Global FX Strategy No more EURUSD upside Nordea Research, 29 October 2013

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1 Foreign Exchange Strategy Global FX Strategy No more upside Nordea Research, 29 October 2013 Global Markets : USD to firm : What if QEternity? NOKSEK: To touch parity? NZDUSD: Too aggressive, too fast? BRL: Don t get carried away Scandi Focus EURNOK: Homemade problems for NOK EURSEK: Two capital friendly currencies Quant of the week Biweekly quant highlight: Volatility slopes are steep! Volatility slopes are steeper than usual broadly based across G10 currencies. Hence, 1Y volatility levels seem rich relative to the 1W volatility. Fair Value Framework: Short and long AUDUSD As long as the keeps going up, the mispricing in regards to the fair value framework seems to grow larger and larger. The EUR is now considered very expensive versus the dollar, with the framework targeting 1.30 for. Furthermore, the AUD has moved into cheap territories again. The framework targets 0.98 for AUDUSD. Chart of the week short term overbought Contents Global Markets... 2 Scandi focus... 8 FX Quant; Spot & highlight FX Quant; Fair Value FX Quant; Volatility FX Quant; Risk Reversal FX Quant; Vol & RR heatm FX Quant; Seasonality FX Quant; Correlation Track. 16 FX Quant; Strategic Monitor.. 18 Last line first page (d

2 Global Markets : USD to firm We expect the USD to gain in the coming weeks also against the EUR The USD has taken a beating over the past few weeks as the market focus has switched from the government shutdown perils to the bad news is good news mode (read: more QE). Indeed, extrapolating the current monetary policy path it does seem that still has a way to go (Figure 1). In the short term, however, we expect the USD to gain ground. The market expectations of tapering have been postponed to March and even later which can be changed by a few better macro figures from the US. (Our economists still call for a January taper.) The weaker payrolls in September may still be revised as they used to in previous years. Various short-term indicator models suggest that the has overshot (eg Figure 2). So far, there is no sign that the ECB is worried about EUR strength. The ECB s Asmussen reiterated last week: We do not have an explicit target for the exchange rate. But it will become a worry if inflation falls below 1% (consensus expects 1.1% this week), which we believe is a significant risk. Back in February when the was at similar highs, Draghi noted: we will certainly want to see whether the appreciation is sustained and will alter our risk assessment as far as price stability is concerned. In any event, next month we will have the new projections. Thus, the longer hovers around yearly highs, the more risk to the downside ultimately. Finally, the ECB does not care about the broad USD weakness, which we have seen during September and the first half of October. But the moment it becomes generalised EUR strength, it does become a worry for the ECB. We have seen the EUR firm against several other major currencies over the past week. Last but not least, excess liquidity in the Euro system has now fallen to below EUR 200bn, increasing the risks of at least talk from the ECB s side. The next meeting is on 7 November beware. Figure 1. and Fed-ECB relative balance sheet Figure 2. short-term overbought 2

3 : What if QEternity? The dollar will likely suffer less and less from potential new postponements of tapering Last week we had lots of questions sounding How high can the EUR go, if FED continues to postpone tapering? Let me start out by sharing our thoughts on an eventual FED QE3 exit date FED is not going to exit the QE3 program on a down sloping 6M NFP average and basically the slope has been pointing south since Q This is maybe the most important lesson learned from FEDs QE reaction function to non-farm-payrolls from the QE1 and QE2 programs. QE programs are entered on clear downslopes, and exited on upslopes (Figure 1) Given the fact that we have just been through a temporary government shutdown, it is hard to see the average NFP pick up pace over the next couple of months. The dotted line represents our macro economists current forecasted tapering date. Risks are in our view clearly skewed towards tapering being postponed past the January meeting. A Reuter s poll released in the aftermath of the September NFP report revealed that consensus is now for tapering to commence in March. This off course begs the question: How much does the EUR gain for each time the perceived exit date is moved back in time? And how high can the EUR go if the FED continues to postpone? Looking at the three latest events that moved the markets perceived QE3 exit date substantially, the immediate upwards reaction has been smaller and smaller for each time. With that said, for every month of postponed tapering expectations, it is fair to say that the has moved % up (Table below) To sum up. The effect of further postponements of tapering expectations will likely have a less pronounced effect on than the previous postponements. However, if the perceived exit date moves to June 2014 or maybe even as far as September 2014, the is set to breach 1.40, and that could break an important long-term down trend (Figure 2). Hence, the potential is there for the to go even higher, in such scenario. Event Tapering expectations reaction September FOMC Statement Postponed from September to December 1.220% US budget/debt ceiling deal Postponed from December to January 1.036% NFP for September Postponed from January to March 0.721% Fig 1: FED exits QE on NFP upslopes Fig 2: is close to breaking the long term trend 3

