8/8/2019 MII Pitch - Naufal Sanaullah - Short EUR/NZD - October 2010

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Short EUR/NZD

Naufal Sanaullah

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Pair-specific background

` 200bps positive annual carry/rate differential

` Pro-risk proxy and inversely correlated with

VIX

` Downtrend since March 2009 and trendingbelow 200dma since May 2009

` Big mover: 52wk range > 40 big figs

` Target: 1.5500` Stop: 1.8600

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Technical studies

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Currency-specific background

Euro ()` European Central Bank

` Benchmark rate: 1.00%

` Inflation rate: 1.90%1

` M3 growth rate: 1.00%2

` GDP growth rate: 1.93%3

` Unemployment rate: 10.07%2

` Current account/GDP: -1.03%3

` Budget/GDP: -5.20% deficit3

` Debt/GDP: 82.43%3

Dollar ($)` New Zealand Reserve Bank

` Benchmark rate:3.00%

` Inflation rate: 1.50%4

` M3 growth rate: -2.00%2

` GDP growth rate:1.90%3

` Unemployment rate:6.40%3

` Current account/GDP: -3.00%3

` Budget/GDP: -4.75% deficit3

` Debt/GDP:25.36%3

1 MIPS, October 2010 | 2 September 2010 | 3 Q2 2010 | 4 CPI, September 2010 | Sources: ECB Statistical Data Warehouse & Statistics New Zealand

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Benchmark rates

Sources: ECB & NZRB

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Inflation rates

Sources: ECB & NZRB

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NZD bull thesis

` Early stage of hike cycle

` Low inflation pressures compared to other

hiking CBs, eg. India, Turkey, NJA

` AUD/NZD selling off` Unemployment low and ticking down

` Agreement with Peter Jackson regarding LOTR

(10% of tourism revenues, 1% ofGDP)

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Milk/grains ratio

` Dairy and milk are NewZealands biggest exports

` Milk ratios are commonly

correlated with NZD

pairs

` Surging food/ag prices

` With higher feed costs,

farmers respond by culling

livestock herds

` Cuts down milk supply

` Milk already undervalued

Sources: Bloomberg

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NZD technicals

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EUR bear thesis

` Greece debt worries going nowhere` Revised 15% deficit/GDP in 2009, 7% deficit/GDP in 2010

` GDP growth -4.0% in 2010, FinMin expects -2.5% to -3.0% in 2011

` Assuming 2011 deficit/GDP of 5% (conservative), debt/GDPskyrockets above 130% by end of 2011

` Recent liquidity tightening unsustainable

` German export recovery unsustainable

` Acute peripheral concerns

` Portugal

` Ireland` Spain

` QE expectations gone

` Is ECB going to be cutting rates/eventually easing in 2011-2012?

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Liquidity tightening

` Long-Term Refinancing Operation (LTRO) saw first majorroll in July, 12mo liquidity

` Very small takedown in July roll

` Led to EONIA (overnight rate) ticking up from 40bps to

above 80bps` Effectively liquidity withdrawal

` Octobers LTRO (3mo) saw major takedown, greater thanexpected

`

First LTRO to lock-in year-end funding` Sovereign spreads have not declined, liquidity tightening

not sustainable

` Federal Reserve FX swaps still being utilized

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German export recovery

` Euro started rallying fromGerman export growth

resulting from EUR/USD at

1.20

`

2000 pips higher, exportgrowth is stalling out

` MoM declines have begun,

August being the first month

` With global protectionist

trends and Euro exchange

rates so high, export

recovery looks unsustainable

Sources: German Destatis

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Periphery concerns

Sources: FX-Concepts

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Portugal, Ireland, Spain

` PIIGS is ubiquitous by now but Portugal, Ireland, & Spain haveacute risks yet to be addressed

` Russian FinMin has taken Irish & Spanish debt off of sovereignwealth fund investment list

` Irish FinMin has cut Ireland out of debt market

` Reduction of deficit from 32% ofGDP to 3% ofGDP by 2014 is thecollateral for lower yields Irish FinMin demanding from market

` 4b in debt maturing next year

` Portugal facing very harsh austerity plan that only passed when

PM threatened resignation if not passed` Spain facing massive strikes and massive structural

unemployment (20% unemployment rate, 40% youthunemployment rate)

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QE expectations

` EUR saw massive inflows since August as late, under-owned expression of QE thesis

` Fed QE headline figure underwhelmed

` S&P at significant resistance level, QE possibly discounted,

and risk factors reemerging

` Efficacy of QE? Potentially USD-bullish?

` ECB dovishness going forward room to cut & ease

unlike Fed

` Germany cant be too happy with prevailing exchange

rates

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Cross-border flows

` $2.5t in Hungarian mortgages > 5yrdenominated in other currencies,

mainly CHF

` Hungarian homeowner collective is

leveraged into massive carry trade

financed by surging Francs that

denominate their suddenly-surgingmortgages

` While the Forints they earn in and

save with are plunging on ever-

increasing economic deterioration in

their home nation (negative GDP

growth H1 2010)

` This phenomenon exists throughout

CEE (Central & Eastern Europe) bloc

` Bailout risk

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EUR technicals

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Risks

` Volatility expansion` IfUSD-driven, typically not bullish for EUR/NZD because USD

bullishness tends to hurt (and reverse a lot of recent gains in) theEuro and could send it plummeting again like in 2010

` Pair with 1:2 ratio NZD/USD short if VIX gets above 28

` New Zealand growth declines` Milk ratios still low, as well as nominal price, suggesting currency

undervalued as it is

` Early in rate hike cycle so lots of potential inflows yet to evendiscount NZRB hawkishness

` Eurozone growth climbs` How much would have to occur for further gains?

` Without Germany, can this happen?

` Can Germany grow with EUR/USD above 1.40?

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Q&A