FX Markets Weekly: The Upcoming Presidential Election in France (Raphael Brun-Aguerre)

Global FX Strategy
April 20, 2012
FX Markets Weekly
Outlook: France adds to the frisson The dollar continues to traverse three-month ranges on below-average volumes, flattening volatility to its lowest level in four years and creating one of the stingiest return environments for currency managers since the Lehman crisis. Blame the collection of low-intensity local dramas in Asia, Europe and the US, which largely offset for the broad dollar. The case for a range break remains weak since the chain of events which converts a local event to a global one requires too many things to go all right (Fed tightening) or all wrong (China, Europe). French elections could confuse an always-complicated European situation in Q2. If the euro will break the 1.30 - 1.34 range which has held for most of the year, it should do so this quarter. By comparison China, Japan and the US provide fewer triggers for large FX moves over the next few weeks. Strategy still focuses on exploiting mean-reversion in FX. Macro Trade Recommendations With the global macro picture neither firm nor weak, country-specific stories remain more influential. Continue to exploit persistent overreaction in currency markets. Sell GBP/USD as the BoEs belated recognition of inflation risks is no foundation for currency strength during economic stagnation. The shift in the BoCs policy bias is constructive medium-term but terms of trade are deteriorating. Took profits on short CAD/JPY April 13. Now sell a 2-mo 0.9850 USD/CAD put with RKI 0.9600. Hold 2-mo 1.00 AUD/USD put, stay short NZD/USD call (0.84 strike, 0.85 RKI) and hold USD/JPY 1x2 put spread. FX Derivatives Double no-touch (DNT) flows are supplying gamma to the street and reinforcing narrow spot ranges. Expect those ranges to hold and back end vols/wings to soften over the next few weeks. USD/PLN vs. EUR/PLN possesses attractive optics as a long/short gamma RV buy/sell 2M vol swaps. Collect risk premium in a quasi-vol neutral fashion by selling 1M vol swaps against buying 1M1M FVAs in CAD/MXN. In skews, we find GBP/CAD risk-reversals are overly rich in favor of GBP calls/CAD puts. Technical Strategy JPY is at risk of a bearish shift following the reversal from critical levels against the USD and on the crosses. The backdrop for CAD continues to improve after holding key range highs: buy CAD/JPY. Stay short NZD/CAD, GBP/USD, EUR/KRW, EUR/INR and PLN/HUF; and long USD/SEK, USD/CZK, EUR/CZK and USD/ZAR. Research Note The upcoming Presidential election in France (Raphael Brun-Aguerre) Model-drive strategies and fund manager performance HFRs monthly indices released last week show variable performance. global macro -1% in March (+1% YTD); EM funds -1.2% in March (+7.7% YTD); and FX funds -0.8% in March (-0.9% YTD). Risk scenarios to accompany 2012 forecasts Scenarios from Key Currency Views published April 13 are collated here.
www.morganmarkets.com/GlobalFXStrategy J.P. Morgan Securities Ltd.
John NormandAC
(44-20) 7325-5222 john.normand@jpmorgan.com
Paul Meggyesi
(44-20) 7859-6714 paul.meggyesi@jpmorgan.com
Arindam Sandilya
(1-212) 834-2304 arindam.x.sandilya@jpmorgan.com
Niall OConnor
(1-212) 834-5108 niall.oconnor@jpmorgan.com
Contents
Outlook Macro Trade Recommendations FX Derivatives Technical Strategy Global FX carry trade monitor Models and manager performance Research Notes Market movers Event risk calendar Central bank meetings in 2012 J.P. Morgan Forecasts Global central bank forecasts FX vs forwards & consensus Rates, credit, equities & commodities Risk Scenarios Global growth and inflation forecasts Sovereign credit ratings and actions Gov't and bank bond redemptions Research Notes on morganmarkets.com Global FX Strategy contact page 31 32 33 34 36 38 39 40 44 2 8 14 18 20 22 24 26 28 30
The certifying analyst is indicated by an AC. See page 42 for analyst certification and important legal and regulatory disclosures.
Global FX Strategy FX Markets Weekly April 20, 2012 John Normand (44-20) 7325-5222 john.normand@jpmorgan.com J.P. Morgan Securities Ltd.
Outlook: France adds to the frisson

The dollar continues to traverse three-month ranges on below-average volumes, flattening volatility to its lowest level in four years and creating one of the stingiest return environments for currency managers since the Lehman crisis. The pattern owes to a collection of low-intensity, local dramas which are largely offsetting, including funding stress and political risk in Europe (USD positive); a sidelined Fed (USD negative); Chinas Q1 deceleration (USD positive) but its Q2 promise of further stimulus (USD negative). The case for a range break remains weak since the chain of events which converts a local event to a global one requires too many things to go all right (Fed tightening) or all wrong (China, Europe). French elections could confuse an alwayscomplicated European situation in Q2. If the euro will break the 1.30-1.34 range which has held for most of the year, it should do so this quarter. By comparison China, Japan and the US provide fewer triggers for large FX moves over the next few weeks. Trades: In the macro portfolio, took profits on short CAD/JPY. Sell GBP/USD in cash and sell a USD/CAD put (0.98 strike with 0.96 RKI). In the technical portfolio, buy CAD/JPY, sell GBP/USD and stay short NZD/CAD. In the derivatives portfolio, stay long G-10 vol vs EM vol (NZD/USD vs USD/MXN). Next week: French elections, flash PMIs in China and Europe, FOMC & BoJ
Chart 1: FX futures volumes, which correlate 80% with OTC activity, are down 7% year-on-year in April
Average daily volume for FX futures on the Chicago Mercantile Exchange across all currencies (G-10 plus MXN, BRL, ZAR, RUB and CNY). Volumes expressed in $bn (left scale) and growth year-on-year (right scale)
160 140 120 100 80 60 40 20 0 07 CME FX futures avg daily volume all currencies, $bn, lhs CME FX futures growth oya, % (rhs) 08 09 10 11 12 100% 50% 0% -50% -100% 200% 150%
Source: J.P. Morgan
Chart 2: Currency manager returns are down over the past year
14% 11% 8% 5% 2% -1% -4% -7% -10% 06
Source: J.P. Morgan
Rolling 12-mo returns on two composite indices of currency manager performance

HFR Currency BTOP FX
07
08
09
10
11
12
The dollar continues to traverse three-month ranges on below-average volumes (chart 1), flattening volatility to its lowest level in four years (VXY Global at 9.8%) and creating one of the stingiest return environments for currency managers since the Lehman crisis (chart 2). We have discussed previously the reasons for this pattern: a collection of low-intensity, local dramas which are largely offsetting, including funding stress and political risk in Europe (USD positive); a sidelined Fed (USD negative); Chinas Q1 deceleration (USD positive) but its Q2 promise of further stimulus (USD negative). Even though currencies are the asset class most sensitive to regional divergences (because FX is simply a relative price), this abundance of cross-currents has become too much of a good thing for anyone but the best of range-traders.
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The alternative strategy is usually to earn carry, which would be as profitable in FX as in credit were it not for the fact that most high-yield currencies belong to commodity exporters (so exposed to China) or central banks inclined to intervene aggressively (Brazil). Given these offsets it is unsurprising that the trade-weighted USD continues to weave between 80 and 82 on the J.P. Morgan index (JPMQUSD) and 78 and 81 on the DXY[1] even given the gravity of many regional developments. The case for a range break remains weak since the chain of events which would convert a local event to a global one requires too many things to all go right (Fed tightening) or all go wrong (China, Europe). French elections could confuse an alwayscomplicated European situation in Q2. If the euro will break
JPMQUSD is diversified across 16 major and emerging market currencies while DXY is weighted 75% towards European pairs.
[1]
the 1.30-1.34 range which has held for most of the year, it should do so this quarter. By comparison China, Japan and the US provide fewer triggers for large currency moves over the next few weeks. Portfolio strategy still focuses on exploiting mean-reversion in commodity currencies. Add a short in GBP to hedge European stress in the most overrated European currency.
Chart 3: Although the dollar is down this year, it sits 2% stronger than it should be given the collapse in FX volatility
JPM nominal effective exchange rate for USD (JPMQUSD on Bloomberg) versus VXY Global index of 3-mo implied vol across 22 currencies (JPMVXYGL).
88 86 84 82 80 78 76
JPM USD nominal trade-wtd index VXY Global
17 16 15 14 13 12 11 10 9
USD too high or volatility too low?

Compared to the collapse in FX volatility this year from 12.5% to 9.8% on the VXY Global, the dollars stability looks odd. It should have fallen about twice as much as it has this year by 3% trade-weighted rather than its actual 1.5% decline given the dollars typical use as a funding currency when liquidity is high and volatility falling. But 2012 is an atypical year in almost every region. The Bank of Japans experimental inflation target has animated many to fund in yen instead; Chinas slowdown has dented interest in owning commodity currencies which normally benefit from a high-liquidity environment; and Europe is managing an unprecedented combination of recession, bank deleveraging, supply-side reform and debt restructuring. By comparison, the US looks outright boring: there is little reason to question the economys 2.5% growth clip, the corporate profits expansion or Fed policy until the fiscal policy debate takes shape in Q3 or Q4. (That drama might eclipse last summers debt ceiling debacle, however.) Momentum will develop and ranges will break when any of these local dramas intensifies sufficiently to create systemic risk. Whether for lack of imagination, obvious navet or just analytic balance, we have never endorsed the extreme scenarios which might generate FX trends this year, whether from a Chinese hard landing, EMU breakup, Fed tightening or Japanese inflation surge. Hence the tame 2012 FX forecasts for only a 3% trade-weighted USD decline and the emphasis in recent trade recommendations on exploiting mean reversion (eg: selling upside on commodity currencies, buying JPY vs commodity FX). That remains our core framework and strategy, as discussed in Macro Trade Recommendations on page 8.
Apr 10 Aug 10 Dec 10 Apr 11

Source: J.P. Morgan
Aug 11 Dec 11
Apr 12
Chart 4: Frances current account deficit is a fraction of Spain and Italys, but it has worsened continuously since 2009
Current account as percentage of GDP
6% 3% 0% -3% -6% -9% -12% 99 00 01 02 03 04 05 06 07 08 09 10 11 12 Spain Italy France
Source: J.P. Morgan
Cest lconomie, idiot

If anything could excite (or depress, depending on ones perspective) currency markets over the next month, it should be Europe. May was always supposed to be a precarious month for the euro given the policy risks from
Greek and French elections, but Spanish funding stress has complicated the equation further. Greeces latest threat to the euro is that the next government certainly will be fragmented and possibly left-leaning, so less willing to implement the troika agreement than even the previous Socialist or current coalition governments have been. The French threat to the euro is more subtle in its nature but potentially more substantial in its impact. A commonly-held view is that a Socialist victory (Hollande) is euro-negative because it implies looser fiscal policy and greater FrancoGerman friction, while a UMP victory (Sarkozy) is europositive through steady deficit reduction and preservation of
Europes noyau dur.1 This characterization is correct but incomplete since it ignores Frances more substantial policy challenges. Maintaining Frances fiscal path seems the easey task, since Sarkozy and Hollande largely agree on deficit reduction: the former plans to balance the budget by 2016 and the latter by 2017. This timing difference is almost trivial, however, in an environment where all governments are pushing back the expected date for eliminating deficits (see The upcoming Presidential election in France by Raphael Brun-Aguerre on page 24). The more material issue is that neither candidate has articulated a supply-side reform agenda for an economy exhibiting some of the competiveness problems which have led investors to question the peripherys growth potential and creditworthiness. Charts 4 and 5 provide some perspective. Although Frances current account deficit is small (2.3% of GDP), its position has worsened almost continuously since 2009 (chart 4). And while the countrys real exchange rate (based on unit labour costs) never appreciated as much as Spain and Italys did after EMU entry, it has risen meaningfully versus Gerrmanys (chart 5). As with many issues with EMU, it would be misleading to label France fully Mediterranean, but in an environment where either limp growth or worsening competitiveness can prompt sovereign funding stress, a French President who focuses on the budget to the exclusion of supply-side issues also threatens euro stability.
Chart 5: Frances real exchange rate never appreciated as much as Spain and Italys after EMU entry, but it has diverged from Germanys
Real effective exchange rate indices based on unit labor costs and indexed to 1999 = 100. A rise (fall) in the index indicates rising (falling) labor costs versus major trading partners and a loss (gain) in competitiveness.
125 120 115 110 105 100 95 90 85 80 94 96 98 00 02 04 06 08 10 12 Germany France Spain Italy
Source: J.P. Morgan and Eurostat
Chart 6: Japanese inflation breakevens near 0.5% already accord credibility to the BoJs inflation target.
Inflation breakevens on Japanese, US and German inflation-linked bonds.
0.6 0.4 0.2 0.0 -0.2 -0.4 -0.6 Mar 11

Source: J.P. Morgan
Japan breakeven inflation (2018) US breakeven inflation (TIPS 10yr) Euro breakeven inflation (Germany 2020)
2.8 2.6 2.4 2.2 2.0 1.8 1.6 1.4 1.2 1.0
China, Japan and US cannot compete

Compared to Europe, events in China, the US and Japan over the next few weeks seem much less interesting. April presented the stiffest test for Chinas outlook in thee years, and it passed sort of. Of the 11 activity and credit indicators China released last month, seven overshot expectations and four undershot2, while key series such as industrial production and retail sales showed signs of acceleration. The case for a hard landing looks weak, though that scenario always seemed stretched given the differences between the Chinese and US housing bubbles, as well as Chinas scope to ease monetary and fiscal policy. The debate instead should center on the shape of the expansion over the balance of 2012: will it come soon and
1
Jun 11
Sep 11
Dec 11
Mar 12
Jun 12
Former President Mitterands term for the hard core of EMU anchored by French-German consensus between them and leader of the rest of Europe.
Upside surprised came on the NBS PMI manufacturing, NBS PMI services, new yuan loans, money supply, trade balance, industrial production and retail sales. Downside surprises came on Markit PMI manufacturing, Market PMI services, fixed asset investment and Q1 GDP.
4
sharp (the V-shaped acceleration from 6.8% q/q in Q1 to +9% in Q3) or later and limper (the U-shape). That question cannot be answered until the authorities deliver additional stimulus, because what has been implemented thus far (two reserve requirement cuts for all banks, a cut for agricultural banks, directed spending for priorities such as social housing) appears tame. Hence our view that commodity currencies like AUD and NZD are in the final phase of a spring correction but will not trend higher until Chinas stimulus plans become more evident. The next test of Chinas underlying momentum comes on April 23 when flash PMIs print.
The Bank of Japan had look set to up the ante on its inflation experiment on April 27, when it could have raised its inflation target from 1% to a 1% to 2% range, alongside its semiannual outlook. Recent BoJ member commentary around the inflation target portray the board as less cavalier than in the wake of its initial February 14 announcement, such that it will probably affirm its 1% target and raise its asset purchases by 5trillion ($62bn). This outcome is probably a non-event for USD/JPY, since Japanese inflation breakevens already discount BoJ success in raising inflation to 0.5% over the next few years (chart 6) and since yen shorts are the largest in five years. So whereas we had expected this BoJ meeting to renew USD/JPYs uptrend towards the mid-80s, the pair should instead stay in the low 80s if the BoJ balks at increasing its inflation target. The wildcard is next weeks FOMC meeting at which new staff forecasts will be released, since these projections are becoming lead indicators for eventual shifts in the FOMC statement. The committee could revise the unemployment rate forecast lower, and a member who voted for a 2014 rate hike could pull forward the projection to 2013. That shift would lift US rates and the dollar, but such a move should be familiar by now. The dollar almost always lurches higher on hawkish Fed statements/projections, but these moves are rarely sustained given the very low odds that the Fed could tighten when house prices are in deflation and the US is entering a multi-year period of fiscal tightening. Yet another argument for mean reversion in currencies after an initial burst of interest rate momentum.
Most US data releases are second-tier but the earnings calendar is very heavy (20% of the S&P reports). The US reports Case-Shiller house prices, new home sales and the Richmond Fed survey on Tuesday; durable goods on Wednesday; Kansas City Fed survey on Thursday and Q1 GDP (advance reading) plus final Michigan consumer sentiment on Friday. Bellwether earnings include Apple (AAPL) on Tuesday, Caterpillar (CAT) on Wednesday, Bristol-Myers Squibb (BMY) on Thursday and General Dynamics on Friday (GD). Four out of five corporates are beating earnings, a development which is underpinning stocks and reinforcing ranges in FX despite the bullish dollar influences from Europe. In Asia the most significant releases are the Chinese flash PMI on Monday and industrial profits on Friday. Taiwans leading index due Friday could inform the story of a regional growth upturn this spring. Japans Shoko Chukin small business survey prints Tuesday and PMI manufacturing on Friday, but the more important yen event is the Bank of Japan meeting on the 27th (discussed earlier). Australian CPI next Tuesday would trigger an RBA rate cut on May 1 if low enough, but since that ease is 90% priced, AUD/USD doesnt have that much downside on a soft print. Besides the Fed and Bank of Japan, four other central banks meet next week: Israel on Monday, Hungary on Tuesday, RBNZ on Thursday and Mexico on Friday. All should stay on hold, though the next move should be up in Israel and New Zealand (late2012/early 2013) and down in Hungary (Q3 2012).
Next week: French elections, flash PMIs in China and Europe, FOMC & BoJ
Next week delivers key data and policy events in all regions. By 8PM local time on April 22, first-round results from French elections should be known. Assuming Hollande and Sarkozy prevail, focus turns to whether minor candidates endorse one of the frontrunners. European data will be heavy too. On Monday the region releases flash PMIs; business confidence in France and the Netherlands; and consumer confidence in Italy. Tuesday delivers Euro area industrial orders, French consumer confidence and BNB business confidence. On Thursday comes EC business and consumer confidence plus Italian business confidence. Aside from the flash PMIs, Italian confidence figures will be the most interesting for signs that the Monti effect might be fading, since consumer confidence is up two months in a row and business confidence rose last month. Bond supply is heavy next week, with Spain issuing t-bills on Tuesday and Italy offering bonds on Tuesday, bills on Thursday and bonds on Friday. France sells up to 8bn in t-bills Monday, in the first test of sentiment after first-round elections.
Main recommendations: Macro, Technical and Derivatives portfolios I. Macro portfolio (page 8 for details) New/closed trades In cash, took profits (1.7%) on short CAD/JPY on April 13. Position opened March 23 at 82.50. Sell GBP/USD at 1.6120 In options, sell a USD/CAD put with 0.98 strike and 0.96 RKI. Existing trades In options, stay short a 2-mo NZD call/USD put (0.84 strike, RKI 0.85) opened March 9. Hold 2-mo AUD/USD put struck at parity, Position opened March 23. Also hold 6-mo 76-72.50 USD/JPY ratio put spread in 1x2 notional. II. Technical portfolio (page 20 for details) Stay short GBP/USD, EUR/INR, NZD/CAD, EUR/KRW and PLN/HUF and long CAD/JPY, USD/SEK, USD/CZK, EUR/CZK and USD/ZAR. III. Derivatives portfolio (page 14 for details) Hold straddles on GBP/USD (2-yr) and EUR/CAD (1-yr) outright. Hold option based carry (ATMF/ATMS spread) in USD/ARS (1-yr). Stay long G-10 commodity currency vol vs. short LatAm vol: NZD/USD vs USD/MXN 3-mo vol swap spread Buy cross-yen calls funded with USD/JPY calls: 6M 4% OTMS BRL/JPY vs. USD/JPY yen put switch Carry efficient protection: Hold EUR/CAD vs. CAD/JPY 1Yx1Y forward vol spread, AUD/EUR vs. AUD/USD corr swaps, 3M AUD/USD vs. AUD/CAD straddle spread, add USD/PLN vs. EUR/PLN 2M vol swap spread, USD/MXN 2M1M vs. 2M3M FVA spread and GBP/USD vs. GBP/JPY corr swaps
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Global FX Strategy FX Markets Weekly April 20, 2012 Paul Meggyesi (44-20) 7859-6714 paul.meggyesi@jpmorgan.com J.P. Morgan Securities Ltd.
Macro Trade Recommendations

