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  Currency

  OUTLOOK                                                                           Macro
                                                                         Currency Strategy
                                                                               March 2012




  FX & Oil
  Rather than look at how theory suggests FX should behave when oil
  prices rise, we examine how currencies actually behave. NOK comes
  out top. In addition, the “risk on” AUD and NZD should not be sold.
  Asia & Oil – Double, double t’oil and trouble?
  A high oil price could introduce more volatility for Asian FX. INR and
  PHP will be vulnerable, while MYR should be the winner.
  EMEA & Oil – how to trade it?
  On a relative basis, long RUB and ZAR against TRY are the most
  attractive trades, if oil prices continue to rise.
  Latam & Oil – How do they mix?
  In Latam BRL tends to perform best and MXN worst.

  QE pendulum to swing in JPY’s favour
  The inflation goal announcement and QE expansion surprised the market.
  USD-JPY has broken higher but the price action looks overdone.




Disclosures and Disclaimer This report must be read with the disclosures and analyst
 certifications in the Disclosure appendix, and with the Disclaimer, which forms part of it
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   Macro
   Currency Strategy                                                                                           abc
   March 2012




Summary

Oil & FX – drilling down to what actually happens                                                  (pg 3)
Rather than look at how economics suggests FX should behave when oil prices rise, we examine how FX
has behaved in the past. Unsurprisingly, oil producers are the winners. However, for large oil price jumps
consistent with supply-side shocks one might have expected all "risk on" currencies to suffer and safe
haven FX to thrive with lower equities. This has not been the case, with AUD and NZD holding their
own, and JPY, CHF and USD suffering.

        Oil & Asia – Double, double t’oil and trouble?                                           (pg 11)
        This section takes an in-depth look at the effect of higher oil prices on Asian FX. A high oil price
        could introduce more volatility for Asian currencies. The higher oil goes, the greater the
        headwinds INR will face. PHP could also be vulnerable, while MYR should be the major winner.

        Oil & EMEA – How to trade it?                                                            (pg 17)
        This section examines the macroeconomic and FX implications of rising oil prices for the EMEA
        region. Russia is the main beneficiary, whereas Turkey and Israel are hurt through the trade
        channel and CEE through the inflation channel. If the oil price rise continues, long RUB and ZAR
        vs TRY are attractive trades.

        Oil & Latam – How do they mix?                                                           (pg 22)
        We look at the reaction function between higher oil prices and Latam currencies. BRL tends to
        perform best on large weekly oil price rises, and MXN worst. We also examine each Latam country’s
        oil balance and discuss how higher oil prices might impact the currencies going forward.

QE pendulum to swing in JPY’s favour                                                             (pg 29)
The recent BoJ inflation goal announcement and QE expansion caught the market by surprise, and USD-
JPY has reached nine-month highs. We think the price action looks overdone. The knee-jerk weakening
of the currency on the back of an easing announcement looks familiar. We have previously observed
similar reactions in USD, GBP and EUR, only to see the currencies bounce up again. The same is likely
to happen with the JPY.




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     Macro
     Currency Strategy                                                                                                                abc
     March 2012




Dollar bloc                                                                                                           (pg 34)
Canada – CAD demand picking up – We still consider the CAD to be fully valued at current levels and
as such, further gains from here should prove more difficult. Nonetheless, the current environment is one
that should continue to work for the CAD, and we would expect solid buying interest on the corrective
pullbacks that do develop.

Australia – AUD – The tipping point – The AUD’s recent strong performance has much to do with an
improved external backdrop and a less dovish RBA. While these represent supportive developments for
the AUD, we believe they also pave the way for domestic fundamental factors to come into sharper focus.

New Zealand – NZD – Rally to reverse – The NZD has, much like the AUD, been harvesting solid gains
so far this year on the back of an improved external outlook and a surge in risk appetite. However, the
NZD has significant downside risks, and we think the NZD looks like the more vulnerable of the two
antipodean currencies.




Key events
Date                                            Event
12 March                                        Eurogroup meeting
13 March                                        Ecofin meeting
13 March                                        FOMC rate announcement
13 March                                        BoJ rate announcement
15 March                                        G20 Sherpas meeting
21 March                                        BoE publishes meetings of 7-8 March MPC meeting
30-31 March                                     Ecofin informal meeting
3 April                                         RBA rate announcement
4 April                                         BoE rate announcement
4 April                                         ECB rate announcement
Source: HSBC


Central Bank policy rate forecasts
                                                                         Last                     Q2 2012(f)             Q4 2012(f)

USD                                                                    0-0.25                         0-0.25                 0-0.25
EUR                                                                      1.00                           0.75                   0.50
JPY                                                                    0-0.10                         0-0.10                 0-0.10
GBP                                                                      0.50                           0.50                   0.50
Source: HSBC forecasts for Fed funds, Refi rate, Overnight Call rate and Base rate


Consensus forecasts for key currencies vs USD
                                                                                     3 months                          12 months
EUR                                                                                     1.273                               1.291
JPY                                                                                     76.91                               78.27
GBP                                                                                     1.536                               1.567
CAD                                                                                     1.014                               1.004
AUD                                                                                     1.022                               1.013
NZD
Source: Consensus Economics Foreign Exchange Forecasts February 2012




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   Macro
   Currency Strategy                                                                                      abc
   March 2012




Oil and FX: Drilling down to
what actually happens
 NOK and CAD have gained on higher oil prices, but CAD gains
   have been surprisingly underwhelming
 Safe-haven currencies have struggled, more so when the oil price
   increases have been dramatic (usually supply-side shocks)
 AUD and NZD upside from commodity price association appears
   to outweigh risk considerations



Oil and FX – defying logic                              Oil producers such as the NOK and CAD
                                                         would benefit the most;
In assessing the likely impact of oil on currencies,
the standard approach is to think of the economic       Safe-havens such as the JPY, CHF and USD
repercussions, and thereby derive currency               would benefit although with JPY a total net
conclusions. Metrics such as net oil imports and         importer it may underperform the USD and
perhaps oil consumption or production as a               the CHF; and
percentage of GDP usually feature in the analysis,
                                                        “Risk on” currencies, such as AUD, NZD and
while additional considerations such as the
                                                         SEK, with no oil production should be most
respective central bank’s reaction function or the
                                                         vulnerable.
risk profile of the currency feature thereafter. We
have argued previously that the impact on              However, rather than looking at the theory and
currencies will vary according to the nature of the    investigating how currencies should behave, we
oil price rise, with demand shocks likely to act in    look at how they have behaved in response to
favour of oil producers and “risk on currencies”,      previous oil price rises. The conclusions are
and supply-side shocks to favour producers and         often quite different from what the traditional
“risk-off” currencies (see Currency Outlook: FX        logic suggests:-
and oil – three key elements, 10 March 2011).
                                                        NOK and CAD have gained on higher oil
Clearly, the greatest current threat to oil prices         prices, but CAD gains have been surprisingly
is for a spike higher on the back of heightened            underwhelming;
supply concerns due to the Iran issue rather
                                                        Safe-haven currencies have struggled, more
than any demand-led rally. The knee jerk
                                                         so when the oil price increases have been
reaction due to traditional logic would suggest
                                                         dramatic (usually supply-side shocks);
the following:


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      Currency Strategy                                                                                                                                                 abc
      March 2012




    1. Currency correlations with oil prices

                                            Ex change rate v s USD, 1Y correlation w ith oil                    5Y correlation
    0.60                                                                                                                                                        0.60
    0.50                                                                                                                                                        0.50
    0.40                                                                                                                                                        0.40
    0.30                                                                                                                                                        0.30
    0.20                                                                                                                                                        0.20
    0.10                                                                                                                                                        0.10
    0.00                                                                                                                                                        0.00
    -0.10                                                                                                                                                       -0.10
    -0.20                                                                                                                                                       -0.20
                                IDR




                                                                                             PHP


                                                                                                         THB
                                             KRW
                          INR




                                                                           NZD




                                                                                                                                 SGD


                                                                                                                                              CAD
                                                                                                                                                    AUD
                    CHF




                                                                                       HUF
              JPY




                                      GBP


                                                   CZK




                                                                                                   TRY




                                                                                                                           SEK


                                                                                                                                        NOK




                                                                                                                                                          RUB
                                                         BRL
                                                               MXN
                                                                     MYR


                                                                                 PLN




                                                                                                               EUR
    Source: Bloomberg, HSBC                                                                                          ZAR


 AUD and NZD upside from commodity price                                                What happens in practice rather than
  association appears to outweigh risk                                                   in theory
  considerations; and                                                                    We want to examine whether supply-side shocks
 There is more evidence of a “risk off”                                                 to oil prices produce a discernibly different
  reaction in the S&P500 especially when oil                                             reaction among currencies when compared to
  spikes much higher, and some modest                                                    demand-led increases in oil prices. A reasonable
  evidence of a “safe haven” bid for the USD.                                            starting point is to assume that oil price increases
                                                                                         driven by rising demand, or expectations of rising
Correlations show little differentiation                                                 demand, are likely to be more sedate in nature
among commodity currencies                                                               rather than sharp price increases driven by a
One approach to determine how currencies                                                 sudden supply-side disruption.
perform relative to oil prices is to look at
                                                                                         In this analysis we first look at G10 currencies.
correlations. We have looked at each currency
                                                                                         Here we examine weekly oil price changes dating
against the USD because oil is priced in USD, this
                                                                                         back to 1990, identifying those occasions when
gives a cleaner measure of a given currency
                                                                                         oil prices rose. We then calculate the percentage
against oil. The chart below shows the
                                                                                         of occasions on which a given currency
correlations over the last year.
                                                                                         appreciated against the USD when oil prices rose
The correlation coefficients suggest oil basically                                       by a given amount or more. For example, when
operates as a “risk on” proxy with safe haven                                            oil prices rise by 1% or more in a week, how often
assets having low or negative correlations (JPY                                          has EUR appreciated against the USD? By raising
and CHF), and traditional risk on currencies at the                                      the threshold, we move towards oil price moves
opposite end of the graph (AUD, SEK).                                                    more consistent with supply-side shocks.

This idea is also supported by the correlation of
oil to the risk-on risk-off (RORO) factor (chart 2).
This shows that oil typically rises and falls along
with other risk assets.




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   Macro
   Currency Strategy                                                                                                                        abc
   March 2012




 2. Asset correlation with the strength of the “risk on / risk off” dynamic




 Source: HSCB, Bloomberg



In the traditional theory, supply-side shocks are                        the same analysis for the CHF. In general, it
viewed as a “risk off” events. In terms of                               illustrates that whatever the magnitude of the
currencies, this should suggest that the safe-haven                      price move in oil, both the JPY and CHF are
currencies such as the JPY and CHF would                                 roughly as likely to rise as fall against the USD. In
perform better as the weekly oil price increases                         fact, there is some dropping off in JPY
became more pronounced.                                                  performance for oil price increases greater than
                                                                         15%, although the relatively low number of
Chart 3 below shows the percentage of times in
                                                                         occurrences at this threshold makes us wary of
red the JPY has strengthened against the USD
                                                                         inferring too much from the result. Nevertheless,
when oil prices have risen by more than our
                                                                         it undermines the view that safe haven currencies
threshold (shown on the x-axis). Chart 4 shows
                                                                         might thrive during a supply-side shock. The


 3. JPY does not capitalise on big oil price rises...                         4. …and nor does the CHF

                                JPY                                                                         CHF
 100%                                                     100%                100%                                                  100%


   50%                                                    50%                   50%                                                 50%


    0%                                                    0%                     0%                                                 0%


  -50%                                                    -50%                 -50%                                                 -50%


 -100%              % of declines     % of increases      -100%               -100%              % of declines     % of increases   -100%
                                                                                         1%
                                                                                         2%
                                                                                         3%
                                                                                         4%
                                                                                         5%
                                                                                         6%
                                                                                         7%
                                                                                         8%
                                                                                         9%
                                                                                        10%
                                                                                        11%
                                                                                        12%
                                                                                        13%
                                                                                        14%
                                                                                        15%
                                                                                        16%
                                                                                        17%
            1%
            2%
            3%
            4%
            5%
            6%
            7%
            8%
            9%
           10%
           11%
           12%
           13%
           14%
           15%
           16%
           17%




 Source: HSBC, Bloomberg                                                      Source: HSBC, Bloomberg




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      Macro
      Currency Strategy                                                                                                                      abc
      March 2012




    5. AUD likes the big oil price gains...                                   6. …as does NZD
                                    AUD                                                                       NZD
    100%                                                      100%             100%                                                  100%

      50%                                                     50%               50%                                                  50%

       0%                                                     0%                 0%                                                  0%

     -50%                                                     -50%             -50%                                                  -50%


    -100%              % of declines       % of increases     -100%           -100%              % of declines      % of increases   -100%
               1%
               2%
               3%
               4%
               5%
               6%
               7%
               8%
               9%
              10%
              11%
              12%
              13%
              14%
              15%
              16%
              17%




                                                                                         1%
                                                                                         2%
                                                                                         3%
                                                                                         4%
                                                                                         5%
                                                                                         6%
                                                                                         7%
                                                                                         8%
                                                                                         9%
                                                                                        10%
                                                                                        11%
                                                                                        12%
                                                                                        13%
                                                                                        14%
                                                                                        15%
                                                                                        16%
                                                                                        17%
    Source: HSBC, Bloomberg                                                   Source: HSBC, Bloomberg



JPY’s underperformance may reflect its net-oil                              show the results for AUD and NZD, which have
importer status, and could be a more acute factor                           little or no oil production, but have a high correlation
given heightened reliance on oil imports given                              with measures of risk appetite. The picture is one of
disruption to nuclear power generation.                                     solid, sizeable and rising gains in an environment of
                                                                            higher oil prices. This is where the value of this type
Strange but true ─ AUD and NZD not
                                                                            of analysis comes in. As a shock to equities driven
bothered by oil price jumps
                                                                            by higher oil prices in practice this does not
There is scant evidence of discernment among safe                           automatically translate in a traditional “risk off”
haven currencies in the face of greater oil price rises,                    trade that includes selling the AUD or the NZD.
might there be some for the “risk on” currencies? By
rights, they should show diminishing performance                            NOK as expected
the greater the oil price increases. Large spikes in the                    Looking at G10 as a whole, the NOK
oil price produce a “risk off” impact and therefore                         encouragingly places where one would expect, at
AUD and NZD should fall. Chart 9 further on in the                          the top of the league table for out-sized oil price
piece illustrates this is certainly the case for equities.                  gains (chart 7). However, there really is not much
In fact, the opposite has proven true. Charts 5 and 6                       difference in performance between this and say


    7. Percentage of times the currency rises against the USD when oil prices are rising


    80%                                                                                                                               80%

    70%                                                                                                                               70%

    60%                                                                                                                               60%

    50%                                                                                                                               50%

    40%                                                                                                                               40%

    30%                                                                                                                               30%
                EUR           JPY         CHF       S&P500         CAD       SEK           GBP          NZD         AUD       NOK

                              Weekly oil price rise >5%      Weekly oil price rise >10%        Weekly oil price rise >15%


    Source: HSBC, Bloomberg




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   Currency Strategy                                                                                                             abc
   March 2012




NZD or AUD. Thus an oil price jump may cause                           returns. So too, the deficiency of the CHF and
investors to buy the NOK. However, for those                           JPY (chart 8) in a rising oil price environment,
tempted to long NOK against the NZD or AUD,                            again undermines the thesis that big oil price
on the basis of anticipated rises in oil prices,                       gains might trigger a large risk averse response in
history suggests it would not work. What we have                       FX. It again shows that as the oil price shocks get
learnt from this exercise is that it if you have a                     bigger, they are negative for the JPY although it is
view on oil, the simplest trade is through oil itself.                 a very muted response. The returns charts retain
Selling equities on the back of higher oil                             the same axis for the sake of comparison.
complicates matters further, while trying to sell
                                                                       However, the data suggests that outsized oil price
“risk on” currencies on the back of an expectation
                                                                       rises might be damaging to the S&P500 (chart 9),
of lower equities extends the sequence of logic
                                                                       with a substantial drop-off in performance the
too far and simply has not worked in the past.
                                                                       higher the oil price increase. Thus a supply-side
Size of the wave, not the motion of                                    shock to equities through oil may be damaging for
the ocean                                                              earnings but it does not cause a generalized move
The previous section examined the directional                          in FX. Hence, as before, the danger of extending
association between currencies and different                           the logic of oil price repercussions too far is
magnitudes of changes in the oil price. The chief                      potent. If oil were to rise a long way, the trade
conclusion is that bigger oil price movements do                       may be to sell equities, but not to sell the “risk
not appear to foster a uniform ‘risk off’ reaction                     on” currencies in response to equities which are,
among currencies. Hence when one buys NOK it                           in turn, responding to oil.
should not be against the traditional ‘risk on’                        Examining returns also reinforces the surprisingly
currencies such as the AUD.                                            lacklustre performance of the CAD against its
In this section, we instead examine currency                           commodity market peers (chart 10). Average
performance in terms of the average return against                     returns for the AUD, NZD and NOK have been
the USD when oil prices are rising. The                                substantially higher than for the CAD. To us, the
conclusion for the AUD and NOK are similar to                          one that is most intuitive is the NOK, so despite
the directional study, leading the pack in terms of                    the returns in AUD and NZD we would not rush


 8. JPY returns are paltry at best, and negative at worst

                                                             Av erage JPY return
  1.6%                                                                                                                   1.6%

  1.2%                                                                                                                   1.2%

  0.8%                                                                                                                   0.8%

  0.4%                                                                                                                   0.4%

  0.0%                                                                                                                   0.0%

 -0.4%                                                                                                                   -0.4%
             1%

                      2%

                           3%

                                4%

                                       5%

                                              6%

                                                     7%

                                                            8%

                                                                  9%

                                                                         10%

                                                                               11%

                                                                                     12%

                                                                                           13%

                                                                                                 14%

                                                                                                       15%

                                                                                                             16%

                                                                                                                   17%




                                                    Oil weekly return threshold
 Source: Bloomberg, HSBC




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      Macro
      Currency Strategy                                                                                                                      abc
      March 2012




    9. S&P500 appears more vulnerable to oil price shocks

                                                                Av erage S&P 500 return
    1.6%                                                                                                                             1.6%

    1.2%                                                                                                                             1.2%

    0.8%                                                                                                                             0.8%

    0.4%                                                                                                                             0.4%

    0.0%                                                                                                                             0.0%

    -0.4%                                                                                                                            -0.4%
                1%

                         2%

                                3%

                                      4%

                                                5%

                                                     6%

                                                           7%

                                                                 8%

                                                                        9%

                                                                              10%

                                                                                     11%

                                                                                           12%

                                                                                                 13%

                                                                                                         14%

                                                                                                               15%

                                                                                                                         16%

                                                                                                                               17%
                                                          Oil weekly return threshold
    Source: Bloomberg, HSBC




to buy them. However, what is also clear is one
should not rush to sell them either.

One additional noteworthy element relates to the
flipside of these currency moves, namely the USD
reaction. Although it shows negative average
returns whichever oil price rise threshold we
examine, which makes sense, those losses fade the
larger the oil price rises are (chart 11). That is, the
inverse relationship between oil and the USD
begins to break down. We argue that large oil
price moves are due to supply side shocks that
actually limit the fall in the USD.




