01 May 2013 Fixed Income Research http://www.credit-suisse.com/researchandanalytics FX Compass: Euro: What Doesn’t Go Down Might Just Go Up … FX Strategy Research Analysts Aditya Bagaria Flows From Japan May Not Happen Overnight +44 20 7888 7428 firstname.lastname@example.org – But They Will Happen Anezka Christovova As we discuss in Bank of Japan's shock therapy, for the past six months +44 20 7888 6635 Japanese markets have largely been driven by expectations of what policy email@example.com change might look like under a new BoJ governor. Now that we know what BoJ Ric Deverell Governor Kuroda is seeking to achieve, the focus turns to execution and the +44 20 7883 2523 reaction of a largely skeptical domestic Japanese investor base made cautious firstname.lastname@example.org by the failures of previous efforts to reflate. Ray Farris As Fed Chairman Bernanke has demonstrated, skepticism is one thing, but +65 6212 3412 the constraints of portfolio balance as the central bank crowds investors out of email@example.com a core asset are altogether more demanding. Alvise Marino In anticipation of the traditional start to the Japanese investment season 212 325 5911 firstname.lastname@example.org following Golden Week, in the body of this note we show that over time the impact of the BoJ’s JGB purchases will force Japanese investors to look Trang Thuy Le offshore, with the flows likely to be substantial. +65 6212 4260 email@example.com Focus: ECB Cut = Rally? In our FX Compass – Euro correction nears its end on 6 March we suggested that the euro would chop sideways for a month or two before resuming its gradual upward trend. From 1.30 on that day, we forecast a three-month rate against the dollar of 1.33, and a 12-month rate of 1.40. At that time, this moderately constructive view on the euro was heavily anti- consensus, with our head of sales in Europe reporting that among our key clients he had not found a single person who agreed with our view. Fast forward eight weeks, and many analysts are once again recommending euro shorts, with the expectation that a rate cut from the ECB on Thursday, 2 May, will push the currency lower. While a temporary dip is possible, we continue to believe that the euro will prove more resilient than many appreciate, with any dip likely to provide an opportunity to average into an opportunistic long position. Trade Recommendations Any dip on the ECB announcement is likely to provide an opportunity for investors to average into a strategic long position in the euro USD cross. Our technical analysts believe that the move back above 1.3123/28 suggests a fresh near-term base has indeed been established, opening the door to a move back to 1.3200 initially, ahead of the 1.3319/42 barrier. We also recommend going tactically long USDZAR ahead of wage negotiations in the gold and coal mining sectors. 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 01 May 2013 In this issue Macro View: Slow But Stable 3 In the US we must trust … ........................................................ 3 The Japanese recovery is underway ........................................ 4 Focus – Euro – What Doesn’t Go Down, Might Just Go Up … 6 Euro negativity persists ............................................................. 6 Golden Week – The Lull Before The Storm … 9 Estimating future flows .............................................................. 9 Current flows have yet to show this impact ............................. 10 The Golden Week effect suggests this week is unlikely to see the start of the reflation flows .................................................. 11 ZAR – Two Months of Potential Instability 13 THB NEER is Likely to Give Back Some Gains 14 India: Drip Feeding the Market Incremental Positives 16 EM FX Scorecard, April 2013 17 Technical Analysis – ECB Level Watch 18 Portfolio Updates 19 FX Forecast Summary 20 FX Compass: Euro: What Doesn’t Go Down Might Just Go Up … 2 01 May 2013 Macro View: Slow But Stable Growth slows but financial system stable The latest northern economy spring slowdown scare is continuing to run its course, with much of the data over the past week disappointing market expectations. While this trend is likely to run for a little while longer, it is notable that final demand in the US continues to hold up reasonably well, with signs that the much-anticipated Japanese rebound may also finally be underway (see here). This suggests that once the fiscal indigestion is past, US growth could again accelerate and act as a locomotive for the rest of the world, although realistically this is unlikely to clearly reveal itself until 2H. In terms of the current downturn, the Credit Suisse bespoke business cycle indicator moved sideways in April, although the smoother 3mma of the index dipped to a level normally associated with a modest fall in global IP (see note). This suggests that the IP downturn will be on par with that in both 2011 and 2012, with Thursday’s PMIs likely to dip further, although with a bit of luck and a fair breeze, it also suggests that much of the slowdown has already occurred. Consistent with the signal from the CSBMI, the Ifo for April continued to dip, suggesting that growth in Germany has slowed as we enter 2Q. Exhibit 1: Global growth has slowed over recent months percentage change (lhs), index (rhs) 1.3% Global IP 3 MMA CS BMI (rhs) 2.5 1.1% 2.0 0.9% 1.5 0.7% 1.0 0.5% 0.5 0.3% 0.0 0.1% -0.5 -0.1% -1.0 -0.3% -1.5 -0.5% -2.0 Jan-10 Jul-10 Jan-11 Jul-11 Jan-12 Jul-12 Jan-13 Source: Credit Suisse In the US we must trust … In the US the focus was on 1Q GDP, which came in at a softer-than-consensus 2.5% saar. Fortunately, however, most of the downside miss was driven by a much larger-than- expected retrenchment in government spending, with real final private demand continuing to grow, albeit at a modest pace, despite the fiscal headwinds. The resilience of final domestic demand was highlighted by the consumption print for the month of March, which despite fiscal tightening as the sequester takes hold, grew by 0.3% on the month. FX Compass: Euro: What Doesn’t Go Down Might Just Go Up … 3 01 May 2013 Exhibit 2: US consumption increased again in March despite tight fiscal policy Real US consumer spending, monthly, percentage change 1.0% MoM SA 3MMA SA 0.5% 0.0% -0.5% -1.0% 2006 2007 2008 2009 2010 2011 2012 2013 Source: Credit Suisse, the BLOOMBERG PROFESSIONAL™ service Unfortunately, consumer resilience has not supported industrial production, with the regional PMIs generally disappointing, suggesting that the PMI (released later today) is likely to moderate further. The Japanese recovery is underway In Japan, after slumping last year, activity is finally beginning to recover, prompting our economists to upgrade their growth forecasts to 1.6% for the 2013 calendar year