FINANCIAL MARKETS RESEARCH

FX Top Trades July 2010

FX
7 July 2010

FX Top Trades
EUR/USD and USD/JPY Relative value trades for 2H10
EUR/USD U SD/JPY (rhs)
1.55 95 1H10 has been characterised by ‘fragile and uneven’ growth in major
93 economies. The Greek debt crisis has brought fiscal consolidation to Europe
1.45
91 one year ahead of schedule. And in the US, fears are growing that more
1.35 monetary stimulus may need to be employed to ensure a sustainable recovery.
89
1.25 EM continues to grow strongly.
87

1.15 85 Here we recommend a variety of FX relative value trades. Some seek to take
Jan-10 Mar-10 May-10 Jul-10
advantage of high yielding and heavily controlled currencies. Others try to
Source: EcoWin benefit from a slowdown in activity and deflation fears. And we also look to
find value in some currencies that have been slow to normalise after the
Best/worst performing vs USD
2008/09 financial crisis.
(YT D, %)
10 US deflation scare
WORST
5 Concerns are growing that the US has yet to deliver a self-sustaining recovery. With
0 government spending restrained, the Fed may need to ease policy further. Sell USD/JPY.
-5
BEST Cautious optimism on India
-10 8% Indian growth, an expected improvement in the budget deficit and a further 75bp of
-15 rate hikes should see persistent INR demand. Buy USD/INR downside structures.
JPY

CAD

EUR
CHF

NOK

GBP

Credibility issues: SNB vs ECB

Source: Bloomberg Since last year the SNB has been concerned about the quality of its balance sheet and
has been making greater provisions – in stark contrast to the ECB. Sell EUR/CHF.
Carry trade performance, YTD
USD/UAH: On a tight NBU leash
Equally weighted BRL, TRY, The NBU appears to have USD/UAH under control and is now in the process of
106 ZAR vs. USD, JPY, CH F 106
rebuilding reserves, aided by an improved C/A position. Collect carry in UAH NDFs.
103 103
Capital flows favour Russia
100 100 Recovery in Russia should mean that banks and corporates will need to rebuild external
97 97
debt. Abundant liquidity will deter the CBR from heavy FX intervention. Buy RUB/PLN.
(1 Jan = 100)
94 94 Canada: G-7’s leading light
Jan-10 Mar-10 May-10 Jul-10 Canada has emerged from the financial crisis with a financial system reasonably intact.
We see the CAD as a store of value, while UK activity may slow in 2H10. Sell GBP/CAD.
Source: Bloomberg
IDR: Asia’s top carry trade
Bank Indonesia’s signal achievement in 2009 was to crush inflation. We believe this will
remain its priority and it has the resources to limit IDR volatility. Pick up carry in IDR.

Double dip: Too bullish Australia

China set to slow into 2011 and there are very early signs that inventory levels may be
too high. That will weigh on production and demand for natural resources. Sell AUD.
Chris Turner
London +44 20 7767
Confidence in ZAR to ebb
chris.turner@uk.ing.com As in many EM countries, South Africa is expected to see a widening C/A deficit. Slowing
Tom Levinson global activity and a more left-leaning President Zuma may weigh on equity flows. Sell ZAR.
London +44 20 7767
tom.levinson@uk.ing.com Riksbank plays catch-up
View all our research on Bloomberg at The Riksbank has just started tightening. Norges Bank is worried about private
ING5<GO> consumption and has cut its forecast tightening profile. Sell NOK/SEK.

research.ing.com 1
SEE THE DISCLOSURES APPENDIX FOR IMPORTANT DISCLOSURES & ANALYST CERTIFICATION
 FX Top Trades July 2010

Contents
US deflation scare 3

Cautious optimism on India 4

Credibility issues: SNB vs ECB 5

USD/UAH: On a tight NBU leash 6

Capital flows favour Russia 7

Canada: G-7’s leading light 8

IDR: Asia’s top carry trade 9

Double dip: Too bullish Australia 10

Confidence in ZAR to ebb 11

Riksbank plays catch-up 12

Top trades summary table 13

Top trades 1H10 – review 15

Research analyst contacts 18

2
 FX Top Trades July 2010

US deflation scare
Sell USD/JPY via boosted forward options strategy

The trade
Buy 6m USD put/JPY call, strike
90.00, Down and Out Barrier
(American) 75.75
Sell 6m USD call/JPY put, strike
90, Down and Out Barrier
(American) 75.75
Target spot on expiry
We now do not see the Fed
withdrawing liquidity and
tightening until 3Q11
It is not clear that US activity can eat into spare capacity quickly enough to lift US
Entry: inflation away from the danger-zone. With the scope for government spending
Zero
cost
curtailed, the Fed may be forced to add more liquidity. USD/JPY should fall.
Having originally thought the Fed might be tightening in 3Q/4Q this year and that
USD/JPY would end the year at 100, we have been forced to change our views. We now
85
do not see the Fed withdrawing liquidity and tightening until 3Q11. Indeed, the market is
now starting to question whether US authorities have sufficient tools to fend off a
slowdown. After all the Congressional Budget Office estimates that peak fiscal stimulus
was seen in 1Q10 and there seems little appetite in Congress to enact fresh fiscal
stimulus with the US budget deficit seen at 10% of GDP this year and next.

Instead, the market is turning to the view that the Fed may have to do more to ensure that
the US does not join Japan in a decade of deflation. In extreme circumstances the Fed
could return to policies of the 1950s and formally target Treasury bond yields. Investors
are responding to this by driving the US 10-year yield below 3.00% and with the Fed’s
own view for core PCE at just 0.9-1.2% YoY this year and not much higher in 2011, there
is little margin for error.

While the USD is seen to have performed strongly this year, this largely reflects
The prospect of the Fed
weakness in European currencies on the back of the debt crisis in southern Europe. And
remaining on hold for
the prospect of the Fed remaining on hold for another year, potentially battling deflation,
another year, potentially
recalls events in 2003. Back then Japan’s Ministry of Finance, up until September that
battling deflation, recalls
year, tried to hold support in USD/JPY at 115 with US$200bn of USD buying intervention.
events in 2003
Under pressure from the US at the G-7 meeting in Dubai, Japan was forced to accept a
lower USD/JPY in the spirit of exchange rate flexibility.

Fig 1 Little margin for error with US inflation Fig 2 P/L of boosted forward strategy to sell USD/JPY

US core PCE (% YoY) Fed funds rate (%, rhs) (USDm)

5 10 2 2

4 8 1 1

0 0
3 6
-1 -1
2 4
-2 -2
1 2
-3 -3
70 75 80 85 90 95 100 105 110
0 0
Jan-89 Jan-92 Jan-95 Jan-98 Jan-01 Jan-04 Jan-07 Jan-10 P/L on expiry of US$10mio invested in Boosted Forward Strategy

Source: EcoWin Source: ING

We doubt the international And that same spirit of exchange rate flexibility exists to this day. After a two-year hiatus
environment would allow China has recently accepted the need for a modestly more flexible CNY and we doubt the
massive Japanese international environment would allow massive Japanese intervention to support USD/JPY.
intervention to support Instead Japanese policymakers, as was the case last December, would demand much
USD/JPY more aggressive easing from the BoJ to counter JPY strength. We therefore see a trade in
being short USD/JPY for the next six months with a boosted forward strategy, which
benefits from a lower USD/JPY as long as 75.75 never trades. This is a trade for
professional investors only, given the risk of unlimited losses were USD/JPY to trade higher.

Chris Turner, Head of FX Strategy, London +44 20 7767 1610

3
 FX Top Trades July 2010

Cautious optimism on India

The trade
Buy 6m 46.00 to 42.00 USD/INR
put spread, RKO 40.00
Sell USD call/INR put, strike
49.50
Target spot on expiry
Buy USD/INR downside seagull with KO
Despite bouts of short-term volatility, we believe the INR will continue its appreciation
Entry:
trend. 8% growth, a narrowing fiscal deficit and what should be widening interest rate
Zero
cost differentials should send USD/INR to 44/45 over the coming six to twelve months.
44.00
The recovery in Indian activity looks resilient. Driven by services and a V-shaped revival
in investment, India is likely to record 8% plus growth in 2010-11. Double-digit growth in
IP and a revival in consumer non-durables, following normal monsoons, will also help.

