Foreign Exchange

London 08:00

FX Daily Strategist: Europe

US Budget deficit as % of GDP vs. US TWI
7.5 5.0 2.5 0.0 -2.5 -5.0 -7.5 -10.0 -12.5 -15.0 170 160 150 140 130 120 110 100 90 80

Risk pressured by US jobs, China growth, Euro concerns Chairman Bernankes testimony to Congress will be especially important this week EUR seeks reassurance from FinMins, Italian government

Risk-off today and for good reason, with trouble building in all three timezones. A disappointing US NFP report showed the US economy adding only 18k jobs vs. consensus of 105k in June. The resulting sell off in equities and rally in US treasurys kept a bid under USD, with only the safe havens of CHF and JPY gaining significantly against USD. The weak data raises the possibility of a change in tone from Chairman Bernanke at his semi-annual monetary policy testimony before Congress on Wednesday and Thursday. At the June FOMC press conference, Chairman Bernanke argued that the US economy would push on and that growth was within reach, implying a high bar for QE3. While it USD TWI might seem premature to reverse course and put QE3 on the -17.5 70 table, the prospect of fiscal tightening from a budget deal may 80 85 90 95 00 05 10 leave Bernanke with little option but to leave the door open. We continue to see any agreement on a legitimate budget deal as a Source: Reuters Ecowin Pro. With Congress USD positive but especially if a second Homeland Investment nearing the August 2nd deadline and the Act forms part of the deal. (See Market focus for more details) potential for a legitimate budget deal in the Chinese data over the weekend has done little to reassure on works, the scenario may prove to be USD global growth. CPI at 6.4% was above expectations; and while positive as the US gains credibility on the fiscal reaction has been muted as the PBoC hiked in advance last week, front. An improvement in the fiscal budget could the trade numbers suggest that Chinese growth is already be long term USD positive. edging lower in response to previous tightening moves. While there are few signs of a hard landing - we still expect GDP GMT Country Release Mkt Last numbers for Q2 to confirm that growth is well above 9% - it is clear 08:00 NO (Jun) CPI % (nsa m/m) -0.2 that China cannot be the engine of growth that it has been 08:00 NO (Jun) PPI % (nsa m/m) -2.1 08:00 NO (Jun) PPI % (nsa y/y) 18.0 over the last couple of years. CPI-ATE % (nsa Meanwhile events in Europe are in danger of turning for the worse. 08:00 NO (Jun) 1.0 1.0 y/y) Concerns look to be spreading to Italy, where open discord 08:00 NO (Jun) CPI % (nsa y/y) 1.8 1.6 between PM Berlusconi and his austerity-minded FinMin Tremonti 12:15 CA (Jun) Housing Starts K 185.0 risks undermining market confidence in Italian assets. Eurogroup meeting of EMU Finance 12:45 BE Spreads of Italian 10yr debt to Bunds widened by 23bp on Friday; Ministers and Italian bank shares have been hit hard; the Italian regulator 15:00 EU Finance Ministers Meet over the weekend imposed new reporting requirements for equity ECBs Bini Smaghi Speaks at 15:00 EU Conference in Milan short-sellers. Top European officials will meet ahead of a 23:01 GB (Jun) RICS House Pric -28 Eurogroup meeting this morning. Headlines out of these meetings 23:01 GB (Jun) BRC Retail Sale % (y/y) -0.3 will be expected to be supportive, but markets will also look for reassurance on Tremonti's position from the Italian government. Meanwhile, the FT reports that the focus of talks over private-sector involvement in any new funding deal for Greece has once again shifted, with the French plan now seemingly out of favour and the German debt-swap one back in. A debt-swap would clearly constitute the default that the ECB remains so adamantly against: the stand-off between the key players shows no sign of resolution. Clearly the risks are to the downside for the EUR today, with a number of key levels within sight: EURUSD at 1.4000, the previous low in EURCHF at 1.1806; and support at EURJPY 113.50. For now, risk currencies in general have held up well but look likely to be under pressure, with only a stellar US corporate earnings season looking capable of turning sentiment around. Aside from the Eurogroup meeting, we expect Norwegian CPI to tick slightly higher to 1.7%y/y (in line with consensus) in June. A higher number suggests that the Norges Bank could hike as early as August especially since the data confirms that the economy remains robust. We like short EURNOK positions and long NOKSEK positions - especially if risk remains under pressure. This is not classified as objective research. Please refer to important information at the end of the report.
US Budget Deficit as % of GDP
http://www.globalmarkets.bnpparibas.com London: +44(0)20 7595 8086
Index

