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Foreign Exchange

London 08:00

FX Daily Strategist: Europe

EURUSD vs. Germany-Italy 5yr CDS
-25 -50 -75 EURUSD 1.55 1.50 1.45

Eurogroup focus on Greece ignores market concerns over Italy FOMC minutes expected to be a non-event focus is on Bernanke tomorrow UK CPI likely to show moderation in core CPI components while Swedish CPI to tick slightly higher

Despite the markets focus on Italy, there has been little in the way of official reassurance. The Italian government has been -100 1.40 silent; and the only comment on Italy from yesterday's meetings was one from Belgian FinMin Reynders who said that Italy was not -125 1.35 discussed at the Eurogroup meeting. Certainly the statement -150 1.30 issued subsequently by the Eurogroup focused on Greece and the approach to private sector involvement, which increasingly seems -175 1.25 to be in favour of a debt swap and selective default, leaving the ECB increasingly isolated in its opposition. EUR has come under -200 1.20 the cosh in the Asian session, aided by comments from new IMF Ger-Italy 5yr CDS -225 1.15 head Lagarde who suggested that a second Greek bailout Jan Apr Jul Oct Jan Apr Jul Oct Jan Apr Jul package remains some distance away; stop-loss selling below the 09 10 11 1.3980 level has extended the New York moves to make fresh Source: Reuters Ecowin Pro. With the situation in lows in EURUSD, EURCHF and EURJPY. While markets are Europe extremely fluid, pressure is likely to weigh now certainly short across all three timezones and thus vulnerable on the EUR. Headlines out of the EcoFin meeting to a squeeze higher, we suspect that any rallies will be met with will be important, but headwinds do lie ahead. renewed selling. Peripheral spreads will remain the driver, but watch also the widening EUR basis swaps. GMT Country Release Mkt Last We note with interest, though, the rather cryptic line in the 07:00 EU EU Finance Ministers Meet Eurogroup statement that says "Ministers stand ready to adopt Ecofin meeting of EU Finance 07:00 BE further measures [], including enhancing the flexibility and Ministers 07:30 SE (Jun) CPI % (nsa m/m) 0.2 the scope of the EFSF [...] Proposals to this effect will be 07:30 SE (Jun) CPIF % (m/m) 0.1 presented to Ministers shortly." This runs counter to comments 07:30 SE (Jun) CPIF % (y/y) 1.8 1.7 yesterday from German FinMin Schaeuble who denied rumours 07:30 SE (Jun) CPI % (nsa y/y) 3.3 3.3 that the EFSF might be doubled. But if there is indeed a plan that 08:30 GB (Jun) CPI % (m/m) 0.2 0.2 would allow for an expanded role for the EFSF - perhaps buying 08:30 GB (May) Non-EU Trade Ba bn GBP -4.34 bonds on the secondary market - this might suggest the 08:30 GB (Jun) RPI % (m/m) 0.3 beginning of a shift towards a fiscal union. This still seems very 08:30 GB (May) DCLG UK House P % (y/y) -0.3 unlikely, implying as it would a huge shift in political thinking, and Trade Balance bn 08:30 GB (May) -7.5 -7.39 GBP not a few hurdles on the way to approval in national parliaments. 08:30 GB (Jun) RPIX % (y/y) 5.3 5.3 But a suggestion that the Eurozone was moving in this direction 08:30 GB (Jun) RPI % (y/y) 5.2 5.2 would probably be seen as a positive for the EUR. Watch for leaks 08:30 GB (Jun) CPI % (y/y) 4.5 4.5 on this topic on the sidelines of today's EcoFin. Trade Balance bn 12:30 US (May) -43.6 -43.7 Markets will remain focused on Europe and likely neglect todays USD FOMC minutes. We expect nothing out of the minutes that Trade Balance bn 12:30 CA (May) 1.0 Bernanke has not already discussed at the June press CAD conference; rather focus will be on Bernankes semi-annual 17:00 US Treasury Auctions 3-Year Notes 18:00 US FOMC Minutes monetary policy testimony before Congress on Wednesday and Thursday. In the meantime, there has been little progress on the US debt ceiling negotiations. Reports say House Speaker Boehner is pushing for immediate spending cuts in the talks, which would only increase the chances that the Fed has to keep policy loose (looser - QE3?) to compensate. We continue to see the potential inclusion of a second Homeland Investment Act as key for FX markets. With ECB policy off the radar, Eurozone CPI data prints will be largely ignored. But elsewhere, UK CPI is expected to remain at 4.5%y/y for the third month in a row. Higher food and energy inflation are expected to be offset by a moderation in inflation in core components. A downside surprise to inflation will push GBP lower, potentially increasing the prospects for QE by the Bank of England. Our view on GBP could be expressed via short GBPSEK especially if todays Swedish CPI does in fact tick slightly higher to 3.4%y/y in June vs. 3.3% in May as we expect. This is not classified as objective research. Please refer to important information at the end of the report.
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MARKET: EURUSD opened in Asia at 1.40312 and moved a touch higher to 1.4063 following some statements from EU FinMin meeting that pledged to take all steps necessary to stop contagion in the EU debt crisis. However, the rally was short-lived as XJPY supply out of Tokyo took EUR to test the o/n low at 1.3990/1.4000. EUR hesitated at 1.4000 for a while but it did not take long for massive stops below 1.3970/90 (o/n low and recent low) to be triggered. EUR was slammed to a low of 1.39329 within seconds. EUR crosses like EURJPY and EURCHF (reached fresh all time low) also fuelled the sell off. Rebound has been shallow so far. Asian bourses all took a negative lead from Wall Street. Risk sentiment is decidedly bearish and would like to keep an eye on the peripheral debt yields as gauge for risk appetite in London. US RECAP: Equities: US stocks plunged. SPX -1.8% to 1,319.49% at 4p.m. in New York, the lowest level since June 29. The Dow Jones Industrial Average declined 151.44 points, or 1.2% to 12,505.76 today. In London, FTSE 100 Index dropped by 61.4 or 1.025% and closed at 5,929.16 points, and Euro Stoxx 50 slid to 2,709.14, down 80.95 or 2.901%. NEWS Data/events in the day ahead (MNI news) BoJ commentary: Still to come from Japan on Tuesday, at 0630GMT, Bank of Japan Governor Masaaki Shirakawa gives a briefing. European data: This morning sees the release of the final readings for June HICP from France at 0530GMT and Germany at 0600GMT, while the EU finance ministers (Ecofin) also meet in Brussels today.European data then continues at 0645GMT with France balance of payments data for May. UK events start at 0730GMT when BoE Deputy Governor Bean delivers a speech in Australia. UK data at 0830GMT includes trade data and the DCLG House Price data for May as well as the June CPI release. Median forecasts look for CPI to come in at 0.2% m/m, 4.5% y/y with core-CPI at 0.3% m/m, 3.3% y/y but forecasters believe that inflation will climb to well over 5% in the autumn. US data starts at 1145GMT with the weekly ICSCGoldman Store Sales data, while at 1230GMT; US Treasury Secretary Tim Geithner opens a conference on Women in Finance in Washington. Also at 1230GMT, the international trade gap is expected to decrease to $42.7 billion in May. This is followed at 1255GMT by the weekly Redbook Average, while at 1400GMT, the IBD/TIPP Econ Optimism Index for June is due. ECB commentary: At 1700GMT, ECB Nowotny delivers a speech at the University of Vienna, in Vienna.

