests tectonic shifts are underway 8 6 4 2 0 -2 -4 -6 -8 CNY RUB TRY ARS HKD USD COP GBP SGD NOK PHP MYR CLP THB AUD CZK PRT FIN PLN DEN ITL AUS IDR NLD TWD SEK FRC CAD RON NZD KRW BLG GER ZAR MXN JPN HUF ESP IRL GRC INR CHF ILS BRL REER appreciation Jul 22 . Figure 1 presents the changes in the relative value of each currency versus its trading partners (REER) since July 22. For the same reason. Growth has surprised on the upside and the recovery seems to be on its way. in addition to offering support for the COP and NOK. We recommend short TRY/BRL positions via the 3m NDF at 1.Barclays | Global FX Quarterly THEME 5: A MULTILATERAL PERSPECTIVE Positioning for tectonic shifts Jose Wynne +1 212 412 5923 jose. looking at multilateral real exchange rates suggests interesting tectonic shifts have taken place in the world economy since the European problems began. 2011. and that the USD is gaining strength. The first important lesson is that China has gotten expensive and Europe cheap since last summer. The CNY has appreciated over 8%.8-5. Interestingly.com Applying a multilateral approach to currency values since before the EU sovereign woes escalated last year suggests that China is getting expensive and Europe cheap.2% in REER terms). notably Greece. In contrast. Think (multi)laterally The ups and downs of global stock markets paint a misleading picture of symmetry in the responses to the European events of the past nine months. that oil has turned into a key driver of global currencies.925. This approach highlights that the TRY looks too expensive and the BRL too cheap against their trading partners for this environment. we believe higher oil prices triggered the depreciation in the JPY (4. We see oil prices as largely responsible for placing the RUB second in terms of REER appreciation since July. We expect these themes to remain in place. and countries in the eurozone have cheapened 1. before the market downdraft. A second lesson is that oil has turned into a key driver of global currency values.present Source: Barclays Research 22 March 2012 19 .006 (target: 0. stop: 1. This suggests capital markets seem to be chasing growth stories despite the disruptions generated by bouts of risk-off and exacerbated by credit market inefficiencies (more below). suggesting that the country’s lingering structural issues are likely not viewed that negatively by markets. The TRY’s REER performance since last summer highlights another key dislocation. when the first 3y LTRO was launched). the current account deficit and EU stagnation. This exercise offers interesting insights. is losing its bite. in our view. we would have expected markets to treat the TRY as they did the INR in this environment. and the period since December 22. and according to equity prices. other than central bank intervention. The BRL has depreciated nearly 8% in REER terms. The TRY’s depreciation against the USD of 9. 22 March 2012 20 . This valuation model computes estimates of the excess return offered by equities relative to bonds using our assumptions for earnings growth (which are based on our long-term growth forecasts for each country). and the INR has depreciated 6.Barclays | Global FX Quarterly perspective. particularly given current oil prices. carry. Relative equity performance is measured by the USD return of a country’s stock market relative to the USD equity return of its trading partners (using the same weights used in our REER measure). REER. as the US structural oil deficit is waning. If that is the case. Where is growth not fully priced? We continue to believe that EM will lead global growth in the years to come. This suggests that multilateral REERs are a key adjustment mechanism for “tectonic” shifts in global growth outlooks (in comparison with the relative value of equities). Recent moves suggest this is indeed the case. Tolerance to inflation may have little room. historically a negative for the USD. equities (in USD terms) outperformed those of trading partners by over 40bp. Second. First. a higher oil price. for no good reason. In fact.1% in multilateral terms (helped by a stronger CNY and USD). Growth. including oil prices. in our view. a combination of factors. sound public and private balance sheets and low external