JPM_FX_Markets_Weekly_US_2015-05-29_1725316

www.jpmm.com/Research/GlobalFXStrategy

Global FX Strategy

08 June 2015

Corrected Note (first published 05 June 2015) (See page 50 for details)

FX Markets Weekly

Answers to FAQs on the bond bear market

Global FX Strategy

John Normand AC

(44-20) 7134-1816

[email protected]

J.P. Morgan Securities plc

Paul Meggyesi

(44-20) 7134-2714

[email protected]

J.P. Morgan Securities plc

Arindam Sandilya

(65) 6882-2022

[email protected]

JPMorgan Chase Bank, N.A., Singapore

Branch

Niall O'Connor

(1-212) 834-5108

[email protected]

J.P. Morgan Securities LLC

Holly Huffman

(1-212) 834-4953

[email protected]

J.P. Morgan Securities LLC

See page 50 for analyst certification and important disclosures.

Outlook:

It isnt official but it is fairly obvious: government bonds are experiencing one

of their worst routs of the past three decades, and maybe the first one driven

initially by a non-US event (the Bund shock). This week's Outlook attempts to

answer the most frequently asked questions around the bond bear market and

its FX spillovers, including: (1) where will Bund yields peak; (2) wont

Treasuries just take over if Bunds ever stabilise; (3) when will the JGB market

implode again; (4) shouldnt surging rate volatility be more contagious; (5)

how much have the vulnerabilities of non-USD currencies diminished since

the taper tantrum; and (6) how much will rate and FX liquidity worsen as the

bond sell-off extends? Because most of the answers are uncomfortable to hear,

we're adding to USD longs this week.

Macro Trade Recommendations:

The dramatic re-pricing in fixed income should increase deleveraging pressure

on currencies that are over-owned, over-valued, or over-reliant on foreign

investors to fund current account deficits. The portfolio is already short the

two largest deficit currencies in G10 (GBP and NZD). Add to defensive

positions through short AUD/USD (cash), USD/MXN and USD/TWD (both

call spreads). Stay short cable but closed short GBP/NOK on weaker Norway

data. Stay short NZD/SEK ahead of a pivotal week for policy (RBNZ meeting

and Swedish CPI).

Emerging Markets FX:

With higher core rates underscoring EM vulnerabilities, we have added to

bearish EM FX trades in the past week and are now underweight in all three

regions. Maintain underweight IDR, THB, PLN, PEN and add underweight

RON. Take partial profits on underweight BRL on a more hawkish BCB but

add EM shorts in options space (MXN, SGD, THB, TWD) to existing

USD/RUB call spreads.

FX Derivatives:

Bund stress should only be mildly FX vol positive until the Fed picks up the

bond bear baton. Avoid adding fresh vol risk. EUR calls/GBP puts are well-

priced for an extension of the EUR rally. Yen skews have narrowed and offer

good entry levels into risk-reversals (long USD calls/short USD puts) for trend

chasers and 1X2 USD put spreads for contrarians. Near all-time low CNY

vols offer good risk-reward in short-dated carry.

Technical Strategy:

Despite this weeks two-sided action, the upside risks to USD are intact. The

backdrop for Asia FX continues to deteriorate as the reversals from April can

extend. Stay long USD/JPY, USD/TWD, EUR/AUD, TRY/ZAR, CHF/NOK

and EUR/PLN & short NZD/CAD and PLN/HUF.

Research notes:

CNY: Capital outflows offset current account surplus (Grace Ng, Lu Jiang and

Haibin Zhu)

CAD: What US energy independence is and isnt doing for Canada (Kevin

Hebner)

Contents

Outlook 2

Macro Trade Recommendations 10

Emerging Markets FX 18

FX Derivatives 23

Technical Strategy 27

Research Notes 29

Market movers 37

Event risk calendar 39

Central bank meetings in 2015 40

J.P. Morgan Forecasts

Global central bank forecasts 41

FX vs forwards & consensus 42

Rates, credit, equities & commodities 43

Global growth and inflation forecasts 44

Sovereign credit ratings and actions 45

Research Notes on morganmarkets.com 46

Global FX Strategy contact page 52

This document is being provided for the exclusive use of Jacqueline Lu at ANACAPA OFFSHORE INC.{[{Tkm{ ovsxo*V *Tkm{ ovsxo8vsJkxkmkzpz8myw*;:9:@9

2Global FX Strategy

08 June 2015

John Normand

(44-20) 7134-1816

[email protected]

Market liquidity post-crisis and The end of easy money on J.P. Morgan

Markets (www.jpmm.com)

The Special Topics area of J.P. Morgan Markets

(www.jpmm.com) archives longer shelf life research

on cross-market themes likely to influence financial

markets for some time.

Two that are relevant during the evolving bear market

in government bonds are The end of easy money and

Market liquidity post-crisis.

The end of easy money highlights reports on rate

normalization written by the J.P. Morgan Economics

and FX & Rates Strategy teams.

Market liquidity post-crisis highlights reports on

market regulation and liquidity written by J.P. Morgan

FX & Rates Strategy.

To access these archives:

1. Go to the Global FX Strategy page of

www.jpmm.com or click here for the Global

FX Strategy page

2. Under the Special Topics section, click the

banners The end of easy money or Market

liquidity post-crisis. Clicking these links will

then launch web pages dedicated to these

topics.


3Global FX Strategy

08 June 2015

John Normand

(44-20) 7134-1816

[email protected]

Outlook: Answers to FAQs on

the bond bear market

It isnt official but it is fairly obvious: government

bonds are experiencing one of their worst routs of

the past three decades, and maybe the first one

driven initially by a non-US event (the Bund shock).

This week's Outlook attempts to answer the most

frequently asked questions around the bond bear

market and its FX spillovers, including: (1) where

will Bund yields peak; (2) wont Treasuries just take

over if Bunds ever stabilise; (3) when will the JGB

market implode again; (4) shouldnt surging rate

volatility be more contagious; (5) how much have

the vulnerabilities of non-USD currencies

diminished since the taper tantrum; and (6) how

much will rate and FX liquidity worsen as the bond

sell-off extends?

Because most of the answers are uncomfortable to

hear, we're adding to USD longs this week. In the

Macro portfolio, add short AUD, MXN and TWD to

existing shorts in GBP and RUB. Stay short NZD vs

SEK. In Derivatives, stay long yen cross gamma

(own CAD/JPY and NZD/JPY vs USD/JPY

straddles) and GBP/USD vol. In the Technicals

portfolio add long USD/TWD to long USD/JPY, and

keep several cross-rate trades (short NZD/CAD;

long EUR/AUD, EUR/PLN and PLN/HUF).

Next week: US retail sales, China data and four

central banks

It isnt official but it is fairly obvious: government bonds

are experiencing one of their worst routs of the past three

decades, and maybe the first one driven initially by a non-

US event in this case the German Bund shock (chart 1).

Whether this move qualifies as a bear market depends on

the sector and definition, but regardless, moves have been

brutal in bonds, rate vol and currencies and liquidity is

notably thin too. So this week's Outlook attempts to answer

the most frequently asked questions around the global bond

sell-off and its FX spillovers. These include: (1) where will

Bund yields peak; (2) wont Treasuries just take over if

Bunds ever stabilise; (3) when will the JGB market implode

again; (4) shouldnt surging rate volatility be more

contagious; (5) how much have the vulnerabilities of non-

USD currencies diminished since the taper tantrum; and (6)

how much will rate and FX liquidity worsen as the bond

sell-off extends? Because most of the answers are

uncomfortable to hear, we're adding to USD longs this

week.

Chart 1: The current rout in global government bonds is the worst in

30-year in USD terms, and the first driven by non-US events

Year-on-year returns on J.P. Morgan Global Bond Index measured in local

currency and USD terms

Source: J.P. Morgan

Cubs are out, if not the bears themselves

In contrast to equities, where losses of 20% or more qualify

as a bear markets, bond investors agree on no such moves in

prices or yields to define a bear market. But since fixed

income rarely posts annual losses at least measured in

local currency terms we apply the bear market label here

if rolling 12-month returns turn negative. By this definition

the cubs are out, if not the bears themselves. J.P. Morgans

Global Bond Index in local currency terms is down 0.6%

year-to-date but up 4.4% over the past 12 months. But in

USD terms the index is down -3.5% YTD and -6.3% over

the past 12 months due to USD strength, so easily rivals the

worst bear markets of the past three decades (chart 1).

Interestingly for its currency and currency volatility

implications, the current bond market rout is the only one of

the past 30 years driven by non-US events (this years

German bund VaR shock). Not even German Reunification

in 1990, which then drove the greatest divergence in

Bundesbank-Fed policy in the post-war era, damaged global

bond markets as much as this year's Bund shock has. Both

the pace of bond losses and the unique circumstances

naturally prompt several common questions, which we

attempt to answer below.

1. Where will Bund yields peak?

When German Bund yields spiked in early May, we thought

the peak would come near 0.75%-0.90% on the 10-yr based

on the following: (1) fair value was closer to 2% on 10-yr

rates for an economy likely to deliver at least 2% nominal

growth in coming years; (2) but QE programmes globally

had shown some success in keeping yields well below fair

value when asset purchases were large relative to net

issuance (ECB purchases would be 150% of net issuance

this year, compared to Fed QE purchases of up to 60% in

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4Global FX Strategy

08 June 2015

John Normand

(44-20) 7134-1816

[email protected]

some years and BoE purchases of up to 95%); and (3) the

usual relationship between investor positions from our

biweekly European client survey and bond yields suggested

that a shift from longs to neutral would equate to about a

0.9% level on German bonds. The Bund market could not

escape an extended and substantial repricing at some point

in 2016 when expectations of tapering built, but mid-2015

seemed too early for Bunds to complete the valuation cycle

by moving from ridiculously expensive to appropriately

priced (see Europe's taper teaser from FX Markets Weekly

on May 8).

