EFTA01149102.pdf

October 2011 Q4 2011 FX Quarterly Outlook Audrey Childe-Freeman Global Head of Currency Strategy The information provided herein is not intended as a recommendation of or an offer or solicitation to purchase or sell any investment product or service or as a recommendation of an investment manager. The investment products and services described herein may not be suitable for all clients. All expressions of opinion, estimates and investment strategies and views in this material constitutes J.P. Morgan's judgment based on current market conditions and are subject to change without notice. Opinions expressed herein may differ from the opinions expressed by other areas of J.P. Morgan. This material should not be regarded as investment research or a J.P. Morgan investment research report. Investment products: Not FDIC insured • No bank guarantee • May lose value Please read the Important Information section at the end of the presentation. J.P.Morgan EFTA01149102 Agenda Key FX takeaways from the third quarter of 2011 2 Considerations and risks for Q4 2011 and into 2012 3 US dollar outlook 4 Summary page on G10/Emerging Market (EM) currency outlook 8 2011 currency forecast summary 9 2011 currency forecast summary — EUR crosses 10 G10 currencies outlook 11 EM currencies outlook 19 Opinions, estimates, forecasts, and statements of financial market trends that are based on current market conditions constitute our judgment and J.P.Morgan are subject The to strategies views and change without notice. described mayWenotbelieve the information be suitable provided for all investors. Pasthere is reliable but performance and forecasts are not reliable indicators of future performance and may not materialize. should is not not be assumed to be accurate or complete. an indication of future returns. Projections 1 EFTA01149103 Key FX takeaways from the third quarter of 2011 Impasse in the eurozone debt crisis has fed through into the FX market ■ Following remarkable resilience earlier this year, the euro has succumbed to the heightened jitters over the worsening eurozone sovereign debt crisis in Q3. ■ EUR/USD has broken through the 1.40-1.45 range prevailing since May. ■ The eurozone crisis has also spread through other risk assets, with EM currencies suffering substantially from the global deleveraging in late Q3. ■ US dollar ultimate safe-haven status has returned in Q3. Yen still a winner in risk-off context. Marked deterioration in global economic prospects add onto a defensive approach in FX ■ Renewed disappointment in the US economy in Q2/Q3 means that recession risks cannot be ignored. US recession is not our central scenario though. J.P. Morgan Securities LLC (JPMS LLC) now expects the US economy to grow by 1.6% in 2011 and 1.3% in 2012 (as per Sep. 30th 2011). ■ The European economic landscape has also turned for the worse, with JPMS LLC now expecting the eurozone to fall into a mild recession into 2012, while the UK economy is now expected to grow by just 1.0% this year and 0.8% next year. ■ EM economies remain in favourable shape but the peak in business cycles are behind us. US S&P rating downgrade confirms a structurally bearish USD case Opinions, estimates, forecasts, and statements of financial market trends that are based on current market conditions constitute our judgment and J.P.Morgan are subject to change without notice. We believe the information provided here is reliable but should not be assumed to be accurate or complete. The views and strategies described may not be suitable for all investors. Past performance is not an indication of future returns. Projections and forecasts are not reliable indicators of future performance and may not materialize. 