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					    Fixed Income: Weekly Strategy
    11 October 2010

    Assessing the impact of further QE on bonds and our forecasts
              We are revising our US bond forecasts to account for the probability that the Fed expands its QE program.

              A comparison of the 10Y US Treasury to the ZCS curve shows the QE risk is already well priced.

              We continue to look for the RBA to raise rates – which will flatten and invert the Australian curve.

              Our Chief FX Strategist also considers what impact the China/US currency dispute may have on bonds.

    The last week has been the tale of two employment numbers. In                       Contents:
    Australia we got the best of times: nearly 50K new jobs created. In the
    US, they got the worst of times: nearly 100K jobs destroyed.                        Key Trades ............................................................................ 2
                                                                                        Forecast revisions - Accounting for QE2 ............................... 3
    This dynamic defined the week. Australian bonds were essentially
    holding the line as US yields hit new record lows. The Australian 10Y               How much QE is already priced? .......................................... 8
    bond is unchanged since last week to the basis point, while the 3Y bond             US Protectionism and China’s Treasury Holdings ............... 11
    has sold-off 3bp. The curve has flattened to 11.5bp. In the US, the 2Y
    bond has reached a new record low of 34bp (down 7bp). The 10Y has                   Key Views............................................................................ 13
    finished the week at 2.40%, down 7bp from last week.                                CBA Forecasts: .................................................................... 14

    While the employment data was pivotal for this week, it is also indicative          Calendar – October 2010 .................................................... 15
    of the general trend of both markets. It is this trend that is causing the
    market to expect a second round of Quantitative Easing by the Federal
    Reserve. The minutes of the FOMC meeting of 21 September will be
    released on Wednesday morning (Australian time). The discussion of QE
    is unlikely to be settled then, but the minutes will only intensify interest
    as to when exactly the Fed will lose patience and implement more QE.
                                                                                        US unemployment is refusing to fall – and trying
    We are updating our forecast to reflect this new dynamic in an article by           the Fed’s patience in the process
    Adam Donaldson on page 3. In brief, we are lowering our US bond
    forecasts and incorporating a flatter Australian curve as the US long end              %                                                                                000s
    holds down Australian long end rates.                                                  12.0                                                                              700

    On page 8 Philip Brown takes up the challenge of figuring out how much
    QE is already priced by the market. Using a comparison to inflation                    10.0                                                                               600
    swaps he deduces that the market is already very significantly priced for
                                                                                                           BLS official unemployment rate
    QE. In fact, should the Fed not deliver QE (or do so in a smaller volume                                             (LHS)
    than the market expects) it is possible the market could sell-off in                     8.0                                                                              500

    Despite the doom and gloom in the United States, the outlook for                         6.0                                                                              400
    Australia remains strong. A second result of our contrasting
    employment fortunes is that AUS-US bond spreads have been widening.                      4.0                                                                              300
    Last week’s data saw the AUD make the first stumbling attempts at
    reaching parity. So far the high remains USD99.18.                                                                   Jobless claims
                                                                                                                     unemployment rate (RHS)
                                                                                             2.0                                                                              200
    Currencies are very much on policy-makers lips, too. The US is making                           85 87 89 91 93 95 97 99 01 03 05 07 09 11
    increasingly stern comments about Chinese policy, but so far the effect
    on bond markets has been small. Richard Grace takes a closer look at
    this issue on page 11.

    The coming week sees very few confirmed highlights. In the US, the Fed
    minutes and the US CPI data are released but in Australia there is only
    business and consumer confidence data. Most likely it will be another
    week devoted to analysing the prospects of further US QE.

Adam Donaldson Head of Debt Research T. +612 9118 1095 E.
Philip Brown Quantitative Strategist T. +612 9118 1090 E.
Richard Grace Chief Currency Strategist T. +612 9117 0080 E.

Important Disclosures and analyst certifications regarding subject companies are in the Disclosure and Disclaimer Appendix of this document and at This report is published, approved and distributed by Commonwealth Bank of Australia ABN 48 123 123 124 AFSL 234945.
Global Markets Research
: Weekly Strategy

 Key Trades
 Trade                    Entry         Curent     Profit   Target   Stop    Comment
 Buy the NSWTC            -12bp         -27bp      15bp     -35bp    0bp     Hold: A long term buy and hold
 Jun-20 (Government       (3-Feb-10)                                         trade. The NSWTC budget suggests
 Guaranteed) as an                                                           borrowing will reduce. QTC has
 ASW                                                                         started to consolidate GG bonds.
 Sell the May-13          -11bp         -6bp       +5bp     3bp      -20bp   Hold: Taking longer than we thought
 ACGB against the         (25 May)                                           – but with Dec-13 included in March
 Nov-12 and Dec-13                                                           2011 Basket should work eventually
 Pay 3yr AUD EFP          35bp          38bp       +3       45bp     30bp    Hold: Increased mortgage fixing may
                          (9 August)                                         force this wider as curve flattens.
 Sell the May-13          62bp          14.5bp     47.5bp   15bp     33bp    Hold: Curve flattening as
 ACGB vs the Apr-20       (5 July)                                           expectations of RBA action push up
                                                                             front end and US holds down long
 10yr ACGB BEI            255 bp        271bp      16bp     280bp    240bp   Hold: Spread has widened in the
 widening                 (18 August)                                        sell-off
 OTM Conditional          3.75% and     5.31 and   -0.4bp                    Hold: An insurance trade for a global
 Stepeener. 6M*2Y         4.28%         5.58       (prem-                    double dip.
 vs 6M*10Y. Buy           0.4bp                    ium)
 100m 6M*2Y 3.75%         premium
 receiver. Sell 24.1M     (25 August)
 6M*10Y 4.28%
 Buy the NSWTC            63bp          62bp       -1bp     75bp     55bp    Hold: We shift into the NSWTC to
 Apr-19 vs the EIB        (8 Sep)                                            EIB trade.
 Buy the Suncorp          TM of         26.5bp     +3bp     0bp      40bp    Hold: This bond is Government
 Metway Govt              29.5bp                                             Guaranteed. It should be much
 Guaranteed Apr-11                                                           tighter. Can hold to maturity in 6
 Floater.                                                                    months.
 Sell the Mar-12 IR       17bp          16bp       -1bp     50bp     0bp     Hold: The market is underpricing the
 future against the       (21 Sep)                                           chance of an active RBA through
 Mar-11                                                                      2011
 Buy NZGB May-21          29bp          +3bp       +26bp    -10bp    14bp    Hold: RBA speculation combined
 vs ACGB May-21           (5 July)                                           with weak NZ GDP has helped the
                                                                             trade a lot.
 Pay 6M*2Y vs             111bp         105bp      -5bp     50bp     135bp   Hold: A number of influences have
 Buying the May-21        (30 August)                                        cancelled out. Still look for further

 Global Markets Research
 : Weekly Strategy

Forecast revisions - Accounting for QE2
Adam Donaldson – Head of Debt Research – 61 2 9118 1095 –

        We revise our US forecasts to take account of the likely Fed Quantitative Easing program.

        US bonds will be lower in yield, causing a secondary effect in Australian long end rates.

        However, the RBA will still be raising rates, leading to a sharper flattening and then inversion of the Australian curve.

        The contrast also points to wider AUS-US bond spreads, supporting our parity call for the AUD.

