EFTA01149102

October 2011 Q4 2011 FX Quarterly Outlook Audrey Childe-Freeman Global Head of Currency Strategy The information provided herein is not intended as a recommendation of or an offer or solicitation to purchase or sell any investment product or service or as a recommendation of an investment manager. The investment products and services described herein may not be suitable for all clients. All expressions of opinion, estimates and investment strategies and views in this material constitutes J.P. Morgan's judgment based on current market conditions and are subject to change without notice. Opinions expressed herein may differ from the opinions expressed by other areas of J.P. Morgan. This material should not be regarded as investment research or a J.P. Morgan investment research report. Investment products: Not FDIC insured • No bank guarantee • May lose value Please read the Important Information section at the end of the presentation. J.P.Morgan EFTA01149102 Agenda Key FX takeaways from the third quarter of 2011 2 Considerations and risks for Q4 2011 and into 2012 3 US dollar outlook 4 Summary page on G10/Emerging Market (EM) currency outlook 8 2011 currency forecast summary 9 2011 currency forecast summary — EUR crosses 10 G10 currencies outlook 11 EM currencies outlook 19 Opinions, estimates, forecasts, and statements of financial market trends that are based on current market conditions constitute our judgment and J.P.Morgan are subjectand The views to change without strategies notice. described mayWe believe not be the for all information suitable provided investors. Pasthere is reliable is performance and forecasts are not reliable indicators of future performance and may not materialize. an not should butnot be assumed to be accurate or complete. indication of future returns. Projections 1 EFTA01149103 Key FX takeaways from the third quarter of 2011 Impasse in the eurozone debt crisis has fed through into the FX market ■ Following remarkable resilience earlier this year, the euro has succumbed to the heightened jitters over the worsening eurozone sovereign debt crisis in Q3. ■ EUR/USD has broken through the 1.40-1.45 range prevailing since May. ■ The eurozone crisis has also spread through other risk assets, with EM currencies suffering substantially from the global deleveraging in late Q3. ■ US dollar ultimate safe-haven status has returned in Q3. Yen still a winner in risk-off context. Marked deterioration in global economic prospects add onto a defensive approach in FX ■ Renewed disappointment in the US economy in Q2/Q3 means that recession risks cannot be ignored. US recession is not our central scenario though. J.P. Morgan Securities LLC (JPMS LLC) now expects the US economy to grow by 1.6% in 2011 and 1.3% in 2012 (as per Sep. 30th 2011). ■ The European economic landscape has also turned for the worse, with JPMS LLC now expecting the eurozone to fall into a mild recession into 2012, while the UK economy is now expected to grow by just 1.0% this year and 0.8% next year. ■ EM economies remain in favourable shape but the peak in business cycles are behind us. US S&P rating downgrade confirms a structurally bearish USD case Opinions, estimates, forecasts, and statements of financial market trends that are based on current market conditions constitute our judgment and J.P.Morgan are subject to change without notice. We believe the information provided here is reliable but should not be assumed to be accurate or complete. The views and strategies described may not be suitable for all investors. Past performance is not an indication of future returns. Projections and forecasts are not reliable indicators of future performance and may not materialize. 2 EFTA01149104 Main considerations and risks for the fourth quarter of 2011 and into 2012 Eurozone debt crisis will stay in the limelight: eurozone is running out of time ■ Contained Greek restructuring (e.g 50% haircut) and strong ring-fencing for Italy and Spain (rise/leveraging in EFSF, recapitalisation of European banks), as well as a credible structural reform agenda would come as a major relief and help the euro into Q4. As it stands, we believe that this is the most likely scenario but implementation may be tedious. ■ Further disappointment/delay in delivering a credible solution would have severe consequences at this point in the crisis — including contagion and/or a sharper fall in the euro/cyclical/EM currencies. Not our central scenario, but a risk worth mentioning. US negative fiscal/monetary policy environment could return to haunt USD bulls ■ Q3 has been all about the eurozone, but the long-term bearish USD forces have not gone away: - The Fed 'Operation Twist' and dovish assessment of the economy/policy message highlights a cyclically bearish case, still. QE3 talks could return should the US economy disappoint. ■ Structural environment remains bearish for the USD too. Worries over potential late November government shutdown is compelling evidence of a still very difficult structural environment. Lack of credible long-term fiscal strategy remains a central USD bearish argument. Macro economic news to be of prime importance in Q4 and in early 2012 ■ US/Eurozone recession scenario and/or deterioration in the Asia/EM economic climate would hurt sentiment further. The USD and the yen would be the winners and EM/cyclical currencies, the biggest losers in this context. Not our central scenario. Opinions, estimates, forecasts, and statements of financial market trends that are based on current market conditions constitute our judgment and J.P.Morgan are subject to change without notice. We believe the information provided here is reliable but should not be assumed to be accurate or complete. The views and strategies described may not be suitable for all investors. Past performance is not an indication of future returns. Projections and forecasts are not reliable indicators of future performance and may not materialize. 