HSBC Jan 2014 USD Strength

Currency
OUTLOOK
Macro Currency Strategy January 2014
USD rally to spread its wings

USD strength is set to continue through 2014, and expand in scope. Currency gains on the Feds exit strategy are only just beginning. Furthermore, the EUR and GBP will no longer be the exceptions to the USD dominance for the reasons we provide in the following reports. GBP: mind the trade gap We question the sustainability of a UK recovery driven by rising house prices. Moreover, the threat of a rapidly widening UK trade deficit adds to our concerns regarding GBP. We believe the combination should see GBP lower, particularly in H2 2014. EUR: myth-buster The EURs resilience in the face of a dovish ECB has encouraged a mistaken belief that the currency is being dominated by factors other than carry. We explain why this is not convincing and show that the outlook for monetary policy is still the key driver of the EUR, and one which should see it lower.
Disclosures and Disclaimer This report must be read with the disclosures and analyst certifications in the Disclosure appendix, and with the Disclaimer, which forms part of it
abc
Summary
Summary
Here we summarise our FX views and provide top EM FX trades for 2014.
(pg 3) (pg 5)
We see the USD rally continuing and expanding in scope in 2014. The pace of tapering and the ability of the Fed to reassure the market that rate hikes need not swiftly follow the end of tapering will be central to the USDs fortunes. On both measures, we expect the currency to thrive. Further, the two notable exceptions to USD dominance in 2013, the EUR and GBP, are likely to succumb in 2014.
GBP: mind the trade gap
(pg 13)
We believe that GBP will face renewed downward pressure in H2 14. The GBP has capitalised on the back of consumption driven recovery that has been fuelled by rising house prices. We have our doubts over the sustainability of this economic revival. If doubts about the durability of the recovery were to threaten capital inflows at the same time as concerns about the UKs widening visible trade deficit were taking hold, the negative impact on GBP would be sizeable.
EUR: myth-buster
(pg 20)
The EURs resilience in the face of a dovish ECB has encouraged a mistaken belief that the currency is being dominated by the improvement in the Eurozones current account balance, and portfolio flows into recovering Eurozone markets. We are not convinced by either. The reality is that the outlook for monetary policy is once again the key driver to the EUR. With the Fed heading towards exiting its emergency accommodation, the EUR bullish run is likely to meet a tragic end.
Precious metals
(pg 27)
We lower our 2014, 2015 and long-term gold forecasts in line with our stronger USD view. However, we see the negative impact of further investor liquidation being partially offset by continued strong emerging market demand. We also lower our platinum forecasts but leave palladium unchanged.
Dollar Bloc
(pg 30)
No love for CAD in the New Year: The CAD has started the year on the defensive and we expect further
weakness going forward. The main factors which will provide additional downward pressure on the CAD are: the market perceiving a greater chance of BoC easing, the Feds exit strategy, the shift from surplus to deficit in Canada trade dynamics and diminished USD recycling from EM.
abc
AUD: the worst is over: Given the adjustment in the AUD over the last year, we believe the depreciation
in 2014 will moderate. Sluggish domestic growth with little signs of rebalancing and expected USD dominance are among the main drags on the AUD. However, our view that the RBAs easing cycle is done is likely to see only a moderate sell off. NZD: a booming 2014: With the economy booming and the RBNZ expected to be the first central bank in the G10 space to start raising rates we are looking for a stronger NZD in 2014.
Key events Date 09 January 09 January 12 January 15 January 21-22 January 22 January 29 January 30 January 04 February 06 February 06 February
Source: HSBC
Event ECB rate announcement BoE rate announcement Central Bank and Regulatory Chiefs meet in Basel Fed releases Beige Book BoJ monetary policy meeting BoC rate announcement and Monetary Policy Report FOMC rate announcement RBNZ rate announcement RBA rate announcement BoE rate announcement ECB rate announcement
Central Bank policy rate forecasts Last USD EUR JPY GBP 0-0.25 0.25 0-0.10 0.50 Q2 2014(f) 0-0.25 0.25 0-0.10 0.50 Q4 2014(f) 0-0.25 0.25 0-0.10 0.50
Source: HSBC forecasts for Fed funds, Refi rate, Overnight Call rate and Base rate
Consensus forecasts for key currencies vs USD 3 months EUR JPY GBP CAD AUD NZD
Source: Consensus Economics Foreign Exchange Forecasts December 2013
12 months 1.279 105.5 1.569 1.066 0.875 0.792
1.321 101.9 1.594 1.051 0.902 0.816
abc
Summary
The rally seen in the USD during much of 2013 is set to continue this year and expand in scope. Our greater bullishness on the USD is based on two principal reasons.
1. The Feds exit will drive USD higher
Treasuries, and was described as modest by the Fed. There is scope for the pace to be increased subject to the data. The USD may also benefit should the market begin to question the Feds message that there is likely to be a substantial gap between the end of QE3 and the start of a rate hike cycle. Surveys suggest that market expectations of this gap currently stand at 10 months. It may narrow. The UK provides a useful parallel where the market has questioned central bank forward guidance, and bought the currency as a result. A similar process in the US is likely to drive the USD stronger.
The USDs gains on the Feds exit strategy are only just beginning, and are likely to accelerate as the market questions the gap between the likely end of QE3 and the first Fed rate hike.
2. GBP and EUR will no longer be the exception to this USD dominance.
The unbalanced nature of the UK recovery means the already large trade deficit could become an even greater concern for GBP. EUR resilience is being built on specious arguments. The currency will succumb to lacklustre growth, low inflation and possible ECB policy easing.

The UKs unbalanced recovery points to considerable GBP weakness later in 2014. For now, GBP may be underpinned by the acceleration in UK activity and the associated hawkish shift in rate expectations. However, the upswing is being driven largely by consumption supported, not by rising real incomes, but by a combination of dis-saving, renewed housing leverage, and wealth effects from a governmentboosted housing market. With little hope for a marked improvement in exports, this means that rising import demand will widen the UK visible trade deficit in goods from an already large 6.5% of GDP in 2013 to potentially troubling levels. At the same time, doubts are likely to emerge about the sustainability of the UK recovery, which will undermine the short-term inflows which have been a crucial element of funding for the trade
Fed to drive the USD higher

The pace of further USD gains will depend on how fast the Fed chooses to taper and whether the market continues to believe there will be a big gap between the end of QE3 and the first rate hike. On both aspects, we think the balance of risks favour USD strength. Recent surveys suggest the market expects that the Fed QE3 programme will not end until the December FOMC meeting. We believe the end could come sooner, especially if the recent run of upside surprises on US economic activity persists. The initial USD10bn taper came earlier than the majority expected, targeted both MBS and
abc
deficit. GBP would face the double whammy of questions over the trade deficits sustainability alongside retreating interest rate hike expectations.
more undervalued than the IDR. Selling IDR against the INR rather than against the USD removes the negative carry aspect.
Short USD-MXN: On a relative basis, the MXN
EUR: myth-busters
We are not convinced by a number of suggestions offered for the EURs resilience to wider USD strength. One idea is that EUR is gaining on the basis of its improving current account balance. Yet the US deficit has seen an even greater correction in its imbalance. In addition, the swing into surplus for the Eurozone reflects economic weakness or collapsing domestic demand not strength. The second suggestion is that the EUR is being supported by portfolio flows, but the Eurozone is not the only market to see buying of local equity and bond markets. Furthermore, portfolio flows are not the dominant aspect of the Eurozones capital account. Like the AUD in 2013, which seemed initially immune to deterioration in many of its macro drivers, we therefore expect the EUR to belatedly weaken in response to its economic frailties. The divergent paths of US and Eurozone monetary policy and the relative pace of economic growth point to a much lower EUR during 2014.
outperformed all other currencies in LatAm FX in 2013 thanks to the approval of important structural reforms that are expected to raise the country's potential growth in the coming years. And yet, in absolute terms, current USD-MXN levels do not reflect this structural shift, in our view. We expect continued support for the MXN against the USD in 2014, aided by an upgrade by the rating agencies, increased FDI inflows, and a rebound in cyclical domestic data. We target USD-MXN at 12.60/USD in 2014 and find current levels as attractive entry points. We would also look to play MXN outperformance against other currencies in the region, or against the EUR, echoing our EUR-USD view.
Long USD-RUB: Interestingly, the RUB has
Emerging market opportunities

Long INR-IDR. Though both currencies are
plagued by current account deficits, the INR is mainly suffering from a large trade deficit, while the IDR is being hurt by a widening income account deficit. The INR has recovered from the summer sell off, helped by import restrictions and schemes to attract capital inflows. The IDR still suffers steady income outflows despite rate hikes and an improved trade balance. While the RBI has been trying to curb the INRs volatility, BI has allowed the IDR to adjust weaker. Valuation also suggests that at current levels, the INR is still
never been categorised in the fragile group of currencies like the TRY and ZAR. The fact that Russia displays a current account surplus is certainly the main explanation. Yet, the RUB has weakened significantly during the EM sell-off in H2 2013 and we believe that the adjustment is likely to extend in 2014. A small current account surplus in a context of persistent and structural capital outflows will continue to weigh on the RUB, particularly given very weak economic growth and sticky inflation. The diminished involvement of the Russian central bank in the FX market and a likely further widening of the RUB trading band should also contribute to a weaker currency.
abc

Dollar dominance
It may not feel like it, but 2013 was a good year for the USD. Chart 1 shows the performance of the worlds most actively traded currencies against the USD during 2013. The skew towards underperformance is clear, and even those few that managed to outpace the USD did so only by a rather small margin. However, for many in the market, the main points of reference for the USD are against the EUR, GBP and JPY. As the USD fell against both the EUR and GBP during 2013, notably during the second half of the year, it may not be remembered as a dominant year for the USD. But even with the headwinds from the EUR and GBP, the broad USD index in 2013 finished close to 4% higher than it started. Furthermore the USD rose 3% in 2013 against an equally weighted index of EUR, GBP and JPY. For 2014, we believe the USD dominance will continue and indeed expand in scope. This is for two principal reasons:1
The USD gains on the Feds exit strategy are only just beginning, and will accelerate as the market questions the gap between the likely end of QE3 and the first Fed rate hike. GBP and EUR will no longer be the exceptions to this USD dominance, and will succumb to vulnerabilities in their respective economic outlooks.
1. Currency performance vs USD during 2013
% 10 5 0 -5 -10 -15 -20 -25 -30 GBP KRW SEK HKD NZD MXN TWD SGD CZK ILS EUR NOK COP PEN INR BRL CAD MYR RUB CLP CNY CHF PLN HUF IDR ARS AUD TRY JPY ZAR FX performance against the USD in 2013
% 10 5 0 -5 -10 -15 -20 -25 -30
Source: HSBC, Bloomberg
abc
1) USD gains on Fed policy have only just begun

There are two aspects as to why we believe USD gains on the back of Fed policy are still in their infancy. Essentially, the extent of USD gains will depend on the following:A) Pace of Fed tapering B) Ability of the Fed to differentiate between QE ending and rates being raised
The pace will invariably be central to the USDs fortunes. Within G10, carry considerations dominate the behaviour of many of the exchange rates with the possible exception of the JPY and CHF. If data prompts the Fed to shift to a soft tapering approach, then EUR-USD would likely hold onto the bulk of the gains posted during H2 13. Similarly, GBP-USD would be supported and emerging market FX would likely capitalise on the upside from the Feds continued liquidity largesse. Of course, this data dependency cuts both ways and the recent signs are encouraging for the USD. Our US activity economic surprise index, shown in Chart 2, has been trending higher for a number of months now. This signals that upside surprises have been outstripping economic disappointments. If sustained, it could be consistent with a swifter end to tapering than is currently anticipated by the market. A Bloomberg survey conducted after the December 2013 FOMC meeting showed the median expectation was that QE3 would end in December 2014. Even if the USD10bn pace established at the December meeting is maintained, it would point to a likely exit at the October meeting. Were data consistently
A) Setting the pace

In terms of pace, the Fed is already off to a reasonably aggressive start. It announced the beginning of its tapering programme at its December FOMC meeting, sooner than expected by the majority of forecasters who had generally anticipated a March 2014 move. The Fed cut back its purchases of both Treasuries and Mortgage Backed Securities (MBS), where some had expected the taper to be confined to Treasuries. The Fed also described the USD10bn taper as a modest reduction, suggesting an appetite for a swifter reduction were the data to warrant it.
2. US economic data has been surprising to the upside
US activ ity surprise index -10 -15 -20 -25 -30 -35 -40 -45 Jan-12 Apr-12 Jul-12 Oct-12 Jan-13 Apr-13 Jul-13 Oct-13 Jan-14 -10 -15 -20 -25 -30 -35 -40 -45
abc
3. The Fed has convinced markets that end of QE3 will not see rates rise swiftly thereafter
Gap betw een ex pected end of tapering and first priced in rate hike (months) 14 12 10 months 8 6 4 2 0 13 Aug
14 12 10 months 8 6 4 2 0 06 Sep 20 Sep 18 Oct 08 Nov 06 Dec 19 Dec
surprising to the upside and inflation began to show some signs of life alongside the activity pick-up, that could arguably come sooner.
B) Mind the gap

Considering the trauma evident in US Treasuries and emerging market FX between May and September 2013 when markets adjusted to the mere possibility of tapering, the market reaction to the actual arrival of tapering in December has been remarkably relaxed. For example, US 10yr government bond yields rose more than 100bp between May and September, but have so far risen only a modest 13bp since tapering was announced somewhat earlier than expected. Similarly, a basket of the fragile five (BRL, IDR, INR, TRY and ZAR) against the USD fell 7% between the May 22 announcement of likely tapering and the September FOMC meeting. This understates the true weakness as between the start of May and the start of December, the drop was over 13%. The drop since the December 18 taper has been less than 1%, with much of this attributable to heightened political risk rather than tapering trauma. Part of this comfort is driven by the Feds success in convincing markets that the end of QE3 will not be followed swiftly by a hike in the Fed funds
rate. Chart 3 uses a sequence of Bloomberg surveys to find when the market expects QE3 to end, and measure the gap in months between this date and when Fed funds futures imply the first hike in the policy rate will occur. When tapering fears were at their height ahead of the September 2013 FOMC meeting, the market anticipated a gap of only 7 months between the end of QE3 and the first rate hike. A combination of a September tapering delay and a concerted communication strategy by the Fed to emphasise that the end of QE3 was a distinct process from any rate hike consideration saw that gap widen out to a sizeable 13 months ahead of the December 2013 FOMC meeting. The ability of the Fed to get the market to buy into this message is all the more remarkable given that US economic data was generally surprising to the upside over this period (see Chart 2). So far, so good; but the problem for the Fed will be in sustaining this distinction as tapering progresses and economic data remains consistent with a normalisation of activity and, in the future, inflation. It is interesting to note that in the wake of the December FOMC taper, that gap between the end of QE3 and the first rate hike has already narrowed back to 10 months.
abc
4. Market expectations for the first BoE hike (measured by short-sterling futures contracts)
UK first ex pected rate hike, 3M GBP futures Hawkish Jun-14 Sep-14 Dec-14 Mar-15 Jun-15 Sep-15 Dec-15 Dovish Mar-16 Jun-16 Sep-16 03-Jan 03-Feb 03-Mar 03-Apr 03-May 03-Jun 03-Jul 03-Aug 03-Sep 03-Oct 03-Nov 03-Dec Jun-14 Sep-14 Dec-14 Mar-15 Jun-15 Sep-15 Dec-15 Mar-16 Jun-16 Sep-16 Dovish Hawkish
Rule Britannia
A useful parallel to the Feds potential difficulty is the UK where the Bank of England has struggled to convince markets that interest rates are not about to rise anytime soon. When Mark Carney arrived as the new governor of the Bank of England in July 2013, forward guidance was promoted as a key policy tool. An unemployment threshold of 7.0% was announced above which rates would not be raised, while a move below 7.0% was not necessarily a trigger for a rate hike.
In August, the BoE projected that the 7% threshold would be not be hit with a greater than 50% probability until Q2 16. Chart 4 shows the progression of UK rate expectations during 2013, using short sterling futures to indicate when the first hike was priced in. The market took a much more hawkish view than the BoE of the UK economy, implying that the first rate hike could be delivered one year earlier during Q2 15.
5. The BoE has shifted its expectations for when the unemployment threshold might be crossed
8.0 7.8 7.6 7.4 7.2 7.0 6.8 6.6 6.4 6.2 6.0
BoE unemploy ment rate forecast (August 2013)
BoE unemploy ment rate forecast (Nov ember 2013)
8.0 7.8 7.6 7.4 7.2 7.0 6.8 6.6 6.4 6.2 6.0
Q3 13 Q4 13
Source: HSBC, BoE
Q1 14 Q2 14 Q3 14 Q4 14 Q1 15
Q2 15 Q3 15 Q4 15 Q1 16 Q2 16
Q3 16 Q4 16
abc
6. USD FX is increasingly correlated with moves in US government bond yields
0.35 0.25 0.15 0.05 -0.05 -0.15 -0.25 Jan-08

