FX Forecast Update - Danske Analyse - Danske Bank

FX Forecast Update 17 December 2012Return of the SEKArne Lohmann RasmussenChief Analyst, Head of Rates, FX and Commodities StrategyKasper Kirkegaard Stefan Mellin Stanislava PravdovaSenior Analyst Senior Analyst AnalystMorten Helt Lars Christensen Christin Tuxen Vladimir MiklashevskySenior Analyst Chief Analyst Senior Analyst Analystwww.danskebank.com/researchBloomberg: DRFX Important disclosures and certifications are contained from page 33 of this report.www.danskeresearch.com

Main forecast changes• We expect most G10 currencies to continue the past quarters’ range-trading and only look for trends in the Europeancurrencies against the yen. Volatility remains very low on the currency market and with stable (low) growth and fewdifferences in monetary policy there are no obvious triggers for big trends.• The Swedish krona has weakened as expected and EUR/SEK has reached our old 8.75 one-month forecast. We expectthe krona sell-off to be nearing the end, however, as about two rate cuts are already priced in the money market. Our mainscenario is a gradual move lower in EUR/SEK going into 2013 and we have lowered our one-month forecast to 8.65.• The Japanese yen has now weakened by almost 14% since mid-year and we expect further weakness in 2013. Globalmacro data are improving and the probability of further monetary easing in Japan has increased (i.e. we see a highprobability of a higher inflation target). As a result, we have lifted our USD/JPY forecast to 85 (3M), 87 (6M), and 88(12M).• On the commodity currencies, we have revised higher our near-term forecasts for AUD/USD and notably NZD/USD asthe latter sees support from a less-dovish RBNZ than previously, as the new governor seems fairly complacent aroundthe growth outlook. With BoC a lone rider among major central banks in maintaining a hawkish bias and aggressive Fedeasing tailwinds gathering for the loonie, we have lowered our near-term USD/CAD projection.• We are fairly positive about the prospects for the EMEA currencies and over the past months we have not gotten muchnews to fundamentally change our view on the region’s currencies. As a consequence our FX forecasts for the EMEAcurrencies are fairly unchanged compared with a month ago.. However, we have adjusted our forecasts for the Turkishlira and the Russian rouble in a more positive direction – mostly because we have become more confident that carrytrades will do well in 2013 on the back of especially fairly aggressive monetary easing in the US. This clearly should besupportive of the relatively high yielding Turkish and Russian currencies.www.danskeresearch.com2

EUR/USD – US fiscal cliff delivers temporary dollar support• Growth. The US is once again outperforming Europe,which remains caught in a zero-growth environment.• Monetary policy. ECB and not least Fed action over thepast couple of quarters has clearly been euro positiveand dollar negative. Relative monetary policy shouldremain a support factor for EUR/USD going into 2013.• Flows. The US runs a sizeable current account deficit,which should amplify the currency-negative effects ofthe Fed’s open-ended easing. We look for a positivecarry environment, which should weigh on the dollar.• Valuation. EUR/USD is trading around neutral levelsaccording to long-term models (PPP estimate is 1.28).• Risks. There are three key risk factors to EUR/USDover the next couple of months: (i) the US fiscal cliff,which could trigger a market sell-off (USD positive), (ii) ifthe global economic recovery proves false, and (iii) ECBrate cuts – a deposit rate cut would make relativemonetary policy much less of a EUR/USD supportfactor.Kasper Kirkegaard, Senior Analyst, kaki@danskebank.com, +45 45 13 70 18Forecast: 1.34 (3M), 1.35 (6M) and 1.32 (12M)1.451.401.351.301.251.20EUR/USD1.15Dec-11 Mar-12 Jul-12 Oct-12 Jan-13 May-13 Aug-13 Nov-1375% conf. int. 50% conf.int. Forward Danske fcst Consensus fcstEUR/USD 1M 3M 6M 12MForecast (pct'ile) 1.33 (70%) 1.34 (69%) 1.35 (67%) 1.32 (47%)Fwd. / Consensus 1.32 / 1.28 1.32 / 1.28 1.32 / 1.27 1.32 / 1.2750% confidence int. 1.30 / 1.33 1.29 / 1.35 1.27 / 1.37 1.25 / 1.3975% confidence int. 1.28 / 1.35 1.26 / 1.37 1.23 / 1.40 1.18 / 1.45Source: Danske Bank Markets• Conclusion. The ECB has reduced tail-risks in Europeand the Fed has secured an historical easingcommitment in the US. Relative monetary policy is nowclearly favouring EUR/USD upside.Relative growth is favouring the dollar, however, andshould continue to reduce the impact from relativemonetary policy. The US fiscal cliff is dollar positive,but going into 2013 we expect renewed upside inEUR/USD.www.danskeresearch.com3

EUR/USD – important issues to watch• A clear trend reversal in relative monetary policy...− For more than a year, relative monetary policy hasbeen supporting a euro downtrend as the ECB wascatching up with the Fed. This trend was broken inSeptember.− Even though it is too early to dismiss further ECBeasing, it appears highly unlikely that the ECB willbe able to match the Fed’s open-endedcommitment to monetary easing.• ...but relative growth lowers the FX impact− US economic data has surprised strongly on theupside recently, while European data remainsweak. If this growth differential is sustained beyondthe US fiscal cliff, it is likely to reduce the EUR/USDpositive effects from relative monetary policy.• US fiscal cliff is dollar positive – not negative− The US fiscal cliff is a major tail-risk for both the USeconomy and for the US sovereign credit rating.For most other countries this would translate intoan increased tail-risk on its currency. However, thedollar is the world’s main reserve currency and isthus seeing support from increased marketuncertainty.Kasper Kirkegaard, Senior Analyst, kaki@danskebank.com, +45 4513 70 18Stabilisation in relative rates1 1 5 .0125In d e xBp1 1 2 .51001 1 0 .0751 0 7 .5501 0 5 .0251 0 2 .501 0 0 .0-2 59 7 .5-5 0< < T r a d e - w e ig h t e d E U R in9 5 .0T r a d e - w e ig h t e d 2 Y s w a p s p r e a d-7 59 2 .5-1 0 0J u l N o v M a r J u l N o v M a r J u l N o v M a r J u l N o v09101112Source: Reuters EcoWin, Danske Bank MarketsHistorical Fed easing in the pipeline400040003750U S D b nU S D b n375035003500325032503000S iz e o f F e d b a la n c e s h e e t3000275027502500250022502250200020001750175015001500125012501000100075075007 08 09 10 11 12 13Source: Reuters EcoWin, Danske Bank Marketswww.danskeresearch.com4

EUR/GBP – Bank of England on hold for now• Growth. Q3 GDP ended the double-dip recession in theUK with a rise of 1.0% q/q. However, the leadingindicators show a cloudier picture and bothmanufacturing and construction PMI remain below 50.Underlying activity remains soft and Q4 GDP growth islikely to be significantly weaker than Q3. We do,however, expect growth slowly to pick up in 2013.• Monetary policy. The Bank of England (BoE) kept its assetpurchase target at GBP375bn at the December meeting.However, as the BoE is to transfer received interestpayment on the bonds to the Treasury, this effectivelycorresponds to a monetary expansionary effect of aroundGBP11bn in 2013.• Debt risks. UK has been put on negative watch by S&Pand Chancellor Osborne has missed the debt target.• Valuation. From a long-term perspective, sterling isundervalued (PPP around 0.77). A regime shift hasprobably happened though and EUR/GBP, in our view,belongs above 0.80 in 2013.• Risks. Much more aggressive monetary policy than weexpect. GBP and USD are still highly correlated. Hence,if we are wrong on EUR/USD we are probably alsowrong on EUR/GBP. UK entering a new recession.Arne Lohmann Rasmussen, Chief Analyst, arr@danskebank.dk, +45 45 12 85 32Forecast: 0.83 (3M), 0.85 (6M) and 0.83 (12M)0.900.850.800.75Dec-11 Mar-12 Jul-12 Oct-12 Jan-13 May-13 Aug-13 Nov-13EUR/GBP 1M 3M 6M 12MForecast (pct'ile) 0.82 (71%) 0.83 (77%) 0.85 (86%) 0.83 (59%)Fwd. / Consensus 0.81 / 0.80 0.81 / 0.80 0.81 / 0.79 0.82 / 0.7950% confidence int. 0.81 / 0.82 0.80 / 0.83 0.79 / 0.84 0.79 / 0.8575% confidence int. 0.80 / 0.83 0.79 / 0.84 0.78 / 0.85 0.75 / 0.87Source: Danske Bank MarketsEUR/GBP75% conf. int. 50% conf.int. Forward Danske fcst Consensus fcst• Conclusion. We expect the combination of a weakerdollar and the risk of further easing by the BoE toweigh on sterling over the next six months. The GBPmight also lose some of its safe-haven shine after UKwas put on negative watch by S&P this month. Fiscalcliff is still a short-term risk for our forecast. If nosolution is found, we expect a stronger USD and henceforth also a stronger GBP against EUR. 1M forecast is0.82www.danskeresearch.com5

