The dollar has come under pressure as the Federal Reserve remains on hold for an extended period. SEB’s strategists say in the latest issue of Currency Strategy that it is likely that the dollar continues to remain weak. They do however note that we are closer to see the dollar finding some traction versus other G10 currencies. The bank’s experts forecast a slow grind lower in the euro/Swedish krona echange rate.

1. TUESDAY
The dollar duality 10 MAY 2011
We still expect good support for risk appetite overall. Despite some weaker leading indicators EDITOR
reacting to high commodity prices and uncertainties following the crises in Japan, we still Carl Hammer
believe global growth will remain close to trend driven by Asia/Emerging markets. There is + 46 8 506 231 28
now more evidence to suggest Asia together with other developing countries will continue to
tighten monetary policy as inflation moves even higher. Asian FX appreciation will clearly be a
key weapon in fighting inflation – we expect China to allow the Renminbi to appreciate faster
than consensus. The end of QE2 also creates uncertainty; we do not believe US interest rates
will rise substantially as this is already discounted in US Treasury prices. US monetary
tightening will begin by stopping reinvesting maturing principals on the Fed's mortgage
portfolio, probably in H2 2011. We still expect the first Fed rate hike in Jan 2012. With the FX-
market closely linked to changes in interest rate differentials the USD has come under
pressure with the Fed remaining on hold for an extended period. While it is therefore likely
that the broad trade-weighted dollar will continue to weaken, the USD is now closer to finding
traction vs. other G10 currencies as the Fed prepares to cautiously tighten monetary policy.
We expect the EUR/USD moving back up towards 1.50 during summer, which however will
prove a more lasting top. The euro will be increasingly vulnerable to bad news and markets are
fully discounting ECB rate hikes. We expect a stronger USD H2 2011 which will also facilitate
some SEK strength vs. the euro again.
BASKET TRADE: BUY TOP 3 VS BOTTOM 3. We
recommend to buy the top 3 currencies (AUD, RUB, TRY) vs Currency outlook (end Q2)
the bottom 3. Still, procyclical currencies are found at the
top against the JPY, GBP and USD. Once tighter monetary AUD +4
policy is required in the US we would expect a set-back to RUB +4
this trade; however that’s expected to happen early 2012. PLN +4
TRY +4
BUY EUR AND USD VS JPY. We continue to expect JPY to
EUR +3
be the weakest G3 currency based on most rating
categories as both monetary policy and fundamentals CAD +3
hardly support the Japanese currency. NZD +3
SEK +3
BUY SEAGULL IN EUR/SEK. The skew in vol makes a NOK +3
seagull structure for the downside attractive: Buy a 6
DKK +3
months EUR/SEK seagull 9.00 put (1x) vs. sold 9.35 call
HUF +3
(1.5x) and sold 8.65 put (1x) is nearly zero cost.
CNY +2
BUY EM-ASIAN BASKET long MYR, KRW, CNH vs. short CHF +1
JPY, GBP, USD. This theme revolves around the need for USD -1
further Asian FX appreciation vs. majors. Fundamentals, GBP -2
interest rate expectations, flows and now also the desire by
JPY -3
Asian policymakers to tolerate a somewhat faster
appreciation to stem imported inflation.
You can also find our research materials at our website: www.mb.seb.se. This report is produced by Skandinaviska Enskilda Banken AB (publ) for institutional investors only. Information and
opinions contained within this document are given in good faith and are based on sources believed to be reliable, we do not represent that they are accurate or complete. No liability is
accepted for any direct or consequential loss resulting from reliance on this document. Changes may be made to opinions or information contained herein without notice.

