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Global Economic Research April 2011

Foreign Exchange
Outlook
Global recovery dynamics, the nuclear-related Japanese shock,
coordinated official intervention, monetary policy shifts, oil-driven
commodity price adjustments and the quest for yield are factors driving
capital flows in foreign exchange markets.

The USD is on the defensive despite gradual signs of recovery. The


CAD remains a market favourite on the basis of solid economic and
financial sector strength. The MXN and BRL will be supported by
favourable terms of trade, growth differentials and interest rate
attractiveness.

The EUR is immersed in a strengthening trend against both the USD


and the GBP. Improved growth prospects and shifts in monetary policy
support the euro zone currency. Persistent sovereign debt
sustainability concerns in the periphery economies may temporarily
weigh on the EUR.

The JPY is reacting to the G7 intervention to prevent disorderly gains


caused by repatriation flows. The Asian currency environment retains a
strengthening bias, led by regional economic strength and rising
interest rates. The CNY, KRW and the THB will continue to appreciate.

Index

Market Tone & Fundamental Focus ......................................................................................... 3


US/Canada.................................................................................................................................. 5
Europe ........................................................................................................................................ 6
Asia/Oceania .............................................................................................................................. 8
Developing Asia....................................................................................................................... 10
Developing Americas .............................................................................................................. 12
Developing Europe/Africa....................................................................................................... 14
Global Currency Forecast....................................................................................................... 16

Foreign Exchange Outlook is available on: www.scotiabank.com and Bloomberg at SCOE


Global Economic Research April 2011

Foreign Exchange
Outlook
Global Foreign Exchange Outlook
April 1, 2011 Actual Q1 11 Q2 11 Q3 11 Q4 11 Q1 12 Q2 12 Q3 12 Q4 12
EURUSD 1.41 1.42 1.42 1.44 1.45 1.45 1.46 1.47 1.48
Euro Consensus* 1.39 1.36 1.36 1.36 1.36 1.35 1.34 1.33
USDJPY 84.3 83 79 82 84 86 87 89 90
Yen Consensus* 82 84 85 86 88 88 89 90
GBPUSD 1.60 1.60 1.60 1.61 1.63 1.65 1.67 1.69 1.70
Sterling Consensus* 1.61 1.60 1.61 1.63 1.64 1.64 1.64 1.63
USDCAD 0.97 0.97 0.97 0.96 0.95 0.95 0.94 0.93 0.92
Canadian Dollar Consensus* 0.98 0.98 0.99 0.99 0.99 1.00 1.01 1.01
AUDUSD 1.04 1.03 1.05 1.06 1.08 1.07 1.08 1.09 1.10
Australian Dollar Consensus* 1.00 0.99 0.98 0.96 0.95 0.94 0.93 0.91
USDMXN 11.84 11.91 12.15 12.24 12.49 12.55 12.48 12.57 12.73
Mexican Peso Consensus* 11.94 12.09 12.14 12.19 12.24 12.30 12.35 12.41
Spot Price vs. 100 Day Moving Average vs. 200 Day Moving Average - (5yr Trend)
EURUSD USDJPY
USD/ JPY
1.62 121 100 Day
EUR/ USD 200 Day
1.52 100 Day 114
200 Day 107
1.42
100
1.32
93
1.22 86
1.12 79
0
D 9
07

07
Au 6

Ap 7

08

09

M 9

06

06

07

08

09

10

1
M 0
06

08

-1
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Ju
Ja

Ju

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Fe

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M

M
N

GBPUSD USDCAD
USD/ CAD
2.11 GBP/ USD
100 Day
100 Day
1.30
200 Day
1.96 200 Day
1.22
1.81 1.14

1.66 1.06

1.51 0.98

1.36 0.90
06

06

07

08

09

10

1
06

06

07

08

09

10

-0

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Se

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M
M

AUDUSD USDMXN

AUD/ USD 15.2


0.97 USD/ M XN
100 Day
0.89 200 Day 14.1 100 Day
200 Day
0.82 13.0

0.74 11.9

0.67 10.8

0.59 9.7
06

06

07

08

09

10

1
06

06

07

08

09

10

-0

-0

-0

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-1
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M
M

(*) Source: Consensus Economics Inc. March 2011

2
Global Economic Research April 2011

Foreign Exchange
Outlook
MARKET TONE & FUNDAMENTAL FOCUS
Pablo F.G. Bréard +1 416 862-3876 Camilla Sutton +1 416 866-5470

Global financial markets continue to absorb the multiple moderate the pace of currency strength. Monetary policy
shocks caused by Japan’s natural disaster and ensuing tightening in Brazil, Chile, Peru and Colombia is under
nuclear crisis, intensifying geopolitical upheaval in North- way. Fiscal tightening measures will aim at addressing
ern Africa and the Middle East, deteriorating sovereign excess demand risks. The commodity price shock is a
debt conditions in peripheral European countries, and boon for the core Latin American economies. Managing
sharp adjustments in commodity prices. Notwithstanding the inflationary consequences of such market dynamics
the intensified volatility in securities and currency markets, has become a key policy priority.
the global economy remains in recovery mode. Increasing
evidence of US economic gains adds to the strength cur- The European currency environment presents a mixed
rently in place within the emerging-market universe, pro- outlook. The prospects of an imminent increase in the
longing a phase of global risk appetite. The combined ef- euro zone’s main refinancing rate highlight interest rate
fect of strengthening demand and supply-side risks has differentials in favour of the EUR versus both the USD and
injected upward pressure on energy prices with positive the British pound (GBP). In addition, signs of improving
effects on oil-linked currencies. The severity of the com- economic conditions in the euro area also support a near-
modity price shocks is re-fuelling the inflation debate term positive outlook for the EUR; indeed, after testing
amongst global market participants, prompting the adop- recent resistance barriers against the USD, we view that
tion of conventional and unconventional policy action by EURUSD will approach the 1.45 mark by the close of the
the world’s major central banks. year. Nevertheless, the euro zone’s sovereign debt crisis
remains on global investors’ radar screens, now focused
The NAFTA zone currencies are influenced by the US on political and economic developments in Portugal. The
business cycle, the moderation of credit easing measures likelihood of a multilateral rescue package to address the
by the Federal Reserve (Fed), the direction of crude oil country’s sovereign debt distress has increased. Mean-
prices, and the relative health of the financial sector. The while, international rating agencies continue to downgrade
US dollar (USD) has maintained a defensive tone over the the ratings (and outlook) on the peripheral European sov-
past four months, as highlighted by the 7% decline in the ereign credits. Interest rate differentials, rising commodity
trade-weighted DXY index. Currency markets are fixated prices and investor sentiment support the Swedish krona
on the outlook for interest rates, leaving the USD vulner- (SEK) and the Norwegian krone (NOK), while the Swiss
able to any shift in the stance emanating from the Fed. franc (CHF) offers an inter-Europe diversifying vehicle.
However, any USD rally is likely to prove temporary, as The pound sterling (GBP) has been supported by a weak
the economic weight of a depressed housing market, high USD and rising expectations for an increasingly hawkish
oil prices and improving but still elevated unemployment Bank of England. However, the UK’s combination of low
levels push out US interest rate hikes into 2012. Both the growth, above target inflation and an uncertain path for
Canadian dollar (CAD) and the Mexican peso (MXN) are interest rates is likely to see the GBP underperform the
in synchronicity, appreciating against the USD on the EUR this year.
grounds of supportive commodity prices (mainly energy), a
relatively healthier fiscal position, systemically stronger The Asian currency environment remains promising de-
financial sectors and healthy recovery prospects. With a spite the tragic events affecting the Japanese economy.
looming Federal election, Canadian political uncertainty is The bias towards regional currency appreciation remains
on many radar screens. However, Canada’s enviable sov- intact as capital flows eye the fast-growing region. The
ereign position, its exposure to rising commodity prices, Chinese yuan (CNY) is in strengthening mode, yet we do
widening interest rate spreads and favourable sentiment not expect any material change in the country’s currency
are just a few of the drivers that should help to support the regime. The Japanese yen (JPY) is reacting to the joint
CAD. The MXN also is benefitting from attractive intervention by G7 countries, which was an effort to pre-
(government bond) yield differentials, which continue to vent disruptive appreciation as a result of repatriation of
act as a magnet of intra-North American capital flows. Japanese assets to finance reconstruction following the
earthquake/tsunami and ongoing nuclear crisis. After
The currency outlook for Latin America remains favour- touching the 76 per USD mark in intra-day trading on
able. Robust economic performance, favourable terms of March 16th, the JPY is entering the second quarter on a
trade, massive foreign capital flows and widening interest weakening tone approaching the 85 mark. Elsewhere in
rate differentials as policymakers tackle the threat of infla- the region, top-tier regional currencies such as the South
tionary pressures are injecting a positive tone into the re- Korean won (KRW), the Malaysian ringgit (MYR) and the
gional foreign exchange market environment. The Brazil- Thai baht (THB) continue in rallying (against the USD)
ian real (BRL) is testing new technical resistance levels, mode on the back of strong growth and widening interest
prompting decisive government/central bank action to rate differentials.

