Barclays Global FX Quarterly Fed On Hold Eyes On Growth

Foreign Exchange Research
September 2013
Global FX Quarterly
Fed on hold, eyes on growth
PLEASE REFER TO THE LAST PAGE FOR ANALYST CERTIFICATION(S) AND IMPORTANT DISCLOSURES.
Barclays | Global FX Quarterly
CONTENTS
Top Trades ............................................................................................... 2
Our top three thematic trades are short AUD/CNH, long 6m GBP/USD put spread and long
EUR/CHF. Our top two relative value trades are short ZAR, TRY against MXN, PHP and long
EUR/CZK.
Overview ................................................................................................... 3
The Feds decision to postpone tapering delays, but does not derail our constructive USD
outlook. We expect the delays to add USD250bn to the Fed balance sheet; hence, we expect
the USD to trade sideways with a downward bias in the near term.
Theme 1: EUR and CHF ......................................................................... 8

Fed does not derail EUR/USD weakness
We expect EUR/USD to range trade over the near term with downside risks, with the ECB
likely to ease liquidity conditions through a VLTRO in late Q4. Further out, diverging growth
trends and the relative monetary policy outlook still point to EUR/USD weakness.
Theme 2: EM .......................................................................................... 13
Square carry shorts until tapering
For the first time since the start of the year, we recommend taking profits on our short EM
carry positions, adopting a more neutral stance. We recommend being long the RUB,
staying short the ZAR and neutral the MXN.
Theme 3: CNY, AUD and NZD ............................................................ 17

Local matters
We think the PBoC will continue to use currency appreciation, albeit at a slower pace than
this year, as a rebalancing tool. Slowing growth in China, as well as a soft outlook for
domestic economies, is likely to weigh on AUD and NZD in the medium term.
Theme 4: GBP ........................................................................................ 20

Fade the rally
Against the backdrop of the delay in Fed tapering, stronger UK data and a disappointing BoE
forward guidance framework have boosted GBP recently. We think the good news is largely
priced and expect underlying headwinds to re-emerge, putting downward pressure on GBP.
Theme 5: JPY .......................................................................................... 25

Grind higher, against gravity
We continue to expect USD/JPY to grind higher, driven by the relative growth and monetary
policy outlooks between the US and Japan. Political uncertainty poses downside risk in the
near term yet upside risk in the longer term.
FX Views for the Year Ahead .............................................................. 28

Open Trades .......................................................................................... 33
FX Closed Trades .................................................................................. 34
FX Forecast Tables ............................................................................... 36
26 September 2013
FX STRATEGY
Top trades 1
Jose Wynne
+1 212 412 5923
jose.wynne@barclays.com
Aroop Chatterjee
+1 212 412 5622
aroop.chatterjee@barclays.com
Thematic trades
1. Short AUD/CNH spot
China growth is expected to remain under pressure, despite the recent bounce-back in data.
CNY appreciation will likely continue to be used as a tool for rebalancing (toward
consumption), while lower investment and growth should weigh on the AUD.
2. Long 6m GBP/USD put spread

We believe current levels offer a good opportunity to establish a medium-term view of a gradual
but persistent move lower. BoE monetary policy is set to remain loose for far longer than Fed
policy, and GBP weakness related to a rebalancing of the UK economy away from services/nontradable sectors toward tradable sectors is still relevant.
3. Long EUR/CHF spot

We recommend going long EUR/CHF spot on reduced fragmentation risks and significant
scope for unwinds of legacy long CHF positions amid better sentiment in the euro area. A
stable EUR/USD in the near term with depreciation ahead means that we keep our long
USD/CHF position.
4. No longer underweight carry

We expect the delay in Fed tapering to provide breathing room for high-yielding EM FX and
allow some differentiation in the asset class. In our view, short EM carry is not an attractive
proposition in the near term until the likelihood of tapering increases again.
Relative value trades

1. Still Short ZAR, TRY vs MXN and PHP
A slightly more constructive global context is not enough to outweigh external funding
needs and declining activity (ZAR) and currency-mismatched balance sheets (TRY).
Structural reforms still make the MXN and PHP appealing on a relative basis, despite the
cyclical softening and dovish monetary policy for the MXN.
2. Long EUR/CZK spot

The weakness in the economy and likely downward pressure on inflation argue for central
bank intervention to weaken the crown, in our view.
26 September 2013
Please refer to the Open Trades table for the specifics on these recommendations.
OVERVIEW

Jose Wynne
+1 212 412 5923
Aroop Chatterjee
+1 212 412 5622
The Feds decision to postpone tapering delays, but does not derail, our constructive
USD outlook. We expect the delays to add USD250bn to the Fed balance sheet; hence,
we expect the USD to trade sideways with a downward bias in the near term.
The EUR should trade in a range until later in Q4, when we expect to re-engage in short
EUR/USD positions. Tapering and a stronger US growth outlook, combined with ECB
LTROs, should favour a weaker EUR. Fed measures and economic recovery should be
CHF-negative. We recommend tactical long EUR/CHF positions at current levels.
We expect Chinese growth to remain under pressure, despite the recent bounce back in
data. CNY appreciation will likely continue to be used as a rebalancing tool (toward
consumption), while lower investment and growth should weigh on the AUD. We
recommend short AUD/CNH in spot.
For the first time since the start of the year, we recommend taking profits on our short
EM carry positions, adopting a more neutral stance. We recommend being long the
RUB, staying short the ZAR and neutral the MXN.
Stronger UK data and disappointment in BoE forward guidance have pushed GBP up.
We think the good news is priced and expect underlying headwinds to re-emerge,
putting downward pressure on GBP. Buy a 6m GBP put spread (1.60 vs 1.55).
Data and Fed delay the USD rally

We still expect the USD to strengthen in the coming months, but recent surprises on activity
and the Feds decision to delay tapering have led us to modify our views for Q4. For the first
time in months, we think it is time to take profit on our short EM carry positions held since the
start of the year. We also think a broad-based USD rally against the major currencies, including
the EUR, will have to wait until the Fed begins to taper (in December, we expect) or until
growth trends in the US and EU re-diverge. Moreover, we see the growth rebound in China as
reassuring, though headwinds from rebalancing will likely be too much for the AUD to handle.
Thus, we recommend re-engaging in AUD shorts at current levels.
The main surprise to our short EUR/USD position was in activity data from Europe and the
Feds decision. Under our base case, we expected the US economy to grow in line with what
data have shown, with unemployment dropping faster than most anticipated on a shrinking
labor force participation rate (driven by demographic forces, such as the retirement of baby
boomers), pushing the Fed to taper in September, as most market participants believed.
The reasons for the tapering delay have yet not been made clear, but we think several factors
played a part. For instance, the housing market seems to have slowed on higher mortgage
rates and economic activity has disappointed the Feds expectations. Furthermore, tapering
exerted more pressure on the belly of the UST curve than could be contained by forward
guidance alone. Most of the fiscal drag from sequestration is also likely to hit between now
and year-end, and the committee may have considered it more appropriate to wait.
Additionally, significant funding pressures in some emerging markets (ie India, Indonesia,
Turkey, South Africa and Brazil) could have increased the perception of downside risks to
global growth. Perhaps even the risk of a military strike in Syria was a factor in the decision.
We now expect the tapering program to begin in December and end in June 2014 (faster
than most expect, on falling labour force participation). Such a delay would add USD250bn
to the Fed balance sheet relative to our former expectations, part of which should end up in
26 September 2013

equities and part in bonds (given shrinking net UST issuance). We think European equities
and EM may attract inflows. We expect this to be priced fairly soon, if not already, but we
believe staying short EM carry is not an attractive near-term proposition until the likelihood
of tapering increases again.
Our view was also surprised by a synchronized growth recovery in the developed world
(Figure 1). Confidence manufacturing surveys, even in Europe, have been stronger than our
relatively optimistic forecasts. A synchronization of a euro area recovery with the US fuels
equities performance, but limits the scope for currency moves, supporting the EUR and
limiting a broad USD rally beyond versus EM, as we discuss in detail in Theme 1. During this
synchronized global recovery, including China, growth and sentiment surveys disappointed
in most parts of the EM world. Lackluster EM growth also exacerbated the downward
pressure in EM carry currencies while the market digested news on tapering.
Furthermore, this unexpected rebound in activity in Europe has led us to push out our
forecast of further ECB easing this year from early Q4 to December. The view that the ECB
would engage in another round of VLTROs was a key ingredient in our call for a lower
EUR/USD. The ECB remains worried about the tightening of financial conditions that is
taking place as the liquidity surplus declines with LTRO money (from the past 3y LTROs)
being paid back (Figure 2). We remain enthusiastic about the idea that the central bank may
arrest the passive tightening by introducing further VLTROs at a fixed rate. In other words,
the ECB could receive fixed rates beyond the typical 3m LTRO for the first time since the
crisis, backing the recent forward guidance with a liquidity injection that would in practice
push 1y1y forward rates in Europe and EUR/USD, by extension, significantly lower.
The rebound in euro area data has removed the urgency for an immediate, large and
indiscriminate liquidity injection. Hence, it delays and mitigates our bearish EUR/USD view.
This explains why we expect EUR/USD to trade in a range over the next three months and
weaken afterward but with a lower terminal level (we have revised our 12m forecast from 1.23
to 1.27). This has become more likely with the Fed on hold and global rates stable. Had global
rates not stabilized, the ECB might have been forced to arrest tighter financial conditions with
easing measures. The weak growth trend remains a key concern for the ECB, in our view.
Finally, our lower EUR/USD call has also been challenged by the unwind of EM carry
positions. We were expecting USD, JPY and CHF to be almost the only funding currency
FIGURE 1
Synchronized rebound in global manufacturing confidence
in G4
FIGURE 2
Passive tightening to be addressed with another LTRO
(December)
normalised
1,200
1,000
800
600
-1
400
-2
US
Emerging economics
Euro area
UK
Japan
-3
-4
-5
07
08
09
Source: Barclays Research
26 September 2013
10
11
12
13
200
150
100
50
200
0
Jun-09
Apr-10
Feb-11
Jan-12
Nov-12
0
Sep-13
Exc. Liq., eur bn, lhs
3bn payback
EONIA fixing, bp
Exp. Eonia, bp
depo facility, bp
refi rate, bp

beneficiaries of the EM carry unwind (see our March FX Quarterly, Opportunities emerge as
correlation falls), but were surprised by anecdotal evidence suggesting that a good portion
of these EM positions were funded in EUR. This factor pushed the EUR higher in Q3 but is
likely to be less of a factor as EM assets stabilize in the short run.
Whats next for EUR/USD?

In Theme 1 we also argue that these surprises delay but do not derail our views for EUR/USD
and the USD more broadly. On the data, we think some of the rebound will fail to be sustained
and that soon enough divergent trends in the US versus euro area will re-emerge. Figure 3
shows that imports in the euro area have sharply underperformed those from any other parts
of the world. In contrast, corporate profitability in the US is at an all-time high and investment
intentions are up, suggesting pent-up demand (Figure 4). Furthermore, gains in US house
prices show strength in household balance sheets. Last, the US fiscal deficit is beating
expectations, providing reasons for optimism on corporate investment (supporting both the
S&P 500, which is at record highs, and tighter 5y CDS on US Treasuries).
Furthermore, we believe that the Feds decision to delay tapering may generate an even
better environment for a USD rally in Q1 14. By keeping the purchase program on hold,
there may be stronger economic activity the day the Fed begins tapering and, hence, better
conditions for a broad-based USD rally, including against the EUR (as well as others in the
G4). Combined with further ECB measures to address the passive tightening in late Q4 13,
this environment is likely to be a powerful combination to get EUR/USD moving lower.
Meanwhile, we expect EUR/USD to stay range-bound, with short-term upside risks toward
1.37, and grinding lower as the rebound in the cyclical data disappoint and the weak
underlying growth trend emerges.
Still short CHF

We continue to like short CHF positions. In the context of the Feds postponement of
tightening, the CHF should underperform as risk and carry trades are tactically re-established
over the quarter. USD/CHF, however, is unlikely to move higher in the near term, given its
sensitivity to moves in front-end US rates. We keep our long USD/CHF position over the
medium-term horizon, however, since EUR/USD will likely be range-bound, at best, in the near
term, followed by subsequent depreciation. For the CHF, we see a variety of reasons to remain
bearish on the currency, as discussed in Theme 1.
FIGURE 3
Eurozone domestic demand is structurally weak
Index
US
110
EA
Japan
FIGURE 4
US corporate profitability at record highs
UK
24
105
22
100
20
95
18
90
16
14
85
12
80
10
75
3mma, SA 2007=100
70
07
08
26 September 2013
09
10
11
12
13
70
75
80
85
90
95
00
05
10
15
Corporate profits as a % of gross value added by the corporate
sector (sa)
China rebalancing to support CNY, weigh on AUD

In Theme 2, we focus on the FX implications of Chinas rebalancing. We think the recent
pickup in economic activity looks temporary. We expect economic growth to accelerate in Q3,
but we forecast a slowing into year-end and beyond. Indeed, we think the government intends
to rebalance the economy away from fixed investment and exports toward private
consumption which, although unavoidable, will be punitive for growth.
Despite the likely disappointing growth trend, we believe the government will continue to lean
on currency appreciation as a rebalancing tool. We expect USDCNY to continue to fix lower
despite a stronger USD. This should continue to push CNY into stronger territory on
multilateral terms, albeit at a slower pace.
The recent improvement in Chinese growth sentiment helped AUD recover lost ground in
September, but we think downside pressure on AUD will re-emerge. The currency is still
15% and 12% expensive on a multilateral and bilateral basis, respectively. A slower China
and significantly slower investment demand should deter AUD optimism, despite the global
cyclical rebound.
Square EM carry shorts