    10. CAD returns have not matched other commodity currencies when oil prices are rising

                              Av g CAD return         Av g NZD return         Av g AUD return          Av g NOK return
     1.6%                                                                                                                            1.6%

     1.2%                                                                                                                            1.2%

     0.8%                                                                                                                            0.8%

     0.4%                                                                                                                            0.4%

     0.0%                                                                                                                            0.0%

    -0.4%                                                                                                                            -0.4%
                1%

                         2%

                                3%

                                      4%

                                                5%

                                                     6%

                                                           7%

                                                                 8%

                                                                        9%

                                                                              10%

                                                                                    11%

                                                                                           12%

                                                                                                 13%

                                                                                                        14%

                                                                                                               15%

                                                                                                                     16%

                                                                                                                               17%




                                                          Oil weekly return threshold
    Source: Bloomberg, HSBC




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   Macro
   Currency Strategy                                                                                                                            abc
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 11. USD suffers, but shows some safe haven potential

                                                  Av erage return - USD trade-w eighted (majors)
  1.6%                                                                                                                                  1.6%

  1.2%                                                                                                                                  1.2%

  0.8%                                                                                                                                  0.8%

  0.4%                                                                                                                                  0.4%

  0.0%                                                                                                                                  0.0%

 -0.4%                                                                                                                                  -0.4%

 -0.8%                                                                                                                                  -0.8%
             1%

                      2%

                           3%

                                   4%

                                           5%

                                                  6%

                                                        7%

                                                               8%

                                                                      9%

                                                                             10%

                                                                                     11%

                                                                                             12%

                                                                                                      13%

                                                                                                            14%

                                                                                                                    15%

                                                                                                                           16%

                                                                                                                                  17%
                                                       Oil weekly return threshold
 Source: Bloomberg, HSBC




Emerging markets show a more                                               For example, the following charts show
conventional reaction function                                             commodity plays such as the BRL and MYR fare
Conventional logic that higher oil price rises should                      substantially better than their regional oil
foster a “risk off” reaction in FX markets is not                          consuming peers of MXN and INR. Similar
borne out by the experience of G10 where some risk                         patterns are evident for ZAR against the CZK,
on currencies have surprisingly fared well even amid                       PLN and HUF. Here we see larger oil price spikes
outsized gains in oil. However, the traditional logic                      support the net-oil exporting MYR well, and it
is more evident in terms of the directional                                could be bought against the INR, for example. On
performance within the emerging market sphere. We                          the South American front, those anticipating big
would caution against reading too much into the                            oil price rises would be buying BRL against
very extreme thresholds for oil prices gains as the                        MXN, the latter restrained by its US association.
number of incidents is relatively low. Nonetheless,
the pattern of weaker “risk on” currencies and
stronger FX for oil producers is evident at lower
thresholds in many instances.


 12. MYR can thrive...                                                      13. …while INR suffers

                                MYR                                                                         INR
  100%                                                       100%            100%                                                       100%

   50%                                                       50%              50%                                                       50%

    0%                                                       0%                0%                                                       0%

  -50%                                                       -50%            -50%                                                       -50%

 -100%                                                       -100%          -100%                                                       -100%
                                                                                       1%
                                                                                       2%
                                                                                       3%
                                                                                       4%
                                                                                       5%
                                                                                       6%
                                                                                       7%
                                                                                       8%
                                                                                       9%
                                                                                      10%
                                                                                      11%
                                                                                      12%
                                                                                      13%
                                                                                      14%
                                                                                      15%
                                                                                      16%
                                                                                      17%
            1%
            2%
            3%
            4%
            5%
            6%
            7%
            8%
            9%
           10%
           11%
           12%
           13%
           14%
           15%
           16%
           17%




                  % of increases      % of declines                                         % of increases        % of declines

 Source: HSBC, Bloomberg                                                    Source: HSBC, Bloomberg




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     Currency Strategy                                                                                                  abc
     March 2012




 14. BRL gains on ever higher oil price rises               15. MXN becomes vulnerable at low thresholds

                             BRL                                                         MX N
  100%                                             100%     100%                                                100%

     50%                                           50%        50%                                               50%

      0%                                           0%          0%                                               0%

     -50%                                          -50%      -50%                                               -50%

 -100%                                             -100%    -100%                                               -100%
             1%
             2%
             3%
             4%
             5%
             6%
             7%
             8%
             9%
            10%
            11%
            12%
            13%
            14%
            15%
            16%
            17%




                                                                       1%
                                                                       2%
                                                                       3%
                                                                       4%
                                                                       5%
                                                                       6%
                                                                       7%
                                                                       8%
                                                                       9%
                                                                      10%
                                                                      11%
                                                                      12%
                                                                      13%
                                                                      14%
                                                                      15%
                                                                      16%
                                                                      17%
                 % of increases    % of declines                             % of increases     % of declines

 Source: HSBC, Bloomberg                                    Source: HSBC, Bloomberg




Conclusion – oil spike means buy                           The next three sections take an in-depth look at
NOK, BRL and MYR, sell JPY, INR                            how the high oil prices are likely to impact
and MXN                                                    currencies in Asia (page 11), EMEA (page 17)
The suggested FX strategies that economic logic            and Latam (pages 22).
suggests would thrive in an environment of higher
oil prices, either demand-led or due to supply-
shocks, are not always especially evident in terms
of actual historical performance. We concentrate
our efforts looking at the relationship between
currencies and oil price rises only. The results
show that large oil price rises, which could be
more consistent with supply-shocks rather than
demand-led gains, do not prompt weakness in
G10 “risk on” commodity currencies even if they
are not oil producers per se. Nor is there strong
evidence of increased strength in safe-haven
currencies amid faster rises in oil prices. Within
the G10 we find the NOK performs well but
should not be bought against the “risk on”
antipodeans even if equities move downwards.
Buying NOK-JPY would be a more appealing
strategy. Emerging markets better support the
thesis that higher oil price gains could drive “risk
on” currencies lower while benefiting the oil /
commodity producers. Here the Asian play could
be to buy MYR against the INR and in South
America one could buy BRL against MXN.




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Asia: Double, double t’oil
and trouble?
 A high oil price could introduce more volatility for Asian currencies
 The higher oil goes, the greater headwinds INR will face
 PHP could also be vulnerable, while MYR should be the major
   winner



Grease or sand in the wheels                           commodity prices, the potential impact on the
                                                       region’s trade balances and whether portfolio
We started this year believing there was room for
                                                       inflows started to slow because of concern about
Asian currencies to strengthen, even those on
                                                       re-emerging inflation in Asia.
which we have been cautious, such as the INR
and IDR (see Fight or flight). However, the strong     Either way, should the oil price strengthen further
recovery by these currencies also led us to            from here, at least, we would anticipate greater
consider scenarios that could halt, or ever reverse,   volatility for Asian currencies. INR would be
their appreciation (see The Fast and the Furious).     most at risk and we believe the best expression of
One of these risk factors was rising commodity         relative value from differential vulnerabilities to
prices, in particular energy prices. Following on      oil in the region is to be long MYR-PHP
from the previous section, we take a closer look at
                                                       We would also continue to prefer currencies with
what rising oil prices in particular may mean for
                                                       largest external buffers, as we have previously
Asian currencies.
                                                       highlighted, such as RMB, SGD and KRW.
One question being asked is whether recent oil
prices rises have been – geopolitics aside –           Asian FX – oil and vinegar
demand-driven, or a response to further potential      Much depends on the nature of a potential
easing by major central banks.                         continued rise in oil prices. Putting the clearly
                                                       negative geopolitical supply shock scenario to one
If it becomes clearer that the global economy is
                                                       side, the debate for markets is whether the latest
reflating at a swift pace, then the upward pressure
                                                       upturn in the oil price is more demand-driven, is a
on Asian currencies will intensify despite a
                                                       temporary QE-fuelled rally, or is a combination of
strengthening oil price, although the likes of INR
                                                       both, as our Asian economics team believes.
would still be more vulnerable than others.

In a QE-induced, USD-lower for longer scenario,
we still think Asian currencies would appreciate.
But much would depend on the reaction of


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 1. Major centrals’ balance sheets to the rescue?                                2. One consequence of more QE…a higher oil price
          Balance sheet, Jan-2008=100                                                        USDbn
 350                                                                             3200
 300                                                                                                                                                           110
                                                                                 2900
 250                                                                                                                                                           90
                                                                                 2600
 200
                                                                                 2300                                                                          70
 150
                                                                                 2000                                                                          50
 100
     50                                                                          1700                                                                          30
                                                                                       Jan-09              Jan-10             Jan-11                 Jan-12
      Jan-05          Jan-07                Jan-09             Jan-11
                       ECB                 Fed             BOE                               Fed balance sheet USDbn                      Oil (USD bbl, rhs)

 Source: Bloomberg, HSBC                                                         Source: Bloomberg, HSBC




For example, we have earlier pointed out the                                    on implication is that Asian currencies are at risk
degree to which major central banks have once                                   of trading with greater volatility.
again expanded their balance sheets (charts 1 and
                                                                                Path-dependent, but more Asian FX volatility
2). We would tread with some caution when
                                                                                For example, major central banks trying to reflate
interpreting the resilience of the oil price as a
                                                                                their economies through unconventional policies
direct result of QE.
                                                                                could help stimulate growth elsewhere, in turn
The QE justification alone is incomplete when                                   leading to greater demand for commodities. This
considering that other commodities such as                                      inflation would be demand-driven and by nature
industrial metals have not benefitted in the same                               should be positive for most Asian currencies. This
way (charts 3 and 4). This suggests that at the                                 is at least how most recent oil price rally episodes
very least, what is causing the rise in oil prices is                           started off.
impacting other economic variables in a different
                                                                                Chart 5 shows the change in the oil price and
way than in past episodes of rising oil prices.
                                                                                movement by Asian currencies versus the USD
Ultimately, we believe that the impact to Asian                                 after the Fed’s QE1 and QE2. The 2009 period
currencies from higher oil prices will be path-                                 was very pronounced in terms of the QE impact
dependent, but regardless of the cause, the knock-                              on both the oil price and Asian currencies with a


 3. Oil is strong relative to industrial metals like nickel                      4. Oil has also significantly outperformed gold
  115                                                                   31000    115
                                                                                                                                                              1900
  105                                                                            105
                                                                        26000
                                                                                                                                                              1700
     95                                                                           95

                                                                        21000                                                                                 1500
     85                                                                           85


     75                                                                 16000     75                                                                          1300

      Jan-11     Apr-11          Jul-11        Oct-11       Jan-12                  Jan-11       Apr-11          Jul-11        Oct-11       Jan-12


                           Ny mex front oil contract (USDbbl, lhs)                                         Ny mex front oil contract (USDbbl, lhs)

                           Nickel generic contract (USD-MT)                                                Gold (USD per troy oz.)


 Source: Bloomberg, HSBC                                                         Source: Bloomberg, HSBC




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 5. Oil prices and Asian currency performance

  25%                                                                                                                                           -100%
                                    HSBC Pan Asia index (USD-Asia y /y )
  20%                               Oil (y /y , inv erted, rhs)
                                                                                                                                                -60%
  15%
                                                           Fed QE 1 and QE2
  10%                                                                                                                                           -20%
   5%
   0%                                                                                                                                           20%

  -5%
                                                                                                                                                60%
 -10%
 -15%                                                                                                                                           100%
       Dec-00              Aug-02            Apr-04             Dec-05        Aug-07                Apr-09              Dec-10

 Source: Bloomberg, HSBC




V-shaped recovery unfolding in many Asian                                  So, this leaves the view that the QE-oil impact
economies. Importantly, the high oil price was not                         for Asian currencies is path-dependent. But
a significant barrier to the Asian currency strength                       under both paths, we believe Asian currencies
in these periods. This only occurred more notably                          would be at risk of trading with greater volatility
when the QE stimulus stopped.                                              and some currencies would not manage the
                                                                           impact as well as some others would.
However, the main concern with the QE policies
of major central banks would be if they only                               This is because respective trade balances would
triggered a so-called ‘sugar high’ or what could be                        be at risk to deterioration whilst capital inflows
considered a supply side squeeze to energy prices,                         could be more volatile should inflationary
without much boost to aggregate demand. If the                             pressures prove stickier (charts 6 and 7).
oil price strengthens too quickly and it is not
                                                                           From an individual currency perspective, we
demand-driven, then Asian currencies should
                                                                           believe the INR would face the greatest
suffer, as the market becomes concerned about the
                                                                           headwinds given India’s relatively weaker
negative impacts on growth and inflation.
                                                                           trade position.



 6. Asia’s trade balance at risk with a higher oil price                      7. Asian equity flows turned when oil prices rose quickly

 USD bn, ex HK                                        USD bn, ex HK           160                                                                   200
 60                                                              60
                                                                                                                                                    160
  40                                                              40          120

  20                                                              20                                                                                120
                                                                              80
   0                                                              0
                                                                                                                                                    80
 -20                                                              -20
                                                                              40
                                                                                                                                                    40
 -40                                                              -40
 -60                                                              -60           0                                                                   0
   Jan-05             Jan-07        Jan-09            Jan-11                    Mar-03     Sep-04       Mar-06    Sep-07    Mar-09    Sep-10

                      Headline                            Oil                        Oil (USD bbl, lhs)          Cumulative equity flows to Asia (USDbn)

 Source: CEIC, HSBC                                                           Source: Bloomberg, HSBC




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 8. Asia’s proportion of exports and imports in oil                                 9. India’s trade balance without oil and gems isn’t too bad

 40%                                                                                USD bn, 3mma                                                      USD bn, 3mma
                                                                                     5                                                                          5
 30%                                                                                  0                                                                          0

 20%                                                                                 -5                                                                          -5
                                                                                    -10                                                                          -10
 10%
                                                                                    -15                                                                          -15
     0%                                                                             -20                                                                          -20



                                                                                          Jan-05

                                                                                                      Jan-06

                                                                                                               Jan-07

                                                                                                                        Jan-08

                                                                                                                                   Jan-09

                                                                                                                                             Jan-10

                                                                                                                                                       Jan-11
                        CN HK       IN      ID   KR MY PH SG TW TH

                        Oil as % of total        Ex ports          Imports
                                                                                                    Trade balance                       ex oil, gems & jew ellery

 Source: CEIC, HSBC                                                                 Source: RBI, CEIC, HSBC




Drilling down further: INR most                                                    natural shortage of dollars caused by this trade
vulnerable                                                                         deficit means the INR is very sensitive to broad
Chart 8 shows Asian countries’ exposure to oil                                     USD liquidity pressures, as we saw late last year
from both an import and export perspective. For                                    (chart 11). A wider deficit due to higher oil prices
India, oil accounts for over 30% of imports.                                       would only exacerbate this vulnerability.
Indeed, most of India’s trade deficit comes from                                   Despite easing USD liquidity pressures, this
oil and precious metals. Excluding those items                                     deficit drag could reintroduce a source of greater
would leave India’s trade position in much better                                  volatility to the INR, particularly if inflation
shape (chart 9).                                                                   concerns also threaten portfolio inflows.
Also, India’s oil demand is largely inelastic, so                                  We recognise that demand-driven strength of the oil
rising prices have resulted in an increased trade                                  price is a better scenario for Asian currencies than a
deficit, thereby adding to the imbalances in the                                   supply side squeeze or shock. But under either
domestic economy (chart 10).                                                       scenario, the INR is likely to be the currency that
This can act as a drag on the INR and is                                           would struggle most in Asia. The offsetting feature
particularly problematic when the market is                                        is the fact that the INR’s carry is very high. So, it
suddenly in need of dollars. In other words, the                                   would be costly to sell it from an investor’s



 10. India’s trade deficit has widened with higher oil prices                       11. The INR is sensitive to USD liquidity pressures

                       5                                                            55                                                                          -120

                       0                                                            53                                                                          -100
     Trade bal, $bn




                                                                                    51                                                                          -80
                       -5
                                                                                    49                                                                          -60
                      -10
                                                                                    47                                                                          -40
                      -15                                                           45                                                                          -20
                      -20                                                           43                                                                          0
                            0               50               100             150     Jan-11          Mar-11         Jun-11       Sep-11      Dec-11
                                            Brent crude, $/bbl                                     USD-INR              EUR-USD 12m x -ccy basis (rhs, inv )

 Source: Bloomberg, HSBC                                                            Source: Bloomberg, HSBC




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perspective, particularly if such risks are very much               in recent years, they may not be enough to offset the
path-dependent as we argue. Hence, we would look                    widening trade deficit under the above scenario.
for other ways to play the higher oil price story,
                                                                    …but MYR would glide
given that there is quite a divergence in oil
                                                                    Malaysia continues to be Asia’s chief commodity
exposures amongst Asian currencies.
                                                                    exporter, with a crude and palm oil surplus that
MYR-PHP the best expression of                                      accounts for close to 50% of its large trade
relative vulnerability to oil                                       surplus. This also removes the fiscal constraint
Rather than through INR, we believe long MYR-                       over the fuel subsidy regime, giving authorities
PHP is a more attractive expression of relative                     more flexibility on how much inflation pass-
vulnerability to the threat of high oil prices,                     through to allow. Combined with the BNM’s
particularly as it is a small positive carry trade in               strong stance on inflation in recent years, MYR
tenors further out than 1m.                                         would also be less at risk of fears of a weakening
                                                                    growth-inflation mix, and of policy paralysis.
PHP could also skid through an oil slick…
PHP too would likely face more headwinds if oil                     IDR also vulnerable… to inflation
prices picked up further, with PHP net oil deficit                  Perhaps of all currencies in Asia, the IDR has the
worth nearly 60% of the 2011 trade deficit. In                      most complex relationship with oil prices.
fact, the combination of the most recent rise in oil                Although Indonesia is a crude oil exporter, it
and underperformance of exports have eaten                          actually has a material net oil deficit and sees a
significantly into the previously large remittances                 continuously rising fuel subsidy bill. Hence, a
buffer (chart 12). A quick calculation would                        three-way dynamic between trade, fiscal policy
suggest that an oil price of around USD140/bbl,                     and inflation under the influence of rising oil
all things being equal, would lead to the trade                     prices makes it difficult to assess the impact to the
deficit fully offsetting remittances inflows.                       currency in a systematic framework. We have
                                                                    been highlighting for some time the vulnerability
 12. Oil induced trade deficit could wipe out remittance gains
                                                                    we expect IDR to face this year from inflation
  3                                                                 risks (see Rupiah walking a tightrope,
        USDbn
  2                                                                 18 November 2011).
  1
                                                                    And so we expect this to be the dominant channel
  0                                                                 between oil prices and the IDR this cycle. This
 -1                                                                 was underscored by a recent comment by the BI
 -2                                                                 governor1, that a fuel subsidy cut would likely
  Jan-07       Jan-08       Jan-09      Jan-10    Jan-11   Jan-12   push inflation above the target range. Thus, we
                                                                    would group IDR in the more vulnerable side of
             Trade                   Remittance            Net
                                                                    the spectrum of Asian currencies under the
 Source: CEIC, Bloomberg, HSBC
                                                                    influence of higher oil prices.

Meanwhile, given the smaller size of Philippines
asset markets, and its status as a non-investment
grade country, portfolio flows could prove more
difficult to come by than elsewhere. While such
                                                                    1
inflows to the Philippines have no doubt increased                    Jakarta Globe, “Subsidized Fuel Price Increase Could Spur Inflation,
                                                                    BI Says” 23 Feb 2012



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Middle of the road for the rest                          Thus at least for those currencies, the threat to
Meanwhile, it is likely that the other currencies        trade flows remains marginal, rather than critical.
will fall somewhere in the middle. Some (KRW,            And assuming continued net USD inflows from
TWD, THB) may have a larger net oil deficit as a         the current account, there will be fewer funding
percentage of GDP than the PHP. However, these           pressures compared to PHP and INR.
destinations run sizable trade surpluses. Even if        Finally, these currencies that have had the largest
one argues that from a macro perspective, such           surpluses have naturally seen the most reserve
open economies would also suffer from the                accumulation as well. The bottom line is quality
double toil of a contraction in external demand in       matters – and hence our continued preference for
addition to a higher oil bill, the surpluses are large   RMB, SGD, MYR, and KRW.
enough such that the existence is not under threat,
as it is in PHP.