4 NOKSEK: To touch parity? NOKSEK likely to touch parity seen from a macro perspective As highlighted in several research pieces the near term macro outlook truly favours SEK in relation to NOK. Many indicators and surveys in Sweden suggest that also hard data is likely to pick up in the months to come. Especially lagging Swedish exports are to rebound, should the orders component for exports in PMI be right. In neighbour Norway much data indicate the opposite. Not only soft house prices are worrying, also weaker retail sales indicate a fading domestic demand. When it comes to housing there is of course the big question if the housing in Sweden not is just as overheated as it is in Norway. Indeed, Swedish house prices and private debt are at high levels compared to international standard, but on the supply side things look much better in Sweden. Sweden has not seen a construction boom since the beginning of the 90 s. As seen in the graph the construction in relation to GDP has picked up in Norway, but not in Sweden, over the recent years. With a quite gloomy macro outlook the next question is how important is macro for the NOKSEK exchange rate? But also from a flow perspective a retake on the NOK seem to be in the cards. With a bit more stability in EZ the safe-haven inflow should vanish. Some rumours even say that central banks have started to withdraw from Norway. If so, NOK could really be up for a setback. Then we have Norges Bank. Volatile communication of policy has made the central bank hard to predict, which in turn could be another reason for foreigners turning somewhat cautious on NOK. On the contrary, one could of course say that all else equal Sweden is likely to default on its debt before Norway, and hence should a strengthening in SEK vs NOK be rather limited. Indeed, this could be the case for the longer term, but for the coming quarter we see domestic risks associated with Norway, and Norges Bank, to be a driver for a lower NOKSEK; a test towards parity is not to be ruled out. Construction remain a small part of Swedish GDP Swedish exports to rebound, should PMI be right 4

5 NZDUSD: Too aggressive, too fast? Stretched market pricing vs. RBNZ s bank bill path having corrected.. As highlighted about two weeks ago in 'AUD/NZD: Short-term positives, but longer term cautious', we saw some short-term downside risks for the NZD vs. the AUD, with one of our arguments being that the market pricing of RBNZ tightening appeared stretched. At the time, the bank bill future strip was actually steeper than RBNZ s own bank bill rate trajectory, i.e. the market was more hawkish than RBNZ themselves. Since then, the short-end has experienced somewhat of a re-pricing (among other things on the back of dovish comments from Governor Wheeler) with forward rates now being more in line with the rate path presented in the September MPS (see chart 1). but the scale of RBNZ s guidance is in itself fairly aggressive With that said, the scale of RBNZ s guidance appears in itself fairly aggressive, not least in an environment with several G10 central banks currently pulling back from planned exit strategies while also guiding down expectations of future rate hikes (e.g. Fed, Norges Bank, Riksbank, BoC). With RBNZ s communication of 200bps of tightening in 2014 and 2015, they are admittedly the most hawkish central bank in the G10 space both in terms of magnitude and timing of tightening. Were the bank to go through with the planned hikes, at the same time as other central banks stay defensive (in line with what they currently indicate), the NZD should strengthen materially, clearly interfering with RBNZ s fear of a too strong currency. This was not least underlined last week when Governor Wheeler admitted being quite concerned about the risks of damage to the export sector originating from a stronger currency. With inflation below target, the perceived need for tightening stems from an increasingly inflated housing market. Trying to pin-point that particular issue, RBNZ earlier this month introduced LTV restrictions. Interestingly, when asked about the LTV-limits last week, Wheeler said that although it was too Chart 1: The bank bill rate path vs. the future strip 5

