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                                                                                                                          16 April 2013

Global Macro Daily
Falling commodity prices =
lower inflation                                                                              Market Insights and Events
                                                                                             Global                                 4
• Despite risk premium considerations not favouring the USD currently, we expect             North America                          4

   a stronger USD over the medium term, especially against low yielding currencies.          Asia Pacific                           5
                                                                                             EEMEA                                  5
   This is supported by aggressive monetary policy easing in Japan and weak
                                                                                             Latin America                          5
   economic prospects in the euro area and the UK, in contrast to stable growth in
   the US (see Focus below).                                                                 The next 24 hours
                                                                                             North America                          6
• A sustained drop in commodity prices (particularly gold and crude) would be a              Europe                                 6
   major positive driver for India. We estimate that the current account balance             Asia Pacific                           6
   could improve by nearly 1%. Full Story                                                    EEMEA                                  6

• Given the recent fall in global commodity prices and the Thai baht’s appreciation,         Latin America                          7

   we have lowered our Thai inflation forecast for the year to 2.9%. Full Story              Calendar                               8

• The National Association of Home Builders (NAHB) index of home builder                     Contacts                               9

   sentiment declined to 42 in April. Full Story Elsewhere, the Empire State
   manufacturing index fell to 3.1 in April from 9.2 in March. Full Story

• Chinese industrial production was softer than expected for the second
   consecutive month. Production of industrial goods declined in line with softer
   fixed investment. Full Story Meanwhile, Q1 GDP slowed to 7.7%y/y from 7.9% in
   Q4. Full Story

• In Europe, we have updated our monthly inflation profiles taking into account the
   latest information available from last week's country releases. Full Story In the
   UK, March consumer and producer price data will be released on Tuesday. We
   have a slightly above-consensus forecast for CP (at 2.9%).

• On Wednesday, we expect the UK MPC minutes to show the same vote split as in
   the March meeting. Full Story

FX risk premia or fundamentals?
Aroop Chatterjee

The FX markets have seen large moves over the past month. Whereas markets were
range-trading for much of March, realized volatility in the major FX crosses (G4
currencies) has been distinctly higher in April. Are these moves driven by fundamentals or
risk premia? We believe fundamentals – relative monetary policy and economic outlooks –
have largely been responsible for these trends.

Aggressive monetary policy easing in Japan and weak economic prospects in the euro
area and the UK contrast with relatively stable growth in the US (despite the recent soft
patch of economic data). As a result, we expect the recent USD strengthening trend
against the rest of the G4 (low yielding currencies) to persist in the months ahead.

Barclays | Global Macro Daily

FIGURE 1                                                                            FIGURE 2
EUR/USD spot versus risk-neutral fair value                                         GBP/USD spot versus risk-neutral fair value
 1.70                                                                                 2.30

 1.60                                                                                 2.10

 1.50                                                                                 1.90

 1.40                                                                                 1.70

 1.30                                                                                 1.50

 1.20                                                                                 1.30

 1.10                                                                                 1.10
    Jun-05           Jun-07          Jun-09             Jun-11                           Jun-05            Jun-07           Jun-09          Jun-11
                       EURUSD spot                EURUSD RNFV                                            GBPUSD spot                       GBPUSD RNFV
Source: Bloomberg, Haver Analytics, Barclays Research                               Source: Bloomberg, Haver Analytics, Barclays Research

                                              To investigate whether risk premia or fundamentals have been responsible for FX market
                                              movements, we need to be able to disentangle these over the short run – a difficult exercise,
                                              in our view. Although fair value models do exist for FX, these tend to be focused on
                                              establishing a level for the exchange rate over the medium term. Further, despite the fact
                                              that FX and asset prices (nominal interest rates, equities, commodities, etc.) can at times
                                              demonstrate strong relationships, these are rarely stable.

                                              The risk-neutral fair value
                                              Instead, we follow the work of Clarida (2012) 1, who shows that a structural relationship can
                                              be derived between nominal FX, national price levels and yields on long-term inflation-
                                              linked bonds. The structural relationship implies a “risk-neutral fair value” for the exchange
                                              rate based on the relative price of inflation linked bonds – the portion that is driven by
                                              fundamentals. Divergences between spot exchange rates and the risk-neutral fair value are
                                              then being driven by risk premia.