3 EFTA01149105 USD is now roughly flat year-to date on a trade weighted index basis U.S. trade weighted dollar index, YTD End Q1 End Q2 End Q3 84 JPMorgan USD Trade Weighted 83 Index 82 81 80 /9 /8 11 76 - 75 Jan-11 Feb-11 Mar-11 Apr-11 May-11 Jun-11 Jul-11 Aug-11 Sep-11 Oct-11 Source: JPMS LLC, Bloomberg, data as of 12 October 2011 • The JPMS LLC USD trade weighted index is down 0.9% year-to-date. In Q3, the USD has actually gained 5.8% on a trade weighted index basis. • The USD ultimate safe-haven status was confirmed by the September price action: when it comes to global deleveraging, the USD and the yen remain the most appealing currencies. • The Swiss National Bank ceiling announcement was a further supportive force for the USD in a risk-off world. J.P. Moran Opinions, estimates, forecasts, and statements of financial market trends that are based on current market conditions constitute our judgment and g are subject to change without notice. We believe the information provided here is reliable but should not be assumed to be accurate or complete. The views and strategies described may not be suitable for all investors. Past performance is not an indication of future returns. Projections and forecasts are not reliable indicators of future performance and may not materialize. 4 EFTA01149106 US dollar: Nothing has changed on the cyclical front Expectations for FY 2011 growth continue to be Fed policy outlook remains USD bearish revised lower 3-month Eurodollar futures curve, % Annualised GDP growth 2.5 6 months ago 3 months ago — — Now 3.0% 2.0 69 firm composite 1.5 2.5% 1.0 2.0% 0.5 Adjustment to a more dovish outlook for 2012 1.5% 0.0 Jan-11 Mar-11 May-11 Jul-11 Sep-11 Dec-11 Mar-12 Jun-12 Sep-12 Dec-12 Source: Bloomberg, data as of 15 September 2011 Source: JPMS LLC, Bloomberg, data as of 1 October 2011 • The US economy has continued to disappoint over the past couple of quarters, leading many in the market to adjust to a more negative US GDP growth outlook. • JPMS LLC now expects the US economy to grow by just 1.6% in 2011 and by 1.3% in 2012. • In this context, it is obvious that Fed rate rises are off the agenda for the foreseeable future. ■ We do not expect further monetary initiative besides 'Operation Twist', but QE3 talks may resurface. The monetary policy environment is still bearish for the USD. Opinions, estimates, forecasts, and statements of financial market trends that are based on current market conditions constitute our judgment and J.P.Morgan are subject to change without notice. We believe the information provided here is reliable but should not be assumed to be accurate or complete. The views and strategies described may not be suitable for all investors. Past performance is not an indication of future returns. Projections and forecasts are not reliable indicators of future performance and may not materialize. EFTA01149107 US dollar: Nothing has changed on the structural front Large gap between expenditures and receipts US primary balance Percent of GDP 2% _ Primary balance (budget balance less interest payments) as a percentage of GDP 24% 0% Expenditures 22% -2% - 20% - i1 -4% - 18% 16% I ' I ' I ' IIMI -8% - 14% SR c .1 ; a 12% It a. it c) g 195O's 196O's 197O's 198O's 199O's 2OOO's 2011E Source: Office of Management and Budget, Congressional Budget Office Source: JPMS LLC, FX Markets Weekly, 22 July 2011 ■ The Budget Control Act mainly focused on cuts in spending and not new measures on the revenue front. Lack of credible medium-term fiscal strategy remains a USD bear. • The primary balance is worse than that of Japan and/or Europe. • JPMS LLC expects the US 2011 budget deficit to GDP ratio at a high 9% (2012 deficit to GDP ratio at 6.8%). ■ Current account deficits to GDP ratio expected at 4.1% and 4.2% respectively for 2011 and 2012. Opinions, estimates, forecasts, and statements of financial market trends that are based on current market conditions constitute our judgment and J.P.Morgan are subject to change without notice. We believe the information provided here is reliable but should not be assumed to be accurate or complete. The views and strategies described may not be suitable for all investors. Past performance is not an indication of future returns. Projections and forecasts are not reliable indicators of future performance and may not materialize. 6 EFTA01149108 US dollar: Diversification theme has not gone away Foreign central banks continue to diversify away Total foreign currency reserves (in USD bn) from the USD 20% - % of annual increase in global FX reserves accounted for by non-G4 currencies, IMF COFER report 1 year % change Current (USD bn) China 30.3 3197.49 15% - Japan 11.9 1135.19 Russia 11.8 484.02 10% - Taiwan 7.6 400.29 Brazil 26.8 349.76 5% - South Korea 9.4 312.19 India 276.93 0% _ II. nn Hong Kong 4.7 6.9 279.40 Singapore 20.7 249.18 -5% - Thailand 19.2 178.06 Malaysia 44.1 131.66 -10% - Mexico 26.3 136.45 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 Poland 13.4 98.23 Turke 13.0 85.65 Source: JPMS LLC, FX Markets Weekly, 8 July 2011 Source: Bloomberg, as of 4 October 2011 ■ Foreign central banks have continued accumulating foreign reserves over the past twelve months, with China's foreign reserves up 30%, Brazil up 28% and Saudi Arabia up nearly 23% year-to-date. ■ While the ongoing eurozone debt crisis highlights the euro's many challenges, the reserve diversification theme has not gone away. ■ Expect the USD diversification theme (out of the USD) to keep a bearish bias on the USD on a multi-year basis. Opinions, estimates, forecasts, and statements of financial market trends that are based on current market conditions constitute our judgment and J.P.Morgan are subject to change without notice. We believe the information provided here is reliable but should not be assumed to be accurate or complete. The views and strategies described may not be suitable for all investors. Past performance is not an indication of future returns. Projections and forecasts are not reliable indicators of future performance and may not materialize. 