Docstoc
EXCLUSIVE OFFER FOR DOCSTOC USERS
Try the all-new QuickBooks Online for FREE.  No credit card required.

Credit Suisse - Equilibrium Exchange Rates

Document Sample
Credit Suisse - Equilibrium Exchange Rates Powered By Docstoc
					                                                                                                                  31 May 2012
                                                                                                       Fixed Income Research
                                                                                   http://www.credit-suisse.com/researchandanalytics




                                              Equilibrium Exchange Rates
                                              International      FX Strategy


                      Research Analyst        Credit Suisse Fair Value 2012
                             Baron Chan
                                              In our 2012 Credit Suisse fair value update, we re-estimate our long-term
                       +44 20 7883 4188
               baron.chan@credit-suisse.com   equilibrium exchange rate model, extending the sample period from 1980-2006
                                              to 1980-2010. We find that the inclusion of recent observations results in
                                              meaningful impact on the results. The key conclusions of our 2012 updates are:

                                               The valuation spectrum reveals interesting patterns related to regions and
                                                currency features. Non-Japan Asia currencies are cheap to their fair values.
                                                This is followed by EMEA and Latam currencies, and then G10 low-yielding
                                                currencies, such as GBP, JPY and SEK. The high-yielding commodity-
                                                related currencies as well as the Swiss franc appear very expensive

                                               The US dollar is the cheapest among G10 currencies, and the current USD
                                                undervaluation versus G10 currencies is close to the bottom of its historical
                                                range. The US dollar appears to remain rich against a broader set of
                                                currencies, thanks to its overvaluation against EM currencies.

                                               Euro-dollar fair value is at $1.18. On a trade-weighted basis, the EUR is
                                                close to fairly priced. Within the European context, the euro is now trading
                                                cheap to its major trading partners.

                                               We estimate fair value for USDJPY at 83.6, largely unchanged from last
                                                year‟s estimate of 83.4. Our 2012 EURJPY fair value estimate is 98.6, up
                                                marginally from 97.0 last year.

                                               Commodity-related currencies are among the most expensive in our
                                                framework. However, after adjusting for elevated commodity prices, we note
                                                that the Canadian dollar is the most overvalued, followed by the Kiwi dollar.

                                               Joining the “expensive” club, the Swiss franc is among the few currencies to
                                                diverge by multiple standard deviations from fair value. Given the extreme
                                                valuation in the CHF and the SNB‟s EURCHF floor firmly in place, we see
                                                good value in being short the CHF versus the “cheap” G10 currencies.

                                               We also extend our framework to cover a few more emerging market
                                                currencies, such as the Chilean peso (CLP), Israeli shekel (ILS), Indian
                                                rupee (INR), Malaysian ringgit (MYR), and Indonesian rupiah (IDR).




ANALYST CERTIFICATIONS AND IMPORTANT DISCLOSURES ARE IN THE DISCLOSURE APPENDIX. FOR OTHER
IMPORTANT DISCLOSURES, PLEASE REFER TO https://firesearchdisclosure.credit-suisse.com.

CREDIT SUISSE SECURITIES RESEARCH & ANALYTICS                                                     BEYOND INFORMATION®
                                                                                Client-Driven Solutions, Insights, and Access
                                                                                                                                            31 May 2012




                             The CSFV Model – 2012 Update
                             In our 2012 Credit Suisse fair value update, we re-estimate our long-term equilibrium
                             exchange rate model, extending the sample period from 1980-2006 to 1980-2010. We
                             find that the inclusion of recent observations results in meaningful impact on the model
                             parameters and regression results1. This is partly due to the sharp fluctuation in exchange
                             rates, as well as market and macroeconomic variables, recorded throughout the 2008-
                             2010 turbulence period.
                             We also extend our framework to cover a few more emerging market currencies, such as
                             the Chilean peso (CLP), Israeli shekel (ILS), Indian rupee (INR), Malaysian ringgit (MYR),
                             and Indonesian rupiah (IDR).
                             Exhibit 1 compares the 2012 fair values of most commonly traded pairs to our
                             previous 2011 fair value estimates. For details and a longer history of Credit Suisse
                             fair value estimates, please refer to Appendix II.

                             Exhibit 1: Summary of changes in Credit Suisse Fair Value estimates
                                                               vs USD                   vs EUR                     vs JPY             Other crosses
                                                            2012    2011             2012    2011               2012    2011          2012     2011

                                                     EUR    1.18       1.16
                                                     JPY    83.7       83.4          98.7          97.0
                                                     GBP    1.47       1.56          0.80          0.75         123           130
                                  G10




                                                     CHF    1.15       1.17          1.35          1.36          73            71
                                                     CAD    1.26       1.20          1.48          1.40          67            69
                                                     AUD    0.70       0.62          1.68          1.87         58.8          51.8   AUDNZD AUDNZD
                                                     NZD    0.57       0.49          2.08          2.37         47.5          41.0    1.24   1.26
                                                     SEK    7.06       6.73          8.32          7.82         11.9          12.4
                                                     NOK    6.91       7.51          8.14          8.74         12.1          11.1

                                                     CNY    3.60       3.26
                                                      INR   38.8
                                                      IDR   9376
                                                     KRW    788         829
                                                     MYR    2.38
                                  Emerging Markets




                                                     SGD    0.96       1.00
                                                     TWD    19.4       20.5
                                                     THB    25.4       27.0

                                                     MXN    12.7       12.6
                                                     CLP    530

                                      PLN       3.02                   3.59          3.57          4.18
                                      HUF       213                    265           251           308
                                      CZK       19.9                   25.4          23.5          29.6
                                      ILS       3.62
                                      ZAR       8.37                   8.07
                             By market conventions
                             Source: Credit Suisse



                             Glancing across the spectrum of deviations from fair value, Exhibit 2 reveals interesting
                             patterns related to regions and currency features. The findings are similar to what we
                             previously reported. From left to right, most non-Japan Asia currencies appear to be
                             cheap to their equilibrium exchange rates. This is followed by the EMEA and LATAM
                             currencies, which seem to be slightly underpriced to fairly priced. G10 low-yielding


                             1   For technical details of the 2012 model updates and recalibrations, please refer to Appendix I.


Equilibrium Exchange Rates                                                                                                                            2
                                                                                                              31 May 2012



                             currencies, such as GBP, JPY and SEK, are trading within one standard deviation band
                             rich versus the USD relative to their fair values. On the expensive side, the high-yielding
                             commodity-related currencies as well as the Swiss franc have further stretched their
                             valuations against the USD close to record levels.
                             Compared with last year‟s values, the cross-sectional dispersion of valuation
                             misalignments has declined somewhat. This is attributable to a combination of
                             fundamental reasons (exchange rate mean reversion), and technical reasons (re-
                             calibration of the model and re-alignment of the fixed effects, particularly in some
                             emerging market currencies).

                             Exhibit 2: Deviation from 2012 Credit Suisse fair value (against the USD)


                                 80%         NJA ccys      Deviation from fair value, in %    expensive
                                                           + / - 1 stdev       G10 QE low
                                 60%
                                                                             yielders
                                 40%
                                 20%
                                   0%
                               -20%
                               -40%                     cheap             EMEA AND            G10 Commodity
                                                                          LATAM ccys          bloc and CHF
                               -60%
                                            TWD




                                              ILS




                                             JPY
                                            MYR




                                            NOK
                                             PLN

                                            MXN
                                            KRW
                                             INR




                                             IDR



                                            EUR




                                            CAD
                                            NZD
                                            AUD

                                                                                                                     USD
                                            THB




                                            SEK
                                            CZK
                                            ZAR

                                             CLP
                                            CNY




                                            SGD




                                            HUF




                                            CHF
                                            GBP
                             Source: Credit Suisse



                             Focusing on individual currencies and specific currency blocs, the main conclusions from
                             our fair value update are:


                             US Dollar
                             The US dollar is the cheapest among G10 currencies. Although the US dollar trade-
                             weighted index (TWI) against the major currencies has been trading in “cheap” territory
                             since 2004, we note that the current USD undervaluation versus G10 currencies is close
                             to the bottom of its historical range. The US dollar undervaluation ranges from 6.0%
                             versus the Japanese yen, to as much as 40% versus the Antipodean currencies. We note
                             that the cross-sectional distribution of deviations from fair value continues to mirror
                             the yield premia (i.e., carry) dimension, with the Swiss franc being the exception.
                             Exhibit 3 shows that the US dollar TWI (majors) is trading around 1.2 standard deviation
                             cheap to its implied fair value.
                             On a broader trade-weighted basis, the US dollar appears to be 1.1 standard
                             deviations rich to fair value (Exhibit 4), as the US dollar‟s overvaluation versus the
                             emerging market currencies, particularly the non-Japan Asia bloc, outweighed its
                             undervaluation against the major G10 currencies.




