Friday, 25th June 2010

FX Strategy Weekly Market Strategy

• Market Outlook
Kenneth Broux Tactical view:
Senior Market Economist
= EUR/CHF hits 1.35 target; JPY back in demand; USD safe haven status falters
0207 158 1750
The resilience of GBP and stale USD performance vs G10 currencies in a broader context
kenneth.broux@lloydsbanking.com of risk aversion is a new development and will bear close watching over the week ahead
as we square up to heightened event risk from the US and the euro zone. Investor
scepticism has been underlined by the 40% collapse in the Baltic Dry and a dreadful
sequence of US housing data for May, drawing support for the JPY and CHF. A second
disappointing US employment report in as many months threatens to further derail
confidence and could add to the view that the Fed will eventually have to resume asset
purchases. The ECB one-year tender expires on Thursday. The quarterly IMF Cofer statistics
covering changes in Q1 FX reserve composition are due on Wednesday.
• Recap
• A solid weekly performance saw GBP rally against all G10 currencies bar the JPY as the
correlation with risk turned lower. Bolstered by hawkish MPC minutes and the endorsement
of the UK Budget by the credit ratings agencies lifted GBP/NOK to the top of the rankings
with a 2.7% gain, followed by GBP/CAD (2.6%) and GBP/EUR (1.6%). China’s decision to
Weekly de-peg the yuan from the USD resulted in USD/CNY hitting an all-time low at 6.7860, but
Close Change the impact on the broader G10 was muted with JPY gains primarily attributed to the flight
FX % from risk. The CHF continues to attract solid demand since the June 17 SNB meeting, and
GBP/EUR 1.2156 1.60% progressed to below 1.35 vs the EUR. USD/CHF slipped below 1.10.
GBP/USD 1.4985 1.09%
GBP/JPY 133.86 -0.45% • News that MPC member Sentance voted for a rate hike at the June meeting came as a
GBP/CHF 1.6398 -0.21% shock and was the highlight of a week primarily dominated by the emergency Budget.
Though the majority MPC view still points to low interest rates for longer, Mr Sentance’s
GBP/AUD 1.7268 1.57%
dissent indicates that the policy debate could be become more fragmented if the recovery
GBP/NZD 2.1106 0.62%
is sustained in the second half of the year. The regime of fiscal austerity imposed by the
GBP/CAD 1.5550 2.64% Chancellor leaves many question marks over the direction of the economy. The Budget
GBP/NOK 9.6862 2.70% foresees GDP growth of 1.2% this year and 2.3% in 2011, with CPI inflation on target. An
GBP/SEK 11.60 1.30% additional £40bln of fiscal tightening means net borrowing is projected to fall from £155bln
of GDP this year to £37bln by 2015.
EUR/USD 1.2328 -0.48%
USD/JPY 89.33 -1.52% • A stellar performance for UK rates saw 5y swaps return to the lower end of the trading
AUD/USD 0.8678 -0.48% range and 10y yields slide to the lowest level since last October, cracking technical support
NZD/USD 0.7100 0.44% at 3.44% and 3.40%. Key support runs at 3.35%. 3-mth Libor was unchanged at 0.73%
USD/CAD 1.0377 1.56% for a 3rd week running, causing the 3mth Libor/5y swaps curve to flatten to 176bp, a two-
USD/SEK 7.7440 0.21% week low. The 3mth Libor/Ois spread ended the week marginally tighter at 23.5bp. The
USD/NOK
2y/10y swaps curve flattened 6bp to 197bp. Failure to break 206bp leaves the curve
6.4643 1.62%
vulnerable to a corrective flattening to 192bp. Following this week’s lull, gilt sales will
USD/CHF 1.0943 -1.28%
resume next week with the auction of £800mln, 0.75%, 2047 IL paper.

Swaps % bp Contents Page

2yr 1.439 -7.9 Market Outlook, EUR/GBP update .................................................................................. 2
5yr 2.472 -14.3 Quantitative Market Analysis .............................................................................................. 4
10yr 3.418 -13.3
FX & commodity futures positioning ............................................................... 5
Equities %
FTSE100 5046.47 -3.89%
FX options: Risk reversal skews ...................................................................... 6
FX options: Implied volatility ............................................................................ 7
Economic data surprises ................................................................................. 8
Interest rate spreads vs. FX ............................................................................. 9
S&P500 vs. FX ................................................................................................ 10
Commodities vs. FX ........................................................................................ 11
Market Review .................................................................................................................. 12
Disclaimer ......................................................................................................................... 15

Lloyds TSB Corporate Markets Economic Research, 10 Gresham Street, London, EC2V 7AE, Switchboard: 0207 626 1500.
1
 Market Strategy
Kenneth Broux - Senior Market Economist June 2010
contact: +44 207 158 1750
G10 FX - EUR/GBP, further downside targeted
The descent of EUR/GBP since March continued virtually CDS spreads: UK trades below France
uninterrupted this week as the pair progresses below 0.83 to a
0.8181 low and the reciprocal GBP/EUR rate motors through 1.22 5y CDS France UK Germany
120
to a 1.2223 high. A bullish technical set-up (see chart p2) is
accompanied by the still volatile backdrop in EU peripheral bonds 100
based on deeper rooted funding and liquidity concerns, and
argues for EUR/GBP to extend to 0.80 in the short-term (1.25 for 80
GBP/EUR). Our bullish stance is partially based on the view that
EUR/USD underperformance vs GBP/USD is set to continue. 60

Though we are uncomfortable with the rally in GBP/USD up to

40
1.5012 because of the broader context of risk aversion, the dual
fillip from the emergency Budget and a more hawkish MPC tone 20
could tempt participants to cut back on the share of short GBP/
USD positions vis-a-vis EUR/USD. 0

