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  • 1. Global FX Strategy October 18, 2010 FX Markets Weekly • FX Outlook: Hedging a trade war John NormandAC As the dollar declines, the G-20’s unwritten currency accord becomes (44-20) 7325-5222 clearer: QE will weaken the dollar indirectly, and the rest of the world john.normand@jpmorgan.com will manage the consequences through whatever tactics suit domestic Paul Meggyesi circumstances. An unintended consequence may be a trade war – a low (44-20) 7859-6714 probability event but one which previously exacerbated declines in paul.meggyesi@jpmorgan.com USD/JPY (autos) and rallies in EUR/USD (steel). The most effective Tohru Sasaki hedges for serious trade conflict in 2011 would be short USD/JPY and (81-3) 6736-7717 USD/CHF, or long USD/CNY. The euro and commodity currencies are tohru.sasaki@jpmorgan.com the wrong hedges for this tail risk. Arindam Sandilya (1-212) 834-2304 • FX Derivatives arindam.x.sandilya@jpmorgan.com The dollar will remain front and center of FX markets, which bodes well Niall O’Connor for long USD-correlation trades. Stay long USD-vol vs. short EUR-cross (1-212) 834-5108 vol in CHF, but take profits on AUD and NZD. Options are not re-rating niall.oconnor@jpmorgan.com G10 skews in favor of USD puts at the same rate as before. High and rising USD-correlations also suggest caution around an unfettered Contents extension of the dollar downtrend. CAD/JPY vs. USD/CAD is on our radar as a long/short gamma spread; entry levels are 0.7-0.8 vols way. FX Outlook 2 CAD/JPY is an interesting wing option buy in its own right, with var Global FX carry trade monitor 8 swap vs. vol swap strike differentials at historical lows. FX Derivatives 10 • Trade Recommendations Trade Recommendations 14 The prospect of QE-II is proving more toxic for the dollar than QE-I. Technical Strategy 22 Stay short against a broad basket of currencies (AUD, EUR, SEK, INR FX alpha strategies & performance 24 and KRW) to reflect the Fed’s willingness to debase its currency. Similar Research Notes 26 arguments justify a broad short in GBP vs CHF, EUR, NOK and SEK, Market movers 30 especially as fiscal reality bites through next week’s Comprehensive Event risk calendar 32 Spending Review. J.P. Morgan Forecasts • Technical Strategy FX vs forwards & consensus 34 The USD bear trend has broken through the next line of key supports Rates, credit, equities & commodities 35 suggesting further weakness. Importantly, the trend has broadened as Global growth and inflation forecasts 36 laggards such as USD/CAD and NZD/USD have pushed through Global central bank forecasts 37 important levels. The key focus is now on the 1.4375 area for EUR/USD Sovereign credit ratings and actions 38 and the 76 zone for the DXY which should define the next extension. Government bond and bank redemptions 39 Asia FX trends are approaching a number of critical resistance levels, but corrective retracements remain buying opportunities. Stay short Research Notes on morganmarkets.com 40 USD/JPY, USD/KRW, GBP/JPY, EUR/PLN and long EUR/GBP. Global FX Strategy contact page 44 • FX alpha strategies & manager performance Rate momentum has become mixed for the dollar after a month of recommending an across-the-board sell. Currency and global macro funds are having a strong October, up 0.25% to 1% so far. • Research note US-Japan trade war and USD/JPY – implications for USD/CNY (Tohru Sasaki and Junya Tanase) www.morganmarkets.com/GlobalFXStrategy J.P. Morgan Securities Ltd. The certifying analyst is indicated by an AC. See page 42 for analyst certification and important legal and regulatory disclosures.
  • 2. Global FX Strategy FX Markets Weekly October 18, 2010 John Normand (44-20) 7325-5222 john.normand@jpmorgan.com J.P. Morgan Securities Ltd. Chart 1. Global trade disputes have been ebbing over the past FX Outlook: Hedging a trade decade but are always in play Number of trade disputes filed annually with World Trade Organisation vs global war real GDP growth 60 -3% • As the dollar declines, the G-20’s unwritten 50 number of WTO trade disputes, lhs -2% currency accord becomes clearer: QE will weaken global real GDP growth inverted, rhs -1% the dollar indirectly, and the rest of the world will 40 0% manage the consequences through whatever tactics 30 1% suit domestic circumstances. 2% 20 • An unintended consequence may be a trade war – a 3% low probability event but one which previously 10 4% exacerbated declines in USD/JPY (autos) and rallies 0 5% in EUR/USD (steel). 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 • The most effective hedges for serious trade conflict in 2011 would be short USD/ JPY and USD/CHF, or Source: J.P.Morgan, WTO long USD/CNY. The euro and commodity Chart 2. USD/JPY’s undershoots of fair value in 1993 and 1995 could currencies are the wrong hedges for this tail risk. reflect a risk premium for auto dispute Actual USD/JPY rate vs predicted (model) based on regressing spot on US –Japan • Strategy: stay short baskets of USD and GBP rate spreads (1-mo rates 12 months forward), daily data, 1990-95 sample period • Trades: In cash, stay short USD vs EUR, SEK, 170 AUD, INR and KRW; stay short GBP vs EUR, 160 USD/JPY CHF, SEK & NOK. Model 150 • Next week: US earnings, European PMIs, UK 140 spending review, G-20 build-up 130 120 With each week that the dollar declines, the G-20’s 110 undershoot unwritten currency agreement becomes more apparent. The 100 US will weaken its currency indirectly though Fed easing, 90 undershoot and the rest of the world will manage the consequences through whatever policies suit domestic circumstances 80 (acquiescence, intervention, rate cuts or transaction taxes). 1990 1991 1992 1993 1994 1995 1996 The only rule of the road is that countries cannot peg their Source: J.P.Morgan currencies or drive the dollar higher, since doing so could invite a trade war. (See Consequences of a unilateral Plaza over 400 trade disputes with the WTO since its launch in Accord, FXMW, October 8). Since core views are 1995 (chart 1) and the US has been involved in half of unchanged this week, the Outlook examines how to hedge those, equally as plaintiff and defendant. These cases range tail risk around a trade war in 2011. from the universally memorable (US vs Japan on autos) to the seemingly trivial (US vs EU over bananas). Most fail to War is rare, conflict is a constant impact major asset classes since they concern a minor Trade wars are very black swans. If trade wars are defined product, or because they are settled before escalating into as unilateral restrictions on economically significant goods broader categories or retaliatory actions. which impact growth and financial markets, then the world Probably the most significant cases of the past twenty years has not experienced one since the Smoot-Hawley tariffs of are the US-Japanese auto dispute and the US-EU steel 1930. The closest approximation would be the US-Japan conflict, because they involved iconic sectors and because auto dispute twenty years ago, and prior to that, the Nixon the US threatened or imposed unilateral sanctions. Table 1 Administration’s tariff hikes of 1971. But trade conflict, lists the key events in each saga, from which a simple point defined as restrictions on narrower classes of goods with no emerges: trade conflict does not erupt suddenly. Trade market impact, are always underway. Countries have lodged relations deteriorate over several years starting with investigations, the proceeding through negotiation, threat of 2
  • 3. Global FX Strategy FX Markets Weekly October 18, 2010 John Normand (44-20) 7325-5222 john.normand@jpmorgan.com J.P. Morgan Securities Ltd. sanction, sanction then dispute resolution (within or outside Japanese purchases of US goods), and February to May the WTO). 1995, the months between the US’s proposed tariffs and an eventual compromise. Although another factor may explain Isolating a trade war’s impact on FX the residual, a risk premium for trade conflict could account Isolating the currency impact of a trade war requires for the divergence. In some months this premium was as separating the dispute from the cyclical trend. Consider the high at 15%. The same modeling exercise for EUR/USD case of USD/JPY. As discussed in the research note US- during the 2002 steel dispute also yields a decent residual – Japan trade war and USD/JPY on page 26 (Sasaki and the euro was some 6% stronger than cyclical conditions Tanase), US-Japan trade tensions persisted from the mid- would have predicted. This overshoot could also reflect the 1980s to mid 1990s, when Japan constituted 40% to 60% of US accounting scandals which unfolded over the same the US’s total trade deficit. Over those ten years USD/JPY period, but trade frictions may have aggravated the trend. declined every year but one (1989), which should be Note that now, neither the trade-weighted dollar nor unsurprising in view of cyclical conditions and G-7 policy. individual dollar pairs are far from fair value, suggesting 1985 to 1986 delivered the Plaza Accord to weaken the little risk premium for possible trade conflict. dollar; 1989 to 1992 was a major Fed easing cycle; 1993 Hedging the next trade war was the year of a near-record Japanese trade surplus; and 1994 to early 1995 was a period of broad dollar weakness Whether 2011 delivers a trade war is largely conjectural, due to dislocations from unexpected Fed tightening and the but there are four reasons why China looks the likely target Mexican peso crisis. for any serious conflict: (1) it accounts for the majority of the US’s trade deficit (chart 4); (2) the US and China have As an attempt to isolate the trade war’s impact on been involved in at least 20 low-level tariff confrontations USD/JPY, chart 2 regresses USD/JPY on rate spreads as a over the past two years; (3) China’s exchange rate is the proxy for cyclical conditions. There are two major most managed of any major trading partner; and (4) its undershoots: January to August 1993 (Clinton’s retaliatory weapon of selling – or not buying – US inauguration through his G-7 summit proposing targets for Treasuries is less effective when the Fed substitutes as a Table 1: Characteristics of US-Japan auto and US-EU steel disputes Product Countries Key dates Economic significance of involved products autos US vs Japan January 1993: Clinton inaugurated and raises trade issues as a means of boosting In 1993 US exported the US economy. $50bn of autos and auto parts and imported July 1993: Clinton announces at G-7 summit the Framework for a New Economic $100bn. The $50bn annual Partnership to open Japanese markets for autos and auto parts, as well as trade deficit in autos was insurance and telecoms. the second highest February 1994: Talks deadlock over US demands that Japan commit to sectoral deficit, after the quantitative targets for US goods. $75bn annual deficit in consumer goods. Oct 1994: US proposes 100% tariffs on Japanese autos to retaliate for alleged unfair trade practices in Japanese auto parts market May 1995: Japan files claim with WTO. June 1995 Compromise agreement reached under which Japan agrees to increase purchases of autos and auto parts steel EU (later 2000: Presidential candidate Bush promises voters in Ohio and West Virginia that In 2002, US imported joined by his Administration would aid the steel industry. $12bn and exported $8bn Japan, Korea, of steel and steel products. Brazil and June 2001: US launches investigation into European trade practices for steel The deficit in steel others) vs US sector. October 2001: US publishes preliminary findings. Feb 2002: US publishes final report. March 2002: US imposed 8% to 30% tariffs on steel imports for three years. EU immediately requests WTO consultation. Five other countries join EU complaint against US. July 2003: WTO rules against US. December 2003: US repeals tariffs. Source: J.P.Morgan 3
  • 4. Global FX Strategy FX Markets Weekly October 18, 2010 John Normand (44-20) 7325-5222 john.normand@jpmorgan.com J.P. Morgan Securities Ltd. buyer of last resort. The obvious currency hedge would be Osborne laid out the broad deficit targets in his June to buy USD/CNY, since the market discounts 3.3% emergency budget (£149bn in FY 2010-11, £116bn in 201- appreciation over the next near when the authorities would 12, £89bn in 2012-13), and his speech Wednesday should probably fix the currency if subjected to excessive US focus on departmental details. There is some risk that he pressure. Due to hedging demand forwards and vols would backs away from the previously-proposed broad targets in move significantly even without a change in spot, as view of the economy’s slowdown, though we doubt he occurred in 2008 when forward points moved from discount would tempt the gilt market vigilantes so carelessly. to premium and vols spiked from 5% to 25%. Three central banks meet next week: the Bank of Canada The difficulty with this position is highlighted by the US- on Tuesday and the central banks of Brazil and Thailand on Japan and US-EU disputes, however. Hedging directly Wednesday. We expect Canada and Brazil to stay on hold though the currency in conflict must respect cyclical until Q1 2011, but the BoT should hike 25bp next week. conditions, since trade wars can require years to evolve, G-20 finance ministers gather on Friday in Seoul ahead of even once specific sanctions are mentioned. In the US- the leader’s summit on November 11. Within such a diverse Japan and US-EU cases, cyclical conditions favored a group, the only likely consensus is their opposition to higher yen and euro as tensions built. In China’s case, volatility, an expression which accommodates the US desire cyclicals favour a weaker USD/CNY for the next several for a weaker currency and the rest of the world’s burden of months, resulting in losses on the hedge if trade war is a managing that decline. A communiqué could lift this very long term event risk. language from previous G-7 statements, but should not have As a proxy hedge, the best options are to sell USD/JPY or much market impact other than confirming that countries USD/CHF. These currencies are biased lower in any event will continue to conduct smoothing operations in the forex due to cyclical conditions (QE in the US, trade surpluses in market as the Fed’s QE program sustains excessive capita Japan and Switzerland), and would benefit from any flows. investor deleveraging which accompanies an escalation in Chart 3. The US’s trade deficit with China exceeds that of Japan, trade tensions. Owning the euro or commodity currencies Mexico and Canada combined are poor hedges since both would decline with equities. US trade deficit by major trading partner, $bn, 12-mo rolling sum This impact would counter any bid for euros which might 50 come from China’s shift away from Treasuries during trade conflict. We are not tactical sellers of either USD/JPY or 0 USD/JPY today given how far the dollar has moved (see -50 Trade Recommendation on page 14), but we intend to add on pullbacks. -100 China Japan -150 Next week: US earnings, European PMIs, G-20 China's trade surplus exceeds Mexico build-up, UK CSR -200 Japan's by 2000 Canada Next week is heavy on all fronts: earnings, data and policy -250 announcements. Nearly 20% of the S&P500 reports -300 earnings next week (see Earnings calendar on page 6), and 93 95 97 99 01 03 05 07 09 we expect this week’s string of better-than-expected releases to extend into November. So if QE were not sufficient propellant for non-dollar currencies, earnings Source: J.P.Morgan would be. In the US, the key data releases are the TIC and industrial production on Monday, housing starts on Tuesday and the Philadelphia Fed on Thursday. In the Euro area, watch the Zew on Tuesday, flash PMIs on Thursday and Ifo and BNB on Friday. The monthly batch of Chinese data due Thursday – GDP, CPI, retail sales and industrial products – will be scrutinised given hopes that China will reaccelerate into 2011 after its apparent soft landing. In the UK, retail sales prints on Thursday, but it will be anticlimactic following release of the Chancellor’s Comprehensive Spending Review on the day before. 4