At 1800GMT, the latest FOMC Meeting Minutes are due, which should set the scene for Fed Chairman Ben Bernanke's scheduled semi-annual monetary policy testimony before the House Financial Services Committee, which is due on Wednesday. US/Canada: Obama Pushes for Budget Deal. President Barack Obama ratcheted up the pressure on Republicans in tense budget talks, saying that the time had come for them to match their rhetoric on Americas looming fiscal crisis with action on a politically difficult $4,000bn fiscal deal. According to Democratic officials familiar with the talks, the US president stressed in a meeting with congressional leaders that Democrats in the House of Representatives would not support any deal to increase Americas borrowing authority unless Republicans were prepared to agree to new revenues and tax increases on the wealthy. Although Republicans control the lower chamber of Congress, dozens of Republicans are expected to vote against any increase in the debt limit, meaning that passage can only be guaranteed with the backing of some Democrats. (FT) Alcoa Doubles Quarterly Earnings. Alcoa, the integrated aluminium producer, more than its doubled second-quarter earnings and expressed confidence in its outlook, saying that it was well ahead of financial targets. Kicking off the North American second-quarter reporting season, Klaus Kleinfeld, Alcoas chief executive, described the economic recovery as uneven, but said the outlook for the company and for the aluminium industry as a whole remained positive. (FT) U.S. Tackles Housing Slump. The Obama administration is ramping up talks on how to revive the housing market, which is weighing on the economic recoveryand possibly the president's re-election in 2012. Last year, advisers considered several housingpolicy prescriptions but rejected them in favor of letting the market sort things out. Since then, weak demand and a stream of foreclosed properties have put renewed pressure on home prices, prompting concern within the White House. (WSJ) Fed Quarterly Survey: Financing terms have eased to hedge funds, private capital pools, insurers, and institutional investors. Attributes continued credit easing to increased competition, improvement in market liquidity, financing terms eased for broad spectrum of securities, from equities to asset backed securities, small fraction of dealers eased margin requirements on standardized OTC derivatives based on credit and interest rates. Survey respondents say use of leverage now roughing in the middle between pre-crisis peak and post-crisis trough. (Reuters) Europe: Eurogroup Statement: Working Group will explore steps to reduce cost of debt servicing for Greece and means to improve debt sustainability, ways of financing multi-annual adjustment programme for Greece, ministers have tasked working group to propose new