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Oil & EMEA:
How to trade it?
 Rising oil prices benefit Russia. Turkey and Israel are hurt through
      the trade channel, CEE through the inflation channel
 If the oil price rise continues, long RUB and ZAR vs TRY are
      attractive trades



Macro view: Is this the                                     covered in detail in the previous publication:
Groundhog Day for oil?                                      Vulnerability to the Middle East and North
                                                            Africa: What MENA has in store for EMEA,
Oil prices are rising again and, as we have
                                                            2 March 2011.
witnessed repeatedly over the past few years, it
turns market attention to winners and losers.               The first part of this section deals with the
These are not too difficult to identify in the              macroeconomic outlook for the EMEA region,
Emerging EMEA region, as the major oil                      and we re-examine the list of winners and losers
exporters, Russia and Kazakhstan, are the clear             we presented in the report referenced above. As
winners, with most of the remaining larger                  with our previous analysis, we find that the direct
economies in our EMEA coverage unfortunately                macro transmission channels are trade and
losing from rising oil prices due to their net              inflation, whereas sentiment and expectations
importer status. The most outstanding ones are              constitute the indirect channel of impact.
Turkey and Israel, which are impacted negatively
through the trade channel. These have been

Table 1. Energy trade in CEEMEA
Share of petroleum and natural gas imports in total (%)
                                  2006               2007    2008           2009            2010             2011
Czech Republic                     8.8                7.2     9.3             7.9            8.2              8.9
Hungary *                          9.8                8.4    11.1             8.9            9.3             10.0
Poland **                          3.5                6.1     6.9             5.7            4.9              4.5
Romania *                         12.5                9.6    11.2             8.8           10.2              9.8
Israel                            13.9               14.1    17.0            14.6           15.6             16.4
Turkey                            20.7               19.9    23.9            21.2           20.7             22.5
South Africa                      14.0               13.8    16.9            16.3           13.4             14.2
Share of petroleum and natural gas exports in total (%)
                                  2006               2007    2008           2009            2010             2011
Russia                            61.0               59.2    63.4           59.6            60.9             62.3
Source: CEIC
* 2011 is Jan-Nov data
** 2011 is HSBC estimate




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  1. Net energy imports as percent of energy use (2009)

   100                                                                                                                  84.8
                                                                                                           69.0
    80                                                                                        55.7
    60
                                                                  25.7           28.2
    40                                                 17.8
    20
     0
   -20
                                             -11.5
   -40
   -60
   -80
  -100              -82.6
                   Russia              South Africa   Romania    Czech          Poland      Hungary       Turkey        Israel
                                                                R epublic

  Source: WDI




With regards to the impact on trade and the                                 Once again, Turkey and Israel’s dependency on
current account, we measure “energy                                         imported energy is clear, with the CEE4 countries
dependence” using two approaches. First, we take                            following in tow with slightly lower ratios. South
a look at imported energy as a share of a country’s                         Africa appears as a net exporter in chart 1 because
total imports. Turkey, Israel, and South Africa all                         of its bituminous coal exports, but the country is a
import significant amounts of energy-related                                net importer of both crude oil and natural gas.
items (predominantly oil and natural gas),                                  Poland is also a significant coal producer, but coal
corresponding to c15%, if not more, of their total                          exports correspond to less than 1% of the country’s
import volumes on average. The Central &                                    total exports.
Eastern European (CEE) countries, the Czech
Republic, Hungary, and Romania follow with                                  Rising oil prices clearly impact inflation dynamics,
nearly 9.0%-10% each, and Poland comes in last                              too. To gauge the relative vulnerabilities, we look at
with only c5.0%. Russia and Kazakhstan are the                              the weight of energy-related items in each of the
two countries in the exporter category. We focus                            EMEA countries’ consumption baskets. For ease of
on Russia here and its total energy exports                                 comparison across countries, we only include
correspond to 62% of the total as of 2011, while                            natural gas, liquid fuel, and petroleum in the energy
its energy imports are negligible (table 1).                                category (table 2).

Our second measure looks at the share of net energy                         Here, the Central & Eastern European countries
imports in total domestic consumption (chart 1).                            appear as the most exposed. But this does not tell


Table 2. Weight of energy* in the CPI basket (%)
South Africa                                                             4.5
Israel                                                                   4.7
Czech Republic                                                           6.2
Russia                                                                   7.4
Turkey                                                                   7.7
Hungary                                                                  11.0
Romania                                                                  11.5
Poland                                                                   11.6
Source: National statistical offices, CEIC
* Household utilities and transportation fuel




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the whole story. In Turkey, the inflation angle is                 FX view: Prefer ZAR or RUB
less straightforward than trade since Turkey                       vs TRY
imposes heavy taxes on refined fuel product
                                                                   At first sight, the reaction of EMEA currencies to
prices, which dampen the impact of crude oil
                                                                   the increase in oil prices has been very
price changes Turkey also relies heavily on
                                                                   conventional. The Rouble has been the winner,
hydrocarbons for power generation, hence the oil
                                                                   given the strong positive relationship between oil
price shocks are also transmitted through
                                                                   prices and the Russian trade surplus. On the other
electricity prices.
                                                                   side of the spectrum, the Israeli shekel and
In sum, as far as the macro dimension is                           Turkish lira have weakened and have
concerned, Russia is the clear beneficiary of rising               underperformed the other currencies of the region.
oil prices, whereas Turkey and Israel are impacted                 Israel and Turkey are indeed the most dependent
most negatively through the trade channel among                    countries on gas and petroleum imports. The
the Emerging EMEA countries in our coverage.                       dependence on oil is less important in central
CEE countries, excluding the Czech Republic, are                   Europe and there is no strong evidence that the
the most vulnerable through the inflation channel                  increase in energy prices has had a significant
due to the high weight of energy-related items in                  impact on CEE-3 currencies.
the consumption basket.
                                                                   It is worth emphasising that oil does not entirely
                                                                   explain the recent price action. Geopolitical risk is
                                                                   an important parameter for a currency like the
                                                                   Israeli Shekel. Moreover, we cannot downplay the
                                                                   impact that the signs of monetary policy
                                                                   relaxation in Turkey have had on the lira recently.

                                                                   Beyond the consequences for current account
                                                                   balances and ultimately for currencies that rising oil
                                                                   prices may have, statistical analysis may help to
                                                                   determine how currencies perform relative to oil.



 3. Currency correlations with oil prices

 0.60                                                                                                               0.60

 0.50                                                                                                               0.50

 0.40                                                                                                               0.40

 0.30                                                                                                               0.30

 0.20                                                                                                               0.20

 0.10                                                                                                               0.10

 0.00                                                                                                               0.00
                CZK             ILS         TRY              HUF             PLN          ZAR            RUB
                                            3m correlation            1Y correlation

 Source: HSBC, Bloomberg




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Looking at correlation of each currency in the                                difficult to explain from a macro fundamental
EMEA region against the US dollar, it emerges that                            standpoint. But our approach here is to highlight
the Rouble and the Rand are the most correlated,                              how EMEA currencies have behaved in response
while the Czech Koruna and Israeli Shekel are the                             to previous oil price rises not how they should
least correlated among EMEA currencies (chart 3).                             behave based on a macroeconomic analysis.
Admittedly, the negative correlation between oil
                                                                              It is worth noting that the rand strengthened most
and the US dollar plays an important role in the
                                                                              of the times when the oil prices went up and the
results. The fact that CEE-3 are mainly EUR-block
                                                                              speed of the rise in oil prices exacerbated the
currencies is another perturbing factor. However,
                                                                              upward movement of the ZAR against the USD
the correlation gives a good sense of the
                                                                              (chart 5). This phenomenon may be explained by
performances on a relative basis.
                                                                              the fact the ZAR has a commodity angle. So if oil
In the first section of this publication (see pages 3-                        prices rise and other commodity prices continue to
10), we examined weekly oil price changes dating                              rise in tandem with oil then this is not a negative
back to 1999, identifying those occasions when oil                            for the ZAR. We saw the same phenomenon for
prices rose. We then calculated the percentage FX                             the AUD and the NZD. For the TRY, the picture
moves when oil prices rose by a given amount. We                              is different. The TRY generally weakens against
now repeat this analysis for EMEA currencies.                                 the USD when oil prices have risen slowly (>5%
                                                                              but < 10%) shown by the red bars. As oil prices
TRY takes the underperformer seat
                                                                              rise more aggressively, TRY generally holds its
Chart 4 shows that EMEA currencies tend to rise                               value against an under-performing USD.
against the USD when oil prices are rising                                    Therefore, on a relative basis it is the worst
although the relative performances change with                                performer in the region (chart 6).
the threshold. The RUB shows the most stable
results; strangely, the ZAR and ILS appear the
main beneficiaries of oil price spikes. The TRY
emerges as the underperformer. The results are
surprising and counterintuitive when it comes to
the behaviour of the ZAR and the ILS. They are


 4. Percentage of times the currency rises against the USD when oil prices are rising

 100%                                                                                                                              100%
  90%                                                                                                                              90%
     80%                                                                                                                           80%
     70%                                                                                                                           70%
     60%                                                                                                                           60%
     50%                                                                                                                           50%
     40%                                                                                                                           40%
     30%                                                                                                                           30%
     20%                                                                                                                           20%
     10%                                                                                                                           10%
      0%                                                                                                                           0%
                  CZK                 HUF              TRY              PLN               RUB             ILS                ZAR
                           Weekly oil price rise >5%         Weekly oil price rise >10%         Weekly oil price rise >15%

 Source: HSBC, Bloomberg




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 5. The rand is the outperformer                              6. The lira is the underperformer

                               ZAR                                                           TRY
  100%                                                100%    100%                                                   100%


   50%                                                50%       50%                                                  50%


    0%                                                0%         0%                                                  0%


  -50%                                                -50%     -50%                                                  -50%

                   % of declines     % of increases           -100%              % of declines      % of increases   -100%
 -100%                                                -100%

                                                                         1%
                                                                         2%
                                                                         3%
                                                                         4%
                                                                         5%
                                                                         6%
                                                                         7%
                                                                         8%
                                                                         9%
                                                                        10%
                                                                        11%
                                                                        12%
                                                                        13%
                                                                        14%
                                                                        15%
             1%
             2%
             3%
             4%
             5%
             6%
             7%
             8%
             9%
            10%
            11%
            12%
            13%
            14%
            15%




 Source: HSBC, Bloomberg                                      Source: HSBC, Bloomberg




If the oil price rise continues, long
RUB and ZAR vs TRY are attractive
trades
All in all, the results of the macro and the
statistical analyses converge on some currencies.
For investors wanting to play the upward
movement of oil prices in the EMEA FX space,
we recommend buying the RUB and if other
commodity prices rise in tandem with oil then one
should also buy the ZAR. Note that the RUB has
already performed very strongly and there is
probably more value in the ZAR. Although the
ILS appears also reacting quite well to the rise in
oil prices, a cautious approach is warranted as the
geopolitical risk may remain a negative factor. On
a relative basis, long RUB and ZAR against the
TRY are the most attractive trades, if one believes
the oil price rise will continue.




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Oil and Latam FX:
How do they mix?
 We look at the reaction function between higher oil prices and
      Latam currencies
 BRL tends to perform best on large weekly oil price rises, and
      MXN worst
 We also examine each Latam country’s oil balance and discuss
      how higher oil prices might impact the currencies going forward



What do higher oil prices                                     are a number of countries that enjoy a healthy oil
mean for Latam FX?                                            ‘surplus’, notably Venezuela, Brazil, Ecuador and
                                                              Colombia. Mexico is also a major exporter of oil,
In this report we continue our theme of looking at
                                                              but it imports significant amounts of refined oil,
the rise in oil prices that we have also discussed
                                                              which means its net oil exports are not as large as
for other regions and assets in other recent
                                                              imagined. Mexico’s economy is also closely tied
publications. Here we discuss the likely
                                                              to the US economy, the latter of which tends to be
implications that further rises in oil prices may
                                                              negatively impacted by higher oil prices, and
have for the currencies in Latin America.
                                                              hence the reaction function for the Mexican peso
As a region, Latin America remains a net oil                  to rising crude prices is far from clear.
importer (see chart 1), but within the region there
                                                              Chart 2 illustrates the rolling 3-month correlations
 1. Latin America’s oil supply/demand as a region             (of the percentage daily differences) between
 mb/d                                                         crude oil prices and HSBC’s Latam FX Index,
7.0                                                           using NY closing prices. As can be seen, since the
6.5
                                                              global financial crisis the correlation has generally
6.0
5.5                                                           averaged between 0.4-0.6, but there are periods
5.0                                                           where it dips lower, and in 1Q 2011 it fell into
4.5                                                           negative territory briefly. This was when oil rose
4.0
3.5
                                                              quite sharply thanks to the beginning of the ‘Arab
3.0                                                           Spring’ in the Middle East where fears of major
          2008      2009          2010      2011    2012(f)   supply disruptions sent oil prices sharply higher.
                         Supply    Demand                     At the same time, Latam currencies were
 Source: IEA                                                  generally range-bound though March of last year.



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   March 2012




 2. Oil correlations with the HSBC Latam FX Index

 1 .0

 0 .8

 0 .6

 0 .4

 0 .2

 0 .0

 -0 .2

 -0 .4
    Se p -0 8                 M a r-0 9               Sep -09                 M ar-10            Sep -1 0           M ar-11              S e p-1 1
                                          3 -m th ro llin g co rre latio n b etwee n oil a nd HSB C L atam FX Ind e x       C rud e O il (RHS)

 Source: Bloomberg, HSBC



This is a good reminder that oil price shocks due                               How have Latam currencies
to geopolitical events can result in independent                                reacted to oil in the past?
movements in the oil price that are not matched
                                                                                In this section we look at the historical
by other ‘risk on’ assets. In other words, if we did
                                                                                performance of Latam currencies vs oil prices,
see a major geopolitical event that should send oil
                                                                                specifically the freer floating ‘Latam majors’ of
prices much higher, we believe Latam currencies
would weaken, even those currencies where the                                   BRL, CLP, COP and MXN. Chart 4 illustrates
country is a net oil exporter. We might assume that                             their correlations with oil. We looked at three-
heightened geopolitical concerns would see the                                  month rolling correlations of percentage daily
S&P move in the opposite direction to oil,                                      differences and priced oil in SDRs instead of USDs
something we have not seen yet in the recent oil                                to remove some of the natural inverse relationship
rally (see chart 3). Without taking a view on                                   normally seen between oil and the USD.
equities, this could suggest that it is not just
                                                                                As can be seen the correlations are quite volatile
geopolitical concerns that are pushing oil prices
                                                                                and not particularly strong, although generally
firmer, but also demand factors are contributing to
                                                                                they are positive. Given that in broad terms both
the rise in energy prices.
                                                                                oil and Latam currencies might be considered
 3. S&P and oil – still moving together                                         ‘risk on’ assets, and given the strong risk on/risk
1500                                                                 125        off dynamic we have seen in the market since the
                                                                                global financial crisis, a positive correlation is not
1300
                                                                     100        too surprising. The periods when the correlations
1100                                                                            dipped into negative territory were in the nadir of
                                                                     75         the post-Lehman crisis and the ‘Arab Spring’ of
 900                                                                            early 2011. This implies that during periods of
 700
                                                                     50         heightened volatility we may see the naturally
                                                                                positive correlations break down.
 500                                                                 25
    Jan-09             Jan-10              Jan-11           Jan-12
                           S&P500 Index       Crude oil

 Source: Bloomberg, HSBC




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       March 2012




 4. 3-mth rolling correlations oil/SDR vs the freer floating       tend to do better as oil prices rise, but only up to a
 Latam currencies
                                                                   point after which results are more balanced 50/50.
 0.8
                                                                   Finally the MXN does the least well when weekly
 0.6
                                                                   oil price gains increase, and we discuss the likely
 0.4
                                                                   reasons behind this in the country section on
 0.2                                                               Mexico later in this report.
 0.0
                                                                   From these data, we would suggest that in an
-0.2                                                               environment of sharp oil prices rises investors
-0.4                                                               should look to buy BRL vs MXN.
   Jan-08         Jan-09      Jan-10        Jan-11        Jan-12

                  BRL       CLP          COP          MXN          Assuming demand-led oil
 Source: Bloomberg, HSBC
                                                                   price increases
                                                                   While it’s true that some supply side concerns are
Reaction to weekly oil price gains                                 likely responsible for the recent rise in oil prices,
Below we examine how these Latam exchange                          notably concerns over Iran and broader gulf
rates have behaved in the past in a rising oil price               supplies, importantly we have not seen a major
environment. This was an exercise we carried out                   shock that has sent prices sharply higher. Rather,
for the major currencies and select EM currencies                  the rise has been more gradual, and other factors
in the first section of this publication (pages 3-10).             have also likely contributed, not least some
Here we expand this analysis to include CLP and                    improvements in US economic data, and ongoing
COP as well as BRL and MXN that were in the                        strong demand form Asia (see Oil is the new
above-referenced section.                                          Greece, 2 March).

We look at weekly rises in oil prices and as these                 Given that geopolitically-induced oil price shocks
weekly rises get bigger, how currencies in Latam                   will have a harmful outcome for other asset
tend to react: the percentage of occasions the                     prices, including Latam FX, we make the
currencies gain vs the USD. Very large oil price                   assumption that oil prices continue to rise through
gains in a week would perhaps imply some kind                      a combination of increased demand and
of supply-side shock, while lesser gains may be                    speculation, with perhaps also some non-
more associated with demand-led oil increases.                     catastrophic supply concerns. Under these
                                                                   assumptions, we look below in more detail at each
In charts 5-8 on the next page we show the
                                                                   of the major Latam countries, and discuss the
reaction of the Latam currencies to these weekly
                                                                   expected implications of such a rise in oil prices
oil gains. One caveat to note with the data,
                                                                   for their currencies. Table 1 below shows each
however, is that there are very few data points for
                                                                   country’s energy and non-energy commodity
weeks when oil prices rose excessively.
                                                                   balances during 2011.
The most notable currency is the BRL, where we
see the currency do increasingly well with larger
weekly oil price gains. The BRL gained 100% of
the time when oil prices rose more than 15% in a
week (again, note, few data points). CLP and COP
show similar results to one another – that is, both



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  5. BRL gains on ever higher oil price rises                                     6. CLP does less well with large oil gains

                                      BRL                                                                         CLP
   100%                                                             100%           100%                                                      100%

    50%                                                             50%             50%                                                      50%

      0%                                                            0%               0%                                                      0%

    -50%                                                            -50%           -50%                                                      -50%

  -100%                                                             -100%         -100%                                                      -100%
              1%
              2%
              3%
              5%
              7%
              9%




             17%




                                                                                            16%
              4%
              6%
              8%
             10%
             11%
             12%
             13%
             14%
             15%
             16%




                                                                                             1%
                                                                                             3%
                                                                                             5%
                                                                                             6%
                                                                                             7%
                                                                                             8%
                                                                                            10%
                                                                                            11%
                                                                                            12%
                                                                                            13%
                                                                                            14%
                                                                                            15%
                                                                                            17%
                                                                                             2%
                                                                                             4%



                                                                                             9%
                    % of increases           % of declines                                       % of increases       % of decreases

  Source: Bloomberg, HSBC                                                         Source: Bloomberg, HSBC



  7. COP generally improves with higher oil                                       8. MXN eventually struggles with rising oil

                                      COP                                                                         MXN
   100%                                                             100%           100%                                                      100%

    50%                                                             50%             50%                                                      50%

      0%                                                            0%               0%                                                      0%

   -50%                                                             -50%           -50%                                                      -50%

  -100%                                                             -100%         -100%                                                      -100%
                                                                                             1%
                                                                                             2%
                                                                                             3%
                                                                                             5%
                                                                                             7%
                                                                                             9%
                                                                                            11%
                                                                                            13%
                                                                                             4%
                                                                                             6%
                                                                                             8%
                                                                                            10%
                                                                                            12%
                                                                                            14%
                                                                                            15%
                                                                                            16%
                                                                                            17%
              1%
              3%
              5%
              7%
              8%
              9%
             10%
             11%
             12%
             13%
             14%
             15%
             16%
             17%
              2%
              4%
              6%




                     % of increases           % of declines                                        % of increases       % of declines

  Source: Bloomberg, HSBC                                                         Source: Bloomberg, HSBC



Table 1: Breakdown of energy vs non-energy commodity trade balances in Latam in 2011 (USDbn)
USDbn                    Exports Commodity _____ Commodity _____                  Imports     Commodity          ____ Commodity ______         Trade
                           Total     Total    Energy Non-Energy                     Total         Total             Energy Non-Energy        Balance

ARS                             84                27            6            20        74                   31           9              22          10
BRL                            256               139           30           109       226                   60          36              24          30
CLP                             81                50          0.2            49        70                   39          14              25          11
COP                             57                46           36            10        55                   14           4              10           2
MXN                            350                89           56            34       351                   66          35              31          -1
PEN                             46                33            5            28        36                   17           6              12          10
VEF*                            68                66           64             2        34                    2           0               2          34
* VEF assuming 1.6m bbl daily exports at $110/bbl
Source: CEIC, Datastream, National Stats webpages, EIA




