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CURRENCY INSIGHTSForeign Exchange Forecast and Analysis

July 2013

Dynamic and Volatile Financial Economy A Return to Pre-Financial Crisis Markets

CURRENCY INSIGHTSJuly 2013

2

04 Global Market Perspective

06USD

08CAD

09EUR

This quarter we see global markets and regulation move to a new market environment seemingly returning to pre-financial crisis, even normal, trading conditions.

With the domestic economy trending in a positive trajectory, the real issue for the Federal Reserve and everyone else is unemployment.

The Loonie takes its cue from market sentiments tied to macro outlooks of Europe and the UK, while feeling the decisions of the US Federal Reserve stimulus plans.

The hypnotic abilities of ECB President Draghi continue to dispel the notion of fragility throughout the region.

10 GBP

All eyes now turn to the Bank of England minutes towards the end of the month for the voting pattern on further QE.

IN THIS ISSUE

3

11JPY

12 CHF

13AUD

After the loss of confidence in the “three-arrow” approach, the trickle-down effects of “Abenomics” are beginning to emerge on the economic data front in Japan.

The CHF has long been considered a safe haven, however many of the assets that are correlated with the Swiss franc have been coming under pressure of late.

The Aussie is in for a turbulent road ahead, while investors move forward on their expectation of when the cheap supply of money from the Federal Reserve may end.

0809

10

111213

06

3

14NZD

Growth and a brighter economy, the Kiwi finds some support with surprisingly upbeat unemployment reports amidst, sluggish global demand of the country’s exports.

The health of all emerging currencies remains entrenched in the speculation of the US Federal Reserve looking to trim its QE programs.

15 Emerging Markets

14

4

Each morning for the past four years, North American traders would wake, turn to their smart phone and check where the Hang Seng finished trading the previous evening and where the FTSE was at that time. With those two data points, most could likely

tell you within 20 basis points where all the majors would be trading in a global

market environment where traders were either risk-accepting and were buyers of currency, or risk-avoidant and were selling currencies in favor of the Dollar, Yen and Swissy. The daily oscillation between risk-on and risk-off was constant and the level of correlation, if not outright causation, across financial markets was extreme.

Contrast that with what is being experienced today: The JPY and the USD are trading in opposite directions with significantly divergent market biases, equities remain largely resilient despite a strengthening Greenback, all while concern about bailouts and political instability in Europe continue to bubble away on the back burner. The financial world has seemingly become more complex, correlations aren’t as strong, forecasts are less convergent and the world views of market analysts have become more varied. So, what is happening? Are we entering some kind of new financial reality? In short, we would argue that we are not. We are just going through a healthy process of returning to a pre-financial crisis market environment where every trend cannot be explained simply in terms of risk appetite, but where economic fundamentals and actual data matter, as opposed to markets swinging on sentiment alone.

The fact that we are moving to a new market environment, one characterized by much more normal trading conditions is evident everywhere in currency markets. The Dollar and Yen, once flight-to-quality brothers in arms have significantly diverged, with the pair trading 15.2% higher

“Are we entering some kind of new financial reality?”

CURRENCY INSIGHTSJuly 2013

GLOBAL MARKET PERSPECTIVE- Mark Frey, Vice President and Chief Market Strategist

so far in 2013. The Dollar Bloc Commodity Cousins of Australia, New Zealand and Canada are still positively correlated in that they are all down against the Big Dollar thus far this year, as is nearly everything else, but the relative performance divergence is rather profound. The Loonie is 4.7% lower and the Kiwi a slightly larger 5.7%, but the Aussie is down 12.9% in 2013 alone, hobbled by a suddenly dovish Reserve Bank and underwhelming Chinese demand for the country’s raw material base metals. This return to more normalized market conditions however isn’t limited to currencies in that the energy price complex and equities are higher now than they were to begin the year as well. If we look back just a year ago, it would have been seemingly inconceivable that equities, commodities and the Dollar could all rally in unison with a market still concerned about a global economic slowdown and an ongoing sovereign debt issue in Europe.