While India may be the only Asian economy struggling with twin deficits, we believe there
is scope for the fiscal deficit to narrow from 6.7% of GDP in FY10 to 5.5% this year. This
Driven by services and a V-
should be driven by two developments: 1) deregulation of long-subsidised and politically
shaped revival in investment,
sensitive petrol and diesel prices. Subsidies have been a chronic burden on Indian
India is likely to record 8%
government having accounted for 13-15% of government expenditure in the last few
plus growth in 2010-11
years and a move towards market-driven prices is a positive and 2) windfall gains in the
3G spectrum auction. While the government had budgeted for INR350bn as non-tax
revenue from this auction, the amount garnered topped INR1000bn.

Growth reaching trend and an upward shift in the inflation trajectory following domestic
fuel price deregulation has prompted the RBI to hike key rates 75bp this year. This makes
the RBI one of the fastest moving central banks in the world. We expect RBI to hike
another 75bp over the remaining financial year, with a next 25bp in late July.

Fig 3 INR should continue to trend firmer Fig 4 P&L of 46-42 USD/INR put spread, RKO 40

Extreme risk aversion likely to impact INR adversely, though Profit/(Loss)

the long-term trend is upwards 1000 1000
4 53
500 500
3 50

2 47 0 0

1 44
-500 -500
0 41 Profit/Loss ('000 USD)
-1000 -1000
ING Global Risk Index USD/INR (rhs)
-1 38 39 40 41 42 43 44 45 46 47 48 49 50 51 52 53 54
Feb08 Jun08 Oct08 Feb09 Jun09 Oct09 Feb10 Jun10 Spot on expiry

Source: EcoWin, ING Source: ING

Portfolio outflows from India
in the recent risk aversion
bout have been limited
Strong medium-term growth prospects, a commitment towards fiscal consolidation, rising
interest rate differentials and more policy flexibility should contribute to long-term INR
appreciation. Also supportive has been the resilience of portfolio flows. Portfolio outflows
from India in the recent risk aversion bout have been limited. In spite of the current
volatility and depreciation bias, cumulative net foreign institutional flows in equity during
last two months have been a small positive (as against outflows of USD4.5bn in the two
months post Lehman collapse). In all we look for USD/INR to break down to 44.

In all we look for USD/INR at In line with the above view we propose a seagull structure. The structure gives
44 participation in the INR appreciation up to 42. The advantage is knocked out in case 40
(15% move from current spot) is seen, which we expect to be highly unlikely in the
coming six months. The downside is if the spot ends higher than 49.5 at expiry. The OTM
call at 49.50 gives good value since risk-reversals are favouring USD calls and the
knockout is expected to decay faster and can be bought out during the life of the trade.

Deepali Bhargava, Mumbai +91 22 2499 8114

4
 FX Top Trades July 2010

Credibility issues: SNB vs ECB

The trade
In 50% of the position. Sell
EUR/CHF six month forward at
current level
Add remaining 50% of position,
selling EUR/CHF forward for
same trade date should spot
trade at 1.36
Target
Sell EUR/CHF 6-month forward: Scale in
The SNB remain very much focused on the quality of their balance sheet and are
Entry:
increasing provisioning against larger FX exposure. The ECB balance sheet looks
1.33
more leveraged and contains riskier assets. Investors will continue to sell EUR/CHF.
Perhaps the market should have paid more attention to the comments of SNB board
member, Jean-Pierre Danthine. Back in March he said that households and businesses
Spot: should prepare themselves for market-driven exchange rates. Since those comments,
1.25
EUR/CHF has fallen nearly 10%, with the SNB intervening intermittently in massive
amounts and slowly softening its resistance to CHF appreciation against the EUR.

The loss of confidence in the Clearly the loss of confidence in the EUR has been one of the most important factors
EUR has been one of the driving the EUR/CHF bear trend. And credibility issues may be playing a role here. Since
most important factors last December the SNB has been concerned with the growth of its balance sheet and
driving the EUR/CHF bear intends to increase provisioning against potential market losses coming through from its
trend growing holdings of foreign exchange reserves. Previously the SNB had increased
annual provisioning by the five-year average of nominal GDP growth. It now plans to
double that provision for the sake of balance sheet credibility.

We have yet to hear the ECB
express much concern over
its growing balance sheet
We have yet to hear the ECB express much concern over its growing balance sheet.
Capital and reserves make up under 4% of the ECB’s balance sheet and the ECB’s
holdings of peripheral Eurozone debt are fast approaching its level of core capital. Should
concerns build over a possible restructuring of Greek debt, we expect the ECB will be
forced to address issues of balance sheet credibility more forcefully.

Fig 5 SNB balance sheet soars Fig 6 Foreign banks rein in CHF lending

(CHFbn) Swiss banks cross border CHF lending

350 150 Foreign banks cross border CHF lending 1.70
Total assets EUR/CHF (rhs)
300
Provisions and equity capital 100 1.60
250
200
50 1.50
150
100 0 1.40
50
0 -50 Cumulative CHF lending (USD bn) since 2000 1.30
Dec-96 Dec-98 Dec-00 Dec-02 Dec-04 Dec-06 Dec-08 00 01 02 03 04 05 06 07 08 09 10

Source: SNB Source: BIS, EcoWin

It seems that foreign banks
(who undertook the majority
of cross border CHF lending
last decade) are still paying
those CHF loans down
In the meantime, we see no let up in the demand for CHF. Trade trends are supportive
and somewhat surprisingly the SNB jettisoned concerns over CHF strength in its June
policy statement, having spent a substantial EUR56bn in trying to limit that appreciation
just a month earlier. At the same time, it seems that foreign banks (who undertook the
majority of cross border CHF lending last decade) are still paying those CHF loans down
and the EUR/CHF bear trend will continue.

Earlier this year we estimated that EUR/CHF at 1.25 would equate to the strongest levels
of the real CHF TWI seen in 1995. 1.25 thus remains our target even though short
EUR/CHF is clearly a very crowded trade.

Chris Turner, Head of FX Strategy, London +44 20 7767 1610

5
 FX Top Trades July 2010

USD/UAH: On a tight NBU leash

Sell USD/UAH 6-month outright NDF
The trade
Having been forced to accept a weaker UAH in 2H08 on the back of the financial
Sell USD/UAH six month outright Entry:
crisis and a weak BoP position, the National Bank of Ukraine (NBU) now seem to
NDF 8.20
have USD/UAH under control at 7.90. UAH implied yields near 9% pa are attractive.
Target spot on expiry 7.90

After the sharp UAH devaluation and abrupt economic decline in 2H08, Ukraine’s balance
of payments (BoP) position is much improved this year and points to a stable UAH in
2H10, with the possibility of UAH strength in 2011-12. At the same time, the NBU is
managing USD/UAH very tightly – a policy we believe is designed to restore confidence
and reduce UAH devaluation expectations amongst households and businesses.

The NBU is currently
replenishing its FX reserves
The BoP has remained positive for a second month in a row, allowing the NBU to
manage USD/UAH a little lower from March – ie, the period when new president Viktor
Yanukovich’s Regions Party came to power. Thus the excess supply of foreign currency
that is coming mostly from rising export relative to import growth is allowing the NBU to
replenish its FX reserves. As of the middle of June, NBU FX reserves exceeded
USD29bn – thus raising the level of import coverage to 7.5 months. Recent UAH stability
and modest strength has helpfully removed the weaker UAH trend on the cash exchange
market – the key gauge of local household sentiment.

