Market Mover - BNP PARIBAS - Investment Services India

This section is classified as non-objective researchfunction of risk appetite and global growth. The 6-monthand 1-year rolling correlation between oil and NOK,CAD and AUD have been consistently strong since2008. However, there were intervals when thecorrelation broke down. In 2011, the correlationbetween WTI and NOK weakened from the end ofFebruary to the beginning of May while the correlationbetween WTI and both CAD and AUD weakened fromthe end of February until July.The end of February corresponds with the onset of theArab spring in Bahrain. Concerns that instability couldcross the borders into Saudi Arabia raised concern thatsupply constraints were foreseeable. In the meantime,FX markets were still well-supported by ample liquidityconditions thanks to accommodative Fed policy.Meanwhile, USDCAD, USDNOK, AUDUSD, and oilwere all in consolidation mode up until the beginning ofAugust when sentiment turned negative. With thecorrelation currently strong and the markets moving asa function of risk appetite, a risk-on mode from thepotential change in Fed communication at the FOMCmeeting next week would spark a move higher in oiland boost commodity currencies.Based on recent Fedspeak, we expect the Fed toimpose an unemployment target (of let’s say 7%) in itscommuniqué, which would signal not only loosemonetary policy for longer but also place a lower barChart 2 : Fed Balance sheet vs. WTISource: Reuters Ecowin, Bloomberg, BNP Paribasfor QE3. With unemployment a lagging indicator, adecline in unemployment would take at least 3 years tofall to 7% from the current level of 9.1%. Our ratesstrategists expect that this change would leadTreasuries to rally in the front end, which would benegative for USD. As such, with a potentialcomprehensive solution on the eurozone debt crisis inthe works, risk appetite should improve and restore theimpact of the ”Bernanke put” under risky assets, drivingcommodities and commodity currencies higher.FX Strategy / Mary Nicola 27 October 2011Market Mover66www.GlobalMarkets.bnpparibas.com