greece: final countdown to€¦ · fixed income fi strategizer: the weekend is likely to bring...

30 April 2010 Economics & FI/FX Research

Curves & Crosses

Greece: final countdown to May19 Fixed Income

■ FI Strategizer: The weekend is likely to bring relevant news on Greece. If details of the aid package are agreed upon, risk appetite will increase. The release of as many details as possible will be key to make enthusiasm last. The ECB meeting next week should not be a market mover. Attention will also be focused on the UK elections.

■ Greece: This weekend, Greece should finalize an agreement about a three-year austerity package with the IMF and the EC. The total size of the measures should be EUR 24bn through 2012 (10% of GDP). We provide some thoughts on the measures reported in the press.

■ EU Portfolio Strategy: "It ain't over till it's over", but with (EU average) 7-10Y yields at the upper end of our projected 3.4-3.7% range, we put our money where our mouth is and lengthen duration by 0.5 years.

■ ECB: Trichet will face a tough Q&A session on 6 May, with Greece obviously again under the spotlight. We provide a number of questions Trichet will probably be asked, and his likely answers.

■ MM: Some banks are still in trouble, as shown by this week's 3M LTRO. The number of bidders doubled from the previous auction and the average rate was 1.15% (maximum: 1.50%), well above the market level.

■ Supply Corner: Next week, EU primary market activity should be subdued. There will be no liquidity; gross supply should be ca. EUR 13/15bn, mainly long and extra long core. Keep an eye on Portugal's 6M T-bill auction and on the Spanish tap of SPGB Apr15.

■ Periphery supply calendar: Given strong interest from investors and enquiries from clients, we provide a detailed calendar on May auctions that will be held by peripheral countries.

Forex

■ FX Strategizer: FX majors will likely breathe a sigh of relief once the aid plan for Greece has been signed-off; but the USD will rapidly return into the spotlight again ahead of the new US employment report next Friday.

■ EUR: The battered EUR-USD may enjoy a temporary rebound as Greek woes will ease for a while, but any relief won’t turn into a trend reversal.

■ JPY: The Shanghai export fair starting this weekend may ignite fresh speculation about a Beijing move on the yuan sooner rather than later: hence, more selling pressures on the JPY may end for a while.

■ CHF: The 1.43 base on EUR-CHF has held the line again, shifting thus market’s attention to USD-CHF: a test above 1.10 looks at hand for now.

■ GBP: Election Day is moving closer, but a hung Parliament is still seen as the most likely outcome. Sterling should keep a defensive tone in the coming days, but fears of a sell-off seem exaggerated.

■ Pacific Rim & CAD: The outcome of the RBA meeting on Tuesday is a close call, but we give a greater chance to another 25bp rate hike of the cash rate to 4.50%. The Aussie dollar should thus remain on bid.

■ Nordics: Buying both the SEK and the NOK against the euro remains favored, even if the Norges Bank stays prudent on rates next week.

More insight in our monitors: Surprise indicator - Swap Curve - Relative Value – Inflation – Money Market – FX Monitor - FX PPP – IMM Monitor – Beta analysis - FX Hit Parade - FX Correlation – calendar - Forecasts Table

MARKET PRICES - CDS Spot 1W 1MDE 43 4 15FI 28 4 7NL 36 3 9FR 61 2 20AT 67 2 18BE 78 6 27IT 140 9 33ES 164 1 59IE 197 25 62PT 294 32 162GR 650 45 328SovX 115 3 28Itrx Europe 90 3 11iTrx Fin. Senior 118 7 27

MARKET PRICES - FOREX

Spot 1W 1MEUR-USD 1.3312 -0.5 -1.5USD-JPY 94.03 0.1 0.6USD-CHF 1.0775 0.4 2.2GBP-USD 1.5300 -0.5 0.8EUR-JPY 125.17 -0.4 -0.9EUR-GBP 0.8701 0.0 -2.2EUR-CHF 1.4343 -0.1 0.7

EGB: CURRENT ASW AND 1W CHANGE (BP) 5Y 10Y 30Y Today 1W Today 1W Today 1W DE -30 -2 -15 -2 20 0 FR -11 -3 13 0 56 -2 AT 5 3 24 4 42 1 NL -16 -4 5 -1 21 -1 ES 75 12 82 9 131 5 BE 3 -2 28 0 57 2 PT 218 52 192 27 149 9 IT 49 17 81 8 131 6 GR 697 71 545 51 289 26 US -17 -1 1 2 18 5 UK -35 -8 8 -10 35 -5 SZ -45 -1 -47 -4 -37 -1

Source: Bloomberg, UniCredit Research

Chief Economist – UniCredit Group Head of Global Economics & FI/FX Research Marco Annunziata +44 20 7826-1770 [email protected]

Head of Global FI & FX Research Michael Rottmann +49 89 378-15121 [email protected]

Editor Luca Cazzulani +39 02 8862-0640 [email protected]

Editorial deadline Friday, April 30, 2010 15:30 Prices as of Friday, April 30, 2010, 15:00

Bloomberg: UCGR Internet: www.research.unicreditgroup.eu

UniCredit Research page 1 See last pages for disclaimer.


Curves & Crosses

The story so far… Yield 1w ch 1m ch DE IT US UK DE IT US UK DE IT US UK2Y 0.79 1.43 1.33 1.34 -11 24 -14 -14 -17 30 -22 05Y 1.96 2.52 2.25 2.43 -9 7 -14 -15 -17 16 -22 -310Y 2.99 3.99 3.63 3.89 -7 4 -9 -16 -9 14 -22 -330Y 3.72 4.87 4.60 4.51 -8 0 -6 -10 -7 10 -21 22/5 118 109 92 109 2 -17 0 -1 0 -14 -1 -25/10 103 147 138 145 3 -3 5 -1 8 -2 0 02/10 221 256 230 255 5 -20 5 -2 7 -16 -1 -310/30 72 89 97 62 -1 -5 3 5 2 -4 2 52/5/10 7 -19 -23 -18 0 -7 -3 0 -4 -6 0 -110Y BE 192 196 243 310 3 1 5 -7 3 0 17 6 ASW 1w ch 1m ch DE IT US UK DE IT US UK DE IT US UK2Y -57 17 -21 -45 -5 26 -4 -9 -11 32 -5 -145Y -30 46 -16 -35 -3 14 -3 -8 -9 24 1 -1710Y -15 81 3 9 -2 8 2 -10 -1 21 3 -1030Y 19 131 23 36 -2 6 6 -4 5 21 7 792/5 27 29 5 10 3 -12 2 2 2 -7 6 -35/10 15 35 19 43 1 -6 4 -2 8 -3 2 710/30 34 50 20 27 0 -3 4 5 6 0 3 88

Swap curves EMU 10Y benchmarks EU US BP SZ JP Yield ASW Spread

vs. DE 1w ch 1m ch

EONIA 0.35 0.26 0.55 0.05 0.10 DE10Y 2.99 -15 - - -1M 0.41 0.28 0.55 0.08 0.16 FI10Y 3.14 7 14 2 33M 0.66 0.35 0.68 0.25 0.24 NL10Y 3.25 5 26 1 36M 0.97 0.53 0.93 0.33 0.45 FR10Y 3.31 13 32 1 112M 1.24 1.02 1.37 0.63 0.67 AT10Y 3.43 23 44 5 72Y 1.40 1.20 1.73 0.80 0.47 BE10Y 3.51 28 52 3 75Y 2.33 2.65 2.99 1.56 0.69 IT10Y 3.99 81 99 11 2310Y 3.19 3.71 3.86 2.27 1.35 ES10Y 4.04 83 105 13 3430Y 3.55 4.36 4.12 2.54 2.20 IE10Y 5.07 199 208 44 812/5 93 145 127 76 22 PT10Y 5.21 192 222 33 1165/10 87 106 87 72 66 GR10Y 9.63 545 664 81 32710/30 36 65 26 27 85

Forex EUR USD Last 1w ch 1m ch 3m ch 6m ch Last 1w ch 1m ch 3m ch 6m chEUR-USD 1.3334 -0.4% -1.3% -4.3% -9.8% EUR-USD 1.3334 -0.4% -1.3% -4.3% -9.8%EUR-JPY 125.70 0.3% 0.9% 4.0% 4.5% USD-JPY 94.27 0.3% 0.9% 4.0% 4.5%EUR-GBP 0.8722 0.2% 2.1% 1.8% 5.3% GBP-USD 1.5288 0.2% 2.1% 1.8% 5.3%EUR-SEK 9.6220 -0.6% 0.7% -4.2% -6.8% USD-SEK 7.2165 -0.6% 0.7% -4.2% -6.8%EUR-NOK 7.8594 0.4% 1.6% 4.5% 3.1% USD-NOK 5.8949 0.4% 1.6% 4.5% 3.1%EUR-CHF 1.4342 2.0% 2.9% 3.2% 1.8% USD-CHF 1.0756 2.0% 2.9% 3.2% 1.8%EUR-AUD 1.4309 1.0% -0.6% -4.9% -6.3% AUD-USD 0.9318 1.0% -0.6% -4.9% -6.3%EUR-NZD 1.8229 0.0% -0.5% -0.4% -5.7% NZD-USD 0.7314 0.0% -0.5% -0.4% -5.7%EUR-CAD 1.3450 -0.1% 0.7% -2.5% -5.0% USD-CAD 1.0088 -0.1% 0.7% -2.5% -5.0%

Equity Commodities Last 1w ch 1m ch 3m ch 6m ch Last 1w ch 1m ch 3m ch 6m chS&P 1206.8 -0.9% 3.2% 12.4% 16.5% OIL 85.88 1% 3% 18% 12%Eurostoxx 2822.3 -3.3% -3.7% 1.6% 2.9% Gold 1179.45 2% 6% 9% 13%DAX 6146.6 -1.8% -0.1% 9.6% 13.5% CRB 443.69 0% 2% 7% 14%FTSE 5574.9 -2.6% -1.8% 7.4% 10.5% iTraxx 430.48 8 3 -27 -96Nikkei 11057.4 1.0% 0.6% 8.4% 11.8% Shanghai 2870.6 -3.8% -7.7% -4.0% -4.2%



Curves & Crosses

Favorite Trends & Medium Term Strategies Fixed Income EU US UK Change Actual Expected trend Change Actual Expected trend Change Actual Expected trend

-3M -1M 1M 3M -3M -1M 1M 3M -3M -1M 1M 3M

Key policy rates 1.00 1.00 1.00 0.25 0.25 0.25 0.50 0.50 0.50

3M Libor 0.66 0.64 0.66 0.25 0.29 0.34 0.64 0.65 0.68

10Y 3.10 3.09 3.07 3.61 3.95 3.74 4.03 3.92 3.93

2/10Y 215 213 226 280 284 273 309 276 273

2/5/10Y 10 11 8 9 14 12 26 17 16

10Y SwSp 24 18 14 9 1 -1 -15 -13 -6

Portfolio allocation After the activation of the aid package, GGB/Bund spreads should decline, but a significant recovery of GGBs is unlikely until the structural problems are correctly addressed. The pressure on other peripheral countries we have seen in the most recent days should decrease.

Periphery vs. Bund

Periphery has been under strong pressure this week on contagion worries. Only Italy has managed to avoid investor dislike thanks to its better fiscal outlook. We expect some relief rally on GGBs once the aid package is finalized, although not a huge one. Portugal is, among the other peripheral countries, the one with the weakest fundamentals.

Supply

May will be the second less liquid month of the year (after February): redemptions will be only EUR 15bn and coupons EUR 7bn, almost all coming from Greece and Portugal and concentrated on 19 and 20 May. Given the tensions on these two countries, we expect pressure to remain high. Gross supply should be ca. EUR 71/80bn, lower than the YTD monthly average (EUR 100bn). As liquidity will be very low, net supply should be much higher than in April (EUR 56/66bn vs. EUR 35bn).

FX Change Actual Expected

trend Change Actual Expected

trend Change Actual Expected

trend -3M -1M 1W 1M -3M -1M 1W 1M -3M -1M 1W 1M EUR-USD -4% -1% 1.33 EUR-JPY 0% 0% 126 EUR-NOK -4% -2% 7.85 USD-JPY 4% 1% 94 EUR-CHF -3% 1% 1.43 AUD-USD 4% 2% 0.93 USD-CHF 2% 2% 1.08 EUR-GBP -1% -3% 0.87 NZD-USD 3% 2% 0.73 GBP-USD -4% 1% 1.54 EUR-SEK -5% -1% 9.62 USD-CAD -5% -1% 1.01

EUR-USD

The euro may enjoy temporary relief once the aid package for Greece has been approved, but EMU woes, now directly affecting also Portugal and Spain, should weigh further on the EU unit, with markets focusing on borrowing needs of major EMU members in the coming years. EUR-USD may steady in the 1.33-1.35 band for now, but risks of a slide towards the 1.25-1.23 area at least have risen significantly.

JPY We expect the yen to return to be the world’s favored borrowing currency during the new Japanese FY that has started: therefore, we reiterate our call for USD-JPY to return progressively back close to 100 by the end of the year and this should bring EUR-JPY close to 140.

CHF

In the wake of the unconfirmed intervention on 1 April, more “guerrilla tactics” should likely come from the SNB to protect another EUR-CHF slide much below the 1.43 base. But in the wake of the EUR weakness, the margin for a sustained EUR-CHF recovery in the medium term has become quite limited.

GBP

A further GBP rally may be frozen as long as the UK political situation is not clear, but the strong sterling resilience emerged so far has created base-building against more selling pressures. Market’s attention will rapidly shift to the early moves which the new government will make on the fiscal front, but a test of parity on EUR-GBP is unlikely and we still target cable above 1.60 and EUR-GBP close to 0.80 on a 1Y time horizon.

Pacific Rim and the CAD

Commodity currencies will stay healthy for the time being. The Aussie dollar should be favored by additional RBA rate hikes over time, but the Kiwi and the Loonie dollar should appreciate further, as a tightening cycle is expected to start in the coming months also in New Zealand and Canada.

Nordic Block Monetary policy will become tighter in Sweden and Norway in the coming months too. Selling EUR-SEK and EUR-NOK into rallies is still favored and we still target EUR-SEK and EUR-NOK to fall further towards 9.50 and 7.80, respectively, on a 12M horizon.

Source: UniCredit Research



Curves & Crosses

Favorite Trades

Favourite FI trades Type Trade Rationale Entry

date Entry level

Act. Stop Target P&L (bp)

T/Bund spread

Sell UST 2Y Buy Bund 2Y

Recent Bernanke remarks have suggested a first step vs. The exit strategy. The ECB may have to leave rates low for longer in response to persisting credit tensions in the EMU

12-Feb-10 21 -8 11 -40 29.4

Swap spreads

Sell 5Y Bund vs. swap

Supply in the EMU will be high. We expect particular pressure at the 5Y, in line with 2009. Furthermore the 5Y appears to be still relatively expensive compared to the 10Y. We prefer to avoid the 2Y, which is very sensitive to developments in risk aversion.

14-Dec-09 -43 -32 -35 -10 10.7

MM Sell Euribor Mar11 We expect a rate hike early next year and regard current levels of the Euribor strip as too expensive

1-Apr-10 1.25 1.15 1.10 1.65 -9.5

Buy Libor Dec10 We think market is pricing in too much of Fed rate hikes 1-Apr-10 0.84 0.79 0.98 0.50 4.5 EMU cross

country Buy BTP Mar20 vs. SPGB Apr20

The latest S&P downgrade of the Spanish rating has supported our trade. We still see room for a further cheapening of Spain vs. Italy

14-Dec-09 14 -5 10 -10 18.9

Buy BTP 10Y vs. France

Stopped 14-Dec-09 45 66 58 20 -13.0

Buy RAGB Mar19 vs. DBR Jul19 (yield spread)

Take profit 14-Dec-09 46 36 36 20 10.0

Rel. Value Buy BTP Sep20 vs. BTP Aug21

BTP Aug21 is longer than BTP Sep20 and has a lower yield 30-Mar-10 5 3 8 0 2.0

Sell RAGB 4.15 mar37, buy DSL 4 Jan37

Spread at historical lows 16-Apr-10 15 21 8 25 5.7

Inflation Sell BTP Sep35, buy BTP Sep19 in BE

Inflation expectations at the long are too high compared to the 10Y.

26-Feb-10 68 83 87 30 -15.1



Curves & Crosses

FX Trades SHORT-TERM SPOT TRADES

Cross Position Start Entry Level

Target Current Spot

Stop 3M Carry % Return P/L net EUR

Rationale / Status

P/L Open Trades 0.000 P/L Closed Trades 17.975

Update 30-Apr-10 11:00h CET

P/L Total Trades 17.975

Note: P/L Net EUR also includes carry cost calculations and refers to a notional amount (1mn EUR or USD). Source: Bloomberg, UniCredit Research

MEDIUM-TERM OPTION STRATEGIES

Strategy Direction Start Maturity Strike Current Spot

Entry Level

Actual

% Return P/L net EUR

Rationale / Status

EUR-CHF call plain vanilla

Long 08-Jan-10 12-Oct-10 1.4850 1.4350 1.37% 0.31% -1.06% -10.600 We do not expect the SNB to give markets a carte blanche to the downside

AUD-JPY call spread

Long 01-Apr-10 05-Oct-10 90-95 88.00 1.18% 1.30% 0.12% 0.839 JPY weakness with start of new FY and more RBA rate hikes to come

EUR-GBP call spread

Long 01-Apr-10 06-Jul-10 0.90-0.95 0.8690 1.15% 0.55% -0.60% -5.960 We expect increasing nervousness in the run-up to UK general elections

GBPJPY call spread

Long 16-Apr-10 20-Oct-10 145-150 145.25 1.45% 1.55% 0.10% 1.151 We expect more JPY weakness to come, as the government's main objective is to fight deflation

EUR-CAD put spread

Long 23-Apr-10 25-Oct-10 1.30-1.25 133.55 1.10% 0.90% -0.20% -2.000 EUR to remain under pressure, while the CAD will defend its G-10 top ranking

EUR-NOK put spread

Long 30-Apr-10 02-Nov-10 7.80-7.60 7.8570 0.85% 0.85% 0.00% 0.000 Norges Bank to hike rates at least three times this year

EUR-SEK put spread

Long 30-Apr-10 02-Nov-10 9.55-9.40 9.6250 0.71% 0.71% 0.00% 0.000 Once risk aversion has entirely abated EUR-SEK will get back to "average levels" of around 9.00-9.20

P/L Open Trades -1.64% -16.570

P/L Closed Trades 2.98% 30.331

Update 30-Apr-10 11:00h CET

P/L Total Trades 1.34% 13.761

Note: entry/actual levels are calculated as cost/income as a percentage of the notional amount (EUR 1mn or USD). Source: Bloomberg, UniCredit Research

SUMMARY TABLE

FX Open Trades -16.570

FX Closed Trades 48.306 FX Total Trades 31.736

Update 30-Apr-10



Curves & Crosses

US Surprise & Improvement Indices Monitor MOST RECENT 5 SURPRISES: GROWTH DATA MOST RECENT 5 SURPRISES: PRICE DATA

When What Data Surprise Ch. 27-Apr-10 Consumer Confidence 57.9 4.4 5.4 23-Apr-10 Durables -1.3 -1.5 -1.8 23-Apr-10 New Home Sales 26.9 21.4 29.1 22-Apr-10 Existing Home Sales 6.8 1.5 7.4 16-Apr-10 Housing Starts 626 16 51

When What Data Surprise Ch. 22-Apr-10 PPI 0.7 0.2 1.3 14-Apr-10 CPI 0.1 0 0.1 1-Apr-10 ISM Prices Paid 75 8 8 29-Mar-10 PCE core MoM 0 -0.1 0 26-Mar-10 GDP price index 0.5 0 0.1

We define Surprise the difference between a macroeconomic data release and its consensus forecast. A positive surprise indicates that the data came out higher than expected and denotes a growth bullish situation. The reverse is true for a negative surprise. Improvement (not visualized in the table) is defined as the difference between the actual value of a macroeconomic release and its previous release. Data released on Friday are taken into account from the following Monday.