The USD250bn of assets that the Fed is likely to purchase before revising its current policies
will prop up demand for EM assets and support carry. In Theme 3, we discuss these issues
and, although these inflows will not undo the large depreciation of many EM currencies over
the past quarter, we do expect this to provide breathing room for high-yielding EM FX.
Against a backdrop of muted risk aversion and relatively attractive valuations, we believe
markets will allow some differentiation in EM. These are our main picks:
Square underweight in the BRL and INR, stay neutral on the MXN. Mexicos structural
reforms are likely to deliver improved growth and a stronger currency, but the loss of
cyclical momentum and easier monetary policy implies balanced risks for the MXN.
Furthermore, the high carry offered by the BRL and INR seems attractive from a riskadjusted perspective, now that firm policy intervention is in place.
Short ZAR, long RUB, and cautious TRY and IDR. A slightly more constructive global
context is not enough to outweigh external funding needs and declining activity in
South Africa. Policymakers in Turkey and Indonesia will likely continue to use the
exchange rate as a policy instrument to limit liability mismatches. The RUB offers a
relatively high carry, and spot is supported by improving prospects for oil prices.
Long PLN and MYR. A recovery of global manufacturing activity would benefit Poland,
while we think funding pressures on the MYR are likely over. Leading indicators point to
a growth pickup in these economies, especially given their relatively low vulnerability to
a sudden spike in global interest rates.
Buy GBP put spreads to fade the rally

We were surprised by the stronger UK data and disappointed by the knockouts included in
the BoE forward guidance, which pushed the GBP higher. In Theme 4 we argue that the
good news is priced and that we expect underlying headwinds to re-emerge, putting
downward pressure on the GBP.
We expect BoE monetary policy to remain loose for far longer than Fed policy, which should
weigh on the currency. UK rates continue to price tighter policy than the BoE and our
economists expect. We think market pricing is inconsistent with the MPCs expectations for
the underlying growth trend and inflation outlook. The September FOMC meeting serves as
a warning to the market that central banks ultimately control policy and retain the power to
move rates where they see fit. We expect the MPC to bolster its forward guidance
framework, especially if UK economic data soften.
26 September 2013
USD/JPY to grind higher

In Theme 5 we provide an update on USDJPY. We maintain our medium-term bullish view
on USD/JPY and expect it to grind higher toward 103-105 in the next 12 months. Both the
relative growth and monetary policy outlooks favour a higher USDJPY, despite the fact that
the yen is abnormally cheap. We expect the VAT hike to slow economic activity, starting in
Q2 2014, at a time when the US economy is expected to be growing 2.5%, and tapering is
well advanced (expected to end by June 2014). We expect slower activity and a marginally
more proactive BoJ to weigh on yen in a stronger USD environment.
In the very near term, we think political uncertainty in the US and Japan poses downside risk
to our forecast, and as a result, we do not recommend being long USDJPY just yet. In the US,
the debt-ceiling issue (to be addressed by mid-October) and the budget for the next fiscal
year remains unresolved. In Japan, PM Abe is widely expected to go ahead with the VAT
hike as planned, but disappointments could put downward pressure on equities and USDJPY
in Q4.
26 September 2013
THEME: EUR AND CHF
Fed does not derail EUR/USD weakness

Chris Walker
+44 (0) 20 3555 5863
chris.x.walker@barclays.com
Aroop Chatterjee
+1 212 412 5622
The main surprises to our short EUR/USD position came from euro area activity data and
the Feds decision to delay tapering. We expect EUR/USD to range trade over the near term
with downside risks as the ECB re-takes control of the short end of the yield curve and
eases liquidity conditions through a VLTRO in late Q4. Further out, diverging growth trends
and the relative monetary policy outlook still point to EUR/USD weakness. A stable
EUR/USD near-term with depreciation ahead means that we keep our long USD/CHF
position. We recommend going long EUR/CHF spot on reduced fragmentation risks and
significant scope for unwinds of legacy long CHF positions amidst better sentiment in the
euro area.
Fed action has delayed the broad USD rally, which we had expected to encompass low
yielders such as the EUR. Indeed, the bigger disappointment emerging from the September
2013 FOMC, in our view, was continued reticence in allowing the short end of the yield
curve to price in rate hikes than the decision to delay the tapering in asset purchases. So far
in H2 13, the Fed has been more successful than the ECB in controlling the short end of the
yield curve, and the relative movement in short rates has supported EUR/USD.
Although we do not expect any aggressive policy shifts by the ECB, we expect it to cap any
steepening in the rates curve and/or a decline in the liquidity surplus. As such, we see
EUR/USD stuck in a range initially (1m forecast: 1.35), potentially weakening at the 3m
horizon (3m: 1.32) as the ECB responds to the liquidity tightening with a new LTRO. We still
believe monetary policy divergence will favour the USD over the EUR in the medium term,
though the pace of depreciation is likely to be relatively slow as the US curve is allowed to
steepen only gradually. We expect the weakening trend in EUR/USD to persist (6m forecast:
1.30, 12m: 1.27), with diverging medium-term prospects implying a more aggressive ECB than
the Fed. Euro area events that pose downside risks to our forecast profile include package
renegotiations in Portugal, Greece and Cyprus, as well as added political uncertainty (Italy).
Why is EUR/USD not lower?

The resilience of the EUR is owing to a less-than-credible forward guidance (FRG)
framework, a backup in rates that has happened more rapidly than in the US (especially
FIGURE 1
Correlation of 1y1yf rates in the euro area and the US
FIGURE 2
Importance of each factor (beta * standard deviation)
0.5
%
100%
0.4
80%
0.3
60%
40%
0.2
20%
0.1
0%
-20%
-40%
-60%
13-Jun
-0.1
WTI
1-Jul
19-Jul
6-Aug
24-Aug
11-Sep
MSCI Relative 10Y

World equities spread
Correlation of EA and US 1y1yf

26 September 2013
1Y
spread
3M
LIBOR
spread
3M
LIBOR
spread
(level)

recently) and signs of an improved outlook in the euro area, which have led to a fresh influx
of foreign capital flows. These add to other inflows into the euro area such as from euro
area banks disposing of foreign assets, as well as investors unwinding/hedging EM risk in
the tapering-related EM asset sell-off in summer 2013.
We had argued that the imposition of forward guidance regimes should be negative for the EUR
to the extent that the frameworks are able to control front-end rates. The ECBs inability to
achieve this is striking, as Figure 1 shows, with correlations between euro area and US rates
recoupling only a month after the announcement at the July meeting. Although the euro areas
emergence from recession may have something to do with the steepening in EUR rates, the
lions share has clearly been driven by the backup in US rates (correlations are 80-90%).
The EUR has been particularly sensitive to these developments: the EURs beta to 1y rate
spreads is the strongest driver per our FFV model (Figure 2), and the movement in relative
interest rates contributes nearly two-thirds of the EURs rally since July (Figure 3). What is
striking is that other factors such as relative equity returns (which capture improved euro
area growth prospects and sentiment versus the US) have not contributed as much to the
EURs stability (about 20% of its move), even though European equities have moderately
outperformed those in the US over the past three months.
However, there is some evidence to suggest that investor flows into the euro area has
picked up recently after years of being underweight the region. Flows into Europe ex-UK
show a noticeable pickup from early July onwards. Given our overweight view on European
equities (Global Outlook, 26 Sep 2013), we expect these flows to provide some additional
support for the currency.
Further, BIS data show that euro area banks continued to sell assets outside of the region into
Q1 13. Cross-border lending by euro area banks has dropped $105bn since the end of Q3 13.
The largest declines were against developed market countries, with lending into the G10 (exeuro area) falling about $147bn. Inasmuch as these loans are FX hedged, we would expect a
disposal of assets to generate an FX flow back into the euro area, adding to the EURs resilience.
Finally, the EUR/USD may have received additional support from the unwind of EM carry
positions. We were expecting the USD, JPY and CHF to be almost exclusively the currency
beneficiaries of the EM carry unwind (see the March 2013 Global FX Quarterly), but were
surprised by the anecdotal evidence suggesting quite a bit of these EM positions were
funded in EUR.
FIGURE 3
Breakdown of EUR/USD moves using our FFV model since
July 2013
%
8
FIGURE 4
Equity mutual fund flows into each country/region, 2013
(mm, cumulative)
3m LIBOR sprd
d(3m LIBOR sprd)
14000
d(1Y-3m sprd)
d(10Y-1Y sprd)
12000
dlog(rel equity returns)
dlog(MSCI world)
10000
dlog(WTI)
8000
6000
4000
2000
0
-2000
-4000
-6000
Jan-13
0
Fitted
26 September 2013
Actual
Mar-13
Europe
May-13
Jul-13
Europe ex-UK
Source: EPFR, Haver Analytics, Barclays Research
US-EA cyclical divergence

On the cyclical outlook, we believe diverging trends in the US versus EU will re-emerge as
2014 begins. There are a variety of reasons to be positive on underlying US growth. We
expect the drag from the spending cuts/sequestration to lessen into 2014. At the same
time, the wealth effects generated from higher financial assets and housing prices should
continue to bolster consumer spending; we estimate that higher prices on financial assets
and houses will generate 1% more consumption growth in 2014, offsetting the drag from
the fiscal headwinds. On the investment side, cleaner balance sheets and improved
profitability in the corporate sector, aided by loose credit conditions, are likely to spur credit
growth and investment. In the euro area, tight credit conditions, deleveraging and banking
sector issues are likely to restrain growth. The credit crunch in the periphery has continued
(Figure 5). The upcoming asset quality review ahead of the first stage of the banking union
is a risky exercise that may increase the credit issues of the periphery, implying downside
risks to growth. With full employment in the euro area still a far-off prospect (NAIRU
estimates are about 8%, compared with a prevailing unemployment rate of north of 12%),
monetary policy in the euro area will very likely remain far looser for longer than in the US.
Over the medium term, we expect this divergence in US and euro area growth to persist and
drive the relative monetary policy outlook. For the Fed, we expect tapering to begin in
December 2013, though that is likely to have a limited effect on EUR/USD, given its
sensitivity to the short end of the yield curve rather than the long end (on which QE has a
bigger effect). However, into 2014, we expect the stronger underlying trend to the US
economy to give the Fed some comfort in allowing the market to price in higher rates. And
after the September surprise from the Fed, the next policy surprise over the coming three
months may indeed arrive from the ECB.
ECB to respond
We expect the ECB to find it tough to control EUR rates beyond the front end of the money
market curve as data in the euro area improve faster than market expectations. However,
we do expect the ECB to regain control of the very front end through the unveiling of
another VLTRO program in Q4 13. This would address any liquidity pressures (ie, as the
liquidity surplus falls below EUR200bn) and prevent EONIA moving up too sharply inside the
corridor. At the September press conference, ECB President Draghi included a paragraph on
liquidity conditions for the first time, and while stating the current level of excess liquidity
(c.EUR220bn) was adequate, the ECB will act to offset any future declines that affect the
FIGURE 5
Continued signs of a credit crunch
16
FIGURE 6
1y1y Eonia rates to stay capped
1.6
% y/y
14
12
1.50
1.45
1.2
10
8
1.40
0.8
1.35
0.4
1.30
2
0
0.0
1.25
-2
92
94
96
M3
98
00
M1
02
04
06
08
10
12
Loans to private sector
-0.4
Sep-10
Sep-11
1y1yf Rate differential
26 September 2013
1.20
Sep-13
Sep-12
EURUSD
10

EONIA fixing. Additionally, it would smooth the exit from the previous LTROs, so that there
is no jump in rates after the previous ones expire, and would help (even if only on the
margin) to unlock lending to SMEs. Since we expect any new LTRO to be tailored towards
periphery SMEs, however, this may limit the scale of the liquidity injection, something
whose necessity is arguably reduced as the recovery in the euro area gains traction.
We expect the market to take EUR150-250bn of new liquidity in a new long-term program
(beyond the expiry of the current 3y LTRO in February 2015). The amounts could be larger if
the overall risk environment does not deteriorate and/or the terms are made extremely
attractive. A fixed-rate, long-dated program would likely be taken as a very dovish policy shift
by the market and help the ECB gain more traction with its FRG. Our rate strategists expect a
VLTRO announcement along the lines described above to push 1y1yf EONIAs to decline to
10-20bp (from approximately 35bp). All else equal (assuming no change to US rates and
broader risk appetite), it would imply EUR/USD could depreciate 3-4%, using the sensitivities
in our FFV model. We acknowledge this by pushing our 3m forecast down to 1.32.
Keep on the radar

After a relatively calm (in policy terms) summer, the coming quarter is likely to bring several
key policy issues back to the table. Our economists have highlighted (see Euro Area Focus:
Busy Schedule for Finance Ministers) the large degree of uncertainty over the upcoming
asset quality review, details of which will be revealed by mid-October. While conditions for
European banks have improved significantly in the past year, it is not known how potential
capital shortages will be tackled. Policy discussions on the issue may also offer a source of
market volatility since any disagreements would delay subsequent stages of
implementation of the banking union, increasing fragmentation and worsening prevailing
financial conditions. These present downside risks to the EUR since it would invite
aggressive monetary support from the ECB.
Second, troika-programme countries are reaching important deadlines. While significant
progress has been made in Ireland (indeed, we expect the country to regain market access),
the environment for Portugal is more challenging. Negotiations on the current program are
likely to begin in November, and our economists believe that another program will be
necessary for Portugal, which is likely to reignite the PSI debate, given the hostility towards
FIGURE 7
2s10s spreads in the periphery have stabilised after periods
of stress in the past three years
400
1.7
350
1.6
300
3
2
-20000
1.5
250
200
1.4
150
1.3
100
1.2
50
1
-40000
-60000
-1
-2
-80000
1.1
1.0
-50
-100
Jan-09
FIGURE 8
Swiss banks total CHF foreign assets minus liabilities (LHS,
CHF mn) versus average Spanish and Italian deposit growth
(y/y, RHS)
0.9
Jan-10
Italy
26 September 2013
Jan-11
Spain
Jan-12
Jan-13
EURUSD
-3
-100000
-120000
Dec-11
-4
-5
Apr-12
CHF A-L
Aug-12
Dec-12
Apr-13
Spain/Italy y/y deposit growth
Source: SNB, Haver Analytics, Barclays Research
11

further public sector debt relief in parts of northern Europe (see Portugal: More funding and
debt relief needed). Program reviews are also due to be discussed in Greece and Cyprus
over the coming quarter and could pose downside risks to EUR/USD in the near term.
Third, the risk of political uncertainty continues to linger in the euro area, most notably in
Italy. The recent decision by the Italian Senate to strip former PM Berlusconi of his
parliamentary immunity against prosecution increases the chances for his party to
withdraw support from the government, thereby threatening political stability.
For the EUR, the risk premium associated with negative tail events has slowly been priced
out, given the improvement in financial conditions and reduction in fragmentation (Figure 7).
Accordingly, the spill-over of local risk events into other bond markets and FX has been
increasingly small. Any one of the above events may increase the need for the market to
buy downside protection to the EUR (higher vol) and/or sell the EUR.
We remain medium-term bearish CHF

