Foreign Exchange

London 08:00

FX Daily Strategist: Europe

Markets choose to take the strong ADP report at face value. We revise our NFP forecast to 125k good enough to perpetuate Thursdays risk rally EUR firmer out of ECB but still highly vulnerable 90.0 90 Watch for news of US debt ceiling agreement and more 87.5 80 importantly whether HIA 2 might be part of it 85.0 70 Risk markets rejoiced Thursday at the June ADP report showing a DXY better-than-expected pick up in private sector hiring. With ADP 82.5 60 having given an okay steer on the weak non-farm payrolls report last month, markets displayed a strong preference to believe that 80.0 50 the 157k ADP print heralds a better NFP report today despite, 77.5 40 and as our US economists were keen to stress, ADP's highly dubious track record. We have nevertheless revised upward our 75.0 30 forecast for NFP to 125k from 75k. We suspect the market is 72.5 20 also now priced near here even though the new Bloomberg VIX (RHS) consensus has only moved to +105k from 100k. As our 70.0 10 economists also note, the tone of the June employment report will Jul Nov Mar Jul Nov Mar Jul Nov Mar set the backdrop for Chairman Bernanke's semi-annual monetary 08 09 10 11 policy testimony before Congress next week. Source: Reuters Ecowin Pro. Yesterday's reaction to the ECB confirmed that the ratings Fear or risk appetite as measured by the VIX and agencies have sabotaged any hopes that the market might the dollar index (DXY) have remained positively leave the Greek crisis behind and focus more on the diverging correlated. But given the ever present fear factor monetary policies of the world's two most important central banks. in running long euro positions we wonder While the rate hike and the accompanying economic/inflation whether the sign on the correlation could switch commentary failed to resonate, the EUR received more of a boost temporarily in the event of a good payrolls report from comments related to peripheral debt issues. Mr Trichet today, or more durably in the event of a credible inevitably perhaps admitted that the ECB was suspending its US budget deal. ratings rules with regards to Portuguese paper, but remains implacably opposed to accepting Greek debt in the event of a GMT Country Release Mkt Last selective default ruling arising from the currently articulated plans Industrial Prod % 07:30 SE (May) 10.0 12.0 for private sector involvement (PSI) in a second Greek aid plan. (nsa y/y) Industrial Prod % With agreement on PSI still weeks away at best, EUR remains 07:30 NL (May) 0.1 -0.3 (m/m) highly susceptible to negative headlines. The ECB and 07:30 NL (May) Industrial Prod % (y/y) 0.8 German government in particular are still at loggerheads over the Industrial Prod % issue. Suppose the ECB's obstinacy prevails (despite the fact they 07:30 SE (May) 0.4 -0.7 (sa m/m) have shown extreme pragmatism on so many other EuroIndustrial Prod % 08:00 IT (May) 0.0 1.0 peripheral issues) to the point where those governments insisting (m/m) on PSI as a condition for their participation in the second Greek Industrial Prod % 08:00 IT (May) 2.2 1.7 aid deal have to consider a climb down? A second Greek bailout (wda y/y) Output PPI % with little or no PSI would pose some very thorny political 08:30 GB (Jun) 5.6 5.3 (nsa y/y) challenges both within and across member states. As such, there Output PPI % remains much to fear trading EUR from the long side, and in any 08:30 GB (Jun) 0.1 0.2 (nsa m/m) extension of the positive risk environment we much prefer to go Output PPI (Ex08:30 GB (Jun) 3.2 3.4 long the likes of NZD, AUD, SEK and NOK, shorting Swiss and % (nsa y/y) now JPY after Thursdays push out of the top of the range. Employment K 11:00 CA (Jun) 13.0 22.3 We also now have to consider whether risk appetite and the dollar (y/y) will remain negatively correlated, especially if a near term credible Unemployment 11:00 CA (Jun) 7.4 7.4 Ra % budget deal is the catalyst for a fresh leg of the risk rally. The debt Non-farm Payrol ceiling negotiations are rapidly becoming a key focal point for 12:30 US (Jun) 90 54 K markets; and overnight House Speaker Boehner struck an Unemployment optimistic note saying that there is a 50:50 chance of a deal over 12:30 US (Jun) 9.1 9.1 Ra % the coming days. We will discuss the FX implications in an Average Hourly 12:30 US (Jun) 0.2 0.3 upcoming Focus piece, but a comprehensive deal that addresses % (m/m) the longer term fiscal issues confronting the US would likely be Wholesale Inven 14:00 US (May) 0.6 0.8 broadly positive USD. The inclusion of a second HIA as part of % (m/m) Consumer Credit the agreement would be a far greater USD positive. In the 19:00 US (May) 5.0 6.2 bn USD countdown to payrolls, its doubtful that any of the European data will have much impact, though if UK PPI were to unexpectedly moderate this could be latched onto as making additional QE from the BoE more likely and hurt GBP some more in the process. This is not classified as objective research. Please refer to important information at the end of the report.

