Macro Weekly. Not so magnificent seven. 18 February Group Economics Macro Research

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1 Macro Weekly Not so magnificent seven Group Economics Macro Research 18 February 213 Big Picture: The economy contracted in six of the seven G7 countries last quarter. Overall global growth was propped up by the emerging markets, leaving it expanding at sub par rates. Looking forward, we think that the decline in uncertainty, global monetary policy stimulus, and the subsequent easing of financial conditions have sowed the seeds for recovery. However, ongoing severe budget cuts suggest that the global recovery will be gradual this year. Meanwhile, the G2 did not sound too worried about currency wars in its statement. Eurozone: Eurozone GDP contracted by.6% qoq in Q4. The weakness emphasises the challenges the economy faces, but also partly reflects quarterly volatility. Looking forward, we think the eurozone will lag behind the global recovery. As well as ongoing severe budget cuts, rising unemployment and bank deleveraging suggest that the recovery will be excruciatingly slow. The rise in the euro is a more recent threat to growth. US: Retail sales were soft, reflecting the impact of the rise in taxes in the first weeks of the year, though they did not fall off a cliff, as some commentators had feared. This partly reflects that the labour market remains relatively resilient and suggests that consumer demand will improve once it shakes off the tax hikes. Asia: Last week, China s State Council approved an income distribution plan to improve low and middle incomes. This is an important step to enforce the rebalancing strategy, which supports consumption and reduces the reliance on fixed investment. This is an important step for the long-term health of the economy. Main economic/financial forecasts GDP growth (%) e 214e 3M interbank rate 8/2/213 15/2/213 +3M +12M 213e 214e United States United States Eurozone Eurozone Japan Japan United Kingdom United Kingdom China World Inflation (%) e 214e 1Y interest rate 8/2/213 15/2/213 +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 15/2/213 +3M 213e 214e Currencies 8/2/213 15/2/213 +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 - Not so magnificent seven - 18 February 213 The Big Picture Nick Kounis, tel Not so magnificent seven Eurozone GDP slumped in Q4 and the economy actually contracted in six of the seven G7 countries last quarter. Overall global growth was propped up by the emerging markets, leaving it expanding at sub par rates. Looking forward, we think that the decline in uncertainty about the future of the single-currency area, global monetary policy stimulus, and the subsequent easing of financial conditions have sowed the seeds for economic recovery. However, ongoing severe budget cuts and in the eurozone - rising unemployment and bank deleveraging suggests that the recovery will be gradual this year, and will not really gain strength until next year. Almost every G7 economy shrank in Q4 GDP in Q4, % qoq, at an annualised rate US JP UK FR GE IT The idea of a currency war has dominated discussion on FX markets and filled many column inches in the financial press. However, global policymakers do not seem overly concerned, perhaps reflecting that there is little evidence of a currency war to speak of. The G2 statement repeated calls to refrain from competitive devaluation, but officials gave a green light for countries to follow domestic policy objectives aggressively. This is what Japan and indeed others - can credibly claim to be doing. Eurozone GDP fell sharply in Q4 Eurozone GDP fell by.6% in Q4, following a.1% decline in Q3. The outcome was weaker than the consensus forecast (-.4%). The weakness in the fourth quarter emphasises the challenges the economy faces, but should partly be seen in the context of quarterly volatility, given that the third quarter was more resilient than suggested by evidence from business surveys. Business surveys have improved in recent months, but remain consistent with moderate contraction in the economy. The country breakdown showed more significant weakness in the usual suspects (Portugal: -1.8%, Greece: - 1.1%, Italy: -.9%, Spain: -.7%) and somewhat more moderate contraction in the core (Belgium: -.1%, Austria: -.2%, the Netherlands: -.2% and France: -.3%). The big outlier in terms of the north-south divide was Germany, which saw GDP shrink by.6%. However, the weakness was partly down to one-off factors (construction was particularly weak in Q4) and volatility, and we judge that Germany will be among the fastest growing eurozone economies in coming quarters. In particular, the German government is one of the few that does not need to put in place significant fiscal consolidation this year, while fundamentals for private sector domestic demand are relatively favourable. Thank goodness for Canada Amazingly, the figures for