Currency news: Commodity rout weighs on sentiment 09.12.15 Currency thought of the day: BoE still significant despite being overshadowed Today’s Treasury Events Equities: Irish Banks – Moody’s changes outlook on the system to positive 09.30 UK BoE Fin. Pol. Mins. 15.00 US Wholesale Inv. Equities: Banks – Central Bank updates on Irish bank capital requirements 20.00 NZ RBNZ announcem’t Upcoming Equity Events 10.12 Abbey - IMS

Rates and Commodites Last 1m chg % FX rates Last Indices Last 1m chg %

ECB rate 0.05 0.00 EUR/USD 1.0921 ISEQ 6,756 3.48 UK Base rate 0.50 0.00 EUR/GBP 0.7262 EUROSTOXX 3,300 -3.46 US Fed Funds 0.25 0.00 EUR/AUD 1.5178 FSTE 100 6,127 -2.68 LIBOR GBP 3M 0.58 -0.09 EUR/CAD 1.4834 S&P 500 2,064 -0.72 LIBOR USD 3M 0.48 39.72 EUR/CHF 1.0836 Top 5 Irish Equities Last 1m chg %

EURIBOR 3M -0.11 -54.80 EUR/JPY 134.0400 CRH PLC 26.92 5.42 Gold ($) 1076.79 -1.42 EUR/NZD 1.6501 Ryanair Holdings PLC 14.64 0.97 Brent oil ($) 40.66 -13.84 EUR/ZAR 15.9609 Kerry Group PLC 77.06 7.99 Natural Gas ($) 2.09 -14.86 GBP/USD 1.5038 Bank of Ireland 0.33 3.73 Copper ($) 208.65 -6.94 GBP/EUR 1.3771 Smurfit Kappa Group 23.62 -10.48

Daily Deposit Rates

EUR 1 Month Notice 1 Month 3 Months 6 Months 12 Months 0.10% 0.01% 0.05% 0.15% 0.40%

GBP 1 Month Notice 1 Month 3 Months 6 Months 12 Months 0.8% 0.40% 0.60% 0.70% 1.00%

USD 1 Month Notice 1 Month 3 Months 6 Months 12 Months 0.25% 0.10% 0.20% 0.40% 0.60%

Currency Q4'15 Q1'16 Q2'16 Q3'16 Support Resistance

EUR/USD 1.1080 1.0600 1.0800 1.1000 1.0850 1.0930 0.7000 0.6700 0.6900 0.7100 0.7245 0.7285 EUR/GBP

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Wednesday, 09 December 2015

Currency news: Commodity rout weighs on sentiment

Commodity currencies feel the pain: There’s quite a bit of head scratching going on at the moment as to what exactly is behind the recent rout in global commodity prices. Most fingers are pointing not solely to a slow-down in demand but also to the impending Fed exit from their nearly ten years of monetary stimulus. The list is lengthy; copper, iron ore, gold, silver and most importantly oil, all hitting multi year lows much in the same fashion as they hit all-time highs when the Fed piled QE programme on top of QE programme directly after the financial crisis of 2008/2009. It is easy to know that things are precarious when we hear that mining giant Anglo American is due to shed almost 65% (85k) of its 135k workforce. Commodity linked currencies such as the Australian dollar and south African rand have been feeling the pressure in recent days, but it’s the oil linked currencies that have been bearing most of the burden with the Norwegian krone and the Canadian dollar both down (vs. EUR) over 5% in less than a week.

Chinese inflation ticks up: Following on from the recent slew of soft data from China, inflation data released overnight has been one tiny bright in an otherwise dark few days. Chinese November CPI printed at +1.5% yoy (1.4% forecast). The two big Chinese equity indices (Shanghai Comp & Shanghai CSI 300) both closed out the day in the green.

Up today: A quite day ahead with the only releases of note being the release of the UK’s Financial Policy Committee’s (FPC) minutes later this morning and the Reserve Bank of New Zealand’s rate decision after hours this evening.

Currency thought of the day: BoE still significant despite being overshadowed

The Monetary Policy Committee sits tomorrow for a meeting that has been largely overlooked due to its timing, between last week’s major ECB meeting, (which caused some of the biggest one day moves in FX markets since the financial crisis) and the first Fed rate hike, expected to be announced on 16th December. While the Bank of England is not expected to hike rates any time soon, the BoE meeting is very significant for the outlook of the Pound, which finds itself on its knees against the Dollar, with the Pound worth less than $1.50 for much of the month so far. The weaker Pound has been largely caused by the increasingly dovish tones emanating from recent BoE speakers, which has pushed back expectations of the timing of the UK’s first rate hike. Economists estimate the first rate hike from the BoE to occur in Q3 2016, while markets don’t think it will occur until Q4 2016.

