G10 FX Outlook: GBP & USD are the Stars

G10 FX Outlook: GBP & USD are the Stars Frankfurt - Steven Saywell Global Head of FX Strategy

FX Themes USD: Tapering should support a stronger USD against the other lower yielding G10 currencies. Long USD positioning has not fully recovered, which provides scope for upside despite for consensus for USD strength. EUR: Further ECB policy easing is increasingly likely and we forecast a further rate cut in early 2014. EUR will suffer from this while current account support is also fading. We forecast 1.23 EURUSD by end-2014. Asia: Growth in the region to remain robust, but Fed tapering expectation to impact USD vs Asia. Asian currencies may struggle in 2014. JPY: USDJPY to rise as the BoJ remains committed to very loose policy, in contrast to a Fed that is heading towards the exit. Domestic investors to continue to be crowded out of the JGB market and allocating funds abroad. We forecast 118 USDJPY by end-2014. GBP: The recovering in UK economy to continue to underpin the GBP. Market positioning is extreme long but it remains cheap vs long-term valuation. We forecast 0.78 EURGBP by end-2014. CHF: EURCHF to rally as global growth recovers, but further ECB easing will provide a headwind. As the Swiss begin to recycle large current account surplus we forecast a gentle rise to 1.25 EURCHF by end-2014. AUD, NZD, CAD: Pockets of EM resilience + local growth will be enough to shield commodity currencies strong as Chinese growth remains robust.. AUD & NZD now appear undervalued. NOK, SEK: Scandinavian currencies appear oversold currently, in particular the NOK should recover against the SEK in 2014. 2

We expect USD to gain broadly in 2014 Forecast percentage change vs. USD from 01-Jan-2014 to end 2014 4% 2% 0% -2% -4% -6% -8% -10% -12% -14% CHF JPY EUR SEK GBP CAD NZD NOK AUD Source : Ecowin Reuters, BNP Paribas Sharper USD gains are due in 2014 especially vs EUR, JPY & CHF 3

Fed Tapering agenda Source : BNP Paribas Our basecase is in line with the agenda laid out by the Fed 4

US & UK move to the top of the pack Comparison of major countries PMI readings (Manufacturing) 60.0 57.5 55.0 52.5 G lobal PM I (M anufacturing) C om parison C h in a Sw eden U S U K 50.0 47.5 45.0 E u r o A r e a G e r m a n y 42.5 M a y Jul S e p N o v Jan M a r M a y Jul S e p N o v 12 13 Source : Ecowin Reuters, Bloomberg, BNP Paribas US and the UK outpace the rest, eurozone and China lag 5

US yields hit new highs recently US Data surprise index vs. 10 year yields 80 55 30 5-2 0-4 5-7 0-9 5-120 -145-170 U S D a ta S u r p r is e In d ic a to r ( L H S ) U S 1 0 Y Y ie ld 08 09 10 11 12 13 4.3 3.8 3.3 2.8 2.3 1.8 1.3 Source : US Federal Reserve, BNP Paribas Fed QE has kept yields subdued despite improving data but yields are starting to relink. 6

The USD continues to takes its lead from US yield DXY (USD Index) vs US 2 yr swap spread - DXY components 85-5.0 84 U S - D XY 2y sw ap rate differential (bp, R H S) -7.5-1 0.0 83-1 2.5 82-1 5.0 81-1 7.5-2 0.0 80-2 2.5 79 Feb D X Y A p r M a y Jun Jul A u g S e p O c t N o v D e c Jan 13 14-2 5.0 Source : Ecowin Reuters, BNP Paribas The USD continues to takes its lead from yields. USD is now lagging the yield pick-up 7

USD is set to rise against the low-yielders 2Y Sovereign Benchmark yields (bp) 0.7 0.6 2y Benchm ark Yields 0.5 G B P 0.4 0.3 U S D 0.2 0.1 E U R JPY 0.0-0.1 C H F -0.2 Jan Feb M a r A p r M a y Jun Jul A u g S e p O c t N o v D e c Jan 13 14 Source : Ecowin Reuters, BNP Paribas EUR & GBP yields rise in tandem with USD, but JPY & CHF stay low 8

