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1 FX STRATEGY FX QUANT INSIGHT BNP Paribas 22 October 2013 Non-Independent Marketing Communication James Hellawell +44 (0) Michael Sneyd +44 (0) Most major G10 pairs are trading in line with BNP Paribas EURNOK is still above its fair value, but is now trading back within its 1.5 z-score corridor BNP Paribas indicates that short-term fundamentals back up the recent strength in the EUR and AUD EURNOK remains overvalued and should continue to move lower. USDJPY and EURCHF remain vulnerable to a move higher. The low-volatility environment and a lack of conviction among investors may be among the reasons that most G10 currencies are trading broadly in line with their s. This is because usually, large deviations from, and hence strong trading signals, can occur due to swings in positioning, as investors turn too bullish or bearish on a currency. BNP Paribas FX Positioning Analysis suggests that the absolute level of G10 currency positioning has dropped to very low levels. Chart 1 shows a time series of the sum of the absolute value of our positioning measure across all G10 currencies. As the chart shows, G10 positioning is now running at very low levels relative to those seen over the past few years. As a result, most major pairs are trading in line with their short-term fair values. The two exceptions within the model are USDJPY and EURCHF; both pairs remain significantly undervalued After several weeks of trading significantly above its fair value, EURNOK is starting to converge back to its of (Chart 2). BNP Paribas indicates that EURNOK remains overvalued after its strong rally in late September, but the sell-off in EURNOK over the past week has brought the cross back within its 1.5+/- z-score corridor. However, EURNOK s current level is still not supported by the recent price action in other financial markets. Although EURNOK has now entered the top of the corridor, its misalignment from fair value remains sizable. Chart 1: BNP Paribas Positioning Analysis total net G10 positions Chart 2: BNP Paribas for EURNOK EURNOK 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 EURUSD is slightly overvalued, while EURCHF remains cheap USDJPY remains vulnerable to a move higher NZDUSD has scope to move lower, but AUD and CAD trading are in line with This publication is classified as non-objective research Among the other EUR crosses, EURUSD is slightly overvalued this week, according to, but it remains within its +/-1.5 z-score corridor (Chart 4). suggests EURUSD has scope to rise to before appearing overvalued. Elsewhere, continues to indicate that EURCHF is significantly undervalued and vulnerable to an increase towards its fair value of continues to indicate that USDJPY is oversold, with its fair value having risen further over the week to (Chart 8). The relationships captured by BNP Paribas indicate that global equities continue to move in favour of USDJPY., therefore, continues to suggest that USDJPY is vulnerable to a move higher, although we would be cautious in trading this signal, as the relationships between USDJPY and its short-term drivers remain unstable. This often corresponds with less reliable trading signals from. Finally, the recent decline in the US 2y swap rate has been supportive of the s of the commodity currencies. However, this has been offset by the underperformance of local equities relative to the US. There are currently divergences, however, in how these currencies are trading relative to their s: NZDUSD is slightly overvalued relative to its of , while AUDUSD and USDCAD are trading broadly in line with their s. Chart 3: Deviation from short-term value (z-score) USDJPY is undervalued by more than 2.5 standard deviations, according to, but Z score deviation from BNP Paribas we are cautious about the current bullish signal. 2.0 EURCHF remains one of the most oversold currencies The recent decline in EURNOK is supported by. AUDUSD and USDCAD are trading in line with their fair values, whereas NZDUSD is expensive relative to its of Oct Oct-2013 EURSEK and EURGBP continue to trade within their corridors, indicating no significant signal for these crosses. 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 mis-valuations 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. 22 October

3 BNP Paribas EM Michael Sneyd +44 (0) Short-term fundamentals have generally been favourable for EM currencies EURCZK is slightly overbought, while EURHUF is slightly oversold USDPHP and USDINR have scope to decline USDCLP appears slightly overbought BNP Paribas indicates that the short-term fundamentals have generally been supportive of EM currency appreciation. USDPHP and USDINR have scope to decline, according to, while USDIDR appears to be overbought. suggests that EURCZK and USDCLP are slightly overbought, while EURHUF is slightly undervalued. BNP Paribas indicates that the appreciation of emerging-market currencies over the past week has been in line with the short-term underlying fundamentals. In particular, a decline in the US 2y interest-rate swap, further declines in local CDS and rallies in local equities have been supportive of emerging-market currencies. In CEEMEA, most currencies are trading broadly in line with their s. EURCZK, however, appears to be overvalued by almost 1 z-score following its recent rally. Over the past month, EURCZK has tended to oscillate around its as investors have attempted to position for potential intervention by the Czech central bank. During this time, has provided good signals for when the currency has been overbought or oversold and it currently indicates that there is moderate scope for EURCZK to decline. In contrast, EURHUF appears to be slightly oversold, according to, with the short-term fundamentals not supporting the forint s recent strength. In Asia, indicates that the appreciation of most of the local currencies over the past week have been in line with the short-term fundamentals. USDINR and USDPHP are two exceptions: these pairs have remained flat, while indicates they have scope to decline to and 42.49, respectively, due to the recent rise in local equities and favourable interest-rate differentials (chart 2). Meanwhile, USDIDR appears oversold and is vulnerable to an upward move, according to. In Latam, all exchange rates are trading within their +/-1.5 z-score corridors. USDCLP has been the most volatile pair, moving from being slightly cheap to trading almost 1 z-score above its following the surprise rate cut by the central bank. USDPEN is also trading 1.2 z-scores above its, with local and global equity performance indicating scope for the exchange rate to decline. Chart 1: BNP Paribas for EURCZK EURCZK Source: Reuters EcoWin, Bloomberg, BNP Paribas Chart 2: Contribution to changes in USDINR and USDPHP 1.0% 0.5% 0.0% 0.5% 1.0% 1.5% 2.0% % w/w contribution 2.5% USDINR USDPHP Actual move in currencies Commodities Global Equities Rate Diff Local Equities Local CDS SPOT Source: Reuters EcoWin, Bloomberg, BNP Paribas 22 October