It’s not just the price action that tells us that we’re moving away from the financial crisis mindset, it’s how the market responds to data as well. Positive American data now leads to a positive response for the Greenback as opposed to a bid for risk products in general and an offered tone for the Dollar. Market participants are also actually looking at the data as trading incentives as well, not just the headlines, as evidenced by the surge in trading activity and volatile price action following major data releases. In short, it seems we are finally returning to pre-financial crisis trading conditions – normal trading conditions if you will. So what does this mean for markets? It means that we will likely see divergent asset performance. Equities, commodities and currencies won’t necessarily all trade in lockstep. Further, individual assets or currencies won’t necessarily perform in line with the rest of the market, meaning that relative valuations will drive underlying performance. Interest rate policy is also set to diverge for the first time since the onset of the financial crisis. While the Bank of England, European Central Bank and Bank of Japan may still be overtly dovish, the Fed is actually musing publicly about removing monetary

5

GLOBAL MARKET PERSPECTIVE

CURRENCY INSIGHTSJuly 2013

accommodation. Ultimately, it is this divergence in policy and the resultant economic performance that will unquestionably lead us to a market that will trend over time, rather than simply chop back and forth. Further, as the market establishes a new world order, the present elevated levels of volatility are likely to persist for a sustained period until we all get used to the way the market used to be, when it was slightly more rational, and slightly less predictable.

“ Market participants are also actually looking at the data as trading incentives as well, not just the headlines.

CURRENCY INSIGHTS

6

USD- Mark Frey, Vice President and Chief Market Strategist

The Greenback has been well bid through much of the second quarter and now into the third, propelled by both an improving US economy and guidance from the US Federal Reserve that appears poised to begin removing monetary accommodation at some point in the not-too-distant future. In fact, the questions for most, if not nearly all market participants at this stage, is not so much whether the Fed will begin to pull back on the purse strings, but when? By how much? And in what form will its stimulus be removed from the economy?

The domestic economic picture is unquestionably becoming clearer, with many key indicators trending in a positive trajectory. The Current Account and Trade

Deficit continue to narrow, albeit only modestly, but it is clear that the stark structural imbalances that have

plagued the US economy are beginning to correct. The Federal Government actually ran a budget surplus in the month of June, as tax revenues exploded alongside the modest spending cuts that Congress has been able to cobble together. The housing market is also continuing to show signs of improvement, with home prices and existing home sales trending positively as new construction shows signs of significant life after its near death experience through the financial crisis.

However, the real issue, both for the Fed and the broader economy, remains to be employment, or what many still see as the lack thereof. The unemployment rate continues to tick lower, with solid but unspectacular job growth thus far in 2013. Discouraged workers appear to be coming back to the workforce and the private sector is in fact leading the way in terms of new hiring. That said, robust job growth historically has been characterized by non-farm payroll gains of at least 300 thousand per month, a figure the economy has not yet come close to threatening, never mind sustaining. The rate of joblessness is even more important in the current environment as this is the key indicator that the Federal Reserve and its policy committee have chosen on

“ ... long-term yields should begin to creep up...”

which to focus much of their attention. The Fed’s own forecasts are placing the unemployment rate as low as 6.5% to 6.8% as early as the first half of 2014, but that still seems to be an optimistic view of a situation which still possesses a great deal of market risk.

Should employment continue to trade favorably, the FOMC will at some point begin to remove monetary stimulus, likely by first “tapering” or scaling back its current $85 billion level of monthly bond purchases aimed at lowering long-term interest rates through quantitative easing. It is important to understand however, that the Fed is still engaged in a program of new purchases each month, in addition to the previous paper that it continues to roll over. In short, there is a great deal of accommodation that can come out of scaling back QE before the Fed ever looks to raise its benchmark interest rate. In other words, long-term yields should begin to creep up, but the Fed is effectively hoping to kick-start a slow and steady trend as opposed to the knee-jerk reaction that markets have delivered of late. In our view, we can expect the Fed to begin scaling back around the close of 2013, with significant forward guidance around the timing and scale of any removal of monetary accommodation.

