jun 2010 scotiabank group fx outlook

8/9/2019 JUN 2010 Scotiabank Group FX Outlook

1/17

Global Economic Research June 2010

Foreign Exchange Outlookis available on www.scotiabank.com and Bloombergat SCOE

Index

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

US/Canada.................................................................................................................................. 5

Europe/Japan (Majors) .............................................................................................................. 6

Asia/Oceania/Europe................................................................................................................. 8

Developing Asia.......................................................................................................................10

Developing Americas .............................................................................................................. 12

Developing Europe/Africa.......................................................................................................14

Global Currency Forecast.......................................................................................................16

Prolonged EUR weakness, European credit market stress,commodity price shifts, profit-taking in emerging markets,emergence of geo-political tension in Asia, monetarytightening dynamics and intensifying official intervention arekey issues shaping capital flows in foreign exchangemarkets.

USD strength against the EUR remains intact. Interest ratedifferentials will inject an appreciation bias into the CAD andGBP. The JPY remains broadly stable against the USD, yetmaintains a strengthening bias vs. the EUR.

The CNY and Chinas FX policy continue to act as a globalstabilizing factor. However, profit-taking headwinds andheightened geo-political tensions are fuelling disruptive

volatility in selective Asian markets. The THB and the KRWremain on the defensive despite mild recovery from sharplosses.

Global risk aversion placed emerging-market currencies onalert. A monetary tightening cycle is in place in Latin America.Growth and interest rate differentials coupled with supportivecommodity prices will reignite a short-term strengtheningbias into the BRL, MXN, CLP, RUB and ZAR.


2/17


Actual Q1 10 Q2 10 Q3 10 Q4 10 Q1 11 Q2 11 Q3 11 Q4 111.23 1.35 1.20 1.17 1.19 1.21 1.22 1.24 1.26

1.35 1.30 1.30 1.29 1.29 1.29 1.29 1.29

91.3 93 91 93 95 97 98 99 100

93 93 95 96 98 99 99 991.47 1.52 1.44 1.46 1.50 1.51 1.52 1.54 1.55

1.52 1.50 1.50 1.51 1.52 1.53 1.53 1.53

1.05 1.02 1.02 1.01 1.00 0.99 0.98 0.97 0.97

1.02 1.01 1.01 1.02 1.03 1.03 1.04 1.04

0.84 0.92 0.87 0.88 0.90 0.91 0.92 0.93 0.94

0.92 0.92 0.92 0.91 0.90 0.89 0.89 0.88

12.88 12.37 12.43 12.65 12.80 12.94 12.96 13.08 13.22

12.33 12.31 12.38 12.43 12.49 12.55 12.64 12.72

(*) Source: Consensus Economics Inc. May 2010

Spot Price vs. 100 Day Moving Averagevs. 200 Day Moving Average -(5yr Trend)

Consensus*

Mexican Peso

Canadian Dollar

Australian Dollar

Global Foreign Exchange Outlook

Euro

Yen

Sterling

AUDUSD USDMXN

EURUSD USDJPY

GBPUSD USDCAD

June 2, 2010EURUSD

Consensus*

USDJPY

Consensus*GBPUSD

Consensus*

Consensus*

USDCAD

Consensus*

AUDUSD

USDMXN

86

93

100

107

114

121

Jun-

05

Dec-05

Jun-

06

Dec-06

Jun-

07

Dec-07

Jun-

08

Dec-08

Jun-

09

Dec-09

Jun-

10

USD/JPY

100 Day

200 Day

1.12

1.22

1.32

1.42

1.52

1.62

Jun-

05

Nov-

05

Apr-0

6

Sep-

06

Feb-

07

Jul-0

7

Dec-07

May

-08

Oct-

08

Mar

-09

Aug-

09

Jan-

10

Jun-

10

EUR/USD

100 Day

200 Day

1.36

1.51

1.66

1.81

1.96

2.11

Jun-

05

Dec-05

Jun-

06

Dec-06

Jun-

07

Dec-07

Jun-

08

Dec-08

Jun-

09

Dec-09

Jun-

10

GBP/USD

100 Day

200 Day

0.90

0.98

1.06

1.14

1.22

1.30

Jun-

05

Dec-05

Jun-

06

Dec-06

Jun-

07

Dec-07

Jun-

08

Dec-08

Jun-

09

Dec-09

Jun-

10

USD/CAD

100 Day

200 Day

0.59

0.67

0.74

0.82

0.89

0.97

Jun-

05

Dec-05

Jun-

06

Dec-06

Jun-

07

Dec-07

Jun-

08

Dec-08

Jun-

09

Dec-09

Jun-

10

AUD/USD100 Day

200 Day

9.7

10.8

11.9

13.0

14.1

15.2

Jun-

05

Dec-05

Jun-

06

Dec-06

Jun-

07

Dec-07

Jun-

08

Dec-08

Jun-

09

Dec-09

Jun-

10

USD/MXN

100 Day

200 Day


3/17


Europe is at the center of investors heated debate on theglobal currency outlook. The fiscal erosion and deteriorat-ing creditworthiness of southern European economies

have weakened the near-term outlook for the euro (EUR)and triggered another round of disorderly currency adjust-ments and heightened global risk aversion. The US dollar(USD) has been the primary beneficiary of the increasingbearish sentiment towards the EUR, revival in the flight-to-liquidity bias, and the relative strengthening in US mac-roeconomic fundamentals. The credit market distressweakened the euro zone currency and economic outlook,yet the process of diversification of international reservesmanagement remains intact; indeed, China was quick tostress that the EUR remains a strategic (reserve cur-rency) option. The Canadian dollar (CAD), underpinnedby the strength of its financial system, high energy prices,

and rising interests (Bank of Canada is the first G7 centralbank to raise rates), continues to be a market favouriteamongst global investors; a move back towards parity vs.the USD is likely. Emerging-market currencies regainedan appreciating bias following the recent spike in marketvolatility, supported by growth and interest rate differen-tials and financial systemic strength. The European fiscal/debt shock reinforces the relative position and weight ofdeveloping countries in the new global financial map.

In response to heightened investor intolerance, Europeanleading nations joined forces with multilateral lending in-stitutions and the US Federal Reserve (Fed) to bring sta-bility to nervous financial markets. Collective action withinthe 27-member European Union (EU) and the Interna-tional Monetary Fund (IMF) gave birth to a comprehen-sive financial assistance package of 860 billion(including 110 billion in IMF support to Greece, a 60billion EU Stabilization Fund, 440 billion in country loanguarantees and up to 250 billion in IMF funds for theregion at large). The Fed reinstated the already discon-tinued reciprocal currency arrangements with theworlds influential central banks to address temporarydysfunctions in short-term USD funding markets.

Market metrics imply a mixed reaction to the Europeanfinancial programme. The USD remains well bid; the

trade-weighted DXY index increased further over the pastweeks, accumulating a 17% gain since late November2009. Currency trading dynamics in the weeks ahead willdictate the degree of success of the European financialpackage. The deepening of the bearish trend may soonplace EUR/USD closer to the 1.20 mark. The EUR is alsoweakening against both the Japanese yen (JPY) and theBritish pound (GBP). Although post-election policy shiftsin the UK might cause budget-related uncertainties, theGBP should benefit from widening interest rate differen-tials; indeed, EUR/GBP will continue to weaken as the

Bank of England begins to tighten monetary policyAgainst the JPY, euro weakness has been more modestyet there is potential for consolidation within the 110-120

range in the near term; in fact, low growth, deflation anddemographic shifts continue to weigh on the JPY outlookFinally, as in previous global shock waves, the Chineseleaders acted with prudence and maintained a stable currency trading environment. However, once financial market stability is restored, we do expect that China will adopa more flexible exchange rate regime.