1-Apr

8-Apr

15-Apr

22-Apr

29-Apr

6-May

13-May

20-

27-

3-Jun

10-Jun

17-Jun

24-Jun
A stalling of risk appetite in June and the 40% collapse in the
Baltic Dry since May have not stopped EUR/GBP from breaking
back below 0.83, with a public endorsement by the ratings
agencies of the June 22 Budget bolstering GBP sentiment. Though
the correlation of GBP/USD with equities and commodities has
eased from earlier May peaks, GBP/USD is still better placed to EUR/GBP vs 10y Greece/Germany
benefit from any relief bounce in risk compared to EUR/USD,
EUR/GBP, LHS 10y GREECE/GERMANY, RHS
though the prospect for a summer rally in stocks looks increasingly
0.88 300
bleak as doubts over the economic recovery return and make
0.87
way for speculation of renewed asset purchases by the Fed. 400
0.86
Controversially, it is not unthinkable that the prospect of new
0.85 500
central bank measures to bolster liquidity could support risk as
0.84
observed between Mar-09 and Jan-10, albeit on a smaller scale. 600
0.83
700
0.82
Separately, perceptions of a structural shift in EUR sentiment may 0.81 800
result in a reduction of EUR portfolio holdings by a number of 0.80
900
market participants including real money funds and reserve 0.79
managers. The account of EUR in global currency reserves has 0.78 1000
27-Apr

8-Jun

16-Jun

24-Jun
5-May

13-May

21-May

31-May

shot up from 17% to 27% over the last 10 years. We await the IMF
Cofer statistics for Q1 due on June 30 to understand if any changes
in the composition of global fx reserves is taking place. Because
of the EU debt crisis and niggling uncertainty over capital
adequacy and counterparty risk, we think exposure to EUR
assets is likely to be scaled back, reversing the bullish trend of
the past decade.

EU and UK lending to non-financials: weak

Additionally, GBP may derive support from a shift in the MPC’s
policy bias if confidence grows that the recovery is developing 20
%y/y

stronger momentum in the second half of 2010. A first vote for a

rate hike in June hike since July 2008 (by MPC member Sentance), 15
though not representative of the overall neutral bias of the rest
of the committee, means a more fragmented view could buoy
10
GBP demand should the BoE decide to re-calibrate its inflation
outlook in the August QIR.
5

Finally, the combined impact of tighter fiscal policy, rising real

interest rates and a stronger exchange rate is undesirable and 0
may not enhance the prospects of a more balanced economic
recovery. The BoE has not held back in the past from defending -5
the virtues of a weaker exchange rate in the context of the need EU
2005 2006 2007 2008 2009 2010

for economic rebalancing and though currencies fall outside the UK

BoE policy remit, it is not unthinkable that the MPC could again
turn more vocal should participants bid up GBP.
 EUR/GBP: 0.8165 before 0.80. Setting up for a pullback to 0.78?

Daily QEURGBP= 21/09/06 - 20/07/10 (GMT)

Price
GBP
0.0% 0.9807 0.98
0.97
0.96
0.95
0.94
0.93
0.92
0.91
23.6% 0.9032
0.9
0.89
0.88
0.87
0.86
38.2% 0.8553
0.85
0.84
0.83
0.82
50.0% 0.8165
0.81

0.8
0.79

61.8% 0.7778 0.78

0.77
0.76
0.75
0.74
0.73
0.72
0.71

0.7
0.69
0.68
0.67
0.66
100.0% 0.6523 .1234
O N D J F M A M J J A S O N D J F M A M J J A S O N D J F M A M J J A S O N D J F M A M J J
Q4 2006 Q1 2007 Q2 2007 Q3 2007 Q4 2007 Q1 2008 Q2 2008 Q3 2008 Q4 2008 Q1 2009 Q2 2009 Q3 2009 Q4 2009 Q1 2010 Q2 2010

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Quantitative Market Analysis
• Short EUR and GBP positions cut back
• Macro data gaining influence as USD stalls?

Contrarian Indicators

Risk Reversal Skews (based on options prices, see page 7) Table 1: 1-month rolling correlations
and IMM data (highlighting speculative positioning, see page AUDUSD USDCAD EURUSD GBPUSD USDJPY AUDJPY EURJPY

6) are used to analyse foreign exchange to understand how

stretched currencies may have become. 2 YR SPD 0.79 0.73 0.37 0.25 0.50 0.82 0.19