Av g correlation (100D) of USD vChart s G10 ex change rates w ith US 10Y Treasury y ield Title
0.35 0.25 0.15 0.05 -0.05 -0.15 -0.25
Jan-09
Jan-10
Jan-11
Jan-12
Jan-13
Jan-14
By November, the markets stance was largely validated by the Bank of Englands fresh set of unemployment forecasts in the inflation report. Chart 5 compares the forecasts made in August with those made in November, indicating that they are lower across the board. In addition, that 50% probability that the unemployment rate would be 7.0% or lower is now expected in Q4 2014, matching the markets expectation for when the first hike may be delivered. In the UK, the market chose not to believe the central bank and anticipated swifter policy tightening than the BoE had in mind. In the US,
the market has so far chosen to believe the Fed that there will be a reasonable gap between the end of QE and the start of a rate hiking cycle. The market also took solace from the Feds insistence at the December FOMC that it likely will be appropriate to maintain the current target range for the federal funds target rate well past the time that the unemployment rate declines below 6.5%. But the UK example shows that the market will not always take its lead from the central bank. The fact that US government bond yields are already inching higher and that the QE3-hike gap is narrowing following the December taper could be
7. US bond yield movements may also be critical to any emerging market FX view
US 10Y gov t bond y ield % (LHS) Index of USD v s 'fragile fiv e' ex change rates (BRL, IDR, INR, TRY and ZAR), 100=01 May 13 (RHS) 3.1 2.9 2.7 2.5 2.3 2.1 1.9 1.7 1.5 01-May 21-May
120 117 114 111 108 105 102 99 10-Jun 30-Jun 20-Jul 09-Aug 29-Aug 18-Sep 08-Oct 28-Oct 17-Nov 07-Dec 27-Dec
abc
a sign that markets will increasingly question quite how long-lasting the Feds commitment to unchanged rates will last if the data continues to improve. In similar fashion to the pace of tapering, this element of the policy has immediate policy implications for the USD. Chart 6 shows the average correlation of the daily changes in various G10 exchange rates vs the USD against daily changes in US 10Y government bond yields. Clearly, the relationship has strengthened markedly during 2013 and will be a key determinant of USD fortunes in 2014. If the gap closes between the perceived end of QE3 and the first rate hike, the USD will capitalise. An additional angle on this theme relates to emerging market FX where there has been a similar hardening of the relationship between US government bond yields and EM FX movements. Chart 7, for example, shows an index of the fragile five plotted against the US 10Y government bond yield. Assuming you believe this relationship will hold, then your expectations for these currencies will be heavily dependent on your view for US yields. So we believe that USD gains related to Fed policy have only just begun. We expect the US economy to be sufficiently strong to allow the current pace of tapering to persist through 2014, suggesting an exit at the October meeting. In addition, the USD should also capitalise were the market to challenge the Feds message that the gap between the end of QE3 and the start of a rate hike cycle will be a long one.
economic deficiencies, although these vulnerabilities are quite different in nature.
GBP: unbalanced
GBP has been a noteworthy exception to USD strength during H2 13, rallying close to 10% against the USD. It is a trend we expect to reverse, and our forecast for GBP-USD at the end of 2014 is 1.50. The unbalanced nature of the UK economic recovery is what troubles us most with regard to GBP. It has relied excessively on a consumption binge fuelled by rising house prices which, in turn, may have been fostered by government support rather than any notable shift in underlying fundamentals. We outline our concerns in greater detail elsewhere in this document (see GBP: mind the trade gap), but in summary we believe this imbalance in growth drivers will be echoed in rising concerns regarding the UKs sizeable visible trade deficit. These fears are likely to be most prevalent during H2 14 as doubts about the sustainability of the recovery begin to undermine the capital inflows which have so far underpinned GBP despite the large trade deficit. With export markets still facing headwinds but imports supported by the consumer revival, the visible trade balance is likely to deteriorate in 2014. The UK is starting an economic expansion with a deficit as a percentage of GDP of roughly 7%. The hope, and our economic teams presumption, is that the drag from net investment income and net transfers will reverse in 2014 and allow the headline overall current account deficit to narrow. However, this was also the hope at the start of 2013, and it never happened. GBP has capitalised on the boost to interest rate expectations that better than expected economic data has driven, but 2014 may be the year where the focus switches from carry considerations to balance of payments concerns. If it does, GBP could face a
2) GBP and EUR to fall on economic vulnerabilities

The second part of the bullish USD view is driven by our belief that the two principal exceptions to USD dominance in H2 13, namely the EUR and GBP, will weaken in 2014. Both will succumb to
10
abc
similarly traumatic time to that of H1 13, although for quite different reasons.
EUR = AUD version 2.0

In arriving at a forecast for the EUR, one simple question is whether we can recommend that investors continue to buy the EUR at current levels in anticipation of further gains based on fundamentals? Our answer is no. We faced a similar predicament with the AUD when it moved above parity against the USD. For us, the currency then represented poor value relative to a backdrop of slowing China growth, declining commodity prices and narrowing carry against the USD. However, the AUD remained stubbornly resilient throughout H2 12 and into early 2013 before finally succumbing to those fundamental pressures in Q2 13. We think the EUR faces a similar path. Some after-the-fact rationalisations have been offered for EUR strength, including the improvement in the Eurozones current account balance, and portfolio flows into recovering Eurozone markets. We are not convinced by either, and explain why elsewhere in this report in more detail (see EUR: myth-buster). To summarise, the US has seen a greater improvement in its current account balance than
the Eurozone since the crisis began. In addition, Europes trade improvement largely reflects crumbling domestic demand and imports, not some export revival. Should we really be buying the currency of countries suffering in this way? The portfolio flow argument holds some merit as net inflows have improved, but they are small when compared to net FDI or other investment flows. They cannot be the dominant driver to the EURs resilience. Instead, the problem for the EUR remains the divergent paths of monetary policy and the relative pace of economic growth. The Feds balance sheet may be still getting bigger even as they taper, but it is clear that policy is heading towards the exit from emergency accommodation. By contrast, we believe that the ECB may choose to ease policy again this year given the weakness of activity and associated disinflation. ECB President Draghi has made it clear that all options remain open, including a negative deposit interest rate or a further LTRO, perhaps linked to a commitment to boost credit growth. It is rare for policy within G4 to move in opposite directions, and the reality of such a divergence rather than the mere prospect of it, will likely see EUR-USD head much lower through the year.
8. Divergent monetary policy will put EUR-USD under downward pressure
EUR-USD 1.40 1.38 1.36 1.34 1.32 1.30 1.28 1.26 01-Jun
Ex pected Dec'15 3M rate differential (EUR-USD, RHS)
% -0.1 -0.2 -0.3 -0.4 -0.5 -0.6 -0.7 -0.8 -0.9
01-Jul
01-Aug
01-Sep
01-Oct
01-Nov
01-Dec
01-Jan
11
abc
Chart 8 shows EUR-USD plotted against relative rate expectations for the end of 2015. The relationship has been growing stronger in recent months. If, as we argued in the previous section, the market no longer looks for such a big gap between the end of QE3 and the start of rate hikes in the US, then this relative interest rate spread will point towards a lower EUR-USD. In addition, if policy easing in the Eurozone delays when markets expect Eurozone rates to ultimately go higher, then this too will drag EUR-USD lower. In addition, the starting point for this adjustment may already suggest that EUR-USD is a little high relative to current rate expectations. We look for EUR-USD to finish 2014 at 1.28.
Conclusion
USD strength is set to continue through 2014, and expand in scope. Both the EUR and GBP, which were the notable exceptions to the rule of USD dominance in 2013, are likely to weaken. The EUR will succumb to the reality of economic underperformance against the US, and the divergence in monetary policy. GBP, buoyed so far by the pick-up in UK economic indicators and associated carry considerations, is vulnerable to a shift in the markets focus to the UKs problematic trade deficit. All of which clears a path for a powerful USD this coming year. Its only just begun.
The exceptional JPY

If there is to be an exception to USD dominance, we suspect it may be the JPY. The consensus persists with its view that USD-JPY will continue to climb higher during 2014. But as much of H2 13 demonstrated, ongoing monetary easing by the Bank of Japan does not mean the currency has to persistently weaken. Much is already in the price, most likely including some additional BoJ easing later this year. In addition, we start 2014 with the market once again anticipating a wave of Japanese money to flood out, causing the JPY to weaken. They may be right this time around, but 2013 showed that such presumptions can be wide of the mark. Finally, 2014 will be the year where the market will have to deliver its verdict on Abenomics. If all we witness is a currencyinduced temporary spike in inflation rather than a wage-led revival in inflation expectations, then how much has really changed, especially if structural reforms continue to underwhelm in their scope and pace of delivery. We forecast USD-JPY to finish the year at 101.
12
abc

GBPs carry dominance to fade
We believe currencies fall into three main groupings or buckets, namely the carry-sensitive G10 pairings, the diminished safe-havens of the JPY and CHF, and finally the balance of payments club dominated by emerging market FX category (see Currency Outlook: The new FX paradigm, October 2013). In general, GBP has happily belonged in the first bucket. Chart 1 shows GBP-USD in red plotted against expectations for how wide the market believes the gap will be between UK and US interest 3M rates by the end of 2015. The currency has closely tracked the shifts in relative rate expectations. For H2 13, this has driven a stronger GBP against the USD as the market consistently brought forward it expectation of when the Bank of England (BoE) might first hike interest rates. In addition, a delay to the Feds tapering in September 2013 and a successful effort by the Fed to emphasise that US rates are unlikely to rise soon after QE3 ends further contributed to the gap moving in GBPs favour. This all makes perfect sense in a carry world and, for now at least, should help provide some underpinning to GBP. However, for GBP-USD in particular, carry considerations may begin to move in the opposite direction during 2014. In addition, GBP may find itself more in focus for its balance of payments fundamentals, a process that points to considerable downside for the currency.
Quantity not quality

The principal problem for GBP is that the driver to the UK economic upswing may be impressive in terms of quantity, but less so in terms of quality. The recovery in the UK economy has been heavily dependent on the improvement in the housing market and the increase in consumption
1. GBP has taken its cue from relative rate expectations
% 0.70 0.50 0.30 0.10
Ex pected Dec15 3M rate differentials (UK-US)
GBP-USD (RHS) 1.69 1.66 1.63 1.60 1.57
-0.10 -0.30 -0.50 Jan-12 Mar-12 May -12 Jul-12 Sep-12 Nov -12 Jan-13 Mar-13 May -13 Jul-13 Sep-13 Nov -13 Jan-14
1.54 1.51 1.48
13
abc
2. Housing activity being fuelled by low mortgage rates and government incentives
UK mortgage approv als (000) 140 120 100 80 60 40 20 Sep-02 Jul-03 May -04 Mar-05 Jan-06 Nov -06 Sep-07 Jul-08 May -09 Mar-10 Jan-11 Nov -11 Sep-12 Jul-13
140 120 100 80 60 40 20
that a more active housing market induces. The housing market has been helped by continued low mortgage rates (and assurances that rates will stay low for some time) plus government incentive such as the help to buy schemes. Chart 2 shows the monthly rate of mortgage approvals. Before the crisis, these were running at over 100,000 per month. Between 2010 and 2012 the rate was about 50,000 per month, but it has recently accelerated to about 70,000 per month. There would still seem to be some scope for this to increase further, which would imply that
further strength in UK consumption spending may be seen in early 2014. At the same time, the increase in housing market activity has seen housing construction pick up from a low base (chart 3), and there would again seem to be scope for this to accelerate further. So this has been a consumption driven recovery that has been funded either by improved access to credit or a draw-down in savings as consumers grow in confidence on the back of rising house prices and falling unemployment. This creates two problems for GBP:-
3. Still scope for housing construction to rise
House Building in England, quarterly , 55,000 50,000 45,000 40,000 35,000 30,000 25,000 20,000 15,000 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 Starts Completions 55,000 50,000 45,000 40,000 35,000 30,000 25,000 20,000 15,000
Source: Bloomberg, HSBC
14
abc
4. Negative real income growth will eventually bite
% 4.0 3.0 2.0 1.0 0.0 -1.0 -2.0 -3.0 -4.0
UK Real w eekly earnings y -o-y
% 4.0 3.0 2.0 1.0 0.0 -1.0 -2.0 -3.0 -4.0
Mar-01 Mar-02 Mar-03 Mar-04 Mar-05 Mar-06 Mar-07 Mar-08 Mar-09 Mar-10 Mar-11 Mar-12 Mar-13
Questions over the sustainability of the UK recovery Likely deterioration in the visible trade balance
market would likely be postponed into 2015, and GBP would weaken in tandem. However, it is the second vulnerability of external imbalance that may prove the greater threat to GBP, and see it move from the carry bucket into the balance of payments club.
Ultimately, strong consumption spending cannot be sustained without growing incomes. As chart 4 clearly shows, real earnings growth has been negative for much of the period since 2009, so consumption spending will eventually falter. Once consumption starts to falter, the UK economy will start to look weak again, and the markets perception of sterling will quickly change. The December 2014 hike currently priced into the
5. UK current account deficit could be more than 5% of GDP in 2015
UK Current Account and relativ e domestic demand -7.0% -6.0% -5.0% -4.0% -3.0% -2.0% -1.0% 0.0% 2006
Source: HSBC, Datastream
Index 109 108 107 106 105 104 103 102 101
UK Current Account (% GDP 4Q ma, LHS inv erted) Relativ e domestic demand (RHS) Forecast relativ e domestic demand
2007
2008
2009
2010
2011
2012
2013
2014
2015
15
abc
6. The starting point for the trade deficit is already at a worrying level
UK v isible trade balance, % GDP 2.0% 1.0% 0.0% -1.0% -2.0% -3.0% -4.0% -5.0% -6.0% -7.0% -8.0% 1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012
Source: HSBC, ONS
2.0% 1.0% 0.0% -1.0% -2.0% -3.0% -4.0% -5.0% -6.0% -7.0% -8.0%
Welcome to the balance of payments club