Foreign Exchange Strategy Tuesday, 12 July 2011 http://www.GlobalMarkets.bnpparibas.com

measures to reinforce current policy response to Greek crisis, confirms that credit event or selective default should be avoided, calls on Greece to sustain efforts to meet commitments under adjustment program, steps also include lengthening maturities of loans and lowering the interest rate on loans, includes enhancing flexibility and scope of EFSF rescue fund, stand ready to adopt further measure to improve euro area systemic capacity to resist contagion, safeguard stability. (Reuters) Spain Shuffles Cabinet. Spanish Prime Minister Jos Luis Rodrguez Zapatero reshuffled his cabinet Monday, appointing a new interior minister and a government spokesman after the departure of Deputy Prime Minister Alfredo Perez Rubalcaba. Mr. Zapatero said at a press conference that Deputy Interior Minister Antonio Camacho will be promoted to the position of interior minister. Development Minister Jos Blanco, in turn, will take up the role of government spokesman, Mr. Zapatero added. (WSJ) Euro Zone to weigh new powers for bailout fund as tensions rise, consider measures to enhance the "flexibility" and "scope" of the European Financial Stability Facility, the EUR440 billion fund set up last year to lend money to euro-zone nations. One of these measures could be a previously dismissed option that would give the fund the power to buy euro-zone sovereign bonds on the secondary market. The fund now can only make direct loans to governments. (Reuters) Euro zone's silence on selective default breaks taboo, ECB alone in expressing fears over selective default, move seen as signal of progress on private participation, position seen as giving boost to German bond swap plan. (Reuters) Euro zone countries declined to reiterate opposition to the possibility of a selective default of Greek debt on Monday, a move officials said bolstered Germany's push to involve investors in easing Greece's debts despite the concerns of the European Central Bank. Ministers pledge more flexibility for rescue funds, EU to agree "shortly" on cheaper loans, longer terms, Ministers no longer explicitly rule out selective default, Threat to Italy, Spain increases sense of urgency. (Reuters) Junker: Longer Greek maturities possible, we are going to prefect our instruments in order to stop contagion spreading in the Eurozone, private sector will be involved in Greek bailout, We didnt look in specific terms at the Italian crisis, fully aware that Italy and other countries are in the focus of the financial markets, stress the need to make Greek debt more sustainable. (Reuters) Soros FT Editorial: Greek default may be "inevitable", European Union (EU) leaders have to adopt a "plan B" to stem contagion to the rest of the bloc, while some contagion ... will be unavoidable, the rest of the euro zone needs to be ringfenced. That means strengthening the euro zone, probably by wider use of Eurobonds and a euro zone deposit insurance scheme," he wrote. (Reuters)

