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					Global Research                                                                           Contact Information:
                                                                                          Steve Malyon, CFA                Sacha Tihanyi
                                                                                          Currency Strategist              Associate Currency Strategist

Foreign Exchange Update
              Daily
                                                                                          (416) 863-7719                   (416) 862-3154
                                                                                          Stephen_malyon@Scotiacapital.com Sacha_Tihanyi@Scotiacapital.com

                                                                                          Monday, December 8, 2008
Obama Builds a Bridge to a Monday Equity Rally
•    US job loss worst in 34 years, equity markets rejoice.                                  USDCAD Through Trend Line Support at 1.2530
•    President-elect Obama promises massive fiscal stimulus, but says economy to
     get worse before it gets better.
•    OPEC secretary general warns of “significant” output cut.
•    BIS warns that banks have become too reliant on central bank liquidity.
•    German industrial production falls 2.1% in October.
•    Japanese merchant sentiment falls to record low in November.
•    India boosts it fiscal stimulus measures following 100bp rate cut.

Americas
USDCAD (1.2500) • The USD and JPY are under significant pressure, losing 1-3%
against their G10 counterparts as global equities continue to climb on the back of
Friday’s afternoon rally in the United States. Scandinavian and commodity currencies
are leading the G10 higher, with CAD getting an added boost from a rise in crude oil
prices following a warning from OPEC’s secretary general that a consensus has
formed around “a significant reduction of production levels” at its December 17th
meeting. USDCAD is down 1½% and is suddenly looking vulnerable on the
charts after being rejected once again just above 1.3000 on Friday. Today’s move             Few BRICs Left in the Decoupling Wall
lower has also violated trend line support at 1.2530, which foreshadows a move
back to the low 1.20s if broader market trends persist in the days to come. • Presi-
dent-elect Obama said over the weekend that he will introduce an infra-
structure-focused fiscal stimulus plan “equal to the task” once he takes
office and that “we can’t worry, short term, about the deficit”. The hope that the US
will spend its – and the world’s – way out of recession appears to have overwhelmed
Obama’s warning that “things are going to get worse before they get better”.
Whether hope for a better future can continue to outweigh the reality of the rapidly
deteriorating present will likely dictate the tone in the foreign exchange market early
this week since there isn’t a lot of key data. There can be no doubt that the global
economy is rapidly deteriorating following the events of the past several days. Not
only was the 533K decline in US nonfarm payrolls in November the worst
since 1974, but the downward revision to September (to –403K) reveals that the
rapidly-worsening state of the US economy cannot be laid entirely at the feet of Leh-
man Brothers. And while much has been made of the surge in US mortgage refi-
nancing applications last week – a consequence of the decline in mortgage rates
that followed the Fed’s announcement it was establishing a $600bn facility to pur-
chase GSE debt and GSE-guaranteed MBS – you won’t hear us calling a bottom in                Japanese Front-Line Merchants’ Gloom Deepens
the US housing market as long as the economy is shedding half a million jobs a
month. Meanwhile, the final vestiges of resistance in the global economy are now
crumbling, with Canada’s 71K job loss in November the largest since 1982
and the latest OECD leading economic indicators showing downgrades to each
of the BRIC countries. Finally, there is still the small matter of dysfunctional credit
market conditions, with the Bank for International Settlements warning in its
latest quarterly report that central bank liquidity injections risked weakening “banks’
incentives to resume their intermediation function”. • Equity markets will remain in
focus today given the absence of key economic data (we see only Canadian hous-
ing starts). The early-week highlight will be the BoC interest rate decision to-
morrow. The consensus call (and that of Scotia Economics) is for rates to be cut by
50bps to 1.75%, but relatively aggressive central bank moves appear to be de
rigueur these days so we certainly can’t rule out a larger cut. While this represents a
potential risk for CAD, much will depend on broader trends, and whether the bear
market equity rally can endure through year end. SM

EURUSD (1.2870) • EURUSD is up 1.2% ahead of the North American open, moving
closer to the upper end of its range over the past month and a half. Industrial pro-

