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BNP Paribas FX Strategy Summary - 17 September 2013

Core Content Overview

This document outlines the BNP Paribas FX Strategy and provides insights into the short-term fair values (STEER™) of various currency pairs, based on a combination of interest rates, equity performance, and commodity prices. The analysis highlights the current state of major and emerging market currencies, with a focus on their relative valuations and potential movements.

Main Points and Key Information

G10 Currencies

• USDJPY and EURCHF are undervalued and have potential to rise towards their fair values of 104.85 and 1.2480, respectively.
• GBPUSD and EURGBP show significant overvaluation:
  • GBPUSD is trading 2.7 z-scores above its STEER of 1.5430, indicating potential weakness.
  • EURGBP is trading 2.1 z-scores below its STEER of 0.8640, suggesting overvaluation.
• AUDUSD and NZDUSD have moved closer to their fair values but are still within ±1.5 z-score corridors, indicating no strong signal for further movement.
• USDCAD is trading in line with its STEER of 1.0340.
• USDCHF is also undervalued and may rise, with a STEER of 0.9360.

Emerging Market Currencies (EM STEER™)

• EM currencies are mainly driven by CDS levels and local equity performance.
• In CEEMEA:
  • USDTRY is overvalued by 1.75 z-scores, and may face downward pressure.
  • USDILS is undervalued but the model for this pair has not passed the co-integration test, so the signal is weak.
  • EURPLN is undervalued and may rise.
  • EURHUF is overvalued and vulnerable to a decline.
  • USDZAR is now trading in line with its STEER.
• In Asia:
  • USDIDR is overvalued, with a deviation of 2.61 z-scores, indicating potential for decline.
  • USDTWD is undervalued and may rise.
  • USDKRW is undervalued and within ±1.5 z-score corridor.
  • USDSGD, USDMYR, USDTHB, and USDPHP are trading within ±1.5 z-score corridors.
• In Latin America:
  • Most currencies are trading within ±1.5 z-score corridors.
  • USDBRL is overvalued by 1.03 z-scores, making it vulnerable to a fall.
  • USDPEN is undervalued but has not triggered a trading signal.
  • USDCOP is undervalued and within ±1.5 z-score corridor.

STEER Model Insights

• The STEER model uses interest rate differentials, equity performance, and commodity prices to estimate short-term fair values.
• Deviations from STEER are typically short-lived (days to weeks), and the model is useful for short-term forecasting.
• A z-score deviation greater than 1.5 is considered a significant predictor of exchange rate movements.
• Overvaluation implies a likely decline, while undervaluation suggests a rise.

Trading Strategy

• A simple strategy of buying undervalued (cheap) crosses and selling overvalued (expensive) crosses has historically been successful.
• The Sharpe ratio for such a strategy is approximately 0.9.

Summary of Key Currency Pairs

Contacts for FX Strategy

• Steven Saywell - Global Head of FX Strategy, London
• James Hellawell - Quantitative Strategist, London
• Kiran Kowshik - FX Strategist, London
• Phyllis Papadavid - Senior Global FX 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
• Diego Donadio - 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

Disclaimer

• This document is non-independent research and is marketing communication.
• It is not subject to the independence of investment research and may be subject to conflicts of interest.
• The information is based on public sources and is not guaranteed to be accurate or up to date.
• No liability is accepted for any loss or damage arising from reliance on this document.
• The document is intended for professional clients and not for retail clients.
• It is not an offer or solicitation to buy or sell any securities.
• BNP Paribas may have previously received parts of the report for verification purposes.

Conclusion

The BNP Paribas FX Strategy highlights the relative undervaluation of USDJPY and EURCHF, suggesting potential for upward movement, while the GBP remains overvalued and may face downward pressure. For EM currencies, USDTRY is overvalued, and USDILS is undervalued but with a weak signal. The STEER model continues to emphasize the importance of interest rate differentials and local equity performance in driving currency movements.