EUR/GBP – important issues to watch• Marc Carney turned out to be pragmatic− The Bank of Canada’s governor, Mark Carney, has beenappointed to take over from Sir Mervyn King in July2013. Marc Carney was by many commentators seenas ‘hawkish’. However, after Carney has been openlydiscussing nominal GDP targeting instead of inflationtargeting, everything has changed. We believe thisissue in relation to his job at the BoE will attract a lot ofattention in 2013, not least if the UK economy fails torecover. If the BoE inflation targeting regime is in factchanged, it could dramatically weaken GBP.− There is also the possibility that the BoE will move inthe same direction as the Federal Reserve andintroduce a form of open-ended easing. If this happens,the GBP should also suffer significantly.• Dollar link has faded− The correlation between GBP and USD is still relativelystrong, but has faded recently. Hence, sterling is still inthe hands of the dollar. However, note that the latestmove higher in EUR/USD has not been reflected inEUR/GBP moving higher to the same degree.Sterling still closely linked with USD0 .8 0 C o r r e la t io n c o e f f ic ie n t0 .7 50 .7 00 .6 50 .6 00 .5 50 .5 00 .4 5UK recovery in Q3 but still lagging behind1021011009998979695949392D e c11G B P / U S D c o r r e la t io n u s in gE U R a s n u m e r a ir e ( 3 M r o llin g )J a n2 0 0 8 = 1 0 0P o u n d / d o lla r c o r r e l a t i o nF e b M a r A p r M a y J u n J u l A u g S e p O c t N o v D e cU S AF r a n c e121 0 Y a v e r a g eSource: Reuters EcoWin, Danske Bank MarketsG e r m a n yC o r r e la t io n c o e f f ic ie n t08 09 10 11 12UK0 .8 00 .7 50 .7 00 .6 50 .6 00 .5 50 .5 00 .4 51021011009998979695949392Source: Reuters EcoWin, Danske Bank MarketsArne Lohmann Rasmussen, Chief Analyst, arr@danskebank.dk, +45 45 12 85 32www.danskeresearch.com6

USD/JPY – New government implies a weaker yen• Growth. Japan’s GDP in Q3 contracted 3.5% q/q AR.The quarterly Tankan index for large manufacturersfeel to -12 in Q4. This was its lowest level since 2010and implies that Japan’s GDP is likely to contract in Q4.Thus Japan is technically in recession.• Monetary policy. We expect the Bank of Japan (BoJ)to expand its asset purchase programme by JPY10-15trn at its meeting on 20 December. However, thisseems to be fully priced into the market and shouldhave a limited impact on the yen. The BoJ is alsoexpected to announce some details for a new fundingfor-lending-facility.• Election. The Liberal Democratic Party (LDP) was thebig winner of the general election and LDP leader,Shinzo Abe, will become the new Prime Minister. TheLDP now has the majority in the lower house, whichmeans that the likelihood of more BoJ easing and aweaker yen has increased significantly.• Valuation. PPP estimate is around 82.• Risks. If the Bank of Japan fails to deliver enoughmonetary easing to counter aggressive Fed easing, itcould cause USD/JPY to move lower. On the otherhand, the new funding-for-lending-facility, if usedaggressively, is an upside risk to our forecast.Morten Helt, Senior Analyst, mohel@danskebank.com, +45 45 12 85 18Forecast: 85 (3M), 87 (6M) and 88 (12M)95.090.085.080.0USD/JPY75.0Dec-11 Mar-12 Jul-12 Oct-12 Jan-13 May-13 Aug-13 Nov-1375% conf. int. 50% conf.int. Forward Danske fcst Consensus fcstUSD/JPY 1M 3M 6M 12MForecast (pct'ile) 84.0 (54%) 85.0 (66%) 87.0 (76%) 88.0 (75%)Fwd. / Consensus 84.1 / 80.4 84.1 / 81.7 84.1 / 82.9 84.1 / 84.950% confidence int. 82.4 / 85.4 81.4 / 86.0 80.3 / 86.7 78.6 / 87.875% confidence int. 81.4 / 86.7 80.0 / 88.2 78.2 / 90.0 75.3 / 92.4Source: Danske Bank MarketsConclusion. The yen has been the worst performingcurrency over the past month and has depreciatedmore than 7% against EUR and 4.5% against USD asinvestors have increased their bets that a change ingovernment and economic recession will result in asubstantially more dovish BoJ. We expect the BoJ todeliver more aggressive monetary easing goingforward and we expect the yen to weaken furtherduring 2013. We have raised our targets on USD/JPYand we now see USD/JPY at 84 in 1M, 85 in 3M, 87 in6M and 88 in 12M.www.danskeresearch.com7

USD/JPY – important issues to watch• New government implies a more aggressive BoJ− The Liberal Democratic Party (LDP) won the generalelection which was held 16 December and LDP-leader,Shinzo Abe, will become new Prime Minister. LDP has beencampaigning on a very aggressive growth agenda, thatincludes more fiscal easing and “forcing” BoJ to moreaggressive. We think that at some stage after April 2013Japan will raise its inflation target from 1% to 2% - eithervoluntarily by BoJ or by changing the BoJ law. A crediblehigher inflation target could reverse the yen-appreciationtrend seen over the past decades.• New funding-for-lending-facility is a risk factor− There is not a lot of information available about the newfunding-for lending-facility which BoJ plans to launch.However, if used aggressively (i.e. allowing foreign investorsto use the facility), this could have a significant negativeimpact on the yen. Hence, this is an important risk factorfor our forecasts as this could trigger USD/JPY to movesignificantly higher than we currently expect.• Investors are net short JPY again− According to the IMM, non-commercial positioning isnearing stretched levels. This indicates that the chance forfurther moves higher in USD/JPY near term could belimited.Morten Helt, Senior Analyst, mohel@danskebank.com, +45 45 12 85 18New BoJ target to end yen appreciation200200175175U S D / J P Y s p o t150150125125100P P P e s t i m a t e100757550502525Source: Reuters 90 EcoWin, Danske 95 Bank Markets 00 05 10Short JPY positions are nearing stretched levels0 .5% o f o p e n in t e r e s t < < N o n -c o m m e r c ia l J P Y p o s it io n sU S D / J P Y0 .40 .30 .20 .10 .0-0 .1-0 .2-0 .3-0 .4+ / - 1 s t d e v f r o m m e a n-0 .5U S D / J P Y s p o t > >Source: CFTC, Reuters EcoWin, Danske Bank Markets-0 .606 07 08 09 10 11 12www.danskeresearch.com 81301251201151101051009590858075