7 EFTA01149109 Summary page on G10/Emerging Market (EM) currency outlook Structurally bullish currencies EM currencies that we expect Not quite safe-haven Structurally bearish, long-term, but affected by the to outperform versus the rest currencies yet... but will stay bid in deleveraging environment of EM in the next few months risk-off world Emerging Asian FX: Still our favourite bloc in -a TRY GBP, NOK, SGD USD WY EM space but be selective (SGD, MYR,CNY) TRY has already lost 35% since In euro debt crisis context, Strong growth, reasonable current-account and fiscal the Nov 2010 high. Most of Find support as/when risk- balances, relatively attractive yields and central GBP and NOK offer good off trades return and the bad news priced in. alternative exposure to banks historically focused on limiting volatility. liquidity dries up. US rating Europe. NOK fundamentals downgrade, continuation are much healthier. in accommodative Fed LATAM FX: Supportive outlook, more MXN However, the UK market is policy and diversification dependent on commodities for MXN (MXN, BRL) More 'appropriate' monetary larger and the UK is a step Strong growth, appealing yields and ties to story all consistent with policy management (vs BRL), ahead on the fiscal continued USD weakness commodities for MXN. Careful on valuations and still very robust fundamentals management front (vs central bank policy choices for BRL. longer-term. Yen has poor and reasonable valuations. Euro & US). demographics and is still SGD has been referred to structurally bearish. A EMEA FX: (UK, TRY, PLN) PLN, CZK still vulnerable to euro crisis, but as the CHF of Asia. L CNY, SGD, MYR Relatively small market fundamentals are solid and political context stable. though. New benchmark in EMEA EM. TRY oversold, Excellent track record in improving C/A position, positive rating outlook and fiscal-monetary policy mix appealing yields. and a continuation in the Special cases gradual move towards a Scandies: (SEK and NOK) flexible exchange rate. We Current-account and fiscal balances are outstanding, still believe in the strong favourable yields. Norway has commodity ties. High China growth story long- Euro. CHF Beta currencies so at risk in euro crisis context. term. Euro: will eventually come out stronger from the debt crisis but a difficult and bumpy way out. Cyclical environment has Commodity currencies: (AUD and CAD) also turned more euro negative of late. AUD monetary cycle less favourable but relative yield advantage remains, good proxy for bullish China OW and SNB: so far so good, possible hike in the ceiling. story. Valuation factors remain more appealing on Notwithstanding a bullish environment, SNB has successfully CAD but link to US economy is an important defended ceiling. consideration should there be a recession in the US. Source: J.P. Morgan Private Bank, October 2011 J.P.Morgan Opinions, estimates, forecasts, and statements of financial market trends that are based on current market conditions constitute our judgment and are subject to change without notice. We believe the information provided here is reliable but should not be assumed to be accurate or complete. The views and strategies described may not be suitable for all investors. Past performance is not an indication of future returns. Projections 8 and forecasts are not reliable indicators of future performance and may not materialize. EFTA01149110 2011 currency forecast summary FX Pair Current Spot Dec 2011 Mar 2012 Jun 2012 Sep 2012 EURUSD 1.3657 1.38 1.38 1.40 1.42 GBPUSD 1.5591 1.59 1.58 1.58 1.60 USDJPY 76.67 75 74 73 72 USDCHF 0.909 0.93 0.94 0.94 0.95 USDCAD 1.0276 1.01 0.97 0.96 0.95 AUDUSD 0.9968 1.00 1.03 1.08 1.10 USDNOK 5.6879 5.80 5.60 5.43 5.35 USDSEK 6.6795 6.80 6.70 6.36 6.27 USDTRY 1.8348 1.83 1.77 1.75 1.73 USDPLN 3.1614 3.25 3.01 2.89 2.81 USDCZK 18.1232 18.70 18.60 17.80 17.40 USDHUF 216.6 220 215 198 196 USDZAR 7.8535 8.01 7.65 7.67 7.82 USDRUB 31.4007 32.00 30.50 29.14 29.14 USDCNY 6.3665 6.30 6.20 6.10 6.00 USDSGD 1.2834 1.25 1.20 1.16 1.15 USDKRW 1166.85 1150 1100 1051 1040 USDIDR 8960 9000 8750 8550 8500 USDINR 49.235 48.50 48.00 46.30 45.00 USDMYR 3.142 3.10 3.00 2.94 2.92 USDBRL 1.7759 1.85 1.80 1.75 1.75 USDMXN 13.3462 13.80 13.00 12.50 12.00 USDCLP 509.38 520 500 475 470 Source: J.P. Morgan Private Bank, 11 October 2011 Opinions, estimates, forecasts, and statements of financial market trends that are based on current market conditions constitute our judgment and J.P.Morgan are subject to change without notice. We believe the information provided here is reliable but should not be assumed to be accurate or complete. The views and strategies described may not be suitable for all investors. Past performance is not an indication of future returns. Projections and forecasts are not reliable indicators of future performance and may not materialize. 