Global FX Strategy Santander Global Corporate Banking

24 November 2016, 11:05 GMT

FX COMPASS
Note: There will be no FX Compass in December. The next edition of the FX Compass will be
published in late January 2017.

Stuart Bennett
G10 G-10 FX Strategy, Head
stuart.bennett@santandergcb.com
Main Themes 4 Banco Santander, S.A. London Branch
(+44) 20 7756 4136
G10 FX Overview 5
Michael Flisher
USD Watching the dollar closely 6 G-10 FX Strategy
michael.flisher@santandergcb.com
Banco Santander, S.A. London Branch
EUR Parity or bust? 7
(+44) 20 7756 5799

GBP Things can only get better? 8

JPY USD does the heavy lifting 9
CHF Sticking not twisting 10 Brendan Hurley
Latin America Rates/FX Strategy
bhurley@santander.us
CAD Every cloud has a silver lining 11 Santander Investment Securities, Inc
(+1) 212 350 0734
AUD A more stable end to the year 12
Juan Pablo Cabrera
NZD Lower cash rate but still strong demand 13 Latin America Rates/FX Strategy
jcabrera@santander.cl
NOK Waiting for the dark clouds to clear 14 Banco Santander Chile S.A.
(+56) 22 320 3778
SEK At tipping point or supported by a negative carry? 15 David Franco
Chief Economist, Mexico
LatAm dafranco@santander.com.mx
Banco Santander Mexico S.A.
(+52) 55 5269 1932
Main Themes 16
Nicolas Kohn
BRL The external factor 17 Latin America Rates/FX Strategy
nicolas.kohn@santandergcb.com
MXN Plenty of NAFTA risk premium 18 Banco Santander, S.A. London Branch
(+44) 20 7756 6633
CLP Elephant in the room 19
COP FX weakness complicates monetary policy outlook 20
ARS Weathering the storm but still running from behind 21 Agnieszka Decewicz
BZWBK, Senior Economist
agnieszka.decewicz@bzwbk.pl
CEE Bank Zachodni Wbk S.A.
(+48) 22 534 1886
Main Themes 22
Marcin Sulewski
PLN Little room for recovery 23 BZWBK, Analyst
marcin.sulewski@bzwbk.pl
Bank Zachodni Wbk S.A.
CZK Immune to global factors 24 (+48) 22 534 1884

HUF Risks are still there 24

RUB Still oil driven 25

Santander Interest Rate & FX Strategy in Bloomberg: SRFS <GO>

Banco Santander, S.A. is registered in Spain and is authorised and regulated by Banco de Espaa, Spain (C.I.F.:A39000013). Banco Santander, S.A. London Branch is
registered in the UK (with FRN 136261) and subject to limited regulation by the FCA and PRA. Santander Investment Securities Inc. (SIS) is a member of FINRA, US (CRD.
n 37216). US recipients should note that this research was produced by a non-member affiliate of SIS. For further disclosures please see the back of this report.
FX Spot Returns
G10 spot returns vs. USD G10 spot returns vs. EUR
3% 6%
2%
1% 4%
0%
2%
-1%
-2%
0%
-3%
-4%
-2%
-5%
-6% -4%
-7%
-8% -6%
JPY NOK EUR AUD CHF SEK NZD CAD GBP JPY NOK AUD CHF SEK NZD CAD USD GBP
November-to-date spot return October spot return November-to-date spot return October spot return

LatAm spot returns vs. USD LatAm spot returns vs. EUR
4% 6%

2% 4%

0%
2%
-2%
0%
-4%
-2%
-6%

-8% -4%

-10% -6%
MXN BRL COP CLP ARS PEN MXN BRL COP CLP ARS PEN

November-to-date spot return October spot return November-to-date spot return October spot return

CEEMA vs. USD CEEMA vs. EUR

4% 6%

2% 4%

0% 2%

-2% 0%

-4% -2%

-6% -4%

-8% -6%

-10% -8%
TRY PLN ZAR HUF CZK RUB TRY PLN ZAR HUF CZK RUB
November-to-date spot return October spot return November-to-date spot return October spot return

Source: Bloomberg, Santander. Note: Data current as at 24-November-2016

2
FX Forecasts
G10 FX Forecasts

Q4 16 Q1 17 Q2 17 Q3 17 Q4 17 Q1 18
EUR-USD 1.09 1.05 1.09 1.10 1.11 1.13
GBP-USD 1.20 1.20 1.20 1.22 1.24 1.26
GBP-EUR 1.11 1.14 1.10 1.11 1.12 1.12
EUR-GBP 0.90 0.88 0.91 0.90 0.90 0.90
USD-JPY 108 104 106 108 110 112
EUR-JPY 118 109 116 119 122 127
EUR-CHF 1.09 1.10 1.10 1.11 1.12 1.14
USD-CHF 1.00 1.05 1.01 1.01 1.01 1.01
USD-CAD 1.33 1.31 1.28 1.25 1.25 1.25
AUD-USD 0.74 0.72 0.72 0.71 0.71 0.72
NZD-USD 0.70 0.69 0.68 0.68 0.66 0.67
EUR-NOK 9.0 9.0 8.9 8.8 8.8 8.7
EUR-SEK 9.5 9.4 9.3 9.2 9.2 9.1

LatAm FX Forecasts

Q4 16 Q1 17 Q2 17 Q3 17 Q4 17 Q1 18
USD-BRL 3.45 3.53 3.60 3.68 3.75 3.77
USD-MXN 20.0 20.3 20.7 20.9 21.0 21.0
USD-CLP 679 690 685 680 679 690
USD-COP 3200 3300 3300 3350 3350 3400
USD-ARS 16.0 16.7 17.4 18.2 19.0 19.4
EUR-BRL 3.76 3.71 3.92 4.05 4.16 4.26
EUR-MXN 21.8 21.3 22.6 23.0 23.3 23.7
EUR-CLP 740 725 747 748 754 780
EUR-COP 3488 3465 3597 3685 3719 3842
EUR-ARS 17.4 17.5 19.0 20.0 21.1 21.9

CEE FX Forecasts

Q4 16 Q1 17 Q2 17 Q3 17 Q4 17 Q1 18
EUR-PLN 4.40 4.35 4.30 4.30 4.30 4.20
EUR-CZK 27.1 27.1 26.9 26.6 26.2 26.0
EUR-HUF 313 310 308 306 305 305
USD-RUB 70 70 64 62 58 58
EUR-RUB 76 74 70 68 64 66

Sources: Santander, Bank Zachodni Wbk

3
G10 FX: Main Themes
Currency Risk Main Themes
The US economic GDP outlook is firm. Higher yields, supported by the
USD Mildly Bullish prospect of reflationary policies from the Mr Trump, have boosted the USD
The FOMC is expected to hike rates in December. The knee-jerk response
should be USD positive, but a hike should already be priced in

The Eurozone GDP and CPI outlooks remain relatively positive, but the EUR
EUR Neutral has weakened amid USD strength and political uncertainty in Q1-17
An extension of ECB QE beyond March 2017 should be EUR negative. But
doubts about how much more easing the ECB can do could provide support

The Brexit vote has changed the outlook for Sterling. The currency should
GBP Bearish remain under pressure over the forecast horizon
Uncertainty should weigh on the UK economy going forward. We still expect
the BoE to cut rates in H1-17, which would be another GBP negative

The JPY has weakened following the US election, as US yields have risen.
JPY Bearish Low inflation implies the BoJ should continue with its loose monetary policy
However, any re-emergence of risk in Q1-17 might undermine risk appetite,
equities and rates, and imply a safety boost for the Yen

CHF The CHF remains overvalued, but robust Swiss data and signs that inflation is
Neutral picking up suggest that business may be learning to live with its value
The SNB reserves the right to intervene, but another rate cut looks less likely

The CAD should continue to move in line with the oil price. Hence, the
CAD Mildly Bullish forecast for a slightly firmer oil price into 2017 should be CAD positive.
However, a US rate hike and a more dovish BoC may counter some of the
positive CAD effect from a firmer oil price

A rise in commodity prices has been an AUD positive in recent months,

AUD Bearish though iron ore and coking prices are expected to fall going forward
After a weak Q2-16 CPI, the RBA cut rates in August. The RBA is now more
neutral, but could cut rates again if the Q4-16 print disappoints

The RBNZ cut rates again in November. The market is not expecting any
NZD Bearish further hikes, but we see this as dependent on a big CPI pick-up in Q4-16
Strong fundamentals and a notable yield advantage are NZD positives.
NZD/USD is likely to continue to be USD-driven in the short term

The Norges Bank shifted to neutral mode in October, supporting the NOK.
NOK Neutral This should leave oil as the main NOK focus in the coming months
OPEC members implied they would announce a cut in oil output at their 30
November meeting. If confirmed, this should be NOK positive

We do not expect the Riksbank to cut rates again in this cycle, but we do an
SEK Mildly Bullish extension of its govie purchase programme in December
Domestic growth is relatively firm and inflation is rising, but international risk
pressures could result in elevated SEK volatility heading into 2017

4
G10 FX Overview
Stuart Bennett
stuart.bennett@santandergcb.com
(+44) 20 7756 4136
Michael Flisher
michael.flisher@santandergcb.com
(+44) 20 7756 5799
The USD is ending 2016 strongly and looks set to start 2017
similarly. We expect robust growth next year, supported by the
prospect of reflationary policies from the President-elect. In addition,
a likely Fed rate hike in December, and two further hikes in 2017,
should insulate the USD against a notable reversal of its recent
gains. However, given the pace and size of the recent USD gains,
the currency may find it harder than some currently expect to
strengthen significantly more over the coming months.
The rampant dollar has already pulled EUR/USD toward five-year
lows, and the EUR is set to remain vulnerable into the start of 2017.
Scheduled events in December, specifically the Italian referendum,
and the FOMC and ECB meetings, look likely to keep the pressure
on the EUR. However, Eurozone economic data have been
surprising to the upside and we expect the Eurozone economy to
grow relatively strongly in 2017, pulling inflation higher, which should
reduce the likelihood of even more ECB easing and allow for a
gradual strengthening of the currency next year.
We remain negative about Sterling. The UK economy has held up
well in H2-16 and the market is already very short the Pound, which
would normally act as a brake on further declines. However, Brexit
uncertainty continues to hang over the currency and, until this clears,
it will remain difficult to be confidently positive on the currency.
Equally, given Sterlings decline already in 2016, it may require some
very bad news next year to weaken the currency significantly further.
Following the US election, we have revised up our USD/JPY forecasts.
The possibility of a more reflationary US economic policy has boosted
yields and equities, supporting G10 risk appetite and reducing
demand for the safe haven Yen. However, a possible spike in risk
aversion in Q1-17, perhaps sparked by the UK triggering Article 50,
Eurozone politics or Chinese growth jitters could weigh on the pair.
We remain negative on the CHF, but have revised our EUR/CHF
forecast profile lower. The SNB still views the CHF as expensive and
remains willing to intervene to weaken it, but we feel that the Bank will
view keeping EUR/CHF broadly within a 1.08-1.10 range in H1-17.
The prospect of further US rate hikes next year should intermittently
favour USD/CAD upside, especially as the BoC appears to be
adopting a slightly more dovish tone. We remain positive on the CAD
in general, with the Canadian economy and currency are well placed
to benefit from the prospect of more reflationary US policies and
robust US growth. Firmer oil prices should also support the CAD.
We are negative the AUD and NZD in 2017, but after the early
November decline, see a sideways move as likely in December. The
US election result was USD positive, weighing on AUD/USD and
NZD/USD. Rising commodity prices and relatively high domestic
yields should still be supportive, but a drop in commodity prices, or
further rate cuts remain a risk to both currencies.
We are neutral the NOK in early 2017. The domestic economy has
struggled this year, but the currency is now weak, and the prospect
of higher oil prices should be supportive. Despite significant SEK
weakness in 2016, and our belief that the Riksbank will extend its
government bond purchase programme in December,we only see a
short-term risk to the downside for the SEK. We still see EUR/SEK
as overbought, and expect the pair to fall in 2017.
5
USD Watching the dollar closely
Chart 1: The USD index has already reached its The USD is ending 2016 strongly and looks set to start 2017
highest level since 2003 similarly. We expect robust growth next year, supported by the
130
prospect of reflationary policies from the President-elect. In
addition, a likely Fed rate hike in December, and two further hikes
120 in 2017, should insulate the USD against a notable reversal of its
110 recent gains. However, given the pace and size of the recent
100 USD gains, the currency may find it harder than some currently
expect to strengthen significantly more over the coming months.
90
80 Beyond a negative knee-jerk reaction to Mr Trumps election, the
USD responded positively to the US vote. This morning, the USD
70
index hit its highest level since early 2003. The USD has been on
60 an uptrend since late August, but the election gave it added
impetus as it was seen as not derailing Fed rate hikes. Plus,
yields rose amid expectation that the new administration will
boost fiscal stimulus measures and spur inflation.
Source: Bloomberg, Santander
The US growth outlook should remain USD supportive in 2017.
Our economists are very positive on US GDP growth, and expect
Chart 2: EUR/USD and EUR-USD 10Y yield 1.6% YoY in 2016, rising to 2.6% in 2017 and then 2.8% in 2018,
spread taking into account Mr Trumps rhetoric on reflationary policies.
However, to ensure economic sentiment, US yields and the USD
1.16 -1.4 remain firm, it will be important that the new President quickly
-1.5 provides some of the detail of his proposals, and how they will be
1.14 implemented. Otherwise, the swift rise in yields and the currency
-1.6
1.12 may unwind amid policy tardiness.
-1.7
The growth outlook should allow the Fed to hike US rates in
1.1 -1.8
December, and twice again in 2017. However, given the rise in
-1.9 the USD since August and the fact that it is now 26% above its
1.08
-2 mid-2014 levels, we would suggest that this first hike, at least,
1.06 EUR.USD has already been priced in.
-2.1
EUR-USD 10Y spread (%), rhs
1.04 -2.2 Indeed, when we use the EUR-USD 10-year spread to estimate
Jan-16 Apr-16 Jul-16 Oct-16 EUR/USD, using data over the last five years, it suggests that the
rise in US yields relative to the Eurozones did encourage the USD
Source: Bloomberg, Santander to strengthen post-election, but the analysis also indicates that the
USD is now a little overvalued against the EUR. Further, whilst we
Chart 3: USD index and the oil price expect US 10-year yields to rise in 2017, we also expect Eurozone
120 80
yields to increase, leaving the spread unchanged from its current
level and implying limited room for the USD to strengthen further.
100 85 We also still believe that, even as the Fed hikes rates, it may
80 remain unprepared to allow the USD to appreciate much further
90
and be viewed as a one-way bet to the upside, which could
60
undermine activity. The Feds Kaplan recently admitted that,
95
40 whilst he was ready to remove some accommodation, we watch
100 the dollar very closely.
20
In addition, USD bulls should keep an eye on the oil price as
0 105 potentially another brake on significant dollar gains. The USD
Jul-14 Feb-15 Sep-15 Apr-16 Nov-16
and the oil price tend to be inversely correlated over the medium
WTI USD/bbl USD index (rev), rhs term. OPEC meets on 30 November and is expected to
Source: Bloomberg, Santander announce some sort of cut in supply, which should push the oil
price higher, therefore capping USD gains. Using data for the last
five years, we would suggest that the USD index is currently
around 5% overvalued. Further, we estimate that the consensus
forecast for WTI to end Q2-17 at USD52.50/bbl is in line with
EUR/USD at closer to 1.1400.