In a context of the Feds postponement of tightening, the CHF should underperform as risk
and carry trades are tactically re-established over the quarter. USD/CHF, however, is
unlikely to move higher in the near term, given its sensitivity to moves in front-end US rates.
We keep our long USD/CHF position, however, since, at best, EUR/USD will be rangebound
in the near term and followed by subsequent depreciation. For the CHF, we see a variety of
reasons to remain bearish.
With regards to domestic policy, while the SNB now anticipates somewhat higher inflation
in 2014, they note there are no signs of inflation risks, and the cap remains the prime policy
tool. The improvement in recent core data has been relatively sharp, but while this has
come hand in hand with a strengthening CHF, we continue to believe that the principal
drivers of the franc are external in nature.
There remains significant scope for unwinds of legacy long CHF positions, primarily those
held on deposit in the Swiss banking system. While this has started to gain traction (Figure 8),
the scale of the flows post-crisis suggests that in the absence of any major global risk
aversion (such as an escalation in the events outlined above), the steady unwind of deposits
should continue. We also view the gradual reduction in fragmentation across the
Eurosystem as a necessary condition for deposit unwinds from Switzerland, and there is
growing evidence that this is happening: with the exception of Cyprus, Eurosystem deposit
flows have moved back towards the periphery over the past 12 months (Figure 8).
Given the commitment to the floor and the scope for further unwinds of deposit flows, we
view the risks of the CHF trade as asymmetric over the medium term and recommend using
it as a funding currency. There is good reward potential in initiating long EUR/CHF (or CHF
funded selective carry) in the near term (1m). Further, we would position for this in spot FX
rather than options, since the move higher is likely to be relatively gradual and there is an
obvious location for a stop-loss (below the 1.20 floor). Accordingly, we go long EUR/CHF at
1.23050 (target: 1.2600; stop-loss: 1.1980).
26 September 2013
12
THEME: EM
Square carry shorts until tapering

We recommend taking profits on our year-to-date short EM carry strategy. We favour an
overall carry-neutral stance on EM currencies and recommend squaring our
underweight carry positions (BRL, TRY, INR, and IDR). We like long CNY, MYR, and PLN
positions ahead of the rebound in manufacturing activity. We remain long RUB, PHP,
RON, and ILS. Our preference for short ZAR and neutral MXN positions has not changed.
Koon Chow
+44 (0)20 7773 7572
koon.chow@barclays.com
Sebastin Brown
+1 212 412 6721
The quarter of a trillion USD of assets the Fed is likely to purchase before revising its current
policies should prop up demand for EM assets. These capital inflows are unlikely to fully
offset the exodus of funds from EM that has taken place this last quarter (Figure 1).
However, we do expect these investments to provide some much-needed breathing room
for EM policymakers, many of whom face challenging macro backdrops that include
funding pressures, dwindling global and domestic growth, inflationary pressures, declining
reserves, and political instability.
sebastian.brown@barclays.com
Against a backdrop of muted risk aversion and relatively attractive valuations (Figure 2), we
believe markets will price the different realities among EMs. We favour currencies of
economies likely to gain from the early signs of a synchronized resuscitation of developed
market economic activity and from Chinas apparent stabilization. Our preferred strategy is
to take profits on our short carry trades and to then combine long and short positions
within EM FX, aiming for an overall carry-neutral exposure to the asset class.
Policies and credibility: No longer short BRL and INR, still neutral on MXN
Mexicos structural reforms are still appealing and likely to deliver improved growth and a
stronger currency. However, the loss of cyclical momentum, which is likely to translate into
easier monetary policy and a worrisome erosion of the governments political capital in
Mexico, leads us to prefer a neutral stance on the peso ahead of crucial votes in Congress
regarding the energy reform.
Emerging market economies running significant current account deficits have also
experienced an upwards adjustment of their currencies carry (Figure 3). The volatility
dampening associated both with more supportive global risk tolerance and effective albeit
FIGURE 1
QEs survival will not fully reverse the outflows from EM
10
$bn
3.2
3.0
2.8
2.6
2.4
2.2
2.0
-2
1.8
-4
1.6
FIGURE 2
but it is likely to be supportive of under-valued currencies
30%
20%
BEER
valuation
-10%
1.4
-8
1.2
-30%
1.0
-40%
-20%
Dec-12
Local govt. bonds

26 September 2013
Mar-13
Equities
Jun-13
Aug-13
PLN
TWD
INR
-20%
-6
-10
Sep-12
TRY
10%
0%
RUB
HUF
CZK
BRL
RON
ILS
PHP
CNY
THB
CLPIDR
MXN
MYR
KRW
ZAR
-10%
UST 10yr yield, RHS
0%
10%
20%
30%
REER (current level / 10y average)
13

not always efficient policymaking pushes the risk-adjusted carry returns of both the BRL
and the INR to levels we consider attractive. Note, however, that relative to a year ago, longterm risk premia seem low across the major EM currencies other than the BRL (Figure 4).
In Brazil, the aggressive USD60bn intervention is likely to keep BRL volatility contained.
While we still expect a weaker BRL for structural reasons, the real could remain rangebound
in the short run. In the absence of large price movements, we recommend investors not
hedge their exposure to the BRL given the currencys 8% 3m FX-implied yield.
Similarly, the RBIs credibility has improved. Furthermore, its recent decision to hike the
official repo rate while lowering the MSF to provide liquidity leads us to believe that
controlling inflation might not have excessive costs in terms of growth. Likely reforms to the
local bond market and the implementation of measures to encourage capital repatriation
suggest a more neutral INR stance is warranted to avoid missing the 12% yield implied by
3-month forwards.
When sentiment is not enough: Cautious TRY and IDR and stay short ZAR
Despite the temporary rehabilitation of some high-yielding currencies, we believe there
are structural weaknesses in the countries that have experienced credit-driven economic
growth over the past five years (Figure 5). And while an intervention of USD60bn can
temporarily blur the structural weaknesses of Brazils economy and their effect on the BRL,
there is no such shield for the IDR and the TRY. Policymakers in Turkey and Indonesia will
continue to use the exchange rate as a policy instrument as currency-mismatched balance
sheets in the government and private sector turn any sell-off into an extremely costly event.
Thus, while we remain neutral, we recommend selling TRY and IDR on rallies.
A slightly more constructive global context is not supportive enough to expect anything
other than further depreciation of the ZAR. The ZARs well-known structural woes, external
funding needs, and declining activity, along with increasing inflationary pressures, shape
our very pessimistic view on the ZAR.
Upcoming elections in Indonesia, Turkey, and South Africa during 2014 are yet another
reason to be cautious about exposure to these currencies. To highlight the difference
between EM economies facing structural bottlenecks and those pushing for structural
improvements, as well as the effect of these diverging paths on the value of their currencies,
we reiterate our recommendation of being long a basket of MXN and PHP funded by a short
position in a basket of TRY and ZAR.
INR
BRL
TRY
RUB
CLP
ZAR
IDR
RON
MXN
HUF
CNY
PLN
MYR
KRW
THB
ILS
SGD
CZK
0.0
Last
26 September 2013
FX 10y real premium
SA
2.0
Israel
4.0
Korea
6.0
Mexico
8.0
350
300
250
200
150
100
50
0
-50
-100
-150
Turkey
10.0
Bp
Thailand
12.0
3m FX implied yields (last, 25 percentile and 75

percentile over last 1y)
Poland
FIGURE 4
but long-term real premia is low, except in Brazil*
Brazil
FIGURE 3
Attractive risk-adjusted carry of some CA-deficit currencies
FX 10y real premium, 1y ago
Note: * EM real yields US real yields EM CDS spreads. Source: Barclays Research
14
Beneficiaries of a synchronized recovery: Long CNY, MYR, and PLN

While a timid yet globally-synchronized rebound of manufacturing is not enough for the
ZAR, we believe its effects on the Chinese, Malaysian, and Polish economies could be
significant. Leading indicators point to a growth pickup in these economies, which should
lead an appreciation of their currencies, especially given these economies relatively low
vulnerability to a sudden spike of global interest rates.
To express our views on the CNY, we recommend being short AUD/CNH spot (ref. 5.72,
target: 5.40, stop: 5.88). In addition to Malaysias improving growth outlook, we think the
MYR has sold off excessively over the past two months and recommend selling SGD/MYR
1m NDF (1m fwd ref. 2.5680, target: 2.50, stop: 2.60). Finally, we reiterate our
recommendation to remain long PLN/short EUR.
Idiosyncratic longs: RUB, ILS, PHP, and RON

The relatively low vulnerability of these currencies to external funding pressures and
favourable growth outlooks allow us to capitalize on supportive idiosyncratic factors across
these countries (Figure 6).
The RUB offers a relatively high carry, and the spot is supported by improving prospects for
oil prices. We recommend a long RUB position funded by a basket of EUR and USD.
From a more structural standpoint, we still like the PHP and think that after the recent selloff, it offers significant room for appreciation due to its reforms. We look for a rebound of the
PHP and like selling the USD/PHP 1m NDF (1m fwd ref. 43.26, target: 42.50, stop: 43.65).
The RON is also attractive due ongoing reforms in Romania and its exposure to rebounding
activity in Europe, so we recommend being short EUR/RON. Finally, we like the ILS because
policymakers in Israel have given up on depreciating the shekel and only hope for managed
appreciation, so we also recommend a long ILS position funded in EUR.
FIGURE 5
Credit-driven growth economies face currency pressures
Brazil
Indonesia
Ukraine
Ghana
Change in domestic credit since 2007 (% GDP)

Source: Haver Analytics, Barclays Research
26 September 2013
Government
BRL
25
COP
15
PHP
MYR
MXN
-5
40
20
-30
-15
60
IDR
Hungary
80
RUB
-20
Nigeria
100
THB
-10
HUF, PLN, TRY:

Cannot afford
sustained
depreciation
ZAR
Poland Malaysia
Mexico
Philippines India
Chile
Thailand
Romania Peru Russia
Korea
Colombia Taiwan
Venezuela
CLP
S. Africa
120
Serbia
TRY
10
External
debt % GDP
140
PLN
20
Turkey
HUF
Change in banking system's LTD ratio
30
FIGURE 6
Who can survive higher global interest rates?
Private sector
15
THEME: CNY, AUD, NZD
Local matters
Nick Verdi
+65 6308 3093
nick.verdi@barclays.com
Hamish Pepper
+65 6308 2220
hamish.pepper@barclays.com
Jian Chang
Recent stronger-than-expected China data have overcome hard landing concerns,

supporting CNY outperformance relative to its regional peers. Although we expect a
weaker growth trajectory in 2014, we think the PBoC will continue to use currency
appreciation, albeit at a slower pace than this year, as a rebalancing tool. For the AUD,
weak domestic data and the RBAs aversion to currency strength are likely to cap gains
in the near term, offsetting a further pickup in Chinese activity and potential USD
weakness into year-end. In 2014, slowing China growth, a stronger USD and ongoing
weak Australian domestic activity will see AUD/USD depreciate to 0.83 in 12 months.
China hard landing fears subside; rebalancing-led slowdown in 2014
+852 2903 2654

jian.chang@barclays.com
Recent economic data for China have confounded expectations of a hard landing that were
ubiquitous three months ago. Market sentiment gauged by the Shanghai composite index
and copper prices has been recovering gradually from its late-June trough at the height of
the interbank liquidity squeeze (Figure 1). The PBoCs hawkish stance and the perceived
willingness of the new government to avoid policy stimulus while deleveraging the
economy fuelled the worst hard-landing fears for China since 2011.
Hard landing concerns have

receded, with economic
momentum likely to have
improved further in Q3
The trigger for a turn in market sentiment was hard economic data and began with the official
manufacturing PMI unexpectedly moving into expansionary territory in July. More recently, the
acceleration in industrial production growth to 10.1% y/y in July-August, from 9.1% in Q2,
was significant, signalling an improvement in Q2s 7.5% y/y growth rate to 7.7% in Q3. As
such, we recently fine-tuned our 2013 growth forecast to 7.6% from 7.5%. However, the
recent pickup in economic activity reflects the traditional drivers of Chinese GDP growth and is
being led by infrastructure investment, similar to the temporary rebound in Q4 12.
While we expect economic growth to accelerate in Q3, we forecast a slowing into year-end
and recently lowered our 2014 GDP growth forecast to 7.1% y/y from 7.4%, as rebalancing
increasingly takes hold (see China: The new norm No pain, no gain, 18 September 2013).
The Third Plenary Session of the 18th Central Committee in November will represent a
major marker on how the government intends to rebalance the economy away from fixed
FIGURE 1
Measures of China sentiment have improved recently
Index
USD/MT
Shanghai composite (index)
2,500
25 July - China
announces mini
stimulus
package
2,300
2,200
2,100
8300
7800
7300
2,000
1,900
6800
1 Aug - Upside PMI surprise

begins period of better China data
1,800
Jan-13
Mar-13
May-13
Source: Bloomberg, Barclays Research
26 September 2013
Jul-13
Japan Korea China

(1990) (1996) (2009)
8800
Copper (USD/tonne, RHS)
2,400
FIGURE 2
Real GDP growth has tended to slow post-rebalancing
during past episodes
Avg. ann. GDP growth