6 early to tell if they are working, anecdotes suggest that they are. Furthermore, Wheeler recognized that if such measures prove to be successful, it might provide RBNZ with some scope potentially to delay the increase in interest rates while also adding that hopefully we won t have to raise them by quite so much. Some evidence of a slowdown in house lending activity already In fact, there are already some indications of a cooling down in lending activity, in line with Wheelers comments. For example, recent house lending figures have been weak. Interestingly, the momentum in loan figures point to a rather marked slowdown in the momentum of house price appreciation on a few months horizon, albeit still from high levels (see chart 2). In addition, house sales have come down a bit, although it remains to be seen if that s just a seasonality induced blip. Chart 2: LTV-restrictions to take the edge of the strong housing momentum? Housing indicator based on housing loans, 4m lead, lhs NZ, House prices y/y, rhs But make no mistake, as we outlined in 'AUD/NZD: Short-term positives, but longer term cautious', forward looking macro indicators point to improvements in growth, employment and inflation, all-in-all consistent with RBNZ being one of the early birds in this cycle. However, given the aggressive rate guidance already in place, a leveling out in house prices could be enough to trigger a softening in rhetoric from the RBNZ despite it taking place simultaneously with a rebound in other macro measures. Hence, for the time being, we see value in playing NZDUSD from the short side, as the RBNZ may potentially tone down their hawkish stance somewhat (while still indicate that rate hikes are on the cards). In terms of the OCR announcement on Thursday, Wheeler s comments combined with some signs of a slowdown in lending momentum, but also the fact that the currency is almost 2% stronger than anticipated by RBNZ, points to risk of a slightly softer tone in the RBNZ statement. Given the strength of the currency, we wouldn t be surprised by a stronger wording highlighting the risks from a strong exchange rate, but potentially also a reference to the currency in relation to the determination of monetary policy. On the back of this, we favor being short the NZD vs. the USD going into the meeting. 6 Source: Nordea Markets and Reuters Ecowin

7 Weaker BRL by year-end as Brazil remains vulnerable to external shocks BRL: Don t get carried away Tapering delay brings only temporary relief for the BRL Recently, the story of the BRL has been one of records. First, during the Emerging Market (EM) sell-off in August the BRL soared to a near 5-year low, as investors worried about Brazil s deteriorating current account balance in an environment of less global liquidity. In response, Banco do Brasil (BCB) on 22 August launched one of the boldest FX intervention programmes in EM history, selling swaps to investors as protection against BRL weakening. As a result, the BRL began a downward trend against the USD that accelerated in September when the Fed unexpectedly decided to delay tapering. Reversing all its losses from August, the BRL appears to have settled below 2.20 versus the USD. Nonetheless, we still expect to see the BRL trade weaker at 2.25 by year-end as it remains vulnerable to external shocks due to Brazil s large current account deficit, deteriorating fiscal outlook and overall weak macro picture. Too much of a good thing? While the recent surge in the BRL is certainly a good thing seen from the perspective of the BCB, which is still trying to curb stubbornly high inflation, the finance ministry is likely to perceive it differently, as issues related to Brazilian competitiveness begin to mount again. We see USD/BRL below 2.15 as an uncomfortable strong level for the Brazilian authorities. Should the BRL rally beyond 2.15, this will likely raise concerns regarding excessive appreciation, prompting the BCB to take action. To sum up, we expect the BRL to trade within a band of for the rest of the year. Looking ahead, we expect a gradual BRL weakening in 2014 and 2015 driven by Fed tapering and the need to restore external balances in Brazil. Chart 1. Deteriorating current account balance Chart 2. BRL-weakening ahead 7

8 Scandi focus EURNOK: Homemade problems for NOK With a market expecting QE from FED to last for longer it seems like risk appetite is on the rise meaning that implied volatility in most markets are coming down. Same goes for implied volatility in EURNOK. This kind of environment normally means downside for EURNOK as well. Higher carryto-risk ratios have done its magic in currencies like AUD and emerging markets. EURNOK seems stuck in the range between 8.07 and Norwegian macro stands to take the blame for this. Norges Bank didn t give us much last week. They realize that the retail sector is a touch weaker than expected and inflation lower. On the other hand they emphasized that NOK is weaker than their forecast. There are signs of slower investment growth in the oil-sector, but Norwegian retail sector will be the most important driver going forward. Especially signs from the housing market should be watched closely. Our models tell us that tomorrow s retail sales data might be on the weak side, but Friday s real estate figures from NEF (not published on Bloomberg) are even more important. We stand by our call that the weakness in Norwegian macro is still signs of weaker growth and not a substantial downturn. For a more complete picture of NOK-flows see: Sep08 2Sep09 2Sep10 2Sep11 2Sep12 2Sep13 22 EURNOK (left axis) EURNOK 3m ATM (right axis) CVIX (right axis) 8

