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Financial Pacific - Rebound in USD makes ax j currencies attractive (third party)

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  • 1. Wealth Management Research 23 May 2011UBS daily forex USRebound in USD makes AxJcurrencies attractive Teck Leng TanThe USD continues to benefit from renewed Eurozone worries, with CFA, strategist, UBSthe latest news coming from Greece and Italy over the weekend.Ratings agency S&P lowered the credit rating outlook of Italy from AGstable to negative, while Fitch downgraded Greeces credit ratingby three notches and kept its outlook negative. DisappointingEurozone PMI data early this week further boosted the USD atthe expense of the EUR, with the USD index reaching a seven-week high. On the back of risk aversion, Asia ex-Japan currenciesretreated against the USD, dragged down by a poor showing ofAsian equity markets. While we envisage the USD rebound tocontinue in the short term, investors should take advantage offurther weakness in Asian currencies to establish exposure. Robusttrade surpluses, as well as the need to counter inflation, which isat multi-year highs in many Asian economies, should continue tounderpin the appreciation of Asian currencies, in our view. s EURCHF hit by risk aversionFX heat mapCurrency Pair Actual Forecast Technical Indications Implied Volatility Volatility Comment 3m 6m Bias 2. Support 1. Support 1. Resistance 2. Resistance 3m 6m CommentEURUSD 1.4024 1.35 1.38 bullish 1.4158 1.4282 1.4940 1.5144 12.75 13.00 Volatility is high inUSDJPY 81.85 88 90 neutral 76.25 80.20 85.93 87.95 10.90 11.20 relation to last 12 months.GBPUSD 1.6117 1.60 1.65 neutral 1.5297 1.5937 1.6747 1.7041 9.55 10.05 Volatility is low inUSDCHF 0.8833 0.98 0.96 bearish 0.8000 0.8554 0.9012 0.9340 11.75 12.25 in relation to last 12 months.USDSEK 6.3735 6.48 6.23 bearish 5.8218 5.9789 6.5499 7.0734 14.20 14.55USDNOK 5.6137 5.70 5.51 bearish 4.9439 5.2174 5.7234 6.2370 14.31 14.66 Clients can find information onUSDCAD 0.9795 0.95 0.93 neutral 0.9058 0.9500 0.9974 1.0350 9.40 9.85 the construction and elementsAUDUSD 1.0504 1.00 1.00 bullish 0.9706 1.0256 1.1012 1.1230 13.20 13.95 of the FX Heat Map underNZDUSD 0.7882 0.74 0.74 neutral 0.7118 0.7620 0.8122 0.8214 13.25 14.05 Currencies from the OnlineUSDBRL 1.6353 1.65 1.65 N/A na na na na 12.85 13.65 Services Research platform.USDMXN 11.7310 11.80 11.90 bearish 10.6417 11.4800 12.2410 12.5960 10.05 10.50USDZAR 7.0181 7.10 6.85 N/A na na na na 14.70 14.70Date & Time / 23.05.2011 / 11:13:00 / EST Source: THOMSON REUTERS; UBS WMRThis report has been prepared by UBS AG. Please see important disclaimers and disclosures that begin on page 3.
