Docstoc

TD Securities - 2013 Global Outlook

Document Sample
TD Securities -  2013 Global Outlook Powered By Docstoc
					                     2013 Global Outlook
                     Rates, FX and Commodities Research
                     14 December 2012 | TD Securities


                                                                                                                                 PRINT

 CONTENTS
 Market Outlook             2
 View From the Top          3
 Regional Risks             4
 Trade Recommendations      5
 United States              6
 Canada                     8
 Europe                    10
 China                     12
 Australia / New Zealand   13
 G10 Rates                 15
 Emerging Markets          16
 Commodities               18
 Foreign Exchange          20
 Forecasts                 22
 Research Team             25
                                                               2013 GLOBAL OUTLOOK

                                                   “The Guide is definitive. Reality is frequently inaccurate.”
                                                                   -Hitchhiker’s Guide to the Galaxy



                                   The global economy will continue to struggle through a period of transition. Risks will
                                   continue to percolate in Europe, with fiscal austerity in the US. The world is still grappling
                                   with the implications of a slowing Chinese juggernaut, and with growth rates in the
                                   developed world still too low for comfort, the risks of further exogenous shocks derailing the
                                   global economic recovery remain high. Growth volatility may remain high, but central
                                   banks will limit reverberations into financial assets, ultimately feeding more inflation
                                   volatility as policy accommodation and growth diminish the risk of disinflation.


                                                                   ASSET ALLOCATION
                                                                           Bias                           Asset Allocation
AREAS OF COVERAGE:
                                                         Proactive central bank action should
                                     G10 Rates           keep rates low
                                                                                                              Underweight
United States
                                                         Asset price reflation a big central bank
Canada                              Risk Assets                                                            Overweight equities
                                                         objective
Europe                                                                                                   LONG                SHORT
United Kingdom                                           Mature market reflation will eventually          NZD                 CHF
                                      Foreign
Australia                                                favor the Euro, EM and commodity                 INR                 USD
                                     Exchange            sensitive currencies                             ZAR                 USD
New Zealand
                                                                                                          USD                 JPY
Emerging Markets                                         Positive risk-adjusted return favors EM
Foreign Exchange                         EM              exposure in the medium term
                                                                                                               Overweight

Commodities                                              Precious/base metals, and energy                LONG                SHORT
G10 Rates                           Commodities          trend up with risk appetite from more         Pd and Zinc            Au/Ag
                                                         QE3 and economy                                Roll CO1            NGV3/NGF4
                                                         Asset price reflation, liquidity injections
https://www.tdsresearch.com/          Volatility         and better growth should keep                               Flat
currency-rates/                                          volatility down
2013 Global Outlook
Rates, FX and Commodities Research
14 December 2012 | TD Securities

                                                                                                          THE TD VIEW
                                                                                                                         Trading Bias
                                              Macro Outlook                                          Rates                                               FX                                         Key Risks
                                                                                                                                   US growth advantage and bouts of risk
                                  Recovery likely to be sluggish, but negative     Fiscal cliff uncertainty and Fed buying                                                          Going over fiscal cliff primary risk of
                                                                                                                                   aversion should limit USD weakness
                    US            outcome avoided. Fiscal effects fade and         should delay and temper, but not prevent,
                                                                                                                                   despite more QE and lingering fiscal
                                                                                                                                                                                    negative feedback loop. Europe also
                                  private GDP strengthens in H2.                   an upward drift in rates over 2013.                                                              lingering risk.
                                                                                                                                   uncertainty.

                                                                                                                                                                                    Renewed     European stresses,  EM
                                  Weak exports and domestic fatigue to keep        Rates to remain low, but slowly increase        Uncertain external environment and more
                                                                                                                                                                                    weakness or an austerity-driven US
                    Canada        growth and core inflation subdued in H1          over 2013; curve stays flat. BoC to raise       distant rate hikes to weigh on CAD initially
                                                                                                                                                                                    recession will weigh heavily on the
         G                        2013. Outlook should brighten thereafter.        overnight rate 50bp in Q4 2013.                 before rebounding in the second half.
                                                                                                                                                                                    Canadian economy.
         1
                                  UK sees weak demand/higher inflation as          Gilts underperform on no QE/less safe
         0                                                                                                                         Recessionary conditions, fiscal strains and      ECB will define Q1. Italian/German
                                  productivity wanes. EZ recession slowly          haven flow. Core/semicore EGBs supported
                    Europe        ends due to rate cuts, OMT, less fiscal          by rate cuts, hurt by OMT. NGBs steepen
                                                                                                                                   ECB rate cuts should keep the pressure on        electoral risks a worry. UK recovery could
                                                                                                                                   the EUR early in the year.                       falter if OMT/FLS ineffective.
                                  drag.                                            early.

                                  RBA to cut once more in mid-2013 to a            AU-NZ 3yr yield spread to flip from +10bp       Expect AUD and NZD to 'range' trade for          Commodity prices fall on weaker China;
                    Asia-Pac      record low 2.75%; RBNZ to start tightening       to -40bp in H1 2013, driven by higher NZ        most of 2013 (at around $1.04, $0.83             currency rising further forcing RBA to ease
                                  around the same time.                            yields as mkts price RBNZ hike.                 resp.); NZD to outperform on rate diff.          more and RBNZ to hold for longer.


                                  Mexican GDP growth resilient, Brazilian          Receive Jan-14 DI in Brazil as the BCB will     BRL anchored between 2.05/2.10 to USD in         High CPI conducive to earlier tightening
                    Latam         rebound to kick in later. Regional CPI           deliver later hikes than the market implies.    H1 2013, but to appreciate thereafter. MXN       from the BCB. US fiscal cliff and China’s
                                  nudging higher.                                  Extend duration on Mexico’s curve.              on a steady appreciation trajectory.             slowdown beyond expectations.

                                                                                   Easing is the general bias. Hence we
                                  Economic slowdown likely to linger longer                                                        Gains in PLN and HUF unlikely until H2           IMF deal fiasco in Hungary, wage
         E                                                                         continue to see swap curves steepening
                    EMEA          than elsewhere, with CPI improving
                                                                                   and bond yields falling. Russia is the
                                                                                                                                   2013. TRY stable, RUB to appreciate, and         pressures and rating cuts in S. Africa.
         M                        throughout 2013.                                                                                 ZAR undervalued but volatile.                    Unsolved EZ troubles.
                                                                                   exception.

                                  Local economies to reap the fruits of
                                                                                   RBI to ease less than expected, so ND-OIS       Weaker FX in the short-term, stronger by         Sharp Chinese slowdown. High fiscal
                                  monetary easing. Global recovery to
                    Asia          support growth, but also rising inflation in
                                                                                   1s5s steepening will occur later. Other         end-2013. Stronger INR on reforms, IDR           deficits in India and Malaysia. C/A deficit in
                                                                                   curves to flatten from mid-2013 onwards.        and MYR improving in H2 2013.                    Indonesia and high WPI in India.
                                  2013.

                                  Stronger global growth to help boost oil                                                                                                          A slower-than-expected global recovery
         C                                                                                                Long Brent Crude Oil (roll yield targeting);
                    Energy        demand in 2013, but supply keeping pace;
                                                                                                         Short Nymex NG Oct'13/Long Nymex Jan'14.
                                                                                                                                                                                    would hurt oil demand growth, increase
         O                        geopolitical risks remain supportive.                                                                                                             surplus supply, and sink prices.
         M
         M                        Supply constraints, rising industrial &                                                                                                           EZ crisis returns and Fed stimulus effects
                    Precious
         O                        investor demand, along with more QE/fiscal                                  Short gold/silver ratio; Long palladium.                              wane—lower investor demand and cash
                    metal         cliff clarity to boost precious metals.                                                                                                           accumulation force precious metals lower.
         D
         I
         T                        US growth after fiscal cliff resolve and China                                                                                                    US goes over fiscal cliff and China does not
                    Other         infrastructure commitment to tighten                                                      Long zinc.                                              provide new stimulus, driving the world near
         Y
                    metals        markets and drive industrial demand.                                                                                                              recession and metal oversupply.




                                                                                                CENTRAL BANK MONITOR
                                                                    Inflation                                                                             Central Bank Policy Rate
                                  Deviation from target* (% points)                        Y/Y%       As of      Next            Last Mtg    Current Next Mtg                            12m Fcast (bps∆ from spot)
                             ‐4      ‐2       0      2        4       6                                          Print       Date     Change   %    Date    TD                                         Mkt     TD
                             Below Target                   Above Target                                                                                                                  -150-75 0 75 150
                   NZ                                                                      0.8        Sep        17 Jan      6 Dec        +0bp           2.50     30 Jan          +0                           -6          +75
                   Sweden                                                                  0.4        Oct        18 Jan      25 Oct       +0bp           1.25     18 Dec          +0                           -41          -50
                   Japan                                                                   -0.4       Oct        27 Dec      7 Dec        +0bp           0.10     20 Dec          +0                           -4            +0
                   Norway                                                                  1.2        Nov        10 Jan      31 Oct       +0bp           1.50     19 Dec          +0                           -2          +25
G10




                   Canada                                                                  1.2        Oct        21 Dec      4 Dec        +0bp           1.00     23 Jan          +0                           +1          +50
                   Australia                                                               2.5        Nov        22 Jan      4 Dec        -25bp          3.00     5 Feb           +0                           -51          -25
                   US                                                                      2.2        Dec        16 Jan      12 Dec       +0bp           0.25     30 Jan          +0                           -3            +0
                   EZ                                                                      2.2        Nov        4 Jan       10 Dec       +0bp           0.75     10 Jan          +0                           -3           -50
                   UK                                                                      2.7        Oct        18 Dec      7 Dec        +0bp           0.50     10 Jan           +0                          -20           +0
                   China                                                                   1.9        Nov        9 Jan                                                             +0
                   Malaysia                                                                1.4        Oct        19 Dec      8 Nov        +0bp           3.00     31 Jan           +0                          -13         +25
Emerging Markets




                   Indonesia                                                               4.4        Nov        …           11 Dec       +0bp           5.75     …                +0                          n/a         +25
                   Russia                                                                  6.4        Nov        10 Jan      10 Dec       +25bp          4.50     9 Jan            +0                          -57         +25
                   Poland                                                                  2.8        Dec        15 Jan      5 Dec        -25bp          4.25     9 Jan           -25                          -114         -50
                   Brazil                                                                  5.5        Nov        10 Jan      6 Dec        +0bp           7.25     16 Jan           +0                          +38           +0
                   S Africa                                                                5.6        Dec        23 Jan      7 Dec        +0bp           5.00     24 Jan           +0                          -17           +0
                   Mexico                                                                  4.2        Nov        7 Jan       30 Nov       +0bp           4.50     18 Jan           +0                          +5            +0
                   Turkey                                                                  6.3        Nov        3 Jan       20 Nov       +0bp           5.75     18 Dec           +0                          n/a          -25
                   Hungary                                                                 5.1        Nov        15 Jan      27 Nov       -25bp          6.00     18 Dec          -25                          -143       -125
                   India                                                                   7.2        Dec        14 Jan      30 Oct       +0bp           8.00     18 Dec           +0                          -40          -75

                                 Current                              Fcast for 2013
                   *Deviation from 10y avg for India, which does not have an inflation target.
                                                                                                                                                                                                                                     2
2013 Global Outlook
Rates, FX and Commodities Research
14 December 2012 | TD Securities

VIEW FROM THE TOP
Relative to this time last year, the outlook for the global economy              Central Banks Easing and Assets Rising*
in 2013 is marginally improved, even if the hand-off into the New         40                                                                      10

Year looks grimmer. Europe should transition out of its current           30                                                                      9
recession, China is poised for a better outcome, and the                  20
                                                                                                                                                  8
underlying fundamentals in the US have that economy better                10
                                                                                                                                                  7
positioned for growth than at any point in five years. The bad             0
news is that broad challenges constraining growth have not                                                                                        6
                                                                         -10
changed. The world is still fundamentally out of balance. Growth                                                                                  5
                                                                         -20
may be better this time next year, but only relative to the weak                                                                                  4
                                                                         -30
output of the past year and feeling better is a matter of                            Number of G10 CB Cuts
                                                                         -40                                                                      3
perspective. Relative to the past two decades that marked the                        Number of G10 CB Hikes
                                                                         -50         G4 CB Balance Sheets ($T, RHS)                               2
ever greater move toward globalization, there remains no obvious
                                                                                04     05     06     07       08      09    10     11      12
catalyst to growth. That does not change in 2013.
                                                                         *G4 CBs include Fed, BoE, ECB, BOJ    Source: TD Securities, Bloomberg
Debt saturation within much of the developed world signaled the         households whose de-leveraging process may be well advanced;
end of the old order. Mature economies have to save more and            but one not poised for a significant re-gearing anytime soon. It
emerging economies need to identify other sources of growth.            puts more emphasis on generating a wealth effect, and in the US
There the need is to save less and spend more, but that transition      household net worth has risen 27% under QE, now only 3.5% off
has been slow to materialize, leaving the burden of adjustment          its peak in late 2007.
first and foremost in the developed markets such as the US,
Europe, and the UK. Global growth should inch higher in 2013 at         Policy reflation means global liquidity will be even more ample in
a 3.2% rate, up from 2.9% in 2012, but it will be uneven and only       2013. Volatility will be squeezed and the search for yield ever
1.3% among G-7 countries, softer than the 1.4% rate in 2012.            more acute, exerting ongoing pressure on spread products to
                                                                        narrow further. This will eventually make risk assets, such as
Economic rebalancing has been a long and painful process, and           equities, increasingly attractive. The return on credit products
in the interim it is difficult to generate adequate growth in jobs or   looks increasingly less appealing relative to equities that already
incomes. Developed economies face an opposite goal, but the             offer superior dividend growth rates, and ones that provide
challenges are no less immense. In China, wage pressures are            protection from duration risk from which there is now little cushion.
rising and investment as a share of output is still excessive. The      Equities are poised to outperform over the coming year. Portfolio
US suffers from the opposite condition. Investment remains              substitution will increasingly favor equities, and with dividend
insufficient and wage pressures continue to fall, a condition that is   yields having risen to 2.2% on the S&P 500, coupled with better
broadly emblematic of the developed world. Global spare capacity        growth expectations and ongoing financial repression, suggests
remains high, but its effect is consequently uneven. In the             that a 6% to 8% return looks reasonable.
developed world, inadequate absorption of excess slack (high
output gaps) means the principal risk remains tilted toward             The global economy continues to struggle through a period of
disinflation, and disinflation or worse within economies saturated      transition. Risks will continue to percolate in Europe, with the fiscal
with debt is a recipe for disaster. Central banks will therefore        cliff in the US. The world is still grappling with the implications of a
remain proactive. Reflation will be the lingering theme in 2013.        slowing Chinese juggernaut and with growth rates in the
Canada stands out as an exception.                                      developed world still too low for comfort, the risk of further
                                                                        exogenous shocks derailing the recovery remains too high.
The lion’s share of global growth remains centered in emerging          Growth volatility may remain high, but central banks will limit
markets, and the lion’s share of global liquidity will come from        reverberations into financial assets, and unlike 2012, ultimately
developed economies. For the developed world, insufficient              feed more inflation volatility as policy accommodation and growth
income growth in a period of austerity continues to present a           diminish the risk of disinflation.
unique challenge. Attention is moving back toward Italy, where
austerity is only now beginning to bite and the looming departure       The key point, however, is that a negative outcome should be
of the Monti regime re-introduces political risk in the muddle          avoided. Over the second half of 2013 the growth trajectory is set
through Euro-zone crisis. In the US, a lack of sufficient growth in     to turn higher. Highly accommodative central banks and an
buying power complicates the Fed’s efforts to generate a stronger       improving growth environment set up a better environment for risk
recovery in domestic demand. That is always true, and holds             assets, including equities and commodities. It will, however, prove
throughout most of the developed economies. But it is more              a more challenging one for fixed income.
significant today given fiscal austerity, slow global growth, and
                                                                                                                                                       3
2013 Global Outlook
Rates, FX and Commodities Research
14 December 2012 | TD Securities

