Weekly Commentary 18 July 2014

Contact your treasury specialist Corporate Treasury 1800 60 70 20 or 1800 30 30 03 Business Banking Treasury 1800 79 01 53 Institutional Treasury 1800 60 70 40 Specialised Finance +353 (0) 1 790 0001 UK Sales Team 0800 039 0038 (within the UK) US Sales Team +1 203 391 5555 Keep in touch with the markets, visit www.treasuryspecialists.com Weekly Commentary 18 July 2014 Themes from the week Euro drifts lower Headlines for the week ahead BoE minutes, UK Q1 GDP, EA PMI s, US retail sales & durable goods Inflation in the Euro area confirmed at 0.5%... The detailed June data show energy prices have stopped falling and are now adding a little to inflation, while services inflation has also picked up a bit. Industrial production fell 1.1% in May and has fallen by 0.2% in the three months to May. The annual increase is still positive, +0.5%, but the manufacturing sector in Europe appears to be coming off the boil of late, not helped by the weak production numbers in France recently. Not much reaction to this data but the Euro has drifted down in the latter half of the week to the lower half of $1.35 UK CPI rises to 1.9% in June up from 1.5% in May, which was a much higher rate then the consensus forecast 1.6%. This immediately prompted increased speculation that the Bank of England may raise rates by year end. Sterling rose as did gilt yields. However, a large part of the jump in inflation in June is down to price increases for clothing, food and airfares which may prove to be seasonal, and temporary, effects UK unemployment rate falls again to 6.5% in May from 6.6% in April, closer to the Bank of England estimate of what is the long term sustainable rate. However, the pace of annual earnings growth declined further to just 0.3% in May from 0.8% in April (smallest yearly increase in 5 years) which brings further headaches to BoE members who are concerned that the lack of wage pressure signals invisible slack in the economy US retail sales show solid gains sales in June rose by 0.2% with May s gain revised up to 0.5% from 0.3%. Auto sales were surprisingly weak in June weighing down on the headline increase as ex cars the gains last month appeared broad based across retail categories. Core sales have increased about 1.7% in Q2 as sales recovered from the weakness of Q1. The robust increase in consumption could add around to 1% to GDP in Q2 Yellen sticks to Fed script in her bi-annual testimony to Congress the Fed chair offered little new information. Her overall view was more positive but there are mixed signals concerning the economy and the Fed needs to be careful to make sure the economy is on a solid trajectory before considering raising rates. The continued slow pace of wages growth is a sign of the significant slack in the economy and a high degree of monetary policy accommodation remains appropriate The week ahead quiet start to the week but the BoE minutes on Wednesday brings the small chance of a split vote. Busier on Thursday and Friday with US retail sales and durable good, Irish property price, UK Q2 GDP and also Euro area flash PMIs Patrick Mullane Data section contents (changes on the week) Highlights for the week ahead Commodities Prev Fcst Cons Tues US CPI Inflation 2.1% 2.1% 2.1% Wed US Existing Home Sales 4.9% 1.6% 1.6% Bank of England Minutes EA Consumer Confidence -7.5-7.5-7.5 Thurs EA flash PMI s 52.8 52.7 52.7 US Retail Sales -0.5% 0.3% 0.3% US Initial Jobless Claims 302k Ireland Property Prices 2.3% US New Home Sales 18.6% -4.8% -4.8% Fri IFO Expectations 104.8 104.4 104.4 Spot rates UK Q2 GDP 0.8% 0.8% 0.8% US Durable Goods -0.9% 0.5% 0.5% EUR/GBP 0.7918 EUR/CHF 1.2146 EUR/USD 1.3514 EUR/JPY 137.03 GBP/USD 1.7066 EUR/CAD 1.4506 EUR/SEK 9.2461 EUR/PLN 4.1463 EUR/NOK 8.3705 EUR/ZAR 14.3764 EUR/HUF 309.58 EUR/CZK 27.424 2 year 3 year 5 year 7 year 10 year 15 year 20 year EUR 0.37 0.45 0.69 0.99 1.41 1.88 2.06 GBP 1.39 1.75 2.21 2.49 2.75 3.02 3.15 USD 0.73 1.17 1.84 2.24 2.64 3.04 3.21 Official rates Current Q3 14 Q4 14 Q1 15 Fcst Cons Fcst Cons Fcst Cons EUR 0.15 0.15 0.15 0.15 0.15 0.15 0.15 GBP 0.50 0.50 0.50 0.50 0.50 0.75 0.750.32 0.01 0-0.25 0-0.25 0-0.25 0-0.25 0-0.25 0-0.25 0-0.25 Recent research View recently published reports at www.treasuryspecialists.com/research, including: The Bulletin (monthly analysis of international and Irish markets) The Outlook (quarterly analysis of trends in the Irish economy) All rates quoted are indicative market rates

