MARKET MOVER - BNP PARIBAS - Investment Services India

Market Economics | Interest Rate Strategy | Forex Strategy 16 December 2010
We wish all our readers Happy Holidays
and a Happy New Year.
Market Mover
The next edition of Market Mover will be published on 6 January 2011
Market Outlook 2-3
Fundamentals 4-30
• Global: Fire and Ice 4-5
• US FOMC: Pricing Out Japan 6-7
• US: A Curious Case of Consumer 8-10
Deleveraging
• ECB: Room at the Top 11-15
• UK: HMS QE2 Sunk Before It Was 16-17
Launched
• SNB: Governing Two Economies 18
• Sweden: Further Tightening 19-20
• Norway: Hawkish Tone 21-22
• Turkey: Reserving Judgement 23-25
• Japan: Tankan Points to Soft Patch 26-28
• Japan: Marking Up 2010 Growth 29-30
Forecast
Interest Rate Strategy 31-59
• Bonds: Forecast Update 31-32
• USD Rates Outlook in Q1 33-36
• US: Ideal Timing for LT Bullish
37
Hedges
• US: OIS Firm, Libor Under Pressure 38-39
• MBS: 2011 Outlook – Status Quo 40-42
• EUR: Flattening Trend Will Resume 43
• EUR: Excess Liquidity to Decline 44
Next Week
• EUR: Euribor Red/Greens
45
Opportunities
• EUR: 2011 EGB Issuance Preview 46-47
• Gilts: Strategic Trades for 2011 48
• JGBs: Watch the Corporate Sector 49
• Global Inflation Watch 50-53
• Inflation: Post Mortem 2010 54-56
• Technical Analysis 57-58
• IR Strategy: Track Record for 2010 59
FX Strategy 60-65
• Looking for Value in the North 60-62
• Technical Strategy: USD Rebound 63-64
Tests Resistance
• Trading Positions 65
Forecasts & Calendars 66-80
• 2 Week Economic Calendar 66-67
• Key Data Preview 68-74
• 4 Week Calendar 75
• Treasury & SAS Issuance 76-77
• Central Bank Watch 78
• Economic & Interest Rate Forecasts 79
• FX Forecasts 80
Contacts 81
www.GlobalMarkets.bnpparibas.com
• Bond markets are desperately seeking support. Any
rebound continues to prove short-lived and the market
action shows little sign of a lasting reversal before the
turn of the year.
• The market is oversold. Although better-than-expected
economic data have been fuelling the sharp sell-off, poor
year-end liquidity conditions have been a key factor
exacerbating the move.
• The lows in yields are behind us. We have updated our
forecasts to take into account recent moves and the
reduction in downside risks to growth as well as upward
surprises in inflation in several developed economies.
• As real money flows return, we expect yields to
decline at the start of 2011, before resuming their rise
later in the year.
• Curves remain mostly directional as do US/EUR
spreads which have widened in the recent sell-off.
• JGBs continue to partly resist the sell-off in
Treasuries. We expect the belly of the curve to
underperform in the near term.
• Sterling remains extremely vulnerable. We expect
GBPUSD to target the 1.5300/1.5200 area.
• USDJPY has not (yet) reacted to the sharp move of the
US curve. A rally is likely if US data remain on the strong
side.
• We expect EURUSD to resume its downtrend going
into 2011.
Market Views
UST 10y T-note Yield (%)
2y/10y Spread (bp)
EGB 10y Bund Yield (%)
2y/10y Spread (bp)
JGB 10y JGB Yield (%)
2y/10y Spread (bp)
Forex EUR/USD
USD/JPY
Current 1 Week 1 Month
3.52 ↔ ↓
285 ↔ ↓
3.06 ↔ ↓
199 ↔ ↓
1.28 ↔ ↔
105 ↔ ↔
1.3218 ↓ ↓
84.30 ↑ ↑
IMPORTANT NOTICE. Please refer to important disclosures found at the end of
this report. Some sections of this report have been written by our strategy teams
(shown in blue). Such reports do not purport to be an exhaustive analysis and may
be subject to conflicts of interest resulting from their interaction with sales and
trading which could affect the objectivity of this report.

Market Outlook
Further capitulation by
bond markets
Analysing the bond market sell-off has not been an easy exercise and, going
into the year-end, it remains unclear whether we have seen a fundamental
shift or an overdone correction – the reality probably lying in between. As
discussed in last week’s Market Mover, the recent sharp sell-off reflects a
mix of bad positioning, central bank and political news (US fiscal deal),
better economic data (except US payrolls) and year-end market conditions.
The difficulty lies in attaching weights to these different factors but, so far,
the QE2 sell-off looks similar to the QE1 sell-off seen in the spring of 2009.
The recent market action and the risk that upcoming data will continue to
surprise to the upside indicate that the lows in yields are behind us (see our
updated forecasts in the “Forecasts & Calendars” section). However,
although it may remain tough to fight the reflation trade going into 2011, the
big picture still favours a low-yield environment. The economic picture does
not look as bad as it did six months ago but the US output gap continues to
be unusually wide, final demand growth has been lacklustre and the
economic recovery faces substantial headwinds. In addition, underlying
inflation is very weak and will remain so for some time – the trough on core
inflation is still to come. Against this backdrop, policy rates will remain
exceptionally low in 2011 with QE2 targeting a rise in inflation expectations.
Both Real and Nominal Yields Should Drop in Q1
RY
3.0
core
3.0
Core CPI, LHS
Core, 6mth ahead
5.5
2.5
2.0
2.5
2.0
1.5
US 10y Nominal
5.0
4.5
4.0
1.5
1.0
1.0
0.5
10y Real Yield
3.5
3.0
2.5
0.5
0.0
2.0
0.0
-0.5
Jan-03 Jan-05 Jan-07 Jan-09 Jan-11
1.5
Risk appetite remains solid
Looking for signs of a
stabilisation on Treasuries
Source: BNP Paribas
The different measures of inflation expectations indicate that there has not
(yet) been a fundamental shift in expectations. The US 5y5y forward
breakeven has been rising over the past couple of months while the EUR
one has fallen but both remain in the ‘neutral’ zone. The flat(er) 10/30y
spreads in both the US and Europe also support this view.
Risk appetite remains solid and is still supported by ample global liquidity
conditions. Some recent data suggest that investment funds have been
switching their allocation from bonds to stocks. But, despite the collapse of
the bond market, there has been no acceleration of the bullish momentum in
equities. This highlights that, beyond some asset switches, the bond market
sell-off has, so far, more to do with wrong positioning − the latest surveys
suggest that the market may have to sell off more before reaching a turning
point. This probably also indicates concerns about possible political
decisions, rising inflation pressures in the emerging world as well as a
decoupling between the main western equity indices and the domestic
economy (household confidence) which is unlikely to last.
Overall, judging from the very poor liquidity in the bond market, year-end
pressures to cut balance sheets appear to be a significant factor
exacerbating the recent move on Treasuries. The move so far has been
primarily cash driven but, over the past couple of sessions, the attendant
Cyril Beuzit 16 December 2010
Market Mover
2
www.GlobalMarkets.bnpparibas.com

Early 2011 buying
opportunities
Renewed stress on EMU
peripherals
JGBs are still
outperforming in the
sell-off
GBP is at risk
USDJPY to push higher
EURUSD to resume its
downward trend
swap spread widening indicates that convexity hedging flows have also
played a role. Peak mortgage negative convexity is in the 3.25 to 3.50%
range, which suggests that we may have seen most of the adjustment. From
this point onward, convexity flows should become a more modest force. With
mortgages finding support, the Treasury market should also become less
volatile, which should mark the beginning of the end to this sell-off.
Both the 2y and the 5y parts of the curve have cheapened on a forward
basis to levels close to the top end of their ranges of the past two years. For
instance, the 5y5y rate is around 5.28% within 20bp of the top since end-
2008. Therefore, the belly of the curve will offer a buying opportunity… but
probably not before the year-end.
In Europe the focus will remain on peripheral markets in coming weeks with
a big question mark about demand for early 2011 auctions (see “EUR: 2011
EGB Issuance Preview”). Spreads remain off their November highs but
renewed tensions look likely with Moody’s putting Spain’s rating on review
for a possible downgrade. It is unclear exactly how much progress will be
made towards deciding on a permanent rescue framework at the EU Heads
of State Summit given the extent of the divergence in views among the
individual EU members.
We remain neutral on EGBs going into 2011. Regarding the curve,
directionality is less significant on rebounds, as the short end has some
potential to rally at current levels of yields and the long end is still under
pressure in line with the Treasury market. This leads us to see the near-term
bias for the curve as neutral to slightly steeper − receiving the 2-10y will be
one of our key strategic trades for 2011.
The JGB market continues to follow the global bear trend in bond prices,
with the 10y yield now just below the psychologically important 1.3% level.
Correction pressures appear to have abated slightly, however, with many
investors prepared to buy into weakness at current levels. The super-long
sector has moved back into its historical range and the 10y sector has also
experienced a significant sell-off. Much is now likely to depend on the extent
to which yields rise for the short- to medium-term JGBs that constitute the
core of banks' bond portfolios.
The BoJ Monetary Policy Board will meet on Monday and Tuesday (20-21
December), but is not expected to announce any new measures. Monetary
policy still looks likely to remain highly accommodative for quite some time to
come and JGB market participants will therefore be focusing most of their
attention on rising stock prices (fuelled by an improvement in economic
sentiment) and the move in overseas rate markets.
Sterling is now in an extremely vulnerable position as the negative mix of
higher inflation and slower growth dynamics in the UK economy leave the
BoE in a difficult position. Indeed, the sharp spike higher in the BoE’s
Inflation Expectations Survey is a particular concern suggesting that sterling
is now set to come under increasing pressure. We see GBPUSD as at
significant risk as the US continues to produce positive data surprises which,
together with the rise in yields, is providing the USD significant support. We
expect GBPUSD to target the 1.5300/1.5200 area.
However, it is interesting to note that USDJPY, which is traditionally the
currency pair most closely correlated with the US yield curve, has remained
in a range over the past couple of weeks despite the sharp rise in yields.
This seems to be the result of Japanese investors’ continued hedging of
their bond portfolios. However, if US data remain strong, this could be
enough to encourage investors to unwind their hedges, triggering a sharp
move higher in USDJPY.
The EUR is also expected to remain weak as the latest data provide further
evidence of increasing economic divergence within the eurozone. We expect
EURUSD to extend the major down trend into the end of the year and
through the first half of 2011 with the USD set to embark on a broad-based
rebound.
Cyril Beuzit 16 December 2010
Market Mover
3
www.GlobalMarkets.bnpparibas.com

Global: Fire and Ice
• Some say the world will end in fire, some
say in ice.
• The pendulum is swinging between these
two extremes.
• Market attention may shift from fears that
things are getting too cold in developed
economies…
• …to worries that things are getting too hot
in emerging markets.
• The problem is that policy stimulus in
developed economies is fuelling overheating in
emerging markets, which are resisting FX
appreciation.
To quote from a poem by Robert Frost, “Some say
the world will end in fire, Some say in ice.” Earlier in
the year, observers feared that things might get too
cold in developed economies. But as double-dip
fears fade, attention may shift to concerns that
emerging markets are getting too hot. Ultra-loose
policies in developed economies are fuelling capital
flows into emerging markets. But as EM
policymakers are resisting FX appreciation, inflation
pressures will intensify if central banks fall behind the
curve and let their economies overheat. In all, are we
moving from concerns of recession ice in developed
economies to worries of inflation fire in emerging
markets?
Hot and cold
The cold front from the North seems mostly behind
us now. Earlier in the year, many feared a double dip
in growth performance, particularly in the US.
However, in part on the heels of further policy
accommodation in developed economies, global
growth seems to be finding a better footing. Doubledip
fears have faded, notwithstanding concerns
about sovereign risk in some eurozone economies.
But the Fed's monetary easing is affecting markets
well beyond the US. Along with a weaker USD and
rising commodity prices, capital flows to emerging
markets (EM) have intensified. The resulting
currency appreciation across emerging markets has
prompted policymakers to introduce measures to
cool these inflows, and to tighten monetary policy by
less than domestic demand considerations in EM
alone would dictate. In many cases, EM
policymakers are increasingly resorting to measures
other than outright rate hikes (such as higher reserve
requirements and credit restrictions), perhaps fearing
the currency implications of rate increases. Specific
experiences vary from country to country, but the
broader theme seems the same across emerging
markets, from Turkey to China, including Brazil.
How will it play out? Our take: global liquidity remains
abundant, with policies accommodative in the
developed world. Capital flows to emerging markets
remain strong. Pressures for FX appreciation in EM
persist. But EM policymakers are resisting these FX
pressures, and many EM central banks are falling
behind the curve. Policies remain too loose for too
long. Inflation pressures are building across EM. The
question is how policymakers will ultimately respond.
In all, market attention may well swing from fears that
things could get too cold in developed economies to
worries that things are getting too hot in emerging
markets. No one wants a repeat of the great
depression of the 1930s. But the inflationary 1970s
were not that great either.
Hell is other people
At the heart of this ice-and-fire global policy dilemma
are the tensions between what is seen as best for
developed economies at the current stage of the
global business cycle and what is seen as best for
emerging markets – especially when countries fail to
fully consider the global implications of their
individual choices. In that context, each country
thinks it is pursuing its own best interests, oblivious
to international spillovers. Hell is others.
The US judges it is doing what is best for the US
economy (QE). If others (such as China) don't let
their currencies appreciate against the USD, that is
their problem. For the US, the problem is lack of FX
flexibility in EM. My currency, your problem. Hell is
emerging markets.
By contrast, EM policymakers judge they should not
just allow ultra-loose monetary conditions in
developed economies to fuel bubbles in their
markets. Emerging market countries do not want FX
to appreciate beyond what they judge is consistent
with fundamentals. They cannot – and will not – allow
their policies to be dictated by Washington DC. Hell
is the US.
As often in economic debates, there is some truth on
both sides. The US is right: it is harder and more
painful to engineer global rebalancing if EM
policymakers resist FX adjustment. But EMs are also
Marcelo Carvalho 16 December 2010
Market Mover
4
www.GlobalMarkets.bnpparibas.com

ight: it is hard to rely on the USD as a reliable
reserve currency for the international monetary
system when the cornerstone country is pursuing
domestic policies which are not optimal for others.
Real FX adjustments tend to prevail in the long run –
if not via nominal appreciation, then via higher
inflation. The problem with the inflation route is that it
is much more painful – and probably more
destabilising.
Conclusion
Market attention may well start to swing from one
extreme to the other – from concerns of recession ice
in developed economies to worries of inflation fire in
emerging markets. At the heart of the matter: policy
stimulus in the developed world is fuelling
overheating in emerging markets while EM
policymakers are resisting currency appreciation. All
claim that hell is other people.
In a nutshell, can EM policymakers deliver stability
without a credible and steady US policy anchor as
the centre of the international monetary system?
What happens if things fall apart and the centre
cannot hold?
Marcelo Carvalho 16 December 2010
Market Mover
5
www.GlobalMarkets.bnpparibas.com

US FOMC: Pricing Out Japan
• Bold moves by US policymakers have led
investors to price out the Japan scenario,
suggesting that higher rates are here to stay.
Chart 1: Rates Rising Rapidly
• The FOMC confirmed its resolve by
interpreting incoming data conservatively and
signalling its commitment to QE2 in the
December FOMC statement.
• That said, we think the FOMC is correct in
being cautious about incoming data. With the
strong patch in spending yet to show reliable
follow-through to job creation, forecasts of
significantly above-trend growth and fears of
inflation being built into longer-term rates are
probably overdone.
Source: Reuters EcoWin Pro
Chart 2: Retail Sales Firm, Need Follow-
Through to Jobs
Interest rates continued their steady march higher
after the December FOMC meeting as markets
continued to price out any possibility the US could
get stuck in a Japanese-style scenario. US
policymakers have shown a remarkable commitment
to stimulate the US economy; incoming data
suggests some they are getting some traction. The
FOMC made only minor changes to its policy
statement and stayed the course on QE2. The 10-
year Treasury is up more than 100 basis points since
the announcement of QE2 (see Chart 1). However,
that only puts it back at the levels seen in April, when
the recovery looked to be on a moderate but
reasonably steady track. Meanwhile, equities are up
more than 3% since the November FOMC meeting
and nearly 11% for the year. The rise is helping to
offset house price declines and keep the recovery in
household net worth on track. November retail sales
represented yet another data point suggesting we will
get a solid gain in GDP in Q4. We have revised up
our forecast to 2.6% q/q saar.
The data flow on balance has been encouraging. But
we have yet to see good follow-through to job
growth, something the FOMC emphasised in its
statement. Consumers have maintained a saving
rate just under 6% throughout the recovery. Thus the
recent data will prove to be a fleeting firm patch
unless we see hiring pick up. We think consumer
spending and jobs are likely to meet in the middle,
with consumer spending growth continuing to post
moderate gains (rather than accelerating) and the
jobs picture improving gradually. While some of the
volatility in rates markets owes to technical factors,
Source: Reuters EcoWin Pro
the message from US policymakers has been clear.
They will prevent a Japanese scenario at all costs
and the market is reacting accordingly. This
enthusiasm from investors is not without its risks.
Higher rates threaten the recovery in an alreadyfragile
housing market and higher headline inflation
will erode some of the stimulus. Nonetheless, we
seem to have left the Japanese scenario behind for
now.
There were very few changes to the December
FOMC statement. The Fed chose a conservative
interpretation of recent data following the recent
back-up in the unemployment rate. In November, the
FOMC said that information received since the last
meeting confirmed that the "pace of the recovery in
output and employment continues to be slow". In the
latest statement, it indicated that information received
since the last meeting confirms that the "recovery is
continuing, though at a rate that has been insufficient
to bring down unemployment”.
Julia Coronado 16 December 2010
Market Mover
6
www.GlobalMarkets.bnpparibas.com

Other changes were also modest. While the Fed
previously noted that housing starts continue to be
depressed, this time it said the housing sector
continues to be depressed. This broader reference
includes the decline in prices we have seen of late.
Having previously said that measures of underlying
inflation have trended lower in recent quarters, this
time it said that these measures “have continued to
trend downward”. This perhaps suggests a slightly
more entrenched dynamic. There were few to no
changes in the policy paragraphs and the parameters
of the QE2 programme are virtually unchanged. As
expected, the Fed remains cautious and sought to
send a signal of steady policy.
Retail sales posted a solid gain in November, rising
0.8% after an upward-revised 1.7% increase in
October. As shown in Chart 2, gains in consumer
spending have not come at the expense of a lower
saving rate. Therefore any acceleration in consumer
spending growth will likely be dependent on
continued improvement in the labour market. We
expect that to be forthcoming but gradual. The US
economy lacks the cyclical turbo boosters of
manufacturing, construction and finance that fuelled
job growth early in prior recoveries; another engine of
job creation has yet to come forward.
One encouraging sign on the jobs front came from
the NFIB survey of small businesses for November.
This reported that a net 4% of small companies are
planning to hire. This may sound small, and it is.
However, it is up from the record low of -10%
reached in March 2009 and has been rising steadily
in recent months. Small businesses have been
another sector weighing on the recovery. Thus a
move into positive territory confirms that the
economy is making headway in its healing process
and downside risks are diminishing.
The pricing out of Japan likely means that higher
rates are here to stay. However, we think the
forecasts of significantly above-trend growth and
fears of inflation being built into longer-term Treasury
rates are probably overdone.
Julia Coronado 16 December 2010
Market Mover
7
www.GlobalMarkets.bnpparibas.com

US: A Curious Case of Consumer Deleveraging
• The Q3 Flow of Funds Accounts indicate a
pick-up in household net worth. This was driven
by capital gains on equity, partially offset by
losses in real estate wealth on the back of
house price declines. Also boosting net worth
were continued declines in both consumer
credit and net mortgage borrowing.
Chart 1: Net Worth Rose in Q3
• The recent pick-up in retail spending has
been supported by gradual improvement in the
labour market. However, consumer deleveraging
still represents a speed limit.
• Three main factors appear to have
contributed to ongoing declines in revolving
credit: households continue to default on their
obligations; they are paying off a larger share of
their balances each month; and they are
financing less of their new spending with credit.
Source: Reuters EcoWin Pro
Chart 2: Real Estate Values Declined in Q3
Household net worth rose in Q3 as capital gains
on equity holdings were partially offset by
declines in real estate values
The Flow of Funds Accounts for Q3 released last
week indicated that household net worth rose by
USD 1.19trn to USD 54.9trn last quarter, driven
mainly by capital gains on equity holdings. Broad
equity indices rebounded by 11.1% in Q3 after falling
11.4% in Q2 and have advanced roughly 8.5% since
then. This suggests net worth will likely continue
increasing in Q4.
As shown in Chart 1, net worth as a percentage of
disposable income in Q3 – while up from the trough
reached in Q1 2009 – was still below its level at the
end of 2009. Real estate values declined
substantially as the expiration of the tax credit
incentive pushed house prices down in Q3. Much of
the gain in equity prices has thus been offset by
falling home prices in a process that will likely persist
in Q4 (Chart 2).
Measures of consumer financial stress have
painted different pictures
The US has not experienced a deleveraging cycle
since the Great Depression. However, it is
sometimes difficult to calibrate when households will
reach a new equilibrium and be ready to borrow
again in the aggregate. The Federal Reserve’s
financial obligation ratio (FOR), which includes
automobile lease payments, rental payments on
Source: Reuters EcoWin Pro
Chart 3: Debt Ratios Continued to Fall
Source: Reuters EcoWin Pro
tenant-occupied property, homeowners' insurance
and property tax payments, has dropped to levels
last seen in 2000. Meanwhile, the ratio of total
household debt to annual disposable personal
income remained at 1.22 in Q3, not far below its
peak of 1.35 at the beginning of the latest recession.
Both measures suggest consumers have improved
their balance sheets, albeit to dramatically different
degrees (Chart 3). The FOR probably overstates the
Yelena Shulyatyeva 16 December 2010
Market Mover
8
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progress consumers have made as it assumes
consumers can refinance all their debt at current low
rates. We know this is not the case, owing to tight
credit and underwater mortgages. But as some
people have been able to take advantage of low
rates to reduce their debt burdens, the true picture
probably lies somewhere between the two measures.
Consumer credit continues to decline…
Incoming data on consumer borrowing suggest
consumers are not yet content, however, as
borrowing continues to contract. Private sector
deleveraging continued at a rapid pace in Q3. In
particular, household borrowing contracted 1.7% in
Q3 following a 2.2% decline in Q2. Mortgage
borrowing fell by 2.5% after a drop of 2.3%.
Consumer credit contracted 1.5% in Q3 after falling
3.3% in Q2.
Chart 4: Revolving Credit Continues to Decline
Source: Reuters EcoWin Pro
Chart 5: Charge-Off Rates Remain Elevated
In October, consumers continued to deleverage.
Non-revolving credit growth has picked up lately,
supported by increases in student loans. People
continue to enter university to ride out the difficult
labour market recovery. Spending on autos has also
risen of late, probably accounting for some of the
pick-up. However, revolving credit, which tracks
credit card debt, continued to decline in October; it
dropped by USD 5.6bn (Chart 4).
...even as retail sales improve
Retail sales posted a solid gain in November, rising
0.8% after an upward-revised 1.7% increase in
October. In addition, consumer confidence, while still
at recessionary levels, has improved of late. The
University of Michigan index of buying conditions for
durables surged to the highest level since January
2008. Ongoing deleveraging suggests that high
saving rates still represent a speed limit, with further
acceleration dependent on improving labour market
conditions.
Three main factors appear to have contributed to
ongoing declines in revolving credit
Consumers continued to reduce their debt, largely by
defaulting on their credit cards. While quarterly
government data on commercial banks suggest that
charge-off rates on credit cards eased from their alltime
highs reached in Q2, they remain at an elevated
8.4% of the average loan balance (Chart 5). In fact,
since the economy plunged into recession in 2008,
around 70% of the decline in consumer credit has
been caused by consumer defaults.
At the recent Philadelphia Payment Cards Center
Conference, Fed Governor Elizabeth Duke
suggested that “accelerated payment rates on
existing balances do not seem to have contributed
importantly to the drop in credit card debt outstanding
over the past couple of years”. She argued that, at
Source: Reuters EcoWin Pro
Chart 6: Pay Down Rates Pick Up
Source: Haver Analytics
the beginning in 2007 as economic conditions
worsened, “households began to pay off their card
debt at a significantly slower pace – a trend that
extended into 2008 and 2009…the drop in the payoff
rate has been more pronounced than in the
recessions of 1990-91 and 2000-01” (Chart 6). More
recently, however, this trend has reversed. As of
September 2010, the repayment rate had risen to a
more typical level. According to Governor Duke, “it
could also be attributed to a shift in the composition
of cardholders in bank portfolios toward more
creditworthy borrowers as charged-off accounts were
replaced with new accounts underwritten using
Yelena Shulyatyeva 16 December 2010
Market Mover
9
www.GlobalMarkets.bnpparibas.com

