Weekly Commentary 21 March 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 21 March 2014 Themes from the week spike higher post Fed meeting. dollar rallies Headlines for the week ahead Euro area PMI; US consumer confidence and spending Markets unnerved by the Fed The Fed announced a further tapering of asset purchases following Wednesday s meeting, saying it would reduce the pace of purchases by $10bn to $55bn a month from the start of April. It also said it is likely to continue tapering in measured steps at future meetings. In relation to its forward guidance, the Fed said that, in determining how long to keep interest rates at near zero percent, it will take into account a wide range of information, including measures of labor market conditions, indicators of inflation pressures and inflation expectations.., adding that, based on its current assessment of these factors, it will be appropriate to keep rates unchanged for a considerable time after asset purchases end. Asked what is a considerable time, the Fed Chair, Janet Yellen, said perhaps six months. Assuming asset purchases end in the final quarter of this year, this means the Fed could begin raising interest rates in late spring/early summer next year, which is sooner than the market has been expecting. This together with an upward revision to Fed participants (median) projection of the appropriate level of interest rates at end-2015 and end-2016 (of 25bps and 50bps to 1% and 2.25% respectively) caused a reaction in markets. US bond yields rose quite sharply 10-year yields ended the week about 10bps higher at just under 2.80% while the dollar strengthened against the other major currencies. The euro had risen at the start of the week to trade close to last week s highs of $1.3950 (before Mario Draghi s intervention) but fell to $1.38 post the Fed meeting, while sterling ended the week trading at around $1.65, almost 2% off its recent highs. In his annual Budget, the Chancellor of the Exchequer revised up forecasts for UK growth for this year, to 2.7% from 2.4%, and in 2015, to 2.3% from 2.2% (which is broadly in line with the consensus forecast). The latest labour market data, meanwhile, showed the unemployment rate was unchanged at 7.2% in the three months to January, though whole-economy annual earnings growth picked up a little but remained relatively low at 1.3%. Employment also rose further over the three months to January, by 105k, though the pace of growth slowed to just 0.3% from almost 1% over the three months to November. The minutes of this month s Bank of England MPC meeting revealed nothing new. The MPC has said there is still spare capacity in the labour market than can be absorbed before it needs to raise interest rates. Data section contents (changes on the week) Highlights for the week ahead Commodities Prev Fcst Cons Mon EA Composite PMI 53.3 53.1 53.1 Tues US Consumer Confidence 78.1 78.6 78.6 Wed US New Home Sales 468k 445k 445k IRL Residential Property Prices (Feb) 6.3%y/y US Durable Goods Orders -1.0% 1.0% 1.0% Thurs US GDP (Q4, final est.) 2.4% 2.7%. 2.7% US Jobless Claims 320k 325k 325k EA Money Supply (M3) 1.2% 1.3% 1.3% Fri IRL Retail Sales (Feb) 8.9%y/y Spot rates EA Economic Confidence 101.2 101.5 101.5 US Personal Spending 0.4% 0.3% 0.3% US PCE Inflation 1.2% 0.9% 0.9% EUR/GBP 0.8366 EUR/CHF 1.2179 EUR/USD 1.3802 EUR/JPY 141.13 GBP/USD 1.6493 EUR/CAD 1.5476 EUR/SEK 8.8624 EUR/PLN 4.1950 EUR/NOK 8.3636 EUR/ZAR 14.9754 EUR/HUF 313.01 EUR/CZK 27.446 2 year 3 year 5 year 7 year 10 year 15 year 20 year EUR 0.57 0.73 1.11 1.49 1.94 2.39 2.55 GBP 1.10 1.49 2.10 2.50 2.89 3.23 3.40 USD 0.62 1.04 1.85 2.42 2.94 3.38 3.57 Official rates Current End-Q2 End-Q3 End-Q4 Fcst Cons Fcst Cons Fcst Cons EUR 0.25 0.10 0.25 0.10 0.25 0.10 0.25 GBP 0.50 0.50 0.50 0.50 0.50 0.50 0.50 USD 0-0.25 0-0.25 0-0.25 0-0.25 0-0.25 0-0.25 0-0.25 Highlights for the week ahead Amongst the scheduled releases of note are the latest Euro Area flash PMI data (Monday) the Composite Index has risen further in the opening couple of months of 2014 and US consumer confidence and consumer spending (Tuesday and Friday respectively). Irish data due includes residential property prices and retail sales. Michael Crowley Recent research View recently published reports at www.treasuryspecialists.com/research, including: The Bulletin (monthly analysis of international and Irish markets) UK View (monthly analysis of trends in the UK economy) The Outlook (quarterly analysis of trends in the Irish economy) Irish Property Review (quarterly analysis of Irish property trends) Market Newsflash (up-to-the-minute analysis of key economic developments) All rates quoted are indicative market rates