Largest FX market positions are long GBP & short CAD, JPY BNP Paribas Estimate of FX Market Positioning Methodology BNP Paribas FX Positioning Analysis is a broad gauge of positioning that combines the following factors: Client Exposure Internal sales desks estimate of FX investor exposure IMM The Commitment of Traders (CFTC) is a widely used proxy for US-based hedge-fund/cta activity. Risk reversals Risk reversals indicate the relative price of calls relative to puts, and thus incorporate a option market sentiment function. Beta Decomposition of the BTOP managed currency index. BNPP Trending Indicator. - A technical measure of the strength of a currencies momentum. The overall currency score is then calculated as the equally weighted sum of the components Source : BNP Paribas CAD shorts have overtaken AUD & JPY, while GBP is the largest long positioning 9

FX participants shift to a net long USD exposure BNP Paribas Estimate of FX Market Positioning for USD 5 0 O p e r a t i o n Q E 2 T w i s t Q E 3 4 0 3 0 2 0 1 0 0-1 0-2 0-3 0-4 0-5 0 S e p 1 0 J a n M a y S e p J a n 1 1 U S D n e t p o s i t i o n i n g B N P P a r i b a s F X P o s i t io n in g A n a l y s i s M a y S e p J a n 1 2 M a y S e p J a n 1 3 1 4 Source : Ecowin Reuters, BNP Paribas Methodology Client Exposure Internal sales desks estimate of FX investor exposure IMM The Commitment of Traders (CFTC) is a widely used proxy for US-based hedge-fund/cta activity. Risk reversals Risk reversals indicate the relative price of calls relative to puts, and thus incorporate a option market sentiment function. Beta Decomposition of the BTOP managed currency index. BNPP Trending Indicator. - A technical measure of the strength of a currencies momentum. The overall currency score is then calculated as the equally weighted sum of the components FX investors generally establish USD shorts during QE. But the more data contingent nature of QE3 has made markets less comfortable funding in USDs. 10

Overall FX positioning is low Total G10 positions Positions typically build in Oct. and Nov. 300 275 5y running average (~190) 20 15 % BNP Paribas Positioning Analysis Seasonal Factors for G10 FX Positioning * 250 10 225 5 200 0 175 150-5 125-10 100 75 Jan Apr Jul Oct Jan 11 Total net positioning BNP Paribas FX Positioning Analysis Apr Jul Oct Jan 12 Apr Jul Oct Jan 13 14-15 -20 *Seasonal factor is the typical percentage increase or decrease in positioning during the month Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Source : Ecowin Reuters, BNP Paribas Seasonal analysis shows that October and November are when FX positioning is usually highest 11

Dislocation between market views and positioning BNP Paribas Forecasts vs Consensus EURUSD Implied Positioning 75 50 EURUSD net positioning BNP Paribas FX Positioning Analysis 25 0-25 -50-75 -100 Nov Mar Jul Nov 10 11 Mar Jul Nov 12 Mar Jul Nov 13 14 Source : Ecowin Reuters, BNP Paribas Market consensus is bullish USD, but investors have only started to put on the position 12

US TIC capital flow data US TIC capital flow data broken down by asset type 145 120 N et purchases of UST bonds & notes [m a 3] N et purchases of agency bonds [m a 3] N et purchases of corporate bonds [m a 3] N et purchases of stocks [m a 3] 95 USD (billions) 70 45 20-5 -3 0-5 5 06 07 08 09 10 11 12 13 Inflows into US Treasuries and Agency debt have returned 13

EUR strength is starting to wane: EURUSD is set to fall

EURUSD has now diverged from interest rate spreads EURUSD vs. 2-yr euro US swap spread 0.150 0.125 0.100 E U R U S D, R H S 1.39 1.38 1.37 1.36 0.075 1.35 0.050 0.025 1.34 1.33 1.32 0.000 1.31-0.0 2 5-0.0 5 0 EU R 2yr sw ap yield less U S 2yr sw ap yield 1.30 1.29 1.28-0.0 7 5 Jun Jul A u g S e p O c t N o v D e c Jan 13 14 1.27 Source : Ecowin Reuters, BNP Paribas US fiscal stress has pushed EURUSD way beyond fundamentals 15