2 EFTA01149104 Main considerations and risks for the fourth quarter of 2011 and into 2012 Eurozone debt crisis will stay in the limelight: eurozone is running out of time ■ Contained Greek restructuring (e.g 50% haircut) and strong ring-fencing for Italy and Spain (rise/leveraging in EFSF, recapitalisation of European banks), as well as a credible structural reform agenda would come as a major relief and help the euro into Q4. As it stands, we believe that this is the most likely scenario but implementation may be tedious. ■ Further disappointment/delay in delivering a credible solution would have severe consequences at this point in the crisis — including contagion and/or a sharper fall in the euro/cyclical/EM currencies. Not our central scenario, but a risk worth mentioning. US negative fiscal/monetary policy environment could return to haunt USD bulls ■ Q3 has been all about the eurozone, but the long-term bearish USD forces have not gone away: - The Fed 'Operation Twist' and dovish assessment of the economy/policy message highlights a cyclically bearish case, still. QE3 talks could return should the US economy disappoint. ■ Structural environment remains bearish for the USD too. Worries over potential late November government shutdown is compelling evidence of a still very difficult structural environment. Lack of credible long-term fiscal strategy remains a central USD bearish argument. Macro economic news to be of prime importance in Q4 and in early 2012 ■ US/Eurozone recession scenario and/or deterioration in the Asia/EM economic climate would hurt sentiment further. The USD and the yen would be the winners and EM/cyclical currencies, the biggest losers in this context. Not our central scenario. Opinions, estimates, forecasts, and statements of financial market trends that are based on current market conditions constitute our judgment and J.P.Morgan are subject to change without notice. We believe the information provided here is reliable but should not be assumed to be accurate or complete. The views and strategies described may not be suitable for all investors. Past performance is not an indication of future returns. Projections and forecasts are not reliable indicators of future performance and may not materialize. 3 EFTA01149105 USD is now roughly flat year-to date on a trade weighted index basis U.S. trade weighted dollar index, YTD End Q1 End Q2 End Q3 84 JPMorgan USD Trade Weighted 83 Index 82 81 80 /9 /8 11 76 - 75 Jan-11 Feb-11 Mar-11 Apr-11 May-11 Jun-11 Jul-11 Aug-11 Sep-11 Oct-11 Source: JPMS LLC, Bloomberg, data as of 12 October 2011 • The JPMS LLC USD trade weighted index is down 0.9% year-to-date. In Q3, the USD has actually gained 5.8% on a trade weighted index basis. • The USD ultimate safe-haven status was confirmed by the September price action: when it comes to global deleveraging, the USD and the yen remain the most appealing currencies. • The Swiss National Bank ceiling announcement was a further supportive force for the USD in a risk-off world. J.P. Moran Opinions, estimates, forecasts, and statements of financial market trends that are based on current market conditions constitute our judgment and g are subject to change without notice. We believe the information provided here is reliable but should not be assumed to be accurate or complete. The views and strategies described may not be suitable for all investors. Past performance is not an indication of future returns. Projections and forecasts are not reliable indicators of future performance and may not materialize. 4 EFTA01149106 US dollar: Nothing has changed on the cyclical front Expectations for FY 2011 growth continue to be Fed policy outlook remains USD bearish revised lower 3-month Eurodollar futures curve, % Annualised GDP growth 2.5 6 months ago 3 months ago — — Now 3.0% 2.0 69 firm composite 1.5 2.5% 1.0 2.0% 0.5 Adjustment to a more dovish outlook for 2012 1.5% 0.0 Jan-11 Mar-11 May-11 Jul-11 Sep-11 Dec-11 Mar-12 Jun-12 Sep-12 Dec-12 Source: Bloomberg, data as of 15 September 2011 Source: JPMS LLC, Bloomberg, data as of 1 October 2011 • The US economy has continued to disappoint over the past couple of quarters, leading many in the market to adjust to a more negative US GDP growth outlook. • JPMS LLC now expects the US economy to grow by just 1.6% in 2011 and by 1.3% in 2012. • In this context, it is obvious that Fed