Global Foreign Exchange Outlook Scotia Capital Scotiabank

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Global Foreign Exchange Outlook Scotia Capital Scotiabank Powered By Docstoc
					Global Economic Research                                                                                                                    September 2012

                                                        Foreign Exchange
Collective stimulus and liquidity injections by major central
banks, decelerating growth in emerging-market economies,
speculative moves in selected commodities and persistent
Europe-centred financial stress currently dominate investor
sentiment in foreign exchange markets.

The USD offers a modest appreciating bias versus the EUR and
JPY. Commodity-linked AUD and CAD will benefit from AAA-
rating status and attractive yield differentials. The MXN remains a
regional favourite whereas the BRL is in stable trading mode.

The EUR will remain weak against all major currencies. The CHF
value will be anchored versus the EUR by policy and the GBP
outlook is bright. The RUB and TRY remain vulnerable to risk-
aversion and oil price shifts.

The JPY offers limited upside potential. The CNY will regain a
strengthening tone on the back of decisive policy action, injecting
a favourable tone into Asian floating currencies such as KRW,
THB and MYR. The INR retains a weak outlook.


 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: and Bloomberg at SCOE
Global Economic Research                                                                                          September 2012

                                                                                                     Foreign Exchange
                            Global Foreign Exchange Outlook
            August 30, 2012            Actual Q1a 12 Q2a 12 Q3 12 Q4 12 Q1 13 Q2 13 Q3 13 Q4 13
                         EURUSD          1.25              1.33    1.27    1.21    1.23      1.22    1.22           1.21                  1.21
          Euro          Consensus*                                         1.23    1.23      1.23    1.23           1.23                  1.24
                         USDJPY          78.6                83     80      78      80        84      85             86                    87
          Yen           Consensus*                                          79      79        80      81             82                    83
                         GBPUSD          1.58              1.60    1.57    1.55    1.59      1.62    1.63           1.64                  1.64
         Sterling       Consensus*                                         1.56    1.55      1.55    1.55           1.56                  1.57
                         USDCAD          0.99              1.00    1.02    1.02    0.99      0.98    0.97           0.97                  0.97
   Canadian Dollar      Consensus*                                         1.03    1.01      1.01    1.00           1.00                  0.99
                         AUDUSD          1.03              1.03    1.02    1.02    1.02      1.04    1.04           1.05                  1.05
  Australian Dollar     Consensus*                                         1.01    1.01      1.00    1.00           1.00                  1.00
                         USDMXN         13.39             12.81    13.36   13.28   13.12     13.20   13.08          13.17                 13.38
    Mexican Peso        Consensus*                                         13.31   13.13     13.10   13.06          13.04                 13.04
            Spot Price vs. 100 Day Moving Average vs. 200 Day Moving Average - (5yr Trend)
                      EURUSD                                                               USDJPY
                                                   EUR/ USD                                                              US D/ JPY

 1.62                                                             123                                                    100 Day
                                                   100 Day

                                                   200 Day
                                                                  116                                                    200 Day

 1.42                                                             102

 1.32                                                              95
 1.12                                                              74

                      GBPUSD                                                               USDCAD
                                                                                                                                     US D/ CAD

  2.11                                           GBP/ USD

                                                 100 Day
                                                                  1.30                                                               100 Day

  1.96                                           200 Day
                                                                                                                                     200 Day

  1.81                                                            1.14

  1.66                                                            1.06

  1.51                                                            0.98

  1.36                                                            0.90

                      AUDUSD                                                               USDMXN
  1.12                                                                                                       US D/ MXN

  1.04                                                                                                       100 Day

                                                                                                             200 Day
  0.97                                                            14.1

  0.89                                                            13.0
                                                AUD/ USD          11.9
  0.74                                          100 Day

  0.67                                          200 Day

  0.59                                                             9.7

 (*) Source: Consensus Economics Inc. August 2012

Global Economic Research                                                                                     September 2012

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

Central bank intervention, growth stimulus in China and           ripheral economies, coupled with the governance chal-
Brazil, persistently strong European financial market             lenges facing German and French leaders, should keep
stress, speculative trading dynamics in commodity mar-            the euro (EUR) on the defensive for a prolonged period.
kets and uneven directional shifts in emerging-market             The growing uncertainty about the future shape of the
assets are some of the primary factors swaying capital            European currency union has triggered another round of
flows in foreign exchange markets.                                credit rating revisions last month: Moody’s downgraded
                                                                  the rating outlook of Germany, the Netherlands and Lux-
The US dollar (USD) has been under pressure following             embourg to “negative”. This bearish outlook for EUR is
three consecutive months of gains versus other major              tempered by the negative USD fundamentals noted
currencies, with the exception of the Japanese yen (JPY).         above. Meanwhile, the Swiss authorities remain commit-
The US economy continues to struggle to address pro-              ted to defending the policy-mandated ceiling of 1.20
longed weakness in employment conditions, despite timid           francs (CHF) per EUR as a means of defending the coun-
improvement in leading job-market indicators over the             try’s export sector against damaging currency apprecia-
past few months. Recent data on jobless claims and still-         tion. The outlook for the other European currencies is
high unemployment levels indicate a relatively fragile out-       brighter; however the recent strength in the Swedish kro-
look for consumption activity. The USD may be on the              na (SEK) seems to have overshot. The bullish outlook for
defensive as monetary authorities remain committed to             the British pound (GBP) is temporarily damped as the UK
maintaining a near-zero short-term interest rate environ-         struggles to meet its austerity plan and to address the
ment and to its large-scale asset (US Treasury and Mort-          economic contraction. The Bank of England maintains
gage-based securities) purchase program aimed at de-              aggressive policy as the UK finds itself highly exposed to
pressing long-term funding costs for both the government          the European crisis; however, on a relative basis the GBP
and mortgage borrowers. Currency markets will be im-              should fare better than EUR and rally against the USD in
pacted materially by the mid-September Federal Reserve            2013.
decision on further asset purchases (so-called QE3). The
US fiscal outlook is complicated by the November elec-            The Japanese yen (JPY) continues to be treated as a
tion; however, market participants will demand clarity on         preferred safe-haven asset in times of global financial
key government policies before year-end.                          market stress. Against the euro, the JPY has been by far
                                                                  the world’s best-performing currency over the past five
The other NAFTA zone currencies, the Canadian dollar              years. The slight devaluation of the Chinese renminbi
(CAD) and the Mexican peso (MXN) have been immersed               (CNY) versus the USD this year has complicated JPY
in a strengthening phase, supported by higher commodity           dynamics. However, the fundamental outlook for JPY is
prices, relatively better financial sector strength and, to an    negative, as aggressive monetary policy, an anticipated
extent, interest rate differentials. Credit differentiation dy-   deceleration in growth and demographics weigh on the
namics continue to drive capital flows to assets issued by        currency. The CNY is enjoying a gradual revaluation
the best-rated sovereign borrowers. Following the recent          (versus the USD) following three months of depreciation.
downward revision to a “negative” outlook for Germany,            Persistent correction in equity markets and a slowdown in
Canada and Australia are the only major sovereign cred-           both the manufacturing and export sectors were key fac-
its with a triple-A rating and a “stable” outlook. In brief,      tors weighing on the CNY. The CNY should appreciate
The Canadian dollar (CAD) appears comfortable close to            only modestly from its 2011 year-end levels as the funda-
parity and, though it should appreciate over time, we do          mental side has shifted and government policy also ap-
not expect it to move dramatically away from parity. The          pears to be in transition. The Indian rupee (INR) is enjoy-
combination of the Bank of Canada’s hawkish tone, a tri-          ing a stabilization phase following a period of acute cur-
ple-A rating, a large resource base and investor sentiment        rency weakness; the INR lost 17% against the USD over
is supportive of a relatively strong CAD. The MXN is also         the past 12 months. The underlying causes of such soft-
receiving the benefits of the post-election premium and           ness remain in place. Australia’s enviable sovereign credit
consolidating its position as a high-yield North American         position, interest rate differentials and strong foreign de-
option. Meanwhile, the Brazilian real (BRL) remains within        mand for high-yield currencies drove up the value of Aus-
its spring and summer range, with a slight bias towards           tralian dollar (AUD) during the spring and early summer.
further weakness.                                                 However, loosening monetary policy, AUD’s high beta
                                                                  status and fears concerning the end of its mining boom
The European economic landscape remains in a constant             weigh heavily on what would otherwise be a bullish out-
state of convulsion. Despite a temporary relief in the sell-      look.
off spree, the underlying structural weakness of the pe-

Global Economic Research                                                                                                                                             September 2012