Eurozone inflation undershoots sharply Eurozone Inflation CPI (HICP) y/y % change 4.5 4.0 E u r o z o n e H IC P ( % y /y ) 3.5 3.0 2.5 2.0 E C B 's 2% threshold 1.5 1.0 0.5 0.0-0.5-1.0 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13 Source : Ecowin Reuters, BNP Paribas The sharp undershoot in inflation increases prospects for ECB easing. We forecast a refi rate cut in December 16

Support from the current account is fading C/A surplus appears to have peaked Periphery has driven the deterioration 30 20 Germany 10 Euro area 0 billions -10-20 -30-40 eurozone ex Germany Current account balance, bln 02 03 04 05 06 07 08 09 10 11 12 13 Source : Ecowin Reuters, BNP Paribas Eurozone current account suggest greater EUR vulnerability 17

Eurozone Financial Account Breakdown Equity balance turned negative in Sep. Stock market yield suggests lower inflows Source : Ecowin Reuters, BNP Paribas Portfolio flow data show the EUR surplus is being recycled more efficiently now 18

Market Positioning remains Long EUR EUR Market Positioning 50 40 30 20 10 0-10 -20-30 -40 EUR net positioning BNP Paribas FX Positioning Analysis 60 EUR net postioning BNP Paribas FX Positioning Analysis 50 40 30 20 10 0-10 -20-30 -40-50 -50 Oct Feb Jun Oct 10 11 Feb Jun Oct 12 Feb Jun Oct 13 14-60 May Jun Jul Aug Sep Oct Nov Dec Jan 13 14 Trending Indicator FX Funds Risk Revesals IMM Clients Source : BNP Paribas Methodology Client Exposure Internal sales desks estimate of FX investor exposure IMM The Commitment of Traders (CFTC) is a widely used proxy for US-based hedge-fund/cta activity. Risk reversals Risk reversals indicate the relative price of calls relative to puts, and thus incorporate a option market sentiment function. Beta Decomposition of the BTOP managed currency index. BNPP Trending Indicator. - A technical measure of the strength of a currencies momentum.00 The overall currency score is then calculated as the equally weighted sum of the components The market remains long EUR despite dovish ECB rhetoric 19

EURUSD trades very close to its fair value BNP Paribas FEER for EURUSD BNPP FEER (Fundamental Equilibrium Exchange Rate) is the value of an exchange rate when an economy is operating with an internal balance (i.e. output in line with potential output, full employment and inflation in line with central bank s target) and a sustainable current account balance. 1.45 1.25 1.05 0.85 0.65 OECD "Synthetic" EUR prior to 1999 1980 1985 1990 1995 2000 2005 2010 BNP Paribas FEER EURUSD Source : BNP Paribas EURUSD FEER is estimated at 1.32, so EURUSD is not overvalued despite Fed QE3 20

Our STEER model signals EURUSD is trading above fair value BNP Paribas STEER * fair value model EURUSD *BNPP STEERs are regression based short-term fair-values based on relationships between exchange rates, interest rate markets, equity markets and commodity markets. 1.39 1.38 1.37 1.36 1.35 1.34 1.33 1.32 23-Oct-2013 23-Nov-2013 23-Dec-2013 STEER EURUSD Source : BNP Paribas EURUSD trades inside of its corridor 21

Relaxation in Eurozone stress normalizes euro basis Spanish 5 Year CDS vs Euro Basis 5 year swap Euro basis normalization creates opportunities for some corporates 22

JPY to be driven higher by Abenomics.

The BOJ undertakes a dramatic increase in policy Japanese monetary base projections (JPY trillions) 300 250 JPY270 tr (BOJ target) Year end 2014 200 150 100 JPY200 tr (BOJ target) Year end 2013 50 JPY 138 tr Year end 2012 0 07 08 09 10 11 12 13 14 Source : BoJ, BNP Paribas The policy shift under Governor Kuroda is dramatic 24

USDJPY is highly correlated to Nikkei 225 USDJPY vs. Nikkei 225 17000 107.5 16000 15000 14000 13000 U S D J P Y 105.0 102.5 100.0 97.5 95.0 12000 11000 N ik k e i 2 2 5 92.5 90.0 10000 Jan M a r M a y Jul Sep N o v Jan 13 14 87.5 Source : Ecowin Reuters, BNP Paribas The close link between Japanese equities and the JPY is policy driven by Abenomics 25