SURPRISE & IMPROVEMENT INDICES FOR GROWTH SURPRISE & IMPROVEMENT INDICES FOR PRICES

-20-18

-16-14-12

-10-8

-6-4-2

02

4

Jan-06 Jul-06 Jan-07 Jul-07 Jan-08 Jul-08 Jan-09 Jul-09 Jan-10

Surprise Im provem ent

-15

-10

-5

0

5

10

15

20

25

Jan-06 Jul-06 Jan-07 Jul-07 Jan-08 Jul-08 Jan-09 Jul-09 Jan-10


The growth surprise indicator is calculated as a weighted cumulative sum of standardized surprises in a group of selected macroeconomic data (more specifically, we selected: Change in Non Farm Payrolls, Unemployment rate, ISM Manufacturing, Advanced Retail Sales, Industrial Production, Durables Goods Orders, the Advance Release of the GDP, NAHB Index, Chicago PMI, Consumer Confidence, Existing Home Sales, New Home Sales and Housing starts). Weighs to different releases are assigned according to a rebalancing of the R2 of a regression relating surprises in each series of data release with the correspondent change in the 2Y &10Y US rates. The price surprise indicator is calculated using the same methodology of the growth indicator (we selected CPI (m-o-m), PPI (m-o-m), ISM Prices Paid, GDP Price Index, PCE Core (m-o-m) as surprises), but it also includes daily change in the Commodity Research Bureau Index. Also in this case weighs to different releases are assigned according to a rebalancing of the R2 of a regression relating surprises in each series of data release with the correspondent change in the 2Y&10Y US rates. The improvement indicators (growth and price) are calculated following the same procedure of the surprise indicators. The left chart shows the long term dynamic of the surprise and improvement growth indices, while the right chart shows the long term dynamic of the surprise and improvement price indices.

CHANGE OF SURPRISE & IMPROVEMENT INDICES OVER DIFFERENT PERIODS OF TIME

CHANGE IN GROWTH INDICES CHANGE IN PRICE INDICES

0

1

2

3

4

5

6

6M 3M 1M 1W


-1.5

-1.0

-0.5

0.0

0.5

1.0

1.5

2.0

2.5

3.0

3.5

6M 3M 1M 1W


The left chart shows the change of the surprises and improvement indices for growth over different time frames (6 months, 3 months, 1 month and 1 week). The right chart shows the change of the surprises and improvement indices for growth over the same time frames.

Source: Bloomberg, UniCredit Research (all tables and charts in this page)



Curves & Crosses

Macroeconomic focus ECB: A challenging Q&A session

Marco Annunziata, Ph.D. (UniCredit Bank) +44 20 7826-1770 [email protected] Marco Valli (UniCredit Bank Milan) +39 02 8862-8688 [email protected]

We have no doubts that the Q&A session will be the mostinteresting part of the May 6 ECB meeting. These are the topics that we expect the questionswill deal with, and the answers that we expect Trichet to provide. Much will depend onwhether an agreement on the IMF program has already been reached or not. In either case, our working assumption is that the German Bundestag will not yet have approved Germany’sshare of the EUR 30bn package.

1. Huge tensions on Greek spreadsand CDS market

Trichet has never commented explicitly on the evolution of spreads and CDS, and we think he will stick to this policy also this time despite the severe further worsening of the situation. On 8 April, when asked about this topic, he just answered that what counts are: 1) the budgetary measures taken and implemented by the Greek government; 2) the EU/IMF accord on financial aid. On May 6, the message will be very similar. Trichet could mention the further budgetary measures that should lead to a total effort of EUR 24bn through 2012 to support the view that Greece has embarked on a credible medium-term debt-reducing path, implicitly hinting that current market valuations are exaggerated and that, due to the stringent conditionality, the EUR 45bn package cannot be seen as a bailout.

2. Contagion

Judging from the most recent comments, for example Stark’s on Wednesday, the ECB’s line seems to be that Greece is a “unique case” and that it is inappropriate to speak of contagion.Although there is no precise definition of “contagion”, we tend to disagree with the ECBposition on this. At the moment, momentum in the markets and in the media is clearly in the direction of greater contagion. Unless an IMF program is approved and turns the tide, Trichetwill be facing another uphill struggle on this one.

3. Possibility of Greek default (or some form of debt restructuring)

On 8 April, Trichet stated, “based on all the information that I have, default is not an issue forGreece”. It’s a virtual certainty that he will be asked the same question again. Despite thefact that 2Y GGB yield reached 15%, on 27 April Trichet stated that a Greek default is “out of question”. Accordingly, he is unlikely to change his answer on 6 May, although this doesn’tmean that markets will necessarily feel comforted by his words.

4. Outright purchase of government bonds

In theory, one possible line of defense in case of widespread contagion from the Greek crisiswould be for the ECB to purchase sovereign bonds – on the secondary market, as it is prohibited from buying directly at auction. However, we think that this solution is extremely unrealistic. Direct ECB purchases of government bonds would be seen, correctly, as directmonetary financing of excessive fiscal deficits, especially as a recovery is already underwayand deflation risks, the textbook rationale for quantitative easing, are off the table. Germanopposition to such a move would be even stronger than to fiscal bailout operations. Givenhow difficult it had been for the ECB to agree on a very limited program of covered bondspurchases, it is hard to imagine how it could agree to substantial government bond purchases. Still, it is telling that, on Wednesday, ultra-hawk Stark did not completely rule out this possibility, stating, “buying Greek bonds is not an issue at present”. Trichet could decideto adopt a similar line.

5. ECB’s official position on Greek measures taken so far

Provopoulos on Tuesday made some interesting remarks, stating that the Greek budgetaryeffort so far (i.e. before the additional measures reported on the press today) is “promising”, but that the deficit correction for 2010 should be more than 5% of GDP vs. the announced4%. This is a sign that the ECB probably sees the need for Greece to stick to the agreedlevel of the deficit-to-GDP ratio for 2010, i.e. 8.7%, and not the previously agreed size of the correction (4pp), which would lead to a 2010 deficit/GDP of 9.6% now that Eurostat has officiallycommunicated that last year the deficit was 13.6% of GDP (with risks of a possible upwardrevision). Moreover, Provopoulos supported deeper spending cuts, while he stated that further tax hikes could backfire.

6. Whether the EUR 45bn package will be enough

We have highlighted several times that Greece faces a tough redemption schedule beyond2010, and that regaining access to market funding is essential to avoid asking for moreEU/IMF money in early 2011. Remember also that when they announced the agreement ona rescue package three weeks ago, Rehn and Van Rompuy said that the EU would provideEUR 30bn for the first year and that financing for successive years would be discussed in the



Curves & Crosses

context of program negotiations. Markets now seem to be expecting a larger package thanthe EUR 45bn. Given also the political sensitivities, we think Trichet will remain vague on thisissue, merely noting that discussions on the program are ongoing, and that if Greece implements in full the agreed upon austerity measures, it should soon regain marketconfidence and access. Trichet will also probably note that the EU and IMF are committed tohelping Greece throughout its adjustment effort, implying that agreement leaves the dooropen to further financing, if needed.

7. German handling of the crisis

While Germany has a strong point in asking for a credible medium-term budgetary correction plan before granting its share of loan, we strongly believe that the way Germany handled thecrisis in the last couple of weeks contributed significantly to the surge in the Greek risk infinancial markets. To say it with Mersch, “the scale of the (Greek) effort has suffered fromcommunication that I wouldn’t describe as optimal, neither on the part of Greece nor ofEurope”. If asked, we expect Trichet to adopt a similar line, and we think he will urgeEuropean governments to proceed quickly on the rescue package.

8. Minimum credit threshold in ECB’s collateral framework

Last month, we argued that the ECB’s decision to retain a minimum credit threshold (at BBB-) in its collateral framework was not optimal, and we would have preferred a “once forall” solution fitting even tail events in which the sovereign rating of one member state is cut below investment grade by all rating agencies. Presumably, the ECB found the retention ofthe minimum credit threshold a good compromise to avoid the risk of a significantdeterioration of its collateral portfolio, but Tuesday’s three-notch Greek downgrade by S&P to BB+ now raises the issue anew. With Fitch right at the minimum credit threshold andMoody’s three notches away from it, the risk that Greek bonds will lose eligibility is againtangible, and Trichet will probably have a tough time getting around it, if asked.

9. Balance of risks to the inflation outlook

This is the easiest answer of the Q&A. Trichet will probably say that he is the only one thatspeaks on behalf of the Governing Council, clearly hinting that recent remarks by Weber and Stark on upside inflation risks don’t represent the view of the majority. Due to persistingeconomic slack and high unemployment, price pressures will remain dampened over thepolicy-relevant horizon. In this context, short-term volatility triggered by commodity prices needs to be considered as noise, and risks in the medium term are broadly balanced. Inaddition, should concerns on sovereign debt sustainability persist, they will pose a seriousobstacle to the ECB’s exit strategy, and while we would rule out direct government bondspurchases, on the other hand rate hikes will also become less likely. Hawkish statements oninflation, already unwarranted, would therefore become even more unwise.

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Curves & Crosses

Preliminary thoughts on Greece's new austerity measures Tullia Bucco (UniCredit Bank Milan) +39 02 8862-2079 [email protected]

Greece has agreed with the IMF and the European Commission to toughen its austerity package, which now envisages EUR 24bn deficit-cutting measures through 2012.Accordingly, the total size of the fiscal consolidation through 2012 should be 10% ofGDP. While full details about the package will be disclosed later today or during the weekend, the new measures leaked in the press consist in the following.

On the expenditure side:

■ Outright abolition of the ‘13th month’ and ‘14th month’ bonuses paid to civil servants eachyear. This would represent a 15% reduction in the salary bill (EUR 1.4bn a year, based on our calculation). This cut implies a clear step-up in the government’s previous commitment to reduce civil servant bonus salary payments by 30%.

■ Extension of the public sector wage freeze, originally planned only for 2010, to the next two years. This should produce savings of about EUR 300mn per year, according toestimates earlier produced by the government.

■ Extension of this year’s public recruitment freeze to the next two years. This measureshould be worth EUR 80mn per year.

■ No renewal of short-term public sector contracts, while in the January bill the governmentenvisaged only a reduction that was expected to deliver savings for EUR 120mn. For thetime being, we are not able to quantify the impact of this tougher measure.

On the revenue side:

A further 2-3pp increase in the VAT rate to 23-24%. According to previous government estimates, this measure should be worth EUR 1.6bn a year. However, we think that thisestimate may suffer from downside risks now that the recession is about to deepen.

Overall, we have so far been able to identify measures worth EUR 3.4bn, against the EUR 8bn to be delivered each year. The difference is made up by new measures consisting in:

- closure of more than 800 state entities;

- privatization proceeds coming from sales of state corporations and sales and lease of state-owned land and properties;

- overhaul of the pension system via an increase in the average retirement age to 67 fromthe current 53. Obviously, the larger the savings stemming from the pension reform vs. the others two measures, the better.

On top of this, the government plans a liberalization effort consisting in opening up more than60 closed-shop professions.

Bottom line There seems to be enough to win back some of the lost market confidence. Key challenges will be the effective implementation of the new measures in a context ofincreasing social tensions, and the possibility to achieve the foreseen increase in taxrevenues despite the worsening of the recession.

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Curves & Crosses

FI Strategizer Two political events in the spotlight

Luca cazzulani (UniCredit Bank Milan) +39 02 88620640 [email protected]

This week we have witnessed an escalation of worries on Greece. With Germany continuing to play hardball for most of the week, fears of contagion have spread to otherEMU countries. Markets have realized that a multi-year package is the only way out of this crisis and have started to clam down only after this option was put on the table. At the end of the week, discussion of fiscal measures for a total of EUR 24bn in the next twoyears contributed to create some positive momentum on Greece.

That said; we remain quite cautious before claiming that the crisis is over. First of all, as we have seen many times recently, one thing is discussing a plan (which usually bringseuphoria to markets in the short run), another one is nailing down all the details (which isrequired to make euphoria last). Second, once the aid package is agreed, it will still be necessary to see concrete improvements in the economic and fiscal reforms.

Main theme of the week: contagion…

A main theme for the week has been contagion: Portuguese CDS have widened 80bp, Irish 50bp and Spanish 20bp. Investors have actively debated how much would cost to bailout other EMU countries. The math is impressive and a clear result that emerges is that a generalized bail-out of several countries would not be feasible. It is hence mandatory to address quickly the remaining issues on Greece, before the fire spreads too much.

… and negative rating drift A second theme has been negative rating drift in the EMU: S&P has cut Greece by three notches (from BBB+ to BB+), Portugal by two (from A+ to A-) and Spain by one (from AA+ to AA). Most of these decisions simply ratify what the market was already pricing (see chartbelow on the right). After the S&P downgrade, Greece paper will become un-eligible if both Fitch downgrades the issuer by at least one notch (which seems quite likely) and Moody’s by at least four (which seems unlikely in a near term scenario).

Equities down and Bunds up In the atmosphere of uncertainty, equity markets have fallen (Dax –2%, Eurostoxx – 3%, Athens up to -8%) and Bunds have posted further gains. The new Bund 3% Jul20 hasreceived a fairly good demand and demand at the Italian BTP auction has been very good.This is a signal that markets are becoming selective.

FOMC has not brought significant news

The FOMC has not brought any significant news; the US central bank has kept the extended period of time rhetoric in place. In the last weeks, US Libor rates have been risingreflecting increasing expectations for a rate hike. We have argued that such expectations area bit overdone and open a trade at the beginning of April (Long 3M Libor Dec10).

FI FORECASTS - KEY CHARTS

3Y yields – who’s feeling the heat and who is not Rating and ASW

1

3

5

7

9

11

13

15

Jan-09 Apr-09 Jul-09 Oct-09 Jan-10 Apr-10

IT PT SP GR IE

GR

IE

IT

DE

PT

ESBENLFR

FI

ATSL

SK

BB+

AAA

AA+

AA AA-

A+ A A- BBB

+

BBB

BBB

-

y = 47.262x - 58.575R2 = 0.8527

-500

50100150200250300350400450500550600650




Curves & Crosses

Next week: two political events in the spotlight

Next week will be very eventful, with two elections in the spotlight: UK general elections on May6 and North-Rheine Westphalia elections in Germany on May 9. In addition, decisionson Greece will continue to catch market attention. Important releases are scheduled in the US (NFP and PMIs) while the EU calendar will be pretty empty. Finally, although we expect avery interesting Q&A session at the ECB meeting, from a practical perspective we would notexpect a big impact on markets.

UK elections: some thoughts The UK elections will most likely deliver a hung Parliament, with no parties having the majority of votes. Therefore, it is almost certain that a coalition government will lead thecountry over the next parliament. At this stage, it is far from certain if it will be a Lib-Lab or a Tories-Lib coalition. Negotiations between parties to form the government might taketime, protracting the uncertainty, which should prove negative for Gilts in the short-term. On a medium-term perspective, even after the new government will be in office, theuncertainty will remain on the speed of implementation of the fiscal adjustmentrequired to stabilize the ballooning public debt. In fact a coalition government (whatever it willbe) could find it more difficult to quickly implement the structural reforms needed to reduce government spending (for example, the reform of the national health system seems to beone battle field). As the different parties have similar plans of deficit reduction and differ to alimited extent only with respect to the proposed mix of spending cuts and tax rises, it will becrucial to see 1) if the savings will prove realistic – there are no details so far on where they should come from – and 2) weather the fiscal consolidation outlined by the three main parties in their programs will be enough to bring UK public debt back on a sustainable path.

Bunds have benefited from the crisis but now face two joint risks

Bunds have gained from the turmoil in the EU and, at just above 3% we would buy 10Yonly to bet on extreme scenarios (restructuring or default of Greece and similar). Otherwise German bonds are likely to suffer both from a reduction in risk aversion if the crisiseases and from a repricing of credit risk (once the package is approved investors will likely require a premium because Greece-related risk will end up on German balance sheets).

EMU supply to be fairly subdued next week

Next week, eurozone primary market activity should be rather subdued. There will be noredemptions and coupons, while we expect gross (and net) supply to be in the EUR 13/14bn range, coming mainly from core countries (Austria and France), on the longand extra long end of the curve.

Bottom line Next week will remain dominated by developments of the Greek crisis. The May 9 German elections will continue to represent a critical date in this respect. This week marketreaction with respect to other peripheral countries is probably overdone and the concretepossibilities of a contagion will be put into a better perspective in the coming weeks. Even amulti-year package that shields Greece from market for some years would not removeentirely the pressure from other peripheral countries. Given the stretched yield levels, wewould only buy Bunds to bet on extreme scenarios.

10Y yields at a glance 2Y yields in EU, UK and US

3.80 3.92 3.93 3.92 3.98 4.19 4.02 4.01 4.21 4.01 4.48 4.04

0

2

4

6

8

10

12

GE FR NL FI AT IE BE ES IT PT GR SW

avg since '03 last

Vertical bars show the minimum and the maximum level since Jan-03

0.6

0.8

1.0

1.2

1.4

1.6

1.8

2.0

Jan-09 Apr-09 Jul-09 Oct-09 Jan-10 Apr-10

UK EU US


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Curves & Crosses

Real Money Section: Euroland Portfolio Strategy Forecast risk tilted towards yields staying low for longer

Michael Rottmann (UniCredit Bank) +49 89 378-15121 [email protected] Negative rating drifts leads to heavy losses for a second week in a row

While contagion of the Greek crisis so far had been manageable, the heat increasedthroughout this week, with S&P inflating the negative rating drift in the euro zone by downgrading Greece three notches from BBB+ to BB+, Portugal two notches from A+ to A-and Spain one notch from AA+ to AA. And worse, if the ratings are regressed against the 5Y CDS levels of eurozone and Eastern European countries, it appears that marketparticipants do not see this as the end of the negative drift, with 5Y CDS of Greece, Portugal, Ireland and Spain trading sharply above the regression line. The situation did calm down towards the end of the week. Whereas at the beginning of the week the public debate had increasingly focused on speculation of a debt restructuring and official denials wereincreasingly ignored, the situation changed from Wednesday on. The Berlin press conference attended by ECB President Trichet and IMF Managing Director Strauss-Kahn, as well as the subsequent comments from German politicians suggest an aid package phased in several years in the triple-digit billions. Nevertheless, at the end of the week, the YTD return of EGBs lost further ground, actually +1.40% after a peak of 2.46% just 3 ½ weeks ago.

EGB RETURNS, VOLATILITY AND CROSS ASSET CORRELATIONS

5-day return

20-day return

YTD return

20-day return

volatility

YTD return

volatility

60-day return/20-day return correlation

EGBs> 1Y

EGBHICP-ILB

1-10Y

iBoxx EUR Corp. BBB

Euro- Stoxx

DJ AIG Commodity

Oilprice

3M Euribor 0.01 0.04 0.20 0.02 0.02 EGBs >1 1 0.50 0.57 -0.10 -0.14 -0.10EGBs >1Y -0.27 -0.98 1.40 2.83 2.40 EGB HICP-ILB 1-10Y 0.58 1 0.28 0.32 0.27 0.34EGBs 1-3Y -0.27 -0.59 0.45 1.92 1.25 iBoxx EUR Corp. BBB 0.52 0.33 1 -0.14 -0.24 -0.26EGBs 3-5Y -0.34 -0.94 1.01 2.93 2.09 EuroStoxx 0.07 0.50 0.00 1 0.60 0.67EGBs 5-7Y -0.36 -1.06 1.30 2.98 2.40 DJ AIG Commodity -0.13 0.34 -0.20 0.58 1 0.85EGBs 7-10Y -0.46 -1.42 1.12 3.81 3.25 Oil price -0.06 0.38 -0.31 0.58 0.75 1EGBs >10Y -0.02 -1.04 2.99 4.74 4.36 EGB HICP-ILB 1-10Y -0.03 -0.59 0.98 2.69 2.49


"It ain't over till it's over", but with a 7-10Y yields trading at the upper end of our projected 3.4-3.7% range, we put our money where our mouth is and lengthen duration by 0.5 years

Details of the rescue package could be on the table as early as Monday. This is most likely not synonymous with declining volatility; merely the direction could be changed temporarily: Spreads of periphery countries have a chance to narrow, with yields in core countries slightly higher, but overall with a U-turn towards positive returns in the aggregated EGB universe. Over the medium term, the odds for yields in core countries staying atdepressed levels increased. As noted by our economists, the ECB is getting into an increasingly difficult situation. The planned exit strategy of the ECB will be substantially more complex, and the discussion of a possible purchase of Greek government bonds is alsonot conducive to worrying about monetary policy tightening. The risk right now lies in slower key rate normalization than assumed so far, which in turn will tend to keep long-term yields of the core countries at a low level even longer. However, we are on the verge of moving our expectation of a moderate upturn in yields further out in time. In our March quarterly outlook we argued that we would manage duration under the assumption of 7-10Y yields trading between 3.4% and 3.7%. Given we reached the upper end of the range two days ago we lengthen our duration exposure.

