FX STRATEGY FX QUANT INSIGHT BNP Paribas 10 September 2013 Non Independent Research Marketing Communication James Hellawell +44 (0)20 7595 8485 Michael Sneyd +44 (0)20 7595 1307 BNP Paribas indicates gains in the AUD, NZD and CAD may be reversed USDJPY and EURCHF remain sensitive to investor risk appetite according to The AUD, NZD and CAD appear overvalued according to as they rose along with risk appetite this week. Further gains in global equities should continue to support USDJPY and EURCHF according to. EURNOK has converged back in line with its, while EURSEK has scope to continue to decline. Investor risk appetite, proxied in BNP Paribas by the MSCI world equity index, rebounded sharply over the past week (up over 2.3%). In FX, the AUD, NZD and CAD typically the more risk-sensitive currencies have been the best performing currencies over this period. However, all three now appear significantly overvalued according to BNP Paribas. Based on the latest relationships captured by, the sensitivities of AUDUSD, NZDUSD and USDCAD to risk appetite remain low. In recent months, interest-rate differentials and relative local equity market performance have been the main drivers of the commodity currencies that is, domestic rather than global variables have been important for these currencies. Unless the AUD, NZD and CAD manage to permanently reestablish their links with global risk appetite, the domestic variables suggest that these currencies may decline back towards their respective s of 0.9015 AUDUSD, 0.7815 NZDUSD and 1.0460 USDCAD. BNP Paribas indicates that USDJPY and EURCHF are the most sensitive currencies to global equity performance. USDJPY is trading broadly in line with its of 101.50 (Chart 8), while EURCHF is trading around 1 standard deviation below its of 1.2445. A further rebound in global equities should continue to support these currency pairs. Chart 1: NZDUSD overvalued relative to 0.84 Chart 2: Scope for EURNOK to continue to decline 0.83 0.82 0.81 0.80 0.79 0.78 0.77 0.76 0.75 NZDUSD Source: Reuters Ecowin, Bloomberg, BNP Paribas Source: Reuters Ecowin, Bloomberg, BNP Paribas Non Independent Research - Marketing Communication Please refer to important information at the end of the report
continues to support short EURNOK and EURSEK EURSEK have scope to continue to decline according to This publication is classified as non-objective research EURUSD is currently trading very close to its fair value of 1.3260 (Chart 2). indicates that relative and global equity performance will be important to EURUSD, having become key drivers of the currency recently. Among the other EUR crosses, the spike downwards in EURGBP triggered a signal by that the pair could rise, with the fair value having recently been stable around 0.8650. After several weeks of indicating that EURNOK has been overvalued, the recent decline in EURNOK following the strong inflation release for August has brought the exchange rate back in line with its of 8.8630. Meanwhile, continues to indicate further downside for both EURSEK, although it is trading within its +/-1.5 z-score corridors. EURSEK s deviation from is around 1.0 z-score (compared with 2.3 on 2 September). The fair value for EURSEK has risen slightly over the past week to 8.5870. Hence, EURSEK still appear overstretched and the crosses remain vulnerable to a further decline. Chart 3: Deviation from short-term value (z-score) GBPUSD remains significantly overbought, according to, while EURGBP remains significantly oversold. EURNOK has moved back in line with its, while EURSEK has scope to continue to decline. The recent rises in AUDUSD and NZDUSD appear overstretched. EURUSD and USDJPY are trading broadly in line with their s. EURUSD GBPUSD AUDUSD NZDUSD USDJPY USDCAD EURNOK EURSEK EURGBP EURCHF Spot 1.326 1.5724 0.9296 0.8058 100.33 1.0354 7.8594 8.6892 0.84333 1.23965 Fair Value 1.3260 1.5350 0.9015 0.7815 101.5000 1.0460 7.8630 8.5870 0.8635 1.2445 Over (+ve) Under (-ve) valuation* 0.00 2.22 1.73 2.23-0.47-1.65-0.03 1.08-1.80-0.69 Forecast Bias** - - - * Over- or under-valuation of spot against, measured as a z-score (i.e. % mis-valuation divided by the standard deviations of misvaluations over the past year). ** A mis-valuation greater than 1.5 is considered a significant predictor of exchange-rate movements over the weeks ahead. An overvaluation suggests that the exchange rate is likely to fall, while an under-valuation suggests that a currency is likely to rise. 10 September 2013 2