10y pre- Cum. chg. in fixed capital
rebalancing formation (%GDP)
Cum. chg. in consumption
(%GDP)
Avg. ann. GDP growth
10y post- Cum. chg. in fixed capital
rebalancing formation (%GDP)
Cum. chg. in consumption
(%GDP)
4.6
8.8
10.3
2.8
10.2
13.4
-5.1
-8.0
-7.7
1.1
2.9
9.1*
-3.5
-6.1
3.1*
4.6
2.3
2.2*
6300
Sep-13
Note: *China data are for the period since 2009. Source: WDI, Barclays Research
16

investment and exports towards private consumption. Some of the fundamental challenges
facing the Chinese economy industrial sector overcapacity, a latent property bubble,
financial risks and lower potential growth remain unaddressed. However, it is becoming
increasingly clear that the government is willing to tolerate slower growth to address these
issues. Indeed, on 3 September, President Xi said, We would rather bring down the growth
rate to a certain extent in order to solve the fundamental problems hindering our economic
development in the long run.
The rebalancing experience in
Japan and Korea points to
slower GDP growth
Chinas rebalancing process is underway, but is in the early stages. Although consumptions
share of GDP has increased, it has not yet led to a meaningful decrease in investment.
Historical parallels including Japan and Korea which faced rebalancing, albeit as a result of
financial crises support our view that GDP growth slows next year and beyond (Figure 2;
see also FX Mid-quarter Update: How does China matter for FX, 15 August 2013). However,
if the economy slows more sharply than we expect in 2014, the authorities willingness to
provide further stimulus at the expense of rebalancing will be tested. An important lesson this
year is the governments efforts to support the economy whenever hard landing fears
intensified, suggesting that USD/CNY volatility will remain subdued.
Portfolio outflows have slowed
For now, the upside surprise in Chinas growth momentum has seen a decline in portfolio
outflows, to about USD32bn in July and August, respectively, from USD48bn in June. In
addition, a pickup in PBoC FX purchases in August suggests CNY appreciation pressures are
building (Figure 3). Reflecting this, in the recent EM FX sell-off, USD/CNY has remained
stable, appreciating almost 4% since 1 May 2013 on a nominal effective exchange rate basis
and outperforming its EM counterparts (Figure 4).
Market sentiment on China will likely continue to be supported through November, in
response to the improving economic momentum that we expect to be reflected in the Q3
data. That suggests USD/CNY will trend lower in the coming weeks. After that, we expect
USD/CNY to continue to move lower as the Chinese authorities use a stronger currency as a
rebalancing tool. However, 2014 will be framed by a stronger USD environment, in our view,
suggesting that the pace of CNY will slow. Furthermore, the CNY has appreciated
significantly this year and on a real effective basis is more than two standard deviations
above its 2010-13 average.
FIGURE 3
Recent portfolio outflows are likely to turn around on
improving economic data
USD bn
120
100
FIGURE 4
CNY outperformed its EM counterparts in the recent selloff
NEER
Index
108
Estimated portfolio capital inflow

Change in PBoC FX purchase
CNY
EM Asia (ex China and India)
EEMEA
LatAm
80
103
60
40
20
98
0
-20
93
-40
-60
-80
Aug-08
Aug-09
Source: CEIC, Barclays Research
26 September 2013
Aug-10
Aug-11
Aug-12
Aug-13
88
May-13
Jun-13
Jul-13
Aug-13
Sep-13
Source: Barclays Live
17
AUD: Conflicting forces give way to weakness in 2014

AUD domestic concerns and
slower China growth point to
AUD/USD downside
An improving China growth outlook has seen AUD/USD rally 5.2% through September,
following a 14% decline during May-August. But in the context of a stronger USD and a fairly
weak outlook for Australian domestic activity, we maintain our view of AUD/USD depreciation
over the coming year. We forecast GDP growth will decline to 2.1% y/y in 2014 from 2.5% this
year. While there are concerns about strong growth in housing finance recently, consumer
spending remains subdued, and last years pickup in non-mining investment has been
unwound. As such, growth in overall bank lending remains low. The labour market also
remains weak, and the unemployment rate has continued to move higher in recent months. In
addition, recent declines in Australian exports to China are concerning (Figure 5), and our
forecasts for Australias commodity prices are fairly mixed (Figure 6). RBA forecasts imply an 810% drop in Australias terms of trade over the next year or so. However, net exports are likely
to provide a partial offset to weaker growth, as previous mining sector investment comes online
(allowing a pickup in mining exports) and mining-related capital imports decline.
The RBA is uncomfortable

with AUD strength
Consistent with a weak domestic economic outlook, the RBAs low tolerance for a stronger
currency is an AUD negative, in our view. Concerns about a rapidly recovering housing market
indicate that the central bank is keen to achieve looser financial conditions through a weaker
exchange rate, rather than adding to the 225bp reduction in the cash rate already administered
during this cycle. The RBA would also welcome further AUD weakness to help the economy
rebalance away from resources investment toward other sources of demand, noting in the
minutes of its 3 September policy meeting: Some further decline in the exchange rate would
be helpful in achieving such an outcome. However, if the AUD appreciates further, thereby
tightening monetary conditions, we think the likelihood of a rate cut increases, as the central
bank would likely become increasingly concerned about the downside risks to the non-mining
sector. This factor will limit AUD gains from here, in our view.
The effect of a weak domestic outlook and the RBAs aversion to a stronger currency is
likely to be mostly offset by a pickup in Chinese economic activity and some USD weakness
in the context of Fed tapering being off the agenda until December. This combination will
see AUD/USD broadly flat at a one-month horizon, in our view.
However, we expect this sell-off to become more pronounced towards the end of this year
and through 2014, driven by a stronger USD environment, continued weakness in
Australian economic conditions and slowing Chinese economic activity. We continue to
FIGURE 5
Chinese imports from Australia have declined recently
FIGURE 6
A mixed outlook for Australias commodity prices
10%
Chinese imports from Australia, 3m rolling USD bn

RBA commodity price index (USD, RHS)
28
120
25
110
22
100
19
90
16
80
13
70
10
Jan-10
60
Jan-11
Source: Bloomberg, Barclays Research
26 September 2013
Jan-12
Jan-13
5%
Q2
Q3f
Q4f
2014f
0%
-5%
-10%
-15%
Gold (8%)
Crude oil (6%) Copper (5%)
Aluminium
(5%)
Note: Percentage in parentheses refer to commodity weight in the Reserve Bank

of Australias commodity price index. Source: Bloomberg, Barclays Research
18

think the AUD, as a high-yielding G10 currency, remains vulnerable to rising US interest
rates. Moreover, our analysis suggests the AUD is the most vulnerable to a China growth
surprise, encapsulating commodity and high-beta currency characteristics (see FX Midquarter Update: How does China matter for FX, 15 August 2013). Combined with stillsignificant overvaluation (AUD/USD is 12% overvalued based on our Behavioural
Equilibrium Exchange Rate model), we believe these factors will ultimately weigh on the
AUD; thus, we maintain our forecast for AUD/USD to reach 0.83 in 12 months.
Relative domestic factors to lead AUD/NZD lower

AUD/NZD downside in
prospect on relative
domestic outlooks
Further near-term improvement in Chinese economic activity bodes well for the NZD, in the
context of strong domestic growth and elevated terms of trade. AUD/NZD has declined
about 9% year to date, and we expect this to continue as economic outlooks and
commodity prices diverge further. The RBNZ expects increased consumption and the
reconstruction of Canterbury to drive GDP growth to 3.5% y/y in mid-2014, significantly
higher than our forecast for Australian GDP growth of 2.1% y/y in 2014. A pickup in export
demand from an improving global economy is also likely to contribute to economic activity.
Despite the recent strength in the NZD, export revenues are currently being protected by
high NZ commodity prices, which have increased almost 20% this year in world terms,
while Australias commodity prices are flat year to date.
However, market expectations for RBNZ rate hikes (of about 75bp over next 12 months) are
likely overdone in the context of inflation outcomes below the lower end of the RBNZs
1-3% inflation-targeting band and the recent announcement of macro-prudential measures
to cool the housing market. We do not expect the RBNZ to hike rates until Q2 14, in line
with RBNZ forecasts.
However, slowing Australian

and Chinese GDP growth
will likely weigh on NZD/USD
in 2014
Slowing Australian and Chinese economic growth in 2014, which together take almost 40%
of New Zealands exports, is likely to weigh on the NZD further ahead, in the context of
broad-based USD strength. As such we forecast NZD/USD to reach 75 cents in 12 months.
We do not think a rebalancing of Chinese economic activity away from investment towards
consumption will be an important driver of AUD/NZD. Despite New Zealands large
proportion of agricultural commodity exports relative to Australia, which suggests New
Zealand should benefit to a greater degree from the rebalancing of Chinese growth, we
recently found that the import content of investment and consumption goods in China is
not as large or dissimilar as markets tend to believe (see FX Mid-quarter Update: How does
China matter for FX, 15 August 2013).
Trade recommendation: short AUD/CNH

Short AUD/CNH spot (ref. 5.72, target: 5.40, stop: 5.88). Further AUD/USD appreciation is
unlikely, given weak domestic economic activity and the RBAs low tolerance for further
currency strength. However, we acknowledge the possibility of USD weakness in the
coming weeks as markets play out Septembers no taper Fed decision. As such, we prefer
to express AUD weakness versus CNH (a proxy for CNY spot), with improving Chinese
growth driving portfolio inflows near term, and CNH appreciation aiding economic
rebalancing further out.
26 September 2013
19
THEME: GBP
Fade the rally

Aroop Chatterjee
+1 212 412 5622
Chris Walker
+44 (0) 20 3555 5863
Against the backdrop of the delay in Fed tapering, stronger UK data and a disappointing
BoE forward guidance framework have boosted GBP recently. We think the good news is
largely priced and expect underlying headwinds to re-emerge, putting downward
pressure on GBP. BoE monetary policy is set to remain loose for far longer than Fed
policy, and GBP weakness related to a rebalancing of the UK economy away from
services/non-tradable sectors toward tradable sectors is as relevant today as in the
post-crisis period. We recommend buying a 6m GBP/USD put spread (1.60 (ATM) vs
1.55) to express our view of a gradual but persistent move lower.
Upside surprises for GBP in Q3

Circumstances were conducive to GBP strength in Q3, during which the currency was
second only to the NZD in terms of performance. Economic data in the UK consistently
surprised to the upside during much of Q3, with the market caught being too bearish on the
economic prospects (Figure 1). The UK recovery has been relatively broad-based, with
survey data suggesting a continuation of the improvements into Q4. The better news
implied that stretched GBP short positioning had to be covered (Figure 2).
Some of the bearishness toward GBP heading in to Q3 related to the announcement of the
MPCs forward guidance framework a tool for keeping interest rates low in a cyclical
recovery by focusing the market on the long-term issues of economic slack and structural
rebalancing. Yet reaction to the unveiling of the BoEs forward guidance suggests the MPC
may struggle to contain market enthusiasm about better cyclical data. The correlated GBP
appreciation and selloff in short rates (Figure 2) suggest that the market viewed the forward
guidance framework as quite soft, and the inclusion of relatively ambiguous knockouts (since
dubbed thresholds) has raised questions about the BoEs commitment to the framework.
Finally, GBP was expected to depreciate versus the USD as the Fed finally moved to end
asset purchases and, more important, allowed the market to price in more aggressive rate
hikes at the short end of the curve. Indeed, the Feds message of low for longer rates at
the September FOMC was yet another disappointment for short-GBP positions and, in our
view, more important than the decision to delay the tapering in asset purchases.
FIGURE 1
UK data have consistently surprised the market during Q3
DSI
FIGURE 2
Combined with steepening UK rates, this has put pressure on
bearish GBP positions
%
bp
0.25
0.30
25
0.20
0.20
20
0.15
2
1
0.10
0.05
0.00
-0.05
0.00
-1
-0.10
-3
-0.10
-0.15
Jan-13
0
-2
Mar-13
May-13
UK DSI (LHS)
26 September 2013
Jul-13
Sep-13
GBP NEER
15
0.10
10
5
0
-0.20
-5
-4
-0.30
-5
-0.40
Jan-13
-10
-15
Mar-13
May-13
Jul-13
GBP net long (% open interest, LHS)
Sep-13
UK 3m2y slope
Source: Bloomberg, CFTC, Barclays Research
20
Reasons to be bearish GBP in the medium term

BoE monetary policy is set to remain loose for far longer than Fed policy, continuing to
weigh on the currency. UK rates continue to price tighter policy than the BoE and our
economists expect. Short sterling futures currently price the first hike around March
2015, more than 12 months before our economists expect action (August 2016). While
this premium in the curve may be partly justified by the improvements in cyclical data, it
is not in line with levels the MPC sees as consistent with the longer-term outlooks for
growth and inflation. The September FOMC meeting serves as a warning to the market
that central banks ultimately control policy and retain the power to move rates where
they see fit. We expect the MPC to bolster its forward guidance framework, especially if
UK economic data soften.
We do not expect much follow-through in USD weakness against low-yielding currencies
like GBP from the September FOMC since the Feds low-for-longer message effectively
arrests the move in the short end of the yield curve instead of pushing it lower. The
underlying cyclical trend is still very positive in the US with consumption remaining strong,
investment picking up and labour market resilient. We expect the market to revisit the issue
of rate hikes once tapering is underway, leading to the long-awaited broad USD rally.
We expect GBP, like the EUR, to be stuck in a range in the near term as recent sources of
support are set to hold firm. Our 1m and 3m forecasts are 1.59 and 1.57; further out, we see
a gradual depreciation in the currency to 1.55 and 1.53 in 6m and 12m, respectively.
The longer-term divergence between the UK and the US is even more telling. The output
gap in the UK is only expected to narrow very slowly versus the US (Figure 3). Weak
productivity levels and an economy that has to rebalance away from services towards
tradable sectors will keep growth slower than trend, which is something that UK monetary
policy will have to accommodate by being dovish.
Is dovish monetary policy crucial for GBP weakness?

