HSBC - Currency outlook - November 2013

Macro

Currency Strategy

November 2013

Currency

OUTLOOK

Disclosures and Disclaimer This report must be read with the disclosures and analyst

certifications in the Disclosure appendix, and with the Disclaimer, which forms part of it

Guiding the EUR lower

Main contributors

David Bloom

Global Head of FX Research

HSBC Bank plc

+44 20 7991 5969

[email protected]

Paul Mackel

Head of Asian FX Research

The Hongkong and Shanghai Banking Corporation Limited

+852 2996 6565

[email protected]

Stacy Williams

Head of FX Quantitative Strategy

HSBC Bank plc

+44 20 7991 5967

[email protected]

Mark McDonald

FX Quantitative Strategist

HSBC Bank plc

+44 20 7991 5966

[email protected]

Robert Lynch

Head of G10 FX Strategy, Americas

HSBC Securities (USA) Inc.

+1 212 525 3159

[email protected]

Clyde Wardle

Emerging Markets FX Strategist


+1 212 525 3345

[email protected]

Marjorie Hernandez

FX Strategist, Latin America


+1 212 525 4109

[email protected]

Murat Toprak

FX Strategist, EMEA

HSBC Bank plc

+44 20 7991 5415

[email protected]

Dominic Bunning

FX Strategist, Asia


+852 2822 1672

[email protected]

Daragh Maher

FX Strategist, G10

HSBC Bank plc

+44 20 7991 5968

[email protected]

Ju Wang

FX Strategist, Asia


+852 2822 4340

[email protected]

The November decision to cut interest rates by the ECB may have been

influenced by lower than expected inflation, but we believe the strength

of the EUR was a key consideration. Our central forecast is for the EUR

to continue to weaken.

US data back in the spotlight

With the US debt-ceiling drama over for now, economic data releases

are back in focus. We examine how financial markets have traditionally

responded to data, which markets are most responsive and which

economic variables are now most important. Unemployment data and

survey data are being watched closely but can be hard to interpret as we

see in ‘Taking up the slack’ & ‘Reading UK surveys’.

NOK recovery finally in sight

Bright economic prospects for 2014 favour the NOK.

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Macro Currency Strategy November 2013

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Guiding the EUR lower (pg 3) The November decision to cut interest rates by the ECB may have been influenced by lower than

expected inflation, but we believe the strength of the EUR was a key consideration. A strong currency is a

problem for the Eurozone and the recent monetary easing is unlikely to be the last action to temper EUR

enthusiasm.

US data back in the spotlight (pg 8) With the US debt-ceiling drama over for now, economic data releases are back in focus. We examine how

financial markets have traditionally responded to data, and how the global financial crisis changed these

relationships. We also look at which markets are most responsive and which economic variables are now

most important.

Taking up the slack (pg 14) US unemployment rate announcements have never had a clean impact on markets. This continues to be

true despite the Fed now tying the outlook for interest rates directly to the unemployment numbers. The

difficulty in interpreting the headline rate lies at the heart of this.

Reading UK surveys (pg 15) Survey data make forecasting models better but they do not make them good. So while the surveys

suggest the UK is about to hit top gear, they may well be giving a false steer.

NOK recovery finally in sight (pg 16) Although the NOK has not performed well thus far in 2013, bright economic prospects for 2014 suggest

that NOK may again be becoming more attractive.

Dollar Bloc (pg 23) More CAD headwinds: We still expect USD-CAD to move higher, and for Fed tapering to play a role in

that move, but we expect more of that dynamic to play out in 2014, rather than into year-end.

Talking down the AUD: Despite concerns over the higher AUD, a further rate cut seems an unlikely

option. Low rates are already getting traction and even lower interest rates could risk overinflating the

housing market. Instead, the RBA will jawbone the AUD lower.

Summary

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Key events

Date Event

20 November FOMC publishes minutes of October meeting 20 November BoE publishes minutes of November meeting 25 November BoJ publishes minutes of October meeting 28 November BoE publishes Financial Stability Report 03 December RBA rate announcement 03 December BoE publishes record of Financial Policy Committee 04 December BoC rate announcement 04 December Fed releases Beige Book 04 December UK budget update and fiscal forecasts announced 05 December BoE rate announcement 05 December ECB rate announcement 05 December Norges Bank rate announcement 12 December RBNZ rate announcement 12 December SNB monetary policy assessment

Source: HSBC

Central Bank policy rate forecasts

Last Q1 2014(f) Q3 2014(f)

USD 0-0.25 0-0.25 0-0.25EUR 0.25 0.25 0.25JPY 0-0.10 0-0.10 0-0.10GBP 0.50 0.50 0.50

Source: HSBC forecasts for Fed funds, Refi rate, Overnight Call rate and Base rate

Consensus forecasts for key currencies vs USD

3 months 12 months

EUR 1.314 1.279JPY 101.0 104.5GBP 1.572 1.545CAD 1.093 1.103AUD 0.908 0.875NZD 0.805 0.782

Source: Consensus Economics Foreign Exchange Forecasts October 2013

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The Fed fixation Minutes from the September FOMC meeting

showed two considerations lay behind the

decision not to taper QE. One was the looming

fiscal debate which the Fed feared, justifiably in

the end, could damage growth prospects. The

other more prominent concern, however, was the

potentially damaging effect of rising US interest

rates on the recovery. To quote, “the tightening of

financial conditions observed in recent months, if

sustained, could slow the pace of improvement in

the economy and labour market.”

There are a number of elements which feed into

financial conditions, but in the case of the US, the

fixation is likely on long-term interest rates. The

US housing market is particularly sensitive to

shifts in long-term government bond yields as

many mortgages are taken out on a long term

fixed rate basis, and these mortgage rates closely

follow those of government yields (see chart 1).

Since May, when tapering talk began to get

traction in the market, mortgage rates have risen

alongside Treasury yields. This in turn has led to

softening in some US housing indicators, notably

in refinancing applications. Chart 2 again shows

the US mortgage rate but this time plotted against

mortgage refinancing. We have inverted the

refinancing series, but it shows that higher US

mortgage rates are associated with lower

refinancing demand.

Effectively, in delaying tapering, the Fed has

taken a judgement on what level of long-term

interest rates the US economy can bear. In this

environment, there is less of a focus on the

exchange rate. US policymakers are more fixated

on bond yields, not the USD. This can be thought

of in terms of a monetary conditions index. This

measure blends together movements in real short-


1. US mortgage rates rose sharply during tapering talk

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US 10y r Treasury y ields US 30y r mortgage rates US 30y r Treasury y ields%%

Source: Bloomberg, HSBC

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term interest rates, real long-term interest rates

and the real effective exchange rate. However, the

picture painted can often be determined by the

weights given to each of the three components.

Much academic ink has been spilt trying to

optimise what the relative weights should be for a

given country

In chart 3, we show two MCIs for the US. The

black line shows the MCI when the interest rate

components are given the more dominant

weighting (4:1 vs FX), and the red line shows the

MCI when the exchange rate is instead given an

equal weighting. For the Fed, their perception of

monetary conditions is likely closer to the black

line than the red one.

Europe feels the pain

In Europe, the perspective on the relative

importance of the exchange rate and interest rates

is likely rather different. Much has been made of

the recovery in the Eurozone economy, and for

much of 2013, the numbers were generally been

better than expected. But there have been some

recent signs that the upside surprises are no longer

so prevalent (see chart 4).

2. US mortgage rates and mortgage refinancing activity

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US MBA refiinancing (inv erted, SA Index ) US 30y r mortgage rate (%, RHS)


3. MCIs vary according to the weights given to interest rates over the exchange rate

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US MCI (w eights: Rates 4:1 FX) US MCI (w eights: Rates 1: 1 FX)


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It is hard to isolate the role of the stronger EUR in

these more recent disappointments but it is clear

that net exports have been an important part of the

recovery story. Chart 5 shows which parts of the

economy have been contributing the most to

Eurozone GDP growth YoY. The thick red line is

overall GDP growth: still mired in negative

territory, but things would have been a lot worse

were it not for the positive contribution from net

exports (shown in thick black line).

Much of this improved contribution from net

exports has been driven by lower imports

associated with weak domestic demand rather

than stronger exports (see chart 6). But a stronger

EUR is still an adverse factor as imports remain

more affordable than they otherwise would be,

and exports are constrained not just by lower

demand but by lower competitiveness also.

If we consider the Monetary Conditions Index

(MCI) faced by Europe, the picture is once again

determined to some extent by the weightings

chosen. We have chosen the 4:1 ratio between

rates and FX used for the US. It is likely that

policymakers in the Eurozone will be less

unnerved by the rise in long term interest rates

than their US counterparts, but more uneasy about

4. Eurozone economic surprise index has been turning lower

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5. Net exports has been the main positive contributor to Eurozone GDP

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Consumption Gov ernment consumption

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the damage a stronger EUR may be doing to the

recovery. In either event, it shows that monetary

conditions have been steadily tightening for over a

year now. In current conditions, it would be tempting to argue

that the rise in the EUR is appropriate given the

Eurozone economy has shown signs of revival. But

the reality is that the pick-up in activity is modest.

It is unlikely to be sufficiently potent to drag down

lofty unemployment rates quickly, or deliver a

robust cyclical improvement in fiscal balances.

Nor is inflation an issue with CPI currently at a

lowly 0.7% YoY, in fact the threat of deflation is

growing. With such a fragile foundation, the

recovery can ill afford a stronger EUR.

6. Lower imports have been the key element of net export’s contribution

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Net ex ports (EURbn, RHS) Ex ports YoY% Imports YoY%% EURbn


7. Eurozone MCI has been consistently tightening for over a year now

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The treatment

Fortunately, the ECB has potential medicine at

hand to try and reduce the pain being inflicted by

the stronger EUR. Interest rate reductions are

clearly a potent tool. For example, the November

decision to cut interest rates saw EUR-USD fall

swiftly from 1.35 to 1.33. Indeed, the EUR has

generally shown a rising correlation to medium

term interest rates expectations (see chart 8). We

believe that the EUR is firmly in the grouping of

currencies being driven by carry (see Currency

Outlook: ‘The new FX paradigm’, October 2013).

Successfully manoeuvring rate expectations lower

has seen the EUR fall in similar fashion.

President Draghi made it clear that a further rate

reduction is a possibility. He reminded markets

that the refinancing rate is not yet at the zero

bound and that the ECB is technically prepared

for a negative deposit rate. The interest rate threat

to EUR bears remains prominent. In addition,

another LTRO would also likely be EUR negative

given the market’s current perception of how QE

and currencies relate to each other. Actions speak

louder than words, and any LTRO or rate cut

would have a profound impact on market interest

rate expectations.

The timing of November’s decision to cut interest

rates by the ECB may have been influenced by

lower than expected inflation, but we believe the

strength of the EUR will have been a central

consideration even if the ECB does not want to

say so publicly. With further easing likely in the

Eurozone and a drift towards the exit from

monetary easing likely in the US, monetary policy

is unusually heading in opposite directions in the

Eurozone and US. It is a combination that we

believe will continue to drive EUR-USD lower,

and we retain our forecast of 1.30 by year end and

1.24 for end 2014.

8. Policy has the scope to manoeuvre the EUR lower

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3M corr betw een EUR-USD and Dec 15 rate differential (EU-US)


https://www.research.hsbc.com/midas/Res/RDV?p=pdf&key=jTCtrPCWvs&n=389866.PDF

https://www.research.hsbc.com/midas/Res/RDV?p=pdf&key=jTCtrPCWvs&n=389866.PDF

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Macro data announcements move markets It goes without saying that macro-economic data

are important for financial markets, but the

relationship between data and markets is complex.

Models that try to explain prices, such as

exchange rates, with macro variables directly tend

to perform poorly. For example, in their famous

paper of 1983 Meese and Rogoff1 looked at this in

detail for FX and found no explanatory power.