The four-month range in the dollar will persist so long as competing regional themes (China slowdown, US recovery and Fed policy, Euro area stress) fail to morph into systemic issues. Keep portfolio risk light in the absence of a dominant macro theme. With the macro big-picture still up in the air (more balanced China data, less impressive US data) country-specific stories are becoming more influential, specifically the increasing sense of differentiation in the outlook for G-10 monetary policy. Short-run valuation models suggest, however, that the FX market is beginning to overreact to the prospect that central banks could begin to break ranks over the coming year. Sell GBP/USD as the BoEs belated recognition of inflation risks is not a convincing foundation for currency appreciation at a time of broad economic stagnation. The shift in the BoCs policy bias is more constructive in the medium-term for CAD. Nonetheless, with Canadian export prices still falling (near 20% oya), US data losing steam and risk markets still consolidating, the CAD rally could take a break. Sell a 2-mo 0.9850 USD/CAD put, RKI 0.9600 to monetise the view. Closed trades: Took profits on short CAD/JPY April 13. New trades: Sell GBP/USD in cash. Sell a 2-mo USD/CAD put, 0.9800 strike, RKI 0.9600. Existing Trades: Hold a 2-mo 1.00 AUD put/USD call. Stay short a NZD/USD call (0.84 strike, 0.85 RKI). Hold a USD/JPY 1x2 put spread.
FX trade recommendations
Trade recommendations in this section are mostly spot, for easier incorporation into the monthly Global Markets Outlook & Strategy (GMOS), which outlines J.P. Morgans flagship model portfolio across bonds, credit, equities, fx and commodities. Some directional option trades are included here as alternatives to cash position, and as a complement to relative value trades discussed in FX Derivatives section of this publication (p. 14). Current recommendations are marked to market at Friday afternoon London time. A complete inventory of closed trades is presented at the end of this section along with performance statistics such as success rates and average returns per trades.
Chart 1: Monetary divergence favours CAD over the rest of the commodity bloc. GBP has also gained an interest rate advantage
Change in 2Y swap rates 20
10 0 -10 -20 -30 -40 -50 AUD NZD EUR
Source: J. P. Morgan
1 week
1 month
JPY
USD CHF
SEK NOK GBP CAD
Identifying macro trades in a low-volatility, dollar-neutral environment remains a challenge. It is not that there is a dearth of potentially significant regional issues, rather that none of these has yet developed into a gamechanger. If anything, both the China (slowdown) and US (recovery) stories have become more balanced. China is still slowing but the data flow is consistent with growth bottoming around the 7% q/q rate recorded in Q1. At the same time, the US data has clearly lost steam, which is troubling for risk markets and commodity currencies
despite the reduction in China tail risk. The possibility that the US economy is hitting another spring-time wall has also neutralised the uptrend in Treasury yields and undermined hopes for a regime shift in the dollar (whereby wider rate differentials transform the dollar into a pro-cyclical currency). As for the Euro area, peripheral governments continue to finance themselves despite the widening in spreads. Auction failures may well be required, or serious policy missteps from news governments (French and Greek elections) before macro markets can once again move on the euro story. In the absence of a clear-cut and dominant macro-theme, risk markets are liable to consolidate further, as is the big-dollar. That said, since the balance of risk remains negative for cyclical assets (even if the source of risk is perhaps rotating away from China towards the euro area and the US once more), and given that cyclical currencies
remain rich, we continue hold a modest-sized negative position in commodity currencies (short NZD calls, long AUD puts). We are focusing more this week on country-specific stories that have emerged in recent weeks. Specifically, the market has begun to reprice the outlook for relative monetary policy, upgrading the outlook for the BoC (robust growth and a clear statement of intent from the BoC to start to normalise monetary policy) as well as the BoE (the MPC is in the process of rediscovering its inflation mandate after five years of persistently overshooting its target), while downgrading the outlook for the RBA and ECB (chart 1). Japanese monetary policy is also up for debate, even if the BoJ is unlikely to deliver a coup-de-grace for the yen in the form of an increase in its 1% inflation target at next weeks policy meeting. For currency markets, the question is how significant and durable is the cyclical decoupling within G-10, and what are the consequences for G-10 cross rates? Arguing against a major rerating in cross rates is : 1) the relative repricing in monetary policy is not that significant from a historical perspective (chart 2); 2) the market has had a clear tendency in recent years to overstate potential policy changes in early 2011, for instance, the market priced nearly 100bp in annual tightening from both the BoC and BoE. 3) Currency markets are already overreacting to the prospect of central bank tightening, as evidenced by the overvaluation of GBP and CAD relative to high-frequency valuation models. EUR/GBP is currently the single most misaligned G10 cross-rate (chart 3). Fundamentally, we are far more sceptical about the prospect for medium-term monetary tightening in the UK than in Canada (indeed, we believe the BoC will eventually deliver more tightening than the 18bp that is discounted for the next year). Growth in the UK is far weaker than in Canada (0.4% versus 2.3%) while the output gap is much wider. Moreover, having tolerated an inflation overshoot for so long, the BoEs new-found sensitivity to inflation does not ring entirely true. And even if we are wrong and the BoE does move towards a rate hike, it is not at all clear whether this would sustain currency appreciation given such an anaemic growth backdrop. For all these reasons we are adding a short cash position in cable this week. Virtual stagnation in the Q1 GDP figures due next week should give the sterling bulls pause for thought, while the FOMC meeting could provide a wild-card boost to the dollar should the committee show signs of dissent about its guidance to hold rates steady until 2014. As for CAD, we are inclined to think that the recent rally will pause, not least as the step-down in US growth data risks impacting CAD sentiment, as does the ongoing decline in Canadian commodity prices (the BoCs commodity price index has
now declined by 19% oya). Monetise near-term consolidation in CAD by selling a 2-mo 0.9800 USD/CAD put, RKI 0.9600.
Chart 2: Monetary divergence within G10 has increased but not yet to an extreme or unusual level. Hence, while country-specific factors have become more influential, the scope for cross-rate adjustment is still rather limited
The difference between the maximum and minimum change in G10 2Y swap rates over a rolling one-month window. 1.0
0.8 0.6 0.4 0.2 0.0 Jan-10
Average
Jul-10
Jan-11
Jul-11
Jan-12
Chart 3: However, currency markets are in danger of over-reacting to recent developments in monetary policy. EUR/GBP and USDCAD are now notably undervalued versus their cyclical drivers
Deviation from bi-lateral, high-frequency valuation models. Models include frontend rate spreads and, where applicable, a risk-proxy, credit spreads and commodity prices. 1.5
1.0 0.5 0.0 -0.5 -1.0 -1.5 -2.0 -2.5
Trades
Took profits on short CAD/JPY in cash. Sell 2-mo 0.9800 USD put/CAD call, RKI 0.9600. We took profits on a short cash position in CAD/JPY (part of a basket of negative commodity currency trades) prior to the recent BoC meeting given the risk of a more hawkish assessment from the central bank. The BoC duly
9
served warning that policy rates cannot be sustained at 1% indefinitely and CAD bounced. Even though we are bullish towards CAD in the medium-term, the near-term risks are skewed towards a period of consolidation and position accordingly by selling a 2-mo put in USD/CAD, albeit with an RKI at 0.9600 to provide an additional cushion against continued upward momentum in CAD. For all of the focus on the BoC, USD/CAD is unlikely to move materially lower absent a fresh move higher in equity markets and/or an improvement in Canadian export prices, which have taken quite a knock in recent months, particularly due to the decline in natural gas prices (gas prices could struggle even further as gas in storage approaches its physical capacity limits). Chart 4 highlights the recent divergence between CAD and softer commodity prices. Closed short CAD/JPY on April 13 for a profit of 1.7% (trade was opened March 28 at 82.50). Sell a 2-mo USD put/CAD call, strike 0.9800, RKI 0.9600. Premium received 0.557% (spot ref 0.9910).
Chart 4: Canadian commodity prices are still falling, which should help to underpin USD/CAD in the near-term.
% oya
80% 60% 40% 20% 0% 0% -20% -40% -60% Jan-00 Jan-02 Jan-04 Jan-06 Jan-08 Jan-10 Jan-12 -10% -20% -30% BoC commod index CAD vs USD, rhs 30% 20% 10%
discounted, a technical double-dip recession would nonetheless provide a reality check for GBP. Aside form this, cable would well be pulled lower should EUR/USD struggle with the first round results from the French presidential elections, not to mention the wildcard possibility of some softening in the FOMCs interest rate guidance. Sell GBP/USD at 1.6100, stop 1.6400. Hold a 2-mo 1.00 AUD put/USD call. This is the one negative commodity trade that has not worked as we anticipated. More balanced Chinese data (particularly the bounce in credit growth) together with a very robust Australian employment report have served to arrest the downward momentum in AUD/USD, even though AUD has still managed to underperform on a broader basis (even dropping versus EUR this week). The trade has a month left to run but we will decide whether to close it after next weeks Australian CPI figures. The data is the decisive input into what in reality is likely to be a close-call RBA meeting on May 1. The market prices a 90% chance of a cut at this meeting, so we recognize the danger of a squeeze in AUD should CPI print firmer than consensus. Hold a 2-mo 1.0000 AUD put/USD call for 0.93%. Bought March 23 for 0.93%. Worth 0.41%. Hold a short 2-mo NZD call/USD put. NZD/USD has been confined to a 3% range for the best part of two months now. While the Kiwi remains oddly resilient in the face of wide-ranging negative factors (notably its substantial structural and cyclical overvaluation, not to mention more the overt efforts of policymakers to talk the currency down), we are encouraged by NZDs failure to regain any positive momentum. Next weeks RBNZ meeting is unlikely to materially lift NZD Q1 CPI was reported at 1.6%, towards the bottom of the 1-3% target range, which affords the central bank plenty of leeway to hold policy steady until earthquake reconstruction comes on stream. The RBNZ meanwhile is likely to reiterate its concerns with the detrimental effects of an overvalued currency. There seems little reason not to run the short call till expiry on 10 May. Stay short a 2-mo NZD call/USD put, strike 0.8400, RKI 0.85. Sold March 9 for 0.76%. Marked at 0.07%. Hold USD/JPY 1x2 put spread 1x2 notional. Cost 0.15%, worth 0.02%. Expire May 22.
Source: Bank of Canada; J. P. Morgan
Sell GBP/USD in cash. As discussed above, we doubt whether a combination of high inflation (past, present and future) and unimpressive growth is the ideal cocktail for sustainable currency strength, even if the BoE is now intent on taking its inflation mandate more seriously (or at least more literally). Certainly some indicators of UK growth have improved, but the evidence is partial (it is most pronounced in survey data) and in some cases unconvincing (a 3% gain in real retail sales seems rather implausible given that inflation-adjusted wages are falling by some 1.5%). Next weeks GDP data is likely to be on the soft side, and while a 0.1-0.2% gain is
10
Table 1.Current FX spot recommendations and P&L

Long USD JPY Short GBP CAD Entry date 20/04/12 23/03/12
Active trades are marked to market on Friday afternoon London time.
Entry level 1.612 82.50
Current level 1.613 81.10
Stop loss 1.640 84.75
P&L since entry -0.1% 1.7%
Comments New trade Took profits Apr 13
Table 2. Current FX derivatives (directional/non-RV) recommendations and P&L

Active trades are marked to market on Friday afternoon London time.
Description Long 6-mo 76-72.50 USD put/JPY call spread in 1x 2 notional Sell 2-mo 0.84 NZD/USD call RKI 0.85 Buy 2-mo 1.00 AUD/USD put Sell 2-mo 0.98 USD/CAD call RKI 0.96 * P&L in % of asset Entry date 22/11/11 09/03/12 23/03/12 20/04/12 Expiry date 22/05/12 10/05/12 25/05/12 22/06/12 Days to expiry 32 20 35 63 Entry level 0.15% 0.76% 0.93% 0.56% Current level 0.07% 0.07% 0.41% 0.63% P&L since entry* -0.08% 0.69% -0.52% -0.07% Comments 2012 outlook Hold Hold New trade
11
I. Performance statistics 2008 2012

2012 I. Trade Recommendations portfolio Cash # of trades Success rate Average return per trade (% , unweighted) Average holding period (days) Derivatives (non-digital) # of trades Success rate Average return per trade (% , unweighted) Average holding period (days) Derivatives (digital) # of trades Success rate Average return per trade (% , unweighted) Average holding period (days) 2011 2010 2009 2008 2008-2012 avg
12 83% 0.8% 32 9 67% 0.1% 53 1 100% 34.3% 73
42 60% 0.0% 25 27 74% 0.9% 71 10 50% -0.9% 87
89 53% 0.0% 23 27 62% 0.3% 54 4 25% -6.7% 60
61 64% 1.0% 20 21 62% 0.5% 59 21 38% -4.7% 55
85 59% 2.0% 31 3 0.0% -0.6% 66 5 20% -3.6% 54
289 59% 0.8% 25 87 64% 0.5% 61 41 39% -2.9% 64
II. FX Derivatives portfolio (relative value) Vol r.v # of trades 8 Success rate 100% Average return per trade (unweighted)* 0.7 Average holding period (days) 67 Vol plus directional r.v # of trades Success rate Average return per trade (bp, unweighted) Average holding period (days) Digital # of trades Success rate Average return per trade (% , unweighted) Average holding period (days) III. Technical Strategy portfolio # of trades Success rate Average return per trade (% , unweighted) Average holding period (days) *P&L in vol points
Cash 2012 2011 2010 2009 2008 2008-12 avg 0% 1% 2%
37 62% 0.1 44 16 75% 12 27 33 58% 0.1% 54
45 69% 0.7 99 4 50% -8 50 52 46% 0.0% 36
32 63% 0.1 73 46 57% 0.1% 10
13 77% 0.3 53 3 33% 8% 33 87 43% 0.2% 9
135 68% 0.4 71 26 73% 17.5 41 3 33% 8% 33 226 48% 0.1% 24
6 83% 49 73 NA NA NA NA 8 25% -0.9% 66
Chart 1: 2008-2012 performance summary: Average returns per trade

Derivs (non-digital) 2012 2011 2010 2009 2008 2008-12 avg -1% 0% 1% RV (non-digital) 2012 2011 2010 2009 2008 2008-12 avg 0.0 0.2 0.4 0.6 0.8 -2% Technical 2012 2011 2010 2009 2008 2008-12 avg -1% 0% 1%
Chart 2: 2008-2012 Performance summary: Success rate by type of trade

Cash 2012 2011 2010 2009 2008 2008-12 avg 0% 50% 100% Derivs (non-digital) 2012 2011 2010 2009 2008 2008-12 avg 0% 50% 100% 2012 2011 2010 2009 2008 2008-12 avg 0% 100% 200% RV (non-digital)
Technical 2012 2011 2010 2009 2008 2008-12 avg 0% 50% 100%
12
II. Closed trades 2012 Cash portfolio

Long JPY JPY EUR EUR NOK NOK SEK EUR NOK EUR EUR JPY Short USD EUR SEK GBP SEK GBP USD USD USD GBP NZD CAD Entry date 31/10/11 06/01/12 20/01/12 13/01/12 22/11/11 27/01/12 27/01/12 03/02/12 13/02/12 24/02/12 24/02/12 23/03/12 Entry level 78.20 98.80 8.760 0.831 1.171 9.170 6.790 1.312 5.721 0.848 1.605 82.50 Exit date 06/01/12 20/01/12 26/01/12 03/02/12 24/02/12 24/02/12 16/02/12 03/03/12 09/03/12 14/03/12 30/03/12 13/04/12 Exit level 77.10 99.50 8.836 0.832 1.177 8.835 6.770 1.322 5.668 0.831 1.627 81.10 P&L 1.4% -0.7% 0.9% 0.1% 0.5% 3.8% 0.3% 0.8% 0.9% -2.0% 1.4% 1.7%
FX Derivatives portfolio (vol relative value)

Trade Entry date Entry level Exit date Exit level P&L*
Buy USD/JPY 3M 25D risk-reversals (long USD puts vs. short USD calls, vega-neutral), deltahedged Buy NZD/USD 3M D/N straddles vs. Sell USD/MXN 3M D/N straddles, 100:90 vega ratio (both legs delta-hedged) Buy NZD/USD 3M vs. Sell USD/CLP 3M vol swap spread, equal USD-vega on each leg Buy EUR/USD 6M 25D risk-reversals, veganeutral, delta-hedged Buy EUR/JPY vs. Sell EUR/GBP risk-reversals (60K vega/leg vs 100K vega/leg), 3M 25D, deltahedged Buy AUD/USD vs. Sell USD/BRL 6M straddles
05/12/11
0.8
20/01/12
-0.8
-1.6
11/11/11
27/01/12
2.2
1.2
27/01/12
-0.4
23/03/12
1.7
2.1
06/01/12
05/04/12
1.9
-1.2
13/01/12
1.1
05/04/12
1.8
0.7
20/01/12
05/04/12
6.4
1.7
Derivatives (directional)
Entry date Entry level Non-Digital Options Buy 4-mo 100-97 EUR call/JPY put spread, RKI 93.00 on the lower strike Buy a 6-mo 117-112 GBP put/JPY call spread, sell 127 GBP call/JPY put Buy 4-mo 0.75-0.70 NZD put/CAD call spread and sell a 0.83 NZD call/CAD put, RKI 0.85 Buy a bullish 4-mo USD/SEK fly (buy 1x 7.00 call sell 2x 7.50 call and buy 1x 8.00 call) Buy 4-mo 100-95 EUR put/JPY call spread Sell 6-mo 1.2050 EUR put/CHF call Sell 2-mo 1.20 NOK/SEK call RKI 1.22 Sell 2-mo 1.08 AUD/USD call RKI 1.10 Sell 2-mo EUR/CAD 1.2850 put, buy 1.3500 call 22/11/11 22/11/11 22/11/11 22/11/11 22/11/11 22/11/11 09/03/12 09/03/12 23/03/12 0.83% -0.19% 0.88% 1.04% 1.13% 2.05% 0.74% 0.77% 0.40% 20/01/12 20/01/12 27/01/12 27/01/12 03/02/12 24/02/12 30/03/12 31/03/12 05/04/12 1.14% 0.41% -0.75% 0.71% 1.30% 0.80% 0.07% 0.16% -0.21% 0.31% 0.60% -1.63% -0.33% 0.17% 1.25% 0.67% 0.61% -0.61% Exit date Exit level P&L (%)
Sell EUR/BRL 3M 25D RR, vega-neutral, delta hedged Buy USD/CAD vs. Sell USD/BRL 1Y1Y FVA, 220:100 vega ratio
02/03/12
6.0
05/04/12
3.7
2.3
08/02/12
20/04/12
6.2
0.6
Technical portfolio
Trade Entry Date Entry level Exit date Exit level P &L
Short GBP v s USD Long USD v s SEK Short EUR v s USD Short USD v s JPY Long NOK v s SEK Long EUR v s NZD Long EUR v s SEK Short NZD v s JPY
02/11/11 20/12/11 25/10/11 22/11/11 10/02/12 24/02/12 23/01/12 23/03/12
1.574 6.786 1.337 78.16 1.179 1.61 8.785 67.31
01/02/12 08/02/12 24/02/12 24/02/12 14/03/12 05/04/12 05/04/12 12/04/12
1.580 6.643 1.347 81.15 1.179 1.61 8.801 66.89
-0.5% -2.1% -1.0% -3.9% 0.0% 0.0% 0.1% 0.3%
FX Derivatives portfolio (vol relative value plus directional)