                           Our last set of US and Australian bond forecast
                           revisions a quarter ago included substantial          CBA forecasts
                           downward reductions in forecast bond yields.
                           This took account of increased global focus on                                                Dec-        Jun-       Dec-
                           fiscal austerity and the unfolding slowdown in                                 Current          10          11         11
                           the United States, which we assessed could             Official Cash                4.50      4.75        5.25       5.75
                           bring Federal Reserve quantitative easing (QE)         90-day BBSW                  4.83      5.10        5.60       6.10
                           back on to the agenda.                                 1-year swap                  5.11      5.30        5.85       6.25
                                                                                  3-year swap                  5.31      5.55        5.95       6.15
 Fed poised to             In the event, the Fed has already taken steps to
                                                                                  10-year swap                 5.61      5.70        5.95       6.15
 implement QE2             preserve the existing level of QE and seems
                                                                                  Aus 3yr bond                 4.87      5.10        5.40       5.60
                           poised to increase the scale of intervention in
                                                                                  Aus 10yr bond                5.01      5.10        5.30       5.50
                           the bond market. Our 2.8% end-September
                                                                                  Aus 3-10yr
                           forecast for US 10yrs wasn’t aggressive                Curve (bp)                     14         0         -10        -10
                           enough. We are now lowering our Q4 and Q1
                                                                                  US 2yr bond                  0.34      0.30        0.65       1.75
                           forecasts to 2.25% and pushing out the timing
                                                                                  US 10yr bond                 2.39      2.25        2.40       3.00
                           of the rebound.
                                                                                  AUS-US 10yr
                                                                                  spread (bp)                  262       285         290         250
                           The strong US bond rally meant that Australia’s
                           yield curve has flattened a little more than
                           expected and AUS-US bond spreads have
                           widened more than expected. While the RBA
                           didn’t tighten monetary policy as the market
                           had discounted in October, the fundamentals
                           suggest a move is still likely before long. The
                           contrast with the outlook in the benchmark US         Chart 1: US GDP and Final Sales
                           market suggests further AUS bond under-
                           performance and curve flattening is likely,
                           suggesting we could see an inverted yield curve            %                                                     %
                           in the near future.                                        6                                                     6
                                                                                                 Final sales

                           US backdrop                                                3                                                     3

 US data no longer         The weakening trend in US economic data
 trending weaker, but      appears to have abated over the past month
                           after a clear slowdown in July and August. This            0                                                     0
 not recovering either
                           inflection in the momentum of the data provided
                           powerful support to financial markets in early
                                                                                      -3                  contribution                      -3
                           September, when not-as-bad-as-expected
                           August ISM and payrolls results prompted a
                           surge in equities and a 35bp rise in 10yr                                                             GDP
                           Treasury yields.                                           -6                                                    -6
                                                                                           85   88   91 94     97   00   03     06   09
                           But the outright level of activity remains
                           anaemic. While annual growth in GDP
                           accelerated to a respectable 3.0% in Q2, 1.9%
                           points of this reflected a bounce in business
                           inventories as firms recallibrated production in
                           the wake of the GFC shock (Chart 1). The
                           concern is that underlying sales growth remains
                           very weak and that the inventory boost to
                           orders is now fading (Chart 2). As confirmed

Global Markets Research
: Weekly Strategy

                          again on Friday, progress in lowering the
                                                                               Chart 2: US ISM versus wholesale
                          unemployment rate has stalled (Chart 3).

                          The risk of a double-dip in the US economy            6m % annualised                                   ISM Index
                          does not appear to have increased over the
                                                                                 30                                                        80
                          past quarter (nor abated). But the Fed is clearly                  W'sale sales-inventories
                          losing patience. Subdued growth points to lack                     growth gap (LHS)
                          of job creation and therefore failure to address
                                                                                 15              ISM (RHS)                                 65
                          one of the Fed’s key responsibilities. But failure
                          to absorb abundant spare capacity also
                          intensifies the disinflationary pulse running
                          through the US economy – very important                 0                                                        50
                          considering the Fed declared on September 21
                          that inflation already is too low (Chart 4). The
                          upshot is that the FOMC:
                                                                                -15                                                        35
                               “is prepared to provide additional
                               accommodation if needed to
                               support the economic recovery and                -30                                                        20
                               to return inflation, over time, to
                                                                                       95   97   99    01    03   05    07   09
                               levels consistent with its mandate”.

QE speculation has        US Treasuries have subsequently rallied
seen US treasuries        aggressively to new yield lows on the
rally significantly       expectation that the Fed will deliver further QE     Chart 3: US unemployment rate & jobless
                          when it next meets on November 2-3. In the           claims
                          absence of more information on timing, size and
                          objectives from the Fed, it is very difficult to      %                                                       000s
                          gauge just what impact this QE2 will have on          12.0                                                     700
                          the Treasury market.

                                                                                10.0                                                       600
                          Recalibrating US bond forecasts
                                                                                            BLS official unemployment rate
QE does not               The initial March 2009 QE program jolted US            8.0                                                       500
necessarily cause a       10yrs 50bp lower to 2.5%. But the impact was
sustained rally           short-lived because it coincided with the cycle
                          low in the economy, equities, confidence and           6.0                                                       400
                          risk appetite. 10yrs were back at 4.0% by June
                          2009 amid growing concern that fiscal and              4.0                                                       300
                          monetary largesse were inappropriate and
                          presented long-term inflation risk in the brighter                           Jobless claims
                                                                                                   unemployment rate (RHS)
                          economic climate that was unfolding. But we            2.0                                                       200
                          also assess that the defined size of the Fed’s               85 87 89 91 93 95 97 99 01 03 05 07 09 11
                          program and the fact most of this was directed
                          towards the RMBS market limited the impact of
                          QE1 on the yield curve.
                                                                               Chart 4: US inflation & unit labour costs
                          The current situation bears some similarities in
                          that equities are again rallying strongly on the      y/y %                                                  y/y %
                          elixir of monetary stimulus (Chart 5) and the         10                                                         12
                          recent momentum in US economic data has
                          been firmer. But the inventory and fiscal              8                                                         9
                                                                                                                Unit labour costs
                          backdrop suggest a strong bounce in activity is                                     (non-financial sector,
                          much less likely this time around. More                6                                     RHS)                6
                          importantly, having apparently decided to act
                          (though clearly not uniformly), we suspect the
                          Fed will stay the course for at least six months       4                                                         3
                          to ensure the recovery is locked in and deflation
                          risks minimised.                                       2                                                         0

Market has already        Still, as detailed in the accompanying article, we                Core PCE deflator (LHS)
                                                                                 0                                                          -3
priced in further QE      assess that QE2 is now largely priced in. That
                          mainly reflects a view that real yields wont fall
                          much further, though there is probably scope           -2                                                         -6
                          for the inflation premium to unwind some of its             70 74 78 82 86 90 94 98 02 06 10

Global Markets Research
: Weekly Strategy

                          recent increase (from 1.5% to 2.0% for 10yrs)
                          as actual inflation remains very subdued.            Chart 5: US bonds versus equities
                          However, the larger near-term risk is probably
                          market disappointment with the pace of Fed            %                                                       Index
                          easing that sparks a knee-jerk pull-back in bond      7                  US                                   1,800
                          yields.                                                                 10yrs              S&P 500
                                                                                 6                                                      1,600
                          We have lowered our US 10yr forecast to
                          2.25% for both Q4-10 and Q1-11. After that                                                                    1,400
                          time, we currently look for yields to start            5
                          tracking significantly higher as the recovery                                                                 1,200
                          finally comes through and the Federal Reserve          4
                          withdraws back to the sidelines. Our                                                                          1,000
                          economists envisage that the Fed will start            3
                          lifting the Federal Funds rate from Q3-11, which                                                              800
                          we think would signal the start of a return to a       2
                          more normal term structure of rates in the US.                                                                600

                                                                                 1                                                      400
                          Australian bond revisions                                  98 99 00 01 02 03 04 05 06 07 08 09 10

