Global Economic Research October 2011 Foreign Exchange Outlook Global economic softness, sharp adjustments in commodity and equity securities markets, decisive government intervention and monetary stimulus in advanced economies, and persistent asset price adjustments and risk repricing in developing countries are key factors affecting flows in foreign exchange markets. The USD is in recovery mode. European fundamental fragility, intervention by Japan and Switzerland, US Fed asset reallocation and equity market sell-off all acted to inject a positive tone into the USD. Weakened by commodity prices, the CAD and MXN will regain strength through year-end. Following a bearish momentum, Latin American currencies will soon test and reach technical levels. European distress is escalating. Eroding sovereign creditworthiness, softening economic activity, unattractive interest rate differentials, and uncertain currency union developments weigh on the EUR, with negative spillover effects on the GBP, CHF and RUB. In Asia/Oceania, the JPY and the CNY emerged as favourite investor assets. Commodity and equity market adjustments injected a near-term bearish tone into the AUD (soon to be reversed) as well as into the core group of developing Asian currencies including the KRW, TWD, MYR and THB. Index Market Tone & Fundamental Focus ......................................................................................... 3 US/Canada.................................................................................................................................. 5 Europe ........................................................................................................................................ 6 Asia/Oceania .............................................................................................................................. 8 Developing Asia....................................................................................................................... 10 Developing Americas .............................................................................................................. 12 Developing Europe/Africa....................................................................................................... 14 Global Currency Forecast....................................................................................................... 16 Foreign Exchange Outlook is available on: www.scotiabank.com and Bloomberg at SCOE Global Economic Research October 2011 Foreign Exchange Outlook Global Foreign Exchange Outlook October 4, 2011 Actual Q2a 11Q3a 11 Q4 11 Q1 12 Q2 12 Q3 12 Q4 12 Q1 13 EURUSD 1.33 1.45 1.34 1.40 1.42 1.42 1.40 1.40 1.38 Euro Consensus* 1.41 1.41 1.41 1.41 1.39 1.38 USDJPY 76.9 81 77 80 82 83 84 85 87 Yen Consensus* 78 79 80 81 82 83 GBPUSD 1.54 1.61 1.56 1.60 1.61 1.62 1.63 1.64 1.65 Sterling Consensus* 1.61 1.62 1.63 1.65 1.64 1.64 USDCAD 1.06 0.96 1.05 1.02 1.00 0.99 0.98 0.98 0.97 Canadian Dollar Consensus* 0.99 0.98 0.98 0.98 0.99 1.00 AUDUSD 0.95 1.07 0.97 1.00 1.02 1.04 1.06 1.08 1.08 Australian Dollar Consensus* 1.05 1.04 1.03 1.03 1.01 1.00 USDMXN 13.96 11.71 13.90 12.93 12.94 12.71 12.67 12.71 12.40 Mexican Peso Consensus* 12.17 12.20 12.23 12.25 12.35 12.44 Spot Price vs. 100 Day Moving Average vs. 200 Day Moving Average - (5yr Trend) EURUSD USDJPY EUR/ USD USD/ JPY 1.62 124 100 Day 100 Day 200 Day 117 200 Day 1.52 110 1.42 103 96 1.32 89 1.22 82 1.12 75 1 Ju 8 08 D 0 Au 7 8 09 10 M 0 M 6 1 6 7 8 9 0 1 07 09 07 08 09 10 11 -1 l-1 -0 -0 -1 -0 0 -1 -0 -0 -0 -0 -1 -1 p- n- n- b- g- r- r- r- r- r- r- ov ec ay ar ct ct ct ct ct ct ct ct Ju Ja Ap Se Fe Ap Ap Ap Ap Ap O O O O O O O O N GBPUSD USDCAD USD/ CAD 2.11 GBP/ USD 100 Day 100 Day 1.30 200 Day 1.96 200 Day 1.22 1.81 1.14 1.66 1.06 1.51 0.98 1.36 0.90 6 7 8 9 0 1 07 08 09 10 11 6 7 8 9 0 1 07 08 09 10 11 -0 -0 -0 -0 -1 -1 -0 -0 -0 -0 -1 -1 r- r- r- r- r- ct ct ct ct ct ct r- r- r- r- r- ct ct ct ct ct ct Ap Ap Ap Ap Ap Ap Ap Ap Ap Ap O O O O O O O O O O O O AUDUSD USDMXN 1.12 15.2 1.04 USD/ M XN 0.97 14.1 100 Day 200 Day 0.89 13.0 0.82 AUD/ USD 11.9 0.74 100 Day 200 Day 10.8 0.67 0.59 9.7 6 7 8 9 0 1 6 7 8 9 0 1 07 08 09 10 11 07 08 09 10 11 -0 -0 -0 -0 -1 -1 -0 -0 -0 -0 -1 -1 r- r- r- r- r- r- r- r- r- r- ct ct ct ct ct ct ct ct ct ct ct ct Ap Ap Ap Ap Ap Ap Ap Ap Ap Ap O O O O O O O O O O O O (*) Source: Consensus Economics Inc. September 2011 2 Global Economic Research October 2011 Foreign Exchange Outlook MARKET TONE & FUNDAMENTAL FOCUS Pablo F.G. Bréard +1 416 862-3876 Camilla Sutton +1 416 866-5470 A scenario of global economic deceleration is materializ- Brazilian real (BRL) was subject to the negative effects of ing amidst heightened financial market volatility associ- a reduction in the government’s administered monetary ated with sovereign credit distress in advanced econo- policy rate (by 50 bps), financial transactions tax changes mies and global risk repricing. Ongoing shifts in commod- and of the bearish tone in other top-tier emerging markets ity prices are feeding sharp currency adjustments in most such as China, India and Russia. emerging markets. The correction and profit-taking activ- ity in equity securities has also led to an escalation of Europe remains center stage in this renewed phase of global risk aversion. The US dollar (USD) has regained a financial market volatility. Sustainability concerns over perceived sense of strength during this volatile period, sovereign debt and the currency union, expected mone- reminding global investors that its role as a world reserve tary easing, and the need to recapitalize many European currency remains firmly entrenched. Simultaneously, the financial institutions have all been factors placing the EUR top-tier Asian currencies, the Japanese yen (JPY) and the on the defensive against all major currencies save for the Chinese renminbi (CNY), have emerged as favourite as- Swiss franc. The CHF is likely to stick relatively close to sets. Even the so-called “shadow currencies”, composed the newly implemented 1.20 EURCHF floor. The uncer- of the Canadian dollar (CAD) in the Americas, the Swiss tain details of an extended European Financial Stability franc (CHF) in Europe and the Australian dollar (AUD) in Facility may inject a bearish tone into the EUR in the near Asia/Oceania, have adopted a bearish tone as of late. term, yet we believe that the currency union will continue Finally, aggressive intervention by both Japan and Swit- to receive the political and financial support of its core zerland has also been a key factor swaying flows in cur- member nations. We have reassessed global economic rency markets. and financial market conditions and now expect EURUSD to close the year at 1.40. Our scenario assumes that The steady recovery of the USD is shaping currency- European authorities succeed in putting a much stronger trading dynamics within the NAFTA zone. Despite persis- financial safety net under the hard-pressed economies tent weakness in employment conditions, depressed and financial institutions. The British Pound (GBP) has housing markets and the slow recovery of consumer dy- also been immersed in a pro-USD global adjustment namics, the USD continues to benefit from strong fiscal phase prompting market participants to anticipate further and monetary stimuli. The USD received liquidity support central bank support through its asset-purchase pro- from the Fed’s asset-purchase programme despite unat- gramme. In line with the profit-taking phase affecting tractive US treasury yields (10-year bonds valued at emerging-market currencies, both the Russian ruble 1.74%). In addition, the acute sell-off in emerging markets (RUB) and the Turkish lira (TRY) weakened accordingly. also injected an element of support to the USD. The proc- ess of systemic deleveraging, together with relative im- The Asian currency market environment presents a mixed provement in foreign trade and manufacturing activity, are outlook. The JPY remains relatively stable as a favourite encouraging signs of a still soft US economic recovery. safe-haven asset worldwide despite persistent fiscal and Although the fundamental strengths of the Canadian and economic weakness in Japan. Excluding the CNY, the Mexican economies remain in place, both the CAD and top-tier floating currencies within developing Asia experi- the MXN weakened due to sharp declines in export- enced a synchronized material correction. Looking ahead, sensitive