  • 5. Global FX Strategy FX Markets Weekly October 18, 2010 John Normand (44-20) 7325-5222 john.normand@jpmorgan.com J.P. Morgan Securities Ltd. Main recommendations Closed/new trades ⎯ None. Existing trades ⎯ In cash, stay long AUD/USD from 0.9385 opened September 17, and short GBP/SEK from 11.19, opened September 10. ⎯ Stay long EUR/USD from 1.3720, long EUR/GBP from 0.8680, short USD/SEK from 6.7100 and short USD/KRW from 1130, all opened October 1. ⎯ Stay short GBP/ CHF from 1.5479, and short GBP/NOK from 9.3081, all opened September 24. ⎯ Stay short USD/INR from 46.17 opened June 18. ⎯ In options, keep a 12-mo at-expiry EUR/CHF 1.25 digital. 5
  • 6. Global FX Strategy FX Markets Weekly October 18, 2010 John Normand (44-20) 7325-5222 john.normand@jpmorgan.com J.P. Morgan Securities Ltd. Earnings calendar Date Time Company Name Company Ticker Estimate-JPM Estimate-Cons Oct 18 (Mon) 13:00 Citigroup C US n.a. 0.06 Aft-mkt IBM IBM US n.a. 2.74 Apple AAPL US n.a. 4.07 Oct 19 (Tue) Bef-mkt Coca-Cola Co/The KO US n.a. 0.90 11:30 Bank of New York Mellon BK US n.a. 0.55 12:00 Bank of America BAC US n.a. 0.14 13:00 Goldman Sachs GS US n.a. 2.25 Occidental Petroleum Corp OXY US n.a. 1.38 EMC Corp/Massachusetts EMC US n.a. 0.30 Johnson & Johnson JNJ US n.a. 1.15 Yahoo! Inc YHOO US n.a. 0.15 Oct 20 (Wed) Bef-mkt Abbott Laboratories ABT US n.a. 1.04 Bef-mkt US Bancorp USB US n.a. 0.43 Bef-mkt United Technologies Corp UTX US n.a. 1.28 12:00 Altria Group Inc MO US n.a. 0.52 12:30 Boeing BA US n.a. 1.00 13:00 Wells Fargo & Co WFC US n.a. 0.56 21:15 Fidelity National Financial FNF US n.a. 0.30 eBay EBAY US n.a. 0.37 US Airways LCC US n.a. 1.11 SanDisk Corp SNDK US n.a. 1.05 Oct 21(Thu) Bef-mkt United Parcel Service UPS US n.a. 0.88 Bef-mkt Freeport-McMoRan FCX US n.a. 1.94 Bef-mkt McDonald's Corp MCD US n.a. 1.24 Bef-mkt United Parcel Service UPS US n.a. 0.88 Bef-mkt SunTrust Banks Inc STI US n.a. -0.02 12:00 Philip Morris International PM US n.a. 1.01 12:15 Xerox XRX US n.a. 0.21 12:30 Caterpillar CAT US n.a. 1.09 13:00 AT&T T US n.a. 0.56 Aft-mkt American Express AXP US n.a. 0.83 Swedbank SWEDA SS n.a. 1.22 Morgan Stanley MS US n.a. 0.22 Credit Suisse CS US n.a. 1.03 Eli Lilly & Co LLY US n.a. 1.15 Union Pacific Corp UNP US n.a. 1.48 Credit Suisse CS US n.a. na Oct 22 (Fri) 11:00 Schlumberger SLB US n.a. 0.71 Verizon Communications VZ US n.a. 0.54 Amazon.com Inc AMZN US n.a. 0.48 Bristol-Myers Squibb BMY US n.a. 0.53 6
  • 7. Global FX Strategy FX Markets Weekly October 18, 2010 John Normand (44-20) 7325-5222 john.normand@jpmorgan.com J.P. Morgan Securities Ltd. This page left intentionally blank 7
  • 8. Global FX Strategy FX Markets Weekly October 18, 2010 Yoonyi Kim (81-3) 6736-7729 yoonyi.x.kim@jpmorgan.com JPMorgan Chase Bank NA Global FX carry trade monitor Chart 1: Japanese retail -- market capitalisation of 100 largest FX- Chart 2: Japanese retail -- aggregate retail margin shorts in JPY denominated ITs ¥trn; market capitalization of 100 largest investment trusts excluding funds ¥trn, Japanese retail measured by positions in USD, NZD, EUR, GBP and AUD investing in equities; ranked in the order of total asset as of Nov 17th 09 on Tokyo Financial Exchange; positive indicates shorts in JPY 25 70 ¥8 Aggregate margin shorts in JPY, JPYtrn, lhs 70 JPY trade-w td, inv erted rhs 80 ¥6 80 20 90 ¥4 90 100 ¥2 100 15 110 ¥0 110 Market cap of top 100 ITs, JPY trn, lhs JPY trade-w td index , inv erted rhs 10 120 -¥2 120 06 07 08 09 10 07 08 09 10 Source: J.P. Morgan, Bloomberg Source: J.P. Morgan, TFE; • Japanese retail exposure to foreign currency investment trusts • Japanese aggregate margin shorts in JPY reached ¥5.2 trn as slightly declined from ¥17.3 trn as of Oct 7th to ¥17.1 trn as of of Oct 12, the largest since Sep 14th. However, it declined to Oct 8th and has stabilized. This is 11% below this year’s high ¥4.3 trn as of Oct 14th. This is still 32% and 39% below this at ¥19.2trn and 29% below the record high at ¥24.1trn marked year’s peak at ¥6.3trn and record peak at ¥7.1trn respectively. in Aug 08. Chart 3: Japanese retail -- margin position in JPY vs USD, EUR, Chart 4: CTAs -- aggregate IMM position in USD AUD mln local currency. positive indicates long in local currency/short in JPY $ bn as the sum of net speculative positions on the IMM in AUD, NZD, CAD, EUR, GBP, JPY, CHF and MXN. $30 110 40 USD Aggregate IMM position in USD, $ bn, lhs 30 EUR $20 USD trade-wtd index, rhs 105 AUD $10 100 20 10 $0 95 0 -$10 90 -10 -$20 85 -20 -$30 80 -30 Jan-08 Jul-08 Jan-09 Jul-09 Jan-10 Jul-10 -$40 75 00 01 02 03 04 05 06 07 08 09 10 Source: J.P. Morgan, TFE Source: J.P. Morgan, CME • Margin longs in USD/JPY marked a new record high at • Aggregate IMM shorts in USD have hit a new all-time high of $35.5bn as of Oct 12, before modestly declining to $33.1bn as $35.9bn as of the October 8 report. Longs are almost evenly of Oct 14th. Short EUR/JPY increased by €1.2 bn to €3.7 bn in spread across euros ($8bn), yen ($8bn) and Australian dollars the past week while long AUD/JPY was largely unchanged at ($7b). Swiss longs total $3bn. around A$12 bn. 8
  • 9. Global FX Strategy FX Markets Weekly October 18, 2010 Yoonyi Kim (81-3) 6736-7729 yoonyi.x.kim@jpmorgan.com JPMorgan Chase Bank NA Chart 5: Market capitalisation of US-listed currency ETFs Chart 6: Currency managers and global macro hedge funds -- Beta with trade weighted USD Weekly data, $bn. Positive value indicates longs in foreign currency and shorts in HFR used for global macro hedge funds. Barclay BTOP Index used for currency USD managers. 5 75 3.0 Global macro hedge funds 2.0 Currency managers 4 80 1.0 3 85 0.0 -1.0 2 90 -2.0 1 95 -3.0 Market cap of US-listed FX ETFs, $bn, lhs -4.0 USD trade-w td index , inv erted, rhs 0 100 05 06 07 08 09 10 06 07 08 09 10 Source: J.P. Morgan, Bloomberg Source: J.P. Morgan, Bloomberg • US retail exposure to foreign currencies via ETFs was • The returns beta for macro funds with the dollar was stable at unchanged at $3.3bn, which is just a tad lower than the around -0.2 for global macro funds, indicating a small short. year-to-date high at $3.4bn. Compared to the pre-Lehman The beta for currency managers held around -0.4, indicating a peak, however, it is still 35% below. moderate short. Note that betas are still well shy of their 2007/08 lows. Chart 7: Currency managers and global macro hedge funds -- Beta Chart 8: Currency managers and global macro hedge funds -- Beta with G-10 carry strategies with emerging markets carry strategies Positive beta implies a long in carry, a short in dollars HFR used for global macro Positive beta implies a long in carry, a short in dollars HFR used for global macro hedge funds. Barclay BTOP Index used for currency managers. hedge funds. Barclay BTOP Index used for currency managers. 3.0 2.0 Currency managers Global macro hedge funds Currency managers Global macro hedge funds 2.0 1.5 1.0 1.0 0.5 0.0 0.0 -1.0 -0.5 -2.0 -1.0 05 06 07 08 09 10 05 06 07 08 09 10 Source: J.P. Morgan, Bloomberg Source: J.P. Morgan, Bloomberg • Both returns beta for macro funds and currency managers • Macro funds’ returns beta with EM carry jumped notably to with G-10 carry continued to show little change with the beta +0.1 from close to year-to-date low at -0.5, turning positive for former staying flat since mid-July and the latter since mid- for the first time since early June. The beta for macro funds July. also advanced further to record a new year-to-date high at +0.3. Historical high for each beta stands at +1.8 and +0.8 respectively. 9
  • 10. Global FX Strategy FX Markets Weekly October 18, 2010 Arindam Sandilya (1-212) 834-2304 arindam.x.sandilya@jpmchase.com JPMorgan Chase Bank NA Chart 1. Option markets are currently not re-rating USD-skews in FX Derivatives favor of USD-puts at the pace at which it was in previous weeks USD-skews defined as average 3M 25D USD call vol – USD put vol across 9 G10- • The dollar will remain front and center of FX currencies. Beta is calculated as the slope of regressing hourly vol pt. changes in the average USD-skew on hourly % changes in DXY over rolling 1-week windows. markets, which bodes well for long USD-correlation Beta (vol pts per 1% DXY move) trades. Stay long USD-vol vs. short EUR-cross vol in 0.15 82 DXY CHF, but take profits on AUD and NZD. 0.10 81 • Options are not re-rating G10 skews in favor of USD puts at the same rate as before. High and 0.05 80 rising USD-correlations also suggest caution around an unfettered extension of the dollar downtrend. 0.00 79 • CAD/JPY vs. USD/CAD as a long/short gamma RV -0.05 78 is beginning to look interesting. Entry levels are 0.7- Rolling 1-w eek beta of av g. -0.10 77 0.8 vols away from current implied spreads. G10 USD-skew s w .r.t. DXY • CAD/JPY is an interesting wing option buy in its -0.15 76 own right, with var swap vs. vol swap strike basis at 15-Sep 20-Sep 26-Sep 2-Oct 8-Oct 14-Oct historical lows. Source: Bloomberg Chart 2. Higher ex-ante USD-based correlations have historically Another week, another bout of dollar selling. Dovish Fed yielded larger returns from long DXY positions, whether the exit minutes on Tuesday nipped any impending trend correction point is determined by a threshold drop in correlation… in the bud, and the surprise MAS move to increase the slope Average ex-post returns (since ‘99) from long DXY positions contingent on various and width of the SGD NEER policy band on Thursday ex-ante USD-based correlation buckets, where corrs are computed as the average pairwise 3M implied correlation between USD-majors within G10. Exit points from accelerated the downdrift in the greenback. Option markets DXY longs are marked by a threshold drop in USD-corrs. This is a low-frequency have however not re-rated the dollar’s prospects lower with signal, with the average holding period corresponding to a 5% drop being a year. as much enthusiasm lately as spot markets. Chart 1 Av g. long DXY returns highlights this nascent divergence by overlaying the beta of 8% Current correlation average G10-USD skews wr.t. DXY on the dollar index Ex it DXY longs w hen correlation drops: bucket itself. Even as the DXY has pushed lower, the rate at which 6% 1.0% 2.5% 5.0% G10 skews have re-priced in favor of USD puts has come 4% off the boil over the past week. This dovetails well with a prior analysis that suggested dollar bearishness as measured 2% by option skews was approaching a historical extreme, a 0% set-up that has typically preceded a 1%-2% correction in the DXY over the following month (FXMW, Oct 8). While this -2% does not in itself mark the end of the spot trend, it does 40% 43% 45% 48% 50% 53% 55% 58% 60% 63% 65% 68% suggest that gains for dollar shorts could come at a Correlation bucket mid diminishing pace in the days ahead. Source: J.P. Morgan A similar read is provided by the relationship between the Chart 3. … or by a pre-defined holding horizon USD-based G10 correlations and the DXY. Intuitively, Av g. long DXY returns since the dollar explains around 60% of the variation in all 5% Current correlation majors taken together, pronounced dollar trends should drag Ex it DXY longs after holding for: bucket USD-based correlations higher as they gather steam, before 3% 2 w eeks 1 month 2 months eventually exhausting themselves and causing correlations to top out. Empirical analysis lends some credence to this 1% hypothesis. Chart 2 and 3 plot the average ex-post returns from entering long DXY positions contingent on various -1% levels of ex-ante USD-based correlations – defined as the average pairwise 3M implied correlation between USD- -3% majors within G10 – using either a threshold drop in corrs 40% 43% 45% 48% 50% 53% 55% 58% 60% 63% 65% 68% (chart 2) or fixed holding periods (chart 3) to mark exit Correlation bucket mid points from trades. The inference is identical from both: high regimes of USD-correlations have typically preceded Source: J.P. Morgan 10
  • 11. Global FX Strategy FX Markets Weekly October 18, 2010 Arindam Sandilya (1-212) 834-2304 arindam.x.sandilya@jpmchase.com JPMorgan Chase Bank NA 3-4 % corrections in the dollar trend. In light of this, the Chart 4. Long USD-vol vs. short EUR-cross vol spreads in AUD and current correlation level of 57% – at 0.7 std. devs above a NZD have re-priced to levels where taking profits looks prudent long run mean, not quite at a historical peak – does not vol pts. 1.0 AUD/USD - 1.2*EUR/AUD 6M 25D strangle spread justify positioning for a trend reversal in the DXY the way NZD/USD - 1.2*EUR/NZD 6M 25D strangle spread 65%+ buckets do. But the empirical pattern does suggest 0.5 some deceleration in the dollar downtrend going forward, even if a complete reversal maybe some way off. 0.0 Regardless of direction though, the dollar will remain front -0.5 and center of FX markets for some time now – despite all indications that the Fed is set to announce LSAPs on Nov 3, -1.0 any disappointments on this front could turn out to be explosive for markets given current positioning – which -1.5 bodes well for long USD-correlation trades. Our proxy correlation longs in the portfolio in the form of USD-vol vs. -2.0 EUR-cross vol spreads have finally gained traction of late Apr 10 Jun 10 Aug 10 Oct 10 after more than a month of frustrating price action. A Source: Bloomberg number of USD-vols – most notably AUD, EUR and the USD/Scandis – have now transitioned to the rich end of the Chart 5. CAD/JPY is a better gamma buy relative to USD/CAD vol pts. vol scale after a sharp uptick in implieds over the past two 20 CAD/JPY - 1.3*USD/CAD 3M Implied Vol Spread weeks. The move is almost certainly an artifact of CAD/JPY - 1.3*USD/CAD 1M Realized Vol Spread CAD/JPY - 1.3*USD/CAD 3M Realized Vol Spread directional option demand given that realized vols have not 15 firmed up nearly enough to justify the move, and has led our vol spreads to reprice to levels where taking profits on 10 some of them seems prudent (chart 4). That still leaves us with one finger in the long USD-corr. pie through a long 5 USD/CHF vol vs. short EUR/CHF vol spread initiated last week – the only trade of its ilk that still offers value given 0 its stark cheapness in the context of generally elevated dollar corrs. Admittedly, the richening of EUR/CHF vols owes much to the antics of the SNB in the first half of the -5 year and the enormous amount of levered capital that the Oct-07 Apr-08 Oct-08 Apr-09 Oct-09 Apr-10 Oct-10 bullish CHF trade attracted to fade CB intervention. But Source: J.P. Morgan with the SNB having now stepped aside, the broad dollar trend should re-assert its influence on the spread and force a stabilizers, absent a large and diverging policy differential relative reassessment higher of USD/CHF vols. between the two central banks; the latter is likely to be less of an issue over the next quarter with our economists In relative value space, one trade that we have begun to pushing back the date of the next BoC hike to March 2011. track closely is buying CAD/JPY gamma as a spread to More critically from the standpoint of trade optics, vol USD/CAD gamma. Generally speaking, we have been compression over the past month has pushed implied loath to buy yen-cross vols against USD-vols given the spreads down to levels that are approaching '09 lows, and grind lower in USD/JPY over the last 3-4 months. The latter are significantly under trailing realized vols (chart 5). This has meant that yen-crosses have underperformed dollar should place a floor under the spread if the softness in the pairs in the direction of currency strength/USD- or JPY- greenback extends further, while exposing the trade to weakness, thereby reducing the incentive to own the more greater upside in the event of a trend correction, or less expensive JPY-cross vol over the USD vol on at least one likely, another round of BoJ intervention. Historical stats side of the spot distribution (FXMW, September 17). That suggest we are 0.7-0.8 vols of cheapening in the beta said, the one currency to which the argument probably does weighted spread away from pulling the trigger on the trade, not apply as forcefully as it does to others, and where by and will remain on our radar for the next couple of weeks. extension the reverse trade is not overly onerous, is CAD. This can be attributed to the fact that a dollar downtrend That CAD/JPY turns up as the long leg of the vol RV above does not usually elicit the kind of runaway moves that one is interesting in the light of a rich/cheap analysis of wing usually associates with other commodity bloc currencies options. One approach to gauging value in owning wings is such as AUD, largely on account of economic linkages to consider the attractiveness of owning variance swaps between US and Canada that tend to act as automatic trend over vol swaps. Because the vol swap product is linear in 11
