Summary of macroeconomic forecasts

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ECONOMIC RESEARCH DEPARTMENT

Summary of macroeconomic forecasts

In the US, the normalisation of the monetary policy has been put on hold for the time being pending the release of stronger data. The rebound in oil prices has brought relief for the highly-leveraged shale oil sector The stabilisation of the dollar, better Chinese data and a strong Q1 in the Eurozone reduce the pressure on the manufacturing sector However, pressure on corporate profits do not bode well for business investment The US consumer remains key, hence the importance of the labour market and wage evolution.

In the Euro area, the recovery looks self-sustained and compares favourably to the poor Q1 performance in the US and the underlying weak growth in Japan Yet, the UK referendum’s direct effects on economic activity lead us to revise our forecasts downward somewhat Credit and money growth will continue to revive on the back of the ECB’s QE and negative deposit rate policy Core inflation will stay low but headline inflation will gradually accelerate following the rise in energy prices.

1 US GDP growth and composite ISM 2 EMU GDP growth and composite PMI

▌GDP, q/q, ann. [L] ▬ M&N Index [R] 30 35 40 45 50 55 60 65 -8% -6% -4% -2% 0% 2% 4% 6% 2009 2010 2011 2012 2013 2014 2015 2016 2017 ▌GDP, q/q, ann. [L] ▬ PMI composite [R] 35 40 45 50 55 60 -8% -6% -4% -2% 0% 2% 4% 2009 2010 2011 2012 2013 2014 2015 2016 2017

Source : Thomson Datastream, BNP Paribas Source : Thomson Datastream, BNP Paribas

Quarterly averages do not always tell the truth: both ISM surveys are actually rebounding from their early-2016 lows.

Despite some softening the composite PMI is still above the 50 barrier. It is too early to see the potential effects of the Brexit vote. En % 2015 2016 e 2017 e 2015 2016 e 2017 e 2015 2016 e 2017 e 2015 2016 e 2017 e Advanced 1.9 1.5 1.3 0.3 0.7 1.6 United States 2.4 1.8 1.6 0.1 1.3 2.2 -2.6 -2.5 -2.9 -2.5 -3.1 -3.1 Japan 0.5 0.2 0.2 0.8 0.0 0.7 3.3 3.6 3.3 -4.6 -4.3 -4.2 United Kingdom 2.3 1.4 0.7 0.1 0.6 2.2 -5.2 -5.7 -4.5 -3.9 -3.2 -3.3 Euro Area 1.6 1.4 0.9 0.0 0.1 1.3 3.2 2.9 2.7 -2.1 -2.0 -1.8 Germany 1.4 1.4 1.1 0.1 0.2 1.6 8.6 8.4 7.8 0.7 0.2 0.2 France 1.2 1.4 1.0 0.1 0.2 1.1 -0.2 -0.1 -0.7 -3.5 -3.3 -3.0 Italy 0.6 0.9 0.3 0.1 -0.2 0.9 2.2 1.9 1.8 -2.6 -2.7 -2.5 Spain 3.2 2.7 1.5 -0.6 -0.7 1.3 1.4 1.2 1.1 -5.1 -4.0 -3.1 Emerging 4.1 4.3 4.9 6.1 6.4 5.5 China 6.9 6.6 6.3 1.4 1.9 2.2 3.1 3.2 2.4 -2.4 -3.0 -3.2 India 7.3 7.8 8.4 4.9 5.6 5.0 -1.3 -0.9 -1.3 -4.1 -3.9 -3.5 Brazil -3.8 -3.0 2.0 9.0 8.6 5.0 -3.3 -1.1 -1.6 -10.3 -8.7 -7.0 Russia -3.7 -0.5 2.0 15.6 7.4 6.4 5.3 3.5 3.6 -3.7 -4.5 -3.8 World 3.1 3.1 3.3 3.6 4.0 3.8

Source : BNP Paribas Group Economic Research (e: Estimates & forecasts)

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Summary of financial forecasts

3 Euro-dollar 4 Interest rates

Euro-dollar exchange rate Spot price 1.11 1.00 1.10 1.20 1.30 1.40 1.50 2011 2012 2013 2014 2015 2016 1-Jul

Government Bond Yields (10 year) — US ▬ Germany -0.13% 1.5% 1-Jul -2% -1% 0% 1% 2% 3% 4% 2011 2012 2013 2014 2015 2016 Spread

