08july2011_fx Weekly Final

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IMPORTANT NOTICE. Please refer to important disclosures found at the end of this report.Some sections of this report have been written by our strategy teams (shown in blue). Suchreports do not purport to be an exhaustive analysis and may be subject to conflicts ofinterest resulting from their interaction with sales and trading which could affect theobjectivity of this report.www.GlobalMarkets.bnpparibas.com

Foreign Exchange 08 July 2011

FX Weekly: Shark Infested Waters Currency Summary 2

JPY - Eternal Equilibrium? 4

Chinas Delicate Balancing Act 6

Higher USDCAD Volatility Set to Persist 8

Reasons for SEK Underperformance 10

Our Take on Chinese Bad Debt 12

Medium Term Recommendations 15

Volatility Cones 18

Correlation 19

Economic Calendar 20

FX Forecast 22

Contacts 23

Ratings agencies have sabotaged hopes for sustainedimprovement in EUR sentiment; we cant be long here.

Fate of budget talks key for USD, but implications of a dealare highly ambiguous.

Local markets are set for another volatile week as mixednews-flow is likely to continue next week.

FX Weekly Strategy: G10 Summary

Fridays US employment report was distressing in all respects. For FXmarkets, it makes even more complex what was already a complicated

equation. Our presumption, at the end of last week, that the passage of theGreek austerity measures heralded a period of sustained improvement in riskappetite could not have been more wrong, the ratings agencies quicklysabotaging any hopes that the market might be able to leave the Greek (andbroader euro-peripheral) crisis behind for a while. The Troika that hadagreed the outline of a new deal for Greece is now redefined to mean theECB, the ratings agencies and those EU governments insistent on significantprivate-sector involvement (PSI) in any new funding deal for Greece. Howthis plays out is absolutely crucial for the fate of the euro, much more so inthe short term than whether the ECB remains hawkish in its approach tomonetary policy. Our call for EURUSD at 1.50 in Q3, and possibly 1.55before year-end, is currently in suspense and we are very reluctant torecommend long EUR positions either versus USD or on crosses.

Also complicating our USD view is the rising expectation of a substantial andcredible US budget deal. The potential for such an occurrence to restoreconfidence in US risk-free assets, and at time when the completion of QE2has brought an end, for now, to an era of perceived currency debasement,has the potential to be USD positive even if a budget deal is supportive ofrisk. This would especially be the case if any accord includes a commitmentto a new version of the 2005 Homeland Investment Act, bringing with it theprospect of significant repatriation flows by US corporates in 2012 (and whichwill inevitably be front run by the risk-taking FX community). The barrier toHIA2 may not be as high as we previously supposed. At the same time,meaningful fiscal contraction in 2012 arising from a budget deal will and allthe more so in the wake of the latest employment numbers inevitablyresurrect speculation that the Fed will have to do more. The bar for QE3may remain high but might not be insurmountable in these circumstances.

Risk will be better expressed via AUD (including short EURAUD), NZD, CAD,NOK and SEK than EUR. We also favour fading Fridays GBP rally, on ourview that the bar to more QE from the BoE is much lower than at the Fed.

Local Markets Strategy

Local markets have seen a volatile trading week as a four-notch downgradeof Portugal, monetary tightening by China, and very weak NFP datacountered the improvement in risk sentiment following the better-than-expected ADP print. Given the ongoing concerns regarding the eurozoneperiphery, we are fairly cautious on risky assets in the upcoming week.CEEMEA currencies have been testing well-established ranges, but weexpect to see some retracement in the coming days. Inflation figures to bereleased in the Czech Republic and in Poland should vindicate the respective

central banks dovish stances. In Latam, central bank policy continues todiverge with Brazil expected to press ahead with tightening while Banxicoremains firmly on hold. We expect the Chilean central bank to hike rates nextweek and like being short USDCLP on the back of higher copper prices.


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Friday, 08 July 2011

FX Weekly http://www.GlobalMarkets.bnpparibas.com

Weekly Currency SummaryEurope

EUR

The ECB rate hike failed to prop up EURUSD by the end of the week as ratings agency actions on Portugal (and nowItaly) as well as their ongoing threat to issue an SD verdict on currently Greek PSI plans dominated proceedings. Thelatter left the ECB and German government at loggerheads. The Euro FinMin meeting on Monday and Tuesday willbe carefully watched. Thus, EUR remains vulnerable to any further negative peripheral headlines.

CHFThe downgrade of Portuguese bonds to junk status by Moodys and its view that a second bail-out will be neededreversed much of the EURCHF prior weeks relief rally. We remain short EURCHF in case of any further bad news onperipheral Europe especially ahead of the FinMin meeting this coming week.

GBP

Mixed nature of data out of the UK fails to provide any clear support for GBP. As expected, the BoE left ratesunchanged, but the BoE minutes on July 20 will be key, especially as the BoE seems to be shifting to a more dovishstance. This may be helped by CPI this week, which should show a moderation in inflation. Data out of the UK thisweek are likely to augment the weakness in the UK economy. We continue to recommend fading GBPAUD rallies.

NOKIP numbers out of Norway were weaker than the previous month. However, the economy overall is performing well.CPI data this week are likely to show an uptick in inflation highlighting that the CB could hike as early as August. Wefavour short EURNOK positions.

SEKIP data out of Sweden surprised to the upside. June Inflation numbers this week should be marginally higher thanMays figures. With robust fundamentals and risk appetite in tact, SEK should perform well. However, if risk appetitedeteriorates, then we recommend long NOKSEK.

Converging Europe, Russia and Israel

PLNPLN benefited from the improvement in sentiment towards the end of the week, and our short EURPLN position hasperformed well; however, we could see some profit-taking going into next week which could take the pair back to 3.95.We would use this to re-establish downside positions.

CZK

CZK was relatively unfazed by the ECB rate hike this week, despite the widening rate differential between the CzechRepublic and the eurozone. Inflation next week should affirm the lack of demand side pressures in the economy,implying that rate hikes will remain off the table for a while. We see potential for EURCZK to move lower and test the24.10 support level, particularly if nervousness over eurozone debt resurfaces next week.

HUF

HUF has held up particularly well this week despite a re-widening in Hungary CDS on the back of the downgrade inPortugal. Nonetheless, we think HUF is vulnerable at current levels to shifts in global risk sentiment. EURHUF hasbroken below the bottom of the range seen since the start of Q2, but we think that this is looking stretched and woulderr on the side of EURHUF upside in the coming week.

RONRomanian assets received a boost on the back of a ratings upgrade by Fitch to BBB-, bringing it back to investmentgrade. CDS tightened substantially on the back of the news, and given the correlation with the currency, our shortEURRON position performed well. We remain short EURRON into next week, targeting 4.16 in the short term.

RUB

RUB strengthened on the back of the improvement in risk appetite and the move higher in oil prices during the week,breaking through the 33.35 support against the basket. However, we think that political risks remain elevated andcapital outflows ahead of the elections later this year will prevent the currency from strengthening substantially. Weremain neutral on RUB at this stage, and we expect to see some profit taking next week.

TRY

While risk-taking activity at the end of the week helped to bring the level of TRY/basket to below 1.97, we think that itis still difficult at this stage to be outright bullish TRY, particularly as current account data on Monday could sparkanother bout of nervousness with regards to Turkish assets. Also, the CBRT is due to meet on 22 July and to publishthe new inflation report shortly after this, which will likely serve to propagate the banks excessively dovish stance.

ILSBoI Governor Fischer sounded relatively hawkish this week, highlighting that inflation remains a concern as levels arestill too high. On the currency front, ILS gained on the back of Fischers comments; however, the BoI has been seenintervening in USDILS below 3.40. We are, therefore, neutral towards the shekel at current levels.

