BNP Paribas STEER. 10 September James Hellawell +44 (0) Michael Sneyd +44 (0)

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FX STRATEGY FX QUANT INSIGHT BNP Paribas 10 September 2013 Non Independent Research Marketing Communication James Hellawell +44 (0)20 7595 8485 Michael Sneyd +44 (0)20 7595 1307 BNP Paribas indicates

risk appetite this week. Further gains in global equities should continue to support USDJPY and EURCHF according to.

1 FX STRATEGY FX QUANT INSIGHT BNP Paribas 10 September 2013 Non Independent Research Marketing Communication James Hellawell +44 (0) Michael Sneyd +44 (0) BNP Paribas indicates gains in the AUD, NZD and CAD may be reversed USDJPY and EURCHF remain sensitive to investor risk appetite according to The AUD, NZD and CAD appear overvalued according to as they rose along with risk appetite this week. Further gains in global equities should continue to support USDJPY and EURCHF according to. EURNOK has converged back in line with its, while EURSEK has scope to continue to decline. Investor risk appetite, proxied in BNP Paribas by the MSCI world equity index, rebounded sharply over the past week (up over 2.3%). In FX, the AUD, NZD and CAD typically the more risk-sensitive currencies have been the best performing currencies over this period. However, all three now appear significantly overvalued according to BNP Paribas. Based on the latest relationships captured by, the sensitivities of AUDUSD, NZDUSD and USDCAD to risk appetite remain low. In recent months, interest-rate differentials and relative local equity market performance have been the main drivers of the commodity currencies that is, domestic rather than global variables have been important for these currencies. Unless the AUD, NZD and CAD manage to permanently reestablish their links with global risk appetite, the domestic variables suggest that these currencies may decline back towards their respective s of AUDUSD, NZDUSD and USDCAD. BNP Paribas indicates that USDJPY and EURCHF are the most sensitive currencies to global equity performance. USDJPY is trading broadly in line with its of (Chart 8), while EURCHF is trading around 1 standard deviation below its of A further rebound in global equities should continue to support these currency pairs. Chart 1: NZDUSD overvalued relative to 0.84 Chart 2: Scope for EURNOK to continue to decline NZDUSD Source: Reuters Ecowin, Bloomberg, BNP Paribas Source: Reuters Ecowin, Bloomberg, BNP Paribas Non Independent Research - Marketing Communication Please refer to important information at the end of the report

2 continues to support short EURNOK and EURSEK EURSEK have scope to continue to decline according to This publication is classified as non-objective research EURUSD is currently trading very close to its fair value of (Chart 2). indicates that relative and global equity performance will be important to EURUSD, having become key drivers of the currency recently. Among the other EUR crosses, the spike downwards in EURGBP triggered a signal by that the pair could rise, with the fair value having recently been stable around After several weeks of indicating that EURNOK has been overvalued, the recent decline in EURNOK following the strong inflation release for August has brought the exchange rate back in line with its of Meanwhile, continues to indicate further downside for both EURSEK, although it is trading within its +/-1.5 z-score corridors. EURSEK s deviation from is around 1.0 z-score (compared with 2.3 on 2 September). The fair value for EURSEK has risen slightly over the past week to Hence, EURSEK still appear overstretched and the crosses remain vulnerable to a further decline. Chart 3: Deviation from short-term value (z-score) GBPUSD remains significantly overbought, according to, while EURGBP remains significantly oversold. EURNOK has moved back in line with its, while EURSEK has scope to continue to decline. The recent rises in AUDUSD and NZDUSD appear overstretched. EURUSD and USDJPY are trading broadly in line with their s. EURUSD GBPUSD AUDUSD NZDUSD USDJPY USDCAD EURNOK EURSEK EURGBP EURCHF Spot Fair Value Over (+ve) Under (-ve) valuation* Forecast Bias** * Over- or under-valuation of spot against, measured as a z-score (i.e. % mis-valuation divided by the standard deviations of misvaluations over the past year). ** A mis-valuation greater than 1.5 is considered a significant predictor of exchange-rate movements over the weeks ahead. An overvaluation suggests that the exchange rate is likely to fall, while an under-valuation suggests that a currency is likely to rise. 10 September

