Foreign Exchange

London 08:00

FX Daily Strategist: Europe

CHFSEK v. VIX
8.75 8.50 8.25 8.00 7.75 7.50 7.25 7.00 6.75 6.50 6.25 Dec 08 Jun Sep Dec Mar 09 Jun Sep Dec Mar Jun 10 11 VIX CHFSEK 60 55 50 45 40 35 30 25 20 15 10

Last minute debt deal to avert default but not potential ratings downgrade Ahead of potentially weak NFP after very soft GDP, USD should be under pressure UK PMI will be first glimpse of the performance of Q3

Source : Reuters Ecowin Pro : SEK tends to suffer the most in periods of risk aversion given the Swedish banking sectors reliance on short term USD liquidity, and CHF continues to reign as the safe haven currency of choice. Given the near term resolution on the US debt, we would recommend selling CHFSEK.
GMT 07:30 07:50 07:55 08:28 Country CH (Jul) FR (Jul) DE (Jul) GB (Jul) Release PMI Manufacturi PMI (sa) PMI CIPS Manufactur Unemployment Ra % ISM Manufacturi Construction Sp % (m/m) Mkt 52.8 50.1 52.1 51.0 9.9 55.0 0.1 Last 53.4 52.5 54.6 51.3 9.9 55.3 -0.6

Risk markets received a boost in Asia after Washington reached a deal to avert default, with the CHF and JPY losing over 1%. However, while this deal averts an immediate default, it is unlikely to be sufficient to prevent a ratings downgrade with the spending cuts not appearing stringent enough for S&P. Still, with risk appetite buoyed, any signs of retracement in USD funding pressures should support the pro-cyclical currencies especially the Scandies today against the CHF and JPY. As such CHFSEK (see chart alongside) should retrace meaningfully lower in the days ahead. Still, with the rating downgrade intact and on the heels of a extremely weak US GDP report, we expect the USD to only receive intermittent support and downward pressure will resume in short order this week leading into a potentially soft nonfarm payrolls print at the end of the week. The US debt agreement reached over the weekend was signed off by Senate Majority leader Harry Reid along with President Obama, and pledged to raise the debt ceiling and put in place USD 2.5trn in spending cuts over a 10 year period. However, this will come in two phases, with USD 1 trn in spending cuts to be agreed by Tuesdays deadline, and a subsequent USD 1.5 trn in cuts to come by year end, taking it beyond the 2012 elections. Congress will reappoint a bi-partisan deficit committee which will have to decide on the composition of these cuts which suggests that political wrangling will come back towards the end of Q3. Today, the markets will await confirmation that the House Republicans will fall in line behind the agreement. Comments from Boehner yesterday suggest it should satisfy 98% of Republican demands. Assuming the first phase is ratified, the markets focus will shift back to the state of the US economy. Fridays US Q2 GDP report along with downward revisions to the prior two quarters showed that growth was on a much weaker footing into 2011, and the US ISM today (we expect a slight moderation to 54.5 in July from 55.2 in June) could underline this ahead of the crucial nonfarm payrolls report, where our economists look for a below consensus 50K print and another tick up in the jobless rate. Irrespective of the USD side of the equation, EUR had developed independent weakness against most G10 currencies last week with the market questioning the EU summit agreement. Peripheral bonds (Spain and Italy) spreads continued to widen against bunds, but the bigger focus has been on Spain. On Friday, the Spanish PM called for early elections and this just after Moodys threatened to downgrade Spain. Heading into next week, we expect volatility in the markets with both sides of the recent 1.425-1.4500 range on EURUSD likely to be expanded. We have UK July PMI today which we expect to slow to 50 vs. consensus of 51.0. The number will be a crucial indicator of the performance of the start of Q3. A weak number may undermine the surprisingly strong Q2 GDP report and bring the BoE to discuss more QE at the upcoming (Thursday) meeting. As such, a weaker number will pose a fresh risk for GBP, and GBPAUD could retest 1.4750/80 support following the slightly better than expected China PMI released earlier today.
NY: +1 212 841 2408 Sing.: +65 6210 3263/3347

09:00 EU (Jun) 14:00 US (Jul) 14:00 US (Jun)