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Global FX Research                                                                                                                       Monday, December 08, 2008


  duction in Germany (the largest Eurozone economy) fell by more than expected at -2.1% m/m in                USDJPY’s test last Friday through the 92 level for the
  October, failing to rebound significantly following the horrible 3.3% contraction the previous month.       first time since late October, before an afternoon North
  However, ECB council member Ewald Nowotny has said that the central bank is waiting to see                  American equity rally helped to drive the currency back
  how events unfold before their next meeting in January, and does not want to be subject to any pres-        above 93. Japan’s current account surplus con-
  sure from expectations for further significant rate cuts, though the market is expecting at least 50bps     tracted for the eighth straight month on a y/y
  of easing in January with a significant bias for a further 75bp cut forming. ECB President Trichet          basis as exports fell by 9.4% m/m, their largest
  will speak in front of European Parliament today and markets will be watching his tone to see if it         amount in seven years. The continuing weak per-
  reveals any hint that the last 75bp cut was seen as a very unique move by the council, or whether           formance in exports is a particularly negative sign as
  more of the same could be in the pipeline. ST                                                               the world economy seems to be some distance yet
                                                                                                              away from bottoming, suggesting that this Japanese
  GBPUSD (1.4860) • Sterling is up 1.2%, somewhat of a middle of the pack performance against the             growth driver is not set to recover substantially for
  USD, though the pound is in the midst of attempting one of its largest gains in the past ten sessions.      some time. Meanwhile, the pessimism among Japa-
  November producer prices in the UK fell for the fourth consecutive month, by 0.7%, after                    nese merchants is deepening, with the Economy
  peaking in July, however core prices rose by 0.2%, the first positive read in four months. ST               Watchers Index falling to a record low of 21. Inter-
                                                                                                              estingly however, are comments from Masamitsu
  Asia / Oceania                                                                                              Sakurai, the head of Japan’s second largest business
  USDJPY (92.25) • The yen is the weakest performing of the majors, down by 0.4% against the USD,             lobby, which suggest that although currency volatility is
  as global equity markets surge ahead of the North American open, though it had been off by almost           difficult to manage, Japanese companies can still re-
  three times as much at one point before regaining some ground in the European session. This follows         main profitable at current yen levels as it makes the
                                                                                                              cost of imports much cheaper, echoing comments last
Key Pricing & Levels                                                                                          week by Fiscal Policy Minister Kaoru Yosano. ST
                       30 Day                 1 Day      1 Week 100 Day 200 Day Pivot 1st        Pivot 1st
                                  Spot
                       Hist Vol              Change      Change       MA      MA       Support Resistance     AUDUSD (0.6640) • AUD is leading the majors today,
USDCAD                   30.0     1.2513     -0.0188      0.0005     1.1265  1.0676      1.2311     1.2861    up 2.7% against the USD in one of its largest one day
EURUSD                   20.8     1.2851      0.0123      0.0262     1.3918  1.4780      1.2681     1.2969    moves in the past two weeks of trading. An interesting
GBPUSD                   23.4     1.4847      0.0102      0.0019     1.7345  1.8576      1.4566     1.5088    statistic from ANZ group has shown that job-vacancy
USDCHF                   18.4     1.2139     -0.0050      0.0067     1.1288  1.0772      1.1964     1.2283
                                                                                                              advertisements fell in November for the sev-
USDJPY                   21.5      93.27         0.44        0.05    103.03  103.55       91.95      94.25
                                                                                                              enth straight month, and the fall in newspaper ads
AUDUSD                   37.1     0.6625      0.0161      0.0239     0.7698  0.8564      0.6382     0.6780
                                                                                                              over the past two months have been the worst in the
USDMXN                   24.7      13.50    - 0.13      - 0.16        11.63   11.05       13.37      13.74
                                                                                                              30 years the data has been tracked. As Australia’s
DXY (USD index)          16.7      86.04    - 1.09      - 0.77        80.61   76.60       85.34      87.11
                                                                                                              employment outlook falls, so does the expected path
CRB Commodity                     208.60         0.00     -33.60     329.64  376.72         N/A         N/A
                                                                                                              for interest rates in the country as markets are currently