Trade Entry date Entry level Buy 2M GBP put/AUD call 1.48 One-touch vs. sell 2M GBP call/AUD put 1.59 One02/12/11 7 Touch, equal GBP notionals Buy 2M 35D USD call/NOK put vs. sell 2M 35D USD call/BRL put, equal USD 16/12/11 -76 notionals Buy 6M 1500 Gold call/ EUR put one touch vs. Sell 2M 1500 Gold call/ EUR put one touch in 1: 1.42 ratio of EUR notionals Buy EUR/CAD 2M 4% OTMS EUR calls vs. Sell EUR/MXN 2M 4% OTMS EUR calls, equal EUR notionals Sell USD/TRY 6M 10D USD call/TRY put delta-hedged 09/09/11 42 Exit date 06/01/12 Exit level 35 P&L 28 Units % GBP
13/01/12
59.0
135.0
bp USD
10/02/12
23
-19
% EUR
20/01/12
-38
23/03/12
0.0
37.8
bp EUR
06/01/12
80
05/04/12
77
bp USD
Buy 2Y 43/50 TRY call/JPY put spread
27/01/12
275
05/04/12
382.2
107.2
bp TRY
13
Global FX Strategy FX Markets Weekly April 20, 2012 Arindam Sandilya (1-212) 834-2304 Matthias Bouquet (44-20) 7777-5276 JPMorgan Chase Bank NA, J.P. Morgan Securities Ltd.
FX Derivatives
Double no-touch (DNT) flows are supplying gamma to the street and reinforcing narrow spot ranges. Expect ranges to hold, back end vols/wings to soften. USD/PLN vs. EUR/PLN possesses attractive optics as a long/short gamma RV. Buy/sell 2M vol swaps. Risk premium can also be collected in a quasi-vol neutral fashion by selling 1M vol swaps against buying 1M1M FVAs in CAD/MXN. In risk-reversals, we find GBP/CAD skews overly rich in favor of GBP calls/CAD puts.
Chart 1. USDPLN / EURPLN implied vol ratios are plumbing postEuropean crisis lows..
USDPLN / EURPLN 2M implied vol ratio 2.1
2.0 1.9 1.8 1.7 1.6 1.5 1.4

Source: J.P.Morgan
Current
April has seen a very atypical sell-off in risk markets that has left front-end FX vols lower than where they began the month. VXY printed a fresh post-Lehman trough this week, a remarkable feat considering the macro-risks facing the global economy. Part of this can be attributed to one of the tactical risk factors over the past two weeks a potentially weaker-than-expected earnings season not materializing, but the overriding driver is the glut of central bank liquidity that has sponsored massive flows into short-dated range structures (DNTs) in the option market, especially in EUR/USD. While tough to quantify, the street seems to be awash in gamma from this flow; anecdotal evidence suggests that a fresh wave of ~1M DNTs has replenished the batch that has rolled off over the last few days, meaning that respite from tedious dollar ranges and depressed vols is unlikely to arrive till those barriers expire in mid-May. Till then, currencies will continue to be a collection of idiosyncratic stories driven by anticipation of shifts in Central Bank policy stances (Canada, UK, Japan), intervention (Brazil) or political noise (Europe); systemic trends that drive a U-turn in vols will have to wait. From a vol standpoint, aggressive decay management in this environment will further compress risk premia; since vol curves in many currencies are near extremes of steepness and risk-reversals in select pockets are still elevated, backend implieds and wings will likely come under selling pressure over the next few weeks, and relative value rather than outright directional vol plays will yield better returns. As a long/short gamma pair trade, USD/PLN vs. EUR/PLN possesses attractive optics. Because USD/PLN implied vols closely track those in EUR/USD, and because the latter have collapsed this year, USDPLN/EURPLN implied vol ratios are plumbing their European-crisis lows (chart 1) and effectively discounting a highly sanguine state of the world this year. While that is by and large the case across all measures of risk premia, the difference in this case is that realized vol outperformance in favor of USD/PLN makes the vol spread an easy hold; chart 2 shows that on a beta weighted basis, relative realized vols are
14
Apr-10
Oct-10
Apr-11
Oct-11
Apr-12
Chart 2. .and their realized vol spreads have consistently outperformed implieds in recent years
vol pts. 10 8 6 4 2 0 -2 -4 Apr-10
Source: J.P.Morgan
USD/PLN - 1.5*EUR/PLN wtd. 2M implied vol spread USD/PLN - 1.5*EUR/PLN wtd. 1M realized vol spread USD/PLN - 1.5*EUR/PLN wtd. 2M realized vol spread
Oct-10
Apr-11
Oct-11
Apr-12
clocking ~ 3 vols over implieds vols, very much in line with a consistent pattern of outperformance over the past two years. In addition to checking the usual RV boxes, we like this class of vol spreads on account of their implicit bullish USD correlation bias that acts as a hedge against us (and the market) being wrong-footed by a surge in vol. Long USD correlation exposures pay off in risk-sell-offs when the dollar receives a flight-to-quality bid across-the-board. USD-pairs moving in lockstep also dampens volatility in non-dollar crosses and leads to cross vol underperformance against the majors; recall that similar arguments motivated an AUD/USD vs. AUD/CAD gamma spread a couple of weeks back (see FXMW, April 5) and it has held in well despite the Bank of Canada induced CAD rally earlier in the week. We recommend buying 2M USD/ PLN vol swaps against selling 2M EUR/PLN vol swaps in 100K: 150K vega ratio (~ inverse vol weighting on the two legs). The net P/L should be of the order of 1.5 vol pts after transaction costs if realized vol spreads continue to come in around current relatively muted levels, a reversal to their 2-yr mean should net another 0.7-0.8 vols.
Risk premium can be collected in a quasi-vol neutral fashion by selling 1M vol swaps against buying 1M1M FVAs in CAD/MXN. In a market offering few, if any, relative value vol opportunities, short vol swap vs. long FVA packages in CAD/MXN look moderately appealing. Their value proposition lies in the disconnect between a very flat vol term structure (2M 1M vol spread = 0.1 vols) that is commonly associated with a jittery risk environment, vis--vis sharp gamma underperformance (1M implied 1M realized vol spread in excess of 3 vols) typical of lackluster directionless markets. Overlaying long 1M1M FVAs on short 1M vol swaps therefore creates a quasi-vol neutral combination that is insulated from large vol spikes and yet benefits from continued delivered vol softness. Chart 3 shows that on an unconditional basis (i.e. without ex-ante vol slide/carry considerations on the two legs), the FVA overlay costs about 0.4 vol pts/ a month in P/L compared to an outright vol swap short, but sharply reduces drawdown in periods of deleveraging like the fall of last year. We open a long/short package in our model portfolio this week; at current prices, 1M1M FVAs slide flat to spot vols and the net combination carries positively to the tune of 2.5 vol pts. after bid-offer. In risk-reversals, we find GBP/CAD skews unnaturally bid for GBP calls/CAD puts. In theory, skews should price in the correlation of moves in spot and ATM vols, and 3M 25D R/Rs are at least 0.5 vols too high given recent realized spot-vol correlations (chart 4). Not only are OTM high strikes historically expensive (outright as well as adjusted for the level of ATM vols), but also their richness exceeds risk premia priced into other G10 skews even those in USD-pairs and JPY-crosses that usually face the maximum brunt of any weakness in risk. This is odd because market downturns usually sponsor broad-based USD strength, leading to higher USD-correlations and dampened volatility in crosses such as GBP/CAD. Chart 5 shows that even as USD calls in G10 FX have cheapened relative to USD puts this year after liquidity injections from the ECB, GBP/CAD skews have remained stubbornly bid, creating the kind of dislocations seen in 2010 that more often that not corrected with a sharp reversal in cross-riskies. Because GBP/CAD spot has essentially traced a range for much of the past year and we do not have any strong directional views the apparent shifts in the tone of monetary policy in the UK and Canada this week offset each other, and if anything, probably bias the cross lower the richness of OTM GBP calls is probably best monetized simply by selling vanilla high strikes (delta-hedged), or alternatively buying notouches/or even double no-touches as a defined downside expression of the view (our range analytics peg GBP/CAD as one of the most attractive DNT to own given the width of the range vis--vis spot hi-lo trading bands in recent weeks).
Chart 3. Overlaying vega-neutral amounts of 1M1M FVA longs on 1M vol swap shorts in CAD/MXN can sharply reduce drawdowns during periods of deleveraging like in the fall of 2011
Rolling hold-to-maturity returns (vol pts.) from selling 1M CAD/MXN vol swaps (WMR fixes, no mean, 252 returns/yr) vs. buying 1M1M FVAs. Assumes 0.6 vols in bid-mid width on vol swap and choice price on FVA. Data over the past 2 years.
Avg. monthly IR Max monthly P/L (vol pts.) (annualized) loss (vol pts.) Short 1M v ol sw ap + Long 1M1M FVA Short 1M v ol sw ap
vol pts. 9 6 3 0 -3 -6 Apr-10 Sep-10 Source: J.P. Morgan
0.9 1.3
1.4 1.8
-3.4 -5.2
Short 1M vol swap + long 1M1M FVA Short 1M vol swap
Aug/Sep 2011 Jan-11 Jun-11 Oct-11 Mar-12
Chart 4. GBP/CAD risk-reversals are overly rich in favor of GBP calls/CAD puts vis--vis realized spot ATM vol correlations.
GBP/CAD 3M 25D RR (GBP call vol - GBP put vol) 0.2 Y = 0.74 X1 - 0.54 0.0 R = 21% -0.2
-0.4 -0.6 -0.8 -1.0 -1.2 -1.4 -1.6 -0.6 -0.4 -0.2 0.0 0.2 0.4 0.6 0.8 Rolling 2-mo realized corr. (daily % chg spot, daily vol pt. chg 3M ATM vol) Source: J.P. Morgan
Chart 5. and have remained stubbornly bid to the topside even as USD-skews have broadly compressed in line with other risk premia
vol pts. 0.2 0.0 -0.2 -0.4 -0.6 -0.8 -1.0 -1.2 -1.4 -1.6 Oct-09 Apr-10 Source: J.P. Morgan Oct-10 Apr-11 Oct-11 vol pts. GBP/CAD 3M 25D RR (GBP call vol - GBP put vol) Average USD/G10 3M 25D RRl (USD call vol - USD put vol) 2.5 2.0 1.5 1.0 0.5 0.0 -0.5 Apr-12
15
Implied volatilities
A UDJP Y A UDUSD CA DJP Y CHFJP Y EURA UD EURCA D EURCHF EURGB P EURJP Y EURNOK EURNZD EURSEK EURUSD GB P JP Y GB P USD NZDUSD USDCA D USDCHF USDJP Y USDNOK USDSEK USDA RS USDB RL USDCLP USDM XN EURCZK EURHUF EURP LN EURRUB USDRUB USDTRY USDZA R USDIDR USDINR USDKRW USDP HP USDSGD USDTWD 1 2.8 9.9 1 2.6 1 2.4 8.1 8.3 3.1 6.6 1 2.0 6.3 8.3 6.1 9.1 1 .4 1 7.0 1 0.5 7.5 9.5 9.8 1 .3 1 1 0.9 6.5 1 3.3 1 2.0 1 3.4 7.1 1 0.9 8.5 7.9 9.3 9.0 1 4.3 6.2 9.7 8.0 5.2 5.6 3.7 1 3.7 1 .0 1 1 3.2 1 3.1 9.1 9.2 4.6 7.3 1 2.6 6.7 9.5 6.8 1 0.2 1 .9 1 7.8 1 .6 1 8.1 1 0.7 1 0.1 1 2.5 1 2.1 1 3.0 1 3.8 1 2.5 1 3.8 7.5 1 .4 1 9.5 8.9 1 0.3 1 0.2 1 5.5 8.8 1 0.5 9.6 5.8 6.3 4.4
Current Implied Vols Avg. Implied Vols Z-Score Implied Vols 1M 3M 1Y 1M 3M 1Y 1M 3M 1Y

1 5.8 1 3.2 1 4.4 1 4.0 1 .1 1 1 0.5 6.4 8.5 1 4.0 7.5 1 .5 1 8.0 1 .9 1 1 3.0 9.4 1 3.8 9.6 1 2.3 1 .5 1 1 4.1 1 3.9 21 .0 1 5.0 1 3.5 1 4.6 7.9 1 .7 1 1 0.4 1 .0 1 1 2.7 1 2.7 1 6.9 1 2.5 1 .5 1 1 .8 1 7.0 7.4 5.9 1 6.0 1 3.7 1 4.4 1 2.7 1 .4 1 1 .1 1 9.8 9.1 1 4.2 8.2 1 .8 1 8.0 1 2.6 1 3.0 9.9 1 4.0 1 0.3 1 2.5 1 0.3 1 4.3 1 4.5 5.7 1 3.8 1 2.6 1 2.9 7.3 1 .5 1 1 0.7 1 0.2 1 .2 1 1 2.5 1 6.3 8.4 9.2 1 2.9 7.8 7.6 6.1 1 6.7 1 4.2 1 5.0 1 3.1 1 2.0 1 .5 1 9.9 9.7 1 4.8 8.4 1 2.4 8.2 1 3.0 1 3.8 1 0.5 1 4.6 1 0.7 1 2.7 1 .0 1 1 4.7 1 5.0 8.4 1 4.6 1 3.1 1 3.5 7.4 1 .9 1 1 .2 1 1 0.9 1 .9 1 1 3.2 1 6.7 9.9 9.8 1 3.5 8.4 7.8 6.6 1 8.4 1 5.2 1 6.5 1 4.2 1 3.1 1 2.3 1 0.4 1 0.8 1 6.4 8.7 1 3.4 8.6 1 3.7 1 5.5 1 .7 1 1 5.6 1 .5 1 1 3.0 1 2.7 1 5.4 1 5.6 1 6.9 1 6.4 1 4.2 1 4.5 7.7 1 2.7 1 .9 1 1 2.4 1 3.3 1 4.5 1 7.4 1 2.8 1 0.7 1 4.5 9.5 8.2 7.4 -0.8 -1 .5 -0.6 -0.1 -1 .9 -1 .7 -1 .9 -2.2 -0.9 -1 .4 -2.0 -1 .4 -1 .8 -0.6 -1 .7 -1 .4 -1 .3 -1 .2 -0.4 -1 .4 -1 .5 0.3 -0.1 -0.2 0.1 -0.1 -0.2 -1 .0 -1 .2 -0.7 -1 .5 -0.5 -0.7 0.2 -1 .3 -1 .7 -1 .0 -1 .8 -0.9 -1 .6 -0.7 0.0 -2.1 -1 .7 -1 .9 -2.3 -1 .0 -1 .4 -2.0 -1 .2 -1 .7 -0.8 -1 .7 -1 .5 -1 .4 -1 .0 -0.6 -1 .2 -1 .4 1 .1 -0.2 -0.2 0.1 0.1 -0.2 -0.9 -1 .1 -0.6 -1 .5 -0.3 -0.4 0.4 -1 .4 -1 .9 -1 .0 -1 .8 -1 .1 -1 .5 -1 .1 -0.1 -2.2 -1 .7 -1 .8 -2.3 -1 .5 -1 .2 -2.1 -0.6 -1 .5 -1 .3 -1 .9 -1 .4 -1 .2 -0.5 -1 .3 -1 .0 -1 .2 1 .3 -0.6 -0.4 0.0 0.2 -0.6 -1 .2 -0.9 -0.3 -1 .3 -0.2 -0.1 0.7 -1 .5 -2.2 -0.7 -1 .3
Biggest 3M Implied Volatility Movers

Weekly Changes
USDARS USDBRL USDMXN EURCHF USDJPY USDCAD USDCLP EURCAD EURGBP NZDUSD USDIDR EURAUD USDTWD AUDJPY USDTRY USDPHP USDRUB EURRUB USDSGD USDKRW -1 0 1
Monthly Changes
USDARS USDMXN EURCHF CHFJPY GBPJPY EURJPY USDINR EURCAD USDNOK USDCLP USDRUB USDTWD USDBRL NZDUSD EURAUD USDPHP USDIDR USDSGD EURNZD USDTRY
Vol
Vol
Vol
Vol
-2 -1 0
Source: J.P. Morgan
Front-End Vol Rankings

In order of Normalized Volatility Risk Premium*
USDARS EURCHF USDTWD USDIDR USDCLP USDPHP USDBRL EURHUF EURPLN EURCZK AUDUSD EURCAD EURJPY USDZAR AUDJPY USDCAD CADJPY GBPJPY GBPUSD EURGBP -1.0 0.0 1.0 2.0
Vols RICH
Vols CHEAP
3.0
4.0
Source: J.P. Morgan
Current trade recommendations and P&L

