THE FX QUANTITATIVE ANALYZER
FOREIGN EXCHANGE RESEARCH Global Foreign Exchange Strategy | 26 July 2010 PLEASE SEE ANALYST CERTIFICATIONS AND IMPORTANT DISCLOSURES STARTING AFTER PAGE 20 THE FX QUANTITATIVE ANALYZER Commodity and cyclical currencies outperformed last week, helped by rising equity and commodity prices, while the EUR came under pressure across the board ahead of the release of the euro area bank stress tests. In particular, the EUR fell against the USD and GBP, despite our financial fair value (FFV) model forecasting modest appreciation on favorable moves in interest rates and equity prices. As a result, the undervaluation of the EUR against the USD and GBP widened to a significant level, likely reflecting a rise in the risk premium associated with uncertainty about the stress-test results. Although it remains to be seen whether the results – only 7 out of 91 banks were found to require a modest amount of additional capital – will be able to restore investor confidence in the euro area banking sector, the reduced uncertainty will help lower the risk premium to some degree and is marginally positive for the EUR in the short term, in our view. Chart of the week: Weekly percentage changes in spot and FFV -2.0-1.5-1.0-0.50.00.51.01.52.02.53.0EUR/USDUSD/JPYEUR/GBPEUR/CHFUSD/CADAUD/USDNZ D / USDEUR/NOKEUR/SEKactualFFV Source for all charts and tables: Barclays Capital Yuki Sakasai +81 (3) 4530 5026 yuki.sakasai@barcap.com www.barcap.com Contents Summary 3EUR/USD Spot 4EUR/USD Volatility 5USD/JPY Spot 6USD/JPY Volatility 7EUR/GBP Spot 8EUR/GBP Volatility 9EUR/CHF Spot 10EUR/CHF Volatility 11USD/CAD Spot 12USD/CAD Volatility 13AUD/USD Spot 14AUD/USD Volatility 15NZD/USD Spot 16EUR/NOK Spot 17EUR/SEK Spot 18A Primer on Quantitative Analysis (QA) 19 Barclays Capital | The FX Quantitative Analyzer 26 July 2010 2 This page is intentionally left blank Barclays Capital | The FX Quantitative Analyzer 26 July 2010 3 SUMMARY1 SPOT Deviation from fair value Market sentiment Risk premium Momentum % No. of SD Signal No. of SD Signal No. of SD Signal No. of SD EUR/USD -4.7 -2.0 Bearish -0.9 High -2.6 Oversold -1.1 USD/JPY -0.8 -0.6 Bearish -0.7 Low 5.9 Oversold -1.5 EUR/GBP -6.4 -2.6 Bearish -1.0 High -2.0 Oversold -0.6 EUR/CHF -1.9 -1.3 Bearish -0.7 Low 0.6 Oversold -3.2 USD/CAD -1.8 -1.4 Bullish 1.3 Low -1.2 Oversold -0.5 AUD/USD 1.3 1.0 Bearish -1.2 Low 1.0 Overbought 0.6 NZD/USD 0.4 0.2 Bearish -0.8 – – Overbought 0.9 EUR/NOK -1.2 -0.7 Bullish 1.6 – – Oversold -1.4 EUR/SEK -3.3 -0.9 Bullish 2.2 – – Oversold -1.3 Note: All the measures refer to the crosses rather than the specific currencies. The blue shaded area shows extreme overbought conditions, while the grey shaded area shows extreme oversold conditions. The notional of standard deviation shows the strength of each signal as well as the direction of deviation Commodity and cyclical currencies outperformed last week, helped by rising equity and commodity prices, while the EUR came under pressure across the board ahead of the release of the euro area bank stress tests. In particular, the EUR fell against the USD and GBP, despite our financial fair value (FFV) model forecasting modest appreciation on favorable moves in interest rates and equity prices. As a result, the undervaluation of the EUR against the USD and GBP widened to a significant level, likely reflecting a rise in the risk premium associated with uncertainty about the stress-test results. Although it remains to be seen whether the results – only 7 out of 91 banks were found to require a modest amount of additional capital – will be able to restore investor confidence in the euro area banking sector, the reduced uncertainty will help lower the risk premium to some degree and is marginally positive for the EUR in the short term, in our view. CFTC positioning data as of Tuesday, 20 July, show that investors continued to reduce the net short EUR speculative position against the USD, while adding to the net long AUD speculative position. They also slightly reduced the net long JPY position against the USD, although it is still at an elevated level. Option-implied bearish sentiment on commodity currencies has been falling steadily, and option-implied bearish sentiment on the SEK relative to the EUR remains elevated. VOL Vol valuation (Principal Component Analysis) Vol valuation (GARCH) Strangle value 3m vol 6m vol 9m vol 12m vol 3m vol 3m EUR/USD Fair Cheap Expensive Cheap Expensive High USD/JPY Expensive Cheap E
