FX Forecast Update. December 2011: Moving closer to a bottom in EUR/USD

Transcription

1 FX Forecast Update December 2011: Moving closer to a bottom in EUR/USD Arne Lohmann Rasmussen Chief Analyst, Head of Rates, FX and Commodities Strategy John M. Hydeskov Chief Analyst Kasper Kirkegaard Senior Analyst Stefan Mellin Senior Analyst Sverre Holbek Senior Analyst k Bloomberg: DRFX <GO> Important disclosures and certifications are contained from page 24 of this report.

2 Main forecast changes EUR/USD: Last month we cut our three-month and six-month EUR/USD forecast to This target was reached last week, which poses the question: what now? Until a trough in the global slowdown is confirmed and until the new de facto zero rate ECB regime is fully priced, we expect the euro to remain under pressure. As aresult result, we have cut the 3M forecast to 1.28 with risks skewed toward a temporary undershooting of this new target. Short euro positions are stretched, however, and global recession risks are priced too excessively on financial markets. Hence, we still look for a rebound in EUR/USD during H1 12, but will await better levels and a more attractive risk/reward before positioning accordingly. Scandies: Even though we believe that the Riksbank will cut rates aggressively throughout 2012 we believe that a lot of bad news is embedded in the Swedish krona already. Hence, we have cut our EUR/SEK forecast on a three-, six- and 12-month horizon to 9.10, 9.00 and 8.70, from 9.30, 9.10 and 9.00 previously. We have also cut our EUR/NOK forecast marginally to 7.65, 7.60 and 7.50 on a three-, sixand 12-month horizon from 7.70, 7.65 and 7.50 previously. Norwegian outperformance in respect of growth, money market rates and fundamentals is expected to keep the Norwegian krone well supported in For the next six months we believe that foreign inflow will continue maintain downward pressure on EUR/DKK. But the Danish central bank will continue to mitigate the inflow with lower rates and/or intervention in the market. We see EUR/DKK at 7.43, 7.43 and 7.44 on a three-, six- and12-month horizon. 2

3 EUR/USD Risk of big downward correction is likely behind us Growth: The eurozone has likely entered into recession, while US economic data is stabilising. Monetary policy: The 16 ECB initiated an easing cycle in November and we expect the policy rate to be cut below 1%. Hence, relative rates are expected to move against the euro over the coming quarter, Forecast: 1.28 (3M), 1.32 (6M) and 1.38 (12M) 1.7 EUR/USD but Fed easing in 2012 should mitigate part of this. 0.8 Flows: A large US BBoP deficit implies structural Jan May Jul Sep Nov Jan Mar May Jul Sep Nov dollar weakness as long as the global economy pct. region Spot (incl. DB forecast) 12 avoids recession. 50 pct. region Forward Source: Danske Markets Valuation: EUR/USD is back close to neutral levels Conclusion: During the initial phase of the (PPP estimate: 1.28). European debt crisis the euro was supported by Risks: The European debt crisis has entered a tighter monetary conditions. This is changing, as new phase, which for the first time could trigger the ECB is catching up with the other major larger portfolio flows out of Europe. ECB debt central banks. We expect EUR/USD to correct monetisation is another important euro risk, lower and trade below 1.30 over the coming although this would likely coincide with further Fed quarter. In the medium term, structural US dollar easing. weakness, Fed easing, and lower global recession fears are expected to lift EUR/USD. Senior Analyst: Kasper Kirkegaard, kaki@danskebank.com,

4 EUR/USD Important issues to watch Monetary policy remains a dominating FX driver The strength of the euro during the European debt crisis has been called the enigma of the currency market. This need not be an enigma, however. Narrowing rate spread to drive euro weakness 225 Bp EUR/USD spot >> Two factors can explain the resilient euro: i) There has been no capital flight (foreign investors are likely to have remained net buyers of European assets); and ii) Relative monetary conditions have been tightened in Europe until << 2y swap spread (incl forecast) now. With the ECB moving toward de facto zero percentage rates the rate advantage of the euro will be reduced and an important euro risk factor is now the potential for ECB debt Source: Reuters EcoWin, Danske Markets monetisation. Speculative investors already very short euro Unless ECB prints money we do not expect a % of open interest Non-commercial EUR positions collapse in EUR/USD Speculative short euro positions remain significant, which 10 limits downside risk in the short term. As long as the ECB 0-10 does not move toward debt monetisation we do not see violent euro depreciation as the main scenario. As trading +/- 1 stdev from mean -40 in recent months has shown, periods of reduced market -50 volatility and improved risk sentiment tend to see the dollar return to its structural depreciation trend. Source: Reuters EcoWin, Danske Markets EUR/USD Senior Analyst: Kasper Kirkegaard, kaki@danskebank.com,