Data section contents Data section showing % changes on the week Long term fixed rates Commodity prices Europe Euro drifts lower The euro drifted lower over the course of the week. It traded down to almost $1.35 against the dollar, from over $1.36 last Friday, and also fell against sterling and the yen. Comments by Mario Draghi may have played some role in this. In remarks to the Committee on Economic and Monetary Affairs of the European Parliament on Monday, he said the ECB is closely monitoring exchange rate developments, noting the exchange rate is an important driver of future inflation in the euro area, and that in the present context (of low inflation and weak growth), an appreciated exchange rate is a risk to the sustainability of the recovery. This suggests the ECB is not too happy about the still elevated level of the euro, notwithstanding its fall (of above 2% on a trade-weighted basis) over the past couple of months. Illustrating the weak nature of the recovery, output in both industry and construction fell in May and in each case is now running below Q1 levels, suggesting there is some downside risk to the consensus forecast for an increase in GDP of 0.3% in the second quarter. Meanwhile, equity markets sold off late in the week following news of the downing of a Malaysia Airlines jet over Ukraine and Israel s ground offensive in Gaza, while bond yields fell. Ireland Irish debt trading at all time low There was a flight to the safety of longer dated bonds this week due to geopolitical risks and worries about Banco Espirito Santo in Portugal. Irish yields fell in that environment with 2 year yields falling to just 10bps and 10-year yields trading at an all time low of just 2.25%. Irish exports continue to improve. Preliminary data showed that seasonally adjusted export rose by over 1bn in May to 7.9bn. Imports also rose but by a lesser extent so the terms of trade improved. In the year to May, the value of exports rose by 9% ( 660m) with the driver of the annual gain an increase in chemicals (+14%) and pharmaceuticals (+12%). United Kingdom Inflation, employment data increase speculation on rate move Annual CPI inflation rose to 1.9% in June up from 1.5% in May, which was a much higher rate then the consensus forecast of 1.6%. The increase in the rate was largely down to price increases in clothing, food and airfares which may prove to be seasonal, and temporary, effects. Nonetheless, the increase to close to the Bank of England target rate of 2.0% prompted a rise in gilt yields and boosted Sterling. In addition, UK employment rose strongly over the three months to May and the unemployment rate declined further (to 6.5%) but annual earnings growth remains very subdued falling to a multi-year low of just 0.3%. This creates something of a dilemma for the Bank of England MPC in deciding when to raise interest rates, though if the unemployment continues to fall at its current pace then a first hike early next year is still probable. United States Economy rebounding The latest data continue to point to a rebound in economic activity after a very weak first quarter. Manufacturing output rose by almost 1.5% in Q2 after increasing by 0.4% in Q1, while the growth in retail sales accelerated to 2.3% from 0.2%. Housing starts fell in June but still rose in Q2 and the national home builders index of activity rose further in July. In her semi-annual testimony to Congress, Fed Chair Janet Yellen said the economy continues to improve (but) the recovery is not yet complete, noting that the unemployment rate remains above its longer-run normal rate and inflation remains below its target of 2%. She said that asset purchases are set to conclude after the October meeting and reiterated that interest rates are likely to remain unchanged for a considerable time after asset purchases end. However, she also emphasised that the path of interest rates remains dependent on the Fed s assessment of incoming information and the implications for the economic outlook, adding that if the labour market continues to improve more quickly than anticipated (by the Fed) then increases 2 Bank of Ireland Global Markets