Although GBPs depreciation of more than 22% on a nominal effective exchange rate basis
since its peak in 2007 has coincided with aggressive monetary policy by the BoE, we do not
think monetary policy has been the sole driver of currency weakness. If monetary policy is
credible, long-term inflation expectations should be stable since central bank easing would
largely be endogenous ie, in response to deterioration in the real economy. As long as
prices adjust, any currency weakness in the short run would be temporary. However, when
long-term inflation expectations have risen and the currency has remained persistently
FIGURE 3
Output gaps in the US and UK
FIGURE 4
GBP/USD spot vs the level implied by monetary policy
expectations (RNFV)
2.30
% potential
GDP
6
2.10
1.90
1.70
0
-2
1.50
-4
1.30
-6
-8
2007
2009
2011
2013
US
Source: IMF WEO, Barclays Research
26 September 2013
2015
UK
2017
1.10
Jun-05
Jun-07
Jun-09
GBPUSD spot
Jun-11
Jun-13
GBPUSD RNFV
21

weak, it is possible that central bank easing was largely viewed as exogenous (see
Broadbent (2011) for a discussion of this). But can we pin down a fair value level for
GBP/USD that is consistent with the movement in inflation expectations?
In a risk-neutral world, with financial market equilibrium and purchasing power parity
holding over the long term, nominal GBP/USD should be such that an investor is indifferent
between investing in a long-term (10y) zero-coupon inflation linked bond in the UK (currency
unhedged) or in the US. We follow the work of Clarida (2012) to determine this so-called
risk-neutral fair value (RNFV) level for the currency the one that is largely determined by
relative long-term inflation expectations and interest rates (ie, monetary policy) Assuming UK
and US interest rates and inflation expectations in the US are constant, an increase in UK
inflation expectations would drive down real yields and imply a lower RNFV for GBP/USD.
Figure 4 shows the GBP/USD RNFV over time. It is clear that most of the decline in
GBP/USD in the early post-crisis years was not driven by monetary policy considerations.
The portion that is unexplained by monetary policy shifts could relate to: fundamentals that
affect the real value of the currency; or currency risk premia. We find that about 20% of the
changes in the deviation of spot from the RNFV (since the crisis) can be explained by
fundamentals that drive value of the currency over the medium term 2. The remainder are
driven by pure risk premia shifts ie, political/fiscal/financial risks.
We find that monetary policy has actually been a bigger driver of GBP/USD since the
beginning of 2013, with the GBP/USD RNFV declining as expectations of a more activist BoE
versus the Fed have grown and the backup in US real interest rates has far outstripped
those in the UK. The gap driven by fundamentals/risk premium has declined to the extent
that GBP/USD is not trading above its RNFV, implying either better fundamentals or lower
risk premium. The latter is not likely given the still-elevated levels of government debt and
disproportionately large financial sector compared with the size of the economy. What have
the developments been on fundamentals?
Rebalancing: Another reason for a weaker GBP

The importance of services, especially finance (contributing 92% of the 4.7% average
growth in GVA from 2000-09), has left the economy susceptible to financial sector shocks.
FIGURE 5
GVA for financial services, goods production and
construction (% total)
FIGURE 6
GVA breakdown by sector in 2012 (% total)
20
18
16
14
12
10
8
6
4
2
0
Total Goods Production

Construction
Distribution, Leisure
ICT
Finance and Insurance
Real Estate
03
04
05
06
07
08
09
10
11
Professional & support

services
Government services
12
Finance and Insurance

Total Goods Production
Construction
Other
These are relative productivity, terms of trade, net foreign assets and relative government consumption as specified
in our BEER model please see Currency valuation from a macro perspective, June 2011, for more details.
26 September 2013
22

Because these events coincided with a weak public sector balance sheet, the scope for
countercyclical fiscal policy was reduced. Healthy job creation without public sector
assistance requires the economy to rebalance away from finance into other sectors,
including tradable. The recent strength in GBP is, we think, an impediment to a muchneeded reallocation of resources.
The rebalancing process has not gone very far. For one, the UKs current account position
has remained roughly the same as it was pre-crisis. Digging deeper into the production
data, we find that total goods production (manufacturing and mining) has been in steady
decline since before the crisis. Despite the significant GBP depreciation following the crisis,
the goods production sectors share of total gross value added (GVA) has remained broadly
flat (Figure 5). The financial and insurance services share of GVA peaked in 2009 at 10%
and has since fallen by roughly 3pp. A 3pp GVA shift away from finance and insurance can
be seen on the margin as rebalancing, but is, at best, minor, in our view. In 2012, total
production of goods still contributes a relatively minor amount of UK output relative to the
dominant service sector (Figure 6).
What about forward-looking indicators? If the rebalancing process were proceeding well, we
would expect equity markets to price in higher value added/profitability in the tradable sector
versus the non-tradable sector. We gauge this by looking at the performance of the UK equity
market at the sectoral level 3. We characterise the various sectors on the basis of their relative
sensitivity to GBP movements (we regress weekly sector returns on the broad market and the
GBP NEER, using data from 2004-07; see the Appendix, Figure 9) and construct equalweighted quintile baskets. These baskets, based on the tradability of the sector, are shown in
Figure 7, with T5 the least tradable basket and T1 the most tradable. The significant
underperformance of T1 briefly in 2011 and, more recently, since 2012 is striking.
We ran regressions of the returns on the different sector quintile baskets on the level of the
currency (versus the RNFV) in the previous period, controlling for the currency return and
broad equity market return. Figure 8 shows that a higher level of GBP leads to
outperformance of the non-tradable sector baskets (T5 and T4) versus the tradable baskets
FIGURE 7
Cumulative price returns of equity sector baskets on the
basis of tradability (Jan 2009=100)
FIGURE 8
Regression of equity sector baskets on the basis of
tradability on market variables
Index
350
300
250
200
d (GBP)
d (FTSE)
GBP (t-1)
Const
T5
0.12
0.71***
2.62
0.22
T4
-0.13
0.75***
0.90
0.20
T2
-0.29***
0.83***
0.14
0.24
T1
-0.24*
1.32***
-0.89
-0.36
T5-T1
0.36**
-0.61***
3.51
0.57
150
100
50
Feb-09
Jan-10
T5
Dec-10
Nov-11
Sep-12
T2
T1
T4
Aug-13
Note: We regress weekly sector returns on the broad market and the GBP NEER,
using data from 2004-07 and construct equally weighted quintile baskets based
on the estimated coefficients on GBP. T5 and T1 represent non-tradable and
tradable sectors, respectively. Source: Bloomberg, Barclays Research
Note: We regress weekly returns of the different basket returns on GBP and FTSE
returns, as well as the GBP level versus the RNFV, in the past week.
*** significant at the 1% level; ** significant at the 5% level; * significant at the
10% level. Source: Barclays Research
We use sectoral data of the FTSE 350 index. We exclude sectors that are composed of fewer than three different
companies to avoid capturing stock-specific drivers. We exclude the financial sectors to minimize the importance of
the financial crisis and its aftermath.
26 September 2013
23

(T1 and T2). Its effect on the difference in performance between the extreme baskets (T5
and T1) has the right sign but the effect is not statistically significant. There appears to be
limited evidence that the low level of GBP has helped differentiate the performance of the
tradable versus the non-tradable sector.
There are structural reasons that may explain why the tradable sectors have not performed
as well over the medium term. These issues relate to wider questions of competitiveness
(which has been on a persistent decline), the nature of goods/services exported (priceinsensitive) and the high import content of exported goods (ie, a weaker GBP increases
import costs). This suggests that in order to achieve any successful rebalancing, GBP will
have to remain weaker for far longer.
Where do we go from here?

We believe current GBP levels are attractive for establishing a medium-term short. On the
one hand, we have argued that BoE monetary policy will remain loose for far longer than the
Fed, continuing to weigh on the currency. On the other, the real factors for GBP weakness
related to rebalancing the UK economy away from services/non-tradable sectors toward
tradable ones are as relevant today as they were in the post-crisis period.
We favour establishing medium-term downside positions in GBP/USD via a 6m put spread
with strikes at 1.60 and 1.55 at a cost of 1.05% of notional. Over the next three months, Fed
and BoE policy are unlikely to shift markedly. However, we expect the market to price in more
aggressive Fed rate hikes once tapering is announced (in December, we expect). UK economic
data have been unusually strong recently (as suggested by our data surprise index), and there
are signs that the market has become too optimistic about the UK outlook. A retrenchment of
market expectations for the UK would add further weight to the currency. Finally, the mediumterm structural negative from the rebalancing remains very much in place.
Appendix
FIGURE 9
Sensitivity of FTSE 350 sectors to changes in GBP NEER from 2004 to 2007 (we exclude financial services from our baskets
given their specific role in the crisis)
0.4
T1
0.2
T2
T3
T4
T5
0.0
-0.2
-0.4
-0.6
-0.8
Food consumption
General retail
Oil equipment
Gas
Telecommunications
Investment (Real est)
Chemicals
Household Goods
Media
Aerospace
Support Services
Leisure
Non-life Insurance
Pharmaceuticals
Electronic Equip
Financial Services
Tech Hardware
Beverages
Engineering
Banks
Software
Food Production
Industrial eng
Investment (Fins)
Mining
Construction
Oil & Gas
Industrial Metals
-1.0
26 September 2013
24
THEME: JPY
Grind higher, against gravity

Despite a surprise from the Fed, we continue to expect USD/JPY to grind higher, driven
by the relative growth and monetary policy outlooks between the US and Japan. The
pace of appreciation is likely modest given the Feds gradualism to policy normalization
and the stretched valuation of JPY. Political uncertainty poses downside risk in the near
term yet upside risk in the longer term.
Yuki Sakasai
+1 212 412 5652
yuki.sakasai@barclays.com
Shinichiro Kadota
+81 3 4530 5038
shinichiro.kadota@barclays.com
The Fed on hold, but effect expected to be limited

The Fed surprised the market by not announcing tapering this month. We do not expect it
to have much effect beyond the near term, however, given that the market is already pricing
in Feds renewed dovishness and our view that the US economy would keep growing at a
modest pace in H2 13 and beyond.
The recent event has only affected the timing of our economists call for the Fed, not the
direction: we still look for the monetary policy stance between the Fed and the BoJ to
diverge in 2014, with further easing in the BoJs pipeline (expected in April 2014). The low
correlation between 1y1y forward rate in the US and Japan suggests that the BoJs forward
guidance to keep the rate low for longer is perceived as credible by the market, which will
help to limit passive tightening of financial conditions in Japan (Figure 1). We also note that
due to the planned VAT hike in Japan, our economists expect US growth to again outpace
that of Japan in 2014 (we expect US growth of 2.3% in 2014, versus Japans 1.5%).
USD/JPY to grind higher

We maintain our medium-term USD/JPY bullish view and expect it to grind higher, driven by
the relative growth and monetary policy outlooks between the US and Japan. The pace of
USD/JPY appreciation is likely rather modest, given the Feds dovishness and the stretched
valuation for the JPY. While elevated from an historic perspective, USD/JPYs mis-valuation
tends to persist when the interest rate differential (not directly included in the long-run
equilibrium estimate) is wide (Figure 2). Given our view of a gradual widening in the rates
spread between the US and Japan for next 12 months, we think the valuation is unlikely to
cause a correction and rather would slow the pace of appreciation as headwinds.
FIGURE 1
US-Japan 1y1y forward rates correlation remains subdued
FIGURE 2
Mis-valuation tends to persist with wider rates differential
60
100%
5
JPY undervaluation
40
80%
60%
4
3
20
40%
20%
-20
0%
-20%
-40
Mar-95
-40%
-60%
Sep-12
Dec-12
EUR
Mar-13
GBP
Jun-13
JPY
Sep-13
CAD
Note: 30-day rolling correlation between 1y1y forward rate in the US and in each
country. Source: Bloomberg, Barclays Research
26 September 2013
0
JPY overvaluation
Mar-01
-1
Mar-07
Mar-13
USD/JPY mis-valuation from BEER (%, LHS)

+2 SD
-2 SD
US-JP 10Y yield spreads (%, RHS)
25
Political uncertainty poses downside risk

In the very near term, we think political uncertainty in the US and Japan poses downside risk
to our forecast. In the US, the debt-ceiling issue to be addressed by mid-October and
budget for next fiscal year starting on October 1 remain unsolved. While our baseline case
assumes an eventual resolution, there is a risk the negotiation between Democrats and
Republicans goes down to the wire yet again due to the political brinksmanship, causing a
short-term disruption in the market.
In Japan, PM Abe is likely to announce his decision on the VAT hike on October 1, and an
extraordinary Diet session is expected to be called around mid-October to discuss growth
strategy, such as a tax system overhaul, labor market liberalization and de-regulation of
restricted industry sector. PM Abe is widely expected to go ahead with the VAT hike as
planned, with some offsetting measures alleviating the direct effect of a VAT hike.
According to the Nikkei, the supplementary budget would be worth JPY5trn, which includes
a corporate tax reduction of JPY1.4trn in FY14 mainly due to eliminating the surtax for postearthquake reconstruction a year ahead of schedule, with further reductions from FY 2015
onward to be discussed in the future.
As we discussed in JPY: Japanese politics back in market focus, 29 August 2013, we expect
USD/JPY to trade along with equities initially in response to news on the policy front, given
foreign investor hedging activity in the Japanese equities market, which we suspect has
been amplifying the correlation between USD/JPY and Japanese equities (Figure 3). The
media reports suggest progress would be made on the tax front, which is likely to have
been priced by the market already, and no details have yet been provided on labor market
reforms. While our baseline case assumes PM Abe would make every effort to meet market
expectations, the risk of disappointment is something worth keeping in mind.
Structural reforms dictates long-term trend

Structural reforms in Japan have much more long-term implications to FX. Japans need to
boost the potential growth rate is due to a declining population. According to the BoJ, the
declining population was subtracting 0.2% from potential growth in the 2000s (our
estimate is currently 0.7%), and this drag is expected to become larger as the time goes ie,
-0.6% in 2010s, -0.8% in 2020s and -1.2% in 2030s. It has been long argued that given the
inertia in demographics, Japan must take swift action to increase labor force and improve
productivity key components of long-term potential growth.
FIGURE 3
Japanese equities worth attention in the near term
FIGURE 4
Competitiveness challenge significant for Japan exporters
100
80
60
Diff between
Japan/World
export
growth
Competitiveness
effect
Structural
effect
40
1990-1995
-0.8%
-3.2%
2.4%
20
1996-2001
-4.0%
-4.7%
0.7%
2002-2007
-3.8%
-4.2%
0.5%
2008-2012
-1.6%
-3.5%
2.0%
1990-2012
-2.6%
-3.9%
1.3%
0
-20
-40
-60
Jan-81
Jan-87
Jan-93
Jan-99
Jan-05
Jan-11
52-week rolling correlation between Nikkei 225 and USD/JPY

Source: EcoWin, Barclays Research
26 September 2013
Note: Average over the periods. Source: ComTrade, EcoWin, Barclays Research
26