NY: +1 212 841 2408 Sing.: +65 6210 3263/3347

MARKET: G10FX: EURUSD opened the week under pressure as the market focussed on the emergency meeting in Brussels today called by EU's Van Rompuy on Sunday. Fell from around $1.4240/45 towards $1.4200 before reports in the FT discussing a possible Greek default applied additional pressure to a low of $1.4187; just ahead of stops at $1.4185. Reasonable bids from Asian and possibly sovereign names are talked about later, shoring up the base. Cable was rather more sidelined opening at $1.6021 and trading a $1.6006/42 range but dragged towards the lower end of the range. The yen complex was still reeling after Friday's very weak US NFP data release, with the dollar continuing on a weak footing as cross sales continue to weigh on EU peripheral debt woes and today's extraordinary meeting called over the weekend by EU's Van Rompuy. USDJPY fell to early lows of Y80.50 finding Japanese bids and later picking up to Y80.78. EURJPY slipped from Y114.90 to Y114.41, but managed a weak recovery later to Y114.77. [MNI] Asian equities all in the red except for China; declines led by Australia (-1.50% plus) then KOSPI (-1.15%). Data/Events for the day ahead (MNI news) There are less US data items that will be of particular interest to markets in the coming week. The release of earnings reports for the second quarter will get underway in earnest on Monday with numbers from Alcoa. That company data is expected after market hours. Also in the US this week, the Fed will release the FOMC meeting minutes on Tuesday in advance of Fed Chairman Ben Bernanke's scheduled semi-annual monetary policy testimony before the House Financial Services Committee, which is due on Wednesday and Senate Banking Committee on Thursday. The two main US data reports likely to define the July 11 week are those for June retail sales on Thursday and the Consumer Price Index on Friday. European data for Monday starts at 0645GMT with France industrial output, while UK data at 0830GMT includes BoE Quoted Rates data. The May EMU OECD leading indicator data is also due, at 1000GMT. At 1200GMT, ECB Nowotny is due to speak at the 50-year anniversary of the OECD, in Vienna. At 1300GMT the Eurogroup (EMU finance ministers) start their key meeting in Brussels to discuss the second Greece bailout package. Also at 1500GMT, ECB Bini Smaghi takes part on a panel on "Where is the economy going? The challenges ahead", in Milan. At 1500GMT, US President Obama holds a press conference on the status of budget talks with Congressional leaders. NEWS Europe: Foreign Exchange Strategy Monday, 11 July 2011 http://www.GlobalMarkets.bnpparibas.com

