Global FX 10 May 2010

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Global FX 1 May 1 Fear gripped financial markets in the past week as market feared that Europe s inability to resolve its sovereign credit crisis will turn into a global financial crisis.

its fiscal targets which are conditions for the loan. Many saw a high possibility that Greece would need to restructure its debts.

Contagion concerns caused panic, triggering a sell off in the euro and sending it to trade at 1-month lows of around 1. versus the greenback.

They met on May 9, a Sunday, and came up with a plan to try to restore confidence and stabilize the euro.

1 Global FX 1 May 1 Fear gripped financial markets in the past week as market feared that Europe s inability to resolve its sovereign credit crisis will turn into a global financial crisis. Despite the fact that Greece finally secured a EUR11 billion loan package from other euro zone countries and the International Monetary Fund, market remained skeptical as to whether Greece could meet its fiscal targets which are conditions for the loan. Many saw a high possibility that Greece would need to restructure its debts. Investors also expected other countries, including Spain and Portugal, to require financial assistance. Contagion concerns caused panic, triggering a sell off in the euro and sending it to trade at 1-month lows of around 1. versus the greenback. For the year to date, the single currency has declined about 1. Other riskier assets were also sold off. The slide of the euro finally jolted the European leaders into action. They met on May 9, a Sunday, and came up with a plan to try to restore confidence and stabilize the euro. The plan was to set up an emergency loan programme of as much as EUR7 billion, including loan guarantees by the euro zone countries totaling EUR billion, a stabilization fund worth EUR billion from the EU s budget, and EUR billion from the IMF. In addition, the European Central Bank said that it would intervene in government and private bond markets to ensure depth and liquidity in those markets, but such actions will be sterilized through specific operations to re-absorb the liquidity injected. The central bank will also reactivate temporary liquidity swap lines with the US Federal Reserve and resume US dollar liquidity providing operations at terms of 7 and 8 days. These actions seem to have a calming effect, pushing the euro back up the 1.9 level. However, whether they can succeed in restoring longer term confidence in the single currency remains to be seen. 9Q 1Q1 1QF 1QF 1QF EUR/USD USD/JPY GBP/USD AUD/USD NZD/USD USD/CAD USD/CNY Notes: End of period figures; F denotes forecast Sources: Bloomberg L.P, Hang Seng Bank

2 Interest Rates 1 May 1 The Reserve Bank of Australia raised rates by basis points again on May, bringing its key rate to., the highest among the developed world. The fact that the RBA led the world in tightening shows that the country has been successful in avoiding the global financial crisis. Its success, however, is not accidental. The country implemented aggressive fiscal and monetary stimulus. It also has a stable banking system and strong demand for Australia s commodity exports from Asia, especially mainland China, all helped accelerate its recovery. After raising rates six times in the past eight months, the central bank signaled that the first stage of its tightening cycle might be over. In contrast, other central banks might be more hesitant in raising rates. In the US, for example, despite a recent round of strong data, the recession dating agency, the Business Cycle Dating Committee of the National Bureau of Economic Research, said that it would be premature to declare end of the US recession. The situation in Europe is even worse. Despite the fact that the eurozone countries and the International Monetary Fund reached an agreement to provide Greece with a EUR11 billion loan, market is not convinced that the Greek government could implement tough measures to bring down the deficit, which are the conditions for the loan. There are also risks of a contagion as a number of eurozone countries, including Spain and Portugal, also have sizable fiscal deficits. The European Central Bank said on May 1 that it would intervene in government and private bond markets to ensure depth and liquidity of those markets, as well as reactivating temporary liquidity swap lines with the US Federal Reserve. Under such circumstances, it would be difficult, if not impossible, for the European Central Bank to raise interest rates anytime soon. () 9Q 1Q1 1QF 1QF 1QF US Fed Funds Target Rate Japanese Target Rate Euro Refinancing Rate British Repo Rate..... Australian Cash Rate New Zealand Cash Rate Canadian Bank Rate..... Notes: End of period figures; F denotes forecast Sources: Central Bank Data, Bloomberg L.P., Reuters, Hang Seng Bank