Yields did indeed retrace lower from mid-May but have

surged again this week to an intra-day high of 0.99% on a

higher-than-expected core inflation reading for May, plus

an ECB press conference in which Draghi commented that

the bank would not adjust its monetary policy due to macro

or market volatility. The inflation print and press conference

naturally prompt questions about whether the macro and

policy environment are changing in a way that justifies a

much quicker return to fair value. We do not think they

have. We, the ECB and almost all investors (judging from

survey and inflation breakevens) always expected inflation

to turn higher around this summer, and month-to-month

readings are always noisy. In our view, the odds of an early

end to ECB QE are trivial (less than 10%), because we

think the ECB will struggle to meet its inflation forecast of

roughly 1.5% on headline and core in 2016. If we are right,

the money market curve should be much flatter throughout

2017 compared to the 30% odds of an ECB hike in late

2017 that are discounted currently (chart 2).

Translating the money market outlook into a Bund forecast,

the 10-yr should trade around 0.9% if the JPM scenario of a

first ECB hike in September 2018 materialises. If the first

hike occurs in late 2017, as is implied by the ECB's forecast

showing a rapid return to near-2% inflation, fair value is

around 1.7%. If indeed Europe needs a few more years to

lift inflation sustainably and the first hike doesnt come

until late 2019, fair value is around 0.65%. A probability-

weighted average of these three scenarios (15% on 2017,

60% on 2018, 25% on 2019) yields a target of around

0.95%. Thus the conclusion isnt much different from the

one we reached a month ago: maximum 10-yr yields this

year roughly between 0.75% and 1%, but with the usual

overshooting risk intra-quarter due to illiquidity (see also

todays Global Fixed Income Markets Weekly. For the

euro, this yield profile leaves us neutral this month

Chart 2: European money markets price 30% odds of ECB hikes in

2017, which seems premature

Current curve for 1-yr eonia rates at various forward starting dates versus curve

projections under three scenarios of first ECB hike in Jun 2017 (implicit ECB view),

Sept 2018 (JPM view), Sept 19 (Japan-like environment) and weighted average

(15% on 2017, 60% on 2018 and 25% on 2019).

Source: J.P. Morgan

Chart 3: QE programmes are supposed to cap long-end rates, but

the relationship is inconsistent over time

Global bond yields as measured by the JPM Global Bond Index (Broad) versus

growth in Fed, BoJ, ECB, BoE and SNB balance sheets

Source: J.P. Morgan

given the randomness around whether Bunds or Treasuries

lead the global sell-off in any particular week, but still

negative into year-end (December EUR/USD target is 1.05)

as the Fed eventually trumps the ECB.

2. Wont Treasuries just take over if Bunds ever

stabilse?

The short answer is the worrisome one yes. The

combination of Fed rate normalisation and market

illiquidity was always supposed to drive the bear market in

global bonds this year and next, though JPM's forecasts

have barely been above rate forwards since BoJ and ECB

would also create enough duration scarcity to contain the

rise in long-end rates. Admittedly this belief that asset

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5Global FX Strategy

08 June 2015

John Normand

(44-20) 7134-1816

[email protected]

purchases will cap long-term yields is subject to some risks

for two reasons: the relationship between QE programmes

and global bond yields is unstable over time (chart 3), and

both Bunds and JGBs could be hit by expectations of

tapering in 2016.

This uncertainty about the stability of long end rates is also

the reason it is premature to sell dollars and buy cheap,

high-yielding currencies (all of which are in the emerging

markets) just because the US is experiencing secular

stagnation. Indeed lower long-tem growth should guarantee

a much lower than usual terminal rate when the Fed finishes

tightening, but there are no promises around how long-end

rates and market volatility would move in the first year of

Fed tightening given the lack of clarity around the pace of

hikes, market liquidity and possible ECB/BoJ tapering in

2016.

3. When will the JGB market implode again?

Just as the Bank of Japan pioneered QE, the JGB market

has led global bond markets in delivering VaR shocks over

the past decade, most of which have been overlooked

because non-residents only ever owned about 5% of this

market. (For comparison, foreign ownership of Treasuries

run around 50% and of Euro area bonds is about 30%.) In

summer 2003, Japanese 10-yr rates tripled from 0.5% to

1.5% and swaption vol quintupled in two months as Japan

appeared to be exiting deflation (chart 4). In April 2013 10-

yr rates doubled from 0.45% to 0.90% and swaption vol

quadrupled in a month following the BoJs launch of QQE.

In January 2015, yields also doubled due to poor auctions

(chart 4 red boxes).

Rising inflation expectations drove the 2003 and 2013

shocks, which is intuitive since price pressures trigger the

rethink on BoJ policy and also make JGBs look as

mispriced as Bunds (10-yields of 0.5% on JGBs and 0.9%

on Bunds look equally absurd if both economies could

deliver at least 2% nominal growth sustainably). We don't

know when another inflation scare will drive the next JGB

VaR shock, but with Japanese wage growth now running at

its fastest pace in 15 years as the unemployment rate

collapses a context similar to the US and UK (chart 5)

the odds of a minor shock in 2015 and a major one in 2016

seem high (see also JGB market liquidity: is high volatility

cyclical or structural? by Yamashita and Yamawaki

published May 27). This risk is why most of our exposure

to USD/JPY is highly tactical, why forecasts over the next

year show no trend within the low 1.20s despite Fed

tightening, and why we hedge a disorderly unwind of

USD/JPY longs over the medium term through a 2-yr put

(see FX Derivatives on page 23).

Chart 4: Japan pioneered QE and bond market VaR shocks

10-yr JGB yield (%) versus Japan 3Mx10Y swaption vol (basis points annualised)

Source: J.P. Morgan

Chart 5: It's worth wagering that accelerating wage growth would

drive Japanese inflation and a major JGB VaR shock in 2016

Wage growth year-on-year (%) by the preferred measure in US, UK and Japan

Source: J.P. Morgan

Chart 6: Investors were long of USD before the Bund shock than

they were ahead of any previous surge in rate volatility

Aggregate USD positions on the IMM (USD billions) versus G-3 average swaption

vol (basis points annualised)

Source: J.P. Morgan

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6Global FX Strategy

08 June 2015

John Normand

(44-20) 7134-1816

[email protected]

4. Shouldnt surging rate volatility be more

contagious?

Depending on which market one monitors, it wouldn't be

obvious that a VaR shock has hit the world's second largest

government bond market (Bunds) over the past two months.

Yes, European rate vol has doubled to its highest level since

the taper tantrum, dragging rates and rate volatility higher

across all government bond markets. But FX volatility has

moved +/-1% around an average level of 9.5% (basis VXY

Global) since European rates began rising; the VIX has

oscillated +/12% around 14%; and credit spreads are mixed

(wider in high-grade and EM external debt, stable in high

yield).

We've written before about some unique circumstances that

have prevented this explosion in rate volatility from

infecting FX vol. These include the Euro-centric nature of

the bond market sell-off in May which supported EUR/USD

and therefore depressed USD-based FX volatility. Also key

has been FX positioning, as investors had never been so

long of dollars/short of foreign currency when rate vol

begins to surge (chart 6). Thus our view on how the Bund

market sell off would play out across markets has been that

it will generate mild disorder: yes the euro should

outperform commodity currencies and EM due to

deleveraging and keep a roughly 1.10 -1.14 range versus the

dollar (depending on whether Treasuries or Bunds lead the

global sell-off), but FX volatility is unlikely to break above

11% (see Shouldn't rising rate volatility be more

contagious? published May 15).

5. How much have the vulnerabilities of non-US

currencies diminished since the taper tantrum?

Serious disorder characterised by moved like a 5% surge

in the trade-weighted dollar, a 2-point rise in FX vol to

taper tantrum levels like 12%, a 10% decline intra-month

decline in equities and 10-point rise in equity volatility

might result from a September start to Fed tightening. Such

imminent tightening would be so disruptive for two reasons:

money markets only partially price the event, even after

todays US payrolls report; and the imbalances, valuation

problems and thin risk premia that characterised so many

non-US economies in early 2013 have not shifted much

since the taper tantrum.

Recall the three original sins of many countries in early

2013, some due to the influence of ultra-loose G10

monetary policy and some due to their domestic policy

choices: (1) current account deficits were large (in excess of

3% of GDP); (2) currencies were quite expensive (real

effective exchange rates more than 10% above their long-

term average); (3) and risk premia as measured by real

Chart 7: Current account positions globally: some progress but not

enough six countries with deficits greater than 3% of GDP

Latest value versus Q1 2013 and long-term average

Source: J.P. Morgan

Chart 8: Valuations: nine countries real effective exchange rates are

now at least 10% above their respective long-run averages

Deviation of JPM real effective exchange rates (PPI-based) from long-term

average in Q1 2013 and today

Source: J.P. Morgan

Chart 9: Real policy rates: 15 now pay negativeor near-zero rates

Policy rates deflated by core CPI today versus Q1 2013 and 10-year average

Source: J.P. Morgan

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7Global FX Strategy

08 June 2015

John Normand

(44-20) 7134-1816

[email protected]

policy rates were extraordinarily low (often negative for

countries running external deficits). Over the past two

years, few have atoned. That is why when clients ask what

currency we would own versus the dollar as the Fed

prepares the tighten, the answer is "none, really, unless one

is interested in earning a carry short term in USD/CNY.