EUR/SEK – the krona should gain from global recovery• Growth. Global recovery in 2013 is set to support procyclicalcurrencies like the krona. The Swedish growthoutlook remains subdued – GDP growth below potentialnext year but at around 1.3% still better than Euroland.• Monetary policy. We expect the Riksbank to stay on holdin 2013 following a final cut to 1.0% in December.Overall pricing appears stretched. Relative yields areexpected to weigh on EUR/SEK next year.• Fundamentals. Sweden’s stable triple-A status standsout in a generally debt-laden world. We believe healthypublic finances and a solid current account surpluscoupled with positive carry will support the SEK in 2013.• Flows. Positive structural SEK flows have counteractedadverse cyclical forces in 2012. We see less of those nextyear, suggesting only modest SEK appreciation.• Valuation. The SEK is stronger than ‘normal’ given thebusiness cycle phase. Still, there is value left in the SEKaccording to fundamental equilibrium models.• Risks. Negative domestic macro news and rate cutsbeyond our forecast could send EUR/SEK higher.Intensified eurozone turmoil and associated flight to qualityor a more hawkish Riksbank could send EUR/SEK lowerthan our current forecast.Forecast: 8.50 (3M), 8.40 (6M) and 8.40 (12M)9.75EUR/SEK9.509.259.008.758.508.258.00Dec-11 Mar-12 Jul-12 Oct-12 Jan-13 May-13 Aug-13 Nov-1375% conf. int. 50% conf.int. Forward Danske fcst Consensus fcstEUR/SEK 1M 3M 6M 12MForecast (pct'ile) 8.65 (18%) 8.50 (12%) 8.40 (13%) 8.40 (20%)Fwd. / Consensus 8.80 / 8.60 8.82 / 8.60 8.84 / 8.51 8.89 / 8.3750% confidence int. 8.69 / 8.90 8.63 / 8.97 8.58 / 9.07 8.48 / 9.2175% confidence int. 8.61 / 8.99 8.51 / 9.12 8.38 / 9.28 8.17 / 9.54Source: Danske Bank MarketsConclusion. For 2013, we look for an environmentwhere investors prefer to be short defensivecurrencies with ultra-easy monetary policies andweak internal and external balances and to be longcurrencies that are traditionally pro-cyclical, offerpositive carry and have sound core fundamentals.Hence, we are still (moderately) bullish on the SEK.However, we acknowledge that excessive SEKappreciation will not go unnoticed by the Riksbank.We keep our 3M, 6M and 12M forecasts intact.Stefan Mellin, Senior Analyst , mell@danskebank.com +46 (0)8 568 805 92www.danskeresearch.com9

EUR/SEK – important issues to watchDecember cut marks the end of easing cycle• The Riksbank is squeezed between the cyclical downturn inthe Swedish economy and macro prudential considerations.We think the Riksbank will lower the repo rate to 1.0% inDecember but that this will mark the end of the easing cycle.First, we think the Riksbank will share our view of a mildglobal recovery next year. Second, the Riksbank will remainreluctant to cut further given household credit growth anddebt (macro prudential policy). Third, the Riksbank hasacknowledged a growing matching problem in the labourmarket, stressing that monetary policy cannot mitigatestructurally high unemployment.• Compared with many other central banks, not least the onesthat pursue aggressive quantitative easing, the Riksbank willstand out as relatively ‘non-dovish’ and Swedish short rateswill continue to offer positive carry in a zero-rate world.Quality still a supportive factor• Sweden’s stable triple-A status has generated positivestructural SEK flows in 2012, counteracting adverse cyclicalforces. We believe healthy fundamentals coupled withpositive carry will continue to support the SEK.SEK offers positive carry vs EUR, USD, JPY3,02,52,01,51,00,50,0nov jul09 103M interbank ratesnovUSDmar jul nov11Source: Reuters EcoWin, Danske Bank MarketsDecember cut marks end of easing cycleSource: Reuters EcoWin, Danske Bank MarketsSEKJPYEURmar jul nov123,02,52,01,51,00,50,0Stefan Mellin, Senior Analyst , mell@danskebank.com +46 8 568 805 92www.danskeresearch.com10

EUR/NOK – still edging lower• Growth. Growth in the Norwegian economy has heldup well despite the debt problems in Europe but thereare now signs of a slowdown in Norway as well.Growth in private consumption is falling, homebuildinghas slowed slightly and manufacturing activity is down.On the other hand, employment growth has picked upagain, which suggests that underlying demand is stillhealthy. We forecast that mainland GDP will grow3.5% and 3.3% in 2012 and 2013, respectively. Oilinvestments add approximately 0.8pp to mainlandGDP growth in 2013.• Monetary policy. Norges Bank says that rates shouldbe kept at today’s level into next year, followed by agradual increase towards a more normal level. Weshare the view. However, very low inflation and thecurrency point in the other direction.• Flows. Norges Bank expected to purchase a modestamount of foreign currency again in January. SNBmight diversify into NOK in 2013.• Valuation. NOK has become expensive (PPP 7.79). I-44 at lowest level ever.• Risks. Norges Bank cutting rates due to strong NOK.Arne Lohmann Rasmussen, Chief Analyst, arr@danskebank.com, +45 45 12 85 32Forecast: 7.25 (3M), 7.15 (6M) and 7.10(12M)8.258.007.757.507.257.006.75Dec-11 Mar-12 Jul-12 Oct-12 Jan-13 May-13 Aug-13 Nov-13EUR/NOK 1M 3M 6M 12MForecast (pct'ile) 7.30 (14%) 7.20 (10%) 7.15 (13%) 7.10 (17%)Fwd. / Consensus 7.42 / 7.37 7.44 / 7.35 7.47 / 7.26 7.54 / 7.2150% confidence int. 7.34 / 7.48 7.31 / 7.54 7.28 / 7.63 7.22 / 7.7775% confidence int. 7.29 / 7.54 7.22 / 7.64 7.14 / 7.78 6.99 / 8.02Source: Danske Bank MarketsEUR/NOK75% conf. int. 50% conf.int. Forward Danske fcst Consensus fcst• Conclusion. We expect EUR/NOK to decline slowlytowards 7.10 in 12 months ‘ time supported byrelative rates, improved risk sentiment anddiversification flows. We expect Norges Bank to raiserates eventually despite the strong NOK, underliningthat Norwegian monetary policy is more or less outof sync with the rest of the world. 1M forecast 8.30.www.danskeresearch.com11

EUR/CHF – reduced euro tail-risks means upside potential• Growth. Growth is also slowing in Switzerland, whichis, however, still outperforming the euro zone.• Monetary policy. The SNB left monetary policyunchanged at its December meeting and pledged tocontinue defending the 1.20 minimum target.• Flows. Underlying flows (current account surplus)remain CHF supportive, but unwinding of European tailriskhedges has opened a window for temporaryEUR/CHF upside. The SNB does not have to interveneat current levels.• Valuation. The Swiss franc remains overvalued byabout 13% against the euro, according to the DanskeBank General PPP model.• Risks. When the SNB judges deflation risks to behistory, a move back to a free-floating currency shouldbe expected. However, this policy shift is, in our view,unlikely to take place during the coming quarters.Forecast: 1.21 (3M), 1.22(6M) and 1.21 (12M)1.251.20EUR/CHF1.15Dec-11 Mar-12 Jul-12 Oct-12 Jan-13 May-13 Aug-13 Nov-1375% conf. int. 50% conf.int. Forward Danske fcst Consensus fcstEUR/CHF 1M 3M 6M 12MForecast (pct'ile) 1.21 (76%) 1.21 (64%) 1.22 (75%) 1.21 (48%)Fwd. / Consensus 1.21 / 1.21 1.21 / 1.21 1.21 / 1.22 1.21 / 1.2250% confidence int. 1.20 / 1.21 1.20 / 1.21 1.20 / 1.22 1.19 / 1.2375% confidence int. 1.20 / 1.21 1.19 / 1.22 1.18 / 1.23 1.16 / 1.25Source: Danske Bank Markets• Conclusion. The 1.20 minimum target is likely toremain in place going into 2013. This should secureEUR/CHF above 1.20. We doubt that the Swissfranc will re-emerge as a global funding currency,but see potential for a reduction in European tailriskhedges (i.e. unwinding of long CHF positions) totemporarily lift EUR/CHF.Kasper Kirkegaard, Senior Analyst, kaki@danskebank.com, +45 4513 70 18www.danskeresearch.com13