                                              Figures 1-3 show how the major USD-crosses compare with their risk-neutral fair value
                                              levels. By and large, the pictures are consistent with our qualitative views on the size and
                                              direction of risk premia in FX (the gap between the spot and risk-neutral fair value lines).
                                              The positive correlation between exchange rates and their risk-neutral fair values implies
                                              that market moves have followed fundamentals (Figure 4). Indeed, this correlation measure
                                              for EUR/USD has flipped to positive from being negative as recently as mid-March 2013.

                                              Fundamentals have become modestly USD positive
                                              Peripheral European issues have meant that EUR/USD has traded with a large negative risk
                                              premium since 2011. This risk premium has normalized since July 2012 as a result of the
                                              ECB’s actions and remained modest even though the flare-up in political risk, notably in Italy
                                              in addition to Cyprus, led to some modest widening in March. More importantly, the risk-
                                              neutral fair value for EUR/USD has declined about 3% over the past few months, reflecting
                                              the improved economic prospects in the US (the real yield differential has become more
                                              USD positive).

                                               Clarida, Richard, “Get Real: Interpreting Nominal Exchange Rate Fluctuations,” International Journal of Central
                                              Banking, 2009.

16 April 2013                                                                                                                                                    2
Barclays | Global Macro Daily

FIGURE 3                                                                    FIGURE 4
USD/JPY spot versus risk-neutral fair value                                 60-day correlation of exchange rates and their risk-neutral
                                                                            fair values
 135                                                                           80

 125                                                                           60

   85                                                                         -40

   75                                                                         -60
    Jun-05           Jun-07          Jun-09             Jun-11                  Jan-12      Apr-12       Jul-12      Oct-12         Jan-13      Apr-13
                   USDJPY spot                     USDJPY RNFV                                     EURUSD             GBPUSD                 USDJPY
Source: Bloomberg, Haver Analytics, Barclays Research                       Source: Bloomberg, Haver Analytics, Barclays Research

                                              Negative risk premia have been persistently weighing on GBP/USD since the global financial
                                              crisis. Although the risk premia have become smaller recently, this has happened largely on
                                              account of a decline in the risk-neutral fair value instead of an appreciation in the GBP/USD
                                              spot rate. The tolerance of higher inflation by the BoE/Treasury has made real yield
                                              differentials less favourable for the GBP versus the USD.

                                              Figure 3 shows that USD/JPY has traded close to its risk-neutral fair value until November
                                              2012. Indeed the BoJ’s unanticipated easing has now pushed the risk premium in USD/JPY
                                              to extremely positive levels (more than 2 standard deviations above the risk-neutral level).
                                              We would expect the higher risk premium to continue to build in the cross as the currency
                                              overshoots. However, it also suggests that further USD/JPY upside may remain limited
                                              unless relative fundamentals begin catching up – if real yields in Japan fall further as the BoJ
                                              easing continues and the US economy is able to emerge from its soft patch.

16 April 2013                                                                                                                                            3
Barclays | Global Macro Daily


                                Trend for global auto registrations should continue to support global IP
                                Julian Callow, Tal Shapsa

                                We find that moderate trend growth in global auto registrations continues, although this
                                has been highly dependent upon growth in Chinese registrations. Within advanced
                                economies, the pace of US auto registrations has become a little flatter in recent months,
                                which would not be surprising, given the significant tax increases on 1 January. Euro area
                                auto registrations appear to be bottoming out, helped by improvement in southern Europe.
                                Full Story

                                North America
                                US FI Outlook for April 16: The bull flattening continues
                                Ajay Rajadhyaksha, Dean Maki

                                TIC data for February show that foreign investors net sold $8bn in US long-term fixed
                                income securities, driven by $16bn in agency securities. They neither net purchased nor
                                sold coupon Treasuries, compared with buying $21bn/m over the previous six months.
                                China net purchased $9bn of coupon Treasuries, and Japan net sold $7bn, driven by both
                                private and official investors. Full Story