JPY short exposure had fallen to just -16 BNP Paribas FX Positioning Analysis (JPY) 50 40 JPY net positioning B N P P a r ib a s F X P o s itio n in g A n a ly s is 30 20 10 0-1 0-2 0-3 0-4 0-5 0 O c t F e b Jun O c t 10 11 F e b Jun O c t 12 Feb Jun O c t 13 14 Source : BNP Paribas BNP Paribas JPY positioning indicator signals that investors short JPY exposure is the smallest this year. 26

but domestic investors are not yet short JPY Japanese investors net purchases of foreign assets -1.0 0 O u tflo w -0.7 5-0.5 0-0.2 5 thousand billions 0.0 0 0.2 5 0.5 0 0.7 5 1.0 0 1.2 5 W e e k ly n e t p u r c h a s e s [ m a 4 ] M o n t h ly n e t p u r c h a s e s 1 1 1 2 1 3 In flo w Source : Ecowin Reuters, BNP Paribas Japanese investors have turned net long JPY over Q1. Most of this is driven by repatriation. 27

Aggregate demand-supply balance for JPY 5 F D I + P o rtfo lio in v e s tm e n t + s h o rt-te rm J P Y lo a n s In flo w 4 Current account JPY dem and-supply balance (Sum of both series) 3 2 thousand billions 1-1 -2-3 -4-5 R ecycling of C/A surplus via capital outflows...h a s n o t b e e n taking place in 2013-6 -7-8 Outflow 03 04 05 06 07 08 09 10 11 12 13 Source: Reuters EcoW in Source : Ecowin Reuters, BNP Paribas Evidence has yet to emerge of large-scale JPY outflows but the net inflows are falling 28

USDJPY long-term fair value is now 74 BNP Paribas FEER for USDJPY BNPP FEER (Fundamental Equilibrium Exchange Rate) is the value of an exchange rate when an economy is operating with an internal balance (i.e. output in line with potential output, full employment and inflation in line with central bank s target) and a sustainable current account balance. 250 200 150 100 50 1980 1985 1990 1995 2000 2005 2010 BNP Paribas FEER USDJPY Source : BNP Paribas Our estimate of long-term fair value (BNP Paribas FEER) continues to fall and now stands at 74 29

GBP: Economic recovery to provide on going support

Recovery in UK Data is Different This Time BNP Paribas Positioning Analysis UK economic dataflow 50 40 30 20 10 0-10 -20-30 Z score 0.8 0.3 0.2 0.7 BNPP Data Surprise Index* -40-50 Nov Mar Jul Nov 10 11 GBP net positioning BNP Paribas FX Positioning Analysis Mar Jul Nov 12 Mar Jul Nov 13 14 1.2 BNPP Economic Strength Index Jun 10 Jun 11 Jun 12 Jun 13 * Zero indicates that the releases are in line with expecta ons; zero indicates the releases are in line with their long term averages Source : BNP Paribas Economic data is finally strong enough for the output gap to start to narrow 31

We favour EURGBP downside UK growing much faster than eurozone EURGBP shorts far from extreme level 40 30 EURGBP net positioning BNP Paribas FX Positioning Analysis 20 10 0-10 -20-30 -40-50 -60-70 -80 Nov Mar Jul Nov 10 11 Mar Jul Nov 12 Mar Jul Nov 13 14 Source : Ecowin Reuters, BNP Paribas We expect the GBP to recover against the EUR, targeting 0.81 EURGBP 32

EURGBP is significantly above long-term fair value estimates BNP Paribas FEER for EURGBP BNPP FEER (Fundamental Equilibrium Exchange Rate) is the value of an exchange rate when an economy is operating with an internal balance (i.e. output in line with potential output, full employment and inflation in line with central bank s target) and a sustainable current account balance. 1.00 0.90 0.80 0.70 0.60 0.50 1980 1985 1990 1995 2000 2005 2010 BNP Paribas FEER EURGBP Source : BNP Paribas EURGBP overvalued on longer term valuation estimates and has plenty of scope to decline 33