3 US Economy 1 May 1 The US economy grew at an annualised rate of. in the first quarter, after rebounding. in the final quarter of 9. The main reasons for the latest performance was increasing consumer spending and inventory rebuilding. Consumer spending rose. during the quarter, contributing to. percentage points to growth, the most since the final quarter of. Similarly, efforts to boost inventories also helped support growth, contributing 1. percentage points to GDP. In contrast, net exports and government spending subtracted from growth during the quarter. The April data show that the economy started the second quarter on a strong note. The ISM manufacturing index surged to. in April, its strongest pace since June. April s figure also marks a ninth consecutive month that the index has been above, signaling that the manufacturing recovery continues to move ahead at a good pace. In addition, the ISM services index, which covers about 9 of the economy, held at an almost fouryear high of. for a second month in April. Another positive sign is that banks are more willing to extend loans to consumers. The Fed s April survey of senior loan officers showed that most banks did not tighten lending standards during the first quarter. In terms of customers, the survey showed the proportion of banks that restrict standards on business lending was the smallest in two years, and that more banks expressed a greater willingness to make installment loans to consumers. The shortage of credit has been an important factor behind the slow recovery. Even the labour market showed signs of improvement. US employers added 9, jobs in April, following a, gain in March. Excluding government jobs such as those created by the 1 census, private sector still took on 1, workers during the month. However, the unemployment rate jumped to 9.9 in April from 9.7 in March as more people rejoined the labour force. Nevertheless, there are still some negative aspects of the report. For instance, the so-called underemployment rate, which includes part time workers who would prefer a full time job and people who want work but have given up looking, increased to 17.1 from 1.9. The report also showed that the number of peopled unemployed for 7 weeks or more rose as percentage of all jobless, to a record.9.

4 Euro Zone Economy 1 May 1 Annual GDP volumes, EUR in million 9 of euro area Euro area 8,88,19 1. Germany,71,7.7 France 1,81,79 1. Italy 1,88, Spain 1,8, Greece,8. Ireland 17, Portugal 19, 1.7 Source: Eurostat, Hang Seng Bank Eurozone Economic Sentiment Indicator (long-term average: = 1) European Commission's spring forecast, Apr 1 (for the euro area) 9E 1F 11F GDP Inflation Unemployment Budget balance (share of GDP) Debt balance (share of GDP) Current account (share of GDP) E: estimates; F: forecasts Source: European Commission, Hang Seng Bank Greece s sovereign debt problems have been a major source of uncertainty in the region s economy. While the share of Greece, in the overall gross domestic product of the euro area, is less than, the share of Greece and other peripheral eurozone countries altogether can be large. A financial contagion to Portugal, Spain, or those already suffering high debt, could risk financial market stability and the economic recovery in the eurozone. Facing the voice of reducing public spending, many countries including Greece, Portugal, and Ireland have strengthened their austerity measures despite the fact that economic activity is just starting to pick up. The fiscal restraints will inevitably slow down overall euro area growth in the year and next. In addition, recent increases of government bond yields of peripheral eurozone nations will have an adverse impact on the recovery as they are often used as a benchmark for the cost of borrowing when firms or households take credit from banks. Until now the effect of the debt crisis has yet to reflect on economic indicators. The European Commission s measure of economic confidence rose further to 1. in April, the first time above its long-term average of 1. since May 8. The purchasing managers survey also suggested a continued expansion of output over the near term. However, labor market conditions have been weak, with the unemployment rate staying at a doubledigit level. Job insecurity has also weighed on consumer spending, as evidenced by the volume of retail sales being flat in March. The European Commission expects that weak domestic demand, due to a slow improvement in labor markets, will continue to restrain the recovery. As the degree of fiscal consolidation efforts is different among governments, the pace of growth will vary across member states. For the euro area as a whole, the Commission forecasts a.9 growth in 1 and a 1. in 11. The projections are more or less the same as the International Monetary Fund s estimates in April.