Italy's Market Regulator Consob imposes measures to curb speculation after a selling wave hit Italian banks Friday. New measures oblige market operators to disclose short-selling moves above certain levels effective starting Monday and remain in force until Sept. 9. New rules: traders must disclose to Consob any shortselling order involving shares that represent 0.2% or more of the capital of the company and shorting orders valued at 0.1% or more of the company's capital. (Reuters) EU Calls New Meeting on Greece. European Union President Herman Van Rompuy has called a meeting of top EU policy makers Monday to discuss plans for a second bailout package for Greece, EU officials said on Sunday. The gathering comes as Europe continues to struggle with a contentious issue: whether and how Greece's private-sector creditors should share the burden when the anticipated second aid package is doled out to the debt-burdened country. Germany and other euro-zone nations are pushing for some form of burden-sharingfor instance, delaying repayments to private-sector bondholders whose debt is about to mature. The European Central Bank is opposed. (WSJ) EU Stance Shifts on Greece Default. European leaders are for the first time prepared to accept that Athens should default on some of its bonds as part of a new bailout plan for Greece that would put the countrys overall debt levels on a sustainable footing. The new strategy, to be discussed at a Brussels meeting of eurozone finance ministers on Monday, could also include new concessions by Greeces European lenders to reduce Athens debt, such as further lowering interest rates on bail-out loans and a broad-based bond buyback programme. It also marks the possible abandonment of a French-backed plan for banks to roll-over their Greek debt. (FT) US Hedge Funds Bet Against Italian Bonds. US hedge funds are placing large bets against the value of Italian government debt, directly shorting the bonds of the eurozones third-largest economy. The funds have increased the size of short positions in the last month, speculating that investor concerns over the countrys ability to fund itself may spread from Europes periphery to Italy, according to investors in the funds briefed on the strategy. (FT) Trichet Urges More Regulation. The global economy is still fragile and more work needs to be done in terms of strengthening economic governance in the European Union and coordinating policies among its 17 members to avoid future crises, European Central Bank President Jean-Claude Trichet said Sunday. (WSJ) 70% Germans opposed to tax cuts and want the government to focus on cutting debt rather than reducing taxes, according to respected Emnid polling institute. Germany's fiscal deficit will sink below 2 percent of gross domestic product (GDP) this year from 3.3 percent in 2011 and the government aims to have a nearly balanced budget by 2016. Its debt is expected to slip to 81 percent of GDP in 2012 from 82 percent this year. (Reuters)

German paper Die Welt quotes ECB sources: rescue fund not big enough for Italy, never designed to provide a credible defensive wall for Italy. The newspaper said that the rescue fund might have to be doubled to up to 1.5 trillion euros. But it was not clear if it was the central bank source calling for the increase. (Reuters) German president Wulff: Greece will need a lot longer to resolve its debt problems than many people in Europe are now acknowledging, a need for "an overall concept" for resolving Europe's debt crisis, banks and ratings agencies should be held more accountable for their role in the European debt crisis. (Reuters) IMF Chief Lagarde: Can't imagine for a second that the U.S. would default, but if lawmakers fail to reach an accord, that would be a real shock and it would be bad news for the U.S. economy and would certainly jeopardize the stability of the global economy. (Reuters) ECB Trichet calls for stronger EU governance amid global economic fragility, advances in regulating systemic institutions, stronger coordination needed on public spending among EU members, reiterates call for federal minister in future. (Reuters) Van Rompuy calls emergency debt crisis talks with Trichet, Juncker, Barroso and Rehn to discuss efforts to assemble a second rescue package for Greece and growing concerns about market pressure on Italy, forge a clearer consensus among policymakers before euro zone finance ministers meet later on Monday to discuss Greece and the results of stress tests on European banks, which are scheduled for release on July 15. (Reuters) IMF Advisor Min Zhu: EU protectionism blocking bank recapitalization and stabilisation of the financial sector, EU banks should be able to raise capital more easily, Europe needs growth to stabilize financial sector, confident of stabilizing Greeces situation. IMF sources say Zhu, a Chinese national who was a special adviser to former IMF Managing Director Dominique Strauss-Kahn, was expected to fill a new deputy managing director post to be created by the Fund's new chief, Christine Lagarde. (Reuters) Reuters reported that European countries will support banks that fail the stress tests if those lenders cannot raise capital from investors within six months. Moodys questions if Italy can implement austerity measures. According to the WSJ, a senior figure in discussions between governments and the private sector about how to deal with Greeces debt problems said talks had broadened to look at ways of cutting Greeces stock of debt. UK: Hundreds of billions of pounds of additional debt will appear on the government's books on Wednesday when the Treasury publishes accounts drawn up on the Foreign Exchange Strategy Monday, 11 July 2011 http://www.GlobalMarkets.bnpparibas.com

