SEB Report: Investors To Move Away From Dollar, Euro

The good, bad and ugly
Downside risks have clearly materialized with growth in both the US and Europe well below expectations during the second quarter. Currently, markets discount a fairly high probability of a double dip recession with fiscal and monetary policy having very little left to offer and political uncertainties increasing. Lack of political support has driven the euro risk premium significantly higher with politicians facing increasing difficulties persuading markets that the situation in Europe is under control and that the euro will continue to exist in its current form. In the US political turbulence regarding negotiations over long-term measures to improve the budget has made US politics far less predictable than usual. Furthermore, the Fed has already signaled strongly the possibility of further easing. Simultaneously growing current account deficit imply a persistent need to attract capital inflows to the US. Consequently, given the uncertain outlook for the worlds two most liquid currencies investors are likely to continue to diversify away from them towards fundamentally stronger peers. Over the past year, we have emphasized that we regard this as a key driver for FX markets and see little reason why it should not continue to be so. Therefore, provided financial market stress remains under control and the euro continues to exist, consistent with our main scenario, we remain optimistic concerning currencies with strong internal and external fundamentals, which should attract further capital inflows. With the SNB seeking to limit the effects of capital inflows on the CHF, pressure on the quality currencies has increased/will increase further.
TUESDAY 13 SEPTEMBER 2011
EDITOR Carl Hammer + 46 8 506 231 28
BASKET TRADE: BUY TOP 3 VS BOTTOM 3 We usually recommend buying the top-rated currencies vs. the lowest-rated currencies. Amongst the top-picks we prefer AUD, SEK and CNY, all traditionally offensive currencies but less so in current environment. RELATIVE QUALITY TRADE Buy NOK and SEK vs CAD and NZD. With superior fundamentals the Scandies should outperform their piers in Asia and North America as investors consider alternatives to weaker currencies. SELL CAD/NOK One important FX market theme is the external balance outlook: in this respect we clearly see more support for NOK vs. CAD. Canada also appears to suffer more from an overvalued currency. VOLATILITY SKEW TRADE: BUY AUD/JPY 6M UPSIDE RR 85.0 CALL VS 69.0 PUT, ZERO COST After the decision by SNB to intervene the pressure on the JPY has increased. The scew in the 6m risk reversal is currently around 8% in favour of the AUD. Hence the sold put is placed below levels most likely triggering new intervention by the BOJ.
Currency outlook (end Q4) )

KRW AUD SEK NOK CNY NZD DKK CHF CAD RUB JPY PLN HUF TRY EUR USD GBP
+5 +3 +3 +3 +2 +1 +1 0 0 -1 -2 -2 -2 -2 -3 -4 -4
You can also find our research materials at our website: www.mb.seb.se. This report is produced by Skandinaviska Enskilda Banken AB (publ) for institutional investors only. Information and opinions contained within this document are given in good faith and are based on sources believed to be reliable, we do not represent that they are accurate or complete. No liability is accepted for any direct or consequential loss resulting from reliance on this document. Changes may be made to opinions or information contained herein without notice.
Currency Strategy
Forecasts
FX forecasts
12-sep
EUR/USD EUR/JPY EUR/GBP EUR/CHF EUR/CAD EUR/AUD EUR/NZD EUR/SEK EUR/NOK EUR/DKK EUR/RUB EUR/PLN EUR/HUF Cross rates USD/JPY GBP/USD USD/CAD USD/CHF AUD/USD NZD/USD USD/SEK USD/NOK USD/RUB USD/PLN USD/HUF USD/TRY USD/CNY USD/KRW 1.3662 105.32 0.8608 1.2057 1.3648 1.3214 1.6653 9.0194 7.6085 7.4469 41.33 4.3174 281.65 77.09 1.587 0.9990 0.8825 1.0339 0.8204 6.6018 5.5691 30.25 3.1602 206.16 1.7923 6.4040 1093
SEB
Q4 11 1.38 105 0.87 1.20 1.34 1.28 1.64 8.80 7.45 7.44 40.8 4.30 282 76 1.59 0.97 0.87 1.08 0.84 6.38 5.40 29.6 3.12 204 1.80 6.30 1020 Q1 12 1.43 113 0.90 1.25 1.36 1.30 1.70 8.75 7.50 7.45 40.8 4.10 275 79 1.59 0.95 0.87 1.10 0.84 6.12 5.24 28.5 2.87 192 1.72 6.18 985
Consensus*
Q4 11 1.42 113 0.87 1.15 1.39 1.34 1.69 9.00 7.70 7.45 39.5 3.93 269 78 1.64 0.98 0.81 1.06 0.84 6.34 5.42 29.0 2.77 189 1.75 6.30 1043 Q1 12 1.43 114 0.87 1.17 1.40 1.36 1.70 8.92 7.65 7.45 39.9 3.86 268 80 1.65 0.98 0.82 1.05 0.84 6.24 5.35 28.8 2.70 187 1.70 6.24 1025
Contents
Forecasts The big picture USD EUR JPY GBP CAD AUD NZD CHF SEK NOK DKK RUB PLN HUF TRY KRW CNY Summary ranking Seasonal patterns Guide to indicators Contacts 2 3 6 8 10 12 14 16 18 20 22 24 26 28 30 32 34 36 38 40 41 42 43
* Bloomberg survey FX forecasts.
SEB policy rate forecasts

RB Current End-10 Jun Jul Aug Sep Oct Nov Dec End-11 Jan Feb Mar Apr May Jun H1-12 End-12 Inflation target 50bps hike 2.00% 1.25% 5 Jul* 7 Sep 27 Oct* 20 Dec 2.00% 16 Feb 14 Mar* 19 Apr 10 May 20 Jun* 3.00% 3.25% 2.5% 25bps cut 13 Mar 25 Apr 20 Jun 0.0-0.25% 0.0-0.25% ~1.8% 50bps cut 10 Aug 21 Sep 19 Oct* 14 Dec 2.50% 9 Aug 20 Sep 2 Nov 13 Dec 0.0-0.25% 25 Jan NB 2.25% 2.00% 22 Jun* FED 0.0-0.25% 0.0-0.25% 22 Jun ECB 1.50% 1.00% 9 Jun 7 Jul 4 Aug 8 Sep 6 Oct 3 Nov 8 Dec 1.50% 12 Jan 9 Feb 8 Mar 4 Apr 3 Maj 6 Jun 1.50% 1.50% ~1.8% BOE 0.50% 0.50% 9 Jun 7 Jul 4 Aug 8 Sep 6 Oct 10 Nov 8 Dec 0.50% 5 Jan 9 Feb 8 Mar 5 Apr 10 Maj 7 Jun 0.50% 0.50% 2.0% BOJ 0.10% 0.10% 14 Jun 12 Jul 5 Aug 7 Sep 7 & 27 Oct 16 Nov 21 Dec 0.10% 24 Jan 14 Feb 13 Mar 10 & 27 Apr 23 May 15 Jun 0.10% 0.10% 0-2% BOC 1.00% 1.00% 19 Jul 7 Sep 25 Oct 6 Dec 1.00% 17 Jan 8 Mar 17 Apr 5 Jun 1.25% 2.00% 2.0% 15 Sep SNB 0.0-0.25% 0.0-0.75% 16 Jun RBA 4.75% 4.75% 7 Jun 5 Jul 2 Aug 6 Sep 4 Oct 1 Nov 6 Dec 4.75% 7 Feb 6 Mar 3 Apr 1 May 5 Jun 5.25% 5.75% 2-3%
sep 12, 2011
RBNZ 2.50% 3.00% 9 Jun* 28 Jul 15 Sep* 27 Oct 8 Dec* 2.75% 26 Jan 8 Mar* 26 Apr 14 Jun* 3.25% 3.75% 1-3%
15 Dec 0.0-0.25%
2.00% 2.00% 2.0% 25bps hike
0.0-0.25% 0.25% 2.0%
>50bps cut Italics indicate past decisions
* = Strategic policy meetings
Currency Strategy
The Big Picture

In our last Currency Strategy entitled Dollar Duality we argued that the USD would continue to depreciate, possibly even more rapidly, against Asian currencies. Our CNY forecasts were stronger than consensus expecting Chinese authorities to allow it to appreciate more rapidly than the market anticipated. This scenario has proved correct, especially after US credit ratings were downgraded, a process which probably caused Asian reserve managers to take more urgent steps to diversify at least part of their USD holdings into other currencies. At the same time we also argued that Asian countries had a good domestic reason to allow their own currencies to appreciate more quickly to cap imported inflation. Now, we still expect Asian currencies to strengthen although the near-term is clouded by the poor risk appetite. The US dollar duality scenario also stipulated that the currency would trade satisfactorily against its G10 counterparts, an expectation based on its cheap valuation, stable deficit outlook and our belief that the Fed would cautiously trim its extended balance sheet before subsequently raising interest rates. In part, this assumption has proved correct with the USD stronger against all currencies except the JPY and NZD during the past four months. However, the fundamental outlook for the greenback has deteriorated. The flow outlook is weaker than originally anticipated (chart below), the Fed has resumed its easing bias and growth has been far worse than expected. As of today, we forecast a continued flight to fundamentally strong currencies. The USD meanwhile is no longer regarded as the safe-haven it once was: current strength is related to euro-worries and the USD being the worlds most liquid currency. FX markets we think will continue to be characterised by a flight to quality. Against this background, Scandies stand out as strong alternatives for investors seeking to continue diversify currency reserves although they will clearly fall back if financial markets destabilize or macroeconomic concerns resurface. FUNDAMENTALS RULE: SEB FX STYLES For more than a year we argued that fundamentally strong currencies would benefit as investors continued to diversify out of twin deficit currencies such as the USD and EUR. So far this year, with political uncertainties increasing, the performance of our FX styles indicates that the principal FX market driver is now fundamentals, rather than (as previously) interest rates and especially changed expectations concerning future rate hikes which was the key driver when Trichet began preparing markets for hikes. Going forward, we expect continued political uncertainty both in Europe and the US with further lacklustre global growth. Fundamentals will therefore probably remain the key market driver as investors continue to diversify away from inherently weak currencies. However, if clear signs of a recovery in global growth emerge, central bank expectations and valuation factors are likely to become increasingly important as FX market drivers.
SEB FX investment styles 2011