Going forward, it is our view that the US economy will out-perform much of the rest of the developed world in terms of economic growth. Yields will move higher, the money supply will shrink and these three factors will provide a significant tail wind for the Big Dollar for the foreseeable future. There will unquestionably be significant volatility, but from a pure market perspective, economic decision makers should be preparing themselves for a sustainably much stronger Greenback in the months and possibly even years to come.

July 2013

CURRENCY INSIGHTS

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April 2013CURRENCY INSIGHTS

July 2013

7

Q3

Current Rate

Expected Target

Q4

USD daily

“ The domestic economic picture is unquestionably becoming clearer, with many key indicators trending in a positive trajectory.

Economic Indicators

GDP

1.9Inflation Unemployment

Rate

0.0 - 0.25

83.00

84.50

2.1 7.2Fed Funds

Rate

CURRENCY INSIGHTS

8

CAD- David Starkey, Product Manager Options & FX Market Analyst

Q2 2013 saw the Loonie take its cue from broader market trends, more recently getting caught up in speculation that the US Federal Reserve may begin to cut back on its stimulus measures. This saw the

USDCAD touch multi-year highs as it approached 1.06. Meanwhile strength in oil prices helped the CAD outperform

other commodity currencies, particularly the Australian Dollar. Versus the Sterling and the Euro, relative macro outlooks tilt the scales towards the Canadian unit, especially in light of recent comments from both the Bank of England, now headed by ex-Bank of Canada (BoC) Governor Mark Carney, and the European Central Bank.

On the domestic rate front, risks from softening inflation square off against an overheating housing market and ballooning debt. These conflicting factors have effectively sidelined the BoC for the time being. Despite constructive employment results, output gains remain elusive, however strength in the American economy will have a direct and meaningful impact on Canada given the USA represents over 70% of the Canadian export market. Our base case for the Bank of Canada is that it remains locked in place during the medium term as it awaits economic activity in the United States to pick up in late 2013/early 2014. This will drive exports and hence GDP, allowing the BoC to look at tightening its overnight rate sometime in mid-2014 as a means to reign in the housing market and personal debt.

Turning to charts, the USDCAD continues to hold court firmly entrenched in an ascending channel dating back to January 2013. Chatter about Fed Tapering biases the pair to further upside through Q3 and into early Q4. Given recent activity, initial resistance doesn’t kick in until just ahead of 1.06, leaving the pair venerable to move back up into that area on sustained bouts of USD bullishness.

CAD daily

Economic Indicators

GDP

1.7 1.1Inflation

7.1Unemployment

Rate

Q3

Q4

Current Rate

Expected Target

Assuming our base case, as 2013 winds down export demand & BoC speculation sets the stage for a Loonie rally, pushing the pair back towards 1.03 at the end of the year. Versus other commodity currencies the themes we’ve seem over the last couple of months are likely to persist. Close ties with the United States and a strong correlation to oil prices favor the Loonie against currencies like the AUD and the NZD. Meanwhile sentiment tied to the relative macro outlooks of Europe and the UK also favor the Canadian unit, and are set to drive trading against those currencies through the end of 2013.

“... risks from softening inflation square off against an overheating housing market...”

1.04

1.03

July 2013

1.0Bank of

Canada Rate

CURRENCY INSIGHTS

EUR- Darryl Hood, Options Specialist, UK

The Euro continues to be supported despite sound arguments and an interest rate cut in May to a record low of 0.5%. Headline news has moved away from the Cypriot bailout, the political landscape in Italy and corruption allegations within the Spanish Government to the normal data flows that continually disappoint and lower revised growth forecasts.

