Macro Weekly. Verbal FX intervention. 11 February Group Economics Macro Research

Transcription

1 Macro Weekly Verbal FX intervention Group Economics Macro Research 11 February 213 Big Picture: ECB President Mario Draghi subtly talked down expectations of higher interest rates and the euro in the press statement following the central bank s decision to keep interest rates on hold. He hinted that euro strength if sustained could eventually trigger a rate cut. Meanwhile, Japan s new government that has engineered a sharp fall in the yen took a small step back from the policy in the run-up to this week s G2 meeting. The finance minister said the fall in the yen had gone too far. Eurozone: Mr. Draghi s intervention focused on the monetary policy channel, underlining that monetary conditions would remain accommodative and that euro strength was a downside risk to inflation. In addition, he said that the ECB s estimates of early repayments of the second 3-year LTRO suggested that the degree of excess liquidity would remain high, signalling that downward pressure on interbank rates would continue. US: The economy is starting to feel the effects of the tax increases. The ISM non-manufacturing index fell modestly in January, while the more marked drop in the leading new orders sub-index suggests that services activity is likely to continue to soften. This is in line with our view that consumer spending will be depressed in coming months, but we still expect a recovery in the second half of the year. Asia: The first hard data of the year in China painted a relatively upbeat picture. However, these reports should be treated with some caution since the data released in January and February will include some distortions caused by the Chinese New Year. Our central view remains one of moderate recovery. Main economic/financial forecasts GDP growth (%) e 213e 214e 3M interbank rate 1/2/13 8/2/13 +3M +12M 213e 214e United States United States Eurozone Eurozone Japan Japan United Kingdom United Kingdom China World Inflation (%) e 214e 1Y interest rate 1/2/13 8/2/13 +3M +12M 213e 214e United States US Treasury Eurozone German Bund Japan Euro swap rate United Kingdom Japanese gov. bonds China UK gilts World Key policy rate 8/2/13 +3M 213e 214e Currencies 1/2/13 8/2/13 +3M +12M 213e 214e Federal Reserve EUR/USD European Central Bank USD/JPY Bank of Japan GBP/USD Bank of England EUR/GBP People's Bank of China USD/CNY , ABN AMRO Group Economics.

2 2 Macro Weekly - Verbal FX intervention - 11 February 213 The Big Picture Nick Kounis, tel Verbal currency intervention ECB President Mario Draghi subtly talked down expectations of higher interest rates and the euro in the press statement following the central bank s decision to keep interest rates on hold. He hinted that euro strength if sustained could eventually trigger a rate cut. Meanwhile, Japan s new government that has engineered a sharp fall in the yen took a small step back from the policy in the run-up to this week s G2 meeting. The finance minister said the fall in the yen had gone too far. Meanwhile, politics in Spain and Italy returned to the spotlight. At this time last year, significant political uncertainty in both Spain and Italy would have sent global financial markets into a serious tail-spin. However, after a wobble on Monday, investors shrugged off these events. This reflects that the ECB s sovereign safety net for troubled countries remains credible. On the economic data front, news was mixed, but remained consistent with a gradual recovery in the global economy. ECB talks down the euro subtly ECB President Mario Draghi subtly talked down expectations of higher interest rates and the euro in the press statement following the central bank s decision to keep interest rates on hold. He said that the inflationary pressures would remain contained and this would allow the monetary policy stance to remain accommodative. He sounded a little more optimistic on inflation, saying that it would drop below 2% in coming months compared to this year in the previous statement. In addition, for the first time, the strength of the euro was mentioned as posing a downside risk to the inflation outlook. When asked about the strength of the euro explicitly, he noted that the rise reflected an increase in confidence in the single currency area and that the trade weighted exchange rate was not high from a historical perspective. Furthermore, in an explicit retort to France s President Hollande s call to weaken the euro, Mr. Draghi asserted that the central bank did not have an exchange rate policy. However, he went on to note that the ECB would need to see how the rise in the euro impacted the growth and inflation outlook, with the ECB s forecasts set to be published next month. In addition, he pointed out that a continued strength in the euro could impact the balance of risks to inflation. The decision to keep rates on hold was unanimous though there was discussions and hints about how to improve financial conditions. This hints that euro strength if sustained could eventually trigger a rate cut. Verbal intervention stems rise in the euro Trade weighted exchange rate Jan-12 Apr-12 Jul-12 Oct-12 Jan-13, ECB Japan s minister of finance puts the break on the yen in run up to G2 The new Japanese government has been less than subtle in its desire to weaken the yen over recent months. It has been moving heaven and earth to try and achieve this aim, including putting substantial pressure on the BoJ to run a more aggressive monetary policy. Up until now, the results have been very impressive. The yen is down by around 18% against a basket of currencies since the autumn of last year. However, at the end of last week, the yen has found its footing again. Japan s finance minister, Taro Aso, told reporters on Friday that the fall in the yen had been too rapid. Coincidently (or maybe not so coincidently) there is a G2 meeting of finance ministers and central bankers coming up later this week, where the risks of competitive currency devaluation may be a theme. Currency devaluation is not a phenomenon seen outside of Japan, despite all the talk of currency wars. As such, Japan s authorities may come under pressure from other governments to take a less aggressive approach to the currency. After all, the G2 are committed to refrain from competitive devaluation of currencies as well as disorderly movements in exchange rates, as they can have adverse implications for economic and financial stability. The First Deputy Chairman of Russia s central bank, Alexei Ulyukayen, who s country currently holds the presidency of the G2, has been critical of Japan s policy over recent weeks. So it may well be put on the agenda.