rate rises are off the agenda for the foreseeable future. ■ We do not expect further monetary initiative besides 'Operation Twist', but QE3 talks may resurface. The monetary policy environment is still bearish for the USD. Opinions, estimates, forecasts, and statements of financial market trends that are based on current market conditions constitute our judgment and J.P.Morgan are subject to change without notice. We believe the information provided here is reliable but should not be assumed to be accurate or complete. The views and strategies described may not be suitable for all investors. Past performance is not an indication of future returns. Projections and forecasts are not reliable indicators of future performance and may not materialize. EFTA01149107 US dollar: Nothing has changed on the structural front Large gap between expenditures and receipts US primary balance Percent of GDP 2% _ Primary balance (budget balance less interest payments) as a percentage of GDP 24% 0% Expenditures 22% -2% - 20% - i1 -4% - 18% 16% I ' I ' I ' IIMI -8% - 14% SR c .1 ; a 12% It a. it c) g 195O's 196O's 197O's 198O's 199O's 2OOO's 2011E Source: Office of Management and Budget, Congressional Budget Office Source: JPMS LLC, FX Markets Weekly, 22 July 2011 ■ The Budget Control Act mainly focused on cuts in spending and not new measures on the revenue front. Lack of credible medium-term fiscal strategy remains a USD bear. • The primary balance is worse than that of Japan and/or Europe. • JPMS LLC expects the US 2011 budget deficit to GDP ratio at a high 9% (2012 deficit to GDP ratio at 6.8%). ■ Current account deficits to GDP ratio expected at 4.1% and 4.2% respectively for 2011 and 2012. Opinions, estimates, forecasts, and statements of financial market trends that are based on current market conditions constitute our judgment and J.P.Morgan are subject to change without notice. We believe the information provided here is reliable but should not be assumed to be accurate or complete. The views and strategies described may not be suitable for all investors. Past performance is not an indication of future returns. Projections and forecasts are not reliable indicators of future performance and may not materialize. 6 EFTA01149108 US dollar: Diversification theme has not gone away Foreign central banks continue to diversify away Total foreign currency reserves (in USD bn) from the USD 20% - % of annual increase in global FX reserves accounted for by non-G4 currencies, IMF COFER report 1 year % change Current (USD bn) China 30.3 3197.49 15% - Japan 11.9 1135.19 Russia 11.8 484.02 10% - Taiwan 7.6 400.29 Brazil 26.8 349.76 5% - South Korea 9.4 312.19 India 276.93 0% _ II. nn Hong Kong 4.7 6.9 279.40 Singapore 20.7 249.18 -5% - Thailand 19.2 178.06 Malaysia 44.1 131.66 -10% - Mexico 26.3 136.45 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 Poland 13.4 98.23 Turke 13.0 85.65 Source: JPMS LLC, FX Markets Weekly, 8 July 2011 Source: Bloomberg, as of 4 October 2011 ■ Foreign central banks have continued accumulating foreign reserves over the past twelve months, with China's foreign reserves up 30%, Brazil up 28% and Saudi Arabia up nearly 23% year-to-date. ■ While the ongoing eurozone debt crisis highlights the euro's many challenges, the reserve diversification theme has not gone away. ■ Expect the USD diversification theme (out of the USD) to keep a bearish bias on the USD on a multi-year basis. Opinions, estimates, forecasts, and statements of financial market trends that are based on current market conditions constitute our judgment and J.P.Morgan are subject to change without notice. We believe the information provided here is reliable but should not be assumed to be accurate or complete. The views and strategies described may not be suitable for all investors. Past performance is not an indication of future returns. Projections and forecasts are not reliable indicators of future performance and may not materialize. 