Weekly Commentary 07 June 2013

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1 Contact your treasury specialist Corporate Treasury or Business Banking Treasury Institutional Treasury Specialised Finance +353 (0) UK Sales Team (within the UK) US Sales Team Keep in touch with the markets, visit Weekly Commentary 07 June 2013 Data section contents (changes on the week) Themes from the week Yen leads short covering rally against US dollar Headlines for the week ahead Irish and Euro CPI, German court hearing on OMT Profit- taking on long dollar positions Data on market positioning of late has pointed to traders being very long US dollars and short yen, sterling and the euro. This always raised the risk of a short covering rally and that duly emerged in the week; the dollar fell sharply against the yen and the Swiss franc and also slid versus sterling and the single currency, albeit outperforming the Australian dollar and the Mexican peso. US Treasury yields declined on the week and equity markets there and elsewhere fell amid some disappointing data, including a sub-50 reading in the ISM index and a softer than expected rise in ADP employment, although the weekly jobless claims fell back and payrolls came in slightly ahead of expectations at 175k. The unemployment rate did tick up, to 7.6%, reflecting a sharp rise in the labour force. Commodities Highlights for the week ahead Prev Fcst Cons Tues UK Industrial Production 0.7% 0.0% German Constitutional Court Wed UK labour market Euro Industrial Production Thurs IRL CPI 0.5% 0.5% US Retail Sales 0.1% 0.4% Fri IRL External Trade Euro CPI 1.2% 1.4% US Industrial Production -0.5% 0.2% The euro s advance was supported by what was taken as a slightly more upbeat tone from the ECB, with President Draghi reiterating that growth was expected to pick up later in the year, although he did emphasise that the Bank still has a range of unconventional policies available if needed, including a negative deposit rate, as well as further conventional measures. He also expounded on the positive market impact of the OMT announcement last summer and appeared unconcerned about the upcoming hearing at the German Constitutional court. The consensus is that an adverse ruling is very unlikely, although some criticisms of the policy may emerge. Peripheral bond markets sold-off following the meeting and yields rose on the week, with bunds outperforming. Spot rates EUR/GBP EUR/CHF EUR/USD EUR/JPY GBP/USD EUR/CAD EUR/SEK EUR/PLN EUR/NOK EUR/ZAR EUR/HUF EUR/CZK The BoE left policy unchanged as generally expected amid another raft of stronger data. The services PMI rose to a 15-month high of 54.9 and the construction index rebounded into expansion territory. The manufacturing index also picked up, to 51.3 from a revised The housing market too appears to be picking up momentum, with the Halifax index recording a 1.9% rise in the three months to May. Irish residential property price, in contrast, fell by 1.2% in the three months to April although prices did increase on the month, by 0.8%, for the first month in five. Industrial production also rose in April, by 3% and the unemployment rate for May was unchanged at 13.7%. Finally, the Exchequer finances in May benefitted from an unexpectedly early inflow from the new local Property tax, which left tax receipts year to date 0.7% ahead of profile. Non-tax revenue is also well above target although VAT is behind, implying that domestic spending may be weaker than forecast by the government. Dan McLaughlin 2 year 3 year 5 year 7 year 10 year 15 year 20 year EUR GBP USD Official rates Current End-Q2 End-Q3 End-Q4 Fcst Cons Fcst Cons Fcst Cons EUR GBP USD Recent research View recently published reports at including: The Bulletin (monthly analysis of international and Irish markets) UK View (monthly analysis of trends in the UK economy) The Outlook (quarterly analysis of trends in the Irish economy) Irish Property Review (quarterly analysis of Irish property trends) Market Newsflash (up-to-the-minute analysis of key economic developments) All rates quoted are indicative market rates