Equilibrium Exchange Rates                                                                                                 3
                                                                                                                                                    31 May 2012




Exhibit 3: The US dollar TWI (Majors) is trading 1.5                           Exhibit 4: ... but the US dollar is fairly traded on a
std dev cheap …                                                                broad TWI basis
  140          USD TWI "Majors"            FV          +/-1 StDev 140            140          USD TWI "Broad"               FV              +/-1 StDev      140
  130                                                                 130        130                                                                        130
                                                                                 120                                                                        120
  120                                                                 120
                                                                                 110                                                                        110
  110                                                                 110        100                                                                        100
  100                                                                 100         90                                                                        90
                                                                                  80                                                                        80
   90                                                                 90
                                                                                  70                                                                        70
   80                                                                 80
                                                                                  60                                                                        60
   70                                                                 70          50                                                                        50
   60                                                                 60          40                                                                        40
                                                                                       1984     1988       1992   1996     2000    2004      2008    2012
        1984    1988     1992   1996   2000     2004   2008    2012

Source: Credit Suisse                                                          Source: Credit Suisse




                                       Euro
                                       We estimate the 2012 fair value for EURUSD at $1.18, slightly higher compared with last
                                       year‟s estimate of 1.16. We note that technical reasons are behind the higher EURUSD
                                       fair value, as our 2011 estimate has also been revised higher to 1.23. Fundamentally, our
                                       model suggests that EURUSD fair value has continuously fallen since 2009.
                                       At the current rate of 1.26, EURUSD is 7%, or 0.5 standard deviations, rich to its fair value.
                                       We suspect that global central bank reserve diversification flows have been an important
                                       factor supporting the euro and preventing it from a powerful reversion to fair value during
                                       the height of the sovereign fiscal crisis.
                                       On a trade-weighted basis, the EUR TWI has exhibited mean reversion over the past three
                                       years, although it is almost fairly priced (Exhibit 5). Within the European context, the euro
                                       is now trading cheap to its major partners. Exhibit 6 shows that EUR overvaluation against
                                       an equally weighted basket of NOK, SEK, GBP and CHF has declined from 15%
                                       overvalued in mid-2009 to 5% undervalued now. As such, we see more value in EURUSD
                                       and EURJPY downside, rather than in the G10 European crosses, particularly if the euro
                                       zone fiscal stress intensifies.

Exhibit 5: EUR TWI is close to fairly valued …                              Exhibit 6: ... but cheap vs. a basket of European currencies
  20%              EUR TWI Deviations from FV                                    15%

  15%                                                                                               expensive                   Peaked at
                   +/-1StDev               expensive                             10%                                            Mar 2009
  10%                                                                             5%
    5%
                                                                                  0%
    0%
                                                                                 -5%
   -5%                                                                                                                                      cheap
                                                                                -10%
  -10%
                                                                                -15%                       EUR_Euroean crosses deviations from FV
  -15%                                                                                                     (GBP, CHF, NOK and SEK, 25% each)

  -20%                                                 cheap                    -20%                       +/-1StDev
      1982        1987       1992   1997      2002     2007    2012                 1982            1987      1992       1997      2002      2007        2012

Source: Credit Suisse                                                       Source: Credit Suisse




Equilibrium Exchange Rates                                                                                                                                        4
                                                                                                                                                               31 May 2012




                                          Japanese yen
                                          We estimate fair value for USDJPY at 83.6, essentially unchanged from last year‟s estimate
                                          of 83.4. Our 2012 EURJPY fair value estimate is 98.6, up marginally from 97.0 last year.
                                          The yen has substantially mean-reverted over the past few years amidst persistent risk
                                          aversion and compression of G10 yield differentials, and is now close to its fair value.

Exhibit 7: USDJPY is trading close to its fair value …                                   Exhibit 8: ... so is EURJPY
  260                   USDJPY                        FV                     260                                 EURJPY                           FV
                                                                                           240                                                                           240
                        +1 StDev                      -1 StDev                                                   +1 StDev                         -1 StDev

  210                                                                        210
                                                                                           200                                                                           200


  160                                                                        160           160                                                                           160


  110                                                                        110           120                                                                           120


   60                                                                        60              80                                                                          80
        1984    1988      1992     1996   2000     2004      2008     2012                        1984    1988      1992     1996     2000      2004    2008    2012
Source: Credit Suisse                                                                    Source: Credit Suisse




                                          G10 commodity currencies (AUD, NZD, CAD and NOK)
                                          Commodity-related currencies are among the most expensive in our framework, both
                                          against the dollar and on a trade-weighted basis. In fact, four out of five currencies which
                                          currently exceed one standard deviations rich to fair value are G10 commodity currencies.
                                          We show that most of these currencies‟ misalignments can be explained by the still
                                          elevated level of commodity prices. We employ a two-stage estimation to incorporate
                                          commodity prices into our fair value framework 2 . Exhibit 9 compares the original fair
                                          values and the commodity price adjusted fair values. After adjustment, we note that at 7%
                                          the Canadian dollar is the most overvalued among the commodity currency bloc, followed
                                          by the New Zealand dollar which is 5% overvalued.
                                          We also use AUDUSD as an illustration below for scenario analysis. Exhibit 10 shows that
                                          AUDUSD is almost fairly priced after adjusting for the commodity prices, and Exhibit 11
                                          illustrates the AUDUSD commodity price adjusted fair value under different commodity
                                          price scenarios. Similar analyses and charts for the other G10 commodity price currencies
                                          can be found in Appendix II (USDCAD – Exhibits 26-28; AUDUSD – Exhibits 27-29;
                                          NZDUSD – Exhibits 30-32; USDNOK – Exhibits 33-35).

                                          Exhibit 9: Comparison between original fair values and commodity price
                                          adjusted fair values
                                                                                            Original             Deviation         Commodity price           Deviation
                                                                         Spot               fair value            from FV         adjusted fair value         from FV
                                          AUDUSD                          0.98                0.70                 39%                   0.99                  -1%
                                          NZDUSD                          0.75                0.57                 32%                   0.72                   5%
                                          USDCAD                          1.02                1.25                 22%                   1.10                   7%
                                          USDNOK                          5.98                6.91                 13%                   5.78                  -3%
                                          Source: Credit Suisse



                                          2   For technical details about the two stage estimation, please refer to Appendix I.


Equilibrium Exchange Rates                                                                                                                                                     5
                                                                                                                                                      31 May 2012




Exhibit 10: AUDUSD is close to fairly priced after                                   Exhibit 11: AUDUSD commodity price augmented
adjusting for commodity prices                                                       FVs under different levels of commodity prices
                                                                                      Scenario Analysis
   50%                  Residuals (orginal FV - AUDUSD)

   40%                  Residuals (commodity price augmented FV)                      AUDUSD fair value                                                       0.70
                        + / - 1 stdev                                                 RBA commodity price index (real terms)          Commodity price augmented FV
   30%
                                                                                      Current lvl = 138                                                  AUDUSD
   20%                                                                                              110.0                                                     0.90
   10%                                                                                              120.0                                                     0.93
                                                                                                    130.0                                                     0.97
    0%
                                                                                                    140.0                                                     1.00
  -10%                                                                                              150.0                                                     1.02
  -20%                                                                                              160.0                                                     1.05
                                                                                                    170.0                                                     1.08
  -30%                                                                                              180.0                                                     1.10
      1982 1986 1990 1994 1998 2002 2006 2010

Source: Credit Suisse                                                                Source: Credit Suisse




                                              Swiss franc
                                              Joining the “expensive” club, the Swiss franc is among the few currencies which exceed 2
                                              standard deviations from fair value. At the Swiss National Bank’s (SNB) official EURCHF
                                              floor of 1.200 (with spot trading at 1.201), the Swiss franc is over two standard deviations
                                              rich to its fair value of 1.35 against the euro. The Swiss franc overvaluation has also
                                              reached a record level on a TWI basis. Exhibit 13 shows that this is the largest
                                              overvaluation on record, substantially larger than the extreme levels seen in 1994/95, in
                                              the aftermath of the ERM crisis. We think CHF overvaluation supports the SNB’s
                                              concerns over deflationary risk and its FX policy stance. Even with EURCHF at the 1.20
                                              floor, the CHF remains expensive and should weaken over time.
                                              Given the extreme valuation in the CHF and with the SNB’s EURCHF floor firmly in place,
                                              we see good value in being short the CHF versus the “cheap” G10 currencies such as the
                                              USD and the JPY.

