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EUROPEANMONETARY
UNION
IN
CRISIS
CamillaSutton lChiefCurrencyStrategist
(416)8665470 [email protected]
DIALIN:
905
694
9451
(local
to
Toronto)
PASSCODE:865033782#
CONFERENCECALLCOMMANDS
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SCOTIABANKSFORECAST
FX
USDperformance
is
mixed REAL
GDP
A
softened
growth
profile
2010 2011 2012f 2013f 0010 2011 2012f 2013f
USDCAD 1.00 1.02 0.98 0.96 US 1.8 1.7 2.3 2.4
CADUSD 1.00 0.98 1.02 1.04 Canada 2.2 2.5 2.1 2.2
AUDUSD 1.02 1.02 1.09 1.11 Mexico 2.1 3.9 3.6 3.7
EURUSD 1.34 1.30 1.25 1.29 EuroZone 1.4 1.5 (0.5) 0.9
GBPUSD 1.56 1.55 1.63 1.68 UK 2.0 0.7 0.5 1.8
USDJPY 81 77 85 87 Japan 0.9 (0.7) 2.0 1.7
USDCNY 6.61 6.30 6.18 6.05 China 9.5 9.3 8.4 8.9
INFLATION Expectedtoremaincontained I NTERESTRATES Remainaccomodative
US 3.3 2.4 2.2 Q411 Q412 Q413
Canada 2.7 2.2 2.1 FED 0.25 0.25 0.25
BoC 1.00 1.00 1.75
COMMODITIES
Yearlyaverages ECB 1.00
0.75
0.75
Oil(WTI) 95 105 105 BoE 0.50 0.50 0.50
Gold 1,569 1,650 1,600 BoJ 0.10 0.10 0.10
RBA 4.25 3.75 4.00
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RISKAVERSIONSPIKESARETEMPORARYBUTVIOLENT
Riskaversionistemporary
Since2008,spikeshavebeenbetween2and5weeks(weareinweektwo).
Takessubstantialtimetoretrace
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RISKAVERSION&FXLOSSES AREWETHEREYET?
Historymightnotrepeatbutprovidesaguideofpotentialimpact
Nothingcomparestothefallof2008
Epicenterofcrisisdoesntmatter.
AUDalwayshigherbetaandlargerlosses.
Comparedtoeither2010or2011itlookslikeweare1/2to2/3ofthewaythere.
AsofMay24
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EUROPEANBONDANDCDSMARKETS
SPAINSCDSLEVELSRISETONEWHIGH;YIELDSELEVATED
SPAINSCDSRISESTONEWHIGH;YIELDSELEVATED
GERMANCDSLEVELSRISEASYIELDSFALLTOLOWS
ITALYSCDSLEVELSRISE;BUTYIELDSCONTAINED
CDS
10yrYIELDS
CDS
10yrYIELDS
CDS
10yrYIELDSSource:Bloomberg&ScotiaFXStrategy
Source:Bloomberg&ScotiaFXStrategy Source:Bloomberg&ScotiaFXStrategy
FRENCHCDSLEVELSRISEASYIELDSFALLTOLOWS
Source:Bloomberg&ScotiaFXStrategy
CDS
10yrYIELDS
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TWOTHEMESTHISYEAR GLOBALGROWTHANDCENTRALBANKPOLICYCHANGING
Slowingglobalgrowthisbeingpricedintomarkets
RiskofFedQE3,ECBactionhasincreased;butnotthereyet
OECD
leading
indicators
(May
10)
more
bullish
than
market
perception
Sourceforallcharts:OECD
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EUROPE HASAGLOBALIMPACT
IMPACTOF
AN
INTENSIFIED
EURO
AREA
CRISIS
ON
THE
WORLD
Verystrong(>3%)
Strong(23%)
Moderate(12%)
Limited(
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EURUSD HISTORICALTRADINGPATTERNS
EURkeylevels:
1.2588:Historicalsupport/resistance
1.2500:Psychological(brokenintraday)
1.2152:Nextmajorsupport
1.1877:Majorsupportfrom2010low
EURSINCE
INCEPTION
EURs RECENTHISTORY
EUR
key
levels:1.21:Averagesinceinception
1.6038:Alltimehigh July2008
0.8230:Alltimelow October2000
Source:Bloomberg&ScotiabankFXStrategy
Source:Bloomberg&ScotiabankFXStrategy
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EURUSD WHATPROTECTSEURFROMCOLLAPSE
Themesthat
support
EUR:
USeconomy needsaweakUSD;justlikeEurozoneneedsweakEUR.
USfiscalproblemsloom currentlaw suggestsfiscaldragof3.9%in2013;BoCestimatesitat2%.