2 Data section contents Data section showing % changes on the week Long term fixed rates Commodity prices Europe ECB not in a hurry interest rates again The ECB left the main refinancing rate unchanged at 0.5% at Thursday s meeting, as expected. Draghi also reiterated that the Bank will closely monitor developments and is ready to act if necessary, again as expected. So far so good, except he did not convey the sense that the ECB is in any hurry to act again. Draghi noted the improvement in some of the survey data recently (although they still signal the euro area economy is contracting) and said a gradual recovery is likely later this year. It seems there will have to be a renewed deterioration in the data, or no further improvement, for the ECB to cut the refinancing rate again. As regards non-standard measures, including a negative deposit rate, Draghi said the Governing Council did not see any reason to act at this present point in time but these measures are there on the shelf (though they are likely to remain there it would seem). Not surprisingly, the euro strengthened against the dollar on the back of all this, trading up above $1.33 at one stage before coming back to around $1.32. Fixed rates also rose as the likelihood of a near-term cut in official interest rates receded, with 5-year rates rising by around 10bpsd Ireland Property tax boosts Exchequer finances Irish tax receipts emerged ahead of profile in the exchequer data to end-may, having been around target to end-april. This improvement occurred despite undershooting in a range of tax headings, including VAT, income tax and excise duty, in contrast to a major upside surprise from corporation tax, which is some 17% above profile. The net effect would have been to leave receipts marginally adrift but May also recorded an unexpected 121mn euro inflow from the local Property tax, which was not scheduled until July and beyond. As a result total tax revenue emerged 105mn euro above profile (0.7%) with non-tax receipts also running well above expectations. Current spending is behind target and the current budget deficit year to date came in at 6.5bn, euro, virtually identical to the corresponding period last year. The overall exchequer deficit is lower than 2012, however, at 5.3bn euro versus 6.5bn, euro reflecting unbudgeted cuts in capital outlays (due to the Promissory note deal) and unbudgeted capital receipts. In other data, residential property prices rose for the first month in five, increasing by 0.8% in April, with the change over three months at -1.2%. The unemployment rate in May was unchanged at 13.7% although the Live Register recorded its eleventh consecutive monthly decline, taking the seasonally adjusted total to 426,100, a four-year low. Finally, industrial production rose by 3% in April and by 1.0% on a 3-month view.. United Kingdom BoE leaves policy unchanged amid run of strong data The UK economy appears to have gained some momentum in recent months and the data over the week was consistent with that pattern. The manufacturing PMI in May rose to 51.3 from a revised 50.2 while the construction index rebounded into expansion territory with a reading of The services sector has been consistently stronger than the other industries and May saw a rise in the PMI index to 54.9, the highest reading in some 15 months, from 52.9.The housing market also appears to have picked up, with prices rising by 0.4% in May on the Halifax index, taking the increase over three months to 1.9%. The Bank of England left policy unchanged at Governor King s final meeting, as expected, and sterling outperformed most of the other majors with the exception of the yen and the Swiss franc. The UK currency traded above $1.56 at one point, a 4-month high, before easing to $1.55, and the euro fell back to around 85 pence. United States Employment rises by 175k in May; unemployment rate nudges up to 7.6% US government 10-year yields have backed over the past five weeks, triggered initially by a stronger than expected employment report for April published at the start of last month and further fuelled by comments from Fed Chairman, Ben Bernanke, that the central 2 Bank of Ireland Global Markets

3 Data section contents Data section showing % changes on the week Long term fixed rates Commodity prices bank may step down the pace of its asset purchases under QE3 in the next few meetings depending on the economic data. Yields peaked at over 2.2% last week and had fallen to around 2.05% ahead of today s (Friday) jobs report for May. The latter showed employment rose by a reasonably healthy 175k last month. While this was only slightly more than the 165k expected, it was still probably better than had been feared just before the report. The unemployment rate did nudge higher to 7.6% from 7.5% in April, though this was due to an increase in the labour force participation rate which can be viewed as a good thing. The report overall probably keeps alive the possibility of a step down in asset purchases within the next few months and both bond yields and the dollar rose post the numbers Japan Yen recovers some more ground The Japanese yen depreciated sharply between November and mid-may, falling from around Y80 to over Y103 against the dollar over this period. The Nikkei index of Japanese shares also rose sharply over this period, gaining almost 75%. The catalyst for these quite extraordinary moves was the election of a new PM, Abe, who promised to take aggressive action to end deflation in the economy, including structural reforms, fiscal stimulus and (via the Bank of Japan) monetary stimulus, This led markets to take large positions in the yen (expecting the currency to weaken on the back of monetary stimulus) and stocks (expecting share values to rise on the back of an improving economy and a weaker yen that would boost exports). Though nothing much has changed and we have to wait and see if these policies have the desired effect, some of these positions have been unwound recently. This continued this week with the yen gaining further ground, strengthening to sub Y96 against the dollar at one stage from over Y100 last Friday (and over Y103 in mid-may), while the Nikkei fell by more than 6% from last week s close (and is now more than 18% off its recent high). What happens from here may depend on how market expectations evolve regarding the US Federal Reserve s QE3 program (which in turn will depend on the data in the US). If a tapering of the Fed s asset purchases is considered likely, then the yen may weaken again and the Nikkei possibly fall further. If asset purchases are considered likely to continue at the current pace (of $85bn a month), then the yen and stocks might both move higher still. 3 Bank of Ireland Global Markets