This seems somewhat at odds with the

observation that markets often move significantly

when new economic data is announced. This is, of

course, because in reality it is the news or

1 "Empirical Exchange Rate Models of the Seventies: Do they fit out of Sample?", Meese, R. and Rogoff, K., Journal of International Economics 14 (1983)

‘surprise’ component of a data release which is of

immediate importance. Expectations of future

data releases are constantly being priced in to

markets and it is the deviations from these

expectations which dominate on announcement.

These surprises have a strong and measurable

impact on markets and are very much a key

driver, though again the nature of the relationship

is not always simple.

In figure 1 we show the HSBC US Economic

Activity Surprise Index and 2-year US yields. The

surprise index is an aggregate of data surprises

across all significant US data releases. It is

published weekly (most recent available here) and


Economic releases and their impact on markets

1. US Surprise Index vs US 2-year yields

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US Activ ity Surprise 2-year y ields (RHS)


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includes a full construction methodology. In short,

though, a positively trending index indicates that

data is generally coming in better than expected

and vice-versa for a declining index.

The index tracks the 2-year yield quite well up

until the end of last year. As tapering-talk started

to dominate, however, the relationship starts to

look rather less clear. Renewed emphasis on data

There is now a renewed emphasis on data. The

gradual normalisation of US monetary policy is

being anticipated and the US Federal Reserve has

taken the unusual step of linking its decisions

directly to economic variables, such as the

unemployment rate (see here).

Understanding the impact of data more fully is

thus crucially important. In this piece, we

examine how various asset classes have

traditionally responded to data, and how the crisis

changed this behaviour. We also look at the state

of play today – which markets are most

responsive and which economic variables are

most important. We can assess this directly by

looking at the correlation between economic data

surprises and market moves.

USD against major currencies

The average correlation between US activity data

surprises and the DXY index (a USD index

against major currencies) is shown in figure 2.

Up until 2007, the relationship was choppy but

essentially positive. Stronger data would typically

be positive for the USD, although the strength of

the relationship waxed and waned considerably.

The financial crisis completely changed this

relationship as the USD acquired safe haven

characteristics. Poor US data became good for the

USD resulting in a negative correlation on the

chart. The correlation is now back to pre-crisis

levels which is encouraging, although we were

briefly at similar levels in 2010.

Against the majors, the USD is certainly starting

to respond to data more normally – this

relationship does however need to be tracked

carefully, as it is prone to change rapidly.

2. Impact of data on USD-Majors

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0.3Good data is good for the USD

USD becomes a "safe hav en"

normality returning..?


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USD against EM currencies

The correlation between US data surprises and the

USTWI OITP (a trade-weighted USD index

against other important trading partners) is shown

in figure 3. The advent of the crisis produced a

significant change. Once again the correlation

dropped into negative territory as the USD

assumed safe-haven characteristics and EM

became classically ‘risk on’. As with the majors,

there are signs of some normalisation, with

correlations now back into positive territory – but

only just. The EM moves over the summer were a

stark reminder that, when it comes to the specific

issue of tapering, they can rapidly revert to type as

‘risky’ assets.

EM currencies are starting to behave a little more

normally with respect to US data – they are

however especially sensitive to US monetary

policy announcements. Interest rates

The impact of US data surprises on interest rates

depends significantly on the point on the curve in

question. Figure 4 shows the correlation between

US data surprises and the 2-year yield. Pre-crisis,

the 2-year yield was especially responsive to data,

3. Impact of data on USD-EM

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4. Impact of data on 2-year yields

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with a strong positive correlation – much higher

than for currencies or equities. The impact on the

2-year yield is really the bellwether of data being

priced in ‘properly’ – the 2-year cleanly adjusted to

incoming economic news, as participants priced in

changing probabilities of rate moves. The advent of

the crisis did not destroy the relationship, as it did

with currencies, although it did severely weaken it.

During the height of the crisis the correlations

became very low, as crisis management and policy

response overwhelmed the relevance of official

data. Today the relationship is still rather weak

compared to pre-crisis times, which is noteworthy.

A return to pre-crisis correlations will be a strong

sign of genuine normalisation.

The responses of 5-year yields and 10-year yields

show a similar pattern, but in a more muted

fashion.

When it comes to data impact, the 2-year yield is

the one to watch for genuine normalisation. This

has not happened yet.

Equities

Pre-crisis, the relationship between data surprises

and equities was weak and variable. Equities were

never a clean play on economic data but this

changed substantially as the crisis developed.

The S&P became a ‘risk on’ asset, positively

responding to good economic news, and driven

more by global macro considerations rather than

the idiosyncrasies of its component stocks. Today,

normality seems to have resumed as far as the

response to economic data is concerned.

Equities have historically been relatively

unresponsive to economic data. This changed

considerably during the crisis, but has since

reverted.

5. Impact of data on S&P

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Which release now matters most?

Having seen how the main asset classes generally

respond to data, it is also illuminating to see how

the relative importance of particular economic

numbers has changed, and which releases are

most important now.

Non-farm payrolls has long been considered the

most important individual economic data release

and rightly so. Figure 6 shows the correlation

between payroll surprises and changes in the

5-year yield through time.

The impact of payrolls has been consistently strong

and continues to be strong today. This is in marked

contrast to the impact of the unemployment rate

shown in figure 7. One might have expected a

strong negative relationship through time but this is

not borne out by the data. In fact, during recent

times the relationship is the wrong way round.

This is especially pertinent given the stated

importance of the unemployment rate by the Fed.

It can only mean that the headline number alone is

actually of little immediate relevance to the

market. The problems of interpreting the release,

given a changing participation rate, are most

likely responsible. Payroll is easier to interpret

and still dominates.

The Chicago PMI release has had a huge fall in

importance as shown in figure 8. Pre-crisis this

survey number was of comparable importance to

payrolls but now it causes barely a ripple. The

other main regional survey from the Philadelphia

Fed does however remain relevant (figure 9).

6. Non-farm Payroll Impact 7. Unemployment Rate Impact

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Source: Bloomberg, HSBC Source: Bloomberg, HSBC

8. Chicago PMI Impact 9. Philadelphia Fed Impact

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What is most striking, though, is the emergence of

Housing Starts and New Home Sales as releases of

major significance (shown in figures 10 and 11). It

strongly suggests that the market is looking towards

new housing activity as a sign of genuine recovery.

Existing Home sales display far less impact.

Conclusion

The focus on economic data makes understanding

its impact on markets of renewed importance.

The ‘surprise’ component is of most immediate

consequence for asset prices, but the relationships

are not simple. The financial crisis changed how

data was absorbed into markets and it has, by no

means, fully normalised. Understanding the state

of play today is crucial, if one is to correctly

interpret forthcoming releases.

10. Housing Starts Impact 11. New Home Sales Impact

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This is an extract from the full report ‘Taking up

the slack’, 21 October.

As we discussed on page 12, US unemployment

rate announcements have never had a clean

impact on markets. This continues to be true

despite the Fed now tying the outlook for interest

rates directly to the unemployment numbers.

In fact, recently the relationship has been the

wrong way round. The difficulty in interpreting

the headline rate lies at the heart of this.

Choosing a target variable was never going to be

straightforward. The benefit of an unemployment

target is that the data is timely and not heavily

revised. But most importantly it is easily

understandable to the general public and therefore

particularly useful if you believe it is merely

animal spirits that are holding back the recovery.

But there are major issues with setting policy on

the back of the unemployment rate. Setting an

exact target runs into all sorts of problems if the

central bank has incorrectly measured the NAIRU

– the rate of unemployment which is consistent

with stable inflation. If they have set their

unemployment rate goal too low – they may get

more inflation than they bargained for (see ‘Low

participation nation’, 8 February, 2012). But there

are other problems. In particular, the pressure in the

labour market and therefore the potential for wage

inflation is not perfectly measured by the

unemployment rate. Indeed, given the length and

severity of the recent downturn, the unemployment

rate is doing a particularly bad job of summing up

the amount of slack currently present in either the

US or UK labour markets. That is because a

significant amount of the population is either

underemployed or temporarily discouraged from

actively seeking work. To accurately capture the

deflationary pressures in the economy at present,

central bankers should be considering a larger pool

of labour market information.

As a result, it seems likely that in the coming

months central banks will try to distance

themselves from tying the future path of policy to

headline measures of unemployment on a set

timescale, or to simply move the threshold. From

historical data, the current headline

unemployment rate suggests it will be some time

before the Fed meaningfully moves to the brake,

but accounting for other measures of slack one

can conclude we are even further away.

With the recent showdown in Washington

regarding the debt ceiling, markets are already

pushing back their expectations of when the Fed

will begin tapering. Even if a more concrete

resolution were to be reached in the coming

months, the labour markets of both the US and

UK suggest we shouldn’t fear a rapid withdrawal

of global liquidity any time soon.

Taking up the slack

Targeting the unemployment rate is a thankless task

Announcements have an inconsistent effect on markets

Karen Ward

Senior Global Economist HSBC Bank plc +44 20 7991 3692 [email protected]

https://www.research.hsbc.com/midas/Res/RDV?p=pdf&key=aeq7Glypkm&n=390889.PDF

https://www.research.hsbc.com/midas/Res/RDV?p=pdf&key=aeq7Glypkm&n=390889.PDF

https://www.research.hsbc.com/midas/Res/RDV?p=pdf&key=3K7XFYXYBg&n=320592.PDF

https://www.research.hsbc.com/midas/Res/RDV?p=pdf&key=3K7XFYXYBg&n=320592.PDF

15


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This is an extract from the full report ‘Reading

UK surveys: Top gear or false steer?’,

1 November.

Over recent months survey data across the board

has been very strong. Official data have also

improved, but have failed to keep pace with the

rampant surveys. Still, it would be wrong to

ignore the surveys and most economists use them

to inform their forecasts of the latest quarter’s

GDP growth.

We try to assess the incremental value of survey

data for forecasting the preliminary UK GDP

release. Initially, we focus only on services

activity because this accounts for about three

quarters of total UK output. We compare two

models: one model uses survey data and the other

doesn’t (naïve model). Our key findings are:

When trying to forecast the initial outturns of

services growth over our full data sample, a

simple model that includes the PMI clearly

out-performs a model that doesn’t.

But before the 2008/09 recession, the PMI

model only marginally outperformed the

naïve model.

So there is a danger that forecasters put too

much faith in the surveys once the economy

starts to normalise.

In general, average errors are large.

Forecasting GDP with surveys is a highly

uncertain business.

The PMIs help forecast initial growth

outturns but aren’t good at predicting revised

or ‘final’ data.

A similar exercise using the output component of

the manufacturing PMI and real-time data on

manufacturing output showed clear evidence that

the PMI is useful for forecasting throughout the

sample period, although the fit improves greatly

as the recession hits.

Services and manufacturing together make up 86%

of the UK economy. So combining model-based

forecasts of services and manufacturing output into

a rough nowcast for GDP growth suggest very

strong growth of 1.2% in Q4. But our own forecast

for Q4 growth, based on a wider set of indicators, is

currently just 0.5%. We should bear in mind that

the model-based forecasts are highly uncertain with

the model, unhelpfully, only able to predict Q4

growth of between 0.1% and 2.3% qoq confidently.

Survey data make forecasting models better but

they do not make them good.

Another reason to aim off the simple models is

that they forecast only the output side of the

economy. GDP by expenditure looks less

buoyant. Real pay is still being squeezed and

investment is picking up only slowly. However,

with the services PMI having risen again since in

October it is safe to say that there are big upside

risks to our Q4 growth forecast.