9 EURSEK: Capital friendly currencies A common denominator for the EUR and the SEK is its central banks relaxed attitude towards currency appreciation. The EU and ECB focus is more about financial responsibility, austerity and bank solvency issues in order to keep the EUR breathing but they lack a coordinated FX strategy. The Riksbank takes an optimistic view on the krona and refer to it in real terms as to be on the weak side. So in a world where capital quite often is being mistreated by governments and central banks both the EUR and the SEK are performing well on a trade weighted basis. Our basic analysis of the SEK is one of relative monetary policy and relative economic performance, where stronger fundamentals in Sweden will give the SEK its advantage. Although after last week s policy meeting we revised our repo rate forecast. The first hike is now expected in September 2014 (previously in April). A more dovish tone was communicated by the Riksbank at the meeting last week and their rate path was revised down in Q to 1.15% from 1.25% in the September report. The adjustment of our repo rate forecast sets a higher target for the EURSEK (See our forecast below). The new Nordea rate forecast is still ahead of the market pricing and the Riksbank prediction but the gradual widening of rate spreads should come into play later in 2014 rather than sooner. So while activity data will most likely refrain the Riksbank from a spring hike, its improvement could still result in a stronger SEK as the market sentiment can shift towards and early hike. We would consider such a shift being driven more by credit growth and continued house price inflation but also accompanied by stronger activity data. Last week s Business Tendency Survey pointed to decent GDP growth for Q4 and Swedish households turned more optimistic in October. And as we have stressed many times before, households overall fundamentals look positive with net savings and net wealth at record highs. The EURSEK went from 8.77 to 8.72 on the number and we believe that relative macro can continue to outperform and push EURSEK lower. And from the past we know that this type of improvement affects rates and the SEK. The chart below shows 5 periods since 2009 where Swedish data have outperformed the euro-zone and the average FX effect. Nordea s new forecast on EURSEK Currencies Spot 3M 30-Jun Dec Dec-15 EURSEK EURSEK movements (%) Business sector set to rebound 9

10 Editors; Nils Rosendahl, Andreas Steno, Spot heatmap FX Quant; Spot & highlight G10 Heatmap Spot Change* 10-day MA 25-day MA % EURJPY % EURGBP % EURCHF % EURSEK % EURNOK % USDSEK % SEKJPY % GBPSEK % CHFSEK % NOKSEK % USDNOK % NOKJPY % GBPNOK % CHFNOK % AUDUSD % USDCAD % NZDUSD % GBPUSD % % *Change over the last two weeks The EUR has continued its rise against the USD over the last two weeks, but it has more to do with dollar weakness than EUR strength. The USD has lost value against all currencies tracked in the spot heat map. The JPY has lost a bit of value as tensions have eased in the aftermath of a budget deal in US. Biweekly data highlight: Volatility slopes are steeper than usual Implied Volatility Slope Slope* Change* Z-score* Rich/Cheap EURJPY EURGBP EURCHF EURSEK EURNOK USDSEK JPYSEK GBPSEK CHFSEK NOKSEK USDNOK JPYNOK GBPNOK CHFNOK AUDUSD USDCAD NZDUSD GBPUSD Volatility slopes are steeper than usual broadly based across G10 currencies. Hence, 1Y volatility levels seem rich relative to the 1W volatility. The volatility heat map at page 14 furthermore shows how the short end implied volatility has come down a lot more than the long end lately. Very Steep Z-Score > 2 *Slope = 1Y ATM IV - 1W ATM IV Steep 1 < Z-Score < 2 *Change from last publication Neutral -1 < Z-Score < 1 *Z-scores based on 3 months of data Flat -2 < Z-Score < -1 Very Flat Z-Score < -2 10