Exhibit 12: EURCHF is over 2 standard deviations                                     Exhibit 13: ... the Swiss franc overvaluation has also
cheap to its fair value of 1.35 …                                                    reached a record level on a TWI basis
                                   EURCHF                   FV                          25%
                                   +1 StDev                 -1 StDev
                                                                                                             CHF TWI Deviations from FV expensive
   2                                                                           2
                                                                                        20%                  +/-1StDev

  1.8                                                                          1.8      15%

  1.6                                                                          1.6      10%

                                                                                         5%
  1.4                                                                          1.4
                                                                                         0%
  1.2                                                                          1.2
                                                                                        -5%
                                                                                                                                            cheap
   1                                                                           1       -10%
        1984   1988     1992      1996        2000   2004        2008   2012               1982           1987     1992        1997    2002      2007      2012

Source: Credit Suisse                                                                Source: Credit Suisse




Equilibrium Exchange Rates                                                                                                                                        6
                                                                                                                31 May 2012




                             Appendix I                       The CSFV Model – 2012 Update
                             In our 2012 Credit Suisse fair value update, we have re-estimated our long-term
                             equilibrium exchange rate model, extending the sample period from 1980-2006 to 1980-
                             2010. We find that the inclusion of recent observations resulted in meaningful impacts on
                             the model parameters and regression results.
                             We have made two modifications to the existing model. First, we removed the net
                             investment income (NII) variable from the model, as it has lost statistical significance. We
                             acknowledge that the extreme volatility in the NII variable saw in 2008 and 2009 has
                             largely impaired the variable‟s usefulness in explaining FX price movement. In addition,
                             we note that trade balance, another external balance variable in the model, has lost some
                             explanatory power (although it remains significant) relative to other variables such as PPP,
                             yield and productivity.
                             Second, we used semi-truncated panel dataset, via dummy variables, to control for the
                             time effect of pre and post eurozone inception. Although explanatory variables in euro
                             zone members exhibited certain degree of fluctuation post 1999, the independent
                             variables are essentially brought in line with EURUSD price action. This mitigates the
                             problem of under-estimation bias induced by limited variation in the currency movement
                             for the euro zone members in our panel database.
                             Exhibit 14 depicts the new estimates for the long-run coefficients, comparing them with the
                             estimates obtained in the previous updates in 2004 and 2008. These coefficient estimates
                             represent the long-term elasticity of the nominal exchange rate with respect to each
                             variable.

                             Exhibit 14: Long-term coefficient estimates
                                                               Panel DOLS –      Panel DOLS –           Panel DOLS –
                                                                2012 Update       2008 Update            2004 Update
                             PPP                                   -0.81             -0.78                  -0.88
                              t-stat                              -14.45            -15.49                 -15.49
                              p-value                               0.00              0.00                  0.00
                             Yield differential                     4.60              3.64                  4.21
                              t-stat                                8.51              7.95                  8.39
                              p-value                               0.00              0.00                  0.00
                             Relative productivity                  0.77              0.50                  0.59
                              t-stat                                4.57              3.41                  3.56
                              p-value                               0.00              0.00                  0.00
                             Trade Balance                          0.69              0.85                  1.08
                              t-stat                                2.17              3.65                  2.81
                              p-value                               0.00              0.00                  0.01
                             Net Investment Income                    -               1.43                  1.59
                              t-stat                                  -               2.15                  1.87
                              p-value                                 -               0.0                   0.00

                             R-squared adjusted                    0.996             0.996                  0.996
                             Akaike Information Criterion         -0.995            -0.980                 -1.010
                             Schwartz Information Criterion       -0.646            -0.633                 -0.611
                             Source: Credit Suisse




Equilibrium Exchange Rates                                                                                                7
                                                                                                                31 May 2012




                             Long term coefficients: We note that the explanatory power of the PPP and yield
                             differential remain strong, and are highly significant. At the same time, the relative
                             productivity variable also gained explanatory power in explaining currency movement.
                             However, the usefulness of external balances in explaining FX has weakened substantially
                             – Although the coefficient on trade balance remains statistically significant, its magnitude
                             has been largely reduced. Overall, we think the inclusion of recent observations resulted
                             in meaningful impacts on the model parameters and regression results. This is partly due
                             to the sharp fluctuation in exchange rates, as well as market and macroeconomic
                             variables, recorded throughout the 2008-10 turbulence period. In addition, the recent
                             observations also feature new risk factors, such as sovereign credit and liquidity risk
                             premium, which have heavily influenced market variables and currency market price action.
                             Short term dynamic coefficients: The PDOLS estimation also generates a set of
                             powerful short-term dynamics, which captures the simultaneous, and potentially
                             endogenous, interaction between the nominal exchange rate and the different
                             macroeconomic variables, and helps address the issue of serial correlation in the residuals.
                             At the same time, they add some dynamics to our long-term fair value, enhancing the
                             usefulness of the fit of our estimates.
                             Country-specific intercepts: The model also estimates country-specific intercepts, which
                             effectively rebase each exchange rate, such that the fair value is on average equal to spot
                             over the sample period. The extension of the sample period has, therefore, affected the
                             fair value estimates, making the fair value more in line with the spot rate in the sample. In
                             most cases, this had a marginal impact. In a few cases, such as the case of Asian and
                             EMEA currencies, the impact was more pronounced.




Equilibrium Exchange Rates                                                                                                8
                                                                                                                      31 May 2012




                             TECHNICAL NOTE I: A brief recap of the CSFV model


                             Our CSFV model is rooted in traditional purchasing power parity (PPP) theory, but is
                             augmented by several structural and cyclical factors, which help explain, both
                             theoretically and empirically, much of the observed deviation from basic PPP in the
                             floating exchange rate period. We employ a panel dynamic OLS (PDOLS) framework,
                             which allows us to obtain robust long-run estimates of our fair values with rich short-term
                             dynamics. In this way we focus on the “true” long-run determinant of exchange rates in
                             general, rather than simply describing the history of any single exchange rate, as a more
                             traditional country-by-country approach may do. The PDOLS estimator also helps to
                             address potential serial correlation in the residuals introduced by the presence of non-
                             stationary variables in our data set.
                             In the 2012 update, our panel data set consists of 21 OECD countries, with a sample
                             period of 30 years, starting in 1980. We estimate our long-term exchange rate
                             equilibrium values with the following equation:

                                    sit   i  1 ( pit  pt* )   2 ( Rit  Rt* )   3 ( gdppcit  gdppct* ) 
                                                                                                                         [1]
                                           4 ( BALit  BAL* )   5 ( NII it  NII t* )   it
                                                           t

                             where s is USD per unit of home currency, p is        Table 1: Long-Run Coefficients
                             the home price level as measured by GDP                                                 PANEL DOLS
                             deflator, R is the ten-year-bond yield, gdppc is      PPP                                 -0.81
                             real GDP per capita (a proxy for productivity),       t-stat                             -14.45
                             BAL is the goods and services trade balance as        p-value                              0.00
                             percentage of GDP, and NII is net investment          Yield differential                   4.60
                             income as a percentage of GDP.                        t-stat                               8.51
                             Lower cases indicate data are in logarithmic          p-value                              0.00
                             terms, and * indicates a „foreign‟ variable, which    Relative productivity                0.77
                             in each case here is the US.                          t-stat                               4.57
                                                                                   p-value                              0.00
                             In Table 1 we display the estimated long-run          Trade Balance                        0.69
                             coefficients (representing the long-term elasticity   t-stat                               2.17
                             of the nominal exchange rate with respect to          p-value                              0.00
                             each variable). The estimated coefficients are
                             signed and sized in accordance with                   R-squared adjusted                  0.996
                             expectations.                                         Akaike I.C.                        -0.995
                             We highlight that, in practice, this reading Schwartz I.C.                         -0.646
                             provides only a long-run anchor, around which Source: Credit Suisse
                             we would expect the currency to drift
                             significantly. The direction and extent of such drift is viewed as being driven by more
                             idiosyncratic or exogenous factors, such as shocks to the terms of trade, capital flows, and
                             fiscal / monetary policies.




