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DISCLOSURE APPENDIX AT THE BACK OF THIS REPORT CONTAINS IMPORTANT DISCLOSURES AND
ANALYST CERTIFICATIONS.
CREDIT SUISSE SECURITIES RESEARCH & ANALYTICS BEYOND INFORMATION®
Client-Driven Solutions, Insights, and Access
FX Compass: Looking away from the dollar FX Strategy
Exhibit 1: USD 3m implied correlations look to be peaking
31-Dec-11 30-Jun-12 30-Dec-12 30-Jun-13 30-Dec-13 01-Jul-14
0.00
0.25
0.50
0.75
USD/EUR, USD/JPY USD/EUR, USD/AUD USD/JPY, USD/AUD
Source: Credit Suisse Locus
In the past week global equity prices have registered heavy losses, oil price
collapsed to a new post-2010 low (down 25% in just five weeks), and bond
yields gapped lower across the board.
Prior risk-off environments often boosted the USD materially across the board,
with JPY usually the only exception to the rule. This doesn't appear to be the
case at the moment, with the greenback still some way from its recent highs
against the likes of EUR and AUD.
As discussed in last week's FX Compass, we still believe positioning is key to
this. USD longs appear extended and vulnerable to the dovish changes in tone
seen from the Fed in the past week. With US bond yields dropping sharply as
well, the USD has lost its rates-supported influence against EUR and JPY in
particular.
Where to from here? We expect the USD's longer-term bullish story to stay
intact. But in the next few weeks, it seems likely that there will be greater
dispersion in FX performance and a partial breakdown in the strong correlations
vs. USD the market has priced in recent weeks. This makes it likely that realized
and implied volatility will rise in non-USD crosses, while other currencies such
as GBP may come further into focus. We discuss both these topics in greater
depth in this week's edition of FX Compass.
We continue to prefer EURJPY puts funded by selling USDJPY calls, but also
see scope for AUDJPY to come under further pressure. We added a GBPUSD
1x1 put spread funded by selling a 1x1 call spread to our model portfolio.
Research Analysts
Anezka Christovova
+44 20 7888 6635
Matthew Derr
+1 212 538 2163
Ray Farris
+65 6212 3412
Shahab Jalinoos
+1 212 325 5412
Trang Thuy Le
+65 6212 24260
Alvise Marino
+1 212 325 5911
Bhaveer Shah
+44 20 7883 1449
15 October 2014
Fixed Income Research
http://www.credit-suisse.com/researchandanalytics
15 October 2014
FX Compass: Looking away from the dollar 2
Table of Contents
Furthering the case for tactical JPY outperformance 3
GBP: A turn in events 5
Monetary policy divergence challenged .................................... 5
Housing market appears to be cooling ...................................... 7
Structural weakness also looms ................................................ 9
How to trade it ........................................................................... 9
House prices and G10 FX ....................................................... 11
TRY: Modestly bearish 12
Current account outlook neutral for the lira ............................. 12
ISIS-Kurd tail-risk contained for now – but keep watching ...... 14
Bearish drags for EMEA FX in the medium term .................... 14
Technicals 15
The risk of further GBP weakness .......................................... 15
Vanilla Portfolio Update 16
Exotic Portfolio Update 17
FX Forecast Summary 18
15 October 2014
FX Compass: Looking away from the dollar 3
Furthering the case for tactical JPY outperformance In last week’s FX Compass, we recommended selling USDJPY topside to fund EURJPY
puts – our preferred tactical expression over the coming weeks. The combination of
uncertainty heading into the 26 October AQR results, the delay in both GPIF reforms and
BoJ easing expectations, and the increased debate about the cost/benefits of recent yen
weakness have been at the core of this view.
However, the last several trading sessions have seen concerns over global growth grow
louder, contributing to a risk-off tone in the market – causing VIX to spike and calling into
question the timing of the Fed’s removal of monetary accommodation. Fed Vice Chair
Fischer’s comments over the weekend were particularly telling, noting that "...if foreign
growth is weaker than anticipated, the consequences for the U.S. economy could lead the
Fed to remove accommodation more slowly than otherwise.”
Taken together, these factors reinforce our call to sell EURJPY – but to also broaden out
to AUDJPY shorts – as a sustained period of equity market volatility and risk-off behavior
could result in broad-based yen outperformance, driving up JPY/ccy implied correlation at
the expense of currently elevated USD/ccy implied correlations (Exhibits 2-3).
Exhibit 2: USD-implied correlations look to be peaking
Exhibit 3: … while JPY implied correlations have room to rise from subdued levels
3m implied correlation 3m implied correlation
31-Dec-11 30-Dec-12 30-Dec-13
0.00
0.25
0.50
0.75
USD/EUR, USD/JPY USD/EUR, USD/AUD
USD/JPY, USD/AUD
31-Dec-11 30-Dec-12 30-Dec-13
0.25
0.50
0.75
JPY/EUR, JPY/USD JPY/EUR, JPY/AUD
JPY/USD, JPY/AUD
Source: Credit Suisse Locus Source: Credit Suisse Locus
From a volatility standpoint, JPY-implied volatility stands out as cheap when compared to
the recent sharp move higher in both the VIX and USD implied volatility (Exhibits 4-5). This
has been a key driver behind why we continue to see value in selling USDJPY topside to
fund short EURJPY and AUDJPY structures. Should the recent risk-off move be sustained,
causing the market to question a mid-2015 Fed hike, we think JPY volatility could begin to
outperform its USD counterpart.
Shahab Jalinoos
+1 212 325 5412
Matthew Derr
+1 212 538 2163
15 October 2014
FX Compass: Looking away from the dollar 4
Exhibit 4: JPY implied volatility has been slow to react to the move in VIX
Exhibit 5: … as well to the pick-up in USD-implied volatility
Average 3m implied vol vs. EUR and AUD
4
9
14
19
24
29
34
39
44
-
10
20
30
40
50
60
70
80
90
2007 2009 2011 2013
VIX
Avg JPY 3m implied vol (vs G10, right)
30-Jun-13 30-Dec-13 01-Jul-14
0.075
0.100
0.125
0.150
0.06
0.07
0.08
0.09
0.10
0.11
Avg JPY 3m implied vol Avg USD 3m implied vol, right
Source: Credit Suisse, the BLOOMBERG PROFESSIONAL™ service Source: Credit Suisse Locus
Government yield spreads are also consistent with a strong yen in the near term. While
the relationship between USDJPY and 5-year government rate differentials has been
volatile in recent years, to the extent that Vice Chair Fischer’s comments and the global
macro backdrop weigh on US yields, we would expect this to exert downward pressure on
USDJPY (Exhibit 6).
Finally, though considerable text has already been dedicated to the sharp decline in euro
area inflation expectations – having broken through decade lows – additional ECB action
and EUR weakness appears likely (Exhibit 7).
Exhibit 6: USDJPY looks rich to rate differentials Exhibit 7: Euro area inflation expectations have
broken below decade lows
70
80
90
100
110
120
130
140
0
50
100
150
200
250
300
350
400
450
500
2002 2004 2006 2008 2010 2012 2014
US-Japan 5y govt rate spread
USDJPY, right
30-Dec-04 01-Jul-07 30-Dec-09 30-Jun-12
2.00
2.25
2.50
2.75
Euro Area 5y5 inflation swap
Source: Credit Suisse, the BLOOMBERG PROFESSIONAL™ service Source: Credit Suisse Locus
15 October 2014
FX Compass: Looking away from the dollar 5
GBP: A turn in events Sterling's monetary policy divergence story vs. the euro has come under pressure. The
slide in UK inflation combined with a cooling in its housing market pose key challenges.
The unwind of the GBP trade probably has some further scope to run in the near term,
although we would probably need to see weakness in the labor market and/or a more
serious downturn in house prices to materially extend losses vs. EUR, in our view. Neither
are our base case for the UK.
- We revise our three-month forecast for EURGBP to 0.805 from 0.78.