Reading UK Surveys

Surveys are helpful, but don’t put too much weight on them

Simon Wells

Chief UK Economist HSBC Bank plc +44 20 7991 6718 [email protected]

https://www.research.hsbc.com/midas/Res/RDV?p=pdf&key=rQ0Q8jNdb7&n=392727.PDF

https://www.research.hsbc.com/midas/Res/RDV?p=pdf&key=rQ0Q8jNdb7&n=392727.PDF

16


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Following an aggressive sell-off during the

financial crisis, the Norwegian Krone enjoyed

four consecutive years of increasing strength to

the end of 2012. Since the beginning of this year,

however, the trend has reversed and the NOK has

fallen by about 9% on a trade-weighted basis

(chart 1) and by 12% against the euro.

Why has the NOK traded so badly, and are there

any signs that this period of weakness is coming

to an end? NOK weakness this year seems to have

been caused by a combination of changed

perceptions of Norway’s cyclical outlook, reduced

fears over the future of the Eurozone, and ever

decreasing relative liquidity.

Weaker cyclical outlook

One of the reasons for continued NOK strength in

late 2012 was the belief that the Norges bank

would soon have to start raising rates again

because of the strength of the economy and the

growing risk of a housing bubble. Despite official

discomfort with the strength of the NOK at the

time, the market belief was that the authorities

would accept a strong currency rather than see the

domestic economy getting out of hand.

Chart 2 shows expected 3m interest rate spreads

between NOK and the EUR and USD out one

year. In early 2012 these spreads widened out

until the Norges bank cut rates in March (mostly

in response to currency strength), but stayed

around 160bp for the rest of the year as the market

believed that rates would soon have to be

increased again.

This year expected interest rate spreads narrowed,

especially in June, when the Norges bank

surprised the market by turning more dovish,

saying that policy rates would probably need to be


1. NOK has had a bad year so far

84

86

88

90

92

94

Jan-11 Jul-11 Jan-12 Jul-12 Jan-13 Jul-13

84

86

88

90

92

94

Import-weighted NOK

Wea

ker N

OK

Stro

nger

NO

K


17


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kept lower for longer than had previously been

thought. This change in central bank view had a

significant impact on the currency (chart 1).

Since then, there have been further signs that

pressures on the Norges bank to move back to

more normal interest rates have eased further,

with consensus GDP forecasts being downgraded

(chart 3) and the rise in house prices moderating

further (chart 4).

Reduced fears of a Eurozone break-up

One of the factors behind the strength of the NOK

in 2009-2012 was the fear that the sovereign debt

crisis in the Eurozone would lead to the break-up

of the currency union. European investors wanting

to reduce exposure to the Eurozone saw NOK as

an attractive alternative. In 2013, however, fears

over the future of the Eurozone are much reduced

as can be seen by the narrowing of sovereign bond

spreads (chart 5). The incentive to accept lower

yields in Norway has been reduced.

The behaviour of NOK during 2013 suggests that

investors have been reducing their exposure to the

currency on a scale that it has proved difficult for

the market to absorb (chart 6).

2. Expected interest rate spreads narrowed this year

1.00

1.20

1.40

1.60

1.80

2.00

2.20

Dec-12 Mar-13 Jun-13 Sep-13

1.00

1.20

1.40

1.60

1.80

2.00

2.20

US-NOK 3M differential (4th contract) EUR-NOK 3M differential (4th contract)% %


3. GDP growth forecasts have been downgraded

2.1

2.3

2.5

2.7

2.9

Nov -11 Mar-12 Jul-12 Nov -12 Mar-13 Jul-13

2.1

2.3

2.5

2.7

2.92013 Norw ay GDP consensus (% y -o-y )


18


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The episodes of sharp weakness, though perhaps

triggered by news events, are suggestive that

relatively large transactions are going through the

market. This leads to the third main reason why

the NOK has traded so poorly this year –

declining relative market liquidity. Declining relative liquidity

Volumes in the FX market have continued to

grow rapidly in recent years. The BIS triennial

survey showed spot transactions in April 2013 at

more than USD 2tr per day, more than double

their level in 2007. The vast majority of this

turnover relates to financial market transactions

for investment and hedging purposes.

As the market has grown, the relative liquidity of

NOK has declined. Table 7 shows the currency

distribution of FX market turnover according to

the BIS survey. NOK has dropped from 10th in

2007 to 14th in 2013, as EM currencies such as

CNY, MXN and RUB have grown. According to

the BIS, daily turnover in EUR-NOK is about

USD 20bn per day, compared with USD 1,300bn

per day in EUR-USD.

4. The risk of a housing bubble seems reduced

Norw egian House Prices (% y -o-y )

-10%

-5%

0%

5%

10%

15%

20%

25%

1993 1995 1997 1999 2001 2003 2005 2007 2009 2011 2013

-10%

-5%

0%

5%

10%

15%

20%

25%

Source: Statistic Norway, HSBC

5. Reduced fears over the Eurozone future have made NOK relatively less attractive

1

2

3

4

5

6

7

Jan-11 May -11 Sep-11 Jan-12 May -12 Sep-12 Jan-13 May -13 Sep-13

1

2

3

4

5

6

7Spain-Germany Italy -Germany

10 y r bond y ield spread% %


19


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This declining relative liquidity is important given

the history of the currency since 2008. During the

crisis, there was an indiscriminate fall in all but the

perceived safe haven currencies, and this saw

EUR-NOK rise as high as 10 by end 2008. From

early 2009 to end 2012, the NOK gained ground

steadily as the attractions of Norway’s strong

economic fundamentals and fears over the future of

the Eurozone drew funds into the currency (chart 8). Positions gradually built over four years cannot

easily be cut in an illiquid market without having a

significant impact on price. Changed expectations

about Norges bank policy and reduced fears of a

Eurozone break-up may well have induced investors

to reduce exposure to the NOK, and the sharp fall in

June may have induced further liquidation in

August and September. The fall in SEK after very

weak inflation numbers in November seems to have

been behind the latest fall. Hence, despite what still

appear to be very attractive fundamentals, we are

left with a currency that is languishing at

surprisingly weak levels.

7. NOK no longer a top 10 currency by trading volume

2001 2004 2007 2010 2013 Currency Share Rank Share Rank Share Rank Share Rank Share Rank

USD 89.9 1 88.0 1 85.6 1 84.9 1 87.0 1 EUR 37.9 2 37.4 2 37.0 2 39.1 2 33.4 2 JPY 23.5 3 20.8 3 17.2 3 19.0 3 23.0 3 GBP 13.0 4 16.5 4 14.9 4 12.9 4 11.8 4 AUD 4.3 7 6.0 6 6.6 6 7.6 5 8.6 5 CHF 6.0 5 6.0 5 6.8 5 6.3 6 5.2 6 CAD 4.5 6 4.2 7 4.3 7 5.3 7 4.6 7 MXN 0.8 14 1.1 12 1.3 12 1.3 14 2.5 8 CNY 0.0 35 0.1 29 0.5 20 0.9 17 2.2 9 NZD 0.6 16 1.1 13 1.9 11 1.6 10 2.0 10 SEK 2.5 8 2.2 8 2.7 9 2.2 9 1.8 11 RUB 0.3 19 0.6 17 0.7 18 0.9 16 1.6 12 HKD 2.2 9 1.8 9 2.7 8 2.4 8 1.4 13 NOK 1.5 10 1.4 10 2.1 10 1.3 13 1.4 14 SGD 1.1 12 0.9 14 1.2 13 1.4 12 1.4 15

Source: BIS, HSBC

6. Price movements in recent months are indicative of position liquidation

EUR-NOK

7.2

7.4

7.6

7.8

8.0

8.2

8.4

Jan-13 Feb-13 Mar-13 Apr-13 May -13 Jun-13 Jul-13 Aug-13 Sep-13 Oct-13 Nov -13

7.2

7.4

7.6

7.8

8.0

8.2

8.4


20


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Is it over?

The analysis suggests that the NOK has been

driven this year by liquidation of investment

positions built up over several years in a relatively

illiquid market. It is obviously very difficult to

identify when this process may be over, but there

are reasons to suggest that the NOK may enjoy a

better performance going forward. Relative cyclical position improving

Weaker growth expectations in Norway are

increasingly being matched by lowered expectations

elsewhere, with growth expectations for the US and

much of the EM world being cut. Despite lowered

expectations for growth this year, the prospects for

the Norwegian economy are still good. Real wage

growth is strong and unemployment is low, so

consumer spending should be well supported next

year (charts 9 and 10).

8. A protracted period of NOK strength may have encouraged position building

EUR-NOK

7.0

7.5

8.0

8.5

9.0

9.5

10.0

Dec-08 Jun-09 Dec-09 Jun-10 Dec-10 Jun-11 Dec-11 Jun-12 Dec-12 Jun-13

7.0

7.5

8.0

8.5

9.0

9.5

10.0


9. Real wage growth is strong… 10. …and unemployment low

-2.0

-1.00.0

1.02.0

3.0

4.05.0

6.0

Mar-02 Mar-04 Mar-06 Mar-08 Mar-10 Mar-12

-2.0

-1.00.0

1.02.0

3.0

4.05.0

6.0

Real w age % change y -o-y% %

1.0

1.5

2.0

2.5

3.0

3.5

4.0

Mar-02 Mar-04 Mar-06 Mar-08 Mar-10 Mar-12

1.0

1.5

2.0

2.5

3.0

3.5

4.0

Unemploy ment rate% %


21


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We expect Norwegian GDP growth to be the

strongest in the G10 next year (chart 11), so the

relative attractiveness on the NOK would seem to

be growing again.

The fall this year has now made NOK ‘cheap’

The fall in the NOK this year has pushed its real

effective exchange rate back down to levels last

seen in 2009 and to about 3% below its 5 year

moving average (chart 12). While this is not an

absolute measure of value, the currency has traded

in a range about 5% above and below this moving

average since mid 2009 and it is now towards the

low end of its range.

Furthermore, within the G10 only the yen is

further below its 5 year REER average, and this

reflects a policy-induced currency fall from very

elevated levels (chart 13). Relative to the other

G10 currencies, NOK would appear to offer good

value at current levels.

11. Norwegian GDP growth expected to be the strongest in the G10 next year

0.0%

0.5%

1.0%

1.5%

2.0%

2.5%

3.0%

3.5%

4.0%

Nor

way

*

New

zeal

and

Aust

ralia US

UK

Can

ada

Ger

man

y

Japa

n

Euro

zone

Fran

ce

Italy

0.0%

0.5%

1.0%

1.5%

2.0%

2.5%

3.0%

3.5%

4.0%GDP grow th forecasts for 2014

Source: HSBC * Mainland

12. NOK at the low end of its 4 year range on a REER basis

90

95

100

105

110

115

120

125

Jan-01 Jan-02 Jan-03 Jan-04 Jan-05 Jan-06 Jan-07 Jan-08 Jan-09 Jan-10 Jan-11 Jan-12 Jan-13

90

95

100

105

110

115

120

125NOK Trade-Weighted REER 5 Yr MA IndexIndex

1 Jan 1996 = 100


22


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The fundamentals remain as strong as ever

Finally, the economic fundamental for Norway

remain as compelling as ever. Solid GDP growth

and low inflation are combined with large fiscal

and current account surpluses all of which means

that Norway is in a stronger economic position

than its G10 peers (chart 14). Of course, these

fundamentals did not stop the NOK falling this

year, but combined with the other factors outlined

above, the case for a NOK recovery is now

stronger than ever.

Conclusion

The NOK has not performed well thus far in 2013

as lowered interest expectations and reduced fears

on the future of the Eurozone seem to have

triggered investment position reduction in an

illiquid market. While it is impossible to be

completely confident that this process is over,

bright economic prospects for 2014 suggest that

NOK may again be becoming more attractive. At

the same time, the falls this year mean that those

looking to buy NOK are doing so at levels that

appear to offer good value.