  • 12. Global FX Strategy FX Markets Weekly October 18, 2010 Arindam Sandilya (1-212) 834-2304 arindam.x.sandilya@jpmchase.com JPMorgan Chase Bank NA realized vol at expiry while the variance swap payout is in Chart 6. P/L from long var swap vs. short vol swap is quadratic w.r.t. terms of vol squared, the net P/L from a vega-neutral the realized vol at expiry long/short spread between the two is quadratic in at- P/L at ex piry maturity realized vol (chart 6), with long var/short vol combinations out-performing in outsized or extremely Root1 = KVAR - √[2*KVAR*(KVAR-KVOL)] muted market moves when delivered vols end up beyond Root2 = KVAR + √[2*KVAR*(KVAR-KVOL)] the two roots of the quadratic. Currency pairs that usually deliver vol outside these roots should rank as good wing option longs, and CAD/JPY ranks as one of the few that qualify as attractive variance buys on this gauge (chart 7). In addition, the absolute level of the var swap – vol swap strike basis in CAD/JPY is plumbing historical lows (chart Root1 Root2 8), which buttresses the case for overweighting OTM strikes in the cross. In contrast, a number of EUR/high beta crosses Realized v ol at ex piry (EUR/BRL, EUR/MXN, EUR/NZD) require generously wide thresholds of realized vols to be breached before wing Source: J.P. Morgan longs can begin to deliver positive P/L, and therefore appeal Chart 7. CAD/JPY has more often than not clocked realized vols as variance sells. Even though the market for flat vega outside the current roots of a long 1Y var /short 1Y vol swap spread products such as vol and var swaps has widened out Fraction of time since 2002 that 1Y realized vols have ended up within the current considerably from their pre-crisis days and trading spreads lower and upper roots of a long 1Y var swap vs. short 1Y vol swap spread. Rolling between the two is transaction cost prohibitive, rich/cheap 1Y realized vols computed off 252 WMR fixings. rankings like these are useful to track even if the actual 100% Wings cheap Wings rich trade implementation is via simple delta-hedged vanilla butterflies. 80% 60% 40% 20% 0% USD/HUF USD/CHF USD/CZK CHF/JPY USD/SEK USD/NOK CAD/JPY USD/TRY USD/CLP EUR/NZD USD/ZAR CAD/MXN EUR/CHF USD/SGF EUR/JPY GBP/JPY EUR/CZK EUR/BRL EUR/ZAR EUR/MXN Source: J.P. Morgan Chart 8. CAD/JPY var swap strikes are trading at a historically low premium to vol swap strikes, making long wing positions attractive CAD/JPY 1Y var swap – vol swap (mid) strike differential. No transaction costs. v ol pts. 1.8 1.4 1.0 0.6 0.2 -0.2 Feb-07 Nov -07 Jul-08 Apr-09 Jan-10 Oct-10 Source: J.P. Morgan 12
  • 13. Global FX Strategy FX Markets Weekly October 18, 2010 Arindam Sandilya (1-212) 834-2304 arindam.x.sandilya@jpmchase.com JPMorgan Chase Bank NA Implied volatilities Biggest 3M Implied Volatility Movers Current Implied Vols Avg. Implied Vols Z-Score Implied Vols Weekly Changes Monthly Changes 1M 3M 1Y 1M 3M 1Y 1M 3M 1Y USDCLP USDINR A UDJP Y 16.3 17.0 19.3 24.1 23.9 24.0 -0.88 -1.01 -1.08 USDKRW USDKRW A UDUSD 14.4 14.5 15.5 17.7 17.6 17.4 -0.56 -0.69 -0.71 USDM XN USDTWD CA DJP Y 15.6 16.1 17.9 21.1 20.9 20.8 -0.87 -0.98 -0.92 USDJPY USDSGD USDRUB Vol Vol USDNOK CHFJP Y 1 .1 1 1 .9 1 13.9 15.6 15.5 15.7 -1.07 -1 2 .1 -0.85 USDSGD USDSEK EURA UD 10.9 1 .6 1 13.1 13.4 13.7 14.0 -0.58 -0.63 -0.42 USDARS USDP HP EURCA D 1 .2 1 1 .5 1 12.6 13.1 13.2 13.5 -0.52 -0.56 -0.39 USDTRY A UDUSD Vol EURCHF 10.7 10.3 9.9 7.3 7.0 6.6 1.08 1.26 1.72 USDPHP EURUSD EURGB P 10.1 10.4 1 .4 1 12.2 12.5 12.8 -0.53 -0.64 -0.58 USDINR A UDJP Y EURJP Y 13.3 14.1 16.4 17.7 17.8 18.1 -0.77 -0.80 -0.55 EURCZK USDIDR AUDUSD EURCZK EURNOK 8.7 8.6 8.9 10.9 10.6 10.1 -0.58 -0.62 -0.53 USDCAD EURHUF Vol EURNZD 1 .0 1 1 .6 1 13.2 14.1 14.3 14.6 -0.88 -0.96 -0.77 EURSEK EURAUD EURSEK 8.1 8.1 8.5 1 .5 1 1 .1 1 10.5 -0.89 -0.93 -0.88 EURCAD USDCLP EURUSD 13.5 13.5 13.6 13.7 14.0 14.2 -0.05 -0.18 -0.26 AUDJPY EURJP Y GB P JP Y 13.2 14.2 16.6 20.0 19.9 20.1 -1.04 -1 0 .1 -1.01 CHFJPY EURNZD EURJPY CA DJP Y GB P USD 10.9 1 .3 1 12.3 14.3 14.5 14.7 -0.83 -0.95 -1.05 GBPJPY GB PJP Y NZDUSD 14.3 14.5 15.6 18.3 18.4 18.3 -0.82 -1.00 -1 0 .1 USDCA D 12.4 12.5 13.2 14.7 14.8 14.9 -0.57 -0.69 -0.68 -1 -0.6 -0.2 0.2 0.6 1 .0 .0 -1 -0.2 0.6 1 2.2 3.0 .0 .4 USDCHF 12.9 12.9 12.8 12.6 12.9 13.0 0.08 -0.02 -0.07 USDJP Y 12.2 12.5 13.4 14.4 14.3 14.3 -0.62 -0.74 -0.87 Source: J.P. Morgan USDNOK 15.7 15.7 15.8 17.4 17.3 17.1 -0.38 -0.46 -0.59 USDSEK 15.8 15.7 15.7 18.0 17.6 17.3 -0.50 -0.54 -0.68 Front-End Vol Rankings USDA RS 5.0 8.0 15.8 10.2 15.7 26.2 -0.49 -0.80 -1 2 .1 In order of Normalized Volatility Risk Premium* USDA RS USDB RL 12.8 14.4 16.5 19.8 19.5 19.6 -0.81 -0.79 -0.77 A UDJP Y USDCLP 13.2 12.6 12.5 16.3 16.4 17.0 -0.58 -0.76 -0.98 USDSGD USDM XN 12.3 13.2 14.2 17.8 17.5 17.6 -0.70 -0.66 -0.64 EURCZK EURCZK 5.8 6.3 6.8 1 .0 1 10.2 9.3 -1.03 -1.03 -1.07 USDM XN USDJP Y Vols RICH EURHUF 10.1 1 .2 1 13.0 15.6 15.2 14.9 -0.95 -0.89 -0.58 GB P JP Y EURP LN 10.5 1 .3 1 12.3 16.8 15.9 14.9 -0.88 -0.85 -0.75 USDB RL USDRUB 12.1 12.1 12.5 14.2 15.5 18.4 -0.43 -0.67 -1.05 USDSEK USDTRY 12.7 12.8 13.6 15.5 15.8 16.8 -0.47 -0.63 -1.01 USDZA R USDZA R 14.3 14.5 15.0 20.7 20.7 20.7 -0.98 -1 0 .1 -1.41 USDNOK USDIDR 6.5 8.5 1 .9 1 16.8 17.8 19.8 -0.95 -0.96 -0.92 EURHUF EURUSD USDINR 10.5 10.9 1 .5 1 1 .5 1 12.3 13.3 -0.27 -0.38 -0.46 EURGB P Vols USDKRW 14.8 15.0 15.3 20.2 19.2 17.7 -0.46 -0.46 -0.43 USDTWD CHEAP USDP HP 8.5 8.6 9.7 10.3 1 .2 1 12.6 -0.46 -0.65 -0.74 EURCA D USDSGD 7.5 7.6 7.9 7.7 8.1 8.6 -0.09 -0.19 -0.34 EURCHF USDTWD 6.7 6.9 7.3 7.0 7.7 8.6 -0.16 -0.40 -0.60 EURNZD 0.0 0.6 1.2 1.8 2.4 3.0 *Normalized Volatility Risk Premium = 1M Implied Vol / 1M Realized Vol - 1 Source: J.P. Morgan Open Trades Entry Entry* Current P/L P/L Analyst Description Remarks date mid Units Buy 6M 25D USD/CAD strangles vs. Sell 6M 25D EUR/USD Vol spread proxy for a defensive long CAD/USD vs. CAD/EUR Sandilya 09/07/10 0.2 -0.2 -0.4 vol pts. strangles, equal USD vega on both legs correlation trade Buy 6M 25D MXN/JPY strangles vs. Sell 6M 25D EUR/JPY Vol spread proxy for a defensive long MXN/JPY vs. MXN/EUR Sandilya 23/07/10 -3.6 -1.7 1.9 vol pts. strangles, 100:140 JPY vega ratio correlation trade Buy 6M 25D AUD/USD strangles vs. Sell 6M 25D EUR/AUD Sandilya 30/07/10 -0.8 0.7 1.5 vol pts. Profit taking on realized correlation strangles, 100:120 AUD vega ratio Buy 6M 25D NZD/USD strangles vs. Sell 6M 25D EUR/NZD Sandilya 13/08/10 0.0 0.5 0.5 vol pts. Profit taking on realized correlation strangles, 100:120 NZD vega ratio Sandilya Buy GBP/USD 6M straddles 13/08/10 12.4 10.7 -1.7 vol pts. Attractive valuations on GBP vols Sandilya Sell EUR/SEK 3M 25D Risk Reversals 10/09/10 1.6 0.7 0.8 vol pts. Riskies rich vs. history,ATMs and realized skews Buy 2M AUD/USD straddes vs. Sell 2M AUD/CAD straddles, Sandilya 10/09/10 0.7 0.2 -0.5 vol pts. Relative value in gamma 100:120 AUD vega ratio Sandilya Sell EUR/JPY 1Y 25D strangles 17/09/10 16.0 16.4 -0.4 vol pts. Short yen vol theme, back-end vols rich to front Sandilya Sell USD/BRL 6M6M FVAs 24/09/10 16.6 17.2 -0.6 vol pts. Historically steep vol curve, contained vol levels Buy 6M 25D USD/CHF strangles vs. Sell 6M 25D EUR/CHF USD/CHF vols underpriced vs. EUR/CHF vols in a high dollar- Sandilya 08/10/10 1.5 0.7 -0.8 vol pts. strangles, 100:120 vega ratio based correlation environment * For delta-hedged straddles and vol products, P/L is in vol points; for directional trades, bp of notional; negative indicates a net credit at inception 13
  • 14. Global FX Strategy FX Markets Weekly October 18, 2010 Paul Meggyesi (44-20) 7859-6714 paul.meggyesi@jpmorgan.com J.P. Morgan Securities Ltd. Trade Recommendations FX trade recommendations Trade recommendations in this section are mostly spot, for • The prospect of further QE is proving more toxic easier incorporation into the monthly Global Markets for the dollar than QE1. Outlook & Strategy (GMOS), which outlines J.P. Morgan’s flagship model portfolio across bonds, credit, equities, fx • Stay short against a broad basket of currencies to and commodities. Some directional option trades are reflect the Fed’s willingness to debase its currency. included here as alternatives to cash position, and as a complement to relative value trades discussed in FX • Similar arguments justify a broad short in GBP, Derivatives section of this publication (p. 10). especially as fiscal reality bites Current recommendations are marked to market at Friday • Closed trades: None afternoon London time. A complete inventory of closed trades is presented at the end of this section along with • New trades: None. performance statistics such as success rates and average • Existing trades: Stay short USD versus AUD, EUR, returns per trades. SEK, INR and KRW (all cash). Stay short GBP versus CHF, EUR, NOK and SEK. Hold short Chart 1: The QE2 heralded by Bernanke at his Jackson Hole speech EUR/CHF via a 1-yr at-expiry digital. is having a more adverse effect on the dollar than QE1 USD trade-weighted index set to 100 at the time of the QE announcement. For 2009 we use the March 18 announcement of Treasury purchases, for 20010 we The overarching theme for FX remains the growing divide use Ben Bernanke’s Jackson Hole speech on Aug 27 when he set out the case for between the developed world’s central banks, between the further easing. happy debasers on the one hand (the Fed and the BoE) and 104 Fed QE 'announcement' those with either an economic or philosophical objection to a more explicit pursuit of inflation. It is not necessary to 102 make a normative judgement about which central bank Mar-09 Aug-10 course is correct; merely to recognise that nominal 100 exchange rates will adjust to reflect the varying inflation 98 preferences of individual central banks. A credible commitment to inflate is a credible commitment to devalue. 96 The question for us is not whether the theme will change – 94 monetary divergence seems entrenched for a further one- 92 two quarters at least, even if the political frictions created by monetary and exchange rate policies are more -10 0 10 20 30 40 50 unpredictable – but whether QE2 is yet discounted in the Day s before/after Fed QE announcement dollar and in sterling. This is hard to answer with precision, Source: J.P. Morgan not least because the Fed has offered little if any guidance about the magnitude or timing of additional large scale asset Chart 2: USD depreciation is also more evenly spread than with QE1 FX appreciation vs USD 30 days following an ‘announcement’ of QE by the Fed. purchases. But on reasonable assumptions a $500bn asset purchase programme would depress 10-year Treasury yields to the low 2.00s, some way below their current 2.50%. On a 12 Mar-09 Aug-10 yield basis, therefore, it would seem that the dollar has 10 some way yet to decline. Another way to consider this is to compare the response of the dollar following the launch of 8 QE1 last March with its performance since August 27 when 6 Bernanke set out the case for additional stimulus (chart 1). The dollar is certainly trading as though QE2 is a reality, 4 and at 5% its trade-weighted depreciation is some 2% 2 greater than at a similar stage of QE2. Ultimately, however, QE1 led to a near 10% drop in the dollar, so on this basis 0 we doubt QE2 is yet close to being played out. Meanwhile, JPY EUR CHF NOK SEK CAD GBP NZD AUD -2 Source: J.P. Morgan 14
  • 15. Global FX Strategy FX Markets Weekly October 18, 2010 Paul Meggyesi (44-20) 7859-6714 paul.meggyesi@jpmorgan.com J.P. Morgan Securities Ltd. Chart 3: Credibly irresponsible – the Fed yet again succeeds in Chart 4: Not all central banks are happy debasers boosting inflation expectations Monetary base (bank deposits at the central banks plus notes and coins in US 10Y breakeven inflation rate. Net change in % from the time at which the Fed circulation). Jan 2008=100 ‘announced ‘ QE. For 2009 we use the March 18 announcement of Treasury purchases, for 20010 we use Ben Bernanke’s Jackson Hole speech on Aug 27 300 BoE when he set out the case for further easing. Fed 250 0.8 Fed QE 'announcement' 0.6 Mar-09 Aug-10 200 0.4 ECB 150 0.2 0 BoJ 100 -0.2 Jan-08 Jul-08 Jan-09 Jul-09 Jan-10 Jul-10 -0.4 Source: J.P. Morgan -10 0 10 20 30 40 50 the outperformance of currencies with the most orthodox, Day s before/after Fed QE announcement least inflationist central banks. Source: J.P. Morgan Trades neither the average level of dollar correlations or skew yet • Bearish USD: Stay short AUD, EUR, SEK, INR and signal a mature trend ripe for correction (see FX Derivatives KRW in cash. on page 8). Having trimmed short USD exposure last week we are Aside from the overall trend in the dollar, it is instructive to content to hold the current basket of dollar shorts going consider the cross-sectional nature of the dollar’s decline. into next weekend’s key G20 finance ministers’ meeting. As chart 2 shows, whereas QE1 was felt most keenly in Monetary policy may be the pivotal factor in the dollar’s dollar depreciation versus high-beta currencies, the dollar’s decline but the political frictions that predatory monetary decline in the early stages of QE2 has been much more and FX policies give rise to can only reinforce the general evenly distributed, with funding currencies and most negativity towards the dollar. Economically there are no notably the European currencies doing far better than they winners from a trade war but as the major international did during QE1. This does not come as a surprise to us. debtor the US is vulnerable to the financial retaliation that First time around the markets may have hoped that QE may follow a spillover from currency wars to an outright would prove a panacea for the global economy. The fact trade war. that the Fed is considering QE2 only a year and a half later As discussed above, we believe that relative central bank means that these hopes were unfounded, hence the inability credibility is playing a greater role in shaping the of the high-beta currencies to replicate their outperformance contours of dollar deprecation as we approach QE2. The of QE1. Secondly, there is a more overt inflationary optimal trade for QE1 was to sell dollars against the most motivation for QE2 than for QE1, which translates to a cyclical currencies, to benefit from expected global broader debasement in the dollar. Finally, there is far less reflation. The optimal trade for QE2 is to position for a participation in QE2 from other central banks than there more even rate of dollar deprecation. Cyclical/commodity was in QE1. Indeed, most European central banks with the currencies will still benefit from expectations of nominal singular exception of the BoE are indicating their reflation but European currencies should keep pace as preference to normalize monetary policy (the Riksbank is investors reward more the conservative central bank expected to deliver its third rate increase in two next week). practises in mainland Europe. The Riksbank meets in two QE1 could be characterized as a global effort to relate; QE2 weeks, and while a rate hike is fully discounted, such a should be seen rather as a unilateral US effort to inflate. The decision can only help reinforce the sense of division distinction matters for how one positions for dollar between the Fed and European central banks. Sweden has depreciation – QE1 heavily favoured cyclical currencies, a larger output gap than the US but unlike the Fed the QE2 is more about relative central bank credibility, hence Riksbank is sensitive to the risks from maintaining an emergency setting of policy long after the economic emergency (i.e. fear of depression) has receded. 15