- We see more scope for GBPUSD to fall, with GBP now more likely to trade in closer
alignment to the EUR. GBPUSD is approaching key technical levels (1.5750), which if
breached should support (and perhaps cause even an undershoot) of our 1.565
target. We also view GBPUSD vol as underpriced.
Monetary policy divergence challenged
Monetary policy expectations have been the main driver of GBP as Exhibits 8 and 9 show.
However, the idea that the UK can sustain a materially different monetary policy path than
its neighboring economies has come under increasing pressure. The market is now pricing
the first rate hike by August 2015 and a very gradual pace of tightening thereafter (about
30bps for 2015). This contrasts with market expectations only three months ago of a first
rate hike by December 2014 and 100bps of further tightening in 2015.
Sustaining a monetary policy tightening outlook has proven hard elsewhere in G10 too.
Another rate hike play, NZD, was hit hard after falling terms of trade, housing market
weakness, softer inflation and higher labor market slack thanks to immigration reduced
expectations for RBNZ policy rate hikes. We see similarities to the UK and the fast turn in
circumstances is worth noting – NZD has underperformed even the AUD.
Exhibit 8: EURGBP now slightly lagging rate spreads Exhibit 9: And so is GBPUSD
0.77
0.79
0.81
0.83
0.85
0.87
-120
-100
-80
-60
-40
-20
0
Jan-13 Jul-13 Jan-14 Jul-14
EURGBP 2y swap spread, bps
EURGBP (RHS)
1.47
1.52
1.57
1.62
1.67
1.72
10
20
30
40
50
60
70
80
Jan-13 May-13 Sep-13 Jan-14 May-14 Sep-14
GBPUSD 2y swap spread, bps
GBPUSD (RHS)
Source: Credit Suisse, the BLOOMBERG PROFESSIONAL™ service Source: Credit Suisse, the BLOOMBERG PROFESSIONAL™ service
However, our economists expect Bank of England to hike in February 2015. This argues
that the current weak phase for GBP could prove temporary and we have kept our 12-
month forecast for this reason unchanged. Some indicators, particularly pertaining to the
labor market, remain indeed impressive. However, we are wary that in the near term the
UK monetary policy pessimism can extend even further given the negative momentum.
Shahab Jalinoos
+1 212 325 5412
Anezka Christovova
+44 20 7888 6635
Bhaveer Shah
+44 20 7883 1449
15 October 2014
FX Compass: Looking away from the dollar 6
We would focus on the following drivers in particular:
CPI undershooting: Printing 1.2%yoy in September, Q3 average inflation is now close to
40bps below the BoE projection from the August inflation report. Data from BRC showed
that the rate of shop price declines in the UK accelerated to 1.8%yoy in September while
news continues to emerge of intensifying supermarket competition (for instance,
Morrison’s announcement to match Lidl and Aldi prices).
Wage growth still lagging: Our economists argue that wage growth is just lagging the
erosion of slack in the labor market (see Global Economy Notes: Don’t overcomplicate
things, September 30 and UK Economics: Coming to the boil, July 21). In fact. our forecast
is for slightly above consensus gains in average weekly earnings today. Nevertheless, if
wage growth does not rise, the scope for tightening will continue to be questioned.
Some growth risk: There is a case to be made that UK growth can sustain itself on a self-
enforcing positive cycle with higher employment pushing up wages and hence consumer
spending, confidence and business investment. Yet, UK manufacturing PMI has taken an
even larger hit than the euro-area’s, although from a higher base.
House price risks: Considering the recently rather strong correlation of FX rates to
housing sector performance in G10, we devote a separate section below to the risks from
the signs of a cooling housing market.
Exhibit 10: Wage growth catching up on unemployment crucial for the monetary policy divergence theme Exhibit 11: UK Manufacturing PMI took a hit
4.0
4.5
5.0
5.5
6.0
6.5
7.0
7.5
8.0
8.5
9.00%
1%
2%
3%
4%
5%
6%
Jan-01 Jul-04 Jan-08 Jul-11 Jan-15
RegularAWE,%yoy
Unemploymentrate (RHS,inverted)
30
35
40
45
50
55
60
65
Jan-05 Jul-07 Jan-10 Jul-12
Eurozone
United States
United Kingdom
Source: Credit Suisse, Thomson Reuters DataStream Source: Credit Suisse, the BLOOMBERG PROFESSIONAL™ service, Markit
At this moment, EURGBP appears to be slightly lagging rates spreads (Exhibit 8),
suggesting some further shift higher is still likely. Meanwhile IMM data indicate mainly
unwinding of previous GBP longs rather than any build-up of short positioning. Therefore,
there appears to be a risk that GBP’s positioning can follow the EUR’s lead, in line with the
historical pattern, if data and sentiment continue to challenge the rate hike outlook.
15 October 2014
FX Compass: Looking away from the dollar 7
Exhibit 12: GBP net positioning has returned to flat thanks to unwinding of longs
Exhibit 13: The risk is that GBP positioning aligns with EUR’s
0
20
40
60
80
100
120
Jan-11 Jan-12 Jan-13 Jan-14
GBP longcontracts
GBP shortcontracts
-250
-200
-150
-100
-50
0
50
100
150
-250
-200
-150
-100
-50
0
50
100
150
Jan-04 Jan-07 Jan-10 Jan-13
EUR net positions, (contracts)
GBP net positions, (contracts)
Source: Credit Suisse, the BLOOMBERG PROFESSIONAL™ service Source: Credit Suisse, the BLOOMBERG PROFESSIONAL™ service
Housing market appears to be cooling
House prices have exhibited notable correlation to some G10 FX (see charts at the end of
the section). The correlation appears particularly strong for NOK and NZD, while
elsewhere the relationship is less convincing or stable.
A case could be made for causality rather than just correlation. In Norway and partially in
New Zealand, house prices have driven household consumption and construction activity
and this has been a major consideration for growth and monetary policy. Hence there has
been a stronger link between house prices and monetary policy expectations than purely
for “bubble prevention” reasons. In both countries, one can also point to macro-prudential
policy as likely instigating the slowdown in the sector, perhaps to a larger degree (at least
temporarily) than was intended. In fact, house price expectations can have a self-fulfilling
impact and once a house price momentum reverses the moves can be rather sustained.
Hence “fine-tuning” the impact of macro-prudential policy could prove hard.
Exhibit 14: House prices could pose a risk to GBP
-6%
-4%
-2%
0%
2%
4%
6%
-10%
-5%
0%
5%
10%
15%
20%
Jan-10 Jan-11 Jan-12 Jan-13 Jan-14
Nationwide, % 3m/3m ann.
Nationwide, % 3mma ann.
GBP TWI, % 3m/3m (RHS)
Source: Credit Suisse, the BLOOMBERG PROFESSIONAL™ service, Thomson Reuters DataStream
15 October 2014
FX Compass: Looking away from the dollar 8
This experience elsewhere in G10 leaves us cautious on GBP, given house prices have
played a role in the recovery, in our view. Household consumption growth has outstripped
income growth with the savings rate falling. House price gains have likely at least partly
inspired this consumer confidence, while the BoE counts on a further fall in the savings
rate to below its pre-crisis average in its projections. Meanwhile BoE hopes that housing
investment growth can approach 4% per quarter by the end of the year.
Exhibit 15: Transactions and mortgage approvals falling Exhibit 16: New buyer enquiries down substantially
20
40
60
80
100
120
140
160
Jan-02 Jan-05 Jan-08 Jan-11 Jan-14
Propertytransactions
Mortgageapprovals
-80
-60
-40
-20
0
20
40
60
80
Jan-02 Jan-05 Jan-08 Jan-11 Jan-14
New buyer enquiries
New instructions to sell
Source: Credit Suisse, Thomson Reuters DataStream, Thousands Source: Credit Suisse, Thomson Reuters DataStream
So far the signs of cooling are really just early and not alarming: Nationwide house prices
dropped 0.2%mom in September, while housing transactions and mortgage approvals are
down about 10% and 15%, respectively, since their peak in January/February. New
buyers' interest appears to be lower than new instructions to sell.