EUR/CHF – important issues to watch• This is not a currency peg− SNB’s minimum target on EUR/CHF is technically nodifferent from the interventions it conducted fromMarch 2009 to mid-2010, although this time the SNBhas announced the level that it will defend. It isimportant to note that this is not a currency peg in thetraditional sense. The SNB has not expressed any viewon how long it intends to keep the exchange rate floor inplace, or as to whether it intends to move the target.• It has become more expensive to be long CHF− Swiss money market rates are falling again with the1 and 2M libor now fixing negative.− As a result of the SNB interventions there has beenadded significant liquidity to the financial system.− It has been reported that Swiss banks would startcharging banks negative interest on CHF holdings.− In Denmark, negative rates triggered a weakening ofthe krone against the euro. A higher negative carry inSwitzerland has the potential to trigger an unwindingof long franc positions and thereby a temporary movehigher in EUR/CHF.Less need for the SNB to intervene706050403020100-1 0-2 0-3 0Source: Bloomberg, Danske MarketsSwiss money market rates are falling again0 .2 7 50 .2 5 00 .2 2 50 .2 0 00 .1 7 50 .1 5 00 .1 2 50 .1 0 00 .0 7 50 .0 5 00 .0 2 50 .0 0 0-0 .0 2 5-0 .0 5 0M o n t h ly c h a n g e in S w is s F XR e s e r v e s , C H F b nJ a n% %A p r J u l O c t J a n103 M lib o r f ix in gA p r J u l O c t J a nSource: Reuters EcoWin, Danske Bank Markets11A p r J u l O c t12706050403020100-1 0-2 0-3 00 .2 7 50 .2 5 00 .2 2 50 .2 0 00 .1 7 50 .1 5 00 .1 2 50 .1 0 00 .0 7 50 .0 5 00 .0 2 50 .0 0 0-0 .0 2 5-0 .0 5 0Kasper Kirkegaard, Senior Analyst, kaki@danskebank.com, +45 4513 70 18www.danskeresearch.com14

EUR/DKK – trading at the central parity• The negative Danish deposit rate and less demandfor safe-haven assets have taken away theappreciation pressure on DKK and since JulyEUR/DKK has moved from 7.43 to just above 7.46.Recently EUR/DKK has somewhat surprisingly beenallowed to trade marginally above the central parity.• After the latest move higher in EUR/DKK,Nationalbanken(NB) intervened for a modestDKK1,500m in November to support DKK. Furtherintervention is likely at or just above the current level,which should limit the upside for EUR/DKK.• The reaction function of NB will in our view be fullysymmetrical and the adverse effects of the negativepolicy rate will not be taken into account. Hence, firstNB will intervene and subsequently policy rates will behiked. Intervention of approximately DKK10-20bn islikely to trigger an independent Danish rate hike. TheDanish deputy governor Callensen underlined in aBloomberg interview on 2 November that the reactionis in fact symmetrical and he underlined that ‘policymakers won’t be swayed by financial industrycomplaints to depart from their goal of defending thekrone peg’.Forecast: 7.46 (3M), 7.46 (6M) and 7.46 (12M)7 .4 6 57 .4 6 07 .4 5 57 .4 5 07 .4 4 57 .4 4 07 .4 3 57 .4 3 0C e n t r a l p a r i t yE U R D K K07 08 09 10 11 12 13E U R / D K K S p o t 7 .4 6 0 3 8Source: Reuters EcoWin, Danske Bank MarketsConclusion. NB has been successful in taking awaythe strong appreciation pressure in Q2 and theinflow into DKK has come to a halt. EUR/DKK is nowtrading close to the central parity. We think thatEUR/DKK will – helped by intervention and rate hikes– be kept at the current level in 2013. Hence, thepotential for further upside in EUR/DKK is limited, asNB is still expected to favour EUR/DKK very close tothe central parity. An escalation of the euro crisiscould push EUR/DKK slightly lower.Arne Lohmann Rasmussen, Chief Analyst, arr@danskebank.dk, +45 45 12 85 32www.danskeresearch.com15

EUR/DKK forwards – to tighten further in 2013 but mightwiden short term• The forward discount in EUR/DKK has in generaltightened since June as the market has started toprice in independent Danish rate hikes and the crosscurrencybasis has moved in favour of DKK. Webelieve this normalisation will continue in 2013.• However, there is a risk that the forward discountwill widen slightly ahead of year-end. There is a risk offorwards moving to the left, primarily in December,when banks tend to demand foreign currency (higherforward discount in EUR/DKK). Second, we believethat short term the market will continue to price outimminent rate hikes from Nationalbanken asintervention despite EUR/DKK trading close to thecentral parity has been very modest.• If the ECB contrary to our view cuts the deposit ratebelow zero to -0.25bp, Nationalbanken is expected tomirror the move by cutting the CD rate by 15-25bp,cutting the lending rate to 0.05bp and lifting thecurrent account limits somewhat as in July when thenegative deposit rate was introduced. A refi-rate cutby ECB is expected to be mirrored by Nationalbankenlowering the lending rate 15bp to 0.05%Forward discount in EUR/DKK to tighten further (pips)Source: Reuters EcoWin, Danske Bank MarketsRelative rates support EUR/DKK forwards3020bp3 M C IB O R - 3 M E u r ib o r100-1 0-2 0-3 0-4 0-5 0J a nM a r M a y J u l S e p N o v J a n11Source: Reuters EcoWinM a r M a y J u l S e p N o v123020100-1 0-2 0-3 0-4 0-5 0Arne Lohmann Rasmussen, Chief Analyst, arr@danskebank.dk, +45 45 12 85 32www.danskeresearch.com16

USD/CAD – hawkish BoC to support CAD• Growth. Canadian data have been mixed lately. Q3 GDPand retail sales surprised on the downside but verystrong employment figures in November.• Monetary policy. The Bank of Canada (BoC) hasmaintained its overnight lending rate at 1.00% for thepast two years. Although the BoC has suggested thatrates will need to be hiked at some point, we look forBoC to be on hold with a hawkish bias. Carney leavingfor BoE should not induce a significant change in policy.• Flows. While it has come off a little, positioning stilllooks stretched in CAD. Canadian public finances arehealthy though and CAD stands to be supported by thecountry’s solid triple-A rating as US fiscal cliff concernsweigh on the greenback.• Valuation. CAD is expensive on PPP measures, albeitless so than e.g. AUD.• Commodities. We look for oil prices to stay elevated inthe near term, supporting Canada’s terms of trade, butwe see weakness in oil prices in 2013 as the marketlooks set to stay well supplied.• Risks. BoC has stressed that ‘the evolution ofimbalances in the household sector’ will play a role insetting policy – a new reaction function?Christin Tuxen, Senior Analyst, tux@danskebank.com, +45 45 13 78 67Forecast: 0.97 (3M), 0.96 (6M) and 0.98 (12M)1.101.051.000.950.90Dec-11 Mar-12 Jul-12 Oct-12 Jan-13 May-13 Aug-13 Nov-13USD/CAD 1M 3M 6M 12MForecast (pct'ile) 0.98 (32%) 0.97 (24%) 0.96 (23%) 0.98 (46%)Fwd. / Consensus 0.99 / 0.99 0.99 / 0.99 0.99 / 0.98 1.00 / 0.9850% confidence int. 0.98 / 1.00 0.97 / 1.00 0.96 / 1.01 0.95 / 1.0375% confidence int. 0.97 / 1.00 0.96 / 1.02 0.94 / 1.04 0.92 / 1.07Source: Danske Bank MarketsUSD/CAD75% conf. int. 50% conf.int. Forward Danske fcst Consensus fcstConclusion. Canada stands to benefit from a USrecovery, which we see materialise during H1.Combined with a risk relief rally when fiscal cliff woesare assumed out of the way early 2013 this should bea positive environment for CAD. BoC will be a lonerider among central banks with its tightening bias andCAD could thus continue to attract investor interest.Although downward pressure should materialise on oilprices, we look for oil prices to stay above USD100,still a decent price for Canada. This coupled withextensive Fed easing should cap USD/CAD upside nextyear.www.danskeresearch.com17