20% 15% 10% 5% 0% -5% -10% -15% 20% 15% 10% 5% 0% -5% -10% -15%
feb
jan
maj
dec
jun
Valuation
Growth
mar
Rate change
apr
Fundamentals
jul
Carry
FURTHER RISK AVERSION With no near-term solution to the euro debt crisis and uncertainties surrounding the political process, risk appetite will continue to decrease in coming weeks with substantial set-backs on equity markets. Such factors are driving business and consumer confidence even further down although growth projections have already been lowered considerably. Our current GDP projections indicate that the world will enter a growth recession (significant slowdown) rather than an outright recession (two consecutive quarters of negative growth). In this situation leading indicators will bottom sometime this fall (with the ISM remaining at or above 40/45). If these assumptions are correct then risk appetite should stabilize after deteriorating further in coming weeks. According to our equity research some equity markets (incl. OMX) already discount a growth recession. Absent a complete euro-collapse we expect a cautious recovery in risk appetite sometime in Q4 2011.
Currency Strategy
USD PRESSURE MAINTAINED ON POOR FLOW OUTLOOK. Historically, the USD has generally performed well during periods of financial stress, as in 2008, reflecting its status as the global reserve currency and the world leading liquidity of US financial markets. However, more recently the USD has failed to strengthen as rapidly as it has previously. There are several reasons why this may be so. The S&P credit downgrade and political turbulence concerning negotiations over long-term measures to improve the budget and increased polarization between Republicans and Democrats has created considerable political instability and made US politics less predictable. In addition the Fed has signalled the possibility of further easing using additional balance sheet expansion. With US bond yields already depressed the main reason for doing so may be to support risk appetite and depreciate the dollar. Investors have signalled their increasing reluctance to continue to finance the US twin deficits with foreign investors becoming net sellers of long-term securities in June for the first time since early 2009 (chart above). In addition the US economy depends on external finance with the current account deficit once again increasing with a further deterioration probably based on the latest USD 450bn job plan and persistent high budget deficit. OUR ASSUMPTIONS ON THE EURO DEBT CRISIS. For some time we have argued there will be substantial write-downs on Greek, Irish and Portuguese bond holdings. As regards Greece, the bond market largely discounts this scenario. The remaining question now is how/when the write-down will be carried out? At the EU summit on 21 Jul the EU decided to extend the EFSF mandate enabling it to direct funds to recapitalized banks and buy sovereign bonds in the secondary market. These funds (EUR 440bn) are however insufficient if either Spain or Italy requires financial assistance. EFSF amendments do not yet have the full force of law pending ratification by Germany (29 Sep) and the Netherlands. Currently, a significant increase in the size of the fund is unlikely. We think it more likely that the ECB will continue to be forced to buy mainly Spanish and Italian bonds. At present purchases are sterilized and amount to only 1.5% of GDP, a minor sum compared to expansionary measures already taken by the Fed and BOE. While however such actions have met with resistance from the Bundesbank bond purchases will remain the first and only line of defence given current restrictions on the political process. Trying to forecast the outlook for the euro is very uncertain. We do not expect a complete currency collapse, flows into the Euro-zone remains remarkable positive. The ECB is likely to remain on hold at 1.5% while the Fed may try to expand its balance sheet further. Therefore, trying to
make sense of where the euro will trade largely depends on how to attach a reasonable risk premium to it. With the ECB buying bonds we prefer to be guided by CDS prices. The biggest problem for the euro is political uncertainty surrounding the problem. Although not an optimal currency union (rather the contrary) present problems could have been managed successfully given the modest size of the smaller countries in trouble. Most currency unions without a political union (and also common fiscal policies) have eventually collapsed. Sooner or later the EMU must either integrate or disintegrate: there is no middle ground for it to exist in, and there is very little political support currently for fiscal union. Proposals presented during the crisis all indicate closer scrutiny and coordination of fiscal policy. If the euro survives the present crisis further steps must be taken in these areas to avoid a future recurrence. This need not of course imply a common detailed EMU-wide fiscal policy, but only that the respective fiscal positions of member countries will need to be consistent with what the EMU as a whole regards as sustainable. So far, political peer group pressure has not worked. If the euro is abandoned we make the following assumptions concerning the levels at which currencies will be floated (although changes in exchange rates are likely to be much greater).
Currency move towards the EUR to neutralize ULC discrepancies

Germany -16% Austria Finland Sweden France Belgium Netherlands Irland Italy Spain Luxembourg Portugal Greece
Appreciation Devaluation
-7% 1% 1% 1% 2% 4% 9% 11% 11% 11% 12% 17%
FX WAR POSSIBLE AGAIN. As risk-seeking capital flows pushed several EM currencies higher against most major counterparts in 2010 these economies responded by imposing various measures including FX intervention, capital controls and taxes to prevent appreciation otherwise known as an FX war. The trigger was the Feds decision to launch a second round of QE to add liquidity to markets. Given increasing expectations of further moves by the central bank to ease liquidity and debt
Currency Strategy
crisis concerns causing investors to diversify out of major currencies into quality counterparts, these fundamentally strong currencies have appreciated. With the SNBs patience regarding CHF overvaluation finally exhausted and the central bank at last intervening, this may have become the trigger for the next round of currency manipulation to prevent the fundamentally strongest from appreciating. This situation may well exert enormous pressure on the few remaining quality currencies still free floating. The key to a more permanent solution to this issue will probably lie in a freer floating and significantly stronger CNY (i.e. surplus currencies), easing pressure on other counterparts.
G10 central bank tolerance towards FX appreciation
FED ECB BOJ BOE SNB RBA BOC RBNZ RIX NB
Therefore, it is not surprising that Swedish interest rates have continued to attract strong buying interest as global reserve managers regard Swedish assets attractive.
Safe-haven currencies?
Domestic fundamentals CHF JPY NOK SEK USD
Good Bad Excellent Good Poor
Resilience to global growth

Fair Bad Fair Poor Good
Liquidity
Fair Excellent Bad Poor Excellent
External Balance/ NIIP

Excellent Good Excellent Good Bad
Official attitude Relaxed Relaxed Aggressive Relaxed Aggressive Relaxed Concerned Concerned Relaxed Concerned
Unofficial attitide Weakening bias Maintain Purch Power Depreciate Inflation vs. rebalance Depreciate!! Cap on inflation Competitiveness USA Overvalued "This is expected" Incr. FX purchases?
Valuation Undervalued Fair Overvalued Undervalued Overvalued Overvalued Overvalued Overvalued Fair Fair
SCANDIES ATTRACTIVE AS FLIGHT TO QUALITY CURRENCIES. For some time now we have argued that the krona should be re-priced as a substantially less procyclical currency. The arguments for doing so are fairly straightforward: Sweden has rebalanced its economy during the past 15 years with steady improvements in competitiveness helping to achieve a prolonged large current account surplus.
WHY SCANDIES ARE NOT PERFECT SAFE-HAVENS. The decision by the SNB to cap the Swiss franc vs. the euro at 1.20 has had rapid, far-reaching implications mainly for currencies we would have regarded as fundamentally strong (SEK, NOK, AUD, CAD). The spontaneous reaction by so-called fast money accounts following the SNB decision has been to sell EUR/Scandies. Our long-held arguments for repricing the SEK (and NOK) have been embraced by global fund managers. However, we caution against treating Scandies as new safe-havens. First and foremost liquidity is poor. Currently Swedish corporates face slower demand for their goods which will exacerbate lower turnover in the SEK (as hedging activity also slows). Consequently, liquidity is, if anything deteriorating. Rather than regard Scandies as safehavens, we would characterise them as part of the Flight to Quality process. On that basis the SEK will remain vulnerable (albeit less than previously) if the world encounters a new recession.
Currency distribution of global foreign exchange
Percentage shares of average daily turnover in April Currency 1998 2001 2004 2007 2010
US dollar Euro JPY GBP AUD CHF CAD HKD SEK NZD KRW SGD NOR MXN 86.8 ... 21.7 11.0 3.0 7.1 3.5 1.0 0.3 0.2 0.2 1.1 0.2 0.5 89.9 37.9 23.5 13.0 4.3 6.0 4.5 2.2 2.5 0.6 0.8 1.1 1.5 0.8 88.0 37.4 20.8 16.5 6.0 6.0 4.2 1.8 2.2 1.1 1.1 0.9 1.4 1.1 85.6 37.0 17.2 14.9 6.6 6.8 4.3 2.7 2.7 1.9 1.2 1.2 2.1 1.3 84.9 39.1 19.0 12.9 7.6 6.4 5.3 2.4 2.2 1.6 1.5 1.4 1.3 1.3
EUR/SEK
Source: BIS Triennial FX survey 2010
The target surplus in the fiscal budget implemented after the financial crisis in the early 1990s forced the government to control spending. As a result, Sweden is currently one of only a very few developed economies enjoying a current account surplus. Prudent fiscal spending has resulted in a declining debt to GDP ratio with present forecasts indicating that the ratio may reach below 30% during 2013-14 through growth and state asset privatization. External surpluses have also enabled Sweden to enjoy a positive international investment position (a prime characteristic for defensive currencies such as the CHF).
CONCLUSION. CONCLUSION . G4 currencies all have their own problems to deal with. Clearly, the FX market continues to focus on buying sound, fundamentally strong currencies. However, in the near-term major uncertainties and lack of political unity/coordination in terms of how to deal with the EU debt crisis will further weigh on risk appetite. In this situation, the USD will probably benefit from its status as the worlds safe-haven currency, especially given its liquidity. In the longer-term we are almost equally bearish on both the euro and the USD and expect continued respective trade-weighted weakness.
Currency Strategy
US dollar
The political turbulence in US has increased the political uncertainty. In addition the agreed package with budget improvements well below what probably will be required to stabilize the US debt has increased uncertainty. The Fed remains with an easing bias and further quantitative measures, e.g. additional bond purchases, are now in our forecast. As a consequence the risk premium attached to the USD has increased. With the twin deficits the US is dependent on attracting foreign capital while these flows have deteriorated. The outlook for the USD hence remains uncertain, most likely we will continue to see rebalancing out of the USD. MONETARY POLICY At the August meeting the FOMC announced that the key interest rate will remain close to zero until mid-2013. In addition some of the members argued for further action as additional bond purchases. If growth continues to disappoint in coming months Fed is likely to launch a third round of bond purchases in Q4 2011. Hence, the Fed is one of few central banks with a clear easing bias. Further QE and zero interest rates for an -1 extended period is likely to weaken the dollar. ECONOMIC FUNDAMENTALS US growth has disappointed in the first two quarters. Most likely growth for this year will be around 1.5%. The labour market shows very few signs of recovering and unemployment has increased in recent months as job creation has slowed. Weak labour market, continued weakness in the housing market and high gasoline prices has undermined household sentiment now back on 2009 levels. In addition business sentiment has dropped to levels normally associated with very weak or zero growth. Usually the current state of the economy would render policy action from fiscal and monetary policy to support the recovery. However, with interest rates already at historically low levels, gross public debt at 90% of GDP and substantial deficits, policy options are limited. Hence it seems as if the economic recovery this time will have to rely on a recovery in private demand and therefore will be -1 slow. FLOWS Trade deficit has widened in recent months as exports have declined more rapidly than imports. That is one reason why the current account deficit is expected to increase from 3.5%/GDP in Q1 11, despite weak US growth. That means a growing need for US to attract foreign capital inflows. However, in June foreigners net sold US long-term securities for the first time since 2009, which may be a sign that current yields are too low to attract foreign capital with rising risk premiums. -2 TECHNICALS & POSITIONING: There is a clear similarity between the current setup and the sharp upturn seen post Lehman 2008. The break above 76.72 is clearly bullish but still needs a second close above it to confirm 0 the change of trend.
Total
-4
Monetary pol.
-1 -1 -2 0
Fundamentals Flows
Technicals
USD speculative positions