The unprecedented and coordinated multilateral officiaintervention to bring calm to the European credit stormand restore order to currency and securities markets isshowing some signs of success, yet the EUR outlook remains grim. EUR/USD will likely approach the 1.17 mark

in the second half of 2010 before regaining moderatestrength in 2011. Although both the IMF and the OECDdo not expect a major decline in European economic ac-tivity, we have downgraded our outlook for euro zoneGDP growth to 0.8% and 1% for 2010 and 2011, respectively, on the grounds of deteriorating credit conditionsand adoption of sizable fiscal adjustments. Irrespective othe European Financial Stabilization mechanism unveiledon May 9th, some international rating agencies havedowngraded the rating (and/or outlook) of sovereign credits such as Spain, Portugal, Greece and Ireland. Moreover, Standard and Poors (S&P) has maintained anegative outlook on the United Kingdoms sovereignrating since May 2009.

The near-term risk of sovereign credit default in SouthernEuropean countries has declined, yet the structura(fiscal) deficiencies remain in place in Europe (and theUS) at large. EU leaders stressed the need to deepenfiscal consolidation in Spain and Portugal, prompting theintroduction of tax reform and public expenditures adjustments. Multi-country fiscal consolidation will end in sloweeconomic activity, triggering a reassessment of monetaryconditions within the euro zone; indeed, the EuropeanCentral Bank may keep short-term rates unchanged untithe last quarter of 2011. Top-tier emerging-market countries such as the BRIC group (Brazil, Russia, India and

China) and others (Mexico, South Africa, and Turkey toname a few) continue to be recognized financially andpolitically as new players of relevance in the global financial map. Relatively buoyant view for commodityprices coupled with widening interest rate and growth dif-ferentials support currencies such as the Brazilian realthe Mexican peso, and the South African rand. Howeverescalating geo-political tensions in Thailand and the Ko-rean peninsula remind global investors of the potential fodisrupting events in the developing world.

MARKET TONE & FUNDAMENTAL FOCUSPablo F.G. Brard +1 416 862-3876 Camilla Sutton +1 416 866-5470


4/17


Global risks have risen and the outlook for growth has been dampened; however, Canadas strong story has not evaporated. In fact on a relative currency basis, CADs star is still shining. USDCAD parity remains on the horizon. The austerity measures being undertaken in Europe have dampened the outlook for global growth; yet for Europe this will be

somewhat offset by the 20% depreciation in the euro that has transpired since December 2009. The OECD estimatesthat a 10% depreciation in the euro will cause a 0.2% increase in world growth in both the first and second year. Accordingly, even though developments in Europe will dampen global growth, some of this will be offset by FX fluctuations. Theoutlook for oil is also highly sensitive to changes in the outlook for global growth and in its circular way this too has alarge impact on the valuation for CAD. Worries over a drop in global growth have weighed on oil markets; however, theincrease in demand for oil stems largely from the developing world, whose growth prospects might have been tarnishedbut continues to be fairly robust. Accordingly, though oil prices might not be as lofty as once hoped, the outlook remainsfirm, which, in turn should keep a major driver of CAD anchored. On the domestic side, there are many hurdles aheadfor the Canadian economy. However, on a relative basis, the economy is well placed. The growth outlook is similar tothe US and above that of Europe and Japan. The Bank of Canada has entered its interest rate hiking cycle, which wilprovide an additional rate advantage for CAD. Admittedly, both the fiscal and current accounts are in deficit; however, ona relative basis these are still strong. In addition, global investor sentiment is favourable. The combination of ongoingglobal diversification, rising fears in Europe and the untarnished reputation of the Canadian financial system bodes wel

for foreign flows into Canada. Finally, speculative demand for the Canadian dollar is off its highs, but investors still holda net long CAD position. Recent turmoil in Europe has dampened the outlook for global growth, but not to the extent thait has fundamentally changed CADs path. Spiking risk aversion remains the key risk and returning bouts of it will stop asignificant rally in the currency. Accordingly, CADs shine might have been temporarily tarnished, but parity is still on thehorizon.

CANADA Camilla Sutton +1 416 866-5470

12 m 6 m 3 m 3 m 6 m 12 m

AUDCAD 0.874 0.968 0.942 0.892 0.903 0.905 AUDCAD

CADJPY 87.3 81.8 84.6 91.1 94.0 99.3 CADJPY

EURCAD 1.545 1.585 1.434 1.196 1.187 1.196 EURCAD

USDCAD 1.092 1.056 1.052 1.013 1.003 0.983 USDCAD

Currency TrendsSpot

2-Jun

OutlookGoing BackFX Rate FX Rate

0.881

87.1

1.288

1.048

AUDCAD CADJPY

EURCAD USDCAD

0.87

0.89

0.90

0.92

0.94

0.95

0.97

0.98

Jun-09 Aug-09 Oct-09 Dec-09 Feb-10 Apr-10 Jun-10

79

81

83

85

88

90

92

94


1.25

1.29

1.34

1.38

1.43

1.47

1.51

1.56

1.60


0.99

1.01

1.04

1.06

1.09

1.11

1.13

1.16



5/17


UNITED STATES - The impact of Europe's debt turmoil onthe US economic outlook is likely to be relatively small,spreading through 2011. Even prior to pricing in the Greece

debacle, Europe was forecast to lag the global recovery,and by a rather wide margin. Declining euro and weakerdemand in the region may hurt the competitiveness of USexports, earnings of American companies abroad and re-duce the number of European tourists. While over 20% ofUS exports are destined for Europe, the peripheral eurozone countries (Portugal, Italy, Greece, Spain) account forunder 3% of the overall US exports. Historically, even largefluctuations in European trade have a limited impact on theUS economy. The 19% drop in US exports to the EU ex-perienced in 2009 shaved only 0.4 percentage points fromthe GDP headline, recording the biggest drag since at leastthe 1980s. Estimates of the exchange rate fluctuation re-quired to shave off 1% of the trade balance vary from 10%to 30%, depending on the underlying factors. Moreover, thelag between currency movements and trade balance ad-

justment could take over a year. The declining euro couldalso put pressure on foreign direct investment (FDI). USFDI in Europe represents over 50% of the countrys overallinvestment abroad, while roughly 60% of European assetsare held in the US. Revived risk aversion increases thevolatility in the financial markets, with possible feed-througheffects on the real economy. This could put a dent inhousehold wealth and prompt banks to become more re-luctant to lend, adversely affecting consumption and busi-ness investment. Europe's debt crisis carries some hiddenbenefits as well. Lower commodity prices are reducing

pipeline inflationary pressures, giving the Fed more flexibil-ity. The euros continued weakness has reasserted theUSD as the global reserve currency of choice, while thewidening of the CDS spreads is reaffirming the US Treas-uries status as the global risk-free asset.