It is understandable that policymakers are less concerned about the quality of growth, and are simply relieved to see the UK emerge from recession and in fact lead the way in terms of European growth. However, for currency investors, the nature of growth is likely to become increasingly important and more threatening to GBP.
More worryingly, this time around, the starting point for the visible trade deficit is already larger than in the late 1980s. Chart 6 shows the UK visible trade balance as a percentage of GDP. If domestic demand is outstripping peers by the magnitudes expressed in chart 5, there is a substantial risk that the visible trade deficit will take a further lurch deeper into the red. Certain idiosyncrasies of the UKs overall current account balance may help limit the damage. Much of the deterioration in the deficit over the last two years has been due to two less closely followed components of the current account, namely the
7. The UK overseas income balance has turned negative
UK Income balance (% of GDP 4Q sum) 3.0% 2.5% 2.0% 1.5% 1.0% 0.5% 0.0% -0.5% -1.0% -1.5% 1977 1980 1983 1986 1989 1992 1995 1998 2001 2004 2007 2010 2013 3.0% 2.5% 2.0% 1.5% 1.0% 0.5% 0.0% -0.5% -1.0% -1.5%
16
abc
8. The deficit on transfers has widened further
UK Transfers balance (% of GDP) 0.5% 0.0% -0.5% -1.0% -1.5% -2.0% 1986 1989 1992 1995 1998 2001 2004 2007 2010 2013 0.5% 0.0% -0.5% -1.0% -1.5% -2.0%
balance on overseas income and the balance on transfers (such as worker remittances, overseas aid, EU payments and receipts). Both of these elements have moved towards a larger deficit in the past two years. Chart 7 shows the balance on overseas income as a per cent of GDP on a 4 quarter sum basis. While this was strongly in surplus until 2008, it has since moved to a deficit approaching 1% of GDP. This deterioration has been driven by lower earnings on UK assets held abroad and increased profit repatriation by overseas owned businesses in the UK. Chart 8 shows the balance on transfer
payments. The widening deficit here has been due mostly to an increase in the deficit on government transfers which were running at about GBP 2.5bn per quarter in 2009 and are now about GBP 5bn per quarter. In its official projections for the current account deficit for 2014, the Office for Budget Responsibility (OBR) has assumed that these two deteriorating elements will simply reverse in a mean-reversion exercise. Whether this happens or not is open to question as a similar misplaced assumption was made at the start of 2013. In any event, we believe the troubling picture from the
9. The UKs substantial visible trade deficit may become a greater concern in 2014
8.0% 6.0% 4.0% 2.0% 0.0% -2.0% -4.0% -6.0% -8.0% -10.0% -12.0% 2000
Source: HSBC, ONS
UK Current account balance as % of GDP
8.0% 6.0% 4.0% 2.0% 0.0% -2.0% -4.0% -6.0% -8.0% -10.0% -12.0%
Net inv estment income balance Transfers balance Trade in serv ices balance Trade in goods balance Current account balance 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013
17
abc
10. Direct investment has turned positive, but portfolio flows have been strongly negative
UK Direct Inv estment and Portfolio flow s (4Q sum) GBP bn 300 200 100 0 -100 -200 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 Direct Inv estment Portfolio GBP bn 300 200 100 0 -100 -200
more fashionable parts of the current account, the visible trade deficit in particular, will be sufficient to trip up GBP. Chart 9 shows the various constituents of the UK current account deficit. The prominent deficiency is the sizeable deficit in the trade in goods balance (visible trade balance). For 2014, the combination of rising UK domestic demand and lacklustre growth in the UKs major export markets point to further deterioration in this part of the overall deficit. If net income and transfers do not improve as forecast, then things could be very grim indeed.
Current account financing can come from three sources:

1
Direct investment inflows: the purchase of UK fixed assets and businesses by overseas investors. Portfolio flows: the purchase of UK bonds and equities by overseas investors. Short-term financing: short-term loans or the purchase of money market instruments by overseas investors.
Financing the current account deficit

The fact that the UK has a troublesome trade balance does not necessarily imply that sterling will be under downward pressure. Ex ante demand for sterling denominated assets may be more than strong enough to finance the deficit, which will result in upward pressure on the currency (as has been happening in recent months). The nature of the current account financing will, however, show whether the currency is becoming more vulnerable, and an analysis of the UK data does not give encouraging results.
Of course, the financing element for the current account is the net of inflows and outflows for each of these categories. Chart 10 shows the balance on direct investment and portfolio balance on a 4 quarter sum basis. Large portfolio inflows during the crisis have become large outflows in recent quarters. For the most part, portfolio outflows have been larger than direct investment inflows, which means short term financing flows must be large enough to cover this capital flow deficit as well as the wider current account deficit. Chart 11 shows the short-term financing flows that have been required to ensure that the balance of payments does, in fact, balance.
18
abc
11. Short term inflows into the UK have become substantial
GBP bn 300 200 100 0 -100 -200 2001 2002 2003 2004 2005
Implied short term funding flow s (4Q sum)
GBP bn 300 200 100 0 -100 -200
2006
2007
2008
2009
2010
2011
2012
2013
During the crisis, the fall in the current account deficit and the portfolio inflow implied that shortterm funding flows were negative. The rush to safe havens during the crisis saw investors moving funds out of sterling and into the yen and the dollar. Since 2011, however, the implied short-term financial flow has been positive, suggesting that investors have been building up large holdings of UK short-term assets.
We believe this time will come in H2 14, and we look for GBP-USD to fall to 1.50 by year end.
Conclusion: The double whammy

The importance of short-term financial flows has put sterling firmly in the carry candidate bucket where expected moves in short term rates are crucial to the fortunes of the currency. As long as the market continues to perceive sterling in terms of carry, and as long as the economy continues to improve, then recent sterling strength can remain in place. However, as we noted earlier, we have our doubts over the sustainability of this economic revival without a productivity-driven rise in wages growth that could put the economy on a firmer footing. If doubts about the durability of the recovery were to threaten capital inflows at the same time as concerns about the UKs widening visible trade deficit were taking hold, the negative impact on GBP would be sizeable.
19
abc
EUR: myth-buster
The EUR myths emerge
The EURs relentless rise, even as the ECB has cut interest rates and flagged the possibility of negative interest rates, has encouraged the markets to look for other explanations for the currencys on-going rise. There are two popular suggestions:-
Suggestion 2: Flows into Eurozone peripheral asset markets are driving the EUR higher
In addition, not only is the current account side of the balance of payments improving, but capital inflows are also likely to be benefitting from the renewed strength in Eurozone equities and peripheral bond markets. For example, since Draghi announced in mid-2012 his willingness to do whatever it takes to protect the Euro project, the broad European equity market has risen by roughly 25% and 10Y Spanish government bond spreads have narrowed roughly 400bp against their German equivalent (see chart 2). Both these developments are, of course, potentially currency positive. However, we have our doubts that they are the most pertinent driver of the EUR. We examine both lines of logic in the coming sections.
Suggestion 1: The EUR is rising because of Europes improving current account balance
The logic offered is that the EUR is capitalising on the improving current account balance which has seen it swing from a deficit in the early part of the crisis to a surplus currently (see chart 1).
1. Eurozone current account has moved into surplus
Eurozone C/A balance, 3M MA (EUR billions) 30 25 20 15 10 5 0 -5 -10 -15 -20 Jan-05 Jan-06 Jan-07 Jan-08 Jan-09 Jan-10 Jan-11 Jan-12 Jan-13 30 25 20 15 10 5 0 -5 -10 -15 -20
20
abc
2. European equities and peripheral bond markets have performed well
EuroStox x 600 Index 330 310 290
Germany v s Spain bond y ield spread, % (RHS, inv erted) 1.5 2.5 3.5
270 4.5 250 230 210 Jan-11 May -11 Sep-11 Jan-12 May -12 Sep-12 Jan-13 May -13 Sep-13 Jan-14 5.5 6.5
The EUR rise is due to the improving current accountwrong

The US has delivered the biggest improvement
The red columns in Chart 3 shows the change in the current account balances of developed nations in USD terms since the start of the crisis in 2007. The first notable point is that the biggest improvement has been delivered by the US, yet few people seem to argue that the USD should be stronger as a result. In addition, it is worth noting that the improvement in the Eurozones balance
can be accounted for by the swing in the peripheral country balances, a point we will revisit below. Furthermore, the black line shows the spot return of the respective currencies against the USD from the end of 2006 until the end of 2012, the same period used for the current account balance shift. The best performing currency was in fact the JPY, strengthening despite the deterioration in its current account balance. The CHF came a close second despite a virtually unchanged external balance. Their role as safe havens during the crisis explains this apparent anomaly, but it also
3. Currency performance has not been driven by current account balance developments during this crisis
C/A change, 2006-12 (1000 million USD) 400 300 200 100 0 -100 -200
Currency performance against the USD since 2006, % change 60 50 40 30 20 10 0 -10 -20 -30
Australia
Ireland
Switzerland
Eurozone
Japan
Canada
France
Zealand
Greece
Spain
UK
Sweden
Source: HSBC, IMF, Bloomberg
Periphery
Germany
Portgual
Italy
Norway
New
US
21
abc
4. Export growth has decelerated less in the US than elsewhere
Change in ex port grow th rate 2007-12 v s 2001-06, % 0.0 -2.0 -4.0 -6.0 -8.0 -10.0 -12.0 -14.0 Japan UK Greece Germany Ireland Spain Periphery Italy Eurozone Portugal France US 0.0 -2.0 -4.0 -6.0 -8.0 -10.0 -12.0 -14.0
Source: HSBC, Bloomberg, Eurostat, BEA
illustrates that current account balances have not been at the heart of G10 FX. If you were investing in FX on the basis of the current account, you would have bought USD-JPY over this period, not sold it. Admittedly, what drives a currency market can change with time. External balances gained sudden prominence in emerging market FX earlier in 2013 when the market became nervous about what US tapering of QE would mean for capital flows to deficit nations. Have they simply become equally fashionable in G10 FX, and so explain the ongoing rally in the EUR?
Eurozone improvement reflects weakness not strength

Part of the answer to this depends on what is driving the improvement in the current account deficit. A stronger external balance driven by accelerating export growth has a different feel to one fostered by a collapse in domestic demand and the associated drop in imports. In our opinion, this distinction once again argues against the current account story being a dominant driver to the EUR rally.
5. Collapsing import demand has driven the Eurozone's improving current account
% 12.0 10.0 8.0 6.0 4.0 2.0 0.0 -2.0 -4.0 -6.0 Japan
Import grow th 2001-2006 (CAGR)
Import grow th 2007-2012 (CAGR) % 12.0 10.0 8.0 6.0 4.0 2.0 0.0 -2.0 -4.0 -6.0
US
Spain
Greece Periphery Eurozone Ireland
UK
France Germany
Italy
Portugal
Source: HSBC , Bloomberg, Eurostat, BEA
22
abc
6. Cumulative flows into European asset markets

Cumulative flow, USD bn
Europe ex UK Equity 30 10 Europe ex UK bond (rhs) 30 20 10 0 -10 -20 -30 -40 Dec-13
-10 -30 -50 -70 -90 -110 Jul-07
Oct-08
Feb-10
May-11
Sep-12
Source: HSBC, EPFR
Chart 4 looks at export growth before and during the crisis. The red columns show what the average growth rate was of exports of goods and services during the crisis compared to what it was in the years leading up to the global financial crisis. Not surprisingly, given the global recession, export growth decelerated across the board. However, the slowdown in export growth in the US has proven rather more modest than in the Eurozone, and considerably better than the experience of Japan or the UK.
Given the drop in export growth, any improvement in the current account balance in the Eurozone has been driven by a marked drop in import demand. The red columns in Chart 5 show import growth before the crisis, the black columns import growth during the crisis. The improvement in the peripheral current account balance, which drove the swing in the overall Eurozone balance, has clearly been driven by the collapse in import demand.
7. Cumulative flows into US and European asset markets

Europe ex UK bond 550 450 Europe ex UK Equity US Equity US bond (rhs) 550 450 350 250 150 50 -50 -150 Dec-13
350 250 150 50 -50 -150 Jul-07
Oct-08
Feb-10
May-11
Sep-12
Source: HSBC, EPFR
23
abc
Buying the EUR on the basis of the current account improvement in the Eurozone faces two problems. Firstly, there has been a more marked improvement in the US current account balance than in the Eurozone, and G10 FX performance has not been closely tied to deficit developments during the crisis. Secondly, the source of improvement in the Eurozones current account balance has been much lower import demand. Buying the EUR because of this would suggest the winners in global FX should be those currencies where domestic demand is collapsing a rather counter-intuitive strategy.
Chart 6 shows cumulative investment flows into European equity markets (in black) and European bond markets (in red) since the global financial crisis took hold. Initially, both bonds and equity holdings were reduced, with flows back into bonds picking up in 2009. The pick-up in equity market flows took much longer to arrive, coinciding with ECB President Draghis underpinning of the EUR in mid-2012. Recent months have seen a particularly sharp acceleration in equity market holdings, and yet they still remain below levels seen at the start of the crisis. EUR bulls would argue there is further upside on this front.
EUR strength reflects stronger portfolio inflowswrong

So we are doubtful that the current account story in the Eurozone really is a key point of support for the EUR. We have rather more sympathy for the suggestion that the renewed appeal of Eurozone asset markets may still be inducing capital inflows that will continue to drive the EUR higher. But even here, we remain doubtful that it is the key element in the EUR story.
Europe is not the only market seeing equity inflows

The challenge to this logic comes on two fronts. Firstly, Europe is not along in seeing renewed flows into equity markets. Chart 7 repeats the data for Europe from Chart 6, but adds the equivalent numbers for the US market. The flow in US equities started earlier than in Europe and has also been more sizeable. For EUR-USD, it is not immediately apparent therefore that the fashion for buying European equities was driven by this relative story of US and European equity flows.
8. Eurozone capital account breakdown. Portfolio flows are not dominant
Direct inv estments
Portfolio flow balance
Financial deriv ativ es
Other inv estment
Reserv e assets
(EURbn) 60
40 20 0 -20 -40 -60 Jan-04 Jan-05 Jan-06 Jan-07 Jan-08 Jan-09 Jan-10 Jan-11 Jan-12
(EURbn) 60
40 20 0 -20 -40 -60 Jan-13
Source: HSBC, Eurostat, Bloomberg
24
abc
9. EUR-USD fares better when the market is less nervous about banks
EUR-USD (LHS) 1.40 1.38 1.36 1.34 1.32 1.30 1.28 1.26 1.24 1.22 1.20 Jan-12 Mar-12 May -12 Jul-12
Europe banks and financial serv ices performance relativ e to Euro Stox x (RHS)
Index 2007=100 112 107 102 97 92 87 82 77
Sep-12
Nov -12
Jan-13
Mar-13 May -13
Jul-13
Sep-13
Nov -13
Jan-14
Eurozone portfolio inflows are not the dominant part of the capital account
The second problem is that currency markets tend to place too much emphasis on what is happening to portfolio flows. This is understandable. After all, their impact is evident each day in the movement of share, bond and currency prices. However, this does not mean they are the dominant capital flow. Chart 8 shows a breakdown of the Eurozones capital account. Portfolio flows have been positive, but it is also clear that they have been dwarfed by movements in the net balances for other investments and direct investments. If the EUR is being whipped about by the capital account part of the balance of payments, the decisive factor is not flows into and out of European financial assets. This is not to say flows into European financial markets are irrelevant to the EUR. Chart 9 returns to an observation we have made in the past that EUR-USD is being partly driven by fear, or an absence of it. In the early stages of the crisis, this was reflected in peripheral bond spreads over safe haven bunds. With the introduction of the ECBs OMT, the threat to peripheral bonds passed and the link between bond spreads and EUR-USD weakened. However, the Cyprus crisis ensured
that the fear merely changed in nature from a peripheral bond market fear to a banking system fear. Since then, EUR-USD has tracked the relative performance of European Banks compared to equities overall. If banks are outperforming, the EUR has typically been stronger, and vice-versa.
25
abc
10. Rate expectations are at the heart of EUR fortunes
EUR-USD 1.40 1.38 1.36 1.34 1.32 1.30 1.28 1.26
Ex pected Dec'15 3M rate differential (EUR-USD, RHS)
% -0.1 -0.2 -0.3 -0.4 -0.5 -0.6 -0.7 -0.8 -0.9
03-Jun 18-Jun 03-Jul 18-Jul 02-Aug 17-Aug 01-Sep 16-Sep 01-Oct 16-Oct 31-Oct 15-Nov 30-Nov 15-Dec 30-Dec
Conclusion: rating the EUR