The hypnotic abilities of ECB President Draghi continue to dispel the notion of fragility in the area despite evidence that suggests otherwise. The Euro benefits from increased liquidity flows due to easing programmes in the US and Japan, and as

a benefactor from any risk on movements.

With France, the Eurozone’s second largest economy, now in recession again, and confirmation that the area as a whole shrank by a worse than expected 0.3% in Q1, it would be fair to assume that cracks in the Euro should be widening. Instead it is stronger this year by 6% against the Pound and is punching above its weight with EURUSD trading at 1.30.

Data from Germany has been a mixed bag with manufacturing PMI at 48.7, industrial production falling by 1% and factory orders falling by -0.3%; at the same time German services PMI and retail sales have performed better than expected. However, if Germany’s economy begins to flatline, their growth for 2013 is predicted to be a rather anaemic 0.3% for the year; where is the ray of hope?

To some extent, it doesn’t matter if there is any. The market is awash with liquidity and for as long as this is the case, the Euro will ride the crest of the worldwide QE wave and continued JPY weakness. However, with the prospect of an exit or tapering from QE in the US and the correction already being seen in AUD and NZD, which have also benefitted in a similar manor to the Euro, we can expect a weakening to 1.26 as we near Q4.

“Data from Germany has been a mixed bag...”

9

Q31.30

Q41.26

Current Rate

Expected Target

1.03

July 2013

EUR daily

Economic Indicators

GDP

-0.5 1.5Inflation

12.3Unemployment

Rate

0.5ECB Rate

CURRENCY INSIGHTS

10

GBP- Darryl Hood, Options Specialist, UK

The introduction of Mark Carney as Bank of England Governor has brought with it volatility in all Sterling crosses. Governor Carney’s change of style was evident in his first week as the Bank of England issued a statement to accompany the expected hold

on rates and QE, putting the Pound on the back foot as it was made clear that rates of 0.5%, a record low, would be

held for some time until unspecified thresholds are met. Furthermore, the bank signalled the introduction of guidance on future interest rates would most likely begin in August.

All eyes now turn to the Bank of England minutes towards the end of the month for the voting pattern on further QE. Previously the vote was 6-3 against, going against the opinion of former Governor King. Has the change of personnel led to a change in this pattern? The inflation figure released in June was 2.7%, providing scope for further QE, continued prints in Q3 of under 3% inflation will not help quash further easing rumours and continues to keep Sterling under pressure.

However, support for the Pound should come in the form of Q2 GDP, whereby we are expecting an increase on the recession preventing 0.3% reading for Q1. With retail sales and PMI service figures out performing of late, growth of 0.6% is likely, Sterling could receive a boost going in to the second half of the year. The IMF recently raised their growth forecast for the UK for 2013 from 0.6% to 0.9% and further growth could be enough to avoid the expected downgrades by rating agencies S&P and Fitch, following Moody’s decision in February.

With Carney’s stance on QE yet to be revealed, it is difficult predicting the extent to which the current volatility in the Pound end and a regular trading pattern established. However, with fundamental data pointing to a slow but continued recovery, a move higher to 1.56 by October is feasible.

“...continued prints in Q3 of under 3% inflation will not help quash further easing rumours and continues to keep Sterling under pressure.”

Q31.51

Q41.56

Current Rate

Expected Target

10

July 2013

GBP daily

Economic Indicators

GDP

0.8 2.8Inflation

7.6Unemployment

RateBank of

England Rate

0.5

JPY- Scott Smith, Senior FX Trader

The second quarter was a tumultuous one for the yen, characterized by wild swings resulting from a loss of confidence in the ability of Prime Minster Shinzo Abe

to fulfill his “three-arrow” approach to stimulate the economy. The

USDJPY promptly reversed course and retraced a good majority of the recent yen weakness when questions were raised surrounding the Bank of Japan’s (BoJ) ability to achieve its inflation goal of 2% within the targeted time frame. Compounding the concern towards policy promises designed at getting the Japanese economy out of stall speed, a feeble firing of Abe’s “third arrow” and subsequent growth strategy left investors desiring further action.