CANADA - The countrys economic recovery is well en-trenched, with most recent economic indicators coming inabove expectations. Real GDP increased at a 6.1% annu-

alized rate in the first quarter of the year, roughly doublethe US Q1 GDP advance and topping all other G7 nationsover the same period. Importantly, the broad-based natureof the recovery attests to its sustainability once fiscal andmonetary stimuli are withdrawn, and inventory adjustmentsrun their course. Our diffusion index of GDP is runningclose to its highest level in two years, with a large majorityof industries back in expansion mode. As is typical of theearly stages of most cyclical rebounds, goods-producingsectors are leading the advance, piggybacking on thepickup in global trade and industrial production, and theneed to replenish depleted stockpiles. Rising export volumes combined with a sharp improvement in the terms oftrade has lifted Canadas merchandise trade balancewhich slipped into deficit last year, back into a modest surplus position. Construction remains in high gear, asstrength in homebuilding and public infrastructure outlaysmore than compensates for reduced commercial and industrial activity. Service sector activity is also gaining momentum. Retailers have been reporting a steady pickup insales volumes, and somewhat better profit margins. Homesales remain at a historically high level, but are showingsigns of slowing as reduced affordability tempers demandPrivate sector hiring is on the rise again, with the economynow having recouped fully two-thirds of the roughly420,000 jobs lost over the course of the 2008-2009 recession. Statistics Canadas leading composite index jumped

0.9% in April, representing a 11th straight monthly increasewith eight of the 10 subcomponents posting advances. Thebiggest driver of growth is shifting from housing to manu-facturing.

CANADAAND UNITED STATES Adrienne Warren +1 416 866-4315Fundamental Commentary Gorica Djeric +1 416 866-4214

MONETARY POLICY COMMENTARY Derek Holt +1 416 863-7707 Karen Cordes Woods +1 416 862-3080

UNITED STATES - While economic activity continues torecover in the US after the worst recession since WWII, theFed has remained on the sidelines, keeping the Fed fundsrate at an emergency low of 0.25% despite some dissen-

tion amongst Fed members. By the end of June, however,all of the unconventional measures will be complete, settingthe stage for the Fed to start tightening monetary policyeither through unwinding many of these measures or via ahike in the fed funds rate and interest on reserves. None-theless, the current European debt crisis, its adverse effecton financial markets over the past few months, and theprospect of rolling global fiscal shocks including future USausterity measures will likely put downward pressure on USgrowth over the next few years, pushing our own forecastfor the first fed hike into Q1 2011.

CANADA - The Bank of Canada (BoC) hiked the overnighrate on June 1st by 25 bps to 0.50% as we had been expecting and re-established the normal operating band of 50bps. While the accompanying statement was neutral in its

bias as the BoC highlighted that there was considerableuncertainty surrounding the outlook, we remain of the viewthat the BoC will continue to tighten monetary policy andtake its overnight rate up to 1.25% by year end - including aJuly hike of 25 bps - and 2.75% by end of 2011. This ispredicated on the argument that emergency rates are nolonger needed in Canada given stronger than expectedgrowth results which continue to threaten the BoCs 2%core inflation target in the medium term. While there aredownside risks to the current tensions in Europe, there arealso upside risks that are supportive for economic growththereby balancing out the risks.


6/17


EURO ZONE - On June 1st, the euro fell to a new four-year low of 1.2111, breaking below the 50% Fibonacci retracementof the multi-year EUR rally. Speculators continue to short the currency in record numbers and the market is notably bearish even after a 20% drop in the currency. Technically, most studies warn of further near-term downside. This, combined

with fundamental concerns over the region and its banking sector, negative flow and bearish sentiment should all workagainst the euro. We expect EURUSD to bottom in Q310, closing the quarter at 1.17.

JAPAN - Since the beginning of 2010, USDJPY has been unable to break out of its 85 to 95 range. Japanese funda-mentals are weak, the central bank is dovish, and technicals are bullish; all of which should keep upside pressure onUSDJPY. However, offsetting this has been significant spikes in risk aversion, which has kept USDJPY within its rangeWe expect USDJPY to drift higher and close the year at 95.

UNITED KINGDOM - May was a difficult month for GBP traders; however, as we look out to June, the prospects appeato be improving. Political uncertainty has eased, a new fiscal plan should be firmed on June 22 and it is increasingly evi-dent that the central bank will be raising rates ahead of the ECB. Technically, there are early signs that the currency bot-tomed in mid-May. However, speculators continue to hold large short positions.

SWITZERLAND - During May, USDCHF jumped higher as EURCHF was contained by SNB intervention. The Swissfundamental currency outlook is strong, however looming intervention will be a major weight for CHF to contend withTechnically, we would expect EURCHF to push below 1.40. We hold a USDCHF year-end target of 1.09 and EURCHFof 1.30.

MAJOR CURRENCIESCurrency Outlook Camilla Sutton +1 416 866-5470

12 m 6 m 3 m 3 m 6 m 12 m

EURUSD 1.42 1.50 1.36 1.18 1.18 1.22 EURUSD

USDJPY 95 86 89 92 94 98 USDJPY

GBPUSD 1.62 1.64 1.52 1.45 1.49 1.52 GBPUSD

EURCHF 1.51 1.51 1.46 1.32 1.30 1.31 EURCHF

EURUSD USDJPY

GBPUSD EURCHF

1.23

91

1.47

1.42

Currency TrendsSpot

2-Jun


1.21

1.25

1.29

1.33

1.37

1.41

1.45

1.49


86

88

90

91

93

95

97

98


1.42

1.46

1.50

1.53

1.57

1.61

1.65

1.68


1.40

1.42

1.44

1.46

1.48

1.49

1.51

1.53



7/17


EURO ZONE - Concerns regarding the sustainability ofgovernment finances in Greece and in other highly indebtedeuro zone economies are weighing on the euro and on the

debt markets of the regions peripheral economies. To re-duce investor concerns, collective action within the Euro-pean Union and the International Monetary Fund (IMF) re-sulted in a comprehensive financial assistance package of

860 billion (including 110 billion in country-specific IMFsupport to Greece, a 60 billion EU Stabilization Fund, and

440 billion in country loan guarantees as well as up to250 billion in IMF funds for the region at large). The signifi-cantly cheaper euro is a welcome development for eurozone exporters; export receipts rebounded to a 17-monthhigh of 134.9 billion in March. Regional industrial outputrose 1.2% m/m in March; new orders soared 5.3% m/m and20% y/y, which should translate into increased production in

the coming months. The region-wide purchasing managersindex for the services sector moved further into expansionterritory in May, while the manufacturing sector indicatedsomewhat weaker business conditions, but remained ingrowth mode. Meanwhile, the tough austerity measuresimplemented in some European countries will dampen do-mestic growth prospects; euro zone confidence indicatorsdipped in May, reflecting the markets ongoing unease. Weexpect the European Central Bank to maintain the currentmonetary policy stance until the last quarter of 2011 due tothe ongoing turmoil and weakening growth prospects.

JAPAN - The Japanese economic recovery is bound to beaffected by the weakening of the euro. Although evidenceof continued export growth through April is an initial solid

step into the second quarter, competitiveness losses vis--vis German manufacturing goods are likely to dent somemomentum from Japanese foreign shipments. Export vol-umes expanded at a brisk 6.5% monthly rate in April asgrowing demand from China and developing Asia continued to bolster the outlook of Japanese conglomerates. Thetrade figures provided an additional positive element whichcould become more relevant subsequently, as import volumes recovered from a retrenchment in March. Furtheevidence of positive transmission to the local economy oexternally generated gains came from retail sales whichposted a 0.5% pickup in April, the fourth consecutivemonthly rise. With foreign sales driving most of the gains

the Japanese economy grew at a 1.2% q/q rate during thefirst quarter, the highest quarterly rate in a decade. Consumer spending growth slowed to 0.3% q/q, after the previous quarters 0.7% rise, leaving the recovery in domesticdemand conditions still unclear. Post-first-quarter sales andconsumer confidence indicators have posed mixed signalswith willingness to buy durable goods rising to the higheslevel in a year. The lukewarm recovery in locally orientedsectors remains dominated by a downward trend in banklending which persisted through April for the fifth straighmonth.

