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Forex & Interest Rate Strategy 20 October 2010
Asia at the Open

Overnight Highlights
Sometimes it’s hard to know which way to turn.
USD went bid and risk assets got plundered after China hiked its 1Y CNY lending rate to 5.56% from 5.31% and
its 1Y deposit rate to 2.5% from 2.25%.
But a host of Fed speakers hit the wires favouring further Quantitative Easing, suggesting explicitly the US
could be caught in a “liquidity trap”.
So beware: that which is bought today may be debased tomorrow.
Stocks plunged on either side of the Atlantic. A report that a consortium that includes the New York Fed wants
to force Bank of America to buy back $47 billion of mortgage bonds didn’t help. DXY rocketed almost 2%
higher and trades above 78. The rising USD also hurt gold, which saw its biggest one-day fall since July. Gold
futures for December delivery fell $36.
The price of Investment Grade credit fell 0.11% to 99.98% of par, while the price of High Yield credit fell
0.4087% to 99.03% of par. The US 10Y yield was off 3.4 bp to 2.479%; the 2s10s curve flattened by 4.2 bp to 211
bp. US 2Y swap spreads tightened 1.4 bp to 17.87 bp. The TED Spread widened by 0.8 bp to 0.16%; Libor-OIS
spreads in 3M tenors rose 0.5 bp and trade over 12 bp.
US housing starts rose 0.3% to a five-month high of 610,000 units, better than the 580,000-unit rate expected by
the Street. Permits for new construction fell 5.6% to a 539,000 unit pace, instead of the expected 580,000 pace,
due to a decline in multi-family units.
In Fed speak, Atlanta Federal Reserve President Dennis Lockhart said he favours Quantitative Easing and said
the amount of asset purchases needs to be significant to make a difference. "It doesn't make sense to do a
small portion of QE," Lockhart said. "It has to be enough to make a difference. Something along the lines of
$100 billion a month would be in range."
The Chicago Fed’s Charles Evans hit the wires saying temporarily boosting US inflation may be hard pill to
swallow, but would be “potentially beneficial”. Said Evans: “Boosting inflation temporarily is an entirely
appropriate strategy to escape a liquidity trap and it's likely the US is in a liquidity trap for first time since Great
Depression.” Evans went on to say price-level targeting does call for a series of large scale asset purchases by
Fed.
Note this, too, from the Dallas Fed’s Richard Fisher: “In my darkest moments, I have begun to wonder if the
monetary accommodation we have already engineered might even be working in the wrong places…A great many
baby boomers or older cohorts who played by the rules, saved their money and migrated over time, as prudent
investment counsellors advise, to short- to intermediate-dated, fixed-income instruments are earning extremely low
nominal and real returns on their savings. Further reductions in rates earned on savings will hardly endear the Fed to
this portion of the population."
Germany’s ZEW Investor Sentiment Index fell to a 21-month low of -7.2 in October from -4.3 in September.
Markets had forecast a decline to -7. “The repeated decline of economic sentiment in October indicates that
compared to the period of rapid recovery [seen earlier this year], economic growth is likely to slow in the next
six months,” ZEW said in a statement. ZEW’s current conditions index rose to 72.6 points from 59.9 in
September.
The ECB's Juergen Stark, interviewed by the Journal de Negocios, was again on the wires saying that the
central bank’s liquidity operations may end sooner than later as there are "clear signs of reactivation and
normalisation of money markets".
Forex & Interest Rate Strategy Drew Brick, Head of FX and IR Strategy Asia
www.GlobalMarkets.bnpparibas.com +65 6210 3262
Bank of England Governor Mervyn King overnight said that some gauges of UK inflation are "extremely
subdued," signalling that he may be open to stepping up bond purchases.
Canada’s central bank opted to keep rates steady; Reserve Bank of Australia Minutes made clear a rate hike is
still on the table, though the timing of the move was unclear.
Risk Watchlist
Possible market risk points to watch today:
(Asia) Korea September Unemployment Rate; Thailand September Exports, BoT Rate Announcement; Taiwan
September Export Orders; Australia AUD 500mn 6.00% Bonds Due 2017 Sale; China CNY 28bn 5Y Bonds Sale;
Japan 3M Bills Sale; Malaysia MYR 1.5bn 166D Islamic Notes Sale, MYR 1bn 364D Notes Sale, MYR 3bn 91D Notes
Sale; India INR 40bn 91D Bills Sale, INR 20bn 364D Bills Sale.
(G11) Germany September PPI; Eurozone ECB’s Constancio Speaks in Frankfurt, ECB’s Orphanides Speaks in
Frankfurt; Netherlands Consumer Confidence; Italy August Industrial Production, September Non-EU Trade Balance;
UK September PSNCR and PSNB, BoE MPC Minutes, Comprehensive Spending Review; US ABC Consumer
Confidence, Weekly EIA Oil Inventories, Fed’s Plosser Speaks on “Incentives & Regulation”, Beige Book, Fed’s Lacker
Speaks on US Economic Outlook, USD 25bn 56D Cash Management Bills Sale; Canada BoC Monetary Policy Report;
Portugal Up to EUR 750mn Bills Sale.
Main Points
*** The Dow Jones Industrial Average fell 165.07 points, or 1.5%, to 10,978.62 led by a 4.5% drop in shares of
Bank of America. The S&P 500 Index sank 18.81 points, or 1.6%, to 1,165.90, while the Nasdaq plunged 43.71 points,
or 1.8%, to 2,436.95.
*** The CBOE Volatility Index soared nearly 9% to nearly 21.
*** How did our favourite convergence trade trade overnight? Well, the growth cross that is AUDJPY, E-Mini
Futures and the 2s10s30s US Treasury butterfly converged! The news out of China put a smack-down on the
reflationist enthusiasts.
Asia at the Open 20 October 2010 2
FX & IR Strategy www.GlobalMarkets.bnpparibas.com

*** The Stoxx Europe 600 Index lost 0.5% to 265.24 in London, the biggest drop since October 4. The gauge has
climbed 2.1% this month, closing at the highest level since April Monday.
*** National benchmark indexes declined in 15 of the 18 western European markets. The UK’s FTSE 100 and
France’s CAC 40 slid 0.7%. Germany’s DAX fell 0.4%.
*** US Treasuries rose, pushing 30Y bond yields from near a two-month high. On the day, yields fell 4 bp to
3.915%. The 10Y was off 3 bp to 2.479%; its spread to the 0.359% 2Y is at 211 bp this morning.
*** The yield gap between US 10Y notes and Treasury Inflation Protected Securities was 2.08 percentage points,
compared with a 2010 low of 1.47 in August. The five-year average is 2.1 percentage points.
*** Note again that global demand for US stocks, bonds and other financial assets rose in August. Net buying of
long-term equities, notes and bonds totalled $128.7 billion in August compared with net buying of $61.2 billion in July.
Total foreign purchases of Treasury notes and bonds were $117 billion in August, compared with purchases of $30
billion in July.
*** In the money markets, 3M USD Libor fixed again at 0.28906% -- its ninth consecutive day. The Libor-OIS
spread for 3M tenors rose and now trades over 12 bp. Three-month Euro Libor fixed at 0.94438%; 3M Euribor
continues to map higher and is now at 1.008%.
*** European benchmark bond yields rose. The 10Y Bund was 3 bp higher at 2.416%; the 10Y Gilt was 4 bp
higher at 2.998%; the French 10Y was also 4 bp higher and yields 2.798%.
*** Bonds from peripheral European nations declined relative to German Bunds. The yield on Greek 10Y bonds
rose 19 bp to 8.972%, pushing the yield premium over German 10Y securities up by 11 bp to 660 bp. Yields on Irish
securities rose 23 bp to 6.102%, leaving the spread with Bunds at 383 bp. The yield on Spanish 10Y bonds increased
four basis points to 4.034%, after being as low as 3.99% intra-day. The extra yield investors demand to hold Spain’s
10Y bonds instead of similar Bunds widened to 163 bp.
*** Spain sold 6.4 billion Euros of Treasury bills at auction overnight as the ruling Socialist party headed for victory
in a vote to pass its 2011 budget law. Spain sold 4.18 billion Euros of 12M bills at an average yield of 1.842%,
compared with 1.908% at the last auction on September 21. It sold 2.22 billion Euros of 18M bills at a yield of 2.009%,
compared with 2.146% in September. The Bank of Spain had set a target of 6 billion to 7 billion Euros for the sale.
Investors asked for 2.06 times the amount of 12M bills sold, compared with 1.71 times at the September 21 auction.
The bid-to-cover ratio for the 18M bills fell to 2.03 times, down from 2.91 at the last sale. Spain’s Prime Minister Jose
Luis Rodriguez Zapatero secured a majority for the vote on his fiscal plan through accords with two regional parties.
The alliances also clear the way for Zapatero, who got an austerity package through Parliament in May with a one-vote
margin, to overhaul the pension system and employment policies as the country emerges from the deepest recession in
six decades.
*** The yield premium investors demand to buy Italian 10Y bonds instead of German bunds fell four basis points
to a two-month low of 134 bp overnight, down from a Euro-era high of 185 bp on June 8.
*** The news that BofA is getting sued because of mortgage putbacks by the NY Fed, Pimco, Blackrock and
others sure pressured the financials’ credit default swaps in the overnight. Bank of America traded at its widest of the
year, as per the rack provided below at Zero Hedge charting LTM 5 Y Senior CDS spreads.