The vulnerability metrics plotted in charts 7,8 and 9 and

explained in the bullets below highlight why: no currency

offers the combination of small imbalances, cheap

valuations and decent risk premium that make them worth

owning before such an unpredictable Fed cycle in a

liquidity-constrained market environment has even begin.

Current account deficits: In early 2013, 11 countries

had current account deficits of over 3% of GDP: Turkey

(-6%), South Africa (-5.7%), India (-4.8%), Chile

(-4.1%), New Zealand (-3.9%), UK (-3.9%), Poland

(-3.8%), Colombia (-3.5%), Australia (-3.3%), Canada

(-3.3%) and Indonesia (-3%). Now, six countries have

deficits beyond the -3% threshold: Turkey (-5.8%),

South Africa (-5.1%), Colombia (-5%), Brazil (-4.6%),

New Zealand (-3.3%) and UK (-5.5%). Four of these

countries (Turkey, South Africa, Colombia, UK)

featured in the 2013 list.

Valuations: As measured by the real effective exchange

rate's deviation from its long-term average, 12 REERs

were at least 10% above their long-term mean in early

2013: BRL (+50%), RUB (+47%), IDR (+33%), THB

(+29%), AUD (+25%), NOK (+22%), NZD (+22%),

CLP (+22%), ILS (+13%), TRY (+13%), COP (+12%)

and CNY (+11%). Now, nine REERs trade at least 10%

above their long-term average, half of which also looked

expensive two years ago: NZD (+32%), IDR (+21%),

THB (+26%), RUB (+22%), BRL (+18%), CNY

(+18%), ILS (13%), CHF (+13%) and MYR (+12%).

Note that four REERs trade at least 10% below their

long-run average, most of which are QE currencies:

SEK (-13%), EUR (-14%), ZAR (-17%) and JPY

(-27%).

Risk premia: Real policy rates are some compensation

for a currencys vulnerability due to a large external

financing requirement when the Fed in tightening.

Although US real policy rates have been negative for

years and are almost the lowest in the world, at least the

US is the market where real rates will rise over the next

year or two. In early 2013, six currencies paid real

policy rates that were negative or near zero: ZAR (-

0.2%), RUB (-0.1%), TRY (0%), NOK (+0.1%), EUR (-

0.4%), GBP (-1.5%). Half of these countries ran large

current account deficits (South Africa, Turkey and UK).

Now, after a wave of easing and a revival in inflation,

15 currencies pay real rates that are negative or near

zero: CLP (-2.2%), CAD (-1.1%), RUB (-1.1%), SEK

(-1%), NOK (-0.8%), EUR (-0.7%), KRW (-0.5%),

CHF (-0.5%), GBP (-0.3%), AUD (-0.3%), JPY (-

0.2%), HUF (0%), ZAR (0.1%) and TRY (+0.5%).

Chart 10: If bond markets become this shallow on modest changes

in policy and/or data, what would a year of Fed tightening due?

Market depth in cash Treasuries and Bund futures measured as average size of

top three bids and offers between 8am and 4pm on Eurex (Bunds) and 830am and

1030am on BrokerTec (Treasuries)

Source: J.P. Morgan

Chart 11: Sometimes FX volumes rise during stress events, but

spreads widen too

Average daily volume in CME FX futures as proxy for OTC activity versus average

FX bid-offer spreads across all currencies as percent of mid

Source: J.P. Morgan

6. How much would rate and FX liquidity worsen

as the bond market sell-off extends?

The short answer is that no one knows because the

regulatory environment that has contributed to these

conditions is unprecedented. We do know a few things,

however: VaR shocks are occurring more frequently; bond

market depth seems to decline during each of these episodes

(chart 10); FX volumes sometimes rise and sometimes fall

during these shocks (chart 11); but FX bid-off spreads

almost always widen (chart 11 again). And if such has been

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0.08

0.10

0.12

0.14

0.16

0.18

0.20

Feb 12 Aug 12 Feb 13 Aug 13 Feb 14 Aug 14 Feb 15 Aug 15

taper tantrum

Bund shockflash crash

CME avg daily FX volume (5-day movav), USD bn

avg global FX bid-offer spread, %


8Global FX Strategy

08 June 2015

John Normand

(44-20) 7134-1816

[email protected]

the reaction to somewhat modest inflection points in data or

central bank policy, liquidity conditions seem biased to

worsen much more during a policy process like Fed

tightening that could run for a year or more. Such is the

nature of operating in overvalued, illiquid markets as

discussed in the outlook presentation Operating in

overvalued markets published May 20. Today's payrolls

report hastens the move into disorderly markets, particularly

due to confirmation of accelerating wages from the average

hourly earnings figures. Having shifted the portfolio to a

long USD position last week though shorts in GBP and

RUB, we add this week by selling AUD, MXN and TWD

(see Macro Trade Recommendations on page 10).

Next week: US retail sales, China data and

four central banks

In the US, the coming week will be somewhat slow, being

sandwiched between nonfarm payrolls this week and the

FOMC in a little over a fortnight. The most important

release will be May retail sales (11th), which will be

important given the reticence of the US consumer this year.

The NFIB survey, JOLTS, wholesale trade (all on 9th), the

federal budget (10th), import prices (11th), business

inventories (11th), PPI (12th) and consumer confidence

(12th) will also be released. There are no Fed speakers

scheduled as the blackout period before the June FOMC is

in effect. In Canada, housing starts (8th), building permits

(8th), new housing price index (11th), new vehicle sales

(12th) and the Teranet house price index (12th) are on the

calendar.

The Euro area calendar is light. IP will be released from

Germany (8th), France (10th), Italy (10th) and area wide

(12th). Additionally, Germany has trade (8th) while CPI

will come from France (11th) and Spain (12th). In the UK,

IP (10th), manufacturing (10th), RICS HPI (11th) and

construction output (12th) will be released. In Sweden,

Prospera inflation expectations will be important for

gauging the appropriateness of the Riksbanks muscular

monetary policy (10th). IP will also be released. Norway

has CPI (10th) although Fridays investment in oil & gas is

likely more important.

Japan sees some important releases: a second estimate of

Q1 growth (8th), bank lending (8th), the current account

(8th), the Economy Watchers survey (8th), M3 (9th),

consumer sentiment (9th), machinery orders (10th) and IP

(12th).

China has an important first tier data: trade report (8th),

CPI (9th), IP, retail sales and FAI (all on 11th). Money

supply should be released over the week. Taiwan has trade

(8th), Korea has a jobs report (10th) while India releases IP

and CPI (12th).

In LatAm, the most important releases include CPI from

Mexico (9th) and Brazil (10th). CEEMEA has IP (8th) and

GDP (10th) from Turkey; IP (8th) from Czech Republic; IP

from South Africa (11th) while Russia has trade (11th).

Four central banks meet: Thailand (10th), Chile (11th),

South Korea (11th) and New Zealand (11th). No changes

are expected from any.


9Global FX Strategy

08 June 2015

John Normand

(44-20) 7134-1816

[email protected]

Main trade recommendations

Source: J.P. Morgan

Trade type Currency Trade P/L

Cash (new) AUD/USD Enter short position

Cash (existing) NZD/SEK Hold short position 2.8%

GBP/USD Hold short position 0.3%

GBP/NOK Take loss -1.1%

Options (new) USD/TWD Buy 5M 30.80-31.40 USD/TWD call spread

USD/MXN Buy 2M 15.90-16.50 USD/MXN call spread

Options (existing) USD/KRW vs JPY/KRW Keep long 6M USD/KRW 1070 put vs 6M JPY/KRW 9.335 call -0.7%

USD/RUB Buy 3M 55-61 USD/RUB call spread 2.1%

RV (new) None

RV (existing) EUR/JPY Hold short 2Yx3Y variance swap (3Y variance swap forward start in 2Y), in JPY payout -1.1vol

USD/JPY Hold short 3-month 25D put vs. long 2-year 10D put in 1x2 notional -14 bp

EUR/USD Long 1Y 35D put vs short 6M 35D put, 1.5x1 notls: 6M leg closed, now running long 1Y leg delta-

hedged

-43 bp

JPY/KRW vs USD/JPY Hold long 1Y JPY/KRW vs short USD/JPY ATM, equal JPY vegas -0.5 vol

USD/CNY Hold 1Y 6.22 put 20 bp

CAD/JPY vs. USD/JPY Long 2M CAD/JPY vs. short 2M USD/JPY, equal JPY vega -2.1vol

NZD/JPY vs. USD/JPY Long 2M NZD/JPY vs. short 2M USD/JPY, equal JPY vega -1.8vol

EUR/AUD vs. EUR/USD Long 2M EUR/AUD vs. short 2M EUR/USD, equal EUR vega -3.7vol

USD/INR Short 3M vs. long 1Y USD/INR straddles, 100:75 notional ratio (100:150 vega) 0.5vol

USD/KRW Short 2M ATM -0.3vol

GBP/USD Long 1Y 25D strangle 0.8vol

EUR/KRW vs USD/KRW Long 1Y EUR/KRW vs USD/KRW ATM, equal USD vega -0.3vol

USD/NOK vs USD/MXN Long 3Mx3M USD/NOK vs USD/MXN FVA spread -0.7vol

USD/CNH Long 6M USD/CNH 6.10 put -3bp

Cash (new) USD/TWD Long (Tech Alert) 0.09%

Cash (existing) USD/JPY Long (Tech Alert) 5.07%

PLN/HUF Short (Elliott Model Portfolio) -1.28%

CHF/NOK Long (Elliott Model Portfolio) 4.86%

TRY/ZAR Long (Elliott Model Portfolio) 3.76%

EUR/AUD Long (Tech Alert) 0.83%

NZD/CAD Short (Tech Alert) 0.42%

EUR/PLN Long (Elliott Model Portfolio) 0.90%

Cash (closed) None

Macro portfolio

Technical Portfolio

Derivatives portfolio (relative value)


10

Global FX Strategy

08 June 2015

Paul Meggyesi

(44-20) 7134-2714

[email protected]

FX trade recommendations

Trade recommendations in this section are mostly spot, for

easier incorporation into the monthly Global Markets

Outlook & Strategy (GMOS), which outlines J.P. Morgans

flagship model portfolio across bonds, credit, equities, fx

and commodities. Some directional option trades are

included here as alternatives to cash position, and as a

complement to relative value trades discussed in FX

Derivatives section of this publication (p.23).