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     March 2012




Argentina                                              net liquid fuel exporter, mainly thanks to
Argentina is an oil producer and, despite a            expanding crude oil exports.
combination of flagging production and rising           9. Brazil’s energy needs are rising, but so are exports
demand, the country is still a net oil exporter.       40
However, its oil surplus is relatively small and its   35

total energy trade balance is slightly negative.       30
                                                       25
A more-or-less balanced energy account means           20

less of a reaction to the country’s trade balance      15

emanating from oil price changes. Therefore, one       10
                                                        5
may not expect there to be too much of a reaction
                                                        0
to oil price shifts for the ARS. On top of that, the          2005     2006      2007     2008      2009     2010      2011
central bank keeps a very tight grip on the FX                Annual energy exports (USDbn)   Annual energy imports (USDbn)

market and movements in USD-ARS. Therefore,             Source: IEA

in the case of Argentina, there tends not to be
much reaction for the currency to immediate oil        Chart 9 shows Brazil’s annual energy exports and
price changes.                                         imports, showing that both are trending upwards,
                                                       though exports are expected to grow more rapidly
That said, there are certainly longer-term
                                                       in the years ahead. Brazil should therefore become
implications for higher energy prices more
                                                       a net beneficiary of higher oil prices, assuming
broadly. Domestic fuel prices in Argentina will
                                                       these are mostly demand-led. As such, we would
tend to rise with higher oil prices, and with a rise
                                                       also expect higher oil prices to have a broadly
in inflation will come a real appreciation of the
                                                       beneficial effect on the BRL, and this was
peso. Given the central bank’s policy of
                                                       confirmed by our analysis on pages 22-23.
maintaining a competitive real exchange rate, this
implies that over the medium term, there may be a      Chile
need to engineer a more rapid nominal                  Chile enjoys only a very small oil production
depreciation of the currency. Therefore, on            capacity, producing just 10.8 thousand bbl/d of oil
balance, we view higher oil prices as a net            in 2009, versus consumption of almost 300
negative for the ARS via the inflation channel.        thousand bbl/d. As such, higher oil prices are
                                                       detrimental to the country’s overall trade balance
Brazil
                                                       and, in theory, may have a negative influence on
While Brazil’s oil production and proven reserves
                                                       the CLP.
have both been growing rapidly in recent years,
the country remains a net energy importer. This is     However, an important point to note is that Chile
thanks in part to strong domestic demand and           enjoys very strong non-energy commodity
consumption growth for energy needs, which             exports, in particular copper. Copper exports
means the country imports refined oil products         represent well over 50% of total exports (see chart
from the US. However, looking forward, the EIA         10), and therefore it will matter significantly
expects Brazil’s liquid fuel consumption to            whether oil prices are rising independently of
approximately equal production in 2012 and by          other commodities – particularly metals – or in
2013 it forecasts that the country will become a       conjunction with them. If the latter, i.e. all
                                                       commodities are rising, then the CLP is likely to
                                                       still benefit, despite higher oil prices. For


26
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example, from mid-February oil prices have risen          11. CLP tends to strengthen when the oil/copper ratio falls
                                                          (i.e. oil prices lower, copper prices higher)
by over 10%, but this has been accompanied by a
3-4% rise in the CRB commodity index and the               700                                                            45

CLP been broadly unaffected, with USD-CLP                  650                                                            40
remaining around the 480 level.                            600                                                            35

 10. Chile's exports are dominated by copper and so it     550                                                            30
 matters whether oil is rising with metals or not
                             5%                            500                                                            25

                                                           450                                                            20

                                                           400                                                            15
            31%
                                                             Jan-08        Jan-09        Jan-10     Jan-11       Jan-12
                                                                               USD-CLP        Oil/copper ratio (RHS)
                                               55%
                                                          Source: Bloomberg, HSBC


                2%
                     7%                                  Colombia
                      Copper          Other minerals
                                                         Colombia’s oil production has grown substantially
                      Perishables     Industrials
                      Other                              in recent years, and with strong investment
                                                         spending by EcoPetrol S.A., the state oil
 Source: Bloomberg, HSBC
                                                         company, production is set to continue growing at
Supporting this point is the relationship between        an impressive pace. In the past, Colombia’s
the oil/copper ratio and USD-CLP. As can be seen         energy sector has been held back by a
in chart 11, the CLP tends to appreciate during          combination of political instability, security
periods when the oil/copper ratio falls (i.e. lower      concerns, high royalty rates and lower oil prices.
oil prices/higher copper prices) and vice versa.         However, security in the country has improved,
Indeed, local analysts in Chile tend to pay very         oil prices have risen and improvements in the
close attention to this ratio with respect to its        domestic economy have spurred investment in the
potential influence on the peso.                         sector. According to company reports, Ecopetrol’s
In summary, higher oil prices by themselves              investment budget will exceed USD8bn in 2012,
may tend to have a negative effect on the CLP,           up from USD6bn in 2010, while oil-related FDI
but should oil rise along with metals, in                into Colombia rose impressively to USD7.1bn in
particularly copper, it is likely that the CLP           2011, up 145% from the prior year, according to
will not be impacted negatively.                         the IEA, quoting government figures. Colombia’s
                                                         oil supply is expected to exceed 1.0mb/d this year,
                                                         up from 0.75mb/ at the end of 2009 (IEA).

                                                         As a consequence, Colombia now enjoys a strong
                                                         and growing net energy surplus of around 10% of
                                                         GDP. As such, we would expect a sustained rise
                                                         in the oil price to benefit the COP in a broad
                                                         sense, although we would note that the
                                                         government and the central bank are often at pains
                                                         to prevent excessive COP appreciation that could



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hurt the country’s export sector. One of the          Venezuela
government’s tools in this regard has been the        Venezuela is consistently one of the top oil
periodic suspension of the EcoPetrol’s dividends      producers in the world and the oil sector remains
that are brought back into COP from USDs.             of vital importance to the economy’s health,
However, all other things being equal, we             representing over 90% of export earnings and
would expect higher oil prices to benefit the         close to two thirds of government budget
COP, especially going forward as Colombia’s           revenues. While Venezuela’s currency is highly
oil production capacity expands.                      controlled by authorities, oil prices have a strong
Mexico                                                bearing on the economy and, by extension, the
                                                      outlook for the currency. Higher oil prices boost
The oil sector remains important for the Mexican
                                                      the country’s fiscal accounts and, put simply,
economy. State oil company Petroleos Mexicanos
                                                      reduce the chances of a currency devaluation in
(Pemex) is one of the largest oil companies in the
                                                      the future (see, No devaluation in 2012 unless oil
world and the country ranked in the world’s top
                                                      prices fall, 10 January 2012).
ten oil producers in 2010. Oil exports represented
14% of export revenues in 2010, according to the      A devaluation of the Venezuelan bolivar (VEF)
EIA, and a third of government revenues are           has the advantage of boosting the country’s fiscal
derived from the oil sector. However, the impact      accounts through higher USD oil receipts
of higher oil prices on the country’s trade balance   (converted to VEF at a higher USD-VEF
is less straightforward.                              exchange rate). However, a cheaper currency
                                                      tends to exacerbate inflation pressures via higher
First, due to a lack of refining capacity, Mexico
                                                      import prices. Therefore, especially in an election
imports a significant amount of its refined oil
                                                      year, the government will be keen to avoid a
from the US, which means its net energy trade
                                                      currency devaluation because higher inflation can
balance is much less positive than one might
                                                      have important political costs. As such, given that
expect. Last year Mexico’s energy exports totalled
                                                      fiscal accounts naturally receive a boost from
USD56bn, compared to energy imports of
                                                      higher oil prices, in such an environment we
USD35bn.
                                                      would find it highly unlikely that the government
Second, Mexico remains heavily reliant on the US      allows the VEF to devalue. In summary, higher
economy for its economic health, and higher oil       oil prices make a VEF devaluation less likely.
prices tend to have a detrimental effect on the US
economy. As such, higher oil prices, while
certainly good for Mexico’s fiscal balances, are
not necessarily always good for the overall
health of the Mexican economy. The result is
that the MXN tends to perform less well when
we see large oil price gains, as shown in Chart 8.




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   March 2012




QE pendulum to swing in JPY’s favour


JPY – QE-asy does it?                                                        Visions and revisions which a
                                                                             moment will reverse
Just when it almost felt as if the market had
stopped caring about the value of the JPY,                                   Before the Fed and the Bank of England
Japanese policymakers dragged the currency back                              embarked on their asset purchase programmes
into the spotlight. The Bank of Japan’s                                      (QE), the general opinion in the market – based
announcement on 14 February that it would adopt                              on economic theory – was that QE was currency
a 1% inflation goal and expand its asset purchase                            negative. It was thought that injecting money into
programme by JPY 10trn caught the market by                                  the economy would create inflation and erode the
surprise. Having traded sideways since August                                value of the currency. Or in even simpler terms, if
last year, mainly within a tight 76.0-78.5 range,                            you have more of a currency relative to another,
USD-JPY has risen sharply since the                                          its value must fall. However, as the market
announcement (chart 1). In other words, adopting                             frequently reminds us, economic theory and
an inflation goal, which is not even as iron-clad as                         market practice can be two very different things.
an inflation target, has done more to the JPY                                It now seems that this initial view has changed,
exchange rate than BoJ’s large-scale currency                                and that QE can be seen as a counterweight to
interventions. This makes us ask the question: Is                            fiscal austerity. QE can help boost nominal GDP,
this large move justified on the grounds of QE?                              thereby supporting the currency as the FX market
                                                                             rewards the appropriate policy mix. The change in
                                                                             the way of thinking of QE is illustrated by the
                                                                             GBP in chart 2. As can be seen, when asset


 1. USD-JPY broke through the top of its tight trading range following the BoJ announcement

                                                                            USD-JPY
 82               4 August - BoJ interv ention                                                                                      82
 81                                                                                                                                 81
                                                      31 October - BoJ interv ention after USD-JPY hits all-time low
 80                                                                                                                                 80
 79                                                                                                                                 79
 78                                                                                                                                 78
 77                                                                                                                                 77
 76                                                                                                                                 76
 75                                                                                                                                 75
                                                 Oct-11




                                                                                      Dec-11
      Jul-11




                           Aug-11




                                      Sep-11




                                                                                                  Jan-12




                                                                                                                  Feb-12




                                                                                                                           Mar-12
                                                                   Nov-11




 Source: Bloomberg, HSBC




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     March 2012




 2. GBP weakness in response to BoE balance sheet expansion has not been repeated this time
                                BoE GBP effectiv e ex change rate (LHS)                           BoE balance sheet (RHS)                        GBP bn
 100                                                                                                                                                 350

                                                                                                                                                     300
     90
                                                                                                                                                     250

     80                                                                                                                                              200

                                                                                                                                                     150
     70
                                                                                                                                                     100

     60                                                                                                                                              50
      Jun-08           Dec-08        Jun-09               Dec-09             Jun-10            Dec-10            Jun-11            Dec-11
 Source: Bloomberg, HSBC




purchases went up in 2008, trade-weighted GBP                                    Reconsidering QE has become
went down. Here the BoE added to this idea by                                    common
arguing QE also works through a weaker                                           Much like the market sold the USD and the GBP
currency. The mechanism was as follows: the                                      on QE announcements, and then reconsidered, the
BoE bought bonds from foreigners and they                                        EUR reaction to the ECB’s 36-month long-term
would then repatriate their GBP cash home,                                       refinancing operations (LTRO) was also initially
thereby weakening GBP. This time around,                                         negative (chart 3). However, once again market
however, GBP has remained stable since the BoE                                   participants subsequently amended their
once again expanded their asset purchase                                         judgement. In December of last year, the large
programme in October 2011, and then yet again in                                 take-up of EUR 489bn was considered to
February 2012. If anything, there has been a                                     demonstrate a large amount of unwanted debt that
modest uptick in GBP.                                                            banks wanted to get off their balance sheets.

                                                                                 Deemed a sign of distress, the EUR sold off
                                                                                 sharply and the LTRO was used as justification to


 3. The market sold the EUR on the LTRO announcement, but then reconsidered

 Index                                                       BoE EUR effectiv e ex change rate                                                     Index
 99                                                                                                                                                   99
                                                                   8 Dec: Tw o 36m LTROs announced
 98                                                                                                                                                   98
 97                                                                                                                            29 Feb: EUR 530bn      97
 96                                                                                                                                                   96
                                                                                                22 Dec: EUR 489bn allotted
 95                                                                                                                                                   95
 94                                                                                                                                                   94
 93                                                                                                                                                   93
 92                                                                                                                                                   92
 91                                                                                                                                                   91
 90                                                                                                                                                   90
 89                                                                                                                                                   89
                                                 Oct-11




                                                                                      Dec-11
          Jul-11




                       Aug-11




                                   Sep-11




                                                                                                        Jan-12




                                                                                                                          Feb-12




                                                                                                                                        Mar-12
                                                                    Nov-11




 Source: Bloomberg, HSBC




30
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drive the single currency lower. However, as 2012                 HSBC Fixed Income Research pointed out in
began, the currency market became obsessed with                   ‘Asia-Pacific Rates’, 16 February 2012, there has
Eurozone bond auctions. But because of the                        been a modest but noticeable increase in overseas
LTRO, banks now had free cash to buy up fresh                     ownership of JGBs. Non-resident holdings of
bonds, European peripheral yields came off                        JGBs jumped to 6.3% of outstanding JGBs at the
substantially and gave Eurozone leaders some                      end of September 2011, equating to JPY 47.4trn
breathing space. History was revised – the large                  (~USD 610bn based on the Q3 2011 average
LTRO take-up by banks was not a sign of distress                  exchange rate) versus JPY 37trn (~USD 430bn) a
after all, but actually emancipated capital. This                 year earlier. In USD terms, foreign JGB
was then used as an argument to buy the EUR.                      ownership levels are at record highs (chart 5).

Reconsidering the USD-JPY reaction                                In our view, this does not pose any significant
What does this mean in the context of Japan? The                  threat to the JPY. Foreign investors now have an
question is whether the knee-jerk reaction to sell                incentive to hold on to their JGBs as the BoJ buys
the JPY is also overdone much like we saw in the                  JGBs. If they eventually do sell their bonds to the
other major monetary authorities, and whether the                 central bank, there could be some repatriation of
recent BoJ action could actually result in                        funds – much in the way the BoE argued QE
something yen-positive? Here we ask whether this                  would weaken GBP. However, some of the extra
could manifest itself though increased foreign                    liquidity stemming from the bond purchases
buying of Japanese equities.                                      might go towards buying higher-yielding JGBs
                                                                  further out the curve (BoJ buying will be around
JGB market impact on FX will likely                               the 1-2 year area of the curve for now). We also
be limited                                                        think it is likely that much of it finds its way to
Let us first consider Japan’s immense debt                        the Japanese equity market and does not leak out
market. It is well-known that the vast majority of                of Japan. Similarly, domestic investors may sell
Japan’s government bond market is domestically                    bonds to the BoJ and switch into equity, hence
owned. In fact, foreign investors account for less                limiting money flowing out of Japan.
than 7% of JGB ownership (chart 4).



 4. Overseas ownership of JGBs remains low, but is trending upwards

                                             Share of JGBs held by non-Japanese inv estors
 8.0%                                                                                                           8.0%

 7.0%                                                                                                           7.0%

 6.0%                                                                                                           6.0%

 5.0%                                                                                                           5.0%

 4.0%                                                                                                           4.0%

 3.0%                                                                                                           3.0%

 2.0%                                                                                                           2.0%
          Q4 2003
          Q1 2004
          Q2 2004
          Q3 2004
          Q4 2004
          Q1 2005
          Q2 2005
          Q3 2005
          Q4 2005
          Q1 2006
          Q2 2006
          Q3 2006
          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
          Q3 2010
          Q4 2010
          Q1 2011
          Q2 2011
          Q3 2011




 Source: MoF/BoJ, HSBC




                                                                                                                             31
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     Currency Strategy                                                                                                                                                                                  abc
     March 2012




 5. Foreign holdings of JGBs are at record highs in USD terms

 USD bn                                                                   Holdings of JGBs by non-Japanese inv estors                                                                   USD bn
 700                                                                                                                                                                                           700
 600                                                                                                                                                                                           600
 500                                                                                                                                                                                           500
 400                                                                                                                                                                                           400
 300                                                                                                                                                                                           300
 200                                                                                                                                                                                           200
 100                                                                                                                                                                                           100
     0                                                                                                                                                                                         0
          Q4 2003
          Q1 2004
          Q2 2004
          Q3 2004
          Q4 2004
          Q1 2005
          Q2 2005
          Q3 2005
          Q4 2005
          Q1 2006
          Q2 2006
          Q3 2006
          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
          Q3 2010
          Q4 2010
          Q1 2011
          Q2 2011
          Q3 2011
 Source: MoF/ BoJ, Bloomberg, HSBC




Foreigners have a much bigger                                                                          Frederic Neumann and Tushar Arora point out
exposure to Japanese stocks                                                                            that more stimulus appears warranted (see ‘The
The share of non-domestic ownership is a lot                                                           BoJ and Asia – Another monetary kick’, 21
larger for the Japanese equity market. So although                                                     February 2012). The BoJ explicitly pledged to
the JGB market is much bigger, foreigners have a                                                       “continue pursuing the powerful easing until it
greater USD exposure to Japanese stocks than                                                           judges the 1 percent goal in sight”. As we have
JGBs. Chart 6 shows the percentage of equity                                                           seen elsewhere, QE tends to be supportive of risk
market value owned by foreigners. The trend has                                                        assets such as equities. As chart 7 shows, the
been increasing steadily since around 1990, and                                                        Nikkei 225 index has rallied strongly since
seems to have stabilised around 25% in recent                                                          the announcement.
years. In other words, based on the current
                                                                                                       As official asset purchases attempt to push up
exchange rate, non-Japanese investors own
                                                                                                       nominal GDP without causing yields to rise,
roughly USD 600bn of JGBs, and around USD
                                                                                                       domestic investors may switch out of government
1.02trn worth of Japanese stocks.


 6. Non-domestic investors own around one quarter of Japanese equities

 %                                          Share of Japanese equity market market v alue ow ned by non-Japanese inv estors                                                                        %
 30                                                                                                                                                                                                30

 25                                                                                                                                                                                                25

 20                                                                                                                                                                                                20

 15                                                                                                                                                                                                15

 10                                                                                                                                                                                                10

     5                                                                                                                                                                                             5

     0                                                                                                                                                                                             0
         1985
                1986
                       1987
                              1988
                                     1989
                                            1990
                                                   1991
                                                          1992
                                                                 1993
                                                                        1994
                                                                               1995
                                                                                      1996
                                                                                             1997
                                                                                                    1998
                                                                                                           1999
                                                                                                                  2000
                                                                                                                         2001
                                                                                                                                2002
                                                                                                                                       2003
                                                                                                                                              2004
                                                                                                                                                     2005
                                                                                                                                                            2006
                                                                                                                                                                   2007
                                                                                                                                                                          2008
                                                                                                                                                                                 2009
                                                                                                                                                                                        2010




 Source: Tokyo Stock Exchange, HSBC




32
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   Currency Strategy                                                                                                         abc
   March 2012




 7. Japanese equities have rallied following the BoJ announcement

                                                                Nikkei 225 Index
 10500                                                                                                               10500

                                                                                    14 February - BoJ announcement
 10000                                                                                                               10000


  9500                                                                                                               9500


  9000                                                                                                               9000


  8500                                                                                                               8500


  8000                                                                                                               8000
       Jul-11              Aug-11   Sep-11   Oct-11       Nov -11      Dec-11      Jan-12      Feb-12     Mar-12

 Source: Bloomberg, HSBC




bonds and into equities in search of higher returns.                We now think there is a good chance of a similar
As overseas investors have traditionally shown a                    reaction for USD-JPY.
greater appetite for Japanese equities than JGBs,
                                                                    The expanded QE programme should spill over to
and yields are set to stay low going forward, it
                                                                    the equity market as investors move out of JGBs
seems likely that those interested in holding
                                                                    and into equities in search of higher return. Non-
Japanese assets will prefer equities to
                                                                    domestic investors have a much greater exposure
government bonds.
                                                                    to Japanese equities than JGBs, and in our view,
We therefore believe that the effects of foreign                    the incentive to add to their equity holdings is
investors wanting to increase their exposure to the                 now greater than the incentive to sell their JGBs
equity market are likely to outweigh any selling of                 and pull funds out of Japan. Similarly, domestic
JGBs, and see a good chance that the net outcome                    investors may sell bonds to the BoJ and switch
for the JPY could be positive once the market gets                  into equity, hence preventing money flowing out
some time to digest the news.                                       of Japan.