Analyst Description Entry date 19-Aug-11 04-Nov -11 13-Jan-12 Entry 1.5 12.4 59.0 8.9 5.6 6.8 1.2 1.0 -0.6 -18 58.0 1.6 Current mid -1.7 9.9 49.1 8.5 6.2 4.4 0.4 -2.3 -0.8 -48 53.6 0.7 P/L -3.2 -2.5 -9.9 -0.4 0.6 -2.4 -0.7 -3.2 -0.2 -30 -4.4 -0.9 P/L units v ol pts. v ol pts. corr pts Remarks Was originally a 3M/2Y calendar spread, 3M leg has been unw ound, continue to hold long 2Y as low bleed protection Attractiv e entry location w ith v ols hav ing fully retraced their Aug/Sep rally , flat v ol curv e minimizes negativ e v ol slide Asy mmetric protection against a v ol spike; historically low implieds coupled w ith higher realizeds
Sandily a/Bouquet Buy GBP/USD 2Y D/N straddle Sandily a/Bouquet Buy EUR/CAD 1Y D/N straddles, delta-hedged Sandily a/Bouquet Buy 6M AUD/USD v s. AUD/EUR correlation sw ap
Sandily a/Bouquet Buy EUR/CAD v s. Sell CAD/JPY 1Y1Y FVA, 150:50 v ega 03-Feb-12 ti Sandily a/Bouquet Buy USD/CAD v s. Sell USD/BRL 1Y1Y FVA, 220:100 v ega 08-Feb-12 ti Sandily a/Bouquet Buy USD/ARS 1Y ATMF/ATMS USD put spread 02-Mar-12 Sandily a/Bouquet Sandily a/Bouquet Sandily a/Bouquet Sandily a/Bouquet Buy AUD/USD v s. Sell AUD/CAD 3M straddles, deltahedged, 100:130 AUD v ega notionals Buy NZD/USD v s. Sell USD/MXN 3M v ol sw aps, equal USD v ega notionals Buy USD/MXN 2M1M FVAs v s. Sell 2M3M FVAs, equal USD v ega notionals Buy 6M 4% OTMS BRL call/JPY put v s. Sell 6M 4% OTMS USD call/JPY put, equal JPY notionals 05-Apr-12 05-Apr-12 05-Apr-12 05-Apr-12 05-Apr-12 18-Apr-12
v ol pts. Carry efficient long VXY prox y , w ith some relativ e v alue edge v ol pts. Ex it in light of idiosy ncratic BRL w eakness % USD Best max pay out/cost ratio optionalized carry trade v ol pts. v ol pts. v ol pts. bp JPY corr pts Vol RV that prov ides a carry efficient w ay of taking on long v ol ex posure Addition to the suite of long high-beta G10 v ol v s. short EM v ol relativ e v alue trades Mildly positiv e carry defensiv e trade that benefits from v ol curv e flattening/inv ersion Cross-y en high strikes underpriced relativ e to USD/JPY high strikes Carry efficient defensiv e trade w ith ex cellent implied realized technicals
Sandily a/Bouquet Buy 1Y GBP/USD v s. GBP/JPY correlation sw ap Sandily a/Bouquet Buy USD/PLN v s. Sell EUR/PLN 2M v ol sw aps, 100:150 v ega notionals Buy CAD/MXN 1M1M FVAs v s. Sell 1M v ol sw aps, equal v ega notionals
v ol pts. Long/short gamma pair trade Quasi-v ol hedged positiv e carry trade that benefits from a
Sandily a/Bouquet
16-Apr-12
1.0
0.7
-0.3
v ol pts. disconnect betw een a flat v ol curv e and sharp gamma underperformance
16
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Global FX Strategy FX Markets Weekly April 20, 2012 Niall OConnor (212) 834-5108 niall.oconnor@jpmorgan.com JPMorgan Chase Bank NA
Technical Strategy
The bearish reversal for JPY from critical levels suggests the March corrections are likely complete with a growing risk of further underperformance. While the range bias for USD/CAD and EUR/CAD remains intact, the backdrop for CAD has improved. Buy CAD/JPY. Stay short NZD/CAD, GBP/USD, EUR/KRW, EUR/INR, PLN/HUF & long CAD/JPY (new trade), USD/SEK, USD/CZK, EUR/CZK and USD/ZAR.
and the critical former highs from late-October. Importantly, the advance has developed in an impulsive, trend-like manner while likely confirming a bullish reversal week. For the near term setup, the 81.80/82.00 area should act as key initial resistance with upside breaks suggesting a closer test of the March high. Despite the improved short term setup for USD/JPY, we are closely monitoring for any whipsaws given the broad range bias for the USD. Still, at the very least this weeks price action has likely confirmed the low-end of a new range with growing upside risks.
Chart 2: CAD/JPY Daily Chart: the reversal from the important 80.10/79.65 support zone suggests an increased risk of a sustained bullish shift.
JPY looks vulnerable following the reversal from critical levels; the backdrop for CAD continues to improve This weeks reversal in JPY suggests a growing risk that the corrective phase since March is now complete and the underperformance bias is back on track. Importantly, the corrections for USD/JPY and cross JPY since March effectively held key support levels over the past week leading to bullish reversals and the best price action since the late-February/early-March timeframe. In turn, the recent lows have likely defined at least short term bottoms in place with additional upside expected in the weeks ahead. As important, our short term momentum gauges are in an oversold setup similar to the early-February timeframe.
Chart 1: USD/JPY Daily Chart: the reversal after approaching important support in the 80.00/79.55 zone implies a growing risk that prices are forming a short term base.
The JPY crosses show a similar framework while implying the current setup can allow additional upside followthrough. Both EUR/JPY and GBP/JPY have reversed from key support levels suggesting the upside risks are on the rise particularly as the rallies from the weeks lows have developed in a clear, impulsive manner. Note that AUD/JPY held the 82.35/81.20 support area (38.2% retracement and uptrendline from October low), while the setup argues for at least a short term base. The bullish risks should increase on a break above the 84.80/85.20 resistance area. Moreover, NZD/JPY has once again reversed from the important 65.30 short term range lows amid an oversold setup. While the bounce from this key area has thus far failed to confirm a short term low, the overall range reflects a corrective bias consistent with the view for eventual new highs. The bullish shift for CAD/JPY over the past week is in line with the view for additional upside as well. In this regard, the recent lows effectively held critical support in the 80.10/79.65 support area. This area represents the 38.2% retracement from the October low, the uptrendline from the January low and the February breakout area (79.65). With Fridays close confirming a bullish reversal week, we see potential for additional upside follow-through. Moreover, as
For USD/JPY, the March-April decline extended into the critical 80.10/79.55 support zone. This area should represent an ideal basing zone particularly if the medium term structure has really sustained a bullish shift with the February rally. This zone represents the 50% retracement from the February low, the March-April channel support
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Global FX Strategy FX Markets Weekly April 20, 2012 Niall OConnor (212) 834-5108 niall.oconnor@jpmorgan.com JPMorgan Chase Bank NA
the decline from the March peak reflects a corrective bias, the upside should seek new highs with targets in the 86/87 area. We entered a new long position Friday and will look to add on near term corrective pullbacks.
Chart 3: USD/CAD Daily Chart: While the range continues to develop above the .9842 low, the recent failure at the range highs suggests a growing risk of a downside break.
the January low. And while the cross has once again held important support in the 1.2995/75 area, the overall corrective bias to this consolidation phase suggests new lows are likely. Resistance at the 1.3180 and 1.3335 levels should remain intact to maintain the more immediate downside bias for a test of the 1.28/1.25 downside targets. CAD remains in position to continue the outperformance bias against other commodity currencies. In this regard, the declines from the mid-April highs for the likes of AUD/CAD and NZD/CAD imply a renewed trending bias. The key test for AUD/CAD enters at the 1.0185 support as violations should allow for an extension into the important medium term support near .9900. NZD/CAD reflects a similar setup as we maintain our current short position. A downside break of the .8000 support area should confirm the onset of another leg down following the reversal from the February high.
Chart 4: NZD/CAD Daily Chart: The reversal from the February and April highs points to further weakness; note Fridays uptrendline violation. Critical support enters at .8000.
In line with the bullish setup for CAD/JPY, we also see an improved backdrop for the broad CAD view. While we recognize the range bias for both USD/CAD and EUR/CAD remains intact, the potential for a downside break has increased following the price action over the past week. For USD/CAD, the important .9860/42 support zone continues to hold despite the prior weeks failure at the range highs (1.0050/70). Still, the range bias since earlyMarch has not altered the overall corrective bias which is consistent with the view for new lows. Again, the 1.0050/70 resistance zone should continue to hold to maintain the view for a test of the .9700/.9600 target area. Similarly, EUR/CAD has also traded within a well-defined range since
Technical trades
P&L based on postion size
Trade details Long Short USD HUF EUR INR CAD KRW USD USD USD CAD JPY CZK PLN CZK EUR NZD EUR ZAR SEK GBP JPY NZD
Entry date 10/08/11 11/11/11 11/11/11 23/11/10 22/11/11 22/11/11 22/11/11 05/04/12 21/03/12 20/04/12 23/03/12
Entry level 17.2550 70.3070 25.2100 64.900 0.7921 1548 8.1250 6.6962 1.5989 82.46 67.31
Current level 18.9450 70.8474 24.9720 68.7090 0.8081 1502 7.8103 6.6844 1.6113 82.39 66.89
Stop loss 18.2500 73.3500 24.1500 70.850 0.8501 1670 6.8000 6.5350 1.6250 80.13 66.89
P&L since entry % 9.86% -0.78% -0.91% -5.98% -2.02% 1.48% -3.61% -0.18% -0.82% -0.04% 0.31%
Comments
Long-term bottoming formation confirmed, added on 9 September Deeper correction still intact, added at 69.50 on 12th of January Medium term basing pattern suggests further upside. Outlook 2011 trade, added on 25 April and 27 September Outlook 2012 trade, added on 9th of January at 0.8082 Outlook 2012 trade Outlook 2012 trade Inverted H & S bottoming formation seen as complete MT downtrend incomplete; added April 20th MT downtrend incomplete; added April 20th Closed April 12
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Global FX Strategy FX Markets Weekly April 20, 2012 Anna Hibino (61-2) 9220-1381 anna.hibino@jpmorgan.com J.P. Morgan Securities Australia Limited
Global FX carry trade monitor

Chart 1: Japanese retail -- market capitalisation of 100 largest FXdenominated ITs
trn; market capitalization of 100 largest investment trusts; ranked in the order of total asset as of March 2011
30 70 80 25 90 20 100 110 15
Market cap of top 100 ITs, JPY trn, lhs JPY trade-wtd index, inverted, rhs
Chart 2: Japanese retail -- aggregate retail margin shorts in JPY

trn, Japanese retail measured by positions in USD, NZD, EUR, GBP and AUD on Tokyo Financial Exchange; positive indicates shorts in JPY
10 8 6 4 2 0 -2 -4 Apr-08 Apr-09 Apr-10 Apr-11 Apr-12 100 110 120
Aggregate margin shorts in JPY, JPYtrn, lhs JPY trade-wtd, inverted rhs
70 80 90
120 130
10 Jan-06 Jan-07 Jan-08 Jan-09 Jan-10 Jan-11 Jan-12
Source: J.P. Morgan, Bloomberg
Source: J.P. Morgan, TFE;
Japanese retail exposure to the top 100 foreign currency ITs
Japanese aggregate margin JPY shorts of 4.5trn on April
as of March 2011 stood at 23.0trn on April 6th, before declining to 22.5trn as of yesterday. Market cap of the top FX-denominated ITs have declined by more than 2% over the past two weeks, while the trade-weighted JPY has only declined by less than 0.5% during the same period.
6th reached as high as 4.7trn this Monday, which is the highest since mid-January of this year. Since then, JPY shorts have declined to 3.9trn as of yesterday. The current level is 30% below the year-to-date high of JPY5.6trn marked in early January.
Chart 3: Japanese retail -- margin position in JPY vs USD, EUR, AUD

mln local currency. positive indicates long in local currency/short in JPY
60 50 40 30 20 10 0 -10 -20 -30 Jan-08 Jan-09 Jan-10 Jan-11 Jan-12
USD EUR AUD
Chart 4: CTAs -- aggregate IMM position in USD

$ bn as the sum of net speculative positions on the IMM in AUD, NZD, CAD, EUR, GBP, JPY, CHF and MXN.
$35 $25 $15 $5 -$5 -$15 -$25 -$35 -$45 02 03 04 05 06 07 08 09 10 11 12
Aggregate IMM position in USD, $ bn, lhs USD trade-wtd index, rhs
110 105 100 95 90 85 80 75
Source: J.P. Morgan, TFE
Source: J.P. Morgan, CME
Estimated USD longs of $25.6bn on April 6th declined to
Aggregate USD longs increased from $14.1bn to
$24.6bn as of yesterday. AUD longs of A$23.1bn increased to A$24.9bn thisTuesday the high since early January of this year before declining to A$21.4bn as of yesterday. EUR longs of 1.1bn declined to turn short by 0.3bn.
$19.9bn between April 3rd and 10th. EUR shorts increased from $13.0bn to $16.6bn. JPY shorts likewise increased from $10.0bn to $10.2bn, refreshing the largest level of shorts since July 2007.
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Chart 5: Market capitalisation of US-listed currency ETFs

Weekly data, $bn. Positive value indicates longs in foreign currency and shorts in USD
HFR used for global macro hedge funds. Barclay BTOP Index used for currency managers.
Chart 6: Currency managers and global macro hedge funds -- Beta with trade weighted USD
5 4 3 2 1
Market cap of US-listed FX ETFs, $bn, lhs
75 80 85 90 95
USD trade-wtd index, inverted, rhs
3.0 2.0 1.0 0.0 -1.0 -2.0 -3.0 -4.0 06 07 08 09
Global macro hedge funds Currency managers
0 06 07
100 11 12
10
11
12
08
09
10
Market cap of US-listed FX ETFs of $1.3bn as of April 6th
Currency mangers returns beta with the trade weighted
was unchanged throughout the past two weeks. The current market cap is 33% below the year-to-date high of $1.9bn. From the 2011 high of $4.5bn marked in August, market cap has sank 72% while the trade-weighted USD has rallied by 5%.
Chart 7: Currency managers and global macro hedge funds -- Beta with G-10 carry strategies
dollar stood at 0.7 on April 6th, which declined significantly to 0.2 by yesterday. Meanwhile, global macro funds beta showed relatively smaller moves in the past two weeks, with their negative beta edging up from -0.2 to -0.3.
Positive beta implies a long in carry, a short in dollars. HFR used for global macro hedge funds. Barclay BTOP Index used for currency managers.
3.0
Currency managers
Chart 8: Currency managers and global macro hedge funds -- Beta with emerging markets carry strategies
Positive beta implies a long in carry, a short in dollars. HFR used for global macro hedge funds. Barclay BTOP Index used for currency managers.
2.0
Currency managers Global macro hedge funds
2.0 1.0
Global macro hedge funds
1.5 1.0 0.5
0.0 -1.0 -2.0 06 07 08 09 10 11 12

0.0 -0.5 -1.0 06 07 08 09 10 11 12
Currency managers returns beta with G10 carry declined
Returns beta with EM carry for currency managers was
from -0.1 to turn positive by as high as 0.2 this Monday, before settling down to 0.1 as of yesterday. Changes in beta for global macro funds were relatively smaller, edging lower from 0.4 to 0.3.
unchanged over the past two weeks at 0.2. Contrarily, global macro funds decreased their exposure to EM carry during the same period as their returns beta declined from 0.5 to 0.3.
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Model-driven strategies & manager performance

Alpha strategies: Price Momentum Overlay (buy Alpha strategies: Carry Carry strategies have lost 0.5% (G-10) to 2.3% (EM) over currencies exhibiting momentum in spot FX and in the month, in line with the decline in risky markets. Yearrate spreads) Price momentum overlay is a variant of standard price to-date returns are still decent, however, with the G-10 momentum in that it only positions in currencies where basket up 2.4% and the EM basket up 3.2%. The G-10 spot rates have been trending over the past year and interest pairs offering the highest volatility-adjusted carry are short rate spreads have been trending over the past month (as USD vs AUD and NZD and short EUR vs NOK and SEK. confirmation). The strategy performed terribly in 2011 In emerging markets, the dollar should be sold versus given range-bound currencies but is managing 1% return ARS, INR, TRY, BRL and CNY. Short USD/CNY is the this year. Currently this strategy holds a mix of USD longs only recent change in the basket composition since the rally and shorts like Forward Carry described earlier, since the in 12-mo USD/CNY forwards now provides positive carry trading rules involve common elements. The model is long on owning the renminbi while PBoC intervention continues USD vs SEK and AUD and short EUR vs GBP, NOK and to limit spot volatility. JPY. Alpha strategies: Forward Carry (trading FX on Hedge fund and currency manager performance interest rate momentum) HFRs monthly return indices for March published last week The forward carry strategy uses trends in interest rates to show quite variable performance across composites. Global generate signals on currencies, and buys the pairs in whose macro funds were down 1% in March, which has lowered fair rate expectations have moved over the past month. The their YTD return to +1%. Emerging markets funds lost strategy has earned 1.6% year-to-date and has typically 1.2% in March but are still up 7.7% for the year. Currency held a mix of USD shorts and longs this year. Rate funds lost 0.8% in March and are down 0.9% this year. momentum signals currently advise owning USD vs EUR, SEK, JPY, AUD, NZD and CAD, but selling USD vs GBP Other indices which track currency manager performance and NOK. on a daily basis show better performance through midApril than the HFR Currency Index indicates through March. The Parker index is flat while the BTOP index is up 0.7%.
Table 1: Current signals and recent performance
Returns Strategy G-10 carry Emerging markets carry Positions Short USD vs. AUD, NZD; short EUR vs NOK and SEK Short USD vs. ARS, INR, TRY, BRL and CNY Long USD vs EUR, SEK, JPY, AUD, NZD and CAD; short USD vs GBP and NOK Short USD vs. NOK; short EUR vs GBP, NOK and SEK Long USD vs. SEK and AUD; short EUR vs GBP, NOK and JPY 1W 0.6% -0.8% 1M -0.4% -2.3% 3M 1.2% 2.1% 12M -0.8% -7.4% YTD 2.4% 3.2%
Forward Carry G-10 carry with Forward Carry overlay Price Momentum overlay
-0.5% 0.6% -0.1%
-1.8% -0.7% 0.0%
1.0% -1.2% 1.7%
3.9% 1.9% -25.4%
1.6% -1.2% 1.0%
Source: J.P. Morgan. Note: Bid-offer spreads were taken into account when implementing daily strategy models, YTD returns are non-annualized.
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Chart 1: Performance of FX carry strategies

310 260 210 160 110 60 01
Source: J.P. Morgan
Chart 2: Performance of carry and momentum strategies

190 170 Forward Carry Forward Carry Overlay Price Momentum Overlay
G-10 Carry EM Carry
150 130 110 90
03
05
07
09
11
70
Source: J.P. Morgan
00
02
04
06
08
10
12
Table 2: Long-term performance of FX alpha strategies, currency managers and global macro funds
FX alpha strategies Currency manager performance Barclay Currency Barclay Group Traders Index* BTOP FX** Hedge fund performance HFR emerging market hedge funds*
Emerging Forward carry G-10 carry Markets carry (rates (unlevered) (IncomeEM) momentum) 2012 YTD YTD return Std dev IR 2011 Avg annual return Std dev IR 2007-2011 (5 years) Avg annual return Std dev IR 2002-2011 (10 years) Avg annual return Std dev IR 2.1% 11.0% 0.2 5.1% 8.5% 0.6 3.4% 11.1% 0.3 11.0% 11.2% 1.0 6.3% 7.8% 0.8 3.3% 6.7% 0.5 0.7% 10.2% 0.1 -9.8% 12.6% -0.8 1.9% 6.9% 0.3
G-10 carry with Forward Carry overlay
Price momentum Overlay
Parker Blacktree CMI**
HFR currency index*
HFR global HFR global macro hedge macro hedge funds** funds*
2.4% 0.4% 6.6
3.2% 0.4% 7.8
1.6% 0.3% 6.2
-1.3% 0.4% -3.4 5.0% 9.5% 0.5
1.0% 0.3% 3.2 -26.9% 14.7% -1.8
0.0% 0.2% 0.0 -6.2% 3.5% -1.8
0.7% 0.3% 2.3 -4.4% 4.9% -0.9
0.7% 0.4% 1.8 2.8% 3.2% 0.9
-0.9% NA NA -5.5% 4.2% -1.3
-1.6% 0.3% -5.9 -4.9% 0.9% -5.4
1.0% 1.1% 0.9 -4.2% 4.8% -0.9
7.7% 3.7% 2.1 -14.0% 12.0% -1.2
-2.4% 10.5% -0.2 2.7% 8.5% 0.3
-2.6% 10.5% -0.2 -2.2% 10.8% -0.2
1.5% 3.2% 0.5 NA NA NA
0.4% 4.1% 0.1 NA NA NA
0.2% 2.3% 0.1 3.6% 4.7% 0.8
-1.1% 4.7% -0.2 NA NA NA
-0.5% 1.0% -0.5 NA NA NA
4.9% 5.7% 0.9 10.0% 5.7% 1.8
-3.1% 14.4% -0.2 17.1% 12.5% 1.4
* monthly return composites ** daily return composites 2012 YTD returns and std dev are non-annualized Strategy descriptions
G-10 and emerging markets carry strategies select four currencies with highest ratio of carry (1-mo rate differential) to volatility (annualized spot vol over past 30 days). Forward Carry buys the currency in whose favor rate expectations have moved over the past month. Expectations are based on 1mo rates 3mos forward. Forward Carry Overlay only buys high yield currencies if rate expectations are also moving in that currencys favor, so combines standard carry and Forward Carry concepts. Forward Momentum Overlay only buys currencies which have appreciated in spot terms over the past year and are experiencing rising rate expectations relative to another currency over the past month. Thus it combines the standard price momentum framework with Forward Carry. All strategies are described in Alternatives to Standard Carry and Momentum in FX (Normand and Ghia, August 8, 2008) posted on www.morganmarkets.com/GlobalFXStrategy.
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Global FX Strategy FX Markets Weekly April 20, 2012 Raphael Brun-Aguerre (44-20) 7777-0282 raphael.x.brun-aguerre@jpmorgan.com JPMorgan Chase Bank NA, London Branch
Research Note
The upcoming Presidential election in France