REGIONAL RISKS


    CANADA                                                                                             ASIA-PACIFIC
    ● The majority of the downside risks to the economic
    outlook are external. Renewed Eurozone tensions would            ● China's economy is picking up after slowing down in
    erode financial conditions and damage confidence. A              mid-2012. However, the extent and sustainability of the
    deceleration in emerging market growth or an austerity-          growth acceleration is uncertain, as trade stats paint a
    driven US recession would imperil the Canadian                   subdued external backdrop. We remain cautious on the
    economy and undermine the recovery.                              2013 outlook, and see downside risks to consensus
                                                                     expectation of 8%+ growth in 2013.
    ● Rising household leverage is a symmetric risk to the
    Canadian economy, and could undermine growth if                     ● Further cuts to Australia's investment pipeline are not
    tighter regulation proves too                                                                   implausible should China's
    severe or exacerbate
    financial imbalances if                         U
                                                  NITED            S    TATES                       growth        disappoint
                                                                                                    expectations. This will need
    leverage continues to rise.                                                                     to be offset by an even
                                                                                                    stronger pickup in housing
    ● Given that a relatively         We are more bullish on growth prospects given our             activity and consumer
    small output gap reflects a       view that underlying fundamentals are much                    spending.
    more advanced recovery, a         improved, as evidenced by household balance sheet
    stronger-than expected            ratios having reverted back to 2003 levels, and a             ● Geopolitical risks arising
    rebound in the global             housing market on the mend. Private GDP growth                from territorial disputes
    economy would require the         should also get a fillip from reduced uncertainty on          between China and its
    Bank of Canada to take            the fiscal cliff, and a Euro crisis that will muddle along    neighbours also pose a
    interest rates higher, ahead      but looks to be beyond the riot point. Key risks              threat over the medium term.
    of many of its developed          remain and include:
    market peers.
                                      ● Going over the fiscal cliff or a fix that creates a
                                      drag north of 1.5% of GDP, something the private
                                      economy may struggle to overcome.
    EUROPE                            ● Private sector surpluses must be deployed to
                                                                                                                       EMS
                                      accommodate fiscal austerity. If not, then a negative
                                      feedback loop into jobs, housing, and incomes could
     ● The Eurozone crisis is far     take shape which the Fed would find difficult to
     from over, but 2013 marks        prevent.                                                    ● EMs continue to suffer from
     the transition to the back                                                                   both idiosyncratic and
     half of the crisis with fewer    ● An oil spike from an escalation in tensions with          external risk factors. On the
     catalysts for crisis. More       Iran, a hard landing in China, and failure to achieve a     external front, primary
     political stumbling blocks,      solution in Europe remain lingering risks.                  sources of concern remain
     however (Italian and                                                                         the Eurozone debt crisis, the
     German elections), may                                                                       US fiscal cliff and China
     limit the ability to respond.                                                                growing      slower     than
                                                                                                  expected.
     ● The OMT limits the risk of a liquidity crisis, but
     Spanish solvency remains the major question to be                 ● EM central banks continue to pursue dovish monetary
     answered in 2013. Nevertheless, with rate cuts also               policies, with focus visibly drifting from inflation to
     coming, we would be long Eurozone peripherals and                 growth. While these moves are supportive for yields, the
     credit in Q1 before potentially seeing widening.                  overextended low-interest rate period could bear
                                                                       negative EMFX implications.
     ● This all means fewer external risks for the UK, the
     primary driver for BoE action in 2012, so gilt yields could       ● Emerging market authorities struggle to win
     move higher with a resilient labor market and weak                competitive advantages vis-à-vis peer EMs and DMs.
     productivity potentially emboldening hawks.                       This implies a bias for weak currencies in order to
                                                                       improve the national share of global trade, but also limits
     ● Negative developments in the US fiscal situation pose           the EMFX upside potential.
     the most immediate risks to European forecasts.



                                                                                                                                     4
2013 Global Outlook
Rates, FX and Commodities Research
14 December 2012 | TD Securities

SUMMARY OF TRADE RECOMMENDATIONS
                                                              United States
● A steepening bias for the Treasury curve should be a dominant theme in 2013. While the uncertain economic outlook for H1-2013
means that any particular short-term trade idea remains a low-conviction trade, we are especially enticed into a 5s30s steepening bias
going into Q4 2013. Our year-end target is 250bp and a stop-loss of 210bp. This trade is motivated by our expectations for the sub-par
economic growth performance in H1 to give way to more robust GDP growth later in the year.


                                                                  Canada
● A more advanced economic recovery paired with a constrained Bank of Canada in the face of more QE from the Fed raises the risk of
greater inflation. Recommend long Canada breakevens (Buy Canada 2.00% December 2041s, Sell Canada 4.00% June 2041s). Enter into
trade at breakevens below 2.00% with a target of 2.20%.
● A parallel shift in the curve in response to eventual hikes by the Bank of Canada opens the door to consider a Canada/US 2s10s box
trade based on a steeper US curve versus a flatter Canada curve. Entry around 75 bp with a target of 105 bp.


                                                                  Europe
● An early ECB rate cut could see the wings catch up with already rich 5s on a 2s5s10s bund fly, while ECB dithering on cuts or early
activation of the OMT could see 5s sell off. Rate cuts and OMT offer competing risks for EGB levels, but support credit positive outlook.
● For the UK, we see no QE in February and 10s moving from 1.80% to 2.30% by mid-year as a result, with more scope to help 10s30s
to move from 135bp to 100bp by year-end and 5s10s reverse course in a box trade with OATs.
● We fund a long NOK and SEK position with short CHF and JPY, entering this index at the current level of 84.6, targeting a stop of 82
and target of 95.5 for a potential reward of 12.9%, rising 3.6%.


                                                       Australia / New Zealand
● Expect significant underperformance of NZGBs relative to ACGBs in 1H 2013, particularly in the short-end, due to divergent interest rate
paths and ACGBs continuing to benefit from ‘AAA flows’.
● We expect the gap between ACGB-NZGB 3yr yields (currently +15bp, a good entry point) to close and completely reverse by mid-2013
(targeting -40bp).
● We also recommend paying NZ 12m OIS for as long as rate cuts remain priced in, as we expect the next move to be up, and earlier
than markets currently expect.


                                                           Emerging Markets
● In the EMFX space, our top trade idea for 2013 remains short USD/INR as we expect the pair to nudge progressively lower to 50.10 by
year-end, down from 54.3 at the time of writing. This corresponds to a spot return of approximately 8.4% to the USD, on top of an 8.7%
interest return (calculated as annualized 3-month onshore deposit rate. However, offshore interest returns will be somewhat lower). The
main driver of appreciation should be the economic recovery in India and globally, and the reform process in the country ahead of the 2014
elections.
● We also like short USD/BRL (expected to fall to 2.05 from 2.08 currently on a stable rate outlook and the likely decision from Brazilian
authorities to allow more BRL appreciation into 2013), and short USD/ZAR (which may correct just above 8.5 by end-2013 on a
substantial retracement of idiosyncratic risks priced in by the market).


                                                              Commodities
● An improvement in market risk appetite, along with tighter supply/demand conditions and rising investor interest, should help industrial
precious metals, base metals and energy move higher in the period following the start of a new US Congressional session. As such, we
recommend shorting the gold/silver ratio, a long palladium and zinc position, and collecting positive roll yield by rolling a Brent crude oil
long position.


                                                           Foreign Exchange
● Very accommodative central bank policy settings and low volatility should support an environment conducive to carry trades. In this
context, we recommend a long NZD/CHF position to take advantage of our anticipation of RBNZ tightening later in 2013. Yield spreads
should widen modestly in the USD’s favor versus the JPY, which we think is a buy on weakness from current levels. But with BoC rate
hikes further delayed by the slow global recovery and USD/CAD near the lower end of our forecast range, we suggest a long USD/CAD
position via a 6-month option.

                                                                                                                                                5
2013 Global Outlook
Rates, FX and Commodities Research
14 December 2012 | TD Securities

UNITED STATES
                                                                                      Fiscal Austerity To Accelerate in 2013
Bobbling the Hand-off
The US economic outlook for 2013 has the ingredients in place to
surprise to the upside. The hand-off into the New Year does look
fairly grim, with Q4 GDP poised to be 1% or lower, and most high
frequency indicators pointing to an economy losing some
momentum. Moreover, even our more sanguine outlook
incorporates a first half of 2013 that will struggle to generate
growth north of 2%. That is a residue of a fiscal fix that will, in our
base case view, increase drag on the economy from 0.6% in
2012 to as much as 1.5% next year.

As we move deeper into 2013, economic growth will begin to
reflect underlying fundamentals that are, even now, the best they          Source: TD Securities, EcoWin
have been in 5 years. There are two main reasons:

                                                                          Second,    the housing recovery is firmly planted. Home
First,  we expect a resolution to raise confidence and                     prices are rising, which has begun to drag reluctant buyers
   reduce uncertainty, providing a tailwind for hiring and                   back into the market to take advantage of record low
   investment. That will push the contribution of private                    mortgage rates. The visible and shadow inventory
   demand to the GDP growth rate from 2.5% in 2012 to 3.3%                   overhang has been cut over 50%, and with new home
   by the end of 2013. Central to this view is the presumption               inventories at 50-year lows, residential construction has
   that whatever fiscal compromise is achieved will not merely               transitioned from a headwind to a tailwind for GDP.
   delay the fiscal cliff, but will provide some underlying
   bargain on taxation and spending. It need not be a grand
   bargain. However, it must provide some permanency to
                                                                          Third, corporations are awash with cash and have thus far
                                                                             failed to invest beyond the depreciation rate of the capital
   clarify the ground rules that, at this point, have been
                                                                             stock, owing to an uncertain 2013. Going over the fiscal
   lacking.
                                                                             cliff would create a drag of 4% in an economy growing 2%,
                                                                             ugly economic math that breeds caution not expansion.
Second,    the economic effect from the drag of fiscal thrust              Pent-up investment spending is poised to provide
   (the change in the change in spending) weakens over each                  additional support to GDP over 2013.
   successive quarter. Base effects put growth rates over H2
   in better position to accelerate.                                      The Fed has struggled to generate a self-sustaining recovery
                                                                          sufficient to absorb excess slack. That will not change over the
We transition into the New Year on a weak footing and with too
                                                                          first half of 2013. The labor market has been and remains the
much uncertainty, again. When one considers the ongoing risks
                                                                          lynchpin to a positive feedback loop through the economy.
that stem from a percolating Eurozone crisis, balance sheet
                                                                          However, Bernanke has operated at a distinct disadvantage.
adjustments that may prove stickier than expected, and lingering
                                                                          Unlike previous recoveries, jobs in construction, government, and
instability in the Middle East, it is tempting to find shelter in the
                                                                          finance have not only failed, to rise they have continued to fall.
view that more of the same disappointment is on the way.
                                                                          The good news for 2013 is that a recovery in construction jobs will
However, there is plenty of room for optimism. What will
                                                                          become more obvious, and the decline in government jobs wane
distinguish 2013 from other years since 2008 is that underlying
                                                                          considerably, the balance of which tilts job metrics to the upside.
fundamentals are improved, even if they remain far from perfect.
                                                                          The glass half full perspectives must not be confused with the
First,  household de-leveraging is close to running its                 underlying realities of this recovery, ones that will persist through
   course, with debt/income ratios back to 2003 levels. Since             2013. First, economic growth will remain substandard for some
   QE was launched in 2009, household wealth has risen                    time as net leverage in the economy, still close to record highs
   27% and is now only 3% off its record high. Income growth
                                                                          owing to bulging government debt, must be whittled down.
   continues to lag and that will not change in 2013. However,
   the decisive healing in household balance sheets, rising               Second, the balance sheet adjustments needed to facilitate that
   wealth, and cheap credit should be sufficient to generate              adjustment remain a source of uncertainty. Private sector
   consumption growth of 2% or higher by the second half of               surpluses must be unleashed to facilitate fiscal austerity
   2013. With mortgage debt continuing to shrink, household               otherwise, absent a corresponding adjustment in the current
   debt will rise at a pace less than GDP and household                   account (will not happen), private sector demand growth could
   incomes. De-leveraging slows, but remains intact.
                                                                                                                                                  6
2013 Global Outlook
Rates, FX and Commodities Research
14 December 2012 | TD Securities



shift lower. Third, the labor market may continue to improve, but                   Financial Repression to Persist in 2013
will remain far from “normal” for some time, ensuring that QE will
continue well into end-2013.