14. Norway retains its enviable budget and current account surpluses

New Zealand

CanadaAustraliaUS

UK

Japan

EurozoneSw eden

Sw itzerland

Norw ay

-15%

-10%

-5%

0%

5%

10%

15%

-6% -4% -2% 0% 2% 4% 6% 8% 10% 12% 14% 16%

Current account (% GDP), 2013f

Budg

et (%

GD

P), 2

013f

Current account v s Fiscal balance for G10 countries, 2013f

Source: HSBC

13. Only JPY is further below its 5 yr average on a REER basis

-25%

-20%

-15%

-10%

-5%

0%

5%

10%

15%

NZD SEK GBP CHF AUD EUR CAD USD NOK JPY

-25%

-20%

-15%

-10%

-5%

0%

5%

10%

15%% gap betw een current trade w eighted REER and 5y r MA


23


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More CAD headwinds The Bank of Canada’s decision to drop its

tightening bias in October has been followed by

some slippage in the CAD, while better US data

and yet another shift in Fed tapering expectations

have also supported USD-CAD.

BoC to neutral

Although the Bank of Canada left the overnight

target rate unchanged at 1.0% at its October 23

policy announcement, as widely expected, it

caught the market off guard by adopting a neutral

policy stance, removing the tightening bias that

had been in place for the past three years. In

making the change, the BoC noted, “the fact that

inflation has been persistently below target means

that downside risks to inflation assume increasing

importance”. The Bank remains concerned about

household imbalances (elevated levels of credit)

and as such shows no inclination to shift to a

dovish bias. Nonetheless the low inflation

backdrop has clearly taken on greater significance

as it has elsewhere, including the long standing

concerns and policy responses in Japan, the more

recent justification for the latest rate cut from the

European Central Bank, and the voiced concern

about lower US inflation by some Fed officials.

The Bank of Canada targets inflation in the

middle of a 1% to 3% band. For the past year,

headline CPI has held near and below 1%, the

bottom of the target band. In addition, core CPI,

one of the commonly used predictors of future

headline inflation, has ranged from 1.0% to 1.4%

in the past year (chart 1). Beyond that, our Canada

economist noted that in the BoC’s Autumn 2013

Business Outlook Survey, low inflation

expectations were becoming more firmly

entrenched, highlighted by the fact that 70% of

firms expected inflation of between 1% and 2%

over the next two years. Inflation below the 2%

target, as well as indicators and expectations that

it will persist well into the future, prompted the

shift in emphasis from the BoC.

Dollar Bloc

1. Inflation remains at the lower end of the BoC’s target range

0.0

0.5

1.0

1.5

2.0

2.5

3.0

3.5

4.0

Jan-10 May -10 Sep-10 Jan-11 May -11 Sep-11 Jan-12 May -12 Sep-12 Jan-13 May -13 Sep-13

0.0

0.5

1.0

1.5

2.0

2.5

3.0

3.5

4.0Canadian CPI, % YoY Canadian Core CPI (BoC), % YoY


24


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CAD reacts to the shift in BoC policy expectations

We have regularly highlighted the BoC’s

tightening bias in our views and outlook for the

CAD in recent years. It is also the case that the

BoC has steadily diluted that tightening bias in a

manner whereby markets expected no imminent

rate hike. Indeed, BoC policy expectations as

measured by 1-year Canada OIS rates (where

markets expect the overnight rate to be in a year’s

time) have been relative steady for quite some

time, leaving little opportunity to impact the

CAD. That said, markets are now looking even

further into the future, due in part to forward

guidance by many major central banks that policy

interest rates will not start to increase until well

into the future, perhaps not for two or three years.

As a result, we looked at 2-year Canada OIS and

found that the rate has dropped more noticeably in

the last two months, from above 1.35% in

September down to 1.10% in the week after the

BoC dropped the tightening bias in October,

suggesting the market began pricing out 2015

tightening as well. And that shift lower in yields

did indeed coincide with some slippage in the

CAD (chart 2).

CAD strength not welcome

Two other notes on the Bank of Canada in regards

to the CAD. First, the BoC again referenced the

delay in the expected rotation of demand in

Canada towards exports and investment as it did

in its September statement. However, the

continued delay was a factor causing the Bank to

lower its growth forecasts in October. While the

BoC did not specify the currency’s role in that

regard, the sought after shift towards increased

exports would be impeded by a stronger CAD.

Second, CAD fluctuations also play a role in

inflation. Given the newfound focus on

undershooting the inflation target, that too

represents a condition that would be exacerbated

by CAD strength.

Canada data is mixed

On the data front, Canada’s October jobs report

was mixed. Employment rose 13.2K in October,

near expected, and the 16K rise in full time jobs

added an element of strength to the headline.

However, private sector employment fell 22.1K

on the month, with government employment

jumping 47.3K, a clearly less favourable mix.

Hourly wages increased 1.7% y/y, down from the

1.8% pace in September and suggesting

less-strong consumption (without dipping into

2. BoC rate hikes pushed back

1.0

1.1

1.2

1.3

1.4

01-Aug-13 16-Aug-13 31-Aug-13 15-Sep-13 30-Sep-13 15-Oct-13 30-Oct-13

1.02

1.03

1.04

1.05

1.06

2-y ear Canada OIS, % USD-CAD (inv erted, RHS)


25


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savings or using credit, which would also be less

favourable). It is also a factor contributing to low

levels of inflation. The unemployment rate was

steady at its cycle low of 6.9%, but the labour

participation rate also held at its cycle low of

66.4%. On balance, the modest pace of job

creation, low wage growth and low participation

suggest a softer pattern of consumption and

overall growth going forward. Looking ahead,

potentially key data include readings on October

CPI and retail sales, and the Q3 reports on the

current account and GDP.

Better US jobs data puts Fed tapering back on the radar, aiding the USD

The USD itself has received an additional lift

following the strong October employment data in

the US. Although many market participants had

previously assessed that Fed tapering was unlikely

to begin until Q1 2014, the report raised at least

some risk of a December tapering. US yields have

risen notably following the data and the USD has

gained broadly as well, including against the

CAD. If tapering expectations continue to build,

and are followed by actual tapering at the

December 17-18 FOMC meeting, the USD should

continue to benefit, and we would expect USD-

CAD to make new highs for the year (the existing

high was 1.0609 reached in July). However, given

the September “no tapering” experience, we have

less conviction that the Fed will act in December.

Moreover, that same experience will leave the

market more cautious as well. We recognize that

the market’s Fed policy expectations will continue

to evolve, and that this latest shift has indeed

aided the USD. But lacking clearer guidance from

key Fed officials and additional, supporting

economic data, we suspect further USD-CAD

gains based on Fed tapering expectations will get

more difficult in the coming month. We continue

to look for USD-CAD to move higher, and for

Fed tapering to play a role in that move, but we

expect more of that dynamic to play out in 2014,

rather than into the end of this year.

26


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Talking down the AUD

AUD rose to 4-month high of 0.9750 on 22

October despite a lack of supporting economic

data. At its last meeting (5 November) the RBA

expressed concern over the elevated currency and

noted that cutting rates further is an option.

However, we think this option is unlikely. Cutting

interest rates further seems somewhat unpalatable,

because low rates are already getting traction and

even lower interest rates could risk overinflating

the housing market. Instead, the RBA will attempt

to jawbone the AUD lower.

Recent economic activity and housing market data

showed more signs that lower interest rates have

been supporting the economy. Retail sales

surprised to the upside rising 0.8% (against

expected 0.4%) in September. Low interest rates

are supporting rising asset prices which, in turn,

now appears to be flowing through to a bit more

retail spending. Moreover, house prices have been

rising (chart 1) with Q3 data showing a 1.9%

increase from a previous quarter and we expect

the trend to continue (see ‘Downunder digest:

Australia’s housing boom: no bubble yet’,

8 October). Inflation has also been on the upward

trend since the second half of the year (chart 2).

Headline CPI rose 1.2% in Q3 (vs expected 0.8%)

pointing out that while inflation remains

comfortably in the RBA target band, it is picking

up at a pace that is faster than expected. Summing

up the above, any further rate cut could accelerate

house prices and inflation from their already

modest levels and thus mute the effects of weaker

AUD on the economy.

What options does the RBA then have to weaken

the currency? The RBA knows that the level of

the AUD is mostly determined by international

investors and other major central banks’ actions.

At the same time, they would like to see growth

rebalance more, which leaves them hoping the

AUD will do some more work for them. The

AUD is a classic risk currency that still needs US

flows and therefore earlier tapering could put

some downward pressure on the AUD and help

facilitate further rebalancing. However, with the

disruptions from the US fiscal debacle, tapering is

now viewed to be delayed until 2014. Therefore,

at this stage the most likely policy tool to be

applied is jawboning the currency lower. The

Governor, Glenn Stevens, in his speech on

29 October suggested the AUD was still too high.

Further, following the November rate

announcement, RBA’s Assistant Governor

Debelle gave commentary at the IMF in

Washington suggesting that ‘in Australia’s case,

an exchange rate appreciation that is not in line

with the fundamentals, if persistent enough, can

lead to Dutch Disease’.

1. Lower rates have been driving house prices up 2. Inflation has picked up since beginning of 2013

5.0

6.0

7.0

8.0

9.0

Sep-08 Sep-09 Sep-10 Sep-11 Sep-12 Sep-13

-4.0

-2.0

0.0

2.0

4.0

6.0

Mortgage rate, % per annum (inv erted, RHS)House price, % QoQ

-0.2

0.0

0.20.4

0.60.8

1.01.2

1.4

Sep-10 Mar-11 Sep-11 Mar-12 Sep-12 Mar-13 Sep-13

-0.2

0.0

0.20.4

0.60.8

1.01.2

1.4CPI, % QoQ


https://www.research.hsbc.com/midas/Res/RDV?p=pdf&key=Ap5dfelrJx&n=389015.PDF

https://www.research.hsbc.com/midas/Res/RDV?p=pdf&key=Ap5dfelrJx&n=389015.PDF

27


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In all, we believe the RBA’s strategy of talking

the currency down will prove to be effective for

now. With labour market still weak and the

Central Bank projecting it to remain on the back

foot throughout 2014 the economy is still looking

fragile. This as well as generally choppy global

economic outlook and soft commodity prices,

should also keep pointing towards weaker AUD.

28


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G10 at a glanceCHF Switzerland: Deflation threat will not lead to changes

1.01.11.21.31.4

1.51.61.7

Jan-

02

Jan-

03

Jan-

04

Jan-

05

Jan-

06

Jan-

07

Jan-

08

Jan-

09

Jan-

10

Jan-

11

Jan-

12

Jan-

13

0.6

0.8

1.0

1.2

1.4

1.6

1.8

EUR- CHF (LHS) USD- CHF (RHS)

Until recently the risk of deflation seemed to have diminished, with data coming out at around zero the last four months. However, in October year-on-year CPI showed a drop of 0.3%. As there is little in the way of policy to counter the threat of renewed deflation, this appears to be worrying. Further, disappointing inflation data when taken together with the surprising ECB cut, left many asking if the Swiss would adjust the EUR-CHF floor?

In our view the answer is simple: No. The floor has survived some hairy moments, particularly in 2012 when the Swiss had to buy massive amounts of EUR into their reserves. Since then, the EUR-CHF has settled in the 1.20 - 1.25 range and the SNB must be very happy with this level of stability. Therefore, we think, the Central Bank has no incentive to put themselves back into a precarious position and will have to live with the renewed deflation threat.