Speculative short GBP and EUR positions were scaled back 10 YR SPD 0.38 0.30 0.47 -0.07 0.16 0.74 0.47
dramatically over the past week, explaining the resilience
and occasional bullish price action in EUR/USD and GBP/ S&P500 0.67 -0.65 0.67 0.49 0.07 0.74 0.79
USD. The spreads between GBP and EUR short contracts
narrowed to -8,500 from -14,100 (bigger drop in EUR shorts) Gold 0.54 -0.56 0.08 0.64 -0.23 0.48 -0.10
but could not prevent EUR/GBP from sinking below 0.82.
Total GBP short contracts now stand at -66,500, the lowest Oil 0.93 -0.87 0.51 0.86 -0.15 0.92 0.42
since April 20. This rally for GBP/USD up to 1.5012 indicates
that short positions were further reduced over the last week, Relative Yield Curve 0.87 0.48 -0.23 0.30 0.42 0.75 -0.69
probably to around or below 50,000. Total EUR short positions
fell to -75,000 from over -111,000. This is the lowest since April CRB 0.95 -0.78 0.68 0.86 -0.31 0.88 0.48
13 and has helped EUR/USD to build a base in the 1.2250
area. The swings in EUR and GBP positions totally overwhelm
the changes in the other currencies.
whilst EUR/USD reversals eased back to -1.20. The implied
Following the decline in speculative short CHF positions last 1mth/1y vol curves steepened a touch for EUR/GBP (1.32) and
week, this time markets partially reversed their positions, EUR/USD (1.39) as short dated vol continued to ease off (except
snapping up CHF short contracts and raising the total number EUR/USD). EUR/GBP 1mth vol dropped below 10.0. EUR/USD
of short positions to 23,500. This is counter-intuitive to the price vol ticked up along the curve, led by the 1y to 14.59.
trend observed in EUR/CHF. The cross slipped below 1.35
late on Friday as CHF outpaced gains vs the USD. USD/CHF FX correlations
broke below 1.10 and has lost more than six big figures this Market correlations are shown on pages 10-12. 1-month rolling
month alone. Positioning in the commodity and high yield correlations are plotted for G-10 FX against interest rate
currencies underwent few changes as commitment to risk spreads, S&P 500 and commodities (represented through the
remained light. AUD positions were virtually unchanged from CRB index).
last week at 13,000 contracts (+200). Long CAD positioning
rose to 47,700 (+4,200), a three-week high. This tallies with G10 correlations with 2y interest rate differentials returned to
the very flat positioning in S&P futures. The pullback below statistically significant levels for AUD/JPY and remain quite
1,100 to 1,070 underlines the move toward underweight risk relevant for USD/CAD. Conversely, 10y spreads have become
and backs up the accumulation of short S&P futures. irrelevant. A major change and discussed above with regard
to the USD is that the correlation of major currencies with the
The US DXY returned a surprisingly flat performance over S&P has continued to ease back and halved last week for
the last week, failing to capitalise on the faltering in risk GBP/USD to just 0.25. The correlation with EUR/JPY remains
assets. The DXY has been remarkably stable, struggling to mildly significant but overall correlations are well off recent
push through 86.0 but equally finding support around 85.50. highs. The correlation with the CRB index is still a powerful
The stale price action could be about to change next week driver especially for GBP/USD and AUD/JPY. The CRB index
when the July employment report is published. Failure to has been remarkably stable, oscillating between 259 and
move back up to trendline resistance in the 86.77 area may 267.
however be temporary though price action in EUR/USD and
GBP/USD, two of the index components, infers that There are signs that macro data are starting to gain greater
participants are no longer automatically resorting to the USD traction, marking a change from recent months. The
as a choice for safety. weakness of US macro data in particular has not gone
unnoticed and has been a drag on USD performance,
Risk reversals moved in an orderly fashion for most of the G10 despite fading appetite for risk assets. US non-farm
currencies, bringing change from the sharp swing in CHF payrolls will be a litmus test next week to determine
reversals last week. GBP/USD reversals flattened out at -2.21, whether the influence of macro data is waxing.

4
FX & Commodity Futures Positioning
Data from the major US futures & options exchanges are released each Friday evening and report positions up to
the close of business on the previous Tuesday. Traders are classified as either commercial or non-commercial. The
positioning of the non-commercial traders can be used as a proxy for the speculative side of the market. Extreme
net long or net short positions are taken as an indication of the market’s vulnerability to a sharp reversal. For a
squeeze to occur, however, a separate catalyst such as a piece of fundamental news or a breach of a key technical
level is usually required.

$ cont r act s
EUR/USD $ GBP/USD cont ract s SFr USD/CHF cont ract s
60,000 1.80 0 1.20 20,000
1.53
40,000
1.48 20,000 1.70 -20,000 10,000
0 1.15
1.43
- 20,000 1.60 -40,000 0
1.38
- 40,000 1.10
1.33 - 60,000 1.50 -60,000 - 10,000
1.28 - 80,000
- 100,000 1.05
1.23 1.40 -80,000 - 20,000
- 120,000
1.18 - 140,000
1.30 -100,000 1.00 - 30,000
09- 09 12-09 03- 10 06-10
09-09 12- 09 03- 10 06-10 09-09 12-09 03-10 06-10

Net -Long Non- Commercial Posit ions ( CME) Spot Rat e Net -Long Non-Commercial Posit ions (CME) Spot Rat e Net - Long Non-Commercial Posit ions (CME) Spot Rat e

JPY USD/JPY cont r act s C$ USD/CAD cont ract s $ AUD/USD cont ract s
1.20 0 0.95 100,000
100 80,000
-10,000
1.15 80,000
40,000 -20,000 0.90
95 1.10
-30,000 60,000
0
1.05 -40,000 0.85
90 40,000
-40,000 -50,000
1.00
-60,000 0.80
0.95 20,000
85 -80,000 -70,000
09-09 12-09 03-10 06-10 0.90 -80,000 0.75 0
09-09 12-09 03-10 06-10 09-09 12-09 03-10 06-10
Net -Long Non- Commercial Posit ions ( CME) Spot Rat e
Net -Long Non-Commercial Posit ions (CME) Spot Rat e Net - Long Non-Commercial Posit ions (CME) Spot Rat e

£ cont ract s SFr cont ract s

$ bn USD POSITIONING EUR/GBP (derived) EUR/CHF (derived)
0.94 160,000 1.54 50,000
40 90 0.92 1.52
120,000
1.50 0
20 85 0.90
80,000 1.48
0.88 -50,000
0 80 40,000 1.46
0.86
1.44 -100,000
-20 75 0
0.84 1.42
-40 70 0.82 -40,000 1.40 -150,000
06-07 12-07 06-08 12-08 06-09 12-09 06-10 09-09 12-09 03-10 06-10 09-09 12-09 03-10 06- 10
SUM (INDIVUAL CURRENCY PAIRS) - LHS
DXY - spot (RHS) Net -Long Non- Commercial Posit ions (CME) Spot Rat e Net -Long Non-Commercial Posit ions (CME) Spot Rat e