Data section contents Data section showing % changes on the week Long term fixed rates Commodity prices in the federal funds rate likely would occur sooner and be more rapid than currently envisioned. Despite those latter remarks, government bond yields fell on the week amid a flight to quality prompted by geo-political developments. The dollar was also generally firmer, gaining some ground against the euro and sterling. Japan Japan s recovery still on track according to BoJ Industrial production rose by a better than expected 0.7% in May with the annual increase improving to 1.0% from 0.8%. The impact of the sales tax increase has not been as great as feared and after an initial fall in spending and production the economy appears to be picking up once more. The Bank of Japan kept policy on hold at its June meeting as it continues to analyse the latest data before considering more QE, although it has to be said the chances are probably decreasing with each relatively more positive item of data. Governor Kuroda dismissed talk that the recovery was under threat and predicated that the economy would grow at above its potential over the next three years. 3 Bank of Ireland Global Markets

Data section changes on the week EUR/GBP Spot 0.7918-0.34% 1M 3 3M 9 6M 21 12M 58 EUR/USD Spot 1.3514-0.69% 1M 2 3M 5 6M 10 12M 29 GBP/USD on the week Spot 1.7066-0.33% 1M -4 3M -14 6M -33 12M -88 EUR currency pairs EUR/CAD 1.4506-0.65% EUR/AUD 1.4391-0.64% EUR/NZD 1.5568 0.84% EUR/CHF 1.2146 0.05% EUR/JPY 137.03-0.65% EUR/SEK 9.2461 0.08% EUR/NOK 8.3705-0.41% EUR/HUF 309.58-0.08% EUR/PLN 4.1463 0.15% EUR/ZAR 14.3764-1.32% EUR/CZK 27.424 0.06% USD currency pairs USD/CAD 1.0731 USD/AUD 1.0652-0.08% USD/NZD 1.1522 1.51% USD/CHF 0.8987 0.69% USD/JPY 101.40 0.04% USD/CNY 6.2075 0.07% USD/MXN 12.9585-0.27% USD/SGD 1.2410 0.03% USD/BRL 2.2336 0.59% USD/THB 32.12 USD/ZAR 10.6400-0.64% GBP currency pairs on the week GBP/CAD 1.8318-0.26% GBP/AUD 1.8175-0.23% GBP/NZD 1.9656 1.23% GBP/CHF 1.5338 0.42% GBP/JPY 173.05-0.32% GBP/SGD 2.1178-0.30% GBP/MYR 5.4301-0.39% GBP/NOK 10.5690 0.12% GBP/HKD 13.2266-0.32% GBP/SEK 11.6753 0.50% GBP/DKK 9.4148 0.36% GBP/ZAR 18.1570-0.98% on the Week Base O'night 1 week 2 week 1 M 2 M 3 M 6 M 9 M 12 M EUR 0.15 0.00 0.02 0.00 0.08 0.13 0.17 0.26 0.00 0.43 GBP 0.50 0.48 0.48 0.00 0.50 0.52 0.56 0.71 0.00 1.06 USD 0-0.25 0.09 0.12 0.00 0.15 0.20 0.23 0.33 0.00 0.55 on the Week 2 year Chng 5 year Chng 7 year Chng 10 year Chng EUR 0.32 00.1 0.63-0.01 0.94-0.03 1.36-0.07 GBP 1.33 0.02 2.14 0.00 2.43 0.00 2.70-0.02 USD 0.67 0.05 1.79 0.06 2.21 0.02 2.61-0.01 Government bond yields (YTM) on the Week 2 year Chng 5 year Chng 10 year Chng 30 year Chng Ireland 0.11-0.02 0.80-0.04 2.27-0.04 Germany 0.03 0.01 0.31 0.01 1.15-0.05 2.08-0.07 US 0.48 0.03 1.67 0.03 2.50-0.02 3.31-0.03 UK 0.83 0.00 1.97-0.02 2.57-0.03 3.31-0.06 Prime Rate Bank of Ireland prime rate 0.72 on the Week ISEQ 4701 0.94% DOW Jones 17078 0.79% S&P 500 1975 0.37% SMI 8511 0.51% Nasdaq 4419 0.08% FTSE 100 6749 0.89% Eurostoxx 50 3164 0.23% Nikkei 15216 0.34% Commodities on the Week Brent 107.57 0.85% WTI Cushing 103.00 2.15% Gold 1307.16-2.29% Wheat 532.50 3.45% Emissions Allowance 6.13 7.17% 4 Bank of Ireland Global Markets

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