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G10 currencies UBS View side have been considerably reduced. ¢ The GBP trended higher despite stimulus measures by the Bank of England. The main reason is the need for diversification out of the EUR and USD and decisive UK policy making. We maintain an overweight after the strong rebound of economic data in 3Q 2012 which we expect to persist into 2013. ¢ The CAD remains supported by better growth dynamics. However in the short term, around the US elections and fiscal cliff debate, a setback cannot be ruled out. We also remain underweight in the AUD. ¢ The SNB has shown that it can defend the CHF floor. With EUR tail risk reduced the CHF likely recovers together with the EUR against most other currencies. Thus we close the CHF underweight. e We expect stronger policy intervention in Japan to weaken the JPY over the coming months. 4 Positive scenario & Negative scenario What we're watching Why it matters Chinese growth We expect China to land softly and then recover. Should China disappoint with a hard landing, then risk-unwinding would support USD and JPY vs. risk-taker currencies. In the base case, a Chinese recovery should support the AUD in the medium term, but a dip below parity is likely in the short term. European sovereign The main focus lies on the Spanish application for ESM/ECB support, which would crisis, ECB policy be EUR positive; a rate cut (not expected) would hurt the EUR. Key date: Nov 8, ECB meeting US growth and Fed What will the Fed do once Operation Twist ends at year end? How will the policy response presidential elections change political power in Washington? Key dates: Nov 6, US presidential elections; Dec 12, FOMC meeting 2 UBS See table for current exchange rates and CIO forecasts © We believe the risks to the EURUSD currency pair are now more balanced, as tail risks on the European FX targets: EURUSD >1.35 / EURJPY 115 ¢ The announcement of unlimited QE in the US, as well as a stronger-than-expected acceleration of global growth or further European integration would be EURUSD positive. EURUSD should trade above 1.35 in this case. Yen weakness should come as the Bank of Japan intervenes to weakens its currency. FX targets: EURUSD <1.25 / EURJPY 90 ¢ The European growth outlook deteriorates further with continued recession in 2013. The euro could rapidly fall below 1.25. A European debt-default cascade (possibly triggered by a disorderly Greece euro exit) is a tail risk for the single currency. Risk aversion would lead to an extended USD and JPY rally. Note: Scenarios refer to global economic scenarios (see slide 7) Recommendations Tactical (6 months) ¢ We continue to have a preference for the GBP and keep the short in the JPY. Strategic (1 to 2 years) e We recommend that investors diversify from large USD and EUR exposures into minor currencies. Structural financing issues weigh on all the major currencies. e The best diversifiers based on long-term macroeconomic fundamentals are the CAD and the SEK. The AUD, NOK and CHF should only be added at better entry levels. The GBP also remains attractive. UBS CIO FX forecasts 24-10-12 3M 6M 12M PPP EURUSD 1.294 1.30 32 34 1.30 USDIPY 79.75 80 82 86 79 USDCAD 0.991 0.94 0.94 Q;92 0.98 AUDUSD 0322 0.97 00 05 0.74 GBPUSD 6018 (85. 68 70 1.69 NZDUSD 0.8138 0.78 0.80 0.83 0.60 USDCHF 0.9346 O88: 0.92 O92 1.03 EURCHF 2097 1.21 2) 23 1.33 GBPCHF 4974 1.54 54 56 1.73 EURJPY 03.27 104 108 115 102 EURGBP 0.8079 0.79 Of 9 O79 O77 EURSEK 8.6577 8.20 8.00 8.00 8.86 EURNO! 7.4373 1:30 LoAO, 7.20 8.53 Source: Thomson Reuters, UBS, as of 15 Octeber 2012 Note: Past performance is not an indication of future returns. ‘ ‘ Tl 31 For further information please contact ClO asset class specialist Thomas Flury, thomas.flury@ubs.com Please see important disclaimer and disclosures at the end of the document. HOUSE_OVERSIGHT_025278