America

USD

Fridays employment report massively disappointed, leading to a rally in US Treasury yields and taking a toll on risk

appetite overall. The US budget talks this week will be important. A credible budget deal could restore confidence inUS assets and has the potential to be USD positive but supportive for risk. Bernankes testimony to Congress onWednesday will be crucial following the weak employment data. US retail sales this week will continue to emphasisethe weak consumer sector.

CADCAD found some support against the USD on the improvement in the US ADP numbers, but it failed to maintain itsstrength after weak NFP. US retail sales as well as UMich Consumer Confidence numbers this upcoming week will beimportant for CAD given its reliance on the US consumer, as well as oil and equities.

EMK America

BRLAfter the downward pressure in USD/BRL due to the month-end fixing formation, the key focus is on the sizeable USDinflow related to equity issuance and FDI in the second half of July. Talks on potential additional FX measures weredownplayed by President Rousseff. Inflation remains a key problem for the current administration.

CLPThe stream of betterthan-expected activity numbers in Chile and globally pushed copper prices higher. As such, CLPis moving in tandem. Ahead of next weeks rates decision, expected to be another 25bp hike, we see USD/CLP testingnew lows. We sell USD/CLP.

MXN Even though we took profit on the short USD/MXN options position we opened in mid-June, technicals are still light,but US numbers have been mixed. MXN is a buy-on-dips story in Latam.

COPWhile fundamentals call for robust USD inflow (due to the S&Ps upgrade of Colombia to the IG criteria), Banrep isopening the door for a pause in rate hikes, and the National Treasury still has ammo to prevent COP to move higher.

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We remain neutral for now, waiting for a better entry level to establish short USD/COP.

PENFundamentals remain favorable for PEN, and we are inclined to add short USD/PEN positions next week, after theexpected punctual USD buying pressure caused by the maturity of USD 250mn in CDRs.

VEFThe current level of oil prices is enough to give the government some extra-time before announcing another devaluationof the VEF, which we expect to take place at the beginning of 2013, following presidential elections in December 2012.

ARSAs elections approach, we expect the BCRA to intensify its intervention in the spot market to assure just a gradual ARS

nominal depreciation. Historically, private sector USD outflow gains momentum ahead of elections. We are neutral ARS.

YENUSDJPY collapsed back into the all-too familiar range on Friday following the weak US employment report as USTreasuries rallied. USDJPY may reverse its course if a favourable US budget deal is reached. However, theperformance of JPY will depend on overall risk appetite and any news out of Europe.

SGD

The SGD made a new historic high as real and leveraged accounts jumped back into the Asian currency play as debtwoes in the eurozone and US made major currencies even less appealing. A slowdown in PMI in June failed todampen enthusiasm for the SGD, as details were comforting. Data in the week ahead include advance Q2 GDP, retailsales and NoDX, which should confirm the slowdown in Q2. Investors, however, expect a recovery in H2. We continueto run with our tech short USDSGD positions with a protective stop lowered to 1.2320.

MYR

USDMYR broke the key 3.0000 level after PM Tun Razak shifted Malaysias Economic Transformation Programme(WTP) into higher gear with the governments six Strategic Reform Initiatives (SRI) and GLC divestment. The KLCI

made fresh highs. Industrial production and manufacturing sales this week are expected to be weak, reflecting the softpatch of growth in Q2. BNM failed to hike policy rates last week and, instead, hiked SRR by 1% to 4%. June CPI datawill be watched for guidance on the timing of the next rate hike. We maintain our USDMYR tech shorts with a stoplowered to 3.0250 to profit profits.

IDRUSDIDR is approaching a key support at 8500, a break here opens the way to 8300, a level last seen in January2004. Indo bonds and stocks remain well in demand, as the BI is seen keeping rates unchanged at its meeting on 12July. We maintain our technical short positions with a stop lowered to 8560 to protect profits.

THB

Aggressive buying in Thai assets after the landslide win by the Puea Thai Party prompted a 1.7% appreciation in THBthe past week. Whilst the PTPs populist economic policies could lead to higher inflation and a wider fiscal deficit, themarket is relieved over the militarys and peoples acceptance of the results, and a return of political calm could restoreinvestor confidence. Data in the coming week, especially weekly FX reserves, will be watched for the level ofintervention as THB surged. The BoT meets next week where we expect a 25bp rate hike. Trendline support forUSDTHB is at 29.95. After the sharp rally, we expect 30.00 to act as a strong floor and consolidation between 30.00-30.50.

PHP

USDPHP slumped over the last week, as robust risk taking sentiment fed rallies in Phil stocks and bonds. Bothheadline and core CPI continue to rise, nudging towards the top end of the BSPs target range of 3-5%. We expect

another 25bp rate hike at the next meeting on 28 July, which should add to the PHPs high-yield appeal. USDPHP ishovering above trendline support at 42.70. A break is needed to push further peso gains to 42.60. The data calendaris heavy in the week ahead with bank lending, exports, OFW, BoP and budget data.

HKDRetail sales remained strong on tourism spending and rising wages. Forwards traded higher on easing concerns overUSD liquidity with forwards up to 1Y supported. Retail sales and PMI will be released this week.

CNY

We are close to the end of this tightening cycle after the PBoC delivered a long-awaited 25bp rate hike lastWednesday. We saw heavy buying of onshore FX swaps ahead of the rate hike while reaction in the NDF market tothe rate hike was muted. Fast money continues rolling short USDCNY NDF position such as 1M while oil companiesbuying of USDCNH persists. We stay with our short 1Y CNH DF vs. 1Y CNY NDF.

TWD

Growth in exports and imports slowed in June due to weak external demand. But a wider trade surplus and increasingFX reserves could provide support to TWD. USDTWD has met strong resistance at 29.00 and the 100-day MA at29.04. We maintain a technical short position established at 28.70 with a stop at 29.20. Reportedly, the CBC is stillpaying 1M to 3M FX swap.

KRW

FX reserves slid marginally in June, but a strong KOSPI sent USDKRW lower. The pair broke 1063 to trade to a low of1056. The sale of KB Financial Holdings and foreigners purchase worth some USD 1.2bn aided the KRW rally. Whilstwe stay cautious on possible intervention, we maintain our short USDKRW position at 1087 with a protective stop

lowered to 1070. Data due this week include FDI, unemployment rate, bank lending and money supply.

INR

USDINR fell back below 44.50 on better-than-expected US data before the disappointing NFP on Friday. Stronger WPIprints in the coming weeks due to fuel price hikes should keep interest rate expectations alive. The underperformanceof Indian stocks should limit any gains in the INR where the range will remain in play. May IP and June WPI are thekey data to watch in the week ahead.

VNDA surprise cut in the repo rate by 1% to 14% on 4 July provided a leg-up to Viet bonds. USDVND continues to tradebelow the ceiling rate. Stability in the Viet CDS shows the improved confidence in both the country and currency.

AUDAUD remained resilient despite the policy rate hikes in China, negative news on China local debt and the downgradeof Portugal. AUD lost ground against USD after the horridly weak US employment report. Aussie employmentnumbers were strong indicating a robust domestic economy. Thus, we like short EURAUD positions.

NZDAs risk appetite holds steady, NZDUSD continues to gain ground and may push to new highs. AUDNZD continues totrade within a tight range and will remain dependent on AUD.

ZAR

USDZAR broke below 6.70 on the back of an improvement in risk appetite; however, we think that current levels are

looking stretched, and we expect to see some profit-taking next week. Manufacturing data to be released on Tuesdayshould confirm the moderation in activity.

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Robert Ryan Friday, 08 July 2011


JPY: Eternal Equilibrium?

The recent extremely tight USDJPY spottrading range can be quite readily justified, butshouldnt last.

The breakout when it comes could(almost) as easily be down as up.

Buy 1m (Aug 5) USDJPY 80.00/82.00Strangle for 1.03% [Spot ref 81.00, vol ref8.95%].