5 USD/JPY caught in a range Growth: Japanese growth surged by 6.0% q/q AR. It reflects the recovery after the earthquake in March. Growth looks poised to slow in the next few months to 2% and 3% q/q AR in Q4 and Q Monetary policy: BoJ expanded its asset purchase programme by JPY5trn to JPY20trn October 27 to mitigate the latest JPY appreciation. Debt risks: Further credit downgrades for the US are likely, with the government seeming too optimistic on growth and the political will for fiscal Forecast: 76 (3M), 75 (6M) and 78 (12M) 95 USD/JPY consolidation lacking. Despite Japans gross public 50 pct. region Forward debt exceeding 200% of GDP, we do not expect the Source: Danske Markets current debt crisis to spill over into Japan as the huge debt is primarily owned by local investors. Flows: Japan continue to run a current account surplus. BoJ intervened in the market in October. Valuation: PPP estimate around 86. Risks: US debt woes (USD neg.), BoJ intervention (JPY neg.), global monetary easing (JPY pos.) Senior Analyst, Sverre Holbek, holb@danskebank.com, Jan May Jul Sep Nov Jan Mar May Jul Sep Nov pct. region 50 pct. region Spot (incl. forecast) Forward 12 Conclusion: Downward pressure on USD/JPY are stemming from the US fiscal situation, the US C/A deficit and weak external balances, as well as JPY positive trade flows. However, we would expect a fall in USD/JPY towards 75 to be countered by further BoJ intervention. The upside is also capped in our view, as sluggish US growth and the risk of further Fed easing should keep rates contained. 5

6 USD/JPY important issues to watch out for Risk of more aggressive Fed/ECB policy to strengthen JPY The next couple of quarters we see a risk that the market increasingly will price that both the ECB and the Fed will engage in (more) quantitative easing /balance sheet expansion. This could lead to downside pressure on USD/JPY. We expect this to be countered by a more aggressive BoJ, given that the Bank has plenty of room to expand its balance sheet. Intervention has intensified The effectiveness of intervention is mixed. It appears that only the coordinated intervention in the wake of the March earthquake had a significant lasting effect. However, BoJ has managed to hold the spot well above the recent low of 75.35, by stepping up its intervention efforts. The BoJ and the Japanese Ministry i of ffinance continue to view a stronger yen as one of the key threats to the recovery. Medium-term outlook remains positive Recent economic data have caused fears that the US is on the verge of recession to dissipate, thus lowering the odds of further Fed easing, in turn implying upside for US rates. Modest expansion of BoJ balance sheet 350 Bank's total assets 325 Jan. 08=100 Fed BoE SNB ECB 125 BoJ Source: Reuters EcoWin Japans intervention has intensified JPY trn M onthly FX intervention JPY trn Source: Reuters EcoWin, Danske Markets Senior Analyst, Sverre Holbek, holb@danskebank.com,