Relativemonetarypolicy ECBnotmovingtowardsQE;FedhasdooropentoQE3.
Germany hasvaluewhetheryoubelieveinEMUornot.
Repatriation IMF deleveragingwilltotal$2.6trn
with75%ofthisexpectedtocomefromsalesofsubsidiaries,noncoreassetsandsecurities
Source:Bloomberg&ScotiaFXStrategy
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EURUSD WHYTHECURRENCYSHOULDSTRUGGLE
EURtrends
lower
in
2012,
closing
at
1.25
but
does
not
collapse
as:
Fundingcurrency:EURbecomescarryfundingpotential.
Sentimentisbearish:evenifshortsarefrustratedandtired.
Centralbankpolicy:supportsEURinneartermbutECBtostaydovishlongerthanFED.
Politics:lackofwilltomovetowardscloserfiscalties;butfewother choices.
Growthoutlook:stillfalling austerity/growthbalance.
Riskaversion repeatedspikesasconfusionreignsforEurope.
Uncertainty:
membership,
politics,
future,
contagion
potential.
Source:Bloomberg&ScotiaFXStrategy
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USDCAD WHATRISKCOULDMEANFORUSDCADTEMPORARILY
1.0853
1.0658
1.0790
1.1335
1.0500
1.0000
0.9500
USDCADHISTORYANDPOTENTIAL
Source:Bloomberg&ScotiaFXStrategy
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USDCAD RISKAVERSIONINTERUPTSBUTDOESNTCHANGEATREND
USDCAD
RISKAVERSION
IS
AN
INTERUPTION
AND
TEMPORARY
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CADDRIVERS&OUTLOOK
DRIVERS
OF
CAD USDvsCADrelativepicture
Globalgrowthoutlook(US&China)
Europe
Domesticfundamentals
Bank ofCanadapolicyvsFedpolicy
Oilandcommodities
Flow
TripleAstatus
Riskaversion
Sentiment
Technicals
Outlook CADmaintainsitsappreciatingtrend
USDCADcloses2012at0.98(strongerCADthantheendof2011)
USDCADcloses2013at0.96(strongerCADthantheendof2012)
USDCAD
MOVE
UP
TEMPORARY
Source:Bloomberg&ScotiaFXStrategy
Source:Bloomberg&ScotiaFXStrategy
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SCOTIABANKSGLOBALFORECASTANDOUTLOOK
MEDIUMTERMOUTLOOKINTOYEAREND2012
Bullish CAD: Benefits from BoC vs Fed (and global) policy, sentiment, risk on, weak USD, relatively
strongCanadian
economic
and
sovereign
fundamentals;
risk
is
global
growth
outlook.
Bearish EUR: Confusion, uncertainty, no political will for solution, funding side of carry all weigh on
EUR;buteachleglowerisfollowedbyperiodofretracement.USDcannotstrengthenforever.
Bearish JPY: Drivers that support JPY are spikes in risk aversion and alternatives to USD; but
fundamentals,
sentiment
and
monetary
policy
no
longer
support
a
strong
currency.
BullishGBP:IncreasinglyseenasanalternativetoUSDandEUR;mediumtermproblemsstillaweight.
BullishCNY: Authoritiesallowmeasuredpaceofappreciation;butslowerthanpreviouslythought.
BullishAUD:SupportedbytiestoAsia,carrytrade,interestrates,investor sentiment&USDweakness.
FXOutlook
2010 2011 2012f 2013f USDCAD 1.00 1.02 0.98 0.96
CADUSD 1.00 0.98 1.02 1.04
EURUSD 1.34 1.30 1.25 1.29
GBPUSD 1.56 1.55 1.63 1.68
AUDUSD 1.02 1.02 1.09 1.11
USDJPY 81 77 85 87
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SCOTIABANK FXSTRATEGY
FXSTRATEGY
SUMMARY
OF
DOCUMENTS
DailyFXUpdate Publishedat7:45am(EST)
DailyLatAM Update Publishedat7:45am(EST)
DailyAsianUpdate Publishedat10:00pm(EST)
CurrencySentiment
CFTC
Report
Published
every
Friday
SpecialReports Activetradestrategies;intradaymarket
movingevents;monetarypolicy,etc.
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FXSTRATEGY
GLOBAL
COVERAGE
CamillaSutton,CFA,CMT
ChiefCurrencyStrategist
(416)8665470
EricTheoret
CurrencyStrategist
(416)8637030
SachaTihanyi EmergingAsia
SeniorCurrency
Strategist
EduardoSuarez LatAM
SeniorCurrencyStrategist
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