The recovery will remain weak by historical standards, and the US
economy is not about to transition back to debt financed
expansion. However, factors supporting a better outcome on
growth have now become more compelling. Simply put, we
believe the economy is positioned to get better, not worse.


Lower for Longer
The takeaway theme is really one of avoiding a negative
outcome, a view that will eventually drive the upward drift in rates.
How this translates into fixed income markets will almost certainly       Source: TD Securities, EcoWin
prove uneven, and the only real theme we can hang our hats on
is that low rates will persist. The question is how low. It would be a   under which remains anchored by a normalization of Fed policy
fool’s errand to pretend markets and events must evolve                  that remains years away. That theme is reinforced by the looming
according to a static forecast. The high probability outcome is that     expiration of FDIC guarantees on TAG accounts. Some of that
even if rates drift higher into year-end 2013, it will not be            cash will slip into the front end of the Treasury curve.
monotonic. Given so much uncertainty all one can reasonably
hope to present is the logic that governs our assumptions. Global        The US is neither Europe nor Japan. There are low growth, low
liquidity will rise in 2013, as central bank balance sheets expand       rate similarities to be sure, but each region has its own intrinsic
in Europe, Japan, and the US. That argues for lower volatility and       problems and momentum. What drives the Japanese gloom
further spread compression in credit and swaps, but within this          remains an inadequate policy response, a banking sector that
backdrop a periodic setback looks inevitable. Within an economy          was slow to write off accumulated losses, a demographic
that will continue to struggle to grow much above 2%, a natural          nightmare, and of course deflation, few if any of which apply to the
fallback position is that more of the same is a high probability.        US. Indeed, real US 10yr rates are already almost 175bp below
                                                                         Japan. Barring another exogenous shock, the odds of nominal
Traditional metrics of fair value has been distorted by political        US 10yr rates drifting to 1% must be viewed as exceptionally low.
risks and the heavy hand of the Fed. How one forecasts rates             A US debt downgrade certainly won’t get us there. The rally
must therefore rely disproportionately on one’s assumptions. We          across US rates after the S&P downgrade had everything to do
like the higher and steeper theme for several reasons. First, odds       with unfolding events in the global economy.
favor a stronger US recovery into the second half of 2013. And as
bad as Japan and Europe, as well as China now appear, we                 The Fed will remain exceptionally accommodative long after the
suspect global growth will remain fragile, but on a sounder footing.     recovery has gained momentum. Better economic traction will not
Second, Europe will muddle through. It is the best one can hope          be sufficient to tighten policy, and may not be enough to dilute the
for, but that is enough to diminish fears of financial contagion.        appetite for more QE. The Fed will not tolerate a massive sell-off
And third, disinflation risks persist, but are slowly diminishing.       in bond markets, but need not lean against upward drift toward
                                                                         2.35% by year-end, a rate exceptionally accommodative by any
In effect, the factors that pushed US rates to 1.60% persist, but        metric. If we are wrong on this Q4 timeframe, it will be that
will slowly give way. A 2013 year-end forecast of 2.35% on US            financial repression will persist even longer. That has less to do
10yr rates may be too high, but the emphasis is on positioning           with prevailing economic conditions than a broader desire to
and a risk/reward profile that looks increasingly asymmetric. That       facilitate public sector de-leveraging. Bernanke knows that is the
sets up underperformance on the long end relative to the 5yr, and        best way to position the economy for prosperity.



 RECOMMENDATION:
 A steepening bias for the Treasury curve should be a dominant theme in 2013. While the uncertain economic outlook for
 H1-2013 means that any particular short-term trade idea remains a low-conviction trade, we are especially enticed into a 5s30s
 steepening bias going into Q4 2013. Our year-end target is 250bp and a stop-loss of 210bp. This trade is motivated by our
 expectations for the sub-par economic growth performance in H1 to give way to more robust GDP growth later in the year.

                                                                                                                                                7
2013 Global Outlook
Rates, FX and Commodities Research
14 December 2012 | TD Securities

CANADA
The Little Engine That Could, Can’t Anymore                                      Canadian Real GDP Growth (Ann % Change)
                                                                            8
The Canadian economy is set to experience a lackluster year.                                                                         Forec as t
                                                                            6
Momentum has slowed markedly over the second half of 2012,
                                                                            4
and the theme of international headwinds and domestic fatigue is
                                                                            2
forecast to keep growth subdued heading into early 2013. The
                                                                            0
outlook is expected to gradually brighten over the second half of
                                                                           -2
the year, though much of this improvement will depend on events
                                                                           -4
outside of Canada’s borders. In appreciation of several important
                                                                           -6
near-term risks, the low yield environment and narrow trading
                                                                           -8
range defining the Canadian dollar in recent months are also
                                                                          -10                 Annual Average
expected to spill over into 2013. The gradual improvement in
                                                                                2007   2008     2009     2010     2011     2012      2013     2014
economic growth expected over the course of the year will help
yields drift higher and strengthen the CAD.                              Source: TD Securities, Statistics Canada, Haver Analytics



The Importance of the International...                                  of the more pernicious tail risks. However, the road to a more
For a small open economy where domestic demand has done                 integrated Europe remains long and littered with numerous
much of the heavy lifting thus far in the recovery, the international   potholes, ensuring that even in the most favorable light, the crisis
outlook will be a crucial determinant of the year ahead. The            has only moved from an acute to a chronic condition. Steps taken
persistent strength in the currency only adds to the challenge          by policymakers across many emerging market economies have
faced by exporters, and requires an even stronger upturn in             also helped dull fears of an imminent hard landing, though there is
external demand to overcome the erosion in competiveness.               clearly less willingness to employ the same degree of stimulus
Unfortunately, the theme of weak global growth is inescapable.          that helped lift the global economy out of the Great Recession.
The outlook also continues to be shrouded by significant
downside risks, limiting our optimism for a sustained improvement       … And the Delirium of the Domestic
in net exports until late in the year.                                  An external outlook that can best be described as uncooperative
                                                                        will once again put more emphasis on domestic drivers of growth
The most significant near-term risk that has the potential to           to support the wider economy. Thus far, households have been
reshape expectations for 2013 is the ability of policymakers in the     up to the task, though this support has come at a cost. Leverage
United States to negotiate a detour around the fiscal cliff. If a       remains an important medium term risk to financial stability, and
compromise cannot be reached and the full drag is realized, the         steps taken by policymakers to tighten mortgage regulations
recovery in the US will almost certainly be derailed and the            threaten to slow the housing market and consumer spending. The
Canadian economy will slow perilously close to its own recession.       drag is expected to be more pronounced in residential investment,
The next worst outcome is a patchwork solution that delays the          while consumer spending should hold its own amid continued,
bulk of the fiscal drag in, 2013 but stops well short of eliminating    though unspectacular, job growth. Previous examples of tighter
the uncertainty that has kept business investment and hiring            mortgage regulations have only had a temporary effect on
subdued. As history has painfully demonstrated, this may end up         restraining activity in the housing market, and as long as interest
being the most likely outcome, and is consistent with the muddle        rates remain stimulative, activity tends to rebound. While this
through scenario underpinning the base case forecast over the           places an upside risk on domestic demand in the year ahead, it
first half of 2013. Even if an agreement can be found that delays       also raises the likelihood that policymakers will tighten regulations
the fiscal hit in 2013 and resolves private sector uncertainty, the     further, which may imperil growth.
wider recovery in the US will remain slower than in past business
cycles, in appreciation of the structural shifts taking place within    Elsewhere in the domestic economy, the lull experienced in
the economy and a deleveraging cycle that is slowly shifting from       business investment through the second half of 2012 is also
the private to public sector.                                           forecast to seep into the coming year before a stronger global
                                                                        backdrop and generally robust corporate balance sheets revive
The economic aftermath of the sovereign debt crisis in Europe           sentiment. Government spending is also expected to offer a very
also speaks to a slower backdrop for global growth. The main            modest contribution to growth next year. That is poised to grow if
conduit of contagion between Europe and Canada remains                  any of the downside risks to the outlook materialize.
through financial market channels, and the policy infrastructure
developed by European policymakers has helped to reduce some

                                                                                                                                                     8
2013 Global Outlook
Rates, FX and Commodities Research
14 December 2012 | TD Securities



Slow but Sustained Recovery Drives Market
                                                                                 Net Financial Flows into Canadian Bonds*
Inertia with an Upward Drift
                                                                         12
The success of domestic demand in reviving the wider economy
has helped reinforce a stronger starting point for the year ahead.
Facing a period of below trend growth will widen what is still a          8
fairly small output gap. However, with growth expected to recover
over the second half of the year, spare capacity in the economy
                                                                          4
will once again be reabsorbed and core inflation will grind higher
towards the 2.0% target.
                                                                          0
By stitching together a more robust outlook for the global
economy heading into 2014, with an eye to preserving financial
                                                                         -4
stability, the Bank of Canada is forecast to raise its overnight rate
                                                                          1988      1991       1994      1998     2001      2004      2008      2011
to 1.50% by the end of the year – through two 25bp hikes
                                                                         *6m MA, $C billion   Source: TD Securities, Statistics Canada, Haver Analytics
beginning in Q4. Having struck a better balance around the risks
around inflation, while still providing a considerable degree of        meaningful expectations for a cut out of OIS and BAXs while
monetary accommodation commensurate with a slow growth                  placing a 1.00% floor under 2s. We expect this pricing will remain
environment, the Bank is then expected to return to the sidelines       in place, and would fade any renewed attempt to price in a cut by
for the bulk of 2014.                                                   the Bank. Longer-dated yields are also expected to remain
                                                                        subdued heading into 2013, before increasing slowly over the
For the rest of the curve, the preponderance of downside risks
                                                                        balance of the year. The shape of the curve is forecast to remain
facing the outlook early in 2013 is expected to keep yields
                                                                        largely unchanged, as the improved international backdrop will
subdued. By holding onto its forward-looking bias to eventually
                                                                        allow longer-dated yields to rise in proportion to the expectation
take the overnight rate higher, the Bank of Canada has wrung any
                                                                        that the Bank will resume hiking the overnight rate. This forecast
                                                                        stands in contrast to our expectation for a steeper US curve and
                  Canada-US Spreads (Percent)                           opens the door to a thematic box trade. It is also anticipated that
                                         Forecast                       strong international interest in Canadian securities will accentuate
     0.4
                                                                        this move, and we expect an outperformance in 30s versus
                                                                        Treasuries.
     0.0
                                                                        Real return bonds could substantially outperform versus nominal
                                                                        30s, as inflationary pressures are likely to build over course of the
    -0.4
                                                                        year in both Canada and the US. Excluding the crisis period in
                                                                        late 2008 and early 2009, periods of sub-2.00% breakeven
    -0.8
                                                                        inflation rates have been exceedingly rare and present excellent
                   10s             30s                                  long-term trading opportunities. As long bonds sell-off through
    -1.2                                                                2013, we expect to see breakevens widen meaningfully.
           2011          2012            2013       2014

Source: TD Securities, Bloomberg




 RECOMMENDATION:
 A more advanced economic recovery paired with a constrained Bank of Canada in the face of more QE from the Fed raises the risk of
 greater inflation. Recommend long Canada breakevens (Buy Canada 2.00% December 2041s, Sell Canada 4.00% June 2041s).
 Enter into trade at breakevens below 2.00% with a target of 2.20%.

 A parallel shift in the curve in response to eventual hikes by the Bank of Canada opens the door to consider a Canada/US 2s10s box
 trade based on a steeper US curve versus a flatter Canada curve. Entry around 75 bp with a target of 105 bp.

                                                                                                                                                          9
2013 Global Outlook
Rates, FX and Commodities Research
14 December 2012 | TD Securities

EUROPE
Realism Over Rhetoric                                                      UK 10s Drive 10s30s Higher, Narrow Spreads to OATs
                                                                                    10s30s spread (bps)                    5s10s box spread (bps)
Beauty pageant contestants promise world peace. World leaders                 160                                                                   80
promise growth through austerity. Realism must continue to                    140                                                                   60
trump rhetoric in both. 2013 marks fewer drivers of a Eurozone                120
                                                                                                                                                    40
crisis, but worse politics, which could hamper responses and                  100
                                                                                                                                                    20
drive further volatility. The UK transitions central bankers, where            80
the reality is central bank tightening is far in the future. And               60
                                                                                                                                                    0

Norway and Sweden continue to need macroprudential                                                                                                  -20
                                                                               40
measures more than rate tweaks, and currency strength is likely                                           UK 10s30s spread (lhs)
                                                                                                                                                    -40
                                                                               20                         UK-France 5s10s box (rhs)
to remain the unifying Scandie hallmark. This means:
                                                                                0                                                                   -60
                                                                                11/08    5/09   11/09     5/10   11/10   5/11   11/11   5/12   11/12
   The Eurozone recession is likely to remain through Q1,
     biasing us towards more Eurozone and Riksbank easing,                 Source: TD, Securities, Bloomberg

     slower tightening in Norway, and a close call for the UK. This
     means schatz are likely to trade negative for most if not all of     sovereign debt, and the ESM is fully operational, approved, and
     2013, the NGB curve should steepen into spring but flatten           ready to lend.
     back out by year-end, and UK 10s30s can flatten further.

