seb sees the dollar remaining weak

You can also find our research materials at our website: www.mb.seb.se. This report is produced by Skandinaviska Enskilda Banken AB (publ) for institutional investors only. Information and

opinions contained within this document are given in good faith and are based on sources believed to be reliable, we do not represent that they are accurate or complete. No liability is

accepted for any direct or consequential loss resulting from reliance on this document. Changes may be made to opinions or information contained herein without notice.

The dollar duality TUESDAY

10 MAY 2011

EDITOR

Carl Hammer

+ 46 8 506 231 28

We still expect good support for risk appetite overall. Despite some weaker leading indicators reacting to high commodity prices and uncertainties following the crises in Japan, we still believe global growth will remain close to trend driven by Asia/Emerging markets. There is now more evidence to suggest Asia together with other developing countries will continue to tighten monetary policy as inflation moves even higher. Asian FX appreciation will clearly be a key weapon in fighting inflation – we expect China to allow the Renminbi to appreciate faster than consensus. The end of QE2 also creates uncertainty; we do not believe US interest rates will rise substantially as this is already discounted in US Treasury prices. US monetary tightening will begin by stopping reinvesting maturing principals on the Fed's mortgage portfolio, probably in H2 2011. We still expect the first Fed rate hike in Jan 2012. With the FX-market closely linked to changes in interest rate differentials the USD has come under pressure with the Fed remaining on hold for an extended period. While it is therefore likely that the broad trade-weighted dollar will continue to weaken, the USD is now closer to finding traction vs. other G10 currencies as the Fed prepares to cautiously tighten monetary policy. We expect the EUR/USD moving back up towards 1.50 during summer, which however will prove a more lasting top. The euro will be increasingly vulnerable to bad news and markets are fully discounting ECB rate hikes. We expect a stronger USD H2 2011 which will also facilitate some SEK strength vs. the euro again.

BASKET TRADE: BUY TOP 3 VS BOTTOM 3. We recommend to buy the top 3 currencies (AUD, RUB, TRY) vs the bottom 3. Still, procyclical currencies are found at the top against the JPY, GBP and USD. Once tighter monetary policy is required in the US we would expect a set-back to this trade; however that’s expected to happen early 2012.

BUY EUR AND USD VS JPY. We continue to expect JPY to be the weakest G3 currency based on most rating categories as both monetary policy and fundamentals hardly support the Japanese currency.

BUY SEAGULL IN EUR/SEK. The skew in vol makes a seagull structure for the downside attractive: Buy a 6 months EUR/SEK seagull 9.00 put (1x) vs. sold 9.35 call (1.5x) and sold 8.65 put (1x) is nearly zero cost.

BUY EM-ASIAN BASKET long MYR, KRW, CNH vs. short JPY, GBP, USD. This theme revolves around the need for further Asian FX appreciation vs. majors. Fundamentals, interest rate expectations, flows and now also the desire by Asian policymakers to tolerate a somewhat faster appreciation to stem imported inflation.

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AUD

RUB

PLN

TRY

EUR

CAD

NZD

SEK

NOK

DKK

HUF

CNY

CHF

USD

GBP

JPY

Currency outlook (end Q2)

Currency Strategy

Forecasts

FX forecasts

08-maj Q2 11 Q3 11 Q2 11 Q3 11 Forecasts 2EUR/USD 1.4316 1.48 1.45 1.44 1.41 The big picture 3EUR/JPY 115.43 121 122 121 120 USD 6EUR/GBP 0.8747 0.91 0.90 0.88 0.86 EUR 8EUR/CHF 1.2582 1.28 1.28 1.31 1.32 JPY 10EUR/CAD 1.3838 1.39 1.36 1.38 1.35 GBP 12EUR/AUD 1.3379 1.33 1.36 1.38 1.37 CAD 14EUR/NZD 1.8105 1.82 1.86 1.89 1.88 AUD 16EUR/SEK 9.0335 9.00 8.85 8.75 8.70 NZD 18EUR/NOK 7.9204 7.95 7.85 7.73 7.68 CHF 20EUR/DKK 7.4573 7.45 7.45 7.45 7.45 SEK 22EUR/RUB 39.67 39.5 38.7 39.5 39.9 NOK 24EUR/PLN 3.9446 3.92 3.82 3.93 3.86 DKK 26EUR/HUF 264.58 265 265 269 268 RUB 28Cross rates PLN 30USD/JPY 80.63 82 84 84 86 HUF 32GBP/USD 1.64 1.62 1.62 1.63 1.63 TRY 34USD/CAD 0.9666 0.94 0.94 0.96 0.96 CNY 36USD/CHF 0.8789 0.87 0.88 0.91 0.94 Summary ranking 38AUD/USD 1.0700 1.11 1.07 1.04 1.03 Seasonal patterns 39NZD/USD 0.7907 0.81 0.78 0.76 0.75 Guide to indicators 40USD/SEK 6.3101 6.08 6.10 6.08 6.17 SEBEER 41USD/NOK 5.5326 5.37 5.41 5.37 5.45 Fair-value models 42USD/RUB 27.71 26.7 26.7 27.7 27.8 Contacts 43USD/PLN 2.7554 2.65 2.63 2.73 2.74USD/HUF 184.81 179 183 187 190USD/TRY 1.5445 1.49 1.48 1.54 1.51USD/CNY 6.4932 6.38 6.28 6.45 6.36* Bloomberg survey FX forecasts.

ContentsSEB Consensus*

SEB policy rate forecasts maj 08, 2011

RB NB FED ECB BOE BOJ BOC SNB RBA RBNZ

Current 1.50% 2.00% 0.0-0.25% 1.25% 0.50% 0.10% 1.00% 0.25% 4.75% 2.50%End-10 1.25% 2.00% 0.0-0.25% 1.00% 0.50% 0.10% 1.00% 0.25% 4.75% 3.00%jan-11 26 jan 26 jan 13 jan 13 jan 25 jan 18 jan 27 jan

Feb 15 Feb* 3 feb 10 feb 17 feb 1 febMar 16 Mar* 15 mar 3 mar 10 mar 15 mar 1 mar 17 mar 1 mar 10 Mar*Apr 20 apr 27 apr 7 apr 7 apr 7 & 28 Apr 12 apr 5 apr 28 aprMay 12 maj 5 maj 5 maj 20 maj 31 maj 3 majJun 22 Jun* 22 jun 9 jun 9 jun 14 jun 16 jun 7 jun 9 Jun*Jul 5 jul 7 jul 7 jul 19 jul 5 jul 28 julAug 10 aug 9 aug 4 aug 4 aug 2 augSep 7 sep 21 sep 20 sep 8 sep 8 sep 7 sep 15 sep 6 sep 15 Sep*Oct 27 okt 19 Oct* 6 okt 6 okt 25 okt 4 okt 27 oktNov 2 nov 3 nov 10 nov 1 novDec 20 dec 14 dec 13 dec 8 dec 8 dec 6 dec 15 dec 6 dec 8 Dec*

End-11 2.75% 2.75% 0.0-0.25% 2.00% 1.00% 0.10% 1.50% 0.25% 5.25% 2.75%

Inflation target 2.0% 2.5% ~1.8% ~1.8% 2.0% 0-2% 2.0% 2.0% 2-3% 1-3%

50bps hike 25bps hike 25bps cut 50bps cut >50bps cut Italics indicate past decisions * = Strategic policy meetings

2

Currency Strategy

The Big Picture

The FX market is usually characterized by either one or several key drivers. Previously we have argued that fundamentals (shown by growth in the following chart) were such a factor, with strong currencies attracting buyers as investors diversified out of those countries with large deficits and poor economic

prospects.

SEB FX investment styles 2011

-10%

-6%

-2%

2%

6%

10%

31/Dec 31/Jan 28/Feb 31/Mar 30/Apr

-10%

-6%

-2%

2%

6%

10%

Valuation

Growth

Rate change

Carry

In the last issue of this report we suggested that carry would emerge as a more important FX market theme. As volatilities decreased the risk adjusted carry return would increase. This would support currencies with high interest rates and weaken those with low such as the yen. Despite signs that yield differentials attract inflows the carry theme has not fully materialized as excessive currency moves following the Japanese quake pushed FX volatilities higher making carry

positioning less attractive.

Risk-adjusted carry vs JPY, 3m

0.00

0.10

0.20

0.30

0.40

0.50

0.60

0.70

0.80

AUD CAD EUR NZD NOK PLN KRW SEK USD GBP

2011-05-04 2011-03-02

IT’S THE RATE OF CHANGE, STUPID. Instead, the influence of monetary policy expectations captured by changes in rate differentials between currencies has been the FX market’s key driver. This has supported currencies with rising interest rates such as the EUR until fairly recently. It has also been the main reason for USD weakness with the Fed clearly signalling it will remain one of the few central banks to maintain a zero interest rate policy for the foreseeable

future.

Moreover, the importance of this theme was illustrated as the ECB proving more dovish than the market expected at its May meeting, causing a dramatic sell off in EUR/USD as European rates fell back. Central bank expectations will probably remain the key driver for FX markets going forward. However, as yield differentials between currencies continue to widen and as FX volatilities fall back further the carry theme

is likely to become increasingly important.