82.5 80.0 77.5 75.0 72.5 70.0 67.5 May
E U R speculative positio ns U S D /C A D E U R /U S D 1.35 0
1.30 0 1.25 0 1.20 0 1.15 0 S peculative positions Speculative positions 04 USD index 05 06 07
10 0 75 50 25 0 -2 5
The lack Nov of significant upside progress in Aug Feb May Aug EUR/USD makes the current substantial net 10 11 long speculative position a burden. Should the sub-1.29-area be revisited, speculative longs will have to be reduced.
Current acc. & budget bal. % of GDP
Contracts (thousands)
12 5
30 25 20 15 10 5 0 -5 -10 -15 -20
Technical view: USD Index

Price USD 84
80
76 72
2008 2009 2010 2011
2000
2010
Detb to GDP, %
Currency Strategy
UNITED STATES
Currency Strategy
The euro
Given the magnitude of the debt crisis in the euro area the euro remains remarkably steady. It indicates that investors distinguish between the debt problems of the euro member states and the overall solid fundamentals of the currency. Looking ahead, a still possible worsening of the crisis remains the major downside risk to the euro. Despite that the currency should hold up ok. MONETARY POLICY. The ECBs rate hike cycle is already over. ECB staff reduced their growth projections for 2012 in September; the outlook for inflation has improved making additional rate hikes unnecessary. Recently banks were increasingly reluctant to lend to each other. Therefore the ECB was forced to increase its efforts to improve the functioning of the money market. All refinancing operations until year-end are conducted with full allotment. Due to the banks behaviour the money market is drowned in excess liquidity which pushed market rates well below the ECBs interest rate of the main refinancing operations. Rates will stay there for a long time making the euro less attractive. 0 ECONOMIC FUNDAMENTALS Latest leading indicators as well as economic data now turned south and point to a slowdown in the moderate recovery in the euro area. The expansion remains uneven with the core EMU member states still growing slowly while some smaller countries continue to face severe headwinds from their fiscal crises. Due to increased market tensions governments have speed-up measures to consolidate budgets and to introduce structural reforms which will continue to hamper growth in coming quarters. More importantly, markets will focus closely on the ratification process on the changes to the mandate of the European Financial Stability Facility in EMU member states. The political risk premia on the euro is substantial and it is currently hard to predict how the debt crisis will be solved. This -3 constitutes the major head-wind for the currency. FLOWS The flow picture improved in past months despite the discussion in markets about a break up of the euro. In the 12 months ending June 2011, the euro area reported net combined foreign direct and portfolio investments of EUR 333bn compared with net inflows of EUR 107bn a year earlier. That is more than enough to finance the 12m cumulated seasonally adjusted current account deficit of EUR 59.9bn in June 2011. +1 TECHNICALS & POSITIONING The ECB eur index took another beating last week, falling and closing below the support line of the bear flag. The break does further enhance a bearish case and we do accordingly expect the euro to continue to weaken, eyeing the 100 medium term -1 key support as the next main attractor.
Total
-3
Monetary pol.
0 -3 +1 -1
Fundamentals Flows
Technicals
EUR speculative positions

1.50 1.45 1.40 1.35 1.30 1.25 1.20 1.15 Jun 100 75 E U R speculative positio ns U S D /C A D 12 5 50 E U R /U S D 1.35 0 10 0 25 1.30 0 75 0 50 1.25 0 -25 25 1.20 0 0 -50 1.15 0 S peculative positions -2 5 -75 Speculative positions 04 05 06 07 -100 EUR/USD The lack of significant upside progress -125 in EUR/USD makes the current substantial net Sep Dec Mar Jun Sep long speculative position 11burden. Should a 10
the sub-1.29-area be revisited, speculative longs will have to be reduced.
Technical view: ECB EUR Index

Price 115 110 105
100
95 90
2004 2006 2008 2010 2012
2000
2010
Detb to GDP, %
Currency Strategy
EURO-ZONE
Currency Strategy
Japanese yen
Risk aversion and rapidly falling equity markets have again produced a strong demand for JPY and in tradeweighted terms the currency is now more expensive compared to the time of the coordinated G7 intervention in March 2011. Subdued risk appetite over the coming weeks on continued uncertainties as regards the EU debt crisis will likely strengthen the JPY further. We do however expect a weaker JPY 2012 based on poor fundamentals and expensive valuation. MONETARY POLICY Bank of Japan continues to run very easy monetary policy, and we would expect an even easier stance if anything. BOJ has added JPY 5000bn for asset purchases to the JPY 50000bn facility. BOJ will also assign USD 100bn of FX reserves to support exports and investments abroad. The current level of the JPY furthermore warrants caution for JPY longs as the BOJ will likely intervene on further strength. The interventions and target set for EUR/CHF by the SNB validate the question whether the BOJ will also try to peg the currency? We disagree as the JPY is not nearly as expensive as the CHF. However, monetary policy will continue to be highly -2 negative for the JPY. ECONOMIC FUNDAMENTALS The earth quake and tsunami and their effects on the Japanese economy have been more severe than anticipated. The economy was very weak even before the natural disaster and Q2 2011 was the third quarter in a row with falling GDP. For 2011 we forecast GDP to contract by 0.6% before growth will rebound by 2.9% (2012) as rebuilding takes place. The finance-minister Noda is expected to strike a more prudent fiscal policy approach. Japan nevertheless is increasingly vulnerable as debt/GDP is substantially above 200% with no prospect on turning soon. Fundamentals continue to be a clear negative for the -2 Japanese yen. FLOWS The large positive net international investment position will support the JPY in times of stress. The current account and the basic balance have deteriorated during Q2, however that is partly related to the natural disaster and a temporary need for increasing imports. Still we would keep a close eye on net exports as the tendency is clear and Japanese exporters are now pushing hard for continued JPY interventions in order to weaken the expensive currency. +1 TECHNICALS & POSITIONING The post earthquake decline didnt last for long given that the market soon again started to accumulate yen. The up-trend remains in force and a new trend high is sought during the autumn. The positioning could be of some concern should the +1 market turn down.
Total
-2
Monetary pol.
-2 -2 +1 +1
Fundamentals Flows
Technicals
10 0 75 50 25 0
1.30 0 1.25 0 1.20 0 1.15 0
S peculative positions
04 05 06 07
-2 5
Current account and budget balance

% of GDP 5.0 2.5 0.0 -2.5 -5.0 -7.5 -10.0 -12.5 90
Current account balance Budget balance Public debt
The lack of significant upside progress in EUR/USD makes the current substantial net long speculative position a burden. Should the sub-1.29-area be revisited, speculative longs will have to be reduced.
12 5
250 200 150 100 50 0 15

Source: IMF
95
00
05
10
Technical view: BOE JPY Index

Price 180 170 160 150 140
2009 2010 2011 2012
2000
2010
10
Currency Strategy
JAPAN
11
Currency Strategy
British pound sterling

We continue to expect the pound to be an underperformer as the economy is focused on an ambitious austerity program. We see a clear risk for additional stimulus through bond purchases (QE2) should inflation finally start to move back towards the BOE target. The very swift and resolute act of the government to quickly implement the substantial fiscal savings program has made the UK less vulnerable to a credit downgrade. The only argument however for buying the pound is its relatively cheap level vs most G10 currencies, we dont foresee valuation however to be a major theme for investors in the coming 6 months. MONETARY POLICY Inflation continues to be a problem for the Bank of England. In its latest Aug Inflation Report the central bank projects CPI to reach 5% by year-end before heading below the 2% target in 2013. The CPI trajectory coupled with the unanimous vote for an unchanged rate in Aug (rather than a few members voting for a hike) shows the MPC has adopted an easing bias. Adding the very weak money growth (M4 -1.5% y/y) we see a significant risk for further bond purchases (QE2) sometimes in late Q4-2011. Monetary policy hence is still -1 a drag for GBP. ECONOMIC FUNDAMENTALS The recovering economy has been weaker than initially thought as GDP growth ex stock-building contracted Q1 2009 Q1 2011 (in y/y terms). We forecast UK growth to continue to remain below trend (1.1% 2011 and 1.6% 2012) and hence unemployment looks likely to rise further. Consumers are also facing a very adverse environment with falling real wages and lower house prices. The austerity program furthermore will trim GDP substantially. Despite the massive savings debt/GDP looks set to rise close to 100% 2012. On the positive side, UK will keep its AAA credit rating for now due to the extensive (planned) budget -1 improvements. FLOWS Twin deficits will continue to weight on Sterling. Despite poor growth and a weak currency, the UK economy has not managed to rebalance away from the large external deficits. In the first quarter 2011 the current account deficit improved somewhat on weaker imports but judging by monthly trade data the C/A deficit has widened to 3% of GDP during Q2. Basic balance is even weaker as portfolio flows are negative and may reach 5% of GDP in Q2. -1 TECHNICALS & POSITIONING The market has recently been back testing and validating the exit from the bear triangle, hence Sterling should now be in a rather vulnerable position and a move below the July low will intensify selling activity. -1
Total
-4
Monetary pol.
-1 -1 -1 -1
Fundamentals Flows
Technicals
GBP speculative positions