$ cont r act s
GOLD $ SILVER cont ract s $ OIL (NYMEX WTI) cont ract s
1300 300,000 20 60,000 90 160,000
19 85 140,000
1200 250,000 50,000
18 80 120,000
200,000 40,000
1100 17 75 100,000
150,000
16 30,000 70 80,000
1000
100,000 15 65 60,000
20,000
900 50,000 14 60 40,000
13 10,000 55 20,000
800 0
09-09 12-09 03-10 06-10 12 0 50 0
09- 09 12-09 03-10 06- 10 09-09 12-09 03-10 06-10
Net -Long Non- Commercial Posit ions ( CME) Spot Rat e
Net -Long Non-Commercial Posit ions (CME) Spot Rat e Net - Long Non-Commercial Posit ions (CME) Spot Rat e

cont r act s cont ract s cont ract s

S&P 500 Future 124
10-YR TREASURY NOTES 0 99.8
3-m onth Eurodollar Future 1,400,000
1300 20,000
122 -50,000 99.7 1,200,000
1200 0
99.6 1,000,000
120 -100,000
1100 -20,000 99.5 800,000
118 -150,000
1000 -40,000 99.4 600,000
116 -200,000
900 -60,000 99.3 400,000
114 -250,000 99.2 200,000
800 -80,000
09-09 12-09 03-10 06-10 112 -300,000 99.1 0
09-09 12-09 03- 10 06-10 09- 09 12-09 03-10 06-10
Net -Long Non- Commercial Posit ions ( CME) Spot Rat e
Net -Long Non-Commercial Posit ions (CME) Spot Rat e Net - Long Non-Commercial Posit ions (CME) Spot Rat e

5
FX Options: Risk Reversal Skews
The risk reversal skew is the difference in volatility between similar out-of-the-money call and out-of-the-money put
options. A positive risk reversal means that the implied volatility (used for pricing) of the call is greater than that of
the put. In this section, the skew is based on 1-month 25 delta call and put options. The skew has been analysed over
a one-year period, with the positioning ranked and charted (in red) underneath the skew. If the skew and positioning
are towards an extreme (we use above 75% or below 25% for the percentile rank), the risk of a contra-trend move
in the underlying spot rate is high.

EURUSD GBPUSD AUDUSD

1.0 0.0 0.0

0.0
25 delta skew

-1.0 -2.0
25 delta skew

25 delta skew
-1.0
-2.0 -4.0
-2.0

-3.0 -6.0
-3.0

-4.0 -4.0 -8.0

25 Aug 09

25 Oct 09

25 Dec 09

25 Feb 10

25 Apr 10

25 Jun 10

25 Aug 09

25 Oct 09

25 Dec 09

25 Feb 10

25 Apr 10

25 Jun 10

25 Aug 09

25 Oct 09

25 Dec 09

25 Feb 10

25 Apr 10

25 Jun 10
100% 100% 100%
percentile rank

80% 80% 80%

percentile rank

percentile rank
60% 60% 60%
40% 40% 40%
20% 20% 20%
0% 0% 0%

NZDUSD USDCAD USDCHF

0.00 4.00 2.00

1.50
3.00
-2.00
25 delta skew

25 delta skew

25 delta skew

1.00
2.00
-4.00 0.50
1.00
0.00
-6.00
0.00
-0.50

-8.00 -1.00 -1.00

25 Aug 09

25 Oct 09

25 Dec 09

25 Feb 10

25 Apr 10

25 Jun 10

25 Aug 09

25 Oct 09

25 Dec 09

25 Feb 10

25 Apr 10

25 Jun 10

25 Aug 09

25 Oct 09

25 Dec 09

25 Feb 10

25 Apr 10

25 Jun 10
100% 100% 100%
percentile rank

percentile rank

percentile rank

80% 80% 80%

60% 60% 60%
40% 40% 40%
20% 20% 20%
0% 0% 0%

USDSEK USDNOK USDJPY

4.00 4.00 0

3.00 3.00 -1
-1
25 delta skew

25 delta skew

25 delta skew

2.00 2.00
-2
1.00 1.00
-2
0.00 0.00
-3
-1.00 -1.00 -3
-2.00 -2.00 -4
-3.00 -3.00 -4
25 Aug 09

25 Oct 09

25 Dec 09

25 Feb 10

25 Apr 10

25 Jun 10

25 Aug 09

25 Oct 09

25 Dec 09

25 Feb 10

25 Apr 10

25 Jun 10

25 Aug 09

25 Oct 09

25 Dec 09

25 Feb 10

25 Apr 10

25 Jun 10

100% 100% 100%

80% 80% 80%
percentile rank

percentile rank

percentile rank

60% 60% 60%

40% 40% 40%

20% 20% 20%

0% 0% 0%

6
FX Options: Implied volatility
Implied volatility is an input that is required when an option has to be priced. A higher implied volatility would result
in a higher option price, if other factors were unchanged. Implied volatility is traded in the markets and is therefore
also dependent upon supply and demand for options. In periods of uncertainty or illiquidity, implied volatility will climb
higher. One-month and one-year implied volatility is shown in the charts below.