Australian bond           Chart 6 highlights the powerful impact the US
yields likely to go       rally has had on the long end of the Australian
higher                    bond curve. Aussie bonds have under-
                          standably lagged the US rally given the strength     Chart 6: US versus Australian 10yr bond yields
                          of the local economy, but there has been
                          substantial foreign buying of Australian bonds        %                                                    %
                          on a relative value basis – the local market          7                                                    8
                          offers a large yield premium attractive to foreign
                          investors, particularly those wishing to short
                          expensive foreign markets and positive on the         6                                                       7
                          outlook for the AUD (Chart 7). With the front
                          end of the curve under upward pressure due to         5                                                       6
                          the threat of domestic monetary tightening, this
                          has also led to a marked flattening of the yield
                          curve (Chart 8). Both of these developments           4                                                       5
                          were in line with previous forecasts but went                    Australia
                          further than expected.                                3           (rhs)                                       4
                                                                                                            United States
Though the global         There was, however, a short period in the                                              (lhs)
backdrop is still a       second half of August when the price trends in        2                                                       3
risk                      the domestic market altered somewhat. The                  98     00     02      04   06      08     10
                          yield curve steepened and AUS-US bond
                          spreads actually narrowed for a period despite
                          the continued rally in US bonds, as concerns
                          over a global double-dip intensified. The
                          Australian market actually priced in some risk of    Chart 7: Foreign buying has surged recently
                          Reserve Bank monetary easing during this
                          period, though that appeared to reflect               $ bn                                                $ bn
                          smoothing out of the curve as 3yrs rallied down       120                                                 120
                          to 4.25% amid global buying and a lack of
                          domestic capacity to further short the market                                          Foreigners
                          (Chart 9). The episode shows the potential             90                                                 90
                          impact of foreign investors on the local market
                          and serves as a warning that re-emergence of                                  Commonwealth,
                          broad-based global economic weakness would             60
                          dramatically change the outlook for the
                          domestic fixed income market. We have                                        NBFIs
                                                                                    (mainly custodial,
                          advocated cheap OTM conditional steepening                  likely foreign)
                                                                                 30                                                 30
                          trades as a useful hedge against this risk to our            Banks
                          core views.

                          Trading patterns reverted back to normal                   0                                              0
                          following the release of the key US ISM and                    69 73 77 81 85 89 93 97 01 05 09
                          payroll reports in early September, which
                          arrested fears of a dramatic slide in the US

Global Markets Research
: Weekly Strategy

                          economy. China’s monthly PMI was just as
                          important, showing the first increase for several     Chart 8: US 10yrs versus AUS-US 10yr spread
                          months. But the kicker for the Australian
                          market was exceptional strength in the Q2              %                                                               bp
                          national accounts, which showed a much
                          stronger than expected 1.6% rise in real GDP           8.0                                                         -100
                          and an even more stunning 3.6% surge in
                                                                                                            3-10yr curve
                          nominal GDP (up 10.4% y/y, Chart 10). The                                        (inverted, rhs)
                          data has been followed by two very strong
                          employment reports and a host of hawkish               6.0                                                         0
                          speeches from RBA officials that convinced the
                          market it would tighten policy in October.

RBA’s surprise “no        The RBA’s ‘surprise’ decision not to hike in
                                                                                 4.0                                                         100
move” in October          October introduced further volatility to the front-
doesn’t change the        end of the Australian curve. But the change in
                                                                                                                     Cash rate
trend                     sentiment has had a more enduring impact on                                                  (lhs)
                          the bond market. The 3-10yr futures curve has
                          flattened 36bp since the end of August (Chart 8)       2.0                                                         200
                          and the 10yr AUS-US spread has widened                        97      99    01      03     05      07     09
                          40bp. Chart 11 shows how the spread is being
                          more impacted by domestic dynamics than just
                          the US rally which largely explained previous
                          spread widening.
                                                                                Chart 9: IB cash rate pricing
                          Looking ahead, our economists continue to
                          forecast that the Reserve Bank will lift the cash
                                                                                  %                                                            %
                          rate 25bp in November, and a further 100bp
                                                                                 5.50                                                        5.50
                          over the course of 2011. Relative to our                                             June 2011
                          forecast for US bond yields to drift and hold a                                                         Dec 2011
                          little lower, this points to a continuation of the
                          curve flattening and spread widening dynamics          5.00                                                        5.00
                          of recent months. An increase in our forecast
                          for the AUS-US 10yr spread to a peak of 300bp
                          in Q1 broadly offsets the impact of lower US           4.50                                                        4.50
                          bond forecasts. The net impact is a 10-20bp                        December
                          downward revision to our 10yr Aussie bond                            2010
                          forecast in H1 2010 and a similar upward               4.00                                                        4.00
                          revision to our 2-3yr bond forecasts.
                                                                                                     Cash rate
                          Australian curve and market views                      3.50                                                        3.50
                                                                                       Jan-10        Apr-10         Jul-10         Oct-10
The combination           One result of these forecast revisions is that we
leads to an inverted      are now forecasting the Australian yield curve to
AUD bond curve            invert from Q1, with the 2-10yr slope reaching
                          -20bp and the 3-10yr reaching -10bp. On a             Chart 10: Australian GDP growth measures
                          trade view, with these curves already trading in
                          a 10-15bp range, we wouldn’t be surprised to           y/y %                                                       y/y %
                          see inversion this year, subject to the Fed
                                                                                 12                                                               12
                          implementing significant QE2 and the RBA
                          hiking as forecast in November.                                                          Nominal GDP

                                                                                  9                                                               9
                          But we can’t forget that both these central
                          banks will be meeting on November 2nd,
                          highlighting just how unusual such an outcome           6                                                               6
                          would be. As discussed, there is clear capacity
                          for the Fed to disappoint aggressive market
                          pricing for QE. The RBA, meanwhile, has                 3                                                               3
                          already managed to surprise markets by not
                          tightening as expected, and a November move             0                                                               0
                          would appear highly contingent on the inflation
                          data to be released on October 27th. Our                                                           Real GDI
                          economists forecast a 0.7% rise in underlying           -3                                                              -3
                          inflation and expect this would be enough to                 93 95 97 99 01 03 05 07 09 11
                          push the RBA over the line in November, but

Global Markets Research
: Weekly Strategy

                          also caution that most of our internal indicators
                          point to downside risk.
                                                                              Chart 11: US 10yrs versus AUS-US 10yr spread
Our current trades        Cash rate futures are currently pricing in a 54%
already capture           chance of a 25bp hike in November, which             bp                                         %
these views               probably understates the risk of a move. But
                                                                               275                                       1
                          we are cognisant that the market is discounting                              AUS-US
                          a 90% chance of a hike by December, and                                    10yr spread
                          suspicious that the lack of any hike this year       250                       (lhs)
                          could have a profound impact on future market                                                  2
                          expectations. We retain our core flattening
                          trade exposure but don’t feel the need to            225
                          double-up with further trades at this stage given                                              3
                          relatively full pricing on the two key events        200
                          confronting the market over the next month.
                                                                                                         US 10yr         4
                                                                                                     (inverted, rhs)

                                                                               150                                       5
                                                                                  Jul-09   Dec-09   May-10      Oct-10

 Global Markets Research
 : Weekly Strategy

How much QE is already priced?
Philip Brown – Fixed Income Quantitative Strategist – 61 2 9118 1090 –

         The market is already reacting to the prospect of further Quantitative Easing.

         The spread between 10Y UST and 10Y ZCS measures the pricing of QE.

         The current levels of this spread show QE is already significantly (if not fully) priced.

         There must be risk of significant disappointment if the Fed doesn’t deliver in November.