vulnerability suggest the BRL should have become more expensive in this environment. as Turkey has lost competitiveness against its other important trading partners. Measuring equity performance in relative terms sharply increases the correlation with REER. are likely to prove too much for the TRY to handle. with input from such factors as oil prices and central bank intervention. Both are oilsensitive currencies with current accounts deficits. Furthermore. Figures 2 and 3 show the correlation between changes in multilateral real exchange rates and relative performance of equities during two periods of acute change in the global growth outlook (between July 22 and December 22 2011. in both the upside and downside elasticities are very similar: for every percentage point of REER exchange rates appreciation. hence. this angle supports our positive take on the BRL at current levels. as we believe the USD should continue to gain when the EUR has room to weaken. this view is not fully priced. Given that we expect a weaker EUR. after growth stories The analysis suggests that REER dynamics have been driven by growth differentials to a great extent. Turkey’s current account deficit remains vulnerable. Figure 4 shows our latest estimate of the equity risk premia (ERP) according to the Gordon model relative to its range since 2005 (see Chapter 2 of the Equity Gilt Study 2011). REER changes and relative equity performance correlate positively during both the market downturn and subsequent upturn. The fourth lesson involves significant dislocations. global equity returns should display a positive correlation with REER changes. 2011. The current BRL REER may prove inflationary if China manages to a soft landing. Such a perspective is more important than ever.4% since July is misleading. EM equity rally has legs 16% 12% 8% 4% 0% -4% Chile Singapore Hungary Turkey Czech South Peru Taiwan Poland Thailand Mexico Philippines Egypt Russia Indonesia China Colombia Malaysia Korea Brazil Hong 21 Min Source: Barclays research Israel Max “Tectonic” trade ideas This multilateral perspective offers support to directional trades we have outstanding such as our short CHF/MXN. but equities offer excess returns of nearly 10% relative to bonds in many Asian countries. TRY.4319x .Barclays | Global FX Quarterly Figure 2: Multilateral FX vs relative equity performances during H2 11 market downdraft y = 0. This approach suggests that EM equity risk premia are not fully pricing our growth outlook for EM.2422 R = 0.1208 Equity performance in USD relative to that of trading partners 2 Figure 3: Multilateral FX vs relative equity performance during recent market recovery Since Dec 22 Equity performance in USD relative to that of trading partners Jul 22 . We suggest using BRL. including China. and long BRL. ZAR. EUR and CNY to express this multilateral view but our optimal weightings estimate boils down to a short TRY/BRL. 22 March 2012 India Last .1879 10 2 R = 0. RUB. March 2012).4641x + 0.164 RON 5 SEK JPN -8 EUR -3 0 USD GBP -5 ARS IDR ILS -10 Source: Barclays Research TRY RUB MYR 7 GBP THB CHF AUD IDR ZAR JPN 2 NZD COP NOK SEK EUR MXN HKD -14 -9 CLP -4 1 TRY 6 -3 BRL KRW DKK SGD CAD -8 ILS TWD RUB INR RON -13 CZK HUF PLN -18 REER changes DKK PLN PHP CLP NZD TWD THB SGD HUF HKD CZK INR NOK ZAR COP KRW 3 8 CHF AUD MYR CNY CAD MXN BRL CNY ARS REER changes Source: Barclays Research EM equity risk premia are elevated in most EM countries. COP and MYR (see The Emerging Markets Quarterly. which supports the idea that the tectonic shifts away from the eurozone periphery (and from the EUR) into Asia. has not run its course. USD. We also believe the BRL is likely to benefit relative to the RY for the abovementioned reasons. our long USD/CHF and USD/JPY (in different structures). Figure 4: EM equity risk premia remain elevated.1. MXN.Dec 22 12 PHP USD y = 0. geopolitics and supply constraints combined to push the oil price sharply higher. soaring oil prices supported commodity currencies. Market risk is the 60-day beta to MSCI World. − Data continued to show resilient global growth. and the market’s perceptions about US monetary policy turned from considering an extension of QE to wondering if the Fed will bring forward its guidance on when