EURUSD GBPUSD AUDUSD

% % %
21 21 28
26
19 19 24
17 17 22
20
15 15 18
16
13 13 14
11 11 12
10
9 9 8
25 J un 09

25 Sep 09

25 D ec 09

25 M ar 10

25 J un 10

25 J un 09

25 Sep 09

25 D ec 09

25 M ar 10

25 J un 10

25 J un 09

25 Sep 09

25 D ec 09

25 M ar 10

25 J un 10
1-month 1-yr 1-month 1-yr 1-month 1-yr

NZDUSD USDCAD USDCHF

% % %
29 21 16
27 15
19
25
14
23 17
21 13
15
19 12
17 13
11
15
11 10
13
11 9 9
25 J un 09

25 S ep 0 9

25 D ec 0 9

25 M ar 1 0

25 J un 10

25 J un 0 9

25 S ep 0 9

25 D ec 0 9

25 M ar 1 0

25 J un 1 0

25 J un 0 9

25 S ep 0 9

25 D ec 0 9

25 M ar 1 0

25 J un 1 0
1-month 1-yr 1-month 1-yr 1-month 1-yr

USDSEK USDNOK USDJPY

% % %
26 20 19
24 19 18
18 17
22
17 16
20 15
16
18 14
15
16 13
14 12
14 13 11
12 12 10
10 11 9
25 J un 09

25 Sep 09

25 D ec 09

25 M ar 10

25 J un 10

25 J un 09

25 Sep 09

25 D ec 09

25 M ar 10

25 J un 10

25 J un 09

25 Sep 09

25 D ec 09

25 M ar 10

25 J un 10

1-month 1-yr 1-month 1-yr 1-month 1-yr

7
Economic Data Surprises
The charts below show relative economic data surprises against historical FX spot rates. The economic data surprises
indice are provided by Citigroup. They are defined as weighted standard deviations of data surprises – actual
releases vs. Bloomberg survey median. Relative data surprises between two countries have been calculated and
graphed below.

EURUSD GBPUSD AUDUSD

150 1.80 200
1.00 250
1.48 1.75
100 150 0.95 200
1.43 1.70 0.90
50 100 150
Su rp rise In d ex

Su rp rise In d ex

Su rp rise In d ex
0.85
Sp o t R ate

Sp o t R ate 1.65

Sp o t R at e
1.38
0.80 100
0 1.60 50
1.33 0.75 50
1.55
-50 0 0.70
1.28 0
1.50 0.65
1.23 -100 -50 -50
1.45 0.60
1.18 -150 1.40 -100 0.55 -100
08 J ul 09

04 Sep 09

03 N ov 09

31 D ec 09

01 M ar 10

28 Apr 10

25 J un 10

08 J ul 09

04 Sep 09

03 N ov 09

31 D ec 09

01 M ar 10

28 Apr 10

25 J un 10
08 J ul 09

04 Sep 09

03 N ov 09

31 D ec 09

01 M ar 10

28 Apr 10

25 J un 10

Economic Data Surprise Spread (RHS) Spot Rate (LHS) Economic Data Surprise Spread (RHS) Spot Rate (LHS) Economic Data Surprise Spread (RHS) Spot Rate (LHS)

NZDUSD USDCAD USDCHF

1.18 250 1.18 100
0.80 150
1.16 200 1.16 50
0.75 100 1.14 150 1.14
100 0
0.70 1.12 1.12
Su rp rise In d ex

Su rp rise In d ex
50
Sp o t R ate
Su rp rise In d ex

50
Sp o t R ate

Sp o t R at e
0.65 1.10 1.10 -50
0
0 1.08 1.08
0.60 -50 -100
-50 1.06 1.06
-100 -150
0.55
1.04 -150 1.04
0.50 -100 -200
1.02 -200 1.02
0.45 -150 1.00 -250 1.00 -250
08 J ul 09

04 Sep 09

03 N ov 09

31 D ec 09

01 M ar 10

28 Apr 10

25 J un 10

08 J ul 09

04 Sep 09

03 N ov 09

31 D ec 09

01 M ar 10

28 Apr 10

25 J un 10

08 J ul 09

04 Sep 09

03 N ov 09

31 D ec 09

01 M ar 10

28 Apr 10

25 J un 10
Economic Data Surprise Spread (RHS) Spot Rate (LHS) Economic Data Surprise Spread (RHS) Spot Rate (LHS) Economic Data Surprise Spread (RHS) Spot Rate (LHS)

USDSEK USDNOK USDJPY

8.5 150 6.9 150 99 250
200
100 6.7 97
8.0 100 150
50 6.5 95 100
Su rp rise In d ex
Su rp rise In d ex

Su rp rise In d ex

Sp o t R ate
Sp o t R ate

Sp o t R ate

7.5 50 93 50
0 6.3
0
-50 6.1 91 -50
7.0 0
89 -100
-100 5.9
-150
6.5 -50 87
-150 5.7 -200
85 -250
6.0 -200 5.5 -100
08 J ul 09

04 Sep 09

03 N ov 09

31 D ec 09

01 M ar 10

28 Apr 10

25 J un 10
08/07/09

04/09/09

03/11/09

31/12/09

01/03/10

28/04/10

25/06/10

08/07/09

04/09/09

03/11/09

31/12/09

01/03/10

28/04/10

25/06/10

Economic Data Surprise Spread (RHS) Spot Rate (LHS) Economic Data Surprise Spread (RHS) Spot Rate (LHS) Economic Data Surprise Spread (RHS) Spot Rate (LHS)

8
Interest Rate Spreads vs. FX
The charts below show interest rate spreads plotted against historical FX spot rates. The spreads are calculated
using two-year interest rate swaps. A one-month rolling correlation (between the spot rate and the interest rate
spread) is shown to identify time periods when interest rate spreads are driving FX movements.