UNITED KINGDOM - The May 6th general elections re-sulted in a coalition government of the Conservatives andthe Liberal Democrats, bringing an end to the 13 years ofLabour Party rule. The new administration acknowledgesthe need for fiscal consolidation in the context of elevatedinvestor concerns regarding government finances in Europeand the financial markets proven ability to punish for ineffi-cient fiscal management; improving the budget deficit (163billion in 2010, equivalent to 11.1% of GDP) will be givenpriority following the release of the June 22nd emergencybudget. At end-May, the Treasury announced a plan to cutgovernment spending by 6.2 billion in 2010-11. The Bankof England (BoE) will be challenged by the task of finding abalance between restoring growth and limiting inflationarypressures; consumer price inflation increased to 3.7% y/y in

April. We expect the BoE to maintain the Bank Rate at 0.5%until the second quarter of 2011. Gradual economic recov-ery is taking hold with the manufacturing sector being thedriving force. The economy recorded a second consecutivequarterly increase in output in the January-March periodwhen real GDP expanded by 0.3% q/q following a 0.4%increase in the final quarter of 2009. Household consump-tion remained flat while government spending and invest-ment increased by 0.5% q/q and 1.5% q/q, respectively. Theexternal sector was a drag on GDP growth with exports re-maining stable and imports increasing by 1.4% q/q.

SWITZERLAND - The Swiss economy continues to enjoy arobust recovery; output expanded by 0.4% q/q and 2.2% y/yin the first three months of 2010. Moreover, with govern-ment finances in a considerably better shape than the Euro-pean norm (the Swiss 2009 budget was virtually balanced)Switzerland has no immediate need for joining its regionapeers in their fiscal consolidation efforts. A stream of posi-tive news is setting the stage for economic growth of around1% in 2010-11; the KOF Swiss Leading Indicator measur-ing future trends of economic activity jumped in May to thehighest level since August 2006. In a similar fashion, con-sumer consumption and confidence indicators point to further increases in private spending, while employment conditions are showing signs of improvement; the unemploymenrate decreased to 4.0% in April, a level previously seen in

August 2009. As inflationary pressures remain manageablewe expect the Swiss National Banks policy committee toleave the benchmark interest rate target at 0.25% until thethird quarter of 2010; the next quarterly monetary policymeeting is scheduled for June 17th. Consumer price inflationhovered at 1.4% y/y in April with higher energy costs fromthe year before accountable for most of the price pressuresWe expect inflation to hover around 1% through 2011, sup-ported by the strong franc that tends to appreciate alongwith bouts of increased investor risk aversion.

MAJOR CURRENCIES Tuuli McCully +1 416 863-2859Fundamental Commentary Oscar Snchez +1 416 862-3174


8/17


AUSTRALIA - Widening short-term interest rate differentials vis--vis other developed economies is providing a solidfoundation for renewed Australian dollar appreciation. The currency has gained almost 30% against the USD over thepast year and we expect the exchange rate to appreciate to 0.94 vs. the USD by the end of 2011.

NEW ZEALAND - NZDUSD dropped to a 10-month low of 0.6561 in May, but appears to have stabilized temporarily. LikeAUD and CAD, NZD is vulnerable to further spikes in risk aversion. Technically, the outlook has improved but is still weak.We hold a 0.70 year-end target for NZD.

TAIWAN - Central bank intervention will continue to underpin the relative stability of the New Taiwan dollar (TWD). Expectations for a lower pace of adjustment in the exchange rate policy stance of the Peoples Republic of China (Taiwansleading trading partner) will also imply a modest quickening in the pace of appreciation of the TWD vis--vis the USD.

NORWAY - After breaking temporarily above 6.60; USDNOK has fallen back towards 6.40 as we enter June. Like manyof the other commodity currencies, spikes in risk aversion have significantly increased volatility. Technically, severastudies are on the verge of turning bearish and the spike to 6.67 on May 25 could prove to be the top; however, as of yethe risk is still temporarily to the upside.

ASIA/OCEANIA/EUROPE Oscar Snchez +1 416 862-3174Currency Outlook Camilla Sutton +1 416 866-547

12 m 6 m 3 m 3 m 6 m 12 m

AUDUSD 0.80 0.92 0.90 0.88 0.90 0.92 AUDUSD

NZDUSD 0.64 0.72 0.70 0.69 0.70 0.72 NZDUSD

USDTWD 32.6 32.2 32.1 31.1 30.3 29.4 USDTWD

USDNOK 6.29 5.68 5.91 6.37 6.32 6.22 USDNOK

Currency TrendsSpot

2-Jun


0.84

0.68

32.2

6.44

AUDUSD NZDUSD

USDTWD USDNOK

0.77

0.79

0.82

0.84

0.86

0.88

0.91

0.93


0.61

0.63

0.65

0.67

0.70

0.72

0.74

0.76


31.25

31.50

31.75

32.00

32.25

32.50

32.75

33.00


5.51

5.65

5.79

5.92

6.06

6.20

6.34

6.47



9/17


AUSTRALIA - The Reserve Bank of Australia has taken thelead in the global monetary policy tightening cycle, raisingits benchmark interest rate by 150 bps since October. The

cash rate lies currently at 4.5%. Although central bank gov-ernor Glenn Stevens has noted that the recovery in globaleconomic activity continues to favour the outlook for Austra-lian growth and the improvement in domestic credit condi-tions, he decided to leave the benchmark cash rate un-changed after the June 1st monetary policy meeting. Theauthorities further stressed that borrowing costs may bekept steady as their impact is assessed in coming months.However, if inflation trends continue to rise towards the up-per half of the 2-3% target zone, further rate hikes cannotbe discounted in coming months, as the central bank hasrecognized in previous announcements. Latest data on la-bour market conditions revealed that job growth accelerated

in April, with 37,500 added to the full-time employment rolls,bringing full-time gains over the past seven months to136,500 - an increase of 1.8%, with the unemployment rateremaining steady at 5.4%. With skilled job vacancies still onthe rise, the strength of labour demand will likely be increas-ingly reflected in higher wages in 2010, with positive ramifi-cations for consumer spending and potentially adverse im-plications for inflation. Australian authorities expect GDPgrowth to accelerate from 3.25% in 2010 to 3.75% in 2011and 4% in 2012.

NEW ZEALAND - The most recent economic data emerging from New Zealand give the Reserve Bank some additional leeway to consider the timing of its first interest rate

hike in the upcoming monetary policy tightening cycle. Infla-tionary pressures remain muted. The headline consumeprice index rose just 0.4% q/q in the first quarter of 2010and was up 2.0% y/y (in the middle of the official medium-term target range of 1-3%). Although the unemploymenrate fell to 6% in the first quarter, as companies hired about22000 workers, consumer confidence measures of currenconditions remain subdued. This has reflected in weakspending indicators as retail sales (adjusted for inflationincreased 0.2% in the three months to March, the slowespace in a year. Under these conditions, there is clearly noneed for an early adjustment in interest rates, though westill anticipate that the central bank will adhere to its previ-

ously announced target and shift to a less accommodativestance around the middle of 2010. Central bank governorAllan Bollard anticipated in March that the economy wouldexpand at a 3.2% yearly rate in 2010, after contracting by1.6% in 2009. In a late April commentary, Mr. Bollard recog-nized that households were not spending and the housingmarket remained subdued. We do not expect the monetarypolicy committee to take any action at its upcoming meetingon June 10th; rather, we anticipate that the first rate increasewill be announced on July 29th.