Conclusion – USD-JPY is                                             That being said, there are several counteracting
overreacting                                                        forces currently acting upon the JPY. We would
The currency market has reacted strongly to the                     therefore prefer to be sidelined on USD-JPY for
Bank of Japan’s recent adoption of an inflation                     the time being. However, we maintain that USD-
goal and asset purchase programme expansion,                        JPY is heading lower in the medium term, and
and has sent the JPY to nine-month lows against                     that the move will be accelerated by a weakening
the USD. We think this price action looks                           USD as the US presidential election draws nearer.
overdone. We have seen the USD and GBP
weaken in response to QE announcements in the
US and the UK, and the EUR in response to the
LTROs, only to bounce back up again as the
market changes its mind regarding whether
monetary easing is necessarily currency negative.



                                                                                                                                 33
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     Currency Strategy                                                                                                   abc
     March 2012




Dollar Bloc
CAD demand picking up                                             4.5%, 5.6% and 6.3% respectively over the same
                                                                  time. This highlights some limits in the extent to
The CAD has pushed to five-month highs against
                                                                  which an expansion in the broader risk trade is
the USD, consistent with the prevalence of higher
                                                                  also reflected in the CAD.
levels of risk appetite and the relatively
favourable investment backdrop in Canada.                         Reduced Fed easing expectations
CAD gains on the risk trade less                                  give CAD a lift
robust                                                            There is another, more recent development in Fed
                                                                  policy expectations that can have somewhat
In recent months, we have discussed how the
                                                                  different implications for the CAD than for some
Fed’s easier policy bias, particularly the
                                                                  other high-beta currencies. In congressional
announcement in January that the anticipated
                                                                  testimony February 29, Fed Chairman Bernanke’s
period of exceptionally low fed funds rate was
                                                                  failure to highlight the potential for further asset
pushed back to end-2014 from mid-2013,
                                                                  purchases by the central bank was seen by the
supported the “risk trade,” including the CAD.
                                                                  market as reducing the potential for such actions
We fully expect the CAD to remain sensitive to
                                                                  in the future. Essentially, the reduction in Fed
swings in risk appetite. However, there are some
                                                                  easing expectations also reduced the perceived
recent and important developments in this
                                                                  risk that the Bank of Canada might have to take
relationship to note. First, among the other
                                                                  easing measures of its own… either to counter
commodity-linked, G10 currencies, the CAD has
                                                                  outright downside risks to growth, or more subtly
been the notable underperformer in the year-to-
                                                                  to limit the extent of the policy divergence
date, rising 2.7% against the USD (chart 1). That
                                                                  between the Fed and the BoC. And because
lags the AUD, NZD and NOK, which have risen
                                                                  Canada’s economy is more closely linked to the


 1. CAD gains have lagged other commodity-linked currencies in 2012

                                                  YTD % gains v ersus the USD
 7                   6.34                                                                                           7

 6                                            5.57                                                                  6

 5                                                                         4.5                                      5

 4                                                                                                                  4
                                                                                                   2.67
 3                                                                                                                  3

 2                                                                                                                  2

 1                                                                                                                  1

 0                                                                                                                  0
                     NOK                      NZD                         AUD                      CAD

 Source: HSBC, Bloomberg




34
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   March 2012




US than those of the other commodity producing                         these external influences have, in our view, been
countries cited above, the ramifications of shifts                     important for the CAD.
in Fed policy expectations can potentially have
                                                                       On the domestic front, we have seen mixed
notably different implications for BoC policy than
                                                                       Canadian data over the past month. Q4 GDP
it might have for the RBA, the RBNZ or Norges
                                                                       posted a near expected 1.8% annualized increase,
Bank. That also means that if upcoming events
                                                                       with soft net exports and a contraction in
such as the March 13 FOMC meeting result in
                                                                       inventories key factors in the outcome. And on
another shift in Fed policy expectations, there
                                                                       balance, the data did little to alter expectations for
could be further ramifications for the CAD.
                                                                       a modest growth rate this year of near 2%
Canada yields and BoC easing                                           (Bloomberg survey median). Potentially more
expectations have shifted                                              important will be upcoming data, particularly the
These are not necessarily the types of sentiments                      February labor market report due March 9. The
that will remain a driver for the CAD over time,                       unemployment rate has risen to 7.6% as of
but the recent rise in Canadian front-end yields                       January from 7.2% last September, and net
has been notable and is one that is consistent with                    employment has actually contracted 34K over that
a firmer CAD. Implied yields on the December                           time. The CAD has held up very well despite the
2012 BA futures have risen 40 bp from late-                            unexpected weakening in the labor market, but
December to stand at 1.3%, their highest level in                      that is not to say an extension of that recent trend
seven months. BoC policy expectations, as                              would not create more noticeable headwinds for
measured by the one-year OIS (overnight indexed                        the currency.
swap) rate, indicate the market expects no rate                        Long CAD positions are building
cuts in the coming year (chart 2). That compares
                                                                       But far from expecting headwinds, speculators
to its levels from December when most of a 25 bp
                                                                       have clearly embraced the CAD over the past
easing was priced in. There will of course be other
                                                                       month. Commitment of Traders data shows
factors impacting BoC policy expectations beyond
                                                                       speculators flipped to long CAD positions in
what may or may not happen at the Fed, and that
                                                                       February after a five month stretch of short
obviously centers on domestic developments. But
                                                                       positions in the currency (chart 3). Long positions


 2. Market has taken out prior expectations for BoC easing

 %                              1-y r Canada Ov ernight Index ed Sw ap (LHS)       USD-CAD (inv erted, RHS)
 1.5                                                                                                                    0.92
 1.4
                                                                                                                        0.94
 1.3
 1.2                                                                                                                    0.96
 1.1                                                                                                                    0.98
 1.0
 0.9                                                                                                                    1.00
 0.8                                                                                                                    1.02
 0.7
                                                                                                                        1.04
 0.6
 0.5                                                                                                                    1.06
     Apr-11                Jun-11              Aug-11               Oct-11            Dec-11              Feb-12


 Source: Bloomberg, HSBC




                                                                                                                                    35
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          Currency Strategy                                                                                                           abc
          March 2012




 3. Speculators are jumping on board the CAD train

                                                     CAD Net (in USD)    USD-CAD

                       10                                                                                 0.90
     Billions of USD




                        8                                                                                 0.92
                                                                                                          0.94




                                                                                                                 USD-CAD (inverted)
                        6
                                                                                                          0.96
                        4                                                                                 0.98
                        2                                                                                 1.00
                                                                                                          1.02
                        0
                                                                                                          1.04
                       -2                                                                                 1.06
                       -4                                                                                 1.08
                        Mar-10   Jul-10   Nov -10           Mar-11      Jul-11     Nov -11       Mar-12

 Source: Bloomberg, HSBC




are not yet at what would be considered
“extreme” levels and indeed are still only roughly
¼ to 1/3 of the outsized longs that speculators
were running in February-April 2011 period,
when USD-CAD moved to and briefly below the
0.9500 threshold. The shift into the CAD is
consistent with the relatively favorable investment
backdrop there, highlighted by a less volatile
political and regulatory backdrop, steady (if not
overly strong) growth, and Canada’s triple-A
credit rating.

We still consider the CAD to be fully valued at
current levels and as such, further gains from here
should prove more difficult. Nonetheless, the current
environment is one that should continue to work for
the CAD, and we would expect solid buying interest
on the corrective pullbacks that do develop.




36
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   Currency Strategy                                                                                                                       abc
   March 2012




AUD – The tipping point                                             interest rate differentials against many G10
                                                                    currencies, which limits its ability to capitalise on
‘Risk on’ returned with a bang and helped propel
                                                                    stronger GDP growth. Furthermore, the mining
AUD-USD significantly higher. After having
                                                                    investment boom has resulted in a two-speed
trended upwards since the beginning of the year, it
                                                                    economy, with sectors linked to mining doing
now looks as though the rally has come to a halt.
                                                                    very well and with weakness in the remaining
The AUD’s recent strong performance has much                        parts of the economy. The mining boom has also
to do with an improved external backdrop. The                       done much to improve Australia’s external
situation in the Eurozone stabilised following the                  position in recent years, but a current account
ECB’s LTRO operations, the new bailout package                      deficit remains, resulting in a poor risk/reward
for Greece and the deal on private sector                           compared with some G10 alternatives.
involvement. The Fed’s pledge to keep interest
                                                                    The medium-term bearish case for the AUD
rates close to zero for even longer has also done a
                                                                    remains. However, we would not rush to sell the
lot to boost risk appetite.
                                                                    AUD based on the recent oil price spike.
Expectations of further rate cuts by the RBA, as                    Traditional thinking suggests that since large oil
measured by the 1-year overnight indexed swap,                      price jumps caused by supply-side shocks are
have also been considerably scaled back                             typically viewed as ‘risk off’ events, which
following the central bank’s surprise decision to                   weighs on equities, the highly ‘risk on’ AUD
keep rates on hold in February (chart 2). While                     should sell off when the oil price is rising fast.
these are all supportive developments for the                       Interestingly, our analysis shows that this has not
AUD, we believe they also pave the way for                          been the case in the past (see pages 3-10). In fact,
domestic fundamental factors to come into                           the AUD tends to perform very well when oil
sharper focus.                                                      prices are rising. It seems that commodity price
                                                                    association outweighs risk considerations when
The AUD remains significantly overvalued, both
                                                                    oil prices are high. We would hence caution
on a REER and PPP basis. This does not
                                                                    against selling AUD if high crude prices are your
necessarily mean imminent weakness, but
                                                                    sole motivation for doing so, and similarly against
increases the risks. The Australian economic
                                                                    strategies of buying oil-currencies such as NOK
outlook looks relatively healthy, but the currency
                                                                    or CAD against the ‘risk on’ AUD.
has already far overshot levels consistent with


 1. The AUD-USD rally seems to have run out of steam                 2. The market has scaled back it’s RBA easing expectations

                                      AUD-USD                                            1-y r Australia Ov ernight Index ed Sw ap
 1.10                                                        1.10    %                                                               %
                                                                                         RBA target cash rate
                                                                     5.5                                                             5.5
 1.05                                                        1.05    5.0                                                             5.0
                                                                     4.5                                                             4.5
 1.00                                                        1.00    4.0                                                             4.0
                                                                     3.5                                                             3.5
 0.95                                                        0.95    3.0                                                             3.0
                    Dec-11




                                                                            Oct-11

                                                                           Dec-11
                             Jan-12



                                           Feb-12


                                                    Mar-12
        Nov-11




                                                                           Jan-11
                                                                           Feb-11
                                                                           Mar-11
                                                                            Apr-11

                                                                           Jun-11
                                                                            Jul-11
                                                                           Aug-11
                                                                           Sep-11




                                                                           Jan-12
                                                                           Feb-12
                                                                           Mar-12
                                                                           May-11




                                                                           Nov-11




 Source: Bloomberg, HSBC                                             Source: Bloomberg, HSBC




                                                                                                                                             37
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     Currency Strategy                                                                                                                        abc
     March 2012




NZD – Rally to reverse                                                becomes whether financial flows can fill the void
                                                                      that is likely to be left when the capital account
The NZD has been harvesting solid gains so far
                                                                      boost from insurance payments fades. We are not
this year on the back of an improved external
                                                                      convinced this will happen. Foreign investors
outlook and a surge in risk appetite. However, the
                                                                      already have a large exposure to New Zealand’s
NZD has significant downside risks based on its
                                                                      debt market, holding around 60% of outstanding
extreme valuation, both on a REER and a PPP
                                                                      government bonds. Ownership has failed to rise
basis, its balance of payments dynamics, poor
                                                                      significantly even during periods of stronger risk
risk/reward compared with other G10 peers and a
                                                                      sentiment, suggesting that foreigners are less
declining role as a China proxy. It shares many of
                                                                      inclined to hold ever more quantities of NZ debt.
these risks with the AUD, but we think the NZD
                                                                      Also, with Western banks retrenching lending and
looks like the more vulnerable of the two
                                                                      having to build up higher levels of capital, foreign
antipodean currencies.
                                                                      loans are unlikely to pick up back to levels seen in
Both Australia and New Zealand have been                              earlier years.
running large current account deficits for many
years. However, Australia’s trade account has                         Keeping this in mind, the NZD no longer looks
improved significantly in recent years thanks to                      particularly attractive on a risk/reward basis when
the booming mining sector, helping to narrow the                      comparing its current account risk to the relatively
current account deficit. Looking at the NZ balance                    high yield it offers.
of payments data makes us more worried. The
                                                                      Lastly, the antipodean currencies’ role as proxies
financial account flows – largely portfolio flows,
                                                                      for buying into the rapid growth in China is
loans and trade credits – declined significantly
                                                                      fading. Firstly, a number of Asian currencies have
from 2009. Meanwhile, the capital account inflow
                                                                      opened their capital accounts significantly, and
jumped remarkably in 2010 and 2011 (chart 2).
                                                                      provide relatively liquid markets for investment.
This reflects the huge insurance-related payments
                                                                      Secondly, the offshore RMB (CNH) market now
that were transferred to New Zealand after the two
                                                                      allows investors to hold RMB directly, removing
earthquakes in Christchurch in September 2011
                                                                      the need for a proxy currency.
and February 2011.

It seems unlikely that these huge capital account
flows will be repeated. The key question then


 1. The NZD has rallied strongly since the start of the year           2. C/A financing largely from the capital account in 2011

                                      NZD-USD                          NZD bn                    NZ Balance of Pay ments             NZD bn
 0.86                                                          0.86    20                                                               20
 0.84                                                          0.84
 0.82                                                          0.82    10                                                               10
 0.80                                                          0.80      0                                                              0
 0.78                                                          0.78
 0.76                                                          0.76    -10                                                              -10
 0.74                                                          0.74
                                                                       -20                                                              -20
 0.72                                                          0.72
                                                                             1996
                                                                             1997
                                                                             1998
                                                                             1999
                                                                             2000
                                                                             2001
                                                                             2002
                                                                             2003
                                                                             2004
                                                                             2005
                                                                             2006
                                                                             2007
                                                                             2008
                                                                             2009
                                                                             2010
                                                                             2011
                    Dec-11



                             Jan-12



                                           Feb-12


                                                    Mar-12
        Nov-11




                                                                                    Cur Acc              Cap Acc           Fin Acc

 Source: Bloomberg, HSBC                                               Source: Bloomberg, HSBC




38
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  Currency Strategy                                                                                                                                                                                          abc
  March 2012




Europe at a glance
CHF                                                                                                                                   Switzerland: Floor will stay put
                                                                                                                                       As long as the market is in ‘risk on’ mood and the issue of the
1.70                                                                                                                           1.80     euro breaking up is on the backburner, the Swiss monetary
1.60                                                                                                                           1.60     authorities should have little trouble defending the 1.20 target.
                                                                                                                                       What could go wrong is a violent swing to ‘risk off’ that sees the
1.50                                                                                                                           1.40     market returning to the safety of the CHF. Any hint that the euro
1.40                                                                                                                                    situation is deteriorating sharply would undoubtedly spark such
                                                                                                                               1.20
1.30                                                                                                                                    a move. The lowest risk, but something to watch, is domestic
1.20                                                                                                                           1.00     inflation. That is because large amounts of unsterilised
                                                                                                                                        intervention in a deflationary scenario can continue without
1.10                                                                                                                           0.80
                                                                                                                                        limit. The same can not be said in an inflationary environment.
1.00                                                                                                                           0.60    For the moment, however, this remains an elusive risk. The
                                                                                                                                        SNB has not had to do much yet to defend the floor – they
        Jan-02
                    Jan-03
                               Jan-04
                                         Jan-05
                                                   Jan-06
                                                             Jan-07
                                                                       Jan-08
                                                                                  Jan-09
                                                                                             Jan-10
                                                                                                         Jan-11
                                                                                                                     Jan-12




                                                                                                                                        spent about CHF 17.8bn for FX intervention in 2011 – and it is
                                                                                                                                        unlikely that they will risk a strategy which is working
                   EUR- CHF (LHS)                                                USD- CHF (RHS)                                         remarkably well. Our view is still that barring a cataclysmic
                                                                                                                                        event, the SNB will hold on to the 1.20 level.
Source: Bloomberg



EUR-NOK                                                                                                                                Norway: NOK benefiting from high oil prices

10.50                                                                                                                         10.50
10.00                                                                                                                         10.00
 9.50                                                                                                                         9.50
 9.00                                                                                                                         9.00
 8.50                                                                                                                         8.50     See pages 3-10.
 8.00                                                                                                                         8.00
 7.50                                                                                                                         7.50
 7.00                                                                                                                         7.00
          Jan-02
                     Jan-03
                               Jan-04
                                         Jan-05
                                                  Jan-06
                                                            Jan-07
                                                                      Jan-08
                                                                                Jan-09
                                                                                           Jan-10
                                                                                                      Jan-11
                                                                                                                  Jan-12




Source: Bloomberg



EUR-SEK                                                                                                                               Sweden: Serious slowdown
                                                                                                                                       The Riksbank cut rates to 1.50% on 16 February in response to
12.0                                                                                                                           12.0     a weakened economic outlook caused by “developments
11.6                                                                                                                           11.6     abroad”. GDP for Q4 2011 was much weaker than expected,
11.2                                                                                                                           11.2     serving as a stark reminder of Sweden’s reliance on exports to
                                                                                                                                        the Eurozone. The unemployment rate also rose sharply to
10.8                                                                                                                           10.8
                                                                                                                                        8.0% in January from 7.1% in December, which should fuel
10.4                                                                                                                           10.4     speculations that the Riksbank might resort to further rate cuts.
10.0                                                                                                                           10.0    We strongly prefer NOK among the Scandies, but we still prefer
 9.6                                                                                                                           9.6      the SEK to most other G10 currencies despite the weakened
 9.2                                                                                                                           9.2      economic backdrop. Its budget surplus and low public debt
 8.8                                                                                                                           8.8      mean Sweden will not be forced into austerity, and thus looks a
                                                                                                                                        lot less vulnerable than others.
 8.4                                                                                                                           8.4
                                                                                                                                       We believe the best way to play a long SEK position is to buy it
       Jan-02
                   Jan-03
                              Jan-04
                                        Jan-05
                                                  Jan-06
                                                            Jan-07
                                                                      Jan-08
                                                                                 Jan-09
                                                                                            Jan-10
                                                                                                        Jan-11
                                                                                                                    Jan-12




                                                                                                                                        with the NOK against the AUD and NZD. That way one
                                                                                                                                        minimises the cost of carry and has a blended risk profile
                                                                                                                                        against the Antipodeans, which we still prefer to sell.
Source: Bloomberg




                                                                                                                                                                                                               39
                                                                                      渐飞研究报告 - http://bg.panlv.net
     Macro
     Currency Strategy                                                                                            abc
     March 2012




Asia – regional overview
Strong start – but risks remain                         some of their shine. This is particularly the case if
                                                        we saw inflation manifest itself through higher
Asian currencies enjoyed a strong start to 2012.
                                                        commodity prices.
Although we agree with Asian currency strength
this year, the appreciation path is likely to be less   Double, double, t’oil and trouble?
linear and less rapid than the recent price action      One question being asked is whether recent oil
has suggested. The most obvious potential catalyst      prices rises have been – geopolitics aside –
for a pullback is still an unforeseen event in the      demand-driven, or a response to further potential
Eurozone, a universal risk scenario for global          easing by major central banks.
markets. Outside of this, we think there are a
                                                        If it becomes clearer that the global economy is
number of potential catalysts which could halt or
                                                        reflating at a swift pace, then the upward pressure
even reverse the appreciation seen in early 2012.
                                                        on Asian currencies will intensify despite a
Decline in global growth expectations                   strengthening oil price.
If we were now to see a sudden and unexpected
                                                        In a QE-induced, USD-lower for longer scenario,
deterioration in global growth expectations, it
                                                        we still think Asian currencies would appreciate.
would weaken sentiment for Asian currencies,
                                                        But much would depend on the reaction of
especially given their sensitivity to US and global
                                                        commodity prices, the potential impact on the
growth cycles. More specific to Asia, if there was
                                                        region’s trade balances and whether portfolio
a significantly more marked deterioration in
                                                        inflows started to slow because of concern about
China’s activity data, this would fuel fears of a
                                                        re-emerging inflation in Asia.
hard landing with wider fears of Asian contagion.
With CNY acting as an anchor for the region, and        Either way, should the oil price strengthen further
China also a key export destination for Asian           from here, at least, we would anticipate greater
producers, an increased perception of a hard            volatility for Asian currencies. INR would be
landing could hit Asian FX.                             most at risk from higher oil prices, but given its
                                                        positive carry, it is hard for investors to short. We
Inflation being sticky
                                                        believe the best expression of relative value from
The re-emergence of strong inflationary pressures
                                                        differential vulnerabilities to oil in the region is to
would also be a threat, especially since the
                                                        be long MYR-PHP. We would also continue to
consensus is looking for inflationary pressures in
                                                        prefer currencies with largest external buffers, as
Asia to moderate. The key issue would be how
                                                        we have previously highlighted, such as RMB,
policy maker flexibility is impacted in the event
                                                        SGD and KRW.
of very stubborn price pressures. Easing in Asia in
the face of slower growth should be a positive for
Asian FX, as it helps to support asset prices.
However if sticky inflation were to limit this
policy reaction, then Asian currencies would lose



40
                                                                                                                                          渐飞研究报告 - http://bg.panlv.net
  Macro
  Currency Strategy                                                                                                                                                          abc
  March 2012




Asia at a glance
USD-CNY                                                                                            China: Less appreciation more volatility
                                                                                                    We believe RMB will show less appreciation and more volatility
8.40                                                                                        8.40     in 2012. The recent daily fixings, the most high-frequency
8.20                                                                                        8.20     indication of FX policy, have shown further signs of the two-way
8.00                                                                                        8.00     volatility that we flagged late last year. The large moves higher
7.80                                                                                        7.80     in the fixing in late February and early March underline the fact
7.60                                                                                        7.60     that 2012 could see more sustained periods of CNY weakness.
7.40                                                                                        7.40     That said, the overall directionality of fixings will likely continue
7.20                                                                                        7.20
7.00                                                                                        7.00     to be in-line with the movement of the broad dollar.
6.80                                                                                        6.80    The recent downgrade of the 2012 growth target, outlined by
6.60                                                                                        6.60     Premier Wen at the NPC in early March, should not be taken at
6.40                                                                                        6.40     face value. While the concerns have switched away from
6.20                                                                                        6.20     inflation towards growth, our economists note that the target
                                                                                                     has historically been a lower bound for growth, rather than a
       Jan-05

                Jan-06

                         Jan-07

                                  Jan-08

                                            Jan-09

                                                      Jan-10

                                                                    Jan-11

                                                                                  Jan-12




                                                                                                     mid-range target. With China still providing a growth engine for
                                                                                                     the region, Asian fundamentals also continue to look robust.