ECB's Bini Smaghi: Greece can repay debt, rich country, just need the right program to do it, default would lead to a "humanitarian crisis,", problem different if Greece refused to honor its commitments, same case applied to Italy, Italy will never default, and that Italian banks must hasten recapitalization. (Reuters) ECBs Bini Smaghi: A sovereign default would dramatically weaken Euro area, Euro remains competitive currency, correlation between sovereign and bank CDS potentially explosive, direct contagion link between sovereign risk and bank risk, inflation expectations in Euro area stable for now, trend in euro area towards self-sustaining recovery, but country situations differ and easing in commodity prices pressures only temporary. (Reuters) Schaeuble urges peers to reconsider Greek bond swap-source, can have the Greek programme any time you want but need private sector involvement which is not a bailout for the banks, have a model on the table (bond swaps) which does that. Option of Greek bond buybacks problematic because it envisages public sector not private sector participation, says a source. (Reuters) Greek budget gap widens, misses targets, Jan-June central govt deficit widens 28 pct yr/yr- finmin, net budget revenues are 13 percent below target, Govt attributes shortfall to recession, deficit widens 15 percent y/y on a cash basis. (Reuters) ECB Nowotny: Greece needs mix of discipline and expansive policies, time for clear head and a steady hand, rating agencies reacting in a problematic, procyclical manner. (Reuters) Bank of Portugal: Warns countrys internal demand to sink, exports only positive contributor to economy, economy to shrink 2% in 2011, 1.8% in 2012, expects rise in inflation and unemployment. (Reuters) Australia/ New Zealand/Canada Australia NAB business confidence fell to 0 in June from 6 the previous month. NAB business conditions edged up to 2 last month from 1 in May. Japan BOJ Leaves Overnight Call Rate Unchanged At 0.0%0.1% Range. Keeps asset-purchase fund unchanged at JPY 10tn and credit-loan program unchanged at JPY 30tn. -Upgrades economic assessment in July Japan corporate goods prices up 2.5% in June. Japan's corporate goods prices in June rose 2.5 pct from a year before, the Bank of Japan said Tuesday. The price index for goods at production and wholesale stages stood at 105.4 against 100 for the base year of 2005, the central bank said in a preliminary report. Month on month, the index was down 0.1 pct. (JiJi)

Foreign Exchange Strategy Tuesday, 12 July 2011 http://www.GlobalMarkets.bnpparibas.com

China China June Lending CNY 634bn with FX Reserves USD 3.2tn. Chinese banks lent CNY 633.9bn in local currency loans in June, the People's Bank of China said on Tuesday, exceeding market forecasts for CNY 590bn. Annual growth in China's broad M2 measure of money supply quickened to 15.9% in June from May's 15.1%. China's FX reserves soared to a record USD 3.2tn at the end of June, threatening to worsen the country's inflation headache as bank lending and money growth expanded faster than forecast. (Reuters) The PBoC to Sold CNY 11bn of 1Y Bills Today. China's central bank auctioned CNY 11bn (USD 1.7bn) of 1Y bills in its open market operations on Tuesday at a yield of 3.4982 percent, traders said, unchanged from last week and within market expectations. A total of 125 billion yuan in central bank bills and repos are due to mature this week. The People's Bank of China (PBOC) conducted a net injection of 18 billion yuan into the banking system last week. (Reuters) Chinas Wen Says Inflation Top Priority, More Tightening Seen. China's premier and the country's central bank governor vowed on Monday to prevent stubbornly high inflation from upending the economy, reinforcing expectations for more increases in interest rates and bank reserve requirements. Premier Wen Jiabao said tackling inflation was the government's top policy priority while central bank governor Zhou Xiaochuan said the authority needed to make maintaining price stability "more prominent and important". (Reuters) China Central Bank Reiterates Confidence in Euro. China has confidence in the euro zone and the euro and Europe's financial market will remain a primary investment target for Beijing, a Chinese vice-central-bank governor said on Monday. Yi Gang, a vice-governor at the People's Bank of China and the head of State Administration of Foreign Exchange, which manages China's $3.05 trillion foreign exchange reserves, reiterated that China supports the efforts by the European Union, the European Central Bank and the International Monetary Fund in addressing the sovereign debt issue. (Reuters) China Local-Bond Sale Falls Short. Amid growing concerns about the financial health of local governments, China on Monday failed to sell some of the 50 billion yuan ($7.73 billion) in local bonds offered at a regular auction. It was the first time one of these Ministry of Finance auctions failed to sell out since they began in 2009. Local governments can't issue bonds directly so the ministry auctions the bonds on their behalf. (WSJ) Chinese Consumer Confidence Drops in June. Chinese consumers' confidence dropped in June largely due to rising food prices, according to an index released on Monday. The Bankcard Consumer Confidence Index (BCCI), compiled by Xinhua News Agency and China UnionPay, a national bank card association, stood at 86.06 in June, down 0.24 points from the previous year and down 0.05 points from May. The report attributed the drop in consumer confidence to continuous increases of Foreign Exchange Strategy Tuesday, 12 July 2011 http://www.GlobalMarkets.bnpparibas.com