stricter criteria”. Regardless of the cause, consumer
credit is currently being paid down at an aggressive
rate, particularly when one considers that the uptrend
in pay downs between 2003 and 2007 owed in large
part to the substitution of home equity debt for credit
card borrowing. Both home equity and credit card
balances are declining.
Indeed, there has been a recent surge in “cash-in”
refinancing whereby homeowners have been
reducing their principal balances through a
refinancing transaction. This could be the result of
tighter lending standards and declining home values,
with lenders requiring homeowners to reduce their
loan balances to access lower mortgage rates.
However, it stands in stark contrast to the peak of the
housing bubble in 2006 when “cash-outs” (refinances
resulting in loan amounts that were at least 5%
greater than the amortised unpaid principal balance
of the original loan) accounted for almost 90% of all
refinancing transactions. As the housing bubble burst
and home values dropped, the cash-out ratio
dropped to 18.5% as of Q3 2010 – the lowest level
since Freddie Mac records began in 1985. In
contrast, the proportion of cash-ins surged to 33% in
Q3 (Chart 7).
Some of the deleveraging can be attributed to a
reduction in new borrowing. According to the Federal
Reserve Board’s quarterly Senior Loan Officer
Opinion Survey, despite a modest easing in lending
standards, demand for consumer loans remains
weak (Chart 8). According to the quarterly report on
household debt and credit from the New York Fed,
the number of inquiries for new consumer credit is
significantly down from its pre-recession levels (Chart
9 – I).
Chart 7: Cash-In Refinances Surged This Year
Source: Reuters EcoWin Pro
Chart 8: Demand for Credit Remains Sluggish
Source: Haver Analytics
Chart 9: Supply Factors Also Limit Credit
Increases
Supply factors have also likely contributed to the
decline in overall credit card outstanding balances.
Households may be charging less because they had
less credit available. Indeed, the same survey shows
a significant decline in credit card limits since the
peak in mid-2008 (Chart 9 – II).
The relationship between consumers and credit is
undergoing a fundamental change. While a solid
holiday shopping season should help keep the
recovery on track, there are no indications that credit
will soon become the accelerator it once was.
Source: Reuters EcoWin Pro
Yelena Shulyatyeva 16 December 2010
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ECB: Room at the Top
• The ECB will have a new president from the
beginning of November 2011.
• As the process of choosing a new president
is lengthy, speculation over who it will be could
continue for some time yet.
• A German president remains the most likely
outcome, with Axel Weber the front runner. But
alternative candidates are also in the frame.
• Uncertainty over the change of leadership,
plus increased divergence within the eurozone,
implies a more uncertain policy outlook.
The structure
The Governing Council of the ECB is made up of six
Executive Board members and the heads of each of
the national central banks (NCBs) in the eurozone.
The number of NCBs currently stands at 16 but will
expand to 17 from the start of 2011 when Estonia
joins the eurozone.
The six members of the Executive Board of the ECB
serve a non-renewable eight-year term. They can be
removed only in the case of incapacity or serious
misconduct. The names of the current members are
in Table 1, along with the expiry dates for their terms.
Jean-Claude Trichet’s eight-year term as president of
the ECB will expire on 31 October 2011. Choosing
his replacement may be a lengthy process (Table 2).
Who will get the job, when we will find out and what
this means for future policy are obviously a source of
considerable interest for markets.
The nomination process
According to the ECB statutes, the members of the
Executive Board should be persons of "recognised
standing and professional experience in monetary
and banking matters" (Article 283 of the EU Treaty,
effective since the ratification of the Lisbon Treaty).
The Executive Board members are chosen by the
European Council, voting on a qualified majority
basis, on the recommendation of the Council and
after the European Parliament and the Governing
Council of the ECB have expressed their opinions.
The timetable for choosing Mr Trichet to be president
of the ECB back in 2003 offers a template for how
the procedure will evolve this time. Mr Trichet’s term
began in November 2003. The European Council
officially chose him in mid-July that year. By the end
Table 1: Executive Board Members
Name Nationality Term Ends
J-C Trichet France President 31/10/2011
V Constancio Portugal V/President 31/05/2018
G Tumpel-Gugerell Austria Member 31/05/2011
J-M Gonzales-Paramo Spain Member 31/05/2012
L Bini-Smaghi Italy Member 31/05/2013
J Stark Germany Member 31/05/2014
Source: ECB
Table 2: Timetable for Naming the New ECB
President
Steps
Likely timing
Heads of State discussions May-June 2011
European Council official approval of
Candidate June-July 2011
ECB expresses opinion July 2011
Monetary & Economic Affairs Commission
of EU Parliament hears the candidate September 2011
EU Parliament expresses opinion September 2011
European Council formal nomination September 2011
New ECB President takes up duties 1 November 2011
Source: BNP Paribas
Table 3: Governing Council Membership
Total Number of % of % of
Country NCB Head GC Members Members Capital Key
Germany A Weber 2 9.1 27.1
France C Noyer 2 9.1 20.4
Italy M Draghi 2 9.1 17.9
Spain MF Ordoñez 2 9.1 11.9
Netherlands N Wellink 1 4.5 5.7
Belgium G Quaden 1 4.5 3.5
Greece G Provopoulos 1 4.5 2.8
Austria E Nowotny 2 9.1 2.8
Portugal C Costa 2 9.1 2.5
Finland E Liikanen 1 4.5 1.8
Ireland P Honohan 1 4.5 1.6
Slovakia J Makuch 1 4.5 1.0
Slovenia M Kranjek 1 4.5 0.5
Luxembourg Y Mersch 1 4.5 0.3
Cyprus A Orphanides 1 4.5 0.2
Malta M Bonello 1 4.5 0.1
Source: ECB, BNP Paribas
of July, the ECB had adopted a positive opinion on
his nomination. The European Parliament approved
the choice on 23 September, less than two weeks
after the EU Commission for Economic and Monetary
Affairs had heard the candidate.
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On the basis of the 2003 timetable, it is most likely
that the new president of the ECB will be chosen at
the Heads of State and Government meeting in May
or June next year. It is likely that the nomination will
seep through to the public domain before this as the
European Council will want to ensure the candidate
has sufficient support beforehand. Negative opinions
from the ECB or the European Parliament would not
necessarily block the appointment but would be very
damaging to the authority of the proposed president
and to the credibility of the ECB.
An earlier indication of who will be the new president
is also possible. This is because the term of current
Executive Board member Mrs Tumpel-Gugerell will
come to an end in May next year, so a successor will
have to be nominated soon. This could be discussed
as soon as the EU Summit on 16-17 December.
The nationality of the proposed successor to Mrs
Tumpel-Gugerell may be an indication of the likely
nationality of the new president. Media reports have
suggested that Germany and France will discuss the
choice of the new Executive Board member and the
new president in tandem. The suggestion is that a
deal could be struck in favour of the ECB president
being German as long as a France national fills the
vacancy on the Executive Board, replacing Mrs
Tumpel-Gugerell but with a high-profile portfolio
(such as the responsibility for economic analysis).
The role of ECB president
The ECB president has just one vote like the other
members but has considerably more influence given
his or her position in setting the agenda and chairing
the Governing Council meetings. The ECB president
is obliged to present and explain the policy decisions
of the Governing Council in the press conference that
follows the policy-setting meetings (which usually
occur on the first Thursday of each month). This is a
key part of the job and an important issue for who is
chosen – discussed below.
The president also has to deliver a testimony, and
answer questions, in the European Parliament twice
a year. He or she will usually attend the meetings of
finance ministers of the eurozone, an opportunity to
make recommendations to finance ministers about
other aspects of economic policy. One of the features
of Mr Trichet’s ECB presidency has been less public
disagreement between the two camps.
Who is in the frame?
In theory, any person from the eurozone who meets
the relevant criteria can be president. But in practice,
choosing a President is a complicated process given
the horse-trading between member states over the
key roles and responsibilities within the eurozone.
Box 1: ECB Governing Council - Voting Rights
The principle for voting at the Governing Council is one
member, one vote. However, with the increasing number
of new eurozone members, the ECB has secured specific
voting rules insuring that no more than 21 people take
part in the voting (the voting system is described in the
Article 10 of Protocol 4 annexed to the EU Treaty).
Since January 2009, the number of eurozone member
states has exceeded 15 and the new set of rules can
apply. However, the Governing Council can decide to
stick to the simple one member one vote system as long
as the number of member countries remains below 18.
The system works as follows:
Every Executive Board member always has a voting right.
The Governors of the NCBs in the main five countries
have at least four permanent voting rights. The main five
countries are defined according to two criteria: the size of
GDP (with a weighting of 5/6); and the size of the national
financial system (for the remaining 1/6 weighting). The socalled
first group is currently composed of Governors from
Germany, France, Italy, Spain and the Netherlands.
The second group is composed of the Governors from the
other central banks and they share the remaining 10 or 11
vote rights on a rotating basis. The frequency of rotation
of the first group cannot be lower than that of the second
group. As a result the first group currently has 5 voting
rights and the second group only 10. From January next
year, 10 of the 12 members of the second group will have
a voting right. Only when an 18 th country joins EMU will
the first group lose the fifth voting right it currently holds.
Different rules, with three groups of Governors, will apply
from the day the monetary union reaches 22 member
countries. These rules are also defined in Article 10. They
are intended to prevent the voting rights of the largest
countries being overly diluted as the monetary union
expands its membership.
Source: EU Treaty, effective since the ratification of the Lisbon Treaty
What we know is that both previous presidents were
experienced heads of national central banks at the
time of their nomination. Having run a central bank is
an obvious advantage. But it is not a necessity.
Nationality is probably the more important issue. The
presidency of the ECB has not been held by the
largest economy, Germany, which is one reason why
the initial focus of speculation over who will be the
new president centred on the Bundesbank’s current
president, Axel Weber.
At the time of writing, we see four main scenarios for
the choice of the new president of the ECB which we
discuss in turn below. The probabilities which we
have attached to each outcome are very fluid given
the political nature of the decision.
Dominique Barbet/Ken Wattret 16 December 2010
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Scenario 1: Axel Weber (40%)
The initial front runner for the position and a very
credible candidate in many respects, Mr Weber has
the requisite experience of having running a central
bank, is a highly respected economist and is, of
course, German. The suggestion is that, should Mr
Weber secure the presidency, the current Executive
Board member Jürgen Stark would then return to the
Bundesbank to become its new president.
There have never been two people from the same
country on the ECB Executive Board simultaneously,
though there is no formal obstacle to this happening.
Indeed, as Table 3 highlights, the larger countries are
under-represented in relation to their contributions to
the ECB’s capital.
At one stage, a Weber presidency was perceived by
some to be a ‘done deal’, with Chancellor Merkel a
strong supporter of his candidacy. It has looked less
of a certainty recently, however, related in part to Mr
Weber’s tendency to express a different view to that
of the Governing Council as a whole. His dissent has
been most vocal in relation to the Securities Markets
Programme (or SMP).
His reputation as a ‘hawk’ is also a concern for the
countries in most economic and financial distress
given the potential implications for future monetary
policy. The reservations over Mr Weber have led to
speculation of an alternative outcome…
Scenario 2: Another German (20%)
Germany feels that, as the largest economy in the
eurozone, it is its turn to hold the ECB presidency. If
Mr Weber is too controversial a candidate, then an
option would be for another German to take the role.
A potential alternative is the current ECB Executive
Board member Jürgen Stark. Though he has never
been the head of a central bank, he has extensive
experience in senior roles at the Bundesbank and the
ECB.
His candidacy, however, is complicated by a couple
of issues. First, his reputation as a policy hawk. If this
is an obstacle to Mr Weber securing the position,
then the same reservations may apply to Mr Stark.
However, as he has not showed the same degree of
public dissent as Mr Weber, he is probably viewed as
more of a team player. A second problem is his role
on the Executive Board. His eight-year term does not
expire until mid-2014. While responsibilities within
the Executive Board can be switched around, starting
a new term as the president is a different issue.
Our understanding, having spoken to the ECB, is that
it would not be possible to nominate an existing
Executive Board member for another position on the
Board until his or her current term had expired. A
former Executive Board member could, however, be
nominated to be president.
Other high-profile German nationals have also been
floated as possible candidates, including the current
CEO of the EFSF, Klaus Regling. He has extensive
experience in the financial sector, including at the
German Finance Ministry and the IMF. But he has
not run a central bank, or even had a senior position
at a central bank, which is an issue. Another is the
practical constraint of his current role at the EFSF.
The implication of the probabilities attached to the
first two scenarios is that we believe it is more likely
than not that a German will be the next president of
the ECB. But it is not a done deal. Another member
state of the eurozone may yet take the top job. This
leads us to the third scenario…
Scenario 3: A Compromise Candidate (20%)
Contrary to perceptions before the formation of the
ECB that its first president would be a German, the
job went to the Netherlands. The head of the Dutch
central bank, Wim Duisenberg, got the job, though
only for half a term (i.e. four years). Germany took
the role of Chief Economist for the highly influential
Otmar Issing.
Mr Duisenberg was a compromise option. He was a
highly experienced central banker, from a core
member state and sufficiently hawkish to placate
Germany.
Such a compromise option is also possible this time.
Indeed, there is a long tradition in Europe of a ‘small
country’ compromise candidate emerging late in the
day when there has been insufficient support for the
‘big country’ front runner. It happened only recently
with the choice of Herman Van Rompuy as president
of the EU Council.
As the outgoing president is French, another French
national is highly unlikely to secure the role. To some
extent this also applies to the Netherlands, given the
nationality of the first ECB president. Would it really
be fair that a country representing just 6% of total
eurozone output accounted for two of the first three
ECB presidents? This would seem to rule out the
current head of the Netherlands central bank, Nout
Wellink, who would otherwise be seen as a credible
candidate for the compromise option.
That the newly appointed vice president of the ECB,
the former head of the Central Bank of Portugal, Mr
Constancio, is from southern Europe is an additional
complication. This makes it more likely that the new
president will be from a northern European country, a
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key reason why Germany apparently pushed hard for
Mr Constancio to get the job of vice president.
With so many member states seemingly out of the
running, this has led to speculation that the current
head of Finland’s central bank, Mr Liikanen, could
become the next president of the ECB. He has the
requisite experience of running a central bank and is
from a ‘neutral’ part of the eurozone. He also worked
for the European Commission from 1995 to 2004, so
has plenty of EU experience.
But is he the right fit given the specific requirements
of the role? Mr Duisenberg often struggled in dealing
with the media. The position of ECB president needs
someone who can deal effectively and comfortably
with a bombardment of questions on a variety of
issues very shortly after the conclusion of what are
likely to be, given increasing divergence within the
eurozone, difficult discussions on the Governing
Council. Does he have the experience required to
steer the Governing Council in these difficult times?
The same question marks also apply to other ‘small
country’ names which have periodically cropped up
in speculation, largely centred on Benelux countries.
One could argue, however, that these countries are
already over-represented in senior EU positions.
The best compromise option would be for Mr Trichet
to stay in the role. The advantages of continuity in
these highly uncertain times are obvious. How about
extending his term for another four years, say, given
the exceptional circumstances? There are, however,
procedural obstacles. The terms of Executive Board
members are non-renewable which would appear to
rule this option out.
The nationality of the current ECB vice president is
one of the obstacles in the way of the last of our four
scenarios…
Scenario 4: Mario Draghi (20%)
In a number of respects, Mr Draghi is a very credible
candidate for the ECB presidency. He ticks many of
the most important boxes. He has been a highly
effective head of the Banca D’Italia, is the president
of the Financial Stability Board, earned a doctorate in
economics from MIT, worked at the World Bank for
many years and unlike most of the candidates, has
extensive private sector experience also.
In contrast to some on the ECB Governing Council,
he has kept a remarkably low profile in his near fiveyear
spell running the Banca D’Italia. A key issue in
the way of his candidacy is the national politics
associated with choosing the leadership of the ECB.
Having two Southern Europeans at the helm is not
acceptable for some.
Tough call
Given the issues highlighted above, predicting who
will get the job is not straightforward. Weighing up all
the information available, our bottom line assumption
is that the most probable outcome is that the next
president of the ECB will come from Germany. We
are aware that Mr Weber’s candidacy has been
damaged by his outspokenness. But given the lack of
practical alternatives, we still believe that a Weber
presidency is the single most likely outcome.
It is unlikely in our view that the next president of the
ECB will come from southern Europe. This is not a
refection of Mr Draghi’s candidacy. As stated above,
his credentials are impressive. Rather, it reflects the
politics of the eurozone.
Policy implications
An obvious worry is that if a German with a hawkish
reputation takes the presidency, this will lead to a
tighter than otherwise monetary policy stance – much
too tight potentially for the periphery. This is more of
a concern now than in the past. In the early days of
EMU, the German economy struggled. Now, it looks
structurally strong. The unemployment rate is at its
lowest in almost two decades and skill shortages in
fast growing sectors risk generating upward pressure
on labour costs and inflation.
While the ECB sets monetary policy for the eurozone
as a whole it is reasonable to assume that members
of the Governing Council will be influenced by what is
happening in their own countries or those near by.
There is some historical experience of this in respect
of German influence on ECB policy.
That the German economy was going strong in early
2008 – GDP surged by over 5% annualised in Q1 –
and wage pressures were building, were contributory
factors behind the ECB’s decision to raise rates in
July 2008 in the eye of the financial storm. Germany
had pushed hard – rightly, in our opinion at the time –
for a faster pace of tightening in 2006 and 2007 and
this frustration was instrumental in the decision to
hike in summer 2008.
Germany was also highly influential on policy in the
early 2000s but in the other direction. Taylor Rule
analysis suggests that rates were low in relation to
eurozone needs in the early years of EMU (Chart 1),
when the German economy was performing poorly.
This contributed to the formation of asset price
bubbles in other countries which have now burst with
such devastating consequences.
More divided
ECB policy is not determined by the president alone.
But inasmuch as the president shapes the agenda
for Governing Council meetings and is influential in
Dominique Barbet/Ken Wattret 16 December 2010
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determining how the decisions will be made – on the
basis of consensus-building like Mr Trichet, on the
basis of simple voting or guided more strongly by the
Executive Board – the choice of the new president is
highly significant. The president’s style is also going
to be important when it comes to how the ECB will
interact with other policymakers, like governments,
during a crisis.
A less consensus-driven approach could result in a
more responsive ECB, with faster decision-making.
But it could also lead to more dissent if members of
the Governing Council feel frustrated that they are
not being heard. Looking ahead, with the eurozone
looking increasingly divergent growth-wise, greater
dissent and a higher degree of difficulty in forging a
consensus are to be expected. This implies a need
for strong leadership - but preferably a leadership
style which can persuade the Governing Council to
stick together rather than creating dissent.
Shifting to second
A likely consequence of a German presidency would
be an increased emphasis on the second pillar of the
ECB’s monetary policy strategy – monetary analysis.
If ECB policy were to become less sensitive to short
run determinants of inflation (e.g. the balance of
supply and demand) and more sensitive to mediumterm
trends as signalled by the money and credit
analysis, this would also lean towards higher ECB
policy rates earlier.
Broad money and credit growth rates are not normal
at present but they are in the process of normalising.
If this continues, growth rates will look increasingly
out of kilter with the emergency level of policy rates
currently in place (Chart 2).
There is also likely to be a greater tendency at a
German-run ECB to 'lean against the wind' when it
comes to potential asset price bubbles. This was a
prominent theme of Mr Stark’s contributions to the
ECB’s conference last month on the causes and
consequences of the global financial crisis. In this
context, the speeches of Mr Weber suggesting that
the costs of too late an exit from monetary policy
accommodation would be greater than the costs of
too early an exit are also significant.
Another salient issue given recent developments is
how sensitive, or otherwise, a German-led ECB
would be to problems in the peripheral economies.
From a purely arithmetical perspective, the solidity of
the core member states is far more important than
the problems in the periphery. The combined output
share of Greece, Ireland and Portugal is around 6%,
less than a quarter of that for Germany alone. An
increased emphasis on the solidity of the core was,
until recently, the direction in which the speeches of
7.0
6.0
5.0
4.0
3.0
2.0
1.0
0.0
-1.0
-2.0
Chart 1: ECB Policy & Taylor Rule
Eurozone
ECB Refi
98 99 00 01 02 03 04 05 06 07 08 09 10
Sources: Reuters EcoWin Pro & BNP Paribas
5.5
5.0
4.5
4.0
3.5
3.0
2.5
2.0
1.5
1.0
0.5
0.0
Chart 2: ECB Policy & Lending Growth
97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12
Sources: Reuters EcoWin Pro
Bank Lending (% y/y, 18Mth Lag RHS)
ECB Refi Rate (%)
those most keen on ‘normalisation’, including from Mr
Weber and Mr Stark, were leaning.
Forecast implications
Our forecast remains for the refinancing rate to stay
at 1% until spring 2012, consistent with low domestic
price pressures and subdued growth in the eurozone
as a whole. Market developments will also be key to
maintaining policy accommodation, as was evident in
the recent decision to maintain full allotment for all
refinancing operations through Q1 2011.
Looking to the longer-term, under Scenarios 1 and 2
the bias would be towards tighter policy and a flatter
yield curve. Under Scenario 4, this is also possible.
With the ECB led by southern Europeans there could
be a desire to reinforce the anti-inflation credibility of
the ECB by raising interest rates earlier and more
quickly than otherwise.
The bottom line is that we are entering an uncertain
era for ECB policy. The vice president is new to the
job and all members of the Executive Board will see
their terms expire within two and a half years of the
next president taking up the role. Add the increased
internal divergence to the mix and forecasting ECB
policy is unlikely to be straightforward.
13
12
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9
8
7
6
5
4
3
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1
0
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UK: HMS QE2 Sunk Before It Was Launched
• We have changed our Bank of England
monetary policy forecast.
Chart 1: BoE CPI Inflation Forecasting Error 2-
Years Ahead
• Given higher than expected inflation and the
threat this poses to inflation expectations, we
no longer expect the Bank to engage in a
second round of quantitative easing.
• Given our view that GDP will grow much
more slowly during 2011 than the BoE’s central
projection, we still believe that the first interest
rate hike is a long way off (2012).
• Nonetheless, if inflation expectations rise
abruptly and upside risks to wage inflation
emerge, there is a risk that the BoE will hike
Bank Rate during 2011.
Enough is enough
We have revised our BoE monetary policy forecast.
We had expected downward surprises on GDP
growth during 2011 to provoke a downward revision
to the Bank’s medium-term inflation outlook, opening
the door to a second phase of quantitative easing.
However, Tuesday’s upward surprise on inflation was
the final nail in the coffin.
CPI inflation accelerated by 0.1pp to 3.3% y/y,
contrary to earlier indications that we might have
seen a slight deceleration. It was a bad number
which is only likely to get worse in the coming
months. Rising utility bills and petrol prices will add to
inflation in December, before the VAT hike to 20%
pushes inflation even higher in January. We had
expected CPI inflation to peak at 3.6% y/y in
February. However, following this week’s surprise,
the peak is likely to be 3.8% y/y with a significant risk
of 4% y/y.
There have been persistent upward surprises on
current inflation over the last two years. While it is
typically the medium-term outlook for inflation that
matters most for BoE policy, near-term inflation is
posing an ever-bigger threat to inflation expectations
and wages – with implications for inflation further
ahead. The fact remains that around 1pp of current
inflation is related to increases in indirect taxes
including VAT. The latter will eventually drop out of
the y/y calculation. Nonetheless, when this happens
(in 2012), the likely undershoot relative to target is
looking more and more marginal as time passes.
Source: Reuters EcoWin Pro, BoE
End-of-year appraisal
Given the time of year, it is worthwhile assessing
what the BoE has done well and what it has done
badly. To its credit, QE1 worked. The economy has
recovered more swiftly than expected and
unemployment is lower than feared. Contrary to
concerns that the economy might flirt with the risk of
deflation, the UK seems about the furthest from
deflation of the industrialised economies.
However, what the BoE hasn’t done particularly well
is forecast inflation. Chart 1 shows where inflation
has actually been compared with the BoE’s
projection 2 years earlier. The shaded bars show that
it is incredibly rare for inflation to be lower than the
Bank projects. In fact, on average inflation has been
around 0.75pp points higher than the Bank’s
projection. Given this, there should be a tendency for
the Bank to aim a little higher at the medium-term
horizon.
US lessons
The key reason the BoE hasn't begun QE2 already is
worries about inflation expectations. If inflation stays
above 2% for a long time, people will doubt it is truly
aiming at 2%. If we go to 4%, they definitely won't
believe it.
Also, the Bank will have learned from the Fed's
experience that QE can have a perverse effect on
bond yields through inflation expectations, with
breakevens having risen considerably since
Bernanke made his Jackson Hole speech (by around
50bp). Rising inflation expectations are the last thing
the BoE needs.
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Nominal GDP has been increasing at close to a 6%
y/y pace over the last year, and it is questionable
whether the Bank would want to boost this further.
The labour market in recent months has seen very
good job growth, and there is anecdotal evidence of
pay freezes being less widespread than before.
Wage growth will probably pick up.
Faster-than-expected inflation seems to reflect to an
important degree a bigger pass-through of the
exchange rate shock from sterling's depreciation.
Why has this happened? It could be that inflationary
expectations have held up better than normal,
possibly as a result of BoE policy. It may be that the
output gap is a lot smaller than the fall in output
might suggest. Neither argues for more QE.
Conclusion
Despite our view that GDP growth will disappoint
expectations during 2011, the obstruction to further
QE now looks too big. Hence we no longer expect
QE2 to be launched. We continue to believe that
disappointing growth will prevent the first interest rate
hike from being delivered any time soon (not until
2012). In particular, the Bank has aimed high with
regard to near-term inflation. Nonetheless, if inflation
expectations do rise appreciably and there are signs
that this is pushing wage inflation higher, there is
clearly a risk that the MPC begins to tighten policy
during 2011.
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SNB: Governing Two Economies
• As widely expected, the SNB left the policy
target unchanged in December.
Chart 1: SNB Policy Rates
• The central bank remains extremely
sensitive to the strength of the franc and the
stress in the euro area periphery.
• The SNB continues to expect a marked
slowdown in the coming quarters and has
revised its inflation forecast down further.
• We think growth will surprise to the upside
but a hike as soon as March looks very
challenging.
• The timing of the first hike remains
dependent on the exchange rate.
As widely expected, the SNB left the policy target
and band unchanged in December. The strength of
the franc continues to delay policy normalisation.
The dilemma for the SNB is setting a single policy
variable for two sectors of the economy that are
experiencing very different monetary conditions. For
the domestic economy, policy looks too loose. But
monetary conditions are tight for exporters. The two
sectors’ performance will diverge accordingly –
domestic demand will contribute more to growth than
in the past, net trade less.
If any of the franc’s current strength reflects rate hike
expectations, the SNB clearly doesn’t want to
validate them. Despite the strength of the economic
data since the last meeting, the SNB continues to
expect a marked slowdown in growth in 2011.
The monetary authority expects growth to slow to
1.5% in 2011 from 2.5% this year. We see risk to the
upside of that 2011 forecast (we have 2%). Sectors
focused on the domestic market are in a strong
position to respond to the SNB’s zero interest rate
policy – employment growth is rising and neither the
private nor public sector is characterised by the
imbalances evident in many parts of Europe. In
addition, while net trade should contribute less to
growth on the combination of a strong franc and
robust domestic demand growth, Swiss exports will
benefit vibrant emerging-market demand.
The SNB also revised down the medium-term
outlook for inflation further. 2012 inflation is now
expected at 1% rather than 1.2%. We are less
sanguine about medium-term inflation. With a smaller
output gap than elsewhere in Europe (we put it at
c.0.5%), closing more quickly, the drag from spare
capacity is fading quite rapidly. The prospect of
stronger inflation in the future is evident in the SNB’s
Source: Reuters EcoWin Pro
Chart 2: SNB Inflation Forecasts
Source: Reuters EcoWin Pro
preferred gauge of core inflation – dynamic factor
inflation – which rose from 0.1% y/y in October 2009
to 1.0% last month. Shorter-term measures of
momentum in the GDP deflator are also picking up.
With the franc delivering monetary tightening
independent of SNB policy, the outlook for policy is
dependent on the outlook for the exchange rate.
Were the franc to depreciate significantly, then given
the strength of domestic fundamentals, we would
expect the SNB to hike. But if the franc stays strong,
the first increase will come later as the SNB awaits
further evidence on the robustness of the economy.
Since July, we have had the first hike in March 2011.
That now looks very challenging, particularly given
the subdued level of the SNB’s medium-term inflation
forecast. It is also tricky to think of reasons to expect
the franc to soften between now and then; there are
widespread expectations of an escalation in market
tensions early in 2011 when a large amount of euro
area sovereign debt supply comes onto the market.
We will revisit our call first thing in the New Year –
but the risk is clearly that the first hike comes later in
2011.
Eoin O’Callaghan 16 December 2010
Market Mover
18
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Sweden: Further Tightening
• The Riksbank delivered a 25bp rate hike at
its December meeting, taking the policy rate to
1.25%.
• There were upward revisions to the GDP and
inflation forecasts for 2010 and 2011.
• But there were no changes to policy rate
projections as the Bank noted that economic
prospects remain “largely the same as in
October”.
• We believe the policy rate is still low given
economic fundamentals.
• Therefore, we continue to expect another
25bp rate hike in February.
Table 1: Riksbank’s Latest Forecasts (% y/y)
CPI
CPIF
GDP
Unemp. Rate (%)
Repo Rate (%,
ann. avg.)
2010 2011 2012 2013
1.3
(1.2)
2.1
(2.0)
5.5
(4.8)
8.4
(8.4)
0.5
(0.5)
2.2
(1.7)
1.7
(1.3)
4.4
(3.8)
7.5
(7.6)
1.7
(1.7)
2.0
(2.2)
1.4
(1.5)
2.3
(2.5)
7.0
(7.2)
2.6
(2.6)
Source: The Riksbank. October 2010 forecasts in brackets
Chart 1: Policy Rate (%)
2.6
(2.6)
1.9
(1.9)
2.4
(2.4)
6.6
(6.8)
3.3
(3.3)
The Riksbank delivered its fourth rate hike in this
cycle at its December meeting, in line with market
expectations, taking the policy rate from 1.00% to
1.25%. The Bank’s rate projections were left
unchanged.
Robust domestic economic growth
Once again, robust growth in the Swedish economy
was acknowledged in the policy statement. On this
the language was quite strong – the Riksbank
described the economy as growing “at a record rate”.
In particular, the upturn was noted as being “broad
based”. On consumption, the Riksbank expects high
consumer confidence and “good finances” to
contribute to further rises in private consumption.
Source: Reuters EcoWin Pro
Chart 2: Consumer Confidence and Private
Consumption (% y/y)
On the inflation front, although underlying inflationary
pressures were perceived to be low, the Riksbank
noted that they “are expected to increase as
economic activity strengthens”.
Uncertainty elsewhere
Despite strong domestic growth, uncertainty over
economic developments elsewhere was also
mentioned. The particular emphasis was on public
finances in Europe as well as the weak housing and
labour markets in the US.
In terms of its latest projections, the Bank revised up
its growth forecasts for the eurozone and the US. It
now expects eurozone GDP to grow by 1.5% in
2011, compared with its previous projection of 1.3%,
and US GDP by 3.0% (2.4%).
Source: Reuters EcoWin Pro
Revisions to the Riksbank’s forecasts
As we had expected, there were upward revisions to
the Riksbank’s growth forecasts. In particular, given
stronger than expected Q3 GDP, the 2010 GDP
projection was pushed up from 4.8% to 5.5%. For
Gizem Kara 16 December 2010
Market Mover
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2011, the Riksbank now expects GDP to grow by
4.4%, up from 3.8% previously. These upward
revisions again led to lower unemployment rate
forecasts. The 2011 and 2013 forecasts were revised
down by 0.1-0.2pp.
Chart 3: CPI & CPIF (% y/y)
On the inflation front, the Bank’s assessment was
that:
• ”While higher electricity prices and commodity
prices temporarily push up inflation, underlying
inflationary pressures in the Swedish economy
will be low as a result of low labour costs”.
In line with this assessment, unit labour cost
forecasts for 2010 and 2011 were revised down, from
-1.2% to -2.2% and 0.6% to 0.4%, respectively.
However, given strong domestic demand, inflation
pressures are expected to build over the forecast
horizon. In terms of revisions to inflation forecasts,
the major change was in the 2011 projections. Both
CPI and CPIF forecasts were revised up – CPI from
1.7% to 2.2%, and CPIF from 1.3% to 1.7%.
What next?
Given the upward revision to growth and inflation
forecasts for next year, one could have expected an
upward revision to rate projections. But the
divergence between the Deputy Governors over the
policy decision meant a revision at this stage was
unlikely. Once again, Deputy Governors Karolina
Ekholm and Lars Svensson entered a reservation
against the decision to raise the repo rate and the
repo rate path in the Monetary Policy Update.
In all, December’s policy decision and statement
were broadly in line with our expectations. Looking
ahead, we believe the strength of the domestic
economy should lead the Riksbank to deliver further
rate hikes. Although the Riksbank rightly mentions
the uncertainty regarding external developments
abroad, we believe this should not prevent it from
implementing more increases.
As Sweden does not suffer from fiscal and other
structural imbalances or a struggling banking sector,
it continues to outperform other advanced
economies. Although we expect growth to moderate
Source: Reuters EcoWin Pro
Chart 4: Swedish Real GDP (Index, Q1 2005=100)
Source: Reuters EcoWin Pro
somewhat next year, it will remain robust and
significantly exceed that in the eurozone. Therefore,
we continue to argue that domestic interest rates are
low in Sweden and see some upside risks to the
Riksbank’s rate projections. In particular, we share
the view of some Deputy Governors that there is a
risk of imbalances mounting. As the Riksbank said in
its statement, “a gradual rise in the repo rate can also
contribute to slower growth in household borrowing
and reduce the risk of imbalances building up in the
Swedish economy”. Against this backdrop, we expect
another 25bp rate hike to be delivered at the
Riksbank’s next meeting in February, if we do not
see a significant appreciation in the krona in the
meantime.
Gizem Kara 16 December 2010
Market Mover
20
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Norway: Hawkish Tone
• The Norges Bank left its policy rate at 2.00%
at its December meeting, in line with market
expectations.
Chart 1: Policy Rates (%)
• The statement accompanying the policy
decision was hawkish compared to October’s.
• We expect the Norges Bank to deliver a rate
hike in Q2 2011, but a hawkish statement overall
has increased the chances of a hike in Q1.
• If the krone does not appreciate significantly
and economic data turn out to be stronger than
the Bank’s expectations, a rate hike is likely in
Q1.
Rates on hold
The Norges Bank kept its policy rate at 2.00% at its
December meeting, in line with market expectations.
In the opening paragraph of the statement, the Bank
mentioned that “underlying inflation has been
approximately as expected” and “growth has picked
up”. But the level of activity was perceived to be
“probably still somewhat lower than normal”. In terms
of external developments, the Bank said that “growth
has been unexpectedly high among several of
Norway’s most important trading partners”. We
believe this mainly reflects stronger-than-expected
growth in Sweden in Q3. Another positive factor
noted was the increase in oil prices, which provides a
boost to the economy overall.
Source: Reuters EcoWin Pro
Source: Reuters EcoWin Pro
Chart 2: Real GDP (% y/y)
Chart 3: Private Consumption & Retail Sales
Less positively, there was acknowledgement of the
uncertainty regarding developments in Europe due to
fiscal concerns. The Norges Bank noted the high
level of borrowing rates in peripheral eurozone
countries. That said, the emphasis was still that
“contagion to other markets has so far been limited”.
Overall, while the Norges Bank kept its policy rate
unchanged, it noted that “the consideration of
guarding against the risk of future financial
imbalances that may disturb activity and inflation
somewhat further ahead suggests that the key policy
rate should not be kept low for too long”. This was
broadly the same as in the Norges Bank’s in-depth
assessment back in October. In all, compared to its
predecessor, the statement had a hawkish tone.
Risks around the policy outlook
In terms of policy, in its in-depth assessment, the
Norges Bank noted that:
Source: Reuters EcoWin Pro
“Both the consideration of bringing consumer price
inflation up to target and the consideration of
stabilising developments in output and employment
imply a low key policy rate”.
Although it again mentioned that “the low interest
rate level has not triggered an increase in household
debt growth so far”, there was particular emphasis on
Gizem Kara 16 December 2010
Market Mover
21
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the rise in house prices and consumer spending.
Against this backdrop, the Norges Bank remains
aware of the risk of financial imbalances building up
in the economy. Therefore, rates are not expected to
remain low “for too long”.
Policy ahead
Overall, the policy statement signalled that we might
see an upward revision to the Norges Bank’s rate
projections at its March meeting, when the new
Monetary Policy Report will be published. As we
noted before, recent domestic developments suggest
growth will pick up in the quarters ahead. Given the
key policy rate is still low compared to what the
neutral rate should be in Norway, we expect rate
hikes. We expect the next hike to come in Q2, but
the hawkish statement has increased the risk of a
rate hike in Q1.
Chart 4: Credit To Households and Non-
Financial Corporations (% y/y)
Source: Reuters EcoWin Pro
Chart 5: Import-Weighted NOK
At the press conference after the policy decision,
Deputy Governor Qvigstad mentioned that he sees
no reason to change the Bank’s policy rate
projections (the quarterly rate projections in the
October Monetary Policy Report suggested the Bank
intends to deliver a rate hike, at the earliest, in
summer 2011). However, developments in the period
ahead will be key for the timing of the hike.
In particular, if we do not see a signicant appreciation
in the currency, economic data surprises to the
upside and house prices increase markedly, the
Norges Bank is likely to deliver a rate hike in Q1. But
if tensions in financial markets intensify going into
next year due to concerns over the eurozone, the
Bank will wait until Q2.
Source: Reuters EcoWin Pro
Gizem Kara 16 December 2010
Market Mover
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Turkey: Reserving Judgement
• The Turkish central bank’s deputy governor,
Erdem Başçı, this week suggested that the CBT
could cut interest rates and increase reserve
requirements.
• This would be designed to maintain
monetary discipline in the economy while
avoiding undue appreciation of the exchange
rate.
• We have serious doubts about the
effectiveness of such a policy without support
from fiscal policy.
• We believe the current suggested policy mix
is likely to result in real exchange rate
appreciation through higher inflation and would
do little to bolster financial stability in the event
of a reversal of inflows.
The Turkish central bank’s deputy governor, Erdem
Başçı, this week stated that to achieve the dual
objectives of “price stability” and “financial stability”,
the optimal policy choice was to reduce the policy
rate to curb FX inflows and to tighten domestic
conditions through use of tools other than the interest
rate (read: reserve requirements).
Turkey is not alone in its endeavour. An increasing
number of emerging market countries are looking for
ways to manage monetary policy by avoiding outright
rate hikes because they fear FX appreciation. They
have adopted measures to discourage speculative
inflows and address potential financial instability.
These measures are sometimes called macroprudential
regulation, which sounds a lot less coarse
than capital controls.
Emerging markets’ worries are understandable
We have sympathy with the authorities in emerging
markets where achieving domestic balance requires
higher interest rates but where achieving external
balance argues against that. One of the main effects
of ultra-easy US monetary policy is on inflation
abroad. These effects are often manifested in oil and
other commodity prices (e.g. food).
However, the Fed's inflation objective excludes food
and energy. There are two things wrong with this.
First, it treats a big chunk of US inflation as
exogenous whereas we all know it is endogenous
40
35
30
25
20
15
10
5
0
Czech R.
Chart 1: Credit Growth 1 and Reserve
Requirement Ratios in Selected EMs
S. Korea
Russia
Credit Growth, y/y,
%
Poland
Turkey
India
Indonesia
RRR, %
and is affected by US policy. Second, the inflation
target is inconsistent with the US' obligations as
issuer of THE reserve currency.
Is the US shock temporary or more lasting?
Clearly, in many countries, the level of interest rates
is far below nominal growth when the economy is at
potential, which appears too loose. If one believes
that the US output gap is transitory and US inflation
is low on a temporary basis, then keeping rates down
Peru
Argentina
Source: ReutersEcowinPro, local authorities. (1) Latest available data.
25
20
15
10
5
0
-5
-10
Jan-08
China
Chart 2: Required Reserves and Their
Remuneration
Remuneration Rate of
RR
Mar-08
May-08
Jul-08
Source: CBT, ISE
Market overnight rate
Cost of RR( Policy
rate-RR)
Sep-08
Nov-08
Jan-09
Mar-09
May-09
Jul-09
RRR (RHS)
Sep-09
Nov-09
Jan-10
Mar-10
May-10
Jul-10
Brazil
Sep-10
Nov-10
Although Turkey’s reserve requirement ratios are relatively low
compared to its peers, the CBT stopped paying remuneration on
these reserves as of October 2010.
7
6
5
4
3
2
1
0
IMPORTANT DISCLOSURE:
This analysis has been produced jointly by employees of BNP Paribas S.A. ("BNPP") and Turk Ekonomi Bank A.S. (“TEB”). It has been separately
reviewed and approved by BNPP and TEB. BNPP is an indirect shareholder of TEB with 42.125% stake. This analysis does not contain investment
research recommendations.
Paul Mortimer-Lee / Selim Cakir 16 December 2010
Market Mover
23
www.GlobalMarkets.bnpparibas.com

to avoid a temporary spike in the exchange rate
against the USD is fine – that would just misallocate
resources and disrupt the pattern of production,
growth and inflation.
If however, a large US output gap persists for many
years – which seems likely – and if US inflation stays
low – also likely – then a permanent change in the
exchange rate is justified and rates should not stay
long below their domestic equilibrium. Our concern in
several economies is that controls designed to lower
the exchange rate are being inappropriately applied.
They might be fine if the shock affecting the US were
temporary, but they are inappropriate if the US shock
is more durable, which is our view.
If such policies are applied inappropriately, nominal
GDP is likely to surprise on the upside and so will
inflation. There will be a rise in the real exchange
rate brought about through inflation.
How does lowering rates and increasing reserve
requirements work?
Lowering rates while increasing reserve
requirements could work by lowering deposit rates
available to foreigners and hence reducing FX
inflows while not reducing loan rates domestically.
This increased wedge between loan and deposit
rates is a reason why reserve requirements are a
favoured instrument now. We also fear that, in some
countries, they are a disguised way of running tooslack
policy without owning up to it.
We are sceptical about such policies in general, and
this applies to the Turkish initiative. We fear that it is
in fact an easing in policy. This is of concern when
Turkish credit growth is extremely rapid (Chart 1).
The rapid growth is associated with a considerable
current account deficit (Chart 3).
We are not the only ones to see the policy shift as
expansionary. The Turkish equity markets rebounded
strongly on the news, with an increase in demand for
risk assets.
All this suggests that the policy is indeed
expansionary, which we find concerning when growth
is already good, credit creation strong and the
current account deficit wide. The economy looks as
though it needs a touch on the brake, not the
accelerator.
We have serious doubts about the effectiveness of
such a policy without strong support from fiscal
policy. A tighter fiscal policy would be much more
effective in containing aggregate demand, limiting
exchange rate appreciation and achieving better
6
4
2
0
-2
-4
-6
-8
Chart 3: 2010 Current Account Balances in
Selected EMs
China
Russia
S. Korea
Source: BNP Paribas.
Argentina
Indonesia
Peru
Czech R.
Unlike several other emerging market countries that also need to
deal with capital inflows, Turkey has a large current account
deficit. As a result, Turkey is more vulnerable to a sharp reversal
of capital inflows.
post-inflow financial stability. Accordingly, we would
argue that a much tighter cyclically adjusted fiscal
policy, supported by strict regulations by the Banking
Regulation and Supervision Authority (BRSA), and
possibly a tighter monetary policy would represent a
better policy choice for Turkey. If these options are
not possible prior to elections, the CBT could have
also considered intensifying FX purchases and/or
administrative measures to curb short-term inflows.
Most importantly, for the reserve requirement ratio
strategy to work, the CBT should be ready to reduce
TRY liquidity in the system. In such a case, money
market rates would go above the CBT’s policy rate of
7%. We think the CBT would not allow that and the
liquidity it provides will find its way to credit. The
economy will thus continue to overheat and
ultimately inflation will be the price.
Effects of higher reserve requirements
Higher reserve requirements will:
1) Increase the cost of bank intermediation;
2) Lower the rate on deposits and raise the rate on
lending. In Turkey, the cost of raising RR by 1pp
increases the cost to banks by 15bp. In the
recent past, banks were able to reflect around
60% to 70% of cost increase in the remuneration
paid to deposits.
3) Tax bank intermediation and encourage nonbank
intermediation and intermediation outside
the country's borders. In the 1970s and 1980s,
US thrifts developed accounts that were
designed to attract household deposits in the US
Brazil
Poland
India
Turkey
IMPORTANT DISCLOSURE:
This analysis has been produced jointly by employees of BNP Paribas S.A. ("BNPP") and Turk Ekonomi Bank A.S. (“TEB”). It has been separately
reviewed and approved by BNPP and TEB. BNPP is an indirect shareholder of TEB with 42.125% stake. This analysis does not contain investment
research recommendations.
Paul Mortimer-Lee / Selim Cakir 16 December 2010
Market Mover
24
www.GlobalMarkets.bnpparibas.com

to avoid the reserve requirements applying to
banks. The IMF mentions South Korea, where
Korean deposits went from 70% being in deposit
centre banks in the 1970s to half that in 1992 as
a result of extensive use of RR and the
consequent disintermediation of the banking
system;
4) Reduce stock returns to holders of bank equity.
BCB found evidence of this in Brazil, which
would reduce the rate effect;
5) People use non-taxed cash more; and
6) The policy operates on domestic deposits, not
credit. For a country that has more or less closed
its output gap and which at the margin is
financing credit through external wholesale flows
and is running a big current account deficit, the
money effects will be negligible (wholesale
capital comes in, the current account deficit
widens and deposits are unchanged). With an
open capital account, there will be leakage in the
system that would reduce the effectiveness of
RR increases. At the same time, we note that
circumventing the reserve requirement ratio is
rather difficult in Turkey since the regulator
(BRSA) applies the RR to every obligation of
banks, be it bonds or loans from other banks.
The risk is inflation
We have concerns that such a policy could end up
being inflationary. Why?
1) It feeds expectations that the central bank is
reluctant to raise rates when they in fact need to
rise and so stimulates demand (we see the stock
market reaction as strong evidence of this);
2) It feeds expectations that the central bank does
not want to see a rise in the exchange rate (while
admitting it is undervalued in the sense of being
weaker than the market would price it left to its
own devices). This must encourage greater
employment, investment and cost tolerance by
exporters and those competing with imports; and
3) Circumvention of the controls is profitable and
broad liquidity will continue to rise quickly. The
higher the reserve requirement, the greater will
be the incentive to circumvent the regulations.
The famous “impossible trinity” of open economy
macroeconomics, i.e. the inability to simultaneously
target the exchange rate, to run an independent
monetary policy and to allow full capital mobility
suggests that if capital flows are sustained (i.e in the
absence of effective capital controls), Turkey needs
to choose between nominal appreciation and
inflation.
We believe that the current suggested policy mix is
likely to result in real exchange rate appreciation.
This will come about through inflation. Moreover, the
policy mix would do little to reduce the possible
damage to financial stability in the event of a future
reversal of inflows.
IMPORTANT DISCLOSURE:
This analysis has been produced jointly by employees of BNP Paribas S.A. ("BNPP") and Turk Ekonomi Bank A.S. (“TEB”). It has been separately
reviewed and approved by BNPP and TEB. BNPP is an indirect shareholder of TEB with 42.125% stake. This analysis does not contain investment
research recommendations.
Paul Mortimer-Lee / Selim Cakir 16 December 2010
Market Mover
25
www.GlobalMarkets.bnpparibas.com

