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The euro is here to stay

Global FX Strategy. The euro is here to stay. July 2012. David Bloom Global Head of FX Strategy HSBC Bank plc david.bloom@hsbcib.com +44 20 7991 5969 . View HSBC Global Research at: http://www.research.hsbc.com Issuer of report: HSBC Bank plc

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The euro is here to stay

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  1. Global FX Strategy The euro is here to stay July 2012 David Bloom Global Head of FX Strategy HSBC Bank plc david.bloom@hsbcib.com +44 20 7991 5969 View HSBC Global Research at: http://www.research.hsbc.com Issuer of report: HSBC Bank plc Disclosures and Disclaimer This report must be read with the disclosures and the analyst certifications in the Disclosure appendix, and with the Disclaimer, which forms part of it

  2. The ugly contest get uglier The Wheel of Misfortune Japan - BoJ intervenes USD - Fed QE x Keeping rates low Fiscal issues Debt to GDP over 200% EUR - Eurozone GBP – QE x Division in the MPC Fiscal issues sovereign problems EM and Others Source: HSBC

  3. Euro is here to stay • The first half of 2012 was again dominated by the Eurozone • We continue to believe that the euro will not break u • Problems will rotate to the US

  4. Conventional wisdom Yield FX QE FX

  5. Government Borrowing • If I bought a 5 year bond • Say 10 million • How do you get your principal back?

  6. The interplay between choices Borrow Print Default Surplus Source: HSBC, Bloomberg

  7. Debt dynamics EUR X US   X X Borrow Print Default Surplus Bad but stable

  8. EUR Now X  X  EUR T-6 X X  X Debt dynamics USD   X X Borrow Print Default Surplus Bad but stable

  9. Politics – UK has political legitimacy EURO Print Default Surplus UK

  10. What makes US switch? EUR Now US Borrow POLITICS Print Default Surplus

  11. Presidential election may focus the market Source: HSBC, Bloomberg

  12. Debt ceiling will resurface last time it was 14trn Source: HSBC, Wiki Commons

  13. US economy now surprising to the downside Source: HSBC, Bloomberg

  14. The QE pendulum This is a file from the Wikimedia Commons. Information from its description page there is shown below. Commons is a freely licensed media file repository.

  15. P...QE pendulum...what we used to think... • When the Fed and the BoE first did QE, market thought it was FX negative • Injecting money would create inflation and erode the value of the currency • In simpler terms, if you have more of a currency relative to another, its value must fall • The market has changed its mind

  16. GBP weakness in response to BoE balance sheet expansion has not been repeated Source: HSBC, Bloomberg

  17. The market sold the EUR on the LTRO announcement, but then reconsidered Source: HSBC, Bloomberg, ECB

  18. Developed Host Country • Weak growth QE • More QE • Growth threatened • Leakage to • Developing world • Western Wages stagnant leading to real income squeeze • Food and Energy Demand rises • Food and Energy Prices rise globally Source: HSBC

  19. The Gates of BRL, ZAR, TRY, PLN Paradise THB, CZK, IND, ILS Safe haven flows GBP JPY CHF SEK NOK EUR Source: HSBC, Gates of Paradise by Ghiberti. Battistero di San Giovanni (Florence), Wikipedia

  20. Conclusions • Euro is here to stay

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