same basis as those of companies, the FT says.After years of delay, the government will give the first glimpse of what the UKs public finances would look like if the UK were a listed company, the paper says. George Osborne will fail in his ambition to create the most competitive corporate tax system in the G20 on current plans, according to analysis by Oxford University, the FT says. But the Treasury dismissed the research that showed the UK was set to take fifth place by 2014 in a league table of effective tax rates as taking too narrow a view of competitiveness, the paper says. The tough conditions faced by high-street retailers were thrown into sharp relief during the first six months of the year as the number of profit warnings soared, according to new figures published today, the Independent says. The accountancy firm Ernst & Young said Britain's listed retailers issued 26 profit warnings between January and June, more than those issued during the whole of 2010 and almost twice the number in 2009, the paper says. National debt could rise towards 100 per cent of GDP if future governments do not boost tax revenues and slash public spending to defuse the fiscal time bomb of an ageing population, the Office for Budget Responsibility will warn this week, the Times says. Ahead of the report's publication on Wednesday, Robert Chote, the head of the OBR, told The Times that demographic pressures would intensify over the next 50 years as the population ages, pushing up spending on health, long-term care and pensions. Britain's manufacturers are increasingly downbeat about the economy, with confidence in the sector plummeting to a two-year low, according to a new survey, the Independent reports. Optimism has been hit by both weak trends at home and by the global slowdown as sentiment across the eurozone fell in response to the ongoing debt crisis, the accountancy firm BDO said. As a result, its business confidence index for the manufacturing sector dropped to 90.1 in June, equating to a 26-point fall over the span of four months, with the index standing at 116.4 back in February. China: China to keep policy tight, avoid big growth swings China's central bank will maintain a "prudent policy" to fight stubbornly high inflation, but will try to avoid causing big swings in economic growth, central bank chief Zhou Xiaochuan said in comments published on Monday. (Reuters) CME to launch new Yuan FX futures contracts U.S. derivatives exchange CME Group Inc said it will launch new yuan foreign currency futures contracts in August to

meet growing global customer demand for investment products denominated in the Chinese currency. (Reuters) Nestle to buy 60 pct of Chinese candy maker for $1.7 bln Nestle, the world's largest food company, offered to buy 60 percent of Chinese candies and pastries group Hsu Fu Chi International for about $1.7 billion to expand in one of the world's biggest consumer markets. (Reuters) China will invest over CNY 1.5tn (USD 232bn) in the aviation industry in the next five years and will push consolidation among airlines to hone their international competitiveness, the official Shanghai Securities News reported on Monday. (Reuters) China's Hunger for Corn Turns Market on Ear A Chinese buying spree for U.S. corn is putting on display the ability of Beijing to reshape grain markets as well as the cost of food globally. (China this past week bought 540,000 metric tons of U.S. corn for delivery after August, according to the U.S. Department of Agriculture, more than the 500,000 tons the agency forecast that nation would buy in an entire year.) (WSJ) China offers aid to Libyan people China announced Monday to provide humanitarian materials worth 50 million yuan ($7.73 million) to the Libyan people. (China Daily) China Boosts Lead in Global Exports. More than a year after China started letting its currency climb against the dollar, the nation is a bigger force in exports than ever, adding to its dominance as a trading power and complicating efforts by other nations to wrest away manufacturing jobs. The latest evidence of China's prowess came Sunday, when it reported that exports hit $162 billion in June and $874 billion in the first half of the year, both records, up nearly 20% from the year-earlier periods. (WSJ) CPI inflation hits 36-month high. China's CPI inflation climbed to a 36-month high of 6.4% YoY in June from 5.5% in May vs. market expectations of 6.2% (Bloomberg) or 6.3% (Reuters). On the month, CPI climbed 0.3% in June after a 0.1% gain in May. Commodity currencies such as AUD could be undermined on this print. (Bloomberg) Trade Data Show China Economy Slowing. Chinese trade figures for June provided fresh evidence that the worlds second-largest economy was slowing even as inflation hit a three-year high, according to data released over the weekend. The contradictory readings will further complicate Beijings attempts to maintain rapid economic growth while tackling price increases that have stoked discontent in the country. (FT) Prices Force Blackstone to Drop China Stake. Blackstone pulled out of its investment in a Chinese agricultural company earlier this year after the mainland group warned the buy-out firm that its involvement would complicate moves to raise prices, according to three people familiar with the matter. The case offers a stark illustration of the sensitivity surrounding rising prices as Foreign Exchange Strategy Monday, 11 July 2011 http://www.GlobalMarkets.bnpparibas.com