The current account improvement in the Eurozone may have helped the EUR, but it is hard to demonstrate that it has been the key driver to EUR fortunes. The USD should be the winner in this particular battle. Similarly, while Eurozone financial markets are enjoying support, so too have other markets, and in any event portfolio flows are not the dominant element of the capital account in the Eurozone. So in the end, the EUR continues to be a carry trade where currency movements are largely determined by movements in relative rate expectations. Chart 10, for example, shows EUR-USD in black plotted against the expected gap between Eurozone and US 3M interest rates by the end of 2015. The link may not be perfect, but it is strong. The EUR-USD exchange rate will be determined by the policies of the ECB and Fed, a data-determined evolution, and one we continue to believe will see EUR-USD much lower over the coming year.
26
abc
Precious Metals
We lower our 2014, 2015 and long-term gold forecasts based on
expected tapering in line with economic recovery and a stronger USD; we introduce a 2016 forecast for all the precious metals
The negative impact on gold of further investor liquidation should
James Steel Analyst HSBC Securities (USA) Inc +1 212 525 3117 james.steel@us.hsbc.com Howard Wen Analyst HSBC Securities (USA) Inc +1 212 525 3726 howard.x.wen@us.hsbc.com
be partially offset by continued strong emerging market demand, reduced scrap supplies and stagnant mine output
We lower our platinum forecasts but leave palladium unchanged;
the PGMs should be supported by robust auto demand and sluggish mine output; we also expect them to decouple from gold
Gold to recover modestly

We are lowering our average gold price forecasts across the board and introduce a 2016 forecast, as shown in the table below. We estimate a wide trading range of USD1,390/oz to USD1,105/oz for 2014. Golds bull run, which lasted more than a decade, ended last year as the investment demand that fuelled the long-running rally sharply contracted. Reduced demand for safe havens and expectations of US monetary policy shifts triggered a rush out of gold-exchange traded funds (ETFs) and greatly reduced net long positions on the Comex. A chart illustrating the decline in ETF holdings is located on the following page.
We expect monetary policy especially as it influences the USD will be key in helping to shape and determine gold prices this year. Tapering expectations helped trigger a near stampede out of gold in 2013 and it is reasonable to say that some form of tapering has already been factored into prices. That said, it is likely that further tapering would have a second-round negative impact on gold prices. These declines should be much more restrained than the plunge in prices in the first half of 2013. Much will depend on the pace and timing of the tapering the Fed decides on and economic conditions going forward. If, as HSBC foreign exchange research anticipates, the Fed tapers decisively this year, in the midst of a solid
HSBC gold price forecast (USD/oz) __________ 2014f____________ ___________ 2015f ___________ Old New Old New __________ 2016f ___________ Old New _______ Long term ________ Old New
1,435
Source: HSBC
1,292
1,395
1,310
1,345
1,500
1,350
27
abc
economic rebound, then the USD is likely to rally and pressure gold. This is the most likely scenario and the one on which we base our expectations for a weaker gold price in the near term. If the Fed shies away from further tapering then gold may receive some modest support. Alternatively if the Fed opts for a slow, modest taper and the economy fails to rebound we would expect gold to be buoyed. Under a disaster scenario in which the economy reacts badly to tapering we would expect subsequent USD weakness to boost gold.
Gold holdings in exchange-traded funds
emerging market demand in general and Chinese demand in particular will remain strong in 2014. There is also the possibility that high tariffs and regulations aimed at curbing Indias gold imports, will relax in 2014, thus boosting consumption. Economic recovery in the mature economies should also support jewelry demand. Low prices will help keep supply tight. With all-in sustaining costs on average between USD1,100/oz and USD1,200/oz range, see Gold Outlook: Getting physical, 12 September 2013, should prices drop near or below the low end of this range producers may be compelled to close and/or restructure high cost mines. Supplies may be further tightened by a contraction in scrap supplies as holders will be unlikely to hand in gold for reprocessing at low prices. We expect the combination of tight supplies and buoyant physical demand to engineer a price recovery later this year as the market recovers from the negative impact of Fed tapering.
2,100 1,900 1,700 1,500 1,300 1,100 900 700 500 300 Apr-04
moz
90 80 70 60 50 40 30 20 10 0
Apr-06
Apr-08
Apr-10
Apr-12
Gold in ETFs (RHS)

Gold prices USD/oz (LHS)
Silver, a steady, but not a rising star

We are raising our 2014 average price forecast slightly and introduce a 2016 forecast, as shown in the table below. We expect a trading range for 2014 of USD17.75/oz to USD22.75 for 2014. Our relatively neutral outlook for silver is based on expectations of adequate but not ample mine supply increases, mostly as a by-product from polymetallic mines in Latin America. Industrial demand, notably for electronics, which comprises half of total silver consumption, is expected to be robust based on industrial production forecasts from HSBC macroeconomics.
Tapering combined with a stronger USD creates a climate, in our view, for lower prices in 1H 2014. Without significant investor interest, golds upside will be limited. It will be hard to generate any such interest if the Fed continues a tapering policy. That said, gold prices will not be entirely determined by USD direction and Fed policy and we expect tight supply and strong physical demand to rally gold modestly, later in the year. We estimate China absorbed the equivalent of half of total gold mine production in 2013. Based on low prices and strong income growth we believe
HSBC silver price forecast (USD/oz) __________ 2014f ___________ ___________ 2015f ___________ Old New Old New __________ 2016f ___________ ________ Long term ________ Old New Old New
20.00
Source: HSBC
20.80
20.25
20.25
21.50
25.00
25.00
28
abc
HSBC PGMs price forecasts (USD/oz) ________ 2014f __________ _________ 2015f _________ Old New Old New _________2016f__________ Old New ______Long term_______ Old New
Platinum Palladium
Source: HSBC
1,625 825
1,595 825
1,875 900
1,850 900
1,925 925
1,825 950
1,800 900
PGMs decoupling from gold

We are lowering our platinum price forecasts across the board but leave our palladium forecasts unchanged with the exception of our long-term forecast, as shown in the table on the next page. We also introduce 2016 forecasts for the PGMs. We expect a wide trading range this year for platinum of USD1,360/oz to USD1,725/oz and for palladium of USD680/oz to USD900/oz. With both the platinum and palladium markets forecast to run steep production /consumption deficits in 2014 (Platinum Group Metals Outlook: Decoupling from gold, 22 November 2013), we expect both metals to decouple from potentially weak gold prices and trade higher. Prospects for limited mine output and growing auto and other industrial demand in 2014 will provide support to the PGMs regardless of gold direction, we believe. Platinum may be supported more directly by labor tensions in South Africa. Palladium is likely to benefit from waning exports from Russian stockpiles.
29
abc
Dollar Bloc
No love for CAD in the New Year
The CAD remains on the defensive early in the New Year, after weakening notably against the USD through 2013 and registering even more sizeable declines versus some other G10 currencies. A dovish shift from the Bank of Canada and deterioration in some previously-supportive CAD fundamentals continue to weigh on the currency, encouraging speculators to continue to build short positions. CAD registered even larger declines on some of the crosses in 2013, falling 7.5% against the SEK, 8.3% against GBP, 8.9% against the CHF and 10.3% against the EUR. Although the CAD is traditionally measured and still mostly traded against the USD, the broader nature of the selloff and the more sizeable movements in the CAD crosses versus USD-CAD has attracted more speculative sales of the currency, exacerbating the loonies declines. Indeed, CFTC data shows speculative sales in the CAD increased sharply in the latter part of 2013, putting net short positions at their highest levels since the Spring of 2013, which themselves were the largest short positions run in the currency since the CFTC began publishing the data.
Broad based CAD declines

Following several years of trading at historically strong levels, the CAD weakened through most of 2013, pushing to its lowest levels against the USD since 2010. The decline in the CAD has been gradual rather than abrupt (USD-CAD implied volatility is still among the lowest of other G10 currencies against the USD) but it is nonetheless pronounced, with the CAD losing over 6% versus the USD last year. But importantly as well, the
BoC impact
One obvious change in the CADs dynamics came from the Bank of Canada, where Gov. Stephen Poloz, taking over for Mark Carney at mid-year, dropped the Banks tightening bias and adopted a neutral one instead. In truth, that might not seem
1. 2013 CAD performance
2013 CAD performance v s G10 (% change) 15 10 5 0 -5 -10 -10.35 -15 EUR

13.37 8.86 1.89
15 10 5 0 -5
-8.9
-8.32
-7.54
-6.61
-5.77
-10 -15
CHF
GBP
SEK
USD
NZD
NOK
AUD
JPY
30
abc
2. CAD weakness more pronounced on crosses versus the USD since mid-year
CAD perfromance against other G10 currencies, Index EUR Index , 8 July 13=100 104 100 96 92 88 Jul-13
GBP
CHF
USD Index , 8 July 13=100 104 100 96 92 88
Aug-13
Sep-13
Oct-13
Nov -13
Dec-13
to be such a momentous shift, given that the Bank had steadily diluted the tightening bias previously, to the point where very few market participants expected any monetary policy tightening in the foreseeable future. However, additional changes have followed both in the Canada backdrop and in the BoCs policy emphasis. In particular, inflation has remained low, at times lower than the bottom of the BoCs 1%-3% target range (it was most recently reported at 0.9% y/y). And with core inflation also subdued holding between 1.0% and 1.4% throughout 2013 the outlook for future headline inflation remains low as well. Against that backdrop, the BoC acknowledged in its December policy statement that the, downside risks to inflation appear to be greater than it assessed in the October Monetary Policy Report, and that factors weighing on core inflation look to be more persistent than anticipated. Dropping the tightening bias in an environment of steady, near-target inflation is one thing. But doing so against a backdrop of too-low and/or falling inflation is a different matter, and one that will lead to at least some speculation of possible easing in monetary policy. Our Canada economist does not expect the BoC to cut the overnight target rate from its current level of 1%. But markets will certainly be sensitive to
upcoming data (employment and inflation will likely stand out) as well as BoC meetings and commentary (the next BoC policy statement is due January 22) and the extent to which they increase the perceived risk for a further dovish shift in policy. The shift in policy emphasis to date has already weighed on the CAD, but the currency would still be at further risk if markets perceive some greater chance of actual BoC easing.
Relative spreads have shifted in USD-CADs favour

Also on the interest rate front, the shift in the US backdrop following the announcement of Fed tapering in December is clearly an important development for the USD generally, including USD-CAD. On balance, with the Fed now beginning to exit QE while the Bank of Canada has sounded more dovish, the relative central bank stance is potentially more USD-CAD supportive. That said, the fallout of central bank expectations on currencies, particularly Fed policy expectations, has often been inconsistent for much of the past year. But more tangibly, we would highlight that US-Canada two-year interest rate spreads have shifted in USD-CADs favor, narrowing from near -102 bp in late-November to -89 bp at present, with most of that move
31
abc
3. US-Canada yield spreads have narrowed
USD-CAD (LHS) 1.08 1.06 1.04
US-Canada 2y r y ield spread (sw aps, RHS) -0.80 -0.85 -0.90 -0.95
1.02 -1.00 1.00 0.98 Jan-13

-1.05 -1.10 Mar-13 May -13 Jul-13 Sep-13 Nov -13 Jan-14
stemming from higher US yields. And the recent shift in the spread has concurred with USD-CAD gains over that period.
EM fallout
Also, there is another element of CAD-sensitivity to the EM-related weakness and developments of the past year that warrants mentioning. With many EM currencies coming under downward pressure, USD-buying intervention to curb local FX appreciation has slowed, and in some cases stopped and even reversed. The CAD had been a substantial beneficiary of EM reserve manager USD recycling, but with that recycling now far less pronounced, one important source of CAD buying interest has also diminished. That pattern has not been apparent in the IMFs breakdown of foreign reserve data, with the CADs share of global FX reserves holding steady in the latest data (1.82% through Q3 2013 versus 1.81% in Q2). However, currency allocations are not provided for large portions of the IMFs FX reserve data (46%), which reduces the reliability of the near-steady holdings of the CAD within the allocated-reserve category. And anecdotally, it stands to reason that EM developments, FX weakness, and diminished USD recycling have curtailed some level of demand for the CAD.
Trade dynamics
Separately, Canadas trade dynamics have changed markedly in recent years. That is reflected broadly in the current accounts shift to deficit from surplus back in 2008 (where it has remained since) and just recently in the monthly trade statistics, which showed deficits of near C$1 bln for each of the two most recent months, worse than expected. Lower oil exports, and for some periods lower oil prices, have been important factors in the deterioration in Canadas trade position. That stems in part from increased oil and gas production in the US (and less need for Canada imports) as well as slower economic growth in most emerging markets over the past year-plus. For the CAD, Canadas trade position now represents a modest negative for the currency, contrary to the pronounced supportive factor it had been for many years. Moreover, the shift in trade dynamics has also seen the CADs correlation with oil prices diminish somewhat, with the currency no longer enjoying the kind of benefit it once did during periods of rising energy prices.
32
abc
Conclusion
Looking ahead, we expect further CAD weakness going forward. The conditions we have highlighted above, both in Canada and abroad, are likely to prevail for the foreseeable future, and should be consistent with additional downward pressure on the CAD. With the currency already at its lowest levels against the USD in nearly four years, and given the notable depreciation in recent months and over the past year, more pronounced near-term gains in USD-CAD will become more difficult. But buying strategies remain favoured, and we would continue to view corrective declines in the currency pair opportunistically to establish long positions.
33
abc
AUD: The worst is over

In 2013 the AUD depreciated over 14% against the USD, which put it among worst performers in the G10 space. Only the JPY faired worse (-16%). Given the adjustment in the currency, we believe, the depreciation in 2014 will moderate. Sluggish domestic growth with little signs of rebalancing and expected USD dominance, as we outlined in USD rally to spread its wings (page 5), are among the main drags on the AUD in 2014. However, our view that the RBAs easing cycle is done and prospects of the greater openness of Chinese financial system could pose some upside risks for the currency.
Below-trend growth, rebalancing needed
prior 10.2%). With the timing and success of rebalancing remaining unclear but signs of a slowdown in mining investment already in place we see uncertainty having a negative effect on the AUD.
Carry still dominates the behaviour of the AUD
The Federal Reserve announced the beginning of its tapering programme at 18 December meeting, but also presented a dovish forward guidance noting that the end of QE3 will not be followed swiftly by a rate hike. Nevertheless, as we mentioned on page 7, the first rate hike might come earlier than expected if economic data continues to bring positive surprises. Chart 1 shows that there is a strong relationship between AUD-USD and relative interest rate expectations. Therefore, if market expectations for US rates rise, while uncertainty surrounding growth prospects keep Australian rate expectations low, then this spread will point towards a lower AUD-USD.
The RBAs easing phase is likely to be over
Australias Q3 GDP release showed that the economy grew 2.3% YoY in (2.6% expected) remaining sluggish and below trend. On net, mining investment was still a positive contributor to growth, despite having slowed down. However, we expect it to fall, as fewer new projects are getting started, and, particularly from H2 2014 investment in the mining sector is expected to be a significant drag on growth. So, the economy needs to rebalance. Disappointingly, there were a few signs that growth was rebalancing as of Q3. Household consumption remained subdued, rising by only 0.4% QoQ, while the saving rate remained stubbornly high climbing to 11.1% (vs
In testimony to a parliamentary committee on 18 December the RBAs governor Stevens noted that, while the Board has had an 'open mind' about cutting rates further, there are 'few serious claims that the cost of borrowing per se is holding back growth'. He also highlighted that 'confidence' matters more, at this stage, not borrowing rates.
1. Divergence in rate expectation will bring AUD-USD lower
2. Recent timely indicators point toward more rebalancing
Ex pected Dec'15 3M rate differential (AUD-USD, RHS) AUD-USD % 3.00 2.80 2.60 2.40 2.20 2.00 1.80 01-May 01-Jul 01-Sep 01-Nov 01-Jan 1.03 1.00 0.97 0.94 0.91 0.88 0.85 12 8 4 0 -4 -8 -12
NAB business confidence, Index (LHS) Westpac consumer confidence, Index , Sep 1974=100 115 110 105 100 95 90 Jan-12 May -12 Sep-12 Jan-13 May -13 Sep-13
34
abc
Consumer and business sentiment have picked up recently and retail sales have also shown improvements in the past four months (chart 2). These timely indicators suggest that the problem highlighted by the RBA is already improving as well as growth may be rebalancing more in the coming quarters. We think that this can play an important role in supporting investor sentiment and is the main reason we only expect the AUD to sell off moderately against the USD in 2014. We forecast AUD-USD at 0.86 at the year-end.
Advantages of greater China openness
According to estimates from the Heritage Foundation, Australia has been the world's largest recipient of capital investment from China over the past eight years. As further financial market reforms announced at the Chinas Third Plenum in November should provide boost to financial flows in 2014, Australia is in a favourable position to take advantage of this opening up of Chinas financial sector (see Downunder digest: Australias financial ties to China set to grow, 18 December 2013). This could give Australian businesses greater opportunities in attracting offshore investment for expansion and thus could add to domestic growth and rebalancing. This process is, however, a long term structural possibility, and thus we dont expect direct impact on growth this year. Nevertheless, it might help to boost business and consumer confidence, which in turn should lift overall sentiment and bring some support for the AUD against the resurgent USD.
35
abc
NZD: a booming 2014