EURUSD GBPUSD AUDUSD

1.53 0.8 1.75 0.9 1.00 4.5
1.48 0.7 1.70 0.8 0.95 4.0
0.6 1.65 0.7 0.90
1.43 3.5

2Y Rate Spread

2Y Rate Spread

2Y Rate Spread
0.5 1.60 0.6 0.85
Spot Rate

Spot Rate

Spot Rate
1.38 0.4 1.55 0.5 0.80 3.0
1.33 0.3 1.50 0.4 0.75 2.5
2Y Rate Spread (RHS) 0.2 1.45 0.3 0.70
1.28 2.0
0.1 1.40 2Y Rate Spread (RHS) 0.2 0.65 2Y Rate Spread (RHS)
Spot Rate (LHS)
1.23 0.0 1.35 0.1 0.60 Spot Rate (LHS) 1.5
Spot Rate (LHS)
1.18 -0.1 1.30 0.0 0.55 1.0
26 Jun 09

08 Sep 09

19 Nov 09

01 Feb 10

14 Apr 10

25 Jun 10

26 Jun 09

08 Sep 09

19 Nov 09

01 Feb 10

14 Apr 10

25 Jun 10

26 Jun 09

08 Sep 09

19 Nov 09

01 Feb 10

14 Apr 10

25 Jun 10
1 1 1

0 0 0

Correlation Correlation Correlation

-1 -1 -1

NZDUSD USDCAD USDCHF

0.80 4.0 1.20 0.6 1.30 1.0
0.75 0.4 2Y Rate Spread (RHS) 0.9
3.5 1.15 1.25
0.2 Spot Rate (LHS) 0.8
0.70
2Y Rate Spread

2Y Rate Spread
3.0 1.10 0.0 1.20 0.7

2Y Rate Spread
Spot Rate

Spot Rate

0.65 0.6

Spot Rate
-0.2 1.15
2.5 1.05 0.5
0.60 -0.4
1.10 0.4
2.0 1.00 -0.6
0.55 1.05 0.3
2Y Rate Spread (RHS) 2Y Rate Spread (RHS) -0.8
0.50 1.5 0.95 0.2
Spot Rate (LHS) Spot Rate (RHS) -1.0 1.00
0.1
0.45 1.0 0.90 -1.2
0.95 0.0
26 Jun 09

08 Sep 09

19 Nov 09

01 Feb 10

14 Apr 10

25 Jun 10

26 Jun 09

08 Sep 09

19 Nov 09

01 Feb 10

14 Apr 10

25 Jun 10

26 Jun 09

08 Sep 09

19 Nov 09

01 Feb 10

14 Apr 10

25 Jun 10
1 1 1

0 0 0

Correlation Correlation
Correlation
-1 -1 -1

USDSEK USDNOK USDJPY

8.5 0.2 7.5 -0.5 99 2Y Rate Spread (RHS) 1.2
2Y Rate Spread (RHS)
0.1 2Y Rate Spread (RHS) -0.7
8.0 Spot Rate (LHS) 7.0 97 Spot Rate (LHS) 1.0
0.0 -0.9
Spot Rate (LHS)
2Y Rate Spread
-1.1 95
2Y Rate Spread

-0.1
2Y Rate Spread

7.5 6.5 0.8

Spot Rate
Spot Rate

-1.3
Spot Rate

-0.2 93
7.0 -0.3 6.0 -1.5 0.6
-1.7 91 1
-0.4
6.5 5.5 0.4
-0.5 -1.9 89
-0.6 5.0 -2.1 0.2
6.0 87
-0.7 -2.3
5.5 -0.8 4.5 -2.5 85 0.0
26 Jun 09

08 Sep 09

19 Nov 09

01 Feb 10

14 Apr 10

25 Jun 10
26 Jun 09

08 Sep 09

19 Nov 09

01 Feb 10

14 Apr 10

25 Jun 10
26 Jun 09

08 Sep 09

19 Nov 09

01 Feb 10

14 Apr 10

25 Jun 10

1 1 1

0 0 0

Correlation Correlation Correlation

-1 -1 -1

9
S&P500 vs. FX
The charts below show the S&P500 plotted against historical FX spot rates. A one-month rolling correlation (between
the spot rate and equity index) is shown to identify time periods when the two series are moving in tandem.

EURUSD GBPUSD AUDUSD

1.53 1300 1.75 1300 1.00 1300
1.48 1200 1.70 1200 0.95 1200
1.43 1100 1.65 0.90
1100 1100
Spot Rate

1.60 0.85

Spot Rate

Spot Rate
1.38 1000

S&P500
1000 1000

S&P500
1.55 0.80

S&P500
1.33 900 1.50 900 0.75 900
1.28 800 1.45 0.70
800 800
S&P500 1.40 S&P500 0.65 S&P500
1.23 700 700 700
Spot Rate (LHS) 1.35 0.60 Spot Rate (LHS)
Spot Rate (LHS)
1.18 600 1.30 600 0.55 600
25 Jun 09

07 Sep 09

18 Nov 09

29 Jan 10

13 Apr 10

24 Jun 10

25 Jun 09

07 Sep 09

18 Nov 09

29 Jan 10

13 Apr 10

24 Jun 10

25 Jun 09

07 Sep 09

18 Nov 09

29 Jan 10

13 Apr 10

24 Jun 10
1 1 1

0 0 0

Correlation Correlation Correlation

-1 -1 -1

NZDUSD USDCAD USDCHF

07 Sep 09

18 Nov 09

07 Sep 09

18 Nov 09
13 Apr 10

13 Apr 10
0.80 1300
25 Jun 09

29 Jan 10

24 Jun 10

25 Jun 09

29 Jan 10

24 Jun 10
0.75 1200

0.70 1100
1.18 600 1.30 600
Spot Rate

0.65 1000
S&P500

1.16 S&P500 700 1.25 700

S&P500
0.60 900 1.14 Spot Rate (RHS)
800 1.20 Spot Rate (LHS) 800
S&P500 inverted