This is not classified as objective research. Please refer to important information at the end of the report.
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FX IMM Positioning Latest IMM CFTC data for 26 July showed that short USD positions are getting extreme -- to Usd 25.42 bn in the week ended Jul 26 vs Usd 14.00 bn in the week prior. At the same time, net long positions in the Swiss Franc fell to 7,877 from 11,494 prior whilst bets in favour of the Canadian dollar also dropped to 36,141 from 27,764. On the other side of the fence, specs nearly doubled their long positions in the Euro to 17,038 from 9,246 in the week prior and continued to raised their bets in favour of the Yen to a lofty 8mth over high of 51,302 from 42,155 prior. Bets against the Sterling were reversed back to a net long position of 1,222 vs a net short 6,714 position prior, whilst net long positions in the Aussie rose to 81,438 from 77,795, in the Kiwi to 23,291 from 21,438 and in the Mexican Peso to 91,913 from 89,266. (IGM) US: Senate Majority Leader Harry Reid (D., Nev.) has "signed off" on a debt ceiling agreement pending the approval of the Senate Democratic caucus, a congressional aide said Sunday. The deal would raise the debt ceiling by $2.4 trillion in three stages and provide initially for roughly $900 billion in spending cuts over 10 years with everything on the table for a 2nd stage of deficit cutting. A special committee of lawmakers would be charged with finding another $1.5 trillion in deficit reduction through a tax overhaul and changes to safety-net programs. House Republican leaders will now brief GOP lawmakers on the deal at 8.30PM and contrary to earlier reports, GOP leaders have yet to sign on to the agreement, with House speaker Boehner balking at some of the proposals. Both leaders still have the tough task of rounding up support from their troops and scheduling votes, which are likely to take place not before Monday, first in the Senate and then to the House for a final vote. (WSJ, IGM) Obama to Deliver Statement at 8:40 pm ET - White house (Reuters) DJ sources: rep. Boehner concerned plan could lead to sharp cuts in military spending. (Reuters) Moodys: will decide whether to downgrade the United States' Aaa rating based on the country's economic performance in 2012 and prospects for future deficit reduction measures. (Reuters) If United States defaults, lawsuits await-- US cuts about 100 million checks per month; many obstacles to private suits against government; government contractors especially vulnerable. (Reuters) Fed's Lockhart states that he would not rule out further economic monetary easing but said conditions would Foreign Exchange Strategy Monday, 01 August 2011 http://www.GlobalMarkets.bnpparibas.com

have to worsen. He sees the bar set high for more easing. Fed's Bullard: Rising Inflation Makes New Stimulus Unlikely; Headline Inflation Could Rise Even More; Must Be 'Circumspect' In Easing Policy Again; Reasonable To Expect Better Growth Over Second Half; Expects 2h 2011 Gdp To Rise To 3.5%; Repeats Fed Can't Bail Treasury Out Of A Default; Little need for central bank to help beyond what it's doing; Price pressures don't give the Fed much latitude to act; Should the US default, the only role the Fed has to play will be in helping keep financial markets steady. (Reuters) US Q2 GDP disappointed expectations coming in at 1.3% vs. 1.8%. Q1 GDP was revised down from 1.9%q/q to 0.4% q/q. Personal consumption was weak coming in at 0.1% vs. consensus of 0.8% Australia/ New Zealand/Canada Australia TD-MI's latest inflation gauge ticked higher over July, to rise by 0.3% over the month after a flat reading prior. On the year the gauge rose back to 3.25 from 2.9% prior. At the same time, TD's trimmed measure of underlying inflation nudged up by 0.2% vs a 0.1% gain prior, raising the annual pace to 2.1% from 1.8% prior. According to the gauge, underlying price pressures still remain contained well within RBA's target 2-3% band. (IGM) Australia Manufacturing activity floundered over July; with AIG-PW's Performance of Manufacturing Index (PMI) tumbling by a hefty 9.5pts over the mth to 43.4. Activity slid back into contractionary territory after rising 5.2pts in June to 52.9O, with only three of the 12 sub-sectors posting increases. In a negative for the labour mkt, the seasonally adjusted employment subindex decreased 3.3pts to 46.1, whilst the new orders sub-index dived by 14.4 pts to 40. (IGM) Australian Treasurer Wayne Swan on Monday joined the chorus of world leaders urging the U.S. to move toward long-term consolidation of its budget deficit, saying a deal struck Sunday in the U.S. to end the debt ceiling impasse is just the first step toward ending the country's debt woes. "The economy is strong and we have the proven ability to deal with global uncertainty... Our region remains strong," he said. Swan added the Reserve Bank of Australia will need to consider the global environment and recent local inflation data when its board sits down Tuesday to discuss a possible rise in interest rates. (Reuters) Australia New home sales suffered their biggest fall in five months over June, to tumble by 8.7% over the month after easing by 0.2% prior. According to the latest mthly survey by HIA-Jeld-Wen, sales of detached houses fell for the 2nd straight mth and by a hefty 8.8% vs a 2.4% fall prior, whilst sales of multi-units tumbled by 8.1% after rebounding by 23.3% in May.(IGM) Canadian Fin Min Flaherty in a radio interview expects the Canadian economy to rebound in the 2H this year but growth will be only modest. Canadian