3 BNP Paribas EM A rebound in EM currencies over the past week has caused several overvalued USD crosses to fall towards their s. USDZAR and USDINR now appear oversold and are liable to rise according to. USDKRW, USDTHB and USDPHP appear oversold, while the Latam currencies have converged in line with their s. EM currencies have been supported by local equity and bond performance USDINR appears oversold according to and may rebound USDBRL and USDMXN have declined in line with their s USDZAR appears oversold according to and is liable to rise BNP Paribas indicates that, across EM, stronger local market equities and a decline in CDS have supported currencies. In last week s edition of FX Quant Insight, several EM currencies appeared oversold against the USD. The rebounds in many EM currencies have caused them to move back towards their s, while several currencies now appear overbought according to. In Asia, USDIDR and USDINR, for example, have declined towards their s over the past week. USDIDR remains significantly overvalued by 1.7 z-scores and has scope to continue to decline according to. The fall in USDINR, on the other hand, appears overstretched according to, signalling that the pair is now predisposed to rise towards its fair value of (Chart 27). Elsewhere in Asia, USDKRW, USDTWD and USDPHP appear oversold and liable to rise. In Latam, USDBRL and USDMXN were significantly overvalued according to last week. Both are now trading in line with their s, with the fair values having also declined due to strong local equity performance and declines in Brazilian and Mexican CDS. USDCOP and USDCLP are also trading broadly in line with their s once again, but this has been driven by moves in rather than the exchange rate. indicates that local market equities and CDS are the main drivers of Latam currencies. In CEEMEA, most currency pairs are trading broadly in line with their, with USDTRY returning to its, while EURRON has rebounded after appearing very cheap. indicates that the recent decline in USDZAR to is overstretched and the pair is liable to rise according to. Its fair value is 1.5 z-score, or 2.3% higher, at Chart 1: USDZAR appears oversold 9.14 USDZAR Source: Reuters Ecowin, Bloomberg, BNP Paribas 2.0% 1.0% 0.0% 1.0% 2.0% 3.0% Chart 2: Latam currencies supported by equities and CDS % (03 Sep Sep 2013) Contribution 4.0% 5.0% Actual move in currencies USDBRL USDCLP USDMXN Commodities Global Equities Rate Diff Local Equities Local CDS SPOT Source: Reuters Ecowin, Bloomberg, BNP Paribas 10 September

4 Chart 3: CEE currencies- Deviation from short-term value(z-score) indicates that USDZAR has scope to rebound towards its of All other CEEMEA currencies are trading within their +/-1.5 z-score corridors around. EURRON is trading back in line with its after appearing very undervalued in recent weeks. Over the week, the s for USDRUB and USDTRY have declined, driven by favourable moves in interest-rate differentials and a rebound in local equities. 03-Sep Sep-2013 Chart 4: Asian currencies - Deviation from short-term value(z-score) Sep Sep-2013 USDIDR and USDINR, which have recently been significantly overvalued, have declined over the past week. USDIDR remains overvalued, while USDINR now appears undervalued according to and may rebound. USDTWD and USDKRW continue to appear undervalued according to s. USDPHP also appears undervalued. USDTHB is trading at the top of its corridor. A strong local equity performance and a decline in the CDS suggest the pair should decline Chart 5: Latin America currencies - Deviation from short-term value(z-scor) Local equity market performance and declines in CDS have been supportive of Latam currency strength over the week. USDBRL and USDMXN have declined back in line with their s after having appeared overvalued last week. USDCOP and USDCLP are also trading in line with their, but due to a move in their fair values. Going forward, indicates that local equity performance and CDS will remain the prominent drivers for Latam currencies. 03-Sep Sep September

5 G10 Chart 6: EURUSD short term value (FV=1.3260) Chart 7: GBPUSD short term value (FV=1.5350) EURUSD 1.43 GBPUSD Chart 8: USDJPY short term value (FV=101.50) Chart 9: USDCAD short term value (FV=1.0460) USDJPY 1.01 USDCAD Chart 10: AUDUSD short term value (FV=0.9010) Chart 11: NZDUSD short term value (FV=0.7820) AUDUSD 0.75 NZDUSD 10 September

