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BNP Paribas FX Strategy Summary (December 3, 2013)

Core Content Overview

This document outlines the BNP Paribas FX Strategy and EM STEER™ assessment for various currency pairs, highlighting their short-term fair values and potential movements based on market fundamentals. The analysis is based on the STEER™ model, which evaluates exchange rates using interest-rate differentials, equity market performance, and commodity prices.

Key Insights and Main Points

Commodity Currencies Against USD

• AUDUSD and NZDUSD are considered oversold and undervalued against the USD.
• USDCAD has reached overbought levels, indicating potential for a downward move.
• GBPUSD is supported by short-term fundamentals, showing a positive outlook.
• The USD appears overbought against risky currencies, suggesting it may be vulnerable to a decline.

G10 Currencies

• Among the G10 currencies, commodity currencies (AUD, NZD, CAD) are seen as undervalued.
• EURSEK has fallen back into its 1.5 z-score corridor, but remains slightly overvalued.
• EURNOK is overvalued, but the fair value has remained stable, suggesting limited further decline.
• EURGBP and EURUSD are trading close to their STEERs, indicating balanced valuation.

Emerging Market (EM) Currencies

• USDMXN and BRLMXN are overvalued, with potential for decline.
• EURHUF is overbought, suggesting a bearish outlook.
• USDSGD and USDMYR are overvalued, with bearish signals.
• USDZAR, USDTRY, USDRUB, and USDILS are slightly overvalued, but their fair values have remained stable.

Z-Score Analysis

• Z-scores greater than +1.5 or -1.5 are considered significant predictors of exchange rate movements.
• AUDUSD is more than 2 z-scores below its STEER of 0.9425, indicating under-valuation.
• USDCAD is at the upper end of its 1.5 z-score corridor, suggesting over-valuation.
• USDMYR and USDSGD are overvalued by more than 1.5 z-scores, indicating bearish potential.
• USDPHP and USDTWD are overvalued, but have not triggered a bearish signal yet.

Key Currency Pair Analysis

G10 Currencies

Emerging Market Currencies

Main Viewpoints

• The STEER™ model identifies short-term fair values and misalignments in currency pairs.
• Commodity currencies (AUD, NZD, CAD) are undervalued against the USD, with AUDUSD being the most misaligned.
• EURSEK and EURNOK have returned to their fair value corridors, but EURNOK remains overvalued.
• GBPUSD has gained support due to a rise in the UK 2y swap rate and flat US 2y swap rate.
• USDCAD is overbought, and USDMXN remains significantly overvalued.
• EURHUF is overbought, and USDZAR, USDTRY, and USDRUB have moved in line with their STEERs.

Summary of Key Currency Outlook

• AUDUSD: Undervalued, vulnerable to a move higher.
• NZDUSD: Undervalued, likely to rise.
• USDCAD: Overbought, vulnerable to a decline.
• GBPUSD: Supported by fundamentals, expected to remain stable.
• EURSEK: Within fair value corridor, slightly overvalued.
• EURNOK: Overvalued, but fair value stable.
• USDMXN: Overvalued, likely to decline.
• BRLMXN: Overvalued, potential for further decline.
• EURHUF: Overbought, vulnerable to a decline.
• USDSGD and USDMYR: Overvalued, bearish signals.

Disclaimer

• This document is non-independent research and marketing communication.
• It is not subject to legal requirements for independent investment research.
• The STEER™ model is based on short-term fundamentals and market relationships, and deviations from STEER are short-lived.
• No representation or warranty is made regarding the accuracy or completeness of the information.
• Past performance is not indicative of future results.

Contacts

For further information or inquiries, please contact:

• Steven Saywell: Global Head of FX Strategy, London
• James Hellawell: Quantitative Strategist, London
• Michael Sneyd: FX Strategist & Lead Quant Strategist, London
• Daniel Katzive: Head of FX Strategy North America, New York
• Vasilis Koutsaftis: FX Options Strategist, New York
• Vassili Serebriakov: FX Strategist, New York
• Mirza Baig: Head of FX & IR Asia Strategy, Singapore
• Rohit K Garg: FX & IR Asia Strategy, Singapore
• Jasmine Poh: FX & IR Asia Strategy, Singapore
• Yii Hui Wong: FX & IR Asia Strategy, Singapore
• Bartosz Pawlowski: Global Head of EM Strategy, London
• Dina Ahmad: FX & IR CEEMEA Strategist, London
• Stanislav Petrov: FX & IR CEEMEA Strategist, London
• Gabriel Gersztein: Head of FX & IR Latam Strategy, Sao Paulo
• Thiago Alday: FX & IR Latam Strategist, Sao Paulo
• James Z Hao: FX & IR Latam Strategist, New York

Distribution and Legal Information: This report is non-independent and intended for professional clients only. It may not be distributed to retail clients. For distribution details and legal compliance, contact Diana Seifert.