7 EFTA01149109 Summary page on G10/Emerging Market (EM) currency outlook Structurally bullish currencies EM currencies that we expect Not quite safe-haven Structurally bearish, long-term, but affected by the to outperform versus the rest currencies yet... but will stay bid in deleveraging environment of EM in the next few months risk-off world Emerging Asian FX: Still our favourite bloc in -a TRY GBP, NOK, SGD USD WY EM space but be selective (SGD, MYR,CNY) TRY has already lost 35% since In euro debt crisis context, Strong growth, reasonable current-account and fiscal the Nov 2010 high. Most of Find support as/when risk- balances, relatively attractive yields and central GBP and NOK offer good off trades return and the bad news priced in. alternative exposure to banks historically focused on limiting volatility. liquidity dries up. US rating Europe. NOK fundamentals downgrade, continuation are much healthier. in accommodative Fed LATAM FX: Supportive outlook, more MXN However, the UK market is policy and diversification dependent on commodities for MXN (MXN, BRL) More 'appropriate' monetary larger and the UK is a step Strong growth, appealing yields and ties to story all consistent with policy management (vs BRL), ahead on the fiscal continued USD weakness commodities for MXN. Careful on valuations and still very robust fundamentals management front (vs central bank policy choices for BRL. longer-term. Yen has poor and reasonable valuations. Euro & US). demographics and is still SGD has been referred to structurally bearish. A EMEA FX: (UK, TRY, PLN) PLN, CZK still vulnerable to euro crisis, but as the CHF of Asia. L CNY, SGD, MYR Relatively small market fundamentals are solid and political context stable. though. New benchmark in EMEA EM. TRY oversold, Excellent track record in improving C/A position, positive rating outlook and fiscal-monetary policy mix appealing yields. and a continuation in the Special cases gradual move towards a Scandies: (SEK and NOK) flexible exchange rate. We Current-account and fiscal balances are outstanding, still believe in the strong favourable yields. Norway has commodity ties. High China growth story long- Euro. CHF Beta currencies so at risk in euro crisis context. term. Euro: will eventually come out stronger from the debt crisis but a difficult and bumpy way out. Cyclical environment has Commodity currencies: (AUD and CAD) also turned more euro negative of late. AUD monetary cycle less favourable but relative yield advantage remains, good proxy for bullish China OW and SNB: so far so good, possible hike in the ceiling. story. Valuation factors remain more appealing on Notwithstanding a bullish environment, SNB has successfully CAD but link to US economy is an important defended ceiling. consideration should there be a recession in the US. Source: J.P. Morgan Private Bank, October 2011 J.P.Morgan Opinions, estimates, forecasts, and statements of financial market trends that are based on current market conditions constitute our judgment and are subject to change without notice. We believe the information provided here is reliable but should not be assumed to be accurate or complete. The views and strategies described may not be suitable for all investors. Past performance is not an indication of future returns. Projections 8 and forecasts are not reliable indicators of future performance and may not materialize. EFTA01149110 2011 currency forecast summary FX Pair Current Spot Dec 2011 Mar 2012 Jun 2012 Sep 2012 EURUSD 1.3657 1.38 1.38 1.40 1.42 GBPUSD 1.5591 1.59 1.58 1.58 1.60 USDJPY 76.67 75 74 73 72 USDCHF 0.909 0.93 0.94 0.94 0.95 USDCAD 1.0276 1.01 0.97 0.96 0.95 AUDUSD 0.9968 1.00 1.03 1.08 1.10 USDNOK 5.6879 5.80 5.60 5.43 5.35 USDSEK 6.6795 6.80 6.70 6.36 6.27 USDTRY 1.8348 1.83 1.77 1.75 1.73 USDPLN 3.1614 3.25 3.01 2.89 2.81 USDCZK 18.1232 18.70 18.60 17.80 17.40 USDHUF 216.6 220 215 198 196 USDZAR 7.8535 8.01 7.65 7.67 7.82 USDRUB 31.4007 32.00 30.50 29.14 29.14 USDCNY 6.3665 6.30 6.20 6.10 6.00 USDSGD 1.2834 1.25 1.20 1.16 1.15 USDKRW 1166.85 1150 1100 1051 1040 USDIDR 8960 9000 8750 8550 8500 USDINR 49.235 48.50 48.00 46.30 45.00 