                                US home builder sentiment falls further in April
                                Cooper Howes

                                The National Association of Home Builders (NAHB) index of home builder sentiment declined
                                to 42 in April, below our forecast (44) and the consensus (45). The decrease was driven by a
                                drop in the present sales (45, previous: 47) and prospective buyers traffic (30, previous: 34)
                                indices while the future sales index rose modestly to 53 (previous: 50). Full Story

                                Empire State manufacturing index falls in April, but employment improves
                                Cooper Howes

                                The Empire State manufacturing index declined to 3.1 in April from 9.2 in March, below our
                                expectation (7.5) and the consensus (7.0) but above the six-month average of 0.5. There
                                were notable decreases in the new orders (2.2, previous: 8.2) and shipments (0.8, previous:
                                7.8) sub-indices, and the inventories index remained in negative territory with a print of -4.6
                                (previous: -5.4). Full Story

                                Asia Pacific
                                India: Gold and oil prices - Major silver linings?
                                Siddhartha Sanyal, Rahul Bajoria

                                The drop in commodity prices, particularly in gold and crude oil, if sustained, could be a
                                major positive driver for India. The immediate and most visible effect would be on the
                                current account balance, which could improve by nearly 1% of GDP in FY 13-14, on our
                                estimates. A reduction in oil under-recoveries would also reduce the necessity for domestic
                                fuel price hikes, which contribute over 25% to current inflation. Full Story

16 April 2013                                                                                                                 4
Barclays | Global Macro Daily

                                China: A closer look at the March IP, FAI, property sector and retail sales data
                                Steven Lingxiu Yang, Jian Chang, Yiping Huang

                                Industrial production growth posted a downside surprises for the second month in a row.
                                Investment goods production declined, in line with softer fixed-asset investment growth.
                                Infrastructure investment remains robust, offsetting slow property and manufacturing
                                growth. Property investment slowed, and faces more headwinds as property starts edged
                                lower. Property sales were strong in March as the public rushed to conclude transactions
                                before new policies take effect. Full Story

                                Thailand: Lowering our 2013 inflation forecasts; stay overweight ThaiGBs
                                Rahul Bajoria, Rohit Arora

                                Given the recent fall in global commodity prices, the THB's appreciation and our
                                commodities team's downward revisions to their crude oil price forecasts, we have lowered
                                our inflation forecasts. This year, we now expect headline inflation to be 2.9% (previously
                                3.6%) and core inflation to be 1.7% (previously 1.9%). For 2014, we have reduced our
                                headline inflation forecast to 3.2% (previously: 3.8%). The downward revisions are driven
                                mainly by our expectations of lower fuel prices, as well as more benign demand-led price
                                projections. Full Story

                                Israel inflation moderates further, fiscal policy changes
                                Daniel Hewitt, Piotr Chwiejczak

                                Israel CPI eased to 1.3% y/y, mainly due to base effects from last year. Inflation is likely to
                                decline next month also due to base effects, and then rise in the next three months.
                                Increases in indirect taxes could push inflation higher. The BoI does not hold a rate setting
                                meeting in April. We think the BoI is likely to keep its base rate unchanged at 1.75% at its
                                next meeting in May, barring an unexpected steep decline in Israel's growth indicators. We
                                retain our recommendation to receive 10y nominal bonds. Full Story

                                Latin America
                                Venezuela: Elections result increases uncertainty
                                Alejandro Arreaza, Alejandro Grisanti

                                The official result of the presidential election announced by CNE gave Nicolas Maduro a very
                                tight victory. But this has not been recognized by the opposition, which has claimed
                                irregularities in the process and has asked for a recount. The high uncertainty about the
                                political situation in the short term is likely to be taken negatively by the market. Given his
                                relatively weak position, Maduro could face difficulties with expected reform. Full Story

16 April 2013                                                                                                                 5
Barclays | Global Macro Daily


                                North America
                                US – Inflation: We expect a 0.1% m/m decline in the CPI in March, consistent with an NSA
                                index print of 233.0, down from 232.166 in February. The gasoline component is likely to be
                                the largest contributor – we have factored in a 4.5% decline, fully reflecting the effect of the
                                seasonal factor. Elsewhere, we expect a small gain in food prices and a 0.2% increase in
                                core inflation. The latter is likely to be driven by a continuation of the trend for modest
                                monthly gains in core services prices.