the three biggest eurozone member states meant that almost every G7 economy shrank in Q4. The falls in GDP in Germany, France and Italy followed economic contractions in the US, Japan and UK. The odd one out looks to be Canada, which does not have full figures yet for the fourth quarter, but its monthly GDP statistics up until November, suggest there is a remote chance of a small plus. Still, the does not change the picture of a very weak performance in the developed world. Indeed, it is of course not really Canada that will save the day, but rather the fast growing emerging markets. As a result, the global economy most likely grew in the fourth quarter, albeit at a rather lacklustre rate. Seeds sowed for recovery Looking forward, we think that the decline in uncertainty about the future of the single-currency area, global monetary policy stimulus, and the subsequent easing of financial conditions have sowed the seeds for economic recovery. However, ongoing severe budget cuts and in the eurozone - rising unemployment and bank deleveraging suggest that the recovery will be gradual this year, and will not really gain strength until next year. Economic data towards the end of the fourth quarter and the start of this quarter are consistent with this view. This week s US economic reports were mixed but broadly in line with moderate economic recovery. Initial jobless claims fell to 341K in the last week from 368K in the week before, suggesting that the upswing in the labour market recovery is continuing. This seems to be helping consumer sentiment, which rose to a three month high in February. On

3 3 Macro Weekly - Not so magnificent seven - 18 February 213 the other hand, hard spending data in the shape of retail sales seem to have been hit by the tax hikes. Finally, industrial production fell in January, but the Empire State Manufacturing Index heralded a return to growth in February. Dutch GDP failed to recover in Q4 The Dutch economy s.2% fall was better than that of the eurozone average, but it was disappointing from the perspective that the economy contracted by 1% in the third quarter. This means in the second half of last year, the economy has shrunk almost twice as fast as that the eurozone as a whole. The key reason for the underperformance is consumer spending, which fell by 2% over the last year and 1% in the fourth quarter alone. This can be pinned down to two key factors. First of all, real household incomes have been hit by a combination of a deteriorating labour market, rising inflation and budgetary tightening. Indeed, the VAT rate was hiked at the start of the fourth quarter, which hit consumer spending. Second, the malaise of the housing market remained an ongoing negative. The latter is also visible in construction spending, which declined by a whopping 8.3% in the year to the fourth quarter. Looking forward, the good news is that the Dutch economy s openness, competitiveness and role as a transportation hub leave it well placed to benefit from the global economic recovery. The bad news is that the correction in the housing market probably has further to go, while fiscal consolidation is more aggressive than the eurozone average this year, though it should drop back again next year. Overall, a slow economic recovery broadly in line with the eurozone average looks to be on the cards. The Dutch economy s twin weak spots % qoq consumer spending construction following their meeting over the weekend, only modestly firmed the language on currencies. Global policymakers committed to refrain from competitive devaluation and not target exchange rates for competitive purposes. Nevertheless, in individual comments from officials, a green light was given for countries to follow domestic policy objectives aggressively. Given Japan remains mired in deflation, the authorities there can easily explain a more aggressive monetary easing from that perspective. Indeed, even the godfather of the currency war, Brazilian Finance Minister Guido Mantega, sounded relaxed, saying that Japan was simply trying to develop its economy. More broadly, there is little evidence of a global currency war to speak of. For currency movements to have a large impact on the economy and on monetary policy they need to be sizeable in trade weighted terms. However, currencies have not risen strongly in trade-weighted terms with the exception of the euro - while there has also not been much policy action aimed specifically at weakening currencies. Another round of Draghi versus Weidmann Eurozone policymakers can make a claim to follow domestic policy objectives. The strength of the euro if sustained is a threat to even the rather modest eurozone economic outlook. This seems to be a subject of disagreement between the Bundesbank President Weidmann and ECB President Mario Draghi. Each of them made comments on the euro on Friday, which though not outright contradictory, had a sharply