commodity prices. As for the 2012 outlook, the the Chinese exchange rate policy may, once again, be- problems facing Europe continue to be front and centre, come a source of friction with advanced economies dur- keeping the common currency generally soft. A weakened ing the campaign leading to the US presidential elections. euro (EUR) next year does not limit the potential for the With US$3.2 trillion in international reserves, China has USD to depreciate against other major blocks of curren- the ability to dictate the value of its currency at leisure. cies in Asia and the Americas. Once the high-volatility Ironically, non-deliverable forward markets imply, at pre- phase subsides, we expect the CAD to retrace some of its sent, a slight devaluation of the CNY versus the USD by recent losses, closing 2012 above parity versus the USD. the end of 2012. Our forecast estimates a USDCNY rate of 5.88. Considering recent volatile moves in the remain- Latin American floating currencies remain immersed in a ing Asian FX space, our forecast looks for a return to the phase of sharp depreciation against the USD, triggered in appreciating bias with varying degrees for the Indian ru- early August. There is no clear endogenous fundamental pee (INR), Thai baht (THB), Taiwanese dollar (TWD), justification for this loss of value suffered in tandem by all South Korean won (KRW), Indonesian Rupiah (IDR), Phil- of these regional currencies. At the core of this bearish ippine peso (PHP) and Singapore dollar (SGD). tone lies the sharp recovery of the USD, fuelled by the intensifying fiscal problems in Greece and other European countries. In the case of the leading regional currency, the 3 Global Economic Research October 2011 Foreign Exchange Outlook CANADA Camilla Sutton +1 416 866-5470 Eric Theoret +1 416 863-7030 The Canadian dollar (CAD) has entered the third quarter at a new 13-month low and is trending lower. On the back of rising global risk aversion driven by uncertainty in Europe, market participants are rapidly shifting portfolio holdings to highly liquid US assets and away from risk assets like CAD. Weakness in the currency is likely to continue until there is at least some stability in Europe, which we expect markets, politicians and Europeans to demand before year-end. Ac- cordingly, though the current outlook looks fairly bleak for CAD, we would expect a general retracement of some of the recent losses as we approach year-end. The fundamental outlook for CAD has deteriorated over the last quarter. The US economy remains vulnerable, with growth estimates still being ratcheted lower, in turn pulling the Canadian outlook down. However, for currency markets it is the relative outlook that matters and with this as our metric, the Canadian backdrop remains more favourable than either the US or European one. In addition, as long as growth remains close to 9% in China, commodity prices should stabilize and provide some support to the commodity sensitive Canadian econ- omy. Still it is hard to ignore the reality of what the Bank of Canada Governor, Mark Carney, has termed increasing ‘headwinds’ from eternal factors. It is on the back of these that the market has begun pricing in a fifty percent chance of an interest rate cut before year-end. Should this materialize it would put added downward pressure on CAD; however this is not part of our base case, providing reason for CAD to retrace some of its recent losses. As FX reserves have increased globally (the most recent IMF data suggests they are now at US$10.1 trillion), the desire to diversify has also intensified. The non-G4 currencies, including CAD, are playing an increasingly important role in this trend. Both anecdo- tally and officially, these flows should prove somewhat supportive of CAD into the medium-term. The risks associated with our forecast are higher than they typically are. Some of fundamental shifts that would cause our forecast to include a softer CAD outlook would include: a significant deterioration in the European situation; a material softening in the out- look for China’s growth; a breakdown in global confidence that drives a more extended period of risk aversion than we currently expect. We are watching closely. Accordingly, though we anticipate further near-term CAD weakness before markets stabilize, we would expect that over the next quarter the currency is able to retrace some of its recent losses, closing the year through parity at 0.9850. Currency Trends Going Back Spot Outlook FX Rate FX Rate 12 m 6m 3m 4-Oct 3 m 6 m 12 m AUDCAD 0.995 1.003 1.033 1.003 1.015 1.020 1.039 AUDCAD CADJPY 81.16 85.65 83.62 72.49 78.80 82.00 85.71 CADJPY EURCAD 1.403 1.374 1.397 1.409 1.421 1.420 1.372 EURCAD USDCAD 1.029 0.971 0.963 1.060 1.015 1.000 0.980 USDCAD AUDCAD CADJPY 1.06 89.5 1.04 87.0 84.5 1.02 82.0 1.00 79.5 0.99 77.0 0.97 74.5 0.95 72.0 Oct-10 De c-10 Fe b-11 Apr-11 Jun-11 Aug-11 Oct-11 Oct-10 De c-10 Fe b-11 Apr-11 Jun-11 Aug-11 Oct-11 EURCAD USDCAD 1.45 1.06 1.04 1.41 1.02 1.38 1.00 1.34 0.98 1.31 0.96 1.27 0.94 Oct-10 De c-10 Fe b-11 Apr-11 Jun-11 Aug-11 Oct-11 Oct-10 De c-10 Fe b-11 Apr-11 Jun-11 Aug-11 Oct-11 4 Global Economic Research October 2011 Foreign Exchange Outlook CANADA AND UNITED STATES Adrienne Warren +1 416 866-4315 Fundamental Commentary Gorica Djeric +1 416 866-4214 UNITED STATES - While our forecast for 2011 GDP CANADA - After a solid start to 2011, the Canadian econ- growth remains unchanged at 1.7% q/q annualized, our omy contracted slightly in Q2. Some of the factors that de- view for 2012 has been downgraded to 1.5% from 2.1%. railed growth during the spring are beginning to dissipate. Recent indicators confirm that a gradual recovery remains Most notably, motor vehicle & parts assemblies that had underway, but with downside risks weighing on the outlook. been sharply curtailed by global supply disruptions are es- Aside from cautious hiring activity, still elevated energy sentially back on track. The sector is expected to add bills, struggling housing market and ongoing household roughly a percentage point to annualized GDP growth in deleveraging, added fiscal and political uncertainty are tak- Q3, and a further half percentage point over the final three ing a toll on consumer confidence, sapping shoppers’ en- months of the year. A solid GDP gain in July also suggests thusiasm to spend. Businesses have also adopted a more the economy started the third quarter on a firmer footing. At cautious outlook, keeping liquidity ratios at their highest the same time, the economy faces additional headwinds, since the 1960s, rebalancing debt profiles, moderating the including a weaker-than-expected US recovery and intensi- pace of capital expenditure and keeping inventories lean. fying sovereign debt concerns in Europe that are weighing The improving quality of corporate balance sheets and on confidence and unnerving financial markets. The latest capital investments should help ride out this slow economic data suggest the economy continues to report modest, if period allowing businesses to take advantage of future op- uninspiring, growth. Consumers have become more reti- portunities, such as additional expansions to emerging cent, especially with the pace of hiring showing some signs markets, especially supported by a weaker US dollar. In of slowing. Even so, consumer confidence held steady in early September, President Obama revealed the American September, and retailers reported stable sales and traffic Jobs Act – which proposed further payroll tax relief, mort- into at least the early part of the month. Auto sales edged gage refinancing and measures for unemployed workers – down in September, but remained in line with the average supporting his strategy of introducing further near-term of the past decade. Home sales and pricing have cooled a stimulus within a longer-term deficit reduction plan. While bit, but also remained at healthy levels through the end of several measures may have the advantage of some biparti- August, with potential buyers taking advantage of histori- san support, inevitably contentious – amid increased need cally low interest rates. Given the heightened degree of for fiscal austerity – is the Act’s steep price tag of US$447 economic uncertainty and financial market volatility, we billion, 2.9% of US GDP in 2012. Moreover, the Administra- expect consumers and businesses to remain cautious tion has still to unveil its housing market and mortgage