2. Currency Strategy
Forecasts
FX forecasts SEB Consensus* Contents
08-maj Q2 11 Q3 11 Q2 11 Q3 11 Forecasts 2
EUR/USD 1.4316 1.48 1.45 1.44 1.41 The big picture 3
EUR/JPY 115.43 121 122 121 120 USD 6
EUR/GBP 0.8747 0.91 0.90 0.88 0.86 EUR 8
EUR/CHF 1.2582 1.28 1.28 1.31 1.32 JPY 10
EUR/CAD 1.3838 1.39 1.36 1.38 1.35 GBP 12
EUR/AUD 1.3379 1.33 1.36 1.38 1.37 CAD 14
EUR/NZD 1.8105 1.82 1.86 1.89 1.88 AUD 16
EUR/SEK 9.0335 9.00 8.85 8.75 8.70 NZD 18
EUR/NOK 7.9204 7.95 7.85 7.73 7.68 CHF 20
EUR/DKK 7.4573 7.45 7.45 7.45 7.45 SEK 22
EUR/RUB 39.67 39.5 38.7 39.5 39.9 NOK 24
EUR/PLN 3.9446 3.92 3.82 3.93 3.86 DKK 26
EUR/HUF 264.58 265 265 269 268 RUB 28
Cross rates PLN 30
USD/JPY 80.63 82 84 84 86 HUF 32
GBP/USD 1.64 1.62 1.62 1.63 1.63 TRY 34
USD/CAD 0.9666 0.94 0.94 0.96 0.96 CNY 36
USD/CHF 0.8789 0.87 0.88 0.91 0.94 Summary ranking 38
AUD/USD 1.0700 1.11 1.07 1.04 1.03 Seasonal patterns 39
NZD/USD 0.7907 0.81 0.78 0.76 0.75 Guide to indicators 40
USD/SEK 6.3101 6.08 6.10 6.08 6.17 SEBEER 41
USD/NOK 5.5326 5.37 5.41 5.37 5.45 Fair-value models 42
USD/RUB 27.71 26.7 26.7 27.7 27.8 Contacts 43
USD/PLN 2.7554 2.65 2.63 2.73 2.74
USD/HUF 184.81 179 183 187 190
USD/TRY 1.5445 1.49 1.48 1.54 1.51
USD/CNY 6.4932 6.38 6.28 6.45 6.36
* Bloomberg survey FX forecasts.
SEB policy rate forecasts maj 08, 2011
RB NB FED ECB BOE BOJ BOC SNB RBA RBNZ
Current 1.50% 2.00% 0.0-0.25% 1.25% 0.50% 0.10% 1.00% 0.25% 4.75% 2.50%
End-10 1.25% 2.00% 0.0-0.25% 1.00% 0.50% 0.10% 1.00% 0.25% 4.75% 3.00%
jan-11 26 jan 26 jan 13 jan 13 jan 25 jan 18 jan 27 jan
Feb 15 Feb* 3 feb 10 feb 17 feb 1 feb
Mar 16 Mar* 15 mar 3 mar 10 mar 15 mar 1 mar 17 mar 1 mar 10 Mar*
Apr 20 apr 27 apr 7 apr 7 apr 7 & 28 Apr 12 apr 5 apr 28 apr
May 12 maj 5 maj 5 maj 20 maj 31 maj 3 maj
Jun 22 Jun* 22 jun 9 jun 9 jun 14 jun 16 jun 7 jun 9 Jun*
Jul 5 jul 7 jul 7 jul 19 jul 5 jul 28 jul
Aug 10 aug 9 aug 4 aug 4 aug 2 aug
Sep 7 sep 21 sep 20 sep 8 sep 8 sep 7 sep 15 sep 6 sep 15 Sep*
Oct 27 okt 19 Oct* 6 okt 6 okt 25 okt 4 okt 27 okt
Nov 2 nov 3 nov 10 nov 1 nov
Dec 20 dec 14 dec 13 dec 8 dec 8 dec 6 dec 15 dec 6 dec 8 Dec*
End-11 2.75% 2.75% 0.0-0.25% 2.00% 1.00% 0.10% 1.50% 0.25% 5.25% 2.75%
Inflation target 2.0% 2.5% ~1.8% ~1.8% 2.0% 0-2% 2.0% 2.0% 2-3% 1-3%
50bps hike 25bps hike 25bps cut 50bps cut >50bps cut Italics indicate past decisions * = Strategic policy meetings
2

3. Currency Strategy
The Big Picture
The FX market is usually characterized by either one or IT’S THE RATE OF CHANGE, STUPID. Instead, the
several key drivers. Previously we have argued that influence of monetary policy expectations
fundamentals (shown by growth in the following captured by changes in rate differentials between
chart) were such a factor, with strong currencies currencies has been the FX market’s key driver.
attracting buyers as investors diversified out of those This has supported currencies with rising interest rates
countries with large deficits and poor economic such as the EUR until fairly recently. It has also been
prospects. the main reason for USD weakness with the Fed clearly
signalling it will remain one of the few central banks to
SEB FX investment styles 2011 maintain a zero interest rate policy for the foreseeable
10% 10% future.
6% 6%
Moreover, the importance of this theme was illustrated
as the ECB proving more dovish than the market
2% 2%
expected at its May meeting, causing a dramatic sell
off in EUR/USD as European rates fell back. Central
-2% -2%
bank expectations will probably remain the key driver
for FX markets going forward. However, as yield
Valuation
-6% Growth -6%
differentials between currencies continue to widen
Rate change and as FX volatilities fall back further the carry theme
-10%
Carry
-10%
is likely to become increasingly important.
31/Dec 31/Jan 28/Feb 31/Mar 30/Apr
In the last issue of this report we suggested that carry
would emerge as a more important FX market theme.
As volatilities decreased the risk adjusted carry return
would increase. This would support currencies with
high interest rates and weaken those with low such as
the yen. Despite signs that yield differentials attract
inflows the carry theme has not fully materialized as
excessive currency moves following the Japanese
quake pushed FX volatilities higher making carry
positioning less attractive.
RISK APPETITE LIKELY TO STAY SUPPORTIVE. Risk
Risk-adjusted carry vs JPY, 3m
appetite has remained firm despite falling back
0.80 temporarily as the effects of the Japanese earthquake
0.70 and the nuclear accident in March created short-term
0.60
uncertainty. Going forward it appears as if risk
appetite will remain supported with global growth
0.50
likely to continue around trend. Nevertheless, we
0.40 cannot fully preclude the possibility that risk appetite
0.30 could be adversely affected by a more rapid tightening
0.20 of monetary policy in high growth economies in
response to surging inflation than is currently
0.10
anticipated. There have already been several signs
0.00 that financial markets are sensitive to news indicating
AUD CAD EUR NZD NOK PLN KRW SEK USD GBP
possibly faster than expected rate hikes, although so
2011-05-04 2011-03-02
far effects have been temporary. However with
surging commodity prices feeding inflation EM central
banks may be forced to tighten monetary policy more
3

