1258

ING’s view on the major bullish and bearish currency themes

FX Strategy Chris Turner Head of Foreign Exchange Strategy

Tom Levinson Foreign Exchange Strategy

14 August 2009 USD vs majors (1 Jan 06 = 100)

The dollar has been showing more resilience to the rally in

130

risk assets. We believe this to be part of the bottoming

120

JPY

120

process. Dollar stability is the best to be hoped for into

110

GBP

110

year end, before a cyclical dollar rally unfolds in 1H10

100

130

EUR

100

90 80

ING FX forecasts

90 (USD stronger)

80

70

EUR/USD 1 mth 3 mth 6 mth 12 mth

USD/JPY Ð Ð Ð Ð

1.40 1.39 1.35 1.28 EUR/CHF

1 mth 3 mth 6 mth 12 mth

EUR/RON 1 mth 3 mth 6 mth 12 mth

32.5 34.0 36.0 42.4

Ï Ï Ï Ï

97.0 98.0 103.0 112.0

USD/RUB Ï Ï Ï Ï

1.85 1.90 1.95 2.00

130

C ZK

130

120

H UF

120

110

110

100

100

90

90 weaker EMEA

80

Î Ð Ð Ð

6.83 6.82 6.80 6.73

Jan09

PLN

USD/CNY Ï Ï Ï Ï

Jan08

CE3 vs EUR (1 Jan 06 = 100)

Ï Ð Ð Ð

4.30 4.10 3.75 3.60

70 Jan07

Source: EcoWin

EUR/HUF Î Ï Ï Ï

1.08 1.14 1.20 1.30

Jan06

Ð Ð Ð Ð

0.84 0.82 0.80 0.76

AUD/USD Î Ð Ð Ð

8.60 8.50 8.30 8.10

EUR/GBP

80

70 Jan06

70 Jan07

Jan08

Jan09

Source: EcoWin

Source: ING

USD vs other EM (1 Jan 06 = 100)

FX performance EUR/USD

EUR/JPY

GBP/USD

EUR/CHF

EUR/NOK

USD/CAD

+1.5 -4.9

+3.3 -12.3

+1.6 -11.9

-7.0 +9.4

+6.4 -4.6

-5.3 +2.5

EUR/CZK

USD/ZAR

USD/TRY

USD/BRL

USD/CNY

USD/INR

-5.2 +25.7

-2.4 +13.4

-3.4 +25.8

-7.0 +14.1

0.0 -0.3

-5.3 +19.9

MoM (%) YoY (%)

MXN KRW INR

150 130

CNY RUB 150 130

stronger USD

110

MoM (%) YoY (%)

110

90

90

Source: ING, EcoWin 70 Jan06

70 Jan07

Source: EcoWin

This publication has already been published under the ING Bank Wholesale Banking brand

Jan08

Jan09

FX talkING – August 2009

EUR/USD

Current spot: 1.4290

• While the dollar has yet to show any signs of strength, at

Dollar starting to show more resilience 1.65

1.65

1.55

1.55 Mkt Fwds 1.45

1.45

1.35

1.35 1.25

1.25 ING f'cas t

1.15 1.15 Jan06 Jul06 Jan 07 Jul07 Jan08 Jul08 Jan09 Jul09 Jan10 Jul10

least it has been able to withstand July’s 15% rise in the S&P 500. We believe this is an important part of the bottoming process. In particular the resumption of more normal financial conditions should now start to see the dollar responding more positively to better US economic data.

• The cyclical dollar rally we expect may not come through more forcefully until 1H10. After all, the Fed looks like it will maintain its wording of keeping rates low for an extended period at its September and November meetings. And two year US yields may not start to push up to 2.00% until early next year – ahead of Fed tightening next summer.

• In the Eurozone, huge excess capacity and core inflation

Source: Bloomberg, ING

under 1% should see the ECB in no hurry to raise rates. _

ING forecasts (mkt fwd)

1 mth: 1.40 (1.427)

3 mth: 1.38 (1.427)

6 mth: 1.35 (1.427)

12 mth: 1.28 (1.427) Chris Turner (London)

_

USD/JPY

Current spot: 95.4

• Japan goes to the polls August 30th for lower house

New government to weigh on the JPY? 130

130

120

120 ING f'cast

110

110

100

100 90

90 Mkt Fwds

80

80 Jan06 Jul06 Jan07 Jul07 Jan08 Jul08 Jan09 Jul09 Jan10 Jul10

parliamentary elections. The ruling LDP look set to lose power to the DPJ, yet a DPJ win requires a large 8-9% swing in voting. The risk of small working majorities for either the DPJ or surprisingly the LDP looks a worry. Both have courted the popular vote and plan to spend, which will raise questions over Japan’s debt sustainability given a 9% budget deficit and 180% debt to GDP ratio.

• In addition to debt concerns, Japan’s macro position looks poor. High inventory levels and very weak profit growth suggests activity will be slow to recover.

• USD/JPY should be a prime beneficiary of the cyclical dollar rally we see developing over the next 6-12 months.