different tone. Mr. Weidmann said that the euro was one factor among many in determining the inflation outlook and that the ECB would certainly not justify any monetary policy decision with one single factor. He went on to argue that the euro was broadly in line with fundamentals. Meanwhile, Mr. Draghi said that the ECB s mandate was to pursue price stability in both directions and that the euro was important for price stability. This is not the first time that the two Presidents have not seen eye-to-eye. Mr Weidmann was against the loosening of collateral requirements in the ECB s refi operations, as well being against the ECB s OMT programme. He has cut an increasingly isolated figure within the Governing Council and hence we put more emphasis of the ECB President s communication. As such, we remain of the view that the ECB will attempt to counter the strength of the euro. Verbal intervention has already begun, but if that does not work, interest rate cuts will come back on to the table. Global policymakers rightly relaxed about currency war The idea of a currency war has dominated discussion on FX markets and filled many column inches in the financial press. However, global policymakers do not seem overly concerned. The statement of G2 finance ministers and central bankers

4 4 Macro Weekly - Not so magnificent seven - 18 February 213 Eurozone Economy & Euro GDP in selected member states 212Q4, % qoq Eurozone -2. BE NL AT FR FI DE ES IT GR* PT * Greece's Q4 GDP in qoq terms is estimated from the official yoy numbers Foreign trade (12-month sum) EUR bn 2, 16 1,6 12 1, Trade balance (rhs) Exports (lhs) Imports (lhs) Euro against dollar and relative interest rates Level EUR/USD Ratio German 2-year/US 2-year yield (lhs) EUR/USD (rhs) Economy I Aline Schuiling, tel: Georgette Boele (FX), tel: Eurozone GDP contracted by.6% qoq in 212 Q4 (Q3 was -.1%). The weakness emphasises the challenges the economy faces, but also reflects quarterly volatility, given that Q3 was more resilient than suggested by evidence from business surveys. Looking forward, we think that the decline in uncertainty about the future of the singlecurrency area and easing financial conditions have sowed the seeds for an economic recovery. However, ongoing severe budget cuts, rising unemployment and bank deleveraging suggests that the recovery will be excruciatingly slow. The country breakdown showed weakness in the usual suspects (Portugal, Greece, Italy and Spain) and somewhat more moderate contraction in the core (Belgium, Austria, the Netherlands and France). The big outlier was Germany (-.6%). However, the weakness in Germany was partly down to one-off factors (construction was particularly weak in Q4) and volatility, and we judge that the country will be among the fastest growing eurozone economies in coming quarters. Economy II Trade data for December were published last week. Exports fell by 1.8% mom, while imports dropped by 3.%. During the fourth quarter as a whole, imports fell significantly sharper than exports as well, implying that the trade balance improved and foreign trade contributed positively to GDP growth. Actually, foreign trade was positive to growth during 212 as a whole, with the trade balance moving from a EUR 14bn deficit in 211 to a EUR 82bn surplus in 212. Detailed data have been published until November. They show that during the months January-November exports to Japan (+15%), Russia (+15%) and the US (+13%) grew the most, followed by the UK (+8%) and China (+6%). Looking at the composition of exports, energy products (+21%), machinery and vehicles (+9%) and food and drink (+9%) grew the fastest. On an individual country basis, Greece stood out (exports + 19% in Jan-Nov), while the other peripheral countries showed robust growth rates as well (Portugal +7%, Spain +4% and Italy +4% as well). EUR/USD Last week, currency markets, including EUR/USD, reacted nervously on comments from officials ahead of the G2 meeting. There was some confusion on the interpretation of the G7 statement which led to volatility in the JPY crosses, which also had an impact on EUR/USD. Later in the week the euro came under pressure after the weaker than expected German GDP number. As GDP data form other eurozone countries and the overall eurozone GDP also surprised on the downside, the euro continued its slide. The euro s reaction to the GDP releases has been in line with our view that the euro has become sensitive to eurozone news and data again. German yields also corrected lower and this has made the euro less attractive from a carry point of view. Next week, there are more eurozone reports such as the German ZEW survey and PMI data on the agenda (both for February), which we expect to come in below expectations partly because of the rise in the euro over that period. We therefore expect the euro to come under further pressure. We stick to our target for the end of March of 1.3.

