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8/12/2019 2014 Global Out Look
http://slidepdf.com/reader/full/2014-global-out-look 1/21
9 January 2014 | TD Securities
2014 Global OutlookRates, FX and Commodities Research
CONTENTS Market Outlook 2
View From the Top 3
Summary of Trades 4
United States 5
Canada 7
Europe 8
Australia / New Zealand 9
G10 Rates 10
Emerging Markets 11
Commodities 13Foreign Exchange 15
Regional Risks 17
Forecasts 18
Research Team 21
AREAS OF COVERAGE
United States
Canada
Europe
United Kingdom
Australia
New Zealand
Emerging Markets
Foreign Exchange
Commodities
G10 Rates
https://www.tdsresearch.com/currency-rates
2014 GLOBAL OUTLOOK
Financial markets enter 2014 with an outlook driven by a strengthening global economy,
reduced fiscal drag in the developed world, and the transition away from open-ended QE at
the world’s largest central bank. Tapering will continue to exert upward pressure on G7 term
premia ex-Japan, and tighter financial conditions present more unique challenges to EMs.
However, upward drift in rates will be constrained by a pervasive lack of inflation and ultra-loose policy rates, both of which set up well for risk assets more broadly. The US is well
positioned to outperform and relative to the rest of world, growth risks there are tilted to the
upside. This is USD-positive, especially against those economies more vulnerable to a
setback in growth, inflation, or both.
CORE VIEWS Bias Asset Allocation
G10 RatesLow inflation keeps policyaccommodative, but upward drift putspremium on curve plays, box trades.
Underweight
Risk Assets
Supported by stronger growth, lowinflation, policy accommodation butupside muted relative to outsizedgains in 2013.
Neutral/Overweight Equities
End of QE and stronger growthprospects favor the Anglo-Saxonbloc. US best positioned toaccommodate tighter financialconditions of tapering.
LONG SHORT
USD CAD
GBP JPY
EM Adjustment in rates and FX tocontinue. Selectively look for positivetotal returns.
Underweight vs USD.
Total return for bonds maystill be positive.
Commodities
Most industrial metals higher as
demand and risk appetite grow, golddown and energy facing downsideamid strong supply growth.
LONG SHORT
WTI Brent
Zn, Pd, Pb Au/Pt ratio
VolatilityLiquidity injections diminish, centralbanks happy to tolerate highervolatility as growth prospects rise.
Overweight
ForeignExchange
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9 January 2014 | TD Securities
2014 Global OutlookRates, FX and Commodities Research
CENTRAL BANK MONITOR
Inflation Central Bank Policy RateDeviation from target* (% points) Y/Y% As of Next Last Mtg Current Next Mtg 12m Fcast (bps∆ from spot)
Print Date Change % Date TD Mkt TD
Below Target Above Target
*Deviation from avg since 2007 for India, which does not have an inflation target.
+20 +0
NZ 1.4 Sep 21 Jan 12 Dec +0bp 2.50 30 Jan
-25bp 0.75 13 Feb +0Sweden 0.1 Nov 14 Jan 17 Dec
0.25 6 Feb
+0bp 1.00 22 Jan
+120 +75+0
+0bp 0.25 29 Jan
+0 +3 +0
0.10 22 Jan
+0bp
Canada 0.9 Nov 24 Jan 4 Dec -5 +0+0
US 1.2 Nov 16 Jan 18 Dec +8 +0+0
EZ 0.8 Dec 31 Jan 5 Dec +0bp
-3 +0
Australia 2.4 Nov 19 Jan 3 Dec +3 +50+0
Japan 1.5 Nov 30 Jan 20 Dec +0bp
27 Mar
+0bp 2.50 3 Feb
+0
UK 2.1 Nov 14 Jan 5 Dec
Norway 2.5 Nov 10 Jan 5 Dec
+8 +0
E m e
r g i n g M a r k e t s
China 3.0 Dec
+0bp 0.50 6 Feb +0
G 1 0
-20
+0 -5 +01.50
+0bp 3.50 31 Jan
3.00 21 Jan -20
15 Jan 8 Jan +0bp 2.50 5 Feb +0
Hungary 0.9 Nov 15 Jan 17 Dec -20bp
Mexico 3.6 Nov 9 Jan 6 Dec
+50
Russia 6.5 Dec 9 Jan 13 Dec +0bp -505.50 14 Feb +0 n.a.
Poland 0.6 Nov
+0
S Africa 5.3 Nov 22 Jan 21 Nov +0bp +1005.00 29 Jan +0 +111
Malaysia 2.9 Nov 22 Jan 7 Nov +0bp 3.00 29 Jan +0
Brazil 5.8 Nov 10 Jan 27 Nov +50bp +2510.00 15 Jan +25 +184
Turkey 7.4 Dec 3 Feb 17 Dec +0bp
India 11.2 Nov 13 Jan 18 Dec +0bp
4.50 21 Jan +0 n.a.
-327.75 28 Jan +0
Indonesia 8.4 Dec 2 Feb 12 Dec +0bp 7.50 9 Jan +0
+16 +25
+38
+11
-35 +25
+150
+50
-12 +50
-4 -2 0 2 4
Fcast for 2014Current
-100 0 100 200
THE TD VIEW
Trading Bias
Macro Outlook Rates FX Key Risks
US
The outlook has brightened, and we expect
economic momentum to pick up
meaningful ly in 2014 wi th GDP growth
averaging 3.0%.
Despite QE tapering, the upward
adjustment in rates should remain modest
given the Fed's lower for even longer
commitment.
Position for broad USD gains. A disorderly rise in yields caused by anoverly aggressive QE3 wind-down presents
a key risk to this constructive outlook.
Canada
A modest acceleration in real GDP growth
al lows core inflation to carve out a trough
but will remain below the 2.0% target.
Front-end to remain anchored with a dovish
Bank of Canada, as longer-term yields drift
higher in tandem with Treasuries.
P os it ion for CAD underperformance,
particularly against USD and GBP.
A false start in the US would undermine the
forecasted recovery in Canadian exports
and put more pressure on domestic
demand.
Europe
Euroz one recovery to s urpris e t o t he
upside. UK test will come mid-year, when
investment and exports must bear some
burden.
By mid-2014 the market may begin pricing
in more ECB hikes into mid-2015 to early-
2016 favoring steepeners in Eonia forwards.
GBP to outperform EUR on growth
divergence.
Disappointing US growth, market overreach
on UK rec overy , wide unc ert aint y on
Scandie CB prospects.
Asia-Pac
Australia growth drivers are rotating, not
shrinking; strong data supports NZ
tightening but optics suit March 2014.
OIS pricing for the RBA is flat , now l it tle
appetite for 2014 tightening; NZ 12mth OIS
at +100bp matches our base case.
Underperformance of AUD in US tapering
bouts indicates value in short AUD/NZD.
Aussie non-mining investment and
employment s tagnates ; RB NZ delay
worsens housing bubble; China reform
stalls growth.
Latam
Brazil's finances under more scrutiny, with
rating downgrades possible on bad data.Mexico growth recovery kicks in at last.
Brazil's BCB will soon end tightening and
1y-2y PRE-DI should be good receivers.Mexico's curve to mimic USTs.
MXN remains our top pick for fundamental
reasons in the long-term. BRL to s tayweak, but short-term correction
overstretched.
More rate hikes in Brazil. Swings in
sentiment on Brazil election expectations.Negat ive impact of QE tapering on MXN
assets.
EMEA
EU recovery should drive stronger growth,
but near-term focus is on Turk ish and S
African imbalances. Less extreme inflation.
Rates l ikely to continue bear flattening in
Turkey. More stable in S. Afr ica, Poland,
Hungary. Steepening in Russia.
CEE FX remains overvalued vs. EMFX
peers. Likely to correct on EUR weakness.
Also TRY and ZAR to stay weak.
Pol it ical r isks in Turkey, pension reform
failure in Poland. S. African and Turkish
rating downgrades. Rising global rates.
Asia
India's data to continue improving, whi le
Indonesia's ore exports ban may raise near-
term deficits. Inflation to decline.
Indiais at risk of monetary tightening. Front-
end ND-OIS to stay inverted. Indonesia's
NDS to slowly normalize.
INR and MYR to remain relatively resilient
in 2014, but subject to general trends. IDR
should regain market confidence in 2H.
Continued IDR depreciation and volatility.
Newly elec ted government unable to
continue reforms in India.
Energy
Cont inued s trengt h in non-OPEC oil
production will keep the global oil market
more than amply supplied through 2014.
Geopolitical risks have the ability to send
oil prices sharply higher.
Precious
metal
QE tapering should see real yields continue
to increase along wi th the USD, making
gold a less attractive option in 2014.
US economy slows markedly and tapering
ceases, pushing easy monetary pol icy
further.
Other
metals
Now that monetary policy focus has
diminished, industrial precious and base
metals should refocus on fundamental
drivers.
Chinese economy falters or certain supply
side shortfall expectations fail to
materialize.
G
1
0
E
M
C
O
M
M
O
D
I
T
Y
Short Brent/Long WTI (Dec'14).
Long PD.
Long Pb; Long Zn.
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9 January 2014 | TD Securities
2014 Global OutlookRates, FX and Commodities Research
Financial markets enter 2014 with an outlook driven by a
strengthening global economy, reduced fiscal drag in the
developed world, and the transition away from open-ended QE at
the world’s largest central bank. At the same time, key event risks
continue to fade. Budget politics in the US has receded sufficiently
that the risk of a fiscal meltdown is now diminished, and in Europe
few openly fret of a breakup of the Euro. None of this is to suggest
that downside risks have been eliminated. However, the
pervasive fear and doubt that governed much of the first five
years of this global recovery is giving way to more confidence in a
better outcome.
Tapering and US Ascendancy
G4 central bank balance sheets will continue to rise through 2014,
but the momentum toward ever greater dollar liquidity is now
rolling over. Volatility is set to creep higher. While tighter financial
market conditions will continue to be managed by aggressive
central bank forward guidance, risk assets look to be more
attractive relative to safe haven assets even if stronger growth
assumptions already look to be priced into global equity markets.
Tapering will continue to exert upward pressure on G7 term
premia and emerging markets will struggle more out of the gate to
manage through tighter financial conditions.