Our economists think 1) a tax system overhaul (ie, higher VAT, lower corporate tax), 2)
labor market reform (more flexibility in hiring and wage setting), and 3) the Trans-Pacific
Partnership (TPP) are three key pillars of structural reforms. The government has yet to
provide details of its plans, and it is hard to quantify the effect at this stage, but at least we
can consider the channels through which structural reforms could be JPY-positive for FX in
the very long-run beyond the negative short-term effect as the economy rebalances.
1. Via growth: Higher productivity, investment boom and flexible labor market would put
upward pressure on wages and prices.
2. Via export competitiveness: Japan gaining export competitiveness will improve trade
balance and slow the pace of structural current account balance deterioration.
3. Via fiscal risk premium: Japan still benefits from its large net foreign asset position and
low foreign ownership of JGBs, but higher prices and trend growth will help stabilize
public debt dynamics, mitigating higher fiscal risk premium in the future.
Japan has been losing export shares in the global market since the 1990s. Using the
constant market share analysis (CMSA) framework, we find most of this loss can be
explained by Japanese exporters becoming less competitive, rather than changes in the size
of each product/geographical market in the world (Figure 4). While the loss in
competitiveness is partly driven by the rise of some emerging markets such as China and
Korea, domestic factors are also to blame. For instance, US competitiveness is showing
signs of stabilization while the downtrend in Japan remains intact (Figure 5), which could be
explained by energy costs (US shale gas versus the nuclear reactors shutdown in Japan).
Structural reforms will help Japan regain export competitiveness, and the resulting
improvement in trade balance would slow the structural deterioration in the current
account balance, which we think would fall into a structural deficit in 2017-18 (Figure 6).
The JPY-positive effect from the structural reforms could be amplified if inflation increases
because it would reduce the likelihood of further monetary easing and sharp increase in
fiscal risk premium. Our baseline case assumes USD/JPY to move gradually towards a level
suggested by Purchasing Power Parity (about 94.00) in the very long run, with above
mentioned reforms being addressed at least partially. Given the degree of challenges Japan
faces, however, the risk to our USD/JPY forecast appears to be tilted toward the upside in
the longer term, in our view.
FIGURE 5
Competitiveness challenge significant for Japan exporters
20%
0%
-20%
-40%
-60%
-80%
-100%
Jan-90
Jan-97
Jan-04
Jan-11
Cumulative competitiveness effect (Japan, LHS)

Cumulative competitiveness effect (US, LHS)
Source: ComTrade, Barclays Research
26 September 2013
FIGURE 6
Further loss of export competitiveness may accelerate
current account deterioration
(% of GDP)
16
14
12
10
8
6
4
2
0
-2
-4
-6
-8
-10
-12
-14
-16
70 75 80 85 90
Households
General govt
Current account
Simulated
95
00 05 10 15
Non-financials
Financials
20
(FY)
27
FX VIEWS FOR THE YEAR AHEAD

Currency
G10 views
USD
3m
15
6m
We believe the Fed decision to postpone tapering delays, but does not derail, our constructive USD outlook.
We expect these delays to add USD250bn to the Fed balance and, hence, expect the USD to trade sideways
with a downward bias in the near term. We now expect the Fed to start tapering in December and
complete asset purchases in June 2014 and the USD to regain upward momentum into year-end and
beyond as the policy normalization becomes a reality.
12m
10
Our baseline case assumes eventual resolution of US fiscal issues, but significant uncertainty remains and
the risk of negotiations lasting until the last minute and causing temporary disruption in the financial market
is worth attention.
AUD
GBP
JPY
EUR
EUR
3m
10
6m
Since the Fed has been more successful than the ECB in controlling the short end of the yield curve, relative
movement in short rates has supported EUR/USD. However, although we do not expect any aggressive
shifts in policy by the ECB, we expect it to cap any steepening in the rates curve and/or a decline in the
liquidity surplus. As such, we see EUR/USD stuck in a range initially, potentially weakening at the threemonth horizon as the ECB responds to the liquidity tightening with a new LTRO.
12m
5
0
-5
CHF
GBP
JPY
USD
-10
JPY
3m
10
6m
We still believe monetary policy divergence will favour the USD over the EUR in the medium term, though
the pace of depreciation is likely to be relatively slow as the US curve is allowed to steepen only gradually.
We expect a weakening trend to EUR/USD to persist with diverging medium-term prospects implying a
more aggressive ECB versus the Fed. There are euro area events that could pose downside risks to our
forecast profile such as package renegotiations in Portugal, Greece and Cyprus, as well as added political
uncertainty (Italy).
We continue to expect USD/JPY to rise gradually in the medium term, driven by the relative growth and
monetary policy outlook between the US and Japan. However, given the Feds decision not to taper in
September, we look for USD/JPY to rise more modestly than we expected before (i.e., 100 by year-end
versus our previous forecast of 103). We still expect the BoJ to ease further in April 2014 when it publishes
its semi-annual outlook report.
12m
5
0
Japan politics is worth attention as a risk factor in coming months, especially over tax decisions (consumption
tax hike and corporate tax cut), supplemental budget, and structural reforms. Disappointment on these fronts
would likely hurt investor sentiment and weigh on Japanese equities and USD/JPY in the short term.
-5
AUD
GBP
EUR
USD
-10
GBP
3m
15
6m
The markets reaction to the unveiling of the BoEs forward guidance suggests the MPC may struggle to
contain the markets enthusiasm about better cyclical data. The correlated GBP appreciation and selloff in
short rates suggest the market viewed the forward guidance framework as relatively soft and the inclusion
of relatively ambiguous knockouts (since dubbed as thresholds) has raised questions about the central
banks commitment to the framework.
12m
10
5
0
-5
CHF
JPY
EUR
USD
-10
CHF
3m
6m
In a context of the Feds postponement of tightening, the CHF should underperform as risk and carry trades
are tactically re-established over the quarter. USD/CHF,, however is unlikely to see the move higher we had
previously expected in the near term given its sensitivity to moves in front-end US rates. With regard to
domestic policy, while the SNB now anticipates somewhat higher inflation in 2014, it notes there are no
signs of inflation risks and the cap remains the prime policy tool.
12m
-5
-10
-15
GBP
JPY
EUR
-20
USD
Given our relatively bearish view on the UK labour market, we expect monetary policy from the BoE will remain
loose for far longer than the Fed and continue to weigh on the currency. UK rates continue to price tighter
policy than the BoE has told the market and than our economists expect. Short sterling futures currently price
the first hike around March 2015, over 12m before our economists expect action (August 2016). While this
premium in the curve may be partly justified by the improvements in cyclical data, it is inconsistent with the
levels the MPC sees as compatible with the longer-term outlook for growth and inflation.
Given the commitment to the floor and the scope for further unwinds of deposit flows, we view the risks of
the CHF trade as asymmetric over the medium term and like to use it as a funding currency. We would,
however, switch from long USD/CHF positions into long EUR/CHF or CHF funded selective-carry in the near
term, given our view of a relatively range-bound EUR/USD over the coming three months (which defines the
majority of the USD/CHF move).
Note: Charts represent expected return of each currency against major crosses based on our FX forecast. Spot reference as of 25 September 2013.
26 September 2013
28

Currency
G10 views
CAD
3m
15
6m
We remain constructive on the CAD, especially against other commodity currencies due to a less-stretched
valuation, resilient oil prices outlook, a gradual but steady recovery in the Canadian economy and a cyclical
outperformance of the US. Against the USD, we expect it to weaken modestly in the medium term as the
Fed normalizes its policy gradually. A dovish signal from the Fed is near-term positive for commodity
currencies, including CAD, but uncertainty over the US fiscal issues (i.e., continuing resolution and debtceiling) is likely to limit the scope for appreciation.
12m
10
5
0
AUD
JPY
EUR
USD
-5
The BoC is expected to remain firmly on hold until H2 2014 given the modest growth and benign inflation
outlook, while maintaining its guidance that the next move is likely to be a hike, rather than a cut, barring
significant negative shocks to the economy.
AUD
3m
6m
We expect AUD/USD to remain fairly range bound over the coming two months as a weaker USD and
further positive momentum in Chinese economic activity is offset by continued weakness in Australian
economic conditions and the RBAs low tolerance for currency strength. Further ahead, we expect the
AUD/USD to depreciate as the currency responds to the ongoing weakness of domestic activity, slowing
Chinese growth, and a stronger USD.
12m
-5
-10
NZD
JPY
EUR
USD
-15
NZD
3m
6m
Further near-term improvement in Chinese economic activity bodes well for the NZD, in the context of
strong domestic growth and elevated terms of trade. However, market expectations for RBNZ rate hikes (of
about 75bp over the next 12 months) are likely overdone in the context of inflation outcomes below the
lower end of the RBNZs 1-3% inflation-targeting band and the recent announcement of macro-prudential
measures to cool the housing market.
12m
0
-5
-10
AUD
JPY
EUR
USD
-15
SEK
3m
6m
Our analysis suggests the AUD is the most vulnerable to a China growth surprise, encapsulating commodity
and high-beta currency characteristics. Combined with still significant overvaluation (AUD/USD is 12%
overvalued based on our Behavioural Equilibrium Exchange Rate model), we believe these factors will
ultimately weigh on the AUD and maintain our forecast for AUD/USD to reach 0.83 in 12 months time.
We do not expect the RBNZ to hike rates until Q2 2014, in line with RBNZ forecasts. In addition, slowing
Australian and Chinese economic growth in 2014, which together take almost 40% of New Zealands
exports, is likely to weigh on the NZD further ahead, in the context of broad-based USD strength. As such,
we forecast NZD/USD to reach 75 cents in 12 months time.
The Riksbank (RB) remains caught between countering growing financial imbalances and undershooting
inflation. The removal of responsibility over financial imbalances from the RBs mandate (passed over to the
FSA) is likely to be gradual and, until more explicit guidance is provided, it will remain an implicit part of the
RBs reaction function; therefore, policy will remain tighter than the inflation outlook suggests.
12m
4
2
We expect no further cuts this year, however, and instead expect the SEK to trade constructively as a
function of the cyclical upturn in the global (and in particular) the eurozone growth cycle. We therefore
maintain our forecasted downward trajectory in EUR/SEK with the bulk of the SEK appreciation
concentrated beyond the 3m horizon.
0
-2
NOK
JPY
EUR
USD
-4
NOK
Norges Bank (NB) has reacted to the easing in deflationary pressures (which have partly been driven by the
selloff in the currency) by raising its repo rate path guidance. NB seems likely to be one of the first G10
central banks to hike its policy rate next year and domestic conditions are now better placed to warrant NOK
appreciation. However, given significant long NOK positions (particularly in the bond market) a repeat of the
global bond market volatility witnessed in June would likely see NOK underperform, and we expect this
(along with liquidity concerns) to outweigh domestic pull factors, as they have done in Q2.
SEK
12m
EUR
USD
6m
JPY
3m
8
6
4
2
0
-2
-4
-6
We maintain our downward sloping EUR/NOK forecast path in the long term but acknowledge the risks of a
repeat of the liquidity and bond-market driven selloff seen in June and August and see risks of a repeat over
the coming months.
26 September 2013
29

Currency
Major EM views
INR
3m
10
6m
As a high-yielding EM currency, the INR has been a key beneficiary of the recent delay in Fed tapering. Lower
US interest rates for longer, combined with recent initiatives to encourage portfolio inflows, are likely to
reduce concerns about the ability of India to finance its twin current account and fiscal deficits.
12m
That said, the RBIs recent decision to unexpectedly hike interest rates suggests any gains will be capped by
uncertainty regarding future RBI policy. Further ahead, we think weak growth, a lack of RBI stimulus and a
stronger USD will limit the scope for INR appreciation. We recently lowered our forecasts for FY 13-14 GDP
growth to 5.3% from 6% and now think RBI policy easing will be delayed until December.
6
4
2
GBP
JPY
EUR
USD
TWD
3m
6m
Continued momentum in Chinese economic activity is likely to support Taiwanese services exports and the
TWD in the near term. Further ahead, a strengthening USD and slowing Chinese economy in 2014 will likely
cap TWD appreciation.
12m
6
4
2
0
-2
CNY
JPY
EUR
USD
-4
CNY
3m
6m
Continued positive momentum in Chinese economic data, in the context of broad-based USD weakness, is
likely to support a return of portfolio inflows and further appreciation in the CNY this year. While we expect
Chinese growth to slow in 2014, we think Chinese policy makers will encourage continued CNY appreciation
consistent with Chinas medium-term FX liberalisation objectives, which are designed to create a more
efficient model for economic growth.
12m
6
4
However, the pace of CNY appreciation in 2014 will likely slow given a strengthening USD and significant
CNY appreciation to date. On a real effective basis, CNY is more than 2 standard deviations above its 200613 average.
TW
D
JPY
EUR
USD
KRW
3m
6m
We expect the KRW to benefit from a pickup in US economic activity, an increasingly supportive balance of
payments and improving economic growth. Strengthening domestic demand is likely to be underpinned by
a strong labour market and a pickup in electronic exports in response to strong growth in US equipment and
software investment.
12m
6
4
However, expected JPY weakness is likely to limit the degree of KRW appreciation through a perceived loss
of export competitiveness in third markets. Next year, a strengthening USD will also weigh on the KRW.
2
0
CNY
JPY
EUR
USD
-2
MYR
3m
10
6m
A likely return of foreign MGS investors has improved sentiment towards Malaysia in recent weeks and we
expect this to continue to support the MYR in the context of lower US interest rates. Further ahead, the MYR
is likely to be supported by Malaysias robust domestic growth, large current account surplus, and
manageable short-term external debt.
12m
8
6
Our economists forecast GDP growth of 4.8% y/y this year and 5.7% y/y in 2014. In addition, they forecast
Malaysias current account surplus to remain relatively large at 3.7 and 4.6% of GDP in 2013 and 2014,
respectively. As such, we forecast modest appreciation against the USD in 6 and 12 months.
4
2
SGD
JPY
EUR
USD
26 September 2013
30