Current recommendations are marked to market at Friday

afternoon London time. A complete inventory of closed

trades is presented at the end of this section along with

performance statistics such as success rates and average

returns per trades.

Macro Trade

Recommendations

The dramatic re-pricing in fixed income has bearish

ramifications for risky markets and should increase

deleveraging pressure on currencies that are over-

owned, over-valued, or over-reliant on foreign

investors to fund current account deficits.

The portfolio is already short the two largest deficit

currencies in G10 (GBP and NZD). Positioning

creates tactical risk of a NZD bounce if RBNZ is not

overly dovish next week, but we hold the trade as

dairy prices tumble. GBP is vulnerable to a loss of

momentum in UK survey data.

We add a short position in TWD, a currency that has

enjoyed substantive outperformance on equity inflows

so vulnerable to contagion from bonds to equities as

well as a re-pricing of Fed policy post-payrolls.

Broad-based strength in US payrolls makes the choice

of asset currency more straightforward than was the

case under a Euro-centric bond sell-off with Greek

risk. Increase dollar exposure at the expensive of

high-beta currencies but keep one foot in the

European reflation camp through SEK. JPY is best

left alone (capital outflows are conflicted given higher

global yields yet greater volatility).

Sell AUD/USD in cash and buy a USD/MXN call

spread to add to the existing bearish positions in high-

beta currencies (USD/RUB and NZD/SEK).

We closed NOK long vs GBP on evidence of greater

economic pass-through from energy prices.

Closed trades: Closed GBP/NOK at -1.1%.

New trades: Sell AUD/USD in cash, buy a 2-mo

USD/MXN call spread, buy a 5-mo USD/TWD call

spread.

Existing trades: Stay short NZD/SEK and cable in

cash. Hold a USD/RUB call spread and a USD/KRW

6-month 1070 put vs a JPY/KRW 6-month 9.3350 call.

The euro-centric bond market bushfire re-ignited this week,

but the portfolio avoided being singed as we held a proxy

EUR long in SEK and had confined USD longs to

expensive currencies which lagged the euro rally (GBP).

RUB shorts performed well; indeed, RUB was the single

worst performing major currency this week, SEK the best.

The violent and recurrent nature of this fixed income sell-

off increases the likelihood that there will be a broader

contagion to risky markets. We warned of this possibility

when the sell-off first became disorderly in early May, and

even though bonds enjoyed a brief respite, the second leg of

this bear market (if that, indeed, is what this will prove to

be) has started to unnerve equity markets with the S&P500

dropping to a three-week low.

It would be relatively straightforward to position in FX for a

more contagious euro-centric sell-off in fixed income were

it not for the increasingly binary event risk in Greece and

the more convincing evidence post-payrolls of a step-up in

US growth that may see the leadership in the FI sell-off

rotate from Europe to the US. Without these two issues to

contend with the deleveraging playbook book would

suggest buying under-owned and fundamentally cheap

current account surplus currencies, so EUR, SEK and JPY

(the QE-bubble is deflating in the first two, if not the latter -

charts 1 and 2) whilst selling a range of the usual suspects

chosen for their vulnerable current account positions (AUD,

GBP and NZD in G10, TRY, ZAR and BRL in EM) and/or

stretched valuations and positions (RUB, BRL, NZD, THB

and IDR amongst others). But of course Greece cannot be

assumed away, neither can the step-up in US activity be

ignored, in which case the arguments for owning EUR are

not compelling, neither the arguments for overlooking USD.

The upshot is that were relatively confident that rising

yields in the US and Europe will pressure externally

exposed and expensive high-beta currencies. The case for

concentrating more of these positions against the dollar has

certainly improved as a result of the broad-based strength in

the payrolls report, but we keep one leg in the European

reflation camp through a long position in SEK. We thus add

three new dollar longs (vs AUD, TWD and MXN) to run

alongside the existing short in cable, whilst retaining a short

position in NZD/SEK.


11

Global FX Strategy

08 June 2015

Paul Meggyesi

(44-20) 7134-2714

[email protected]

Chart 1: The air is let out of the QE bubble, both in bonds...

Change in 10Y bond yields in % from 100 days before the start of local QE

Source: J.P. Morgan

Chart 2: and currencies

Trade-weighted ccy, indexed to 100 at 100 days before the start of local QE

Source: J.P. Morgan

We dont completely exclude buying the yen on the

deleveraging theme at some stage, but theres no rush as the

yen is much more focused at the moment on the steady-state

boost to capital outflows from Japan of higher global bond

yields. Investors are yet to recognize the possibility that the

transition to higher yields will be erratic and sometime

destabilizing so liable to intermittently depress rather than

encourage Japanese outflows. So probably there will be

better levels to buy the yen for further rounds of bond-

centric disorder.

The portfolio has had some success with RV trades as

NZD/SEK finally broke lower this week, albeit we took a

small loss on the short GBP/NOK position following

disappointing evidence of an accelerated economic pass-

through in Norway from lower energy prices (this more

than offset the distinctly downbeat message from the UK

PMIs, but at least we were short cable to capitalize on this

setback to hopes for a 2Q recovery in the UK). Next week

could prove decisive for the NZD/SEK cross as the RBNZ

meets while Swedish CPI and the quarterly Prospera survey

are the two most important indicators for an inflation-

obsessed central bank.

Trades

Sell AUD/USD in cash

AUD has neither the worst external nor valuation metrics

in G10 (those titles belong to GBP and NZD), but its

nevertheless vulnerable to the back-up in global bond

yields, especially if the payrolls report brings to the fore

the prospect of a Fed lift-off in September. So while

AUD may not be the single top pick of currencies to sell

against a backdrop of rising bond yields and Fed risks, it

is nevertheless a reasonable complement to a short basket

of high-beta currencies that in our case already includes

both GBP and NZD.

Sell AUD/USD at 0.7645 with a stop at 0.7835.

Buy a 2-month USD/MXN 15.9-16.5 call spread

The beta of USD/MXN to UST has remained rather

contained, certainly well below the levels observed

during the taper tantrum, which is manifest in the so far

orderly rally in USD/MXN. Without excess volatility to

yet encourage a change in intervention volumes, we

believe USD/MXN can continue to rally in a rising US

yield environment. Only beyond 15.80-15.95 do we

expect FEC to upscale its intervention programme.

Buy a 2-month USD/MXN 15.9-16.5 call spread

for 0.95%.

Buy a 5-month USD/TWD 30.8-31.4 call spread

As detailed in the Emerging Markets FX section, TWD is

vulnerable from 1) the slowdown in the Asian export

cycle; 2) a slowdown and potential reversal of sizeable

equity inflows, 3) a re-pricing of the Fed as September

lift-off approaches which could re-invigorate yield-

seeking deposit outflows. The Fed cycle could prove

particularly stressful for Asian EM this time around if US

rates were to rise whilst Asian export growth were

contracting as a consequence of the slowdown in China.

Asian currencies risk falling into the gap between the US

and Chinese business cycles.

Buy a 5-month USD/TWD 30.8-31.4 call spread

for 69bp.

Stay short cable, took small losses on GBP/NOK

These two trades enjoyed mixed fortunes over the past

week with cable delivering small gains and GBP/NOK

somewhat larger losses. Domestic UK developments

were supportive for our tactically negative stance on GBP,

most notable the PMI reports that stepped down a fair

way in May, albeit from historically elevated levels. The

deterioration in hitherto strong PMI series adds to the

body of evidence that suggests UK trends have

deteriorated this year and that momentum in

-1.4

-1.2

-1

-0.8

-0.6

-0.4

-0.2

0

0.2

-100 -75 -50 -25 0 25 50 75 100

JGB

Gilts

Bunds

SEK

80

85

90

95

100

105

-100 -75 -50 -25 0 25 50 75 100

JPY GBP

EUR SEK


12

Global FX Strategy

08 June 2015

Paul Meggyesi

(44-20) 7134-2714

[email protected]

Chart 3: GBP/NOK is a record 9% overvalued compared to rate

differentials and crude prices (a 2-sigma gap)

Residual from a 5Y regression of EUR/NOK on 2Y rate differentials and Brent. R2

= 78%, SE = 0.41

Source: J.P. Morgan

Chart 4: Cable provides amongst the most attractive entry levels for

dollar bulls

Z-score misalignment of local ccy vs USD from high-frequency valuation models

Source: J.P. Morgan

the economy is not yet rebounding after the tepid 0.3%

growth rate in 1Q. In truth however these trades were

dominated by non-UK developments, on the one

hand the ebb and flow and ebb again of EUR/USD

(clueless in a range) and markedly weak macro data from

Norway that went some way to validating what had

previously seemed strangely negative price action in

NOK over the preceding weeks. We consequently closed

the GBP/NOK position after the IP data and Norges

Bank's regional survey that should have removed any

doubt that the Norges Bank will make good on its

promise to cut rates on June 18. Were regard this as a

tactical defeat - GBP/NOK remains extremely expensive

from a valuation standpoint, and so still vulnerable should

this downturn in the Norwegian data prove to be yet

another in a long line of domestic data head fakes (chart

3).