Source: Bloomberg



USD-HKD                                                                                            Hong Kong: Internationalization steadily continues
                                                                                                    The process of internationalisation continued in a quieter
7.84                                                                                        7.84     fashion in the past month with a slew of smaller
                                                                                                     announcements. For example, the cross-border RMB trade
7.82                                                                                        7.82
                                                                                                     settlement regime took one final step with the announcement
7.80                                                                                        7.80     that the scheme is now open to all firms in China, the Mainland
                                                                                                     Designated Enterprise (MDE) white-list being replaced by a
7.78                                                                                        7.78     much less restrictive ad-hoc black-list. Meanwhile, the press
7.76                                                                                        7.76     has reported that China Development Bank would begin
                                                                                                     offering RMB loans to counterparts in several other EM
7.74                                                                                        7.74     countries; that the Bank of China and CME would start RMB
                                                                                                     settlement of commodities trades; and that London would soon
7.72                                                                                        7.72     see its first RMB denominated (dim sum) bond offering. We
7.70                                                                                        7.70     expect a continued internationalization of the RMB at a pace
                                                                                                     that will surprise many, and look for the RMB to become
       97       99       01       03       05        07        09             11                     increasingly influential in the Asian currency sphere.

Source: Bloomberg



USD-IDR                                                                                            Indonesia: Oil and Inflation complexity
                                                                                                    Perhaps of all currencies in Asia, the IDR has the most
16000                                                                                      16000     complex relationship with oil prices. Although Indonesia is a
14000                                                                                      14000     crude oil exporter, it actually has a material net oil deficit and
                                                                                                     sees a continuously rising fuel subsidy bill. Hence, a three-way
12000                                                                                      12000     dynamic between trade, fiscal policy and inflation under the
                                                                                                     influence of rising oil prices makes it difficult to assess the
10000                                                                                      10000     impact to the currency in a systematic framework. We have
 8000                                                                                      8000      been highlighting for some time the vulnerability we expect IDR
                                                                                                     to face this year from inflation risks and so we expect this to be
 6000                                                                                      6000      the dominant channel between oil prices and the IDR this cycle.
 4000                                                                                      4000      This was underscored by a recent comment by the BI governor,
                                                                                                     that a fuel subsidy cut would likely push inflation above the
 2000                                                                                      2000      target range. Thus, we consider IDR to be one of the more
                                                                                                     vulnerable Asian currencies to higher oil prices.
           97     99     01       03       05        07        09            11

Source: Bloomberg




                                                                                                                                                                               41
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     Macro
     Currency Strategy                                                                                                                   abc
     March 2012




Asia at a glance continued
 USD-KRW                                                      South Korea: S’won-derful
                                                               We have become more comfortable about the risks to KRW. In
 2000                                                  2000     particular we noted that recent changes in FX policy, which
                                                                have been biased towards a less volatile and more symmetric
 1800                                                  1800     exchange rate, are likely to be permanent. Policy makers
                                                                appear more comfortable that they have the capacity to
 1600                                                  1600     manage global market uncertainty and the volatility of capital
                                                                flows. Meanwhile, we think the geopolitical risk premium is
 1400                                                  1400
                                                                appropriately priced, and that there is little risk from domestic
 1200                                                  1200     politics this year.
                                                               In other words, where we spent much of the past year cautious
 1000                                                  1000     on the KRW, we are now more comfortable on the risks. The
                                                                fundamental case for KRW has long been recognized, but we
     800                                               800      now find the risk-reward much more compelling, and for this
                                                                reason, we recently shifted KRW into our group of favoured
            97    99   01   03   05   07   09    11             Asian currencies.
 Source: Bloomberg



 USD-INR                                                      India: Rupee risks rise again
                                                               The state election results in India in some ways leave the
                                                                political balance at the national sphere largely unchanged, with
 54                                                      54     neither coalition leader Congress Party nor the key opposition
 52                                                      52     party BJP gaining or losing control in the three larger states
 50                                                      50     contested. The broad implication is that the prospect of policy
                                                                paralysis at the centre will persist, possibly until the next round
 48                                                      48
                                                                of national elections in 2014. Meanwhile, this is likely to mean
 46                                                      46     that fiscal deterioration will continue with further populist
 44                                                      44     measures ahead of the general elections. The low prospect of
 42                                                      42     an improved political atmosphere will leave FX investors with
 40                                                      40     little hope of near-term structural reforms that could boost
 38                                                      38     future FDI flows. Therefore the framework for the currency
 36                                                      36     remains one which relies on attracting sufficient short-term
 34                                                      34     capital inflows to fund a trade deficit that threatens to balloon
                                                                should oil prices rise sharply from here. We reiterate our view
       97        99    01   03   05   07    09    11            that INR is the most vulnerable currency in Asia and will be
                                                                held hostage by its external funding requirement. If risk
                                                                sentiment worsens, USD-INR is at risk of retracing higher.
 Source: Bloomberg



 USD-MYR                                                      Malaysia: Would glide through the oil slick
                                                               Unlike the rest of Asia, a rise in oil prices will bolster Malaysia’s
 4.8                                                    4.8     fundamentals further. Malaysia continues to be Asia’s chief
                                                                commodity exporter, with a crude and palm oil surplus that
 4.4                                                    4.4     accounts for close to 50% of its large trade surplus. We have
                                                                been positive for some time now on the ringgit largely due to
 4.0                                                    4.0     the strength of its external surplus. Even if the external
                                                                environment were to weaken somewhat, higher oil prices could
 3.6                                                    3.6     keep MYR as an outperformer in Asia.
                                                               Also, Malaysia’s lack of oil dependence removes the fiscal
 3.2                                                    3.2     constraint over the fuel subsidy regime, giving authorities more
                                                                flexibility on how much inflation pass through to allow. Combined
 2.8                                                    2.8
                                                                with the BNM’s strong stance on inflation in recent years, MYR
 2.4                                                    2.4     would also be less at risk of facing a worse growth-inflation outlook,
                                                                which should help to keep local asset markets supported and
       97        99    01   03   05   07   09     11            maintain foreign inflows into the bond market for example.


 Source: Bloomberg




42
                                                                                   渐飞研究报告 - http://bg.panlv.net
   Macro
   Currency Strategy                                                                                          abc
   March 2012




Latin America – regional overview

Caution returns                                        early August, and are also seeking to limit official
                                                       sector inflows into the local currency, both aimed
Latam currencies have enjoyed strong starts to
                                                       at limiting COP appreciation.
2012, but most are now struggling to make further
gains. Investors are becoming more cautious as         Peru’s central bank also continues to buy USDs to
we await further developments in Europe and the        prevent excessive PEN appreciation, although we
global economy more broadly. US data has been          expect no similar action from Chilean authorities
better but our US Economists still point to a          for now, given their intervention criteria of a
sluggish housing market, weak consumption and          ‘fundamentally misaligned’ CLP is currently not
rising oil prices as reasons to avoid too much         met, according to the central bank’s real exchange
optimism. China’s lower 7.5% growth trajectory,        rate model.
while still probably representing a lower growth
                                                       Similarly, we believe Mexico’s FX Commission
band, has also caught the market’s attention.
                                                       is very unlikely to be concerned about the strength
Meanwhile, concerns over regional currency             of the MXN at current levels – the peso remains
strength and intervention have been stepped up         relatively cheap with still more room to appreciate
lately across the Latam region, notably in Brazil      on positive external news, especially with respect
and Colombia. Other developments include the           to any further improvements in the US economy.
rise in oil prices over the past few weeks, and we     That said, 12.60 appears to represent formidable
offer our views on the likely impact this, and         USD support and near-term topside resistance
possible further rises in oil, may have on Latam       looks more vulnerable.
currencies on pages 22-28 of this report.
                                                       While macro-fundamentals may support Latam
Despite investors’ reticence to commit large sums      currencies, in the current climate of uncertainty in
of capital to ‘risk on’ trades, flows to Latam local   Europe, geopolitical fears and specific
markets have held up reasonably well, so much so       intervention to prevent currency strength, Latam
that Brazilian authorities have felt the need to re-   currencies look likely to struggle to make much
start intervention in their currency markets as well   headway vs the USD in the near term. Our
as tweaking some taxes on foreign loans.               favourite currencies in the region are the COP,
                                                       MXN and PEN, while we are neutral on the BRL
As we discuss in Brazil Economics & Strategy :
                                                       and CLP, and still negative on the ARS.
BRL: IOF adjustment raises intervention alert, 1
March 2012, we believe there is an elevated risk
that we may see more regulation changes to
prevent the BRL from strengthening, particularly
if USD-BRL breaks substantially below 1.70.
Meanwhile in Colombia the authorities have
extended the period during which they will
continue buying USD20m per day through to


                                                                                                                  43
                                                                                                                                                                          渐飞研究报告 - http://bg.panlv.net
     Macro
     Currency Strategy                                                                                                                                                                                      abc
     March 2012




Latin America at a glance
 USD-BRL                                                                                                                             Brazil: Ramping up intervention
                                                                                                                                      In recent sessions the Central Bank of Brazil (BCB) and the
 4.0                                                                                                                           4.0     Finance Ministry have broadened their intervention efforts,
                                                                                                                                       showing increasing discomfort with USD-BRL’s flirting with the
 3.5                                                                                                                           3.5
                                                                                                                                       psychological 1.70 level. The central bank has stepped up the
 3.0                                                                                                                           3.0     frequency of its USD purchases while the government recently
                                                                                                                                       extended the minimum maturity on which external loans are
 2.5                                                                                                                           2.5     exempt from a 6% IOF tax from two years to three years. As
                                                                                                                                       global growth remains sluggish it seems likely that these efforts
 2.0                                                                                                                           2.0     will be maintained to ensure Brazilian exporters don’t feel the
 1.5                                                                                                                           1.5     added pinch of an appreciating currency. Indeed, the finance
                                                                                                                                       ministry has recently said as much and further measures are
 1.0                                                                                                                           1.0     likely should we see an eventual break of the 1.70 level. We
                                                                                                                                       could even see FX and monetary policy being coordinated
       Jan-02
                    Jan-03
                                Jan-04
                                          Jan-05
                                                    Jan-06
                                                             Jan-07
                                                                       Jan-08
                                                                                 Jan-09
                                                                                            Jan-10
                                                                                                        Jan-11
                                                                                                                     Jan-12




                                                                                                                                       more closely, with rate cuts being combined with macro-
                                                                                                                                       prudential measures to tackle the resulting inflationary impact.
 Source: Bloomberg



 USD-COP                                                                                                                             Colombia: Too much of a good thing
                                                                                                                                      As in Brazil, Colombian authorities have become increasingly
 3000                                                                                                                         3000     concerned by the strength of their currency. The COP has
                                                                                                                                       gained 8% since the start of the year, and in early February the
 2800                                                                                                                         2800
                                                                                                                                       central bank re-started USD purchases to the tune of USD20m
 2600                                                                                                                         2600     per day. These, they have said, will persist until at least early
                                                                                                                                       August. One cause of the COP’s strength is increased oil
 2400                                                                                                                         2400
                                                                                                                                       profits for Ecopetrol, but when these are monetised it will tend
 2200                                                                                                                         2200     to put added upward pressure on the COP. Strong FDI inflows
                                                                                                                                       are already pressuring the currency stronger (USD15bn last
 2000                                                                                                                         2000     year and USD1.8bn in January) and so to the extent the
 1800                                                                                                                         1800     government can delay public sector inflows, it will. However,
                                                                                                                                       there is little that can be done to prevent the COP appreciating
 1600                                                                                                                         1600
                                                                                                                                       as a result of FDI inflows. Capital controls are unlikely to be
           Jan-02
                       Jan-03
                                 Jan-04
                                           Jan-05
                                                    Jan-06
                                                             Jan-07
                                                                      Jan-08
                                                                                Jan-09
                                                                                          Jan-10
                                                                                                     Jan-11
                                                                                                                 Jan-12




                                                                                                                                       used given the nature of the inflows, and so this leaves us with
                                                                                                                                       a constructive bias towards the COP, certainly on a relative
                                                                                                                                       basis compared to other Latam currencies.
 Source: Bloomberg



 USD-CLP                                                                                                                             Chile: Watch the oil/copper ratio
                                                                                                                                      After having cut rates by 25bp in January, Chile’s central bank
 800                                                                                                                           800     left rates on hold in February and with relatively firm growth and
 750                                                                                                                           750     a still tight labour market, it seems we may see rates left on
                                                                                                                                       hold again in March. The global economy also has not
 700                                                                                                                           700
                                                                                                                                       deteriorated by as much as the central bank thought possible
 650                                                                                                                           650     when it began cutting. But as a small, open, commodity-
 600                                                                                                                           600     dependent economy Chile remains exposed to external
                                                                                                                                       conditions, particularly softer external demand and lower
 550                                                                                                                           550
                                                                                                                                       commodity prices. The CLP tends to be negatively impacted by
 500                                                                                                                           500     a deteriorating oil/copper ratio (oil higher/copper lower) and so
 450                                                                                                                           450     in an environment of rising geopolitical tensions we might
                                                                                                                                       expect to see the CLP underperform. China’s lower 7.5%
 400                                                                                                                           400
                                                                                                                                       growth target has also come under the spotlight, denting
       Jan-02
                    Jan-03
                                Jan-04
                                          Jan-05
                                                    Jan-06
                                                             Jan-07
                                                                      Jan-08
                                                                                 Jan-09
                                                                                            Jan-10
                                                                                                       Jan-11
                                                                                                                    Jan-12




                                                                                                                                       commodity prices from their late February highs. Any further
                                                                                                                                       softening of data from China is likely to see the CLP come
                                                                                                                                       under more pressure.
 Source: Bloomberg




44
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   Macro
   Currency Strategy                                                                                          abc
   March 2012




EMEA – regional overview
Feeling the effect of liquidity                       We continue to see value in the zloty. The Polish
injection, but for how long?                          economy stands out in CEE with the robust
                                                      economic growth. While other central banks in
Signs of fatigue
                                                      the region are ready to loosen monetary policy to
The expansion of global liquidity created by the
                                                      support anaemic growth, Polish central bank
major central banks and the resolution of the
                                                      retains a hawkish bias, providing indirectly a
Greek crisis (even temporarily) have offered a
                                                      support to the currency. Moreover, the balance of
strong support to EMEA currencies. Since the
                                                      payments, which has been a weak spot in 2011,
start of the year, the performances have been
                                                      has started to improve (narrowing current account
impressive but the question is for how long such a
                                                      deficit and healthier financing).
factor will continue to dominate. The injection of
massive liquidity into the system cannot be on its    However, we are more sceptical on the upside
own a lasting supportive factor. At some point,       potential of the RUB. The RUB has strengthened
the baton has to be taken by an improvement in        strongly since the start of the year in line with our
macroeconomic variables and, on that front, the       expectations. But we now believe that this
situation has hardly changed in recent months.        appreciation is largely overdone. The seasonal
                                                      improvement in the current account surplus in Q1
The first signs of fatigue have already emerged. In
                                                      has played its role in the RUB's rise and is now
the past month, several currencies such as the TRY,
                                                      largely priced in. In the coming months, the
HUF and CZK have indeed consolidated. The
                                                      dynamic of the current account is likely to
extension of the rally appears uncertain without
                                                      deteriorate, unless the oil prices make another
another booster, preferably a fundamental one.
                                                      jump. On the political front, Vladimir Putin won
We see value in the PLN and are cautious on           presidential election and the lack of political
the RUB gains                                         disruption may be seen as a positive for the
It is worth noting that the outstanding currencies    currency. But the political challenges remain and
have been the PLN and the RUB in the recent           the rising demands for more liberal policies may
period. Those two currencies have outperformed        be disappointed.
thanks to robust economic data (PLN) and rising
oil prices (RUB).