May GDP report showed an unexpected drop of 0.3% or weakest in 2 years. Flaherty also said the govt's fiscal plans remain on track to meet the deficit-reduction goals. Govt data today showed the federal budget deficit narrowed to C$3.3 bln in first 2 mths of the current fiscal year compared to a year ago.(IGM) Europe: European authorities should stop public bickering and speak with one voice to make the second rescue package for Greece work, warned Christine Lagarde, the new managing director of the IMF. In an interview with the Financial Times, the former French finance minister said public discord between eurozone ministers and the European Central Bank over the last bail-out had created confusion in the markets. Putting on my European hat for a microsecond...we did not communicate it in a harmonised fashion, nor did we particularly speak with one voice, she said, adding that this time the Europeans must stick to the script. (FT) Greece and other stricken countries will have faster and easier access to tens of billions of euros in European Union funds under a plan to help stimulate their economies. The plan, to be unveiled, would not involve extra assistance but would ease co-financing rules for Greece, Ireland, Portugal, Hungary, Latvia and Romania so that they would not have to put up as much of their own cash in order to collect EU funds. (FT) Schaeuble: Defends second Greek rescue package, denied that this month's Greek bailout deal paves the way for a future 'transfer union' in which euro zone countries are liable for each others' debts. (Reuters) IIF's Dallara: optimistic about Greek debt swap, second bailout makes Greek debt sustainable, sees Greek bond market return in 18-30 months. (Reuters) Rating agency Moody's put Spain on review for a possible downgrade: Moody's move to place the Aa2 government bond rating on review cited concerns over growth and said funding costs would continue to be high in the wake of euro zone leaders' bolder moves to curb the Greek crisis last week. Particular focus rested on Spain's regional governments who will miss their collective budget deficit target by up to 0.75% GDP, Moody's said, hampering the central government's programme of austerity to reduce the overall shortfall. Spain Election Unlikely to Calm Investors: By the end of last week, Jos Luis Rodrguez Zapatero, Spains embattled Socialist prime minister, was left with no choice. He was obliged to break his earlier vow to stay in power until March, which would have meant completing his second term of office with some dignity intact. Mr Zapateros decision on Friday to call an early general election on November 20 he characteristically chose the anniversary of the death of the dictator Franco in 1975 to remind voters of the dangers of the political right was an acknowledgement of defeat. The governments credibility at home and abroad has been fatally undermined by three years of economic crisis and by worsening conditions in the eurozone sovereign bond markets. (FT) Foreign Exchange Strategy Monday, 01 August 2011 http://www.GlobalMarkets.bnpparibas.com