Developed Markets Lead Global GDP Higher
In 2014 we expect global GDP to accelerate from 2.9% to 3.5%, a
move driven primarily, though not exclusively, by stronger growth
among G7 countries. Fiscal drag in the US and other G7
countries ex-Japan is receding and the Eurozone economy will
continue to strengthen off the recession of last year. Tax hikes in
Japan point to a moderation in growth later this year, but as a
group, all G7 countries will be in firm expansionary territory for the
first time since 2010. Growth in China is poised to hold steady in
the 6.5% to 7.5% range.
As a bloc, emerging market growth will accelerate only modestly
as prospects there look less robust over the coming year. Fiscal
drag is set to increase, financial conditions continue to tighten on
the back of Fed tapering, commodity prices are trading sideways,
and no obvious growth catalyst has emerged to replace the debt
driven growth model of past cycles. All emerging markets
benefitted from QE, but some will suffer more than others as
tapering proceeds over 2014. Those emerging market economies
that have stronger external fundamentals such as Taiwan and
even Brazil, which is close to the end of its tightening cycle, are
better positioned than others such as Turkey. As a group, risingglobal PMIs and IFO confidence measures point to a rebound in
trade flows that will provide underlying support to emerging
market growth prospects in a post-tapering world.
The US, however, is in the best position to outperform in a tighter
financial regime. This argues for a stronger USD, especially
against those economies most vulnerable to a setback. In the
case of the BoJ, economic math simply does not stack up and
more accommodation is forthcoming as growth and inflation slow
over 2014. In the case of Europe, inflation risks predominate.
Europe will avoid deflation but weak credit metrics, deleveraging
bank balance sheets, and downside momentum in wage growth
suggest the risk of further accommodation relative to the Anglo-
Saxon central banks cannot be ignored.
Low Inflation Drives Ongoing Accommodation
Highly accommodative and innovative central banks succeeded
in dampening volatility and providing a cushion to financial assets
during an extended period of sub-optimal growth. The good news
is that growth metrics are now starting to turn and these higher
rates of growth reduce the vulnerability to exogenous shocks.
However, the policy accommodation that underpinned economic
growth has yet to feed into more inflation volatility or more realized
inflation. Despite stronger growth prospects the risk of further
disinflation remains uncomfortably high across the G7 given rates
of inflation that remain near multi decade lows.
Stronger growth gives central banks latitude to tiptoe away from
emergency policy settings that characterized the first years of this
recovery, but low inflation will keep them both vigilant and inclined
to “let it run” with record low policy rates. The developed world
continues to suffer from an excessively high stock of debt. It
means policy must be especially vigilant against disinflation or
outright deflation, which would simply magnify that debt burden in
real terms. Policy must, therefore, remain firmly directed towards
more growth and more inflation.
In the coming year low inflation risks will be the primary drivers ofpolicy. It will require some fancy footwork in terms of forward
guidance. The BoE will be challenged first, followed by the Fed,
and eventually the ECB. BoC forward guidance is conspicuously
vague and an asteroid impact is more likely than a hike by the
BoJ.
VIEW FROM THE TOP
Sources: TD Securities, Bloomberg
G4 Central Bank Balance Sheets
3
4
5
6
7
8
9
10
11
12
-1500
-1000
-500
0
500
1000
1500
2000
2500
3000
04 05 06 07 08 09 10 11 12 13 14E 15E
T o t al G4 B al an c e S h e e t s ( $ T r i l l i on )
A n n u a l B a l a n c e S h e e t C h a n g e ( $ B i l l i o n )
BOE ECB BoJ Fed Total G4 (RHS)
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9 January 2014 | TD Securities
2014 Global OutlookRates, FX and Commodities Research
SUMMARY OF TRADE RECOMMENDATIONS United States
Canada
● The long-term secular bear trend in the USD is looking long in the tooth as fundamental support for a stronger USD become more evident, and
with BoJ policy settings to remain loose or even loosen further our end-2014 forecast for USDJPY of 110 look very reasonable. However, the
short JPY trade already looks well-populated, so there is some risk in jumping in at this point. Given posit ioning and the gains in the USD seen
already, we prefer to get long via a USD call spread.
● Rising US yields and the BoC’s moderating policy outlook helped push the CAD to its lowest level versus the USD since 2008 in the past few
months. We think the trend towards a broadly softer CAD will extend into 2014. Buy USD/CAD at 1.0725, targeting a push to 1.13.
Foreign Exchange
Commodities
● Given improving economic growth prospects and a set course for the QE3 wind-down, a modest sell-off in Treasuries should be the main
theme in 2014. We are enticed into a short 2s5s30s butterfly trade. Our target is -50bp and a stop-loss of -95bp. The trade is motivated by ourexpectations for the long-end’s outperformance as it will benefit disproportionately from the benign inflationary backdrop and the prospect of
improving fiscal dynamics as well as having the front-end anchored by the Fed’s “lower for even longer” commitment.
● We also like buying the EDZ4Z6 butterfly to take advantage of the mispricing in expectations for fed funds hikes as we expect the Fed to
push the timing for the first rate hike further into the horizon. Enter at -40bp with a target of -100bp.
● A stronger global economy in 2014 is a particularly encouraging development for Canada. We recommend receiving in 1y/1y forwards. Entry
around 153bp with a target of 133bp and a stop-loss of 164bp. Hikes beginning in 2015Q3 would be consistent with a 1y/1y forward rate of
1.45%, but if the Bank shifts to an easing bias early this year we would not be surprised to see the 1-2 year area of the curve flatten
further—especially if inflation remains soft.
● We suspect by mid-2014, the market will be pricing in more ECB rate hike risk into end-2015 and early-2016 and recommend steepeners in
Eonia forwards. We recommend paying Eonia 1y1y and receiving Eonia 1y. Entry around 14bp with a target of 53bp and a stop-loss of 0bp.
● The normalization of the Eurozone with a lag, the attractive carry, and extreme levels make compression in spreads of bunds to US and
Swedish 10s likely a strong trade in 2014. We recommend buying US 10s and Swedish 10s and selling 10yr Bunds. Entry at 108bp/55bp with a
target at 50bp/2bp and a stop-loss at 127bp/68bp.
● For UK, we continue to short gilts and see a risk 2s5s may test as high as 160bp. We short the belly of 10s20s30s at 45bp (target 83bp) as
the area of the curve most in need of normalization. The market is moving to price in quarterly BoE hikes in 2015-2016, but that is slightly more
than we expect and is the maximum likely for 2015. We would take opportunities to buy Dec14 short sterling at 99.000 or Dec15 if it nears
98.000.
● The outlook for the Antipodean countries for 2014 is one of gently restoring the cash rate back to neutral after a year or more of a record low
cash rate setting.
● The ACBG curve is steeper than we expected as the financial markets are once again pricing in a material chance of another RBA cut to
2.25% by mid-year. We recommend taking advantage of current steepness in the ACGB curve to profit from a flatter 3s10s curve by year end
2014.
● With the UST 10yr expected to nudge higher, EMs should continue to be skewed towards weakness. In this process, however, velocity
remains as crucial as levels and shape of the curve. Orderly adjustments in UST yields will see orderly EM moves and prevalence of
idiosyncratic factors. Potentially even gains. But sharp UST adjustments will likely lead to synchronized EM selloffs. We continue to be focused
on EM RV trades.
● Based on the macroeconomic backdrop, valuations and likelihood of intervention from local authorities, we like being long a basket of
BRL/CLP, INR/PLN and IDR/KRW, equally weighted and rebased (Jan-2010=100). At the time of writing, however, the technical picture still
looks unfavorable, and there is nothing immediate suggesting an upside break from the downtrend. Therefore, to enter the trade, we wait for the
basket to test support at 75.0. We target 79.4 and place a stop loss at 73.4, implying a risk/reward ratio of 2.75.
● Supply constraints, likely deficits and rising industrial demand in China, recovering auto sector in the western world make zinc, platinum,
palladium and lead our favorite metals through 2015. Low benchmark policy rates for longer could boost base metals demand and limit dollar
upside, which is price positive for metals. Long Lead, Zinc and Palladium.
● We see significant downside risks to the oil market given that supply growth is expected to outpace demand growth over the next 12 months,
adding to the pre-existing surplus supply conditions. Short Brent/Long WTI.
Emerging Markets
Australia / New Zealand
Europe
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9 January 2014 | TD Securities
2014 Global OutlookRates, FX and Commodities Research
UNITED STATES
A Year of Transition
Momentum is building in the US economy and with it Fedconfidence that a transition to a stronger growth profile is finally
taking shape. With reduced fiscal drag, decreased policy
uncertainty, favorable domestic private sector fundamentals
bolstered by strengthening balance sheets, and a more
supportive global economic backdrop, we expect the pace of
GDP growth to accelerate sharply. In 2014, growth is set to rise
at a 3.0% annual rate, 1% above potential. That compares
favorably to the 1.3% average in the four quarters leading up to
mid-2013, and the 2.3% average in the previous four years.
Inflation momentum is slowly tilting higher, but we still expect thecoming year to be defined by continued weak inflationary
pressures. Prices rising well below the Fed’s 2% target works at
cross purposes to long term sustainable growth in an economy
that remains highly levered, and this will provide the Fed every
justification to maintain its ultra-accommodative monetary policy
stance. The market better understands that tapering is not
tightening, but this will remain a lingering challenge for the Fed’s
forward guidance over the coming year. The Fed has provided
every signal that it will continue to err on the side of caution, and
will tighten later rather than sooner. In this regard, we see three
board themes emerging this year:
The shift in the Fed’s emphasis from balance sheet
operations to forward guidance will be complete this year,
and as the form of stimulus is transformed, the timing for
rate hikes will be pushed further into the horizon.
The front-end of the curve is well-anchored, with the 5yr
and 7yr sectors becoming the new pivot point for the
Treasury curve. However, as the Fed accelerates its QE3
wind-down this year, we expect this sector to
underperform the rest of the curve.
A sustained period of above-potential GDP growth should
begin to temper the persistent disinflationary impulse in
the US economy. Nevertheless, with the level of domestic
economic slack still substantial, it will be some time before
inflation becomes a concern. However, we suggest
positioning for this very outcome this year.