Gold                              769.63       13.18         3.15    815.48  866.50      748.43     784.14
                                                                                                              pricing at least another 75bps of easing in early Febru-
WT Crude (Nymex)                   43.03         2.22       -6.24     90.15  105.65       40.86      44.83
Nat Gas (Nymex)                      5.56       -0.18       -1.01       7.46    9.29        5.38       5.87
                                                                                                              ary of 2009. Perhaps some guidance will come from
BoC Noon Rate                     1.2969                CAD (close from Bloomberg not BoC):         1.2703
                                                                                                              RBA Governor Glenn Stevens’ speech early tomor-
                                                                                                              row morning to the Australian Business Economists
Pricing Source: Bloomberg                                                                        12/8/2008
                                                                                                              group, entitled “Interesting Times”. ST
Today's Releases & Speakers
                                                                                                              Commodities
Time (EST)   Country Release                                 Period     Cons       Last    Significance
                                                                                                              Oil ($42.50) • Oil is trading up somewhat from its low
     8:15 AM   CA    Housing Starts                           NOV        192.0K    211.8K      Low
                                                                                                              on Friday on the hopes that the public investment
     9:00 AM   EC    ECB's Trichet Speaks at European Parliament                              High
                                                                                                              pledged by Barak Obama over the weekend will help to
   11:00 AM    US    Fed's Kohn Speaks on Regulatory Panel in Washington                       Low
                                                                                                              stimulate demand for commodities. Additionally, it is
     6:50 PM   JN    Gross Domestic Product (QoQ)             3Q F      -0.20% -0.10% Medium
                                                                                                              being reported that Libya will be pushing for a substan-
     7:01 PM   UK    BRC November Retail Sales Monitor        NOV                            Medium
                                                                                                              tial reduction in oil output at OPEC’s next meeting
     7:01 PM   UK    RICS House Price Balance                 NOV      -83.00% -82.00% Medium
   12:00 AM    JN    Leading Index CI                        OCT P           85         89 Medium
                                                                                                              on December 17th. ST
     1:00 AM   JN    Machine Tool Orders (YoY)               NOV P           - - -40.00%       Low
     2:00 AM   GE    Current Account (EUR)                    OCT         14.0B     15.0B Medium              Gold ($768.58) • Gold is trading up today, reflecting
     4:00 AM   AU    Reserve Bank Governor Stevens Speaks in Sydney                           High            the significant USD weakness, however the metal is still
     4:30 AM   UK    Total Trade Balance (GBP/Mln)            OCT        -£4000    -£3863 Medium              down almost 8% in the past week after last Monday’s
     4:30 AM   UK    Industrial Production (YoY)              OCT       -3.20% -2.20% Medium                  large drop. We’ll need to see some sustained strength
     5:00 AM   GE    ZEW Survey (Econ. Sentiment)             DEC           -57        -54 Medium             at this level to really establish the new range, until then
                                                                                                              there is a bearish bias in the market. ST
Suggested Reading
The Dollar Powers Through the Turmoil, Joanna Slater, WSJ (December 6, 2008)
Obama to Focus on Stimulus Not Deficit, Daniel Dombey, FT (December 7, 2008)
To Euro or Not? UK Reluctant, Laurence Norman, WSJ (December 8, 2008)
Huge Treasury Sales Benefit from Yields, Deborah Lynn Blumberg, WSJ (December 8, 2008)
Banks Angry at Gordon Brown’s Call for Retail Rate Cut, Sam Coates & Catherine Boyle, UK Times (December 8, 2008)
As Other Sources of Funding Dry Up, Japanese Companies Turn to Banks, IHT (December 8, 2008)
Hedge Fund Withdrawals Accelerate, Joseph Checkler, WSJ (December 8, 2008)
Euro Dreams Fade for Zloty, Forint, Koruna on Slump, Ewa Krukowska, Bloomberg (December 8, 2008)


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Global FX Research                                                                                                                                       Monday, December 08, 2008



 FX Strategy Conference Call - The replay from our November 18th call is now available.

 To access the replay:
 Please go to the following website for the presentation and to access the call:
 http://www.scotiafx.com/conference/index.htm
 Directions for the replay (archived for 14 days):
 Replay call-in #: 416-863-7630
 Press 3 (Review meeting notes, recordings, etc.)
 Enter the month (ie: 11# for the month of November)
 Enter the day (ie: 18# for the 18th day)
 Enter meeting ID: 8710#
 Enter 1 to hear the recording
 Here are a few more commands that might help during the call: 1 Rewind; 2 Pause; 3 Fast Forward.




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