9 EFTA01149111 2011 currency forecast summary - EUR crosses FX Pair Current Spot Dec 2011 Mar 2012 Jun 2012 Sep 2012 EURUSO 1.3657 1.38 1.38 1.40 1.42 EURGBP 0.8759 0.87 0.87 0.89 0.89 EURJPY 104.7 103.50 102.12 102.20 102.24 EURCHF 1.2415 1.28 1.30 1.32 1.35 EURCAD 1.40339 1.39 1.34 1.34 1.35 EURAUD 1.3701 1.38 1.34 1.30 1.29 EURNOK 7.7679 8.00 7.73 7.60 7.60 EURSEK 9.1222 9.38 9.25 8.90 8.90 EURTRY 2.506 2.53 2.44 2.45 2.46 EURPLN 4.3175 4.49 4.15 4.04 4.00 EURC2K 24.751 25.81 25.67 24.92 24.71 EURHUF 295.7900 303.60 296.70 277.83 278.82 EURZAR 10.7255 11.05 10.56 10.73 11.11 EURBRL 2.4084 2.55 2.48 2.45 2.49 Source: J.P. Morgan Private Bank, 11 October 2011 Opinions, estimates, forecasts, and statements of financial market trends that are based on current market conditions constitute our judgment and J.P.Morgan are subject to change without notice. We believe the information provided here is reliable but should not be assumed to be accurate or complete. The views and strategies described may not be suitable for all investors. Past performance is not an indication of future returns. Projections and forecasts are not reliable indicators of future performance and may not materialize. 10 EFTA01149112 Euro: Impasse on sovereign debt crisis weighs increasingly Key dates on the International calendar in Oct/Nov Summit of EU heads of state and government in Oct 23 Brussels Oct 25 Large Greek coupon payment (EU1.05B) Oct 26 EU/China summit Oct 31 Trichet retires from the ECB Nov 1 Draghi replaces Trichet as President of the ECB Nov 2 FOMC decision / Bernanke press conference Nov 3 ECB meeting Nov 3-4 G20 Annual Summit in Cannes, France Nov 7-8 Eurogroup/Ecofin meetings Nov 20 Spanish elections Joint Committee of Congress debt reduction Nov 23 legislation Nov 29-30 Eurogroup/Ecofin meetings Source: JPMS LLC, Bloomberg, data as of 4 October 2011 Source: JPMS LLC ■ The euro has finally succumbed to the deleveraging story, but considering the gravity of the eurozone situation, we note that the decline has been relatively contained. ■ The eurozone seems to be running out of time: a contained Greek debt restructuring and strong ring-fencing for the rest of the periphery, including an increase/leveraging in the EFSF, has become the market's favoured outcome. • Sovereign debt crisis is a key driver in FX again. That may leave a choppy environment in place for the euro in the near-term. Opinions, estimates, forecasts, and statements of financial market trends that are based on current market conditions constitute our judgment and J.P.Morgan are subject to change without notice. We believe the information provided here is reliable but should not be assumed to be accurate or complete. The views and strategies described may not be suitable for all investors. Past performance is not an indication of future returns. Projections and forecasts are not reliable indicators of future performance and may not materialize. 11 EFTA01149113 Euro: Business and monetary cycles have become less supportive Euro zone economy faces recession risks in 2012 This has led to a U-turn in rate expectations Forecast Changes for the Euro zone 4.5 ECB refinancing rate Real GDP, %oya 6 months ago Old forecast New forecast 4 3 months ago ECB rate expectations 2011 2012 2011 2012 Current 3.5 (EURIBOR futures) Euro area 1.6 0.9 1.6 -0.6 3 i Germany 2.8 1.3 2.8 0.2 2.5 / France 1.6 1.3 1.6 -0.1 ••• •••• 2 Italy 0.6 0.6 0.5 -1.2 Spain 0.7 0.4 0.7 -0.6 1.5 Greece -3.9 0.6 -6.3 -5.9 1 a a Ireland 0.4 1.1 2.1 0.3 Portugal -1.4 -1.9 -1.6 -2.8 0.5 The new Irish forecast for 2011 is higher than the old one due to the strong GDP 0 performance in 2Q and an upward revision to 1Q (released this week) Jan-08 Jan-09 Jan-10 Jan-11 Jan-12 Source: JPMS LLC Source: JPMS LLC, Bloomberg, data as of 4 October 2011 ■ The eurozone economy (including the core) has shown mounting signs of softness in Q3, with a combined tighter fiscal stance, deteriorating business and consumer confidence and weakening global economic context all weighing on real activity. ■ JPMS LLC now expects the eurozone to experience a mild recession into 2012. ■ This weaker growth profile is associated with lessened inflationary pressures and a significant downward adjustment in ECB rate expectations. A few economists are now expecting an ECB rate cut in the next few months. ■ The U-turn in expected ECB rate outlook means that the yield factor is less supportive for the euro now and into 2012 than it was earlier this year. Opinions, estimates, forecasts, and statements of financial market trends that are based on current market conditions constitute our judgment and J.P.Morgan are subject to change without notice. We believe the information provided here is reliable but should not be assumed to be accurate or complete. The views and strategies described may not be suitable for all investors. Past performance is not an indication of future returns. Projections and forecasts are not reliable indicators of future performance and may not materialize. 12 EFTA01149114 Japanese yen: Structurally bearish but favourable global context Japanese assets becoming more appealing? Carry trade losing appeal in current G7 rate context Foreigners net purchase of Japanese stocks and bonds % points: 2-year swap rate spread between simple average of G7 + JPY bite 15 Japanese Pout 5.5 Australia and Japan 10 4.5 - S 3.5 0 2.5 -s 1.5 •10 -15 0.5 2008 2009 2010 2011lan.