EGBS: EXPECTED RETURNS AND PORTFOLIO RECOMMENDATION

Modified Duration in Years Effas Benchmark weighting Recommended UniCredit weighting3M Euribor 0.25 0EGBs 1-3Y 1.76 24.44 13.5EGBs 3-5Y 3.55 20.11 19EGBs 5-7Y 5.15 11.84 18EGBs 7-10Y 6.88 18.18 24EGBs >10Y 12.11 25.43 25.5EGB HICP-ILB 1-10Y 4.69 0Average Duration 6.07 6.05


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Curves & Crosses

Real Money Section: Euroland Country StrategyHang on …

Luca Cazzulani (UniCredit Bank Milan) +39 02 88620640 [email protected]

The Greek saga has made some progresses towards the end of the week. GGBs have taken more losses in the first days and then started to recover a bit. The S&P decision todowngrade Portugal and Spain has also put some pressure on our allocation performance.The weekly performance has been again negative (almost 0.4%).

In the run-up to May19, odds are for a recovery of the most recent widening. Our mainscenario is still that an aid package will be finally agreed upon and this should bring a relief rally on GGBs and on other peripheral countries. Although we do not expect a massive rally, it makes sense not to reduce our exposure now.

EFFAS redemption yield EMU Weekly returns

2.0

3.0

4.0

5.0

6.0

7.0

8.0

9.0

10.0

GR PT IE IT ES AT BE FR NL DE FI

Core Mid Periphery

-5.0%

-4.0%

-3.0%

-2.0%

-1.0%

0.0%

1.0%

FR DE NL FI AT BE ES IT IE PT GR

weekly performance


EGB COUNTRY RECOMMENDATION

>1Y YTM Duration YTD return Last week return EFFAS weighting Our weighting Ch. since last week Over / Under w.Austria 3.19 6.57 4.09% 0.19% 3.9% 5.0% 1.1%Belgium 3.14 5.76 2.77% 0.05% 5.9% 1.5% -4.4%Germany 2.87 5.90 3.56% 0.47% 21.5% 17.5% -4.0%Spain 3.95 5.87 0.62% -0.31% 9.9% 6.0% -3.9%Finland 2.78 5.52 3.13% 0.32% 1.2% 0.0% -1.2%France 3.12 6.45 3.35% 0.49% 20.8% 26.5% 5.7%Greece 9.59 4.82 -17.14% -4.53% 4.1% 8.0% 3.9%Ireland 4.94 5.77 -0.93% -2.50% 2.0% 4.0% 2.0%Italy 4.00 6.43 1.16% -0.45% 23.2% 29.5% 6.3%Netherlands 2.91 5.76 3.43% 0.40% 5.4% 1.5% -3.9%Portugal 5.24 5.51 -6.41% -3.17% 2.2% 0.5% -1.7%Eurozone 3.65 6.08 1.27% -0.21%

SUMMARY

Yield 3.69 3.98 Duration 6.08 6.14

YTD return 1.39% 1.05% Tot. Ret. Last week -0.21% -0.39%

Source: Bloomberg, UniCredit Research (all tables and charts on this page)



Curves & Crosses

Total Return Monitor

TOTAL RETURN YTD OF FIXED INCOME ASSETS


0.4

2.5

0.8

2.0

0.9 1.2

0.1

2.5

0.8

2.0

0.8 1.

2

0.1

10.9

9.1

4.4

6.3

1.0

5.6

7.5

0

2

4

6

8

10

12

Euro 7-10 Euro 1-3 US 7-10 US 1-3 UK 7-10 UK 1-3 JP 7-10 JP 1-3

Tota

l ret

urn

(%)

Asset return Hedged EUR Eur return

TOTAL RETURN YTD OF CURRENCIES AND EQUITIES

8.2

3.5

6.2

3.5

6.5

2.4 3.

8

2.4

4.8

3.6

15.3

2.4

10.2

6.0

13.4

12.1

-4

-2

0

2

4

6

8

10

12

14

16

USD GBP JPY CHF S&P DAX Nikkei FTSE Gold CRB

Tota

l ret

urn

(%)

Asset return Eur return

TOTAL RETURN BY COUNTRY AND MATURITY BUCKET

Euro 7-10

Euro 1-3

US 7-10

US 1-3

UK 7-10

UK 1-3

JP 7-10

JP 1-3

1W -0.43 -0.24 0.72 0.22 0.76 0.19 0.30 -0.01 1M -1.45 -0.60 1.94 0.39 0.13 0.01 0.81 0.03

TOTAL RETURN BY ASSET CLASS EUROZONE (2010 YTD)

5.3

9.6

5.7

-0.9

1.6

4.5

1.0

3.4

3.3

1.8

3.8

6.7

4.1

0.4

2.5

2.2

1.9

3.6 4.

1

1.0

4.3

-0.5

7.6

9.5

3.5

-0.1

3.5 3.9

6.9

0.9

9.8

2.0

-4

-2

0

2

4

6

8

10

12

2003 2004 2005 2006 2007 2008 2009 2010

YTD

tota

l ret

urn

(%).

Euro 7-10 Euro 1-3 CCT ILB

TOTAL RETURN BY COUNTRY AND MATURITY BUCKET

USD

GBP JPY CHF S&P DAX NKY UK Gold CRB

1W 0.50 0.47 0.20 0.09 -0.86 -1.01 1.31 -1.57 1.46 -0.281M 1.42 2.48 1.80 -0.16 2.43 -0.63 -2.03 -1.94 4.89 2.49

TOTAL RETURN BY ASSET CLASS US (2010 YTD)

3.3 4.

9

2.8

2.5

10.1

-5.2

2.5

2.4

1.0

3.8

7.3

6.4

0.9

0.8

7.9

7.5

2.3

1.4

11.3

-2.6

1.9

17.2

1.8

12.0

-10

-5

0

5

10

15

20

2003 2004 2005 2006 2007 2008 2009 2010

YTD

tota

l ret

urn

(%).

US 7-10 US 1-3 ILB

TOTAL RETURN YTD BY COUNTRY AND MATURITY BUCKET

Maturity bucket DE FR AT FI NL BE ES PT IT GR IE 1 -3 1.35% 1.46% 1.80% 1.66% 1.48% 1.39% 0.47% -2.40% 0.53% -12.41% -0.85% 3 -5 2.92% 2.72% 3.13% 2.86% 2.87% 2.29% 0.88% -5.12% 1.38% -17.40% - 5 - 7 3.41% 3.06% 3.64% 3.24% 3.30% 2.38% 0.82% -6.91% 1.48% -20.00% -1.42% 7 - 10 3.87% 3.60% 4.12% 3.94% 3.99% 3.26% 0.73% -7.44% 1.44% -20.82% -0.69%

>1 3.58% 3.37% 4.16% 3.14% 3.45% 2.81% 0.62% -6.37% 1.17% -17.06% -0.91%

SPREAD TO DE

1 -3 - 0.11% 0.45% 0.31% 0.13% 0.05% -0.88% -3.74% -0.82% -13.76% -2.19%

3 -5 - -0.21% 0.21% -0.06% -0.05% -0.63% -2.04% -8.04% -1.54% -20.32% - 5 - 7 - -0.35% 0.22% -0.18% -0.11% -1.04% -2.59% -10.32% -1.93% -23.42% -4.83% 7 - 10 - -0.27% 0.25% 0.07% 0.12% -0.61% -3.14% -11.31% -2.43% -24.70% -4.56% >1 - -0.21% 0.58% -0.43% -0.13% -0.77% -2.96% -9.94% -2.40% -20.64% -4.49%

Total return for the following combinations of bucket & countries are calculated using EFFAS indices of total return: EUR 7-10, EUR 1-3, US 7-10, US 1-3, UK 7-10, UK 1-3, JP 7-10, JP 1-3. CCTs total return is calculated using MTS index

Source: Bloomberg, EFFAS, UniCredit Research (all tables and charts in this page

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Curves & Crosses

Money Market Monitor Eurosystem liquidity analysis

Giuseppe Maraffino (UniCredit Bank Milan) +39 02 88622027 [email protected]

On 28 April the ECB held the first 3M LTRO without full-allotment fixed rate, since the adoption of extraordinary measures in October 2008. 1) The ECB allotted EUR 4.846bn, so demand was ca. EUR 1.5bn above the amount expiring (EUR 3.3bn), 2) The number of bidders, 24, was twice as much as at the 1M LTRO on April 14 and at the last 3M LTRO held in March with full allotment. c) The weighted average rate was 1.15%, which signals that banks bidding at the auction were very eager to get the funds (the highest accepted bid hasa rate of 1.50%). These elements suggest that there is still a bunch of banks that are still unable to get funding in the market and that need the ECB to get liquidity.

EUROSYSTEM: LIQUIDITY CONDITIONS AT A GLANCE (€ BN) Liquidity needs Liquidity

outstanding Excess Liquidity

Deposit Facility

Marginal Facility

Aut. Factor Reserve at the ECB Total

Reserve requirement

Excess Reserve

Tot Reserve

30-Apr-10 350 211 8 219 569 791 221 222 0

23-Apr-10 363 211 -7 204 567 784 217 217 0

change -13 0 15 15 2 6 4 4 0

25-Jun-09 390 218 145 363 753 897 143 143 0

change -40 -7 -137 -144 -184 -106 78 78 0 * date of the first 12M LTRO

Liquidity components (€ bn) Excess liquidity and EONIA

-600

-400

-200

0

200

400

600

800

1000

1200

Jul-08 Oct-08 Jan-09 Apr-09 Jul-09 Oct-09 Jan-10 Apr-10

Liquidity outstanding Res. requirement Aut. factor

Tot liquidity - (reserve requirement + autonomous factors)

-100

-50

0

50

100

150

200

250

300

350

Jul-08 Oct-08 Jan-09 Apr-09 Jul-09 Oct-09 Jan-10 Apr-10

eonia vs. refi (bp) excess liquidity (€bn), 7d mov av.

Deposits at the ECB (€bn) Weekly MRO

0

50

100

150

200

250

300

350

Apr-08 Jul-08 Oct-08 Jan-09 Apr-09 Jul-09 Oct-09 Jan-10 Apr-10

Deposit facility

Lehman collapse

ECB June 12M LTRO

40

60

80

100

120

140

160

180

Jun-09 Jul-09 Sep-09 Oct-09 Nov-09 Dec-09 Jan-10 Mar-10 Apr-10 May-100.0

0.2

0.4

0.6

0.8

1.0

1.2

1.4allotment, €bn, LHS aver. allot., €bn, RHS




Curves & Crosses

OIS BASED PROBABILITY OF CENTRAL BANKS’ ACTIONS EUR OIS 1-month: historical and forward ECB

0.00%

0.25%

0.50%

0.75%

1.00%

1.25%

1.50%

1.75%

Sep-09 Apr-10 Nov-10 May-11 Dec-11

HistoricalForward structure - todayForward structure - 1 week ago

ECB meeting Forward 0.25% 0.50% 0.75% 1.00% 1.25% 1.50% 1.75%

6-May-10 0.40% 42% 58% - - - - -

10-Jun-10 0.47% 11% 89% - - - - -

8-Jul-10 0.57% - 70% 30% - - - -

5-Aug-10 0.60% - 59% 41% - - - -

2-Sep-10 0.62% - 50% 50% - - - -

7-Oct-10 0.67% - 31% 69% - - - -

4-Nov-10 0.69% - 23% 77% - - - -

2-Dec-10 0.71% - 14% 86% - - - -

13-Jan-11 0.74% - 2% 98% - - - -

3-Feb-11 0.79% - - 85% 15% - - -

3-Mar-11 0.83% - - 66% 34% - - -

7-Apr-11 0.87% - - 51% 49% - - -

5-May-11 0.92% - - 31% 69% - - -

9-Jun-11 0.96% - - 15% 85% - - -

Given the abundant of liquidity in the market, EONIA rates reflect expectations on the depo rather than on the refi rate.

SONIA 1-month: historical and forward BOE

0.00%

0.25%

0.50%

0.75%

1.00%

1.25%

1.50%

1.75%

2.00%

Sep-09 Mar-10 Oct-10 May-11 Dec-11


BoE meeting Forward 0.25% 0.50% 0.75% 1.00% 1.25% 1.50% 1.75%

10-May-10 0.49% 5% 95% - - - - -

10-Jun-10 0.50% 2% 98% - - - - -

8-Jul-10 0.50% 0% 100% - - - - -

5-Aug-10 0.54% - 85% 15% - - - -

9-Sep-10 0.56% - 76% 24% - - - -

7-Oct-10 0.60% - 61% 39% - - - -

4-Nov-10 0.69% - 23% 77% - - - -

9-Dec-10 0.77% - - 92% 8% - - -

13-Jan-11 0.82% - - 71% 29% - - -

10-Feb-11 0.92% - - 31% 69% - - -

10-Mar-11 1.04% - - - 86% 14% - -

7-Apr-11 1.14% - - - 45% 55% - -

5-May-11 1.29% - - - - 84% 16% -

9-Jun-11 1.38% - - - - 48% 52% -

USD OIS 1-month: historical and forward FED

0.00%

0.25%

0.50%

0.75%

1.00%

Sep-09 Dec-09 Mar-10 Jun-10 Sep-10 Dec-10


FOMC meeting Forward 0.00% 0.25% 0.50% 0.75% 1.00% 1.25% 1.50%

23-Jun-10 0.25% 1% 99% - - - - -

10-Aug-10 0.27% - 91% 9% - - - -

21-Sep-10 0.33% - 67% 33% - - - -

3-Nov-10 0.40% - 40% 60% - - - -

4-Dec-10 0.49% - 6% 94% - - - -

26-Jan-11 0.62% - - 53% 47% - - -


Note: Probability of central banks’ actions is calculated from the 30-day forward on the OIS curve at the beginning of maintenance period following each meeting. Importantly, it is the conditional probability of an action given an action at the previous meeting.



Curves & Crosses

Euribor rates: historical movements and expectations 3M EURIBOR STRIP (RATES, %)


0.50

0.75

1.00

1.25

1.50

1.75

Jun-10 Sep-10 Dec-10 Mar-11

23-Apr-10 30-Apr-10 Euribor (e) refi (e)

EONIA AND POLICY RATES (REFI AND DEPO RATES)

0

1

2

3

4

5

6

Oct-08 Dec-08 Feb-09 Apr-09 Jun-09 Aug-09 Oct-09 Dec-09 Feb-10 Apr-100

50

100

150

200

250

300spread EONIA vs depo (bp), RHSmarginal depo rate (%)eonia rate (%)refi rate (%)

3M GBP LIBOR STRIP (RATES, %)

0.00

0.25

0.50

0.75

1.00

1.25

1.50

1.75

2.00


23-Apr-10 30-Apr-10 Libor (e) BoE rate (e)

3M LIBOR FIXING VS. OIS: HISTORY AND MKT EXPECT (BP)***

0

50

100

150

200

250

300

350

400

Jun-07 Dec-07 Jun-08 Nov-08 May-09 Oct-09 Apr-10 Oct-10 Mar-11

3M: Euribor vs. OIS (bp)

3M: GBP Libor vs. SONIA (bp)

3M: USD Libor vs. OIS (bp)

Jun-10Sep-10 Dec-10 Mar-11

3M USD LIBOR STRIP (RATES, %)

0.00

0.25

0.50

0.75

1.00

1.25

1.50


23-Apr-10 30-Apr-10 Libor (e) Fed fund rate (e)

EURIBOR RATES (%): EXPECTED PATH

0.00

1.00

2.00

3.00

4.00

5.00

6.00

Jan-07 Jun-07 Dec-07 Jun-08 Dec-08 Jun-09 Dec-09 Jun-10 Dec-10

6M 12M 1M 3M Refi


***. Triangles are the difference between the Euribor future with maturity are the indicated date and the 3M forward on the OIS curve, starting from the expiration date of the future. For example, the Mar09 triangles is the difference between the Euribor future expiring in Mar09 and the 3M forward on the OIS curve starting on the expiration date.

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Curves & Crosses

Swap Monitor SWAP CURVE: PAST, SPOT, 3M FORWARD

1.41.0

-6.0

-5.3

-3.2

-3.1 -7.8

0.5

1.0

1.5

2.0

2.5

3.0

3.5

4.0

4.5

0 5 10 15 20 25 30Maturity (years)

30-Apr-10 3 months ago Forward 3M

Numbers denote the 1w bp change in yields

ROLLDOWN &CARRY (3M HORIZON)

0

5

10

15

20

25

30

35

0 2 4 6 8 10 12 14 16 18 20 22 24 26 28 30maturity (years)

bp

2 & 5 YEAR SWAP RATE: WHAT FORWARDS TELL US


9m: 8

6

6m: 8

8

3m: 8

9

Cur

rent

: 92

1.0

1.5

2.0

2.5

3.0

3.5

4.0

4.5

5.0

5.5

Dec-06 Jun-07 Dec-07 Jun-08 Dec-08 Jun-09 Dec-09 Jun-10 Dec-10

2Y swap rate (%) 5Y swap rate (%) Forward rates

10 & 30 YEAR SWAP RATE: WHAT FORWARDS TELL US

9m: 1

5

6m: 2

1

3m: 2

7

Cur

rent

: 33

2.5

3.0

3.5

4.0

4.5

5.0

5.5


10Y swap rate (%) 30Y swap rate (%) Forward rates

10&30 AND 2&30 SPREADS: HISTORY AND FORWARD

212

3m 6m

9m

-100

-50

0

50

100

150

200

250


10/30Y spread (bp)

2/30Y spread (bp)

2/10Y spread (bp)

Forward spread

SWAP RATES AT A GLANCE

Average Cheap / rich Last Short term

(last 6M) Long term

(Jan99)Short term

(last 6M) Long term

(Jan99)2Y 1.41 1.62 3.47 EEEE EEEE5Y 2.33 2.58 3.97 EEEE EEEE10Y 3.20 3.41 4.47 EEEE EEEE15Y 3.58 3.79 4.72 EEEE EEEE30Y 3.54 3.81 4.85 EEEE EEEE

Cheap and rich indicators are base on distribution percentiles. EEEE=Very expensive, E= Expensive, CCCC=Very cheap, C=cheap. Valuations are from the investor’s perspective.