ini- spenders for the time being. Exports, meanwhile, are being tiatives this western hemisphere autumn. The White House restrained by softening global demand, particularly from the acknowledges that all of its proposed measures may not be United States, the destination of roughly 75% of Canadian incorporated, and the eventual compromise will likely re- international shipments. flect Republican input, a process that could stretch through to year’s end. MONETARY POLICY COMMENTARY Derek Holt +1 416 863-7707 Karen Cordes Woods +1 416 862-3080 UNITED STATES - We maintain our view that the Federal CANADA - We continue to expect the Bank of Canada Reserve will keep its fed funds target rate on hold until Q3 (BoC) to remain on the sidelines until the end of Q3 2012, 2013, in line with the Fed’s loose commitment made in Au- with the risk of an even longer holding period pending de- gust. Indeed, should further monetary easing be deemed velopments in Europe’s debt situation, US politics, and Ca- essential, unconventional policies will likely be engaged nadian domestic growth. Indeed, continued financial market once again. However, the options are now more limited turmoil and a sharp reduction in both business and con- after the Fed engaged in “Operation Twist” last month, sumer confidence have put downward pressure on global shifting US$400 billion worth of Treasury securities with economic activity, raising the risk of weaker growth pros- maturities of 3 years and under into Treasury securities pects for Canada. Real GDP has already come in weaker with maturities of 6 out to 30 years by the end of June than expected in Q2 with a mild contraction while the risks 2012. While the Fed has acknowledged that the impact of of another weak print in Q3 have increased. Inflation, on the operation has been, and will continue to be, modest, it the other hand, has come in slightly higher than originally is the Fed’s view that lower borrowing costs will provide expected which has prompted BoC Governor Carney to further support for the US economy, especially when fiscal note in a recent speech that the BoC retains considerably policy is at a standstill. Thus, we can’t rule out the final pol- flexibility surrounding the inflation noise by altering the hori- icy options – additional asset purchases (QE3) and reduc- zon over which it evaluates inflation pressures. In fact, over ing interest on reserves – which we think could potentially the last two decades, the BoC has varied its desirable fore- be announced towards the end of this year or early next cast horizon from between as little as two quarters and as year once the current voting members on the FOMC go much as 11 quarters. This has added to sentiment that the through the next rotation. BoC is looking through near-term upside risk and expects a substantially softer inflation profile going forward. 5 Global Economic Research October 2011 Foreign Exchange Outlook EUROPE Camilla Sutton +1 416 866-5470 Currency Outlook Eric Theoret +1 416 863-7030 EURO ZONE - Debt and contagion fears are driving downward movement in EURUSD and fueling bearish sentiment in EUR with CFTC positioning net short at US$14.0 billion and approaching Q3 2010 levels. Initial support at 1.3500 was broken late in the month of September, and ongoing risk aversion could see EURUSD test the psychologically important 1.30. With a base case that authorities will attempt to provide a solution we expect EUR to retrace its recent losses and end 2011 at 1.40. UNITED KINGDOM - Calls for an increased asset purchase program have risen in frequency and are driving bearish sen- timent in GBP, with investors adding to their gross short positioning. The net short US$6.3 billion position is still shy of its levels from June 2010 though continued decisive movement against GBP could see the previous levels surpassed. Sup- port is expected at the psychologically important 1.50, consistent with congestion seen in mid-2010. We expect a retrace- ment of GBP losses, ending the year at 1.60. SWITZERLAND - Official intervention to set at EURCHF floor at 1.20 removed CHF from the list of investors’ safe ha- vens. As a result, a bearish shift was seen in positioning, with an accelerated decline of the net long CHF position from nearly US$4.0 billion in June 2011 to nearly flat. We expect EURCHF to stay at current levels to end 2011 at 1.23. NORWAY - Traditionally high-beta, NOK broke out of its recent range in September amid widespread risk aversion. USDNOK had seen ongoing resistance at 5.60 since May, when a break in mid-September left the cross headed towards 6.00. We expect a retracement of the recent movement and hold a year-end target of 5.60. Currency Trends Going Back Spot Outlook FX Rate FX Rate 12 m 6 m 3 m 4-Oct 3 m 6 m 12 m EURUSD 1.36 1.42 1.45 1.33 1.40 1.42 1.40 EURUSD GBPUSD 1.57 1.60 1.61 1.54 1.60 1.61 1.63 GBPUSD EURCHF 1.34 1.30 1.22 1.23 1.23 1.22 1.20 EURCHF EURSEK 9.19 8.95 9.18 9.18 9.00 8.92 8.77 EURSEK EURUSD GBPUSD 1.68 1.45 1.64 1.40 1.60 1.35 1.56 1.30 1.25 1.52 Oct-10 De c-10 Fe b-11 Apr-11 Jun-11 Aug-11 Oct-11 Oct-10 De c-10 Fe b-11 Apr-11 Jun-11 Aug-11 Oct-11 EURCHF EURSEK 9.45 1.38 1.30 9.30 1.23 9.15 1.15 9.00 1.08 8.85 1.00 8.70 Oct-10 De c-10 Fe b-11 Apr-11 Jun-11 Aug-11 Oct-11 Oct-10 De c-10 Fe b-11 Apr-11 Jun-11 Aug-11 Oct-11 6 Global Economic Research October 2011 Foreign Exchange Outlook EUROPE Fundamental Commentary Sarah Howcroft +1 416 863-2859 EURO ZONE - The outlook for economic growth and finan- UNITED KINGDOM - We have revised our growth outlook cial stability in the euro zone is increasingly precarious. for the UK lower as a number of factors are weighing more The loss of confidence fuelled by the persistent inability of heavily on the British economy, including persistent labour the region’s politicians to adequately resolve the debt crisis and housing market weakness, slowing external demand, has begun to spillover to the real economy. Following a the continued erosion of household real disposable income 0.8% q/q non-annualized gain in the first quarter, real GDP from high inflation, and the impending drag from fiscal aus- advanced by only 0.2% q/q in April-June, with some of the terity. Consumer spending – which accounts for two-thirds earlier disparity in growth rates between the region’s core of economic activity – has been persistently negative over and periphery having disappeared. Available data for the the last year and further declines are likely in the quarters third quarter point to further widespread weakening in the ahead. This is likely to limit overall growth to 1.0% for the second half of the year. The euro zone composite PMI in- year. With the gradual recovery of the consumer next year – dex – a gauge of private sector activity – has deteriorated partially offset by reduced government expenditures – and a significantly in recent months, moving into contractionary potential boost from the London Olympics in the third quar- territory in September for the first time in two years. Fiscal ter, growth should accelerate to around 1.2% in 2012. How- consolidation measures are accelerating in some member ever, the outlook remains largely dependent on the broader nations as policymakers struggle to address ongoing mar- global economic picture, and an improvement in the Euro- ket concerns related to sovereign solvency, while con- pean debt crisis. Consumer prices rose by 4.5% y/y in Au- sumer spending remains constrained by tight lending con- gust and will continue to advance at an annual pace signifi- ditions and elevated unemployment. We now expect output cantly above the Bank of England’s (BoE) 2% target for the in the euro zone to advance by 1.6% and 1.1% in 2011 and remainder of the year. With the dropping out of a value- 2012, respectively. The September flash CPI estimate sug- added tax hike and commodity price gains from the base gests that annual inflation in the region reached 3% y/y in starting in 2012, inflation will likely slow sharply, reaching the month. This supports our view that inflation will remain just above 2% by the end of next year. We anticipate the elevated through year-end before dropping toward the BoE will maintain the policy rate at 0.50% until early 2013, European Central Bank’s (ECB) target in 2012, though and we emphasize the strong likelihood of a resumption in given the deterioration in economic conditions, it may reach quantitative easing before year-end, by November at the