TAIWAN - Taiwans economy grew in the first quarter atthe fastest pace in more than three decades. GDP ex-

panded at a 13.3% year-over-year rate on the back of surg-ing exports, which have picked up at a 31% y/y rate duringthe past six months. The rise in foreign sales was matchedby an increase in private investment which displayed a37% yearly gain in the first quarter, more than 3 times theinitial rebound registered during the final three months of2009 that broke a contracting trend. Taiwanese exportershave been leading the economic recovery in Asia after be-ing among the hardest-hit by the global economic down-turn. As a result, industrial output jumped close to 50% y/yin the first quarter of 2010. Demand from China and HongKong - now Taiwans most relevant market - accounted for44% of Taiwanese exports in April, compared with about

10% for both the US and Europe. In what would be an ini-tial indication of an effect from the European sovereigndebt crisis, Taiwans export orders, which signal prospec-tive shipments in the next one to three months, declined ona monthly basis in April. In the event that this downwardcorrection materializes in actual sales, it will likely affectproduction in later months. The so-far prevalent rebound inindustrial output has led to continuous improvement in la-bour market conditions; the jobless rate fell for an eighthconsecutive month to 5.4%.

NORWAY - Norwegian monetary conditions continue to benormalized; following Norges Banks Executive Board meet

ing on May 5th

, the key policy rate was increased by 25 ba-sis points to 2.0%. The rate has been raised by 75 bpssince October 2009, when Norges Bank became the firscentral bank in Europe to start a monetary tightening cycleIn the official policy statement, monetary policymakersnoted that developments regarding government finances inEurope increase the uncertainty surrounding the Norwegianeconomic outlook, and that they had considered leaving thebenchmark rate unchanged. On balance, however, the authorities stressed the importance of guarding against therisk of future domestic economic imbalances in the contexof an ongoing recovery, very low interest rates, rising houseprices and fairly strong household credit growth (lending

increased by 4.0% y/y in April). The next monetary policymeeting is scheduled for June 23rd. The Norwegian kronasrecent appreciation vis--vis the euro should ease inflation-ary pressures in the coming months. Consumer price inflation, hovering at 3.3% y/y in April, continued to exceed thecentral banks 2.5% target for a third consecutive monthActivity in the mainland economy expanded by 0.1% q/q inthe first three months of 2010; nevertheless, lower energysector output weighted on overall economic performancebringing real GDP down by 0.1% q/q in Q1 2010.

ASIA/OCEANIA/EUROPE Tuuli McCully +1 416 863-2859Fundamental Commentary Oscar Snchez +1 416 862-3174


10/17


CHINA - Chinese policymakers have increased bank reserve requirements three times in 2010. Together with an offi-cially restrictive lending mandate, these measures have successfully resulted in slowing credit growth. Although we continue to expect further credit tightening measures in China, and a gradual flexibilization of the Chinese yuan (CNY) peg

against the US dollar, a more balanced monetary policy picture for China has already emerged.

INDIA - We expect the Reserve Bank of India to continue tightening monetary conditions in the months ahead, a policythat will provide some near-term support to the Indian rupee. The exchange rate - currently 47.15 per US dollar - hasdepreciated by 1.4% this year; while further moderate gains may be evident in the near-term, a reversal will eventuallymaterialize to compensate for Indias adverse inflation differential.

KOREA - The Korean won (KRW) has lost over 10% during the past two weeks reflecting investor concerns regardingongoing tensions between South and North Korea. Korean CDS spreads increased by over 60 basis points to 166 onMay 25th. We expect USD/KRW to close the year at 1120.

THAILAND - The Thai baht (THB) reached an eight-week low of 32.83 vis--vis the US dollar on May 30th. The currencycontinues on the defensive. Notwithstanding the political turmoil, the THB has gained 2.6% so far in 2010, as expor

flows remained undisrupted through the political crisis.

DEVELOPING ASIACurrency Outlook Oscar Snchez +1 416 862-3174

12 m 6 m 3 m 3 m 6 m 12 m

USDCNY 6.83 6.83 6.83 6.75 6.65 6.34 USDCNY

USDINR 47.1 46.5 46.1 45.8 45.2 45.8 USDINR

USDKRW 1255 1163 1160 1166 1131 1090 USDKRW

USDTHB 34.3 33.2 33.1 32.5 32.5 32.9 USDTHB

USDCNY USDINR

USDKRW USDTHB

6.83

47.2

1216

32.6

Currency TrendsSpot

2-Jun


6.823

6.825

6.827

6.829

6.831

6.832

6.834

6.836


44.2

44.8

45.5

46.1

46.7

47.3

48.0

48.6


1100

1131

1163

1194

1225

1256

1288

1319


32.0

32.3

32.6

32.9

33.3

33.6

33.9

34.2



11/17


CHINA - Export gains have coupled with ongoing domesticspending strength underpinning a vibrant economic recov-ery in China. GDP expanded at a brisk 11.9% y/y pace dur-

ing the first quarter of 2010, with solid 30% y/y growth inthe value of foreign shipments continuing to play an inte-gral part in the economic rebound. As a testament to theagility of domestic spending, however, imports have out-paced exports, translating into a down-trending trade sur-plus. We anticipate this trend to be supported in comingmonths by the strengthening of the Chinese yuan (CNY)vis--vis the euro (EUR), as Europe accounts for a signifi-cant share of Chinese exports (15% in 2008). Although theeffect on export values will clearly be felt in coming months,the effect on shipment volumes remains an open questionas Chinese products tend not to compete with Europeanmanufactures, but with goods from other Asian countries.

Notwithstanding the necessary adjustment in trade flows,all in all, we deem the overall consequence of the Euro-pean crisis on the outlook for the Chinese economy aspositive, as the urgency for CNY appreciation against theUS dollar has been greatly reduced. Tighter monetary con-ditions within China, because of the implicit revaluation ofthe CNY, will also aid local authorities in their drive to con-trol both asset and goods inflation. Yearly goods inflation ison an upward trend, having reached 2.8% in April, with pro-ducer prices jumping at a 6.8% yearly rate, the fastest pacein 19 months.

INDIA - Solid gains in domestic spending and a recovery inforeign sales are providing a strong foundation for industriagrowth in India. GDP expanded at an 8.6% yearly rate in

the first quarter, evidencing accelerating economic conditions after the upwardly revised 6.5% y/y pickup of the previous three months. Output of capital goods increased aan annual rate of more than 18% in the three monthsthrough March, with production of consumer durables in-creasing at a double-digit pace. Exports made an encour-aging recovery expanding by 14% y/y and breaking theseries of contractions in the previous three quarters. Private consumption growth slowed to 2.6% y/y from 5.3% inthe final quarter of 2009. Part of the explanation for thedisappointing household consumption figures can be linkedto the surge in inflation as it has reduced peoples spendingpower. Inflation in India has so far outpaced all other major

economies, as the closely-followed wholesale price indexrose 9.6% y/y in April, a slight reduction from the 9.9%March print. Food prices are leading the way, but the cosof manufactured goods is also rising at a double-digit pacesuggesting that inflationary pressures are becoming moredeeply embedded in the Indian economy. The outlook foinflation hinges materially on weather conditions as lasyears weak harvests caused food prices to rise sharplyShould expectations of an improved monsoon season ma-terialize this year, inflation should moderate in the secondhalf of 2010.