3 3 Macro Weekly - Verbal FX intervention - 11 February 213 Political unrest in Spain and Italy Southern Europe was briefly back in the financial headlines last week. The political scandal engulfing Prime Minister Rajoy in Spain, and to a lesser extent - the rise of Silvio Berlusconi s centre right bloc in the polls ahead of the Italian general election later this month, raised the specter of political risk. The concern is that Prime Minister Rajoy may resign and this could trigger new elections. At the same time, there is the worry that the revival of Silvio Berlusconi s centre right block, could lead to a hung parliament. These concerns have led to a rise in Spanish and Italian government bond yields. At this time last year, significant political uncertainty in both Spain and Italy would have sent global financial markets into a serious tailspin. However, after a wobble on Monday, investors shrugged off these events. This reflects that the ECB s sovereign safety net for troubled countries remains credible, even though the central bank has not yet spent a cent under its conditional bond purchase scheme (dubbed Outright Monetary Transactions). Furthermore, incoming governments have tended to follow the Euro-IMF policy agenda. So even if there is political change, it is unlikely to lead to policies that break the conditionality needed for the ECB to provide them with support. Overall, we stick to the view that financial markets are unlikely to return to anything like the kind of stress that we saw before Mr. Draghi made his famous speech in London at the end of July last year. The darkest days of the euro crisis are behind us, though the economic hangover will be with us for some time to come. the US, where consumer demand may well have started to feel the effects of the tax hikes. These should dampen growth momentum in the first half of this year, but underlying cyclical tailwinds are strengthening and we expect the US economy to accelerate again in the second half of the year. Meanwhile, the eurozone composite PMI rose further last month, and was even a little stronger compared to the previously released flash estimate. It is still consistent with moderate contraction but is closing in on the 5-mark, suggesting the economy could well stabilise in coming months. Finally, China s exports rose strongly in January, adding to evidence of a turn in the industrial cycle. Exports were up by 25% yoy, the highest since April 211, though they may have been inflated by distortions related to the New Year holiday. Spanish and Italian bond yields rise 2-Y government bond yield, % 8 1st 3-year LTRO Draghi London Jun-11 Sep-11 Dec-11 Mar-12 Jun-12 Sep-12 Dec-12 Spain Italy Economic data point to gradual recovery Meanwhile, economic data has been mixed recently, though the evidence remains broadly supportive of our scenario of a gradual economic recovery. Although the global manufacturing PMI rose in January, the services PMI declined. This left the whole-economy output index inching lower. The key factor behind this fall was a deceleration in service sector growth in

4 4 Macro Weekly - Verbal FX intervention - 11 February 213 Eurozone I Retail sales and consumer confidence % 3mo3m level Retail sales (lhs) Consumer confidence (rhs) EONIA rate future fall after Draghi remarks % Jul-12 Sep-12 Nov-12 Jan-13 6-month 12-month Euro falls after Draghi remarks EUR/JPY EUR/USD Jul 12 Sep 12 Nov 12 Jan 13 EUR/JPY (lhs) EUR/USD (rhs) Economy Aline Schuiling, tel: Nick Kounis, tel: Georgette Boele (FX), tel: The volume of retail sales staged its fifth consecutive monthly decline in December 212, falling by.8% mom in December, following a.1% decline in November. During the final quarter of last year sales fell by 1.6% qoq after they stabilised in the third quarter, which bodes ill for consumption growth in Q4. Severe government austerity measures in most countries, as well as rising unemployment rates are reducing household disposable income and expenditure, which is also reflected in historically low levels of consumer confidence. We expect these forces to continue to hamper consumption this year and next, though their impact will gradually weaken. Comparing individual countries, the steepest declines retail sales were recorded in Greece, Spain and Portugal, followed by Italy and the Netherlands. Sales were significantly stronger than the