Unlike its Australian peer, the NZD held its own against the USD in 2013. Post-earthquake reconstruction, rapidly rising house prices and improving terms of trade significantly boosted domestic demand last year. We expect these factors to persist and timely indicators point to further solid growth in 2014. Domestic inflation has picked up and with the economy already reaching capacity, we expect the RBNZ to lift rates soon to keep a lid on inflation. The combination of these factors will see a stronger NZD in 2014.
New Zealands boom begins
supported income growth which saw domestic demand rising by a whopping 6.2% YoY in Q3. Looking ahead, these key drivers are likely to persist and rapidly expanding economy should see the NZD edging higher.
A rate hike is expected soon
New Zealand's economy is booming. GDP increased strongly in Q3, rising by 3.5% YoY (3.3% expected). The main factors providing the boost to growth are:
1
At its latest meeting on December 2013, the RBNZ noted that they 'will increase the OCR as needed in order to meet the 2 % inflation target. According to their profile for the rate outlook, rate rises are expected to begin from Q2 2014. However, in our view, the RBNZ may need to raise rates as soon as Q1 2014, due to greater cost-pressure than the RBNZ is currently factoring in (chart 2). In either case, the RBNZ would be the first central bank in the G10 space to start raising rates. This should grant support to the currency in 2014 and we forecast NZD-USD at 0.87 by year-end.
Post-earthquake reconstruction in Canterbury. Here residential investment picked up 18.7% over the past year. For the country in general, the latest data showed that house prices rose 9.2% YoY, the highest since December 2007 (chart 1). Substantial rise in export prices. A rapid runup in prices of diary products, the countrys biggest export earner, saw terms of trade reaching a 40-year high in Q3 13. This has
1. New Zealand housing market is booming
2. We expect inflation to be higher than the RBNZ forecast
New Zealand QV house prices, % YoY 11 8 5 2 -1 -4 -7 -10 Dec-07 Dec-08 Dec-09 Dec-10 Dec-11 Dec-12
11 8 5 2 -1 -4 -7 -10
3.0 2.5 2.0 1.5 1.0 0.5
RBNZ CPI inflation projections, YoY HSBC forecast % Current Projections
3.0 2.5 2.0 1.5 1.0 0.5
Mar-12 Sep-12 Mar-13 Sep-13 Mar-14 Sep-14

Source: HSBC, Statistics New Zealand, RBNZ estimates
36
abc
G10 at a glance
CHF
1.7 1.6 1.5 1.4 1.3 1.2 1.1 1.0 Jan-02 Jan-03 Jan-04 Jan-05 Jan-06 Jan-07 Jan-08 Jan-09 Jan-10 Jan-11 Jan-12 Jan-13 Jan-14
1.8 1.6 1.4 1.2 1.0 0.8 0.6
EUR- CHF (LHS)

Source: Bloomberg
USD- CHF (RHS)
Switzerland: Risk appetite is still a driver The CHF has started 2014 on the defensive, falling against both the EUR and the USD. However, for the year as a whole, we expect EUR-CHF will tend to oscillate around 1.25 rather than sustain a marked uptrend. The CHF continues to be driven by risk appetite, particularly with regard to the Eurozone outlook. While EUR break-up and other such traumatic tail risks should not resurface in 2014, the more mundane story of lacklustre Eurozone growth, disinflation and uncertain ECB policy are likely to discourage any large outflow of Swiss capital into the EUR. Instead, the drama is likely to be confined to a higher USD-CHF where we forecast a move back to parity in a years time. The Swiss side of the equation is also not a game changer. We expect some acceleration in GDP growth to 2.1% in 2014 from 1.9% in 2013, but not enough to prompt any change in monetary policy or shift in the SNBs FX floor.
EUR-NOK
10.5 10.0 9.5 9.0 8.5 8.0 7.5 7.0

Jan-02 Jan-03 Jan-04 Jan-05 Jan-06 Jan-07 Jan-08 Jan-09 Jan-10 Jan-11 Jan-12 Jan-13 Jan-14
10.5 10.0 9.5 9.0 8.5 8.0 7.5 7.0
Norway: Facing a battle NOK will continue to be a battle between the conflicting forces of strong structural economic support, cyclical frailties and the downside of relatively low liquidity. The pessimism regarding the Norwegian economic cycle and the associated dovish shift in interest rates appears rather overdone in FX terms, especially when compared to a Eurozone economy expected to grow just 0.8% in 2014 compared to Norways 2.3%. Structurally, the NOK will likely enjoy the upside from a fresh widening of the current account surplus and a still very healthy fiscal surplus. The problem for the NOK remains its relatively low liquidity which has made it subject to the mood swings more normally associated with EM FX. This will remain an issue amid US tapering, but it is likely that much of the rotation out of NOK may be largely complete given the NOK retreat in H2 13.
Source: Bloomberg
EUR-SEK
12.0 11.6 11.2 10.8 10.4 10.0 9.6 9.2 8.8 8.4 8.0
Jan-02 Jan-03 Jan-04 Jan-05 Jan-06 Jan-07 Jan-08 Jan-09 Jan-10 Jan-11 Jan-12 Jan-13 Jan-14
12.0 11.6 11.2 10.8 10.4 10.0 9.6 9.2 8.8 8.4 8.0
Sweden: Monetary easing is likely to be over The SEK finished 2013 on a stronger note, but it was a difficult year for the currency given economic weakness and the associated monetary easing of the Riksbank. However, for 2014, we expect the currency to strengthen. There are already signs that activity is beginning to improve, and our 2014 GDP forecast is 2.5% compared to just 0.8% in 2013. Unemployment has stabilised, albeit at a high level, and destocking is well advanced. With the Eurozone emerging from recession, there is some scope for net exports to contribute positively. We believe the rate cutting cycle has come to an end which should end some of the selling pressure on the SEK. The extent to which the SEK can capitalise on economic momentum, however, may be somewhat curtailed by its sensitivity to equity markets were the latter to become less relaxed about the ongoing US tapering process.
Source: Bloomberg
37
abc
Asia regional overview

This year will be about the survival of the fittest, which sees us maintain our preference for North Asian currencies relative to the rest of the region. Many Asian currencies were stuck in a rut in 2013 and this will likely be the case in 2014 too. We had factored in a temporary recovery for Asian currencies in Q1. But the risks are rising that this strength does not materialise or, if it does, it will be short-lived. Beyond this period we still anticipate that challenges for a number of Asian currencies will become more apparent. For instance, lower growth potential, weakening current accounts, lower portfolio inflows, signs of overvaluation for some currencies and low yields for others do not create a lot of optimism.. Taking into account such downside risks, this implies that many Asian currencies will be exposed to periods of higher volatility in 2014. In turn this means that monitoring the FX policy reaction for currencies facing downward pressure will become even more important. The days are long gone when Asian currencies would be treated similarly and it was only about looking to sell or buy USD-Asia. The warning signs against treating Asian currencies as a homogeneous bloc have existed for some time. But last year demonstrated how individual currency differences can matter significantly, especially when Fed policy is changing and China's growth is moderating. This year we expect much the same with a survival of the fittest theme prevailing. We are most cautious on the IDR, THB, MYR, and INR, which in general have more challenging BoP and IIP positions. The relative paucity of consistent inflows means these currencies should trade with more volatility, though much will depend on FX policy and the differing constraints around policy choices in each currency. For their outlooks to improve, tough domestic policy choices will need to be made to correct weak external positions. Within this camp we prefer INR over IDR as the formers current account deficit is showing better signs of reversing. We expect North Asian currencies to hold up better. Stronger external balances and slower leveraging trend should see the KRW and TWD face less volatility. In the middle ground, the PHP and SGD, while still fundamentally sound, should face gradual depreciation pressures after Q1 given their rich valuations and relatively low yield. We see USD-CNY ending 2014 at 5.98. Inflow pressures that support the RMB are expected to remain stubbornly strong, helped by interest rate liberalization and an increasing policy willingness to adapt to market forces. We believe bold FX reforms are needed to reduce the one-sided appreciation pressures on the CNY and create greater RMB volatility. RMB internationalisation will accelerate in 2014, suggesting the path towards currency convertibility will quicken too.
38
abc
Asia at a glance
USD-CNY
8.4 8.2 8.0 7.8 7.6 7.4 7.2 7.0 6.8 6.6 6.4 6.2 6.0
Jan-05 Jan-06 Jan-07 Jan-08 Jan-09 Jan-10 Jan-11 Jan-12 Jan-13 Jan-14
8.4 8.2 8.0 7.8 7.6 7.4 7.2 7.0 6.8 6.6 6.4 6.2 6.0
China (CNY): Holding up The RMBs strong performance in 2013 can be largely attributed to three factors: high interest rates, a policy preference for a stable currency and a resilient current account surplus. None of these factors are likely to change substantially. As such we remain constructive on the RMB, although we expect a smaller gain this year than last year. We see USD-CNY ending 2014 at 5.98. Inflow pressures that support the RMB are expected to remain stubbornly strong, helped by interest rate liberalization (which keep interest rates elevated) and an increasing policy willingness to adapt to market forces. We believe bold FX reforms are needed to reduce the one-sided appreciation pressures on the CNY and create greater RMB volatility. RMB internationalisation will accelerate in 2014, suggesting the path towards currency convertibility will quicken too.
Source: Bloomberg
USD-CNH
6.80 6.70 6.60 6.50 6.40 6.30 6.20 6.10 6.00 Aug-10 Nov-10 Feb-11 May-11 Aug-11 Nov-11 Feb-12 May-12 Aug-12 Nov-12 Feb-13 May-13 Aug-13 Nov-13 Feb-14
6.80 6.70 6.60 6.50 6.40 6.30 6.20 6.10 6.00
China (CNH): A plan for Shanghai On 2 December 2013, the PBoC published a proposal for the Shanghai Free Trade Zone (FTZ) which opened a number of new channels for broader cross-border flows. Residents of the FTZ can set up free trade accounts (FTA) denominated in both CNY and foreign currencies, and nonresidents are allowed to set up non-resident free trade accounts (NFTA). Transactions between these accounts and offshore accounts are free. Transactions between FTAs and onshore accounts are treated as cross-border. A number of other earlier restrictions will also be liberalised including with regards to cross-border lending and investments (see China: It's now official: Beijing is accelerating the pace of RMB convertibility, 3 December 2013). We continue expect a quick pace of FX internationalisation and liberalisation in 2014.
Source: Bloomberg
USD-MYR
4.8 4.4 4.0 3.6 3.2 2.8 2.4 97 99 01 03 05 07 09 11 13
4.8 4.4 4.0 3.6 3.2 2.8 2.4
Malaysia: Lingering concerns As a result of a smaller current account surplus, the deterioration of MYRs FX cover has been significant in recent years, which has left the currency vulnerable to the reversal/hedging of capital flows. The implementation of the October budget will be crucial for the MYR. While the reaction from rating agencies has been mixed, we see reforms so far being insufficient to change Malaysias fiscal trajectory. The removal of fuel and sugar subsidies, while positive for the fiscal outlook, may raise inflation pressures in 2014. This could hurt the MYR via either FX hedging or foreign investors trimming onshore positions. The liquid nature of the onshore FX and bond markets and relative ease of market access means that the MYR will continue to be a proxy play for less liquid EM Asian currencies (i.e. IDR). The less interventionist nature of the BNM will likely mean that MYR will remain volatile with bias towards depreciation in 2014.
Source: Bloomberg
39
abc
Asia at a glance continued

USD-INR
70 66 62 58 54 50 46 42 38 34 97 99 01 03 05 07 09 11 13
70 66 62 58 54 50 46 42 38 34
India: Past the worst In response to the RBIs measures, Indias trade deficit has narrowed quickly and the outlook for the current account is improving (see Fixing the current account deficit, 25 October 2013). Parliamentary elections (scheduled to take place before May this year) might make it difficult to see progress on fiscal prudence and structural reforms. The recent state elections registered a favourable outcome for the current opposition and the focus will be if a similar result occurs in the national election. The best one for the INR would be one with less political fragmentation to give a platform to introduce reforms. In terms of FX policy, the RBIs willingness to use pockets of appreciation to build FX reserves is prudent. While the INR may have passed the worst, the nature of the capital account is very portfolio dependent. So going into 2014 the INR will remain sensitive to sudden changes in broad risk dynamics.
Source: Bloomberg
USD-IDR
16000 14000 12000 10000 8000 6000 4000 2000 97 99 01 03 05 07 09 11 13
16000 14000 12000 10000 8000 6000 4000 2000
Indonesia: No easy way out The IDR lost nearly 20% against the USD in 2013. However, what stands out is that, unlike other EM deficit currencies in the region, the IDR has not been able to stabilise meaningfully. The large income deficit, driven by equity dividends and bond coupon payments, has been a significant pressure point for the IDR. These flows are much harder to tackle as they cannot be easily reduced by tighter monetary policy or changes to import or export policies. However, tighter monetary policy may still be needed to calm investors who are still concerned about inflation. Given its chronic current account deficit, thinning FX cover ratio and monetary policy potentially still needing to play catch up, the IDR should be the most vulnerable to any tightness in global liquidity. The legislative election slated for April 2014 adds further uncertainty with regards the government and more importantly its policy direction.
Source: Bloomberg
USD-INR
55 50 45 40 35 30 25 20 97 99 01 03 05 07 09 11 13
55 50 45 40 35 30 25 20
Thailand: From best to worst We are cautious on the THB on a number of domestic and external fronts. The current account has worsened largely as a result of rising income outflows. On account of these factors, in 2013 Thailands FX cover fell to its lowest level since 2006. While this ratio is still higher than others in Asia, and the BoT is ready and able to actively intervene to reduce FX volatility, the weak growth outlook may curb efforts to contain THB depreciation. Political pressures provide another point of concern for the THB. Sentiment is likely to remain cautious going into the 2 February election, which are being boycotted by the main opposition party. If such political uncertainties lead to further delays in the governments THB 2trn infrastructure plan, there could be another drag on growth. In general, Thailands debt profile has worsened over recent years. This means banks asset quality and corporate earnings could be negatively impacted should global interest rates start to rise in 2014.
Source: Bloomberg
40
abc
Latam regional overview

