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G10 currencies

UBS View see UBS FX forecasts, below-right
• The negative momentum on the EUR is likely to persist. The growth outlook has deteriorated in the last couple of months to a point, which challenges the fiscal austerity efforts seriously.
• The USD profits from European troubles, but the upside remains limited by expansive fed policy
• The GBP is resuming its uptrend despite stimulus measures by the Bank of England. The main reason is the need for diversification of the EUR and better current economic indicators.
• The AUD seems to have found a bottom, and should recover on the back of better risk sentiment. We believe the CAD remains one of the most attractive currencies.
• The SNB has shown that it will defend the CHF-floor. EURCHF will remain in the 1.20-1.25 range.

Positive scenario FX targets: EURUSD >1.35 / EURJPY 120
• Eurozone economies avoid a material contraction and financial market conditions recover. EURUSD should trade above 1.40 in this case. Yen weakness could develop, since hopes for global growth would make the carry-trade role of the yen more prominent.

Negative scenario FX targets: EURUSD <1.20 / EURJPY 100
• European growth outlook deteriorates further with continued recession in 2013. The euro could rapidly fall below 1.20. A European debt default cascade is a tail risk for the single currency. Risk aversion would lead to an extended USD and JPY rally.
Note: Scenarios refer to global economic scenarios (see slide 7)

What we're watching Why it matters
Chinese growth We expect Chinese growth to land softly and then recover. Should China disappoint us with a hard landing, then we have a problem. Risk unwinding will support USD and JPY versus risk takers currencies.
European sovereign crisis, ECB policy With Greek elections out of the way, the main focus lies on Spain and on potential ECB rate cuts. Any improvement in Spain should support the euro, a rate cut would probably hurt it. Key dates: ECB Meetings on 5 July and 2 August
US growth and Fed policy response Will the Fed add QE to current Operation Twist programs? How will presidential elections change political powers in Washington? Keys to address long-term financing issues. Key dates: 1 August, FOMC meeting; 6 November, US Presidential elections

Recommendations
Tactical (6 months)
• Long USD, GBP and CAD
• Short EUR, and CHF
Strategic (1 to 2 years)
• We recommend investors diversify from large USD and EUR exposures into minor currencies. Structural financing issues weigh on each of the major currencies.
• The best diversifiers based on long-term macroeconomic fundamentals are the CAD and the SEK. The AUD, NOK and CHF should only be added at better entry levels.

UBS CIO FX forecasts
25-06-12 3M 6M 12M PPP
EURUSD 1.2485 1.22 1.28 1.32 1.31
USDJPY 79.88 83 85 90 80
USDCAD 1.0296 0.98 0.94 0.94 0.94
AUDUSD 0.9993 0.97 1.00 1.05 0.75
GBPUSD 1.5548 1.56 1.65 1.70 1.69
NZDUSD 0.7851 0.75 0.79 0.83 0.60
USDCHF 0.9617 0.99 0.95 0.93 1.01
EURCHF 1.2006 1.21 1.21 1.23 1.32
GBPCHF 1.4947 1.55 1.56 1.58 1.71
EURJPY 99.74 101 109 119 105
EURGBP 0.8026 0.78 0.78 0.78 0.77
EURSEK 8.8133 8.65 8.55 8.40 8.86
EURNOK 7.492 7.40 7.40 7.40 8.57

Source: Thomson Reuters, UBS CIO, as of 25.06.2012
Note: Past performance is not an indication of future returns.

UBS 31
For further information please contact CIO's asset class specialist Thomas Flury, thomas.flury@ubs.com
Please see important disclaimer and disclosures at the end of the document.
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