EURGBP tracking real yield differentials instead EURGBP vs. 5 year yield spreads 0.900 E U R G B P ( R H S ) 2.00 0.875 0.850 E U - G B 5 y r e a l yield spreads 1.75 1.50 1.25 0.825 1.00 0.800 0.75 0.50 0.775 11 12 13 0.25 Source : Ecowin Reuters, BNP Paribas Real rates maybe a better indicator as central bank policy is now impacting FX through the inflation expectations channel. 34

Easing of eurozone stress now suggests durable Swiss Franc reversal

Easing of eurozone stress key for durable Swiss Franc reversal EURCHF vs. Weighted Peripheral Spreads 1.45 1.40 1.35 E U R C H F *A verage of 2,5,10yr sovereign spreads for Spain, Italy, Ireland and Portugal vs G erm any 0.25 1.25 1.30 2.25 1.25 1.20 3.25 1.15 1.10 4.25 1.05 5.25 1.00 0.95 0.90 10 11 12 13 W eighted Peripheral Spreads (%, R H S )* 6.25 7.25 Source : Ecowin Reuters, BNP Paribas Easing eurozone stress now signals EURCHF upside 36

Swiss investment outflows Financial account moves from inflow to outflow 100 In flo w s * Portfolio investm ent, direct investm entsand loans and deposits 75 50 Sw iss Investm ent Flow s * (Bn C H F, Q uarterly) billions 25 0-2 5-5 0 O u tflo w s Sw iss Investm ent Flow s (Bn C H F, 4 quarter average) 05 06 07 08 09 10 11 12 13 Source : Ecowin Reuters, BNP Paribas Total net financial inflows peaked in Q2 2012 at the same time eurozone stress peaked. Outflows are now taking off. 37

Easing of Eurozone stress key for durable Swiss Franc reversal EURCHF v. 2-year swap spread 1.80 1.75 1.70 1.65 1.60 1.55 1.50 1.45 1.40 1.35 1.30 1.25 1.20 1.15 1.10 1.05 1.00 SNB Floor at 1.20 o n E U R C H F Introduced 2 y r E U R - C H F s w a p s p r e a d ( r h s ) E U R C H F ( L H S ) 08 09 10 11 12 13 2.25 2.00 1.75 1.50 1.25 1.00 0.75 0.50 0.25 0.00-0.2 5-0.5 0-0.7 5-1.0 0 Source : Ecowin Reuters, BNP Paribas CHF appears extremely overvalued vs relative interest rates 38

EURCHF is undervalued relative to its long term fair value BNP Paribas FEER for EURCHF BNPP FEER (Fundamental Equilibrium Exchange Rate) is the value of an exchange rate when an economy is operating with an internal balance (i.e. output in line with potential output, full employment and inflation in line with central bank s target) and a sustainable current account balance. 2.10 1.90 1.70 1.50 1.30 1.10 1982 1987 1992 1997 2002 2007 2012 BNP Paribas FEER EURCHF Source : BNP Paribas EURCHF trades significantly below its FEER of 1.40 39

Market positioned neutral CHF EURCHF 50 40 C H F net positioning B N P P a r ib a s F X P o s itio n in g A n a ly s is 30 20 10 0-1 0-2 0-3 0-4 0-5 0 O c t Feb Jun O c t 10 11 Feb Jun O c t 12 Feb Jun O c t 13 14 Source : BNP Paribas Market positioning has turned long CHF for the first time since the floor was introduced 40

Commodity currencies; A surprisingly positive outlook

Fed tapering has been negative for commodity currencies 1.15 4.25 4.00 1.05 3.75 0.95 A U D U S D 3.50 0.85 0.75 Feb Balance Sheet 3.25 3.00 2.75 2.50 thousand billions 0.65 0.55 Q E 1 Q E 2 O peration Twist Q E 3 09 10 11 12 13 2.25 2.00 1.75 Source : Ecowin Reuters, BNP Paribas Expectations of Fed tapering is negative for the commodity currencies 42

AUDUSD not trading rich vs commodity prices AUDUSD vs. AUD exporter commodity prices 1.10 550 1.00 450 0.90 0.80 0.70 AUDUSD (lhs) 350 250 0.60 0.50 Australia Daily Commodity Price Series (RHS) Apr-99 Apr-03 Apr-07 Apr-11 Source : Ecowin Reuters, BNP Paribas 150 50 AUDUSD is not trading that rich against underlying export commodity prices 43