Source: Bloomberg, ING _

ING forecasts (mkt fwd)

1 mth: 97.0 (96.2)

3 mth: 98.0 (96.2)

6 mth: 103.0 (96.1)

12 mth: 112.0 (95.7) Chris Turner (London)

_

GBP/USD

Current spot: 1.66

• Leading indicators for UK activity have turned the corner

Bank of England prefers a weaker GBP 2.20

2.20

2.00

2.00

1.80

ING f'cast

1.80

and point to a rebound in GDP growth towards 2% into early 2010. That may overstate the bounce, and certainly the BoE is less optimistic than the market, yet better UK activity data should support market expectations of tightening in 1H10. That should continue the normalisation of GBP back towards pre-crisis levels.

1.60

• Also supporting GBP has been strong new equity issuance

1.40

1.40

as UK-listed corporates take advantage of market conditions to re-capitalise.

1.20

1.20

1.60 Mkt Fwds

Jan06 Jul06 Jan07 Jul07 Jan08 Jul08 Jan09 Jul09 Jan10 Jul10

Source: Bloomberg, ING

ING forecasts (mkt fwd)

1 mth: 1.67 (1.66)

• Our flat GBP/USD profile is around long term fair value and suggests both GBP and the USD recover as tightening cycles approach next summer.

3 mth: 1.70 (1.66)

6 mth: 1.69 (1.66)

12 mth: 1.68 (1.66) Chris Turner (London)

FX talkING – August 2009

EUR/JPY

Current spot: 136.3

• The surprise expansions in both the German and French

Risks skewed to upside 170

170 ING f'cas t

150

150

130

130

economies in 2Q09 leave the risk to our EUR/JPY forecast profile skewed to the upside for two reasons. The first is that this contributes to the view of a synchronised global expansion which is good for the carry trade. The second is that it shows the Eurozone performing relatively well in spite of a strong EUR.

• At the same time, we believe there is a good leading

Mkt Fwd s 110

110

90

90

Jan06 Jul06 Jan07 Jul07 Jan08 Jul08 Jan09 Jul09 Jan10 Jul10

relationship between the Fed Funds rate and volatility. The sharp reduction in Fed Funds 2007/2008 should lead market volatility down through 2010, improving risk adjusted returns and generally weighing on the JPY.

• A sustained move above 139 warns sizable EUR/JPY

Source: Bloomberg, ING

strength comes earlier than we envisage. _

ING forecasts (mkt fwd)

1 mth: 135.8 (137.3)

3 mth: 136.2 (137.2)

6 mth: 139.1 (137.1)

12 mth: 143.4 (136.5) Chris Turner (London)

_

EUR/GBP

Current spot: 0.862

• EUR/GBP continues to correct lower and we believe it will

Continued normalisation of GBP 1.00

1.00

0.95

0.95

0.90

Mkt Fwds

0.90

0.85

0.85

0.80

0.80 ING f'cast

0.75

0.75

0.70

0.70

0.65

0.65

Jan06 Jul06 Jan07 Jul07 Jan08 Jul08 Jan09 Jul09 Jan10 Jul10

ultimately trade down to the 0.75/78 levels next summer once the MPC starts its tightening cycle. Typically, UK cycles have far larger amplitudes than those in the Eurozone and by end 2010, UK policy rates could be 125bp above those in the Eurozone versus 50bp below today.

• Risks to GBP remain in the form of the UK fiscal position, with a S&P ratings downgrade still hanging over the UK after a warning in May. Yet GBP is still some 20% weaker than year ago levels and is supporting spending on UKproduced goods, both at home and abroad.

• 0.87/0.88 are probably the best levels to be hoped for over

Source: Bloomberg, ING

coming quarters before the bear trend resumes. _

ING forecasts (mkt fwd)

1 mth: 0.84 (0.858)

3 mth: 0.82 (0.858)

6 mth: 0.80 (0.858)

12 mth: 0.76 (0.859) Chris Turner (London)

_

EUR/CHF

Current spot: 1.528

• Latest data shows Swiss FX reserves rising a staggering a

Floor confirmed at 1.50

1.55

US$24bn in June. While this probably overstates the amount of physical FX intervention the SNB undertook, it does serve as a reminder that the SNB has no interest in EUR/CHF trading under 1.50. And based on exports to USD-centric destinations, the SNB will do its best to limit USD/CHF weakness to 1.06.

1.50

• Despite improved prospects for the Eurozone, the KOF

1.70

1.70

1.65

1.65

1.60

ING f'cast

1.55 1.50 Mk t Fwds

1.45 1.40

1.60

1.45 1.40

Jan06 Jul06 Jan07 Jul 07 Jan08 Jul08 Jan09 Jul09 Jan10 Jul10

institute is forecasting a 0.6% contraction for Switzerland in 2010. Despite the SNB acknowledging current headline inflation is primarily oil-related, excess capacity and the risk of deflation should keep the SNB dovish.