7 EUR/GBP still heading lower Growth: UK growth is weak and the economic outlook is bleak but it might be worse in the eurozone. Monetary policy: We expect the Bank of England to continue printing money, which theoretically should erode the value of sterling. However, the ECB will cut rates further and might also engage more clearly l in monetary stimulus than previously. Debt risks: The UKs credit rating is likely to come under pressure next year (see UK Research: How long can the UK maintain its AAA rating?, 7 September but the immediate risks are bigger for various eurozone countries. Valuation: From a long-term perspective, sterling is one of the most undervalued currencies in the G10 space (PPP around 0.75). A regime shift has probably happened though and EUR/GBP, in our view, belongs above Risks: Almost anything. The forecast is surrounded with considerable uncertainty and cautiousness is warranted. Forecast: 0.82 (3M), 0.86 (6M) and 0.88 (12M) 1.00 EUR/GBP Jan May Jul Sep Nov Jan pct. region 50 pct. region Source: Reuters EcoWin, Danske Markets Spot (incl. DB forecast) Forward Mar May Jul Sep Nov 12 Conclusion: Investors see sterling as a safe haven from the unstable eurozone but the UK has its own problems. UK assets are liquid and have offered good protection so far but tables can turn quickly. We believe sterling will remain weak and the current spot level is a good reference point. A relative high hedging ratio is preferable. Chief Analyst John Hydeskov, johy@uk.danskebank.com +44 (0)

8 EUR/GBP important issues to watch Eurozone debt crisis support sterling EUR/GBP vs 2Y swap spread 0,9 % EUR/GBP The ongoing turmoil in continental Europe lends has turned sterling into a safe-haven currency 0,8 0,7 EUR/GBP >> 0,90 0,89 0,6 0,88 0,5 0,87 Relative rates support sterling 0,4 0,86 0,3 0,85 Having favoured the euro for most of 2011, relative rates 0,2 0,84 now support sterling. Indeed, the 2Y swap spread has fallen 0,1 << 2Y swap spread 0,83 dramatically, implying that EUR/GBP has some catching up 0,0 0,82-0,1 0,81 to do on the downside. The Bank of England restarts QE Isolated, printing money is likely to erode the value of sterling. The BoE might have to lift the ceiling for asset purchases further in early 2012, as the economy is likely to need additional stimulus. Underlying growth is weak Effectively, the UK economy has been flatlining since Q aug okt 10 dec Source: Reuters EcoWin feb apr jun aug okt dec 11 Bank of England restarts QE sterling at risk 400 GBP bn Danske forecast Assets purchased by the BoE Private consumption has collapsed and needs a boost from government. There is a risk of slow death in the retail Source: Reuters EcoWin sector. Chief Analyst John M. Hydeskov, johy@uk.danskebank.com +44 (0) ,

9 EUR/CHF Downside risks have decreased Growth: The Swiss economy is under pressure from the strong Swiss franc and weaker foreign Forecast: 1.24 (3M), 1.27 (6M) and 1.27 (12M) export demand, as a result of the European recession EUR/CHF 1.25 Monetary policy: The SNB has eased monetary 1.15 policy significantly during 2011, but chose to leave the 1.20 minimum target unchanged at the 1.05 December meeting. Deflation risks leave potential for further monetary easing, but a near-term hike off the EUR/CHF floor has become less likely. Flows: SNB Swiss franc selling should keep 90 pct. region 50 pct region EUR/CHF stable above Valuation: The Swiss franc remains overvalued by about 13% against the euro according to the Danske Bank General PPP model. Risks: In a normal financial risk environment EUR/CHF risks are likely to be skewed to the upside, but SNB success in recent months does not guarantee the downside and a euro tail-risk could see the market test the 1.20 minimum target Jan May Jul Sep Nov Jan 11 Spot (incl. DB forecast) 50 pct. region Forward Source: Danske Markets Senior Analyst: Kasper Kirkegaard, kaki@danskebank.com, Mar May Jul Sep Nov 12 Conclusion: The market continues to trade with high credibility at the 1.20 floor and we expect the SNB to remain successful in keeping the Swiss franc from appreciating. Deflation risks have risen over the past months, but the SNB December monetary policy decision has made a near-term hike off the 1.20 floor less likely. We expect a modest depreciation of the Swiss franc during