1.675 1.650 1.625 1.600 1.575 1.550 1.525 1.500 1.475 1.450 1.425 Jun 75
1.30 0 1.25 0 1.20 0
50
10 0 75 50 25 0 -2 5 Contracts (thousands) 12 5
25 0
-25 -50
Speculative positions 1.15 0 S peculative positions GBP/USD

04 05
-75 Sep Dec Mar upside progress in Jun Sep The lack of significant 10 11 EUR/USD makes the current substantial net
long speculative position a burden. Should the sub-1.29-area be revisited, speculative longs will have to be reduced.
06
07
Technical view: BOE GBP Index
Price
90 85 80 75
2008 2009 2010 2011 2012
2000
2010
12
Detb to GDP, %
Currency Strategy
UNITED KINGDOM
13
Currency Strategy
Canadian dollar
With the close relationship between Canadian and US economies, and the high correlation between stock market performance and the Canadian currency, the CAD currently faces several head-winds which could slow down the appreciation in the short term. However, the Canadian economy and the flow outlook will continue to be supported by high commodity prices, lately the historical relationship with the CAD as a pro-risk currency has been more ambiguous as well. Being one of few currencies with acceptable fundamentals we expect the CAD to continue to strengthen medium-term. MONETARY POLICY With the policy rate at 1% monetary policy is very accommodative. Inflation peaked earlier this year and has lately declined towards the central banks forecasts. Wage pressure has increased as the labour market has recovered, in Q1 labour costs rose by 2.6% from a year ago. In July the BOC seemed to signal a coming hike with a small hawkish change in the statement. However, the latest statement was once again more dovish indicating BOC will remain on hold as long as global growth uncertainties persist. Market is currently 0 pricing one 25 bps cut over the next 6 months. ECONOMIC FUNDAMENTALS In Q2 GDP was basically unchanged from the previous quarter with the domestic economy contributing positively to growth, while net export had a substantial negative contribution. Business spending remains the most important driver for Canadian growth. However, with disposable income growing and renewed pick-up in mortgage credit growth household spending surprised on the upside in Q2, with a marked improvement in retail sales towards its long-term average. The strong links to the struggling US economy will have a negative impact on Canadian growth going forward while high commodity prices are likely to support domestic demand.= +1 FLOWS The Current account deficit widened in Q2 towards historically highs. The deficit is related to deteriorating competitiveness due to a stronger currency, weak productivity growth and slowing US growth. On the other hand Canada continues to attract foreign capital inflows, primarily foreigners buying bonds that compensate for the current account deficit. These inflows will probably remain as investors continue to diversify out of US and European assets. 0 TECHNICALS & POSITIONING The exit down from the rising wedge (wedge = ending pattern) has put some pressure on the CAD. If following the textbook the market should over the coming months take aim at the origin of the wedge i.e. the 106/107-area. The recent round of strength didnt attract speculators to any larger extent something that adds further credibility to a weakening -1 Loonie.
Total
Monetary pol.
0 +1 0 -1
Fundamentals Flows
Technicals
1.30 0 1.25 0 1.20 0 1.15 0
75 50 25 0
04 05 06 07
-2 5

% of GDP
5.0 0.0 -5.0
100 80 60 40
-10.0 -15.0 90
20 0 15
Source: IMF
95
00
05
10
Technical view: BOE CAD INDEX

Price 115 110 105
100
95 90
Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3
2009
2010
2011
14
10 0
12 5
Currency Strategy
CANADA
15
Currency Strategy
Australian dollar
The AUD is one of a few fundamentally strong currencies with a central bank that has refrained from intervening to weaken the currency despite a stretched valuation. In contrast the RBA previously welcomed a stronger currency. The Australian economy is still strong and will continue to attract capital inflows. In addition market currently prices several cuts by the central bank, which most likely has to be reversed. A combination of continued inflows and revised expectations on the central bank will support the AUD going forward. MONETARY POLICY Since the latest rate hike in November 2010 the Australian central bank has left its key interest rate unchanged at 4.75%. In the last two statements the RBA has expressed concern for the medium-term inflation outlook as underlying measures of inflation are running at around 2.5%. As cost pressure in the economy has increased substantially with high wage growth and weak productivity growth we dont expect the current tightening bias to shift towards easing, but rather the RBA will remain on hold until uncertainty regarding global growth fades. With the set-back in global growth, market pricing currently indicates expectations for 2-3 cuts over the next 6 months. As we do not agree with market pricing, monetary policy may be supportive for +2 the currency when RBA expectations are re-priced. ECONOMIC FUNDAMENTALS Australia continues to benefit from strong growth in Asia and persistent demand for commodities supporting exports, and is currently generating the largest surpluses on record. Higher commodity prices have also improved Australias terms of trade (ToT). Despite unemployment around 5% and growing household income, household confidence has dropped well below its long term average. Cautious households have continued to save a substantial part of their growing income with modest growth in retail sales and slow credit growth as a result. Hence, household balance sheets improve and that should spill over into higher spending eventually. +1 FLOWS Capital flows were less AUD supportive in Q1 as equity flows and direct investment flows were neutral. High commodity prices still have a positive effect on ToT and the external trade is generating the largest surpluses on record. That is however not enough to generate current account surpluses as persistent outflows from net investment income continues to grow. To summarize the persistent deficit in Australias C/A is historically small and more than fully compensated for by portfolio inflows.
Total
+3
Monetary pol.
+2 +1 0 0
Fundamentals Flows
Technicals
10 0 75 50 25 0
1.30 0 1.25 0 1.20 0 1.15 0
04 05 06 07
-2 5
12 5
Technical view: BOE AUD INDEX
Price
100
90 80 70
2008 2009 2010 2011
0
TECHNICALS & POSITIONING The AUD struggles to st maintain its uptrend. The 1 attempt to exit below the wedge so far seems to have failed, giving the AUD some respite. The wedge is however normally a trend ending pattern so great caution is urged. Abandon any remaining longs if breaking below the Aug low. Speculators have already sharply trimmed longs during the summer. 0
16
2000
2010
Detb to GDP, %
Currency Strategy
AUSTRALIA
17
Currency Strategy
New Zealand dollar

It is a fast changing world. Just a month ago, RBNZ, at its latest policy meeting sounded hawkish enough to make the market more or less fully price the removal of the March 2011 50 bps emergency cut. Now, with renewed global recession fears, sovereign debt focus and a slowing Australian economy, the probability of a September 15 (next OCR announcement) hike is just about down to zero. Short-term, the current turmoil will likely see the NZD trade sideways to lower vs. the USD. MONETARY POLICY RBNZ struck a hawkish tone at its latest OCR meeting (July 28) stating that the Bank sees little need for the March 2011 insurance cut to remain in place much longer. Since then the short end of the yield curve has flattened and no hike is currently priced in until a potential 25 bps hike in October or more likely December. Inflation continues to be above the Banks 13% target band but is expected to moderate as the Oct 2010 VAT hike disappears from the data. Also the increased credit premiums (~100 bps) for the banks given global credit issues acts effectively as a tightening (80% of households are at floating mortgage rates). Given the current global uncertainty we expect RBNZ at least to be +1 on hold (2.50%) until its December meeting. ECONOMIC FUNDAMENTALS Economic growth will slow as a result of weaker global outlook, an elevated level of the NZD and easing commodity prices. The cost of the Canterbury earthquake, with damages more severe than estimated, has pushed the budget deficit to a historical high. Fears of a possible downgrade will keep the governments focus on fiscal consolidation for the 0 foreseeable future. FLOWS The C/A deficit for the full year 2011 is expected to basically be in line with 2010, the best reading in 20 years. The very strong NZD is slowing export growth but at the same time making imports cheaper. The balance of trade deteriorated for the third consecutive month in July. The latest statistics shows on the other hand that terms of trade continues to be in a positive trend albeit at a slower pace. 0 TECHNICALS & POSITIONING Speculators long position remains large which is a risk should the NZD weaken further. Technically we are closely watching the old ceiling line which was bullishly broken late Q2. Return back below that line would likely trigger a rapid decline straight through the previous range (exactly the opposite to the false break lower late Q1). 0
Total
+1
Monetary pol.
+1 0 0 0
Fundamentals Flows
Technicals
10 0 75 50 25 0
1.30 0 1.25 0 1.20 0 1.15 0
04 05 06 07
-2 5
12 5
Technical view: BOE NZD INDEX