USDMYR 3.142 3.10 3.00 2.94 2.92 USDBRL 1.7759 1.85 1.80 1.75 1.75 USDMXN 13.3462 13.80 13.00 12.50 12.00 USDCLP 509.38 520 500 475 470 Source: J.P. Morgan Private Bank, 11 October 2011 Opinions, estimates, forecasts, and statements of financial market trends that are based on current market conditions constitute our judgment and J.P.Morgan are subject to change without notice. We believe the information provided here is reliable but should not be assumed to be accurate or complete. The views and strategies described may not be suitable for all investors. Past performance is not an indication of future returns. Projections and forecasts are not reliable indicators of future performance and may not materialize. 9 EFTA01149111 2011 currency forecast summary - EUR crosses FX Pair Current Spot Dec 2011 Mar 2012 Jun 2012 Sep 2012 EURUSO 1.3657 1.38 1.38 1.40 1.42 EURGBP 0.8759 0.87 0.87 0.89 0.89 EURJPY 104.7 103.50 102.12 102.20 102.24 EURCHF 1.2415 1.28 1.30 1.32 1.35 EURCAD 1.40339 1.39 1.34 1.34 1.35 EURAUD 1.3701 1.38 1.34 1.30 1.29 EURNOK 7.7679 8.00 7.73 7.60 7.60 EURSEK 9.1222 9.38 9.25 8.90 8.90 EURTRY 2.506 2.53 2.44 2.45 2.46 EURPLN 4.3175 4.49 4.15 4.04 4.00 EURC2K 24.751 25.81 25.67 24.92 24.71 EURHUF 295.7900 303.60 296.70 277.83 278.82 EURZAR 10.7255 11.05 10.56 10.73 11.11 EURBRL 2.4084 2.55 2.48 2.45 2.49 Source: J.P. Morgan Private Bank, 11 October 2011 Opinions, estimates, forecasts, and statements of financial market trends that are based on current market conditions constitute our judgment and J.P.Morgan are subject to change without notice. We believe the information provided here is reliable but should not be assumed to be accurate or complete. The views and strategies described may not be suitable for all investors. Past performance is not an indication of future returns. Projections and forecasts are not reliable indicators of future performance and may not materialize. 10 EFTA01149112 Euro: Impasse on sovereign debt crisis weighs increasingly Key dates on the International calendar in Oct/Nov Summit of EU heads of state and government in Oct 23 Brussels Oct 25 Large Greek coupon payment (EU1.05B) Oct 26 EU/China summit Oct 31 Trichet retires from the ECB Nov 1 Draghi replaces Trichet as President of the ECB Nov 2 FOMC decision / Bernanke press conference Nov 3 ECB meeting Nov 3-4 G20 Annual Summit in Cannes, France Nov 7-8 Eurogroup/Ecofin meetings Nov 20 Spanish elections Joint Committee of Congress debt reduction Nov 23 legislation Nov 29-30 Eurogroup/Ecofin meetings Source: JPMS LLC, Bloomberg, data as of 4 October 2011 Source: JPMS LLC ■ The euro has finally succumbed to the deleveraging story, but considering the gravity of the eurozone situation, we note that the decline has been relatively contained. ■ The eurozone seems to be running out of time: a contained Greek debt restructuring and strong ring-fencing for the rest of the periphery, including an increase/leveraging in the EFSF, has become the market's favoured outcome. • Sovereign debt crisis is a key driver in FX again. That may leave a choppy environment in place for the euro in the near-term. Opinions, estimates, forecasts, and statements of financial market trends that are based on current market conditions constitute our judgment and J.P.Morgan are subject to change without notice. We believe the information provided here is reliable but should not be assumed to be accurate or complete. The views and strategies described may not be suitable for all investors. Past performance is not an indication of future returns. Projections and forecasts are not reliable indicators of future performance and may not materialize. 