10 EUR/CHF Important issues to watch This is not a currency peg SNBs minimum target on EUR/CHF is technically no different from the interventions that the SNB conducted from March 2009 to mid-2010, although this time the SNB has announced the level that it will defend. It is important to note that this is not a currency peg in the traditional sense. The SNB has not expressed any view on how long it intends to keep the exchange rate floor in place, or as to whether it intends to move the target. Should economic conditions allow, the SNB would likely seek to raise the minimum target. Similarly, should the large liquidity provisions prove inflationary, the SNB could be forced to move away from large interventions. However, inflation is not a current concern, as illustrated by the SNBs inflation forecast. We see a roughly a 50% probability of the SNB hiking the 1.20 floor during 2012, due to rising deflation risks. Swiss franc still overvalued SNB now sees deflation risks 3.5 % y/y % y/y SNB inflation forecast Source: Reuters EcoWin, Danske Markets Sep 2011 forecast Swiss franc still overvalued at PPP estimate We believe the Swiss franc remains overvalued at However, the large Swiss current account surplus and European debt concerns also justify EUR/CHF below the Source: Reuters EcoWin, Danske Markets 1.40 fair value level (PPP). Senior Analyst: Kasper Kirkegaard, kaki@danskebank.com, SNB's 1.20 minimum target EUR/CHF spot

11 EUR/SEK a lot of bad news already embedded in SEK Growth: Forward-looking data suggest marked slowdown both in Sweden and abroad in Weak growth outlook will weigh on SEK. Monetary policy: The Riksbank embarked on an easing cycle today and is expected to cut the repo rate to 0.50% by H While lower rates could weigh on SEK, re-pricing of relative yields is close to neutral for EUR/SEK. Fundamentals: SEK is well supported by relatively solid fundamentals, a savings surplus, low public debt and stable AAA. Flows: SEK will benefit from fundamental demand and rebound in global equities. Exports will be hit and commercial SEK demand will diminish. Valuation: SEK remains undervalued. A huge savings surplus suggests SEK could move to overvalued territory. Risks: Event risks could take the pair either higher h or lower than the forecast profile suggests. Forecast: 9.10 (3M), 9.00 (6M) and 8.70 (12M) 11.0 EUR/SEK Jan May Jul Sep Nov Jan pct. region 50 pct. region Spot (incl. DB forecast) Forward Mar May Jul Sep Nov 12 Conclusion: We have argued for near-term weakness (Riksbank) and medium-term rebound (fundamentals) for the Swedish krona. So far there has not been much weakness even though h rate cuts have been priced in and macro data have deteriorated further. A lot of bad news is embedded in SEK already. We lower the EUR/SEK profile and continue to see it edging slightly lower in 12M. Senior Analyst Stefan Mellin, mell@danskebank.com +46 (0)

12 EUR/SEK important issues to watch The Riksbank (RB) embarks on an easing cycle Today the RB, as expected, cut the repo rate with 25bp to 1.75% while the repo rate path was shifted from indicating hikes to indicating cuts, although only modestly, in It might have been a big turnaround for the RB, but there is a lot more to come in terms of repo rate cuts next year. Admittedly, we had expected a slightly softer tone and more decisive macro forecast revisions. The GDP forecast was lowered just marginally from 1.9 to 1.7% cal adj. However, the small adjustment masks a big cut in domestic demand. The malfunctioning transmission mechanism was not addressed at all. Hmm. The Riksbank clearly chooses an optimistic approach to the debt crisis in Euroland, which we think it will have to reassess before long. It is also too optimistic on the Swedish economy in terms of GDP and the labour market. Relative yields and EUR/SEK -0,2-0,3-0,4-0,5-0,6-0,7 07-0,8 << 2Y swap spread EUR/SEK >> oktober november 11 Source: Reuters EcoWin, Danske Markets EUR/SEK spot, mean and +/- 1 stddev 12,0 11,5 11,0 10,5 Mean: /- 1 stddev: 9.67/8.63 We expect that the forecast will be revised further, which 9,0 9,0 will prompt a more aggressive easing cycle. We project a 8,5 8,5 repo rate at 0.5% in Q3, market is pricing in close to 0.75%. 8,0 8,0 10,0 9,5 december ,30 9,25 9,20 9,15 9,10 9,05 9,00 8,95 12,0 11,5 11,0 10,5 10,0 9,5 mean std.dev. + coef std.dev. - coef Source: Reuters EcoWin, Danske Markets Senior Analyst Stefan Mellin, mell@danskebank.com +46 (0)