4. Currency Strategy
rapidly going forward, which could set back global risk
appetite.
USD PRESSURE TO EASE AS ASIAN CURRENCIES
STRENGTHEN. USD depreciation has taken the narrow
USD-index close to 2008 lows. This potentially limits
Index
Index
potential for further USD weakness against such
currencies although we expect a renewed test of
recent lows over the coming months. The USD should
regain ground going forward although the outlook is
different when measured against EM currencies.
Although the USD trades around previous lows, in real
trade weighted terms, we see scope for further
depreciation against such currencies. In nominal
terms the broad USD index is far from historical Going forward tentative signs of currency
lows as higher EM inflation has depressed appreciation in the EM world will probably
nominal values of EM currencies vs. their G10 become more entrenched in the valuation of their
counterparts. currencies, causing further appreciation against
those of the world’s largest countries. That
process would most likely ease downward
pressure on the USD against other G10 currencies
as rebalancing flows out of the USD should
moderate.
OUR VIEW ON COMMODITIES. In early May warning
lights were flashing in commodity markets. Record
long speculative positions together with high
commodity prices generally and several potential
sector threats made a correction inevitable. Fears of
Asian tightening, lacklustre US macroeconomic data,
and marked USD appreciation provided the excuse.
Commodities fell across the board as investors
However, the fact that EM economies continue to offloaded broad indices in the general sell-off that
generate significant Current account surpluses is a followed. However, we argue that the correction is
sign that their currencies are still some way off their unlikely to have marked the end of the current cyclical
long-term fair values. Therefore, G10 currencies bull market in commodities. Instead, it created several
including the USD will probably continue to depreciate attractive buying opportunities. We expect crude oil to
against their EM counterparts. recover to $120/b and beyond in Q2-11 as the loss of
Libyan sweet crude is felt to its fullest extent. In H2-11,
Recently, rapid increases in energy and food prices however, we expect them to fall back to an average of
have exerted upward pressure on global inflation, $105/b as high prices dampen demand for awhile.
especially in high growth economies. Last year’s Furthermore, we still regard gold prices as well
currency war has ceased with currency appreciation supported by rising inflation, high geopolitical risk,
having become one possible means of stemming sovereign debt fears and diversification demand from
the effect of higher import prices, besides monetary investors and central banks. We expect gold to trade
policy tightening. Recently we have seen signs that at $1550/ozt at year end with a potential peak above
ASEAN-3 may initiate a joint revaluation of their $1700/ozt in 2011 if the bearish dollar trend continues.
currencies and that China may not entirely reject Industrial metals appear well supported in the long
the idea of letting its currency appreciate slightly term but are sensitive short term to bouts of concern
faster than usual against the USD. However, this over a possible Chinese hard-landing, which is likely to
remains undiscounted in current exchange rates with provide additional buying opportunities.
trade deficit currencies having actually outperformed
trade surplus currencies vs. the USD since the start of
the year. FED PROBABLY KEY FOR A SHIFT IN FX MARKETS.
With central bank expectations the key FX market
driver and cheap dollar liquidity still accessible we
believe current FX market trends supporting
4

5. Currency Strategy
commodity related and EM currencies are likely to China as the largest holder of treasury bonds as
continue as long as the Fed maintains its zero interest sustained USD weakness would produce massive
rate policy. As it eventually begins to communicate losses on its holdings. Is it in the interest of the US
changes in its current policy, which we expect in H2- itself? Short-term a weak dollar would improve
11, it may well mark an end to current FX market conditions for exporters and at the same time dampen
developments. imports, potentially improving the current account
deficit. However, this would simultaneously generate
The shift in Fed expectations is likely to be increasing inflation, and more importantly, reduce
reflected in relative yields beginning to support foreign demand for US assets. Overall, this would
the USD against other G10 currencies currently probably drive US yields higher to compensate for the
benefiting from rising yields. As part of monetary risk of currency depreciation. With the US economy
policy tightening the Fed will stop reinvesting highly dependent on interest rates staying low to
maturing principals on its bond holdings, bringing an support growth we would argue that a weak USD is
end to cheap USD liquidity, which should ease actually not even in the interests of the US. There are
pressure on commodity prices and capital inflows to therefore very few, if any, winners from long-term USD
EM countries. Consequently, current pressure on EM depreciation. Consequently, the risk of a collapse is
currencies to appreciate would diminish, further probably limited.
reducing the need for central bank interventions to
prevent EM currencies from strengthening too far and SCANDIES FACING SOME NEAR-TERM HEADWINDS.
therefore reducing rebalancing flows out of the USD. Following market leading performances in Q1 both
SEK and NOK now face more formidable obstacles to
Such a shift in US monetary policy is likely to further appreciation. The trade-weighted krona (TCW)
generate new market trends not only vs. the USD hit a 14-year low (inverted relationship) last month as
but probably also in more general terms. Ultimately the dollar continued downward. Further, the I44
this shift would start to push currencies toward their (import-weighted krone) only recently set a 3-year low
long-term fair values. Within the G10 we therefore (inverted relationship) just 2% off its bottom.
expect this shift to finally slow or even reverse Arguably, further appreciation by Scandinavian
current appreciation trends in such commodity currencies vs. the EUR is less likely if the USD remains
currencies as the AUD and CAD. Moreover the shift weak(er). Although the ECB did not fulfil hawkish
will probably mark the start of a more broad-based JPY expectations, we still believe European interests will
depreciation with the Japanese central bank remaining continue to rise. This trend will also prevent any
the only central bank maintaining a zero interest rate significant SEK and NOK appreciation vs. the EUR in
policy. coming months. The case is different over the
slightly longer term as we expect the respective
central banks to continue to raise rates more
rapidly than the ECB. In addition the strong
fundamental outlook for both countries will
continue to attract foreign flows, with the SEK
and NOK also slightly undervalued according to
our models. We therefore expect a further 3-5%
trade-weighted appreciation over the next 12 months.
CONCLUSION. It is too early to bet on a swift reversal
in the fortune of the Greenback as the Fed is still
pursuing QE2 and keeps its current policy stance for
USD COLLAPSE UNLIKELY. Rapid growth in US an “extended period”. However already this summer
government debt has increased concerns that the USD we expect the US central bank to start trim its balance
may continue to depreciate against G10 and EM sheet and prepare the market for a rate hike in early
currencies as one way to reduce the value of US debt, 2012. This should eventually stabilise the USD vs G10
fully issued in local currency. However, as the global currencies. The large Current account surpluses
reserve currency we are led to ask who would actually together with rising FX reserves and also now rising
benefit from a weak USD. We argue that a USD inflation makes the case for continued and perhaps
collapse is in fact in no one’s interest. With the US still even more rapid Asian FX appreciation compelling.
an important market for final demand a weak USD is Hence we expect the theme first explored in Currency
most certainly not in the interests of exporters, nor of Strategy Nov 2009 “Appreciated Asia” to still be valid.
5