6
EUR Parity or bust?
The EUR is set to remain vulnerable into the start of 2017. The
Chart 4: EUR/USD moving lower, even as rampant dollar has already pulled EUR/USD toward five-year lows.
Eurozone economic data surprise to the upside Scheduled events in December, specifically the Italian referendum,
and the FOMC and ECB meetings, look likely to keep the pressure
75 1.2
on the EUR. However, Eurozone economic data have been
50 surprising to the upside and we expect the Eurozone economy to
1.15 grow relatively strongly in 2017, pulling inflation higher, which should
25
0
reduce the likelihood of even more ECB easing and allow for a
1.1 gradual strengthening of the currency next year.
-25
-50 Downside risks for the EUR are likely to dominate over the coming
1.05
month, focusing on at least three events. First, the Italian
-75
referendum on 4 December. If the vote is for no change to the
-100 1 Italian constitution, the Italian PM may feel he has to resign,
Jun-15 Sep-15 Dec-15 Mar-16 Jun-16 Sep-16 prompting more concerns about political uncertainty in the
Eurozone economic surprise index Eurozone, ahead of French Presidential elections in April/May and
EUR/USD, rhs German elections in October.
Source: Citi, Bloomberg, Santander Second, the FOMC on 14 December risks a bumpy end-of-year
for the EUR. Admittedly, a US rate hike should already be priced
Chart 5: But the recent EUR/USD decline has into EUR/USD. But, if Yellen is seen as adopting a more hawkish
merely brought it back in line with EU-US stance, this, together with the assumption that President-elect
interest rate differentials Trump will reflate the US, could lead the FX market to price in
more than two US rate hikes in 2017.
1.20 -0.4
Third, before the FOMC, at its 8 December meeting, the ECB is
1.16 -0.6
expected to extend its QE programme beyond the current end
-0.8 date of March 2017. Indeed, Draghi has already started to prepare
1.12
-1.0 the ground for such a move, and perhaps to justify it to some of
1.08 the more sceptical members of the Council, by warning that he
-1.2 sees no evidence of a sustained rise in inflation.
1.04 -1.4 Additional QE would increase the Banks balance sheet and
1.00 -1.6 should be EUR negative. However, much like the expected US
Jan-15 Jul-15 Jan-16 Jul-16 Jan-17 rate hike, we suspect that such a move should already be priced
EUR/USD EUR-USD 2Y Swap Spread (%), rhs into the currency. Further, the FX market may focus more on the
longevity of the ECBs QE programme beyond 2017.
Source: Bloomberg, Santander
We believe that central banks are increasingly conscious of the
diminishing returns of asset purchases and of the asset price
Chart 6: An ECB QE extension should be EUR distortions that low or negative interest rates can cause. So, even
negative, but less so if the market starts to
if the ECB does relax its policy parameters to increase the
question how much more room the Bank has to
ease available amount of sovereign bonds that it can buy, the FX
market may be more willing to focus upon and price in an
1200 1.05 eventual slowing, or tapering, of asset purchases.
1000 Additional support for the EUR in 2017 should stem from the
1.15
800 economic outlook. We expect the Eurozone economy to grow 1.9%
600 1.25 in 2017, faster than the consensus view of 1.3% and above 2016s
expected growth rate of 1.5%. Admittedly, this would still imply the
400
1.35 Eurozone growing more slowly than the US, but it would signal an
200 improvement in European activity and we continue to believe that it
0 1.45 would take a significant deterioration in the Eurozone economy to
-200 justify further sustained EUR weakness.
Jan-09 Jan-11 Jan-13 Jan-15 Further, this acceleration in growth should pull inflation higher. The
ECB Eurozone excess liquidity (EURbn) ECB staff forecasts due in December may show that inflation is
EUR/USD (rev), rhs expected to near 2% in 2019, from the 1.6% expected in 2018. If
Source: Bloomberg, Santander CPI is expected to be near target on a two-year horizon, this
should also reduce the need and justification for even more ECB
easing, and hence provide some support for the EUR through 2017.

7
GBP Things can only get better?
We remain negative about Sterling. The UK economy has held
Chart 7: We still expect more BoE easing in H1- up well in H2-16 and the market is already very short the Pound,
17 which would normally act as a brake on further declines.
98 1.4 However, Brexit uncertainty continues to hang over the currency
1.2 and, until this clears, it will remain difficult to be confidently
93 positive on the currency. Equally, given Sterlings decline already
1
in 2016, it may require some very bad news next year to weaken
88 0.8 the currency significantly further.
83 0.6 Whilst the Sterling risks may still be skewed to the downside,
0.4 the currency has been a lot perkier since the start of November.
78 The catalyst for this mini-recovery was the UK High Courts
0.2
73 0 judgement, stating that the UK Parliament should be involved in
the triggering of Article 50 and the UKs departure from the EU.
Apr-15 Oct-15 Apr-16 Oct-16
Trade weighted Sterling The market views any involvement of Parliament in the Article 50
UK overnight 1Y interest rate 1Y forward (%) process as increasing the chance of the UK aiming for a soft
Source: Bloomberg, Santander Brexit and maintaining access to the Single Market. The Supreme
Court will hear the governments appeal on this issue in early
December, with a decision expected in January. If the Supreme
Chart 8: Speculative short GBP/USD positions
have been slightly unwound, providing some Court agrees that a parliamentary vote is required to start the process
Sterling support of leaving the EU, the Pound is likely to rally. Hence, the market
may be reluctant to weaken the Pound ahead of that decision.
180
160 However, if the Supreme Court does rule against the
140 government, the Prime Minister is expected to bring forward
120 legislation that will still allow her to trigger Article 50 by the end
100
of March. Hence, any Sterling gains post the Supreme Court
80
ruling may be short lived. Under this scenario, FX markets will
probably look for some clarification on the UKs position on
60
Single Market access. If the government signals it wishes to
40
remain in the Single Market, or at least attempt to, this should
20
also be Sterling positive, and vice versa.
0
Nov-15 Mar-16 Jul-16 Nov-16 Whilst Sterling support may have stemmed from the High Court
GBP/USD Non-Commercial Long Contracts (000s) case, the pace of the Pounds decline in October after the flash
GBP/USD Non-Commercial Short Contracts (000s) crash may have anyway implied that technical factors would
have prevented a further big sell-off. In addition, the sell GBP
Source: CFTC, Bloomberg, Santander
trade is still very crowded, which suggests it will require more
GBP-negative news to pull it lower. For example, the IMM non-
Chart 9: Has Sterling already priced in a weaker commercial position data still show that speculators net short
UK economy?
Cable position is extremely large.
9 60
Moreover, even before the October losses, the Pounds significant
8 70 decline, in our opinion, meant that it had diverged from current
economic conditions and interest rate spreads, and was,
7 80 therefore, over sold.
90 Looking ahead to 2017, we expect the UK economy to grow by
6
1.1%, down from 2% in 2016. In particular, we forecast activity
100
5 will be weak in the first half of the year, which we expect to
110 prompt the BoE to cut rates and increase asset purchases at
4 the May MPC.
95 97 99 01 03 05 07 09 11 13 15
Slower growth and an even easier monetary policy should keep
UK ILO unemployment rate
pressure on the Pound, especially as the market is pricing in a
GBP effective exchange rate index (rev), rhs
50% chance of a rate hike by the end of next year. However,
Source: Bloomberg, Santander whilst the Pound may weaken in a knee-jerk reaction to soft
economic numbers and BoE action in H1-17, the currencys
decline in 2016 and divergence from fundamentals might imply
that it has effectively already priced these factors in.

8
JPY USD does the heavy lifting
We have revised up our USD/JPY forecasts following the US
Chart 10: Firmer equity markets/improved risk election. The possibility of a more reflationary US economic
appetite has pulled USD/JPY higher policy has boosted yields and equities, supporting G10 risk
22000 130
appetite and reducing demand for the safe haven Yen.
However, a possible spike in risk aversion in Q1-17, perhaps
125 sparked by the UK triggering Article 50, Eurozone politics or
20000 Chinese growth jitters could weigh on the pair.
120
The Yen has weakened significantly since the US election,
18000 115 helped by three factors. First, President-elect Trump is expected
110 to adopt a reflationary policy for the US, which has pulled US
16000 yields higher. Second, such sentiment has also helped equity
105 markets, particularly the Nikkei. Third, the election result is not
14000 100
considered likely to prevent the Fed hiking rates in December,
and then twice again in 2017.
Jan-15 Jun-15 Nov-15 Apr-16 Sep-16
Nikkei Index USD/JPY, rhs Japanese policymakers will probably welcome the decline in the
Yen, as it should help them meet their target of sustainably
Source: Bloomberg, Santander
punching inflation to 2% YoY. Indeed, monetary policy
divergence between the US and Japan is likely to widen next
Chart 11: BoJ to maintain a Yen-negative loose year. The BoJ kept its policy unchanged in November, with rates
monetary policy as inflation and wage growth remaining at -0.1%, as well as the target of keeping 10-year JGB
remain low yields close to 0%.
4 Further, BoJ Governor Kuroda reiterated that the BoJ will continue
easing aggressively. Moreover, whilst the Bank still expects a
2
gradual recovery trend, GDP growth in fiscal year (FY) 2017 is
0 only forecast to be 1.3%, with 2% inflation not expected to be
reached until FY 2018, given that wage growth remains subdued.
-2
Consequently, the risks appear skewed toward further Yen
-4 weakness into the end of 2016. Even if the BoJ does not ease
policy in December, it appears committed to an ultra-loose, Yen-
-6 negative monetary stance. Second, given that the speculative
Mar-08 Mar-10 Mar-12 Mar-14 Mar-16 part of the market remains long the Yen against the USD, even
Japan Wages YoY %, 3MMA though that position has been reduced, there would appear
Japan CPI YoY %, 3MMA ample room for fast money to sell the Yen.
Source: Bloomberg, Santander Third, investment flow data from the Ministry of Finance have
persistently shown Japanese investors to be net buyers of overseas
Chart 12: A jump in yield differentials has pulled bonds and notes, an outflow that arguably should have had more
USD/JPY higher of a negative effect on the Yen, even before the US vote.

4 However, we tend to favour other factors that indicate that further

120
3 110
2 100
90
1 H1-17. These could weigh on Asian equities and, hence,
80
0 70
04 05 07 08 10 11 13 14 16
US - Japan 10 year yield spread (%)
USD/JPY, rhs
Source: Bloomberg, Santander
Yen weakness will be much more gradual. First, given the recent
spike in USD/JPY, longer-term models such as purchasing power
parity, suggest the pair has moved back into overvalued territory.
Second, several factors, including the French elections and the
UK preparing to trigger Article 50, could reduce risk appetite in
USD/JPY.
Finally, although USD/JPY is no longer significantly overvalued
when compared to the US-JPY 10-year spread, it is still, in our
opinion, slightly on the expensive side. Further our forecast for
US 10-year yields at 2.7% by the end of H1-17, assuming
Japanese yields at 0%, suggests that, based on this yield gap,
USD/JPY should only be around 106 at that time.