• Improving risk sentiment could see EUR/CHF exiting the

Source: Bloomberg, ING

1.50-1.54 trading range to the upside before year end. _

ING forecasts (mkt fwd)

1 mth: 1.53 (1.531)

3 mth: 1.55 (1.530)

6 mth: 1.57 (1.528)

12 mth: 1.58 (1.522) Chris Turner (London)

FX talkING – August 2009

EUR/NOK

Current spot: 8.64

• Interest rates in Norway appear to have based at 1.25%. In

Norges Bank signals hike are on the way 10.50

10.50

10.00

10.00

9.50

9.50

9.00

Mkt Fwds

8.50 8.00

ING f' ca st

7.50

fact, on 12 Aug Norges Bank indicated that it ‘may be appropriate to increase interest rates earlier than projected’. This is a reference to a previous forecast for a first hike not to come before 2Q10. Key now will be the new Monetary Policy Report due in October.

9.00

• An election on 14 Sept should see the ruling Labour-led

8.50

coalition win, but it is unclear if it will retain its majority. The government is on track to spend 5.7% of Norway’s oil fund this year vs. the usual spending rule of 4%.

8.00 7.50

Jan06 Jul 06 Jan07 Jul07 J an08 Jul08 Jan09 Jul09 Jan10 Jul10

• EUR/NOK has tracked EUR/SEK’s recent sharp decline. A correction in equities, steady oil prices near US$70/bbl and credible Norges Bank rate hike prospects could see our profitable short NOK/SEK trade lose momentum.

Source: Bloomberg, ING

_

ING forecasts (mkt fwd)

1 mth: 8.60 (8.60)

3 mth: 8.50 (8.61)

6 mth: 8.30 (8.64)

12 mth: 8.10 (8.70) Tom Levinson (London)

_

EUR/SEK

Current spot: 10.23

• EUR/SEK has posted a dramatic 8% decline over the past

Correction from extreme undervaluation 12.00

12.00

11.50

11.50

11.00

Mkt Fwds

10.50

11.00 10.50

10.00

10.00

9.50

9.50 ING f'cast

9.00 8.50

9.00 8.50

Jan06 Jul 06 Jan07 Jul07 Jan08 Jul08 Jan09 Jul09 Jan10 Jul10

month. SEK’s outperformance of higher yielding, usually more risk sensitive currencies is noticeable. This comes despite the Riksbank’s pledge to hold rates at just 0.25% until Autumn 2010. This though marks dissention within its ranks with more optimistic members backed by three months of strong rises in the Economic Tendency Survey.

• Recent S&P downgrades to Estonia and Latvia serve as reminders of Baltic exposure, as do ongoing strains within Latvia’s coalition government. Any Baltic devaluation would see Swedish banks suffer a surge in loan defaults.

• EUR/SEK’s correction lower marks an improvement from extreme undervaluation. SEK remains cheap, but we expect gains from here to be more of a challenge.

Source: Bloomberg, ING

_

ING forecasts (mkt fwd)

1 mth: 10.20 (10.21)

3 mth: 10.20 (10.20)

6 mth: 9.80 (10.20)

12 mth: 9.40 (10.20) Tom Levinson (London)

_

EUR/ISK

Current spot: 220.0

• Sedlabanki held interest rates at 12% on 13 Aug as it

Capital controls to be lifted soon 400

400

300

300

200

200 ING f'cast

100

0

100

0

Jan06 Jul06 Jan07 Jul07 Jan08 Jul08 Jan09 Jul09 Jan10 Jul10

prepares to begin lifting ISK capital controls in the ‘next few months’. Having cut rates some 600bp the central bank believes ISK stability is its core aim and that cutting rates further risks weakening the crown still further. In terms of capital controls, restrictions on long-term foreign holdings will be the first to be lifted.

• Iceland submitted an application for EU membership on 17 July. If approved the government plans a referendum. Issues surrounding the Icesave Bill to repay English and Dutch savers mean a slight delay to a next IMF tranche.

• ISK liquidity remains very low, but a successful, gradual lifting of capital controls can see EUR/ISK ease lower.

Source: Bloomberg, ING _

ING forecasts (mkt fwd)

1 mth: 215.0

3 mth: 210.0

6 mth: 200.0

12 mth: 160.0 Tom Levinson (London)

FX talkING – August 2009

USD/CAD

Current spot: 1.089

• USD/CAD’s decline below 1.07, its lowest level since Oct

Verbal intervention to do the trick? 1.50

1.50

1.40

ING f'cast

1.40

1.30

1.30

1.20

1.20

1.10

1.10 Mk t Fwds

1.00

1.00 0.90

0.90 Jan06 Jul06 Jan07 Jul07 Jan08 Jul08 Jan09 Jul09 Jan10 Ju l10

Source: Bloomberg, ING

2008, prompted Canada’s FinMin to comment that he is ‘concerned with rapid’ CAD appreciation and that ‘there are some steps that could be taken’. The remarks have contributed to USD/CAD’s sharp bounce and follow BoC Governor Carney’s 23 July warning that CAD strength is an ’important brake’ on the pace of growth. The BoC has not intervened in FX markets since 1998.

• 2Q GDP due 31 Aug is important for the BoC’s pledge to hold rates at 0.25% until end 2Q10. It assumes growth of 1.3%QoQ and a return to growth in 3Q09. Canada should benefit disproportionately from a US recovery but auto sector restructuring is a long-term issue.

