Market Mover - BNP PARIBAS - Investment Services India

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Global risks While the stress in the eurozone has intensified over the past week and the euro has come under significant pressure, it is interesting to note that the euro has not been the weakest currency. In fact since the beginning of the year, although the euro is lower against the USD, it has remained supported on many of the crosses. The underperformers are the commodity currencies and sterling. In fact the commodity currencies could well be the main casualties of the year, along with sterling. Sterling stands out – as vulnerable In many cases sterling and the commodity currencies are exposed to the very risks that are currently causing the most concern within Europe. Indeed, the UK net debt to GDP ratio is expected to increase rapidly over the next few years, reaching 67% in 2010 and 74% in 2011 on our forecasts. This is likely to be worse than in Spain, where government debt is expected to reach 66.3% of GDP in 2010 and 74.0% in 2011. While sterling stands out as the most vulnerable of the major currencies given its poor and deteriorating fiscal position, which is likely to see the UK’s AAA rating called into question post the election if action is not taken, the commodity currencies are also exposed to the additional risk of global liquidity withdrawal. Indeed, signs that the action already taken by China is beginning to bite is starting to have a direct negative impact on the AUD far earlier than originally anticipated. The RBA has also signalled a slowing of the pace of tightening, citing the anticipated tightening of policy in China. As a result, we have also lowered our AUDUSD forecast. Most bearish In the case of sterling we have the most bearish GBPUSD forecast in the market for end-2010 (GBPUSD 1.31) and the data from the UK provide little reason to change this bearish assessment. The UK has shown the weakest and most fragile of recoveries, especially compared to its developed economy peers. Taking a full quarter longer to emerge from recession than most other major economies, with a weak 0.1% q/q print in Q4, there are also signs that the brighter spots within the UK economy are already running out of steam. The latest survey evidence from the UK consumer sector (BRC) is showing some worrying signs, but the biggest concern has to be the collapse in the new buyer enquires in the housing market as revealed by the RICS house price survey. This is widely regarded as one of the better leading indicators of the UK housing market and the current pace of deterioration does not bode well for the housing market. Chart 5: BoE Corrects Rate Expectations, which Will Move GBPUSD Lower 1.750 1.725 1.700 1.675 1.650 1.625 1.600 1.575 1.550 1.525 Jul Rate expectations (FRA 3x9) GBPUSD (lhs) Source: Reuers EcoWin Pro, BNP Paribas 75 50 25 0 -25 -50 -75 Sep Oct Nov Dec Jan 09 10 Chart 6: RICS House Price Survey RICS House Price Expectations RICS New Buyer Enquires 00 01 02 03 04 05 06 07 08 09 Source: Reuers EcoWin Pro, BNP Paribas BoE dovish The BoE has also delivered a very dovish assessment, which is consistent with our view that interest rates will remain at an extremely low level for an extended period of time, probably throughout 2010 and well into 2011. In fact BoE Governor King has left the door wide open for a resumption of the asset purchase programme if required (the asset purchase programme was paused at the February MPC meeting). Meanwhile, the BoE has undertaken a significant downward revision of its inflation forecasts, suggesting that inflation will remain below the target throughout the two year forecast period. An adjustment of market interest rate expectations will also add to the negative picture for sterling. Liquidity withdrawal gains momentum Global liquidity withdrawal remains a major risk for global asset markets and the commodity currencies, where we expect increased volatility to develop in the coming months. While, the BoE has left the door 1.0 0.9 0.8 0.7 0.6 0.5 0.4 0.3 0.2 0.1 75 50 25 0 -25 -50 -75 -100 Ian Stannard 12 February 2010 Market Mover, Non-Objective Research Section 40 www.GlobalMarkets.bnpparibas.com
open for further measures if required, elsewhere the withdrawal of liquidity is gaining momentum. Despite the fiscal problems in eurozone, the ECB has continued on the path of unwinding unorthodox measures, with the more hawkish members reiterating the need to normalise money markets. In the US, Fed Chairman Bernanke has also laid out the process of liquidity withdrawal and policy normalisation. This removal of liquidity from the global financial system will have a huge impact given that this was the fuel driving asset and commodity markets over the past year. We would suggest that the asset markets currencies which were the biggest beneficiaries of this liquidity injection will now be the most at risk. Chart 7: AUDUSD and Commodity Prices 1.00 Indust Commodities Index (rhs) 0.95 0.90 0.85 