However, if the slowdown were to extend, we believe this would have material
consequences for GBP. We focus on two potentially negative factors:
1) Further macro-prudential measures could exacerbate weakness: FPC published a
consultation paper in July signaling that bank leverage ratios may be raised. This might
depress mortgage markets and push up mortgage rates as banks might need to hold
more capital against mortgages. The FPC is meeting this week but will announce the
outcome at the end of the month. The FT reported yesterday that major banks are
concerned that setting the leverage ratio too high would have a material impact.
Meanwhile, the Mortgage Market Review appears to have had a larger impact than
envisaged – possibly because new processes have had to be introduced and staff
trained or because it affects availability of credit for some borrowers.
2) Slowdown in foreign capital inflow into the housing market. While exact data are
not available, it is believed foreign demand has played some role with buying
concentrated in particular in the luxury segments of the London property market.
Additionally, foreign buying may be related to the rather high percentage of cash
purchases (about 40%). However, geopolitical developments and perhaps the
corruption campaign in China may weigh on parts of this capital inflow. A potential
aspect is that the cash buying may represent borrowing obtained abroad rather than
pure free cash. If that’s the case, EM capital squeeze could exacerbate the withdrawal
of foreign interest from the UK housing market. Unfortunately, evidence for any of the
above effects is rather anecdotal only.
15 October 2014
FX Compass: Looking away from the dollar 9
Structural weakness also looms
While the impact may not be immediate, we expect the need for fiscal consolidation to
weigh on GBP. Fiscal deficit remains wide and has not yet narrowed in response to
cyclical strength. Tightening ahead of next year's General Election is unlikely, but
afterwards it could be considerable, and provide a brake on monetary tightening. This
would be at a time when the fiscal drag in the US and the euro area would be well behind.
Meanwhile the large current account deficit combined with unfavorable composition of the
net international investment deficit and large gross positions in “other” investment
suggests structurally GBP remains highly vulnerable to any global or domestic tail risk
scenario. We discussed this in detail in FX Strategist: Playing GBP vulnerability
persistence, September 9, and continue to believe these factors should justify a higher
GBP-implied volatility in contrast to current market pricing.
Exhibit 17: Fiscal deficit is larger than for the EUR and USD
Exhibit 18: Current account deficit is widening, although that might be just reflective of stronger domestic demand
-12%
-10%
-8%
-6%
-4%
-2%
0%
2%
4%
Jan-05 Jan-07 Jan-09 Jan-11 Jan-13
UK Fiscal Balance % GDP
Eurozone Fiscal Balance % GDP
US Fiscal Balacne % GDP
-8%
-6%
-4%
-2%
0%
2%
4%
Jan-05 Jan-07 Jan-09 Jan-11 Jan-13
UK CA % GDP
Eurozone CA % GDP
US CA % GDP
Source: Credit Suisse, Thomson Reuters DataStream Source: Credit Suisse, Thomson Reuters DataStream
How to trade it
In our FX Strategist: Playing GBP vulnerability persistence, September, we argued GBP
vol should trade structurally higher. We see now a strong case that in particular GBPUSD
vol is underpriced. It is the cheapest vol in G10 vs. USD, below EURUSD vol. This pricing
appears to assume a continued positive correlation between EURUSD and EURGBP with
any weakness in EURUSD feeding automatically into lower EURGBP as well. However, if
the market starts to acknowledge the challenge to the UK’s scope to diverge from the euro
area, the positive correlation may increasingly look too high. It is already higher than for
other G10 crosses.
We suggest three potential expressions for the weaker GBP outlook:
- 2m 1.5750 GBPUSD put: Currently offered for 0.70% of the GBP notional (spot ref.
1.5924). The risk is limited to the premium paid.
- 2m GBPUSD put spread financed by selling call spread. To cheapen the above
structure (although sacrificing much of the vol view), and realizing that cable has
moved notably lower already, we suggest buying an ATMF/1.5600 1x1 put spread
which can be financed by selling an ATMF/1.6185 1x1 call spread. By selling skew,
this structure provides a 0.03% premium take-in of the GBP notional (spot ref.
1.59107).
15 October 2014
FX Compass: Looking away from the dollar 10
- 2m 1.25 EURUSD put with a KO on EURGBP below 0.7750. Consistent with the
peaking in USD implied correlation theme noted above, this structure is offered at
0.36% of the EUR notional (spot ref. 1.2658; 0.7950) with about 45% saving to vanilla
put achieved through the correlation KO. The risk is limited to the premium paid. We
believe this structure is likely to perform in a gradual EURUSD downside scenario.
Exhibit 19: GBPUSD vol lowest in G10 Exhibit 20: Implied correlation still assumes euro
area weakness does not hurt the UK much
5%
6%
7%
8%
9%
10%
11%
12%
GBP EUR CAD CHF JPY SEK NOK AUD NZD
3m ATM Vol vs. USD
-10%
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
Oct-10 Oct-11 Oct-12 Oct-13 Oct-14
EURGBP/EURUSD
Avg (EURJPY, EURCAD, EURAUD, EURNZD)/EURUSD
Avg (EURSEK, EURNOK)/EURUSD
Source: Credit Suisse Locus Source: Credit Suisse Locus
15 October 2014
FX Compass: Looking away from the dollar 11
House prices and G10 FX
Exhibit 21: Norway Exhibit 22: New Zealand
-6%
-4%
-2%
0%
2%
4%
6%
-10%
-5%
0%
5%
10%
15%
20%
Jan-10 Jan-11 Jan-12 Jan-13 Jan-14
HP, % 3m/3m ann.
HP, % 3mma ann.
NOK vs EUR, % 3m/3m (RHS)
-7%
-5%
-3%
-1%
1%
3%
5%
7%
9%
-10%
-5%
0%
5%
10%
15%
20%
Jan-10 Jan-11 Jan-12 Jan-13 Jan-14
HP, % 3m/3m ann.
HP, % 3mma ann.
NZD vs. AUD, % 3m/3m (RHS)
Source: Credit Suisse, Thomson Reuters DataStream Source: Credit Suisse, Thomson Reuters DataStream
Exhibit 23: Sweden Exhibit 24: Canada
-9%
-7%
-5%
-3%
-1%
1%
3%
5%
7%
9%
-15%
-10%
-5%
0%
5%
10%
15%
20%
25%
Jan-10 Jan-11 Jan-12 Jan-13 Jan-14
HP, % 3m/3m ann.
HP, % 3mma ann.
SEK vs EUR, % 3m/3m (RHS)
-8%
-6%
-4%
-2%
0%
2%
4%
6%
8%
-5%
0%
5%
10%
15%
Jan-10 Jan-11 Jan-12 Jan-13 Jan-14
av 3m/3m momentum
HP, % 3mma ann.
CAD vs. basket, % 3m/3m (RHS)
Source: Credit Suisse, Thomson Reuters DataStream Source: Credit Suisse, Thomson Reuters DataStream
15 October 2014
FX Compass: Looking away from the dollar 12
TRY: Modestly bearish We have raised our 3M TRYBASK forecast to 2.60, from our previous forecast of 2.58. We
kept our 12M forecast unchanged at 2.65. We expect the resumption of broad USD
strength later this year to combine with Turkey's still large external financing needs to keep
the lira under pressure to depreciate. Central to our view that this depreciation will be
modest is our expectation that Turkey's central bank (CBRT) will continue tightening
liquidity conditions, raising effective interest rates with the specific objective of managing
the TRY.
Central bank is working to control lira depreciation
The CBRT seems to believe that limiting TRY weakness is crucial to its efforts to reduce
inflation. Although CPI inflation moderated to 8.9%yoy in September from a high of
9.7%yoy in May, this is still well above the central bank's target and underlying inflation
momentum remains high (Exhibit 25). Additionally, the government's 3-year economic
program last week said disinflation was a key goal (see our Emerging Markets Economics
Daily). Against this background, our economists see signs that domestic sources of growth
are recovering. This enhances the importance of limiting imported inflation.