• CAD declines come as a welcome relief to the BoC. USD gains and oil capped at US$73/bbl can see CAD fall. _

ING forecasts (mkt fwd)

1 mth: 1.08 (1.08)

3 mth: 1.14 (1.08)

6 mth: 1.20 (1.08)

12 mth: 1.30 (1.08) Tom Levinson (London)

AUD/USD

Current spot: 0.841

• As expected the RBA moved from an easing to a neutral

RBA set to hike first 1.00

1.00 Mk t Fw ds

0.90 0.80

0.90 0.80

0.70

ING f'cast

0.70

0.60

0.60

0.50

0.50

Jan06 Jul06 Jan07 Jul07 Jan08 Jul08 Jan09 Jul09 Jan10 Jul10

Source: Bloomberg, ING

policy bias at its 4 Aug meeting, underlining the RBA as the central bank likely to hike first. Futures price at least 50bp of hikes by year-end. From an already high rate of 3% this would increase the AUD’s yield advantage.

• Strong Chinese data bodes well, with China Australia’s largest export market. The current climate is now labelled a ‘downturn’ rather than ‘recession’. A stronger AUD is expected to help keep inflation under wraps.

• Most of the AUD’s appreciation has occurred in offshore trading, consistent with a still high correlation with US equity markets and general risk appetite. AUD/USD has failed to breach September’s 0.85 high and the RBA’s strategic purchasing of FX may limit AUD upside.

_

ING forecasts (mkt fwd)

1 mth: 0.85 (0.84)

3 mth: 0.84 (0.84)

6 mth: 0.82 (0.83)

12 mth: 0.75 (0.81) Tom Levinson (London)

_

NZD/USD

Current spot: 0.679

• The RBNZ believes that the strength of the NZD is putting

NZD strength putting the recovery at risk 0.90

0.90

0.80

0.80 Mkt Fwds

0.70

0.70

0.60

0.60 IN G f'cas t

0.50 0.40

0.50 0.40

Jan06 Jul06 Jan07 Jul07 Jan08 Jul08 Jan09 Jul09 Jan10 Jul10

any economic recovery at risk and has suggested it will cut interest rates should NZD continue to outperform. We doubt this will occur and expect little change in terms of rhetoric from the RBNZ on 10 Sept.

• Terms-of-trade fell in 4Q08 and 1Q09. A similar outcome for 2Q (9 Sept) would highlight that NZ has not enjoyed the same upswing in fortunes as other commodity producers given its soft commodity exposure. Exports contribute one third of GDP and therefore NZD moves are of added importance in the policy-making process.

• NZD trade-weighted is more than 10% stronger than assumed in the RBNZ’s June forecasts. NZD/USD looks expensive up at current valuations.

Source: Bloomberg, ING

_

ING forecasts (mkt fwd)

1 mth: 0.69 (0.677)

3 mth: 0.67 (0.674)

6 mth: 0.64 (0.670)

12 mth: 0.58 (0.662) Tom Levinson (London)

_

FX talkING – August 2009

Emerging _

EUR/PLN

Current spot: 4.13

• EMU and ERM entry has been put on hold, mostly due to

EMU entry delayed until 2013 earliest 5.0

5.0

4.5

4.5

Mkt Fw ds

budget deficit woes. EMU entry is now seen in 2013 at the earliest, or at least a year’s delay from the 2012 target set by the government in September last year. Yet this news has had no negative influence on the PLN whatsoever.

• A weak zloty in 1H09 resulted in a relatively painless and 4.0

4.0

3.5

3.5

ING f'cas t

3.0

3.0 Jan06 Jul06 Jan07 Jul07 Jan08 Jul08 Jan09 Jul09 Jan10 Jul10

quick transition from a 5.8% of GDP current a/c deficit to five straight months of surplus since February. Strongly positive net exports are proof of the zloty’s potential, which is ready to take advantage of any improvement in Eurozone demand or credit markets, i.e. positive 2Q EU16 GDP.

• With a positive outlook LT, short term risks are confined to any global risk aversion and equity correction episodes.

Source: Bloomberg, ING _

ING forecasts (mkt fwd)

1 mth: 4.30 (4.12)

3 mth: 4.10 (4.14)

6 mth: 3.75 (4.16)

12 mth: 3.60 (4.20)

Mateusz Szczurek(Warsaw) _

EUR/HUF

Current spot: 269.4

• With global equity gains extending, positive sentiment has

NBH cuts to cap potential HUF gains 340

340

320

320 Mkt Fwds

300

300 280

280 260

260 ING f'cast

240

240

220

220

Jan06 Jul06 Jan07 Jul07 Jan08 Jul08 Jan09 Jul09 Ja n1 0 Jul10

• Flash 2Q09 GDP showed a 7.6%YoY contraction. NBH surprised with a deeper than expected interest rate cut (100bp) in July with more expected by the end of the year, including 50bp priced for 24 August. We expect NBH to use better market sentiment as an opportunity to cut rates, leaving EUR/HUF broadly stable. This would suggest HUF underperforms regional peers like PLN and CZK.

• Near-term an equity correction remains the main external risk. Work on the 2010 budget is a key domestic problem.