Japan: Tankan Points to Soft Patch
• The December Tankan showed that
business sentiment among large firms
deteriorated for the first time in seven quarters,
but the setback was not as bad as expected.
• While the outlook DI is weaker than
expected, we judge that sentiment DIs could rise
modestly in the March Tankan.
• Capital spending plans for large
manufacturers were marked up to 2.9% y/y from
2.4% in September. Businesses are focusing
more on expansion overseas, but domestic
investment should continue picking up as long
as the recovery in exports and production
continues.
• The BoJ’s next move depends on the Fed.
So long as the Fed does not expand QE2,
pressures are unlikely to intensify on the BoJ
for further easing to counter appreciating
pressures on the yen.
• If the Fed takes additional action, causing
the yen to strengthen against the dollar, the BoJ
will be pressed to do more to neutralise such
pressures by expanding the scale of its Asset
Purchase Programme.
Modest decline in DIs confirms a soft patch
In the December Tankan survey, business sentiment
modestly retreated for the first time in seven quarters.
This indicates that the economy has entered a lull, as
corporate earnings have stalled due to slowing
exports and the end of domestic stimulus
programmes. Even so, the setback in business
confidence was not as bad as expected, and the
survey results confirm that fallout from the end of
green car subsidies and yen appreciation had only
limited adverse effects on overall business activity.
Setback in confidence not as bad as expected
In terms of the Tankan’s headline index, the current
conditions diffusion index (DI) for large
manufacturers fell three points from the September
survey to +5. Weakness was pronounced in sectors
affected by the end of stimulus programmes such as
motor vehicles or by ongoing inventory adjustments
in the global IT/digital sector like electrical machinery.
Collateral damage was sustained by materialsupplying
sectors such as non-ferrous metals and
chemicals. However, business confidence continued
to improve on the back of solid Asian demand for
capital goods in industries such as general-purpose
10
0
-10
-20
-30
-40
-50
-60
Chart 1: Business Conditions DI
– All Enterprises
*Q1 2011 is forecast from December Tankan.
00 01 02 03 04 05 06 07 08 09 10 11
Source: BoJ, BNP Paribas
30
20
10
0
-10
-20
-30
-40
-50
-60
Chart 2: Business Conditions DI
– Large Enterprises
Manufacturing
Nonmanufacturing
*Q1 2011 is forecast from December Tankan.
00 01 02 03 04 05 06 07 08 09 10 11
Source: BoJ, BNP Paribas
machinery and shipbuilding/heavy machinery.
Interestingly, the business conditions DI for small
manufacturers, while remaining in negative territory,
improved two points from September, suggesting
that the negative factors weighing on the mood of
their larger manufacturing cousins have not filtered
down (though the outlook does not look good, with
the forecast DI for small makers showing an 11-point
drop).
Moving on to non-manufacturers, the current
conditions DI for large enterprises fell just one point
from September to +1. The setback in sentiment was
modest both in areas directly connected to factory
activity such as the wholesale trade and in areas
connected to consumer spending like the retail trade
and services for individuals. As for the retail trade,
despite the stabilisation of department store sales
and the surge in last-minute demand for eco-friendly
appliances ahead of the downsizing of the eco-point
Ryutaro Kono/ Hiroshi Shiraishi 16 December 2010
Market Mover
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system in December, the plunge in car sales
following the end of fiscal incentives inevitably took a
greater toll on confidence. On the upside, the DI for
the communications industry was relatively strong,
and the DI for business-oriented services posted a
sharp increase. The DI for small-sized nonmanufacturers
fell just one point to -22.
20
10
0
-10
Chart 3: Business Conditions DI
– Medium-Sized Enterprises
Outlook DI also shows weakness but…
While the decline in the current condition DIs were
smaller than expected, the forecast DIs showed that
firms are quite cautious about the outlook. We had
caution about the outlook as it is difficult to gauge the
level of domestic demand following the end of
stimulus programmes. But the December Tankan
shows large manufacturers are more wary about the
future than we expected, with their outlook DI falling
seven points. It seems that producers are quite
concerned about the uncertainties surrounding
demand for cars and home appliances, as well as the
squeeze on profit margins from resurgent commodity
prices. In contrast, the outlook DI for large nonmanufacturers
is down just two points.
The resurgent commodities market reflects the
revival in global manufacturing, spearheaded by
booming domestic demand in China and other
emerging economies. At least for the time being,
brisk exports to these economies will likely offset the
damage from higher commodity prices. Meanwhile,
with US Christmas sales proving solid (so far), it is
likely that inventory adjustments in the IT/digital
sectors will make faster headway. Consequently,
despite the downbeat tone of the latest forecast DIs,
when the next Tankan is released on 1 April we feel
business sentiment may not be all that weak. It could
even modestly rise, as we expect the export-led
recovery to resume at the start of 2011, with
momentum steadily growing from the spring as the
negative payback from eco-point sales fades.
(Domestic demand, however, will be too weak to
drive the economy due to the effects of an ageing
population.)
Meanwhile, the latest sales and profit projections
show a slight upward revision for FY 2010 as a whole,
but forecasts for the latter half of the year have been
marked down for both sales and profits. In fact,
second-half profits for large enterprises (all
industries) are now projected to drop a modest 1.0%.
On the surface, it seems that these companies are
pessimistic about the future, following a first half year
when profits surpassed expectations. However, it is
more likely that second-half forecasts are being
adjusted now to avoid large-scale revisions of the
annual projection. Once it becomes clear that exports
are back on a recovery track, sales and profit
projections for FY 2010 could well be revised upward,
-20
-30
-40
-50
-60
-70
Manufacturing
Nonmanufacturing
*Q1 2011 is forecast from December Tankan.
00 01 02 03 04 05 06 07 08 09 10 11
Source: BoJ, BNP Paribas
20
10
0
-10
-20
-30
-40
-50
-60
-70
Chart 4: Business Conditions DI
– Small Enterprises
Manufacturing
Nonmanufacturing
*Q1 2011 is forecast from December Tankan.
00 01 02 03 04 05 06 07 08 09 10 11
Source: BoJ, BNP Paribas
despite fallout from the probable rise in commodity
prices.
Capex plans largely unchanged from September
With regard to the FY 2010 capital spending plans,
large manufacturers project a 2.9% y/y increase
(2.4% in September), for a revision rate of -1.0%.
Large non-manufacturers forecast gains of 3.0%
(1.6%), for a revision rate of 1.3%. The upward
revision for non-manufacturers is largely due to a
mark-up for land purchases, which suggests
improving conditions in the real estate market. But
GDP-based capital investment is closer to the
Tankan’s “software and fixed investment excluding
land purchases”. Spending plans here show large
manufacturers project a rise of 4.1% y/y and large
non-manufacturers a rise of 4.5%, with the revisions
rates for both being negative at -0.9% and -0.3%,
respectively. Whether spending plans include real
estate or not, domestic appetite for capex is not
robustly picking up. Indeed, while many firms during
Q3 settlements marked up their spending plans,
alongside increased profit projections, the upward
revisions for investment were concentrated in
Ryutaro Kono/ Hiroshi Shiraishi 16 December 2010
Market Mover
27
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spending on overseas plants. Owing to the
appreciation of the weak yen and the robustness of
domestic demand in emerging markets,
manufacturers and non-manufacturers are both
focusing more on expansion overseas, rather than
investment at home. Hence the recovery in domestic
investment continues to lag that of profits.
Even so, with the export-led recovery set to get back
on track in 2011, we believe domestic investment will
continue to gradually pick up. On this score,
spending plans show downward revision in the first
half of FY 2010, when concerns were mounting
about a double dip in the US/Europe and yen
appreciation. But the plans for the second half are
uniformly marked up as these uncertainties have
been dispelled.
BoJ policy: No policy change, unless the Fed
acts
With the concern over a double-dip recession having
faded, global share prices and bond yields have
crept higher and the greenback has appreciated of
late. This reflects that fact that global manufacturing
started to turn up again in October, led by emerging
economies. The manufacturing cycle in the
developed world is also reviving on the back of
exports to booming EMs. On this score, that the
recoveries in emerging economies are accelerating
reflects not just their autonomous growth dynamics
but also the effects of the Fed’s QE2 (via defence of
fixed exchange rates). In this sense, QE2 is starting
to benefit the US economy (via exports). Given this
backdrop, the Fed seems likely to take a wait-andsee
stance for a while.
As pointed out in earlier reports, Japanese monetary
policy is influenced most by the exchange rate, and
the factor currently impacting the exchange rate most
is US monetary policy. So long as the Fed does not
move to expand QE2, pressures are unlikely to
intensify on the BoJ for further easing to counter
appreciating pressures on the yen. Hence, Japanese
monetary policy should be unchanged for the time
being.
That said, it will still take a considerable amount of
time for the US’s balance sheet troubles to be
undone. US domestic demand is thus likely to
continue lacklustre, even if revived exports trigger a
cyclical recovery. More fiscal stimulus might give US
growth a firmer tone, but it will likely be only shortlived.
As a result, the US jobless rate will probably
show only limited improvement and the core inflation
rate will probably continue trending lower (the
headline inflation rate, however, could rise on the
resurgent commodities market and higher crude oil
prices). If such weak conditions continue, the Fed
Chart 5: Fixed Investment Including Land
Purchasing Expenses, Excluding Software
Investment (%)
30
20
10
0
-10
-20
-30
-40
02 03 04 05 06 07 08 09 10
Source: BoJ, BNP Paribas
Large Enterprises/Manufacturing
Large Enterprises/Nonmanufacturing
Chart 6: Fixed Investment Including Land
Purchasing Expenses, Excluding Software
Investment (%)
30
20
10
0
-10
-20
-30
-40
-50
02 03 04 05 06 07 08 09 10
Source: BoJ, BNP Paribas
Small Enterprises/Manufacturing
Small Enterprises/Nonmanufacturing
could move to ease further. While America’s natural
rate of interest is unlikely to be revived by such
macro-stabilisation measures, the Fed – fully aware
of this – will probably still undertake aggressive
action.
In such an event, the yen is likely to strengthen
further against the dollar, and the BoJ will inevitably
be pressed to do more to neutralise such pressures.
Given that Japan depends on exports for growth, as
domestic demand is chronically sluggish due to the
effects of an ageing population (and the economic
structure is not yet geared to benefit from yen
appreciation), Japan cannot allow currency
appreciation to damage the export sectors.
Consequently, if the action by the Fed causes
another wave of yen appreciation, we expect the BoJ
to respond by expanding the scale of its Asset
Purchase Programme (currently JPY 35 trillion).
Ryutaro Kono/ Hiroshi Shiraishi 16 December 2010
Market Mover
28
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Japan: Marking Up 2010 Growth Forecast
• Growth in Q3 was marked up slightly more
than projected, to 4.5% annualised from 3.9%,
due to upward revisions in private capital
investment and inventory.
• But the robust tone of Q3 is essentially a
product of policies that triggered a surge in
demand for green car and cigarettes; the
underlying pace of growth slowed alongside
softening exports. Payback for the Q3 policy
factors is likely to see contraction in Q4.
• Even so, with the global economy back on a
recovery track, Japanese growth should resume
in early 2011 and accelerate from the spring.
• Meanwhile, the final figures for last year
show the economy contracted 6.3% in 2009
(rather than 5.2%). The economy’s collapse in
the two quarters following the Lehman shock
was sharper than previously estimated while the
subsequent recovery was slightly faster.
• Following the revision of past GDP data, our
new forecasts call for 4.4% growth in 2010 (up
from 3.6%) and 1.6% in 2011 (1.4%).
Annualised growth rises to 4.5% on stronger
capital spending
In the second preliminary real GDP reading for Q3,
growth was marked up slightly more than we had
projected, coming in at 1.1% q/q (4.5% annualised).
This compares to the preliminary (first estimate)
reading of 0.9% q/q (3.9% annualised). On the
upside, as expected, private capital investment was
marked up (to 1.3% q/q from 0.8%), reflecting the
latest MOF survey of corporate financial statements.
There were also upward revisions to inventory
(contribution of 0.2pp from 0.1pp); personal
consumption (1.2% q/q from 1.1%); and government
consumption (0.2% q/q from 0.1%). On the downside,
public investment was revised down to -1.0% q/q
from -0.6%.
The robust growth registered in Q3 was essentially a
product of special factors that bolstered household
spending (last-minute demand for eco-friendly cars
and hoarding of cigarettes ahead of a tax hike).
Indeed, the underlying pace of growth appears to
have slowed as export growth eased. With nominal
GDP growth being marked down to 0.6% q/q or 2.6%
annualised (from 0.7% q/q, 2.9% annualised), and
the GDP deflator’s negative margin expanding to
Chart 1: Contributions to Real GDP (% q/q, pp)
3
2
1
0
-1
-2
-3
-4
-5
-6
Domestic Demand
(excluding Stocks)
Stocks
External Demand
06/1Q 07/1Q 08/1Q 09/1Q 10/1Q
Source: Cabinet Office, BNP Paribas
4
3
2
1
0
-1
-2
-3
-4
-5
-6
Chart 2: Real GDP (% q/q)
The 1st preliminary
The 2nd preliminary
06 07 08 09 10
Source: Cabinet Office, BNP Paribas
-2.4% y/y (from -2.0%), the latest report also
indicates that deflationary pressures have not let up.
Growth in FY 2009 sharply marked down
Meanwhile, the final figures for growth in FY 2009
were also released. Real GDP’s rate of contraction
was marked sharply down, to -2.4% from -1.8% (on a
CY-basis, to -6.3% from -5.2%). On a quarterly basis,
there were steeper annualised drops in both Q4 2008
(-11.9% rather than -10.4%) and Q1 2009 (-19.9%
rather than -15.8%), reflecting sharper declines in
personal consumption and inventory. All quarterly
readings thereafter have been revised up modestly.
The new figures show that the swing in the inventory
cycle was greater; hence the economy’s collapse in
the wake of the Lehman shock was sharper and its
subsequent pace of recovery slightly faster.
Ryutaro Kono/ Hiroshi Shiraishi 16 December 2010
Market Mover
29
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After a modest contraction in Q4, the recovery
should resume
Looking ahead, we expect growth to be significantly
affected by policy factors in the coming months.
These ‘policy-created fluctuations’ will become
apparent in Q4, when negative payback will emerge
for the Q3 rush to buy green cars and cigarettes.
According to our estimates, these two factors alone
could depress Q4 GDP quarterly growth by roughly
0.7pp (2.8pp in annualised terms). But the economy
is unlikely to contract that much, thanks to the
downsizing of another stimulus programme – the
eco-point system. This programme for buying
energy-efficient appliances generated a surge in lastminute
demand products such as LCD TVs in
October and November. That said, the eco-point
system, just like the green car subsidies, has only
robbed demand from the future. Thus, while the
economy might enjoy some support in Q4, there will
be comparable negative payback in Q1 2011.
These policy-induced fluctuations make it hard to
gauge the economy’s true state. However, the
outlook does not look too bad as there are growing
signs that global manufacturing, led by China, is
recovering again. Thus, we see Japan emerging from
its soft patch. Although exports have been stagnant,
partly owing to ongoing adjustments in the global
IT/digital industries, they should start accelerating in
the not-too-distant future on the back of surging
Asian demand. On this score, exports to China,
Japan’s largest trading partner, rebounded in
October. Early indications for November suggest
exports overall should pick up the pace. In a similar
vein, data for machinery orders show overseas
bookings grew at a double-digit rate in October.
With the global economy back on a recovery path,
we suspect that Japan’s stalled factory sector would
have touched bottom in October before starting to
bounce back – were it not for misguided interventions
by the authorities. In short, domestic demand still
lacks the vigour to drive the economy, owing to the
effects of an ageing population. But we expect a
cyclical recovery, triggered by exports, to resume in
early 2011. The pace of growth should accelerate
from the spring, by which time fallout from the end of
the eco-point system will have faded. It is these
fundamentals (the state of the economy, looking
through the effects of policy meddling) that are
probably driving the current stock market rally.
570
560
550
540
530
520
510
Chart 3: Real GDP (JPY trn, sa)
500
02 03 04 05 06 07 08 09 10 11
Source: Cabinet Office, BNP Paribas
minus 10.1
7.5
Annualized
4.9
Chart 4: Domestic Final Consumption
Expenditure of Households (s.a., Q1 2008=100)
140
135
130
125
120
115
110
105
100
95
90
85
Durable goods
Semi-durable goods
Non-durable goods
Services
Q1'07 Q1'08 Q1'09 Q1'10
Source: Cabinet Office, BNP Paribas
New forecasts
Based on the latest official GDP data, our new
annual growth forecasts are as follows: 3.4% in FY
2010 (up from 2.7%) and 1.6% in FY 2011
(unchanged); on a CY basis, 4.4% in 2010 (3.6%)
and 1.6% in 2011 (1.4%). Our quarterly forecasts
(annualised) are now -0.8% in Q4, 1.2% in Q1 2011,
2.0% in Q2, 2.0% in Q3, 2.0% in Q4 and 1.6% in Q1
2012. The large upward revision to our 2011 forecast
is largely due to the official revisions to the growth
path in the past several quarters noted above. (The
base effect for FY 2011 rose to 1.9pp from 1.6pp,
while Q2 and Q3 2010 were also revised up). Were it
not for the revisions to past data, our forecasts would
not be significantly different.
Ryutaro Kono/ Hiroshi Shiraishi 16 December 2010
Market Mover
30
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Bonds: Forecast Update
• We have revised our government bond
forecasts in light of the surprisingly large jump
in yields in recent weeks.
• In the near term, we believe the sell-off is
overdone and will partly reverse during Q1.
• Longer term, we believe that QE2 is a
commitment to create inflation and, among
other things, should exert upward pressure on
10-year yields. We expect 10-year Treasury
yields to reach 3.75% by the end of 2011 and
4.6% a year later.
In light of the surprisingly large jump in bond yields in
recent weeks, we have revised up our yield forecasts
for the next two years (Table 1). We believe that the
sell-off reflects a combination of bad positioning,
central bank and political news (US fiscal
agreement), better economic data (except US
payrolls) and year-end market conditions. The
difficulty is attaching weights to these different
factors.
Table 1: Key Bond Yield Forecasts
Spot Q1'11 Q2'11 Q3'11 Q4'11 Q1'12
US
Fed Funds 0.25 0.25 0.25 0.25 0.25 0.25
2-year 0.66 0.50 0.75 0.85 1.00 1.10
10-year 3.50 3.00 3.25 3.50 3.75 4.00
Eurozone
Refi 1.00 1.00 1.00 1.00 1.00 1.00
2-year 1.08 1.00 1.20 1.30 1.50 1.70
10-year 3.07 2.75 2.90 3.15 3.35 3.50
Japan
ODR 0.30 0.30 0.30 0.30 0.30 0.30
Call Rate 0.10 0.10 0.10 0.10 0.10 0.10
2-year 0.20 0.25 0.25 0.25 0.25 0.25
10-year 1.28 1.20 1.30 1.40 1.40 1.40
Source: BNP Paribas. End Period, Spot Rates as at 16 December
Source: Reuters EcoWin Pro
Chart 2: 2s10s vs Fed Funds
We believe that the key influences on the outlook for
yields are:
• There is an unusually large output gap. At some
stage, this means the economy will grow
significantly above trend for an unusually long
period;
• In the near term, the recovery faces substantial
headwinds and final demand growth has
remained lacklustre;
• Underlying inflation is very weak and will remain
so for some time;
• Policy rates are exceptionally low. The Fed is
making exceptional helicopter drops of money to
build up expectations that it will be able to avoid
deflation;
• The Fed has made it clear that it wants to raise
inflation. Our view is that the stock of QE is a
promise to create excess inflation down the road
(i.e. around 2014) that will raise inflation
expectations today and so raise prices and
activity today by lowering real policy rates;
• The budget deficit is unusually high. Debt is rising
quickly in relation to GDP. There are no credible
fiscal consolidation plans;
• At some stage, the Fed will sell Treasuries back
to the market − an exceptional occurrence;
Source: Reuters EcoWin Pro
• Also at some stage, mortgage demand will return
(it may be the middle of the decade but that
should affect bonds);
• We believe that the first Fed rate hike is a long
way off; and
• The USD's reserve currency status is fraying
around the edges.
Putting this into the context of our bond yield
forecasts, the 2-year yield will continue to be very
much dependent on the outlook for the Fed funds
rate. We believe that the Fed is unlikely to hike rates
any time soon (not until late 2012). Given this, the
2-year yield should maintain a narrow spread to Fed
funds through to mid-2012 (Chart 1). Thereafter, we
expect a sharp widening in that spread in anticipation
of the first hike, which should flatten the 2s10s
portion of the curve at that time (Chart 2).
Paul Mortimer-Lee / Cyril Beuzit 16 December 2010
Market Mover
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Further out along the curve, we believe that the lows
in yields are behind us. However, while the trend in
yields is likely to be upwards through most of 2011,
we expect a rally early in the new year. In particular,
the recent sell-off looks overdone. The start of the
recent sell-off was primarily due to extreme market
positioning (QE2’s ‘buy the rumour, sell the fact’, like
QE1 in 2009) and the move has been exacerbated
by year-end market conditions. We expect 10-year
yields to move back down during Q1.
Risk appetite remains solid and supported by ample
liquidity conditions. Recent data suggest that
investment funds have been switching their allocation
from bonds to stocks. Nonetheless, it is noteworthy
that risky assets have not extended their gains in the
wake of the recent sharp setback on bonds.
This highlights that, beyond some asset switches, the
bond market sell-off has so far more to do with wrong
positioning − the latest surveys of speculative
positioning suggest that the market may have to sell
off more before reaching a turning point.
Overall, judging from the very poor liquidity in bond
markets, year-end pressures to cut balance sheets
appears to be a significant factor exacerbating the
recent moves on Treasuries. The move so far has
been primarily cash driven but, over the past couple
of sessions, the attendant swap spread widening
indicates that convexity hedging flows have also
played a role.
We expect the rally in the 10-year during Q1 to give
way to a sell-off over the remainder of the year – in
turn, temporarily steepening the curve. Thereafter,
we would expect 2s10s to flatten during 2012 as the
first Fed rate hike approaches.
The pace of the sell-off will depend on:
• How much the fiscal and debt premium adds to
yields;
• How much competition from the return of private
funding needs adds to yields (since mortgage
rates are rising it argues for less demand via
refinancing, though the flip side is more demand
as new purchases recover);
• Less central bank appetite; and
• The extent that the market prices in an inflation
overshoot over the coming decade.
The last will be the most important, particularly for
the belly of the curve. We suspect that the
commitment to excess inflation will be a temporary
one. We would be surprised if this does not add up to
50bp or more of excess steepness compared with
past cycles.
More generally, the curve is likely to fluctuate a lot
because long-term expectations about growth,
inflation and the deficit are going to be the main
drivers – not Fed funds expectations. Growth this
year has been very close to consensus expectations
at the end of 2009 – yet the market has done a lot
without that much solid macro ‘news’. Expectations
about the future are very unstable, so the long-term
bond will be unstable and hence the curve’s shape
will fluctuate.
In one year’s time we would expect:
• The recovery to be better established;
• QE to have ended;
• Inflation on the core measure to have troughed
but at a level below today's;
• Emerging market inflation to be higher;
• Debt to be higher, but the deficit not much better;
and
• The market to be looking for Fed rate hikes and
maybe Treasury sales by the Fed (the soft
exchange rate policy favours the latter first).
These factors argue for higher bond yields over the
coming year. By contrast, policy is currently 75bp
lower than ahead of the 2003/04 Fed-hiking cycle.
Based on a 3:1 relationship between policy and
10-year yields, this suggests that the 10-year yield
should be around 25bp lower now compared with
2003/04. This and lower spot inflation argue for lower
yields.
Ahead of the 2003/04 hiking cycle yields were 3½%.
We believe that, taking on board all of the above,
yields should be higher by the end of 2011 than at
the end of 2003, hence we target 3.75%.
During 2012, the first Fed rate hike will be
approaching and possibly even the start of a reversal
of QE. The political and fiscal prospects are highly
uncertain, but it seems likely that there will be a
reasonable risk premium in Treasuries. With inflation
rising, we would expect at least a 100bp sell-off. We
expect 10-year yields to rise to around 4.6% by end-
2012.
In Europe, we have also revised up our forecast for
Bund yields, though by slightly less than in the US.
The focus will remain on peripheral markets over the
weeks ahead with a big question mark about the
demand for early 2011 auctions. Spreads remain off
their November highs but renewed stress looks likely
with Moody’s putting Spain’s rating on review for a
possible downgrade. Although we expect the ECB to
begin hiking rates earlier than the Fed, we continue
to expect Bunds to outperform Treasuries linked to
the greater willingness of the Fed to deliver
unconventional policy stimulus to raise inflation and
inflation expectations.
Paul Mortimer-Lee / Cyril Beuzit 16 December 2010
Market Mover
32
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USD Rates Outlook in Q1
• Macro environment supportive of low rates
through Q1
The confluence of lacklustre growth, core inflation at its
lowest in decades, persistently high unemployment and
Treasury purchases by the Fed are likely to prevent a
runaway selloff in the early part of 2011. The driving
force in the USD rate market will continue to be yield
grab, which will manifest itself in duration extension,
preference for (high-quality) spread products and
selling convexity (think callables and mortgages).
Having said that, the back-up in rates seen since
November threw cold water on expectations that QE
would put a soft cap on rates. What became apparent
is that the Fed is doggedly going after inflation
expectations, trying to boost them in the long run. And
if they succeed, and there is reason to believe they will
given the amount of excess liquidity they are pumping
into the system, then intermediate and long term rates
have no reason to be anywhere near the lows of 2009
and 2010. In other words, even in the absence of a
material improvement in the economy in short order,
Fed’s actions may actually have conspired to put a soft
floor on the 10y and 30y rates, more so than the 2y.
Any improvement in the employment picture, no matter
how temporary or tentative it may prove to be, would
almost surely add fuel to the fire and bring expectations
for a faster recovery. As a result, we are revising up our
earlier forecasts, putting the 10y at around 3% by the
end of Q1. There are clearly risks to either side of this
level. Still we believe that after the turn of the year, no
longer held back by balance sheet constraints as they
are now, investors will test long positions. Why?
Because rates along the curve do offer value in the
near term thanks to all the factors cited above. So at
the very least what we can say is, look for a reversal in
rates – back to 3%, below, or somewhat above? That is
not quite the point, as much as the direction.
• QE2 purchases will cancel out net Tsy
supply
The peak in Treasury issuance was seen during 2008-
09, at over USD 150bn of net supply per month. Since
then the Treasury has cut issuance sizes and net
supply is now running at USD 100-110bn per month
which we expect to remain relatively stable through
FY11 (see Table 1 for breakdown of issuance
forecast).
This monthly figure closely matches the USD 110bn
per month that the Fed intends to purchase as part of
QE2. Interestingly, when looking at specific maturity
sectors it appears the Fed’s purchases will not perfectly
match the supply in that sector (see Table 2) The 5y
was the main beneficiary of the rally before the market
reversed course in November. Is this likely to happen
Table 1: FY 2011 Treasury Coupon Issuance
Forecast (USD bn)
Net Issuance in Bills 120
Redemptions (ex-Bills) -755
2y 420
3y 384
5y 420
7y 348
10y 264
30y 168
5y TIPS 32
10y TIPS 64
30y TIPS 15
Coupon Issuance: 2,115
Total Net Issuance
Source: BNP Paribas
1.5 Trillion
Table 2: 7y-17y Debt Outstanding is Shrinking
(USD bn)
Maturity
Expected Fed
Purchases in
Next 8 Months
Gross Supply in
Next 8 Months
Issuance Net of
Fed Buying
1.5 - 2.5y 45 280 235
2.5 - 4y 180 256 76
4 - 5.5y 180 280 100
5.5 - 7y 207 232 25
7 - 10y 207 176 -31
10 - 17y 18 0 -18
17 - 30y 36 112 76
Source: BNP Paribas
Table 3: Fed Will Shift Purchases Away From
2y and 5-7y in Favour of 7-10y Sector
Maturity
Allocation in
MBS Program
Allocation in
Change vs
2009 Program New Allocation MBS Pattern
Change vs
2009 Pattern
1.5 - 2.5y 14% 18% 5% -9% -13%
2.5 - 4y 11% 20% 20% 9% 0%
4 - 5.5y 21% 18% 20% -1% 2%
5.5 - 7y 38% 21% 23% -15% 2%
7 - 10y 4% 10% 23% 19% 13%
10 - 17y 6% 7% 2% -4% -5%
17 - 30y 5% 6% 4% -1% -2%
Source: BNP Paribas
as rates turn around? We are confident that we will not
see the extent of richness we did at the time, with
Treasury 2s5s10s reaching -75bp. However, the 5y
should still lead the way down. The 10y should also
follow suit, giving rise to a compression of the
2s10s30s spread. Therefore, it is best to overweight
the belly of the curve.
Turning to the back end, the 30y yield is unlikely to
drop precipitously because concerns about long-term
inflation in the face of QE are likely to persist. Unless
the collective mindset of investors shifts toward
disinflation, we would be hard pressed to see 10s30s
IR Strategy NY 16 December 2010
Market Mover, Non-Objective Section 33
www.GlobalMarkets.bnpparibas.com

move decisively below current levels of around 100bp –
even though that is still on the high side as far as the
history of this spread.
On the flipside, a significant steepening in the back end
is also rather unlikely, because of the implication for
forward rates. To provide some perspective, the 10y
forward 10y swap rate is in the 5.25% area as of this
writing. Anything above 5% begins to look attractive for
long duration players such as pension funds and
insurance companies. In our view, the very presence of
this backstop bid will likely keep the back end from
selling off, or lagging massively in the event of a rally.
For example the Fed will not purchases securities
under 1.5yrs in maturity, and purchase only about half
of the supply out till the 5yr sector. In the 7-10y sector
the Fed will be purchasing more than the monthly
supply, and in the very long end the Fed will purchase
about half of supply. Thus, the support for the belly of
the curve is greater.
Another important point is that the market will have to
adjust to the Fed’s shift in purchase allocation.
Purchases will now focus on the 7-10y sector much
more than the market was previously accustomed to,
and the 2y and 5y sectors will get fewer purchases
(see Table 3). This was the rationale behind one of our
top relative value trades since the November FOMC
meeting – the 5s10s Tsy flattener. Having now backed
away from record steep levels, we expect this to
continue as the overall disinflation theme also helps
flatten the yield curve.
• RV along the Treasury Curve
A quick look at Chart 1 shows us the various peaks and
troughs along the 3-month return profile of Treasuries
under an unchanged yield curve environment. The
local kinks on the return profile mark the sectors to buy
(peaks) and the sectors to sell (troughs). The most
prominent peak is in the mid 2016 to early 2017 sector
and newly issued 10y notes.
In addition to the profile in an unchanged yield curve,
analyzing the Treasury universe under various
bullish/bearish scenarios we find that issues maturing
mid/late 2016 still look attractive from a return
perspective, while issues maturing in early 2014 (Jan
2014 and Jan 2014) and late 2017 (Aug 2017 and Sept
2017) fall in the troughs of the return profile, helping us
favour bullets over barbells (see Chart 2). Interestingly,
the above mentioned portfolio would perform the best
in the event one were neutral on rates or overweight
bullish scenarios while limiting losses on bearish
scenarios.
• Cautiously optimistic on swap spreads
With rates likely to be range-bound/moderately lower in
the coming months, this should also keep 5y and 10y
swap spreads from rising substantially due to the
general directionality. Nevertheless, there are other
technical factors at play that lead us to foresee a
moderate upward bias in the coming months. The y/y
3m Nominal Returns
Chart 1: Projected 3-Month Treasury Returns
under an Unchanged Yield Curve (%)
1.6
1.4
1.2
1
0.8
0.6
0.4
0.2
0
2014
Mid 2016 -
Early 2017
Late 2012 / Early 2013
Newly Issued 10s
2029 / 2030 / 2031
0 5 10 15 20
Effective Duration
Source: BNP Paribas, Yield Book
Chart 2: Favour Bullets over Barbells in the 4-7y
Sector
3m Nominal Returns
1.4
1.2
1
0.8
0.6
0.4
Buy 3.25% 05/16
Sell 1.875% 02/14 or 1.75% 01/14
and 1.875% 08/17 or 1.875% 09/17
2 3 4 5 6 7
Effective Duration
Source: BNP Paribas, Yield Book
140
120
100
80
60
40
20
0
Chart 3: Declining Treasury Supply to Put
Widening Pressure on Swap Spreads
10y Swap Spread
Issuance Forecast
YoY Change in 1+ Yrs
Debt Outstanding net
of Fed Purchases
(R.H.S, Log Scale Inv.)
-20
96 98 00 02 04 06 08 10
Source: BNP Paribas, Treasury Direct
-0.15
-0.10
-0.05
0.00
0.05
0.10
0.15
0.20
pace of Treasury supply has historically had strong
explanatory power, and it seems this is set to decline in
the months ahead (see Chart 3). In fact, Tsy issuance
IR Strategy NY 16 December 2010
Market Mover, Non-Objective Section 34
www.GlobalMarkets.bnpparibas.com