                                                                                                                                                        Foreign Exchange
CANADA                                                                                                                                        Camilla Sutton +1 416 866-5470
                                                                                                                                                Eric Theoret +1 416 863-7030

CAD has traded in a relatively narrow 647 point spread in 2012, with the currency comfortable close to parity. We expect
the fall to prove more volatile but that it closes both this year and next above parity. The global themes that have impact-
ed currency markets this year are: 1) the outlook for global growth; 2) the European crisis and 3) the central banking
response. These, as well as domestic factors, are the same major themes that are likely to drive CAD’s valuation into
year-end. The deterioration that took place in the global growth outlook early in the summer has stabilized in the major
economies of China and the US. We expect China to engineer a soft landing, which will help to support global growth,
commodity prices and pro-cyclical currencies like CAD. With regards to Europe, we expect the process to be long and
difficult but do not foresee a collapse in the EMU or EUR. Accordingly, the impact on CAD is most likely through recur-
ring spikes in risk aversion, which causes periods of temporary USD strength. Finally, with regards to global central
banks, their commitment to do whatever it takes has decreased tail risk and crushed volatility; both are encouraging de-
velopments for CAD traders. On the Canadian side, the fundamental story is mixed. The Bank of Canada (BoC) stands
out as the most hawkish of the DM central banks even as the domestic economy has recently softened as it relies heavi-
ly on the US and commodity prices. On the flow side, Canada is an increasingly rare combination with a solid triple-A
rating and a developed bond market, which has sparked international investor interest and driven the net long CAD posi-
tion higher and higher. Oil prices have rallied off their lows and Scotiabank forecasts that they will average US$95 in
2012 and $100 in 2013. However it is not just the level, but also the spread between where Canada exports and imports
that is also important and this is expected to narrow; providing support for the Canadian economy and CAD. Finally the
outlook for the USD is weak. The combination of the US fiscal cliff, a challenging political framework and loose Fed poli-
cy creates an environment where the USD should weaken, outside of temporary spikes in risk aversion. The largest
risks to our view are a further deterioration in global growth or a spike in risk aversion. Our year end targets are: 1.01 in
2012 and 1.03 in 2013, reflecting a strengthening CAD.

                                                                               C urrency T rends
                                         G o in g B a c k                                 Spot                                      O u tlo o k
  F X R a te                                                                                                                                                                  F X R a te
                         12 m                  6 m                   3 m                30-A ug                3 m                    6 m                 12 m
A UD C A D                1 .0 5              1 .0 6                 1 .0 1              1 .0 2 2              1 .0 2                 1 .0 2               1 .0 2          A UD C A D
CADJPY                   7 8 .7 5            8 1 .9 7               7 4 .9 4             7 9 .1 7             7 9 .3 2               8 1 .2 8             8 3 .1 0         CADJPY
E URC A D                 1 .3 9              1 .3 2                 1 .2 9              1 .2 4 1              1 .2 2                 1 .2 0               1 .1 8          E URC A D
US D C A D                0 .9 8              0 .9 9                 1 .0 4              0 .9 9 2              1 .0 0                 0 .9 8               0 .9 7          US D C A D
                                    AU D C AD                                                                                         C AD J P Y

  1.07                                                                                         8 4 .0

  1.05                                                                                         8 1 .0

  1.03                                                                                         7 8 .0

  1.01                                                                                         7 5 .0

  0.99                                                                                         7 2 .0
     A u g -1 1   O c t- 1 1   D ec-11    F e b -1 2   A p r -1 2   J u n -1 2   A u g -1 2         A u g -1 1     O c t- 1 1    D ec-11   F e b -1 2   A p r -1 2   J u n -1 2   A u g -1 2

                                    E U R C AD                                                                                        U S D C AD
                                                                                              1.0 6

  1.39                                                                                        1.0 4

                                                                                              1.0 2

  1.30                                                                                        1.0 0

                                                                                              0.9 8

  1.21                                                                                        0.9 6
     A u g -1 1   O c t- 1 1   D ec-11    F e b -1 2   A p r -1 2   J u n -1 2   A u g -1 2      A u g -1 1      O c t- 1 1     D ec-11    F e b -1 2   A p r -1 2   J u n -1 2   A u g -1 2

Global Economic Research                                                                                        September 2012

                                                                                                        Foreign Exchange
Fundamental Commentary                                                                            Devin Kinasz +1 416 866-4214

UNITED STATES - The economic deceleration in the Unit-            CANADA - Data continue to confirm slower Canadian
ed States seems to be moderating in Q3, but the data re-          growth in Q2, with output expected to have increased by
main mixed. Industrial Production was up 8% annualized in         only about 1.5% annualized. July employment data sug-
July, led by motor vehicles & parts production, as well as        gest that economic weakness could linger into the second
defense & space equipment, materials and consumer                 half of the year as the global environment remains weak
goods production. Several measures of the housing sector          and domestic demand moderates. In July, the labour mar-
– including prices, new and existing home sales, and build-       ket lost 30,000 jobs – across a variety of sectors including
ing permits – have been slowly trending upwards. Residen-         natural resources, manufacturing, transportation and public
tial investment will contribute positively to GDP in 2012 for     administration – and the unemployment rate rose to 7.3%.
the first time since 2005, although housing activity remains      Retail sales were down by 0.4% in June, likely influenced
well below pre-crisis levels. In July employment data             by increased duty-free limits which encouraged cross-
showed that 163,000 new jobs were created, which is a             border shopping. Retail sales contracted by 2% in Q2, as
significant improvement on the Q2 monthly average of              consumer cautiousness takes hold because of labour mar-
73,000 jobs. However, July’s rate of increase is still insuffi-   ket softening, high household debt levels and the cooling
cient to lower the unemployment rate, which actually ticked       housing market. Housing starts have flattened, though re-
-up to 8.3% as discouraged workers returned to the job            main above longer-term averages, and prices have begun
market. The weak labour market, slow consumer credit              to soften (down 2.2% y/y in July); however, there is consid-
growth and low confidence levels continue to restrain             erable regional variation. Manufacturing shipments were
household consumption, hampering a more robust recov-             down by 0.4% m/m in June, on par with average declines
ery. The Conference Board consumer confidence index               registered in the first half of 2012. Manufacturing data have
was down sharply in August. Furthermore, rising food and          been soft across a variety of sub-sectors, though the auto
gasoline prices will put a dent in consumer discretionary         industry continues to perform well, both in production and
spending, at a time when business investment is also de-          sales. The weakness has been more pronounced in non-
celerating. Total orders for durable goods, after stripping       durable goods, with the manufacturing of durable goods
out military and aviation, confirms that demand for ‘core’        performing better alluding to robust business investment on
capital goods continues to decline. Trade data also demon-        the back of strong corporate balance sheets. The trade
strate weak demand for imported industrial supplies and           deficit widened in June to an annualized C$21.7 billion as
capital goods. Second quarter GDP figures show the low-           imports continued to grow, while exports remained flat af-
est level of business investment since the beginning of           fected by the ongoing euro zone crisis which has negative-
2011, confirming that firms are delaying hiring and outlays       ly impacted global trade. The slowdown in business invest-
because of the uncertainty surrounding the ‘fiscal cliff’, and    ment in the US, due to the approaching ‘fiscal cliff’, will also
potential spending cuts and tax increases. Moreover, event        affect the Canadian economy at a time when domestic fac-
risk in September is high because of several key develop-         tors such as the housing market and consumption are sof-
ments in the European debt crisis, which is further clouding      tening. Canada should benefit from the rising price of oil
the US outlook and depressing worldwide trade.                    and agricultural products, but without further pipeline export
                                                                  capacity, deep discounting of Canadian crude will continue
                                                                  as production increases.
MONETARY POLICY COMMENTARY                          Derek Holt +1 416 863-7707                       Dov Zigler +1 416 862-3080

UNITED STATES - Scotiabank continues to expect that the           CANADA - Scotiabank anticipates that the Bank of Canada
Federal Reserve (Fed) will undertake quantitative easing          (BoC) will remain on hold through our 2013 economic fore-
during H2 2012 with high odds that it will commence its           cast horizon and into 2014. Our forecast is based on our
purchasing program at its September 13 meeting. We ex-            view that spare capacity in the Canadian economy will in-
pect further easing to come in the form of open-ended roll-       crease in the coming quarters as actual growth under-
ing purchases of a mix of treasury securities and MBS. The        performs potential growth in no small part due to cool ex-
Fed’s rationale for undertaking further quantitative easing is    ports and expected softness in housing and consumer
slow economic growth (2% q/q in Q1, 1.7% q/q in Q2) and           spending. Subdued inflation (CPI came in at 1.3% y/y in
stubbornly high unemployment (8.3% in July, 8.3% in Janu-         July) and slow GDP growth (Scotia forecasts 1.4% q/q
ary). Minutes from the August 1 FOMC meeting said that            growth in Q2) are further signs of slack in the economy.
“Many members judged that additional monetary accom-              Combined with the likelihood that US monetary policy will
modation would likely be warranted fairly soon unless in-         remain accommodative through our forecast horizon, they
coming information pointed to a substantial and sustainable       round out our rationale for anticipating that the BoC will not
strengthening in the pace of the economic recovery” – we          hike rates. We do not expect rate cuts absent a global li-
do not see any change in the economic data that would             quidity and funding crisis (neither Scotia’s base case nor
reverse that view.                                                the BoC’s).