Trade 1: Less tightening now, but more later
US monetary policy has been in transition for some time, as the
Fed’s modus operandi has slowly shifted away from the use of its
balance sheet to forward rate guidance as its preferred tool for
providing stimulus to the economy. This new policy paradigm has
been the defining contribution of Janet Yellen in her position as
Vice-Chair at the FRB. As she assumes her new role at the helm
of the FOMC this year, we expect ever greater emphasis to be
placed on communication strategy and the use of forward rateguidance. Moreover, armed with an optimal control policy
framework that argues for policy tightening further in the horizon,
we believe that the risks are tilted in favor of a later rather than an
earlier start for policy tightening.
Too much tightening priced into Dec 2015... Even at a time
when the Fed was signalling its tapering intentions, Yellen and
Bernanke both went to great lengths to disentangle balance sheet
policy from interest rate policy. In doing so the Fed has
succeeded in driving a wedge between these two policy
frameworks, and the dramatic flattening in the front-end of the
curve has been testament to the effectiveness of this initiative.
At the December FOMC meeting, the median fed funds rate
forecasts for 2015 and 2016 were lowered by 25bp, signalling a
shift in the timing for policy tightening further into the horizon.
Notwithstanding this, the market continues to price in 50bp to
75bp in tightening into December 2015. We believe this reflects a
greater level of tightening than the Fed might be willing to
deliver—even if they stick to the late-2015 timetable. And even
though our current forecast calls for 25bp in fed fund hikes by end
-2015, we believe that the risks are for the timing of the first hike
to drift into 2016.
… and too little into Dec 2016. A later start to policy tightening
will likely necessitate a more aggressive pace of stimulus
withdrawal when the Fed does embark on its rate hike cycle.
Sources: TD Securities, Bloomberg
Lower for Longer, But Faster Hikes Later
Trade Recommendation: Buy EDZ4Z6 butterfly to take
advantage of the mispricing in expectations for fed funds hikes.
Enter: -40bp
Target: -100bp
Carry/Roll: +14bp/quarter
Stop: -10bp
0.0
0.5
1.0
1.5
2.0
2.5
3.0
3.5
%
FFR Liftoff Eurodollar Pricing
TD Securities' Forecast
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9 January 2014 | TD Securities
2014 Global OutlookRates, FX and Commodities Research
Given this, as the market re-prices the timing on the first hike this
year, we see the potential for more tightening to be pushed into
2016, and see upside to the 125bp in hikes currently being pricedinto the market between the EDZ5 and EDZ6 Eurodollar
contracts. Our own expectation is for the Fed to deliver 175bp in
tightening.
The combination of these two legs offers some appeal, with a
positive roll-down of 14bp per quarter. The key risk to the trade is
a faster acceleration in economic growth momentum that forces a
quicker QE3 wind-down and an earlier start to stimulus withdrawal
by the Fed. This risk, however, is low.
Trade 2: Sell 2s5s30s butterfly
In this current environment of improving economic growth
prospects and a set course for the QE3 wind-down, we expect the
selloff in Treasuries to persist, though it is likely to remain modest.
The brunt of this selloff should be felt in the intermediate sector,
building on the underperformance in the lead-up to the tapering
announcement in December. The long-end of the curve, however,
should outperform on the down-trade as it will benefit
disproportionately from the benign inflationary backdrop and the
prospect of improving fiscal dynamics. And with the front-end of
the curve essentially anchored by the Fed’s “lower for even
longer” commitment, we see an opportunity in entering a short
2s5s30s butterfly trade.
Both legs of this trade offer some appeal. The potential for a
further steepening in the 2s5s curve from its current level of133bp is captured by our belief that any move by the Fed to
accelerate the current pace of tapering will be complemented with
enhanced low rate guidance. And while we see the risks being in
favor of a faster wind-down of QE versus a later end, the
incorporation of an inflation threshold or a lowering of the
unemployment threshold will be seen as an unequivocal signal by
the Fed of its intention to push the timing for rate hikes further into
the horizon. This will support our trade.
The back end of the trade also has some attraction. Given the
considerable amount of slack in the economy, we continue to see
little risk of an imminent upswing in core inflation pressures, even
with a sustained period of slack-absorbing growth. This augurs
well for the long-end of the curve, and over the course of this year
we see the potential for a flattening in this part of the curve. The
downside to this trade is the negative carry of 2.5bp/month.
Trade 3: Position for an eventual rise in mediumterm inflation expectations
The benign inflationary environment has provided a favorable
backdrop for the Fed’s accommodative policy stance. This theme
should remain intact this year. In fact, with the disinflationary
impulse persisting over the first few months of this year, the Fed
will continue to be faced with too little rather than too much
inflation. However, given the Fed’s willingness to tolerate a level
of inflation above the 2.0% target and its signal of a delay in the
start of policy tightening cycle for “a considerable time after the
asset purchase program ends and the economic recovery
strengthens”, we see some risks that the outlook for medium term
inflation expectations beginning to rise later this year even if ourexpectation for lower energy prices materializes.
To be clear, we continue to see a very low risk of a disorderly
eruption in inflation or inflation expectations over the next 2 to 3
years. Similarly, we have no reason to believe that the Fed’s
inflation fighting credentials will ever be questioned by the market,
suggesting that the back-end of the curve should remain well-
behaved. However, given the Fed’s unwavering commitment to
err on the side of caution on withdrawing policy stimulus, and their
expressed preference to tolerate some higher inflation before
acting, there is some risk that the Fed could be seen as falling
behind the inflation curve. This concern is likely to come into play
later this year, and we see some opportunity in scaling into this
potential trade.
Sources: TD Securities, Macrobond
Soft Inflation to Keep Rate Hikes at Bay
Trade Recommendation: Sell UST 2s5s30s butterfly asthe belly of the curve underperforms the wings.
Entry: -80bps
Target: -50bps
Carry/Roll: +2.5bps/month
Stop: -95bp
Trade suggestion: Look for the BE5s10s curve to flattenand BE2s5s to steepen as medium term inflationexpectations rise.
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9 January 2014 | TD Securities
2014 Global OutlookRates, FX and Commodities Research
Will a Rising Global Tide Lift Canada’s Boat?
As a new year dawns, the prospect of a stronger global economy
in 2014 is a particularly encouraging development for Canada.
After relying on domestic demand to lead many of its developed
market peers in the early stages of the recovery from the Great
Recession, the persistent weakness in net exports has steadily
eroded the performance of the Canadian economy. But with manyof the fundamental headwinds that had restrained the United
States set to fade in the year ahead, Canadian real GDP is
forecast to accelerate from an annual average growth rate trough
of 1.7% in 2013 (which matches the 2012 outturn) to 2.3% this
year and to 2.4% in 2015. This growth trajectory will help to
gradually absorb the recent accumulation of economic slack, and
allow underlying inflation to recover from a prolonged period of
disinflation.
Wary of an economic recovery that has been littered with false
dawns, the key uncertainty in the year ahead will be the Bank of
Canada’s tolerance for subdued inflation and its patience in
waiting for the nascent momentum in the global economy to filter
through the export channel. In the tail end of the Carney era, the
Bank balanced the competing priorities of below-target inflation
and elevated household debt with the intention of raising the
overnight rate at some distant point in the future. Under Governor
Poloz, the focus has steadily shifted to paying more attention to
the risk posed by the persistent weakness in inflation, while the
responsibility for curtailing household leverage and preserving
financial stability has been pushed back to the Department of
Finance and its suite of macroprudential measures.
While many other developed market economies face a similar
inflation challenge, the Bank is in a rare position with the option to
use the traditional policy tool of cutting its overnight rate to
respond. We readily acknowledge that absent a further and
significant deterioration in economic growth that would ensnare
headline and core inflation, the bar to an actual cut in the
overnight rate remains exceptionally high (we expect the first hike
in Q3 2015 with a year-end forecast for the overnight rate of
1.50%). There is, however, little incentive to sound hawkish even
in the event that 2014 ends up being stronger than expected.
Instead, the Bank is expected to remain as dovish as possible
through ‘open mouth’ operations which could extend as far as the
adoption of an outright easing bias in an upcoming Fixed
Announcement Date (FAD). While nowhere as explicit as the
Reserve Bank of Australia in commenting on currency
movements, a steady stream of dovish rhetoric by the Bank does
have the benefit of weakening the CAD to provide an additional
tailwind to net exports. Paired with our longstanding view of
outright USD strength, we expect to see further weakness in the
Canadian dollar with USD/CAD forecast to reach 1.11 by the end
of 2014.
In contrast to previous instances of global stress or economic
vulnerability, where despite the Bank holding onto a hawkish tone,
the market was more than happy to price in a cut in the overnight
rate. For instance, 2yr yields have periodically traded through the
overnight rate by as much as 20bp since late 2011—the response
to the dovish tilt taken through the end of 2013 has been far more
muted. And while the Bank is not expected to cut, we see value in
the front-end of the Canadian curve given the Bank’s growing
unhappiness with what we forecast to be a sustained period of
below-target inflation. The very front-end of the curve looks fairly
priced, with 1yr OIS rates near 1.00%. The 1-2 year area of the
curve looks too steep for our taste, however, and we like receiving
on 1y1y forwards. Hikes beginning in Q3 2015 would be
consistent with a 1y1y forward rate of 1.45%, but if the Bank shifts
to an easing bias early this year, we would not be surprised to see
the 1-2 year area of the curve flatten further—especially if inflation
remains soft.
The backdrop of a stronger global economy expected to flow
through to the Canadian economy in the year ahead received an
explicit acknowledgement by the Federal Reserve, which
surprised the market by tapering its asset purchase program in
December. In typical fashion, longer-dated Canadian government
yields were able to outperform the selloff in US Treasuries. We
expect this dynamic to continue in the year ahead as US yields
are forecast to grind higher, steepening the curve in both
countries. The outperformance is expected to be particularly
pronounced in 5s, the sector in the US most vulnerable to the
Fed’s tapering.
CANADA
Sources: TD Securities, Bank of Canada Forecast by MPR
The Elusive Return of Core Inflation
0.0
0.5
1.0
1.5
2.0
2.5
%
Oct-13 Jul-13
Apr-13 Jan-13
Actual
Recommendation: Receive in 1y1y ForwardsEntry: 149bp
Target: 130bp
Roll: 1.8bp/month
Stop: 164bp
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9 January 2014 | TD Securities
2014 Global OutlookRates, FX and Commodities Research
Normalcy Hedged by Overshoots
2013 marked the start of the normalization trades as Eurozone
fears abated and global macro expectations pulled out of a two
year slump. US and UK recoveries look likely to build while the
Chinese moderation is turning. If this proves true in 2014, then
the major remaining normalization will be Eurozone expectations
and data. Another major trend will be increased G10 central bank
independence and diversity, as local factors become more
important the more global trends improve, which should fuel UK
rate volatility around the ongoing steepening trend.