6 Chart 12: EURGBP short term value (FV=0.8640) Chart 13: EURCHF short term value (FV=1.2440) EURGBP 1.21 EURCHF Chart 14: EURNOK short term value (FV=7.8630) Chart 15: EURSEK short term value (FV=8.5870) EURNOK 8.32 EURSEK 10 September

7 CEEMEA Chart 16: EURPLN short term value (FV=4.2790) Chart 17: EURCZK short term value (FV= ) EURPLN Chart 18: EURHUF short term value (FV=299.60) EURCZK Chart 19: EURRON short term value (FV=4.4440) EURHUF EURRON Chart 20: USDZAR short term value (FV= ) Chart 21: USDTRY short term value (FV=2.0210) USDZAR Chart 22: USDILS short term value (FV=3.6390) USDTRY Chart 23: USDRUB short term value (FV= ) USDILS USDRUB 10 September

8 Asia Chart 24: USDKRW short term value (FV=1098) USDKRW Chart 26: USDIDR short term value (FV=11216) Chart 25: USDMYR short term value (FV=3.2950) USDMYR Chart 27: USDINR short term value (FV= ) USDIDR USDINR Chart 28: USDTHB short term value (FV= ) Chart 29: USDSGD short term value (FV=1.2780) USDTHB 1.24 USDSGD Chart 30: USDPHP short term value (FV= ) Chart 31: USDTWD short term value (FV= ) USDPHP USDTWD 10 September

9 Latin America Chart 32: USDBRL short term value (FV=2.2770) Chart 33: USDCLP short term value (FV=508.80) USDBRL Chart 34: USDMXN short term value (FV= ) USDMXN Chart 36: USDCOP short term value (FV=1933) USDCLP Chart 35: USDPEN short term value (FV=2.7890) USDPEN USDCOP 10 September

10 CEEMEA Currency pair Spot Fair Value Deviation Forecast Bias EURPLN EURCZK EURHUF EURRON USDZAR USDTRY USDILS USDRUB Asia Currency pair Spot Fair Value Deviation Forecast Bias USDKRW USDMYR USDIDR USDINR USDTHB USDSGD USDPHP USDTWD Latin America Currency pair Spot Fair Value Deviation Forecast Bias USDBRL USDCLP USDMXN USDPEN USDCOP * Over- or under-valuation of spot against, measured as a z-score (i.e. % misvaluation divided by the standard deviations of misvaluations over the past year). ** A misvaluation greater than 1.5 is considered a significant predictor of exchange-rate movements over the weeks ahead. An over-valuation suggests that the exchange rate is likely to fall, while an under-valuation suggests that a currency is likely to rise. *** Indicates that the signal is from a model which does not pass statistical tests for co-integration, which corresponds to lower forecasting power. See Introducing BNP Paribas EM for further details. Brief Introduction to BNP Paribas s (short-term equilibrium exchange rates) BNP Paribas s are the short-term fair values of exchange rates, estimated based on the relationships between exchange rates, interest-rate markets, equity markets and commodity markets. Deviations from tend to be short lived (from a few days to several weeks) and are a useful input when forecasting exchange-rate movements over the weeks ahead. We use the following variables as the main short-term drivers of exchange rates: interest-rate differentials, relative yield-curve steepness, relative local-market equity performance, global equity-market performance and the oil price. A simple trading rule of buying crosses that are cheap and selling crosses that are expensive has historically been a successful trading strategy, with a Sharpe ratio of around 0.9 for a portfolio of currencies. BNP Paribas s can also be used to explain what factors from other financial markets may be driving exchange rates on a day-to-day basis, can highlight the sensitivity of an exchange rate to other market variable or assist with short-term forecasting. 10 September