Price
105
100
95 90 85 80
Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4
2008
2009
2010
2011
18
Detb to GDP, %
Currency Strategy
NEW ZEALAND
19
Currency Strategy
Swiss franc
With setting a minimum exchange rate for the franc against the euro, the Swiss National Bank has brought the rise in the currency against the euro to a halt. But the franc remains overvalued and the economy will feel the pain in coming quarters. Switzerland must hope for a sustainable solution to Europes debt crisis to ease capital inflows into Switzerland. As there is no easy solution possible, investors may continue to look for save havens. MONETARY POLICY With the decision to set a minimum exchange rate at CHF 1.20 per euro, the SNB took massive action to end the rise of the Swiss franc against the euro. The SNB stressed that it will defend this boundary with unlimited amounts of monetary liquidity. This decision could become very costly and could create enormous additional permanent liquidity in the Swiss money market. Over the medium term it could create upside risks to inflation. Over the next months, the SNB faces increased risks to deflation as well as downside risks to growth due to the strong currency. Therefore the SNB will stand ready to implement additional measures to fight those downside risks to inflation. Monetary policy -3 remains the major threat to the CHF. ECONOMIC FUNDAMENTALS The KOF leading indicator fell sharply in August. At 1.61 points, it has reached its lowest level since November 2009. This suggests that Swiss recovery will considerably lose steam in coming months as it faces a strong headwind from the currency appreciation. We therefore expect GDP growth to slow to 1.7% in 2011, down from 2.7% in 2010. For 2012 another 0 slowdown to only 1.0% looks likely. FLOWS In the past four quarters up to March 2011 Switzerland posted a current account surplus of CHF83.49bn, up from CHF 71.33bn in the previous period. Safe-haven flows remain the major driver of the CHF. Since a lot of these trades take place in international markets Swiss statistics give no hint of increased inflows into the franc. +3 TECHNICALS & POSITIONING Speculative involvement has been mediocre and the answer must be searched elsewhere. The recent SNB inspired move lower has at large neutralized the prior notable stretch. Further losses may well unfold, at least towards possibly 142.50 or even a 140-test. Above 160 would be needed to jeopardize the recent record high. 0
Total
Monetary pol.
-3 0 +3 0
Fundamentals Flows
Technicals
10 0 75 50 25 0
1.30 0 1.25 0 1.20 0 1.15 0
04 05 06 07
-2 5

% of GDP 15.0 10.0 5.0 0.0 -5.0 90
12 5
80 70 60 50 40 30 20 10 0 10 15
Source: IMF
95
00
05
Technical view: BOE CHF Index

Price 160 150 140 130
J F M A M J J A S
Q1 2011
Q2 2011
Q3 2011
20
Currency Strategy
SWITZERLAND
21
Currency Strategy
Swedish krona
Under normal circumstances, the krona would already have weakened substantially more than experienced. Given the Swedish export dependence, SEK has been a highly pro-cyclical currency as can be seen in the chart PMI and EUR/SEK. This tendency has diminished during the past year and for good reasons as the krona is repriced as a more defensive currency. Strong fundamentals and a solid balance sheet explains the transformation although we would caution chasing SEK higher near-term as world growth slows. MONETARY POLICY The monetary policy outlook has changed markedly the last couple of months. At the start of the year it was reasonable to expect Riksbank to continue to hike rates at every meeting this year. Given the abrupt slowing of economic growth and projected slowdown on the labour market coupled with clearly slowing house prices, Riksbank is now expected to remain on hold for long. The revised repo path from the meeting in September however still forecasts rate hikes in 2012 and 2013. Markets however are discounting rate cuts, an outlook we disagree with. Hence, we see monetary policy as a small positive for SEK. +1 ECONOMIC FUNDAMENTALS Economic projections have been cut substantially SEB now expects GDP to grow 2012 by 1.4% vs 2.6% previously. With growth below trend the positive labour market developments will level out and unemployment will stay above 7% throughout the forecast horizon. This will also have negative implications for the budget outlook although we expect a small surplus 2012. Debt/GDP will fall gradually but at a slower pace (reaching 30% by 2013). This is still a very positive development for Sweden relative to most other G10 countries. We will watch the development of Swedish export orders extra carefully now as the appetite for Swedish export goods is still the best barometer for SEK developments. Corporates and pension funds are positioned for a weaker krona and are assumed to be SEK buyers on additional krona weakness. +1 FLOWS The current account continues to show a substantial surplus of 6-7%/GDP. In the second quarter the balances of services produced a surplus of SEK 40.3bn whilst goods saw a SEK 20bn surplus. As regards investment income record high Swedish dividends contributed to a net outflow of SEK 14.2bn. FDI saw a net outflow of SEK 10.9bn whilst portfolio flows saw a net inflow of SEK 34bn as foreigners continued to pile up on Swedish fixed income instruments. The overall flow outlook is expected to be SEK positive. +1 TECHNICALS The break below the multiyear floor became short lived as the market soon returned up. Higher highs and higher lows makes the risk somewhat skewed for a weaker SEK but on the other hand the response to moves above 124 in the index has so far been 0 to buy the SEK.
22
Total
+3
Monetary pol.
+1 +1 +1 0
Fundamentals Flows
Technicals
PMI and EURSEK

8.5
EUR/SEK (rev. scale)
70
1.30 0
9.0 9.5 10.0 10.5 11.0 11.5
65
10 0 75 50 25 0 -2 5 Contracts (thousands)
55 50 45 40 35 30
PMI (monthly) 1.20 0 EUR/SEK (rev. scale)

1.15 0
1.25 0
04 05 06 07
04 EUR/USD makes the 08 09 10 11 05 06 07 current substantial net

long speculative position a burden. Should the sub-1.29-area be revisited, speculative longs will have to be reduced.
The lack of significant upside progress in
TECHNICAL VIEW: SEK TCW INDEX
Price SEK
140 130 120

2006 2008 2010 2012
2000
2010
Detb to GDP, %
Diffusion index
12 5
60
Currency Strategy
SWEDEN
23
Currency Strategy
Norwegian krone
With defensive fundamentals still in fashion, its hard to not be optimistic on the krone in the longer term. The oil rich economy is less dependent on global growth and a superb fiscal situation makes additional stimulus possible if needed. At such, foreign appetite for the NOK is expected to remain high painting a rather positive flow outlook in the medium term while gradual rate hikes from Norges Bank also will support the currency. MONETARY POLICY Norges Bank has argued for over a year now that the domestic economy calls for higher rates but a strong krone and global factors have hindered the bank from hiking too much ahead of peers. Rising inflationary pressure from wage increases and a continued acceleration in house prices will force Norges Bank to hike rates gradually once the renewed market turbulence settles. However, in the near term the krone appreciation will result in Norges Bank revising its optimal rate path lower in the October MPR while still signalling gradual rate hikes. This is not reflected in market pricing which currently discount rate cuts. We disagree with market pricing viewing risks as skewed to unchanged (rather than lower) rates. Continued verbal warnings from 0 the central bank will keep monetary policy neutral. ECONOMIC FUNDAMENTALS We expect close to trendgrowth in mainland GDP for 2011-2012 as strong investments in the oil sector (which is less affected by the global cycle in the near term) will increasingly drive growth. Private consumption should be strong backed by solid income growth and high savings. This will also dent any unexpected downturn in the housing market. Fiscal policy is currently neutral and the spending of oil money is below the 4% fiscal policy rule. Norway has ample +2 resources to stimulate the economy if needed. FLOWS Norges Banks NOK selling of 400-500m/day has been offset by foreign purchases of triple-A rated bonds. Both the ownership rate in government bonds and foreign issuance of NOK-denominated bonds have increased reflecting diversification of global reserve managers into fiscally sound currencies. This trend has/will accelerate following the SNB announcement to peg EUR/CHF as the world will seek other safe-havens. In the nearest term however, the flow outlook for the krone is expected to be less positive as FX purchases should increase to NOK 700-800m/day by November. Looking beyond that, the appetite for Norwegian krone should be high based on a positive outlook for OBX (supported by the oil sector), expected Brent oil price above $100/barrel in 2012 and continued NOK bond buying. +1 TECHNICALS & POSITIONING The index broke below the 2003 & 2008 lows but without finding staying power beneath. The spike below the prior low points is a clear warning of an overextended move and a potential 0 upward reaction.
24
Total
+3
Monetary pol.
0 +2 +1 0
Fundamentals Flows
Technicals
10 0 75 50 25 0
NOK millions
1.30 0 1.25 0 1.20 0 1.15 0
12 5
04 05 06 07
-2 5
Technical view: NOK Index (I44)

Price
100
95 90 85
2002 2004 2006 2008 2010 2012
2000
2010
Index
Currency Strategy
NORWAY
25
Currency Strategy
Danish krone
Fundamentals, flows and technicals point to a stronger DKK vs. EUR. DNB has recently sold DKK and lowered rates. With Euro zone worries to culminate in the fall, a further fall in EUR/DKK towards the lower end of the current band at 7.44 is likely before a reversal. A disorderly Euro-zone development could test 7.44. MONETARY POLICY Officially EUR/DDK is allowed to fluctuate by +/- 2.25% around its central parity rate (7.46038). However, in reality DNB maintains a much tighter range, recently 7.44 to 7.46 with the mid of the range triggering policy reversal. During August DNB bought 11bn euro as the 7.45 level was breached. Also the deposit rate was cut lowering the spread to the Euro zone. Further strengthening will lead to intervention putting downward pressure on DKK with determination increasing as the 7.44 level is approached.= -1 ECONOMIC FUNDAMENTALS We expect 1.4% growth this year mainly driven by exports. Next year the growth baton will be passed on the domestic economy as fiscal policy and pent-up demand lifts growth to 1.7% - higher than the Euro zone. The public deficit will increase in 2012, but this should not be a concern for financial markets given the large current account surplus and low public debt level. Confidence should remain regardless of the outcome of the national elections on September 15. The fundamental problem in the Danish economy is the aftermath of the private debt accumulation during the housing bubble. The bust has left consumers stretched and revealed pockets of weakness among banks. This has caught international attention as failures lead to losses on senior debt. The FSA has signalled that further write downs are in the pipeline. However, outlines for a Bank Bill 4 encourage consolidation in the sector before failures and DNB will start accepting less liquid collateral addressing liquidity problems. Hence, the toolkit for dealing with the situation will improve and speedier consolidation is likely. With the current focus on public +1 balances, we find fundamentals net positive. FLOWS Positive spreads to Germany makes Danish AAA government bonds attractive. However, recent downgrades of Danish mortgage bonds from AAA has dented foreign investor appetite somewhat. The current account surplus leads to a general inflow. With exports slowing in the second half of the year, this flow could moderate towards year-end. In the past year, risk aversion has lead to upward pressure on DKK vs. EUR. This pressure is likely to be strong until the Euro situation is resolved. Our main scenario is a resolution and stabilization in leading indicators later this year. Bottom line, flows are positive short-term, with moderation more +1 likely as the year nears its end. TECHNICALS & POSITIONING The cross is headed south within parameters set by a broader range. 0
Total
+1
Monetary pol.
-1 +1 +1 0
Fundamentals Flows
Technicals
10 0 75 50 25 0
1.30 0 1.25 0 1.20 0 1.15 0
04 05 06 07
-2 5
12 5
Technical view: EUR/DKK