RISK APPETITE LIKELY TO STAY SUPPORTIVE. Risk appetite has remained firm despite falling back temporarily as the effects of the Japanese earthquake and the nuclear accident in March created short-term uncertainty. Going forward it appears as if risk appetite will remain supported with global growth likely to continue around trend. Nevertheless, we cannot fully preclude the possibility that risk appetite could be adversely affected by a more rapid tightening of monetary policy in high growth economies in response to surging inflation than is currently anticipated. There have already been several signs that financial markets are sensitive to news indicating possibly faster than expected rate hikes, although so far effects have been temporary. However with surging commodity prices feeding inflation EM central banks may be forced to tighten monetary policy more

3

Currency Strategy

rapidly going forward, which could set back global risk

appetite.

USD PRESSURE TO EASE AS ASIAN CURRENCIES

STRENGTHEN. USD depreciation has taken the narrow USD-index close to 2008 lows. This potentially limits potential for further USD weakness against such currencies although we expect a renewed test of recent lows over the coming months. The USD should regain ground going forward although the outlook is different when measured against EM currencies. Although the USD trades around previous lows, in real trade weighted terms, we see scope for further depreciation against such currencies. In nominal terms the broad USD index is far from historical lows as higher EM inflation has depressed nominal values of EM currencies vs. their G10 counterparts.

However, the fact that EM economies continue to generate significant Current account surpluses is a sign that their currencies are still some way off their long-term fair values. Therefore, G10 currencies including the USD will probably continue to depreciate against their EM counterparts.

Recently, rapid increases in energy and food prices have exerted upward pressure on global inflation, especially in high growth economies. Last year’s currency war has ceased with currency appreciation having become one possible means of stemming the effect of higher import prices, besides monetary policy tightening. Recently we have seen signs that ASEAN-3 may initiate a joint revaluation of their currencies and that China may not entirely reject the idea of letting its currency appreciate slightly faster than usual against the USD. However, this remains undiscounted in current exchange rates with trade deficit currencies having actually outperformed trade surplus currencies vs. the USD since the start of

the year.

Index

Index

Going forward tentative signs of currency appreciation in the EM world will probably become more entrenched in the valuation of their currencies, causing further appreciation against those of the world’s largest countries. That process would most likely ease downward pressure on the USD against other G10 currencies as rebalancing flows out of the USD should moderate.

OUR VIEW ON COMMODITIES. In early May warning lights were flashing in commodity markets. Record

long speculative positions together with high

commodity prices generally and several potential

sector threats made a correction inevitable. Fears of

Asian tightening, lacklustre US macroeconomic data,

and marked USD appreciation provided the excuse.

Commodities fell across the board as investors

offloaded broad indices in the general sell-off that

followed. However, we argue that the correction is

unlikely to have marked the end of the current cyclical

bull market in commodities. Instead, it created several

attractive buying opportunities. We expect crude oil to

recover to $120/b and beyond in Q2-11 as the loss of

Libyan sweet crude is felt to its fullest extent. In H2-11,

however, we expect them to fall back to an average of

$105/b as high prices dampen demand for awhile.

Furthermore, we still regard gold prices as well

supported by rising inflation, high geopolitical risk,

sovereign debt fears and diversification demand from

investors and central banks. We expect gold to trade

at $1550/ozt at year end with a potential peak above

$1700/ozt in 2011 if the bearish dollar trend continues.

Industrial metals appear well supported in the long

term but are sensitive short term to bouts of concern

over a possible Chinese hard-landing, which is likely to

provide additional buying opportunities.

FED PROBABLY KEY FOR A SHIFT IN FX MARKETS.

With central bank expectations the key FX market driver and cheap dollar liquidity still accessible we believe current FX market trends supporting

4

Currency Strategy

commodity related and EM currencies are likely to continue as long as the Fed maintains its zero interest rate policy. As it eventually begins to communicate changes in its current policy, which we expect in H2-11, it may well mark an end to current FX market

developments.

The shift in Fed expectations is likely to be reflected in relative yields beginning to support the USD against other G10 currencies currently benefiting from rising yields. As part of monetary policy tightening the Fed will stop reinvesting maturing principals on its bond holdings, bringing an end to cheap USD liquidity, which should ease pressure on commodity prices and capital inflows to EM countries. Consequently, current pressure on EM currencies to appreciate would diminish, further reducing the need for central bank interventions to prevent EM currencies from strengthening too far and

therefore reducing rebalancing flows out of the USD.

Such a shift in US monetary policy is likely to generate new market trends not only vs. the USD but probably also in more general terms. Ultimately this shift would start to push currencies toward their long-term fair values. Within the G10 we therefore expect this shift to finally slow or even reverse current appreciation trends in such commodity currencies as the AUD and CAD. Moreover the shift will probably mark the start of a more broad-based JPY depreciation with the Japanese central bank remaining the only central bank maintaining a zero interest rate

policy.

USD COLLAPSE UNLIKELY. Rapid growth in US government debt has increased concerns that the USD may continue to depreciate against G10 and EM currencies as one way to reduce the value of US debt, fully issued in local currency. However, as the global reserve currency we are led to ask who would actually benefit from a weak USD. We argue that a USD collapse is in fact in no one’s interest. With the US still an important market for final demand a weak USD is most certainly not in the interests of exporters, nor of

China as the largest holder of treasury bonds as sustained USD weakness would produce massive losses on its holdings. Is it in the interest of the US itself? Short-term a weak dollar would improve conditions for exporters and at the same time dampen imports, potentially improving the current account deficit. However, this would simultaneously generate increasing inflation, and more importantly, reduce foreign demand for US assets. Overall, this would probably drive US yields higher to compensate for the risk of currency depreciation. With the US economy highly dependent on interest rates staying low to support growth we would argue that a weak USD is actually not even in the interests of the US. There are therefore very few, if any, winners from long-term USD depreciation. Consequently, the risk of a collapse is

probably limited.

SCANDIES FACING SOME NEAR-TERM HEADWINDS.

Following market leading performances in Q1 both SEK and NOK now face more formidable obstacles to further appreciation. The trade-weighted krona (TCW) hit a 14-year low (inverted relationship) last month as the dollar continued downward. Further, the I44 (import-weighted krone) only recently set a 3-year low (inverted relationship) just 2% off its bottom. Arguably, further appreciation by Scandinavian currencies vs. the EUR is less likely if the USD remains weak(er). Although the ECB did not fulfil hawkish expectations, we still believe European interests will continue to rise. This trend will also prevent any significant SEK and NOK appreciation vs. the EUR in coming months. The case is different over the slightly longer term as we expect the respective central banks to continue to raise rates more rapidly than the ECB. In addition the strong fundamental outlook for both countries will continue to attract foreign flows, with the SEK and NOK also slightly undervalued according to our models. We therefore expect a further 3-5%

trade-weighted appreciation over the next 12 months.

CONCLUSION. It is too early to bet on a swift reversal in the fortune of the Greenback as the Fed is still pursuing QE2 and keeps its current policy stance for an “extended period”. However already this summer we expect the US central bank to start trim its balance sheet and prepare the market for a rate hike in early 2012. This should eventually stabilise the USD vs G10 currencies. The large Current account surpluses together with rising FX reserves and also now rising inflation makes the case for continued and perhaps even more rapid Asian FX appreciation compelling. Hence we expect the theme first explored in Currency

Strategy Nov 2009 “Appreciated Asia” to still be valid.

5

Currency Strategy

US dollar The USD has depreciated by more than 5% in trade

weighted terms since the beginning of this year and is

currently below 2008 lows (broad trade-weighted USD).

USD weakness has been driven by Fed policy holding

interest rates low for an extended period. In addition the

USD suffers from the lack of political ability to finally

reduce the huge budget deficits. Still it is difficult to find a

clear winner of a significant weaker USD, and hence addi-

tional USD weakness is in no one’s interest. Lacking yield

support the USD is likely to continue to fall vs. G10. With

the Fed to signal tighter monetary policy in H2 2011 the

USD should retake some lost ground.

MONETARY POLICY Fed is one of two G10 central banks

that continues to ease monetary policy purchasing

government debt. The QE2 program will however end in

June and thereafter further easing of monetary policy is

unlikely. We expect the next step from the Fed to be a

mild tightening as the Fed stop reinvesting maturing

bonds after summer, and then finally consider rate hikes

by early next year. The key for future Fed policy will be

developments in the labour market, where a persistent

improvement is a prerequisite for a monetary policy

tightening together with the evolvement in inflation

expectations. ��-1

ECONOMIC FUNDAMENTALS Despite disappointing Q1

GDP growth the US economy is on track for a continued

recovery. Supported by strong export demand most

business sentiment indicators have reached multiyear

highs in the first quarter, historically related to strong US

growth. Sentiment amongst small companies however

lags probably reflecting tight credit conditions and weak

domestic demand. Recovery in the housing market

remains slow and prices continue to fall rendering a

negative impact on household wealth. Unemployment

has dropped to 9.0%. Despite a significant slack in labour

market disposable income has improved significantly

supporting household demand. However, gasoline prices

at almost 4 USD/gallon will be a drag for spending if

sustained. �� +1

FLOWS US trade balance has improved as exports have

been growing strongly due to a weaker USD and strong

global demand. Nevertheless going forward we expect

import growth to pick up causing the trade deficit to de-

teriorate. With foreign equity markets continuing to att-

ract US capital outflows, US bond market is the only sour-

ce of net inflows as non-official foreign capital show signs

of finding its way back into US non-treasury bonds while

official capital flows have turned negative early this year

according to the latest TIC data. �� 0

TECHNICALS & POSITIONING: The dollar is now, despite

last week’s bounce approaching long term key support

levels. Our primary view is still that the key support will

hold and yield a counter reaction. It is also worth noting

that the speculative short dollar position has been

decreased despite the dollar decline. �� -1

EUR speculative positions

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Speculative positions

USD/CADUSD/CADEUR/USD

The lack of significant upside progress in EUR/USD makes the current substantial net long speculative position a burden. Should the sub-1.29-area be revisited, speculative longs will have to be reduced.