*** In IG, wideners outpaced tighteners by around 2-to-1, with 62 credits wider. Cross-market, the HY-XOver
spread decompressed to 51 bp from 39.79 bp and remains above the short-term average of 45.97 bp, with the
HY/XOver ratio rising to 1.11x, above its five-day mean of 1.1x. The IG-Main spread decompressed to -1 bp from
negative 4.69 bp and remains above the short-term average of -2.89 bp, Among the HY names, higher risk names
(>500 bp) underperformed lower risk (<500 bp) names. In the IG names, higher beta names outperformed lower beta
names.
*** Credit default swaps on the Markit CDX North America Investment Grade climbed 2.7 bp to a mid-price of 99.6
in New York. The Markit iTraxx Europe Index of 125 companies with IG ratings decreased 1.4 bp to 101.
*** DXY surged 1.7% to 78.25 at the NY equity session close, up from 76.922 in North American trading late
Monday. It touched 78.276 at its best level, a 1.8% advance and the biggest upward move since August 11.
*** The MSCI Emerging Markets Index slid 1.3% to 1,097.66 in New York in the longest losing streak in seven
weeks. Raw-material and technology companies led declines. The iShares FTSE/Xinhua China 25 Index Fund, an
exchange-traded fund that holds Chinese stocks, fell 2.4% to $45.24.
*** Brazil’s Bovespa Index declined 2.6%, the biggest decline since June 29, and the Real fell for a fourth day
against the USD. Brazil late Monday raised the so-called IOF tax on foreign investment in fixed-income securities to 6%
from 4%. It also boosted the levy on money brought into the country to make margin deposits for transactions in the
futures market to 6% from 0.38%.
*** The Emerging Market Index was 3.7% or 6.9 bp wider. EM currently trades at the wides of the week's range at
99.83%. The HY-EM spread decompressed to 332.83 bp from 329.49 bp and remains above the short-term average of
331.61 bp, with the HY/EM ratio falling to 2.74x, below its five-day mean of 2.85x.
*** Crude oil for November delivery fell $3.59 to $79.49 a barrel on the New York Mercantile Exchange. Selling
accelerated just before floor closing time. It was oil’s first time settling under $80 a barrel in October and at its lowest
price since September 29.
*** Gold for December delivery retreated $36.10 to $1,336 an ounce, its lowest close since October 7. Intra-day,
the gold contract hit a low of $1,332.50 an ounce.

*** December silver also dropped 2.6% to $23.78 an ounce, its lowest settlement since October 12. Last
Thursday, the silver contract posted a 30-year high $24.44 an ounce.
*** December copper retreated 10 cents, or 2.5%, to $3.76 a pound. That is copper’s lowest settlement since
October 7.
*** Currency policy is foreign policy, these pages have long insisted. Well, so too is the so-called rare earth’s
space apparently. The NY Times reports Beijing has just halted shipment of rare minerals to the US and Europe:
"China, which has been blocking shipments of crucial minerals to Japan for the last month, has now quietly halted
shipments of some of those same materials to the United States and Europe, three industry officials said on Tuesday...
China mines 95 percent of the world’s rare earth elements, which have broad commercial and military applications, and
are vital to the manufacture of diverse products including large wind turbines and guided missiles. Any curtailment of
Chinese supplies of rare earths is likely to be greeted with alarm in Western capitals, particularly because Western
companies are believed to keep much smaller stockpiles of rare earths than Japanese companies do." As we disclosed
a few weeks ago, prepare for an explosion in various rare metal prices.
*** The Thomson Reuters/Jefferies CRB Index of 19 commodities dropped 1.9% to 292.98, the most since June
29. Ten of the commodities declined more than 2%.
China Rate Hikes
China last raised benchmark lending rates in December 2007. Central bank Deputy Governor Zhu Min said on
March 25 that rates are a “heavy-duty weapon” as the government attempts to slow credit growth, curb real-
estate speculation and cool inflation.
On China’s surprise rate hikes, this from BNPP Economics:
The PBOC announced a 25 bp hike to benchmark 1Y deposit and lending rates. 1Y deposits were hiked to 2.50% from
2.25% ; 1Y lending rates raised 25 bp to 5.56%.
The 3m, 6m, 2Y, 3Y, 5Y deposit rate were hiked by 20 bp , 22 bp , 46 bp , 52 bp and 60 bp to 1.91%, 2.2%, 3.25%,
3.85%, 4.2%.

Other terms of the lending floor were raised 20 bp..
This robust tightening is much stronger and earlier than our expectation and market consensus.
With central bankers arguing for exchange rate flexibility and Chinese leaders looking to manage the effects of inflation
and confidently using quantitative tools to manage liquidity, the urgency of normalizing very low nominal and real
interest rate have been ignored and deferred; especially with FED -G3 QE imminent and heavy pressure on RMB
persisting into the G20 summit.
What does the surprise tightening imply?
1. As recent data suggest and we have argued, both growth and inflation are presenting upside risk; the declining
USD and surging liquidity flows are also inflaming property risk;
2. The decision is likely from top policymakers at the Politburo; it might be related to the ascendance of next generation
politicians who are rather worried about excessive loose policy effects on property bubbles and financial risks, which
despite intensified controls put in place in the last six months remain worrisome; it seems more hawkish risk
management-biased policymakers are getting the upper hand after the Party central committee meeting over the last
week.
3. The rate hike is structured as more robust and will steepen the deposit curve; this clearly is targeting managing
household inflation expectations and to protect depositors and curb asset bubble risk;