3
Global Economic Research April 2011

Foreign Exchange
Outlook
CANADA Camilla Sutton +1 416 866-5470

As we move into April, the Canadian dollar (CAD) has gained 3% against the USD on a year-to-date basis. The combi-
nation of a broadly weaker USD, strong oil prices, favourable investor sentiment and Canada’s relative fundamental and
sovereign positions have all supported the sustained move through parity. Looking out to the spring and fall, most of the
factors that have supported the CAD are likely to remain intact. News that Canada will hold a federal election on May 2nd
has injected a potential uncertainty into the future. However, global investors are accustomed to Canadian elections,
minority governments and the limited difference between parties (at least with regards to how they would relate to cur-
rencies); accordingly, the CAD’s reaction has been somewhat muted. In addition, rising oil prices have helped to offset
the weight of a looming election. It is clear that part of the explanation for strong oil prices lies in developments in Libya
and the Middle East; however, ongoing demand growth, notably from the emerging nations, is also supporting prices. In
the months ahead tensions in the Middle East might lessen, but it is likely that supply fears will remain elevated, creating
more sustained upward pressure on oil prices. This is not particularly good for the US growth outlook; however a con-
tained rise in oil prices from here is likely to be a net benefit to Canada and positive for the CAD. On the flip side, any
sustained dramatic rise in oil prices would weigh on the US and global growth outlook and shift to a net negative for
Canada. Rising commodity prices are part of what is putting upward pressure on global inflation and leading to rising
central bank rates. In Canada it is likely that the Bank of Canada tightens policy later this year; nevertheless, in the US a
depressed housing sector, elevated unemployment and a lack of core inflationary pressures leaves the Federal Reserve
unlikely to increase interest rates until 2012. This should widen interest rate differentials in the CAD’s favour. US mone-
tary and fiscal policy combined with sentiment should keep medium-term downward pressure on the broader USD. Can-
ada’s strong sovereign position is likely to draw ongoing CAD favourable flows by global investors. Finally, market senti-
ment is favourable CAD. The main risk to our view is any shock that creates a temporary run to the USD as well as a
more sudden hawkish shift at the Federal Reserve than we expect. We hold 1.05 year-end CAD forecast.

Currency Trends
Going Back Spot Outlook
FX Rate FX Rate
12 m 6m 3m 1-Apr 3m 6m 12 m
AUDCAD 0.931 0.995 1.022 1.000 1.019 1.018 1.017 AUDCAD
CADJPY 92.05 81.14 81.30 87.29 81.44 85.42 90.53 CADJPY
EURCAD 1.372 1.403 1.336 1.365 1.377 1.382 1.378 EURCAD
USDCAD 1.015 1.029 0.998 0.965 0.970 0.960 0.950 USDCAD
AUDCAD CADJPY
1.03
93.1
1.00
90.9
0.98
88.8
0.95
86.6
0.93 84.5

0.90 82.3

0.88 80.2

0.85 78.0
Apr-10 Jun-10 Aug-10 Oct-10 De c-10 Feb-11 Apr-11 Apr-10 Jun-10 Aug-10 Oct-10 De c-10 Fe b-11 Apr-11

EURCAD USDCAD

1.44
1.07
1.41
1.05
1.37
1.03
1.34
1.01
1.30 1.00

1.27 0.98

1.23 0.96
Apr-10 Jun-10 Aug-10 Oct-10 De c-10 Feb-11 Apr-11 Apr-10 Jun-10 Aug-10 Oct-10 Dec-10 Fe b-11 Apr-11

4
Global Economic Research April 2011

Foreign Exchange
Outlook
CANADA AND UNITED STATES Adrienne Warren +1 416 866-4315
Fundamental Commentary Gorica Djeric +1 416 862-3080

UNITED STATES - The US economy is showing steady CANADA - Canada’s economic recovery is continuing
progress along the recovery path, but underlying details apace. We expect output expanded at around a 4% annu-
are more mixed. Manufacturing and services sectors con- alized rate in the first quarter of 2011, following a 3.3% ad-
tinue to regain momentum, which points to a gradual pick- vance in Q4. Consumer spending remains reasonably
up in private-sector hiring, but – alongside a depressed healthy, supported by steady job growth. Nonetheless,
housing market – the US consumer remains under pres- there are some signs of increasing consumer caution amid
sure from a still uncertain labour landscape and rising cost rising gas and food prices and high household debt bur-
of food and energy prices. According to the ISM manufac- dens. Indeed, consumer confidence readings have recently
turing and services indices, activity in these industries has softened and the pace of consumer credit growth has
been revving up for a string of months now, in part sup- slowed. Looming public sector hiring and wage restraint
ported by export demand and business investment. This also reinforces a more temperate consumer outlook. Gov-
has resulted in steady gains in private-sector employment, ernment stimulus spending is still providing a lift to overall
averaging an addition of close to 130,000 jobs per month. activity, but this support will fade later this year and into
For the quarter as a whole, US consumer spending is 2012 as fiscal shortfalls are addressed and current infra-
tracking a marked slowdown, providing less of a lift to first- structure projects wind down. At the same time, the econ-
quarter GDP. Alongside tepid wage growth and an uncer- omy is benefitting from rising emerging market demand for
tain labour market outlook, higher cost of basic goods – Canadian commodities and strengthening US industrial
food and energy prices in particular – may be crowding out activity. Exports are now making a solid contribution to
broader consumer spending and pushing Americans to growth, despite the challenge of a persistently strong Ca-
hoard stimulus gains. Despite higher commodity prices, nadian dollar for many manufacturers. Global supply chain
measures of underlying inflation remained subdued and disruptions in the wake of Japan’s devastating earthquake/
longer-run inflation expectations still well-anchored. From a tsunami are expected to result in some temporary produc-
structural perspective, price sensitivity has been reduced tion disruptions domestically, primarily in the large motor
through improvement in monetary policy transparency and vehicle and parts sector, though reconstruction efforts will
reduced reliance of advanced economies on the manufac- in turn provide a lift to exports of lumber and other building
turing sector. From a cyclical perspective, the strength of materials. Business investment remains a bright spot. Ca-
the impact of a commodity price-shock is dependent on nadian firms have been taking advantage of a strong cur-
what stage of the economic cycle a country faces. Given rency, healthy corporate balance sheets, firm commodity
that the economic recovery in the United States is ex- prices and government incentives to invest in machinery &
pected to be gradual, the crowding-out effect of costlier equipment and resource-related exploration. Overall, cor-
basic goods, tepid wage pressures and excess capacity porate outlays are expected to contribute over one percent-
are likely to hamper the price transmission mechanism. age point to GDP growth this year and next, providing an
important offset to a more cautious consumer and increas-
ing public sector restraint.
MONETARY POLICY COMMENTARY Derek Holt +1 416 863-7707 Gorica Djeric +1 416 862-3080