13 EUR/NOK Growth and rates support the NOK Growth: Norwegian mainland-gdp rose by 0.8% q/q in Q3 and the regional network report from Norges Bank points to growth of 0.7% q/q and 0.6% q/q in Q4 11 and Q1 12, respectively. Hence, strong growth outperformance compared with the current eurozone recession. Monetary policy: Norges Bank lowered the policy rate by 50 basis points to 1.75% in December. We believe this will be the last cut from Norges Bank in this cycle. Flows: We see very good demand for Norwegian government paper and 2012 issuance of NGBs will pick-up to NOK50bn, as the government has taken over the responsibility of export finance. Valuation: The NOK is expensive in terms of valuation. Risks: Positioning, new rate cuts, or risk aversion, could put strong upward pressure on EUR/NOK. The same could result from a sudden safe-haven outflow. Forecast: 7.65 (3M), 7.60 (6M) and 7.50 (12M) 9.5 EUR/NOK Jan Source: Danske Markets May Jul Sep Nov Jan Mar May Jul Sep Nov pct. region 50 pct. region Spot (incl. DB forecast) Forward 12 Conclusion: We expect EUR/NOK to decline toward 7.50 during We still see strong international focus on strong Norwegian fundamentals. Furthermore, Norges Bank is expected to keep rates unchanged (or even hike in 2012). However, NOK is not a safe haven in the traditional sense and if we see a strong setback in risk-appetite, we would expect the NOK to suffer. Chief Analyst Arne Lohmann Rasmussen, arr@danskebank.com,

14 EUR/NOK Important issues to watch Relative rates an upside risk for EUR/NOK Relative rates a risk on the upside for EUR/NOK The outlook for Norges Bank and relative rates continues to 4.76 EUR/NOK x 9.55) << EUR/NOK %-points be the most important factor for EUR/NOK. If Norges Bank, contrary to our expectations, cuts rates aggressively to mitigate NOK strength, the NOK could come under renewed pressure. Today, relative rates point to a higher EUR/NOK y swap spread >> -1.9 Changes in NOK flows The weekly flow data from Norges Bank indicates that foreign banks, which we see as a proxy for speculative money, are increasingly long on NOK. Hence, there is a risk of profit taking in NOK. A fall in risk appetite, the oil price or in NOK rate expectations could easily trigger some profittaking. Norges Banks purchase of foreign currency in the market going forward might weigh on NOK. NOK is not the new CHF Jan Mar May Jul Sep Nov Jan 10 Source: Reuters EcoWin, Danske Markets Mar May Jul Sep Nov 11 Still many speculative long NOK positions* -150 Bn NOK,acc Foreign banks >> << Norges Bank w2 w15 w30 w45 w6 w19 w34 w49 w9 w22 w37 w52 w15 w30 w Due to low liquidity and lack of stability in the past NOK is, in our view, not the new safe-haven currency to take over from the CHF. However, going gforward, we could from time to time see strong flows into the NOK, due to Norways strong * Weekly position data accumulated fundamentals and the euro debt crisis. Hence, rapid drops Source: Norges Bank in EUR/NOK are likely. Chief Analyst Arne Lohmann Rasmussen, arr@danskebank.com,

15 EUR/DKK Inflow into bonds adds downward pressure Actual range tighter than official bands: EUR/DKK trades in a +/-2.25% band around a central parity of ( ). In practice, the central bank has kept EUR/DKK within a much tighter band of (-0.1% to +0.5%). In recent years, the Danish central bank has shown a strong commitment to keeping EUR/DKK stable and dlower than central parity. Fast central bank response: Over the past month the Danish central bank, Nationalbanken, has both Forecast: 7.43 (3M), 7.43(6M) and 7.44(12M) EURDKK intervened in EUR/DKK and reduced policy rates to mitigate a strong currency inflow. On December EUR/DKK Spot Nationalbanken lowered the lending rate by 40bp to 0.8%, 15bp more than the corresponding ECB cut. Just one week later the lending rates were cut by an additional 10bp and the current account rate was lowered 5bp to 0.25% bringing it in line with the ECB deposit rate. Nationalbanken still reacts decisively: If the DKK sees appreciation pressure Nationalbanken would first intervene then cut rates. Central parity Source: Reuters EcoWin, Danske Markets Conclusion: We believe the central bank will continue eagerly fighting the current currency inflow into Denmark using both intervention and rate cuts. Zero rates or even policy rates below zero cannot be ruled out. However, before rates are lowered below zero we believe Nationalbanken will intervene aggressively in the market. Our main scenario is that the lending rate will be lowered a final time to 0.35% in January and that EUR/DKK will trade close to 7.43 over the next six months. Chief Analyst Arne Lohmann Rasmussen, arr@danskebank.com,