4. The aggressive tightening into the G20 summit in Seoul and FED QE suggests a level of confidence regarding
exchange rate impact on growth. We expect Beijing to continue two way floating referencing NEER.
5. With the strong hikes, we don't expect another rate move till spring after Chinese new year.
With overall real rates low , the tightening won't change our growth outlook of soft landing to 8% in 1H; however, the
pressure on property and banks might intensify greatly into 2011; after the knee-jerk reaction , A share markets should
remain well-supported as long as bearish uncertainty is cleared and inflationary-low real rates fuel retail risk- taking.
On the market implications of China’s rate hike, this from BNPP’s Chief Global FX Strategist Hans Redeker:
China’s rate hike will help mopping up excess liquidity in the system, but with the spread between USD and RMB rate
rising, sterilisation costs rise. China’s rate hike suggests to us that that the likelihood of a G-20 deal has increased and
not de-creased. The consensus opinion on this issue is different. The consensus assumes that higher rates would be in
substitution a stable RMB. The argument follows the rational that higher rates would help fighting off inflation and hence
no longer requiring a currency adjustment. We disagree. Higher rates are required mobbing up excess liquidity (helping
to sell sterilisation bonds), but if the RMB does not increase in value the inflow of capital would just continue and
require even more of a sterilisation effort. Moving the RMB closer to equilibrium suggests Chinese reserves increasing
at a slower pace reducing the need of sterilisation operation. Hence, we see the RMB rate hike providing further
evidence that a G-20 currency deal might be in the making.
The implications on markets will be significant. It remains our view that a G-20 agreement weakens global liquidity
conditions and we trade markets accordingly. Over past weeks, Gold has been the ultimate liquidity trade and hence
will have to suffer most should the G-20 agree. The ZAR looks vulnerable as its rally has been entirely commodity
based unrelated to South Africa’s economic performance, which has disappointed. We stay on our long volatility call
and see the USD rebounding against G-10 currencies with the JPY remaining the exception to the rule.
On our China trades, this is from our China Strategist, Gao Qi:
As the rate hike could boost the expectation on CNY appreciation, we look to sell USD versus CNY on rallies. We took
profit on our short 1Y CNH vs. 1Y USDCNY NDF position as now the spread is about -100 pips only. We look to trade
the spread again when it widens above -800 pips.
We stay with our 2-5Y CNY ND IRS steepener.
CNY: 2-5Y CNY ND IRS Steepener

Enter: 50 bp, 23 September 2010
Stop: 40 bp
Target: 70 bp
Bid/Ask: 3 bp for USD 5-10K PV01
Carry: +0.75 bp/month
Pay-out Ratio: 2.0x
Current: 69 bp
Economic and Market News of Note
(US Housing Starts and Building Permits) The report on housing starts was stronger than expected in September.
Starts were almost flat, moving up by 0.3% m/m, while the market was looking for a 3% decline. In the meanwhile, the
previous month's reading was revised up to 608k from 598k. The revision in August was concentrated in the more
volatile multifamily sector which saw a 42.3% m/m jump (previously estimated 32.2%). In September, multi-family starts
dropped 9.7% m/m. Meanwhile the single-family sector increased by 4.4% m/m, the second consecutive increase
following three months of declines. The level of starts in September was the highest since April of this year, however,
remains well below previous recessions' troughs. In contrast to the increase in starts, building permits, the indicator of
future activity, have been growing much weaker in the recent months and dropped to the lowest level since May 2009.
Building permits declined 5.6% m/m in September as the multi-family permits dropped 20.2% m/m.

BNPP Economists’ Comment: While the recent pick up in starts might suggest that the housing market is
bottoming out, mounting shadow inventories, near record-low home sales and a lack of jobs mean any pick up
will be painful and will take time to develop.
(BoA Lawsuit) The New York Federal Reserve Bank is part of a consortium of eight large institutional investment firms
that is suing Bank of America over failures related to mortgage securities. The firms – which include Pimco and
Blackrock – are seeking to force BofA to buy back $47 billion in mortgage bonds. Kathy Patrick, lead attorney for the
consortium, confirmed in a statement Tuesday that the group holds more than 25% of the voting rights in more than
$47 billion worth of Bank of America securities. Shares of Bank of America, a component of the Dow Jones Industrial
Average, were more than 4%. A suit alleging failures by Countrywide Financial to properly service loans that were part
of certain mortgage-backed securities was also filed overnight. Countrywide was acquired by Bank of America in 2008.
"We want to enforce the holders' contract rights," Patrick told CNBC. "Today's action begins the clock ticking ... If these
issues of non-performance are not addressed and cured, then our clients will be able to enforce their rights in court."
(US Commercial Real Estate) The Moody's REAL/Commercial Property Price Index dropped by 3.3% in August, and
is now 45.1% lower compared to the October 2007 peak. According to Moody's: “The data suggest that the commercial
real estate market has become trifurcated, with prices for larger trophy assets rising, prices for distressed assets
declining sharply, and prices for smaller but healthy properties remaining essentially flat. One way to view index returns
is by looking at the interplay of these three components of the overall market. The index again turned negative this
month in part because large negative returns on distressed properties created a drag that outweighed the positive and
flat results of the performing properties.”
(US Mortgages) Interest rates on 30Y fixed-rate US mortgages rose for the first time in five weeks. Mortgage rates on
30Y fixed mortgages, the most widely used loan, were 4.14% Tuesday afternoon, up from 4.13% at the same time last
week, according to Zillow Mortgage Marketplace. The previous week was the lowest rate reported since Zillow
Mortgage Marketplace launched in April 2008. The 30Y fixed mortgage rate peaked at 4.19% on Sunday, and then
steadily declined for the remainder of the week, Zillow said. Interest rates on other types of mortgages were mixed.
Fifteen-year fixed mortgage rates were 3.60%, down from 3.65% the previous week. Rates for 5/1 adjustable-rate

mortgages, or ARMs, set at a fixed rate for five years and adjustable each following year, were 3.00%, up from 2.98%
the previous week.
(Bank of Canada) In a largely anticipated move, the Bank of Canada left its overnight interest rate at 1.0%.The Bank of
Canada began moving towards normalization back in June and had raised the target rate three times this year from a
record low of 0.25%. The BoC statement suggests that no further hikes are likely by at least the end of this year (The
next scheduled date for announcing the overnight rate target is 7 December 2010). “At this time of transition in the
global recovery, with a weaker U.S. outlook, constraints beginning to moderate growth in emerging-market economies,
and domestic considerations that are expected to slow consumption and housing activity in Canada, any further
reduction in monetary policy stimulus would need to be carefully considered.” The statement reads much more dovish
than the previous one making reference to “a more protracted and difficult global recovery” rather than the previous
reference that “the global economic recovery is proceeding but remains uneven.” The domestic outlook has been
revised down: “The Bank expects the economic recovery to be more gradual than it had projected in its July Monetary
Policy Report, with growth of 3.0 per cent in 2010, 2.3 per cent in 2011.” Previously they expected a 3.5% growth in
2010, 2.9% in 2011. Similarly to the September statement, the Bank of Canada added an explicit statement about the
US in their October statement, pointing to “a weaker-than-projected recovery in the United States in particular.”
(German ZEW) The survey continued to show cross-winds, with expectations falling, but current conditions jumping --
the latter proving bigger than the former. More specifically, the current conditions index surged by 12.7 points to 72.6.
Having already exceeded the peaks recorded in 1995 and 2000, the series is now approaching the all time high of 88
recorded in 2007. By contrast, expectations fell from -4.3 to -7.2. That was a moderate fall in comparison. However that
followed a near-18 point fall the prior month -- the biggest since the fall of Lehman Brothers.
BNPP Economists’ Comment: The accompanying commentary mentioned that weak growth in the US and
some euro area countries are a major risk. We suspect that the strength of the EUR (up by over 6% over the
last month) also had a part to play in the weaker expectations index. Overall, the thrust of the survey was
largely in line with expectations -- however current conditions continue to exceed expectations -- the last time
it was weaker than expected was the February survey.
(Eurozone BoP) The Eurozone current account deficit widened from EUR 4.1bn in July to EUR 7.5bn in August, based
on the seasonally adjusted data. This is the largest deficit since September 2009. This is due to weaker exports of
goods and services during the month, which go against the rise shown by the customs data. We have to wait for the
September figures to determine whether the trend is in line with the BoP data, which point to an economic slowdown, or
to the customs' figures, which suggest a more resilient activity, both inside and outside the Eurozone.