-May Jan-04 Jan-05 Jan-06 Jan-07 Jan-08 Jan-09 Jan-10 Jan-11 Source: JPMS LLC, FX Markets Weekly, 29 July 2011 Source: JPMS LLC, FX Markets Weekly, 29 July 2011 ■ The structurally bearish yen environment remains: 2011 budget deficit to GDP ratio expectected at 8.9%, gross debt to GDP ratio seen at a high 225%, but not of market relevance for now. ■ Japan's recovery continues but the BoJ monetary policy environment will remain extremely loose. At current levels and on a historical basis though, G7 interest rate levels are not overwhelmingly consistent with the short-JPY carry trade . ■ In a still highly vulnerable overall market sentiment and with the world now short of one safe-haven currency (i.e the Swiss franc post SNB announcement), we believe that the yen is highly appealing. We have a year-end target at 75.00 on USD/JPY and 103.50 on EUR/JPY. ■ BoJ intervention risks prevail but unilateral intervention is unlikely to change the trend. Opinions, estimates, forecasts, and statements of financial market trends that are based on current market conditions constitute our judgment and J.P.Morgan are subject to change without notice. We believe the information provided here is reliable but should not be assumed to be accurate or complete. The views and strategies described may not be suitable for all investors. Past performance is not an indication of future returns. Projections and forecasts are not reliable indicators of future performance and may not materialize. 13 EFTA01149115 Sterling: Near-term risks but do not lose faith longer-term GBP was weaker getting into QE1, so the negative ..but GBP appealing in a world short of safe-haven impact was limited. currencies. GBP TM indexed to 100 on March 5 2009 - Time scale shows days Foreign purchases of Gilts, GBP bn before/after QE 150 — 12m sum 120 £75bn £125bn £175bn £200bn 1st Greek bail-out 130 3m sum ann. 115 110 90 110 70 105 50 30 100 10 95 -30 90 •50 -250 •200 •150 •100 •50 0 50 100 150 200 25C Jan•05 Jan-06 Jan-07 Jan-08 Jan-09 Jan-10 Jan-11 Source: JPMS LLC, data as of September 2011 Source: JPMS LLC, data as of September 2011 ■ BoE policy outlook (i.e latest round of QE) is bearish for the pound in the near-term, but a dovish monetary policy environment is not a UK specific story. ■ We remain of the view that in the current global/domestic economic/market context, the UK loose monetary/tight fiscal policy mix is the only feasible policy mix. ■ Notwithstanding near-term downside risks to growth, the UK is a step ahead on the fiscal management front, bullish for the pound longer-term. ■ In a world short of safe-haven currencies and in a context of heightened euro jitters, the UK is relatively well positioned and sterling is a winner longer-term. Opinions, estimates, forecasts, and statements of financial market trends that are based on current market conditions constitute our judgment and J.P.Morgan are subject to change without notice. We believe the information provided here is reliable but should not be assumed to be accurate or complete. The views and strategies described may not be suitable for all investors. Past performance is not an indication of future returns. Projections and forecasts are not reliable indicators of future performance and may not materialize. 14 EFTA01149116 Swiss franc: Respect the SNB this year SNB sets floor against the euro at 1.20 The 1978 DEM ceiling was a success 110 CHF vs EUR (OEM in 1978). Value = 100 when the CHF peg was 1.40 introduced —EURJCHF 105 1.35 100 1.30 New SNB ceiling 95 1.25 90 1.20 85 1.15 80 1978/79 CHF peg 75 - 2011 peg 1.10 70 1.05 -24 •18 •12 -6 t 6 12 18 24 1.00 Jan-11 Apr-11 Jul-11 Oct-11 Months before/atter peg was introduced Source: JPMS LLC Bloomberg, data as of 4 October 2011 Source: JPMS LIG, data as of September 2011 ■ The SNB has stepped up its policy to contain additional currency strength by introducing a 1.20 ceiling on EUR/CHF. A similar measure was successfully introduced against the DM in 1978. Then, the SNB was successful on the currency front, but this came with a substantial inflation spike. ■ So far so good for the SNB in spite of an environment that is theoretically still bullish for the Swiss franc. EUR/CHF has been stable above 1.20. ■ At 1.20, the Swiss franc is still overvalued (roughly 20%) and a further increase in the ceiling (to 1.25/1.30) cannot be ruled out in the next few months. ■ SNB's balance sheet position is not as supportive as in 1978, but the recent SNB policy language indicates that the monetary authorities are ready to sacrifice inflation in the near-term. ■ Bearing this in mind, we prefer to play bullish USD or JPY instead of bullish CHF in risk-off times. Opinions, estimates, forecasts, and statements of financial market trends that are based on current market conditions constitute our judgment and J.P.Morgan are subject to change without notice. We believe the information provided here is reliable but should not be assumed to be accurate or complete. The views and strategies described may not be suitable for all investors. Past performance is not an indication of future returns. Projections and forecasts are not reliable indicators of future performance and may not materialize. 15 EFTA01149117 Swedish krona: Has lost appeal in risk-off context, but we still like it longer-term SEK: Still a high beta currency SEK base, % change since 1 September 2011 CHF AUD NZD NOK CAD EUR DKK GBP USD JPY -10% -5% 0% 5% 10% Source: JPMS LLC, Bloomberg, data as of 4 October 2011 Source: JPMS LLC, Bloomberg, data as of 4 October 2011 ■ Swedish krona remains a high beta* currency (*currency highly sensitive to the global economic cycle). A strong positive correlation with the equity market leaves it highly vulnerable in the current risk-off environment. ■ The Swedish real economy has been holding remarkably well - see Q2 GDP reported at a strong 4.9% y/y. However, most recently, business and consumer confidence have been tilting significantly lower. The inflation context is relatively benign, giving leeway to the Riksbank. ■ Riksbank policy language has adjusted to a less hawkish bias, with the tightening cycle going through a pause at this stage. Some are now betting on a rate cut scenario as the next move. ■ Longer-term bullish call on the krona is intact. Near-term outlook is a little more uncertain, more so against the USD and the yen than versus the euro. Opinions, estimates, forecasts, and statements of financial market trends that are based on current market conditions constitute our judgment and J.P.Morgan are subject to change without notice. We believe the information provided here is reliable but should not be assumed to be accurate or complete. The views and strategies described may not be suitable for all investors. Past performance is not an indication of future returns. Projections and forecasts are not reliable indicators of future performance and may not materialize. 