   The BoE continues to favor FLS to get banks lending, while           Spain and Politics Key 2013 Risks
     ECB rate cuts and OMT activation are likely in Q1 – and they         If there is a risk, it is that the market is overconfident on the
     could try for something akin to QE/FLS to support private            influence of the OMT. Draghi's July comments and subsequent
     credit – while the OMT and/or ESM could support Ireland              details of the OMT have had a tremendous impact in lowering
     and Portugal’s return to markets. This means European                Eurozone risk premiums. But the lower cost of funding merely
     credit could continue to outperform early in 2013, and               reduces the risks of an illiquidity-driven sudden stop in Spain, and
     Eurozone sovereigns that have traded like credit can                 buys time to see if Spain is a solvency risk. We expect Spain will
     continue to compress as CDS spreads have narrowed but                fall behind schedule in tightening the deficit by around 2ppts next
     peripheral CDS-bond basis (non-default premiums) remain              year, but if it goes further than that, Spain's debt sustainability
     wide and Ireland and Portugal are attractive for the yield-          could be questioned. They simply wouldn’t be able to tighten fast
     starved.                                                             enough without official support to provide borrowing at more
                                                                          concessional terms. This means the precautionary credit line
                                                                          requested to activate the OMT would likely need to be used.
Macro Drivers For Euro Crisis Diminish
Heading into 2013, the Eurozone will finally see the size of its          Outside of Spanish risks, implementation risks will be complicated
fiscal drag diminish, while handing the baton for the largest G10         by Eurozone politics. Elections in Italy will likely happen in
fiscal drag to the US. The drag from tightening fiscal policy will fall   February, and in Germany by October. In both cases, it is unclear
from around 1.5ppts in 2012 to 1.0ppt in 2013, just as we                 what sort of coalition may emerge. In the case of Italy, the risks of
estimate the drag from fiscal tightening in the US is set to rise         a negative result are larger with the emergence of a strong third
from 0.5ppts in 2012 to 1.5ppts in 2013. Austerity will still             party, the Five Star Movement, which has been polling around
exacerbate the primary structural problem in Eurozone debt                15%. It says that it will not participate in any government, and it
markets – the lack of a single common bond market – which has             calls for potential BTP default and Italian Eurozone exit, which
driven this crisis, but the risks of a growing Eurozone crisis will       may make a new coalition difficult to form. In Germany, neither
finally start to fall.                                                    the right nor the left is polling strong enough to form a
                                                                          government on its own either. But if all else fails, a broader
Similarly, 2013 will mark diminishing funding needs by Eurozone
                                                                          coalition could happen and Germany's amenity to Eurozone
sovereigns and corporates as deficits decline and rollover needs
                                                                          integration will be no stricter than it is now regardless of the
are lower. As with diminished fiscal drag, this does not mean the
                                                                          combination.
crisis will come to an end, and Spain is the notable exception to
this progress in funding, but the precipitants of the crisis are          The lists of risks doesn’t end there, although those are the major
declining. This is made even more true by the fact that we enter          ones. Greece will be a problem if it runs out of funds before the
2013 with more available official funding support than we have            German election, at which point official sector write downs will still
previously seen. The ECB has the OMT ready to purchase                    be unthinkable. But a bigger OSI plan is more likely a 2014 story.

                                                                                                                                                          10
2013 Global Outlook
Rates, FX and Commodities Research
14 December 2012 | TD Securities



Portugal and Ireland will also be returning to the market in 2013,                        Basket of NOK, SEK vs CHF, JPY
although there should be enough assistance from the ESM and
OMT to get them through. So the original Eurozone bailout                         Index (April 2005=100)
                                                                            120
nations will still bear watching, but are not the biggest 2013 risks.
                                                                            115
                                                                                                    NOK, SEK Stronger
                                                                            110
UK To Be Tested Early                                                       105
The UK clearly faces nowhere close to the existential risks the             100
Eurozone continues to struggle with. While Eurozone austerity is             95                                                          50%

meant to keep the Eurozone together, UK austerity is meant to                90
                                                                             85
defend the AAA. The economy rebounded from recession in Q3
                                                                             80
with a 1% Q/Q expansion, but will likely contract again in Q4. We                                   CHF, JPY Stronger
                                                                             75
remain wary of the risks of renewed QE in February, but we think
                                                                             70
the January data is likely to make or break this risk by providing                95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13
trackings into Q1, with decent consumer and labor market data,                                Basket                 Fibonacci levels
as well as stronger inflation, keeping the odds narrowly against a
                                                                           Source: TD Securities calculations, Bloomberg
resumption of QE.
                                                                          Scandies Need Macroprudential Measures
Markets have recently had to digest the appointment of Mark
                                                                          Given the typical lags from Eurozone shocks into Norway and
Carney as Governor of BoE as of July, with the knee-jerk reaction
                                                                          Sweden, the risks of Swedish rate cuts and delayed Norwegian
that QE for the BoE is now or never due to Carney's hawkish
                                                                          rate hikes is likely to remain through much of the first half of 2013.
biases. We see this as very misplaced. As Bank of Canada
                                                                          Both economies have struggled to balance the need to provide
Governor, Carney was proactive in easing rates ahead of other
                                                                          stimulus to offset poor external demand with the fact this stimulus
central banks in 2008 and has only been leaning towards raising
                                                                          has stoked significant housing and household debt risks.
rates recently as the Canadian economy has been facing an
overheating housing market and labor market which has regained            These risks require macroprudential controls on lending in order
all the jobs lost in the recession. We expect that Carney will be         to mitigate credit bubble risks, and the more these controls are put
willing to use QE or any other tool like FLS in order to stimulate        in place, the greater the ability of the Riksbank to ease and
UK demand and credit as needed.                                           Norges Bank to remain on hold. Inflation in both countries remains
                                                                          well below target. The Swedish FSA has begun to do just this,
So while we look for gilts to underperform as we start 2013, with
                                                                          and we think it will be enough to allow the Riksbank to ease a little
likely scope for further 10s30s flattening on QE disappointment,
                                                                          further. But as their economies improve later in 2013, the
the pace should lessen later in the year. If the US fiscal cliff is not
                                                                          Riksbank will likely be anxious to reverse course. For the Norges
addressed as quickly or resolutely as we expect, this will drive a
                                                                          Bank, we still suspect lingering global worries, low global growth,
significant risk to the UK outlook. But any deterioration, especially
                                                                          low domestic inflation, and macroprudential measures will keep
late in the year, or move in UK spreads too far from Treasuries or
                                                                          rate hikes at bay until Q4 2013, at the earliest. This is likely to see
Bunds, and we would tactically look for gilts to richen as there is
                                                                          the short end of NGBs outperform on the curve and on a cross-
nothing to argue for strong UK drivers that would be needed to
                                                                          country basis, likely coming in tandem with a weakening EUR that
drive a secular divergence. The UK will be importing just as much
                                                                          puts pressure on NOK to strengthen, though with plenty of
fiscal austerity in 2013 as in 2012, just more US and less
                                                                          uncertainties remaining around USD and EUR, we prefer to fund
Eurozone.
                                                                          a long position in NOK and SEK against JPY and CHF.




 RECOMMENDATION:
 An early ECB rate cut could see the wings catch up with already rich 5s on a 2s5s10s bund fly, while ECB dithering on cuts or early
 activation of the OMT could see 5s sell off. Rate cuts and OMT offer competing risks for EGB levels, but support credit positive
 outlook. For the UK, we see no QE in February and 10s moving from 1.80% to 2.30% by mid-year as a result, with more scope to help
 10s30s to move from 135bp to 100bp by year-end and 5s10s reverse course in a box trade with OATs. We fund a long NOK and SEK
 position with short CHF and JPY, entering this index at the current level of 84.6, targeting a stop of 82 and target of 95.5 for a potential
 reward of 12.9%, rising 3.6%.
                                                                                                                                                11
2013 Global Outlook
Rates, FX and Commodities Research
14 December 2012 | TD Securities

CHINA
                                                                                          CNY Appreciation Could Resume in 2013
Embracing Lower Growth
In recent months, economic activity in China has noticeably
improved after a moderation over the first half of the year. The
slowdown should not have been a surprise, given the
aggressive monetary tightening undertaken by the People’s
Bank of China over 2010 and the first half of 2011. In fact, a
portion of the risk-off malaise around the middle of this year
can be attributed to snowballing expectations of a harder
landing in China, an outcome particularly unwelcome since
next to no growth was emerging from the United States or
Europe. However, reliable leading indicators such as the
official PMI have gathered momentum, hinting at a firm end to
2012, and confining fears of a hard landing to history.                          Source: Bloomberg; TD Securities, line is path to 6.0 by end-2013


        Is the World Ready for China to Grow at 7%                              actual policy announcements remain thin on the ground so far,
                                                                   7% w ould
 14                                                                             we question widespread expectations for such lofty GDP
                                                                    be a 23yr
                                                                          low   growth performance for 2013, when the target is more likely to
 12
                                                                                remain at 7%. If indeed the target for 2013 is announced at
 10                                                                             “only” 7%, then perhaps long-entrenched assumptions that this
  8
                                                                                is a “hard landing” need to be reconsidered.

  6                                                                             Not surprisingly, the main drag on Chinese export growth, and
                                                                                therefore overall GDP growth, this year has been from the
  4
                                                                                stagnant European region. Exports to the US remain quite
  2                                                                             robust, while exports to the European Union are stuck in a
  0                                                                             sharp downtrend. As we expect European growth to muddle
      79 81 83 85 87 89 91 93 95 97 99 01 03 05 07 09 11 13                     along for another twelve months, we cannot expect material
Source: NBS, TD Securities, horizontal line is ’77-’11 average of 9.9%          improvement in the medium-term either. We will also be
                                                                                closely watching trade flows with Japan, to gauge if the
The official manufacturing PMIs for October and November
                                                                                diplomatic dispute over the Senkaku/Diaoyu Islands translates
gathered considerable momentum, and given historical
                                                                                into restricting trade between the two countries.
correlations we expect a rebound in fourth quarter GDP of
around 7.75% y/y. This generates a 2012 GDP growth of                           In mid-2012, the PBoC allowed the trading band (between spot
around 7.7%, which is more or less consensus, and consistent                    and the daily fix) to be widened from +/-0.5% to +/-1%. In
with the IMF and World Bank. This outcome, however, over-                       recent months, this range has been tested to the upside and
achieves the “official” target of 7.5%, a phenomenon that the                   downside, but for now, the daily fix is likely to remain rather
market is quite used to anticipating.                                           close to “equilibrium” 6.30. However, should global risks
                                                                                recede further next year, we pencil in further gentle
But what about 2013? Consensus is clustered around 8.00-
                                                                                appreciation to closer to 6.0 by end-2013.
8.25% GDP growth for next year, while the World Bank
expects 8.1% (albeit a downgrade from the prior view of 8.6%)
                                                                                Bottom Line
and the IMF via the October World Economic Outlook
                                                                                Positive noises about sustainable growth from the new
announced 8.2%. All of these forecasts rely on further
                                                                                administration suggests that growth can be expected from
monetary and fiscal stimulus to achieve such “above-target”
                                                                                home building activity and urban expansion. In our view, these
growth.
                                                                                projects are supportive for growth and commodity
The new administration (elected at the November 8 National                      consumption. In tandem, rising middle-class incomes are
Congress of the Communist Party of China) of President Xi                       demanding travel and overseas-based education. So from a
Jinping and Premier Li Keqiang so far lean towards China                        commodity perspective, it is not of concern to us if the new
achieving more “sustainable” growth, such that double-digit                     administration favors GDP growth of around 7% in 2013 rather
gains of the past are highly unlikely to be repeated. While                     than consensus’ expectations for a revival to 8%+.

                                                                                                                                                     12
2013 Global Outlook
Rates, FX and Commodities Research
14 December 2012 | TD Securities

AUSTRALIA
                                                                                       Australia: Rotation of Growth Drivers in 2013
Glass Half Full
                                                                             20
GDP growth is expected to slow from an above-trend 3.6% pace                           As % of GDP
                                                                             18
in 2012 to a slightly below-trend 3.0% in 2013, with the theme                                               Business investment
                                                                             16
being the rotation of growth drivers away from mining and towards            14
interest-rate sensitive sectors. The growth deceleration is driven           12
by three factors (1) ongoing soft jobs market as ‘traditional’               10

industries struggle against a persistently high currency, (TD $1.03           8                                             Dwelling investment
-1.04 through 2013); (2) resource investment peaking and terms                6