UNITED STATES - In line with the broad consensus, the CANADA - Perhaps the biggest market implication to the
FOMC decided to remain on the sidelines at its latest meet- Federal Budget and the announced federal election lies in
ing on March 15th. On balance, the accompanying state- terms of what it means for the Bank of Canada (BoC). We
ment signaled no policy shift, but the slightly greater opti- maintain our longstanding view that the BoC is on hold until
mism may have been oriented toward striking a balance October on the back of recent fiscal, political and indicator
between the hawks and the doves. That said, there was no developments. Over the past twenty years, the BoC has
change to key references and the Fed indicated, in its generally avoided starting a tightening campaign during an
strongest statement reference yet, that it is seeing through election period, a good policy given the uncertainty facing
inflation upsides as transitory – this aligns with our view. the fiscal regime. Regardless of the election results, it is
Alongside our expectations for the Fed to remain on hold likely that fiscal drag will still lie significantly on the horizon
through at least the remainder of the year, we do not antici- in a manner that tightens policy conditions. On the data
pate any shift in tone at the next meeting, on April 27th. front, January’s disappointing retail sales figures also rein-
This would reaffirm our view that the Fed will carry out the force our view on the BoC. What’s more, the recent trade
QE2 program through to its scheduled completion. Manag- figures highlight the BoC’s legitimate concerns about Can-
ing Fed language will be key in keeping bond vigilantes at ada’s ability to leverage the US recovery via export com-
bay, and we expect this will be achieved by underscoring petitiveness. Finally, the BoC can take its time in evaluating
the Fed’s readiness to act should economic conditions inflation risk, as it is in no danger of breaching its inflation
change substantially in either direction. target any time soon, unlike pressures being faced in Asia
and Europe.

5
Global Economic Research April 2011

Foreign Exchange
Outlook
EUROPE
Currency Outlook Camilla Sutton +1 416 866-5470

EURO ZONE - An increasingly hawkish ECB, a commitment from authorities to protect the monetary union, growing com-
fort with the problems in the European periphery and a bearish stance towards the USD have all supported investor flows
into the EUR. Our story continues to be that the EUR retraces some of its 2010 losses, but gains from the current 1.41
level are likely to be harder fought. We expect the EUR to close Q211 at 1.42 and 2011 at 1.45.

UNITED KINGDOM - Investors sentiment towards the GBP has been volatile, with the net exposure moving from net long
to net short and back to net long. This is reflective of the conflicting pressures on the currency. High inflation, an uncertain
path for interest rates, low growth and strict austerity might prove a dangerous combination. Technically, it is encouraging
that the GBP reached a new 15-month high in March. We expect the GBP to be supported by a weak USD and interest
rate differentials, closing Q211 at 1.60 and the year at 1.63.

SWITZERLAND - The CHF has been trending higher since last June on the back of its powerful position as a safe-
haven, inter-Europe alternative to both the USD and EUR and its strong sovereign position. Technically, the outlook is
bullish and investor sentiment favours further gains. The threat of SNB intervention will likely limit gains if EURCHF
drops to new lows. We expect USDCHF to close the year at 0.90 and EURCHF to close at 1.31.

NORWAY - Benefitting from oil prices, its sovereign position and an increasingly hawkish central bank, the NOK has ral-
lied to a new 17-month high. Technically, 5.50 is going to prove a challenge to break, but bullish sentiment is working in
its favour. We expect the NOK will close the year at 5.50.

Currency Trends
Going Back Spot Outlook
FX Rate FX Rate
12 m 6m 3m 1-Apr 3m 6m 12 m
EURUSD 1.35 1.36 1.34 1.41 1.42 1.44 1.45 EURUSD
GBPUSD 1.52 1.57 1.56 1.60 1.60 1.61 1.65 GBPUSD
EURCHF 1.42 1.34 1.25 1.31 1.31 1.30 1.31 EURCHF
USDNOK 5.94 5.88 5.81 5.53 5.67 5.64 5.58 USDNOK
EURUSD GBPUSD
1.45 1.64

1.41 1.60

1.36 1.56

1.32 1.52

1.27 1.48

1.23 1.44

1.18 1.40
Apr-10 Jun-10 Aug-10 Oct-10 De c-10 Fe b-11 Apr-11 Apr-10 Jun-10 Aug-10 Oct-10 De c-10 Fe b-11 Apr-11

EURCHF USDNOK

1.45 6.65

1.41 6.45

1.37 6.25

1.33 6.05

1.30 5.85

1.26 5.65

1.22 5.45
Apr-10 Jun-10 Aug-10 Oct-10 De c-10 Fe b-11 Apr-11 Apr-10 Jun-10 Aug-10 Oct-10 De c-10 Fe b-11 Apr-11

6
Global Economic Research April 2011

Foreign Exchange
Outlook
EUROPE
Fundamental Commentary Tuuli McCully +1 416 863-2859

EURO ZONE - The beginning of the European Central UNITED KINGDOM - Inflationary pressures continue to in-
Bank’s (ECB) monetary policy tightening cycle is imminent. tensify in the UK, with the consumer price index increasing
ECB policymakers have become more concerned about by 4.4% y/y in February, up from 4.0% in the prior month.
second round inflation impacts stemming from higher en- The headline inflation rate will likely continue to increase in
ergy and food prices. The central bank assesses that risks the coming months toward the 5.0% y/y threshold before
to the inflation outlook are "on the upside", and that infla- subsiding to below 4.0% by the end of the year. As inflation
tion tracking persistently over the target of “below, but expectations and prices at the core level are also picking up
close to, 2%” is a threat to the ECB’s price stability man- (core inflation reached 3.4% y/y in February), British mone-
date. Consumer prices increased by 2.6% y/y in March, tary authorities will be challenged to find a balance between
according to a “flash estimate”. We expect the benchmark promoting price stability and supporting economic growth
interest rate to be raised by 25 basis points in April, fol- conditions. We expect that the Bank of England will begin a
lowed by adjustments of similar magnitude each quarter gradual process of monetary policy normalization in the
until the policy rate reaches 2.5% in the third quarter of third quarter of 2011, taking the Bank Rate to 1.0% by the
2012. In the context of persistent turmoil in the euro zone end of the year and to 2.0% by end-2012. The 2011
periphery, ECB President Jean-Claude Trichet has pointed Budget, released on March 23rd, remains committed to the
out that tighter monetary conditions can be accompanied government’s fiscal consolidation plan in order to bring pub-
by non-standard liquidity measures. As the sovereign crisis lic finances back onto a sustainable path. The budget defi-
is predominantly driven by investor sentiment, we assess cit, after peaking at 11.1% of GDP in the FY2009-10 (April-
that the likelihood that Portugal might be forced to seek March), is set to narrow to 9.9% of GDP in the ongoing fis-
funding from the European Union-International Monetary cal year, due in part to in-year spending cuts and the VAT
Fund financial assistance pool in the near term is relatively hike, and further to 7.9% of GDP in the FY2011-12. We as-
high. We expect euro zone growth to slow modestly this sess that aggressive fiscal consolidation and slower export
year to around 1.4% on the back of widespread fiscal con- sector momentum will limit the nation’s economic growth to
solidation efforts and slower export sector momentum. 1.4% in 2011 before picking up to around 1.7% in 2012.
Nevertheless, as the euro zone periphery recovers in 2012,
output will pick up again, expanding 1.7% in the year.