IMF says Spain's growth outlook dominated by 'downside risks' and Spain may need further medium term action on the deficit. UK banks are set to eclipse their European rivals by making even deeper job cuts as part of sweeping cost-saving measures to reverse rapidly falling revenues. (FT) Irish Central Bank: No reason to significantly alter its growth projections, trimmed GDP forecast in line with government figures; Euro area growth expected to continue at a gradual and uneven pace; Expects EU unemployment rate to remain stable in 2011 and decline slowly thereafter although remaining above 9 percent. (Reuters) CBI Lowers UK Growth Forecast Again: The surge in commodity prices and erosion of business confidence is leading to sluggish economic growth, according to the CBI, which has scaled back its growth forecast for the second time this year. Britains biggest business group now predicts 1.3 per cent growth this year, down from its forecast of 1.7 per cent in May, which was a reduction from its forecast of 1.8 per cent in February. (FT) China China July PMI fell to 50.7 (but better than 50.1 forecast) compared to 50.9 in Jun. Although slower than previous month, the PMI remains well above 50.0 China c. Bank says taming inflation still a priority: China Central Bank says inflation could rebound if Beijing relaxes its policy and it will use range of policy tools, including rates and FX China's central bank on Monday said that it will maintain a prudent monetary policy and that price pressures would be in danger of escalating if it relaxed its policy. (Reuters) China should maintain its tight capital controls to combat "hot money," People's Bank of China adviser Xia Bin wrote in an essay published in Caijing magazine on Monday. (DJ) Former PBOC Adviser: Monetary Policy Likely More Accommodating in 2H China's monetary policy will likely be more accommodating in the second half of the year amid a likely decline in headline inflation and concerns over a hard landing for the economy, a former adviser to the People's Bank of China wrote in an opinion piece Monday. (DJ) New law to fight grassroots graft To fight corruption at the grassroots, China's central authorities have issued the first regulations forbidding township and village officials from appropriation of land, embezzlement and vote buying. (China Daily) China c.bank's maturing bills and repos in August A total of 352 billion yuan ($54.7 billion) in Chinese central bank bills and repos are due to mature in August, down slightly from last month, according to Reuters calculations. (Reuters)

Residential property prices in 100 major cities in China rose 0.21% in July from June, slower than June's 0.41% month-on-month increase, China Real Estate Index System said Monday. (DJ) China is drafting measures to promote the domestic sale of goods originally produced for export, China Daily reported, citing Chen Linhui, vice-chief of the processing trade division at the Department of Foreign Trade and Economic Cooperation in Guangdong province. The measures, expected in September, will include a simplified approval process for selling exportoriented goods inside China, financing, and assistance in expanding sales channels and improving brand image, Chen said, according to the newspaper. (Bloomberg) China Nonferrous Metal Industrys Foreign Engineering and Construction Co. said its board approved a plan to buy 12.3 million shares of Terramin Australia Ltd. For A$4.55 million ($4.97 million), according to a Shenzhen Stock Exchange statement today. China Nonferrous, the largest shareholder in Terramin, will increase its stake in the Adelaide-based company to 19.86 percent from 14.38 percent following the purchase, the statement said. (Bloomberg) As many as 14 people have been killed in a weekend of violence in the restive western Chinese region of Xinjiang, as deep-rooted tensions in the area again exploded into violence. State-run Xinhua news agency reported on Sunday that four suspects were shot dead by police in the Silk Road city of Kashgar in north-west Xinjiang, after a night of violence on Saturday had left seven people dead and at least 22 injured. Xinhua said the police were reacting to what it called an eruption of violence on Sunday afternoon. (FT) Corporate Japan Warms to Chinese Investors: Corporate Japan appears to be shedding its long-held suspicion of Chinese investors after a big jump in the value of acquisitions in Japan by mainland companies this year. Last weeks agreement by Panasonic to sell the white goods division of its Sanyo subsidiary to Haier, the Chinese refrigerator and washing machine company, put the value of inbound Chinese investment at $575.5m to the end of July, according to Dealogic, more than four times the total for last year. (FT) FinMin source: China may help fund Greek bond buybacks, signs China interested, Greek finmin met China's IMF representative in Washington. (Reuters) Japan Japan escalates warnings on yen rise to protect recovery; Finmin Noda says weighing how long Tokyo can keep yen rise "unattended"; Sources say still no full agreement on whether and when to intervene; Will take appropriate action in cooperation with BOJ Noda; BOJ official says focusing on yen rise harm to economy; Factory output up 3.9 pct in June, confirms recovery on track. (Reuters) Japan Agency in New Storm The Japanese government disclosed reports Friday showing that its Foreign Exchange Strategy Monday, 01 August 2011 http://www.GlobalMarkets.bnpparibas.com