Source: Bloomberg

EUR-NOK Norway: XXX

7.0

7.5

8.0

8.5

9.0

9.5

10.0

10.5

Jan-

02

Jan-

03

Jan-

04

Jan-

05

Jan-

06

Jan-

07

Jan-

08

Jan-

09

Jan-

10

Jan-

11

Jan-

12

Jan-

13

7.0

7.5

8.0

8.5

9.0

9.5

10.0

10.5

See ‘NOK recovery finally in sight’, page 16

Source: Bloomberg

EUR-SEK Sweden: Rate cuts back on the agenda

8.08.48.89.29.6

10.010.410.811.211.612.0

Jan-

02

Jan-

03

Jan-

04

Jan-

05

Jan-

06

Jan-

07

Jan-

08

Jan-

09

Jan-

10

Jan-

11

Jan-

12

Jan-

13

8.08.48.89.29.610.010.410.811.211.612.0

The feeling that many got after the last Riksbank minutes (6 November) was that rates could stay low for longer even if the economy was to show signs of improvement. The PMI for manufacturing has been moving higher and so has the service sector PMI and hence these comments put the market’s mind at rest. Two days later the economic bombshell came.

Industrial production for September was unchanged whilst the market had expected a solid bounce back following a big drop the month before. Meanwhile, industrial orders fell 2.9% following a drop in the previous month.

In short, if the Riksbank is prepared to keep rates low into an improving economic environment surely they are inclined to cut rates into renewed economic weakness. Hence rate cuts are back on the agenda. This should put downward pressure on the SEK particularly against the NOK which we think is ripe for a rally.

Source: Bloomberg

29


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The October FOMC meeting, which saw Fed

officials displaying less concern over the

‘tightening of financial conditions’, saw Asian

currencies soften. We suspect that some Asian

central banks had used earlier periods of lower FX

volatility to rebuild FX reserves. In most places,

FX reserves increased through September and

October, which suggests Asian policy makers are

better prepared for the eventual tightening of USD

liquidity and its impact on regional currencies.

But going into 2014, we believe most of Asian

currencies are likely to remain under downward

pressure, especially versus the USD. Regional

growth has stabilized, but not accelerated. In most

places, policymakers still need to proceed with

challenging structural reforms. As such we still

think this is a ‘pick and choose’ market where

those Asian currencies with weaker fundamentals

and external balances will underperform (i.e. INR

and IDR).

The INR had benefited from some positive

sentiment stemming from proactive decisions by

the RBI to normalize interest rates and focus on

inflation. The expected expiry of the temporary

swap windows for onshore oil companies as well

as FCNR accounts by the end of November will

be a critical test to the currency’s recent stability.

As for the IDR, recent rate hikes and an

improvement in onshore FX liquidity should point

to some more optimism for the currency. But

more time is needed to ascertain if we are seeing

the beginning of a sustainable development. The

IDR is not out of the woods in our view.

The MYR initially traded positively on the

unveiling of the 2014 budget on 25 October (See

‘Malaysia’s budget: A cautious, balanced

strategy’, 25 Oct 2013). But we maintain our

caution towards this currency, believing it will

remain relatively volatile for some time.

For those currencies with better fundamentals,

FX policy is now coming to the fore. The PHP

remains supported by healthy external balances

and remittance inflows typically show a seasonal

pick-up in Q4. However we see small likelihood

of an outperformance given rising FX intervention

and richer valuation. (See ‘PHP: A currency for

all seasons?’, 31 October 2013).

Similarly in Korea, rising policy resistance has

supported USD-KRW despite strong trade

numbers and portfolio inflows. The SGD stands

out in this respect following the MAS decision on

14 October to maintain the appreciation path of

the SGD NEER. The MAS stance suggests policy

tolerance for further appreciation of the SGD,

which is currently trading above the mid-point but

further away from the ceiling of our revised SGD

NEER band. (See ‘SGD: Battle of the Band’,

6 November 2013)

The RMB has been the best-performing Asian

currency since the October FOMC meeting. Prudent

monetary policy by the PBoC has kept interbank

liquidity relatively tight. Economic data continued to

show stabilization in the domestic economy.

Moreover the PBoC has continued nudging the

onshore CNY fix lower despite renewed USD

strength. This has fuelled expectation of a band-

widening move and further FX reforms. We expect

policy makers to continue to push forward with

RMB internationalization and capital account

liberalization measures.

Asia – regional overview

https://www.research.hsbc.com/midas/Res/RDV?p=pdf&key=86ASGp9L7R&n=391907.PDF

https://www.research.hsbc.com/midas/Res/RDV?p=pdf&key=86ASGp9L7R&n=391907.PDF

https://www.research.hsbc.com/midas/Res/RDV?p=pdf&key=eBlUw7Wx9i&n=392587.PDF

https://www.research.hsbc.com/midas/Res/RDV?p=pdf&key=eBlUw7Wx9i&n=392587.PDF

https://www.research.hsbc.com/midas/Res/RDV?p=pdf&key=ctf1nnNsDf&n=393232.PDF

30


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USD-CNY China (CNY): Reforms on the cards

6.06.26.46.66.87.07.27.47.67.88.08.28.4

Jan-

05

Jan-

06

Jan-

07

Jan-

08

Jan-

09

Jan-

10

Jan-

11

Jan-

12

Jan-

13

6.06.26.46.66.87.07.27.47.67.88.08.28.4

We expect more detailed measures on FX liberalisation and capital convertibility to emerge now that the third Plenum has been completed. The PBoC’s recent daily FX operations – via both intervention and movements in the USD-CNY fix – suggest that FX liberalisation, including a potential widening of USD-CNY’s daily trading band, could be around the corner.

The new Shanghai Free Trade Zone should start to take off when more detailed rules are announced after the plenum. We expect the zone to be a test ground for RMB convertibility, enhancing offshore RMB liquidity over time.

China’s FX reserves increased by USD166bn in Q3, the biggest quarterly gains since Q1 2011. FX inflows have rebounded strongly after posting a small net outflow in late 2Q. Strong inflows pressures are supporting the CNY but this is challenge for the authorities when trying to introduce more market driven FX reforms.

Source: Bloomberg

USD-HKD Hong Kong (HKD): The peg is here to stay

7.70

7.72

7.74

7.76

7.78

7.80

7.82

7.84

97 99 01 03 05 07 09 11 13

7.70

7.72

7.74

7.76

7.78

7.80

7.82

7.84 The HKD’s Linked Exchange Rate System (LERS) had its 30th

anniversary in October. We do not believe the system is under pressure to change. Despite the importing of low interest rates, Hong Kong’s inflation remains inline with its long-term average.

In other words headline inflationary pressures are not rising because of a low interest rate setting. In addition, the authorities have enough tools via macro-prudential measures and fiscal policy to curb excessive asset price inflation. And it is unclear whether an alternative system to the LERS would work better.

Despite Fed tapering concerns and Hong Kong’s weakening current account position, the HKD has remained stable and credibility of the LERS remains intact. We think the HKD peg is here to stay for the foreseeable future.

Source: Bloomberg

USD-PHP Philippines: A currency for all seasons?

25

30

35

40

45

50

55

60

97 99 01 03 05 07 09 11 13

25

30

35

40

45

50

55

60

We had favoured the PHP compared to its ASEAN peers but we note that the positive impact of stronger Q4 remittance flows on the currency has been declining in recent years. This is due to the growing importance of capital flows for the PHP, and is also a reflection of FX policy curtailing seasonal PHP strength.

We also believe that much of the good news is “in the price” for the Philippines. Onshore bond yields remain lower than in the likes of Malaysia and Thailand (despite their stronger credit ratings), with little possibility of another ratings upgrade in the near future, in our view. Meanwhile, the PHP appears to be one of Asia’s most overvalued currencies on a REER basis.

The PHP should still hold up better than many of its peers, especially if broad USD strength re-emerges. Stable foreign inflows will remain supportive, while the country’s strong fundamentals should encourage investors to remain invested onshore, even if external factors start to turn negative.

Source: Bloomberg

Asia at a glance

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Asia at a glance continued USD-KRW South Korea: FX policy becoming more of a barrier

800

1000

1200

1400

1600

1800

2000

97 99 01 03 05 07 09 11 13

800

1000

1200

1400

1600

1800

2000

The KRW continues to be one of the region’s most consistent outperformers thanks to its strong fundamentals. The current account surplus is pushing higher on the back of resilient exports. The financial account, particularly in terms of portfolio investment, has also registered sizable inflows.

But policy makers are showing increasing resistance towards further strengthening of the KRW. Several officials from the Finance Ministry have made comments warning against ‘excessive currency strength’ amidst heightened external uncertainty. Their moves have capped the strength of the KRW versus the USD.

Going into next year, the solid balance of payments position will continue to support our view that the KRW will be one of Asia’s most resilient currencies. Given its strong fundamentals, authorities may face an uphill battle in trying to stem the currency’s strength.

Source: Bloomberg

USD-SGD Singapore: Battle of the band

1.10

1.20

1.30

1.40

1.50

1.60

1.70

1.80

1.90

97 99 01 03 05 07 09 11 13

1.10

1.20

1.30

1.40

1.50

1.60

1.70

1.80

1.90

At its biannual meeting in October, the MAS maintained a path of modest and gradual appreciation for the SGD NEER. Since then, the SGD stands out as one of the few currencies where external flows appear to support appreciation and where FX policy is not providing a stiff barrier to ongoing currency gains.

We have slightly shifted the mid-point of estimated SGD NEER policy band in our model. Despite this, we still see the SGD NEER in the top half of the policy band, and thus only limited room for independent SGD appreciation. However, into 2014 the SGD is likely to be an outperformer.

The MAS’s ongoing hawkish bias and the underlying trend for SGD NEER appreciation should remain intact at least until the next MAS policy meeting. If so, the SGD could actually outperform versus currencies where FX policy is more focused on curbing currency appreciation or building up FX reserves, or where external balances are much less supportive.

Source: Bloomberg

USD-MYR Malaysia: Remain cautious despite budget

2.4

2.8

3.2

3.6

4.0

4.4

4.8

97 99 01 03 05 07 09 11 13

2.4

2.8

3.2

3.6

4.0

4.4

4.8

Liquid markets, relatively higher yields and benign FX policy have seen the MYR trading in a higher beta manner than most other currencies in the region. While this has helped the currency, we think it also makes the MYR vulnerable when USD liquidity inevitably tightens.

The FY2014 budget, presented on 25 October, has helped stave off some near-term concerns about Malaysia’s fiscal dynamics. The MYR initially reacted positively on the news that the government will introduce the much-anticipated Goods and Services Tax (GST). But beyond the knee-jerk reaction, the degree of implementation will remain a key test.

In the medium-term, the decline in the MYR’s external balances, as well as sizable presence of foreign investors in the onshore markets, leaves the currency more vulnerable than others. Although it is unlikely to fall into deficit currency category, we think the central bank should use pockets of MYR strength to bolster its FX reserves buffer further.

Source: Bloomberg

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Fed tapering, Mark 2

External drivers, in particular the renewed rise in

US yields, have taken precedence again pushing

USD-LatAm FX higher again. Our previous call

that a window of opportunity for tactical trades

had been opened has come under challenge as

regional currencies have broken out of their recent

ranges in the last few days. Still, we continue to

believe that differentiation does matter and see

pockets of value in currencies with better

fundamentals like the MXN as well as those

supported by official intervention like the PEN

and BRL.

Last month we discussed our more constructive

view on LatAm currencies as being a short term

tactical view. The key risk we highlighted for any

(selective) long LatAm positioning was a possible

rise in US yields on expectations of Fed tapering.

Indeed, following the stronger October US payroll

data we have seen this risk play out.

US 10-year yields have risen from 2.48% to

2.78%, with the last 18bps of this move coming

post-payrolls. With this rise in US yields we have

witnessed a stronger dollar, not just against

LatAm, but most EM currencies. Once again,

investors have grown cautious on EM FX as an

asset class, particularly among the ‘deficit’

countries. Within the LatAm space, the BRL

(8%), CLP (5%), COP (3%) and MXN (3%) have

been hardest hit vs the USD.

Broadly, we are cautious on LatAm FX given the

uncertain global environment, particularly

regarding the path of US rates. However, we still

see pockets of value. Notably we like buying the

PEN around the 2.80/USD level given the central

bank’s defence of the PEN at that level. The

MXN also looks relatively cheap, and while we

would look to sell USDs above 13.30, we would

caution that the MXN has shown the tightest

correlation to US yields. Therefore, should US

10-year rates keep ticking higher, we would

expect USD-MXN to do the same, but neither is

our house view.