Exhibit 25: Turkish inflation remains a key challenge for policy
Exhibit 26: Higher effective interest rates seem to have begun to contain TRY weakness
Inflation momentum (3m/3m %); now vs. 3 months ago % (lhs), Basket rate (rhs)
-4%
-2%
0%
2%
4%
6%
8%
10%
12%
14%
TR
Y
INR
RU
B
ZA
R
BR
L
PH
P
CLP
MX
N
CO
P
HU
F
IDR
CZ
K
KR
W
MY
R
PL
N
TW
D
TH
B
ILS
CN
Y
3m/3m ann% - 3M ago
3m/3m ann% - Latest - Inflation momentum
2.40
2.45
2.50
2.55
2.60
2.65
2.70
6
7
8
9
10
11
12
Jan-14 Mar-14 May-14 Jul-14 Sep-14 Nov-14
Turkey Repo Rate Lira Basket (rhs)
Source: Credit Suisse, the BLOOMBERG PROFESSIONAL™ service Source: Credit Suisse
This leads us to expect the CBRT to continue tightening liquidity, nudging effective interest
rates higher. On days of TRYBASK weakness, the CBRT has cut the supply of repo
lending to the financial system at the one-week rate of 8.25% forcing institutions to borrow
at the higher overnight rates of 10.75% for primary dealers and 11.25% for other
institutions. This has pushed the overnight interbank rate to about 10.75% this month, up
from an average of 8.4% in early September before the TRY began weakening
(Exhibit 26). We judge this to have helped contain lira weakness in the recent range of
2.566 – 2.592 on the basket (Exhibit 26).
We think about 2.60 on the basket may prove to be a critical level for policy. Our bias is to
expect the CBRT to raise the overnight interbank rate to close to the effective ceiling of
11.25% within the current bands and for this to limit TRY weakness. However, if this level
of rates does not contain lira weakness, the CBRT would need to raise rates formally.
Failure to do so would probably lead the lira to overshoot our forecasts.
Ray Farris
+65 6212 3412
Bhaveer Shah
+44 20 7883 1449
15 October 2014
FX Compass: Looking away from the dollar 13
Current account outlook neutral for the lira
Turkey's current account deficit should remain at levels that are less damaging for the TRY
over the next year. The trend in Turkey's current account deficit has improved to about 6%
of GDP, a level that historically has not been inconsistent with lira stability, even in the
period before the Global Financial Crisis (Exhibit 27).
Exhibit 27: The current account deficit has improved
Exhibit 28: Seasonality is a risk, but may be offset by improving terms of trade
-12
-10
-8
-6
-4
-2
01.3
1.5
1.7
1.9
2.1
2.3
2.5
2.7
Mar-04 Mar-08 Mar-12
TRYBASK
Turkey C/A, % of GDP(RHS)
(***)
(***) (***)
(***)
(***)
(***) (***)(***)
(***)
-1.5%
-1.0%
-0.5%
0.0%
0.5%
1.0%
1.5%
Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec
Average Monthly Seasonality on Current Account
Source: Credit Suisse, the BLOOMBERG PROFESSIONAL™ service Source: Credit Suisse, the BLOOMBERG PROFESSIONAL™ service
The negative seasonality in the deficit shown in Exhibit 28 is a near-term risk, but recently
lower commodity prices are working to offset this. We estimate that the fall in oil prices
over the past several months could improve Turkey's current account balance by annual
rate of 0.7% of GDP. Combined with lower global food and metals in Q3, Turkey's terms of
trade have improved by almost 1% of GDP on our estimates (see Global Economy Notes)
This leads us to think that an unexpected export shock is the main risk for Turkey's
current account balance. The Euroarea's four largest economies account for about 21%
of Turkey's exports, with Germany being the destination for almost 10% (Exhibit 28). Iraq
and Russia account for another roughly 10%. This prevents us from being outright
constructive on the outlook for the impact of Turkey's current account on the TRY despite
its improving terms of trade.
Exhibit 29: Turkey's exports are concentrated in weakening economies
0%
1%
2%
3%
4%
5%
6%
7%
8%
9%
10%
Ger
man
y
Iraq
UK
Italy
Fran
ce
Rus
sia
USA
UAE
Spai
n
Switz
erla
nd
Net
herla
nds
Iran
Saud
i Ara
bia
Isra
el
Egyp
t
Belg
ium
Rom
ania
Chi
na
Azer
baija
n
Pola
nd
Liby
a
Turk
men
ista
n
Bulg
aria
Alge
ria
Syria
Ukr
aine
% share of YTD Turkey exports to country
Source: Credit Suisse, CEIC.
15 October 2014
FX Compass: Looking away from the dollar 14
ISIS-Kurd tail-risk contained at present, but will linger as a risk
Some have expressed concern that Turkey's failure to intervene to prevent ISIS
occupation of Kurdish Kobani in Syriah will lead to civil unrest in Turkey itself. To
be sure, Turkey has experienced some riots in its Southeast. It also claims new
snipping attacks by the PKK to which it has retaliated against. These events do not
seem to led markets to add a significant risk premium to the TRY. TRY vols actually
fell slightly since mid-September levels, despite the riots in the Southeast.
We are not experts in this area, but our rough analysis leads us to think that civil
unrest will remain contained to the Southeast and not increase to levels that affect
Turkey's country risk premia or the TRY. The Erdogan government has made progress
in engaging Turkey's Kurdish leadership and has set for itself the objective of a formal end
to conflict with the PKK. The situation is of course highly uncertain, but our bias is to
expect Turkey's Kurdish leadership to want to preserve the peace process in its pursuit of
enhanced minority rights offered by the Turkish government.
15 October 2014
FX Compass: Looking away from the dollar 15
Technicals The risk of further GBP weakness
The post Scottish referendum bounce in GBP has proved to be pretty lackluster to say the
least, and while our view has been, and remains medium-term bullish, there is a risk that
further GBP weakness may be seen first prior to the broader uptrend resuming.
For the GBP TWI (BoE), the spotlight remains on its rising 40-week/200-day average at
86.45. While we have been looking for this to hold, we need to see a break above 87.85 to
ease the risk of a deeper pullback for strength back to the 88.54/55 recent high, and
eventually on to our 93.80/94.00 medium-term target.
Below the 86.45 40-week average should confirm a more concerted phase of GBP
weakness is underway for a fall to 86/85.90 initially, and more realistically back towards
what we would expect to be much better support at 84.30/00 – the "neckline" to the
medium-term base and 38.2% retracement of the 2013/2014 uptrend. We would be buyers
of GBP here.
For GBPUSD, the added impact of a strong USD leaves the market at a new cycle low,
and we look for the decline to extend to the 1.5854 November 2013 low next, ahead of
what should be better support at 1.5752/22 – the "neckline" to the 2013 base and 61.8%
retracement of the 2013/2014 bull trend. We look for a floor here. Failure to hold 1.5722
would raise the prospect of a more serious top, and a move to 1.5435/25 next, which we
would see as a minimum objective. Above price/moving average resistance at 1.6228 is
needed to ease the immediate downside bias, with a better base seen above 1.6525.
EURGBP achieved our .7800/.7755 long-held medium-term bear target in September, and
the initial consolidation from here has now evolved into a base. This suggests GBP can
weaken against the EUR also, and we look for strength to extend to .8000 next, then what
should be tougher resistance at .8066/.8100, which we look to cap. Only above here would
raise the prospect of a more important base. Below .7755 at any stage would mark the
completion of an important top, to target .7235.