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0

-1Monetary pol.

Fundamentals

Flows

Technicals

-1Total

USD speculative positions

Dec09 10

Mar Jun Sep Dec11

Mar

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20

30

40

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67.5

70.0

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80.0

82.5

Speculative positions USD index Speculative positions USD index

Technical view: USD Index

73.16100.0%support zone

Price

72

76

80

84

2008 2009 2010 2011

2000 2010

6

Currency Strategy

UNITED STATES

Percent AR

Basic Balance, USD bn

Current Account Bal, % of GDP

Percent of total labour force

Fed Funds target rate

00 02 04 06 08 100

1

2

3

4

5

6

7

0

1

2

3

4

5

6

7

Percent y/y

Percent y/y

7

Currency Strategy

The euro Despite the ongoing debt problems in some euro area

member countries the euro regained some strength in

recent months. Markets seem convinced that the

monetary union is strong enough to solve the debt

problems. The ECB’s strategy to fight upside risk to

inflation with rising policy interest rates remains the main

driver of the currency going forward.

MONETARY POLICY After having raised the main policy

interest rate to 1.25% in April the ECB put rates on hold in

May. It signalled no hurry in hiking rates further. The ECB

is still worried that recent price rises could lead to second

round effects in price and wage settings. To prevent

those effects we think the ECB has to hike rates steadily

in coming months. The next rate hike now seems due in

July. At year end, the interest rate of the main refinancing

operation should stand at 1.75%. That’s already priced in

money market rates. Therefore, there is not much room

to surprise markets on the upside. �� +1

ECONOMIC FUNDAMENTALS Leading indicators as well as economic data point to a continuation of the moderate

recovery in the euro area. But the expansion remains

uneven with the core EMU member states in the lead

while some smaller countries are facing severe

headwinds from their fiscal crises. The cut back of the

excessive budget deficits will continue to hamper growth

in those countries in coming quarters while the

introduction of structural reforms must speed up. So,

despite the introduction of a financial stability

mechanism, markets remain concerned that a debt

restructuring at least in Greece is unavoidable. Such a

step would increase uncertainties about the health of the

financial system. So far, we see no immediate need for

such a measure. On an aggregate level, the budget deficit

declined to 6.0% in 2010 and EMU has cut the budget

deficit slightly by 0.3 percentage points to 6.0% of GDP

in 2010. For 2011 a further cut below 4% of GDP looks

possible, increasing the flexibility of the euro zone to

respond to new fiscal problems. �� 0

FLOWS In the 12 months ending February 2011, the euro area reported combined foreign direct and portfolio

investments of EUR 108bn compared with net inflows of

EUR 191bn a year earlier. In the same period, the compo-

sition of portfolio flows has improved significantly with

flows into equities up to EUR 113bn while flows into debt

instruments were scaled back to EUR 73.8bn. �� +1

TECHNICALS & POSITIONING As the index during its

latest attempt lower couldn’t break the pattern of rising

lows the move higher remains intact. We thus foresee a

test of the 50% correction point (of the 2009/2010

decline), 109.35, before turning lower. The €/$

speculative position is at elevated levels and is an

additional supply risk should the pair turn down. �� +1


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Fundamentals

Flows

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Feb

10

May Aug Nov

11

Feb May

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1.20

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Speculative positionsEUR/USDSpeculative positionsEUR/USD

Effective exchange rate

00 02 04 06 08 10

EUR index (BoE)

75

80

85

90

95

100

105

110

115

120

EUR index (BoE)

75

80

85

90

95

100

105

110

115

120

Technical view: ECB EUR Index

107.138.2%

109.3550.0%

111.5961.8%

Price

100

104

108

112

116

Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3

2009 2010 2011

8

Currency Strategy

EURO-ZONE

Percent y/y

Basic Balance, EUR bn



Percent y/y

Percent y/y

9

Currency Strategy

Japanese yen The tragic events in Japan in March has added to the

already vulnerable situation that Japan’s economy is in.

Although the bond market shows no signs of stress the

debt/GDP ratio at +200% is a clear long-term problem.

With no room at all for a change in the current super-

loose monetary policy JPY will be a funding currency of

choice going forward, hence we continue to see the JPY

as a major underperformer. The speculative market is

very short JPY hence we don’t expect a fast JPY

depreciation near-term.

MONETARY POLICY BOJ responded swiftly following the

tsunami by adding record-large amounts of liquidity

(close to USD 500bn). The joint FX intervention by G7 was

also an exceptional event as immediate risk aversion

made the JPY gain 9% (trade-weighted) in matter of days.

Almost flat GDP growth 2011 and continued deflation

make increasing rates this and next year a virtually

impossible proposition. Monetary policy will continue to

be a (very) negative factor for the currency for the

foreseeable future. �� -2

ECONOMIC FUNDAMENTALS The earth quake and tsunami and their effects on the Japanese economy are

still very uncertain. SEB has revised lower its GDP forecast

for 2011 to a mere 0.5%, 2012 will see rebuilding lifting

GDP by 2.4%. The Japanese government has signed off

an emergency extra budget adding USD 50bn used for

catastrophic aid. We expect more measures needed to

supplement the rebuilding efforts -> this will obviously

add to the fiscal vulnerability and unsustainable debt

profile that Japan already has. The large positive net

international investment position will however continue

to be supportive for the JPY in times of stress. �� -1

FLOWS Japan’s flow position has improved significantly with both the basic balance and the current account

recovering from the sharp drops seen on back of the

financial crisis. The developments following the earth

quake is still very uncertain. Households are reported not

to hold a large proportion of foreign assets according to

BOJ and these funds are probably FX hedged as the cost

of doing so is currently small -> repatriation of foreign

funds is not going to be that significant. Net purchases of

Japanese bonds and equities however have been very

positive lately and overall flows are likely to be JPY

positive still. �� +1

TECHNICALS & POSITIONING The “up-thrust” peak in March (and downside key month reversal) most likely

ended the multiyear uptrend. The return into the “box” is

however a bit annoying and a return below it is needed to

increase credibility to a bearish case. Speculators have

also begun building a short JPY position. �� -1


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-2Monetary pol.

Fundamentals

Flows

Technicals

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JPY speculative positions

Feb

10

Apr Jun Aug Oct Dec

11

Feb Apr

-70

-50

-30

-10

10

30

5077.5

80.0

82.5

85.0

87.5

90.0

92.5

95.0

Speculative positionsUSD/JPYSpeculative positionsUSD/JPY

Technical view: BOE JPY Index

Price

155

160

165

170

J J A S O N D J F M A M J

Q2 10 Q3 10 Q4 10 Q1 11 Q2 11

10

Currency Strategy

JAPAN

Percent y/y

Basic Balance, JPY trn



Percent y/y

Percent y/y

11

Currency Strategy

British pound sterling The pound is currently undervalued against most G10

currencies, but for good reasons, and it will remain so for

the next 3-6 months. The economy struggles as

household demand remains under pressure and the

welcomed restructuring of the economy towards external

demand has been slower than desired. Currently there

are signs that external trade has started to improve but

the economy is in need for this process to continue and a

weak currency may pave the way.

MONETARY POLICY With inflation persistently above the

BOE’s target the bank is facing an undesirable policy

problem with weak growth and high inflation. After

peaking at 4.4% in February, headline inflation however

fell back slightly to 4.0% in March which released some

pressure on BOE. Among MPC members a few have

argued for hiking the key rate to prevent rising inflation

expectations, while the majority has favoured an

unchanged monetary policy as the economy is weak.

Currently we expect the BOE to cautiously increase rates

in H2 2011 but these hikes may be postponed if last

months’ easing in inflationary pressure continues. �� 0

ECONOMIC FUNDAMENTALS From negative growth in

the fourth quarter last year (-0.5% q/q), partly related to

bad weather conditions, the UK economy preliminary

grew by 0.5% q/q in Q1 2011. Amid falling real wages,

weak outlook for the labour market and falling house

prices the confidence among UK households is back at

the low levels from the financial crisis, indicating quite

weak private demand for the next couple of quarters.

Business sentiment indicators have been surprisingly

strong probably supported by growing export demand

but recently we have seen those moving lower as well. In

addition measures to improve government budget will

further dampen the growth prospects: we expect a

lacklustre GDP expansion of 1.4% 2011. �� -1

FLOWS Short-term observations are difficult given the

volatile components in the basic balance, mainly

including financial industry related portfolio flows. In the

fourth quarter 2010 the current account deficit

deteriorated to almost 3% of GDP related to weak trade

balance. The weak currency and weaker domestic

demand have however improved trade balance

dramatically in the beginning of 2011 as imports dropped

while exports continued to show some growth. This

development was expected and should continue; hence

the flow outlook has the potential for further

improvements. �� +1

TECHNICALS & POSITIONING The market is breaking

down from the bear triangle reasserting the long term

bear trend. Next will be a test of the Q4 2010 low point of

78.3. Trimmed long £/$ positions despite the rising price

during April is a bearish behaviour. ��-2


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-1

-2

+1

0Monetary pol.