China seeks to combat inflation running at a three-year high. (FT) Australia/ New Zealand/ Australian Home-Loan Approvals Increased 4.4% in May. Australian home-loan approvals rose for a second straight month in May as construction of new dwellings and demand from investors increased. The number of loans granted to build or buy houses and apartments gained 4.4 percent from April, when they increased a revised 4.6 percent, the statistics bureau said in Sydney today. That compares with the median estimate for approvals to rise 4.5 percent in a Bloomberg News survey of 15 economists. (Bloomberg) Other Asia: Investors Weigh the Risks of Heading into India. For much of the corporate world, news of a fresh probe in India represents just the latest example of how multiple corruption cases, bureaucracy and ambiguous regulation is unsettling sentiment towards the country. The most recent blow, a few weeks ago, came from a draft report from Indias national auditor alleging that oil and gas groups including two foreign companies had potentially cost the exchequer millions of dollars in lost revenue. The news sparked another media frenzy, a fall in energy stocks and a round of analysis about what it would all mean. (India) S.Korea to invest $9.5 bln by 2020 to boost grain supply South Korea, the world's fourth-largest grain importer, will invest some 10 trillion won ($9.5 billion) between 2012 and 2020 to boost grain supply, the agriculture ministry said in a statement on Monday. (Reuters) Malaysian Production Shrinks a Second Month as Exports Falter. Malaysias industrial production fell a second straight month in May as export growth eased, supporting the central banks decision to refrain from raising interest rates last week. Production at factories, utilities and mines fell 5.1percent from a year earlier after declining a revised 1.7percent in April, the Putrajayabased statistics department said in a statement today. That compares with the median estimate for a 2.7 percent drop in a Bloomberg News survey of 15 economists. (Bloomberg) US/Canada: US Leaders Still Confident of Debt Deal. The White House and congressional leaders expressed confidence they could still reach a deal to raise the US borrowing limit and avert a default, even after talks to strike an ambitious plan to cut $4,000bn from the countrys deficit broke down over disagreements on tax cuts for the wealthy. New pressure to strike a deal could come this week from Wall Street. Moodys Investors Service has warned it could place Americas triple-A credit rating on review for downgrade by mid-July in the absence of a deal. (FT)

Debt Talks Back to Square One. The White House and Republican leaders in Congress embarked on a new effort Sunday to cut the federal deficit, one that now appears to have been shorn of its most ambitious elements, including revamping the tax code and significantly reducing growth in benefit programs. President Barack Obama and the top eight congressional leaders from both parties met at the White House Sunday night in attempt to piece together a scaled-down package. The leaders are under pressure to show they can reach a deal that will win support from conservatives opposed to tax increases and liberals opposed to Medicare cuts. (WSJ) US Banks Set for Lacklustre Reporting Season. Tepid trading activity, low interest rates and mounting legal costs have all weighed on the profitability of US banks such as JPMorgan Chase and Bank of America, leaving investors in search of fresh signs of optimism as the big banks quarterly reporting season kicks off on Thursday. In a June 29 preliminary report of its results, BofA said trading revenue fell in the second quarter from the first and that net interest income the amount banks earn on loans would also decline. (FT) Geithner: 'US Not Going To Default' -NBC TV, economic rebound is a long-term recovery, economic recovery has not stalled, no creditable way to give Congress more time on budget talks, sees higher debt rates as Aug 2 deadline approaches, Obama standing tough on not cutting entitlement programs, administration pushing for biggest budget deal possible. (Reuters) Obama prepared to meet every day this week to hash out a deal to cut the federal budget and raise the debt limit, pressed Republicans at a White House meeting to aim for a broad, $4 trillion deficit-reduction package rather than a more modest one. (Reuters) RECAP: US NFP payroll numbers massively disappoint increasing 18k vs. consensus of 105k. In addition, the May employment figures were revised down to 25k from 54k. Private payrolls also came in at a meagre 57k vs. consensus of 132k. The May numbers were revised 10k lower. US unemployment rate unexpectedly ticked up 0.1% to 9.2%. Average hourly earnings were flat in June on a m/m basis. Consensus was looking for a 0.2% increase m/m. House of Representatives Speaker John Boehner said the two sides must overcome serious disagreements on taxes and spending cuts. Boehner and President Barack Obama are trying to agree on a budget deal that would ensure the national debt remains at a sustainable level by cutting $4 trillion from budget deficits over 10 years.