16 EUR/DKK Important issues to watch Strong inflow into DGBs Fast rate response to new build-up in currency reserve 500 DKK bn In 2011 we have seen a strong inflow into Danish Government bonds. According to Nationalbanken foreigners have bought DGBs for DKK86bn from January to October, and there is little doubt that the inflow has Currency reserve continued in November and December Risk of zero-rates rates or even negative rates The strong inflow into DBGs and also mortgage bonds have put appreciation pressure on the DKK. Until now Nationalbanken has been able to mitigate the inflow by rates cuts and intervention in the FX market. However, if the inflow continues rates will fast approach zero. If that happens we believe Nationalbanken will primarily keep EUR/DKK stable by intervening in the market, but negative policy rates cannot be ruled out. Danish T-bills already yield a negative return. If the inflow explodes a somewhat stronger DKK is also a possibility, that cannot be ruled out. What happens if the flows turn around? Source: Reuters EcoWin, Danske Markets Strong inflow into Danish government bonds (DGSs) 35 Foreign net purchase, bn DKK (r.h.) Share, % (l.h.) During 2012 it cannot be ruled out that foreigners start Jan 09 Apr 09 Jul 09 Oct 09 Jan 10 Apr 10 Jul 10 Oct 10 Jan 11 Apr 11 Jul 11 Oct 11 scaling back on holdings of Danish bonds. If that happens fast it could put significant upward pressure on EUR/DKK. Source: Nationalbanken, Danske Markets Chief Analyst Arne Lohmann Rasmussen, arr@danskebank.com,

17 AUD/USD decent upside potential in 2012 Growth: Weaker global growth also translates into weaker Australian growth, but Australia is still expected to outperform most developed economies. Monetary policy: The RBA lowered the policy rate by another 25bp to 4.25% in November and we expect further rate cuts over the coming months. However, the money market already prices >125bp cuts, which we doubt the RBA will be able to deliver. Debt risks: Public debt is a mere 22% of GDP in Australia and is thus far from the USs triple digits. Forecast: 1.00 (3M), 1.04 (6M) and 1.10 (12M) 1.3 AUD/USD Flows: The terms of trade have peaked for now, but 50 pct. region Forward higher commodity prices during 2012 are expected to see renewed AUD demand. Source: Danske Markets Valuation: AUD/USD remains heavily overvalued compared with long-term models (PPP estimate at 0.76), but terms of trade gains and weak US fundamentals justify the apparent overvaluation. Risks: AUD remains highly correlated with global risk sentiment and tail-risks remain skewed to the downside Jan May Jul Sep Nov Jan Mar May Jul Sep Nov pct. region 50 pct. region Spot (incl. DB forecast) Forward 12 Conclusion: Sustained high global recession risks and further RBA rate cuts are likely to weigh on AUD/USD over the coming months. The terms of trade are expected to improve during 2012, however, which together with less soft RBA pricing is expected to lift AUD/USD. As the Asian economy stabilises we see a strong AUD appreciation potential against USD. Chief Analyst John Hydeskov johy@uk.danskebank.com +44 (0)

18 NZD/USD carry demand to return during 2012 Growth: Data surprises from New Zealand have on the whole been negative recently though less so than previously. Monetary policy: According to the OIS market, RBNZ is not expected to lower rates next year. Relative rates remain supportive for NZD. Debt risks: Public finances remain healthy but the cost of quake reconstruction is taking its toll. Flows: Terms of trade are expected to remain well supported. Valuation: NZD/USD remains heavily overvalued compared with long-term models (PPP estimate at 0.63), but terms of trade gains and weak US fundamentals justify this. Risks: NZD remains a high-beta h currency and should risk sentiment worsen again downside risks are significant. As for other carry target currencies, spot returns are skewed to the downside. Forecast: 0.78 (3M), 0.80 (6M) and 0.82 (12M) 0.90 NZD/USD Jan Source: Danske Markets May Jul Sep Nov Jan pct. region 50 pct. region Spot (incl. DB forecast) Forward Mar May Jul Sep Nov 12 Conclusion: Relative rates have narrowed recently and suggest downside risks over the coming months. In the medium term, however, we expect reduced d global recession fears and rising commodity prices to support NZD. Chief Analyst John Hydeskov johy@uk.danskebank.com +44 (0)