policy may be tightened. Carry attractiveness is measured by the 3m IR diff vs US/3m vol. Valuation is % over (+)/under(-) valuation versus BEER. They may not always match our forecasts. Source: Bloomberg. while importance last quarter is obtained from the cross-sectional correlation of currency ranks and currency performance since last quarter. Positioning in 20-day cumulative flows is standardised by its volatility. A cold snap in Europe. the reduction in euro area risk (and large EUR shorts) helped European currencies perform during the quarter. many G10 central banks loosened policy further. current (Q2 12) versus previous quarter (Q1 12)* Importance of driver Carry Valuation Positioning Market risk Idiosyncratic risk Momentum Overall *** [***] *** [-] * [***] * [-] * [***] * [***] Current quarter rank [Last quarter rank] EUR 7 [6] 5 [6] 3 [1] 3 [5] 1 [7] 1 [5] 3 [4] AUD 1 [1] 10 [10] 1 [5] 9 [9] 6 [4] 9 [4] 6 [2] CAD 5 [5] 7 [7] 9 [2] 6 [6] 4 [3] 5 [1] 8 [1] CHF 10 [10] 9 [9] 7 [7] 5 [3] 5 [6] 1 [2] 10 [6] GBP 6 [7] 2 [2] 5 [9] 4 [4] 8 [10] 5 [10] 4 [10] JPY 9 [9] 3 [4] 2 [3] 1 [2] 10 [8] 10 [5] 7 [6] SEK 3 [4] 4 [3] 4 [4] 7 [8] 9 [1] 1 [5] 2 [2] NOK 4 [3] 1 [1] 8 [6] 8 [10] 3 [2] 5 [8] 1 [4] NZD 2 [2] 8 [8] 6 [8] 10 [7] 2 [9] 5 [8] 5 [9] USD 8 [8] 6 [5] 10 [10] 2 [1] 7 [5] 4 [3] 9 [8] Note: We rank currencies such that a higher rank (lower number) implies greater attractiveness. Idiosyncratic risk is the difference between 3m implied and realised vol. Since then. The February agreement over the second bailout for Greece meant a messy default would be avoided. Barclays Research 22 March 2012 22 . progress over the Greek bailout reduced the risk premium on all European currencies. This environment was generally supportive of high beta risk currencies and has lately prompted a nascent recovery in the USD. we expect further depreciation of the JPY against the USD. and central banks continued to loosen policy. These quantitative measures provide guidance on how to understand currency drivers better. And while Greek implementation risks remain high. The Bank of Japan surprised the market with an expansion of its asset purchase fund. The importance of each driver this quarter is determined by our currency views. combined with objective currency ranks. the NOK and CAD were two of the strongest performing currencies in the quarter. which include factors such as event risk and policy response. As a result. 22 July 2011). the market has taken the ISDA’s proclamation of a CDS event in its stride. Momentum is % positive returns. Subjective views on market themes.Barclays | Global FX Quarterly G10 FX MOVES OVER THE PAST QUARTER Key themes over the past quarter: Sustained momentum from the US and China supported global risk appetite. Despite a generally improving economic backdrop. the MPC increased asset purchases to £325bn and the Norges Bank cut the policy rate despite strong domestic fundamentals.” FX Monthly. based on attractiveness with respect to each driver. While these events prompted a sell-off in their respective currencies. − − − SUMMARY OF KEY DRIVERS FOR G10 FX We have developed a set of six metrics to quantify the main thematic drivers behind currency moves (see “It’s not just risk on/risk off. Downside: Increased concerns about global growth. weighing on GBPUSD.77 Downside: Should an oil price spike constrain global activity and risk appetite. Domestic activity likely to strengthen as Canterbury reconstruction picks up later this year. The CHF remains our favourite short as euro area safe haven lessens and concerns over the country’s fundamentals increase. Downside: Increased concerns about global growth. local fundamentals have been weakening recently along with growing concerns about the Canadian housing sector. Exporters currently benefiting from high world prices With RBNZ expected to raise rates by year-end. would weigh on the AUD. JPY 88 GBP 1. it would imply larger underperformance versus the USD.98 AUD 1. and Chinese economic activity in particular. Risks Downside: A spike in oil prices and/or a fall in economic momentum would reinvigorate the debate over QE. The UK’s growth outlook is weak relative to the US. Downside: As oil revenues are largely held offshore. however. Despite Sweden’s