that mark sooner than previously envisaged. latest. SWITZERLAND - Currency conditions have largely stabi- NORWAY - With unabated financial market turbulence and lized in Switzerland since the Swiss National Bank (SNB), an increasingly uncertain global growth outlook, Norwegian concerned with massive overvaluation of the Swiss franc monetary authorities will maintain a neutral policy stance (CHF), implemented an exchange rate floor for the currency over the near term. The benchmark deposit rate was left at 1.20 per euro on September 6th. In the year to date, infla- unchanged at the Norges Bank’s September meeting for the tionary pressures in the country have been nonexistent, with third consecutive time following a rate hike in May of this the most recent August CPI report (EU-harmonized) regis- year, at which time it was assessed that inflation and inter- tering a 0.3% y/y contraction, marking the first month of de- est rates would pick up gradually with the support of robust flation since November 2009. Further price declines could domestic activity. The Executive Board now judges that the be reported in the coming months before inflation begins to policy rate will be left “low for a longer period” than previ- pick up in 2012, staying below 1% through most of next ously anticipated given that, despite a decent second quar- year. The SNB will likely maintain a highly accommodative ter output gain of 0.4% q/q (non-annualized), conditions monetary stance – leaving the three-month Libor “as close have changed dramatically since the spring, and the pro- to zero as possible” – until at least the third quarter of next jected escalation of wage and price pressures has not ma- year, when a 25 basis point hike will mark a gradual return terialized. The headline inflation rate has stabilized around to more normal conditions. In line with the global decelera- 1½% y/y – well below the bank’s 2.5% target – with the core tion, we have revised our growth expectations for Switzer- rate closer to 1%. A full update of the central bank’s growth, land downward; we now expect output to expand at a rate inflation and interest rate projections will be detailed in the of around 1¾% through 2012. While domestic demand Monetary Policy Report at the next meeting on October 19th. should remain relatively robust with the support of low un- While the Norwegian economy (particularly the energy sec- employment and interest rates, investment and exports will tor), as well as the krone will be subject to externally- slow given increased business caution and recent currency generated volatility in the near term, the nation nevertheless strength. Amid exceptional financial market turbulence and maintains a strong position relative to many of its devel- global uncertainty, Switzerland maintains strong economic oped-world peers. Both the government balance and the fundamentals; the current account surplus will average current account will remain in double-digit surplus through above 10% in 2011-2012 while the fiscal account will stay 2012, and real GDP growth is expected to average around roughly balanced through the forecast horizon. 2%. 7 Global Economic Research October 2011 Foreign Exchange Outlook ASIA/OCEANIA Camilla Sutton +1 416 866-5470 Currency Outlook Eric Theoret +1 416 863-7030 JAPAN - USDJPY has remained extremely stable through the recent bout of financial turmoil, as low yield spreads and ongoing risk aversion leave it trading within its recent range between 76.00 and 78.00. Positioning in JPY is bullish, and net long US$6.9 billion, as investors seek protection in safe haven assets. This is likely to dissipate as financial market volatility falls and market participants refocus towards fundamentals. We hold a year-end USDJPY target of 80.00. CHINA - CNY traded flat in the month of September despite significant intraday movement that is uncharacteristic of the managed currency. CNY has been one of the few to outperform versus the USD, up 1.3% in Q2 and up 3.9% on a YTD basis. The trend of appreciation is expected to continue into year end, with a USDCNY target of 6.25. AUSTRALIA - Recent concerns arising from softening commodities demand have left AUD underperforming versus the USD in an environment of risk aversion. Positioning has remained bullish and is marginally net long though it has fallen from highs near US$10.0 billion. We expect strength heading into year-end, with an AUDUSD target of 1.00. NEW ZEALAND - High beta NZD has remained volatile amid the recent market turmoil, a ratings downgrade and deterio- rating fundamental picture pushing the currency towards 0.75. Positioning has not fallen in line with most of NZD’s com- modity peers as sentiment remains bullish. We hold a year-end forecast of 0.80. Currency Trends Going Back Spot Outlook FX Rate FX Rate 12 m 6m 3m 4-Oct 3m 6m 12 m USDJPY 83.5 83.1 80.6 76.9 80.0 82.0 84.0 USDJPY USDCNY 6.69 6.55 6.46 6.36 6.25 6.16 5.97 USDCNY AUDUSD 0.97 1.03 1.07 0.95 1.00 1.02 1.06 AUDUSD NZDUSD 0.73 0.76 0.83 0.75 0.80 0.81 0.83 NZDUSD USDJPY USDCNY 86.8 6.73 84.5 6.64 82.3 6.54 80.0 6.45 77.8 75.5 6.35 Oct-10 Dec-10 Feb-11 Apr-11 Jun-11 Aug-11 Oct-11 Oct-10 De c-10 Fe b-11 Apr-11 Jun-11 Aug-11 Oct-11 AUDUSD NZDUSD 1.11 0.88 1.07 0.84 1.04 0.80 1.00 0.76 0.97 0.72 0.93 0.68 Oct-10 De c-10 Fe b-11 Apr-11 Jun-11 Aug-11 Oct-11 Oct-10 Dec-10 Feb-11 Apr-11 Jun-11 Aug-11 Oct-11 8 Global Economic Research October 2011 Foreign Exchange Outlook ASIA/OCEANIA Fundamental Commentary Oscar Sánchez +1 416 862-3174 JAPAN - Safe heaven waves will continue to support the CHINA - The Chinese renminbi (CNY) will continue to Japanese yen (JPY). While the country’s manufacturers strengthen at a moderate pace as appreciation fulfills both a envisage an improvement in economic conditions during short-term objective of monetary tightening and the me- the final quarter of 2011 –as represented in the latest dium-term goal of domestic market development. While the Tankan survey– they view JPY strength as a constraining annual inflation rate seems to have peaked in July at 6.5%, factor. The currency’s gains against Japan’s close price pressures remain a concern with the double-digit ad- neighbors have put automakers in the odd position of hav- vance in food costs well ahead of the 3% y/y gain in the ing to ship product from U.S. factories to supply the South non-food items’ tally. Elevated inflationary readings have Korean market. The country’s industrial output expanded dented retail sales, with a rebound in consumer spending for the fifth straight month in August, with activity so far in expected once inflation stabilizes at a more normal 3-4% y/ the third quarter more than 6% above first quarter readings. y level. A slowdown in investment has yet to become evi- Along similar lines, the value of Japan’s exports is virtually dent, notwithstanding persistent moves by Chinese authori- back to pre-earthquake levels. The possibility of an expe- ties to rein in credit growth. Lending by state-controlled dite economic recovery still hinges on the prevalence of a banks has supported this trend, which still implies the trade-competitive JPY, with further currency intervention a prevalence of ample liquidity conditions. Imports continue to persistent risk. While retail sales slowed in latest readings, advance at a quick 27% yearly pace on the back of local car sales continue to display gains underpinned by firm income gains and the double-digit expansion in investment labour market indicators as unemployment has stayed near outlays. Signs of a “soft patch” in global demand have yet to record lows. The reconstruction effort is likely to gather mo- find echo within China, where exports through August have mentum during the complementary part of 2011 and expanded by more than 20% y/y on average. The Chinese through 2012. GDP will expand by a meager 0.3% this economy grew at a rate of 9.6% y/y rate during the three year, with a 3.2% rebound anticipated for 2012. While de- months to June 2011, after a 9.7% y/y gain in the first quar- pendence on imported fuel, and a higher energy tally, will ter. As a new generation of leaders heaves its support be- bring back supply-side price pressures, the Bank of Japan hind an aggressive social program of affordable housing will retain a loose monetary policy stance throughout the development, we expect continued gains in construction to recovery, with unsterilized interventions aimed at prevent- lead GDP to