Data section contents Data section showing % changes on the week Long term fixed rates Commodity prices Euro area Euro loses ground post Fed meeting Having fallen towards the end of last week following Mario Draghi s intervention, the euro regained ground against the dollar at the start of this week to trade close to its recent highs of over $1.3950. The single currency reversed course, however, following the Fed meeting on Wednesday - the dollar staged a broad-based rally post the meeting which saw it gain ground against sterling and the yen as well (see US section below). Market interest rates also rose in line with an increase in US rates, with 3- and 5-year rates increasing by around 7bps and 10bps respectively. Meanwhile, on the data front, annual inflation in February was revised down to 0.7% from an initial estimate of 0.8%, the former matching last October s low. However the initial estimate of the core inflation rate last month was left unchanged at 1%, up from 0.8% in January due to a pick up in both (ex-energy) goods inflation and services inflation. The coming week sees the release of the flash PMI data for March - the Composite PMI rose further over the opening couple of months of this year to reach its highest level in almost 3 years in February. Ireland Value of exports up year-on-year in January The latest Goods Exports and Imports data from the CSO shows the value of goods exports rose by 4% in January 2014 from a year earlier, driven mainly by an increase of 6% in exports of Chemicals and a 9% increase in Food exports, while the value of imports rose by 2% over this period. The trade surplus stood at 2.5bn euro in January of this year, compared to a surplus of just under 2.3bn euro in January 2013. United Kingdom Unemployment rate unchanged at 7.2% In his annual Budget, the Chancellor of the Exchequer revised up forecasts for UK growth for this year, to 2.7% from 2.4%, and in 2015, to 2.3% from 2.2%, and lowered his projections for the budget deficit over the period to 2018 (although the underlying deficit still remains large at an estimated 6.6% in FY 2013/14 and is forecast to fall only gradually over the next few years). The latest labour market data, meanwhile, showed the unemployment rate unchanged at 7.2% in the three months to January, though whole-economy annual earnings growth picked up a little but remained relatively low at 1.3%. Employment also rose further over the three months to January, by 105k, though the pace of growth slowed to just 0.3% from almost 1% over the three months to November. The Bank of England noted in the minutes of this month s meeting that productivity growth seems to have returned to its longer-run average of around 0.5% a quarter, or 2% a year. If the recovery in productivity is sustained then, as the Bank of England also noted, the unemployment rate may fall more slowly than has been the case recently as employment growth will also be slower (with more of any increase in GDP/output accounted for by an increase in productivity, output per worker, than by an increase in employment). In any case, the unemployment rate still remains above its estimated sustainable rate (of 6.0% to 6.5%), so there is still slack in the labour market that can be absorbed before the MPC needs to raise interest rates. UK markets partly took their cue from developments elsewhere with bond yields rising as US yields increased post the Fed meeting, though the changes to the pension system announced in the Budget weighed on UK stocks which underperformed other equity markets. Sterling lost ground against a generally resurgent dollar, falling to around $1.65 (about 2% off its recent highs), though it was largely unchanged against the euro at around 83.5p. United States Markets unnerved by the Fed The Fed concluded Wednesday s policy statement by saying that it had updated its forward guidance but this did not indicate any change in (its) policy intentions as set 2 Bank of Ireland Global Markets

