Daily Currency Briefing

July 6, 2011

Substantial credit risks

G10 Currencies
EUR: The rating agency Moodys yesterday lowered Portugals rating from Baa1 to Ba2 and thus to junk status. Moodys allocates this rating to issuers with substantial credit risks. Indeed: according to the bailout plan Portugal is supposed to return to the capital markets in 2013. This seems about as unrealistic as the original plan for Greece according to which the country was supposed to return to the capital market as of next year. The political condition that bond holders are to be included in the next round of Greeces bailout is not going to make it any easier for Portugal to return to the capital market in 2013, as the risks involved in the purchase of bonds of the countries that have been saved increase as a result of this demand and are now difficult to calculate. It is becoming increasingly clear: we are likely to see the same toing and froing that we are experiencing in connection with Greece at the moment for Portugal next year. The debt crisis of the peripheral countries is likely to remain with us for a long, long time. That means for EUR-USD: the risk of sharp drops in EUR-USD will stay with us, too. The risk reversal curve (chart 1) is therefore more susceptible to the downside for longer maturities, like 9 month and above. CHART 1: EUR-USD risk reversals have so far eased longer maturities are likely to remain attractive EUR-USD risk reversals, 25; percentage points annualised volatility
-1.50 -1.75 -2.00 -2.25 -2.50 -2.75 0 6 12 Tenor (months) 18 24
Ulrich Leuchtmann +49 69 136 23393 ulrich.leuchtmann@commerzbank.com

CHART 2: Non-manufacturing ISM index: was the recovery in May just an interlude in the soft patch? Index

06 Jul 06 Jun

65 60 55 50 45 40 35 2007

2008

2009

2010

2011

Source: Bloomberg L.P.

Source: Institute for Supply Management

USD: US data publications are gradually getting more interesting. The non-manufacturing ISM index (chart 2) due for publication today is a fundamental heavy weight. Following a small recovery in May the result for June might have eased off once again. Should that be the case concerns would be fuelled about an extension of the soft patch, the period of weakness in the US economic recovery.
The only thing is: Who is going to bet on that today, two days ahead of the publication of the Bureau of Labor Statistics labour market report. The labour market report is the indicator that creates by far the largest fluctuations in the USD exchange rates. Despite its fundamentally

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Daily Currency Briefing

significant role the ISM index might take the back seat and not have much of a lasting effect on the external value of the dollar.

SEK: The krona was unable to benefit from the Riksbanks rate decision. First of all the 25bp rise of the repo rate to 2.0% had been priced in. Only a considerably more hawkish Riksbank might have been able to provide more support for the krona. In its latest Monetary Policy Report it did not change its projections for growth, inflation and the rate path. This was reflecting the fact that although the Swedish economy is entering a calmer phase, the economy is continuing to grow at a good pace. As the Riksbank did not suggest a faster or stronger tightening of monetary policy the krona didnt manage to push higher. Therefore general market sentiment is back in the driving seat in EUR-SEK. If sentiment improves further EUR-SEK might re-test the area of 9.04 and slowly trend back towards 9.00. AUD: Australias labour market report for June is due for publication tonight. Markets expect a solid increase in jobs of roughly 15k and a constant unemployment rate of 4.9%. If the labour market surprises positively AUD-USD is likely to rise back towards 1.0780-1.0800 assuming market sentiment remains positive. Should the figure disappoint the sceptics will feel confirmed in particular following the RBAs more cautious comments yesterday which means that the area of 1.0550 might then be at risk.