USDJPY: time for a breakout?

The recent extremely tight USDJPY spot tradingrange can be quite readily justified, but shouldnt last

The breakout when it comes could (almost) aseasily be down as up.

USDJPY has been seemingly oblivious to the wavesof fear and euphoria coursing though markets of late,holding a ridiculously tight 187-pip range since thestart of June. Despite its reputation as a gauge offear, the JPY was little moved on the Greek cliff-hanger vote; and the correlation with US Treasuries

seems to have evaporated almost entirely. Whatexplains this lack of activity?

The JPYs traditional fear-gauge characteristic was,to a large extent, based on the yen carry trade: asfear and volatility rose, risk positions would beunwound, strengthening the yen. But the yen carrytrade is no longer: with cross-yen volatility higherand the cost of funding no cheaper, the JPY has lostout, in large part, to the USD.

On the JPYs correlation with Treasuries, the ultra-low cost of hedging means that there is little

incentive for portfolio managers to be anything butfully currency hedged: we assume that mostpurchases of USD-denominated bonds are matchedwith an offsetting forward sale of USD, eliminatingthe impact on the currency markets. Thus moves inthe Treasury market no longer impact USDJPY inthe same way. Recent data have shown a bettercorrelation with the 2y Treasury yield. But, with itbelow 50bp, this has now fallen so low that smallmoves no longer have a major bearing on the pair.

Post the Japanese earthquake, the trade balancehas shifted into a deficit and, in any case, exporters

are in no hurry to hedge so early in the financialyear. But, in a new development, the lack ofalternatives has seen reserve manager inflows offsetstronger importer flows. Meanwhile Japanese retail

accounts have been building substantial positions ondips and unloading them on any rallies, furtherdepressing volatility. Added to this mix is a generallack of interest from hedge funds over May andJune; the assumption of semi-official bids below 80;and significant technical resistance to the topside.Implied volatility had remained relatively high until

recently, but over the past couple of months it hasfallen fast. 1-month volatility now trades at levels notseen since pre-Lehman.

Two implications arise from this. First, the supply ofvol is likely to dry up given that there is little to gainfrom selling it at current levels. Second, with spothaving been in such a tight range for so long, the volsellers are probably clustered around strikes that areclose by. A break through this sticky level of excessgamma would likely see an area where gamma ismuch more bid. Against that backdrop, the comingmonth will be very important for USDJPY.

The period to 5 August covers two non-farm payrollprints, when the most important measure of the USrecovery will support or detract from our view that

Chart 1: USDJPY vs. 2y Yield Differential

Source: BNP Paribas

Chart 2: USDJPY Implied Volatility

Source: BNP Paribas

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Robert Ryan Friday, 08 July 2011


the current downturn represents just a temporarysoft patch. The same period will also see someclarification of the impact of the end of QE2; and theoutcome of the US debt ceiling negotiations,potentially involving a USD-supportive HIA 2.

On Japans domestic front, politics continue tofrustrate as the focus remains on the timing of PM

Kans departure and with the ratings agenciesseemingly working overtime, the risk of furtherdowngrades is ever-present.

Strategy: Buy 1m (Aug 5) USDJPY 80.00/82.00

Strangle for 1.03% [Spot ref 81.00, vol ref 8.95%].

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Kiran Kowshik Friday, 08 July 2011


Chinas Delicate Balancing Act

Chinese policymakers appear to be toyingwith a dangerous balancing act in monetarypolicy by going gradual on lending rate hikes.

Whether or not they succeed depends onhow far inflation moderates in H2 and whetherEurope as a whole manages to hold up. This inturn will likely determine the fate of the AUD.

However, with the market beginning tobelieve that China could be winning the inflationfight after all and now eyeing easing measuresin Q3, the AUDs tone may improve. EURAUD

sees further downside.

Chinese policymakers dangerous balancing act

Chinese policymakers appear to be toying with adangerous balancing act in monetary policy.

Whether or not they succeed depends on how farinflation moderates in H2 and whether Europe as awhole manages to hold up. This in turn will likelydetermine the fate of the AUD.

China had raised lending rates only three times inthe current prudent monetary tightening cycle justbefore announcing a further 25bps hike this week.The focus has instead been on relying on softermeasures such as immediate controls on lendingpractices and hikes in reserve requirement ratios.China has already raised the RRR to 21.50% inmultiple steps since November. The current level is afull 4.5 percentage points over the RRR peak seen inthe prior hiking cycle (which ended mid-2008). Its asif the Chinese were intending to use lending rates totighten policy having reached the prior peak in

RRR but then changed their minds (perhaps fearfulof the consequences for hot money inflows).

Even after accounting for the latest rise, lendingrates have not been moved to the extent seen in thelast cycle. At present, the nominal 1Y lending ratestands at 6.56%, still well below the 7.50% peak in2008. As a consequence, depositors have beenlosing out to rising inflation, even accounting for thefact deposit rates have risen by 25bp more thanlending rates in this cycle.

It makes sense that, to ward off speculative

investments in asset markets such as property,savers ought to get a decent enough return on theirdeposits. Chart 1 compares the real deposit rate(nominal minus inflation) set against saving deposits

as a proportion of overall money supply. The currentlevel of real deposit rates is deeply negative now at-2.00%, well below pre-crisis levels of +2.00%.However, for the real deposit rate to be raised, wewould either need rate increases, or inflationmoderating sharply, or a combination of both. Itappears that the Chinese have been relying more onthe latter i.e. hoping that inflation peaks by mid-year,thereafter moderating and hence by default takingreal rates higher- thus explaining their strategy ofappearing behind the curve. This came through incomments from Chinese Premier Wen Jiabao as hestressed that stabilisation of prices remained a toppriority. Notably, he pointed out that some of thefactors driving up inflation in particular, pork prices had been reined in by government measures toboost supply.

The potential for falling soft commodity prices in themonths ahead may also help. However, amoderation in inflation in H2 might not be enough totake real rates high enough and our economists seeon balance the risk of one more 25bps rate hike overthe remainder of the year. However, in what appears

Chart 1: Real Deposit Rates and Savings

Source: Bloomberg, BNP Paribas

Chart 2: China Benefits from a Higher EUR

Source: Bloomberg, BNP Paribas

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odd at first glance, overall monetary conditions(access to credit) is seen as being too tightconsidering the faster slippage seen in growth; oureconomists expect selective easing measures inJuly/August.

At the same time, if China is going slower onpushing the rate hike pedal, we expect to see aquickening in CNY appreciation back to the 5% ratelast seen when there was an inflation problem in2007-08. This, in turn, could add a fresh layer ofsupport to the AUD, given its status as the quasi-China trade.

However, as the Chinese look to guide monetarypolicy so as to prompt a slow landing while keepinginflation expectations in check, Europe also remainsa key risk and China may want to ensure that the

euro holds its value.

Chart 2 plots the EURCNY against the ShanghaiComposite Index with a lead of 14 days. It displays afairly tight lead-lag relationship, playing to the viewthat apart from having a viable investmentalternative to the USD China wants a strong

EURCNY to maintain strong exports to Europe as itattempts to juggle monetary levers.

If this works, Chinese asset prices and by extensionthe Australian dollar will hold up better. EURAUDshould continue to see further downside and arenewed break down towards 1.3000 multi-weekseems likely, especially as the market looks towardthe easing in Chinese monetary policy. Maybe wewould need to take the downward break in EURAUDoption risk reversals (to 3-year lows) more seriouslyas the period of EURAUD range-trading looks like itcould end.

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Ray Attrill Friday, 08 July 2011


Higher USDCAD Volatility Set to Persist

STRATEGY: Buy 1mo 25d strangle,indicative cost 0.80% (strikes 0.9445 and 0.9755,vol offer 8.85).