6. Currency Strategy
US dollar Total
The USD has depreciated by more than 5% in trade
weighted terms since the beginning of this year and is
-1 Monetary pol. -1
currently below 2008 lows (broad trade-weighted USD). Fundamentals +1
USD weakness has been driven by Fed policy holding
interest rates low for an extended period. In addition the
Flows 0
USD suffers from the lack of political ability to finally
reduce the huge budget deficits. Still it is difficult to find a
clear winner of a significant weaker USD, and hence addi- Technicals -1
tional USD weakness is in no one’s interest. Lacking yield
support the USD is likely to continue to fall vs. G10. With
the Fed to signal tighter monetary policy in H2 2011 the USD speculative positions
USD should retake some lost ground.
82.5 50
MONETARY POLICY Fed is one of two G10 central banks 40
Contracts (thousands)
80.0
that continues to ease monetary policy purchasing E U R speculative positio ns
U S D /C A D 30
government debt. The QE2 program will however end in 77.5 12 5
Contracts (thousands)
1.35 0 E U R /U S D
June and thereafter further easing of monetary policy is 10 0
20
75.0 1.30 0 75
unlikely. We expect the next step from the Fed to be a
50 10
mild tightening as the Fed stop reinvesting maturing 1.25 0
72.5 25
bonds after summer, and then finally consider rate hikes 1.20 0
0
0
by early next year. The key for future Fed policy will be 70.0 1.15 0 S peculative positions
Speculative positions -2 5 -10
developments in the labour market, where a persistent USD index
04 05 06 07
improvement is a prerequisite for a monetary policy 67.5 -20
tightening together with the evolvement in inflation Dec Mar lack of significant upside progress in
The Jun Sep Dec Mar
EUR/USD makes the current substantial net
expectations. -1 09 10 position a burden. 11
long speculative Should
the sub-1.29-area be revisited, speculative
ECONOMIC FUNDAMENTALS Despite disappointing Q1 longs will have to be reduced.
GDP growth the US economy is on track for a continued
recovery. Supported by strong export demand most
business sentiment indicators have reached multiyear
highs in the first quarter, historically related to strong US
growth. Sentiment amongst small companies however
lags probably reflecting tight credit conditions and weak
domestic demand. Recovery in the housing market
remains slow and prices continue to fall rendering a
negative impact on household wealth. Unemployment
has dropped to 9.0%. Despite a significant slack in labour
market disposable income has improved significantly
supporting household demand. However, gasoline prices
at almost 4 USD/gallon will be a drag for spending if
sustained. +1
FLOWS US trade balance has improved as exports have
been growing strongly due to a weaker USD and strong Technical view: USD Index
global demand. Nevertheless going forward we expect Price
import growth to pick up causing the trade deficit to de-
teriorate. With foreign equity markets continuing to att- 84
ract US capital outflows, US bond market is the only sour-
ce of net inflows as non-official foreign capital show signs
80
of finding its way back into US non-treasury bonds while
official capital flows have turned negative early this year
76
according to the latest TIC data. 0
100.0% 73.16
TECHNICALS & POSITIONING: The dollar is now, despite support zone 72
last week’s bounce approaching long term key support
levels. Our primary view is still that the key support will 2008 2009 2010 2011
2000 2010
hold and yield a counter reaction. It is also worth noting
that the speculative short dollar position has been
decreased despite the dollar decline. -1
6

7. Percent of total labour force Current Account Bal, % of GDP Percent AR
Basic Balance, USD bn
7
Percent y/y Percent y/y
0
1
2
3
4
5
6
7
00
02
04
06
08
Fed Funds target rate
10
UNITED STATES
0
1
2
3
4
5
6
7
Currency Strategy