Global Economic Research                                                                                                                                                   September 2012

                                                                                                                                                             Foreign Exchange
EUROPE                                                                                                                                            Camilla Sutton +1 416 866-5470
Currency Outlook                                                                                                                                    Eric Theoret +1 416 863-7030

EURO ZONE - Event risk in the Eurozone looms and has skewed the risk return profile of EUR. Sentiment has improved
but remains bearish with both risk reversals and CFTC positioning suggesting there has been significant short covering.
Historically, September has proven the most volatile month of the year, averaging an absolute return of 4%. Fundamen-
tally, the outlook is weak; however it is also a challenge to build in a sustainably stronger USD profile. Accordingly, we
do not expect EUR to collapse, but instead for it to trend lower, closing year-end at 1.23.

UNITED KINGDOM - The domestic fundamentals continue to deteriorate as the UK struggles to meet its austerity plan,
growth falters and the Bank of England turns to increasingly aggressive policy. The economy is exposed and vulnerable
to the European crisis. To date, GBP has been supported by its triple-A rating, which could come under threat. Technicals
suggest GBP is ranging, while the option market has positioned itself increasingly for GBP upside. Sentiment has im-
proved, but the net position is only modestly long. We hold a Q412 forecast of 1.59.

SWITZERLAND - The Swiss National Bank has intervened heavily in order to enforce its 1.20 EURCHF floor. FX re-
serves are growing, should the current pace continue, they will be larger than the Swiss economy by year-end; a rare
and politically sensitive development. We expect authorities to maintain the floor until there are signs of inflationary pres-
sures. Accordingly, we hold a Q312 target of 1.20.

SWEDEN - On a year-to-date basis, SEK is the strongest performing DM currency, having rallied 3.3% against the USD
and 6.6% against EUR. The country’s triple-A rating and relative fundamentals have supported the currency, even as the
market is pricing in 50bpts points of central bank easing over the next year. We expect EURSEK’s appreciating trend to
moderate, targeting a Q412 rate of 8.45.

                                                                                  C u rrency T ren ds
                                              G o in g B a c k                                S pot                                    O u tlo o k
  F X Ra te                                                                                                                                                                         F X Ra te
                               12 m                 6 m                  3 m                 30-A ug                3 m                  6 m                    12 m
E U RUS D                      1 .4 3              1 .3 3                1 .2 4               1 .2 5                1 .2 2              1 .2 2                  1 .2 1          E U RUS D
GB P US D                      1 .6 2              1 .5 9                1 .5 4               1 .5 8                1 .5 8              1 .6 1                  1 .6 4          GB P US D
E U RC HF                      1 .1 3              1 .2 1                1 .2 0               1 .2 0                1 .2 0              1 .2 5                  1 .2 5          E U RC HF
E U RS E K                     9 .1 5              8 .8 2                9 .0 1               8 .3 7                8 .4 7              8 .4 5                  8 .4 0          E U RS E K
                                        EURUSD                                                                                          G BPUSD
                                                                                                                                              GB P US D
  1.45                                                                                             1.6 3

                                                                                                   1.6 1

                                                                                                   1.5 8

                                                                                                   1.5 6

  1.20                                                                                             1.5 3
     A u g -1 1    O c t- 1 1      D ec- 11    F e b -1 2   A p r -1 2   J u n -1 2   A u g -1 2      A u g -1 1    O c t- 1 1     D ec-11     F e b -1 2    A p r -1 2    J u n -1 2   A u g -1 2

                                        EURCHF                                                                                          EURSEK
 1.2 8

 1.2 3                                                                                              9.10

 1.1 8

 1.1 3

 1.0 8                                                                                              8.10
    A u g -1 1    O c t- 1 1     D ec-11      F e b -1 2    A p r -1 2   J u n -1 2   A u g -1 2       A u g -1 1     O c t- 1 1    D ec-11     F e b -1 2    A p r -1 2   J u n -1 2   A u g -1 2

Global Economic Research                                                                                       September 2012

                                                                                                       Foreign Exchange
Fundamental Commentary                                                                          Sarah Howcroft +1 416 863-2859

EURO ZONE - September is loaded with European event               UNITED KINGDOM - Despite nagging concerns on the fis-
risk which may affect both the euro and the growth outlook,       cal, economic, and inflation fronts, the pound sterling
including the likely announcement of details regarding Euro-      strengthened through August as markets were buoyed by
pean Central Bank (ECB) bond purchases, a German Con-             expectations of imminent action by global central banks.
stitutional Court ruling on the European Stability Mechanism      Notwithstanding the mild upward revision to the second-
(ESM), Dutch elections and, possibly, a report on Greece          quarter GDP estimate at the second reading (to -0.5% q/q
from the Troika. In light of the considerable remaining un-       from -0.7%) and the anticipated boost from a successful
certainties in the region, the somewhat better-than-              Olympic games, the fundamental growth story in the UK
expected performance of the euro area economy in the first        remains weak. The PMIs drifted lower again in July, with the
half of 2012 (driven mainly by Germany and France) is ex-         manufacturing and services indexes reaching their lowest
pected to be offset by a more protracted slump through mid-       levels since May 2009 and December 2010, respectively.
2013. We maintain our expectation for a output decline of         The nation’s public finances have also deteriorated; four
0.7% in 2012, though we now anticipate growth of just 0.2%        months into this fiscal year, government borrowing is GBP
in 2013. Sub-50 PMIs continue to portray contractionary           9.3 billion higher than the same period last year, on track to
conditions across the region, as fiscal austerity bites deeper    exceed the official full-year target by a notable margin. With
in the periphery and unemployment climbs higher. Expecta-         the nation’s triple-A credit rating under close scrutiny, au-
tions are mounting for additional bailout requirements,           thorities are now under pressure to either tighten spending,
which would weigh on the ratings of the remaining triple-A        or loosen the fiscal plan so as to support growth, and in-
credits and the ESM. The ECB will resume purchases of             crease borrowing even further. Meanwhile, rising food and
distressed government securities, likely complemented by a        energy costs have revived near-term inflationary concerns.
quarter-point reduction in the policy rate before year-end, in    The chances for additional policy easing by the Bank of
order to facilitate the process of debt refinancing and to im-    England have receded, though we consider the door still
prove the functioning of interbank markets. Inflationary          open for expanded asset purchases. In stark contrast to the
pressures have returned in the form of higher food and oil        headline GDP data, the labour market appears remarkably
prices, and we have accordingly lifted our year-end inflation     resilient. In the three months to June, 201,000 jobs were
forecast to 1.9% y/y. Ultimately, we do not anticipate that       added, the most in two years. This trend should continue in
this development will dissuade the ECB from easing policy.        July given the 5,900 drop in jobless claims that month.