an average 9% y/y advance in 2011-12. ing excessive JPY appreciation. AUSTRALIA - The outlook for the Australian dollar (AUD) NEW ZEALAND - The New Zealand dollar (NZD) will pare remains well supported by record terms of trade gains. back some of the losses brought about by the current wave However, global uncertainty and its effects on confidence of global uncertainty, with the economy’s underperformance will condition AUD gains in the coming months. The Re- likely to condition a return to early year heights. New Zea- serve Bank of Australia (RBA) now deems it possible for land’s GDP expanded by a meager 0.1% q/q during the inflation to remain within target during 2012-13, weighing second quarter, with exports contracting after a solid first down the possibility of labour cost acceleration outside the quarter gain. Seemingly, lagged effects from the Christ- resources sector. The RBA became concerned with the church earthquake hurt economic activity, as it lost signifi- pickup in underlying pressures as services costs under- cant momentum in the three months to June. Earthquake pinned a rise in core inflation, with headline annual inflation induced output disruptions during the first quarter had a mi- accelerating to 3.5% y/y in Q2. The central bank now nor effect on the country’s growth, with the economy ex- gauges that the underlying pace of price gains was less panding at a solid upwardly revised 0.9% q/q rate. While sharp than initially indicated. While local supply-side pres- household spending remains underpinned by moderate sures persist, especially within the mining sector where in- confidence after the initial adverse shock as a result of the vestment spending is increasing at a strong pace, labour earthquake, we expect it to take a back seat through year- pressures in other sectors remain subdued with employers end as weak income growth and losses in wealth hurt pur- unexpectedly cutting workers for a second straight month chasing power. Annual inflation at 5.3% remains well above during August. We thus expect the RBA to maintain the cur- the Reserve Bank of New Zealand’s (RBNZ) 1-3% comfort rent monetary policy stance through the turn of the year. zone. Tradable goods prices lead the advance in costs, and Rising investment and cautious consumer spending support are likely to continue to advance given the recent leg of domestic demand stability, with moderate bank credit ex- NZD weakness. Non-tradable goods inflation has finally pansion and somewhat softer local asset prices providing shown a respite although rising services costs and a some- the background for cautious household borrowing. The what tighter labour market still have prices running at an economy rebounded during the second quarter from an over 5% yearly rate. The RBNZ is likely to remain on the earthquake induced contraction in the first, and is expected sidelines through the turn of the year, remaining sanguine to advance at a 3% yearly average in 2011-12, with fiscal about rising price pressures as it attempts to support an policy a drag on growth as a surplus is targeted by 2012-13. economic rebound. 9 Global Economic Research October 2011 Foreign Exchange Outlook DEVELOPING ASIA Currency Outlook Sacha Tihanyi +1 416 862-3154 INDIA - INR fell to its lowest level since May 2009 as India’s gaping current account deficit (a near record $14.1bn in Q2’11) and still heavy reliance on volatile financial flows for funding, led INR to collapse during September’s strong USD-buying biased volatility. INR is still not cheap on an REER basis, and high inflation makes it difficult to justify too strong a valuation considering the external deficit. We expect INR to remain one of the more challenged Asian curren- cies, only able to rebound to 46.00 by Q4'12. KOREA - KRW was worst hit amongst the Asian currencies during the September market volatility, a result of Korea’s heavy gearing to global economic growth dynamics as KRW was punished for wholesale downgrades to the global growth outlook. Downside growth risks mean that fixed income markets have priced out further near term policy tighten- ing. KRW should remain highly exposed to downside financial market volatility, but we look for fundamentals to support the resumption of an appreciatory path over our forecast horizon, pushing USDKRW to 1070 by Q4'12. THAILAND - THB has been an outperformer during the recent market volatility. This was a result of official efforts to re- strain weakness in the baht; during September the Bank of Thailand used approximately 4.3% of its reserves (US$8.1 billion) in an effort to restrain downside THB volatility. THB remains well placed for appreciation on a resumption in nor- malized global financial conditions, with still strong domestic demand, a hawkish central bank, and a potentially substan- tial fiscal impulse helping USDTHB to 28.60 by Q4'12. MALAYSIA - MYR lost significant ground in September, with the scope of depreciation in line with its close partner the SGD. With the latter currency likely being oriented by its central bank towards a less aggressive appreciatory stance, MYR will face some restraint in its ability to recapture lost ground going forward. Nevertheless solid macro fundamentals should lead eventual normalization in portfolio flows and help MYR reach 3.00 by Q4'12. Currency Trends Going Back Spot Outlook FX Rate FX Rate 12 m 6m 3m 4-Oct 3m 6m 12 m USDINR 44.95 44.59 44.70 49.40 47.50 47.12 46.37 USDINR USDKRW 1140 1097 1068 1194 1130 1115 1085 USDKRW USDTHB 30.35 30.28 30.73 31.24 30.50 30.01 29.06 USDTHB USDMYR 3.09 3.03 3.02 3.20 3.10 3.07 3.02 USDMYR USDINR USDKRW 1195 46.70 1165 46.10 1135 45.50 1105 44.90 44.30 1075 43.70 1045 Oct-10 De c-10 Feb-11 Apr-11 Jun-11 Aug-11 Oct-10 De c-10 Fe b-11 Apr-11 Jun-11 Aug-11 Oct-11 USDTHB USDMYR 3.20 31.15 3.15 30.80 3.10 30.45 3.05 30.10 3.00 29.75 2.95 29.40 2.90 Oct-10 De c-10 Feb-11 Apr-11 Jun-11 Aug-11 Oct-11 Oct-10 De c-10 Feb-11 Apr-11 Jun-11 Aug-11 Oct-11 10 Global Economic Research October 2011 Foreign Exchange Outlook DEVELOPING ASIA Fundamental Commentary Oscar Sánchez +1 416 862-3174 INDIA - The Indian rupee (INR) will regain at least some of KOREA - The Korean won (KRW) will remain range bound its recent losses as interest rate and growth differentials in the midst of global uncertainty, with the Bank of Korea remain in favour of the Asian giant. Annual price gains in on the sidelines notwithstanding persistent above target India continue to top Asian economies, with prospects for inflationary readings. The KRW will regain a strengthening further monetary tightening still hinging on performance on trend toward levels recorded prior to the recent spate of the inflationary front. Elevated inflationary expectations re- global uncertainty as economic activity remains solid on the main the main concern for the Reserve Bank of India (RBI) back of firm industrial output performance. Latest data on leaving it compelled to persist in its anti-inflationary stance factory output put it close to peak levels registered at the even in the midst of global uncertainties about the growth turn of the year, rebounding from the losses suffered as a outlook for developed countries. While a slowdown in the result of the Japanese catastrophe last March. Supply pace of monetary tightening is envisaged for the coming chain disruptions conditioned economic performance dur- months the economic backdrop continues to support a re- ing the second quarter as a slowdown in export volumes strictive stance. We expect inflation to embark on a down- resulted in a GDP advance of 0.8% q/q, coming below the ward trend in the second half of 2011 on the back of falling solid 1.3% gain of the first quarter (also export-led). The fuel and food cost gains, with prospects for the fall harvest value of foreign shipments remained stable during July and key to determining the extent of disinflation in agricultural August, advancing at an average 24% y/y rate, above the products. We expect at most one more 25 bps hike for the 19% y/y average gain of the second quarter. The year- current year. The fall in inflation will lead to further gains in over-year rebound in foreign sales is evidence of produc- discretionary consumer spending, with double-digit growth tion lines being brought to normality, supporting our antici- in exports complementing a growth picture that has been pation of a gain in economic momentum during the third characterized by dwindling public