net of Fed buying is going to have an even steeper
decline relative to what was seen in recent years.
There are other factors at play that will periodically tilt
the balance one way or the other. Corporate issuance
tends to weigh on swap spreads due to issuers
hedging their fixed liabilities by receiving in swaps.
Issuance tends to be below average near the end of
the year so this should help spreads widen, although
January tends to be one of the biggest issuance
months in the year so this will pose challenges (see
Chart 4).
In general, issuers appear to be comfortable swapping
from fixed to floating out to 5yrs, due to the widely held
view that the economic backdrop will not be conducive
to a big spike in rates in the next few years. This makes
earning the carry an attractive proposition over that
time span. Go out to the 10yr sector though and the
story changes somewhat. Many issuers are content to
lock in rates 10 years at the current levels (despite the
recent backup) as they still fall in the lower end of
historical ranges. In other words, issuers are reluctant
to take a risk by getting into the carry game for fear that
rates may indeed back up briskly past the first few
years. Therefore, the widening impact could be
magnified in the 10y sector in particular due to a
combination of net removal of Treasury supply in that
sector as noted above, and a dearth of swapped
issuance. We would expect the 10y swap spread to
reach 20-25bp as a result.
• Agencies to do well, especially callables
GSE reform will start coming back into focus as we
approach the congressional deadline of January 2011
for an overhaul plan. However, the deadline is unlikely
to be met given lack of progress on this issue. We
would expect a proposal to be presented by the
deadline, followed by the first draft in Q2 2011, with a
final resolution possible in H2 2011. Although we don’t
think private recapitalization is on the cards, we would
expect that the government will guarantee both MBS
and debentures whatever the arrangement is.
In the interim, Fannie and Freddie continue be
supported by unlimited backstop from the US Treasury
and investors don’t seem to be worried. We like
agencies due to carry/rolldown advantage over
Treasuries. The 5y sector was recently under pressure
mostly due to temporary re-allocation related flows, and
now offers biggest carry/rolldown package. We prefer
the 3y-5 sector, which not only provide best
carry/rolldown along the agency curve at 49-51bp over
6m (see Chart 5) in absolute terms, but also on vol
adjusted basis. We expect investors to continue
moving out the curve to pick up yield and extend
duration, especially if yields start to come down again.
We also like callables for additional pick-up in yield and
a wide band of outperformance relative to duration
matched bullets, especially in the sell-off. Since we
expect lower rates in Q1, before gradually rising
Chart 4: Expect High Corp Issuance in January
(USD bn)
90
75
60
45
30
15
0
Jan
Feb
Source: BNP Paribas
Mar
Average Issuance since 2000
Apr
May
June
July
Aug
Sep
Oct
Nov
Dec
Chart 5: Carry and Rolldown in Agency Bullets
55
49
43
37
31
25
19
13
7
1
-5
10
28
17 21
Source: BNP Paribas
Total Rate of Return Difference (bp)
220
200
180
160
140
120
100
80
60
40
20
0
-20
-40
-60
-80
-100
26
15
12
25 27 25
Rolldown
Carry
2y 3y 5y 7y 10y 30y
Chart 6: 5y Agency Callable vs Bullet
Source: BNP Paribas
5nc3m berm vs. bullet
5nc6m berm vs. bullet
5nc1y berm vs. bullet
-30 -20 -10 0 10 20 30 40 50 60 70 80 90 100
Parallel Shift (bps)
Table 4: Combined GSE Issuance Projections
in billions
Proj
2010
Proj
2011
Proj
2012
Discount Fannie Mae 512 563 620
Notes Freddie Mac 486 535 481
FHLBanks 1167 1284 1477
Sub-Total 2,165 2,382 2,578
Callables Fannie Mae 319 287 258
Freddie Mac 216 206 185
FHLBanks 314 340 391
Sub-Total 849 833 834
Bullets Fannie Mae 86 77 69
Freddie Mac 128 122 110
FHLBanks 148 170 196
Sub-Total 362 369 375
Total Issuance 3,376 3,584 3,787
Source: BNP Paribas, FNMA, FHLMC, FHLB
4
20
IR Strategy NY 16 December 2010
Market Mover, Non-Objective Section 35
www.GlobalMarkets.bnpparibas.com

through the rest of the year, we recommend callables
with 6m to 1y lockouts. In general, an investor will give
up some outperformance potential but widen the
outperformance range for any given horizon by moving
from a 5nc3m berm to a 5nc6m berm (Chart 6). A
5nc6m has a lower projected maximum
outperformance of ~150p over a duration-matched
bullet, but will withstand a larger range of yield curve
shifts (from -20bp to +100bp) before underperforming
over the 6m horizon.
Total debt issuance for the three housing GSEs –
Fannie Mae, Freddie Mac and the Federal Home Loan
Banks – is on pace to total ~USD 3.4 trillion for 2010.
Just under two-thirds of this issuance has been in
discount notes, with the other third in long-term
callables and bullets. Projections for 2011 and 2012
are for total agency debt issuance to rise by ~6% per
year, to USD 3.6trn and USD 3.8trn respectively,
primarily driven by re-growth of the advance business
at the FHLBanks. Fannie and Freddie are likely to
shrink their long-term debt issuance while filling in
financing gaps with increased discount note issuance
(see Table 4).
• Volatility surface may gradually rotate toward
that of Japan's
As rates have risen since the FOMC delivered QE2, so
has swaption implied vol. More specifically, shorter
expiry/front end volatilities jumped significantly. This
was not only because of realized volatility but also
because the sell-off moved the front end of the curve
out of the "anchoring" region of ultra-low rates.
Taking into account our bullish view for the coming
months, volatilities will likely go back down especially
for shorter expiry/front end. Additionally, issuance in
structured notes such as Agency callables picked up
during the period when rates remained low and
investors searched for yield pick-up. This has supplied
vol into the marketplace and if rates go back down a
similar pattern is likely to play out (Chart 7).
As the Fed-on-hold and low-rate environment becomes
more and more prolonged, then it could be useful to
look at the vol surface's evolution in Japan for some
guidance. Not only are levels of vol much lower, but the
ratio of 2y tails over 10y tails are lower since short
rates are not expected to be raised any time soon.
Also, the ratio of short expiries over longer expiries is
much lower since rates become increasingly rangebound
and this drives gamma vol lower vs vega vol. All
of these are symptoms of a low-rate environment, and
in the US the pattern has been quite strong (Chart 8).
We certainly acknowledge the risk scenario of higher
rates, and vol will likely rise in that scenario. In fact,
even when considering that vol is higher at strike levels
above the forward rates (i.e. payer skew is positive),
when the market sells off and reaches those higher
strikes then the vol at that particular strike still tends to
increase (Chart 9). Payer skew is already at historical
highs, and this should continue to be supported since
Chart 7: Agy Issuance Supplying Vega to Vol
Market – Helping Keep Vol Relatively Low
200
180
160
140
120
100
80
60
40
Mar-09 Jun-09 Sep-09 Dec-09 Apr-10 Jul-10 Oct-10
Source: BNP Paribas
1.7
1.5
1.3
1.1
0.9
0.7
6m5y Implied Volatility
Vega Vol Supply from Agy
Issuance ($mm, Inverted R.H.S)
Chart 8: Upper-Left Vol Leads the Move
0.5
0
Mar-08 Sep-08 Apr-09 Oct-09 May-10 Nov-10
Source: BNP Paribas
1y2y/1y10y Vol Ratio
1y2y/5y2y Vol Ratio
2y Swap Rate (R.H.S)
Chart 9: Actual Directionality in Implied Vol is
Vastly Greater than That Implied by Skew
12
8
4
0
-4
-8
-12
Jan-10 Apr-10 Jul-10 Oct-10
Source: BNP Paribas
1y10y ATM Vol Change on Week
-100
-120
-140
investors will show interest in buying protection against
higher rates while rates are still low. But even then one
can expect vol to rise for fixed strike levels (e.g. at 5%
strikes as opposed to ATM+50bp) if economic
sentiment picks up.
0
-20
-40
-60
-80
4
3.5
3
2.5
2
1.5
1
0.5
(ATM Vol) minus (Previous Week's Vol at that Strike)
IR Strategy NY 16 December 2010
Market Mover, Non-Objective Section 36
www.GlobalMarkets.bnpparibas.com

US: Ideal Timing for LT Bullish Hedges
• Much has been said recently about the
failure of QE2 to drive rates lower. However,
our forecast for a prolonged period of relatively
low rates is based on the economic backdrop
of low/stable inflation and a high
unemployment rate. The consensus across
Wall Street economists is that this fundamental
landscape is unlikely to improve much in the
coming quarters.
• The recent rise in rates and vol has led to a
much improved entry level on strategies such
as those which are long delta and short vol.
• STRATEGY: Consider receiver spreads in
vega space such as the structure below.
We explore strategies with a limited upfront cost but
large potential for gains if spot rates continue to stay
near current levels. The trade we show is to buy an
at-the-money 4y10y receiver (roughly 5.00% strike at
the time of writing) and sell twice the notional in a
200bp out-of-the-money receiver. This reduces the
upfront cost and the only scenario where the trade
loses money at expiry beyond the premium is if the
10y spot rate is at ultra-low levels (below 1.00%).
Chart 1 shows the profit region for the trade at expiry,
and Chart 2 shows a PnL profile.
These types of structures have often been unwound
well before maturity. In the meantime, they carry well
and gain value in a rally; thus they are often thought
of as interim hedge assets. The carry is positive due
to theta and rolldown in the 4y10y rate. After one
year, the estimated PnL is +25% of the entry cost in
an unchanged scenario, +50% in a -50bp move, and
flat in a +50bp move.
Table 1 shows the trade details and various greeks.
Note that the investor would be selling the receiver
skew (ratio of 3%-strike norm vol over 5%-strike
7
6
5
4
3
2
1
Chart 1: Hedging Against a Wide Range of
Lower Rates (Profit Region at Expiry)
0
Jan-01 Jun-03 Dec-05 Jun-08 Dec-10
Source: BNP Paribas
PnL ($MM)
15
10
5
0
(5)
10y Swap Rate
Chart 2: PnL Profile at Expiry
Profit Region
(10)
0% 1% 2% 3% 4% 5% 6%
Source: BNP Paribas
10y Spot Rate at Expiry
norm vol) at just over 100%. This has improved
significantly from the 92-94% range it had been in
during the three months prior to the recent selloff.
Table 1: Trade Details for Receiver Spread with Current Cost of 303c
Structure Strike Norm Vol (bp) Notional ($) PV01 ($) Vega ($) Gamma ($) Theta ($)
Buy 4y10y Rec 5.00% 115.8 100,000,000 34,591 644,080 1,391 (3,063)
Sell 4y10y Rec 3.00% 116.2 (200,000,000) (20,370) (658,871) (653) 3,987
Net 14,222 (14,791) 739 924
Source: BNP Paribas
Suvrat Prakash 16 December 2010
Market Mover, Non-Objective Research Section
37
www.GlobalMarkets.bnpparibas.com

US: OIS Firm, Libor Under Pressure
• OIS remains fixed in the front end, as the
Fed renewed its commitment to maintain an
easing stance at Tuesday’s FOMC meeting.
During yesterday’s sell-off, convexity hedgers
finally materialized in the market, driving
eurodollar futures lower and mechanically
pressuring OIS/Bor and swap spreads wider.
• Nerves are a bit frayed, balance sheets still
need to shrink and funding pressures are likely
to intensify going into year-end. European
sovereign debt came under renewed pressure
as Moody’s placed Spain (Aa1) on review for
possible downgrade, but front Libor settings
barely nudged.
• STRATEGY: We favour being in steepeners
in OIS/Bor spreads as the back-end of the curve
is simply much too flat (Chart 1) and we think
swap spreads will stay under pressure for the
next few sessions. We recommend adding a
long 2y swap spread position as protection in
case the European crisis intensifies and Libor
blows out.
OIS/Bor Spread (bps)
45
40
35
30
25
20
15
10
5
0
Source: BNP Paribas
Basis Spread (bp)
100
90
80
70
60
50
40
30
Chart 1: OIS/Bor Spread Curve
Spot
ED1
ED2
ED3
ED4
ED5
ED6
ED7
ED8
Chart 2: OIS/Bor Spread History
OIS/Bor ED2
OIS/Bor ED6
OIS/Bor Steepeners
The OIS/Bor spread curve has been flattening
mechanically during the sell-off as the reds and
greens have pushed wider but OIS has remained
fixed and 3m Libor settings have only nudged higher.
The result has been that the OIS/Bor spread curve
looks too flat (shown in Chart 1). A 2-year history of
OIS/Bor spreads for ED2 and ED6 is shown in Chart
2, and Chart 3 tracks the slope between these two
spreads. The current 4bp slope is below the average
slope of the past two years of ~8bp. Given underlying
pressures in the market from convexity hedgers,
shrinking of balance sheet and seasonal withdrawal
of liquidity we think reds and greens could continue
to sell-off. In particular, the slope between M11 at
+35bp (ED2) to M12 at +39bp (ED6) is likely to
steepen going into year-end.
The front of the curve should stay anchored as we
think overnight to 3m Libor settings will stay tame.
Having experienced two prior waves of sharp
increases in dollar funding pressures due to the
European crisis – in early 2009 and spring of 2010 –
we think most high credit quality European banks
have already secured funding over the turn.
Moreover, Libor quotes are just that – quotes – and
they enjoy (or suffer from) a potential disconnet
20
10
0
Jan-09
Mar-09
Jun-09
Sep-09
Dec-09
Feb-10
May-10
Aug-10
Nov-10
Sep-10
Source: BNP Paribas
Basis Spread (bp)
Chart 3: OIS/Bor Slope History
40
ED2/ED6 slope
30
20
10
0
-10
-20
-30
-40
-50
Jan-09
Mar-09
Jun-09
Sep-09
Dec-09
Feb-10
May-10
Aug-10
Nov-10
Sep-10
Source: BNP Paribas
Dec-10
Dec-10
Mary-Beth Fisher 16 December 2010
Market Mover, Non-Objective Research Section
38
www.GlobalMarkets.bnpparibas.com

etween a bank’s perception vs. reality of where they
can fund.
Longer-dated eurodollar futures, however, appear to
be coming under renewed pressure from convexity
hedgers who are squaring-up positions before yearend,
generating considerable paying in swaps and
pushing spreads wider.
We recommend entering an OIS/Bor spread curve
steepener by being short the OIS/Bor M11 spread
and long the M12 spread. The primary risk to this
position is that an intensifying crisis in the Eurozone
translates into sharply higher 3m Libor and this
section of the spread curve inverts – similar to what
occurred in the spring of 2010 and February of 2009.
The Feb09 inversion was sharp but only lasted a few
days, while the inversion last spring endured for
several weeks. To hedge that risk we recommend
overlaying a long 2-year swap spread, which should
outperform if such a crisis occurs.
Mary-Beth Fisher 16 December 2010
Market Mover, Non-Objective Research Section
39
www.GlobalMarkets.bnpparibas.com

MBS: 2011 Outlook – Status Quo
• We favour an overweight MBS position as
convexity flows are likely behind us with the 10Y
selling off beyond 3.50%. Incremental extension
in a sell-off is not likely to be material.
• Prepays should remain contained on an
overall scale in a rally due to capacity
constraints.
• The status quo is likely to prevail on GSE
reform, as close exploration of every possibility
leads to a dead end.
• Issuance should be about USD 100bn/month
at current level of rates with net issuance about
flat. More importantly, net supply is choked off
as Fed prepays may have slowed from USD
32bn to USD 12bn due to the sell-off and should
be readily absorbed by other investors.
• We continue to favour up in coupon on
attractive carry and the low probability of a
government-induced refi wave in 2011.
• 15s/30s should underperform on the
strength of the basis. GN/FNs should maintain
the status quo, but if it rallies, up in coupon in
GNs could outperform on supply.
• We like buying lower coupon specified
pools as a cheap option against a rally but
higher coupon specifieds may not hold as much
value.
• Short resets and higher coupon seasoned
ARMs offer attractive spreads and IO ARMs
should continue to prepay slower with limited
prepay opportunities.
• We like CMOs that benefit from the
slowdown in speeds due to the sell-off that
locked out PACs. TBA-ish IIOs look attractive vs
storied IIOs for the same reason.
• STRATEGY: Overweight into 2011 with up in
coupon bias.
Overweight mortgages with the major convexity
flush behind us
The mortgages basis has suffered as the sell-off
caused convexity selling, leading to an overhang of
dealer inventory in lower coupons. As shown in Chart
1, the convexity profile of the mortgage universe
indicates that the main choke off in prepays happens
around the 3.50% 10Y treasury. While these
numbers are expressed in 10Y terms, this is a
1m CPRs
Chart 1: FNM 30Y October 2010 S-Curve
35
30
25
20
15
10
5
0
Source: BNP Paribas
8.6
10Y ~ 3.50%
3.5 3.8
1.4
33.2
30.1 30.5
28.6
27.7
26.5 26.7
Nov 15, 2010 (10Y~ 3%)
24.3
21.2
10Y~ 3.25%
-50 -25 0 25 50 75 100 125 150 175 200 225 250
Moneyness
Chart 2: 15Y vs 30Y Performance by Coupon
(12/15 close)
30Y 1M Performance 15Y 1M Performance
30Y 4, 15Y 3.5 -1-05 1 -0-16 2
30Y 4.5, 15Y 4 -0-30 5 -0-16 7
30Y 5, 15Y 4.5 -0-13 0 -0-05 5
30Y 5.5, 15Y 5 0-03 0 0-05 1
30Y 6, 15Y 5.5 0-19 6 0-10 7
Source: BNP Paribas, Yield Book
reasonable mapping from primary mortgage rates
given current spread levels. In terms of the current
coupon the 4.30% threshold was key in our mind
(roughly 75 bp in the money). After convexity selling
as Treasuries crossed the 3.50% mark on
Wednesday, with the current coupon overshooting to
4.43%, we think that mortgage duration may have a
smooth ride in either rate direction going forward.
The prepayment S-curve of the universe in
aggregate is more relevant since servicers are the
dominant convexity hedger in today’s market.
Servicer convexity flows do not depend on who holds
the MBS. With major convexity selling behind us, we
like being overweight mortgages into the New Year.
Prepays: Remain muted, with capacity limits at
low rates, though specific coupon-vintages
under threat
We think that capacity constraints may have come
into play in prepays over the past couple of months,
and should we rally back to rate lows or beyond,
capacity constraints are likely to keep prepayments
relatively dampened. Of course, prepays in lower
coupons are likely to be significant. But once we hit
capacity limits, lack of a further increase in
prepayments should keep overall convexity of the
universe at bay. In fact, if we rally beyond a certain
point, prepays for example in 4.5s and 5s may
Anish Lohokare / Timi Ajibola 16 December 2010
Market Mover, Non-Objective Research Section
40
www.GlobalMarkets.bnpparibas.com

educe while those in 4s pick up, as the overall
prepay speed remains the same while the
contribution of 4s increases pushing that of 4.5s and
5s down.
Thus we expect the status quo of muted prepays
(

GN/FN: status quo
We expect a status quo on the structure of the
GSEs, and thus the premium attributed to the explicit
guarantee for GNs is unlikely to change materially.
With the sell-off, Fed paydowns reinvested into
treasuries, a negative factor for conventionals, has
subsided considerably. Should we rally however, up
in coupon in GN/FNs should outperform as lower
coupons may suffer due to increased supply.
One wild card could be the additional data provided
by GNMA. Starting in February 2011, GNMA will
require servicers to collect loan purposes data with
possible values of purchase, refi, loan mod-hamp
and loan mod-non hamp. If the data is not available
then the pool would be a fail. GNMA did release
some of this data for pools originated since May
2010 but the data provision was voluntary on part of
servicers. While there was talk of loss mitigation
loans having high CPR, this was not the case in the
limited data that was disclosed. Depending on the
statistics that ultimately come out, the adverse
selection of pools could affect the TBA deliverability.
Spec pools: Comeback in a rally?
Pay-ups initially came under pressure at higher rates
as concerns moved away from call risk, but have
since stabilized. We continue to favour selling
seasoned higher coupon pools, as muted
prepayments reduce the need for call protection. The
moneyness of the coupons implies that extension
risk is not likely to come into the picture unless we
sell off materially from already high rate levels. We
like loan balance collateral off lower coupons, as
valuation is attractive after recent cheapening, and it
provides excellent insurance in a rally.
ARMs: Favour short resets and high coupon
seasoned ARMs
As seen in recent prepayment reports, newer
collateral in ARMs picked up, responding to lower
rates while seasoned collateral remained call
protected. In fixed rates on the other hand, in 5s and
to some extent in 5.5s, seasoned collateral speeds
have been quite significant. In terms of relative value,
we continue to like short resets into Q1-2011. Higher
coupon seasoned ARMs offer attractive spreads as
well. IO ARMs continue to offer call protection vs
amortizing ARMs as their refinancing options remain
constrained.
CMOs: Pricing in the speed slowdown
As the market has sold off, the CMO market appears
to have been lagging the pricing in of slower speeds.
We like the theme of picking bonds benefiting from
this slowdown going into the New Year. Locked out
PACs off seasoned 5s for example benefit from this
theme. In the inverse IO space, selling bonds off
Chart 4: IO ARMs Continue to be Call
Protected; Seasoning Provides Call Protection
in ARMs
CPR
45
40
35
30
25
20
15
10
5
0
Source: eMBS
160
140
120
100
80
60
40
20
Libor IO
2010 2009 2008 2007 2006 2005 2004
Vintage
Libor Amort
Chart 5: WAL and I-Spread Profiles for a
Locked-Out PAC Off Seasoned 5s
0
Spd/I
WAL
6 12 18 24 30 36 42
Source: BNP Paribas, Bloomberg
storied collateral in favour of TBAish collateral makes
sense.
Consider a locked out PAC off around 66 WALA FG
5s. At an indicative price of 107-04 as of Wednesday
3pm, this bond is only 63 bp to the I-curve at 40
CPR, about the speed at which it paid in Nov.
However at a speed of 20 CPR, which is quite
reasonable given the considerable slowdown in the
refi index, the spread is much higher at 150 bp. If we
rally back to only about 2.9% 10Y (our expectation
for Q1-11), the profile is still likely to be attractive, as
the spread is about 152 bp/I at 25 CPR, as the
locked out feature helps protect the bond. The
average life profile is also quite protected at relevant
prepay speeds, given the PAC structure.
Consider two Inverse IOs off 6s, one loan balance
another TBAish. The TBA-ish bond at a USD 11
handle as a 4.25% yield to forward (YTF) at 33 CPR,
its November speed. If the speed slows down to
about 16 CPR, the YTF improves to 16.25%. For the
loan balance IIO which prepaid at about 18 CPR last
month and priced roughly around 15-24, the YTF is
4.65%, but at 12 CPR it improves to 11.7%. The
TBA-ish collateral thus offers a much better YTF if
the speed slowdown is maintained.
10
9
8
7
6
5
4
3
2
1
0
Anish Lohokare / Timi Ajibola 16 December 2010
Market Mover, Non-Objective Research Section
42
www.GlobalMarkets.bnpparibas.com

EUR: Flattening Trend Will Resume
• Although the curve is still flatter than at the
start of the year, the flattening bias has been
interrupted by strong steepening pressures.
Chart 1: Expectations Track Actual Inflation
• However, the recent correction should prove
temporary. Flattening remains the structural
theme for the curve next year.
• STRATEGY: Receiving the 2-10y remains
our key strategic trade for 2011.
The belly of the curve severely hit by QE
Same player shoots again… When, in 2009, the Fed
started QE1, the US curve suffered bear-steepening
pressures that persisted for roughly two months. This
also affected the EUR curve. Indeed, bearish
pressures on the belly of the curve accompanied the
ECB’s rate cuts, favouring lower rates at the short
end.
The latest developments are similar in several
respects. QE2 is raising inflation expectations,
fuelling bear-steepening pressures across the US
curve and, given contagion effects, across the EUR
curve as well. In 2009, the EUR 2-10y sector
steepened by more than 40bp in the sell-off. So far,
the recent bear-steepening bias has resulted in a
steepening of the EUR 2-10y of more than 50bp.
This is a significant move especially as, unlike in
2009, the steepening correction was not aided by a
decline in short-term rates. The resteepening that
took place therefore seems too large to be consistent
with structural factors. Hence there is now room for a
return to the structural flattening trend.
Inflation expectations will moderate
A decline of inflation expectations is a precondition
for a better tone on the belly of the curve. We expect
the current rise in inflation expectations to prove
temporary. In the main, inflation expectations are
tracking actual inflation rates. As core inflation
continues to moderate in the US and will remain
subdued in Europe, expectations should also decline.
This will help to lower the inflation expectation
component on medium and long-term yields. Such a
development will help the belly of the curve to rally
slightly in the early months of 2011.
The short end will be more exposed next year
The ECB recently decided to extend its
accommodative conditions for liquidity, but this has
not prevented the level of excess liquidity from
Source: BNP Paribas
Chart 2: Higher Real Rates Will Help Flattening
Source: BNP Paribas
easing from the peaks reached earlier this year. The
outlook for next year is less favourable. The gradual
normalisation of liquidity conditions will cause the
ECB to remove, at least partly, current non-standard
measures. This will put rates at the front end under
modest upward pressures. At the moment, the
market is discounting that normalisation will be
achieved at the start of Q4 2011. So far, this has not
spread significantly through the short end of the bond
market curve. But, as the normalisation takes place,
yields at the short end will push higher. The flattening
bias will therefore be reinforced during the year,
although the bull flattening we expect in Q1 will
gradually give way to bear flattening.
Strategy: Receiving the 2-10y remains our key
strategic trade for 2011.
Patrick Jacq 16 December 2010
Market Mover, Non-Objective Research Section
43
www.GlobalMarkets.bnpparibas.com

EUR: Excess Liquidity to Decline Next Week
• In addition to its regular weekly MRO, the
ECB will have to provide liquidity as EUR
200.9bn are expiring from 3mth and 1y tenders.
• We expect liquidity to drop on the back of
next week’s operations. The magnitude of the
decrease in liquidity will set the tone in the
eonia space.
• STRATEGY: Benefit from the recent
compression to play tactical OIS/BOR (IMM1)
spread extension.
Chart 1: Short-Term Liquidity is Increasing
Demand at next week’s tenders
The expiry of the 3mth (EUR 104bn) and the 1y
(EUR 96.9bn) tenders next week will be offset by a
new 3mth LTRO and a 13day quick tender that will
provide liquidity beyond the turn of the year. From
the 1y tender which is maturing, one can expect that
at least a quarter will not be rolled, as this
corresponds to carry trades benefiting from the last
1y tender the ECB conducted in December 2009.
When it comes to the 3mth LTRO expiring, it
corresponds to the roll of different LTROs (3tmh,
6mth, 1y) that matured in September. It is difficult to
see precisely where demand came from, in particular
because liquidity fell significantly at the end of
September despite the solid demand for the 3mth.
However, liquidity provided at recent 3mth LTRO
suggests that demand for this maturity is solid. As a
result, the total demand for both 3mth and 13day
tenders next week could be in the EUR 150-170bn
area, or a EUR 30-50bn drop in liquidity. This range
is wide as uncertainty remains high, and the drop in
liquidity is significant.
When it comes to the split between 3mth and 13day
tenders, it makes sense to see 3mth liquidity still
elevated. At the moment, liquidity provided by the
MRO is less than EUR 190bn and the liquidity
provided by LTROs is slightly below EUR 350bn.
After next week’s tenders, we expect a higher
proportion to come from short-term liquidity. A split of
EUR 130bn/EUR 30bn between the 3mth and the
13day tenders would lead, other things being equal,
to an extension of short-term liquidity in the total
liquidity provided in the eurosystem.
Limited impact on rates near term
The eurosystem is running long of liquidity in the
amount of around EUR 90bn. A EUR 40bn fall in
liquidity will have therefore have limited impact on
rates near term, as excess liquidity will remain
Source: BNP Paribas
Chart 2: Limited Impact Near Term
Source: BNP Paribas
elevated enough at this juncture. Don’t expect
significant upward pressures on eonias near term. If
liquidity falls more significantly, the impact will be
more pronounced. There was evidence in the past
that the impact on eonia is more significant when
excess liquidity falls below EUR 40bn. As a result,
we expect limited impact given our expectations for
demand next week. Neither do we expect strong
tensions at the end of the year, as a significant
proportion of liquidity in the system will run beyond
the turn. Further, there will be a MRO on 29
December, which will provide short-term liquidity.
The ECB will do what is necessary to avoid year-end
tensions.
Strategy: Benefit from the recent compression to
play tactical OIS/BOR (IMM1) spread extension.
Patrick Jacq 16 December 2010
Market Mover, Non-Objective Research Section
44
www.GlobalMarkets.bnpparibas.com

EUR: Euribor Red/Greens Opportunities
• Reds Euribor are back in cheap territory
versus fronts and greens and also relative to
Euro$.
• Further downward pressure – which is likely
in illiquid year-end market conditions – should
be used to enter bullish trades.
• STRATEGY: Sell the U1U2U3 fly in the
+12/15 area or the U1H2-U2H3 box at +3/5
targeting -10 on both.
50
35
20
5
-10
-25
-40
Chart 1: Eur, GBP, USD 3/7/11 Gen Flies:
Cheapening More Pronounced On Euribor
Red Euribor
decoupling from Eurodollar
-55
Reds Euribor below mid-November’s lows
In this article, we focus on trading opportunities on
Euribor flies and calendar spreads. The rally seen at
the short end in the wake of disappointing non-farm
payrolls was short-lived and some stronger US data
over the past week have pushed reds Euribor below
mid-November’s lows. The bearish dynamics should
persist in the very near term fuelled by weak sterling
(November RPI data were again disappointing) and
Eurodollar contracts (the latest retail sales data
surprised to the upside). However, it is worth
remembering that a similar sell-off in December 2009
was followed by a sharp rebound in January.
In addition, 1y calendar spreads, such as the 3 rd /7 th ,
currently Sep 11/Sep 12, have bear steepened
almost 50bp from late-August’s low and are getting
close to the 50% retracement of the November 2009-
August 2010 flattening trend. Even though August’s
level on spreads should remain the cyclical low, the
pricing in of a 65bp tightening on the eonia curve by
September 2012 seems excessive given current
uncertainty regarding the eurozone.
Chart 1 shows the 3 rd /7 th /11 th generic flies on the
USD, Euro and GBP curves. The difference between
the Euribor and the Eurodollar flies is really
overstretched pointing to the relative cheapness of
red Euribor. Another way to underscore that
cheapness is the position of the Euribor fly within its
distribution relative to the Eurodollar fly. An additional
panic sell-off, pushing the Euribor fly to the high 10s,
would provide an attractive risk/reward for longs Sep
11 versus Sep 12 and Sep 13 targeting a return to
the -5/-10bp area.
Another interesting RV trade on a final downward
move would be to sell the front/red-red/green box. As
Chart 3 shows, the Sep 11/Mar 12-Sep 12/Mar 13
box disinverted 12bp over the past week’s sell-off.
The +5/7bp area has tended to be a strong
resistance on the generic over the past year and the
dollar one is trading 15bp below the Euribor one!
-70
Jan-10 Mar-10 May-10 Jul-10 Sep-10 Nov-10
3/7/11 Euribor fly 3/7/11 Sterling fly 3/7/11 Eurodollar fly
Source: BNP Paribas
Chart 2: Distribution of 3/7/11 Gen Euribor Fly
vs. Euro$ One: Euribor Fly Getting Too High
0.05
0.045
0.04
0.035
0.03
0.025
0.02
0.015
0.01
0.005
EUR 3/7/11 with USD 3/7/11
0
-80 -70 -60 -50 -40 -30 -20 -10 0 10 20 30
Source: BNP Paribas
80
65
50
35
20
5
-10
Peak at -10.1
Current level: 5.0
Strategy:
1) Sell the U1U2U3 Euribor fly in the +12/15 area
targeting -10 by late January.
2) Sell the U1H2 – U2H3 box at +3/+5.
Selling area
Chart 3: 3/5-7/9 Euribor Box: Sell U1H2 vs.
U2H3 in the 4-6bp Area
-25
Jan-09 Apr-09 Jul-09 Sep-09 Dec-09 Mar-10 Jun-10 Sep-10 Dec-10
Source: BNP Paribas
3/5 vs 7/9 Euribor box 3/5 generic Eur spd
3/5 vs 9/11 Euribor box 7/9 generic Eur spd
selling area
Eric Oynoyan 16 December 2010
Market Mover, Non-Objective Research Section
45
www.GlobalMarkets.bnpparibas.com