Source: Bloomberg, ING

ING forecasts (mkt fwd)

also returned to EM currencies. CE FX markets are now particularly supported by a surprising positive 2Q09 GDP reading from Germany - a crucial trade partner.

1 mth: 275.0 (270.2)

3 mth: 275.0 (273.0)

6 mth: 265.0 (277.0)

12 mth: 260.0 (284.0) Agata Urbańska (London)

_

EUR/CZK

Current spot: 25.7

• The CNB has cut interest rates 25bp to 1.25% and forecasts

Bullish outlook on CZK in light of export recovery 30

30

29

29 28

Mkt Fwds

28

a gradual decline of market short-term interest rates (3M PRIBOR) until 1Q10 and a temporarily negative rate differential vs. the Eurozone. CNB does not expect this to trigger currency depreciation.

27

• Exports and industrial output enjoyed an unforeseen bounce

26

26

25

25

in June, likely attributable to rising foreign demand (mainly Germany). While the export-side is improving, domestic retail sales continue to weaken.

27

24

ING f 'cast

24

23

23

• Rising new industrial non-resident orders signal more FX

22

22

hedging activity by exporters can be expected over the medium-term, supporting gradual CZK appreciation toward, or even below, the levels of 25/EUR.

Jan06 Jul 06 Jan07 Jul07 Jan08 Jul08 Jan09 Jul09 Jan10 Jul10

Source: Bloomberg, ING

ING forecasts (mkt fwd)

1 mth: 25.9 (25.8)

3 mth: 25.8 (25.8)

6 mth: 25.2 (25.9)

12 mth: 24.6 (25.9) Vojtech Benda (Prague)

FX talkING – August 2009

EUR/RON

Current spot: 4.21

• The local currency continues to trade in a very tight range

NBR behind RON stability 5.0

5.0 ING f'c ast

4.5

4.5

against a backdrop of thin liquidity. The NBR is probably behind the current EUR/RON stability and could intervene in the FX market if required given that the NBR governor reaffirmed a commitment to keep low FX volatility.

• The NBR cut the key rate by another 50bp to 8.5% on 4

Mkt Fwds

4.0

August in line with our view. We look for a last cut of 50bp at the 29 September policy meeting.

3.5

3.5

• Besides further sharp deterioration in fundamentals due to a

3.0

3.0

4.0

Jan06 Jul06 Jan07 Jul07 Jan08 Jul08 Jan09 Jul09 Jan10 Jul10

Source: Bloomberg, ING

worsening recession and IMF expecting a budget deficit of 7.3% of GDP, we see a weaker than previous medium-term RON outlook after the decision to use money from the IMF to finance the budget gap.

_

ING forecasts (mkt fwd)

1 mth: 4.25 (4.25)

3 mth: 4.30 (4.30)

6 mth: 4.60 (4.38)

12 mth: 4.40 (4.54)

Nicolaie Alexandru-Chidesciuc (Bucharest)

EUR/HRK

Current spot: 7.31

• HNB has pledged cautious monetary policy but expectations

HNB expected to boost kuna liquidity 7.60

7.60

7.50

7.50

7.40

7.40

7.30

7.30

7.20

7.20 ING f'cast

7.10

7.10

7.00

7.00

Jan06 Jul06 Jan07 Jul07 Jan08 Jul08 Jan09 Ju l09 Jan10 Jul10

are building for it to lower reserve requirements and boost kuna liquidity. This carries a risk of kuna trading on the soft side.

• EU accession talks are still on hold over the border dispute with Slovenia, making it more likely than not that EU entry will be delayed beyond 2011. Public support for EU accession has been on a decline in the past few months on the back of this issue and it currently stands at just under 50%.

• We see little direction for HRK in the coming 12 months. EUR/HRK is likely to oscillate around the 7.30 level with a slight downward preference over the longer-term.

Source: Bloomberg, ING _

ING forecasts (mkt fwd)

1 mth: 7.30

3 mth: 7.30

6 mth: 7.30

12 mth: 7.20 Agata Urbańska (London)

EUR/RSD

Current spot: 93.4

• The first IMF programme review is due at the end of this

EUR/RSD likely to hover around the 95 level 100.0

100.0

95.0

95.0

90.0

90.0 ING f'cast

85.0

85.0

80.0

80.0

75.0

75.0

Jan06 Jul 06 Jan07 Jul07 Jan08 Jul08 Jan09 Jul09 Jan10 Jul10

month. Serbia wants to revise its budget deficit target higher and be able to use some of the IMF money for budget financing. The IMF has agreed on this in Hungary and Romania and a positive decision in Serbia can also be anticipated. Still, insufficient fiscal tightening remains a risk factor for the IMF programme for the reminder of this year.

• The EC continues to send positive signals to Serbia and an opening of membership negotiations by the end of 2010 cannot be ruled out. This would be very positive for the FDI outlook. Such a development would be more RSD positive than we have in our base case scenario.

• We see EUR/RSD holding in the 90-95 range.