S&P500 inverted
1.12
Spot Rate

0.55 S&P500 800

900
Spot Rate
1.10 1.15 900
0.50 Spot Rate (LHS) 700 1.08 1000 1.10 1000
0.45 600 1.06
1100 1.05 1100
25 Jun 09

07 Sep 09

18 Nov 09

29 Jan 10

13 Apr 10

24 Jun 10

1.04
1.02 1200 1.00 1200
1.00 1300
0.95 1300
1 1 1
Correlation Correlation

0 0 0

Correlation
-1 -1 -1

USDSEK USDNOK USDJPY

07 Sep 09

18 Nov 09

07 Sep 09

18 Nov 09
07 Sep 09

18 Nov 09

13 Apr 10

13 Apr 10
13 Apr 10

25 Jun 09

29 Jan 10

24 Jun 10

25 Jun 09

29 Jan 10

24 Jun 10
25 Jun 09

29 Jan 10

24 Jun 10

8.5 600 7.5 600 99 600

8.0 700 700 97 700

7.0
S&P500 inverted

800 800 95 800

S&P500 inverted

S&P500 inverted

7.5
Spot Rate
Spot Rate

6.5
Spot Rate

900 900 93 900

7.0
1000 6.0 1000 91 1 1000
6.5 1100 89 1100
1100
S&P500 5.5 S&P500
6.0 1200 S&P500 1200 87 1200
Spot Rate (LHS) Spot Rate (LHS) Spot Rate (LHS)
5.5 1300 5.0 1300 85 1300
1 1 1
Correlation Correlation

0 0 0

Correlation
-1 -1 -1

10
Commodities vs. FX
The charts below show oil prices plotted against historical FX spot rates. A one-month rolling correlation (between
the spot rate and the commodity series) is shown to identify time periods when the two series are moving in tandem.

EURUSD GBPUSD AUDUSD

1.53 100 1.75 100 1.00 100

1.48 90 1.70 90 0.95 90

80 1.65 80 0.90 80
1.43
1.60 0.85
Spot Rate

Spot Rate

Spot Rate
70 70 70
1.38 1.55 0.80
60 60 60

O IL

O IL

O IL
1.33 1.50 0.75
50 50 Oil (RHS) 50
1.45 0.70
1.28
40 1.40 Oil (RHS) 40 0.65 Spot Rate (LHS) 40
Oil (RHS)
1.23 30 1.35 30 0.60 30
Spot Rate (LHS) Spot Rate (LHS)
1.18 20 1.30 20 0.55 20
26 J un 09

08 Sep 09

19 Nov 09

01 Feb 10

14 Apr 10

25 J un 10

26 J un 09

08 Sep 09

19 Nov 09

01 Feb 10

14 Apr 10

25 J un 10

26 Jun 09

08 Sep 09

19 Nov 09

01 Feb 10

14 Apr 10

25 Jun 10
1 1 1

0 0 0

Correlation Correlation Correlation

-1 -1 -1

NZDUSD USDCAD USDCHF

08 Sep 09

19 Nov 09

08 Sep 09

19 Nov 09
01 F eb 10

14 Apr 10

01 F eb 10

14 Apr 10
0.80 100
26 J un 09

25 J un 10

26 J un 09

25 J un 10
0.75 90

0.70 80
1.18 20 1.30 20
Spot Rate

70
0.65 1.16 Oil (RHS)
30 1.25 30
60 Oil (RHS)
O IL

1.14 Spot Rate (LHS)

0.60 40 40
50 Spot Rate (RHS) 1.20
1.12
Spot Rate

0.55 Oil (RHS) 50 50

40
Spot Rate

1.10 1.15
Spot Rate (LHS) 60
O IL

0.50 60

O IL
30 1.08
70 1.10
0.45 20 1.06 70
80 1.05
26 J un 09

08 Sep 09

19 Nov 09

01 Feb 10

14 Apr 10

25 J un 10

1.04 80
1.02 90 1.00 90
1.00 100
0.95 100
1 1 1
Correlation Correlation

0 0 0

Correlation
-1 -1 -1

USDSEK USDNOK USDJPY

08 Sep 09

19 Nov 09

08 Sep 09

19 Nov 09
08 Sep 09

19 Nov 09

01 Feb 10

14 Apr 10

01 Feb 10

14 Apr 10
01 Feb 10

14 Apr 10

26 J un 09

25 J un 10

26 J un 09

25 J un 10
26 Jun 09

25 Jun 10

8.3 20 7.5 20 99 20
8.1 30 30 97 Oil (RHS) 30
Oil (RHS) 7.0
7.9 40 40 Spot Rate (LHS) 40
Spot Rate (LHS) 95
7.7
Spo t Rate

50
Spot Rate

50 6.5 50
Spot Rate

93
O IL

7.5
60 60
O IL

O IL

60
7.3 91 1
70 6.0 70 70
7.1 89
80 80 80
6.9 5.5
90 90 87 90
6.7 Oil (RHS)
6.5 100 5.0 Spot Rate (LHS) 100 85 100
1 1 1
Correlation Correlation

0 0 0

Correlation
-1 -1 -1

*All charts are sourced to Lloyds TSB Corporate Markets Research, Bloomberg, Datastream and Citigroup.