France holds the first round of Presidential elections on April 22 and the second round on May 6. Although Socialist candidate Francois Hollande leads in the polls, the high percentage of undecided voters leaves the outcome uncertain. Policy differences between Hollande and the incumbent Nicolas Sarkozy of the UMP are not so distinct. candidacy. Whoever takes the lead can claim a psychological ascent, and a halfway victory. But the outcome for the remaining candidates will also be important, and their voting instruction crucial. Francois Bayrou, Marine Le Pen, and Jean Luc Melenchon currently gather around 40% of voters. It is not clear whether a specific voting instruction will be given by any of these candidates, although we can expect followers of Jean Luc Melenchon to prefer Francois Hollande, while supporters of Marine Le Pen should direct their votes towards Nicolas Sarkozy. In this setting, the followers of Francois Bayrou might have a crucial role, but guessing their choice is very hard. These voters originate from a centre-right tradition, but many seem reluctant to vote for Nicolas Sarkozy. The two-week period between the two rounds will see strategic moves from both candidates trying to secure voters on a larger scale. It is also important to notice that a large proportion of voters, around 30%, have not yet decided who to vote for. And an increasing proportion of people seem reluctant to vote (more than 30% of voters claim to have little or no interest in the Presidential election). The final few days will be important in trying to convince undecided voters. The tradition requires the two main candidates to debate on TV a week before the second round of the election, and this exercise could prove critical for those undecided voters.
With the first round of the French Presidential election approaching, we review the most recent developments of the campaign, and the most likely outcomes. According to the latest polls, Francois Hollande (Socialist party, centreleft) remains ahead, but his lead has been declining over the past few weeks. A Socialist victory is not secured, and three factors should be monitored. First, Nicolas Sarkozy (UMP party, centre-right) could gather momentum before the first round of the election and create a psychological shock. Second, it is not clear which voting instructions will be given by smaller parties for the second round. And third, a TV debate will take place between the two main candidates, which can impact undecided voters. Beyond the outcome of the election, we also present the main proposals of the two candidates, and highlight two differences. First, both candidates want to increase government revenues, but the sources of these additional revenues differ. Second, the visions of the two candidates for the governance of the Euro area are quite different.
What are the main differences between the two main candidates?
As Francois Hollande victory seems most likely at that stage, it is important to highlight the possible implications from such a change. Both Francois Hollande and Nicolas Sarkozy want to achieve a balanced budget if they are elected. And in terms of timing, the difference is small: the current French president has set up the objective of a balanced budget for 2016, while the socialist candidate targets the same outcome for 2017. On the fiscal side again, both candidates agree on the implementation of a balanced budget golden rule. The difference here is that Nicolas Sarkozy would like to reach a constitutional amendment, while Francois Hollande would rather propose a simple law. In the details, the source of the balancing between spending and revenues diverges substantially. Both want to reduce public spending, although neither has been clear on how to do it, and increase revenues. On the latter, an important difference is that Francois Hollande wishes to increase taxes on higher incomes, while the main proposition of Nicolas Sarkozy is to increase the VAT tax rate by 1.6%pt to 21.2%. A corporate tax rebalancing should also occur if
What outcome should we expect from the Presidential election?

The French institutional process requires two rounds for the Presidential election. Ten candidates will compete for the first round that is due to happen on Sunday 22nd of April, and only two candidates can move on the second round that is due to happen on Sunday 6th of May. Among the ten candidates, Francois Hollande and Nicolas Sarkozy have been leading the polls for some time, gathering around 28% of voters according to the latest polls, while the following three candidates could hope to reach 10% or more (these candidates are Francois Bayrou, Marine Le Pen, and Jean Luc Melenchon). There is little doubt that Francois Hollande and Nicolas Sarkozy will compete in the second round, but the dynamics of the first round matter for the final outcome. Francois Hollande lost some ground in the last few weeks, while his main contestant has gathered momentum around his
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Global FX Strategy FX Markets Weekly April 20, 2012 Raphael Brun-Aguerre (44-20) 7777-0282 raphael.x.brun-aguerre@jpmorgan.com JPMorgan Chase Bank NA, London Branch
Francois Hollande is elected, with a tax cut to 15% and 30% for very small and small companies, respectively, and a 1.5%pt tax hike to 35% for large companies. On the other hand, Sarkozy proposed a revision of the tax system for large companies benefiting from tax exemptions, and he mentioned the possibility to tax profits made abroad by French companies. Both candidates also proposed a financial transaction tax to be imposed on the banking sector, but Francois Hollande stepped in further by proposing a higher tax rate for banks, and a separation of the retail and investment activities. The difference is also important in relation to the governance of the Euro area. Francois Hollande expressed a
Vote intentions: first round of the French Presidential election
% of people expressing preference (Ifop survey) Nov. 4 Nov. 30 Dec. 15 J.L. Melenchon 5 7.5 6.5 F. Hollande 36 29.5 27.5 E. Joly 5 4 5 F. Bayrou 6 8.5 11 N. Sarkozy 25 26 24 M. Le Pen 18 19.5 20 Jan. 6 6 28 3 12 26 19 Jan. 27 8 28 3 13.5 22 20.5
desire to renegotiate the fiscal compact adopted on December 9th, 2011. First, Francois Hollande wishes more action from the ECB, but he stated that this institution should remain independent. Second, he asked for Eurobonds to be introduced in order to mutualise some part of the European debt. It is hard to see how much progress Hollande could make here. France will not be able to do anything unilaterally and it is going to be difficult to convince Germany to change course. More broadly on the Euro area governance, both candidates are still in the traditional French intergovernmental camp and are reluctant to give up national sovereignty.
Feb. 12 8.5 30 3 12.5 25 17.5
Feb. 22 8.5 29 2.5 11 27 18
Mar. 7 8.5 29.5 3 12.5 26 18
Mar. 21 10.5 28 2.5 12 28 17
Apr. 4 12.5 27 3 10.5 28.5 16
Apr. 15 13.5 26 2.5 11 28 16
The score of other minor candidates has not been presented and the total does not sum up to 100.
Vote intentions: second round of the French Presidential election

% of people expressing preference (Ifop survey) Nov. 4 F. Hollande N. Sarkozy 57 43 Nov. 30 56 44 Dec. 15 56 44 Jan. 6 54 46 Jan. 27 57 43 Feb. 12 57.5 42.5 Feb. 22 56 44 Mar. 7 55.5 45.5 Mar. 21 55 45 Apr. 4 53.5 46.5 Apr. 15 53.5 46.5
The question asked was: "If the second leg of the presidential election was to happen next Sunday, for which candidate would you be likely to vote?"
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Global FX Strategy FX Markets Weekly April 20, 2012 Justin Kariya (1-212) 834-9618 Anna Hibino (61-2) 9220-1381 J.P. Morgan Securities Australia Limited
Market movers
(all times BST; +9hrs for Sydney, +8hrs for Tokyo, -5hrs for New York)
Date Country Data/Event
JPM
During the week Apr 23 (Mon) UK China Australia China Japan Switzerland Taiwan Euro Area 02:30 03:30 06:00 06:00 08:00 09:00 08:00 08:00 08:30 08:30 09:00 09:00 09:00 US Canada Israel Euro Area Apr 24 (Tue) Japan Australia China New Zealand Switzerland Sweden UK Euro Area 13:00 21:30 13:30 15:30 16:45 00:50 07:00 02:30 03:00 04:00 07:00 08:30 09:30 07:45 09:30 10:00 Hungary Canada US 13:00 13:30 20:30 13:00 13:00 BMO BMO 14:00 15:00 15:00 15:00 15:00 18:00 AMC AMC AMC AMC AMC na na Apr 25 (Wed) Euro Area UK US 08:00 09:00 09:30 12:30 12:30 12:30 BMO BMO 13:30 17:30 18:00 Nationwide HPI (%m/m, sa) Leading index (CI) PPI (%q/q, sa) HSBC mfg. PMI flash (index, sa) Coincident index final (CI) Leading index final (CI) SNB publishes monthly statistical bulletin IP (%oya) France PMI services flash (index, sa) France PMI mfg. flash (index, sa) Germany PMI services flash (index, sa) Germany PMI mfg. flash (index, sa) PMI services flash (index, sa) PMI composite flash (index, sa) PMI mfg. index flash (index, sa) ConocoPhillips earnings Texas Instruments earnings Wholesale inventories (%m/m, sa) BoI rate announcement ECB's Weidman speaks in New York Corporate service prices (%oya) Shoko Chukin small firm survey (DI) CPI (%q/q, sa) Conference board leading economic index Credit card spending (%m/m, sa) Trade balance (CHF bn) Unemployment rate (%) Public sector finances (GBP bn) France consumer confidence Spain sells bills Italy sells zero coupon notes and I/L Bonds NBH rate announcement Retail sales (%m/m, sa) BoC's Carney testifies at House of Commons Finance Committee AT&T earnings Illinois Tool Works earnings Teck Resources earnings United Technologies earnings S&P/CS HPI (%oya) FHFA house price index (%m/m) New home sales (000s, saar) Consumer confidence (index, sa) Richmond Fed mfg. Index US sells 2-year note ACE Limited earnings AFLAC, Inc. earnings Apple Inc. earnings Norfolk Southern earnings Amgen Inc earnings 3M earnings Coach, Inc earnings ECB's Draghi testifies to EU parliament Committee ECB bank lending survey GDP (%q/q, sa) Boeing earnings Caterpillar earnings Southern Company earnings Praxair earnings General Dynamic earnings Durable goods orders (%m/m, sa) FOMC rate announcement US sells 5-year note 4Q 1Q 1Q 1Q 1Q 1Q 1Q Mar Apr 0.25 0.97 2.04 na 1.36 1.7 0.1 0.924 2.129 0.47 1.357 1.695 -1.5 0.25 (Feb) (Mar) 2.4 0.25 (4Q ) -0.3 1Q 1Q 1Q 1Q 1Q 1Q 1Q 1.85 1.64 10.8 1.15 1.34 1.4 0.75 1.868 1.652 9.944 1.125 1.457 1.483 0.751 1Q 1Q 1Q 1Q Feb Feb Mar Apr Apr 0.56 0.94 0.63 na 0.574 0.952 0.884 1.197 -3.5 0.1 320 70 7 (Jan) (Jan) (Feb) (Mar) (Mar) -3.78 0.0 313 70.2 7 Apr Feb 7.00 7.00 0.2 (Mar) (Jan) 7.00 0.5 Mar Mar 1Q Mar Mar Mar Mar Mar Apr 87 3.00 8.0 -0.6 46.5 0.8 0.5 -0.6 (Feb ) (Feb ) (4Q ) (Feb ) (Feb ) (Feb ) (Feb ) (Feb ) (Mar) 0.5 2.68 7.8 -7.80 87 -0.6 48.7 0.0 Apr Mar 1Q Apr Feb Feb Mar Apr Apr Apr Apr Apr Apr Apr 1Q 1Q Feb Apr 2.50 2.50 n.a. 0.18 -6.5 50.1 47.2 52.3 49.0 49.3 49.3 48.1 2.06 0.28 (Jan) (Mar) -1 2.50 0.7 0.5
Forecast
Consensus
0.5 (Mar) (Feb ) (4Q ) (Mar) (Jan ) (Jan ) (Feb ) (Mar) (Mar) (Mar) (Mar) (Mar) (Mar) (Mar)
Previous
-1.00 101.27 0.3 48.3 93.7 93.6 8.4 50.1 46.7 52.1 48.4 49.2 49.10 47.7
26
Global FX Strategy FX Markets Weekly April 20, 2012 Justin Kariya (1-212) 834-9618 Anna Hibino (61-2) 9220-1381 J.P. Morgan Securities Australia Limited
Market movers
(all times BST; +9hrs for Sydney, +8hrs for Tokyo, -5hrs for New York)
Date Country Data/Event JPM
Apr 25 (Wed) 19:00 19:15 AMC na Canada New Zealand Apr 26 (Thu) UK Japan Sweden Norway Euro Area 21:15 22:00 00:01 05:30 08:15 08:30 09:00 08:00 10:00 10:00 13:00 US BMO BMO BMO BMO BMO 11:00 12:00 12:45 13:30 15:00 18:00 AMC AMC AMC na na Apr 27 (Fri) UK Japan 00:01 00:30 00:30 00:30 00:30 00:30 00:30 00:50 00:50 06:00 06:00 China Switzerland Sweden Euro Area US 02:30 02:35 08:00 09:00 08:30 08:30 07:00 10:00 BMO BMO BMO 13:30 13:30 13:30 13:30 14:55 na Canada Mexico 13:10 15:00 FOMC to release projections of economy and Fed Funds Rate Fed's Bernanke holds press conference Goldcorp earnings Eli Lilly & Company earnings Bank of Canada's Carney testifies at Senate Banking Committee RBNZ rate announcement Nationwide consumer confidence (index) All sector activity index (%m/m, sa) Consumer confidence (index) PPI (%m/m) Unemployment rate (%) ECB's Draghi to attend markets conference Euro-Zone consumer confidence final Italy sells bills Germany HICP (%oya) Exxon Mobil earnings Colgate-Palmolive earnings Time Warner Cable earnings Tyco International earnings Lockheed Martin earnings Potash Corp earnings PepsiCo earnings UPS earnings Initial jobless claims Pending home sales (%m/m, sa) US sells 7-year note Amazon.com earnings Starbucks earnings Metlife earnings Bristol-Myers Squibb Company Dow Chemical earnings GFK consumer confidence (%bal, sa) Unemployment rate (%, sa) Jobs to applicants ratio (sa) All household spending (%oya) Nationwide CPI (%oya) Nationwide core CPI (%oya) Tokyo CPI (%oya) IP (%m/m, sa) Retail sales (%m/m, sa) Construction orders (%oya) Housing starts (%oya) BoJ rate announcement Industrial profits (ytd, %oya) MNI business condition survey KOF leading indicator (index, sa) SNB's Jordan speaks at shareholder meeting Retail sales (%m/m, sa) Trade balance (SEK bn) Germany GFK consumer confidence (index, sa) Italy sells Bonds/Floating rate notes Simon Property Group earnings Procter & Gamble earnings Merck & Co earnings GDP advanced (%q/q, saar) Personal consumption advanced (%q/q, saar) GDP price index advanced (%q/q, saar) PCE core advanced (%q/q, saar) U. Michigan consumer confidence final (index) Chevron earnings BoC Carney speaks in Ottawa Banxico rate announcement Apr 4.50 4.50 (Mar) 4.50 1Q 1Q 1Q 1Q 1Q 1Q 1Q Apr 1Q 2.92 NA 0.92 0.98 2.5 0.648 0.922 0.976 2.5 2.3 2.2 2.1 75.7 3.198 (4Q) (4Q) (4Q) (4Q) (Apr) 3.0 2.1 0.9 1.3 75.7 1Q 1Q 1Q 1Q 1Q Apr Mar Mar Mar Mar Mar Apr Mar Mar Mar Mar Apr Mar Apr Apr Mar Mar May 0.2 -0.2 6.5 5.9 7.8 0.1 8.2 0.1 (Feb ) (Mar) (Mar ) (Feb ) (Feb ) (Apr) 0.08 1.2 5.9 5.9 1.0 0.1 4.4 0.76 3.5 0.65 0.68 0.49 0.37 0.364 0.39 1.26 0.641 0.598 -30 4.5 0.76 4.0 0.4 0.1 -0.1 2.3 -0.5 (Mar ) (Feb ) (Feb ) (Feb ) (Feb ) (Feb ) (Mar ) (Feb ) (Feb ) (Feb ) (Feb ) -31 4.5 0.75 2.3 0.3 0.1 -0.1 -1.6 2.00 -1.8 7.5 0.1 -5.2 Apr 1Q 1Q 1Q 1Q 1Q 1Q 1Q 1Q 21-Apr Mar 1.93 1.24 1.29 0.78 1.66 0.62 0.64 1.01 2.2 2.05 1.235 1.237 0.79 1.708 0.639 0.669 1.014 375 1.2 14-Apr (Feb) 386 -0.5 (Apr) 2.3 Apr -19.8 (Mar) -19.8 Apr Mar Feb Apr Mar Apr 0.8 2.50 2.50 44 -0.2 1.0 -0.3 2.5 (Mar) (Feb ) (Jan ) (Mar) (Feb ) (Mar) 2.50 44 -1 0.0 0.4 2.6 1Q 1Q 0.57 0.81 0.542 0.785
Forecast Consensus
Previous
27
Global FX Strategy FX Markets Weekly April 20, 2012 Justin Kariya (1-212) 834-9618 justin.p.kariya@jpmorgan.com JPMorgan Chase Bank NA
Event risk calendar

Month Date Country Event
April 2012
20-22 22 23 24-25 25
IMF/World Bank Euro area Switzerland US Euro area China New Zealand Euro area Australia Euro area Euro area Switzerland Russia Syria UK G20 Euro area MENA New Zealand UK G8 Euro area OECD Iran Egypt Euro area Brazil Euro area India New Zealand Euro area Switzerland UK Euro area New Zealand Euro area G20 New Zealand US Norway Euro area US Euro area Hong Kong Euro area
IMF/World Bank spring meeting in Washington French Presidential election (round 1) SNB FX reserve data FOMC rate announcement (incl. press conference) Euro area Bank Lending Survey China/US Strategic Dialogue (provisional) Fonterra dairy auction results ECB rate announcement RBA Statement on Monetary Policy French Presidential election (round 2) Greece parliamentary elections SNB FX reserve data Putin takes office Parliamentary election (Postponed from February) BoE rate announcement G20 Sherpas meeting Eurogroup/Ecofin meeting Arab League Summit (postponed from March) Fonterra dairy auction results BoE Quarterly Inflation Report G8 conf at Camp David Newly elected French President takes office. OECD Forum Iranian Nuclear Talks Egyptian Presidential elections EU leaders summit COPOM rate announcement Ireland fiscal pact referendum Presidential election (indirect) Fonterra dairy auction results ECB rate announcement SNB FX reserve data BoE rate announcement French legislative election (round 1) RBNZ Monetary Policy Statement French legislative election (round 2) G20 Leaders Summit Fonterra dairy auction results FOMC rate announcement (incl. press conference) Norges Bank Monetary Policy Report Eurogroup/Ecofin meeting Final primary in Republican nomination process EU leaders summit New Hong Kong Chief Executive takes office Cyprus assumes EU Council Presidency
May 2012 1 3 4 6 6 7 7 7 10 10-11 14-15 15 15 16 18-19 21 22-23 23 23-24 25 30 31 June 2012 5 6 7 7 10 14 17 18-19 19 19-20 20 21-22 26 28-29 July 2012 1 1
28
Event risk calendar