BNPP Economists’ Comment: Capital flows show, as every month since the start of this year, a net outflow for
foreign direct investments of EUR 11bn in September. This is financed by a net equity inflow, for the fourth
straight month, amounting to EUR 21.7bn in September, mostly due to eurozone investors buying foreign
equities. Alike in July, but contrary to April and May, we have a large net outflow on bonds and notes in August
(EUR 22.5bn after EUR 34.5bn), with both foreign investors selling eurozone bonds and domestic ones buying
paper overseas. Altogether the August basic balance is in deficit for an amount similar to that of July (EUR
22.1bn after EUR 23.5bn). The flow of funds may explain the weakness of the EUR/USD during the month of
August. The September balance of payments data will be more interesting, since they will show whether the
sharp rally of the EUR was driven by long-term capital flows or by short-term capital movements.
Here’s a quick-take preview from BNPP Economics on BoE Minutes due out later today:
We expect the October BoE MPC minutes to show a 3-way split. It would be very odd if Adam Posen does not vote for
more QE, even if he warned not to assume this was a foregone conclusion on the back of his speech in Hull. We
expect the tone of the body of the minutes to show further baby steps towards more QE. The committee's assessment
of the domestic and international activity data should have turned more dove friendly. If the minutes open the door
further to more QE, next week's initial estimate of Q3 GDP could be crucial.
Currency Wars Redux: The Plaza Accord Becomes the Hyundai Accord?
So Beijing jacks rates, USD goes bid, risk goes offered. But for all the activity out of China overnight, we
continue to wonder if some sort of global FX policy deal could be in the offing before all is said and done.
Indeed, after we mused in yesterday’s Asia at the Open whether a Plaza-like currency accord might be in the
cards in the run-up to the G20 meetings in Seoul, we sat down with our colleague in Asia Strategy, Rob Ryan,
to see whether the 1985 agreement between the US, UK, France, West Germany and Japan to weaken the USD
might help benchmark a prospective Hyundai Accord now.
The Seoul meeting, after all, is being held at the Hyundai Hotel.
Before long, we found ourselves editing and – admittedly -- giggling. Take a look at the September 1985
Finance Ministers’ Communiqué below – aka the Plaza Accord -- and tell us, dear reader, if the American
humorist Mark Twain wasn’t right:
“History doesn’t repeat itself – at best it sometimes rhymes.”
th
Our edits are in blue and remember, the policy kicker came in the final 18 point – and on that score, we didn’t
need to alter a word. A full 25 years after the fact, what was past is still prologue.

Announcement of the Ministers of Finance and Central Bank
Governors of the G20 France, Germany, Japan, the United
Kingdom, and the United States (Plaza Hyundai Accord)
September 22, 1985 October 22-23, 2010
1. Ministers of Finance and Central Bank Governors of the G20 France, the Federal Republic of Germany,
Japan. the United Kingdom, and the United States met today, September 22,1985, October 23, 2010, in the
context of their agreement to conduct mutual surveillance and as part of their preparations for wider
international discussions at the forthcoming meetings in Seoul, Korea. (!!) They reviewed economic
developments and policies in each of their countries and assessed their implications for economic
prospects, external balances and exchange rates.
2. At the Bonn Economic Pittsburgh Summit in May 1985 September 2009 the Heads of State or
Governments of the G20 seven major industrial countries and the President of the European Commission
of the European Communities issued an Economic Declaration Towards Sustained Growth and Higher
Employment a Framework for Strong, Sustainable, and Balanced Growth. In that Declaration Framework
the participants agreed that:
The best contribution we can make to a lasting new prosperity in which all nations can share is
unremittingly to pursue, individually in our own countries and cooperatively together, policies conducive
to sustained growth and higher employment. Our countries have a shared responsibility to adopt
policies to achieve strong, sustainable and balanced growth, to promote a resilient international
financial system, and to reap the benefits of an open global economy.
3. The Ministers and Governors were of the view that significant progress has been made in their efforts to
promote a convergence of favorable economic performance among their countries on a path of steady non
inflationary growth. Furthermore, they concluded that their countries are restoring the vitality and
responsiveness of their economies. As a result of these developments, they are confident that a firm basis
has been established for a sustained, more balanced expansion among their countries. This sustained
growth will benefit other industrial countries and will help ensure expanding export markets for developing
developed countries, thereby contributing importantly to the resolution of problems of heavily indebted
developing developed countries.
4. They believe that this convergence of favorable economic performance has been influenced increasingly
by policy initiatives undertaken by their developing countries. Moreover, each of their countries is
committed to the implementation of further policy measures which will reinforce favorable convergence and
strengthen the sustainability of the current expansion.
5. Ministers and Governors were of the view that recent shifts in fundamental economic conditions among
their countries together with policy commitments for the future, have not been reflected fully in exchange
markets. (!!)
6. Ministers and Governors expect that growth in aggregate for their countries will be about 3 5.0 percent
this year, compared to negative growth of -0.7 -0.5 percent in 2009 1982. Although this figure is down
slightly from 1984 the pre-crisis period, growth will be more balanced than at any time in the last four years.
After the particularly rapid U.S. Chinese growth 1983-84 of the last four quarters, there is now increased
some evidence of internal growth in the other developed countries. In particular, private investment has
picked up strength. The current expansion is occurring in a context of fiscal consolidation: it is not
dependent on short-lived fiscal stimulus. As a result of the changes in the components of growth, real
growth in their countries can be expected to remain strong as U.S. Chinese growth moderates.

7. The current sustained expansion is occurring within a framework of declining inflation, a phenomenon
that is unprecedented in the past three decades. Inflation rates are at their lowest in nearly 20 years, and
they show no signs of reviving. (!!)
8. There has been a significant fall in interest rates in recent years. Apart from welcome domestic effects
this has been particularly helpful in easing the burden of debt repayments for developing developed
countries.
9. This successful performance is the direct result of the importance given to macroeconomic policies which
have reduced sought to raise inflation and inflationary expectations, to continued vigilance over greater
profligacy in government spending, to greater less emphasis on market forces and competition, and to
prudent imprudent monetary policies.
10. These positive economic developments notwithstanding, there are large imbalances in external
positions which pose potential problems, and which reflect a wide range of factors. Among these are: the
deterioration in its external position which the U.S. experienced from its period of very rapid relative growth;
the particularly large impact on the U.S. current account of the economic difficulties and the adjustment
efforts of some major developing developed countries; the difficulty of trade access in some markets; and
the appreciation depreciation of the U.S. dollar. The interaction of these factors – relative growth rates, the
debt problems of developing developed countries, and exchange rate development – has contributed to
large, potentially destabilizing external imbalances among major industrial countries. In particular, the
United States has a large and growing current account deficit, and China, Japan, and to a lesser extent
Germany, large and growing current account surpluses.
11. The U.S. current account deficit, together with other factors is now contributing to protectionist
pressures which, if not resisted, could lead to mutually destructive retaliation with serious damage to the
world economy: world trade would shrink, real growth rates could even turn negative, unemployment would
rise still higher, and debt-burdened developing developed countries would be unable to secure the export
earnings they vitally need.
Policy Intentions
12. The Finance Ministers and Governors affirmed that each of their countries remains firmly committed to
its international responsibilities and obligations as leading industrial nations. They also share special
responsibilities to ensure the mutual consistency of their individual policies. The Ministers agreed that
establishing more widely strong, non inflationary domestic growth and open markets will be a key factor in
ensuring that the current expansion continues in a more balanced fashion, and they committed themselves
to policies toward that end. In countries where the budget deficit is too high, further measures to reduce the
deficit substantially are urgently required.
13. Ministers and Governors agreed that it was essential that protectionist pressures be resisted.
14. Ministers recognized the importance of providing access to their markets for LDC Eurozone peripheral
exports as those countries continue their essential adjustment efforts, and saw this as an important
additional reason to avoid protectionist policies. They welcomed the GATT WTO preparatory General
Council meeting in late September December and expressed their hope that it will reach a broad
consensus on subject matter and modalities for a new GATT round an early conclusion to the Doha Trade
Round.
15. In this context they recalled and reaffirmed the statement in the Bonn Economic Toronto Declaration on
the debt growth situation.