food prices, represented by agricultural produce prices. (ChinaDaily) China-Based Rally Hits Hog Prices. Futures for lean hog carcasses soared after China singled out rising domestic pork prices as a concern, a move analysts say increases the likelihood that the country will continue to boost imports. Prices surged immediately after trading began on the Chicago Mercantile Exchange and hit the daily limit on price increases within an hour and a half after the open. Lean hogs for August delivery ended limit up, rising 3.1%, or 3 cents, to 99.17 cents a pound. (WSJ) China Able to Contain Local-Financing Vehicles Risk PBoC. China can contain the risk from loans to localgovernment financing vehicles, the PBoC said, adding that a 14 trillion yuan ($2.2 trillion) estimate of the outstanding debt is obviously too large. The results of a national audit issued June 27 that showed local governments had 10.7 trillion yuan of debt on Dec. 31. Chinas banks may have loaned an additional 3.5 trillion yuan that didnt appear in the report, Moodys said July 5. Any additional unreported debt may indicate poorly documented loans that are at greater risk of default, Moodys said in its report. Chinas central bank rejected the higher debt estimate. (Bloomberg) Moodys Raises Fed Flags at 61 Chinese Firms. Credit-ratings firm Moody's Investors Service warned of "red flags" at 61 rated Chinese companies as it sought to provide transparency on its approach to ratings amid rising investor concern about corporate governance at such entities. The flags are meant to "highlight issues meriting scrutiny to identify possible governance or accounting risks for non-financial corporate issuers in emerging markets" and relate to issues such as weak corporate governance, riskier or more opaque business models, fast-growing-business strategies, poorer quality of earnings or cash flow, and concerns over auditors and quality of financial statements, the report, issued Monday, said. (WSJ)

Dollar complexities multiplying

Persistence of Euro-peripheral stress to keep EURUSD capped for longer US Budget deal has highly ambiguous USD implications If the bar to QE3 is lowered, the dollar could suffer even with a credible budget deal Events of just the past week or so have thrown up some important challenges to the latest iteration of our dollar forecasts published in the June edition of the Global Outlook. We are currently in an extreme state of flux with respect to the influences driving currency rates and forecasts for the period ahead are fraught with even greater than usual danger. Uppermost among the uncertainties governing dollar direction are firstly, the fate of current efforts to put a new Greek rescue deal to bed as well as contain current stresses in the rest of the europeriphery. Secondly, the fate of US deficit reduction negotiations and the manner in which the debt ceiling will eventually be raised. Even with successful resolution of deficit reduction negotiations, implications for the dollar are highly ambiguous. We are also faced with the conundrum of discovering that the strength of the EURUSD exchange rate in the first quarter of 2011 does not look to have been amplified by global reserve managers diversification of rapidly rising dollar reserves into euros. Latest IMF COFER data suggests that collectively central banks were modest net sellers of euros in Q1. This data excludes China and it is possible that while many central banks were maintaining or slightly reducing their euro exposure, China was still a significant net buyer. It is also possible that between the end of Q1 2011 and the onset in early May of the current phase of the euro-peripheral crisis, central banks were in aggregate net euro buyers. Yet whether this was so or not, most of the run-up in the EURUSD rate thus far in 2011 can be explained by the widening in the spread between German and core Eurozone (read German) interest rates, with either the 2year bond yield differential or 1yr-1yr forward rate spread doing a good job here. This was after the ECB flagged the commencement of its monetary policy tightening cycle sooner than many, including ourselves, has previously supposed. At the same time, expectations for the first move by the Fed to reverse out of its ultra-easy policy settings were being pushed back as it became evident that US was entering a period of lower growth. The current iteration of our G10 FX forecasts, formulated in late June, was predicated on the expected passage by parliament of the proposed Greek austerity measures in early July, leading to a fairly rapid agreement to unlock the earning tranche of the existing Greek IMF/EFSF aid package. This would then be quickly followed by agreement to a second aid package that would preclude Greece from needing to utilize private funding markets before at least 2014. Eurozone stresses across the euro-periphery were then seen easing back. This, in concert with the expectations of continued hawkish rhetoric from the ECB with respect to the need to contain building inflation pressures, would facilitate a recovery in EURUSD back to and then through its early May highs, i.e. to above 1.50.