EUR: 2011 EGB Issuance Preview
• We expect gross EGB issuance of
EUR 827bn in 2011 from EUR 943bn in 2010. In
net supply terms, we expect EUR 311bn in 2011
from EUR 430bn in 2010. Bond redemptions will
be EUR 35bn higher in 2011 at EUR 548bn.
January is expected to be the heaviest month in
terms of issuance with an estimated EUR 84bn
of EGB supply.
• We present the full 2011 bond and bill
redemption profile as this often signals
pressure points, especially for weaker
sovereigns where concentration is higher. Only
AAA bond redemptions are scheduled for
January. Heavy AAA issuance in early January
is historically linked to ASW compression.
• A more detailed research piece will follow
once the official funding plans of all eurozone
issuers have been released.
Table 1: 2011 EGB Issuance Projections
EUR Sovereign Financing: Projections for 2011 (EUR bn) 2010 Bond
2010 Net
Issuer Redemptions Deficit Borrowing Needs Bond Issuance Issuance Net Issuance Issuance
Austria 8.3 10.2 18 19 21 11 12
Belgium 24.0 16.0 40 34 41 10 16
Finland 5.7 6.3 12 15 16 9 7
France 91.8 90.0 182 180 188 88 105
Germany 147.3 33.0 180 195 207 48 74
Greece 27.7 18.7 46 - 18 - 2
Ireland 4.4 16.4 24 - 22 - 22
Italy 155.2 73.0 228 225 260 70 88
Netherlands 27.9 23.9 52 50 52 22 29
Portugal 9.6 9.3 19 18 22 8 16
Slovenia 1.0 2.1 3 3 3 2 2
Spain 45.1 43.7 89 88 94 43 59
Total 548 343 894 827 943 311 430
Source: BNP Paribas
280
240
200
160
Chart 1: Gross Supply in 2009-2011
Gross Supply
2009 2010 2011 est.
120
Forecasting 2011 European government bond (EGB)
issuance has become more difficult lately given the
need to forecast not only how much a country will
issue in the coming year but also whether a country
will need to issue in the first place or not. We expect
Greece and Ireland to stay away from the primary
markets in 2011 as they are both under EU/IMF aid
mechanisms that cover state financing except for
T-bills which will keep being rolled-on in the market.
In our central case scenario, we believe that, sooner
or later, Portugal will need to follow the same route
towards the EFSF but we do not believe this will be
the case for Spain, which we do not think faces the
same fate at the three smaller peripherals. As a
result, a direct comparison between 2010 and
estimated 2011 issuance is distorted by the fact that
not all countries that issued paper in 2010 will issue
in 2011.
Nevertheless, we expect both gross and net 2011
issuance to decline since most European
governments have adopted fiscal consolidation
measures aimed at decreasing their budget deficits.
Bond redemptions will be higher in 2011 (by
EUR 35bn), offsetting part of the impact of the fiscal
consolidation efforts on gross supply, but net supply
will decrease significantly in the year ahead (see
Table 1 for more details). In total, we expect 2011
EGB issuance of around EUR 827bn, down from
943bn in 2010 (-12%). In net supply terms in 2011, a
steeper reduction is expected to around EUR 311bn
from EUR 430bn in 2010 (-28%). Note these
80
40
0
Germany
France
Italy
Source: BNP Paribas
120
100
80
60
40
20
0
Germany
Spain
Netherlands
Belgium
forecasts are subject to revision on the release of
eurozone countries’ funding plans for 2011.
Charts 1 and 2 show the gross and net supply figures
in the 2009-2011 period for eurozone countries. In
percentage terms, we expect Belgium (-17%),
Portugal (-17%) and Italy (-13%) to see the biggest
decrease in gross supply in the year ahead. In net
supply terms, Portugal, Belgium and Germany will
Austria
Portugal
Finland
Ireland
Chart 2: Net Supply in 2009-2011
France
Italy
Source: BNP Paribas
Spain
Netherlands
Net Supply
Belgium
Austria
Portugal
Finland
Ireland
Greece
2009 2010 2011 est.
Greece
Slovenia
Slovenia
Ioannis Sokos 16 December 2010
Market Mover, Non-Objective Research Section
46
www.GlobalMarkets.bnpparibas.com

see the biggest falls although net supply will be much
lower in almost all eurozone countries in 2011.
As we’ve seen over the course of 2010, the
redemption profile can signal pressure points for
weaker sovereigns. In Table 2 we present the
monthly bond and bill redemption profile for 2011. In
January, for example, only AAA bond redemptions
are scheduled. For Spain, the pressure points will be
in April, July and October in 2011, while for Portugal
they lie in April and June. Countries with a higher
concentration in terms of accumulated redemptions
as a percentage of the total, such as Portugal and
Spain, usually face higher pressure around their
redemption dates. The redemptions of core countries
are better dispersed throughout the year. In the table
we include redemptions of bonds issued in all
currencies and this is why the total figure of
EUR 569bn is higher than the figure shown in
Table 1.
In Table 3 we estimate the monthly issuance in each
country taking into account the historical patterns of
issuance and the existing redemption profile. As is
usually the case, January is expected to be the
heaviest month in terms of EGB issuance with a
EUR 84bn forecast. Bear in mind that EFSF and
EFSM issuance needs to be added on top of that
figure. AAA issuance in January is estimated at
around EUR 50bn. This could lead to a compression
in ASW in January, repeating a seasonal pattern that
has been seen in previous years. EFSF’s Regling
has already said that the EFSF may issue between
EUR 5bn and 8bn of bonds in January. At these
levels we do not think that the extra EFSF issuance
will have an impact on AAA eurozone issuance.
In 2010, the 10y sector’s share of total issuance rose
to 31% from 27% in 2009. The 30y sector’s share of
total issuance was unchanged at 7%. In 2011 we
expect core countries to increase the duration of their
debt, taking into account the search for duration by
real money accounts. T-Bill issuance could decrease
further, continuing the trend seen in 2010. In the
case of Germany which is one of the few countries
that has released its funding plans, the breakdown
across different maturity buckets will not change
much compared to 2010. 2y and 5y issuance
increases by 1.1% as a percentage of total supply
while 10y issuance’s share falls by 1.4% and 30y
issuance’s by 0.8%.
Finally, for Spain, we calculate that redemptions that
stem from regional bonds in 2011 amount to around
EUR 6.5bn versus a 50bn outstanding. Out of these
EUR 6.5bn, 3.7bn will expire in November. These
figures are not high enough to be a threat right now
since SPGB redemptions will be EUR 46bn in 2011
and Spanish Letras another EUR 73bn.
Table 2: Monthly Bond & Bill Redemptions
Bonds Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec 2011
ITA 0.0 21.7 30.5 0.0 14.6 12.2 2.7 20.2 46.0 0.0 15.5 0.0 163.3
FRA 17.8 0.0 0.0 18.4 0.0 0.0 29.3 0.0 13.8 15.7 0.0 0.0 95.0
GER 23.3 0.0 15.0 19.0 0.0 15.0 24.0 0.0 16.0 17.0 0.0 18.0 147.3
SPA 0.0 0.0 0.0 15.5 0.0 0.0 17.0 0.0 0.0 14.1 0.0 0.0 46.6
GRE 0.0 0.0 9.1 1.0 7.0 0.0 0.0 6.8 0.0 0.0 0.0 5.8 29.8
BEL 0.0 0.0 11.3 0.0 0.0 3.4 0.0 0.0 12.7 0.0 0.0 0.6 28.0
NET 13.9 0.0 0.0 0.0 0.0 0.0 14.1 0.0 0.0 0.0 0.0 0.0 27.9
AUS 8.3 0.1 0.1 0.0 0.9 0.0 0.6 0.0 0.0 0.0 0.0 0.1 10.0
POR 0.0 0.0 0.0 4.5 0.0 5.0 0.0 0.0 0.0 0.0 0.0 0.0 9.5
IRE 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 4.5 0.0 4.5
FIN 0.0 5.7 0.0 0.0 1.5 0.0 0.0 0.1 0.1 0.0 0.0 0.0 7.3
Total 63.2 27.4 66.1 58.5 24.0 35.5 87.6 27.1 88.6 46.7 20.0 24.5 569.2
T-Bills Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec 2011
ITA 17.4 17.3 17.3 17.3 14.6 6.6 7.5 7.2 7.7 7.2 6.1 4.2 130.1
FRA 33.3 35.9 29.7 15.1 15.8 14.2 8.5 7.4 5.6 7.1 5.8 2.0 180.3
GER 11.0 11.0 11.0 11.0 11.0 11.0 4.0 4.0 4.0 3.0 3.0 2.0 86.0
SPA 8.7 7.8 6.5 6.2 6.5 4.2 4.2 7.1 5.3 8.2 3.7 4.6 73.0
GRE 4.2 0.4 1.4 2.4 0.4 0.0 0.0 0.0 0.0 0.0 0.0 0.0 8.8
BEL 5.5 6.2 6.4 4.1 3.7 2.0 1.9 2.1 2.0 2.0 1.8 1.6 39.5
NET 9.7 8.3 11.6 3.5 4.0 8.0 0.0 0.0 2.7 0.0 0.0 0.0 47.9
AUS 0.1 0.0 0.7 1.1 0.0 0.0 0.2 0.9 0.2 0.2 0.3 0.0 3.5
POR 3.4 3.5 3.8 0.0 0.0 0.0 1.8 1.4 1.4 1.4 1.4 0.0 18.1
IRE 2.1 1.2 1.6 1.3 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 6.0
FIN 3.6 2.2 2.5 1.1 1.5 0.0 0.0 0.0 0.0 0.0 0.0 0.0 10.8
Total 99.0 93.7 92.4 63.0 57.4 46.0 28.0 30.1 28.9 29.0 22.1 14.4 604.0
Source: BNP Paribas
Table 3: Monthly/Country Breakdown of 2011
EGB Issuance
2011 GER FRA ITA SPA NET BEL AUS POR FIN Total
Jan 19.0 19.7 20.6 9.1 5.5 4.2 4.0 0.8 1.0 83.9
Feb 18.0 16.2 19.6 8.5 6.5 3.7 1.5 3.3 0.0 77.3
Mar 16.0 19.9 18.0 10.5 3.0 3.3 1.5 0.8 4.0 77.1
Apr 19.0 16.7 23.2 5.2 6.5 3.3 2.0 1.7 1.5 79.0
May 19.0 17.6 15.2 6.2 7.8 0.0 1.8 1.8 0.0 69.4
Jun 18.0 17.4 23.2 7.7 3.5 3.3 1.9 2.2 1.5 78.7
Jul 11.0 17.0 16.8 12.4 6.0 6.6 1.2 2.5 0.0 73.5
Aug 13.0 0.0 18.5 3.3 0.0 2.8 0.9 1.1 0.0 39.5
Sep 20.0 16.5 23.7 6.9 2.5 2.9 1.9 1.7 4.0 80.0
Oct 12.0 16.9 21.2 6.6 5.7 2.3 1.4 1.0 1.7 68.9
Nov 20.0 16.7 18.1 8.5 3.0 1.7 1.0 1.0 1.5 71.4
Dec 10.0 5.3 6.8 3.2 0.0 0.0 0.0 0.0 0.0 25.3
Total 195 180 225 88 50 34 19 18 15 824
Source: BNP Paribas
2011 issuance starts in December with the end-ofmonth
Italian auctions which settle in the first days of
2011. Then, during the first week of January,
Germany will tap the 10y DBR Jan-21 for EUR 5bn.
We also expect France to issue OATs that week.
Austria and Netherlands are expected to issue bonds
in the second week of the year, together with Italy
and potentially Spain. In the absence of Greece and
Ireland, we expect Portuguese and Spanish auctions
to be a barometer for investors’ appetite for
peripherals.
Ioannis Sokos 16 December 2010
Market Mover, Non-Objective Research Section
47
www.GlobalMarkets.bnpparibas.com

Gilts: Strategic Trades for 2011
• Realised Gilt interest rate volatility has
markedly increased since mid-October. It has
hence become a complex task to establish
strategic positions given the elevated macro
uncertainty. In this context, we recommend two
trades for investors with a medium-term
horizon.
• STRATEGY: a) Buy Gilt 4.25% 2039 asset
swap around 6M Libor +29bp; b) sell the
Gilt/Bund 2s10s box, i.e. sell Gilt 5.25% 2012 vs
Gilt 4.75% 2020 duration weighted and buy
Schatz 1.00% 2012 vs Bund 3.25% 2020 duration
weighted.
Gilts have recently been driven more by events in the
eurozone than domestic developments. Level
correlation with Germany has increased above 0.9
since November (Chart 1). Indeed, interest rate
volatility has markedly increased. In contrast to
gyrations in yields, swap spreads have been
relatively stable over the past month. The average
spreads on Short and Medium Gilts are unchanged
whereas the average spread has widened by 3bp on
Long Gilts. At the same time, gross financing
requirement is expected to remain stable around
GBP 170bn in 2011 and to drop from GBP 143bn in
2012 to GBP 87bn in 2014 (Chart 2). Meanwhile,
Moody’s UK banking system outlook released on
Monday remains negative. Of particular concern, in
our view, is the still-high utilisation of wholesale
funding which exposes banks to refinancing risk as
the SLS will not be renewed. GBP 110bn is to be
repaid by February 2010. Moreover, GBP 125bn of
government-guaranteed debt will mature through
April 2014. Clearly, the cost of liquidity (hence libor
rates) will increase. We thus recommend playing the
normalisation of Long-Gilts swap spreads, which are
still hovering in negative territory.
Strategy: Buy Gilt 4.25% 2039 asset swap around
6M Libor +29bp.
The Gilt/Bund 2s10s box is hovering around 40bp. In
our view, steepening pressures on core yield curves
in the eurozone next year will be more pronounced
than on the Gilt curve. Firstly, markets are likely to
price in increased exposure of core paper in the
eurozone to the euro periphery via the EFSF while
Gilts could retain their status as safe haven assets.
Note that the price return for the 7y-10y sectors in
Germany and in the UK in November (peak of Irish
crisis) were -1.36% and -1.26% respectively.
Secondly, inflation and inflation expectations are
markedly different. The BoE will be expected to
Chart 1: Gilt/Bund Rolling Correlation
Source: BNP Paribas
Chart 2: Evolution of Gilt Issuance
Source: BNP Paribas
2.0
1.5
1.0
0.5
0.0
-0.5
-1.0
-1.5
1.0
0.9
0.8
0.7
0.6
0.5
0.4
0.3
0.2
0.1 3M F.D. Corr(Gilt 10y, Bund 10y) -
(RHS)
0.0
Jan-09 Jul-09 Jan-10 Jul-10
250
200
150
100
50
GBP bn
0
1998 2000 2002 2004 2006 2008 2010 2012 2014
Chart 3: Gilt/Bund 2s10s Box
-2.0
2003 2004 2005 2006 2007 2008 2009 2010
Source: BNP Paribas
3M Corr (Gilt 10y, Bund 10y)
Gilt Issuance
BNP Paribas Forecast
Dec-10
tighten earlier than the ECB, we think. Accordingly
we recommend short positions in the box at current
levels. It visited levels below -140bp in mid-2004
when the policy rate differential reached 2.75%
(Chart 3).
Strategy: Sell Gilt 5.25% 2012 vs buy Gilt 4.75%
2020 duration weighted. Buy Schatz 1.00% 2012 vs
Sell Bund 3.25% 2020 duration weighted.
1.0
0.9
0.8
0.7
0.6
0.5
Matteo Regesta 16 December 2010
Market Mover, Non-Objective Research Section
48
www.GlobalMarkets.bnpparibas.com

JGBs: Watch the Corporate Sector
• Although the level of private sector orders
in October was 5.5% below the average for Q3,
it was 3.6% above the average for Q2 and
shows that a slow recovery continues.
• Corporate willingness to invest in plant and
equipment is recovering, even though the
expiry of support for environmentally friendly
autos is acting to reduce output and earnings.
• If corporate behaviour becomes more
aggressive, ample funds on hand will boost
capital expenditure and potentially improve the
employment environment.
• We maintain a cautious stance on the belly
of the curve. While the short end and the
super-long end are likely to outperform over
the near term, the latter still faces fiscal risk
over the longer term.
Machinery orders are trending higher
How long will the improvement in expected growth
persist? At the very least, it will last until the results of
the US Christmas sales are known. The focus of
markets will shift after the start of the year to demand
for the Chinese New Year. Next for Japan will be the
equity prices at March book closings. As a result of
curtailing capital expenditure and employment, the
Japanese corporate sector is awash with cash;
investors will examine whether these events lead to
vigorous, positive corporate behaviour.
The 9 December release of October machinery
orders (excluding ships and electric power) showed
that private sector orders fell 1.4% m/m, their second
consecutive drop. However, declines in the last two
months are a reaction to the summer surge (July:
+8.8% m/m; August: +10.1%; September: -10.3%).
Although the level of private sector orders in October
was 5.5% below the average for Q3, it was 3.6%
above the average for Q2 – indicating that a slow
recovery continues.
Corporate willingness to invest is recovering
The Japanese economy, the manufacturing sector in
particular, is experiencing a soft patch because of
slowing exports and the termination of subsidies for
environmentally friendly autos. On this score,
improvements have paused in business conditions
DIs of the December BoJ Tankan, released on
Wednesday. On the other hand, the global
manufacturing cycle, which had slowed from the
Chart 1: Machinery Orders and 5-year JGB Yield
16000
14000
12000
10000
8000
6000
4000
2000
0
2007 2008 2009 2010 2011
Source: BNP Paribas
5-year JGB (%, RHS)
Overseas orders (JPY bn)
Private demand (JPY bn)
spring, has started to reaccelerate. October
machinery order data also revealed that orders from
overseas surged 16.0% m/m, after rising 6.9% in
September.
In addition, machine tool orders – a precursor of
machinery orders – soared 20.5% m/m in November.
Not only were overseas orders strong (+19.5%) but
so were private sector orders (+22.8%). After falling
at the beginning of autumn, machine tool orders are
again picking up. Corporate willingness to invest in
plant and equipment is recovering, even though the
expiry of support for environmentally friendly autos is
acting to reduce output and earnings.
Corporate action could have a major impact on
domestic money flows
The halt of yen appreciation and the retreat of
downside risk to global growth lie behind these signs
of a pick-up in capex-related indicators. If corporate
behaviour becomes more aggressive, ample funds
on hand will boost capital expenditure and potentially
improve the employment environment. Corporate
action could also have a major impact on domestic
money flows.
Pressures for bear flattening, a reaction to the
protracted bull steepening of the yield curve caused
by double-dip concerns, will persist for some time. In
the current environment, we maintain a cautious
stance on the belly of the curve. The short end and
the super long end are likely to outperform over the
near term. However, we note that the super-long end
still faces fiscal risk over the longer term.
2
1.5
1
0.5
Koji Shimamoto 16 December 2010
Market Mover, Non-Objective Research Section
49
www.GlobalMarkets.bnpparibas.com

Global Inflation Watch
Inflation data over the holiday period
There are some important inflation releases over the
holiday period and at the very beginning of January.
While most of the November inflation data is now out,
Japan will publish its CPI release for the month on 28
December. That will be followed the next day by the
first December data release in the euro area from
Germany. That will be followed by the eurozone flash
HICP on the second working day of the year, 4
January.
In Japan, inflation jumped by 0.5pp in October, in
most part thanks to a tobacco tax hike. The trimmed
mean core measure of inflation also rose, gaining
0.1pp to reach -0.3% y/y. That compares with its
-1.3% low at the end of 2009. In November, we
expect both the headline core CPI and trimmed mean
measures of inflation to move sideways, though the
moderation in deflation should continue in the coming
quarters.
Chart 1: Japanese CPI (% y/y)
3
Core CPI
2
1
0
-1
CPI excluding energy and food, but not alcohol
-2
-3
02 03 04 05 06 07 08 09 10
Source: Reuters EcoWin Pro, BNP Paribas
Chart 2: EZ HICP Energy & Brent (EUR)
December inflation should be marked by robust
energy prices given the strong rise in oil prices
between the end of November and mid-December.
This is particularly true in the euro area, where this
move has been exacerbated by the falling value of
the euro in the second half of November.
In Germany, we are expecting headline CPI inflation
to reach 1.7% y/y in December, the second
consecutive 0.2pp increase. Energy inflation is
forecast to reach 8% y/y – its highest level since
October 2008. Food inflation should also gain –
November’s 1% gain in food prices was the first
concrete evidence of pass-through from the soft
commodity shock to consumer prices, and this
process has much further to go.
Source: Reuters EcoWin Pro, BNP Paribas
Chart 3: German Clothing HICP (% m/m, sliced)
This strength in commodity prices should dominate a
decline in core inflation. In November, core inflation
rose by 0.2pp in Germany to 0.78% y/y, largely on a
jump in clothing inflation. This jump, however, was
driven by changing seasonality in the discounting of
clothes in the run-up to the holiday period. A large
amount of this strength should therefore unwind in
December, when discounts come a month later than
in 2009.
This strong German release should contribute to a
rise in inflation across the euro area – headline
inflation is expected to hit 2.1% y/y on similar
dynamics. It should remain around 2% until early
spring 2011, when energy base effects should drag it
lower.
Source: Reuters EcoWin Pro, BNP Paribas
Luigi Speranza/Eoin O’Callaghan 16 December 2010
Market Mover
50
www.GlobalMarkets.bnpparibas.com

Table 1: BNP Paribas' Inflation Forecasts
Eurozone
France
US
Headline HICP Ex-tobacco HICP
Headline CPI
Ex-tobacco CPI
CPI Urban SA CPI Urban NSA
Index % m/m % y/y Index % m/m % y/y Index % m/m % y/y index % m/m % y/y Index % m/m % y/y Index % m/m % y/y
2009 108.1 - 0.3 107.9 - 0.2 119.3 - 0.1 118.0 - 0.1 214.5 - -0.3 214.5 - -0.4
2010 (1) 109.8 - 1.6 109.5 - 1.5 121.1 - 1.5 119.8 - 1.5 218.1 - 1.6 218.0 - 1.6
2011 (1) 111.6 - 1.6 111.2 - 1.6 123.2 - 1.7 121.7 - 1.6 221.0 - 1.3 221.0 - 1.4
Q3 2009 108.0 - -0.4 107.8 - -0.5 119.4 - -0.4 118.1 - -0.4 215.4 - -1.6 215.7 - -1.6
Q4 2009 108.6 - 0.4 108.4 - 0.3 119.7 - 0.4 118.4 - 0.3 216.8 - 1.5 216.2 - 1.4
Q1 2010 108.6 - 1.1 108.3 - 1.0 120.3 - 1.3 119.0 - 1.2 217.6 - 2.4 217.0 - 2.4
Q2 2010 110.0 - 1.5 109.7 - 1.4 121.3 - 1.6 120.0 - 1.5 217.2 - 1.8 218.1 - 1.8
Q3 2010 109.9 - 1.7 109.5 - 1.6 121.2 - 1.5 119.8 - 1.5 218.0 - 1.2 218.3 - 1.2
Q4 2010 (1) 110.8 - 2.0 110.4 - 1.9 121.7 - 1.6 120.2 - 1.6 219.4 - 1.2 218.8 - 1.2
Q1 2011 (1) 110.7 - 1.9 110.3 - 1.9 122.2 - 1.6 120.8 - 1.5 220.6 - 1.4 220.0 - 1.4
Q2 2011 (1) 111.6 - 1.5 111.2 - 1.4 123.1 - 1.5 121.6 - 1.4 220.8 - 1.6 221.6 - 1.6
Jan 10 108.1 -0.8 1.0 107.75 -0.8 0.9 119.7 -0.2 1.1 118.32 -0.2 1.0 217.6 0.2 2.7 216.69 0.3 2.6
Feb 10 108.4 0.3 0.9 108.10 0.3 0.8 120.4 0.6 1.3 118.99 0.6 1.2 217.6 0.0 2.2 216.74 0.0 2.1
Mar 10 109.4 0.9 1.4 109.09 0.9 1.3 120.9 0.5 1.6 119.58 0.5 1.5 217.7 0.1 2.4 217.63 0.4 2.3
Apr 10 109.9 0.5 1.5 109.58 0.4 1.4 121.3 0.3 1.7 119.90 0.3 1.6 217.6 -0.1 2.2 218.01 0.2 2.2
May 10 110.0 0.1 1.6 109.71 0.1 1.5 121.4 0.1 1.6 120.04 0.1 1.6 217.2 -0.2 2.0 218.18 0.1 2.0
Jun 10 110.0 0.0 1.4 109.70 0.0 1.3 121.4 0.0 1.5 120.02 0.0 1.4 216.9 -0.1 1.1 217.97 -0.1 1.1
Jul 10 109.7 -0.3 1.7 109.31 -0.4 1.7 121.0 -0.3 1.7 119.68 -0.3 1.6 217.6 0.3 1.3 218.01 0.0 1.2
Aug 10 109.9 0.2 1.6 109.54 0.2 1.5 121.3 0.2 1.4 119.97 0.2 1.3 218.2 0.3 1.2 218.31 0.1 1.1
Sep 10 110.1 0.2 1.8 109.76 0.2 1.7 121.2 -0.1 1.6 119.88 -0.1 1.5 218.4 0.1 1.1 218.44 0.1 1.1
Oct 10 110.5 0.4 1.9 110.16 0.4 1.8 121.4 0.1 1.6 120.03 0.1 1.5 218.9 0.2 1.2 218.71 0.1 1.2
Nov 10 110.6 0.1 1.9 110.27 0.1 1.8 121.5 0.1 1.6 120.09 0.0 1.5 219.1 0.1 1.1 218.80 0.0 1.1
Dec 10 (1) 111.2 0.5 2.1 110.87 0.5 2.1 122.1 0.4 1.8 120.59 0.4 1.7 220.2 0.5 1.4 218.85 0.0 1.3
Jan 11 (1) 110.3 -0.9 2.0 109.87 -0.9 2.0 121.7 -0.3 1.7 120.24 -0.3 1.6 220.4 0.1 1.3 219.52 0.3 1.3
Feb 11 (1) 110.6 0.3 2.1 110.25 0.3 2.0 122.3 0.5 1.6 120.83 0.5 1.5 220.7 0.2 1.4 219.95 0.2 1.5
Mar 11 (1) 111.3 0.6 1.7 110.89 0.6 1.6 122.7 0.3 1.4 121.19 0.3 1.3 220.6 -0.1 1.3 220.58 0.3 1.4
Apr 11 (1) 111.5 0.2 1.5 111.11 0.2 1.4 123.0 0.2 1.4 121.47 0.2 1.3 220.7 0.1 1.4 221.16 0.3 1.4
May 11 (1) 111.6 0.1 1.5 111.24 0.1 1.4 123.2 0.2 1.5 121.69 0.2 1.4 220.8 0.0 1.7 221.72 0.3 1.6
Jun 11 (1) 111.7 0.0 1.5 111.27 0.0 1.4 123.3 0.1 1.6 121.77 0.1 1.5 220.9 0.0 1.8 222.04 0.1 1.9
Updated
Next
Release
Dec 16
Dec Flash HICP (Jan 4)
Dec 16
Dec CPI (Jan 13)
Dec 16
Dec CPI (Jan 14)
Source: BNP Paribas, (1) Forecasts
Chart 4: Eurozone Core HICP (% y/y)
Chart 5: US Core CPI (% y/y)
Source: Reuters EcoWin Pro
Since printing an all-time low in April, core inflation has been a
touch stronger in recent months, reflecting gains in both core
goods and core services inflation. While we expect core services
inflation to head lower, the rebound in core goods has further to
run. We expect a brief interruption to the downward trend in core.
Source: Reuters EcoWin Pro
The downward trend in shelter inflation was recently interrupted
and leading indicators suggest its strength will continue until yearend.
The renewed collapse in the housing market should see a
reversion to a downward trend from early next year.
Luigi Speranza/Eoin O’Callaghan 16 December 2010
Market Mover
51
www.GlobalMarkets.bnpparibas.com

Table 2: BNP Paribas' Inflation Forecasts
Japan
UK
Sweden
Core CPI SA
Core CPI NSA
Headline CPI RPI
CPI CPIF
Index % m/m % y/y Index % m/m % y/y Index % m/m % y/y Index % m/m % y/y Index % m/m % y/y Index % m/m % y/y
2009 100.3 - -1.3 100.3 - -1.3 110.8 - 2.1 213.7 - -0.5 299.7 - -0.3 191.2 - 1.9
2010 (1) 99.2 - -1.1 99.2 - -1.1 114.5 - 3.3 223.6 - 4.6 303.3 - 1.2 195.1 - 2.0
2011 (1) 98.6 - -0.6 98.6 - -0.6 118.3 - 3.3 232.7 - 4.1 309.2 - 2.0 197.6 - 1.3
Q3 2009 99.9 - -2.3 100.1 - -2.3 111.3 - 1.5 214.4 - -1.4 299.5 - -1.2 191.6 - 1.6
Q4 2009 99.7 - -1.8 99.9 - -1.8 112.1 - 2.1 216.9 - 0.6 301.3 - -0.4 193.2 - 2.3
Q1 2010 99.7 - -1.3 99.3 - -1.2 112.9 - 3.2 219.3 - 4.0 301.2 - 1.0 194.0 - 2.6
Q2 2010 99.3 - -1.2 99.3 - -1.2 114.4 - 3.4 223.5 - 5.1 302.8 - 1.1 194.9 - 2.1
Q3 2010 98.8 - -1.1 99.1 - -1.0 114.7 - 3.1 224.5 - 4.7 302.9 - 1.1 194.8 - 1.7
Q4 2010 (1) 99.1 - -0.6 99.3 - -0.6 115.8 - 3.3 227.0 - 4.7 306.2 - 1.6 196.5 - 1.7
Q1 2011 (1) 98.9 - -0.9 98.4 - -0.9 117.0 - 3.6 229.4 - 4.6 305.9 - 1.5 195.5 - 0.8
Q2 2011 (1) 98.7 - -0.6 98.7 - -0.6 118.2 - 3.3 232.6 - 4.1 309.0 - 2.1 197.2 - 1.2
Jan 10 99.6 -0.1 -1.3 99.2 -0.6 -1.3 112.4 -0.2 3.4 217.9 0.0 3.7 299.8 -0.6 0.6 193.0 -0.2 2.6
Feb 10 99.8 0.2 -1.2 99.2 0.0 -1.2 112.9 0.4 3.0 219.2 0.6 3.7 301.6 0.6 1.2 194.2 0.6 2.7
Mar 10 99.8 0.0 -1.2 99.5 0.3 -1.2 113.5 0.5 3.4 220.7 0.7 4.4 302.3 0.2 1.2 194.7 0.3 2.5
Apr 10 99.3 -0.5 -1.5 99.2 -0.3 -1.5 114.2 0.6 3.7 222.8 1.0 5.3 302.4 0.0 1.0 194.8 0.0 2.2
May 10 99.3 0.0 -1.2 99.3 0.1 -1.2 114.4 0.2 3.3 223.6 0.4 5.1 302.9 0.2 1.2 195.0 0.1 2.1
Jun 10 99.2 -0.1 -1.0 99.3 0.0 -1.0 114.6 0.2 3.2 224.1 0.2 5.0 303.0 0.0 0.9 195.0 0.0 1.9
Jul 10 98.9 -0.3 -1.1 99.0 -0.3 -1.1 114.3 -0.3 3.1 223.6 -0.2 4.8 302.0 -0.3 1.1 194.3 -0.3 1.7
Aug 10 98.8 -0.1 -1.0 99.1 0.1 -1.0 114.9 0.5 3.1 224.5 0.4 4.7 302.1 0.0 0.9 194.3 0.0 1.4
Sep 10 98.7 -0.1 -1.1 99.1 0.0 -1.1 114.9 0.0 3.0 225.3 0.4 4.6 304.6 0.8 1.4 195.8 0.8 1.8
Oct 10 99.1 0.4 -0.6 99.5 0.4 -0.6 115.2 0.2 3.1 225.8 0.2 4.5 305.6 0.3 1.5 196.3 0.3 1.8
Nov 10 (1) 99.2 0.1 -0.6 99.3 -0.2 -0.6 115.6 0.4 3.2 226.8 0.4 4.7 306.6 0.3 1.8 196.8 0.2 1.9
Dec 10 (1) 99.1 -0.1 -0.6 99.2 -0.1 -0.6 116.6 0.9 3.6 228.4 0.7 4.8 306.5 0.0 1.6 196.4 -0.2 1.5
Jan 11 (1) 99.0 -0.1 -0.6 98.6 -0.6 -0.6 116.6 -0.1 3.7 228.4 0.0 4.8 304.4 -0.7 1.5 194.7 -0.9 0.8
Feb 11 (1) 98.9 -0.1 -0.9 98.3 -0.3 -0.9 117.1 0.5 3.8 229.5 0.5 4.7 306.1 0.6 1.5 195.5 0.4 0.6
Mar 11 (1) 98.7 -0.2 -1.1 98.4 0.1 -1.1 117.4 0.3 3.5 230.3 0.3 4.3 307.1 0.3 1.6 196.3 0.5 0.8
Apr 11 (1) 98.7 0.0 -0.6 98.6 0.2 -0.6 117.9 0.4 3.3 232.0 0.8 4.1 308.6 0.5 2.1 196.9 0.3 1.1
May 11 (1) 98.7 0.0 -0.6 98.7 0.1 -0.6 118.2 0.3 3.3 232.7 0.3 4.1 309.1 0.2 2.1 197.2 0.2 1.1
Jun 11 (1) 98.6 -0.1 -0.6 98.7 0.0 -0.6 118.4 0.1 3.3 233.0 0.2 4.0 309.2 0.0 2.1 197.4 0.1 1.2
Updated
Next
Release
Nov 26
Nov CPI (Dec 28)
Dec 14
Dec CPI (Jan 18)
Dec 09
Dec CPI (Jan 13)
Source: BNP Paribas, (1) Forecasts
Chart 6: Japanese CPI (% y/y)
Chart 7: UK CPI (% y/y)
Source: Reuters EcoWin Pro
Prices are expected to continue falling but the pace of decline is
easing as the economy recovers.
Source: Reuters EcoWin Pro, BNP Paribas
We expect inflation to remain above target for the remainder of the
year, although trending down.
Luigi Speranza/Eoin O’Callaghan 16 December 2010
Market Mover
52
www.GlobalMarkets.bnpparibas.com