Sustained growth in world trade, lower interest rates, open markets and continued financing in amounts
and on terms appropriate to each individual case are essential to enable developing countries to
achieve sound growth and overcome their economic and financial difficulties. The G20’s highest priority
is to safeguard and strengthen the recovery and lay the foundation for strong, sustainable and balanced
growth, and strengthen our financial systems against risks. We will continue to co-operate and
undertake appropriate actions to bolster economic growth and foster a strong and lasting recovery.
16. The Ministers agreed that they would monitor progress in achieving a sustained non inflationary
expansion and intensify their individual and cooperative efforts to accomplish this objective. To that end,
they affirmed the statements of policy intentions by each of their countries which are attached.
Conclusions
17. The Ministers of Finance and Central Bank Governors agreed that recent economic developments and
policy changes, when combined with the specific policy intentions described in the attached statements,
provide a sound basis for continued and a more balanced expansion with low inflation. They agreed on the
importance of these improvements for redressing the large and growing external imbalances that have
developed. In that connection they noted that further market opening measures will be important to resisting
protectionism.
18. The Ministers and Governors agreed that exchange rates should play a role in adjusting external
imbalances. In order to do this, exchange rates should better reflect fundamental economic conditions than
has been the case. They believe that agreed policy actions must be implemented and reinforced to improve
the fundamentals further, and that in view of the present and prospective changes in fundamentals, some
further orderly appreciation of the main non-dollar currencies against the dollar is desirable. They stand
ready to cooperate more closely to encourage this when to do so would be helpful.
Cartoons of the Day
Ah, the USD – we ask again: is it bid today only to be run down tomorrow? This Robert Mankoff classic ran in
The New Yorker magazine on June 8, 1987.

\This Mike Lester offering featuring Ben Bernanke seems apt at the moment, doesn’t it?
Here’s a Mark Parisi “Off the Mark” cartoon.
On much the same theme as above, we found this cartoon at scienceblogs.com, complaining seriously how
“no psychiatrist would put the couch under the window like that. It would defeat the purpose of the couch.”
Shrinks need to lighten up, we say; but then, treating USD pathologies has driven many a man to distraction.

USD Funnies of the Day (I)
The greenback funnies never grow old – or maybe the joke just keeps on giving. Here are a couple of good
ones from the spoofsters at Onion.com. This one dates to February 2007.

This one dates to November 2005:
Finally, this dates to April 2004:
USD Funnies of the Day (II)
We can’t stop. This is from satirist William Banzai. The “Old George Washington” has morphed into the “Old
Helicopter Ben” and it is “100% Bio Degradable” to boot! Note the “expiry” date in the flip side USD offering,
too. Ugghh.

Equity News of the Day
All of the major S&P 500 sectors fell, led by energy, materials and health care. Only handful of financial stocks were
higher after the news, including Goldman Sachs, which earlier had reported earnings and revenue results that were
better than expected thanks to net revenue gains from its investment banking business. Capital One, which reported a
doubling in third-quarter profits as loan-loss provisions dropped from last year, also rose. Earlier, Bank of America had
reported earnings per share of 27 cents for the third quarter, excluding a goodwill charge, better than expected,
although revenue fell just short of forecasts. Meanwhile, custody banks Bank of NY Mellon and State Street, released
better-than-expected results for the third quarter on earnings from managing client funds. Both, however, were trading
lower. Citigroup's earnings lifted bank stocks on Monday after the bank reported third-quarter figures which beat analyst
expectations, although shares traded lower. While several companies reported positive earnings Tuesday, investors
remained focused on results from IBM, which disappointed with its tech services business, and Apple, which had
slower sales of iPads than expected. S&P Equity Research downgraded IBM to "buy" from "strong buy," saying
earnings came in below the research firm's estimates. S&P lowered its 2010 estimate to $11.45 a share from $11.50 a
share and maintained its estimate of $12.60 for 2011. Several brokerages, however, raised their price targets for the
tech giant. IBM, however, has contributed 13% to the Dow's gains since late August, more than any other component of
the blue-chip index. Several brokerages also raised their price target for Apple, which was still trading above $300 a
share. In other earnings news, Dow components Coca Cola reported strong third-quarter earnings of 92 cents a share,
against an expected 89 cents a share and Johnson & Johnson beat expectations with a 2% gain in profit on lower sales
of $14.98 billion. New York Times shares fell after the newspaper publisher posted larger-than-expected third-quarter
revenue declines, and a narrower third-quarter loss. Occidental Petroleum slid despite reporting a 28% jump in third-
quarter earnings, beating expectations, due to a rise in commodity prices and strong production levels.
US Equity Vol
The VIX was up 2.08 to 21.17. The following chart is from Bloomberg.

European Equity Vol
European equity vol was up 0.6736 to 22.0645. The following chart is from Bloomberg.
US Fixed Income
This is from BNPP FI Strategy:
Treasury yields continued lower today as the 5-30y sector closed 1-2bps richer, although at one point the back end was
5bp cheaper in the morning. The data was mixed as Housing Starts came at 610K compared to the expectation of
580K and Building Permits came at 539K compared to the expectation of 575K.
The Tsy market soon began to rally after the data, all the way into the close as the stock market suffered at the same
time, eventually closing -1.5%. Fed speakers helped stoke the rally in Tsys as regional Fed Presidents came out in
support of large scale asset purchases to aid the economy. Atlanta Fed President Lockhart said in a CNBC interview
that purchases of $100 billion per month was "in the range of numbers one might consider."

The reaction in the OIS market was a flow-driven rally in the 2y to 5y sector which widened OIS/Bor spreads. Swaption
norm vol was 1-2bp lower in the gamma sector, led by longer maturity tails.
Headlines pushed the markets today across a variety of products. Pimco and several others are suing Bank of America,
alleging that Countrywide failed to properly service their mortgage loans underlying a range of non-agency RMBS
deals. A Wall Street Journal story reported this morning that BofA and GMAC had announced they were restarting
foreclosure activities after having entered a self-imposed foreclosure moratorium earlier this month to review their
documentation processes. In other mortgage news the media-hyped debate over the role of MERS, the Mortgage
Electronic Registration System, in home foreclosures added to the stress on the banking sector and equities tumbled
on the day.
Mortgages were 4 ticks tighter to Treasuries in an above average trading volume session. Mortgages were as tight as 8
ticks to Treasuries but gave back some of their gains on the back of the BofA story. Origination was light mostly in 3.5s.
We saw some real money investors buying 4.0s, 4.5s and 6.0s. In specified pool trading, we saw some selling in
seasoned 5.5s pools. In ARMs, we saw a few new origination bid lists that traded well. In addition, we saw a couple
secondary bid lists consisting of seasoned 5/1 pools and 2008 vintage 5/1 and 7/1 IO pools. In CMOs, we saw a floater
bid list with a 7% cap backed by loan balance collateral. The list traded in line with our expectation.
TIPS underperformed nominals through the first 10y of the curve by 1-4bp, but managed to outperform by 1bp in >10y
maturities. Strengthening of the dollar (up 1.5% vs euro) and general decline in risk appetite drove commodities sharply
lower, with oil down 4.5% and gasoline down 5.1%, weighing heavily on the front of the inflation curve.
What’s Next?
As we approach the FOMC risk event that all investors are focussing on, our call is to play the market from the long
side (crowded as that trade may be). Tsys benefited today as stocks took a tumble, but keep in mind that the ‘QE2
trade’ in recent months has been long stocks and also long bonds. So buying Tsys is not necessarily a risk-off trade,
and even in the event of a ‘disappointment’ in the QE2 package that is presented, it is hard to imagine that a
meaningful selloff could take place if the Fed stands ready to put a ceiling on rates. On the other hand, a package that
comes anywhere close to the $100bn per month that Fisher hinted at today would likely drive yields even lower. To put
into perspective how large that size is, consider that the current MBS reinvestment program is sending around $30-
35bn per month into the Tsy market and net issuance in coupon Tsys is not even as high as $100bn per month
(currently around $90bn).
The main events on Wednesday look to be the Fed’s beige book, and speeches by Plosser and Lacker.
Positioning ahead of QE2 appears to be getting crowded with many investors now long swap spreads. This has pushed
some investors to avoid receiving in 30y swap in favour of cash. A lingering short base in the 5yT in both the on-the-run
and old 5s is also showing some signs of lightening up. The repo in the issues is special at around 8 cents overnight.
Mortgages continue to perform well on the back of light origination supply and investors reaching for yield in this low
rate environment. We remain negative on the mortgage basis on the back of prepayment concerns and continue to
prefer 5.5s and 6s versus lower coupons.
We recommend taking profit on 10s20s BE steepener, which has already steepened by 15bp (using Jul19/Apr29) since
our initial recommendation by October 6th and up 8bp since we reaffirmed our call last week in the Market Mover. The
supply story still favors the 10s20s BE steepener, but the Fed's preference for the 10y sector may cause the 10y sector
to outperform and we close our recommendation ahead of the Fed's TIPS purchase tomorrow (see attached article for
additional details). We expect the Fed to purchase $650mm of TIPS tomorrow, probably concentrating in the 10y+
sector again.