US VIX vs. DXY

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MARKET: Significant upside ADP employment surprise carried the day Thursday, with the ECBs post rate-rise press conference unable to upset the risk-back-on apple cart. G10FX: In late NYC, NZD, NOK, AUD and CAD all vied for top spot with gains of 0.69-0.77% and CHF the main loser in a risk on environment, up 150 pips from the lows on EURCHF and USDCHF up 0.6%. These have been retraced in Asia but only modestly so, though AUD, CAD still slightly positive. Asian equities are mixed- though Japan and China are in the green- though only modestly (+0.40%) so. US equity indices ended with gains of 1.36% for NASDAQ, 1.05% for S&P500 and 0.74% for the Dow. And following more modest gains for most European bourses (topped by FTSE +0.86% - Eurostoxx 50 finished +0.42% AAA sovereigns gave back a little of the earlier week gains, 10yr USTs +3bps, German bunds =3bps though Euro peripheral bonds also higher by similar amounts. Oil the big mover again in the commodity complex, Brent surging nearly $5 o 4.3% (WTI +2.09%). Data/Events in the day ahead (Via MNI) European data starts at 0600GMT with Germany trade balance data, which is followed at 0630GMT by the BoF France business survey at 0630GMT. Also at 1400GMT, ECB Governing Council member Mario Draghi makes remarks at a session entitled "The Currency War", at the Paul Cezanne University, in Aixen-Provence. Speakers include ECB Ordonez, while at 1730GMT, ECB Bini Smaghi delivers a speech on "Adjusting to the Crisis: Policy Choices and Politics in Europe", in Poros (Greece). Also today, the IMF board meets to discuss the next tranche for Greece under three-year loan program, in Washington. UK data includes the Producer Price Index for June as well as the May. Median forecasts say PPI Output is expected to come in at 0.1% m/m, 5.6% y/y with corePPI at 0.2% m/m, 3.3% y/y and the input prices at 0.1% m/m, 16.1% y/y. Construction Output data released at 0830GMT. US data: At 1230GMT, non-farm payrolls are expected to rise to 105,000 in June after a very modest 54,000 rise in May. Private payrolls are seen up 125,000. The unemployment rate is forecasted to fall a tenth to 9.0%. Hourly earnings are expected to dip to 0.2 % following a 0.3% jump in May, while the average workweek is forecast to hold steady at 34.4. US data continues at 1400GMT with Wholesale Inventories data. Late US data sees the 1900GMT release of both Consumer Credit for May and Treasury Allotments By Class for June. Consumer credit usage is expected to fall to $4.0 billion in May after increases in each of the last seven months. Foreign Exchange Strategy Friday, 08 July 2011 http://www.GlobalMarkets.bnpparibas.com

NEWS US/ Canada ADP Employment increased a hefty 157K June relative to consensus for 70K for June and vs. revised 36K in May (38K pre-revision). "While it is just one month's number, it suggests that maybe what happened was a pause in the economic expansion and as we head into the summer months we're going to pick up some momentum," said Joel Prakken, chairman at Macroeconomic Advisers, joint producers of the ADP employment report. Weekly jobless claims fell 14K to 418K (consensus 420K) from a revised 432K in prior week (428K prerevision) The latest Monster Employment Index comes in at 146 for June after 143 in May and compared to 141 for June 2010. Compromise Signaled in US Debt Talks. Barack Obama and the Republican leader in the House of Representatives signaled they were both ready to make compromises in order to avoid a looming fiscal crisis in the US and increase the nations borrowing authority. But on a day when both sides met at the White House to hash out a possible $4,000bn fiscal deal ahead of an August 2 deadline to avoid a US default, there was deep skepticism in Washington whether a grand bargain was feasible. Any deal would include deep cuts in spending and popular entitlement programmes as well as reductions in corporate tax breaks to some industries. (FT) Similarly, WSJ reports on how US President Barack Obama and congressional leaders have agreed to work into the weekend to get political support for a deficitreduction deal, including a sweeping plan to curb entitlements and make major tax-code changes. Sights set on big debt deal. President Barack Obama and congressional leaders agreed Thursday to strive for a blockbuster deficit-reduction deal and will spend the weekend determining whether political support is possible for a sweeping plan to curb entitlements and make major tax-code changes. (WSJ) Feds Hoenig: Clearer evidence that U.S. inflation is accelerating could force Fed to tighten monetary policy but no pressing worry that prices will surge. Hoenig renewed his call for the Fed to raise benchmark interest rates to 1 percent and hold them there while the economic recovery proceeds. (Reuters) Foreign central banks US debt holdings rise. Foreign central banks' overall holdings of U.S. marketable securities at the Federal Reserve rose in the latest week, data from the U.S. central bank showed on Thursday. The Fed said its holdings of U.S. securities kept for overseas central banks rose $12.71 billion in the week ended July 6, to stand at $3.453 trillion. The breakdown of custody holdings showed overseas central banks'