4 Data section changes on the week EUR/GBP Spot % 1M 3 3M 9 6M 17 12M 34 EUR/USD Spot % 1M 2 3M 7 6M 13 12M 30 GBP/USD on the week Spot % 1M -3 3M -9 6M M -31 EUR currency pairs EUR/CAD % EUR/AUD % EUR/NZD % EUR/CHF % EUR/JPY % EUR/SEK % EUR/NOK % EUR/HUF % EUR/PLN % EUR/ZAR % EUR/CZK % USD currency pairs USD/CAD % USD/AUD % USD/NZD % USD/CHF % USD/JPY % USD/CNY % USD/MXN % USD/SGD % USD/BRL % USD/THB % USD/ZAR % GBP currency pairs on the week GBP/CAD % GBP/AUD % GBP/NZD % GBP/CHF % GBP/JPY % GBP/SGD % GBP/MYR % GBP/NOK % GBP/HKD % GBP/SEK % GBP/DKK % GBP/ZAR % on the Week Base O'night 1 week 2 week 1 M 2 M 3 M 6 M 9 M 12 M EUR GBP USD on the Week 2 year Chng 5 year Chng 7 year Chng 10 year Chng EUR GBP USD Government bond yields (YTM) on the Week 2 year Chng 5 year Chng 10 year Chng 30 year Chng Ireland Germany US UK Prime Rate Bank of Ireland prime rate 0.72 on the Week ISEQ % DOW Jones % S&P % SMI % Nasdaq % FTSE % Eurostoxx % Nikkei % Commodities on the Week Brent % WTI Cushing % Gold % Wheat % Emissions Allowance % 4 Bank of Ireland Global Markets

5 Contacts Economic Research Unit (ERU) To discuss any aspect of this report, contact your treasury specialist or our Economic Research Unit (ERU): Chief Economist, Bank of Ireland: Dr. Dan McLaughlin Tel: +353 (0) Senior Economist: Michael Crowley Economist: Patrick Mullane Contact your treasury specialist Corporate Treasury or Business Banking Treasury Institutional Treasury Specialised Finance +353 (0) UK Sales Team (within the UK) US Sales Team Our Offices Dublin 2 Burlington Plaza, Burlington Road, Dublin 4, Ireland Tel +353 (0) London Bow Bells House, 1 Bread Street, London EC4P 4BP, UK Tel +44 (0) Belfast 1 Donegall Square South, Belfast, BT1 5LR, UK Tel +44 (0) Stamford (US) 300 First Stamford Place, Stamford CT 06902, US Tel Keep in touch with the markets, visit Market data supplied by Thomson Reuters Disclaimer This document has been prepared by the Economic Research Unit at Bank of Ireland Global Markets ( GM ) for information purposes only and GM is not soliciting any action based upon it. GM believes any information contained herein to be accurate but GM does not warrant its accuracy and accepts no responsibility, other than any responsibility it may owe to any party under the European Communities (Markets in Financial Instruments) Regulations 2007 as may be amended from time to time, and under the Financial Services Authority rules (where the client is resident in the UK), for any loss or damage caused by any act or omission taken as a result of the information contained in this document. No prices or rates mentioned are bids or offers by GM to purchase or sell any currencies, securities or financial instruments. Except as otherwise may be specifically agreed, GM has not acted nor will act as a fiduciary, financial or investment adviser with respect to any currency or derivative transaction that it has executed or will execute. Any decision made by a party after reading this document shall be on the basis of its own research and not be influenced or based on any view expressed by GM. This document does not address all risks. Any party should obtain independent professional advice before making any investment decision. Any expressions of opinion reflect current opinions as at 07 June This publication is based on information available before this date. This document is property of GM. The content may not be reproduced, either in whole or in part, without the express written consent of a suitably authorised member of GM staff. Bank of Ireland is regulated by the Central Bank of Ireland. In the UK, Bank of Ireland is authorised by the Central Bank of Ireland and authorised and subject to limited regulation by the Financial Services Authority. Details about the extent of our authorisation and regulation by the Financial Services Authority are available from us on request. Bank of Ireland incorporated in Ireland with limited liability. Registered Office - Head Office, 40 Mespil Road, Dublin 4, Ireland.Registered Number - C-1. Bank of Ireland Global Markets