19 USD/CAD heading for parity in the near term Growth: Canadian economic data have disappointed recently, but we do not look for any significant underperformance. Monetary policy: The potential for further Fed easing could see relative monetary policy turn CAD supportive during Debt risks: Compared with its southern neighbour, Canadian government finances are healthy. Flows: With oil prices still at elevated levels, the oil sector is booming. We expect oil prices to support CAD in Valuation: USD/CAD is expensive on PPP measures, but less so than other commodity currencies. Risks: A large setback in oil prices or a decline in risky asset prices remain the key risks. Positioning i i is slightly short CAD and thus not a risk at present. Forecast: 1.00 (3M), 0.98 (6M) and 0.96 (12M) 1.30 USD/CAD CAD in p g 0.80 Jan Source: Danske Markets May Jul Sep Nov Jan pct. region 50 pct. region Spot (incl. DB forecast) Forward Mar May Jul Sep Nov 12 Conclusion: Higher commodity prices, Fed easing and reduced global recession fear are expected to drive a significant CAD appreciation during USD/CAD is negatively correlated with risk, but the upside should be capped given the current spot level. Chief Analyst John Hydeskov johy@uk.danskebank.com +44 (0)

20 Danske Markets FX forecasts vs. EUR and USD Forecast Forecast vs forward outright, % Spot +1m +3m +6m +12m +1m +3m +6m +12m Exchange rates vs EUR USD JPY GBP CHF DKK NOK SEK Exchange rates vs USD JPY GBP CHF DKK NOK SEK CAD AUD NZD Note: GBP, AUD and NZD are denominated in local currency rather than USD 20

21 Danske Markets FX forecasts vs. DKK Forecast Forecast vs forward outright, % Spot +1m +3m +6m +12m +1m +3m +6m +12m Exchange rates vs DKK EUR USD JPY GBP CHF NOK SEK CAD AUD NZD PLN CZK HUF RUB

22 Danske Markets FX forecasts vs. SEK Forecast Forecast vs forward outright, % Spot +1m +3m +6m +12m +1m +3m +6m +12m Exchange rates vs SEK EUR USD JPY GBP CHF NOK DKK CAD AUD NZD PLN CZK HUF RUB

23 Danske Markets FX forecasts vs. NOK Forecast Forecast vs forward outright, % Spot +1m +3m +6m +12m +1m +3m +6m +12m Exchange rates vs NOK EUR USD JPY GBP CHF SEK DKK CAD AUD NZD PLN CZK HUF RUB

24 Disclosure This presentation has been prepared by Danske Research, a division of Danske Bank A/S ("Danske Bank"). Analyst certification Each research analyst responsible for the content of this research report certifies that the views expressed in the research report accurately reflect the research analysts personal view about the financial instruments and issuers covered by the research report. Each responsible research analyst further certifies that no part of the compensation of the research analyst was, is or will be, directly or indirectly, related to the specific recommendations expressed in the research report. Regulation Danske Bank is authorized and subject to regulation by the Danish Financial Supervisory Authority and is subject to the rules and regulation of the relevant regulators in all other jurisdictions where it conducts business. Danske Bank is subject to limited regulation by the Financial Services Authority (UK). Details on the extent of the regulation by the Financial Services Authority are available from Danske Bank upon request. The research reports of Danske Bank are prepared in accordance with the Danish Society of Financial Analysts rules of ethics and the recommendations of the Danish Securities Dealers Association. Conflicts of interest Danske Bank has established procedures to prevent conflicts of interest and to ensure the provision of high quality research based on research objectivity and independence. These procedures are documented in the research policies of Danske Bank. Employees within the Danske Bank Research Departments have been instructed that any request that might impair the objectivity and independence of research shall be referred to the Research Management and the Compliance Department. Danske Bank Research Departments are organised independently from and do not report to other business areas within Danske Bank. Research analysts are remunerated in part based on the over-all profitability of Danske Bank, which includes investment banking revenues, but do not receive bonuses or other remuneration linked to specific corporate finance or debt capital transactions. Financial models and/or methodology used in this research report Calculations l and presentations in this research report are based on standard deconometric tools and methodology as well as publicly l available statistics i for each individual security, issuer and/or country. Documentation can be obtained from the authors upon request. Risk warning Major risks connected with recommendations or opinions in this research report, including as sensitivity analysis of relevant assumptions, are stated throughout the text. First date of publication Please see the front page of this research report for the first date of publication. Price-related data is calculated using the closing price from the day before publication. 24