5 Interest rates 6 Oil market

Government Bond Yields (10 year)

▬ Germany — France -0.13%0.17% 1-Jul -1% 0% 1% 2% 3% 4% 2011 2012 2013 2014 2015 2016

Oil price (Brent) $ per barrel, spot

40 120 80 100 60 50 20 2011 2012 2013 2014 2015 2016 1-Jul

Interest rates ######## ######## ########

End period Q1 Q2 Q3 Q4 Q1 Q2 Q3e Q4e 2015 2016e 2017e

US Fed Funds 0.25 0.25 0.25 0.5 0.5 0.5 0.25-0.50 0.25-0.50 0.01 0.25-0.50 0.25-0.50

3-month Libor $ 0.27 0.28 0.33 0.61 0.63 0.65 0.65 0.70 0.61 0.70 1.05

10-year T-notes 1.93 2.35 2.03 2.27 1.79 1.49 1.55 1.60 2.27 1.60 1.75

EMU Refinancing rate 0.05 0.05 0.05 0.05 0.00 0.00 0.00 0.00 0.05 0.00 0.00

3-month Euribor 0.02 -0.01 -0.04 -0.13 -0.24 -0.29 -0.30 -0.30 -0.13 -0.30 -0.30 10-year Bund 0.18 0.77 0.59 0.63 0.16 -0.13 0.00 -0.20 0.63 -0.20 -0.20 10-year OAT 0.42 1.20 0.90 0.98 0.41 0.20 0.30 0.10 0.98 0.10 0.10 10-year BTP 1.29 2.31 1.73 1.60 1.23 1.35 1.10 0.80 1.60 0.80 0.80 UK Base rate 0.50 0.50 0.50 0.50 0.50 0.50 0.00 0.00 0.50 0.00 0.00 10-year Gilt 1.58 2.03 1.77 1.96 1.42 1.02 1.35 1.50 1.96 1.50 1.80

Japan Overnight call rate 0.02 0.01 0.01 0.04 -0.00 -0.06 -0.30 -0.30 0.04 -0.30 -0.50

10-year JGB 0.40 0.44 0.35 0.25 -0.04 -0.23 -0.20 -0.20 0.25 -0.20 -0.30

Exchange rates

End period Q1 Q2 Q3 Q4 Q1 Q2 Q3e Q4e 2015 2016e 2017e

USD EUR / USD 1.07 1.11 1.12 1.09 1.14 1.11 1.10 1.10 1.09 1.10 1.05

USD / JPY 120 122 120 120 112 103 108 110 120 110 124

EUR EUR / GBP 0.72 0.71 0.74 0.74 0.79 0.83 0.82 0.80 0.74 0.80 0.68

EUR / CHF 1.04 1.04 1.09 1.09 1.09 1.08 1.14 1.16 1.09 1.16 1.20

EUR/JPY 129 136 134 131 128 114 119 121 131 121 130

Source : BNP Paribas Group Economic Research (e: Estimates & forecasts)

2015 2016

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United States

7 US, business climate 8 US, investment cycle vs corporate profits

Business climate indicators (from purchasing manager index) ▬ ISM Manufacturing ▬ ISM Non manufacturing

30 35 40 45 50 55 60 65 2009 2010 2011 2012 2013 2014 2015 2016 2017

▬ Nonfinancial corporate, fixed investment (% value added) [L]

▬ Nonfinancial corporate, net profits (% value added) [R]

2% 4% 6% 8% 10% 12% 14% 14% 16% 18% 20% 22% 1991 1996 2001 2006 2011 2016

The manufacturing ISM index has rebounded after a long decline.

Corporate investment declined for two quarters in a row, in line with declining profit margins.

9 US, falling oil prices dampen corporate investment.. 10 …but benefit to the consumer

US Oil market

▬ Oil production (mb/d) ─ Number of drillings [R]

0 300 600 900 1 200 1 500 1 800 4 5 6 7 8 9 10 2008 2009 2010 2011 2012 2013 2014 2015 2016

▌Private consumption, 3m/3m, ann. [L]

▬ Retail sales, vol., 3m/3m, ann. [R]

-15% -10% -5% 0% 5% 10% 15% -6% -3% 0% 3% 6% 2009 2010 2011 2012 2013 2014 2015 2016 2017 car sales (adjusted to scale)

Drillings have collapsed. Production is weakening Private consumption is supported by the strength of the labour market and the fall in the energy bill.