Australian commodity prices stable in 2013 AUD commodity prices relatively stable 120 115 110 C o a l Com m odity price series norm alised to 100 over tim e span 105 100 95 90 85 80 Iro n O re C opper 75 Jun A u g O c t D e c 12 Feb A p r Jun A u g O c t D e c 13 14 Source : Reuters Ecowin, BNP Paribas AUD commodity prices have stabilised in 2013, at odds with notion of a severe terms of trade shock 44

China now providing positive signal AUD NEER vs. Hang Seng China Enterprises index 13000 12500 12000 11500 11000 10500 10000 9500 9000 8500 A U D N E E R H a n g S e n g C h in a E n te r p r is e s In d e x 117.5 115.0 112.5 110.0 107.5 105.0 102.5 100.0 97.5 8000 Jun S e p 11 D e c M a r Jun S e p D e c 12 M a r Jun S e p D e c 13 14 95.0 Source : Ecowin Reuters, BNP Paribas Chinese stocks signals AUD upside 45

BNP Paribas FEER AUDUSD vs AUD PPP BNP Paribas FEER for AUDUSD BNPP FEER (Fundamental Equilibrium Exchange Rate) is the value of an exchange rate when an economy is operating with an internal balance (i.e. output in line with potential output, full employment and inflation in line with central bank s target) and a sustainable current account balance. AUDUSD 1.20 1.00 BNP Paribas FEER 0.80 0.60 OECD's PPP estimate 0.40 Jan-80 Jan-85 Jan-90 Jan-95 Jan-00 Jan-05 Jan-10 Source : BNP Paribas We believe that BNP Paribas FEER is more useful than PPP and indicates that AUDUSD is not overvalued 46

Scandinavia; Appreciation but NOK outperforms

Norwegian inflation pressures have increased in recent months Norwegian CPI-ATE (% y/y) 3.5 C PI-ATE (% y/y) 3.0 Inflation pressures have increased in recent m onths 2.5 2.0 1.5 1.0 0.5 0.0 04 05 06 07 08 09 10 11 12 13 Source : Ecowin Reuters, BNP Paribas Inflation has picked up in Norway in recent months 48

Interest rate differentials suggest scope for EURNOK decline 2-year euro-norwegian swap spread (bps) -1.1 EURNOK (RHS) 8.6 8.5-1.2 8.4-1.3 8.3 8.2-1.4 8.1 8.0-1.5 7.9 7.8-1.6 7.7 7.6-1.7 7.5 EUR-NO K 2Y swap spread 7.4-1.8 Jan M a r Apr M a y Jun Jul Aug Sep O c t N o v D e c Jan 13 14 7.3 Source : Ecowin Reuters, BNP Paribas NOK is trading far weaker than signalled by the rates market 49

NOK appears undervalued relative to oil prices 110.5 108.0 105.5 103.0 Brent oil prices (R H S) 130 120 110 100 90 100.5 N O K T W I 80 98.0 70 95.5 60 93.0 50 90.5 40 88.0 08 09 10 11 12 13 30 Source : Ecowin Reuters, BNP Paribas NOK has weakened relative to oil prices. Our commodity strategists target Brent at $115 per barrel 50

Our STEER model signals EURSEK is undervalued BNP Paribas STEER * fair value model EURSEK BNPP STEERs are regression based short-term fair-values based on relationships between exchange rates, interest rate markets, equity markets and commodity markets. 9.20 9.10 9.00 8.90 8.80 8.70 8.60 23-Oct-2013 23-Nov-2013 23-Dec-2013 STEER EURSEK Source : BNP Paribas EURSEK appears undervalued according to STEER 51

Short-term rates are the principal driver of EURSEK EURSEK vs 2 year Swap Differential 1.00 12.0 0.75 11.5 0.50 0.25 0.00-0.2 5-0.5 0-0.7 5-1.0 0-1.2 5 2 Y r S w a p S p r e a d E U R S E K 09 10 11 12 13 14 11.0 10.5 10.0 9.5 9.0 8.5 8.0 Source : Ecowin Reuters, BNP Paribas We believe the Riksbank will hike rates at least 12 months ahead of the ECB. The downward trend will continue. 52