Table 3: BNP Paribas' Inflation Forecasts
Canada Norway Australia
CPI Core CPI Headline CPI Core
CPI
Core
Index % q/q % y/y Index % q/q % y/y Index % q/q % y/y Index % q/q % y/y Index % q/q % y/y Index % q/q % y/y
2009 114.4 0.3 113.6 1.8 125.7 2.2 118.4 2.6 167.8 - 1.8 - - 3.7
2010 (1) 116.5 1.8 115.5 1.6 128.7 2.3 120.0 1.4 172.9 - 3.1 - - 2.8
2011 (1) 118.6 1.8 117.1 1.4 130.3 1.3 121.6 1.3 178.3 - 3.3 - - 2.9
Q3 2009 114.7 0.5 -0.9 113.9 1.2 1.6 125.8 0.0 1.8 118.5 0.0 2.4 168.6 1.0 1.3 - - 3.5
Q4 2009 114.9 0.6 0.8 114.4 1.9 1.6 126.6 0.6 1.4 119.3 0.7 2.3 169.5 0.5 2.1 - - 3.4
Q1 2010 115.4 2.0 1.6 114.9 1.6 1.9 128.4 1.4 2.9 119.4 0.1 2.0 171.0 0.9 2.9 - - 3.1
Q2 2010 116.2 2.6 1.4 115.5 2.3 1.8 129.1 0.6 2.6 120.3 0.8 1.5 172.1 0.6 3.1 - - 2.7
Q3 2010 116.8 2.2 1.8 115.6 0.3 1.6 128.2 -0.7 1.9 119.9 -0.3 1.2 173.3 0.7 2.8 - - 2.4
Q4 2010 (1) 117.4 1.5 2.2 116.0 1.2 1.4 129.0 0.7 1.9 120.5 0.5 1.0 175.2 1.1 3.1 - - 2.5
Q1 2011 (1) 117.9 1.6 2.1 116.4 1.6 1.4 129.4 0.2 0.8 120.6 0.1 1.0 176.1 0.6 3.2 - - 2.4
Q2 2011 (1) 118.3 1.7 1.9 116.9 1.7 1.2 130.3 0.8 1.0 121.7 0.9 1.1 177.3 0.7 3.3 - - 2.6
Updated
Next
Release
Nov 23
Nov CPI (Dec 21)
Dec 10
Dec CPI (Jan 10)
Oct 29
Q4 CPI (Jan 25)
Source: BNP Paribas, (1) Forecasts
Chart 8: Canadian Total Versus Core CPI
Chart 9: Australian CPI (% y/y)
Source: Reuters EcoWin Pro, BNP Paribas
Wage pressures appear subdued, suggesting that underlying
inflation should remain within the target range.
Source: Reuters EcoWin Pro, BNP Paribas
Near-term inflation pressures should be muted but, with the limited
spare capacity in the labour market being eroded, underlying
inflation is likely to settle near the top of the RBA's target range.
CPI Data Calendar for the Coming Week
Day GMT Economy Indicator Previous BNPP F’cast Consensus
Mon 20/12 07:00 08:00 PPI y/y : Nov 4.3% 4.6% 4.6%
Tue 21/12 12:00 07:00 CPI m/m : Nov 0.4% 0.3% n/a
12:00 07:00 Bank of Canada Core CPI m/m : Nov 0.4% 0.2% n/a
Thu 23/12 07:45 08:45 PPI y/y: Nov 4.3% 4.0% n/a
10:15 11:15 CPI y/y : Dec 2.9% 3.1% n/a
Tue 28/12 23:30 08:30 CPI National y/y : Nov 0.2% 0.0% n/a
23:30 08:30 Core CPI National y/y : Nov -0.6% -0.6% n/a
23:30 08:30 CPI Tokyo y/y : Dec 0.2% 0.1% n/a
23:30 08:30 Core CPI Tokyo y/y : Dec -0.5% -0.5% n/a
Wed 29/12 09:00 10:00 States Cost of Living y/y : Dec 1.5% 1.7% 1.5%
09:00 10:00 HICP (Prel) y/y : Dec 1.6% 1.8% n/a
Release dates and forecasts as at c.o.b. prior to the date of publication: See Daily Economic Spotlight for any revision
Source: BNP Paribas
Luigi Speranza/Eoin O’Callaghan 16 December 2010
Market Mover
53
www.GlobalMarkets.bnpparibas.com

Inflation: Post Mortem 2010
• Increasing supply and liquidity in 2010.
• Real Yields: At or below Jan levels.
• Breakevens: At or below Jan levels.
• ASW: Strong despite stress on EGBs & vol.
• Volatility: Normalisation continues.
EUR bn
80
60
40
Chart 1: Inflation Supply
US EMU UK JPY
Tomorrow, we will publish our main views for 2011 in
the Inflation Monitor but today we focus one last time
on 2010. Deepening credit and balance-sheet
concerns, greater uncertainty and risk aversion, an
increased regulatory burden and anxiety about
inflation and deflation: 2010 has not been a year for
the faint-hearted.
Supply & Demand: Thanks to the normalisation in
market conditions in 2009, sovereigns came back to
inflation markets more aggressively in 2010. The US
issued USD 87bn of TIPS in 2010 against only USD
59bn in 2009. The UK issued GBP 31bn of UKTI
against GBP 28bn in 2009. In the eurozone, France
doubled linkers supply to EUR 24bn thanks to the
launch of new 10y benchmarks in FRF and EUR
inflation. With EUR 11bn in 2010 compared to EUR
5bn in 2009, Germany stuck to its commitment to
issue EUR 2-3bn of linkers every quarter although it
did not issue a new benchmark. Finally, with only
EUR 14.5bn vs EUR 17bn in 2009, Italy is the only
issuer to have reduced inflation supply, probably
because of the launch of the CCT-eu programme.
20
0
150
100
2003 2004 2005 2006 2007 2008 2009 2010
YTD
Chart 2: Monthly Turnovers in Linkers
EUR bn, 1M
50
Lehman
Conso in 2009 Up in 2010
USD
GBP
0
Jan-07 Jan-08 Jan-09 Jan-10 Jan-11
Chart 3: TIPS TR vs Gold & ED15
2011
For
EUR
Liquidity wise, we note a marked improvement in
2010 (Chart 2). Using official data, turnover
increased in the US, UK and France by 21%, 37%
and 55% respectively. Based on BNPP data (note
BNPP is number one in TIPS and top three in EZ
secondary markets), activity has jumped even more
for German linkers while barely improving on BTPeis.
Demand wise, HFs are coming back gradually but
ALM demand has stayed strong and ASW activity is
still supporting activity in linkers and swap. The focus
has also switched to structured solutions that reduce
counterparty and funding risk. In this context, use of
TRS solutions should expand further. In 2010,
pension funds have continued to be active in linkers
despite deterioration in funding ratios while inflows in
ETFs have declined compared to 2009. In France,
the increase of the Livret A rate and of real yields is
triggering some activity in swap in Q4, distorting
slightly further valuations vs. EUR breakevens.
Real Yields and Breakevens: Real yields mainly
followed gold prices and weakening growth
Chart 4: US 10y BE vs NY, WTI and SPX
Source: BNP Paribas, Bloomberg, AFT, Fed, UK DMO
Herve Cros / Shahid Ladha / Sergey Bondarchuk 16 December 2010
Market Mover, Non-Objective Research Section
54
www.GlobalMarkets.bnpparibas.com

expectations until November’s FOMC then rose in
line with short-term contracts (Chart 3). Deflation
fears surged during the summer but breakevens
have been more sensitive to oil and stocks than
nominals since the Jackson-Hole speech (Chart 4).
Looking at the 10y maturity, the sell-off was huge in
November but real yields are finishing 2010 at (EUR)
or a bit below (US & UK) levels prevailing in early
January. Meanwhile, breakevens are finishing the
year close to (US) or below (UK, EUR) Jan levels.
C. 5: Quarterly Returns in Linkers 1y+ Indices
6%
EUR GBP USD
5%
Linkers
4%
3%
2%
1%
0%
-1%
-2%
Total returns: Late sell-off and EGB crisis. 2009
was a year of normalisation for distressed assets.
Therefore it is unsurprising that linkers have not
managed to repeat the same performance in 2010 as
in 2009. Beyond the recent unwinding of the QE
trade, the market seems to be acknowledging the
positive effects of loose monetary policy more on
growth (via higher real yields) than on inflation
(inflation breakevens mainly stable since November).
This also explains stocks’ strong performance.
-3%
-4%
8%
6%
4%
2%
0%
Q1-09 Q2-09 Q3-09 Q4-09 Q1-10 Q2-10 Q3-10 Q4-10
Chart 6: Quarterly Returns in BE trades
EUR GBP USD
Breakevens
Overall, in local-currency terms, TIPS have returned
5% in 2010 vs. 10% in 2009, slightly underperforming
vs. nominals against 16% outperformance in 2009.
UK linkers have done better with 5% return in 2010
vs. 6% in 2009. Still, relative to nominals, UKTI has
barely outperformed against 8% differential in 2009.
Finally, in the eurozone, performance has been
mixed between issuers. BTPei underperformed both
in real and breakeven terms (around -4% return)
while French and German linkers underperformed
only vs. nominals. Overall, EUR linkers have
returned 1% in 2010 (vs. 8% in 2009), i.e. 3% less
than nominals (vs. +3.5% outperformance in 2009).
Clearly, the stress on EGBs and the need for fiscal
tightening are putting pressure on breakevens,
especially on BTPei.
Asset Swap: Strong performance. After being
stable most of H1, linkers ASW have followed
nominals in H2 and are returning close to 0bp margin
vs. Libor (Chart 7), benefiting from an expected
improvement in governments’ deficits next year.
Given the context of volatility and stress in EGBs, we
highlight the stability in Linkers/Nominals ASW
discounts, especially in the EZ and the US (Chart 8).
Globally, ASW discounts are finishing the year tighter
than in Jan. The carry trade has worked again in
2010. We also expect the trend of switching out of
P/P to proceeds ASW to continue in EZ in 2011.
Volatility: Down but still 50% higher than
nominal. Despite a resurgence of deflation fears
during the summer, inflation volatility has declined in
2010 (Chart 9) although it still trades 50% richer than
nominal vol. We also note an expansion of the real
rate swaptions market and arbitrage between local
inflations.
80
60
40
20
-2%
-4%
Q1-09 Q2-09 Q3-09 Q4-09 Q1-10 Q2-10 Q3-10 Q4-10
Chart 7: Linkers ASW: Return to 0
OATEI20 Real ASW
UKTI20 Real ASW
TIPS Jan-19 Real ASW
0
Dec-09 Mar-10 Jun-10 Sep-10 Dec-10
60
50
40
30
20
10
0
Chart 8: Linkers R/N ASW Discounts: Tight
-10
Dec-09 Mar-10 Jun-10 Sep-10 Dec-10
2.50%
2.30%
2.10%
1.90%
1.70%
1.50%
1.30%
1.10%
0.90%
0.70%
OATEI20 R/N ASW Discount
UKTI20 R/N ASW Discount
TIPS Jan-19 R/N ASW Discount
VIX, RHS
USD
EUR
OATei
Chart 9: Implied Vol
0.50%
Dec-09 Mar-10 Jun-10 Sep-10 Dec-10
TIPS
UKTI
EUR Implied Inflation Vol
EUR Implied Interest Rate Vol
USD Implied Inflation Vol
USD Implied Interest Rate Vol
40
35
30
25
20
15
10
Source: BNP Paribas, Bloomberg
Herve Cros / Shahid Ladha / Sergey Bondarchuk 16 December 2010
Market Mover, Non-Objective Research Section
55
www.GlobalMarkets.bnpparibas.com

Pricing Date
Repo Rate
Sett. Date
Table 1: BNP Paribas Carry Analysis
Benchmark Carry
15-Dec-10
Term 1
Term 2
2m
3m
6m
12m
0.42% 0.42% 0.34% 0.34% 0.34% 0.56%
16-Dec-10 01-Feb-11 01-Mar-11
16-Feb-11
16-Mar-11
16-Jun-11
16-Dec-11
Yield BE Real BE Real BE Real BE Real BE Real BE Real BE
Short-end
OATei Jul-12 -1.00% 1.91% 3.9 0.8 34.2 29.7 24.8 21.3 -16.3 -20.8 2.1 -2.7 -77.6 -40.5
OATI Jul-13 -0.37% 1.71% -0.9 -5.0 12.8 6.3 8.9 3.4 2.0 -5.7 27.1 12.8 30.2 7.1
TIPS Jul-12 -0.78% 1.34% -4.3 -7.2 -13.4 -18.2 -9.0 -13.0 -5.5 -11.5 51.7 36.7 22.5 -18.5
UKTi Aug-13 -1.62% 2.83% 21.5 17.2 15.8 8.6 23.1 17.4 17.0 8.7 66.6 49.5 72.6 38.5
5y
OATei Jul-15 0.51% 1.65% 5.5 0.7 18.2 10.5 14.4 7.7 3.9 -5.7 19.9 1.1 30.5 -5.9
OATi Jul-17 0.72% 2.02% 1.7 -2.9 8.3 0.8 6.5 -0.1 5.2 -4.2 18.8 0.3 29.1 -6.9
TIPS Apr-15 0.09% 1.69% 1.2 -3.8 -0.1 -8.2 0.5 -6.2 3.6 -6.4 26.1 4.8 30.2 -16.3
UKTi Jul-16 0.05% 2.62% 14.5 9.0 14.2 5.3 16.6 9.3 16.2 5.6 47.0 25.4 66.2 22.3
JGBI-4 June-15 1.05% -0.55% 5.3 4.1 4.9 2.9 6.0 4.5 0.9 -1.5 -6.2 -11.0 17.9 7.2
10y
OATei Jul-20 1.34% 1.98% 3.9 -0.2 11.1 4.3 8.9 3.0 4.4 -4.1 14.7 -1.9 24.5 -7.9
OATI Jul-19 1.06% 2.08% 1.8 -2.5 7.3 0.2 5.8 -0.4 5.1 -3.8 16.7 -0.8 26.6 -7.4
TIPS Jul-20 1.14% 2.26% 2.1 -3.1 2.4 -6.0 2.2 -4.7 4.6 -5.6 17.7 -3.4 25.4 -18.2
UKTi Nov-22 0.83% 3.07% 5.6 0.7 12.3 4.4 9.2 2.7 12.5 3.1 24.8 5.9 40.1 2.4
JGBI-16 June-18 1.37% -0.44% 3.9 2.3 4.0 1.4 4.5 2.5 1.7 -1.4 -1.4 -7.6 15.1 2.0
30y
OATei Jul-40 1.71% 2.18% 1.7 -0.6 4.4 0.7 3.6 0.3 2.0 -2.7 6.2 -2.9 10.2 -7.1
OATI Jul-29 1.59% 2.22% 1.5 -1.7 4.8 -0.3 3.9 -0.7 3.8 -2.7 11.0 -1.6 18.0 -6.2
TIPS Feb-40 1.98% 2.61% 1.3 -2.2 1.8 -3.9 1.6 -3.1 2.8 -4.0 9.0 -4.9 13.8 -14.4
UKTI Mar-40 0.78% 3.67% 2.2 -0.9 4.9 -0.2 3.6 -0.5 4.9 -1.0 9.6 -2.2 15.1 -8.2
Short-end
Term 1 -> Term 2 Term 1 -> Term 2 Term 2 -> 3m
3m -> 6m
6m -> 12m
OATei Jul-12 30.3 28.9 20.5 18.9 -41.1 -42.1 18.4 18.1 -79.7 -37.7
OATI Jul-13 13.7 11.3 9.1 6.4 -6.9 -9.1 25.1 18.5 3.1 -5.7
TIPS Jul-12 -9.1 -11.0 -7.3 -9.3 3.5 1.4 57.2 48.3 -29.3 -55.2
UKTi Aug-13 -5.7 -8.7 20.5 17.6 -6.1 -8.7 49.6 40.8 6.0 -11.1
5y
OATei Jul-15 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0
OATi Jul-17 12.7 9.7 9.9 6.6 -10.5 -13.4 16.0 6.8 10.6 -7.0
TIPS Apr-15 6.6 3.7 5.1 1.8 -1.2 -4.1 13.5 4.5 10.3 -7.2
UKTi Jul-16 -1.2 -4.4 -0.7 -3.9 3.0 -0.2 22.5 11.1 4.2 -21.0
JGBI-4 June-15 -0.4 -1.2 -2.7 -3.4 -5.2 -6.0 -7.1 -9.5 24.1 18.2
10y
OATei Jul-20 7.1 4.5 5.9 2.9 -4.5 -7.1 10.3 2.2 9.8 -5.9
OATI Jul-19 5.5 2.7 4.4 1.2 -0.6 -3.4 11.5 3.0 9.9 -6.6
TIPS Jul-20 0.3 -2.9 0.6 -2.7 2.3 -0.9 13.2 2.2 7.6 -14.9
UKTi Nov-22 6.8 3.7 5.7 2.6 3.4 0.4 12.3 2.8 15.4 -3.5
JGBI-16 June-18 0.1 -0.9 0.1 -0.9 -2.8 -3.9 -3.1 -6.2 16.5 9.6
30y
OATei Jul-40 2.8 1.3 2.3 0.7 -1.6 -3.0 4.1 -0.3 4.1 -4.1
OATI Jul-29 3.3 1.3 2.7 0.5 -0.1 -2.1 7.3 1.1 6.9 -4.6
TIPS Feb-40 0.4 -1.7 0.5 -1.7 1.2 -0.9 6.2 -1.0 4.7 -9.5
UKTI Mar-40 2.7 0.8 2.3 0.3 1.3 -0.5 4.7 -1.2 5.5 -5.9
Source: BNP Paribas
Herve Cros / Shahid Ladha / Sergey Bondarchuk 16 December 2010
Market Mover, Non-Objective Research Section
56
www.GlobalMarkets.bnpparibas.com

Technical Analysis – Interest Rates & Commodities
Bond & Short-Term Contracts
• Europe 10y: Still weak MT within a ST rising channel & now close to key 3.08/3.11 (LT 38.2%+MT 61.8%)
• US 10y: Break above 3.37 (MT 61.8%) increased MT weak bias for LT falling resistance (3.68)
• Short-term contracts m1: ST toppish bias on ED (risk of top H&S) & Euribor (falling ABC to develop?)
Equities & Commodities
• WTI (Cl1): Sill up MT within MT rising channel but stalling below 90.19 top with risk of further ST consolidation
• Equity markets: MT positive bias persists with new tops in US while European markets remain rather toppish
US 10y: Break above 3.37 (MT 61.8%) calls for key 3.68 MT Trend: Up Range: 3.25/3.58
MT SCENARIO remains up
Market broke decisively above 2.96 (wave “3”
top) early December to then extend rising
wave “5”. This strengthened MT bearish
scenario with a move above critical 3.37 (MT
61.8%), which is now targeting 3.68 (LT
falling resistance line) & then on a breakout
4.00/4.07 (April top & LT 61.8%). Trend
indicators (DMI+MACD) are up oriented again
2.80

Germany 10y: Stalling below MT 61.8%. Beware of a ST rising channel break MT Trend: Up Range: 2.80/3.10
MT SCENARIO is still up
2.64 3.70
Negative break above MT falling channel and
2.50 (wave “1” top) allowed the rising wave
“3” to develop beyond key 2.64 (LT falling
wedge res) to extend MT rise towards key
3.08/3.11 (LT 38.2%+MT 61.8%) area initially
within a ST rising channel. A break would see
an extension towards 3.39 (LT 50%) then
ALTERNATIVE SCENARIO...ST correction
Current ST correction in wave “3” will stall &
end below key 3.11 (MT 61.8%) and it will
then resume fall for a classic pullback towards
2.62/64/69 (61.8%+LT falling wedge res + ST
38.2%) with 2.79 & 2.70 (38.2, 50%) before.
Slight bearish divergences on daily RSI could
help such a scenario to develop.
STRATEGY
Sell stop 2.95 S/L 3.01 for 2.70/2.80
UK 10y: Negative within ST rising wedge towards MT 61.8% (3.73) MT Trend: Up Range: 3.40/3.75
MT SCENARIO remains up
3.14 4.30
Break above bottom 2-dip neckline turned MT
bias negative. It took sharply the way up with
3.53/3.55 (MT 50%+end-July top+2-dip
target) now overcome for a move towards
critical 3.73 (MT 61.8%) & 3.83 (LT falling
wedge resistance). Trend indicators (DMI &
MACD) remain up but RSI looking expensive
ALTERNATIVE SCENARIO… ST correction
It will now stall below MT 61.8% at 3.73 &
take the way down again with a break then
below MT rising wedge support (3.49) to
extend correction towards 3.33 (ST 50%) &
3.23 (ST 50%) initially. A break below 61.8%
(3.14) is needed to rekindle the previous MT
falling bias towards 2.79 (last low)
STRATEGY
Buy break below 3.49, for 3.33 S/L 3.54.
S&P: Above key 1228 but is the corrective wave “IV” now over or not? MT Trend: Up Range: 1180/1260
MT SCENARIO is still up
1129

IR Strategy: Track Record for 2010
During 2010, we proposed 60 strategies (25 of them medium-term) with an average hit ratio of 62% across all portfolios. Total
P/L for the year stands at EUR 1550k with a significant contribution coming from linkers, yield-curve and money-market
strategies. In terms of currency distribution, both EUR and GBP strategies contributed significantly (EUR+1600k). Risk analysis
suggests a stabilisation of average risk per trade relative to 2009. The 2010 investment environment has been characterised by
abundant central bank liquidity, high volatility in sovereign risk premia and a strong performance by risky assets.
Track Record Summary 2010
Total number of trades 60 Tactical positions (near-term trade ideas) 35
Total P/L (bp) during the period 165 Hit ratio 61%
Total P/L (EUR k) during the period 1550 Risk/Reward 2.2
Hit ratio 62% Strategic positions (medium-term trends) 25
Average dv01 (EUR k) 9.0 Hit Ratio 63%
Average P/L (EUR k) 27.5 Risk/Reward 4.5
Risk/Reward 3.1
2010 Valuation (EUR) 2010 Valuation (Basis Points)
Short-term Linkers Cash/Swaps Box/Cross Options
Total P/L (EUR k) 293 840 525 -13 -93
Share 23% 11% 44% 2% 20%
P/L contribution 19% 54% 34% -1% -6%
Avg. Profit 58 120 61 #DIV/0! 51
Avg. Loss -71 #DIV/0! -64 -13 -19
Avg. P/L ratio 0.8 #DIV/0! 1.0 #DIV/0! 2.6
% profitable 71% 100% 67% 0% 17%
Max profit 117 265 240 -13 66
Max loss -103 8 -122 -13 -80
Short-term Linkers Cash/Swaps Box/Cross Options
Total P/L (bp) 39 69 77 -10 -9
Share 23% 11% 44% 2% 20%
P/L contribution 23% 42% 46% -6% -5%
Avg. Profit 7 10 8 #DIV/0! 11
Avg. Loss -9 #DIV/0! -8 -10 -3
Avg. P/L ratio 1 #DIV/0! 0.9 #DIV/0! 4
% profitable 71% 100% 70% 0% 17%
Max profit 12 27 24 -10 11
Max loss -12 1 -16 -10 -9
1000
P/L Contribution by Strategy (EUR P/L)
1200
P/L Contribution by Currency (EUR P/L)
800
EUR P/L by strategy
1000
EUR P/L by ccy
600
800
600
400
400
200
200
0
0
-200
Money Market Linkers Curve Cross Ccy Options
-200
EUR USD GPB Other
P/L Evolution in 2010
P/L Evolution over Three Years
1800
1600
1400
1200
EUR (k)
Single Trade P/L
Cumulatd EUR P/L 2010
3000
2500
2000
EUR (k)
Single Trade P/L
Cumulated EUR P/L
1000
1500
800
1000
600
500
400
200
0
0
-500
-200
-1000
Source for all Charts & Tables: BNP Paribas
Interest Rate Strategy 16 December 2010
Market Mover, Non-Objective Research Section
59
www.GlobalMarkets.bnpparibas.com

Looking for Value in the North
• Heading into 2011, the outlook for the
eurozone is clouded by persistent problems in
peripheral Europe.
Chart 1: Sweden GDP Outperformance
• The key risk for the EUR is data from Spain
as the risk of a double-dip recession leaves the
currency vulnerable to a larger-scale debt crisis.
• Look north for the value in Europe. Norway
and Sweden are good ways to position for the
underlying strength in core Europe.
• Both countries have solid macro
fundamentals with a tightening bias for
monetary policy.
• We recommend buying both the NOK and
SEK against the EUR going into 2011.
Summary
Heading into the New Year, concerns over the
eurozone periphery continue to dominate as
investors question whether Portugal and Spain will
be next. Within Europe, there are two shining stars in
the north, Norway and Sweden. While the EUR
outlook may be clouded by an assortment of risks,
the SEK and NOK serve as good proxies for the EUR
without the burden of the problems in the periphery.
Macroeconomic fundamentals give the Scandinavian
countries the edge, with both Sweden and Norway
recovering well. Also, valuations against the euro
suggest that there is further room for gains. Sweden
in particular is a good proxy for the EUR given that it
is part of the EU, maintains strong balance sheets
and has similar export characteristics to Germany. It
is the closest thing to betting on Germany’s
economic performance without worrying about
vulnerabilities within EMU. The main risk for the SEK
is the tightening in global liquidity as Asian central
banks try to fend off inflationary pressures. In a riskoff
environment, the NOK would be the favoured
currency. In either scenario, we remain bullish on
both the NOK and SEK against the EUR.
European constraints
Now that Ireland and Greece have both been bailed
out, markets have shifted their focus to who will be
next: Portugal, Spain or both. It was reported that
Portugal was pressured by other states to take on a
bailout package to prevent the fall of Spain.
However, this has not come to pass. The lack of a
unified message from EU officials has kept the
markets jittery, with macroeconomic fundamentals in
peripheral Europe set to keep the eurozone in a
Source: BNPP Bloomberg: The Swedish economy is expected to
outperform the eurozone and US in the upcoming year. This should
provide further support for the SEK as growth remains subdued elsewhere
in the G10.
Chart 2: Norway’s Government Surplus vs.
EURNOK
Source: Bloomberg, BNP Paribas. Note: Healthy government balances
should keep NOK well supported especially as the scrutiny sovereign debt
takes hold into 2011.
vulnerable position as we head into 2011. Growth in
the periphery will be constrained by fiscal austerity
measures. Large spending cuts including in public
wages and higher taxes will reduce personal
consumption. Investment is also likely to decline.
External trade will need to be the saving grace if the
peripheral nations are to be dragged out of
recession. Greece, Portugal and Ireland will all have
an impact on the eurozone. However, the key risk for
the EUR heading into 2011 is economic data from
Spain, the fourth-largest economy in the eurozone.
Our base-case scenario is that Spain will head into a
double-dip recession. This would reduce tax
revenues, increase fiscal spending, cut asset values
even more and worsen the banks’ balance sheets.
Mary Nicola 16 December 2010
Market Mover, Non-Objective Research Section
60
www.GlobalMarkets.bnpparibas.com

Spain’s ambitious budget targets coincide with
optimistic assumptions on nominal growth. As such,
we expect them to be missed – only deepening the
gloom over Spain.
The other problem the eurozone will face next year is
the disparity in growth rates between core and
peripheral Europe. Growth in Germany is expected to
moderate in 2011 but should remain strong. External
demand will drive growth, especially as emerging
markets’ expansion continues. About 16% of total
German exports end up in Asia. This divergence in
growth within EMU will leave the ECB with a policy
dilemma as one part of the eurozone will need loose
monetary policy and the other part will need tighter
monetary policy. Loose monetary policy may have to
remain in place to allow the peripheral just to muddle
through. This growing divergence between the core
of Europe and the periphery will add to pressure on
the euro.
Norway and Sweden: the favoured ones
While the EUR will remain vulnerable to events in
peripheral Europe, the NOK and SEK will be proxies
for performance of the eurozone core. Economic
fundamentals in both countries support a bullish view
on the Scandies, which will likely lead to further rate
hikes by both central banks in 2011. While the
Norges Bank sat on its hands this week, it did adopt
a more hawkish tone. The Riksbank, however,
increased the repo rate by 25bp to 1.25%, making
clear in the accompanying statement that further
hikes are in the pipeline.
Unlike the eurozone, Norway’s consumer and
government sectors are both relatively strong. While
much of the eurozone must restore its balance
sheets, leading indicators and PMI data underline the
expansionary trend in Norway. Rising oil prices will
boost economic performance. Debt levels in Norway
remain low and the current account surplus is robust.
These dynamics alone warrant NOK appreciation.
While the economy is in good shape, the Norges
Bank has been reluctant to hike interest rates due to
softer inflation. CPI figures have consistently
undershot central-bank and market expectations.
With the more hawkish tone set by the Norges Bank,
we now expect speculation to build for a hike in
March rather than the middle of the year,
compounding the NOK’s strength.
Sweden: Europe’s outperformer
Among European countries, Sweden has been one
of the fastest-growing economies in 2010. Low
government debt and strong current account
surpluses will appeal to investors, especially since
Sweden is part of the European Union – just not the
EMU. With the strong growth seen over the last year,
this week’s hike from the Riksbank will lead to
Chart 3: EURNOK Spot vs. EURNOK PPP
Source: Bloomberg, BNPParibas. EURNOOK spot is trading around PPP
levels after being significantly “undervalued” for some time. In light of
potential tight liquidity in 2011, the NOK is a safe trade given its defensive
qualities.
Chart 4: EURSEK Spot vs. EURSEK PPP
Source: Bloomberg, BNP Paribas. Note: Current EURSEK spot levels is
above EURSEK PPP. Based on this, the SEK is of particularly good value
against the EUR as there is strong justification for further appreciation.
SEK appreciation against the EUR will only bring it to its “fair value” level.
speculation that the pace of tightening will be
maintained into 2011. The central bank increased its
growth forecast for 2011 to 4.4% vs. 3.8% and the
inflation forecast was raised to 2.2% from 1.7% in
2011. CPI is nearing the Riksbank’s 2% target, with
the headline rate coming in at 1.8% y/y in November.
Swedish house prices have risen for eighteen
consecutive months, increasing an annual 5% in the
three months through October. The Riksbank
Governor said that he personally tracks household
credit when deciding rate policy. Interest rate
differentials will spark further strength of the SEK,
which may lead to a decline in competitiveness
against Sweden’s trading partners.
Nevertheless, the strength of the domestic economy
underscores the need to hike interest rates. The real
economy, particularly the labour market, is
recovering well.
Mary Nicola 16 December 2010
Market Mover, Non-Objective Research Section
61
www.GlobalMarkets.bnpparibas.com

The currency side of the story
Growth and interest rate differentials suggest that
both the NOK and SEK will outperform the EUR and
even the USD in 2011. But what is the story on the
currency front? The market was significantly short
USD on the back of the prospects of QE2. This
provided some support for both the EUR and SEK, in
particular the SEK as it benefited from the pick-up in
risk appetite and the liquidity trade. The NOK, on the
other hand, did not reap the same benefits as its
defensive qualities kept it relatively stable.
As 2011 approaches and global liquidity drops off on
the back of Asia policy tightening, the NOK may
outperform the SEK but they will both outperform the
EUR. From a valuation perspective, EURNOK is
trading around the PPP level while EURSEK is
trading above the PPP level. This implies that further
appreciation against the EUR is warranted,
especially for the SEK.
Against the USD, both the NOK and SEK spot values
are above the PPP values. This may suggest that
they are not good buys against the USD. However, it
is worth noting two things. First, as shown in Charts 5
and 6, they are no longer at extreme levels. Second,
the USD was arguably used as a funding currency
for much of 2008 and again in recent months on the
anticipation of QE2. Short USD positioning was at an
extreme over the past few months.
The risks to NOK and SEK in 2011
While both currencies look attractive, there are a few
risks worth noting. Global risk appetite is of particular
importance to these two countries. The SEK benefits
in a risk-on environment while the NOK gains in riskoff.
For example, when China allowed faster appreciation
of its currency in September, the SEK’s beta to CNY
appreciation was similar to that of the AUD. This was
mostly on the back of the improvement in risk
appetite rather than Sweden’s links to China (these
are fairly limited). In 2011, Asia will have to start
tightening more aggressively than they have been,
thereby limiting the ample global liquidity that had
been provided by central banks around the world.
On the back of that, the NOK should outperform the
SEK. In addition, OPEC is calling for USD 100/bbl as
a fair price for oil. If there is a significant rise in oil
prices, again the NOK should outperform the SEK.
However, if Asia allows for faster FX appreciation as
a way to offset inflationary pressures, then the riskon
environment will take hold and the SEK will likely
outperform the NOK. Moves against the USD will be
a function of risk appetite as well.
Chart 5: USDSEK Spot vs. USDSEK PPP
Source: Bloomberg, BNP Paribas. Note: USDSEK is currently trading
below the USDSEK PPP, suggesting that SEK is “overvalued” against the
USD. However, it is important to note that it is not at extreme levels as
seen in 2008. The USD was weakened as it was being used as a funding
currency as prospects of QE2 came to light.
Chart 6: USDNOK Spot vs. USDNOK PPP
Source: Bloomberg, BNP Paribas: USDNOK spot is also trading below
USDNOK PPP implying that NOK is “overvalued” against the USD. Like
the SEK it is not trading at extreme levels as seen back in 2008 before the
peak of the financial crisis and the start of the USD unwind.
Also, the pace of rate hikes in Norway versus
Sweden will to some degree depend on how the
currencies perform. We expect the Riksbank to be
more hawkish than the Norges Bank, finding support
for the SEK. The Riksbank may nevertheless be
cautious on hiking too fast as the SEK’s appreciation
against the EUR, its key trading partner, could
present roadblocks for the recovery.
Weakness in the eurozone periphery will position the
two Scandie currencies as the more favoured
currencies by investors. Sweden serves as a good
proxy for Germany’s likely strong growth in 2011
given their similar export characteristics. We expect
the SEK to outperform the NOK in early 2011, but
gains will slow if risk appetite is challenged and NOK
will outperform the SEK. But given the differing
characteristics of the SEK and NOK, we recommend
buying both these currencies against the EUR.
Mary Nicola 16 December 2010
Market Mover, Non-Objective Research Section
62
www.GlobalMarkets.bnpparibas.com