  • 16. Global FX Strategy FX Markets Weekly October 18, 2010 Paul Meggyesi (44-20) 7859-6714 paul.meggyesi@jpmorgan.com J.P. Morgan Securities Ltd. Meanwhile, the ECB may not be tightening official result of which the BoE is starting to play a little fast and policy in the same way as the Riksbank but excess loose with its credibility. To get the UK price level back liquidity in the eurosystem continues to decline, which on track, consistent with a 2% inflation target, the BoE translates to a de facto tightening in money market would need to target annual deflation of -1% for the next conditions (chart 4). De facto and de jeure tightening five years. Next week the focus will fall squarely on the constitute a bullish backdrop for EUR and SEK. government’s long-awaited announcement of its detailed medium-term spending plans on Wednesday. The In addition to the general dollar-trend, INR has been a government has to find some £80bn over five years to beneficiary of IPO-related inflows from foreign investors. match its budget commitments, a tall-orders that risks In our estimation probably slightly less than half of the further undermining economic confidence as the populace flow has been done so far (2-3 billion USD), so we will digest the personal implications (non-protected budgets look to run this position for another week before covering will need to be slashed by some 25% in real terms over as the unsuccessful IPO bidders will be refunded this period). eventually and part of the inflow into INR will be reversed. ⎯ Stay long EUR/GBP. Bought Oct 1 at 0.8680, Chart 5: As the Fed moves to ease, the ECB presides over a de-facto marked at 0.7%. tightening in money market conditions ⎯ Stay short GBP/CHF. Sold Sept 24 at 1.5479. 1.0 First ECB 1Y repo EUR 1M EONIA Current mark 1.0%. 0.9 USD 1M OIS ⎯ Stay short GBP/NOK. Sold Sept 24 at 9.3081; 0.8 ECB repo drain marked at 1.0%. 0.7 0.6 ⎯ Stay short GBP/SEK. Opened Sept 10. Current 0.5 mark 6.3%. Cut stop to 10.66. 0.4 Chart 6: BoEs credibility as an inflation-targeter is on weak ground 0.3 GDP deflator, Q1 200=100. 0.2 UK 130 0.1 US 0.0 120 May -09 Aug-09 Nov -09 Feb-10 May -10 Aug-10 EUR Source: J.P. Morgan 110 ⎯ Stay long EUR/USD. Bought Oct 1 at 1.3720, Price lev el consistent w ith 2% inflation target 100 marked at 2.6%. Raise stop to 1.3450. Japan ⎯ Stay short USD/SEK. Sold Oct 1 at 6.7100, marked 90 at 2.4%. 80 ⎯ Stay long AUD/USD. Bought Sept 17 at 0.9385. Current mark 6.0%. Raise stop to 0.9750. 00Q1 02Q1 04Q1 06Q1 08Q1 10Q1 ⎯ Stay short USD/KRW. Sold Oct 1 at 1130, marked Source: J.P. Morgan at 1.7%. ⎯ Hold short USD/INR. Sold June 18, marked at • Stay short EUR/CHF via options +4.8% Cut stop to 44.60. The tactical outlook for EUR/CHF is neutral/moderately • Stay short GBP vs EUR, CHF, NOK and SEK. higher as the ECB effectively tightens policy and the SNB tries to justify still near-zero rates for an economy Sterling remains overshadowed by the dominant focus on with no output gap. The SNB can maintain this policy the dollar. Nonetheless, as a candidate for additional pretence for a while but ultimately it risks being surprised quantitative easing of its own, GBP remains vulnerable once more by an economy that refuses to follow its against the harder currencies of mainland Europe. Unlike bearish script. the Fed, the BoE lacks any inflation pretext for additional easing. Indeed, the UK has suffered a singularly bad ⎯ Hold a 1-yr 1.250 at-expiry digital in EUR/CHF. inflation performance over the past decade (chart 6), as a Bought on June 8 for 13%. Currently 15.2% 16
  • 17. Global FX Strategy FX Markets Weekly October 18, 2010 Paul Meggyesi (44-20) 7859-6714 paul.meggyesi@jpmorgan.com J.P. Morgan Securities Ltd. Table 1.Current FX spot recommendations and P&L Active trades are marked to market on Friday afternoon London time. Long Short Entry Entry Current Stop Comments date level level loss P&L since entry, % EUR USD 01/10/10 1.37 1.41 1.35 2.6% hold SEK USD 01/10/10 6.71 6.55 6.93 2.4% hold AUD USD 17/09/10 0.9385 0.9950 0.9750 6.0% stop raised KRW USD 01/10/10 1130.0 1111.5 1158.0 1.7% hold INR USD 18/06/10 46.17 44.06 44.60 4.8% stop lowered CHF GBP 24/09/10 1.55 1.53 1.59 1.0% hold EUR GBP 01/10/10 0.868 0.874 0.858 0.7% hold SEK GBP 10/09/10 11.19 10.53 10.66 6.3% stop lowered NOK GBP 24/09/10 9.31 9.22 9.33 1.0% stop lowered Table 2. Current FX derivatives (directional/non-RV) recommendations and P&L Active trades are marked to market on Friday afternoon London time. Description Entry Expiry Days to Spot Entry Current P&L since Comments date date expiry reference offer entry Buy a 1Y EUR/CHF 1.2500 at-expiry digital put 08/06/10 08/06/11 236 1.3438 13.0% 15.2% 2.2% hold 17
  • 18. Global FX Strategy FX Markets Weekly October 18, 2010 Paul Meggyesi (44-20) 7859-6714 paul.meggyesi@jpmorgan.com J.P. Morgan Securities Ltd. I. Performance statistics 2008 – 2010 Chart 1: 2008-2010 performance summary: Average returns per trade 2008-2010 -0.1% 2010 YTD 2009 2008 weighted avg Cash 1.0% I. Trade Recommendations portfolio 2.0% Cash 0.2% # of trades 69 61 85 215 Non-digital 0.5% 2010 Success rate 52% 64% 59% 58% -0.6% 2009 Average return per trade (%, unweighted) -0.1% 1.0% 2.0% 1.0% Average holding period (days) 19 20 31 24 -6.7% 2008 Derivatives (non-digital) Digital -4.7% -3.6% # of trades 29 21 3 53 Success rate 55% 62% 0.0% 55% -0.1% Average return per trade (%, unweighted) 0.2% 0.5% -0.6% 0.3% Technical 0.1% Average holding period (days) 55 59 66 57 0.2% Derivatives (digital) # of trades 4 21 5 30 -10% -8% -6% -4% -2% 0% 2% 4% Success rate 25% 38% 20% 33% Average return per trade (%, unweighted) -6.7% -4.7% -3.6% -4.7% Average holding period (days) 60 55 54 56 Chart 2: 2008-2010 Performance summary: Success rate by type of II. FX Derivatives portfolio (relative value) trade Vol r.v # of trades 36 32 13 81 52% Cash 64% 2010 Success rate 72% 63% 77% 69% 59% 2009 Average return per trade (unweighted)* 0.8 0.1 0.3 0.5 55% Average holding period (days) 100 73 53 82 Non-digital 62% 2008 0% Vol plus directional r.v # of trades 2 NA NA 2 25% Success rate 50% NA NA 50% Digital 38% 20% Average return per trade (unweighted)* 24 NA NA 24 Average holding period (days) 50 NA NA 50 72% RV (non-digital) 63% Digital 77% # of trades - NA 3 3 41% Success rate - NA 33% 33% Technical 57% 43% Average return per trade (%, unweighted) - NA 8% 8% Average holding period (days) - NA 33 33 0% 20% 40% 60% 80% 100% III. Technical Strategy portfolio # of trades 34 46 87 167 Success rate 41% 57% 43% 46% Average return per trade (%, unweighted) -0.1% 0.1% 0.2% 0.1% Average holding period (days) 32 10 9 14 *P&L in vol points for 2010 18
  • 19. Global FX Strategy FX Markets Weekly October 18, 2010 Paul Meggyesi (44-20) 7859-6714 paul.meggyesi@jpmorgan.com J.P. Morgan Securities Ltd. II. Closed trades 2010 Trade Recommendations derivatives (directional) Entry date Entry level Exit date Exit level P&L (bps) Trade Recommendations cash portfolio Non-Digital Options Trade Entry Date Entry level Exit date Exit level P&L Buy a 6-mo USD put/worst-of basket call where the basket comprises CHF, AUD and JPY. Strikes are 24/11/09 0.83% 05/02/10 0.03% -0.8% Short NZD vs CHF 22/01/10 1.3504 09/02/10 1.3545 0.3% 0.9762, 0.9426 and 85.21 (35 delta). Long CHF vs NOK 05/02/10 5.5750 10/02/10 5.520 -1.0% Long CHF vs SEK 05/02/10 6.9490 10/02/10 6.7840 -2.4% Buy a 6-mo 1.30 AUD call/NZD put, RKO 1.41 24/11/09 0.68% 05/02/10 0.34% -0.3% Long USD vs SEK 05/02/10 7.4820 17/02/10 7.1630 -4.3% Short EUR vs USD 19/02/10 1.3520 05/03/10 1.3583 -0.5% Buy 2m 7.15-7.35 CHF call/SEK put spread 05/02/10 0.47% 12/02/10 0.16% -0.3% Long USD vs NOK 05/02/10 6.0030 05/03/10 5.9173 -1.4% Short NZD vs USD 05/02/10 0.6910 05/03/10 0.6890 0.3% Buy 2-mo 1.60-1.55 GBP put/USD call spread 29/01/10 0.89% 12/02/10 1.55% 0.7% Short GBP vs USD 19/02/10 1.5400 05/03/10 1.5023 2.5% Short GBP vs CHF 22/01/10 1.6760 05/03/10 1.6200 3.5% Buy 1-mo 0.73-0.71 NZD put/CHF call spread 22/01/10 0.68% 12/02/10 0.12% -0.6% Short EUR vs PLN 15/01/10 4.0400 05/03/10 3.8771 4.2% Short AUD vs USD 05/02/10 0.8670 03/03/10 0.8670 -4.5% Buy a 12-month 10.00-9.60 EUR put/SEK ratio call Long EUR vs GBP 10/02/10 0.8775 12/03/10 0.9082 3.5% 24/11/09 0.88% 19/02/10 1.28% 0.4% spread Short GBP vs CHF 19/03/10 1.6050 26/03/10 1.5859 1.1% Buy a 2-mo 7.75-8.00 USD call / SEK put spread 05/02/10 0.51% 26/02/10 0.15% -0.4% Short GBP vs CAD 05/03/10 1.5525 26/03/10 1.5231 1.9% Short EUR vs CHF 05/03/10 1.4630 26/03/10 1.4281 2.4% Buy a 6-mo 3.90/3.60 NZD put/NOK ratio call spread in 24/11/09 1.50% 26/03/10 0.08% -1.4% Long AUD vs NZD 11/03/10 1.3090 26/03/10 1.2845 -1.1% 1x1.5 notional Long NOK vs SEK 10/03/10 1.2132 24/03/10 1.1965 -1.3% Long EUR vs USD 12/03/10 1.3740 22/03/10 1.3500 -1.3% Buy a 3-month 1.4550-1.4250 EUR put/CHF call spread, 12/03/10 0.17% 26/03/10 1.75% 1.6% sell a 1.4750 call Long CHF vs JPY 12/03/10 85.65 26/03/10 85.37 1.3% Short AUD vs CAD 05/02/10 0.9270 06/04/10 0.9240 0.3% Long EUR vs JPY 26/03/10 123.95 06/04/10 125.5000 1.3% Buy a 3 month 1.3150 AUD call/NZD put, RKO 1.3650 11/03/10 0.30% 09/04/10 0.35% 0.05% Long EUR vs GBP 26/03/10 0.9000 06/04/10 0.8800 -2.2% Short USD vs CNY 26/03/10 6.6720 09/04/10 6.6204 0.8% Buy a 1 month 1.39/1.42 EUR call/USD put spread 12/03/10 0.37% 12/04/10 0.00% -0.4% Long CAD vs NZD 19/02/10 0.7280 16/04/10 0.7153 1.5% Long CHF vs USD 12/03/10 1.0610 16/04/10 1.0580 0.4% Buy a 1 month 1.05/1.02 USD put/CHF call spread 12/03/10 0.38% 12/04/10 0.00% -0.4% Long PLN vs CZK 05/03/10 6.6420 12/04/10 6.4800 -1.3% Long CAD vs NZD 23/04/10 0.7155 30/04/10 0.7380 -3.0% Buy a 3mth 1.22/1.25 NOK call/SEK put spread 10/03/10 0.65% 29/04/10 1.00% 0.4% Long CAD vs USD 16/04/10 1.0040 06/05/10 1.0400 -2.8% Long IDR vs EUR 16/04/10 12217 06/05/10 11680 4.8% 'Sell 3m EUR/USD vs USD/CAD volatility via vol swaps 30/04/10 0.36% 07/05/10 -0.44% 0.80% Long CAD vs JPY 23/04/10 93.50 06/05/10 89.90 -2.8% Long INR vs EUR 23/04/10 59.30 06/05/10 57.72 3.0% Buy a 3-month 1.3200/1.2800 EUR put/CAD call spread 23/04/10 0.17% 14/05/10 2.18% 2.01% Short JPY vs KRW 30/04/10 11.76 06/05/10 12.30 -4.5% and sell a 1.40 EUR call/CAD put Short EUR vs CAD 23/04/10 1.3380 07/05/10 1.3200 1.3% Buy a 3-month 0.9900/0.9600 USD put/CAD call spread 23/04/10 0.11% 14/05/10 -1.21% -1.32% Short GBP vs USD 07/05/10 1.4690 14/05/10 1.5000 -2.1% and sell a 1.0400 USD call/CAD put Short EUR vs CHF 16/04/10 1.4330 20/05/10 1.4400 -0.5% Buy a 6-mo 95-100 CAD call/JPY put spread; sell a 6-mo Short EUR vs INR 14/05/10 56.45 20/05/10 58.00 -2.6% 15/01/10 0.23% 14/05/10 0.50% 0.27% 80 CAD put/JPY call, RKI 70 Short EUR vs IDR 14/05/10 11375 21/05/10 11700 -2.6% Short EUR vs USD 14/05/10 1.2450 21/05/10 1.2565 -0.3% Buy a 6-mo 1.60-1.50 GBP put/CHF call spread with a 24/11/09 1.35% 24/05/10 0.00% -1.35% 1.45 RKI Short GBP vs CHF 07/05/10 1.6350 24/05/10 1.6725 -2.3% Short NOK vs SEK 11/06/10 1.2239 22/06/10 1.1972 2.2% Buy 3-month 1.4350-1.3900 EUR put/CHF call spread 09/04/10 0.10% 04/06/10 1.95% 1.85% and sell a 1.4450 EUR call/CHF put Long CHF vs EUR 04/06/10 1.3935 02/07/10 1.3392 3.9% Long EUR vs AUD 09/07/10 1.4850 12/07/10 1.4400 -3.0% Sell 6M GBP/USD vs USD/CHF vol via vol swaps 09/04/10 1.90% 16/06/10 0.10% 1.80% Long EUR vs JPY 09/07/10 111.70 16/07/10 112.30 0.5% Long EUR vs GBP 02/07/10 0.8290 23/07/10 0.8338 0.6% Buy 3-month 1.3825-1.3400 EUR put/CHF call spread 04/06/10 0.20% 02/07/10 2.42% 2.22% and sell a 1.4300 EUR call/CHF put Long SEK vs GBP 09/07/10 11.34 23/07/10 11.31 0.3% Long EUR vs USD 16/07/10 1.2960 13/08/10 1.2815 -1.1% Buy a 3-month 1.02-0.98 USD put/CAD call spread and 18/06/10 0.00% 30/07/10 0.12% 0.12% Long EUR vs NZD 30/07/10 1.8020 13/08/10 1.8058 0.2% sell a 3-month 1.0586 USD call/CAD put Long CHF vs USD 30/07/10 1.0422 20/08/10 1.0320 1.0% Buy a 2-month 85 USD put/JPY call in 1x notional, sell a Long CHF vs NOK 20/08/10 6.0175 27/08/10 6.1500 2.2% 17/09/10 0.60% 08/10/10 1.66% 1.06% 2-month 82 USD put/JPY call in 1.5x notional Long JPY vs NZD 30/07/10 62.40 03/09/10 61.30 1.8% Long CHF vs EUR 30/07/10 1.3555 10/09/10 1.3010 4.2% Long JPY vs USD 06/08/10 85.20 10/09/10 83.96 1.5% Entry date Entry level Exit date Exit level P&L (bps) Long AUD vs EUR 10/09/10 1.3740 24/09/10 1.4037 -2.1% Digital Options Long AUD vs GBP 10/09/10 1.6650 24/09/10 1.6473 1.1% Buy a 6-mo 123-142 EUR/JPY range binary 24/11/09 23.3% 22/01/10 31% 8.1% Long CHF vs USD 24/09/10 0.9801 01/10/10 0.9760 0.4% Buy a 3-mo USD put/CAD call one-touch with a 0.95 09/10/09 18.6% 11/01/10 0.00% -18.6% Long SEK vs EUR 10/09/10 9.2100 01/10/10 9.2200 -0.1% barrier Long CHF vs EUR 24/09/10 1.3191 01/10/10 1.3500 -1.8% Buy 6-mo 0.8900 USD/CHF one-touch 24/11/09 16.7% 05/02/10 1.21% -15.5% Long NOK vs USD 17/09/10 6.1200 08/10/10 5.8140 5.3% Buy a 1Y 92 strike USD call/JPY put with a 3M 86/94 19/03/10 0.9% 01/04/10 0.0% -0.9% Long CHF vs NZD 24/09/10 0.7204 08/10/10 0.7200 0.1% window DKO 19
  • 20. Global FX Strategy FX Markets Weekly October 18, 2010 Paul Meggyesi (44-20) 7859-6714 paul.meggyesi@jpmorgan.com J.P. Morgan Securities Ltd. FX Derivatives portfolio (vol relative value plus directional) (vol relative value) Trade Entry date Entry level Exit date Exit level P&L* Technical Strategy portfolio Buy USD/JPY 5Y vs sell EUR/JPY 5Y vol 21/08/08 -1.9 08/01/10 -1.3 0.6 Trade Entry Date Entry level Exit date Exit level P&L Buy USD/JPY 2Y vs sell USD/SEK 2Y vol 11/09/08 -2.9 08/01/10 -4.2 -1.3 Long EUR vs JPY 07/01/10 133.950 15/01/10 131.000 -0.6% Long EUR vs USD 17/12/09 1.432 19/01/10 1.441 0.3% Buy 50D EUR/USD call vs sell 10D call 31/03/09 3.3 08/01/10 2.3 -1.0 Long CHF vs GBP 14/12/09 1.678 18/01/10 1.678 0.0% Buy 3M CAD/JPY straddles vs. Sell 3M CHF/JPY straddles 18/09/09 4.4 08/01/10 2.3 -2.1 Long NOK vs GBP 30/10/09 9.351 19/01/10 9.303 0.1% Sell 3M USD/BRL vol swap 09/10/09 18.2 08/01/10 12.5 5.7 Long AUD vs JPY 07/01/10 85.890 20/01/10 82.800 -0.9% Long EUR vs USD 21/01/09 1.4074 28/01/10 1.3950 -0.22% Buy 3M GBP/USD v EUR/USD vol swap 16/10/09 1.1 15/01/10 0.5 -0.6 Long NOK vs NZD 05/10/09 4.156 19/02/10 4.161 -0.03% Sell 3M3M EUR/USD FVA 04/12/09 13.3 15/01/10 11.5 1.8 Long USD vs GBP 05/02/10 1.568 01/03/10 1.486 1.31% Long 35D strangle v short NZD/USD 1M1M Long NZD vs AUD 25/02/10 1.284 02/03/10 1.297 -0.26% 18/12/09 -2.2 15/01/10 -1.3 0.9 FVA Long USD vs NOK 19/02/10 6.001 12/03/10 5.823 -0.7% Long USD/CHF v GBP/USD 3M3M FVA 15/01/10 3.5 05/02/10 4.8 0.7 Short GBP vs CHF 01/03/10 1.628 22/03/10 1.585 0.7% Short EUR/GBP 3M3M FVA 08/01/10 11.6 19/01/10 10.6 1.0 Long EUR vs GBP 25/02/10 0.886 22/03/10 0.900 0.4% Long 2M AUD/USD v AUD/CAD straddles 29/01/10 0.7 05/03/10 1.2 0.5 Short EUR vs MXN 24/11/09 19.337 24/03/10 16.700 3.4% Buy 1Y GBP/JPY v USD/JPY straddles 14/10/09 -3.3 19/03/10 -2.6 0.7 Short EUR vs CHF 01/04/10 1.4180 10/04/10 1.4300 -0.2% Sell 3M3M USD/JPY vol 19/02/10 13.6 19/03/10 12.6 1.0 Long EUR vs JPY 31/03/10 125.500 08/04/10 123.980 -0.3% Sell 1M 25D EUR/JPY calls (delta-hedged) 12/03/10 11.5 14/04/10 12.3 -0.8 Short EUR vs USD 05/02/10 1.3687 12/04/10 1.3570 0.2% Short EUR vs CZK 18/03/10 25.315 19/04/10 25.270 0.0% Buy 2M NZD/USD vol vs sell 2M EUR/USD vol 19/02/10 1.1 23/04/10 0.2 -0.9 Short NZD vs CAD 12/03/10 0.715 30/04/10 0.732 -0.6% Sell 3M USD/BRL vol swap 02/02/10 17.1 07/05/10 11.6 5.5 Long USD vs JPY 24/03/10 92.400 06/05/10 92.610 0.1% Short EUR vs TRY 02/04/10 2.042 06/05/10 2.035 0.1% Buy 2M USD/SEK v 2M GBP/USD vol swap 03/03/10 1.0 07/05/10 0.5 -0.5 Short EUR vs GBP 05/05/10 0.855 07/05/10 0.880 -1.5% Long 2Y AUD/USD v USD/JPY straddles 27/01/10 -2.0 21/5/10 -1.6 0.4 Short EUR vs USD 07/05/10 1.2848 10/05/10 1.305 -0.8% Buy 2M 35D NZD/USD strangles vs sell 2M2M Short GBP vs USD 07/05/10 1.475 10/05/10 1.500 -0.9% 18/03/10 0.4 21/5/10 -2.6 -3.0 FVA Short EUR vs CAD 11/05/10 1.3056 20/05/10 1.3053 0.0% Buy 6M AUD/JPY skew vs sell 3M3M FVA 09/04/10 -2.1 21/5/10 0.2 2.3 Short EUR vs AUD 13/05/10 1.402 19/05/10 1.4455 -0.8% Short GBP vs CAD 13/05/10 1.4906 20/05/10 1.5354 -0.8% Buy 2M USD/SEK v 2M GBP/USD vol swap 23/04/10 0.4 21/5/10 0.7 0.3 Short GBP vs USD 17/05/10 1.45 16/06/10 1.49 -1.1% Buy 1Y Silver v sell 1Y Gold vol swap 03/06/09 9.5 04/06/10 17.6 8.9 Long AUD vs USD 15/06/10 0.8644 29/06/10 0.8502 -0.4% Short GBP vs USD 29/06/10 1.506 27/07/10 1.555 -0.8% Buy 1Y AUD/CAD v sell 1Y USD/CAD 10/06/09 -1.9 04/06/10 -1.1 -2.0 Long EUR vs SEK 02/07/10 9.533 02/08/10 9.376 -0.4% Sell GBP/AUD 6M 25D strangles 12/05/10 12.7 04/06/10 16.6 -3.9 Long EUR vs ZAR 01/07/10 9.494 13/08/10 9.290 -0.54% Long EUR vs AUD 02/07/10 1.480 23/08/10 1.417 -1.1% Sell USD/CAD 3M 25D Risk Reversals 04/06/10 3.0 09/07/10 1.4 1.6 Short EUR vs CHF 19/08/10 1.323 16/09/10 1.317 0.10% Buy CAD/JPY vs. Sell EUR/JPY 3M 25D 11/06/10 2.3 09/07/10 5.0 2.7 Short GBP vs NOK 22/09/10 9.324 01/10/10 9.210 1.2% strangle spread Buy AUD/USD vs Sell EUR/USD 6M 25D 25/06/10 2.8 09/07/10 3.8 1.0 strangle spread Buy 6M EUR/BRL v 6M USD/BRL vol swap 12/01/10 -2.5 12/07/10 -1.6 0.9 Buy 1M1M FVAs vs. Sell USD/MXN 1M vol 02/07/10 -0.7 05/08/10 1.4 2.0 swaps Buy USD/CHF 6M6M FVAs 15/07/10 11.2 27/08/10 12.7 1.3 Sell USD/BRL 3M 25D Risk Reversals 20/08/10 4.5 10/09/10 3.6 0.9 Sell EUR/JPY 3M3M FVAs 09/07/10 17.4 17/09/10 15.2 2.2 Sell USD/JPY 6M 25D strangles 20/08/10 12.9 17/09/10 12.2 0.7 Sell USD/MXN 1M1M FVAs 20/08/10 12.0 22/09/10 11.4 0.6 Buy 6M AUD/USD vs EUR/AUD strangles 30/07/10 -0.8 15/09/10 0.7 1.5 Buy 6M NZD/USD vs EUR/NZD strangles 13/08/10 0.0 15/09/10 0.5 0.5 *P&L in vol points 20