 After Friday night’s Payrolls report the prospect of further quantitative
 easing remains unresolved. Although the headline figure was weaker                     Figure 1: Shock and awe in 2008/09
 than expected (-95K) the discrepancy was mainly due to the continued
 fall in public employment (partly Census related). The trend of anaemic
                                                                                                 %         QE1a         QE1b         UST
 US growth and associated Fed commentary suggests the Fed’s
 patience will soon wear thin and they will embark on further QE.                         7.00

 We believe that the there is already a significant chance of QE implicit in              6.00
 the prices of US treasuries. However, lacking the clean instruments                      5.00
 available in money markets, we are forced to use more involved
 methods. Here, we compare the 10Y treasury yield to the 10Y inflation                    4.00
 ZCS to obtain a simple measure of term premium in the 10Y treasury.
 Since Fed QE purchases do not affect the ZCS, a tightening of the                        3.00
 premium indicates that the market is expecting QE. This approach                         2.00
 shows the most recent rally is taking US bonds into areas only seen
 briefly – and right at the height of QE1.                                                1.00

 Background – QE as a technique                                                                  Jul-04     Jul-06        Jul-08           Jul-10

 QE is a technique that is still being refined. Monetary policy is often                Source: CBA, Bloomberg
 described as a blunt instrument or as a sledge hammer – which must
 make QE something akin to a steam roller.

 The first set of QE (presumably QE1, if the next set is QE2) was actually
 split into two separate stages. What we’ll term QE1a began with the
 announcement of the intention to purchase $100b of GSE bonds (read
 Fannie and Freddie) and a further $500m of MBS on 25 November 2008.

 On March 18 2009, the Fed announced a second set of purchases
 (QE1b). The Fed extended the purchases of MBS by a further $750bn to                   Figure 2: 10Y UST and ZCS – long view
 $1.25 trillion and doubled the total value of GSE straight-debt purchases
 to $200bn. However, the Fed also began purchasing US Treasuries at                          bp
 this point, with a total of $300bn of purchases announced.                                               Yield on 10Y Treasury less ZCS
 The purchases of US treasuries were undertaken by a reverse tender                        220
 system, with the Fed announcing an approximate maturity span and                          200
 asking for tenders in that space. This is the same system they are using                  180
 to repurchase the maturities and coupons at the moment.                                   160
 There was a knee-jerk 47bp rally in US 10yrs when the Fed announced it                    120
 would purchase Treasuries on 18 March 2009. However, the impact                            80
 was short-lived because it coincided with the cycle low in the economy,                    60
 equities, confidence and risk appetite. Three weeks later the 10Y bonds                    40
 were back with 10bp of the pre-announcement price and by June 2009                         20
 10yrs were back at 4.0%. The sell-off occurred amid growing concern                         0
 that fiscal and monetary largesse were inappropriate and presented                        -20
 long-term inflation risk in the brighter economic climate that was                              Jul-04     Jul-06        Jul-08           Jul-10
 unfolding. But the defined size of the Fed’s treasury purchase program
 likely limited the impact of QE1 on the yield curve.                                   Source: CBA, Bloomberg

Global Markets Research
: Weekly Strategy

Measuring QE expectations                                                           Figure 3: UST and ZCS – short view

The recent rally in bond markets and the volume of discussion of QE                         bp        QE1a         QE1b            UST less ZCS
give us a relatively clear indication that the bond market is reacting to
the prospect of QE. However, it is not easy to measure how much
reaction has already occurred.
When assessing a cash rate profile money market futures and OIS make
the process relatively exact, but here we’ve got less to go on. The                    150
outright level of US treasury yields is not a particularly helpful measure
(see Figure 1). Bonds rallied significantly as QE1a approached – but the
economy was tanking at the same time and there was a strong flight to
quality bid. QE1b, in contrast, saw a sharp but temporary reaction in the
10Y yield as discussed above.                                                           50

Although the outright yield of 10Y treasuries is not a good measure, all is              0
not lost. We have compared the 10Y US Treasury yield to the 10Y US                          Jul-06   Jul-07      Jul-08     Jul-09      Jul-10
ZCS. Our rationale here is that the yield curve is often broken down
into 1 :
                                                                                    Source: CBA, Bloomberg
       rate = real rate +
                                                                                    Figure 4: ZCS has sold-off in recent days
               inflation +
                                                                                            %          QE1a           QE1b            ZCS
               term premium +
               inflation risk premium
Usually the inflation component is done with TIPS. But TIPS are                        3.00
physical bonds and so are also exposed to secondary market effects as
the QE pushes up bond prices. In fact, there’s no guaranteed that QE2
wouldn’t involve TIPS directly. They have recently reinvested a small                  2.00
share of maturities from their QE1 portfolio into TIPS. If the Fed
deliberately buys an instrument that receives inflation it sends a strong
signal that the Fed thinks deflation isn’t a problem.                                  1.00
ZCS, however, are not affected by QE expectations as they are not a
physical bond. As a derivative of the CPI only, they will not be used by               0.00
the Fed. ZCS still show, in our view, a fair representation of inflation                    Jul-04      Jul-06            Jul-08         Jul-10
expectations. Currently 10Y ZCS are yielding nearly the same as 10Y
Treasuries – just 8bp less. That spread doesn’t leave much for real rate,
term premium or inflation risk premium in our model. Unless, that is, we            Figure 5: Australia to US bond spreads
had a missing term above and the correct specification is:
                                                                                      bp                                                  %
       rate = real rate +                                                             300                                                2
                                                                                                             US 10yr
               inflation +                                                                               (inverted, rhs)
               term premium +
                                                                                      250                                                3
               inflation risk premium +/–
               expected QE adjustment
                                                                                      200                                                4
Using this measure we find the periods of significant movement coincide
with the announcements of previous QE measures. After a period of                                                     10yr spread
relative stability, the spread became highly volatile when QE become a                                                    (lhs)
possibility. Although the spread has moved large amounts before (like in
                                                                                      150                                                5
2007/8 when there was a flight to quality), QE causes sharp gapping
behaviour in the spread. (See figures 2 and 3.) QE1a coincided with a                    Jul-09      Dec-09        May-10
massive tightening in the spread and the lowest ever value was achieved
two days after QE1b.                                                                Source: CBA, Bloomberg

To our mind this shows relatively conclusively that this measure works

 For example, in Don H Kim and Jonathon H Wright “An Arbitrage-free Three-Factor Term Structure Model and the Recent Behaviour of Long-
Term Yield and Distant-Horizon Forward Rates”, Fed Discussion Paper FEDS 2005-33

Global Markets Research
: Weekly Strategy

and there is already a substantial QE action priced into the US 10Y
treasury market. Which begs the question, what if we don’t get QE? Or
only a smaller than expected one? A vicious sell-off, we assume.

The rally in US 10Y has contributed to a widening in AUS-US bond
spreads. This can be readily explained as a symptom of QE
expectations. We took profit on a spread widening trade because we
were concerned about getting our fingers burned. As it turned out we
should have maintained the position, but our rationale for exiting is now
doubly true – the scope for a US sell-off and contraction in the AUS-US
10Y spread is now just as real as the scope for the opposite, depending
on whether or not QE eventuates – and in what size.

How might QE be implemented?
There are no clear “rules” as to how the Fed will undertake QE like there
are for interest rate decisions. When banks seek to move the interest
rate they almost always choose multiples of 0.25% - but QE is so rare
that there is no real standard. So far, central banks have just been
choosing nice, round numbers for QE announcements.