Equilibrium Exchange Rates                                                                                                      9
                                                                                                                                         31 May 2012




                                                                  nd
                             TECHNICAL NOTE II: 2                      Stage - Apply CSFV to idiosyncratic modeling


                             Our CSFV model can be further extended to capture cross sectional idiosyncrasy, as
                             well as currency specific factors. For instance, we discussed in Credit Suisse Fair Value
                             2010 about how to incorporate commodity prices into our valuation framework. Although
                             our CSFV model indirectly captures the impact of commodity prices and changes in the
                             terms of trade via the trade balance variable, we note that deviations from fair values for
                             AUDUSD, NZDUSD, USDCAD and USDNOK currency pairs have co-varied tightly with
                             commodity prices over the past decades.
                             We suggested a two-stage approach to incorporate commodity prices into our fair value
                             framework with the following equations: This methodology allows us to integrate short
                             term market variables with high frequency data
                             into a medium / long term macro valuation Table 2: FX / commodity elasticity
                             model .                                            nd                    2 stage commodity price adjusted fair values
                                   ^
                                                                                                   AUDUSD / RBA commodity
                                   it     i * Comdty         it    e it   ...... Eq(2)
                                                                                                   price index (in USD)                   0.43
                                       ^   ^     ^                                                 p-value                                0.00
                                  FV it   i   i * Comdty it                 ...... Eq(3)   ^ R-squared                                0.71
                                                                                                it     i * Comdty it  e it
                                                                                                 ^
                                                                                                   NZDUSD / ANZ commodity
                                                                                                        ^      ^
                                                                                                   price   i * Comdty it
                                                                                               FV it   iindex (in USD)                  0.48
                             Where ε is residual series obtained from the                          p-value                                0.00
                             original fair value model (equation (1)), Comdty                      R-squared                              0.38
                             is the corresponding price of commodity                               USDCAD / WTI crude oil
                             baskets, denominated in USD term (in                                  price (USD / barrel)                  -0.14
                             logarithm).                                                           p-value                                0.00
                                                                                                   R-squared                              0.58
                             Table 2 illustrates the estimated elasticity of                       USDNOK / WTI crude oil
                             currency valuation with respect to various                            price (USD / barrel)                  -0.24
                             basket of commodity prices. Deviation from fair                       p-value                                0.00
                             value and commodity prices are tested to be co-                       R-squared                              0.63
                                                                                                 Source: Credit Suisse
                             integrated over time, and that the regression
                             residuals yielded from eq (2) are stationary.
                             Finally, we note that similar methodology can be easily applied to capture other currency
                             specific factors, which are not directly modeling in our FV. A few examples are (1)
                             capital account flows drive emerging markets currencies; (2) reserve diversification flow
                             and credit risk proxy are important for the euro.




Equilibrium Exchange Rates                                                                                                                           10
                                                                                                                                 31 May 2012




                             Appendix II Fair Value Chart Pack – G10
                             US dollar
                             Exhibit 15: US dollar TWI (Majors) is trading close to 1.2 standard deviations cheap
                                                                                                                     Country       % Weight
                              140           USD TWI "Majors"                FV           +/-1 StDev     140
                                                                                                                      Canada          30.7%
                              130                                                                       130
                                                                                                                    Euro area         35.7%
                              120                                                                       120             Japan         17.6%
                              110                                                                       110                 UK         8.7%
                                                                                                                   Switzerland         2.9%
                              100                                                                       100
                                                                                                                      Sweden           2.0%
                                90                                                                      90           Australia         2.4%
                                80                                                                      80
                                70                                                                      70
                                60                                                                      60
                                     1984    1988      1992      1996    2000    2004    2008    2012

                             Source: Credit Suisse, US Federal Reserve




                             Exhibit 16: However, the USD is close to fairly price on a broader measure
                                                                                                                     Country       % Weight
                              140           USD TWI "Broad"               FV            +/-1 StDev     140
                              130                                                                      130            Canada          17.4%
                              120                                                                      120          Euro area         20.2%
                              110                                                                      110              Japan         10.0%
                              100                                                                      100                 UK          4.9%
                                90                                                                     90         Switzerland          1.6%
                                80                                                                     80             Sweden           1.1%
                                70                                                                     70            Australia         1.4%
                                60                                                                     60              Mexico         11.1%
                                50                                                                     50       Ex-Japan Asia         32.3%
                                40                                                                     40     CE3 and S.Africa         0.0%
                                     1984    1988      1992      1996    2000    2004   2008    2012

                             Source: Credit Suisse, US Federal Reserve




Equilibrium Exchange Rates                                                                                                               11
                                                                                                                                                      31 May 2012




                                       Euro

                                       Exhibit 17: EURUSD Fair Value
                                                                      EURUSD                          FV                                   2012 CSFV        1.18
                                        1.6                           +1 StDev                        -1 StDev                     1.6
                                        1.5                                                                                        1.5     + 1 st. dev.     1.35
                                        1.4                                                                                        1.4     - 1 st. dev.     1.03
                                        1.3                                                                                        1.3
                                        1.2                                                                                        1.2
                                        1.1                                                                                        1.1
                                           1                                                                                       1.0
                                        0.9                                                                                        0.9
                                        0.8                                                                                        0.8
                                        0.7                                                                                        0.7
                                               1984       1988          1992     1996       2000           2004    2008     2012

                                       Source: Credit Suisse




Exhibit 18: EUR TWI is still close to 2% expensive                                Exhibit 19: ...... but is now trading cheap relative to a
                                                                                  basket of European currencies
                                                                                  Dotted line represents intra-year peak in EUR TWI vs the European ccys.


  20%               EUR TWI Deviations from FV                                      15%

  15%                                                                                                     expensive              Peaked at
                    +/-1StDev              expensive                                10%                                          Mar 2009
  10%                                                                                5%
    5%
                                                                                     0%
    0%
                                                                                    -5%
   -5%                                                                                                                                       cheap
                                                                                   -10%
  -10%
                                                                                   -15%                       EUR_Euroean crosses deviations from FV
  -15%                                                                                                        (GBP, CHF, NOK and SEK, 25% each)

  -20%                                                     cheap                   -20%                       +/-1StDev
      1982         1987      1992   1997        2002           2007      2012          1982          1987        1992     1997      2002       2007       2012


Source: Credit Suisse                                                             Source: Credit Suisse




Equilibrium Exchange Rates                                                                                                                                    12
                                                                                                                                   31 May 2012




                             Japanese yen

                             Exhibit 20: USDJPY Fair Value


                                260                                                                                260    2012 CSFV       83.7
                                               USDJPY              FV          +1 StDev          -1 StDev

                                                                                                                          + 1 st. dev.   100.2
                                210                                                                                210    - 1 st. dev.    69.9



                                160                                                                                160



                                110                                                                                110



                                  60                                                                               60
                                       1984      1988       1992    1996       2000   2004       2008       2012

                             Source: Credit Suisse




                             Exhibit 21: EURJPY Fair Value

                                                                                                                          2012 CSFV       98.7
                                240            EURJPY              FV           +1 StDev           -1 StDev         240
                                                                                                                          + 1 st. dev.   119.7
                                                                                                                          - 1 st. dev.    81.3
                                200                                                                                 200



                                160                                                                                 160



                                120                                                                                 120



                                  80                                                                                80
                                       1984          1988   1992        1996   2000       2004   2008        2012

                             Source: Credit Suisse




Equilibrium Exchange Rates                                                                                                                  13
                                                                                                                                   31 May 2012




                             Swiss franc

                             Exhibit 22: EURCHF Fair Value

                                                                   EURCHF                        FV                       2012 CSFV      1.35
                                 2                                 +1 StDev                      -1 StDev           2
                                                                                                                          + 1 st. dev.   1.41
                                                                                                                          - 1 st. dev.   1.30
                              1.8                                                                                   1.8


                              1.6                                                                                   1.6


                              1.4                                                                                   1.4


                              1.2                                                                                   1.2


                                 1                                                                                  1
                                     1984       1988     1992      1996       2000     2004           2008   2012

                             Source: Credit Suisse




                             Exhibit 23: USDCHF Fair Value


                                3.0                                                                                 3.0
                                                                                                                          2012 CSFV      1.15
                                                        USDCHF                       FV
                                                        +1 StDev                     -1 StDev
                                2.6                                                                                 2.6   + 1 st. dev.   1.29
                                                                                                                          - 1 st. dev.   1.02
                                2.2                                                                                 2.2

                                1.8                                                                                 1.8

                                1.4                                                                                 1.4

                                1.0                                                                                 1.0

                                0.6                                                                                 0.6
                                      1984       1988     1992     1996       2000        2004        2008   2012

                             Source: Credit Suisse




Equilibrium Exchange Rates                                                                                                                 14
                                                                                                                             31 May 2012




                             UK pound

                             Exhibit 24: GBPUSD Fair Value

                                                        GBPUSD                    FV                                2012 CSFV      1.47
                              2.1                       +1 StDev                  -1 StDev                    2.1
                              2.0                                                                             2.0   + 1 st. dev.   1.61
                              1.9                                                                             1.9   - 1 st. dev.   1.33
                              1.8                                                                             1.8
                              1.7                                                                             1.7
                              1.6                                                                             1.6
                              1.5                                                                             1.5
                              1.4                                                                             1.4
                              1.3                                                                             1.3
                              1.2                                                                             1.2
                              1.1                                                                             1.1
                                    1984        1988       1992    1996   2000         2004    2008    2012

                             Source: Credit Suisse




                             Exhibit 25: EURGBP Fair Value


                              1.00                      EURGBP                   FV                          1.00   2012 CSFV      0.80
                                                        +1 StDev                 -1 StDev
                              0.95                                                                           0.95   + 1 st. dev.   0.88
                              0.90                                                                           0.90   - 1 st. dev.   0.73
                              0.85                                                                           0.85