11 FX Quant; Fair Value As long as the keeps going up, the mispricing in regards to the fair value framework seems to grow larger and larger. The EUR is now considered very expensive versus the dollar, with the framework targeting 1.30 for. Furthermore, the AUD has moved into cheap territories again. The framework targets 0.98 for AUDUSD. Average Z - score Thursday this week. Fair value heat map Misalignment against USD. The heat map shows the deviation of spot vs. fair values (yearly z-scores in brackets). Coloring according to z-scores Expensive currencies Cheap currencies EUR GBP CHF SEK NZD NOK JPY CAD AUD Model EUR GBP AUD JPY CHF CAD NZD SEK NOK Macro 5.17% (2.57) 3.53% (2.09) 3.4% (1.2) -4.77% (-1.34) 2.53% (0.86) 0.12% (0.05) 1.61% (0.45) 2.08% (0.75) 1.3% (0.53) PPP - CPI 3.82% (0.94) 3.52% (1.02) -4.11% (-1) 1.67% (0.31) 3.25% (0.52) -0.35% (-0.1) 1.04% (0.14) 2.32% (0.4) 1.38% (0.25) PPP - Real rate 4.26% (0.93) 3.28% (0.75) -3.99% (-0.84) 2.42% (0.41) 4.19% (0.8) -0.37% (-0.09) 1.51% (0.21) 2.76% (0.5) 1.57% (0.31) PPP - PPP 3.72% (0.79) 2.82% (0.55) -1.34% (-0.24) -4% (-0.86) 3.44% (0.72) -0.76% (-0.2) 2.25% (0.3) 2.52% (0.47) -1.83% (-0.34) Vol - VIX 4.87% (2.23) 3.12% (1.29) -4.12% (-0.88) -4.81% (-0.81) 3.9% (2.08) -2.69% (-1.27) 0.85% (0.29) 2.67% (1.4) -2.13% (-0.7) Vol - ATM (1M) 3.39% (1.97) 2.65% (1.7) -4.81% (-3.62)-11.17% (-3.78) 3.59% (2.21) -3.98% (-2.83) 1.98% (1.51) 2.14% (1.3) -1.99% (-1.23) Vol - RR (10 delta) 3.12% (1.38) 0.01% (0.01) -8.96% (-10.43)-0.28% (-0.05) 2.2% (0.75) -3.62% (-2.73) 1.06% (0.89) 2.02% (0.96) -4.15% (-2.48) Consensus (12m)* 12.13% (1.24) 2.68% (1.32) % (1.01) 8.44% (0.33) -7.25% (0.58) % (0.13) -3.8% (0.13) CDS - CDS (5y) 4.83% (1.37) 0.48% (0.11) -5.73% (-0.9) 1.47% (0.36) 2.84% (0.62) -1.07% (-0.32) -1.72% (-0.4) 1.52% (0.46) -0.67% (-0.13) CDS - Risk free rate 1.65% (1.6) -1.04% (-0.78) -5.47% (-2.7) 1.35% (0.43) 3.5% (1.61) -0.56% (-0.29) 1.42% (0.3) 1.33% (0.75) -1.02% (-0.44) Average 5.65% (1.61) 2.21% (0.97) -2.83% (-1.57) -5.27% (-0.31) 4.2% (0.93) -2.38% (-0.42) 1.09% (0.38) 2.4% (0.63) -1.01% (-0.2) GBPUSD AUDUSD USDCHF USDCAD NZDUSD USDSEK USDNOK Fair Value * Consensus Economic Inc. and Nordea Analytics Very Rich Z-Score > 2 Z - score = (current FX spot - current fair value) / stdev, i.e. how many standard Rich 1 < Z-Score < 2 deviations the spot is from the fair value. In the calculations, the non-usd currency Neutral -1 < Z-Score < 1 is used as base. Cheap -2 < Z-Score < -1 Very Cheap Z-Score < -2 The models Using a set of regression models the long term fair values of G10 currencies are estimated. The models are split into five different categories found below. The framework is not associated with our or trading, but rather a stand-alone model. Macro: Uses macroeconomic indicators such as industry production and money supply to calculate fair values. Purchasing Power Parity: Is based on the relative price levels and interest rates of the two countries. Consensus: Twelve month forecasts are used as input variables to generate fair values. CDS: To capture the overall riskiness of a country CDS spreads are used both as standalone variables and in a real rate framework Vol: Estimates fair values by means of volatility proxies such as implied vol, risk reversal and VIX. 11