Last time the Fed undertook QE in late 2008 / early 2009, the explicit
intention was “shock-and-awe”. The Fed was deliberately noisy about
the way they were purchasing bonds. So they announced a large
number and went about buying the bonds and forcing the rate lower.
But that was to restore confidence and avert a catastrophe. The focus
on the GSE bonds and MBS was to also assist the housing market, not
only to lower outright yields.

The task confronting the Fed now is perhaps a little more nuanced than
the steam-roller of QE1: to try to cajole a spluttering economy back to
life. It is by no means certain that the best way to achieve this is with

If the Fed implements QE2, we presume the NY Fed system of
purchasing the bonds within a specified maturity bucket is likely to be
retained. The process has worked well so far. The more difficult
question will be whether or not the Fed announces any or all of: a total
volume of purchases; a timeframe for said purchases; or a target rate.

The total volume of purchases was the technique used in 2008 and 2009
As we have noted this situation is a slightly different problem and may
require a more nuanced solution.

It is likely that the Fed will announce a total volume, but not definite. Nor
would an end-point seem entirely necessary. It is possible the Fed
could suggest that they will purchase an approximate amount per month
until the economy recovers – or “for an extended period”.

Although the target price is superficially attractive, it fails in practical
application. While the target works in FX when there is only one price,
there are simply too many bonds with too many prices to be effectively
targeting each one. Moreover, the purpose of QE is to lower the entire
curve structure of interest rates in the whole economy – there is no
reason not to buy all maturities.

There are many possible reactions depending on what the Fed
announces. The characteristics of QE2 will define the result – and while
a rally is the most likely, it is not a foregone conclusion. If the Fed
announces a small QE program the market may sell-off. However, we
expect the announcement will be large enough to see bonds rally in
response. Though, given a large amount is already priced, this rally may
not be particularly large (or, at least, not large once the dust settles, as
per QE1b).

 Global Markets Research
 : Weekly Strategy

US Protectionism and China’s Treasury Holdings
Richard Grace – Chief Currency Strategist – 61 2 9117 0080 –

              US House of Reps. passed the Currency Reform Act. Chinese officials respond claiming non-compliance with WTO

              Are the Chinese likely to further respond by dumping US treasuries and the USD ? We think not.

             Even if this unlikely event were to occur, the lasting net effect on the US bond market and the USD would be

 The US House of Representatives passed the Currency Reform for Fair
 Trade Act, by a vote of 348 to 79. To become law, the bill needs to be                      Figure 1:
 passed by the Senate (which is difficult before the November mid-term
 elections) and then signed by President Obama. China’s Commerce
                                                                                                          FOREIGN OWNERSHIP OF US
 Ministry representative, Yao Jian, responded by commenting that                               US$
                                                                                                                PUBLIC DEBT
                                                                                                bn                                                                 bn
 “starting a countervailing investigation in the name of exchange rates                       14,000                                                          14,000
 does not conform with relevant WTO rules".                                                                                  Total Stock of US
                                                                                              12,000                                Public Debt               12,000

 Is China likely to retaliate by dumping US treasuries and the                                10,000                                                          10,000
 USD ?
                                                                                               8,000                                                          8,000

 In short, the answer is no. Such a retaliatory action by China would not                      6,000                                                          6,000
                                                                                                                      Stock of Foreign Holdings (30%)
 be in China’s own interests. For that matter, it would not be in anybody’s
 interest, considering the announcement effect would create volatility.                        4,000      Stock of China's Ownership                          4,000
                                                                                                            of US Public Debt (6.4%)
                                                                                               2,000                                                          2,000
 Of the US$13.6 trillion in US treasury debt on issue, China’s holdings of
 US treasuries is relatively small at 6.4%, or US$847 billion (chart 1).                             0                                                        0

 China’s treasury portfolio comprises $431 billion in treasury bonds and                             Mar-00      Nov-02      Jul-05      Mar-08         Nov-10

 $416 billion in treasury bills. If China were to retaliate by selling 10% of
                                                                                             Source: CBA, Bloomberg
 their treasury holdings as a “protest” over the US House vote, it would
 amount to US$84 billion – equivalent to one-week’s supply of treasuries
 issued by the US government. The lasting impact of a Chinese portfolio                      Figure 2:
 adjustment on the US treasury market and the USD would be minimal.

 China has been in a process of reserve diversification for a number of                       US$          CHINA: FX RESERVES                             US$
                                                                                               bn        (rolling twelve month addition)                   bn
 years. In fact, the rate of growth of China’s non-USD foreign exchange
                                                                                              600                                                         600
 reserves has been exponential compared to the rate of growth in USD                                              Total China FX
 reserves (chart 2). This process of reserve diversification has left 48% (or                 500
                                                                                                              (12 Month Rolling Total)
 US$1.2 trillion) of China’s foreign exchange reserves denominated in
 non-USDs. This non-USD proportion is mostly EUR, but it probably also                        400        Gap equals net inflow                            400
                                                                                                             into non-USD
 contains GBP, JPY, AUD and other currencies (charts 2 and 3).                                           currencies (eg. EUR,
                                                                                              300          GBP, JPY, KRW,                                 300
 The remaining 52% (or $1.28 trillion) of China’s US$2.45 trillion in foreign                                     AUD)

 exchange reserves is held in USD. Of this total, 34% or US$847 billion is                    200                                                         200
 in US treasuries. The remaining US$271 billion is in agency bonds and
 US$157 billion is in corporate bonds (table below).                                          100                                                         100

                                                                                                                                 Net inflows to USD
                                                                                                0                                                         0
                                                                                                 Feb-97 Oct-99 Jun-02 Feb-05 Oct-07 Jun-10
                 China's Foreign Exchange Reserves (US$b)
                                                                        US$b            %
   - Treasury Bills                                                   416
   - Treasury Bonds                                                   431
  Total Public US Treasury Debt                                                 847     34
   - Agency Bonds                                                     271
   - Corporate Bonds                                                  157
  Total USD Foreign Exchange Reserves                                          1,275   52

  Total Non-USD Foreign Exchange Reserves                                      1,182   48

  Total Foreign Exchange Reserves                                              2,456   100
  A s at end June 201 So urce: P B o C, US Treasury, CB A Research.

Global Markets Research
: Weekly Strategy

                                                                                              Figure 3:
Recent trends illustrate China is reducing US treasury
                                                                                                                   CHINA'S FOREIGN
holdings                                                                                                         EXCHANGE RESERVES
                                                                                               100                                                        3.0
The monthly Treasury International Capital (TIC) data illustrates that
China has reduced its holdings of US treasuries over the last few                                           52% or $1.28tn in USD
                                                                                                80          (lhs)                                         2.4
months. But some of this capital has gone into agency bonds, so there
has been no major currency impact. This development also indicates
that a reduction in China’s treasury portfolio is not reflective of a loss of                   60                                                        1.8
confidence in US assets. In April 2010, the Chinese returned to be a net                                   48% or $1.2tn in Other
                                                                                                           Currencies (lhs)
buyer of agency bonds for the first time since June 2008 (charts 4 and                          40                                                        1.2

While China is an important player in the US treasury market, one should                        20                                                        0.6

not over-estimate the net impact a portfolio adjustment by the Chinese                                           Total Reserves (US$2.4tn) rhs
would have on the very deep and liquid US treasury market (chart 6).                                0                                                     0.0
The very high risk of some additional Fed quantitative easing following                                 Jan-04      Jan-06       Jan-08        Jan-10
the 3 November FOMC meeting is likely to have a much greater impact
on US treasury yields and the USD (chart 7). Having said that, it is still
worth mentioning than an on-going trade and exchange rate dispute
between China and the US still risks being somewhat unsettling on
market sentiment.