Currency
Major EM views
SGD
3m
6m
The SGD is currently trading about 100bp above the mid-point of the +/- 2% trading band. Further SGD
appreciation is likely to be limited in the near term by downside economic growth risks and further ahead,
by a strengthening USD in 2014.
12m
6
4
2
0
-2
MYR
JPY
EUR
USD
-4
MXN
3m
10
6m
We still believe that the completion of the governments agenda of structural reforms in Mexico will
translate into a higher level of potential GDP growth and a stronger currency. And while the governments
political capital seems to have weakened, we still think Pea Nieto will be able to get most of the reforms
approved by making concessions to the opposition on the political reforms.
A bout of weak economic data triggered a 25bp cut in the policy rate. We expect Banxico to implement
another 25bp interest rate cut in its next meeting and for the economy to recover its dynamism only toward
the end of the year.
12m
8
6
4
2
CAD
JPY
EUR
USD
Given that aggregate uncertainty is likely to remain elevated in the near term and the less MXN-supportive
domestic environment, we expect the currency to continue exhibiting relatively elevated two-way volatility.
Because of the limited room for spot appreciation and the MXNs unattractive carry, we remain MXNneutral waiting for a better trading environment or a selloff to re-engage with long positions.
BRL
3m
6m
From a fundamental mid-term perspective, we continue to expect the BRL to weaken relative to the USD
given the countrys limited growth, investors negative sentiment, and a combination of monetary and fiscal
policy that is likely to trigger a sovereign credit downgrade early in 2014.
12m
However, the BCBs decision to implement a USD 60bn program of currency intervention will in all likelihood
contain the BRLs volatility and all but eliminate the risks of the real gaping downwards. Given Brazils very
attractive FX-implied yields we are no longer short the BRL but neutral and recommend that investors
holding BRL exposure not hedge their currency risk in the very short run.
-5
-10
AUD
JPY
EUR
USD
-15
RUB
3m
6m
We remain positive for RUB against the basket and other high yielding currencies. Russia scores well on the
external financing front with current account surplus and large FX reserves, and the relatively high carry
should keep the RUB well supported. The sluggish growth is likely to elicit some counter-cyclical macro
measures, but we do not believe this would be sufficient to weaken the RUB, particularly as oil prices remain
well supported by global supply factors and a likely lower-for-longer US monetary policy.
12m
4
2
0
-2
GBP
JPY
EUR
USD
-4
ILS
3m
12
6m
We are bullish the shekel over the medium term. Interventions have not succeeded in turning around the
currency, suggesting to us that the policy bias is to control the appreciation rather then turn the currency
around. The countrys widening current account surplus and strengthening net foreign assets position
mean a strong balance sheet will support the shekel, even when global financial conditions re-tighten. We
recommend being long ILS against the EUR.
12m
10
8
6
4
2
GBP
JPY
EUR
USD
26 September 2013
31

Currency
Major EM views
PLN
3m
6m
The PLN is one of our favored longs. The monetary easing cycle has likely reached an end, and the Polish
government is looking to take new fiscal steps to support investment in the country and have better access
to EU funds. This could mean stronger cross-border inflows, investment and higher growth (in 2014). Last
but not least, Polands widening current account surplus increases its resilience to volatility in EM flows.
12m
4
2
0
-2
CZK
JPY
EUR
USD
-4
ZAR
3m
6m
South Africas external financing needs surrounding the twin deficits and the deteriorating terms of trade on
relatively lower Chinese growth are the two major challenges for the ZAR, in our view. Although domestic labor
unrest has recently settled down, we note the risk of increasing political uncertainty going into next years
general elections. We also think that the monetary policy will not be in favor of the ZAR as the central bank is
unlikely to hike interest rates until late 2014 as inflation pass-through so far seems to be relatively low.
12m
0
-2
-4
GBP
JPY
EUR
USD
-6
HUF
3m
6m
We are neutral on the HUF. Although the current account surplus is widening, substantial deleveraging and
external debt repayment flows are putting downward pressures on reserves. The government is considering
new options to extricate households from their FX-linked loans, which is likely to lead outflows and
currency negative. That said, we expect NBH to try to keep the HUF stable against the EUR, at least until the
bailout program for FX mortgages is in place.
12m
0
-5
-10
PLN
JPY
EUR
USD
-15
TRY
3m
6m
We expect a drop in lira volatility along with broader EM FX trends; however, this may be met with a drop in
the liras carry but not spot appreciation. Higher external funding needs and the already-large stock of
external debt of the private sector (net FX exposure of the non-bank corporate sector) are the major
sources of pressure for the lira. Moreover, the central banks hesitance to hike rates to defend the lira and
instead its allowance of some depreciation to support growth puts additional downside pressure on the lira
as well.
12m
6
4
2
0
-2
GBP
JPY
EUR
USD
-4
CZK
3m
6m
We recommend staying short CZK in the coming months. The economic recovery in the Czech Republic
remains fragile, and while CE exports are likely to firm, they may not be strong enough to give GDP growth a
meaningful boost. Meanwhile, inflation is low and in early 2014 there is risk of zero inflation or deflation. We
think these factors increase the likelihood of FX intervention.
12m
2
0
-2
-4
PLN
JPY
EUR
USD
-6
26 September 2013
32
OPEN TRADES, AS OF 25 SEPTEMBER 2013

Original
Trade/date/macro views
Long EUR/CZK spot, 11/12/2012
Spot
reference
% of
notional
Mark to market
Expiry
25.26
Current
spot reference
Net profit
since
inception
25.83
+2.25%
Profit
change
(since
15/08)
Initial rationale: The risk of intervention remains high, as prices in the Czech Republic may head towards deflation territory and the cyclical growth
recovery is muted.
Long USD/CHF spot, 21/03/2013
0.9466
0.9115
-3.70%
-2.96pp
Initial rationale: This trade performs under our base case of USD strength and manageable euro area risks. With EUR/CHF still floored at 1.20, there is
limited downside on any serious re-emergence of peripheral risks.
Short basket of ZAR and TRY against a basket of MXN
and PHP, stop-loss: 97 and target: 105, 18/06/2013
USDZAR: 9.9916
USDTRY: 1.8863
USDMXN: 12.8955
USDPHP: 43.115
USDZAR: 9.9916
USDTRY: 1.8863
USDMXN: 12.8955
USDPHP: 43.115
+1.59%
+1.24pp
Initial rationale: We are cautious of currencies that might suffer from an inability to borrow from abroad after a period in which above-average yields have
led them to depend on foreign financing. We recommend positioning this against currencies with positive reform stories such as the MXN and PHP.
Long 6m GBP/USD put spread (1.60 vs 1.55),
1.05%
25/3/14
1.6050
25/9/2013
Initial rationale: We believe current levels offer a good opportunity to establish a medium-term view of a gradual but persistent move lower.
Short EURPLN spot, target 4.05, stop 4.25, 25/9/2013
4.22
4.22
Initial rationale: We believe the economy is stabilising, driven by euro area demand for exports, which is likely to be joined by fiscal easing.
Long EUR/CHF, stop-loss 1.1990, target 1.2600,
1.2300
1.2300
25/09/13
Initial rationale: We recommend going long EUR/CHF spot on reduced fragmentation risks and significant scope for unwinds of legacy long CHF
positions amid better sentiment in the euro area
Short AUDCNH spot, stop-loss: 5.88, target 5.40,

25/9/2013
5.72
Initial rationale: China growth is expected to remain under pressure, despite the recent bounce-back in data. CNY appreciation will continue to be
used as a tool for rebalancing (towards consumption), while lower investment and growth should weigh on the AUD.
26 September 2013
33
FX CLOSED TRADE RECOMMENDATIONS

Closed portfolio trades as of 25 September, 2013
Original
Trade, Date
3m USD/JPY 88.0 one-touch
Mark to market at time of closing
Spot reference
Cost as %
of notional
Closed on
Closing spot
Profit as a %
of notional
82.90
28.90%
14/06/2012
79.2650
0%
GBP/USD: 1.5812
USD/JPY: 82.46
-0.80%
22/06/2012
GBP/USD: 1.5559
USD/JPY: 80.4950
-0.69%
Short EUR/CHF 1y/1y FVA and long XAU/EUR for 20

times the vega amount
XAU/EUR: 1081.58
EUR/CHF FVA: 11.9%
25/06/2012
XAU/EUR: 1271.58
EUR/CHF FVA: 6.30%
+17.85%
Short USD/JPY through a 1m 76.75-81.50 risk reversal
79.06
0%
28/06/2012
80.2050
0%
CAD/EUR: 0.7111
CAD/GBP: 0.6267
10/07/2012
EUR/CAD: 1.2526
GBP/CAD: 1.5804
+6.58%
80.17
1.95%
23/08/2012
79.0820
0%
Long GBP/USD 3m straddle at 1.5812, short 3m

USD/JPY straddle at 82.3344
Long CAD vs a 50/50 basket of EUR and GBP

6m CAD/JPY call at 83.0, 23/2/2012
1m AUD/NZD 1.29-1.27 put spread, 23/7/2012
1.3024
0.30%
23/08/2012
1.2840
+0.47%
Long GBP/USD 3m straddle at 1.5812, short 3m

USD/CHF straddle at 0.9660, 30/5/2012
GBP/USD: 1.5583
USD/CHF: 0.9660
-1.77%
30/08/2012
GBP/USD: 1.5812
USD/CHF: 0.9609
+0.70%
Short USD/CAD through a 3m 0.9964-1.0715 risk reversal
1.0257
-0.23%
30/08/2012
0.9924
+0.63%
Sell EUR/SEK spot, 23/9/2010
9.1895
27/09/2012
8.4244
+12.12%
Long USD/CHF, 23/6/2011
0.8388
27/09/2012
0.9398
+11.03%
3m EUR/JPY 96-92.50 1x2 put spread, 16/7/2012
96.37
0%
16/10/2012
102.94
0%
3m EUR/BRL put at 2.4504, 16/7/2012
2.4984
0.86%
16/10/2012
2.6549
0%
6m 1.24-1.19 EUR/USD put spread
1.2441
1.36%
29/11/2012
1.2979
-1.36%
Short CHF/NOK, 22/3/2012
6.3360
7/12/2012
6.0701
+5.31%
3m EUR/USD put at 1.25, with 1m window knock-in at

1.27, 23/8/2012
1.2580
0.58%
23/11/2012
1.2959
-0.58%
1m EUR/USD straddle at 1.2959, 12/10/2012
1.2952
1.97%
14/11/2012
1.2729
-0.23%
79.65
0.0%
20/11/2012
81.74
+0.42%
Long SGD/TWD, 23/11/2011, target 24.2, stop loss at

22.8
23.1723
23/11/2012
23.8198
+2.76%
Long 3m EUR/USD straddle, short 12m EUR/USD

straddle equal notional, 27/9/2012
1.2913
-4.25%
27/12/2012
1.3222
+0.50%
Buy MYR/KRW spot, 16/11/2012
354.9
03/01/2013
350.0
-1.38%
Long 3m USD/CNY 6.25-6.32-6.37 topside seagull,

18/10/2012
6.25
0.09%
18/01/2013
6.2181
-0.51%
Long 3m USD/JPY 80.50 call, 1/11/2012
79.89
1.12%
01/02/2013
92.07
+11.45%
Long 3m USD/MXN 13.20 call, 1/11/2012
13.0853
2.07%
01/02/2013
12.6062
-2.07%
Short GBP/USD through 3m 1.6350-1.5950 risk reversal,

11/1/2013
1.6126
0.085%
04/02/2013
1.5711
+1.90%
Long USD/JPY through a 1m 1x1.5 90-93 call spread,

21/3/2013
89.62
0.72%
21/02/2013
93.17
+2.41%
Short USD/CAD through a 1m 1x1 0.98-1.0 put spread,

24/1/2013
1.003
0.45%
22/02/2013
1.0215
-0.45%
Long CLP/COP, 11/12/2012
3.7800
01/03/2013
3.8300
+1.54%
Long 3m GBP/JPY 136 call, 7/12/2012
132.11
0.88%
07/03/2013
142.6030
+3.75%
Long USD/CHF through a 3m 1x2 0.92-0.95 call spread,

14/1/2013
0.9170
0.47%
11/03/2013
0.9509
+0.85%
Long AUD/NZD through a 2w 1.2250-1.2363-1.2500

seagull, 4/3/2013
1.2366
0.22%
18/03/2013
1.2582
+0.89%
219.8156
21/03/2013
181.53
-17.42%
USD/JPY upside through a 3m 78-81.40 risk reversal,

20/8/2012
Long VECTOR strategy, 18/3/2010

Short EUR/GBP, 23/4/2012
0.8190
21/03/2013
0.8518
-3.90%
Long 18m GBP/JPY 170 one-touch, 23/4/2012
130.75
12.80%
21/03/2013
144.28
-5.70%
AUD/CAD: 0.9990
CAD/SEK: 7.0270
21/03/2013
AUD/CAD: 1.0690
CAD/SEK: 6.3321
-10.87%
Long CAD vs. AUD and SEK, 5/15/2012
26 September 2013
34

Original
Trade, Date
Spot reference
Mark to market at time of closing

Cost as %
of notional
Closed on
Closing spot
Profit as a %
of notional
Short EUR vs. GBP and NOK, 30/5/2012
EUR/GBP: 0.7978
EUR/NOK: 7.5229
21/03/2013
EUR/GBP: 0.8518
EUR/NOK: 7.5463
-2.43%
Long NOK, CAD vs. EUR, JPY
EUR/NOK: 7.5000
CAD/JPY: 78.30
21/03/2013
EUR/NOK: 7.5463
CAD/JPY: 92.8987
+8.21%
EUR/ZAR: 10.44
JPY/CLP: 6.2100
21/03/2013
EUR/ZAR: 12.0342
JPY/CLP: 4.9682
+7.22%
1.8270
0.11%
21/03/2013
1.8180
-0.11%
Long CLP, ZAR vs. EUR, JPY

Short GBP/NZD through a 1m 1.8050-1.8550 risk
reversal, 21/02/2013
Long USD/JPY spot, 1/2/2013
92.72
1/04/2013
93.30
+0.63%
RUB/EUR: 0.0251
USD/RUB: 30.8610
4/04/2013
RUB/EUR:0.0245
USD/RUB: 31.1766
-1.70%
Long 1m USD/JPY call at 94.50, 1 4/2013
93.31
0.91%
1/05/2013
97.20
+1.87%
Long 3m AUD/CAD 1.05 put, 21/03/2013
1.0698
0.75%
3/05/2013
1.0344
+1.00%
USD/MYR : 3.1354
0.37%
9/05/2013
2.97
-0.98%
1.5059
0.22%
Long RUB vs. (50-50 EUR and USD)
Short USD/MYR via 1x2 USD/MYR put spread