9
CHF Sticking not twisting
We remain negative on the CHF, but have revised our EUR/CHF
Chart 13: Inflation remains negative, for now forecast profile lower. The SNB still views the CHF as expensive
and remains willing to intervene to weaken it, but we feel that the
4
Bank will view keeping EUR/CHF broadly within a 1.08-1.10
3 1.7 range until H2-17, and preventing significant EUR/CHF
2 weakness as a success.
1.5
1 The SNBs President, Jordan, reiterated that he believes the
CHF is significantly overvalued. Further, Maeschler, a colleague
0 1.3 on the SNB Board, commented recently that he is confident that
-1 the Bank can cut rates further if needed. However, we now feel
1.1 that it will require a significant deterioration in economic activity
-2 Swiss CPI YoY %
and inflation to convince the Bank to cut rates.
-3 EUR/CHF 12 month lead, rhs 0.9
The three-month Libor target range is -0.25% to -1.25%, with the
Jan-00 Jan-05 Jan-10 Jan-15 sight deposit rate at -0.75%. Interest rates have not been
Source: Bloomberg, Santander changed for around two years. Consequently, intervention
should remain the SNBs preferred tool to smooth CHF gains.
Indeed, both Swiss FX reserves and total sight deposits used
Chart 14: Intervention, rather than rate cuts, as a proxy, or indicator of FX intervention have been increasing
should remain the preferred way to contain CHF throughout 2016.
gains
However, despite the SNBs action, the CHF has been unable to
700 600
hold on to declines against the EUR. In essence, the SNB has
600 500 been reasonably successful at preventing CHF appreciation,
500 keeping EUR/CHF within a broad 1.08-1.10 range, but has been
400
400 unable to actually weaken the Swiss Franc.
300
300
200 Fortunately for the Bank, there may be less need for the SNB to
200
attempt to aggressively weaken the CHF in 2017. Indeed, the
100 100
macro data released during 2016 suggest that the economy has
0 0 adapted to the strong currency.
Jan-12 Jan-13 Jan-14 Jan-15 Jan-16
Foreign Currency Reserves (CHF bn) The economy is forecast to grow 1.8% in 2017, which is up from
Total Sight Deposits (CHF bn), rhs an expected 1.5% rate in 2016. Further, whilst inflation was still
negative in October 2016, at -0.2% YoY, it is expected to turn
Source: Bloomberg, Santander positive and average +0.2% in 2017 and +0.6% in 2018.
Consequently, we suspect that the SNB will focus on preventing
Chart 15: The enacting of the 2014 referendum CHF strength in 2017, rather than feeling obliged to try to
on restricting EU migration is expected to be a weaken the currency to spur inflation.
risk for Swiss activity
Admittedly, Eurozone political uncertainty surrounding the French
10 Presidential election in April/May could put EUR/CHF under
downside pressure. Alternatively, the SNB may be helped in its
5 desire for a firmer EUR/CHF by the ECB. Even if the ECB does
announce an extension of its QE programme beyond March
0 2017 in December, the market perception that the Bank is
running out of ways, or the need, to significantly increase
-5
monetary easing again, should be EUR/CHF positive.
-10 Swiss political risk for the CHF focuses on the implementation of
Swiss GDP YoY %
the February 2014 referendum to limit EU migration into
-15 Swiss Gross Fixed Investment YoY %
Switzerland. The vote was meant to be implemented in Q1-17
4Q03
1Q05

4Q13
1Q00
2Q01
3Q02

2Q06
3Q07
4Q08
1Q10
2Q11
3Q12

1Q15
2Q16

and, if the government cannot find some sort of compromise that

appeases the EU, the bilateral agreements between the EU and
Switzerland (covering trade, etc.) will be at risk. This is expected
Source: Bloomberg, Santander to have a big negative impact on growth, which could force the
SNB to ease policy and might, ironically, achieve the goal of a
significantly firmer EUR/CHF, albeit at a heavy price.

10
CAD Every cloud has a silver lining
We remain positive on the CAD in general for 2017. The prospect of
Chart 16: Interest rates point toward a higher further US rate hikes next year should intermittently favour
USD/CAD, but USD/CAD upside, especially as the BoC appears to be adopting a
slightly more dovish tone. However, the Canadian economy and
1.55 0.40 currency are well placed to benefit from the prospect of more
1.45 0.20 reflationary US policies and robust US growth. Further, firmer oil
1.35 0.00 prices should also support the CAD.
-0.20
1.25 USD/CAD has been on an uptrend since May 2016, but gains over
-0.40 the last couple of months have tended to be driven by monetary
1.15 -0.60 policy expectations. The prospect of a US rate hike in December,
1.05 -0.80 and the likelihood of at least two further rate hikes in 2017 has
0.95 -1.00 boosted the USD. At the same time, the BoC has adopted a more
Mar-14 Mar-15 Mar-16 dovish stance.
USD/CAD
The BoC made no change in policy at its October meeting, but it did
USD-CAD 2Y Swap Spread (%), rhs
discuss the possibility of adding more monetary stimulus. The Bank
Source: Bloomberg, Santander held off from making any changes in order to gauge the impact of
the US election and allow more time for the Canadian governments
fiscal boost to have an effect.
Chart 17: a firm oil price should support the
CAD The consequences of Mr Trumps election victory may not become
clear for several months, and the market is pricing in only around a
150 0.9 20% chance of a BoC rate cut by next May. In our opinion, it would
require a significant deterioration in both activity and CPI data over
125 1 the coming months to push the Bank toward more easing.
100 1.1 At the moment, that scale of deterioration does not seem likely.
75 1.2 Indeed, Canadian economic data are surprising to the upside. Q3-
16 GDP is expected to rebound from the weak Q2 figures, due to
50 1.3 the Alberta wildfires. Admittedly, the BoC revised its 2016 GDP
forecast to 1.1% from 1.3%, but growth in both 2017 and 2018 is
25 Oil price WTI (USD/bbl) 1.4
still estimated to be around 2%.
USD/CAD (rev), rhs
0 1.5 Further, the consequences of the US election on the CAD may be
2012 2013 2014 2015 2016 more symmetrical than some suspect. The US accounts for around
75% of Canadas exports. Hence, if Mr Trump adopts a more
Source: Bloomberg, Santander
protectionist view and questions the need for NAFTA, Canadian
Chart 18: and a reflationary US could help confidence and the CAD are likely to be affected.
Canada and its currency
However, markets have rallied since the US election, on the belief
8 that the new President will adopt reflationary policies. Whilst these
may be designed to specifically benefit the US, there could be a
6 spillover effect for Canada. The correlation between US QoQ
US GDP QoQ annualized (%)

4 annualised growth and Canadian growth since 2003 is 0.63.

2 Hence, even if, in the short term, US monetary policy and growth
0 favour upside for USD/CAD, the CAD should still be able to
-10 -5 outperform its G10 peers. Further, if US growth trickles down to
-2 0 5 10
Canada, that could cap USD/CAD gains in the medium term.
-4
CAN GDP = In addition, the oil price outlook should also provide some clear
-6 0.685 + CAD support. We currently think that the CAD is already
-8 0.686*US GDP undervalued given the present oil price. Plus, it is possible that, at
its 30 November meeting, OPEC will agree on supply cuts that
-10
should boost the oil price. Even before this meeting, the Bloomberg
Canada GDP QoQ annualized (%) consensus is for WTI to reach USD54/bbl by Q3-17. Given the
relationship between USD/CAD and the oil price, everything else
Source: Bloomberg, Santander equal, this would be in line with the pair appreciating to 1.24.

11
AUD A more stable end to the year
We are negative the AUD in 2017. However, after the early
Chart 19: Lower production in China has boosted November decline, we see a sideways move as likely in
iron ore and coal prices, although there are December. The US election result was USD positive, weighing
concerns that these gains may be temporary
on AUD/USD. But rising commodity prices and relatively high
90 0.84 domestic yields should still be AUD supportive. The RBA is
now neutral on rates, but unless inflation and wages rise in
80
Q1-17, we would not rule out further rate cuts just yet. We
0.80
70 forecast AUD/USD at 0.74 in Q4-16 and 0.71 in Q4-17.
AUD/USD has weakened in November, and even touched
60 0.76
below 0.7350 at the start of this week. However, this move
50 was USD led, with the Dollar outperforming since the US
0.72 Presidential elections. The pair is likely to continue to be
40 USD-led between now and year-end as the market focuses
on the 14 December FOMC meeting, where the market is
30 0.68 expecting a 25bp rate hike.
Jan-16 Mar-16 May-16 Jul-16 Sep-16 Nov-16
Iron Ore spot price (62% Import Fine Ore) AUD/USD, rhs
Ahead of the FOMCs December meeting, the RBA meeting
(6 December) is likely to pass by unnoticed. Indeed, the
Source: Bloomberg, Santander Bank has taken a neutral stance in recent months and, after
cutting rates in both May and August, seems inclined to
Chart 20: Inflation data remain below the RBAs leave rates at 1.5% for now. The market has actually started
target range pricing in a small chance of a rate hike in H2-17. We see this
as premature, and would not yet rule out further easing next
5%
year, especially if inflation and wage data remain subdued,
or the governments fiscal consolidation weighs on growth.
4%
Australias Q3-16 GDP data, released 7 December, could
3% offer the AUD some direction in the month ahead, but
anything above 3% growth YoY is likely to be considered
2% robust and better than most peers, and thus AUD supportive.
However, we would note that speculators already hold a large
1% net long AUD position, at over 40k contracts. Hence, while
strong data should be AUD supportive, it may take some
0% very good numbers to further boost the net long AUD
05 06 07 08 09 10 11 12 13 14 15 16
position, and actually pull the currency higher.
Headline inflation YoY RBA target range
Perhaps of more importance to the AUD, in terms of
Source: Bloomberg, Santander domestic data, is inflation. While many central banks would
not consider Australias Q3-16 print, at 1.3% YoY, as low, it
Chart 21: Asia matters for Australian trade
is the eighth consecutive number below the RBAs 2-3%
inflation target. Governor Lowe has implied that he is not
30% Goods Exports (% of total, Sept 2016) concerned about inflation at this level. But, if the Q4-16 CPI
Goods Imports (% of total, Sept 2016) reading, released 25 January, were to dip lower, that could
25%
test the Governors resolve, especially as employment gains
20% have disappointed in recent months, with the participation
rate dropping to a ten-year low in October.
15%
A key focus for the AUD in the months ahead will be Asian
10%
growth and demand for Australias commodity exports.
5% Indeed, Chart 21 shows the importance of Asia, specifically
China, as an export destination. The outlook for the Chinese
0%
economy remains a source of uncertainty for commodity
New Zealand
China

Japan

Hong Kong

India
Korea

USA

prices, as it is not clear whether local authorities will

continue to enforce policies that have contributed to lower
Chinese production of iron ore and coal. Hence, while the
Source: Bloomberg, Santander recent iron ore and coal price gains are positive for the AUD,
concerns that they may prove temporary could limit the
extent to which they are interpreted as AUD positive.

12
NZD Lower cash rate but still strong demand
We are negative the NZD in 2017. The domestic economy is
Chart 22: A pick-up in commodity prices, especially performing well, with growth levels elevated and
for dairy, has supported NZD/USD employment data improving. A pick-up in New Zealands
350 0.90
commodity prices has supported the NZD, but the outlook
ahead is uncertain. Also, a strong currency has dampened
import prices and reduced tradables inflation, which is a
300 0.80 concern for the RBNZ. The Bank cut rates again in
November, but we think persistent below-target inflation
250 0.70 would keep pressure on the RBNZ to act again in 2017. We
forecast NZD/USD at 0.70 in Q4-16 and 0.66 in Q4-17.
200 0.60 New Zealands fundamentals look good. GDP data led the
way in H1-16, with annual growth in Q2-16 at 3.6%, the
150 0.50 strongest among the G10-currency economies. The Q3-16
06 07 08 09 10 11 12 13 14 15 16 data have not yet been released, but the RBNZ foresees
New Zealand ANZ Bank Commodity World Price Index annual growth holding above 3% during both 2017 and
NZD/USD, rhs 2018. In isolation, this should be NZD supportive.
Source: Bloomberg, Santander The latest employment report also looks very healthy.
Indeed, in Q3-16 and for the first time since 2008 the
Chart 23: Weak inflation is still an issue for the unemployment rate dipped below 5%. Immigration has
RBNZ and a risk for the NZD limited the decline in the unemployment rate over the past
couple of years, but the participation rate has been rising,
6% reaching above 70% for the first time in over a decade.
5%
Commodity prices have also been NZD supportive this year.
4% Dairy products New Zealands largest export have surged
3%
by 50% since the start of June. But the outlook is less clear,
as these prices can no longer be viewed as historically weak.
2%
The big concern for New Zealands economy is inflation.
1%
Indeed, as Chart 23 shows, annual headline CPI remains
0% below the RBNZs 1-3% target range. The RBNZ does
-1%
forecast a sharp rise in Q4-16, to 1.1% YoY, but businesses
06 08 10 12 14 16 2Y-ahead inflation expectations remain low, at just 1.68%.
Hence, a disappointing Q4-16 CPI print should be a NZD
Headline inflation YoY negative, as it could imply further action from the RBNZ.
Source: Bloomberg, Santander The RBNZ cut rates to 1.75% in November, its seventh cut
in two years. Governor Wheeler stated that he does not think
Chart 24: Rate differentials have failed to pull the Bank will need to cut rates further. But, if the NZD
NZD/USD lower in 2016, but still imply the pair is remains elevated and inflation stays low, then we see a
overbought good chance of further central bank action in 2017.
0.80 Despite a strong economy and a bright outlook, we maintain
3.00 a negative NZD view, given the risk of further action from the
0.75 RBNZ. While the NZD has not followed interest rates lower
2.50 in 2016 (see Chart 24), the NZ-US 2-year swap spread
0.70
continues to imply that the pair is still too strong.
2.00
0.65 Perhaps one reason the NZD has refused to fall is the fact
1.50 that the RBNZ Cash Rate, even at just 1.75%, is still the
0.60
highest among the G10-currency central banks, thereby
0.55 1.00 providing the NZD a relative yield advantage. If the RBNZ
does cut rates again in 2017, however, with the RBA now
0.50 0.50 seen as staying on hold in H1-17, that could see some of the
Jan-15 Jul-15 Jan-16 Jul-16 NZDs yield-related demand slide across to the AUD. Hence,
NZD/USD NZD-USD 2Y Swap Spread (%), rhs we maintain our view that the AUD/NZD risks should be
Source: Bloomberg, Santander
skewed to the upside in early 2017.