Having traded within an effective 0.97-0.99 rangeduring most of June, USDCAD has since exhibitedmuch more extreme volatility, breaking above 0.99(and to above its 200-day moving average) only totest and break 0.9600 shortly thereafter. The crosscurrents buffeting the Canadian dollar are quiteintense. They include oil and other hard commodity

prices, global risk appetite, Bank of Canada policyand the strength of demand for the Canadian dollarby global reserve managers.

The significance of the latter should not beunderstated. The IMFs latest update on FXreserves confirms central banks to still be scaling uptheir holdings of other currencies, a category thatincludes mostly CAD, AUD, SEK and NOK. In Q1,the sub-group of central banks who reveal thebreakdown of their reserves raised the value of their'other holdings by some USD 23bn. A good part ofthis will have been FX valuation effects, but over the

past year, it looks like this group added close to USD70bn worth of other currencies to reserves. If thisbehaviour has been replicated among countries whodont report their currency breakdown (most notablyChina), the addition will be more like USD 150bn.CAD is likely to account for at least quarter of this,and we envisage CB demand providing ongoing andmeaningful support for the CAD.

The Bank of Canada, meanwhile, is likely to remaina benign influence on the currency through Q3 andpossibly Q4. While the latest CPI reading wassomewhat disconcerting, core inflation (more

important than headline CPI for BoC operationalpurposes) remains at 1.8%, below the mid-point ofthe 1-3% target band. Growth has undoubtedlyslowed off the 3.9% annualized Q1 pace, and Bankof Canada Governor Carney in late June indicatedthe need for continued accommodative policy inorder to close the output gap. We, therefore, see nourgency on the central banks part to adjust ratesfrom their current 1%. As a result, interest ratespreads between the United States and Canada areunlikely to be exerting significant influence on nearterm USDCAD volatility.

In contrast, oil/commodity price volatility and riskappetite both have potential to push USDCAD to orthrough both sides of the recently expanded trading

range. USDCAD continues to rank among the topthree G10 currency pairs in terms of positivecorrelation with the S&P500 (alongside AUD andSEK). Risk appetite and the US dollar have, inrecent years, been highly negatively correlated; ifthis relationship holds and we have significant risk-

positive event such as meaningful and credibleagreement on a long term US fiscal reform/deficitreduction, USDCAD could quickly extend through itsrecent lows. Alternatively, such an event might (andespecially in the context of ongoing eurozone fiscaltravails) prove dollar positive, in which case,USDCAD could move to retest the recent highsabove 0.99. There are many variants on this theme,including a breakdown in deficit talks or a further turnfor the worse (or better) in eurozone fiscal stressesthat could have dramatic impact on risk sentimentwith ambiguous USD implications, but they are alllikely to entail the maintenance of higher levels of

USDCAD volatility.

Lastly, the added volatility in oil prices engenderedby the IEA decision to release 60 mn barrels of oil

Chart 1: USDCAD vs. DJIA

05 06 07 08 09 100.90

0.95

1.00

1.05

1.10

1.15

1.20

1.25

1.30

1.35

-15000

-14000

-13000

-12000

-11000

-10000

-9000

-8000

-7000

-6000

USDCAD (rhs)

DJIA (inverted)

Source: Reuters Ecowin Pro

Chart 2: USDCAD vs. Oil

05 06 07 08 09 10 110.90

0.95

1.00

1.05

1.10

1.15

1.20

1.25

1.3030

40

50

60

70

80

90

100

110

120

130140

150

W TI (inverted)

USDCAD (rhs)

Source: Reuters Ecowin Pro

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Ray Attrill Friday, 08 July 2011


from strategic reserves, accounts for a significantportion of recent USDCAD volatility. USDCADcorrelations with oil on any time frame longer thanmonth run consistently above 50% (daily %changes), but CAD has underperformed the recent

rebound. If oil prices hold current levels, USDCAD

should (broader risk appetite themes aside) extendthrough its recent lows. Another sharp fall, incontrast, would likely be associated with USDCADmoving to retest the top side of the range andbringing parity back under discussion.

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Reasons for SEK Underperformance

The SEKs decline over the past monthseems related to concerns over liquiditytightening.

Eventually, we expect the SEKs status as afiscal safe haven to come back to the fore,spurring a recovery.

We still like EURSEK lower and expect thisto gain further traction once it becomes clearthat the scope for a liquidity crisis is slim.

Identifying reasons for the SEKsunderperformance

The SEKs decline over the past month appearsrelated to concerns over liquidity tightening. Thehope is that these concerns will eventually be put torest once a viable Greek debt rollover plan isfinalised.

Eventually, we expect the SEKs status as a fiscalsafe haven to come back to the fore and spur arecovery, with the recent Riksbank hike helping

further. We still like EURSEK lower.

The Riksbank earlier in the week hiked rates by25bp to 2.00% as expected, and broadly stuck withits more hawkish interpretation of the labour market.Our economists reckon that, despite some cautionon the external environment displayed in thestatement, the rate profile remains consistent withrates at 2.50% by the year end. This rate advantageshould bode well for the SEK which until veryrecently was a notable underperformer. Note that theSEK has lost 2.15% against the USD over the pastmonth, the steepest decline of all G10 currencies.

However, timing is everything. Unless we have aclear and timely resolution to the Greek debt rolloversituation, the concern is that the SEK could remainon the back foot especially against the US dollar.However, what exactly drove the SEKs obviousunderperformance within G10 FX in June? Webelieve that in addition to the tail risk of a sharpmanufacturing slowdown, fears of a liquidity crisishurt the SEK in a big way. It is well known thatSwedish banks though well capitalised and withminimal exposure to GIIPS rely on funding in othercurrencies. However, with the passing of the Greek

vote on austerity measures and implementation, wehave averted the tail risk of a funding crisis.

Even ahead of the Greek vote, we saw signs ofcentral bankers taking pre-emptive measuresagainst the potential for a default-led liquidity crisiswith the Feds extension of USD swap lineagreements by a year (they were originally due toexpire on 1 August). We point out that this is acontingency measure, not directly contributing to

USD liquidity. However, that didnt prevent themarkets from believing that it will. After the measurehad been announced, some easing of tensions inEURUSD cross currency basis swaps (swapping ofEUR LIBOR for USD LIBOR) was seen consistentwith a sharp fall in USDSEK However, following thisweeks rating announcements, this has reversedonce again. (Chart 1 compares the EUR 1Y basisswap with USDSEK cross).

We had previously laid out some reasons for ourconstructive SEK view see EURSEK Lower,Barring Liquidity Stress, Market Mover, 12 May. As

the title suggests, the SEKs performance over thepast two years appears to be strongly explained byits status as a fiscal safe haven, with an ongoingfocus on the medium-to-longer term sovereign debt

Chart 1: USDSEK vs. Cross-Ccy Swap

Source: Bloomberg, BNP Paribas.

Chart 2: SEK-DEM CDS Leading EURSEK

Source: Bloomberg, BNP Paribas.

10


11/23



concerns in Europe. Chart 2 shows that the spreadof Sweden 5Y CDS over its German counterpart hasled EURSEK by about a month. In other words, theSEK is being judged relative to one of the soundestsovereigns in Europe. It suggests that EURSEK

looks a little over the top and should at least becloser to 9.00.

In terms of risk factors to our constructive SEK view,we have to acknowledge that the currency ofSweden, being a small and open economy exposed

to the global IP cycle, could be vulnerable in thecontext of globally falling PMIs. However, just asJapanese data (recent IP) have rebounded fromsupply shortages following the 11 March disaster with these being mirrored in stronger PMIs in the US,

it plays to our economists view that much of whatwe are seeing could be temporary. This in turnimplies that a reversal in the other factor hurting theSEK i.e. fears of a liquidity shortage could see thekrona recover as its fiscal safe-haven status returnsas the dominant driver of the currency.