5 UK Economy 1 May UK Consumer Credit (monthly change, s.a.) The eurozone debt crisis has some implications for the fiscal policy in the United Kingdom. While the UK does not adopt the euro and is not a member of the European monetary union, the country s financial strength has still been a major area of public concern. In his Budget 1, Chancellor of the Exchequer Alistair Darling already announced taking austerity measures in the coming years, but in the light of the recent developments in Greece it is uncertain whether the new government after the general election on May will take a more tightening stance towards its fiscal policy UK House Prices Annual Change Nationwide's UK house prices index (s.a., 199Q1=1) annual change Halifax's UK house prices index (s.a., 198=1) annual change UK Producer & Consumer Prices (year-on-year change) Manufactured products output price index (YoY) Consumer price index (YoY) Trade was another channel through which the sovereign debt problems could affect the UK economy. The fiscal adjustment plans taken by peripheral eurozone countries are likely to weaken the growth outlook for the euro area and thus have a negative effect on UK exports. In the last three years, the values of UK exports of goods to euro area nations accounted for about half of the country s total exports. Any decrease in export demand from the 1-country region will in turn weigh on UK domestic production and growth. UK broad equity price indexes have dropped around 1 from their recent peaks amid concerns about the Greek fiscal strength. Declines in stock prices could adversely affect household wealth and sentiment, although such impacts have not yet been seen on recent data. In March, net consumer credit rose again, suggesting that overall consumers were willing to extend credit to purchase goods and services. Housing activity continued to strengthen in spring. The number of mortgage approvals and net lending secured on dwellings both increased in March. In addition, Nationwide s house price index rose by 1. in April compared with March, or 1. compared with a year before. A continuation of such trend could help offset the effect of stock price decreases on household net worth. Consumer price annual inflation has been above the Bank of England s target, due to higher energy and food prices, and broad money has recently increased. But given the present state of the economy and the uncertainty surrounding the eurozone debt crisis, the Bank is unlikely to change its easing stance soon.

6 Japan Economy 1 May 1 The Bank of Japan s Forecasts for FY 1 and FY 11 ending 1 March (yoy chg.) Real GDP Core CPI FY to to -. (+1.8) (-.) January s +1. to to -. Forecast (+1.) (-.) FY to to +. (+.) (+.1) January s +1.7 to to -.1 Forecast (+.1) (-.) Note : a) Forecasts based on Majority of Policy Board Members b) Assumption of no change in monetary policy c) Brackets indicate median of the forecasts Source : Bank of Japan Japan Household Spending vs Consumer Confidence Household Spending Consumer Confidence Japan Employment Situation Unemployment Rate Labour Cash Earnings, Chg Y/Y (yoy ) Source: Reuters EcoWin Source: Reuters EcoWin The Bank of Japan published its latest Outlook for Economic Activity and Prices report on the first day of May. The Bank was more optimistic about economic growth for this fiscal year, forecasting that the economy will expand 1.8 (median forecast) for FY1 ending 1 March 11, an upward revision from its previous projection, while the growth for FY11 is expected to be.. According to the report, the Bank said that business activities from FY1 through FY11 are likely to be on a recovery trend. This view actually rested on some assumptions. First of all, exports would carry on gathering pace on the backdrop of strong expansion in emerging and commodity-exporting economies. Furthermore, the Bank was optimistic that business fixed investment was also likely to pick up with the recovery in corporate profits. In addition, it is expected that the strengthening corporate sector is able to feed through into the household sector slowly but steadily. This means that while the effect of various policy measures targeted at durable goods consumption were likely to gradually wane, the momentum for a self-sustaining recovery in private consumption is likely to grow gradually. Furthermore, the central bank said the recent extremely accommodative financial conditions would continue giving support to private demand. For the outlook of prices, the central bank predicted that deflation would persist until FY11. Core consumer prices would drop. for FY1, unchanged from January s estimate. Prices the country s prices are expected to resume a positive gain in FY11, rising.1 next fiscal year. Other economic reports seemed to confirm the view that the Japanese economy has been on a gradual road of recovery while deflation remained severe. Retail sales rose at the fastest pace in 1 years, advancing.7 from a year earlier, while household spending also increased. in the month, outpacing the market forecast. On the inflation front, consumer prices declined for the 1 th month in a row in March. Core consumer prices plummeted 1. from a year earlier, the pace as compared with the previous month and matching expectations.