and 1.3% for the 2014 calendar year (see here). In addition to stronger domestic demand, the PMI for April suggests that manufacturing production is also making a comeback, notwithstanding still disappointing hard data. Exhibit 3: Japanese IP is recovering … percentage change (lhs), index (rhs) 8% 75 Japan IP MoM Manf. PMI New Orders 6% 70 65 4% 60 2% 55 0% 50 -2% 45 40 -4% 35 -6% 30 -8% 25 2005 2006 2007 2008 2009 2010 2011 2012 2013 Source: Credit Suisse, Markit PMI, the BLOOMBERG PROFESSIONAL™ service During the week the BoJ upgraded its inflation projections (see here). Some may be surprised that the Bank of Japan’s new forecasts did not have it attaining its 2% inflation target. However, we view its forecast of 1.9% in FY2015 for core inflation as a clever way of the BoJ expressing confidence in its ability to end deflation while simultaneously leaving the door open to take more policy action in the future if it deems this necessary. In contrast, a forecast of 2.0% or just above would have said the BoJ board is certain it has done enough and largely removed from the market the threat of future increases in FX Compass: Euro: What Doesn’t Go Down Might Just Go Up … 4 01 May 2013 asset purchase amounts. Equally important to our thinking is the simple fact that the BoJ’s projections for core inflation rise through time: +0.7% in FY13, +1.4% in FY14, and +1.9% in FY15, excluding the effects of the increase in consumption taxes. Governor Kuroda has made clear that he is out to change expectations, and forecasting success combined with a statement that he will adjust policy as necessary in the future to attain success is key to this process. This approach stands in stark contrast with past experience in which the BoJ would take policy action, but forecast that it would not be very effective. Exhibit 4: BoJ board members' median forecast Exhibit 5: BoJ board members' median forecast (real GDP) core CPI excl. VAT FY12 FY13 FY14 FY15 FY12 FY13 FY14 FY15 Apr 12 2.3 1.7 Apr 12 0.3 0.7 Oct 12 1.5 1.6 0.6 Oct 12 -0.1 0.4 0.8 Jan 13 1.0 2.3 0.8 Jan 13 -0.2 0.4 0.9 Apr 13 1.0 2.9 1.4 1.6 Apr 13 -0.2 0.7 1.4 1.9 Source: BoJ, Credit Suisse Source: BoJ, Credit Suisse FX Compass: Euro: What Doesn’t Go Down Might Just Go Up … 5 01 May 2013 Focus – Euro – What Doesn’t Go Down, Might Just Go Up … In our FX Compass – Euro correction nears its end on 6 March, we suggested that the euro would chop sideways for a month or two before resuming its gradual upward trend. From 1.30 on that day, we forecast a three-month rate against the dollar of 1.33 and a 12- month rate of 1.40. At that time, this moderately constructive view on the euro was heavily anti-consensus, with our head of sales in Europe reporting that among our key clients he had not found a single person who agreed with our view. Fast forward eight weeks, and the euro/dollar rate has dogmatically refused to follow the consensus script and fall, rather actually strengthening a little. Euro negativity persists The negativity surrounding the euro has once again been a reflection of the dire economic situation facing the continent, combined with the latest dose of political challenges. Economic activity on the continent continues to contract, with the green shoots of recovery seen around the turn of the year once again snuffed out as the Ifo and the PMIs have once again dipped; and Italy and Cyprus have been the latest in a long line of political challenges. Exhibit 6: The euro only falls below 1.28 during periods of full-blown panic 1.60 Setbacks 1.55 EURUSD 1.50 Forecast 1.45 1.40 1.35 1.30 1.25 1.20 ACUTE FINANCIAL PANIC LEVELS 1.15 1.10 Jan-08 Jan-09 Jan-10 Jan-11 Jan-12 Jan-13 Jan-14 Source: Credit Suisse, the BLOOMBERG PROFESSIONAL™ service With the ECB now widely expected to cut the policy rate by 25 basis points to 50 basis points at Thursday’s meeting, many have once again begun to position for a fall in the euro. However, while a short-term dip is possible, to us most of the negatives have already been priced in, with a substantial dip highly unlikely unless markets begin to once again price a euro break-up. Or to put it another way, in our view, the euro is unlikely to fall substantially further unless the market begins to discount the Draghi Put. There are several reasons for this non-consensus view. Rather than testing the Draghi put, over recent weeks markets have remained very well behaved, with equity markets continuing to rally, while bond markets are continuing to differentiate between assets. The period of severe risk on and risk off, which drove strong asset correlations, remains in the past. FX Compass: Euro: What Doesn’t Go Down Might Just Go Up … 6 01 May 2013 Exhibit 8: Reserve manager demand also likely Exhibit 7: Government yields down capping downside 10y generic government bond yields 8 Italy 300 Change in major EM FX reserves, quarterly, 1.65 Spain valution adjusted, USDbn 1.60 7 250 Germany EURUSD (RHS) 1.55 6 200 1.50 150 1.45 5 1.40 4 100 1.35 3 50 1.30 1.25 2 0 1.20 1 -50 1.15 Jan-10 Nov-10 Sep-11 Jul-12 Feb-03 Mar-05 Apr-07 May-09 Jun-11 Jul-13 Source: Credit Suisse, the BLOOMBERG PROFESSIONAL™ service Source: Credit Suisse, the BLOOMBERG PROFESSIONAL™ service Consistent with this, the formation of a new Italian government in recent days has once again confounded the doomsayers. While the political environment in Europe is far from ideal, once again it has avoided the more damaging outcomes. The developments in Italy have seen bond yields in the periphery continue to rally, suggesting that the market is currently not particularly worried about financial stability on the continent. Interestingly, as the financial situation has stabilized, and the yen has depreciated, EM central banks have once again been accumulating reserves as they lean against appreciating currencies. This suggests that purchases of euro reserves may also be on the increase. In the past, movements in EM reserves have correlated relatively well with movements in the euro. While the euro area’s economic prospects remain bleak, it is not clear that they have deteriorated as much as many have suggested. As we noted last week, the manufacturing surveys remain on a very slow upward trend, despite the 2012 and 2013 January “head fake”. Exhibit 9: Manufacturing surveys remain on a very slow upward trend, despite the “head fake” around the new year Index 65 Eurozone Manufacturing PMI New Orders 60 55 2Q 2015 50 45 40 Jan-10 Jan-11 Jan-12 Jan-13 Jan-14 Jan-15 Source: the BLOOMBERG PROFESSIONAL™ service FX Compass: Euro: What Doesn’t Go Down Might Just Go Up … 7 01 May 2013 In addition to that, the current policy mix in Europe is continuing to deliver an ever- increasing current account surplus, which all other things being equal, will put upward pressure on the euro over time. Exhibit 10: Europe