holdings of Treasury debt rose by $14.12 billion to stand at $2.716 trillion. Foreign institutions' holdings of agency securities fell by $1.41 billion to stand at $736.95 billion. (Reuters) Feds balance sheet grows to another record Canada Ivey PMI stronger than expected in June; 68.20 (67.50 tipped) though still lower than 69.10 in May. New house price index +1.9% y/y (1.7% tipped) unchanged from prior month. Europe: Greek press reports say negotiations between the Greek government, EU and the IMF over a second loan deal should be finalised by Sep 20. That would allow any agreement to be approved by Parliament before the end of the month. The IMF is also due to meet today to agree the share of Greece's 12-billion-euro loan instalment for July. ECB WEIDMANN on future rate hikes: can't say what ECB will do ahead. No precommitment;ECB to analyze, decide anew each month. Official interest rates still relatively low. Economy in EMU currently developing quite dynamically. Dynamic economy can naturally foster price increases. Since 3Q11, infl expectations risen slowly but steadily. Inflation expectations decisive for monetary policy Mon policy not tailor-made for individual countries. Notes ECB fcasts show avg infl under 2% again in 2012. High infl of recent months mainly due energy,raw materials. Rate hike today to prevent broad-based infl pressures. ECB does not orient mon policy by what markets expect RECAP: ECB raised e-financing rate was raised by 25bp to 1.50%, as widely expected- with the decision being unanimous. The policy corridor was left unchanged, at 75bp either side of the re-financing rate. There had been some speculation beforehand that it could be re-widened back to the 'normal' 100bp either side, to dampen the impact on market rates of the hike in the re-financing rate. The tone of the Introductory Statement was very similar to the previous version. In particular, the risk assessments for growth and inflation were left as before. - For growth, the risks are still judged to be 'broadly balanced', in an environment of high uncertainty. The economy is slowing, but this is in line with the ECB's expectation, made clear in June, that growth would weaken relative to Q1. It was again emphasised, as in June, that underlying growth momentum remains positive, again suggesting that the ECB will look through the recent softening of some activity data. - The risks to price stability were again seen 'on the upside'. It was reiterated also that inflation pressure was discernible in the earlier stages of the production process, while it remains of paramount importance that Foreign Exchange Strategy Friday, 08 July 2011 http://www.GlobalMarkets.bnpparibas.com

second round effects do not materialise and inflation expectations remain well anchored. ECB to accept Portuguese debt regardless of rating (as done with Greece and Ireland before) but Trichet continued to maintain his hard lined stance against saying no to selective default when it comes to any Greek debt deal. Banks Said to Tussle with EBA Over Stress-Test Profit Estimates: EU regulators may publish estimates of the future profitability of the regions lenders as part of the bank stress-test results, four people familiar with the process said. Banks are challenging the proposal from the EBA because the estimates may be lower than figures published by some lenders, said the people, who didnt want to be identified. [BBG] UK: The UK front and business pages are covered with the news that Rupert Murdoch's empire has decided to close the UK's largest-selling Sunday paper next week, the decision coming in the wake of reports of phone-tapping and more recently The business page claims of bribes to police. The business pages switch attention to any implication for News Corporation's final bid for BSkyB. Japan Japan May Current Account Surplus -51.7% Y/Y Vs Apr -69.5%. Japan May Current Account Surplus at Y590.7 Bln. Nikkei News report observes that emerging market currencies are becoming a bigger focus for Japanese firms as they seek to avoid dollar fluctuations, and report cites the example of Sony Corp. as it likely will sell more tv's in emerging markets this fiscal year "than in Japan, the US and Europe." Nikkei says Sony is gearing up its FX capabilities and will be able to operate in 38 currencies by the end of the fiscal year from 27 at the end of 2006 fiscal year. Nikkei says China and other emerging economies account for about 40% of listed companies profits in Japan. China China Q2 business confidence index dips from Q1 China's business confidence index fell to 132.4 in the second quarter from 137.4 in the previous quarter, the national statistics agency said on Friday. (Reuters) China to release economic indicators earlier. China's statistics authorities said Thursday it will release the country's key economic indicators, including the consumer price index (CPI) and producer price index (PPI), two to three days ahead of the original schedule starting July. The move aims to shorten the time between the data compilation and release, reducing the risk of possible leaks and to better meet public demand for the economic data, said the National Bureau of Statistics (NBS) in an online statement. (ChinaDaily)