16 EFTA01149118 Norwegian krone: Not quite a safe-haven currency just yet NOK: Pro-cyclical currency But we still love the fundamentals long-term 60% Correlation between global composite PMI and trade•weighted exchange rates, 3m change. Data from 1998 Current account Real GDP Fiscal balance 40% balance (% of (%yoy) (% of GDP) GDP) 20% 0% 11111111111 2010 0.33 12.83 10.52 .20% 2011 11 1.11 I 2.20 16.30 10.80 Forecasts 40% 04` esees940*-404943094,-gy 2012 Forecasts 2.25 16.00 11.05 Source:11'MS LLC, FX Markets Weekly, 9 September 2011 Source: :IBMS LLC, Bloomberg, data as of 4 October 2011 PMI: Purchasing Manager Index ■ Notwithstanding safe-haven appeal (in particular from a fiscal and a remarkably healthy fundamentals perspective), the recent price action has shown that the Norwegian krone still trades like a pro-cyclical currency, in particular against the USD. ■ Should it persist, the deleveraging market environment and declining oil prices observed in late Q3 would keep a negative premium on the Norwegian krone. ■ Structurally, the longer-term outlook remains overwhelmingly bullish but a sustainable return in risk appetite is central for this outlook to materialise. Opinions, estimates, forecasts, and statements of financial market trends that are based on current market conditions constitute our judgment and J.P.Morgan are subject to change without notice. We believe the information provided here is reliable but should not be assumed to be accurate or complete. The views and strategies described may not be suitable for all investors. Past performance is not an indication of future returns. Projections and forecasts are not reliable indicators of future performance and may not materialize. 17 EFTA01149119 Australian dollar: Not a one way trade anymore RBA outlook has turned dovish China outlook solid, but loss in momentum 6.0% 1.20 8,000 - 35,000 -Intl Merchandise Trade Export China, AUD AUD 2y IRS —AUD/USD (right) 7,000 —Exports Goods and Services, AUD (right) 5.5% 30,000 6,000 5,000 25,000 5.0% 4,000 4.5% 3,000 20,000 2,000 4.0% 15,000 1,000 3.5% 0 10,000 Jan-10 Jul-10 Jan-11 Jul-11 2006 2007 2008 2009 2010 2011 Source: JPMS LLC, Bloomberg, data as of 4 October 2011 Source: JPMS LLC, Bloomberg, data as of 4 October 2011 ■ The RBA policy language has turned much more dovish and rate cuts cannot be ruled out altogether into 2012. On a relative basis, the yield factor has become significantly less supportive for the Australian dollar. ■ However, record high terms of trade, a supportive structural environment (modest budget deficit and C/A deficit positions) and a still relatively constructive outlook for China are consistent with a bullish longer-term outlook for the Australian dollar. ■ Recent price action has confirmed that there is no decoupling and that the AUD is at risk in a deleveraging world. ■ JPMS LLC short-term value model estimates AUD/USD close to 0.97. Our year-end target has adjusted to 1.00 and 1.10 for end of 2012. Opinions, estimates, forecasts, and statements of financial market trends that are based on current market conditions constitute our judgment and J.P.Morgan are subject to change without notice. We believe the information provided here is reliable but should not be assumed to be accurate or complete. The views and strategies described may not be suitable for all investors. Past performance is not an indication of future returns. Projections and forecasts are not reliable indicators of future performance and may not materialize. 18 EFTA01149120 EM currencies: This is not 2008, but caution ahead EM currencies sold off sharply but remain resilient Volatility has increased sharply compared to 2008 2008 moves are peak-to-trough versus USD during Aug-Dec 2011 moves are peak-to-trough versus USD August to October 3 Vol 1%) BRL ZAR KRW TRY MXN IDR RUB INR SOD P, ,-(v TNB 19 JPMorgan Emerging Market Volatility index 0 17 -10 - 15 -15 - 13 -20 - 11 -25 - -30 - 9 -35 - ■ 912038 .2011 7 -40 - Jan-11 Apr-11 Jul-11 Oct-11 Source: JPMS LLC, Emerging Markets Outlook and Strategy, 4 October 201 Source: JPMS Lit, Bloomberg, data as of 4 October 2011 • Global deleveraging has translated into a sharp sell-off in EM currencies since the beginning of September. However, we are still a long way away from the 2008 type correction. • We acknowledge that the EM world is entering into a softening phase of the cycle, but recession risks are very low for EM at this stage. Expect aggressive monetary-fiscal policy responses should the economic climate weaken faster than expected. • Our longer-term constructive outlook for the EM currency world is intact, but we call for caution in the near-term considering the external risks. This should present opportunities for investors to enter longer-term bullish positions at better levels. Interventionist central banks should help contain the downside on currencies. Opinions, estimates, forecasts, and statements of financial market trends that are based on current market conditions constitute our judgment and J.1? Morgan are subject to change without notice. We believe the information provided here is reliable but should not be assumed to be accurate or complete. The views and strategies described may not be suitable for all investors. Past performance is not an indication of future returns. Projections and forecasts are not reliable indicators of future performance and may not materialize. 