Daily Currency Briefing

June 21, 2011

Europes fingers crossed approach

G10 Currencies
EUR: Following the long meeting of the Ministers of Finance the press conference yesterday initially took the pressure off EUR-USD. And indeed the head of the Eurogroup Jean-Claude Juncker, EU Commissioner Olli Rehn and EFSF CEO Klaus Regling had good news to announce: The top-up of the EFSF was finally agreed (which had been due to take place in March). It will now be able to provide loans up to EUR 440bn. Also the ESM (which is to replace the existing bailout mechanism after mid-2013) made progress. No reason for euphoria though as the press conference also made it clear that considerable risks remain. The Finance Ministers continue to pursue a dangerous strategy, as regards the integration of bond holders into the extended Greece bailout. According to Rehn we will see an involvement along the lines of the Vienna Initiative. In other words: there will be a gentlemens agreement on the part of important bond holders who undertake to maintain their Greece exposure. Rehn is convinced: that would not lead to a credit event or a selective default. That is far from certain though, in particular as far as Greeces rating as an issuers is concerned. Rather than pursuing a safe approach European politicians continue with their fingers crossed attitude. More importantly: Europes politicians keep their eyes closed against the unavoidable reality. How else could we interpret Junckers comments: it is clear that the debt [of Greece] is sustainable in view of GGB yields of close to 30%. Nothing is further off from reality. EUR-USD: spot and risky diverge clearly again now
EUR-USD spot (left hand chart); 3 month 25 delta risk reversal (right chart), 60 minute chart
Ulrich Leuchtmann +49 69 136 23393 ulrich.leuchtmann@commerzbank.com

1.45 1.44 1.43 1.42 Spot 1.41 Risky 1.40 13/06

-2.00 -2.20 -2.40 -2.60 -2.80 -3.00 14/06 15/06 16/06 17/06 20/06

Sources: EBS, Bloomberg

It seems absurd that EUR-USD was able to appreciate in spite of these events. By now the pair has retraced more than half the losses recorded last week. The picture of the EUR-USD risk reversal (riskies) however looks very different: they are at the lowest level since last June (see chart). This illustrates once again that the debt crisis is not reflected in the EUR-USD spot prices but only in the risk reversals. The latter continue to price in high downward risks for EUR-USD. Is this a contrast between spot and options market which will have to be overcome one way or the other? Will riskies have to rise soon or EUR-USD spots fall? Not necessarily. Yesterdays trading session also demonstrated: in the absence of extreme events EUR-USD trends upwards. The debt crisis nonetheless hangs over the euro exchange rate like the sword

For important disclosure information please refer to the back pages

Daily Currency Briefing

of Damocles. Large down moves are always possible. Only that they do not have a marginal effect on EUR-USD. The situation of the riskies is very different: each news item emerging from the Eurozone affects the likelihood of a major collapse and thus the riskies. The riskies rather than the exchange rate itself therefore constitute the barometer of the debt crisis. USD: The FOMC meeting kicks off today. At best the event will be dollar neutral. In view of continued weak US economic data (todays existing home sales for May are unlikely to make an exception) the FOMC will do anything in its power to reassure markets that the ultraexpansionary monetary policy will be continued for the foreseeable future. The recent new round of dollar weakness seems justified. SEK: The Swedish krona is and remains at the mercy of market sentiment. That means it will only appreciate on a sustainable basis once market concerns about a Greek default have abated. A start was made yesterday allowing EUR-SEK to move away from the 9.20 mark. It is paradoxical really that the SEK loses against the EUR if the debt crisis in the Eurozone comes to a head. With the dynamic growth and the solid public finances in Sweden the krona should be able to outplay the euro easily. But as a risk sensitive currency of a small, illiquid market it quickly falls victim to the fears of investors, so that it has recorded the weakest performance against the euro and US dollar among the G10 currencies since the beginning of the month. The fact that Moodys harbours no doubts regarding the countrys AAA rating underlines that this performance is not justified. The SEK will remain at the mercy of market sentiment over the coming days, though. As we assume that IMF, EU and Eurogroup will eventually agree on a Greek solution the krona is likely to appreciate again in the end. At this stage the yield differential will attract more attention again clearly favouring the krona keep in mind that the next Riksbank rate rise to 2.0% will likely take place in early July. As a result levels in the area of 9.20 in EUR-SEK are selling levels for us.
Antje Praefcke +49 69 136 43834 antje.praefcke@commerzbank.com