Despite investor anxiety, the trickle-down effects of “Abenomics” are beginning to emerge on the economic data front, with core consumer prices holding firm in May with a flat y/o/y print. The encouraging inflation figures marked the end to seven straight months of declines, confirming that massive stimulus packages and aggressive asset purchases are starting to flow into the right places. In addition, a recent economic up-tick prompted a July meeting between the BoJ and Governor Kuroda, where they refrained from adding further stimulus, while increasing the likelihood that the Central Bank holds fire on additional asset purchases for the remainder of 2013.

Although recent BOJ commentary highlights a modest recovery for the Japanese economy, policymakers are still a long way from reigning in their accommodative stance towards monetary policy. For example, in an effort to ensure the region breaks out of its deflationary cycle, the government has decided to move from targeting the core CPI reading (which excludes only fresh food), to targeting a “core-core” CPI structure which adds energy prices to the list of excluded items. Policy tweaks like this which allow the BoJ to keep the printing presses on overdrive will ensure the dichotomy between monetary policies at the Federal Reserve and the BoJ persist for quite some time.

“...the trickle-down effects of “Abenomics” are beginning to emerge...”

CURRENCY INSIGHTS

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July 2013

Looking ahead to the tapering of asset purchases from the Fed on the horizon coupled with the potential for further BOJ stimulus in 2014, the yen is poised to experience continued weight in the short-term. The recent struggle for USDJPY to hold the 100 level should be overcome if the Fed does move towards slowing its QE program by the end of Q3, which would then allow USDJPY to retest the highs seen back in May of this year.

Economic Indicators

GDP

3.5 0.0Inflation

4.1Unemployment

Rate

Q3

Q4

Current Rate

Expected Target

99.40

103.00

<0.10

Bank of Japan Rate

JPY daily

CURRENCY INSIGHTS

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CHF- Jason Conibear, Director, Sales & Trading, UK

Last quarter we reported on the likelihood that CHF would remain strong against the EUR with a clear statement of intent from the Swiss National Bank (SNB) to aggressively protect the 1.20 level. In fact, this protection wasn’t required and mid quarter we

saw in excess of 1.26 before falling back towards the 1.23 level. The CHF has

long been considered a safe haven, however many of the assets that are correlated with the Swiss franc have been coming under pressure of late, not least of all, the continued drop in the price of gold, which has led the SNB to state that they would consider the CHF “to exhibit safe haven characteristics against some currencies – such as the euro – but not against other major currencies such as the USD or JPY.” It therefore seems likely that the 1.20 floor against the euro will remain and there could be an argument to suggest that another visit to 1.26 and beyond is very possible. It is important to appreciate that much of the volatility in CHF is created from US or German data and as such, the statement from the U.S. Federal Reserve that it would want to see more job creation before slowing its QE program helped drive USD/CHF from above 0.97 to below 0.95. There are still concerns that the Swiss housing market is overcooked due to the prolonged low interest rates, however the SNB have confirmed that they intend to keep the record low interest rates intact.

“the CHF to exhibit safe haven characteristics against some currencies...”

Q3

Current Rate

Expected TargetQ4

12

July 2013

CHF daily

0.94

0.97

Economic Indicators

GDP

0.6 -0.1

Inflation

2.9Unemployment

Rate

0.25Swiss National

Bank Rate

AUD- Scott Smith, Senior FX Trader

To say the Aussie had a bumpy ride over Q2 would be quite the understatement, with the antipodean currency cratering approximately 15% from its high in April. The commodity-linked currency continues to face headwinds as we enter the third quarter, struggling

against a massive carry unwind as traders and investors move forward their

expectation of when the cheap supply of money from the Federal Reserve may end. With the prospect of Mr. Bernanke and the Fed easing off on the monetary stimulus throttle potentially as soon as the end of Q3, and the Reserve Bank of Australia (RBA) taking a decidedly dovish tone at the last policy meeting, traders have been running for the exits and dumping the Aussie like there is no tomorrow. The most recent data from the CFTC shows that speculative positioning has pushed the Aussie’s short position into record territory, with its net short position second only to the JPY.