Fundamentals

Flows

Technicals

-2Total

GBP speculative positions

Feb

10

May Aug Nov

11

Feb May

-100

-75

-50

-25

0

25

50

75

1.425

1.450

1.475

1.500

1.525

1.550

1.575

1.600

1.625

1.650

1.675

Speculative positionsGBP/USDSpeculative positionsGBP/USD


90 92 94 96 98 00 02 04 06 08 10

Index (BoE)

70

75

80

85

90

95

100

105

110

Index (BoE)

70

75

80

85

90

95

100

105

110

Technical view: BOE GBP Index

Value

76

80

84

88

92

2009 2010 2011

2000 2010

12

Currency Strategy

UNITED KINGDOM

Percent y/y

Basic Balance, GBP bn



Percent y/y

Percent y/y

13

Currency Strategy

Canadian dollar We have persistently argued that the CAD should

continue its slow grind higher against the USD, but lately

the loonie has appreciated more rapidly amid general

USD weakness and higher commodity prices. A rapid

strengthening of the currency is not welcomed as

competitiveness among Canadian exporters is weak due

to poor productivity growth. Still the CAD will be

supported by high commodity prices, a gradual

tightening of monetary policy and US economic recovery;

however additional appreciation will be gradual.

MONETARY POLICY With the policy rate at 1% monetary

policy is very accommodative. Markets price two hikes by

the BOC in 2011, which is in line with our projection. Until

recently inflation has been very soft with core inflation far

below BOC forecasts. Inflation however accelerated in

March to 3.2% and core inflation to 1.6% due to rising

energy prices and higher provincial sales taxes. From

previously undershooting the BOC forecast, inflation

currently exceeds the BOC April forecast significantly.

However BOC will remain cautious with respect to the

strong currency and is likely to stick to a very slow

tightening of monetary policy. ��+1

ECONOMIC FUNDAMENTALS In the fourth quarter GDP expanded by 3.2% from the previous year. Business

outlook remains firm and business confidence reflects

optimism about sales outlook and increased investments.

Especially within the commodity related sectors, as higher

commodity prices have bolstered national income.

Helped by a healthy growth in disposable income

household spending grew at average pace in 2010.

Although unemployment has stayed above 7.5%

consumer confidence improved in Q1 as terms of trade

gains continue to boost household income which

supports spending. In its latest report BOC projects the

output gap will be closed by mid-2012, two quarters

earlier than the previous forecast.=��+1

FLOWS Although the current account improved

somewhat in the fourth quarter last year the deficit

remains historically high. The current account deficit is

related to deteriorating competitiveness due to a stronger

currency and weak productivity growth. The trade

situation should however improve with higher commodity

prices. On the other hand Canada continues to attract

foreign capital inflows that currently more than fully

compensate for the trade deficits. These inflows should

continue to rise as long as commodity prices are

supported. �� 0

TECHNICALS & POSITIONING The trend is expected to

be in its latter stages shown by the rising wedge

formation (a trend-ending pattern), though we can’t call

for a top in place with less than a downside exit from the

wedge. Speculators’ positioning is not at record levels

despite fresh highs which show that there is less

confidence in the recent move higher. �� +1


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+1

+1

0

+1Monetary pol.

Fundamentals

Flows

Technicals

+3Total

Contracts (thousands)

Technical view: BOE CAD INDEX

Price

90

95

100

105

110

Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3

2009 2010 2011

14

Currency Strategy

CANADA

Percent y/y

Basic Balance, CAD bn



Percent y/y

Percent y/y

15

Currency Strategy

Australian dollar The AUD is expensive relative its long term fair value as

well as in REER terms. So far this deviation has seemed

reasonable amid strong fundamentals and rising

commodity prices. From being supported by a

widening interest rate gap to the rest of the world the

AUD currently is favoured by a significant carry pick-up.

Going forward the economy will continue to generate

good growth supported by strong external demand and

high commodity prices, which will continue to attract

capital inflows. Despite the high valuation there are

few reasons to expect the AUD to weaken as long as

global risk appetite remains firm.

MONETARY POLICY Since the latest rate hike in

November the Australian central bank has left its key

interest rate unchanged at 4.75%. Currently markets

price one hike this year, which we judge to be cautious.

RBA is one of few central banks accepting an

appreciating currency. In fact in a previous statement

RBA explicitly said that the exchange rate “is playing a

stabilising role for the economy as a whole” as long as

the currency appreciates in line with rising commodity

prices. Higher inflation in the first quarter was partly

related to a temporary spike in food prices due to the

flooding earlier this year and shouldn’t affect current

monetary policy. �� +1

ECONOMIC FUNDAMENTALS Australia continues to benefit from strong growth in Asia with a persistent

demand for commodities supporting exports and

generating the largest surpluses on record. Higher

commodity prices have also improved Australia’s terms

of trade (ToT) additionally from record levels adding to

national income. RBA expects the economy to grow by

4.25% in 2011. Despite falling unemployment currently

below 5% and growing household income, household

confidence has fallen back though still above its long

term average. Households are more cautious with

higher savings rate than normal and modest growth in

retail sales as a result. As household income continues

to improve spending should pick up and could

potentially get another boost as households normalize

their savings. �� +1

FLOWS The flow outlook continues to be AUD supportive. Higher commodity prices boost ToT and

the external trade is generating the largest surpluses

on record. Furthermore high commodity prices attract

portfolio investment inflows and direct investment

inflows into Australia. All in all, the persistent deficit in

Australia’s current account is historically small and

more than fully compensated for by portfolio inflows.

�� +1

TECHNICALS & POSITIONING: The bull market is

running overtime. No strong and confirmed signs yet of

a reversal however hold a still positive bias. Watch out

if falling down below the wedge floor. A decreasing

huge long position is a warning sign. �� +1


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1.350




+1

+1

+1

+1Monetary pol.

Fundamentals

Flows

Technicals

+4Total


Technical view: BOE AUD INDEX

Price

70

80

90

100

2008 2009 2010 2011

2000 2010

16

Currency Strategy

AUSTRALIA

Percent y/y

Basic Balance, AUD bn, AR



Percent y/y

Percent y/y

17

Currency Strategy

New Zealand dollar An already weaker than expected NZ economy (H2 2010)

together with the Christchurch earthquake made the

RBNZ to reduce the Official Cash Rate (OCR) 50 basis

points at its March 10 meeting. The earthquake has

further divided the NZ economy that was already divided

between a somewhat struggling domestic economy and

strong export growth benefiting from trading partners

growth. Projections are for relatively weak growth during

H1 2011 and with inflation contained by low domestic

demand and a strong currency the bank is expected to

remain on hold well into the autumn, we think.

MONETARY POLICY RBNZ reduced its OCR to 2.5% in

the aftermath of the earthquake as an attempt to offset

some of its negative effects. The bank says “that current

policy accommodation will be removed once entering the

rebuilding phase” and “the current level of the OCR is

likely to be appropriate for some time”. Together with the

expectation of the annual inflation to settle within the

bank’s target band once the October VAT hike drops out

of the statistics, we forecast the bank to remain on hold

until its December meeting. �� +1

ECONOMIC FUNDAMENTALS Business confidence (50.1 in March down from 52.6 in February), consumer

spending and tourism has all declined following the

earthquake but has since shown signs of recovery with

the greater part of the country being relatively unaffect-

ed. Continued strength in trading partner growth,

resulting in higher export commodity prices is supporting

whereas higher oil price and the strong currency have a

dampening effect. GDP is expected to grow 0.9% y/y.

�� 0

FLOWS The C/A for the full year 2010 was -2.3%, the

lowest level for more than 20 years. Post earthquake

insurance inflows will continue to have a positive impact

on the C/A balance during 2011 and only thereafter it is,

given a pickup in domestic demand, expected to widen

some. The improving terms of trade continues to be a

positive factor for NZ. �� +1

TECHNICALS & POSITIONING It seems that the speculative community disagrees with the recent

strengthening of the NZD, given the limited long

speculative positioning. The BOE NZD index remains

contained within its boundaries of late which together

with the flat, non-trending average suggests continued

sideways action. �� +1


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+1

+1

+1Monetary pol.

Fundamentals

Flows

Technicals

+3Total


98 00 02 04 06 08 1070

75

80

85

90

95

100

105

110

115

120

Technical view: BOE NZD INDEX

Price

80

85

90

95

100

105

Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3

2009 2010 2011

18

Currency Strategy

NEW ZEALAND

Percent y/y

Basic Balance, NZD bn, AR



Percent y/y

Percent y/y

19

Currency Strategy

Swiss franc In recent months, upward pressure on the Swiss franc has

eased and the currency held stable at elevated levels. The

franc remains based on sound economic fundamentals.

In addition, the continuing debt problems in the euro area

as well as geopolitical tensions will support capital flows

into save havens, keeping the Swiss franc stable in

coming months.