SWITZERLAND – Swiss authorities maintain a firm commit-           SWEDEN – The Swedish krona maintains a strong safe-
ment to the exchange rate floor, which is now approaching         haven position, backed by a resilient economy, healthy
its first anniversary, and which the market views as credible.    public finances, a stable triple-A credit rating and a large
Deflation remains a prime concern for the Swiss National          current account surplus. The economy posted an impres-
Bank (SNB); the headline price index dropped 0.7% y/y in          sive 1.4% q/q gain (seasonally adjusted) in the second
July, marking the tenth straight decline, albeit at the slowest   quarter, following the 0.8% expansion of the first quarter,
pace since December. The SNB also continues to monitor            bringing the average annual growth pace to 1.9% for the
the domestic property market which, although still flourish-      first half of the year. As evidenced by the moderation in
ing, has recently shown signs of moderation. The UBS Real         private consumption and investment in the second-quarter
Estate Bubble index eased slightly in the second quarter,         GDP report, the hitherto resilient domestic side of the econ-
backing off from the 10-year high registered in the prior         omy is beginning to suffer the knock-on confidence effects
quarter, while the SNB’s single family home price index           of the European crisis. Meanwhile, the external sector re-
posted a 0.5% q/q contraction in the same period, its first       mains supportive of growth (partly because Sweden’s top
quarterly drop in five years. These developments supported        trading partners are those in northern Europe which contin-
the SNB’s recent decision to shelve a proposal for capital        ue to grow, albeit slowly). Nevertheless, the boost from net
buffers on banks’ mortgage books. With the central bank           exports will likely fade as export competitiveness is eroded
continuing to intervene in foreign exchange markets in de-        by persistent krona strength (the currency reached a near-
fense of the EURCHF floor, international reserves have sky-       12-year high vis-à-vis the euro on August 10th), limiting
rocketed, reaching a record CHF 406.5 billion in July. As a       growth in 2012 overall to slightly under 1%. At the last poli-
share of GDP, forex reserves now measure 68%, up from             cy-setting meeting of the Riksbank in July, the Executive
9% prior to the global recession (and higher than the shares      Board voted by a majority to leave the benchmark repo rate
of China and Japan, the largest reserve holders). Neverthe-       unchanged at 1.50%. Though the central bank sees down-
less, the SNB Chairman has asserted that there is no limit        side risks to inflation (currently well below target at 0.7% y/
to the amount of reserves the bank can buy. The economy           y) from persistent uncertainties in the euro zone and krona
continues to hold up relatively well. The KOF Leading Indi-       strength, lingering concerns related to high household debt,
cator posted a 12-month high in August and the trade sur-         an overvalued property market and domestic financial sec-
plus touched its highest level since last May in July.            tor risks may preclude any further monetary easing.

Global Economic Research                                                                                                                                             September 2012

                                                                                                                                                        Foreign Exchange
ASIA/OCEANIA                                                                                                                                 Camilla Sutton +1 416 866-5470
Currency Outlook                                                                                                                               Eric Theoret +1 416 863-7030

JAPAN - From a currency perspective, the Japanese fundamentals are notably weak, and marked by a disappointing
growth trajectory, a large debt burden and an aggressive central bank. However, low volatility, US-JN 2 year spreads and
flows continue to support JPY well above its fundamental valuation. We expect USDJPY to remain relatively range bound
in the near-term and hold a Q412 target of 80.

CHINA - Entering September the renminbi is down 0.8% year-to-date, while forwards are pricing in an essentially flat path
into year-end. A narrowing current account surplus, some relief on the political front, a shifting domestic policy towards
the currency and sentiment has removed much of the immediate pressure for appreciation. We hold a year-end USDCNY
target of 6.25.

AUSTRALIA - Entering September AUD is up a modest 1.5% year-to-date. Investors continue to hold net long positions,
but we fear these are vulnerable to profit taking. The RBA is apt to cut rates, fears are growing that the mining sector
boom is waning, the outlook for China is challenging, positions are stretched and technicals have shifted against AUD.
We expect it to be a relatively volatile ride and hold a Q412 forecast of 1.02.

NEW ZEALAND - A neutral stance at the RBNZ, a broadly weaker USD, low volatility and improving investor sentiment
have supported NZD. However, the currency remains vulnerable, particularly as its economy is far from balanced and
particularly exposed to softening dairy prices. We favour NZD less than a currency like AUD. Accordingly, we hold a rela-
tively bearish outlook, expecting NZDUSD to close the quarter at 0.77.

                                                                                C u rren cy T ren d s
                                           G o in g B a c k                               S pot                                    O u tlo o k
  F X Ra te                                                                                                                                                                   F X R a te
                           12 m                  6 m                  3 m                30-A ug                3 m                  6 m                  12 m
US D J P Y                 7 6 .9 3            8 1 .1 5              7 8 .0 2             7 8 .6               7 9 .3 3             8 2 .6 7              8 5 .0 0         US D J P Y
US D C NY                   6 .3 8              6 .2 9                6 .3 7              6 .3 5                6 .2 7               6 .2 5                6 .1 7          US D C NY
A UD US D                   1 .0 7              1 .0 7                0 .9 7              1 .0 3                1 .0 2               1 .0 3                1 .0 5          A UD US D
NZD US D                    0 .8 5              0 .8 3                0 .7 5              0 .8 0                0 .7 7               0 .7 8                0 .7 9          N ZD U S D
                                      USDJPY                                                                                        USDCNY

  8 3 .5

  8 1 .5                                                                                        6.36

  7 9 .5

  7 7 .5

  7 5 .5                                                                                        6.26
       A u g -1 1   O c t- 1 1   D ec-11    F e b -1 2   A p r-1 2   J u n -1 2   A u g -1 2       A u g -1 1     O c t- 1 1    D ec-11    F e b -1 2    A p r-1 2   J u n -1 2   A u g -1 2

                                      AU D U S D                                                                                     N ZD U S D
                                                                                               0.8 6

                                                                                               0.8 3

                                                                                               0.8 1

                                                                                               0.7 8

  0.97                                                                                         0.7 6

  0.93                                                                                         0.7 3
     A u g -1 1     O c t- 1 1   D ec-11    F e b -1 2   A p r-1 2   J u n -1 2   A u g -1 2      A u g -1 1    O c t- 1 1     D ec-11    F e b -1 2    A p r-1 2    J u n -1 2   A u g -1 2

Global Economic Research                                                                                        September 2012

                                                                                                        Foreign Exchange
ASIA/OCEANIA                                                                                 Pablo F.G. Bréard + 1 416 862-3876
Fundamental Commentary                             Daniela Blancas +1 416 862-3908             Sarah Howcroft + 1 416 863-2859

JAPAN - The Japanese yen (JPY) continues to be treated            CHINA - The Chinese renminbi (CNY) is enjoying a gradu-
as a preferred safe-haven asset in times of global financial      al revaluation (versus the USD) following three months of
market stress. Against the euro (EUR), the JPY has been           depreciation (USDCNY found strong resistance to trade
by far the world’s best-performing currency over the past         above the 6.40 mark in late July). Persistent correction in
five years. The devaluation of the Chinese renminbi (CNY)         equity markets and evidence of a slowdown in the manu-
versus the USD in the last 12 months added further fuel to        facturing and export sectors were key factors weighing on
the appreciating fire. Nevertheless, it is worth highlighting     the CNY. Chinese policy makers are not indifferent to the
that the value of Japanese equity securities (as measured         damaging effects of Europe’s recession. As a result, a pro-
by the benchmark Nikkei 225 index) has been in synchro-           growth bias in currency markets sensitive to export sector
nized decline during the same period that the JPY was ap-         weakness was mostly welcomed by the authorities, allow-
preciating, hinting that earnings growth potential (linked to     ing a weaker CNY. While a material change to the existing
expected economic growth) will decline irrespective of JPY        currency regime is not imminent, increased flexibility to per-
strength. Moreover, the Bank of Japan has stressed that           mit market-induced exchange rate moves within a wider
the European debt crisis and recession is having a material       intervention band (+/- 1% off the daily fixing rate) translated
adverse impact on Japan through the dual effect of re-            into a directional shift towards CNY weakness in both spot
duced export activity and sustained currency strength. Un-        and forward markets. Nevertheless, we are of the view that
doubtedly, a strong JPY hurts the export-oriented Japa-           the CNY will regain an appreciating tone once stimulus
nese economy. Looking ahead, we believe that the sup-             measures are unveiled and uncertainties regarding mone-
portive effect of the massive stimulus put together in re-        tary policy actions by the US and European central banks
sponse to the tsunami/earthquake/nuclear shock will grad-         dissipate. It is a political transition year for both the US and
ually unwind and that the real economy will adjust to the         China; therefore, leadership succession will be of material
new realities of decelerating global growth dynamics. Ja-         relevance at the time of implementing swift changes to the
pan will expand by 2.3% this year before decelerating to a        existing exchange rate arrangement to prevent disorderly
1.5% rate in 2013. In brief, we estimate that the JPY will        currency alignments and execute labour-intensive fiscal
reverse some gains and marginally depreciate versus the           stimulus measures. In brief, joint monetary and fiscal stimu-
USD through the end of 2013.                                      lus will help China maintain robust growth supporting a
                                                                  stronger currency in the near term.
AUSTRALIA - After rebounding 9% between June and ear-             NEW ZEALAND - New Zealand’s economy began to show
ly August, the Australian dollar (AUD) has lost some              some optimistic -albeit modest- signs of recovery by the end
ground against the US dollar in recent weeks in response          of the second quarter; though we expect the improvement
to lower prices for key commodities and evidence of a             to be more evident by year-end. Local demand remains
slowing pace of investment activity in the mining sector.         subdued; however, second-quarter retail sales volumes ex-
The mining investment boom, which has been a major driv-          panded 1.3% q/q, a higher rate than the contraction of 0.6%
er of growth for several years, may be near its peak given        in the first quarter. Motor vehicle sales were the major driver
the apparent stabilization of demand conditions in emerg-         of the retail sales performance; nonetheless, excluding this
ing Asia and the more uncertain global growth outlook in          sector, sales in the pharmaceutical sector and electronic
general. The recent drop in the spot prices for iron ore and      goods also presented significant advances. Additionally,
coal has had an adverse effect on Australia’s terms of trade      positive signs in the construction sector point towards a re-
and, if sustained, could also impact the government’s fiscal      bound in the coming months. Building consents have been
consolidation plans through lower resource revenues. Sev-         posting positive rates of expansion in June and July, which,
eral large mining projects have recently been canceled or         together with an improvement in residential building inten-
deferred in the face of reduced commercial viability. None-       tions (a component of the business confidence survey),
theless, economic activity remains relatively buoyant; the        suggests that earthquake reconstruction efforts may pick up
Reserve Bank of Australia (RBA) estimates that output             in the third and fourth quarter of the year. Nonetheless, we
growth overall is running close to trend, while employment        maintain our view that the New Zealand economy will post a
growth is modest and signs suggest that the property mar-         mild GDP growth in 2012 as household spending remains
ket has finally bottomed out. Inflation is currently low due to   restrained and foreign demand, particularly coming from
earlier currency appreciation, but is expected to rise as a       China and Australia moderates. In the second quarter,
result of the newly-introduced carbon tax, before returning       headline inflation reached its lowest rate in 12 years, while
to the middle of the 2-3% target range by end-2013. Both          inflation expectations also remain near the lower limit of the
monetary and fiscal authorities retain scope for further poli-    central bank’s tolerance range. Accordingly, the central
cy accommodation should downside risks to growth or in-           bank has left the reference rate unchanged at 2.5% for
flation – primarily, with respect to China and commodity          more than a year. We do not anticipate any change in the
prices – dampen the outlook materially.                           monetary policy stance for the remainder of the year.