Exhibit 30: GBP TWI (BoE) – weekly Exhibit 31: GBPUSD – weekly
Source: Updata, the BLOOMBERG PROFESSIONAL™ service, Credit Suisse Source: CQG, Credit Suisse
David Sneddon
+44 20 7888 7173
Christopher Hine
+212 538 5727
GBP TWI below its 40-
week average at 86.45
would warn of a more
serious downturn
GBPUSD is expected to
test 1.5752/22, but we
look for this to hold
EURGBP has completed
a small base
15 October 2014
FX Compass: Looking away from the dollar 16
Vanilla Portfolio Update
This week’s trade updates
We added a 2m GBPUSD put spread financed by selling a call spread. Realizing
that cable has moved notably lower already, we suggest buying an ATMF/1.5600 1x1
put spread which can be financed by selling an ATMF/1.6185 1x1 call spread. By selling
skew, this structure provides a 0.03% premium take-in of the GBP notional (spot ref.
1.59107).
Exhibit 32: Current derivative trade recommendations
Entry Date Expiration Trade DetailsEntry
Cost/Level
Current
Value
P&L (% of
notional)
Notional
(USD)P&L (USD)
14-Oct-14 12-Dec-14 Buy 2m GBPUSD put spread, sell call spread Buy ATMF/1.5600, sell ATMF/1.6185 (0.03%) (0.03%) 0.00% 10,000,000 0
8-Oct-14 13-Nov-14 Buy 5w EURJPY put Buy 134.75 0.48% 0.73% 0.26% 7,500,000 18,994
8-Oct-14 8-Jan-15 Buy USDILS (8 Jan 15 value date) Target 3.76, Stop 3.64 3.7074 3.7306 0.63% 5,000,000 31,286
30-Sep-14 28-Nov-14 Buy 2m USDCAD 1x1.5 call spread Buy 1.12, Sell 1.15 0.58% 0.85% 0.27% 10,000,000 26,500
30-Sep-14 16-Dec-14 Buy 11w EURCAD 1x1 put spread Buy 1.40, Sell 1.37 0.64% 0.30% (0.34%) 7,500,000 (25,532)
24-Sep-14 24-Nov-14 Buy 2m CADJPY call Buy 101 0.27% 0.06% (0.21%) 7,500,000 (15,518)
15-Sep-14 27-Oct-14 Buy 6w USDKRW put Buy 1015 0.38% 0.08% (0.30%) 7,500,000 (22,500)
15-Sep-14 13-Nov-14 Buy 2m USDINR put Buy 59.5 0.19% 0.04% (0.16%) 7,500,000 (11,625)
15-Sep-14 13-Nov-14 Buy 2m USDJPY 1x1 call spread Buy 108.15, Sell 110 0.45% 0.34% (0.11%) 7,500,000 (8,250)
3-Sep-14 2-Dec-14 Buy 3m EURTRY 1x1 put spread Buy 2.896, Sell 2.8283 1.05% 0.85% (0.21%) 10,000,000 (19,717)
29-Jul-14 31-Oct-14 Buy 3m USDSGD call Buy 1.255 0.40% 1.73% 1.33% 7,500,000 99,375
8-Oct-14 4-Nov-14 Sell USDSGD (4 Nov 14 value date) Hedging the 31 Oct 14 USDSGD call 1.2765 1.2766 (0.01%) 7,500,000 (846)
29-Jul-14 31-Oct-14 Buy 3m USDZAR 1x1 call spread Buy 11.00, Sell 11.50 1.20% 1.27% 0.07% 10,000,000 7,000
17-Jun-14 17-Dec-14 Buy 6m GBPJPY risk reversal Buy 185, Sell 160 0.00% (0.16%) (0.16%) 5,000,000 (7,267)
9-Apr-13 9-Apr-15 Buy 2y USDJPY call Buy 120 1.83% 0.07% (1.77%) 7,500,000 (132,375) Please see the Structured Securities, Derivatives, and Options Disclaimer. Past performance should not be taken as an indication or guarantee of future performance, and no representation or warranty, express or implied, is made regarding future performance. Information, opinions and estimates contained in this report reflect a judgment at the original date of publication by CS and are subject to change without notice. The price, value of and income from any of the securities or financial instruments mentioned in this report can fall as well as rise. The value of securities and financial instruments may be subject to exchange rate fluctuation that may have a positive or adverse effect on the price or income of such securities or financial instruments. The P&L results shown do not include relevant costs, such as commissions, interest charges, or other applicable expenses. Source: Credit Suisse
Exhibit 33: Recently closed derivative trade recommendations
Entry DateDate
ClosedTrade Details
Entry
Cost/Level
Ending
Value
P&L (% of
notional)
Notional
(USD)P&L (USD)
11-Aug-14 30-Sep-14 Buy 3m EURCAD put spread, sell call Buy 1.4532, Sell 1.4177, Sell 1.5074 0.31% 1.80% 1.49% 5,000,000 70,421
5-Aug-14 22-Sep-14 Buy 3m USDCLP call ladder Buy 577, Sell 590, Sell 603 0.25% 0.43% 0.18% 5,000,000 9,000
17-Jun-14 16-Sep-14 Buy 3m 1x1 EURCAD put spread Buy 1.4559, Sell 1.4166 0.45% 1.97% 1.52% 10,000,000 144,698
26-Nov-13 16-Sep-14 Buy 1y USDBRL topside seagull Sell 2.250, Buy 2.800, Sell 3.175 0.30% (0.34%) (0.64%) 5,000,000 (31,750)
29-Jul-14 15-Sep-14 Buy 3m USDJPY 1x1 call spread Buy 103.75, Sell 104.95 0.00% 0.92% 0.92% 7,500,000 68,625
10-Jun-14 10-Sep-14 Buy 3m 1x1.5 EURTRY put spread Buy 2.81, Sell 2.75 0.42% 0.00% (0.42%) 5,000,000 (20,024) Please see the Structured Securities, Derivatives, and Options Disclaimer. Past performance should not be taken as an indication or guarantee of future performance, and no representation or warranty, express or implied, is made regarding future performance. Information, opinions and estimates contained in this report reflect a judgment at the original date of publication by CS and are subject to change without notice. The price, value of and income from any of the securities or financial instruments mentioned in this report can fall as well as rise. The value of securities and financial instruments may be subject to exchange rate fluctuation that may have a positive or adverse effect on the price or income of such securities or financial instruments. The P&L results shown do not include relevant costs, such as commissions, interest charges, or other applicable expenses. Source: Credit Suisse
15 October 2014
FX Compass: Looking away from the dollar 17
Exotic Portfolio Update
This week’s trade updates
No changes this week.