                          Figure 4:                                                           Figure 5:

                                       CHINA'S HOLDINGS OF US                                             CHINA NET PURCHASE OF US
                            US$                                                      US$       US$                                 US$
                                                BONDS                                 bn        bn
                                                                                                                    BONDS           bn
                                            (rolling 3 month average)                                              (rolling 6 month average)
                            600                                                      600       20                                                         20
                                                                 Treasury Bills

                            500                                                      500       15                                                         15

                            400                                                      400       10                                                         10
                                                             Treasury Bonds                                            Corporate bonds
                            300                                                      300        5                                                         5

                                                            Agency Bonds
                            200                                                      200        0                                                         0
                                                                                                                              Agency bonds
                                                            Corporate bonds
                            100                                                      100        -5                                                        -5
                                   Dec-07     Nov-08       Nov-09        Nov-10                  Feb-97 Oct-99 Jun-02 Feb-05 Oct-07 Jun-10

                          Figure 6:                                                           Figure 7:

                                      CHINA NET PURCHASES OF US                        US$
                                                                                                           QUANTITATIVE EASING AS % OF
                             bn               TREASURIES                                bn                             GDP
                            400                                                        400      20                                                            20

                                                                                                                                       US Fed
                            300                                                        300
                                                                                                16                                                            16
                                               Monthly Change in Total US
                                                           Treasury Debt
                            200                                                        200
                                                                                                                                      UK BoE
                                                                                                12                                                            12

                            100                                                        100                                                 Eurozone ECB
                                                                                                 8                                                         8
                              0                                                        0
                                               Monthly Change in Total Chinese
                                                 Net Purchases of US Treasury                    4                                                         4
                            -100                                                       -100
                               Mar-00       Nov-02      Jul-05       Mar-08       Nov-10                                             Japan BoJ
                                                                                                 0                                                         0
                                                                                                03-Jan-07         03-Jul-08    03-Jan-10    03-Jul-11

Global Markets Research
: Weekly Strategy

Key Views
                                                                                                             Tactical   Strategic
                                                                                                             (<1 mth)   (>3 mths)
United States

The continued weakness of US data has brought the possibility of further QE into sharp         Policy rate   0.1%       0.1%
focus. Most recently, Payrolls registered another mediocre result (-95K). The negative
headline figure was caused mostly by a contraction in Government employees (-159),             10yr bond     2.25%      2.25%
private payrolls was positive (+64K).
The contraction in Government payrolls was partly due to more of the temporary census          2/10 curve    195bp      190bp
workers finishing their employment. The other contributing factor was the longer-term
pattern of US Governments of all levels seeking to reduce their deficits by reducing wage      USD/JPY       83.5       84
The US bond market is already pricing a significant amount of Quantitative easing. Even        EUR/USD       1.41       1.32
if the Fed does increase QE (which is far from certain) the market may struggle to rally too
much more from here.
The political sphere is starting to interact with the financial sphere in currency markets
too. After the intervention by the BoJ, the Yuan fix has come under increased
speculation. The House of Representatives has approved a bill allowing the US to
increase duties on countries whose currencies are undervalued as a result of an
intervention (read China).
With volatility at the lower end of recent experience and the US economic data generally
soft, we see the USD easing further. There is a high risk the Fed implements more QE at
its November meeting which pushes down the USD. With the BoJ on the sidelines ready
to sell yen, the EUR/USD is likely to be the main beneficiary of a softer USD.

                                                                                                             Tactical   Strategic
                                                                                                             (<1 mth)   (>3 mths)

The Australian economy continues to perform well. The most recent employment figures           Policy rate   4.75%      4.75%
were strong and over 50K new full time jobs were created. We expect the Q3 CPI on
October 27 to make or break the case for tightening at the November RBA meeting, with          10yr bond     5.00%      5.20%
a hike more likely than not at this stage.
Ultimately, more tightening is likely through 2011 as policy-makers make room for the          3/10 curve    10bp       0bp
resources boom and inherent inflation risks.
The Aust-US spread will be dominated by the US QE question. The contrast between the           10yr EFP      57bp       65bp
US and the Australian outlook points to a flatter Australian curve.
                                                                                               10yr v US     280        290
The combination of a softening USD, declining vol, and Australia’s relative economic
health are providing upside risks to the AUD. Stronger than expected outcomes in China
                                                                                               AUD/USD       0.97       0.99
and Asia’s economies and weaker than expected outcomes in the US and Europe will
feed into future AUD strength, particularly if vol. can remain low.

                                                                                                             Tactical   Strategic
                                                                                                             (<1 mth)   (>3 mths)
New Zealand

The recent earthquake in Christchurch has left a significant re-building task. In economic     Policy rate   3.0%       3.0%
terms the result is that near-term growth is reduced, but medium term GDP is given a
boost by the rebuilding effort.                                                                10yr bond     5.0%       5.1%
After a much weaker than expected Q2 GDP reading our economists look for the RBNZ
to be on hold through to the March meeting in 2011, before again raising rates. The            2/10 swap     110bp      100bp
RBNZ left rates unchanged at the September 16 meeting and issued a relatively Dovish           curve
The increase in the NZ GST appears to have been implemented reasonably smoothly.               10yr v US     280        290
The data is starting to show some pull-forward in retail spending.
                                                                                               10yr v AUS    0          -10
The growing contrast between the Australian and New Zealand economies is likely to
push AUD/NZD higher. The US economy and New Zealand economies are both rather
                                                                                               NZD/USD       0.74       0.75
soft, suggesting NZD/USD will range-trade, though a weaker USD and firm dairy prices
may work in the NZD’s favour.
                                                                                               AUD/NZD       1.3100     1.3200

Global Markets Research
: Weekly Strategy

CBA Forecasts:
Cash rate            11-Oct      Dec-10   Mar-11   Jun-11   Sep-11   Dec-11   Mar-12   Jun-12   Sep-12   Dec-12
US                    0.25        0.25     0.25     0.25     0.50     1.00     1.50     1.75     2.00     2.25
Australia             4.50        4.75     5.00     5.25     5.50     5.75     6.00     6.00     6.00     6.00
New Zealand           3.00        3.00     3.25     3.75     4.25     4.50     4.50     4.50     4.50     4.50
Canada                0.50        1.25     1.75     2.25     2.75     3.25     3.25
United Kingdom        0.50        0.50     0.50     0.50     0.75     1.00     1.25     1.50     1.75     2.00
Eurozone              1.00        1.00     1.00     1.00     1.00     1.25     1.50     1.75     2.00     2.00
Japan                 0.05        0.05     0.05     0.05     0.05     0.05     0.30     0.30     0.30     0.30
2-yr bond yield      11-Oct      Dec-10   Mar-11   Jun-11   Sep-11   Dec-11   Mar-12   Jun-12   Sep-12   Dec-12
US                    0.34        0.30     0.35     0.65     1.50     1.75     2.00     2.30     2.60     2.75
Australia             4.84        5.10     5.30     5.45     5.60     5.70     5.60     5.60     5.60     5.60
New Zealand           3.80        4.00     4.20     4.60     4.90     5.00     4.80     4.80     4.70     4.70
United Kingdom        0.62        0.50     0.75     2.00     2.70     2.95     3.25     3.45     3.55     3.65
Eurozone              0.79        0.80     1.00     1.20     1.40     1.70     2.00     2.30     2.50     2.50
Japan                 0.13        0.15     0.15     0.20     0.30     0.60     0.70     0.70     0.80     0.80
10-yr bond yield     11-Oct      Dec-10   Mar-11   Jun-11   Sep-11   Dec-11   Mar-12   Jun-12   Sep-12   Dec-12
US                        2.39    2.25     2.25     2.40     2.80     3.00     3.20     3.30     3.40     3.50
Australia                 5.01    5.10     5.20     5.30     5.40     5.50     5.50     5.50     5.50     5.40
New Zealand               5.08    5.10     5.20     5.30     5.50     5.70     5.50     5.50     5.40     5.40
United Kingdom            2.87    2.75     2.80     3.00     3.90     4.00     4.20     4.40     4.50     4.60
Eurozone                  2.25    2.30     2.40     2.60     2.80     3.00     3.10     3.20     3.30     3.40
Japan                     0.88    0.80     0.90     1.20     1.40     1.50     1.60     1.70     1.80     1.80