13
NOK Waiting for the dark clouds to clear
We are neutral the NOK in early 2017. The domestic
Chart 25: Oil investments are expected to fall again economy has struggled this year, but a 30% drop in the
in 2017
currency from 2013-2015 implies this is already in the price.
5% The NOK has risen thus far in 2016 as oil prices returned to
USD50/bbl but, without an even higher oil price or a strong
0% pick-up in the domestic economy, further NOK upside should
now be more limited. We continue to forecast EUR/NOK
holding at 9.0 in Q4-16 before declining to 8.8 in Q4-17.
-5%
The NOK has had a pretty good 2016. Indeed, with the
-10% March 2016 Norges Bank forecasts exception of the JPY, the currency has strengthened year-
June 2016 Norges Bank forecasts to-date against all of the other G10 currencies, with a large
September 2016 Norges Bank forecasts part of this support coming from the pick-up in oil prices.
-15%
However, this years c.3% rise (in trade-weighted terms)
comes after three years of declines, when the currency
-20% dropped 30%. Hence, the currency is still historically weak,
16 17 18 19
with scope for some further gains during 2017.
Source: Norges Bank, Santander As Norge Bank Governor Olsen explained earlier this year,
there are dark clouds ahead for the Norwegian economy,
Chart 26: which could continue to take a toll on as the country tries to become less oil-dependent. The worst
jobs looks to be over for the currency, though, as there should
5.5 Unemployment Rate (%) 0 now be less scope for further negative surprises.
WTI Crude (USD/bbl), rhs, rev Domestic growth has suffered over the past couple of years,
5.0 20
and the Q3-16 print was very weak again, with the countrys
40 mainland growth, which excludes oil and gas exploration and
4.5 transport, expanding just 0.2% in Q3-16. When including oil
60 and gas, GDP fell by 0.5% QoQ, and 1.0% YoY (a six-year
4.0 low). At the same time, Norways labour force unemployment
80
rate has been rising, climbing to above 5% in July.
3.5
100 Given the domestic headwinds, the Norges Bank already has
3.0 120 a very expansive monetary policy. Indeed, the Bank cut rates
to an all-time low, of 0.5%, in March this year, with a further
2.5 140 rate cut on the cards over the summer. While the Bank is still
10 12 14 16 not ruling out a cut, it switched to a more neutral stance in
October, with the NOK rising to a 2016 high on this news.
Source: Bloomberg, Santander
As Chart 27 suggests, the main NOK driver in 2016 was the
Chart 27: leaving the NOK to follow the oil price oil price. A great deal of uncertainty may still surround this
once again in 2017 commodity, but oil prices are likely to remain the chief driver
for the currency In 2017. The Bloomberg consensus
70 8.4 foresees WTI crude holding just below USD50/bbl during
65 8.6 2017, which would imply EUR/NOK staying close to 9.0.
60
8.8
55 In the month ahead, the main oil focus and thus the main
50 9.0 NOK focus is the 30 November OPEC meeting, in Vienna.
45 9.2 In September, OPEC members, which currently produce just
40 9.4 over a third of global oil production, agreed that their
35 production should be cut to 32.5-33 million barrels/day (34
9.6
30 million barrels/day in October). This announcement boosted
25 9.8
the oil price, and the NOK, but was light on details. New
20 10.0
Jun-15 Sep-15 Dec-15 Mar-16 Jun-16 Sep-16 production targets for each group members were not
announced, and could prove harder to agree. Either way, the
WTI Oil Price (1st future) EUR/NOK, rhs, rev news flow from next weeks meeting should give both the oil
price, and the NOK, its short-term direction.
Source: Bloomberg, Santander

14
SEK At tipping point or supported by a negative carry?
We are upbeat the SEK in 2017. Recent domestic data have
Chart 28: After a bad 2016 for the SEK, EUR/SEK is been relatively strong. Also, we do not expect the Riksbank
now historically very strong
to cut rates again this cycle. However, an extension of the
12 Riksbanks government bond purchase programme in
EUR/SEK December, is a short-term risk to the downside for the SEK. We
still see EUR/SEK as overbought, but it could stay that way
11 in early 2017 if the currency is treated as a funding currency.
We forecast the cross at 9.4 in Q1-17 and 9.2 in Q4-17.
10 The Riksbank has maintained very dovish rhetoric throughout
2016, cutting rates to -0.5% and extending its government
bond purchase programme until the end of 2016. It has kept
9 policy unchanged since April, but last month pushed back its
forecasts for a rate hike to 2018.
The short-term SEK focus will now be on the 21 December
8
Riksbank meeting. We do not believe the Bank will cut rates
99 01 03 05 07 09 11 13 15
below -0.5%, but we do expect an extension of its govie
Source: Bloomberg, Santander purchase programme (we estimate another SEK45bn).
However, Swedens November CPI (13 December) and the
Chart 29: The Riksbank may extend its government ECB meeting (8 December) are released ahead of this
bond purchase programme in December meeting, and could both play a key role in shaping the next
300 monetary policy decision.
December announcement (??)
45
Announced at meeting (SEK bn)
250 Previously announced (SEK bn) ?? Swedish headline inflation rose to a four-year high in
45 October. But, at 1.2% YoY, it is still considered too low.
200 Therefore, Novembers inflation data failing to rise would
65 increase the likelihood of policy action in December.
150
In recent years, the Riksbank has tended to follow the ECBs
245

45 lead on monetary policy. Hence, although we do not believe

200

100
the Riksbank needs to extend its govie purchase programme,
135

50 if the ECB extends its QE programme to beyond March

50 90
30 2017, we would expect this to prompt an extension from the
40
0 10 10 Riksbank in December. If the Bank does act, that would
Feb-15 Mar-15 Apr-15 Jul-15 Oct-15 Apr-16 Dec-16 imply short-term risks to the downside for the SEK.

Source: Riksbank, Santander Local policy and data are important, but we would be careful
not to focus excessively on domestic issues. Indeed, Swedish
data already suggest that the SEK is too weak. But global
Chart 30: Interest rate swaps imply that EUR/SEK is
factors have weighed on the currency in 2016.
significantly overbought at its current level
Indeed, the low growth environment in the Eurozone has
10.0 1.2
been a SEK negative this year, while the UKs Brexit vote
1.0
9.8 and the associated uncertainty also has negative implications
0.8
for a risk currency such as the SEK. In the year ahead,
0.6
9.6 Eurozone specific risks (including the Italian Constitutional
0.4
referendum, and elections in France, Holland and Germany)
9.4 0.2
could all weigh on risk sentiment, and therefore also the SEK.
0.0
9.2 In addition, if the SEK is now used as a funding currency
-0.2
-0.4 due to its negative carry, it could remain weaker than we
9.0
-0.6 currently forecast. We consider the SEK to already be very
8.8 -0.8 weak following its significant decline in H2-16, and the risk of
Feb-14 Aug-14 Feb-15 Aug-15 Feb-16 Aug-16 a partial reversal would suggest to us that limited carry
returns are not worth the currency risk. However, the
EUR/SEK EUR-SEK 2Y Swap Spread (%), rhs
Riksbanks negative repo rate is unlikely to turn positive for
Source: Bloomberg, Santander well over a year, making such a strategy potentially
attractive to some, in the short term.

15
LatAm FX: Main Themes
Currency View Main Themes

The fast BRL move since November 8, making it one of the worst
performers in EM FX, is consistent with its high-beta nature.

The BCB executed its rhetoric of flexibility and adaptation to external

BRL Bearish conditions and suspended the reverse FX swaps after November 8 and
auctioned regular swaps for USD 2.5bn, supporting the BRL.

We expect external conditions to keep weighting on the BRL as the

market tries to get a better understanding of the direction of US policies

Trumps victory prompted us to revise our MXN forecast weaker in response

to short-term uncertainty and possible trade protectionism.

We do not expect a meaningful downgrade to NAFTA as this would imply

competitiveness and negative growth shocks for US firms as well. But the
Neutral (ST) MXN is already pricing a big toll from trade stress plus a more aggressive
MXN Fed.
Bearish (MT)
Banxico delivered another 50bp hike as expected to address potential
capital outflows in the aftermath of the US elections. We expect Banxico to
remain MXN dependent but recognize the 225bp of tightening since last
December means it is now more likely to focus on long-term inflation
expectations and growth.

CLP performance will continue to depend heavily on global USD trends. If

Neutral/negative BCCh starts cutting rates, the Peso is likely to underperform EM peers,
(short term) & although rising copper prices may act in the opposite direction.
CLP
negative (long Medium term, the CLP looks expensive vs. local fundamentals (growth,
term) exports, interest rates, public finance), so we expect a downward correction
in coming quarters.

Given that the currency is now closer to its long-term average on a real
exchange rate basis, we see limited room for further strengthening unless
EM risk assets and oil prices begin to move structurally higher. In addition,
seasonal factors often limit gains in the COP going into year-end and the
COP Neutral economic slowdown in 2016 looks set to continue into 2017.

BanRep has finally paused after a long series of rate hikes. The
convergence of inflation with the BanRep target will be watched closely as
the market contemplates the size of a cutting cycle, with the real policy rate
likely to remain high until inflation convergence is assured.

The response of the peso amid the shake-up in global markets was
contained, which is not entirely positive as competitiveness gains are still
needed.

As we move closer to year-end, the tax amnesty should get more traction,
ARS Bearish
something that may temporarily create appreciation pressures for the peso.

However, the Central Banks change in stance on monetary policy amid

activity that is not yet showing signs of recovery could compensate part of
any amnesty-related pressure.

16
BRL The external factor
Nicolas Kohn The outcome of the US election, leading to a stronger US
nicolas.kohn@santandergcb.com dollar and a steeper yield curve in that country, drove the
(+44) 20775 66633 BRL to levels above 3.4 after trading sub USDBRL 3.20 in
October. The fast move in the BRL since November 8,
making it one of the worst performers in the EM FX space, is
consistent with its high-beta nature. Even though
fundamentals have been improving in Brazil, when analyzing
previous episodes of US treasuries sell-offs (particularly 10yr
rates), the BRL has generally been the underperformer
among its Latam peers. For example, in the taper tantrum
of 2013, the BRL fared worse than the rest of Latam FX,
depreciating 15% between May and September 2013, while
Chart 31: Net/net still a good year for the BRL
the MXN only lost 5% in that period. It is fair to say that, back
25.0%
then, the initial BRL reaction was more in tandem with the
19.7%

18.9%

20.0% 15.9% MXN and the rest of Latam FX, but the real ended up
15.0% decoupling later on.
6.2%

10.0%
6.2%

As the market prices in potential policies under a new US

5.7%
3.0%

2.9%

2.2%

administration, uncertainty in the coming weeks could

1.2%

5.0%
0.9%
0.2%

0.2%
0.1%

0.0% negatively play into the BRL, in conjunction with a

-0.2%

-0.5%

generalized reaction in EM FX. In this environment, the BCB

-1.5%
-2.6%

-5.0%
-3.1%
-4.2%

executed its rhetoric of flexibility and adaptation to external

-8.0%

-10.0%
conditions, and suspended the reverse FX swaps after
-11.4%

-15.0% November 8 (and up until the time of writing) and started

-14.6%

-20.0% auctioning regular FX swaps for an accumulated USD 2.5bn

ARS
BRL
CLP
COP
MXN
PEN
CNY
HKD
INR
IDR
MYR
PHP
SGD
KRW
TWD
THB
CZK
HUF
PLN
RUB
TRY
ILS
ZAR

in five auctions, leading to a USD 26.5bn outstanding

position. On top of that, the monetary authority announced
YTD returns against the US dollar up to November 21st on November 10 the rollover of its USD 6.5bn contracts
Source: Bloomberg and Santander st
maturing on December 1 . Since then, the BCB has
successfully rolled the full amount of those contracts. In
October, when the BCB announced that it would not roll its
Chart 32: FX swaps by maturity USD 2.9bn November contracts due to the potential inflow
10.0 from the tax amnesty, the real sold off 4% in less than a
9.0 week, something that the BCB would not look to repeat
8.0 under this environment.
7.0
6.0
We see the flexibility imprinted by the Central Bank as
5.0
positive with regards to the FX swaps and do not expect to
4.0
see a sustained intervention in the currency. Indeed, since
3.0
they have taken up their roles, board members have been
2.0 moving towards a reduction in the FX swaps on the back of
1.0 the normalization in US monetary policy and less benign
0.0 external conditions, to give the BRL more flexibility in the
01/12/2016 01/01/2017 01/02/2017 01/03/2017 01/04/2017 future.
Amount Outstanding (USD bn; Nov 8)
Amount Outstanding (USD bn; Nov 21) Amid an economy that is recovering at a slower than
expected pace, after negative surprises from several activity
Source: BCB and Santander
indicators in the last few months, the BCB will continue with
its easing cycle. After the reprise in the rates space, the
market is now expecting to see a 25bp cut in the monetary
policy rate at the November 30 meeting (the last of 2016),
with cuts of 275bp priced in for 2017. Even though we
foresee the BCB delivering larger-than-priced cuts next year,
we expect external conditions to weigh more on the BRL as
the market tries to get a better understanding of the direction
of US policies.

