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EM currencies

UBS View
For current exchange rates and CIO forecasts see table
• With the risk of a Greek Eurozone exit subsiding, we think selected emerging market (EM) currencies look attractive over the medium term against the USD and JPY and some even against the EUR.
• Global growth prospects remain intact, also due to recent policy easing in China, and the risk of a broader European crisis remains contained, in our view. Over the medium term, this will likely support EM currencies. However, further bouts of volatility remain likely in the months ahead, since negative headlines from Europe will likely continue to weigh on investor sentiment.
• Our tactical and strategic recommendations list our preferred currencies. For now, we remain cautious on the Brazilian real, Hungarian forint, Indian rupee, and Turkish lira.

Positive scenario > 7% outperformance of EM FX against G4 currencies over a 6-month horizon
• Macroeconomic data comes in stronger than expected and contagion risks in Europe subside further. EM exchange rates could appreciate swiftly against G4 currencies (USD, EUR, JPY, GBP).

Negative scenario > 4% depreciation of EM FX across regions against USD over a 6-month horizon
• Global growth prospects suffer a prolonged deterioration and the European debt crisis intensifies further. EM exchange rates could see a significant, although likely temporary, sell-off across regions. Should growth concerns return to the fore, we expect export-oriented EM countries (e.g. most Asian economies) to welcome currency weakness in order to cushion economic growth.
Note: Scenarios refer to global economic scenarios (see slide 7)

What we're watching Why it matters
Inflation dynamics in EM
Inflation dynamics are important to forecast central bank policy rate decisions. Monetary easing typically weighs on EM currencies, while rate hikes tend to be supportive. Key policy rate announcement dates: 29 June, Colombia; 4 July Poland; 5 July, Malaysia; 11 July, Brazil; 12 July, Indonesia; 19 July, Turkey

European sovereign crisis
Setbacks in sentiment will likely lead to bouts of EM currency depreciation and elevated volatility across regions, providing attractive entry points for investors.

US growth
Growth in the US is key for risk sentiment, growth prospects in EM, and US monetary policy decisions. Positive surprises tend to support EM currencies. Key dates: 1 August, US ISM & FOMC rate decision

Recommendations
Tactical (6 months)
• Several EM currencies look attractive at current levels; we advise investors to gradually increase their exposure to our preferred EM currencies, using the yen and the USD as funding currencies. Our preferred EM currencies are CNY, IDR, KRW, SGD, MXN, ZAR, CZK, and PLN.

Strategic (1 to 2 years)
• We recommend EM currencies backed by stable fundamentals as a strategy to diversify currency exposure.
• Our favorites include the Chilean peso, Czech koruna, Polish zloty, Chinese renminbi, Korean won, Malaysian ringgit and Singapore dollar.

UBS CIO EM FX forecasts
27.06.2012 3-month 6-month 12-month
Americas
USDBRL 2.07 2.10 1.95 1.85
USDMXN 13.8 12.7 12.5 12.3
Asia
USDCNY 6.37 6.30 6.25 6.15
USDINR 57.1 53.0 54.0 55.0
USDIDR 9'480 9'300 9'200 9'000
USDKRW 1'157 1'130 1'110 1'050
USDSGD 1.28 1.24 1.23 1.22
EMEA
EURPLN 4.25 4.35 4.15 4.00
EURHUF 286 305 285 310
EURCZK 25.9 26.0 25.0 24.3
USDTRY 1.81 1.75 1.78 1.78
USDZAR 8.43 7.90 7.75 7.50
USDRUB 32.9 33.5 32.0 31.0
Source: Bloomberg, UBS CIO, as of 27 June 2012
Note: Past performance is not an indication of future returns.1
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UBS
For further information please contact CIO's asset class specialists Michael Bolliger, michael.bolliger@ubs.com or Teck-Leng Tan, teck-leng.tan@ubs.com
Please see important disclaimer and disclosures at the end of the document.
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