Emerging Market Currencies

HUF: When trying to describe yesterdays Hungarian central bank rate decision even the word non-event would be an understatement. As expected the MNB (Magyar Nemzeti Bank) left key rates unchanged at 6.00% and is planning to leave them unchanged for a sustained period. This is due to the assumption that weak domestic demand as well as continued high rates of unemployment will ensure that the inflation rate will return to its target - that is once the current effect of the high commodity prices has worn off. The MNB even seemed more dovish than at the last meeting as it revised its growth outlook downwards for this and next year (2011: 2.6% from 2.9%; 2012: 2.7% from 3.0%). On the whole there was a lack of momentum for the forint so that it is likely to now be driven by the Eurozone crisis again. BRL: The rating agency Moodys yesterday upgraded Brazils foreign currency rating from Baa3 to Baa2 leaving the outlook positive. With this step Moodys honoured the efforts of President Dilma Rousseff since she took office at the beginning of the year. The new governments aim is to reduce state spending and fight inflation. From the point of view of most observers these steps are not going far enough, but against the difficulties in the euro zone as well as the difficult budget situation in the US and Japan, countries like Brazil seem to be the golden boys. Thanks to rating improvements investor interest in Brazil is likely to increase. The real is likely to benefit from this development so that we see scope for further appreciation. In the current environment there is however the risk that USD-BRL will temporarily trade higher. We consider prices above 1.60 as interesting entry levels.
Thu Lan Nguyen +49 69 136 82878 thulan.nguyen@commerzbank.com

You-Na Park +49 69 136 42155 you-na.park@commerzbank.com

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Daily Currency Briefing

Todays Events
Time 10:00 10:00 11:00 15:00 Region Indicator EUR GER ZAR USA ZEW business expectations ZEW business expectations Consumer confidence Existing Home Sales Period Jun Jun Q2 May May Actual Our Forecast +0,0 mom yoy Survey 6,1 -3,0 10 +4,80 -5,0 Last 13,6 3,1 9 +5,05 -0,8 Direction Cross

+4,8

Important Market Data

FX Current Change (%) Last trading day's high Last trading day's low FX Current Change (%) Last trading day's high Last trading day's low FX Current Change (%) Last trading day's high Last trading day's low FX Current Change (%) Last trading day's high Last trading day's low Forwards / Options EUR-USD 3M Money Market Rate (%) Bonds / Bond Futures Yield (%), Price Equity Indices Closing Change Change (%) Oil / Prec.Metals $ per unit EUR-USD 1,4349 +0,38 1,4328 1,4191 EUR-SEK 9,1688 +0,02 9,1969 9,1141 EUR-AUD 1,3577 +0,72 1,3554 1,3389 EUR-RUB 40,2395 +0,31 40,2318 39,9763 Fwd 3M -39,2500 EURIBOR 1,51 10Y Bund 2,97 EuroStoxx50 2748,01 -22,11 -0,80 Oil, Brent 112,05 EUR-JPY 115,06 +0,42 115,00 113,60 EUR-NOK 7,9236 +0,42 7,9359 7,8346 EUR-NZD 1,7709 +0,45 1,7691 1,7497 EUR-RON 4,2517 +0,38 4,2765 4,2175 Fwd 6M -77,7600 $ LIBOR 0,25 10Y T-Note 2,96 DAX 7150,21 -13,84 -0,19 Oil, Nymex 93,91 EUR-GBP 0,8848 +0,05 0,8850 0,8791 EUR-DKK 7,4592 -0,00 7,4616 7,4570 EUR-BRL 2,2908 +0,37 2,2939 2,2674 EUR-CNY 9,2826 +0,29 9,2825 9,1879 Fwd 12M -157,7800 LIBOR 0,20 10Y JGB 1,13 Dow Jones 12080,38 +76,02 +0,63 Gold 1542,25 EUR-CHF 1,2099 -0,10 1,2143 1,2019 EUR-HUF 268,09 +0,02 269,57 266,43 EUR-MXN 16,9992 -0,23 17,0490 16,9227 EUR-SGD 1,7725 +0,51 1,7701 1,7488 Vol 1M 13,05 LIBOR 0,83 EUR-CAD 1,4042 +0,11 1,4037 1,3933 EUR-CZK 24,110 +0,01 24,163 23,967 EUR-TRY 2,2976 +0,78 2,3033 2,2732 EUR-KRW 1548,0787 -0,46 1555,8003 1540,6407 Vol 3M 13,13 $ index 74,88 -0,15 75,47 74,90 EUR-PLN 3,9834 +0,09 3,9995 3,9713 EUR-ZAR 9,7381 +0,51 9,7125 9,6221 EUR-THB 43,8280 +0,30 43,8156 43,3897 Vol 12M 12,89

CHF LIBOR CAD LIBOR 0,18 1,18 10Y T-Note Future 10Y Gilt Bund Future 3,22 126,15 123,83 Nikkei 225 9445,44 +91,12 +0,97 Palladium 754,75 Zinc 2149,0 FTSE 100 5693,39 -21,55 -0,38 Platinum 1740,50 Tin 24675,0 1278,36 +6,86 +0,54 Silver 35,98

S&P 500

Industrial Metals Aluminium Lead Copper Nickel $ per ton 2491,0 2380,0 8935,0 21410,0 Sources: Bloomberg L.P., European Banking Federation, British Bankers Association, Dow Jones, Xetra, S&P, TSE, LSE, LME.

21 June 2011

Daily Currency Briefing

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