KOREA - The re-emergence of geo-political tensions in theKorean peninsula has yet to put a dent on the South Ko-

rean economic recovery. Although the curbing of trade tiesbetween the two countries, with the exception of the Kae-song manufacturing complex, will have an unfavourableeffect, the cusp of the adverse shock will jeopardize coun-try risk impairing the accessibility of foreign funds for SouthKorean conglomerates. So far, however, the economic re-covery continues on a solid footing (we expect annual GDPgrowth of 5.2% this year), with April trade figures displayingpersistent export gains. Merchandise exports have playeda prominent role in GDP growth strengthening 1.8% q/q inthe first three months of 2010, up from an average of 1.5%q/q in the previous four quarters. Notwithstanding a 6% q/qrise in government outlays, the contribution of domestic

demand has remained moderate. Private consumptionedged up a sub-par 0.6% q/q in Q1, following a 0.4% ex-pansion in the preceding quarter. Although investment ex-panded for a fifth consecutive time at the outset of 2010, itdid so at a diminishing rate. Employment conditions havestarted to respond to the pickup in economic activity raisingthe likelihood of improving consumer spending prospects incoming months. The jobless rate in April decreased to3.7%, from a 10-year high of 4.8% in January, but remainsabove the pre-crisis unemployment rate of 3.2-3.4%. Addi-tionally, consumer confidence improved in May for the firsttime in seven months.

THAILAND - Thailand is still positioned to expand by aleast 4.5% in 2010, though a deceleration appears inevita

ble as tourism arrivals plunged by one-third between Marchand April. Tourism accounts for 6% of GDP and 15% oemployment. Thailands economic recovery was confirmedby a healthy 3.8% q/q GDP expansion in the first quarter o2010 as a major recovery in exports, which account for twothirds of the economy, remains at the core of the economicrebound. The domestic political environment remains undestress. The ruling six-party coalition, led by Prime MinisteAbhisit Vejjajiva, was put under severe pressure as it wasforced to crack down large-scale demonstrations in Bangkok unable to reach a concerted agreement to the countryspolitical crisis. Although a decision by the government toforcibly remove protesters was followed by gun battles in

the city centre, the risk of a spreading of the conflict to thecountryside subsided as both parties sought talks. Whileofficially general elections will not be held until the end o2011, calls for early elections remain a contested issue withprotesters. At the height of confrontations the central bankwas forced to intervene in the foreign exchange marketthough the potential for official intervention still supportsthat the exchange rate will remain trading within a narrowrange through the balance of the year. International reserves stand currently at US$139 billion (53% of GDP)having fallen by around US$4 billion during May, aftepeaking in late April.

DEVELOPING ASIAFundamental Commentary Oscar Snchez +1 416 862-3174


12/17


BRAZIL - The Brazilian real (BRL) is regaining strength as global investors re-assess the risks linked to the Europeandebt crisis and fears of potential overheating in Chinese property and equity markets. The relative bullish view on the BRLis underpinned by an aggressive monetary tightening effort by the central bank to pre-emptively contain inflationary pres-

sures. We expect USD/BRL to close the year at 1.80.

MEXICO - The Mexican peso (MXN) seems to be consolidating after a period of high stress and volatility caused by disorderly adjustments amongst major currencies connected with risk re-pricing activity in European sovereign credit markets. The Mexican currency outlook is well supported by still attractive interest rate differentials and relatively high crudeoil prices. We expect USD/MXN to close the year at 12.8.

CHILE - The Chilean peso (CLP) remains a commodity-linked currency highly dependent on growth prospects, capitaflows movements in metal markets and trade flows in the Asian region. The CLP is in recovery mode after a sustainedadjustment caused by a correction in commodity prices and intensifying stress in European debt markets. On the backof a major stimulus effort, growth is accelerating. We expect USD/CLP to close the year at 530.

PERU - The Peruvian Sol (PEN) continues to show a remarkable period of stability and resilience to global financia

shocks. The combined effect of supportive commodity prices, broad-based economic growth dynamics, robust investmentflows and well-timed and effective official intervention are the main factors supporting the Peruvian currency market outlook. We expect USD/PEN to close the year at 2.75.

DEVELOPING AMERICASCurrency Outlook Pablo Brard +1 416 862-3876

12 m 6 m 3 m 3 m 6 m 12 m

USDBRL 1.97 1.76 1.81 1.81 1.80 1.84 USDBRL

USDMXN 13.15 12.93 12.77 12.58 12.75 12.95 USDMXN

USDCLP 562 497 525 530 530 534 USDCLP

USDPEN 2.99 2.88 2.85 2.80 2.76 2.75 USDPEN

Currency TrendsSpot

2-Jun


1.82

12.88

532

2.84

USDBRL USDMXN

USDCLP USDPEN

1.69

1.74

1.78

1.83

1.87

1.92

1.96

2.01


12.1

12.4

12.6

12.9

13.1

13.4

13.6

13.9


488

499

511

522

534

545

556

568


2.83

2.86

2.88

2.91

2.94

2.96

2.99

3.01



13/17


BRAZIL - Strong growth, presidential elections and ratehikes will shape the countrys near-term economic outlook

though Brazilians will rather be focused on the World Cup

which begins on June 11th

. Brazil continues to show evi-dence of strong economic performance ahead of the (tworounds of) presidential elections which are scheduled totake place in the fourth quarter of 2010. The latest surveyof macroeconomic projections conducted by the centralbank highlights an economic expansion of 6.5% in 2010. Inits latest assessment of global economic conditions, theOECD also calls for a similar pace of growth, and a decel-eration to 5% in 2011. Domestic credit continues to showsigns of strength; the central bank reported that overallcredit expanded by 17.6% in the 12-month period ending inApril 2010. Residential real estate lending increased byalmost 50% over the same period, following a month-to-

month gain of 3.3%, according to a recent document re-leased by the central bank. The same report highlightedthat the monetary base increased by 21% in 12 months,heightening investors awareness of potential overheatingrisks. As a result, market participants are widely anticipat-ing an increase of 75 basis points in the short-term policy-setting SELIC interest rate to 10.25% at the monetary pol-icy committee (COPOM) meeting scheduled for June 9th.Widening interest rate differentials will continue to underpinrelative currency strength in Brazil.

MEXICO - Geographic proximity does matter. The recoverytrend currently in place in the US is underpinning traderelated economic activity south of the border, despite lack-

lustre progress in the US employment outlook. The Mexican economy is benefiting from the dual effect of increasing economic (and manufacturing) activity in the US andstill supportive (for energy exporters) crude oil prices(averaging US$74 per barrel over the past 12 months)There is a generalized expectation that consumer priceinflation, which is estimated to fall towards the 3% target in2011, does not pose, at present, any threat to an orderlyeconomic recovery. In fact, the countrys monetary authorities have not provided any rhetorical evidence that a rateincrease is in prospect; market participants are eagerlymonitoring any signal that the Federal Reserve may pro-vide as to the timing of the first rate hike in the US. Futures

markets imply that Banco de Mexico will keep its accom-modative monetary stance unchanged through the remainder of the year. The Mexican economy will likely grow closeto 5% in 2010 before decelerating to a more sustainable3.5% rate next year in alignment to the US slowdown. Mexico still offers an attractive high-yield investment alternativewithin the universe of investment-grade sovereign creditsInterest rate differentials and strong energy prices arecausing a recovery in the Mexican peso following the spikein volatility caused by the European debt shock.