Foreign Exchange Strategy Monday, 11 July 2011 http://www.GlobalMarkets.bnpparibas.com

FX and the US Debt Ceiling

With time ticking away towards the August 2 date when the US Treasury runs out of cash, the negotiations over the US debt ceiling are finally getting serious. On Thursday, House Speaker Boehner rated the chances of a deal in the next few days as 50:50; further talks are reportedly set for this Sunday at the White House. We examine the currency implications of a deal and of a failure to arrive at one. Scenario 1: No deal In short, potentially disastrous. Ironically, USD would likely benefit as investors dump risk assets on uncertainty, possibly also driven by huge deleveraging of positions as the collateral system falls apart. Other safe haven currencies would also benefit, but perhaps the clearest winner would be Gold. A failure to honour debt commitments would lead to a downgrade of the US; with implications for funds that are restricted to AAA. The combination of higher yields, deleveraging, volatility and economic uncertainty certainly has the potential to derail US recovery and indeed the global one. A less calamitous scenario would see the Treasury pay investors but stop other payments, but the politics of such a decision means this could not be sustained for more than a few days. Thankfully both sides seem to have recognised the dangers of not reaching a deal and this now seems highly unlikely. Scenario 2: Postponement If no long-term agreement is possible, the most likely path would now seem to be a postponement of the issue despite Obama's stated opposition. This would see the debt ceiling raised by a relatively small amount, and the decision could be put off until the end of year. This would likely be the most negative outcome for the USD: the risks would be averted (at least temporarily) but the US would appear indecisive and unwilling to tackle the fiscal issues. Scenario 3: Agreement reached The FX implications of a deal will depend upon what makes up the agreement. One element will be the degree of near-term fiscal tightening (whether through spending cuts or tax hikes): the more tightening, the more likely the Fed will have to step in with QE3. This aspect is clearly USD negative, risk positive. But this needs to be offset by the extent to which the agreement credibly addresses the long-term fiscal issues confronting the US particularly Medicare and Social Security. If the deal is seen as restoring the sustainability of American finances, renewed confidence in US assets as a long-term store of value will benefit the USD. We would expect the biggest loser in this case to be EUR as FX reserve diversification slows. But from an FX perspective, the most important element of any agreement, far outweighing any sentiment factors or economic implications, will be whether it includes a second Homeland Investment Act. Political opposition to this seems to have evaporated, and we no longer see Foreign Exchange Strategy Monday, 11 July 2011 http://www.GlobalMarkets.bnpparibas.com

Chart 1: USD Debt-to-GDP Projections (%)

200 175 150 125 100 75 50 25 0 2000 2005 2010 2015 2020 2025 2030 Extended-Baseline Scenario Alternative Fiscal Scenario Actual Projected 200 175 150 125 100 75 50 25 0 2035

Source: Congressional Budget Office

Chart 2: USD TWI versus US FDI flows

125 120 115 110 105 100 95 90 85 80 75 97 99 00 01 FDI flows (USD) (2Q mav)(rhs) 02 03 04 05 06 07 08 09 10 -50 -75 0 -25 USD-TW I (lhs) 75 HIA related FDI flows 50 25 100

Source: Reuters Ecowin Pro this as far-fetched. We would expect a re-run of the 2005 tax holiday to see repatriation flows at least match the USD 300bn estimated last time. And given the near-zero returns on USD and the weaker USD trend, we would expect a significant portion of this cash to be held in foreign currencies. Passage of "HIA II" would be enough to have us revising our call for EURUSD at 1.50+ in H2 2011, suspecting it could be worth as much as a 5% lift for the dollar versus our current baseline forecasts. Though actual corporate FX flow would likely not occur before 2102, FX risk takers are likely to move well ahead of this.