                                                                                                                  45
                                                                                                                                                                                  渐飞研究报告 - http://bg.panlv.net
     Macro
     Currency Strategy                                                                                                                                                                                               abc
     March 2012




EMEA at a glance
 EUR-PLN                                                                                                                                    Poland: More appreciation in the medium term
                                                                                                                                             The PLN has strengthened significantly since the start of the
 5.00                                                                                                                                5.00     year on the back of expanding global liquidity and notably the
                                                                                                                                              second ECB LTRO. The strong appreciation has been also
 4.60                                                                                                                                4.60     supported by a robust economic activity and the central bank’s
                                                                                                                                              hawkish rhetoric. Although we do not expect a rate hike this
                                                                                                                                              year, this stance is PLN-supportive on a relative basis as the
 4.20                                                                                                                                4.20
                                                                                                                                              other central banks of the region have a rather dovish bias.
                                                                                                                                             We see further appreciation in the medium-term. Even after the
 3.80                                                                                                                                3.80     recent appreciation, the PLN appears attractive on a valuation
                                                                                                                                              basis. The balance of payments dynamics, which was the
 3.40                                                                                                                                3.40     Achilles’ heal in 2011, have improved in recent months. The
                                                                                                                                              current account deficit has narrowed and the quality of
 3.00                                                                                                                                3.00     financing improved.
                                                                                                                                             The main risk remains external. Despite its supportive macro
          Jan-02
                        Jan-03
                                      Jan-04
                                                  Jan-05
                                                               Jan-06
                                                                          Jan-07
                                                                                    Jan-08
                                                                                              Jan-09
                                                                                                        Jan-10
                                                                                                                  Jan-11
                                                                                                                            Jan-12




                                                                                                                                              fundamentals, the PLN is one of the most sensitive currencies
                                                                                                                                              to the risk-on/risk-off factor and may see large fluctuations if the
                                                                                                                                              global sentiment changes.
 Source: Bloomberg



 USD-RUB                                                                                                                                    Russia: Appreciation is overdone – unless oil keeps rising
                                                                                                                                             The RUB has been one of the best performing currencies since
 38                                                                                                                                    38     the start of the year. The positive global market sentiment has
 36                                                                                                                                    36     certainly played an important role but the seasonal
 34                                                                                                                                    34     improvement in the current account has also been an important
                                                                                                                                              driver. The rise in oil prices has fuelled the upward movement
 32                                                                                                                                    32
                                                                                                                                              of the RUB.
 30                                                                                                                                    30    We now believe that this appreciation is overdone, barring
 28                                                                                                                                    28     further large gains in oil prices. The seasonal improvement in
 26                                                                                                                                    26     the Q1 current account surplus has played its role in the RUB’s
 24                                                                                                                                    24     rise and is now largely priced in. In the coming months, the
                                                                                                                                              dynamic of the current account is likely to deteriorate.
 22                                                                                                                                    22    On the political front, Vladimir Putin’s victory at the presidential
      Jan-07
                    Jul-07
                                  Jan-08
                                               Jul-08
                                                            Jan-09
                                                                        Jul-09
                                                                                   Jan-10
                                                                                             Jul-10
                                                                                                       Jan-11
                                                                                                                 Jul-11
                                                                                                                            Jan-12




                                                                                                                                              election may be initially seen as a guarantee of continuity. But
                                                                                                                                              the political challenges remain and the rising demands for more
                                                                                                                                              liberal policies may be disappointed.
 Source: Bloomberg



 USD-ILS                                                                                                                                    Israel: The underperformer
                                                                                                                                             The Israeli shekel has been the underperforming currency
                                                                                                                                              during the rally. Several factors have been at work. The
 5.10                                                                                                                                5.10     economic indicators have been rather weak, particularly on the
                                                                                                                                              export front. The central bank continued to cut its interest rates
 4.70                                                                                                                                4.70     to support a weakening growth amid low inflationary pressures.
 4.30                                                                                                                                4.30     These fundamental factors actually explain only part of the
                                                                                                                                              underperformance since the start of the year. The geopolitical
 3.90                                                                                                                                3.90     risks have also played an important role.
                                                                                                                                             The ILS is too weak relative to its regional peers and the fact
 3.50                                                                                                                                3.50     that the central bank has now probably finished its rate cut
                                                                                                                                              cycle is likely to ease some of the downside pressures. Given
 3.10                                                                                                                                3.10
                                                                                                                                              the renewed strength of the housing market, we believe that the
               Jan-02
                             Jan-03
                                      Jan-04
                                                   Jan-05
                                                               Jan-06
                                                                          Jan-07
                                                                                    Jan-08
                                                                                             Jan-09
                                                                                                       Jan-10
                                                                                                                 Jan-11
                                                                                                                           Jan-12




                                                                                                                                              next move on key policy rate will be up, probably before the
                                                                                                                                              end of the year. Nevertheless, the geopolitical situation remains
                                                                                                                                              a factor uncertainty and will continue to be a risk factor for the
                                                                                                                                              shekel for some time.
 Source: Bloomberg




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   Macro
   Currency Strategy                                                                                              abc
   March 2012




HSBC Volume-Weighted REERs


For full details of the construction methodology of       How should we weight the                                Mark McDonald
                                                                                                                  FX Strategist
the HSBC REERs, please see “HSBC’s New                    basket?                                                 HSBC Bank plc
                                                                                                                  +44 20 7991 5966
Volume-Weighted REERs” Currency Outlook                   If we are trying to create an index for the change      mark.mcdonald@hsbcib.com
April 2009.                                               in value of a currency against a basket of other
The value of a currency                                   currencies, we now need to decide on how to
                                                          weight our basket. One possible solution would be
Since FX prices are always given as the amount of
                                                          to simply have an equally-weighted basket. The
one currency that can be bought with another, the
                                                          rationale for this would be that there is no a priori
inherent value of a currency is not defined. For
                                                          reason for choosing to put more emphasis on any
example, if EUR-USD goes up, this could be
                                                          one exchange rate. However, this could clearly
because the EUR has increased in value, the USD
                                                          lead to the situation where a large move in a
has decreased in value, or a combination of both.
                                                          relatively small currency can strongly influence
One possible method for getting some insight into
                                                          the REERs and NEERs for all other currencies.
changes in the value of a currency is to look at
                                                          To avoid this, the indices are generally weighted
movements in the value of a basket of other
                                                          so that more “important” currencies get higher
currencies against the currency of interest. For
                                                          weighting. This, of course, begs the question of
example, if EUR-USD increased over some time
                                                          how “importance” is defined.
period, one could see how EUR had performed
against a range of other currencies to determine          Trade Weights
whether EUR has become generally more valuable            Weighting the basket by bilateral trade-weights is
or whether this was simply a USD-based move. An           the most common weighting procedure for
effective exchange rate is an attempt to do this and to   creating an effective exchange rate index. This is
represent the moves in index form.                        because the indices are often used to measure the
                                                          likely impact of exchange rate moves on a
There are two main approaches to building an
                                                          country’s international trade performance.
effective exchange rate: Nominal Effective
Exchange Rates (NEERs) and Real Effective                 Volume Weights
Exchange Rates (REERs). NEERs simply track                The daily volume traded in the FX market
the weighted average returns of a basket of other         dwarves the global volume of physical trade.
currencies against the currency being investigated;       From this it is possible to make a convincing
REERs deflate the returns in an attempt to                argument that the weighting which would be
compensate for the differing rates of inflation in        really important would be to weight the currency
different countries. The reason for doing this is         basket by financial market flows, rather than
that, particularly over long time frames, inflation       bilateral trade.
can have a large impact on the purchasing power
of a currency.


                                                                                                                                    47
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     Macro
     Currency Strategy                                                                                   abc
     March 2012




To do this properly would require us to have        Data Frequency
accurate FX volumes for all currency pairs
                                                    This is something which is rarely considered
considered in the index. However, these are not
                                                    when constructing REERs – inflation data is
available. The BIS triennial survey of FX volumes
                                                    generally released at monthly frequency at best so
only gives data for a small number of bilateral
                                                    the usual procedure is to simply create monthly
exchange rates. However, the volumes are split by
                                                    indices by default. However, some countries
currency for over 30 currencies. From these
                                                    release their inflation data only quarterly. The
volumes we can estimate financial weightings for
                                                    usual procedure for these countries is to simply
each currency. We believe that this gives another
                                                    pro-rata the change over the period. Here there is
plausible definition for “importance”, and one
                                                    an implicit assumption that the rate of inflation
which may be more relevant for financial
                                                    changes slowly. We take this assumption one step
investors than trade weights. We call this
                                                    further and assume that it is valid to spread the
procedure volume weighting and the indices
                                                    inflation out equally over every day in the month.
produced through this procedure we call the
HSBC volume-weighted REERs.

We would argue that if you are a financial market
investor, the effective value of a currency you
would be exposed to is more accurately
represented by the HSBC volume-weighted index
rather than the trade-weighted index.




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      Macro
      Currency Strategy                                                                                                                                             abc
      March 2012




HSBC Volume – Weighted REERs
USD REER index                                                                       EUR REER index

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




140                                                                            140   105                                                                      105




120                                                                            120    90                                                                      90




100                                                                            100    75                                                                      75




 80                                                                            80     60                                                                      60
  Jun-94    Jun-97      Jun-00    Jun-03       Jun-06     Jun-09      Jun-12           Jul-95       Jul-98    Jul-01     Jul-04     Jul-07    Jul-10     Jul-13


Source: HSBC                                                                         Source: HSBC




JPY REER index                                                                       GBP REER index
            JPY Trade-Weighted REER             JPY Volume-Weighted REER                            GBP Trade-Weighted REER        GBP Volume-Weighted REER
                                                                                      1996=100
 1996=100                                                              1996=100                                                                        1996=100
                                                                                     140                                                                      140
120                                                                           120




                                                                                     125                                                                      125
105                                                                            105




 90                                                                            90    110                                                                      110




 75                                                                            75    95                                                                       95




 60                                                                            60    80                                                                       80
  Jul-95       Jul-98    Jul-01       Jul-04     Jul-07      Jul-10       Jul-13       Jul-95       Jul-98    Jul-01     Jul-04     Jul-07    Jul-10     Jul-13


Source: HSBC                                                                         Source: HSBC




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      Currency Strategy                                                                                                                                                          abc
      March 2012




 CAD REER index                                                                           CHF REER index
                 CAD Trade-Weighted REER              CAD Volume-Weighted REER                        CHF Volume-Weighted REER             CHF Trade-Weighted REER
 1996=100                                                                1996=100         1996=100                                                               1996=100
150                                                                             150      130                                                                               130

140                                                                                140   120                                                                               120


130                                                                                130   110                                                                               110


120                                                                                120   100                                                                               100


110                                                                                110    90                                                                               90


100                                                                                100    80                                                                               80


 90                                                                                90     70                                                                               70


 80                                                                                80     60                                                                               60
     Jul-95       Jul-98     Jul-01      Jul-04      Jul-07     Jul-10        Jul-13       Jul-95       Jul-98      Jul-01       Jul-04     Jul-07     Jul-10        Jul-13


 Source: HSBC                                                                            Source: HSBC



 AUD REER index                                                                           NZD REER index
               AUD Trade-Weighted REER             AUD Volume-Weighted REER                           NZD Volume-Weighted REER               NZD Trade-Weighted REER
   1996=100                                                              1996=100
                                                                                           1996=100                                                              1996=100
160                                                                             160      140                                                                            140



140                                                                                140
                                                                                         120                                                                               120


120                                                                                120

                                                                                         100                                                                               100

100                                                                                100


                                                                                          80                                                                               80
 80                                                                                80



 60                                                                                60     60                                                                               60

     Jul-95       Jul-98     Jul-01      Jul-04      Jul-07     Jul-10        Jul-13       Jul-95       Jul-98      Jul-01       Jul-04     Jul-07      Jul-10        Jul-13


 Source: HSBC                                                                            Source: HSBC



 SEK REER index                                                                           NOK REER index
              SEK Trade-Weighted REER             SEK Volume-Weighted REER
                                                                                                      NOK Trade-Weighted REER              NOK Volume-Weighted REER
 1996=100                                                                    1996=100
110                                                                                110    1996=100                                                               1996=100
                                                                                         130                                                                            130



100                                                                                100   120                                                                               120


                                                                                         110                                                                               110
 90                                                                                90

                                                                                         100                                                                               100

 80                                                                                80
                                                                                         90                                                                                90


 70                                                                                70
                                                                                         80                                                                                80



 60                                                                                60    70                                                                                70

     Jul-95       Jul-98     Jul-01      Jul-04      Jul-07     Jul-10        Jul-13       Jul-95       Jul-98      Jul-01       Jul-04      Jul-07     Jul-10        Jul-13


 Source: HSBC                                                                            Source: HSBC




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      Macro
      Currency Strategy                                                                                                                                                                  abc
      March 2012




HSBC forecasts vs forwards
 EUR-USD vs forwards                                                                         EUR-CHF vs forwards
 USD/EUR                           Forward    Forecast                          USD/EUR      CHF/EUR                             Forward       Forecast                      CHF/EUR
1.60                                                                                1.60
                                                                                             1.70                                                                                 1.70
1.50                                                                                1.50
                                                                                             1.60                                                                                 1.60
1.40                                                                                1.40
                                                                                             1.50                                                                                 1.50
1.30                                                                                1.30
                                                                                             1.40                                                                                 1.40
1.20                                                                                1.20
                                                                                             1.30                                                                                 1.30
1.10                                                                                1.10
                                                                                             1.20                                                                                 1.20
1.00                                                                                1.00
                                                                                             1.10                                                                                 1.10
0.90                                                                                0.90
                                                                                             1.00                                                                                 1.00
0.80                                                                                0.80
                                                                                                Jan-00     Jan-02     Jan-04        Jan-06        Jan-08   Jan-10   Jan-12
   Jan-00     Jan-02     Jan-04      Jan-06       Jan-08     Jan-10    Jan-12

 Source: Thomson Financial Datastream, Reuters, HSBC                                         Source: Thomson Financial Datastream, Reuters, HSBC



 GBP-USD vs forwards                                                                         EUR-GBP vs forwards
 USD/GBP                              Forward     Forecast                      USD/GBP     GBP/EUR                            Forward     Forecast                          GBP/EUR
  2.10                                                                               2.10     1.00                                                                                1.00
  2.00                                                                               2.00     0.95                                                                                0.95
  1.90                                                                               1.90     0.90                                                                                0.90
                                                                                              0.85                                                                                0.85
  1.80                                                                               1.80
                                                                                              0.80                                                                                0.80
  1.70                                                                               1.70
                                                                                              0.75                                                                                0.75
  1.60                                                                               1.60     0.70                                                                                0.70
  1.50                                                                               1.50     0.65                                                                                0.65
  1.40                                                                               1.40     0.60                                                                                0.60
  1.30                                                                               1.30     0.55                                                                                0.55
     Jan-00     Jan-02    Jan-04      Jan-06       Jan-08     Jan-10    Jan-12                   Jan-00     Jan-02    Jan-04        Jan-06        Jan-08   Jan-10   Jan-12

 Source: Thomson Financial Datastream, Reuters, HSBC                                         Source: Thomson Financial Datastream, Reuters, HSBC



 USD-JPY vs forwards                                                                         EUR-JPY vs forwards
JPY/USD                            Forward      Forecast                        JPY/USD
                                                                                            JPY/EUR                            Forward       Forecast                    JPY/EUR
140                                                                                   140
                                                                                            175                                                                                   175
130                                                                                   130   165                                                                                   165
120                                                                                   120   155                                                                                   155
110                                                                                   110   145                                                                                   145
                                                                                            135                                                                                   135
100                                                                                   100
                                                                                            125                                                                                   125
 90                                                                                   90    115                                                                                   115
 80                                                                                   80    105                                                                                   105
 70                                                                                   70     95                                                                                   95
                                                                                             85                                                                                   85
 60                                                                                   60
                                                                                              Jan-00      Jan-02     Jan-04        Jan-06        Jan-08    Jan-10   Jan-12
  Jan-00      Jan-02     Jan-04      Jan-06       Jan-08      Jan-10    Jan-12

 Source: Thomson Financial Datastream, Reuters, HSBC                                         Source: Thomson Financial Datastream, Reuters, HSBC




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     Currency Strategy                                                                                                                abc
     March 2012




Short rates
3 Month Money

                                                2007     2008     2009    2010     2011             2012
end period                                        Q4       Q4       Q4      Q4       Q3      Q4      Q1f      Q2f     Q3f      Q4f
North America              x                       x        x
x                          US (USD)              4.7      1.4      0.3      0.3     0.4      0.5     0.6      0.5      0.5     0.5
x                          Canada (CAD)          4.5      1.9      0.5      1.2     1.2      1.4     1.5      1.4      1.4     1.4
Latin Am erica             x                       x        x        x        x       x        x       x        x        x       x
x                          Mex ico (MXN)         7.3      8.2      4.6      4.6     4.3      4.3     4.3      4.4      4.4     4.5
x                          Brazil (BRL)         11.2     13.0      8.7     11.1    12.0     11.0    10.0      9.0      9.0     9.0
x                          Argentina (ARS)*     13.6     19.8     10.0     11.3    14.0     18.0    17.0     16.0     15.0    16.0
x                          Chile (CLP)           6.2      7.9      0.5      3.3     5.3      5.3     4.6      4.6      4.6     4.6
Western Europe             x                       x        x        x        x       x        x       x        x        x       x
Eurozone                   x                     4.6      2.9      0.7      0.9     1.5      1.4     1.2      1.1      1.1     1.0
Other Western Europe       x                       x        x        x        x       x        x       x        x        x       x
x                          UK (GBP)              5.9      2.8      0.6      0.8     1.0      1.1     1.0      0.9      0.9     0.9
                           Norw ay (NOK)         5.9      4.0      2.2      2.6     3.0      2.9     2.0      1.9      1.9     1.8
x                          Sw eden (SEK)         4.7      2.5      0.5      1.8     2.5      2.7     2.2      2.2      2.2     2.3
x                          Sw itzerland (CHF)    2.6      0.6      0.3      0.2     0.0      0.1     0.1      0.1      0.1     0.1
EMEA
                           Hungary (HUF)         7.6     10.0      6.0      5.9     6.1      7.0     7.0      7.0      7.0     6.9
                           Poland (PLN)          5.1      5.8      4.2      4.0     4.8      5.0     5.0      4.8      4.7     4.7
                           Russia (RUB)*         6.3     20.6      6.6      3.8     6.2      6.0     6.3      6.5      6.7     6.5
                           Turkey (TRY)         16.0     15.5      7.5      6.7     8.0      9.7     9.5      9.3      9.3     9.0
                           Ukraine (UAH)         6.6     20.0     16.1      9.1    12.0     20.0    17.0     17.0     17.0    10.0

Asia/Pacific               x                       x        x        x        x       x        x        x       x        x        x
x                          Japan (JPY)           0.6      0.6      0.3      0.2     0.2      0.2      0.2     0.2      0.2      0.2
x                          Australia (AUD)       7.3      4.1      4.0      4.9     4.8      4.7      4.1     4.1      4.1      4.1
x                          New Zealand (NZD)     8.9      6.0      2.8      3.3     2.8      2.9      2.8     3.1      3.3      3.6

 North Asia
                           China (CNY)           3.3      1.7      1.7      2.3     3.1      3.1      3.1     3.1      2.9      2.9
x                          Hong Kong (HKD)       3.5      1.0      0.1      0.3     0.3      0.3      0.3     0.3      0.3      0.3
x                          Taiw an (TWD)         2.2      1.0      0.5      0.7     0.9      0.8      0.6     0.8      1.0      1.1
x                          South Korea (KRW)     5.7      4.7      2.8      2.8     3.6      3.5      3.3     3.3      3.3      3.3
South Asia
                           India (INR)           8.3      9.2      3.7      7.2     8.4      8.4      8.2     8.0      7.8      7.8
x                          Indonesia (IDR)       7.8     12.0      6.6      6.4     6.4      5.3      5.1     4.9      4.9      4.9
x                          Malay sia (MYR)       3.6      3.4      2.3      3.0     3.3      3.2      2.9     2.7      2.7      2.8
x                          Philippines (PHP)     3.7      6.1      3.9      0.8     0.7      4.5      4.2     4.2      4.2      4.2
x                          Singapore (SGD)       2.5      1.4      0.7      0.4     0.4      0.4      0.4     0.4      0.4      0.4
x                          Thailand (THB)        3.7      3.6      1.4      2.2     3.6      3.6      3.6     3.6      3.6      3.8
Africa                     x                       x        x        x        x       x        x        x       x        x        x
x                          South Africa (ZAR)   11.3     11.4      7.1      5.6     5.6      5.5      5.2     5.2      5.1      5.1
No tes: * 1-mo nth mo ney. So urce: HSB C


Important note

This table represents three month money rates. Due to the dislocation in the three month money markets, these rates may not give a
good indication of policy rates.