5Y SWAP-OPTION VOLA AT 5Y TENOR

17.56

13.3

15.1

10

12

14

16

18

20

22

24

Jan-99 Dec-00 Dec-02 Dec-04 Dec-06 Dec-08 Dec-10

Swaption vola (5Y) average since 1999 average since Aug07

SWAP CURVE AT A GLANCE

Average Cheap / rich Last Short term

(last 6M)Long term

(Jan99) Short term

(last 6M)Long term

(Jan99)2/5 92 96 50 EEEE CCC5/10 87 83 49 CC CCCC10/15 37 38 25 E CCC15/30 -4 2 12 EEEE EEEE2/5/10 2 7 1 EEEE C10/15/30 21 18 6 CCCC CCCC


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Curves & Crosses

Relative Value Monitor Contagion fears hit Portugal

Cremonesi Chiara (UniCredit Bank Milan) +44 207 8261771 [email protected]

The stalemate on the Greek aid agreement and S&P downgrades for Greece (tree notches to BB+), for Portugal (two notches from A+ to A-) and for Spain (one notch from AA+ to AA) led to an unprecedented pressure on periphery, as contagion fears started to spread. Talks thatEMU/IMF could soon reach an agreement restored some confidence in periphery, butspreads remain extremely wide, especially for Greece and Portugal. The spread widening of periphery vs. Germany and vs. swap was much more pronounced at the short end, especially for Greece and Portugal, as investors price in an increase in the probability of default. Whilethe announcement of an agreement (likely to be a 3Y program) should bring some relief at theshort end of the Greek curve, we do not see the case for a pronounced rally at the long enduntil the medium term issues are convincingly addressed by the government.

1-WEEK ASW CHANGE (BP) 5Y MATURITY ASW SPREAD VS. GERMANY (BP)

-10

0

10

20

30

40

50

60

70

80

NL FR DE AT BE ES IT GR PT

15.0 19.4 35.7 38.579.9 103.2

719.4

267.5

050

100150200250300350400450500550600650700750800850

NL FR AT BE IT ES PT GR

10Y MATURITY

-10

0

10

20

30

40

50

60

70

80

DE NL FR AT BE IT ES PT GR

20.1 27.9 38.8 45.995.2 96.2

223.2

560.2

050

100150200250300350400450500550600650

NL FR AT BE IT ES PT GR

30Y MATURITY

-10

0

10

20

30

40

50

60

70

80

DE FR NL AT BE IT ES GR PT

2.022.9

37.8 38.6

111.3 112.2138.3

260.3

0

50

100

150

200

250

300

350

NL AT FR BE IT ES PT GR

Charts at right: vertical bars in the charts on the right denote the 1-week trading range Source: Bloomberg, UniCredit Research (all charts on this page)



Curves & Crosses

Trade Ideas 5Y AREA

DE FR AT NE ES EIB BE PT IT GR ASW OBL 2.50% Feb15 rich Cheapest BTAN 3.00% Jul14 12 rich Bond Current 1W Ch.RAGB 3.50% Jul15 36 24 cheap cheap GGB 4% Aug13 845.1 154.9DSL 2.75% Jan15 15 4 -20 rich GGB 4.6% May13 886.1 174.2SPGB 3.00% Apr15 103 92 68 88 rich EIB 4.25% Apr15 32 21 -3 17 -71 Richest BGB 3.50% Mar15 38 27 2 23 -65 6 Bond Current 1W Ch.OT 3.35% Oct15 267 256 232 252 164 235 229 NETH 1.75% Dec13 -45.9 -2.2BTP 3.50% Jun14 79 68 43 64 -24 47 41 -188 NETH 3.75% Jul14 -24.8 -2.3GGB 6.10% Aug15 720 708 684 704 616 687 682 452 640

10Y AREA DE FR AT NE ES EIB BE PT IT GR ASW DBR 3.25% Jan20 Cheapest OAT 3.50% Apr20 28 Bond Current 1W Ch.RAGB 3.90% Jul20 38 11 GGB 5.9% Apr17 232.0 63.5DSL 3.50% Jul20 20 -8 -18 PGB 4.2% Oct16 619.2 59.8SPGB 4.00% Apr20 95 67 56 75 cheap EIB 4.25% Apr19 33 5 -5 13 -62 Richest BGB 3.75% Sep20 45 17 7 25 -50 12 rich Bond Current 1W Ch.OT 4.80% Jun20 223 195 184 203 128 190 177 DBR 3.25% Jan20 1.5 -1.3BTP 4.25% Mar20 95 67 57 75 0 62 50 -128 NETH 4% Jul16 -3.6 -1.0GGB 6.00% Jul19 557 529 518 537 462 524 512 334 462

30Y AREA DE FR AT NE ES EIB BE PT IT GR ASW DBR 4.75% Jul40 rich rich Cheapest OAT 4.00% Apr55 37 rich rich rich rich Bond Current 1W Ch.RAGB 4.15% Mar37 23 -15 cheap GGB 5.3% Mar26 383.7 42.6DSL 4.00% Jan37 2 -35 -21 rich rich rich rich BTPS 6.5% Nov27 124.8 10.4SPGB 4.70% Jul41 112 75 89 110 rich EIB 4.00% Oct37 22 -16 -1 19 -90 Richest BGB 5.00% Mar35 39 1 16 36 -73 17 rich Bond Current 1W Ch.OT 4.10% Apr37 139 101 116 136 27 117 100 FRTR 5.5% Apr29 23.5 -2.8BTP 5.00% Sep40 111 74 89 109 -1 90 73 -27 DBR 6.25% Jan30 2.6 -2.8GGB 4.60% Sep40 260 223 238 258 148 239 222 122 149

Source: Bloomberg, UniCredit Research (all tables in this page) How to read the tables: all tables on the left are divided into two triangle areas.

The lower one (bold numbers) contains the swap-spread difference (country on the row MINUS country on the column). The upper range contains Z-scores calculated on swap spread differences (country in the row MINUS country in the column) over the last 60 working days. Rich means the country in the row has richened vs. the country in the column (.Z-score lower than -1.5) and would denote a sell opportunity. Cheap means the country in the row has cheapened vs. the country in the column (Z-score higher than 1.5) and would denote a buy opportunity.

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Curves & Crosses

EGB spread monitor

EGB market: yield spreads vs. Germany (bp) AAA GROUP NOT AAA GROUP

5Y MATURITY

-20

0

20

40

60

80

100

120

140

Apr-07 Oct-07 Apr-08 Oct-08 Apr-09 Oct-09 Apr-10

5Y FR-DE 5Y AT-DE 5Y NL-DE

5Y MATURITY

0

100

200

300

400

500

600

700

800

900

1000


5Y IT-DE 5Y GR-DE 5Y PT-DE 5Y BE-DE 5Y ES-DE

10Y MATURITY

0

20

40

60

80

100

120

140


10Y FR-DE 10Y AT-DE10Y NL-DE

10Y MATURITY

0

100

200

300

400

500

600

700



30Y MATURITY

0

20

40

60

80

100

May-07 Oct-07 Mar-08 Aug-08 Jan-09 Jun-09 Nov-09 Apr-10

30Y FR-DE 30Y AT-DE30Y NL-DE

30Y MATURITY

0

50

100

150

200

250

300

350

400

450



Note: We use Bloomberg generics for all issuers across maturities

Source Bloomberg, UniCredit Research (for all charts in this page)



Curves & Crosses

Inflation Monitor

Inflation rises further in April Marco Valli (UniCredit Bank Milan) +39 02 88628688 [email protected]

The flash estimate for eurozone April HICP was reported at 1.5% yoy, after 1.4% inMarch. This is in line with our revised forecast following the weak German reading on Wednesday – last week, for the eurozone we had penciled in 1.6% with downside risks.

As always with the flash estimate, no details are yet available. But it’s very likely that core inflation – ex food, energy, alcohol and tobacco – decelerated substantially, to 0.7-0.8% yoy vs. the previous 1.0%. This validates our view that the March increase was largelytechnical and due to the timing of Easter at the very beginning of April. In our workingassumptions, the slowdown in core inflation offset the upward pressure stemming fromenergy, while food inflation continued its moderate upward trajectory (mostly on a baseeffect).

Also out today, Italy’s April CPI matched our expectations at 1.5% yoy, but the monthly increase was slightly stronger than we had expected. We have adjusted our FOI projectionsaccordingly.

Our very preliminary eurozone forecast for May flags a further moderate acceleration inheadline inflation to 1.6% yoy.

1W & 1M CHANGE IN BE

-10

0

10

20

Sep1

0Se

p12

Sep1

4Se

p17

Sep1

9Se

p21

Sep2

3Se

p35

Sep4

1Ju

l10

Jul1

2Ju

l15

Jul2

0Ju

l32

Jul4

0Ap

r13

Apr1

6Ap

r20

Jul1

1Ju

l13

Jul1

7Ju

l23

Jul2

9Ju

l25

Jul3

0

IT FR e DE FR i GR

Cha

neg

in B

E (b

p)

1W ch. 1M ch.

CURRENT BE VS. RECENT AND LONG-RUN AVERAGE

0

50

100

150

200

250

300

350

US UK EU

Long term avg 1-Jan-09 6M avg Last

OUR INFLATION EXPECTATIONS (EX-TOBACCO)


1.7

1.7

1.4

1.31.4

-1.0

0.0

1.0

2.0

3.0

4.0

5.0

Jan-05 Jan-06 Jan-07 Jan-08 Jan-09 Jan-10 Jan-11

FORECAST

BE CURVE IN EUROPE (BP)

100

150

200

250

300

350

400

0 5 10 15 20 25 30 35

Today 1M ago 3M ago



Curves & Crosses

REAL YIELD CURVE (%)


BTP

2.1

Sep

21

BTP

2.3

5 S

ep19

BTP

2.1

Sep

17

BTP

2.1

5 S

ep14

BTP

1.8

5 S

ep12

BTP

2.6

Sep

23

BTP

2.3

5 S

ep35

BTP

2.5

5 S

ep41

T€i 1

.6 J

ul15

BREAKEVEN CURVE (BP)

OA

T€i 3

Jul

12

OA

OA

T€i 2

.25

Jul2

0

OA

T€i 3

.15

Jul3

2

OA

T€i 1

.8 J

ul40

Bun

d 2.

25 A

pr13

Bun

d 1.

5 A

pr16

Bun

d 1.

75 A

pr20

-2

-1

0

1

2

3

4

5

Jan-09 Dec-13 Dec-18 Dec-23 Dec-28 Dec-33 Dec-38

Real Swap rate

BTP

2.5

5 S

ep41

BTP

2.3

5 S

ep35

BTP

2.6

Sep

23BTP

1.8

5 Se

p12

BTP

2.1

5 Se

p14

BTP

2.1

Sep

17

BTP

2.3

5 Se

p19

BTP

2.1

Sep

21

OA

T€i 1

.6 J

ul1

OA

T€i 1

.8 J

ul40

OA

T€i 3

.15

Jul3

2

OA

T€i 2

.25

Jul2

0

5

OA

T€i 3

Jul

12

Bund

1.7

5 Ap

r20

Bun

d 1.

5 Ap

r16

Bund

2.2

5 Ap

r13

ggb

2.3

Jul3

0

ggb

2.9

Jul2

5

50

100

150

200

250

300

Mar-10 Mar-15 Mar-20 Mar-25 Mar-30 Feb-35 Feb-40

Swap Inflation

10Y REAL YIELDS – EU, JP, UK, US (%)

-1

0

1

2

3

4

5

6

Jan-05 Jan-06 Jan-07 Jan-08 Jan-09 Jan-10

US UK EU JP

10Y BE – EU, JP, UK, US (BP)

-400

-300

-200

-100

0

100

200

300

400

500

Jan-05 Jan-06 Jan-07 Jan-08 Jan-09 Jan-10

US UK EU JP

BTPEI REAL YIELD (%)

-0.5

0.0

0.5

1.0

1.5

2.0

2.5

3.0

3.5

4.0

Dec-06 Jul-07 Jan-08 Jul-08 Jan-09 Jul-09 Jan-10

BTP Sep12 BTP Sep19 BTP Sep35

BTPEI BREAKEVEN AND EU INFLATION EX-TOBACCO (BP)

-100

0

100

200

300

400

500

Jan-07 Jul-07 Jan-08 Jul-08 Jan-09 Jul-09 Jan-10

BTP Sep12 BTP Sep19 BTP Sep35 Inflation

OATEI REAL YIELD (%)

-1.5

-1.0

-0.5

0.0

0.5

1.0

1.5

2.0

2.5

3.0


OAT Jul12 OAT Jul20 OAT Jul40

OATEI BREAKEVEN AND EU INFLATION EX-TOBACCO (BP)

-100

0

100

200

300

400

500


OAT Jul12 OAT Jul15 OAT Jul40 Inflation

Source: Bloomberg, UniCredit Research (all charts in this page)


Curves & Crosses

Supply Corner: The week ahead Periphery to remain under heavy scrutiny

Chiara Cremonesi (UniCredit Bank London) +44 207 826 1771 [email protected]

This week, as expected, the focus was on primary market activity from periphery, as investors tried to assess to what extent each periphery country's activity could be affected bythe Greek tragedy. The environment for periphery has been worsening by the day, as inaddition to the EMU delay on the disbursement of Greek aid, S&P downgraded Greece to junk status (from BBB+ to BB+), and also downgraded Portugal by two notches (from A+to A-) and Spain by one notch (from AA+ to A+).

Investor interest in Italian paper remains strong

Despite the extremely difficult environment for periphery, yesterday the Italian auction(3Y, 10 BTp and CCT) went rather well, with the Treasury issuing at the top of the announced range and the pricing coming in above the market level both for the 3Y and for the10Y BTP. If, on the one hand, this was a good sign after the weak BOT auction and thedisappointing Spanish T-bill auction two days ago, we should not interpret it as a positive signalso for the rest of periphery, as Italy enjoys a favorable position among periphery countriesthanks to its better economic, fiscal and rating outlook. Therefore, over the next few weeks, we expect periphery auctions to continue to be heavily scrutinized by investors.

Next week, we expect gross (and net) supply to be in the EUR 13/15bn range, rather subdued

Next week, eurozone primary market activity should be rather subdued. There will be noredemptions and coupons, while we expect gross (and net) supply to be in the EUR 13/15bn range, coming mainly from core countries (Austria and France), on the longand extra long end of the curve.

Portugal & Spain in the spotlight next week

Importantly, Portugal will hold a 6M T-bills auction next Wednesday (EUR 0.5bn), while Spain will re-open SPGB Apr15 next Thursday, where we expect the auction size to be ca. EUR 3bn. These will be two very important tests for the periphery market and more specifically for Portugal and Spain, after the S&P downgrades.

Portugal holds a reverse auction of OT May10

Next Monday, Portugal will also hold a reverse auction of OT May10 with EUR 1bn as an indicative amount. This is the second reverse auction for this bond and should reduce theoutstanding to be redeemed on 20 May to EUR 4.6bn.

May will be rather illiquid, and redemptions will come from Greece and Portugal

Turning to the supply outlook for May, this will be the second less liquid month of the year (after February): redemptions will be only EUR 15bn and coupons EUR 7bn. Interestingly,redemptions will all come from Greece and Portugal and will all be concentrated on 19and 20 May. Given the tensions on these two countries, we expect pressure to remain high.

Gross supply in May to be in the EUR 71/80bn area

We expect gross supply in May to be in the EUR 71/80bn area, lower than the YTD monthly average (EUR 100bn). About 60% will come from core issuers (GE, FR, AT, NL) andthe remaining 40% will come from periphery, mostly Italy (EUR 16.5) and Spain (EUR 6.5bn).

Net supply will be higher than in April, given the low liquidity

As liquidity will be very subdued, net supply should be substantially higher than in April (EUR 56/66bn vs. EUR 35bn). In terms of maturity bucket, issuance should be split as follows: 18% on 2/3Y, 32% on 5Y,26% on 10Y, 2% on 15Y, 11% on 30Y/30Y+, and 5% on linkers.

New issues: France, the Netherlands and (possibly) Portugal

France could issue a new 3Y Btan, the Netherlands plans to issue a new 30Y on 18 May and Portugal plans to issue a new benchmark in 2Q, we think a 5Y is likely. The timing of thelatter will be rather critical.

Timing for the new benchmark from Portugal will be rather critical

While the redemptions on 20 May (EUR 6bn) suggest that May could be a good time forPortugal to issue a new bond, as liquidity would support demand, we think that only if the actual disbursement of the Greek aid package restores some confidence in the market and calms down contagion fears, thus lowering borrowing costs for Portugal, could itdecide to issue a new benchmark as early as in May.

Ireland may skip the May auction The Irish NTMA suggested that it could skip the May auction if market conditions for periphery remain adverse, as Ireland is quite advanced in terms of funding, having completed ca. 60%of the yearly program.

Revising down Greek issuance Following recent developments, we revised down our projections for Greek yearly bond supply from EUR 42bn to EUR 30bn. We would not exclude that Greece comes back to markets, provided the aid disbursementrestores some confidence and the government presents a credible medium-term plan.



Curves & Crosses

However, this will come at still high borrowing costs, as we do not see a convincing GGB rallylikely even on the drawdown of IMF and EMU funds.

Italy could issue a new 3Y BTP at the end of May auction

According to the funding plan, Italy should issue a new 3Y BTP (likely a Jun13) at the May auction, with settlement in June.

NEXT TWO WEEKS' SUPPLY (GROSS SUPPLY FIGURES ARE EX BOTS, CCTS AND CTZS)

Date Country Bond in issue Min Max Bucket Date Country Bond in issue Min Max Bucket 03-May SK Slovakia Govt May26 - - - 15Y 11-May IT BOT 12M BOT 6.5 MM 03-May PT Reverse auction 1 11-May NL DSL Jan15 2.0 / 2.5 5Y 4-May AT RAGB Feb17 & Mar26 2.2 7Y & 15Y 12-May GE New Schatz Jun12 7.0 2Y 5-May PT 6M T-bills 0.5 MM 13-May IT BTP BTP Apr15 & Sep40 5.5 / 6.0 5Y & 30Y 6-May SP SPGB Apr15 3.0 / 3.5 5Y 6-May FR OAT OAT Apr20, Apr21 &

Apr41 7.5 / 9.0 10Y &

30Y

Gross supply 12.7 / 14.7 Gross supply 14.5 / 15.5 Redemptions 0.0 Redemptions 8.1 Coupons 0 Coupons 1.3 Net supply 12.7 / 14.7 Net supply 6.4 / 7.4

NEXT FOUR WEEKS’ REDEMPTIONS IN DETAIL NEXT FOUR WEEKS’ COUPONS IN DETAIL 01-May/8-May 08-May/15-May 15-/22-May 22/29-May 01-May/8-May 08-May/15-May 15-/22-May 22/29-May

GR GGB 6.00 19-May-10 8.1

GGB 6.00 31-May-10 0.4

2/5Y - 1.3 1.4 1.1

GE GERMAN 3 7/8

06/01/10 3.8 6/8Y - - -

-

PT 0.0 0.0 PGB 5.85 20-May-

10 5.9 0.0 10Y - - -

-

Total

8.1 5.9 4.1 15/30Y - - - -

Total - 1.3 1.4 1.1

Redemptions are inserted in the indicated weeks as if they were paid three days in advance with respect to the actual date at which the bond is redeemed. This is done to allow for the exact matching of redemption flows with the auction settlement date (T+3)

A TENTATIVE CALENDAR FOR PERIPHERY PRIMARY MARKET ACTIVITY IN MAY (BONDS AND T-BILLS)

Date Week day Country Bond in issue Amount Maturity bucket 5-May10 Wed PT 6M T-bills 0.5 / 0.75 MM 6-May-10 Thu SP SPGB Apr15 3 / 3.5 5Y 11-May-10 Tue IT 12M BOT 6.5 - - MM 13-May-10 Thu IT BTP Apr15 & Sep40 5.5 / 6 5Y & 30Y IE T-bill auction 1 MM 18-May-10 Tue IE IRISH 2Y & 10Y 1 / 1.5 2Y & 10Y SP 12M & 18M T-bills 2 / 3 MM 19-May-10 Wed PT 9M T-bills 0.5 MM 20-May-10 Thu SP SPGB Apr20 3 / 3.5 10Y 25-May-10 Tue SP 3M & 6M T-bills 2 / 3 MM 26-May-10 Wed IT 6M BOT 9.5 - - MM IT CTZ Apr12 3 - - CTZ 27-May-10 Thu IT BTPei auction 1 / 1.5 ILB

28-May-10 Fri IT New 3Y BTP & BTP Sep20 7 / 8 3Y & 10Y

IT CCT Mar17 1 / 1.5 CCT

Numbers and bonds in grey represent our estimates

Source: UniCredit Research



Curves & Crosses

Supply recap

YTD SUPPLY BY MATURITY: 2009 & 2010 YTD SUPPLY BY COUNTRY: 2009 & 2010

127

95

102

18 19

10 16

112

25 29

21

14

116

93

0

20

40

60

80

100

120

140

160

180

3y 5y 10y 15y 30y + IL Floater

EU

R b

n

2009 2010YTD Supply 2009: €387 bn 2010 : €410 bn

8

64

46

12

113

6 3 2

46

9.5 16

.5

6.5

85.0

83.0

20.4

11.7

25.1

8.0

2.5

3.2

34.1

6

2219

40

104.

