1. The euro is here to stay David Bloom Global Head of FX Strategy HSBC Bank plc david.bloom@hsbcib.com +44 20 7991 5969 View HSBC Global Research at: http://www.research.hsbc.com Issuer of report: HSBC Bank plc Disclosures and Disclaimer This report must be read with the disclosures and the analyst certifications in the Disclosure appendix, and with the Disclaimer, which forms part of it Global FX Strategy July 2012

2. 2. The ugly contest get uglier Source: HSBC EUR - Eurozone sovereign problems Japan - BoJ intervenes Debt to GDP over 200% USD - Fed QE x Keeping rates low Fiscal issues GBP – QE x Division in the MPC Fiscal issues The Wheel of Misfortune EM and Others

3. 3. Euro is here to stay  The first half of 2012 was again dominated by the Eurozone  We continue to believe that the euro will not break u  Problems will rotate to the US

4. 4. Conventional wisdom FXQEYieldFX

5. 5. Government Borrowing  If I bought a 5 year bond  Say 10 million  How do you get your principal back?

6. 6. The interplay between choices Source: HSBC, Bloomberg Borrow Surplus Print Default

7. 7. Debt dynamics US X X Borrow Surplus Print Default EUR X Bad but stable

8. 8. Debt dynamics USD X Borrow Surplus Print Default EUR Now X X Bad but stable EUR T-6 X X X

9. 9. Politics – UK has political legitimacy Surplus Print Default UK EURO

10. 10. What makes US switch? US Borrow Surplus Print Default EUR Now POLITICS

11. 11. Presidential election may focus the market Source: HSBC, Bloomberg

12. 12. Debt ceiling will resurface last time it was 14trn Source: HSBC, Wiki Commons

13. 13. US economy now surprising to the downside Source: HSBC, Bloomberg

14. 14. The QE pendulum This is a file from the Wikimedia Commons. Information from its description page there is shown below. Commons is a freely licensed media file repository.Wikimedia Commonsdescription page there

15. 15. P...QE pendulum...what we used to think...  When the Fed and the BoE first did QE, market thought it was FX negative  Injecting money would create inflation and erode the value of the currency  In simpler terms, if you have more of a currency relative to another, its value must fall  The market has changed its mind

16. 16. GBP weakness in response to BoE balance sheet expansion has not been repeated Source: HSBC, Bloomberg

17. 17. The market sold the EUR on the LTRO announcement, but then reconsidered Source: HSBC, Bloomberg, ECB

18. 18. Source: HSBC QE  Developed Host Country  Weak growth  Leakage to  Developing world  Food and Energy Demand rises  Food and Energy Prices rise globally  Western Wages stagnant leading to real income squeeze  Growth threatened  More QE

19. 19. Source: HSBC, Gates of Paradise by Ghiberti. Battistero di San Giovanni (Florence), Wikipedia Safe haven flows JPY CHFSEKNOK The Gates of Paradise BRL, ZAR, TRY, PLN THB, CZK, IND, ILS EUR GBP

20. 20. Conclusions  Euro is here to stay

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