is a drag on global growth Exhibit 11: Growth is purely derivative 2.5 Q1 estimate based on 102 data up to February Domestic demand (2008Q1=100) 2.0 101 1.5 100 Euro area 1.0 US 99 0.5 Japan 98 0.0 97 -0.5 -1.0 96 Euro zone -1.5 current account 95 balance, % of -2.0 94 GDP -2.5 93 Mar-99 Nov-01 Jul-04 Mar-07 Nov-09 Jul-12 2008 2009 2010 2011 2012 Source: Credit Suisse, Thomson Reuters DataStream Source: Credit Suisse, the BLOOMBERG PROFESSIONAL™ service Despite any ECB action this week, monetary policy in Europe will remain by far and away the least accommodative among the G3. While the case for a rate cut is compelling, we continue to feel that a cut is more of an even probability event than the certainty assumed by markets. In the event of a cut, while European bonds could rally a little further, in the main this process has already occurred, with the risk that a failure to deliver could see short-dated yields actually rise. We feel that the potential benefits to growth of any policy action will outweigh the loss of yield, with any new measures to ease credit conditions in the periphery of more benefit than the reduction in the policy rate. Finally, it is notable that the debate on austerity looks to be turning, with the new Italian government likely to push back against the more draconian measures being proposed. This suggests to us that it is just possible that the worst of the contraction in domestic demand may be behind us. Exhibit 12: The ECB remains the least accommodative CB Total central bank assets/nominal GDP (%) 70 CS 60 ECB Fed 50 BoE 40 BoJ 30 20 10 0 '06 '07 '08 '09 '10 '11 '12 '13e '14e Source: Credit Suisse, ECB, FRB, BoE, BoJ FX Compass: Euro: What Doesn’t Go Down Might Just Go Up … 8 01 May 2013 Golden Week – The Lull Before The Storm … With traders in Japan enjoying the traditional Golden Week lull, we take the opportunity to outline our views on the likely flows that will eventually (note not yet) occur as the Bank of Japan fully ramps up its unprecedented asset purchase program. As we outlined in our Japanese portfolio flow monitor, as of last week there was little evidence to suggest Japanese investors had begun to increase their offshore investments. Indeed, given the dip in the yen, rebalancing has seen repatriation increase. We are not particularly surprised by this and note that the yen has depreciated despite the lack of flow reversal so far. Rather, in our view, the flows that are likely to commence over coming months as domestic investors are forced offshore are likely to drive the second leg of yen depreciation. Estimating future flows While the magnitude of future flows remains highly uncertain, in Bank of Japan's shock therapy we outline a possible scenario. On existing allocations, we would expect inflows into Japanese equities of ¥2tn annualized and into foreign assets of just under ¥3tn annualized as a result of the BoJ’s purchases. This is marked as “Default deflation portfolio allocation” in Exhibit 13. Based on JGB ownership data, we show that two-thirds of the cash inflows from BoJ purchases will be received by Japanese banks, life insurance companies, and pension funds. We initially assume the end-2012 asset allocation is maintained by all Japanese investors. The largest desired flows would be new purchases of JGBs and, reflecting the banks’ allocation, new loans into the real economy as well as other JPY fixed income securities. In our view, the scale of the increase in loans appears implausible given the long period of weakness in the real economy while the JPY fixed income market outside JGBs is too small to accommodate a near-doubling in inflows. As Japanese investors find that the BoJ will prevent them from increasing their holdings of JGBs, either loans into the domestic economy must double or the outflow into Japanese equities and foreign assets will accelerate sharply: we estimate a ¥10tn and ¥20tn annualized pace of purchases, respectively, as plausible. This is marked as “Prospective Kuroda reflation allocation” in Exhibit 13. The increase in cash flow must either go into JPY cash, equities or, given that the BoJ will buy JGBs faster than the government issues them, foreign assets. In seeking to gauge the extent of the flows, we make some assumptions. For simplicity, we assume that BoJ and government JGB holdings are recycled in whole, but that banks/lifers and pension funds use the extra cash flow to fund increased exposure to equities and foreign fixed income. We assume loans and other JPY fixed income flows remain unchanged from the base case and then reallocate the remainder of the inflow into JGBs, equities, and foreign assets. We assume a 25:75 split in those flows given that we judge it unlikely that banks will increase their equity exposure meaningfully. The implied change in flows into equities and foreign assets is dramatic, with the rate of purchases increasing by almost ten times the level before the step-up in BoJ purchases. We note that this is an aggressive scenario, but one that illustrates the nature of the choices once portfolio constraints and a change in perception of the value of JPY cash are taken into account. FX Compass: Euro: What Doesn’t Go Down Might Just Go Up … 9 01 May 2013 Exhibit 13: Reinvesting the BoJ flows – how the deflation portfolio could change under Kuroda ¥ trillion Total BoJ Of which… Default “deflation portfolio” allocation Prospective 'Kuroda reflation' allocation purchases Lifers / Banks JGBs Equities Abroad Remainder JGBs Equities Abroad Remainder Pension (loans, other (loans, other Funds JPY FI, etc.) JPY FI, etc.) Q1 11.4 3.3 4.3 5.0 0.3 0.7 5.4 5.0 0.3 0.7 5.4 Q2 21 6.1 7.9 9.2 0.5 1.4 10.0 7.3 2.5 5.7 5.4 Q3 22.2 6.5 8.3 9.7 0.5 1.4 10.5 7.8 2.8 6.3 5.4 Source: Credit Suisse For illustration purposes, we compare the estimated “Kuroda reflation” flows to the historical magnitude of resident net outward portfolio flows. While substantial JPY depreciation may ex-post dampen the outflow to some extent, our estimates point at potentially very significant flow pressure on the yen comparable to the 2004-2007 yen carry trade period. Exhibit 14: Comparing prospective flows to historical magnitudes Quarterly resident portfolio flows 100 Kuroda reflation scenario quarterly flows 50 4Q sum 0 -50 -100 -150 -200 -250 -300 Mar-96 Jun-99 Sep-02 Dec-05 Mar-09 Jun-12 Source: Credit Suisse Current flows have yet to show this impact So far, rather than significant outflows, weekly securities transaction data, covering Japan’s portfolio flows for the second week post the BoJ decision to 19 April, show continued Japanese repatriation, with ¥935bn of sales of foreign assets, up from ¥549bn in the previous week. We are not particularly surprised by this result, as it will take some time for institutional investors to modify investor mandates. We