USD Rebound Tests Resistance
• The USD recovery continued this week versus EUR, GBP and JPY but now faces strong resistance
• This is reflected by strong EURUSD and GBPUSD support at 1.3165 and 1.5485, and strong
USDJPY and US Dollar Index resistance at 84.60 and 80.40
• AUDUSD, a key leader of the risk-on rally during the past six months, is potentially forming a head
and shoulders top, with a break of key 0.9750 support risking a medium-term sell-off
• The decline in IMM futures trading volume suggests the seasonal slowdown in FX trading activity
has begun, creating volatile swings in the process
Based on data from the Chicago Mercantile
Exchange, it seems the seasonal slowdown in FX
trading activity has begun, with Monday’s trading
volume in EURUSD futures falling 18% below the
30-day moving average for volume. Reduced
liquidity during the latter part of December has a
tendency to exaggerate currency swings, and
volatile swings could continue into year-end.
Recent wide swings in EURUSD have muddled the
chart pattern. As a result of overlapping moves,
both the powerful November decline (1.4280-
1.2965) and the December rebound (1.2970-
1.3498) have counter-trend features. On balance,
this suggests watching key support at
1.3165/1.3080, and key resistance at
1.3500/1.3625. Currently EURUSD is under the
bearish influence of declining weekly and daily
momentum indicators. This risks breaking 1.3165
and 1.3080 support, sparking a re-test of the 1.2965
November 30 low. One caveat: despite the 10-cent
November collapse which created a bearish key
reversal month amid one of the sharpest monthly
declines on record, EURUSD monthly momentum
remains neutral. Also, bearish weekly momentum
has entered the oversold zone (28% on the 8-week
stochastic) and is currently more oversold than at
the 1.2590 August low. These monthly and weekly
momentum factors, combined with counter-trend
chart pattern features, suggest a fair probability key
1.2965 support will hold, with EURUSD holding
between 1.2965-1.35 for the rest of December.
Confirming recent USD strength will not only require
knocking EURUSD below 1.2965 support, but also
validation via driving GBPUSD and AUDUSD below
key support at 1.5485 and 0.9825, respectively, and
the US Dollar Index (DXY) above 80.40 key
resistance. Watch AUDUSD. On the bearish side,
Tuesday’s 1.0024 high smacks of the “right
shoulder” in a potential head and shoulders bearish
reversal pattern (“left shoulder” at the 1.0003
October 15 high; “head” at the 1.0183 Nov 5 peak).
Although not a textbook example, the important
point is that Aussie could be forming an important
secondary top near 1.0030/50 resistance: a
subsequent break of 0.9750 support would be the
initial signal for a deeper decline with scope to test
and even crack the 0.9535 Dec 1 low.
Chart 1: EURUSD – Nears test of key 1.2965 support
At nearly 10 cents, the
severe November
1.44
decline off 1.4280 has
the potential to kick-off
1.40
1.3690
a longer-term decline
towards pivotal 1.36
support from the
1.3335
Aug/Sep base at 1.32
1.2590-1.2642.
However, recent
erratic trading and
pattern analysis
suggest scope for
holding above 1.2965
support as 1.30-1.35
1.28
1.24
1.20
1.2642
trading occurs into
1.1875
year-end. 1.16
23-Apr-10 22-Jun-10 19-Aug-10
1.4280
1.4160
1.2965
18-Oct-10 15-Dec-10
Source: BNP Paribas
Andrew Chaveriat 16 December 2010
Market Mover, Non-Objective Research Section
63
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Chart 2: AUDUSD – Head and shoulders top may be forming
Although not a classic
1.0180
example by any means,
1.02
the past 2 months of A$
trading resemble a head
& shoulders bearish 0.98
reversal pattern.
0.9380
Critically, this week’s 0.94
high is stalling close to
0.9220
resistance from the mid-
0.90
Oct high (“left shoulder”)
0.8860
below the 1.0183 Nov
0.8770
peak (“head”). Mixed 0.86
momentum indicates a
break below 0.9750 0.82
0.8315
support is an open
question: but if seen, a
0.8085
medium-term decline 0.78
would be favoured
23-Apr-10 22-Jun-10 19-Aug-10 18-Oct-10
Source: BNP Paribas
Chart 3: EURGBP – Retracing the autumn decline
The breakout above the
Oct down channel plus 0.89
bullish daily momentum
0.8810
and multiple bullish daily 0.88
divergence suggest the
0.87
Oct-Dec decline is being
retraced. We expect 0.86
0.8530
bullish
weekly
momentum to arrive 0.85
soon, for the first time
0.84 0.8425
since mid-Oct. Anchored
by the recent 0.8332/48 0.83
double-bottom, we favour
a choppy rebound initially 0.82
targeting 0.8565-0.8600, 0.81
0.8140
and then 0.8635/50 over
0.8065
the next 2-4 weeks 0.80
23-Apr-10 22-Jun-10 19-Aug-10
18-Oct-10
0.8940
0.9535
15-Dec-10
0.8510
0.8345
15-Dec-10
Source: BNP Paribas
Chart 4: USDKRW – Higher toward 1190 and potentially 1210
The April/Nov twinbottom
just above 1100
1330
psychological support is
an ideal way to complete
the May decline off 1277 1280
1277
and begin a multi-month
rebound. The dollar
rebound is driven by 1230
bullish
weekly
momentum, currently as
1199
1185
strong as during the
explosive Apr-May jump. 1180
The support base at 1130
1167
is seen holding as a
medium-term rebound 1130
extends toward 1190,
and if exceeded, 1210
1115
1107
(61.8% retracement of
1103
1080
the May-Nov decline).
07-Jan-10 08-Mar-10 05-May-10 02-Jul-10 31-Aug-10 28-Oct-10
Source: BNP Paribas
Andrew Chaveriat 16 December 2010
Market Mover, Non-Objective Research Section
64
www.GlobalMarkets.bnpparibas.com

Currency Spot Trade Recommendations Date
EURAUD 1.3400 Short 1.3930, lower stop to 1.3600, target 1.2930 19 Nov 2010
EURCHF 1.2810 Short from 1.3475 achieved the 1.2775 target 17 Nov 2010
USDKZT 147.56 Short at 147.00, stop at 149.50, target 135.00 28 May 2010
Source: BNP Paribas
Andrew Chaveriat 16 December 2010
Market Mover, Non-Objective Research Section
65
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Economic Calendar: 17 - 31 December
GMT Local Previous Forecast Consensus
Fri 17/12 07:45 08:45 France Industry Survey : Dec 100 102 102
08:00 09:00 Norway Unemployment Rate : Dec 2.7% 2.7% 2.8%
08:45 09:45 Eurozone ECB’s Weber Speaks in Munich
10:00 11:00 Foreign Trade Balance (sa) : Oct EUR2.4bn EUR2.0bn n/a
12:45 13:45 ECB’s Honohan Speaks in Dublin
09:00 10:00 EU EU Leaders Conclude Summit in Brussels
09:00 10:00 Italy Industrial Orders y/y : Oct 17.9% 20.0% 16.0%
09:00 10:00 Germany Ifo Business Climate : Dec 109.3 109.8 109.0
09:00 10:00 Ifo Expectations : Dec 106.3 106.8 106.0
09:00 10:00 Ifo Current Conditions : Dec 112.3 112.8 112.5
14:00 15:00 Belgium Consumer Confidence : Nov 0 0 n/a
15:00 10:00 US Leading Indicators m/m : Nov 0.5% 1.0% 1.1%
Mon 20/12 07:00 08:00 Germany PPI m/m : Nov 0.4% 0.4% 0.4%
07:00 08:00 PPI y/y : Nov 4.3% 4.6% 4.6%
08:30 09:30 Neths Consumer Confidence : Dec -7 -5 n/a
09:00 10:00 Eurozone Current Account (sa) : Oct EUR-13.1bn EUR-2.0bn n/a
Tue 21/12 Japan BoJ Rate Announcement
00:01 00:01 UK GfK Consumer Confidence : Dec -21 -22 -21
09:30 09:30 PSNCR : Nov GBP2.4bn GBP14.7bn n/a
09:30 09:30 PSNB : Nov GBP9.7bn GBP17.0bn GBP16.8bn
00:30 11:30 Australia RBA MPC Minutes
07:00 08:00 Germany GfK Consumer Confidence : Jan 5.5 5.7 5.7
08:00 09:00 Sweden Consumer Confidence : Dec 22.6 22.0 n/a
10:00 11:00 Italy Unemployment Rate : Q3 8.5%
12:00 07:00 Canada CPI m/m : Nov 0.4% 0.3% n/a
12:00 07:00 CPI y/y : Nov 2.4% 2.2% n/a
12:00 07:00 Bank of Canada Core CPI m/m : Nov 0.4% 0.2% n/a
12:00 07:00 Bank of Canada Core CPI y/y : Nov 1.8% 1.7% n/a
Wed 22/12 23:50 08:50 Japan Trade Balance (nsa) : Nov JPY821.3bn JPY510.1bn JPY480.1bn
(21/12)
08:30 09:30 Sweden PPI m/m : Nov -0.7% 0.3% n/a
08:30 09:30 PPI y/y : Nov 2.3% 1.7% n/a
08:30 09:30 Italy ISAE Consumer Confidence : Dec 108.5
09:00 10:00 Retail Sales y/y : Oct 0.3%
10:00 11:00 Wages y/y : Nov 1.5%
09:00 10:00 Norway Unemployment Rate (sa) : Oct 3.5% 3.5% n/a
09:30 09:30 UK BoE MPC Minutes
09:30 09:30 GDP (Final) q/q : Q3 0.8% (p) 0.8% 0.8%
09:30 09:30 GDP (Final) y/y : Q3 2.8% (p) 2.8% 2.8%
09:30 09:30 Current Account : Q3
13:30 08:30 US GDP (Final, saar) q/q : Q3 2.5% (p) 2.5% 2.8%
13:30 08:30 GDP Deflator (Final, saar) q/q : Q3 2.3% (p) 2.3% 2.3%
13:30 08:30 Corporate Profits (Rev, saar) q/q : Q3 2.8% (p) 2.7% n/a
15:00 10:00 Existing Home Sales : Nov 4.43mn 4.74mn 4.71mn
15:00 10:00 FHFA House Prices m/m : Oct
15:30 10:30 EIA Oil Inventories
14:00 15:00 Belgium Business Confidence : Dec 0.8 1.0 n/a
Thu 23/12 Japan Public Holiday
07:45 08:45 France Household Consumption m/m : Nov -0.7% 1.1% n/a
07:45 08:45 Household Consumption y/y : Nov -0.3% -0.3% n/a
07:45 08:45 PPI m/m : Nov 0.8% -0.1% n/a
07:45 08:45 PPI y/y: Nov 4.3% 4.0% n/a
08:30 09:30 Neths GDP (Final) q/q : Q3 -0.1% (p) -0.1% n/a
08:30 09:30 GDP (Final) y/y : Q3 1.8% (p) 1.8% n/a
10:15 11:15 Belgium CPI m/m : Dec 0.1% 0.4% n/a
10:15 11:15 CPI y/y : Dec 2.9% 3.1% n/a
Market Economics 16 December 2010
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GMT Local Previous Forecast Consensus
Thu 23/12 13:30 08:30 US Durable Goods Orders m/m : Nov -3.4% -0.5% -0.6%
(Cont.) 13:30 08:30 Personal Income m/m : Nov 0.5% 0.2% 0.3%
13:30 08:30 Personal Spending m/m : Nov 0.4% 0.5% 0.5%
13:30 08:30 Initial Claims 420k 425k 420k
14:55 09:55 Michigan Sentiment (Final) : Dec 71.6 74.3 74.5
15:00 10:00 New Home Sales : Nov 283k 300k 300k
13:30 08:30 Canada GDP m/m : Oct
Fri 24/12 US Public Holiday
10:00 11:00 Switzerland SNB Quarterly Bulletin
14:00 15:00 France Job Seekers (sa) : Nov -20k -10k n/a
Mon 27/12 Holiday UK, Canada
Japan BoJ Minutes
05:00 14:00 Housing Starts y/y : Nov 6.4% -0.6% n/a
08:30 09:30 Neths Producer Confidence : Dec 0.3 0.5 n/a
Tue 28/12 Holiday UK, Canada
23:30 08:30 Japan CPI National y/y : Nov 0.2% 0.0% n/a
23:30 08:30 Core CPI National y/y : Nov -0.6% -0.6% n/a
23:30 08:30 CPI Tokyo y/y : Dec 0.2% 0.1% n/a
23:30 08:30 Core CPI Tokyo y/y : Dec -0.5% -0.5% n/a
23:30 08:30 Household Consumption y/y : Nov -0.4% 0.4% n/a
23:30 08:30 Unemployment Rate (sa) : Nov 5.1% 5.0% n/a
23:50 08:50 Industrial Production (sa) m/m : Nov -2.0% 1.0% n/a
23:50 08:50 Retail Sales y/y : Nov -0.2% 1.4% n/a
(27/12)
06:30 07:30 France GDP (Final) q/q : Q3 0.4% (p) 0.4% n/a
06:30 07:30 GDP (Final) y/y : Q3 1.8% (p) 1.8% n/a
07:45 08:45 Housing Starts (nsa, 3-mths) y/y : Nov 2.3% 3.0% n/a
08:30 09:30 Sweden Retail Sales (sa) m/m : Nov 0.8% 0.4% n/a
08:30 09:30 Retail Sales (nsa) y/y : Nov 5.1% 5.5% n/a
14:00 09:00 US S&P/Case-Shiller Home Price Index : Oct
15:00 10:00 Consumer Confidence : Dec 54.1 57.0 54.5
Wed 29/12 08:00 09:00 Spain Retail Sales y/y : Nov -2.8%
09:00 10:00 Eurozone M3 y/y : Nov 1.0% 1.5% 1.6%
09:00 10:00 M3 y/y (3-Mth) : Nov 1.1% 1.2% 1.2%
Germany States Cost of Living m/m : Dec 0.1% 1.0% 0.9%
States Cost of Living y/y : Dec 1.5% 1.7% 1.5%
HICP (Prel) m/m : Dec 0.1% 1.1% n/a
HICP (Prel) y/y : Dec 1.6% 1.8% n/a
09:30 09:30 UK BoE Housing Equity Withdrawal : Q3
10:30 11:30 Switzerland KoF Leading Indicator : Dec 2.12 2.08 n/a
15:30 10:30 US EIA Oil Inventories
Thu 30/12 08:30 09:30 Italy ISAE Business Confidence : Dec 101.6
08:10 09:10 Eurozone Retail PMI : Dec 51.3 52.0 n/a
08:30 09:30 Eurocoin : Dec 0.45 0.50 n/a
13:30 08:30 US Initial Claims
14:45 09:45 Chicago PMI : Dec 62.5 61.0 61.0
Fri 31/12 Holiday US, Germany, Italy, Spain, Sweden
During 29-31 UK Nationwide House Prices Index m/m : Dec -0.3% -0.3% n/a
Week Nationwide House Prices Index y/y : Dec 0.4% -0.3% n/a
Release dates and forecasts as at c.o.b. prior to the date of publication: See Daily Economic Spotlight for any revision
Source: BNP Paribas
Market Economics 16 December 2010
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67
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Key Data Preview
120
115
110
105
100
95
90
85
80
Chart 1: German Ifo Business Climate
Expectations (4-Mth Lag)
Current Conditions
75
93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10
Source: Reuters EcoWin Pro
Dec (f) Nov Oct Sep
Headline 109.8 109.3 107.7 106.8
Expectations 106.8 106.3 105.2 103.9
Current Conditions 112.8 112.3 110.2 109.8
Key Point:
Sentiment will remain elevated, with the economic
expansion broadening out.
BNP Paribas Forecast: Still Going Strong
Germany: Ifo Business Climate (December)
Release Date: Friday 17 December
Ifo’s business climate index improved for the sixth straight
month in November, rising above its high point during the
previous expansion from 2005 to 2008.
The sub-indices measuring current business conditions
and future expectations both improved last month, with the
former at a very elevated level (see chart).
The assessment of current business conditions in Germany
is still a little short of its cycle high in 2006 (115.5) and we
expect a further improvement in December.
The improvement in Ifo’s sentiment surveys was initially
due to the exceptional strength in the manufacturing and
export sectors but domestic sectors, including retail, have
also shown a pronounced improvement more recently. The
business climate index for the retail sector has risen to its
strongest level since the early 1990s. Survey participants
have signalled a moderation in the rate of externally-driven
growth relative to the spring peaks but domestic demand is
picking up the baton.
The latest ‘hard’ activity data have been strong in
Germany, with industrial output rising at its fastest m/m rate
for six months in October. This points to a further pick-up in
expectations, though this could be tempered by the recent
sharp rise in bond yields.
Chart 2: French Business Surveys (Normalised)
125
120 Manufacturing
115
110
105
100
95
90
85
Services
80
75
70
65
00 01 02 03 04 05 06 07 08 09 10
Source: Reuters EcoWin Pro
SA Dec (f) Nov Oct Dec 09
Services Index 102 102 101 90
Manufacturing Index 102 100 102 88
Overall Manuf. Outlook 10 8 8 -5
Own Manuf. Outlook 14 11 16 4
Key Point:
We expect a technical recovery in manufacturing,
but there is no post-recession catch-up in sight.
BNP Paribas Forecast: Modest Gain
France: Monthly Industrial Survey (December)
Release Date: Friday 17 December
The correction of manufacturing confidence in November
can be partly explained by social unrest and its impact on
the chemical industry. This should be temporary, and we
forecast a production catch-up starting in November.
Apart from the automobile industry, orders have been
relatively robust recently, which should support confidence
and output in the coming months.
It is important to highlight that, contrary to what has
happened in Germany, the recession is being followed by
normalisation but no real catch-up. Headline indices for
services as well as for manufactured goods have both
been in a narrow range, from 99 to 102, during the last
three months. There is still plenty of scope for production to
increase, as the low capacity utilisation ratio shows, should
demand be strong enough.
The French economy is trapped between dynamic northern
Europe and poor-performing southern Europe. This may
have to do with geography, but it is also due to
competitiveness. We are thus moderately confident about
the growth outlook for France.
Market Economics 16 December 2010
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Key Data Preview
Chart 3: Canadian Inflation
BNP Paribas Forecast: Moderate Pressure
Canada: CPI (November)
Release Date: Tuesday 21 December
Source: Reuters EcoWin Pro
m/m % Nov (f) Oct Sep Aug
CPI 0.3 0.4 0.2 -0.1
Bank of Canada Core 0.2 0.4 0.2 0.1
Key Point:
Food and energy prices are likely to push prices
higher in November. A moderation in shelter prices
is likely to be followed by a decline in the coming
months.
We expect Canadian headline CPI to increase by 0.3% in
November, as higher energy prices continue to pressure
headline inflation. Consequently, headline inflation should
moderate to 2.2% y/y in November from a rate of 2.4% y/y
in October.
The Bank of Canada core CPI is expected to increase by
0.2% m/m in November. Shelter costs are likely to be a
significant factor in November’s reading. We are expecting
moderation close to 0.1% m/m—coming off the significant
0.6% increase in October. Note that food, shelter, and
transportation prices make up 63.5% of the headline
inflation index.
Going forward, the main upside risks to the inflation outlook
are higher commodity prices. On the other hand, a
deceleration in the growth of unit labour costs, the relatively
strong CAD weighing on import costs, and a more
pronounced correction in the housing market should limit
core inflation growth.
Chart 4: Japan: Trade Balance (JPY bn, s.a.)
1400
1200
1000
800
600
400
200
0
-200
-400
-600
-800
00 01 02 03 04 05 06 07 08 09 10
Source: Reuters EcoWin Pro
JPYbn Nov (f) Oct Sep Aug
Trade balance (nsa) 510.1 821.3 788.5 84.0
Trade balance (sa) 691.0 578.5 611.3 580.2
Key Point:
Shipments to China revived sharply in October and
we expect overall real exports to pick up the pace in
November.
BNP Paribas Forecast: Larger Surplus
Japan: Trade data (November)
Release Date: Wednesday 22 December
Based on trade data through mid-November, we expect
nominal exports and nominal imports will both increase for
the month as a whole, with the result that the seasonally
adjusted trade surplus expands. Owing to the yen’s
appreciation (which causes yen-based prices to decline for
imports and exports), nominal exports and imports have
been trending lower. Real exports (adjusted for exchange
rate and price fluctuations) have also lost momentum since
May, reflecting the fading impact of overseas inventory
restocking and fiscal stimulus. Even so, the slowdown by
exports to China, Japan’s top trading partner, show signs
of reaccelerating, including a double-digit surge in October.
Such strength dovetails with recent Chinese indicators
showing domestic demand is expanding and the Chinese
manufacturing cycle has recovered (manufacturing PMI
has been soaring since bottoming out in July). What is
more, there are signs that the manufacturing cycles in the
US and EU are also starting to turn up. Thus, we expect
the pace of export growth will strengthen moving forward.
In November, we expect real exports and real imports will
both expand.
Market Economics 16 December 2010
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Key Data Preview
Chart 5: US: Existing & Pending Home Sales
Source: Reuters EcoWin Pro
Nov (f) Oct Sep Aug
New Home Sales
(000s saar) 300 283 308 275
Existing Home Sales
(millions saar) 4.74 4.43 4.53 4.12
BNP Paribas Forecast: Up
US: Existing & New Home Sales (November)
Release Date: Wednesday & Thursday 22 & 23 Dec
Existing home sales are expected to jump 7% m/m to
4.74mn annualised units in November, more than offsetting
the last month’s 2.2% decline. Pending sales that are
based on contract signings and lead existing sales by one
to two months jumped 10.4% m/m in November. In
addition, mortgage applications to purchase surged 17.9%
m/m in November, further supporting our forecast for an
increase in existing home sales.
New home sales plunged 8.1% in October to 283k
annualised units. We expect a rebound of 6% m/m to 300k
in November, in line with strong mortgage applications.
Both new and existing home sales remain low by historical
standards and relatively small monthly changes in the
number of homes sold translate into relatively large swings
in growth rates.
Key Point:
Existing home sales are expected to jump 7% m/m
to 4.74mn annualised units while new home sales
should rebound 6% to 300k in November, in line with
strong mortgage applications.
Chart 6: French Sales of Manuf. Goods
8
Manuf. Goods Sales (% y/y, volume)
7
6
5
4
3
2
1
0 Household Confid. (RHS)
-1 Commission Survey
-2
-3
-4
05 06 07 08 09 10
Source: Reuters EcoWin Pro
Volume index Nov (f) Oct Sep Nov 09
SA-WDA
% m/m 1.1 -0.7 1.6 1.2
% y/y -0.3 -0.3 1.2 3.8
Key Point:
Correction of car sales should boost the November
figure. The underlying trend should remain strong.
5
0
-5
-10
-15
-20
-25
-30
-35
-40
BNP Paribas Forecast: Rebounding
France: Hh Consumption of Manuf. Goods (November)
Release Date: Thursday 23 December
Household confidence has been rising since July despite
social unrest. The INSEE index is still very weak in
absolute terms, but the EU Commission puts confidence in
line with long-term average. As a result, durable goods
sales ex-autos have been quite dynamic recently; this
momentum should continue.
Sales of clothes have been relatively robust in the last few
months, printing strong gains vs. weak 2009 levels. This
trend should continue, with the help of cold weather.
Some 90% of the retail sales decline in October was due to
cars; we expect this to be corrected. Car sales, which are
included in the French overall retail sales data, were
boosted last year by car sales incentives. As the incentive
has been halved since last year (to EUR 500), the effect is
weaker this year but has not totally disappeared.
November new car registrations, up 19% m/m but down
10.4% y/y, show this. Car sales will again drive the
headline retail sales data in the last few months of this
year.
According to retailers, Christmas sales are proving
relatively dynamic; this could boost their turnover during
the last weekend of November. The bulk of the benefit
should be visible in the December data (due on 25 January
2011).
Market Economics 16 December 2010
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Key Data Preview
Chart 7: US Confidence vs Consumption
Source: Reuters EcoWin Pro
% m/m Nov (f) Oct Sep Aug
Personal Income 0.2 0.5 0.0 0.5
Consumption 0.5 0.4 0.2 0.3
Core PCE Prices 0.0 0.0 0.0 0.1
Key Point:
A surge in holiday shopping should lead to a solid
gain in spending while income gains will be
subdued.
BNP Paribas Forecast: Solid Spending,
Subdued Income
US: Personal Income & Spending (November)
Release Date: Thursday 23 December
Personal consumption is forecast to rise 0.5% in November
after a similar gain in October. The gain will be driven by a
surge in retail holiday spending while auto purchases were
flat on the month and we look for a modest increase in
service expenditures. The increase would be consistent
with a healthy gain of between 2.5% and 3.0% in overall
consumer spending in Q4 as consumers gain a little more
confidence in the recovery.
Meanwhile personal income is forecast to rise by a
subdued 0.2% in November reflecting weakness in
aggregate hours worked captured in the employment
report. This comes on the heels of a 0.5% surge that was
driven by a more robust increase in wages and salaries.
Smoothing through the monthly volatility, wage and salary
income is growing at a moderate pace serving as a
foundation for continued gains in spending. The more
subdued increase in income should lead the personal
saving rate to move lower.
The core PCE price index is expected to be flat in
November, which would hold the y/y steady at a record low
0.9% where we expect it to be for the next four months.
Headline inflation is expected to rise 0.2% suggesting a
0.3% increase in real consumer spending.
Chart 8: US: ISM Points to Moderation
BNP Paribas Forecast: Small Decline
US: Durable Goods (November)
Release Date: Thursday 23 December
Durable goods orders are expected to fall 0.5% in
November, reflecting a plunge in orders for Boeing aircraft.
Meanwhile, we look for orders ex transportation to rise a
solid 1.5% after plunging 2.7% a month prior. The October
reading was disappointing and contradicts some of the
resilience we have seen in other manufacturing indicators.
Therefore we look for a rebound which would leave
equipment and software investment on a more moderate
but still robust growth trajectory in Q4.
Source: Reuters EcoWin Pro
% m/m Nov (f) Oct Sep Aug
Durable Goods -0.5 -3.4 5.0 -0.8
Ex-Transport 1.5 -2.7 1.3 2.1
Key Point:
A decline in the headline will mask a solid rebound in
orders ex-transportation.
Market Economics 16 December 2010
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Key Data Preview
Chart 9: Japanese Unemployment Rate (% sa)
6.0
5.5
5.0
4.5
4.0
3.5
00 01 02 03 04 05 06 07 08 09 10
Source: Reuters EcoWin Pro
% s.a. Nov (f) Oct Sep Aug
Unemployment rate 5.0 5.1 5.0 5.1
BNP Paribas Forecast: Slight Improvement
Japan: Unemployment rate (November)
Release Date: Tuesday 28 December
We expect the unemployment rate in November to drop
0.1pp to 5.0%, reversing the 0.1pp increase in October.
Basically, though, the jobless rate is still seesawing in the
low 5% range, a pattern that has continued since the rapid
improvement from 5.6% in July 2009 ended in January-
February at 4.9%. Despite the economy’s relatively robust
expansion, job growth continues to lag because
corporations are reluctant to aggressively hire owing to
lingering perceptions of over-staffing.
Although perceptions of excessive employment are steadily
waning, it will be some time before job growth clearly picks
up, especially since the economy looks headed for a
momentary contraction in Q4 due to the winding down of
stimulus programmes and negative payback for frontloaded
demand.
Key Point:
The jobless rate continues to seesaw in the low 5%
range. With the economy likely to contract in Q4, it
will be some time before job growth clearly picks up.
3
2
1
0
-1
-2
-3
Chart 10: Japanese CPI (% y/y)
CPI excluding energy and food, but not alcohol
Core CPI
02 03 04 05 06 07 08 09 10
Source: Reuters EcoWin Pro
% y/y Nov (f) Oct Sep Aug
Core CPI -0.6 -0.6 -1.1 -1.0
CPI 0.0 0.2 -0.6 -0.9
BNP Paribas Forecast: Modest Improvement
Japan: CPI (National, November)
Release Date: Tuesday 28 December
In October, the rate of decline in the national core CPI
improved a sharp 0.5pp from September to -0.6% y/y, due
in large part to the effects of a tobacco tax hike. But even
excluding such one-off policy factors, the “10% trimmed
mean CPI” – which excludes volatile special factors such as
the tobacco tax (contribution:+0.28pp) and the earlier tuition
fee exemptions for public high schools (+0.52pp) – showed
an improvement of 0.1pp to -0.3% in November. This index
has been steadily on the mend since hitting a low of -1.3%
in November 2009. Based on the Tokyo CPI numbers for
November (after making allowances for differences with the
national index), we estimate that the national core index in
November will decline at the same 0.6% rate as in October
and that the national 10% trimmed mean CPI will also move
sideways.
Key Point:
Although one-off factors have made prices volatile
of late, trend indicators (10% trimmed mean CPI)
confirm deflation continues to moderate.
Market Economics 16 December 2010
Market Mover
72
www.GlobalMarkets.bnpparibas.com

Key Data Preview
Chart 11: Japanese Production and Exports
120
115
110
105
100
95
90
85
80
75
70
65
(2005=100, seasonally adjusted)
Production
00 01 02 03 04 05 06 07 08 09 10
Source: Reuters EcoWin Pro
Exports (RHS)
150
140
130
120
110
100
90
80
70
60
50
Nov (f) Oct Sep Aug
% m/m 1.0 -2.0 -1.6 -0.5
Key Point:
Production in November should recover for the first
time in six months, thanks to last-minute demand for
home appliances ahead of the downsizing of a
stimulus program.
BNP Paribas Forecast: First Increase in Six
Months
Japan: Industrial Production (November)
Release Date: Tuesday 28 December
We expect production in November to expand 1.0% m/m,
the first rise in six months. With exports slowing to a virtual
standstill, factories have hit a soft patch since the summer,
made worse by huge production cuts in October that were
triggered by the end of green car subsidies. But the
forecast index projects output will rebound in both
November and December. While such forecasts warrant
caution owing to the upward bias in the METI’s seasonallyadjusted
data in Q4, it seems safe to say that producers
are not especially downbeat about future demand. Indeed,
the cyclical outlook for the manufacturing cycle does not
look too bad as global manufacturing is recovering again.
One note of caution is that production in Q4 is being
propped up by rush demand ahead of the downsizing of
another stimulus programme (eco-point system), which has
triggered stronger-than-expected sales of LCD TVs and air
conditioners. The demand thus robbed from the future will
have negative consequences on production in Q1 2011.
However, we expect manufacturing to be supported by the
resumption of brisk exports to emerging Asia from the start
of next year. The recovery in the manufacturing sector
should resume, with the pace becoming pronounced from
the spring when fallout from the end of the eco-point
system fades.
Chart 12: US Consumer Confidence
Source: Reuters EcoWin Pro
Dec (f) Dec 2H Dec p Nov
Conference Board 57.0 54.1
Michigan Sentiment 74.3 74.4 74.2 71.6
BNP Paribas Forecast: Up
US: Consumer Confidence (December)
Release Date: Tuesday 28 December
The Conference Board Index of Consumer Confidence is
expected to increase to 57.0 in December from 54.1 in
November. Consumers continued to gain confidence in
early December, as the University of Michigan consumer
sentiment index indicated.
Consumers enjoyed putting the election behind them, saw
the stock market bounce, and retailers are luring them with
discounts this holiday season. Indeed, early data suggest
that more shoppers visited stores and websites over Black
Friday weekend and on Cyber Monday and spent more
than a year ago. Retailers are anticipating a happier festive
season this year as the recovery gradually gains
momentum. Moreover, the proposed extension of tax cuts
and unemployment benefits should help boost confidence
in the second half of the month.
Key Point:
The proposed extension of tax cuts and
unemployment benefits should help boost
confidence in the second half of the month.
Market Economics 16 December 2010
Market Mover
73
www.GlobalMarkets.bnpparibas.com

Key Data Preview
Chart 13: Eurozone M3 & Bank Lending (% y/y)
12.5
10.0
7.5
5.0
2.5
0.0
Private Sector
Bank Lending
M3
-2.5
92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10
Source: Reuters EcoWin Pro
% y/y Nov (f) Oct Sep Aug
M3 1.5 1.0 1.1 1.2
M3 (3-mth Avg.) 1.2 1.1 0.8 0.5
Private Sector Loans 1.4 1.4 1.2 1.2
Key Point:
The y/y rates of growth in M3 and bank lending are
low by past standards but are trending higher.
BNP Paribas Forecast: Trending Higher
Eurozone: Monetary Developments (November)
Release Date: Wednesday 29 December
The y/y growth rate in M3 decelerated in the two months to
October. Still, at 1.0%, it was almost 1½ percentage points
above its cycle low in February 2010.
Given the unusually large m/m drop in M3 in November
2009 (of 0.5%), the y/y rate of increase in M3 is likely to
rise in November this year. The three-month average y/y
rate of growth is forecast at 1.2%, a 13-month high.
The differential between narrow and broad money growth
rates in the eurozone has narrowed The y/y growth rate of
M1, having been in double digits for almost a year from
mid-2009, fell to 4.9% y/y in October, a 20-month low.
As with M3, the y/y growth rate in bank lending remains low
but has been trending upwards. October’s 1.4% growth
rate compares to a trough of -0.8% in October 2009.
Loans to households have been the main driver of the pickup,
rising by 2.9% y/y in October. Lending for mortgages is
stronger, up by 3.6% y/y in October, than consumer credit,
which continues to contract on a y/y basis.
Lending to the non-financial corporate sector is lagging that
for households, as is typically the case. The rate of decline
has moderated, however, to -0.6% y/y in October versus a
trough of -2.7% in January 2010.
Source: Reuters EcoWin Pro
Chart 14: German CoL
% Dec (f) Nov Oct Sep
CoL m/m 1.0 0.1 0.1 -0.1
CoL y/y 1.7 1.5 1.3 1.3
HICP m/m 1.1 0.1 0.1 -0.2
HICP y/y 1.8 1.6 1.3 1.3
Key Point:
Headline inflation should rise further as an increase
in commodity inflation dominates a decline in core.
BNP Paribas Forecast: On The Rise
Germany: CoL (October, preliminary)
Release Date: Wednesday 29 December
In November, inflation in Germany was pushed higher by a
combination of stronger core inflation and a sharp increase
in food prices. Core inflation rose by 0.2pp to 0.8% y/y, as
the sharp discounting in clothing prices last November
dropped out of the y/y comparison and retailers increased
their prices in November this year. Food inflation rose,
meanwhile, as the impact of the soft commodity price
shock finally began to show in the data.
In December, we expect a further rise in German inflation
as a sharp rise in energy prices over the month and a
further gain in food inflation dominate a decline in core
inflation.
Energy prices are expected to have risen by nearly 2%
m/m in December on a combination of a fall in the euro’s
value in November and a sharp rise in oil prices at the start
of December. That should push y/y energy inflation to
around 8% - its highest level since October 2008.
Core inflation, meanwhile, is expected to give up much of
its November gain as the clothing discounts come one
month later than 2009 and a household goods price base
effect washes out.
Market Economics 16 December 2010
Market Mover
74
www.GlobalMarkets.bnpparibas.com