25 General disclaimer This presentation has been prepared by Danske Markets (a division of Danske Bank A/S). It is provided for informational purposesonly and should be viewed solely in conjunction with the oral presentation provided by Danske Markets and/or Danske Markets Inc. It does not constitute or form part of, and shall under no circumstances be considered as, an offer to sell or a solicitation of an offer to purchase or sell any relevant financial instruments (i.e. financial instruments mentioned herein or other financial instruments of any issuer mentioned herein and/or options, warrants, rights or other interests with respect to any such financial instruments) (Relevant Financial Instruments). The presentation has been prepared independently d and solely l on the basis of publicly l available information i which h Danske Bank considers to be reliable. Whilst reasonable care has been taken to ensure that its contents are not untrue or misleading, no representation is made as to its accuracy or completeness, and Danske Bank, its affiliates and subsidiaries accept no liability whatsoever for any direct or consequential loss, including without limitation any loss of profits, arising from reliance on this presentation. The opinions expressed herein are the opinions of the research analysts responsible for the presentation and reflect their judgment as of the date hereof. These opinions are subject to change, and Danske Bank does not undertake to notify any recipient of this presentation of any such change nor of any other changes related to the information provided in the presentation. Danske Bank, its affiliates, subsidiaries and staff may perform services for or solicit business from any issuer mentioned herein and may hold long or short positions in, or otherwise be interested in, the financial instruments mentioned herein. The Equity and Corporate Bonds analysts of Danske Bank and undertakings with which the Equity and Corporate Bonds analysts have close links are, however, not permitted to invest in financial instruments which are covered by the relevant Equity or Corporate Bonds analyst or the research sector to which the analyst is linked. Danske Bank is authorized and subject to regulation by the Danish Financial Supervisory Authority and is subject to the rules and regulation of the relevant regulators in all other jurisdictions where it conducts business. Danske Bank is subject to limited regulation by the Financial Services Authority (UK). Details on the extent of the regulation by the Financial Services Authority are available from Danske Bank upon request. This presentation is not intended for retail customers in the United Kingdom or the United States. This presentation is protected by copyright and is intended solely for the designated addressee. It may not be reproduced or distributed, in whole or in part, by any recipient for any purpose without Danske Banks prior written consent. 25

26 Disclaimer related to presentations to U.S. customers In the United States this presentation is presented by Danske Bank and/or Danske Markets Inc., a U.S. registered broker-dealer and subsidiary of Danske Bank. In the United States the presentation is intended solely to "U.S. institutional investors" as defined in SEC Rule 15a-6. Danske Bank is not subject to U.S. rules with regard to the preparation of research reports and the independence of research analysts. In addition, the research analysts of Danske Bank who have prepared this presentation are not registered or qualified as research analysts with the NYSE or FINRA, but satisfy the applicable requirements of a non-u.s. jurisdiction. Any U.S. investor recipient of this presentation who wishes to purchase or sell any Relevant Financial Instrument may do so only by contacting Danske Markets Inc. directly and should be aware that investing in non-u.s. financial instruments may entail certain risks. Financial instruments of non-u.s. issuers may not be registered with the U.S. Securities and Exchange Commission and may not be subject tothe reporting and auditing standards of the U.S. Securities and Exchange Commission. 26