                              0.80                                                                           0.80

                              0.75                                                                           0.75

                              0.70                                                                           0.70

                              0.65                                                                           0.65

                              0.60                                                                           0.60

                              0.55                                                                           0.55
                                     1984        1988      1992    1996   2000        2004    2008    2012

                             Source: Credit Suisse




Equilibrium Exchange Rates                                                                                                           15
                                                                                                                                                      31 May 2012




                                        Canadian dollar

                                        Exhibit 26: USDCAD Fair Value
                                                                                                                                             2012 CSFV       1.26
                                                                 USDCAD        FV             +1 StDev                -1 StDev
                                            1.6                                                                                   1.6
                                                                                                                                             + 1 st. dev.    1.37
                                            1.5                                                                                   1.5        - 1 st. dev.    1.16
                                            1.4                                                                                   1.4

                                            1.3                                                                                   1.3

                                            1.2                                                                                   1.2

                                            1.1                                                                                   1.1

                                              1                                                                                   1

                                            0.9                                                                                   0.9
                                                  1984          1988   1992   1996      2000           2004    2008        2012

                                        Source: Credit Suisse




Exhibit 27: USDCAD valuation less stretched after                              Exhibit 28: USDCAD commodity price augmented
accounted for oil prices                                                       FVs under different levels of crude oil prices
                                                                                Scenario Analysis
   20%                  Residuals (original FV framework)
                        Residuals (commodity price augmented FV)
                                                                                USDCAD fair value                                                             1.25
                        + / - 1 stdev
   10%                                                                          WTI Crude Oil Prices (in real term)                   Commodity price augmented FV
                                                                                Current lvl = 93                                                          USDCAD
     0%                                                                                         70.0                                                          1.14
                                                                                                80.0                                                          1.12
                                                                                                90.0                                                          1.10
  -10%
                                                                                               100.0                                                          1.09
                                                                                               110.0                                                          1.07
  -20%
                                                                                               120.0                                                          1.06
                                                                                               130.0                                                          1.04
  -30%                                                                                         140.0                                                          1.04
      1982 1986 1990 1994 1998 2002 2006 2010

Source: Credit Suisse                                                          Source: Credit Suisse




Equilibrium Exchange Rates                                                                                                                                      16
                                                                                                                                                31 May 2012




                                         Australian dollar

                                         Exhibit 29: AUDUSD Fair Value
                                                                   AUDUSD                              FV                              2012 CSFV       0.70
                                          1.1                                                                                   1.1
                                                                   +1 StDev                            -1 StDev
                                                                                                                                       + 1 st. dev.    0.80
                                          1.0                                                                                   1.0
                                                                                                                                       - 1 st. dev.    0.62
                                          0.9                                                                                   0.9

                                          0.8                                                                                   0.8

                                          0.7                                                                                   0.7

                                          0.6                                                                                   0.6

                                          0.5                                                                                   0.5

                                          0.4                                                                                   0.4
                                                1984        1988   1992       1996      2000           2004       2008   2012

                                         Source: Credit Suisse




Exhibit 30: AUDUSD close to fair value after                                   Exhibit 31: AUDUSD commodity price augmented
adjusting for commodity prices                                                 FVs under different levels of commodity prices
                                                                                Scenario Analysis
   50%                  Residuals (orginal FV - AUDUSD)

   40%                  Residuals (commodity price augmented FV)                AUDUSD fair value                                                       0.70
                        + / - 1 stdev                                           RBA commodity price index (real term)           Commodity price augmented FV
   30%
                                                                                Current lvl = 138.9                                                 AUDUSD
   20%                                                                                         110.0                                                    0.90
   10%                                                                                         120.0                                                    0.93
                                                                                               130.0                                                    0.97
    0%
                                                                                               140.0                                                    1.00
  -10%                                                                                         150.0                                                    1.02
  -20%                                                                                         160.0                                                    1.05
                                                                                               170.0                                                    1.08
  -30%                                                                                         180.0                                                    1.10
      1982 1986 1990 1994 1998 2002 2006 2010

Source: Credit Suisse                                                          Source: Credit Suisse




Equilibrium Exchange Rates                                                                                                                                17
                                                                                                                                                  31 May 2012




                                          New Zealand dollar

                                          Exhibit 32: NZDUSD Fair Value

                                                                      NZDUSD                             FV                              2012 CSFV       0.57
                                           0.85                       +1 StDev                           -1 StDev                 0.85
                                                                                                                                         + 1 st. dev.    0.64
                                                                                                                                         - 1 st. dev.    0.50
                                           0.75                                                                                   0.75

                                           0.65                                                                                   0.65

                                           0.55                                                                                   0.55

                                           0.45                                                                                   0.45

                                           0.35                                                                                   0.35
                                                  1984        1988   1992    1996         2000           2004       2008   2012

                                          Source: Credit Suisse




Exhibit 33: NZDUSD is still over 6% rich after                                   Exhibit 34: NZDUSD commodity price augmented
adjusted for commodity prices                                                    FVs under different levels of commodity prices

                                                                                  Scenario Analysis
   50%                  Residuals (original FV framework)
                        Residuals (commodity price augmented FV)
   40%                                                                            NZDUSD fair value                                                       0.57
                        +/- 1 stdev
                                                                                  ANZ Commodity Prices (nominal term)             Commodity price augmented FV
   30%
                                                                                  Current lvl = 196                                                   NZDUSD
   20%                                                                                           160.0                                                    0.65
   10%                                                                                           180.0                                                    0.69
                                                                                                 200.0                                                    0.73
    0%
                                                                                                 220.0                                                    0.76
  -10%                                                                                           240.0                                                    0.79
  -20%                                                                                           260.0                                                    0.82
                                                                                                 280.0                                                    0.85
  -30%
                                                                                                 300.0                                                    0.88
      1982 1986 1990 1994 1998 2002 2006 2010

Source: Credit Suisse                                                            Source: Credit Suisse




Equilibrium Exchange Rates                                                                                                                                  18
                                                                                                                                          31 May 2012




                                   Norwegian krone

                                   Exhibit 35: EURNOK Fair Value
                                                           EURNOK                        FV                                      2012 CSFV       8.14
                                    10                                                                                     10
                                                           +1 StDev                      -1 StDev
                                                                                                                                 + 1 st. dev.    8.51
                                                                                                                                 - 1 st. dev.    7.80
                                     9                                                                                     9



                                     8                                                                                     8



                                     7                                                                                     7



                                     6                                                                                     6
                                         1997        1999      2001   2003        2005        2007       2009      2011
                                   Source: Credit Suisse




Exhibit 36: USDNOK is close for fair value after                         Exhibit 37: USDNOK commodity price augmented
adjusted for oil prices                                                  FVs under different levels of commodity prices

                                                                             Scenario Analysis
                             Residuals (orginal FV framework)
   40%                       Residuals (comdty augmented FV)
                             +/- 1 Stdev                                     USDNOK fair value                                                    6.91
   30%                                                                       WTI Crude Oil Prices (in real term)          Commodity price augmented FV
   20%                                                                       Current lvl = 93                                                 USDNOK
                                                                                             70.0                                                 6.19
   10%                                                                                       80.0                                                 6.00
     0%                                                                                      90.0                                                 5.83
                                                                                            100.0                                                 5.69
  -10%
                                                                                            110.0                                                 5.55
  -20%                                                                                      120.0                                                 5.42
                                                                                            130.0                                                 5.31
  -30%
                                                                                            140.0                                                 5.20
      1997 1999 2001 2003 2005 2007 2009 2011

Source: Credit Suisse                                                    Source: Credit Suisse




Equilibrium Exchange Rates                                                                                                                          19
                                                                                                              31 May 2012




                             Swedish krona

                             Exhibit 38: EURSEK Fair Value


                                                        EURSEK              FV                       2012 CSFV      8.32
                              12                                                                12
                                                        +1 StDev            -1 StDev
                                                                                                     + 1 st. dev.   8.91
                              11                                                                11   - 1 st. dev.   7.78


                              10                                                                10


                                9                                                               9


                                8                                                               8


                                7                                                               7
                                    1993         1996       1999   2002   2005    2008   2011

                             Source: Credit Suisse




                             Exhibit 39: USDSEK Fair Value


                              11                        USDSEK             FV                   11   2012 CSFV      7.06
                                                        +1 StDev           -1 StDev
                              10                                                                10   + 1 st. dev.   7.87
                                                                                                     - 1 st. dev.   6.32
                                9                                                               9

                                8                                                               8

                                7                                                               7

                                6                                                               6

                                5                                                               5
                                    1993         1996       1999   2002   2005    2008   2011