BNP Paribas EM A rebound in EM currencies over the past week has caused several overvalued USD crosses to fall towards their s. USDZAR and USDINR now appear oversold and are liable to rise according to. USDKRW, USDTHB and USDPHP appear oversold, while the Latam currencies have converged in line with their s. EM currencies have been supported by local equity and bond performance USDINR appears oversold according to and may rebound USDBRL and USDMXN have declined in line with their s USDZAR appears oversold according to and is liable to rise BNP Paribas indicates that, across EM, stronger local market equities and a decline in CDS have supported currencies. In last week s edition of FX Quant Insight, several EM currencies appeared oversold against the USD. The rebounds in many EM currencies have caused them to move back towards their s, while several currencies now appear overbought according to. In Asia, USDIDR and USDINR, for example, have declined towards their s over the past week. USDIDR remains significantly overvalued by 1.7 z-scores and has scope to continue to decline according to. The fall in USDINR, on the other hand, appears overstretched according to, signalling that the pair is now predisposed to rise towards its fair value of 65.75 (Chart 27). Elsewhere in Asia, USDKRW, USDTWD and USDPHP appear oversold and liable to rise. In Latam, USDBRL and USDMXN were significantly overvalued according to last week. Both are now trading in line with their s, with the fair values having also declined due to strong local equity performance and declines in Brazilian and Mexican CDS. USDCOP and USDCLP are also trading broadly in line with their s once again, but this has been driven by moves in rather than the exchange rate. indicates that local market equities and CDS are the main drivers of Latam currencies. In CEEMEA, most currency pairs are trading broadly in line with their, with USDTRY returning to its, while EURRON has rebounded after appearing very cheap. indicates that the recent decline in USDZAR to 10.04 is overstretched and the pair is liable to rise according to. Its fair value is 1.5 z-score, or 2.3% higher, at 10.2270. 10.54 10.34 10.14 9.94 9.74 9.54 9.34 Chart 1: USDZAR appears oversold 9.14 USDZAR Source: Reuters Ecowin, Bloomberg, BNP Paribas 2.0% 1.0% 0.0% 1.0% 2.0% 3.0% Chart 2: Latam currencies supported by equities and CDS % (03 Sep 2013 09 Sep 2013) Contribution 4.0% 5.0% Actual move in currencies USDBRL USDCLP USDMXN Commodities Global Equities Rate Diff Local Equities Local CDS SPOT Source: Reuters Ecowin, Bloomberg, BNP Paribas 10 September 2013 3
Chart 3: CEE currencies- Deviation from short-term value(z-score) 3.0 2.5 2.0 1.5 1.0 0.5 0.0-0.5-1.0-1.5-2.0 indicates that USDZAR has scope to rebound towards its of 10.2270. All other CEEMEA currencies are trading within their +/-1.5 z-score corridors around. EURRON is trading back in line with its after appearing very undervalued in recent weeks. Over the week, the s for USDRUB and USDTRY have declined, driven by favourable moves in interest-rate differentials and a rebound in local equities. 03-Sep-2013 10-Sep-2013 Chart 4: Asian currencies - Deviation from short-term value(z-score) 5.0 4.0 3.0 2.0 1.0 0.0-1.0-2.0-3.0-4.0 03-Sep-2013 10-Sep-2013 USDIDR and USDINR, which have recently been significantly overvalued, have declined over the past week. USDIDR remains overvalued, while USDINR now appears undervalued according to and may rebound. USDTWD and USDKRW continue to appear undervalued according to s. USDPHP also appears undervalued. USDTHB is trading at the top of its corridor. A strong local equity performance and a decline in the CDS suggest the pair should decline. 