sector spending. Further- quarter. Although headline inflation finally came down last more, the eventual fall in manufacturing costs will improve month on the back of moderated food price increases, it the outlook for investment as capital spending by firms is has surpassed the central bank’s 3% ±1% target each mainly drawn from the profit pool. Given that lower com- month so far this year. Notwithstanding the slowdown in modity prices are a plus for Indian growth, we expect Indian credit, economic conditions remain solid, with the unem- GDP to expand at a solid 8.2% y/y rate in 2011-12. ployment rate falling to 3.1% in September. THAILAND - The Thai baht (THB) will remain range-bound MALAYSIA - The Malaysian ringgit (MYR) will regain some in the coming quarters amid global financial volatility. Fa- of the losses that resulted from the recent bout of global vourable growth and interest rate spreads will lead to a uncertainty, when most Asian currencies weakened in tan- strengthening trend once global uncertainty subsides. Thai- dem. While the appreciation of the MYR after the global land’s economy will continue to reap the benefits of a privi- recession had been the strongest within Southeast Asia, the leged location within Southeast Asia, with local demand MYR is now weaker than the Chinese yuan -a factor that momentum running alongside still solid foreign sales. Manu- instills a favourable competitiveness profile into the coun- facturing output has climbed back to the turn-of-the-year try’s manufacturing base. Malaysia’s industrial production peak underpinned by a rebound in exports values. Up- regained most of the momentum lost as a result of the trending credit growth has supported a comeback in the Japanese shock. Manufacturing, which accounts for 63% of investment rate to over 20% of GDP, a level equivalent to industrial output, has continued to grow supporting our ex- that observed prior to the global crisis. We have revised pectation of a build up in momentum in the complementary slightly lowered our forecast for Thailand’s GDP growth to half of the year. The country’s GDP expanded at a 0.6% q/q 4.5% y/y in 2011, and 4.8% in 2012, mainly as a result of rate during the second quarter, an implied 4% yearly gain, sluggish growth in the US and the euro zone. Price pres- which stands significantly lower than the 7.3% y/y advance sures remain intense partly due to the upbeat tone in local of 2010. We anticipate growth of 5% y/y in 2011, and a activity, with core inflation still elevated, at 2.9% y/y, but 4.7% gain in 2012. Inflationary trends remain driven by sup- within the Bank of Thailand’s 0.5-3% target range. The ply factors, with limited evidence of excess demand pres- yearly gain in the price of rice has finally started to come sures. Headline inflation fell for the second month in a row down, with Thailand being a key regional benchmark. As in August, while remaining elevated at 3.3% y/y, as food food costs stabilize, we expect inflation to capitulate in the and transport costs rose at a moderated pace. While the coming months helped by capped increases in fuel costs government is phasing out price controls and subsidies, the and a softer commodity cost mix. In the midst of an uncer- adjustment has not been too aggressive, improving the in- tain global scenario, and unless there is an extraordinary flationary profile. Bank Negara Malaysia (BNM) is likely to event, we expect the central bank to stay on the sidelines keep interest rates on hold as local transmission of lower through the rest of 2011. global commodity prices lead to falling inflation through 2012. 11 Global Economic Research October 2011 Foreign Exchange Outlook DEVELOPING AMERICAS Currency Outlook Pablo F.G. Bréard +1 416 862-3876 BRAZIL - The Brazilian real (BRL) has been subject to a sharp decline over the past two months. We welcome the recent weakening adjustment that will help correct an already established overvalued currency. The Brazilian macroeconomic environment remains sound despite visible signs of deceleration in activity indicators, in line with trends present in the world’s largest economies. We expect the USDBRL rate to close the year at 1.80 and remain relatively stable in 2012. MEXICO - The Mexican peso (MXN) is behaving as a traditional emerging-market currency in distress and correcting in line with the rest of the core developing countries. All Latin currencies are in the process of testing new technical support levels. We continue to believe that the MXN is relatively undervalued against peer currencies within the emerging-market universe. However, Mexico is not immune to the recent round of global market volatility. We expect USDMXN to close the year at 12.93. CHILE - The Chilean peso (CLP) has yet to find clear technical support in response to the bearish climate currently in place. Increased market nervousness in connection with European sovereign debt shocks, declining commodity prices in response to downward revisions in global economic growth, and asset price adjustments in emerging markets have weighed on the CLP since the beginning of August. We expect USDCLP to close the year at 520. COLOMBIA - The Colombian peso (COP) remains in a weakening mode aligned to the heightened volatility present in global financial markets. The COP received the dual negative effect from increased global risk aversion and declining export-sensitive crude oil prices, yet the economy remains in expansionary mode. We have adjusted our exchange rate forecast accordingly: we expect the USD/COP rate to close the year at 1,920 and to partially recover to 1,880 by the end of 2012. Currency Trends Going Back Spot Outlook FX Rate FX Rate 12 m 6m 3m 4-Oct 3m 6m 12 m USDBRL 1.69 1.63 1.56 1.88 1.80 1.79 1.76 USDBRL USDMXN 12.59 11.90 11.71 13.96 12.93 12.94 12.67 USDMXN USDCLP 484 477 467 535 520 515 505 USDCLP USDCOP 1802 1871 1771 1976 1920 1910 1890 USDCOP USDBRL USDMXN 1.90 14.1 1.82 13.6 1.75 13.1 12.6 1.67 12.1 1.60 11.6 1.52 11.1 Oct-10 De c-10 Fe b-11 Apr-11 Jun-11 Aug-11 Oct-11 Oct-10 De c-10 Fe b-11 Apr-11 Jun-11 Aug-11 Oct-11 USDCLP USDCOP 2045 535 525 1995 515 1945 505 495 1895 485 1845 475 1795 465 455 1745 Oct-10 De c-10 Feb-11 Apr-11 Jun-11 Aug-11 Oct-11 Oct-10 De c-10 Fe b-11 Apr-11 Jun-11 Aug-11 Oct-11 12 Global Economic Research October 2011 Foreign Exchange Outlook DEVELOPING AMERICAS Fundamental Commentary Pablo F.G. Bréard +1 416 862-3876 BRAZIL - The Brazilian economy is well positioned to ex- MEXICO - Fundamentally, Mexico will deepen its structural pand, by an average of 3.75% in 2011-12. Recent foreign integration in the North American economic zone. The gov- trade data indicate that the trade surplus has been increas- ernment is estimating that the economy may expand by 4% ing despite a prolonged phase of currency gains over the this year. However, we are more cautious in our assess- past few years. This trade increase has resulted from per- ment of the North American economy; in fact, we now ex- sistent terms of trade gains as Brazil’s output of raw materi- pect that Mexican real GDP will expand by 3.7% this year als remains in high demand throughout the world; in fact, and decelerate to 2.9% next year. Mexico does not have the latest survey conducted by the central bank points to a any meaningful trade with distressed European economies US$25 billion trade surplus for 2011 as a whole. Inflation is with the European economies in distress; nevertheless, likely to consolidated over the next 18 months, we are esti- indirectly market risk perception may escalate if the Euro- mating that the rate of IPCA-based CPI will reach 6.5% by pean sovereign debt distress rocks the systemic stability of the end of 2011 before decelerating to 5.5% at the end of the Spanish banking sector. On a positive note, interest next year. The official rhetoric from government and mone- rate differentials are MXN supportive at the long end of the tary authorities hints at a further reduction in short-term in- yield curve. At times, policy uncertainties connected to the terest rates through the end of 2012. We now estimate that electoral cycle under way (presidential elections will take the benchmark SELIC rate will be reduced to 11% by the place in July 2012 and a new government will take office in end of this year and to 10.5% in 2012. The adverse interna- December 2012) may fuel a period of temporary financial tional (economic and financial) scenario is convincing