8. Currency Strategy
The euro
Total
Despite the ongoing debt problems in some euro area
member countries the euro regained some strength in
recent months. Markets seem convinced that the
+3 Monetary pol. +1
monetary union is strong enough to solve the debt Fundamentals 0
problems. The ECB’s strategy to fight upside risk to
inflation with rising policy interest rates remains the main Flows +1
driver of the currency going forward.
MONETARY POLICY After having raised the main policy Technicals +1
interest rate to 1.25% in April the ECB put rates on hold in
May. It signalled no hurry in hiking rates further. The ECB
is still worried that recent price rises could lead to second EUR speculative positions
round effects in price and wage settings. To prevent
those effects we think the ECB has to hike rates steadily 1.50 100
in coming months. The next rate hike now seems due in 1.45 E U R speculative positio ns 75
U S D /C A D
12 5 50
July. At year end, the interest rate of the main refinancing
Contracts (thousands)
1.35 0 E U R /U S D
1.40 10 0
operation should stand at 1.75%. That’s already priced in 25
1.30 0 75
money market rates. Therefore, there is not much room 1.35 0
50
1.25 0
to surprise markets on the upside. +1 1.30 25 -25
1.20 0
0 -50
1.25
ECONOMIC FUNDAMENTALS Leading indicators as well 1.15 0 S peculative positions -2 5 -75
1.20 Speculative positions
04 05 06 07
as economic data point to a continuation of the moderate EUR/USD -100
recovery in the euro area. But the expansion remains 1.15 The lack of significant upside progress -125 in
uneven with the core EMU member states in the lead Feb May Aug Nov Feb May
EUR/USD makes the current substantial net
while some smaller countries are facing severe long speculative position a burden. Should
10 11
the sub-1.29-area be revisited, speculative
headwinds from their fiscal crises. The cut back of the longs will have to be reduced.
excessive budget deficits will continue to hamper growth Effective exchange rate
in those countries in coming quarters while the
120 120
introduction of structural reforms must speed up. So,
despite the introduction of a financial stability 115 115
mechanism, markets remain concerned that a debt 110 110
EUR index (BoE)
EUR index (BoE)
restructuring at least in Greece is unavoidable. Such a 105 105
step would increase uncertainties about the health of the 100 100
financial system. So far, we see no immediate need for
95 95
such a measure. On an aggregate level, the budget deficit
declined to 6.0% in 2010 and EMU has cut the budget 90 90
deficit slightly by 0.3 percentage points to 6.0% of GDP 85 85
in 2010. For 2011 a further cut below 4% of GDP looks 80 80
possible, increasing the flexibility of the euro zone to 75 75
respond to new fiscal problems. 0 00 02 04 06 08 10
FLOWS In the 12 months ending February 2011, the euro
area reported combined foreign direct and portfolio Technical view: ECB EUR Index
investments of EUR 108bn compared with net inflows of
EUR 191bn a year earlier. In the same period, the compo- Price
sition of portfolio flows has improved significantly with 116
flows into equities up to EUR 113bn while flows into debt
112
instruments were scaled back to EUR 73.8bn. +1 61.8% 111.59
50.0% 109.35
TECHNICALS & POSITIONING As the index during its 38.2% 107.1
108
latest attempt lower couldn’t break the pattern of rising
lows the move higher remains intact. We thus foresee a 104
test of the 50% correction point (of the 2009/2010
decline), 109.35, before turning lower. The €/$ 100
speculative position is at elevated levels and is an Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3
additional supply risk should the pair turn down. +1 2009 2010 2011
8

9. Percent of total labour force Current Account Bal, % of GDP Percent y/y
Basic Balance, EUR bn
9
Percent y/y Percent y/y
EURO-ZONE
Currency Strategy

10. Currency Strategy
Japanese yen Total
The tragic events in Japan in March has added to the
already vulnerable situation that Japan’s economy is in.
-3 Monetary pol. -2
Although the bond market shows no signs of stress the Fundamentals -1
debt/GDP ratio at +200% is a clear long-term problem.
With no room at all for a change in the current super- Flows +1
loose monetary policy JPY will be a funding currency of
choice going forward, hence we continue to see the JPY
as a major underperformer. The speculative market is Technicals -1
very short JPY hence we don’t expect a fast JPY
depreciation near-term.
JPY speculative positions
MONETARY POLICY BOJ responded swiftly following the
tsunami by adding record-large amounts of liquidity 77.5
50
(close to USD 500bn). The joint FX intervention by G7 was 80.0
also an exceptional event as immediate risk aversion E U R speculative positio ns 30
82.5 U S D /C A D
12 5
made the JPY gain 9% (trade-weighted) in matter of days.
Contracts (thousands)
1.35 0 E U R /U S D 10
85.0 10 0
Almost flat GDP growth 2011 and continued deflation 1.30 0 75
make increasing rates this and next year a virtually 87.5 -10
50
1.25 0
impossible proposition. Monetary policy will continue to 90.0 25 -30
1.20 0
be a (very) negative factor for the currency for the 0
92.5 1.15 0 S peculative positions
Speculative positions -50
foreseeable future. -2 USD/JPY 0 4
-2 5
05 06 07
95.0 -70
ECONOMIC FUNDAMENTALS The earth quake and Feb Apr Jun Aug Oct Dec Feb Apr in
The lack of significant upside progress
tsunami and their effects on the Japanese economy are 10 11
EUR/USD makes the current substantial net
still very uncertain. SEB has revised lower its GDP forecast long speculative position a burden. Should
the sub-1.29-area be revisited, speculative
for 2011 to a mere 0.5%, 2012 will see rebuilding lifting longs will have to be reduced.
GDP by 2.4%. The Japanese government has signed off
an emergency extra budget adding USD 50bn used for
catastrophic aid. We expect more measures needed to
supplement the rebuilding efforts -> this will obviously
add to the fiscal vulnerability and unsustainable debt
profile that Japan already has. The large positive net
international investment position will however continue
to be supportive for the JPY in times of stress. -1
FLOWS Japan’s flow position has improved significantly
with both the basic balance and the current account
recovering from the sharp drops seen on back of the
financial crisis. The developments following the earth
quake is still very uncertain. Households are reported not
to hold a large proportion of foreign assets according to
BOJ and these funds are probably FX hedged as the cost Technical view: BOE JPY Index
of doing so is currently small -> repatriation of foreign
funds is not going to be that significant. Net purchases of Price
Japanese bonds and equities however have been very
positive lately and overall flows are likely to be JPY 170
positive still. +1
165
TECHNICALS & POSITIONING The “up-thrust” peak in
March (and downside key month reversal) most likely 160
ended the multiyear uptrend. The return into the “box” is
however a bit annoying and a return below it is needed to 155
increase credibility to a bearish case. Speculators have
also begun building a short JPY position. -1 J J A S O N D J F M A M J
Q2 10 Q3 10 Q4 10 Q1 11 Q2 11
10