MONETARY POLICY In its March meeting the SNB kept

its expansionary policy unchanged in place. Its

conditional inflation forecast gives no indication of major

upside risks to inflation until the end of 2012. Since then

inflation figures were in line with expectations and the

ongoing strong currency will continue to keep upside

risks to inflation in check. Therefore the SNB is in no hurry

to raise rates in June. Short term money market rates are

still below the SNB’s target indicating ongoing excess

liquidity in the market. The SNB will continue to absorb

this liquidity with the issuance of SNB bills. Regarding the

economy the SNB has raised its GDP growth projection by

0.5 percentage points to 2%, indicating no risk of

deflation. Hence there is no need for additional

interventions in the foreign exchange market, should the

CHF start to strengthen again. �� -1

ECONOMIC FUNDAMENTALS The KOF leading indicator

rose to 2.29 points in April, the highest level since August

2006. It suggests that the strong expansion in the Swiss

economy will continue in coming months. More important

the KOF gives no hint that the strong Swiss franc is

hurting the outlook for growth. But growth in exports is

already slowing, suggesting that growth could be

dampened in the later part of the year. The Seco

consumer climate improved in January suggesting that

private consumption will remain robust in coming

months. Overall, a solid expansion of the Swiss economy

in 2011 is the most likely scenario. �� 0

FLOWS In 2010 Switzerland posted a surplus in the

current account of CHF 79.6bn, up from CHF 61.5bn in

2009. Portfolio flows showed a huge swing. After

outflows of CHF 32bn in 2009, Switzerland faced inflows

of CHF 31.2bn in 2010. Due to an ongoing search for safe

havens we suppose that inflows into Switzerland will

continue. �� +1

TECHNICALS & POSITIONING The market continues to

move higher, currently exiting a bull triangle to the

topside. The next likely target will be the top line currently

running at 144.40. Positioning in USD/CHF is however

showing that there is some hesitation to expand CHF

longs despite the surge in the index. �� +1


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1.350




0

+1

+1

-1Monetary pol.

Fundamentals

Flows

Technicals

+1Total


Technical view: BOE CHF Index

Value

115

120

125

130

135

Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2

2009 2010 2011

20

Currency Strategy

SWITZERLAND

Percent y/y

Basic Balance, CHF bn, AR

Current account Bal, % of GDP


Percent y/y

Percent y/y

21

Currency Strategy


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1.250

1.300

1.350




Swedish krona SEK was one of our favoured currencies in the previous

Currency Strategy and racked up the best G10

performance during Q1 2011. The outlook is still positive

although we have trimmed our grade as the trade-

weighted krona (TCW) is approaching multi-year highs.

Rate hikes by the ECB does also contribute to a slightly

less bearish EUR/SEK outlook. Should the TCW continue

lower (stronger SEK) on more USD weakness the scope

for additional EUR/SEK depreciation is more limited.

MONETARY POLICY Riksbank continues to hike by

25bps at every meeting 2011 according to our forecast.

The market is discounting 3 of the remaining 4 hikes and

hence we continue to view this factor as positive for the

krona. Credit growth has moderated and inflation is still

well behaved so the risk of 50bps hikes is not evident

currently. On the other hand, although the housing

market is slowing there is little evidence of seeing the

Riksbank taking a pause due to falling house prices.

Furthermore, with the ECB now on a tightening path this

facilitates the job of raising rates in Sweden. Overall

monetary policy is still supportive for the SEK. �� +1

ECONOMIC FUNDAMENTALS Growth momentum is

about to slow from elevated levels. The economic

tendency indicator from NIER slipped in April from the all-

time high set in February to the lowest level since last fall.

However the indicator remains higher than its average

level consistent with above-trend growth in GDP. It’s

likely that leading indicators will ease further in coming

months. Still, after 5.7% growth in 2010 we are looking

for another stellar year with 4.7% GDP growth before

slowing to trend growth in 2012. Swedish corporates are

clearly not that sensitive to additional moderate SEK

appreciation according to our FX survey. Growth is

furthermore judged to be a tad more dependent on

domestic demand going forward. �� +1

FLOWS Portfolio flows into Swedish bonds increased last

year to SEK 122.1bn (24.4bn 2009). We expect reserve

managers’ appetite for Swedish bonds to continue to be a

SEK positive factor as portfolio managers are seeking

viable alternatives to G4 currencies. Furthermore, the

current account surplus is expected to remain at +6-7%

/GDP for the coming years although a declining trade

surplus would not be surprising given continued SEK

strength. Important for the SEK is export activity and

order growth, although it has moderated somewhat the

overall order flow is still judged to be positive for hedging

activity and hence for SEK. �� +1

TECHNICALS Follow-through below the previous floor

has been poor and despite numerous downside attempts

the market has failed to move further south. The

behaviour points to more consolidation ahead. Return

above the prior floor line will be regarded as negative for

the krona. �� 0

+1

0

+1

+1Monetary pol.

Fundamentals

Flows

Technicals

+3Total

PMI and EURSEK

04 05 06 07 08 09 10

Diffu

sio

n index

30

35

40

45

50

55

60

65

70

EU

R/S

EK

(re

v. scale

)

8.5

9.0

9.5

10.0

10.5

11.0

11.5

PMI (monthly)EUR/SEK (rev. scale)

TECHNICAL VIEW: SEK TCW INDEX

PriceSEK

120

130

140

2008 2009 2010 2011

2000 2010

22

Currency Strategy

SWEDEN

Percent y/y


Percent y/y

Percent y/y

23

Currency Strategy

Norwegian krone With little support from Norges Bank, the NOK has

strengthened on back of the elevated oil price and

positive flow situation. While the flow outlook will

gradually deteriorate, Norges Bank raising rates will partly

offset that. As such, EUR/NOK is stuck in range in the

near term. Strong economic fundamentals and a fair

value below 7.50 vs. the EUR suggest a gradual

appreciation of the NOK by year-end but with the risk for

a prolonged period of range-trading.

MONETARY POLICY The latest Monetary Policy Report

showed that domestic factors gained the upper hand.

Core inflation is expected to remain low for months

ahead but higher wages and better improvements in the

labour market motivate higher rates. The concern against

a too strong NOK is starting to ease and current krone

level is partly blamed on a temporary strong oil price.

More importantly, ECB has paved the way for Norges

Bank to resume its rate hike cycle. We expect a hike on

May 12 followed by hikes to 2.75% by year-end and

another 125bps of hikes in 2012. Our key deposit rate

scenario is in line with the bank’s latest optimal rate path.

Nevertheless, market is not fully discounting our scenario

and especially not for 2012. We expect market to

discount more rapid rate hikes supporting the NOK going

forward. �� +1

ECONOMIC FUNDAMENTALS Above trend-growth at 3% in mainland GDP is expected in 2011-2012. Recent

indicators suggest a more broadly-based recovery in non-

oil domestic demand and very strong growth in oil sector

investments will stimulate the rest of the economy. The

fiscal situation remains superior. Although the non-oil

budget deficit will decrease, indicating that spending of

oil revenues in 2011 will be below the 4% fiscal spending

rule, fiscal policy will remain rather neutral supporting

growth further. �� +2

FLOWS The flow picture for the krone is rapidly deteriorating. Undoubtedly, our expectations of a 10-15%

rise on Oslo stock exchange (OBX) this year and an oil

price stuck at elevated levels suggest further NOK buying

by foreigners/rising foreign ownership rate on the OBX.

However, Norges Bank has recently resumed its FX

purchases selling NOK 300m/day in May. We expect the

selling volumes to increase throughout the year,

offsetting the positive flow from foreigners. �� 0

TECHNICALS The index still hovers just above the long

term floor and so with little potential left to the downside.

This mounts an increasing risk for the NOK going forward.

The return above 88.50 is however a sign that an upside

reaction might have begun, still breaking the pattern for

falling tops, 89.90, is needed to add confidence. �� 0


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+2

0

0

+1Monetary pol.

Fundamentals

Flows

Technicals

+3Total

Even larger FX purchases a risk

Government Pension Fund Global & FX

05 06 07 08 09 10 11 12 13

Inde

x

85.0

87.5

90.0

92.5

95.0

97.5

100.0

102.5

105.0

NO

K m

illio

ns

0

250

500

750

1000

1250

1500

1750

2000I44 (import-weighted exchange rate)

NB I44 forecast

SEB fc

Daily FX purchases


00 02 04 06 08 10

90

93

95

98

100

103

105

108

110

113

115

90

93

95

98

100

103

105

108

110

113

115

Technical view: NOK Index (I44)

Price

85

90

95

100

105

2008 2009 2010 2011

2000 2010

24

Currency Strategy

NORWAY

Percent y/y

Basic Balance, NOK bn

Current Account Bal, %

of GDP

Employment y/y (3MMA)


Percent y/y

Percent y/y

25

Currency Strategy

Danish krona Danish FX reserves are at record levels in spite of the

Danish money market spread vs. EMU having fallen into

negative territory. We see the outlook for EUR/DKK as

neutral around current level with a slight downward bias.

MONETARY POLICY Officially EUR/DDK is allowed to

fluctuate by +/- 2.25% around its central parity rate

(7.46038). However, in reality DNB maintains a much

tighter range and usually intervenes in the market

whenever EUR/DKK moves above that rate or below 7.44.

The official lending rate spread is now only 5bps although

money market spreads have risen slightly. Given the

complete market confidence in the EUR/DKK peg we see

monetary policy as neutral/slightly positive for the DKK in

coming months.=�� +1

ECONOMIC FUNDAMENTALS Following strong growth in

Sweden and Germany the Danish growth outlook has

improved. We forecast 2.6% GDP growth in 2011.

Unemployment has levelled out and we see a gradual

decline over the coming years to 3.5% in 2012. Wage

growth look set to be moderate at slightly above 2% this

year and 3% in 2012. Last year posted an unexpectedly

low budget deficit of 2.7% of GDP. The government has

introduced an austerity package which should be enough

to reduce the budget deficit to 1-2% of GDP by 2012.