11


12/23



Our Take on Chinese Bad Debt

Moodys report on Chinese debt identifiedanother potential RMB 3.5trn (USD 540bn) ofsuch loans that the Chinese auditors did notdiscuss in their report.

The scale of the bad debt at the banks is thebiggest unknown we confront from a risk-management perspective, no matter the amountof bad debt Beijing chooses to absorb from theprovinces onto its balance sheet.

Systemic risk amongst Chinas banks isclearly worth monitoring. According to Fitch,

Chinas bank sector is one of the most thinlycapitalized within emerging markets just as itsdisclosed off-Balance Sheet exposures rise whileundisclosed items remain difficult to track.

For now, the nervous risk-manager readingthis might take solace in the fact that China is notGreece or Spain; has little foreign borrowing;runs with an inconvertible currency; worksbehind the Great Wall that is its closed capitalaccount and has tons of cash at hand. What isthe globes most liquid financial institution, welike to quiz clients? The answer: The Chinese

Communist Party. It is not by chance that this isso.

This is from the 4 July Moodys report on Chineselocal government bad debt:

"Moody's Investors Service says that the potentialscale of the problem loans at Chinese banks may becloser to its stress case than its base case, accordingto an assessment that the rating agency conductedfollowing the release of new data by China's NationalAudit Office (NAO).

When considering the apparent absence of a clear

master plan to deal with this issue, Moody's alsoviews the credit outlook for the Chinese bankingsystem as potentially turning to negative.

"We assume that the majority of loans to localgovernments are of good quality, but based on ourassessment of the loan classifications and riskcharacteristics, as provided by the NAO and other

Chinese agencies, we conclude that the banks'exposure to local government borrowers is greaterthan we anticipated," says Yvonne Zhang, a Moody'sVice President and one of the authors of the report.

Of the RMB 10.7 trillion (about $1.6 trillion) of localgovernment debt examined by the Chinese auditagency, RMB 8.5 trillion ($1.3 trillion) was funded by

Chart 1: Total Assets at end-2010

Source: Fitch report: EM Banking System Datawatch

Chart 2: Cumulative Loan Growth end-08-end-2010


Chart 3: Equity/Assets at end-2010


Chart 4: Off-Balance Sheet exposures rise


12


13/23



banks. However, Moody's has identified anotherpotential RMB 3.5 trillion ($540 billion) of such loansthat the Chinese auditors did not discuss in theirreport.

"When cross-examining the findings by the June 27NAO report -- in conjunction with reports fromChinese banking regulators -- we find that theChinese audit agency could be understating banks'exposures to local governments by as much as RMB3.5 trillion," says Zhang.

"Since these loans to local governments are notcovered by the NAO report, this means they are notconsidered by the audit agency as real claims onlocal governments. This indicates that these loansare most likely poorly documented and may pose thegreatest risk of delinquency," the analyst adds.

Moody's report estimates that the Chinese bankingsystem's economic non-performing loans could reachbetween 8% and 12% of total loans, compared to 5%to 8% in the rating agency's base case, and 10% to18% in its stress case.

In the report, the rating agency examines variousscenarios as to how banks could tackle problemloans, including some where the governmentprovides assistance, but Moody's generally expectsthe Chinese authorities to implement gradualdiscipline.

The following is culled from our June 30 Asia at the

Open feature Of China, Debt and the Worlds MostLiquid Financial Institution. It seems right to run partof the article here again now.

The scale of the bad debt at the banks is the biggestunknown we confront from a risk-managementperspective, no matter the amount of bad debtBeijing chooses to absorb from the provinces onto itsbalance sheet. The ratings agency Fitch tackledsome of the numbers at a recent bank conference inSingapore, too. First, note in chart 1, the enormity ofChinas banking sector itself it equals all 42 otherEmerging Markets under Fitchs purview combined!

Now note, in chart 2, that China has one of thefastest growing banking systems in the EM Complex.In chart 3, Chinas bank sector is one of the mostthinly capitalized just as, at least by Fitchs reckoningin chart 4, its off-Balance Sheet exposures rise.

That Chinese Banks Disclosed Off-Balance SheetItems (chart 5) are sizeable and fast-growing ishardly solace to the aggrieved particularly sinceundisclosed items remain difficult to track as it is(chart 6).

We arent bank system experts here, but Fitchargues in chart 7 that Systemic Risk amongstChinas banks is clearly worth monitoring.

Chart 5: Disclosed Off-Balance Sheet Items of 16 RatedBanks (% of total assets)


Chart 6: Cumulative Loan Growth end-08-end-2010


Chart 7: Summarising Bank System Risk


13


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How will China go about managing its debtoverhang? Well, the machinery to remove bad loansfrom the banking system is already in place.

In 1999, Beijing created four Asset

Management companies (AMCs) to acquirenon-performing loans bad banksessentially which were supposed to exist ofonly 10 years. The AMCs alas were able toachieve only a 20% recovery rate acrosstheir portfolios, almost entirely in loans tostate enterprises. But rather than writing-offthe remaining debt, the government decidedto extend financing to the AMCs for anotherdecade in 2009.

Beijing could also avail Co-ManagedAccounts to deal with the problem loans. In

the restructuring of the Agricultural Bank ofChina, these special accounts acquired atface value the bad loans, using only theMinistrys IOU as payment. Today, theseloans are carried as restructuringreceivables on bank balance sheets.

Whatever the case, the fact that China may havewasted some CNY 10 trillion in cash has to besobering for Beijings economic planners. If themoney had been added to the National SocialSecurity Fund which runs unfunded to the tune of a100% of GDP the Peoples Republic might havebeen several steps further along the path of creating

an economy driven by domestic consumption ratherthan infrastructural development.

For now, the nervous risk-manager reading thismight take solace in the fact that China is not Greeceor Spain; has little foreign borrowing; runs with aninconvertible currency; works behind the Great Wallthat is its closed capital account and has tons of cashat hand, as per chart 8. What is the globes mostliquid financial institution, we like to quiz clients? Theanswer: The Chinese Communist Party. It is not bychance that this is so.

Chart 8: China Gross Domestic Savings as % of GDPvs. FX Reserves

Source: Bloomberg, World Bank, BNPP

14


15/23



Medium Term FX RecommendationsGo Short EURJPY Spot

08 July 2011Sell at market targeting 112.00, multi-week, stop-loss at 117.15

EURJPY

115.10

Despite the ECB having played to our economist view that weare more likely than not to see rate hikes every quarter, thereare signs of contagion from the periphery and Italian bondscontinued their recent sell-off, with spreads vs. bunds wideningto higher highs. With no signs of any resolution as yet on PSIissue, EUR should continue to remain under downwardpressure. On the other hand, on the heels of a disastrous USnon-farm payrolls report, the decline in yields should seeupward pressure on the JPY especially ahead of next weeksBernanke testimony. A likely upgrade to the economic viewfrom the Bank of Japan at this weeks meeting may only

promote this further, with any aggressive easing (beyondroutine crisis specific lending) now increasingly off the table.

Look to Enter Short EURCAD Spot

08 July 2011Sell on up tick to 1.3850, target 1.3400multi-week, stop-loss at 1.3950.

EURCAD

1.3760

The tone of the commodity currency complex has improvedmarkedly following Chinas lending rate hike last week, with theconsensus now having moved towards a neutral/easy policybias with the decline in soft commodity prices helping. Oureconomists now look toward selective easing measures intoQ3 just as it becomes clearer that the down move in PMIsappeared substantially related to temporary factors relating tothe Japanese earthquake. While the CAD is dependent on theUS economy, we believe that further support for oil pricesshould see the Canadian dollar find favour. On the other hand,there are signs of contagion from the periphery in Europe withrisk premiums on EUR assets increasing. The double top onspot adds some more technical conviction that furtherEURCAD spot downside seems likely.