17
MXN Plenty of NAFTA risk premium
David Franco The US elections ratcheted up the pressure on the Mexican
dafranco@santander.com.mx peso, as expected. A future of US trade protectionism under
(+52) 55 5257-8170 the Trump era is already being discounted and with a clear
distinction in the case of MXN: risk premia are deeper and
more systemic compared to the milder FX response in
countries with similar dependence on US import demand.
Chart 33: MXN already discounting a disruptive
NAFTA impact
Indeed, the MXN tumbled 8% in the two weeks following the
US elections (compared to the previous two weeks, using
averages to smooth volatility), in addition to a 10% slide in the
first ten months of 2016. Post-US election casualties for the
MXN were 2-3 times higher than for the rest of EM FX, and
this justified yet another 50bp hike from Banxico to 5.25%, in
line with our expectations a week ago. Note that every time
the Board has hiked pre-emptively since February, it has
coincided with a worse MXN underperformance versus EM-FX
(this spread is now at 19%-pts, spot % change YTD).
At this juncture, we all have very limited information on the new
US policies, so we will update our MXN outlook accordingly
when we do. Still, we derived 3 important conclusions from the
market reaction and better signals than feared from the new
President-elect so far: 1) Trumps business-like approach
focusing on fiscal spending instead of disruptive trade
sanctions so far has triggered a fast sell-off in core bond yields
plus USD momentum, hence, some of the MXNs headwinds
MXN is real exchange rate index.
are actually higher US inflation expectations and more Fed
tightening. Note the Mexico-US interest rate spread (10yr
Mexican exports is %, market share of total US imports.
swaps) widened by 100bp to 560bp, or 3 times higher than
Source: Inegi, Bloomberg and Santander
during the Brexit shock. 2) Reserve FX, mainly EUR and JPY,
have not strengthened in response to trade tensions, which
Chart 34: Trade balance by main partner indicates the MXN has plenty of NAFTA risk premium
2009 2011 2016 embedded. The top chart shows the MXNs performance (in
real terms), consistent with a meaningful downgrade to
US 68 100 123 NAFTA; or a fall in Mexicos market share to about 8.5% from
Non-oil 59 88 139 the current 14% of the total US import market (worth $2.3trn a
year). 3) Any spillover from a positive US demand shock from
Oil 10 12 -17
lower taxes and higher infrastructure spending which could
Asia -65 -91 -120 circle back to Mexico is absent from MXN pricing today.
Non-oil -64 -91 -123 In all, we believe market participants moved quickly and
incorporated a structural flaw through meaningful tariff
Oil -1 0 3
sanctions after NAFTA is renegotiated, but the MXN is also
China -29 -45 -65 reflecting uncertainty about aggressive Fed hiking and even
Non-oil -29 -46 -65
European elections. So, the MXN trade is likely to remain
asymmetric short term. The next big local catalyst should be
Oil 0 1 0 Pemexs first farm out and Round 1.4 deep water auction
Europe -20 -21 -27 (Dec-5) featuring FDI of around USD 4-6bn per contract. A
sound outcome should be MXN positive as it would provide
Non-oil -18 -22 -28
fiscal room for maneuver to both Pemex and the government
Oil -2 1 2 considering the fiscal metrics will remain under close scrutiny.
Total -12.9 -1.8 -16.2 Until the new US trade policy is clear, a closer look at Mexicos
Non-oil -19.5 -14.8 -4.3 trade balance offers some guidance on the implications of a
new NAFTA. Mexicos non-oil or private-manufacturing TB
Oil 6.6 13.0 -12.0
surplus with the US grew by 2.4 times since the crisis, with a
USbn, 1 year cumulative through Sep. each year. corresponding widening of Mexicos deficit with Asia (half with
Items do not add up since TB with others is not shown. China). This suggests a disruptive trade policy would be likely
Source: Inegi and Santander. to have negative multiplying effects on the global supply chain
and reduce competitiveness in the three countries.

18
CLP Elephant in the room
Juan Pablo Cabrera The US elections on 8 November brought a sudden halt to
jupcabrera@gruposantander.com the CLP uptrend seen until that day, unleashing a 4.5% sell-
(+34) 91 257 2172 off since then, to the current 675 vs the USD. The peso
weakness reflected the USD rally vs. both DM and EM and
the increase in global risk aversion, although it was mitigated
by the surge in copper prices (+10% since 8 Nov), reflecting
expectations of rising infrastructure spending in the US
during Trumps presidency. Surprisingly, offshore NDF
positioning has not changed much in the last two weeks, as
per the official BCCh survey, in a context of falling liquidity in
the local FX market.
Chart 35: USD/CLP rate vs. EM FX index Domestically, in November the BCCh kept policy interest
rates unchanged, at 3.50%, maintaining a neutral bias.
Before Trumps victory, the market was pricing in some rate
cuts in the coming quarters, and the latest BCCh minutes
revealed that the board started to discuss changing to a
dovish bias in the October meeting. Septembers IMACEC
surprised on the downside (1.4% vs consensus 2.2% y/y)
and, more importantly, October CPI came out lower than
expected again (0.16% vs. the consensus at 0.3% m/m),
sending the year-on-year reading to 2.8%, the lowest value in
almost three years.
So, just when local news-flow indicated that expectations of
monetary easing early next year in Chile were gaining
ground, the US election outcome led to a sell-off in local rates
all along the curve, reflecting higher chances of a weaker
Sources: Bloomberg, JPMorgan, Santander. CLP putting a sudden end to the current disinflationary
environment. In this context, the BCCh opted to play safe and
keep the monetary stance unchanged, waiting for a more
permanent direction in global markets.
Chart 36: Terms of trade: Copper to oil price ratio
Looking ahead, it is difficult to make strong calls on the CLP
before having a clearer sense on the future direction of US
economic policy. That said, it seems fairly evident that a
faster pace of Fed rate hikes in coming quarters would push
the peso lower, with the BCCh likely doing little to contain the
slide (at least compared with Latam peers). Also, if US
protectionist measures start to hit global trade in a
meaningful way, Chiles open economy would likely suffer,
more so if China is also heavily affected. Also, Chile is part of
the TPP trade agreement, which was expected to lift
restrictions on agricultural exports to the US, so the end of
TPP negotiations is bad news for Chile. That said,
Santanders USDCLP forecast remains unchanged for the
time being, at 679 for December 2017.
Copper price in cents per pound, WTI price (US$/bl). Source: On the positive side, the recent increase in copper prices, if it
Bloomberg, Santander.
lasts, can make a difference for Chiles external and fiscal
accounts in coming quarters, after a long period of depressed
expectations in the mining sector. We estimate that, with all
else held equal, an average price of US$2.35/lb for the next
four quarters (vs. US$2.17/lb in the last four) would imply a
net boost to the current account of around US$4bn annually
(or 1.7% of GDP). On the fiscal side, the windfall could reach
US$1bn annually (0.4% of GDP), helping to stabilize the
fiscal deficit at around 2.5% of GDP.

19
COP FX weakness complicates monetary policy outlook
Brendan Hurley Since our last FX Compass, published 21 October, the COP
bhurley@santander.us has been the second-worst performing Latam currency, after
(+1) 212 350 0733 the MXN, having depreciated by 7.8%, with 7.2% of this since
the US election on 8 November. After Brazil, Colombia is the
market where participants were expecting the greatest amount
of policy easing over 2017, and the rise in core yields is
causing a reconsideration of the monetary policy path in
Colombia.
At their October policy meeting, BanRep left rates unchanged
at 7.75%, as expected, and revised down their growth
forecasts for 2016 and 2017. For 2016, they lowered their
Chart 37: Activity Decelerating growth forecast from 2.3% to 2% and from 2.35% to 2% for
8% Monthly Activity Indicator 8% 2017. In the post-meeting press conference, BanRep stated
7% 7% that nominal rates would remain high until the inflation
6% 6%
convergence to 4% by the end of 2017 was totally certain.
5% 5% The discussion of when to lower the nominal policy rate was
4% 4% timely, in that inflation has been plunging, having reached
3% 3%
6.48% in October from 8.97% in July. 83% of the drop in
inflation has been caused by the fall in food prices, which has
2% 2%
happened in the context of decelerating high-frequency activity
1% 1%
GDP yoy Monthly Activity Indicator indicators. On the back of this drop in inflation, the market
0% 0% moved to price rate cuts from BanRep, starting as early as
Dec-11
Mar-12
May-12

Nov-12

Apr-13

Oct-14

Apr-15

May-16
Jan-13

Jul-13

Dec-13

Dec-15
Feb-16
Sep-13

Mar-14
May-14

Jan-15

Jun-15
Sep-15
Aug-12

Aug-14

Jul-16

December and for as much as 175bp in 2017 and 75bp in

Source: DANE
Chart 38: Previous cutting cycles
Source: Santander, Central Bank of Colombia
2018.
However, after the post-US election depreciation of the COP,
the market is now pricing in a more modest cutting cycle,
starting in January, for a total of 140bp in 2017 to reach 6.25%
by that year-end, and then remaining on hold throughout 2018.
The re-pricing is a reflection of doubts over a cutting cycle in
the midst of FX weakness, along with possible funding
pressure and financial market volatility should interest rates
continue to climb in the US.
However, assuming inflation convergence in 2017, and no
sudden stop in financial flows, the BanRep cutting cycle that is
currently envisaged looks very modest. In 2010 and again in
2013, BanRep brought the real policy rate into deeply
expansionary territory, -0.30% in 2010 and 0.60% in 2013. The
current level of growth looks worse than that prevailing during
the 2013 cutting cycle. Therefore, it seems fair to expect that
the nominal policy rate can be taken below the 6.25% mark in
order to generate a further drop in the real policy rate to a
range that was previously associated with the extant level of
growth. In fact, based on the previous cycle, we believe we
could see the policy rate dip below 5% in the next two years.
The main risk to this view is inflation failing to converge as
quickly as expected, forcing BanRep to leave the real policy
rate above the level that would normally be associated with
below-trend growth. Therefore, it will be important to monitor
the depreciation of the COP moving into year-end for the
possibility of pass-through into the inflation basket, which
would complicate BanReps ability to embark on a robust
cutting cycle.

20
ARS Weathering the storm but still running from behind
Nicolas Kohn After a fairly stable path since the end of August, the shake-
nicolas.kohn@santandergcb.com up in global markets following the US elections on November
(+44) 20775 66633 8 led the peso to trade at levels not seen since last March.
The peso lost more than 4% against the US dollar to
USDARS 15.59 between November 8 to 14. The move in the
ARS was more contained than back in June, when the UK
voted to leave the EU. In a similar timespan back in June,
the ARS weakened close to 9.0% against the greenback.
When compared to Latam peers, the peso move since the
US elections has been one of the most contained, only
outperformed by the PEN. That does not bode well for the
peso in real terms as the BRL depreciation considering that
Chart 39: Still pending a catch-up
Brazil is Argentinas main trading partner more than double
110.0 that of the peso.
105.0
Even though the ARS has been the worst performer in the
100.0 EM FX space this year, with a 20% loss against the US
95.0 dollar, high inflation, pushed by the normalization in
90.0 regulated prices, prevented the peso from catching up in real
terms. The BRLs 15% appreciation against the greenback
85.0
alleviated Argentinas competitiveness this year, a picture
80.0 that is not shared when the bilateral real exchange rate is
75.0 compared to the US, Europe and China, top destinations for
17-Dec-15
07-Jan-16
28-Jan-16
18-Feb-16
10-Mar-16
31-Mar-16
21-Apr-16
12-May-16
02-Jun-16
23-Jun-16
14-Jul-16
04-Aug-16
25-Aug-16
15-Sep-16
06-Oct-16
27-Oct-16
17-Nov-16

Argentine exports. Despite the 10% real appreciation against

the BRL, the ARS is still down 6% in multilateral terms this
year.
MRER RER RER RER RER
Brasil US China EU As we move closer to year-end, the tax amnesty should get
Multilateral and bilateral real exchange rates on a daily basis more traction, something that may temporarily create
indexed to Dec 31 = 100. Source: Central Bank of Argentina appreciation pressures for the peso. As the dynamic of the
and Santander amnesty for local assets showed, tax payers decided to opt
for the amnesty more actively as the deadline approached.
The money that was declared locally hovered around a solid
Chart 40: Toning down the hawkishness USD 8.0bn, a rather small amount if compared to the
39
estimated USD 100bn (by some market observers) of assets
being held offshore and that could get into the amnesty.
37

35 On the other side, and amid activity that is not yet showing
33 signs of recovery, the Central Banks change in stance on
monetary policy could compensate part of the appreciation
%

31
pressure that may come from the amnesty. In its policy
29
decision on November 15, the CB decided to unexpectedly
27
cut the monetary policy rate by 50bp to 25.75%, after a 50bp
25
cut in the preceding meeting. The CB was keeping a hawkish
16-Dec-15
6-Jan-16
27-Jan-16
17-Feb-16
9-Mar-16
30-Mar-16
20-Apr-16
11-May-16
1-Jun-16
22-Jun-16
13-Jul-16
3-Aug-16
24-Aug-16
14-Sep-16
5-Oct-16
26-Oct-16
16-Nov-16

rhetoric on the back of inflation expectations being outside

the target band for 2017, the first year of full implementation
Monetary Policy Rate of the inflation targeting regime. Inflation expectations have
Source: Central Bank of Argentina and Santander
not materially improved in the last few months and now stand
at 19.7%, almost 3pp higher than the upper bound of 17%.
Although it is early to hold that the CB will rather adopt a
dovish stance with regards to monetary policy going forward,
we see higher chances of the CB toning down its hawkish
approach to help activity in the short term. The latter has not
been picking up as expected and an election year is coming.
With the ARS still being an important anchor for inflation
expectations, we would not expect to see the CB cutting
aggressively if the peso starts to weakens significantly.

21
CEE FX: Main Themes
Currency View Main Themes

Our forecast for December has already materialized in mid-

November. We do not expect the zlotys depreciation vs the euro to
PLN Neutral continue, but both external factors (December Fed rate hike, shaky
global market sentiment) and internal issues (economic growth
below expectations, lower retirement age) should limit the scope for
the zlotys recovery.

The Czech koruna was quite immune to global risk aversion after
CZK Neutral Trump's victory in the US presidential elections. We still expect
EUR/CZK to remain near its floor.

The forint depreciated as Donald Trump was announced the winner

HUF Neutral of the US presidential race. We keep our forecasts unchanged as a
weaker economic outlook and risk for more monetary policy easing
could keep EUR/HUF high in the short term.

USD/RUB jumped temporarily above 66 from 63 on a correction of

RUB Bearish oil prices and the dollars strengthening worldwide. We keep our
year-end target of 70 unchanged, as we see risk of a downward
move in oil prices after the recent rally.