This leaves us short cable, and while we caution against

expecting a rapid break higher in the dollar on the back of

the payrolls report (weve learnt to our cost never to over-

react to payrolls), the juxtaposition of better growth data

in the US and the opposite in the UK is supportive for a

test of 1.50 in cable. Cable is one of the few currencies

apart from CHF that screens as expensive to the dollar on

an interest rate basis (chart 4). Next week the limelight

will fall on Mark Carney's Mansion House address

(Wednesday). We doubt he will try to steer the market's

interest rate expectations as explicitly as he did at the

event last year, when his warning against interest rate

complacency pushed up rate expectations by around 20bp.

Sold cable at 1.5280 May 29. Marked at 0.1%

Sold GBP/NOK at 11.87 May 29. Closed June 5

for a loss of 1.1%.

Stay short NZD/SEK in cash

NZD/SEK finally broke lower this week after a

frustrating period of consolidation. In fact SEK was the

best performing G10 currency this week, a performance

all the more impressive since there really wasn't a single

obvious trigger for the move (the services PMI was

strong but it has been apparent for some time that the

Swedish economy is accelerating nicely to and beyond a

2.5% growth rate). What appears to be driving the move

is a broader sense that the Riksbanks unconventional

policy is becoming incrementally less credible and less

sustainable in the face of a relatively robust cyclical

upswing in the economy and an even more powerful

upswing in the housing market underpinned by credit

expansion. Policy is on an emergency setting; investors

increasingly question the nature of the domestic

emergency, hence Swedish bonds sold off virtually as

much as Bunds this week.

Next week could provide pivotal for the trade with the

RBNZ meeting and Sweden releasing CPI data and the

2Q, the two most important releases for the inflation-

obsessed Riksbank. There are certainly tactical risks to

the trade, especially from an RBNZ that fails to act or talk

as dovishly as expected (short Kiwi positions are

stretched and the rate market is priced almost 50:50 for a

cut next week). That being said, the policy rate gap

between the two countries is already straining what is

credible for two economies that in many regards are quite

similar (the Riksbank is facing a housing boom with a

policy rate that is 3.75% below that in NZ, and with

fewer macro-prudential tools to compensate), so we

continue to believe that there is substantially more

downside in the NZD/SEK cross on dovish news than

-0.8

-0.6

-0.4

-0.2

0.0

0.2

0.4

0.6

0.8

1.0

1.2

Residual

2011 2013 2015

-3.0

-2.5

-2.0

-1.5

-1.0

-0.5

0.0

0.5

1.0

1.5

NOK EUR JPY NZD AUD SEK CAD GBP CHF USD

index


13

Global FX Strategy

08 June 2015

Paul Meggyesi

(44-20) 7134-2714

[email protected]

upside on hawkish news. Moreover, NZD/SEK still

remains on the expensive side of fair value despite its

12% decline this year, which should limit the potential for

a major bounce (chart 5.

Sold NZD/SEK at 6.1270 on May 29. Marked at

3.10%. Lower stop to 6.06.

Chart 5: The initial decline in NZD/SEK has largely removed the

egregious over-valuation in the cross. Further declines are liable to

be less impulsive unless the RBNZ cuts rates next week

Residual of NZD/SEK from high-frequency fair-value.

NZD/SEK = 4.99 + 0.25 (2Y NZD-SEK). R2 = 55%, SE = 0.24. 5Y window.

Source: J.P. Morgan

Stay long USD/RUB via a 3-mo USD/RUB call spread

On 28 May we recommended buying a long 3-month

USD call/RUB put 1x1 spreads (strikes of 55.0 and 61.0)

as way to expressing a view of rouble-weakening over the

summer. USD/RUB is around 9% higher since mid-May

(and around 6.1% higher since 28th

May) as hostilities in

Ukraine intensified and oil prices fell over the period.

Given these large moves recently, the roubles nominal

exchange rate against the basket (0.55 USD + 0.45 EUR)

has modestly over-short-term models given the price of

oil and sovereign credit spreads (see Exhibit 10). We

think this over-shoot is best explained by the CBR's FX

purchases, which it has signaled can continue even

though crude prices have been falling (Brent crude prices

have fallen 5% MTD). Without a material rebound in

crude prices, the central banks USD-buying program

should keep the negative pressure on the RUB over the

summer, while seasonal income outflows over the next

two months will materially weaken the current account

surplus.

Bought a 3-month USD/RUB 55.0-61.0 call spread

for 2.34% on May 29. Now worth 4.45%.

Hold a USD/KRW put funded by selling a JPY/KRW

call

This trade has an intra-Asian RV angle in that we

expected KRW to outperform JPY, hence we subsided a

USD/KRW put by selling a JPY/KRW call. The trade

nevertheless stands to decay should USD/KRW continue

to rally, which seems increasingly likely post-payrolls,

That being said, we hold the trade for now as the

maximum loss assuming both options expire OTM is only

9bp worse than the current valuation (we see little risk

that JPY/KRW can bounce the 4.25% necessary for the

call we have sold to expire ITM).

Long a USD-KRW 6m put (k=1070), short a JPY-

KRW call (k=9.335). Paid 0.54% on April 24th.

Marked at -0.45%.

-0.6

-0.4

-0.2

0.0

0.2

0.4

0.6

0.8

Residual

2011 2013 2015


14

Global FX Strategy

08 June 2015

Paul Meggyesi

(44-20) 7134-2714

[email protected]

Table 1.Current FX spot recommendations and P&L

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

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

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

Long Short Entry date Entry level Current level Stop lossP&L since

entryComments

SEK NZD 07/05/15 6.127 5.932 6.060 2.99% Low ered stop

USD GBP 29/05/15 1.528 1.527 1.550 0.08% Hold

NOK GBP 29/05/15 11.87 12.00 12.15 -1.10% Take loss

USD AUD 05/06/15 0.7645 0.7645 0.7835 0.00% New trade

DescriptionEntry

dateExpiry date

Days to

expiryEntry level

Current

level

P&L since

entry*Comments

Buy 6M USD/KRW 1070 put, sell 6M JPY/KRW 9.335 call 24/04/15 26/10/15 143 0.54% -0.44% -0.98% Hold

Buy 3M USD/RUB 55-61 call spread 28/05/15 28/08/15 84 2.34% 4.45% 2.11% Hold

Buy 5M USD/TWD 30.80 - 31.40 call spread 05/06/15 05/11/15 153 0.65% 0.65% 0.00% New trade

Buy 2M USD/MXN 15.90 - 16.50 call spread 05/06/15 06/08/15 62 0.95% 0.95% 0.00% New trade

* P&L in % of asset unless otherw ise specified


15

Global FX Strategy

08 June 2015

Paul Meggyesi

(44-20) 7134-2714

[email protected]

I. Performance statistics 2008 2015

Chart 1: 2008-2015 performance summary: Average returns per trade

Chart 2: 2008-2015 Performance summary: Success rate by type of trade

2015 2014 2013 2012 2011 2010 2009 2008

2008-2015

avg

I. Macro Trade Recommendations portfolio

Cash

# of trades 32 55 54 28 42 89 63 85 56

Success rate 56% 56% 56% 61% 57% 53% 65% 59% 58%

Average return per trade (%, unweighted) 0.25% -0.09% 0.47% 0.25% 0.03% 0.02% 0.97% 1.96% 0.48%

Average holding period (calendar days) 18 28 20 25 25 24 20 31 24

Derivatives (non-digital)

# of trades 9 30 32 33 27 27 21 3 23

Success rate 44% 50% 31% 61% 74% 62% 62% 0.0% 48%

Average return per trade (%, unweighted) 2.95% 0.02% -0.13% 0.13% 0.94% 0.34% 0.55% -0.57% 0.53%


Derivatives (digital)

# of trades 2 2 3 5 10 4 21 5 7

Success rate 50% 100% 67% 80% 50% 25% 38% 20% 54%

Average return per trade (%, unweighted) 11% 49% 25% 12% -1% -7% 5% -4% 11%


II. FX Derivatives portfolio (relative value)

Vol r.v

# of trades 22 51 36 41 37 45 32 13 35

Success rate 77% 57% 58% 54% 62% 69% 63% 77% 65%

Average return per trade (unweighted)* 0.8 0.0 0.3 0.1 0.1 0.7 0.1 0.3 0.3


Vol plus directional r.v

# of trades 7 9 3 11 14 4 - - 8

Success rate 71% 67% 33% 91% 79% 50% - - 65%

Average return per trade (bp, unweighted) 38 55 -182 37 16 -8 - - -7.1

Average holding period (calendar days) 39 92 138 81 27 50 - - 71

Digital

# of trades 2 2 6 6 2 - - 3 4

Success rate 0% 50% 33% 50% 50% - - 33% 36%

Average return per trade (%, unweighted) -14% -6% -7% -7% -13% - - 8% -7%

Average holding period (calendar days) 94 59 92 51 25 - - 33 59

III. Technical Strategy portfolio

# of trades 44 75 34 20 33 47 47 87 48

Success rate 57% 52% 56% 40% 58% 47% 55% 43% 51%

Average return per trade (%, unweighted) 0.46% 0.91% 0.65% 0.39% 0.07% -0.01% 0.09% 0.16% 0.34%


2.0%

1.0%

0.0%

0.0%

0.2%

0.5%

-0.1%

0.2%

0.5%

-1% 0% 1% 2% 3%

2008

2009

2010

2011

2012

2013

2014

2015

2008-15 avg

Cash

-0.6%

0.5%

0.3%

0.9%

0.1%

-0.1%

0.0%

0.5%

-3% -1% 1% 3% 5% 7%

2008

2009

2010

2011

2012

2013

2014

2015

2008-15 avg

Derivs (non-digital)