Most Economists Expect No More PBOC Interest Rate Hikes This Year: 8 of 13 economists polled by Dow Jones expect no further China rate hikes this year. Expectation that inflation will fall after June underpins forecasts- primarily reflecting stabilising food prices and y/y base effects. Economists expect PBOC to hike reserve requirement ratio one to two more times this year. The remaining 5 economists expect one more lending rate hike in the third quarter. Several economists declined to give a forecast for how much higher the PBOC may raise the RRR< with some suggesting it was dependent on how much foreign funds flow into the country, requiring the central bank to mop them up. [DJ Poll] China PBoC governor to speak at a forum. Chinese central bank governor Zhou Xiaochuan is scheduled to speak at a forum in Beijing today at 1:30 p.m. local time. Other speakers at the event include Nobel-prize winning economist Joseph Stiglitz. The National Bureau of Statistics is scheduled to release consumer prices and producer price data for June tomorrow. Inflation may have gained 6.2% in June, according to a Bloomberg survey of 19 economists. (Bloomberg) Temasek seeks more deals in China, citing bullish outlook. Temasek Holdings Pte, Singapores stateowned investment company, is bullish on China and seeking deals even after selling some of its stakes in two of the nations banks this week for $3.6 billion. China is our largest investment destination, Nagi Hamiyeh, Temaseks managing director of investment, said in Singapore yesterday. We are still looking for opportunities in China and we are very comfortable with our position there at this time. (Bloomberg) China may cut spending on strategic industries China may rein in plans to invest heavily in seven new strategic industries, including high speed rail and wind power, scaling back cutting-edge projects for industries suffering from old-fashioned problems such as corruption and overcapacity, sources said. (Reuters) China central government departments fail to disclose spending. Almost all central government departments, excluding the Ministry of Science and Technology (MST), failed to publish expenses for "overseas trips, vehicles and receptions" by the end of June, a deadline set by the State Council. The government's "opaque" spending has exacerbated public concerns about potential corruption and extravagance on the part of officials. Since May, the State Council has repeatedly called on its ministries to reduce "squandering practices" and make their fiscal information public in more areas and "provide greater details", especially regarding funds used for the "three public consumptions" - overseas travel, receptions and official cars - as these items have long been criticized as "sources of corruption and waste". (ChinaDaily) Reuters citing sources said CNH deposit of RMB participation banks placed at BOC HK will be invested in the Mainland interbank bond market. Investment return will be passed to participation bank every six months. (Reuters) Foreign Exchange Strategy Friday, 08 July 2011 http://www.GlobalMarkets.bnpparibas.com

Other Asia: Korea June annual PPI steady vs. May. South Korean annual producer price inflation held steady in June after easing for two consecutive months although it remained relatively high, data showed on Friday, a week before the central bank's monthly policy meeting. The producer price index rose 6.2% in June from a year earlier, the same as in May when the pace of growth slowed from 6.8% in April and 7.3% in March. It was still high compared to an average rise of 3.8% for the whole of 2010 and a decline of 0.2% in 2009. (Reuters) U.S. and Seoul Make Plans to Respond to Attacks U.S. and South Korean military leaders this year developed broad new countermeasures and plans for dealing with North Korean attacks against the South, amid pressure in Seoul to take a more aggressive stance toward its rival in the future, the commanding general of the combined forces said. (WSJ) India's Election Test: Campaign in Uttar Pradesh Pits a Populist Against Gandhi Heir Elections in India's most populous state won't take place for many months, but the battle already is well under way, pitting the scion of the Gandhi-Nehru dynasty against one of India's most charismatic politicians. (WSJ) Philippine c.bank says likely to meet inflation goal The Philippine central bank said on Thursday inflation pressures from higher commodity prices and excessive liquidity remained manageable, and it expected to meet the government's 3 to 5 percent inflation target for 2011. (Reuters) Reuters poll shows that the Bank of Thailand is likely to raise its benchmark interest rate for a sixth straight meeting next Wednesday to continue its normalization efforts as well as ward off escalating price pressures. (Reuters) Malaysia to block KL roads to stop protest rally. Major roads into Malaysias capital city will be closed and buses diverted tomorrow when a group campaigning for fair elections plans to defy a government ban on staging a protest rally in Kuala Lumpur, the police said. (Bloomberg) Others Central banks pull most gold in decade from BIS. Central banks have pulled 635 tonnes of gold from the Bank for International Settlements in the past year, the largest withdrawal in more than a decade. The move, disclosed in the BISs annual report, marks a sharp reversal from the previous year when central banks added to deposits of gold at the so-called bank for central banks rather than lending it directly to the private sector amid growing concerns over counterparty risk. (FT) Push to Regulate Derivatives is Under Strain. The global deal to regulate opaque derivatives markets is under strain, according to officials and bankers, amid increased tensions between countries on the shape of