11 US, housing market recovers 12 US, housing market recovers

▬ Housing starts, x1000 [L] ▬ NAHB [R] 0 30 60 90 0 500 1 000 1 500 2 000 2 500 3 000 1991 1996 2001 2006 2011 2016 ▬ Housing starts, x1000 [L]

▬ Inventories in months of sales [R]

0 2 4 6 8 10 12 14 0 500 1 000 1 500 2 000 2 500 3 000 1991 1996 2001 2006 2011 2016

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United States

13 US, non-farm payrolls vs unemployment rate 14 US, labour force participation rate

▬ Monthly change in nonfarm payrolls (x1000) [L]

▬ Unemployment rate [R] 4% 5% 6% 7% 8% 9% 10% -800 -600 -400 -200 0 200 400 2009 2010 2011 2012 2013 2014 2015 2016 2017 Participation rate 20-64 aged population 75% 77% 79% 81% 1986 1991 1996 2001 2006 2011 2016

The US unemployment rate has moved below the 5% threshold. At this low level of unemployment, wage growth and inflation are supposed to pick up.

The rate of participation among the working age population (20-64) has rebounded recently, a further indication that the labour market is getting into a better shape.

15 US, no concern for inflation… neither deflation 16 US, no concern for inflation… neither deflation

▬ CPI Core y/y

▬ CPI Headline, y/y

-30% -20% -10% 0% 10% 20% 30% 40% -3% -2% -1% 0% 1% 2% 3% 4% 2009 2010 2011 2012 2013 2014 2015 2016 2017 Energy Phillips curve

Yaxis: growth in nominal wages ; Xaxis:unemployment rate

R² = 0.6 0% 1% 2% 3% 4% 5% 2% 3% 4% 5% 6% 7% 8% 9% 10% 11% 2010 15'Q4

Energy is largely responsible for the decrease in the inflation rate. Core inflation (excluding food and energy) is rather stable but well below 2%, the Fed’s official target.

Wage growth is still subdued. However, the most recent observation came a little bit higher (estimated rise in hourly earnings : +2.5%yoy in Q1 2016).

17 US, credit to corporates keeps healthy 18 US, highly leveraged corporate sector

▌Credit to corporate*, net flows, an $bn [L]

▬ Banks tightening credit, % [R]

-30 0 30 60 90 -600 -400 -200 0 200 400 600 800 1 000 2004 2006 2008 2010 2012 2014 2016

Corporate debt (credit market instrument) % value added 70% 75% 80% 85% 90% 95% 1991 1996 2001 2006 2011 2016

Credit conditions applied by banks are still easy though less than before. Net credit flows to corporates (loans and bond issues) remain considerable.

US non-financial companies have increased their leverage ratio by issuing record amounts of debt on the bond market.

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United States

19 US, low corporate spreads 20 US, highly leveraged investment trusts

US corporate spreads ▬ BBB ─ High Yield 1-Jul 0% 5% 10% 15% 20% 2001 2004 2007 2010 2013 2016

REITS Balance sheet

▬ MSB, $bn [R] ─ Repo as % of total liabilities [L]

0 50 100 150 200 250 300 350 0% 10% 20% 30% 40% 2001 2004 2007 2010 2013 2016

Corporate spreads, after widening in the second part of 2015, have tightened as of late.

Real estate investment trusts (REITS) use repo markets as a source of funding for longer-term, less-liquid assets like RMBS. Some are vulnerable to contagion risks / asset fire sales [IMF].

21 US, Fed funds rate and core inflation 22 US, real Fed funds rate and unemployment rate

▬ Fed funds ▬ Core CPI, yy 0% 2% 4% 6% 8% 1992 1995 1998 2001 2004 2007 2010 2013 2016

Fed funds rate vs Unemployment

─ Fed funds [Grey = real, LHS] - - - U. Rate [RHS]

4% 6% 8% 10% -2% 0% 2% 4% 6% 8% 1991 1996 2001 2006 2011 2016

December 2015 marked the end of an exceptional period (seven year) of zero interest rate policy.

In the past, a 5% to 5.5% unemployment rate saw the real Fed fund rate turning positive. This time is different and on this measure the Fed is well behind the curve.