2.0 1.5 1.0 0.5 0.0-0.5-1.0-1.5-2.0 Chart 5: Latin America currencies - Deviation from short-term value(z-scor) Local equity market performance and declines in CDS have been supportive of Latam currency strength over the week. USDBRL and USDMXN have declined back in line with their s after having appeared overvalued last week. USDCOP and USDCLP are also trading in line with their, but due to a move in their fair values. Going forward, indicates that local equity performance and CDS will remain the prominent drivers for Latam currencies. 03-Sep-2013 10-Sep-2013 10 September 2013 4
G10 Chart 6: EURUSD short term value (FV=1.3260) 1.36 1.34 1.32 1.30 1.28 1.26 Chart 7: GBPUSD short term value (FV=1.5350) 1.61 1.59 1.57 1.55 1.53 1.51 1.49 1.47 1.45 1.24 EURUSD 1.43 GBPUSD Chart 8: USDJPY short term value (FV=101.50) Chart 9: USDCAD short term value (FV=1.0460) 1.08 106 1.07 101 1.06 1.05 96 1.04 91 1.03 1.02 86 USDJPY 1.01 USDCAD Chart 10: AUDUSD short term value (FV=0.9010) 1.01 0.99 0.97 0.95 0.93 0.91 0.89 0.87 Chart 11: NZDUSD short term value (FV=0.7820) 0.84 0.83 0.82 0.81 0.80 0.79 0.78 0.77 0.76 0.85 AUDUSD 0.75 NZDUSD 10 September 2013 5
Chart 12: EURGBP short term value (FV=0.8640) Chart 13: EURCHF short term value (FV=1.2440) 1.26 0.90 0.88 1.25 0.86 1.24 0.84 1.23 0.82 1.22 0.80 EURGBP 1.21 EURCHF Chart 14: EURNOK short term value (FV=7.8630) Chart 15: EURSEK short term value (FV=8.5870) 8.09 7.99 7.89 7.79 7.69 7.59 8.82 8.72 8.62 8.52 8.42 7.49 EURNOK 8.32 EURSEK 10 September 2013 6
CEEMEA Chart 16: EURPLN short term value (FV=4.2790) Chart 17: EURCZK short term value (FV=25.8060) 4.36 26.10 4.31 26.00 25.90 4.26 25.80 4.21 25.70 25.60 4.16 EURPLN Chart 18: EURHUF short term value (FV=299.60) 306 304 302 300 298 296 294 25.50 EURCZK Chart 19: EURRON short term value (FV=4.4440) 4.61 4.56 4.51 4.46 4.41 292 4.36 290 288 4.31 EURHUF EURRON Chart 20: USDZAR short term value (FV=10.2270) Chart 21: USDTRY short term value (FV=2.0210) 10.54 10.34 10.14 2.06 2.01 9.94 9.74 9.54 9.34 9.14 USDZAR Chart 22: USDILS short term value (FV=3.6390) 3.77 3.72 3.67 1.96 1.91 1.86 1.81 USDTRY Chart 23: USDRUB short term value (FV=32.8600) 33.52 33.02 3.62 32.52 3.57 32.02 3.52 USDILS 31.52 USDRUB 10 September 2013 7
Asia Chart 24: USDKRW short term value (FV=1098) 1174 1164 1154 1144 1134 1124 1114 1104 1094 1084 USDKRW Chart 26: USDIDR short term value (FV=11216) 11750 11550 11350 11150 10950 10750 10550 10350 10150 Chart 25: USDMYR short term value (FV=3.2950) 3.41 3.36 3.31 3.26 3.21 3.16 3.11 3.06 3.01 USDMYR Chart 27: USDINR short term value (FV=65.7460) 68.20 66.20 64.20 62.20 60.20 58.20 56.20 9950 USDIDR 54.20 USDINR Chart 28: USDTHB short term value (FV=31.8830) Chart 29: USDSGD short term value (FV=1.2780) 32 32 31 31 30 30 1.29 1.28 1.27 1.26 1.25 29 USDTHB 1.24 USDSGD Chart 30: USDPHP short term value (FV=44.8730) Chart 31: USDTWD short term value (FV=29.9440) 45.60 45.10 44.60 44.10 30.50 30.40 30.30 30.20 30.10 43.60 43.10 42.60 42.10 41.60 USDPHP 30.00 29.90 29.80 29.70 29.60 29.50 USDTWD 10 September 2013 8
Latin America Chart 32: USDBRL short term value (FV=2.2770) Chart 33: USDCLP short term value (FV=508.80) 2.46 2.41 2.36 2.31 2.26 2.21 2.16 2.11 USDBRL Chart 34: USDMXN short term value (FV=13.1010) 13.70 13.50 13.30 13.10 12.90 12.70 12.50 12.30 USDMXN Chart 36: USDCOP short term value (FV=1933) 522 517 512 507 502 497 492 USDCLP Chart 35: USDPEN short term value (FV=2.7890) 2.86 2.84 2.82 2.80 2.78 2.76 2.74 2.72 2.70 USDPEN 1955 1935 1915 1895 1875 1855 USDCOP 10 September 2013 9