4 Chart 3: CEEMEA currencies deviation from short-term value (z-score) All CEEMEA currencies are trading within their +/-1.5 z-score corridors Last week, was signalling that USDZAR and USDRUB had scope to decline. These pairs have fallen back in line with their s. EURHUF appears slightly oversold, falling to 1 z-score below its over the week. EURCZK s recent rally, in contrast, has overshot its. The pair is trading 1 z-score above its of Oct Oct-2013 Chart 4: Asian currencies deviation from short-term value (z-score) Most Asian currencies are trading in line with their s The fair values for USDAsia have declined over the week, driven by a combination of lower CDS, a lower US 2y interest-rate swap and higher local and global equities. USDINR and USDPHP are exceptions these are trading significantly above their s and are vulnerable to a move lower. 15-Oct Oct-2013 USDIDR, meanwhile, is significantly undervalued Chart 5: Latin America currencies deviation from short-term value (z-score) indicates that the moves lower in the USDLatam exchange rates are in line with the underlying fundamentals. Accordingly, all Latam currencies are trading within the +/-1.5 z-score corridors. The decline in the 2y interest-rate swap, a fall in the CDS and increases in global equities have been supportive of the Latam currencies vs. the USD Oct Oct October

5 G10 Chart 6: EURUSD short-term value (FV=1.3540) Chart 7: GBPUSD short-term value (FV=1.6010) EURUSD 1.47 GBPUSD Chart 8: USDJPY short-term value (FV=105.90) Chart 9: USDCAD short-term value (FV=1.0280) USDJPY 1.00 USDCAD Chart 10: AUDUSD short-term value (FV=0.9610) Chart 11: NZDUSD short-term value (FV=0.8360) AUDUSD 0.75 NZDUSD 22 October

6 Chart 12: EURGBP short-term value (FV=0.8460) 0.91 Chart 13: EURCHF short-term value (FV=1.2470) EURGBP 1.22 EURCHF Chart 14: EURNOK short-term value (FV=8.0020) Chart 15: EURSEK short-term value (FV=8.7960) EURNOK 8.37 EURSEK 22 October

7 CEEMEA Chart 16: EURPLN short-term value (FV=4.1660) Chart 17: EURCZK short-term value (FV= ) EURPLN Chart 18: EURHUF short-term value (FV=295.40) EURCZK Chart 19: EURRON short-term value (FV=4.4370) EURHUF Chart 20: USDZAR short-term value (FV=9.7940) EURRON Chart 21: USDTRY short-term value (FV=1.9640) USDZAR Chart 22: USDILS short-term value (FV=3.5280) 1.89 USDTRY Chart 23: USDRUB short-term value (FV= ) USDILS USDRUB 22 October

8 Asia Chart 24: USDKRW short-term value (FV=1068) Chart 25: USDMYR short-term value (FV=3.1670) USDKRW Chart 26: USDIDR short-term value (FV=11270) USDMYR Chart 27: USDINR short-term value (FV= ) USDIDR USDINR Chart 28: USDTHB short-term value (FV= ) Chart 29: USDSGD short-term value (FV=1.2370) USDTHB 1.22 USDSGD Chart 30: USDPHP short-term value (FV= ) Chart 31: USDTWD short-term value (FV= ) USDPHP USDTWD 22 October

9 Latin America Chart 32: USDBRL short-term value (FV=2.1990) Chart 33: USDCLP short-term value (FV=498.80) USDBRL Chart 34: USDMXN short-term value (FV= ) USDCLP Chart 35: USDPEN short-term value (FV=2.7580) USDMXN Chart 36: USDCOP short-term value (FV=1880) 2.73 USDPEN USDCOP 22 October

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. % mis-valuation divided by the standard deviations of mis-valuations 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 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. 22 October

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 Thiago Alday FX & IR Latam Strategist Sao Paulo thiago.alday@br.bnpparibas.com James Z Hao FX & IR Latam Strategist New York james.z.hao@us.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. RESEARCH DISCLAIMERS - Please see important disclosures in the text of this report. 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. 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