think the policy change is simply too recent to have generated significant asset allocation changes by Japan’s historically bureaucratic and slow-to-move institutional investors. From anecdotal evidence, we note the two biggest Japanese life insurers announced last week that they will consider increasing foreign bond holdings and reduce or keep steady their purchases of domestic bonds this financial year. The WSJ also reported that the third- and fourth-largest life insurers are also moving to increase their allocations to foreign bonds. FX Compass: Euro: What Doesn’t Go Down Might Just Go Up … 10 01 May 2013 As illustrated in Exhibit 16, we think the current repatriation flow mainly reflects rebalancing to keep current asset allocations stable as the weaker yen pushes foreign asset valuations higher. The data suggest that the depreciation in the yen to date has occurred without substantial net outflows from Japanese investors. This suggests that the impact on the yen from the likely change in investor flows is yet to come. Exhibit 15: Residents’ repatriation flow continued in Exhibit 16: Residents’ flow likely reacting to yen the second week post BoJ weakness by taking profits on foreign asset holdings ¥100bn, positive number is portfolio inflow to Japan ¥100bn, positive number is portfolio inflow to Japan Portfolio flow, residents, weekly data Japan resident portfolio flow, 4w sum 50 60 8% Portfolio flow, residents, 4w sum USDJPY % monthly change (based 40 6% 40 on average monthly level), RHS 30 4% 20 20 2% 10 0 0% 0 -2% -10 -20 -20 -4% -40 -30 -6% -40 -60 -8% Jun-11 Dec-11 Jun-12 Dec-12 Jan-07 Jan-09 Jan-11 Jan-13 Source: Credit Suisse, Japan Ministry of Finance Source: Credit Suisse, Japan Ministry of Finance, the BLOOMBERG PROFESSIONAL™ service As a key focus over coming weeks and months will be the impact of the BoJ’s policies on capital flows, in our Japanese portfolio flow monitor we review and explain the myriad sources of data on Japanese flows. The Golden Week effect suggests this week is unlikely to see the start of the reflation flows With Japan enjoying a collection of national holidays this week, we have looked into the impact this interruption in trading has historically had on USDJPY and the yen crosses. We find that there is a negative USDJPY impact, particularly heading into the second, more compact part of the Golden Week holiday schedule. We believe this negative seasonality is driven by squaring of foreign investment positions and absence of residents investing abroad. While previously the temporary effect may have been also bolstered by a basic balance surplus, we think it can reoccur even with Japan’s current basic balance deficit position. The holiday schedule starts with the Showa day on 29 April, followed by Constitution, Greenery, and Children’s Days on 3, 4, and 5 May. This year, markets will be closed on Monday (29 April), Friday (3 May), and Monday (6 May). On average, USDJPY falls in the first day of the holiday, followed by a slight recovery in the gap between Showa Day and Constitution Day and then followed by a deeper and more pronounced fall towards the end of the Golden Week (Exhibit 17). As the gap between Showa Day and Constitution Day can in certain years be as long as four business days, the USDJPY seasonal pattern tends to be relatively less pronounced looking at the period as a whole. FX Compass: Euro: What Doesn’t Go Down Might Just Go Up … 11 01 May 2013 Exhibit 17: The more compact second part of the Exhibit 18: Seasonal effect most pronounced in holiday generates a stronger USDJPY impact USDJPY Second part of Golden Week only, daily seasonal effect in pips, (**) denotes significance at 5% level, (*) denotes significance at the 10% level 100.2 0 100.1 -5 100.0 -10 -15 99.9 (**) (*) 99.8 -20 (**) (**) (**) -25 first 99.7 second -30 (**) (*) (*) part of 99.6 golden part of last 12y USDJPY -35 (*) (*) week golden 99.5 -40 full sample (1974) holiday Avg 40y week holiday 99.4 schedule -45 schedule Avg 20y NZDJPY CHFJPY USDJPY AUDJPY SEKJPY CADJPY EURJPY NOKJPY GBPJPY 99.3 Avg 10y 99.2 Source: Credit Suisse, the BLOOMBERG PROFESSIONAL™ service Source: Credit Suisse, the BLOOMBERG PROFESSIONAL™ service Nevertheless, focusing on the more compact second part of the holiday schedule, we find a statistically significant negative USDJPY seasonality (Exhibit 18). This is particularly the case over the last 10-12 years (Exhibit 19), while even a longer period supports this pattern, albeit with somewhat less consistency (Exhibit 20). We find the effect particularly strong in USDJPY followed by EURJPY. Exhibit 19: Over the past 12 years, USDJPY reaction Exhibit 20: … past 30-year reaction also supports in the second part of the holiday schedule has been this pattern, albeit with somewhat less consistency particularly strong … Excludes top low and high outlier 101.0 USDJPY 101.0 USDJPY 100.5 100.5 100.0 100.0 99.5 99.5 99.0 99.0 98.5 98.5 98.0 98.0 Source: Credit Suisse, the BLOOMBERG PROFESSIONAL™ service Source: Credit Suisse, the BLOOMBERG PROFESSIONAL™ service FX Compass: Euro: What Doesn’t Go Down Might Just Go Up … 12 01 May 2013 ZAR – Two Months of Potential Instability We believe renewed labor unrest in South Africa is likely to capture international headlines again in the next two months, with negative implications for the rand. We maintain our USDZAR forecast at 9.40 in three months and see potential for the pair to overshoot our three-month target in the short term. As a tactical trade, we recommend going long USDZAR at current levels with a 9.560 target and a 8.735 stop loss. Contentious wage negotiations in the mining sector were the main driver behind the violent wave of wildcat strikes that hit the South African mining sector in late 2012. With collective contracts in the coal and gold sectors expiring on 30 June, we think upcoming negotiations in early May could lead to another surge in domestic turbulence. The lingering risks from the platinum sector and the recent rally in the ZAR and in South African rates suggest the impact of these events on domestic asset prices could be significant. In the first week of May one of the largest platinum miners is expected to announce details of its restructuring plans. The early version of this plan, revealed in January, involved the shutter of several mines and several thousand layoffs. While the upcoming announcement is likely to feature an sweeter version of the restructuring plan, we think the two main labor unions active in the platinum sector might use this occasion to call for uncoordinated strikes in competition against each other. Unlike in the coal and gold sectors, wage negotiations in the platinum sector do not take place under a centralized bargaining framework. This has given way to an increasingly wide split between two