SWITZWERLAND - Inflationary pressures remain virtually NORWAY - Norwegian monetary authorities are preparing
absent in Switzerland on the back of the strength of the to resume the monetary tightening cycle that has been on
Swiss franc (CHF). Despite elevated commodity prices, the hold since June 2010. Though the key policy rate was kept
headline consumer price index increased by only 0.5% y/y on hold at 2.0% following the Executive Board’s meeting on
in February, compared with a rate of 0.2% in the previous March 16th, policymakers have since become more hawk-
month. Not surprisingly, Swiss monetary authorities opted to ish, noting that the benchmark interest rate should be in-
keep the key interest rate target unchanged at 0.25% fol- creased before the end of the first half of 2011. The next
lowing the quarterly monetary policy meeting on March 17th. policy meeting is scheduled for May 12th. Consumer price
An expansionary policy stance will likely be maintained for inflation eased to 1.2% y/y in February from 2.0% in the
an extended period of time; we expect that policymakers will prior month, while prices at the core level increased by
begin a cautious process of monetary normalization in the 0.8% y/y. Meanwhile, the growth outlook for the Norwegian
final quarter of 2011, raising the benchmark rate gradually economy is favourable, as indicated by improving consumer
to 1.0% by the end of 2012. The next policy meeting is confidence, rising credit demand, solid manufacturing sector
scheduled for June 16th. Solid economic performance is not performance and elevated energy prices. Mainland real
feeding inflationary pressures, at least for the time being. GDP – which excludes volatile oil, gas and shipping – ex-
The KOF leading indicator, the purchasing managers’ index panded by 0.3% q/q in the final quarter of 2010 while the
together with robustly growing exports (despite the strength whole economy’s output surged 2.4% q/q. Therefore, the
of the CHF) point to promising industry prospects, while monetary authorities assess that a higher interest rate level
household spending should be supported by relatively is justified in an effort to reduce the risk of future financial
healthy labour market conditions (the unemployment rate imbalances. Norway has solid economic fundamentals as it
decreased slightly to 3.4% in February from 3.5% the month enjoys a strong external position (the current account sur-
before). We expect the economy to grow by around 2.0% plus will likely hover around 13% of GDP through 2012) and
this year, following a 2.6% expansion in 2010. The political healthy government finances (the fiscal surplus will average
outlook is dominated by the approaching general elections, 10% of GDP in 2011-2012).
scheduled for October 2011; nevertheless, the country con-
tinues to enjoy a high degree of political stability.

7
Global Economic Research April 2011

Foreign Exchange
Outlook
ASIA/OCEANIA
Currency Outlook Camilla Sutton +1 416 866-5470

JAPAN - A national disaster, coordinated G7 intervention and weak fundamentals have led to a volatile March for yen
traders. As we enter April, there appears to be new-found stability. The near-term risk is that repatriation flows support the
yen, but the medium-term outlook has only worsened over the last month. We expect USDJPY to drift higher and close
the year at 84.

CHINA - The yuan continues to trend slowly higher and reached a new post-(quasi) float high in March. The NDF market
is pricing in a further 1.3% appreciation this year, though we’d expect a more aggressive return profile. A weaker USD
combined with the commitment to an increasingly flexible foreign exchange regime on behalf of Chinese authorities
should all be supportive of a stronger CNY. We hold a USDCNY6.1 year-end target.

AUSTRALIA - The AUD reached a new 28-year high in March, suggesting that upward momentum in the currency re-
mains strong. Investor sentiment, technicals and fundamentals are all working in the currency’s favour and a rebuilding of
the carry trade is putting additional upward pressure on the AUD. As long as emerging Asia growth remains strong, so too
does the outlook for the AUD. We hold a Q2 2011 target of 1.05 and a year-end forecast of 1.08.

NEW ZEALAND - The outlook for NZD is still marred and pales in comparison to the AUD. Investor sentiment is weak,
the fundamentals have deteriorated and the RBNZ recently cut interest rates by a surprising 50 basis points. We expect
the NZD to retrace some of its recent losses and hold a Q2 2011 forecast of 0.76 and a year-end forecast of 0.78.

Currency Trends
Going Back Spot Outlook
FX Rate FX Rate
12 m 6m 3m 1-Apr 3m 6m 12 m
USDJPY 93.5 83.5 81.2 84.3 79.0 82.0 86.0 USDJPY
USDCNY 6.83 6.69 6.59 6.55 6.40 6.25 6.01 USDCNY
AUDUSD 0.92 0.97 1.02 1.04 1.05 1.06 1.07 AUDUSD
NZDUSD 0.71 0.73 0.78 0.77 0.77 0.77 0.78 NZDUSD
USDJPY USDCNY
95.5 6.85

93.0 6.80

90.5 6.76

88.0 6.71

85.5 6.67

83.0 6.62

80.5 6.58

78.0 6.53
Apr-10 Jun-10 Aug-10 Oct-10 De c-10 Fe b-11 Apr-11 Apr-10 Jun-10 Aug-10 Oct-10 De c-10 Fe b-11 Apr-11

AUDUSD NZDUSD
0.80
1.02
0.78
0.98
0.75
0.95
0.73
0.91
0.70
0.88

0.84 0.68

0.81 0.65
Apr-10 Jun-10 Aug-10 Oct-10 Dec-10 Fe b-11 Apr-11 Apr-10 Jun-10 Aug-10 Oct-10 De c-10 Fe b-11 Apr-11

8
Global Economic Research April 2011

Foreign Exchange
Outlook
ASIA/OCEANIA
Fundamental Commentary Oscar Sánchez +1 416 862-3174

JAPAN - Near-term Japanese yen (JPY) volatility will re- CHINA - Yuan (CNY) strength will continue through 2012.
main in place with the Bank of Japan (BoJ) battling exces- CNY appreciation is viewed as a policy to tighten monetary
sive appreciation. Initial strengthening forces will be coun- conditions while promoting domestic market development.
tered by the blow to the country’s infrastructure and uncer- China’s condition as the global growth pace-setter will inten-
tainty about the capacity for a quick recovery, leading to a sify as domestic demand momentum balances export
weakening profile. The economy will remain in recovery growth. We expect yearly economic growth to average
mode as authorities grapple with the aftermath of the March 9.5% y/y in 2011-12. Output expansion accelerated to 9.8%
11th earthquake/tsunami and lingering nuclear reactor crisis. in the final quarter of 2010, taking the yearly advance to
Government estimates of the damage place the loss at 10.3% alongside a credit easing-inspired 25% rise in fixed-
around US$300 billion, or 5.5% of the country’s GDP. The asset investment. Recent economic reports reaffirm the
viability of an expeditious recovery hinges not only on re- country’s relevance worldwide, as imports continue to out-
storing a reliable electricity grid and transportation network, pace exports thereby pulling the global recovery forward.
but also on the level of the JPY, given export dependence. Credit abundance underpins double-digit investment gains,
The JPY rebound post-G7 intervention is maintaining oper- while consumer spending supported by real wage improve-
ability for exporters, and further intervention is likely if sig- ments is associated with rising productivity. Inflation re-
nificant appreciation resumes. A second quarter contraction mains a concern. The pickup in food prices behind the re-
will be followed by the reconstruction effort gathering mo- cent buildup in headline inflation has combined with ele-
mentum in the second half of 2011 and through 2012. After vated raw material costs looming in the background. A
last year’s record 3.9% y/y gain, GDP is expected to ex- gradual rise in the CNY would help contain their inflationary
pand 1% in 2011 and 2.9% in 2012. The BoJ will likely re- impacts. Although a rebound in inflation is not impossible,
tain a loose monetary policy stance, as export dependence transmission to non-food items has yet to become evident,
raises the relevance of unsterilized currency interventions to with real wage adjustments still consistent with productivity
prevent excessive appreciation. While the setback resulting advances. Rising bank reserve requirement constraints
from recent disasters will exacerbate deflationary forces, have been the main tool to contain excess liquidity, while
cost push inflation could emerge as the recovery gathers interest rate increases have been aimed at deflating expec-
pace, given dependence on imported fuel amid persistent tations of rising asset valuations. Recent property price
global oil market uncertainty and the higher energy tally. gains are way off early-2010 double-digit advances.
AUSTRALIA - The Australian dollar (AUD) will remain well NEW ZEALAND - The New Zealand dollar (NZD) will re-
supported in the medium-term. Notwithstanding recent natu- main on the sidelines on the back of loosening monetary
ral disasters, improving fiscal and solid external account conditions and an economy in recovery mode after the
fundamentals as well as exposure to highly-bid commodities Christchurch earthquake in late February, which was the
all bode in favour of the AUD. An eventual resumption of second in the past six months and the country’s worst natu-
monetary tightening will further support the currency to- ral disaster in 80 years. The fiscal effects of the earthquake
wards the end of 2011. Australia’s economic expansion will will be significantly higher than the NZ$4 billion tally of the
average 3.5% y/y in 2011-12. Notwithstanding the unfavor- previous Canterbury tremor, and will fall on an already
able effects of the Queensland floods, the economy will weakened government balance. The economy avoided a
continue to expand at trend growth with performance re- recession in the final quarter of 2010 with GDP expanding
maining supported by terms of trade improvements. Growth by 0.8% y/y. While the setback from the recent catastrophe
acceleration during the fourth quarter on the back of rising could be significant, the outlook is not totally grim as exports
investment spending continues to translate into falling un- performed solidly through February. Business confidence
employment, with firms in the mining and energy sectors has firmed up as well on the back of improvements in the
boosting output levels to meet demand from China and In- external accounts, as the country continues to exploit prox-
dia. While consumer confidence was dented by recent ex- imity to Australia and the dynamic Asian region. Housing
treme weather events, employment prospects and durable outlays however could be severely dented with confidence
goods buying intentions remain above average. An initially and credit card spending indicators already displaying a
unfavorable effect from the expected slowdown in Japan retrenchment. Although annual inflation closed 2010 at 4%,
should be compensated for by higher commodity demand well above the Reserve Bank of New Zealand’s (RBNZ) 1-
during the reconstruction phase. Japan was surpassed by 3% comfort zone, the central bank appears relaxed with
China in 2009 as the main destination for Australian ex- regard to price pressures as it attempts to support a re-
ports. Inflation will remain within the central bank’s 2-3% bound in activity. In March, the RBNZ decided to lower its
target, as some pressures emerge with supply constraints benchmark interest rate by 50 basis points to a record low
due to crop destruction and labour displacements. Inflation of 2.5%. A downtrend in unemployment is reflected in do-
fell to 2.7% y/y in Q4, with core inflation falling to 1.6% on mestic demand conditions; accordingly, non-tradable goods
the back of a significant retrenchment in services costs. prices are advancing faster than headline inflation.