  • 21. Global FX Strategy FX Markets Weekly October 18, 2010 Paul Meggyesi (44-20) 7859-6714 paul.meggyesi@jpmorgan.com J.P. Morgan Securities Ltd. This page left intentionally blank 21
  • 22. Global FX Strategy FX Markets Weekly October 18, 2010 Niall O’Connor (212) 834-5108 niall.oconnor@jpmorgan.com JPMorgan Chase Bank NA indicators and moving average signals still maintain a Technical Strategy bearish bias for the USD and have yet to reach an extreme. As such, while some consolidation to the one-way decline • Another week, another round of key USD supports can develop particularly as the DXY approaches key have given way as the bear trend is expected to support near 76, retracements should continue to be used as continue; the focus is on 1.4375 EUR/USD and the 76 opportunities to add, or establish short positions. area for the DXY. The broader USD weakness over the past week is an • As the trend persists, note the USD has yet to reach an important development and another factor that argues for oversold extreme consistent with previous cycle lows. additional weakness. In this regard, two currencies that have lagged over the past month finally broke through important • Asia FX trends are approaching the next line of key USD supports implying a higher risk for additional follow- levels which can allow for some pause, but through. USD/CAD broke down below the critical 1.01 retracements are viewed as buying opportunities. medium term range lows. In turn, we see a higher risk for additional downside follow-through which should allow • Stay short USD/JPY, GBP/JPY, USD/KRW Chart 2: USD/JPY – Daily Chart – The violation of the intervention EUR/PLN and long EUR/GBP. day low affirms the medium term bearish setup; the focus is now on the 79.92 all-time low. USD: the bear trend broadens The USD bear trend continued over the past week leading to a violation of another round of critical support levels. Importantly, the trend broadened as a number of pairs finally extended through key supports adding to the overall bearish theme. As the decline continues to develop, the inevitable question of whether the USD is at an oversold extreme setup must be asked. We do not believe that is the case at this time. As outlined in recent updates (see Oversold USD? Not there yet. October 6), our short term studies suggest the USD is oversold and can allow for some pause, but appear to be overwhelmed by the strong trending bias. Moreover, the more important medium term metrics have yet to reach an extreme condition consistent with previous cycle lows (Chart 1). We also note that our trend Chart 1: DXY – Weekly Chart – The decline maintains a strong trending bias as weekly momentum metrics have yet to reach an oversold extreme consistent with previous lows. for a closer test, if not break of the important .9930 low from April. Moreover, NZD/USD extended above the key .7637 October 2009 high while suggesting further upside should develop in the coming weeks. Note that while we see room for an extension in these pairs, prices are still expected to lag particularly given the setup in the crosses as there is still little evidence of a reversal pattern in the likes of AUD/NZD and AUD/CAD. Still, the trends for other USD pairs remain intact and are expected to continue. With EUR/USD pushing through the key 1.40 area, the focus is now on the critical 1.4375 resistance area which represents the 76.4% retracement of the decline from the November 2009 cycle high. Importantly, this level should define whether a closer test of the 2009 highs is underway. Following the break through the key .9920 zone for AUD/USD, the upside bias should now allow for a more sustained break of the key 1.00 area and closer test of the next zone of important resistance near 22
  • 23. Global FX Strategy FX Markets Weekly October 18, 2010 Niall O’Connor (212) 834-5108 niall.oconnor@jpmorgan.com JPMorgan Chase Bank NA 1.0220 zone- the 61.8% retracement from the 1981 cycle In this regard, the ADXY Index is quickly approaching high. critical resistance at the 2008 highs near 116.20/116.35 (Chart 3). While we sense the index will eventually break In line with the broad-based USD weakness theme, we through this key zone of resistance, some initial pause can continue to see downside risks for USD/JPY despite the develop. Note this setup lines up with the critical 1100 short term oversold framework The violation of the 82.87 support area for USD/KRW which represents the April low intervention day low is consistent with this view and (Chart 4). Moreover, USD/INR has thus far held the April suggests a closer test, if not break of the critical 79.92 low from 1995 is in the offing (Chart 2). Chart 4: USD/KRW - Daily Chart – With the decline extending into the 1100 area, some near term pause can develop, but the overall bias Asia FX: key levels in focus but trends remain suggests an eventual downside break. strong and incomplete The price action for Asia FX over the past few weeks has confirmed the medium term bullish bias. As outlined in recent updates (see Asia FX trends picking up momentum, FXMW, October 1), the price action has clearly shifted into a trending bias which is incomplete at the moment. Still, we do note that a number of key levels are now in focus which can allow for some pause to the one-way outperformance trend that has developed since early-September. Chart 3: ADXY – Daily Chart – The index is extending into the critical 2008 highs; while some pause cannot be ruled out, the trending bias argues for a more sustained breakout. low near 44 support area while leading to the current bounce. We currently hold a short position in USD/KRW and will look to add to this trade on corrective retracements. Similarly, the bounce in USD/INR over the past week reflects a corrective bias which is consistent with the view for additional weakness and sustained break of the key 44 support zone. The 45.50/46.00 zone should continue to act as a short term ceiling and maintain the bias for new lows while presenting another shorting opportunity. Importantly, the price action in USD/SGD and USD/THB continue to reflect a clear trending bias with strong momentum in line with the view that Asia FX can maintain the outperformance bias. Trade details P&L Comments Long Short Entry Entry Current Stop since entry date level level loss % EUR GBP 23/09/10 0.8487 0.8794 0.8690 0.89% Bullish breakouts suggesting a broader up-swing JPY GBP 15/10/10 130.34 130.64 132.00 -0.06% Resuming the medium term decline PLN EUR 14/10/10 3.9150 3.9065 3.9800 0.05% Breakdown below 1140 support suggests renewed trending bias JPY USD 20/09/10 85.75 81.34 83.30 1.29% Resumption of the broader downtrend indicated KRW USD 04/10/10 1128.0 1110.1 1164.0 0.40% Breakdown below 1140 support suggests renewed trending bias NOK GBP 22/09/10 9.3240 9.2100 9.2100 0.61% Closed Oct 15 23
  • 24. Global FX Strategy FX Markets Weekly October 18, 2010 John Normand (44-20) 7325-5222 john.normand@jpmorgan.com J.P. Morgan Securities Ltd. FX alpha strategies & manager performance • Alpha strategies: Carry • Alpha strategies: Forward Momentum Overlay (buy Carry strategies are up another 0.8% on the G-10 basket currencies with momentum in spot FX and in rate and 1.3% on the EM basket, for year-to-date returns of spreads) 1.3% and 12.6%, respectively. The G-10 basket is long The price momentum strategy continues to recommend AUD, NZD and NOK vs USD, while the EM basket is selling USD vs CAD and JPY. long ARS, BRL and TRY. • Currency, global macro and EM fund performance Global macro funds are having a strong October – they • Alpha strategies: Forward Carry (trade FX on rates are up 1.1% through this week. Currency managers are spread movements) generating 0.25% to 0.8% (depending on composite), Rate momentum has become mixed for the dollar after a which is high once adjusted for the lower volatility of month of recommending an across-the-board sell. The their performance. forward carry model is now long USD vs AUD and NZD, and short USD vs JPY, EUR, GBP and CAD. Year-to- date the signals have returned over 16%. Table 1: Performance of FX alpha strategies Current Returns Product Positions level 1W 1M 3M 12M YTD Alpha strategies G-10 carry (IncomeFX) IncomeFX Long AUD/USD, NZD/USD; Short EUR/NOK, USD/NOK 126.4 3.1% 6.6% 13.1% 7.3% 9.8% G-10 carry (unlevered) NA Long AUD/USD, NZD/USD; Short EUR/NOK, USD/NOK 201.9 0.8% 3.4% 9.0% -0.8% 1.2% Emerging Markets carry (IncomeEM) IncomeEM Short USD vs ARS, TRY & BRL. Long USD vs CNY. 113.3 1.3% 5.5% 9.4% 13.5% 12.6% Short USD vs CAD; EUR, GBP, SEK & JPY. Long USD vs. NOK, CHF, Forward Carry (9 USD pairs) NA 311.8 0.2% 2.6% 4.3% 15.9% 16.8% AUD & NZD. Forward Carry (22 Major pairs) NA As above, plus long EUR vs GBP, NOK, CHF, AUD and NZD. 298.8 0.2% 1.5% 2.0% 6.6% 5.9% G-10 carry with Forward Carry overlay NA Short USD vs. CAD, AUD & SEK; Long EUR vs CHF 270.0 0.8% 4.9% 8.6% 1.3% 4.9% Source: J.P. Morgan Chart 1: Performance of FX alpha strategies Chart 2: Performance of FX alpha strategies 325 225 300 G-10 Carry 210 Forward Carry (9 USD pairs) G10 Carry (Unlevered) Forward Carry Overlay 275 195 Forward Momentum Overlay 250 EM Carry 180 225 165 200 150 175 135 150 125 120 100 105 75 90 00 01 02 03 04 05 06 07 08 09 10 11 00 01 02 03 04 05 06 07 08 09 10 11 Source: J.P. Morgan Source: J.P. Morgan 24
  • 25. Global FX Strategy FX Markets Weekly October 18, 2010 John Normand (44-20) 7325-5222 john.normand@jpmorgan.com J.P. Morgan Securities Ltd. Table 2: Long-term performance of FX alpha strategies, currency managers and global macro funds FX alpha strategies Currency manager and hedge fund performance Emerging G-10 carry with Barclay Parker HFR HFR global HFR emerging G-10 carry G-10 carry Markets carry Forward Carry Forward Carry Forward Carry Currency Barclay Group Blacktree currency macro hedge markets hedge (IncomeFX) (unlevered) (IncomeEM) (9 USD pairs) (22 Major pairs) overlay Traders Index* BTOP FX** CMI** index* funds** funds* 2010 YTD YTD return 9.8% 1.2% 12.6% 16.8% 5.9% 4.9% 2.1% 0.4% 2.2% 1.6% -1.8% 7.1% Std dev 18.7% 11.1% 19.2% 7.4% 4.5% 9.2% NA 3.7% 2.9% 5.4% 6.1% 9.6% IR 0.52 0.11 0.66 2.27 1.30 0.54 NA 0.10 0.75 0.30 -0.29 0.74 2009 Avg annual return 57.9% 20.6% 10.2% 7.9% 3.0% 21.8% 0.9% 5.1% -1.2% 0.0% 4.3% 35.0% Std dev 28% 14% 8% 8.6% 5.6% 13% 1.5% 9.0% 2.8% 2.1% 6.3% 10.0% IR 2.09 1.51 1.34 0.92 0.53 1.64 0.61 0.57 -0.41 0.00 0.69 3.50 2005 - 2009 (5 years) Avg annual return 4.8% -0.1% 7.3% 9.4% 8.1% 2.6% 1.1% 6.7% 3.2% 0.7% 7.0% 10.6% Std dev 32% 16% 14% 3.6% 6.1% 15% 1.9% 11.6% 3.0% 3.4% 2.7% 30.0% IR 0.15 -0.01 0.51 2.61 1.33 0.18 0.58 0.58 1.09 0.20 2.56 0.35 2000 - 2009 (10 years) Avg annual return 9.0% 4.2% 10.2% 6.2% 5.7% 4.2% 3.2% NA NA NA 7.6% 10.8% Std dev 22% 12% 16% 5.2% 5.1% 11.5% 3.5% NA NA NA 6.1% 23.5% IR 0.41 0.35 0.63 1.18 1.12 0.37 0.92 NA NA NA 1.26 0.46 * monthly return composites ** daily return composites Strategy descriptions G-10 and emerging markets carry strategies select four currencies with highest ratio of carry (1-mo rate differential) to volatility (annualized spot vol over past 30 days). Forward Carry buys the currency in whose favor rate expectations have moved over the past month. Expectations are based on 1mo rates 3mos forward. Forward Carry Overlay only buys high yield currencies if rate expectations are also moving in that currency’s favor, so combines standard carry and Forward Carry concepts. Forward Momentum Overlay only buys currencies which have appreciated in spot terms over the past year and are experiencing rising rate expectations relative to another currency over the past month. Thus it combines the standard price momentum framework with Forward Carry. All strategies are described in Alternatives to Standard Carry and Momentum in FX (Normand and Ghia, August 8, 2008) posted on www.morganmarkets.com/GlobalFXStrategy. 25
  • 26. Global FX Strategy FX Markets Weekly October 18, 2010 Tohru Sasaki (81-3) 6736-7718 Junya Tanase (81-3) 6736-7718 JPMorgan Chase Bank NA Research Note US-Japan trade war and USD/JPY: implication for CNY going basis (like managed float, currency peg, etc.), we find • Despite series of media sources reporting that a this hard to agree with. Emerging countries with such currency war has intensified, we believe that is still regimes have regularly intervened in FX markets. To not the case at this point. believe that they have started to sell their domestic currencies only recently is clearly a misperception. Indeed, • The real matter at hand is not a currency war but most emerging currencies have risen against USD since the tension between DM and EM countries about June this year when USD started its downtrend and many how they share the burden of USD weakness. currencies have appreciated even in trade-weighted terms. Should this tension intensify, an eruption of a trade Thus, there has been no evidence so far suggesting that war or currency war comes into play. emerging countries have strengthened their bias for a weak • Trade dispute between the US and Japan stemmed currency. from bilateral trade imbalance led to a sharp Although the problem stems from differences between decline in USD/JPY between late 1980s and early- currency regimes, it may be inevitable for industrial 1990s. countries to claim that emerging countries are not carrying a • Current US-China relationship looks similar to the sufficient share of the burden of a cheap USD. Therefore, US-Japan relationship in the early 90s. If the ratio the real issue at hand is not a currency war, but rather how of the trade deficit with China increases by 10-20% the burden of USD weakness should be distributed between points within the overall US trade deficit, the risk of industrial countries and emerging countries. If they fail to bilateral trade dispute could heightens find an equilibrium point, there remains a possibility that industrial countries intensify their protectionist stance, Currency war has yet to begin: the real problem is which could result in a trade war and/or a currency war. USD weakness From this perspective, we believe it useful to review the developments surrounding the trade war between the US At the moment, tension concerning currency policies seems and Japan through late 80s and early 90s along with to be at the highest levels witnessed within the last few USD/JPY movements during the period. years. Amid a flurry of international conferences between