11
Market Review
Short-term G-10 FX Charts

GBP/USD EUR/USD
1.50 1.24

1.24
1.49
1.23
1.48
1.23
1.47 1.22

1.46 1.22

1.21
1.45
1.21
1.44
1.20
1.43
1.20

1.42 1.19
25/05/10 01/06/10 08/06/10 15/06/10 22/06/10 25/05/10 01/06/10 08/06/10 15/06/10 22/06/10

EUR/GBP USD/JPY
0.86 93

0.86
92
0.85

0.85
91

0.84

0.84 90

0.83
89
0.83

0.82 88
25/05/10 01/06/10 08/06/10 15/06/10 22/06/10 25/05/10 01/06/10 08/06/10 15/06/10 22/06/10

AUD/USD NZD/USD
0.89 0.72

0.88
0.71
0.87

0.86 0.70

0.85
0.69
0.84

0.83 0.68

0.82
0.67
0.81

0.80 0.66
25/05/10 01/06/10 08/06/10 15/06/10 22/06/10 25/05/10 01/06/10 08/06/10 15/06/10 22/06/10

USD/NOK USD/SEK
6.73 8.10

6.68 8.05

8.00
6.63
7.95
6.58
7.90
6.53
7.85
6.48
7.80
6.43
7.75
6.38
7.70
6.33 7.65

6.28 7.60
25/05/10 01/06/10 08/06/10 15/06/10 22/06/10 25/05/10 01/06/10 08/06/10 15/06/10 22/06/10

USD/CHF USD/CAD
1.17 1.09

1.16 1.08

1.15 1.07

1.14 1.06

1.13 1.05

1.12 1.04

1.11 1.03

1.10 1.02

1.09 1.01
25/05/10 01/06/10 08/06/10 15/06/10 22/06/10 25/05/10 01/06/10 08/06/10 15/06/10 22/06/10

12
Medium-term G-10 FX Charts

GBP/USD EUR/USD
1.75
1.53

1.70
1.48

1.65
1.43

1.60 1.38

1.55 1.33

1.50 1.28

1.45 1.23

1.40 1.18
Jun-09 Aug-09 Oct-09 Dec-09 Feb-10 Apr-10 Jun-10 Jun-09 Aug-09 Oct-09 Dec-09 Feb-10 Apr-10 Jun-10

EUR/GBP USD/JPY
0.96 101

0.94 99

97
0.92
95
0.90
93
0.88
91
0.86
89

0.84 87

0.82 85
Jun-09 Aug-09 Oct-09 Dec-09 Feb-10 Apr-10 Jun-10 Jun-09 Aug-09 Oct-09 Dec-09 Feb-10 Apr-10 Jun-10

AUD/USD NZD/USD
0.95 0.78

0.93 0.76
0.91 0.74
0.89
0.72
0.87
0.70
0.85
0.68
0.83
0.66
0.81

0.79 0.64

0.77 0.62

0.75 0.60
Jun-09 Aug-09 Oct-09 Dec-09 Feb-10 Apr-10 Jun-10 Jun-09 Aug-09 Oct-09 Dec-09 Feb-10 Apr-10 Jun-10

USD/NOK USD/SEK
6.85
8.10
6.65
7.90

6.45 7.70

6.25 7.50

7.30
6.05
7.10
5.85
6.90
5.65
6.70

5.45 6.50
Jun-09 Aug-09 Oct-09 Dec-09 Feb-10 Apr-10 Jun-10 Jun-09 Aug-09 Oct-09 Dec-09 Feb-10 Apr-10 Jun-10

USD/CHF USD/CAD
1.18 1.20

1.16

1.14 1.15

1.12

1.10 1.10

1.08

1.06 1.05

1.04

1.02 1.00

1.00

0.98 0.95
Jun-09 Aug-09 Oct-09 Dec-09 Feb-10 Apr-10 Jun-10 Jun-09 Aug-09 Oct-09 Dec-09 Feb-10 Apr-10 Jun-10

13
FX Snapshot

Currency performance vs. USD

Weekly Currency Performance vs. USD Monthly Currency Performance vs. USD 12month Currency Performance vs. USD

CHF 3.58 GBP 3.10 NZD 9.80

SEK 3.17 CHF 2.19 CAD 8.96

EUR 2.78 JPY 1.91 AUD 8.23

AUD 2.67 NZD 1.09 JPY 5.82

GBP 2.52 SEK 0.70 SEK 2.07

NZD 2.50 CAD 0.59 NOK 0.48

NOK 2.36 EUR 0.49 CHF -2.61

JPY 0.93 AUD -0.23 GBP -9.18

CAD 0.85 NOK -0.77 EUR -11.27

0 1 2 3 4 -1 0 1 2 3 4 -15 -10 -5 0 5 10 15
% % %

Currency performance vs. GBP

Weekly Currency Performance vs. GBP Monthly Currency Performance vs. GBP 12 month Currency Performance vs. GBP

CHF 1.17 CHF -0.84 CAD 17.33

SEK 0.69 JPY -1.13 NZD 17.31

EUR 0.27 NZD -1.99 AUD 16.08

AUD 0.13 SEK -2.43 JPY 14.47

NZD 0.01 CAD -2.50 SEK 11.01

NOK -0.08 EUR -2.53 NOK 9.60

JPY -1.58 USD -3.10 USD 9.18

CAD -1.65 AUD -3.34 CHF 6.83

USD -2.52 NOK -3.88 EUR -2.29

-3 -2 -1 0 1 2 -5 -4 -3 -2 -1 0 -5 0 5 10 15 20
% % %

Currency performance vs. EUR

Weekly Currency Performance vs. EUR Monthly Currency Performance vs. EUR 12 month Currency Performance vs. EUR

CHF 0.91 GBP 2.53 CAD 19.21

SEK 0.47 CHF 1.73 NZD 19.21

AUD -0.12 JPY 1.43 AUD 18.00

NZD -0.26 NZD 0.61 JPY 16.43

GBP -0.27 SEK 0.21 SEK 13.09

NOK -0.34 CAD 0.09 NOK 11.71

JPY -1.84 USD -0.49 USD 11.27

CAD -1.91 AUD -0.74 CHF 8.96

USD-2.78 NOK -1.25 GBP 2.29

-3 -2 -1 0 1 2 -2 -1 0 1 2 3 0 5 10 15 20 25
% % %

14
DISCLAIMER

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15