the market volatility. On the policy front, we do not anticipate Brazilian government that further stimuli is needed to place any change in the current monetary policy stance through the economy on a sustainable, albeit lower, growth path. the end of 2012, given that inflationary expectations seem Despite this shift in market sentiment, Brazilian govern- to be well contained in line with North American trends. ment-administered interest rates remain the highest within Finally, shifts in exchange rate policy in either China or the G10 group of world economies, acting as a strong in- Brazil may affect risk perception in emerging-market portfo- centive to keep Brazilian capital at home. lios in general and indirectly affect Mexican assets. Simply speaking, there is no immunity against a major correction in these two top-tier emerging-market economies. CHILE - The sharp downward adjustment in export- COLOMBIA - The Colombian macroeconomic environment relevant commodity prices due to the process of global remains promising despite the recent wave of financial economic deceleration has weighed on the value of the market turmoil. The latest central bank assessment reaf- CLP. Copper prices decelerated abruptly from US 451 to firmed its expected GDP growth rate for 2011 of between 300 cents per pound over the past two months, exacerbat- 4.5% and 6.5% (we estimate that it will close the year at ing a bearish tone already in place. As Chile is one of the 5%). The economy expanded by 5% during the first half of most trade-intensive economies of the developing Ameri- the year and recent domestic demand indicators point to- cas, any material decline in global economic and trade ac- wards a yet stronger third quarter. Although energy prices tivity is reflected immediately in GDP projections. The CLP have declined, affecting Colombian export revenue, they remains highly correlated to metal commodity prices; in are still at relatively high enough levels to continue to sup- addition, gold prices have also suffered a decline because port currency gains. Domestic demand remains robust, of the USD recovery in the past month. The Chilean econ- also fuelled by increased access to domestic sources of omy is not immune to the process of global economic de- finance. Sensitive to escalating financial market volatility, celeration; real GDP will expand by 4.8% in 2012, down evidence of global economic softening and contained price from an estimated expansion of 6.5% this year. Despite pressures, the central bank opted to keep its short-term strong domestic demand activity, consumer price inflation reference rate unchanged at 4.5% in September. The cen- remains quite in line with the official target; we estimate tral bank stressed that inflationary expectations remain well that the rate of inflation will converge towards the 3% target anchored and that the decision is justified by the current by the end of 2012, down from an estimated 3.5% rate for macroeconomic outlook. In addition, monetary authorities 2011. An improvement in inflationary expectations in the decided not to renew the program of daily accumulation of context of decelerating economic activity is allowing the international reserves in response to current financial mar- Chilean monetary authorities to ease monetary policy con- ket conditions. Instead, the central bank will begin to auc- ditions next. We have revised our projections for Chile’s tion US dollars in an effort to moderate ill-justified inflation- government-administered interest rate and now estimate sensitive exchange rate market volatility. On a negative that it will close next year at 4.75%. note, the Colombian economy is facing structural hurdles to improve employment conditions; the country’s unemploy- ment rate remain elevated nearing the 10% mark. 13 Global Economic Research October 2011 Foreign Exchange Outlook DEVELOPING EUROPE/AFRICA Currency Outlook Sarah Howcroft +1 416 863-2859 RUSSIA - On the back of the recent spike in global risk aversion and the general downtrend in oil prices – and in spite of the end to speculation regarding the futures of Messrs. Putin and Medvedev – the outlook for the Russian ruble (RUB) has weakened. The currency is likely to regain some ground against the US dollar in the coming months; however, we now see USDRUB around 30 at year-end. TURKEY - Recent continued weakening of the Turkish lira (TRY) is reflective of investor concern regarding the nation’s large current account imbalance, in addition to the broader risk aversion-fuelled correction in emerging market currencies. The TRY will remain vulnerable to further swings in market sentiment in the near term and we now expect USDTRY to close the year around 1.78. Next year should see some appreciation as the central bank moves to normalize rates. POLAND - The near-term outlook for the Polish zloty (PLN) is has weakened, given its considerable depreciation against the euro since the renewal of global financial market turmoil in August after several months of relative stability. With inves- tor risk aversion expected to normalize in the coming months, the zloty will begin to retrace its recent losses. We hold a year-end forecast for EURPLN of 4.15, and expect a further modest strengthening in 2012. SOUTH AFRICA - The South African rand (ZAR) is likely to retrace much of its recent risk-related losses against the US dollar by year-end, though the currency will remain subject to commodity price and financial market volatility in the near- term. We now anticipate the ZAR to close the year around 7.4 per USD. We continue to expect a gradual weakening through 2012 against a backdrop of political and investor uncertainty in the domestic economy. Currency Trends Going Back Spot Outlook FX Rate FX Rate 12 m 6m 3m 4-Oct 3m 6m 12 m USDRUB 30.5 28.4 27.9 32.7 30.4 30.0 29.3 USDRUB USDTRY 1.45 1.55 1.62 1.90 1.78 1.76 1.73 USDTRY EURPLN 3.96 4.02 3.98 4.41 4.15 4.11 4.04 EURPLN USDZAR 6.96 6.77 6.77 8.29 7.40 7.42 7.47 USDZAR USDRUB USDTRY 33.35 1.95 1.86 32.10 1.76 30.85 1.67 29.60 1.57 28.35 1.48 27.10 1.38 Oct-10 Dec-10 Feb-11 Apr-11 Jun-11 Aug-11 Oct-11 Oct-10 Dec-10 Feb-11 Apr-11 Jun-11 Aug-11 Oct-11 EURPLN USDZAR 4.60 8.60 4.40 8.25 4.20 7.90 4.00 7.55 3.80 7.20 3.60 6.85 3.40 6.50 Oct-10 Dec-10 Feb-11 Apr-11 Jun-11 Aug-11 Oct-11 Oct-10 Dec-10 Feb-11 Apr-11 Jun-11 Aug-11 Oct-11 14 Global Economic Research October 2011 Foreign Exchange Outlook DEVELOPING EUROPE/AFRICA Fundamental Commentary Sarah Howcroft +1 416 863-2859 RUSSIA - Months of speculation ended in late-September TURKEY - Turkey’s economic landscape continues to be when it was finally announced that the current prime minis- dominated by domestic demand, while prospects for the ter, Vladimir Putin, and the president, Dmitry Medvedev, will external sector remain subdued. The economy outper- switch roles at the upcoming parliamentary and presidential formed expectations in the second quarter, posting growth elections in the coming months. With Putin now set to return of 1.3% q/q, following the 1.7% pace of the prior quarter. to the Kremlin for a third term, investor confidence in the Low interest rates and declining unemployment have un- Russian economy appears mixed. Perceived political stabil- derpinned robust consumer spending so far in 2011, while ity is balanced by the potential for stagnation in economic private fixed investment has also posted strong growth. We reforms, particularly plans for privatization and diversifica- expect real GDP to expand by 6¾% this year, followed by tion to lessen the nation’s dependence on oil and raw mate- 4% in 2012. However, we note the risk to economic growth rials exports. The outlook for oil prices – and thus Russia’s from Turkey’s large current account deficit, and specifically growth prospects – remains generally favourable, with Brent from the nation’s ability to finance this imbalance, given Oil to average above US$100/bbl through 2012. However, recent global financial market turbulence as well as Tur- prices will continue to be subject to considerable volatility key’s reliance on volatile capital inflows. Though the cur- related to the uncertain global environment and the Euro- rent account deficit reportedly narrowed to TRY5.3 billion in pean debt crisis. Both public and private expenditures re- July from TRY7.6 billion in June, it may nonetheless reach main supportive of the economy, while industrial production 10% of GDP for 2011 as a whole, before