AUD Sw ap Rates      11-Oct      Dec-10   Mar-11   Jun-11   Sep-11   Dec-11   Mar-12   Jun-12   Sep-12   Dec-12
3-year                5.30        5.55     5.75     5.95     6.05     6.15     6.00     5.95     5.95     5.95
10-year               5.60        5.70     5.85     5.95     6.05     6.15     6.10     6.10     6.10     6.00
NZD Sw ap Rates      11-Oct      Dec-10   Mar-11   Jun-11   Sep-11   Dec-11   Mar-12   Jun-12   Sep-12   Dec-12
3-year                3.97        4.15     4.40     4.75     5.15     5.25     5.20     5.20     5.15     5.15
10-year               4.90        5.70     5.82     5.95     6.02     6.12     6.12     6.12     6.12     6.12

Global Markets Research
: Weekly Strategy

Calendar – October 2010
                        M onday                                                              Tuesday                                                                 Wednesday                                                                  Thursday                                                              Friday
Early November                                                     Central Banking Meetings                                                                                                                                                                                                                                                            1
A U Ho use price index, QIII (1No v)                               A U RB A (5 Oct)                                                                                                                                                                                                         A U A I- G ro up P M I, S e p, Inde x, ( 5 1.7 )
A U RB A cash target, No v (2 No v)                                EZ ECB (7 Oct)                                                                                                                                                                                                           CH P M I M anufacturing, Sep, Index, (51  .7)
A U B uilding appro val, Sep (3 No v)                              UK B OE (7 Oct)                                                                                                                                                                                                          JP CP I, A ug, y%ch, (-0.9), Vehicle sales, Sep, y%ch, (46.7)
A U Retail trade, Sep, QIII (4 No v)                               JP B o J (4/5 Oct, 28 Oct)                                                                                                                                                                                               EU/GE/UK P M I manufacturing, Sep, Index, (53.6/55.3/54.3)
A U Trade balance, Sep (4 No v)                                                            9
                                                                   CA B ank o f Canada (1 Oct)                                                                                                                                                                                              US P erso nal inco me/spending, A ug, m%ch, (0.2/0.4)
A U RB A SM P (5 No v)                                             NZ RB NZ (28 Oct)                                                                                                                                                                                                                                               .5/1
                                                                                                                                                                                                                                                                                            US P CE deflato r/co re, A ug, y%ch, (1 .4)
A U Ho using finance, Sep (1 No v)                                 US FOM C (2-3 No v)                                                                                                                                                                                                      US Uni. Of M ichigan co nfidence, Sep, Index, (66.6)
A U Labo ur fo rce, Oct (1 No v)                                                                                                                                                                                                                                                            US ISM manufacturing, Sep, Index, (56.3)
                                                                                                                                                                                                                                                                                            US Co nstructio n spending, A ug, m%ch, (-1   .0)
                                                                                                                                                                                                                                                                                            US To tal vehicle sales, Sep, mn, (1 .46)

                                                              4                                                                      5                                                                            6                                                                     7                                                              8
A U La bo ur D a y ( N S W, A C T , S A )                          A U C B A / A i- G ro up P e rf o f S e rv Inde x, S e p, ( 4 7 .5 )   A U A i- G ro up P C I, S e p, Inde x, ( 4 3 .2 )                      A U La bo ur f o rc e , S e p                                              A U R B A D e p G o v B a t t e llino s pe a k s in B ris ba n
A U T D inf la t ga uge S e p, m / y%c h, , ( 0 .2 / 3 .0 )        A U A N Z J o b a ds , S e p, m %c h, ( 2 .6 )                         A U R B A F in. S t a b. H e a d Luc i E llis s pe a k s in B ris ba ne e m plo ym e nt , ' 0 0 0 , 2 0 , ( 3 0 .9 )                              JP Current acco unt/Trade balance, A ug
EU P P I, A ug, m/y%ch, (0.2/4.0)                                  A U R e t a il t ra de , A ug, m %c h, 0 .3 , ( 0 .7 )                                         .0/1
                                                                                                                                          EU GDP , QII, q/y%ch, (1 .9)                                             une m plo ym e nt ra t e , %, 5 .1, ( 5 .1)                                                  bn, 3.5)
                                                                                                                                                                                                                                                                                            GE Trade bal, A ug, € (1
UK P M I co nstructio n, Sep, Index, (52.1)                        A U N A B B us c o nf / c o nd, S e p, Inde x, ( 11/ 5 )               GE Facto ry o rders, A ug, m/y%ch, (-2.2/1 7.7)                          pa rt ic ipa t io n ra t e , %, 6 5 .4 , ( 6 5 .4 )                      UK P P I Input/Output/co re, Sep, y%ch, (8.1/4.7/4.6)
US Facto ry o rders, A ug, m%ch, (0.1  )                           A U R B A c a s h ra t e , %, 4 .7 5 , ( 4 .5 0 )                      UK New car registratio ns, Sep, y%ch, (-1  7.5)                        JP Leading / Co incident index CI, A ug,                                   US A vg hrly earnings, Sep, m/y%ch, (0.3/1 .7)
US P ending ho me sales, A ug, m/y%ch, (5.2/-20.1   )              NZ NZIER B usiness o pinio n survey QIII, index, (1    8)              IM F Wo rld Eco no mic Outlo o k released                              JP M achine to o l o rders, Sep                                            US No n-farm payro lls, Sep, '000, (-54)
                                                                   JP B o J target rate, %, 0.1 (0.1 0)                                   CA Ivey purchasing manager index, Sep, (65.9)                          EU ECB anno unces int. rate, %, 1      .00, (1 .00)                        US Unemplo yment rate, Sep, %, (9.6)
                                                                   EU P M I services/co mpo site, Sep, Index, (53.6/53.8)                                                                                        GE/UK Industrial pro ductio n, A ug, y%ch, (1        0.9/1.9)              US Who lesale invento ries, A ug, m%ch, (1 .3)
                                                                   EU Retail sales, A ug, m/y%ch, (0.1 .1/1 )                                                                                                    UK B o E anno unces rates, %, 0.50, (0.50)                                 CA Net change in emplo yment, Sep, '000, (35.8)
                                                                   GE/UK P M I services, Sep, Index, (54.6/51      .3)                                                                                           US Co nsumer credit, A ug, $ bn, (-3.6)                                    CA Unemplo yment rate, Sep, %, (8.1    )
                                                                   US ISM no n-manufacturing, Sep, Index, (51        .5)                                                                                         CA B uilding permits, A ug, m%ch, (-3.3)                                   CA Ho using starts, Sep, '000, (1  83.3)