unions, the ANC- linked National Union of Mineworkers (NUM) and the more militant Association of Mineworkers and Construction Union (AMCU). We see potential for tension between rival unions in the platinum sector to spread to the coal and gold negotiations. While the NUM has traditionally been more active in these two sectors than in platinum, we see a risk that AMCU might have made inroads since the announcement of the large-scale restructuring earlier this year. Furthermore, the poor conditions of the gold market, on the back of weak price action in commodities, would likely exacerbate the miners’ negotiating position. This could generate reduce tolerance for wage increases, leading to increased labor unrest. From a fundamental perspective, we remain firmly bearish on ZAR. The growth picture remains disappointing, with manufacturing production and survey data surprising steadily weak at the end of 1Q. The monetary outlook is on permahold, with rising expectations of a rate cut before the end of the year. While the BoJ policy innovation has sparked expectations of South African bonds attracting Japanese retail flows, our rate strategists and economists expect to see consolidation in the fixed income sector in the coming weeks (see report). We think a sudden increase in labor unrest would likely bring these traits back into the spotlight, causing the ZAR to reverse recent gains. FX Compass: Euro: What Doesn’t Go Down Might Just Go Up … 13 01 May 2013 THB NEER is Likely to Give Back Some Gains The relaxation of the Bank of Thailand’s (BoT) investment rules to allow it to put FX reserves into high grade Thai government-linked papers issued overseas and high grade emerging market FX debt is a potential game changer for the THB. Combined with very public discussions about the appropriateness of capital controls and rate cuts, this has sent a strong signal that the authorities’ pain thresholds for THB appreciation have been met. The uncertainty these policy discussions have caused has driven a 2.9% correction in USDTHB from 28.56 to 29.39. We see potential for this correction higher to extend a bit further, given that the surge in foreign inflows into front-end baht rates products over the past several months seems overextended. To be sure, in our Asia Macro Strategy of 9 April, we noted the lack of central bank intervention had been a key reason for USDTHB’s drop to as low as 28.56 this year. The absence of intervention has effectively encouraged further inflows into baht-denominated debts and added to THB momentum. Foreign investors’ shares of government bonds and BoT bonds rose to a record 17.6% and 9.8%, respectively, in March, from 16.7% and 9.0% in February, and 12.3% and 7.4% in March 2012 (Exhibit 21). The reluctance to intervene has so far come in large part from what we perceive to be a dispute over policy between the Ministry of Finance (MoF) and the BoT. The MoF has wanted the BoT to cut interest rates. It has argued that intervention would only add to BoT losses on FX reserves because the BoT’s cost of sterilizing its intervention is greater than the income on FX reserve assets. We believe the BoT has resisted cutting rates because of its concern about stimulating credit growth and the property market and, probably, in defense of its independence. The BoT’s broadening of its investment universe would offer it returns on marginal FX reserves acquired that are generally higher than its cost of sterilization. Illustratively, Thai government corporate bonds yield roughly 3.25% or higher. This would largely neutralize the MoF’s argument against new intervention. Exhibit 21: Foreign shares of government and BoT bonds rose to a record in March Exhibit 22: Marginal sterilization cost has risen Sterilization cost is estimated as 3m T bill rate – 3y bond yield of a basket of US, euro area, Japan, and UK 3y bonds in ratio of 70%, 20%, 5%, and 5%. 18% Foreign holding of Government bonds, % 10% 5 US$bn Foreign holding of BoT bonds, % (RHS) 9% 16% 4 Stock of FX 8% reserves * 14% 3 interest rate 7% 2 differential 12% 6% 1 10% 5% 0 8% 4% -1 6% 3% -2 4% 2% -3 2% 1% -4 0% 0% Jan-05 Mar-07 May-09 Jul-11 Jan-09 Mar-10 May-11 Jul-12 Source: Credit Suisse, CEIC Source: Credit Suisse, the BLOOMBERG PROFESSIONAL™ service FX Compass: Euro: What Doesn’t Go Down Might Just Go Up … 14 01 May 2013 However, we see several factors as likely to prevent a sharp rally in the USDTHB: The BoT is only likely to take action to prevent THB strength. We doubt it would intervene to push the THB weaker. Capital flow controls or taxes on foreign inflows are highly unlikely, in our judgment. Statements from senior government officials lead us to believe that the government believes the capital control measures it took in 2006 were highly damaging to markets and it does not want to repeat this experience. Expectations for inflows from Japanese investors and recent headlines suggesting Japan could invest some of its FX reserves in ASEAN bonds will limit THB weakness, in our view. Looking beyond the effect of positioning on the THB over the next month or two, our more fundamental view is that Thailand’s current account balance will return to deficit in the second half of this year, helping to push USDTHB up to 30.5 over the next year. In particular, infrastructure investment demand is likely to drive strong imports, while soft global growth and the recent overvaluation of the THB will likely dampen export growth. Exhibit 23: NEER is likely to give back some of the Exhibit 24: Current account deterioration in 2H is recent gains likely to drive THB weakness 25 11000 THB NEER Current account, 20 12m sum, $bn 10500 15 10000 10 9500 5 0 9000 -5 CS forecast 8500 Jun-97 Aug-01 Oct-05 Dec-09 -10 Jan-05 Jul-07 Jan-10 Jul-12 Source: Credit Suisse, the BLOOMBERG PROFESSIONAL™ service, Bank of Thailand Source: Credit Suisse, CEIC FX Compass: Euro: What Doesn’t Go Down Might Just Go Up … 15 01 May 2013 India: Drip Feeding the Market Incremental Positives We turned more constructive on the INR in our 17 April FX Compass. In support of our view, India’s finance minister has surprised positively again by proposing to cut the withholding tax on rupee-denominated bonds owned by foreigners. The cut will take the tax rate down from about 20% on most classes of foreign investors to 5% for a period of two years from June of this year. The parliament will likely need to approve it, but we don't see opposition to this and would expect it to go through. Indian bonds and the rupee have rallied in response to the proposal and we agree it is a significant positive for foreign flows into Indian local currency debt. Roughly speaking, there are about $30bn in limits purchased and available for purchase, about $20bn of which are for corporate bonds. Sovereign and corporate credit quality will