23 US, dollar effective exchange rate 24 US, external accounts

Dollar, real effective exchange rate 1973 = 100 80 90 100 110 120 130 1976 1986 1996 2006 2016

Current account balance % GDP -6% -4% -2% 0% 2% 2001 2004 2007 2010 2013 2016

Source : Thomson Datastream, IMF, BNP Paribas Source : Thomson Datastream, BNP Paribas

The real effective exchange rate (trade weighted & adjusted for inflation) of the dollar is close to its long term average.

Household deleveraging and the surge in shale oil production, which reduces the dependence on imported energy, have contributed to a shrinking current account deficit in recent years.

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China

25 China, weaker than officially admitted 26 China, change in growth drivers

China, growth indicators (y/y)

▬ GDP ─ Ind. output - - - Electr. output

-10% -5% 0% 5% 10% 15% 20% 25% 30% 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017

▬ US, households debt ratio (% GDP)

-L-▬ China, exports (% GDP) -R-10% 20% 30% 40% 60% 80% 100% 1998 2001 2004 2007 2010 2013 2016

Indicators such as electricity output or shipping indicate that China’s slowdown is particularly severe in the industrial sector, which is hit by weak demand, overcapacities and deflation.

China’s export performance remains weak, in part due to subdued global demand. US consumption of Chinese goods has been on a downward trend as households have deleveraged.

27 China, investment has come down 28 China, credit

China, fixed investment vs private consumption

▬ Fixed investment, % GDP ─ Private consumption, % of GDP

35% 40% 45%

2006 2008 2010 2012 2014 2016

China, credit outstanding as % of GDP

▬ Total ─ Bank lending

80% 100% 120% 140% 160% 180% 200% 220% 240% 2004 2007 2010 2013 2016 Bonds, entrusted loans, bank's acceptances, financial trusts...

Investment ratio is down, which is less a sign of a controlled rebalancing in growth sources than a painful adjustment after years of overinvestment and excessive debt.

China’s internal debt ratio is the highest in the emerging world and continues to increase.

29 China, recovery in trade surpluses 30 China, food and energy bill

China, trade balance % GDP 0% 2% 4% 6% 8% 10% 2000 2002 2004 2006 2008 2010 2012 2014 2016

China, food & energy trade balance % GDP -6% -4% -2% 0% 2000 2002 2004 2006 2008 2010 2012 2014 2016

External trade surpluses are on the rise, due to improving terms of trade, sluggish export growth and weaker domestic demand.

Large trade deficits generated by food and energy imports have declined in the last three years.

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Euro Area

31 Euro area, lagging behind 32 Euro area, consumption remains strong

GDP, vol. (2008 = 100) ▬ US ─ EMU 90 95 100 105 110 115 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 ▌Private consumption, yy

▬ Retail sales, vol., yy

-4% -2% 0% 2% 4% 2009 2010 2011 2012 2013 2014 2015 2016 201

The Eurozone did a lot better than the US in Q1 2016. Since the start of 2008 the picture is completely different.

Consumption is a key driver behind the Eurozone recovery, as witnessed by healthy retail sales.

33 Germany, GDP growth vs business surveys 34 France, GDP growth vs business surveys

▌GDP, q/q, ann. [L]

- - - PMI Manuf.[R] ▬ PMI composite [R]

30 35 40 45 50 55 60 65 -8% -6% -4% -2% 0% 2% 4% 6% 2009 2010 2011 2012 2013 2014 2015 2016 2017 ▌GDP, q/q, ann. [L]

- - - Composite indicator (BdF&Insee) ▬ PMI [R]

30 35 40 45 50 55 60 65 -8% -6% -4% -2% 0% 2% 4% 6% 2009 2010 2011 2012 2013 2014 2015 2016 2017

Business surveys and early data indicate that GDP growth slowed significantly in Q2. The uncertainty following the Brexit vote is likely to weigh on production in the coming quarters.

GDP increased by 2.6% in Q1 (saar), confirming the expected pick-up (after +1.5% annually in Q4). However the slight loss of momentum in surveys points towards a less strong Q2.

35 France, housing activity bottoming out? 36 France, consumption and purchasing power gains

Housing

▬ Starts (12m cumulated) ─ Surveys [RHS]

-60 -30 0 30 300 350 400 450 500 2006 2008 2010 2012 2014 2016

Source : Thomson Datastream, BNP Paribas Source : Thomson Datastream, European Commission BNP Paribas

Part of the French weaker performance versus the Eurozone is due to the housing market, close to an all-time low. 2016 may see the first signs of recovery.