5 5 Macro Weekly - Not so magnificent seven - 18 February 213 Eurozone Interest Rates Polls put centre left out in front % Centre Left (Bersani) Centre Right (Berlusconi) Five Star (Grillo) poll of polls Centre (Monti) Source: Various polling organisations; ABN AMRO Group Economics Spanish and Italian government bond yields 1-year, % Jul-212 Oct-212 Jan year (EUR) swap rates % Spain Italy Jul-212 Oct-212 Jan-213 Others Italian elections Nick Kounis, tel: Ruben van Leeuwen (FI), tel: On February, general elections will be held in Italy. They will usher in a new government, following the one-year stint of Mario Monti s technocrat government. The most likely scenario according to the last round of opinion polls seems to be a Bersani-Monti coalition, which would mark a joining of centre left and centre coalitions, respectively. However, the rise of the Berlusconi-led centre right coalition and the anti-establishment, anti-euro Five Star Movement in the polls has created an outside risk of an intractable hung parliament. In this case, another technocratic government or new elections may follow. An unclear election result would generate uncertainty and market instability, but it will continue to be limited by the ECB s sovereign safety net. The programmes of all parties are relatively vague on badly-needed structural reforms. The Monti coalition looks the most likely to deliver, he will need to compromise with the larger Bersani block to form a government. A far-reaching reform programme does not seem to be on the cards. Government bonds Last week, there was on balance little movement in government bond yields visible. The 1-year Bund yield rose 4 bps to 1.64% on Friday. During the week, the developments in bond yields were more volatile, with 1-year German Bund yields moving between roughly 1.6% and 1.7%. The increase in investor appetite for Spanish and Italian government securities initially resulted in higher bond yields of core eurozone countries, whereas the publication of the negative economic growth numbers for Q4 212 resulted in some return in demand for safe haven assets. This latter factor did not change the sentiment towards Spain and Italy. The yield on 1-year Spanish government bonds equalled 5.2% at the end of last week. Compared to the level recorded a week earlier, this is a decline of nearly 2 bps. Also the spread against Germany declined by a similar amount. Italian government bond yields also declined last week, but less than their Spanish counterparts. The 1-year Italian government bond closed the week at a yield level of 4.38% Swap rates There were two distinct developments last week. On one side, fixings and rates in the very short end of the curve declined further. Expectations regarding a quick reversal of monetary policy continue to be unwound, but the resulting declines in rates were clearly less sizeable than the weeks before. On the other side, interest rates in the very long end of the curve rose. On balance, fixed rates in IRS structures with a maturity between 2 and 5 years rose by approximately 9 bps. The 2-year swap rate recorded a 9-month high last week of 2.5%. In our view, expectations regarding economic growth and risk sentiment in general have gained importance. Although this influence is especially prevalent in the very long end of the curve, it is also affecting 5 and 1 year swap rates. Developments in the money market have become less relevant. Probably as a result of this, 1-year swap rates increased last week. On Friday afternoon, 1-year rates closed the week at 1.89%.

6 6 Macro Weekly - Not so magnificent seven - 18 February 213 US Peter de Bruin, tel Core retail sales % mom Jan-12 Apr-12 Jul-12 Oct-12 Jan-13 Initial jobless claims s Jan-11 Jul-11 Jan-12 Jul-12 Jan-13 Initial jobless claims Initial jobless claims (four week moving average) 1-Y Treasury yields and Vix volatility index % index 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 consumption was affected by the rise in taxes in the first weeks of the year, though it did not fall off a cliff, as many had feared. Retail sales rose by.1% in January, following a.5% gain the month before. Looking at the details of the report, gasoline sales rose (reflecting a rise in prices) and there was a modest gain in building materials. However, these were offset by a drop in car sales. As a result, core retail sales, which exclude cars, gas, and building materials, rose by.1% as well. This part of the retail sales report is the most closely linked to consumer spending in the National Accounts, and the small gain suggests real spending was flat in January. This is in line with our view that we will see weak consumption growth and GDP growth of merely 1.5% in Q1. Meanwhile, upward revisions to core retail sales in November-December suggest that consumer spending did a bit better than earlier thought in Q4. Together with somewhat better news on the inventory front this lifted our 212 Q4 tracking estimate to.4% from.2%. Economy II One reason why we expect consumer spending to be relatively resilient, despite the decline in disposable income due to tax hikes, is that the labour market recovery seems to be holding up well. Indeed, initial jobless claims fell to 341K