Exhibit 34: Current exotic trade recommendations
Entry Date Expiration Trade DetailsEntry
Cost/Level
Current
Value
P&L (% of
notional)
Notional
(USD)P&L (USD)
9-Sep-14 9-Dec-14 Buy 3m6m EURGBP FVA 7.90% 6.64% (1.27%) 2,500,000 (30,913)
22-Jul-14 22-Oct-14 Sell 3m6m EURJPY FVA, buy 3m vol swap 2.35% 2.34% 0.01% 2,500,000 235
26-Nov-13 26-Nov-14 Buy 1y1y USDRUB FVA 12.00% 14.19% 2.19% 2,500,000 54,625
9-Apr-13 9-Apr-15 Buy 2y zero cost USDJPY RKI risk reversal Buy 120, Sell 83, 76 RKI 0.00% (0.03%) (0.03%) 2,500,000 (625) Please see the Structured Securities, Derivatives, and Options Disclaimer. Past performance should not be taken as an indication or guarantee of future performance, and no representation or warranty, express or implied, is made regarding future performance. Information, opinions and estimates contained in this report reflect a judgment at the original date of publication by CS and are subject to change without notice. The price, value of and income from any of the securities or financial instruments mentioned in this report can fall as well as rise. The value of securities and financial instruments may be subject to exchange rate fluctuation that may have a positive or adverse effect on the price or income of such securities or financial instruments. The P&L results shown do not include relevant costs, such as commissions, interest charges, or other applicable expenses. Source: Credit Suisse
Exhibit 35: Recently closed exotic trade recommendations
Entry DateDate
ClosedTrade Details
Entry
Cost/Level
Ending
Value
P&L (% of
notional)
Notional
(USD)P&L (USD)
8-Jul-14 8-Oct-14 Buy 3m AUDUSD lower, GBPUSD higher dual digital AUDUSD < 0.9125, GBPUSD > 1.7131 8.00% 0.00% (8.00%) 1,000,000 (80,000)
8-Jul-14 8-Oct-14 Buy 3m AUDUSD lower, NZDUSD higher dual digital AUDUSD < 0.9314, NZDUSD > 0.8793 8.50% 0.00% (8.50%) 1,000,000 (85,000)
30-Jun-14 24-Sep-14 Buy 3m CADJPY KO call Buy 96.0, 93.3 KO 0.54% 2.20% 1.66% 2,500,000 39,983
3-Sep-14 17-Sep-14 Buy 3m EURUSD 1m windowed digital put Buy 1.2850, 1.2880 / 1.3375 window 10.00% 0.00% (10.00%) 1,000,000 (97,600)
17-Jun-14 16-Sep-14 Buy 3m EURGBP RKO digital put Buy 0.780, 0.755 RKO 10.00% 0.00% (10.00%) 1,000,000 (95,510)
25-Jul-14 15-Sep-14 Sell 3m USDKRW RKI risk reversal Buy 1015.0, Sell 1047.5, 1075.0 KI 0.00% (0.26%) (0.26%) 5,000,000 (12,750)
30-May-14 15-Sep-14 Sell 6m USDINR RKI risk reversal Buy 59.5, Sell 62.3, 64.5 RKI 0.00% (0.72%) (0.72%) 5,000,000 (36,000)
10-Jun-14 10-Sep-14 Buy 3m EURRUB digital put 44.8 digital 10.00% 0.00% (10.00%) 1,000,000 (95,350) Please see the Structured Securities, Derivatives, and Options Disclaimer. Past performance should not be taken as an indication or guarantee of future performance, and no representation or warranty, express or implied, is made regarding future performance. Information, opinions and estimates contained in this report reflect a judgment at the original date of publication by CS and are subject to change without notice. The price, value of and income from any of the securities or financial instruments mentioned in this report can fall as well as rise. The value of securities and financial instruments may be subject to exchange rate fluctuation that may have a positive or adverse effect on the price or income of such securities or financial instruments. The P&L results shown do not include relevant costs, such as commissions, interest charges, or other applicable expenses. Source: Credit Suisse
15 October 2014
FX Compass: Looking away from the dollar 18
FX Forecast Summary
Major Currencies1 vs. Spot
Forecasts 3m 12m
US Dollar TWI 88.50 89.14 92.71 Bullish. As the labor market continues its gains and the economy
strengthens, we expect many EM currencies to gradually come under
pressure, as excesses of the unprecedented period of record low US
interest rates begin to reveal themselves.
by market convention EUR 1.266 1.260 1.200
JPY 107.1 111.0 118.0
GBP 1.590 1.565 1.600
CHF 0.954 0.960 1.025
AUD 0.872 0.860 0.820
CAD 1.130 1.100 1.120
SEK 7.250 7.143 7.375
Euro TWI 94.0 94.4 91.37 Bearish. After cutting rates again, EURUSD prospects will be
determined by the evolution of short-term real interest rate differentials
and flow-based factors, where we see scope further diminishing. We
recommend selling selective EUR-EM crosses.
foreign currency units
per euro
USD 1.266 1.260 1.200
JPY 135.6 139.9 141.6
GBP 0.796 0.805 0.750
CHF 1.208 1.210 1.230
AUD 1.452 1.465 1.463
CAD 1.430 1.386 1.344
SEK 9.179 9.000 8.850
Japanese Yen TWI 136.1 131.5 125.9 Bearish. Ongoing weakness in the economy and talks of further BoJ
easing contrast against hike-expectations in the US. Deterioration in
Japan's current account deficit, combined with our outlook for US yields
keep rising, will also support a USDJPY higher trend. GPIF-related flows
will also be important – we expect a broader shift to Japanese outflows
to keep yen under the pressure.
yen per unit foreign
currency
USD 107.1 111.0 118.0
EUR 135.6 139.9 141.6
GBP 170.3 173.7 188.8
CHF 112.26 115.59 115.12
AUD 93.33 95.46 96.76
CAD 94.8 100.9 105.36
SEK 14.77 15.54 16.00
UK Sterling TWI 88.00 87.02 92.74 Bullish. Data remain strong and market expectations for the BoE to
hike continue to be bought forward. Expectations for divergence
between euro zone and UK rates are at historical highs. However,
high positioning is a risk to this view, particularly as the Scottish
referendum approaches. While housing concerns remain, we do not
expect any macro-prudential measures from the FPC to have a
significant negative impact on GBP.
foreign currency units
per pound
USD 1.590 1.565 1.600
EUR 1.256 1.242 1.333
JPY 170.3 173.7 188.8
CHF 1.517 1.503 1.640
AUD 1.824 1.820 1.951
CAD 1.797 1.722 1.792
SEK 11.53 11.18 11.80
Swiss Franc TWI 146.6 146.6 142.7 Neutral. EURCHF looks set to remain near-term range-bound as
Switzerland’s superior growth prospects are counterbalanced by the
SNB’s continued dovish focus on the 1.20 floor given low inflation, while
other bilaterals look set to rise. Risks relate to the potential unwinding of
crisis-related flows and CHF becoming a funding currency.
francs per unit foreign
currency (per 100 units
for JPY and SEK)
USD 0.954 0.960 1.025
EUR 1.208 1.210 1.230
JPY 0.891 0.865 0.869
GBP 1.517 1.503 1.640
AUD 0.831 0.826 0.841
CAD 0.844 0.873 0.915
SEK 13.16 13.44 13.90
1 Major currencies, defined and ranked by order of their reported foreign exchange market turnover from the BIS 2004 Triennial
Central Bank Survey.
15 October 2014
FX Compass: Looking away from the dollar 19
Regional Currencies vs.
Spot
Forecasts
Comments 3m 12m
Americas
Brazilian Real USD 2.400 2.400 2.550 Bearish. Over the longer term, deteriorating external and fiscal balances
could trigger a rating downgrade, undermining support for BRL.
Canadian Dollar TWI 105.2 108.4 107.3 Neutral. We expect the BoC to turn less dovish in Q4, causing CAD to
outperform the forwards. This said, we expect CAD to remain highly sensitive
to US rates repricing, hence our bearish 12-month forecast. USD 1.130 1.100 1.120
Mexican Peso USD 13.44 13.40 13.10 Neutral. Domestic growth has been disappointing, but non-oil exports have
strengthened, suggesting the economy is starting to see benefits from the US
recovery.
Colombian Peso USD 2049 2055 2030 Bearish. The recent dovish shift in policy language suggests COP could
underperform in the near term. The strong growth outlook still leaves us
constructive on the outlook for inflows in 2015.
Chilean Peso USD 588.0 600.0 590.0 Neutral. The ongoing slowdown in FDI is likely to continue, undermining the
currency. Recent CLP weakness might however stoke inflation, causing
easing expectations to retrace.
Pacific
Australian Dollar USD* 0.872 0.860 0.820 Bearish. A less dovish Fed, falling commodity prices, and the potential for
macro-prudential measures should keep AUD under pressure. JPY* 93.33 95.46 96.76
NZD* 1.112 1.130 1.100
NZ Dollar USD* 0.784 0.761 0.745 Bearish. Dairy prices have remained weak while RBNZ has increased their
intervention. Higher volatility will also likely discourage carry inflows, making it
more challenging to fund New Zealand current account deficit. JPY* 83.96 84.48 87.96
Scandinavia
Swedish Krona EUR 9.179 9.000 8.850 Bearish. The latest inflation data have been slightly better than expected and
should keep SEK trading range-bound for the near term. In the longer term,
weak underlying price pressures and rate spreads should work against SEK. USD 7.250 7.143 7.375
Norwegian Krone EUR 8.322 8.000 8.300 Long-term bearish. Data have improved, with house prices surging, lending
rates falling, stronger business surveys and looser fiscal policy. Yet despite
the upbeat short-term outlook, deeper long-term structural issues still remain. USD 6.574 6.349 6.917
SEK* 1.103 1.125 1.066
Emerging Europe, Middle East and Africa
Czech Koruna EUR 27.55 27.40 27.40 Neutral. Low inflationary pressure should support the credibility of the floor
while negative carry suggests the koruna can play the role of a funding
currency for the region. In the medium term, we believe the inflation dynamic
will prove crucial in determining the exit strategy from the current policy.