remain an issue for some investors, so we don’t expect an immediate rush of funds into the bonds. However, we think flows will pick up for several reasons: The recent fall in gold and oil prices, if sustained as we expect, should improve India’s trade deficit by about 1% of GDP. The government now seems to be sticking to its targets to the reduce the budget deficit, having positively surprised the market on this front with the latest year’s performance. After having promised little in the budget announced in February other than to continue reducing the deficit, the finance minister is practicing a policy of gradually drip feeding positive marginal reform into the market to keep sentiment positive. We expect this to continue. FX Compass: Euro: What Doesn’t Go Down Might Just Go Up … 16 01 May 2013 EM FX Scorecard, April 2013 The latest run of our emerging market currency model, the Scorecard, suggests being long the RUB, BRL, and PHP, against being short the INR, KRW, and TWD in May 2013 (Exhibit 25). Intervention has helped the RUB score this month whereas it has hurt the INR. The INR and TWD scores have also been hurt by larger-than-expected falls in real rates this month relative to last month. The March 2013 Scorecard advocated being long the RUB, IDR, and TRY, against being short the CZK, ZAR, and KRW. This generated an estimated loss vs. the USD of 0.8% in April 2013. Year to date, the Scorecard records a notional return of 1.7% vs. the USD. The March 2013 Scorecard underperformed a strategy of going long the three currencies with the highest carry and short the three currencies with the lowest carry. This "carry basket" notionally recorded a return of 0.4% vs. the USD. It also underperformed a strategy of buying and holding all 17 EM currencies vs. the USD (the "index"), which notionally recorded a gain of 1.1% vs. the USD. For more details on the EM Scorecard, see report here. For the Asia component of the Scorecard, see report here. Exhibit 25: Aggregate scores for selected emerging market currencies A positive/negative score implies underlying variables are currency positive/currency negative. 10 8 6 4.0 4 2.0 2 0.5 0 -2 -0.5 -0.5 -0.5 -0.5 -1.0 -4 -2.5 -2.5 -3.0 -3.0 -3.0 -6 -4.0 -5.0 -5.0 -8 -7.0 MYR MXN PLN TWD THB BRL PHP TRY IDR ZAR CZK INR KRW RUB SGD CNY HUF Source: Credit Suisse FX Compass: Euro: What Doesn’t Go Down Might Just Go Up … 17 01 May 2013 Technical Analysis – ECB Level Watch David Sneddon Although the EUR has taken a back seat recently and has technically been sidelined, +44 20 7888 7173 given the upcoming and much anticipated ECB meeting and the potential for a rate cut, we firstname.lastname@example.org highlight key levels that need to break in EURUSD to mark a fresh trending phase. Christopher Hine 212 538 5727 The late April setback, encouragingly for the bulls, saw the market test and defend key email@example.com support from the rising 200-day average, currently seen intersecting at 1.2960, and momentum is also leaning higher on a daily and weekly basis. Above downtrend and price resistance at 1.3123/28 suggests a fresh near-term base has indeed been established, opening the door to a move back to 1.3200 initially, ahead of the 1.3319/42 barrier – the 61.8% retracement of the February/April decline and price resistance from late February. At the end of the day, though, we believe we need to see above 1.3342 to see a more sustained rally emerge back to 1.3711. Below 1.2960/55 would not only see a near-term bearish tone take hold, but would also open the debate about the potential for a large “head & shoulders” topping structure, with key support seen starting at 1.2765 and stretching down to 1.2662, the November low. Below this latter level at any stage would see an important bearish reversal established targeting 1.2400 initially, ahead of the 2012 low at 1.2042 . Exhibit 26: EURUSD – Daily Source: CQG, Credit Suisse FX Compass: Euro: What Doesn’t Go Down Might Just Go Up … 18 01 May 2013 Portfolio Updates Exhibit 27: Open positions in cash recommendations portfolio Date Notional Spot Opened Trade units Reference Forward Take profit Stop loss % Gain P&L in USD 8-Jan-13 Short USDCNY 6m NDF 0.5 6.2993 6.3015 52.5 53.9 1.37% 68,285 13-Mar-13 Long USDIDR via NDF 1 9695 9775 10200 9600 -0.27% (26,700) 3-Apr-13 Short AUDUSD 1 1.0459 1.0388 0.99 1.06 0.66% 65,704 16-Apr-13 Long MXNJPY 1 8.0154 7.9490 8.73 7.75 0.35% 35,322 16-Apr-13 Short RUBINR 1 1.729 1.7292 1.662 1.764 0.50% 50,354 20-Apr-13 Long USDZAR 0.5 8.9764 9.1016 9.56 8.735 0.00% New trade Unrealized P&L 92,964 Realized P&L 2012 (333,091) Total P&L 2012 ytd (140,127) Gainers/Total 2012 60% Source: Credit Suisse 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 judgment at the 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 may be subject to exchange rate fluctuation that may have a positive or adverse effect on the price or income of such securities or financial instruments. The P&L results shown do not include relevant costs, such as commissions, interest charges, or other applicable expenses. Exhibit 28: Derivatives trade recommendations update – active positions For full table including closed trades, please see Locus Trade Tracker Entry Current P&L (as % Notional (in Entry Date Trade Details Cost Value of notional) USD) P&L (in USD) Comments 23-Apr-13 2m USDNOK digital call 12.50% 4.27% -8.23% 1,000,000 -82,288 Hold 23-Apr-13 4m GBPUSD digital puts 13.50% 6.52% -6.98% 1,000,000 -71,031 Hold 23-Apr-13 1m EURPLN call 0.32% 0.31% -0.01% 100,000,000 -8,604 Hold 16-Apr-13 3m GBPJPY higher, GBPUSD lower dual digital 10.50% 8.00% -2.50% 1,000,000 -25,315 Hold 16-Apr-13 3m USDKRW higher, JPYKRW lower dual digital 10.50% 15.00% 4.50% 1,000,000 45,566 Hold 16-Apr-13 1m USDJPY 1x2x1 RKI call butterfly 0.50% 0.29% -0.21% 100,000,000 -211,250 Hold 16-Apr-13 6m/1y USDMXN calendar risk reversal -0.77% -0.30% 0.47% 100,000,000 473,650 Hold 16-Apr-13 3m USDMXN 1x2x1 RKI put butterfly 0.48% 0.67% 0.19% 100,000,000 193,750 Hold 09-Apr-13 2y USDJPY call 1.83% 1.08% -0.75% 100,000,000 -754,050 Hold 09-Apr-13 2y zero cost USDJPY RKI risk reversals 0.00% -0.29% -0.29% 100,000,000 -291,250 Hold 09-Apr-13 Buy 1y AUDJPY vol swap 13.20% 13.21% 0.01% 50,000 495 Hold 21-Mar-13 2m USDSEK 1x1 call spread 0.51% 0.19% -0.32% 100,000,000 -318,500 Hold 14-Mar-13 Sell 6m in 6m USDRUB FVA 9.80% 9.80% 0.00% 10,000 0 Hold 14-Mar-13 6m USDJPY higher, USDKRW higher dual digital 12.50% 50.00% 37.50% 1,000,000 375,000 Hold 29-Jan-13 6m AUDUSD 1x1 RKI put spread 0.38% 0.18% -0.20% 100,000,000 -198,237 Hold 22-Jan-13 1y USDJPY 2x1 RKI call spreads 1.06% 2.97% 1.91% 100,000,000 1,908,750 Hold 22-Jan-13 1y EURCHF risk reversal (long calls) 0.21% -0.26% -0.47% 100,000,000 -464,022 Hold 06-Dec-12 Sell 6m USDMXN RKI risk reversals 0.00% 3.09% 3.09% 100,000,000 3,091,250 