                                US – Housing starts: We expect housing starts to rise 2.5% m/m in March, to 940,000
                                units. Homebuilder sentiment has stabilized in recent months, and we look for starts to stay
                                elevated relative to previous quarters. Underlying our forecast is the expectation that single-
                                family starts move higher to 625,000 units (saar) while multi-family starts to increase to
                                315k. This is reflective of the gradual climb in single-family permit activity and a rebound in
                                multi-family permit activity. A reading of 940,000 would leave the 3mma at 922,000, above
                                the Q4 average of 904,000 units and the Q3 average of 774,000. We continue to expect
                                residential construction to add to GDP growth in the coming quarters.

                                US – IP: We look for growth of 0.3% in industrial production and 0.2% in manufacturing
                                output in March. Timely indicators have generally softened relative to February, with a
                                decline in the ISM and weakness in manufacturing employment and hours worked in the
                                latest employment report.

                                Euro area – Final inflation: We look for the final euro area March HICP inflation rate to be
                                left unrevised at 1.7% from the preliminary estimate, consistent with a 1.2% m/m rise. Our
                                forecast is very close to the rounding point, so we do not entirely rule out a 1.8% print if the
                                remaining countries to publish their inflation data (Austria, Finland, Slovakia) were to yield
                                significant upside surprises. We project the core inflation rate to accelerate 0.1pp, to 1.4%,
                                although we don’t exclude it from going to 1.5%. Finally, we forecast the HICPx tobacco
                                index to come at 116.95, after 115.55 in February.

                                UK – Inflation: We forecast March CPI inflation to increase to 2.9% y/y (from 2.8% in
                                February). We look for both RPI and RPIx to increase by 3.4% y/y (from 3.2% in February).
                                We expect inflation to persist above the BoE's 2% target in the medium term.

                                UK – PPI: We expect input prices to have increased by 0.5% m/m in March (from 3.2% in
                                February) as a result of sterling weakness and an increase in electricity prices. We forecast
                                output prices to have increased by 0.5% m/m (from 0.8% previously), with higher oil prices
                                contributing to the increase to some extent. We forecast the increase in core output prices
                                to slow to 0.3% m/m.

                                Asia Pacific
                                No significant events or releases

                                Turkey – Overnight rates: We think the CBT is likely to cut the repo and borrowing rates in
                                expectation of rising QE-related capital inflows.

                                Poland – Core inflation: Core inflation will likely continue to decline at an accelerating pace.

                                Ukraine – Retail trade: Deflation will likely maintain retail sales figures at elevated levels.

16 April 2013                                                                                                                     6
Barclays | Global Macro Daily

                                Latin America
                                No significant events or releases.