22
PLN Little room for recovery
Marcin Sulewski Last month we titled the PLN section Let the depreciation
marcin.sulewski@bzwbk.pl begin and repeated that we still expect EUR/PLN to rise
(+48) 22 534 1884 to 4.40 later in the year. This call proved correct as early
November saw the zlotys sharp depreciation in response
to the result of the US presidential elections.
Our forecast for December (4.40) has already materialized
in mid-November. We do not expect the zlotys depreciation
Chart 41: EUR/PLN and Polish 10Y bond yield vs the euro to continue, but both external factors (December
4.50 3.8 Fed rate hike, shaky global market sentiment) and internal
4.44 3.6 issues (economic growth below expectations, lower
4.38 3.4 retirement age) should limit the scope for the zlotys recovery.
4.32 3.2 Also, in November EUR/PLN was moving closely with
4.26 3.0 bond yields. We think that after some recovery Polish debt
could again come under pressure (among other reasons,
4.20 2.8
due to the outlook for higher Fed rates), and this could
4.14 2.6 again weigh on the zloty.
4.08 2.4
EURPLN According to the flash estimate, GDP growth in 3Q16
4.02 10Y PL (rhs) 2.2 reached 2.5% y/y, well below market consensus. We still
3.96 2.0 do not know the breakdown of this growth, but we suspect
Jun 15

Jun 16
Dec 15

Feb 16
Apr 15

Oct 15

Apr 16

Oct 16
Aug 15

Aug 16

that three effects could be responsible for the lower-than-

expected reading: (1) deeper fall in investments; (2)
weaker-than-expected improvement in private
Source: Reuters, Bank Zachodni WBK. consumption, despite new child subsidies; and (3) revision
of the data for 2015 (higher base effect).
Overall, this piece of news on the Polish economy
suggests that the slowdown is more severe than expected.
Moreover, 4Q may not be any better if private consumption
and investments do not recover sharply. Another wave of
downward revisions of GDP growth forecasts for Poland
may be coming.
The issue of Polands rating has recently receded into the
background, but this could again attract market attention
after the lower house of the Polish Parliament approved
the bill prepared by President Andrzej Duda lowering the
retirement age. Now the bill will go to the Senate and is
expected to come into force in October 2017. The
government estimated that the costs of a lower retirement
age will amount to PLN2bn in 2017 (funds for this are
already included in next years budget) and PLN10bn in
2018. The costs will rise substantially in the following
years. In our view, this decision will have negative
consequences for the economy on many levels, including:
(1) high fiscal costs; (2) a lower active population; and (3)
lower future pensions.
Moodys rating agency said that lowering the retirement
age has a negative impact on Polands rating as it hurts
public finances, generates drag on economic growth and
deteriorates further credibility of Polish politics. Fitch
Ratings said that the lowering of the retirement age and
slower GDP growth entail risk for Polands fiscal outlook.
The next date of Polands rating review by Moodys is
unknown, but S&P will update its assessment in early
December and Fitch in the first half of January.

23
CZK Immune to global factors
Agnieszka Decewicz The Czech koruna was quite immune to global risk aversion
agnieszka.decewicz@bzwbk.pl after Trump's victory in the US Presidential elections, and
(+48) 22 534 1886 EUR/CZK has remained slightly above 27.0.
The Czech National Bank (CNB) kept its monetary policy
Chart 42: EUR/CZK unchanged in November, in line with expectations. The
28.5 CNB presented its new economic forecasts with the
assumption that the exchange rate will be used as a
28.0
monetary policy instrument until mid-2017. According to the
27.5 forecasts, Czech GDP should rise 2.8% y/y in 2016 (vs
2.4% y/y previously expected) and by 2.9% y/y in 2017-18
27.0 (down from 3.0% y/y). The CNB stressed that the slowdown
in both government and corporate investment activity co-
26.5
financed with EU funds is only temporary.
26.0 In our view, despite the slightly lower-than-expected 3Q16
GDP growth, there is no change in the economic story, with
25.5
private consumption and exports remaining the main
25.0 engines for growth. The CNB revised the CPI path lower in
2016-18 but still expects headline inflation to rise above the
Jan 16
Jan 13

Jan 14

Jan 15

Jul 15
Apr 13
Jul 13
Oct 13

Apr 14
Jul 14
Oct 14

Apr 15

Oct 15

Apr 16
Jul 16
Oct 16

2% y/y target. The CNB assumes stable monetary

conditions in the coming months; however, the banks
Source: Bloomberg, CNB, Bank Zachodni WBK.
governor, Jiri Rusnok, stated that the committee does not
rule out introducing negative rates as a monetary policy tool
but do not see them making a fundamental contribution to
monetary policy.

HUF Risks are still there

Marcin Sulewski In October we wrote that EUR/HUF could rise to 310 due to
marcin.sulewski@bzwbk.pl global factors, and this was actually the case when the
(+48) 22 534 1884 forint depreciated as Donald Trump was announced the
winner of the US presidential race. We are leaving our
Chart 43: EUR/HUF forecasts unchanged, as a weaker economic outlook and
risk for more monetary policy easing could keep EUR/HUF
325
high in the short term.
320 Next to the sell-off on the emerging markets, monetary
policy easing in Hungary put additional pressure on the
315 forint. In late October, the Hungarian Central Bank (MNB)
cut the overnight lending rate by 10bp to 1.09% and
310 decided on another 15bp cut in late November. Both
decisions surprised the market and weighed on the forint.
305
The MNB said that the monetary policy could be eased
300 further if needed. The most recent decisions show that the
bank has started to adopt somewhat non-standard
295 measures like cutting the amount of deposits that could be
parked at the central bank (September) or cutting the
Apr-15

Jul-15

Oct-15

Apr-16

Jul-16

Oct-16
Jan-15

Jan-16

lending rate (in October and November). Recent data on

the economic activity in Hungary disappointed (in
Source: Bloomberg, Bank Zachodni WBK September industrial output contracted the most in annual
terms since November 2012), and GDP growth decelerated
in 3Q to 2.0% from 2.8% in 2Q, according to the flash
estimate.

24
RUB Still oil driven
Marcin Sulewski USD/RUB jumped temporarily above 66 from the 63
marcin.sulewski@bzwbk.pl seen in late October on a correction of oil prices and the
(+48) 22 534 1884 dollars strengthening worldwide. We are leaving our
year-end target unchanged at 70 as we see risk for a
downward move in oil prices after the recent rally.
An OPEC meeting is scheduled for the end of
November, and the market is pricing in that oil exporters
Chart 44: USD/RUB and Brent oil price will finally decide to freeze/cut output. In mid-November,
85 20 President Vladimir Putin said that Russia could freeze
80 its oil output at the current level, boosting expectations
30
for an agreement to be reached. Since bottoming out
75
40 earlier in November, the Brent oil price has already risen
70 15%, with the price reaching two standard deviations
65 50 from its 20- and 30-day moving average. We think that
60 the market has already priced in much of the expected
60
OPEC agreement, and, after the recent rise in oil prices,
55
70 a correction could take place when it is finally delivered.
50 The same would obviously happen if no agreement were
USD/RUB 80
45 reached.
Brent (rhs, reversed scale)
40 90 In late October, the Central Bank of Russia (CBR) left
Jun 15

Jun 16
Dec 14

Dec 15
Feb 15

Feb 16
Oct 14

Apr 15

Oct 15

Apr 16

Oct 16
Aug 15

Aug 16

interest rates unchanged, with the main rate at 10%, in

line with the market consensus. The bank said that rates
could stay unchanged for the remainder of the year and
Source: Bloomberg, Bank Zachodni WBK
go down in 1Q17 or 2Q17. This was in line with the
earlier statements. The CBR still sees risk that its 4%
inflation target will not be met at the end of 2017, which
warrants a cautious approach in easing the monetary
policy. In mid-November, central bank governor Elvira
Nabiullina said that monetary policy should remain
moderately tight as households inflation expectations
remain high.
The last bunch of macro data on the Russian economy
was somewhat of a mixed bag. On the one hand,
industrial output for October surprised slightly to the
upside as it fell only -0.2% y/y (vs -0.8% y/y in
September) and manufacturing PMI jumped to 52.4pts
from 51.1pts a month earlier. On the other hand,
Octobers real retail sales contracted more than
expected (-4.4% y/y vs -3.6% y/y in September) and real
wages grew less than forecasted (2.0% y/y vs
consensus at 2.4% y/y). Last month we stated that it had
only been the statistical low base effect that led to a rise
in annual dynamics for industrial output or retail sales,
and nothing has changed on this front since then. Only
the manufacturing PMI is sending more optimistic
signals that need to be confirmed in hard data.

25
G10 FX: IMM Speculative Positioning

Speculators increased their net long USD composite position Stuart Bennett
in the week ended 15 November. The USD Index may have stuart.bennett@santandergcb.com
surged since the US Presidential Election result, on 9 November, (+44) 20 7756 4136
but it had already been rising since mid-August. The USD
Michael Flisher
composite position has followed a similar trend, climbing to a net
michael.flisher@santandergcb.com
long 221k contracts, from just 69k contracts at the end of August.
(+44) 20 7756 5799
Net short EUR position continues to rise. While the current
119k contracts is slightly below the net short position two weeks IMM commitment of traders
ago (137k contracts), the November levels are at their highest report: USD composite position
since January. USD strength, Decembers ECB meeting, and
various political risks in the Eurozone are likely to keep this EUR 500 102
position notably short in the coming weeks. 400
100
300
The net long JPY position has fallen to just 20k contracts, 98
200
from 37k in mid-October and over 60k in August, following the JPY
100 96
move lower since the US Presidential election.
0
The net short CHF position has grown significantly during -100
94
the past two months, climbing to 22k contracts, from 16k in -200 92
October, after a fairly neutral position throughout the summer. Nov-15 Mar-16 Jul-16 Nov-16
Speculators retained a large net short GBP position, at 80k Net Speculative Contracts ('000s)
contracts, but this is now off its 4 October high of 97k contracts. USD index, rhs

Net Speculative Contracts ('000s)*

15-Nov-16 18-Oct-16 4w chg YtD chg -150 -100 -50 0 50

USD*** 221.2 195.4 25.8 94.3 EUR
EUR -119.2 -109.3 -9.9 19.7
GBP
GBP -80.3 -91.6 11.2 -48.4
JPY
JPY 20.7 37.0 -16.3 -35.8
CHF
CHF -22.2 -16.4 -5.8 -9.8
AUD 41.5 30.0 11.5 -5.0 AUD
NZD 15-Nov-16
NZD 2.0 -0.2 2.2 -0.4
18-Oct-16
CAD -18.6 -14.3 -4.3 4.8 CAD

Net Speculative Contracts as % of Open Interest**

15-Nov-16 18-Oct-16 4w chg YtD chg -100% -50% 0% 50% 100%

USD*** 21% 18% 3% 2%
EUR
EUR -33% -30% -3% 30%
GBP
GBP -43% -47% 4% -6%
JPY
JPY 18% 33% -15% -45%
CHF
CHF -61% -31% -30% 1%
AUD 36% 23% 14% -13% AUD

NZD 3% 0% 3% -15% NZD 15-Nov-16

CAD -21% -23% 2% 8% CAD 18-Oct-16

Sources: CFTC, Bloomberg, Santander. Note: *Net Speculative Contracts = Long non-commercial traders contracts minus short non-commercial traders
contracts, **Open Interest = The total number of outstanding long and short futures contracts, ***USD composite index = USD composite index uses AUD, CAD,
CHF, EUR, GBP, JPY, NZD and MXN IMM positioning to arrive at an aggregate USD position.

26
 G10 FX: IMM commitment of traders report

EUR/USD USD/CAD USD/JPY

0 1.16 25 1.25 100 95

100
1.30 50
-50 0 105
1.12
1.35 110
-100 -25 0
1.40 115
1.08
-150 -50 -50 120
1.45
125
-200 1.04 -75 1.50 -100 130
Nov-15 Mar-16 Jul-16 Nov-16 Nov-15 Mar-16 Jul-16 Nov-16 Nov-15 Mar-16 Jul-16 Nov-16

Net Speculative Contracts ('000s) Net Speculative Contracts ('000s) Net Speculative Contracts ('000s)
EUR/USD, rhs USD/CAD, rhs, rev USD/JPY, rhs, rev

USD/CHF
GBP/USD AUD/USD

75 0.80 10 0.95
0 1.55
1.50 50
-20 0
1.45 25 0.75 0.98
-40 1.40
0 -10
-60 1.35
-25 0.70 1.01
1.30 -20
-80 -50
1.25
-100 1.20 -75 0.65 -30 1.04
Nov-15 Mar-16 Jul-16 Nov-16 Nov-15 Mar-16 Jul-16 Nov-16 Nov-15 Mar-16 Jul-16 Nov-16

Net Speculative Contracts ('000s) Net Speculative Contracts ('000s)

Net Speculative Contracts ('000s)
GBP/USD, rhs AUD/USD, rhs USD/CHF, rhs, rev

EUR/GBP NZD/USD USD minus MXN

50 0.92 15 0.76 400 104

0.88 10 300 102
0 0.72
0.84 5 100
200
-50 0.80 0 0.68 98
100
0.76 -5 96
-100 0.64
0.72 -10 0 94
-150 0.68 -15 0.60 -100 92
Nov-15 Mar-16 Jul-16 Nov-16 Nov-15 Mar-16 Jul-16 Nov-16 Nov-15 Mar-16 Jul-16 Nov-16
Net Speculative Contracts ('000s) Net Speculative Contracts ('000s) Net Speculative Contracts ('000s)
EUR/GBP, rhs NZD/USD, rhs Trade-weighted USD, rhs

Sources: CFTC, Bloomberg and Santander.