in the week ending February 9 (was 368K). Although the claims data have been volatile lately, the more stable four-week moving average has continued to trend downwards, and is hovering at post recession lows. This suggests that a modest labour market recovery is continuing, which probably also explains why the preliminary estimate of the Unv. of Michigan s Consumer Sentiment index rose to 76.3 in February (was 73.8). Finally, data during the week showed that the manufacturing sector is picking up. Granted, manufacturing production fell by.4% in January, but this was more than offset by upward revisions to the November and December data, and the trend in production is now firmly upwards. Meanwhile, the Empire State Manufacturing index rebounded from -7.8 in January to 1 in February. Interest rates It was a bad week for US Treasuries, with prices falling. Yields moved roughly sideways in the beginning of the week, but rose on Wednesday. This was the result of a poorly received auction, while January s retail sales report, though showing that consumption was affected by the rise in taxes, suggested that it did not collapse, as some had feared. Yields fell back a bit on Thursday, after the weaker-than-expected eurozone Q4 GDP figures spurred safe haven demand. But the gains in Treasury prices were more than offset on Friday, when the Unv. of Michigan Consumer Sentiment index rose more strongly than expected. As a result, 1-Y yields ended the week at 2.%, 5bp higher than at the start of last week. Looking further down the road, we continue to think that there is not much room for yields to rise further. This is because we expect the recovery to be slow in the first half of the year due to the rise in taxes, but Treasury demand in the coming weeks is also likely to be underpinned by discussions about the automatic spending cuts, which are due to start at the 1 st of March.

7 7 Macro Weekly - Not so magnificent seven - 18 February 213 UK Joost Beaumont, tel: Retail sales and private consumption % 3mo3m Private consumption in National Accounts Retail sales Economy Georgette Boele (FX), tel: Last week's data showed that consumers have started this year on a weak footing. Retail sales unexpectedly fell by.6% mom in January, following a.2% decline in December, and marking the fourth consecutive monthly drop. It seems that ongoing high inflation, which continues eroding household purchasing power, together with severe fiscal consolidation and a weak economic outlook, are taking their toll on consumption. Indeed, inflation stabilised at 2.7% in January. One explaining factor is the ongoing high labour cost growth, partly reflecting the resilience of employment. Meanwhile, university tuition fees as well as a rise in administered prices have put upward pressure on inflation. Although it is likely to remain above the 2% level during the rest of this year, we expect inflation to come down gradually on the back of lower energy prices. Moreover, the vast amount of economic slack should dampen domestically-generated inflationary pressures. This, in turn, will probably underpin a modest pickup in consumption growth. Inflation % yoy Inflation Core inflation BoE target EUR/USD and EUR/GBP EUR/GBP ratio EUR/GBP (lhs) 2-year yield ratio Germany - UK (rhs) BoE/interest rates The main message from the BoE s Inflation Report and accompanying press conference is that the central bank will look through inflation being above its 2% target for the time being. Although the BoE raised its inflation forecasts and now expects it to remain above-target in the coming two years, this is mainly due to higher university tuition fees, the recent fall in sterling, as well as an increase in administered prices. In contrast, domestic price pressures are expected to remain subdued and as long as this persists, the BoE will tolerate above-target inflation. Meanwhile, BoE Governor King stressed that there are limits to the impact of monetary policy on the economy. Therefore, combined with the view of the central bank (as well as ours) that the economy will stage a sustained (albeit modest) recovery, it seems unlikely that the BoE will start a new round of gilt purchases. This, together with the outlook for ongoing elevated inflation, led to a sharp rise in 1-Y gilt yields, which ended the week 1 bp higher at 2.19%. GBP The Bank of England inflation report shocked the currency market, with sterling weakening after its release. It was hit by the outlook for ongoing high inflation in combination with sluggish growth. Meanwhile, some commentators translated Governor King s comments as signalling that the door remains open for more stimulus. We don t agree with this, just like the UK bond market, which actually saw a strong rise in yields (see above). Later in the week, the rally in EUR/GBP lost momentum, as the euro was hurt by the weaker-than-expected eurozone data. With the market being so negative on sterling and more sensitive on eurozone news, the chances have increased for a sizeable downward correction in EUR/GBP. This week, strong UK data, such as UK employment report, and/or weaker-than-expected eurozone data will probably bring EUR/GBP much closer to our forecast of.82 at the end of March.