Eurozone: I’m Not Dead Yet
ECB easing remains a risk, but just as last year, is largely
focused on half-hearted measures that we think present more
opportunities to trade the inevitable market overreaction. The risk
of a refi rate cut would make receiving Eonia attractive, while a
negative deposit rate cut in a slow but ongoing disinflationary
environment would extend that attractiveness to Euribor.
However, if there is a major growth scare, it would be LTROs and
asset purchases, focussed on private sector assets, that would
be the likely tools. Meanwhile, the ECB’s stress tests and AQR
are likely to increase the differentiation in European credit. A
muddled toolbox that makes for muddled trading risks.
But the UK shows how quickly the market can move to price in a
normal central bank cycle, and as we warned at the time, the
ECB’s refi rate cut in November has been all but priced out of
forwards. It is highly inconceivable that the ECB raises rates in
2014, and even 2015 remains only a minor risk.
But we suspect that by mid-2014, the market will be pricing in
more ECB rate hike risk into end-2015 and early-2016 and
recommend steepeners in Eonia forwards. That same likelihood
of normalization, attractive carry, and extreme levels makes
compression in spreads of bunds to US and Swedish 10s a likely
strong trade for 2014.
UK: Tis But a Scratch
Unlike the Eurozone, UK normalization is well underway. We
continue to short gilts and see a risk 2s5s may test as high as
160bp. We short the belly of 10s20s30s at 45bp (target 83bp) asthe area of the curve most in need of normalization. The market is
moving to price in quarterly BoE hikes in 2015-2016, but that is
slightly more than we expect and is the maximum likely for 2015,
with the market itching to price risks into 2014. That is too much
and something the BoE will quash sooner rather than later.
We recommend buying Dec 14 short sterling with any hike priced
in and Dec 15 when the market prices more than 75-100bp of
hikes. The BoE will likely hit their 7% unemployment threshold by
mid-2014 – as early as February – which should mark the initial
peak in hawkish sentiment. At that point, there is a risk that H2
2014 sees weaker housing or a weaker than expected handoff to
business investment on top of the tail risk from the Scottish
independence vote. We see only a 1/3 chance that the BoE
lowers their unemployment rate threshold, but it is possible, which
would imply a limited risk of a 2014 hike. And even “normal
communication” implies limited risk of 2014 tightening as wages
would need a significant acceleration.
This is part hedge on the road to Castle Aaargh, part positioning
on market overreach. On any major disappointment to global
growth, we would also be quick to receive Sonia 1y1y and 1y2y
given the full reflation there. A similar hedge for the Eurozone,where peripheral spreads should continue to narrow as the
funding onus is shifted from sovereigns to markets, would be
shorting bonos versus BTPs, as the Spanish fiscal deficit around
6% leaves them more leveraged to the global recovery.
EUROPE
Sources: TD Securities, Bloomberg
Bund-UST Spread Points to EZ Macro Outperformance
Recommendation: Long US and Swedish 10s / Shortbunds as Eurozone normalizes with a lag.Entry: 108bp / 55bp
Target: 50bp / 2bp
Carry/Roll: +8.5bp/month / +4.5bp/month
Stop: 127bp / 68bp
Recommendation: Pay Eonia 1y1y, receive Eonia 1yEntry: 14bp
Target: 53bp
Carry/Roll: -1.4bp/monthStop: 0bp
Recommendation: Short belly of Gilt 2Q23/4H34/3Q44.Entry: 45bp
Target: 83bp
Carry/Roll: -3bp/month
Stop: 38bp
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9 January 2014 | TD Securities
2014 Global OutlookRates, FX and Commodities Research
Steep Now, Flatter Later
The outlook for the Antipodean countries for 2014 is one of
gently restoring the cash rate back to neutral after a year or
more of a record low cash rate settings of 2.5%. While weexpect the timing of the RBA and RBNZ tightening cycles to
differ, our expectation for 100bp of tightening for the RBNZ is
already well priced into the markets. In contrast, our 50bp of
tightening expected for the RBA, even if deep into 2014, is not
priced at all, presenting a stronger trading opportunity for 2014.
Above-trend growth for 2014
In Australia, the hand-wringing over the end of the mining
investment boom is overdone, as consumption and housing –
the traditional interest rate sensitive sectors - are already
taking up some of the growth slack. Our 3% GDP growth
forecast for 2014, along with only a modest pickup in core
inflation, allows for a steady 2.5% cash rate to persist until our
expected 50bp hike to 3.0% deep in 2014. In New Zealand,
GDP growth in late 2013 is already being driven by the
traditional domestic demand growth drivers of consumption
and investment, plus the earthquake reconstruction effort has
spread to the major cities. Subsequently, we can see GDP
reaching 3.5% in 2014, the highest annual growth rate in a
decade.
The Chinese GDP growth slowdown is not an issue for the
outlook for Antipodean exports. While Chinese GDP growth
has eased from 12% a few years ago to a likely 7.5% in 2014,
over that timeframe imports from Australia (iron ore, coal) have
increased three-fold, while imports from New Zealand (dairy)
have doubled, the latter aided by the 2009 free trade
agreement between China and New Zealand. Subsequently, a
further growth slowdown to 6-7% over the medium term in
China does not threaten exports as long as quality growth is
achieved and wealth is created.
It’s down to timing
We expect the RBNZ to start withdrawing stimulus in March,
for 100bp of overall tightening. In contrast, the RBA is likely to
pause for several months as the burgeoning recovery in
housing and consumption builds up more steam, before the
RBA starts preparing the markets for a withdrawal of
extraordinary stimulus in the final months of the year.
Defying our dollar bloc house view
Can the Australian and New Zealand yield curves defy the anti
-gravitational steepening global yields we expect for 2014?
Not in the first half. The ACBG curve is steeper than we
expected as financial markets are once again pricing in a
material chance of another RBA cut to 2.25% by mid-year,
while the longer end remains more or less unchanged. This
could see the curve remain at around 130bp to 140bp and is
our entry level for the flattening trade.
However, as 2014 unfolds, and Australia’s GDP growth gains
traction via consumption and housing, we expect the RBA to
not only drop its soft easing bias, but to begin signaling that the
economy no longer requires a record low cash rate. We
believe the first modest withdrawal can be in November, with a25bp hike, followed by a similar lift in December for a year-end
cash rate of 3.0%. For the RBNZ, there is more urgency to lift
the cash rate sooner rather than later, and we expect
tightening to start in March, for a year-end target of 3.5% given
the persistent housing bubble there. Indeed, the risks for the
RBNZ lie towards doing more tightening than our 100bp
forecast, not less.
Neutral cash rates are 4.25%-4.5% for both countries, so our
year-end targets remain accommodative.
Subsequently, we expect the Antipodean yield curves to flatten
over 2014, compared with our U.S. and Canadian colleagues
expecting further steepening.
AUSTRALIA / NEW ZEALAND
Sources: TD Securities, Bloomberg
Bear Flattener on the Way
Recommendation: ACGB: take advantage of currentcurve steepness to profit from a flatter 3s10s curve byyear end 2014.
Entry: +133bpTarget: +105bpCarry/Roll: -0.7bp/monthStop: +145bp
2.0
2.5
3.0
3.5
4.0
4.5
5.0
14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29
%
Maturities
3mth range
Today
TD end-2014 target
3y
5y
10y
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2014 Global OutlookRates, FX and Commodities Research
G10 RATES
Slowly Back to Normal
The mildly surprising taper decision in December set the stage
nicely for 2014. Even with bonds selling off sharply through the
second half of 2013, yields in most countries are at historically low
levels across the curve. With the global economy finding itself on
an increasingly more stable footing—we look for faster growth
across most of the G7—the broad trend in fixed income will be
towards higher yields. The gradual end to quantitative easing in
the US will reinforce the rise in yields, as the selloff in the
Treasury market will lift rates in other advanced economies.
QE Will End, But Low Policy Rates Here to Stay...The Fed will probably be relieved to see the end of QE, but they
have been adamant that the fed funds rate will need to remain
very low for a prolonged period of time. We expect the fed funds
rate to remain at its current level until the end of 2015 (consistent
with the Fed’s most recent Summary of Economic Projections),
and the balance of risks skewed toward even later tightening.
Persistently low policy rates will be a key theme in Europe and
Canada as well. The Eurozone recovery is still too fragile to
consider increasing rates in 2014—especially with the most
recent cut occurring just last November. In Canada, the outlook
for economic activity is fairly positive; the economy likely grew
faster than its potential rate in H2 2013, but inflation has been
stubbornly low. Thus far, the Bank of Canada has focused on
softer inflation and downplayed the stronger growth.
Furthermore, the BoC appears more comfortable with current
household leverage levels under Governor Poloz, and it is clear
that they are in no rush to tighten. We think the most likely
scenario is for the overnight rate to remain unchanged throughout
2014, but easing looks like an increasingly plausible risk scenario.
Accommodative policy across the globe points to broadly steeper
curves by the end of 2014.
…Except in the Antipodes
New Zealand and Australia will be the major outliers in 2014. We
expect to see the RBNZ tightening in the current quarter, with
hikes from the RBA expected in Q4 2014. Although markets
already incorporate hikes to a certain extent (in New Zealand, at
least), we nonetheless look for front-end bonds to sell off with the
curve flattening in those markets. This stands in stark contrast to
the Canadian outlook, where more dovish language from the
Bank of Canada should keep the front-end well bid. Look for the
Canadian front-end to outperform through 2014.
Big Shifts Coming for Germany and the UK
This trade should also work if replacing Australia with the UK.
While the Bank of England will probably not begin tightening in
2014, we nonetheless expect to see the BoE hike before the BoC.
UK rates have moved higher in response to the string of positive
economic surprises, but we do not think that the gilt market has
fully adjusted to the improving outlook. To that end, we look for
2yr and 5yr rates to finish the year 60-70bp higher with 10yr yields
rising by more than 80bp.
