Market Mover - BNP PARIBAS - Investment Services India

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This section is classified as non-objective researcheurozone and a reversal of the (very modest) pace ofoutright credit expansion evident in the past year or soas eurozone banks delever (and for which there isalready some evidence in the latest ECB lendingsurvey), it would flag some potential additional upsideeuro risk on top of that which we expect to emanatefrom the Fed from upcoming FOMC meetings.in eurozone credit and broad money supply growth,then the ensuing macro economic implications (adeepening recession and attendant deflation risk)could well mandate the ECB eventually adoptingunconventional policy measures (quantative easing).But the road from here to there could well be via a stillstrongereuro.Of course, were a full-blown eurozone credit crunch tomaterialise and be reflected in an outright contractionFX Strategy / Ray Attrill 27 October 2011Market Mover64www.GlobalMarkets.bnpparibas.com
This section is classified as non-objective researchOil Implications for FX• Fundamentals, technical picture, and Fedpolicy supportive for oil• The rebound in oil prices should support AUD,CAD, and NOK• Correlations between AUD, CAD, NOK and oilremain strongChart 1 : WTI technical pictureNYMEX WTI prices soared in the last three weeks,bouncing off the year’s low of USD 75.67/bbl to overUSD 90/bbl. The earlier downtrend in oil could be partlyattributed to the fears of a sharp decline in demand dueto the grim global economic outlook as well as sheerrisk aversion from an unsettling situation in theeurozone. With the recent rebound in risk and oilrallying, commodity currencies like AUD, CAD, NOK –the three with the strongest correlation to oil – shouldfind ongoing support. While risk appetite remains a keydriver of oil prices, underlying oil fundamentals coupledwith our Fed view should be sufficient to carry oil andcommodity currencies higher.NYMEX WTI suffered a significant drop in October asmarkets were repricing global growth. But, the recentupside surprise in the US data led the price of WTI backup. The technical trading picture for WTI has turnedconstructive. While WTI has been subject to such starkfluctuations, Brent, which is the oil price used for theEuropean oil market, remained steady because oildemand from European countries tends to be relativelyinelastic. As such, Brent is insulated from fluctuations inrisk appetite. In addition, the supply constraints fromLibya directly affect the price of Brent unlike WTI giventhat nearly 85% of Libyan oil exports are sold toEurope.Source: Reuters Ecowin, Bloomberg, BNP ParibasChart 2 : USDCAD vs. WTISource: Reuters Ecowin, Bloomberg, BNP ParibasChart 1 : NOK TWI vs. WTIHeading into Q4 2011, our oil analysts expect oil pricesto remain at current high levels (year-end forecast ofUSD 92/bbl) due to the following fundamental factors:(1) oil demand holding up in local markets, (2) aseasonal increase in demand as we move into thenorthern hemisphere’s winter, (3) growth of non-OPECsupply delayed into next year, (4) OPEC cutting backon production as Libya oil eventually returns to themarket, and (5) consequent reduction in oil inventoriesin consuming countries.A positive outlook on oil implies that commoditycurrencies with the strongest correlation to oil – NOK,CAD, and AUD – should rally. While Norway andCanada may be the only oil producing/exportingcountries of the three, AUD’s relationship with oil is aSource: BNP ParibasFX Strategy / Mary Nicola 27 October 2011Market Mover65www.GlobalMarkets.bnpparibas.com
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Market Economics | Interest Rate St
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