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Credit Suisse -What Does'nt Go Down Might

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					                                                                                                                        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
               aditya.bagaria@credit-suisse.com    – 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
           anezka.christovova@credit-suisse.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
                  ric.deverell@credit-suisse.com
                                                   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
                    ray.farris@credit-suisse.com
                                                     a core asset are altogether more demanding.
                               Alvise Marino
                                                   In anticipation of the traditional start to the Japanese investment season
                               212 325 5911
                alvise.marino@credit-suisse.com    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
                 trangthuy.le@credit-suisse.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
            david.sneddon@credit-suisse.com
                                               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
          christopher.hine@credit-suisse.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
                    ric.deverell@credit-suisse.com                                       eric.miller.3@credit-suisse.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
aditya.bagaria@credit-suisse.com             anezka.christovova@credit-suisse.com


TECHNICAL ANALYSIS

David Sneddon, Managing Director             David Robertson, Analyst
+44 20 7888 7173                             +44 20 7888 7172
david.sneddon@credit-suisse.com              david.robertson@credit-suisse.com

NEW YORK                                                                                    Eleven Madison Avenue, New York, NY 10010

Alvise Marino, Vice President
+1 212 325 5911
alvise.marino@credit-suisse.com

TECHNICAL ANALYSIS

Christopher Hine, Director
+1 212 538 5727
christopher.hine@credit-suisse.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                                trangthuy.le@credit-suisse.com
ray.farris@credit-suisse.com
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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. If this report is being distributed by a financial institution other than Credit Suisse AG, or its affiliates, that financial institution is solely responsible for distribution. Clients of that institution
should contact that institution to effect a transaction in the securities mentioned in this report or require further information. This report does not constitute investment advice by Credit Suisse to the
clients of the distributing financial institution, and neither Credit Suisse AG, its affiliates, and their respective officers, directors and employees accept any liability whatsoever for any direct or
consequential loss arising from their use of this report or its content. Principal is not guaranteed. Commission is the commission rate or the amount agreed with a customer when setting up an
account or at any time after that.
Copyright © 2013 CREDIT SUISSE 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 the purchase price only.

				
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