(strikes 3.10 and 3.04), 19/03/2013
1m GBP/USD 1x2 1.49-1.46 put spread, 06/03/2013
Long MXN/JPY, 11/12/2012
Short USD/CNH 12m-3m forward spread, stop loss
at 900 pips, 9/05/2013
Short USD/MYR 6m forward, stop loss at 3.05,
9/5/2013
Short ZAR/INR, stop loss at 6.20, 9/5/2013
Long BRL/TRY, 3/19/2013
08/04/2013
1.5313
-0.22%
6.48
03/06/2013
7.8764
+22.29%
610 pips
12/06/2013
6.1432
-1.48%
3.013
23/05/2013
3.05
-1.33%
6.02
31/05/2013
5.60
+7.27%
0.9192
6/20/2013
0.8585
-6.804%
Long USD/JPY, 3/5/2013
98.95
3/6/2013
99.80
+0.86%
Short GBP/USD, 21/3/2013
1.5164
14/6/2013
1.5679
-3.40%
Long EUR/USD spot, stop-loss 1.34, target 1.28,

20/6/2013
1.3225
11/7/2013
1.3100
+0.95%
Long USD/JPY spot, stop-loss 94.00, target 103,

20/6/2013
97.44
22/7/2013
99.50
2.11%
Long USD/ILS, stop-loss: 3.55 and target: 3.70,

18/06/2013
3.5909
6/8/2013
3.5500
-1.14%
Short AUD/USD spot , stop 0.9350 target 0.88,

11/7/2013
0.921
8/8/2013
0.905
+1.74%
Short AUD/MXN spot, stop 11.70, 18/7/2013
11.45
26/7/2013
11.7
-2.18%
USD/CNH via a 1m ATM-F USD/CNH call option

(strike 6.1613), 18/06/2013
0.25%
18/7/2013
-0.25%
Long MXN/SGD, stop-loss: 0.0940 and target: 0.100,

18/06/2013
0.0978
18/7/2013
0.1013
+3.58%
Short EUR/USD spot, stop 1.3275, 30/7/2013
1.3066
26/7/2013
1.3275
-1.60%
Short SGD/INR by through a 1m risk reversal (strikes

45.0 and 49.0) for zero cost, 18/06/2013
46.6128
0%
18/7/2013
47.09
0%
Long GBP/USD 6m/6m FVA, 21/02/2013
10.05%
22/08/2013
7.92%
-2.13%
1.4892
0.52%
5/09/2013
1.5526
-0.52%
1.3266
20/08/13
1.3450
-1.39%
4.26
22/08/13
4.23
+0.70%
1119.40
ATM vol: 7.24%
0%
26/09/2013
0%
Short TWD/PHP, stop-loss :1.47 and target:1.36,

18/06/2013
1.4428
22/08/2013
1.467
-1.89%
Long PEN/COP, stop-loss: 670 and target: 730,

18/06/2013
687.288
08/09/2013
670
-2.54%
Long 1w GBP put / USD call
1.5599
0.29%
29/8/2013
1.5507
+0.05%
2m ATMF GBP put/USD call (1.4892 strike, 1x

notional), selling a 2m 1.45 strike GBP put/USD call
(1.5x notional), 5/7/13
Short EURUSD target 1.28, stop 1.3450, 30/7/2013
Short EURPLN, target 4.15, stop 4.32, 1/8/2013
USDKRW 6wk risk-reversal (strikes 1140 and 1111)
15/8/13
26 September 2013
35
FORECAST TABLES
Forecasts
Forecast vs Outright Forward
Spot
1 Month
3 Month
6 Month
1 Year
1 Month
3 Month
6 Month
1 Year
EUR/USD
1.35
1.35
1.32
1.30
1.27
-0.2%
-2.4%
-3.9%
-6.2%
USD/JPY
98
98
100
102
105
-0.4%
1.6%
3.7%
7.0%
GBP/USD
1.61
1.59
1.57
1.55
1.53
-1.1%
-2.3%
-3.5%
-4.6%
USD/CHF
0.91
0.92
0.95
1.00
1.06
1.2%
4.6%
10.2%
17.1%
USD/CAD
1.03
1.03
1.03
1.04
1.05
-0.2%
-0.3%
0.4%
0.9%
AUD/USD
0.94
0.94
0.89
0.86
0.82
0.5%
-4.4%
-7.1%
-10.4%
NZD/USD
0.82
0.82
0.79
0.77
0.75
-0.4%
-3.6%
-5.4%
-6.5%
EUR/JPY
133
132
132
133
133
-0.9%
-0.9%
0.0%
0.1%
EUR/GBP
0.84
0.85
0.84
0.84
0.83
1.0%
-0.2%
-0.3%
-1.7%
EUR/CHF
1.23
1.24
1.26
1.30
1.35
0.9%
2.5%
5.9%
10.1%
EUR/SEK
8.68
8.60
8.50
8.40
8.30
-1.0%
-2.3%
-3.7%
-5.3%
EUR/NOK
8.12
8.00
8.10
8.20
7.70
-1.6%
-0.6%
0.2%
-6.6%
USD/CNY
6.12
6.10
6.08
6.07
6.05
-0.8%
-1.2%
-1.5%
-2.3%
USD/HKD
7.75
7.76
7.76
7.76
7.76
0.1%
0.1%
0.1%
0.1%
USD/INR
62.42
62.00
61.00
61.00
61.00
-0.8%
-4.7%
-6.5%
-9.6%
USD/KRW
1077
1065
1065
1070
1070
-1.1%
-1.5%
-1.5%
-2.1%
USD/SGD
1.25
1.25
1.25
1.26
1.26
-0.4%
-0.4%
0.5%
0.5%
USD/TWD
29.57
29.50
29.75
29.75
29.75
-0.1%
1.0%
1.4%
2.0%
USD/BRL
2.23
2.25
2.35
2.40
2.45
0.4%
3.5%
3.7%
1.6%
USD/MXN
13.00
12.80
12.78
12.75
12.70
-1.8%
-2.4%
-3.3%
-5.0%
EUR/CZK
25.82
25.75
25.75
25.75
25.25
-0.3%
-0.2%
-0.2%
-1.9%
EUR/PLN
4.22
4.20
4.16
4.12
4.05
-0.6%
-1.9%
-3.3%
-6.0%
USD/RUB
32.05
32.00
32.00
32.00
33.00
-0.7%
-1.8%
-3.2%
-2.9%
BSK/RUB
37.13
37.04
36.61
36.32
37.01
-0.8%
-2.9%
-4.9%
-5.5%
USD/TRY
2.01
1.95
1.95
1.98
2.05
-3.6%
-4.6%
-4.8%
-4.9%
USD/ZAR
9.98
9.90
10.10
10.30
10.50
-1.2%
-0.1%
0.6%
-0.2%
NOK
NZD
Percent deviation from PPP (+ overvaluation/- undervaluation)

As of 25/09/13
EUR
USD
AUD
vs EUR
0%
-8%
16%
vs USD
8%
0%
24%
CAD
CHF
GBP
JPY
SEK
2%
14%
-8%
-13%
-10%
1%
25%
10%
22%
0%
-5%
-2%
9%
33%
Note: Daily updates for this table are available on Barclays Live: https://live.barcap.com/BC/barcaplive?menuCode=MENU_FI_FX_GLB_FXH.
Source for all tables: Barclays Research
21%
RUB
HUF
0%
EUR
19%
-1%
TWD
17%
13%
PHP
-1%
CNY
12%
CHF
-2%
DKK
MXN
SGD
10%
-6%
15%
10%
BRL
TRY
-6%
SEK
GBP
15%
9%
VEF
-8%
MYR
CZK
7%
CAD
-9%
KRW
NZD
5%
PLN
-9%
IDR
14%
2%
THB
-10%
HKD
-15%
INR
NOK -20%
-50%
JPY -28%
-30%
ZAR -28%
-10%
14%
2%
CLP
10%
ILS
1%
30%
AUD
1%
USD
RON
50%
30%
Percent deviation from BEER (+ overvaluation/- undervaluation)
Note: Spot data are as of 25 September 2013. For the details of our BEER model, see Currency valuation from a macro perspective, 14 June 2011.
26 September 2013
36

Other FX forecasts
Emerging Markets FX Forecasts
Forecast vs Outright Forward
Spot
1 Month
3 Month
6 Month
1 Year
1 Month
3 Month
6 Month
1 Year
USD/IDR
11480
11500
12000
12250
11750
-1.1%
USD/MYR
3.22
3.15
3.15
3.17
3.18
-2.2%
0.9%
0.9%
-7.0%
-2.5%
-2.4%
USD/PHP
43.41
42.75
42.75
43.00
43.00
-1.1%
-0.9%
-2.9%
-0.4%
-0.5%
USD/THB
31.25
31.00
31.25
31.50
32.00
-0.8%
-0.4%
-0.1%
0.5%
USD/ARS
5.77
5.84
6.02
6.46
7.37
-2.0%
-10.1%
-15.7%
-18.7%
USD/COP
1893
1895
1900
1920
1930
-0.1%
-0.3%
0.0%
-1.0%
USD/CLP
501
505
510
518
525
0.4%
0.5%
0.9%
0.2%
USD/PEN
2.76
2.75
2.76
2.80
2.85
-0.8%
-1.0%
-0.5%
0.0%
EUR/HUF
299
297
295
295
310
-1.0%
-2.1%
-2.7%
1.1%
EUR/RON
4.45
4.42
4.38
4.34
4.30
-1.0%
-2.3%
-3.7%
-6.0%
USD/ILS
3.55
3.50
3.50
3.47
3.40
-1.5%
-1.6%
-2.6%
-4.7%
USD/EGP
6.89
6.85
6.78
6.67
6.52
-0.8%
-4.1%
-9.5%
-18.7%
Long-term FX forecasts
18 Month
2 Year
3 Year
4 Year
5 Year
1.27
1.26
1.26
1.25
1.25
EUR
JPY
104
103
102
101
100
GBP
1.51
1.48
1.49
1.51
1.56
CHF
1.09
1.11
1.12
1.12
1.11
CAD
1.04
1.02
1.04
1.05
1.07
AUD
0.83
0.83
0.80
0.79
0.78
0.67
NZD
0.73
0.72
0.70
0.69
EUR/JPY
131
130
128
126
124
EUR/GBP
0.82
0.82
0.81
0.81
0.80
EUR/CHF
1.36
1.36
1.37
1.38
1.38
EUR/SEK
8.25
8.21
8.16
8.11
8.07
EUR/NOK
7.73
7.75
7.78
7.80
7.83
1Q 14
2Q 14
Policy rate forecasts (%, end of quarter)

Current
FOMC
3Q 13
4Q 13
0-0.25
0-0.25
0-0.25
0-0.25
0-0.25
BoJ
0.10
0-0.10
0-0.10
0-0.10
0-0.10
MPC
0.50
0.50
0.50
0.50
0.50
ECB
0.50
0.50
0.50
0.50
0.50
Riksbank
1.00
1.00
1.00
1.00
1.00
Norges Bank
1.50
1.50
1.50
1.50
1.50
SNB
0-0.25
0.25
0.25
0.25
0.25
BoC
1.00
1.00
1.00
1.00
1.25
RBA
2.50
2.50
2.50
2.50
2.50
RBNZ
2.50
2.50
2.50
2.50
2.50
Source for all tables: Barclays Research
26 September 2013
37
GLOBAL FOREIGN EXCHANGE RESEARCH

Global
Jose Wynne
Head of FX Research
+1 212 412 5923
Global FX
Koon Chow
Head of EM Strategy
+44 (0)20 777 37572
koon.chow@barclays.com
Aroop Chatterjee
Head of FX Quantitative Strategy
+1 212 412 5622
Sebastian Brown
FX Strategist, Latin America
+1 212 412 6721
sebastian.brown@barclays.com
Durukal Gun
EM/FX Strategist
+44 (0)20 313 46279
durukal.gun@barclays.com
Shinichiro Kadota
FX Strategy
+81 3 4530 1881
shinichiro.kadota@barclays.com
Michael Keenan
South Africa/Sub-Saharan
FX Strategist
+27 (0) 11 895 5513
mike.keenan@absacapital.com
Hamish Pepper
FX Strategist, Asia-Pacific ex-Japan
+65 6308 2220
hamish.pepper@barclays.com
Yuki Sakasai
FX Strategy
+1 212 412 5652
yuki.sakasai@barclays.com
Chris Walker
FX Strategy
+44 (0) 20 3555 5863
Nick Verdi
FX Strategist, Asia-Pacific ex-Japan
+65 6308 3093
nick.verdi@barclays.com
26 September 2013
LAST PAGE
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Barclays Global FX Quarterly Fed On Hold Eyes On Growth

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Foreign Exchange Research

Barclays | Global FX Quarterly

Theme 1: EUR and CHF ......................................................................... 8

Theme 3: CNY, AUD and NZD ............................................................ 17

Theme 4: GBP ........................................................................................ 20

Theme 5: JPY .......................................................................................... 25

FX Views for the Year Ahead .............................................................. 28

Barclays | Global FX Quarterly

2. Long 6m GBP/USD put spread

3. Long EUR/CHF spot

4. No longer underweight carry

Relative value trades

2. Long EUR/CZK spot

Barclays | Global FX Quarterly

Fed on hold, eyes on growth

Data and Fed delay the USD rally

Barclays | Global FX Quarterly

Source: Barclays Research

Exc. Liq., eur bn, lhs

Source: Barclays Research

Barclays | Global FX Quarterly

Whats next for EUR/USD?

Still short CHF

Source: Barclays Research

Source: Barclays Research

Barclays | Global FX Quarterly

China rebalancing to support CNY, weigh on AUD

Square EM carry shorts

Buy GBP put spreads to fade the rally

Barclays | Global FX Quarterly

USD/JPY to grind higher

Barclays | Global FX Quarterly

THEME: EUR AND CHF

Fed does not derail EUR/USD weakness

Why is EUR/USD not lower?

MSCI Relative 10Y

Correlation of EA and US 1y1yf

Source: Barclays Research

Barclays | Global FX Quarterly

d(3m LIBOR sprd)

dlog(rel equity returns)

Source: EPFR, Haver Analytics, Barclays Research

Barclays | Global FX Quarterly

US-EA cyclical divergence

Loans to private sector

Source: Barclays Research

Source: Barclays Research

Barclays | Global FX Quarterly

Keep on the radar

Source: Barclays Research

Spain/Italy y/y deposit growth

Source: SNB, Haver Analytics, Barclays Research

Barclays | Global FX Quarterly

We remain medium-term bearish CHF

Barclays | Global FX Quarterly

Square carry shorts until tapering

Local govt. bonds

UST 10yr yield, RHS

Source: Barclays Research

Barclays | Global FX Quarterly

FX 10y real premium

3m FX implied yields (last, 25 percentile and 75