Look to Enter Long USDJPY Strangle

08 July 2011 Look to enter long 1m strangle

USDJPY

80.60

USDJPY has been holding a ridiculously tight 187 pip rangesince the start of June. However, the period to August 5 coverstwo NFP prints, where the most important measure of the USrecovery will support or detract from our view that the currentdownturn represents just a temporary soft patch. The sameperiod will also see some clarity on the impact of the end ofQE2 given Bernanke testimonies; and the outcome of the USdebt ceiling negotiations, potentially involving a USD-supportive HIA 2. The wide range of factors suggest that wecould get a breakout eventually. Implied volatility has remainedrelatively elevated until recently, but over the past couple ofmonths has fallen fast. 1-month volatility now trades at levelsnot seen since re-Lehman.

15


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Short GBPUSD Spot

24 June 2011Sold on a break of 1.5930, target 1.5350multi-month, stop-loss at 1.6285.

GBPUSD

1.6018

Our short position in Cable was activated on June 27th

however given predominant price action emphasised inEURUSD and EURGBP given the focus on the European debtcrisis, GBPUSD has traded in a narrow 1.5930-1.6150 range.A likely unchanged June CPI print this week should not detractfrom the view that the bias for the BoE remains one where thecash rate could be lower for longer. On the other hand, theUSD could begin to garner support if Fed Chairman Bernankereiterates an unwillingness to undertake a QE3, even after thedismal June NFP print. This should put further pressure onGBPUSD especially when the focus moves tactically awayfrom European debt crisis to issues in the US. Our measuresof real rates has plunged (see chart alongside)Hold Short GBPAUD Via Options

24 June 2011Long Sep 23 1.53 put 1.45 RKO Vs. Short1.63 Call.

GBPAUD

1.4964

The position, now marks to market at 0.39% up from nil.Keeping in mind the choppiness that a carry trade like shortGBPAUD can face on rising volatility, we opted to use optionsto play for a grind lower (using RKO to cut cost) and further sella very OTM call to make it zero entry cost. We hold theposition as we feel that GBPAUD could continue to move lowerwith spot breaking down to levels last seen in Q1 1985. Thetone of the AUD has improved significantly after Chinaslending rate hike with a growing consensus that the tighteningcycle is over. Locally, a solid June employment report helpedthough this has not impacted RBA pricing which would need astrong CPI print come end July. On the other hand, wecontinue to remain negative sterling.

Long EURCHF KIKO Call Working

01 July 2011 Long Sep 30 1.22 Call, 1.28 KI, 1.17 KO

EURCHF1.1925

Position now MTM at 0.5024% EUR versus entry cost of0.88%. Trade was recommended at a significant discount to itsvanilla counterpart following the passing of Greek austeritymeasures which reduced the tail risk of immediate default. Butrenewed uncertainty followed after credit ratingpronouncements last week has shown up in signs ofcontagion, with renewed widening in Italy-German spreads andconsequent EURCHF pressure (Chart alongside). While anyfurther delays on any resolution could prevent trade fromworking, we expect that eventually downward pressure willabate and with SNB likely to lag the ECB on its tighteningcycle, the cross could drift higher. The risk reversal couldnormalise from downwardly stretched levels.

16


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Hold NOKSEK RKO Call

03 June 2011 Buy Aug 4 1.1485 Call 1.1905 RKO

Suggested Aug 4 1.1485 RKO Call (barrier at 1.1905) nowmaps at 0.5540% NOK versus 0.5000% entry cost of option.Trade was recommended at over a 50% discount relative tothe vanilla alternative. The NOK, like the SEK should continueto recover strongly to the extent they had been dogged byliquidity tensions in the weeks leading to the Greek vote. Withthe sombre threat of a liquidity crisis (on bond haircuts) havingbeen averted, NOK should once again gain given its status asthe most superior "fiscal" safe haven. ON the data calendar,we have June CPI for both Scandinavian cousins, though areeconomists flag Norway CPI to accelerate more. Having fallenback after the end-June rise to 1.1900, NOKSEK hasrecovered and we expect further gains into next week.

July 21 1.05/1.01 AUDUSD Put in the red

20 May 2011Jul 21 1.05/1.01 put spread bought at1.05%

AUDUSD1.0725

The position MTM in the red at 0.2000% AUD. While AUDUSDdid manage to correct down to 1.04 late June deeming thetrade in the money, the tone of the AUD has improved significantlyafter Chinas lending rate hike with a growing consensus that thetightening cycle is over. Locally, a solid June employment reporthelped though this has not impacted RBA pricing which could be moredependent on the CPI print would need come end July. On the other

hand, we point out that that the USD could come back in favourshould Chairman Bernanke fail to sympathise with the doveseven after the extremely weak NFP print when he meets nextweek. This could put AUDUSD back under some pressure(even as AUD outperforms vs. EUR and GBP) and we will tryto offload position at a smaller loss in the days to come.

17


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Implied Option Volatility Analysis

EURUSD Implied Volatility Curve and 1y highs& lows

8

10

11

13

14

16

18

1w 1m 2m 3m 6m 9m 12m

Current Imp. Vol. High/Low Last Week Imp. Vol. USDCHF Implied Volatility Curve and 1y highs

& lows

7

8

9

11

12

13

14

15

17

1w 1m 2m 3m 6m 9m 12m

Current Imp. Vol. High/Low Last Week Imp. Vol.

AUDUSD Implied Volatility Curve and 1y highs& lows

8

11

13

16

18

21

1w 1m 2m 3m 6m 9m 12m

Current Imp. Vol. High/Low Last Week Imp. Vol.

USDJPY Implied Volatility Curve and 1y highs& lows

67

9

10

1113

1415

1618

19

202223

1w 1m 2m 3m 6m 9m 12m

Current Imp. Vol. High/Low Last Week Imp. Vol. GBPUSD Implied Volatility Curve and 1y highs

& lows

6

8

9

11

12

14

1w 1m 2m 3m 6m 9m 12m

Current Imp. Vol. High/Low Last Week Imp. Vol. USDCAD Implied Volatility Curve and 1y highs

& lows

6

8

9

11

13

15

1w 1m 2m 3m 6m 9m 12m

Current Imp. Vol. High/Low Last Week Imp. Vol. *BNP Paribas FX Strategy: The above charts show the current volatility curves (1-week through to 1-year) for themajor currency pairs in relation to the 1-year highs and lows for each of the tenor.