CHILE - Despite the estimated slowdown in the worldeconomy for the year 2011, China will continue to grow at a

rapid pace providing a boost to metal markets. More re-cently, copper prices reversed a depreciating phase(trading now at 314 US cents per pound), instilling a posi-tive effect into the CLP. Additionally, the Chilean economyis also adapting well to the new business cycle, as provenby recent data on industrial production (down 1.3% y/y inApril). In swift response to the natural disaster caused bythe earthquake/tsunami of late February and early March,the government has intensified reconstruction efforts byincreasing infrastructure-related public spending. Althoughthe Chilean markets are not immune to negative develop-ments in Europe linked to sovereign debt and fiscal sus-tainability concerns, the contagion effect in Chilean finan-

cial markets has been negligible at best. Looking ahead,the combination of supply-side inflationary pressures andpost-earthquake price distortions has placed the centralbank on alert and ready to initiate a moderate phase of ratehikes. The next monetary-policy setting meeting is sched-uled for June 15th and a 25 bps rate increase to 0.75% isfully discounted by market participants. Chile will followother central banks in the region such as Brazil and Peru inadjusting interest rates upwards. We do not expect that thetightening phase will substantially impair the economic ex-pansion that is forecast at 4% in 2010.

PERU - Currency market volatility remains very low thanksto the effective and transparent intervention by the centra

bank in times of stress and the relatively bullish macroeconomic environment. The PEN has been barely affected bythe recent downward adjustment in local equity securitiesvaluations; indeed, the Lima Stock exchange index accumulated a 10% decline over the past month primarily influenced by corrective headwinds in emerging markets. Peruis experiencing a strong economic performance; indeedthe monthly indicator of economic activity showed that thePeruvian economy expanded by 8.8% in March (versus thesame month in 2009) and by 5.9% versus the previousmonth. The recovery of the economy is broad based withclear evidence of expansion in public infrastructure investment, residential construction, retail trade and power gen

eration. The robust economic performance providedenough justification to the monetary authorities to commence a monetary tightening cycle, which was activated onMay 6th when the central bank raised its monetary policyrate by 50 bps to 1.50%. The Finance Ministry, focused onspending cuts (to manage a potential international shock)is estimating that the economy will grow by 5.5% this yeaand that the rate of consumer price inflation will range between 2 and 2.5%. The central bank will remain in monetary stimulus withdrawal mode; the end-year governmentadministered short-term rate may range between 2.5% and3% depending on inflation trends.

DEVELOPING AMERICASFundamental Commentary Pablo Brard +1 416 862-3876


14/17


RUSSIA - The Russian Ruble (RUB) is recovering a sense of stability following a period of high volatility in May whichpushed USD/RUB to 31.68. Energy prices, European debt sustainability concerns, economic growth dynamics and interest rate differentials will remain the major drivers affecting the value of the Russian ruble in the near term. We expect

USD/RUB to close the year 2010 at 30.

TURKEY - Following marked currency volatility in the midst of European debt sustainability concerns, prospects for nor-malization in the monetary policy stance in Turkey amid robust economic recovery should provide support to the Turkishlira (TRY). We expect the currency to close the year at 1.55 per USD.

SOUTH AFRICA - The South African Rand (ZAR) is immersed in a modest weakening trend against the USD. Renewedsigns of economic recovery, mostly linked to the World Cup, have not outweighed investors concerns regarding thecountrys twin-deficit position, persistently high unemployment and narrowing interest rate differentials. The ZAR has nobenefited from recent gold price gains. We do expect USD/ZAR to close the year at 7.80.

POLAND - Strong fundamentals of the Polish economy and prospects for being among the first regional economies toreverse monetary policy direction continue to provide support to the Polish zloty (PLN). Nevertheless, rapidly changing

investor risk aversion will cause periods of currency volatility.

DEVELOPING EUROPE/AFRICA Pablo Brard +1 416 862-3876Currency Outlook Tuuli McCully +1 416 863-2859

12 m 6 m 3 m 3 m 6 m 12 m

USDRUB 31.0 29.3 29.9 30.5 30.1 30.8 USDRUB

USDTRY 1.53 1.53 1.55 1.56 1.55 1.57 USDTRY

USDZAR 7.94 7.40 7.72 7.73 7.78 7.98 USDZAR

EURPLN 4.51 4.16 3.94 4.04 4.01 3.96 EURPLN

USDRUB USDTRY

USDZAR EURPLN

31.0

1.58

7.68

4.10

Currency TrendsSpot

2-Jun


28.5

29.1

29.7

30.2

30.8

31.4

32.0

32.5


1.43

1.45

1.48

1.50

1.52

1.54

1.57

1.59


7.08

7.26

7.45

7.63

7.82

8.00

8.18

8.37


3.80

3.90

4.00

4.10

4.20

4.30

4.40

4.50



15/17


RUSSIA - We are anticipating a pick up in crude oil pricesfor 2010-11 as global economic activity continues in place,primarily fuelled by a recovery in the US economy and per-

sistently strong emerging-market performance. As theworlds largest producer of crude oil and natural gas, Rus-sia will receive the positive effect from trade-related oilrevenue. Crude oil prices will tend to average US$80 perbarrel in 2011. However, our global forecast implies adownward adjustment in the pace of economic growth inEurope through the end of 2011, with mitigating effects onthe Russian economic outlook. As a key member of theBRIC group (together with Brazil, China and India), Rus-sian equity securities have been adversely affected by thesell-off triggered by China and exacerbated by the Euro-pean debt-related shocks last month. A potential reversalof capital flows to the BRIC group as investors fear over-

heating risks in China may cause sporadic bouts of marketvolatility in Russia. Notwithstanding the linkage betweenthe Russian and the European economic outlook, the RUBcontinues to benefit from massive foreign capital inflowsthat continue to target the core group of emerging-marketeconomies. It is worth noting that market perception ofRussian risk is, nowadays, better than that of SouthernEuropean sovereign credits. On May 31st, the central bankreduced its refinancing rate by 25 bps to 7.75%, continuingthe easing strategy in place since April 2009.

TURKEY - The central bank of Turkey is preparing fomonetary policy normalization as price pressures are building. Nevertheless, following the monetary policy meeting

on May 18th

, Turkish authorities maintained monetary conditions on hold for now due to persistent uncertaintiesaround global economic prospects. However, the monetaryauthorities took initial steps towards policy normalization outlined in the central banks Monetary Policy Exit Strategy, published on April 14th and established the oneweek repo tender as the new benchmark interest rate, cur-rently set at 7.0%. The old policy rate, the overnight borrowing rate, was maintained at 6.5%. Inflation is accelerating; the CPI increased by 10.2% y/y in April from 9.6% themonth before, with costs increasing further up the distribution chain as well (producer price inflation jumped to 10.4%y/y in April from 8.6% in March). As noted by the monetary

policymakers, economic activity is recovering, with industrial output, confidence indicators and purchasing managers indices pointing to continuing improvements in busi-ness conditions. Meanwhile, the unemployment rate edgeddown in February to 14.4%. Following the Article IV consultation with Turkey in May, the International Monetary Fundassesses that the rebound in growth continues, accompanied by a rising current account deficit and above targeinflationary pressures in the near term. The Fund estimatesTurkish output to expand by 6% in 2010 (from a weakbase) and around 4% thereafter.

SOUTH AFRICA - The South African economy is showingsigns of a moderate recovery from the 2009 recession; we

expect growth to edge the 3% rate this year and acceleratefurther in 2011 on the back of a major stimulus provided bythe investment associated with the World Cup that is aboutto commence. Consumer price inflation has been trendingdownwards and, at a 4.8% rate, now stands within the 3-6% target range established by the Reserve Bank of SouthAfrica. The monetary authorities may opt to take a break inthe process of rate adjustments following a 550 bps ratereduction to the current level of 6.5%. Unfortunately, recov-ery dynamics also incorporate a high level of unemploy-ment in excess of 25% which is limiting the contribution ofdomestic consumption. Both credit growth dynamics andconsumer confidence remain fragile. Investor sentiment

vis--vis South African financial markets have been ad-versely influenced by the European debt distress; in fact,the rally in gold prices did not have a material positive ef-fect on the value of the ZAR, implying a temporary shieldagainst global financial instability. Data for the first quarterof the year showed that the economy expanded at an an-nualized rate of 4.6% with strong activity shown in miningproduction, hospitality and manufacturing sectors. A stillwide current account deficit weighs on the South Africancurrency outlook.