CEEMEA Currency pair Spot Fair Value Deviation Forecast Bias EURPLN 4.2670 4.2790-0.32 - EURCZK 25.8230 25.8060 0.16 - EURHUF 300.60 299.60 0.46 - EURRON 4.4700 4.4440 0.76 - USDZAR 9.9870 10.2270-1.44 USDTRY 2.0260 2.0210 0.25 - USDILS 3.6080 3.6390-0.90 - USDRUB 33.0720 32.8600 0.94 - Asia Currency pair Spot Fair Value Deviation Forecast Bias USDKRW 1084 1098-1.69 USDMYR 3.2790 3.2950-0.57 - USDIDR 11498 11216 1.66 USDINR 64.3380 65.7460-1.53 USDTHB 32.1450 31.8830 1.45 - USDSGD 1.2700 1.2780-1.03 - USDPHP 43.9140 44.8730-2.28 USDTWD 29.6480 29.9440-2.77 Latin America Currency pair Spot Fair Value Deviation Forecast Bias USDBRL 2.2760 2.2770-0.03 - USDCLP 508.00 508.80-0.25 - USDMXN 13.0980 13.1010-0.03 - USDPEN 2.7970 2.7890 0.60 - USDCOP 1944 1933 0.92 - * Over- or under-valuation of spot against, measured as a z-score (i.e. % misvaluation divided by the standard deviations of misvaluations over the past year). ** A misvaluation greater than 1.5 is considered a significant predictor of exchange-rate movements over the weeks ahead. An over-valuation suggests that the exchange rate is likely to fall, while an under-valuation suggests that a currency is likely to rise. *** Indicates that the signal is from a model which does not pass statistical tests for co-integration, which corresponds to lower forecasting power. See Introducing BNP Paribas EM for further details. Brief Introduction to BNP Paribas s (short-term equilibrium exchange rates) BNP Paribas s are the short-term fair values of exchange rates, estimated based on the relationships between exchange rates, interest-rate markets, equity markets and commodity markets. Deviations from tend to be short lived (from a few days to several weeks) and are a useful input when forecasting exchange-rate movements over the weeks ahead. We use the following variables as the main short-term drivers of exchange rates: interest-rate differentials, relative yield-curve steepness, relative local-market equity performance, global equity-market performance and the oil price. A simple trading rule of buying crosses that are cheap and selling crosses that are expensive has historically been a successful trading strategy, with a Sharpe ratio of around 0.9 for a portfolio of currencies. BNP Paribas s can also be used to explain what factors from other financial markets may be driving exchange rates on a day-to-day basis, can highlight the sensitivity of an exchange rate to other market variable or assist with short-term forecasting. 10 September 2013 10
FX Global Strategy Contacts Foreign Exchange Steven Saywell Global Head of FX Strategy London 44 20 7595 8487 steven.saywell@uk.bnpparibas.com James Hellawell Quantitative Strategist London 44 20 7595 8485 james.hellawell@uk.bnpparibas.com Kiran Kowshik FX Strategist London 44 20 7595 1495 kiran.kowshik@uk.bnpparibas.com Phyllis Papadavid Senior Global FX Strategist London 44 20 7595 8270 phyllis.papadavid@uk.bnpparibas.com Michael Sneyd FX Strategist & Lead Quant Strategist London 44 20 7595 1307 michael.sneyd@uk.bnpparibas.com Daniel Katzive Head of FX Strategy North America New York 1 212 841 2408 daniel.katzive@us.bnpparibas.com Vasilis Koutsaftis FX Options Strategist New York 1 212 471 7973 vasilis.koutsaftis@americas.bnpparibas.com Vassili Serebriakov FX Strategist New York 1 212 841 2409 vassili.serebriakov@us.bnpparibas.com Emerging Markets FX & IR Strategy Mirza Baig Head of FX & IR Asia Strategy Singapore 65 6210 3262 mirza.s.baig@asia.bnpparibas.com Rohit K Garg FX & IR Asia Strategy Singapore 65 6210 3390 rohit.k.garg@asia.bnpparibas.com Jasmine Poh FX & IR Asia Strategy Singapore 65 6210 3418 jasmine.j.poh@asia.bnpparibas.com Yii Hui Wong FX & IR Asia Strategy Singapore 65 6210 3314 yiihui.wong@asia.bnpparibas.com Bartosz Pawlowski Global Head of EM Strategy London 44 20 7595 8195 bartosz.pawlowski@uk.bnpparibas.com Dina Ahmad FX & IR CEEMEA Strategist London 44 20 7595 8620 dina.ahmad@uk.bnpparibas.com Stanislav Petrov FX & IR CEEMEA Strategist London 44 20 7595 1676 stanislav.petrov@uk.bnpparibas.com Diego Donadio Head of FX & IR Latam Strategy Sao Paulo 55 11 3841 3421 diego.donadio@br.bnpparibas.com Thiago Alday FX & IR Latam Strategist Sao Paulo 55 11 3841 3445 thiago.alday@br.bnpparibas.com Production and Distribution please contact: Diana Seifert, Foreign Exchange, London. 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