9
Global Economic Research April 2011

Foreign Exchange
Outlook
DEVELOPING ASIA
Currency Outlook Sacha Tihanyi +1 416 862-3154

INDIA - In March, the INR temporarily deviated from a 1.5 month strengthening trend due to risk aversion driven off of
Japan’s natural disaster. This proved to be only temporary as in late March, the INR appreciated to its strongest level
since November of 2010, reflecting a normalization in market conditions and a refocusing on India’s hawkish monetary
policy bent and strong growth. External factors, such as the current account deficit, will render the INR vulnerable during
times of global financial market volatility. We hold a year-end forecast of 43.75.
KOREA - Frequent government intervention has not prevented USDKRW from moving lower (KRW strength) as financial
markets rebounded in mid-March. The government is likely to continue to resist too rapid a strengthening in the KRW, but
monetary policy dynamics favour additional appreciation off of a widening KRW yield differential vs. the USD. 1100 has
been a key level of support for USDKRW, but a sustained move past this point would signify government ease with a
stronger KRW. We hold a year-end forecast of 1060.
THAILAND - The THB has been more hesitant to test higher in March, though it temporarily managed to reach a new two
month high against the USD. Policymakers have signaled that inflation is the key concern, which means the THB will not
suffer on a forward looking basis from a lag on the policy front. We’d look for USDTHB’s 200-day moving average to hold
the topside, while 30.00 and 29.50 remain supportive to the downside. We hold a year-end forecast of 28.50.

HONG KONG - USDHKD, for the most part of March, remained below the 7.78 level, well away from the endpoints of the
7.75 to 7.85 band. There is no hint of any plan to shift away from the USD peg, and there is unlikely to be any such shift
towards the CNY until capital account convertibility is satisfied, and the growth of a robust and multi-faceted offshore ren-
minbi market is realized in Hong Kong. We hold a year-end forecast of 7.75 for the HKD.

Currency Trends
Going Back Spot Outlook
FX Rate FX Rate
12 m 6m 3m 1-Apr 3m 6m 12 m
USDINR 44.95 44.97 44.71 44.59 44.31 44.03 43.05 USDINR
USDKRW 1132 1138 1125 1089 1087 1073 1045 USDKRW
USDTHB 32.34 30.35 30.03 30.30 29.67 29.08 28.20 USDTHB
USDHKD 7.76 7.76 7.77 7.78 7.77 7.76 7.75 USDHKD
USDINR USDKRW

47.60
1235
47.00 1210

46.40 1185

45.80 1160

45.20 1135

44.60 1110

44.00 1085
Apr-10 Jun-10 Aug-10 Oct-10 De c-10 Feb-11 Apr-11 Apr-10 Jun-10 Aug-10 Oct-10 Dec-10 Fe b-11 Apr-11

USDTHB USDHKD
32.70
7.801
32.15
7.793
31.60
7.784
31.05
7.776
30.50 7.767

29.95 7.759

29.40 7.750
Apr-10 Jun-10 Aug-10 Oct-10 De c-10 Feb-11 Apr-11 Apr-10 Jun-10 Aug-10 Oct-10 De c-10 Fe b-11 Apr-11

10
Global Economic Research April 2011

Foreign Exchange
Outlook
DEVELOPING ASIA
Fundamental Commentary Oscar Sánchez +1 416 862-3174

INDIA - Favourable interest rate and growth differentials will KOREA - The Korean won (KRW) will maintain a strength-
support the Indian rupee (INR) through 2011. While foreign ening tone through 2011-12 on the back of sustained eco-
portfolio flows have slowed so far this year and the inflation- nomic growth. While the Bank of Korea (BoK) stands ready
ary outlook has deteriorated, support for INR strength re- to dampen excessive appreciation, the healthy rebalancing
mains in place. India’s economic expansion will average of the economy currently underway will continue to attract
over 8.5% y/y in 2011-12. The economy recorded a solid foreign capital. GDP picked up at a 6.1% y/y pace in 2010,
8.7% gain in 2010 with private spending on an upturn, un- and we expect the economy to converge back to a medium
derpinned by abundant bank credit availability. Rising dis- term speed of 5% y/y on average in 2011-12. Waning fiscal
cretionary spending compensated for a downtrend in gov- impulse and expiring subsidies, having brought forward
ernment outlays while public infrastructure outlays still con- consumption in 2010, resulted in a slowdown in spending
tributed to the expansion. Rural incomes improved during towards the end of 2010, though exports remained a bright
2010 as rainfall returned to normal and this factor offers spot. The BoK is in interest rate normalization mode aiming
further support to discretionary spending. Inflation remains to rein in inflation expectations. Although the Korean econ-
a key concern. A downward trend in wholesale price gains omy is highly vulnerable to commodity price fluctuations,
through the end of 2010 has been reverted as global food the main focus has been on averting a wage/price spiral.
and fuel costs continue to erode purchasing power. While Headline inflation hit 4.5% y/y in February on the back of
double-digit gains in food values have trended down, rising food and oil price increases. Core inflation moved higher as
fuel costs are now the main inflation driver. The pervasive well to 3.1% y/y. Although headline pressures could in-
effect of elevated oil prices is evidenced by the reversion of crease in coming months, we expect core inflation to trend
the downward trend in manufacturing costs. The Reserve down during the rest of the year, on the back of slower do-
Bank of India (RBI) has hiked the benchmark repo rate mestic demand and a relatively strong KRW. While unem-
seven times in the past twelve months for a cumulative 200 ployment remains on a downward trend, real wage in-
basis points to 6.75%. The RBI’s main concern is a buildup creases have recently eased, signaling a diminished threat
in inflation expectations with the economy operating close of an inflationary spiral. While the size of the oil import bill in
to full capacity. The central bank will likely feel obliged to Korea is large at 5.5% of GDP, there is plenty of maneuver-
raise rates at least once more in 2011 as it awaits clearer ing room as the country’s fiscal accounts remain solid, with
signs of inflation abatement. no current subsidies on fuel costs.
THAILAND - Thai baht (THB) appreciation will characterize HONG KONG - The exchange rate band around the Hong
the foreign exchange environment in 2011-12. The Bank of Kong dollar (HKD) will remain well supported with few risks
Thailand accumulated US$27 billion in foreign assets last of realignment as the HKD trades close to the middle of the
year, taking its total stock to US$166 billion (55% of GDP). band. Economic activity appears poised for further improve-
While 2011 will remain a politically charged year, the sizable ment with domestic consumption and exports continuing to
reserve stock is more than enough to support the currency. outperform on the back of added momentum on the
Attenuation of political uncertainty, solid export growth and mainland and falling local unemployment. Labour market
rising interest rates triggered a surge in foreign portfolio in- conditions have tightened significantly, as the jobless rate
flows to the point that a 15% withholding tax on foreign in- fell to a record low of 3.6% in February, the lowest since
vestors’ capital gains was reinstated. No such further meas- November 2008. A strong labour market has been under-
ures are anticipated. The economy will continue to reap the pinning a solid domestic spending profile displayed by dou-
benefits of a privileged geographical location in Southeast ble-digit annual retail sales growth. We expect GDP to ex-
Asia, with activity supported by domestic demand momen- pand at a 4.9% y/y average rate in 2011-12. Activity has
tum running alongside rising foreign sales. Manufacturing also been supported by loose monetary conditions imported
activity improved during the three months to December, from the US and a somewhat pro-cyclical fiscal stance,
reversing a mid-year soft spot, underpinning the impressive which point to a possible buildup in price pressures. Head-
7.8% y/y GDP advance of 2010. A recovery in exports line and core inflation have both trended upward reaching
(which account for two thirds of the economy) remains at 3.7% y/y and 3.2% in February, respectively. HKD weak-
the core of the rebound, with positive implications for manu- ness, rising Chinese inflation and accelerating import costs
facturers. Consumer and investment spending are advanc- are feeding price pressures. Accordingly, negative real in-
ing at an over 5% y/y rate, attesting to the solidity of the do- terest rates already underpin asset price gains, supporting
mestic demand picture. Inflationary concerns have come to domestic spending. The government abandoned several
the fore given the upbeat tone in local activity and the rise in key politically sensitive budget initiatives -aimed at fighting
food and fuel costs. Headline consumer inflation has yet to inflation. In particular, a controversial one-off tax rebate
display a definitive upward trend, standing at 3% y/y, with (capped at HK$6000) benefiting around 1.4 million taxpay-
core inflation coming down recently to 1.3% y/y. ers is likely to provoke higher inflationary pressures with
minor effects on growth.