After a grim 2013, calmer tides?
The USD recovery may not have been linear and even across all currencies, but it is likely to remain well supported by a bias for higher rates in the US. For this reason, we maintain a general bias for still weaker LatAm FX versus the USD in our 2014 forecasts. However, we expect less currency depreciation in 2014 relative to last year. Valuations are much improved across the region; according to our LatAm FX REERs, most currencies have converged back towards the average of the last 10 years. Technical drivers are also positive as the market is currently running either long or flat USD-LatAm FX positions. Moreover, we expect central banks in the region to sell USD, as needed, to contain bouts of volatility and currency undershooting. In terms of fundamentals, the trend of current account deterioration has peaked, and importantly, FDI continues to fund the gaps comfortably. Portfolio outflows, meanwhile, have continued to increase rather than reverse despite tapering fears. We also see commodity prices stabilizing, though at lower levels, as China growth has bottomed and the US and Europe continue their recoveries.
Differentiation is key
Relative performance is likely to remain important, reflecting country specific risks. We introduced scorecards to assess vulnerabilities and reaction flexibilities among individual countries in our LatAm FX Focus: 2014 Outlook: Spot the difference and find Brazil and Argentina scoring the worst (highest vulnerability to reaction function) while Colombia and Colombia score the best. Mexico comes across as most balanced. Our forecasts for 2014 largely reflect these dynamics as we have BRL depreciating approximately 6% compared to 3% for CLP and 2% for COP. Our preferred pick is still the MXN, where we are forecasting an appreciation of 3% due to lower vulnerabilities but also to structural changes and positive spillover effects from the US recovery. In these volatile markets, holding on to directional trades has been challenging to say the least. Looking back at total returns per month for 2013, we find that the biggest moves of the year were concentrated in a few months and a few currencies. In our view, this highlights the need to distinguish between directional views with longer investment horizon and short-term tactical trades. We see currencies overreacting to specific events providing opportunities for tactical trades in 2014. Such events include the presidential elections in Brazil (Oct), Colombia (May) and Uruguay (Oct) as well as surprises on G-3 monetary policy and commodity prices.
41
abc
Latin America at a glance

USD-BRL
4.00 3.50 3.00 2.50 2.00 1.50 1.00 Jan-02 Jan-03 Jan-04 Jan-05 Jan-06 Jan-07 Jan-08 Jan-09 Jan-10 Jan-11 Jan-12 Jan-13 Jan-14
4.00 3.50 3.00 2.50 2.00 1.50 1.00
Brazil: A year of volatility The year has not started well for the BRL. However, we maintain our view that risks for the BRL in 2014 are likely to be more two-way than the recent depreciation trend suggests. BRL today looks less vulnerable if we consider that the currencys overvaluation has been largely corrected, the current account deficit is starting to contract, the BCB continues to intervene (albeit more modestly) on a daily basis, and real yields in Brazil are hovering around 6%. Potential for two-way move are high as investors are likely to swing ahead of the 5 October presidential elections. We also look for increased BRL sensitivity to domestic data, in particular to fiscal accounts and inflation account. The latter, in particular, we believe could become a bigger theme for the BRL in 2014 given our out of consensus call for inflation to rise to 6.3% this year. We see little tolerance for much more depreciation by the authorities in the middle of an electoral year with inflation pressures rising.
Source: Bloomberg
USD-MXN
15.5 14.5 13.5 12.5 11.5 10.5 9.5 8.5 Jan-02 Jan-03 Jan-04 Jan-05 Jan-06 Jan-07 Jan-08 Jan-09 Jan-10 Jan-11 Jan-12 Jan-13 Jan-14
15.5 14.5 13.5 12.5 11.5 10.5 9.5 8.5
Mexico: Still our favorite The MXN was not match to the USD in 2013, closing the year slightly weaker against the greenback than the previous year. But on a relative basis, the MXN outperformed the rest of the region reflecting the important structural reforms that are expected to raise the countrys potential growth in the next few years. At current levels we continue to argue that USD-MXN is not pricing in correctly the structural improvement in the economy and remain bullish the MXN. We also find cyclical support for the MXN in 2014 stemming from the US recovery, to which Mexico is disproportionally exposed as well as to a recovery in domestic growth factors following a disappointing 2013. We like playing long MXN in crosses against the EUR and other LatAm FX. The main risks to our constructive MXN view include broad risk aversion, outflows from the domestic bond market, and failure with the implementation of the structural reforms.
Source: Bloomberg
USD-CLP
800 750 700 650 600 550 500 450 400 Jan-02 Jan-03 Jan-04 Jan-05 Jan-06 Jan-07 Jan-08 Jan-09 Jan-10 Jan-11 Jan-12 Jan-13 Jan-14
800 750 700 650 600 550 500 450 400
Chile: Vulnerable and catching up We see USD-CLP weakening further, though modestly so, to 545/USD by end-2014. We have turned less constructive due to lower copper prices, narrowing of interest rate differentials, and political uncertainty surrounding potential policy changes under the new Bachelet administration. We also dont see one-off counter-cyclical flows that helped to support the CLP in 2Q-3Q13 as likely to be repeated in 2014. Moreover, in our comparative analysis, Chile scores among the most vulnerable countries in the region when it comes to external accounts. To be fair, however, we do find Chile with ample room to react to a potential undershooting of the currency though we think the authorities are unlikely to be quick to react. We thus maintain a cautious stance going into 2014. We like to express this view either outright vs the USD or in relative terms against the COP.
Source: Bloomberg
42
abc
EMEA regional overview

Country-specific factors will play dominant role in 2014
In CEE, we favour the PLN and, to a lesser extent, the HUF. For 2014, we are directionally constructive on the PLN and HUF. We consider that the cyclical economic improvement combined with a solid external position will be supportive. Although the cyclical component of the improvement in current account balances has been important, we do not see faster GDP growth having a meaningful impact on C/A in 2014. Moreover, neither the PLN nor HUF show any valuation issue. In the case of the HUF, we even consider that the currency is cheap. Note that we cannot rule out HUF facing some downside pressure in the first months of 2014 given the upcoming FX mortgage plan, general elections and further reduction in policy rate. However, the HUF may absorb those potential negatives, particularly if the reform on FX mortgages is balanced. Political risk is a game changer for the TRY. The macro and political backdrop has led to a vicious circle in the FX market. The constant repricing of the Turkish political risk in the absence of a monetary policy response from the central bank has made the TRY downward spiral selfsustaining. We revised our USD-TRY forecast significantly higher. We now see USD-TRY rising to 2.30 in Q1 and ending 2014 at 2.10 compared to 1.90 previously. This change represents two main factors: 1) The emergence ofsubstantive political risk has to be priced in by the TRY not only in the shortterm but also in the long term. 2) The lack of an immediate monetary policy response to the crisis justifies a higher USD-TRY in 2014 than we previously thought. There is no strong domestic reason for further ZAR depreciation. Beyond the potential implications of a broad-based USD strength, there is little domestic macro reason for a further depreciation as we believe that FX has already adjusted. We expect stabilization in the medium-term with the materialisation of the so-called J-curve. RUB is the new fragile: Interestingly, the RUB has never been categorised in the group offragile currencies like the TRY and ZAR. The fact that Russia displays a current account surplus is certainly the main explanation. Yet, the RUB has weakened significantly during the EM sell-off in H2 2013 and we believe that the adjustment is likely to carry on in 2014. Small current account surplus in a context of persistent and structural capital outflows will continue to weigh on the RUB, particularly in a context of very weak economic growth and sticky inflation. The lower involvement of the Russian central bank in the FX market and likely further widening of the trading band should also contribute to weaken the RUB.
43
abc
EMEA at a glance
USD-TRY
2.3 2.1 1.9 1.7 1.5 1.3 1.1 Jan-02 Jan-03 Jan-04 Jan-05 Jan-06 Jan-07 Jan-08 Jan-09 Jan-10 Jan-11 Jan-12 Jan-13 Jan-14
2.3 2.1 1.9 1.7 1.5 1.3 1.1
Turkey: Downward revision We now see USD-TRY rising to 2.30 during the Q1 and ending 2014 at 2.10 compared to 1.90 previously. The recent emergence of an unexpected and under-estimated political risk is a game changer especially as financial markets had largely ignored nascent political risk in recent years. The market has now to re-integrate politics as an important variable not only for the short term but also from a long-term perspective. In the near-term, where the greatest danger lies, we believe that the risk of a further TRY depreciation is highly likely. The political outlook is uncertain, particularly with the local elections scheduled at the end of March, and the CBRT appears reluctant to increase interest rates whilst the Fed gets on with tapering. In the medium-term, the TRY outlook will depend on the CBRT. If it hikes the lending rate by 175bp some time in Q1 as we expect, the TRY should eventually stabilise before appreciating slightly by the end of 2014.
Source: Bloomberg
EUR-PLN
5.0 4.6 4.2 3.8 3.4 3.0 Jan-02 Jan-03 Jan-04 Jan-05 Jan-06 Jan-07 Jan-08 Jan-09 Jan-10 Jan-11 Jan-12 Jan-13 Jan-14
5.0 4.6 4.2 3.8 3.4 3.0
Poland: The strong link The Polish zloty remains the most solid currency of the region. It shows a noticeable resilience and stability, while most of the other EM currencies suffer from wide adjustments. The macro panorama combining a recovery in economic activity amid low inflation is PLN-supportive. More importantly in the current global context, the PLN is less sensitive to the potential consequence of the Fed tapering. Poland benefits indeed from a low current account deficit that is entirely financed via EU structural funds. Finally, we consider that the orthodox approach of the Polish central bank aiming at maintaining real positive policy rate is also PLN-positive. This positive combination of factors is expected to remain intact in coming months, continuing to support the PLN all the more that the currency does not show any sign of valuation misalignment.
Source: Bloomberg
USD-ILS
5.10 4.70 4.30 3.90 3.50 3.10 Jan-02 Jan-03 Jan-04 Jan-05 Jan-06 Jan-07 Jan-08 Jan-09 Jan-10 Jan-11 Jan-12 Jan-13 Jan-14
5.10 4.70 4.30 3.90 3.50 3.10
Israel: Under the Bank of Israel umbrella While the ILS was a clear buy at the start of 2013, we adopt a more cautious approach for 2014. The fact that most of the macro fundamentals are still ILSsupportive is not debatable. However, we consider that the valuation is no longer compelling. The real effective exchange rate has risen substantially in 2013 and no longer shows misalignment with important macro variables like the current account balance or terms of trade momentum. Moreover, the Bank of Israel is back in the game and is unlikely to let the ILS to strengthen much further. The economy grows below trend and export performances are weak, partly because of ILS strength. In fact, the BoI may adopt a more aggressive intervention policy aiming at weakening the ILS if the economic growth disappoints and inflation stays persistently low. Overall, we see USD-ILS trending towards 3.60 in coming months.
Source: Bloomberg
44
abc
HSBC Volume-Weighted REERs

How should we weight the basket?
If we are trying to create an index for the change in value of a currency against a basket of other currencies, we now need to decide on how to weight our basket. One possible solution would be to simply have an equally-weighted basket. The rationale for this would be that there is no a priori reason for choosing to put more emphasis on any one exchange rate. However, this could clearly lead to the situation where a large move in a relatively small currency can strongly influence the REERs and NEERs for all other currencies. To avoid this, the indices are generally weighted so that more important currencies get higher weighting. This, of course, begs the question of how importance is defined.
For full details of the construction methodology of the HSBC REERs, please see HSBCs New Volume-Weighted REERs Currency Outlook April 2009.
Mark McDonald FX Strategist HSBC Bank plc +44 20 7991 5966 mark.mcdonald@hsbcib.com
The value of a currency

Since FX prices are always given as the amount of one currency that can be bought with another, the inherent value of a currency is not defined. For example, if EUR-USD goes up, this could be because the EUR has increased in value, the USD has decreased in value, or a combination of both. One possible method for getting some insight into changes in the value of a currency is to look at movements in the value of a basket of other currencies against the currency of interest. For example, if EUR-USD increased over some time period, one could see how EUR had performed against a range of other currencies to determine whether EUR has become generally more valuable or whether this was simply a USD-based move. An effective exchange rate is an attempt to do this and to represent the moves in index form. There are two main approaches to building an effective exchange rate: Nominal Effective Exchange Rates (NEERs) and Real Effective Exchange Rates (REERs). NEERs simply track the weighted average returns of a basket of other currencies against the currency being investigated; REERs deflate the returns in an attempt to compensate for the differing rates of inflation in different countries. The reason for doing this is that, particularly over long time frames, inflation can have a large impact on the purchasing power of a currency.
Trade Weights
Weighting the basket by bilateral trade-weights is the most common weighting procedure for creating an effective exchange rate index. This is because the indices are often used to measure the likely impact of exchange rate moves on a countrys international trade performance.
Volume Weights
The daily volume traded in the FX market dwarves the global volume of physical trade. From this it is possible to make a convincing argument that the weighting which would be really important would be to weight the currency basket by financial market flows, rather than bilateral trade.
45
abc
To do this properly would require us to have accurate FX volumes for all currency pairs considered in the index. However, these are not available. The BIS triennial survey of FX volumes only gives data for a small number of bilateral exchange rates. However, the volumes are split by currency for over 30 currencies. From these volumes we can estimate financial weightings for each currency. We believe that this gives another plausible definition for importance, and one which may be more relevant for financial investors than trade weights. We call this procedure volume weighting and the indices produced through this procedure we call the HSBC volume-weighted REERs. We would argue that if you are a financial market investor, the effective value of a currency you would be exposed to is more accurately represented by the HSBC volume-weighted index rather than the trade-weighted index.
Data Frequency
This is something which is rarely considered when constructing REERs inflation data is generally released at monthly frequency at best so the usual procedure is to simply create monthly indices by default. However, some countries release their inflation data only quarterly. The usual procedure for these countries is to simply pro-rata the change over the period. Here there is an implicit assumption that the rate of inflation changes slowly. We take this assumption one step further and assume that it is valid to spread the inflation out equally over every day in the month.
46
abc
HSBC Volume Weighted REERs

USD REER index
USD Trade-Weighted REER 1996=100 160 USD Volume-Weighted REER 1996=100 160
1996=100 120
EUR REER index

EUR Volume-Weighted REER EUR Trade-Weighted REER 1996=100 120
110
110
140
140
100 100
120
120
90
90
80
80
100
100
70 70
80 Jul-95 Jul-98 Jul-01 Jul-04 Jul-07 Jul-10 Jul-13
80
60
Source: HSBC
Source: HSBC
JPY REER index

JPY Trade-Weighted REER 1996=100 120 JPY Volume-Weighted REER 1996=100 120
GBP REER index

1996=100 140 GBP Trade-Weighted REER GBP Volume-Weighted REER 1996=100 140
130
105 105
130
120
120
90
90
110
110
100
75 75
100
90
90
60
80
Source: HSBC
Source: HSBC
47
abc
CAD REER index

CAD Trade-Weighted REER 1996=100 150 140 130 120 110 100 90 80 Jul-95 Jul-98 Jul-01 Jul-04 Jul-07 Jul-10 Jul-13 CAD Volume-Weighted REER 1996=100 150 140 130 120 110 100 90 80
CHF REER index

CHF Volume-Weighted REER 1996=100 130 120 110 100 90 80 70 60 Jul-95 Jul-98 Jul-01 Jul-04 Jul-07 Jul-10 Jul-13 CHF Trade-Weighted REER 1996=100 130 120 110 100 90 80 70 60
Source: HSBC
Source: HSBC
AUD REER index

AUD Trade-Weighted REER 1996=100 160 AUD Volume-Weighted REER 1996=100 160
NZD REER index

NZD Volume-Weighted REER 1996=100 140 NZD Trade-Weighted REER 1996=100 140
140
140
120 120
120
120
100 100
100
100
80 80
80
80
60
60
Source: HSBC
Source: HSBC
SEK REER index

SEK Trade-Weighted REER 1996=100 110 SEK Volume-Weighted REER 1996=100 110
NOK REER index

NOK Trade-Weighted REER 1996=100 130 NOK Volume-Weighted REER 1996=100 130
100
100
120
120
110
110
90
90
100 100
80
80
90 90
70
70
80
80
60
70
Source: HSBC
Source: HSBC
48
abc
HSBC forecasts vs forwards