At first glance, our yield profile for the UK looks broadly similar toCanada, the US, and Germany. Policy rates will be unchanged
but yields will be higher across the curve, with 2s10s steepening.
That said, with the BoE expected to hike in early-2015 the
increase in yields will likely be larger in the UK than in North
America. German fixed income should also stand out as a notable
laggard. Bund-Treasury spreads are currently at multi-year wides,
and we think markets have priced in too much bad news.
We look for 10s to be the weakest performers on the curve in the
UK, which is also the case in Canada. However, in the US we
have seen 5s10s flatten considerably following the taperingdecision, and as the US unwinds its asset purchase program we
expect to see 5s10s flatten further on the Treasury curve. We like
playing 5s10s steepeners in the UK versus flatteners in the US.
Sources: TD Securities, Bloomberg
Expected Change in 10yr Yields in 2014
Recommendation: Buy CAN F17s versus ACGB F17s.
Entry: -161bp
Target: -210bp
Carry/Roll: 0bp/month
Stop: -140bp
Recommendation: US-UK Box Trade: US 5s10s Flattener(1.375% July 18s versus 2.5% Aug 23s) versus UK 5s10sSteepener (1Q18s versus 2Q23s).
Entry: -21bp
Target: 5bp
Carry/Roll: -1.0bp/monthStop: -29bp
0
25
50
75
100
Australia NZ Canada US Germany UK Norway
B a s i s P o i n t s
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2014 Global OutlookRates, FX and Commodities Research
Continue to Brace for High Volatility
With the UST 10yr yield expected to nudge to 3.35% by the end
of 2014 from just around 3.00% now, we expect most of the US
rates adjustment to be behind us, but EMs should continue to be
skewed toward weakness. Recent adjustments have been lessabrupt than the May-August 2013 move, especially given the
limited reaction to the Fed’s December 18 decision to begin
tapering. But with a 100bp rise since May, 10yr rates may still
have a long way to go before stabilizing, or be prone to overshoot
as US data improves and Fed Treasury buying dissipates. Market
expectations, therefore, remain crucial and will continue to adjust
in line with the guidance provided by the Fed and the US
macroeconomic picture.
In this process, velocity remains as crucial as levels and shape of
the curve. If the upside adjustment is orderly, we will see orderly
EM moves driven by idiosyncratic EM factors. Potentially even
gains on selective assets. But sharp UST adjustments will likely
lead to synchronized EM selloffs.
Accordingly, we continue to hold onto our view that the
consequences of tapering (the upside adjustment in the long-end
of the UST curve, in particular) remains negative for emerging
markets.
Positive correlations across EM assets
Some investors believe that 2014 will be a year of shifting asset
allocations out of EMs. Those who believe that the fixed income
space may continue to suffer the consequences of rising UST
yields may also be tempted to believe that EM equities will take
advantage. This is usually true for DMs, where equity and rate
performances typically exhibit a negative correlation. In the EM
universe, however, correlations tend to be positive for longer
periods of time. Thus, more often than not, what tends to be
negative for rates and bonds, turns out being negative for equities
and FX, as well.
This conclusion is not definitive. Nor does it apply to an
undetermined time horizon. In particular, it does not factor in the
structural change in the way markets treat EMs. The main caveat
is still that the market is likely to react and adjust to two primary
DM factors: UST rates and EUR/USD. When the adjustment is
complete, we can consider the conditions to be in place for EM
assets to rally again. Yet, with USTs grinding higher and the dollar
possibly regaining strength, there is little hope that EM rates and
FX can escape the correction. This will not be undifferentiated,
though, as different curves have had extremely varied
performances last year. Likewise, EMFX is a mixed bag of
weakness and strength. Some is fundamentally justified, other is
not. And again, a few central banks tightened monetary policy to
respond to market volatility and elevated inflation. These Banks
have an advantage as they will not be forced into further rate
tightening to the same extent as those who are behind the curve.
There is still value in select EMs
We reiterate our main message. In the absence of substantial
moves in US Treasury rates, the underlying bias for EM curves is
mostly favourable. In countries such as Brazil and Indonesia,
where the immediate tightening cycle is almost complete, double-
digit rates are an attractive proposition. In India there is some
upside risk due to inflation. We think a currency selloff there would
increase the chances of monetary tightening going forward. But
on balance, Indian rates are attractive vis-à-vis other curves.
These three markets may stage positive performances during the
course of 2014 relative to other EMs. In particular, their currencies
already exhibit attractive carry trades that make short positions
expensive to hold for long. Further upside moves in the forwards
would add even more to their attractiveness.
Black swans
In Turkey, rates continue to grind higher as external conditions
have melded into a domestic political crisis, the outcome of whichis unpredictable. Despite the adjustment that has already taken
place, rates remain too low to withstand the double impact of
external and domestic pressures. The Turkish situation is the one
EMERGING MARKETS
Sources: TD Securities, Bloomberg
EM Asset Classes Show Positive Correlation
Recommendation: Long an equally-weighted basket ofthree rebased (Jan-2010=100) crosses (BRL/CLP, INR/PLNand IDR/KRW)
Entry: 75.0
Target: 79.4
Stop: 73.4
Risk/reward: 2.75
-1.0
-0.5
0.0
0.5
1.0
01/04 01/06 01/08 01/10 01/12 01/14
C o r r e l a t i o n C o e f f i c i e n t
Recession
EMFX vs. GBI
MSCI vs. GBI
UST 10yr vs. GBI
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2014 Global OutlookRates, FX and Commodities Research
case where assets would exhibit poor returns in any market
environment. This perfect storm requires rates to move higher
before they can reach a new equilibrium. We have long sustainedthat this can be reached with average CBRT funding cost
somewhere between 9% and 10%, which implies that the
overnight lending rate should be raised to that region as well. The
most recent developments and the CBRT’s inertia have likely
lifted this threshold into the double digits, adding upside risk to
USD/TRY.
The rand also continues to be a major vent of market pessimism
over investors’ concerns on further potential downgrades and
macroeconomic imbalances.
Trade a basket of select EM crosses
In conclusion, UST rates and EUR/USD are not the only drivers of
EM asset performance, but they represent the strongest catalysts
when moves are sharp and unexpected. Capital flows to EMs are
likely to stabilize after the initial outflow, but with a $73B withdrawn
by investors in May-September 2013 (IIF data), we suspect there
could be more in store in the first half of 2014.
Many EMs allowed credit to expand sizeably through the
extended subpar DM growth in recent years and will now need
more time to absorb the realities of lower for longer external
demand.
For these reasons, we continue to pursue a relative value strategy
among EM currencies. Based on the macroeconomic backdrop,
valuations and likelihood of intervention from local authorities, we
like being long a basket of BRL/CLP, INR/PLN and IDR/KRW,
equally weighted and rebased (Jan-2010 = 100). At the time of
writing, however, the technical picture still looks unfavourable, and
there is nothing immediate suggesting an upside break from the
downtrend. Therefore, to enter the trade, we wait for the basket to
test support at 75.0. We target 79.4 and place a stop loss at 73.4,
implying a risk/reward ratio of 2.75.
Sources: TD Securities, Bloomberg
Wait for Favorable Technicals to Long EMFX Basket
70
75
80
85
90
95
100
105
110
115
2010 2011 2012 2013 2014
EMFX long-short basket
SMAVG (50)
SMAVG (200)
0.0%(110.5970)
23.6%(104.7779)
38.2%(101.1780)
50.0%(98.2684)
61.8%(95.3589)
76.4%(91.7589)
100.0%(85.9398)
123.6%(80.1207)
138.2%(76.5208)
150.0%(73.6112)
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2014 Global OutlookRates, FX and Commodities Research
Fundamentals Back in Driver’s Seat
At first glance, the recent macroeconomic trends suggest that
taking indiscriminate broad long positions in base metals, PGMs
and oil going into 2014 is a great idea, with the same signals
suggesting that positioning short in gold and silver should also be
a money maker. But this is unlikely to be the case as markets
become less correlated in the aftermath of the Fed’s decision to
taper its QE asset purchasing program. Investors will need to be
very mindful of the physical fundamentals at different times of the
year, in order to make the right commodity market calls in the next
twelve months.
In sharp contrast to the dominant commodity market dynamics
found in 2013, where changing timelines surrounding the Fed’s
QE taper determined the direction of the entire base metals,
energy and precious metals complexes, the commodity market
movements in the coming year should increasingly be driven by
supply/demand fundamentals.
Supply constraints, likely deficits and rising industrial demand in
China, (which may include more intensive use of galvanization in
the nation’s automotive sector), recovering auto sector in Europe
and increasingly but more modestly in the western world make
zinc, platinum, palladium and lead our favorite metals through2015. While copper is expected to be above the current levels in
early-2014 following the recent rally, we do see downside risk in
the latter part of 2014 if supply starts outpacing demand as
projected. In sharp contrast and despite an improved demand
environment, large inventories and projected surpluses for the
next two years prompt us not to get overly enthusiastic about
entering long aluminum and nickel positions.
Notwithstanding a steadily improving global consumption profile
this year, the price of oil is not expected to show a lot of strength
due to a sharp rise in US production, more crude availability fromIran and Iraq and less geopolitical risk in the Middle East.
Meanwhile, gold and silver are likely to still suffer in the first part of
2014, but could start to bounce from the lows, despite rising
Treasury yields, amid strong Asian demand and potential inflation
concerns later in the year.
China, US and Even Europe Fueling Metal andEnergy Consumption Next Year
Base metals have very badly underperformed other risk assets
like US and global equities last year, but this year looks set to
place base metals in a better light. With the very robust
performance of the copper market in the final days of 2013 and in
the first hours of the New Year, and a rebound in most LME
metals, we are off to a good start.
Our relative optimism is driven by signs that the Chinese, US, and
some emerging market economies are picking up, with
construction and auto sectors posting very respectable growth
statistics. After three years of being a negative influence on
demand for metals like copper, even Europe looks set to add to
global consumption in the coming year, which should help propel
average base metals demand some 5.5% y/y.
On the supply side, a poor base metals price environment, trouble
on the labor front in Chile and South Africa, the dismal state of
equity valuations for virtually all miners, and the resulting cost
cutting maneuvers, which typically include high-grading, should
see production levels disappoint. Mining firms are preserving
capital, cutting costs, excavating higher grades and find it difficult
to secure necessary capital to develop new and expand
brownfield projects. This likely mean less metal availability than
many expect, which adds to market tightness generated by
stronger demand.