11
Global Economic Research April 2011

Foreign Exchange
Outlook
DEVELOPING AMERICAS
Currency Outlook Pablo F.G. Bréard +1 416 862-3876

BRAZIL - The Brazilian real (BRL) remains stable and strong, firmly supported by large-scale foreign capital inflows,
highly attractive interest-rate differentials, favourable commodity prices and a prudential macroeconomic policy environ-
ment. Absent strong fiscal tightening, the BRL could appreciate even further. However, we do expect the BRL to close the
year at 1.65 and modestly depreciate in nominal terms in 2012.

MEXICO - The Mexican peso (MXN) has become a market favourite currency in the context of growing financial uncer-
tainties linked to European debt sustainability shocks, political tension in Northern African and Middle Eastern nations and
commodity market shocks. US recovery dynamics, high oil prices, attractive yields and domestic demand growth are the
key factors shaping a bullish tone in Mexico’s currency and economic outlook. We expect USDMXN to close the year at
12.70.

CHILE - The Chilean peso (CLP) has adopted an appreciating bias in the context of a volatile price environment triggered
by sharp price adjustment in relevant commodity markets. The CLP continues to be influenced by the direction of copper
(export) and crude oil (import) prices. The central bank remains committed to further rate hikes to normalize monetary
conditions. We expect USDCLP to close the year at 480.

COLOMBIA - The Colombian peso (COP) remains in range-trading mode despite signs of ongoing support for further
appreciation versus the USD due to accelerating economic activity, widening interest rate differentials (and short-term
rate increases), increasing crude oil prices, surging domestic demand (and local credit) and massive capital inflows. We
expect USDCOP to close the year at 1,860.
Currency Trends
Going Back Spot Outlook
FX Rate FX Rate
12 m 6m 3m 1-Apr 3m 6m 12 m
USDBRL 1.78 1.69 1.66 1.62 1.64 1.64 1.67 USDBRL
USDMXN 12.36 12.59 12.36 11.84 12.15 12.24 12.55 USDMXN
USDCLP 524 484 468 477 478 479 482 USDCLP
USDCOP 1920 1800 1920 1861 1867 1864 1867 USDCOP
USDBRL USDMXN

1.87 13.2

1.83 13.0

1.80 12.8

1.76 12.6

1.73 12.4

1.69 12.2

1.66 12.0

1.62 11.8
Apr-10 Jun-10 Aug-10 Oct-10 De c-10 Feb-11 Apr-11 Apr-10 Jun-10 Aug-10 Oct-10 De c-10 Fe b-11 Apr-11

USDCLP USDCOP
2050
544
2000
530
1950
516

502 1900

488 1850

474 1800

460 1750
Apr-10 Jun-10 Aug-10 Oct-10 Dec-10 Fe b-11 Apr-11 Apr-10 Jun-10 Aug-10 Oct-10 De c-10 Feb-11 Apr-11

12
Global Economic Research April 2011

Foreign Exchange
Outlook
DEVELOPING AMERICAS
Fundamental Commentary Pablo F.G. Bréard +1 416 862-3876

BRAZIL - Brazil is weathering the triple global events MEXICO - Mexico offers a favourable business and market
(Japan nuclear crisis, political upheaval in Africa and the environment, characterized by accelerating economic
Middle East and the commodity price shock) relatively well. growth, contained inflation and a domestic credit expansion
The government is not indifferent to the deteriorating infla- phase. The year 2010 was earmarked as a period of sharp
tion outlook and the widening current account deficit which recovery, as reflected by the 5.5% growth rate following a
seem to be emerging within the context of a decelerating contraction of 6.9% in 2009. Looking ahead, Mexico’s real
economy. We are now estimating that the economy will GDP is well positioned to expand by 4% this year and next.
slow down the pace of expansion and grow by 4-4.5% in In sharp contrast with other top-tier emerging-marker coun-
2011-12, from the 7.5% increase recorded in 2010. Infla- tries, consumer price inflation (at 3.5%) has not been an
tionary pressures and expectations have been on the rise issue of policymaker/investor concern so far. Futures mar-
for months now, prompting the central bank to adopt a kets indicate, however, that the Mexican monetary authori-
hawkish monetary stance and increase the policy-setting ties may gradually and moderately begin a tightening cycle
SELIC rate by 300 bps to 11.75% since October 2009. Mar- some time during the fourth quarter of the year. At present,
ket participants are now expecting that the central bank will the government-administered policy rate is set at 4.5% (a
complete its tightening cycle by raising the SELIC rate by sharp difference with the 11.75% in Brazil). Due to its per-
another 50 bps and keep it at 12.25% for the rest of the ceived technical undervaluation, rising crude oil prices (the
year. In an effort to tackle the dual policy concerns of robust benchmark WTI light crude oil price has approached the
credit growth and rapid currency appreciation, the govern- US$110 per barrel at the end of March) and attractive peso-
ment recently announced the imposition of a 6% tax on in- dollar bond yield spreads, the MXN attained investor-
ternational lending and bond issuance activity by Brazilian favourite status. Without aggressively intervening in finan-
banks. Recent data indicated that total domestic credit ex- cial markets, the central bank has continued to accumulate
panded at a 21% rate in the 12-month period ending in Feb- international reserves which reached US$125 billion by the
ruary 2011. The central bank also reported that public sec- end of March. Credit market metrics also point towards a
tor financial institutions account for 42% of the total stock of steady improvement in Mexico’s sovereign creditworthi-
Brazilian credit. ness. All international agencies maintain a “stable” outlook
on Mexico’s sovereign credit ratings. A visible improvement
on fiscal reform is at the core of potential rating revisions.
CHILE - Chile is experiencing a period of robust economic promising. The economy is showing signs of steady accel-
activity aided by surging domestic consumption and strong eration on the back of surging domestic demand, increasing
investment flows linked to the thriving export markets. The access to domestic credit, favourable terms of trade, a pru-
economy is positioned to expand by 6.5% this year in line dent macroeconomic framework and sizable foreign capital
with strong momentum enjoyed by Southern Cone coun- inflows. The government of President Santos has not been
tries. Monthly indicators of economic activity continue to shy in stressing policy concerns regarding the potential for
highlight an expansionary phase: in January, the IMACEC steady appreciation of the peso as the country receives vo-
index increased by 6.8% y/y, up from 5.9% in December. luminous amount of foreign direct equity flows linked to the
Retail sales trends also portray an expansionary phase in thriving energy (and mining) sector. The domestic financial
Chile. Inflation is not, for now, an issue of concern; in fact, sector remains strongly capitalized and adequately regu-
consumer prices increased by 2.70% in February on a year- lated leading to a phase of expanding domestic lending ac-
over-basis. However, recent official rhetoric stressed that tivity in the new phase of economic expansion. The Colom-
due to the geo-political crisis taking place in Northern Africa bian economy is well positioned to grow by 6% in 2011 after
and the Middle East, inflationary expectations may suffer an a healthy 4.3% expansion in 2010. Robust consumer
upward adjustment. The central bank continues to stress spending and construction growth was at the core of the
the need to tighten monetary conditions; indeed, the mone- 4.6% growth rate during the last quarter of 2010. In recogni-
tary authorities increased its short-term policy rate by 50 tion of major structural advances achieved over the past few
bps to 4% on March 17th. Of course, higher interest rates years and, in line with a pro-development policy environ-
may be counterproductive if the authorities are somewhat ment, Standard and Poor’s rewarded Colombia with a sov-
concerned by a potential rate of currency appreciation as ereign credit rating upgrade revision to investment grade
stressed by the decision to purchase US$12 billion earlier in status on March 16th; moreover, both Fitch and Moody’s still
the year. As of the end of March, the central bank counted maintain a “positive” outlook on the country’s debt assets
on US$28.5 billion in international reserves. Beyond the implying that the country is nearing “full investment grade
plan to accumulate reserves, the government is relaxing status”. Meanwhile, the central bank remains committed to
rules for Chilean institutional investments in foreign assets normalize monetary conditions, i.e., increase short-term
in order to allow an orderly exchange rate adjustment. interest rates from its current level of 3.50%.
COLOMBIA - The Colombian economic outlook remains