easing gradually is advancing ahead of 5% on a yearly basis. We expect thereafter as consumer borrowing moderates with interest Russian real GDP growth to average 3½% through 2012, rates increases. Turkey’s public finances are improving, though with imports expanding at a pace twice that of ex- though there is a risk here too that a sharper than expected ports, the current account surplus will narrow significantly deceleration in growth could interrupt the downtrend in the next year. Inflationary pressures continue to ease, with the fiscal deficit. The rate of inflation continues to exceed the headline CPI declining on a monthly basis in August for the central bank’s 5.5% target for 2011 while core price gains first time since 2005 on the back of falling food prices. Fur- have accelerated throughout the year. While the central ther disinflation is expected, which, when combined with the bank is unlikely to tighten monetary conditions in the cur- uncertain global outlook, may prompt a loosening of mone- rent uncertain environment, we anticipate a gradual return tary conditions by the Russia central bank. to rate normalization beginning in 2012. POLAND - The outlook for the Polish economy remains SOUTH AFRICA - In the context of a highly uncertain robust given the continued health of its relatively large and global climate, the South African Reserve Bank (SARB) is resilient domestic sector. Poland was among the few na- likely to remain on hold until the first half of 2012, despite tions in Europe in which growth did not decelerate in the elevated inflation. The CPI posted a 5.3% y/y gain in Au- second quarter of 2011, with broad-based gains driving a gust for the second consecutive month, and the growth rate 1.1% q/q (non-annualized) expansion in the economy, the is projected to increase toward the upper limit of the central same pace as in the first quarter. While the ongoing exter- bank’s 3-6% target range by the turn of the year before nal turmoil will likely dampen equity performance and in- moderating in 2012. On the back of cooling activity in the dustrial activity in the remainder of the year, recent cur- export-dependent manufacturing and mining sectors, which rency weakness should provide some offsetting relief for have both been challenged by striking unions demanding exports. Real GDP is expected to expand by around 4% in higher wages, real GDP growth slowed in the second quar- 2011. Nevertheless, the economy is bound to lose some ter. Economic activity is unlikely to rebound significantly in momentum as a result of the global deceleration and would the remainder of the year, and may decelerate further, be particularly susceptible to a downturn in Germany, the given the downturn in key foreign export markets and the nation’s biggest trading partner. More sluggish investment exorbitant unemployment suppressing household demand. and a wider trade deficit are expected to trim up to half a The Kagiso PMI recovered slightly in August after plummet- percentage point from growth in 2012. After lifting the policy ing by almost 10 points in July, though it stayed below the rate four times – by a cumulative 100 basis points – since 50 mark separating contraction from expansion. Output January, the central bank judges that the risks to price sta- growth is expected to advance by 3% in 2011, followed by bility are now roughly balanced, and thus will likely refrain an acceleration to 3.5% in 2012 as domestic demand im- from any additional tightening in the near term. Although proves. With import growth outpacing exports for most of the pace of headline inflation has moderated in recent 2010-2011, the nation’s trade balance will return to deficit months with a softening in food prices, pressures at the in 2011 after two years of surplus. Combined with the in- core level persist, supported by strong domestic demand creasing deficits in the services and income balance, the and the weaker zloty. Inflation should remain elevated current account deficit will accordingly widen from 2.8% of through the end of 2011, before easing toward the central GDP in 2010 to around 5% in 2012. bank’s 2.5±1% target in 2012. 15 Global Economic Research October 2011 Foreign Exchange Outlook GLOBAL CURRENCY FORECAST (end of period) 2009 2010 2011f 2012f 2011f 2012f Q1a Q2a Q3a Q4 Q1 Q2 Q3 Q4 MAJOR CURRENCIES Japan USDJPY 93 81 80 85 83 81 77 80 82 83 84 85 Euro zone EURUSD 1.43 1.34 1.40 1.40 1.42 1.45 1.34 1.40 1.42 1.42 1.40 1.40 EURJPY 133 109 112 119 118 117 103 112 116 118 118 119 UK GBPUSD 1.62 1.56 1.60 1.64 1.60 1.61 1.56 1.60 1.61 1.62 1.63 1.64 EURGBP 0.89 0.86 0.88 0.85 0.88 0.90 0.86 0.88 0.88 0.88 0.86 0.85 Switzerland USDCHF 1.04 0.93 0.88 0.86 0.92 0.84 0.91 0.88 0.86 0.86 0.86 0.86 EURCHF 1.48 1.25 1.23 1.20 1.30 1.22 1.22 1.23 1.22 1.22 1.20 1.20 AMERICAS Canada USDCAD 1.05 1.00 1.02 0.98 0.97 0.96 1.05 1.02 1.00 0.99 0.98 0.98 North CADUSD 0.95 1.00 0.99 1.02 1.03 1.04 0.95 0.99 1.00 1.01 1.02 1.02 Mexico USDMXN 13.1 12.3 12.9 12.7 11.9 11.7 13.9 12.9 12.9 12.7 12.7 12.7 CADMXN 12.4 12.4 12.7 13.0 12.3 12.2 13.2 12.7 12.9 12.8 12.9 13.0 Argentina USDARS 3.80 3.98 4.40 5.00 4.05 4.11 4.20 4.40 4.54 4.69 4.84 5.00 Brazil USDBRL 1.74 1.66 1.80 1.75 1.63 1.56 1.88 1.80 1.79 1.77 1.76 1.75 Chile USDCLP 507 468 520 500 477 467 520 520 515 510 505 500 South Colombia USDCOP 2044 1908 1920 1880 1871 1771 1932 1920 1910 1900 1890 1880 Peru USDPEN 2.89 2.81 2.68 2.63 2.80 2.75 2.79 2.68 2.67 2.65 2.64 2.63 Venezuela 1/ USDVEB 2.15 4.29 4.30 5.15 4.29 4.29 4.29 4.30 4.50 4.70 4.92 5.15 ASIA / OCEANIA Australia AUDUSD 0.90 1.02 1.00 1.08 1.03 1.07 0.97 1.00 1.02 1.04 1.06 1.08 China USDCNY 6.83 6.61 6.25 5.88 6.55 6.46 6.38 6.25 6.16 6.06 5.97 5.88 Hong Kong USDHKD 7.75 7.77 7.75 7.75 7.78 7.78 7.79 7.75 7.75 7.75 7.75 7.75 India USDINR 46.5 44.7 47.5 46.0 44.6 44.7 49.0 47.5 47.1 46.7 46.4 46.0 Indonesia 2/ USDIDR 9.40 9.00 8.75 8.50 8.71 8.58 8.95 8.75 8.69 8.62 8.56 8.50 Malaysia USDMYR 3.43 3.06 3.10 3.00 3.03 3.02 3.19 3.10 3.07 3.05 3.02 3.00 New Zealand NZDUSD 0.72 0.78 0.80 0.84 0.76 0.83 0.76 0.80 0.81 0.82 0.83 0.84 Philippines USDPHP 46.2 43.8 43.5 41.5 43.4 43.4 43.8 43.5 43.0 42.5 42.0 41.5 Singapore USDSGD 1.40 1.28 1.26 1.22 1.26 1.23 1.31 1.26 1.25 1.24 1.23 1.22 South Korea USDKRW 1164 1126 1130 1070 1097 1068 1178 1130 1115 1100 1085 1070 Thailand USDTHB 33.4 30.1 30.5 28.6 30.3 30.7 31.2 30.5 30.0 29.5 29.1 28.6 Taiwan USDTWD 32.0 29.3 30.0 29.0 29.4 28.7 30.5 30.0 29.7 29.5 29.2 29.0 EUROPE / AFRICA Czech Rep. EURCZK 26.4 25.0 24.3 24.0 24.5 24.3 24.7 24.3 24.2 24.1 24.1 24.0 Iceland USDISK 126 115 116 110 114 114 118 116 114 113 111 110 Hungary EURHUF 270 279 280 275 266 266 293 280 279 277 276 275 Norway USDNOK 5.79 5.82 5.60 5.30 5.54 5.39 5.87 5.60 5.53 5.45 5.38 5.30 Poland EURPLN 4.10 3.96 4.15 4.00 4.02 3.98 4.42 4.15 4.11 4.07 4.04 4.00 Russia USDRUB 30.0 30.5 30.4 29.0 28.4 27.9 32.2 30.4 30.0 29.7 29.3 29.0 South Africa USDZAR 7.40 6.63 7.40 7.50 6.77 6.77 8.10 7.40 7.42 7.45 7.47 7.50 Sweden EURSEK 10.25 8.99 9.00 8.70 8.95 9.18 9.20 9.00 8.92 8.85 8.77 8.70 Turkey USDTRY 1.50 1.54 1.78 1.72 1.55 1.62 1.86 1.78 1.76 1.75 1.73 1.72 f: forecast; 1/ a new "strong bolivar" w as announced on January 1st, 2008, equivalent to 1000 bolivars; 2/ in thousands 16 Global Economic Research October 2011 Foreign Exchange Outlook INTERNATIONAL RESEARCH GROUP Pablo F.G. Bréard, Head email@example.com Daniela Blancas firstname.lastname@example.org Sarah Howcroft email@example.com Estela Ramírez firstname.lastname@example.org Oscar Sánchez email@example.com CANADIAN & U.S. ECONOMIC RESEARCH Karen Cordes Woods firstname.lastname@example.org Gorica Djeric email@example.com Derek Holt firstname.lastname@example.org Adrienne Warren email@example.com FOREIGN EXCHANGE STRATEGY Eduardo Suárez firstname.lastname@example.org Camilla Sutton email@example.com Eric Theoret firstname.lastname@example.org Scotia Economics Scotia Plaza 40 King Street West, 63rd Floor This Report is prepared by Scotia Economics as a resource for the clients of Scotiabank and Scotia Capital. While the information is from Toronto, Ontario Canada M5H 1H1 sources believed reliable, neither the information nor the forecast shall Tel: (416) 866-6253 Fax: (416) 866-2829 be taken as a representation for which The Bank of Nova Scotia or Email: email@example.com Scotia Capital Inc. or any of their employees incur any responsibility.
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