Month Date Country Event
July 2012
1 3 4 5 6 11 17 18 25 27 31
Mexico New Zealand Sweden Euro area Switzerland Brazil New Zealand Canada Euro area UK US India Euro area Switzerland UK Australia Kenya US Brazil Hong Kong US APEC Euro area US New Zealand G20 China China
Presidential/legislative election Fonterra dairy auction results Riksbank Monetary Policy Report ECB rate announcement SNB FX reserve data COPOM rate announcement Fonterra dairy auction results BoC Monetary Policy Report Euro area Bank Lending Survey Olympics begin FOMC rate announcement Presidential election ECB rate announcement SNB FX reserve data BoE Quarterly Inflation Report RBA Statement on Monetary Policy Presidential election Republican Party Convention COPOM rate announcement Legislative Council elections Democratic Party Convention APEC 2012 Leaders Week in Vladivostok ECB rate announcement FOMC rate announcement RBNZ Monetary Policy Statement Meeting of Finance Ministers and Central Bank Governors Chinese leadership transition 18th Congress of the Chinese Communist Party ECB rate announcement Presidential election COPOM rate announcement IMF/World Bank annual meeting in Tokyo EU leaders summit BoC Monetary Policy Report FOMC rate announcement (incl. press conference) Riksbank Monetary Policy Report Parliamentary elections Norges Bank Monetary Policy Report Euro area Bank Lending Survey Presidential and Congressional elections ECB rate announcement RBA Statement on Monetary Policy Meeting of Finance Ministers and Central Bank Governors BoE Quarterly Inflation Report COPOM rate announcement Parliamentary elections
August 2012
2 7 8 10 14 27 29
September 2012 3 2-9 6 12 13 13-14 October 2012 4 7 10 12-14 18-19 24 23-24 25 28 31 31 November 2012 6 8 9 9-10 14 28 30
Euro area Venezuela Brazil IMF/World Bank Euro area Canada US Sweden Ukraine Norway Euro area US Euro area Australia G20 UK Brazil Romania
29
Central bank announcement dates in 2012

2012 APR Australia Brazil Canada Chile Colombia Czech Republic Euro area Hungary India Indonesia Israel Japan Korea Malaysia Mexico New Zealand Norway Philippines Poland South Africa Sweden Switzerland Thailand Turkey United Kingdom United States 3 18 17 17 27 4 24 17 12 23 10, 27 13 27 26 10 19 4 19 14 18 5 25 2 29 10 13 21 7 20 25 19 5 31 16 2 9 24 MAY 1 30 17 25 3 3 29 10 28 23 10 3 JUN 5 5 14 29 28 6 26 12 25 15 8 8 14 20 14 6 JUL 3 11 17 12 27 5 24 12 23 12 12 5 20 26 29 26 4 19 4 13 5 20 6 13 5 18 6 12 AUG 7 29 SEP 4 5 31 2 2 28 9 27 9 9 28 27 6 25 13 24 19 13 6 7 13 OCT 2 10 23 26 4 30 11 29 5,30 11 26 25 31 25 3 25 17 18 4 24 28 20 8 7 22 23 1 8 27 8 26 20 8 8 30 NOV 6 28 DEC 4 4 14 19 6 18 11 20 13
6 19 13 5 18 13 18 6 11
30
Global FX Strategy FX Markets Weekly April 20, 2012 David Hensley (1-212) 834-5516 david.hensley@jpmorgan.com JPMorgan Chase Bank NA
Global central bank forecasts

Official rate Global excluding US Developed Emerging Latin America EMEA EM EM Asia The Americas United States Canada Brazil Mexico Chile Colombia Peru Europe/Africa Euro area Refi rate United Kingdom Bank rate Czech Republic 2-wk repo Hungary Israel Poland Romania Russia South Africa Turkey Asia/Pacific Australia New Zealand Japan Hong Kong China Korea Indonesia India Malaysia Philippines Thailand Taiwan Cash rate Cash rate O/N call rate Disc. wndw 1-yr working Base rate BI rate Repo rate O/N rate Rev repo 1-day repo Official disc. 2-wk dep Base rate 7-day interv Base rate Repo rate Repo rate Top of IRC Fed funds O/N rate SELIC O/N Repo rate Disc rate Repo rate Reference Current Change since (bp) Peak1 Trough1 -294 -239 -363 -189 -661 -272 -124 -475 -513 -350 -1000 -525 -325 -475 -225 -321 -325 -525 -300 -400 -300 -200 -500 N/A -650 N/A -130 -300 -575 -47 -625 -91 -200 -700 -50 -50 -350 -200 -175 43 58 5 136 98 210 143 21 0 75 100 0 450 225 300 37 0 0 0 175 200 100 0 N/A 0 N/A 54 125 0 0 0 125 125 0 375 100 0 175 62.5 6 Dec 11 (-25bp) 10 Mar 11 (-50bp) 5 Oct 10 (-5bp) 6 Jul 11 (+25bp) 10 Jun 11 (+25bp) 9 Feb 12 (-25bp) 25 Oct 11 (+25bp) 5 May 11 (+25bp) 1 Mar 12 (-25bp) 25 Jan 12 (-25bp) 1 May 12 2Q 13 (+25bp) 26 Apr 12 3Q 12 (+25bp) 27 Apr 12 On hold 4Q 12 (+25bp) 8 Dec 11 (-25bp) 5 Mar 09 (-50bp) 6 May 10 (-25bp) 20 Dec 11 (+50bp) 23 Jan 12 (-25bp) 8 Jun 11 (+25bp) 29 Mar 12 (-25bp) 14 Sep 11 (-25bp) 18 Nov 10 (-50bp) 3 May 12 3 May 12 On hold 3Q 13 (+25bp) 10 May 12 On hold 24 Apr 12 3Q 12 (-50bp) 23 Apr 12 1Q 13 (+25bp) 9 May 12 2 May 12 Apr 12 On hold 2 May 12 (-25bp) 1Q 13 (+25bp) 16 Dec 08 (-87.5bp) 25 Apr 12 On hold 8 Sep 10 (+25bp) 7 Mar 12 (-75bp) 17 Jul 09 (-25bp) 12 Jan 12 (-25bp) 24 Feb 12 (+25bp) 12 May 11 (+25bp) 17 Apr 12 1Q 13 (+25bp) 18 Apr 12 18 Apr 12 (-75bp) 27 Apr 12 On hold 17 Apr 12 May 12 (+25bp) 30 Apr 12 On hold 10 May 12 On hold rate (%pa) 05-07 avg 2.07 2.85 0.58 6.09 7.10 6.06 5.71 1.26 0.125 1.00 9.75 4.50 5.00 5.25 4.25 1.82 1.00 0.50 0.75 7.00 2.50 4.50 5.25 5.25 5.50 11.50 3.53 4.25 2.50 0.05 0.50 6.56 3.25 5.75 8.50 3.00 4.00 3.00 1.875 -225 -149 -278 -97 -403 -13 -14 -414 -430 -269 -565 -342 38 -199 24 -191 -189 -444 -160 -19 -174 -6 -325 N/A -265 N/A -58 -164 -482 -15 -542 48 -85 -412 164 -22 -307 -75 -62.5 Last change Next mtg Forecast next change Forecast (%pa) Jun 12 Sep 12 Dec 12 Mar 13 Jun 13 Sep 13 Dec 13 2.03 2.78 0.58 5.92 6.75 5.76 5.67 1.21 0.125 1.00 9.00 4.50 5.25 5.25 4.25 1.77 1.00 0.50 0.75 7.00 2.50 4.50 5.00 5.25 5.50 10.00 3.51 4.25 2.50 0.05 0.50 6.56 3.25 5.75 8.25 3.00 4.00 3.00 1.875 2.01 2.77 0.59 5.87 6.76 5.54 5.67 1.21 0.125 1.00 9.00 4.50 5.50 5.25 4.25 1.73 1.00 0.50 0.75 6.50 2.50 4.50 5.00 5.25 5.50 9.00 3.51 4.25 2.75 0.05 0.50 6.56 3.25 5.75 8.25 3.00 4.00 3.00 1.875 2.03 2.79 0.59 5.94 6.76 5.55 5.80 1.21 0.125 1.00 9.00 4.50 5.50 5.25 4.25 1.73 1.00 0.50 0.75 6.00 3.00 4.50 5.00 5.25 5.50 9.00 3.58 4.25 3.00 0.05 0.50 6.81 3.25 5.75 8.25 3.00 4.00 3.00 1.875 2.06 2.83 0.60 6.00 6.88 5.67 5.80 1.25 0.125 1.25 9.25 4.50 5.50 5.25 4.25 1.76 1.00 0.50 0.75 6.00 3.00 4.50 5.50 5.50 5.50 9.00 3.59 4.25 3.25 0.05 0.50 6.81 3.25 5.75 8.25 3.00 4.00 3.00 2.00 2.14 2.94 0.62 6.23 7.24 5.81 6.02 1.34 0.125 1.75 10.00 4.50 5.50 5.25 4.25 1.78 1.00 0.50 0.75 6.00 3.25 4.50 6.00 5.75 5.50 9.00 3.73 4.50 3.75 0.05 0.50 7.06 3.50 6.00 8.50 3.00 4.00 3.00 2.125 2.16 2.97 0.64 6.27 7.24 5.94 6.04 1.36 0.125 2.00 10.00 4.50 5.50 5.25 4.25 1.80 1.00 0.50 1.00 6.00 3.25 4.50 6.50 6.00 5.50 9.00 3.76 4.75 3.75 0.05 0.50 7.06 3.50 6.25 8.50 3.00 4.00 3.00 2.25 2.18 3.00 0.66 6.29 7.24 5.97 6.07 1.39 0.125 2.50 10.00 4.50 5.50 5.25 4.25 1.81 1.00 0.50 1.25 6.00 3.50 4.50 6.50 6.00 5.50 9.00 3.78 4.75 3.75 0.05 0.50 7.06 3.75 6.25 8.50 3.00 4.00 3.00 2.25
24 May 12 On hold
21 Feb 12 (-100bp) 18 Apr 12 May 12
17 Dec 08 (-100bp) 26 Apr 12 On hold 10 May 12 3Q 13 (+25bp) 10 May 12 2Q 13 (+25bp) 17 Apr 12 17 Apr 12 (-25bp) 3 May 12 2 May 12 On hold On hold 19 Apr 12 On hold
30 Jun 11 (+12.5bp) 28 Jun 12 1Q 13 (+12.5bp)
1 Refers to peak rate between 2007-08 and trough rate from 2009-present Bold denotes move since last GDW and forecast changes. Underline denotes policy meeting during upcoming week. Aggregates are GDP-weighted averages. Source: J.P. Morgan
31
Global FX Strategy FX Markets Weekly April 20, 2012 John Normand (44-20) 7325-5222 Justin Kariya (1-212) 834-9618 J.P. Morgan Securities Ltd, JPMorgan Chase Bank NA
J.P. Morgan FX forecasts vs. forwards & consensus

Exchange rates vs. U.S dollar Current Majors EUR JPY GBP AUD CAD NZD JPM USD index DXY Apr 20 1.32 81.7 1.61 1.04 0.99 0.82 81.3 79.3 Jun 12 1.34 86 1.61 1.08 0.98 0.82 81.3 79.0 Sep 12 1.36 84 1.62 1.10 0.96 0.84 80.6 77.8 Dec 12 1.36 83 1.62 1.08 0.98 0.82 81.4 77.7 Mar 13 1.36 82 1.62 1.09 0.97 0.82 81.3 77.5 JPM forecast gain/loss vs Dec-12* forward rate 2.9% -2.0% 0.8% 6.9% 1.9% 2.3% Consensus** 5.1% -3.5% 3.3% 3.6% 1.8% 0.2% Actual change in local FX vs USD Past 1mo 1.4% -3.6% 2.7% -2.9% 1.2% -1.3% 0.1% -0.9% YTD 1.8% -5.8% 3.6% 1.4% 3.0% 4.9% -1.5% -1.1% Past 12mos -9.4% 0.2% -2.6% -3.6% -3.9% 1.8% 4.8% 7.0%
Europe, Middle East & Africa CHF ILS SEK NOK CZK PLN HUF RUB TRY ZAR Americas ARS BRL CLP COP MXN PEN VEF LACI Asia CNY HKD IDR INR KRW MYR PHP SGD TWD THB ADXY EMCI Exchange rates vs Euro JPY GBP CHF SEK NOK CZK PLN HUF RON TRY RUB 108 0.82 1.20 8.83 7.54 24.91 4.19 297 4.38 2.36 38.84 115 0.83 1.21 8.95 7.65 24.65 4.10 294 4.40 2.41 39.22 114 0.84 1.20 8.90 7.60 24.65 4.10 285 4.35 2.41 39.50 113 0.84 1.20 8.80 7.55 24.60 4.10 285 4.35 2.38 39.79 112 0.84 1.20 8.80 7.50 24.50 4.10 285 4.35 2.31 39.79 -4.7% -2.1% -0.1% 1.5% 1.1% 1.5% 5.2% 7.8% 2.5% 4.9% 1.5% -8.2% -1.7% 3.2% -0.1% -1.2% 0.8% 0.3% 2.2% -1.8% -4.0% -1.6% 0.91 3.75 6.70 5.72 18.89 3.18 225 29.45 1.79 7.81 4.40 1.88 486 1774 12.97 2.65 4.29 107.5 6.31 7.76 9184 52.1 1140 3.06 42.63 1.25 29.50 30.88 116.6 97.1 0.90 3.75 6.68 5.71 18.40 3.06 219 29.27 1.80 7.70 4.55 1.84 480 1800 13.20 2.67 4.30 107.8 6.20 7.75 9300 49.5 1120 3.05 41.50 1.25 29.75 30.25 116.7 98.7 0.88 3.70 6.54 5.59 18.13 3.01 210 29.04 1.77 7.70 4.70 1.82 480 1825 12.80 2.68 4.30 108.9 6.20 7.75 9350 50.5 1100 3.05 43.00 1.24 30.00 30.50 119.7 99.6 0.88 3.65 6.47 5.55 18.09 3.01 210 29.26 1.75 7.80 4.80 1.80 480 1850 12.00 2.69 4.30 111.2 6.10 7.75 9450 51.5 1090 3.00 42.50 1.23 30.50 30.75 121.2 100.4 0.88 3.65 6.47 5.51 18.01 3.01 210 29.26 1.70 7.80 5.20 1.80 500 1850 11.80 2.70 6.50 110.4 6.10 7.75 9400 51.5 1090 2.98 42.25 1.23 30.50 30.75 121.2 100.42 3.8% 0.1% -0.1% 5.9% 5.9% 3.4% 1.3% 1.3% -4.1% 1.8% 0.6% 0.3% -6.4% -6.6% -0.6% -1.2% -1.2% -0.5% -4.0% -2.2% 2.8% 3.8% 4.4% 4.1% 4.4% 8.2% 10.9% 4.4% 8.0% 3.9% 7.0% 8.9% 4.3% -1.3% 12.1% -0.4% -0.1% 8.4% 2.2% 5.0% 3.9% 5.9% 5.4% 7.4% 3.4% 0.9% -0.6% 2.7% -2.4% 2.2% -0.7% 5.9% 0.4% 12.6% 1.9% 0.4% 1.1% 1.6% 3.0% 2.2% 0.3% 2.9% -0.7% 0.2% -1.2% -8.1% -0.2% 1.2% -1.5% 1.2% 0.0% -3.2% -0.1% -0.1% -1.0% -5.4% -0.7% -0.2% 0.6% 1.6% 0.3% 0.0% -0.4% -2.4% 3.0% 1.5% 2.8% 4.5% 4.5% 8.4% 8.0% 9.1% 5.6% 3.6% -2.4% -0.8% 6.8% 9.3% 5.9% 1.6% 0.0% 2.9% -0.2% 0.1% -1.3% 1.9% 1.1% 3.4% 2.8% 3.8% 2.6% 2.2% 1.3% 4.0% -2.7% -9.3% -8.9% -6.3% -12.3% -14.7% -19.3% -5.0% -15.1% -14.0% -7.4% -16.8% -3.9% 0.5% -11.8% 6.3% 0.0% -10.5% 3.4% 0.1% -6.0% -14.8% -5.2% -1.9% 1.1% -1.1% -2.1% -3.1% -1.5% -9.9%
Actual change in local FX vs EUR -5.0% 1.2% 0.5% -0.3% 0.2% 1.6% 0.8% -1.1% -0.6% -2.1% 1.5% -7.5% 1.7% 1.3% 1.0% 2.6% 2.7% 6.6% 6.1% -1.1% 3.7% 7.4% 10.6% 7.5% 7.3% 0.6% 3.4% -3.3% -5.9% -11.0% -6.6% -6.3% 5.0%
indicates rev ision resulting in stronger local FX , indicates rev ision resulting in w eaker local FX * Negativ e indicates JPM more bullish on USD than consensus,** Consensus Economics Publication: Foreign Exchange Consensus Forecasts Feb 2012 Source: J.P.Morgan
32
J.P. Morgan forecasts: rates, credit, equities & commodities