eurozone total in France, Belgium and Ireland, while Germany was only moderately above the eurozone total. ECB Watch ECB President Draghi rather subtly talked down rate expectations and the euro during the press conference. On the one hand, he said that the rise in the euro reflected increased confidence in the single currency area and that the central bank did not have an exchange rate policy. On the other hand, he said that monetary policy would remain accommodative and that euro strength could alter the assessment of the balance of risks to inflation. All this suggests that sustained euro strength could bring a rate cut back on to the table. Finally, he noted that the central bank would closely monitor conditions in the money market, with the view to keeping conditions accommodative. Indeed, he asserted that their estimates of early repayments of the second 3-year LTRO suggested that the degree of excess liquidity would remain well above EUR 2bn, a level generally seen as keeping downward pressure on interbank rates. This is also in line with our own assessment. EUR/USD On February 1, market sentiment on the euro started to change reflecting the market s nervousness ahead of the ECB monetary policy decision and political developments in Spain and Italy. This change in perception made the market more receptive to negative news on the eurozone. Immediately ahead of the ECB meeting the EUR recovered on the back of increased optimism that the central bank would not strike a different tone to its meeting in January. However, this proved to be wrong and Draghi s subtle intervention resulted in a large profit taking wave on long euro positions. As a result, EUR/USD dropped by more than 2% compared to the top set on 1 February at On Friday the euro stabilised, but we think this is just a start of downward trend. With the market being sensitive to negative eurozone news, political developments in the eurozone and weaker eurozone data will set the scene for further euro weakness ahead. We judge that our target for the end of March at 1.3 is within reach.

5 5 Macro Weekly - Verbal FX intervention - 11 February 213 Eurozone II German and Dutch government bond yields 1 year, % Jul-12 Sep-12 Nov-12 Jan-13 Netherlands Germany Interest swap rates Euro, % Jul-12 Sep-12 Nov-12 Jan-13 5 year 1 year Government bonds Ruben van Leeuwen, tel: Government bond yields of core Eurozone countries came under pressure last week. On balance, the 1-year yield on German government bonds declined 5 bps to a level of 1.61% on Friday. There was not a single event that caused this marginal decline, but a more dovish ECB and new doubts over Spanish and Italian politics certainly played a role. Dutch government bonds reacted only marginally to the negative outlook of Fitch on the AAA sovereign rating on Monday. Longer dated Dutch government bonds came a bit under pressure however and the gap with Germany widened by 1-2 bps following the news. After Moody's and Standard & Poor s, Fitch is the third rating agency that has placed the Netherlands on negative outlook. Given this, the implications are only marginal. However, Fitch is the first rating agency assigning the negative outlook solely for domestic reasons (housing market and weak economy). The other rating agencies have also cited the Eurozone crisis as an important factor. Swap rates Activity in the interest rate swap market was concentrated around the 5 year maturity last week. Market expectations, especially regarding monetary policy, were probably too biased towards higher rates. The central bank poured cold water on expectations of monetary tightening last week. The ECB showed on Thursday it remains more inclined to cut rates and that rate hikes a very far off. Partly as a result of these statements, interest rates came in last week. Although this decrease was the largest in 5-year maturities (- 13 bps), all other rates along the swap curve decreased as well. 1- year swap rates decreased on balance by 5 bps to a level of 1.85% on Friday. Looking forward, the near-term outlook for swap rates is one of high volatility. Uncertainty over the retraction of liquidity in the money market will likely persist. The first opportunity to repay the second LTRO loan, at the end of this month, will be a very important factor to watch. Also political uncertainty in Spain and Italy could affect interest rates.

