FOREIGN EXCHANGE RESEARCH 5 August 2010 PLEASE SEE ANALYST CERTIFICATIONS AND IMPORTANT DISCLOSURES STARTING AFTER PAGE 25FX WEEKLY BRIEF Inflation Report blues again We remain GBP bulls but expect the BoE’s Inflation Report to be more downbeat than the market expects. This should be a good time to re-establish GBP longs, since the report is typically a big market mover. Where next for G10 FX? A regime analysis 8 We investigate how common the current pattern of strong bond, commodity and equity prices has been since 1990 and discuss the implications for FX. AUD & NZD: Cautious, but not overly bearish 10 There are several reasons to be cautious about the levels of the AUD and NZD. We discuss these and adjust our forecasts accordingly. MXN: Running out of good news 14 As we move beyond Mexico’s cyclical bounce, we believe a medium-term pattern of MXN underperformance against other LatAm currencies is likely to re-establish itself. INR: Technicals strong, but fundamentals weakening 18 While the longer-term outlook for INR is increasingly clouded, the short-term outlook is positive. Figure 1: UK government spreads have fallen against the US and euro area economies -30-150153045607590Jan-09Apr-09Jul-09Oct-09Jan-10Apr-10Jul-10FranceUSUK issues dominateEuro area becomes more important Source: Barclays Capital Editorial 2 FX Short-term and Technical Strategy Views 3 Open Trade Recommendations 4 Closed Trade Recommendations and OPERA 21 Forecasts 22 EM FX Views on a Page 24 Weekly performance of currencies versus the USD 1.7%1.7%1.7%1.6%1.3%1.3%1.2%1.2%1.2%1.1%0.8%0.7%0.6%0.2%0.0%-0.5% 0.7%2.0% CAD KRW GBP NOK AUD SEK PLN RUB MXN JPY ZAR INR EUR TRY NZD BRL CNY CHF Note: Based on Thursday 4pm London rates. Source: Bloomberg BarCap forecasts 3m forecast Returns against forwards USD Index 84.99 4.8% EUR/USD 1.25 -4.9% USD/JPY 94.00 9.6% GBP/USD 1.58 -0.1% USD/CAD 1.05 3.4% AUD /USD 0.88 -2.5% NZD /USD 0.70 -2.9% EUR index 103.80 -2.8% EUR/GBP 0.79 -4.8% EUR/CHF 1.40 1.9% EUR/SEK 9.30 -1.0% EUR/NOK 7.90 -0.4% Major EM USD/CNY 6.71 -0.8% USD/INR 47.0 0.6% USD/KRW 1125 -4.0% USD/RUB 30.3 0.7% USD/ZAR 7.55 2.5% USD/BRL 2.00 11.7% USD/MXN 12.60 -0.4% Source: Barclays Capital Barclays Capital | FX Weekly Brief 5 August 2010 2 EDITIORIAL Time to launch the QE2? The markets have been buffeted by conflicting data in the past couple of weeks. US data continue to be weak, and all eyes are on non-farm payrolls tomorrow and the FOMC meeting next week. Expectations of another round of quantitative easing by the Fed have led to lower US yields and a weak USD. However, the weakness in US data is not matched by the euro zone, where the data continue to surprise to the upside. Equities and commodities have also continued to do well, despite fears of a US slowdown. We feel the market is to be doubly wrong. In the first place, although US data have surprised to the downside, they still indicate a growing economy, albeit with a slower rate of growth. Rhetoric from Fed officials as recent as this week (so they would have seen all but the very recent data) suggests that the economic data would have to deteriorate significantly for there to be further stimulus, and so far they do not, in our view, justify another round of QE. Second, if the US does suffer from a double dip recession, which is not our central scenario, the knock-on effects on global growth seem to be underpriced. Nor do we expect the BoJ to intervene in the FX markets. Based on our models, the JPY is not too far from its equilibrium levels, and we expect significantly more verbal intervention before BoJ intervention in the FX markets. Faced with significant uncertainty, we expect policymakers to keep policy on hold while the various uncertainties resolve themselves one way or another. This was definitely what the BoE and the ECB did today. Neither the MPC statement nor the ECB press conference had any major