  • 2. UBS daily forex USEURCHF hit by risk aversionThe EURCHF exchange rate traded at a new all-time low of1.2323 on Monday. Risk aversion hit foreign exchange marketsafter the Spanish elections were even worse for the ruling partythan expected, the discussions about a Greek debt reprofilingwere running hot and Italian debt was set on a negative watch.There is no particular event in Switzerland that would explain theappreciation of the CHF. Nevertheless, in the short-term the CHFappreciation may well continue.Thomas Flury, strategist Wealth Management Research 23 May 2011 2
  • 3. UBS daily forex US AppendixThe FX Heatmap is designed to serve as a guide to short-to-medium-term investment decisions concerning major currency pairs. The elements in thisconcise table may help your timing and positioning decisions when considering a foreign exchange transaction.WMR Foreign Exchange Research publishes the FX Heatmap in the UBS daily forex and UBS daily guide. In our view, an ideal FX Heatmap should contain the relevantitems that an investor should consider when making short- to medium-term decisions in the foreign exchange market. The WMR FX Heatmap contains in the firstcolumn the spot rate (actual rate), provided as a mid-rate by Reuters and refreshed daily. In the second and third columns are the three-month and six-month WMRforecasts. Next come the technical indications, and in the last two columns, the traded volatility of the exchange rate is indicated.Fundamental Forecast is not a trading targetWMR makes its three- and six-month forecasts using its three-pillar approach: Fundamentals, cyclical influences and market drivers. The purpose of the forecast is toindicate a direction, justified by the fundamentals, and to show the strength of drift within a given forecast horizon. WMR forecast the exchange rate that we considermost likely to be reached in the last couple of weeks of the forecast horizon. This might differ substantially from a trading target, which we define as an exchange ratethat diverges as much as possible from spot while having a fair chance to be reached at any point within the next three (or six) months.Chart Technical Support and ResistanceThe technical elements within the FX Heatmap are first and second supports and resistances, and a technical bias, which can be bullish (exchange rate moves higher),bearish (exchange rate moves lower) or neutral. Technical analysis is one approach to market forecasting. It is based on the study of past price movements, humanpsychology and the laws of probability. Technical analysts study market behavior, primarily using charts, for the purpose of forecasting future price trends. WMR chartistsuse bar charts that consist of daily highs, lows and closes. First-level support/resistance is then defined as initial support/resistance and comprises of a technical outlookof several days to several weeks. Second-level support/resistance is secondary support/resistance encompassing several weeks to several months. Typically, they utilizeone- to three-months of daily bar charts for most of the FX technical analysis.Volatility IndicationThe last two columns of the FX Heatmap table contain the one- and three-month implied option volatility, as they are traded in the interbank over-the-counter optionmarket. The data provider is Reuters. WMR indicates the volatilities, which are relevant for option contracts with a strike level at the one-month (or three-month)forward rate of the exchange rate. Historical analysis suggests that most currency volatilities tend to revert to a stable mean. We use this characteristic to evaluatethe level of current volatility.DisclaimerWealth Management Research is published by Wealth Management & Swiss Bank and Wealth Management Americas, Business Divisions of UBS AG (UBS) or an affiliatethereof. In certain countries UBS AG is referred to as UBS SA. This publication is for your information only and is not intended as an offer, or a solicitation of an offer, tobuy or sell any investment or other specific product. The analysis contained herein is based on numerous assumptions. Different assumptions could result in materiallydifferent results. Certain services and products are subject to legal restrictions and cannot be offered worldwide on an unrestricted basis and/or may not be eligible forsale to all investors. All information and opinions expressed in this document were obtained from sources believed to be reliable and in good faith, but no representationor warranty, express or implied, is made as to its accuracy or completeness (other than disclosures relating to UBS and its affiliates). All information and opinions aswell as any prices indicated are current as of the date of this report, and are subject to change without notice. Opinions expressed herein may differ or be contraryto those expressed by other business areas or divisions of UBS as a result of using different assumptions and/or criteria. At any time UBS AG and other companies inthe UBS group (or employees thereof) may have a long or short position, or deal as principal or agent, in relevant securities or provide advisory or other services tothe issuer of relevant securities or to a company connected with an issuer. Some investments may not be readily realizable since the market in the securities is illiquidand therefore valuing the investment and identifying the risk to which you are exposed may be difficult to quantify. UBS relies on information barriers to control theflow of information contained in one or more areas within UBS, into other areas, units, divisions or affiliates of UBS. Futures and options trading is considered risky.Past performance of an investment is no guarantee for its future performance. Some investments may be subject to sudden and large falls in value and on realizationyou may receive back less than you invested or may be required to pay more. Changes in FX rates may have an adverse effect on the price, value