the new regime. Group of 20 leaders struck an agreement in 2009 to force over-the-counter derivatives through central clearing and, where possible, on to electronic exchanges in an attempt to boost transparency and reduce risk in the notoriously shadowy market. (FT) Brazils inflation is under control and the country will meet its inflation target, FinMin Mantega said during an Economist conference in Paris today. Latin Americas economy isnt overheated and the country doesnt have a credit bubble, Mantega said. Brazilian President Dilma Rousseff is more concerned about containing inflation than stemming a rally in the nations currency, said a government official familiar with her views. The government isnt weighing any further steps to stem gains by the real said the official who cant be named because he isnt authorized to discuss her policies publicly. [BBG]

Foreign Exchange Strategy Friday, 08 July 2011 http://www.GlobalMarkets.bnpparibas.com

Higher USDCAD Volatility Set to Persist

Having traded within an effective 0.97-0.99 range during most of June, USDCAD has since exhibited much more extreme volatility, breaking above 0.99 (and to above its 200-day moving average) only to test and break 0.9600 shortly thereafter. The cross currents buffeting the Canadian dollar are quite intense. They include oil and other hard commodity prices, global risk appetite, Bank of Canada policy and the strength of demand for the Canadian dollar by global reserve managers. The significance of the latter should not be understated. The IMFs latest update on FX reserves confirms central banks to still be scaling up their holdings of other currencies, a category that includes mostly CAD, AUD, SEK and NOK. In Q1, the sub-group of central banks who reveal the breakdown of their reserves raised the value of their 'other holdings by some USD 23bn. A good part of this will have been FX valuation effects, but over the past year, it looks like this group added close to USD 70bn worth of other currencies to reserves. If this behaviour has been replicated among countries who dont report their currency breakdown (most notably China), the addition will be more like USD 150bn. CAD is likely to account for at least quarter of this, and we envisage CB demand providing ongoing and meaningful support for the CAD. The Bank of Canada, meanwhile, is likely to remain a benign influence on the currency through Q3 and possibly Q4. While the latest CPI reading was somewhat disconcerting, core inflation (more important than headline CPI for BoC operational purposes) remains at 1.8%, below the mid-point of the 1-3% target band. Growth has undoubtedly slowed off the 3.9% annualized Q1 pace, and Bank of Canada Governor Carney in late June indicated the need for continued accommodative policy in order to close the output gap. We, therefore, see no urgency on the central banks part to adjust rates from their current 1%. As a result, interest rate spreads between the United States and Canada are unlikely to be exerting significant influence on near term USDCAD volatility. In contrast, oil/commodity price volatility and risk appetite both have potential to push USDCAD to or through both sides of the recently expanded trading range. USDCAD continues to rank among the top three G10 currency pairs in terms of positive correlation with the S&P500 (alongside AUD and SEK). Risk appetite and the US dollar have, in recent years, been highly negatively correlated; if this relationship holds and we have significant risk-positive event such as meaningful and credible agreement on a long term US fiscal reform/deficit reduction, USDCAD could quickly extend through its recent lows. Alternatively, such an event might (and especially in the context of ongoing eurozone fiscal travails) prove dollar positive, in which case, USDCAD could move to retest the recent highs above 0.99. There are many variants on this theme, including a breakdown in deficit talks or a further turn for the worse (or better) in eurozone fiscal stresses that could have dramatic impact on risk sentiment with ambiguous USD implications, but they are all likely to entail the maintenance of higher levels of USDCAD volatility. Foreign Exchange Strategy Friday, 08 July 2011 http://www.GlobalMarkets.bnpparibas.com