12 Current 1M ATM vs. 3 month mean Implied volatility levels have 0.0 come down lately, leaving the levels very cheap from a mean reverting perspective. As seen below the recent fall, may mark a return to normalized volatility levels in the -2.0 aftermath of the US budget tensions. Jajaj jaaja Current 1M ATM vs. realized volatility FX Quant; Volatility Fig 1 - Divergence of 1M implied vol from 3 month mean. Z-Score = (current mean)/stdev Z-Score NZDUSD GBPNOK Volatility Rich GBPUSD USDSEK CHFSEK EURNOK AUDUSD EURGBP GBPSEK EURCHF USDNOK NOKSEK USDCAD CHFNOK EURSEK JPYSEK EURJPY Volatility Cheap Looking at how implied volatility levels have realized, we see no clear pattern. Broadly speaking implied volatility levels have realized in line with what was expected. Fig 2 - Residual from regressing 1M implied vol against realized vol. Z-Score = (current regression value)/stdev. Realized vol calculated using an exponentially weighted moving average. For the regression we use one year of data. Z-Score NZDUSD Volatility Rich GBPNOK GBPSEK CHFSEK EURNOK EURGBP USDNOK EURSEK USDSEK NOKSEK GBPUSD EURCHF AUDUSD EURJPY USDCAD JPYSEK Volatility Cheap ATM volatility heat map The FX volatility heat map has moved into blue territories, indicating broad based volatility cheapness. The vol. map suggests buying volatility in especially. It can be done via a long 1M ATM straddle. Rich/ Cheap 1W 2W 1M 3M Vol Z- Score Rich/ Cheap Vol Z- Score Rich/ Cheap Vol Z- Rich/ Score Cheap Vol Z- Rich/ Score Cheap Vol Z- Rich/ Score Cheap EURJPY EURGBP EURCHF EURSEK EURNOK USDSEK JPYSEK GBPSEK CHFSEK NOKSEK USDNOK JPYNOK GBPNOK AUDUSD USDCAD NZDUSD GBPUSD M 1Y Vol Z- Score Very Rich Z-Score > 2 Vol is current ATM volatiltiy, data as of 28 Oct 2013 Rich 1 < Z-Score < 2 Rich/Cheap = current ATM volatility - 3 month average ATM volatiltiy Neutral -1 < Z-Score < 1 Z-Score = (current ATM volatility - 3 month average ATM volatiltiy)/stdev, i.e. how many standard deviation Cheap -2 < Z-Score < -1 current ATM vol is from mean. Very Cheap Z-Score < -2 12

13 Current 1M RR vs. 3 month mean FX Quant; Risk Reversal The risk reversal levels continue to rise, alongside the market pricing in the postponed expected QE exit date from Fed. The RR levels have moved down in the short end, but up in the long end. xxx Fig 1 - Divergence of 1M RR from 3 month mean. Z-Score = (current mean)/stdev Z-Score RR Rich AUDUSD GBPUSD EURJPY GBPSEK NZDUSD GBPNOK CHFNOK CHFSEK EURGBP EURSEK JPYNOK NOKSEK EURNOK JPYSEK EURCHF USDSEK USDCAD RR Cheap USDNOK VOL 1W RR 25 VOL 2W RR 25 VOL 1M RR 25 VOL 3M RR 25 VOL 6M RR 25 VOL 1Y RR VOL 1W RR 25 VOL 2W RR 25 VOL 1M RR 25 VOL 3M RR 25 VOL 6M RR 25 VOL 1Y RR /10/ Week Ago 1 Month Ago 28/10/ Week Ago 1 Month Ago aeraexasudhausdhaiwiojeaxxxxxxxxxx RR Heat Map From a z-score perspective the recent rise in risk reversal levels seem exaggerated. 1W 2W 1M 3M 6M Rich/ Cheap RR Z- Score Rich/ Cheap RR Z- Score Rich/ Cheap RR Z- Score Rich/ Cheap RR Z- Score Rich/ Cheap RR Z- Score 1Y Rich/ Cheap RR Z- Score EURJPY EURGBP EURCHF EURSEK EURNOK USDSEK JPYSEK GBPSEK CHFSEK NOKSEK USDNOK JPYNOK CHFNOK AUDUSD USDCAD NZDUSD GBPUSD Very Rich Z-Score > 2 RR is current Risk Reversal, data as of 28 Oct 2013 Rich 1 < Z-Score < 2 Rich/Cheap = current RR - 3 month average RR Neutral -1 < Z-Score < 1 Z-Score = (current RR - 3 month average RR)/stdev, i.e. how many standard deviation Cheap -2 < Z-Score < -1 current RR is from mean. Very Cheap Z-Score < -2 13

14 FX Quant; Vol & RR heatmap Below we show the changes in implied volatility and risk reversal week over week and month over month, respectively. Implied Vol W/W W/W 1W 2W 1M 3M 6M 1Y EURJPY EURGBP EURCHF EURSEK EURNOK USDSEK JPYSEK GBPSEK CHFSEK NOKSEK USDNOK JPYNOK GBPNOK CHFNOK AUDUSD USDCAD NZDUSD GBPUSD Implied Vol M/M M/M 1W 2W 1M 3M 6M 1Y EURJPY EURGBP EURCHF EURSEK EURNOK USDSEK JPYSEK GBPSEK CHFSEK NOKSEK USDNOK JPYNOK GBPNOK CHFNOK AUDUSD USDCAD NZDUSD GBPUSD Risk Reversal W/W W/W 1W 2W 1M 3M 6M 1Y EURJPY EURGBP EURCHF EURSEK EURNOK USDSEK JPYSEK GBPSEK CHFSEK NOKSEK USDNOK JPYNOK GBPNOK CHFNOK AUDUSD USDCAD NZDUSD GBPUSD Risk Reversal M/M M/M 1W 2W 1M 3M 6M 1Y EURJPY EURGBP EURCHF EURSEK EURNOK USDSEK JPYSEK GBPSEK CHFSEK NOKSEK USDNOK JPYNOK GBPNOK CHFNOK AUDUSD USDCAD NZDUSD GBPUSD