BRL also looks somewhat oversold around the

2.35 level and we believe that the rate of

depreciation should moderate on account of:

1) improved valuations, 2) higher interest rate

differentials, 3) expectations of an extension of the

intervention program, and 4) a more favourable

technical position. In the near-term, the BCB

remains committed in supporting the BRL via daily

dollar sales and recently announced it would begin

to roll its USD10bn worth of 1 December maturing

swaps, starting 12 November – an indication that it

intends to roll the full amount to prevent further

downside pressures on the BRL.

In contrast, Colombian authorities are still buying

USDs, and will likely be pleased with the recent

COP weakness, taking USD-COP back into their

previously-stated desired target range of 1900-

1950. This intervention is expected to be

continued through year-end, but is unlikely to be

renewed when it expires at end-2013 due to rising

fiscal costs and improved COP levels.

Latam– regional overview

33


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USD-BRL Brazil: Breaking out of the range

1.00

1.50

2.00

2.50

3.00

3.50

4.00

Jan-

02

Jan-

03

Jan-

04

Jan-

05

Jan-

06

Jan-

07

Jan-

08

Jan-

09

Jan-

10

Jan-

11

Jan-

12

Jan-

13

1.00

1.50

2.00

2.50

3.00

3.50

4.00

We had been arguing for range-bound BRL trading following the implementation of the BCB’s automated intervention program and apparent stability in US Treasuries. A spike in US Treasury yields following the better than expected October US payrolls pushed USD-BRL out of the recent 2.15-2.25 range.

On the domestic front, the acceleration of the fiscal deterioration - and the associated risks of a future ratings downgrade – is also weighing increasingly ont the BRL. As BRL moved back towards 2.35/USD, the BCB signalled earlier than usual that it would start rolling over the USD10bn in swaps maturing 1 Dec. In our view, this reflects their willingness to keep USD demand for hedging well supplied.

The external backdrop remains the main risk for the BRL, but we continue to believe that the rate of depreciation should moderate on account of: 1) improved valuations, 2) higher interest rate differentials, 3) expectations of extension of the intervention program, 4) more favourable technical position.

Source: Bloomberg

USD-MXN Mexico: Weaker USTs weigh on MXN

8.5

9.5

10.5

11.5

12.5

13.5

14.5

15.5

Jan-

02

Jan-

03

Jan-

04

Jan-

05

Jan-

06

Jan-

07

Jan-

08Ja

n-09

Jan-

10

Jan-

11

Jan-

12

Jan-

13

8.5

9.5

10.5

11.5

12.5

13.5

14.5

15.5

A confluence of factors have led to a weakening of the MXN, including softer domestic growth, concerns over a wider fiscal deficit and a stronger USD across all EM – in line with rising US yields. However, we believe there is room for the MXN to stage a recovery, based on three assumptions.

First, that UST yields will not rise significantly further. Second, growth in Mexico will rebound (our economists expect to 4.1% in 2014) and that stronger US activity will ultimately be deemed to be a positive factor for Mexican assets. Lastly, we see room for some upside surprise from the energy reforms slated to be passed by year end. To date, the government has indicated that they will favour profit-sharing contracts for foreign oil companies, but media reports (e.g. Bloomberg, 11/11) have suggested the government may consider more attractive production-sharing contracts or even concessions.

This could see accelerated foreign investment, and more room for the MXN to recover from current levels.

Source: Bloomberg

USD-CLP Chile: Political risks rise

400

450

500

550

600

650

700

750

800

Jan-

02

Jan-

03

Jan-

04

Jan-

05

Jan-

06

Jan-

07

Jan-

08

Jan-

09

Jan-

10

Jan-

11

Jan-

12

Jan-

13

400

450

500

550

600

650

700

750

800 The CLP has failed to avoid the recent EM sell-off, falling over

5% since mid-October. As well as the external factors already discussed in this section, political risks are also at play.

Michele Bachelet is widely expected to win the presidential election (to be held a few days after this publication goes to print), and has campaigned on a platform that includes significant increases in corporate taxes. Whatever the final tax reform, until we see more clarity investors are liable to remain cautious. Bachelet has also suggested her administration may make changes to the treatment of foreign investment (presently treated equal to local investment), which represents another potential worry to the market.

A further rate cut is also expected this month while copper prices have softened. CLP weakness may be overdone, however, and more clarity on the political front could allow a relief rally to take place. We still target 500/USD year end.

Source: Bloomberg

Latin America at a glance

34


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Looking for value in a hectic market

CEE-4 FX is relatively ‘safe’

The price action is very hectic since the Fed

decided to not taper in September. With such a

backdrop, the aim is to identify where the value is

and which are the defensive currencies.

We consider that CEE-4 currencies are the most

defensive in the EMEA space. They are less

vulnerable to a reduction of capital inflows to EM

as the structure of the balance of payments has

improved markedly over the past two years. CEE

current account deficits are now small and entirely

covered by EU structural funds. It is also worth

emphasising that foreign direct investments, the

most healthy flow, are smaller than prior to the

financial crisis but still large enough to entirely

cover the C/A deficits in most of the countries.

Moreover, FX reserves and solvency ratios are at

comfortable levels, providing extra buffer

CEE currencies are also relatively safe because

they do not show signs of valuation misalignment.

If the RON appreciation appears to be slightly

overdone, the PLN is fairly-valued while the CZK

and above all the HUF are cheap.

Don’t blindly avoid more vulnerable currencies

If CEE currencies offer the best value to

‘defensive’ characteristics, we are not necessarily

seeing more vulnerable currencies with large

external imbalances weakening much further.

If the recent set of economic data, persistent social

unrest and Fed tapering fear may keep the ZAR

under pressure in the near-term, we do not see a

major upward movement of USD-ZAR as the FX

adjustment has already largely occurred. In fact, we

retain a mild constructive view in the medium-term

as we believe that the past ZAR depreciation will

eventually lead to a reduction of the external deficit.

The case of TRY is interesting and specific. The

macro rebalancing in Turkey cannot be achieved

via a further currency appreciation given its

collateral damages on inflation. The interest

channel has to play its role to counter the rising

core inflation. Therefore, we expect the central

bank to tighten further its monetary policy,

enhancing the carry adjusted volatility and

propelling the TRY.

EMEA – regional overview

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USD-TRY Turkey: High inflation increases the pressure on the CBRT

1.1

1.3

1.5

1.7

1.9

2.1

Jan-

02

Jan-

03

Jan-

04

Jan-

05

Jan-

06

Jan-

07

Jan-

08

Jan-

09

Jan-

10

Jan-

11

Jan-

12

Jan-

13

Jan-

14

1.1

1.3

1.5

1.7

1.9

2.1

Inflation remains an important issue in Turkey. Although headline CPI has decelerated since the summer, core inflation measures have recorded a significant acceleration. The underlying inflationary pressures remain strong, fuelled by a robust domestic demand and weak TRY. The CBRT’s inflation target of 6.3% by year-end appears very difficult to achieve.

High inflation constitutes an important risk factor given Turkey’s wide current account deficit. With the uncertainties surrounding Fed tapering, the combination of high inflation and large external financing need may increase the downward pressures on the TRY.

We continue to believe that the right policy option is to increase interest rates further. Therefore, we retain a constructive view on the TRY as we expect the CBRT to tighten in coming months.

Source: Bloomberg

EUR-ILS Israel: The Bank of Israel will favour weaker shekel

3.10

3.50

3.90

4.30

4.70

5.10

Jan-

02Ja

n-03

Jan-

04

Jan-

05Ja

n-06

Jan-

07Ja

n-08

Jan-

09

Jan-

10Ja

n-11

Jan-

12Ja

n-13

Jan-

14

3.10

3.50

3.90

4.30

4.70

5.10

The unexpected appointment of Karnit Flug as Bank of Israel Governor is an event that should not be overlooked. Like her predecessor, K. Flug has a strong dovish bias and gives a pivotal role to the level of exchange rate. With her nomination and the subsequent new appointments within the board, the dovish stance of the BoI is strongly reaffirmed.

Given the sensitivity of the new Governor to the exchange rate, the BoI may intervene more aggressively to weaken the ILS. The BoI has bought about USD 1.3bn (as of end-Sept) out of 2.1bn in the FX purchases programme announced in May. The central bank still has some USD to buy by year-end but beyond the programme, discretionary buying may increase.

It is also worth emphasising that the BoI can count on the government's support. On 24 October, Finance Minister Yair Lapid said that the government will work with K. Flug to weaken the ILS.

Source: Bloomberg

EMEA at a glance

EUR-CZK Czech Republic: The CNB targets EUR-CZK at 27.00

22

24

26

28

30

32

34

Jan-

02

Jan-

03

Jan-

04

Jan-

05

Jan-

06

Jan-

07

Jan-

08

Jan-

09

Jan-

10

Jan-

11

Jan-

12

Jan-

13

Jan-

14

22

24

26

28

30

32

34 On 7 November, the Czech central bank decided to launch FX

intervention to weaken the CZK. The CNB announced that it is ready sell as much CZK needed to maintain EUR-CZK close to 27.00. This intervention policy will be maintained until significant inflationary pressures emerge.

The Czech Republic continues indeed to face a deflation risk despite signs of revival in economic activity. The issue is that the economic recovery is mainly driven a revival of exports, while the domestic demand remains very weak.

The so-called ‘monetary policy relevant inflation’, followed by the central bank, was at an uncomfortably low level of 0.2% in September. Inflation is likely to continue to trend lower with the risk of falling into negative territory in coming months. To counter this risk, the CNB will try reviving inflationary pressures via an increase in import prices. That can only be done with a persistently weak CZK in coming quarters.

Source: Bloomberg

36


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For full details of the construction methodology of

the HSBC REERs, please see “HSBC’s New

Volume-Weighted REERs” Currency Outlook

April 2009.

The value of a currency Since FX prices are always given as the amount of

one currency that can be bought with another, the

inherent value of a currency is not defined. For

example, if EUR-USD goes up, this could be

because the EUR has increased in value, the USD

has decreased in value, or a combination of both.

One possible method for getting some insight into

changes in the value of a currency is to look at

movements in the value of a basket of other

currencies against the currency of interest. For

example, if EUR-USD increased over some time

period, one could see how EUR had performed

against a range of other currencies to determine

whether EUR has become generally more valuable

or whether this was simply a USD-based move.

An effective exchange rate is an attempt to do this

and to represent the moves in index form.

There are two main approaches to building an

effective exchange rate: Nominal Effective

Exchange Rates (NEERs) and Real Effective

Exchange Rates (REERs). NEERs simply track

the weighted average returns of a basket of other

currencies against the currency being investigated;

REERs deflate the returns in an attempt to

compensate for the differing rates of inflation in

different countries. The reason for doing this is

that, particularly over long time frames, inflation

can have a large impact on the purchasing power

of a currency.

How should we weight the basket? If we are trying to create an index for the change

in value of a currency against a basket of other

currencies, we now need to decide on how to

weight our basket. One possible solution would be

to simply have an equally-weighted basket. The

rationale for this would be that there is no a priori

reason for choosing to put more emphasis on any

one exchange rate. However, this could clearly

lead to the situation where a large move in a

relatively small currency can strongly influence

the REERs and NEERs for all other currencies.

To avoid this, the indices are generally weighted

so that more “important” currencies get higher

weighting. This, of course, begs the question of

how “importance” is defined.

Trade Weights

Weighting the basket by bilateral trade-weights is

the most common weighting procedure for

creating an effective exchange rate index. This is

because the indices are often used to measure the

likely impact of exchange rate moves on a

country’s international trade performance.

Volume Weights

The daily volume traded in the FX market

dwarves the global volume of physical trade.