Global Economic Research                                                                                               September 2012

                                                                                                              Foreign Exchange
Currency Outlook                                                                                      Sacha Tihanyi + 852-2861-4770

INDIA - Compressed range trading held as the rule for USDINR over the past month, with the pair unable to break sus-
tainably below 55.00. Confidence has yet to return to India in terms of the overall macro picture, despite reasonably ro-
bust portfolio inflows continuing through August as the SENSEX rallied. It is likely that the export sector has continued to
deteriorate, while industrial production still shows a lack of recovery. Combined with an uptick in core WPI inflation, the
fundamental picture for INR remains negative. We target USDINR at 55.50 in Q4.

KOREA - The won experienced one of its most stable months in some time during August. With inflation repressed, a
dovish monetary policy stance remains in effect until the uncertainty posed by Europe dissipates. Indeed, as the export
sector still weighs on the overall economy, monetary authorities will resist KRW appreciation. Monetary easing from the
Federal Reserve and ECB in September would stand to provide the won the only real supportive counterweight to eco-
nomic weakness until external demand stabilizes. We target USDKRW at 1160 in Q4.

THAILAND - Strong domestic demand coupled with global economic weakness has resulted in a deterioration for
Thailand’s external accounts. However, the impact on THB has been muted by fact that Thailand’s trajectory has di-
verged from the region thanks to the post-flood recovery (Q2 actually saw a growth acceleration) and a monetary policy
authority that has yet to ease rates. There is risk in that domestic post-flood rebound production is looking soft, which
may incent monetary easing should Europe not recover. We target USDTHB at 31 in Q4.

MALAYSIA - MYR is backed by an economy buoyed by solid domestic demand, thanks in great part to an ongoing in-
frastructure investment program. This helps offset the external weakness plaguing many regional economies. Bank
Negara is unlikely to provide monetary accommodation, adding to fundamental support to counteract periods of financial
market volatility that leads to MYR underperformance due to its “higher-beta” nature. However, strong domestic demand
combined with weak external demand may pressure MYR via the trade account. We target USDMYR at 3.10 in Q4.

                                                        Currency T rends
                                Going Back                       Spot                          Outlook
  FX Rate                                                                                                                    FX Rate
                  12 m             6 m             3 m          30-Aug             3 m          6 m            12 m
USDINR            46.10           49.02           55.59          55.63            55.67        55.33           54.83      USDINR
USDKRW            1061             1119           1178           1134             1163          1153           1129       USDKRW
USDTHB            29.99           30.46           31.76          31.38            31.17        30.83           30.33      USDTHB
USDMYR             2.96            2.99            3.19          3.13              3.10         3.08            3.05      USDMYR
                           USDINR                                                               USDKRW

 56.70                                                               1195




 44.70                                                               1045
    Aug-11    Oct-11   Dec-11   Feb-12   Apr-12   Ju n-12   Aug-12      Aug-11     Oct-11   Dec-11   Feb-12   Apr-12   Ju n-12   Aug-12

                           USDT HB                                                              USDMYR


 30.80                                                                3.10

 30.45                                                                3.05

 30.10                                                                3.00

 29.75                                                                2.95
     Aug-11   Oct-11   Dec-11   Feb-12   Apr-12   Ju n-12   Aug-12       Aug-11    Oct-11   Dec-11   Feb-12   Apr-12   Ju n-12   Aug-12

Global Economic Research                                                                                           September 2012

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

INDIA - The Indian rupee (INR) is enjoying a stabilization           KOREA - The South Korean economic and currency mar-
phase following a period of acute currency weakness; the             ket environment continues to improve despite the adverse
INR lost 17% against the USD over the past 12 months.                external shocks emanating from the European debt crisis,
The underlying causes of such softness remain in place. A            Chinese economic slowdown and persistent US fiscal
sizable twin (fiscal and current account) deficit position, still-   weakness. The South Korean won (KRW) has been the
high inflation (6.9% y/y in July) and evident economic               best performing Asian currency over the past three months,
growth deceleration (GDP advanced only 5.3% y/y in the               appreciating by close to 5% against the USD in this period.
first quarter) led to a material correction in local financial       A period of consolidation may follow after this rebound from
markets. India is about to lose its investment-grade rating:         the weakness seen in May 2012. Although we are of the
both Standard and Poor’s and Fitch have placed India’s               view that the KRW is well positioned to regain a strength-
rating on review for possible downgrade. Inflation remains           ening tone, the monetary authorities will try to prevent a
an issue of concern, as proven by the central bank’s deci-           significant currency appreciation. It has become clear that
sion to keep its monetary policy rate unchanged at 8.0% in           the Korean won will become a major beneficiary of increas-
July despite the need for further stimulus on the growth             ing foreign inflows into Asia as a result of prolonged low
front. Moreover, the Reserve Bank of India highlighted that          interest rates and continued official intervention in US and
the government may not reach its deficit-reduction target            European debt markets. On the monetary front, the central
during the current fiscal year. Without visible progress on          bank has been very successful in pursuing its inflation-
fiscal consolidation, a rating downgrade seems inevitable.           control policy; indeed, the headline inflation rate reached a
India may soon become the first BRIC member to regain                five-year low level of 1.5 % y/y in July 2012. Accordingly,
speculative-grade rating status. We are of the view that,            the monetary authorities are in a comfortable position to
given the structural nature of current macroeconomic imbal-          inject liquidity through lowering interest rates to reinforce
ances, the INR will remain on the defensive and subject to           the economic recovery if need be. The Bank of Korea re-
further depreciation risk. At best, the economy will expand          duced its administered rate by 25 basis points (bps) to
by 6% in 2012-13. Increased sensitivity to Europe-induced            3.0% last July, and we anticipate that the authorities will cut
global risk aversion may exacerbate a process of credit dif-         at least 25 bps at the next monetary policy meeting.
ferentiation amongst core emerging-market economies.