27
Latin America FX: Positioning indexes (Z-scores)
USD/BRL Z-score USD/BRL
Net offshore (USD bn) 12 wk MA BRL (rhs) Z-score (Offshore USD/BRL longs) 10-90%
50 4.5 2
USD longs
40 4.0
1
30 3.5
20 3.0 0
10 2.5
-1
0 2.0
-10 1.5 -2
Dec 12 Dec 13 Dec 14 Dec 15 Dec 12 Dec 13 Dec 14 Dec 15

USD/MXN Z-score USD/MXN

Net speculative (% OI) 12w MA % MXN (rhs) Z-score (Spec USD/MXN longs) 10-90%
80% 22 2
21 USD longs
60%
40% 20 1
19
20% 18 0
0% 17
-20% 16
15 -1
-40%
14
-60% 13 -2
-80% 12
-100% 11 -3
Dec 12 Dec 13 Dec 14 Dec 15 Dec 12 Dec 13 Dec 14 Dec 15

USD/CLP Z-score USD/CLP

Foreign NDF (USD bn) 4wk MA % CLP (rhs) Z-score (Offshore USD/CLP longs) 10-90%
20 750 3
700 USD longs
15 2
650
10 1
600
5 0
550
0 500 -1

-5 450 -2
Nov 12 Nov 13 Nov 14 Nov 15 Nov 16 Nov 12 Nov 13 Nov 14 Nov 15 Nov 16

USD/PEN Z-score USD/PEN

Foreign NDF (USD bn) 3m MA (USD bn) PEN (rhs) Z-score (Offshore USD/PEN longs) 10-90%
12 3.6 3
10 USD longs
3.4
8 2
6 3.2
4 3.0 1
2 2.8
0 0
-2 2.6
-4 2.4 -1
Nov 12 Nov 13 Nov 14 Nov 15 Nov 16 Nov 12 Nov 13 Nov 14 Nov 15 Nov 16

Sources: BM&F, CFTC, BCCh, BCRP, Bloomberg and Santander.

28
 Euro Interest rate forecasts
Government Bond yield Forecasts Swap rate forecasts

Germany Current 4Q16 1Q17 2Q17 3Q17 Euro Current 4Q16 1Q17 2Q17 3Q17
ECB Depo -0.40 -0.40 -0.40 -0.40 -0.40 ECB Depo -0.40 -0.40 -0.40 -0.40 -0.40
3m -0.79 -0.70 -0.60 -0.55 -0.50 3m -0.31 -0.30 -0.20 -0.20 -0.15
2y -0.72 -0.60 -0.50 -0.40 -0.30 2y -0.15 -0.15 -0.10 -0.05 0.00
5y -0.42 -0.35 -0.25 -0.10 0.00 5y 0.09 0.10 0.20 0.30 0.40
10y 0.24 0.30 0.45 0.60 0.80 10y 0.64 0.65 0.80 0.95 1.15
30y 0.87 0.90 1.05 1.25 1.40 30y 1.16 1.15 1.30 1.50 1.65

US Interest rate forecasts

Government Bond yield Forecasts Swap rate forecasts

US Current 4Q16 1Q17 2Q17 3Q17 US Current 4Q16 1Q17 2Q17 3Q17
FOMC 0.50 0.75 0.75 1.00 1.00 FOMC 0.50 0.75 0.75 1.00 1.00
3m 0.49 0.60 0.70 0.95 1.05 3m 0.93 0.95 1.00 1.20 1.30
2y 1.12 1.05 1.25 1.45 1.60 2y 1.32 1.30 1.50 1.70 1.85
5y 1.83 1.70 1.90 2.10 2.30 5y 1.81 1.75 1.95 2.15 2.35
10y 2.35 2.25 2.50 2.70 2.90 10y 2.18 2.10 2.35 2.55 2.75
30y 3.02 2.90 3.05 3.20 3.35 30y 2.44 2.40 2.60 2.80 3.00

UK Interest rate forecasts

Government Bond yield Forecasts Swap rate forecasts

UK Current 4Q16 1Q17 2Q17 3Q17 UK Current 4Q16 1Q17 2Q17 3Q17
MPC 0.25 0.25 0.25 0.10 0.10 MPC 0.25 0.25 0.25 0.10 0.10
3m 0.31 0.25 0.30 0.00 0.05 3m 0.40 0.40 0.45 0.15 0.15
2y 0.14 0.20 0.30 0.00 0.05 2y 0.66 0.60 0.70 0.35 0.40
5y 0.65 0.60 1.00 0.40 0.50 5y 0.97 0.90 1.20 0.70 0.80
10y 1.43 1.30 1.60 1.00 1.30 10y 1.37 1.40 1.50 1.10 1.40
30y 2.07 2.00 2.50 1.75 2.00 30y 1.57 1.60 2.00 1.45 1.70

Brazil/Mexico Interest rate forecasts

Government Bond yield Government Bond yield

BZ Current 4Q16 1Q17 2Q17 3Q17 MX Current 4Q16 1Q17 2Q17 3Q17
SELIC 14.00 13.50 12.50 11.50 10.50 Banxico fondeo 5.25 5.50 5.50 5.75 5.75
NTNF Jan' 19s 11.63 11.00 10.50 10.50 10.00 Mbono Jun. '21s 7.04 7.00 6.90 6.90 7.00
NTNF Jan.' 25s 11.86 11.50 11.50 11.00 11.50 MBono Dec. '24s 7.36 7.20 7.10 7.10 7.20

Chile/Colombia Interest rate forecasts

Government Bond yield Government Bond yield

CH Current 4Q16 1Q17 2Q17 3Q17 CO Current 4Q16 1Q17 2Q17 3Q17
BCCh TPM 3.50 3.50 3.50 3.25 3.25 Banrep O/N 7.75 7.75 7.25 6.75 6.25
BCP 5Y 4.27 4.25 4.00 3.85 3.80 TES 5Y 7.15 7.10 6.80 6.40 6.00
BCP 10Y 4.60 4.55 4.40 4.30 4.20 TES 10Y 7.55 7.75 7.60 7.30 7.00

Source: Santander. Note: Current levels as at 24-November-2016.

29
Forecasts and returns vs. forwards and consensus (% non-annualised)
3M 6M 9M 3M 6M 9M
EUR/USD 1.06 1.08 1.10 USD/BRL 3.50 3.58 3.65
vs.forward 0.6 1.9 3.8 vs.forward 3.3 5.5 7.7
vs.consensus forecast -0.6 0.6 1.5 vs.consensus forecast 4.3 4.9 7.5

USD/JPY 105.33 105.33 107.33 USD/MXN 20.2 20.6 20.8

vs.forward -6.9 -6.9 -5.1 vs.forward -2.5 -0.7 0.6
vs.consensus forecast -1.6 -3.4 -2.0 vs.consensus forecast 4.0 6.3 7.5

GBP/USD 1.20 1.20 1.21 USD/CLP 686 687 682

vs.forward -3.5 -3.5 -2.4 vs.forward 0.9 0.9 0.2
vs.consensus forecast -1.6 -0.8 -1.4 vs.consensus forecast 0.7 -0.3 -0.8

USD/CHF 1.03 1.02 1.01 USD/COP 3267 3300 3333

vs.forward 1.5 0.6 -0.7 vs.forward 2.9 4.0 5.0
vs.consensus forecast 2.2 0.2 -1.1 vs.consensus forecast 4.3 4.6 4.9

USD/CAD 1.32 1.29 1.26 USD/ARS 16.47 17.18 17.94

vs.forward -2.6 -4.6 -6.8 vs.forward 5.9 15.4 15.4
vs.consensus forecast -1.7 -4.4 -6.0 vs.consensus forecast 1.3 3.3 4.7

AUD/USD 0.73 0.72 0.71 EUR/BRL 3.73 3.85 4.01

vs.forward -1.6 -2.5 -3.4 vs.forward 4.1 7.7 12.0
vs.consensus forecast -1.8 -1.4 -2.3 vs.consensus forecast 3.6 5.5 9.1

NZD/USD 0.69 0.68 0.68 EUR/MXN 21.5 22.1 22.8

vs.forward -0.9 -2.3 -2.8 vs.forward -1.9 1.2 4.4
vs.consensus forecast -1.0 -1.0 -1.4 vs.consensus forecast 3.3 6.9 9.2

USD/NOK 8.5 8.3 8.1 EUR/CLP 730 739 748

vs.forward -1.7 -3.6 -6.5 vs.forward 1.7 3.0 4.1
vs.consensus forecast 1.0 -0.8 -1.9 vs.consensus forecast 0.1 0.3 0.8

USD/SEK 8.9 8.7 8.4 EUR/COP 3474 3553 3656

vs.forward -4.1 -6.2 -9.0 vs.forward 3.8 6.1 9.2
vs.consensus forecast -1.0 -2.8 -4.4 vs.consensus forecast 3.7 5.2 6.5

EUR/GBP 0.89 0.90 0.90 EUR/ARS 17.5 18.5 19.7

vs.forward 4.2 5.5 6.3 vs.forward 6.7 12.7 19.8
vs.consensus forecast 0.7 2.0 2.7 vs.consensus forecast 0.7 4.0 6.3

EUR/JPY 112 113 118

vs.forward -6.3 -5.1 -1.5
vs.consensus forecast -2.6 -2.2 1.5

EUR/CHF 1.10 1.10 1.11

vs.forward 2.1 2.4 3.0
vs.consensus forecast 1.5 1.9 0.6
Direct returns of long currency positions against the USD (or EUR), in %. Equivalent tenors for forwards. FX forecasts interpolated from end-of-
quarter forecasts. Sources: Bloomberg and Santander.

30
G10 FX: Spot and forward rates

EUR/USD GBP/USD USD/JPY EUR/JPY GBP/JPY USD/CHF EUR/CHF GBP/CHF

Spot 1.0561 1.2432 113.2 119.6 140.8 1.0169 1.0739 1.2641
1M 1.0573 1.2439 113.1 119.6 140.7 1.0154 1.0735 1.2629
2M 1.0596 1.2454 112.8 119.5 140.5 1.0127 1.0730 1.2611
3M 1.0610 1.2462 112.7 119.6 140.4 1.0109 1.0725 1.2597
6M 1.0659 1.2489 112.2 119.6 140.1 1.0049 1.0710 1.2549
9M 1.0709 1.2517 111.6 119.5 139.7 0.9988 1.0695 1.2499
12M 1.0764 1.2546 111.1 119.5 139.3 0.9923 1.0680 1.2449

ATMf vol.

EUR/USD GBP/USD USD/JPY EUR/JPY GBP/JPY USD/CHF EUR/CHF GBP/CHF

1W 9.6% 9.4% 13.7% 9.4% 13.9% 8.3% 5.4% 10.0%
1M 10.9% 10.3% 13.4% 11.7% 14.5% 9.8% 6.4% 10.9%
2M 10.0% 9.9% 12.4% 11.0% 13.4% 9.1% 6.4% 10.1%
3M 9.9% 10.3% 12.5% 11.2% 13.7% 9.3% 6.5% 10.2%
6M 10.7% 10.9% 12.7% 12.4% 14.2% 10.0% 7.4% 11.0%
9M 10.5% 11.2% 12.4% 12.4% 14.3% 10.0% 7.6% 11.1%
12M 10.4% 11.5% 12.3% 12.4% 14.4% 10.0% 7.7% 11.4%

Implied/realized vol. ratio

EUR/USD GBP/USD USD/JPY EUR/JPY GBP/JPY USD/CHF EUR/CHF GBP/CHF

1W 1.07 0.88 1.14 1.13 1.05 1.05 1.34 1.01
1M 1.07 0.92 0.88 1.13 0.98 0.96 1.30 1.00
2M 1.18 0.81 1.02 1.14 0.92 1.09 1.37 0.85
3M 1.27 0.93 1.09 1.21 1.01 1.18 1.47 0.94
6M 1.29 0.71 1.00 0.93 0.67 1.25 1.27 0.74
9M 1.25 0.83 1.04 1.00 0.76 1.23 1.37 0.84
12M 1.17 0.91 1.06 1.03 0.82 1.16 1.37 0.90

25-delta risk reversals

EUR/USD GBP/USD EUR/GBP

Today 1M ago 6M ago Today 1M ago 6M ago Today 1M ago 6M ago

0.0 0.00 4.5

4.0
-0.5 -1.00
3.5
-1.0 -2.00 3.0
2.5
-1.5 -3.00 2.0
1.5
-2.0 -4.00 1.0
-2.5 -5.00 0.5
0.0
-3.0 -6.00 -0.5
1W 1M 2M 3M 6M 9M 1Y 1W 1M 2M 3M 6M 9M 1Y 1W 1M 2M 3M 6M 9M 1Y

Sources: Bloomberg and Santander.

31
Latin America FX: Spot and forward rates

USD/ARS USD/BRL USD/CLP USD/COP USD/MXN USD/PEN

Spot 15.545 3.390 680.170 3173.950 20.723 3.423
1M 15.700 3.424 681.865 3194.500 20.799 3.438
2M 16.100 3.456 683.275 3207.500 20.895 3.452
3M 16.295 3.483 684.955 3222.500 20.973 3.464
6M 17.000 3.565 689.905 3263.000 21.247 3.504
9M 17.450 3.668 694.675 3322.660 21.533 3.534
12M 18.250 3.713 699.525 3353.000 21.836 3.573

ATMf vol.

USD/ARS USD/BRL USD/CLP USD/COP USD/MXN USD/PEN

1W - 17.27 12.77 20.33 16.06 8.58
1M 17.11 17.03 12.05 19.95 16.48 8.65
2M 19.96 16.26 11.94 19.23 15.46 8.67
3M 21.28 16.32 11.95 19.15 15.37 8.76
6M 23.16 16.37 11.90 18.74 15.23 9.03
9M 24.42 16.52 11.94 18.39 15.22 9.23
12M 25.02 16.59 11.90 18.24 15.25 9.49

Implied/realized vol. ratio

USD/ARS USD/BRL USD/CLP USD/COP USD/MXN USD/PEN

1W - 1.12 1.52 1.31 0.99 2.59
1M 1.72 0.75 1.12 1.06 0.48 1.29
2M 2.49 0.91 1.34 1.16 0.59 1.50
3M 2.69 0.95 1.21 1.13 0.68 1.46
6M 2.13 0.98 1.15 1.10 0.80 1.40
9M 2.00 0.92 1.13 1.11 0.88 1.08
12M 0.75 0.93 1.17 1.08 0.93 1.26

25-delta risk reversals

USD/BRL USD/MXN USD/CLP

24-Nov-16 6m ago 1m ago 24-Nov-16 6m ago 1m ago 24-Nov-16 6m ago 1m ago

5 4 3

4
3
2
3
2
2
1
1
1

0 0 0
1W 1M 2M 3M 6M 9M 1Y 1W 1M 2M 3M 6M 9M 1Y 1W 1M 2M 3M 6M 9M 1Y

Sources: Bloomberg and Santander.