0.80 0.75 0.70 0.65 AUDUSD Spot 0.60 05 06 07 08 09 10 Source: Reuers EcoWin Pro, BNP Paribas 275 250 225 200 175 150 125 100 AUD exposed We would place the AUD near the top of the list of currencies now exposed, especially given the close links to China. Indeed, it is worth remembering that China has been a huge source of USD liquidity over the course of the past year. China has also been running ultra loose monetary policy with the management of the yaun generating huge reserve accumulation (Chinese reserves have grown by USD 453bn over the past year) and diversification, adding to the USD liquidity. However, the explosion in Chinese credit growth at the beginning of the year appears to have triggered a stepping up of tightening measures in China to bring money supply and lending back under control. Initial signs suggest that these measures are having an impact already. If the Chinese authorities are successful in limiting the more speculative aspects of investment then the AUD will suffer as a direct result as commodity and equity markets come under pressure. Note the sharp decline in equity market over the past month, with the S&P 500 down over 6%, the Eurostoxx down over 10%, and the Shanghai index down over 7%. Safe havens? The USD is expected to be the main beneficiary of the global reduction in risk appetite resulting from the liquidity withdrawal process, with the fiscal problems in Europe undermining the euro’s fledgling reserve status. But, we expect the USD’s appeal to go beyond its safe haven status, with global investors once again seeing the US as a destination of choice. There is already evidence of this among Japanese investors where the Lifer companies are under increasing pressure to extend exposure to overseas assets and US Treasuries in particular. JGB yields are set to remain at low levels for a extremely long period of time, with even the prospect of Japan entering quantitative easing (just when everyone else is looking for the exit) to keep yields down. Japanese investors are also expressing an interest in lower hedge ratios on their US exposure as rate Chart 8: Swedish Retail Sales and SEK 90.0 87.5 SEK-TWI 85.0 82.5 80.0 77.5 75.0 72.5 70.0 67.5 65.0 62.5 R etail sales (% y/y, RH S) 60.0 98 00 01 02 03 04 05 06 07 08 09 Source: Reuers EcoWin Pro, BNP Paribas 10 9 8 7 6 5 4 3 2 1 0 -1 -2 expectations in the US start to rise. This will provide USDJPY with medium-term support and we reiterate our USDJPY 108 forecast for end-2010. Within Europe, the Scandinavia countries are now in a unique position. Norway and Sweden have not been tainted with the fiscal problems seen throughout much of the rest of Europe. Indeed, by comparison, debt levels in Norway and Sweden are low, projected to be at 50.6% and 43.6% of GDP respectively in 2010 and at 45.2% and 44.1% of GDP in 2011 (European Commission forecasts). The relatively strong fiscal position, especially in Norway, should provide support. However, with the Norges Bank having already started tightening monetary policy and the Riksbank relatively hawkish, both currencies will benefit from relative interest rate expectations. We would also recommend short GBPSEK positions in this environment, to take advantage of relative fiscal and debt positions. Ian Stannard 12 February 2010 Market Mover, Non-Objective Research Section 41 www.GlobalMarkets.bnpparibas.com
Page 1 and 2: Market Economics | Interest Rate St
Page 3 and 4: gave a few specific details on the
Page 5 and 6: More clarity was given on the seque
Page 7 and 8: Sovereign Debt: Time for Europe to
Page 9 and 10: The PS is more likely to face in th
Page 11 and 12: outlook for GDP and inflation. So h
Page 13 and 14: On inflation, Riksbank’s language
Page 15 and 16: Spending on other areas never did i
Page 17 and 18: would argue that resolving this iss
Page 19 and 20: Ramifications for Rates, Swap Sprea
Page 21 and 22: EUR: Demand for ECB’s Liquidity S
Page 23 and 24: EUR: Peripheral ASW Curves Re-Steep
Page 25 and 26: JGBs: Wait for Price Dips in Q2 •
Page 27 and 28: Table 1: BNP Paribas' Inflation For
Page 29 and 30: Table 3: BNP Paribas' Inflation For
Page 31 and 32: Table 1: BNP Paribas Carry Analysis
Page 33 and 34: Update on curves 5/10y indices’ c
Page 35 and 36: Technical Analysis - Interest Rates
Page 37 and 38: Trade Reviews Options, Money Market
Page 39: leave the euro significantly lower.
Page 43 and 44: EUR/SEK has broken sharply lower th
Page 45 and 46: Economic Calendar: 12 - 19 February
Page 47 and 48: Key Data Preview 115 105 95 85 75 6
Page 49 and 50: Key Data Preview Chart 5: Italian G
Page 51 and 52: Key Data Preview Source: Reuters Ec
Page 53 and 54: Key Data Preview Chart 13: Norwegia
Page 55 and 56: Key Data Preview Chart 17: UK Retai
Page 57 and 58: Economic Calendar: 15 February - 12
Page 59 and 60: Next week's T-Bills Supply Date Cou
Page 61 and 62: Economic Forecasts GDP Year 2009 20
Page 63 and 64: Market Coverage Market Economics Pa

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