19 EFTA01149121 Emerging markets: Where do we stand on the macro front JPM forecast Budget forecast Forecast CA/GDP JPM forecast CPI Current policy JPM forecast Real policy interest rate for end '11, % of ratio for end '11, for end '11, % interest rate, Vo GDP for '12, % Sep 12, % GDP Brazil 5.4 12 11 3.8 -2.4 -3.6 Chile 3.3 5.25 3.5 4.5 0.4 -1.9 Colombia 3 4.5 4.5 3.7 -3.9 -4 Mexico 3.6 4.5 4 2.5 -2.5 -1.1 Peru 3 4.25 3.75 4.5 -0.3 -1.5 Average Americas 3.66 6.1 5.35 3.8 -1.74 -2.42 Czech 2.7 0.75 0.75 1 -4.2 3.1 Hungary 4.6 6 5.75 0.5 1.5 -2.5 Poland 2.8 4.5 3.75 2.7 -5.55 -3.5 Russia 63 335 4 3 -0.65 3.8 South Africa 5.4 5.5 5 2.5 -5.4 -5.5 Turkey 6.2 535 5.75 2.7 -1.5 -2.6 Average Europe/Africa 4.73 4.38 4.17 2.07 -2.63 -1.20 China 4.2 6.56 6.56 8.5 -1.9 5.1 India 7.8 8.25 8.5 8.5 -5 -t8 Indonesia 5.2 6.75 6.5 6.2 -1.6 0.6 Korea 3.1 3.25 3.75 4 0.5 0.4 Malaysia 3 3 3 3.3 -5.2 14.8 Philippines 3.5 4.5 4.5 4.8 -1.75 1.9 Thailand 3.6 3.5 3.75 3.3 -2.95 -3.1 Average Asia/Pacific 4.34 5.12 5.22 5.51 -2.56 2.56 Source: JPMS LLC, Bloomberg, data as of 4 October 2011 ("CA" stands for current account) Opinions, estimates, forecasts, and statements of financial market trends that are based on current market conditions constitute our judgment and J.P.Morgan are subject to change without notice. We believe the information provided here is reliable but should not be assumed to be accurate or complete. The views and strategies described may not be suitable for all investors. Past performance is not an indication of future returns. Projections and forecasts are not reliable indicators of future performance and may not materialize. 20 EFTA01149122 EMEA currency considerations and outlook Near-term Longer-term Currency Key drivers and risks risks* (1-3 risks *(12 months) months +) ■ PLN continues to be vulnerable in the EMEA space at times of heightened euro concerns. Substantial funding needs, a large budget deficit and relatively high debt-to-GDP ratios (53%) all weigh on PLN. ■ Relatively low export-to-GDP ratio (at just 41.6%) means the Polish economy would be well positioned PLN -2.0 +2.0 should a more pronounced/longer slow-down in the global economy unfold. In 2009, Poland was the only economy not to contract. Interventionist central bank may help contain downside on currency. ■ The koruna continues to outperform the rest of EMEA in a global deleveraging context. It has sounder fundamentals compared to the rest of EMEA, in particular on the fiscal front. The debt-to-GDP ratio CZK expected at just 38.7% in 2011. -1.0 +2.0 ■ However, the export-to-GDP ratio currently stands at a very high 79.3%, meaning CZK is strongly at risk in a mild eurozone recession environment. ■ Current deleveraging context is very bearish for the forint. Large external funding needs and highly unappealing fiscal position (debt to GDP ratio expected at a high 80% in 2011) weighing on the forint in the near-term. High export to GDP ratio (86.5%) leave the forint more at risk should the world economy HUF move towards a recession scenario. -3.0 +;1.0 ■ SNB ceiling announcement to weigh too: risk to see fresh capital outflows following early repayment proposal of CHF mortgages. ■ Central bank likely to be interventionist in context of more currency weakness. ■ Near 17% ruble depreciation since early September is in line with a marked weakening in Brent prices and captures a high dependence on oil prices for Russia's economy. RUB -2.0 +1.0 ■ Uncertain political and fiscal outlook ahead of the 2012 parliamentary and presidential elections are a further risk. Interventionist approach from the CBR may help contain the downside medium-term. ■ TRY is vulnerable in a global deleveraging context. However, the lira is already well below the 2008/09 low against the USD and it has depreciated by over 35% since its November 2010 high. On valuation grounds, the lira is increasingly appealing. ■ Astwhen risk appetite returns, we believe that the lira will outperform. We also believe that in intra- TRY -1.0 +3.0 EMEA play, the lira should outperform even in a risk-off context. The rating outlook remains supportive and there has been some improvement in the current account position too. Low export to GDP ratio (sub- 20%) is also helpful at a time when global recession jitters are resurfacing. ■ Interventionist Central Bank to limit the downside. ■ Rand is still the most vulnerable in EMEA EM currency bloc at times of strong deleveraging. Important ZAR external financing needs (foreign bonds ownership at 27%), dreadful fundamentals, including large -3.0 0.0 current account deficit-to-GDP ratio and budget deficit-to-GDP all weigh on the ZAR. * -3 very bearish, +3 very bullish Opinions, estimates, forecasts, and statements of financial market trends that are based on current market conditions constitute our judgment and J.P.Morgan are subject to change without notice. We believe the information provided here is reliable but should not be assumed to be accurate or complete. The views and strategies described may not be suitable for all investors. Past performance is not an indication of future returns. Projections 21 and forecasts are not