From this it is possible to make a convincing

argument that the weighting which would be

really important would be to weight the currency

basket by financial market flows, rather than

bilateral trade.

HSBC Volume-Weighted REERs

Mark McDonald FX Strategist HSBC Bank plc +44 20 7991 5966 [email protected]

https://www.research.hsbc.com/midas/Res/RDV?p=pdf&key=stwbxuj1rr&n=240077.PDF

https://www.research.hsbc.com/midas/Res/RDV?p=pdf&key=stwbxuj1rr&n=240077.PDF

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To do this properly would require us to have

accurate FX volumes for all currency pairs

considered in the index. However, these are not

available. The BIS triennial survey of FX volumes

only gives data for a small number of bilateral

exchange rates. However, the volumes are split by

currency for over 30 currencies. From these

volumes we can estimate financial weightings for

each currency. We believe that this gives another

plausible definition for “importance”, and one

which may be more relevant for financial

investors than trade weights. We call this

procedure volume weighting and the indices

produced through this procedure we call the

HSBC volume-weighted REERs.

We would argue that if you are a financial market

investor, the effective value of a currency you

would be exposed to is more accurately

represented by the HSBC volume-weighted index

rather than the trade-weighted index.

Data Frequency This is something which is rarely considered

when constructing REERs – inflation data is

generally released at monthly frequency at best so

the usual procedure is to simply create monthly

indices by default. However, some countries

release their inflation data only quarterly. The

usual procedure for these countries is to simply

pro-rata the change over the period. Here there is

an implicit assumption that the rate of inflation

changes slowly. We take this assumption one step

further and assume that it is valid to spread the

inflation out equally over every day in the month.

38


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USD REER index EUR REER index

80

100

120

140

160

Jul-95 Jul-98 Jul-01 Jul-04 Jul-07 Jul-10 Jul-13

80

100

120

140

160

USD Trade-Weighted REER USD Volume-Weighted REER

1996=1001996=100

60

70

80

90

100

110

120


60

70

80

90

100

110

120

EUR Volume-Weighted REER EUR Trade-Weighted REER1996=1001996=100

Source: HSBC Source: HSBC

JPY REER index GBP REER index

60

75

90

105

120


60

75

90

105

120

JPY Trade-Weighted REER JPY Volume-Weighted REER

1996=1001996=100

80

90

100

110

120

130

140


80

90

100

110

120

130

140

GBP Trade-Weighted REER GBP Volume-Weighted REER1996=100

1996=100


HSBC Volume – Weighted REERs

39


abc

CAD REER index CHF REER index

80

90

100

110

120

130

140

150


80

90

100

110

120

130

140

150

CAD Trade-Weighted REER CAD Volume-Weighted REER1996=1001996=100

60

70

80

90

100

110

120

130


60

70

80

90

100

110

120

130

CHF Volume-Weighted REER CHF Trade-Weighted REER

1996=1001996=100


AUD REER index NZD REER index

60

80

100

120

140

160


60

80

100

120

140

160

AUD Trade-Weighted REER AUD Volume-Weighted REER

1996=1001996=100

60

80

100

120

140


60

80

100

120

140

NZD Volume-Weighted REER NZD Trade-Weighted REER

1996=1001996=100


SEK REER index NOK REER index

60

70

80

90

100

110


60

70

80

90

100

110

SEK Trade-Weighted REER SEK Volume-Weighted REER

1996=100 1996=100

70

80

90

100

110

120

130


70

80

90

100

110

120

130

NOK Trade-Weighted REER NOK Volume-Weighted REER

1996=1001996=100


40


abc

EUR-USD vs forwards EUR-CHF vs forwards

0.80

0.90

1.00

1.10

1.20

1.30

1.40

1.50

1.60

Jan-00 Jan-02 Jan-04 Jan-06 Jan-08 Jan-10 Jan-12 Jan-14

EUR-USD

0.80

0.90

1.00

1.10

1.20

1.30

1.40

1.50

1.60EUR-USDForward Forecast

1.00

1.10

1.20

1.30

1.40

1.50

1.60

1.70


EUR-CHF

1.00

1.10

1.20

1.30

1.40

1.50

1.60

1.70

EUR-CHFForward Forecast

Source: Thomson Financial Datastream, Reuters, HSBC Source: Thomson Financial Datastream, Reuters, HSBC

GBP-USD vs forwards EUR-GBP vs forwards

1.30

1.40

1.50

1.60

1.70

1.80

1.90

2.00

2.10


GBP-USD

1.30

1.40

1.50

1.60

1.70

1.80

1.90

2.00

2.10

GBP-USDForward Forecast

0.55

0.60

0.65

0.70

0.75

0.80

0.85

0.90

0.95

1.00


EUR-GBP

0.55

0.60

0.65

0.70

0.75

0.80

0.85

0.90

0.95

1.00EUR-GBPForward Forecast


USD-JPY vs forwards EUR-JPY vs forwards

60

70

80

90

100

110

120

130

140


USD-JPY

60

70

80

90

100

110

120

130

140

USD-JPYForward Forecast

85

95

105

115

125135

145

155

165

175


EUR-JPY

85

95

105

115

125135

145

155

165

175

EUR-JPYForward Forecast


HSBC forecasts vs forwards

41


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3 Month M oney

2009 2010 2011 2012 2013 2014end period Q4 Q4 Q4 Q4 Q1 Q2 Q3 Q4f Q1f Q2fNor th A m er ica x x x

x U S (U SD) 0.3 0.3 0.5 0.4 0.3 0.3 0.3 0.3 0.3 0.3

x C anada (CAD) 0.5 1.2 1.4 1.3 1.2 1.2 1.2 1.2 1.2 1.2Latin Am er ica x x x x x x x x x x x

x M ex ico (M XN) 5.5 4.6 4.4 4.2 4.1 4.1 3.8 3.5 3.5 3.5

x Brazil (BRL) 8.7 11.1 10.4 7.1 7.9 8.6 9.4 9.8 9.8 9.8

x C hile (CLP) 0.5 3.3 5.1 4.9 5.2 5.2 4.8 4.6 4.6 4.6W estern Europe x x x x x x x x x x xEurozone x 0.7 0.9 1.3 0.1 0.1 0.1 0.2 0.1 0.1 0.1Other W estern Europe x x x x x x x x x x x

x U K (GBP) 0.6 0.8 1.1 0.5 0.5 0.5 0.5 0.5 0.6 0.6

N orw ay (N OK) 2.2 2.6 2.9 1.9 1.9 1.8 1.8 1.8 2.0 2.2

x Sw eden (SEK) 0.5 1.8 2.7 1.6 1.3 1.3 1.3 1.3 1.3 1.5

x Sw itzerland (CHF) 0.3 0.2 0.1 0.0 0.0 0.0 0.0 0.0 0.0 0.0EM EA

Hungary (HUF) 6.0 5.9 7.2 5.8 4.9 4.2 3.7 3.5 3.5 3.5

Poland (PLN) 4.2 4.0 5.0 4.1 3.4 2.8 2.7 2.7 2.9 3.1

R ussia (RUB)* 6.6 4.1 6.4 7.5 7.1 7.1 6.6 6.4 6.0 6.3

Turkey (TRY) 7.5 6.7 10.1 5.5 6.1 6.5 7.5 7.5 7.5 7.5

U kraine (UAH) 16.1 9.1 21.5 18.3 14.3 14.3 18.3 12.3 10.3 9.3South Africa (ZAR) 7.1 5.5 5.5 5.2 5.1 5.5 5.4 5.3 5.1 5.0

Asia/Pacific x x x x x x x x x x x

x Japan (JPY) 0.3 0.2 0.2 0.2 0.2 0.2 0.2 0.2 0.2 0.2

x Aus tralia (AUD) 4.0 5.0 4.5 3.0 3.0 2.8 2.6 2.6 2.6 2.6

x N ew Zealand (NZD) 2.8 3.2 2.7 2.6 2.6 2.7 2.7 3.0 3.2 3.4

North As iaC hina (CN Y) 1.7 2.3 3.1 2.6 2.6 2.6 2.6 2.6 2.6 2.6

x Hong Kong (HKD) 0.5 0.3 0.4 0.4 0.4 0.4 0.4 0.4 0.4 0.4

x Taiw an (TWD) 0.5 0.7 0.9 0.9 0.9 0.9 0.9 0.9 0.9 1.0

x South Korea (KRW) 2.8 2.8 3.6 2.9 2.8 2.7 2.7 2.8 2.8 2.8South Asia

India (INR ) 4.6 9.0 9.8 8.2 8.2 8.5 11.0 10.0 8.0 8.0

x Indones ia (IDR) 7.1 6.6 5.3 5.0 4.9 5.3 7.0 7.2 7.2 7.2

x M alay sia (MYR) 2.2 3.0 3.2 3.2 3.2 3.2 3.2 3.3 3.3 3.5

x Philippines (PHP) 3.9 0.8 1.6 0.6 0.3 0.5 0.5 0.7 0.7 0.7

x Singapore (SGD) 0.7 0.4 0.4 0.4 0.4 0.4 0.4 0.4 0.4 0.4

x Thailand (THB) 1.4 2.2 3.2 2.9 2.9 2.6 2.6 2.7 2.8 2.9Afr ica x x x x x x x x x x x

x South Africa (ZAR) 7.1 5.5 5.5 5.2 5.1 5.5 5.4 5.3 5.1 5.0

No tes : * 1-m o nth mo ney. So urce: H SB C

Important note

This table represents three month money rates. Due to the dislocation in the three month money markets, these rates may not give a

good indication of policy rates.

Short rates

42


abc

Source: HSBC

Emerging markets forecast table

14-Nov-13 2012 2012 2013 2014

last Q3 Q4 Q1 Q2 Q3 Q4f Q1f Q2f Q3f Q4f

Latin America vs USD x x x x x x x x x x x x x

Argentina (ARS) 5.98 4.70 4.92 5.12 5.39 5.79 6.25 6.60 7.00 7.35 7.75

Brazil (BRL) 2.33 2.03 2.04 2.01 2.22 2.23 2.30 2.33 2.35 2.38 2.40

Chile (CLP) 521 475 479 472 508 505 500 505 510 510 510

Mex ico (MXN) 13.07 12.86 12.87 12.33 12.98 13.17 12.70 12.60 12.50 12.40 12.40

Colombia (COP) 1931 1800 1825 1826 1827 1828 1950 1925 1900 1900 1900

Peru (PEN) 2.80 2.60 2.55 2.59 2.77 2.79 2.70 2.70 2.70 2.70 2.70

Venezuala (VEF) 6.29 4.30 4.30 6.29 6.29 6.29 6.30 7.80 7.80 7.80 7.80

Eastern Europe vs EUR Czech Republic (CZK) 27.20 25.20 25.10 25.76 25.97 25.74 26.00 27.00 27.00 26.80 26.50

Hungary (HUF) 298 285 291 304 295 297 300 295 295 290 285

Russia v s USD (RUB) 32.70 31.20 30.48 31.00 32.88 32.35 32.90 33.50 34.70 34.80 35.20

Romanian (RON) 4.45 4.40 4.50 4.50 4.40 4.40 4.40 4.40 4.35 4.30 4.30

Turkey v s USD (TRY) 2.04 1.80 1.78 1.81 1.93 2.02 2.00 1.95 1.95 1.95 1.90

Simple rate

Poland (PLN) 4.19 4.12 4.08 4.18 4.33 4.23 4.20 4.10 4.00 4.00 3.90

Middle East vs USD x x x x x x x x x x x x

Egy pt (EGP) 6.89 6.07 6.10 6.80 7.00 7.00 7.50 6.80 6.80 6.80 7.50

Israel (ILS) 3.53 3.90 3.85 3.64 3.70 3.55 3.60 3.60 3.55 3.55 3.50

Africa vs USD South Africa (ZAR) 10.32 8.25 8.48 9.17 9.93 10.06 9.80 9.80 9.50 9.30 9.20