Chart 1: USDCAD vs. DJIA

-6000 -7000 -8000 -9000 -10000 -11000 -12000 -13000 -14000 -15000 05 06 07 08 09 10 USDCAD (rhs) DJIA (inverted) 1.35 1.30 1.25 1.20 1.15 1.10 1.05 1.00 0.95 0.90

Source: Reuters Ecowin Pro

Chart 2: USDCAD vs. Oil

30 40 50 60 70 80 90 100 110 120 130 140 150 05 1.30 WTI (inverted) 1.25 1.20 1.15 1.10 1.05 1.00 USDCAD (rhs) 06 07 08 09 10 11 0.95 0.90

Source: Reuters Ecowin Pro Lastly, the added volatility in oil prices engendered by the IEA decision to release 60 mn barrels of oil from strategic reserves, accounts for a significant portion of recent USDCAD volatility. USDCAD correlations with oil on any time frame longer than month run consistently above 50% (daily % changes), but CAD has underperformed the recent rebound. If oil prices hold current levels, USDCAD should (broader risk appetite themes aside) extend through its recent lows. Another sharp fall, in contrast, would likely be associated with USDCAD moving to retest the top side of the range and bringing parity back under discussion. Strategy: Buy 1mo 25d strangle, indicative cost 0.80% (strikes 0.9445 and 0.9755, vol offer 8.85).

Daily Currency Summary

G3
The ECBs actions on rates and words with respect to the outlook (highly uncertain regarding risks to the real economy but a strong re-iteration of upside inflation pressure without any pointers to subsequent rate action) had less impact than subsequent press conference remarks with respect to euro-peripheral issues. Mr Trichets (unsurprising) admission that the ECB would suspend its ratings rules on Portuguese debt (just as it has already done with Greece) and insistence that it will not accept Greek paper in the event of a ratings event arising from PSI in a debt roll-over, played net EURUSD positive. EURUSD still highly susceptible to negative news headline risk with no signs of early resolution of the PSI issue and the problems of herding all the EU member state sheep back into the pen that is a new Greek bailout package, should PSI be dropped. USDJPY finally broke out on the top side of the recent range, though the follow-through after the spurt up to Y81.40 was notable by its absence with options related selling doubtless part of the story here. If risk appetite can be sustained via a US payroll report than mimics ADP, then we would expect renewed upward progress in the days ahead. The failure of USDJPY to gather topside momentum still leaves EURJPY predominately a EURUSD trade, although we would now be more hopeful that crosses can move higher barring a very quick fall back in USDJPY. EURJPY is much less preferred to other crosses such as AUDJPY and CADJPY.

EURUSD

USDJPY

JPY Crosses

EUR Bloc
The Bank of England kept policy unchanged as expected - benchmark rate at 0.50%, Asset Purchase plan at GBP 200bn. UK manufacturing output rebounded strongly in May, rising by 1.8% m/m. But this followed a (revised) 1.6% m/m fall in the prior month, with April's data distorted by working day disruptions. Industrial output fared less well in May, rising by 0.9% m/m, roughly half the magnitude of the 1.7% m/m drop in April and NIESR reckons Q2 GDP will be only +0.1%. EURGBP should continue to find the upside on higher EURUSD easier than the reverse. With EUR trading firmer out of the post ECB meting press conference and risk very much back on elsewhere in the world EURCHFs bumpy ride continues, up 150 pips from the intra lows and USDCHF almost back to its prior week highs. We look for some further progress in both pairs with the now ever-present caveat regarding Eurozone headline risk to EURCHF longs. Swiss CPI accelerates but less than expected in June: 0.6% y/y (0.7% tipped) vs. 0.4% y/y in May low enough to keep the SNB dragging the chain on policy while CHF remains so strong. EURNOK pressed range lows Thursday and NOKSEK held up well none too surprising given a near $5 jump in the Brent oil price. Erratic Norwegian industrial production data was largely ignored. SEK is usually a better risk-on counter than NOK and we would expect some NOKSEK slippage if risk remains supported out of US payrolls, but the story remains the same, and NOKSEK is still consolidating in a 1.1650-1.1750 range near term. It was a little surprising not to see EURSEK lower Thursday given the generally risk on tone, but it seems there was some hesitancy in adding to SEK longs given the move weve seen in the past 10 days or so. The Golden cross (50day ma moving above the 100day) may also have been a factors holding the pair up. We doubt this will survive a good US payrolls number on Friday and continue to look for more SEK upside, whether EURSEK or CHFSEK, though the latter is of course susceptible to any fresh bad news headlines out of the Eurozone.