primary nuclear regulator tried to manipulate public opinion at forums to promote nuclear power, findings that further damage the industry's already tattered reputation. (WSJ) Other Asia: Korea's July CPI rose 4.7%, beating expectations of 4.4% and up from 4.4% in June. This is the strongest print since March 2011 and increases the risk of a 25bp rate hike when the BoK meets on 11 August. Korea reported a trade surplus of USD 7.2bn in July, a sharp improvement from the USD 2.8bn surplus in June. The stellar trade performance was due to strong exports growth of 27.3% yoy, with import growth steady at 24.8%. The HSBC PMI print for July too showed an uptick to 51.3 from 51.1 in June. Bank of Korea Gov. Kim Choong-soo said Monday he's worried about the acceleration in consumer price inflation since May, while reiterating the government's view that inflation will likely ease from September due to a higher base of comparison in the year-earlier period. (DJ) North Korea Wants To Resume Six-Party Nuclear Talks Soon North Korea said Monday it wants an early resumption of six-party negotiations on its nuclear program, following "constructive" talks in New York last week. (AFP) Taiwan's financial regulator will press ahead with a further expansion of the business scope for the island's banks in China, particularly in the burgeoning yuan business, in the next official meeting with its Chinese counterpart in September or October, a senior official said. Lee Jih-chu, vice chairwoman of the Financial Supervisory Commission, also said in an interview that a Taiwanese bank is in talks with a Japanese bank on a potential merger, which would be the first such tie-up in Taiwan. She declined to elaborate or to name the banks, and their identities couldn't immediately be determined. (WSJ) Philippine banks are fairly resilient and are unlikely to be adversely affected by a possible increase in interest rate spreads due to the fiscal constraints and weakness in the U.S. economy, central bank governor Amando Tetangco said on Monday. (Reuters) Indonesia July headline CPI eased to 4.55% YoY, softer than market consensus of 4.80%, and down from 5.54% in June. Core inflation too eased to 4.55% YoY, against market forecast that core CPI would edge to 4.70% from 4.63% in June. On a month-on-month basis, CPI rose 0.67% MoM compared to market expectations of 0.85%.On the trade front, June trade surplus steady at USD 3.33 bn (exp: USD 2.52bn) from USD 3.50bn in May. Exports growth accelerated to 49.4% YoY (exp: 44.3% ) from 45.3% in May; while imports eased to 28.3% YoY (exp: 30.5%) from 48.5% in May.

Thailand Jul CPI rose 4.08% y/y (4.15% f/c) vs 4.06% y/y in Jun, which would mark the fastest pace since Sep 2008. Core CPI up 2.59% y/y in Jul (2.7% f/c) vs 2.55% y/y in Jun, which would inch closer to the top end of BoT's target range of 0.5-3.0%. Food/beverage prices slowed to 7.17% y/y in Jul vs 7.76% y/y in June. On a m/m basis, headline CPI +0.18% in Jul vs +0.13% in Jun, core CPI +0.08% in Jul vs +0.18% in Jun, food/ bev -0.20% in Jul vs +0.44% in June. (IGM)

Foreign Exchange Strategy Monday, 01 August 2011 http://www.GlobalMarkets.bnpparibas.com

Who Blinks First Japan or Switzerland?

Distaste for USD and EUR means JPY and CHF getting stronger by default But CHF overvaluation far exceeds that of JPY and is now starting to hurt; in turn (finally) creating incentives to reconsider efforts to curb CHF inflows and/or encourage capital outflows

Chart 1: KOF, PMI and Swiss Recessions

75 70 65 60 55 50 45 40 35 30 96 98 00 02
Recessions

KOF (rhs)

30 20 10 0 -10 -20

In contrast to Japan where public expressions of concern at JPY strength are now being heard and the threat of intervention is again being made, Swiss authorities have been noticeably quiet during this latest episode of strong CHF inflows. This has seen USDCHF plumb new record lows and the broader CHF exchange rate new highs. We have previously noted (see "Market Focus Little Justification for BoJ intervention", Market Mover, 27 July 2011, pp. 57-58) that, whereas the JPY real effective exchange rate currently trades weaker than its long term average, Switzerlands real exchange rate strength is truly exceptional now some 20% above its 15-year average. Until little more than a month ago, Swiss complaints against unrelenting currency strength rang hollow in the context of incoming data showing the export sector still performing with remarkable strength (evidence in part of the relative price insensitivity of many Swiss exports to CHF strength be they high technology capital goods, chemicals or luxury consumer goods). Income effects from rising Asian wealth looked to be transcending the substitution effects of higher prices (what economists refer to as "Giffin goods"). The income effects from stellar export performance also looked to be helping drive strengthening domestic demand (e.g., retail sales growth in the year to April of 7.8%). Swiss data in the past month have painted a rapidly changing picture. Beginning with the June PMI and confirmed in the July KOF leading indicator activity levels emanating from the manufactured goods sector have slid rapidly, with the changes, if not yet levels, consistent with Switzerland approaching recession territory (see Chart 1). Retail sales fell back sharply (albeit the series is exceptionally volatile) and the trade surplus looks to now be diminishing. Tuesdays PMI will be especially important, and another sharp fall will set alarm bells ringing, as too will Fridays CPI. Base effects may hold the latter up, but if we do see signs that in underlying terms inflation is at risk of moving further back down away from the 2% target, this could provide the "call to arms" by the Swiss authorities to make another attempt at curbing CHF strength. The nature of the flows driving CHF strength continues to leave us sceptical SNB will be tempted to repeat its illfated 2010 FX intervention efforts. As Chart 2 shows, deposit inflows are a key driver of CHF strength, and intervention might simply present better entry levels for investors still enamoured of Switzerlands ultimate safehaven status. Latest IMM data in contrast as one proxy of speculative inflows, is not showing evidence of extended speculative positioning conducive to successful intervention. Alternative attempts to control capital inflows to Switzerland, notably the imposition of taxes on nonForeign Exchange Strategy Monday, 01 August 2011 http://www.GlobalMarkets.bnpparibas.com