The lack of inflation, arising from cheap oil prices, has been boosting purchasing power gains for two years, supporting private consumption. Employment and wages have yet to take over.

▬ Real Disposable Household Income (%, y/y)

— Real Household Consumption (% , y/y)

-2% -1% 0% 1% 2% 3% 4% 2006 2008 2010 2012 2014 2016

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Euro Area

37 Italy, GDP growth vs business surveys 38 Spain, GDP growth vs business surveys

▌GDP, q/q, ann. [L]

30 35 40 45 50 55 60 65 -8% -6% -4% -2% 0% 2% 4% 6% 2009 2010 2011 2012 2013 2014 2015 2016 2017 ▌GDP, q/q, ann. [L]

30 35 40 45 50 55 60 65 -8% -6% -4% -2% 0% 2% 4% 6% 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017

Italian growth turned back positive in 2015, for the first time in almost four years.

Spanish economic growth is likely to weaken in the quarters ahead.

39 Euro area, fixed investment vs cap. utilization rate 40 Euro area, corporate fixed investment vs profits

▬ Corporate investment % of GDP (LHS)

▬ Capacity utilisation rate (RHS)

70% 75% 80% 85% 90% 9.5% 10.0% 10.5% 11.0% 11.5% 2006 2008 2010 2012 2014 2016 ▬ Corporate investment % of GDP (LHS)

▬ Corp. profit index (2007 = 100, RHS)

94 96 98 100 102 9.5% 10.0% 10.5% 11.0% 11.5% 2006 2008 2010 2012 2014 2016

Investment has been picking up on the back of a rising trend in capacity utilisation rates.

The stabilisation of profit margins could encourage corporate investment to pick up. Uncertainty following the UK referendum could hold back investment decisions though.

41 France, fixed investment vs corporate profits 42 France, fixed investment vs corporate debt

▬ Corporate investment % of GDP (LHS)

▬ Operating earnings % of value added (RHS)

29% 30% 31% 32% 33% 34% 10% 11% 12% 13% 2000 2003 2006 2009 2012 2015 ▬ Corporate investment % of GDP (LHS)

▬ Corporate debt % of value added (RHS)

80% 100% 120% 140% 10% 11% 12% 13% 2001 2004 2007 2010 2013 2016

Investment has proved rather resilient in France compared to other countries, despite the fall, until 2015, in corporate profits.

Credit growth has supported corporate investment in France. However the proportion of investment generating productivity gains is insufficient.

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Euro area

43 Corporate debt ratio, diverging trends 44 Euro area, trend in corporate fixed investment

Nonfinancial corporate debt as % of value added

▬ Germany ─ France 60% 80% 100% 120% 140% 2000 2002 2004 2006 2008 2010 2012 2014 2016

Investment in Mach. & Equipt., 2008 = 100 (vol.)

▬ Spain ─ Italy 60 70 80 90 100 110 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017

The French corporate sector’s debt-ratio has increased

significantly over the past decade, contrary to what happened in Germany.

Very different dynamics of investment in Spain versus Italy, where the gap compared to the pre-recession level remains huge.

45 Euro area, trend in labour costs 46 Euro area, trend in exports

Change in unit labour costs 2011 - 2015 (Q4) PTGR IR ES NLIT FRBG OEFN BD -10% -5% +0% +5% +10% +15%

EU Export Volume Index (s.a., 2013 = 100) ▬ Intra EU 28 ▬ Extra EU 28 60 80 100 120 140 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016

Down in many countries of the the EMU “periphery” (Ireland, Spain, Greece, Portugal).

External trade is weaker outside Europe, stronger inside…

47 Euro Area, credit to corporates vs bank lending survey 48 Spain, credit to corporates

▌Credit to corporate*, net flows EUR bn [L]

▬ Expected tightening, % [R] - - - Expected demand, % [R]

-30 -15 0 15 30 45 60 75 90 -400 -200 0 200 400 600 800 1 000 1 200 2006 2008 2010 2012 2014 2016

Spain, credit to corporates, EURbn

▬ 12m cumulated net flows ─ Monthly net flows (annualized)

-200 -100

0 100

2009 2010 2011 2012 2013 2014 2015 2016 2017

ECB’s bank lending surveys are improving with credit standards back to their normal levels. Demand for credit is becoming stronger…before Brexit.