THAILAND - The Thai Baht (THB) is enjoying a positive                MALAYSIA - Malaysia is showing continued evidence of
trend on the back of supportive macroeconomic fundamen-              macroeconomic strength on multiple fronts, with positive
tals at home and the growing likelihood that US monetary             spillover effects on the exchange rate environment, which
and Chinese fiscal stimulus measures will trigger demand             has displayed a bullish tone since early July. The Malaysi-
for Asian assets in the near term. We are of the view that           an ringgit (MYR) is positioned to extend gains into the latter
the THB will maintain its current strengthening phase well           part of this year. The Malaysian economy recorded better
into the New Year, allowing the central bank to continue to          than anticipated growth figures in the second quarter, ex-
accumulate foreign exchange reserves, which reached                  panding by 5.6% y/y. The improved economic performance
US$175 billion in August. On the growth front, the Thai              materialized in the context of well-contained price pres-
economy surprised by posting a faster than expected rate             sures and a persistently robust current account surplus
of expansion in the second quarter: real GDP grew by 4.2%            equivalent to 10% of GDP. The economy is showing signs
y/y versus the same period in 2011. Irrespective of the cur-         of acceleration with GDP growth rates estimated to aver-
rent bullish tone, the Thai economy is not immune to the             age 4.5-5% in 2013-13. The country’s well-entrenched in-
negative effects caused by the European crisis and the               vestment-grade position together with attractive interest
deceleration of global demand as portrayed in a weaker               rate differentials reinforces a bullish tone in the Malaysian
export sector performance. In this context, the government           currency. Additionally, the ringgit will benefit from a surge in
continues to cooperate with the central bank to engineer a           funds into emerging-market assets as a result of prolonged
pro-growth policy mix, something that has been welcomed              monetary policy accommodation in the United States. On
by global financial market participants. At present, non-            the political front, the country is immersed in an electoral
deliverable forward (NDF) contracts are discounting curren-          cycle ahead of the general elections that will take place in
cy stability over the next 12 months; however, there is a            early 2013, an event that will encourage the current gov-
risk that exogenous events (i.e., Fed plus China stimuli)            ernment to step up government expenditures in an attempt
may cause a sharp rally in Asian floating currencies                 to win popular support. The central bank remains commit-
through the remainder of the year with positive conse-               ted to maintaining its existing currency regime based on a
quences for the THB. We maintain our current view for fur-           managed float against a trade-weighted basket of curren-
ther THB strength.                                                   cies. Undoubtedly, any shift in China’s currency policy will
                                                                     incite an adjustment in Malaysia’s currency mix.

Global Economic Research                                                                                                                                                  September 2012

                                                                                                                                                            Foreign Exchange
Currency Outlook                                                                                                                                Daniela Blancas +1 416 862-3908

BRAZIL - In line with a less dovish tone from the central bank, initial signs of an economic recovery –which is expected
to be more evident by the end of the year– and the effect of government stimulus, mainly in the industrial sector, open
the door for a modest strengthening in the Brazilian real (BRL) in the coming quarters. We anticipate that the BRL will
close the year at 1.95 against the USD, an appreciation of less that 5% from current levels in the second half of 2012.

MEXICO - In August, the Mexican peso (MXN) entered a stabilization phase, trading in a 13.05 to 13.25 range vis-à-vis
the US dollar. Flows to MXN-denominated assets continue to be supportive for the currency, together with a solid local
economic outlook, strong oil prices and a generally weaker US dollar against major currencies. We expect USDMXN to
close the year at around 13.10.

CHILE - Chile remains one of the strongest economies in Latin America, showing still solid local demand conditions, a
stable monetary policy and low inflation, despite lower foreign demand. However, commodity prices –particularly copper-
continue to be a factor of volatility for the currency. We anticipate a slight rebound in the USDCLP by year-end from cur-
rent levels, to close 2012 around the 500 mark.

COLOMBIA - The Colombian peso (COP) has been negatively affected by official intervention, economic moderation
and loose monetary policy in a low-inflation environment, offsetting the positive impact from Standard and Poor’s recent
revision to the credit rating outlook from “stable” to “positive”. We maintain our view that the USDCOP rate will close the
year near the 1,800 mark; however, we do not discount the possibility of further intervention coming from the central
bank or the government, which would put more pressure on the currency in the short-term.

                                                                                       C u rren cy T ren ds
                                             G o in g B a c k                                     S pot                                  O u tlo o k
  F X R a te                                                                                                                                                                           F X R a te
                               12 m                6 m                     3 m                   30-A ug                3 m                6 m                 12 m
US D B RL                       1 .6 2            1 .7 2                   2 .0 4                 2 .0 5                1 .9 7             1 .9 3               1 .8 8          US D B RL
US D M X N                     12.29             1 2 .8 6                 1 4 .3 1                13.39                1 3 .1 7           1 3 .1 7             1 3 .1 4         US D M X N
US D C LP                       459                479                     518                     481                  501                504                  511             US D C LP
US D C OP                      1779               1767                    1831                    1830                 1803               1807                 1833             US D C OP
                                         USDBRL                                                                                           USDM XN
                                                                                                       14 .6

  1.97                                                                                                 14 .1

                                                                                                       13 .6

  1.75                                                                                                 13 .1

                                                                                                       12 .6

  1.52                                                                                                 12 .1
     A u g -1 1      O c t- 1 1    D ec-11     F e b -1 2    A p r -1 2    J u n -1 2    A u g -1 2       A u g -1 1    O c t- 1 1   D ec-11   F e b -1 2   A p r -1 2    J u n -1 2     A u g -1 2

                                         USDCLP                                                                                           USDCO P
 54 5                                                                                                 19 95

 53 0
                                                                                                      19 45

 51 5
                                                                                                      18 95
 50 0
                                                                                                      18 45
 48 5

                                                                                                      17 95
 47 0

 45 5                                                                                                 17 45
   A u g -1 1     O c t- 1 1      D ec-11    F e b -1 2     A p r -1 2    J u n -1 2    A u g -1 2        A u g -1 1    O c t- 1 1   D ec-11   F e b -1 2   A p r -1 2    J u n -1 2     A u g -1 2

Global Economic Research                                                                                       September 2012

                                                                                                       Foreign Exchange
Fundamental Commentary                                                                        Daniela Blancas +1 416 862-3908

BRAZIL - The Brazilian Real (BRL) continues to trade with-       MEXICO - The Mexican peso (MXN), subject to internation-
in a very stable range against the US dollar, seesawing          al risk appetite, has been stabilizing around the 13.15 mark
around the 2.0-mark since the beginning of July. Clear           against the US dollar, accumulating a 5.6% gain year-to-
messages from authorities refusing to allow further curren-      date. Robust domestic economic activity, a solid advance
cy appreciation, together with a loose monetary policy           in the local equity market, a stable monetary policy and
stance, sluggish output performance and government ef-           higher oil prices have been supporting MXN’s stabilization
forts to boost economic activity, set a weaker -although         phase. The Mexican economy remains on a solid trajecto-
stable- tone for the BRL in the short-term. In June, the eco-    ry. The country’s output expanded by 4.1% y/y in the se-
nomic activity index showed the strongest monthly pace of        cond-quarter, slightly below the 4.5% rate observed in the
recovery in more than a year; expanding by 0.8% against          first three months of the year. Trade, construction and ser-
May. Retail sales also expanded in the same month, partic-       vices were accountable for this strength; while the industri-
ularly in durable goods and car sales, reflecting govern-        al sector has been decelerating as a result of the close
ment stimulus in the auto sector. This will not be enough to     links to foreign demand and US economic cycles. Accord-
contribute significantly to second-quarter GDP growth;           ingly, we are revising our 2012 GDP forecast up to 3.9%
however, we anticipate the boost to be more evident in the       from 3.7%, previously. Inflationary pressures are building,
third and fourth quarters. The export sector remains weak,       with headline inflation surpassing the central bank’s toler-
as exports to the European Union and Argentina continue          ance range for the second consecutive month in July to
to decelerate, offsetting the positive effect of higher trade    4.4% y/y. Food and merchandise prices have been driving
with China and the US. In late August, the central bank cut      inflation higher; however, we expect inflation to decelerate
the administrated rate for its ninth consecutive time in one     to within the official target range by the end of the year.
year to a new record low of 7.5%. We anticipate that the         Despite the recent spike in inflation, the central bank has
central bank is reaching the end of its easing cycle, given      left its monetary policy rate unchanged at 4.5%, where we
that headline inflation increased for the first time in eleven   expect it to be held for the remainder of the year. The 10-
months from 4.9% y/y in June to 5.2% in July as a result of      year bond yield has returned to around 5.4%, after reach-
higher food prices, and signs of economic revival are start-     ing record low levels slightly below the 5.0% mark. Never-
ing to emerge.                                                   theless, foreign appetite for (and possession of) Mexican
                                                                 peso-denominated-assets remains high .
CHILE - The Chilean peso (CLP) remains among the                 COLOMBIA - Central bank and government intervention in
strongest currencies in Latin America, with a year-to-date       the currency market, aimed at preventing further apprecia-
return above 8.0% against the US dollar and 4.5% on a            tion of the currency, a moderation in local economic activity
quarter-to-date basis. Amid global economic slowing and          and narrower spreads have influenced the Colombian peso
the effect it has had in countries such as Brazil and, to a      (COP) in recent weeks. The currency traded for the most
lesser extent Colombia, the Chilean economy posted a             part of the month within a stable range; however, the an-
strong second-quarter GDP growth rate of 5.5% y/y, slightly      nouncement that the government was buying US$300 mil-
higher than the first quarter rate of 5.3% (revised from 5.6%    lion in mid-August and the central bank’s increase in its
y/y). Local demand, which expanded by 7.1% y/y in the            daily purchases have finally weighed on the currency. De-
second quarter, has been driving the Chilean economy,            spite the recent drop in the COP vis-à-vis the US dollar; the
with retail sales, services, construction and imports posting    currency maintains a year-to-date gain of 6.0%, the second
significant advances. Headline inflation is trending down,       highest among its Latin American peers. For the second
reaching 2.5% y/y in July (the lowest rate since the end of      consecutive month, the central bank cut the reference rate
2010 and its fifth consecutive decrease). With a resilient       by 25 basis points (to 4.75%), as a result of a negative ef-
economy and no evidence of mounting inflationary pres-           fect coming from weak international demand. We expect
sures, the central bank maintains a neutral monetary policy      the central bank to cut the reference rate once more before
stance, leaving its reference rate unchanged at 5.0%. The        the easing cycle is complete. Headline inflation continues
central bank has stated that the output gap is almost zero       to trend lower, reaching 3.0% y/y in July. As a result of fis-
and that the economy has reached full-employment capaci-         cal reforms and the accurate management of economic
ty, supporting the view of no changes in the monetary poli-      policies that aim to make the Colombian economy more
cy tone. The state-owned copper mining company recently          resilient to external shocks, S&P changed Colombia’s sov-
revised lower the expected average copper prices. Never-         ereign debt outlook to “positive” from “stable”, leaving the
theless, we do not anticipate any significant shocks that        credit rating at “BBB-”. Colombia’s possible impending
could derail Chilean economic growth or compromised the          credit upgrade could be enhanced by the government’s
country’s fiscal position; however, the currency could suffer    recent confirmation that a peace negotiation has been initi-
from higher volatility.                                          ated with the guerrilla group, which, if successful, will repre-
                                                                 sent higher confidence among international investors.