18


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Majors Emerging Markets

EURUSD GBPUSD USDCHF USDJPY AUDUSD USDCAD USDZAR USDTRY USDHUF USDPLN

O

IL

0.52

0.09

0.47

0.48

0.09

0.33

0.02

0.39

0.17

0.51

0.19

0.11

0.64

0.04

0.58

0.08

0.74

0.55

0.05

0.56

0.38

0.23

0.64

0.42

0.04

0.470.44

0.01

0.560.52

COPPER 0.33

0.04

0.2

0.4

0.03

0.15

0.14

0.38

0.01

0.32

0.31

0.09

0.45

0.11

0.37

0.01

0.350.3

0.07

0.41

0.23

0.01

0.36

0.06

0.08

0.37

0.2

0.03

0.34

0.23

CRB

0.87

0.68

0.8

0.81

0.49

0.71

0.64

0.84

0.64

0.02

0.77

0.33

0.84

0.34

0.6

0.29

0.68

0.53

0.23

0.66

0.5

0.11

0.73

0.41

0.55

0.780.75

0.57

0.85

0.72

Commodities

GOLD

0.5

0.4

0.17

0.58

0.25

0.25

0.09

0.58

0.24

0.18

0.58

0.04

0.62

0.17

0.47

0.15

0.49

0.34

0.04

0.48

0.27

0.27

0.54

0.17

0.27

0.47

0.14

0.27

0.57

0.17

SP500

0.64

0.18

0.56

0.56

0.16

0.5

0.34

0.5

0.05

0.7

0.09

0.22

0.88

0.32

0.65

0.45

0.88

0.81

0.33

0.78

0.63

0.42

0.77

0.51

0.27

0.680.63

0.34

0.76

0.62

FTSE100 0.52

0.05

0.45

0.38

0.03

0.36

0.27

0.42

0.06

0.52

0.08

0.16

0.7

0.2

0.61

0.2

0.70.65

0.29

0.61

0.52

0.43

0.69

0.47

0.26

0.590.55

0.29

0.62

0.54

NIKKEI

225

0.23

0.14

0.11

0.35

0.07

0.11

0.22

0.14

0.0

0.36

0.17

0.14

0.34

0.01

0.22

0.05

0.33

0.17

0.13

0.3

0.22

0.03

0.26

0.08

0.1

0.22

0.14

0.11

0.240.19

Equities

EUR

O

NEXT

100 0.5

0.02

0.42

0.42

0.12

0.4

0.32

0.3

0.07

0.56

0.06

0.15

0.71

0.2

0.57

0.19

0.740.68

0.2

0.66

0.49

0.36

0.64

0.43

0.29

0.59

0.54

0.29

0.62

0.52

US10Y

Yields

0.54

0.17

0.51

0.51

0.15

0.36

0.57

0.32

0.16

0.68

0.270.28

0.75

0.16

0.51

0.05

0.8

0.66

0.19

0.64

0.43

0.07

0.68

0.41

0.09

0.69

0.52

0.03

0.71

0.54

EU

10Y

Yields

0.52

0.06

0.52

0.45

0.01

0.35

0.45

0.22

0.03

0.54

0.120.15

0.56

0.09

0.27

0.04

0.580.5

0.16

0.470.43

0.01

0.5

0.35

0.05

0.530.53

0.04

0.570.55

J

P10Y

Yields

0.29

0.33

0.23

0.18

0.28

0.04

0.29

0.15

0.02

0.44

0.13

0.06

0.41

0.22

0.04

0.13

0.42

0.18

0.33

0.45

0.12

0.37

0.36

0.06

0.26

0.23

0.22

0.19

0.3

0.26

US3m

LIBOR

0.36

0.25

0.06

0.31

0.17

0.05

0.18

0.23

0.06

0.25

0.22

0.04

0.29

0.21

0.05

0.16

0.34

0.03

0.17

0.21

0.14

0.18

0.34

0.14

0.22

0.33

0.08

0.22

0.32

0.0Bonds&Rates

EU

3m

LIBOR

0.29

0.01

0.13

0.24

0.08

0.1

0.17

0.28

0.03

0.08

0.30.27

0.2

0.18

0.08

0.19

0.17

0.07

0.24

0.140.09

0.09

0.2

0.09

0.01

0.21

0.09

0.01

0.21

0.14

High

Low

Current3 Month log daily return correlation. High and lows over the past 12 months

Different colours highlight the proximity to the extremes (dark red close to extreme)

19


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Economic Calendar: 11-15 JulyGMT Local Previous Forecast Consensus

Mon 11/07 23:50

(10/07)

08:50 Japan M2 y/y : Jun 2.7% 2.5% 2.7%

06:45 08:45 France Industrial Production m/m : May -0.3% -0.2% 0.5%

06:45 08:45 Industrial Production y/y : May 2.6% -0.2% n/a

06:45 08:45 Manufacturing Production (sa) m/m : May 0.2% -0.5% n/a

06:45 08:45 Manufacturing Production (sa) y/y : May 4.1% 2.6% n/a

08:00 10:00 Norway CPI m/m : Jun -0.2% 0.0% n/a

08:00 10:00 CPI y/y : Jun 1.6% 1.7% n/a

08:00 10:00 CPI-ATE y/y : Jun 1.0% 1.0% n/a

08:00 10:00 PPI m/m : Jun -2.1% -0.1% n/a

08:00 10:00 PPI y/y : Jun 18.0% 15.3% n/a

15:00 17:00 Eurozone Finance Ministers Meet

15:00 17:00 ECBs Bini Smaghi Speaks at Conference in Milan

Tue 12/07 23:01 00:01 UK RICS House Price Balance : Jun -28 -25 n/a23:01

(11/07)

00:01 BRC Retail Sales Monitor : Jun -2.1% -1.5% n/a

08:30 09:30 DCLG House Prices : May -0.3% -0.1% n/a

08:30 09:30 Visible Trade Balance : May GBP-7.4bn GBP-7.2bn GBP-7.5bn

08:30 09:30 CPI m/m : Jun 0.2% 0.2% 0.3%

08:30 09:30 CPI y/y : Jun 4.5% 4.5% 4.5%

08:30 09:30 RPI y/y : Jun 5.2% 5.2% 5.2%

08:30 09:30 RPIX y/y : Jun 5.3% 5.2% 5.3%

23:50 08:50 Japan CGPI y/y : Jun -0.1% -0.1% -0.1%

23:50

(11/07)

08:50 Tertiary Index (sa) m/m : May 2.6% 1.2% 0.5%

BoJ Rate Announcement

00:30 12:30 Australia NAB Business Confidence : Jun 6 6 n/a

00:30 12:30 NAB Business Conditions : Jun 1 0 n/a

05:30 07:30 France CPI m/m : Jun 0.1% 0.1% n/a

05:30 07:30 CPI y/y : Jun 2.0% 2.1% n/a

05:30 07:30 HICP m/m : Jun 0.1% 0.1% 0.1%

05:30 07:30 HICP y/y : Jun 2.2% 2.3% 2.3%

05:30 07:30 Ex-Tobacco CPI (nsa) : Index Jun 122.40 122.52 n/a

06:45 08:45 Current Account : May EUR-4.8bn EUR-5.5bn n/a

06:00 08:00 Germany CPI (Final) m/m : Jun 0.1% (p) 0.1% 0.1%

06:00 08:00 CPI (Final) y/y : Jun 2.3% (p) 2.3% 2.3%

06:00 08:00 HICP (Final) m/m : Jun 0.0% (p) 0.0% 0.0%

06:00 08:00 HICP (Final) y/y : Jun 2.4% (p) 2.4% 2.4%

07:00 09:00 Eurozone EU Finance Ministers Meet

07:30 09:30 Sweden CPI m/m : Jun 0.2% 0.1% n/a07:30 09:30 CPI y/y : Jun 3.3% 3.4% n/a

07:30 09:30 CPIF y/y : Jun 1.7% 1.8% n/a

11:30 07:30 US NFIB Small Business Optimism : Jun

12:30 08:30 Trade Balance : May USD-43.7bn USD-43.7bn USD-44.2bn

18:00 14:00 FOMC Minutes

Wed 13/07 00:30 12:30 Australia Westpac Consumer Confidence : Jul 101.2 102.8 n/a

07:00 09:00 Spain CPI (Final) m/m : Jun 0.0% -0.3% n/a

07:00 09:00 CPI (Final) y/y : Jun 3.5% 3.0% n/a

07:00 09:00 HICP (Final) m/m : Jun -0.1% -0.2% n/a

07:00 09:00 HICP (Final) y/y : Jun 3.4% 3.0% n/a

08:00 10:00 Sweden Unemployment Rate (nsa) : Jun 3.8% 4.1% n/a

08:30 09:30 UK Unemployment Change : Jun 19.6k 22.2k 15.0k

08:30 09:30 Unemployment Rate (Claimant) : Jun 4.6% 4.6% 4.7%

08:30 09:30 Average Earnings (3m y/y) : May 1.8% 2.0% 2.1%

09:00 11:00 Eurozone Industrial Production (sa) m/m : May 0.2% 0.4% 0.4%

09:00 11:00 Industrial Production (wda) y/y : May 5.2% 4.5% 4.7%

20


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GMT Local Previous Forecast Consensus