EURSEK is strongly linked to the EZ business cycle German IFO Expectations vs EURSEK deviation from 12 month average 75 80 85 90 95 100 105 110 G e r m a n IF O b u s in e s s expectations (LH S inverse) 1.60 1.35 1.10 0.85 0.60 0.35 0.10-0.1 5-0.4 0 115 E U R S E K ( s p o t d e v ia tio n fr o m 1 2 m m a ) 92 94 96 98 00 02 04 06 08 10 12 14-0.6 5-0.9 0 Source : Ecowin Reuters, BNP Paribas SEK should appreciate as the EZ business cycle improves 53

Top FX Trade Ideas for 2014 1. Short EURUSD target 1.25 One of our strongest themes for 2014 is the widening of US short-term yield spreads versus those in the eurozone. This widening trend should produce a sharp fall in EURUSD despite the recent market focus on the zone s robust current account surplus. 2. Long USDJPY target 118 As the USD rebounds in 2014, we forecast it to make its largest gains against the currencies with the loosest monetary policy. The BoJ is likely to ensure that policy is loosest in Japan and that JGB yields remain low. 3. Long NAFTA basket: Long USD, MXN and CAD vs short CHF and JPY The improvement in US growth will boost economic activity in Canada and Mexico, providing support to the CAD and MXN. Meanwhile, the ultra-low yielding CHF and JPY remain our funding currencies of choice 4. Short EURGBP target 0.78 The UK economy should continue to grow strongly in 2014 causing markets to price in higher yields, especially relative to the eurozone. In addition, the GBP remains very cheap according to our longer-term BNP Paribas FEER model. 5. Long NOKSEK target 1.1460 Macroeconomic favour Norway over Sweden in 2014. Both the Norges Bank and the Riksbank are likely to keep interest rates on hold throughout most or all of 2014, but we except a strong Norwegian economy to support a rebound in NOKSEK. 54

Top FX Trade Ideas for 2014 6. Position for taper stress via GBPUSD put spreads and FVAs We recommend going long forward volatility in a carry-efficient manner, to position for an intensification of stress related to Fed tapering. 7. Long GBPSEK targeting 11.20 Play the relative housing cycle We think a number of currencies like GBP, NZD, NOK and SEK are being increasingly driven by trends in their housing markets. The UK housing market is growing at a fast pace, in contrast in Sweden the housing market is slowing modestly. 8. Positioning for limited upside in EURCHF To position for modest upside in EURCHF, while exploiting expensive topside vols relative to higher delta topside and the SNB s floor at 1.20 EURCHF, we propose entering long EURCHF spot and selling a 12m 2x1 1.26/1.3125 ratio call spread 9. Long AUDNZD target 1.2000 The relative pricing of rate hike expectations between the RBA and the RBNZ appears extreme. 125bp of rate hikes from the RBNZ are expected by mid-2014. In contrast, there is scope for RBA rate expectation to rebound. 10. Prepare for ECB QE via long EUR forward vols To position for a weaker EUR we favour purchasing forward volatility in EUR crosses taking advantage of very low base vols in the entire EUR complex, coupled with flat curves, resulting in a very mild decay profile for the entire EUR complex. 55