32
 IMPORTANT DISCLOSURES
ANALYST CERTIFICATION:
The views expressed in this report accurately reflect the personal views of the undersigned analyst(s). In addition, the undersigned analyst(s) has not and
will not receive any compensation for providing a specific recommendation or view in this report: Stuart Bennett, Michael Flisher, Brendan Hurley, Juan
Pablo Cabrera, Nicolas Kohn, David Franco, Agnieszka Decewicz, Marcin Sulewski

The analysts referenced in connection with the section for which he or she is responsible may have received or will receive compensation based upon,
among other factors, the overall profitability of the Santander group, including profits derived from investment banking activities.

EXPLANATION OF THE RECOMMENDATION SYSTEM

RECOMMENDATIONS
Rating Definition
Long / Buy Appreciation of a given currency with an expected return of at least 5% in 3 months.
Short / Sell Depreciation of a given currency with an expected return of at least 5% in 3 months.
NOTE: Given the recent volatility seen in the financial markets, the recommendation definitions are only indicative until further notice.

DEFINITIONS
*Net Speculative Contracts Long non-commercial traders contracts minus short non-commercial traders contracts.
**Open Interest The total number of outstanding long and short futures contracts.
***USD composite index USD composite index uses AUD, CAD, CHF, EUR, GBP, JPY, NZD and MXN IMM
positioning to arrive at an aggregate USD position.
We generally review our FX recommendations monthly, in our regular FX Compass publication, and when market events/moves so warrant.
Comprehensive disclosures for all G-10 Rates, Macro & FX Strategy/research produced by Banco Santander, S.A. can be found on our website.

G10 Rates/FX Strategy

Antonio Villarroya Head of Macro and Strategy Research antvillarroya@gruposantander.com +34 91 257 2244
Luca Jellinek Head of Rates and FX Strategy luca.jellinek@santandergcb.com +44 20 7756 4111
Stuart Bennett Head G10 FX Strategy stuart.bennett@santandergcb.com +44 20 7756 4136
Michael Flisher G10 FX Strategist michael.flisher@santandergcb.com +44 20 7756 5799
Antonio Espasa Chief Economist aespasa@gruposantander.com +34 91 289 3313
Laura Velasco Economics laura.velasco@gruposantander.com +34 91 175 2289
Beatriz Tejero Economics beatriz.tejero@gruposantander.com +34 91 257 2410
Stuart Green UK Economics stuart.green@santandergcb.com +44 20 7756 6170
Adam Dent UK Rates Strategy adam.dent@santandergcb.com +44 20 7756 6223
Jos Mara Fernndez Rates Strategy josemariafernandezl@gruposantander.com +34 91 257 2244
Edgar da Silva Figueira Rates Strategy efda@gruposantander.com +34 91 257 2244
Latin America Research Strategy
Brendan Hurley Latam Macro, Rates & FX Strategy bhurley@santadner.us +1 212 350 0734
Juan Pablo Cabrera Latam Macro, Rates & FX Strategy jcabrera@santander.cl +56 22 320 3778
Nicolas Kohn Latam Macro, Rates & FX Strategy nicolas.kohn@santandergcb.com +44 7756 6633
Latin America Research Economics
Sergio Galvn Economist Argentina sgalvan@santanderrio.com.ar +54 11 4341 1728
Maurcio Molan Economist Brazil mmolan@santander.com.br +55 11 3012 5724
David Franco Chief Economist Mexico dafranco@santander.com.mx +52 55 5269 1932
Tatiana Pinheiro Economist Peru tatiana.pinheiro@santander.com.br +55 113012 5179
Marcela Bensin Economist Uruguay mbension@santander.com.uy +59 82 1747 5537
Central and Eastern Europe
Maciej Reluga Head CEE Macro, Rates & FX Strategy maciej.reluga@bzwbk.pl +48 22 534 1888
Agnieszka Decewicz Senior Economist BZWBK agnieszka.decewicz@bzwbk.pl +48 22 534 1886
Piotr Bielski Economist piotr.bielski@bzwbk.pl +48 22 534 1888
Marcin Sulewski Analyst BZWBK marcin.sulewski@bzwbk.pl +48 22 534 1884

IMPORTANT DISCLOSURES
This report has been prepared by Banco Santander, S.A. and is provided for information purposes only. Banco Santander, S.A. is registered in Spain and
is authorised and regulated by Banco de Espaa, Spain.
This report is issued in the United States by Santander Investment Securities Inc. (SIS), in Spain by Banco Santander, S.A., under the supervision of the
CNMV and in the United Kingdom by Banco Santander, S.A., London Branch (Santander London). SIS is registered in the United States and is a
member of FINRA. Santander London is registered in the United Kingdom (with FRN 136261, Company No. FC004459 and Branch No. BR001085), and
subject to limited regulation by the UKs Financial Conduct Authority (FCA) and Prudential Regulation Authority (PRA). SIS, Banco Santander, S.A. and
Santander London are members of Santander Group. A list of authorised legal entities within Santander Group is available upon request.
This material constitutes investment research for the purposes of the Markets in Financial Instruments Directive and as such contains an objective or
independent explanation of the matters contained in the material. Any recommendations contained in this document must not be relied upon as investment
advice based on the recipients personal circumstances. The information and opinions contained in this report have been obtained from, or are based on,
public sources believed to be reliable, but no representation or warranty, express or implied, is made that such information is accurate, complete or up to
date and it should not be relied upon as such. Neither the information nor forecast shall be taken as a representation for which Banco Santander, S.A., or
any of its legal affiliates or any of their employees incur any responsibility. Furthermore, this report does not constitute a prospectus or other offering
document or an offer or solicitation to buy or sell any of the currencies referred to in this report. Information and opinions contained in the report are
published for the assistance of recipients, but are not to be relied upon as authoritative or taken in substitution for the exercise of judgement by any
recipient, are subject to change without notice and not intended to provide the sole basis of any evaluation of the instruments discussed herein.
This report may include forward looking statements about the objectives and strategies of members of Grupo Santander. Such forward looking statements
are inherently subject to uncertainties beyond the control of the members of Grupo Santander including, but not limited to, economic and financial
conditions globally, regulatory development, technological developments and competition. Any reference to past performance should not be taken as an
indication of future performance.
This report is for the use of intended recipients only and may not be reproduced (in whole or in part) or delivered or transmitted to any other person without
the prior written consent of Banco Santander, S.A.. Investors should seek financial advice regarding the appropriateness of investing in financial
instruments and implementing investment strategies discussed or recommended in this report and should understand that statements regarding future
prospects may not be realised. Investors should note that the manner in which any strategies set out in this report are implemented may cause exposure to
significant risk. Investors should carefully consider their ability to bear such risks through consultation with their legal, accounting and / or other advisors.
The material in this research report is general information intended for recipients who understand the risks associated with investment. It does not take into
account whether an investment, course of action, or associated risks are suitable for the recipient. Furthermore, this document is intended to be used by
market professionals (eligible counterparties and professional clients but not retail clients). Retail clients must not rely on this document.
To the fullest extent permitted by law, no Santander group company accepts any liability whatsoever (including in negligence) for any direct or
consequential loss arising from any use of or reliance on material contained in this report. All estimates and opinions included in this report are made as of
the date of this report. Unless otherwise indicated in this report there is no intention to update this report.
Banco Santander, S.A. and its legal affiliates (trading as Santander and/or Santander Global Corporate Banking) may from time to time take positions in
the currencies mentioned herein as principal or agent. Banco Santander, S.A. and its legal affiliates may have a financial interest in the currencies
mentioned in this report, including a long or short position and/or options, futures or other derivative instruments based thereon, or vice versa.
Banco Santander, S.A. and/or a company in the Santander group is a market maker or a liquidity provider for EUR/GBP, EUR/JPY, EUR/PLN and
EUR/USD.

ADDITIONAL INFORMATION
Banco Santander, S.A. or any of its affiliates, salespeople, traders and other professionals may provide oral or written market commentary or trading
strategies to its clients that reflect opinions that are contrary to the opinions expressed herein. Furthermore, Banco Santander, S.A. or any of its affiliates
trading and investment businesses may make investment decisions that are inconsistent with the recommendations expressed herein.
No part of this report may be copied, conveyed, distributed or furnished to any person or entity in any country (or persons or entities in the same) in which
its distribution is prohibited by law. Failure to comply with these restrictions may breach the laws of the relevant jurisdiction.
Investment research issued by Banco Santander, S.A. is prepared in accordance with the Santander group policies for managing conflicts of interest. In
relation to the production of investment research, Banco Santander, S.A. and its affiliates have internal rules of conduct that contain, among other things,
procedures to prevent conflicts of interest including Chinese Walls and, where appropriate, establishing specific restrictions on research activity.
Information concerning the management of conflicts of interest and the internal rules of conduct are available on request from Banco Santander, S.A..

COUNTRY & REGION SPECIFIC DISCLOSURES

U.K. and European Economic Area (EEA): Unless specified to the contrary, issued and approved for distribution in the U.K. and the EEA by
Banco Santander, S.A. Investment research issued by Banco Santander, S.A. has been prepared in accordance with Grupo Santanders policies for
managing conflicts of interest arising as a result of publication and distribution of investment research. Many European regulators require that a firm
establish, implement and maintain such a policy. This report has been issued in the U.K. only to persons of a kind described in Article 19 (5), 38, 47 and
49 of the Financial Services and Markets Act 2000 (Financial Promotion) Order 2005 (all such persons being referred to as relevant persons). This
document must not be acted on or relied on by persons who are not relevant persons. Any investment or investment activity to which this document relates
is only regarded as being provided to professional investors (or equivalent) in their home jurisdiction. United States of America (US): This report is
being distributed to US persons by Santander Investment Securities Inc (SIS) or by a subsidiary or affiliate of SIS that is not registered as a US broker
dealer, to US major institutional investors only. Any US recipient of this report (other than a registered broker-dealer or a bank acting in a broker-dealer
capacity) that would like to effect any transaction in any security or issuer discussed herein should contact and place orders in the United States with the
company distributing the research, SIS at (212) 692-2550, which, without in any way limiting the foregoing, accepts responsibility (solely for purposes of
and within the meaning of Rule 15a-6 under the US Securities Exchange Act of 1934) under this report and its dissemination in the United States. US
recipients of this report should be advised that this research has been produced by a non-member affiliate of SIS and, therefore, by rule, not all disclosures
required under NASD Rule 2711 apply. Hong Kong (HK): This report is being distributed in Hong Kong by a subsidiary or affiliate of Banco Santander,
S.A. Hong Kong Branch, a branch of Banco Santander, S.A. whose head office is in Spain. The 1% ownership disclosure satisfies the requirements under
Paragraph 16.5(a) of the Hong Kong Code of Conduct for persons licensed by or registered with the Securities and Futures Commission, HK. Banco
Santander, S.A. Hong Kong Branch is regulated as a Registered Institution by the Hong Kong Monetary Authority for the conduct of Advising and Dealing
in Securities (Regulated Activity Type 4 and 1 respectively) under the Securities and Futures Ordinance. The recipient of this material must not distribute it
to any third party without the prior written consent of Banco Santander, S.A. Japan (JP): This report has been considered and distributed in Japan to
Japanese-based investors by a subsidiary or affiliate of Banco Santander, S.A. - Tokyo Representative Office, not registered as a financial instruments
firm in Japan, and to certain financial institutions defined by article 17-3, item 1 of the Financial Instruments and Exchange Law Enforcement Order. Some
of the foreign securities stated in this report are not disclosed according to the Financial Instruments and Exchange Law of Japan. There is a risk that a
loss may occur due to a change in the price of the shares in the case of share trading and that a loss may occur due to the exchange rate in the case of
foreign share trading. China (CH): This report is being distributed in China by a subsidiary or affiliate of Banco Santander, S.A. Shanghai Branch
(Santander Shanghai). Santander Shanghai or its affiliates may have a holding in any of the securities discussed in this report; for securities where the
holding is greater than 1%, the specific holding is disclosed in the Important Disclosures section above.
For further country and region specific disclosures please refer to Banco Santander, S.A.

Local Offices
Madrid Lisbon London Milan
Tel: 34-91-257-2035 Tel: 351-21-389-3400 Tel: 44-870-607-6000 Tel: 39-02-8542-09810
Fax: 34-91-257-0252 Fax: 351-21-387 0175 Fax: 44-20-7332-6909 Fax: 39-02-8606-71648
Brussels Paris Frankfurt Tokyo
Tel: 32 2 286 5447 Tel: 33 15353 7000 Tel: 49 6959 67-6403 Tel: 813-5561-0591
Fax: 32 2 230 6724 Fax: 33 15353 7060 Fax: 49 6959 67-6407 Fax: 813-5561-0580
New York Bogota Buenos Aires Caracas
Tel: 212-756-9160 Tel: 571-644-8008 Tel: 54114-341-1052 Tel: 582-401-4306
Fax: 212-407-4540 Fax: 571-592-0638 Fax: 54114-341-1226 Fax: 582-401-4219
Lima Mexico DF Santiago de Chile So Paulo
Tel: 511-215-8133 Tel: 525-629-5040 Tel: 562-336-3300 Tel: 5511-3012-5721
Fax: 511-215-8161 Fax: 525-629-5846 Fax: 562-697-3869 Fax: 5511-3012-7368

Grupo Santander . 2016. All Rights Reserved