Also, the total Danish government debt is only about

44% of GDP. Thus, even if Denmark falls short of the

stellar economic and fiscal performance of Sweden, the

country still qualifies as one of the sound economies in

Northern Europe. Overall, we regard economic

developments as neutral for the DKK.=�� 0

FLOWS The Danish flow situation is strong. FX reserves are at record levels on the back of restored confidence in

financial markets and complete confidence in the DKK

exchange rate. The demand for Danish assets has likely

also benefited from euro diversification. As for the

fundamental flow situation the C/A is very strong at 5.3%

of GDP in 2010. The increased competitiveness of Danish

industry following a currency weakening vs. Sweden and

Norway suggest the positive development will be intact in

2011. All in all, the flow situation should have a slightly

positive effect on the DKK.=�� +1

TECHNICALS & POSITIONING After having completed a downside sequence early 2011 the market is currently

correcting the decline. The correction is expected to stall

towards the 106-area. �� +1


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0

+1

+1

+1Monetary pol.

Fundamentals

Flows

Technicals

+3Total

Technical view: DANA DKK index

Value

102

103

104

105

106

107

108

109

2008 2009 2010 2011

2000 2010

26

Currency Strategy

Percent y/y

% of GDP


DENMARK

Percent y/y

Percent y/y

27

Currency Strategy

Russian rouble We remain constructive on the outlook for the RUB

against the basket. The central bank will continue

increasing policy rates and will tolerate further

appreciation, albeit not unlimitedly. High commodity

prices propel the trade balance into a large surplus and

even if oil prices fall back somewhat later this year, public

sector revenues will far exceed those budgeted. With

upcoming elections we expect more fiscal stimuli and

maintain an above consensus GDP growth forecast.

Upcoming elections also imply that inflation will remain a

prime policy objective in coming quarters. Furthermore,

an ongoing privatisation program and possible WTO

membership should support flows.

MONETARY POLICY From a currency/carry perspective,

the reference rate is of lesser importance. The short

market rates are more influenced by for instance the 1W

deposit rate. Late in April both these rates were hiked by

25bps to 8.25% and 3.25% respectively. We expect both

to rise by another 75bps by year end. Headline inflation

has stabilised at 9.6% and will come down but the 7%

target is not within reach until 2012. However, the central

bank is not yet operating under a normal inflation

targeting regime. It also manages the rouble against a

basket (55% USD, 45% EUR) within a band currently at

32.45-37.45. This band has repeatedly been widened and

can change in response to market forces. �� +1

ECONOMIC FUNDAMENTALS We remain more bullish

on GDP growth this year than consensus although recent

weaknesses in retail and PMI data make us reduce our

GDP forecast to 5.3%. A higher oil price supports net

exports and will, in our view, result in a supplementary

budget this autumn. Domestic demand will pick up as

credit growth recovers. Both the fiscal and current

accounts will benefit greatly from high oil prices but, less

encouragingly, complacency will prevent any substantial

progress on structural reforms. We don’t expect that to

change after elections in Dec. and next Mar. �� +1

FLOWS The current account balance generated surpluses exceeding USD 10bn/month in Q1. Although private

capital outflows equalled USD 21bn in Q1, FX reserve has

risen by an average of USD 2.4bn/week so far in 2011. We

expect moderating oil prices to bring this down later this

year but surpluses to remain large also supported by

upcoming Eurobonds and FDI inflows in response to the

ongoing privatisations (USD 32bn 2011-13) and possible

WTO-membership later this year. �� +1

TECHNICALS The Russian rouble has since the end of the H2 2010 reaction been on a strengthening path. The

market is repeatedly trying to break below the 2010/2011

lows, likely to become successful in doing so. �� +1


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+1

+1

+1

+1Monetary pol.

Fundamentals

Flows

Technicals

+4Total

RUB vs. basket, USD and EUR

03 04 05 06 07 08 09 10

22.5

25.0

27.5

30.0

32.5

35.0

37.5

40.0

42.5

45.0

47.5

22.5

25.0

27.5

30.0

32.5

35.0

37.5

40.0

42.5

45.0

47.5RUB vs. basketUSD/RUBEUR/RUB

FX reserves and oil price

00 02 04 06 08 100

100

200

300

400

500

600

10

30

50

70

90

110

130Oil price, BrentGross FX reserves

Technical view: RUBLE BASKET

Value

33

34

35

36

37

38

3940

Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3

2009 2010 2011

28

Currency Strategy

RUSSIA

Percent y/y

USD bn


Percent y/y

Percent y/y

Percent y/y

29

Currency Strategy

Polish zloty The zloty has recovered after underperforming in Q1. We

believe there’s still room for PLN to appreciate to 3.82 vs.

the euro by September. The outlook thus remains

favourable with a central bank likely to surprise markets

on the hawkish side and the economy continuing to

accelerate strongly. On the other hand, there are

concerns about the government’s commitment to

improving the fiscal balance ahead of the autumn’s

parliamentary election.

MONETARY POLICY Poland is in the midst of the

monetary tightening cycle as the economy continues to

grow vigorously with inflation pressures building. The

central bank’s reference rate was raised for the second

time by 25 bps to 4.0% following the Apr 5th MPC‘s

meeting. We expect further gradual rate hikes of 75 bps

this year. Consumer price inflation accelerated to 4.3%

y/y in March from 3.6% the month before, continuing to

exceed the NPB’s 2.5% inflation target by a wide margin.

Although global energy prices are partly responsible for

growing headline inflation, core inflation is also demon-

strating mounting pressures. Carry is thus supportive and

rising. �� +2

ECONOMIC FUNDAMENTALS Domestic demand is

increasingly contributing to GDP growth while export to

Germany keeps industrial sector performance strong. We

expect GDP to rise 4.5% this year. As parliamentary

elections will be held in Oct. we believe general policy

continuity will stay intact, with the ruling Civic Platform

likely remaining the country’s largest party. Fiscal

consolidation is ongoing and is expected to intensify after

the election. Together with a C/A shortfall the fiscal

deficit will be counteracting PLN appreciation. �� +1

FLOWS The annualised basic balance is deteriorating but is still positive. Focus will sporadically return to the

revision of data on errors and omissions, a quarter of

which is due to unreported second hand car imports and

which at worst could double the size of the C/A deficit

from 3.3% of GDP last year. These revisions will likely be

done in June together with the publication of the Q1 C/A

figures. For now, flows are positive but vulnerable to a

boost in risk aversion. Both the MoF and NBP have

reminded the market about the possibility to exchange

substantial EU funds on the market which lends support

to the zloty. �� +1

TECHNICALS Also a 2nd test higher materialized but

failed - both over the recent high and above the trendline.

Sellers have since then pushed the pair lower into a broad

and supposedly firm support area with only failures seen

beneath. Downside tests are likely to take place but

traction below earlier downside spikes is far from certain.

�� 0


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25

50

75

100

125

1.150

1.200

1.250

1.300

1.350




+1

0

+1

+2Monetary pol.

Fundamentals

Flows

Technicals

+4Total

GDP and economic sentiment

98 00 02 04 06 08 10

-4

-2

0

2

4

6

8

75

80

85

90

95

100

105

110

115

120 Economic Sentiment, SA, ECFINGDP growth

Basic balance and exchange rate

00 02 04 06 08 10

80

85

90

95

100

105

110

115

120

125

-20

-15

-10

-5

0

5

10

15

20

25

30 Real Effective Exchange RateBasic balance

Technical view: EUR/PLN

30

Currency Strategy

POLAND

Percent y/y

% of GDP


Percent y/y

Percent y/y

31

Currency Strategy

Hungarian forint The forint has since Jan been benefiting from gradually

recovering market confidence and three consecutive NBH

base rate hikes that brought the forint to a two-year high

vs. the euro. A key factor behind the improving investor

confidence is the announced structural reform program,

officially unveiled in the beginning of March. Although

having a neutral outlook on the forint we believe there

are significant downside risks to watch out for while the

potential for further appreciation is limited.

MONETARY POLICY According to NBH, the mid-term

inflation target of 3% y/y is to be achieved before the end

of 2012 if rates are held unchanged. The message after

the last MPC meeting, when the key rate was left at 6.0%,

was neutral. We share that view in the near term but

expect one more hike this year, in Q4, to support

disinflation. The risk, however, is that the ruling Fidesz

party pushes strongly for rate cuts to stimulate the

economy. Four new members, whose voting behaviour is

still unknown, were appointed in the rate-setting council

gaining majority over the remaining three. �� +2

ECONOMIC FUNDAMENTALS Growth remains

imbalanced with strong exports but a weak domestic

economy. Still, a better economic outlook incl. the

structural reform program has buoyed the HUF but this is

now fully priced in. There are concerns regarding

implementation of the structural reforms. By July 1st many

reforms are supposed to be put into law. Budgetary

developments represent another downside risk for the

forint. The fiscal position has come under strong

pressure, stemming from an unfavorable budget

execution in Q1 as well as from mounting spending

pressure. Part of the latter is related to a pending

program for relief of troubled mortgage borrowers, which

is likely to have significant fiscal costs. �� -1

FLOWS The C/A reached +2.1% in 2010 and will remain

positive this year although it is gradually moving towards

balance. The basic balance overall is positive (latest data

until 4Q10). There are indications that portfolio flows

have reversed to net inflows since the beginning of the

year as shown by the strong demand for government

bonds as well as rising asset prices.=��=+2==

TECHNICALS The market since a couple of years back

remains within a broad sideways range and is now

approaching the lower boundary of it. As long as a

sustained break lower takes place we think the best fitted

pattern continues to point to a large range. �� 0


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25

50

75

100

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1.150

1.200

1.250

1.300

1.350




-1

0

+2

+2Monetary pol.