11 FX Global Strategy Contacts Foreign Exchange Steven Saywell Global Head of FX Strategy London James Hellawell Quantitative Strategist London Kiran Kowshik FX Strategist London Phyllis Papadavid Senior Global FX Strategist London Michael Sneyd FX Strategist & Lead Quant Strategist London Daniel Katzive Head of FX Strategy North America New York daniel.katzive@us.bnpparibas.com Vasilis Koutsaftis FX Options Strategist New York vasilis.koutsaftis@americas.bnpparibas.com Vassili Serebriakov FX Strategist New York vassili.serebriakov@us.bnpparibas.com Emerging Markets FX & IR Strategy Mirza Baig Head of FX & IR Asia Strategy Singapore mirza.s.baig@asia.bnpparibas.com Rohit K Garg FX & IR Asia Strategy Singapore rohit.k.garg@asia.bnpparibas.com Jasmine Poh FX & IR Asia Strategy Singapore jasmine.j.poh@asia.bnpparibas.com Yii Hui Wong FX & IR Asia Strategy Singapore yiihui.wong@asia.bnpparibas.com Bartosz Pawlowski Global Head of EM Strategy London bartosz.pawlowski@uk.bnpparibas.com Dina Ahmad FX & IR CEEMEA Strategist London dina.ahmad@uk.bnpparibas.com Stanislav Petrov FX & IR CEEMEA Strategist London stanislav.petrov@uk.bnpparibas.com Diego Donadio Head of FX & IR Latam Strategy Sao Paulo diego.donadio@br.bnpparibas.com Thiago Alday FX & IR Latam Strategist Sao Paulo thiago.alday@br.bnpparibas.com Production and Distribution please contact: Diana Seifert, Foreign Exchange, London. Tel: , Diana.seifert@uk.bnpparibas.com Important Disclosures: Please see important disclosures in the text of this report. is a trade mark of BNP Paribas. This document has been written by our strategy teams. It does not purport to be an exhaustive analysis, and may be subject to conflicts of interest resulting from their interaction with sales and trading which could affect the objectivity of this report. This document is a marketing communication. They are not independent investment research. They have not been prepared in accordance with legal requirements designed to provide the independence of investment research, and are not subject to any prohibition on dealing ahead of the dissemination of investment research. The information and opinions contained in this report have been obtained from, or are based on, public sources believed to be reliable, but no representation or warranty, express or implied, is made that such information is accurate, complete or up to date and it should not be relied upon as such. This report does not constitute an offer or solicitation to buy or sell any securities or other investment. Information and opinions contained in the report are published for the assistance of recipients, but are not to be relied upon as authoritative or taken in substitution for the exercise of judgement by any recipient, are subject to change without notice and not intended to provide the sole basis of any evaluation of the instruments discussed herein. Any reference to past performance should not be taken as an indication of future performance. To the fullest extent permitted by law, no BNP Paribas group company accepts any liability whatsoever (including in negligence) for any direct or consequential loss arising from any use of or reliance on material contained in this report. All estimates and opinions included in this report are made as of the date of this report. Unless otherwise indicated in this report there is no intention to update this report. BNP Paribas SA and its affiliates (collectively BNP Paribas ) may make a market in, or may, as principal or agent, buy or sell securities of any issuer or person mentioned in this report or derivatives thereon. Prices, yields and other similar information included in this report are included for information purposes. Numerous factors will affect market pricing and there is no certainty that transactions could be executed at these prices. BNP Paribas may have a financial interest in any issuer or person mentioned in this report, including a long or short position in their securities and/or options, futures or other derivative instruments based thereon, or vice versa. BNP Paribas, including its officers and employees may serve or have served as an officer, director or in an advisory capacity for any person mentioned in this report. BNP Paribas may, from time to time, solicit, perform or have performed investment banking, underwriting or other services (including acting as adviser, manager, underwriter or lender) within the last 12 months for any person referred to in this report. BNP Paribas may be a party to an agreement with any person relating to the production of this report. BNP Paribas, may to the extent permitted by law, have acted upon or used the information contained herein, or the research or analysis on which it was based, before its publication. BNP Paribas may receive or intend to seek compensation for investment banking services in the next three months from or in relation to any person mentioned in this report. Any