7

0102030405060708090

100110120130

AT BE FI FR GE GR IE IT NL PT SL SK SP

EUR

bn

2009 2010


PROGRESS OF FUNDING BY MATURITY & BY COUNTRY

Country AT BE FI FR GE GR IE IT NL PT SL SK SP TOT YTD Exp YTD Exp YTD Exp YTD Exp YTD Exp YTD Exp YTD Exp YTD Exp YTD Exp YTD Exp YTD Exp YTD Exp YTD Exp YTD Exp

Maturity 3y - - - 4 - 1 14 40 26 76 - - - - 37 75 9 16 1 1 - - 1 1 5 19 93 2335y 6 9 5 9 1 7 25 53 24 57 13 13 3 7 17 48 8 12 1 7 1 1 1 3 8 32 112 258

10y 2 5 8 11 4 6 22 53 22 62 5 9 8 10 22 48 6 13 5 10 1.5 1.5 2 3 8 32 116 26315y 1 2 - 1 2 2 5 15 - - - - 1 3 5 16 1 4 1 2 - - 0 3 9 11 25 59

30y + - 3 4 5 - - 12 19 6 12 - - - - 5 12 - 6 - 2 - - - - 3 9 29 68 IL - - - - - - 8 18 5 16 - 2 - - 7 17 - - - - - - - - - 4 21 57

Floater - - - 3 - - - - - - 2 6 - - 10 34 - - - - - - 0 1 2 6 14 50

Total ‘10 10 19 16 33 7 16 85 198 83 223 20 30 12 20 105 250 25 51 8 20 3 3 3 11 34 113 410 986Red. ‘10 9 26 5 91 134 17 1 172 23 6 1 3 34 518

Net supply ‘10 10 7 11 107 89 13 19 78 28 14 2 9 79 455

Total ‘09 23 35 10 178 158 60 34 263 48 15 4 4 113 0 937Red. ‘09 13 19 6 112 138 28 5 162 35 6 0 3 31 555

Net supply ‘09 10 16 4 66 20 32 29 101 13 9 4 2 82 382


PROGRESS OF SUPPLY BY MATURITY (%) PROGRESS OF SUPPLY BY COUNTRIES (%)

€ 14

bn

€ 21

bn

€ 29

bn

€ 25

bn

€ 11

6bn

€ 11

2bn

€ 93

bn

€ 3

8bn

€ 3

6bn

€ 1

39bn

€ 1

46bn

€ 1

47bn

€ 3

4bn

€ 3

6bn

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

3y 5y 10y 15y 30y + IL Floater

YTD Still to do

€ 3

4bn

€ 3

bn

€ 79

bn

€ 8b

n

€ 7

bn

€ 1

05bn

€ 8

5bn

€ 2

5bn

€ 1

6bn

€ 1

0bn

€ 1

2bn

€ 3

bn

€ 8

bn € 2

0bn

€ 8

3bn

€ 10

bn

€ 14

5bn

€ 11

3bn

€ 26

bn

€ 16

bn

€ 9b

n

€ 8b

n

€ 10

bn

€ 0b

n

€ 12

bn

€ 14

0bn

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

SL GR IE AT BE NL FR IT FI PT GE SP SK

YTD Still to do

Source: Bloomberg, UniCredit Research (all tables and charts in this and the previous page)

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Curves & Crosses

Eurozone Debt Structure DEBT MATURING IN THE NEXT 12 M (AS % OF TOT DEBT)


11

25 102 10139 190

3228 3

248

00

9

55203 17

100 151

7740 2

9

7

80

0%

5%

10%

15%

20%

25%

30%

35%

FI NL FR PT GE IT SP BE SK GR AT IE SL

M/L MM

Numbers denote the amount in EUR bn

S&P RATING VS. SWAP SPREAD

GR

IE

IT

DE

PT

ESBENLFR

FI

ATSL

SK

BB

+

AA

A

AA

+

AA

AA- A+ A A-

BB

B+

BBB

BB

B-

y = 46.995x - 60.904R2 = 0.8464

-500

50100150200250300350400450500550600650

The chart takes into account the rating & the outlook

MARKETABLE DEBT REDEMPTIONS PROFILE

EUR bn AT BE FI FR GE GR IE IT NL PT SP SK SL EU

Next 30Days (M/L) 0.0 16.0 0.0 0.0 0.0 8.1 0.0 13.5 0.0 5.6 0.0 0 0 43.3 Next 12M (M/L) 8 28 11 102 139 24 0 190 25 10 32 3 0 568 2010 0 17 5 59 81 9 0 129 11 6 16 0 0 332 2011 8 28 6 114 147 28 4 156 28 10 45 2 0 574 2012 10 29 6 106 103 31 6 166 28 8 46 2 1 538 2013 12 25 6 93 79 23 6 98 23 7 44 2 0 416 2014 22 23 7 80 85 31 10 88 14 11 41 1 2 414 2015 11 27 5 81 68 20 0 77 23 8 22 2 1 342 2016 10 16 0 49 51 8 9 43 13 5 15 0 1 219 2017 11 20 6 60 39 21 0 63 13 6 28 1 0 267 2018 10 10 0 40 41 8 8 42 12 6 16 0 0 194 2019 10 10 5 63 48 24 15 82 13 7 27 1 1 303 2020 12 7 4 36 28 5 17 52 10 4 8 2 2 183 >2020 31 43 5 215 146 59 8 292 34 21 85 1 2 941 Total M/L 147 255 55 996 916 266 82 1288 223 98 394 15 10 4747 MM 7 40 9 203 100 9 8 151 55 17 77 2 0 677 Other instruments in EUR 2 0 0 0 0 15 0 26 0 0 0 5 1 51 Foreign debt 15 6 3 0 14 5 0 32 0 1 10 0 0 86 Total debt (including foreign and MM)

171 301 67 1199 1030 294 90 1497 279 116 481 22 12 5561

EUROZONE COUNTRIES BIRD'S EYE

GDP Deficit/GDP Debt/GDP Rating (S&P) Debt (bn of EUR) Swap Spread Yield current

5Y avg

2009e 2010e 5Y avg

2009e 2010e 5Y avg

2009e 2010e Rating Outlook MM (EUR bn)

M/L (EUR bn)

Avg life

5Y avg

Act. Act.

AT 2.8 -3.6 1.3 -1.7 -3.4 -5.0 63 67 69 AAA stable 7 147 7.7 -6 25 3.45BE 2.3 -2.9 0.6 -0.8 -6.0 -5.8 90 97 101 AA+ stable 40 255 6.0 -2 32 3.52FI 3.5 -6.9 0.9 3.7 -2.2 -4.5 39 44 47 AAA stable 9 55 4.8 -14 9 3.29FR 1.8 -2.2 1.4 -3.0 -7.5 -8.5 65 78 86 AAA stable 203 1154 7.1 -14 13 3.32GE 1.7 -4.9 1.4 -1.7 -3.3 -5.3 66 73 78 AAA stable 100 950 6.2 -30 -14 3.05GR 3.6 -2.0 -3.3 -5.8 -13.6 -9.3 98 115 125 BB+ negative 9 266 7.6 60 587 9.06IE 3.8 -6.8 -1.4 -0.2 -14.3 -11.3 30 64 76 AA negative 8 82 6.9 23 194 5.13IT 0.9 -5.1 0.5 -3.1 -5.3 -5.0 105 116 119 A+ stable 151 1288 6.8 23 84 4.03NL 2.7 -4.5 0.9 -0.1 -5.3 -6.1 51 61 66 AAA stable 55 223 5.4 -13 7 3.27PT 1.1 -2.6 0.3 -3.8 -9.4 -8.6 63 77 85 A- negative 17 98 6.4 13 213 5.32SP 3.1 -3.6 -0.7 0.1 -11.2 -9.5 41 53 64 AA negative 77 401 6.9 0 83 4.02SL 5.0 -7.4 1.3 -1.4 -5.6 -6.6 25 30 36 AA stable 0 10 6.9 - 61 3.80SK 7.4 -5.8 1.9 -2.6 -6.3 -6.0 33 35 39 A+ stable 2 15 5.4 - 78 3.97

Source: Bloomberg, EC, UniCredit Research (all tables and charts in this page)

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Curves & Crosses

Eurozone Money Market Monitor STOCK OF MONEY MARKET INSTRUMENTS (CURRENT, AT 31ST DECEMBER 2007, 2008 & 2009 (ESTIMATES)) & FUTURE REDEMPTIONS (1 & 3M)

Outstanding Net Change Redemptions Dec-08 Dec-09 Dec-10 (e) Current (current/end 2009) (end 2010 (e) /end 2009) Next 1M Next 3M

AT - 5 8 7 2 3 1 4 BE 41 38 40 40 1 2 6 18 FI 8 12 12 9 -3 0 3 6 FR 139 222 242 203 -19 20 40 104 GE 39 104 101 100 -4 -3 24 44 GR 1 8 5 9 1 -3 0 4 IE 0 8 8 8 0 0 2 7 IT 148 140 140 151 11 0 16 53 NL 81 60 67 55 -5 7 12 31 PT 12 17 19 17 0 2 1 6 SP 45 85 105 77 -8 20 9 25

Total 514 700 747 676 -24 48 115 303

Source: Ministry of Finance of different eurozone countries, Bloomberg, UniCredit Research

EUROZONE MONEY MARKET YIELDS1

3M & 6M YIELDS AND SPREAD VS. EONIA 3M & 6M YIELDS IN EACH COUNTRY

3M Spread vs. Eonia (bp) 6M Spread vs.

Eonia (bp) AT 0.56 12.8 0.70 18.0 BE 0.29 -14.2 0.44 -8.0 FI 0.54 10.7 0.47 -5.5 FR 0.28 -15.5 0.39 -13.0 GE 0.20 -23.7 0.30 -22.0 GR 6.11 567.3 10.30 977.4 IE 0.46 2.5 - - IT 0.52 8.3 0.75 22.8 NL 0.20 -23.9 0.27 -25.1 PT 0.56 12.0 1.60 108.2 SP 0.53 9.8 0.71 19.0

EONIA 0.436 0.521 EURIBOR 0.659 0.967

0.56

0.28

0.20

6.11

0.46

0.52

0.20 0.

56

0.530.70

0.44

0.47

0.39

0.30

10.3

0

0.00 0.

75

0.27

1.60

0.71

0.29 0.54

0.00

1.00

2.00

3.00

4.00

5.00

6.00

7.00

8.00

9.00

10.00

11.00

AT

BE FI FR GE

GR IE IT NL

PT

SP

3M 6M


MONEY MARKET REDEMPTIONS

…IN THE NEXT MONTH …AND IN THE NEXT 3 MONTHS

0

20

40

60

80

100

120

140

IT GR PT BE SP IE NL AT FI FR DE EU

Eur b

n

0

50

100

150

200

250

300

350

IT GR PT BE SP IE NL AT FI FR DE EU

Eur b

n


Back to front page

1 We computed the yield as a weighted average of the yields at each of the maturity considered (3&6M). We used the outstanding amounts of each T-bill as weighs.



Curves & Crosses

Eurozone Scorecard

10Y ASW PERFORMANCE IN THE EUROZONE COUNTRIES

10 asw: actual vs. last 5Y average Over/undervaluation of the actual 10Y ASW

-100

0

100

200

300

400

500

600

700

AT BE FI FR DE GR IE IT NL PT ES

bp

Last 5Y average Actual

-100

-80

-60

-40

-20

0

20

40

60

80

100

AT BE FI FR DE GR IE IT NL PT ESbp

10Y ASW trade cheap

10Y ASW trade expensive

The left chart shows the actual level of the swap spread at the 10Y maturity for each eurozone country and compares it with its long-term average (5Y). The right chart shows how much the actual level of the 10Y swap spread in each country is over/under value according to a few macroeconomic and market variables. More specifically, the value of the over/undervaluation coefficient corresponds to the error term of the following regression:

[10Y ASW – 10Y ASW*] = α + β* [Deficit expected 2010 – avg Deficit in past 5Y] + γ* Rating (t) + δ* Average Maturity of Debt + ε Where 10YASW* is the 5y average

EUROZONE SCORECARD

Yearly growth rate Deficit/GDP Debt/GDP Rating Money Market Cheap/Rich Total Final Ranking Last 5Y 2010e Last 5Y 2010e 2010e vs. last 5Y dependency Score Weighs

Country 0.50 0.75 0.75 1.50 0.50 0.25 0.50 1.00

FI 9 7 11 11 10 7 5 9 53 1 AT 7 9 6 10 11 7 10 7 49 2 GE 3 10 5 9 8 7 8 10 46 3 NL 6 7 9 7 6 7 1 8 39 4 BE 5 6 7 6 9 6 6 4 34 5 FR 4 10 4 5 5 7 3 6 32 6 IT 1 5 3 8 7 3 7 1 27 7

GR 10 1 1 2 2 1 11 11 27 8 IE 11 2 8 1 1 4 9 5 26 9 SP 8 3 10 3 3 4 2 3 25 10 PT 2 4 2 4 4 2 4 2 18 11


The scorecard table ranks the eurozone countries according to a set of macroeconomic and market variables. The ranking is based on a combination of past fiscal and macroeconomic performance as well as on our expected performance in the coming year. The scorecard can be used as a starting tool to judge a country attractiveness. More specifically we rank the eurozone countries according to: 1) Growth rate (The higher the growth rate of a country, the more attractive it is in terms of investment opportunities)

• Past: the average of the yearly growth rate over the past 5Y, normalized on the average of the last 5Y growth in the all sample • 2010e: the expected growth rate for 2010, normalized on the average expected growth rate in the all sample

2) Deficit/GDP (the higher the deficit/GDP ratio of a country, the less attractive it is in terms of investment opportunities) • Past: the average of the deficit/GDP ratio over the past 5Y, normalized on the average of the last 5Y deficit/GDP ratio in the all sample • 2010e: the expected deficit/GDP ratio for 2010, normalized on the average expected deficit/GDP ratio in the all sample

3) Debt/GDP (The higher the debt/GDP ratio of a country, the less attractive it is in terms of investment opportunities) • The change between the expected debt/GDP ration in 2010 and the average over the past 5 years.

4) Rating (A higher rating and a stable outlook make a country more attractive) • The actual S&P rating of the country • S&P rating outlook

5) Debt structure (A higher money market dependency makes a country less attractive as it has a higher refinancing risk) • The percentage of money market instrument on the entire negotiable debt; it measures the refinancing risk of a country

6) Current market valuation: • The over/under valuation coefficient shown in the right chart on the top.

How we rank countries: For each of the variables presented above we assign a rank (1 to the worst, 11 to the best) We assign a weigh to each variable as, in our opinion, not all these indicator have the same power. Weighs are shown in the table. The final score is simple the sum of each variable score multiplied by the weigh. The best country is ranked 1, the worst is ranked 11 The column “Total score” can be used to gauge how deep the differences between countries are

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Curves & Crosses

FX Strategizer EURO: Relief yes – trend reversal no!

Armin Mekelburg (UniCredit Bank) +49 89 378-14307 [email protected] Roberto Mialich (UniCredit Bank Milan) +39 02 8862-0658 [email protected]

EXPECTED TRENDS

Next Week

Next Month

Cross EUR-USD USD-JPY USD-CHF GBP-USD EUR-JPY EUR-CHF EUR-GBP AUD-USD NZD-USD USD-CAD EUR-SEK EUR-NOK

EUR-USD: A strong US labour market would have the potential to send EUR-USD south again

View: Doubt, worry, fear and even angst have been the rationale behind every market action since Greece decided to activate the EMU/IWF rescue package, only very briefly being replaced by sighs of relief. All eyes have been on Germany from the beginning, as the government demanded even more Greek austerity measures and wanted to wait for the result of ongoing negotiations between Greece, IMF, EMU and ECB before coming to a decision. Although most market participants had the perception that heads of states and finance ministers had already agreed on the premise to allocate money to Athens, this obviously wasn't the case and triggered both confusion and deep disappointment among investors. Disappointment increased further following S&P's downgrade of Greece, Portugal and Spain, resulting in fears that Greece would probably be unable to meet its obligations on 19 May and thus stoking angst of a broad spreading of the debt dilemma onto the Iberian peninsula. With Spain being the fourth ranked among EMU economies, some participants even started to consider a break-up of the EUR. However, the EUR proved itself to be relatively resistant, albeit reaching fresh year lows measured by EUR-USD and trade weighted standards. A positive aspect was that the currency was spared from any panic reaction, such as those observed in the credit and bond markets and volatility spill-over-effects for currencies and equities as well as stock markets. These events revealed the strong grip that the EMU peripheral debt crisis has on the global risk picture.

There was some relief though, as following Strauss-Kahn's (IMF) and Trichet's (ECB) meeting with Merkel and Schäuble, investors increasingly perceived a strong German commitment to agree to a Greek rescue package. With a significant proportion of German politicians, including the opposition, indicating their support for rescue measures, we have no doubt that Germany will agree to a rescue package by the middle of next week at the latest. To avoid any misunderstanding: we believe that doubts about Greek's ability to clear its debts, fears of strong contagion on Spain and even scattered angst of a EUR break-up, will keep the currency under latent selling pressure until next year. Nevertheless, we also believe that markets will breathe a sigh of relief following German approval of the 3-year aid-package, as long as they are free from further ambush attacks by rating agencies. The fact that Spain's sovereign rating of AA being far from a junk status despite the ongoing negative outlook, is seen as further support for a more positive market sentiment. Once Germany commits to contribute its share of the estimated EUR 45bn aid-package, we would expect the EUR-USD to recover beyond 1.33 levels, with consideration also of the positive impact on the risk picture stemming from the latest slightly optimistic Fed statement.

CHARTS OF THE WEEK

Panic reaction on credit markets… ...and a spike in risk aversion

0

100

200

300

400

500

600

700

800

900

Jan-09 Mar-09 May-09 Jun-09 Aug-09 Oct-09 Dec-09 Feb-10 Apr-10

CDS 5Y Greece

CDS 5Y Portugal

CDS 5Y Spain

150

250

350

450

550

650

750

850

950

1050

1150

1250


20

36

52

68

84

100

iTraxx Crossover

VIX-Index (RS)




Curves & Crosses


Despite focus being on the euro turmoil, the USD could return into the spotlight again due to the US labor market report. Given our strong forecast for the NPF figures, which would clearly exceed consensus estimates, EUR-USD may again experience strong selling pressure at the end of next week, resulting in a range between 1.31 and 1.3380.

JPY: Strongly watching the start of the Shanghai expo

Other than the global risk picture and a strong US labor market, what else could be ofmajor importance for the JPY? The answer is the Shanghai Expo starting on 1 May. There is talk that Chinese authorities may judge this event as a perfect global stage to announce the next step for progressing with their currency regime. Thus, we expect investors to be rather cautious with respect to JPY short positioning.

CHF: The 1.43 barrier held, shifting attention to the USD-CHF

The 1.43 barrier on the EUR-CHF has managed to hold again, thus hinting that the rumored SNB intervention did act as a “scarecrow” against strong new sales, despite the weaker EUR-USD. Thus, as long as the 1.43 “dam” holds, despite ongoing EUR-USD pressure, market adjustments will forcedly shift to a firmer USD-CHF. The break of the 1.08 area may soon pave the way for a return above 1.10. Looking ahead, however, the room for a EUR-CHF rally in the coming quarters has strongly diminished, as the upside potential for the euro “per se” has fallen significantly as well: 1. the ongoing EMU woes are not expected to vanish even if Greece meets its funding needs on 19 May, and 2. because it has become clear that the SNB will not be in a hurry to revert the EUR-CHF trend while a rate hike is still looming. Risks that EUR-CHF may stay further confined in the 1.45-1.40 band have risen sharply.