8 8 Macro Weekly - Not so magnificent seven - 18 February 213 Rest of Europe - FX NOK/SEK Level EUR/CHF Level SEK and NOK Georgette Boele, tel: The positive sentiment on the EUR continued last week and this also pushed both EUR/SEK and EUR/NOK higher. There has been a lack of local data releases so the moves were mainly driven by EUR sentiment. This week the driver in these markets will unlikely change as the domestic economic data calendar remains light. In the shortterm, with the move in the EUR set to run out of steam, both the Norwegian krone (NOK) and the Swedish Krona (SEK) will profit. However, looking further out, we remain positive on the SEK but not the NOK. Most of the positives such as resilient economic growth, and expectations on relatively less loose monetary policy appear to be priced into the NOK. On the other hand, we think that financial markets are under estimating the likely strength of the Swedish economy against the background of improving global economic conditions and still solid domestic economic fundamentals. We stick to our year-end targets for EUR/SEK of 8. and EUR/NOK of 7.5 for the end of March. EUR/CHF The Swiss franc s safe haven status was first challenged by the SNB introducing the cap of 1.2 versus the euro in September 211. The SNB was successful in preventing a strengthening of the currency. At the end of last year, some Swiss banks placed negative interest rates on foreign deposits, which also hurt the Swiss franc. Meanwhile, the ECB s move to close the door to rate cuts earlier this month appears to have been a wake up call, leading to a shift out of the Swiss franc and into the euro. As a result, interbank money market rates in Swiss franc have started to rise, not reflecting the prospects of higher official interest rates in Switzerland but signalling that investors would like to receive more compensation to keep balances in Swiss franc. This reflects several factors. First, the Swiss franc is no longer needed because systemic risks and eurozone break-up risks have been sharply reduced. Second, investors start to look at opportunities again in terms of yield pickup. The CHF weakness is in line with our view of a higher EUR/CHF.

9 9 Macro Weekly - Not so magnificent seven - 18 February 213 Asia China: Contribution to GDP % Mar-9 Jun-1 Sep-11 Dec-12 Consumption Fixed investment Exports India: Wholesale prices % yoy Oct-7 Nov-8 Dec-9 Jan-11 Feb-12 Mar-13 Wholesale prices Food prices Asian currencies spot returns against the USD % KRW TWD SGD CNY THB INR China Maritza Cabezas, tel Roy Wellington Teo (FX), tel Last week, China s State Council approved an income distribution plan to improve low and middle incomes. This is an important step to enforce the rebalancing strategy, which supports consumption and reduces the reliance on fixed investment. The target is to double household income per capita between 21 and 22. The plan has 35 goals which include increasing minimum wages to at least 4% of average wage salaries by 215 in most regions. Property taxes would gradually expand, and resource taxes would also increase in scope and level. It promotes hukou reform to improve the prospects of migrant workers, while the plan also encompasses measures to liberalise China s artificially low interest rates. Many of the targets are in line with those stated in the 12th five-year plan. The details of how these policies will be implemented are still vague. We think that the government will apply a gradual and long-term approach, since these projects require broad reforms in the financial system, as well as improvement in the social safety net. India India s December industrial production surprised on the downside at -.6% yoy, while November s decline was revised to -.8% from -.1%. This suggests that GDP growth in 212 could be closer to 5% compared to our forecast of 5.5%. January s PMI released over a week ago showed that manufacturing took a step back, declining 1.5pts to 53.2, suggesting that Q1 growth could be weaker than expected. This was also suggested by a release last week that showed that India s trade deficit increased in January, posting USD 2bn, with imports growing by 6% yoy and exports rising for the first time since April 212 (+.8% yoy). Meanwhile, wholesale inflation (WPI) registered its first sub-7% print in more than two years, at 6.6% yoy in January. As the momentum in WPI is falling at a faster pace than expected on the back of weaker GDP growth, the central bank could have more leeway for another rate cut this year. Given the stronger slowdown than anticipated, we have penciled in another rate cut of.25bps in May. Asia FX I Asian currencies rebounded last week as fears of currency wars subsided. Bank of Korea governor Kim said that it is most desirable for exchange rates to be market driven and that the correlation between the currency and interest rate is not clear in South Korea. That doused market speculation that interest rates will be lowered to weaken the KRW. As a result, the KRW gained more than 1% against the USD. The Indian rupee (INR) came under some pressure due to weaker than expected industrial production numbers in November and December. However, this reversed after wholesale prices declined for the fourth consecutive month, increasing market speculation that the Reserve Bank of India has greater flexibility to stimulate the economy via interest rate cuts. Concerns on India s sovereign credit profile due to its wide current account deficit weighed on the INR. Looking ahead, we remain positive on Asian currencies with the KRW, TWD and INR as our favourites.

