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Foreign exchange overview Foreign exchange - Key points ¢ The ECB's announcement of Outright Monetary Transactions (OMT) has reduced tail risk in the Eurozone considerably, while the Federal Reserve announcing a new round of potentially unlimited asset purchases at their September 13 meeting has weakened the USD. Given that the ECB action was EUR-positive and the Fed action USD-negative, EURUSD has jumped considerably, but since then moved little. ¢ We believe the risks to the pair are now more balanced, and see a range between EURUSD 1.28-1.35 for the months ahead. A Spanish ESM/OMT request would be EUR positive. While the US elections and US fiscal cliff could lead to short term USD strength, we see the USD weaker over the next 6 months. ¢ The CAD remains supported by better growth dynamics in Canada and QE in the US. However, we believe the recent appreciation against the USD could see a near-term setback and we close the overweight. ¢ We keep the overweight position in the GBP despite the current asset purchasing program by the Bank of England (BoE), which we believe will be terminated in November. The GBP remains well supported given the recent rebound in economic data, the expectation of a stronger economy in 2013 and because investors are seeking liquid alternatives to the EUR, the USD and the JPY. ¢ EURCHF has traded higher in our 1.20-1.23 range recently and we continue to see the pair in that range. The SNB protects the downside, while a strong upside move is also limited by a potential flare-up in the euro crisis and reserve unwinding of the SNB at some point. Given this balance, we have decided to close the underweight in the CHF. ¢ Sweden and Norway stand out for their lower debt-to-GDP ratios and current account surpluses. Both the SEK and NOK have appreciated on diversification and safe-haven inflows, but economic data in both countries has become weaker recently, which led to a setback in the SEK. A rate cut in Sweden cannot be ruled out, but seems to be priced in already. e Longer-term debt issues and weak competitiveness of major exporters are hurting the Japanese economy and PMls have disappointed. We therefore think the Bank of Japan and Ministry of Finance will maintain an expansive policy bias and continue trying to weaken the JPY. We are underweight JPY. ¢ For commodity currencies, the AUD and NZD continue to trade at the top of their well established ranges. We got the expected rate cut in Australia and expect another cut by year end. Do not buy AUD above AUDUSD 1.00. We have a preference for the NZD over the AUD. ¢ We maintain a positive medium-term view on emerging market (EM) currencies. This is supported by higher short-term rates which provide an attractive yield pick-up relative to developed market currencies as monetary policies are expected to remain loose for longer. We think investors should increase EM FX exposure across regions. Lower tail risks in Europe should be especially supportive of the higher-yielding currencies in EMEA and Latin America. ¢ Our most preferred emerging market currencies are currently the MXN, ZAR, PLN, KRW and SGD.We expect the CNY to appreciate 2% against the USD, moving towards 6.20 over the coming 12 months. Internationally marketable instruments (such as CNH, the offshore version of the Chinese currency traded in Hong Kong) have similar appreciation potential. Preferences (6 months) underweight USD EUR GBP JPY CHF SEK NOK CAD NZD AUD neutral overweight Bnew old Source: UBS ClO WM Global Investment Office x UBS For further information please contact ClO asset class specialist Thomas Flury, thomas.flury@ubs.com 30 Please see important disclaimer and disclosures at the end of the document. HOUSE_OVERSIGHT_025277