11. Percent of total labour force Current Account Bal, % of GDP Percent y/y
Basic Balance, JPY trn
11
Percent y/y Percent y/y
JAPAN
Currency Strategy

12. Currency Strategy
British pound sterling Total
The pound is currently undervalued against most G10
currencies, but for good reasons, and it will remain so for
-2 Monetary pol. 0
the next 3-6 months. The economy struggles as Fundamentals -1
household demand remains under pressure and the
welcomed restructuring of the economy towards external Flows +1
demand has been slower than desired. Currently there
are signs that external trade has started to improve but
the economy is in need for this process to continue and a Technicals -2
weak currency may pave the way.
MONETARY POLICY With inflation persistently above the GBP speculative positions
BOE’s target the bank is facing an undesirable policy
problem with weak growth and high inflation. After 1.675 75
1.650
peaking at 4.4% in February, headline inflation however 50
1.625 E U R speculative positio ns
fell back slightly to 4.0% in March which released some U S D /C A D 25
1.600 12 5
pressure on BOE. Among MPC members a few have
Contracts (thousands)
1.35 0 E U R /U S D
1.575 10 0 0
argued for hiking the key rate to prevent rising inflation 1.550 1.30 0 75
expectations, while the majority has favoured an 1.525 50 -25
1.25 0
unchanged monetary policy as the economy is weak. 1.500 25 -50
1.20 0
Currently we expect the BOE to cautiously increase rates 1.475 0
Speculative positions -75
in H2 2011 but these hikes may be postponed if last 1.450 1.15 0 S peculative positions -2 5
GBP/USD
04 05 06 07
months’ easing in inflationary pressure continues. 0 1.425 -100
Feb May Aug Nov upside progress in
The lack of significant Feb May
ECONOMIC FUNDAMENTALS From negative growth in EUR/USD10 11
makes the current substantial net
the fourth quarter last year (-0.5% q/q), partly related to long speculative position a burden. Should
the sub-1.29-area be revisited, speculative
bad weather conditions, the UK economy preliminary longs will have to be reduced.rate
Effective exchange
grew by 0.5% q/q in Q1 2011. Amid falling real wages,
110 110
weak outlook for the labour market and falling house
prices the confidence among UK households is back at 105 105
the low levels from the financial crisis, indicating quite 100 100
weak private demand for the next couple of quarters.
Index (BoE)
Index (BoE)
95 95
Business sentiment indicators have been surprisingly
strong probably supported by growing export demand 90 90
but recently we have seen those moving lower as well. In 85 85
addition measures to improve government budget will
80 80
further dampen the growth prospects: we expect a
lacklustre GDP expansion of 1.4% 2011. -1 75 75
70 70
FLOWS Short-term observations are difficult given the 90 92 94 96 98 00 02 04 06 08 10
volatile components in the basic balance, mainly
including financial industry related portfolio flows. In the
fourth quarter 2010 the current account deficit Technical view: BOE GBP Index
deteriorated to almost 3% of GDP related to weak trade
Value
balance. The weak currency and weaker domestic
92
demand have however improved trade balance
dramatically in the beginning of 2011 as imports dropped 88
while exports continued to show some growth. This
development was expected and should continue; hence 84
the flow outlook has the potential for further
80
improvements. +1
76
TECHNICALS & POSITIONING The market is breaking
down from the bear triangle reasserting the long term 2009 2010 2011
bear trend. Next will be a test of the Q4 2010 low point of 2000 2010
78.3. Trimmed long £/$ positions despite the rising price
during April is a bearish behaviour. -2
12

13. Percent of total labour force Current Account Bal, % of GDP Percent y/y
Basic Balance, GBP bn
13
Percent y/y Percent y/y
UNITED KINGDOM
Currency Strategy