10 1 Macro Weekly - Not so magnificent seven - 18 February 213 Yen against the dollar USD/JPY Jan-12 Apr-12 Jul-12 Oct-12 Jan-13 Asia FX II Early last week, the JPY extended its decline against the USD due to continued speculation that the new BoJ leaders will embark on further monetary easing measures to achieve the 2% inflation target as soon as possible. Ahead of the G2 meeting, profit taking in JPY short positions resulted in some JPY strength. However, this quickly reversed after Q4 GDP came in weaker than expected. Though the BoJ left monetary policy unchanged last week, which was widely expected, the JPY continued to ease lower as one of the board members had proposed a forward guidance of keeping zero rates low till the 2% inflation target is judged to be in sight. The Japanese yen weakened further against the dollar this morning after Japan was not singled out for competitively devaluing its currency. The options market is reflecting lower volatility and JPY weakness in the coming month. However, looking ahead, we believe that the risk has increased that the JPY will strengthen against the USD towards 9 as we think the exchange rate is already pricing is very aggressive monetary easing and therefore is positioned for disappointment.

11 11 Macro Weekly - Not so magnificent seven - 18 February 213 Commodity exporters - FX NZD trade weighted index and GDP QoQ % Level % NZD TWI (lhs) GDP QoQ% (rhs) Source: RBNZ, Bloomberg Core CPI in Canada % Jan-9 Oct-9 Jul-1 Apr-11 Jan-12 Oct-12 Brazilian real and interest rate expectations % USD/BRL January 214 interest rate futures (lhs) USD/BRL (rhs) AUD and NZD Roy Wellington Teo, tel Georgette Boele, tel: Strong economic data releases last week pushed the NZD/USD above the.85 resistance level. The NZD trade weighted index has risen by 5% since the beginning of this year and is currently at the highest level since it was floated in Finance minister Bill English said that the current level in NZD reflects the fundamental strength in the economy. He also stated that the government would not intervene in the currency market to weaken the NZD as they are not willing to take huge risks with the tax payer s money. We believe that the strength in the NZD will be a headwind to the fragile economic recovery and hence is unlikely to be sustainable. The AUD/USD also edged higher last week after economic data releases showed that the more accommodative monetary policy stance is slowly boosting consumer confidence and improving business conditions. This week, the RBA minutes is likely to reflect that the monetary policy easing bias remains intact. A lower AUD/USD and NZD/USD towards 1. and.81 is expected later this year. CAD Early last week, narrower Western Canada Select crude oil differential with WTI oil prices limited the CAD loss against the USD to just below the 1.1 support level. However, the strength in the CAD was limited by comments from the Bank of Canada, which continues to reiterate that monetary policy tightening bias is less imminent given the more muted inflation outlook and some initial signs of correction in household imbalances. The options market continues to reflect that any directional bias and price movement in USD/CAD is likely to be slow and gradual. This week, inflation and retail sales numbers could provide further direction in the CAD. We expect inflation to slowly edge higher this year as economic growth picks up. We remain comfortable with our view that interest rate hikes will be delayed untill early 214. Nevertheless, as monetary tightening is expected to be earlier than in the US, we expect the CAD to strengthen towards.96 against the USD later this year. BRL The big issue driving the Brazilian real remains inflation. As a result, inflation fears eased somewhat, pressing yields lower. After reaching a temporary low of 4.9% in June, inflation rose to 6.2% yoy in January. This has made the authorities more comfortable about the strength of the real and has taken interest rate cuts off the agenda. Against this background, the Brazilian real continued to strengthen last week. The market has put its sight on the 1.85 level. Two weeks ago he mentioned that the government won t let the USD/BRL reach Next week more inflation data and retail sales will be released. Stronger-than-expected data will push the BRL up further. The BRL remains one of our top picks and we expect it to strengthen to 1.8 at the end of 213.