October and November, market participants’ attention has The Plaza Accord: Policy coordination lets been focused on whether G-20 countries will reach some USD/JPY plunge kind of accord over the currency policy or not. A plethora In the early 1980s, the Reagan administration of comments from global institutions, such as the Brazilian simultaneously adopted expansionary fiscal and restrictive Finance Minister Guido Mantega (“We are in the midst of monetary policies to coax the stagflationary US economy an international currency war”) and the IMF's managing back onto a recovery path. Although these combined director Dominique Strauss-Kahn (“Using currencies as a policies managed to curb inflation, it also caused interest weapon of economic policy is negative for the global rates to rise to abnormal levels while simultaneously economy”), reiterate the amount of attention this topic has triggering a dollar-rally. Subsequently, between 1981 and gained as of late. Media coverage both in Japan and abroad 1984, the U.S. current account deteriorated rapidly from a makes it seem as though a currency war was indeed narrow surplus to a deficit of $100billion. unfolding. Although the Reagan administration initially saw no But then we ask – is this really happening? Given that no problem in the soaring dollar, complaints from struggling industrial country has intervened in the FX markets with the U.S. manufacturers gradually heightened, while opinion that exception of a unilateral JPY-selling intervention by the undervalued yen was the main reason for the swelling Japanese MoF/BoJ on Sep 15th, declaring the beginning of a US trade deficit became increasingly main-stream. currency war seems to be a bit of a stretch. What is the However, it is important to note that the Japan-US trade situation in emerging countries? friction was nothing new. Starting from escalated conflict Some may site the fact that some emerging countries, China over textile trades started in the 1960-70s, trade friction in particular, have been conducting USD-buying/domestic further intensified throughout the mid-1980s as the U.S. currency-selling intervention as evidence of a “currency trade deficit with Japan continued to grow mainly through war”. However, considering that many emerging countries surging exports of Japanese color TVs and automobiles have adopted regimes that control FX volatility on an on- (Chart 1). As the US administration sought financial liberalization and relaxation of capital regulations in order 26
  • 27. Global FX Strategy FX Markets Weekly October 18, 2010 Tohru Sasaki (81-3) 6736-7718 Junya Tanase (81-3) 6736-7718 JPMorgan Chase Bank NA to hoist up the value of the yen, this led to the inception of partners if US industries sustain losses from unfair trade “the US-Japan Yen Dollar Committee” in November 1983. practices) and the Structural Impediments Initiative (SII) of 1989 in which the US demanded further market-opening Amidst this environment, the Plaza Accord was signed in from Japan. During the four years beginning in 1989 until September 1985. With participating countries coordinating the end of 1992, however, USD/JPY traded in a 120-160 dollar-selling intervention, USD plunged across the board, range as the US-Japan trade friction smoldered. lowering USD/JPY by 50% from 240 yen to 121 yen at the end of 1987 in a matter of two years (Chart 2). With the inauguration of the Clinton administration in January 1993, revitalizing the US economy became a top- Chart 1: US trade deficit with Japan priority, bringing forth a tougher stance against Japan that $ million brought US-Japan trade tensions up by another notch. At 2000 the time, the Clinton administration strongly demanded 0 quantitative targets for US trade with Japan without specifically mentioning exchange rates. In response, the -2000 Japanese government not only refused a public commitment to quantitative targets for increased imports from the US in -4000 March 1993, but also decided against establishing even -6000 indicative targets. USD/JPY embarked on a protracted descent after a remark made by President Clinton after a -8000 US-Japan head-of-state meeting in April the same year, Sep 1985 Plaza Accord -10000 noting that a strong yen would be helpful to correct the trade imbalance. 1974 1978 1982 1986 1990 1994 1998 2002 2006 2010 In 1994, the US administration tightened its stance against Source: U.S. Census Japan once again. When a head-of-state US-Japan meeting in February ended bearing no fruit, President Clinton signed Chart 2: USD/JPY long-term chart a presidential order the following month to reactivate Super 400 301. Resignation of Japan’s Prime Minister Hosokawa in April subsequently pointed to Japanese political instability, 350 Sep 1985 Plaza Accord delaying a solution to the trade dispute, sending USD/JPY 300 lower below 100 in June. USD/JPY remained unable to rise from that level, and after Japan-US automotive trade 250 negotiations failed in April 1995 amidst ensuing hints of US 200 sanctions, USD/JPY posted a post WWII low of 79.75 on 150 April 19th. Thus, within the approximately two years since April 1993, USD/JPY had fallen by more than 30%. 100 50 At first glance, it seems as though USD/JPY declined suddenly on speculations that the US would condone the 1971 1975 1979 1983 1987 1991 1995 1999 2003 2007 yen’s rise out of exasperation over the slow progress in resolving the US trade imbalance. In reality, US authorities Source: Bloomberg bought the dollar as part of a coordinated currency market intervention in April and August 1993, and again in April 1994. Around that time, some US authorities came to the US-Japan trade dispute of the early 1990s: realization that sudden yen appreciation could deliver a Bilateral friction boosts the yen huge blow to the Japanese economy, which conceivably Despite the rapid yen appreciation against the dollar after may have persuaded the US administration to support the the Plaza Accord, the US trade deficit with Japan failed to dollar-buying intervention. Also of note is that a multilateral shrink, much to the betray of expectations; contrarily, it joint intervention involving 17 central banks was also increased its weight in the overall US trade deficit (Chart 3 conducted on May 4, 1994. in next page). As a result, US criticism of Japan accumulated, eventually leading to the enactment of the U.S. Omnibus Foreign Trade and Competitiveness Act in 1988 (of which Section 301, also known as Super 301, allows for appropriate retaliatory measures against trade 27
  • 28. Global FX Strategy FX Markets Weekly October 18, 2010 Tohru Sasaki (81-3) 6736-7718 Junya Tanase (81-3) 6736-7718 JPMorgan Chase Bank NA Chart 3: Share of deficit with China and Japan of total US trade JPY strength suggest that it is relatively easy to talk-up a deficit currency in a country with a current account surplus, based 70% off of the same mechanics that facilitate talking-down a currency with a current account deficit. Under the condition 60% where a currency with a current account surplus is widely 50% Japan expected to appreciate due to political reasons, there is a 40% China sharp decline in the tendency of domestic investors to sell their home currency to invest in foreign assets, which leads 30% to an abnormal level of currency appreciation disconnected 20% from fundamentals. Once such developments are set in 10% motion, the experiences in the early 90s imply that countries may already be at the point-of-no-return only to consequent 0% in a market rampage, even if trade-deficit countries were to 1986 1990 1994 1998 2002 2006 participate in joint interventions and support the buying of their home currencies. Source: J.P.Morgan Chart 4: Real effective exchange rate of USD and JPY Differences between the late 1980s and the early 120 1990s JPY 110 USD FX movements are always the result not of a single factor but a combination of factors. Therefore, a USD/JPY decline 100 between late-1980s and early-1990s was clearly affected by several macro events other than the US-Japan trade dispute. 90 These include aggressive monetary easing by the Fed between 1989 and 1992, the ERM crisis in 1992 and 1993 80 and the Mexican peso crisis at the end 1994 – all of which affected USD/JPY movements to a certain extent. However, 70 we believe that it is safe to claim that one of the major 1980 1982 1984 1986 1988 1990 1992 1994 1996 reasons accounting for the massive drops in USD/JPY over the period was the notion (and an actual utterance to that Source: J.P.Morgan effect) that the US government, was condoning a weak Implication for China dollar (and a strong yen) against a backdrop of escalating trade friction. Put more assertively, one could also say that The current relation of the US with China bears one trade war lead to a currency war, in which the US resemblance to the time when the US was facing a claimed victory. In a sense, this is most natural – from a ballooning trade deficit with Japan, in which the US current account balance perspective, if a country with a advocated for a correction of the imbalance through a huge current account deficit talks down its own currency, revaluation of the trading partner’s currency. Since today’s capital flows into these countries will decrease and situation is not one of USD strength, it cannot be positioned financing the current account deficit will become difficult, as a precursor of another Plaza Accord. Rather, the current resulting in further significant decline in the currency. situation seems closer to the situation in the early 90s. Interestingly, there is a striking difference in the ways Opinion that the significant differences between the US- USD/JPY declined in the late 1980s compared to the late Japan trade war and the US-China trade war is a valid and 1990s. The drop in USD/JPY in the late 1980s after the persuasive voice of dissent. Indeed, the main problem Plaza Accord was caused off the back of a USD weakness during the US-Japan trade dispute was the fact that US and a JPY strength. By comparison, the drop in USD/JPY in products, including color TVs, cars and semiconductors, the late 1990s was largely due to JPY strength. From an lost their competitiveness. Trade dispute in the auto industry, effective exchange rate basis, the yen during that time was a key-industry at the time, became the most heated source at an abnormal high unseen between 1970 and now (today’s of tension. Meanwhile, there have been no cases in the US- effective yen rate is not far from the levels witnessed at the China trade war where Chinese products have posed a threat end of 1997, shown in chart 4). to any integral industries in the US. However, it is worthy to note that the US stance against While the aforementioned may not be sufficient to draw Japan changed as the significant USD/JPY decline post- conclusions, the USD/JPY decline in the early 1990s led by 28
  • 29. Global FX Strategy FX Markets Weekly October 18, 2010 Tohru Sasaki (81-3) 6736-7718 Junya Tanase (81-3) 6736-7718 JPMorgan Chase Bank NA Plaza Accord failed to cut, and even widened, the US’s trade deficit with Japan. The US originally attempted to correct the trade imbalances by reducing Japan’s exports to the US. However, this strategy morphed into asking for increased regulation leniency and heightened openness of the Japanese market after the Plaza Accord, due to a changing perception that the Japanese market exclusivity was the main culprit behind the trade imbalance. This suggests that since trade disputes and any relevant actions are purely political issues, even if the form of the US-China dispute is different from the US-Japan dispute, it is possible that there will not be much difference in the types of actions that the US could take. With the presumption that trade disputes and any relevant actions are purely political issues, highly visible figures like the ratio of a certain country’s trade deficit within the total US deficit become important. The US’s trade deficit with China in the 1990s accounted for roughly 20-30% of the total US trade deficit. Over the last few years , this ratio has increased rapidly to reach 45.1% in 2009, closely resembling the heightened levels during the US-Japan trade friction in the late 1980s (Chart 3 on the previous page). Based on the Japanese experience, a rule of thumb would suggest that if the US trade deficit with China expands to account for 60% of the total US trade deficit, US pressure on China will intensify. Moreover, it also suggests that when a currency with a current account surplus like CNY is talked up, there is risk that the currency will be pushed up to levels disconnected from fundamentals. 29
  • 30. Global FX Strategy FX Markets Weekly October 18, 2010 Yoonyi Kim (81-3) 6736-7729 yoonyi.x.kim@jpmorgan.com JPMorgan Chase Bank NA Market movers (all times BST; +9hrs for Sydney, +8hrs for Tokyo, -5hrs for New York) Date Country Data/Event Forecast Previous JPM Consensus Oct 17 (Sun) NZ 22:45 CPI (%oya) 3Q 1.2 1.5 1.8 Oct 18 (Mon) Japan 00.50 Tertiary sector activity index (%m/m, sa) Aug 0.3 -0.5 (Jul) 1.6 Euro area 11.00 Netherlands to sell up to EUR 7.5bn of bills 14.00 France to sell bills (BTF) US 14.00 TIC long-term net flows ($ bn) Aug n/a (Jul) 61.2 14.15 Industrial production (%m/m, sa) Sep 0.2 (Aug) 0.2 14.15 Capacity utilization (%bal, sa) Sep 74.8 (Aug) 74.7 15.00 NAHB housing market index (index, sa) Oct 14 (Sep) 13 13.00 Citigroup 0.05 0.055 Aft-mkt IBM 2.76 2.75 Apple 4.38 4.09 Oct 19 (Tue) Australia 01.30 RBA minutes Oct Euro area 09.00 Current account (EUR bn, sa) Aug n/a (Jul) -3.8 10.00 Germany ZEW business survey (Index) Oct -8.0 (Sep) -4.3 09.30 Spain to sell 12, 18-month bills 10.00 Greece to sell EUR900mn of 13 week bill UK 11.00 CBI industrial trends survey (%bal) Oct 10 9 (Sep) 10 US 11.30 Bank of NY Mellon 0.56 0.54 12.00 Bank of America 0.15 0.14 13.00 Goldman Sachs n/a 2.25 13.30 Housing starts (000s, saar) Sep 583 (Aug) 598 13.30 Building permits (000s, saar) Sep 575 (Aug) 571r Bef-mkt Coca-Cola 0.88 0.88 Johnson & Johnson 1.15 Yahoo! Inc 0.17 0.15 Canada 14.00 Bank of Canada rate announcement Oct 1.00 1.00 (Sep) 1.00 Oct 20(Wed) Australia 00.30 Westpac Leading Index Aug n/a n/a 0.4 Euro area 07.00 Germany PPI (%oya) Sep 3.8 (Aug) 3.2 UK 09.30 Bank of England releases Minutes of Monetary Policy Committee 09.30 Public sector finances (GBP bn) Sep 14.7 14.6 (Aug) 15.3 09.30 M4 (%oya) Sep n/a 1.5 (Aug) 1.9 US Bef-mkt US Bancorp 0.428 12.30 Boeing Co 1.18 1.06 12.30 Morgan Stanley n/a 0.22 13.00 Wells Fargo 0.56 0.56 19.00 Fed releases Beige Book eBay Inc 0.39 0.37 Canada 15.30 Bank of Canada releases Monetary Policy Report Thailand Bank of Thailand rate announcement 2.00 2.00 1.75 Brazil COPOM announcement 10.75 10.75 10.75 30
  • 31. Global FX Strategy FX Markets Weekly October 18, 2010 Yoonyi Kim (81-3) 6736-7729 yoonyi.x.kim@jpmorgan.com JPMorgan Chase Bank NA Market movers (all times BST; +9hrs for Sydney, +8hrs for Tokyo, -5hrs for New York) Date Country Data/Event Forecast Previous JPM Consensus Oct 21 (Thu) China 03.00 GDP (%oya) 3Q 9.3 9.5 10.3 03.00 PPI (%oya) Sep 4.4 4.1 4.3 03.00 CPI (%oya) Sep 3.5 3.6 3.5 03.00 Retail Sales (%oya) Sep 18.4 18.5 18.4 03.00 Industrial production (%oya, sa) Sep 13.3 14.0 13.9 03.00 Fixed Assets Inv Urban YTD (%oya) Sep 24.5 24.6 24.8 Japan 05.30 All sector activity index (%m/m, sa) Aug 0.0 -0.4 (Jul) 1.0 Sweden 08.30 Unemployment rate (%) Sep 7.6 (Aug) 7.4 Euro area 08.30 Germany PMI mfg. flash (index, sa) Oct 54.6 (Sep) 08.30 Germany PMI services flash (index, sa) Oct 54.9 (Sep) 09.00 PMI composite flash (index, sa) Oct 53.7 (Sep) 09.00 PMI mfg flash (index, sa) Oct 53.2 (Sep) 09.00 PMI services flash (index, sa) Oct 53.7 (Sep) 15.00 Consumer confidence prelim(%bal of responses, sa) Oct -11 (Sep) -11 09.30 Spain to sell 4.65% 2025 bonds 10.00 France to sell fixed notes and/or I/L notes UK 09.30 Retail sales (%m/m, sa) Sep 0.3 0.3 (Aug) -0.5 Canada 13.30 Leading indicators (%m/m, sa) Sep 0.1 (Aug) 0.5 US 12.30 Caterpillar 1.09 1.09 13.00 AT&T 0.550 13.30 Initial jobless claims (000s, sa) 16-Oct 453 462 15.00 Leading indicators (%m/m, sa) Sep 0.3 (Aug) 0.3 15.00 Philadelphia Fed index (DI, sa) Oct 0.0 (Sep) -0.7 Aft-mkt American Express Co 0.835 Amazon.com Inc 0.477 Oct 22 (Fri) Euro area 09.00 Germany IFO business survey (Index, sa) Oct 106.5 (Sep) 106.8 Canada 12.00 CPI (%oya) Sep 1.9 (Aug) 1.7 12.00 CPI core (%oya) Sep 1.6 (Aug) 1.6 13.30 Retail sales (%m/m, sa) Aug -0.1 (Jul) -0.1 13.30 Retail sales less autos (%m/m, sa) Aug 0.4 (Jul) -0.4 31