EURGBP

EURCHF

EURNOK

EURSEK

USD Bloc
Oil and stocks moving higher in tandem is always heady cocktail for CAD and so it proved on Thursday. The much weaker than expected Ivey PMI (59.9 from 65.5 in SA terms) failed to register even though it should add to the BoCs comfort in ignoring the rise in underlying inflation reported last week. New local lows at 0.9569 leaves us biased for further losses, the main caveat here being any breakdown in the better risk tone or, in the context of ongoing wariness towards the euro, a dollar positive rather than negative response to any risk on news regarding either US payrolls on Friday or the US deficit reduction/debt ceiling deliberations. AUDUSD has held up rather well, despite the barrage of negative catalysts the Chinese +25bps rate hike today, negative Moodys reports on Greece and Portugal and on Chinese NPLs. Australian June employment rebounded today, but while the data provides a welcome break from recent disappointing data, it is but one print in a highly volatile series. Having flirted with resistance in the 1.0770-80 area Thursday, any USD negative response to US payrolls should see us trade clean through. AUDNZD retraced its entire post-Australian employment data rally, reinforcing the sanctity of the 1.2780-1.3050 range.

USDCAD

AUDUSD

NZDUSD

Foreign Exchange Strategy Friday, 08 July 2011 http://www.GlobalMarkets.bnpparibas.com