13
Global Economic Research April 2011

Foreign Exchange
Outlook
DEVELOPING EUROPE/AFRICA
Currency Outlook Tuuli McCully +1 416 863-2859

RUSSIA - Elevated oil prices and the outlook for higher interest rates will continue to provide support to the Russian ru-
ble (RUB) despite increased risk aversion stemming from events in the Middle East and Japan. Approaching parliamen-
tary and presidential elections, we will likely see periods of currency volatility. We expect USDRUB to close the year at 28.

TURKEY - The Turkish lira (TRY) is embarking on a period of stabilization following four months of marked selling pres-
sures from November through February. Widening external imbalances together with June general elections may reintro-
duce a modest weakening trend later on this year. We expect the TRY to close the year at 1.60 per USD.

CZECH REPUBLIC - The Czech government’s commitment to fiscal prudence should help prevent a contagion of risk
aversion from neighbouring countries into the Czech Republic. We expect the CZK to remain relatively stable through
2012, hovering close to 24.0 per the euro.

SOUTH AFRICA - The South African rand (ZAR) will continue to reflect rapid changes in investor sentiment. A widening
current account deficit will point to a depreciating bias of the ZAR vis-à-vis the US dollar in 2011 and 2012. We expect
the ZAR to close the year at 7.10 per USD.

Currency Trends
Going Back Spot Outlook
FX Rate FX Rate
12 m 6m 3m 1-Apr 3m 6m 12 m
USDRUB 29.4 30.6 30.5 28.4 28.3 28.1 28.2 USDRUB
USDTRY 1.52 1.45 1.54 1.54 1.56 1.58 1.59 USDTRY
EURCZK 25.4 24.6 25.1 24.5 24.4 24.2 24.0 EURCZK
USDZAR 7.28 6.97 6.63 6.74 6.88 6.99 7.20 USDZAR
USDRUB USDTRY
31.7 1.66

31.0 1.60

30.2 1.55

29.5 1.49

28.7 1.44

28.0 1.38
Apr-10 Jun-10 Aug-10 Oct-10 Dec-10 Feb-11 Apr-11 Apr-10 Jun-10 Aug-10 Oct-10 Dec-10 Feb-11 Apr-11

EURCZK USDZAR
26.25 8.00

25.75 7.70

25.25 7.40

24.75 7.10

24.25 6.80

23.75 6.50
Apr-10 Jun-10 Aug-10 Oct-10 Dec-10 Feb-11 Apr-11 Apr-10 Jun-10 Aug-10 Oct-10 Dec-10 Feb-11 Apr-11

14
Global Economic Research April 2011

Foreign Exchange
Outlook
DEVELOPING EUROPE/AFRICA
Fundamental Commentary Tuuli McCully +1 416 863-2859

RUSSIA - Domestic politics will dominate investor attention TURKEY - Turkish general elections will be held on June
in the coming two years as the next parliamentary elections 12th, 2011 and the robustly growing economy offers a fa-
are scheduled for late 2011, followed by a presidential ballot vourable background for the ruling Justice and Develop-
in 2012. Russia will continue its fight against rising inflation- ment Party’s campaign. Real GDP growth is being boosted
ary pressures in the coming months. At the March 25th by strong expansion in household consumption and invest-
monetary policy meeting, the country’s monetary authorities ment. With the industrial sector on the mend and consumer
opted to leave the refinancing rate unchanged at 8.0% fol- confidence improving, we expect the country’s output to
lowing a hike the month before. Nevertheless, the central grow by around 5¼% through 2012. Following the Monetary
bank continued its monetary tightening policy by raising Policy Committee meeting on March 23rd, the Turkish
bank reserve requirements further. The consumer price in- benchmark interest rate was kept on hold at 6.25% for the
dex increased 9.5% y/y in February, being the highest rate second consecutive month, while reserve requirements
among the BRIC countries. The prospects for further bench- were raised in order to limit rapid credit expansion and en-
mark interest rate increases together with shifting dynamics hance financial stability. Further increases in reserve re-
in global energy markets (demand and pricing) will make quirements are likely. Despite the authorities’ efforts to ease
Russia an attractive destination for capital inflows, thereby capital inflows by keeping interest rates low, the current ac-
providing support to the Russian ruble (RUB) through 2011. count deficit continues to widen. On the back of booming
Developments in crude oil and natural gas prices will signifi- domestic demand, increasing inflation expectations and
cantly impact the Russian economic outlook; we expect the elevated commodity prices, we assess that policymakers do
country’s real GDP growth to average 4½% through 2012, not have any further room to cut the benchmark rate; in-
following a 4.0% expansion in 2010. Similarly, elevated en- stead, a period of monetary policy normalization is ap-
ergy prices will be favourably reflected in Russian public proaching. While Turkey’s inflation continued to ease in
finances; the fiscal deficit will likely narrow to 3½% of GDP February on the back of base effects, reaching 4.2% y/y,
this year from slightly over 4% in 2010. inflationary pressures are rebuilding further up the distribu-
tion chain with producer prices increasing by 10.9% y/y.
Consumer price inflation will likely rebound to around 6½%
y/y by the end of 2011.