Hold 05-Dec-12 6m USDBRL put with a sold 3m DOT (triggered) 1.00% 1.04% 0.04% 1,000,000 378 Hold 30-Nov-12 1y USDCNH put 0.35% 0.63% 0.28% 100,000,000 276,550 Hold 30-Aug-12 Sell 1y USDZAR RKI risk reversals 0.00% -0.39% -0.39% 100,000,000 -388,750 Hold 23-Aug-12 Sell 1y USDINR vol swap 11.35% 8.04% 3.31% 50,000 165,500 Hold Source: Credit Suisse FX Compass: Euro: What Doesn’t Go Down Might Just Go Up … 19 01 May 2013 FX Forecast Summary Spot Forecasts Major Currencies1 vs. 30 Apr 2013 Comments 3m 12m US dollar TWI 85.20 87.38 89.45 Mixed. We think the recent evidence suggests that the global economy by market convention EUR 1.317 1.330 1.400 is at an inflection point, with the acute stage of the financial crisis now JPY 97.4 105.0 120.0 behind us. This said, we don’t expect a broad USD-centric trend in GBP 1.553 1.494 1.538 2013, consistent with a fairly static outlook for US monetary policy CHF 0.930 0.925 0.907 across the forecast horizon. The USD is likely to underperform the euro AUD 1.037 0.990 0.950 and its immediate satellite currencies but will likely retain its upward CAD 1.007 1.015 1.000 momentum against the JPY in coming months. We think the USD will SEK 6.482 6.165 5.857 lose ground vs. the Asian and most Latin American emerging market currencies, and trade sideways vs. the G10 commodity bloc. Euro TWI 94.5 97.2 102.96 Bullish. We think the euro is likely to be a net beneficiary of the latest foreign currency units per euro USD 1.317 1.330 1.400 BoJ policy action. Absent sharp intensification of banking sector and JPY 128.3 139.7 168.0 sovereign stress that causes capital flight out of the euro, we think GBP 0.848 0.890 0.910 underlying flow dynamics are likely to continue to keep the euro CHF 1.224 1.230 1.270 supported. The likelihood of a rate cut has increased. While a rate cut AUD 1.270 1.343 1.474 could push the euro lower as front-end rate spreads compress, this CAD 1.326 1.350 1.400 could be partially offset by the positive impact seen from a tightening in SEK 8.536 8.200 8.200 peripheral spreads, especially if combined with significant relaxation in collateral requirements. Japanese yen TWI 145.3 134.8 115.8 Bearish. We now expect the yen to fall to 105 in 3 months and to 120 in yen per unit foreign currency USD 97.4 105.0 120.0 12 months. Note that we see the risks to the yen as being to the EUR 128.3 139.7 168.0 downside. The BoJ has committed to, among other things, double the GBP 151.3 156.9 184.6 monetary base in the next two years, increasing the base by a CHF 104.80 113.54 132.28 staggering ¥60-70 trillion per month. In effect the bank will be AUD 101.01 103.95 114.00 purchasing a large proportion of available high quality assets in Japan, CAD 96.7 103.4 120.00 almost guaranteeing that domestic investors would need to look SEK 15.03 17.03 20.49 elsewhere – including offshore. UK sterling TWI 80.32 77.04 77.35 Bearish. The slowdown in global growth momentum has also increased foreign currency units per pound USD 1.553 1.494 1.538 the need for further policy stimulus in the UK, likely to be in the form of EUR 1.180 1.124 1.099 credit easing measures. Despite reduced risk of further near-term debt JPY 151.3 156.9 184.6 monetization, the scope for dovish policy innovation in 2H leaves us CHF 1.444 1.382 1.396 bearish sterling. The change in the monetary policy remit provides the AUD 1.498 1.509 1.619 basis for much greater quantity and quality of monetary stimulus in the CAD 1.564 1.517 1.538 second half of the year. The likely introduction of Fed-style forward SEK 10.07 9.21 9.01 guidance in August with intermediate thresholds is expected to suppress the front-end rate structure for GBP. Swiss franc TWI 144.5 145.3 143.8 Bearish. The end of the euro area “break-up” trade should result in a francs per unit foreign currency USD 0.930 0.925 0.907 gradual unwinding of long CHF hedges and reversal of speculative (per 100 units for JPY and SEK) EUR 1.224 1.230 1.270 inflows into the safe haven. At the same time, we think a sustained JPY 0.954 0.881 0.756 recovery in euro area credit combined with improving growth prospects GBP 1.444 1.382 1.396 should encourage the Swiss to recycle their current account surplus AUD 0.964 0.916 0.862 abroad. This should drive further CHF weakness versus the euro over CAD 0.923 0.911 0.907 the medium term. SEK 14.34 15.00 15.49 1 Major currencies, defined and ranked by order of their reported foreign exchange market turnover from the BIS 2004 Triennial Central Bank Survey. FX Compass: Euro: What Doesn’t Go Down Might Just Go Up … 20 01 May 2013 Spot Forecasts Regional Currencies vs. 30 Apr 2013 3m 12m Comments Americas Brazilian Real USD 2.001 1.930 2.000 Neutral. We still think authorities are still likely to defend 1.90 and that USDBRL’s descent is likely to be gradual, with the central bank smoothing out the more aggressive moves via reverse swap issuance, as seen recently on the occasion of recent large intraday movements. Canadian dollar TWI 113.3 112.9 115.1 Neutral. In the near term, we think the high correlation to global growth will USD 1.007 1.015 1.000 undermine support for CAD. We have revised the 12-month forecast higher from 0.975 to 1.000. Mexican peso USD 12.15 11.90 11.50 Bullish. Our expectations of BoJ-driven inflows into EM reinforce our bullish view on MXN, on the back of the promising backdrop of structural reforms and improving US growth momentum. Pacific Australian dollar USD* 1.037 0.990 0.950 Bearish. With mining investment likely to peak this year, the period of JPY* 101.01 103.95 114.00 Australian exceptionalism may be coming to an end, with the AUD likely to NZD* 1.210 1.250 1.220 come under pressure over the next 12 months – we target 0.95. NZ dollar USD* 0.857 0.792 0.779 Bearish. We maintain our view that AUDNZD will trend lower over the year, JPY* 83.50 83.16 93.44 but we have revised our 3- and 12-month forecasts higher to 1.25 and 1.22, from 1.22 and 1.19 previously. The RBNZ has stepped up its resistance against the currency, allowing less scope for NZD outperformance. Scandinavia Swedish krona EUR 8.536 8.200 8.200 Near term bearish. The April Riksbank statement surprised dovish by USD 6.482 6.165 5.857 revising down the rate path as well as pushing the first rate hike further out the curve. The deteriorating euro area core growth outlook leaves us tactically bearish on SEK in the near term. Norway krone EUR 7.598 7.300 7.193 Medium term bullish. The deterioration in the growth/ inflation mix has USD 5.770 5.489 5.138 been accompanied by signs of moderation in household credit growth. SEK* 1.123 1.123 1.140 This raises the likelihood of a dovish policy surprise by the Norges Bank, in our view. Emerging Europe, Middle East and Africa Czech koruna EUR 25.80 25.30 25.20 Neutral. While the Czech central bank board continues to prefer