16 April 2013                                                        7
Barclays | Global Macro Daily

Monday 15 April                                                            Period              Prev 2         Prev 1      Latest     Forecast     Consensus
    -     Greece: FM S tournaras and IMF Chief Thomson speak on " Overcoming stagnation: re-igniting Greece's potential" in Athens
  00:30   US : Chicago Fed P resident E vans (FOMC voter) speaks in Massachusetts
  02:35   US : Atlanta Fed P resident Lockhart (FOMC non-voter) speaks in Iowa
  21:00   E 17: E CB P resident Draghi speaks at University of Amsterdam
    -     P eru: E conomic activity index, % y/   y                      F eb            6.8            4.3           6.2           5.9                 -
  09:30   Australia: Home loans, % m/      m                             F eb           -0.6           -2.1       -0.3 R              -            2.0 A
  09:30   Australia: Investment lending, % m/     m                      F eb           -3.2           -2.4           4.4             -            1.8 A
  10:00   China: Industrial production, % y/   y                         Mar           10.1           10.3            9.9         10.2             9.5 A
  10:00   China: F ixed asset investments, YTD % y/ y                    Mar           20.7           20.6          21.2          21.3           20.9 A
  10:00   China: R etail sales, % y/ y                                   Mar           14.9           15.2          12.3          12.5           12.4 A
  10:00   China: GDP , % y/   y                                          Q1              7.6            7.4           7.9           7.9            7.7 A
  14:00                          m y)
          F inland: HICP , % m/ (y/                                      Mar       0.2 (3.5)      0.0 (2.6)     0.6 (2.5)     0.6 (2.6)      0.5 (2.5) A
  14:30   India: WP I, % y/ y                                            Mar           7.31           6.62          6.84            6.3          5.96 A
  17:00   E 17: Trade balance sa, € bn                                   F eb          10.0           10.3         8.7 R              -          12.0 A
  19:00   Israel: CP I, % y/y                                            Mar             1.6            1.5           1.5           1.3            1.3 A
  20:00   P oland: CP I, % y/ y                                          Mar             2.4            1.7           1.3           0.9            1.0 A
  20:30   US : E mpire S tate mfg, index                                 Apr            -7.8          10.0            9.2           7.5            3.1 A
  21:00   US : Net long-term TIC flows, $ bn                             F eb          57.0           64.2          25.7              -         -17.8 A
  22:00   US : NAHB housing market, index                                Apr              47             46            44            44             42 A
  10:30   K orea: 10y B onds auction                                                                                                      K R W1800bn
  12:00   Malaysia: 91d/  91d/  210d B ills auction                                                                                           1.5/
                                                                                                                                      MYR 1.5/ 1.0bn
  17:30   Holland: DTB 31J ul2013, New 31Oct2013                                                                                           € 1-2;1-2 bn
  20:50   F rance: B TF 18J ul13, 03Oct2013, 03Apr2014                                                                            4      2        1.7
                                                                                                                            € 3.6/ + 1.6/ + 1.3/ bn