  • 32. Global FX Strategy FX Markets Weekly October 18, 2010 Yoonyi Kim (81-3) 6736-7729 yoonyi.x.kim@jpmorgan.com JPMorgan Chase Bank NA Event risk calendar Month Date Country Event October 2010 18 Euro area Eurogroup meeting 19 Euro area Ecofin meeting 20 Canada BoC Monetary Policy Report 20 United Kingdom UK Government comprehensive spending review for 2011-15 21 Global G20 Deputy Finance Ministers and Deputy Central Bank Governonrs meeting in Korea 22 Spain Budget release for September 22-23 Global G20 Finance Ministers and Central Bank Governors Meeting in Korea 28 Spain Budget release for September 29 Norway Norges Bank foreign exchange purchases November 2010 2 New Zealand Fonterra Dairy Auction 2 United States Midterm elections 2 Ireland Budget release for October 5 Australia RBA's Quarterly Statement of Monetary Policy 6 Global APEC Finance Ministers' meeting in Japan 10 United Kingdom Bank of England Inflation Report 10-11 Global 2011 APEC Finance Ministers Meeting in Japan 11-12 Global G20 Leaders' summit in Seould, Korea 13-14 Global APEC summit in Yokohama, Japan 19 Spain Budget release for October 30 Portugal Budget release for October 30 Norway Norges Bank foreign exchange purchases December 2010 1 New Zealand Fonterra Dairy Auction 2 Ireland Budget release for November 6 Euro area Eurogroup meeting 7 Euro area Ecofin meeting 9 New Zealand RBNZ Monetary Policy Statement 16 Switzerland SNB Quarterly Monetary Policy Assessment 21 Spain Budget release for November 23 Portugal Budget release for November January 2011 1 Euro area Estonia joins the Euro zone from Jan 1st March 2011 10 Australia RBA's Quarterly Statement of Monetary Policy April 2011 16-17 Washington, DC IMF/World Bank spring meetings June 2011 9 Australia RBA's Quarterly Statement of Monetary Policy September 2011 15 Australia RBA's Quarterly Statement of Monetary Policy 24-26 Washington, DC IMF/World Bank annual meetings December 2011 8 Australia RBA's Quarterly Statement of Monetary Policy 32
  • 33. Global FX Strategy FX Markets Weekly October 18, 2010 Yoonyi Kim (81-3) 6736-7729 yoonyi.x.kim@jpmorgan.com JPMorgan Chase Bank NA Central bank announcement dates in 2010-2011 2010 2011 OCT NOV DEC JAN FEB MAR APR MAY JUN JUL AUG SEP United States 3 14 26 15 27 22 9 20 Euro area 7 4 2 13 3 3 7 5 9 7 4 8 Japan 5, 28 16 21 25 17 15 7,28 20 14 United Kingdom 7 4 9 13 10 10 7 5 9 7 4 8 Switzerland 16 17 16 15 Canada 19 7 18 1 12 31 19 7 Australia 5 2 7 1 1 5 3 7 5 2 6 New Zealand 28 9 27 10 28 9 28 15 Norway 27 15 26 16 12 22 10 21 Sweden 26 15 15 20 5 Poland 27 24 22 Hungary 25 29 20 Czech Republic 4 22 Israel 25 22 Turkey 14 11 16 South Africa 18 Brazil 19 7 Mexico 15 26 India 2 Indonesia 5 4 3 Korea 14 16 9 Thailand 1 Philippines 4 15 28 33
  • 34. Global FX Strategy FX Markets Weekly October 18, 2010 John Normand (44-20) 7325-5222 john.normand@jpmorgan.com J.P. Morgan Securities Ltd. J.P. Morgan FX forecasts vs. forwards & consensus JPM forecast gain/loss vs Dec-11* Actual change in local FX vs USD Current Majors Oct 15 Dec 10 Mar 11 Jun 11 Sep 11 Dec 11 forward rate Consensus** Past 1mo YTD Past 12mos EUR 1.41 1.30 1.30 1.30 1.30 1.25 -10.7% -4.5% 8.3% -1.8% -5.5% JPY 81.2 79 81 83 85 88 -8.3% 2.6% 5.3% 14.7% 12.0% GBP 1.61 1.49 1.48 1.48 1.49 1.47 -8.0% -7.3% 2.8% -0.6% -1.8% AUD 0.99 0.93 0.95 0.99 1.01 0.98 4.2% 6.9% 5.9% 10.8% 8.5% CAD 1.01 1.03 1.02 0.99 0.97 0.99 2.9% 3.7% 2.2% 3.9% 3.1% NZD 0.76 0.71 0.72 0.76 0.77 0.74 1.4% 3.9% 3.2% 4.3% 2.3% JPM USD index 80.2 82.0 82.1 81.9 81.5 83.1 -4.3% -4.5% -3.2% DXY 77.1 81.6 81.9 81.9 81.9 84.7 -5.4% -1.0% 1.9% Europe, Middle East & Africa CHF 0.95 0.99 0.98 0.96 0.96 1.00 -5.0% 2.8% 5.1% 8.5% 6.8% ILS 3.57 3.75 3.75 3.75 3.75 3.75 -3.9% 1.6% 5.2% 6.3% 4.0% SEK 6.56 6.92 6.92 6.88 6.88 7.20 -7.3% -4.2% 8.1% 9.2% 6.1% NOK 5.74 6.00 5.92 5.92 5.85 6.08 -3.3% -3.4% 6.0% 0.8% -2.3% CZK 17.40 18.85 18.65 19.23 18.85 19.20 -8.6% -3.3% 8.9% 5.6% -0.3% PLN 2.78 3.00 2.96 2.92 2.88 2.96 -2.8% -3.4% 9.1% 3.1% 1.7% HUF 195 212 212 208 206 212 -3.6% -3.7% 11.2% -3.5% -8.2% RUB 30.20 29.66 29.21 28.99 29.36 29.74 6.5% 0.6% 2.6% -0.6% -2.6% TRY 1.41 1.50 1.50 1.49 1.48 1.41 7.9% 8.9% 6.0% 6.6% 3.9% ZAR 6.82 7.00 7.15 7.30 7.70 8.10 -10.0% -5.2% 4.0% 8.2% 7.7% Americas ARS 3.95 4.05 4.15 4.15 4.25 4.25 5.0% 2.7% 0.0% -3.8% -3.3% BRL 1.66 1.70 1.80 1.82 1.83 1.85 -1.7% -1.9% 3.9% 5.1% 3.0% CLP 478.8 480 505 500 500 500 -1.4% 0.9% 3.3% 6.0% 14.4% COP 1802 1800 1830 1850 1880 1900 -3.4% -0.4% 0.3% 13.4% 2.3% MXN 12.79 12.50 12.50 12.25 12.25 12.25 5.8% 3.3% 3.2% 5.6% 5.8% PEN 2.79 2.78 2.84 2.82 2.79 2.78 1.2% 0.5% -0.1% 3.5% 2.3% VEF 4.29 4.30 5.50 5.50 5.50 5.50 -21.9% -14.8% 0.1% -49.9% -49.9% LACI 115.32 113.80 110.48 110.90 110.37 109.91 2.8% 4.9% 4.5% Asia CNY 6.64 6.60 6.50 6.40 6.30 6.20 3.3% 2.1% 1.6% 2.8% 2.8% HKD 7.76 7.78 7.78 7.79 7.80 7.80 -0.7% -0.4% 0.1% -0.1% -0.1% IDR 8920 8700 8600 8550 8500 9200 1.9% -3.8% 0.8% 5.4% 5.4% INR 44.1 45.5 44.5 44.0 43.5 42.0 10.9% 4.9% 5.0% 5.4% 4.9% KRW 1110 1150 1180 1140 1100 1100 2.3% -3.2% 4.6% 4.9% 4.9% MYR 3.08 3.10 3.07 3.04 3.02 3.02 3.7% -0.6% 1.1% 11.2% 9.4% PHP 43.28 43.25 42.75 42.25 42.00 42.25 4.8% 1.7% 2.3% 6.7% 7.8% SGD 1.30 1.32 1.30 1.29 1.28 1.33 -2.5% -3.2% 3.2% 8.4% 7.4% TWD 30.61 31.20 31.00 30.75 30.50 30.50 -2.5% -0.6% 3.8% 4.5% 5.4% THB 29.80 30.25 30.10 30.00 29.70 30.80 -2.3% -2.3% 3.6% 12.0% 12.1% ADXY 115.8 114.8 115.6 117.1 118.7 118.7 2.4% 4.7% 4.7% Exchange rates vs Euro Actual change in local FX vs EUR JPY 114 103 105 108 111 110 2.7% 7.5% -2.8% 16.8% 18.5% GBP 0.88 0.87 0.88 0.88 0.87 0.85 3.0% -3.0% -5.1% 1.2% 3.9% CHF 1.34 1.29 1.27 1.25 1.25 1.25 6.4% 7.7% -3.0% 10.4% 13.0% SEK 9.23 9.00 9.00 8.95 8.95 9.00 3.9% 0.3% -0.3% 11.1% 12.3% NOK 8.09 7.80 7.70 7.70 7.60 7.60 8.4% 1.2% -2.2% 2.6% 3.4% CZK 24.51 24.50 24.25 25.00 24.50 24.00 2.4% 1.3% 0.5% 7.5% 5.4% PLN 3.91 3.90 3.85 3.80 3.75 3.70 8.9% 1.2% 0.7% 5.0% 7.6% HUF 275 275 275 270 268 265 8.0% 0.8% 2.7% -1.8% -2.8% RON 4.28 4.15 4.10 4.05 4.00 3.90 16.6% 5.6% -0.9% -1.1% 0.2% TRY 1.98 1.95 1.95 1.94 1.92 1.76 20.8% 14.1% -2.1% 8.3% 9.9% RUB 42.53 38.56 37.98 37.69 38.17 37.18 19.3% 5.4% -5.3% 1.7% 3.1% ↑ indicates revision resulting in stronger local FX , ↓ indicates revision resulting in weaker local FX * Negative indicates JPM more bullish on USD than consensus,** Consensus Economics Publication: Foreign Exchange Consensus Forecasts October 2010 Source: J.P.Morgan 34
  • 35. Global FX Strategy FX Markets Weekly October 18, 2010 Grace Koo (44-20) 7325-1362 grace.x.koo@jpmorgan.com J.P. Morgan Securities Ltd. J.P. Morgan forecasts: rates, credit, equities & commodities Interest rates Current Dec-10 Mar-11 Jun-11 Sep-11 YTD Return* United States Fed funds rate 0.125 0.125 0.125 0.125 0.125 10-year yields 2.35 2.25 2.25 2.25 2.25 9.5% Euro area Refi rate 1.00 1.00 1.00 1.00 1.00 10-year yields 2.26 2.30 2.20 2.30 2.40 9.3% United Kingdom Repo rate 0.50 0.50 0.50 0.50 0.50 10-year yields 2.86 3.00 3.00 3.10 3.25 9.7% Japan Overnight call rate 0.10 0.10 0.10 0.10 0.10 10-year yields 0.86 0.80 0.80 0.90 0.95 3.6% GBI-EM hedged in $ Yield - Global Diversified 6.19 7.90 10.1% Credit Markets Current Index YTD Return* US high grade (bp over UST) 158 JPMorgan US Index (JULI) i-spread 11.7% Euro high grade (bp over Euro gov) 168 iBoxx Euro Corporate Index 5.4% USD high yield (bp vs. UST) 649 JPMorgan Global High Yield Index 12.6% Euro high yield (bp over Euro gov) 596 iBoxx Euro HY Index 13.1% EMBIG (bp vs. UST) 299 EMBI Global 15.3% EM Corporates (bp vs. UST) 336 JPM EM Corporates (CEMBI) 14.7% Quarterly Averages Commodities Current 10Q4 11Q1 11Q2 11Q3 GSCI Index YTD Return* WTI ($/bbl) 82.8 81.0 78.0 81.0 83.0 Energy -7.4% Gold ($/oz) 1345 1350 1425 1425 1450 Precious Metals 21.1% Copper ($/metric ton) 8087 8200 8600 8500 8750 Industrial Metals 4.0% Corn ($/Bu) 5.28 5.25 5.30 5.15 5.10 Agriculture 7.2% 3m cash YTD Return* Foreign Exchange Current Dec-10 Mar-11 Jun-11 Sep-11 index in USD EUR/USD 1.39 1.30 1.30 1.30 1.30 EUR -2.0% USD/JPY 81.9 79 81 83 85 JPY 13.5% GBP/USD 1.59 1.49 1.48 1.48 1.49 GBP -0.6% USD/BRL 1.68 1.70 1.80 1.82 1.83 BRL 10.7% USD/CNY 6.67 6.60 6.50 6.40 6.30 CNY 1.3% USD/KRW 1120 1150 1180 1140 1100 KRW 6.0% USD/TRY 1.41 1.50 1.50 1.49 1.48 TRY 10.7% YTD Return US Europe Japan EM Equities Current (local ccy) Sector Allocation * YTD YTD YTD YTD ($) S&P 1164 6.0% Energy 2.1% -4.4% -1.7% 1.9% Nasdaq 2394 6.9% Materials 5.2% 4.3% -10.0% 13.7% Topix 839 -5.6% Industrials 15.8% 11.8% -0.3% 24.0% FTSE 100 5658 7.4% MSCI Eurozone* 156 0.7% Discretionary 15.2% 22.1% -13.3% 27.2% MSCI Europe* 1134 3.8% Staples 8.4% 9.7% -1.7% 26.1% MSCI EM $* 1103 13.8% Healthcare -0.1% 1.3% -4.6% 24.6% Brazil Bovespa 70264 2.4% Financials 2.7% -1.3% -9.3% 16.5% Hang Seng 22944 7.9% Information Tech. 0.6% 6.2% -3.4% 4.1% Shanghai SE 2739 -16.4% Telecommunications 11.8% 8.0% 13.5% 15.3% *Levels/returns as of Oct 7, 2010 Utilities 5.5% -7.5% -5.8% 10.6% Local currency except MSCI EM $ Overall 6.0% 3.8% -5.6% 13.8% Source: Bloomberg, Datastream, IBES, Standard & Poor's Services, J.P. Morgan estimates 35
  • 36. Global FX Strategy FX Markets Weekly October 18, 2010 David Hensley (1-212) 834-5516 Carlton Strong (1-212) 834-5612 JPMorgan Chase Bank NA Global growth and inflation forecasts Real GDP Real GDP Consumer prices % over a year ago % over previous period, saar % over a year ago 2009 2010 2011 1Q10 2Q10 3Q10 4Q10 1Q11 2Q11 3Q11 2Q10 4Q10 2Q11 4Q11 The Americas United States -2.6 2.6 2.4 3.7 1.7 1.5 2.0 2.5 2.5 3.0 1.8 0.9 1.2 1.1 Canada -2.5 3.1 2.2 5.8 2.0 2.2 2.0 2.3 2.0 2.4 1.4 1.9 2.1 2.1 Latin America -2.4 5.7 4.1 4.9 9.0 1.0 2.7 4.4 6.0 3.5 6.6 7.1 7.2 ↓ 7.3 Argentina -2.0 8.5 5.5 13.4 12.6 0.0 2.0 6.0 8.0 8.0 10.6 10.5 11.0 12.0 Brazil -0.2 7.5 4.5 11.3 5.1 2.3 3.2 5.7 4.7 5.0 5.1 5.0 5.1 5.1 Chile -1.5 5.5 6.0 -6.0 18.4 11.0 6.0 4.0 4.0 4.0 1.2 3.8 3.6 3.4 Colombia 0.8 4.5 4.1 3.3 3.9 3.7 4.0 4.0 4.1 5.0 2.1 2.6 ↓ 3.1 ↓ 4.0 Ecuador 0.4 2.5 3.0 2.1 7.7 2.5 3.0 3.0 2.5 2.5 3.2 3.6 3.8 3.8 Mexico -6.5 4.5 3.5 -2.5 13.5 -3.6 3.1 2.9 9.2 -0.1 4.0 5.1 4.5 4.0 Peru 0.9 8.2 6.0 8.0 12.7 4.8 3.5 5.8 6.7 7.2 1.2 2.6 2.2 2.7 Venezuela -3.3 -2.2 1.0 -2.0 5.2 3.0 -5.0 2.0 1.0 1.5 31.9 31.6 34.7 35.1 Asia/Pacific Japan -5.2 2.9 0.9 5.0 1.5 2.5 -1.5 0.5 1.5 1.8 -0.9 -0.8 -0.2 -0.3 Australia 1.2 3.2 ↑ 3.6 ↑ 2.7 4.9 3.3 ↑ 2.4 ↓ 3.4 ↑ 4.9 ↑ 3.2 ↑ 3.1 3.3 3.8 3.4 New Zealand -1.7 2.0 2.8 2.2 0.7 2.5 2.5 2.6 3.1 4.2 1.8 4.9 5.6 3.2 Asia ex Japan 5.6 8.7 7.0 10.5 7.4 5.5 6.4 7.4 7.3 7.5 4.5 4.1 3.9 3.9 China 9.1 9.8 8.6 10.8 7.2 7.5 8.1 9.1 8.9 9.1 2.9 2.8 2.7 2.6 Hong Kong -2.8 6.6 4.1 8.7 5.7 3.0 3.5 4.2 4.3 4.7 2.6 2.5 2.2 2.4 India 7.4 8.3 8.5 9.2 8.5 8.0 8.9 8.0 8.5 8.6 13.7 11.0 10.1 10.2 Indonesia 4.5 6.0 5.4 3.0 7.5 4.5 5.0 5.3 5.2 5.0 4.4 6.1 ↓ 5.6 ↓ 4.8 Korea 0.2 6.1 4.0 8.8 5.8 2.5 3.8 4.0 4.0 4.5 2.6 2.9 3.4 3.4 Malaysia -1.2 7.2 4.6 4.8 7.2 3.0 3.5 4.9 4.9 4.5 1.6 1.1 1.4 ↑ 2.4 Philippines 0.9 ↓ 7.0 3.9 11.9 7.7 0.8 1.6 4.9 4.9 4.9 4.2 2.7 ↑ 1.9 ↑ 2.7 ↓ Singapore -1.3 14.8 4.2 45.7 24.0 -11.5 -2.0 8.7 6.6 7.4 3.1 3.5 ↑ 1.8 ↑ 1.6 Taiwan -1.9 9.9 4.1 10.9 7.2 1.5 2.3 4.2 4.6 5.5 1.1 2.0 1.8 1.7 Thailand -2.2 8.5 4.0 ↓ 13.9 0.6 2.8 2.8 4.9 ↓ 4.9 ↓ 4.9 ↑ 3.2 2.0 ↑ 2.5 ↑ 1.8 Africa/Middle East Israel 0.8 3.5 4.5 3.8 4.6 3.0 3.0 4.0 5.0 5.5 2.8 2.6 3.0 2.8 South Africa -1.8 2.9 3.1 4.6 3.2 3.1 3.2 3.1 3.1 3.4 4.5 4.5 4.7 5.9 Europe Euro area -4.0 1.7 1.5 1.4 ↑ 3.9 2.0 1.0 1.0 1.0 1.8 1.5 1.7 1.1 1.0 Germany -4.7 3.3 2.4 1.9 9.0 3.0 2.0 2.0 1.5 2.0 1.0 1.2 0.6 0.7 France -2.5 1.6 1.5 0.7 2.8 2.0 1.5 1.0 1.0 1.5 1.8 1.3 0.7 1.1 Italy -5.1 1.2 1.3 1.7 1.8 2.0 1.0 1.0 1.0 1.5 1.6 1.7 1.4 1.5 Norway -1.2 1.5 2.3 0.7 1.9 3.0 2.5 2.0 2.0 2.5 2.6 2.1 1.3 1.3 Sweden -5.1 4.5 3.1 6.0 8.0 4.5 3.0 2.3 2.3 2.8 1.0 1.5 1.6 1.8 Switzerland -1.9 2.9 2.0 4.2 3.5 2.5 2.0 1.5 1.5 2.3 1.0 0.4 0.1 0.7 United Kingdom -4.9 1.7 2.2 1.3 4.9 2.5 1.5 1.0 2.5 3.0 3.5 2.6 1.9 2.1 Emerging Europe -5.3 4.1 ↑ 4.1 ↓ 2.7 3.8 2.4 3.8 3.9 4.2 4.6 5.7 6.4 6.5 5.6 Bulgaria -5.0 -0.5 4.0 … … … … … … … … … … … Czech Republic -4.1 2.0 3.2 1.5 3.8 2.5 2.3 2.5 3.0 5.0 1.2 2.8 2.7 2.6 Hungary -6.3 1.0 2.8 2.4 0.0 2.0 2.0 2.0 3.0 3.5 5.4 4.4 3.4 3.6 Poland 1.7 3.5 3.8 2.8 4.5 3.5 3.5 3.0 3.5 4.0 2.3 2.6 2.7 2.9 Romania -7.1 -2.0 1.5 … … … … … … … 4.4 8.0 7.2 4.0 Russia -7.9 4.3 4.7 3.3 4.3 2.5 5.0 5.0 5.0 5.0 5.9 7.6 8.4 7.1 Turkey -4.7 7.1 ↑ 4.3 ↓ … … … … … … … 9.2 7.5 7.0 6.2 Global -2.2 3.6 2.9 4.2 3.9 2.5 2.2 2.8 3.1 3.4 ↑ 2.5 2.3 2.3 ↑ 2.1 Developed markets -3.5 2.3 1.9 3.0 2.8 2.0 1.2 1.6 1.9 2.4 1.5 1.2 1.1 1.0 Emerging markets 1.3 6.9 5.6 ↓ 7.7 7.1 3.8 5.0 6.0 6.4 5.9 5.2 5.3 5.2 5.1 Memo: Global — PPP weighted -0.8 4.6 ↑ 3.8 5.3 ↑ 4.7 3.1 3.1 3.8 4.0 4.2 3.2 3.0 3.0 2.8 ↓ Source: J.P. Morgan 36
  • 37. Global FX Strategy FX Markets Weekly October 18, 2010 David Hensley (1-212) 834-5516 david.hensley@jpmorgan.com JPMorgan Chase Bank NA Global central bank forecasts Change from Forecast Official interest rate Current Aug '07 (bp) Last change Next meeting next change Dec 10 Mar 11 Jun 11 Sep 11 Dec 11 Global GDP-weighted average 1.76 -319 1.81 1.86 1.93 1.97 2.04 excluding US GDP-weighted average 2.39 -241 2.45 2.53 2.63 2.68 2.78 Developed GDP-weighted average 0.60 -358 0.62 0.63 0.65 0.68 0.72 Emerging GDP-weighted average 5.00 -210 5.14 5.28 5.51 5.59 5.75 Latin America GDP-weighted average 7.22 -218 7.29 7.79 8.38 8.42 8.42 CEEMEA GDP-weighted average 4.08 -294 4.10 4.11 4.17 4.36 4.85 EM Asia GDP-weighted average 4.55 -170 4.76 4.83 4.99 5.04 5.12 The Americas GDP-weighted average 1.28 -453 1.29 1.38 1.49 1.52 1.56 United States Federal funds rate 0.125 -512.5 16 Dec 08 (-87.5bp) 3 Nov 10 On hold 0.125 0.125 0.125 0.125 0.125 Canada Overnight funding rate 1.00 -325 8 Sep 10 (+25bp) 19 Oct 10 1 Mar 11 (+25bp) 1.00 1.25 1.50 1.75 2.25 Brazil SELIC overnight rate 10.75 -125 21 Jul 10 (+50bp) 20 Oct 10 Jan 11 (+25bp) 10.75 11.50 12.50 12.50 12.50 Mexico Repo rate 4.50 -270 17 Jul 09 (-25bp) 15 Oct 10 On hold 4.50 4.50 4.50 4.50 4.50 Chile Discount rate 2.50 -250 16 Sep 10 (+50bp) 14 Oct 10 14 Oct 10 (+25bp) 3.25 4.00 4.50 4.50 4.50 Colombia Repo rate 3.00 -600 30 Apr 10 (-50bp) 29 Oct 10 1Q 11 (+50bp) 3.00 4.00 5.00 5.50 5.50 Peru Reference rate 3.00 -150 9 Sep 10 (+50bp) 11 Nov 10 7 Oct 10 (+25bp) 3.50 4.25 4.50 4.50 4.50 Europe/Africa GDP-weighted average 1.44 -322 1.45 1.46 1.47 1.52 1.63 Euro area Refi rate 1.00 -300 7 May 09 (-25bp) 4 Nov 10 On hold 1.00 1.00 1.00 1.00 1.00 United Kingdom Repo rate 0.50 -500 5 Mar 09 (-50bp) 4 Nov 10 On hold 0.50 0.50 0.50 0.50 0.50 Sweden Repo rate 0.75 -275 2 Sep 10 (+25bp) 26 Oct 10 26 Oct 10 (+25bp) 1.25 1.25 1.25 1.50 2.00 Norway Deposit rate 2.00 -250 5 May 10 (+25bp) 27 Oct 10 3Q 11 (+25bp) 2.00 2.00 2.00 2.25 2.75 Switzerland 3-month Swiss Libor 0.25 -225 12 Mar 09 (-25bp) 4Q 10 Jun 11 (+25bp) 0.25 0.25 0.50 0.75 1.00 Czech Republic 2-week repo rate 0.75 -200 6 May 10 (-25bp) 4 Nov 10 2Q 11 (+25bp) 0.75 0.75 1.00 1.25 1.75 Hungary 2-week deposit rate 5.25 -250 26 Apr 10 (-25bp) 25 Oct 10 3Q 11 (+25bp) 5.25 5.25 5.25 5.50 5.75 Israel Base rate 2.00 -200 27 Sep 10 (+25bp) 25 Oct 10 22 Nov 10 (+25bp) 2.25 2.50 2.75 3.25 3.50 Poland 7-day intervention rate 3.50 -100 24 Jun 09 (-25bp) Oct 10 2Q 11 (+25bp) 3.50 3.50 3.75 4.00 4.25 Romania Base rate 6.25 -75 4 May 10 (-25bp) 2 Nov 10 3Q 11 (+25bp) 6.25 6.25 6.25 6.50 6.75 Russia 1-week deposit rate 2.75 -25 31 May 10 (-50bp) Oct 10 3Q 11 (+25bp) 2.75 2.75 2.75 3.00 3.50 South Africa Repo rate 6.00 -350 9 Sep 10 (-50bp) 18 Nov 10 On hold 6.00 6.00 6.00 6.00 6.00 Turkey 1-week repo rate 7.00 -1050 - 14 Oct 10 4Q 11 (+50bp) 7.00 7.00 7.00 7.00 8.00 Asia/Pacific GDP-weighted average 2.90 -129 3.04 3.10 3.20 3.25 3.31 Australia Cash rate 4.50 -175 4 May 10 (+25bp) 1 Nov 10 1 Nov 10 (+25bp) 4.75 5.00 5.25 5.50 5.75 New Zealand Cash rate 3.00 -500 29 Jul 10 (+25bp) 27 Oct 10 10 Mar 11 (+25bp) 3.00 3.25 3.50 3.75 4.00 Japan Overnight call rate 0.05 -48 5 Oct 10 (-5bp) 28 Oct 10 On hold 0.05 0.05 0.05 0.05 0.05 Hong Kong Discount window base 0.50 -625 17 Dec 08 (-100bp) 4 Nov 10 On hold 0.50 0.50 0.50 0.50 0.50 China 1-year working capital 5.31 -126 22 Dec 08 (-27bp) 4Q 10 4Q 10 (+27bp) 5.58 5.58 5.85 5.85 5.85 Korea Base rate 2.25 -225 9 Jul 10 (+25bp) 14 Oct 10 4Q 10 (+25bp) 2.50 2.75 2.75 2.75 3.00 Indonesia BI rate 6.50 -200 5 Aug 09 (-25bp) 4 Nov 10 2Q 11 (+25bp) 6.50 6.50 6.75 6.75 6.75 India Repo rate 6.00 -175 16 Sep 10 (+25bp) 2 Nov 10 2 Nov 10 (+25bp) 6.25 6.50 6.50 6.75 7.00 Malaysia Overnight policy rate 2.75 -75 8 Jul 10 (+25bp) 12 Nov 10 On hold 2.75 2.75 2.75 2.75 2.75 Philippines Reverse repo rate 4.00 -350 9 Jul 09 (-25bp) 18 Nov 10 2Q 11 (+25bp) 4.00 4.00 4.25 4.50 4.50 Thailand 1-day repo rate 1.75 -150 26 Aug 10 (+25bp) 20 Oct 10 20 Oct 10 (+25bp) 2.00 2.00 2.00 2.00 2.00 Taiwan Official discount rate 1.50 -163 30 Sep 10 (+12.5bp) 23 Dec 10 3Q 11 (+12.5bp) 1.50 1.50 1.50 1.625 1.75 Bold denotes move since last GDW and forecast changes. Underline denotes policy meeting during upcoming week. Source: J.P. Morgan 37