11 EFTA01149113 Euro: Business and monetary cycles have become less supportive Euro zone economy faces recession risks in 2012 This has led to a U-turn in rate expectations Forecast Changes for the Euro zone 4.5 ECB refinancing rate Real GDP, %oya 6 months ago Old forecast New forecast 4 3 months ago ECB rate expectations 2011 2012 2011 2012 Current 3.5 (EURIBOR futures) Euro area 1.6 0.9 1.6 -0.6 3 i Germany 2.8 1.3 2.8 0.2 2.5 / France 1.6 1.3 1.6 -0.1 ••• •••• 2 Italy 0.6 0.6 0.5 -1.2 Spain 0.7 0.4 0.7 -0.6 1.5 Greece -3.9 0.6 -6.3 -5.9 1 a a Ireland 0.4 1.1 2.1 0.3 Portugal -1.4 -1.9 -1.6 -2.8 0.5 The new Irish forecast for 2011 is higher than the old one due to the strong GDP 0 performance in 2Q and an upward revision to 1Q (released this week) Jan-08 Jan-09 Jan-10 Jan-11 Jan-12 Source: JPMS LLC Source: JPMS LLC, Bloomberg, data as of 4 October 2011 ■ The eurozone economy (including the core) has shown mounting signs of softness in Q3, with a combined tighter fiscal stance, deteriorating business and consumer confidence and weakening global economic context all weighing on real activity. ■ JPMS LLC now expects the eurozone to experience a mild recession into 2012. ■ This weaker growth profile is associated with lessened inflationary pressures and a significant downward adjustment in ECB rate expectations. A few economists are now expecting an ECB rate cut in the next few months. ■ The U-turn in expected ECB rate outlook means that the yield factor is less supportive for the euro now and into 2012 than it was earlier this year. Opinions, estimates, forecasts, and statements of financial market trends that are based on current market conditions constitute our judgment and J.P.Morgan are subject to change without notice. We believe the information provided here is reliable but should not be assumed to be accurate or complete. The views and strategies described may not be suitable for all investors. Past performance is not an indication of future returns. Projections and forecasts are not reliable indicators of future performance and may not materialize. 12 EFTA01149114 Japanese yen: Structurally bearish but favourable global context Japanese assets becoming more appealing? Carry trade losing appeal in current G7 rate context Foreigners net purchase of Japanese stocks and bonds % points: 2-year swap rate spread between simple average of G7 + JPY bite 15 Japanese Pout 5.5 Australia and Japan 10 4.5 - S 3.5 0 2.5 -s 1.5 •10 -15 0.5 2008 2009 2010 2011lan.-May Jan-04 Jan-05 Jan-06 Jan-07 Jan-08 Jan-09 Jan-10 Jan-11 Source: JPMS LLC, FX Markets Weekly, 29 July 2011 Source: JPMS LLC, FX Markets Weekly, 29 July 2011 ■ The structurally bearish yen environment remains: 2011 budget deficit to GDP ratio expectected at 8.9%, gross debt to GDP ratio seen at a high 225%, but not of market relevance for now. ■ Japan's recovery continues but the BoJ monetary policy environment will remain extremely loose. At current levels and on a historical basis though, G7 interest rate levels are not overwhelmingly consistent with the short-JPY carry trade . ■ In a still highly vulnerable overall market sentiment and with the world now short of one safe-haven currency (i.e the Swiss franc post SNB announcement), we believe that the yen is highly appealing. We have a year-end target at 75.00 on USD/JPY and 103.50 on EUR/JPY. ■ BoJ intervention risks prevail but unilateral intervention is unlikely to change the trend. Opinions, estimates, forecasts, and statements of financial market trends that are based on current market conditions constitute our judgment and J.P.Morgan are subject to change without notice. We believe the information provided here is reliable but should not be assumed to be accurate or complete. The views and strategies described may not be suitable for all investors. Past performance is not an indication of future returns. Projections and forecasts are not reliable indicators of future performance and may not materialize. 13 EFTA01149115 Sterling: Near-term risks but do not lose faith longer-term GBP was weaker getting into QE1, so the negative ..but GBP appealing in a world short of safe-haven impact was limited. currencies. GBP TM indexed to 100 on March 5 2009 - Time scale shows days Foreign purchases of Gilts, GBP bn before/after QE 150 — 12m sum 120 £75bn £125bn £175bn £200bn 1st Greek bail-out 130 3m sum ann. 115 110 90 110 70 105 50 30 100 10 95 -30 90 •50 -250 •200 •150 •100 •50 0