Tuesday 16 April                                                           Period              Prev 2         Prev 1      Latest     Forecast     Consensus
  09:30   Australia: RB A board minutes                                    Apr
  19:00   Turkey: B enchmark repo rate, %                                  Apr                   5.50           5.50        5.50          5.25          5.25
  19:00   Turkey: Overnight lending rate, %                                Apr                   8.75           8.50        7.50          7.50          7.25
  19:00   Turkey: Overnight borrowing rate, %                              Apr                   4.75           4.50        4.50          4.00          4.00
  20:00   US : New York Fed P resident Dudley (FOMC voter) speaks in New York
  21:00   E 17: E CB P resident Draghi speaks at a debate in the E uropean P arliament in   S trasbourg
  21:00   US : Chicago Fed P resident E vans (FOMC voter) speaks in Illinois
  09:30   Australia: Vehicle sales, % m/ (y/m y)                           Mar              2.6 (17.2)    -2.2 (10.9)   0.0 (9.4)             -             -
  15:00                            m
          S lovakia: HICP , % m/ ( y/    y)                                Mar              -0.1 (3.4)      0.7 (2.5)   0.0 (2.2)     0.0 (1.9)         (2.2)
  16:00   Austria: HICP , % m/ (y/m y)                                     Mar               0.2 (2.9)     -0.6 (2.8)   0.3 (2.6)     0.7 (2.1)             -
  16:30                    m y)
          UK : CP I, % m/ (y/                                              Mar               0.5 (2.7)     -0.5 (2.7)   0.7 (2.8)     0.4 (2.9)     0.3 (2.8)
  16:30                    m y)
          UK : R P I, % m/ (y/                                             Mar               0.5 (3.1)     -0.4 (3.3)   0.7 (3.2)     0.6 (3.4)     0.4 (3.3)
  16:30                     m y)
          UK : R P Ix, % m/ (y/                                            Mar               0.4 (3.0)     -0.4 (3.3)   0.7 (3.2)     0.6 (3.4)     0.4 (3.2)
  16:30                             m y)
          UK : Input prices, % m/ (y/                                      Mar               0.1 (0.6)      1.3 (1.9)   3.2 (2.5)     0.5 (1.4)    -0.2 (0.7)
  16:30   UK : Output prices, % m/ (y/m y)                                 Mar              -0.1 (2.2)      0.2 (2.1)   0.8 (2.3)     0.5 (2.1)     0.3 (2.0)
  16:30   UK : Core output prices, % m/ (y/ m y)                           Mar               0.0 (1.5)      0.3 (1.4)   0.3 (1.3)     0.3 (1.5)     0.2 (1.4)
  17:00                             m y)
          E 17: F inal HICP , % m/ (y/                                     Mar              -1.0 (2.0)      0.4 (1.8)   ...(1.7) P    1.2 (1.7)     1.2 (1.7)
  17:00                                                          m y)
          E 17: 'E urostat' core (HICP x fd, alc, tob, ene), % m/ (y/      Mar               0.5 (1.5)     -1.8 (1.3)   0.3 (1.3)     1.7 (1.4)         (1.4)
  17:00   E 17: HICP ex tobacco, index (2005 = 100)                        Mar                 116.39         115.13       115.55      116.95               -
  17:00   E 17: ZE W economic sentiment index                              Apr                    31.2           42.4         33.4            -             -
  17:00   Germany: ZE W economic expectations index                        Apr                    31.5           48.2         48.5            -         41.0
  19:00   B razil: IGP -10 inflation, % m/ m                               Apr                    0.42           0.29         0.22            -         0.32
  20:00   P oland: Core inflation, % y/ y                                  Mar                     1.4            1.4          1.1          0.9           1.0
  20:30                    m y)
          US : CP I, % m/ (y/                                              Mar               0.0 (1.7)      0.0 (1.6)   0.7 (2.0)    -0.1 (1.6)     0.0 (1.6)
  20:30   US : Core CP I, % m/ (y/m y)                                     Mar               0.1 (1.9)      0.3 (1.9)   0.2 (2.0)     0.2 (2.0)     0.2 (2.0)
  20:30   US : CP I, NS A index                                            Mar               229.601        230.280      232.166         233.0      232.953
  20:30   US : Housing starts, k saar                                      Mar                     982            910          917         940           930
  20:30   US : B uilding permits, k saar                                   Mar                     909            904          939            -          943
  21:15   US : Industrial production, % m/   m                             Mar                     0.1            0.2          0.8          0.3           0.2
  21:15   US : Capacity utilization, %                                     Mar                    77.8           77.8         78.3        78.5          78.4
    -     Malaysia: 10.5y B onds auction (to 30/    04)                                                                                                     -
  10:00   J apan: 5y J GB Auction                                                                                                                 ¥ 2600 bn
  16:30   S pain : 6m (18Oct2013) & 12m Letras (16Apr2014)                                                                                            € 4 bn
  17:00   Greece: 13-week bill                                                                                                                    € 1.25 bn
  17:30   B elgium: TC 18J ul13, 17Apr13                                                                                                              € 4 bn
Note: All times are Singapore time.
Sources: Reuters, Market News, Bloomberg, Barclays Research

16 April 2013                                                                                                                                               8
Barclays | Global Macro Daily

Larry Kantor
Head of Research
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Anshul Pradhan
Fixed Income Strategy
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Laurent Fransolet                Tim Whittaker                        Philippe Gudin de Vallerin            Kevin Norrish                      Guillermo Felices
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Asia Pacific
Jon Scoffin                      Tetsufumi Yamakawa                   Nigel Chalk                           Igor Arsenin                       Kieran Davies
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+81 3 4530 2956                  +852 2903 3291                       +81 3 4530 1717                       +81 3 4530 1688                    +81 3 4530 1686   
Rahul Bajoria                    Hamish Pepper                        Nick Verdi
Economist - India, Malaysia,     FX Strategist                        FX Strategist
Thailand                         +65 6308 2220                        +65 6308 3093
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16 April 2013                                                                                                                                                               9
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