Fig 7 Ukraine’s BoP better balanced than in 2008 Fig 8 Opportunities in UAH NDFs

(% of GDP) Current account (% of GDP) (USD/UAH)

25 FDI 25 8.80 8.80
Other financing 8.60 8.60
15 15
8.40 8.40
5 5 8.20 8.20

-5 -5 8.00 8.00

7.80 7.80
-15 -15 ING forecast NDF
7.60 7.60
-25 -25 0 2 4 6 8 10 12 14
1Q05 1Q06 1Q07 1Q08 1Q09 1Q10 1Q11F Months

Source: EcoWin Source: Bloomberg

Although we expect a moderately negative BoP this year on the need for the corporate
sector to repay more of its external debt than it is able to borrow, we believe it should not
impact UAH stability considerably. Additionally the readiness of the NBU to suppress any
large fluctuations in the market suggest a maximum UAH weakening this year of no more
than 1.5% – to 8.02/USD. We also believe the NBU has much greater control of
USD/UAH than it did in 2008. First of all, the gap in both the current and capital accounts
The risk of large capital flight
should not be as wide as they were in 2008. Back then Ukraine ran a 7% of GDP current
from Ukraine is reduced
account deficit. The current account should show a small surplus this year. Secondly,
foreign portfolio investments in Ukraine are significantly lower now than in 2008. Thus the
risk of large capital flight is reduced. In fact, this year’s BoP gap of USD2.8bn is less than
10% of current NBU FX reserves.

Near 9% UAH implied pa yield Thus fundamentals do not provide clear reasons why UAH should depreciate this year.
We see value in selling the USD/UAH NDF six months forward, benefiting from a near 9%
UAH implied pa yield and on the assumption NBU has USD/UAH under control.

Alexander Pecherytsyn, Kyiv +38 044 230 3017

6
 FX Top Trades July 2010

Capital flows favour Russia

The trade
Sell PLN/RUB six month forward
Target
We think RUB can gain by
more than 8% versus the
USD:EUR basket by end-
4Q10
Sell PLN/RUB 6-month forward
RUB remains one of the cheapest commodity currencies and strengthening looks
Entry:
hard to avoid once capital flows turn more favourably to Russia. We look to fund the
9.58
RUB trade out of PLN, which remains a proxy for East European budget woe.
Spot:
9.00
We think RUB can gain by more than 8% versus the USD:EUR basket by end 4Q10.
Economic growth is gaining momentum and we look for 2010 GDP growth of 5.1% (-7.9%
in 2009). Taking into account the commitment of policymakers to a more flexible FX
regime, positive capital inflows in 2H10 together with a current account surplus (5.4% of
GDP in 2010) should drive the RUB stronger. In terms of inflation, the current low rate of
5.8% YoY is not likely to persist. We look for a sharp pick-up to 6.8% by 4Q10. This
together with excess RUB liquidity suggests the CBR’s preferred escape valve will be to
allow a stronger RUB, beyond the current strong side limit of 33.4 vs the basket.

Having reduced net foreign
liabilities by USD100bn, we
also look for local banks to
re-leverage
A positive capital dynamic is already in view. The recovery is forcing corporates to rebuild
the external debt that contracted USD25bn between Sept 2008 and April 2010. Having
reduced net foreign liabilities by USD100bn, we also look for local banks to re-leverage.
Renewed capital inflow into the banking sector should be helped both by the growth in
bank external debt and the decrease in a still excessive FX liquidity position. Similarly, in
the aftermath of the 2008 RUB devaluation, households increased hard currency holdings
by more than USD$50bn – a significant FX supply that should return to the market.

Away from fundamentals, RUB continues to be the cheapest commodity currency, trading
at a 15-20% discount to its peers. We doubt that this is sustainable. In the past the RUB
has moved in line with other commodity currencies, but with a lag.

Fig 9 RUB vs commodity currencies Fig 10 Poland, struggling with its budget deficit

(Jul='08=100%) RUB AUD (% of GDP) HU RU CZ RO PL

120% ZAR CAD 120% 0
BRL NZD -1
110% IDR 110%
-2
100% 100%
-3
90% 90% -4
-5
80% 80%
-6
70%
76% 70%
-7
60% 60% -8
08/06 02/07 08/07 02/08 08/08 02/09 08/09 02/10 2009 2010 2011 2012

Source: EcoWin Source: EcoWin, ING

Over recent years PLN has
underperformed other CEE
currencies during wider
market sell-offs
Hungary or Romania are
more likely to step in to
defend their currencies than
Poland
Stanislav Ponomarenko, Moscow +7 495 755 54 80 Agata Urbanska, London +44 20 7767 6970
The PLN is not an obvious funding currency and many fundamental factors support the
widely held view that the zloty is cheap. Yet over recent years it has underperformed
other CEE currencies during wider market sell-offs. This should still likely be the case.
The zloty remains the most liquid currency, least likely to see FX/interest rate intervention
and could yet again be used as a proxy to express the negative view on the region.
Investors will probably assume Hungary or Romania are more likely to step in to defend
their currencies than Poland. Eurozone risk scenarios would see fiscal positions in focus,
where Poland fares relatively badly. Its budget position is comparable with Romania,
where GDP is expected to shrink up to 3% this year and much worse than the Czech
Republic or Hungary, both recording lower growth rates than Poland. Though our
baseline scenario sees a lower EUR/PLN, we believe short PLN/RUB is a viable trade.
7
 FX Top Trades July 2010

Canada: G-7’s leading light

Sell GBP/CAD 6-month forward

The trade Canada has started to tighten policy rates, which is an expression of confidence over
Sell GBP/CAD six month forward Entry: the US economic recovery. Loose Fed policy supports CAD outperformance, as does
1.6025
Canada’s superior fiscal position. A stronger GBP is the last thing the UK needs.
Target Spot:
1.50
In relative terms, Canada emerged from recession in a stronger position within the G-7. It
endured the mildest of economic contractions (GDP fell just 3% from its peak) and stands
today with the best fiscal position. We look for this to count in CAD’s favour in 2H10.

US monetary policy is a
strong positive for CAD
No doubt Canada’s recovery is heavily reliant on the US. While US economic data has
softened of late, the Bank of Canada’s (BoC) 1 June first interest rate hike can be
considered a vote of confidence on growth momentum rather than a policy error. We
forecast BoC rates to rise at least 50bp (to 1%) by year-end, leaving Canada as the only
G-7 central bank to be reducing monetary policy stimulus. Our US economists do not
anticipate FOMC hikes until 3Q11. The Fed mood will remain one orientated toward
protecting the US economy and safeguarding a still impaired financial system. This
should ensure a steep US yield curve for some time, helping to deliver vanilla profits for
US banks. As Fig 11 shows, stimulative US monetary policy is a strong positive for CAD.

Fig 11 Correlation with 10-2Y Treasury yield spread Fig 12 Current a/c, net FDI and USD/CAD

(C$m) Current a/c

1.0 40000 Net FDI 0.95
(vs. USD, since 1 Jan 2009) USD/CAD (rhs, inverted)
30000 1.05
0.8
20000 1.15
0.6
10000 1.25

0.4 0 1.35
-10000 1.45
0.2
-20000 1.55
0.0 -30000 1.65
CAD AUD NZD NOK SEK CHF GBP EUR JPY 98 99 00 01 02 03 04 05 06 07 08 09 10

Source: EcoWin, ING Source: EcoWin

There is also scope for
foreign direct investment to
increase into Canada
Put subtlety, CAD requires more the maintenance of expansive US policy than strong US
growth in order to appreciate. Yet there is also scope for foreign direct investment to
increase (Fig 12). Government comment indicates there will be announcements on
privatisations of state entities, with a strategic review underway. Consultation is also due
to be completed by the end of July on a lifting of overseas investment restrictions in the
telecoms industry (currently set at 20% of voting and 47% of actual control).

Overall, we view CAD as a store of value in 2H10. The BoC warns that there is ‘no pre-
ordained’ path for interest rates, but our conviction on a widening of BoC-Fed rate
differentials is strong. Fiscal discipline remains a key theme from which the CAD should
gain, while the health of its banking system has been widely hailed.

August’s BoE Inflation
Report will provide another
opportunity for the BoE to
talk GBP down
We choose to express a bullish CAD view against GBP. GBP rallied in June as a tight UK
budget reduced the risk premium associated with the potential loss of the UK’s AAA
status. Yet with UK GDP growth struggling to break 1.0% this year and 1.5% next year, we
believe a stronger GBP is the last thing policymakers will want. The August BoE Inflation
Report will provide another opportunity for the BoE to talk GBP down with another very
subdued CPI forecast two years forward. Look for GBP/CAD to fall to 1.50/52.