person mentioned in this report may have been provided with sections of this report prior to its publication in order to verify its factual accuracy. BNP Paribas is incorporated in France with limited liability. Registered Office 16 Boulevard des Italiens, Paris. This report was produced by a BNP Paribas group company. This report is for the use of intended recipients and may not be reproduced (in whole or in part) or delivered or transmitted to any other person without the prior written consent of BNP Paribas. By accepting this document you agree to be bound by the foregoing limitations. Certain countries within the European Economic Area: This report is solely prepared for professional clients. It is not intended for retail clients and should not be passed on to any such persons. This report has been approved for publication in the United Kingdom by BNP Paribas London Branch. BNP Paribas London Branch (registered office: 10 Harewood Avenue, London NW1 6AA; tel: [44 20] ; fax: [44 20] ) is authorised by the Autorité de Contrôle Prudentiel and the Prudential Regulation Authority and subject to limited regulation by the Financial Conduct Authority and Prudential Regulation Authority. Details about the extent of our authorisation and regulation by the Prudential Regulation Authority, and regulation by the Financial Conduct Authority are available from us on request. BNP Paribas London Branch is registered in England and Wales under no. FC This report has been approved for publication in France by BNP Paribas SA, incorporated in France with Limited Liability and is authorised by the Autorité de Contrôle Prudentiel (ACP) and regulated by the Autorité des Marchés Financiers (AMF) whose head office is 16, Boulevard des Italiens Paris, France. This report is being distributed in Germany either by BNP Paribas London Branch or by BNP Paribas Niederlassung Frankfurt am Main, a branch of BNP Paribas S.A. whose head office is in Paris, France. BNP Paribas S.A. Niederlassung Frankfurt am Main, Europa Allee 12, Frankfurt is authorised and supervised by the Autorité de Contrôle Prudentiel and it is authorised and subject to limited regulation by the Bundesanstalt für Finanzdienstleistungsaufsicht (BaFin). United States: This report is being distributed to US persons by BNP Paribas Securities Corp., or by a subsidiary or affiliate of BNP Paribas that is not registered as a US broker-dealer to US major institutional investors only. BNP Paribas Securities Corp., a subsidiary of BNP Paribas, is a broker-dealer registered with the U.S. Securities and Exchange Commission and a member of the Financial Industry Regulatory Authority and other principal exchanges. For the purposes of, and to the extent subject to, 1.71 and of the U.S. Commodity Exchange Act, this report is a general solicitation of derivatives business. BNP Paribas Securities Corp. accepts responsibility for the content of a report prepared by another non-u.s. affiliate only when distributed to U.S. persons by BNP Paribas Securities Corp. Japan: This report is being distributed to Japanese based firms by BNP Paribas Securities (Japan) Limited or by a subsidiary or affiliate of BNP Paribas not registered as a financial instruments firm in Japan, to certain financial institutions defined by article 17-3, item 1 of the Financial Instruments and Exchange Law Enforcement Order. BNP Paribas Securities (Japan) Limited is a financial instruments firm registered according to the Financial Instruments and Exchange Law of Japan and a member of the Japan Securities Dealers Association and the Financial Futures Association of Japan. BNP Paribas Securities (Japan) Limited accepts responsibility for the content of a report prepared by another non-japan affiliate only when distributed to Japanese based firms by BNP Paribas Securities (Japan) Limited. Some of the foreign securities stated on this report are not disclosed according to the Financial Instruments and Exchange Law of Japan. Hong Kong: This report is being distributed in Hong Kong by BNP Paribas Hong Kong Branch, a branch of BNP Paribas whose head office is in Paris, France. BNP Paribas Hong Kong Branch is registered as a Licensed Bank under the Banking Ordinance and regulated by the Hong Kong Monetary Authority. BNP Paribas Hong Kong Branch is also a Registered Institution regulated by the Securities and Futures Commission for the conduct of Regulated Activity Types 1, 4 and 6 under the Securities and Futures Ordinance. Some or all the information reported in this document may already have been published on BNP Paribas (2013). All rights reserved. 10 September

BNP Paribas STEER. BNP Paribas STEER Summary of deviations

BNP Paribas STEER. BNP Paribas STEER Summary of deviations FX STRATEGY FX QUANT INSIGHT BNP Paribas 31 May 2016 Non-Independent Research Marketing Communication Michael Sneyd +44 (0)20 7595 1307 GBPUSD is overvalued according to, but we question whether the GBP