Fundamentals

Flows

Technicals

+3Total

EUR/HUF and 5Y bond spread

05 06 07 08 09 10 11

220

230

240

250

260

270

280

290

300

310

320

2

3

4

5

6

7

8

9

10

11

125Y HGB spread vs. Bobl

EUR/HUF

Technical view: EUR/HUF Index

Price

240

260

280

300

2009 2010 2011

2000 2010

32

Currency Strategy

HUNGARY

Percent y/y

% of GDP


Percent y/y

Percent y/y

33

Currency Strategy

Turkish lira The lira has recently strengthened in March from briefly

touching the 1.60 and traded in April in a range around

1.52. Versus the EUR however, the lira has softened

during the year to a 14 month low. Inflation has abated to

a 40 year low but rose to 4.3% in April. We expect CPI to

rise towards 7.5% y/y by year-end as an effect of an

extended period of very solid domestic demand and

higher oil and food prices, even though the CB sees some

price increases as being temporary. This calls for rate

hikes during H2 2011 which will support appreciation of

TRY.

MONETARY POLICY The unorthodox policy of cutting

policy rates while tightening reserve requirements is still

valid. We however expect interest rate hikes of 150bps

from 6.25% now to be implemented after the June

election in order to effectively rain in domestic demand

during a period in which inflation is expected to rise. A

hawkish first public speech from Erdem Basci, the new

head of the Central Bank, also points in this direction.

And interbank interest rates have increased as an effect

of tighter liquidity conditions. The central bank is

however, wary of TRY appreciation in view of the large

C/A deficit and would try to prevent “excessive”

movements. �� +2

ECONOMIC FUNDAMENTALS: As shown by the freshly

released PMI survey data for April, growth has recently

moderated and new export orders are actually

contracting for the first time in 2 years. Rather than

seeing this as a problem we take it as an indication the

conducted monetary policy actually is contractive. Any

significant impact on bank lending however remains to

bee seen. And to some extent one has to assume that the

crisis in the MENA region is weighing on the Turkish

production outlook. Overheating risks recede as growth

slows from 8.9% in 2010 to just below 6% 2011. �� +1

FLOWS: Investment flows have been noticed for showing a peculiar combination of continued stock-market

outflows while flows into government bonds are still

strong. Inflows to bonds could be explained by local

banks selling bonds out of liquidity funds to place money

in reserve accounts to meet the higher requirements.

Increased yields then had lured foreigners into the market

in the amount of USD 9.2bn ytd. The current account has

worsened and in recent months showed deficits of

around USD 6.5bn to some extent depending on the rise

in oil-prices but mostly due to non-energy trading. �� +1 TECHNICALS The market is stuck in a broad two-year

range with the yearly average as a result also flat and thus

in a non trending mode. Continued range trading should

be expected. �� 0


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25

50

75

100

125

1.150

1.200

1.250

1.300

1.350




+1

0

+1

+2Monetary pol.

Fundamentals

Flows

Technicals

+4Total

USD/TRY

Percent

Technical view: USD/TRY

Value

1.2

1.3

1.4

1.5

1.6

1.7

2009 2010 2011

2000 2010

34

Currency Strategy

TURKEY

Percent y/y

billions

USD (billions)


Percent y/y

Percent y/y

Percent y/y

35

Currency Strategy

Chinese renminbi Economic growth remains impressive with GDP rising by

9.7% y/y in Q1, marginally down from the previous

quarter and below the growth rate of 10.3% for 2010. In

the short run authorities are concerned about inflation

and have used a combination of measures to bring it

down including stricter regulations of the property

market, hiking banks’ reserve requirements and the policy

rate while allowing the CNY to continue to appreciate. We

expect further appreciation, especially during the next

quarter.

MONETARY POLICY The main concern continues to be

inflation which is likely to rise further from 5.4% in March

in coming months. While headline CPI will ease in H2

2011, core inflation is set to rise further. A new system of

dynamic differentiated reserve requirements has been

implemented. Individual banks that lend aggressively can

now be punished by additional increases in reserve

requirements. So far the new system seems to be

effective, new bank lending fell by around 13% in Q1

compared to the same quarter 2010. The policy rate has

also been hiked four times since Oct. 2010 and tightening

is expected to continue. While the People’s Bank (PBOC)

continues to intervene actively to keep the renminbi

down we believe that the rate of appreciation will

increase in response to inflation as indicated by senior

policymakers. �� -3

ECONOMIC FUNDAMENTALS GDP growth remained strong in Q1 at 9.7% y/y and is likely to remain solid in Q2

but decelerate in 2H11 as tightening measures begin to

bite. We expect that the authorities will avoid stifling the

economy through too strong tightening and instead will

be able to manage a soft landing. Growth is expected to

slow down to the 9%-9.5% range for 2011, surpassing

the official target of 8% for the current year. �� +2

FLOWS Foreign exchange reserves increased by USD 198 bn in Q1. This was one of the largest quarterly increases

on record, despite the deficit in the trade account. Hot

money inflows must therefore explain a large part of the

increase in reserves. Gross FDI inflows surpassed USD

100 bn in 2010 and have increased even faster so far this

year. Based on continuing strong GDP growth, an

undervalued currency and easy access to liquidity

continued strong inflows are expected. �� +2

TECHNICALS The contract is testing the low end of a larger wedge, from where it should ideally bounce. But

when narrowly examined there is actually more ground to

cover south of here to complete a full 5-wave sequence

(suggesting extension towards the 2008 low of 6.2475).

In any case there is still a downside tilt to the market as

long as bearishly extending the move below the yearly

average. Resistance at 6.36/39. �� +1


04 05 06 07

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0

25

50

75

100

125

1.150

1.200

1.250

1.300

1.350




+2

+1

+2

-3Monetary pol.

Fundamentals

Flows

Technicals

+2Total

Percent

USD/CNY

% change y/y

Technical view:

36

Currency Strategy

CHINA

Percent y/y

USD bn

USD bn

Percent y/y

Percent y/y

37

Currency Strategy

Currency ranking summary The chart shows the ranking of individual currencies using each of our four evaluation criteria. A positive (negative) value

means we expect that particular criterion to have a strengthening (weakening) impact on the currency.

Monetary policy2 2 2

1 1 1 1 1 1 1 1

0

-1 -1

-2

-3PLN HUF TRY EUR CAD AUD NZD SEK NOK DKK RUB GBP USD CHF JPY CNY

Economic fundamentals2 2

1 1 1 1 1 1 1

0 0 0 0

-1 -1 -1

NOK CNY USD CAD AUD SEK RUB PLN TRY EUR CHF NZD DKK JPY GBP HUF

Flows

2 2

1 1 1 1 1 1 1 1 1 1 1

0 0 0

HUF CNY EUR JPY GBP CHF AUD NZD SEK DKK RUB PLN TRY USD CAD NOK

Technicals & Positioning

1 1 1 1 1 1 1 1

0 0 0 0 0

-1 -1

-2

EUR CHF CAD AUD NZD DKK RUB CNY SEK NOK PLN HUF TRY USD JPY GBP

38

Currency Strategy

Stretch-o-meter & Seasonality

The stretch-o-meter tells us how many standard deviations away currently the exchange rate is from the 200-day moving

average. Higher absolute values indicate more stretched values.

High reaction risk

High reaction risk

SEB FX Stretch-o-meter

-4.00 -3.00 -2.00 -1.00 0.00 1.00 2.00 3.00 4.00

AUDUSD

GBPUSD

EURUSD

EURGBP

EURJPY

EURCAD

EURNOK

NOKSEK

EURSEK

EURPLN

GBPSEK

USDSEK

EURCHF

USDCAD

USDNOK

USDJPY

USDCHF

Seasonal currency patternsJan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec

USD/AUD -0.4 1.0 -0.1 2.3 0.7 0.3 0.5 -0.8 1.2 0.6 0.3 1.4 USD/AUDUSD/CAD -0.3 0.0 0.2 1.4 2.1 -0.3 0.0 0.1 1.6 -0.2 -0.1 0.1 USD/CADUSD/CHF -1.4 0.3 0.4 0.1 0.3 0.7 0.3 0.3 1.5 0.1 0.7 2.7 USD/CHFUSD/GBP -0.1 -0.8 -0.5 1.2 0.5 1.0 0.6 -1.1 0.5 0.1 -0.5 -0.1 USD/GBPUSD/HUF -3.3 0.2 0.2 1.4 0.8 0.0 1.2 -0.9 2.2 -0.5 0.3 2.7 USD/HUFUSD/JPY 0.3 -0.3 -0.7 -0.1 0.8 -0.4 0.1 1.7 0.5 1.2 0.8 0.0 USD/JPYUSD/NOK -1.1 0.3 0.6 2.3 0.2 -0.6 1.2 -0.4 1.6 -0.7 -0.1 1.5 USD/NOKUSD/NZD 1.0 0.1 -3.5 -0.5 1.3 -2.1 2.1 -0.7 -0.2 -0.7 -1.6 3.2 USD/NZDUSD/PLN -2.5 0.3 0.2 1.7 0.0 -0.5 2.0 -1.2 1.4 0.2 0.8 1.9 USD/PLNUSD/SEK -1.4 -0.3 0.4 1.5 0.1 -0.3 1.1 -0.4 1.8 -0.9 0.6 1.8 USD/SEKUSD/SGD -0.1 0.1 -0.1 0.8 0.3 -0.4 0.7 0.1 0.5 0.2 0.0 1.2 USD/SGD

Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov DecEUR/AUD -0.9 -1.0 0.6 -1.5 -0.5 0.0 0.1 0.6 0.3 -0.7 0.2 0.6 EUR/AUDEUR/CAD -0.9 0.0 0.2 -0.6 -2.0 0.5 0.7 -0.3 -0.1 0.0 0.6 2.0 EUR/CADEUR/CHF -0.1 -0.2 -0.1 0.6 -0.2 -0.4 0.3 -0.5 0.1 -0.5 -0.2 -0.6 EUR/CHFEUR/GBP -1.4 1.0 0.8 -0.5 -0.5 -0.6 0.0 0.8 1.1 -0.5 1.0 2.2 EUR/GBPEUR/HUF 2.1 0.0 0.1 -0.6 -0.6 0.4 -0.6 0.7 -0.5 0.3 0.3 -0.7 EUR/HUFEUR/JPY -1.8 0.5 1.2 0.8 -0.7 0.7 0.5 -1.9 1.0 -1.4 -0.2 2.1 EUR/JPYEUR/NOK -0.4 -0.2 -0.3 -1.5 -0.1 1.0 -0.5 0.2 0.0 0.3 0.7 0.5 EUR/NOKEUR/NZD -2.2 -0.1 4.5 1.4 -1.2 2.3 -1.5 0.7 2.1 0.4 2.3 -1.0 EUR/NZDEUR/PLN 1.3 -0.2 0.3 -0.9 0.3 0.6 -1.0 0.7 0.4 -0.5 -0.2 0.0 EUR/PLNEUR/SEK -0.1 0.5 0.0 -0.8 -0.1 0.6 -0.4 0.2 -0.2 0.5 -0.1 0.2 EUR/SEKEUR/SGD -1.3 0.1 0.5 -0.1 -0.1 0.4 0.2 -0.5 1.1 -0.6 0.5 0.6 EUR/SGDEUR/USD -1.5 0.1 0.5 0.7 0.2 0.0 0.9 -0.5 1.7 -0.4 0.5 2.1 EUR/USD

Roughly only values of at least +/-1% (bolded) are statistically significant.

The table show the monthly seasonal effects (in %) that the quoted currency pairs historically have experienced. A positive value indicates that the currency pair tends to rise and vice versa. The calculations are done using data over the last 10 years.

39

Currency Strategy

Guide to indicators

SEB CURRENCY RANKING SYSTEM

Each currency is ranked according to four potential

drivers; Technicals & Positioning, Monetary policy,

Economic fundamentals and Flows. Each of these

drivers is given a grade to reflect how important we

deem it for the currency from a 3 month perspective.

The grades used are 0=no impact, 1=small impact,

2=medium impact, and 3=strong impact. To indicate

whether the factor will have a positive or negative

impact on the currency a (+) or (-) sign is used. For

example, +1 for flows connected with the CHF means

we expect the flow situation to be a slightly positive

factor for the Swiss franc during the coming 3 months.

The sum of the grades for the four different drivers

results in the overall score for the currency which is

printed in the top left corner of the graph.

COMMITMENT OF TRADERS (COT) REPORT

The CoT report (weekly) seeks to describe market

positioning in a currency future on the Chicago

Mercantile Exchange. The Exchange’s trading members

must state whether their trading purposes comprise

either commercial hedging or speculation. Speculators

are regarded as either large (non-commercials) or small.

We present and analyse the positioning of large

speculators in order to understand sentiment in the

currency. The chart presents the net open position

(non-commercial longs less non-commercial shorts).

For those currencies not available in the CoT report we

have created a proxy (see FX Ringside 2006-04-04).

BASIC BALANCE The basic balance is a flow indicator that includes the

current account balance and net flows from both direct-

and equity investments. The broad basic balance also

includes the private sector’s net trade in debt securities.

EFFECTIVE EXCHANGE RATE (ER)

A nominal effective exchange rate is the value of a

currency against a basket of currencies. The Bank of

England calculates the ER using IMF-provided weights.

Each currency is given a weight that reflects its relative

importance in the country’s trade flows. An increase

(decrease) in the BoE index reflects an appreciation

(depreciation) of the currency.

EXTERNAL DATA SOURCES

The main data providers used in this report are: SEB,

national sources, Reuters Graphics and the Reuters

Ecowin.

SEASONAL PATTERN

We have calculated the seasonal effects using a

regression approach. In the regression we have used the

monthly percentage change in the exchange rate as the

dependent variable and dummy variables for the

different months as explanatory variables. Our dataset

consists of end of the month daily close FX rates over

the last 10 years.

SEB STRETCH-O-METER

This indicator shows how stretched a currency pair is by

measuring the distance between the current rate and

the 200 day moving average expressed in standard

deviations. Values in excess of +/-3 are to be considered

over-stretched and often signal an increased

reaction/reversal risk.

0

0

+1

-2Monetary pol.

Fundamentals

Flows

Technicals

-1Total

40

Currency Strategy

SEBEER (long-term FX valuation)

EUR/SEK

Long-term Fair Value (SEBEER)

Ccy Cross Today 2010 2009

EUR/USD 1,4396 1.19 1.26

EUR/SEK 8,9790 8.27 7.68

EUR/NOK 7,8811 7.39 6.93

USD/SEK 6,2371 6.93 6.07

USD/NOK 5,4735 6.19 5.47

USD/JPY 80,78 120 125

EUR/GBP 0,8801 0.71 0.67

EUR/CHF 1,2621 1.44 1.75

GBP/USD 1,6359 1.68 1.88

USD/CHF 0,8767 1.20 1.39

AUD/USD 1,0755 0.91 0.96

USD/CAD 0,9639 1.24 1.10

NZD/USD 0,7921 0.65 0.71

Deviation from Fair Value (SEBEER) % deviation vs. USD

40%

32%

25%

24%

20%

19%

17%

11%

8%

-2%

JPY

CHF

CAD

DKK

NZD

EUR

AUD

SEK

NOK

GBP

OvervaluedUndervalued

41

Currency Strategy

SEB Short-term fair-value models SEB short-term values (STFV) are estimated using separate multiple regressions for each currency. The dependent variable is

the exchange rate and the independent (explanatory) variables are other market variables, e.g. interest rate differentials,

equity index differences, commodity prices and risk appetite.

When examining short-term fair values for indications regarding currency developments there are particularly two factors to

consider: (1) The spread between the exchange rate and its STFV which indicates when temporary over-/undervaluation are

forming and when they may be about to correct (i.e. exchange rate move back towards its STFV) and (2) The slope/trend in

the STFV which provides an indication of a probable medium-term direction (and to some extent speed) of the exchange

rate.

May10

Jul Sep Nov Jan11

Mar May1.15

1.20

1.25

1.30

1.35

1.40

1.45

1.50

1.15

1.20

1.25

1.30

1.35

1.40

1.45

1.50

EUR/USDSEB Short-term fair value

May10

Jul Sep Nov Jan11

Mar May0.80

0.82

0.84

0.86

0.88

0.90

0.92

0.80

0.82

0.84

0.86

0.88

0.90

0.92 SEB STFVEUR/GBP

May10

Jul Sep Nov Jan11

Mar May7.6

7.7

7.8

7.9

8.0

8.1

8.2

8.3

7.6

7.7

7.8

7.9

8.0

8.1

8.2

8.3

EUR/NOKSEB STFV

May10

Jul Sep Nov Jan11

Mar May0.75

0.80

0.85

0.90

0.95

1.00

1.05

1.10

1.15

1.20

0.75

0.80

0.85

0.90

0.95

1.00

1.05

1.10

1.15

1.20

USD/CADSEB STFV

May10

Jul Sep Nov Jan11

Mar May0.80

0.85

0.90

0.95

1.00

1.05

1.10

0.80

0.85

0.90

0.95

1.00

1.05

1.10

AUD/USDSEB STFV

42

Currency Strategy

Contacts

STOCKHOLM

Carl Hammer (editor)

+46 8 506 23128

[email protected]

Richard Falkenhäll

+46 8 506 23133

[email protected]

Johan Javeus

+46 8 506 23019

[email protected]

Dag Müller

+46 8 506 23129

[email protected]

Mats Olausson

+46 8 506 23262

[email protected]

Karl Olsson

+46 8 506 23104

[email protected]

Anders Söderberg

+46 8 506 23021

[email protected]

FRANKFURT

Thomas Köbel

+49 69 97271245

[email protected]

OSLO

Erica Blomgren

+47 22827277

[email protected]

43

With an eye for trading opportunities Did you know that you can do all your trading business via the Internet?

By using Trading Station, you are always in contact with the global trading market.

You get access to the latest exchange rates, and you can buy and sell at the blink of an

eye – spots, swaps or forwards.

To find out how you can develop your electronic trading, visit us at www.seb.se/mb.

Or call one of our traders to activate our e-service:

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44

seb sees the dollar remaining weak

Economy & Finance