reliable indicators of future performance and may not materialize. EFTA01149123 Emerging Asian currency considerations and outlook Near-term Longer-term Currency Key drivers and risks risks* (1-3 risks* (12 months) months +) ■ The central bank is maintaining a gradual currency appreciation approach and continues to use CNY as a tool to contain inflationary pressures and to support local purchasing power. CNY +1.0 +3.0 ■ The degree of CNY gains is a function of global risk appetite, but the long-term trend remains overwhelmingly bullish. A move towards a flexible exchange rate is feasible this decade. ■ Some are betting on a possible 'de-pegging' sooner than expected. We see limited advantage in HKD 0.0 +3.0 HK0 adjusting before CNY moves towards a fully flexible exchange rate system. ■ Persistent current account deficit (see current account deficit to GDP ratio expected near 3%) and budget deficit (expected just above 5%) leave INR highly vulnerable at times of deleveraging. INR ■ The long-term structural outlook remains bullish. Highly favourable demographics, strong growth -2.0 +2.0 and appealing yields mean that long-term bullish case is still very much in place. ■ Due to the overcrowded trade and significant off-shore positioning (through bonds), UDR is more at risk during times of deleveraging. Strong external financing needs mean that the IDR has been a strong underperformer in a risk-off context. IDR -2.0 +3.0 ■ The longer-term bullish case (mainly of a structural nature) remains compelling and large scale pull-backs provide good opportunities to enter long positions. Interventionist Central Bank when it comes to currency weakness. ■ Relatively high export to GDP ratio (just above 55%) leaves KRW economy at risk as global recession fears mount - relative outperformance of Japan's economy (main trading partner) is KRW helpful in the current context. -1.0 +3.0 ■ The strong structural position (i.e. positive fiscal/current account positions) is consistent with a still bullish long-term outlook. Central Bank intervention risk is high at times of currency weakness. ■ Overcrowded trade and as a result, SGD has not been spared from the global deleveraging EM sell-off. MAS risks to adjust to a more 'growth orientated' approach, therefore the pace of currency SGD appreciation likely to be contained near-term. -1.0 +3.0 ■ The remarkably strong current account surplus (20.4% of GDP) and budget surplus (5% of GDP) are crucial in bullish long-term SGD call. It is a good proxy to bullish CNY view. Some call * -3 very bearish, +3 very bullish Opinions, estimates, forecasts, and statements of financial market trends that are based on current market conditions constitute our judgment and J.P.Morgan are subject to change without notice. We believe the information provided here is reliable but should not be assumed to be accurate or complete. The views and strategies described may not be suitable for all investors. Past performance is not an indication of future returns. Projections and forecasts are not reliable indicators of future performance and may not materialize. 22 EFTA01149124 Latin American currency considerations and outlook Near-term Longer-term Currency Key drivers and risks risks• (1-3 risks* (12 months) months +) ■ High beta currency, vulnerable in risk-off context. MXN is highly dependant on US GOP growth expectations. A prolonged sub-trend growth environment in the US would weigh on the Mexican economic growth outlook. An adjustment to a more dovish rate outlook adds on to bearish near- term outlook. A majority of market participants are now expecting a rate cut before year-end. MXN -1.0 +3.0 ■ Longer-term bullish forces remain in place: those include relatively small budget deficit-to-GDP ratio (2.5% expected in 2011) and current account deficit-to-GDP ratio (expected at 1% in 2011). Commodity currency, consistent with bullish long-term outlook on commodities. ■ Credible central bank approach is providing additional support longer-term. ■ BRL is very expensive on valuation grounds and the overcrowded trade has translated into a pronounced underperformance in recent deleveraging phase. The highly unexpected SELIC rate cut (with scope for more to come) adds onto the short-term negative risks for the real. BRL ■ The longer-term bullish BRL forces have not disappeared though. Those include a relatively -2.0 +2.0 healthy fiscal and external position, as well as strong growth rates and appealing yields (rushed rate cuts in this cycle means that rates may have to stay higher and for longer at a later stage). Interventionist central bank should also contribute to containing the downside. ■ Highly export and commodity driven economy, therefore UP is at risk in a deteriorating global growth environment. Copper is Chile's major export and our recent downward adjustment in copper prices expectations is consistent with a weaker than expected currency outlook (see new CLP year-end target at $8650, versus $10,000 at the time of our previous FX quarterly publication). -2.0 +2.0 ■ Longer-term, our still constructive outlook on China will help but in a deleveraging and recession fear world, CLP may struggle. * -3 very bearish, +3 very bullish Opinions, estimates, forecasts, and statements of financial market trends that are based on current market conditions constitute our judgment and J.P.Morgan are subject to change without notice. We believe the information provided here is reliable but should not be assumed to be accurate or complete. The views and strategies described may not be suitable for all investors. Past performance is not an indication of future returns. 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