15 FX Quant; Seasonality November EUR tends to perform The EUR has gained versus the GBP 7 out of the last 10 years in November Percentage of last 10 years when currency cross has appreciated in November 100% 60% 20% 70% 60% 60% 50% 50% 50% NZDUSD EURCHF Percentage of last 10 years when currency cross has depreciated in November 20% 60% 100% EURGBP EURNOK USDCAD AUDUSD EURSEK 60% 60% 70% December Kiwi strong versus USD The NZD has gained versus the USD 8 out of the last 10 years in December. December is another strong EURGBP upside month as well. Percentage of last 10 years when currency cross has appreciated in December Percentage of last 10 years when currency cross has depreciated in December 100% 60% 20% 20% 60% 100% 80% 80% NZDUSD EURGBP 60% 50% 50% 50% EURSEK USDCAD AUDUSD EURCHF EURNOK 60% 60% Monthly movers Average monthly movements since The EUR has gained more than 1.0 % on average versus the GBP since 2000 in both November and December. November December 70% EURGBP NZDUSD EURNOK AUDUSD EURSEK USDCAD EURCHF -0.5% 0.0% 0.5% 1.0% 1.5% EURGBP NZDUSD EURNOK AUDUSD EURSEK USDCAD EURCHF -1.0% 0.0% 1.0% 2.0% Month-end patterns The heat map shows how many times a cross has appreciated during the last trading day of the specific month as percentage during the last ten years (indicated x in the heat map colouring specification below). Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec EURSEK 70% 10% 50% 60% 50% 70% 30% 60% 40% 40% 40% 30% EURNOK 20% 60% 40% 20% 30% 100% 10% 40% 40% 30% 40% 0% 50% 40% 80% 50% 50% 70% 60% 60% 50% 60% 70% 30% EURGBP 50% 20% 40% 30% 30% 80% 40% 60% 50% 10% 40% 20% EURCHF 30% 50% 20% 50% 40% 60% 10% 40% 50% 50% 60% 40% 40% 40% 70% 20% 50% 50% 20% 10% 60% 40% 60% 60% AUDUSD 70% 50% 70% 60% 50% 60% 40% 80% 50% 60% 60% 90% NZDUSD 60% 40% 50% 40% 40% 60% 50% 30% 50% 40% 50% 30% USDCAD 60% 60% 70% 60% 60% 60% 60% 80% 50% 60% 40% 70% x < 20% 20% x < 40% 40% x 60% 60% < x 80% x > 80% 15

16 FX Quant; Correlation Tracker VIX seems to drive FX markets to a certain extent. And notably versus Gold correlation is running high. EURSEK 0.7 EURNOK 0.5 Correlation Correlation Aug 21-Aug 05-Sep 20-Sep 05-Oct 20-Oct Aug 21-Aug 05-Sep 20-Sep 05-Oct 20-Oct Brent EURSEKBasis EURSEKRateDiff VIX EURNOK2/10 EURNOKBasis Highest Short-Term Correlations to EURSEK Brent EURSEKBasis EURSEKRateDiff 47% -37% 24% Highest Long-Term Correlations to EURSEK EURSEKRateDiff Copper Gold 38% -17% -13% Highest Short-Term Correlations to EURNOK EURGBP EURNOK2/10 EURNOKBasis VIX -31% 25% 21% Highest Long-Term Correlations to EURNOK EURNOKRateDiff EURNOK2/10 SP500 44% -22% -16% Correlation Correlation Jul 06-Aug 21-Aug 05-Sep 20-Sep 05-Oct 2/10 Gold Copper Aug 21-Aug 05-Sep 20-Sep 05-Oct 20-Oct VIX CRBMetals EURGBPBasis EURCHF Highest Short-Term Correlations to Gold Copper 2/10 49% 35% 32% Highest Long-Term Correlations to RateDiff Gold SP % 31% 24% Highest Short-Term Correlations to EURGBP VIX CRBMetals EURGBPBasis -31% 31% 19% Highest Long-Term Correlations to EURGBP 0.0 EURGBPRateDiff VIX 44% 28% -18% Correlation Correlation Aug 21-Aug 05-Sep 20-Sep 05-Oct 20-Oct Aug 21-Aug 05-Sep 20-Sep 05-Oct 20-Oct SP500 VIX Brent VIX Gold Highest Short-Term Correlations to EURCHF SP500 Brent VIX 40% 37% -35% Highest Long-Term Correlations to EURCHF SP500 VIX EURCHF2/10 38% -31% 25% Highest Short-Term Correlations to Gold VIX -42% -41% -41% Highest Long-Term Correlations to VIX SP500 2/10-30% 28% 27% 16