AUD/USD – near-term potential intact as China recovers• Growth. Australian data have become less bleak latelywith decent employment growth. Notably, Q3 inflationsurprised on the upside.• Monetary policy. The Reserve Bank of Australia (RBA)maintained its cash target rate at 3.00% in earlyDecember as widely expected. We still think the RBA willstay in easing mode in the near future and will deliver atleast one more cut on a 12-month horizon.• Flows. Speculative longs in AUD have risen lately butpositioning is less stretched than is the case for e.g.CAD. Government finances are vigorous and Australiahas a higher sovereign rating than e.g. New Zealand.• Valuation. AUD/USD remains overvalued by PPPmeasures and an eventual end to the resource boomhighlights the downside risks.• Commodities. Terms of trade should stay favourable inthe near term as we expect metals to be in for a reboundas China bottoms out but the end to the structuralcommodities super-cycle is moving closer.• Risks. A hard landing in China seems less likely than wasthe case just one month ago but should the stabilisation failto materialise, AUD would suffer.Forecast: 1.07 (3M), 1.08 (6M) and 1.04 (12M)1.151.101.051.000.95AUD/USD0.90Dec-11 Mar-12 Jul-12 Oct-12 Jan-13 May-13 Aug-13 Nov-1375% conf. int. 50% conf.int. Forward Danske fcst Consensus fcstAUD/USD 1M 3M 6M 12MForecast (pct'ile) 1.06 (66%) 1.07 (73%) 1.08 (76%) 1.04 (50%)Fwd. / Consensus 1.05 / 1.04 1.05 / 1.04 1.04 / 1.03 1.03 / 1.0350% confidence int. 1.04 / 1.06 1.03 / 1.07 1.01 / 1.08 0.98 / 1.0975% confidence int. 1.03 / 1.07 1.00 / 1.09 0.97 / 1.10 0.92 / 1.12Source: Danske Bank MarketsConclusion. A stabilisation in China should prove apositive for AUD in H1. Although the RBA is in easingmode still, the current environment of major centralbanks easing – headed by the Fed - should stay apositive for carry trades and hence benefit AUD.However, H2 13 looks challenging as focus willprobably turn to ‘low growth for long’ issues and therisk of a structural slowdown in Asia and a likely endto the decade-long commodities super-cycle. ThusAUD/USD could come under pressure towards theend of next year.Christin Tuxen, Senior Analyst, tux@danskebank.com, +45 45 13 78 67www.danskeresearch.com18

NZD/USD – RBNZ assuming less dovish bias• Growth. The data flow out of New Zealand has beendismal of late with notably employment and retail salesdisappointing.• Monetary policy. The Reserve Bank of New Zealand(RNBZ) has kept rates at 2.50% since the earthquakerelatedcut early in 2011. The RBNZ surprised with aless dovish bias at the December meeting and in itsquarterly statement, suggesting that rate cuts are notaround the corner. Still, the new RBNZ governorWheeler has explicitly said that he ‘wishes to see alower exchange rate’, and listed a set of conditions tobe met for RBNZ to consider intervention.• Flows. Speculative longs have been reduced a little oflate but continue to hover around stretched levels.• Valuation. NZD is heavily overvalued in PPP terms.• Commodities. Livestock prices have surged recently asthe past rise in grain prices starts to feed through.• Risks. Recent talk about conditions for interventionunderlines the risk that RBNZ may be looking toweaken NZD if circumstances prove favourable. Also, ifRBA cuts more aggressively than we currently project,RBNZ may follow suit.Christin Tuxen, Senior Analyst, tux@danskebank.com, +45 45 13 78 67Forecast: 0.85 (3M), 0.86 (6M) and 0.82 (12M)0.950.900.850.800.750.70Dec-11 Mar-12 Jul-12 Oct-12 Jan-13 May-13 Aug-13 Nov-13NZD/USD 1M 3M 6M 12MForecast (pct'ile) 0.85 (66%) 0.85 (61%) 0.86 (68%) 0.82 (42%)Fwd. / Consensus 0.84 / 0.82 0.84 / 0.82 0.83 / 0.82 0.82 / 0.8150% confidence int. 0.83 / 0.85 0.82 / 0.86 0.81 / 0.87 0.78 / 0.8875% confidence int. 0.82 / 0.86 0.80 / 0.88 0.77 / 0.89 0.73 / 0.91Source: Danske Bank MarketsNZD/USD75% conf. int. 50% conf.int. Forward Danske fcst Consensus fcstConclusion. There is increasing uncertaintyregarding RBNZ policy with the new governorlooking at the monetary policy toolbox with an openmind; we now think RBNZ policy is tilted in a morehawkish direction as the bank seems fairlycomplacent about the growth outlook and inflationdevelopments. NZD could benefit from carrypositions and decent risk appetite early 2013 butmay trade sideways later in the year as the boomfrom earthquake reconstruction wears off and thethreat of RBNZ intervention caps NZD strength.www.danskeresearch.com19

EUR/PLN – we remain bullish on short-term horizon• Growth. The euro crisis is now clearly having an impacton the Polish economy. Furthermore, domestic worriesare adding to a relatively negative outlook for the Polisheconomy. We now forecast GDP growth of 2.4% y/y in2012 and 1.9% y/y in 2013 – and the risk to our forecastmostly seems to be on the downside given the recentmacroeconomic data out of Poland. In particular, therelatively sharp slowdown in domestic demand isworrying.• Monetary policy. The Polish central bank (NBP) hasfinally initiated an easing cycle and has started to cutinterest rates. Looking ahead, the NBP should continuemonetary easing in early 2013 and we now expect thekey policy rate to be cut to 3.25% over the coming sixmonths. As growth is likely to remain weak in the comingquarters and as inflation seems set to ease, there isreally very little reason why the NBP should not cut ratesfairly aggressively in the coming quarters.• Valuation. The zloty is trading close to its fair value level,so valuation is unlikely to pose any significant hindranceto its continued near-term appreciation.• Risks. The major risk to the zloty remains the euro crisis.A major escalation of the crisis would be likely to hit thezloty hard – as was the case in late 2011.Forecast: 4.05 (3M), 4.10 (6M) and 4.15(12M)4.604.404.204.003.80Dec-11 Mar-12 Jul-12 Oct-12 Jan-13 May-13 Aug-13 Nov-13EUR/PLN 1M 3M 6M 12MForecast (pct'ile) 4.10 (60%) 4.05 (32%) 4.10 (48%) 4.15 (54%)Fwd. / Consensus 4.10 / 4.15 4.12 / 4.15 4.16 / 4.15 4.22 / 4.0450% confidence int. 4.05 / 4.13 4.03 / 4.16 4.01 / 4.22 3.97 / 4.3075% confidence int. 4.02 / 4.17 3.99 / 4.25 3.94 / 4.34 3.84 / 4.50Source: Danske Bank MarketsEUR/PLN75% conf. int. 50% conf.int. Forward Danske fcst Consensus fcstConclusion. Despite the fact that we now expect frontloadedrate cuts, we remain fairly upbeat on the zloty asthe markets have already priced fairly aggressive ratecuts. Furthermore, the zloty continues to provideattractive carry and overall we have little concern aboutPolish macroeconomic fundamentals. So even though weexpect the zloty to weaken slightly in the coming 12months, we would expect a better performance thanwhat is implied by FX forwards.Lars Christensen, Chief Analyst, larch@danskebank.com, +45 4512 85 30www.danskeresearch.com20