In a recent interview, BoE’s newest member Gertjan Vlieghe, who replaced , claimed that he was “relaxed about waiting a little longer before we start” to raise rates, and would prefer to see higher wage growth before hiking, while Carney acknowledged that the UK economy was still facing “some real headwinds” from abroad. The most ardent advocate of holding off on a rate hike has been BoE chief economist , who stated back in November that “the case for raising interest rates is still some way from being made”, and warned that a premature rate hike would increase the chances of the economy falling below critical velocity.

That said, there is already one voter for a rate hike in the MPC (Ian McCafferty, since August) and both and Kirstin Forbes are considered more hawkish in their outlook. Martin Weale has previously (unsuccessfully) called for rate hikes along with McCafferty back in Q4 2014, while, Forbes, testifying to parliament alongside Carney and Haldane, was less dovish than her colleagues, acknowledging further easing was unlikely to be necessary, and stating that the evidence for the effectiveness of Quantitative Easing was weak. Any addition to the McCafferty’s lone vote could go a long way to reverse the Pounds recent slide, but if this is absence and we see a continuation of the dovish rhetoric from Carney and Haldane, the Pound could remain on the back foot into the first quarter of 2016.

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Wednesday, 09 December 2015

Equities: Irish Banks – Moody’s changes outlook on the system to positive

Moody’s has reviewed its outlook on the Irish banking system to positive from stable. This change “reflects the rating agency’s expectation that banks’ credit fundamentals will continue to improve over the next 12-18 months, underpinned by the favourable operating environment and successful execution of the banks’ restructuring plans”.

Moody’s is positive on the banks’ home market, seeing Irish GDP increasing by 6.2% in 2015 and 4.0% in 2016. Given this favourable backdrop, the agency expects “to see a material strengthening of banks’ credit fundamentals, although these improvements come from a low base”.

Helped by low funding costs, the favourable competitive environment and increasing demand for new lending, Moody’s sees sector pre-provision profitability improving. It envisages a “gradual” increase in the cost of risk, but it will remain at “very low levels”.

Similar to the commentary provided by the Central Bank of Ireland in its Macro-Financial Review, Moody’s says that “albeit rapidly improving, asset quality still poses significant challenges to the country’s banks”. A key area of focus is very long- term arrears, which represented c. 82% of total arrears balances at end-June versus 71% a year earlier. The agency notes that “the level of foreclosures has remained at a low level, not allowing banks to realise collateral on residential lending and leaving non-performing assets on their balance sheet for a longer period of time”. Moody’s sees these factors continuing to “weigh down the ratings of domestic banks for the next two to three years”. In any event, strong internal capital generation has materially improved bank solvency, leaving the system better positioned to absorb potential losses.

Moody’s again notes the strengthened funding position of the Irish banks, while acknowledging “given that the bulk of the deleveraging process is now completed, further significant improvements in funding and liquidity are unlikely”.

Philip O’Sullivan │Chief Economist│+353 1 421 0496│[email protected]

Equities: Banks – Central Bank updates on Irish bank capital requirements

The Central Bank of Ireland (“CBI”) this morning published its biannual Macro-Financial Review together with an update on bank capital requirements. The CBI has set the countercyclical capital buffer (“CCYB”), which is due to come into effect on 1st January 2016 for Irish banks, at 0%. This decision will no doubt be welcomed by the Irish banking sector and reflects the CBI’s concerns regarding the sluggish pace of new lending growth in the Irish economy. Additionally, the CBI has clarified that a systemically important institution (“SII”) buffer of 1.5% will be applied to both BKIR and AIB – but not ptsb. However, the SII buffer will not form part of bank capital requirements until 2019 – and will only then be introduced on a phased basis (0.5% in 2019, 1.0% in 2020, and 1.5% from 2021). Again, this development will be welcomed by the Irish banking system – and, particularly, ptsb.

These additional buffers must be considered in the context of minimum capital requirements set by the CBI under its Supervisory Review and Evaluation Process (“SREP”).

John Cronin │Research Analyst│+353 1 421 0494│[email protected]

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Wednesday, 09 December 2015

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