FX WEEKLY BRIEF：When push comes to shove

FOREIGN EXCHANGE RESEARCH 30 April 2010 PLEASE SEE ANALYST CERTIFICATIONS AND IMPORTANT DISCLOSURES STARTING AFTER PAGE 23 FX WEEKLY BRIEF Greek crisis and FX: When push comes to shove The Greek fiscal crisis became more acute this week. We summarise our current thinking, outlining some plausible scenarios in the very short run and the likely impact on FX rates and the way that we believe the crisis is likely to develop in the medium run. JPY: Institutional support 9 There is evidence of Japanese institutional investors being more willing to increase outward investment than previously – reinforcing our bullish view on USD/JPY. TRY: Money is tighter 12 We discuss the main findings of our trip to Istanbul and argue that the growth recovery in Turkey should pull in capital inflows to bolster our long TRY recommendation. MXN: Mexico and the wall of money 15 The allocation of cash into Mexico’s financial markets has been recovering vigorously and we expect it to continue to support asset prices, including the MXN. Figure 1: There has been a “Greek effect” on the EUR 0100200300400500600700800900Jan 09Feb 09Mar 09Apr 09May 0 9Jun 09Jul 09Aug 09Sep 09Oct 0 9Nov 09Dec 09Jan 10Feb 10Mar 1 0Apr 101.21.31.41.51.6Greek CDS spread (L HS)EUR/USD (RHS, inverted)Worries about Greece star t to gr owbps0100200300400500600700800900Jan 09Feb 09Mar 09Apr 09May 0 9Jun 09Jul 09Aug 09Sep 09Oct 0 9Nov 09Dec 09Jan 10Feb 10Mar 1 0Apr 101.21.31.41.51.6Greek CDS spread (L HS)EUR/USD (RHS, inverted)Worries about Greece star t to gr owbps Source: EPFR, Barclays Capital Editorial 2 FX Short-term and Technical Strategy Views 3 Open Trade Recommendations 4 Closed Trade Recommendations and OPERA 18 Forecasts 20 EM FX Views on a Page 22 Weekly performance of currencies versus the USD 2.1%1.3%0.8%0.2 %0.2%-0.1%-0.1%-0.1%-0.1%-0.1%-0.2%-0 . 3 %-0.4%-0.6%-0 .7 %-1.1 %-0.2%2. 4 %NZDBRLZARAUDINRMX NCN YJPYKRWNOKTRYCH FRUBEURGBPCA DSEKPLN2.1%1.3%0.8%0.2 %0.2%-0.1%-0.1%-0.1%-0.1%-0.1%-0.2%-0 . 3 %-0.4%-0.6%-0 .7 %-1.1 %-0.2%2. 4 %NZDBRLZARAUDINRMX NCN YJPYKRWNOKTRYCH FRUBEURGBPCA DSEKPLN Note: Based on Thursday 4pm London rates. Source: Bloomberg BarCap forecasts 3m forecast Returns against forwards USD Index 83.45 2.0% EUR/USD 1.30 -2.5% USD/JPY 96.00 1.9% GBP/USD 1.48 -3.3% USD/CAD 0.97 -3.8% AUD /USD 0.88 -4.5% NZD /USD 0.70 -3.7% EUR index 108.92 -0.7% EUR/GBP 0.88 0.8% EUR/CHF 1.47 2.6% EUR/SEK 9.60 -0.2% EUR/NOK 8.05 2.0% Major EM USD/CNY 6.80 0.9% USD/INR 44.3 -0.7% USD/KRW 1100 -0.9% USD/RUB 29.0 -1.4% USD/ZAR 7.58 1.6% USD/BRL 1.95 10.7% USD/MXN 11.80 -4.3% Source: Barclays Capital Barclays Capital | FX Weekly Brief 30 April 2010 2 EDITIORIAL A long weekend ahead The Greek crisis and its possible impact on risky assets dominated investor concerns this week. We have long argued that problems might arise from the competing incentives of the Greek authorities to obtain the most generous funding possible and the lenders to attach very strict conditions in order to limit political dissent and moral hazard. It now appears that the severity of the situation has led to compromise on both sides, and we expect a large, multi-year deal to be announced over the next few days with the Greek government agreeing to a very tough austerity programme. Assuming a deal is announced, we expect a rally of risky assets and something of a bounce for the EUR – even at this late stage there is residual possibility of a low probability, high-impact event, which would simultaneously hurt risky assets and the EUR. The end of that uncertainty should lead to a rally. But, in our view, the road ahead will be very difficult. Greek growth is likely to be extremely weak, making it much more difficult to stick to the austerity package, and there is bound to be significant political pressure. We think that any relief rally for the EUR will be temporary and that further downside is likely in the coming months. We discuss our thinking in “When push comes to