Tom Levinson, FX Strategist, London +44 20 7767 8057

8
 FX Top Trades July 2010

IDR: Asia’s top carry trade

The trade
In 50% of the position. Sell
USD/IDR three month NDF
Add remaining 50% of the NDF
position, selling USD/IDR
forward for the same trade date
should spot trade 9200
Target spot on expiry
Sell USD/IDR 3-month outright NDF
The crushing of inflation pressure in 2009 and BI’s ability and willingness to curb
Entry:
excessive exchange rate volatility make the rupiah Asia’s top carry trade, one we
9218
think will be resilient in all but the most stressful scenarios.
• A jump in food prices drove Indonesia’s CPI inflation above 5% in June. We expect
seasonal factors, especially the Ramadan fasting month, to keep inflation elevated in
9000
3Q before it recedes in 4Q. Our full-year forecast is 4.4%, toward the low end of Bank
Indonesia’s 4-6% target range (Fig 13). Inflation in Indonesia, like elsewhere,
accelerated in 2008 when commodity prices spiked. Rising fuel subsidies forced the
authorities to hike administered fuel prices by 29% in May 2008, pushing inflation into
the double-digit danger zone where it remained all year. The commodity price crash of
2H08 slowed food price component inflation, pulling headline inflation to a record low
in 2009. It also obviated administered fuel price hikes.

We regard the crushing of • We regard the crushing of CPI inflation in 2009 as a signal achievement. Bank
CPI inflation in 2009 as a Indonesia is an inflation-targeting central bank and bitter experience has taught the
signal achievement authorities that, outside administered fuel price hikes, rupiah depreciation is the main
inflation threat.

Foreign reserves at USD75bn
BI Deputy Governor Darmin Nasution said he expects the rupiah to average between
9100 and 9200 this year. Wide swings in BI’s foreign reserves demonstrate its
commitment to stabilising the exchange rate. The constraint on the policy is the stock of
foreign reserves, which at USD75bn in May were up USD20bn YoY (Fig 14). We think
the constraint would become binding at USD50bn.

Fig 13 Indonesia: CPI inflation and forecast Fig 14 Indonesia: Foreign reserves

(YoY%) ING forecast Actual (USDbn)

20 20 90 90

80 80
15 15
70 70

10 10 60 60

50 50
5 5
40 40

0 0 30 30
Jan-05 Jan-06 Jan-07 Jan-08 Jan-09 Jan-10 Jan-07 Jul-07 Jan-08 Jul-08 Jan-09 Jul-09 Jan-10 Jul-10

Source: CEIC, ING Bank Source: CEIC, ING Bank

BI has the commitment and
foreign exchange reserves to
defend the 9400 level in
USD/IDR
We expect USD/IDR to trade close to 9000 apart from spikes in risk aversion, during
which we believe BI has the commitment and foreign exchange reserves to defend 9400.
For this reason the rupiah is our top pick among Asian FX in 2H10. We recommend
scaling into a short USD/NDF position via 3-month NDFs, taking advantage of implied
IDR yields above 5%. We look to put on 50% of the position at current levels and add the
remainder, should spot USD/IDR trade 9200.

The 80bp fall in the 10-year government bond (FR31) yield in the past month puts it
through our year-end target of 8%. Government bonds are vulnerable to a spike in global
risk aversion but we recommend a buy-on-dips approach on the view that structurally
lower inflation will see the yield fall to 7%.

Tim Condon, Singapore +65 6232 6020

9

The trade
In 50% of the position. Sell
AUD/USD six month forward at
current level
Add remaining 50% of position,
selling AUD/USD forward for
same trade date should spot
trade at 0.87
Target
Softer external demand
stands to weigh on the
Chinese economy and its
export machine
High inventory levels may
start to weigh on Chinese
industrial production …
… and the inputs to that
production process
Fig 15 China’s inventory rise to weigh on Australia?
(Jan 2006 = 100)
120
100
80
60
40
06 07 08
China new orders versus inventories ratio (6m lead)
Au exports (rhs)
Source: EcoWin, ING calculations
Chinese growth should slow
from 11% in 2010 to 9% in
2011
Japanese retail investors are
still substantially long AUD
Scale into a short AUD/USD
position for a drop to a 0.77
target
FX Top Trades July 2010
Double dip: Too bullish Australia
Sell AUD/USD 6-month forward: Scale in
China is attempting to slow the domestic economy at the same time as fiscal stimulus
Entry:
is expiring in major export destinations. Chinese inventory levels are rising and new
0.8400
orders are falling. Chinese demand for Australia’s exports and the AUD may slow.
Roughly 45% of China’s exports go to Asia, while around 20% go both to the EU and US.
Asia looks to be enjoying a little more domestic demand this year, but both the EU and
Spot: US have already seen peak fiscal stimulus, with fears now building that weak credit
0.77 growth and more urgent fiscal restraint could deliver a double-dip recession. ING’s house
view is more for anaemic western growth into 2011, rather than a double-dip per se, but
softer external demand stands to weigh on the Chinese economy and its export machine.
That is not good news for Australia.
The breakdown of the Chinese PMI data shows some very early signs of a slowing
economy. Having crashed in 2008, the Chinese new orders sub index rose to a peak of
61 in December 2009, before sinking back to 52 in June. And the stock of finished goods,
or a gauge of inventory levels, has recently started expanding again, according to the
PMI data – the only time it did this over the last five years was in the autumn of 2008.
Using new orders and stocks of finished goods, we have created a quasi sales-to-
inventory ratio. This seems to have a decent six-month lead on total Australian exports
and preliminary readings suggest high inventory levels may start to weigh on industrial
production and the inputs to that production process – Australian natural resources.
Fig 16 Japanese retail limit long AUD
(3mth ave, A$bn) Net Long AUD/JPY (rhs) AUD/USD (000s contracts)
26 1.00 240
22
0.90 180
18
0.80 120
14
10 0.70 60
09 10 11
0.60 -
Jan-08 Oct-08 Jul-09 Apr-10
Source: TFX, EcoWin
In aggregate we look for Chinese growth to slow from 11% in 2010 to 9% in 2011 and
presume that the external environment will not be so supportive of the AUD. Having hiked
rates 150bp since last October, the RBA now says interest rates are “around their
average levels”. And having made the correct, early call on the global recovery in 2009,
some concerns over the strength of Asian activity would be a useful validation by the
RBA of our trade idea. So far that has not been the case.
At the same time, it seems the market may still be reasonably long AUD. Even though the
Commodity Trading Advisor (CTA) community looks to have substantially cut AUD/USD
speculative long positions over the last two to three months, Japanese retail investors are
still substantially long. We see a re-assessment of Chinese growth prospects and its
impact on Australia as the catalyst for a position unwind and thus want to scale into a
short AUD/USD position for a drop to a 0.77 target.
Chris Turner, Head of FX Strategy, London +44 20 7767 1610
10
 FX Top Trades July 2010

Confidence in ZAR to ebb

Buy TRY/ZAR 6-month forward

The trade We look for investors to lose confidence in the ZAR in 2H10. The current account
Buy TRY/ZAR six month forward Entry: deficit is widening again, as it will for many EM countries, but President Zuma may be
4.90
forced to move to the left to appease his union backers. TRY looks relatively stable.
Target Spot:
5.40
We believe the ZAR is probably trading too expensive to its EM carry peers for the
following three reasons: a) its growing current account deficit, b) insufficient risk premium
priced in for President Zuma to shift to the left and c) the risk of capital flight.

South Africa’s current
account deficit looks set to
re-widen through 5% into
2011
The current account deficit has traditionally been the Achilles’ heel of South Africa. Having
narrowed to 4.0% of GDP in 2009, the deficit looks set to re-widen through 5%. Unless
massive FDI materialises, portfolio flows will again be critical to finance the current account
gap. Potential ‘big’ FDI deals, such as the sale of Nedbank or MTN to foreign investors,
are set to face growing political resistance. And with foreign purchases of equities
comprising a relatively high 34% of portfolio inflows, slower global activity could weigh.