14. Currency Strategy
Canadian dollar
Total
We have persistently argued that the CAD should
continue its slow grind higher against the USD, but lately
the loonie has appreciated more rapidly amid general
+3 Monetary pol. +1
USD weakness and higher commodity prices. A rapid Fundamentals +1
strengthening of the currency is not welcomed as
competitiveness among Canadian exporters is weak due Flows 0
to poor productivity growth. Still the CAD will be
supported by high commodity prices, a gradual
tightening of monetary policy and US economic recovery; Technicals +1
however additional appreciation will be gradual.
MONETARY POLICY With the policy rate at 1% monetary
policy is very accommodative. Markets price two hikes by
the BOC in 2011, which is in line with our projection. Until
recently inflation has been very soft with core inflation far E U R speculative positio ns
U S D /C A D
12 5
Contracts (thousands)
below BOC forecasts. Inflation however accelerated in
Contracts (thousands)
1.35 0 E U R /U S D
10 0
March to 3.2% and core inflation to 1.6% due to rising 1.30 0 75
energy prices and higher provincial sales taxes. From 50
1.25 0
previously undershooting the BOC forecast, inflation 25
1.20 0
currently exceeds the BOC April forecast significantly. 0
S peculative positions
However BOC will remain cautious with respect to the 1.15 0 -2 5
04 05 06 07
strong currency and is likely to stick to a very slow
tightening of monetary policy. +1 The lack of significant upside progress in
EUR/USD makes the current substantial net
ECONOMIC FUNDAMENTALS In the fourth quarter GDP long speculative position a burden. Should
the sub-1.29-area be revisited, speculative
expanded by 3.2% from the previous year. Business longs will have to be reduced.
outlook remains firm and business confidence reflects
optimism about sales outlook and increased investments.
Especially within the commodity related sectors, as higher
commodity prices have bolstered national income.
Helped by a healthy growth in disposable income
household spending grew at average pace in 2010.
Although unemployment has stayed above 7.5%
consumer confidence improved in Q1 as terms of trade
gains continue to boost household income which
supports spending. In its latest report BOC projects the
output gap will be closed by mid-2012, two quarters
earlier than the previous forecast.= +1
FLOWS Although the current account improved
somewhat in the fourth quarter last year the deficit
remains historically high. The current account deficit is
related to deteriorating competitiveness due to a stronger
currency and weak productivity growth. The trade Technical view: BOE CAD INDEX
situation should however improve with higher commodity Price
prices. On the other hand Canada continues to attract
foreign capital inflows that currently more than fully 110
compensate for the trade deficits. These inflows should
continue to rise as long as commodity prices are 105
supported. 0 100
TECHNICALS & POSITIONING The trend is expected to 95
be in its latter stages shown by the rising wedge
formation (a trend-ending pattern), though we can’t call 90
for a top in place with less than a downside exit from the
Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3
wedge. Speculators’ positioning is not at record levels
2009 2010 2011
despite fresh highs which show that there is less
confidence in the recent move higher. +1
14

15. Percent of total labour force Current Account Bal, % of GDP Percent y/y
Basic Balance, CAD bn
15
Percent y/y Percent y/y
CANADA
Currency Strategy

16. Currency Strategy
Australian dollar Total
The AUD is expensive relative its long term fair value as
well as in REER terms. So far this deviation has seemed
+4 Monetary pol. +1
reasonable amid strong fundamentals and rising Fundamentals +1
commodity prices. From being supported by a
widening interest rate gap to the rest of the world the
Flows +1
AUD currently is favoured by a significant carry pick-up.
Going forward the economy will continue to generate
good growth supported by strong external demand and Technicals +1
high commodity prices, which will continue to attract
capital inflows. Despite the high valuation there are
few reasons to expect the AUD to weaken as long as
global risk appetite remains firm.
MONETARY POLICY Since the latest rate hike in
Contracts (thousands)
November the Australian central bank has left its key E U R speculative positio ns
U S D /C A D
12 5
interest rate unchanged at 4.75%. Currently markets
Contracts (thousands)
1.35 0 E U R /U S D
10 0
price one hike this year, which we judge to be cautious.
1.30 0 75
RBA is one of few central banks accepting an 50
1.25 0
appreciating currency. In fact in a previous statement 25
RBA explicitly said that the exchange rate “is playing a 1.20 0
0
S peculative positions
stabilising role for the economy as a whole” as long as 1.15 0 -2 5
04 05 06 07
the currency appreciates in line with rising commodity
prices. Higher inflation in the first quarter was partly The lack of significant upside progress in
related to a temporary spike in food prices due to the EUR/USD makes the current substantial net
flooding earlier this year and shouldn’t affect current long speculative position a burden. Should
the sub-1.29-area be revisited, speculative
monetary policy. +1 longs will have to be reduced.
ECONOMIC FUNDAMENTALS Australia continues to
benefit from strong growth in Asia with a persistent
demand for commodities supporting exports and
generating the largest surpluses on record. Higher
commodity prices have also improved Australia’s terms
of trade (ToT) additionally from record levels adding to
national income. RBA expects the economy to grow by
4.25% in 2011. Despite falling unemployment currently
below 5% and growing household income, household
confidence has fallen back though still above its long
term average. Households are more cautious with
higher savings rate than normal and modest growth in
retail sales as a result. As household income continues
to improve spending should pick up and could
potentially get another boost as households normalize Technical view: BOE AUD INDEX
their savings. +1 Price
FLOWS The flow outlook continues to be AUD
supportive. Higher commodity prices boost ToT and 100
the external trade is generating the largest surpluses
on record. Furthermore high commodity prices attract 90
portfolio investment inflows and direct investment
inflows into Australia. All in all, the persistent deficit in
Australia’s current account is historically small and 80
more than fully compensated for by portfolio inflows.
+1 70
2008 2009 2010 2011
TECHNICALS & POSITIONING: The bull market is 2000 2010
running overtime. No strong and confirmed signs yet of
a reversal however hold a still positive bias. Watch out
if falling down below the wedge floor. A decreasing
huge long position is a warning sign. +1
16

17. Percent of total labour force Current Account Bal, % of GDP Percent y/y
Basic Balance, AUD bn, AR
17
Percent y/y Percent y/y
AUSTRALIA
Currency Strategy