Data section contents Data section showing % changes on the week Long term fixed rates Commodity prices forth in its recent statements. Despite this, though, stocks sold off post the meeting, bond yields rose, and the dollar rallied, strengthening to almost $1.38 against the euro. The Fed acknowledged slower growth recently, which it said was part bad weatherrelated, but was confident enough about the outlook to announce a further $10bn taper of its asset purchases to $55bn a month saying it would continue to taper in measured steps at future meetings. As regards its forward guidance, the Fed said a highly accommodative stance of monetary policy remains appropriate and that in determining how long to maintain the current 0 to 1/4 percent target range for the federal funds rate, the Committee will take into account a wide range of information, including measures of labor market conditions, indicators of inflation pressures and inflation expectations, and readings on financial developments. It also said based on its assessment of these factors it likely will be appropriate to maintain the current target range for the federal funds rate for a considerable time after the asset purchase program ends, especially if projected inflation continues to run below the Committee's 2 percent longer-run goal. If the Fed continues to taper asset purchases at a rate of $10bn at future meetings, then purchases will end in the final quarter of this year. Asked how long is a considerable time after asset purchases end, the Fed Chair, Janet Yellen said perhaps six months (although she added it would depend very much on economic conditions), meaning the Fed could begin raising rates in the spring/early summer next year, which is sooner than the market has been expecting. In addition, the median projection of the sixteen Fed participants individual projections of where interest rates will be at end-2015 and end-2016 are now 1% and 2.25 respectively, up from 0.75% and 1.75% in their December projections. Japan Yen loses ground to the dollar The yen lost ground to the dollar this week falling to over Y102 from just over Y101 at last Friday s close, with all of the decline occurring after Wednesday s Fed meeting. Interestingly, the Bank of Japan Governor, Kuroda noted this week that the excessive appreciation of the yen in the past several years has been corrected albeit not completely. The yen rose from around Y110 against the dollar at the beginning of 2008 to a high of Y76 in later 2011 before reversing course in earnest during 2013). The coming week sees the release of the last CPI data. Both headline and core inflation are back in positive territory. The annual headline rate stood at 1.4% in January, up from -0.9% in January 2013, while the core (ex food) rate was 1.3%, up from -0.5% a year earlier. 3 Bank of Ireland Global Markets

Data section changes on the week EUR/GBP Spot 0.8366 0.14% 1M 1 3M 5 6M 10 12M 26 EUR/USD Spot 1.3802-0.80% 1M -1 3M -2 6M -3 12M -2 GBP/USD on the week Spot 1.6493-0.90% 1M -4 3M -12 6M -24 12M -55 EUR currency pairs EUR/CAD 1.5476 0.25% EUR/AUD 1.5186-1.39% EUR/NZD 1.6136-0.90% EUR/CHF 1.2179 0.37% EUR/JPY 141.13 0.09% EUR/SEK 8.8624-0.28% EUR/NOK 8.3636 0.67% EUR/HUF 313.01 0.34% EUR/PLN 4.1950-0.59% EUR/ZAR 14.9754 0.86% EUR/CZK 27.446 0.41% USD currency pairs USD/CAD 1.1212 0.99% USD/AUD 0.9088-17.99% USD/NZD 1.1692-0.22% USD/CHF 0.8823 1.18% USD/JPY 102.25 0.90% USD/CNY 6.2248 1.22% USD/MXN 13.2347 0.23% USD/SGD 1.2744 0.71% USD/BRL 2.3205-1.09% USD/THB 32.36 0.34% USD/ZAR 10.8385 1.98% GBP currency pairs on the week GBP/CAD 1.8493 0.12% GBP/AUD 1.8147-1.54% GBP/NZD 1.9278-1.08% GBP/CHF 1.4550 0.24% GBP/JPY 168.65-0.04% GBP/SGD 2.1015-0.17% GBP/MYR 5.4542-0.03% GBP/NOK 9.9913 0.53% GBP/HKD 12.7991-0.99% GBP/SEK 10.5902-0.35% GBP/DKK 8.9192-0.09% GBP/ZAR 17.8920 1.15% on the Week Base O'night 1 week 2 week 1 M 2 M 3 M 6 M 9 M 12 M EUR 0.25 0.11 0.16 0.00 0.21 0.25 0.28 0.38 0.00 0.56 GBP 0.50 0.47 0.47 0.00 0.48 0.50 0.52 0.62 0.00 0.90 USD 0-0.25 0.09 0.12 0.00 0.15 0.20 0.23 0.33 0.00 0.56 on the Week 2 year Chng 5 year Chng 7 year Chng 10 year Chng EUR 0.57 0.04 1.11 0.08 1.49 0.08 1.94 0.07 GBP 1.10 0.07 2.10 0.14 2.50 0.13 2.89 0.09 USD 0.62 0.07 1.85 0.18 2.42 0.15 2.94 0.12 Government bond yields (YTM) on the Week 2 year Chng 5 year Chng 10 year Chng 30 year Chng Ireland 0.59 0.02 1.45 0.01 3.07 0.04 Germany 0.21 0.06 0.70 0.10 1.64 0.09 2.51 0.04 US 0.42 0.08 1.72 0.18 2.77 0.11 3.64 0.04 UK 0.68 0.07 1.97 0.09 2.76 0.10 3.53 0.08 Prime Rate Bank of Ireland prime rate 0.72 on the Week ISEQ 4894 0.39% DOW Jones 16418 2.19 S&P 500 1876 1.90% SMI 8262 1.82% Nasdaq 4304. 1.39% FTSE 100 6542 0.22% Eurostoxx 50 3089 2.80% Nikkei 14224-0.72% Commodities on the Week Brent 107.42-1.06% WTI Cushing 99.87 0.99% Gold 1335.85-3.77% Wheat 697.24 1.01% Emissions Allowance 6.01-4.45% 4 Bank of Ireland Global Markets

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