6 6 Macro Weekly - Verbal FX intervention - 11 February 213 US Peter de Bruin, tel Trade balance $bn Trade balance (BEA) Trade balance (Commerce Department, 3M average annualised) ISM non-manufacturing index and new-orders index level ISM non-manufacturing index New orders sub-index 1-Y Treasury yields and Vix volatility index % level Jan-1 Jul-1 Jan-11 Jul-11 Jan-12 Jul-12 Jan-13 1-Y Treasury yields (lhs) Vix volatility index (rhs) Economy I Data during the week suggested that the economy performed a little bit better than earlier thought in the fourth quarter of last year. The December trade deficit narrowed sharply, to $38.5bn from $48.6bn the month before, marking the smallest deficit since January 21. The improvement in the deficit, which was due to a 2.1% rise in exports and a 2.7% drop in imports, was larger than what the BEA had expected during its first estimate of Q4 GDP. As such, we think that the trade deficit in the second Q4 GDP estimate will be about $2bn smaller than initially thought, which implies that net trade now makes a small positive contribution to growth. Although this lifted our 212Q4 tracking estimate to.5%, wholesale inventories unexpectedly fell by.1% in December, implying that companies added even less to their inventories than initially thought, which shaves three tenths off our tracking estimate. The upshot is that, instead of shrinking by.1%, the economy is now seen as having grown by.2% in Q4. Economy II Looking into the first quarter, the limited data that was published suggests that the economy is starting to become affected by the tax increases. The ISM non-manufacturing index fell to 55.2 in January, down from 55.7 the month before. Although this keeps the index at relatively high levels, the more marked drop in the leading new orders sub-index suggests that services activity is likely to continue to soften in coming months. This is in line with our view that the tax increases will hurt consumption growth in the first half of the year. That said, although we think that the risks to consumption are to the downside as higher taxes eat into disposable income, a stronger pace of inventory build-up than what we currently anticipate could pose an upside risk to our Q1 GDP growth forecast of 1.5%. Indeed, Hurricane Sandy prevented companies from adding to their inventories in 212Q4, which reduced GDP growth. However, with manufacturing production up and running again, inventories are likely to give a boost to growth in 213Q1. Interest rates It was a good week for US Treasuries, with prices rising for the first time in three weeks. Although yields rose on Tuesday, when an upward revision to eurozone PMI s suggested that the region s economy continued to improve, they fell in the remainder of the week. This reflected safe haven buying due to the uncertainty about the outcome of Italy s elections and the corruption scandal in Spain. Treasuries were also supported on Thursday after ECB President Mario Draghi said that the euro s rise could impact the ECB s growth and inflation outlook, suggesting that the ECB could loosen its policy if the euro s strength persists. All in all, 1-Y yields fell by 8bp to 1.95%. Looking further down the road, we think that the recovery in the US will be relatively weak in the first half of the year due to the rise in taxes, which should support Treasury prices. However, we do think that yields will rise in the second half of the year, as the economy gradually strengthens. We expect 1-Y yields to be at around 2.5% at the end of the year.

7 7 Macro Weekly - Verbal FX intervention - 11 February 213 UK Joost Beaumont, tel: Composite output PMI and GDP level % 3mo3m Composite output PMI (lhs) GDP (rhs) Economy Georgette Boele (FX), tel: Last week's figures showed that the economy started 213 on a relatively positive note. In January, the services PMI surprised on the upside, rising by 2.5 points to 51.5, following the drop below the boom-bust mark in December. Moreover, the incoming new business, employment, as well as future business expectations indices all increased strongly. Taken together with the slight drop in the manufacturing PMI a week earlier, this brought the composite output PMI to 51.7 (was 49.7), which is in line with a modest recovery. Meanwhile, manufacturing production increased by a better-than-expected 1.6% mom in December (was -.4%), while the volume of exports rose by 3.7% mom (was -.9%). Although output declined sharply in Q4 as a whole (in line with the flash estimate of Q4 GDP), this indicates that the sector ended the year positively. Looking forward, we expect the sector to continue to benefit from a pick up in world trade, also given the recent depreciation in sterling. GDP growth and inflation % yoy GDP Inflation EUR/USD and EUR/GBP EUR/USD EUR/GBP EUR/USD (lhs) EUR/GBP (rhs) BoE Mr. Carney, who will be the new BoE Governor from 1 July, appeared in a hearing before the Treasury Committee. The main takeaway was that he is unlikely to make major changes to the central bank s policy in the near future, playing down expectations that he might favour changing the BoE s remit from its current flexible-inflation targeting, to targeting nominal GDP. He said that it is good to have a discussion about the central bank s policy framework, but that the bar for change is high. Indeed, he clearly favours flexible inflation-targeting, as it has proven to be the most effective, while it is also best-understood. Meanwhile, he stressed that clear and open communication enhances the impact of monetary policy. Indeed, he indicated that he is strongly in favour of a central bank providing forward guidance. Probably coincidently, the BoE unexpectedly published a statement after it decided to keep policy unchanged. In the statement, the MPC said that it is comfortable with the current wait-and-see approach, while it also announced to re-invest maturing gilts of its asset purchases. GBP The market had high hopes that Carney would cause a revolution within the Bank of England (BoE), but in his testimony he clearly calmed these expectations. This gave support to the GBP across the board. However, it was only after Draghi s remarks following the ECB rate decision that EUR/GBP started to fall more dramatically. With the market having become more sensitive to eurozone challenges and data, weak eurozone data is likely to push EUR/GBP much lower. In addition, UK data will also start to matter again for currency markets. This week, inflation data and the BoE's Inflation Report will be released. If data come in a touch higher and the Inflation Report less dovish, EUR/GBP will also head lower. So the downward move in EUR/GBP could be large if both the eurozone sentiment deteriorates and the likelihood of more monetary easing by the BoE eases further. In that case, our target at the end of March of.82 in EUR/GBP is within reach.