President Zuma will likely re-
discover his leftist
tendencies ahead of the ANC
meeting in September
Politics in South Africa is set to come into the limelight again in 2H10. Tensions that the
ruling coalition witnessed in 1Q10 with ANC Youth League leader Malema and trade
unions openly criticising their ‘champion’ President Zuma have been temporarily brushed
off by the World Cup euphoria. But with the latter all but over, chances are former
grievances will reappear sooner rather than later. Zuma also faces a critical ANC meeting
in September. Here he will likely re-discover his leftist tendencies in order to re-stabilise
the coalition. This could translate into a more populist tone, including more social
spending and perhaps even embracing calls for a more competitive ZAR.

Foreigners have been pouring money into ZAR assets like it was 2006/07. Back then,
however, South Africa was growing 5-6%. It is now growing closer to 3% and any re-
assessment of global growth prospects leave the ZAR more exposed to capital flight.

Fig 17 Foreigners strong buyers of SA assets in 2010 Fig 18 ZAR is already much stronger than TRY

2009 2008 2010 7.50 7.50

150,000 150,000 TRY/ZAR
2007 2006 2005 7.00 7.00
100,000 100,000 6.50 6.50

50,000 50,000 6.00 6.00

5.50 5.50
0 0
5.00 5.00
-50,000 -50,000
4.50 4.50
(ZARm)
-100,000 -100,000 4.00 4.00
Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Jan-06 Oct-06 Jul-07 Apr-08 Jan-09 Oct-09 Jul-10

Source: SARB, JSE Source: EcoWin

The Turkish government look
set to enact the Fiscal Rule
Law in July …
… paving the way for a
sovereign upgrade
We therefore prefer to be short ZAR through 2H10. Yet with 6m Jibar at 6.82%, selling
the ZAR is expensive. We therefore need to hold a high yield currency against it, and
while it is a close call, we prefer TRY over BRL. The Turkish government should enact
the Fiscal Rule Law in July, which could pave the way for Moody’s to shift to a positive
ratings outlook and a move to investment grade status over coming years. At the same
time we have more faith in the CBT maintaining TRY in a 1.72-1.82 range against the
50:50 EUR:USD basket. And the Turkish Treasury has already undertaken all of its
external financing for 2010 and FX reserves more than cover external short-term debt.

Dorothée Gasser-Châteauvieux, London +44 20 7767 6023: Sengül Dağdeviren, Istanbul +90 212 329 0752

11
 FX Top Trades July 2010

Riksbank plays catch-up

The trade
Sell NOK/SEK six month forward
Target
At 1.20 NOK/SEK remains at
a premium to pre-crisis levels
Sell NOK/SEK 6-month forward
EUR/NOK & EUR/SEK underperformance is set to continue in 2H10. An accelerating
Entry:
Swedish economy justifies a Riksbank moving up through its monetary policy gears
1.18
and stands in contrast to a Norges Bank that has shifted into neutral. Sell NOK/SEK.
Spot:
1.13
It is easy to condemn the Norwegian krone and Swedish krona to the same fate. Both fell
sharply in late 2008 as less liquid currencies suffered, but the NOK has since recovered
more quickly than the SEK. At 1.20 NOK/SEK remains at a premium to pre-crisis levels
and we look for this premium to dissipate in full through 2H10.

Fig 19 Norges Bank interest rate projections Fig 20 NOK/SEK vs Latvia’s 5Y sovereign CDS

(%) (%) NOK/SEK Latvia 5Y CDS (rhs) (bp)

6 6 1.35 1200
Jun-09 Oct-09
5 5 1.30 1000
Mar-10 Jun-10
1.25 800
4 4
1.20 600
3 3
1.15 400
2 2 1.10 200

1 1 1.05 0
Mar08 Sep08 Mar09 Sep09 Mar10 Sep10 Mar11 Sep11 Jan08 Jul08 Jan09 Jul09 Jan10 Jul10

Source: Norges Bank, ING Source: Bloomberg, EcoWin

Norges Bank cites that With intense market scrutiny of fiscal discipline Norway, with its natural oil wealth, is held
private consumption has up as beacon of safety for government finance. There is no reason for this to change for
evolved ‘considerably lower’ the foreseeable future. Instead, it is the direction of monetary policy that has been subject
than anticipated to review. On 23 June Norges Bank completed a full pullback from a position as the only
European central bank raising interest rates (75bp to 2%). New projections confirm
further hikes are postponed for the rest of the year. Back in October interest rates were
seen at 2.75% by end-2010. Amongst other factors, Norges Bank cites that private
consumption has evolved ‘considerably lower’ than anticipated.

Having upgraded its forecast
for 2010 GDP growth to 3.8%,
the Riksbank expects to be
hiking rates another 50bp
this year
This is in stark contrast to the situation in Sweden, where a domestic-led upswing saw
the Riksbank begin removing monetary policy stimulus on 1 July with a 25bp hike to
0.50%. Of particular worry is record lending to households, accelerating house prices and
an earlier than anticipated peak in unemployment. Having upgraded its forecast for 2010
GDP growth to 3.8% from 2.2% (with private consumption now seen at 3.5% YoY),
Swedish rates are now seen ending the year at 1%, alongside further SEK appreciation.

Also, Baltic-led downside risk for SEK is subsiding. In a sign of confidence, credit agency
Moody’s moved Lithuania, Latvia and Estonia to a ‘stable outlook’ in late March, while in
last month’s Financial Stability Report the Riksbank lowered Swedish bank loan loss
estimates by SEK48bn to SEK61bn for 2011-12. Although SEK-positive we caution that
event risk might stem from elections in Latvia this October.

The Swedish debt office has Directional support for our bearish NOK/SEK view comes from the fact that Sweden’s
a short ‘strategic’ position in debt office has a short ‘strategic’ position in EUR/SEK (entered into above 11.00). This
EUR/SEK position will only be unwound gradually so as not to impact the spot market.