strong fundamentals. Japanese negative factors like trend C/A deterioration.55 CHF 0. We expect the NOK’s performance to be negatively affected by a weakening EUR as well as the Norges Bank’s desire to limit the strength of its currency. robust trading partner growth and continued yield advantage will likely support the AUD. fiscal and potential additional easing by the BoJ should weigh on the JPY versus USD. leading to a risk-off environment would support the JPY. relatively loose monetary policy will cap the upside. Downside: Should deteriorating Swiss fundamentals prompt the SNB to raise the floor versus the EUR. We expect this to contain SEK strength against non European currencies. Prospects remain brighter relative to the EUR.96 CAD 0. A downgrade of the UK’s sovereign credit rating would undermine GBP’s safehaven support. monetary policy remains relatively loose. its yield advantage over most other G10 economies is likely to increase.30 Downside: An oil supply shock as well as a re-escalation of concerns over Greece would increase the downside for the currency. very weak economic prospects and lingering concerns about the periphery weigh on the EUR. Balanced: A contraction in oil supply would pressure CAD higher. EUR 1. As such we expect the AUD to move largely sideways.95 Source: Barclays Research 22 March 2012 23 . Upside: Increased concerns about global prospects. While expected gains in commodity prices. weaker Chinese economic activity and delays in Canterbury reconstruction would weigh on the NZD. the SEK is likely to underperform. A robust US economy and high oil prices will continue to support the Canadian economy and the currency.83 SEK 6. valuation is a concern. weighing on the USD. the country’s link to oil would provide minimal support should a risk-off environment resume. Loose monetary policy. i NOK 5. However. Downside: Increased concerns about Greece would increase the risk premium on GBP.05 NZD 0.Barclays | Global FX Quarterly G10 FX VIEWS ON A PAGE 3m Forecast vs USD Currency USD Central scenario Continued US economic resilience supports a rise in US yields and the USD. FX intervention is a risk at 465. The MXN continues to price rather high risk premium. We expect the current account to benefit from rising commodity prices and portfolio flows to be supported by the government’s divestment program.35 3. sell CHF/MXN (3m target: 12.750.27 2. The dominant theme remains rising onshore CNY deposits.75 INR Bearish 0. The COP has overreacted to the supportive global environment of late. managed by the central bank.71) Slow appreciation potential.33 0. should bolster the economy and the THB. FX intervention risks increase below 1.18 2. premium to BRL. Sell EUR/MXN (3m target: 16).19 2.25 -0.25). Economic growth remains firm against the backdrop of relatively benign inflationary pressures. The central bank’s preference for the PHP not to be an outlier in terms of regional performance points to only modest currency appreciation. but limited downside to oil prices and FDI inflows is positive for it. Factors including firm export growth and a still-strong labor market in the context of an undervalued tradeweighted exchange rate point to steady KRW appreciation.90 22 March 2012 24 .60 2. albeit capped at around buy 2m USD put/BRL call (1. Large equity inflows year-to-date point to upward pressure on the TWD.42 3.21) 0.23 0.00 HKD SGD Neutral Bullish 0. positioning is not crowded and intervention risks are small. and subdued domestic demand point to INR underperformance.25 3.Barclays | Global FX Quarterly 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 CNY MYR Neutral Bullish Ebbing inflationary pressures augur for a less marked pace of currency appreciation over the coming quarter.14 0. supported by expansionary monetary and fiscal policy. Persistent current account and fiscal deficits.32 3.40 IDR PHP Bearish Neutral 0.24 3. A paucity of portfolio inflows in the context of a broad USD uptrend is likely to cap IDR upside near term. Supportive global environment (commodities). We see potential. with the slope and band of the SGD NEER being left unchanged at 2% and +/-275bp on our estimates. We expect MAS to maintain its bias towards currency appreciation when it convenes in April. and sell USD put/BRL call (1.15 1. Sell EUR/COP on spikes targeting 2.10 3.38 3.30 Latin America MXN Bullish 0.75) 1. Ongoing reconstruction efforts following the 2011 floods.70. but the risk premium priced in is small.80 3.42 3. respectively.85 2. sticky inflation.30 PEN CLP Neutral Bullish/ neutral Bullish/ neutral COP 0.80) Short 6m USD/CNY NDF (6m target: 6.70 KRW Bullish 0.47 0.75 TWD Bullish 0.260 in 3m 0.95 BRL Bullish Policy instability and FX intervention has added excessive risk Sell EUR/BRL (3m target: 2.80 THB Bullish 0. 