Interest rates 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00

43


abc

end period 2009 2010 2011 2012 2012 2013 2014Q4 Q4 Q4 Q3 Q4 Q1 Q2 Q3 Q4f Q1f Q2f Q3f Q4f

Americas x

x Canada (CAD) 1.05 0.99 1.02 0.98 1.00 1.02 1.05 1.03 1.05 1.07 1.09 1.10 1.10

x Mex ico (MXN) 13.08 12.36 13.97 12.86 12.87 12.33 12.98 13.17 12.70 12.60 12.50 12.40 12.40

x Brazil (BRL) 1.74 1.67 1.88 2.03 2.04 2.01 2.22 2.23 2.30 2.33 2.35 2.38 2.40

x Argentina (ARS) 3.80 3.97 4.30 4.70 4.92 5.12 5.39 5.79 6.25 6.60 7.00 7.35 7.75x

Western Europe x x x x x x x x x x x x x x

Eurozone (EUR*) 1.43 1.34 1.30 1.29 1.32 1.28 1.30 1.35 1.30 1.28 1.25 1.24 1.24

Other Western Europe x x x x x x x x x x x x x x

x UK (GBP*) 1.61 1.57 1.55 1.61 1.63 1.52 1.52 1.62 1.53 1.51 1.48 1.46 1.46

x Sw eden (SEK) 7.14 6.72 6.86 6.56 6.51 6.50 6.75 6.42 6.46 6.41 6.40 6.45 6.45

x Norw ay (NOK) 5.78 5.81 5.97 5.72 5.57 5.83 6.11 6.01 5.69 5.63 5.68 5.65 5.65

x Sw itzerland (CHF) 1.03 0.93 0.94 0.94 0.92 0.95 0.95 0.90 0.95 0.98 1.00 1.01 1.01x

Em erging Europe x x x x x x x x x x x x x x

x Russia (RUB) 30.2 30.5 32.0 31.2 30.5 31.0 32.9 32.3 32.9 33.5 34.7 34.8 35.2

x Poland (PLN) 2.86 2.95 3.43 3.20 3.09 3.25 3.33 3.12 3.23 3.20 3.20 3.23 3.15

x Hungary (HUF) 188 207 242 222 221 237 227 220 231 230 236 234 230

x Czech Republic (CZK) 18.4 18.7 19.6 19.6 19.0 20.1 20.0 19.0 20.0 21.1 21.6 21.6 21.4x

Asia/Pacific x

x Japan (JPY) 93 81 77 78 86 94 99 98 99 97 95 94 94

x Australia (AUD*) 0.90 1.03 1.03 1.04 1.04 1.04 0.92 0.94 0.90 0.89 0.88 0.87 0.86

x New Zealand (NZD*) 0.73 0.78 0.78 0.83 0.83 0.84 0.77 0.83 0.78 0.77 0.76 0.75 0.75

North Asia x x x x x x x x x x x x x x

x China (CNY) 6.83 6.59 6.29 6.28 6.23 6.21 6.14 6.12 6.12 6.11 6.11 6.10 6.10

x Hong Kong (HKD) 7.75 7.77 7.77 7.75 7.75 7.76 7.76 7.76 7.80 7.80 7.80 7.80 7.80

x Taiw an (TWD) 32.1 30.4 30.3 29.3 29.0 29.8 30.0 29.6 29.3 29.4 29.5 29.6 29.7

x South Korea (KRW) 1166 1121 1159 1114 1064 1111 1142 1075 1070 1075 1080 1090 1095x

South Asia x x x x x x x x x x x x x x

India (INR) 46.4 44.7 53.0 52.9 55.0 54.3 59.5 62.6 62.0 63.0 64.0 65.0 66.0

x Indonesia (IDR) 9425 9010 9068 9570 9638 9718 9925 11580 11100 11200 11300 11400 11500

x Malay sia (MYR) 3.42 3.08 3.17 3.06 3.06 3.09 3.16 3.26 3.18 3.21 3.24 3.27 3.30

x Philippines (PHP) 46.5 43.6 43.8 41.7 41.1 40.9 43.1 43.5 43.0 43.2 43.4 43.6 43.8

x Singapore (SGD) 1.41 1.28 1.30 1.23 1.22 1.24 1.27 1.26 1.25 1.26 1.27 1.28 1.29

x Thailand (THB) 33.3 30.1 31.6 30.8 30.6 29.3 31.1 31.3 31.4 31.6 31.8 32.0 32.2

Vietnam (VND) 18200 19498 21037 20853 20835 20930 21170 21119 21250 21500 21500 21500 21500

Africa x x x x x x x x x x x x x x

x South Africa (ZAR) 7.36 6.62 8.07 8.25 8.48 9.17 9.93 10.06 9.80 9.80 9.50 9.30 9.20

Source HSBC

Exchange rates vs USD

44


abc

end period 2009 2010 2011 2012 2013 2014

Q4 Q4 Q4 Q3 Q4 Q1 Q2 Q3 Q4f Q1f Q2f Q3f Q4fVs euro xAmericas x

x US (USD) 1.43 1.34 1.30 1.29 1.32 1.28 1.30 1.35 1.30 1.28 1.25 1.24 1.24x Canada (CAD) 1.50 1.33 1.32 1.27 1.31 1.30 1.37 1.39 1.37 1.37 1.36 1.36 1.36Europe x

x UK (GBP) 0.89 0.86 0.84 0.80 0.81 0.85 0.86 0.84 0.85 0.85 0.85 0.85 0.85x Sw eden (SEK) 10.24 9.02 8.90 8.44 8.58 8.35 8.77 8.69 8.40 8.20 8.00 8.00 8.00

x Norw ay (NOK) 8.29 7.80 7.75 7.37 7.34 7.49 7.94 8.14 7.40 7.20 7.10 7.00 7.00x Sw itzerland (CHF) 1.48 1.25 1.21 1.21 1.21 1.22 1.23 1.22 1.24 1.25 1.25 1.25 1.25

x Russia (RUB) 43.4 40.9 41.6 40.1 40.2 39.8 42.7 43.8 42.8 42.9 43.4 43.2 43.6

x Poland (PLN) 4.11 3.96 4.46 4.12 4.08 4.18 4.33 4.23 4.20 4.10 4.00 4.00 3.90x Hungary (HUF) 270 278 315 285 291 304 295 297 300 295 295 290 285

x Czech Republic (CZK) 26.4 25.1 25.5 25.2 25.1 25.8 26.0 25.7 26.0 27.0 27.0 26.8 26.5Asia/Pacific x x x x x x x x x x x x x x

x Japan (JPY) 134 109 100 100 114 121 129 133 129 124 119 117 117x Australia (AUD) 1.60 1.31 1.27 1.24 1.27 1.23 1.42 1.45 1.44 1.44 1.42 1.43 1.44

x New Zealand (NZD) 1.97 1.72 1.66 1.55 1.60 1.53 1.68 1.63 1.67 1.66 1.64 1.65 1.65

Vs sterling x x x x x x x x x x x x x xAmericas x x x x x x x x x x x x x x

x US (USD) 1.61 1.57 1.55 1.61 1.63 1.52 1.52 1.62 1.53 1.51 1.48 1.46 1.46

x Canada (CAD) 1.69 1.56 1.58 1.59 1.62 1.54 1.60 1.66 1.61 1.61 1.61 1.61 1.61Europe x x x x x x x x x x x x x xx Eurozone (EUR) 0.89 0.86 0.84 0.80 0.81 0.85 0.86 0.84 0.85 0.85 0.85 0.85 0.85xx Sw eden (SEK) 11.53 10.53 10.65 10.59 10.57 9.87 10.24 10.40 9.88 9.64 9.45 9.45 9.45

x Norw ay (NOK) 9.33 9.10 9.27 9.24 9.05 8.86 9.26 9.74 8.70 8.47 8.39 8.27 8.27x Sw itzerland (CHF) 1.67 1.46 1.45 1.52 1.49 1.44 1.44 1.46 1.46 1.47 1.48 1.48 1.48Asia/Pacific x x x x x x x x x x x x x x

x Japan (JPY) 150 127 120 126 141 143 151 159 151 146 140 138 138

x Australia (AUD) 1.80 1.53 1.52 1.55 1.57 1.46 1.66 1.73 1.70 1.69 1.68 1.68 1.70x New Zealand (NZD) 2.22 2.00 1.99 1.94 1.97 1.81 1.96 1.94 1.96 1.95 1.94 1.95 1.95

Source: HSBC

Exchange rates vs EUR & GBP

45


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Notes

46


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Notes

47


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Disclosure appendix Analyst Certification The following analyst(s), economist(s), and/or strategist(s) who is(are) primarily responsible for this report, certifies(y) that the opinion(s) on the subject security(ies) or issuer(s) and/or any other views or forecasts expressed herein accurately reflect their personal view(s) and that no part of their compensation was, is or will be directly or indirectly related to the specific recommendation(s) or views contained in this research report: David Bloom, Daragh Maher, Clyde Wardle, Robert Lynch, Paul Mackel, Stacy Williams, Marjorie Hernandez, Mark McDonald, Murat Toprak, Ju Wang, Julia Wang, Dominic Bunning, Karen Ward and Simon Wells

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For disclosures in respect of any company mentioned in this report, please see the most recently published report on that company available at www.hsbcnet.com/research.

Additional disclosures 1 This report is dated as at 14 November 2013. 2 All market data included in this report are dated as at close 13 November 2013, unless otherwise indicated in the report. 3 HSBC has procedures in place to identify and manage any potential conflicts of interest that arise in connection with its

Research business. HSBC's analysts and its other staff who are involved in the preparation and dissemination of Research operate and have a management reporting line independent of HSBC's Investment Banking business. Information Barrier procedures are in place between the Investment Banking and Research businesses to ensure that any confidential and/or price sensitive information is handled in an appropriate manner.

48


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[394869]

Macro

Currency Strategy

November 2013

Currency

OUTLOOK

Disclosures and Disclaimer This report must be read with the disclosures and analyst

certifications in the Disclosure appendix, and with the Disclaimer, which forms part of it


Main contributors

David Bloom

Global Head of FX Research

HSBC Bank plc

+44 20 7991 5969

[email protected]

Paul Mackel

Head of Asian FX Research


+852 2996 6565

[email protected]

Stacy Williams

Head of FX Quantitative Strategy

HSBC Bank plc

+44 20 7991 5967

[email protected]

Mark McDonald

FX Quantitative Strategist

HSBC Bank plc

+44 20 7991 5966

[email protected]

Robert Lynch

Head of G10 FX Strategy, Americas


+1 212 525 3159

[email protected]

Clyde Wardle

Emerging Markets FX Strategist


+1 212 525 3345

[email protected]

Marjorie Hernandez

FX Strategist, Latin America


+1 212 525 4109

[email protected]

Murat Toprak

FX Strategist, EMEA

HSBC Bank plc

+44 20 7991 5415

[email protected]

Dominic Bunning

FX Strategist, Asia


+852 2822 1672

[email protected]

Daragh Maher

FX Strategist, G10

HSBC Bank plc

+44 20 7991 5968

[email protected]

Ju Wang

FX Strategist, Asia


+852 2822 4340

[email protected]

The November decision to cut interest rates by the ECB may have been

influenced by lower than expected inflation, but we believe the strength

of the EUR was a key consideration. Our central forecast is for the EUR

to continue to weaken.


With the US debt-ceiling drama over for now, economic data releases

are back in focus. We examine how financial markets have traditionally

responded to data, which markets are most responsive and which

economic variables are now most important. Unemployment data and

survey data are being watched closely but can be hard to interpret as we

see in ‘Taking up the slack’ & ‘Reading UK surveys’.


Bright economic prospects for 2014 favour the NOK.