17 AUDUSD FX Quant; Correlation Tracker NZDUSD Correlation Correlation Aug 21-Aug 05-Sep 20-Sep 05-Oct 20-Oct Aug 21-Aug 05-Sep 20-Sep 05-Oct 20-Oct SP500 Gold Copper NZDUSDRateDiff USDCAD Correlation Highest Short-Term Correlations to AUDUSD SP500 Gold 50% 43% 36% Highest Long-Term Correlations to AUDUSD SP500 Gold 39% 39% 38% Aug 21-Aug 05-Sep 20-Sep 05-Oct 20-Oct SP500 VIX Copper Highest Short-Term Correlations to USDCAD SP500 VIX Copper -41% 34% -33% Highest Long-Term Correlations to USDCAD SP500 Gold -52% -43% -40% Highest Short-Term Correlations to NZDUSD NZDUSDRateDiff Copper 60% 44% 33% Highest Long-Term Correlations to NZDUSD Gold SP500 40% 40% 35% Fact Box We display the movements in realized correlation between the major currency crosses and important drivers. For each currency cross short-term correlation movements are displayed in the graphs. In the tables we display the highest short-term and long-term (1Y) correlated assets. Short-term correlations are calculated using an exponentially weighted moving average (EWMA), a method designed to quickly pick up changes. The drivers considered for each currency cross are spot, S&P 500, Chicago Board Options Exchange Volatility Index (VIX), gold, copper, CRB Metals Index, Brent crude oil, slope in cross asset rate curve (2Y/10Y swap rates), difference in basis spreads (OIS v.s. Libor 3M), and difference in short rates (4 th FRA contract) 17

18 FX Quant; Strategic Monitor In the graphs below we display consensus forecasts and forward price. To visualize volatility and skew we plot the 5 delta and 25 delta strikes. These can be seen as the boundaries for the future spot price implied by options with 90% and 50% probabilities, respectively. Consensus forecasts from FX4Casts/Global Insight. EURSEK EURNOK Oct11 15Aug12 03Jun13 22Mar14 08Jan15 27Oct15 90% prob 50% prob EURSEK Forward Consensus 3M / / M / / M / / M Oct11 28Aug12 29Jun13 30Apr14 01Mar15 31Dec15 90% prob 50% prob Forward Consensus 3M / / M / / M / / M Oct11 15Aug12 03Jun13 22Mar14 08Jan15 27Oct15 90% prob 50% prob EURNOK Forward Consensus 3M / / M / / M / / M EURGBP Oct11 28Aug12 29Jun13 30Apr14 01Mar15 31Dec15 90% prob 50% prob EURGBP Forward Consensus 3M / / M / / M / / M EURCHF Oct11 28Aug12 29Jun13 30Apr14 01Mar15 31Dec15 90% prob 50% prob EURCHF Forward Consensus 3M / / M / / M / / M Oct11 28Aug12 29Jun13 30Apr14 01Mar15 31Dec15 90% prob 50% prob Forward Consensus 3M / / M / / M / / M

19 AUDUSD FX Quant; Strategic Monitor USDCAD Oct11 28Aug12 29Jun13 30Apr14 01Mar15 31Dec15 90% prob 50% prob AUDUSD Forward Consensus 3M / / M / / M / / M NZDUSD Oct11 28Aug12 29Jun13 30Apr14 01Mar15 31Dec15 90% prob 50% prob NZDUSD Forward Consensus 3M / / M / / M / / M Oct11 28Aug12 29Jun13 30Apr14 01Mar15 31Dec15 90% prob 50% prob USDCAD Forward Consensus 3M / / M / / M / / M GBPUSD Oct11 28Aug12 29Jun13 30Apr14 01Mar15 31Dec15 90% prob 50% prob GBPUSD Forward Consensus 3M / / M / / M / / M