3.0%

0.2%

0.1%

0.1%

0.4%

0.6%

0.9%

0.5%

0.3%

0.0% 0.5% 1.0%

2008

2009

2010

2011

2012

2013

2014

2015

2008-15 avg

Technical

0.3

0.1

0.7

0.1

0.1

0.3

0.0

0.8

0.3

0.0 0.5 1.0

2008

2009

2010

2011

2012

2013

2014

2015

2008-15 avg

RV (non-digital)

(vol pts)

-4%

5%

-7%

-1%

12%

25%

49%

11%

11%

-10% 10% 30% 50%

2008

2009

2010

2011

2012

2013

2014

2015

2008-15 avg

Derivs (digital, %)

59%

65%

53%

57%

61%

56%

56%

56%

58%

0% 50% 100%

2008

2009

2010

2011

2012

2013

2014

2015

2008-15 avg

Cash

0%

62%

62%

74%

61%

31%

50%

44%

48%

0% 50% 100%

2008

2009

2010

2011

2012

2013

2014

2015

2008-15 avg

Derivs (non-digital)

77%

63%

69%

62%

54%

58%

57%

77%

65%

0% 50% 100%

2008

2009

2010

2011

2012

2013

2014

2015

2008-15 avg

RV (non-digital)

43%

55%

47%

58%

40%

56%

52%

57%

51%

0% 50% 100%

2008

2009

2010

2011

2012

2013

2014

2015

2008-15 avg

Technical

20%

38%

25%

50%

80%

67%

100%

50%

54%

0% 50% 100%

2008

2009

2010

2011

2012

2013

2014

2015

2008-15 avg

Derivs (digital)


16

Global FX Strategy

08 June 2015

Paul Meggyesi

(44-20) 7134-2714

[email protected]

II. Closed trades 2015

Macro Trade Recommendations portfolio

Cash

Derivatives (non-digital)

Derivatives (digital)

FX Derivatives portfolio (relative value)

Vol r.v

Vol plus directional r.v

Digital r.v

Long Short Entry date Entry level Exit date Exit level P&L

USD EUR 23/12/14 1.22 09/01/15 1.18 3.2%

USD AUD 05/12/14 0.83 12/01/15 0.82 1.1%

CAD SEK 23/12/14 6.69 21/01/15 6.74 0.8%

JPY EUR 09/01/15 140.85 21/01/15 136.23 3.4%

JPY NOK 09/01/15 15.56 21/01/15 15.44 0.8%

USD GBP 06/01/15 1.52 22/01/15 1.51 0.5%

CHF EUR 22/01/15 0.99 27/01/15 1.02 -2.8%

JPY EUR 22/01/15 134.54 30/01/15 132.57 1.5%

CNH (1m fwd) USD 09/01/15 6.23 30/01/15 6.27 -0.6%

JPY NZD 30/01/15 85.14 06/02/15 87.00 -2.2%

USD CAD 30/01/15 1.27 06/02/15 1.24 -2.0%

GBP SEK 30/01/15 12.43 06/02/15 12.78 2.8%

GBP NOK 13/02/15 11.65 27/02/15 11.80 1.3%

EUR AUD 30/01/15 1.45 06/03/15 1.42 -2.5%

CHF GBP 27/02/15 1.47 10/03/15 1.50 -2.0%

SEK NOK 27/02/15 1.09 13/03/15 1.06 3.4%

USD GBP 06/03/15 1.51 19/03/15 1.47 2.7%

EUR NOK 13/03/15 8.62 19/03/15 8.62 0.0%

USD 3M Fwd TWD 20/02/15 31.51 19/03/15 31.45 -0.2%

USD SGD 27/02/15 1.36 19/03/15 1.39 1.8%

USD:EUR ILS 27/02/15 4.23 24/03/15 4.11 -2.7%

USD JPY 06/03/15 120.90 17/04/15 119.15 -1.4%

DKK EUR 20/02/15 7.43 01/05/15 7.46 -0.4%

CHF USD 17/04/15 0.96 01/05/15 0.93 2.5%

NZD USD 24/04/15 0.76 01/05/15 0.76 0.1%

CAD USD 17/04/15 1.22 07/05/15 1.21 1.2%

SEK USD 17/04/15 8.65 07/05/15 8.20 5.5%

EUR USD 01/05/15 1.12 26/05/15 1.09 -2.8%

EUR GBP 01/05/15 0.74 11/05/15 0.72 -2.5%

CHF USD 07/05/15 0.91 08/05/15 0.93 -2.3%

EUR BRL 01/05/15 3.38 18/05/15 3.43 0.9%

NOK GBP 29/05/15 11.87 05/06/15 12.00 -1.1%

Non-Digital Options Entry date Entry level Exit date Exit level P&L (%)

Buy a 5-month 6.75 CAD call/SEK put with 2-mo window

RKO at 6.8025/11/14 0.48% 08/01/15 0.00% -0.48%

Buy 1-y EUR/CHF 1.2088 Put 14/03/14 1.81% 16/01/15 22.90% 21.09%

Buy a 6-month 1.2250-1.18 EUR/USD put spread, sell a

1.30 call RKI 1.3325/11/14 0.12% 21/01/15 2.74% 2.62%

Buy a 6-month 0.75 NZD/USD put vs. selling a 0.81 call,

RKI 0.8526/09/14 0.92% 30/01/15 4.77% 3.85%

Buy a 6-month 121-129 USD/JPY call spread, sell a 113 put,

RKI 10925/11/14 -0.02% 30/01/15 -0.04% -0.02%

Long 2-mo USD/SEK bearish risk-reversal (long 8.15 put,

short a 8.90 call)13/02/15 0.22% 06/03/15 0.06% -0.16%

Buy 6w USD/SGD 1.40-1.43 call spread 20/03/15 0.49% 07/04/15 0.07% -0.42%

Buy 1M EUR/SEK 9.2250 put, RKO 9.05 20/03/15 0.18% 24/04/15 0.00% -0.18%

Short EUR/CZK through a 6-mo 1x2 ratio 27.60-27.15 put

spread07/11/14 0.34% 01/05/15 0.61% 0.27%

Digital Options Entry date Entry level Exit date Exit level P&L (%)

Short GBP/USD through a 6-month AED put struck at 1.51 07/11/14 17.0% 30/01/15 48.3% 31.3%

Buy 1M EUR/GBP 0.751 At-Expiry Digital Call 17/03/15 10.0% 16/04/15 0.0% -10.0%

Trade Entry date Entry level Exit date Exit level P&L (vol)

Sell 6Mx 6M vs buy 1Yx 6M Fwd vols in EUR/USD 13/10/14 0.6 23/01/15 0.0 -0.6

Buy 1Yx 1Y EUR/NZD FVA 17/10/14 10.3 23/01/15 11.5 1.2

Buy 2M EUR/AUD vol swap v s. sell 2M AUD/USD vol

swap, equal AUD vega11/12/14 -1.3 23/01/15 2.1 3.3

Long NZD/USD 6M vol vs. short AUD/NZD 6M vol, 150:50

v ega ratios, delta hedged25/11/14 13.3 23/01/15 14.0 0.7

Buy AUD/JPY 3M3M FVAs 06/01/15 11.7 17/02/15 13.3 1.6

USD/BRL short 1Y1Y vs. long 2Y1Y 2x1 FVA spread 25/11/14 18.9 27/02/15 21.1 2.2

Sell 3M 25D USD/NOK risk reversals 05/02/15 2.8 27/02/15 0.4 2.4

Buy 2M EUR/TRY vol swap v s. sell 2M USD/TRY vol

swap; equal TRY vegas03/02/15 0.4 13/03/15 -1.9 -2.3

Sell/buy 2M/1Y USD/CNH straddle calendars, 1.5:1 notional

ratio; delta hedged06/02/15 3.8 13/03/15 5.8 2.0

Buy 2M TRY/JPY vs 2M USD/JPY straddles, 1:1.5 vega 06/02/15 0.9 13/03/15 3.0 2.1

Short 2M vs long 6M GBP/USD straddles, equal GBP

notionals, delta hedged23/01/15 8.7 13/03/15 9.9 1.2

Buy 6M 25D USD/INR risk-reversal 17/10/14 2.4 20/03/15 1.0 -1.4

Buy 2M EUR/SEK vol swap vs. sell 2M USD/SEK vol

swap; 100:70 SEK vegas03/02/15 0.6 20/03/15 1.0 0.5

Buy 2M USD/NOK vs sell 2M EUR/USD, equal USD vega 13/03/15 2.8 20/03/15 4.9 2.1

Buy 2M EUR/AUD vs. AUD/USD; equal AUD vega 24/02/15 0.1 27/03/15 -2.2 -2.2

Sell 3M v s buy 1Y USD/CLP ATM spread, vega-neutral 09/02/15 0.7 17/04/15 1.1 0.4