Price 7.46 7.455
7.45
7.445 7.44
2007 2008 2009 2010 2011 2012
2000
2010
26
Detb to GDP, %
Currency Strategy
DENMARK
27
Currency Strategy
Russian rouble
We are moderately constructive on the outlook for the RUB against the basket by the end of the year and more so by the end of Q1. Two crucial flows and two key risks are at the centre of our analysis. Oil prices are expected to remain elevated thus maintaining a large current account surplus. Meanwhile, we expect capital outflows to increase, as political uncertainty escalates in the runup to elections. Near term, downside risks dominate emanating from the oil price and the European debt crisis. The rouble may well weaken before it starts recovering towards year end. MONETARY POLICY The Central Bank of Russia (CBR) has hiked the reference rate by 50bps to 8.25%. The 1W deposit rates, which is more important from a currency/ carry perspective, has been raised by 75bps to 3.5%. Inflation has fallen from a peak around 9.5% in early summer to 8.2% (target 7%). Given this and the increased uncertainty about the global economic environment, we expect the CBR to remain on hold for the foreseeable future. Although carry is unlikely to be an important FX driver for now, monetary policy must be seen as RUB supportive, especially in view of the relatively high policy rate in conjunction with an FX reserves rich central bank ready to intervene if/when the rouble against a basket (55% USD, 45% EUR) rises further within the fluctuation band (currently at 32.25+1 37.25). ECONOMIC FUNDAMENTALS GDP growth so far this year has disappointed, dropping from 4.1% in Q1 to 3.4% in Q2. We expect some acceleration backed by high commodity prices and supported by an expected supplementary budget in the run-up to elections (Parliament in Dec-11. and President in Mar-12). Although growth will be high compared to developed countries, it will not come back to pre-crisis level as potential growth has shrunk due to worsening demographics and insufficient renewal of the capital stock. Meanwhile, public debt to GDP is below 10% and the C/A to GDP will be about 4% this year but is set to become lower next.
Total
-1
Monetary pol.
+1 +1 -2 -1
Fundamentals Flows
Technicals
10 0 75 50 25 0
1.30 0 1.25 0 1.20 0 1.15 0
04 05 06 07
-2 5
12 5
Technical view: RUBLE BASKET

Price 36 35 34 33 32
Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1
+1
FLOWS The C/A surplus has supported a steady increase in the FX reserves of about USD 2bn/week YTD to 543bn now. The surge would have been larger were it not for private capital outflows ( >USD 30bn in H1). These outflows are likely to increase with political uncertainties as elections come closer and more so if risk aversion eventually would hit oil prices. -2 TECHNICALS The market has for months been parked on top of the yearly average, consolidating the prior surge. The longer the market remains above the 52w moving average the greater the probability of a sustained move higher towards the ceiling of the 2010/2011 range -1
2010
2011
28
Detb to GDP, %
Currency Strategy
RUSSIA
29
Currency Strategy
Polish zloty
The zloty is among the more vulnerable currencies to continued/deepened turbulence in financial markets. Near term risks are skewed to the downside with the weak spots on the fundamental score card (twin deficits) likely to attract more attention than the strengths. Growth will remain strong in a regional comparison, partially supported by the weak zloty. MONETARY POLICY The next move in policy rates by the National Bank of Poland will be down, in our view. Having frontloaded 100bps of policy rate hikes to 4.5%, focus has shifted from elevated food and energy price risks to a slowing growth trajectory abroad and at home. But a near term rate cut may be seen as premature for two reasons. Headline CPI is unlikely to start falling before year end from around 4% currently towards the 2.5% target and the zloty is weak and vulnerable to further market turbulence. We expect one cut by 25bps each in Q1 and Q2 next year. The FinMin will exchange all the EU-funds on the market and the NBP is likely to mark its presence in the market if the zloty would suffer continued sharp +2 losses however not by drawing a line in the sand. ECONOMIC FUNDAMENTALS will, in our view, remain a crucial driver for currencies. If GDP growth was the only parameter investigated, the zloty should do OK (still strong at +4.3% in Q2). But it isnt. Investors have during recent years learnt to scrutinise internal and external balances and Poland currently suffers twin deficits public budget and current account - and financing of the latter is predominantly with short term or debt generating capital (see Flows below). These deficiencies are eye catching especially during periods of market stress when fundamental strengths such as moderate levels of indebtedness, a strong banking system and stable politics (likely to remain after the October 9 parliamentary election) are out of investors focus. Overall and in the current environment we give a small negative score for -1 fundamentals. FLOWS The annualised basic balance has stabilised just below zero. The current account deficit is set to reach almost 5% of GDP (after the revision) but is fully financed. The quality of financing has however, deteriorated with net FDI now flat with an increasing dependence on portfolio flows. For next year, the plan is to issue public external bonds worth EUR 4.5bn. Poland has a flexible credit line of USD 30bn with the IMF which would be drawn upon only in a very dire situation. -1 TECHNICALS The large round-bottom type of turn indicates a more lasting upturn, so does also the break above the 2010 high point, 4.24, do. With the market moving away from its yearly average, a sing of good momentum, new highs (4.36, 4.50?) looks increasingly -2 likely.
Total
-2
Monetary pol.
+2 -1 -1 -2
Fundamentals Flows
Technicals
GDP and economic sentiment

120 115 110 105 100 95 90 85 80 75 98
Economic Sentiment, SA, ECFIN GDP growth
1.30 0 1.25 0 1.20 0 1.15 0 12 5 10 0 75 50 25 0
8 6
4 2 0 -2 -4
04 05 06 07
-2 5
00 02 04 06 08 10 The lack of significant upside progress in EUR/USD makes the current substantial net long speculative position a burden. Should the sub-1.29-area be revisited, speculative longs will have to be reduced.
Technical view: EUR/PLN

Price
4.4
4
3.6 3.2
2009 2010 2011
2000
2010
30
Detb to GDP, %
Currency Strategy
POLAND
31
Currency Strategy
Hungarian forint
Number crunching the forint foundations in 2011 is a challenging task. On the one hand, the forint enjoys twin surpluses and very high carry. On the other, these supports are partially the fruits of short sighted fiddling with public finances and of a depressed private sector. A lack of political will or capability (or both) to understand the markets reaction to political initiatives adds to the vulnerability of HUF. Near term; risks clearly lie on the downside. By year end, however, a recovery to current levels is likely given our expectation for an orderly solution of the European debt crisis despite its severity. MONETARY POLICY A policy rate at 6% and a real
Total
-2
Monetary pol.
+2 -2 -1 -1
Fundamentals Flows
Technicals
interest rate of almost 3% is definitively too much for the domestic economy. Other EM central banks have or will cut rates as growth and inflation eases. The National Bank of Hungary is unlikely to have the luxury of responding in that manner due to the private sectors heavy foreign indebtedness. Any rate cut that weakens the HUF will raise repayment costs to the extent that it becomes counter productive. Hence, we expect policy rates on hold for now. The excessive policy rate level is a key supporter for the forint. +2
ECONOMIC FUNDAMENTALS Twin surpluses look fine, on paper but this years 2% budget surplus largely rests upon the nationalisation of private pension funds. The weak 2Q GDP growth (1.5% y/y vs. 2.5% expected) and dwindling outlook for exports have put next years budget deficit target in doubt (2.5% of GDP). The government has re-committed to the target and it has a very strong position in parliament. But the Fidesz has a tainted track record and has already decided upon sensitive spending cuts (financially rational given a public debt/GDP close to 80% but politically challenging) for 2012. The C/A surplus reflects a strong export sector but also four years of decline in retail sales. The fundamental weaknesses will be more in focus than the structural progress achieved, -2 especially in the near term. FLOWS The trade balance surplus is a massive 7-8% of GDP. However, the income account is weighed down by high external private and public sector debt and high interest rates. De-leveraging of the high FX debts also weigh on the HUF. This would intensify if new proposals to repay FX loans at preferential rates become law. Still, the C/A surplus is a positive. -1= TECHNICALS The market is currently moving towards a test of the upper boundary of the two year long broad range. Only a successful break out of the box will call for a new trend to have emerged. The fact that the 2011 low (so far) became higher than the 2010 one makes an -1 upside exit more likely.
10 0 75 50 25 0
1.30 0 1.25 0 1.20 0 1.15 0
04 05 06 07
-2 5
The lack of significant upside progress in EUR/USD makes the current substantial net long speculative position a burden. Should the sub-1.29-area be revisited, speculative longs will have be reduced. Current accounttoand budget balance
% of GDP 7.5 2.5 -2.5 -7.5 -12.5 -17.5 98 00 02 04 06 08 10 12 14 16

12 5
80 70 60 50 40 30 20 10 0
Source: IMF
Technical view: EUR/HUF

Price 300 280 260 240
2009 2010 2011
2000
2010
32
5Y HGB spread vs. Bund, percent
Stock market index (HUF)
Currency Strategy
HUNGARY
33
Currency Strategy
Turkish lira
The lira remains at risk of further losses, especially in the near term when liquidity and current account comparisons look set to weigh heavier than carry and other fundamentals. The current account deficit is about to fall substantially but remains large and financing is vulnerable to market stress. A hard landing after recent super strong growth cannot be ruled out. The central bank has, however, followed through on verbal interventions with action as the lira has already weakened enough. While the near term risks are clearly tilted towards further lira losses the outlook next year looks much better. MONETARY POLICY Although carry is not expected to be an important driver for FX markets in coming months, it appears likely that the lira would have been significantly weaker was it not for the high interest rate. The surprise cut in the 1W rate to 5.75 and the rise in the O/N rate to 5.0 early August has been coupled with dovish rhetoric in view of a deteriorating global backdrop. However, the CB also signals that there is a limit to how much lira weakness it accepts. It has hence switched from daily USD purchases to sales among other measures. We expect the global backdrop to weaken further near term, but with the lira risking to fall further and inflation way above target (core at 6.2% vs. the 5.0% target for Dec. 2012) there will not be room to cut rates further for now. Reductions in RRR are more likely. The 5.75% do lend the +2 lira crucial support. ECONOMIC FUNDAMENTALS: The domestically driven rapid growth in recent quarters widened the current account deficit to 12% of GDP in 1H12. This is a key reason for TRY underperformance. Growth will however fall fast from 11% in Q1 and 8.8% in Q2 to perhaps 3% next year. The external deficit will drop from about 10% of GDP to 6-7% as imports slow, the lira is more competitive and energy imports are cheaper. The current account deficit will still remain a key risk especially given its short term financing structure (see below). Other crucial fundamentals such as internal and external debt levels, banking system health and political decisiveness look much stronger but are not likely to come to the forefront for now. -1 FLOWS: Only 15% of the current account deficit is covered by FDI. The rest comes from banks foreign borrowing and portfolio inflows, both of which may dry up if the financial stress increases. We expect government bonds to be rather sheltered in this environment but worry more about the maintenance of adequate roll -1 over ratios in banks foreign borrowing. TECHNICALS The impulsive advance unfolds in a trendshaping wave pattern. In this context the next target (however not the end of the trend) should be sought around 1.88. -2
34
Total
-2
Monetary pol.
+2 -1 -1 -2
Fundamentals Flows
Technicals
Percent y/y
10 0 75 50 25 0
1.30 0 1.25 0 1.20 0 1.15 0
04 05 06 07
-2 5
12 5
Technical view: USD/TRY