Given the expected relatively better demand environment and the
likely disappointments on the production side of the global supply-
demand base metals equation, TD Securities expects prices to be
higher from current levels in 2013. But, not all metals are created
COMMODITIES
Sources: TD Securities, Wood Mac
China Biggest Incremental Consumer
Recommendation: Long Zinc
Entry: $2,030/tonne
Target: $2,400/tonneStop: $1,863/tonne
Recommendation: Long Lead
Entry: $2,139/tonne
Target: $2,380/tonne
Stop: $2,057/tonne
Recommendation: Long Palladium
Entry: $736.80/oz
Target: $930/oz
Stop: $692/oz
36%
38%
40%
42%
44%
46%
48%
50%
0%
25%
50%
75%
100%
125%
150%
175%
200%
225%
Aluminum Copper Nickel Zinc Lead
2008-2012 China Demand Growth, % of Total
2012 China Demand, % of Total (rhs)
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2014 Global OutlookRates, FX and Commodities Research
equal and will have differing performances throughout the year—
supply/demand fundamentals the differentiator.
Low benchmark policy rates for longer could boost base metalsdemand and limit dollar upside, which is price positive for metals.
Besides the obvious demand support, low short term rates for
longer should help base metals forward bets and various carry
trades to stay viable as funding costs on the short end of the
deferred price curve are unlikely to go up sharply.
Downside Risks Abound for Oil
After taking a backseat to demand-side dynamics in recent years,
oil markets are once again going to see price action dominated by
supply-side dynamics in 2014. This, in our view, presents
significant downside risks to the oil market given that supply
growth is expected to outpace demand growth over the next 12
months, adding to the pre-existing surplus supply conditions. For
2014, we are forecasting global oil demand growth of 1.2MMbbls/
day and non-OPEC supply growth to come in at 1.5MMbbls/day.
With non-OPEC supply growth more than covering the expected
growth in demand, something will have to give, and that will come
in the form of a decrease in the call-on OPEC supply.
Timing is everything, and a reduction in the call-on OPEC couldn’t
come at a worse time with output from such OPEC producers as
Iran, Iraq and Libya expected to increase in 2014. We are already
seeing evidence of increasing competition amongst OPEC
producers, with discounts being offered to East of Suez buyers in
order to gain market share. In this environment refineries and
consumers should benefit with potentially lower feedstock costs
for refiners and better pricing at the pump for consumers.
Ongoing surplus conditions should weigh on the oil complex in
2014, with Brent feeling more of the downside pressure as
returning OPEC supply fights for market share in a market already
well supplied. While the downside risks look to be dominant, we
are not forecasting an oil price collapse, as many supply-side
dynamics stand in the way of a rout. A relatively high marginal
cost of production and geopolitical risk are two supply-side factors
that should protect against a significant move lower.
Nevertheless, we expect WTI and Brent to average $3/bbl and $6/
bbl lower, respectively, this year versus last year.
Conversely, recent strength in natgas is likely to have a ripple
effect on prices in 2014, generating better netbacks as the
fundamental balance tightens. Despite near-record high US
domestic production, the recent weather-driven demand has
caused gas-in-storage to decline rapidly, which will have a lasting
impact if demand continues to stay elevated. With so much focus
on oil production growth in North America, investment into gas
has waned, making it more difficult for the supply-side to respond
to the tightening balance. While we are not expecting a significant
jump higher, we do see NYMEX natgas averaging $4/MMBtu in
2014 versus $3.73/MMBtu in 2013.
Zero-Rate Policy to Serve as Partial Gold Offset toQE
Now that the FOMC has started to taper its QE asset purchasingprogram and at the same time it will keep short term rates low for
longer, we feel increasingly comfortable to say that the
environment for gold is likely to get worse before it gets better.
However, since much of the QE Taper impact has been already
priced in, only a modest additional decline is expected as long-
dated Treasury yields migrate higher. Higher real yields along with
strong US equity markets and a firm US dollar should continue to
increase the opportunity cost of holding zero-yielding assets such
as gold. This will likely continue to prompt investors to reduce their
gold ETF holdings in the early part of the year. With coin and
bullion demand also moderating, the positive impact of strongChinese physical demand is likely to be offset.
However, once the spec and physical investment market stabilize
in the aftermath of the end to the Fed’s asset purchase program,
the outlook for the yellow metal should improve in the latter half of
2014. Under the market’s consideration of the Fed’s near-zero
policy rates for longer (possibly stretching well into 2016), gold
should move slowly higher amid strong Asian demand, and
renewed investment demand in reaction to higher price
expectations—we expect core inflation to increase along with the
US economic recovery. The US Fed is likely to keep rates lower
even as headline inflation moves higher and the economy firms,
which is likely to keep real yields subdued, giving a boost to
investment demand.
Sources: TD Securities, IEA
Less Reliance on OPEC Thanks to Non-OPEC Growth
Recommendation: Short Brent/Long WTI (Dec 2014)
Entry: $14.65/bbl
Target: $7/bblStop: $20/bbl
-3.0
-2.0
-1.0
0.0
1.0
2.0
3.0
2002 2004 2006 2008 2010 2012 2014
Y / Y C h a n g e ( M M b b l s / d a y )
Non-OPEC Supply
Call-On OPEC
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9 January 2014 | TD Securities
2014 Global OutlookRates, FX and Commodities Research
2014—Policy Divergence Drives FX
As was the case in 2013, we feel the long-term secular bear trend
in the USD is looking long in the tooth. Now, however, the
reversal process is starting to look more obvious. Fundamental
support for a stronger USD should become even more evident as
we progress through the coming year. Positive US growth
momentum, improving structural imbalances, the Fed’s first steps
away from extreme policy accommodation and rising long-term
yields augur positively for the USD overall in 2014.
Buy USDJPY
Central banks are in motion again and 2014 should see some
more obvious policy divergences open up within the G10 FX
space, driving movement in the majors. Fed tapering and rising
longer-term yields in the US are a core expectation for 2014.
In contrast, we expect BoJ policy settings to remain loose or even
loosen further. The Japanese government’s reflation efforts have
met some successes but headwinds remain and theimplementation of the proposed sales tax hike in April might
represent a stumbling block for the economy, requiring more
assistance via balance sheet expansion from the central bank.
Based on TD forecasts for US 10yr yields and consensus
expectations for 10yr JGB yields, the nominal spread will widen
an additional 25bp from current levels (225bp) through early-
2015. Negative, real long-term yields in Japan (-0.50% for 10yr
notes) as a consequence of the pick up in domestic inflation leave
US long-term yields looking more attractive in real terms (+1.80%
for 10yr Treasury notes).
The spread outlook makes our end-2014 forecast for USD/JPY of
110 look very reasonable. A simple regression model of the
exchange rate versus 10yr US-Japan spreads (utilizing the above
-mentioned forecasts and expectations) suggests a year-end
2014 spot rate of 107 (with a 10 yen standard deviation band
around that point). The model has an R2 of 0.68 using data since
2012.
The short JPY trade already looks well-populated, however, so
there is some risk in jumping in at this point. The latest snapshot
of positioning from the IMM CFTC data suggests that speculativeaccounts are already aggressively short JPY, leaving the JPY
vulnerable to a squeeze in the event of an adverse shock which
drives investors back to safe havens. Given that developed
market fundamentals are improving and financial risks are
reduced, tail risks look significantly skinnier now than last year.
Reflation and the potential for more BoJ stimulus should be
supportive for Japanese equities and the consensus call for a
(roughly) 10% rise in the Nikkei 225 this year (after a banner 56%
gain in 2013) should add additional support to the USD/JPY rally.
Any setback for USD/JPY in early-2014 should be temporary and
provide better USD buying opportunities, we feel.
Technically, we think the USD/JPY bull trend has a lot of positive
momentum behind it. November’s close above the JPY100 level
was a bullish medium/long-term signal and suggests that the main
directional risk is geared to the upside over the coming year.
That will not prevent a correction in the short-term, if there is any
sort of squeeze on short JPY positions but it should mean that
USD weakness is limited in scale and short-lived.
USD/JPY spent much of the second-half of 2013 consolidating
the 77/103 rally seen from late 2012 onwards. The breakout from
the neat consolidation triangle that followed the initial rally impliesthat the market is poised for a repeat of the 26 big figure rally from
the breakout point just above 99, putting 125 on the radar within
the next 12 months.
The rally in spot through the latter part of 2013 has put USD/JPY
well on the way to our 2014 target already, and to some extent,
the market has already discounted some of the spread widening
that we expect to support the USD in the months ahead. Still,
technical factors suggest that if there is a risk to the forecast, it lies
to the upside, especially considering the bullish alignment of
medium-term signals. Our formal end-2014 target is currently 110but we think an overshoot into the mid-teens could be seen this
year. Given positioning and the gains in the USD seen already,
we prefer to get long via a USD call spread.
FOREIGN EXCHANGE
Sources: TD Securities, Macrobond
Wider Spread to Underpin USD/JPY Rise
Recommendation: Long USD/JPY via options
Entry: Buy a 9m JPY110-115 USD Call Spread
Premium: 0.9% of USD notional
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2014 Global OutlookRates, FX and Commodities Research
Buy USD/CAD
Rising US yields and the BoC’s moderating policy outlook helped
push the CAD to its lowest level versus the USD since 2008 in the
past few months. We think the trend toward a broadly softer CAD
will extend into 2014.
The Canadian economy remains in relatively slow growth mode,
helping keep inflation pinned back against the lower end of the
BoC’s comfort zone. This has ensured that any potential policytightening in Canada has been pushed even further into the
future, effectively putting the BoC policy outlook in neutral.
Moreover, if inflation continues to moderate, there is a real risk
that the BoC adopts an outright easing bias, possibly driving the
CAD lower more quickly than we are currently forecasting. The
BoC remains, after all, an inflation-targeting central bank and,
under Governor Poloz, the primacy of the inflation objective over
other considerations (such as household leverage) has been
made very clear.
The biggest risk to our bearish CAD view probably lies here. The
CAD has priced in a neutral-leaning BoC but soft or softer inflation
data is needed to help sustain the bear track through 2014. If, on
the other hand, Canadian inflation data picks up in early 2014 the
accumulation of CAD shorts already in place will be squeezed.