Source: Bloomberg, ING

_

ING forecasts (mkt fwd)

1 mth: 94.0

3 mth: 95.0

6 mth: 95.0

12 mth: 90.0 Agata Urbańska (London)

FX talkING – August 2009

USD/RUB

Current spot: 31.7

• The rouble has weakened beyond 38 vs. the basket despite

RUB weakens despite high oil price 45

45

ING f'cast

40

40

35

35

the fact that Brent oil has held above US$70/bbl. August is traditionally a bad month for RUB due to scant liquidity - we see no fundamental reason for current RUB weakness and expect it should continue to trade within 36-41/basket until the end of 2009. This assumes that the price of Brent does not fall below $40/bbl.

30

• Within this range RUB may be volatile; potential oil price

25

25

pressures on RUB are amplified by a massive RUB liquidity injection during 2H09.

20

20

• We expect CBR to defend the upper bound of RUB

30

Mk t NDFs

Jan06 Jul06 Jan07 Jul07 J an08 Jul08 Jan09 Jul 09 Jan10 Jul10

41/basket until end-2009 but would not be surprised if a devaluation were to occur in early 2010 if the oil price drops and the economy remains very weak.

Source: Bloomberg, ING _

ING forecasts (mkt fwd)

1 mth: 32.5 (32.0)

3 mth: 34.0 (32.5)

6 mth: 36.0 (33.3)

12 mth: 42.4 (35.1) Tatiana Orlova (Moscow)

USD/UAH

Current spot: 8.34

• It would seem the NBU has allowed hryvnia to depreciate

The NBU starts devaluation early 12.0

12.0 Mkt NDF

earlier than the market consensus expected. However current FX volatility still lacks fundamental factors and is based on the panic mood prevailing in the cash market and expectations of hryvnia depreciation in the near future.

10.0

10.0

8.0

8.0

early August, raising NBU FX reserves and strengthening NBU’s ability to support hryvnia in the short-term period

6.0

6.0

• The risk of further hryvnia devaluation into the year-end is

4.0

4.0

• The IMF granted another tranche of its loan to Ukraine in ING f'cas t

still high on the back of stronger imports and still high external debt repayments. The approach of presidential elections will also stimulate demand for foreign currency on the back of upcoming uncertainty during the pre-election period.

Jan06 Jul06 Jan07 Jul07 Jan08 Jul08 Jan09 Jul09 Jan10 Jul 10

Source: Bloomberg, ING

_

ING forecasts (mkt fwd)

1 mth: 8.25 (8.53)

3 mth: 8.80 (9.00)

6 mth: 9.05 (9.80)

12 mth: 9.10 (10.75)

Alexander Pecherytsyn (Kiev)

USD/KZT

Current spot: 150.8

• The central bank governor is adamant that the currency will

KZT is supported by strong FDI outlook 170.0

170.0

• Most important is the default by two of the largest banks,

Mkt NDF 150.0

150.0 ING f'cast

130.0

130.0

110.0

110.0

Jan06 Jul 06 Jan07 Jul07 Jan08 Jul08 Jan09 Jul09 Jan10 Jul10

not be devalued this year. Two facts make this a realistic proposition. which greatly reduces external debt repayments. NBK is to defend the current +/-3% band around USD/KZT150 as further devaluation would exacerbate banking sector problems. The second is the recovery in oil prices, which should limit the deterioration of the current account to a deficit of 6% of GDP or less. This should be outweighed by net FDI inflows worth 10% of GDP.

• Unless oil plunges below US$50/bbl the threat of KZT devaluation appears low; even if it does the authorities would rather spend some FX reserves than let KZT fall.

Source: Bloomberg, ING

_

ING forecasts (mkt fwd)

1 mth: 150.2 (150.8)

3 mth: 150.0 (150.3)

6 mth: 149.0 (153.0)

12 mth: 147.0 (158.8) Tatiana Orlova (Moscow)

FX talkING – August 2009

USD/TRY

Current spot: 1.48

• Despite our view that TRY’s strengthening potential in a

ST risks in a weaker global setup look higher 1.90

1.70

ING f'cast

1.50

1.90

global environment with rising risk appetite looks significant, the risk is that pressure on the TRY might increase into October.

1.70

• After a calm summer with low financing requirement, the

1.50 Mkt Fwds

1.30

1.30

1.10

1.10

Jan06 Jul06 Jan07 Jul07 Ja n08 Jul08 Jan09 Jul09 Jan10 Jul10

real sector will service US$6.7bn of long term external debt in September and October. So without a solid positive development on the long awaited IMF issue by midSeptember, reserve depletion is likely to accelerate. Moreover, the CBT is likely to deliver 100bp more rate cuts in August and September.

• On the positive side, CBT started daily FX buying auctions on 4 August. With rising foreign portfolio inflows, FX reserves stand at about US$68.3bn as of 10 August.

Source: Bloomberg, ING

_

ING forecasts (mkt fwd)

1 mth: 1.52 (1.49)

3 mth: 1.56 (1.51)

6 mth: 1.56 (1.53)

12 mth: 1.53 (1.59)

Sengül Dağdeviren (Istanbul)

USD/ZAR

Current spot: 8.02

• After re-testing 7.70 support mid July, USD/ZAR has

Profit taking to settle further, but tentatively 11.5

11.5

entered a profit-taking phase into mid August, and support is being found below 8.00.