PMI (lhs)

-30 -40 -50 -60 08 10

04

06

Source: Reuters Ecowin Pro, BNP Paribas

Chart 3: Swiss deposit inflows, EURCHF and Switzerland recessions

1.20 1.25 1.30 1.35 1.40 1.45 1.50 1.55 1.60 1.65 1.70 94 96 98 00 02
Recession 08 04 06 EURCHF Inverse (LHS) Saving Deposits in CHF bn (RHS)

260 250 240 230 210 200 190 180 170 160 10 billions 220

Source: BNP Paribas resident deposit inflows, had limited success in the 19721978 period when they were last practised and which culminated in an effective 40% negative interest rate in 1978 (tax of 10% per quarter of non-resident deposits). Only when the SNB abandoned monetary discipline and started targeting the (DEMCHF) exchange rate after 1978 did Swiss Franc strength abate whereupon higher inflation followed. The Swiss authorities will evidently not entertain a repeat of the 1970s policies lightly and may be more inclined to try and encourage capital outflows (why arent Swiss companies buying up their foreign competitors at these exchange rates?). But articulation of the threat if not yet the actuality of re-imposing levies on foreign deposit inflows may well be heard if EURCHF gets down to say the 1.10 area at the same time that incoming data confirm that the economy is now suffering badly from the grip of exceptional exchange-rate strength.

Daily Currency Summary

G3
With the US reaching a potential deal to avert a default, but not necessarily a downgrade, we expect the USD to continue to remain under pressure this week. However, this in itself will unlikely see EURUSD break above the top of its recent 1.4200-1.4450 range. Price action has already become nuanced with the EUR weakening against the remaining G10 currencies last week, with the move linked to rising risk premiums especially in Spain and Moodys highlighting of Spain for a potential ratings downgrade has only added to this, playing to the view that EURUSD continues to remain a range trade for now. The JPY has been the biggest loser today (-1% vs. USD) following the US move to reach a potential deal to avert a US default. However, we expect any USD support to prove transitory as the focus shifts back to the weakness of the US economy following Fridays very weak US GDP figures. Locally, commentary from Vice Finance Minister Igarashi that the USD is weak, rather than the JPY is strong underscores our view that any intervention seems unlikely given the move is driven from external factors far from the control of Japanese officials. USDJPY therefore remains at risk of a continued move lower, however with Japanese retail margin positions reaching new highs, there is a risk for a more volatile decline. EURJPY has recovered sharply following the news of a likely US debt deal. While EURJPY rebounded up to 112.25 from 110.08, the cross is back challenging 111.50 support given independent EUR weakness.

EURUSD

USDJPY

JPY Crosses

EUR Bloc
We have UK July PMI today which we expect to slow to 50 vs. consensus of 51.0. The number will be a crucial indicator of the performance of the start of Q3. A weak number may undermine the surprisingly strong Q2 GDP report and bring the BoE to discuss more QE at the upcoming (Thursday) meeting. As such, a weaker number will pose a fresh risk for GBP, and GBPAUD could retest 1.4750/80 support following the slightly better than expected China PMI released earlier today. The CHF should retrace lower following the likely US debt deal, having been the biggest beneficiary of markets continuing to price in a sovereign default risk. USDCHF now eyes 0.8000. Chart wise, down channel support kicks in around 0.7820. EURNOK has been trading within a range of 7.72 and 7.79 over the last week. Pressure on NOK is due to relatively less-liquid nature and the markets now beginning to price the risk of a potential US default with the continued debt impasse in the US. With a default now likely averted, we still like the NOK longer term on its good fiscal/ current account characteristics. Moreover, crude oil has been holding up rather well, in part explaining the stickiness in USDNOK of late. With gridlock over the US debt ceiling, the concern was that tighter USD liquidity to which SEK is particularly vulnerable given the Swedish banking sector is heavily reliant on short term USD funding. However, with a default is averted, we think SEK will strengthen on positive fundamentals.