FX Forecasts*
USD Bloc EUR/USD USD/JPY USD/CHF GBP/USD USD/CAD AUD/USD NZD/USD USD/SEK USD/NOK EUR Bloc EUR/JPY EUR/GBP EUR/CHF EUR/SEK EUR/NOK EUR/DKK Central Europe USD/PLN EUR/CZK EUR/HUF USD/ZAR USD/TRY EUR/RON USD/RUB EUR/PLN USD/UAH EUR/RSD Asia Bloc USD/SGD USD/MYR USD/IDR USD/THB USD/PHP USD/HKD USD/RMB USD/TWD USD/KRW USD/INR USD/VND LATAM Bloc USD/ARS USD/BRL USD/CLP USD/MXN USD/COP USD/VEF USD/PEN Others USD Index *End Quarter Q3 '11 1.50 78 0.83 1.65 0.98 1.09 0.82 5.93 4.98 Q3 '11 117 0.91 1.25 8.90 7.47 7.46 Q3 '11 2.60 24.3 275 6.80 1.52 4.20 27.51 3.90 7.8 100 Q3 '11 1.22 2.95 8500 29.80 42.50 7.80 6.40 28.00 1060 45.50 20500 Q3 '11 4.18 1.58 450 11.40 1730 4.29 2.70 Q3 '11 72.30 Q4 '11 1.55 83 0.83 1.68 0.93 1.13 0.84 5.48 4.77 Q4 '11 129 0.92 1.28 8.50 7.40 7.46 Q4 '11 2.48 24.5 275 6.60 1.50 4.15 27.25 3.85 7.8 100 Q4 '11 1.21 2.90 8400 29.50 42.00 7.80 6.31 27.50 1050 45.00 20000 Q4 '11 4.25 1.55 435 11.10 1690 4.29 2.65 Q4 '11 70.76 Q1 '12 1.45 85 0.90 1.59 0.95 1.07 0.81 5.93 5.07 Q1 '12 123 0.91 1.30 8.60 7.35 7.46 Q1 '12 2.69 24.1 269 6.55 1.56 4.20 27.86 3.90 7.5 98 Q1 '12 1.21 2.87 8300 29.30 41.50 7.80 6.25 27.00 1040 44.50 20000 Q1 '12 4.34 1.53 425 11.00 1690 4.29 2.63 Q1 '12 74.87 Q2 '12 1.40 90 0.93 1.56 0.97 1.04 0.80 6.21 5.26 Q2 '12 126 0.90 1.30 8.70 7.37 7.46 Q2 '12 2.75 23.9 265 6.60 1.59 4.25 27.97 3.85 7.5 97 Q2 '12 1.20 2.85 8200 29.00 41.00 7.80 6.21 26.70 1030 44.00 20000 Q2 '12 4.43 1.55 430 10.90 1700 4.29 2.63 Q2 '12 77.62 Q3 '12 1.35 95 1.00 1.53 1.01 0.99 0.76 6.67 5.56 Q3 '12 128 0.88 1.35 9.00 7.50 7.46 Q3 '12 2.81 23.8 265 6.50 1.63 4.15 28.08 3.80 7.5 96 Q3 '12 1.19 2.83 8100 28.70 40.50 7.80 6.17 26.50 1020 43.50 20000 Q3 '12 4.51 1.56 435 11.00 1710 4.29 2.64 Q3 '12 80.72 Q4 '12 1.35 95 1.00 1.53 1.01 0.99 0.76 6.67 5.56 Q4 '12 128 0.88 1.35 9.00 7.50 7.46 Q4 '12 2.78 23.5 260 6.50 1.65 4.10 27.65 3.75 7.5 95 Q4 '12 1.18 2.80 8000 28.50 40.00 7.80 6.13 26.00 1010 43.00 20000 Q4 '12 4.60 1.58 440 11.10 1720 4.29 2.66 Q4 '12 80.72 Q1 '13 1.30 95 1.04 1.53 1.04 0.96 0.74 6.92 5.77 Q1 '13 124 0.85 1.35 9.00 7.50 7.46 Q1 '13 2.85 23.7 260 7.20 1.65 4.20 28.19 3.70 7.5 93 Q1 '13 1.17 2.77 7900 28.30 39.50 7.80 6.23 26.00 1000 43.00 20000 Q1 '13 4.69 1.59 442 11.10 1725 8.80 2.67 Q1 '13 82.99 Q2 '13 1.30 95 1.04 1.53 1.04 0.96 0.74 6.92 5.77 Q2 '13 124 0.85 1.35 9.00 7.50 7.46 Q2 '13 2.77 24.0 255 7.10 1.67 4.20 27.75 3.60 7.5 92 Q2 '13 1.16 2.75 7800 28.00 39.00 7.80 6.20 26.00 1000 42.50 20000 Q2 '13 4.78 1.60 445 11.17 1730 8.80 2.68 Q2 '13 82.99 Q3 '13 1.30 95 1.04 1.53 1.04 0.96 0.74 6.92 5.77 Q3 '13 124 0.85 1.35 9.00 7.50 7.46 Q3 '13 2.85 23.5 260 7.00 1.69 4.10 29.07 3.70 7.5 91 Q3 '13 1.15 2.73 7800 28.00 39.00 7.80 6.17 26.00 1000 42.50 20000 Q3 '13 4.86 1.61 447 11.25 1740 8.80 2.69 Q3 '13 82.99 Q4 '13 1.30 95 1.04 1.53 1.04 0.96 0.74 6.92 5.77 Q4 '13 124 0.85 1.35 9.00 7.50 7.46 Q4 '13 2.85 23.3 260 6.90 1.69 3.95 27.75 3.70 7.3 90 Q4 '13 1.14 2.70 7800 28.00 39.00 7.80 6.15 26.00 1000 42.00 20000 Q4 '13 4.95 1.62 450 11.30 1750 8.80 2.70 Q4 '13 82.99 Q1 '14 1.34 114 1.09 1.70 1.21 0.78 0.56 6.94 5.07 Q1 '14 153 0.79 1.46 9.30 6.80 7.46 Q1 '14 2.65 23.1 250 6.69 1.54 3.90 27.75 3.55 7.4 85 Q1 '14 --------------------------------------------Q1 '14 ----------------------------Q1 '14 83.88

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FX - Global Strategy Contacts

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Ray Attrill James Hellawell Kiran Kowshik Mary Nicola Drew Brick Chin Loo Thio Robert Ryan Jasmine Poh Gao Qi Bartosz Pawlowski Diego Donadio Senior Currency Strategist Quantitative Strategist Currency Strategist Currency Strategist Head of FX & IR Strategy Asia FX & IR Asia Strategist FX & IR Asia Strategist FX & IR Asia Strategist FX & IR Asia Strategist Head of FX & IR Strategy CEEMEA FX & IR Latin America Strategist New York London London New York 1 212 841 2492 44 20 7595 8485 44 20 7595 1495 1 212 841 2492 raymond.attrill@americas.bnpparibas.com james.hellawell@uk.bnpparibas.com kiran.kowshik@bnpparibas.com mary.nicola@americas.bnpparibas.com drew.brick@asia.bnpparibas.com chin.thio@asia.bnpparibas.com robert.ryan@asia.bnpparibas.com jasmine.j.poh@asia.bnpparibas.com gao.qi@asia.bnpparibas.com bartosz.pawlowski@uk.bnpparibas.com diego.donadio@@br.bnpparibas.com

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