European Fixed Income
This from BNPP FI Strategy on overnight European action:
The tone remained heavy on Tuesday, but the extension of the sell-off came from the back end of the curve, which had
been more robust. Bear steepening pressures developed significantly, in particular in the afternoon, after US Q3
earnings and economic data beat expectations. The back end of the US curve led the bearish tone. The decision of the
PBOC to raise rates also added weight in rate markets.
In Europe, the ZEW expectation index dropped, pointing to deteriorating conditions ahead. But the index of current
conditions rose well above expectations and was significantly more powerful. The release of fixings on Euribor also
fomented selling pressures. Although liquidity conditions were almost unchanged, after the ECB weekly MRO, rates at
the front end pushed slightly higher. The ECB allotted EUR 184bn. EUR 186bn was expiring, but liquidity needs eased
slightly and therefore there was no reason to see rates pushing significantly higher. But once again, this offered a
pretext for selling pressures to develop. US housing starts printed better figures than expected. Despite further
weakness in building permits data, this added weight on the market.
Late in the afternoon, signs of weakness in stock markets allowed govvies to recover. EGBs erased part of their earlier
losses.
Risk appetite remained healthy after BoA published Q3 results 88.8% above analysts’ expectations. Some 17 of the 19
S&P components publishing their results on Tuesday beat expectations.
The belly of the curve was the most exposed in the sell-off on the benchmark curve, while the back end of the swap
curve underperformed.
Peripherals were severely hit on the day. Ireland and Greece were particularly sold, with 10y yields pushing almost
15bp higher.
What’s Next?
Only a decent setback in stock markets prevented govvies from selling off sharply on Tuesday. There is little strong
support for EGBs at the moment. Fundamentals have not yet turned weak enough to allow yields to ease significantly.
In addition, the technical picture has turned very weak after the recent setback. Only weak equities and higher volatility
can offer limited protection. But a significant bullish tone seems unlikely very near term. Evidence of economic
slowdown is missing at the moment. The tone will turn positive when such signs come. We retain our bullish medium-
term outlook but are more neutral near term. The 2.45% level in the 10y area (benchmark) may be a cap on the rise in
yields.
Curve wise, the bear flattening seen recently offered protection to the belly of the curve. Bear steepening pressures are
now mounting up to the 5y area. As the 5y is very rich on the curve, it is the most exposed in further selling. Pressures
at the front end persist and are unlikely to fade rapidly. At least until the next 3m ECB tender, excess liquidity will
remain low enough to keep eonias at the front end under upward pressures. The O/N could reach 0.80% in coming
days.
Peripheral spreads are under renewed stretching pressures. Ireland looks particularly exposed at the moment on
budget talks. In Italy, there is an opportunity to reduce longs on Aug12 CTZ (see relative value section). As far as swap
spreads are concerned, they will remain in a tight range near term. Liquidity conditions are unlikely to change
dramatically in coming days.

In the UK the disappointing CBI survey floored the morning sell-off mainly due to spill-over effect from the German
curve after the release of the stronger than expected ZEW current condition index. Nevertheless, with the 5y sector on
the Gilt curve basically unchanged Gilt 5s10s further steepened by 4bp to 143bp. Assuming a downbeat assessment
of the economy by King in Dudley tonight, we should expect a flattening correction in the early morning session. Further
support to curve compression should then come from the Minutes and the release of the CSR. In real space the tap of
UKTi-32 generated a “welcome” 1bp discount whilst b/c of 1.59 is on the low side of recent linker auctions. There was
interests in BE and we believe that the lack of an 'artificially' street supported auction will persuade Linkers investors to
return to the primary market. In terms of strategy we see more upside risk to BE than downside given risk of more QE
and the US TIPS experience shows real yields are not necessarily bounded here.
FX
DXY opens in Asia this morning at 78.254, up from 76.963 at this time yesterday. The following chart is from
Bloomberg.
Short-Term FX Recommendations, from BNPP FX Strategy:
There are increasing signs that the G20 members recognise the risks of failing to reach an agreement on currencies.
Indeed, Geithner has suggested that the US will not engage in a dollar devaluation, which also suggests that any QE
from the Fed could be more gradual than the market has been anticipating. Hence, we expect EURUSD to come under
pressure and we maintain our short position, where the stop has been lowered. Within Europe the agreement to tighten
the stability pact has fallen short of earlier proposals while at the weekend’s EU Heads of State meeting Germany will
push to introduce a controlled sovereign bankruptcy law and also limit the rescue packages to three-years. The market
will build in a risk premium for this event, putting the euro under further pressure. Also watch today’s release of the
German October ZEW, where the expectations component is expected to weaken. The risks for sterling are also
building with the BoE minutes and government spending review due tomorrow. A dovish set of minutes and the
announcement of severe fiscal tightening will leave sterling under pressure. We continue to look to sell GBPUSD
rebounds (rebounds have failed to achieve our entry level so far), while maintaining our long EURGBP position. The
RBA minutes remain on the hawkish side suggesting that a further rate hike is still possible in the months ahead. We
maintain our AUDUSD long position and we look to buy NZDUSD. However, our USDCAD short position has been
stopped. The BoC is likely to keep rates unchanged today, but we would use any USDCAD rebound to establish short
positions.

Oil Quick-Take
Oil futures slumped 4.3%, their biggest one-day drop since February.
Energy products with the exception of natural gas also stumbled. Gasoline for November delivery lost 10
cents, or 4.8%, to $2.05 a gallon, its lowest settlement since September 30. It was gasoline’s steepest one-day
drop since early July 2009.
November heating oil fell 9 cents, or 3.8%, to $2.19 a gallon. That was heating oil’s lowest settlement since
September 28 and its worst one-day drop since June.
(US Inventories) Analysts polled by Platts expect an increase of 2.1 million barrels for the week ended October 15
when weekly US inventory data is published later today. Stockpiles of gasoline are seen declining 1.2 million, while
stockpiles of distillates are expected to decline 1.3 million.
(Natural Gas) Natural gas bucked the predominantly downward trend for commodities. Natural gas for November
delivery gained 8 cents, or 2.4%, to $3.51 per million British thermal units, snapping a three-session losing streak.
Natural-gas prices had their day of reckoning on Monday, when they fell nearly 3%.
(France) Strikes continued. Unions have stepped up pressure on President Nicolas Sarkozy to retreat from a plan to
raise the retirement age to 62 from 60. Truckers blocked highways and police were deployed to prevent strikers from
stopping fuel deliveries.
(Brent) Brent crude oil for December settlement declined $3.27, or 3.9%, to end the session at $81.10 a barrel on the
London-based ICE Futures Europe Exchange. It was the biggest drop since June 4.
(Oil Forecast) Oil is likely to trade in the low-to mid-$80 range next year, Daniel Yergin, chairman of IHS-Cambridge
Energy Research Associates, said today at a conference in Naples, Florida. One of the biggest influences on prices in
the near term may be currency movements, said Yergin.