POLAND - In the midst of global uncertainties, Polish central bankers maintain a neutral policy stance. Following the

Monetary Policy Council meeting on May 24th

-25th

, the authorities left the reference rate unchanged at 3.50% for aneleventh consecutive month. Economic recovery is firmlyunderway; according to fresh OECD calculations, GDPgrowth will average 3% in 2010-11, with exports, publicspending - particularly infrastructure investment - and inventory rebuilding leading the way. The Polish economy expanded by 3.0% y/y in the first quarter of 2010 with the industrial sector being the growth driver. Improving laboumarket conditions are providing support to private spendingprospects; the unemployment rate decreased to 12.3% inApril after peaking at 13% in February. The Polish government seems to be in no rush to join its European Union

peers in fiscal tightening to reduce the budget deficit fromthe 7.1% of GDP recorded in 2009. While a forthcomingelectoral cycle (a presidential ballot will take place on June20th and parliamentary elections next year) will partly explain the lack of specific fiscal consolidation measures, apick up in economic activity will likely help reduce thebudget shortfall this year. The Polish zloty will be supportedby expectations for relatively strong economic performancethrough 2011 and by prospects regarding Poland being theleader in monetary tightening in the region.

DEVELOPING EUROPE/AFRICA Pablo Brard +1 416 862-3876Fundamental Commentary Tuuli McCully +1 416 863-2859


16/17


GLOBAL CURRENCY FORECAST (end of period)2008 2009 2010f 2011f

Q1a Q2 Q3 Q4 Q1 Q2 Q3 Q4

MAJOR CURRENCIES

Japan USDJPY 91 93 95 100 93 91 93 95 97 98 99 100

Euro zone EURUSD 1.40 1.43 1.19 1.26 1.35 1.20 1.17 1.19 1.21 1.22 1.24 1.26

EURJPY 127 133 113 126 126 109 109 113 117 120 123 126

UK GBPUSD 1.46 1.62 1.50 1.55 1.52 1.44 1.46 1.50 1.51 1.52 1.54 1.55

EURGBP 0.96 0.89 0.79 0.81 0.89 0.83 0.80 0.79 0.80 0.80 0.81 0.81

Switzerland USDCHF 1.07 1.04 1.09 1.05 1.05 1.13 1.11 1.09 1.09 1.07 1.06 1.05

EURCHF 1.49 1.48 1.30 1.32 1.42 1.36 1.30 1.30 1.32 1.31 1.31 1.32

AMERICAS

Canada USDCAD 1.22 1.05 1.00 0.97 1.02 1.02 1.01 1.00 0.99 0.98 0.97 0.97

CADUSD 0.82 0.95 1.00 1.03 0.98 0.98 0.99 1.00 1.01 1.02 1.03 1.03

Mexico USDMXN 13.7 13.1 12.8 13.2 12.4 12.4 12.7 12.8 12.9 13.0 13.1 13.2

CADMXN 11.2 12.4 12.8 13.6 12.2 12.2 12.5 12.8 13.1 13.2 13.5 13.6

Argentina USDARS 3.45 3.80 4.25 4.80 3.88 3.95 4.10 4.25 4.38 4.52 4.66 4.80

Brazil USDBRL 2.31 1.74 1.80 1.90 1.78 1.82 1.81 1.80 1.82 1.85 1.87 1.90

Chile USDCLP 639 507 530 540 524 530 530 530 532 535 537 540

Colombia USDCOP 2249 2044 2020 2080 1920 1979 1999 2020 2035 2050 2065 2080

Peru USDPEN 3.13 2.89 2.75 2.75 2.84 2.83 2.79 2.75 2.75 2.75 2.75 2.75

Venezuela 1/ USDVEB 2.15 2.15 4.30 4.30 4.30 4.30 4.30 4.30 4.30 4.30 4.30 4.30

ASIA / OCEANIA

Australia AUDUSD 0.70 0.90 0.90 0.94 0.92 0.87 0.88 0.90 0.91 0.92 0.93 0.94

China USDCNY 6.83 6.83 6.60 6.00 6.83 6.83 6.75 6.60 6.44 6.29 6.14 6.00

Hong Kong USDHKD 7.75 7.75 7.75 7.70 7.76 7.78 7.77 7.75 7.74 7.72 7.71 7.70

India USDINR 48.8 46.5 45.0 47.0 44.9 46.2 45.6 45.0 45.5 46.0 46.5 47.0

Indonesia 2/ USDIDR 11.12 9.40 9.25 9.50 9.10 9.19 9.22 9.25 9.31 9.37 9.44 9.50

Malaysia USDMYR 3.47 3.43 3.15 3.20 3.26 3.25 3.20 3.15 3.16 3.17 3.19 3.20

New Zealand NZDUSD 0.58 0.72 0.70 0.74 0.71 0.68 0.69 0.70 0.71 0.72 0.73 0.74

Philippines USDPHP 47.5 46.2 44.0 46.0 45.2 45.9 45.0 44.0 44.5 45.0 45.5 46.0

Singapore USDSGD 1.43 1.40 1.36 1.30 1.40 1.39 1.38 1.36 1.34 1.33 1.31 1.30

South Korea USDKRW 1260 1164 1120 1050 1131 1190 1155 1120 1102 1084 1067 1050

Thailand USDTHB 34.7 33.4 32.5 33.5 32.3 32.5 32.5 32.5 32.7 33.0 33.2 33.5

Taiwan USDTWD 32.8 32.0 30.0 28.5 31.8 31.7 30.8 30.0 29.6 29.2 28.9 28.5

EUROPE / AFRICA

Czech Rep. EURCZK 26.9 26.4 25.5 25.0 25.4 25.5 25.5 25.5 25.4 25.2 25.1 25.0

Iceland USDISK 121 126 130 125 127 129 129 130 129 127 126 125

Hungary EURHUF 266 270 275 270 265 275 275 275 274 272 271 270

Norway USDNOK 6.95 5.79 6.30 5.80 5.94 6.40 6.35 6.30 6.25 6.20 6.00 5.80

Poland EURPLN 4.15 4.10 4.00 3.90 3.86 4.06 4.03 4.00 3.97 3.95 3.92 3.90

Russia USDRUB 29.4 30.0 30.0 32.0 29.4 30.8 30.4 30.0 30.5 31.0 31.5 32.0

South Africa USDZAR 9.53 7.40 7.80 8.25 7.29 7.69 7.74 7.80 7.91 8.02 8.14 8.25

Sweden EURSEK 10.94 10.25 9.50 9.30 9.75 9.51 9.20 9.50 9.45 9.40 9.35 9.30

Turkey USDTRY 1.54 1.50 1.55 1.60 1.52 1.57 1.56 1.55 1.56 1.57 1.59 1.60

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

2011f

North

South

2010f


17/17


This Report is prepared by Scotia Economics as a resource for the

clients of Scotiabank and Scotia Capital. While the information is from

sources believed reliable, neither the information nor the forecast shall

b t k t ti f hi h Th B k f N S ti

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