8 8 Macro Weekly - Verbal FX intervention - 11 February 213 Rest of Europe - FX EUR/SEK In % EUR/NOK EUR/NOK 3-months rates (in reverse order) EUR/NOK Norwegian 3-months interbank rate SEK Georgette Boele, tel: Swedish economic data came in better than expected and they supported the SEK at the start of the week. However, on Tuesday the Riksbank s business survey had the opposite impact. It showed that economic activity has weakened during autumn and winter. Demand from Europe is still perceived to be weak and the strong Krona squeezing the profitability of exporters. This survey resulted in the market anticipating some risk of a rate cut this week. We expect the Riksbank to leave interest rates at 1.% taking into account the recent stronger-than-expected Swedish economic data and an overall improvement in investor sentiment. Even though market consensus is for no rate cut, we believe that such result with a neutral statement will support the Swedish Krona because some investors are positioned for a rate reduction. We keep our forecast for EUR/SEK at 8.5 for the end of March 213. NOK Last week, Norwegian data was broadly in line with expectations. EUR/NOK followed the overall moves in the euro with the exception that the downside was better protected than in any of the other EUR crosses such as EUR/JPY and EUR/GBP. The main difference is that 3-month interest rates in Norway have moved higher, which has supported the Norwegian krone (NOK). In addition, the NOK also received support from higher oil prices. We believe that oil prices are unlikely to move much higher (above 12) so the supportive effect of oil prices on the NOK should ease. This week inflation and growth data will be released. Higher numbers could further drive up shortterm interest rates and support the NOK in the near term. But as the market is already quite constructive on the Norway and the NOK, most of the positive news is in the price. We hold on to our EUR/NOK forecast of 7.5 for the end of March. EUR/CHF Level CHF The recent euro strength was not reflected versus the Swiss franc because of a sense that EUR/CHF has already moved up too quickly, while Swiss economic data were relatively resilient. Another reason is that Swiss short-term interest rates also had also moved higher. On the other hand, the subsequent broad based weakening of the euro during the ECB press conference did have an impact on EUR/CHF. This week inflation data will be released. Weaker than expected numbers could result in speculation that the Swiss franc needs to weaken further. If the euro sentiment deteriorates further as we expect, EUR/CHF will continue to edge lower, but we do not expect the move to be as significant as we are likely to see in the other EUR crosses. We hold on to our forecast for EUR/CHF at the end of March of 1.23

9 9 Macro Weekly - Verbal FX intervention - 11 February 213 Japan Hein Schotsman, tel Exports and imports prices % yoy Import prices Export prices Economy Roy Wellington Teo (FX), tel Since November, the yen has weakened from JPY 8 to JPY 93 versus the dollar. We believe this recent weakening will somewhat raise Japan s competitiveness, but any change will not be spectacular. It seems that Japanese exporters are taking advantage of the weaker yen to increase their export prices in yen (graph). Exports prices rose 1.3% and 3.7% in November and December, respectively, after having fallen almost continuously over the last five years. Moreover, in the past few years, the large multinational corporations (MNCs) have relocated a great number of production plants to other countries. The strength of the yen, cheap labour and the uncertainties created by the tsunami in 211 stimulated these MNCs to move abroad. Many simple production activities take place outside Japan, but MNCs usually continue to produce high-tech products at home. However, these high-tech products have relatively low price elasticity. Therefore, if these products become cheaper, this will not lead to strong volume increases. Overview of financial markets Index % nov-12 dec-12 jan-13 Nikkei (lhs) 1 yr bond yield (rhs),85,82,79,76,73,7,67 Economy II The weaker yen and the plans to support the