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Euro area

49 Euro area, financing conditions improve 50 Euro area, consumer credit recovering

Bank's lending rates to corporates (<1Y & EUR 1mn)

▬ Italy ─ Spain - - - France

0% 1% 2% 3% 4% 5% 6% 7% 2004 2007 2010 2013 2016

Euro are consumer credit 12m cumulated flows, EURbn

-25

0 25 50

2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017

The convergence of lending rates shows fragmentation is declining.

After turning positive for the first time in six years in the first half of 2015, flows continue to rise.

51 Monetary aggregates, Euro area vs US 52 Euro area, base money surge with the QE

Monetary aggregates (2008 = 100) — EMU (M3) ▬ US (M2) 150 140 130 120 110 100 160 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 Money base

▌R.Reserves ▌Ex.Reserves ▌D. Facility

0 200 400 600 800 1 000 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017

Monetary support has been much stronger in the US than in the Euro area, looking at broad aggregates. This now may change with the ECB’s asset purchase program.

Base money (bank’s holdings to the ECB) was temporarily inflated by the ECB’s TLTROs. It is now increasing along with the QE.

53 Euro area, M3 vs core inflation rate 54 Euro Area, ECB “refi” rate vs determinants

▬ CPI Core y/y [L]

▬ M3, y/y [R] -3% 0% 3% 6% 9% 12% 15% 0.0% 0.5% 1.0% 1.5% 2.0% 2.5% 3.0% 2001 2004 2007 2010 2013 2016

▬ Core inflation rate [L]

▬ Unemploment rate [R, inv.] - - - "Refi" rate [L]

7% 8% 9% 10% 11% 12% 13% 0.0% 0.5% 1.0% 1.5% 2.0% 2.5% 3.0% 3.5% 4.0% 4.5% 2001 2004 2007 2010 2013 2016

M3 is weakening on the back of slower M1 growth. The refi has been lowered to 0.0% as of 16 March 2016, and the deposit facility rate (DFR) cut to -0.40%.

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Markets

55 Italian 10 year rates 56 Spanish 10 year rates

Italy, Govt. bond yields

▬ 10y ─ 2y 1.23% -0.10% 1-Jul -2% 0% 2% 4% 6% 8% 2011 2012 2013 2014 2015 2016

Spain, Govt. bond yields

▬ 10y ─ 2y 1.15% -0.17% 1-Jul -1% 1% 3% 5% 7% 9% 2011 2012 2013 2014 2015 2016

Back to historical low levels after tensions seen during the Summer of 2015. The widening of spreads vs Bunds after Brexit has been limited.

Same story

57 France, yields over several maturities 58 Euro, still rather cheap

France, Govt. bond yields

▬ 10y ─ 5y - - - 2y 0.17% -0.40% 1-Jul -0.53% -1% 0% 1% 2% 3% 4% 2011 2012 2013 2014 2015 2016 Trend in th euro (2011 = 100)

▬ Against the dollar ─ Trade weighted

80 90 100 110 120 130 2006 2008 2010 2012 2014 2016

Very low everywhere along the curve, and generating substantial savings on debt interest payments (≈EUR 44.5bn 2016’ Financial Law, down EUR1.2bn compared to previous estimate).

The euro has rebounded in nominal effective terms. However, it looks still cheap by historical standards.

59 Euro-dollar vs interest rate spreads 60 Euro-dollar vs ECB’s balance sheet

▌ Bund - Treasuries yields spreads 5y [R]

▬ Euro vs dollar [L] -2.0% -1.5% -1.0% -0.5% 0.0% 0.5% 1.0% 1.00 1.10 1.20 1.30 1.40 1.50 1.60 2006 2008 2010 2012 2014 2016

ECB's balance sheet vs euro-dollar

▬ ECB Balance Sheet, €bn [L] ─ €/$ [R]

1.00 1.10 1.20 1.30 1.40 1.50 1 500 2 000 2 500 3 000 3 500 2009 2010 2011 2012 2013 2014 2015 2016

Source : Thomson Datastream, BNP Paribas

The spread between German and US interest rates is likely to stay very negative over the foreseeable future, weighing on the euro.

The introduction of a negative deposit rate in 2014 and the anticipation of ECB QE caused a big correction of the euro. More recently, a dovish Fed has caused a strengthening of the euro.

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