10.5

10.5

• We still consider the rand expensive at current levels relative

ING f'cas t

9.5 8.5

9.5 8.5

7.5

Mkt Fwds

7.5

6.5

6.5

5.5

5.5

Jan06 Jul06 Jan07 Jul07 Jan08 Jul08 Jan09 Jul09 Jan10 Jul10

to political noise (face-off with trade-unions on wages negotiations is a further test of the government), a relatively weak external position and downside risks to growth (manufacturing sector lagging the global turnaround). And the ZAR is starting to show some noticeable underperformance of high yielders, e.g. BRL.

• But short-term, prospects of the Bharti Airtel/MTN deal could limit the USD/ZAR upswing to the 8.30 barrier.

Source: Bloomberg, ING _

ING forecasts (mkt fwd)

1 mth: 8.25 (8.05)

3 mth: 8.55 (8.14)

6 mth: 8.65 (8.28)

12 mth: 8.05 (8.54)

Dorothee Gasser-Châteauvieux (London) _

USD/ILS

Current spot: 3.79

• The BoI intervened heavily in early August to prevent

BoI turns less predictable 4.80

4.80 4.50

ING f'cast

4.50

USD/ILS from falling below the 3.75 level. But in a persistently weak USD context, the BoI decided to halt its costly forex purchase programme shortly after – sending USD/ILS back to the 3.80-3.85 range.

4.20

4.20

• Critically however, the BoI remains committed to preventing

3.90

3.90

“exceptional” movements in the currency: it is turning to less predictable and in our opinion more efficient FX intervention..

Mkt Fwds

3.60

3.60

3.30

3.30

3.00

3.00

Jan06 Jul06 Jan07 Jul07 Jan08 Jul08 Jan09 Jul09 Jan10 Jul10

Source: Bloomberg, ING

• While we see the USD soft patch persisting in the short-term but reversing through 4Q09, we would view USDILS levels below 3.80 as a buying opportunity. USD/ILS upside should however be contained mid-term to the 4.20-4.30 range owing to a robust external position.

_

ING forecasts (mkt fwd)

1 mth: 3.95 (3.77)

3 mth: 4.05 (3.80)

6 mth: 4.12 (3.80)

12 mth: 4.18 (3.80)

Dorothee Gasser-Châteauvieux (London)

FX talkING – August 2009

USD/BRL

Current spot: 1.83

• Despite a moderate foreign exchange inflow (US$1.3bn,

Sideways for a while

2.0

while the CB purchased US$2.2bn), the BRL has tested 1.80 and is one of the best performers of the last month, on the back of surging commodities prices. This notable outperformance suggests further appreciation depends on another major wave of improving risk appetite, which appears unlikely at this juncture.

1.8

• On a technical side, foreign investors are no longer

1.6

increasing short positions in USD/BRL, limiting the room for further strengthening.

1.4 1.4 Jan06 Jul06 Jan07 Jul07 Jan08 Jul08 Jan09 Jul09 Jan10 Ju l10

• On the other hand, a BRL correction seems unlikely, as long

2.6

2.6

2.4

2.4

2.2

2.2 ING f'c ast

2.0 1.8

Mk t NDFs

1.6

as commodities continue rising, against a backdrop of the domestic outlook on track. The CB should keep interest rates on hold at 8.75% for a prolonged period, while growth prospects continue improving.

Source: Bloomberg, ING

_

ING forecasts (mkt fwd)

1 mth: 1.85 (1.85)

3 mth: 1.90 (1.87)

6 mth: 1.95 (1.90)

12 mth: 2.00 (1.96) Zeina Latif (São Paulo)

_

USD/MXN

Current spot: 12.87

• MXN has benefited from the improvement in equity markets,

MXN not yet firmly anchored below $13.0/USD 16.5 15.5 ING f'cast

14.5 13.5

16.5

the fall in the VIX and the stabilization of the Mexican oil blend around USD60/bbl.

15.5

• Unless there is convincing evidence of a V-shaped recovery

14.5 13.5

12.5

Mkt Fwds

12.5

11.5

11.5

10.5

10.5

9.5

9.5

Jan06 Jul06 Ja n07 Jul07 Jan08 Jul08 Jan09 Jul09 Jan10 Jul10

in the US economy or surprising peso positive news, our perception is that the MXN will struggle to keep trading south of 13.0/USD. We believe that the Exchange Commission would suspend the daily USD auctions. This decision could become effective on 8 September.

• We maintain our year-end forecast at 13.90/USD. The peso continues to exhibit high volatility and typically weakens in autumn.

Source: Bloomberg, ING

_

ING forecasts (mkt fwd)

1 mth: 13.08 (12.86)

3 mth: 13.37 (12.97)

6 mth: 13.88 (13.14)

12 mth: 13.95 (13.63)

Salvador Moreno (Mexico City)

USD/CNY

Current spot: 6.8333

• The PBOC maintained its daily USD/CNY fixings in the

Baby-steps PBOC tightening 8.40

8.40

8.00

8.00

7.60

7.60

7.20

7.20 NDFs 6.80

6.80 ING f'cast

6.40 6.40 Jan06 Jul06 Jan07 Jul07 Jan08 Jul08 Jan09 Jul09 Jan10 Jul10 Source: Bloomberg, Reuters, ING

6.83-6.84 range that has been in place since the Lehman panic broke in Sep-08. We expect the stable fixings to persist until the authorities are confident that the GDP is on track for 8% growth this year (ING 8.3%).

