Global Foreign Exchange Outlook Scotiabank by liaoqinmei

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									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
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                        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
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                        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
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 (*) 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
                                                    pablo_breard@scotiacapital.com

                                                            Daniela Blancas
                                                   daniela_blancas@scotiacapital.com

                                                            Sarah Howcroft
                                                    sarah_howcroft@scotiacapital.com

                                                             Estela Ramírez
                                                    estela_ramirez@scotiacapital.com

                                                            Oscar Sánchez
                                                    oscar_sanchez@scotiacapital.com


                                            CANADIAN & U.S. ECONOMIC RESEARCH


                                                         Karen Cordes Woods
                                                    karen_woods@scotiacapital.com

                                                              Gorica Djeric
                                                     gorica_djeric@scotiacapital.com

                                                              Derek Holt
                                                      derek_holt@scotiacapital.com

                                                           Adrienne Warren
                                                   adrienne_warren@scotiacapital.com


                                                  FOREIGN EXCHANGE STRATEGY

                                                           Eduardo Suárez
                                                   eduardo_suarez@scotiacapital.com

                                                             Camilla Sutton
                                                     camilla_sutton@scotiacapital.com

                                                              Eric Theoret
                                                     eric_theoret@scotiacapital.com




  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: scotia_economics@scotiacapital.com                                    Scotia Capital Inc. or any of their employees incur any responsibility.

								
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