Interest rates
Current Fed funds rate 10-year yields Euro area United Kingdom Japan GBI-EM hedged in $ Refi rate 10-year yields Repo rate 10-year yields Overnight call rate 10-year yields Yield - Global Diversified 0.125 2.00 1.00 1.74 0.50 2.04 0.05 0.94 6.41 Current 200 264 652 866 359 396 Index JPMorgan JULI Porfolio Spread to Treasury iBoxx Euro Corporate Index JPMorgan Global High Yield Index STW iBoxx Euro HY Index EMBI Global JPM EM Corporates (CEMBI) Quarterly Averages Jun-12 0.125 2.40 1.00 1.80 0.50 2.55 0.05 1.15 Sep-12 0.125 2.50 1.00 2.00 0.50 2.55 0.05 1.05 Dec-12 0.125 2.50 1.00 2.00 0.50 2.40 0.05 1.05 6.30 Mar-13 0.125 2.50 1.00 2.00 0.50 2.40 0.05 1.15 0.5% 2.0% YTD Return* 2.6% 3.7% 5.0% 10.5% 5.3% 5.8% -1.1% 0.8% -0.4% YTD Return* United States
Credit Markets
US high grade (bp over UST) Euro high grade (bp over Euro gov) USD high yield (bp vs. UST) Euro high yield (bp over Euro gov) EMBIG (bp vs. UST) EM Corporates (bp vs. UST)
Commodities
Brent ($/bbl) Gold ($/oz) Copper ($/metric ton) Corn ($/Bu)
Current 122 1655 8266 6.21
12Q2 112 1825 8500 6.60
12Q3 120 1900 8875 6.70
12Q4 125 1925 9000 6.40
13Q1 125 1850 8750
GSCI Index Energy Precious Metals Industrial Metals Agriculture
YTD Return* 6.6% 2.7% 5.0% 1.3%
Foreign Exchange
EUR/USD USD/JPY GBP/USD USD/BRL USD/CNY USD/KRW USD/TRY
YTD Return
Current 1.31 82.4 1.59 1.83 6.30 1129 1.79
Jun-12 1.34 86 1.61 1.84 6.20 1120 1.80
Sep-12 1.36 84 1.62 1.82 6.20 1100 1.77 US
Dec-12 1.36 83 1.62 1.80 6.10 1090 1.75
Mar-13 1.36 82 1.62 1.80 6.10 1090 1.70 Europe YTD -1.1% 8.3% 8.6% 15.3% 4.5% 2.7% 10.5% 12.4% -4.8% -0.2% 5.6%
3m cash YTD Return* index in USD EUR JPY GBP BRL CNY KRW TRY 2.1% 4.8% 3.1% 4.7% 0.5% 1.8% 7.7%
Japan
YTD 10.5% 15.0% 13.9% 26.3% 13.9% 5.3% 28.9% 17.5% -1.3% 8.5% 16.7%
EM
YTD ($) 11.7% 10.0% 18.0% 14.5% 12.6% 13.6% 14.3% 21.7% 6.4% 12.3% 13.7%
Equities
S&P Nasdaq Topix FTSE 100 MSCI Eurozone* MSCI Europe* MSCI EM $* Brazil Bovespa Hang Seng Shanghai SE
Current 1377 3068 815 5652 137 1069 1025 63591 20791 2263
(local ccy) 11.9% 17.8% 16.7% 2.4% 6.4% 5.6% 13.7% 12.9% 16.8% -1.3%
Sector Allocation *
Energy Materials Industrials Discretionary Staples Healthcare Financials Information Tech. Telecommunications Utilities Overall
YTD 2.5% 10.2% 10.5% 15.0% 5.5% 8.7% 20.3% 21.0% 2.7% -1.3% 11.9%
*Levels/returns as of Apr 12, 2012 Local currency except MSCI EM $
Source: Bloomberg, Datastream, IBES, Standard & Poor's Services, J.P. Morgan estimates
33
Global FX Strategy FX Markets Weekly April 20, 2012 John Normand (44-20) 7325-5222 Paul Meggyesi (44-20) 7859-6714 J.P. Morgan Securities Ltd.
Risk scenarios to accompany 2012 FX forecasts

USD
Risk bias Balanced in Q2 Scenarios Potential trigger events
USD bearish: (1) the Euro area economy expands or China shows signs of acceleration in May data; (2)
worlds major reserve holders agree a substantial ($500bn) IMF recapitalization; (3) US is downgraded by Moodys and/or Fitch if Congress delays a substantial portion of the $500bn planned fiscal tightening for 2013.
US payrolls reports, for impact on
USD bullish: (1) US 2-yr rates rise to 0.6% on an accelerating US economy; (2) following spring
elections, the new Greek government demands to reopen negotiations with the troika; (2) Spain fails to deliver on fiscal targets and loses market access; (3) Chinese real GDP growth slows to 7% in Q1/Q2 2012; (4) Iran/Syria/Israel tensions escalate into a regional war; or (5) Q1 US earnings undershoot expectations.
yields; Greek elections on May 6; ongoing ratings reviews; China data each month; IMF/World Bank meetings April 20-22; monthly Spanish budget performance and bi-weekly auctions; Q1 US earnings release through late April.
JPY
Risk bias Bullish bias Scenarios Potential trigger events
USD/JPY 90, EUR/JPY 130 by Q2 if (1) US employment figures improve significantly in 2H12, boosting
consumption, (2) [only for USD/JPY] More Fed members start to see the next rate hike before 2014.
US congress debate on fiscal tightening

in 2H 2012.
USD/JPY 70, EUR/JPY 90 by Q2 if (1) slow-down in the global recovery led by a Chinese slowdown
causes Japanese to repatriate foreign investments and increase hedges, (2) Middle-Eastern tensions erupt with a preliminary attack from Israel on Iran, (3) Spain continuously misses fiscal tightening goals, causing peripheral spreads to widen significantly.
FOMC meetings (April 24-25, June 19-
20, July 31, September 12, October 2324).
EUR
Risk bias Downside in Q2 Scenarios Potential trigger events
Bearish: (1) 1.25 if US 2-yr rates rise to 0.6%; (2) 1.20-1.25 if the new Greek government asks to
renegotiate the austerity package, in turn prompting some core governments to call for Greeces EMU ejection; (3) 1.25 on Spains inability to meet fiscal targets; (4) 1.25 on a Socialist victory in French Presidential elections if Hollande insists on renegotiating EU fiscal compact or slowing fiscal consolidation. recession; (2) worlds major reserve holders agree to a substantial ($500bn) recapitalization of the IMF.
US payrolls for impact on rates; French

Presidential elections on April 22 and May 6 (round 1 and run-off); Greek parliamentary elections on May 6; monthly Spanish budget figures and biweekly auctions; IMF/World Bank spring meetings April 20-22.
Bullish: high 1.30s in Q2 if (1) Euro area economy expands, compared to consensus expectations for GBP
Risk bias Neutral bias Scenarios
Potential trigger events
Bearish: Hopes for an acceleration in growth fade as the consumer is squeezed by rising energy prices
and a rise in mortgage rates in the late spring. Fiscal slippage prompts a debt downgrade by one of the two ratings agencies that have a negative outlook on the UK, fuelling a reallocation by foreign investors away from Gilts. part because of higher energy prices. The BoE openly moves to consider an early tightening in policy in response to persistent stickiness in inflation. Peripheral market stress boils over in the euro area, prompting fresh safe-haven flows to the UK.
BoE meetings (10 May, 7 Jun); BoE
minutes (18 Apr); BoE quarterly Inflation Report (16 May); CPI (17 Apr, 22 May); GDP (Q1 25 Apr).
Bullish: The UK economy steps up a gear (2-3% growth in Q1). At the same time, disinflation eases, in
CHF
Bearish: SNB raises the target floor for EUR/CHF from 1.20. The SNB/government introduces additional
measures to curb CHF, ranging from negative interest rates to capital controls.
SNB meeting (14 June); govt to decide
Bullish: A destabilising end-game to the euro zone debt crisis.Inflation starts to rebound; mortgage
lending accelerates due to lax liquidity in the banking system; house prices surge. SNB intervention reaches unsustainable levels.
on SNB Chairman (April?). Inflation data - CPI (7 May, 7 June), PPI (16 Apr, 14 May). FX reserve data (March final 23 Apr, Apr prelim 7 May). Growth data (KOF 27 Apr; Q1 GDP 31 May). Trade balance (24 Apr, 24 May).
34
Global FX Strategy FX Markets Weekly April 20, 2012 Tohru Sasaki (81-3) 6736-7717 Kevin Hebner (1-212) 834-4254 JPMorgan Chase Bank NA
SEK
Risk bias Near term negative; medium term positive Scenarios Potential trigger events
Bearish: A deeper and more protracted Euro area recession deepens the recession in Sweden and
prompts a further series of rate cuts from the Riksbank. EUR/SEK to 9.10-9.15.
Riksbank rate announcement (18 Apr). CPI (10 May, 12 Jun); GDP (Q1 30 May).
Industrial production (10 May, 8 Jun).
Bullish: The euro zone recession proves short-lived and the Swedish economy rebounds. The Riksbank
is done easing policy. EUR/SEK to 8.70.
CAD
Risk bias Moderate bullish bias Scenarios Potential trigger events
Bearish: USD/CAD above 1.05 with: (1) US growth averaging 1.5% or lower from Q2 of 2012; (2) the
European debt crisis returning to the headlines; (3) a sharp decline in WTI prices (below $90), possibly driven by a Chinese hard landing; and (4) the BoC signaling they will remain on hold well into 2013. ISM north of 55); (2) European funding crisis wanes due to successful 3-year LTROs; (3) WTI climbs above $110; and (4) core inflation remains stubbornly north of 2.0%, leading the BoC to adopt a moderately hawkish tone.
Canada CPI: Apr 20, May 18 Employment: May 11, June 8 Trade: May 10, June 8 BoC meetings: Apr 17, June 5, and MPR
on Apr 18
Bullish: USD/CAD below 0.95 in Q2 with: (1) an upside surprise to US Q1 growth (GDP above 2.5%,
US Q1 GDP: Apr 27 US Payrolls: May 4 AUD

Bearish: AUD/USD below 0.99 due to (1) Chinese growth faltering, driving a sizeable decline in iron ore
and coal prices; (2) Australias mining-capex boom tapers off, with the non-commodity exporting sectors continuing to suffer from the Dutch disease; and (3) the RBA begins an extended cutting cycle. rebounds in Q2, driving commodity prices higher; and (2) the market prices out the 94 bps of RBA cuts currently expected for 2012.
RBA meetings: May 1, June 5. SMP

released May 4.
Bullish: AUD/USD above 1.10 due to (1) Australias mining-capex boom roars ahead as Chinese growth
Employment: May 10, June 7. Australia exports: May 8, June 8 China PMIs: May 1, June 1 China imports: May 10, June 10
NZD
Risk bias Neutral bias Scenarios Potential trigger events
Bearish: NZD/USD below 0.75 if (1) reconstruction is delayed beyond H2, due to continuing
aftershocks, causing domestic demand to falter; and (2) an acceleration in the declining trend of commodity export prices (the two key markets are Australia and China), especially for dairy products. and prevents prices from declining further; and (2) the reconstruction in Canterbury pushes wages higher, leading the RBNZ to signal their intent to hike more quickly than the market currently expects.
RBNZ meetings Apr 26, June 14 Trade data Apr 30, May 24 Q1 GDP June 21 Q1 CPI Apr 19 Dairy auctions Apr 17, May 1 & 15
Bullish: Above 0.88 if (1) stronger than projected global growth drives NZ commodity volumes higher
35
Global FX Strategy FX Markets Weekly April 20, 2012 David Hensley (1-212) 834-5516 Carlton Strong (1-212) 834-5612 JPMorgan Chase Bank NA
Global growth and inflation forecasts

Real GDP
% over a year ago
Real GDP
% over previous period, saar
Consumer prices
% over a year ago
2011 The Americas United States Canada Latin America Argentina Brazil Chile Colombia Ecuador Mexico Peru Venezuela Asia/Pacific Japan Australia New Zealand Asia ex Japan China Hong Kong India Indonesia Korea Malaysia Philippines Singapore Taiwan Thailand Africa/Middle East Israel South Africa Europe Euro area Germany France Italy Norway Sweden United Kingdom Emerging Europe Bulgaria Czech Republic Hungary Poland Romania Russia Turkey Global Developed markets Emerging markets Memo: Global PPP weighted 1.7 2.5 4.3 8.9 2.9 6.0 5.9 7.8 3.9 6.9 4.2 -0.7 2.0 1.4 7.0 9.2 5.0 7.0 6.5 3.6 5.1 3.7 4.9 4.0 0.1 4.8 3.1 1.5 3.1 1.7 0.5 2.7 4.0 0.7 4.8 1.7 1.7 1.7 4.3 2.5 4.3 8.5 2.6 1.3 5.8 3.5
2012 2.5 2.3 3.8 4.5 3.1 5.0 5.0 4.0 3.8 5.5 4.0 2.0 3.0 2.9 6.5 8.2 2.8 7.1 5.3 3.3 3.9 4.3 3.7 2.8 5.1 2.9 2.7 -0.4 0.6 0.3 -1.7 1.4 -0.3 0.4 2.8 1.5 -0.2 0.5 3.2 0.8 3.7 2.5 2.3 1.3 5.0 3.2
2013 2.2 2.5 4.0 4.0 4.5 4.5 5.0 4.0 3.5 7.0 1.0 1.3 3.3 2.7 7.1 9.1 4.2 7.3 5.5 4.0 3.2 4.8 4.0 5.1 3.5 4.4 3.6 0.4 1.4 0.7 -0.7 1.8 1.7 1.9 3.5 2.5 1.7 1.5 3.0 2.7 3.7 4.5 2.6 1.5 5.6 3.5
4Q11 3.0 1.8 2.4 3.2 1.3 8.2 5.4 4.1 1.7 2.8 3.5 -0.7 1.7 1.4 4.6 8.8 1.6 3.8 9.9 1.3 4.8 3.5 -2.5 -0.6 -36.4 3.2 3.2 -1.2 -0.7 0.6 -2.6 2.5 -4.4 -1.2 4.6 -0.5 1.2 4.5 -0.8 6.4 1.5 0.6 4.0 2.4
1Q12 2.5 2.1 3.7 0.0 2.6 5.1 4.5 2.0 5.1 5.2 6.0 2.8 3.1 5.1 8.0 6.8 3.0 13.0 5.0 3.0 5.0 4.3 9.9 3.3 45.0 0.8 2.3 -0.5 0.3 0.0 -2.0 0.0 -0.5 0.5 2.4 -0.8 -0.3 2.8 -1.2 3.5 2.6 1.4 5.9 3.7
2Q12 2.5 2.6 5.1 5.5 5.7 4.9 4.9 3.5 3.9 5.8 6.0 2.0 1.9 2.1 6.7 7.8 4.0 5.5 5.0 4.0 2.0 4.9 6.6 4.8 20.0 3.2 2.6 -0.8 1.0 0.0 -2.5 0.0 -0.5 -1.0 1.4 -1.0 0.3 2.0 -1.5 2.0 2.2 1.0 5.3 3.1
3Q12 3.0 2.3 4.3 6.5 5.5 4.6 4.1 4.0 2.0 6.2 4.0 1.4 3.7 3.7 7.2 9.5 5.5 6.3 4.5 4.5 2.0 5.7 3.2 5.8 2.0 6.1 2.8 -0.5 0.8 0.3 -1.5 1.0 0.5 2.5 2.5 1.1 1.0 2.5 0.8 3.0 2.6 1.5 5.6 3.6
4Q12 2.0 2.4 4.1 5.0 5.7 4.7 3.0 4.0 3.2 7.3 -3.0 1.2 4.1 3.0 7.5 10.0 6.0 6.5 5.0 5.0 2.5 4.9 2.0 6.5 0.5 7.4 3.2 0.3 1.3 0.5 -1.0 1.0 1.0 1.5 3.4 2.3 1.5 3.0 2.4 4.0 2.6 1.3 5.9 3.6
1Q13 1.5 2.7 4.4 3.0 4.5 4.5 5.7 4.0 4.9 8.0 0.0 1.0 4.5 0.9 7.0 9.1 3.0 6.7 5.5 4.0 4.0 4.5 4.5 4.5 5.0 4.5 3.8 0.5 1.5 0.8 -0.5 2.0 2.0 2.0 3.5 3.3 1.5 3.0 2.5 4.0 2.5 1.3 5.7 3.6
2Q13 2.3 2.4 3.8 4.0 4.5 4.4 6.0 4.0 2.8 8.0 0.0 1.2 2.0 3.4 7.0 8.7 3.5 7.5 5.5 4.0 4.5 4.5 4.5 4.6 6.5 2.8 3.5 0.5 1.5 1.0 -0.5 2.5 2.3 2.0 3.2 -1.3 2.0 3.0 3.0 4.0 2.6 1.5 5.5 3.6
4Q11 3.3 2.7 7.2 9.6 6.7 4.0 3.9 5.5 3.5 4.5 28.5 -0.3 3.1 1.8 4.9 4.6 5.7 8.4 4.1 4.0 3.2 4.7 5.5 1.4 4.0 2.5 6.1 2.9 2.6 2.6 3.7 0.9 2.3 4.6 6.4 2.4 4.1 4.6 3.4 6.8 9.2 3.6 2.8 5.7 4.1
2Q12 2.2 1.7 6.4 10.0 5.1 4.2 3.6 5.3 4.2 3.9 23.9 -0.2 2.5 1.2 3.9 3.3 4.5 7.8 3.9 3.0 2.6 3.9 4.6 1.3 2.8 2.3 6.0 2.4 2.3 2.3 3.5 0.9 1.1 3.0 5.3 2.7 5.8 3.9 3.3 4.4 9.0 2.8 2.0 4.8 3.2
4Q12 1.9 1.7 6.3 11.0 5.1 3.9 3.3 4.7 4.0 3.1 23.4 -0.1 3.3 2.5 4.3 3.6 3.6 8.2 7.4 3.5 2.2 4.0 3.4 1.7 1.4 2.5 6.2 2.1 2.1 2.0 3.9 1.4 1.1 3.0 5.6 2.9 5.9 3.5 4.4 6.3 6.8 2.7 1.8 5.1 3.3
2Q13 1.7 2.0 6.9 11.0 5.3 3.4 3.0 4.7 3.8 3.0 31.7 -0.2 3.0 2.7 4.8 4.6 3.2 8.5 7.3 3.8 1.8 4.0 2.8 1.2 1.4 2.1 5.9 1.6 1.8 1.6 3.5 1.7 1.5 2.7 6.1 2.5 3.8 2.8 4.0 6.8 8.8 2.6 1.5 5.5 3.4
Source: J.P. Morgan estimates. Note: For some emerging economies, 2010-2012 quarterly forecasts are not available and/or seasonally adjusted GDP data are estimated by J.P. Morgan. Bold denotes changes from last edition of Global Data Watch, with arrows showing the direction of changes. Underline indicates beginning of J.P. Morgan forecasts.
36
37
Global FX Strategy FX Markets Weekly April 20, 2012 Justin Kariya (1-212)-834-9618 justin.p.kariya@jpmorgan.com JPMorgan Chase Bank NA
Sovereign credit ratings and actions