EUR/HUF – attractive carry supports HUF• Growth. We are increasingly reaching the conclusionthat the key reason for Hungary’s lacklustre growthperformance is a continued deterioration in ‘supplysideconditions’. Continued political ‘noise’ is certainlynot helping. We expect Hungarian GDP to contract by2% in 2012 and a further 1% in 2013.• Monetary policy. At the latest meeting of theHungarian central bank’s (MNB) Monetary Council,the MNB cut its key policy rate by 25bp and continuedits monetary easing. It is pretty clear that the doves onthe Monetary Council are now in more or less fullcontrol of monetary policy. Consequently, we expectthe MNB to continue the easing of monetary policy incoming months despite the fact that inflation is morethan double the level of the MNB’s official inflationtarget of 3%.• Valuation. That the MNB continues to ease monetarypolicy means inflation is likely to remain elevated in themedium term. From a longer-term perspective, this isnot good news in terms of forint valuation.• Risks. Excessive monetary easing combined withpolitical worries and the euro are the key risks to theforint.Forecast: 2.80(3M), 2.80 (6M) and 2.80 (12M)330EUR/HUF320310300290280270260250Dec-11 Mar-12 Jul-12 Oct-12 Jan-13 May-13 Aug-13 Nov-1375% conf. int. 50% conf.int. Forward Danske fcst Consensus fcstEUR/HUF 1M 3M 6M 12MForecast (pct'ile) 282 (41%) 280 (38%) 280 (45%) 280 (50%)Fwd. / Consensus 284 / 285 284 / 285 284 / 285 284 / 28150% confidence int. 280 / 287 277 / 288 273 / 290 267 / 29375% confidence int. 277 / 290 272 / 294 265 / 298 253 / 305Source: Danske Bank MarketsConclusion. In the short run – three to six months – weexpect continued fairly attractive carry and improvedglobal risk appetite to be supportive of the Hungarianforint. That said, we are certainly not confident that itis happy days for the forint given Hungary’s seriousstructural and political problems.Lars Christensen, Chief Analyst, larch@danskebank.com, +45 4512 85 30www.danskeresearch.com21

EUR/CZK – CNB ready to intervene to weaken CZK• Growth. The Czech economy remains in recession. The finalrelease of Q3 GDP showed that the economy shrunk by 1.3%y/y, down from a1.0% y/y contraction in Q2. Growth in Q3 wasmainly dragged down by household consumption andinvestments. We expect Q4 GDP to show an even deeperslowdown. We expect the Czech economy to contract around1.3% y/y but the risk is tilted towards weaker growth thisyear. We expect some stabilisation next year.• Monetary policy. The Czech central bank (CNB) cut the keypolicy rate to a technical zero of 0.05% in November on theback of a gloomy economic outlook and disinflationary risks.Given that the economic slowdown is sharper anddisinflationary pressure stronger than the CNB assumed,further monetary easing is warranted. The CNB will use theexchange rate channel for further monetary easing asstandard monetary policy tools are exhausted.• Debt risks. Debt risks are low. The Czech governmentforecasts the public finance deficit to be below 3% next year.Further austerity measures are planned for next year.• Valuation. On a long-term perspective, CZK is undervalued(fair value is around 22.5).• Risks. Intervention risks in connection with further monetaryeasing, escalation of the eurozone debt crisis.Forecast: 26.0 (3M), 26.8 (6M) and 26.6 (12M)27.0EUR/CZK26.526.025.525.024.524.023.523.0Dec-11 Mar-12 Jul-12 Oct-12 Jan-13 May-13 Aug-13 Nov-1375% conf. int. 50% conf.int. Forward Danske fcst Consensus fcstEUR/CZK 1M 3M 6M 12MForecast (pct'ile) 25.5 (79%) 26.0 (87%) 26.8 (91%) 26.6 (85%)Fwd. / Consensus 25.2 / 25.4 25.2 / 25.5 25.2 / 25.4 25.2 / 24.950% confidence int. 25.0 / 25.4 24.8 / 25.6 24.5 / 25.7 24.1 / 25.975% confidence int. 24.8 / 25.7 24.5 / 26.0 24.1 / 26.3 23.4 / 26.9Source: Danske Bank MarketsConclusion. The CNB is ready for FX interventions toweaken the CZK and we cannot rule out that it couldcome as soon as next week, following the monetary policysetting meeting on Thursday. Hence, we recommendbeing positioned for substantially weaker CZK asintervention risks are imminent. On the back of theintervention risks, we are bearish on the CZK on allforecast horizons.Stanislava Pravdova , Analyst, spra@danskebank.com, +45 45 12 80 71www.danskeresearch.com22

EUR/RUB – waiting for the stronger RUB• Growth. Russian economic growth is slowing on weakeragricultural production and shrinking demand for Russia’smain exports. Q3 12 growth was 2.9% y/y versus 4.0% y/yin Q2 12. In October, the economy expanded only 2.3% y/y.We downgrade our 2012 GDP growth forecast by 0.2pp to3.8%. As we do not expect any significant fall in oil pricesnext year, our 2013 GDP forecast stays at 3.5% y/y.• Monetary policy. Bank Rossii left its refi rate unchangedon 10 December at 8.25% as expected by consensus(DBM: 8.25%) but increased the overnight deposit rate by25bp to 4.50% (consensus 4.25%, DBM: 4.50%). At thesame time, Bank Rossii cut rouble swap rates by 25bp ‘tolimit money market volatility’. The overnight repo rate isunchanged at 5.50%. Bank Rossii commented on thedecision, stating that ‘rates are acceptable for the nearestfuture’ as there is ‘broad stabilisation of consumer prices’.• Flows. Capital outflows remain high and we expect them tostay around USD70bn in 2012 versus almost USD81bn in2011 but to slow to USD60bn in 2013.• Valuation. EUR/RUB is trading around its YTD average of39.90.• Risks. Strong risk-off sentiment amid escalation ofeurozone problems and uncertainties about ‘fiscal cliff’development are the most probable factors that couldshake the rouble.Vladimir Miklashevsky, Economist, vlmi@danskebank.com, +358 10 546 75 22Forecast: 38.50 (3M), 38.20 (6M) and 39.20 (12M)484644424038Dec-11 Mar-12 Jul-12 Oct-12 Jan-13 May-13 Aug-13 Nov-13EUR/RUB 1M 3M 6M 12MForecast (pct'ile) 40 (8%) 38 (4%) 38 (6%) 39 (20%)Fwd. / Consensus 41 / 40 41 / 40 42 / 39 43 / 4150% confidence int. 40 / 41 40 / 42 40 / 43 40 / 4475% confidence int. 40 / 41 39 / 43 39 / 44 38 / 47Source: Danske Bank MarketsEUR/RUB75% conf. int. 50% conf.int. Forward Danske fcst Consensus fcst• Conclusion. Slowing economic growth seems to havebecome a concern for Bank Rossii, and we expectRussia’s central bank to take it into the account in itsfuture decisions if consumer prices continue to growmoderately. As Q1-Q2 13 inflation decelerates, wecannot exclude the possibility of Bank Rossii ending itstightening cycle in H1 13. Thus, we believe Bank Rossiiwill remain on hold at its next meeting in the first halfof January 2013.www.danskeresearch.com23

EUR/RUB – important issues to watch• Better flexibility, higher volatility− The rouble’s volatility remains high, allowing theRussian currency to depreciate more than before onoil price falls and to strengthen more on oil price rises.The band-widening policy is likely to continue, allowingthe corridor to expand by one rouble every six months.Next expansion is expected in January-February 2013.− As expected, Bank Rossii is diminishing its currencyinterventions and keeping a close eye on marketliquidity in the uncertain global environment. Weexpect liquidity to tighten a bit in late December.− Diminishing capital outflows and liberalisation of thelocal rouble bond market in January 2013 wouldsupport the rouble through the next year.42403836343230Source: Bank Rossii, BloombergRouble's trading band vs. dual currencybasketlower borderupper borderRUBBASK Curncy• Eye on seasonality− If Brent crude stays above USD100/bbl on averageover the next six months, we do not expect anysignificant downside pressure on RUB through thecurrent account. We expect a stronger rouble in early2013.Vladimir Miklashevsky, Economist, vlmi@danskebank.com, +358 10 546 75 22www.danskeresearch.com24