12 12 Macro Weekly - Not so magnificent seven - 18 February 213 WEEKLY ECONOMIC CALENDAR Day Date Time Country Market indicator Period Latest outcome ABN AMRO Expectation consensus Monday 18/2/213 1:3: SG Non oil domestic exports - % yoy Jan Monday 18/2/213 1:: EC BOP Current account - EUR bn Dec 19.8 Monday 18/2/213 12:59: SG GDP - % qoq annualised 4Q F Monday 18/2/213 15:: MX GDP - % yoy 4Q Monday 18/2/213 15:3: EC Draghi quarterly hearing before EU Parliament Tuesday 19/2/213 9:3: SE Unemployment - % Jan 7.4 Tuesday 19/2/213 11:: DE ZEW index (expectation economic growth) Feb Tuesday 19/2/213 12:59: HK Composite interest rate - % Jan.3 Tuesday 19/2/213 13:: BR Retail sales - % mom Dec.3 Tuesday 19/2/213 13:59: RU Retail sales - % yoy Jan Tuesday 19/2/213 13:59: RU Unemployment - % Jan Tuesday 19/2/213 16:: US NAHB home builders' confidence index Feb Wednesday 2/2/213 :5: JP Merchandise trade exports - % yoy Jan Wednesday 2/2/213 8:45: FR Business confidence manuf. - index Feb Wednesday 2/2/213 8:45: FR CPI - % yoy Jan Wednesday 2/2/213 9:: ZA CPI - % yoy Jan Wednesday 2/2/213 1:3: GB Change in claimant count - thousands Jan Wednesday 2/2/213 1:3: GB Claimant count unemployment rate - % Jan Wednesday 2/2/213 1:3: GB BoE February meeting minutes Wednesday 2/2/213 14:3: US Producer prices index - % yoy Jan Wednesday 2/2/213 14:3: US Producer prices index core - % yoy Jan Wednesday 2/2/213 14:3: US Prod. prices index excl food and energy - % mom Jan.1.2 Wednesday 2/2/213 14:3: US Housing starts - % mom Jan Wednesday 2/2/213 14:3: US Producer prices index - % mom Jan Wednesday 2/2/213 16:: EC Consumer confidence - index Feb A Thursday 21/2/213 8:: CH Trade balance - CHF bn Jan 1. Thursday 21/2/213 9:3: HK Unemployment - % Jan 3.3 Thursday 21/2/213 9:3: NL Unemployment - % Jan Thursday 21/2/213 9:3: NL Consumer confidence - index Feb Thursday 21/2/213 1:: EC PMI manufacturing - index Feb A Thursday 21/2/213 1:: EC PMI services - index Feb A Thursday 21/2/213 1:: EC Composite PMI output Feb A Thursday 21/2/213 1:3: GB Public sector net borrowing - GBP mln Jan 13.2 Thursday 21/2/213 12:: GB CBI industrial orders - balance (%) Feb Thursday 21/2/213 14:3: US Core inflation - % mom Jan Thursday 21/2/213 14:3: US Core inflation - % yoy Jan Thursday 21/2/213 14:3: US CPI - % mom Jan..2.1 Thursday 21/2/213 14:3: US CPI - % yoy Jan Thursday 14/2/213 14:3: US Initial jobless claims - thousands Feb Thursday 21/2/213 14:58: US Markit - Flash PMI Feb Thursday 21/2/213 15:: MX Retail sales - % yoy Dec Thursday 21/2/213 16:: US Existing home sales - % mom Jan Thursday 21/2/213 16:: US Philadelphia Fed - business confidence - index Feb Friday 22/2/213 9:3: NL Producer confidence manufacturing - index Feb Friday 22/2/213 1:: DE Ifo - business climate - index Feb Friday 22/2/213 11:: EC EC to publish Spring forecasts Friday 22/2/213 14:3: CA CPI - % yoy Jan.8 Friday 22/2/213 14:3: CA Retail sales - % mom Dec.2 Friday 22/2/213 14:3: CA CPI core - % yoy Jan 1.1 Friday 22/2/213 15:: BE Business confidence - index Feb -13.2, 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. 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