Chart 1: Relative Risk Adjusted Nominal Yields versus EURUSD

1.60 1.40 1.20 1.00 0.80 0.60 0.40 0.20 0.00 -0.20 -0.40 -0.60 Jun-2010 1.50 1.45 1.40 1.35 1.30 1.25 1.20 Sep-2010 Dec-2010 Mar-2011 Jun-2011 EURUSD (rhs)

Relative Risk Adjusted Nominal Yields

Source: BNP Paribas

Chart 2: USD TWI versus US Budget Deficit

7.5 5.0 2.5 0.0 -2.5 -5.0 -7.5 -10.0 -12.5 -15.0 -17.5 80 85 90
USD TWI US Budget Deficit as % of GDP

170 160 150 140 130

In dex

120 110 100 90 80 70 95 00 05 10

Source: Reuters Ecowin Pro This scenario has since been sabotaged by the ratings agencies. In particular Moodys contention in justifying its downgrading of Portugals sovereign credit rating to junk that Portugal was likely to be in need of second bailout given the agencys scepticism that private funding markets would be open to them as early as 2013. We shared this view, but expected it would not become an issue before 2012. At the same time, Standard & Poors reiteration that plans for Private Sector Involvement (PSI) in a second Greek bail out would, on plans currently articulated, warrant granting Greece Selective Default status (views expected to be shared by Fitch and Moodys) continue to jar with the ECBs stated refusal to accept Greek paper as collateral in such circumstances. This has cast fresh doubts on whether a new Greek aid plan involving significant PSI can be agreed. If nothing else, this means a more protracted period of negotiation, and inevitable uncertainty, ahead. This is likely to keep FX market participants of all hues necessarily cautious in their attitude towards running long euro exposure and so providing a level of support for the dollar by default. At this stage, our forecasts for EURUSD rising to 1.50 or higher in H2 2011 are in suspense.

Foreign Exchange Strategy Tuesday, 12 July 2011 http://www.GlobalMarkets.bnpparibas.com

Daily Currency Summary

Despite the markets focus on Italy, there has been little in the way of official reassurance about the situation there. The Eurogroup statement focused almost entirely on Greece and the approach to private sector involvement, which increasingly seems to be in favour of a debt swap and selective default, leaving the ECB increasingly isolated. Stoploss selling below the 1.3980 level have extended the New York moves to make fresh lows in EURUSD, EURCHF and EURJPY. While markets are now certainly short euros across all three trading centres and thus vulnerable to a squeeze higher, we suspect that, absent some positive news, any rallies will be met with renewed selling. Peripheral spreads will remain the driver, but watch also the widening EUR basis swaps. We like EURUSD lower. With problems mounting on both the US and the Eurozone, JPY is looking increasingly attractive. Semi-official bids around the 80 region held all day in Asia before the pair broke lower as Europe came in, but those bids should be expected to reappear a little lower. These may support the pair in the short term, but a continuation of the risk-off move risks triggering stops below 79.50. While USDJPY has drifted lower, the largest moves have been reserved for the EUR as EURUSD falls sharply. But resilience in the likes of the commodity currencies is unlikely to last too much longer and we see vulnerability spreading to yen crosses in general. Worrying large short yen positions held by retail investors are protected for the moment by semi-official bids, but these cannot be expected to survive o more significant risk off move.



JPY Crosses

EUR Bloc
EURGBP gained downside momentum following the concerns over Europe. While we are negative on Sterling, we stay away completely from EURGBP reasoning that further downside remains likely given contagion seen in the European bond markets and with a delay in any resolution on PSI for Greece debt package adding to jitters. We focus GBP shorts against the commodity currencies and note the downward break in GBPAUD to levels not seen since Q1 1985. GBP has further downside potential this week if CPI does in fact moderate. EURCHF traded to new record lows as European peripheral concerns continue to dominate, with Europe seemingly playing a dangerous game in hoping that the crisis blows over with the passage of the Italian budget. Further contagion to Eastern Europe risks further appreciation pressure for the franc, although a potential agreement on the US budget should garner some support for USDCHF. Norwegian inflation disappointed. NOK should find support against EUR as European peripheral concerns continue to cast a dark cloud over EUR even though Norwegian inflation numbers disappointed. NOKSEK should continue to be well supported in this risk off environment. SEK remains vulnerable to a further risk-off sentiment, particularly against USD and NOK. We may have to wait some more for opportunities to play more SEK upside pending some clarity on resolution to Greece debt rollover plans. On EURSEK, the "Golden cross" (50day ma moving above the 100day) may also have been a factor holding the pair up, and we wonder if this will survive the continued rise in European Sovereign CDS.