                                                              11                                                                   12                                                                           13                                                                     14                                                              15
A U H o us ing f ina nc e , A ug, m %c h                           JP Co nsumer co nfidence, Sep, Index, (42.5)                           A U M I/ WB C C o ns um e r S e nt , O c t , Inde x, ( 113 .2 )             A U M I C o ns um e r Inf la t io n E xp., O c t , %, ( 3 .1)         JP Industrial pro ductio n/Capacity Utilisatio n, A ug
 No . o f o wn-o ccupiers, %, 2.0 (1.7)                            GE CP I, Sep, m/y%ch, (-0.2/1.3)                                       NZ Fo o d prices, Sep, m%ch, (-0.1  )                                       A U M I Une m p. E xpt ., O c t , Inde x, ( 10 2 .0 )                 EU New car registratio ns Sep, y%ch, (-1  2.9)
 Value o f all lo ans, %, 1 (2.3)                                  UK RICS ho use price balance, Sep, %, (-032)                           CH Trade balance Sep, US$ bn, (20.0)                                        NZ Retail sales, A ug, m%ch, (-0.4)                                                                 .6);
                                                                                                                                                                                                                                                                                            EU CP I, Sep, m/y%ch, (0.2/1 co re, y%ch, (1     .0)
NZ Card spending, Sep, m%ch, (-0.2)                                                               );
                                                                   UK CP I, Sep, m/y%ch, (0.5/3.1 co re, y%ch, (2.8)                      JP M achine o rders, A ug, m/y%ch, (8.8/1 5.9)                              NZ B usiness P M I, Sep, Index, (49.3)                                                          bn,
                                                                                                                                                                                                                                                                                            EU Trade balance A ug, € (-0.2)
                                                                   UK To tal trade balance, A ug, £bn, (-4.9)                             EU Industrial pro ductio n A ug, m/y%ch, (0.0/7.1)                          EU ECB M o nthly repo rt                                                                            .1
                                                                                                                                                                                                                                                                                            US CP I, Sep, m/y%ch, (0.3/1 ); co re, (0.0/0.9)
                                                                   US FOM C M inutes                                                      UK ILO unemplo yment rate (3mths), A ug, %, (7.8)                           US P ro ducer price index Sep, m/y%ch, (0.4)                          US Retail sales, Sep, m%ch, (0.4)
                                                                                                                                          US Impo rt price index, Sep, m/y%ch, (0.6/4.1 )                             US Trade balance, A ug, $ bn, (-42.8)                                 US Empire manufacturing, Oct, Index, (4.1   )
                                                                                                                                          CA Ho using price index, A ug, m%ch, (-0.1  )                               US P ro ducer price index Sep, m/y%ch, (0.4/3.1    )                  US Uni. Of M ichigan co nfidence, Oct, Index
                                                                                                                                                                                                                      CA Trade balance A ug, C$ bn, (-2.7)                                  US B usiness invento ries, A ug, m%ch, (1  .0)

                                                              18                                                                   19                                                                           20                                                                     21                                                              22
A U N e w m o t o r v e h. s a le s , S e p, m / y%c h, ( 0 .3 / 10 A U R B A B o a rd M inut e s                                         A U D E WR s k ille d v a c a nc ie s , O c t , m %c h, ( 0 .1)             A U H IA H o us ing A f f o rd. Inde x, Q III, ( 10 8 .3 )            A U Int ' l t ra de pric e inde xe s , Q III, q%c h
NZ CP I, QIII, q/y%ch, (0.3/1.8)                                                                bn,
                                                                    EU Current acco unt, A ug, € (-3.8)                                   A U R B A A s s . G o v . E de y s pe a k s in S ydne y                     NZ Credit card spending, Sep, m/y%ch, (0.5/2.0)                          e xpo rt pric e s , 1.0 ( 16 .1)
US Industrial pro ductio n, Sep, m%ch, (0.2)                        EU Co nstructio n o utput, A ug, m/y%ch, (-3.1/-7.5)                  JP Leading / Co incident index CI, A ug                                     CH GDP , QIII, y%ch, (10.3)                                              im po rt pric e s , 0 .0 ( 1.9 )
US Capacity utilisatio n, Sep, %, (74.7)                            EU/GE ZEW survey (eco n. sentiment), Oct, Index, (4.4/-4.3)           GE P ro ducer prices, Sep, m/y%ch, (0.0/3.2)                                CH P P I/CP I, Sep, y%ch, (4.3/3.5)                                   GE IFO - B usiness climate, Oct, Index
US NA HB ho using market index, Oct, (1      3)                     US Ho using starts, Sep, '000, (598)                                  UK B ank o f England minutes                                                CH Retail sales/Ind P ro dn, Sep, y%ch, (18.4/13.9)                                                 /-1
                                                                                                                                                                                                                                                                                            CA CP I, Sep, m/y%ch, (-0.1 .7)
                                                                    US B uilding permits, Sep, '000, (569)                                US Federal Reserve B eige B o o k                                           CH Fxd A ss Investment, Sep, y%ch, (24.8)                             CA Retail sales, A ug, m%ch, (-0.1  )
                                                                    CA B ank o f Canada, %, 1 .00, (1.00)                                 CA Who lesale sales, A ug, m%ch, (-0.1    )                                 UK Retail sales, Sep, m/y%ch, (-0.5/0.4)                              G20 Finance M inisters' meeting - 22-23 Oct, Ko rea
                                                                                                                                          CA B ank o f Canada M o netary P o licy Repo rt                             US Leading indicato rs, Sep, m%ch, (0.3)
                                                                                                                                                                                                                      US Federal Reserve B eige B o o k
                                                                                                                                                                                                                      CA Leading indicato rs, Sep, m%ch, (0.5)

                                                              25                                                                   26                                                                           27                                                                     28                                                              29
A U P P I Q III, q/ y%c h, 0 .3 / 1.4 , ( 0 .3 / 1.0 )        UK GDP , QIII                                                               A U C P I, Q III, q/ y%c h                                                  NZ RB NZ o fficial cash rate, %, 3.00, (3.00)                         A U A nnua l N a t io na l A c c o unt s , 2 0 0 9 - 10
R B A G o v e rno r G le nn S t e v e ns s pe a k s in C a nbeUS S&P /Case-Shiller ho me price ind., A ug,                                  - H e a dline 0 .8 / 2 .9 ( 0 .6 / 3 .1)                                  JP Retail sales, Sep                                                  A U H IA ne w ho m e s a le s S e p
JP Trade balance, Sep                                         US Richmo nd Fed, Oct, Index                                                  - T rim m e a n 0 .6 / 2 .5 ( 0 .5 / 2 .7 )                                                           0
                                                                                                                                                                                                                      JP B o J target rate, %, 0.1 (0.10)                                   A U P riv a t e s e c t o r c re dit , S e p
EU Industrial new o rders, A ug, m/y%ch, (-2.4/1 .2)   1                                                                                    - Wgt d m e dia n 0 .7 / 2 .6 ( 0 .5 / 2 .7 )                                                                                                   NZ B uilding permits/Trade B alance, Sep
US Existing ho me sales, Sep, mn/m%ch, (4.1          3/7.6)                                                                               NZ NB NZ B usiness co nfidence, Oct, Index                                                                                                        JP Industrial pro ductio n, vehicle pro ductio n , Sep
US Dallas Fed, Oct, Index                                                                                                                 GE CP I, Oct                                                                                                                                      JP CP I/Ho using starts/Co nstructio n o rders, Sep
                                                                                                                                          US Durable go o des o rders, Sep                                                                                                                  UK Net co nsumer credit, Sep
                                                                                                                                          US New ho me sales, Sep                                                                                                                           US GDP , QIII
                                                                                                                                          CA Teranet Ho use P rices, A ug                                                                                                                   US Emplo yment co st index, QIII, q%ch, (0.5)
                                                                                                                                                                                                                                                                                            US Uni. Of M ichigan co nfidence, Oct, Index

Note: Figures in brackets represent previous result (if available). All information is preliminary and subject to revision. Chief Economist: Michael Blythe ph: 9118-1101                                                                                                             Economist: James McIntyre: 9118-1100

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