Price 1.7 1.6 1.5 1.4 1.3 1.2
2009 2010 2011 2012
2000
2010
Detb to GDP, %
Currency Strategy
TURKEY
35
Currency Strategy
Korean Won
Broadly speaking, in our experience we find that Emerging Market investors view KRW as a proxy for investing in Asia. This is due to the idea that Korea has very liquid and deep bond and equity markets on a cash and derivatives basis. Given our view of a rebound in economic activity in Asia sometimes in Q4 2011, the Asian currency appreciation theme will at first materialize via a rally in KRW against the USD. MONETARY POLICY We believe that the current stance of monetary policy is still loose, given that the real 91 day CD rate (which is our measure of real interest rates in Korea) is negative and the second round effects of past commodity price increases on core inflation has yet to end. As a result, we expect processed goods prices to rise further and add pressure on core inflation to further accelerate in Q4 12. We believe the base policy interest rate may rise by 50-75 bps by end-2011 from the current 3.25%. In our view, the neutral base policy interest rate is around 4-4.5%. The risks to our aggressive view on monetary policy is that if US data shows further signs of slowing in the next few months and global financial +1 market turbulence is sustained. ECONOMIC FUNDAMENTALS Our leading indicators analysis suggests a rebound in economic activity by September. As a result, we forecast Q3 11 GDP growth to be around 3% y/y versus 3.3% in Q2 11. We expect Q4 11 GDP growth of around 4%. In our view, the contribution from investment spending to growth may accelerate in Q4 11 as the uncertainty on global macro and market conditions diminishes. In addition, the US holiday season effect on Korean exports should be positive for larger capacity utilization rates and inventory build up in Korea in our view. As a result, the output gap may remain +2 positive in Q4 11. FLOWS With the exception of the possibility of a marginal current account deficit in August, we expect current account surpluses in Q4 11 driven by goods trade surpluses emanating from exports for the US holiday season. In addition, we expect portfolio flows to accelerate in Q4 11 into the bond and equity markets as Asia growth and currencies outperform comparables in developed economies. +2 TECHNICALS USD/KRW keeps trading in an overall downtrend below the negatively sloped yearly average. The break above the upper boundary of what appears to be a falling wedge is however a warning sign of potentially an upside reaction in the making. 0
Total
+5
Monetary pol.
+1 +2 +2 0
Fundamentals Flows
Technicals
Effective exchange rate & USD/KRW

120 115 110 105 100 95 90 85 80 75 70 65 700 Effective exchange rate E U (reversed) USD/KRW R speculative positio ns
1.35 0 1.30 0 1.25 0 1.20 0 1.15 0 10 0 75 50 25 0 Contracts (thousands)
800
12 5
NEER Index (BIS)
900
1000 1100 1200 1300 1400 1500
04 05 06 07
-2 5

% of GDP
1600 The lack of significant upside progress in 00 01 02 03 makes the current substantial net EUR/USD 04 05 06 07 08 09 10 11 long speculative position a burden. Should the sub-1.29-area be revisited, speculative longs will have to be reduced.
15.0 12.5 10.0 7.5 5.0 2.5 0.0 -2.5 -5.0 90
40 35 30 25 20 15 10 5 0 10 15
Source: IMF
95
00
05
Technical view:
Price /USD 1,200 1,150 1,100 1,050
Q3 Q4 Q1 Q2 Q3 Q4
2010
2011
36
USD/KRW (reversed)
U S D /C A D E U R /U S D
Currency Strategy
SOUTH KOREA
37
Currency Strategy
Chinese Renminbi
We expect Q3 11 GDP to bottom at around 9.2% y/y versu s 9.5% in Q2 11, and rebound to 9.5% in Q4 11. CPI inflation may hit 6.8-7% y/y by November 2011 versus July 6.5%. As a result, we expect policy makers to use a plethora of tools to tighten monetary conditions further, which we believe is only close to neutral and not tight according to our proprietary monetary conditions index. On an annual basis, we expect currency appreciation to rise to 6-7% from the last few years average of 5-6% in order to temper inflationary pressures and geopolitical considerations in the developed economies. MONETARY POLICY We believe that our monetary conditions index should be at least 3% versus end-July 0.9%. This is based on our H2 11 GDP growth forecast of around 9.4% and CPI inflation of 6.8-7% by November 2011. With policy interest rates rising by 50-75 bps by end-2011 as our base case scenario, USDCNY will fall to 6.3 and potentially lower by end-2011 in order for our monetary conditions index to approach 3% by end-2011. By end 2012, we expect USDCNY at 5.90. Price pressures in the utility, transport, and food sectors seem to be robust and show limited signs of moderating, e.g. services CPI which lags goods CPI in our view may accelerate over the next few months. Wages seem to be lagging productivity and inflation. From previous business cycles, we note that the gap between real wages and productivity will have to narrow via further increases -3 in nominal wages. ECONOMIC FUNDAMENTALS We expect economic activity to rebound by September as indicated by our proprietary leading indicator analysis. Investment spending is already showing signs of revival. The main sectors where investment spending may accelerate are cement, chemicals, and capital goods. Overall investment spending will be driven by capacity additions in these sectors and movement of factories from coastal to interior regions as cost and wage pressures have been +2 becoming prohibitive in these areas. FLOWS Due to loose monetary conditions in the G3 economies, we are observing large net FDI and portfolio inflows. In addition, current account surpluses remain intact as trade surpluses continue to remain high on back of strong exports of intermediate and capital goods. Continued foreign exchange management policies have kept the pace of FX reserves growth robust. These trends are likely to continue in the next 1-3 quarters in our view.
Total
+2
Monetary pol.
-3 +2 +2 +1
Fundamentals Flows
Technicals
Policy Rates / Reserve requirement

20.0 17.5 15.0 12.5 10.0 7.5 5.0 2.5 20.0 Lending Rate, 0-1 Years Deposit Rate, 1 Year 17.5 RR2 E U R speculative positio nsRatio - Small Banks - Reserve Requirement 15.0 U S D /C A D
1.35 0 1.30 0 1.25 0 1.20 0 1.15 0
E U R /U S D
12 5 10 0 75 50 25 0
12.5 10.0 7.5 5.0 2.5 0.0
04 05 06 07
-2 5
0.0 96 The lack of 02 04 upside progress in 98 00 significant 06 08 10

EUR/USD makes the current substantial net long speculative position a burden. Should the sub-1.29-area be revisited, speculative longs will have to be reduced.
Technical view: CNY 1Y NDF

Price 7.2 7 6.8 6.6 6.4
2009 2010 2011 2012
+2
TECHNICALS The contract trades comfortably lower below the negatively sloped yearly average. Last month saw an impulsive drop, now partially being corrected towards the middle (maximum the 52w ma and ceiling line) of the falling range, before the downtrend expected +1 to resume.
38
2000
2010
Detb to GDP, %
Currency Strategy
CHINA
39
Currency Strategy
Currency ranking summary

The chart shows the ranking of individual currencies using each of our four evaluation criteria. A positive (negative) value means we expect that particular criterion to have a strengthening (weakening) impact on the currency.
Monetary policy
2 2 2 2 1 1 1 1 0 0 0
-1
-1
-1 -2
-3 AUD PLN HUF TRY NZD SEK RUB KRW EUR CAD NOK USD GBP DKK JPY CHF
Economic fundamentals
2 2 2 1 1 1 1 1 0 0
-1
-1
-1
-1
-2 -2 NOK KRW CNY CAD AUD SEK DKK RUB CHF NZD USD GBP PLN TRY JPY HUF
3 2 2 1 1 1 1
Flows
1 0 0 0
-1 -1 -1 -1 CHF KRW CNY EUR JPY SEK NOK DKK CAD AUD NZD GBP PLN HUF TRY USD
Technicals & Positioning

1 1 0 0 0 0 0 0 0 0
-1
-1
-1
-1
-1 -2
JPY CNY USD CHF AUD NZD SEK NOK DKK KRW EUR GBP CAD RUB HUF PLN
40
Currency Strategy
Stretch-o-meter & Seasonality

The stretch-o-meter tells us how many standard deviations away currently the exchange rate is from the 200-day moving average. Higher absolute values indicate more stretched values.
SEB FX Stretch-o-meter
EURNOK EURJPY USDJPY GBPUSD EURUSD EURSEK EURGBP EURCHF EURCAD USDNOK USDCHF GBPSEK AUDUSD USDSEK USDCAD NOKSEK EURPLN
High reaction risk
High reaction risk
-4.00
-3.00
-2.00
-1.00
0.00
1.00
2.00
3.00
4.00
Seasonal currency patterns