S&P Rating Argentina Australia Austria Belgium Brazil Canada Chile China Colombia Cy prus Czech Republic Denmark Finland France Germany Greece Hong Kong Hungary India Indonesia Ireland Israel Italy Japan Malay sia Mex ico Netherlands New Zealand Norw ay Peru Philippines Poland Portugal Romania Russia Singapore Slov akia Slov enia South Africa South Korea Spain Sw eden Sw itzerland Taiw an Thailand Turkey United Kingdom United States Venezuela B AAA AA+ AA BBB AAA A+ AABBBBB+ AAAAA AAA AA+ AAA SD AAA BB+ BBBBB+ BBB+ A+ BBB+ AAABBB AAA AA AAA BBB BB ABB BB+ BBB AAA A A+ BBB+ A A AAA AAA AABBB+ BB AAA AA+ B+ (-) (+) (-) (-) (-) (-) (+) (-) (-) (-) (+) (-) (-) (-) (-) (-) (+) (-) (-) View Moody 's Rating B3 Aaa Aaa Aa3 Baa2 Aaa Aa3 Aa3 Baa3 Ba1 A1 Aaa Aaa Aaa Aaa C Aa1 Ba1 Baa3 Baa3 Ba1 A1 A3 Aa3 A3 Baa1 Aaa Aaa Aaa Baa3 Ba2 A2 Ba3 Baa3 Baa1 Aaa A2 A2 A3 A1 A3 Aaa Aaa Aa3 Baa1 Ba2 Aaa Aaa B2 (+) (-) (-) (-) (-) (-) (+) (-) (-) (+) (-) (-) (+) (-) (-) (-) (+) (-) (-) (+) View B AAA AAA AA BBB AAA A+ A+ BBBBBBA+ AAA AAA AAA AAA BAA+ BB+ BBBBBBBBB+ A AAA ABBB AAA AA AAA BBB BB+ ABB+ BBBBBB AAA A+ A BBB+ A+ A AAA AAA A+ BBB BB+ AAA AAA B+ (-) (-) (-) (-) (-) (+) (-) (-) (-) (-) (-) (-) (-) (-) (-) Fitch Rating View Recent S&P Action Rating 4-Apr-11 25-Feb-11 13-Jan-12 13-Jan-12 17-Nov -11 29-Jul-02 18-Dec-07 16-Dec-10 16-Mar-11 13-Jan-12 24-Aug-11 27-Feb-01 13-Jan-12 13-Jan-12 13-Jan-12 27-Feb-12 16-Dec-10 21-Dec-11 25-Feb-11 8-Apr-11 13-Jan-12 9-Sep-11 13-Jan-12 25-Feb-11 8-Oct-03 14-Dec-09 13-Jan-12 29-Sep-11 9-Jul-75 30-Aug-11 12-Nov -10 29-Mar-07 13-Jan-12 27-Oct-08 8-Dec-08 25-Feb-11 13-Jan-12 13-Jan-12 1-Aug-05 27-Jul-05 13-Jan-12 16-Feb-04 17-Feb-11 25-Feb-11 31-Oct-06 19-Feb-10 17-Feb-11 5-Aug-11 19-Aug-11 16-Dec-10 21-Dec-11 18-Mar-10 8-Apr-11 13-Jan-12 9-Sep-11 13-Jan-12 26-Apr-11 27-Jul-11 28-Jul-11 13-Jan-12 29-Sep-11 28-May -09 30-Aug-11 16-Dec-11 27-Oct-08 13-Jan-12 29-Nov -11 21-Dec-09 2-May -08 13-Jan-12 13-Jan-12 28-Mar-12 12-Oct-07 13-Jan-12 22-Jan-07 1-Dec-03 11-Jun-10 9-Dec-10 20-Sep-11 26-Oct-10 5-Aug-11 19-Aug-11 Outlook 13-Sep-10 17-Sep-07 13-Jan-12 13-Jan-12 17-Nov -11 18-May -07 16-Dec-10 16-Dec-10 16-Mar-11 13-Jan-12 24-Aug-11 26-Sep-07 13-Jan-12 13-Jan-12 13-Jan-12 Recent Moody 's Action Rating 29-Jun-05 21-Oct-02 26-Jun-77 16-Dec-11 20-Jun-11 3-May -02 16-Jun-10 11-Nov -10 31-May -11 13-Mar-12 12-Nov -02 23-Aug-99 4-May -98 25-Feb-92 29-Apr-93 2-Mar-12 10-Nov -10 24-Nov -11 22-Jan-04 18-Jan-12 12-Jul-11 17-Apr-08 13-Feb-12 24-Aug-11 16-Dec-04 6-Jan-05 20-Feb-12 21-Oct-02 30-Sep-97 16-Dec-09 15-Jun-11 12-Nov -02 13-Feb-12 6-Oct-06 16-Jul-08 14-Jun-02 13-Feb-12 13-Feb-12 16-Jul-09 14-Apr-10 13-Feb-12 4-Apr-02 29-Jan-82 20-Jul-99 26-Nov -03 8-Jan-10 31-Mar-78 2-Aug-11 7-Sep-04 10-Nov -10 6-Dec-10 20-Dec-11 18-Jan-12 17-Dec-10 17-Apr-08 13-Feb-12 24-Aug-11 24-May -06 24-May -06 15-Jul-99 13-May -99 13-May -99 21-Mar-11 15-Jun-11 24-May -06 13-Feb-12 6-Oct-06 12-Dec-08 14-May -03 13-Feb-12 13-Feb-12 9-Nov -11 2-Apr-12 13-Feb-12 15-Nov -03 15-Nov -03 24-May -06 28-Oct-10 5-Oct-10 13-Feb-12 2-Aug-11 Outlook 14-Aug-08 24-May -06 13-Feb-12 16-Dec-11 20-Jun-11 24-May -06 16-Jun-10 11-Nov -10 31-May -11 13-Mar-12 8-Dec-08 24-May -06 24-May -06 13-Feb-12 24-May -06 Recent Fitch Action Rating 12-Jul-10 28-Nov -11 10-Aug-94 27-Jan-12 4-Apr-11 12-Aug-04 1-Feb-11 6-Nov -07 22-Jun-11 27-Jan-12 4-Mar-08 10-Nov -03 5-Aug-98 10-Aug-94 10-Aug-94 13-Mar-12 25-Nov -10 6-Jan-12 1-Aug-06 15-Dec-11 27-Jan-12 11-Feb-08 27-Jan-12 26-Nov -01 8-Nov -04 23-Nov -09 10-Aug-94 29-Sep-11 13-Mar-95 10-Nov -11 23-Jun-11 18-Jan-07 24-Nov -11 4-Jul-11 4-Feb-09 14-May -03 8-Jul-08 27-Jan-12 25-Aug-05 24-Oct-05 27-Jan-12 8-Mar-04 10-Aug-94 20-Nov -01 16-Apr-09 3-Dec-09 26-Oct-95 10-Aug-94 15-Dec-08 22-Jun-11 27-Jan-12 13-Dec-11 18-Dec-07 11-Dec-07 16-Dec-11 6-Nov -07 13-Mar-12 25-Nov -10 6-Jan-12 9-Feb-09 15-Dec-11 27-Jan-12 11-Feb-08 27-Jan-12 27-May -11 9-Jun-09 23-Nov -09 26-Oct-07 29-Sep-11 18-Dec-07 10-Nov -11 23-Jun-11 10-Nov -08 24-Nov -11 4-Jul-11 16-Jan-12 7-Mar-08 8-Jul-08 27-Jan-12 13-Jan-12 7-Nov -11 27-Jan-12 18-Dec-07 11-Jun-07 26-Jan-11 19-Apr-10 23-Nov -11 14-Mar-12 28-Nov -11 4-Apr-12 Outlook 12-Jul-10 28-Nov -11 15-Feb-08 27-Jan-12 4-Apr-11 22-May -07 1-Feb-11
Source: Ratings agencies via Bloomberg * indicates ratings on review/credit watch/rating watch (+/-)
RATING SCALE Upper Investment Grade S&P AAA AA+ AA AAA+ A ALower Investment Grade BBB+ BBB BBBNon-Investment Grade BB+ BB BBMOODY's Aaa Aa1 Aa2 Aa3 A1 A2 A3 Baa1 Baa2 Baa3 Ba1 Ba2 Ba3 Fitch AAA AA+ AA AAA+ A ABBB+ BBB BBBBB+ BB BBDefault RATING SCALE Lower Non-Investment Grade S&P B+ B BCCC+ CCC CCCCC C SD D MOODY's B1 B2 B3 Caa1 Caa2 Caa3 Ca C Fitch B+ B BCCC+ CCC CCCCC C RD D
38
Redemptions for -denominated marketable debt, 2012-2013

Euro area
bn
bn
Spain Italy Greece Portugal Ireland Core* Periphery** Bonds T-Bills Banks Bonds T-Bills Banks Bonds T-Bills Banks Bonds T-Bills Banks Bonds T-Bills Banks Bonds T-Bills Banks Bonds T-Bills Banks Apr-12 May-12 Jun-12 Jul-12 Aug-12 Sep-12 Oct-12 Nov-12 Dec-12 Total 2012 Jan-13 Feb-13 Mar-13 Apr-13 May-13 Jun-13 Jul-13 Aug-13 Sep-13 Oct-13 Nov-13 Dec-13 Total 2013 12 0 0 13 0 2 20 0 0 47 14 0 0 15 0 1 15 0 0 16 0 0 61 11 7 8 5 8 4 6 3 6 58 3 6 4 2 0 3 0 4 0 0 0 0 21 15 10 25 8 3 7 5 10 5 86 12 7 10 11 4 9 9 4 7 14 7 2 95 27 1 2 17 12 11 20 13 30 133 0 21 0 29 0 19 14 25 10 0 18 20 156 29 19 19 15 27 8 7 5 26 156 9 9 0 12 0 0 0 0 11 0 0 0 41 2 6 3 2 2 4 6 5 10 39 4 10 6 7 1 1 1 4 5 3 4 5 51 0 9 0 0 8 0 0 0 2 19 0 6 0 0 17 1 1 6 0 0 0 2 33 4 3 3 2 1 1 0 0 0 15 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 1 1 1 2 1 1 0 6 1 1 0 1 2 0 1 0 0 0 0 1 7 0 0 10 1 0 0 0 0 1 12 0 0 0 0 0 0 0 0 10 0 0 0 10 2 14 0 2 1 0 0 0 1 21 0 2 2 0 0 0 0 0 0 0 0 0 3 0 1 2 2 0 0 0 0 0 6 0 2 0 0 2 0 0 0 0 1 0 0 5 0 0 0 0 0 0 0 0 0 0 0 0 0 6 0 0 0 0 0 0 0 0 6 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 3 0 2 0 0 0 1 3 0 9 1 2 1 3 1 0 2 0 1 0 0 1 13 34 0 19 70 1 44 35 0 29 232 61 0 31 52 0 17 77 0 49 40 0 11 338 54 53 34 23 23 17 12 7 2 225 11 12 3 0 0 0 0 0 0 0 0 0 26 19 10 19 24 8 19 22 8 7 137 44 25 34 12 11 15 17 9 9 23 5 11 215 39 10 12 31 20 13 40 13 33 211 14 27 0 50 17 21 30 31 20 16 18 22 266 45 44 30 25 38 14 13 8 33 249 12 16 5 14 0 3 0 4 11 0 0 0 65 21 17 33 12 5 12 12 18 15 146 18 22 17 22 10 10 13 8 12 18 11 9 170
* Germany, France, Netherlands, Belgium ** Spain, Italy, Greece, Portugal, Ireland
Note: Marketable debt includes conventional bonds plus inflation linkers, floaters and zero coupon bonds for non-conventional bonds Source: J.P. Morgan
39
Global FX Strategy FX Markets Weekly April 20, 2012 John Normand (44-20) 7325-5222 john.normand@jpmorgan.com J.P. Morgan Securities Ltd
Prior Research Notes available on www.morganmarkets.com

Is FX liquidity abnormally low? Normand, Apr 4, 2012 Can BoJ achieve its inflation goal? Adachi, Mar 29, 2012 China: determinants of CNY exchange rate, Mar 23, 2012 Corporate hedging survey: Where have all the hedgers gone? Kariya, Mar 23, 2012 Short NZD/CAD and NZD/NOK, Hebner, Feb 23, 2012 Focus on current accounts why CHF is not following the yen weaker, Meggyesi, Feb 23, 2012 China: FX reserves to resume upward trend, Zhu, Ng & Jiang, Feb 17, 2012 Building Europes firewalls: a progress report, Barr & Mai, Feb 3, 2012 Asian FX and Japanese corporate earnings KRW/JPY is key, Tanase, Feb 1, 2012 Metals Review and Outlook, Jan 2012: Demand needs a Spark, Jansen & Fu, Jan 30, 2012 Portuguese second package unlikely to include PSI, Mai, Jan 27, 2012 Corporate hedging survey: Despite Euro stress, FX management practices mostly unchanged, Kariya, Kavuri, Hibino, Jan 20, 2012 Central bank balance sheet chartpack, Meggyesi, Jan 19, 2012 Commodity Currencies: Risks loom large for Q1 of 2012, especially for the AUD, Hebner, Sandilya, Kariya, Jan 10, 2012 M&A and FX in 2012: Japan/Europe rotation worth monitoring, Normand, Jan 9, 2012 JPY:New FSA regulations on overlay funds could narrow retail path to BRL, Tanase & Hibino, Jan 4, 2012 Answers to 10 common questions on EMU breakup, Normand & Sandilya, Dec 7, 2011 Euro area moves toward a not so grand bargain, Mackie, Barr, Dec 2, 2011 Italy heads toward the IMF, Mai, Barr, Nov 11, 2011 How much can FX intervention lift corporate profits?, Normand, Oct 31, 2011 Asymmetrical correlation between yen and stocks with a bias to stronger yen, Tanase, Hibino, Oct 25, 2011 Corporate hedging survey: EUR/USD will fall to 1.30 by year-end, Kariya, Kavuri, Hibino, Oct 21, 2011
40
Gold and silver: risk factors dominate, Jansen, Oct 7, 2011 Reserve diversification without the yen has limited value, Normand, Sep 30, 2011 Enhancements to J.P. Morgans Long-term Fair Value Model, Kariya, OConnor, Sep 29, 2011 JPY: Japanese are already pulling out of Brazil, South Africa and Australia, and Korea remains a concern, Sasaki, Tanase & Hibino, Sep 22, 2011 Tail-risk hedging: does volatility trading compensate for FX-risk decoupling?, Bouquet, Sep 20, 2011 Slouching towards some kind of fiscal union, Mackie, Sep 13, 2011 Euro area: breaking up is hard to do, Barr & Mackie, Sep 1, 2011 German politics and the euro, Fuzesi, Aug 19, 2011 CHF currency peg reviewing the lessons from 1978, Meggyesi, Aug 16, 2011 Will Japanese retail investors unwind EM investments? Nikkei and BRL/JPY is key, Tanase, Hibino, Aug 9, 2011 USD/JPY reaches target five months early: New target set at 73, Sasaki, Tanase & Hibino, Jul 29, 1011 Does new rule on margin leverage trigger unwinding of JPY shorts?, Tanase, Hibino, Jul 22, 2011 G-3 corporate hedging survey: Weak labor market is by far the greatest risk for growth in 2011, Kariya, Kavuri, Tanase Jun 24, 2011 Long-term valuation: USD is cheap but not a bargain, Kariya, Apr 15, 2011 USD/JPY to peak soon, Tanase & Hibino, Apr 8, 2011 Rebalancing VXY and Introducing VXY Global, Normand & Sandilya, Mar 25, 2011 Earthquake-driven Japanese JPY purchases our best estimate is 10trn, Sasaki, Tanase and Hibino, Mar 23, 2011 G-7 coordinated interventiona much-needed breather, Sasaki, Tanase & Hibino, Mar 18, 2011 The earthquake and its implication on JPY, Sasaki, Tanase & Hibino, Mar 18, 2011 Japanese BRL investments: sharp unwinding is unlikely, but remain wary for FX overlay funds, Tanase, Mar 18, 2011
41
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J.P. Morgan Global FX Strategy

London
John Normand Paul Meggyesi Thomas Anthonj Matthias Bouquet MD MD ED VP Head, Global FX Strategy FX Strategy Technical Strategy Derivatives Strategy (44-20) 7325-5222 (44-20) 7859-6714 (44-20) 7742-7850 (44-20) 7777-5276 john.normand@jpmorgan.com paul.meggyesi@jpmorgan.com thomas.e.anthonj@jpmorgan.com matthias.bouquet@jpmorgan.com
New York
Ken Landon Kevin Hebner Niall OConnor Arindam Sandilya Justin Kariya MD ED ED ED Associate FX Strategy FX Strategy Technical Strategy Derivatives Strategy FX Strategy (1-212) 834-2391 (1-212) 834-4254 (1-212) 834-5108 (1-212) 834-2304 (1-212)-834-9618 kenneth.landon@jpmorgan.com kevin.j.hebner@jpmorgan.com niall.oconnor@jpmorgan.com arindam.x.sandilya@jpmorgan.com justin.p.kariya@jpmorgan.com
Tokyo
Tohru Sasaki Junya Tanase MD ED FX Strategy FX Strategy (81-3) 6736-7717 (81-3) 6736-7718 tohru.sasaki@jpmorgan.com junya.tanase@jpmorgan.com
Sydney
Anna Hibino Associate FX Strategy (61-2) 9220-1381 anna.hibino@jpmorgan.com
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FX Markets Weekly: The Upcoming Presidential Election in France (Raphael Brun-Aguerre)

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FX Markets Weekly: The Upcoming Presidential Election in France (Raphael Brun-Aguerre)

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Global FX Strategy

April 20, 2012

Outlook: France adds to the frisson

Source: J.P. Morgan

Rolling 12-mo returns on two composite indices of currency manager performance

JPM USD nominal trade-wtd index VXY Global

USD too high or volatility too low?

Apr 10 Aug 10 Dec 10 Apr 11

Source: J.P. Morgan

Cest lconomie, idiot

Source: J.P. Morgan and Eurostat

0.6 0.4 0.2 0.0 -0.2 -0.4 -0.6 Mar 11

China, Japan and US cannot compete

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Macro Trade Recommendations

SEK NOK GBP CAD

Source: Bank of Canada; J. P. Morgan

Table 1.Current FX spot recommendations and P&L

Active trades are marked to market on Friday afternoon London time.

Entry level 1.612 82.50

Current level 1.613 81.10

Stop loss 1.640 84.75

P&L since entry -0.1% 1.7%

Comments New trade Took profits Apr 13

Table 2. Current FX derivatives (directional/non-RV) recommendations and P&L

I. Performance statistics 2008 2012

12 83% 0.8% 32 9 67% 0.1% 53 1 100% 34.3% 73

42 60% 0.0% 25 27 74% 0.9% 71 10 50% -0.9% 87

89 53% 0.0% 23 27 62% 0.3% 54 4 25% -6.7% 60

61 64% 1.0% 20 21 62% 0.5% 59 21 38% -4.7% 55

85 59% 2.0% 31 3 0.0% -0.6% 66 5 20% -3.6% 54

289 59% 0.8% 25 87 64% 0.5% 61 41 39% -2.9% 64

37 62% 0.1 44 16 75% 12 27 33 58% 0.1% 54

45 69% 0.7 99 4 50% -8 50 52 46% 0.0% 36

32 63% 0.1 73 46 57% 0.1% 10

13 77% 0.3 53 3 33% 8% 33 87 43% 0.2% 9

135 68% 0.4 71 26 73% 17.5 41 3 33% 8% 33 226 48% 0.1% 24

6 83% 49 73 NA NA NA NA 8 25% -0.9% 66

Chart 1: 2008-2012 performance summary: Average returns per trade

Chart 2: 2008-2012 Performance summary: Success rate by type of trade

II. Closed trades 2012 Cash portfolio

FX Derivatives portfolio (vol relative value)

02/11/11 20/12/11 25/10/11 22/11/11 10/02/12 24/02/12 23/01/12 23/03/12

1.574 6.786 1.337 78.16 1.179 1.61 8.785 67.31

01/02/12 08/02/12 24/02/12 24/02/12 14/03/12 05/04/12 05/04/12 12/04/12

1.580 6.643 1.347 81.15 1.179 1.61 8.801 66.89

-0.5% -2.1% -1.0% -3.9% 0.0% 0.0% 0.1% 0.3%

FX Derivatives portfolio (vol relative value plus directional)

Buy 2Y 43/50 TRY call/JPY put spread

2.0 1.9 1.8 1.7 1.6 1.5 1.4

Short 1M vol swap + long 1M1M FVA Short 1M vol swap

Aug/Sep 2011 Jan-11 Jun-11 Oct-11 Mar-12

Current Implied Vols Avg. Implied Vols Z-Score Implied Vols 1M 3M 1Y 1M 3M 1Y 1M 3M 1Y

Biggest 3M Implied Volatility Movers

Source: J.P. Morgan

Front-End Vol Rankings

Source: J.P. Morgan

Current trade recommendations and P&L

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Global FX carry trade monitor

Chart 2: Japanese retail -- aggregate retail margin shorts in JPY

10 Jan-06 Jan-07 Jan-08 Jan-09 Jan-10 Jan-11 Jan-12