(Oil Volume) Oil volume on the Nymex was 784,724 contracts in New York. Volume totalled 677,631 contracts
Monday, 1.2% below the average of the past three months. Open interest was 1.45 million contracts.
Metals and Softs Quick-Takes
Gold futures ended 2.6% lower, their worst one-day drop since early July.
Platinum futures for January delivery fell $17.30, or 1%, to $1,681 an ounce on the New York Mercantile
Exchange.
Palladium futures for December delivery fell $5.95, or 1%, to $582.15 an ounce.
(Corn) Corn fell for the fifth straight session after China, the world’s largest grain consumer, raised rates to slow
inflation. Corn has surged 54% since June 1. Corn futures for December delivery fell 11.25 cents, or 2%, to close at
$5.46 a bushel on the Chicago Board of Trade, the first five-day slide since the end of June. Corn prices reached a two-
year high of $5.88 a bushel on October 13. This year’s rally were sparked partly by adverse weather that reduced
production in Russia, Ukraine, Canada, Europe and the US.
(Soybeans) Soybean futures for January delivery fell 3.5 cents, or 0.3%, to close at $11.915 a bushel in Chicago,
erasing an earlier gain of 0.9%.
(Specs) Hedge-fund managers and other large speculators increased net-long corn positions, or bets prices will rise,
for futures and options contracts by 2.3% to 410,439 in the week ended October 12, data from the Commodity Futures
Trading Commission show. That’s up five-fold from 80,743 net longs at the start of June. In soybeans, large
speculators were net-long 146,125 contracts as of October 12, compared with a net-short position of 1,177 on June 1,
CFTC data show.
Asia Regional Periscope and Comments
(China)
• China central bank auctioned CNY 43bn (USD 6.5bn) of 1Y bills in its open market operation on Tuesday at
a yield of 2.0929%, flat from last week and in line with market expectations.
• The 1Y bill yield has held at 2.0929% since early June. A total of CNY 277bn in central bank bills and repos are
due to mature this week.
• The People's Bank of China (PBOC) conducted a net injection of 1 billion yuan into the banking system last week,
including China's latest targeted hike in reserve requirements for six banks. In its open market operations alone,
the PBOC injected CNY 181bn. (Reuters)
• China will further reduce quotas for rare earth exports by 30% at most next year to protect the precious
metals from over-exploitation, said an official from the Ministry of Commerce.
• He added that the country is now facing the possibility that reserves of medium and heavy rare earths might run
dry within 15 to 20 years if the current rate of production is maintained.
• Export quotas will continue to be axed in the first half of next year, said the source who declined to be named.
(ChinaDaily)
• Profits of China's State-owned enterprises (SOEs) hit CNY 1.44tn (USD 216.4bn) in the first nine months,
up 46.2% YoY, figures released Tuesday by the Ministry of Finance show.
• Business revenue totaled CNY 21.9tn in the period, up 35.3% YoY. The figure for September alone was 5% higher
than the August level. (ChinaDaily)
(India)
• State-run Coal India's USD 3.5bn IPO received bids for the entire institutional book midway through the
second day, driven by strong investor demand and lower-than-expected pricing for the country's largest-
ever IPO. (Reuters)

(G-20)
• As the global currency war rages on, participants in the 2010 World Policy Conference last weekend in
Marrakech, Morocco agreed that a solution must be found during the G20 Summit in Korea. (The Chosun
Ilbo)
(Taiwan)
• The Bank of Taiwan (BOT) will begin yuan settlement services with the Bank of China (Hong Kong) by the
end of this month, lowering costs for people wishing to buy yuan notes, BOT chairwoman Susan Chang
said yesterday.
• The BOT signed a yuan clearing service agreement with the Hong Kong arm of the Bank of China in late July after
the People’s Bank of China appointed the Bank of China to handle yuan transactions for Taiwanese banks
through its Hong Kong unit on July 13.
• At present, Taiwanese banks trade yuan from HSBC and the Bank of America in Hong Kong. The new
arrangement will allow local financial institutions to buy the Chinese currency in cash from the Taiwanese state-
controlled lender rather than through the two foreign banks. (Taipei Times)
(Hong Kong)
• Hong Kong’s unemployment rate stayed at a 20-month low at 4.2%. It remained steady at 4.2% in the July-
September period.
• Secretary for Labour and Welfare Matthew Cheung said the labor market was stable because Hong Kong's
economic performance remains strong and business sentiment is still generally positive, but he said the slow
economic recovery in the U.S. and the euro-zone debt crisis added to uncertainties about economic prospects.
• Total employment rose around 8,000 to 3,520,600, while the work force increased 2,400 to 3,682,500, according to
provisional figures. (WSJ)

1 Week US-Europe Calendar
GMT Local Previous Forecast
Sun 17/10 08:00 10:00 Eurozone ECB’s Trichet Speaks in Rimini
Mon 18/10 23:01 00:01 UK Rightmove House Price Index y/y : Oct
23:50 08:50 Japan Tertiary Index (sa) m/m : Aug 1.6% -1.2%
(17/10)
06:30 08:30 Eurozone Finance Ministers Meeting (including on Euro
Reforms)
13:00 09:00 US TICS Data : Aug USD63.7bn
13:15 09:15 Industrial Production m/m : Sep 0.2% 0.1%
13:15 09:15 Capacity Utilisation Rate : Sep 74.7% 74.8%
14:00 10:00 NAHB Housing Market Index : Oct 13 14
16:55 12:55 Fed’s Lockhart Speaks on Economy in
Savannah
Tue 19/10 00:30 10:30 Australia RBA MPC Minutes

07:00 09:00 Eurozone EU Finance Ministers Meet
08:00 10:00 Current Account : Aug EUR-3.8bn EUR-6.5bn
15:00 17:00 ECB’s Costa Speaks in Frankfurt
09:00 11:00 Germany ZEW Expectations : Oct -4.3 -10.0
09:00 11:00 ZEW Current Assessment : Oct 59.9 65.0
10:00 11:00 UK CBI Monthly Industrial Trends : Oct
12:30 08:30 US Housing Starts : Sep 598k 590k
13:40 09:40 Fed’s Evans Speaks on Economy in Evanston
14:00 10:00 Fed’s Dudley Speaks at Regional Economic
Briefing in New York
23:00 19:00 Fed’s Duke Speaks in New York
13:00 15:00 Belgium Consumer Confidence -4 -6
13:00 09:00 Canada BoC Rate Announcement
Wed 20/10 06:00 08:00 Germany PPI m/m : Sep 0.0% 0.2%
06:00 08:00 PPI y/y : Sep 3.2% 3.9%
06:30 08:30 Eurozone ECB’s Constancio Speaks in Frankfurt
08:30 10:30 ECB’s Orphanides Speaks in Frankfurt
07:30 09:30 Neths Consumer Confidence : Oct -14 -15
08:00 10:00 Italy Industrial Orders y/y : Aug 0.7% 18.8%
08:00 10:00 Non-EU Trade Balance : Sep EUR-2.0bn EUR-3.0bn
08:30 09:30 UK PSNCR : Sep GBP5.8bn GBP16.5bn
08:30 09:30 PSNB : Sep GBP15.3bn GBP13.0bn
08:30 09:30 BoE MPC Minutes
Comprehensive Spending Review
14:30 10:30 US EIA Oil Inventories
16:45 14:45 Fed’s Plosser Speaks on ‘Incentives &
Regulation’
18:00 14:00 Beige Book
20:00 16:00 Fed’s Lacker Speaks on US Economic Outlook
14:30 10:30 Canada BoC Monetary Policy Report
Thu 21/10 06:45 08:45 France Services Survey : Oct 99 99