Adding to the Aussie’s woes, sluggish resource demand out of China has weighed on the economic prospects of the region, leaving policymakers scrambling to find solutions that can insulate the economy should the prolonged contraction continue. The most recent data suggests that there needs to be more done to prop up the non-resource sectors of the economy, as unexpectedly weak retail sales and higher than expected unemployment rate could continue to sap domestic demand. With policymakers in China becoming increasingly tolerant of lower growth moving forward, the worries from Prime Minister Kevin Rudd that the resource boom in China is over may be coming to fruition, and lead to another quarter of weaker than expected GDP.

The upcoming quarter will be hard for the Aussie to find reprieve from its recent battering, as momentum suggests further weakness is in the cards for AUDUSD. Although the massive slide from April has stretched the technical position somewhat, the majority of the indicators are signalling further weakness to come.

“The upcoming quarter will be hard for the Aussie to find reprieve...”

CURRENCY INSIGHTS

Q3.9050

Q4.8650

Current Rate

Expected Target

13

Adding fuel to the fire, RBA Governor Stevens continues to seem comfortable trying to talk down the Aussie, suggesting that a further reduction in the overnight lending rate could be imminent as soon as the next policy meeting in August. The next key level of support for the AUDUSD will be the round figure of 0.90, and if broken, opens up room to make a run into the mid-80’s.

Economic Indicators

GDP

2.5 2.5Inflation

5.7Unemployment

Rate

2.75Reserve Bank of Australia Rate

July 2013

AUD daily

0.97

CURRENCY INSIGHTS

12

NZD- Scott Smith, Senior FX Trader

The commodity-bloc currencies have been through a rough few months, with the Kiwi unable to find any amnesty from the carnage. As with the majority of other high-yielding currencies, the NZD has seen investors pare back exposure on the basis that the Federal Reserve will be looking to trim back their asset purchase program in the United States.

Compared to its antipodean partner to the west, the outlook for the New Zealand economy is beginning to brighten; however, growth still remains too uneven across various sectors to say unequivocally that the worst is over. A surprisingly upbeat unemployment report for Q1 showed that the jobless rate had

fallen to a three-year low, but more recent trade balance data

shows that sluggish global demand led to a sharp drop in exports, with four of their five main trading partners registering decreased activity.

Focusing attention domestically, the continued upward pressure on home prices has created challenges for how the Reserve Bank of New Zealand (RBNZ) will conduct monetary policy going forward. To bolster domestic demand, increase stubbornly low inflation, and shore up its export sector, the RBNZ does have room to get more accommodative in terms of monetary policy and lower interest rates from the current level of 2.5%. Despite these factors, the central bank will not want to take any bold steps that risk fueling the already lofty home prices in Auckland and Canterbury, and potentially creating a disastrous housing bubble. Even though real estate prices have eased from the record high seen in May, the successful navigation of the property market in specific areas will most likely keep the central bank on hold until March of 2014, with the next move on interest rates most likely being of the upward variety.

After hitting yearly lows at the end of Q2, the NZDUSD has managed to find some support, however the corresponding bounce away from the 0.77 handle has been relatively sanguine,

“potentially creating a disastrous housing bubble”

Q3.7775

.7500

Current Rate

Expected TargetQ4

14

July 2013

foreshadowing that a period of consolidation could be in the cards before the Kiwi takes another leg lower against the big dollar. The momentum for NZDUSD remains to the downside, with the technical indicators in comfortable ranges and not yet stretched to over-sold territory. With the RBNZ likely on hold until Q1 2014, and the Federal Reserve getting more serious about some sort of taper for QE, expect the Kiwi to come under continued pressure and sink to the 0.75 handle against the USD.