Tom Levinson, FX Strategist, London +44 20 7767 8057

12
 FX Top Trades July 2010

Top trades summary table

Top trades performance

1H10

The trade Entry Target Spot Profit/loss Follow-up strategy

1 SELL USD/KZT 6mth NDF 148.4 140.0 146.9 1.1% CLOSE POSITION - 27 May

2 SELL GBP/NOK 6mth fwd 9.56 8.85 9.30 2.7% CLOSE POSITION – 28 Jan

3 SELL USD/INR 6mth NDF – scale in** 47.4 44.5 47.10 0.3% CLOSE POSITION - 5 Feb

4 BUY Down-and-In EUR 6mth option. 27% 1.46, 100% 100% 270% of CLOSE POSITION - 5 Feb
Barrier 1.46 initial
premium

5 SELL EUR/AUD 6mth fwd 1.65 1.50 1.597 3.2% CLOSE POSITION - 2 Feb

6 SELL EUR/CZK 6mth fwd – scale in** 26.2 & 26.1 24.6 25.7 2.0% CLOSE POSITION - 27 May

7 BUY USD/JPY 6mth fwd – scale in 89.7 100.0 89.5 0.2% CLOSE POSITION - 5 Feb

8 SELL USD/OITP & BUY USD/Majors 100.0 5% 1.0649 6.5% CLOSE POSITION - 27 May

9 BUY 3Y KTB & swap into USD 120bp 50bp 50bp 70bp TAKE PROFIT - 30 March

10 BUY CAD/ZAR 6mth fwd – scale in** 7.24 7.50 7.50 1.8% TAKE PROFIT - 23 April

2H09

The trade Entry Target Spot Profit/loss Follow-up strategy

1 SELL RON/PLN 6mth fwd 0.9901 0.93 0.98 1.0% CLOSE POSITION – 16 Dec

2 SELL USD/INR 3mth NDF 48.35 46.5 49.15 -1.6% STOP LOSS – 17 Aug

3 SELL EUR/GBP 6mth fwd 0.865 0.8 0.891 -3.0% CLOSE POSITION – 16 Dec

4 SELL USD/UAH 2mth NDF vs BUY 3mth @ 8.15 6mth NDF 9.5 -8.9% CLOSE POSITION – 16 Dec
6mth NDF 6mth @ 9.55 to 10.50

5 SELL NOK/SEK 6mth fwd 1.204 1.15 1.19 1.0% TAKE PROFIT - 28 Sep

6 USD/JPY seagull with barriers Premium cost 500% return Premium Loss CLOSE POSITION – 16 Dec
US$9.2k US$21.5k US$27.5k

7 EUR/CHF butterfly – 6mth Premium cost 50% return Premium Loss CLOSE POSITION – 16 Dec
CHF23.9k CHF23k CHF12.3k

8 BUY AUD/CAD 6mth fwd 0.9135 0.98 0.963 7.5% CLOSE POSITION – 16 Dec

9 SELL NZD/RUB 6mth fwd 20.5 18 22.2 -8.3% STOP LOSS – 11 Aug

10 BUY BRL/ZAR 6mth fwd 4.03 4.3 4.21 4.5% TAKE PROFIT – 25 Aug

1H09

The trade Entry Target Spot Profit/loss Follow-up strategy

1 SELL USD/JPY 6mth fwd 90.74 80 96.6 -0.7% HALF-SIZED POSITION CLOSED – 17
Feb

2 SELL CZK/HUF 6mth fwd 10.36 9.7 10.4 -3.8% STOP LOSS – 30 Jan

3 BUY USD/SGD 6mth fwd 1.485 1.6 1.45 -1.5% POSITION EXPIRED – 15 Jun

4 BUY CHF/SEK 6mth fwd 6.87 7.60 (7.30) 7.1 7.3% TAKE PROFIT – 15 Jan

5 BUY USD/SAR 12mth fwd 3.765 3.83 3.75 -0.5% CLOSE POSITION – 15 Jun

6 SELL CAD/NZD 6mth forward 1.503 1.35 1.37 0.5% STOP LOSS – 14 Jan

7 SELL USD/TRY 6mth fwd 1.67 1.45 1.53 -5.1% STOP LOSS ON HALF SIZED
POSITION – 5 Mar

8 BUY EUR/DKK 12mth fwd 7.5 8.2 7.45 -0.5% CLOSE POSITION – 15 Jun

13
 FX Top Trades July 2010

9 SELL USD/MXN 6mth fwd 14.05 12.5 13.1 -2.9% STOP LOSS – 30 Jan

10 SELL EUR/GBP 6mth fwd 0.897 0.83 0.86 -2.6% STOP LOSS – 22 Jan

2H08

The trade Entry Target Spot Profit/loss Follow-up strategy

1 SELL USD/UAH 6mth fwd 4.89 6% 4.95 -1.2% POSITION CLOSED – 5 Sep

2 SELL GBP/AUD 2.07 1.95 2.55 -6.2% STOP LOSS – 11 Sep

3 SELL TRY/BRL 1.31 1.2 1.5 -6.4% POSITION CLOSED – 5 Sep

4 BUY USD/JPY 6mth 104-112 strangle 2.83% 5% 6.18% 118% of POSITION CLOSED – 8 Oct
premium

5 SELL ‘Big 3’ NZD TWI 100 90 97.67 1.2% POSITION CLOSED – 16 Oct

6 SELL EUR/PLN 3.36 3.1 3.59 2.3% TAKE PROFIT – 13 Aug

7 BUY RUB 6mth fwd vs 55USD:45EUR 29.58/29.77 2% 30.86 -3.8% POSITION CLOSED – 16 Oct
basket

8 BUY USD/SGD 1.365 1.39 1.48 -0.7% STOP LOSS – 14 Jul

9 BUY USD/CAD 1.01/1.0450 1.08 1.195 17.3% POSITION CLOSED – 16 Oct

10 BUY EUR/CHF 1.62 1.67 1.587 -1.3% POSITION CLOSED – 5 Sep

1H08

The trade Entry Target Spot Profit/loss Follow-up strategy

1 BUY 8mth vega-neutral EUR/SKK Cost €135k Payout €400k - €185k TAKE PROFIT - 24 Apr
butterfly

2 BUY GBP/USD 6mth one touch option, 25% 1.91/100% - 7.5% of HALF POSITION SOLD - 15 Jan
barrier 1.91 payout HALF POSITION EXPIRED - 3 Jun

3 BUY AUD/CAD 0.88 0.96 0.97 2.4% TAKE PROFIT - 15 Jan

4 SELL TRY/RUB 20.73 16.75 19.3 7.0% TAKE PROFIT - 30 Apr

5 SELL USD/AED 3.66 3.56 3.67 -0.3% CLOSE POSITION - 26 Jun

6 SELL EUR/PLN 3.615 3.36 3.36 4.1% TAKE PROFIT - 23 Jun

7 BUY BRL/RON 1.33 1.5 1.46 8.5% TAKE PROFIT - 6 Mar

8 BUY 3x12 USD/SGD fwd/fwd swap -160 -130 - - TAKE PROFIT - 22 Jan

9 SELL NOK/SEK 1.158 1.12 1.18 -2.9% CLOSE POSITION - 26 Jun

10 SELL EUR/CHF 1.658 1.54 1.62 2.8% TAKE PROFIT - 18 Apr

Total profit/loss* 23.0%

* Since inception. Does not include profit/loss from option positions
Source: Bloomberg, ING

14
 FX Top Trades July 2010

Top trades 1H10 – review

Fig 21 USD/KZT KZT to benefit from FX regime change

149 149 • Sell USD/KZT 6-month outright NDF

USD/KZT Dec09: ‘KZT will likely embark on a gradual strengthening path
vs USD in 2010. The authorities are considering a change in FX
148 148
regime to allow more KZT flexibility’.
Now: Local authorities started the year embracing more KZT
147 147 strength, but look as though they got scared when the Eurozone
debt crisis took off. Currently they are managing USD/KZT in a
very tight range. We made 1.1% on the NDF trade.
146 146
18Dec 18Jan 18Feb 18Mar 18Apr 18May 18Jun

Fig 22 GBP/NOK Sifting through the wreckage

10.00 10.00 • Sell GBP/NOK 6-month forward

GBP/NOK Dec09: ‘2010 may be the year when those who spent too heavily
9.75 9.75
pay a price. GBP is in the front line, with its fiscal credentials
9.50 9.50 brought into focus by a weak AAA-rating and an election. Backed
by a potent monetary/fiscal policy mix, NOK is a willing partner’.
9.25 9.25
Now: GBP/NOK fell to a new low in March allowing us to pick up
9.00 9.00 a 2.7% profit. However, UK activity data has not been as bad as
first feared and a tight UK budget on 22 June assuaged some of
8.75 8.75 the fears over a UK debt downgrade.
18Dec 18Jan 18Feb 18Mar 18Apr 18May 18Jun

Fig 23 USD/INR Playing the ‘I’ in BRIC

48 48 • Sell USD/INR 6-month outright NDF: scale in

USD/INR Dec09: ‘Like many emerging market economies, India suffered

47 47 from the collapse in global trade flows in late 08/early 09.
However, growth rates in India are picking up again, investor
46 46 flows are returning and the RBI is getting ready to tighten’.
Now: We managed to squeeze out a small profit in this trade
45 45 before the Eurozone debt crisis spilled over into global equity
markets and saw international investors retreat from Asian FX
44 44 and equity plays.
18Dec 18Jan 18Feb 18Mar 18Apr 18May 18Jun

Fig 24 EUR/CHF Cracks appearing in the SNB’s 1.50 floor

1.52 1.52 • Buy Down-And-In EUR 6-month option, Barrier 1.46

Dec09: ‘At its December meeting, the SNB subtly changed its
1.47 1.47
mission statement from preventing any CHF appreciation against
1.42 1.42 the EUR to preventing any excessive appreciation. Cracks are
appearing in the SNB’s 1.50 floor in EUR/CHF’.
1.37 1.37
Now: This trade worked out well and perhaps we should have
1.32 1.32
been more ambitious in our downside targets. Having
EUR/CHF undertaken massive FX intervention, the SNB have slowly
1.27 1.27 stepped back from the market and have so far let EUR/CHF
18Dec 18Jan 18Feb 18Mar 18Apr 18May 18Jun trade down to 1.30.

All sources: EcoWin, Bloomberg

15
 FX Top Trades July 2010

Fig 25 EUR/AUD Advance Australia Fair

1.65 1.65 • Sell EUR/AUD 6-month forward: scale in

EUR/AUD
1.60 1.60 Dec09: ‘AUD has been a crowded trade since equity markets
marked a low in March. Yet, much like Australia’s national
1.55 1.55
anthem, conditions look ripe for AUD to sustain its advance in
1.50 1.50 2010, even should a trend USD recovery take hold’.