economy are substantially improving the mood in Japan. In December, machine orders (indicator of investment over 3-6 months) rose 2.8% mom, the third consecutive rise. This indicates that corporate investment will play its part during the present upturn. Another leading indicator, the Economy Watchers Survey (survey of professionals whose businesses are sensitive to consumer demand) rose strongly in January. The outlook index jumped to 56.5 from 51 in December. BoJ governor Masaaki Shirakawa will step down in March, a few weeks before his term ends. This will likely underline that ending deflation is not just a BoJ issue. We still think that financial markets are overestimating the impact of the present changes within the central bank. The government needs the support of the opposition in the Upper House to get its candidate approved. Meanwhile, the opposition is sticking to its position in favour of the BoJ's continued independence. USD/JPY and BoJ/Fed balance sheet ratio % USD/JPY 75% 7% % 9 6% 85 55% 8 5% 75 Jan-9 Jan-1 Jan-11 Jan-12 Jan-13 BoJ/Fed balance sheet ratio (lhs) USD/JPY (rhs) USD/JPY Last week, the weak JPY trend continued after governor Shirakawa said that he would step down early. There is renewed market speculation that more aggressive monetary easing by the new BoJ leaders would occur sooner rather than later. We suspect that the market has priced in that the BoJ would increase its monthly asset purchases by 1 trillion JPY over the coming months. This is reflected in the divergence between USD/JPY and the recent ratio of balance sheets between the BoJ and the Fed. However, profit-taking in JPY short positions set in after reports that Prime Minister Abe is facing resistance from his cabinet and political parties in selecting a dovish governor who would pursue powerful monetary easing measures. The resistance is primarily due to fears of rising bond yields. This week s BoJ monetary policy meeting and G2 meeting are likely to provide further direction for the JPY. We expect the weak JPY trend against the USD to stall towards 95 in the coming weeks.

10 1 Macro Weekly - Verbal FX intervention - 11 February 213 Asia ex. Japan China: Inflation % yoy CPI food non food China I Maritza Cabezas, tel Roy Wellington Teo (FX), tel The first hard data of the year showed a firm recovery. But this data should be read with some caution since the non-seasonally adjusted data released in January and February will include some distortions explained by the Chinese New Year. In January the impact will be positive since there were 22 working days compared to 17 days last year, while in February data could be less rosy since there will only be 15 working days this year compared to 21 last year. This means that trends will be read easier after the February data. In fact, this could explain partly the slowdown in inflation in January. Indeed China s January consumer price index (CPI) decreased to 2% yoy compared to 2.5% in December. Details showed that food price inflation slowed to 2.9% yoy coming down from 4.2% the previous month. We think that CPI will gradually increase to 3.2% in 213, but that it will remain well below the 4%-target set by authorities. China: Exports % yoy European Union US Total Asia dollar index CNY THB SGD TWD INR KRW China II China has surpassed the US as the world s largest trading partner in 212, based on total trade flows (exports plus imports). China s influence will probably continue to rise in 213. Indeed, China s exports and imports surged in January. Exports grew 25% yoy compared to an already strong figure in December (14.1%). Export growth was broad based by destination and products. Exports to the US showed a strong pick up, increasing by 14.5% yoy compared to 1.3% the previous month, while exports to the EU showed a modest increase of 5.2% after a 2.3% growth. By product, there are clear signs that the global recovery is firming since cyclical related exports are showing strong growth. Hi-tech products and exports of merchandise and electrical products rose by 15.6% and 8.7%, respectively. In 213 we expect trade to recover on the back of a gradual improving global economy. In 213 trade growth