a weaker koruna, we believe its currency goals are limited and we do not attach much probability to FX intervention at these levels. Nevertheless, renewed growth concerns in the euro zone and no carry should weigh on CZK. Hungarian forint EUR 299.3 310.0 300.0 Near term bearish. Policy uncertainty and easing expectations under the new central bank management are likely to weigh on forint. But the authorities do not desire a weaker HUF, in our view, and will try to balance their policies to avoid a loss of investor confidence. Polish zloty EUR 4.16 4.05 4.00 Modestly bullish. With little valuation concern at these levels, good carry and good credit, we see PLN among the best positioned EM currencies to benefit from Japanese inflows. However, weak data and risk of a renewed dovish shift from the central bank should limit the scope for gains. Israeli shekel USD 3.59 3.65 3.60 Neutral. We think the shekel should benefit from improved flow support, with the current account turning positive and natural gas production coming on-line this year. However, the Bank of Israel is opposed to strong appreciation and has resumed its intervention policy. FX Compass: Euro: What Doesn’t Go Down Might Just Go Up … 21 01 May 2013 Spot Forecasts Regional Currencies vs. 30 Apr 2013 3m 12m Comments Russian rouble Basket 35.5 34.7 35.5 Neutral. With the current account surplus much lower, and the rouble Rouble versus basket: USD 31.1 30.2 30.1 subject to persistent private capital outflows, we think the probability of a .55*USD+.45*EUR EUR 40.9 40.1 42.1 sustained break beyond the free float miniband (34.65) is reduced. Meanwhile, a switch to a new FX intervention mechanism may be a crucial development coming in 2014. South Africa rand USD 8.98 9.40 9.20 Bearish. While we believe that ongoing negotiations in the platinum, EUR 11.82 12.50 12.88 coal, and gold sectors are likely to yield a benign overall outcome, we think the rand will remain vulnerable to isolated strike episodes in the near term, especially given the still poor domestic macro backdrop. Turkish lira Basket 2.08 2.07 2.10 Neutral. We expect the central bank’s increasingly active FX Lira versus basket: USD 1.79 1.78 1.75 management policy to remain the key driver of TRY price action in 2013 as it aims to continue to control exchange rate volatility and target a .50*USD+.50*EUR EUR 2.36 2.36 2.45 broadly stable REER. Asia Chinese renminbi USD 6.17 6.22 6.07 Neutral. We maintain our view that as global growth recovers in 2H, the government will resume modest CNY appreciation. Given the relative strength of China’s exports, we think the risk is still that the CNY appreciates more than we are forecasting. Indian rupee USD 53.8 54.3 55.5 Medium term bearish. Our call for 75 bp of rate cuts has been supportive of the INR. Lower gold and oil prices should moderate the trade deficit somewhat. We expect the finance minister to continue drip feeding the market reform measures over the next couple of quarters. Indonesian rupiah USD 9734 10200 10350 Bearish. We remain concerned that the ongoing deterioration in Indonesia’s current account deficit will lead its central bank to allow the IDR to weaken rather than continue to lose reserves. Korean won USD 1101 1175 1200 Bearish. We have raised our forecasts to 1175 and 1200. The extreme weakness of Korean domestic demand combined with historically low inflation gives the Korean government an incentive to try to minimize the fall in JPYKRW through intervention and easier monetary policy. Malaysian ringgit USD 3.04 3.13 3.05 Near term bearish. We see a chance that MYR could outperform the region in 12 months, once the election uncertainty clears. Our economist’s work shows Malaysia is likely to benefit from stronger Japanese domestic demand growth. Philippines peso USD 41.2 41.7 40.8 Bullish. The government has pushed up its effort to fight the currency, and we think further rate cuts via SDA are likely. This could trigger outflows from foreign funds parked in SDA facilities, exacerbated by weakness in global growth indicators, and crowded long PHP positions. Singapore dollar USD 1.231 1.260 1.265 Bearish. We expect MAS to allow the NEER to continue trading close to the top of the band over the next several months before guiding it to the middle from roughly the second half of the year as Singapore’s current positive output gap fades. Taiwan dollar USD 29.54 30.30 30.80 Neutral. Taiwan’s central bank (CBC) is likely to manage USDKRW to try to keep TWDKRW below 38.70, roughly the top of its range for the past several years. This leads us to push our 3- and 12-month forecasts for USDTWD to 30.3 and 30.8, respectively. Thai baht USD 29.27 29.40 30.50 Bearish. The lack of intervention also means that current THB levels are likely to hold near term. However, we expect the adjustment to come towards year-end via a sharply stronger THB effective exchange rate, forcing the central bank to step up its resistance. Exchange rates are home currency per foreign currency unit, unless indicated by * (= inverse quotation). Source: Credit Suisse FX Compass: Euro: What Doesn’t Go Down Might Just Go Up … 22 GLOBAL FX RESEARCH AND STRATEGY Ric Deverell, Managing Director Eric Miller, Managing Director Global Head of Commodities, GFX and Asia Strategy Global Head of Fixed Income and Economic Research +44 20 7883 2523 +1 212 538 6480 firstname.lastname@example.org email@example.com LONDON One Cabot Square, London E14 4QJ, United Kingdom Aditya Bagaria, Vice President Anezka Christovova, Associate +44 20 7888 7428 +44 20 7888 6635 firstname.lastname@example.org email@example.com TECHNICAL ANALYSIS David Sneddon, Managing Director David Robertson, Analyst +44 20 7888 7173 +44 20 7888 7172 firstname.lastname@example.org email@example.com NEW YORK Eleven Madison Avenue, New York, NY 10010 Alvise Marino, Vice President +1 212 325 5911 firstname.lastname@example.org TECHNICAL ANALYSIS Christopher Hine, Director +1 212 538 5727 email@example.com SINGAPORE One Raffles Link, Singapore 039393 ASIA MACRO STRATEGY Ray Farris, Managing Director Trang Thuy Le, Associate Chief Asia Strategist +65 6212 4260 +65 6212 3412 firstname.lastname@example.org email@example.com Disclosure Appendix Analyst Certification The analysts identified in this report each certify, with respect to the companies or securities that the individual analyzes, that (1) the views expressed in this report accurately reflect his or her personal views about all of the subject companies and securities and (2) no part of his or her compensation was, is or will be directly or indirectly related to the specific recommendations or views expressed in this report. 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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. 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