  • 38. Global FX Strategy FX Markets Weekly October 18, 2010 Yoonyi Kim (81-3) 6736-7729 yoonyi.x.kim@jpmorgan.com JPMorgan Chase Bank NA Sovereign credit ratings and actions Rating View Rating View Rating View Action Date Action Date Action Date United States AAA Aaa AAA Affirmed, O/L stable 10-Jan-08 Affirmed, O/L stable 15-Nov-03 Affirmed, O/L stable 9-May-08 Canada AAA Aaa AAA Affirmed, O/L stable 18-May-07 Affirmed, O/L stable 24-May-06 Affirmed, O/L stable 22-May-07 Germany AAA Aaa AAA Affirmed, O/L stable 14-Jun-07 Affirmed, O/L stable 24-May-06 Affirmed, O/L stable 6-Nov-07 France AAA Aaa AAA Affirmed, O/L stable 28-Feb-06 Affirmed, O/L stable 24-May-06 Affirmed, O/L stable 30-Mar-10 Austria AAA Aaa AAA Affirmed, O/L stable 12-Feb-07 Affirmed, O/L stable 24-May-06 Affirmed, O/L stable 15-Feb-08 Netherlands AAA Aaa AAA Affirmed, O/L stable 24-Jan-06 Affirmed, O/L stable 15-Nov-03 Affirmed, O/L stable 26-Oct-07 Sweden AAA Aaa AAA Affirmed, O/L stable 22-Jan-07 Affirmed, O/L stable 15-Nov-03 Affirmed, O/L stable 18-Dec-07 Norway AAA Aaa AAA Affirmed, O/L stable 28-May-09 Affirmed, O/L stable 15-Nov-03 Affirmed, O/L stable 18-Dec-07 Switzerland AAA Aaa AAA Affirmed, O/L stable 1-Dec-03 Affirmed, O/L stable 15-Nov-03 Affirmed, O/L stable 11-Jun-07 Australia AAA Aaa AAA Affirmed, O/L stable 6-Sep-10 Affirmed, O/L stable 24-May-06 Affirmed, O/L stable 22-May-08 Singapore AAA Aaa AAA Affirmed, O/L stable 1-May-08 Upgrade, O/L stable 14-Jun-02 Affirmed, O/L stable 18-Aug-10 New Zealand AAA Aaa AAA (-) Affirmed, O/L stable 28-May-09 Upgrade, O/L stable 21-Oct-02 O/L changed to (-) ↓ 15-Jul-09 United Kingdom AAA (-) Aaa AAA Affirmed, O/L (-) 29-Mar-10 Affirmed, O/L stable 15-Nov-03 Affirmed, O/L stable 18-Jan-05 Belgium AA+ Aa1 AA+ Affirmed, O/L stable 21-May-07 O/L changed to stable ↓ 13-Jan-09 Affirmed, O/L stable 25-May-07 Spain AA (-) Aa1 AA+ Downgrade, O/L (-) 29-Apr-10 Downgrade, O/L changed to stable ↑ 30-Sep-10 Downgrade, O/L stable 28-May-10 Japan AA (-) Aa2 AA- O/L changed to (-) ↓ 26-Jan-10 upgrade, O/L stable 18-May-09 Affirmed, O/L stable 3-Sep-09 Ireland AA- (-) Aa2 A+ (-) Downgrade, O/L (-) 24-Aug-10 Downgrade, O/L stable 19-Jul-10 Downgrade, O/L (-) ↓ 6-Oct-10 Italy A+ Aa2 AA- Affirmed, O/L stable 23-Oct-07 Affirmed, O/L stable 19-Oct-06 Affirmed, O/L stable 6-Dec-07 China A+ A1 (+)* A+ Upgrade, O/L stable 31-Jul-08 On review positive 8-Oct-10 Upgrade, O/L stable 6-Nov-07 Czech Republic A A1 A+ (+) Affirmed, O/L stable 27-Nov-08 O/L changed to stable ↓ 8-Dec-08 O/L changed to (+) ↑ 4-Jun-10 Korea A A1 A+ Affirmed, O/L stable 12-Jan-10 Upgrade, O/L stable 14-Apr-10 O/L changed to stable ↑ 2-Sep-09 Portugal A- (-) A1 AA- (-) Downgrade, O/L (-) 27-Apr-10 Downgrade, O/L changed to stable ↑ 13-Jul-10 Downgrade, O/L (-) 24-Mar-10 Poland A- A2 A- O/L changed to stable ↓ 27-Oct-08 Affirmed, O/L stable 24-May-06 Affirmed, O/L stable 10-Nov-08 South Africa BBB+ (-) A3 BBB+ (-) O/L changed to (-) ↓ 11-Nov-08 Upgrade, O/L changed to stable ↓ 16-Jul-09 O/L changed to (-) ↓ 9-Nov-08 Russia BBB Baa1 BBB (+) O/L changed to stable ↑ 21-Dec-09 O/L changed to stable ↓ 12-Dec-08 O/L changed to (+) ↑ 8-Sep-10 Mexico BBB Baa1 BBB Downgrade, O/L changed to stable ↑ 14-Dec-09 Affirmed, O/L stable 24-May-06 Downgrade, O/L changed to stable ↑ 23-Nov-09 Hungary BBB- Baa1 (-)* BBB (-) O/L changed to stable ↑ 2-Oct-09 On review negative 23-Jul-10 O/L changed to (-) ↓ 2-Mar-09 Brazil BBB- Baa3 (+) BBB- (+) Upgrade, O/L stable 30-Apr-08 Upgrade, O/L (+) 22-Sep-09 O/L changed to (+) ↑ 28-Jun-10 India BBB- Baa3 BBB- O/L changed to stable ↑ 18-Mar-10 Upgrade, O/L changed to stable ↓ 22-Jan-04 Affirmed, O/L stable 9-Feb-09 Iceland BBB- (-) Baa3 (-) BB+ (-) O/L changed to stable ↑ 23-Apr-10 O/L changed to (-) ↓ 6-Apr-10 Downgrade, O/L changed to (-) ↓ 5-Jan-10 Greece BB+ (-) Ba1 (-) BBB- (-) Downgrade, O/L (-) 27-Apr-10 Downgrade, O/L (-) 14-Jun-10 Downgrade, O/L (-) 9-Apr-10 Latvia BB Baa3 BB+ (-) O/L changed to stable ↑ 12-Feb-10 O/L changed to stable ↑ 31-Mar-10 Affirmed, O/L negative 6-Oct-09 Turkey BB (+) Ba2 (+) BB+ Upgrade, O/L changed to (+) ↑ 19-Feb-10 O/L changed to (+) ↑ 5-Oct-10 Upgrade, O/L changed to stable ↓ 3-Dec-09 Ukraine B+ B2 (-) B Upgrade, O/L stable 29-Jul-10 Downgrade, O/L changed to (-) ↓ 12-May-09 Upgrade, O/L stable 6-Jul-10 Argentina B B3 B Affirmed, O/L stable 13-Sep-10 O/L changed to stable ↓ 14-Aug-08 Upgrade, O/L stable 12-Jul-10 Source: Ratings agencies Note that ratings refer to foreign currency denominated long term debt for EM countries and domestic currency denominated long term debt for others; * indicates ratings on review/credit watch/rating watch (+/-) S&P ratings vs fiscal balance as % of GDP in 2010 S&P ratings vs gross government debt as % of GDP in 2010 C C CCC+ CCC+ AR BB- AR GR TU BB- TU IC IN HU GR RU BZ MX BBB IN BZ HU IC SA BBB RU MX PO PD SA SK PD PO SK IT CH A+ A+ CH IT IR IR SP JP SP JP AAA NO AAA US UK US FR GE CA AUNZ SW SZ AU NZ SZNO SW GE UKCA FR -14% -9% -4% 1% 6% 0% 40% 80% 120% 160% 200% Source: J.P.Morgan, OECD, S&P Source: J.P.Morgan, OECD, S&P *JPM forecast for 2010 used for EM and OECD forecast used for DM *JPM forecast for 2010 used for EM and OECD forecast used for DM 38
  • 39. Global FX Strategy FX Markets Weekly October 18, 2010 John Normand (44-20) 7325-5222 john.normand@jpmorgan.com J.P. Morgan Securities Ltd Government bond and bank redemptions Euro area €bn Germany France Italy Spain Belgium Greece Portugal Ireland Core Periphery Govt Banks Govt Banks Govt Banks Govt Banks Govt Banks Govt Banks Govt Banks Govt Banks Govt Banks Govt Banks Sep-10 26 6 29 7 55 2 7 9 24 0 1.0 1.1 3.7 0.6 0.0 8.1 54 13 67 21 Oct-10 29 14 42 8 17 3 9 2 2 2 5.3 0.5 1.3 0.0 1.0 1.6 71 22 34 7 Nov-10 4 4 8 5 40 3 8 4 2 3 0.1 0.1 3.1 0.7 0.2 0.7 12 8 50 9 Dec-10 15 8 9 2 29 5 8 4 3 1 0.1 0.5 0.0 0.0 0.0 0.7 24 9 36 10 Jan-11 43 18 35 4 8 1 10 6 2 6 3.4 0.0 2.9 2.1 1.8 1.0 78 23 26 10 Feb-11 4 13 9 5 36 8 4 7 2 3 0.1 0.7 2.3 2.3 0.0 1.7 14 17 43 19 Mar-11 19 17 8 4 40 5 5 16 19 4 10.8 1.5 2.8 0.9 1.7 0.2 28 21 60 23 Apr-11 26 13 99 10 9 8 6 16 2 4 1.3 1.5 5.4 0.7 1.3 0.0 125 23 23 26 May-11 0 17 0 6 23 2 21 5 0 0 8.6 1.9 0.0 1.0 0.0 0.6 0 23 53 11 Jun-11 15 9 0 7 19 4 4 10 0 5 0.4 1.3 6.8 1.0 0.3 0.5 15 15 30 17 Jul-11 36 8 42 9 0 3 10 6 0 1 2.8 1.0 0.0 0.8 0.0 0.3 78 17 13 12 Aug-11 0 6 0 4 30 1 19 1 0 1 8.4 0.0 0.0 0.2 0.0 0.5 0 10 58 3 Sep-11 16 11 19 3 51 5 0 5 16 3 0.8 0.9 0.4 0.6 0.0 3.2 35 14 53 15 Oct-11 19 5 28 2 1 3 21 4 0 6 1.1 1.6 1.3 0.3 1.1 0.1 47 7 26 9 Nov-11 0 5 0 2 19 7 0 3 0 1 0.1 2.3 0.0 0.0 4.6 0.9 0 7 23 13 Dec-11 18 3 0 10 1 2 3 6 1 0 5.8 0.1 0.0 1.4 0.0 0.0 19 13 10 10 * Government redemptions cover bonds and bills Other countries Bn of local currency* UK US Japan Canada Australia NZ Norway Sweden Swiss Hungary Govt Banks Govt Banks Sep-10 14.8 9.7 227 99 14.3 25.9 0.6 1.4 12.0 27.5 0.0 220 Oct-10 9.5 6.3 164 90 5.9 12.9 0.9 1.3 0.0 3.5 0.3 778 Nov-10 7.4 6.3 107 68 2.6 5.7 1.6 8.5 0.0 0.0 0.0 55 Dec-10 6.4 4.8 87 90 9.9 23.5 0.7 0.2 12.0 9.8 0.0 177 Jan-11 1.6 3.5 102 78 2.5 0.0 0.0 0.0 0.0 0.0 0.8 165 Feb-11 0.9 7.2 142 80 2.5 0.0 0.4 0.0 0.0 0.0 0.5 432 Mar-11 32.5 8.4 92 89 12.3 1.0 0.3 0.0 0.0 59.5 0.2 0 Apr-11 0.2 8.5 112 80 2.5 0.0 0.9 0.8 0.0 0.3 0.3 617 May-11 0.5 10.9 84 118 0.0 0.0 1.0 0.0 10.8 5.1 0.2 0 Jun-11 6.4 6.8 64 98 9.3 27.3 11.2 0.0 0.0 0.0 1.0 248 Jul-11 8.9 2.1 69 89 0.0 0.0 0.1 0.0 0.0 1.2 0.1 0 Aug-11 0.9 6.9 119 88 0.0 0.0 0.4 0.0 0.0 4.2 0.0 0 Sep-11 8.3 8.2 67 117 9.4 19.3 0.3 0.0 0.0 0.0 0.0 1 Oct-11 0.2 11.3 67 55 0.0 0.0 0.9 0.0 0.0 3.5 0.0 463 Nov-11 0.5 28.8 117 71 0.0 0.0 1.0 0.0 0.0 0.0 0.0 53 Dec-11 22.2 16.4 95 112 9.6 15.3 0.4 0.0 0.0 9.8 0.0 2 * Except for Japan which is expressed in Trillions. Government redemptions cover bonds and bills Chart 1: Euro area: core vs. periphery govt. and bank redemptions Chart 2: Spain, Portugal and Hungarian govt. redemptions €bn € Bn 120 Core Periphery 25 100 Portugal Spain Hungary 20 80 15 60 40 10 20 5 0 0 Sep 10 Oct 10 Nov 10 Dec 10 Jan 11 Feb 11 Sep 10 Dec 10 Mar 11 Jun 11 Sep 11 Dec 11 Core - Gov t Core - Bank Periph. Gov t Periph. Bank Source: J.P. Morgan Source: J.P. Morgan 39
  • 40. Global FX Strategy FX Markets Weekly October 18, 2010 John Normand (44-20) 7325-5222 john.normand@jpmorgan.com J.P. Morgan Securities Ltd Prior Research Notes available on www.morganmarkets.com Precious metals: an immensely supportive backdrop, Managing FX hedge ratios: A framework for strategic and Jansen, Oct 8, 2010 tactical decisions, Normand, De Kock, Franklin-Lyons & Sandilya, May 26, 2010 G-3 corporate hedging survey: year-ahead hedge ratios reach record high, Kim & Normand, Oct 1, 2010 Reflections on negative interest rates in Switzerland, Meggyesi, May 14, 2010 Valuation update – NOK & JPY move to further extremes, Gabriel de Kock, Sep 24, 2010 The Nikkei’s impact on Japanese investment in foreign securities, Tanase, Apr 30, 2010 “Quasi” unsterilized intervention by MoF/BoJ Junya Tanase, Sep 24, 2010 Would the ECB ever intervene in EUR/USD?, Normand, Apr 30, 2010 Market impact of the DPJ leadership election, Tanase, Kim, Yamawaki, Kuroda, Sept 10, 2010 Picking winners among the G-10 high-beta currencies, de Kock, Apr 9, 2010 Fall in USD/JPY can be positive for Japanese firms, Sasaki, Aug 20, 2010 Corporate hedging recommendation: Hedging against a EUR/JPY rally, Sharma, Mar 26, 2010 The weight of Washington - quantifying the impact of politics on the economy and the dollar, China revaluation wouldn't mean much for G-10, de Kock, Aug 13, 2010 Normand, Mar 19, 2010 No compelling reason for Japanese lifers to change their Corporate Hedging Survey: More hedging, less hiring, FX-hedging strategy in the near future Franklin-Lyons, de Kock, Sharma, Mar 19, 2010 Tanase & Kim, Aug 6, 2010 G10 fair value update: EUR and USD fair, Scandies and The knowns, unknowns and unknowables about reserve Swissie cheap, de Kock, Mar 19, 2010 diversification, de Kock, Jul 9, 2010 BoJ’s monetary policy has little impact on USD/JPY, Euro depreciation widely spread but narrowly felt Sasaki, Tanase, Kim, Mar 12 2010 Hensley & Lupton, Jul 9, 2010 Corporate hedging recommendation: participating in GBP The impact of Japan’s Upper House elections downside, Franklin-Lyons, Feb 26, 2010 Tanase & Kim, Jul 9, 2010 The real impact of JPY/KRW, How far can the yen appreciate from here? Tanase and Kim, Feb 26, 2010 Sasaki, Tanase & Kim, Jul 2, 2010 Exiting EMU: The legal, the likely, and the ludicrous G-10 fair value update: EUR & USD fair, Scandies & GBP Normand, Feb 19, 2010 still cheap, de Kock, Jun 25, 2010 Public debt is a minor concern for JPY, Corporate Hedging Survey: Corporates expect EUR to Sasaki, Tanase & Kim, Feb 12, 2010 remain under pressure but not collapse, How do expectations of a CNY revaluation affect JPY? de Kock, Kim, Sharma & Tanase, Jun 25, 2010 Tanase & Kim, Feb 5, 2010 CHF and the SNB’s ballooning balance sheet Cross-currency basis likely to normalize further Meggyesi, Jun 25, 2010 Franklin-Lyons, Jan 29, 2010 UK: Previewing the emergency budget, Japanese FX special account now at record-low net worth Barr & Monks, Jun 18, 2010 Sasaki, Tanase & Kim, Jan 29, 2010 UK: Previewing the coming fiscal drama, Examining the link between foreign demand for Japanese Barr, Jun 11, 2010 stocks and USD/JPY, Tanase & Kim, Jan 22, 2010 How lite is the ECB’s QE-lite?, Meggyesi, Jun 4, 2010 G-10 fair value update: NOK and CAD still cheap Naoto Kan as Prime Minister does not imply a weaker yen, De Kock, Jan 8, 2010 Sasaki and Tanase, Jun 4, 2010 Corporate Hedging Survey: increasing cross-country divergences in hedging behavior, Franklin-Lyons, Sharma & Tanase, Dec 18, 2009 40
  • 41. Global FX Strategy FX Markets Weekly October 18, 2010 John Normand (44-20) 7325-5222 john.normand@jpmorgan.com J.P. Morgan Securities Ltd 41
  • 42. Global FX Strategy FX Markets Weekly October 18, 2010 John Normand (44-20) 7325-5222 john.normand@jpmorgan.com J.P. Morgan Securities Ltd Analyst Certification: The research analyst(s) denoted by an “AC” on the cover of this report certifies (or, where multiple research analysts are primarily responsible for this report, the research analyst denoted by an “AC” on the cover or within the document individually certifies, with respect to each security or issuer that the research analyst covers in this research) that: (1) all of the views expressed in this report accurately reflect his or her personal views about any and all of the subject securities or issuers; and (2) no part of any of the research analyst’s compensation was, is, or will be directly or indirectly related to the specific recommendations or views expressed by the research analyst(s) in this report. Disclosures: J.P. Morgan ("JPM") is the global brand name for J.P. 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  • 43. Global FX Strategy FX Markets Weekly October 18, 2010 John Normand (44-20) 7325-5222 john.normand@jpmorgan.com J.P. Morgan Securities Ltd Commission. (For research published within the first ten days of the month, the disclosure may be based on the month end data from two months’ prior.) J.P. Morgan Broking (Hong Kong) Limited is the liquidity provider for derivative warrants issued by J.P. Morgan Structured Products B.V. and listed on the Stock Exchange of Hong Kong Limited. An updated list can be found on HKEx website: http://www.hkex.com.hk/prod/dw/Lp.htm. Japan: There is a risk that a loss may occur due to a change in the price of the shares in the case of share trading, and that a loss may occur due to the exchange rate in the case of foreign share trading. 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  • 44. Global FX Strategy FX Markets Weekly October 18, 2010 John Normand (44-20) 7325-5222 john.normand@jpmorgan.com J.P. Morgan Securities Ltd J.P. Morgan Global FX Strategy London John Normand MD Head, Global FX Strategy (44-20) 7325-5222 john.normand@jpmorgan.com Paul Meggyesi MD FX Strategy (44-20) 7859-6714 paul.meggyesi@jpmorgan.com Thomas Anthonj ED Technical Strategy (44-20) 7742-7850 thomas.e.anthonj@jpmorgan.com Matthias Bouquet VP Derivatives Strategy (44-20) 7777-5276 matthias.bouquet@jpmorgan.com Sunil Kavuri Associate FX Strategy (44-20) 7777-1729 sunil.d.kavuri@jpmorgan.com New York Ken Landon MD FX Strategy (1-212) 834-2391 kenneth.landon@jpmorgan.com Niall O’Connor ED Technical Strategy (1-212) 834-5108 niall.oconnor@jpmorgan.com Arindam Sandilya ED Derivatives Strategy (1-212) 834-2304 arindam.x.sandilya@jpmorgan.com Justin Kariya Analyst FX Strategy (1-212)-834-9618 justin.p.kariya@jpmorgan.com Tokyo Tohru Sasaki MD FX Strategy (81-3) 6736-7717 tohru.sasaki@jpmorgan.com Junya Tanase ED FX Strategy (81-3) 6736-7718 junya.tanase@jpmorgan.com Yoonyi Kim Analyst FX Strategy (81-3) 67367729 yoonyi.x.kim@jpmorgan.com 44

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