of trade falling; and (3) fiscal contraction, as the government               4

strives to deliver a surplus (a political imperative). Partly offsetting      2

these drags is easier monetary policy that should spur a moderate             0
                                                                                  87    89   91   93   95   97   99   01   03   05   07   09      11   13
recovery in housing construction, and support consumption and
asset prices. Temporary factors that boosted consumption in                 Source: TD Securities, ABS
2012 are behind us, so we are left with trend consumption at best,
amid a patchy labor market. After a dismal 2012, housing                   by mid-2013, and with the longer end more beholden to our
construction should gain momentum through 2013, though we                  forecast rise in US Treasury yields, we expect the curve to
expect the recovery to be modest, with the RBA able to cut rates           steepen to 80bp mid-year. Looking further ahead, though, if our
further if necessary. Monetary policy still works – a point                central scenario plays out and the global economy avoids a major
emphasized by RBA Deputy Governor Lowe in a speech in early                shock, the RBA’s easing bias should give way to a more neutral
December.                                                                  stance, pushing shorter-date yields higher. We target 3.10% for
                                                                           3yrs and 3.55% for 10yrs by end-2013, flattening the 3s10s curve
Resource investment will remain at extremely high levels, but will         to 45bp by year-end (further flattening is prevented by strong
probably peak around mid next year, becoming a small net drag              demand in the short-end). Through out 2013, we expect ACGBs
in H2 2013. The terms of trade has peaked, the pipeline of mining          10yrs to outperform USTs. From the current spread of +165bp,
-related “work yet to be done” has started to fall, while investment       we target a compression towards +120-130bp through 2013.
plans further out the horizon are being scaled down. At the same
time, the ABS capex intentions survey gave no indication that non          NEW ZEALAND
-mining investment is about to take off any time soon, leaving us
with a modest +4% forecast for business investment for 2013,               Vigilance is Key
down from ~15-20% growth in 2011 and 2012. Persistent                      In contrast to Australia, GDP growth in New Zealand is expected
weakness in various AUD-sensitive sectors should keep a lid on             to accelerate from 2.6% in 2012 to 2.9% in 2013, with
jobs growth, and we expect unemployment to spend much of next              construction the main driver, particularly housing.
year at 5.5%, with the risk that it could temporarily overshoot.
                                                                           Private consumption is expected to be below-trend 1.6% in 2013,
                                                                           a similar performance to 2012. A lot of this “weakness” is
The RBA could deliver one last cut to 2.75%
                                                                           welcome however, as household balance sheets are consolidated
Despite the cash rate being at a record low 3%, there is scope to
                                                                           and the “borrow and spend” mentality so far remains dormant.
cut further, with standard variable rate mortgages (SVR) only
                                                                           The unemployment rate has fluctuated around 6.25-6.75% for
50bp below their post-1997 average and 70bp above their post-
                                                                           three years now, and is neither a help nor hindrance to consumer
Lehman low, due to banks’ margin widening. But with core
                                                                           spending. There are upside risks if net migration rebounds (after
inflation right at the middle of the RBA’s target band, and not at
                                                                           turning sharply to outflows following the Christchurch earthquake
risk of undershooting the 2-3% target, we believe the outlook for
                                                                           in early 2011).
slightly below-trend growth in 2013 is consistent with one final cut
to 2.75% (25bp below the post-Lehman low), but no further. In              Post-earthquake reconstruction is key, with building approvals in
contrast, OIS markets are still pricing in a 2.5% cash rate by mid-        Christchurch having doubled their share of the total over the last
2013. Should data surprise on the upside in the coming months,             18 months (to 25%), but there have been signs of a more broad-
we will drop that last cut to 2.75%.                                       based pick up in activity in other parts of the country, particularly
                                                                           in Auckland. House sales volumes were up 25% y/y in November,
Nonetheless, we are of the view that the curve up to the 5yr part
                                                                           and the growing popularity of auctions signal rising confidence.
has room to rally in H1 2013, driven by ongoing demand for (and
                                                                           House price inflation a year ago was just climbing out of negative
low supply of) high yielding AAA bonds. We target 2.5% for 3yrs

                                                                                                                                                            13
2013 Global Outlook
Rates, FX and Commodities Research
14 December 2012 | TD Securities



territory, and is now closer to 5%, the highest since early 2010.                          NZ: Housing Market Strengthening
The correlation between days to sell and house prices suggests                   25                                                                   20
                                                                                         %/yr
further upside to 12-15%.                                                        20                                                                   25


The RBNZ now has a clear mandate to lean against excessive                       15                                                                   30

asset price inflation thanks to the new PTA. But this may not be                 10
                                                                                                                                                      35
the main reason why the RBNZ won’t be cutting rates any time
                                                                                     5
soon (as OIS expects). In his first MPS, Governor Wheeler                                                                                             40


presented a relatively upbeat outlook on the economy, expecting                      0
                                                                                                                                                      45

the “elimination of current excess capacity by the end of next                   -5
                                                                                                                                                      50
year”. The key issue for 2013 should be about how policy should                 -10
                                                                                                                       House price inflation (LHS)
be set at a time when the output gap is closing; with growth being                                                     Days to sell (RHS, inverted)
                                                                                                                                                      55

                                                                                -15
“below trend” for so long, a debate about what is a “neutral” cash                Oct-92        Oct-96    Oct-00         Oct-04      Oct-08      Oct-12

rate is long overdue.                                                      Source: TD Securities, NZ Statistics


RBNZ: First to Hike in 2013, Bonds to
                                                                                         Australia & NZ: Divergent Rate Paths
Underperform ACGB
                                                                            9
Our base case is for the first cash rate increase of +25bp to
                                                                            8                                                   US
2.75% to be announced in June, much earlier than consensus                                                                      Australia
expectation of “end-2013”. One consequence of that view is that,            7                                                   NZ
in contrast to Australia, yields should steadily climb across the           6
curve throughout 2013. 3yr yields have jumped 20bp since mid-               5
November to hit our end-2012 target of 2.55%, but has much                  4
further to run. From a trade angle, we therefore expect material            3
underperformance of NZGBs compared with ACGBs in the front-                 2
end, particularly in the first half of 2013. We anticipate 3yr yields to    1
rise 40bp from 2.55% to 2.90% by mid-2013 (against -10bp to                 0
2.50% for ACGBs), before rising further to 3.40% by end-2013.                   07         08       09            10       11         12         13

We forecast 10yr yields to trade upwards in a gradual manner               Source: TD Securities, Bloomberg
towards 3.95% by end-2013, and see its spread with USTs
narrowing from ~200bp to a range of 160-170bp. The 10yr AU-NZ
“premium” should be steady at around 40bp. The NZDMO will
continue to issue regularly, especially the 2023s, as the Budget
remains in deficit until 2014/15.




  RECOMMENDATION:
  Expect significant underperformance of NZGBs relative to ACGBs in 1H 2013, particularly in the short-end, due to divergent interest
  rate paths and ACGBs continuing to benefit from ‘AAA flows’. We expect the gap between ACGB-NZGB 3yr yields (currently +15bp, a
  good entry point) to close and completely reverse by mid-2013 (targeting -40bp). We also recommend paying NZ 12m OIS for as long
  as rate cuts remain priced in, as we expect the next move to be up, and earlier than markets currently expect.


                                                                                                                                                           14
2013 Global Outlook
Rates, FX and Commodities Research
14 December 2012 | TD Securities


G10 RATES
                                                                                              2013 10-Year Rate Forecasts
Scraping the Bottom                                                                                                                  TD Fcst
                                                                                                                                    (Year end)
The second half of 2012 was defined by an unrelenting grind                        UK
                                                                                                                                          2.75%
lower in rates across the globe, as political gridlock and financial
                                                                                   US                                                     2.30%
repression conspired to push government bond yields to historic
lows. Rates should find their bottom in 2013. In most cases,                   Canada                                                     2.35%

higher yields will not be solely linked to monetary policy – the             Germany                                                      1.85%
ECB, RBA, and Riksbank are all likely to introduce some form of
                                                                          New Zealand                                                     3.95%
additional easing, and we look for the Fed to maintain its QE
                                                                              Australia                                                   3.55%
program through all of 2013.
                                                                                          0     20      40    60       80    100    120     140
Instead, the trigger for higher yields should be a broad reduction                                                 Bps
                                                                                                 Expected Change in 2013  Consensus
in macro risks; we expect US policymakers to agree on a fiscal
pact, and with the worst of the fiscal drag averted the safe haven        Source: TD Securities, Bloomberg

bid into Treasuries should lessen. There will certainly be more
                                                                         similar; while central banks in the two countries would like to lean
volatility in the months ahead; upcoming elections in Italy and
                                                                         against overheating housing markets with higher policy rates, the
Germany are sure to produce some worrying headlines, and
                                                                         uncertain global outlook, strong domestic currencies, and benign
nerves may fray if the fiscal cliff negotiations drag on for too long.
                                                                         inflation should all work to delay the eventual tightening until
But the eventual story will be higher rates in the belly and long-
                                                                         2013Q4. Instead, New Zealand will be the first developed
end, and with monetary policy staying very loose we could see
                                                                         economy to see higher policy rates, with tightening expected to
much steeper yield curves across a number of markets by the end
                                                                         begin in Q2 and 75 bp pencilled in by the end of 2013. As a result,
of 2013.
                                                                         New Zealand is the only economy likely to see a substantially
                                                                         flatter curve in the year ahead.
Higher Yields on the Other Side of the Cliff
US rates will be the pace-setter when yields move higher, as             The hawkish stance of the RBNZ stands in stark contrast to the
Treasuries have disproportionately benefited from safe haven             bias towards easing from its nearest neighbour, as below-trend
flows and GDP growth will be higher in the US than in Europe or          growth and moderate inflation in Australia will likely allow the RBA
Canada. We expect the Fed to begin positioning for reduced               to cut once more. With hikes coming in New Zealand and a cut on
purchases in late-2013, which will reinforce the anticipated sell-off    the way in Australia, we favor owning Australian bonds versus
in Treasuries. Once US rates begin to break higher, we expect            New Zealand in both the 3- and 5-year area of the curve.
rates across most non-crisis economies to follow suit. 10-year
spreads versus Canada should remain roughly constant                     Pax Britannia No More
throughout 2013, but Canadian and German bonds should                    2012 was a good year to own gilts, but 2013 will be more difficult.
outperform in the long-end of the curve. 10-year Australian bonds        UK rates markets currently incorporate at least some expectation
should also outperform versus Treasuries                                 of further gilt purchases from the Bank of England. We think
                                                                         additional government debt purchases from the Bank of England
At the same time, we expect the Fed to leave the fed funds rate
                                                                         are unlikely, however, and we look for UK yields to move higher in
unchanged until at least late-2015, suggesting that US 2-year
                                                                         response (especially in the belly of the curve). With the OMT
yields should remain flat for most of the year. Any sell-off in
                                                                         reducing event-risk out of the Eurozone, the Bank of England
Treasuries should therefore cause the US curve to steepen
                                                                         expected to start tightening in 2014, and US quantitative easing
disproportionately – especially compared to economies with
                                                                         continuing through the end of 2013, we see gilts materially
relatively hawkish central banks. We like playing flatteners in
                                                                         underperforming versus Treasuries in the second half of 2013.
Canada and New Zealand versus steepeners in the US.
                                                                         We favor owning Australian 10s versus gilts, and with the ECB
                                                                         cutting in 2013 we prefer Germany to the UK in the front-end of
New Zealand to Hike First                                                the curve.
While monetary policy will remain broadly loose in 2013, we do
expect tightening from central banks in Norway, Canada, and
New Zealand. The situations in Norway and Canada are broadly




                                                                                                                                                  15
2013 Global Outlook
Rates, FX and Commodities Research
14 December 2012 | TD Securities

EMERGING MARKETS
Take it Easy... for Another Year                                                        EM Private Capital Inflows ($B)
Hopes that quantitative easing would fix most of the US – hence          1,400            EM E urope                   Latam
                                                                                                                                                     9.0
                                                                                          MENA                         EM A sia ex. China
global – troubles proved as wrong as the idea that a hammer can          1,200            China                        Tot al flows (% G DP , rhs)
                                                                                                                                                     8.0

fix the same glass it had previously broken. But what was                1,000
                                                                                                                                                     7.0

particularly unexpected about QE3 is that it didn’t work at all for                                                                                  6.0
                                                                           800
EMs, at least not in the sense of boosting asset prices. As a                                                                                        5.0
                                                                           600
matter of fact, around the QE3 announcement there had been                                                                                           4.0
significant anticipation (in a QE2 fashion), but no further upside.        400
                                                                                                                                                     3.0
The S&P 500 suffered a correction in the following 60 days, the            200
                                                                                                                                                     2.0
MSCI EM stabilized around the announcement levels with very
                                                                              0                                                                      1.0
limited volatility, while EM currencies have so far remained
                                                                           -200                                                                      0.0
skewed to the weak side of trading against the dollar.                             03    04     05     06   07   08   09   10    11     12      13

Against this premise, we observe that capital inflows to the EMs        Source: TD Securities

are re-accelerating, but from levels in 2011 and 2012 that stood       across the board, and therefore, at expansionary levels. Crucially,
well below those of 2010. However, this is not all QE-related effect   the market is increasingly comfortable with this outlook, judging by
as it mostly reflects the increasing importance of EMs and the         the fact that end-2013 CPI expectations remain roughly in line
larger size of their economies in nominal terms. As a percentage       with the national targets. Exceptions are only a few, and mostly
of GDP, the story looks quite different though, with net private       reflect adaptation to recently elevated inflation numbers.
inflows to EMs not likely to exceed the 4% mark by the end of
2013, so just about half the ratio in 2007. Hence, in 2013 the EM      A big question mark is still the behavior of the commodity
world will remain under-represented for yet another year.              markets, to which EM inflation baskets continue to exhibit strong
                                                                       correlation – oil prices in particular. The upside adjustment of
The return of capital flows will continue to face strong opposing      administrative prices in those countries dealing with fiscal
forces. First, the external environment continues to add limited       consolidation, or subsidy cuts and hikes of levies and taxes, may
support and risk aversion is still a material risk, even when          induce a temporary resurgence of price pressures. Moreover,
markets enjoy relatively long periods of stability. Another risk       even amidst the difficulties, the consumer looks generally resilient
factor is the pace of global recovery, which will be slower than we    across EMs. Tight labor markets, abundance of credit and
had initially expected. That applies to DMs and EMs as well. But a     expansionary policies should support growth and eventually fuel
worse-than-expected performance in DMs will sooner or later            inflation at a more advanced stage of economic recovery. So
bear consequences for EMs. So the recovery trajectory of the           while the first half of 2013 will be marked by softness in the
latter, which should be firmer and faster than that of the former      authorities’ approach to monetary and fiscal policies, moving into
anyway, will continue to be characterized by prevailing downside       the second half we envisage an inevitable return of focus on price
risks. In particular, the adjustment of trade balances has been and    stability. Nonetheless, we continue not to challenge a commitment
will be a drag on growth for the more open and export-oriented         to keep rates ‘low for long’ and expect macroprudential measures
emerging economies.                                                    to be the preferred instrument that CBs will use when inflationary
Given this backdrop, the inflation outlook appears benign in the       pressures return.
medium term. Food prices, affected by global shocks in 2012,           In the same manner, as regional divergence in monetary policy is
should continue losing momentum and help the pace of inflation         increasing, so will the performance of EM currencies. An
to decelerate further in Asia and EMEA. The CPI outlook for Latin      increasing number of countries (Brazil, Turkey, and Indonesia,
America is more of a mixed bag. Overall prices seem to have            just to name a few) has recently embraced a policy of currency
already reached a bottom, but should not be able to move much          weakness to stimulate growth. Unspoken commitments have
higher in the medium term. Clearly, given the regional weight of       turned into trading ranges and maximum levels, giving shape and
Brazil, most aggregate measures will be heavily skewed to              substance to the abstract concept of ‘currency war.’ But the
domestic developments there.                                           conflict for competitiveness is inevitably shifting to a new
Wary of downside risks to growth, while inflation will be muted        battlefield, from nominal (spot) levels into real effective exchange
until mid-2013 at least, EM central banks are likely to continue       rates (REER), an absolute measure of currency competiveness. If
pursuing accommodative monetary policies. It should be noted           governments and central banks from major EMs continue to
that benchmark rates are already below their neutral levels all        pursue such a policy vis-à-vis peer currencies that are free to float