EUR-USD vs forwards
EUR-USD 1.60 1.50 1.40 1.30 1.20 1.10 1.00 0.90 0.80 Jan-00 Jan-02 Jan-04 Jan-06 Jan-08 Jan-10 Jan-12 Jan-14 Forward Forecast EUR-USD 1.60 1.50 1.40 1.30 1.20 1.10 1.00 0.90 0.80
EUR-CHF vs forwards
EUR-CHF 1.70 1.60 1.50 1.40 1.30 1.20 1.10 1.00 Jan-00 Jan-02 Jan-04 Jan-06 Jan-08 Jan-10 Jan-12 Jan-14
Forward
Forecast
EUR-CHF 1.70 1.60 1.50 1.40 1.30 1.20 1.10 1.00
Source: Thomson Financial Datastream, Reuters, HSBC
GBP-USD vs forwards
GBP-USD 2.10 2.00 1.90 1.80 1.70 1.60 1.50 1.40 1.30 Jan-00 Jan-02 Jan-04 Jan-06 Jan-08 Jan-10 Jan-12 Jan-14
EUR-GBP vs forwards
Forward Forecast GBP-USD 2.10 2.00 1.90 1.80 1.70 1.60 1.50 1.40 1.30
EUR-GBP 1.00 0.95 0.90 0.85 0.80 0.75 0.70 0.65 0.60 0.55 Jan-00 Jan-02 Jan-04 Jan-06 Jan-08 Jan-10 Jan-12 Jan-14 Forward Forecast EUR-GBP 1.00 0.95 0.90 0.85 0.80 0.75 0.70 0.65 0.60 0.55
USD-JPY vs forwards
USD-JPY 140 130 120 110 100 90 80 70 60 Jan-00 Jan-02 Jan-04 Jan-06 Jan-08 Jan-10 Jan-12 Jan-14 Forward Forecast USD-JPY 140 130 120 110 100 90 80 70 60
EUR-JPY vs forwards
EUR-JPY 175 165 155 145 135 125 115 105 95 85 Jan-00 Forward Forecast EUR-JPY 175 165 155 145 135 125 115 105 95 85 Jan-02 Jan-04 Jan-06 Jan-08 Jan-10 Jan-12 Jan-14
49
abc
Short rates
3 M o n th M o n ey 2009 Q4 x 0.3 0.5 x 5.5 8.7 0.5 x 0.7 x 0.6 2.2 0.5 0.3 6.0 4.2 6.6 7.5 16.1 7.1 x 0.3 4.0 2.8 2010 Q4 x 0.3 1.2 x 4.6 11.1 3.3 x 0.9 x 0.8 2.6 1.8 0.2 5.9 4.0 4.1 6.7 9.1 5.5 x 0.2 5.0 3.2 2011 Q4 0.5 1.4 x 4.4 10.4 5.1 x 1.3 x 1.1 2.9 2.7 0.1 7.2 5.0 6.4 10.1 21.5 5.5 x 0.2 4.5 2.7 2012 Q4 0.4 1.3 x 4.4 7.1 4.9 x 0.1 x 0.5 1.9 1.6 0.0 5.8 4.1 7.5 5.5 18.3 5.2 x 0.2 3.0 2.6 2013 Q3 0.2 1.2 x 3.7 9.4 4.8 x 0.1 x 0.5 1.7 1.2 0.0 3.6 2.7 6.8 6.9 10.2 5.4 x 0.2 2.6 2.7 2014 Q1f 0.3 1.2 x 3.9 10.5 4.1 x 0.2 x 0.6 1.7 1.0 0.0 2.8 2.7 6.7 9.5 12.0 5.2 x 0.2 2.6 3.0 en d p erio d N o r th A m er ica x x L atin A m er ica x x x W estern Eu ro p e Eu ro z o n e Oth er W estern Eu ro p e x x x EM EA Q4f 0.2 1.2 x 3.9 10.3 4.3 x 0.3 x 0.5 1.7 1.0 0.0 3.0 2.7 6.9 7.8 12.0 5.2 x 0.1 2.6 2.7 Q2f 0.3 1.2 x 3.9 10.5 4.1 x 0.2 x 0.6 1.7 1.0 0.0 2.8 2.7 6.8 9.5 12.0 5.1 x 0.2 2.6 3.2 Q3f 0.3 1.2 x 4.0 10.5 4.1 x 0.2 x 0.6 1.8 1.0 0.0 2.8 2.7 6.6 9.5 12.0 5.1 x 0.2 2.9 3.3 Q4f 0.3 1.2 x 4.2 11.0 4.1 x 0.2 x 0.7 1.8 1.1 0.0 2.9 2.7 6.4 9.5 12.0 5.1 x 0.2 3.1 3.4 x U S (U SD) C anada (C AD) x M ex ic o (M XN ) Brazil (BR L) C hile (C LP) x x x U K (GBP) N orw ay (N OK) Sw eden (SEK) Sw itz erland (C HF ) Hungary (HU F ) Poland (PLN ) R us sia (R U B)* T urkey (T R Y) U kraine (U AH) South Afric a (Z AR ) x J apan (J PY) Aus tralia (AU D) N ew Z ealand (N Z D)
A sia/Pacific x x x
N orth As ia x x x South Asia

x x x x x A fr ica x C hina (C N Y) Hong Kong (HKD) T aiw an (T WD) South Korea (KR W) India (IN R ) Indones ia (IDR ) M alay sia (M YR ) Philippines (PHP) Singapore (SGD) T hailand (T HB) x South Afric a (Z AR ) 1.7 0.5 0.5 2.8 4.6 7.1 2.2 3.9 0.7 1.4 x 7.1 2.3 0.3 0.7 2.8 9.0 6.6 3.0 0.8 0.4 2.2 x 5.5 3.1 0.4 0.9 3.6 9.8 5.3 3.2 1.6 0.4 3.2 x 5.5 2.6 0.4 0.9 2.9 8.2 5.0 3.2 0.6 0.4 2.9 x 5.2 2.6 0.4 0.9 2.7 9.7 7.2 3.2 0.5 0.4 2.6 x 5.4 2.6 0.4 1.1 2.7 9.2 7.6 3.2 0.5 0.2 2.4 x 5.2 2.6 0.5 1.1 2.7 8.7 7.7 3.3 0.6 0.3 2.3 x 5.2 2.6 0.5 1.5 2.7 9.5 7.8 3.4 0.6 0.3 2.4 x 5.1 2.6 0.5 1.1 2.8 8.0 7.8 3.5 0.6 0.3 2.5 x 5.1 2.6 0.5 1.5 3.0 7.7 7.8 3.7 0.6 0.3 2.6 x 5.1
N o tes : * 1-m o nth m o ney. So urce: H SB C
Important note This table represents three month money rates. Due to the dislocation in the three month money markets, these rates may not give a good indication of policy rates.
50
abc
Emerging markets forecast table

8-Jan-14 last 2013 Q3 x x Q4 x 2014 Q1f x Q2f x Q3f x Q4f x 2015 Q1f x Q2f x Q3f x Q4f x
Latin America vs USD

Argentina (ARS) Brazil (BRL) Chile (CLP)
6.60 2.37 531
5.79 2.23 505
6.50 2.36 525
7.00 2.35 530
7.50 2.40 535
8.00 2.45 540
8.50 2.50 545
9.20 2.52 550
9.80 2.55 550
10.50 2.58 550
11.00 2.60 550
Mex ico (MXN) Colombia (COP) Peru (PEN) Venezuala (VEF)
13.04 1929 2.80 6.29
13.17 1828 2.79 6.29
13.00 1923 2.80 6.30
12.90 1935 2.80 15.00
12.80 1940 2.80 15.00
12.70 1950 2.75 15.00
12.60 1960 2.75 15.00
12.60 1970 2.75 15.00
12.60 1980 2.75 15.00
12.60 1990 2.75 15.00
12.60 2000 2.75 15.00
Eastern Europe vs EUR

Czech Republic (CZK) Hungary (HUF) Russia v s USD (RUB) Romanian (RON) Turkey v s USD (TRY)
Simple rate
27.5 300 33.1 4.50 2.18 4.18 x 6.96 3.51 x
25.7 297 32.3 4.40 2.02 4.23 x 7.00 3.55
27.0 300 32.9 4.50 2.15 4.20 x 6.95 3.50
27.0 295 33.5 4.40 2.30 4.10 x 6.80 3.60
27.0 295 34.7 4.35 2.20 4.00 x 6.80 3.55
27.0 290 34.8 4.30 2.15 4.00 x 6.80 3.55
27.0 290 35.2 4.30 2.10 3.90 x 6.80 3.50
26.8 290 36.1 4.30 2.15 3.90 x 6.80 3.50
26.5 290 37.6 4.30 2.15 3.90 x 6.80 3.50
26.0 290 37.1 4.30 2.00 3.90 x 6.80 3.50
26.0 290 37.3 4.30 2.00 3.90 x 6.80 3.50
Poland (PLN)
Middle East vs USD

Egy pt (EGP) Israel (ILS)
Africa vs USD
South Africa (ZAR) Interest rates 10.69 10.06 10.60 10.60 10.60 10.40 10.40 10.00 10.00 10.00 10.00
Source: HSBC
51
abc
Exchange rates vs USD

end period
Am ericas x x x x x Western Europe x Canada (CAD) Mex ico (MXN) Brazil (BRL) Argentina (ARS) x Eurozone (EUR*) Other Western Europe x x x x x x Emerging Europe x x x x x Asia/Pacific x x x UK (GBP*) Sw eden (SEK) Norw ay (NOK) Sw itzerland (CHF) x Russia (RUB) Poland (PLN) Hungary (HUF) Czech Republic (CZK) x Japan (JPY) Australia (AUD*) New Zealand (NZD*) 81 1.03 0.78 x 6.59 7.77 30.4 1121 x 44.7 9010 3.08 43.6 1.28 30.1 19498 x 6.62 x 8.07 x 53.0 9068 3.17 43.8 1.30 31.6 21037 x 8.48 x 6.29 7.77 30.3 1159 x 55.0 9638 3.06 41.1 1.22 30.6 20835 x 10.06 77 1.03 0.78 x 6.23 7.75 29.0 1064 x 62.6 11580 3.26 43.5 1.26 31.3 21119 x 10.60 86 1.04 0.83 x 6.12 7.76 29.6 1075 x 61.9 12170 3.28 44.4 1.26 32.7 21080 x 10.60 98 0.94 0.83 x 6.05 7.76 29.8 1053 x 59.0 11750 3.25 44.5 1.23 33.0 21100 x 10.60 105 0.90 0.83 x 6.04 7.80 29.4 1040 x 60.0 12000 3.28 44.8 1.24 33.3 21100 x 10.40 106 0.89 0.84 x 6.02 7.80 29.3 1035 x 61.0 12250 3.30 45.0 1.24 33.6 21100 x 10.40 103 0.88 0.85 x 6.00 7.80 29.2 1030 x 62.0 12500 3.33 45.2 1.25 34.0 21100 x 10.00 103 0.87 0.86 x 5.98 7.80 29.1 1025 x 63.0 12500 3.35 45.4 1.25 34.3 21100 x 10.00 101 0.86 0.87 x 5.96 7.80 29.0 1020 x 64.0 12500 3.35 45.4 1.26 34.5 21100 x 10.00 99 0.86 0.88 x 5.94 7.80 29.0 1015 x 64.0 12500 3.35 45.4 1.26 34.5 21100 x 10.00 99 0.86 0.88 x 5.92 7.80 29.0 1010 x 64.0 12500 3.35 45.4 1.26 34.5 21100 99 0.86 0.88 x 5.90 7.80 29.0 1000 99 0.86 0.88 x 30.5 2.95 207 18.7 x 1.57 6.72 5.81 0.93 x 32.0 3.43 242 19.6 x 1.34 x 1.55 6.86 5.97 0.94 x 30.5 3.09 221 19.0 0.99 12.36 1.67 3.97 x 1.30 x 1.63 6.51 5.57 0.92 x 32.3 3.12 220 19.0 1.02 13.97 1.88 4.30 x 1.32 x 1.62 6.42 6.01 0.90 x 32.9 3.07 219 19.7 1.00 12.87 2.04 4.92 x 1.35 x 1.66 6.47 6.10 0.90 x 33.5 3.04 219 20.0 1.03 13.17 2.23 5.79 x 1.37 x 1.65 6.52 6.15 0.93 x 34.7 3.01 222 20.3 1.06 13.00 2.36 6.50 x 1.35 x 1.61 6.47 6.09 0.94 x 34.8 3.08 223 20.8 1.07 12.90 2.35 7.00 x 1.33 x 1.55 6.46 6.00 0.96 x 35.2 3.05 227 21.1 1.09 12.80 2.40 7.50 x 1.30 x 1.50 6.48 5.94 0.98 x 36.1 3.12 232 21.4 1.10 12.70 2.45 8.00 x 1.28 x 1.47 6.56 5.92 1.00 x 37.6 3.12 232 21.2 1.10 12.60 2.50 8.50 x 1.25 x 1.47 6.56 5.92 1.00 x 37.1 3.12 232 20.8 1.12 12.60 2.52 9.20 x 1.25 x 1.47 6.56 5.92 1.00 x 37.3 3.12 232 20.8 1.12 12.60 2.55 9.80 x 1.25 x 1.47 6.56 5.92 1.00 1.12 12.60 2.58 10.50 x 1.25 1.12 12.60 2.60 11.00 2010 Q4 2011 Q4 2012 Q4 2013 Q3 Q4 2014 Q1f Q2f Q3f Q4f 2015 Q1f Q2f Q3f Q4f
North Asia x x x x x South Asia

x x x x x
x China (CNY) Hong Kong (HKD) Taiw an (TWD) South Korea (KRW) x India (INR) Indonesia (IDR) Malay sia (MYR) Philippines (PHP) Singapore (SGD) Thailand (THB) Vietnam (VND)
Africa x Source HSBC
x South Africa (ZAR)
52
abc
Exchange rates vs EUR & GBP