A low growth/low inflation macro-economic backdrop and the
contrasting monetary policy directions at the BoC and Fed are
sufficient enough reasons to be somewhat cautious on the
outlook for the CAD. But there are other issues at play which
suggest a lower CAD is warranted.
Canada certainly remains an attractive investment destination as
an AAA sovereign credit. But central bank reserve accumulation
has slowed and, as the US economy reflects some of the best
structural fundamentals in a number of years and the Fed starts
the slow process of normalizing monetary policy, diversification
flows away from US Treasuries may decline.
That could accentuate the evident trend towards weaker foreign
investment inflows into Canadian assets—which became more
pronounced in 2013 as developing market central bank reserve
accumulation slowed—leaving Canada struggling just a little more
obviously to fund what will remain a fairly significant current
account deficit in 2014 (around 3%/GDP for the year, we expect).
Canada’s trade position remains relatively weak and while a
rebound in US growth may help the Canadian export sector, it is
clear that a loss of competiveness will make it hard for Canadian
exports to regain lost ground in the global trade space quickly. A
somewhat weaker currency will help boost exports and facilitate
the long-anticipated rotation away from domestic consumption as
a source of support for growth.
Fed tapering will tighten global USD liquidity, boosting the USD,
and may prompt some headwinds for commodity prices as QE
liquidity, which has spilled over into other assets, becomes less
abundant. Increasing supply (US and Middle East) plus reducedgeopolitical risks suggest that our forecast of slight declines for
WTI in 2014 are perhaps conservative. Lower crude (and
commodity prices overall) will be a further drag on the CAD via a
further weakening in Canada’s terms of trade.
From a positioning perspective, the markets have embraced the
short CAD trade already so the risk of a shakeout is high. We
think near-term corrections will be limited, however, and look to
buy into modest USD weakness.
Bullish medium and long-term trend momentum and USD-positive
seasonal factors through Q1 of the calendar year suggest that thescope for USD/CAD weakness should remain limited in the next
few weeks at least. We target a rise to 1.11 by the end of the year
formally but think the risk of an overshoot is high.
Our bullish USD/bearish JPY and CAD are not exactly off
consensus—though there is hardly a universally bullish view on
the outlook for the USD either. Still, we are not uncomfortable to
be running with a sizeable pack on our core views as momentum
counted for a lot last year (neither USD/CAD nor USD/JPY traded
below their January 2013 lows over the rest of the year) and will
count for a lot in 2014 again. If our bullish USD/JPY and bullishUSD/CAD views are correct, an alternative, all-embracing
strategy would be to short CAD/JPY vol.
Sources: TD Securities, Macrobond
Inflation Flirts With Lower End of BoC Band
Recommendation: Buy USD/CAD
Entry: 1.0725
Target: 1.13
Stop: 1.05
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2014 Global OutlookRates, FX and Commodities Research
REGIONAL RISKS
● A false start in the US would undermine the forecastedrecovery in Canadian exports and put more pressure ondomestic demand. Weaker commodity prices would alsoweigh on business investment. Taken together, aprolonged period of below-trend growth would cause theoutput gap to widen further and keep prevent coreinflation from carving out a trough and returning totarget. With scope to use conventional monetary policy,the Bank of Canada may feel compelled to cut itsovernight rate to support therecovery and preventinflation expectations fromfalling.
● A stronger-than anticipatedrebound in global growthpushes bond yields markedlyhigher, imperiling domesticdemand. Weakness in thehousing market and relatedspending would act as anoffset to export growth andchoke the recovery.
● The Chinese Third Plenum detailed the push for ruralhousehold formation, via construction and creatingwealth, as well as allowing the ‘markets’ to set pricesand better allocate resources. Unfortunately there wasscant detail on how the SOE sector will be exposed tosuch competition and the only timeline offered to ‘judge’how effective the reforms will be was 2020, and financial
markets tend to be impatient.
● Our longstanding tail riskevent continues to simmer inthe background, withairspace issues over thedisputed islands the latestdevelopment. The PBoC hasrecently stabilised both thecurrency and interest rates,likely as the policy planswere revealed.
● The largest risk to theregion will come from theUS. The Eurozone lacks astrong domestic growthengine while the UKrecovery must eventuallyrely on some foreign
demand. Another weak yearfor US growth would openrisks to substantial ECBeasing and remove nascentBoE tightening risks. On theother side, stronger growth in the US would improve theEZ recovery which would support EM manufacturing.
● The largest risk from within the region is the Eurozonebecoming stuck in a deflationary trap. It is too soon totrade this risk, but 2014 reform progress will be key forprospects in 2015.
● European politics will also continue to add potential
volatility. The European Parliamentary elections on May22 will provide a stage for Eurosceptics while local UKelections on the same date and Scottish independencevote on September 18 may add caution to marketsentiment heading into the 2015 general election.
● Tapering is on, but marketexpectations may continue toshift hawkishly on strong USdata. If US Treasury yields
continue to climb as a result,EMs will hardly escape anadjustment in rates. Thecorrection is likely to occur inthe equity and FX space, as
well. The corporate sector has allowed credit to expandsizeably during the years of declining interest rates.Thus, rising yields mean higher borrowing costs for theprivate and public sector, and lower GDP growth.
● Against the prospects of prolonged subpar growth,rising yields and underperforming equities, globalinvestors may reduce exposure to EM assets and investin the recovering DMs. Outflows due to repatriation or
reallocation of capital can keep the bearish EMFX biasalive for an extended period of time.
Economic growth momentum is about to shiftdecisively higher this year, with annual GDP growthaveraging around 3.0%, up from 2.0% in 2013. Thetransition to a more sustained recovery will besupported by strong private sector fundamentals,waning fiscal drag and uncertainty, and a moresupportive global environment. Notwithstanding thisencouraging outlook, with the inflationary backdropremaining benign, monetary policy is expected toremain ultra-accommodative as the Fed continues to
manage the upward adjustment in yields. The keyrisks to this outlook are as follow:
● A faster wind-down in QE3 purchases this year notoffset by more qualitative easing could unnerve themarkets and result in a disorderly backup in rates.This outcome could put a brake on the housingmarket recovery—which has been a key driver forthe rebound in consumer spending activity.
● GDP growth will initially be flattered higher by thereduction in fiscal drag. However, for the higher levelof growth to be sustained, private sector spendingmust also shift higher. An uptick in capital investmentwill be especially important, and an absence of apickup in business investment could temper growthmomentum.
CANADA ASIA-PACIFIC
EMS EUROPE
UNITED STATES
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9 January 2014 | TD Securities
2014 Global OutlookRates, FX and Commodities Research
FORECASTS
GDP 2014 2015 Q1 F Q2 F Q3 F Q4 F Q1 F Q2 F Q3 F Q4 F
US 2.8 3.1 2.7 2.9 3.2 3.0 3.1 3.4 3.2 3.1
Japan 1.7 1.6 1.2 0.8 0.8 0.6 1.2 1.2 1.2 1.1
Euro-zone 1.0 1.3 1.0 1.0 1.2 1.2 1.3 1.3 1.3 1.3
Germany 1.6 1.5 1.4 1.4 1.5 1.5 1.5 1.5 1.5 1.4
France 0.8 1.1 0.9 0.9 0.9 0.9 1.2 1.1 1.1 1.2
Italy 0.5 0.8 0.7 0.7 0.7 0.8 0.8 0.9 0.9 0.9
UK 2.6 2.3 2.6 2.5 1.9 1.8 2.6 2.5 2.2 2.2
Canada 2.3 2.4 2.1 2.4 2.5 2.4 2.3 2.4 2.5 2.4
China 7.4 7.1 7.0 6.8 6.6 7.1 7.3 7.2 7.2 7.2
Inflation 2014 2015 Q1 F Q2 F Q3 F Q4 F Q1 F Q2 F Q3 F Q4 F
US 1.7 2.3 1.2 1.8 1.7 2.1 2.3 2.3 2.3 2.4
Japan 1.3 1.4 1.5 1.5 1.1 1.1 1.2 1.4 1.5 1.6
Euro-zone 1.2 1.3 1.2 1.0 1.3 1.3 1.4 1.3 1.3 1.3
Germany 1.7 1.8 1.8 1.7 1.6 1.7 1.8 1.8 1.8 1.9
France 1.7 1.6 1.6 1.9 1.7 1.5 1.6 1.6 1.7 1.7
Italy 1.3 1.7 0.8 1.3 1.3 1.8 1.8 1.8 1.7 1.5
UK 2.1 2.2 2.0 2.1 2.0 2.3 2.0 2.1 2.3 2.4
Canada 1.6 2.2 1.4 1.6 1.7 1.9 2.0 2.1 2.2 2.3
China 3.2 3.2 3.2 3.2 3.2 3.3 3.2 3.2 3.2 3.2
* GDP fi ures are ann rates. Inflation fi ures are headline rates.