Forecasts USD Bloc Spot Q1 '14 Q2 '14 Q3 '14 Q4 '14 Q1 '15 Q2 '15 Q3 '15 Q4 '15 EUR/USD 1.36 1.28 1.26 1.25 1.23 1.23 1.23 1.22 1.25 USD/JPY 104 108 112 114 118 120 120 120 120 USD/CHF 0.91 0.96 0.98 1.00 1.02 1.06 1.07 1.11 1.08 GBP/USD 1.64 1.54 1.56 1.56 1.58 1.60 1.62 1.63 1.64 USD/CAD 1.10 1.10 1.10 1.09 1.08 1.08 1.08 1.09 1.10 AUD/USD 0.88 0.88 0.88 0.90 0.92 0.93 0.93 0.92 0.90 NZD/USD 0.83 0.79 0.79 0.80 0.81 0.82 0.82 0.81 0.80 USD/SEK 6.48 6.88 6.90 6.96 6.99 6.91 6.83 6.89 6.64 USD/NOK 6.19 6.17 6.19 6.08 6.10 6.02 5.93 5.98 5.76 EUR Bloc Spot Q1 '14 Q2 '14 Q3 '14 Q4 '14 Q1 '15 Q2 '15 Q3 '15 Q4 '15 EUR/JPY 141 138 141 143 145 148 148 146 150 EUR/GBP 0.82 0.83 0.81 0.80 0.78 0.77 0.76 0.75 0.76 EUR/CHF 1.23 1.23 1.24 1.25 1.25 1.30 1.32 1.35 1.35 EUR/SEK 8.79 8.80 8.70 8.70 8.60 8.50 8.40 8.40 8.30 EUR/NOK 8.39 7.90 7.80 7.60 7.50 7.40 7.30 7.30 7.20 EUR/DKK 7.46 7.46 7.46 7.46 7.46 7.46 7.46 7.46 7.46 CEEMEA Spot Q1 '14 Q2 '14 Q3 '14 Q4 '14 Q1 '15 Q2 '15 Q3 '15 Q4 '15 EUR/CZK 27.5 27.0 27.0 27.0 27.0 26.5 26.0 25.5 25.0 EUR/HUF 302 300 295 295 300 290 285 285 285 USD/ZAR 10.8 10.50 10.30 9.90 10.00 10.20 10.20 10.50 10.70 USD/TRY 2.24 2.25 2.20 2.22 2.20 2.22 2.25 2.24 2.22 EUR/RON 4.54 4.35 4.40 4.25 4.42 4.30 4.30 4.39 4.42 USD/RUB 33.77 34.01 34.24 33.26 33.50 33.50 34.00 33.75 34.80 EUR/PLN 4.16 4.00 3.90 3.95 4.15 4.10 4.16 4.16 4.18 USD/ILS 3.49 3.60 3.65 3.62 3.60 3.75 3.83 3.79 3.76 Asia Bloc Spot Q1 '14 Q2 '14 Q3 '14 Q4 '14 Q1 '15 Q2 '15 Q3 '15 Q4 '15 USD/SGD 1.28 1.28 1.30 1.28 1.30 1.32 1.35 1.35 1.40 USD/MYR 3.20 3.30 3.32 3.35 3.40 3.40 3.42 3.45 3.50 USD/IDR 9053 12300 12500 12800 13000 13000 13200 13300 13500 USD/THB 32.9 33.80 33.80 33.50 34.00 34.00 34.50 35.00 35.50 USD/PHP 46.3 45.20 45.80 45.20 45.00 45.00 45.50 45.00 46.00 USD/HKD 7.76 7.80 7.80 7.80 7.80 7.80 7.80 7.80 7.80 USD/RMB 6.05 6.02 5.93 6.00 5.89 ----- ----- ----- 5.95 USD/TWD 30.1 30.30 30.50 30.30 30.00 30.00 29.70 29.70 29.50 USD/KRW 1064 1080 1040 1020 1020 1020 1000 970 980 USD/INR 61.6 63.00 65.00 66.00 66.00 67.00 69.00 68.00 69.00 USD/VND 19100 21300 21400 21400 21400 21500 21500 21500 21500 LATAM Bloc Spot Q1 '14 Q2 '14 Q3 '14 Q4 '14 Q1 '15 Q2 '15 Q3 '15 Q4 '15 USD/ARS 6.80 7.13 7.52 8.35 9.27 9.83 10.42 11.04 11.70 USD/BRL 2.34 2.50 2.55 2.75 2.60 2.57 2.55 2.50 2.45 USD/CLP 541 510 515 520 520 510 500 490 500 USD/MXN 13.2 13.15 12.90 12.70 12.60 12.30 12.10 12.00 12.20 USD/COP 1969 1930 1920 1890 1890 1900 1880 1850 1850 USD/VEF 6.29 7.50 7.50 7.50 7.50 7.50 7.50 7.50 7.50 USD/PEN 2.81 2.79 2.79 2.78 2.78 2.77 2.76 2.75 2.75 Others Spot Q1 '14 Q2 '14 Q3 '14 Q4 '14 Q1 '15 Q2 '15 Q3 '15 Q4 '15 USD Index 81.11 85.30 86.50 87.07 88.19 88.34 88.21 88.77 87.29 *End Quarter 56

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