GBP: Hung UK Parliament, lockedBritish pound

Doomsday has arrived: with the UK elections being held next Thursday and the Liberal Party posting strong gains this month, a hung Parliament is still the most likely outcome, even after Tories’ leader Cameron won the third TV Prime Ministerial debate. Position adjustments and book-squaring have already emerged in the run-up to the elections and this should keep a relatively cautious stance on sterling in the coming weeks, with investors waiting to see the formation of the new government and its early actions for handling the UK budget deficit.Thus, unless the election results show a full majority (a very unlikely event according to thelatest polls), cable’s upside potential above 1.55 should remain capped and delayed until theUK political scenario clarifies. On the other hand, EUR-GBP should stay trapped in the middle, reflecting the ongoing EMU woes on the one hand and political uncertainty in Britain on theother. The 1.51-1.55 band for cable and the 0.86-0.90 range for EUR-GBP should remain the point of reference not only for next week, but for most of May also. Looking at the coming quarters, we still see cable back above 1.60 and EUR-GBP below 0.80. The basis for this is that the UK economy should gradually recover, while the euro will stay sluggish due to creeping EMU doubts, in turn making a parity test with sterling quite an unlikely scenario.

The three dollars (AUD, NZD & CAD): a new rate hike at next week’s RBA meeting still a close call

Signals from central banks at home attracted a central role for the three dollars this week. The RBNZ did not sound as hawkish on rates as markets feared, indicating that the removal of its policy stimulus will occur “over the coming months, provided the economy continues to evolve as projected”. A first move is thus unlikely to materialize before July at the earliest, butas the tightening process will be implemented this year in any case, we favor using any Kiwi dollar’s slide as a new buying opportunity: below 0.7080 against the USD and below 65.50 against the JPY. BoC’s Carney fine-tuned his stance on rates too and thus we suspect that a first move will be more likely in September than in July. Indeed, any USD-CAD move above 1.02-1.0250 should be viewed as a new selling opportunity. On the other hand, a rate hike at the end of the RBA meeting on Tuesday has also become a close call: Governor Steven’s remarks that interest rates should normally stay between 4.50% and 5.00% hint that a pause ispossible, but Australia’s CPI being up to 2.9% yoy in 1Q10 increases the chance for a new 25bp move to 4.50%, offering the Aussie dollar some further upside potential as well.

Nordics: Still strong, shrugging off market turbulence

Both the SEK and the NOK held the line fairly well against the euro, below 9.65 and 7.85respectively, despite swinging stock markets: this resilience provides further evidence that their bullish trends would be hardly derailed by market turmoil. Accordingly, we still favor selling both EUR-SEK and EUR-NOK on a rally. In particular, any EUR-NOK rebound above 7.85 in the wake of the Norges Bank holding steady on rates on Wednesday, will offer anew reason to go short again.

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Curves & Crosses

FX Monitor: G-10 Weekly Change Charts below show weekly changes among the G-10 currencies. In particular, positive percentage changes indicate a gain of the currency indicated in the title against the others, while negative percentage changes indicate a loss.

USD WEEKLY PERFORMANCE EUR WEEKLY PERFORMANCE

0.62%

0.22%0.54%

0.00%

-0.34%

-1.34%

0.37%

0.79%

0.01%

-3.0%

-2.0%

-1.0%

0.0%

1.0%

2.0%

3.0%

EUR JPY CHF GBP AUD NZD CAD SEK NOK

Weekly spot gains / losses of the USD vs. the other G-10 units

-0.64%-0.38%

-0.05%

-0.62%

-0.98%

-1.97%

-0.27%

0.13%

-0.63%

-3.0%

-2.0%

-1.0%

0.0%

1.0%

2.0%

3.0%

USD JPY CHF GBP AUD NZD CAD SEK NOK

Weekly spot gains / losses of the EUR vs. the other G-10 units

JPY WEEKLY PERFORMANCE CHF WEEKLY PERFORMANCE

-0.23%

0.42% 0.32%

-0.20%-0.51%

0.17%

0.55%

-0.20%

-1.55%

-3.0%

-2.0%

-1.0%

0.0%

1.0%

2.0%

3.0%

USD EUR CHF GBP AUD NZD CAD SEK NOK

Weekly spot gains / losses of the JPY vs. the other G-10 units

-0.53%

0.06%

-0.37%-0.53%

-0.88%

-1.86%

-0.16%

0.15%

-0.55%

-3.0%

-2.0%

-1.0%

0.0%

1.0%

2.0%

3.0%

USD EUR JPY GBP AUD NZD CAD SEK NOK

Weekly spot gains / losses of the CHF vs. the other G-10 units

GBP WEEKLY PERFORMANCE NORDICS WEEKLY PERFORMANCE

0.00%

0.63% 0.59%0.38%

0.73%

-0.01%

-1.33%

0.21%

-0.33%

-3.0%

-2.0%

-1.0%

0.0%

1.0%

2.0%

3.0%

USD EUR JPY CHF AUD NZD CAD SEK NOK

Weekly spot gains / losses of the GBP vs. the others G.10 units

-0.78%

-0.15%

-0.54%

-0.23%

-0.77%

-2.11%

-0.43%

-0.77%

0.00%

0.71%

0.20%

0.55%

0.00%

-0.33%

-1.35%

0.35%

0.76%

-1.13%

-3.0%

-2.0%

-1.0%

0.0%

1.0%

2.0%

3.0%

USD EUR JPY CHF GBP AUD NZD CAD NOK

Weekly spot gains / losses of the SEK vs. the other G-10 units

Weekly spot gains / losses of the NOK vs. the other G-10 units

Update: April 30, 2010, 09.30 CET Source: Bloomberg, UniCredit Research (all charts in this page)



Curves & Crosses

FX Monitor: G-10 Implied Volatility Curves Charts below show the term structure of implied volatility for FX majors at different maturities (today, last week and last month)

EUR-USD USD-JPY

11.21

12.0512.31

11.75

9.0

10.0

11.0

12.0

13.0

14.0

1M 3M 6M 12M

TodayLast weekLast month

EUR-USD

10.07

10.92

11.75

12.63

9.0

10.0

11.0

12.0

13.0

14.0

15.0

1M 3M 6M 12M


USD-JPY

USD-CHF GBP-USD

10.96

11.2710.62

10.03

9.0

10.0

11.0

12.0

13.0

1M 3M 6M 12M


USD-CHF

12.42

12.8112.3912.64

11.0

12.0

13.0

14.0

15.0

1M 3M 6M 12M


GBP-USD

EUR-JPY EUR-GBP

14.54

13.32

15.06

13.91

11.5

12.5

13.5

14.5

15.5

16.5

1M 3M 6M 12M


EUR-JPY

10.94

10.97

10.94

11.12

9.0

10.0

11.0

12.0

13.0

1M 3M 6M 12M


EUR-GBP




Curves & Crosses

FX Monitor: Risk Reversal The risk reversal (RR) consists of a pair of options (a call and a put) on the same exchange rate with an identical expiration date (here 3M) and the same delta (usually 25 delta). They can be seen as proxies of investors’ bets on the exchange rate direction and of the underlying market positioning. A positive RR means that calls are preferred to puts and that investors are betting on an upward move in the underlying exchange rate, while a negative RR hints at puts being preferred to calls and at investors betting on a downward move in the underlying currency pair. When at “extreme values”, Risk Reversals also work as contrarian indicators: a large positive RR implies an “overbought market” while a large negative RR implies an “oversold market”.

EUR-USD USD-JPY

-3.0

-2.5

-2.0

-1.5

-1.0

-0.5

0.0

0.5

1.0

1.5

Mar-08 Jul-08 Nov-08 Mar-09 Jun-09 Oct-09 Feb-101.25

1.30

1.35

1.40

1.45

1.50

1.55

1.60

1.65EUR-USD 3M RR (LS)

EUR-USD (RS)

-2.0

-1.5

-1.0

-0.5

0.0

0.5

1.0

1.5

Mar-08 Jul-08 Nov-08 Mar-09 Jul-09 Nov-09 Mar-1085

90

95

100

105

110

115USD-JPY 3M RR (LS)

USD-JPY (RS)

GBP-USD USD-CHF

-4.0

-3.5

-3.0

-2.5

-2.0

-1.5

-1.0

-0.5

0.0

0.5

Mar-08 Jul-08 Nov-08 Mar-09 Jul-09 Nov-09 Mar-101.30

1.40

1.50

1.60

1.70

1.80

1.90

2.00

2.10GBP-USD 3M RR (LS)GBP-USD (RS)

-2.0

-1.5

-1.0

-0.5

0.0

0.5

1.0

1.5


1.00

1.05

1.10

1.15

1.20

1.25USD-CHF3M RR (LS)USD-CHF (RS)

AUD-USD USD-CAD

-9.0

-7.0

-5.0

-3.0

-1.0

1.0

3.0


0.65

0.70

0.75

0.80

0.85

0.90

0.95

1.00AUD-USD 3M RR (LS)AUD-USD (RS)

-1.0

-0.5

0.0

0.5

1.0

1.5

2.0

2.5

3.0


1.00

1.05

1.10

1.15

1.20

1.25

1.30

1.35USD-CAD 3M RR (LS)USD-CAD (RS)




Curves & Crosses

FX Monitor: IMM Non-Commercial Commitments The Commodity Futures Trading Commission (CFTC) reports the long and short positions that are opened on a weekly basis at the Chicago IMM when a trader is not using future contracts in a particular currency for hedging purposes. These positions refer to individual investors, hedge funds and other large financial institutions engaged in trading currencies for speculative purposes. Data below are reported as net long positions and are viewed as a proxy of the speculative attitude of the entire FX market.

IMM NON-COMMERCIAL COMMITMENTS

Currency Last Week Previous Week Net Change Market Positioning vs. Previous Week EUR-USD -71,424 -55,464 -15,960 more short USD-JPY 50,338 55,746 -5,408 less long USD-CHF 5,382 4,954 428 more long GBP-USD -49,298 -57,391 8,093 less short AUD-USD 78,904 80,674 -1,770 less long NZD-USD 8,752 7,151 1,601 more long USD-CAD -69,656 -70,475 819 less short


EUR-USD: NET LONG USD-JPY: NET LONG

-100,000

-75,000

-50,000

-25,000

0

25,000

50,000

75,000

100,000

Jan-08 Apr-08 Jul-08 Oct-08 Jan-09 Apr-09 Jul-09 Oct-09 Jan-10 Apr-101.20

1.30

1.40

1.50

1.60

1.70EUR-USD (RS)Net EUR-USD Long (LS)

-75,000

-50,000

-25,000

0

25,000

50,000

75,000

Jan-08 Apr-08 Jul-08 Oct-08 Jan-09 Apr-09 Jul-09 Oct-09 Jan-10 Apr-1085

90

95

100

105

110

115USD-JPY (RS)Net USD-JPY Long (LS)

GBP-USD: NET LONG AUD-USD: NET LONG

-80,000

-60,000

-40,000

-20,000

0

20,000

40,000


1.40

1.50

1.60

1.70

1.80

1.90

2.00

2.10

2.20

GBP-USD Net Long (LS)GBP-USD (RS)

-20,000

0

20,000

40,000

60,000

80,000

100,000


0.60

0.70

0.80

0.90

1.00

1.10AUD-USD NET LONG (LS)AUD-USD (RS)


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Curves & Crosses

FX Monitor: Spot Exchange Rates and Two-year Swap Differentials The charts below display the co-movement between spot exchange rates and two-year interest rate swap differentials for selected G10 currencies. In particular, changes in two-year swap differentials tend to anticipate spot exchange rate fluctuations.

In each graph we report as well the 30-day rolling correlation between daily changes in the swap rate differential and daily changes in the exchange rate for each currency pair. Please note that our use of first differences of both, exchange rates and swap rate differentials, adds to the intuition of our correlation analysis, although it clearly results in lower correlations as such.

EUR-USD & 2Y SWAP DIFFERENTIAL JPY-USD & 2Y SWAP DIFFERENTIAL

0.00

0.50

1.00

1.50

2.00

2.50


1.25

1.30

1.35

1.40

1.45

1.50

1.55

1.60

1.65EU2y-US2y (LS)EUR-USD (RS)

30-day correlation of deltas: 0.5

0.00

0.50

1.00

1.50

2.00

2.50

3.00

Jan-08 Apr-08 Jul-08 Oct-08 Jan-09 Apr-09 Jul-09 Oct-09 Jan-1085

90

95

100

105

110

115

US2y-JP2y (LS)USD-JPY (RS)


GBP-USD & 2Y SWAP DIFFERENTIAL USD-CHF & 2Y SWAP DIFFERENTIAL

0.00

0.50

1.00

1.50

2.00

2.50

3.00


1.40

1.50

1.60

1.70

1.80

1.90

2.00

2.10

2.20

UK2y-US2y (LS)GBP-USD (RS)


-0.75

-0.50

-0.25

0.00

0.25

0.50

0.75

1.00

1.25


0.95

1.00

1.05

1.10

1.15

1.20

1.25US2y-SZ2y (LS)USD-CHF (RS)


AUD-USD & 2Y SWAP DIFFERENTIAL USD-CAD & 2Y SWAP DIFFERENTIAL

1.00

1.50

2.00

2.50

3.00

3.50

4.00

4.50

5.00

5.50

6.00


0.65

0.70

0.75

0.80

0.85

0.90

0.95

1.00AU2y-US2y (LS)AUD-USD (RS)


-1.25

-1.00

-0.75

-0.50

-0.25

0.00

0.25

0.50

0.75

1.00


0.90

1.00

1.10

1.20

1.30

1.40US2y-CA2y (LS)USD-CAD (RS)





Curves & Crosses

FX Monitor: Purchasing Power Parities (PPP) Purchasing Power Parities (PPP) calculate the exchange rate at which one country’s price level equals another country’s price levels and are generally used to calculate “fair values” of exchange rates and determine whether spot rates are “overvalued”, “undervalued” or “fairly valued” with respect to their long-run theoretical values. We define sharp under- or overvaluation as a more than 10% deviation of a currency pair from PPP, while fair valuation refers to pairs trading inside a 5% band around PPP. Here, PPP values are calculated using CPI data and are reported along with spot rates and the resulting respective percentage deviations. However, note that spot rates may significantly diverge from PPP in the near term.

SPOT RATES, PPP AND PERCENTAGE DEVIATIONS

vs. USD Current PPP % Deviation Status vs. EUR Current PPP % Deviation Status

EUR-USD 1.33 1.12 18.35% EUR sharply overvalued EUR-USD 1.33 1.12 18.35% EUR sharply overvalued USD-JPY 94 95 -0.66% JPY fairly valued EUR-JPY 125 107 9.00% JPY undervalued USD-CHF 1.08 1.27 -15.03% CHF sharply overvalued EUR-CHF 1.43 1.43 0.56% CHF fairly valued GBP-USD 1.54 1.47 4.57% GBP fairly valued EUR-GBP 0.86 0.76 13.18% GBP sharply undervalued AUD-USD 0.93 0.70 33.74% AUD sharply overvalued EUR-AUD 1.43 1.61 -11.51% AUD sharply overvalued NZD-USD 0.73 0.58 25.04% NZD sharply overvalued EUR-NZD 1.83 1.93 -5.35% NZD overvalued USD-CAD 1.00 1.20 -16.43% CAD sharply overvalued EUR-CAD 1.33 1.35 -1.09% CAD fairly valued USD-SEK 7.22 6.38 13.24% SEK sharply undervalued EUR-SEK 9.61 7.17 34.02% SEK sharply undervalued USD-NOK 5.89 6.85 -14.00% NOK sharply overvalued EUR-NOK 7.83 7.70 1.78% NOK fairly valued

Red and black color represent tendency of under- and overvaluation, respectively Source: Bloomberg, UniCredit Research

EUR-USD: SPOT RATE % DEVIATION FROM PPP USD-JPY: SPOT RATE % DEVIATION FROM PPP

-30%

-20%

-10%

0%

10%

20%

30%

40%

50%

1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010

% Deviation from PPP: EUR-USD

-30%

-20%

-10%

0%

10%

20%

30%

1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010

% Deviation from PPP: USD-JPY

USD-CHF: SPOT RATE % DEVIATION FROM PPP GBP-USD: SPOT RATE % DEVIATION FROM PPP

-30%

-20%

-10%

0%

10%

20%

30%

1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010

% Deviation from PPP: USD-CHF

-20%

-10%

0%

10%

20%

30%

40%

50%

1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010

% Deviation from PPP: GBP-USD




Curves & Crosses

FX Monitor: The Betas G10 Parade

We define the FX beta as the beta resulting from the following regression:

y(t) = α + β*x(t)+ε

where y(t) is the daily percentage change in an exchange rate and x(t) is the daily percentage change in a synthetic index. The regression is performed over a 10D

horizon and the coefficients in the table represent the value of the Beta over the last 10 days. Beta measures the reaction of the dependent variables (y(t)) to a

marginal movement in the independent variable (x(t)). In this monitor, the dependent variables are all the G10 crosses, while the independent variables are the USD

TWI, the EUR TWI, the US stocks (as proxied by the S&P 500 index) and oil prices. As for the stock-market betas, we can identify high beta exchange rates (with |β|

>1) and low beta exchange rate (with |β|<1), depending on whether they tend to overreact or underreact to changes of the independent variable. More precisely and

in line with the betas in the standard CAPM theory, a beta coefficient>1 indicates that a variable return moves in the same direction of the reference index with a

multiplying effect, while a beta coefficient <-1 means that a variable return moves in the opposite direction of the reference index with still a multiplying effect (we call

them "aggressive" pairs). On the other hand, a beta coefficient below 1 in absolute value indicates a variable return may move in the same or opposite direction of

the reference index, but underperforming the latter (we thus can call them "defensive pairs"). Taxonomy of possible outcome is reported in the table below:

TAXONOMY OF BETA OUTCOMES

β Sign Type Description

β>1 Aggressive Pair (same direction of the X variable) Changes of variable Y tend to outperform changes in variable X (in the same direction)

0<β<1 Defensive Pair (same direction of the X variable) Changes of variable Y tend to under perform changes in variable X (in the same direction)

−1<β<0 Defensive Pair (opposite direction of the X variable) Changes of variable Y tend to under perform changes in variable X (in the opposite direction)

β<−1 Aggressive Pair (opposite direction of the X variable) Changes of variable Y tend to outperform changes in variable X (in the opposite direction)

For each of the independent variables, we calculate the beta coefficients with all the G10 crosses and each of the following tables picks up the five highest and five

lowest FX betas.