Economic Indicators

GDP

2.4 0.9Inflation

6.2Unemployment

Rate

Reserve Bank of New

Zealand Rate

2.5

NZD daily

CURRENCY INSIGHTS

15

July 2013

EMERGING MARKETS- David Starkey, Product Manager Options & FX Market Analyst

To talk about emerging markets necessarily means discussing speculation that the US Federal Reserve is looking to trim its QE programs (Taper), the completion for capital that such action creates, and what it has meant for the Carry Trade. Carry related vulnerability amongst EM currencies has not been homogenous, as circumstantial factors resulted in diverse responses to recent global themes. Currencies like the Indian Rupee & the Brazilian Real experienced swift declines, while the reaction from the Mexican Peso was decidedly muted, and the Chinese Yuan barely budged. Looking forward, the markets seem to have now completed pricing in a base case of Tapering that begins in the fall of 2013, and a complete wrapping up of Fed asset purchasing programs in 2014. Given the unique circumstances driving each EM currency, a separate framework must be created for each—markets have now discarded the risk-on-risk-off mold that defined the financial crisis.

Mexico for example, is positioned to be one of the primary beneficiaries of an American recovery. Following an initial decline, late June and early July have seen the MXN stage a healthy rally on the back of optimism regarding political reforms generating FDI inflows and the export activity picking up meaningfully via a resurgent American economy. Both factors suggest a bump in GDP growth and demand for the Peso. Off the charts, this sets the stage for a move convincingly back into the lower 12.00 region in the fall session.

Counter to Mexico is China. While the USDCNY & USDCNH have outperformed most other EM currencies lately, reduced carry attractiveness and economic risks in China point to a weaker Chinese Yuan in the near and medium term. This might secretly have Chinese policy makers very excited, as the two-way volatility presents an opportunity to widen the USDCNY trading band. In the near term this would serve to stimulate Chinese exports, and in the medium term would meet official currency liberalization objectives.

Turning to Brazil, the prospect of Tapering resulted in a rapid depreciation of the Real, in fact the BRL was among the worst performers of Q2. However, persistent inflation coupled with soft GDP growth (due to a decelerating labor market and weak household consumption) has brought the Banco Central do Brasil (BCB) off the bench in a big way. In a bid to stem capital outflows and further BRL depreciation, the BCB has cut taxes on foreign capital investments and increased the official lending rate (Selic Rate) by 0.5% at both of its last meetings. Furthermore it has made it clear that more Selic rate increases can be expected before 2013 is done. It seems likely that in the coming months recently enacted measures will start to bear fruit; both on the currency and the inflation front. In terms of rates, expectations are that the USDBRL will be contained by key resistance in the 2.28 area, which was the extreme of recent trading activity, and decline slowly back towards 2.20 through the end of 2013.

Like Brazil, India experienced a significant decline in Q2 on the back of Tapering worries. The USDINR forged new all-time highs above 61.00, though has since consolidated, trading on either side of 60.00 plus or minus a big figure depending on the day. While 61.00 feels a bit overdone, reports show that FX reserves have diminished significantly, meaning that the Reserve Bank of India’s ability to intervene directly in FX markets has been dented. To arrest the decline in the INR and restore confidence policy makers may be forced to look at unconventional tools such as USD denominated bonds, which have been used successfully in the past (2000 & 1998). This along with easing foreign capital restrictions would help control the USDINR and stimulate growth, which has been suffering due to lower than expected inflation. Assuming the scenario suggested above, the pair is positioned to continue trading in the upper 50’s through 2013.

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CURRENCY INSIGHTSJanuary 2013

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July 2013