Hungarian Forint EUR 306.2 320.0 325.0 Neutral. Solid growth and ECB stimulus are key positives. However, inflation
is too low and, unlike in Poland, we expect the central bank to be more active
in easing scope for currency gains.
Polish Zloty EUR 4.20 4.20 4.10 Neutral. Growth appears to be picking up strongly and the ECB stimulus
should provide an additional boost to exports. However, inflation remains very
weak and wages are falling. The floor endgame remains uncertain.
Israeli Shekel USD 3.74 3.75 3.75 Bearish. Unwinding of hedges by domestic investors will catalyze
depreciation. BOI also recently intervened to ensure shekel continues
weakening. Domestic dynamics and inflation are very poor, but most of this is
priced in already. Broad USD will be the key trigger now for USDILS higher.
15 October 2014
FX Compass: Looking away from the dollar 20
Regional Currencies vs.
Spot
Forecasts
Comments 3m 12m
Russian Rouble Bask 45.76 48.00 45.00 Bullish. A hawkish central bank, high carry, improving current account and
high oil prices are key positives. The growth outlook remains weak, but we do
not expect this to weigh much on RUB until lower inflation allows CBR to start
easing.
Rouble versus basket: USD 40.866 42.972 41.284
.55*USD+.45*EUR EUR 51.7 54.1 49.5
South African Rand USD 11.054 11.250 11.500 Bearish. We are biased for USDZAR to move higher following a less
hawkish than expected SARB the gradual removal of Fed accommodation. EUR 13.99 14.18 13.80
Turkish Lira Bask 2.58 2.60 2.65 Bullish vs. forwards. The high level of carry, narrowing current account
deficit and ECB stimulus suggest that the lira should be resilient to modestly
higher US yields. However, the pace of monetary policy easing is crucial and
we recognize that if the central bank eases too rapidly, the TRY could suffer.
Lira versus basket: USD 2.27 2.30 2.41
.50*USD+.50*EUR EUR 2.88 2.90 2.89
Asia
Chinese Renminbi USD 6.12 6.14 6.12 Bullish. We underestimated the determination of the government to push
speculative capital out of exchange-rate-based trades by raising USDCNY.
However, China's economy and trade balance are now recovering and
recent USDCNY fixes suggest the depreciation is over.
Indian Rupee USD 61.4 60.5 62.5 Bullish. India's election outcome creates a positive secular outlook for the
INR, in our view. However, the market seems long the INR and the Reserve
Bank of India (RBI) seems to be intervening. As such, we expect USDINR to
be choppy, even if it is biased to grind a bit stronger in the near term.
Indonesian Rupiah USD 12206 12300 12600 Tactically bearish. Indonesia's current account deficit is correcting too slowly
for IDR stability, in our view, particularly given its now much larger debt
refinancing needs..
Korean Won USD 1065 1100 1133 Bullish. JPYKRW should trade down to close to 9.2, given Korea's current
account surplus hitting record levels and USDJPY rising less than expected.
Malaysian Ringgit USD 3.27 3.28 3.38 Bearish. The USD has strengthened faster against G10 FX than we
previously anticipated. Malaysia's terms of trade is deteriorating following the
recent fall in its key commodity prices. This will increase Malaysia's funding
challenge at a time when foreign inflows are likely to slow, if not reverse.
Philippines Peso USD 44.8 43.5 44.0 Bullish. Low carry and a dovish central bank were the peso's weakest
points, but the BSP is moving to address these. A higher PHP rate structure
should combine with solid remittances and inflows from business outsourcing
exports to drive PHP outperformance into 2015, in our view.
Singapore Dollar USD 1.275 1.275 1.285 Neutral. We maintain our forecast for the SGD nominal effective exchange
rate (NEER) to trade close to the center of the bands. We expect the
Monetary Authority of Singapore to maintain an appreciation path for the
NEER of 2% pa with bands of 2% in its upcoming meeting.
Taiwan Dollar USD 30.42 29.80 29.90 Neutral. Exports seem to have broken higher, ending the long period of
stagnation and outperforming regional peers. The recent rise in credit growth
suggests an improving domestic economy.
Thai Baht USD 32.50 31.80 32.50 Bullish near term. Onshore political situation appears to have stabilized
post-coup and sentiment from both domestic and foreign investors has
improved. The seasonal improvement in the current account balance coupled
with still low level of foreign positioning suggest scope for THB
outperformance.
Exchange rates are home currency per foreign currency unit, unless indicated by * (= inverse quotation). Source: Credit Suisse
GLOBAL FIXED INCOME AND ECONOMICS RESEARCH
Ric Deverell
Global Head of Fixed Income and Economics Research
+1 212 538 8964
GLOBAL MACRO PRODUCT STRATEGY
Sean Shepley
Global Head of CS Macro Product Strategy
+44 20 7888 1333
GLOBAL RATES STRATEGY
GLOBAL FX STRATEGY
Helen Haworth, CFA Carl Lantz
Shahab Jalinoos
Co-Head of Global Rates Co-Head of Global Rates
Global Head of FX Strategy Tom Kendall
+44 20 7888 0757 +1 212 538 5081
+1 212 325 5412 +44 20 7883 2432
[email protected] [email protected] [email protected] [email protected]
EU RATES US RATES Anezka Christovova Alvise Marino
Thushka Maharaj Ira Jersey +44 20 7888 6635 +1 212 325 5911
+44 20 7883 0211 +1 212 325 4674 [email protected] [email protected]
[email protected] [email protected]
Bhaveer Shah Matthew Derr
Marion Pelata Carlos Pro +44 20 7883 1449 +1 212 538 2163
+44 20 7883 1333 +1 212 538 1863 [email protected] [email protected]
[email protected] [email protected]
Daniela Russell William Marshall
+44 20 7883 7455 +1 212 325 5584 TECHNICAL ANALYSIS
[email protected] [email protected] David Sneddon
Global Head of Technical Analysis Christopher Hine
Florian Weber JAPAN RATES +44 20 7888 7173 +1 212 538 5727
+44 20 7888 3779 Tomohiro Miyasaka [email protected] [email protected]
[email protected] +81 3 4550 7171
[email protected] James Lim
+65 6212 3612
MARKET STRATEGIES
Sean Shepley
Global Head of Market Strategies Bill Papadakis
+44 20 7888 1333 +44 20 7883 4351
GLOBAL FIXED INCOME AND ECONOMICS RESEARCH
Ric Deverell
Global Head of Fixed Income and Economics Research
+1 212 538 8964
GLOBAL EMERGING MARKETS STRATEGY
Ray Farris
Head of Global Emerging Markets Strategy
+65 6212 3412
EMEA STRATEGY LATIN AMERICA STRATEGY NJA STRATEGY
Nimrod Mevorach Daniel Chodos Ashish Agrawal
+44 20 7888 1257 +1 212 325 7708 +65 6212 3405
[email protected] [email protected] [email protected]
Trang Thuy Le
+65 6212 4260
Martin Yu
+65 6212 3448
Disclosure Appendix
Analyst Certification The analysts identified in this report each certify, with respect to the companies or securities that the individual analyzes, that (1) the views expressed in this report accurately reflect his or her personal views about all of the subject companies and securities and (2) no part of his or her compensation was, is or will be directly or indirectly related to the specific recommendations or views expressed in this report.