should easily surpass the target of 1% set by the government. In 212 trade growth of 6.2% undershot the target. Asia FX Last week, Asian currencies underperformed against the USD due to a weaker JPY. Despite a stronger than expected service PMI data in January, the India rupee came under pressure due to weaker consumer confidence and fears of slower growth. The Bank of Thailand said that there is no government pressure on them to ease monetary policy to weaken the exchange rate. This supported the Thai baht (THB). Intervention fears by local authorities in South Korea continue to weigh on the KRW. We believe that local authorities are more concerned about the pace of exchange rate movements rather than the level at the moment, and hence any possible intervention is likely to be aimed at addressing volatility and hot capital flows. This week G2 finance ministers and central banks governors meeting and Bank of Korea monetary policy meeting will be closely watched. We remain positive on Asian currencies against the USD with the INR and KRW as our favourites

11 11 Macro Weekly - Verbal FX intervention - 11 February 213 Commodity exporters - FX AUD/USD and NZD/USD level Jan-12 Apr-12 Jul-12 Oct-12 Jan-13 AUD/USD (lhs) NZD/USD (rhs), USD/CAD level AUD & NZD Roy Wellington Teo, tel Georgette Boele, tel: Last week, the upward momentum in NZD/USD fizzled when employment numbers in the fourth quarter showed that employment fell by 1% qoq. The lower unemployment print was due to lower participation rate and hence does not truly reflect the health of the job market in New Zealand. Though the RBA kept monetary policy rates unchanged, against our expectations of 25bp cut, the AUD/USD eased below 1.3 as market speculation increase that the RBA would ease in the coming months. The RBA downgraded its growth forecast this year from 2.75% to 2.5%, slightly lower than our expectation of 2.6%. With the peak in mining investment likely in the coming quarters, a softer job market, lower inflation outlook, a lacklustre rebound in the non-mining sectors and continued fiscal consolidation, we remain comfortable with our view that the RBA is likely to lower rates by another 75bp this year. Looking ahead, we expect the AUD/USD and NZD/USD to trend lower towards 1. and.81, respectively, this year. USD/CAD Early last week, the CAD strengthened against the USD after the Ivey PMI in January came in stronger than expected. Though the PMI in January rebounded to the highest level since September 212, the gains in the CAD were marginal as uncertainty about the strength of the US economy continues to weigh on the CAD. A slower US economy will weigh on the Canadian economy given their strong economic linkages. Weaker NYMEX oil prices and comments from Finance Minister Flaherty that there is no need for additional fiscal stimulus also capped the rally in the CAD. In the past week, the CAD has strengthened from 1.1 to below parity against the USD. However, we remain cautious that a bottom in the CAD has been observed until.99 is breached. The options market is reflecting that any movements in the CAD are likely to be slow and gradual. We expect USD/CAD to trend lower towards.96 later this year. USD/BRL January 214 interest rate future in % USD/BRL January 214 interest rate futures (lhs) USD/BRL (rhs) USD/BRL Last week, both inflation data and the services PMI came in higherthan-expected and this pushed short-term interest rates and the Brazilian real (BRL) higher. As reaction on the higher BRL, Finance Minister Guido Mantega said that if the government sees a trend towards speculation, it could increase IOF tax on foreign currency coming into the country or buy dollars for reserves. The BRL is currently at an adequate level. The government won t use the exchange rate to control inflation. He also said that the government won t let the USD/BRL reach The BRL has been one of our major top picks since December 212 but its strength is larger and comes earlier than we had foreseen. The market will likely push USD/BRL below 1.9 before the end of March (our current end of June target). The market will closely watch developments on inflation and comments from officials.