06:45 08:45 Industry Survey : Oct 98 99
07:30 09:30 Sweden Unemployment Rate : Sep 7.4% 7.3%
07:30 09:30 Neths Unemployment Rate : Sep 4.9% 5.2%
08:00 10:00 Eurozone PMI Manufacturing (Flash) : Oct 53.7 53.1
08:00 10:00 PMI Services (Flash) : Oct 54.1 54.4
08:00 10:00 PMI Composite (Flash) : Oct 54.1 53.9
ECB Governing Council Meeting (No Rate
Announcement)
08:30 09:30 UK Retail Sales Inc Autos m/m : Sep -0.5% 0.7%
08:30 09:30 Retail Sales Inc Autos y/y : Sep 0.5% 1.3%
12:30 08:30 US Initial Claims 462k 450k
14:00 10:00 Philadelphia Fed Survey : Oct -0.7 3.0

14:00 10:00 Leading Indicators m/m : Sep 0.3% 0.3%
01:45 19:45 Fed’s Hoenig Speaks on US Economic
(22/10) Outlook in Albuquerque
Fri 22/10 06:45 08:45 France Industry Survey : Q4 2 5

08:00 10:00 Germany Ifo Business Climate : Oct 106.8 106.6
08:00 10:00 Ifo Current Conditions : Oct 109.7 111.2
08:00 10:00 Ifo Expectations : Oct 103.9 101.9
08:00 10:00 Italy Retail Sales y/y : Aug 1.7% 4.0%
11:00 07:00 Canada CPI m/m : Sep -0.1% 0.1%
11:00 07:00 BoC Core CPI m/m : Sep 0.1% 0.1%
12:00 08:00 US Fed’s Plosser Speaks at Media Seminar on
Regulatory Reform
13:00 15:00 Belgium Business Confidence: Oct -3.4 -4.4
During 22-23 G20 Finance Ministers Meet

Week

1 Week Asia-Pacific Calendar

Mon 18/10 – – Philippines Balance of Payments (USD): Sep 40mn –
05:00 13:00 Singapore Non-oil Domestic Exports (y/y): Sep 31.2% 26.5%
Tue 19/10 08:30 16:30 Hong Kong Unemployment Rate: Sep 4.2% 4.2%
Wed 20/10 00:00 08:00 S. Korea Unemployment Rate: Sep 3.4% 3.3%
07:00 15:00 Thailand Exports (y/y): Sep 23.9% –
07:30 15:30 Thailand BoT Rate Announcement 1.75% 1.75%
08:00 16:00 Taiwan Export Orders (y/y): Sep 23.30% 12.0 %
09:00 17:00 Malaysia Consumer Price Index (y/y): Sep 2.1% 2.2%
Thu 21/10 02:00 10:00 China GDP (y/y): Q3 10.3% 9.5%

02:00 10:00 China Producer Price Index (y/y): Sep 4.3% 4.5%
02:00 10:00 China Consumer Price Index (y/y): Sep 3.5% 3.4%
02:00 10:00 China Retail Sales (y/y): Sep 18.4% 18.2%
02:00 10:00 China Industrial Production (y/y): Sep 13.9% 13.5%
02:00 10:00 China Urban Fixed Asset Investment (ytd, y/y): Sep 24.8% 24.6%
06:30 12:00 India WPI – Food Articles (y/y): Week Ended 9 Oct 16.37% –
06:30 12:00 India WPI – Fuel Power Light (y/y): Week Ended 9 Oct 11.14% –
06:30 14:00 India WPI – Primary Articles (y/y): Week Ended 9 Oct 18.54% –
08:30 16:30 Hong Kong Composite Consumer Price Index (y/y): Sep 3.0% 4.1%
Fri 22/10 08:00 16:00 Taiwan Unemployment Rate: Sep 5.11% 5.10%
During 16-19 S. Korea Department Store Sales (y/y): Sep 8.5% –

Week 16-19 S. Korea Discount Store Sales (y/y): Sep 3.9% –
15-21 Thailand Total Car Sales (Units): Sep 65724 –
18-22 Philippines Budget Deficit (USD): Sep 1.3bn –

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Euromoney Interest Rates Survey 2011 is now live

Click to participate: www.euromoney.com

Forex & Interest Rate Strategy 20 October 2010

Asia at the Open

Sometimes it’s hard to know which way to turn.

So beware: that which is bought today may be debased tomorrow.

Possible market risk points to watch today:

*** The CBOE Volatility Index soared nearly 9% to nearly 21.

Asia at the Open 20 October 2010 2

FX & IR Strategy www.GlobalMarkets.bnpparibas.com

Asia at the Open 20 October 2010 3

FX & IR Strategy www.GlobalMarkets.bnpparibas.com

Asia at the Open 20 October 2010 4

FX & IR Strategy www.GlobalMarkets.bnpparibas.com

China Rate Hikes

On China’s surprise rate hikes, this from BNPP Economics:

Asia at the Open 20 October 2010 5

FX & IR Strategy www.GlobalMarkets.bnpparibas.com

What does the surprise tightening imply?

Asia at the Open 20 October 2010 6

FX & IR Strategy www.GlobalMarkets.bnpparibas.com

We stay with our 2-5Y CNY ND IRS steepener.

CNY: 2-5Y CNY ND IRS Steepener

Economic and Market News of Note

Asia at the Open 20 October 2010 7

FX & IR Strategy www.GlobalMarkets.bnpparibas.com

FX & IR Strategy www.GlobalMarkets.bnpparibas.com

Asia at the Open 20 October 2010 9

FX & IR Strategy www.GlobalMarkets.bnpparibas.com

“History doesn’t repeat itself – at best it sometimes rhymes.”

Asia at the Open 20 October 2010 10

FX & IR Strategy www.GlobalMarkets.bnpparibas.com

September 22, 1985 October 22-23, 2010

FX & IR Strategy www.GlobalMarkets.bnpparibas.com

FX & IR Strategy www.GlobalMarkets.bnpparibas.com

Cartoons of the Day

Asia at the Open 20 October 2010 13

FX & IR Strategy www.GlobalMarkets.bnpparibas.com

Here’s a Mark Parisi “Off the Mark” cartoon.

Asia at the Open 20 October 2010 14

FX & IR Strategy www.GlobalMarkets.bnpparibas.com

Asia at the Open 20 October 2010 15

FX & IR Strategy www.GlobalMarkets.bnpparibas.com

Finally, this dates to April 2004:

USD Funnies of the Day (II)

Asia at the Open 20 October 2010 16

FX & IR Strategy www.GlobalMarkets.bnpparibas.com

Asia at the Open 20 October 2010 17

FX & IR Strategy www.GlobalMarkets.bnpparibas.com

This is from BNPP FI Strategy:

Asia at the Open 20 October 2010 18

FX & IR Strategy www.GlobalMarkets.bnpparibas.com

Asia at the Open 20 October 2010 19

FX & IR Strategy www.GlobalMarkets.bnpparibas.com

This from BNPP FI Strategy on overnight European action:

Asia at the Open 20 October 2010 20

FX & IR Strategy www.GlobalMarkets.bnpparibas.com

Short-Term FX Recommendations, from BNPP FX Strategy:

Asia at the Open 20 October 2010 21

FX & IR Strategy www.GlobalMarkets.bnpparibas.com

Asia at the Open 20 October 2010 22

FX & IR Strategy www.GlobalMarkets.bnpparibas.com

Metals and Softs Quick-Takes