Sell 2M EUR/MXN ATM 27/02/15 11.0 17/04/15 10.5 0.5

Sell 2M CAD/MXN ATM 27/02/15 10.0 17/04/15 11.0 -1.0

Buy 3M GBP/AUD vs GBP/CAD ATM, equal GBP vegas 26/03/15 1.1 17/04/15 2.0 0.9

Buy 3M USD/JPY 25D RR 30/03/15 0.4 01/05/15 0.7 0.3

Buy 3M AUD/CHF vs GBP/AUD ATM, equal vega 23/04/15 1.3 08/05/15 2.2 0.9

Buy 3M GBP/CHF vs GBP/JPY ATM spread, equal GBP

v ega30/04/15 0.5 08/05/15 2.0 1.5

Trade Entry date Entry level Exit date Exit level P&L Units

Sell 3M 1.12 EUR put / USD call v s. buy 6M 1.12

strike; 0.7:1.0 EUR notionals05/01/15 60 23/01/15 96 36 bp EUR

Buy 3M 35D AUD puts/CHF calls v s. sell 3M 35D

USD puts/CHF calls, equal CHF notionals, no delta

hedge

09/12/14 13 23/01/15 141 128 bp CHF

Short 2M 35D v s long 6M 35D GBP put/USD call,

1:1.5 notionals25/11/14 135 23/01/15 189 55 bp GBP

Buy 1Y ATMF USD/CNH call v s. sell EUR/CNH 25D

call; USD v s. EUR notls 1:1.505/02/15 -37 27/02/15 46 84 bp CNH

Buy 1Y 35D EUR put / USD call v s. 6M, 1.5:1

notional, no delta hedge23/01/15 221 13/03/15 353 132 bp EUR

Buy 3M 25D GBP/JPY call, sell 3M 25D GBP/USD

call, equal GBP notls03/03/15 24 01/05/15 -8 -32 bp GBP

Buy 3M USD/CAD 1.1912 put, sell 3M USD/SEK

8.2550 put20/04/15 0 08/05/15 -134 -134 bp USD

Digital Options Entry date Entry level Exit date Exit level P&L (%)

Buy EUR/GBP 10W 0.7750?0.8075 DNT 11/12/14 20.5% 23/01/15 0.0% -20.5%

Buy 6M USD/BRL 2.25 one-touch 20/10/14 8.2% 13/03/15 0.0% -8.4%


17

Global FX Strategy

08 June 2015

Paul Meggyesi

(44-20) 7134-2714

[email protected]

Technical Strategy portfolioTrade Entry Date Entry level Exit date Exit level P&L

Short NZDCAD 25/11/14 0.8952 08/01/15 0.9248 -3.2%

Short PLNHUF 27/08/14 74.6100 15/01/15 75.4500 -1.1%

Long USDHUF 17/12/14 252.520 15/01/15 276.000 4.7%

Short EURHUF 21/01/15 316.3600 23/01/15 311.000 0.9%

Short EURJPY 23/01/15 133.7500 26/01/15 130.7000 1.2%

Long USDHUF 17/12/14 252.5200 30/01/15 275.4500 4.5%

Short EURUSD 23/01/15 1.1250 03/02/15 1.1487 -1.0%

Short EURHUF 21/01/15 313.3500 04/02/15 307.5000 1.9%

Short EURHUF 23/01/15 310.3300 04/02/15 307.5000 0.5%

Short EURNOK 15/01/15 8.8722 05/02/15 8.6350 2.8%

Short GBPJPY 08/01/15 180.5000 11/02/15 183.0200 -1.4%

Long CHF/HUF 30/01/15 294.5500 12/02/15 287.9500 -2.2%

Short EURCHF 04/02/15 1.0553 17/02/15 1.0677 -1.2%

Short USD/ZAR 12/02/15 11.7461 27/02/15 11.5775 1.5%

Short GBPUSD 26/02/15 1.5533 04/03/15 1.5365 0.6%

Short USD/TRY 12/02/15 2.4946 04/03/15 2.5680 -1.4%

Short EURTRY 12/02/15 2.8260 04/03/15 2.8425 -0.3%

Short CAD/MXN 24/02/15 11.9810 06/03/15 12.2315 -2.1%

Short USDCHF 02/03/15 0.9561 06/03/15 0.9777 -2.2%

Short USD/ZAR 02/03/15 11.8550 06/03/15 12.0515 -1.6%

Short EURJPY 23/01/15 133.7500 10/03/15 130.7000 1.2%

Short NOKSEK 03/03/15 1.0764 11/03/15 1.0520 1.2%

Long EURNZD 11/03/15 1.4628 11/03/15 1.4450 -1.2%

Short GBPUSD 04/03/15 1.5310 13/03/15 1.4850 1.6%

Short NOKSEK 03/03/15 1.0764 17/03/15 1.0420 1.7%

Short GBPUSD 26/02/15 1.5533 18/03/15 1.4660 3.0%

Short EURUSD 03/02/15 1.1263 18/03/15 1.0702 5.2%

Short EURJPY 10/02/15 133.2300 18/03/15 131.0200 1.6%

Short EURCHF 18/02/15 1.0688 19/03/15 1.0681 0.1%

Long CHF/NOK 18/03/15 8.3200 19/03/15 8.1695 -1.8%

Short NZD/USD 23/10/14 0.7876 23/03/15 0.7620 1.7%

Short EUR/MXN 26/02/15 16.7314 03/04/15 16.3255 1.2%

Short EUR/IDR 27/02/15 14438.0000 03/04/15 14142.0000 1.1%

Long USD/CAD 14/10/14 1.1222 15/04/15 1.2323 9.8%

Short EUR/USD 07/04/15 1.0860 16/04/15 1.0752 1.0%

Short GBPJPY 26/03/15 177.0900 22/04/15 179.5200 -1.4%

Short GBP/CHF 02/04/15 1.4283 22/04/15 1.4522 -1.7%

Long USD/SGD 10/04/15 1.3661 27/04/15 1.3258 -1.5%

Short NOKSEK 14/04/15 1.0980 28/04/15 1.1182 -1.8%

Short EURHUF 01/04/15 301.5250 07/05/15 307.5500 -2.0%

Long EUR/GBP 06/05/15 0.7425 07/05/15 0.7290 -1.8%

Short USDSEK 30/04/15 8.2930 07/05/15 8.1945 1.2%

Short CAD/MXN 08/05/15 12.6605 22/05/15 12.4835 1.4%

Long AUD/NZD 06/05/15 1.0624 27/05/15 1.0640 0.1%


18

Global Emerging Markets Research

08 June 2015

Holly Huffman

(1-212) 834-4953

[email protected]

Daniel Hui

(65) 6882-2216

[email protected]

Emerging Markets FX

With higher core rates underscoring EM

vulnerabilities, we have added to bearish EM FX

trades in the past week and are now UW in all three

regions. Maintain UW IDR, THB, PLN, PEN and add

UW RON. Take partial profits on UW BRL but add

EM shorts in options space (MXN, SGD, THB, TWD)

to existing USD/RUB call spreads.

We moved EM Asia FX to UW from neutral in our

GBI-EM model portfolio, and add to long USD/Asia in

our leveraged portfolio via SGD (outright), THB (3m

forward), and TWD (USD call spreads) in addition to

existing bearish IDR and HKD trades

In EMEA EM, move UW overall by adding UW RON,

remain short PLN/HUF; hold USD/RUB call spreads,

short EUR/RSD, and short ILS versus a basket

We stay UW Latin America FX via BRL and PEN

although we take partial profits on BRL short

exposure due to BCBs hawkishness; we also take

profits on long MXN/COP (4.0% in the money) and

add long USD/MXN exposure via call spreads

We have added to bearish EM FX trades in the past

week and now have an UW position in all three regions.

The continued sell-off in DM rates, highlighted by Friday's

price action following the stronger than expected payrolls

report, underscores the risks to EM from a potential

resurgence in US data that we have been highlighting. The

notable additions to bearish views are in EM Asia and

EMEA EM. In the former, we have added to long USD

positions versus low yielders (SGD, THB, TWD) in the

leveraged portfolio. In the latter, we have moved RON to

UW, taking the regional portfolio positioning to UW given

the existing UW PLN and OW HUF. In Latin America, we

have reduced the portfolio UW by taking partial profits on

BRL in light of a hawkish BCB, but we remain with the

long USD bias and add short MXN risk via USD call

spreads.

EM Asia FX Strategy: Moving to UW as

policy works on both legs of USD/Asia

higher into summer

We move EM Asia FX to UW from neutral in our GBI-

EM model portfolio, and add to long USD/Asia in our

leveraged portfolio via SGD (outright), THB (3m

forward), and TWD (USD call spreads) in addition to

existing bearish IDR and HKD trades. We hold relative

long positions in RMB and KRW. In these pages last week,

we flagged the misfiring export sector and how this will

reinvigorate efforts by Asian policymakers to encourage

currency weakness through various channels including

direct intervention, rate cuts, or more direct regulatory

measures.

Meanwhile, we maintain the expectation that low

yielders in EM Asia will face the largest impact of a shift

in US short-end rates as we move closer to the first

forecast Fed hike in September. Six of the lowest ten

yielding EM currencies1

are in Asia (THB, CNY, PHP,

SGD, KRW, and TWD), which will show the largest

relative magnitude change in carry when the Fed starts to

move. Many of these currencies have shown an anti-home

bias in the past year, with strong growth in foreign-currency

deposits that we think is driven by a combination of

insufficient yield combined with a shift in expectations of

the broad dollar. These flows will likely be reinvigorated as

momentum for the start of Fed rate normalization picks up.

Asia will also enter the Fed liftoff period with pricing

and ownership back near pre-taper-tantrum levels. Half

of EM Asia FX is now stronger than pre-taper in NEER

terms (CNY, KRW, TWD, PHP, SGD, Exhibit 1), with

only IDR more than 10% weaker. Meanwhile, foreign

ownership ratios in bond markets are almost as high (MYR,

THB) if not higher (IDR) than pre-taper (Exhibit 2).

Foreign equity ownership has also substantially grown in

INR, TWD and KRW, and are only lower compared to pre-

taper in THB and MYR. Average FX positioning on our

investor survey is at the same levels as pre-taper, although

the average masks a large rotation into IDR and PHP, and

out of THB, KRW, MYR, and SGD (Exhibit 3). Finally,

net FX reserves are only higher in INR and KRW, while

elsewhere reserves have declined, while the aggregate ex

China is marginally lower than pre-taper.