USD Bloc
Despite the sell off in equities and the dip in oil, USDCAD managed to hold up relatively well, failing to rally above 0.9700; but as contagion spreads from the Euro to other risk currencies, this resilience has begun to crumble; next resistance is in the 0.99 region. AUDUSD continues to hold up relatively well, perhaps on the back of the bid for MacArthur Coal. But today has seen the first real signs of contagion as the EUR moves begin to spread to other risk currencies. There is little sign yet of a more panic-driven move; and option markets remain very long gamma which should slow any moves. Nevertheless the exposure of Australia to global funding conditions means that the currency is vulnerable to any more serious shock emanating from Europe. NZDUSD eventually succumbed to the seemingly inevitable as contagion spreads from the Euro and a more widespread risk aversion takes hold. This brings the next target of 0.8000 into focus, but given the run-up since the post-tsunami lows below 0.7200, there is potential for an even larger move south.




Foreign Exchange Strategy Tuesday, 12 July 2011 http://www.GlobalMarkets.bnpparibas.com

FX Forecasts*
USD Bloc EUR/USD USD/JPY USD/CHF GBP/USD USD/CAD AUD/USD NZD/USD USD/SEK USD/NOK EUR Bloc EUR/JPY EUR/GBP EUR/CHF EUR/SEK EUR/NOK EUR/DKK Central Europe USD/PLN EUR/CZK EUR/HUF USD/ZAR USD/TRY EUR/RON USD/RUB EUR/PLN USD/UAH EUR/RSD Asia Bloc USD/SGD USD/MYR USD/IDR USD/THB USD/PHP USD/HKD USD/RMB USD/TWD USD/KRW USD/INR USD/VND LATAM Bloc USD/ARS USD/BRL USD/CLP USD/MXN USD/COP USD/VEF USD/PEN Others USD Index *End Quarter Q3 '11 1.50 78 0.83 1.65 0.98 1.09 0.82 5.93 4.98 Q3 '11 117 0.91 1.25 8.90 7.47 7.46 Q3 '11 2.60 24.3 275 6.80 1.52 4.20 27.51 3.90 7.8 100 Q3 '11 1.22 2.95 8500 29.80 42.50 7.80 6.40 28.00 1060 45.50 20500 Q3 '11 4.18 1.58 450 11.40 1730 4.29 2.70 Q3 '11 72.30 Q4 '11 1.55 83 0.83 1.68 0.93 1.13 0.84 5.48 4.77 Q4 '11 129 0.92 1.28 8.50 7.40 7.46 Q4 '11 2.48 24.5 275 6.60 1.50 4.15 27.25 3.85 7.8 100 Q4 '11 1.21 2.90 8400 29.50 42.00 7.80 6.31 27.50 1050 45.00 20000 Q4 '11 4.25 1.55 435 11.10 1690 4.29 2.65 Q4 '11 70.76 Q1 '12 1.45 85 0.90 1.59 0.95 1.07 0.81 5.93 5.07 Q1 '12 123 0.91 1.30 8.60 7.35 7.46 Q1 '12 2.69 24.1 269 6.55 1.56 4.20 27.86 3.90 7.5 98 Q1 '12 1.21 2.87 8300 29.30 41.50 7.80 6.25 27.00 1040 44.50 20000 Q1 '12 4.34 1.53 425 11.00 1690 4.29 2.63 Q1 '12 74.87 Q2 '12 1.40 90 0.93 1.56 0.97 1.04 0.80 6.21 5.26 Q2 '12 126 0.90 1.30 8.70 7.37 7.46 Q2 '12 2.75 23.9 265 6.60 1.59 4.25 27.97 3.85 7.5 97 Q2 '12 1.20 2.85 8200 29.00 41.00 7.80 6.21 26.70 1030 44.00 20000 Q2 '12 4.43 1.55 430 10.90 1700 4.29 2.63 Q2 '12 77.62 Q3 '12 1.35 95 1.00 1.53 1.01 0.99 0.76 6.67 5.56 Q3 '12 128 0.88 1.35 9.00 7.50 7.46 Q3 '12 2.81 23.8 265 6.50 1.63 4.15 28.08 3.80 7.5 96 Q3 '12 1.19 2.83 8100 28.70 40.50 7.80 6.17 26.50 1020 43.50 20000 Q3 '12 4.51 1.56 435 11.00 1710 4.29 2.64 Q3 '12 80.72 Q4 '12 1.35 95 1.00 1.53 1.01 0.99 0.76 6.67 5.56 Q4 '12 128 0.88 1.35 9.00 7.50 7.46 Q4 '12 2.78 23.5 260 6.50 1.65 4.10 27.65 3.75 7.5 95 Q4 '12 1.18 2.80 8000 28.50 40.00 7.80 6.13 26.00 1010 43.00 20000 Q4 '12 4.60 1.58 440 11.10 1720 4.29 2.66 Q4 '12 80.72 Q1 '13 1.30 95 1.04 1.53 1.04 0.96 0.74 6.92 5.77 Q1 '13 124 0.85 1.35 9.00 7.50 7.46 Q1 '13 2.85 23.7 260 7.20 1.65 4.20 28.19 3.70 7.5 93 Q1 '13 1.17 2.77 7900 28.30 39.50 7.80 6.23 26.00 1000 43.00 20000 Q1 '13 4.69 1.59 442 11.10 1725 8.80 2.67 Q1 '13 82.99 Q2 '13 1.30 95 1.04 1.53 1.04 0.96 0.74 6.92 5.77 Q2 '13 124 0.85 1.35 9.00 7.50 7.46 Q2 '13 2.77 24.0 255 7.10 1.67 4.20 27.75 3.60 7.5 92 Q2 '13 1.16 2.75 7800 28.00 39.00 7.80 6.20 26.00 1000 42.50 20000 Q2 '13 4.78 1.60 445 11.17 1730 8.80 2.68 Q2 '13 82.99 Q3 '13 1.30 95 1.04 1.53 1.04 0.96 0.74 6.92 5.77 Q3 '13 124 0.85 1.35 9.00 7.50 7.46 Q3 '13 2.85 23.5 260 7.00 1.69 4.10 29.07 3.70 7.5 91 Q3 '13 1.15 2.73 7800 28.00 39.00 7.80 6.17 26.00 1000 42.50 20000 Q3 '13 4.86 1.61 447 11.25 1740 8.80 2.69 Q3 '13 82.99 Q4 '13 1.30 95 1.04 1.53 1.04 0.96 0.74 6.92 5.77 Q4 '13 124 0.85 1.35 9.00 7.50 7.46 Q4 '13 2.85 23.3 260 6.90 1.69 3.95 27.75 3.70 7.3 90 Q4 '13 1.14 2.70 7800 28.00 39.00 7.80 6.15 26.00 1000 42.00 20000 Q4 '13 4.95 1.62 450 11.30 1750 8.80 2.70 Q4 '13 82.99 Q1 '14 1.34 114 1.09 1.70 1.21 0.78 0.56 6.94 5.07 Q1 '14 153 0.79 1.46 9.30 6.80 7.46 Q1 '14 2.65 23.1 250 6.69 1.54 3.90 27.75 3.55 7.4 85 Q1 '14 --------------------------------------------Q1 '14 ----------------------------Q1 '14 83.88