billions

Daily Currency Summary

G3
Last week's interest in ECB's monetary policy now looks quaintly irrelevant as concerns spread to Italy. Open discord between PM Berlusconi and his austerity-minded FinMin Tremonti risks undermining the market's confidence in Italian assets; Italian spreads widened sharply on Friday; and in response to a sharp fall in Italian bank shares, the Italian regulator over the weekend imposed new reporting requirements for short-sellers of equities. Top European officials will meet ahead of a scheduled Eurogroup meeting this morning. Headlines out of these meetings will be expected to be supportive, but markets may also look for reassurance on Tremonti's position from the Italian government. Aside from Italy, the FT reports that the focus of talks over private-sector involvement (PSI) in any new funding deal for Greece has once again shifted towards the German debt-swap plan. A debt-swap would clearly constitute the default that the ECB remains so adamantly against: the stand-off between the key players shows no sign of resolution. We like EURUSD lower. USDJPY reversed its upward trend after the US employment report significantly disappointed. US Treasuries rallied hard with the 10yr yields falling almost 13bps. USDJPY could rally if a favourable US budget deal is reached, but in the meantime, the risk-off environment risks pushing the pair lower. Comments from FinMin Noda today do not suggest the authorities are overly concerned at this stage. With USDJPY still in the 80.50-81.50 range, EURJPY remains predominately a EURUSD trade. With concerns building about Eurozone contagion, certainly EURJPY remains vulnerable But if the Eurozone crisis turns into a broader risk-off move, JPY crosses may be similarly vulnerable.

EURUSD

USDJPY

JPY Crosses

EUR Bloc
Data on PPI Core came in line with expectations. While we are negative on Sterling, we stay away completely from EURGBP reasoning that further downside remains likely given contagion seen in the European bond markets and with a delay in any resolution on PSI for Greece debt package adding to jitters. We focus GBP shorts against the commodity currencies and note the downward break in GBPAUD to levels not seen since Q1 1985. GBP has further downside potential this week if CPI does in fact moderate. EURCHF once again broke below 1.200 as European peripheral concerns continue to dominate. Not only are Greece and Portugal in focus but also Italy; the previous low of 1.1806 is the next target. USDCHF fell under significant downside pressure as the US employment figures were much weaker than expected. A potential agreement on the US budget should garner some support for USDCHF. NOK should continue to find support against EUR as European peripheral concerns continue to cast a dark cloud over EUR. NOKSEK held up well despite a decline in oil prices, but the risk-off sentiment following US payrolls kept NOK supported. Norwegian CPI data this week are likely to show an uptick in inflation highlighting that the CB could hike as early as August. SEK is vulnerable to a further risk-off sentiment. We may have to wait some more for opportunities to play more SEK upside pending some clarity on resolution to Greece debt rollover plans. On EURSEK, the "Golden cross" (50day ma moving above the 100day) may also have been a factor holding the pair up, and we wonder if this will survive the continued rise in European SOV CDS. We would, however, refrain from playing USDSEK from the short side with the USD catching a bid.

EURGBP

EURCHF

EURNOK

EURSEK

USD Bloc
While Canadian employment data surprised to the upside, the US employment data disappointed keeping risk under pressure. A sell-off in oil and a lacklustre performance in equities kept USDCAD above 0.9600. This weeks US consumer data will be highly important for USDCAD. An improvement in US retail sales and consumer confidence should push USDCAD back towards the 0.9550 level. AUDUSD has held up well, despite the barrage of negative catalysts from Chinese inflation and trade figures; from Eurozone contagion fears; and from disappointing US employment figures. But as overall risk appetite heads south, there will be limits to this resilience. The performance of NZD against USD remained relatively unscathed despite the disappointing US employment figures. As such, we could see NZDUSD rise to new highs. As for AUDNZD, it retraced its entire post-Australian employment data rally, reinforcing the sanctity of the 1.2780-1.3050 range.

USDCAD

AUDUSD NZDUSD

Foreign Exchange Strategy Monday, 11 July 2011 http://www.GlobalMarkets.bnpparibas.com

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

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FX - Global Strategy Contacts

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

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