Economic Calendar: 3 – 28 January
3 January 4 January 5 January 6 January 7 January
Eurozone: Manufacturing
PMI (Final) Dec
Spain: HICP (Flash) Dec
UK: Holiday
Switz: PMI Dec
US: ISM Manufacturing
Dec
Eurozone: HICP (Flash)
Dec
UK: CIPS Manufacturing
Dec, Net Consumer
Credit Nov, Mortgage
Approvals Nov
Germany: Labour Nov
France: Consumer
Confidence Dec
US: Factory Orders Nov,
FOMC Minutes
Eurozone: PPI Nov,
Industrial Orders Oct, PMI
Services (Final) Dec
Spain: IP Nov
US: ADP Employment
Change Dec, ISM
Services Dec
Eurozone: Retail Sales
Nov, Business and
Consumer Confidence
Dec
UK: CIPS Services Dec
Germany: Factory Orders
Nov
Neths: CPI Dec
Switz: CPI Dec
Eurozone: Labour Nov,
GDP (Final) Q3
Germany: Industrial
Production Nov, Trade
Balance Nov
France: Trade Balance
Nov
Norway: Industrial
Production Oct, Retail
Sales Nov
US: Labour Dec,
Consumer Credit Nov
Canada: Labour Dec
During Week: Germany Retail Sales Nov, Italy CPI Dec, UK Halifax House Prices Dec
10 January 11 January 12 January 13 January 14 January
Australia: Retail Sales
Nov
France: Industrial
Production Nov
Sweden: Industrial
Production Nov
Norway: CPI Dec, PPI
Dec
Australia: Trade Balance
Nov
Japan: Leading Indicator
Nov
France: BoF Survey Dec
UK: BRC Retail Sales
Monitor Dec
US: NFIB Small Business
Optimism Dec, Wholesale
Inventories Nov
Japan: M2 Dec, Current
Account Nov
Eurozone: Industrial
Production Nov
France: Current Account
Nov
UK: Trade Balance Nov
US: Import Prices Dec
Australia: Labour Dec
Japan: Machinery Orders
Nov
Eurozone: ECB Rate
Announcement & Press
Conference
France: CPI Dec
Neths: Retail Sales Nov,
Industrial Production Nov
UK: Industrial Production
Nov, BoE Rate
Announcement
Sweden: CPI Dec
US: PPI Dec, Trade
Balance Nov
Japan: CGPI Dec
Eurozone: Trade
Balance Nov, HICP Dec
Germany: HICP Dec
Spain: HICP Dec
UK: PPI Dec
US: CPI Dec, Retail
Sales Dec, Industrial
Production Dec, UoM
Sentiment (Prel) Jan,
Business inventories
Nov
During Week: Germany Retail Sales Nov, WPI Dec
17 January 18 January 19 January 20 January 21 January
UK: Rightmove House
Prices Jan
Canada: BoC Rate
Announcement
UK: DCLG House Prices
Nov, CPI Dec
Germany: ZEW Survey
Jan
US: Empire
Manufacturing Jan, TICS
Data Nov, NAHB Housing
Index Jan
Japan: Tertiary Index Nov
Eurozone: Current
Account Nov
Belgium: Consumer
Confidence Dec
UK: Labour Dec
Canada: BoC Monetary
Policy Report
US: Housing Starts Dec
Germany: PPI Dec
Neths: Labour Dec,
Consumer confidence Jan
US: Existing Home Sales
Dec
Eurozone: PMIs
(Flash) Jan
Germany: Ifo Survey
Jan
Belgium: Business
Confidence Dec
UK: PSNCR Dec,
PSNB Dec, Retail Sales
Dec
During Week: Germany WPI Dec
24 January 25 January 26 January 27 January 28 January
Australia: PPI Dec
Eurozone: Industrial
Orders Nov
France: Industry Survey
Jan
Neths: Producer
Confidence Jan
Australia: CPI Dec
Japan: BoJ Rate
Announcement
France: Housing Starts
Dec, Retail Sales Dec,
Quarterly Industrial
Survey Q1
UK: GDP (Adv) Q4
US: S&P/CaseShiller
House Prices Nov,
Consumer Confidence
Jan, FHFA House Prices
Nov
Canada: CPI Dec
France: Job Seekers Dec
UK: BoE Minutes
Norway: Norges Bank
Rate Announcement
US: New Home Sales
Dec, FOMC Rate
Announcement
Japan: Trade Balance
Dec
Eurozone: Business and
Consumer Confidence
Jan
Germany: HICP (Prel)
Jan
France: Consumer
Confidence Jan
Spain: Retail Sales Dec
Sweden: Labour Dec,
PPI Dec, Consumer
Confidence Jan
US: Durable Goods
Orders Dec, Pending
Home Sales Nov
During Week: Germany GfK Consumer Confidence Jan, UK Nationwide House Prices Jan
Source: BNP Paribas
Release dates as at c.o.b. prior to the date of this publication. See our Daily Spotlight for any revisions
Japan: BoJ Monetary
Policy Meeting Minutes,
CPI Tokyo Jan, CPI
National Dec, Labour
Dec, Household
Consumption Dec,
Retail Sales Dec
Eurozone: Eurocoin
Jan, Monetary
Developments Dec
US: ECI Q4, GDP (Adv)
Q4, UoM Sentiment
(Final) Jan
Market Economics 16 December 2010
Market Mover
75
www.GlobalMarkets.bnpparibas.com

Treasury and SAS Issuance Calendar
Daily update onto https://globalmarkets.bnpparibas.com, Research & Apps, Tools & Applications, Mkt Calendar, Government Flows
In the pipeline - Treasuries:
France: Cancelled its BTF auction initially planned for 27 Dec. First BTF auction of 2011 will take place on 3 Jan, settlement on 6 Jan
Austria: Expects to make one or two syndicated issues in 2011
Germany: Intends to issue inflation-linked federal securities (EUR2-3bn quarterly) and reserves the right to issue foreign currency bonds in '11
Poland: May issue euro-denominated bonds as early as January 2011
UK: Index-Linked Gilt 30y-50y area (syndicated) in the second half of January 2011 and two mini tenders, one in Feb & the other in Mar
Belgium: Likely to issue 3 new OLO benchmarks (launched through syndications) in 2011 - plans also to buy back bonds maturing in 2012 for
EUR 2.19bn in 2011
Neths: DSL 10-year (new, DDA) in Feb/Mar 2011 - exact timing yet to be announced, may lead to changes in the regular issuance calendar
Czech Rep.: Plans at least one eurobond benchmark in 2011 - currency denomination is to be defined
Denmark: In 2011, to issue a 5-year EUR loan (EUR 1-2bn) and EUR or USD loans may be issued in the 2-5y maturity segment
Slovak Rep.: Will open two new bond issues in 2011, a 3y zero-coupon bond (up to EUR 1.5bn) and a 7y or 10y bond (EUR 3bn)
Slovenia: Plans to issue Eurobond in H1 2011
During the week:
US: Announcement of 2-, 5- & 7y Notes (new) details on Thu 23 Dec
FNMA: December syndicated auction, details announced on Mon 20 Dec
Date Day Closing Country Issues Details BNPP forecasts
Local GMT
17/12 Fri 11:00 16:00 US Outright Treasury Coupon Purchase (2028-2040) USD 1.5-2.5bn
20/12 Mon 11:00 16:00 US Outright Treasury Coupon Purchase (2018-2020) USD 7-9bn
Outright Treasury Coupon Purchase (2014-2016)
USD 6-8bn
21/12 Tue 12:00 17:00 Canada Repurchase of 10 Cash Mgt Bonds (Jun11 - Jun12) CAD 1bn
11:00 16:00 US Outright Treasury Coupon Purchase (2016-2017) USD 7-9bn
Outright TIPS Purchase (2012-2040)
USD 1-2bn
22/12 Wed 12:00 03:00 Japan JGB 15 Jan 2013 JPY 2.6tn
11:00 16:00 US Outright Treasury Coupon Purchase (2021-2027) USD 1.5-2.5bn
27/12 Mon 13:00 18:00 US Notes 2-year (new) 23 Dec USD 35bn
28/12 Tue 11:00 16:00 US Outright Treasury Coupon Purchase (2013-2014) USD 6-8bn
13:00 18:00 US Notes 5-year (new) 23 Dec USD 35bn
29/12 Wed 10:55 09:55 Italy CTZ 23 Dec EUR 2-3bn
11:00 16:00 US Outright Treasury Coupon Purchase (2012-2013) USD 4-6bn
13:00 18:00 US Notes 7-year (new) 23 Dec USD 29bn
30/12 Thu 10:55 09:55 Italy 3 & 10y BTPs and CCT 23 Dec EUR 5-8bn
03/01 Mon 11:00 16:00 US Outright Treasury Coupon Purchase (2018-2020) USD 7-9bn
04/01 Tue 11:00 16:00 US Outright TIPS Purchase (2012-2040) USD 1-2bn
05/01 Wed 11:00 10:00 Germany Bund 2.5% 4 Jan 2021 EUR 5bn
11:00 16:00 US Outright Treasury Coupon Purchase (2028-2040) USD 1.5-2.5bn
06/01 Thu 12:00 03:00 Japan JGB 10-year 30 Dec JPY 2.2tn
10:50 09:50 France OATs 31 Dec EUR 7-9bn
10:30 10:30 UK Gilt 3.75% 7 Sep 2020 29 Dec
11:00 16:00 US Outright Treasury Coupon Purchase (2015-2016) USD 6-8bn
07/01 Fri 11:00 16:00 US Outright Treasury Coupon Purchase (2013-2014) USD 6-8bn
10/01 Mon Slovak Rep. SLOVGB 4% 27 Apr 2020 (#214) 6 Jan
11:00 16:00 US Outright Treasury Coupon Purchase (2018-2020) USD 7-9bn
11/01 Tue 12:00 03:00 Japan Auction for Enhanced-liquidity 4 Jan JPY 0.3tn
11:00 10:00 Austria RAGBs 4 Jan EUR 1-2bn
10:30 10:30 UK Index-Linked Gilt 1.25% 22 Nov 2032 4 Jan
Neths DSL 15 Jan 2014 (new) EUR 2.5-3.5bn
Denmark DGBs 6 Jan
11:00 16:00 US Outright Treasury Coupon Purchase (2016-2017) USD 7-9bn
13:00 18:00 US Notes 3-year (new) 6 Jan USD 32bn
12/01 Wed 11:00 10:00 Germany OBL 26 Feb 2016 (Series 159) (new) EUR 6bn
11:00 10:00 Sweden T-bonds 5 Jan
10:30 10:30 Portugal OTs (To be confirmed) 6 Jan EUR 1-2bn
13:00 18:00 US Notes 10-year 6 Jan USD 21bn
13/01 Thu 12:00 03:00 Japan JGB 30-year 6 Jan JPY 0.6tn
10:30 09:30 Spain Bonos (TBC) 27 Dec EUR 3-5bn
10:55 09:55 Italy 5-year BTP and possibly 15- or 30-year BTP 5 Jan EUR 7-9bn
13:00 18:00 US Bond 30-year 6 Jan USD 13bn
Sources: Treasuries, BNP Paribas
Interest Rate Strategy 16 December 2010
Market Mover, Non-Objective Research Section
76
www.GlobalMarkets.bnpparibas.com

Next week's T-Bills Supply
Date Country Issues Details
17/12 UK T-Bills Jan 2011 GBP 0.5bn
T-Bills Mar 2011
GBP 1bn
T-Bills Jun 2011
GBP 1.5bn
20/12 Japan T-Bills Apr 2011 JPY 4.8tn
France BTF Mar 2011 EUR 3.5bn
BTF Dec 2011
EUR 1.5bn
US T-Bills Mar 2011 USD 29bn
T-Bills Jun 2011 (new) USD 28bn
FHLMC Bills 3-month & 6-month 17 Dec
21/12 Spain Letras Mar 2011 20 Dec
Letras Jun 2011
20 Dec
Canada T-Bill Mar 2011 CAD 7.4bn
T-Bill Jun 2011
CAD 2.8bn
T-Bill Dec 2011
CAD 2.8bn
US T-Bills 4-week 20 Dec
FHLB Discount Notes
22/12 FNMA Bills 3-month & 6-month 20 Dec
23/12 FHLB Discount Notes
Sources: Treasuries, BNP Paribas
Comments and charts
• EGB supply is over for 2010 and our focus turns
now to 2011 issuance. We expect total EGB gross
issuance of EUR 827bn, down from EUR 943bn in 2010.
In net supply terms, we expect a fall to EUR 311bn in
2011 from EUR 430bn in 2010. Our article “EUR: 2011
EGB Issuance Preview” in this week’s Market Mover has
more details. For that reason, we do not show the
standard charts on the RHS but some general charts on
2011 EGB issuance preview.
• Only the end-of-month Italian auctions remain in
2010, which settle and account for 2011 issuance.
• Outside the eurozone, there will be no issuance in
the US in the week ahead. Only Japan will issue paper
in the week ahead.
Next week's Eurozone Redemptions
Date Country Details Amount
23/12 France BTF EUR 8.0bn
24/12 Greece GTB (13W) EUR 0.4bn
Total Eurozone Short-term Redemption EUR 8.4bn
Next week's Eurozone Coupons
Country
Amount
Italy
EUR 0.1bn
Belgium
EUR 0.7bn
Total Long-term Coupon Payments
EUR 0.8bn
Chart 1: 2011 EGBs Issuance Projections
EUR Sovereign Financing: Projections for 2011 (EUR bn) 2010 Bond
2010 Net
Issuer Redemptions Deficit Borrowing Needs Bond Issuance Issuance Net Issuance Issuance
Austria 8.3 10.2 18 19 21 11 12
Belgium 24.0 16.0 40 34 41 10 16
Finland 5.7 6.3 12 15 16 9 7
France 91.8 90.0 182 180 188 88 105
Germany 147.3 33.0 180 195 207 48 74
Greece 27.7 18.7 46 - 18 - 2
Ireland 4.4 16.4 24 - 22 - 22
Italy 155.2 73.0 228 225 260 70 88
Netherlands 27.9 23.9 52 50 52 22 29
Portugal 9.6 9.3 19 18 22 8 16
Slovenia 1.0 2.1 3 3 3 2 2
Spain 45.1 43.7 89 88 94 43 59
Total 548 343 894 827 943 311 430
Chart 2: EGBs Redemptions in 2011
Bonds Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec 2011
ITA 0.0 21.7 30.5 0.0 14.6 12.2 2.7 20.2 46.0 0.0 15.5 0.0 163.3
FRA 17.8 0.0 0.0 18.4 0.0 0.0 29.3 0.0 13.8 15.7 0.0 0.0 95.0
GER 23.3 0.0 15.0 19.0 0.0 15.0 24.0 0.0 16.0 17.0 0.0 18.0 147.3
SPA 0.0 0.0 0.0 15.5 0.0 0.0 17.0 0.0 0.0 14.1 0.0 0.0 46.6
GRE 0.0 0.0 9.1 1.0 7.0 0.0 0.0 6.8 0.0 0.0 0.0 5.8 29.8
BEL 0.0 0.0 11.3 0.0 0.0 3.4 0.0 0.0 12.7 0.0 0.0 0.6 28.0
NET 13.9 0.0 0.0 0.0 0.0 0.0 14.1 0.0 0.0 0.0 0.0 0.0 27.9
AUS 8.3 0.1 0.1 0.0 0.9 0.0 0.6 0.0 0.0 0.0 0.0 0.1 10.0
POR 0.0 0.0 0.0 4.5 0.0 5.0 0.0 0.0 0.0 0.0 0.0 0.0 9.5
IRE 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 4.5 0.0 4.5
FIN 0.0 5.7 0.0 0.0 1.5 0.0 0.0 0.1 0.1 0.0 0.0 0.0 7.3
Total 63.2 27.4 66.1 58.5 24.0 35.5 87.6 27.1 88.6 46.7 20.0 24.5 569.2
Chart 3: Expected 2011 EGBs Issuance
Breakdown
2011 GER FRA ITA SPA NET BEL AUS POR FIN Total
Jan 19.0 19.7 20.6 9.1 5.5 4.2 4.0 0.8 1.0 83.9
Feb 18.0 16.2 19.6 8.5 6.5 3.7 1.5 3.3 0.0 77.3
Mar 16.0 19.9 18.0 10.5 3.0 3.3 1.5 0.8 4.0 77.1
Apr 19.0 16.7 23.2 5.2 6.5 3.3 2.0 1.7 1.5 79.0
May 19.0 17.6 15.2 6.2 7.8 0.0 1.8 1.8 0.0 69.4
Jun 18.0 17.4 23.2 7.7 3.5 3.3 1.9 2.2 1.5 78.7
Jul 11.0 17.0 16.8 12.4 6.0 6.6 1.2 2.5 0.0 73.5
Aug 13.0 0.0 18.5 3.3 0.0 2.8 0.9 1.1 0.0 39.5
Sep 20.0 16.5 23.7 6.9 2.5 2.9 1.9 1.7 4.0 80.0
Oct 12.0 16.9 21.2 6.6 5.7 2.3 1.4 1.0 1.7 68.9
Nov 20.0 16.7 18.1 8.5 3.0 1.7 1.0 1.0 1.5 71.4
Dec 10.0 5.3 6.8 3.2 0.0 0.0 0.0 0.0 0.0 25.3
Total 195 180 225 88 50 34 19 18 15 824
All Charts Source: BNP Paribas
Interest Rate Strategy 16 December 2010
Market Mover, Non-Objective Research Section
77
www.GlobalMarkets.bnpparibas.com

Central Bank Watch
Interest Rate
EUROZONE
Current
Rate (%)
Minimum Bid Rate 1.00
US
Fed Funds Rate 0 to 0.25
Discount Rate 0.75
JAPAN
Call Rate 0 to 0.10
Basic Loan Rate 0.30
UK
Bank Rate 0.5
DENMARK
Lending Rate 1.05
SWEDEN
Repo Rate 1.25
NORWAY
Sight Deposit Rate 2.00
SWITZERLAND
3 Mth LIBOR Target
Range
CANADA
0.0-0.75
Overnight Rate 1.00
Bank Rate 1.25
AUSTRALIA
Cash Rate 4.75
CHINA
1Y Bank Lending
Rate
BRAZIL
5.56%
Selic Overnight Rate 10.75
Date of
Last
Change
-25bp
(7/5/09)
-75bp
(16/12/08)
+25bp
(18/2/10)
-10bp
(5/10/10)
-20bp
(19/12/08)
-50bp
(5/3/09)
-10bp
(14/1/10)
+25bp
(15/12/10)
+25bp
(5/5/10)
-25bp
(12/3/09)
+25bp
(8/9/10)
+25bp
(8/9/10)
+25bp
(2/11/10)
+25bp
(19/10/10)
+50bp
(21/7/10)
Next Change in
Coming 6 Months
No Change
No Change
No Change
No Change
No Change
No Change
No Change
+25bp
(15/2/11)
+25bp
(12/5/11)
+25bp
(17/3/11)
+25bp
(1/6/11)
+25bp
(1/6/11)
+25bp
(1/3/11)
+25bp
(Dec 10)
+50bp
(19/1/11)
Source: BNP Paribas
For the full EMK Central Bank Watch please see our Local Markets Mover
Comments
Doubts about the sustainability of the recovery and low inflation
pressures imply no rise in the refinancing rate for a considerable
period of time: we expect the first increase only in H2 2012.
The FOMC is expected to maintain the funds rate at 0 to 0.25%
for an extended period. It will execute its QE2 programme through
H1 2011, with a high probability of an extension through H2 2011.
We expect the BoJ to maintain its overnight call rate at 0 to
0.1% for an extended period. It could well expand its asset
purchase programme, depending mainly on moves in the yen.
Persistent upward surprises on inflation and rising inflation
expectations mean that the next BoE move will be a tightening.
We expect disappointing growth to delay the first hike until 2012.
Higher money market rates in the eurozone are likely to
continue to put pressure on the krone. Thus, further increases in
the interest rate on certificates of deposit are on the agenda.
Strong domestic economic growth should lead to further rate
hikes. We expect the Riksbank to deliver the next rate hike at
February’s meeting.
We expect the Norges Bank to raise rates in Q2 2011. Given the
Bank’s hawkish statement in December, the risk is that the rate
hike comes in Q1 if economic data surprise to the upside and
the krone does not appreciate significantly.
Rates look inappropriate given the strength of the domestic
economy. But the first hike is being delayed by financial stress in
the markets and the exceptional strength of the CHF.
In light of developments in global financial markets and the US
economic outlook in particular, the BoC is pausing to allow
further progress in the recovery. Rate hikes should resume in
June 2011, with 75bp of increases delivered by the end of next
year.
The RBA’s December statement said policy is “appropriate for
the economic outlook”, suggesting it is now more data
dependent. We expect above-trend growth in late 2010 and
early 2011 on the back of strength in Asia. This should be
enough to prompt a further rate rise in March.
With growth momentum robust, spurred on by the launch of
QE2, the PBOC will further tighten policy through RRR and
liquidity controls. Furthermore, we expect three more 25bp rate
hikes in coming months: one before end-2010, one in Q1 and
one in Q2. RMB appreciation will also quicken.
The BCB has been on hold since the last hike in July. However,
as the inflation picture is worsening, the monetary authority is
likely to resume hiking rates by January 2011, to tame inflation
expectations and pull inflation back towards the target.
Change since our last weekly in bold and italics
Market Economics 16 December 2010
Market Mover
78
www.GlobalMarkets.bnpparibas.com

Economic Forecasts
GDP
Year 2010
2011
(% y/y) ’09 ’10 (1) ’11 (1) Q1 Q2 Q3 Q4 (1) Q1 (1) Q2 (1) Q3 (1) Q4 (1)
US -2.6 2.8 2.4 2.4 3.0 3.2 2.6 2.2 2.4 2.5 2.5
Eurozone -4.0 1.7 1.3 0.8 1.9 1.9 2.0 1.9 1.2 1.1 1.2
Japan -5.2 3.6 1.4 5.0 2.7 4.4 2.6 1.4 1.4 1.0 1.9
World (2) -0.6 4.7 4.1 4.8 5.0 4.8 4.4 4.1 3.9 4.0 4.2
Industrial Production
Year
2010
2011
(% y/y) ’09 ’10 (1) ’11 (1) Q1 Q2 Q3 Q4 (1) Q1 (1) Q2 (1) Q3 (1) Q4 (1)
US -9.3 5.5 3.0 2.7 7.4 6.6 5.3 4.2 3.0 2.4 2.5
Eurozone -14.6 6.4 1.6 4.6 9.0 6.9 5.2 3.1 1.1 0.8 1.6
Japan -21.9 15.0 1.2 27.4 21.0 13.4 2.6 -1.3 -1.6 1.2 6.2
Unemployment Rate
Year
2010 2011
(%) ’09 ’10 (1) ’11 (1) Q1 Q2 Q3 Q4 (1) Q1 (1) Q2 (1) Q3 (1) Q4 (1)
US 9.3 9.7 9.5 9.7 9.7 9.6 9.7 9.7 9.7 9.5 9.3
Eurozone 9.4 10.0 10.2 9.9 10.0 10.0 10.1 10.1 10.2 10.2 10.2
Japan 5.1 5.1 4.6 4.9 5.2 5.1 5.0 4.8 4.7 4.5 4.5
CPI
Year
2010
2011
(% y/y) ’09 ’10 (1) ’11 (1) Q1 Q2 Q3 Q4 (1) Q1 (1) Q2 (1) Q3 (1) Q4 (1)
US -0.3 1.6 1.2 2.4 1.8 1.2 1.2 1.2 1.5 1.3 0.9
Eurozone 0.3 1.6 1.6 1.1 1.5 1.7 2.0 1.9 1.5 1.5 1.6
Japan -1.4 -0.7 -1.0 -1.2 -0.9 -0.8 0.1 -1.0 -1.1 -0.8 -1.3
Current Account
(% GDP) ’09
Year
’10 (1) ’11 (1) General Government
(% GDP)
’09
Year
’10 (1) ’11 (1)
US -2.7 -3.4 -3.3 US (4) -10.0 -8.9 -9.9
Eurozone -0.6 -0.5 -0.2 Eurozone -6.3 -6.2 -4.7
Japan 2.8 3.5 3.5 Japan -10.2 -8.2 -6.8
Interest Rate Forecasts
Interest Rate (3)
Year
2011
2012
(%) ’09 ’10 (1) ’11 (1) Q1 (1) Q2 (1) Q3 (1) Q4 (1) Q1 (1) Q2 (1) Q3 (1) Q4 (1)
US
Fed Funds Rate 0.25 0.25 0.25 0.25 0.25 0.25 0.25 0.25 0.25 0.25 0.50
3-month Rate 0.25 0.30 0.30 0.30 0.30 0.30 0.30 0.30 0.45 0.75 0.90
2-year yield 1.14 0.60 1.00 0.50 0.75 0.85 1.00 1.10 1.50 2.15 2.40
10-year yield 3.84 3.35 3.75 3.00 3.25 3.50 3.75 4.00 4.25 4.50 4.60
2y/10y Spread (bp) 269 275 275 250 250 265 275 290 275 235 220
Eurozone
Refinancing Rate 1.00 1.00 1.00 1.00 1.00 1.00 1.00 1.00 1.25 1.50 1.75
3-month Rate 0.70 1.05 1.35 1.20 1.25 1.30 1.35 1.50 1.75 1.75 2.00
2-year yield 1.37 1.00 1.50 1.00 1.20 1.30 1.50 1.70 2.05 2.30 2.45
10-year yield 3.40 2.95 3.35 2.75 2.90 3.15 3.35 3.50 3.75 3.90 4.10
2y/10y Spread (bp) 203 195 185 175 170 185 185 180 170 160 165
Japan
O/N Call Rate 0.10 0.10 0.10 0.10 0.10 0.10 0.10 0.10 0.10 0.10 0.10
3-month Rate 0.46 0.35 0.35 0.35 0.35 0.35 0.35 0.35 0.35 0.35 0.35
2-year yield 0.15 0.25 0.25 0.25 0.25 0.25 0.25 0.25 0.30 0.30 0.30
10-year yield 1.30 1.30 1.40 1.20 1.30 1.40 1.40 1.40 1.40 1.50 1.50
2y/10y Spread (bp) 115 105 115 95 105 115 115 115 110 120 120
Footnotes: (1) Forecast (2) Country weights used to construct world growth are those in the IMF World Economic Outlook Update
April 2010 (3) End Period (4) Fiscal year Figures are y/y percentage change unless otherwise indicated
Source: BNP Paribas
Market Economics / Interest Rate Strategy 16 December 2010
Market Mover
79
www.GlobalMarkets.bnpparibas.com

FX Forecasts*
USD Bloc Q4 '10 Q1 '11 Q2 '11 Q3 '11 Q4 '11 Q1 '12 Q2 '12 Q3 '12 Q4 '12 Q1 '13 Q2 '13
EUR/USD 1.34 1.27 1.25 1.20 1.23 1.25 1.30 1.32 1.32 1.33 1.34
USD/JPY 82 85 84 88 92 95 100 110 120 119 118
USD/CHF 0.97 1.01 1.05 1.11 1.09 1.08 1.05 1.05 1.06 1.06 1.07
GBP/USD 1.61 1.55 1.51 1.46 1.45 1.52 1.55 1.57 1.61 1.66 1.70
USD/CAD 0.98 0.95 0.96 0.93 0.95 0.95 1.00 1.02 1.09 1.11 1.14
AUD/USD 1.02 1.02 0.99 0.92 0.93 0.92 0.93 0.92 0.90 0.87 0.85
NZD/USD 0.78 0.79 0.78 0.74 0.73 0.72 0.69 0.67 0.66 0.64 0.62
USD/SEK 6.90 7.09 7.04 7.58 7.56 7.36 7.08 6.89 6.89 6.99 6.94
USD/NOK 6.04 6.22 6.16 6.33 6.10 5.92 5.77 5.76 5.68 5.49 5.30
EUR Bloc Q4 '10 Q1 '11 Q2 '11 Q3 '11 Q4 '11 Q1 '12 Q2 '12 Q3 '12 Q4 '12 Q1 '13 Q2 '13
EUR/JPY 110 108 105 106 113 119 130 145 158 158 158
EUR/GBP 0.83 0.82 0.83 0.82 0.85 0.82 0.84 0.84 0.82 0.80 0.79
EUR/CHF 1.30 1.28 1.31 1.33 1.34 1.35 1.36 1.38 1.40 1.41 1.44
EUR/SEK 9.25 9.00 8.80 9.10 9.30 9.20 9.20 9.10 9.10 9.30 9.30
EUR/NOK 8.10 7.90 7.70 7.60 7.50 7.40 7.50 7.60 7.50 7.30 7.10
EUR/DKK 7.46 7.46 7.46 7.46 7.46 7.46 7.46 7.46 7.46 7.46 7.46
Central Europe Q4 '10 Q1 '11 Q2 '11 Q3 '11 Q4 '11 Q1 '12 Q2 '12 Q3 '12 Q4 '12 Q1 '13 Q2 '13
USD/PLN 2.87 3.07 3.16 3.25 3.09 3.12 2.96 2.88 2.84 2.78 2.69
EUR/CZK 24.4 24.7 24.5 24.3 24.5 24.3 24.0 23.9 23.8 24.0 23.8
EUR/HUF 280 290 285 280 275 270 270 270 265 260 255
USD/ZAR 6.90 7.30 7.50 7.40 7.30 7.40 7.30 7.30 7.50 7.20 7.10
USD/TRY 1.43 1.50 1.52 1.48 1.47 1.49 1.46 1.47 1.46 1.45 1.43
EUR/RON 4.30 4.35 4.50 4.50 4.40 4.20 4.30 4.20 4.20 4.20 4.20
USD/RUB 32.00 32.10 31.46 31.65 30.81 30.11 29.07 28.85 28.41 27.86 27.32
EUR/PLN 3.85 3.90 3.95 3.90 3.80 3.90 3.85 3.80 3.75 3.70 3.60
USD/UAH 8.0 7.9 7.9 7.8 7.8 7.5 7.5 7.5 7.5 7.5 7.5
EUR/RSD 110 105 115 105 100 98 97 96 95 93 92
Asia Bloc Q4 '10 Q1 '11 Q2 '11 Q3 '11 Q4 '11 Q1 '12 Q2 '12 Q3 '12 Q4 '12 Q1 '13 Q2 '13
USD/SGD 1.30 1.29 1.28 1.27 1.26 1.25 1.24 1.23 1.22 1.21 1.20
USD/MYR 3.10 3.05 3.00 2.95 2.90 2.87 2.85 2.83 2.80 2.77 2.75
USD/IDR 8800 8600 8400 8300 8200 8100 8000 7900 7800 7800 7800
USD/THB 30.00 29.50 29.00 28.70 28.50 28.30 28.00 27.70 27.50 27.50 27.50
USD/PHP 43.00 42.50 42.00 41.50 41.00 40.50 40.00 39.50 39.00 39.00 39.00
USD/HKD 7.80 7.80 7.80 7.80 7.80 7.80 7.80 7.80 7.80 7.80 7.80
USD/RMB 6.65 6.58 6.52 6.49 6.45 6.40 6.35 6.30 6.26 6.23 6.20
USD/TWD 30.00 29.70 29.40 29.00 28.70 28.50 28.30 28.00 28.00 28.00 28.00
USD/KRW 1100 1080 1060 1050 1040 1030 1020 1010 1000 1000 1000
USD/INR 44.00 43.50 43.00 42.50 42.00 41.50 41.00 40.50 40.00 40.00 40.00
USD/VND 20500 20500 20500 20500 20500 20500 20500 20500 20500 20500 20500
LATAM Bloc Q4 '10 Q1 '11 Q2 '11 Q3 '11 Q4 '11 Q1 '12 Q2 '12 Q3 '12 Q4 '12 Q1 '13 Q2 '13
USD/ARS 3.98 4.05 4.13 4.20 4.28 4.36 4.44 4.52 4.60 4.68 4.75
USD/BRL 1.70 1.68 1.66 1.65 1.63 1.63 1.65 1.67 1.70 1.71 1.73
USD/CLP 480 473 467 463 458 460 462 465 471 473 475
USD/MXN 12.30 12.00 11.70 11.45 11.30 11.30 11.50 11.80 12.00 12.08 12.15
USD/COP 1830 1800 1750 1720 1700 1705 1730 1745 1760 1770 1780
USD/VEF (Priority) (1) 2.59 2.59 2.59 2.59 2.59 2.59 2.59 2.59 2.59 5.30 5.30
USD/VEF (Oil) (1) 4.29 4.29 4.29 4.29 4.29 4.29 4.29 4.29 4.29 8.80 8.80
Others Q4 '10 Q1 '11 Q2 '11 Q3 '11 Q4 '11 Q1 '12 Q2 '12 Q3 '12 Q4 '12 Q1 '13 Q2 '13
USD Index 78.79 82.04 83.11 86.11 85.63 84.56 83.26 83.51 84.81 84.22 83.77
*End Quarter
(1) Following the devaluation of the VEF, there is now an official ‘priority’ exchange rate and a so-called ‘oil’ exchange rate used for certain transactions
Source: BNP Paribas
Foreign Exchange Strategy 16 December 2010
Market Mover, Non-Objective Research Section
80
www.GlobalMarkets.bnpparibas.com

Market Coverage
Market Economics
Paul Mortimer-Lee Global Head of Market Economics London 44 20 7595 8551 paul.mortimer-lee@uk.bnpparibas.com
Ken Wattret Chief Eurozone Market Economist London 44 20 7595 8657 kenneth.wattret@uk.bnpparibas.com
Luigi Speranza Head of Inflation Economics, Eurozone, Italy London 44 20 7595 8322 luigi.speranza@uk.bnpparibas.com
Alan Clarke UK London 44 20 7595 8476 alan.clarke@uk.bnpparibas.com
Eoin O’Callaghan Inflation, Eurozone, Switzerland, Ireland London 44 20 7595 8226 eoin.ocallaghan@uk.bnpparibas.com
Gizem Kara Scandinavia London 44 20 7595 8783 gizem.kara@uk.bnpparibas.com
Dominique Barbet Eurozone, France Paris 33 1 4298 1567 dominique.barbet@bnpparibas.com
Julia Coronado Chief US Economist New York 1 212 841 2281 julia.l.coronado@americas.bnpparibas.com
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Azusa Kato Japan Tokyo 81 3 6377 1603 azusa.kato@japan.bnpparibas.com
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Interest Rate Strategy
Cyril Beuzit Global Head of Interest Rate Strategy London 44 20 7595 8639 cyril.beuzit@uk.bnpparibas.com
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Matteo Regesta Europe Alpha Strategist London 44 20 7595 8607 matteo.regesta@uk.bnpparibas.com
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FX Strategy
Hans Redeker Global Head of FX Strategy London 44 20 7595 8086 hans-guenter.redeker@uk.bnpparibas.com
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81

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