01 2. but the currency is tightly managed. Despite the positive returns this year and that there are likely no more shorts to unwind. but the risks of an earlier devaluation (the Ukraine continues to experience adverse balance-ofpayments pressures) make the risk/reward unappealing for UAH longs. Turkey’s large external financing needs and current account adjustment keep us cautious on the lira in the current environment of high oil prices.00 1. benefits from high oil prices. we are modestly bullish on the PLN.52 3.02 0. the RUB should Long RUB vs basket and vs TRY continue to enjoy support from solid growth. implying a decrease in FDI and portfolio flows. The Czech economy is in a recession. but it could still be a controlled process.70 RON* Bearish PLN* Bullish 0. For more details on the trade recommendations. high yields and attractive positioning technicals argue for ZAR gains. With the election uncertainties behind us. PPP valuation.10 and 4.Barclays | Global FX Quarterly Currency Tactical bias Strategic directional view Current strategy/trades we like Vol adj 6m returns Score (1-5) Emerging EMEA EGP Neutral The likelihood of a deal with the IMF by April has increased and repatriation flows look firm for the next 23 months. The YTD rally in Hungarian assets. Source: Barclays Research 22 March 2012 25 . systemic risk.21 0. RON stability since October suggests that policymakers are keen to keep the exchange rate cheap and might allow depreciation if global climate turns more negative again.55 2. and inflow momentum should be sustained. basic balance/GDP and reserves accumulated over the past 5y/GDP.65 0. and the current positioning technicals leave the HUF vulnerable to corrections.85 CZK* RUB Neutral Bullish UAH Neutral KZT Bullish Note: * Versus the EUR. The variable score is an index which ranks EM currencies according to the vol-adjusted returns. Low FX implied yields make RON a cheap short. The KZT. Our bias would still to be long.31 Long a 1x2 2m ratio PLN call / EUR put spread (4. The UAH quasi-peg can be maintained until the October elections. We do not see this ending until later this year. Devaluation is probably unavoidable.30 3.19 Short HUF/long EUR spot together with 3m HUF call/EUR put spread at 289-279 3. compressed risk premia. Slow progress in EU/IMF negotiations are also likely to weigh on the HUF High commodity prices. Stay short RON/long EUR 0.00 strikes) Short TRY/long RUB 0. Capital outflows and deteriorating C/A balance have kept the ILS under pressure since the beginning of the year.17 0.00 ZAR ILS Bullish Neutral 0. like the RUB. though.35 TRY Bearish HUF* Bearish -0. carry.25 3. please see the EM Dashboard.01 3. lower inflation and high oil prices.80 2. 8156 192.25 EUR/USD put spread.1723 23. with very loose policy in the majors and global growth remaining reasonably buoyant. we expect the CHF to receive less support from safe-haven flows.30pp Initial rationale: A gradual reduction in euro area risks would be positive for market risk appetitive. a widening CA deficit and relative monetary policy.40 EUR/NOK put spread. if the situation worsens and global financial markets are affected significantly.017.17 1.50-7.9% 14/6/2012 USD/JPY: 82.46pp Initial rationale: Carry and value look attractive.657 CADEUR: 0. we recommend being long a less regime-dependent strategy – VECTOR (for details please see VECTOR: Value Enhanced Carry Trading of Exchange Rates.5865 0. Oil prices are also likely to support the NOK.77% Profit change (since 23/2) -0.3445 0. stop loss at 0. while more positive cyclical data from the US and higher oil prices are likely to support the CAD. 28 October 2011. target 24.49% -1.027 USD/BRL:1. 