12 12 Macro Weekly - Verbal FX intervention - 11 February 213 WEEKLY ECONOMIC CALENDAR Day Date Time Country Market indicator Period Latest outcome ABN AMRO Expectation consensus Monday 11/2/213 8:45: FR Industrial production - % mom Dec,5 -,6 -,2 Monday 11/2/213 1:: NO CPI - % yoy Jan 1,1 Monday 11/2/213 14:3: EC Eurogroup finance ministers meeting Monday 11/2/213 15:: MX Industrial production - % yoy Dec 2,8 Tuesday 12/2/213 1:1: GB RICS house price balance - % Jan, 5, Tuesday 12/2/213 6:3: IN Industrial production - % yoy Dec -,1 Tuesday 12/2/213 9:: EC ECOFIN Tuesday 12/2/213 9:15: CH CPI - % yoy Jan -,4 -,2 Tuesday 12/2/213 1:3: GB CPI - % yoy Jan 2,7 2,6 2,7 Tuesday 12/2/213 12:59: RU Policy rate - % Feb 1 8,25 8,25 8,25 Tuesday 12/2/213 13:3: US NFIB small business optimisme - index Jan 88, 87, Wednesday 13/2/213 :: KR Unemployment - % Jan 3, 3,1 Wednesday 13/2/213 9:3: NL CPI - % yoy Jan 2,9 3,1 Wednesday 13/2/213 9:3: SE Policy rate - % Feb 13 1, 1,,75 Wednesday 13/2/213 1:: NO GDP - % qoq 4Q -,8 Wednesday 13/2/213 11:: EC Industrial production - % mom Dec -,3,4, Wednesday 13/2/213 12:3: GB BoE Inflation Report Wednesday 13/2/213 12:: ZA Retail sales - % mom Dec,9 Wednesday 13/2/213 14:3: US Advance retail sales - % mom Jan,5,1,1 Wednesday 13/2/213 16:: US Business inventories - % mom Dec,3 Wednesday 13/2/213 22:3: NZ PMI manufacturing - index Jan 5,1 Thursday 14/2/213 :: WD G2 finance ministers and central bankers meeting (until Friday) Thursday 14/2/213 :5: JP GDP - % qoq 4Q P -,9,1 Thursday 14/2/213 2:: KR Policy rate - % Feb 14 2,8 2,7 Thursday 14/2/213 7:3: FR GDP - % qoq 4Q P,1 -,2 -,2 Thursday 14/2/213 7:3: IN Wholesale price index - % yoy Jan 7,2 Thursday 14/2/213 8:: DE GDP - % qoq 4Q P,2 -,5 -,5 Thursday 14/2/213 8:45: FR Change in employment - % qoq 4Q P -,3 -,2 Thursday 14/2/213 9:3: NL GDP - % qoq 4Q P -,9, Thursday 14/2/213 11:: EC GDP - % qoq 4Q A -,1 -,6 -,4 Thursday 14/2/213 12:59: IN CPI - % yoy Jan 1,6 Thursday 14/2/213 13:59: JP Policy rate - % Feb 14,1,1 Thursday 14/2/214 14:3: US Initial jobless claims - thousands Feb Friday 15/2/213 5:3: JP Industrial production - % mom Dec F 2,5 Friday 15/2/213 6:: SG Retail sales - % mom Dec -,8 Friday 15/2/213 1:: NO External trade balance - NOK bn Jan 35,2 Friday 15/2/213 1:3: GB Retail sales - % mom Jan -,1,3,5 Friday 15/2/213 11:: EC Trade balance external EU - EUR bn Dec 1124,5 Friday 15/2/213 12:: EC ECB announces repayment in second 3-year LTRO Friday 15/2/213 13:59: RU Industrial production - % yoy Jan 1,4 1,4 Friday 15/2/213 14:3: US Empire State PMI - Manuf. general business conditions - index Feb -7,8-3, -2,2 Friday 15/2/213 15:15: US Industrial production - % mom Jan,3,2,2 Friday 15/2/213 15:55: US Univ. of Michigan cons. confidence - index Feb P 73,8 74, 74,, Reuters, ABN Amro Group Economics If you would like to receive this calendar by on Friday, please send a message to abn.amro.group.economics@nl.abnamro.com. This document has been prepared by ABN AMRO. It is solely intended to provide financial and general information on economics. The information in this document is strictly proprietary and is being supplied to you solely for your information. It may not (in whole or in part) be reproduced, distributed or passed to a third party or used for any other purposes than stated above. This document is informative in nature and does not constitute an offer of securities to the public, nor a solicitation to make such an offer. No reliance may be placed for any purposes whatsoever on the information, opinions, forecasts and assumptions contained in the document or on its completeness, accuracy or fairness. No representation or warranty, express or implied, is given by or on behalf of ABN AMRO, or any of its directors, officers, agents, affiliates, group companies, or employees as to the accuracy or completeness of the information contained in this document and no liability is accepted for any loss, arising, directly or indirectly, from any use of such information. The views and opinions expressed herein may be subject to change at any given time and ABN AMRO is under no obligation to update the information contained in this document after the date thereof. Before investing in any product of ABN AMRO Bank N.V., you should obtain information on various financial and other risks and any possible restrictions that you and your investments activities may encounter under applicable laws and regulations. If, after reading this document, you consider investing in a product, you are advised to discuss such an investment with your relationship manager or personal advisor and check whether the relevant product considering the risks involved- is appropriate within your investment activities. The value of your investments may fluctuate. Past performance is no guarantee for future returns. ABN AMRO reserves the right to make amendments to this material. Copyright 212 ABN AMRO Bank N.V. and affiliated companies ("ABN AMRO").