18. Currency Strategy
New Zealand dollar
Total
An already weaker than expected NZ economy (H2 2010)
together with the Christchurch earthquake made the
RBNZ to reduce the Official Cash Rate (OCR) 50 basis
+3 Monetary pol. +1
points at its March 10 meeting. The earthquake has Fundamentals 0
further divided the NZ economy that was already divided
between a somewhat struggling domestic economy and Flows +1
strong export growth benefiting from trading partners
growth. Projections are for relatively weak growth during
H1 2011 and with inflation contained by low domestic Technicals +1
demand and a strong currency the bank is expected to
remain on hold well into the autumn, we think.
MONETARY POLICY RBNZ reduced its OCR to 2.5% in
the aftermath of the earthquake as an attempt to offset
some of its negative effects. The bank says “that current E U R speculative positio ns
U S D /C A D
12 5
policy accommodation will be removed once entering the
Contracts (thousands)
1.35 0 E U R /U S D
10 0
rebuilding phase” and “the current level of the OCR is 1.30 0 75
likely to be appropriate for some time”. Together with the 50
1.25 0
expectation of the annual inflation to settle within the 25
1.20 0
bank’s target band once the October VAT hike drops out 0
S peculative positions
of the statistics, we forecast the bank to remain on hold 1.15 0 -2 5
04 05 06 07
until its December meeting. +1
The lack of significant upside progress in
ECONOMIC FUNDAMENTALS Business confidence (50.1 EUR/USD makes the current substantial net
in March down from 52.6 in February), consumer long speculative position a burden. Should
the sub-1.29-area be revisited, speculative
spending and tourism has all declined following the longs will have to be reduced.
earthquake but has since shown signs of recovery with
the greater part of the country being relatively unaffect- Effective exchange rate
ed. Continued strength in trading partner growth, 120
resulting in higher export commodity prices is supporting 115
whereas higher oil price and the strong currency have a 110
dampening effect. GDP is expected to grow 0.9% y/y. 105
0 100
FLOWS The C/A for the full year 2010 was -2.3%, the 95
lowest level for more than 20 years. Post earthquake 90
insurance inflows will continue to have a positive impact 85
on the C/A balance during 2011 and only thereafter it is, 80
given a pickup in domestic demand, expected to widen 75
some. The improving terms of trade continues to be a
70
positive factor for NZ. +1 98 00 02 04 06 08 10
TECHNICALS & POSITIONING It seems that the
speculative community disagrees with the recent
strengthening of the NZD, given the limited long Technical view: BOE NZD INDEX
speculative positioning. The BOE NZD index remains Price
contained within its boundaries of late which together 105
with the flat, non-trending average suggests continued
100
sideways action. +1
95
90
85
80
Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3
2009 2010 2011
18

19. Percent of total labour force Current Account Bal, % of GDP Percent y/y
Basic Balance, NZD bn, AR
19
Percent y/y Percent y/y
NEW ZEALAND
Currency Strategy

20. Currency Strategy
Swiss franc
Total
In recent months, upward pressure on the Swiss franc has
eased and the currency held stable at elevated levels. The
franc remains based on sound economic fundamentals.
+1 Monetary pol. -1
In addition, the continuing debt problems in the euro area Fundamentals 0
as well as geopolitical tensions will support capital flows
into save havens, keeping the Swiss franc stable in Flows +1
coming months.
MONETARY POLICY In its March meeting the SNB kept Technicals +1
its expansionary policy unchanged in place. Its
conditional inflation forecast gives no indication of major
upside risks to inflation until the end of 2012. Since then
inflation figures were in line with expectations and the
ongoing strong currency will continue to keep upside
risks to inflation in check. Therefore the SNB is in no hurry E U R speculative positio ns
Contracts (thousands)
U S D /C A D
12 5
to raise rates in June. Short term money market rates are
Contracts (thousands)
1.35 0 E U R /U S D
10 0
still below the SNB’s target indicating ongoing excess 1.30 0 75
liquidity in the market. The SNB will continue to absorb 50
1.25 0
this liquidity with the issuance of SNB bills. Regarding the 25
1.20 0
economy the SNB has raised its GDP growth projection by 0
S peculative positions
0.5 percentage points to 2%, indicating no risk of 1.15 0 -2 5
04 05 06 07
deflation. Hence there is no need for additional
interventions in the foreign exchange market, should the The lack of significant upside progress in
CHF start to strengthen again. -1 EUR/USD makes the current substantial net
long speculative position a burden. Should
the sub-1.29-area be revisited, speculative
ECONOMIC FUNDAMENTALS The KOF leading indicator longs will have to be reduced.
rose to 2.29 points in April, the highest level since August
2006. It suggests that the strong expansion in the Swiss
economy will continue in coming months. More important
the KOF gives no hint that the strong Swiss franc is
hurting the outlook for growth. But growth in exports is
already slowing, suggesting that growth could be
dampened in the later part of the year. The Seco
consumer climate improved in January suggesting that
private consumption will remain robust in coming
months. Overall, a solid expansion of the Swiss economy
in 2011 is the most likely scenario. 0
FLOWS In 2010 Switzerland posted a surplus in the
current account of CHF 79.6bn, up from CHF 61.5bn in
2009. Portfolio flows showed a huge swing. After
outflows of CHF 32bn in 2009, Switzerland faced inflows
of CHF 31.2bn in 2010. Due to an ongoing search for safe
Technical view: BOE CHF Index
havens we suppose that inflows into Switzerland will
continue. +1 Value
TECHNICALS & POSITIONING The market continues to
135
move higher, currently exiting a bull triangle to the
topside. The next likely target will be the top line currently 130
running at 144.40. Positioning in USD/CHF is however
showing that there is some hesitation to expand CHF 125
longs despite the surge in the index. +1
120
115
Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2
2009 2010 2011
20

21. Percent of total labour force Current account Bal, % of GDP Percent y/y
Basic Balance, CHF bn, AR
21
Percent y/y Percent y/y
SWITZERLAND
Currency Strategy