First Quarter Review. G-10 currencies against US Dollar

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1 44 CURRENCIES First Quarter Review The US dollar (USD) performance was broadly weaker in the first quarter of 2011 as several developed and developing nations central banks tightened monetary policy or indicated a desire to raise interest rates soon. Asian currencies were mixed against the USD over the first quarter of The Indonesian Rupiah, Singapore Dollar and Malaysia Ringgit rose 2.4%, 1.25% and 0.80% respectively against the USD, and were the top three performing FX in Asia in the first quarter of The worst performing Asian FX were Indian rupee peso (-1.2%), Thai baht (-1.0%) and Taiwanese Dollar (-0.95%). The best performing G10 currency in the first quarter of 2011 was the Swedish Krona, which rose 5.9% on expectations of monetary policy tightening. The Norwegian Dollar was the second best currency, rising 4.0% in the same period as higher oil price boosted the currency. The Euro gained 3.9% on the back of hints by the ECB that monetary policy tightening could be imminent. G-10 currencies against US Dollar Swedish Krona Norwegian Dollar Euro Danish Krone British Pound Candian Dollar Swiss Franc Australian Dollar New Zealand Dollar % change versus USD from 31 December 2010 to 11 March 2011

2 45 INR, SGD and MYR are the top performing currencies in Q Indonesian Rupiah Singapore Dollar Malaysian Ringgit Chinese Renminbi Philippines Peso South Korean Won Taiwanese Dollar Thai Baht Indian Rupee % change versus USD from 31 December 2010 to 11 March 2011 G-10 currencies against Singapore Dollar Swedish Krona Norwegian Dollar Euro Danish Krone British Pound Candian Dollar Swiss Franc USD Australian Dollar New Zealand Dollar % change versus SGD from 31 December 2010 to 11 March 2011

3 46 Outlook & Strategy The trend of appreciation of Asian Dollar Index (ADXY) appeared to have stalled since the beginning of the year, with the index flat since the beginning of the year after having gained 5.2% in This is not surprising given Asia s relatively higher vulnerability to rising oil prices. The chart below indicates that Asia s net oil consumption (gross consumption less production) as a percentage of GDP was 3.5% in 2010 versus less than 2.5% for US, Japan and Germany. Net oil consumption as % of GDP Oil as % of GDP has risen sharply in Asia since 1990 while it has fallen in US, Japan and Germany Asia-9 US Japan Germany The (JPY) appreciated 1.4% against the USD in the aftermath of the earthquake on 11 March. We do not see the JPY gaining as much as it did in January 1995 after the Kobe earthquake. Back then, the JPY appreciated from 100 to 80.6 in a space of three months. The cost of hedging for USD-JPY rate was more than 400 bps in 1995 which over the past year reduced to only 30 to 50 bps per year as the US interest rate converged to Japanese interest rate. Also, most of Japan s overseas financial assets in the 1990s were unhedged but now as much as 80% of Japanese investments in USD financial assets are hedged. Hence, even if Japanese were to liquidate its overseas assets and repatriate the money back to Japan, we do not see JPY appreciating beyond 80 against the USD. In fact, on a six to 12 months basis, the earthquake probably increased the likelihood of JPY weakening to 85 to 90 against the USD as the BOJ is now more likely to keep interest rate low for a more prolong period compared to other developed nation central banks. Source: Bloomberg, 14 March 2011 We believe that if Brent oil price goes above US$130 per barrel, Asian FX could begin to weaken against the USD. Our key FX strategy over the next one quarter will be to overweight FX that are less affected by higher oil prices and underweight those that are more affected by rising oil prices. Malaysian Ringgit, Indian Rupee, Singapore Dollar, Australian Dollar and Chinese Renminbi stands out as FX that are less affected by rising oil prices while Indonesian Rupiah, Thai Baht and South Korean Won are more affected. CURRENCY FOrecast Currency Against USD 11 March 2011 Forecast End 2Q 2011 (JPY) Euro (EUR) Singapore dollar (SGD) Source: Forecast figures are consensus numbers from Bloomberg, 11 March 2011

4 47 Contact Details Address 80 Raffles Place UOB Plaza 2 Level 3 Singapore hour Hotline (Local) (65) (International) Fax (65) uobam@uobgroup.com Website uobam.com.sg Regional Offices Singapore Institutional Investments Dennis Siew Retail Investments Norman Wu Regional Investments Faizal M. Fazluddin Structured Investments Chong Jiun Yeh Executive Director International Business (China) Jasmine Lim Brunei Kamal Muhd General Manager Japan Masashi Ohmatsu Malaysia Lim Suet Ling Taiwan Juang San Tay General Manager Thailand Vana Bulbon

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