Antje Praefcke +49 69 136 43834 antje.praefcke@commerzbank.com

Emerging Market Currencies

PLN: The members of the monetary policy council are likely to sit back and relax today leaving key rates unchanged. Central bankers are likely to agree that they first want to wait for the effects of the hikes, totalling 100bp, made so far before taking action again. Moreover the NBP is likely to follow in the footsteps of the other central banks in the region by referring to the recent weakening economy as well as global uncertainties at the top of the list: Greece. As a result we assume that the statement will contain few hawkish elements. As the majority of the market is unlikely to expect anything else the effect on the zloty should be limited. BRL: Over the past few days USD-BRL came dangerously close to the level of 1.55. Hardly surprising therefore that Minister of Finance Guido Mantega sounded very concerned about the strength of the real. The government was going to take measures to control the appreciation of the real. However, by his standards Mantegas comments seemed quite moderate. The government had recently distanced itself from far reaching interference aimed at the inflow of foreign capital. As a result the current comments are likely to refer mainly to interventions on the FX markets by the central bank. Moreover Mantega underlined that it was necessary to get inflation under control, the latter rose to 6.55% in May. The publication for June, due tomorrow, is likely to display another slightly higher reading. Markets have used Mantegas comments as a reason to take profits. We consider this to be merely a temporarily correction. Interest rates in Brazil are likely to rise further and investors are likely to use higher USD-BRL prices as entry levels. We urge caution this week though, as US labour market data is due for publication, which might disappoint markets.
Thu Lan Nguyen +49 69 136 82878 thulan.nguyen@commerzbank.com

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

6 July 2011

Daily Currency Briefing

Todays Events
Time 06:00 12:00 15:00 Region Indicator JPY PLN USA USA Leading Index CI Rate decision MBA Mortgage Applications ISM non-manufacturing Period May Jul Jul Jun % % Actual 99,8 4,5 54,0 Our Forecast Survey 99,8 4,5 53,7 Last 96,2 4,5 -2,70 54,6 Direction Cross

EUR-USD

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 1,4457 -0,50 1,4554 1,4443 EUR-SEK 9,0534 -0,48 9,1145 9,0568 EUR-AUD 1,3474 -0,45 1,3570 1,3510 EUR-RUB 40,3065 -0,22 40,4401 40,2480 Fwd 3M -39,0200 EURIBOR 1,57 10Y Bund 3,01 EuroStoxx50 2850,51 -19,68 -0,69 Oil, Brent 113,68 EUR-JPY 116,87 -0,43 117,62 117,08 EUR-NOK 7,7528 -0,14 7,7695 7,7254 EUR-NZD 1,7435 -0,42 1,7545 1,7431 EUR-RON 4,1856 -0,27 4,1983 4,1732 Fwd 6M -81,0000 $ LIBOR 0,25 10Y T-Note 3,14 DAX 7439,44 -3,52 -0,05 Oil, Nymex 97,46 EUR-GBP 0,8987 -0,47 0,9049 0,8977 EUR-DKK 7,4591 +0,00 7,4606 7,4582 EUR-BRL 2,2623 +0,11 2,2656 2,2454 EUR-CNY 9,3492 -0,45 9,4056 9,3410 Fwd 12M -172,6200 LIBOR 0,20 10Y JGB 1,18 Dow Jones 12569,87 -12,90 -0,10 Gold 1516,15 EUR-CHF 1,2141 -1,46 1,2339 1,2207 EUR-HUF 264,78 +0,51 265,34 263,28 EUR-MXN 16,8134 -0,12 16,8703 16,7535 EUR-SGD 1,7721 -0,48 1,7837 1,7734 Vol 1M 11,30 LIBOR 0,83 EUR-CAD 1,3907 -0,33 1,3982 1,3899 EUR-CZK 24,259 -0,11 24,334 24,236 EUR-TRY 2,3521 +0,16 2,3614 2,3407 EUR-KRW 1537,8977 -0,45 1548,2091 1540,3367 Vol 3M 12,05 $ index 74,51 +0,32 74,74 74,21 EUR-PLN 3,9526 +0,28 3,9544 3,9366 EUR-ZAR 9,7369 -0,30 9,8007 9,7277 EUR-THB 44,0417 -0,45 44,2855 43,9930 Vol 12M 12,85

CHF LIBOR CAD LIBOR 0,18 1,18 10Y T-Note 10Y Gilt Bund Future Future 3,32 125,62 122,56 Nikkei 225 10002,62 +30,16 +0,30 Palladium 777,63 Zinc 2363,0 FTSE 100 6024,03 +6,49 +0,11 Platinum 1735,60 Tin 26080,0 1337,88 -1,79 -0,13 Silver 35,68

S&P 500

Industrial Metals Aluminium Lead Copper Nickel $ per ton 2485,5 2660,5 9405,5 23105,0 Sources: Bloomberg L.P., European Banking Federation, British Bankers Association, Dow Jones, Xetra, S&P, TSE, LSE, LME.

6 July 2011

Daily Currency Briefing

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