Foreign Exchange Strategy Tuesday, 12 July 2011 http://www.GlobalMarkets.bnpparibas.com

FX - Global Strategy Contacts

Foreign Exchange
Ray Attrill James Hellawell Kiran Kowshik Mary Nicola Drew Brick Chin Loo Thio Robert Ryan Jasmine Poh Gao Qi Bartosz Pawlowski Diego Donadio Senior Currency Strategist Quantitative Strategist Currency Strategist Currency Strategist Head of FX & IR Strategy Asia FX & IR Asia Strategist FX & IR Asia Strategist FX & IR Asia Strategist FX & IR Asia Strategist Head of FX & IR Strategy CEEMEA FX & IR Latin America Strategist New York London London New York 1 212 841 2492 44 20 7595 8485 44 20 7595 1495 1 212 841 2492 raymond.attrill@americas.bnpparibas.com james.hellawell@uk.bnpparibas.com kiran.kowshik@bnpparibas.com mary.nicola@americas.bnpparibas.com drew.brick@asia.bnpparibas.com chin.thio@asia.bnpparibas.com robert.ryan@asia.bnpparibas.com jasmine.j.poh@asia.bnpparibas.com gao.qi@asia.bnpparibas.com bartosz.pawlowski@uk.bnpparibas.com diego.donadio@@br.bnpparibas.com

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Foreign Exchange Strategy Tuesday, 12 July 2011 http://www.GlobalMarkets.bnpparibas.com