Global Economic Research                                                                                                                                              September 2012

                                                                                                                                                          Foreign Exchange
Currency Outlook                                                                                                                               Sarah Howcroft +1 416 863-2859

RUSSIA - The Russian ruble (RUB) continued to trade in a well contained range over the last month, though at a slightly
stronger level than in July. The currency has benefitted from the recovery in oil prices since late June, though not to the
same extent as was seen in the early part of the year. The RUB remains constrained, however, by persistent capital out-
flows and the still fragile global risk environment. We hold a year-end USDRUB target of 32.5.

TURKEY - After exhibiting considerable stability in recent weeks, the Turkish lira (TRY) is set to weaken as monetary
conditions are gradually loosened by the central bank. We expect the lira to close the year around 1.85 per US dollar. The
currency will regain an appreciating bias in 2013 in response to a pick-up in economic activity and accompanying normali-
zation of interest rates, which will lead those of most global central banks.

CZECH REPUBLIC – Having strengthened considerably versus the euro since late June (in spite of an interest rate cut
by the central bank), the Czech koruna (CSK) will remain critically dependent upon developments in the European debt
crisis. Though the economy is currently mired in recession, underlying fundamentals remain sound, and the currency
should resume an appreciating trend in 2013. We anticipate a year-end EURCZK rate around 25.

SOUTH AFRICA - The South African rand (ZAR) continues to fluctuate in a wide trading range around our year-end tar-
get of 8.3 per US dollar. The path of the currency depends to a large degree on changes in the global risk environment,
particularly with respect to the euro crisis and commodity prices. Over the medium term, the currency is likely to remain
constrained by South Africa’s ongoing political uncertainty, social tensions and considerable twin deficits.

                                                                                      C u rre n c y T re n d s
                                              Going B ac k                                       S pot                                 Outlook
  FX Rate                                                                                                                                                                         FX Rate
                         12 m                    6 m                       3 m                  30-A ug               3 m               6 m                 12 m
US D RUB                 28.97                  29.17                     33.67                  32.56               32.44             32.67                33.17          US D RUB
US D TRY                  1.72                   1.75                      1.86                  1.83                 1.84              1.84                 1.79          US D TRY
E URC ZK                 24.16                  24.90                     25.79                  24.88               25.07             24.87                24.47          E URC ZK
US D ZA R                 7.01                   7.51                      8.58                  8.48                 8.29              8.32                 8.37          US D ZA R
                                       USDRUB                                                                                           USDT RY

  33 .3 5                                                                                            1.8 9

  32 .1 0                                                                                            1.8 4

  30 .8 5                                                                                            1.7 9

  29 .6 0                                                                                            1.7 4

  28 .3 5                                                                                            1.6 9
        A u g -1 1   O c t- 11     D ec- 11     F e b -1 2    A p r-1 2    Ju n -1 2    A u g -1 2      A u g -1 1    O c t- 11   D ec- 11   F e b -1 2   A p r-1 2   Ju n -1 2    A u g -1 2

                                       E U R C ZK                                                                                        U S D ZAR
                                                                                                     8.7 0
26 .00
                                                                                                     8.4 5

                                                                                                     8.2 0
25 .50
                                                                                                     7.9 5

25 .00                                                                                               7.7 0

                                                                                                     7.4 5
24 .50
                                                                                                     7.2 0

24 .00                                                                                               6.9 5
    A u g -1 1   O c t- 11       D ec- 11     F e b -1 2     A p r-1 2    Ju n -1 2     A u g -1 2      A u g -1 1   O c t- 11    D ec- 11   F e b -1 2   A p r-1 2   Ju n -1 2    A u g -1 2

Global Economic Research                                                                                         September 2012

                                                                                                        Foreign Exchange
Fundamental Commentary                                                                          Sarah Howcroft +1 416 863-2859

RUSSIA - After a strong start to the year, the Russian econ-      TURKEY - Turkish monetary authorities are expected to
omy has begun to moderate as the global deceleration be-          ease lending conditions in the coming months. With the me-
gins to weigh on exports and private investment, more than        dium-term inflation projection pointed lower, material pro-
offsetting still sturdy domestic consumer and infrastructure      gress on the economic rebalancing from consumption to
spending. A 4.7% y/y drop in exports in June brought the          external demand, evidence of slowing growth both domesti-
trade surplus to its lowest level since November 2010. The        cally and globally, and the recent stability displayed by the
Russian Economic Ministry projects an average GDP                 lira, the central bank has signaled an imminent reduction in
growth rate of 2.8% y/y in the second half of 2012, a signifi-    the upper margin of the overnight interest rate corridor
cant slowdown from the 4.5% pace set in the first six             (currently at 11.5%). Given that further monetary accommo-
months. Nevertheless, being one of the world’s top energy         dation is expected from the major global central banks,
producers and exporters, Russia will benefit from the re-         Turkish officials are now less concerned about inciting a lira
newed uptick in commodity prices, particularly in Urals           sell-off, though they will likely employ alternative policy tools
blend oil, which has risen roughly 30% since the EU ban on        (i.e., reserve requirements, foreign exchange transactions)
Iranian oil came into effect on July 1st. We continue to ex-      as needed to insulate the currency until the economy recov-
pect growth to average around 3¾% in 2012-13. Mean-               ers a stronger growth trajectory and domestic interest rates
while, inflationary pressures have intensified in recent          begin to move higher. The benchmark one-week repo rate
months on the back of the drought which has affected this         will likely be left at 5.75% until the first half of 2013. The
year’s grain harvest, as well as the implementation of regu-      next rate-setting meeting will be held on September 18th.
lated price and tariff increases. In July the consumer price      With exports maintaining a strong pace (up 13.4% y/y year-
index grew 1.2% over the prior month, the largest monthly         to-date), the current account deficit continues to narrow – a
gain since last January, boosting the annual inflation rate to    shortfall of US$4.2 billion in June was the lowest since last
5.6% y/y from 4.3% in June. We do not anticipate any major        August and was easily covered by foreign capital inflows.
monetary policy changes in the next six months; however,          While this improvement has contributed to reduced lira vola-
upside inflation risks will be monitored closely. Russia offi-    tility in recent months, investors remain cautious of Turkey’s
cially acceded to the World Trade Organization in late July.      still significant external financing needs and resulting vulner-
The agreement implies a gradual reduction of tariffs, though      ability to shifts in global risk appetite. We expect the econo-
the near-term impact is expected to be small.                     my to grow by 2¾% in 2012, accelerating to 4½% next year.
CZECH REPUBLIC - Growth prospects in the Czech Re-                SOUTH AFRICA - Though inflationary pressures have
public have deteriorated as the crisis in the euro zone           moderated in South Africa (at 4.9% y/y in July, the headline
dampens both exports and confidence in the private sector.        rate is now well within the official target range), monetary
After shedding 0.8% q/q in seasonally adjusted terms in the       authorities will be kept on alert going forward, given the
first quarter, GDP dipped another 0.2% in the April-June          weakened trajectory of the rand and possible pass through
period, marking the fourth straight quarter without growth. In    from rising global food prices. After a half-point reduction in
light of the expected further descent of the euro area econo-     July, the benchmark interest rate currently stands at a rec-
my through the remainder of the year (in Germany in partic-       ord-low 5.0%. Domestic activity remains relatively buoyant;
ular, where almost 30% of Czech exports are sent), the re-        retail and vehicle sales continue to expand at a robust pace,
cession will likely extend into the coming quarters, resulting    and the prolonged slump in the mining sector appears to be
in a contraction of almost 1% in 2012 overall. The nation         over – mining production grew in yearly terms for a second
should, however, fare better than some of its emerging Eu-        straight month in June following 11 months of retrenchment.
ropean peers, such as Hungary, given the profitability of its     On the other hand, manufacturing activity has begun to
banks and their low reliance on wholesale and external            weaken as demand for exports is depressed by adverse
funding, its (limited) scope to ease the pace of fiscal consol-   external developments. In fact, South Africa is on track to
idation, and its lower dependence on export markets in the        post its largest merchandise trade deficit on record this
depressed peripheral nations of the currency union. Reflect-      year. GDP growth measured 3.0% y/y in the second quar-
ing these relative strengths, the yield on the government’s       ter, up from 2.1% in the prior three months. We expect the
10-year bond has trended consistently lower this year, and        economy to expand by 2½% this year, a comparatively
now measures just 2.3% (versus 7.3% for Hungary and               weak performance by historical standards. The South Afri-
4.9% for Poland). The government should be able to bring          can Reserve Bank (SARB) estimates that the output gap
the fiscal deficit below the EU-mandated threshold of 3% of       currently measures roughly -3½% and is likely to remain
GDP by 2013, as planned. Headline inflation, at 3.1% y/y in       negative over the medium term. Chief among the longer-
July, is currently above the central bank’s 2% target, bol-       term issues of concern to the SARB are high structural un-
stered by indirect tax increases and commodity prices. Un-        employment, inadequate electricity provision and feeble
derlying price pressures are low, however, and we antici-         private investment. The twin fiscal and current account defi-
pate another policy rate cut before year-end.                     cits also continue to generate unease among investors.