5/1/12 USD/BRL: 1.9% 23/6/2012 XAU/EUR: 1242. USD/BRL 3m at 1.01% -0.45% -3.61% 31/5/2012 EUR/USD: 1.03pp Initial rationale: The CHF is our favourite short among the majors due to our expectations for a weaker EUR and the EUR/CHF floor while robust growth prospects in the US should be supportive of the MXN. 6m CAD/JPY call at 83.40pp Initial rationale: With inflation slowing only gradually.8245 AUD/USD: 1. Alternatively. 1m 7.0 one-touch. USD vs EUR. 14/3/2012 USD/JPY: 82. 23/6/11 0.71pp Initial rationale: Relative central bank responses to divergent inflation and growth developments should be supportive of the SGD versus the TWD.21% -1. in which case the upside for gold should be higher than for the CHF. AS OF 22 MARCH 2012 Original Mark to market Net profit since inception +4.878 and AUD/USD 3m at 1. Long AUD.2662 EUR/SGD: 1. 23/11/11. Short CHF/MXN CHF/MXN: 14. USDSGD: 1.9319 Initial rationale: A continuation of structural issues for the larger economies.6709 EUR/AUD: 1.31 EUR/CHF FVA: 6.35% Initial rationale: We expect the strong upward momentum in USD/JPY to remain intact due to the focus on the fiscal issues in Japan.2712 GBP/USD: 1.Barclays | Global FX Quarterly OPEN TRADES.9135 +8.0381 +0.10pp Initial rationale: The EUR and GBP are facing weak growth and loose monetary policy.3196 +0.8388 0.62 -12.08% -0. Short AUD/BRL 3m forward. 8/12/11 +1. Long VECTOR strategy.1895 % of notional - Expiry - Current spot reference 8.5806 +4. Higher oil prices on global supply disturbances also supports BRL. 23/6/11 XAU/EUR: 1081. Brightening prospects for growth in the US and implementation concerns from the fiscal austerity plans in the euro area should limit EUR/USD upside.3191 GBP/CAD: 1. Ongoing peripheral issues should keep pressure on the EUR.96pp Trade/date/macro views Sell EUR/SEK spot.12% Initial rationale: The ECB is likely to keep monetary conditions in the euro area extremely loose which will be the main driver of the EUR lower. we recommend funding these positions in the EUR and GBP.96% Initial rationale: Evidence of stronger growth in the US and higher oil prices should be supportive of the CAD while weighing on the JPY. Source: Barclays Research 22 March 2012 26 .3035 GBP/USD: 1. As a result.7111 CADGBP: 0. we see the MAS maintaining its bias towards slow SGD appreciation. stop loss at 22. 3m USD/JPY 88. Long USD/CHF. 23/09/10 Spot reference 9. 15 October 2009).93% +1.5631 USD/SGD: 1. should support global equities – and the SEK.8 Long SGD vs USD and EUR (60/40). 3m 1.37% 0. Note: Closed recommendations are at the end of this publication.0.37% 1.58 EUR/CHF FVA: 11. attractive carry and Brazil’s proximity to the US versus Australia’s to China makes selling AUD/BRL an attractive relative value trade.6329 +0. 6/12/11 23.7207 EUR/AUD: 1.95% 23/8/2012 CAD:JPY: 82.78% -7. 14/3/2012 EUR/NOK: 7.15% Initial rationale: The surprise rate cuts by the Norges Bank don’t change our bullish view on EUR/NOK as we expect the ECB to continue to keep monetary policy extremely loose while domestic credit conditions will stay the Norges Bank’s hand. An increasingly dovish BoJ and the low levels of implied volatility also make this position attractive.62% +16.6267 EUR/CAD: 1.30-1. Long CAD vs a 50/50 basket of EUR and GBP.5813 +2.85pp Initial rationale: EUR/CHF volatility is extremely high because of safe-haven flows.45pp Initial rationale: Relative monetary policy prospects (a less dovish BCB and more aggressive RBA).2839 EURSGD: 1. we expect the USD to outperform the CHF.3849 -0.83pp Initial rationale: As concerns about the periphery decrease. Either peripheral concerns decrease – which lowers EUR/CHF volatility – or things worsen. 18/03/10 219. GBP basket.90 28.843 AUD/USD: 1.0541 +2. but returns are likely to depend heavily on the various risk scenarios.50 -6.2. 29/2/2012 EUR/USD: 1. Long SGD/TWD.23% 12/4/2012 EUR/NOK: 7.5021 +0. Short EUR/CHF 1y/1y FVA and long XAU/EUR for 20 times the vega amount. 23/2/2012 CAD/JPY: 80.4 14. For investors looking to be long carry currencies but to hedge out euro area risks. 21% 0.92% USD/CHF: 16. short 1m EUR/USD 1.10/0.25% 0. short 3m/3m USD/CHF FVA.58% 1.90 131.16 GBP/USD: 1.41-1.3370 116.04% USD/SEK: 6. 