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   Macro
   Currency Strategy                                                                                                            abc
   March 2012




Emerging markets forecast table
                                         7-Mar-12       2011            2012                            2013
                                             last         Q3      Q4     Q1f     Q2f     Q3f     Q4f     Q1f     Q2f     Q3f     Q4f
Latin America vs USD    x                      x    x      x       x       x       x       x       x       x       x       x       x


 Argentina (ARS)                             4.34        4.21    4.30    4.40    4.53    4.66    5.00    5.20    5.40    5.50    5.65
 Brazil (BRL)                                1.77        1.85    1.88    1.90    1.90    1.85    1.80    1.83    1.85    1.88    1.90
 Chile (CLP)                                 492         521     520     490     495     500     500     500     500     500     500


 Mex ico (MXN)                              12.98       13.88   13.97   13.60   13.50   13.40   13.20   13.28   13.35   13.43   13.50
 Colum bia (COP)                            1777        1930    1939    1875    1875    1850    1800    1800    1800    1800    1800

 Peru (PEN)                                  2.67        2.73    2.71    2.71    2.70    2.69    2.68    2.68    2.69    2.70    2.70
 Venezuala (VEF)                             4.29        4.30    4.30    4.30    4.30    4.30    4.30    6.50    6.50    6.50    6.50



Eastern Europe vs EUR
 Czech Republic (CZK)                       24.88       24.71   25.50   25.60   26.00   24.50   24.30   24.00   23.80   23.70   23.70


 Hungary (HUF)                               297         293     315     295     295     280     275     275     270     270     270


 Russia v s USD (RUB)                       29.76       31.88   32.02   29.50   30.80   32.00   31.90   29.70   32.50   33.20   33.80


 Romanian (RON)                              4.36        4.31    4.31    4.35    4.30    4.20    4.20    4.10    4.05    4.00    4.00


 Turkey v s USD (TRY)                        1.79        1.86    1.89    1.80    1.80    1.70    1.60    1.60    1.60    1.60    1.60
 Simple rate
 Poland (PLN)                                4.17        4.42    4.46    4.20    4.30    4.10    4.00    4.00    3.90    3.80    3.80


Middle East vs USD                             x    x      x       x       x       x       x       x       x       x       x       x
 Egy pt (EGP)                                6.03        6.00    6.00    6.30    6.50    6.80    7.00    7.10    7.20    7.20    7.20


 Israel (ILS)                                3.81        3.70    3.80    3.70    3.65    3.60    3.55    3.50    3.50    3.50    3.40




Africa vs USD
 South Africa (ZAR)                          7.66        8.04    8.07    8.00    8.00    7.50    7.30    7.00    6.80    6.80    6.80
                        Interest rates                   0.00    0.00    0.00    0.00    0.00    0.00    0.00    0.00    0.00    0.00


Source: HSBC




                                                                                                                                        53
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     Currency Strategy                                                                                                                                                       abc
     March 2012




Exchange rates vs USD

end period                                           2009        2010         2011                                2012                                            2013
                                                       Q4          Q4           Q2         Q3          Q4          Q1f         Q2f         Q3f         Q4f         Q1f         Q2f         Q3f         Q4f
Am ericas                x
x                        Canada (CAD)                 1.05        0.99        0.97        1.04        1.02        1.00        1.00        0.98        0.97        0.95        0.95        0.95        0.95
x                        Mex ico (MXN)               13.08       12.36       11.71       13.88       13.97       13.60       13.50       13.40       13.20       13.28       13.35       13.43       13.50
x                        Brazil (BRL)                 1.74        1.67        1.56        1.85        1.88        1.90        1.90        1.85        1.80        1.83        1.85        1.88        1.90
x                        Argentina (ARS)              3.80        3.97        4.11        4.21        4.30        4.40        4.53        4.66        5.00        5.20        5.40        5.50        5.65
x
Western Europe           x                       x           x           x           x           x           x           x           x           x           x           x           x           x
                         Eurozone (EUR*)              1.43        1.34        1.45        1.34        1.30        1.34        1.37        1.40        1.44        1.45        1.45        1.45        1.45
Other Western Europe x                           x           x           x           x           x           x           x           x           x           x           x           x           x
x                        UK (GBP*)                    1.61        1.57        1.61        1.56        1.55        1.55        1.57        1.57        1.60        1.60        1.62        1.62        1.62
x                        Sw eden (SEK)                7.14        6.72        6.31        6.87        6.86        6.64        6.50        6.29        6.11        6.03        6.00        5.97        5.93
x                        Norw ay (NOK)                5.78        5.81        5.37        5.87        5.97        5.71        5.51        5.32        5.14        5.07        5.03        5.00        4.97
x                        Sw itzerland (CHF)           1.03        0.93        0.84        0.91        0.94        0.90        0.88        0.86        0.83        0.83        0.83        0.83        0.83
x
Em erging Europe         x                       x           x           x           x           x           x           x           x           x           x           x           x           x
x                        Russia (RUB)                 30.2        30.5        28.1        31.9        32.0        29.5        30.8        32.0        31.9        29.7        32.5        33.2        33.8
x                        Poland (PLN)                 2.86        2.95        2.75        3.29        3.43        3.13        3.14        2.93        2.78        2.76        2.69        2.62        2.62
x                        Hungary (HU F)                188         207         183         219         242         220         215         200         191         190         186         186         186
x                        Czech Republic (C ZK)        18.4        18.7        16.8        18.4        19.6        19.1        19.0        17.5        16.9        16.6        16.4        16.3        16.3
x
Asia/Pacific             x
x                        Japan (JPY)                    93         81          81          77          77          78          77           75          74          72          72          72          72
x                        Australia (AU D*)            0.90        1.03        1.07        0.97        1.03        1.06        1.03        1.00        0.95        0.95        0.95        0.95        0.95
x                        New Zealand (NZD*)           0.73        0.78        0.83        0.76        0.78        0.76        0.75        0.73        0.73        0.72        0.72        0.72        0.72
    North Asia           x                       x           x           x           x           x           x           x           x           x           x           x           x           x
x                        China (CNY)                  6.83        6.59        6.46        6.38        6.29        6.27        6.22        6.17        6.12        6.07        6.02        5.97        5.92
x                        Hong Kong (HKD)              7.75        7.77        7.78        7.78        7.77        7.80        7.80        7.80        7.80        7.80        7.80        7.80        7.80
x                        Taiw an (TWD)                32.1        30.4        28.7        30.5        30.3        29.5        29.0        28.5        28.0        27.7        27.4        27.1        26.8
x                        South Korea (KRW)           1166        1121         1067       1181        1159         1110        1095        1080        1070        1060        1050        1040        1030
x
    South Asia           x                       x           x           x           x           x           x           x           x           x           x           x           x           x
                         India (INR)                  46.4        44.7        44.7        49.0        53.0        49.0        48.5        48.0        47.5        47.0        46.5        46.0        45.5
x                        Indonesia (IDR)             9425        9010         8577       8790        9068         8800        8700        8600        8500        8400        8300        8200        8100
x                        Malay sia (MYR)              3.42        3.08        3.02        3.19        3.17        3.02        3.00        2.95        2.88        2.85        2.82        2.79        2.74
x                        Philippines (PHP)            46.5        43.6        43.3        43.7        43.8        42.5        42.3        42.0        41.0        40.5        40.0        40.0        40.0
x                        Singapore (SGD)              1.41        1.28        1.23        1.31        1.30        1.24        1.23        1.21        1.19        1.18        1.17        1.16        1.15
x                        Thailand (THB)               33.3        30.1        30.7        31.1        31.6        30.2        29.7        29.2        28.8        28.5        28.0        27.5        27.0
                         Vietnam (VND)               18200       19498       20515       20830       21037       21500       21500       21500       21500       21500       21500       21500       21500


Africa                   x                       x           x           x           x           x           x           x           x           x           x           x           x           x
x                        South Africa (ZAR)           7.36        6.62        6.78        8.04        8.07        8.00        8.00        7.50        7.30        7.00        6.80        6.80        6.80


Source: HSBC




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   Currency Strategy                                                                                                 abc
   March 2012




Exchange rates vs EUR & GBP

end period                            2009    2010    2011                    2012                            2013
                                        Q4      Q4      Q2      Q3      Q4     Q1f     Q2f      Q3f    Q4f     Q1f   Q2f    Q3f    Q4f
Vs euro        x
Americas       x
x              US (USD)                1.43    1.34    1.45    1.34    1.30    1.34    1.37     1.40   1.44   1.45   1.45   1.45   1.45
x              Canada (CAD)            1.50    1.33    1.40    1.40    1.32    1.34    1.37     1.37   1.40   1.38   1.38   1.38   1.38
Europe         x
x              UK (GBP)                0.89    0.86    0.90    0.86    0.84    0.87    0.87     0.89   0.90   0.91   0.89   0.89   0.89
x              Sw eden (SEK)          10.24    9.02    9.15    9.21    8.90    8.90    8.90     8.80   8.80   8.75   8.70   8.65   8.60
x              Norw ay (NOK)           8.29    7.80    7.78    7.88    7.75    7.65    7.55     7.45   7.40   7.35   7.30   7.25   7.20
x              Sw itzerland (CHF)      1.48    1.25    1.22    1.22    1.21    1.20    1.20     1.20   1.20   1.20   1.20   1.20   1.20
x              Russia (RUB)            43.4    40.9    40.7    42.8    41.6    39.5    42.2     44.8   45.9   43.1   47.1   48.1   49.0
x              Poland (PLN)            4.11    3.96    3.98    4.42    4.46    4.20    4.30     4.10   4.00   4.00   3.90   3.80   3.80
x              Hungary (HUF)            270     278     266     293     315     295     295      280    275    275    270    270    270
x              Czech Republic (CZK)    26.4    25.1    24.3    24.7    25.5    25.6    26.0     24.5   24.3   24.0   23.8   23.7   23.7
Asia/Pacific   x                          x       x       x       x       x       x       x        x      x      x      x      x      x
x              Japan (JPY)              134     109     117     103     100     105     105      105    107    104    104    104    104
x              Australia (AUD)         1.60    1.31    1.35    1.38    1.27    1.26    1.33     1.40   1.52   1.53   1.53   1.53   1.53
x              New Zealand (NZD)       1.97    1.72    1.76    1.76    1.66    1.76    1.83     1.92   1.97   2.01   2.01   2.01   2.01

Vs sterling    x                          x       x       x       x       x       x       x        x      x      x      x      x      x
Americas       x                          x       x       x       x       x       x       x        x      x      x      x      x      x
x              US (USD)                1.61    1.57    1.61    1.56    1.55    1.55    1.57     1.57   1.60   1.60   1.62   1.62   1.62
x              Canada (CAD)            1.69    1.56    1.55    1.62    1.58    1.55    1.57     1.54   1.55   1.52   1.54   1.54   1.54
Europe         x                          x       x       x       x       x       x       x        x      x      x      x      x      x
x              Eurozone (EUR)          0.89    0.86    0.90    0.86    0.84    0.87    0.87     0.89   0.90   0.91   0.89   0.89   0.89
x
x              Sw eden (SEK)          11.53   10.53   10.13   10.70   10.65   10.28   10.19     9.90   9.76   9.66   9.74   9.69   9.63
x              Norw ay (NOK)           9.33    9.10    8.61    9.15    9.27    8.84    8.64     8.38   8.21   8.12   8.17   8.12   8.06
x              Sw itzerland (CHF)      1.67    1.46    1.35    1.41    1.45    1.39    1.37     1.35   1.33   1.33   1.34   1.34   1.34
Asia/Pacific   x                          x       x       x       x       x       x       x        x      x      x      x      x      x
x              Japan (JPY)              150     127     130     120     120     121     121      118    118    115    117    117    117
x              Australia (AUD)         1.80    1.53    1.50    1.60    1.52    1.46    1.52     1.57   1.68   1.69   1.71   1.71   1.71
x              New Zealand (NZD)       2.22    2.00    1.94    2.04    1.99    2.04    2.09     2.16   2.19   2.22   2.26   2.26   2.26


Source: HSBC




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Notes




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Notes




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    Macro
    Currency Strategy                                                                                          abc
    March 2012




Disclosure appendix
Analyst Certification
The following analyst(s), economist(s), and/or strategist(s) who is(are) primarily responsible for this report, certifies(y) that the
opinion(s) on the subject security(ies) or issuer(s) and/or any other views or forecasts expressed herein accurately reflect their
personal view(s) and that no part of their compensation was, is or will be directly or indirectly related to the specific
recommendation(s) or views contained in this research report: David Bloom, Clyde Wardle, Robert Lynch, Paul Mackel,
Daragh Maher, Stacy Williams, Perry Kojodjojo, Marjorie Hernandez, Mark McDonald, Daniel Hui, Dominic Bunning and
Murat Toprak

Important Disclosures
This document has been prepared and is being distributed by the Research Department of HSBC and is intended solely for the
clients of HSBC and is not for publication to other persons, whether through the press or by other means.

This document is for information purposes only and it should not be regarded as an offer to sell or as a solicitation of an offer
to buy the securities or other investment products mentioned in it and/or to participate in any trading strategy. Advice in this
document is general and should not be construed as personal advice, given it has been prepared without taking account of the
objectives, financial situation or needs of any particular investor. Accordingly, investors should, before acting on the advice,
consider the appropriateness of the advice, having regard to their objectives, financial situation and needs. If necessary, seek
professional investment and tax advice.

Certain investment products mentioned in this document may not be eligible for sale in some states or countries, and they may
not be suitable for all types of investors. Investors should consult with their HSBC representative regarding the suitability of
the investment products mentioned in this document and take into account their specific investment objectives, financial
situation or particular needs before making a commitment to purchase investment products.

The value of and the income produced by the investment products mentioned in this document may fluctuate, so that an
investor may get back less than originally invested. Certain high-volatility investments can be subject to sudden and large falls
in value that could equal or exceed the amount invested. Value and income from investment products may be adversely
affected by exchange rates, interest rates, or other factors. Past performance of a particular investment product is not indicative
of future results.

Analysts, economists, and strategists are paid in part by reference to the profitability of HSBC which includes investment
banking revenues.

For disclosures in respect of any company mentioned in this report, please see the most recently published report on that
company available at www.hsbcnet.com/research.

* HSBC Legal Entities are listed in the Disclaimer below.

Additional disclosures
1    This report is dated as at 08 March 2012.
2    All market data included in this report are dated as at close 07 March 2012, unless otherwise indicated in the report.
3    HSBC has procedures in place to identify and manage any potential conflicts of interest that arise in connection with its
     Research business. HSBC's analysts and its other staff who are involved in the preparation and dissemination of Research
     operate and have a management reporting line independent of HSBC's Investment Banking business. Information Barrier
     procedures are in place between the Investment Banking and Research businesses to ensure that any confidential and/or
     price sensitive information is handled in an appropriate manner.




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     Macro
     Currency Strategy                                                                                                                      abc
     March 2012




Disclaimer
* Legal entities as at 04 March 2011                                                                                     Issuer of report
‘UAE’ HSBC Bank Middle East Limited, Dubai; ‘HK’ The Hongkong and Shanghai Banking Corporation
                                                                                                                         HSBC Bank plc
Limited, Hong Kong; ‘TW’ HSBC Securities (Taiwan) Corporation Limited; ‘CA’ HSBC Securities (Canada)
Inc, Toronto; HSBC Bank, Paris Branch; HSBC France; ‘DE’ HSBC Trinkaus & Burkhardt AG, Düsseldorf;                       8 Canada Square, London
000 HSBC Bank (RR), Moscow; ‘IN’ HSBC Securities and Capital Markets (India) Private Limited, Mumbai;                    E14 5HQ, United Kingdom
‘JP’ HSBC Securities (Japan) Limited, Tokyo; ‘EG’ HSBC Securities Egypt SAE, Cairo; ‘CN’ HSBC                            Telephone: +44 20 7991 8888
Investment Bank Asia Limited, Beijing Representative Office; The Hongkong and Shanghai Banking                           Telex: 888866
Corporation Limited, Singapore Branch; The Hongkong and Shanghai Banking Corporation Limited, Seoul
                                                                                                                         Fax: +44 20 7992 4880
Securities Branch; The Hongkong and Shanghai Banking Corporation Limited, Seoul Branch; HSBC
Securities (South Africa) (Pty) Ltd, Johannesburg; ‘GR’ HSBC Securities SA, Athens; HSBC Bank plc,                       Website: www.research.hsbc.com
London, Madrid, Milan, Stockholm, Tel Aviv; ‘US’ HSBC Securities (USA) Inc, New York; HSBC Yatirim
Menkul Degerler AS, Istanbul; HSBC México, SA, Institución de Banca Múltiple, Grupo Financiero HSBC;
HSBC Bank Brasil SA – Banco Múltiplo; HSBC Bank Australia Limited; HSBC Bank Argentina SA; HSBC
Saudi Arabia Limited; The Hongkong and Shanghai Banking Corporation Limited, New Zealand Branch
This document is issued and approved in the United Kingdom by HSBC Bank plc for the information of its Clients (as defined in the Rules of FSA) and those
of its affiliates only. If this research is received by a customer of an affiliate of HSBC, its provision to the recipient is subject to the terms of business in place
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Companies or persons associated with them in respect of any business transacted by them in all or any of the securities or instruments referred to in this
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The information in this document is derived from sources the Participating Companies believe to be reliable but which have not been independently verified.
The Participating Companies make no guarantee of its accuracy and completeness and are not responsible for errors of transmission of factual or analytical
data, nor shall the Participating Companies be liable for damages arising out of any person’s reliance upon this information. All charts and graphs are from
publicly available sources or proprietary data. The opinions in this document constitute the present judgement of the Participating Companies, which is subject
to change without notice.
This document is neither an offer to sell, purchase or subscribe for any investment nor a solicitation of such an offer. HSBC Securities (USA) Inc. accepts
responsibility for the content of this research report prepared by its non-US foreign affiliate. All US persons receiving and/or accessing this report and
intending to effect transactions in any security discussed herein should do so with HSBC Securities (USA) Inc. in the United States and not with its non-US
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Singapore Branch for the general information of institutional investors or other persons specified in Sections 274 and 304 of the Securities and Futures Act
(Chapter 289) (“SFA”) and accredited investors and other persons in accordance with the conditions specified in Sections 275 and 305 of the SFA. This
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and Shanghai Banking Corporation Limited, Singapore Branch" representative in respect of any matters arising from, or in connection with this report. HSBC
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Nacional Bancaria y de Valores (CNBV). HSBC Bank (Panama) S.A. is regulated by Superintendencia de Bancos de Panama. Banco HSBC Honduras S.A. is
regulated by Comisión Nacional de Bancos y Seguros (CNBS). Banco HSBC Salvadoreño, S.A. is regulated by Superintendencia del Sistema Financiero
(SSF). HSBC Colombia S.A. is regulated by Superintendencia Financiera de Colombia. Banco HSBC Costa Rica S.A. is supervised by Superintendencia
General de Entidades Financieras (SUGEF). Banistmo Nicaragua, S.A. is authorized and regulated by Superintendencia de Bancos y de Otras Instituciones
Financieras (SIBOIF).
The document is intended to be distributed in its entirety. Unless governing law permits otherwise, you must contact a HSBC Group member in your home
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© Copyright. HSBC Bank plc 2012, ALL RIGHTS RESERVED. No part of this publication may be reproduced, stored in a retrieval system, or transmitted,
on any form or by any means, electronic, mechanical, photocopying, recording, or otherwise, without the prior written permission of HSBC Bank plc. MICA
(P) 208/04/2011 and MICA (P) 040/04/2011


                                                                                                                                                          [323532]



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Main contributors

           David Bloom                                             Stacy Williams
           Global Head of FX Research                              Head of FX Quantitative Strategy
           HSBC Bank plc                                           HSBC Bank plc
           +44 20 7991 5969                                        +44 20 7991 5967
           david.bloom@hsbcib.com                                  stacy.williams@hsbcgroup.com




           Daragh Maher                                            Mark McDonald
           FX Strategist, G10                                      FX Quantitative Strategist
           HSBC Bank plc                                           HSBC Bank plc
           +44 20 7991 5968                                        +44 20 7991 5966
           daragh.maher@hsbcib.com                                 mark.mcdonald@hsbcib.com




           Paul Mackel                                             Daniel Fenn
           Head of Asian FX Research                               FX Quantitative Strategist
           The Hongkong and Shanghai Banking Corporation Limited   HSBC Bank plc
           +852 2996 6565                                          +44 20 7991 6766
           paulmackel@hsbc.com.hk                                  dan.fenn@hsbcib.com




           Daniel Hui                                              Robert Lynch
           FX Strategist, Asia                                     Head of G10 FX Strategy, Americas
           The Hongkong and Shanghai Banking Corporation Limited   HSBC Securities (USA) Inc.
           +852 2822 4340                                          +1 212 525 3159
           danielpyhui@hsbc.com.hk                                 robert.lynch@us.hsbc.com




           Perry Kojodjojo                                         Clyde Wardle
           FX Strategist, Asia                                     Emerging Markets FX Strategist
           The Hongkong and Shanghai Banking Corporation Limited   HSBC Securities (USA) Inc.
           +852 2996 6568                                          +1 212 525 3345
           perrykojodjojo@hsbc.com.hk                              clyde.wardle@us.hsbc.com




           Dominic Bunning                                         Marjorie Hernandez
           FX Strategist, Asia                                     FX Strategist, Latin America
           The Hongkong and Shanghai Banking Corporation Limited   HSBC Securities (USA) Inc.
           +852 2822 1672                                          +1 212 525 4109
           dominic.bunning@hsbc.com                                marjorie.hernandez@us.hsbc.com




           Murat Toprak
           FX Strategist, EMEA
           HSBC Bank plc
           +44 20 7991 5415
           murat.toprak@hsbcib.com

				
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