USD/AUD USD/CAD USD/CHF USD/GBP USD/HUF USD/JPY USD/NOK USD/NZD USD/PLN USD/SEK USD/SGD Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec -0.4 1.0 -0.1 2.3 0.7 0.3 0.5 -0.8 1.2 0.6 0.3 1.4 USD/AUD -0.3 0.0 0.2 1.4 2.1 -0.3 0.0 0.1 1.6 -0.2 -0.1 0.1 USD/CAD -1.4 0.3 0.4 0.1 0.3 0.7 0.3 0.3 1.5 0.1 0.7 2.7 USD/CHF -0.1 -0.8 -0.5 1.2 0.5 1.0 0.6 -1.1 0.5 0.1 -0.5 -0.1 USD/GBP -3.3 0.2 0.2 1.4 0.8 0.0 1.2 -0.9 2.2 -0.5 0.3 2.7 USD/HUF 0.3 -0.3 -0.7 -0.1 0.8 -0.4 0.1 1.7 0.5 1.2 0.8 0.0 USD/JPY -1.1 0.3 0.6 2.3 0.2 -0.6 1.2 -0.4 1.6 -0.7 -0.1 1.5 USD/NOK 1.0 0.1 -3.5 -0.5 1.3 -2.1 2.1 -0.7 -0.2 -0.7 -1.6 3.2 USD/NZD -2.5 0.3 0.2 1.7 0.0 -0.5 2.0 -1.2 1.4 0.2 0.8 1.9 USD/PLN -1.4 -0.3 0.4 1.5 0.1 -0.3 1.1 -0.4 1.8 -0.9 0.6 1.8 USD/SEK -0.1 0.1 -0.1 0.8 0.3 -0.4 0.7 0.1 0.5 0.2 0.0 1.2 USD/SGD Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec EUR/AUD -0.9 -1.0 0.6 -1.5 -0.5 0.0 0.1 0.6 0.3 -0.7 0.2 0.6 EUR/AUD EUR/CAD -0.9 0.0 0.2 -0.6 -2.0 0.5 0.7 -0.3 -0.1 0.0 0.6 2.0 EUR/CAD EUR/CHF -0.1 -0.2 -0.1 0.6 -0.2 -0.4 0.3 -0.5 0.1 -0.5 -0.2 -0.6 EUR/CHF EUR/GBP -1.4 1.0 0.8 -0.5 -0.5 -0.6 0.0 0.8 1.1 -0.5 1.0 2.2 EUR/GBP EUR/HUF 2.1 0.0 0.1 -0.6 -0.6 0.4 -0.6 0.7 -0.5 0.3 0.3 -0.7 EUR/HUF EUR/JPY -1.8 0.5 1.2 0.8 -0.7 0.7 0.5 -1.9 1.0 -1.4 -0.2 2.1 EUR/JPY EUR/NOK -0.4 -0.2 -0.3 -1.5 -0.1 1.0 -0.5 0.2 0.0 0.3 0.7 0.5 EUR/NOK EUR/NZD -2.2 -0.1 4.5 1.4 -1.2 2.3 -1.5 0.7 2.1 0.4 2.3 -1.0 EUR/NZD EUR/PLN 1.3 -0.2 0.3 -0.9 0.3 0.6 -1.0 0.7 0.4 -0.5 -0.2 0.0 EUR/PLN EUR/SEK -0.1 0.5 0.0 -0.8 -0.1 0.6 -0.4 0.2 -0.2 0.5 -0.1 0.2 EUR/SEK EUR/SGD -1.3 0.1 0.5 -0.1 -0.1 0.4 0.2 -0.5 1.1 -0.6 0.5 0.6 EUR/SGD EUR/USD -1.5 0.1 0.5 0.7 0.2 0.0 0.9 -0.5 1.7 -0.4 0.5 2.1 EUR/USD The table show the monthly seasonal effects (in %) that the quoted currency pairs historically have experienced. A positive value indicates that the currency pair tends to rise and vice versa. The calculations are done using data over the last 10 years. Roughly only values of at least +/-1% (bolded) are statistically significant.
41
Currency Strategy
Guide to indicators
SEB CURRENCY RANKING SYSTEM
Each currency is ranked according to four potential drivers; Technicals & Positioning, Monetary policy, Economic fundamentals and Flows. Each of these drivers is given a grade to reflect how important we deem it for the currency from a 3 month perspective. The grades used are 0=no impact, 1=small impact, 2=medium impact, and 3=strong impact. To indicate whether the factor will have a positive or negative impact on the currency a (+) or (-) sign is used. For example, +1 for flows connected with the CHF means we expect the flow situation to be a slightly positive factor for the Swiss franc during the coming 3 months. The sum of the grades for the four different drivers results in the overall score for the currency which is printed in the top left corner of the graph.
importance in the countrys trade flows. An increase (decrease) in the BoE index reflects an appreciation (depreciation) of the currency.
EXTERNAL DATA SOURCES

The main data providers used in this report are: SEB, national sources, Reuters Graphics and the Reuters Ecowin.
SEASONAL PATTERN
We have calculated the seasonal effects using a regression approach. In the regression we have used the monthly percentage change in the exchange rate as the dependent variable and dummy variables for the different months as explanatory variables. Our dataset consists of end of the month daily close FX rates over the last 10 years.
SEB STRETCH-O-METER
This indicator shows how stretched a currency pair is by measuring the distance between the current rate and the 200 day moving average expressed in standard deviations. Values in excess of +/-3 are to be considered over-stretched and often signal an increased reaction/reversal risk.
Total
-1
Monetary pol.
-2 0 +1 0
Fundamentals Flows
Technicals
COMMITMENT OF TRADERS (COT) REPORT

The CoT report (weekly) seeks to describe market positioning in a currency future on the Chicago Mercantile Exchange. The Exchanges trading members must state whether their trading purposes comprise either commercial hedging or speculation. Speculators are regarded as either large (non-commercials) or small. We present and analyse the positioning of large speculators in order to understand sentiment in the currency. The chart presents the net open position (non-commercial longs less non-commercial shorts). For those currencies not available in the CoT report we have created a proxy (see FX Ringside 2006-04-04).
BASIC BALANCE
The basic balance is a flow indicator that includes the current account balance and net flows from both directand equity investments. The broad basic balance also includes the private sectors net trade in debt securities.
EFFECTIVE EXCHANGE RATE (ER)

A nominal effective exchange rate is the value of a currency against a basket of currencies. The Bank of England calculates the ER using IMF-provided weights. Each currency is given a weight that reflects its relative
42
Currency Strategy
Contacts
STOCKHOLM Carl Hammer (editor) +46 8 506 23128 carl.hammer@seb.se FRANKFURT Thomas Kbel +49 69 97271245 thomas.koebel@seb.de OSLO Erica Blomgren +47 22827277 Erica.blomgren@seb.no COPENHAGEN Jakob Lage Hansen +45 33281469 jakob.lage.hansen@seb.dk SINGAPORE Sailesh Jha Kumar +65 65050583 sailesh.kumar.jha@seb.se
Richard Falkenhll +46 8 506 23133 richard.falkenhall@seb.se Dag Mller +46 8 506 23129 dag.muller@seb.se Mats Olausson +46 8 506 23262 mats.olausson@seb.se Anders Sderberg +46 8 506 23021 anders.soderberg@seb.se
43
With an eye for trading opportunities

Did you know that you can do all your trading business via the Internet? By using Trading Station, you are always in contact with the global trading market. You get access to the latest exchange rates, and you can buy and sell at the blink of an eye spots, swaps or forwards. To find out how you can develop your electronic trading, visit us at www.seb.se/mb. Or call one of our traders to activate our e-service: Gothenburg +46 31 774 90 60 Malm +46 40 667 69 10 Stockholm +46 8 506 231 40

SEB Report: Investors To Move Away From Dollar, Euro

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The good, bad and ugly

TUESDAY 13 SEPTEMBER 2011

EDITOR Carl Hammer + 46 8 506 231 28

Currency outlook (end Q4) )

* Bloomberg survey FX forecasts.

SEB policy rate forecasts

sep 12, 2011

2.00% 2.00% 2.0% 25bps hike

0.0-0.25% 0.25% 2.0%

>50bps cut Italics indicate past decisions

* = Strategic policy meetings

The Big Picture

SEB FX investment styles 2011

Currency move towards the EUR to neutralize ULC discrepancies

-7% 1% 1% 1% 2% 4% 9% 11% 11% 11% 12% 17%

Resilience to global growth

External Balance/ NIIP

Source: BIS Triennial FX survey 2010

USD speculative positions

Current acc. & budget bal. % of GDP

30 25 20 15 10 5 0 -5 -10 -15 -20

Technical view: USD Index

EUR speculative positions

Current acc. & budget bal. % of GDP

Technical view: ECB EUR Index

1.30 0 1.25 0 1.20 0 1.15 0

Current account and budget balance

E U R speculative positio ns U S D /C A D E U R /U S D 1.35 0

250 200 150 100 50 0 15

Technical view: BOE JPY Index

British pound sterling

GBP speculative positions

Speculative positions 1.15 0 S peculative positions GBP/USD

Current acc. & budget bal. % of GDP

Technical view: BOE GBP Index

1.30 0 1.25 0 1.20 0 1.15 0

Current account and budget balance

5.0 0.0 -5.0

Technical view: BOE CAD INDEX

E U R speculative positio ns U S D /C A D E U R /U S D 1.35 0

1.30 0 1.25 0 1.20 0 1.15 0

Current acc. & budget bal. % of GDP

E U R speculative positio ns U S D /C A D E U R /U S D 1.35 0

Technical view: BOE AUD INDEX

New Zealand dollar

1.30 0 1.25 0 1.20 0 1.15 0

Current acc. & budget bal. % of GDP

E U R speculative positio ns U S D /C A D E U R /U S D 1.35 0

Technical view: BOE NZD INDEX

1.30 0 1.25 0 1.20 0 1.15 0

Current account and budget balance

Technical view: BOE CHF Index

E U R speculative positio ns U S D /C A D E U R /U S D 1.35 0

PMI and EURSEK

9.0 9.5 10.0 10.5 11.0 11.5

PMI (monthly) 1.20 0 EUR/SEK (rev. scale)

04 EUR/USD makes the 08 09 10 11 05 06 07 current substantial net

The lack of significant upside progress in

Current acc. & budget bal. % of GDP

TECHNICAL VIEW: SEK TCW INDEX

140 130 120

1.30 0 1.25 0 1.20 0 1.15 0

E U R speculative positio ns U S D /C A D E U R /U S D 1.35 0