1.45 1.45 Now: The trend call was right on this one. Unfortunately we were
stopped out for only a 3.2% profit rather than the 10% decline
1.40 1.40
seen by EUR/AUD.
1.35 1.35
18Dec 18Jan 18Feb 18Mar 18Apr 18May 18Jun

Fig 26 EUR/CZK Trade trends favour CZK

26.5 26.5 • Sell EUR/CZK 6-month forward: scale in

EUR/CZK
Dec09: ‘The expected further increase of the Czech foreign-trade
26.2 26.2
surplus should fuel appreciation of the koruna over a 12-month
25.9 25.9 horizon. And authorities will find it hard to argue with trade-driven
CZK strength’.
25.6 25.6
Now: We secured a 2% gain on this trade, with the trend working
well until the Greek crisis triggered a broader bout of risk
25.3 25.3
aversion in April. The theme of a strong Czech trade balance
played out, with higher exports and slower imports.
25.0 25.0
18Dec 18Jan 18Feb 18Mar 18Apr 18May 18Jun

Fig 27 USD/JPY Tokyo see cents

96 96 • Buy USD/JPY 6-month forward: scale in

USD/JPY
Dec09: ‘Having initially shown benign neglect, the new Japanese
94 94
administration was forced to address JPY strength in December.
92 92 Limited JPY upside and the prospect of the Fed withdrawing
liquidity suggest USD/JPY rallies in 2010’.
90 90
Now: This trade never really got off the ground, this we were
lucky to secure a small profit. Our view had been premised on
88 88
the Fed ready to tighten policy. We were premature with this call
86 86 and don’t see the Fed tightening until 3Q11 now.
18Dec 18Jan 18Feb 18Mar 18Apr 18May 18Jun

Trade

Fig 28 USD Majors & OITP Rebalancing: Solutions to old problems

82 137 • Sell USD/OITP and buy USD/Majors

USD Majors USD OITP (rhs) Dec09: ‘Calls for global rebalancing are not new, but have been
80 135
formalised at the G20 summit in Pittsburgh. A dollar adjustment
78 133
is seen as central to this objective, but in 2010 this will have to
come against EM not DM currencies’.
76 131
Now: This happened to secure a very large 6% profit for us. We
74 129
knew the USD had fallen too far against the majors and looked
for USD/EM to catch up. However, the gains came from the
72 127 Majors falling, rather than EM strengthening against the dollar.
18Dec 18Jan 18Feb 18Mar 18Apr 18May 18Jun Thus we were right for the wrong reasons.

All sources: EcoWin, Bloomberg

16
 FX Top Trades July 2010

Fig 29 KTB bond swap KTB bond swap: Asia’s best carry trade

• Buy 3Y KTB and swap into USD

180 180
KTB bond swap Dec09: ‘The Lehman panic caused CCS rates to plunge and
150 150 KTB yields to spike. These now are slowly normalising. They
remain historically wide, however, which makes swapping KTBs
120 120
into USD Asia’s top carry trade’.
90 90
Now: Improved market conditions into March allowed us to take
60 60 a 70bp profit on this swap position.

30 30
Dec09 Jan10 Feb10 Mar10 Apr10 May10 Jun10

Fig 30 CAD/ZAR Hedging the portfolio

7.5 7.5 • Buy CAD/ZAR 6-month forward: scale in

7.4 7.4 Dec09: ‘Our Top Trade portfolio leans towards a ‘risk-on’ stance,
generally favouring Asia and EM, while allowing for a slightly
7.3 7.3
firmer dollar against the majors. We also add a small hedge in
7.2 7.2 CAD/ZAR should the risk environment deteriorate’.

7.1 7.1 Now: We earned a small profit on this trade – this being seen as
CAD/ZAR our hedge trade under a risk-off scenario. ZAR did fall marginally
7.0 7.0
more than CAD when equities markets turned lower in 2Q.
6.9 6.9
18Dec 18Jan 18Feb 18Mar 18Apr 18May 18Jun

All sources: EcoWin, Bloomberg

17
 FX Top Trades July 2010

Research analyst contacts

Developed Markets Title Telephone Email

London Mark Cliffe Global Head of Financial Markets Research +44 20 7767 6283 mark.cliffe@uk.ing.com
Rob Carnell Chief International Economist +44 20 7767 6909 rob.carnell@uk.ing.com
James Knightley Senior Economist, UK, US, Scandinavia +44 20 7767 6614 james.knightley@uk.ing.com

Chris Turner Head of Foreign Exchange Strategy +44 20 7767 1610 christopher.turner@uk.ing.com
Tom Levinson Foreign Exchange Strategist +44 20 7767 8057 tom.levinson@uk.ing.com

Shaunn Griffiths Senior Credit Analyst +44 20 7767 6535 shaunn.griffiths@uk.ing.com

Amsterdam Maarten Leen Principal Economist +31 20 563 4406 maarten.leen@ing.nl

Martin van Vliet Senior Economist, Eurozone +31 20 563 9528 martin.van.vliet@ing.nl
Teunis Brosens Senior Economist, US +31 20 563 6167 teunis.brosens@ing.nl
Dimitry Fleming Economist, Netherlands +31 20 563 9497 dimitry.fleming@ing.nl

Padhraic Garvey Head of Developed Markets Debt Strategy +31 20 563 8955 padhraic.garvey@ingbank.com
Jeroen van den Broek Head of Developed Markets Credit Strategy +31 20 563 8959 jeroen.van.den.broek@ingbank.com
Wilson Chin Senior Debt Strategist +31 20 563 8956 wilson.chin@ingbank.com
Maureen Schuller Senior Credit Strategist +31 20 563 8941 maureen.schuller@ingbank.com
Han Tong Quantitative Strategist +31 20 563 8957 han.tong@ingbank.com

Mark Harmer Head of Developed Markets Credit Research +31 20 563 8964 mark.harmer@ingbank.com
Eleonore Lamberty Senior Credit Analyst +31 20 563 8976 eleonore.lamberty@ingbank.com

Roelof-Jan van den Akker Technical Analyst +31 20 563 8178 roelof-jan.van.den.akker@ingbank.com

Brussels Peter Vanden Houte Chief Economist, Belgium, Eurozone +32 2 547 8009 peter.vandenhoute@ing.be
Carsten Brzeski Senior Economist, Germany, Eurozone +32 2 547 8652 carsten.brzeski@ing.be
Oscar Bernal Economist, France +32 2 547 3995 oscar.bernal@ing.be
Julien Manceaux Economist, Switzerland +32 2 547 3350 julien.manceaux@ing.be
Philippe Ledent Economist, Belgium +32 2 547 3161 philippe.ledent@ing.be

Milan Paolo Pizzoli Senior Economist, EMU, Italy, Greece +39 02 89629 3630 paolo.pizzoli@ing.it

Emerging Markets Title Telephone Email

London Charles Robertson Head of Research & Chief Economist, EMEA +44 20 7767 5310 charles.robertson@uk.ing.com
Agata Urbańska Senior Economist, Emerging Europe +44 20 7767 6970 agata.urbanska@uk.ing.com
Dorothée Gasser-Châteauvieux Senior Economist, Middle East and Africa +44 20 7767 6023 dorothee.gasser@uk.ing.com
Courtney Ruesch Research Assistant +44 20 7767 5567 courtney.ruesch@uk.ing.com

New York H David Spegel Global Head of Emerging Markets Strategy +1 646 424 6464 david.spegel@americas.ing.com
Natalia Corfield Corporate Debt Strategist +1 646 424 6086 natalia.corfield@americas.ing.com

Brazil Zeina Abdel Latif Chief Economist, Brazil +55 11 4504 6131 zeina.latif@americas.ing.com

Czech Rep Vojtech Benda Senior Economist, Czech Republic +420 2 5747 4432 vojtech.benda@ing.cz

Hungary David Nemeth Senior Economist, Hungary +36 1 255 5581 nemeth.david@ing.hu

India Deepali Bhargava Economist, India +91 22 2499 8114 deepali.bhargava@ingvysyabank.com