                                                                                                                                                           16
2013 Global Outlook
Rates, FX and Commodities Research
14 December 2012 | TD Securities



and appreciate, in six months’ time they will have built a large
                                                                                                                                                                                                              Monetary Policy vs. Credibility
enough buffer to allow for some appreciation. By then, a stronger                                                                                                                (bp)                                                                                                     (%)
                                                                                                                                                                                 100                                                                                                       2.0
currency should help to tackle more serious inflation problems
than we see at the moment.                                                                                                                                                           50                                                                                                   1.0


In essence, the first half of 2013 has a high chance of being                                                                                                                          0                                                                                                  0.0
characterized by a strong performance of the fixed income sector,
                                                                                                                                                                                     -50                                                                                                  -1.0
supported by dovish monetary policies in DMs and EMs. At the
same time, the FX performance will continue to be sub-par,                                                                                                                      -100                                                                                                      -2.0
exhibiting a lack of correlation to the macroeconomic                                                                                                                                                  Poli cy r ate chg (since Jan-1 2)
                                                                                                                                                                                -150                   Consensus chg (to Dec-13 )                                                         -3.0
fundamentals. Idiosyncratic risks will also continue to weigh on                                                                                                                                       TD fcast (to Dec- 13)                             Brazil's SELIC is
sentiment in the short-to-medium term, with a particularly relevant                                                                                                             -200
                                                                                                                                                                                                       Poli cy cred ibility * (rh s)                    375bp looser Y TD
                                                                                                                                                                                                                                                                                          -4.0




                                                                                                                                                                                                 TWD




                                                                                                                                                                                                   ILS
                                                                                                                                                                                                  CLP




                                                                                                                                                                                                  BRL
                                                                                                                                                                                                 MYR

                                                                                                                                                                                                 MXN




                                                                                                                                                                                                  ZAR




                                                                                                                                                                                                 RON
                                                                                                                                                                                                 PHP
                                                                                                                                                                                                 KRW
                                                                                                                                                                                                  IDR




                                                                                                                                                                                                  INR
                                                                                                                                                                                                 RUB




                                                                                                                                                                                                 PEN
                                                                                                                                                                                                  TRY



                                                                                                                                                                                                  PLN

                                                                                                                                                                                                  THB



                                                                                                                                                                                                 CHN
                                                                                                                                                                                                  CZK




                                                                                                                                                                                                 HUF
impact for countries such as South Africa, India, Hungary, Turkey
and Brazil (for the latter two we classify the currency policy as an
                                                                                                                                                                               * End-2013 consensus exp. less CB inflation targets Source: TD Securities
idiosyncratic risk).

But as the recovery advances, inflation slowly picks up, and                                                                                                              higher rates will be penalizing rates and fixed income into the
currency weakness cannot be pursued at any cost anymore,                                                                                                                  latter part of 2013. But a generally stronger footing in the global
there should be scope for stronger equity and EMFX performance                                                                                                            economy, as well, should favor the correlation between FX and
in H2 2013. The drawback is the increasing expectations for                                                                                                               macro data, facilitating EMFX appreciation.




                                                              Real Effective Exchange Rates                                                                                                                              Synchronized Recovery in EMs/DMs
  3                                                                                                                                                                      TD Coverage                                                60                WEAK DMs                    STRONG DMs
        RICH for Z-scores above 0
                                                                                                                                                                         REER (Z-score on 5Y avg)                                                    STRONG EMs                   STRONG EMs
  2                                                                                                                                                                      6M ago
                                                                                                                                                                                                                                    55
                                                                                                                                                                                                                                          y = 0.4346x + 29.761
  1                                                                                                                                                                                                                                            R² = 0.6363
                                                                                                                                                                                                                                    50
                                                                                                                                                                                                                         EM PMI *




  0                                                                                                                                                                                                                                                                             SYNCHRONIZED
                                                                                                                                                                                                                                    45                                           RECOVERY?
  -1                                                                                                                                                                                                                                                              12Y correl    Last 3Y
                                                                                                                                                                                                                                    40                            Last 12M      Last 3M
  -2                                                                                                                                                                                                                                          WEAK DMs            Last            STRONG DMs
                                                                                                                                                                                                                                              WEAK EMs                             WEAK EMs
        CHEAP for Z-scores below 0                                                                                                                                                                                                  35
  -3                                                                                                                                                                                                                                     30     35       40        45      50      55      60
                                                                                                                                                       TWD
                                                                                                                               IDR




                                                                                                                                                                         ZAR




                                                                                                                                                                                                                   INR
       CLP




                                                                                     KRW
                                                                               HKD




                                                                                                                                                                                                 EUR
                                                                   ECS




                                                                                                                   ARS



                                                                                                                                     BRL




                                                                                                                                                                                     PHP
                                                                                                                                                             ILS
             NGN




                                     MYR




                                                                                                                                           MXN
                                                                                                                                                 PLN




                                                                                                                                                                                           MAD



                                                                                                                                                                                                             RON
                                                                                           COP
                   PEN
                         SAR




                                                       PKR




                                                                                                                                                                               KWD
                                                                         THB




                                                                                                             TRY




                                                                                                                                                                   CZK




                                                                                                                                                                                                       SKK
                                                                                                       VEF
                                           SGD



                                                             BGN




                                                                                                 HUF
                               RUB



                                                 EGP




                                                                                                                         CNY




                                                                                                                                                                                                                                                                 DM PMI

 Source: TD Securities                                                                                                                                                                                                   Source: TD Securities




 RECOMMENDATION:
 In the EMFX space, our top trade idea for 2013 remains short USD/INR as we expect the pair to nudge progressively lower to
 50.10 by year-end, down from 54.3 at the time of writing. This corresponds to a spot return of approximately 8.4% to the USD,
 on top of an 8.7% interest return (calculated as annualized 3-month onshore deposit rate. However, offshore interest returns
 will be somewhat lower). The main driver of appreciation should be the economic recovery in India and globally, and the reform
 process in the country ahead of the 2014 elections.

 We also like short USD/BRL (expected to fall to 2.05 from 2.08 currently on a stable rate outlook and the likely decision from
 Brazilian authorities to allow more BRL appreciation into 2013), and short USD/ZAR (which may correct just above 8.5 by end-
 2013 on a substantial retracement of idiosyncratic risks priced in by the market).

                                                                                                                                                                                                                                                                                                 17
2013 Global Outlook
Rates, FX and Commodities Research
14 December 2012 | TD Securities


COMMODITIES
                                                                                        Commodities Follow Global Growth—Moving Up
It’s Deja-Vu All Over Again                                                             5                                                 35

Mirroring the fear inspired by a European meltdown in late-2011,                        4
                                                                                                                                          25
markets again look ready to correct into early-2013. But this time,                     3

it’s the concern that the US economy will fall over a fiscal cliff that                 2                                                 15




                                                                            Y/Y % Chg




                                                                                                                                                Y/Y % Chg
                                                                                        1
is responsible for investors’ angst. As such, we expect volatile                                                                          5
                                                                                        0
markets, with random fiscal cliff headlines triggering risk-off, risk-
                                                                                        -1                                                -5
on commodity trading.
                                                                                        -2
                                                                                                                                          -15
While metal and energy markets have gone from cold, to hot, to                          -3        World GDP, Constant Dollars (lhs)
                                                                                                  CRB Commodity Index (rhs)
cold, to finally finish strong in November, the knee-jerk nature of                     -4                                                -25




                                                                                             2012E
                                                                                             2013F
                                                                                              1996
                                                                                              1997
                                                                                              1998
                                                                                              1999
                                                                                              2000
                                                                                              2001
                                                                                              2002
                                                                                              2003
                                                                                              2004
                                                                                              2005
                                                                                              2006
                                                                                              2007
                                                                                              2008
                                                                                              2009
                                                                                              2010
                                                                                              2011
commodity trading based on headlines, technicals and other non-
fundamentals implies that there are no guarantees that we will
finish the year on a high note. In fact, if the current political winds    Source: TD Securities, IMF, Bloomberg

blow the US over the fiscal cliff and seeing no well defined
                                                                          measures and some sort of debt load lightening, to stabilize EZ
timeline for a solution at the time of writing, commodities could
                                                                          economies. China should continue to get its groove back as
very well finish the year on a sour note, with corrective conditions
                                                                          China’s new leadership possibly add fiscal and monetary (lower
into early-2013.
                                                                          RRRs) pep to the broad domestic economy, boosting real estate,
The concern is that the legislated tax increases and spending             durables and demand for copper, aluminium, zinc and PGMs the
cuts, which amount to some $600 billion over the course of the            most. Oil and bulks should also get a lift.
year, if not reversed in the early part of the New Year could very
well plunge the US in another recession, which would slow the             Gold and Base Metals Look Promising
rest of the world and derail the commodity demand outlook for             Ultra easy monetary policy, Fed balance sheet action in particular,
2013.                                                                     has lifted gold since the Great Recession. And, expectations of
                                                                          more monetary accommodation from the Fed, the ECB, the PBoC
Despite the lack of any solid timelines, markets are still pricing in
                                                                          and other central banks should continue to move it to new highs in
some sort of dignified deal between the US President and the
                                                                          2013.
Republican House to the fiscal cliff problem in the near term. The
view is that a solution must be found before the deadline and that        But monetary policy is not the only way central banks around the
failure not an option. We too are in that camp. If we don’t see           world are helping to support gold. Since 2011, the official sector’s
progress in the negotiations soon, markets may very well react            physical buying has increased, supporting the yellow metal. We
negatively. All at a time when we will have very thinly traded            see another 525 tonnes being purchased by them next year.
holiday markets, which could exaggerate any potential correction.
                                                                          The recently introduced QE3 has already lifted inflation
                                                                          expectations and contributed to a fairly positive price dynamic as
Many Reasons to Buy the Dips
An improvement in market risk appetite, along with tighter supply/
demand conditions and rising investor interest, should help                             Inflation Expectations to Lift Gold Higher in 2013
industrial precious metals, base metals and energy move higher                          2.7                                              2000
in the period following the start of a new US Congressional
                                                                                        2.5                                              1900
session.
                                                                                        2.3                                              1800
Even if the US slides over its fiscal cliff, a solution to the US
                                                                            Yield (%)




                                                                                                                                                $/oz




budgetary problems early in 2013 should leave the economy                               2.1                                              1700
relatively unscathed. Given administrative manoeuvres and the
                                                                                        1.9                                              1600
fact that the fiscal drag would not have enough time to take a
serious bite out of economic activity, implies that the US would                        1.7                                              1500
                                                                                                            US 10 Year Breakeven (lhs)
resume its recovery with help from the Fed.                                             1.5
                                                                                                            Gold Price (rhs)
                                                                                                                                       1400
                                                                                          Aug- Oct- Dec- Feb- Apr- Jun- Aug- Oct- Dec-
At the same time, the ECB along with Euro-Zone (EZ)
                                                                                            11  11 11 12 12         12 12     12 12
governments will likely take policy action, including balance sheet
                                                                           Source: TD Securities, Bloomberg


                                                                                                                                                            18
2013 Global Outlook
Rates, FX and Commodities Research
14 December 2012 | TD Securities


have central bank gold purchases throughout the year—a trend
                                                                                                  OPEC Matters Despite Non-OPEC Supply Growth
that looks set to continue. Gold is projected to jump close to its
                                                                                                       4000
cyclical peak of $2,000/oz in late-2013.
                                                                                                       3000




                                                                          Y/Y Change ('000 bbls/day)
                                                                                                       2000
Supply Issues, Costs, Moving PGMs to Stardom
                                                                                                       1000
Considering the demand forecast (industrial and investment) and                                           0
the less than stellar production in South Africa (SA) and Russia,                                      -1000
which includes the disappearing official stockpile, the palladium                                      -2000
deficit looks set to deepen to 876Koz in 2013 and 1.1 MMoz in                                          -3000
2014. With palladium clearing the market in “auction” price                                                                       Non-OPEC Supply
                                                                                                       -4000
territory, it is seen to rally 40% to north of $975/oz by the end of                                                              Global Oil Product Demand
                                                                                                       -5000
2013.                                                                                                       Jan- Aug- Mar- Oct- May- Dec-   Jul- Feb- Sep-
                                                                                                             08   08   09   09   10   10     11   12   12
Similarly, the current platinum price of $1,633/oz is also set to        Source: TD Securities, Energy Intelligence
jump higher in 2013, representing a robust buying opportunity.
The price needs to rise materially in order to provide incentives to   Fundamentally, both oil and natgas markets have shifted away
build new mines, particularly in SA where labor costs and              from supply-driven price action to more demand-driven markets,
sovereign risk has risen.                                              increasing the influence of macroeconomic fundamentals on
                                                                       energy markets. That, however, is not to suggest supply
China Production Issues and Growing Demand to                          constraints will not continue to have a material impact on oil
Make Zinc an Outperformer                                              markets—which is why geopolitical tensions, particularly in the
The base metal with the tightest market balance outlook for 2013       Middle East, remain a key factor supporting oil markets.
looks to be zinc, as demand should pick up, while supply runs into
                                                                       Generally speaking, energy markets are set to contend with
issues, especially in China. Many zinc smelters are unprofitable,
                                                                       substantial upside and downside risks in 2013, much the same
which is leading to production cuts and forcing a deficit again in
                                                                       way they have in recent years. Middle East geopolitics and both
the supply/demand balance.
                                                                       developed and developing world economic conditions remain the
Demand growth for zinc and other base metals like copper and           key factors that could send energy prices, particularly crude oil
nickel will come from the infrastructure spending in China, as well    prices, materially higher or lower.
as an improving US economy after the fiscal cliff issues clear and
                                                                       Despite the expected volatility for 2013, the flux is likely to be kept
more QE is added. Despite quite high zinc stocks, similar to
                                                                       within a range, albeit a wide range. In this environment, organic
aluminum, financing deals and issues with slow load-out rates
                                                                       price appreciation is not likely to generate the best returns, but we
from LME warehouses will also help prices move higher.
                                                                       see positive carry trades providing the best opportunity for returns.
Couple this with weaker price performance compared to copper           As such, we are recommending a rolling long position in Brent
and lead of recent, zinc should benefit from a big swing higher in     crude oil—taking advantage of the positive roll yield stemming
prices. Thus we prefer this metal versus the rest of its base metals   from the backwardated term structure. We also see a tighter
peers and recommend a long position in zinc for 2013.                  natgas supply/demand balance developing for next winter,
                                                                       supporting winter 2013/14 prices relative to summer 2013.
Unconventional Stability in Energy Market
The rise in unconventional supply and slower demand growth has
stabilized the structural price outlook for both oil and natgas.
However, with macro economic and geopolitical risks continuing
to capture headlines, TDS expects 2013 to be a volatile year.