• GDP growth accelerated to 7.9% in 2Q from 6.1% in 1Q. Financial policies have successfully offset the export crash by stimulating domestic demand. The massive rise in new bank loans has kindled the overheating talk.

• The PBOC employed baby-steps tightening since July by pushing 3M bill rates higher. We expect this to continue, culminating in a first policy rate hike in 1Q10. We forecast a modest CNY appreciation over the next year.

_

ING forecasts (NDF)

1 mth: 6.8330 (6.8343)

3 mth: 6.8200 (6.8323)

6 mth: 6.8000 (6.8235)

12 mth: 6.7300 (6.8028)

Prakash Sakpal (Singapore)

FX talkING – August 2009

USD/INR

Current spot: 48.22

• Exports dipped by 27.7% in June. The fall in imports was

Positive INR medium term 52.0

52.0 Mkt N D F

50.0

50.0

48.0

48.0

46.0

46.0 44.0

44.0

ING f'cast

42.0

42.0

40.0

40.0

38.0

38.0

Jan06 Jul06 Jan07 Jul07 J an08 Jul08 Jan09 Jul09 Jan10 Jul10

• Volatility in FII flows continued. Though USD strength may continue to exert upward pressure on the currency pair in the near-term, outlook on FII flows remains positive with a spurt in QIP and IPO issues. We expect BoP to return to surplus in FY10

• At the same time, we do not expect excessive flows in the

Source: Bloomberg, Reuters, ING

ING forecasts (NDF)

larger at 29.3% led by a 60% YoY fall in oil imports. The sharper fall in imports in Q1 2009-10 is evident in the trade deficit number which has shrunk from USD 26 bn in Q1 FY09 to USD 14 bn in Q1 FY10. This bodes well with our view of a 25% drop in trade deficit for FY10

near-term, as negative returns on majority of QIPs offered in 2009 will likely limit risk appetite 1 mth: 48.25 (48.2)

3 mth: 47.00 (48.3)

6 mth: 46.00 (48.6)

12 mth: 45.00 (49.1)

Deepali Bhargava (Mumbai)

USD/KRW

Current spot: 1235.0

• An uninterrupted net foreign buying of Korean shares since

Moving with global risk appetites 1600

1600

1500

1500

1400 NDFs

1300

1400

• The economy is experiencing a V-shape recovery and this is

1300

the primary source of appreciation pressure on won. The preliminary estimate put 2Q GDP growth at 2.3% QoQ SA., up from 0.1% growth in 1Q.

1200

1200 ING f'cast

1100

mid-July drove USD/KRW to a 10-month low of 1218 in early August. We think trading has moved to a lower range of 1200-1250 from earlier 1230-1280 range.

1100

1000

1000

900

900

800 800 Jan06 Jul06 Jan07 Jul07 Jan08 Jul08 Jan09 Jul09 Jan10 Jul10 Source: Bloomberg, Reuters, ING

• USD/KRW is moving with global risk appetites, which we expect will increase as activity data continues to drive upward revisions to growth forecasts. We expect the BOK’s [c] USD/KRW buying to replenish FX reserves to support the pair above 1200 to year end.

_

ING forecasts (NDF)

1 mth: 1225.0 (1233.5)

3 mth: 1220.0 (1233.3)

6 mth: 1200.0 (1233.6)

12 mth: 1180.0 (1234.4)

Prakash Sakpal (Singapore)

USD/SGD

Current spot: 1.4413

• Consistent with the MAS’s zero appreciation path for the

Slave to DXY

SGD-NEER USD/SGD has been slavishly tracking DXY. We estimate SGD-NEER about 1% stronger than mid-point of the MAS policy band.

1.70

1.70

1.65

1.65

1.60

1.60

• As widely expected the economy staged a strong rebound

1.55

1.55

in 2Q09 with 20.7% QoQ SAAR GDP growth. The pharmadriven surge in the manufacturing was the main driver even as export recovery lagged that in the most of the other regional economies.

1.50

Fwds

1.50 1.45

1.45 ING f'cast

1.40

1.40 1.35

1.35

1.30 1.30 Jan06 Jul06 Jan07 Jul07 Jan08 Jul08 Jan09 Jul09 Jan10 Jul10 Source: Bloomberg, Reuters, ING

• Singapore is experiencing technical deflation from crash in commodity prices in 2H08. We forecast it ending in 4Q09 but we don’t see inflation forcing a change from the MAS’s zero appreciation path for the SGD-NEER this year.

_

ING forecasts (FWD)

1 mth: 1.4334 (1.4440)

3 mth: 1.4331 (1.4444)

6 mth: 1.4325 (1.4446)

12 mth: 1.4300 (1.4447)

Prakash Sakpal (Singapore)

FX talkING – August 2009 Disclaimer

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