13/1/11 Long GBP/USD straddle struck at 1.6357 USD/JPY: 82.82 1.8% 7.2490 and 1.369 1.86 1.92 and 0.Barclays | Global FX Quarterly CLOSED TRADE RECOMMENDATIONS Closed portfolio trades 2011-2012 Original Cost as % of notional 0% -1. 28/10/10 Long EUR/NZD. 21/1/2011 Long 3m 132. 21/7/11 1x2 EUR/USD 3m 1.0287 CHF/NOK: 6.7515 AUD/JPY: 75.7146 AUD/JPY: 79.0320 EUR/CAD: 1.47-1.43pp 0% -2.4556 CHF/NOK:5.7264 1.46 call spread Long EUR/SEK 1m/1m FVA at 13.3205 CHF/JPY: 89. short 2y EUR/JPY strangle (strikes: 109. 7/10/10 1x2 EUR/GBP call spread at 0.22 130.11 1. 19/8/11 Long TRY (50%).3141 AUD/USD upside through 6m 1. 23/11/11 Short AUD/KRW 1m forward.0510 EUR/USD: 1.3333 CHF/JPY: 85.95% Trade/Date Short EUR/AUD. NOK (25%) and NZD(25%) against the CHF and long 50% of 3m USD/ZAR call struck at 7.55% -0.3193 AUD/USD: 1.0756 EUR/CAD: 1.71.72% USD/JPY: 10.01% 0.3699 AUD/USD: 15.30 EUR/AUD: 1.71% +0.2791 1205 1.8712 76. NZD vs USD. 6/1/12 Long AUD/NZD 3m strangle at 1.4397 AUD/USD: 1.10% -9.93% 22 March 2012 27 .37.50 call spread Short AUD.39% +0.0770 1. short USD/JPY 6m/6m FVA.43% 0.44 call Long GBP/CHF 1.4004 EUR/SEK: 13.084 NZD/JPY: 60. 5/7/11 1m USD/JPY one-touch at 75.0695 EUR/USD: 1. 12/9/11 EUR/CAD upside via a 3m 25-delta risk reversal. 24/8/11 Long USD. 8/12/11 Long 3m EUR/JPY delta neutral straddle at 103.84% -1.6944 -1. 24/3/2011 Long 6m EUR/USD 1.7398 USD/ZAR:7.7264. 20/4/11 Buy 9m 1x2 EUR/USD put spread (1.07% USD/CAD: 12.27 put spread. 15/8/11 Long 3m/3m USD/CAD FVA.3% 0% 5.5% and short USD/JPY 1m/1m FVA at 11.46% -12.3447 NZD/CHF: 0.82 1.1.66% Long USD against an equal weighted basket of SEK and PLN.70% CHF/TRY:1.7589 0.925% USD/CHF: 13.2277 AUD/USD: 1.4405 1.35% USD/JPY vol: 10.4265 0.6358.57 and short USD/SEK delta neutral straddle at 6.9036 75.3615 1181 AUD/NZD: 1.0% 0.63 EUR/AUD: 1.4187 AUD/USD vol: 16.50 call.7% 1.45% USD/JPY: 12.48% -1.69% -0.90% 23/1/12 8/2/12 20/2/12 23/2/12 2/3/12 2/3/12 8/3/12 8/3/12 -2. 23/6/11 Short 60% AUD and 40% NZD against the JPY EUR/USD 3m 1.90% AUD/USD: 16.0% USD/CAD: 11.6822 USDZAR: 8.2875 strikes).2892 1.04 USD/SEK: 6.7344 1.3925 0.03% - 8/12/11 8/12/11 21/12/11 22/12/11 -1.9073 USD/PLN: 3.9647 NZD/CHF:0.80% Closed on 24/12/09 27/09/11 7/10/11 8/7/11 8/5/11 11/8/11 19/8/11 24/8/11 24/8/11 21/9/11 24/10/11 25/10/11 10/11/11 21/11/11 8/12/11 Closing spot 1.4114 EUR/SEK: 8. 8/12/11 Source: Barclays Research USD/SEK: 6.50% USD/JPY: 11.3184 EUR/JPY: 108.95% -12.57 USD/SEK: 6.021 1.50 EUR/JPY straddle. short USD/JPY straddle struck at 82.32% 16.94% -4.54% -0.7315 USD/PLN: 3.33-1.07% Mark to market at time of closing Profit as a % of notional +3.2804 1. 25/9/09 Long GBP/JPY spot.25% -0.3631 132.0% +42. 21/9/11 Long AUD/USD 6m/6m FVA.109 NZD/JPY: 57.0119 NZD/USD: 0.25 and155. 17/2/11 Short NZD/CAD.4798 1.6064 USD/JPY: 81.70% CHF/TRY: 2.10% -2.10% 0.04% +3.8307 0.9% Long AUD/USD 3m vol swap. short USD/CHF 3m vol swap.50).4282 AUD/USD: 1.7% USD/CHF: 16.0510 NZD/USD: 0. 23/6/11 Spot reference 1.3699 1.2% -0.16 GBP/USD: 1.95.3514 EUR/JPY:103. 23/09/10 Long AUD against an equal weighted basket of EUR and USD.8189 1.35.9150 risk reversal. JPY vs EUR and CHF equal-weighted spot basket.14% 0% 0% 0. 30 8.0 1.55 1.08 0.93 1.7% 1 Month 1.21 96 1.72 117 0.30 88 1.98 1.21 97 1.2% -6.96 0.7% 0.70 7.38 8.86 108 0.82 111 0.64 5 Year 1.8% 2.3% -0.20 92 1.00 0.7% -4.29 7.0% -5.25 90 1.34 8.83 114 0.14 1.40 8.54 1.21 8.12 0.57 1.04 0.45 3 Month 1.31 83.9% 0.96 1.7% -3.52 1.35 8.3% 7.73 1.50 7.11 0.77 1.1% 0.30 8.92 1.79 1.20 90 1.75 115 0.2% 2.82 1.02 0.92 7.16 1.63 Long-term FX forecasts 18 Month EUR JPY GBP CHF CAD AUD NZD EUR/JPY EUR/GBP EUR/CHF EUR/SEK EUR/NOK Source: Barclays Capital 2 Year 1.43 22 March 2012 28 .0% 6 Month -5.7% -0.32 84 1.7% 18.85 7.30 1 Month 0.43 8.97 0.56 4 Year 1.00 1.8% 3.7% -4.79 1.34 7.04 0.95 1.84 113 0.55 0.23 8.06 0.4% 3.76 1.2% 6.04 0.7% -4.57 0.00 1.05 0.5% 8.40 7.83 1.58 0.47 3 Year 1.5% 1.0% -3.7% 0.01 0.2% -1.25 8.24 7.0% 8.0% -2.0% 9.0% -2.2% -4.78 114 0.99 1.Barclays | Global FX Quarterly FORECAST TABLES Forecasts Spot EUR/USD USD/JPY GBP/USD USD/CHF USD/CAD AUD/USD NZD/USD EUR/JPY EUR/GBP EUR/CHF EUR/SEK EUR/NOK Source: Barclays Forecast vs Outright Forward 6 Month 1.3% 13.7% 1 Year -9.80 7.9% -6.93 0.98 1.8% -1.20 93 1.21 94 1.6% 1.59 1.4% 3 Month -1.8% 8.9% 5.1% -1.90 0.07 0.80 1.5% 4.81 111 0.4% 9.53 1.78 1.50 1.84 1.2% -1.18 1.81 109 0.84 1.1% -4.4% 1.4% 3.35 1.04 0.42 7.80 112 0.4% 4.06 0.3% -0.32 1 Year 1.4% 5. 