1

On a 3m implied yield basis


19


08 June 2015

Daniel Hui

(65) 6882-2216

[email protected]

Saad Siddiqui

(44-20) 7742-5067

[email protected]

Exhibit 1: Pre-Fed stock-take 1: Half of EM Asia stronger than pre-

Taper in NEER terms

Source: JPMorgan

Exhibit 2: Pre-Fed stock-take 2: Bond foreign ownership ratios near

if not higher than pre-taper

Source: Various central bank sources, JPMorgan

The two EM Asia high yielders, INR and IDR, may be

better shielded from the Fed compared to the low-

yielders, but both face idiosyncratic deterioration

reform momentum amid elevated positioning. Heavy

EM positioning is well recognized in INR and, perhaps to a

lesser degree, in IDR. However, we have recently flagged

fatigued or deteriorating reform momentum in both of these

idiosyncratic markets, that make positioning look more

vulnerable especially ahead of the start of Fed

normalization, and we have consequently downgraded our

recommendations in both (see reprints of Recent USD-INR

spike not an opportunity to reload rupee carry trades p.8

and "IDR FX: More depreciation, but also more vulnerable

in the near-term, entry levels good to UW, p. 12).

More details of our latest recommendations and more on

individual Asian currency markets can be found in our

recently published Asian Macro Strategy Compass, 4 June

2015.

Exhibit 3: Pre-Fed stock-take 3: Positioning has rotated into IDR and

PHP from elsewhere in the past 2 years, but on average is flat

Source: JPMorgan

EMEA EM FX: Move UW overall by adding

UW RON, remain short PLN/HUF

EMEA EM FX has generally underperformed the euro

following the recent spike in EUR/USD and Bund yields

over the past two weeks, and we move UW as pressures

on currencies to weaken are likely to intensify in the

second half of the year. We move UW EMEA EM FX in

our GBI-EM Model Portfolio by adding a fresh UW in

RON. We stay OW HUF and UW PLN, given the

currencies similar betas to EUR/USD moves (see Exhibit

4), while also taking advantage of a more constructive

medium-term bond inflow story in Hungary. The higher-

yielders (RUB, TRY, ZAR) have not performed in line with

their historical beta in recent weeks, in part due to

idiosyncratic drivers. While we think the higher yielding

EMEA EM currencies are likely to remain under pressure,

our favoured expression of this view is via RUB. RUB has

been the weakest performer in the region over the past 2

weeks driven mainly by the re-escalation of violence in the

Ukraine region, CBR reserve accumulation talk, and

softening crude prices. We remain positioned for a further

rise in USD/RUB via options.

10%

15%

20%

25%

30%

25%

30%

35%

40%

45%

50%

20

12

Jan

Ma

r

Ma

y

Jul

Sep

Nov

20

13

Jan

Ma

r

Ma

y

Jul

Sep

Nov

20

14

Jan

Ma

r

Ma

y

Jul

Sep

Nov

20

15

Jan

Ma

r

INDOGB MGS

KTB (RHS) ThaiGB (RHS)

-3

-2

-1

0

1

2

3

4

5

IDR PHP INR CNY TWD SGD MYR KRW THB Ave

Positioning change,latest less April-2013 in JPM

investor survey


20


08 June 2015

Saad Siddiqui

(44-20) 7742-5067

[email protected]

Diego W. Pereira

(1-212) 834-4321

[email protected]

Exhibit 4: EMEA FX performance versus implied EUR/USD beta

move

FX moves since May 22. Implied appreciation based on 1-year and EUR/USD

move since May 22.

Source: Bloomberg, J.P. Morgan

RON: We move UW RON in our GBI-EM Model

Portfolio. RON should come under pressure amid USD

strength given the high beta of USD/RON to EUR/USD.

Also, we expect a continued fall in portfolio flows in the

short-run given recent political. Exhibit 5 shows the high

correlation between Romania's nominal effective exchange

rate and portfolio inflows. We think the relative lack of

liquidity of Romanias bond market leaves it vulnerable to

outflows should investors decide to reduce risk ahead of

what could be a volatile summer period. With EUR/RON

around the middle of its 4.40-4.50 range (4.4476 at the time

of writing), we think there is ample room for the central

bank to allow the currency to move towards 4.50 or above

against the euro before intervening. As such, we think that

the leu can underperform regional peers over the summer.

Exhibit 5: RON's NEER is highly correlated to portfolio flows

Source: JPMorgan, Haver Analytics

HUF: We remain OW HUF in the GBI-EM Model

Portfolio and short PLN/HUF. While the forint reacted

negatively to the headlines of the new policy rate,

Hungarys large basic balance surplus and increased

attractiveness of the bond market should keep the forint

well supported. Short-term market rates have scope to fall

in the near term, but we note that HUF implied yields are

already well below the policy rate (3m FX implied yield is

currently 0.91%). As such, as we do not think a fall in

onshore rates should materially alter the outlook for the

currency. Additionally, the Exhibit 6 below shows that over

the past two years there has been a high correlation between

non-resident bond holdings and EUR/HUF. Given the

incremental attractiveness of the Hungarian bond market

(due to increased local support) we do not envisage a

prolonged period of non-resident outflows in Hungary on

the back of this policy move.

PLN: We are UW PLN as the market will take some

time digesting the prospect of political noise and

uncertainty in Poland following the election of Duda to

the post of president. Within the context of CEE, we think

the zloty is likely to underperform peers, particularly

Hungary. We note that Poland remains one of the markets

most vulnerable to Fed-policy-driven bond portfolio

outflows, while its adjusted balance (CA + FDI +net

portfolio flows+ net other investments) is significantly

weaker than Hungarys. Polish government bonds have

been trading with a high beta to bunds lately, and we think

this elevated volatility is likely to dampen the appetite of

crossover investors to buy FX-unhedged polish government

bonds in the coming months. As such, we think the recent

move higher in PLN/HUF was over-done, and hold on to

our recommendation to stay short PLN/HUF.

Exhibit 6: EURHUF driven by non-resident bond flows in recent

years

Source: JPMorgan, Bloomberg

RUB: On 28 May, we recommended buying a long 3-

month USD call/RUB put 1x1 spreads (strikes of 55.0

and 61.0) as way to expressing a view of rouble-

weakening over the summer. USD/RUB is around 9%

higher since mid-May (and around 6.1% higher since 28th

May) as hostilities in Ukraine intensified and oil prices fell

over the period. Given these large moves recently, the

roubles nominal exchange rate against the basket (0.55

USD + 0.45 EUR) has modestly over-short-term models

0.4% 0.8%0.8% 0.8% 0.8%

0.4% 0.4% 0.1%0.8% 0.8% 0.7%

-0.5%-0.5%

-2.7%

-5.6%

-11.6%-14%

-12%

-10%

-8%

-6%

-4%

-2%

0%

2%

ILS RON CZK PLN HUF TRY ZAR RUB

Implied appreciation versus USD:

Actual FX move (vs USD)

-15%

-10%

-5%

0%

5%

10%

-2000

-1000

0

1000

2000

3000

4000

5000

6000

7000

8000

9000

Dec 0

7

Apr

08

Aug 0

8

Dec 0

8

Apr

09

Aug 0

9

Dec 0

9

Apr

10

Aug 1

0

Dec 1

0

Apr

11

Aug 1

1

Dec 1

1

Apr

12

Aug 1

2

Dec 1

2

Apr

13

Aug 1

3

Dec 1

3

Apr

14

Aug 1

4

Dec 1

4

Apr

15

12m rolling portfolio inflows

(EUR mn)

NEER yoy % change, right


21


08 June 2015

Diego W. Pereira

(1-212) 834-4321

[email protected]

Vivian Graves

(1-212) 834-3921

[email protected]

given the price of oil and sovereign credit spreads (see

Exhibit 7). We think this over-shoot is best explained by the

CBR's FX purchases, which it has signaled can continue

even though crude prices have been falling (Brent crude

prices have fallen 5% MTD). Without a material rebound in

crude prices, the central banks USD-buying program

should keep the negative pressure on the RUB over the

summer, while seasonal income outflows over the next two

months will materially weaken the current account surplus.

Exhibit 7: Short-term RUB model suggests the currency is cheap

relative to oil prices and CDS

Source: J.P. Morgan

Exhibit 8: EMEA EM FX Trades

Outright

trades

Entry

Date

Entry

Level

Current

levelTarget Stop

Long 3-month

USD call/RUB

put 1x1

spreads

28-May-15 2.34% 4.48% - -

Short

PLN/HUF15-May-15 75.80 75.80 72.0 77.0

Short

EUR/RSD 6m

forward (levels

reference spot)

11-Mar-15 120.8591 120.5000 120124

(review)

Short ILS vs.

Basket (0.5

EUR, 0.5 USD)

27-Feb-15

4.1140

(old:

4.2265)

4.0864 4.45

4.03

(old:

4.1140)

Source: J.P. Morgan

Latin America FX: We stay UW FX but

reduce UW BRL, take profits on

MXN/COP, and add USD/MXN call spread

The strength of the US labor market added steam to the

core rate selloff, so we stay UW Latin America FX via

BRL and PEN in the GBI-EM Model Portfolio; we take

profits on long MXN/COP (4.0% in the money) and add

short MXN exposure via USD/MXN call spread. We

have not faded the recent sell-off in global rates, on the idea

that US cyclical conditions were offering an asymmetric

risk reward to positive surprises

JPM_FX_Markets_Weekly_US_2015-05-29_1725316

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