USD/TRY – valuation continues to weigh on TRY• Growth. Turkish economic growth figures disappointed themarkets as Q3 12 GDP expansion posted 1.6% y/y(consensus: 2.5%, DBM: 2.1%) versus the revised 3.0% aquarter earlier. It was the worst growth since Q3 09.• Monetary policy. The strong slowdown in economic growthis likely to push Turkey’s central bank to ease its monetarygrip. Lower-than-expected CPI development in November(6.4% y/y) is approaching the medium-term target of 5%and it helps the decision. This would be TRY negative.• Flows. The current account deficit seized further toUSD1.96bn in October. The export statistics contain againgold sales abroad, and imports are decreasing on poordemand.• Valuation. USD/TRY is slightly under the YTD average, andthere is room for a weaker TRY by the end of 2012.• Risks. Risk-off sentiment risk remains together with aslowdown in global economy. New escalation of eurozonewoes could trigger a run from assets in emerging markets.Forecast: 1.78(3M), 1.84(6M) and 1.97(12M)2.00USD/TRY1.951.901.851.801.751.701.651.60Dec-11 Mar-12 Jul-12 Oct-12 Jan-13 May-13 Aug-13 Nov-1375% conf. int. 50% conf.int. Forward Danske fcst Consensus fcstUSD/TRY 1M 3M 6M 12MForecast (pct'ile) 1.78 (48%) 1.78 (44%) 1.84 (70%) 1.97 (86%)Fwd. / Consensus 1.78 / 1.80 1.80 / 1.80 1.82 / 1.80 1.86 / 1.7850% confidence int. 1.77 / 1.80 1.76 / 1.82 1.75 / 1.85 1.74 / 1.9075% confidence int. 1.76 / 1.81 1.74 / 1.85 1.71 / 1.90 1.64 / 1.99Source: Danske Bank MarketsConclusion. The TRY strengthened in lateNovember/early December but the latest weakeconomic data and possible monetary easing may turnthe trend for USD/TRY up in the medium term. Weexpect a widening current account deficit and externalrisks to keep USD/TRY under pressure in late 2013.Vladimir Miklashevsky, Economist, vlmi@danskebank.com, +358 10 546 75 22www.danskeresearch.com25

USD/ZAR – external imbalances limit the ZAR• Growth. Q3 GDP growth was dismal with the economyexpanding poorly by seasonally-adjusted and an annualised1.2%, down from the revised 3.4% q/q in Q2. Growth wasprimarily dragged down by the mining sector due to workstoppage on the back of strikes in Q3. Economic activity inSouth Africa will be weak this year and we expect GDPgrowth c.2.2% y/y and c.2.7% y/y in 2013. Risks are tilted tothe downside mostly due to the gloomy outlook for theeurozone.• Monetary policy. November’s MPC statement was clearlytilted in a more hawkish direction as the South Africancentral bank saw the balance of risks squeezed to the upsidegiven the weaker rand, upside pressure from food prices andplanned changes in the CPI basket. The fact that the MPC didnot even discuss possible rate cuts indicates that it finds thecurrent interest rate setting appropriate. The MPC will likelystick to its ‘wait-and-see’ mode at its meeting in January.• Debt risks. Debt risks are slightly higher. The South Africangovernment raised the projected budget deficit to 4.8% in2012/13 (from 4.6%) and plans to reduce the deficit to3.1% of GDP in 2015/16E.• Valuation. The ZAR remains fundamentally overvalued (fairvalue around 9.90).• Risks. Loss of investor confidence due to intensifiedsocioeconomic problems, further downgrade by the ratingagencies.Stanislava Pravdova , Analyst, spra@danskebank.com, +45 45 12 80 71Forecast: 8.72 (3M), 8.84 (6M) and 9.00 (12M)10.50USD/ZAR10.009.509.008.508.007.507.00Dec-11 Mar-12 Jul-12 Oct-12 Jan-13 May-13 Aug-13 Nov-1375% conf. int. 50% conf.int. Forward Danske fcst Consensus fcstUSD/ZAR 1M 3M 6M 12MForecast (pct'ile) 8.64 (50%) 8.72 (57%) 8.84 (61%) 9.00 (62%)Fwd. / Consensus 8.67 / 8.68 8.73 / 8.70 8.84 / 8.61 9.05 / 8.3750% confidence int. 8.46 / 8.83 8.34 / 8.98 8.21 / 9.16 8.00 / 9.4575% confidence int. 8.32 / 9.00 8.12 / 9.32 7.86 / 9.69 7.44 / 10.27Source: Danske Bank MarketsConclusion. The rand remains volatile and vulnerable torisk-on and risk-off sentiment. Triggered by the labourstrikes and political uncertainty, two rating agencies,S&P and Moody’s, cut South Africa’s rating recently. Therisks are poised for a further downgrade, as all threemain rating agencies changed to a negative outlook.Considering fairly large external imbalances andcontinued fundamental overvaluation of the rand, wecontinue to be bearish on the rand on all forecasthorizons.www.danskeresearch.com26

USD/CNY – fast moving towards a floating exchange rate• Growth. We expect the Chinese economy to recovermoderately in the coming months supported bystronger domestic demand. The property market hasimproved since May and the tail risk of a collapse in theproperty market has declined substantially.• Monetary policy. Despite low inflation, we do notexpect the PBoC to cut its leading interest rates furtherand a cut in the reserve requirement also looksincreasingly unlikely.• FX policy. The daily trading band has been widened andPBoC has been reluctant to intervene in the FX market.China is quickly moving towards a floating exchangerate and convertible currency. Expect more two-wayvolatility in the exchange rate.• Valuation. CNY is, in our view, now only slightlyundervalued (about 7%).• Risks. China could allow its currency to depreciate in ahard-landing scenario . Liberalisation of capital flowsout of China could add to depreciation pressure.Forecast: 6.26 (3M), 6.22 (6M) and 6.15 (12M)6 .66 .56 .46 .36 .2A p rJ u l O c t J a n11Source: Danske Bank MarketsU S D / C N Y e x c h a n g e r a t eT r a d in g b a n dw id e n e dP B o C r e f e r e n c e r a t eS p o tD a ily t r a d in g b a n dA p r J u l O c tConclusion. Fundamentally, CNY is only slightlyundervalued and with more two-way volatility nowallowed, USD/CNY should in the future be less of aone-sided bet and more dependent on market flows.We still expect CNY to be on a moderateappreciation trend but see a possibility oftemporary weakness in Q1 when China’s tradesurplus is usually small.126 .66 .56 .46 .36 .2Flemming Jegbjærg Nielsen, Senior Analyst, flemm@danskebank.com, +45 45 12 85 35www.danskeresearch.com27

Danske Markets FX forecastsForecast Forecast vs forward outright, %Spot +1m +3m +6m +12m +1m +3m +6m +12mExchange rates vs EURUSD 1.310 1.33 1.34 1.35 1.32 1.5 2.2 2.9 0.4JPY 109.3 112 114 118 116 2.4 4.3 7.9 6.1GBP 0.813 0.82 0.83 0.85 0.83 0.9 2.0 4.3 1.6CHF 1.208 1.21 1.21 1.22 1.21 0.2 0.2 1.1 0.4DKK 7.46 7.46 7.46 7.46 7.46 0.0 0.1 0.1 0.2NOK 7.38 7.30 7.20 7.15 7.10 -1.2 -2.8 -3.9 -5.5SEK 8.76 8.65 8.50 8.40 8.40 -1.4 -3.3 -4.7 -5.3Exchange rates vs USDJPY 83.5 84 85 87 88 0.9 2.0 4.9 5.7GBP 1.61 1.62 1.61 1.59 1.59 0.6 0.2 -1.4 -1.2CHF 0.92 0.91 0.90 0.90 0.92 -1.3 -2.0 -1.7 0.0DKK 5.70 5.61 5.57 5.53 5.65 -1.5 -2.1 -2.7 -0.2NOK 5.64 5.49 5.37 5.30 5.38 -2.6 -4.9 -6.6 -5.8SEK 6.70 6.50 6.34 6.22 6.36 -2.9 -5.4 -7.4 -5.6CAD 0.99 0.98 0.97 0.96 0.98 -0.6 -1.8 -3.0 -1.5AUD 1.05 1.06 1.07 1.08 1.04 0.9 2.2 3.8 1.3NZD 0.84 0.85 0.85 0.86 0.82 1.2 1.6 3.4 -0.2Note: GBP, AUD and NZD are denominated in local currency rather than USDSource: Danske Bank Marketswww.danskeresearch.com28