Mexico David Franco Chief Economist, Mexico +52 55 5258 2095 david.franco@americas.ing.com
Ezequiel Garcia Economist, Mexico +52 55 5258 2064 ezequiel.garcia@americas.ing.com

Philippines Joey Cuyegkeng Economist, Philippines +632 479 8855 joey.cuyegkeng@asia.ing.com

Poland Mateusz Szczurek Chief Economist, Poland +48 22 820 4698 mateusz.szczurek@ingbank.pl
Rafal Benecki Senior Economist, Poland +48 22 820 4696 rafal.benecki@ingbank.pl
Grzegorz Ogonek Economist, Poland +48 22 820 4608 grzegorz.ogonek@ingbank.pl

Romania Nicolaie Alexandru-Chidesciuc Chief Economist, Romania +40 21 209 1294 nicolaie.alexandru@ing.ro
Vlad Muscalu Economist, Romania +40 21 209 1393 vlad.muscalu@ing.ro

Russia Stanislav Ponomarenko Head of Research, Russia +7 495 755 5480 stanislav.ponomarenko@ingbank.com
Dmitry Polevoy Economist, Russia & Kazakhstan +7 495 755 7994 dmitry.polevoy@ingbank.com

Singapore Tim Condon Head of Research & Chief Economist, Asia +65 6232 6020 tim.condon@asia.ing.com
Prakash Sakpal Economist, Asia +65 6232 6181 prakashb.sakpal@asia.ing.com

Slovakia Eduard Hagara Senior Economist, Slovakia +421 2 5934 6392 eduard.hagara@ing.sk

Turkey Sengül Dağdeviren Head of Research & Chief Economist, Turkey +90 212 329 0752 sengul.dagdeviren@ingbank.com.tr
Pınar Uslu Senior Economist, Turkey +90 212 329 0751 pinar.uslu@ingbank.com.tr
Ezgi Gülbaş Economist, Turkey +90 212 329 0753 ezgi.gulbas@ingbank.com.tr

Ukraine Alexander Pecherytsyn Head of Research, Ukraine +38 044 230 3017 alexander.pecherytsyn@ingbank.com
Halyna Antonenko Financial Markets Research Analyst +38 044 590 3584 halyna.antonenko@ingbank.com

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 FX Top Trades July 2010

Disclosures Appendix
ANALYST CERTIFICATION
The analyst(s) who prepared this report hereby certifies that the views expressed in this report accurately reflect his/her
personal views about the subject securities or issuers and no part of his/her compensation was, is, or will be directly or
indirectly related to the inclusion of specific recommendations or views in this report.

IMPORTANT DISCLOSURES
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The remuneration of research analysts is not tied to specific investment banking transactions performed by ING Group
although it is based in part on overall revenues, to which investment banking contribute.
Securities prices: Prices are taken as of the previous day’s close on the home market unless otherwise stated.
Conflicts of interest policy. ING manages conflicts of interest arising as a result of the preparation and publication of research
through its use of internal databases, notifications by the relevant employees and Chinese walls as monitored by ING
Compliance. For further details see our research policies page at http://research.ing.com.

FOREIGN AFFILIATES DISCLOSURES

Each ING legal entity which produces research is a subsidiary, branch or affiliate of ING Bank N.V. See back page for the
addresses and primary securities regulator for each of these entities.

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 FX Top Trades July 2010

AMSTERDAM BRUSSELS LONDON NEW YORK SINGAPORE

Tel: 31 20 563 9111
Bratislava
Tel: 421 2 5934 6111
Bucharest
Tel: 40 21 222 1600
Budapest
Tel: 36 1 235 8800
Buenos Aires
Tel: 54 11 4310 4700
Dublin
Tel: 353 1 638 4000
Tel: 32 2 547 2111
Geneva
Tel: 41 22 593 8050
Hong Kong
Tel: 852 2848 8488
Istanbul
Tel: 90 212 367 7011
Kiev
Tel: 380 44 230 3030
Madrid
Tel: 34 91 789 8880
Tel: 44 20 7767 1000
Manila
Tel: 63 2 479 8888
Mexico City
Tel: 52 55 5258 2199
Milan
Tel: 39 02 89629 3610
Moscow
Tel: 7 495 755 5400
Paris
Tel: 33 1 56 39 32 84
Tel: 1 646 424 6000
Prague
Tel: 420 257 473 111
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Tel: 56 2 659 2700
Sao Paulo
Tel: 55 11 4504 6000
Seoul
Tel: 82 2 317 1800
Shanghai
Tel: 86 21 6841 3355
Tel: 65 6535 3688
Sofia
Tel: 359 2 917 6400
Taipei
Tel: 886 2 2734 7600
Tokyo
Tel: 81 3 5210 0100
Warsaw
Tel: 48 22 820 5018

Research offices: legal entity/address/primary securities regulator

Amsterdam ING Bank N.V., Foppingadreef 7, Amsterdam, Netherlands, 1102BD. Netherlands Authority for the Financial Markets
Bratislava ING Bank N.V., pobocka zahranicnej banky, Jesenskeho 4/C, 811 02 Bratislava, Slovak Republic. National Bank of Slovakia
Brussels ING Belgium S.A./N.V., Avenue Marnix 24, Brussels, Belgium, B-1000. Banking Finance and Insurance Commission
Bucharest ING Bank N.V. Bucharest Branch, 11-13 Kiseleff Avenue, PO Box 2-208, 011342, Bucharest 1, Romania
Romanian National Securities and Exchange Commission
Budapest ING Bank N.V. Hungary Branch, Dozsa Gyorgy ut 84\B, H - 1068 Budapest, Hungary. Hungarian Financial Supervisory Authority
Hong Kong ING Bank N.V. Hong Kong Branch, 39/F, One International Finance Centre, Central Hong Kong. Hong Kong Monetary Authority
Istanbul ING Bank A.S, ING Bank Headquarters, Eski Buyukdere Cad, Ayazaga Koyyolu No:6, Maslak 34467, Istanbul, Turkey.
Capital Markets Board
Kiev ING Bank Ukraine JSC, 30-a, Spaska Street, Kiev, Ukraine, 04070 Ukrainian Securities and Stock Commission
London ING Bank N.V. London Branch, 60 London Wall, London EC2M 5TQ, United Kingdom. Authorised by the Dutch Central Bank
Manila ING Bank N.V. Manila Branch, 21/F Tower I, Ayala Avenue, 1226 Makati City, Philippines. Philippine Securities and Exchange Commission
Mexico City ING Bank (Mexico) SA, Bosques de Alisos 45-B, Piso 4, Bosques de Las Lomas, 05120, Mexico City, Mexico. Comisión Nacional
Bancaria y de Valores
Milan ING Bank N.V. Milano, Via Paleocapa, 5, Milano, Italy, 20121. Commissione Nazionale per le Società e la Borsa
Moscow ING Bank (Eurasia) ZAO, 36, Krasnoproletarskaya ulitsa, 127473 Moscow, Russia. Federal Financial Markets Service
Mumbai ING Vysya Bank Limited, A Wing, Shivsagar Estate, 2nd Floor, South Wing, Dr. Annie Besant Road, Worli, Mumbai, 400 018. India
Securities and Exchange Board of India
New York ING Financial Markets LLC, 1325 Avenue of the Americas, New York, United States,10019. Securities and Exchange Commission
Prague ING Bank N.V. Prague Branch, Nadrazni 25, 150 00 Prague 5, Czech Republic. Czech National Bank
Sao Paulo ING Bank N.V. Sao Paulo Branch, Ave. Presidente Juscelino Kubistchek, 510, 3rd floor, Sao Paulo, Brazil 04543-000. Securities and
Exchange Commission of Brazil
Singapore ING Bank N.V. Singapore Branch, 19/F Republic Plaza, 9 Raffles Place, #19-02, Singapore, 048619. Monetary Authority of Singapore
Sofia ING Bank N.V. Sofia Branch, 49B Bulgaria Blvd, Sofia 1404 Bulgaria. Financial Supervision Commission
Warsaw ING Bank Slaski S.A, Plac Trzech Krzyzy, 10/14, Warsaw, Poland, 00-499. Polish Financial Supervision Authority

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