CZECH REPUBLIC - Monetary conditions in the Czech SOUTH AFRICA - South African monetary authorities are
Republic are set to remain on hold in the near term, as de- becoming somewhat more concerned about the inflation
mand-led inflationary pressures remain virtually absent. outlook, assessing that the risks to price stability are “on
Headline inflation continues to hover below the central the upside” due to pressures stemming from administered
bank’s 2.0% target; the consumer price index increased by prices, wage settlements and higher global energy and
1.8% y/y in February. The Czech National Bank has kept food prices. Though showing some signs of a pickup, con-
the benchmark interest rate unchanged at 0.75% since sumer price inflation remained well-contained at 3.7% y/y in
May 2010 and policymakers have indicated that a gradual February. We expect inflation to approach the upper limit of
process of monetary policy tightening will likely begin to- the South African Reserve Bank’s (SARB) 3-6% inflation
ward the end of 2011. The export-oriented Czech economy target range in 2012. As inflationary pressures are not de-
expanded by 0.3% q/q (2.6% y/y) in the final quarter of mand-driven, the SARB opted to keep the benchmark inter-
2010, showing some signs of waning momentum partly due est rate unchanged at 5.5% following the Monetary Policy
to adverse weather conditions. Output growth was driven Committee meeting on March 24th. The next policy meeting
by investment in inventories and net exports. We expect is scheduled for May 12th. South African economic pros-
the economy to grow by around 2% this year and by 2½% pects continue to improve gradually, with the manufacturing
in 2012, following a 2.2% expansion in 2010. Public fi- and mining sectors on the mend and improving retail sales
nances of the Czech Republic compare favourably with pointing towards a modest pickup in household spending.
many of its European peers. The government aims to nar- Following an expansion of 2.8% in 2010 as a whole, we
row the fiscal deficit to 4.6% of GDP in 2011 from 4.8% last expect the country’s real GDP growth to average 3¾%
year, and further to 3% of GDP by 2013. In particular, a through 2012. Nevertheless, these rates of economic ex-
planned large pension reform would significantly ease pub- pansion are not enough to materially reduce the high un-
lic expenditure pressures stemming from the aging popula- employment rate of 24%. With the trade balance moving
tion. Meanwhile, public sector debt is low in regional terms, from a surplus position to a deficit, the current account is
hovering below 40% of GDP in 2010. set to widen significantly from 3.9% of GDP in 2010 to
close to 6% of GDP in 2012; the shortfall points to modest
selling pressures of the ZAR in the next two years.

15
Global Economic Research April 2011

Foreign Exchange
Outlook

GLOBAL CURRENCY FORECAST (end of period)


2009 2010 2011f 2012f 2011f 2012f
Q1a Q2 Q3 Q4 Q1 Q2 Q3 Q4
MAJOR CURRENCIES
Japan USDJPY 93 81 84 90 83 79 82 84 86 87 89 90
Euro zone EURUSD 1.43 1.34 1.45 1.48 1.42 1.42 1.44 1.45 1.45 1.46 1.47 1.48
EURJPY 133 109 122 133 118 112 118 122 125 127 131 133
UK GBPUSD 1.62 1.56 1.63 1.70 1.60 1.60 1.61 1.63 1.65 1.67 1.69 1.70
EURGBP 0.89 0.86 0.89 0.87 0.88 0.89 0.89 0.89 0.88 0.87 0.87 0.87
Switzerland USDCHF 1.04 0.93 0.90 0.86 0.92 0.92 0.90 0.90 0.90 0.89 0.87 0.86
EURCHF 1.48 1.25 1.31 1.27 1.30 1.31 1.30 1.31 1.31 1.30 1.28 1.27

AMERICAS
Canada USDCAD 1.05 1.00 0.95 0.92 0.97 0.97 0.96 0.95 0.95 0.94 0.93 0.92
North

CADUSD 0.95 1.00 1.05 1.09 1.03 1.03 1.04 1.05 1.05 1.06 1.08 1.09
Mexico USDMXN 13.1 12.4 12.5 12.7 11.9 12.2 12.2 12.5 12.6 12.5 12.6 12.7
CADMXN 12.4 12.4 13.1 13.8 12.3 12.5 12.8 13.1 13.2 13.3 13.5 13.8
Argentina USDARS 3.80 3.98 4.40 5.00 4.06 4.17 4.28 4.40 4.54 4.69 4.84 5.00
Brazil USDBRL 1.74 1.66 1.65 1.75 1.63 1.64 1.64 1.65 1.67 1.70 1.72 1.75
Chile
South

USDCLP 507 468 480 490 478 478 479 480 482 485 487 490
Colombia USDCOP 2043 1920 1860 1890 1871 1867 1864 1860 1867 1875 1882 1890
Peru USDPEN 2.89 2.81 2.68 2.60 2.80 2.76 2.72 2.68 2.66 2.64 2.62 2.60
Venezuela 1/ USDVEB 2.15 4.29 4.30 5.15 4.29 4.29 4.29 4.30 4.50 4.70 4.92 5.15

ASIA / OCEANIA
Australia AUDUSD 0.90 1.02 1.08 1.10 1.03 1.05 1.06 1.08 1.07 1.08 1.09 1.10
China USDCNY 6.83 6.59 6.10 5.75 6.55 6.40 6.25 6.10 6.01 5.92 5.84 5.75
Hong Kong USDHKD 7.75 7.77 7.75 7.75 7.78 7.77 7.76 7.75 7.75 7.75 7.75 7.75
India USDINR 46.5 44.7 43.8 41.0 44.6 44.8 44.3 43.8 43.0 42.4 41.7 41.0
Indonesia 2/ USDIDR 9.48 8.98 8.54 8.40 8.71 8.65 8.60 8.54 8.50 8.47 8.43 8.40
Malaysia USDMYR 3.44 3.06 2.89 2.78 3.02 2.98 2.93 2.89 2.86 2.83 2.81 2.78
New Zealand NZDUSD 0.72 0.78 0.78 0.80 0.76 0.77 0.77 0.78 0.78 0.79 0.79 0.80
Philippines USDPHP 46.1 43.6 42.0 40.0 43.4 43.5 42.9 42.0 41.5 41.0 40.5 40.0
Singapore USDSGD 1.40 1.28 1.24 1.21 1.26 1.25 1.24 1.24 1.23 1.22 1.21 1.21
South Korea USDKRW 1158 1125 1060 1000 1100 1090 1075 1060 1050 1040 1028 1000
Thailand USDTHB 33.4 30.0 28.5 27.3 30.3 29.7 29.1 28.5 28.2 27.9 27.6 27.3
Taiwan USDTWD 32.0 29.2 27.8 26.5 29.4 28.9 28.3 27.8 27.5 27.1 26.8 26.5

EUROPE / AFRICA
Czech Rep. EURCZK 26.4 25.1 24.0 24.0 24.5 24.4 24.2 24.0 24.0 24.0 24.0 24.0
Iceland USDISK 126 115 120 115 114 116 118 120 119 117 116 115
Hungary EURHUF 271 279 275 265 266 269 272 275 272 270 267 265
Norway USDNOK 5.78 5.81 5.50 5.30 5.54 5.67 5.64 5.50 5.58 5.55 5.53 5.30
Poland EURPLN 4.11 3.96 3.90 3.80 4.02 3.98 3.94 3.90 3.87 3.85 3.82 3.80
Russia USDRUB 30.0 30.5 28.0 29.0 28.4 28.3 28.1 28.0 28.2 28.5 28.7 29.0
South Africa USDZAR 7.39 6.63 7.10 7.50 6.77 6.88 6.99 7.10 7.20 7.30 7.40 7.50
Sweden EURSEK 10.24 8.99 8.70 8.60 8.95 8.87 8.78 8.70 8.67 8.65 8.62 8.60
Turkey USDTRY 1.50 1.54 1.60 1.55 1.55 1.56 1.58 1.60 1.59 1.57 1.56 1.55

f: forecast; 1/ a new "strong bolivar" w as announced on January 1st, 2008, equivalent to 1000 bolivars; 2/ in thousands

16
Global Economic Research April 2011

Foreign Exchange
Outlook

INTERNATIONAL RESEARCH GROUP

Pablo F.G. Bréard, Head


pablo_breard@scotiacapital.com

Daniela Blancas
daniela_blancas@scotiacapital.com

Tuuli McCully
tuuli_mccully@scotiacapital.com

Estela Ramírez
estela_ramirez@scotiacapital.com

Oscar Sánchez
oscar_sanchez@scotiacapital.com

CANADIAN & U.S. ECONOMIC RESEARCH

Gorica Djeric
gorica_djeric@scotiacapital.com

Derek Holt
derek_holt@scotiacapital.com

Adrienne Warren
adrienne_warren@scotiacapital.com

FOREIGN EXCHANGE RESEARCH

Camilla Sutton
camilla_sutton@scotiacapital.com

Sacha Tihanyi
sacha_tihanyi@scotiacapital.com

Scotia Economics
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