EURGBP

EURCHF

EURNOK

EURSEK

USD Bloc
USDCAD pushed higher as Canadian GDP for May (coming in at -0.3%) and US GDP for Q2 (+1.3%) disappointed. A weaker US economy will drag on the CAD, and so local data this week will be crucial. USDCAD is vulnerable to a broader risk-off (hence USD positive) move. The 0.9525/35 highs from last week are important short term resistance. AUDUSD managed to bounce back to 1.100 on Friday despite the weaker US GDP numbers and the US debt impasse. We maintain our medium term bullish view. Last weeks stronger CPI could lead to a more hawkish RBA this week. Beyond 1.1000, the next major medium term resistance is not until the 1.1500 level, but we have the 1.1300/1.1320 region (23.6% fibo-projection from March-May) to contend with first. Despite the global uncertainty, NZDUSD continues to rally hard. The NZD may be viewed as a safe haven in this environment. With a potentially hawkish RBA this week, we could see AUDNZD push higher. However, a broader risk off move will likely weigh on AUD more than NZD..

USDCAD

AUDUSD

NZDUSD

Foreign Exchange Strategy Monday, 01 August 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 1.20 2.95 8400 29.50 42.00 7.80 6.40 28.00 1040 44.00 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 1.19 2.90 8300 29.30 41.50 7.80 6.31 27.50 1030 43.50 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 1.18 2.87 8200 29.00 41.00 7.80 6.25 27.00 1020 43.00 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 1.17 2.85 8100 28.70 40.50 7.80 6.21 26.70 1010 42.50 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 1.16 2.83 8000 28.50 40.00 7.80 6.17 26.50 1000 42.00 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 1.15 2.80 7900 28.30 39.50 7.80 6.13 26.00 990 41.50 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 1.14 2.77 7800 28.00 39.00 7.80 6.23 26.00 980 41.00 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 1.13 2.75 7700 27.70 38.50 7.80 6.20 26.00 970 41.00 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 1.13 2.73 7600 27.50 38.00 7.80 6.17 26.00 960 41.00 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 1.13 2.70 7500 27.50 38.00 7.80 6.15 26.00 950 41.00 20000 Q4 '13 4.95 1.62 450 11.30 1750 8.80 2.70 Q4 '13 82.99 Q1 '14 1.34 92 0.97 1.70 1.00 0.95 0.76 6.94 5.07 Q1 '14 123 0.79 1.30 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 79.73

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FX - Global Strategy Contacts

Foreign Exchange
Ray Attrill Steven Saywell James Hellawell Kiran Kowshik Mary Nicola Drew Brick Chin Loo Thio Robert Ryan Jasmine Poh Gao Qi Bartosz Pawlowski Dina Ahmad Erkin Isik Diego Donadio Head of FX Strategy America Head of FX Strategy Europe 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 Asia Strategist FX & IR Asia Strategist FX & IR Latin America Strategist New York London London London New York Singapore Singapore Singapore Singapore Shanghai London London Istanbul So Paulo 1 212 841 2492 44 20 7595 8487 44 20 7595 8485 44 20 7595 1495 1 212 841 2492 65 6210 3262 65 6210 3263 65 6210 3314 65 6210 3418 86 21 2896 2876 44 20 7595 8195 44 20 7595 8620 90 216 635 29 87 55 11 3841 3421 raymond.attrill@americas.bnpparibas.com steven.saywell@uk.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 dina.ahmad@uk.bnpparibas.com Erkin.isik@teb.com.tr diego.donadio@@br.bnpparibas.com

Emerging Markets FX & IR Strategy

Production and Distribution, please contact : Roshan Kholil, Foreign Exchange, London. Tel: 44 20 7595 8486, Email: roshan.kholil@uk.bnpparibas.com

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