12:30 08:30 US Import Prices m/m : Jun 0.2% -0.7% -0.7%

12:30 08:30 Import Prices Ex-Petroleum m/m : Jun 0.4% 0.2% n/a

14:00 10:00 Feds Bernanke Gives Semi-Annual Monetary Policy Report to House of Representatives

14:30 10:30 EIA Oil Inventories

17:20 13:20 Feds Fisher Speaks on Economy in Dallas18:00 14:00 Treasury Statement : Jun USD-57.6bn

Thu 14/07 France Public Holiday

07:30 09:30 Neths Retail Sales y/y : May 3.4% 1.5% n/a

08:00 10:00 Eurozone ECB Monthly Bulletin

09:00 12:00 HICP (Final) m/m : Jun 0.0% 0.0% 0.0%

09:00 12:00 HICP (Final) y/y : Jun 2.7% 2.7% 2.7%

09:00 12:00 HICP Core m/m : Jun 0.0% 0.0% n/a

09:00 12:00 HICP Core y/y : Jun 1.5% 1.5% 1.5%

09:00 12:00 Ex-Tobacco Index : Jun 112.74 112.75 n/a

08:00 10:00 Italy CPI (Final) m/m : Jun 0.1% (p) 0.1% 0.1%

08:00 10:00 CPI (Final) y/y : Jun 2.7% (p) 2.7.% 2.7%

08:00 10:00 HICP (Final) m/m : Jun 0.1% (p) 0.1% 0.1%

08:00 10:00 HICP (Final) y/y : Jun 3.0% (p) 3.0% 3.0%

12:30 08:30 US PPI (sa) m/m : Jun 0.2% -0.1% -0.2%

12:30 08:30 PPI (sa) y/y : Jun 7.0% 7.3% 7.4%

12:30 08:30 PPI Core (sa) m/m : Jun 0.2% 0.2% 0.2%

12:30 08:30 PPI Core (sa) y/y : Jun 2.1% 2.2% 2.1%

12:30 08:30 Retail Sales m/m : Jun -0.2% -0.7% 0.1%

12:30 08:30 Retail Sales Ex-Autos m/m : Jun 0.3% -0.8% 0.4%

12:30 08:30 Initial Claims 418k 435k n/a

14:00 10:00 Business Inventories : May 0.8% 0.4% 0.8%

Fri 15/07 Japan BoJ Minutes

06:00 08:00 Eurozone EU25 New Car Registrations : Jun

09:00 12:00 Foreign Trade Balance (sa) : May EUR-2.9bn EUR-5.0bn n/a

08:00 10:00 Italy EU Trade Balance : May EUR-0.7bn EUR-0.8bn n/a12:30 08:30 US CPI m/m : Jun 0.2% -0.1% -0.1%

12:30 08:30 CPI y/y : Jun 3.6% 3.5% 3.7%

12:30 08:30 Core CPI m/m : Jun 0.3% 0.2% 0.2%

12:30 08:30 Core CPI y/y : Jun 1.5% 1.6% 1.6%

12:30 08:30 Empire State Survey : Jul -7.8 1.0 4.1

13:15 09:15 Industrial Production m/m : Jun 0.1% 0.3% 0.4%

13:15 09:15 Capacity Utilisation Rate : Jun 76.7% 76.8% 77.0%

13:55 09:55 Michigan Sentiment (Prel) : Jul 71.5 72.5 72.5

Release dates and forecasts as at c.o.b. prior to the date of publication: SeeDaily Economic Spotlight for any revision Source: BNP Paribas

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

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

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

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

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

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

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

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

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

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

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

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

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

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

EUR/SEK 8.90 8.50 8.60 8.70 9.00 9.00 9.00 9.00 9.00 9.00 9.30

EUR/NOK 7.47 7.40 7.35 7.37 7.50 7.50 7.50 7.50 7.50 7.50 6.80

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

*End Quarter

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FX Global Strategy Contacts

Foreign ExchangeRaymond Attrill Senior FX Strategist New York 1 212 841 2492 [email protected]

James Hellawell Quantitative Strategist London 44 20 7595 8485 [email protected] Kowshik FX Strategist London 44 20 7595 1495 [email protected] Nicola FX Strategist New York 1 212 841 2492 [email protected]

Emerging Markets FX & IR StrategyDrew Brick Head of FX & IR Strategy Asia Singapore 65 6210 3262 [email protected] Loo Thio FX & IR Asia Strategy Singapore 65 6210 3263 [email protected] Ryan FX & IR Asia Strategy Singapore 65 6210 3314 [email protected] Poh FX & IR Asia Strategy Singapore 65 6210 3418 [email protected] Qi FX & IR Asia Strategy Shanghai 86 21 2896 2876 [email protected] Pawlowski Head of FX & IR Strategy CEEMEA London 44 20 7595 8195 [email protected] Gruie FX & IR CEEMEA Strategist London 44 20 7595 8492 [email protected] Ahmad FX & IR CEEMEA Strategist London 44 20 7595 8620 [email protected] Donadio FX & IR Latam America Strategist Sao Paulo 55 11 3841 3421 [email protected]

Production and Distribution please contact:Roshan Kholil, Foreign Exchange, London. Tel: 44 20 7595 8486, Email: [email protected]

Important DisclosuresThis report has been written by our strategy teams. Such reports do not purport to be an exhaustive analysis and may be subject to conflicts of interestresulting from their interaction with sales and trading which could affect the objectivity of this report. (Please see further important disclosures in the text of thisreport).This report is a marketing communication. It is not independent investment research. It has not been prepared in accordance with legal requirementsdesigned to provide the independence of investment research, and is not subject to any prohibition on dealing ahead of the dissemination of investmentresearch. The information and opinions contained in this report have been obtained from, or are based on, public sources believed to be reliable, but norepresentation or warranty, express or implied, is made that such information is accurate, complete or up to date and it should not be relied upon as such. Thisreport does not constitute a prospectus or other offering document or an offer or solicitation to buy or sell any securities or other investment. Information andopinions contained in the report are published for the assistance of recipients, but are not to be relied upon as authoritative or taken in substitution for theexercise of judgement by any recipient, are subject to change without notice and not intended to provide the sole basis of any evaluation of the instrumentsdiscussed herein. Any reference to past performance should not be taken as an indication of future performance. To the fullest extent permitted by law, noBNP Paribas group company accepts any liability whatsoever (including in negligence) for any direct or consequential loss arising from any use of or relianceon material contained in this report. All estimates and opinions included in this report are made as of the date of this report. Unless otherwise indicated in thisreport there is no intention to update this report. BNP Paribas SA and its affiliates (collectively BNP Paribas) may make a market in, or may, as principal oragent, buy or sell securities of the issuers mentioned in this report or derivatives thereon. BNP Paribas may have a financial interest in the issuers mentioned inthis report, including a long or short position in their securities and/or options, futures or other derivative instruments based thereon, or vice versa. BNP

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Certain countries within the European Economic AreaThis report is solely prepared for professional clients. It is not intended for retail clients and should not be passed on to any such persons. This report has beenapproved for publication in the United Kingdom by BNP Paribas London Branch, a branch of BNP Paribas, 10 Harewood Avenue, London NW1 6AA, which isregulated by the Financial Services Authority for the conduct of its investment business in the United Kingdom and registered in England & Wales under No.FC13447. This report has been approved for publication in France by BNP Paribas, a credit institution licensed as an investment services provider by theCECEI and the AMF, whose head office is 16, Boulevard des Italiens 75009 Paris, France.This report is being distributed in Germany either by BNP Paribas London Branch, or by BNP Paribas Niederlassung Frankfurt am Main, regulated by theBundesanstalt fr Finanzdienstleistungsaufsicht (BaFin).

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