                             Source: Credit Suisse




Equilibrium Exchange Rates                                                                                            20
                                                                                                                            31 May 2012




                             Appendix III Fair Value Charts – EM

                             Non-Japan Asia

                             Exhibit 40: USDCNY Fair Value
                                                                                                                   2012 CSFV      3.60
                               14                                       USDCNY                    FV          14
                                                                        +1 StDev                  -1 StDev         + 1 st. dev.   5.32
                               12                                                                             12
                                                                                                                   - 1 st. dev.   2.44
                               10                                                                             10

                                8                                                                             8

                                6                                                                             6

                                4                                                                             4

                                2                                                                             2

                                0                                                                             0
                                    1990             1994       1998          2002        2006         2010

                             Source: Credit Suisse




                             Exhibit 41: USDINR Fair Value
                                                     USDINR                    FV                                  2012 CSFV      38.8
                              60                                                                              60
                                                     +1 StDev                  -1 StDev
                                                                                                                   + 1 st. dev.   45.7
                              50                                                                              50   - 1 st. dev.   32.9


                              40                                                                              40


                              30                                                                              30


                              20                                                                              20
                                    1992        1995        1998       2001     2004       2007        2010


                             Source: Credit Suisse




Equilibrium Exchange Rates                                                                                                          21
                                                                                                                                 31 May 2012




                             Exhibit 42: USDIDR Fair Value
                                                            USDIDR                      FV                              2012 CSFV      9376

                              16000                         +1 StDev                    -1 StDev             16000
                                                                                                                        + 1 st. dev.   13137
                                                                                                                        - 1 st. dev.    6692
                              12000                                                                          12000

                                8000                                                                         8000

                                4000                                                                         4000

                                      0                                                                      0
                                          1988         1992     1996      2000   2004        2008     2012

                             Source: Credit Suisse




                             Exhibit 43: USDKRW Fair Value
                                                            USDKRW                     FV                               2012 CSFV       788
                              1900                                                                               1900
                                                            +1 StDev                   -1 StDev
                                                                                                                        + 1 st. dev.   1020
                              1700                                                                               1700
                                                                                                                        - 1 st. dev.    609
                              1500                                                                               1500

                              1300                                                                               1300

                              1100                                                                               1100

                                900                                                                              900

                                700                                                                              700

                                500                                                                              500
                                      1984           1988     1992     1996   2000    2004     2008     2012

                             Source: Credit Suisse




                             Exhibit 44: USDMYR Fair Value
                                                            USDMYR                      FV                              2012 CSFV       2.38
                               6                                                                                   6
                                                            +1 StDev                    -1 StDev
                                                                                                                        + 1 st. dev.    2.87
                               5                                                                                   5
                                                                                                                        - 1 st. dev.    1.98
                               4                                                                                   4

                               3                                                                                   3

                               2                                                                                   2

                               1                                                                                   1
                                   1988          1992          1996       2000       2004      2008       2012

                             Source: Credit Suisse




Equilibrium Exchange Rates                                                                                                                22
                                                                                                                                    31 May 2012




                             Exhibit 45: USDSGD Fair Value
                                                                                                                           2012 CSFV      0.96
                               3.0                             USDSGD                             FV                 3.0
                                                               +1 StDev                           -1 StDev
                               2.6                                                                                   2.6   + 1 st. dev.   1.24
                                                                                                                           - 1 st. dev.   0.75
                               2.2                                                                                   2.2

                               1.8                                                                                   1.8

                               1.4                                                                                   1.4

                               1.0                                                                                   1.0

                               0.6                                                                                   0.6
                                     1984       1988        1992     1996         2000      2004      2008    2012

                             Source: Credit Suisse



                             Exhibit 46: USDTWD Fair Value
                              50                                                                                      50   2012 CSFV      19.4
                                                             USDTWD                              FV
                              45                             +1 StDev                            -1 StDev             45   + 1 st. dev.   25.7
                              40                                                                                      40   - 1 st. dev.   14.7
                              35                                                                                      35

                              30                                                                                      30
                                                                              3
                              25                                                                                      25

                              20                                                                                      20

                              15                                                                                      15

                              10                                                                                      10
                                   1988              1992     1996          2000          2004        2008     2012

                             Source: Credit Suisse



                             Exhibit 47: USDTHB Fair Value
                                                            USDTHB                          FV                             2012 CSFV      25.4
                              60                                                                                      60
                                                            +1 StDev                        -1 StDev
                                                                                                                           + 1 st. dev.   33.9
                              50                                                                                      50   - 1 st. dev.   19.1

                              40                                                                                      40

                              30                                                                                      30

                              20                                                                                      20

                              10                                                                                      10
                                   1984        1988         1992     1996          2000     2004       2008    2012

                             Source: Credit Suisse




Equilibrium Exchange Rates                                                                                                                  23
                                                                                                                         31 May 2012




                             Latin America

                             Exhibit 48: USDMXN Fair Value

                                                            USDMXN                    FV                        2012 CSFV      12.7
                              16                                                                           16
                                                            +1 StDev                  -1 StDev
                                                                                                                + 1 st. dev.   15.2
                              14                                                                           14
                                                                                                                - 1 st. dev.   10.6
                              12                                                                           12

                              10                                                                           10

                                8                                                                          8

                                6                                                                          6

                                4                                                                          4

                                2                                                                          2
                                    1992         1995         1998      2001   2004    2007       2010

                             Source: Credit Suisse




                             Exhibit 49: USDCLP Fair Value

                                                             USDCLP               FV                            2012 CSFV       530
                              1000                                                                       1000
                                                             +1 StDev             -1 StDev
                                                                                                                + 1 st. dev.    634
                               900                                                                       900
                                                                                                                - 1 st. dev.    444
                               800                                                                       800

                               700                                                                       700

                               600                                                                       600

                               500                                                                       500

                               400                                                                       400

                               300                                                                       300
                                      1992           1995     1998      2001   2004   2007       2010

                             Source: Credit Suisse




Equilibrium Exchange Rates                                                                                                       24
                                                                                                                                 31 May 2012




                             Europe, Middle East and Africa

                             Exhibit 50: USDZAR Fair Value


                                                       USDZAR                        FV                                 2012 CSFV      8.37
                              13                       +1 StDev                      -1 StDev                      13
                                                                                                                        + 1 st. dev.   10.0
                              11                                                                                   11   - 1 st. dev.   6.99

                                9                                                                                  9

                                7                                                                                  7

                                5                                                                                  5

                                3                                                                                  3

                                1                                                                                  1
                                    1984       1988         1992     1996     2000     2004       2008      2012

                             Source: Credit Suisse




                             Exhibit 51: USDILS Fair Value


                                                              USDILS                      FV                            2012 CSFV      3.62
                              5.50                            +1 StDev                    -1 StDev            5.50
                                                                                                                        + 1 st. dev.   4.19
                                                                                                                        - 1 st. dev.   3.13
                              5.00                                                                            5.00


                              4.50                                                                            4.50


                              4.00                                                                            4.00


                              3.50                                                                            3.50


                              3.00                                                                            3.00
                                      1999           2001     2003     2005    2007        2009      2011

                             Source: Credit Suisse




Equilibrium Exchange Rates                                                                                                               25
                                                                                                                               31 May 2012




                             Exhibit 52: EURHUF Fair Value


                                                            EURHUF                        FV                          2012 CSFV       251
                              350                           +1 StDev                      -1 StDev              350
                                                                                                                      + 1 st. dev.    286
                              300                                                                               300
                                                                                                                      - 1 st. dev.    219


                              250                                                                               250

                              200                                                                               200

                              150                                                                               150

                              100                                                                               100
                                     1993            1996      1999      2002     2005          2008     2011

                             Source: Credit Suisse



                             Exhibit 53: EURPLN Fair Value


                                                              EURPLN                     FV                           2011 CSFV      3.56
                                 5                            +1 StDev                   -1 StDev               5
                                                                                                                      + 1 st. dev.   3.95
                              4.5                                                                               4.5   - 1 st. dev.   3.22

                                 4                                                                              4


                              3.5                                                                               3.5


                                 3                                                                              3


                              2.5                                                                               2.5
                                     1995     1997      1999    2001     2003   2005     2007     2009   2011

                             Source: Credit Suisse



                             Exhibit 54: EURCZK Fair Value


                                                            EURCZK                       FV                           2012 CSFV      23.5
                              40                            +1 StDev                     -1 StDev                40
                                                                                                                      + 1 st. dev.   25.1
                                                                                                                      - 1 st. dev.   22.0
                              35                                                                                 35


                              30                                                                                 30


                              25                                                                                 25


                              20                                                                                 20
                                     1995     1997      1999    2001     2003   2005     2007     2009   2011