 RECOMMENDATION:
 An improvement in market risk appetite, along with tighter supply/demand conditions and rising investor interest, should help industrial
 precious metals, base metals and energy move higher in the period following the start of a new US Congressional session. As such,
 we recommend shorting the gold/silver ratio, a long palladium and zinc position, and collecting positive roll yield by rolling a Brent
 crude oil long position.
                                                                                                                                                              19
2013 Global Outlook
Rates, FX and Commodities Research
14 December 2012 | TD Securities

FOREIGN EXCHANGE
                                                                             Spreads Suggest More Upside Risk in USD/JPY
More of the Same
It’s good-bye and good-riddance, almost, to a difficult year for FX
traders and investors. FX returns have been poor (and risk-
adjusted returns even poorer) in the past 12 months. While we
can hope for a better year ahead, the auspices suggest more of
the same. Low volume, low conviction, risk on/off trading amid
declining volatility characterized 2012 and the drivers behind
those factors are likely to remain present in 2013, dulling the
impact of the more usual fundamental drivers of FX.

Massive injections of central bank liquidity have forced investors
into riskier assets as yields plunged and squashed volatility back
to pre-crisis levels. With central bank policy remaining super-          Source: TD Securities, Thomson Reuters Datastream

accommodative over the coming year as global de-leveraging
                                                                        suggest buying USD weakness to JPY80.00, risking JPY78.50
continues, our base case view is that pro-risk trades should do
                                                                        and targeting a rise to JPY85. USD/JPY has tended to be less
relatively well, even if the low volatility environment suggests that
                                                                        correlated with swings in risk appetite than its G7 peers over the
returns may remain weak. But there will be bumps along the way.
                                                                        past 12 months and may also provide some insulation from
Risk appetite, something that is subject to unpredictable news
                                                                        volatile market conditions.
flow and short-term sentiment swings, will continue to have an
important influence on FX trends in the coming year, making for
                                                                        Positive on Carry
an especially foggy outlook.
                                                                        In keeping with the pro-risk theme, we expect the AUD and NZD
The USD is cheap and at the tail end of a long-term secular bear        to remain well-supported overall in 2013. Valuation concerns may
trend versus its G7 peers. Growth in the US economy will trump          prevent strong gains versus the USD from current levels but even
expansion elsewhere in the G7 space in 2013. And for these              modest yield premiums in a very low-yield environment will
reasons alone, we are inclined to be a little more constructive on      continue to attract investors and asset managers looking to
the USD’s longer-term outlook, the more so if the potential to          diversify away from other currencies where zero yields prevail.
boost domestic energy production is realized as the implications
for the US external imbalance will be significant. However, a                   Wider Spreads in Prospect for NZD vs. CHF
marked improvement in the USD is unlikely until a reversal of the
Fed easing bias is in sight or foreign capital inflows into US assets
strengthen significantly (which would surely imply a reversal in the
USD’s inverse trading relationship with risk assets).


Bullish USD/JPY
We think USD/JPY provides one opportunity to express the
potential for the USD to do a little better next year, however. The
Japanese economy fell back into recession in Q2/Q3 so
expectations of an even more aggressive BoJ policy stance
(under the influence of a new government after this month’s
parliamentary election in Japan) seem justified.
                                                                         Source: TD Securities, Thomson Reuters Datastream
Modestly more supportive US/Japan interest rates spreads are
likely through 2013 we think as US yields nudge higher later in
2013. This should help lift USD/JPY in the longer run.                  Meanwhile, continued domestic deflationary pressures (albeit
                                                                        weakening) and sluggish growth momentum suggest that the
However, with the speculative market already massively short            Swiss monetary authorities have little choice but to continue
JPY and spot “overshooting” relative to current rate spreads, the       defending the CHF from appreciation and keeping monetary
prospect of a decent, short-term USD/JPY dip in the next few            policy settings very loose. Negative interest rates on cash
weeks is high as positions are squared after the election. We           balances at Swiss commercial banks will also weigh on the CHF.

                                                                                                                                         20
2013 Global Outlook
Rates, FX and Commodities Research
14 December 2012 | TD Securities



Given our call for a 75bp tightening of RBNZ monetary policy over             Canadian Current Account Balance (% GDP)
the latter part of 2013, short-term spreads will move further in the
NZD’s favor relative to the CHF (from current levels around 280bp
to perhaps nearer 320/330bp by year-end, based on consensus
expectations for Swiss rates), supporting NZD gains.

Technically, we think the NZD/CHF cross is setting up for a
renewed rally after the recent consolidation and, from a longer
term point of view, gains through the 0.80/81 area would be very
constructive. We will buy current spot (0.7784), risking 0.7550,
and target a move to 0.88.


Fundamentally Bearish on EUR
Elsewhere in Europe, we are hard pressed to view the EUR’s              Source: TD Securities, Thomson Reuters Datastream
recent strength as justified. European growth is stagnating as
European public and private sector deleveraging continues.             still uncertain external environment, pressure on the Bank of
Eurozone policy makers have quelled the sovereign bond riot for        Canada to tighten interest rates has eased somewhat and we
now but they have not resolved the problem of competitive              have pushed back the expected rise in rates a little deeper into
divergence between the core and the peripheral economies. We           2013. Tighter monetary policy more distant on the horizon should
expect some further policy accommodation from the ECB in H1 –          take a bit of the shine off the CAD early in the year.
and some significant balance sheet expansion if Spain ever
decides to ask for external support via the OMT. We remain             The high CAD is presenting some headwinds for the domestic
fundamentally negative on the EUR but like 2012, we fear a short       economy. Perhaps most evident is the weak penetration of the
bet on the EUR might not get us very far.                              US economy for Canada’s exporters and a persistent (though
                                                                       mostly ignored) current account deficit which will be close to 4% of
Sterling continues to look relatively cheap but a significant          GDP in 2013.
rebound is unlikely with the UK economy moribund and the
ratings agencies looking very carefully at the government’s fiscal     Such a sizeable current account deficit, while not a new story post
projections. A downgrade remains a strong possibility. The arrival     -Great Recession, continues to suggest that the CAD is over-
of Mark Carney to Threadneedle St may confer a little more             valued from a trade point of view. Without the support of tighter
confidence in the outlook even if it means little change in policy     policy the CAD may not be able to keep pace with its cyclical
prospects. Secular GBP bear trends against some of the more            peers and valuation is looking stretched.
aggressively valued crosses are starting to show signs of              Given the CAD’s generally positive correlation with risk assets, a
stabilizing at least. But real exchange rate depreciation has          long USD/CAD position runs counter to our broader pro-risk
helped the UK economy weather the downturn and policy makers           theme. However, with volatility low and a generally range bound
fear a strengthening in the pound might derail the recovery.           outlook for the year ahead, we think positioning long USD/CAD
                                                                       via options makes sense. We suggest a 6 month USD call/CAD
USD/CAD Starting to Look Cheap                                         put Knock-In, with a 1.00 strike and KI at 0.9750 costing 0.675%
Finally, USD/CAD is poised to end 2012 below par. We do not            (spot ref. 0.9869). This strategy costs about half the price of the
expect losses to be sustained, however. The Canadian economy           vanilla par call option.
has lost a little momentum over the course of 2012. Alongside a




 RECOMMENDATION:
 Very accommodative central bank policy settings and low volatility should support an environment conducive to carry trades. In
 this context, we recommend a long NZD/CHF position to take advantage of our anticipation of RBNZ tightening later in 2013.
 Yield spreads should widen modestly in the USD’s favor versus the JPY, which we think is a buy on weakness from current
 levels. But with BoC rate hikes further delayed by the slow global recovery and USD/CAD near the lower end of our forecast
 range, we suggest a long USD/CAD position via a 6-month option.

                                                                                                                                          21
2013 Global Outlook
Rates, FX and Commodities Research
14 December 2012 | TD Securities

FORECASTS
                               Annual Average                         2013                                               2014
GDP                            2013     2014        Q1 F       Q2 F          Q3 F     Q4 F       Q1 F             Q2 F          Q3 F     Q4 F
US                              1.9      3.0         1.9       2.3           2.6       3.0          2.9           3.2           3.3      3.1
Japan                           1.0      1.2         1.5       2.1           2.2       1.7          0.9           0.6           0.7      0.6
Euro-zone                      -0.1      1.2        -0.2       0.4           0.6       1.0          1.2           1.4           1.6      1.6
Germany                         0.7      1.5         0.5       1.2           1.4       1.7          1.4           1.5           1.4      1.4
France                          0.0      1.1        -0.4       0.3           0.3       0.4          1.3           1.7           1.9      1.7
Italy                          -0.7      0.7        -0.8       -0.4          0.2       0.7          0.8           0.9           0.9      1.1
UK                              1.1      1.4         1.5       1.4           1.3       1.5          1.4           1.5           1.5      1.5
Canada                          1.7      2.5         1.7       2.1           2.4       2.6          2.7           2.5           2.3      2.2
China                           7.9      7.9         7.6       7.9           7.8       7.6          8.2           8.2           7.8      7.8

Inflation                      2013     2014        Q1 F       Q2 F          Q3 F     Q4 F       Q1 F             Q2 F          Q3 F     Q4 F
US                              2.3      2.3         2.1       2.5           2.5       2.2          2.3           2.3           2.3      2.3
Japan                           0.3      0.3         0.2       0.3           0.3       0.3          0.3           0.4           0.3      0.3
Euro-zone                       1.8      1.6         1.9       1.8           1.7       1.6          1.6           1.6           1.6      1.6
Germany                         1.7      1.7         1.7       1.8           1.7       1.6          1.6           1.6           1.7      1.7
France                          1.7      1.7         1.7       1.8           1.8       1.6          1.7           1.6           1.7      1.7
Italy                           2.1      1.8         2.1       2.2           2.0       1.9          1.9           1.8           1.8      1.7
UK                              2.3      1.9         2.4       2.5           2.1       2.1          2.0           2.0           1.9      1.9
Canada                          2.2      2.1         2.1       2.4           2.1       2.0          2.1           2.1           2.1      2.1
China                           2.7      3.3         2.1       2.3           3.0       3.6          3.2           3.4           3.3      3.4
* GDP figures are q/q ann rates. Inflation figures are y/y headline rates.