BETA COEFFICIENTS WITH USD TWI BETA COEFFICIENTS WITH EUR TWI

1.80 1.801.50 1.31 1.17

-1.34-1.61

-1.87 -1.88 -1.94

-3

-2

-1

0

1

2

USDSEK

JPYCHF

USDNOK

USDCAD

USDCHF

EURUSD

AUDJPY

NZDJPY

GBPJPY

EURJPY

AGGRESSIVE BETA

AGGRESSIVE BETA

0.790.60 0.55 0.54 0.48

-0.33-0.42 -0.44

-0.62 -0.66-1

0

1

EURGBP

EURJPY

EURNZD

EURCAD

EURUSD

GBPAUD

JPYCHF

NOKSEK

USDSEK

GBPCHF

AGGRESSIVE BETA

AGGRESSIVE BETA

BETA COEFFICIENTS WITH US STOCKS BETA COEFFICIENTS WITH OIL PRICES

1.00 0.980.83 0.83

0.57

-0.34-0.46 -0.57 -0.69 -0.77-1

0

1

2

NZDJPY

AUDJPY

EURJPY

GBPJPY

NZDUSD

USDCHF

USDNOK

USDSEK

USDCAD

JPYCHF

AGGRESSIVE BETA

AGGRESSIVE BETA

0.51 0.44 0.42 0.40 0.29

-0.20 -0.23 -0.27 -0.37 -0.38

-2.0

-1.0

0.0

1.0

2.0

AUDJPY

NZDJPY

GBPJPY

EURJPY

AUDUSD

EURCAD

USDNOK

USDSEK

JPYCHF

USDCAD

AGGRESSIVE BETA

AGGRESSIVE BETA

Source: Bloomberg, UniCredit Research for all charts and tables in this page

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Curves & Crosses

FX Monitor: a world of correlations

THE BEST 20 DAYS & 80 DAYS CORRELATIONS2

3 MOST POSITIVE 3 MOST NEGATIVE 20dd 80dd 20dd 80dd 20dd 80dd 20dd 80dd 20dd 80dd 20dd 80dd

1st Future CADAUD NOKAUD NOKCAD GBPUSD USDSEK SEKJPY (spread change) 73.0% 26.5% 71.0% 19.9% 70.3% 26.4% -46.2% -10.3% -37.2% 6.7% -29.9% 1.9%

10Y yields USDJPY CADJPY NOKCAD GBPAUD NZDUSD AUDUSD (spread change) 72.1% 70.0% 68.4% 65.0% 68.1% 26.0% -47.4% -17.2% -37.9% -15.9% -33.5% -17.2%

Oil price CADJPY GBPJPY AUDJPY USDCAD USDSEK JPYCHF (return) 74.4% 61.3% 71.3% 61.0% 69.7% 63.6% -78.5% -64.0% -53.5% -62.4% -51.0% -60.8%

Gold price EURCHF GBPCHF NOKCHF NZDAUD USDNOK EURGBP (return) 36.2% 32.4% 33.9% 1.8% 33.9% 43.1% -25.6% 0.4% -18.3% -60.8% -17.9% 10.2%

Copper price GBPUSD GBPJPY NOKJPY USDSEK USDNOK USDCAD (return) 75.6% 43.7% 75.2% 40.9% 70.8% 50.6% -74.7% -56.8% -74.2% -55.9% -69.3% -61.1% S&P 500 GBPJPY NOKJPY SEKJPY USDCAD USDSEK USDNOK (return) 87.4% 67.7% 84.2% 74.3% 82.0% 74.7% -84.2% -71.9% -77.8% -65.4% -77.3% -57.4%

Vix Index USDCAD JPYCHF USDSEK AUDJPY CADJPY GBPJPY 82.1% 64.2% 69.9% 54.5% 67.0% 56.0% -79.3% -62.1% -78.9% -64.3% -77.2% -57.6%

G10 FX RETURNS VS. CHANGE IN MM FUTURES SPREAD 3 G10 FX RETURNS VS. CHANGE IN 10Y YIELDS SPREAD

JPY GBP CHF AUD CAD NZD NOK SEK USD JPY GBP CHF AUD CAD NZD NOK SEK USDEUR -4% 17% 4% 47% 58% -22% 28% 13% -15% EUR 67% 31% 14% -2% 48% -17% 34% 18% 3%JPY 19% 4% -27% -61% 25% -53% 30% 10% JPY -8% 34% -16% -68% 9% -25% -48% -72%GBP -24% 39% 46% -28% 19% -4% -46% GBP 1% -47% 34% -21% -7% 16% -22%CHF -58% -66% 26% -27% 27% -19% CHF -10% -49% -8% -27% -38% 24%AUD -73% -36% -71% -65% 33% AUD -30% -18% -17% -27% -33%CAD 45% -70% -53% -63% CAD 19% -68% -62% 3%NZD -12% -14% -12% NZD -33% -40% -38%NOK 34% -56% NOK 50% 23%SEK 37% SEK 22%

LOOKING BACK – 20 DAYS ROLLING CORRELATIONS OVER THE LAST MONTHS

GBP-USD & COPPER PRICES USD-CAD & US STOCKS

-20%

0%

20%

40%

60%

80%

Aug-09 Sep-09 Nov-09 Dec-09 Feb-10 Apr-10

20dd correlation Last 6M average

20dd

cor

rela

tion

betw

een

GBP

USD

and

cop

per

average +/- 1.5*st.dev.

-100%

-80%

-60%

-40%

-20%

0%

Aug-09 Sep-09 Nov-09 Dec-09 Feb-10 Apr-10

20dd rolling correlation Last 6M average

20dd

cor

rela

tion

betw

een

USD

CAD

and

S &

P

average +/- 1.5*st.dev.

Source: Bloomberg, UniCredit Research 1 We compute the rolling correlation over the last 20 trading days between the daily return of each G10 cross and each of the variable specified on the left. For the FI variables, we considered the daily change of the spread of the variables in the two countries to which the cross refers to. More specifically, we considered the spread of the 1st generic money market future and the spread of the 10Y yields. For commodities, we considered the daily return. Finally, we used the daily return on the Standard & Poor 500 as a proxy for the equity market performance and the Vix index as an indicator of volatility. The table displays the 3 crosses showing the highest positive (on the left hand side) and the 3 highest negative (on the right hand side) correlations with the variables on the left. On the right hand side of each 20dd correlation, we report the rolling correlation over the last 80 trading days. 3 The tables report the 20dd rolling correlation between the daily return of each of the G10 crosses and the corresponding daily change in the spread between 1st generic money market future contracts (left table) and 10Y yields (right table) in the two countries the cross refers to. In each cell the correlation refers to the cross obtained by taking the currencies on the same row and the one on the same column. For example cell(2,2) refers to EUR-JPY. We highlight in grey the correlation if its absolute value is greater than the mean+1.5*standard deviation over the all sample.



Curves & Crosses

FX Monitor: The Over & Undervaluation G-10 Parade G10 FX OVER/UNDERVALUATION TABLE

Key G10 exchange rates The other most over/undervalued crosses EURUSD GBPUSD USDJPY USDCHF NZDJPY GBPJPY NZDUSD AUDJPY EURJPY GBPCAD

Constant 1.5063 1.6747 88.6319 1.0103 64.1571 148.5522 0.7236 79.9984 133.6930 1.8040 Slope -0.0071 -0.0066 0.1598 0.0026 0.0482 -0.3423 -0.0007 0.1850 -0.4186 -0.0110

Fair Value 1.3157 1.4976 92.9455 1.0817 65.46 139.31 0.70 84.99 122.39 1.51 Actual Value 1.3296 1.5367 94.1800 1.0791 68.44 144.72 0.73 87.70 125.22 1.54

Over/Undervaluation 1.1% 2.6% 1.3% -0.2% 4.6% 3.9% 3.2% 3.2% 2.3% 2.3%

The table shows the results of coefficient estimates for the regression: X(t) = a+b*t+e, in which t is a linear trend and X represents an exchange rate in the G-10 universe. The regression is performed on a 6M horizon and on a sample of weekly data. The over/undervaluation coefficient is the percentage difference between the traded value of the exchange rate considered and its “fair value” as implied by its linear trend. A positive (negative) number in the over/undervaluation coefficient means that the indicated exchanged rate is overvalued (undervalued) with respect to its last 6M trend. The table reports on the left side results for EUR-USD, GBP-USD, USD-JPY and USD-CHF and on the right hand side the other six most over/undervalued exchange rates in the G10 world.

EUR-USD: OVER/UNDERVALUATION OVER TIME GBP-USD: OVER/UNDERVALUATION OVER TIME

-8.0

-4.0

0.0

4.0

8.0

12.0

Jan-08 Jul-08 Feb-09 Aug-09 Mar-10

%

Exchange rate is overvalued

Exchange rate is undervalued

Last 6M average

Last 12M average

-12

-10

-8

-6

-4

-2

0

2

4

6

8

10

Jan-08 May-08 Oct-08 Mar-09 Aug-09 Jan-10

%Exchange rate is overvalued

Exchange rate is undervalued

Last 6M average

Last 12M average

The left chart above shows the dynamics of the weekly over/undervaluation coefficient of EUR-USD since January 2008. At any point in time, a coefficient greater than 0 signals that EUR-USD is overvalued on that specific week with respect to its last 6M trend, while a coefficient below zero indicates that EUR-USD is undervalued with respect to its linear trend. The charts also display the average of the over/under valuation coefficient over the last 6 and 12 months. The second chart shows the dynamics of the weekly over/undervaluation coefficient of another G10 cross selected among the most over/undervalued G10 crosses reported in the two charts below.

THE TOP TEN MOST OVERVALUED G-10 CROSSES THE TOP SIX MOST UNDERVALUED G-10 CROSSES

4.6%3.9%

3.2% 3.2% 2.6% 2.3% 2.3% 2.2% 1.9% 1.6%

-7%

-5%

-3%

-1%

1%

3%

5%

7%

NZDJPY

GBPJPY

NZDUSD

AUDJPY

GBPUSD

EURJPY

GBPCAD

GBPCHF

AUDUSD

AUDCHF

-0.2% -0.4% -0.4% -0.5% -0.7% -0.9% -1.3% -1.6% -1.6% -2.2%

-7%

-5%

-3%

-1%

1%

3%

5%

7%

USDCHF

USDSEK

EURNOK

USDCAD

GBPNZD

EURAUD

USDNOK

EURGBP

JPYCHF

EURNZD

The two charts above show the top ten most overvalued/undervalued currencies within the G-10 universe over the last week with respect to their last 6M trend.

Source: Bloomberg, UniCredit Research for all charts in this page

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Curves & Crosses

G-10 Top Data Releases & Events MACRO DATA

Date Time (CET)

Country Data/Events Period UniCredit Forecast

Cons. Previous Market impact

03/07-May-10 - GE Retail Sales (mom) Mar 0.1% -0.1% 1.1% ** 03-May-10 08.30 SW Swedbank PMI Survey Apr - - 61.1 * 03-May-10 09.00 NO Norway PMI Apr - 51.0 49.6 * 03-May-10 10.00 EU Manuf. PMI Apr F 57.5 57.5 57.5 * 03-May-10 - GE Bundestag possible vote on Greece - - - ***

*** 03-May-10 14.30 US Personal Income & PCE (mom) Mar - 0.3/0.6% 0.0/0.3% 03-May-10 14.30 US PCE Core Deflator (mon) Mar - 0.1% 0.0% ** 03-May-10 16.00 US ISM PMI Apr 58.0 59.8 59.6 ***

* 03-May-10 16.00 US Construction Spending (mom) Mar - -0.5% -1.3% * 03-May-10 23.00 US Total Vehicle Sales Apr - 11.50M 11.77M

04-May-10 06.30 AU RBA Cash Markets May 4.50% 4.50% 4.25% *** 04-May-10 10.30 UK CIPS PMI Apr 57.3 57.3 57.2 *** 04-May-10 16.00 US Factory Orders Mar - 0.0% 0.6% ** 04-May-10 16.00 US Pending Home Sales (mom) Mar - 3.1% 8.2% ** 05-May-10 - GR GSEE 24-hour strike - - - ** 05-May-10 10.00 EU Service PMI Apr F 55.5 55.5 55.5 * 05-May-10 13.30 US Challenger Layoffs Apr - - -55.0% ** 05-May-10 14.00 NO Norges Bank Meeting Outcome 1.75% 2.00% 1.75% *** 05-May-10 14.15 US ADP Employment Change Apr - 30K -23K ** 05-May-10 16.00 US ISM Non-Manuf. Composite Apr 55.0 56.0 55.4 *** 06-May-10 00.45 NZ Unemployment Rate 1Q - 7.3% 7.3% *

* 06-May-10 03.30 AU Trade Balance & Retail Sales (mom) Mar - -2.1B/0.7% -1.92B/-1.4% 06-May-10 09.15 SZ CPI (yoy) Apr 1.4% 1.3% 1.4% * 06-May-10 - UK UK General Elections - - - - *** 06-May-10 10.30 UK CIPS Service PMI Apr 57.5 57.0 56.5 *** 06-May-10 12.00 GE Factory Orders (mom) Mar 2.0% 1.4% 0.0% *** 06-May-10 13.45 EU ECB Meeting Outcome (in Lisbon) 1.00% 1.00% 1.00% *** 06-May-10 14.30 US Initial Claims Wkly - 443K 448K **

* 06-May-10 14.30 US Non-Farm Productivity / Unit Labor Costs 1Q P 1.0/2.0% 2.5/-0.5% 6.9/-5.9% 06-May-10 16.00 CA Ivey PMI Apr - - 57.8 ** 07-May-10 09.30 SW Industrial Production (mom) Mar - - -0.8% ** 07-May-10 10.00 NO Industrial Production (sa, mom) Mar - 0.4% -0.5% *

* 07-May-10 10.30 UK PPI Input & Output (yoy) Apr - 4.8/3.5% 3.6/5.0% 07-May-10 - GE Bundestag to debate on Greek aid (tentative) - - - - *** 07-May-10 12.00 GE Industrial Production (mom) Mar 2.0% 1.5% 0.0% *** 07-May-10 13.00 CA Unemployment Rate Apr - 8.2% 8.2% ** 07-May-10 14.30 US Non-Farm Payrolls Apr 250K 175K 162K *** 07-May-10 14.30 US Unemployment Rate Apr 9.8% 9.7% 9.7% *** 09-May-10 - GE North-Rhine Westphalia Elections ***

CENTRAL BANK & POLITICAL EVENTS Date Time

(CET) Country /

CB Event Impact Date Time

(CET) Country /

CB Event Impact

05-May-10 11.00 ECB Weber speaks in FFT ** 06-May-10 15.30 FED Bernanke spks in Chicago ** 05-May-10 12.00 ECB Weber speaks in Stuttgart ** 07-May-10 03.30 RBA RBA Quarterly Repo ** 05-May-10 16.10 FED Lacker speaks in Richmond * 07-May-10 11.30 ECB Trichet speaks in Lisbon ** 06-May-10 14.30 ECB Trichet press conference *** 07-May-10 18.30 FED Plosser speaks in Delaware *

1Q10 EARNING RELEASES Date Time

(CET) Country Company EPS Date Time

(CET) Country Company EPS

04-May-10 06.45 SZ UBS 0.464 06-May-10 07.00 FR BNP Paribas 1.308 04-May-10 - US Pfizer Inc. 0.528 06-May-10 - GE Commerzbank 0.123 04-May-10 - US MasterCard 3.148 06-May-10 22.00 US Kraft 0.453 05-May-10 07.00 FR Société General 0.792 07-May-10 - US Merrill Lynch -

Effective data releases of 1Q10 earnings may change Note: * = low impact; ** = medium impact; ***= strong impact Source: Bloomberg, UniCredit Research

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Curves & Crosses

UniCredit Global Forecasts EU US

Current Jun-10 Sep-10 Dec-10 Mar-11 Current Jun-10 Sep-10 Dec-10 Mar-11Key rate 1.00 1.00 1.00 1.00 1.25 Key rate 0.25 0.25 0.25 0.25 0.753M 0.66 0.70 0.85 1.35 1.70 3M 0.34 0.29 0.30 0.50 1.052Y 0.81 1.15 1.30 1.75 2.15 2Y 1.00 1.10 1.80 2.20 2.505Y 2.02 2.38 2.53 2.91 3.13 5Y 2.50 2.68 3.15 3.50 3.7010Y 3.07 3.30 3.45 3.80 3.90 10Y 3.74 3.85 4.10 4.50 4.6030Y 3.72 3.90 4.00 4.30 4.30 30Y 4.60 4.65 4.80 5.10 5.052/10 226 215 215 205 175 2/10 273 275 230 230 2102/5/10 8 15 15 13 10 2/5/10 12 20 20 15 1510/30 65 60 55 50 40 10/30 86 80 70 60 452Y SwSp 61 40 30 25 25 2Y SwSp 20 10 5 5 010Y SwSp 14 15 10 10 10 10Y SwSp -1 0 -5 -5 -5 UK SZ Current Jun-10 Sep-10 Dec-10 Mar-11 Current Jun-10 Sep-10 Dec-10 Mar-11Key rate 0.50 0.50 0.50 1.00 1.50 Key rate 0.25 0.25 0.50 0.75 1.003M 0.68 0.65 0.80 1.30 1.80 3M 0.18 0.50 0.70 0.90 1.252Y 1.20 1.30 1.70 2.20 2.50 2Y 0.44 0.95 1.50 2.20 2.505Y 2.72 2.88 3.20 3.55 3.75 5Y 1.16 1.28 1.95 2.65 2.8810Y 3.93 4.25 4.60 4.80 4.90 10Y 1.81 2.60 3.00 3.30 3.4530Y 4.53 4.65 4.95 5.20 5.30 30Y 2.24 2.85 3.20 3.45 3.602/10 273 295 290 260 240 2/10 137 165 150 110 952/5/10 16 10 5 5 5 2/5/10 3 -25 -15 -5 -510/30 60 40 35 40 40 10/30 43 25 20 15 15

10Y SwSp -5.83 -15 -10 -10 -5 10Y SwSp 45 45 40 40 40 JN CA Current Jun-10 Sep-10 Dec-10 Mar-11 Current Jun-10 Sep-10 Dec-10 Mar-11Key rate 0.10 0.10 0.10 0.10 0.10 Key rate 0.25 0.25 0.25 0.25 0.503M 0.24 0.35 0.40 0.40 0.40 3M 0.51 0.40 0.45 0.60 0.7510Y 1.29 1.60 1.70 1.80 1.90 10Y 3.66 4.10 4.40 4.70 4.90

NO SW Current Jun-10 Sep-10 Dec-10 Mar-11 Current Jun-10 Sep-10 Dec-10 Mar-11Key rate 1.75 2.00 2.25 2.50 2.75 Key rate 0.25 0.25 0.50 0.75 1.003M 2.40 2.33 2.60 2.60 2.60 3M 0.55 0.55 0.90 1.15 1.4010Y 3.64 4.00 4.15 4.20 4.30 10Y 2.97 3.55 4.10 4.50 4.80

AU NZ Current Jun-10 Sep-10 Dec-10 Mar-11 Current Jun-10 Sep-10 Dec-10 Mar-11Key rate 4.25 4.50 4.75 5.00 5.25 Key rate 2.50 2.75 3.00 3.25 3.503M 4.54 4.80 5.05 5.30 5.55 3M 2.73 3.25 3.50 3.75 3.8510Y 5.71 6.10 6.35 6.45 6.50 10Y 5.91 6.20 6.40 6.60 6.70

FX Forecasts

vs. EUR Current Jun-10 Sep-10 Dec-10 Mar-11 vs. USD 16-Apr-10 Jun-10 Sep-10 Dec-10 Mar-11EUR-USD 1.33 1.39 1.42 1.38 1.35 EUR-USD 1.33 1.39 1.42 1.38 1.35EUR-JPY 126 128 132 137 139 USD-JPY 94 92 93 99 103EUR-GBP 0.87 0.91 0.90 0.86 0.83 GBP-USD 1.53 1.52 1.57 1.60 1.62EUR-SEK 9.60 9.65 9.60 9.55 9.50 USD-SEK 7.21 6.94 6.76 6.92 7.04EUR-NOK 7.85 7.95 7.90 7.85 7.80 USD-NOK 5.90 5.72 5.56 5.69 5.78EUR-CHF 1.43 1.47 1.51 1.48 1.50 USD-CHF 1.08 1.06 1.06 1.07 1.11EUR-AUD 1.43 1.49 1.51 1.53 1.53 AUD-USD 0.93 0.93 0.94 0.90 0.88EUR-NZD 1.82 1.96 1.95 1.97 1.96 NZD-USD 0.73 0.71 0.73 0.70 0.69EUR-CAD 1.34 1.45 1.51 1.49 1.49 USD-CAD 1.01 1.04 1.06 1.08 1.10