Important Disclosures Credit Suisse's policy is only to publish investment research that is impartial, independent, clear, fair and not misleading. For more detail, please refer to Credit Suisse's Policies for Managing Conflicts of Interest in connection with Investment Research: http://www.csfb.com/research-and-analytics/disclaimer/managing_conflicts_disclaimer.html . Credit Suisse's policy is to publish research reports as it deems appropriate, based on developments with the subject issuer, the sector or the market that may have a material impact on the research views or opinions stated herein. The analyst(s) involved in the preparation of this research report received compensation that is based upon various factors, including Credit Suisse's total revenues, a portion of which are generated by Credit Suisse's Investment Banking and Fixed Income Divisions. Credit Suisse may trade as principal in the securities or derivatives of the issuers that are the subject of this report. At any point in time, Credit Suisse is likely to have significant holdings in the securities mentioned in this report. As at the date of this report, Credit Suisse acts as a market maker or liquidity provider in the debt securities of the subject issuer(s) mentioned in this report. For important disclosure information on securities recommended in this report, please visit the website at https://firesearchdisclosure.credit-suisse.com or call +1-212-538-7625. For the history of any relative value trade ideas suggested by the Fixed Income research department as well as fundamental recommendations provided by the Emerging Markets Sovereign Strategy Group over the previous 12 months, please view the document at http://research-and-analytics.csfb.com/docpopup.asp?ctbdocid=330703_1_en . Credit Suisse clients with access to the Locus website may refer to http://www.credit-suisse.com/locus For the history of recommendations provided by Technical Analysis, please visit the website at www.credit-suisse.com/techanalysis . Credit Suisse does not provide any tax advice. Any statement herein regarding any US federal tax is not intended or written to be used, and cannot be used, by any taxpayer for the purposes of avoiding any penalties.
Emerging Markets Bond Recommendation Definitions Buy: Indicates a recommended buy on our expectation that the issue will deliver a return higher than the risk-free rate. Sell: Indicates a recommended sell on our expectation that the issue will deliver a return lower than the risk-free rate.
Corporate Bond Fundamental Recommendation Definitions Buy: Indicates a recommended buy on our expectation that the issue will be a top performer in its sector. Outperform: Indicates an above-average total return performer within its sector. Bonds in this category have stable or improving credit profiles and are undervalued, or they may be weaker credits that, we believe, are cheap relative to the sector and are expected to outperform on a total-return basis. These bonds may possess price risk in a volatile environment. Market Perform: Indicates a bond that is expected to return average performance in its sector. Underperform: Indicates a below-average total-return performer within its sector. Bonds in this category have weak or worsening credit trends, or they may be stable credits that, we believe, are overvalued or rich relative to the sector. Sell: Indicates a recommended sell on the expectation that the issue will be among the poor performers in its sector. Restricted: In certain circumstances, Credit Suisse policy and/or applicable law and regulations preclude certain types of communications, including an investment recommendation, during the course of Credit Suisse's engagement in an investment banking transaction and in certain other circumstances. Not Rated: Credit Suisse Global Credit Research or Global Leveraged Finance Research covers the issuer but currently does not offer an investment view on the subject issue. Not Covered: Neither Credit Suisse Global Credit Research nor Global Leveraged Finance Research covers the issuer or offers an investment view on the issuer or any securities related to it. Any communication from Research on securities or companies that Credit Suisse does not cover is a reasonable, non-material deduction based on an analysis of publicly available information.
Corporate Bond Risk Category Definitions In addition to the recommendation, each issue may have a risk category indicating that it is an appropriate holding for an "average" high yield investor, designated as Market, or that it has a higher or lower risk profile, designated as Speculative, and Conservative, respectively.
Credit Suisse Credit Rating Definitions Credit Suisse may assign rating opinions to investment-grade and crossover issuers. Ratings are based on our assessment of a company's creditworthiness and are not recommendations to buy or sell a security. The ratings scale (AAA, AA, A, BBB, BB, B) is dependent on our assessment of an issuer's ability to meet its financial commitments in a timely manner. Within each category, creditworthiness is further detailed with a scale of High, Mid, or Low − with High being the strongest sub-category rating: High AAA, Mid AAA, Low AAA - obligor's capacity to meet its financial commitments is extremely strong; High AA, Mid AA, Low AA − obligor's capacity to meet its financial commitments is very strong; High A, Mid A, Low A − obligor's capacity to meet its financial commitments is strong; High BBB, Mid BBB, Low BBB − obligor's capacity to meet its financial commitments is adequate, but adverse economic/operating/financial circumstances are more likely to lead to a weakened capacity to meet its obligations; High BB, Mid BB, Low BB − obligations have speculative characteristics and are subject to substantial credit risk; High B, Mid B, Low B − obligor's capacity to meet its financial commitments is very weak and highly vulnerable to adverse economic, operating, and financial circumstances; High CCC, Mid CCC, Low CCC – obligor's capacity to meet its financial commitments is extremely weak and is dependent on favorable economic, operating, and financial circumstances. Credit Suisse's rating opinions do not necessarily correlate with those of the rating agencies.
Structured Securities, Derivatives, Options, and Futures Disclaimer General risks: Structured securities, derivatives, options (OTC and listed), and futures (including, but not limited to, commodity, foreign exchange, and security futures) are complex instruments that are not suitable for every investor, may involve a high degree of risk, may be highly illiquid, and may be appropriate investments only for sophisticated investors who are capable of understanding and assuming the risks involved. There is a risk of unlimited, total, or significant loss resulting from the use of these instruments for trading and investment. Before entering into any transaction involving these instruments, you should ensure that you fully understand their potential risks and rewards and independently determine that they are appropriate for you given your objectives, experience, financial and operational resources, and other relevant circumstances. For options, please ensure that you have read the Options Clearing Corporation's disclosure document, available at: http://www.optionsclearing.com/publications/risks/riskchap1.jsp. Risk of losses on options: The maximum potential loss on buying a call or put option is the loss of total premium paid. The maximum potential loss on selling a call option is unlimited. The maximum potential loss on selling a put option is substantial and may exceed the premium received by a significant amount. There are many other options combinations that entail significant risks and transaction costs: you should ensure they are appropriate for your situation and that you understand the risks. Risk of losses on futures: The maximum potential loss on buying a futures contract is substantial (the loss of the value of the contract) and can be amplified by leverage. The maximum potential loss on selling a futures contract is unlimited. OTC options and other derivatives: In discussions of OTC options and other derivatives, the results and risks are based solely on the hypothetical examples cited; actual results and risks will vary depending on specific circumstances. Investors are urged to consider carefully whether these products, as well as the products or strategies discussed herein, are suitable to their needs. While some OTC markets may be liquid, transactions in OTC derivatives may involve greater risk than investments in exchange-listed derivatives because there is no exchange market on which to liquidate a position and it may be very difficult to assess the value of the position because bid and offer prices need not be quoted. Structured products: These products often have a derivative component. As a result, they carry not only the risk of loss of principal, but also the possibility that at expiration the investor will own the reference asset at a depressed price. Even if a structured product is listed on an exchange, active and liquid trading markets may not develop and the structured product may be thinly traded. Taxation: Because of the importance of tax considerations for many option and other derivative transactions, investors considering these products should consult with their tax advisors as to how taxes affect the outcome of contemplated options or other derivatives transactions. You should consult with such tax, accounting, legal or other advisors as you deem necessary to assist you in making these determinations. Transaction costs: Such costs may be significant in option strategies calling for multiple purchases and sales of options and other derivatives, such as spreads and straddles. Commissions and transaction costs may be a factor in actual returns realized by the investor and should be taken into consideration. Trading on margin: Margin requirements vary and should be determined before investing as they can impact your profit potential. If the market moves against your position, you may be called upon by your broker to deposit a substantial amount of additional margin funds, on short notice, in order to maintain your position. If you do not provide the required funds within the time required by your broker, your position may be liquidated at a loss, and you will be liable for any resulting deficit in your account. Further information: Supporting documentation for any claims, comparisons, recommendations, statistics or other technical data in this material will be supplied upon request. Any trade information is preliminary and not intended as an official transaction confirmation. If you have any questions about whether you are eligible to enter into these transactions with Credit Suisse, please contact your sales representative.
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