                                                                    SUMMARY COMMODITIES FORECASTS
                                                  Spot                    2013                      2014
                                                Dec 14, 2012   Q1 F   Q2 F    Q3 F Q4 F   Q1 F  Q2 F    Q3 F                             Q4 F

                 Gold *                           1695         1825      1875       1925     1950         1900      1825         1775    1725
Precious
 metals




                 Silver *                         32.77        37.00     39.00      42.00    44.00        38.00     34.00        32.50   30.00
                 Platinum *                       1614         1725      1825       1900     1925         1875      1850         1825    1800
                 Palladium *                       682          700       875        950      975          975       950          900     900

                 Copper **                         3.68         3.80      3.84       3.60     3.50         3.66      3.69         3.46    3.37
                 Zinc **                           0.94         0.94      1.04       1.08     1.14         0.98      1.09         1.13    1.19
  Other metals




                 Lead **                           1.05         1.04      1.08       1.12     1.18         1.11      1.15         1.19    1.26
                 Nickel **                         8.00         8.25      8.75       8.25     8.00         8.42      8.93         8.42    8.17
                 Aluminum **                       0.97         1.02      1.05       1.04     1.02         1.03      1.06         1.05    1.03
                 Molybdenum +                     11.35        13.50     15.00      15.00    14.50        14.04     15.60        15.60   15.08
                 Iron Ore *+                       123          130       140        145      135          122       131          136     126

                 Nymex Crude Oil +-                 86          92        95         95       92           95            97        95     90
                 Brent Crude Oil +-                109         107       110        110      105          110           108       110    105
                 Heating Oil -+                    2.97        2.90      2.85       2.80     2.85         3.00          2.90      2.85   2.95
                 Gasoline -+                       2.63        2.70      2.85       2.75     2.65         2.75          2.95      2.90   2.80
  Energy




                 Natural Gas --                    3.37        3.65      3.75       3.50     3.85         3.90          4.00      3.90   4.25
                 AECO Natural Gas --               3.18        3.35      3.40       3.20     3.55         3.55          3.65      3.50   3.85
                 Uranium ++                         44          50        55         55       55           55            55        65     65
                 Hard Coking Coal Spot +*           …          170       185        190      195          195           195       190    190
                 Newcastle Thermal Coal-            91          95       105        100       95           95            95        85     85

Note: *London PM Fix $/oz., **LME $/lb ., +Molyb denum equivalent to moly oxide, FOB USA,
*+CFR China, 62% Fe, dry $/tonnes, +- $/b b l, -+ $/gal., -- $/mmb tu, ++pre-2011 Uranium price is Ux Consulting spot price
indicator post 2011 is NYMEX, +* Japan-Australia Spot, $/tonne FOB, -Japan CIF steam coal marker -Newcastle, $/tonne
                                                                                                                                                 22
2013 Global Outlook
Rates, FX and Commodities Research
14 December 2012 | TD Securities

FORECASTS
                                                                         SUMMARY G10 RATES FORECASTS
                                                    Spot                         2013                                  2014
                                                  Dec 14, 2012   Q1 F    Q2 F           Q3 F    Q4 F    Q1 F    Q2 F          Q3 F   Q4 F

                               Fed Funds Rate       0.25         0.25    0.25           0.25    0.25    0.25    0.25          0.25   0.25
               United States




                                3m                  0.06         0.15    0.15           0.20    0.20    0.20    0.30          0.40   0.40
                                2y                  0.23         0.30    0.30           0.30    0.40    0.40    0.45          0.45   0.50
                                5y                  0.64         0.65    0.70           0.80    1.00    1.15    1.35          1.45   1.65
                                10y                 1.69         1.90    2.00           2.10    2.30    2.50    2.70          2.80   3.00
                                30y                 2.89         3.00    3.10           3.30    3.50    3.75    3.95          4.05   4.10

                               Overnight Rate       1.00         1.00    1.00           1.00    1.50    1.50    1.50          1.75   2.00
                                3m                  0.96         0.95    0.95           1.40    1.60    1.50    1.65          1.90   1.95
               Canada




                                2y                  1.09         1.10    1.20           1.40    1.70    1.70    1.75          1.90   2.05
 DOLLAR BLOC




                                5y                  1.32         1.35    1.50           1.70    1.90    1.95    2.10          2.20   2.30
                                10y                 1.76         1.85    1.95           2.15    2.35    2.45    2.55          2.60   2.75
                                30y                 2.37         2.40    2.50           2.60    2.75    2.95    3.10          3.20   3.30

                               Cash Target Rate     3.00         3.00    2.75           2.75    2.75    2.75    3.00          3.25   3.50
                                3m                  2.96         3.30    3.00           3.00    3.05    3.10    3.25          3.50   3.75
               Australia




                                3y                  2.74         2.50    2.50           2.80    3.10    3.20    3.40          3.60   3.80
                                5y                  2.82         2.60    2.60           2.85    3.20    3.40    3.60          3.80   4.00
                                10y                 3.31         3.20    3.30           3.35    3.55    3.85    4.20          4.30   4.50

                               Cash Target Rate     2.50         2.50    2.75           3.00    3.25    3.50    3.75          4.00   4.00
               New Zealand




                                3m                  2.45         2.60    2.85           3.10    3.35    3.60    3.85          4.10   4.10
                                3y                  2.56         2.65    2.90           3.15    3.40    3.65    3.85          4.15   4.20
                                5y                  2.92         3.00    3.25           3.55    3.75    4.10    4.30          4.40   4.55
                                10y                 3.58         3.60    3.70           3.75    3.95    4.35    4.70          4.80   5.00

                               ECB Refi Rate        0.75         0.50    0.25           0.25    0.25    0.25    0.25          0.25   0.25
                                3m                  -0.06        -0.20   -0.15          -0.15   -0.10   -0.05   0.00          0.05   0.10
               Germany




                                2y                  -0.06        -0.10   -0.05          0.00    0.15    0.30    0.40          0.45   0.55
                                5y                  0.31         0.40    0.65           0.70    0.85    1.05    1.25          1.35   1.50
                                10y                 1.32         1.40    1.65           1.75    1.85    2.00    2.20          2.35   2.50
                                30y                 2.24         2.20    2.40           2.50    2.55    2.70    2.95          3.10   3.25

                               Bank Rate            0.50         0.50    0.50           0.50    0.50    0.50    0.75          1.00   1.25
 EUROPE




                                3m                  0.35         0.35    0.40           0.40    0.45    0.55    0.80          1.05   1.30
                                2y                  0.29         0.50    0.50           0.75    0.90    1.20    1.55          1.75   1.85
               UK




                                5y                  0.80         1.10    1.30           1.60    1.80    2.15    2.45          2.55   2.55
                                10y                 1.82         2.10    2.30           2.60    2.75    3.15    3.60          3.75   3.85
                                30y                 3.12         3.25    3.40           3.65    3.75    4.05    4.35          4.40   4.40

                               Deposit Rate         1.50         1.50    1.50           1.50    1.75    2.00    2.00          2.25   2.50
                                3m                  1.46         1.55    1.55           1.70    2.00    2.25    2.30          2.50   2.75
               Norway




                                3y                  1.51         1.55    1.80           2.10    2.30    2.60    2.90          3.10   3.30
                                5y                  1.56         1.70    2.30           2.70    2.90    3.20    3.50          3.65   3.80
                                9y                  1.97         2.25    2.75           3.15    3.35    3.50    3.70          3.90   4.05

                                                                                                                                            23
2013 Global Outlook
Rates, FX and Commodities Research
14 December 2012 | TD Securities

FORECASTS
                                                                      SUMMARY G10 FX FORECASTS
                                 Spot                                 2013                                      2014
                               Dec 14, 2012        Q1 F          Q2 F      Q3 F   Q4 F    Q1 F           Q2 F          Q3 F    Q4 F

USD/JPY                             83.5           82.0          82.0       84.0      85.0      86.0     86.0          88.0    88.0
EUR/USD                             1.31           1.22          1.20       1.22      1.25      1.26     1.26          1.28    1.28
GBP/USD                             1.61           1.61          1.58       1.58      1.62      1.64     1.64          1.71    1.71
USD/CHF                             0.93           1.02          1.04       1.07      1.04      1.03     1.03          1.02    1.02
USD/CAD                             0.98           1.03          1.02       1.00      0.98      0.98     0.98          0.97    0.97
AUD/USD                             1.06           1.04          1.03       1.03      1.03      1.02     1.00          0.98    0.98
NZD/USD                             0.84           0.82          0.83       0.83      0.83      0.82     0.80          0.78    0.78
EUR/NOK                             7.34           7.30          7.20       7.15      7.10      7.05     7.05          7.00    7.00
EUR/SEK                             8.73           8.45          8.30       8.20      8.10      8.05     8.05          8.02    8.02
DXY                                 80.0           85.0          86.0       85.2      83.6      83.2     83.2          82.1    82.1


                                                                   SUMMARY EMERGING MARKET FORECASTS
                                        Spot                             2013                          2014
                                     Dec 14, 2012         Q1 F      Q2 F      Q3 F Q4 F    Q1 F   Q2 F      Q3 F               Q4 F

                     Brazil                7.25           7.25      7.25       7.25     7.25      7.75    8.75         9.25    9.75
                     Mexico                4.50           4.50      4.50       4.50     4.50      4.50    4.75         5.00    5.00
                     India                 8.00           7.75      7.50       7.25     7.25      7.25    7.50         7.50    7.75
Cantral Bank Rates




                     Indonesia             5.75           5.75      5.75       5.75     6.00      6.25    6.50         6.50    6.75
                     Malaysia              3.00           3.00      3.00       3.00     3.25      3.50    3.50         3.75    4.00
                     Poland                4.25           3.75      3.75       3.75     3.75      3.75    4.00         4.25    4.25
                     Hungary               6.00           5.25      5.00       4.75     4.75      4.75    4.75         4.50    4.25
                     Romania               5.25           5.00      5.00       5.00     5.00      5.00    5.00         5.25    5.50
                     Russia                4.50           4.50      4.50       4.50     4.50      4.50    4.50         4.75    5.00
                     Turkey                5.75           5.50      5.50       5.50     5.50      5.50    5.75         5.75    6.00
                     South Africa          5.00           5.00      5.00       5.00     5.00      5.00    5.00         5.50    6.00

                     USD/BRL                2.07      2.10          2.09      2.05      2.05     2.02     2.02         1.99    1.98
                     USD/MXN               12.74      12.80         12.71     12.63     12.56    12.53    12.40        12.30   12.15
                     USD/INR               54.47      53.40         52.30     50.60     50.10    50.00    49.70        49.50   49.50
                     USD/IDR               9689       9752          9656      9620      9613     9575     9564         9560    9550
EM vs USD




                     USD/MYR                3.05      3.10          3.05      3.02      3.01     2.98     2.95         2.93    2.95
                     USD/PLN                3.13      3.32          3.33      3.26      3.25     3.21     3.20         3.15    3.10
                     USD/HUF                217        230           231       226       226      223      223          220     220
                     USD/RON                3.45      3.60          3.70      3.65      3.64     3.61     3.61         3.60    3.60
                     USD/RUB               30.64      30.90         31.38     31.09     30.80    30.58    30.57        30.00   29.70
                     USD/TRY                1.78      1.83          1.82      1.81      1.79     1.78     1.78         1.75    1.75
                     USD/ZAR                8.64      8.75          8.66      8.58      8.52     8.51     8.80         9.00    9.15

                     EUR/BRL                2.71       2.56          2.51      2.50     2.56      2.55    2.55          2.55    2.53
                     EUR/MXN               16.65      15.62         15.25     15.41    15.70     15.79   15.62         15.74   15.55
                     EUR/INR               71.05      65.15         62.76     61.73    62.63     63.00   62.62         63.36   63.36
                     EUR/IDR               12655      11897         11587     11736    12016     12065   12051         12237   12224
EM vs EUR




                     EUR/MYR                3.99       3.78          3.66      3.68     3.76      3.75    3.72          3.75    3.78
                     EUR/PLN                4.09       4.05          4.00      3.98     4.06      4.04    4.03          4.03    3.97
                     EUR/HUF                283        281           278       276      283       282     281           282     282
                     EUR/RON                4.50       4.39          4.44      4.45     4.55      4.55    4.55          4.61    4.61
                     EUR/RUB               40.04      37.70         37.66     37.93    38.50     38.53   38.52         38.40   38.02
                     EUR/TRY                2.33       2.23          2.18      2.21     2.24      2.24    2.24          2.24    2.24
                     EUR/ZAR               11.29      10.68         10.39     10.47    10.65     10.72   11.09         11.52   11.71
                                                                                                                                       24
2013 Global Outlook
Rates, FX and Commodities Research
14 December 2012 | TD Securities

                                                      GLOBAL RATES, FX AND COMMODITIES RESEARCH TEAM

                                                      New York
                                                      Eric Green                    Global Head of Research                                                       1 212 827 7156
                                                      Millan Mulraine               Director, US Rates Research & Strategy                                        1 212 827 7186
                                                      Cheng Chen                    US Strategist                                                                 1 212 827 7183
                                                      Gennadiy Goldberg US Strategist                                                                             1 212 827 7180


                                                      Toronto
                                                      Shaun Osborne                 Chief FX Strategist                                                           1 416 983 2629
                                                      David Tulk                    Chief Canada Macro Strategist                                                 1 416 983 0445
                                                      Bart Melek                    Head of Commodity Strategy                                                    1 416 983 9288
                                                      Andrew Kelvin                 Senior Fixed Income Strategist                                                1 416 983 7184
                                                      Mazen Issa                    Canada Macro Strategist                                                       1 416 983 0859
                                                      Greg T. Moore                 FX Strategist                                                                 1 416 982 7784
                                                      Mike Dragosits                Commodity Strategist                                                          1 416 983 8075


                                                      Calgary
                                                      David Bouckhout               Senior Commodity Strategist                                                   1 403 299 8649


                                                      London
                                                      Richard Kelly                 Head of European Research                                                   44 20 7786 8448
                                                      Jacqui Douglas                Senior Global Strategist                                                    44 20 7786 8439
                                                      Tim Davis                     Global Strategist                                                           44 20 7786 8441
                                                      Cristian Maggio               Senior Emerging Markets Strategist                                          44 20 7786 8436
                                                      Marcin Budkiewicz             Emerging Markets Strategist                                                 44 20 7786 8437
TD Rates, FX &
Commodities Research
                                                      Singapore
United States
                                                      Annette Beacher               Head of Asia-Pacific Research                                                   65 6500 8047
Canada
Europe                                                Alvin Pontoh                  Asia-Pac Macro Strategist                                                       65 6500 8047

United Kingdom
Australia
New Zealand
Emerging Markets
Foreign Exchange
Commodities



This report has been prepared solely for informational purposes only and is not intended to provide financial, legal, accounting or tax advice and should not be relied upon in that
regard. Information provided in this report is believed to be accurate and reliable, but we cannot guarantee it is accurate or complete or current at all times and no representation is
made in this regard. Conclusions and opinions do not guarantee any future event or performance. Neither The Toronto-Dominion Bank nor any of its subsidiaries or affiliates are
liable for any errors or omissions in the information or for any loss or damage suffered. Trade-mark of The Toronto-Dominion Bank. TD Securities Inc. is a licensed user.
“TD Securities” is a trade-mark of The Toronto-Dominion Bank and represents TD Securities Inc., TD Securities (USA) LLC, TD Securities Ltd. and certain investment banking activi-
ties of The Toronto-Dominion Bank and its subsidiaries. Copyright 2012 The Toronto-Dominion Bank. All rights reserved.

                                                                                                                                                                                           25

				
DOCUMENT INFO
Shared By:
Categories:
Stats:
views:112
posted:1/5/2013
language:
pages:25
Description: 2013 GLOBAL OUTLOOK