end period
Vs euro Am ericas x x Europe x x x x x x x x Asia/Pacific x x x Vs sterling Am ericas x x Europe x x x x x Asia/Pacific x x x
Source: HSBC
2010 Q4 x x US (USD) Canada (CAD) x UK (GBP) Sw eden (SEK) Norw ay (NOK) Sw itzerland (CHF) Russia (RUB) Poland (PLN) Hungary (HUF) Czech Republic (CZK) x Japan (JPY) Australia (AUD) New Zealand (NZD) x x US (USD) Canada (CAD) x Eurozone (EUR) Sw eden (SEK) Norw ay (NOK) Sw itzerland (CHF) x Japan (JPY) Australia (AUD) New Zealand (NZD)
2011 Q4
2012 Q4
2013 Q3 Q4
2014 Q1f Q2f Q3f Q4f
2015 Q1f Q2f Q3f Q4f
1.34 1.33 0.86 9.02 7.80 1.25 40.9 3.96 278 25.1 x 109 1.31 1.72 x x 1.57 1.56 x 0.86 10.53 9.10 1.46 x 127 1.53 2.00
1.30 1.32 0.84 8.90 7.75 1.21 41.6 4.46 315 25.5 x 100 1.27 1.66 x x 1.55 1.58 x 0.84 10.65 9.27 1.45 x 120 1.52 1.99
1.32 1.31 0.81 8.58 7.34 1.21 40.2 4.08 291 25.1 x 114 1.27 1.60 x x 1.63 1.62 x 0.81 10.57 9.05 1.49 x 141 1.57 1.97
1.35 1.39 0.84 8.69 8.14 1.22 43.8 4.23 297 25.7 x 133 1.45 1.63 x x 1.62 1.66 x 0.84 10.40 9.74 1.46 x 159 1.73 1.94
1.37 1.45 0.83 8.86 8.36 1.23 45.1 4.20 300 27.0 x 144 1.52 1.65 x x 1.66 1.76 x 0.83 10.74 10.13 1.49 x 174 1.84 2.00
1.35 1.44 0.82 8.80 8.30 1.25 45.2 4.10 295 27.0 x 143 1.52 1.61 x x 1.65 1.77 x 0.82 10.75 10.14 1.53 x 175 1.85 1.96
1.33 1.45 0.83 8.60 8.10 1.25 46.2 4.00 295 27.0 x 137 1.51 1.56 x x 1.61 1.76 x 0.83 10.42 9.82 1.51 x 166 1.83 1.90
1.30 1.43 0.84 8.40 7.80 1.25 45.2 4.00 290 27.0 x 134 1.49 1.51 x x 1.55 1.70 x 0.84 10.01 9.29 1.49 x 160 1.78 1.80
1.28 1.41 0.85 8.30 7.60 1.25 45.1 3.90 290 27.0 x 129 1.49 1.47 x x 1.50 1.65 x 0.85 9.72 8.90 1.46 x 151 1.74 1.72
1.25 1.40 0.85 8.20 7.40 1.25 45.2 3.90 290 26.8 x 124 1.46 1.42 x x 1.47 1.65 x 0.85 9.65 8.71 1.47 x 146 1.71 1.67
1.25 1.40 0.85 8.20 7.40 1.25 47.1 3.90 290 26.5 x 124 1.46 1.42 x x 1.47 1.65 x 0.85 9.65 8.71 1.47 x 146 1.71 1.67
1.25 1.40 0.85 8.20 7.40 1.25 46.4 3.90 290 26.0 x 124 1.46 1.42 x x 1.47 1.65 x 0.85 9.65 8.71 1.47 x 146 1.71 1.67
1.25 1.40 0.85 8.20 7.40 1.25 46.7 3.90 290 26.0 x 124 1.46 1.42 x x 1.47 1.65 x 0.85 9.65 8.71 1.47 x 146 1.71 1.67
53
abc
Notes
54
abc
Disclosure appendix
Analyst Certification
The following analyst(s), economist(s), and/or strategist(s) who is(are) primarily responsible for this report, certifies(y) that the opinion(s) on the subject security(ies) or issuer(s) and/or any other views or forecasts expressed herein accurately reflect their personal view(s) and that no part of their compensation was, is or will be directly or indirectly related to the specific recommendation(s) or views contained in this research report: David Bloom, Daragh Maher, Paul Mackel, Clyde Wardle, Robert Lynch, Stacy Williams, Marjorie Hernandez, Mark McDonald, Murat Toprak, Ju Wang, Julia Wang, Dominic Bunning, James Steel and Howard Wen
Important Disclosures
This document has been prepared and is being distributed by the Research Department of HSBC and is intended solely for the clients of HSBC and is not for publication to other persons, whether through the press or by other means. This document is for information purposes only and it should not be regarded as an offer to sell or as a solicitation of an offer to buy the securities or other investment products mentioned in it and/or to participate in any trading strategy. Advice in this document is general and should not be construed as personal advice, given it has been prepared without taking account of the objectives, financial situation or needs of any particular investor. Accordingly, investors should, before acting on the advice, consider the appropriateness of the advice, having regard to their objectives, financial situation and needs. If necessary, seek professional investment and tax advice. Certain investment products mentioned in this document may not be eligible for sale in some states or countries, and they may not be suitable for all types of investors. Investors should consult with their HSBC representative regarding the suitability of the investment products mentioned in this document and take into account their specific investment objectives, financial situation or particular needs before making a commitment to purchase investment products. The value of and the income produced by the investment products mentioned in this document may fluctuate, so that an investor may get back less than originally invested. Certain high-volatility investments can be subject to sudden and large falls in value that could equal or exceed the amount invested. Value and income from investment products may be adversely affected by exchange rates, interest rates, or other factors. Past performance of a particular investment product is not indicative of future results. HSBC and its affiliates will from time to time sell to and buy from customers the securities/instruments (including derivatives) of companies covered in HSBC Research on a principal or agency basis. Analysts, economists, and strategists are paid in part by reference to the profitability of HSBC which includes investment banking revenues. For disclosures in respect of any company mentioned in this report, please see the most recently published report on that company available at www.hsbcnet.com/research.
Additional disclosures
1 2 3 This report is dated as at 08 January 2014. All market data included in this report are dated as at close 07 January 2014, unless otherwise indicated in the report. HSBC has procedures in place to identify and manage any potential conflicts of interest that arise in connection with its Research business. HSBC's analysts and its other staff who are involved in the preparation and dissemination of Research operate and have a management reporting line independent of HSBC's Investment Banking business. Information Barrier procedures are in place between the Investment Banking and Research businesses to ensure that any confidential and/or price sensitive information is handled in an appropriate manner.
55
abc
Disclaimer
* Legal entities as at 8 August 2012 Issuer of report UAE HSBC Bank Middle East Limited, Dubai; HK The Hongkong and Shanghai Banking Corporation Limited, HSBC Bank plc Hong Kong; TW HSBC Securities (Taiwan) Corporation Limited; 'CA' HSBC Bank Canada, Toronto; HSBC Bank, 8 Canada Square, London Paris Branch; HSBC France; DE HSBC Trinkaus & Burkhardt AG, Dsseldorf; 000 HSBC Bank (RR), Moscow; IN E14 5HQ, United Kingdom HSBC Securities and Capital Markets (India) Private Limited, Mumbai; JP HSBC Securities (Japan) Limited, Tokyo; EG HSBC Securities Egypt SAE, Cairo; CN HSBC Investment Bank Asia Limited, Beijing Representative Office; Telephone: +44 20 7991 8888 The Hongkong and Shanghai Banking Corporation Limited, Singapore Branch; The Hongkong and Shanghai Banking Telex: 888866 Corporation Limited, Seoul Securities Branch; The Hongkong and Shanghai Banking Corporation Limited, Seoul Fax: +44 20 7992 4880 Branch; HSBC Securities (South Africa) (Pty) Ltd, Johannesburg; HSBC Bank plc, London, Madrid, Milan, Stockholm, Website: www.research.hsbc.com Tel Aviv; US HSBC Securities (USA) Inc, New York; HSBC Yatirim Menkul Degerler AS, Istanbul; HSBC Mxico, SA, Institucin de Banca Mltiple, Grupo Financiero HSBC; HSBC Bank Brasil SA Banco Mltiplo; HSBC Bank Australia Limited; HSBC Bank Argentina SA; HSBC Saudi Arabia Limited; The Hongkong and Shanghai Banking Corporation Limited, New Zealand Branch incorporated in Hong Kong SAR This document is issued and approved in the United Kingdom by HSBC Bank plc for the information of its Clients (as defined in the Rules of FCA) and those of its affiliates only. If this research is received by a customer of an affiliate of HSBC, its provision to the recipient is subject to the terms of business in place between the recipient and such affiliate. In Australia, this publication has been distributed by The Hongkong and Shanghai Banking Corporation Limited (ABN 65 117 925 970, AFSL 301737) for the general information of its wholesale customers (as defined in the Corporations Act 2001). Where distributed to retail customers, this research is distributed by HSBC Bank Australia Limited (AFSL No. 232595). These respective entities make no representations that the products or services mentioned in this document are available to persons in Australia or are necessarily suitable for any particular person or appropriate in accordance with local law. No consideration has been given to the particular investment objectives, financial situation or particular needs of any recipient. The document is distributed in Hong Kong and Japan by The Hongkong and Shanghai Banking Corporation Limited and has been prepared for the New York office of HSBC Bank USA, National Association. In Korea, this publication is distributed by either The Hongkong and Shanghai Banking Corporation Limited, Seoul Securities Branch ("HBAP SLS") or The Hongkong and Shanghai Banking Corporation Limited, Seoul Branch ("HBAP SEL") for the general information of professional investors specified in Article 9 of the Financial Investment Services and Capital Markets Act (FSCMA). This publication is not a prospectus as defined in the FSCMA. It may not be further distributed in whole or in part for any purpose. Both HBAP SLS and HBAP SEL are regulated by the Financial Services Commission and the Financial Supervisory Service of Korea. Each of the companies listed above (the Participating Companies) is a member of the HSBC Group of Companies, any member of which may trade for its own account as Principal, may have underwritten an issue within the last 36 months or, together with its Directors, officers and employees, may have a long or short position in securities or instruments or in any related instrument mentioned in the document. Brokerage or fees may be earned by the Participating Companies or persons associated with them in respect of any business transacted by them in all or any of the securities or instruments referred to in this document. This publication is distributed in New Zealand by The Hongkong and Shanghai Banking Corporation Limited, New Zealand Branch incorporated in Hong Kong SAR. The information in this document is derived from sources the Participating Companies believe to be reliable but which have not been independently verified. The Participating Companies make no guarantee of its accuracy and completeness and are not responsible for errors of transmission of factual or analytical data, nor shall the Participating Companies be liable for damages arising out of any persons reliance upon this information. All charts and graphs are from publicly available sources or proprietary data. The opinions in this document constitute the present judgement of the Participating Companies, which is subject to change without notice. This document is neither an offer to sell, purchase or subscribe for any investment nor a solicitation of such an offer. HSBC Securities (USA) Inc. accepts responsibility for the content of this research report prepared by its non-US foreign affiliate. All US persons receiving and/or accessing this report and intending to effect transactions in any security discussed herein should do so with HSBC Securities (USA) Inc. in the United States and not with its non-US foreign affiliate, the issuer of this report. In Singapore, this publication is distributed by The Hongkong and Shanghai Banking Corporation Limited, Singapore Branch for the general information of institutional investors or other persons specified in Sections 274 and 304 of the Securities and Futures Act (Chapter 289) (SFA) and accredited investors and other persons in accordance with the conditions specified in Sections 275 and 305 of the SFA. This publication is not a prospectus as defined in the SFA. It may not be further distributed in whole or in part for any purpose. The Hongkong and Shanghai Banking Corporation Limited Singapore Branch is regulated by the Monetary Authority of Singapore. Recipients in Singapore should contact a "Hongkong and Shanghai Banking Corporation Limited, Singapore Branch" representative in respect of any matters arising from, or in connection with this report. HSBC Mxico, S.A., Institucin de Banca Mltiple, Grupo Financiero HSBC is authorized and regulated by Secretara de Hacienda y Crdito Pblico and Comisin Nacional Bancaria y de Valores (CNBV). HSBC Bank (Panama) S.A. is regulated by Superintendencia de Bancos de Panama. Banco HSBC Honduras S.A. is regulated by Comisin Nacional de Bancos y Seguros (CNBS). Banco HSBC Salvadoreo, S.A. is regulated by Superintendencia del Sistema Financiero (SSF). HSBC Colombia S.A. is regulated by Superintendencia Financiera de Colombia. Banco HSBC Costa Rica S.A. is supervised by Superintendencia General de Entidades Financieras (SUGEF). Banistmo Nicaragua, S.A. is authorized and regulated by Superintendencia de Bancos y de Otras Instituciones Financieras (SIBOIF). The document is intended to be distributed in its entirety. Unless governing law permits otherwise, you must contact a HSBC Group member in your home jurisdiction if you wish to use HSBC Group services in effecting a transaction in any investment mentioned in this document. HSBC Bank plc is registered in England No 14259, is authorised by the Prudential Regulation Authority and regulated by the Financial Conduct Authority and the Prudential Regulation Authority and is a member of the London Stock Exchange. (070905) In Canada, this document has been distributed by HSBC Bank Canada and/or its affiliates. Where this document contains market updates/overviews, or similar materials (collectively deemed Commentary in Canada although other affiliate jurisdictions may term Commentary as either macro-research or research), the Commentary is not an offer to sell, or a solicitation of an offer to sell or subscribe for, any financial product or instrument (including, without limitation, any currencies, securities, commodities or other financial instruments). Copyright 2014, HSBC Bank plc, ALL RIGHTS RESERVED. No part of this publication may be reproduced, stored in a retrieval system, or transmitted, on any form or by any means, electronic, mechanical, photocopying, recording, or otherwise, without the prior written permission of HSBC Bank plc. MICA (P) 118/04/2013, MICA (P) 068/04/2013 and MICA (P) 110/01/2013
[399887]
56
Main contributors
David Bloom Global Head of FX Research HSBC Bank plc +44 20 7991 5969 david.bloom@hsbcib.com
Stacy Williams Head of FX Quantitative Strategy HSBC Bank plc +44 20 7991 5967 stacy.williams@hsbcgroup.com
Daragh Maher FX Strategist, G10 HSBC Bank plc +44 20 7991 5968 daragh.maher@hsbcib.com
Mark McDonald FX Quantitative Strategist HSBC Bank plc +44 20 7991 5966 mark.mcdonald@hsbcib.com
Paul Mackel Head of Asian FX Research The Hongkong and Shanghai Banking Corporation Limited +852 2996 6565 paulmackel@hsbc.com.hk
Robert Lynch Head of G10 FX Strategy, Americas HSBC Securities (USA) Inc. +1 212 525 3159 robert.lynch@us.hsbc.com
Ju Wang FX Strategist, Asia The Hongkong and Shanghai Banking Corporation Limited +852 2822 4340 juwang@hsbc.com.hk
Clyde Wardle Emerging Markets FX Strategist HSBC Securities (USA) Inc. +1 212 525 3345 clyde.wardle@us.hsbc.com
Dominic Bunning FX Strategist, Asia The Hongkong and Shanghai Banking Corporation Limited +852 2822 1672 dominic.bunning@hsbc.com
Marjorie Hernandez FX Strategist, Latin America HSBC Securities (USA) Inc. +1 212 525 4109 marjorie.hernandez@us.hsbc.com
Murat Toprak FX Strategist, EMEA HSBC Bank plc +44 20 7991 5415 murat.toprak@hsbcib.com

HSBC Jan 2014 USD Strength

Uploaded by

Document Information

Original Title

Copyright

Available Formats

Share this document

Share or Embed Document

Sharing Options

Did you find this document useful?

Is this content inappropriate?

Copyright:

Available Formats

HSBC Jan 2014 USD Strength

Uploaded by

Copyright:

Available Formats

Currency

Macro Currency Strategy January 2014

USD rally to spread its wings

Macro Currency Strategy January 2014

USD rally to spread its wings

GBP: mind the trade gap

Macro Currency Strategy January 2014

12 months 1.279 105.5 1.569 1.066 0.875 0.792

1.321 101.9 1.594 1.051 0.902 0.816

Macro Currency Strategy January 2014

GBP: mind the trade gap

Fed to drive the USD higher

Macro Currency Strategy January 2014

Emerging market opportunities

Macro Currency Strategy January 2014

USD rally to spread its wings

1. Currency performance vs USD during 2013

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

Source: HSBC, Bloomberg

Macro Currency Strategy January 2014

1) USD gains on Fed policy have only just begun

A) Setting the pace

2. US economic data has been surprising to the upside

Source: HSBC, Bloomberg

Macro Currency Strategy January 2014

14 12 10 months 8 6 4 2 0 06 Sep 20 Sep 18 Oct 08 Nov 06 Dec 19 Dec

B) Mind the gap

Macro Currency Strategy January 2014

Source: HSBC, Bloomberg

BoE unemploy ment rate forecast (August 2013)

BoE unemploy ment rate forecast (Nov ember 2013)

Macro Currency Strategy January 2014

6. USD FX is increasingly correlated with moves in US government bond yields

0.35 0.25 0.15 0.05 -0.05 -0.15 -0.25 Jan-08

0.35 0.25 0.15 0.05 -0.05 -0.15 -0.25

Macro Currency Strategy January 2014

economic deficiencies, although these vulnerabilities are quite different in nature.

2) GBP and EUR to fall on economic vulnerabilities

Macro Currency Strategy January 2014

EUR = AUD version 2.0

8. Divergent monetary policy will put EUR-USD under downward pressure

Ex pected Dec'15 3M rate differential (EUR-USD, RHS)

% -0.1 -0.2 -0.3 -0.4 -0.5 -0.6 -0.7 -0.8 -0.9

Macro Currency Strategy January 2014

The exceptional JPY

Macro Currency Strategy January 2014

GBP: mind the trade gap

Quantity not quality

1. GBP has taken its cue from relative rate expectations

% 0.70 0.50 0.30 0.10

Ex pected Dec15 3M rate differentials (UK-US)

GBP-USD (RHS) 1.69 1.66 1.63 1.60 1.57

1.54 1.51 1.48

Source: HSBC, Bloomberg

Macro Currency Strategy January 2014

140 120 100 80 60 40 20

3. Still scope for housing construction to rise

Source: Bloomberg, HSBC

Macro Currency Strategy January 2014

4. Negative real income growth will eventually bite

% 4.0 3.0 2.0 1.0 0.0 -1.0 -2.0 -3.0 -4.0

UK Real w eekly earnings y -o-y

% 4.0 3.0 2.0 1.0 0.0 -1.0 -2.0 -3.0 -4.0