Curves & Crosses

GROSS DOMESTIC PRODUCT % y-o-y Actual UniCredit 2006 2007 2008 2009 2010 2011UNITED STATES 2.7 2.1 0.4 -2.4 3.0 2.5JAPAN 2.0 2.3 -1.2 -5.2 1.4 1.6EUROZONE 3.1 2.8 0.5 -4.0 0.9 1.3GERMANY 3.4 2.6 1.0 -4.9 1.4 1.5ITALY 2.1 1.4 -1.3 -5.1 0.5 1FRANCE 2.4 2.3 0.3 -2.2 1.4 1.6SPAIN 4.0 3.6 0.9 -3.6 -0.7 0.8AUSTRIA 3.5 3.5 2.0 -3.6 1.3 1.4SWEDEN 4.5 2.7 -0.5 -4.7 0.9 2.2NORWAY (mainland) 4.5 5.4 2.0 -1.4 1.8 2.5UNITED KINGDOM 2.9 2.6 0.5 -5.0 1.2 2.3SWITZERLAND 3.6 3.6 1.8 -1.5 1.6 1.5

CONSUMER PRICE INDEX Actual UniCredit 2006 2007 2008 2009 2010 2011UNITED STATES 3.2 2.9 3.8 -0.3 2.2 2.2UNITED STATES (Core CPI) 2.5 2.3 2.3 1.7 0.9 1.2JAPAN 0.3 0.0 1.4 -1.4 -1.0 -0.3EUROZONE 2.2 2.1 3.3 0.3 1.5 1.8GERMANY 1.6 2.3 2.6 0.4 1.0 1.2ITALY 2.1 1.8 3.3 0.8 1.6 1.9FRANCE 1.7 1.5 2.8 0.1 1.1 1.5SPAIN 3.5 2.8 4.1 -0.3 1.4 2.2AUSTRIA 1.5 2.2 3.2 0.5 1.2 2.0SWEDEN 1.4 2.2 3.5 -0.3 1.3 1.5NORWAY 2.3 0.7 3.8 2.2 2.2 2.5UNITED KINGDOM 2.3 2.3 3.6 2.0 1.9 2.0SWITZERLAND 1.1 0.7 2.4 -0.5 1.3 1.0

Eurozone 2009 2010 2011 Q1-09 Q2-09 Q3-09 Q4-09 Q1-10 Q2-10 Q3-10 Q4-10 Q1-11 Q2-11 Q3-11 Q4-11

GDP (% qoq)

-2.5 -0.1 0.4 0.0 0.2 0.5 0.2 0.3 0.4 0.4 0.5 0.5

HICP Inflation (% yoy)

1.0 0.2 -0.4 0.4 1.1 1.5 1.5 1.7 1.7 1.6 1.8 2.0

Core HICP Inflation (% yoy)

1.6 1.6 1.3 1.1 0.9 0.7 0.6 0.5 0.1 0.4 0.4 0.4

US 2009 2010 2011 Q1-09 Q2-09 Q3-09 Q4-09 Q1-10 Q2-10 Q3-10 Q4-10 Q1-11 Q2-11 Q3-11 Q4-

GDP (% qoq, annualized)

-6.4 -0.7 2.2 5.6 3.2 1.2 1.5 2.0 2.1 2.1 2.3 2.3

HICP Inflation (% yoy)

-0.2 -0.9 -1.6 1.5 2.7 2.5 2.1 1.7 1.7 2.1 2.4 2.6

Core HICP Inflation (% yoy)

1.7 1.8 1.5 1.7 1.4 1.0 0.7 0.6 0.8 1.1 1.4 1.6


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Curves & Crosses

Disclaimer Our recommendations are based on information obtained from, or are based upon public information sources that we consider to be reliable but for the completeness and accuracy of which we assume no liability. All estimates and opinions included in the report represent the independent judgment of the analysts as of the date of the issue. We reserve the right to modify the views expressed herein at any time without notice. Moreover, we reserve the right not to update this information or to discontinue it altogether without notice. This analysis is for information purposes only and (i) does not constitute or form part of any offer for sale or subscription of or solicitation of any offer to buy or subscribe for any financial, money market or investment instrument or any security, (ii) is neither intended as such an offer for sale or subscription of or solicitation of an offer to buy or subscribe for any financial, money market or investment instrument or any security nor (iii) as an advertisement thereof. The investment possibilities discussed in this report may not be suitable for certain investors depending on their specific investment objectives and time horizon or in the context of their overall financial situation. The investments discussed may fluctuate in price or value. Investors may get back less than they invested. Changes in rates of exchange may have an adverse effect on the value of investments. Furthermore, past performance is not necessarily indicative of future results. In particular, the risks associated with an investment in the financial, money market or investment instrument or security under discussion are not explained in their entirety. This information is given without any warranty on an "as is" basis and should not be regarded as a substitute for obtaining individual advice. Investors must make their own determination of the appropriateness of an investment in any instruments referred to herein based on the merits and risks involved, their own investment strategy and their legal, fiscal and financial position. As this document does not qualify as an investment recommendation or as a direct investment recommendation, neither this document nor any part of it shall form the basis of, or be relied on in connection with or act as an inducement to enter into, any contract or commitment whatsoever. Investors are urged to contact their bank's investment advisor for individual explanations and advice. Neither UniCredit Bank AG, UniCredit Bank AG London Branch, UniCredit CAIB AG, UniCredit Bank AG Milan Branch, UniCredit CAIB Securities UK Ltd., UniCredit Securities, UniCredit Menkul Değerler A.Ş., UniCredit Bulbank, Zagrebačka banka, UniCredit Bank, Bank Pekao, Yapi Kredi, UniCredit Tiriac Bank, ATFBank, nor any of their respective directors, officers or employees nor any other person accepts any liability whatsoever (in negligence or otherwise) for any loss howsoever arising from any use of this document or its contents or otherwise arising in connection therewith. This analysis is being distributed by electronic and ordinary mail to professional investors, who are expected to make their own investment decisions without undue reliance on this publication, and may not be redistributed, reproduced or published in whole or in part for any purpose. Responsibility for the content of this publication lies with: a) UniCredit Bank AG, Am Tucherpark 16, 80538 Munich, Germany, (also responsible for the distribution pursuant to §34b WpHG). The company belongs to UCI Group. Regulatory authority: “BaFin“ – Bundesanstalt für Finanzdienstleistungsaufsicht, Lurgiallee 12, 60439 Frankfurt, Germany. b) UniCredit Bank AG London Branch, Moor House, 120 London Wall, London EC2Y 5ET, United Kingdom. Regulatory authority: “BaFin“ – Bundesanstalt für Finanzdienstleistungsaufsicht, Lurgiallee 12, 60439 Frankfurt, Germany and subject to limited regulation by the Financial Services Authority (FSA), 25 The North Colonnade, Canary Wharf, London E14 5HS, United Kingdom. Details about the extent of our regulation by the Financial Services Authority are available from us on request. c) UniCredit Bank AG Milan Branch, Via Tommaso Grossi, 10, 20121 Milan, Italy, duly authorized by the Bank of Italy to provide investment services. Regulatory authority: “Bank of Italy”, Via Nazionale 91, 00184 Roma, Italy and Bundesanstalt für Finanzdienstleistungsaufsicht, Lurgiallee 12, 60439 Frankfurt, Germany. The UniCredit CAIB Group, consisting of d) UniCredit CAIB AG, Julius-Tandler-Platz 3, 1090 Vienna, Austria Regulatory authority: Finanzmarktaufsichtsbehörde (FMA), Praterstrasse 23, 1020 Vienna, Austria e) UniCredit CAIB Securities UK Ltd., Moor House, 120 London Wall, London EC2Y 5ET, United Kingdom Regulatory authority: Financial Services Authority (FSA), 25 The North Colonnade, Canary Wharf, London E14 5HS, United Kingdom f) UniCredit Securities, Boulevard Ring Office Building, 17/1 Chistoprudni Boulevard, Moscow 101000, Russia Regulatory authority: Federal Service on Financial Markets, 9 Leninsky prospekt, Moscow 119991, Russia g) UniCredit Menkul Değerler A.Ş., Büyükdere Cad. No. 195, Büyükdere Plaza Kat. 5, 34394 Levent, Istanbul, Turkey Regulatory authority: Sermaye Piyasası Kurulu – Capital Markets Board of Turkey, Eskişehir Yolu 8.Km No:156, 06530 Ankara, Turkey h) UniCredit Bulbank, Sveta Nedelya Sq. 7, BG-1000 Sofia, Bulgaria Regulatory authority: Financial Supervision Commission, 33 Shar Planina str.,1303 Sofia, Bulgaria i) Zagrebačka banka, Paromlinska 2, HR-10000 Zagreb, Croatia Regulatory authority: Croatian Agency for Supervision of Financial Services, Miramarska 24B, 10000 Zagreb, Croatia j) UniCredit Bank, Na Príkope 858/20, CZ-11121 Prague, Czech Republic Regulatory authority: CNB Czech National Bank, Na Příkopě 28, 115 03 Praha 1, Czech Republic k) Bank Pekao, ul. Grzybowska 53/57, PL-00-950 Warsaw, Poland Regulatory authority: Polish Financial Supervision Authority, Plac Powstańców Warszawy 1, 00-950 Warsaw, Poland l) UniCredit Bank, Prechistenskaya emb. 9, RF-19034 Moscow, Russia Regulatory authority: Federal Service on Financial Markets, 9 Leninsky prospekt, Moscow 119991, Russia m) UniCredit Bank, Šancova 1/A, SK-813 33 Bratislava, Slovakia Regulatory authority: National Bank of Slovakia, Stefanikovo nam. 10/19, 967 01 Kremnica, Slovakia n) Yapi Kredi, Yapi Kredi Plaza D Blok, Levent, TR-80620 Istanbul, Turkey Regulatory authority: Sermaye Piyasası Kurulu – Capital Markets Board of Turkey, Eskişehir Yolu 8.Km No:156, 06530 Ankara, Turkey o) UniCredit Tiriac Bank, Ghetarilor Street 23-25, RO-014106 Bucharest 1,Romania Regulatory authority: CNVM, Romanian National Securities Commission, Foişorului street, no.2, sector 3, Bucharest, Romania p) ATFBank, 100 Furmanov Str., KZ-050000 Almaty, Kazakhstan Agency of the Republic of Kazakhstan on the state regulation and supervision of financial market and financial organisations, 050000, Almaty, 67 Aiteke Bi str., Kazakhstan POTENTIAL CONFLICTS OF INTEREST UniCredit Bank AG acts as a Specialist or Primary Dealer in government bonds issued by the Italian, Portuguese and Greek Treasury. Main tasks of the Specialist are to participate with continuity and efficiency to the governments' securities auctions, to contribute to the efficiency of the secondary market through market making activity and quoting requirements and to contribute to the management of public debt and to the debt issuance policy choices, also through advisory and research activities. ANALYST DECLARATION The author’s remuneration has not been, and will not be, geared to the recommendations or views expressed in this study, neither directly nor indirectly. ORGANIZATIONAL AND ADMINISTRATIVE ARRANGEMENTS TO AVOID AND PREVENT CONFLICTS OF INTEREST To prevent or remedy conflicts of interest, UniCredit Bank AG, UniCredit Bank AG London Branch, UniCredit CAIB AG, UniCredit Bank AG Milan Branch, UniCredit CAIB Securities UK Ltd., UniCredit Securities, UniCredit Menkul Değerler A.Ş., UniCredit Bulbank, Zagrebačka banka, UniCredit Bank, Bank Pekao, Yapi Kredi, UniCredit Tiriac Bank, ATFBank have established the organizational arrangements required from a legal and supervisory aspect, adherence to which is monitored by its compliance department. Conflicts of interest arising are managed by legal and physical and non-physical barriers (collectively referred to as “Chinese Walls”) designed to restrict the flow of information between one area/department of UniCredit Bank AG, UniCredit Bank AG London Branch, UniCredit CAIB AG, UniCredit Bank AG Milan Branch, UniCredit CAIB Securities UK Ltd., UniCredit Securities, UniCredit Menkul Değerler A.Ş., UniCredit Bulbank, Zagrebačka banka, UniCredit Bank, Bank Pekao, Yapi Kredi, UniCredit Tiriac Bank, ATFBank and another. In particular, Investment Banking units, including corporate finance, capital market activities, financial advisory and other capital raising activities, are segregated by physical and non-physical boundaries from Markets Units, as well as the research department. In the case of equities execution by UniCredit Bank AG Milan Branch, other than as a matter of client facilitation or delta hedging of OTC and listed derivative positions, there is no proprietary trading. Disclosure of publicly available conflicts of interest and other material interests is made in the research. Analysts are supervised and managed on a day-to-day basis by line managers who do not have responsibility for Investment Banking activities, including corporate finance activities, or other activities other than the sale of securities to clients.

UniCredit Research page 44


Curves & Crosses

ADDITIONAL REQUIRED DISCLOSURES UNDER THE LAWS AND REGULATIONS OF JURISDICTIONS INDICATED Notice to Austrian investors This document does not constitute or form part of any offer for sale or subscription of or solicitation of any offer to buy or subscribe for any securities and neither this document nor any part of it shall form the basis of, or be relied on in connection with or act as an inducement to enter into, any contract or commitment whatsoever. This document is confidential and is being supplied to you solely for your information and may not be reproduced, redistributed or passed on to any other person or published, in whole or part, for any purpose. Notice to Czech investors This report is intended for clients of UniCredit Bank AG, UniCredit Bank AG London Branch, UniCredit CAIB AG, UniCredit CAIB Securities UK Ltd. or UniCredit Bank AG Milan Branch in the Czech Republic and may not be used or relied upon by any other person for any purpose. Notice to Italian investors This document is not for distribution to retail clients as defined in article 26, paragraph 1(e) of Regulation n. 16190 approved by CONSOB on October 29, 2007. In the case of a short note, we invite the investors to read the related company report that can be found on UniCredit Research website www.research.unicreditgroup.eu. Notice to Russian investors As far as we are aware, not all of the financial instruments referred to in this analysis have been registered under the federal law of the Russian Federation “On the Securities Market” dated April 22, 1996, as amended, and are not being offered, sold, delivered or advertised in the Russian Federation. Notice to Turkish investors Investment information, comments and recommendations stated herein are not within the scope of investment advisory activities. Investment advisory services are provided in accordance with a contract of engagement on investment advisory services concluded with brokerage houses, portfolio management companies, non-deposit banks and the clients. Comments and recommendations stated herein rely on the individual opinions of the ones providing these comments and recommendations. These opinions may not suit your financial status, risk and return preferences. For this reason, to make an investment decision by relying solely on the information stated here may not result in consequences that meet your expectations. Notice to Investors in Japan This document does not constitute or form part of any offer for sale or subscription for or solicitation of any offer to buy or subscribe for any securities and neither this document nor any part of it shall form the basis of, or be relied on in connection with or act as an inducement to enter into, any contract or commitment whatsoever. Notice to UK investors This communication is directed only at clients of UniCredit Bank AG, UniCredit Bank AG London Branch, UniCredit CAIB AG, UniCredit CAIB Securities UK Ltd. or UniCredit Bank AG Milan Branch who (i) have professional experience in matters relating to investments or (ii) are persons falling within Article 49(2)(a) to (d) (“high net worth companies, unincorporated associations, etc.”) of the United Kingdom Financial Services and Markets Act 2000 (Financial Promotion) Order 2005 or (iii) to whom it may otherwise lawfully be communicated (all such persons together being referred to as “relevant persons”). This communication must not be acted on or relied on by persons who are not relevant persons. Any investment or investment activity to which this communication relates is available only to relevant persons and will be engaged in only with relevant persons. 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The securities referred to in this report may not be registered under the U.S. Securities Act of 1933, as amended, and the issuer of such securities may not be subject to U.S. reporting and/or other requirements. Available information regarding the issuers of such securities may be limited, and such issuers may not be subject to the same auditing and reporting standards as U.S. issuers. The information contained in this report is intended solely for certain "major U.S. institutional investors" and may not be used or relied upon by any other person for any purpose. Such information is provided for informational purposes only and does not constitute a solicitation to buy or an offer to sell any securities under the Securities Act of 1933, as amended, or under any other U.S. federal or state securities laws, rules or regulations. 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Curves & Crosses

UniCredit Research* Thorsten Weinelt, CFA Global Head of Research & Chief Strategist +49 89 378-15110 [email protected]

Dr. Ingo Heimig Head of Research Operations +49 89 378-13952 [email protected]

Economics & FI/FX Research

Marco Annunziata, Ph.D., Chief Economist +44 20 7826-1770 [email protected]

Economics & Commodity Research Global Economics Dr. Davide Stroppa, Global Economist +39 02 8862-2890 [email protected]

European Economics Andreas Rees, Chief German Economist +49 89 378-12576 [email protected]

Marco Valli, Chief Italian Economist +39 02 8862-8688 [email protected]

Stefan Bruckbauer, Chief Austrian Economist +43 50505 41951 [email protected]

Tullia Bucco +39 02 8862-2079 [email protected]

Chiara Corsa +39 02 8862-2209 [email protected]

Dr. Loredana Federico +39 02 8862-2209 [email protected]

Alexander Koch, CFA +49 89 378-13013 [email protected]

Chiara Silvestre [email protected]

US Economics Dr. Harm Bandholz, CFA +1 212 672 5957 [email protected]

Commodity Research Jochen Hitzfeld +49 89 378-18709 [email protected]

Nikolaus Keis +49 89 378-12560 [email protected]

EEMEA Economics & FI/FX Strategy Cevdet Akcay, Ph.D., Chief Economist, Turkey +90 212 319-8430, [email protected]

Matteo Ferrazzi., Economist, EEMEA +39 02 8862-8600, [email protected]

Dmitry Gourov, Economist, EEMEA +43 50505 823-64, [email protected]

Hans Holzhacker, Chief Economist, Kazakhstan +7 727 244-1463, [email protected]

Anna Kopetz, Economist, Baltics +43 50505 823-64, [email protected]

Marcin Mrowiec, Chief Economist, Poland +48 22 656-0678, [email protected]

Vladimir Osakovsky, Ph.D., Head of Strategy and Research, Russia +7 495 258-7258 ext.7558, [email protected]

Rozália Pál, Ph.D., Chief Economist, Romania +40 21 203-2376, [email protected]

Kristofor Pavlov, Chief Economist, Bulgaria +359 2 9269-390, [email protected]

Goran Šaravanja, Chief Economist, Croatia +385 1 6006-678, [email protected]

Pavel Sobisek, Chief Economist, Czech Republic +420 2 211-12504, [email protected]

Gyula Toth, Economist/Strategist, EEMEA +43 50505 823-62, [email protected]

Jan Toth, Chief Economist, Slovakia +421 2 4950-2267, [email protected]

Global FI/FX Strategy Michael Rottmann, Head +49 89 378-15121, [email protected]

Dr. Luca Cazzulani, Deputy Head, FI Strategy +39 02 8862-0640, [email protected]

Chiara Cremonesi, FI Strategy +44 20 7826-1771, [email protected]

Dr. Stephan Maier, FX Strategy +39 02 8862-8604, [email protected]

Giuseppe Maraffino, FI Strategy +39 02 8862-2027, [email protected]

Armin Mekelburg, FX Strategy +49 89 378-14307, [email protected]

Roberto Mialich, FX Strategy +39 02 8862-0658, [email protected]

Kornelius Purps, FI Strategy +49 89 378-12753, [email protected]

Herbert Stocker, Technical Analysis +49 89 378-14305, [email protected]

Publication Address

UniCredit Research Corporate & Investment Banking UniCredit Bank AG Milan Branch Economics & FI/FX Research Via Tommaso Grossi, 10 - 20121 Milan Tel +39 02 8862.8222 - Fax +39 02 8862.2585

Bloomberg UCGR Internet www.research.unicreditgroup.eu

* UniCredit Research is the joint research department of UniCredit Bank AG (UniCredit Bank), UniCredit CAIB Group (UniCredit CAIB), UniCredit Securities (UniCredit Securities),

UniCredit Menkul Değerler A.Ş. (UniCredit Menkul), UniCredit Bulbank, Zagrebačka banka, UniCredit Bank, Bank Pekao, Yapi Kredi, UniCredit Tiriac Bank and ATFBank.


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