                             Source: Credit Suisse




Equilibrium Exchange Rates                                                                                                             26
                                        FX RESEARCH AND STRATEGY > GLOBAL

                               Peter von Maydell, Director                             Eric Miller, Managing Director
                               Global Head of FX Strategy                   Global Head of Fixed Income and Economic Research
                                    +44 20 7888 9558                                           +1 212 538 6480
                           peter.vonmaydell@credit-suisse.com                          eric.miller.3@credit-suisse.com

LONDON                                                                                     One Cabot Square, London E14 4QJ, United Kingdom


Aditya Bagaria, Vice President                    Baron Chan, Vice President                      Anezka Christovova, Analyst
+44 20 7888 7428                                  +44 20 7883 4188                                +44 20 7888 6635
aditya.bagaria@credit-suisse.com                  baron.chan@credit-suisse.com                    anezka.christovova@credit-suisse.com


TECHNICAL ANALYSIS
David Sneddon, Managing Director                  Steve Miley, Director
+44 20 7888 7173                                  +44 20 7888 7172
david.sneddon@credit-suisse.com                   steve.miley@credit-suisse.com

Pamela McCloskey, Vice President                  Cilline Bain, Associate
+44 20 7888 7175                                  +44 20 7888 7174
pamela.mccloskey@credit-suisse.com                cilline.bain@credit-suisse.com

NORTH AMERICA                                                                                      Eleven Madison Avenue, New York, NY 10010


Daniel Katzive, Director                          Alvise Marino, Associate
+1 212 538 2163                                   +1 212 325 5911
daniel.katzive@credit-suisse.com                  alvise.marino@credit-suisse.com

TECHNICAL ANALYSIS
Christopher Hine, Vice President
+1 212 538 5727
christopher.hine@credit-suisse.com

SINGAPORE                                                                                                   One Raffles Link, Singapore 039393

Puay Yeong Goh, Associate
+65 6212 4464
puayyeong.goh@credit-suisse.com


ASIA MACRO STRATEGY
Ray Farris, Managing Director                     Trang Thuy Le, Analyst
Chief Asia Strategist                             +65 6212 4260
+65 6212 3412                                     trangthuy.le@credit-suisse.com
ray.farris@credit-suisse.com

TOKYO                                                                       Izumi Garden Tower, 1-6 Roppongi 1-Chome, Minato-ku, Tokyo 106-6024