Global Economic Research                                                                                                      September 2012

                                                                                                                   Foreign Exchange

   G LOBAL C URRENCY FORECAST                                            (end of period)
                                    2010     2011     2012f    2013f              2012f                                      2013f
                                                                        Q1a     Q2a       Q3        Q4        Q1        Q2           Q3        Q4

           Japan          USDJPY       81       77       80       87      83      80           78        80        84        85           86        87

           Euro zone      EURUSD      1.34     1.30     1.23     1.21    1.33    1.27     1.21       1.23      1.22      1.22        1.21       1.21
                          EURJPY      108      100       98      105     111     101           94        98    102       104          104       105

           UK             GBPUSD      1.56     1.55     1.59     1.64    1.60    1.57     1.55       1.59      1.62      1.63        1.64       1.64
                          EURGBP      0.86     0.83     0.77     0.74    0.83    0.81     0.78       0.77      0.75      0.75        0.74       0.74

           Switzerland    USDCHF      0.94     0.94     1.02     1.03    0.90    0.95     0.99       1.02      1.02      1.02        1.03       1.03
                          EURCHF      1.25     1.22     1.25     1.25    1.20    1.20     1.20       1.25      1.25      1.25        1.25       1.25

     Canada               USDCAD      1.00     1.02     0.99     0.97    1.00    1.02     1.02       0.99      0.98      0.97        0.97       0.97

                          CADUSD      1.00     0.98     1.01     1.03    1.00    0.98     0.98       1.01      1.02      1.03        1.03       1.03

           Mexico         USDMXN     12.34    13.94    13.12    13.38   12.81   13.36   13.28       13.12     13.20     13.08     13.17        13.38
                          CADMXN     12.37    13.65    13.25    13.79   12.83   13.14   13.02       13.25     13.47     13.48     13.58        13.79

           Argentina      USDARS      3.98     4.30     6.00     6.50    4.38    4.53     5.15       6.00      6.13      6.25        6.38       6.50

           Brazil         USDBRL      1.66     1.87     1.95     1.90    1.83    2.01     2.02       1.95      1.92      1.87        1.88       1.90

           Chile          USDCLP      468      520      502      515     488     501       500       502       505       508          512       515

           Colombia       USDCOP     1908     1939     1800     1850    1789    1784      1810      1800      1810      1820         1840      1850

           Peru           USDPEN      2.81     2.70     2.61     2.55    2.67    2.67     2.62       2.61      2.62      2.58        2.58       2.55

           Venezuela      USDVEF      4.29     4.29     5.15     5.15    4.29    4.29     4.64       5.15      5.15      5.15        5.15       5.15

           Australia      AUDUSD      1.02     1.02     1.02     1.05    1.03    1.02     1.02       1.02      1.04      1.04        1.05       1.05

           China          USDCNY      6.61     6.30     6.25     6.10    6.30    6.35     6.30       6.25      6.25      6.20        6.15       6.10

           Hong Kong      USDHKD      7.77     7.77     7.75     7.75    7.77    7.76     7.75       7.75      7.75      7.75        7.75       7.75

           India          USDINR      44.7     53.1     55.5     54.3    50.9    55.6     56.0       55.5      55.3      55.0        54.8       54.3

           Indonesia      USDIDR     8996     9069     9400     9200    9146    9433      9500      9400      9350      9325         9250      9200

           Malaysia       USDMYR      3.06     3.17     3.10     3.02    3.06    3.18     3.11       3.10      3.07      3.06        3.04       3.02

           New Zealand    NZDUSD      0.78     0.78     0.77     0.82    0.82    0.80     0.77       0.77      0.78      0.78        0.80       0.82

           Philippines    USDPHP      43.8     43.8     42.5     41.5    42.9    42.1     43.0       42.5      42.3      42.0        41.8       41.5

           Singapore      USDSGD      1.28     1.30     1.25     1.21    1.26    1.27     1.25       1.25      1.25      1.24        1.23       1.21

           South Korea    USDKRW     1126     1152     1160     1110    1133    1145      1170      1160      1150      1138         1125      1110

           T hailand      USDTHB      30.1     31.6     31.0     30.0    30.8    31.6     31.5       31.0      30.8      30.5        30.3       30.0

           T aiwan        USDTW D     29.3     30.3     29.5     29.0    29.5    29.9     29.8       29.5      29.4      29.3        29.1       29.0

           Czech Rep.     EURCZK      25.0     25.6     25.0     24.2    24.8    25.5     25.2       25.0      24.8      24.6        24.4       24.2

           Iceland        USDISK      115      123      118      116     127     125       120       118       118       117          117       116

           Hungary        EURHUF      279      315      295      285     294     286       287       295       293       290          288       285

           Norway         USDNOK      5.82     5.98     5.75     5.30    5.69    5.96     5.90       5.75      5.60      5.50        5.40       5.30

           Poland         EURPLN      3.96     4.47     4.25     4.00    4.15    4.22     4.17       4.25      4.19      4.13        4.06       4.00

           Russia         USDRUB     30.54     32.1     32.5     33.5    29.3    32.4     32.3       32.5      32.8      33.0        33.3       33.5

           South Africa   USDZAR      6.63     8.09     8.30     8.40    7.67    8.16     8.28       8.30      8.33      8.35        8.38       8.40

           Sweden         EURSEK      8.99     8.92     8.45     8.30    8.83    8.77     8.50       8.45      8.45      8.40        8.40       8.30

           T urkey        USDTRY      1.54     1.89     1.85     1.76    1.78    1.81     1.82       1.85      1.83      1.81        1.78       1.76

   f: forecast

Global Economic Research                                                                                                                                  September 2012

                                                                                                                                             Foreign Exchange

International Research Group                                   Canadian & U.S. Economic Research                                           Foreign Exchange Strategy

Daniela Blancas                                                Derek Holt                                                                  Eduardo Suárez                                                                

Pablo F.G. Bréard                                              Devin Kinasz                                                                Camilla Sutton                                                                 

Sarah Howcroft                                                 Adrienne Warren                                                             Eric Theoret                                                            

Estela Ramírez                                                 Dov Zigler                                                                  Sacha Tihanyi                                                                 

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