Annual Average 2014 2015
Spot
Jan 9, 2014 Q1 F Q2 F Q3 F Q4 F Q1 F Q2 F Q3 F Q4 F
Gold * 1230 1195 1125 1150 1225 1250 1275 1300 1300
Silver * 19.62 19.00 17.25 17.50 18.90 19.50 19.50 20.00 20.25
Platinum * 1420 1600 1600 1650 1675 1725 1750 1775 1750
Palladium * 738 800 800 825 850 825 850 825 825
Copper ** 3.34 3.36 3.26 3.20 3.10 3.00 3.00 2.80 2.80
Zinc ** 0.92 0.98 1.02 1.03 1.04 1.08 1.10 1.16 1.16
Lead ** 0.96 1.02 1.04 1.06 1.08 1.10 1.12 1.12 1.16
Nickel ** 6.11 6.95 7.75 7.50 7.50 7.75 7.75 7.25 7.25 Aluminum ** 0.78 0.84 0.85 0.84 0.84 0.84 0.82 0.82 0.80
Molybdenum + 9.80 10.00 11.00 11.00 12.00 13.00 13.00 14.00 14.00
Iron Ore *+ 135 138 132 130 130 125 120 115 110
Nymex Crude Oil +- 93 95 93 97 95 98 95 102 98
Brent Crude Oil +- 108 103 100 105 102 105 103 108 105
Heating Oil -+ 2.97 2.90 2.75 2.80 2.90 3.05 2.95 2.80 2.95
Gasoline -+ 2.68 2.85 2.75 2.65 2.60 2.70 3.15 2.95 2.75
Natural Gas -- 4.17 4.05 4.00 3.75 3.95 3.85 4.20 4.00 4.10
AECO Natural Gas -- 3.69 3.60 3.40 3.25 3.30 3.05 3.60 3.40 3.50
Uranium ++ 35 36 38 38 38 40 42 44 48
Hard Coking Coal Spot +* … 170 170 175 175 175 175 170 170Newcastle Thermal Coal- 84 90 90 85 85 85 85 85 85
Note: *London PM Fix $/oz., **LME $/lb., +Molybdenum equivalent to moly oxide, FOB USA,
*+CFR China, 62% Fe, dry $/tonnes, +- $/bb 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
E n e r g y
SUMMARY COMMODITIES FORECASTS
P r e c i o u s
m e t a l s
O t h e r m
e t a l s
2014 2015
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2014 Global OutlookRates, FX and Commodities Research
FORECASTS
Spot
Jan 9, 2014 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 0.50
3m 0.04 0.15 0.15 0.20 0.20 0.25 0.50 0.80 1.00
2y 0.43 0.45 0.50 0.60 0.70 0.95 1.00 1.25 1.65
5y 1.77 1.80 1.95 2.10 2.25 2.50 2.60 2.80 3.05
10y 2.99 3.00 3.10 3.25 3.35 3.60 3.65 3.70 3.75
30y 3.89 4.05 4.20 4.35 4.40 4.60 4.60 4.60 4.60
Overnight Rate 1.00 1.00 1.00 1.00 1.00 1.00 1.00 1.50 1.50
3m 0.90 0.95 0.95 0.95 0.95 0.95 1.05 1.40 1.40
2y 1.11 1.10 1.15 1.20 1.35 1.50 1.70 1.95 2.05 5y 1.90 2.00 2.05 2.15 2.25 2.50 2.60 2.75 2.90
10y 2.71 2.90 2.95 3.00 3.10 3.25 3.35 3.45 3.55
30y 3.21 3.30 3.35 3.45 3.55 3.70 3.75 3.80 3.95
Cash Target Rate 2.50 2.50 2.50 2.50 3.00 3.25 3.50 3.50 3.50
3m 2.64 2.60 2.60 2.75 3.10 3.40 3.65 3.65 3.65
3y 3.04 3.15 3.20 3.35 3.50 3.65 3.85 3.85 3.85
5y 3.55 3.50 3.60 3.75 3.90 4.05 4.20 4.20 4.20
10y 4.32 4.30 4.35 4.45 4.55 4.85 4.85 4.85 4.85
Cash Target Rate 2.50 2.75 3.00 3.25 3.50 3.75 4.00 4.00 4.00 3m 2.87 3.00 3.25 3.55 3.75 4.00 4.25 4.25 4.25
2y 3.23 3.30 3.50 3.80 4.00 4.25 4.40 4.40 4.40
5y 4.25 4.40 4.40 4.45 4.60 4.75 4.85 4.85 4.85
9y 4.74 4.80 4.85 4.95 5.05 5.25 5.25 5.25 5.25
Jan 9, 2014 Q1 F Q2 F Q3 F Q4 F Q1 F Q2 F Q3 F Q4 F
ECB Refi Rate 0.25 0.25 0.25 0.25 0.25 0.25 0.25 0.25 0.25
3m 0.04 0.05 0.05 0.05 0.10 0.15 0.20 0.25 0.30
2y 0.22 0.30 0.35 0.50 0.65 0.70 0.80 0.90 1.00
5y 0.90 1.15 1.30 1.55 1.75 1.85 2.05 2.15 2.30 10y 1.91 2.05 2.20 2.45 2.65 2.75 2.80 2.90 2.95
30y 2.75 2.80 2.95 3.15 3.35 3.40 3.45 3.55 3.55
Bank Rate 0.50 0.50 0.50 0.50 0.50 0.75 0.75 1.00 1.00
3m 0.40 0.55 0.55 0.55 0.55 0.80 0.80 1.05 1.05
2y 0.56 0.60 0.80 0.95 1.20 1.55 1.70 2.00 2.15
5y 1.84 1.75 1.95 2.15 2.45 2.75 2.95 3.20 3.30
10y 2.98 3.00 3.30 3.70 3.85 3.95 4.00 4.15 4.20
30y 3.64 3.70 3.90 4.30 4.50 4.55 4.60 4.70 4.70
Deposit Rate 1.50 1.50 1.50 1.50 1.50 1.50 1.75 2.00 2.25 3m 1.35 1.60 1.60 1.60 1.60 1.60 1.85 2.15 2.40
3y 1.76 2.15 2.30 2.50 2.70 2.90 3.20 3.50 3.80
5y 2.26 2.50 2.80 3.10 3.35 3.55 3.80 4.00 4.20
9y 2.89 3.20 3.40 3.60 3.85 4.10 4.30 4.50 4.65
E U R O P E
G e r m a n y
U K
N o r w a y
SUMMARY G10 RATES FORECASTS
2014 2015
D O L L A R B L O C
U n i t e d S t a t e s
C a n a d
a
A u s t r a l i a
N e w
Z e a l a n d
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9 January 2014 | TD Securities
2014 Global OutlookRates, FX and Commodities Research
FORECASTS
Spot
Jan 9, 2014 Q1 F Q2 F Q3 F Q4 F Q1 F Q2 F Q3 F Q4 F
USD/JPY 105.0 105 107 108 110 112 112 115 115
EUR/USD 1.36 1.33 1.27 1.24 1.22 1.22 1.20 1.20 1.20
GBP/USD 1.65 1.55 1.54 1.55 1.56 1.61 1.60 1.60 1.58
USD/CHF 0.91 0.98 1.02 1.05 1.07 1.07 1.08 1.08 1.08
USD/CAD 1.09 1.07 1.08 1.09 1.11 1.12 1.12 1.13 1.13
AUD/USD 0.89 0.88 0.88 0.87 0.87 0.86 0.85 0.85 0.84
NZD/USD 0.83 0.81 0.80 0.78 0.77 0.76 0.74 0.73 0.72
EUR/NOK 8.41 8.40 8.40 8.35 8.30 8.25 8.15 8.10 8.05
EUR/SEK 8.93 8.80 8.70 8.60 8.50 8.40 8.30 8.20 8.20
DXY 81.0 84.1 87.3 89.0 90.2 90.2 91.2 91.5 91.7
SUMMARY G10 FX FORECASTS
2014 2015
Spot
Jan 9, 2014 Q1 F Q2 F Q3 F Q4 F Q1 F Q2 F Q3 F Q4 F
Brazil 10.00 10.25 10.25 10.25 10.25 10.25 10.25 10.75 11.00
Mexico 3.50 3.50 3.50 3.50 3.75 4.00 4.25 4.75 5.00
India 7.75 8.25 8.25 8.25 8.25 8.25 8.25 8.25 8.25
Indonesia 7.50 7.75 7.75 7.75 7.75 7.75 7.75 7.75 7.75
Malaysia 3.00 3.00 3.25 3.50 3.50 3.50 3.50 3.50 3.50
Poland 2.50 2.50 2.50 2.75 3.00 3.50 3.50 4.00 4.25Hungary 3.00 2.60 2.50 2.50 2.80 3.25 3.75 4.50 5.25
Russia 5.50 5.50 5.50 5.00 5.00 5.00 5.00 5.25 5.50
Turkey 4.50 5.00 5.50 5.50 6.00 6.00 6.50 7.00 7.00
South Africa 5.00 5.00 5.00 5.50 6.00 6.00 6.00 6.50 7.00
USD/BRL 2.40 2.35 2.37 2.38 2.35 2.35 2.40 2.41 2.43
USD/MXN 13.13 13.19 13.14 13.08 12.95 12.90 12.80 12.83 12.89
USD/INR 62.08 63.30 63.60 63.20 62.50 62.00 62.00 62.30 62.60
USD/IDR 12193 11360 11365 11330 11290 11200 11200 11280 11360
USD/MYR 3.28 3.22 3.22 3.21 3.24 3.26 3.26 3.27 3.28
USD/PLN 3.08 3.12 3.26 3.33 3.36 3.36 3.40 3.42 3.44USD/HUF 220 224 236 237 232 235 240 241 243
USD/RUB 33.22 33.40 33.60 33.70 33.60 33.89 34.06 33.93 33.85
USD/TRY 2.18 2.21 2.15 2.16 2.18 2.22 2.22 2.24 2.26
USD/ZAR 10.81 10.28 10.39 10.42 10.46 10.45 10.40 10.50 10.60
EUR/BRL 3.26 3.13 3.01 2.95 2.87 2.87 2.88 2.89 2.92
EUR/MXN 17.82 17.54 16.69 16.22 15.80 15.74 15.36 15.40 15.47
EUR/INR 84.45 84.19 80.77 78.37 76.25 75.64 74.40 74.76 75.12
EUR/IDR 16587 15109 14434 14049 13774 13664 13440 13536 13632
EUR/MYR 4.46 4.28 4.09 3.98 3.95 3.98 3.91 3.92 3.94
EUR/PLN 4.18 4.15 4.14 4.13 4.10 4.10 4.08 4.10 4.13EUR/HUF 299 298 300 294 283 287 288 290 291
EUR/RUB 45.08 44.42 42.67 41.79 40.99 41.34 40.87 40.72 40.62
EUR/TRY 2.97 2.94 2.73 2.68 2.66 2.70 2.66 2.69 2.71
EUR/ZAR 14.68 13.67 13.20 12.92 12.76 12.75 12.48 12.60 12.72
E M
v s E U R
SUMMARY EMERGING MARKET FORECASTS
C a n t r a l B a n k R a t e s
E M
v s U S D
2014 2015
8/12/2019 2014 Global Out Look
http://slidepdf.com/reader/full/2014-global-out-look 21/21
9 January 2014 | TD Securities
2014 Global OutlookRates, FX and Commodities Research
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 thatregard. 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 ismade 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 areliable 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-
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GLOBAL RATES, FX AND COMMODITIES RESEARCH TEAM
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Millan Mulraine Deputy Head, US Research & Strategy 1 212 827 7186
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