7 Key Economic Forecast Update US Euro Zone Japan 1 May 1 (Percent) 8 9 1F 8 9 1F 8 9 1F Real GDP CPI Inflation Rate Unemployment Rate Official Short Rate # Year Bond Yield # Notes: # End-of-period data; E Estimates F - Forecasts US Dollar Forecast Update 9 1Q1 1QF 1QF 1QF EUR/USD USD/JPY GBP/USD AUD/USD NZD/USD USD/CAD USD/CNY Notes: End-of-period figures; F denotes forecast Interest Rate Forecast Update 9 1Q1 1QF 1QF 1QF US Fed Funds Target Rate Japanese Target Rate Euro Refinancing Rate British Repo Rate..... Australian Cash Rate New Zealand Cash Rate Canadian Bank Rate..... Notes: End-of-quarter figures; F denotes forecast Sources: Central Bank Data, Bloomberg L.P., Reuters, Hang Seng Bank This document has been issued by Hang Seng Bank Limited ( HASE ) and the information herein is based on sources believed to be reliable and the opinions containe herein are for reference only and may not necessarily represent the view of HASE. The research analyst(s) who prepared this report certifies(y) that the view expressed herein accurately reflect the research analyst s(s) personal views about the financial instrument or investments and that no part of his/her/their compensatio was, is or will be directly or indirectly related to the specific recommendation(s) or views contained in this research report. Nothing herein shall constitute as offers o solicitation of offers to buy or sell foreign exchange contracts, securities, financial instruments or other investments. Re-distribution of any part of this document by an means is strictly prohibited. The information contained in this document may be indicative only and has not been independently verified and no guarantee, representation, warranty or undertaking express or implied is made as to the fairness, accuracy, completeness or correctness of any information, projections or opinions contained in this document or the basi upon which any such projections or opinions have been based and no responsibility or liability is accepted in relation to the use of or reliance on any information projections or opinions whatsoever contained in this document. Investors must make their own assessment of the relevance, accuracy and adequacy of the informatio and opinions contained in this document and make such independent investigations as they may consider necessary or appropriate for the purpose of such assessmen All such information, projections and opinions are subject to change without notice. HASE and its affiliates may trade for their own account in, may have underwritten, or may have a position in, all or any of the securities or investments mentioned in thi document. Brokerage or fees may be earned by HASE or its affiliates in respect of any business transacted by them in all or any of the securities or investments referre to in this document. The investments mentioned in this document may not be suitable for all investors. Investors must make investment decisions based on their own investment objectives financial position and particular needs and consult their own professional advisers where necessary. This document is not intended to provide professional advice an should not be relied upon in that regard. No consideration has been given to the particular investment objectives, financial situation or particular needs of any recipient. Investment involves risk. Investor should note that value of investments can go down as well as up and past performance is not necessarily indicative of future performance. This document does no purport to identify all the risks that may be involved in the securities or investments referred to in this document. Hang Seng Treasury Strategic Unit Joanne Yim Yvonne Ma Thomas Shik Hang Seng Bank Limited 8 Des Voeux Road Central Hong Kong 7

Global FX 2 Apr 2012

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