Danske Markets FX forecasts vs DKKForecast Forecast vs forward outright, %Spot +1m +3m +6m +12m +1m +3m +6m +12mExchange rates vs DKKEUR 7.46 7.46 7.46 7.46 7.46 0.0 0.1 0.1 0.2USD 5.70 5.61 5.57 5.53 5.65 -1.5 -2.1 -2.7 -0.2JPY 6.82 6.66 6.54 6.32 6.43 -2.4 -4.0 -7.2 -5.6GBP 9.18 9.10 8.99 8.78 8.99 -0.8 -1.9 -4.0 -1.4CHF 6.18 6.17 6.17 6.11 6.17 -0.1 -0.1 -1.0 -0.2NOK 1.01 1.02 1.04 1.04 1.05 1.2 2.9 4.2 5.8SEK 0.85 0.86 0.88 0.89 0.89 1.4 3.4 5.0 5.6CAD 5.78 5.72 5.74 5.76 5.77 -0.9 -0.4 0.3 1.3AUD 6.00 5.95 5.96 5.97 5.88 -0.6 0.1 1.1 1.1NZD 4.79 4.77 4.73 4.75 4.63 -0.3 -0.5 0.6 -0.3PLN 1.82 1.84 1.82 1.80 1.9 1.6 1.8CZK 0.30 0.29 0.28 0.28 -2.8 -5.6 -4.9HUF 0.26 0.27 0.27 0.27 2.4 3.3 4.8RUB 0.19 0.18 0.19 0.18 -2.5 4.5 2.1Source: Danske Bank Marketswww.danskeresearch.com29

Danske Markets FX forecasts vs SEKForecast Forecast vs forward outright, %Spot +1m +3m +6m +12m +1m +3m +6m +12mExchange rates vs SEKEUR 8.76 8.65 8.50 8.40 8.40 -1.4 -3.3 -4.7 -5.3USD 6.70 6.50 6.34 6.22 6.36 -2.9 -5.4 -7.4 -5.6JPY 8.01 7.72 7.46 7.12 7.24 -3.7 -7.2 -11.7 -10.7GBP 10.78 10.55 10.24 9.88 10.12 -2.2 -5.2 -8.7 -6.7CHF 7.25 7.15 7.02 6.89 6.94 -1.6 -3.5 -5.7 -5.6NOK 1.19 1.18 1.18 1.17 1.18 -0.2 -0.5 -0.8 0.2DKK 1.17 1.16 1.14 1.13 1.13 -1.4 -3.3 -4.8 -5.4CAD 6.79 6.64 6.54 6.48 6.49 -2.3 -3.7 -4.5 -4.2AUD 7.05 6.89 6.79 6.72 6.62 -2.0 -3.2 -3.8 -4.3NZD 5.63 5.53 5.39 5.35 5.22 -1.7 -3.9 -4.2 -5.7PLN 2.14 2.10 2.05 2.02 -1.5 -3.3 -3.6CZK 0.35 0.33 0.31 0.32 -6.0 -10.2 -10.0HUF 0.31 0.30 0.30 0.30 -1.0 -1.6 -0.7RUB 0.22 0.20 0.21 0.20 -5.8 -0.4 -3.3Source: Danske Bank Marrketswww.danskeresearch.com30

Danske Markets FX forecasts vs NOKForecast Forecast vs forward outright, %Spot +1m +3m +6m +12m +1m +3m +6m +12mExchange rates vs NOKEUR 7.38 7.30 7.20 7.15 7.10 -1.2 -2.8 -3.9 -5.5USD 5.64 5.49 5.37 5.30 5.38 -2.6 -4.9 -6.6 -5.8JPY 6.75 6.52 6.32 6.06 6.12 -3.5GBP 9.08 8.90 8.67 8.41 8.55 -2.0 -4.7 -7.9 -6.9CHF 6.10 6.03 5.95 5.86 5.87 -1.3 -3.0 -4.9 -5.8SEK 0.84 0.84 0.85 0.85 0.85 0.2 0.5 0.8 -0.2DKK 0.99 0.98 0.97 0.96 0.95 -1.2 -2.9 -4.0 -5.6CAD 5.72 5.60 5.54 5.52 5.49 -2.0 -3.2 -3.7 -4.4AUD 5.93 5.82 5.75 5.72 5.59 -1.8 -2.8 -3.0 -4.5NZD 4.74 4.67 4.57 4.55 4.41 -1.5 -3.4 -3.4 -5.9PLN 1.80 1.78 1.74 1.71 -1.0 -2.5 -3.9CZK 0.29 0.28 0.27 0.27 -5.6 -9.4 -10.2HUF 0.26 0.26 0.26 0.25 -0.5 -0.8 -0.9RUB 0.18 0.17 0.18 0.17 -5.4 0.4 -3.5Source: Danske Marketswww.danskeresearch.com31

EMEA FX forecastsEUR USD DKK SEK NOKDanske Forward Danske Forward Danske Forward Danske Forward Danske ForwardPLN 13-Dec 4.10 3.13 182.0 213.1 179.5+1M 4.10 4.11 3.08 3.14 182.0 211.0 212.4 178.0+3M 4.05 4.14 3.02 3.16 184.2 180.2 209.9 211.5 177.8 178.6+6M 4.10 4.17 3.04 3.18 182.0 178.8 204.9 210.5 174.4 178.0+12M 4.15 4.22 3.14 3.22 179.8 176.2 202.4 208.7 171.1 177.1HUF 13-Dec 283 217 2.63 3.08 2.60+1M 282 284.5 212 217.4 2.65 3.07 3.07 2.59+3M 280 286.4 209 218.8 2.66 2.60 3.04 3.05 2.57 2.58+6M 280 288.9 207 220.5 2.66 2.58 3.00 3.04 2.55 2.57+12M 280 293.2 212 223.3 2.66 2.54 3.00 3.01 2.54 2.55CZK 13-Dec 25.2 19.3 29.5 34.6 29.1+1M 25.5 25.3 19.2 19.3 29.3 33.9 34.6 28.6+3M 26.0 25.3 19.4 19.3 28.7 29.5 32.7 34.6 27.7 29.2+6M 26.8 25.2 19.9 19.3 27.8 29.5 31.3 34.7 26.7 29.4+12M 26.6 25.2 20.2 19.2 28.0 29.5 31.6 34.9 26.7 29.6RUB 13-Dec 40.18 30.73 18.57 21.74 18.31+1M 39.61 40.42 29.78 30.89 18.83 21.84 21.59 18.43+3M 38.50 40.80 28.73 31.17 19.38 18.27 22.08 21.44 18.70 18.10+6M 38.21 41.42 28.30 31.62 19.53 17.98 21.99 21.17 18.71 17.90+12M 39.20 42.63 29.70 32.47 19.03 17.45 21.43 20.68 18.11 17.55TRY 13-Dec 2.33 1.78 320 375 316+1M 2.37 2.34 1.78 1.79 315 365 373 308+3M 2.39 2.35 1.78 1.80 312 317 356 372 301 314+6M 2.48 2.38 1.84 1.82 301 313 339 368 288 311+12M 2.60 2.44 1.97 1.86 287 305 323 361 273 306ZAR 13-Dec 11.32 8.61 65.9 77.2 65.0+1M 11.49 11.33 8.64 8.66 64.9 75.3 77.0 63.5+3M 11.68 11.42 8.72 8.73 63.8 65.2 72.7 76.6 61.6 64.6+6M 11.93 11.57 8.84 8.83 62.5 64.4 70.4 75.8 59.9 64.1+12M 11.88 11.87 9.00 9.04 62.8 62.7 70.7 74.3 59.8 63.0Source: Danske Bank Marketswww.danskeresearch.com32

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