2% -2.30 1.50 0.84 2.30 7.78 48.5% -6.93 1.1% -7.67 24.4% -4.20 6 Month 6.8% -1.71 6.4% 2.60 3.0% -8.0% -6.8% -6.77 1750 483 12.50 1.36 1.25 290 3.30 2.6% 3.70 31.7% -2.5% -4.01 1.0% -1.9% -2.50 1.50 4.25 0.240 30.00 9250 1120 3.33 3.03 1 Month 6.3% 0.9% -0.4% -8.7% -1.30 28. end of quarter) Current FOMC BoJ MPC ECB Riksbank Norges Bank SNB BoC RBA 0-0.5% -5.3% -9.30 7.8% -1.1% -5.2% -5.0% -3.4% Forecast vs Outright Forward 3 Month -0.8% -0.00 3.50 29.15 1.30 4.25 1.1% -6.barcap.2% -1.25 2Q 12 0-0.3% -8.1% -7.8% -2.57 1.73 3.50 1.40 1.5% -3.3% 6 Month -1.75 6.9% -0.75 3Q 12 0-0.85 29.7% -4.210 28.1% -11.60 1.77 6.2% -0.9% -4.9% 0.9% 0.2% -0.50 1.230 29.25 0-0.80 7.50 1.55 4.09 7.80 7.9% -4.4% -2.68 1.6% -1.4% -4.9% -6.6% -7.00 1.49 1.38 28.0% -0.1% -2.9% -1.50 1 Year 6.00 1.75 28.78 49.20 33.03 43.43 33.00 8800 1025 2.00 9000 1075 2.1% -3.17 4.8% -3.00 1. Source for all tables: Barclays Research 22 March 2012 29 .81 7.2% -5.50 0-0.6% 1 Year -3.90 42.4% -4.4% -1.1% -0.2% -2.66 24.0% -1.4% 0.25 1.2% -2.10 0.02 4.9% 0.25 2.0% -1.35 29.15 4.1% -1.70 32.00 1.10 0.5% -0.50 1.7% -10.10 0.50 1.84 42.27 30.77 51.00 1 Month 0.50 27.250 30.50 4.6% -7.6% -1.60 305 4.1% -3.1% -9.5% -9.50 1.25 1.78 52.00 3 Month 6.4% -1.00 9150 1110 3.95 4.74 1750 477 12.4% Policy rate forecasts (%.4% -0.50 0.4% -1.64 24.4% 0.4% -3.1% -2.21 9188 1130 3.9% -4.21 7.08 43.50 1.20 29.6% -1.00 4.50 0-0.75 Percent deviation from PPP (+ overvaluation/.3% -12.4% -0.9% -2.75 4Q 12 0-0.0% -0.9% -4.50 5.50 0.36 1.25 0-0.com/BC/barcaplive?menuCode=MENU_FI_FX_GLB_FXH.00 3.8% -3.65 7.70 6.0% -0.17 1.25 1.25 1.Barclays | Global FX Quarterly Emerging markets forecasts Emerging Markets FX Forecasts Spot USD/CNY USD/HKD USD/INR USD/IDR USD/KRW USD/MYR USD/PHP USD/SGD USD/THB USD/TWD USD/ARS USD/BRL USD/COP USD/CLP USD/MXN USD/PEN EUR/CZK EUR/HUF EUR/PLN EUR/RON USD/RUB BSK/RUB USD/TRY USD/ZAR USD/ILS USD/EGP 6.3% -0.04 4.40 3.00 1.37 29.20 2.5% -2.65 305 4.25 0-0.2% 0.73 1740 475 12.4% -6.10 0.75 1750 480 12.1% -1.2% -2.75 1Q 13 0-0.00 3.5% -5.9% -2.82 1761 487 12.25 28.4% -7.10 0.67 24.4% -2.7% 0.3% -6.6% -1.3% -0.50 2.75 294 4.50 297 4.00 3.80 7.78 51.25 0-0.60 31.8% -2.80 7.66 24.50 1.34 7.undervaluation) As of 22/3/12 vs EUR vs USD EUR 0% 6% USD -6% 0% AUD 29% 36% CAD 9% 15% CHF 20% 26% GBP -8% -2% JPY 8% 14% SEK -11% -5% NOK 5% 11% NZD 27% 34% Note: Daily updates for this table are available on Barclays Capital Live: https://live.50 1.1% -1.00 1.01 42.4% -3.00 3.00 1. Asia-Pacific ex-Japan +65 6308 3093 nick.com Marcelo Salomon Chief Economist – [email protected] Emerging Markets Michael Gavin Head of International Macro Strategy +1 212 412 5915 michael.com Guillermo Felices Head of European FX Strategy +44 (0)20 355 52533 [email protected] Aroop Chatterjee Chief FX Quant Strategist +1 212 412 5622 [email protected] Christian Keller Head of Emerging EMEA Research +44 (0)20 7773 2031 [email protected] Yuki Sakasai FX Strategy +1 212 412 5652 yuki.gavin@barclays. Asia-Pacific ex-Japan +65 6308 2220 [email protected] Raghav Subbarao FX Strategy +44 (0)20 7773 4144 raghav. Emerging Markets and FX Research +44 (0)20 3134 2190 [email protected]@barclays.diviney@barclays. Asia-Pacific ex-Japan +65 6308 2073 olivier.com Jose Wynne Head of North American FX Strategy +1 212 412 5923 jose.com Nick Verdi FX Strategist.com Koon Chow Senior EMEA Strategist +44 (0)20 777 37572 [email protected] G10 FX Paul Robinson Head of FX Research +44 (0)20 777 30903 paul.com Hamish Pepper FX Strategist.com Masafumi Yamamoto Chief FX [email protected] Bill Diviney FX Strategy +81 3 4530 5026 bill.Barclays | Global FX Quarterly GLOBAL FOREIGN EXCHANGE RESEARCH Global Piero Ghezzi Head of Global Economics. Mexico +1 212 412 5982 alejandro.com Olivier Desbarres Head of FX [email protected]@barclays.wynne@barclays. Chile.com Sara Yates FX Strategy +44 (0)20 777 33937 sara.com 22 March 2012 30 . Japan +81 3 4530 5038 [email protected]@[email protected] Alejandro Grisanti Chief Economist – Latin America Ex-Brazil.yates@barclays. Mexico +1 212 412 5717 marcelo. For current important disclosures regarding companies that are the subject of this research report. 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