or income of aninvestment. We are of necessity unable to take into account the particular investment objectives, financial situation and needs of our individual clients and we wouldrecommend that you take financial and/or tax advice as to the implications (including tax) of investing in any of the products mentioned herein. This document maynot be reproduced or copies circulated without prior authority of UBS or a subsidiary of UBS. UBS expressly prohibits the distribution and transfer of this document tothird parties for any reason. UBS will not be liable for any claims or lawsuits from any third parties arising from the use or distribution of this document. This reportis for distribution only under such circumstances as may be permitted by applicable law.Australia: Distributed by UBS Wealth Management Australia Ltd (Holder of Australian Financial Services Licence No. 231127), Chifley Tower, 2 Chifley Square, Sydney,New South Wales, NSW 2000. Austria: This publication is not intended to constitute a public offer or a comparable solicitation under Austrian law and will only beused under circumstances which will not be equivalent to a public offering of securities in Austria. The document may only be used by the direct recipient of thisinformation and may under no circumstances be passed on to any other investor. Bahamas: This publication is distributed to private clients of UBS (Bahamas) Ltdand is not intended for distribution to persons designated as a Bahamian citizen or resident under the Bahamas Exchange Control Regulations. Canada: In Canada,this publication is distributed to clients of UBS Wealth Management Canada by UBS Investment Management Canada Inc.. Dubai: Research is issued by UBS AGDubai Branch within the DIFC, is intended for professional clients only and is not for onward distribution within the United Arab Emirates. France: This publicationis distributed by UBS (France) S.A., French "société anonyme" with share capital of € 125.726.944, 69, boulevard Haussmann F-75008 Paris, R.C.S. Paris B 421 255670, to its clients and prospects. UBS (France) S.A. is a provider of investment services duly authorized according to the terms of the "Code Monétaire et Financier",regulated by French banking and financial authorities as the "Banque de France" and the "Autorité des Marchés Financiers". Germany: The issuer under GermanLaw is UBS Deutschland AG, Bockenheimer Landstrasse 2-4, 60306 Frankfurt am Main. UBS Deutschland AG is authorized and regulated by the "Bundesanstalt fürFinanzdienstleistungsaufsicht". Hong Kong: This publication is distributed to clients of UBS AG Hong Kong Branch by UBS AG Hong Kong Branch, a licensed bankunder the Hong Kong Banking Ordinance and a registered institution under the Securities and Futures Ordinance. Indonesia: This research or publication is not intendedand not prepared for purposes of public offering of securities under the Indonesian Capital Market Law and its implementing regulations. Securities mentioned in thismaterial have not been, and will not be, registered under the Indonesian Capital Market Law and Regulations. Italy: This publication is distributed to the clients of UBS(Italia) S.p.A., via del vecchio politecnico 3, Milano, an Italian bank duly authorized by Bank of Italy to the provision of financial services and supervised by "Consob"and Bank of Italy. Jersey: UBS AG, Jersey Branch, is regulated and authorized by the Jersey Financial Services Commission for the conduct of banking, funds andinvestment business. Luxembourg: This publication is not intended to constitute a public offer under Luxembourg law, but might be made available for informationpurposes to clients of UBS (Luxembourg) S.A., a regulated bank under the supervision of the "Commission de Surveillance du Secteur Financier" (CSSF), to which thispublication has not been submitted for approval. Singapore: Please contact UBS AG Singapore branch, an exempt financial adviser under the Singapore FinancialAdvisers Act (Cap. 110) and a wholesale bank licensed under the Singapore Banking Act (Cap. 19) regulated by the Monetary Authority of Singapore, in respect ofany matters arising from, or in connection with, the analysis or report. Spain: This publication is distributed to clients of UBS Bank, S.A. by UBS Bank, S.A., a bankregistered with the Bank of Spain. UAE: This research report is not intended to constitute an offer, sale or delivery of shares or other securities under the laws of theUnited Arab Emirates (UAE). The contents of this report have not been and will not be approved by any authority in the United Arab Emirates including the UAE CentralBank or Dubai Financial Authorities, the Emirates Securities and Commodities Authority, the Dubai Financial Market, the Abu Dhabi Securities market or any other UAEexchange. UK: Approved by UBS AG, authorized and regulated in the UK by the Financial Services Authority. A member of the London Stock Exchange. This publicationis distributed to private clients of UBS London in the UK. Where products or services are provided from outside the UK, they will not be covered by the UK regulatoryregime or the Financial Services Compensation Scheme. USA: Distributed to US persons by UBS Financial Services Inc., a subsidiary of UBS AG. UBS Securities LLC is asubsidiary of UBS AG and an affiliate of UBS Financial Services Inc. UBS Financial Services Inc. accepts responsibility for the content of a report prepared by a non-USaffiliate when it distributes reports to US persons. All transactions by a US person in the securities mentioned in this report should be effected through a US-registeredbroker dealer affiliated with UBS, and not through a non-US affiliate.Version as per January 2010. Wealth Management Research 23 May 2011 3
  • 4. UBS daily forex US Appendix© UBS 2011.The key symbol and UBS are among the registered and unregistered trademarks of UBS. All rights reserved. Wealth Management Research 23 May 2011 4