Koji Fukaya, Director
Japan Chief Currency Strategist
+81 3 4550 7413
koji.fukaya@credit-suisse.com
Disclosure Appendix
Analyst Certification
I, Baron Chan, certify that (1) the views expressed in this report accurately reflect my personal views about all of the subject companies and securities and
(2) no part of my compensation was, is or will be directly or indirectly related to the specific recommendations or views expressed in this report.
Important Disclosures
Credit Suisse's policy is only to publish investment research that is impartial, independent, clear, fair and not misleading. For more detail, please refer to
Credit Suisse's Policies for Managing Conflicts of Interest in connection with Investment Research: http://www.csfb.com/research-and-
analytics/disclaimer/managing_conflicts_disclaimer.html
Credit Suisse’s policy is to publish research reports as it deems appropriate, based on developments with the subject issuer, the sector or the market that
may have a material impact on the research views or opinions stated herein.
The analyst(s) involved in the preparation of this research report received compensation that is based upon various factors, including Credit Suisse's total
revenues, a portion of which are generated by Credit Suisse's Investment Banking and Fixed Income Divisions.
Credit Suisse may trade as principal in the securities or derivatives of the issuers that are the subject of this report.
At any point in time, Credit Suisse is likely to have significant holdings in the securities mentioned in this report.
As at the date of this report, Credit Suisse acts as a market maker or liquidity provider in the debt securities of the subject issuer(s) mentioned in this report.
For important disclosure information on securities recommended in this report, please visit the website at https://firesearchdisclosure.credit-suisse.com or call +1-212-538-7625.
For the history of any relative value trade ideas suggested by the Fixed Income research department as well as fundamental recommendations provided by
the Emerging Markets Sovereign Strategy Group over the previous 12 months, please view the document at http://research-and-
analytics.csfb.com/docpopup.asp?ctbdocid=330703_1_en. Credit Suisse clients with access to the Locus website may refer to http://www.credit-
suisse.com/locus.
For the history of recommendations provided by Technical Analysis, please visit the website at http://www.credit-suisse.com/techanalysis.
Credit Suisse does not provide any tax advice. Any statement herein regarding any US federal tax is not intended or written to be used, and cannot be used,
by any taxpayer for the purposes of avoiding any penalties.
Emerging Markets Bond Recommendation Definitions
Buy: Indicates a recommended buy on our expectation that the issue will deliver a return higher than the risk-free rate.
Sell: Indicates a recommended sell on our expectation that the issue will deliver a return lower than the risk-free rate.
Corporate Bond Fundamental Recommendation Definitions
Buy: Indicates a recommended buy on our expectation that the issue will be a top performer in its sector.
Outperform: Indicates an above-average total return performer within its sector. Bonds in this category have stable or improving credit profiles and are
undervalued, or they may be weaker credits that, we believe, are cheap relative to the sector and are expected to outperform on a total-return basis. These
bonds may possess price risk in a volatile environment.
Market Perform: Indicates a bond that is expected to return average performance in its sector.
Underperform: Indicates a below-average total-return performer within its sector. Bonds in this category have weak or worsening credit trends, or they may
be stable credits that, we believe, are overvalued or rich relative to the sector.
Sell: Indicates a recommended sell on the expectation that the issue will be among the poor performers in its sector.
Restricted: In certain circumstances, Credit Suisse policy and/or applicable law and regulations preclude certain types of communications, including an
investment recommendation, during the course of Credit Suisse's engagement in an investment banking transaction and in certain other circumstances.
Not Rated: Credit Suisse Global Credit Research or Global Leveraged Finance Research covers the issuer but currently does not offer an investment view
on the subject issue.
Not Covered: Neither Credit Suisse Global Credit Research nor Global Leveraged Finance Research covers the issuer or offers an investment view on the
issuer or any securities related to it. Any communication from Research on securities or companies that Credit Suisse does not cover is factual or a
reasonable, non-material deduction based on an analysis of publicly available information.
Corporate Bond Risk Category Definitions
In addition to the recommendation, each issue may have a risk category indicating that it is an appropriate holding for an "average" high yield investor,
designated as Market, or that it has a higher or lower risk profile, designated as Speculative and Conservative, respectively.
Credit Suisse Credit Rating Definitions
Credit Suisse may assign rating opinions to investment-grade and crossover issuers. Ratings are based on our assessment of a company's creditworthiness
and are not recommendations to buy or sell a security. The ratings scale (AAA, AA, A, BBB, BB, B) is dependent on our assessment of an issuer's ability to
meet its financial commitments in a timely manner. Within each category, creditworthiness is further detailed with a scale of High, Mid, or Low – with High
being the strongest sub-category rating: High AAA, Mid AAA, Low AAA – obligor's capacity to meet its financial commitments is extremely strong; High
AA, Mid AA, Low AA – obligor's capacity to meet its financial commitments is very strong; High A, Mid A, Low A – obligor's capacity to meet its financial
commitments is strong; High BBB, Mid BBB, Low BBB – obligor's capacity to meet its financial commitments is adequate, but adverse
economic/operating/financial circumstances are more likely to lead to a weakened capacity to meet its obligations; High BB, Mid BB, Low BB – obligations
have speculative characteristics and are subject to substantial credit risk; High B, Mid B, Low B – obligor's capacity to meet its financial commitments is
very weak and highly vulnerable to adverse economic, operating, and financial circumstances; High CCC, Mid CCC, Low CCC – obligor's capacity to meet
its financial commitments is extremely weak and is dependent on favorable economic, operating, and financial circumstances. Credit Suisse's rating opinions
do not necessarily correlate with those of the rating agencies.
References in this report to Credit Suisse include all of the subsidiaries and affiliates of Credit Suisse AG operating under its investment banking division. For more information on our
structure, please use the following link: https://www.credit-suisse.com/who_we_are/en/.
This report is not directed to, or intended for distribution to or use by, any person or entity who is a citizen or resident of or located in any locality, state, country or other jurisdiction where
such distribution, publication, availability or use would be contrary to law or regulation or which would subject Credit Suisse AG or its affiliates (“CS”) to any registration or licensing
requirement within such jurisdiction. All material presented in this report, unless specifically indicated otherwise, is under copyright to CS. None of the material, nor its content, nor any
copy of it, may be altered in any way, transmitted to, copied or distributed to any other party, without the prior express written permission of CS. All trademarks, service marks and logos
used in this report are trademarks or service marks or registered trademarks or service marks of CS or its affiliates.
The information, tools and material presented in this report are provided to you for information purposes only and are not to be used or considered as an offer or the solicitation of an offer
to sell or to buy or subscribe for securities or other financial instruments. CS may not have taken any steps to ensure that the securities referred to in this report are suitable for any
particular investor. CS will not treat recipients of this report as its customers by virtue of their receiving this report. The investments and services contained or referred to in this report may
not be suitable for you and it is recommended that you consult an independent investment advisor if you are in doubt about such investments or investment services. Nothing in this report
constitutes investment, legal, accounting or tax advice, or a representation that any investment or strategy is suitable or appropriate to your individual circumstances, or otherwise
constitutes a personal recommendation to you. CS does not advise on the tax consequences of investments and you are advised to contact an independent tax adviser. Please note in
particular that the bases and levels of taxation may change.
Information and opinions presented in this report have been obtained or derived from sources believed by CS to be reliable, but CS makes no representation as to their accuracy or
completeness. CS accepts no liability for loss arising from the use of the material presented in this report, except that this exclusion of liability does not apply to the extent that such liability
arises under specific statutes or regulations applicable to CS. This report is not to be relied upon in substitution for the exercise of independent judgment. CS may have issued, and may
in the future issue, other reports that are inconsistent with, and reach different conclusions from, the information presented in this report. Those reports reflect the different assumptions,
views and analytical methods of the analysts who prepared them and CS is under no obligation to ensure that such other reports are brought to the attention of any recipient of this report.
CS may, to the extent permitted by law, participate or invest in financing transactions with the issuer(s) of the securities referred to in this report, perform services for or solicit business
from such issuers, and/or have a position or holding, or other material interest, or effect transactions, in such securities or options thereon, or other investments related thereto. In addition,
it may make markets in the securities mentioned in the material presented in this report. CS may have, within the last three years, served as manager or co-manager of a public offering of
securities for, or currently may make a primary market in issues of, any or all of the entities mentioned in this report or may be providing, or have provided within the previous 12 months,
significant advice or investment services in relation to the investment concerned or a related investment. Additional information is, subject to duties of confidentiality, available on request.
Some investments referred to in this report will be offered solely by a single entity and in the case of some investments solely by CS, or an associate of CS or CS may be the only market
maker in such investments.
Past performance should not be taken as an indication or guarantee of future performance, and no representation or warranty, express or implied, is made regarding future performance.
Information, opinions and estimates contained in this report reflect a judgement at its original date of publication by CS and are subject to change without notice. The price, value of and income
from any of the securities or financial instruments mentioned in this report can fall as well as rise. The value of securities and financial instruments is subject to exchange rate fluctuation that may
have a positive or adverse effect on the price or income of such securities or financial instruments. Investors in securities such as ADR’s, the values of which are influenced by currency volatility,
effectively assume this risk.
Structured securities are complex instruments, typically involve a high degree of risk and are intended for sale only to sophisticated investors who are capable of understanding and
assuming the risks involved. The market value of any structured security may be affected by changes in economic, financial and political factors (including, but not limited to, spot and
forward interest and exchange rates), time to maturity, market conditions and volatility, and the credit quality of any issuer or reference issuer. Any investor interested in purchasing a
structured product should conduct their own investigation and analysis of the product and consult with their own professional advisers as to the risks involved in making such a purchase.
Some investments discussed in this report may have a high level of volatility. High volatility investments may experience sudden and large falls in their value causing losses when that
investment is realised. Those losses may equal your original investment. Indeed, in the case of some investments the potential losses may exceed the amount of initial investment and, in
such circumstances, you may be required to pay more money to support those losses. Income yields from investments may fluctuate and, in consequence, initial capital paid to make the
investment may be used as part of that income yield. Some investments may not be readily realisable and it may be difficult to sell or realise those investments, similarly it may prove
difficult for you to obtain reliable information about the value, or risks, to which such an investment is exposed.
This report may provide the addresses of, or contain hyperlinks to, websites. Except to the extent to which the report refers to website material of CS, CS has not reviewed any such site
and takes no responsibility for the content contained therein. Such address or hyperlink (including addresses or hyperlinks to CS’s own website material) is provided solely for your
convenience and information and the content of any such website does not in any way form part of this document. Accessing such website or following such link through this report or
CS’s website shall be at your own risk.
This report is issued and distributed in Europe (except Switzerland) by Credit Suisse Securities (Europe) Limited, One Cabot Square, London E14 4QJ, England, which is regulated in the
United Kingdom by The Financial Services Authority (“FSA”). This report is being distributed in Germany by Credit Suisse Securities (Europe) Limited Niederlassung Frankfurt am Main
regulated by the Bundesanstalt fuer Finanzdienstleistungsaufsicht ("BaFin"). This report is being distributed in the United States and Canada by Credit Suisse Securities (USA) LLC; in
Switzerland by Credit Suisse AG; in Brazil by Banco de Investimentos Credit Suisse (Brasil) S.A; in Mexico by Banco Credit Suisse (México), S.A. (transactions related to the securities
mentioned in this report will only be effected in compliance with applicable regulation); in Japan by Credit Suisse Securities (Japan) Limited, Financial Instruments Firm, Director-General of
Kanto Local Finance Bureau (Kinsho) No. 66, a member of Japan Securities Dealers Association, The Financial Futures Association of Japan, Japan Securities Investment Advisers
Association, Type II Financial Instruments Firms Association; elsewhere in Asia/ Pacific by whichever of the following is the appropriately authorised entity in the relevant jurisdiction: Credit
Suisse (Hong Kong) Limited, Credit Suisse Equities (Australia) Limited, Credit Suisse Securities (Thailand) Limited, Credit Suisse Securities (Malaysia) Sdn Bhd, Credit Suisse AG,
Singapore Branch, and elsewhere in the world by the relevant authorised affiliate of the above. Research on Taiwanese securities produced by Credit Suisse AG, Taipei Branch has been
prepared by a registered Senior Business Person. Research provided to residents of Malaysia is authorised by the Head of Research for Credit Suisse Securities (Malaysia) Sdn Bhd, to whom
they should direct any queries on +603 2723 2020. This research may not conform to Canadian disclosure requirements.
In jurisdictions where CS is not already registered or licensed to trade in securities, transactions will only be effected in accordance with applicable securities legislation, which will vary
from jurisdiction to jurisdiction and may require that the trade be made in accordance with applicable exemptions from registration or licensing requirements. Non-U.S. customers wishing
to effect a transaction should contact a CS entity in their local jurisdiction unless governing law permits otherwise. U.S. customers wishing to effect a transaction should do so only by
contacting a representative at Credit Suisse Securities (USA) LLC in the U.S.
This material is not for distribution to retail clients and is directed exclusively at Credit Suisse's market professional and institutional clients. Recipients who are not market professional or
institutional investor clients of CS should seek the advice of their independent financial advisor prior to taking any investment decision based on this report or for any necessary explanation
of its contents. This research may relate to investments or services of a person outside of the UK or to other matters which are not regulated by the FSA or in respect of which the
protections of the FSA for private customers and/or the UK compensation scheme may not be available, and further details as to where this may be the case are available upon request in
respect of this report.
CS may provide various services to US municipal entities or obligated persons ("municipalities"), including suggesting individual transactions or trades and entering into such transactions.
Any services CS provides to municipalities are not viewed as “advice” within the meaning of Section 975 of the Dodd-Frank Wall Street Reform and Consumer Protection Act. CS is
providing any such services and related information solely on an arm’s length basis and not as an advisor or fiduciary to the municipality. In connection with the provision of the any such
services, there is no agreement, direct or indirect, between any municipality (including the officials, management, employees or agents thereof) and CS for CS to provide advice to the
municipality. Municipalities should consult with their financial, accounting and legal advisors regarding any such services provided by CS. In addition, CS is not acting for direct or indirect
compensation to solicit the municipality on behalf of an unaffiliated broker, dealer, municipal securities dealer, municipal advisor, or investment adviser for the purpose of obtaining or
retaining an engagement by the municipality for or in connection with Municipal Financial Products, the issuance of municipal securities, or of an investment adviser to provide investment
advisory services to or on behalf of the municipality.
Copyright © 2012 CREDIT SUISSE GROUP AG and/or its affiliates. All rights reserved.
Investment principal on bonds can be eroded depending on sale price or market price. In addition, there are bonds on which
investment principal can be eroded due to changes in redemption amounts. Care is required when investing in such instruments.
When you purchase non-listed Japanese fixed income securities (Japanese government bonds, Japanese municipal bonds, Japanese government guaranteed bonds, Japanese corporate
bonds) from CS as a seller, you will be requested to pay purchase price only.

				
DOCUMENT INFO
Shared By:
Categories:
Tags: Credit, Suisse
Stats:
views:68
posted:6/26/2012
language:English
pages:29
Description: Credit Suisse Fair Value 2012