Forex Outlook

8/14/2019 Forex Outlook

1/17

Foreign Exchange

Outlook

Global Economic Research

March 2008

Foreign Exchange Outlookis available on www.scotiabank.com , Bloombergat SCOE and Reuters atSM1C

The USD is resuming a depreciating trend against major currencies onthe back of aggressive monetary and fiscal policy easing and deterio-rating US economic conditions. The CAD and the MXN will benefit fromwidening intra-region yield differentials, further underpinned by a re-newed upward bias in energy prices.

European currencies will receive a boost from supportive yield differen-tials and renewed global portfolio diversification away from the USD.The GBP will strengthen in alignment with the EUR lead. Global inves-tors retain a bullish RUB tone ahead of the March presidential election.

The Asian FX bullish tone remains intact. The JPY, which remains in astable trading pattern against the USD since January, will adopt a long-awaited strengthening path. China remains committed at least untilthe Beijing Olympic Games to its gradual and predictable pace ofCNY appreciation.

Emerging-market currencies will find support from favourable growthand interest rate differentials, high commodity prices and sustained ap-petite for carry-trade portfolio investments. Investors will closely monitorthe asset-price adjustment taking place in Chinese stock markets. TheZAR is entering a period of post-adjustment consolidation mode.

Index

Market Tone & Fundamental Focus.................................................................... 3US/Canada.......................................................................................................... 5Europe/Japan (Majors)........................................................................................ 6Asia/Oceania/Europe.......................................................................................... 8Developing Asia.................................................................................................. 10Developing Americas.......................................................................................... 12Developing Europe/Africa................................................................................... 14Global Currency Forecast................................................................................... 16


2/17

Foreign Exchange Outlook March 2008

Global Economic Research 2

Actual Q1 08 Q2 08 Q3 08 Q4 08 Q1 09 Q2 09 Q3 09 Q4 091.51 1.50 1.53 1.55 1.58 1.59 1.60 1.57 1.55

1.48 1.46 1.44 1.42 1.40 1.39 1.37 1.36

106.4 107 106 105 103 100 98 98 100

106 106 107 107 107 107 107 1061.98 1.99 2.01 2.04 2.07 2.07 2.08 2.07 2.05

1.97 1.94 1.92 1.90 1.89 1.87 1.86 1.85

0.98 0.99 0.98 0.97 0.96 0.94 0.95 0.96 0.97

1.01 1.03 1.04 1.05 1.05 1.06 1.06 1.07

0.94 0.92 0.94 0.96 0.98 0.99 0.97 0.95 0.93

0.89 0.88 0.87 0.86 0.85 0.83 0.82 0.80

10.70 10.87 10.92 10.98 11.05 11.13 11.21 11.29 11.37

10.92 10.97 11.03 11.10 11.17 11.24 11.32 11.40

(*) Source: Consensus Economics Inc. February 2008

Spot Price vs. 100 Day Moving Averagevs. 200 Day Moving Average -(5yr Trend)

Consensus*

Mexican Peso

Canadian Dollar

Australian Dollar

Global Foreign Exchange Outlook

Euro

Yen

Sterling

AUD/USD USD/MXN

EUR/USD USD/JPY

GBP/USD USD/CAD

February 27, 2008EUR/USD

Consensus*

USD/JPY

Consensus*GBP/USD

Consensus*

Consensus*

USD/CAD

Consensus*

AUD/USD

USD/MXN

0.82

0.900.97

1.051.12

1.20

1.271.35

1.421.50

1.57

Mar-0

3

Jun-03

Sep-03

Dec-03

Mar-0

4

Jun-04

Sep-04

Dec-04

Mar-0

5

Jun-05

Sep-05

Dec-05

Mar-0

6

Jun-06

Sep-06

Dec-06

Mar-07

Jun-07

Sep-07

Dec-07

EUR/USD

100 Day

200 Day

100

105

110

115

120

125

130

Jul-03

Oct-03

Jan-04

Apr-0

4Jul-04

Oct-04

Jan-05

Apr-0

5Jul-05

Oct-05

Jan-06

Apr-0

6Jul-06

Oct-06

Jan-07

Apr-07Jul-07

Oct-07

Jan-08

USD/JPY

100 Day

200 Day

1.43

1.51

1.59

1.67

1.75

1.83

1.911.99

2.07

2.15

Mar-0

3

Jun-03

Sep-03

Dec-0

3

Mar-0

4

Jun-04

Sep-04

Dec-0

4

Mar-0

5

Jun-05

Sep-05

Dec-0

5

Mar-0

6

Jun-06

Sep-06

Dec-0

6

Mar-07

Jun-07

Sep-07

Dec-07

GBP/USD

100 Day

200 Day

0.961.021.081.141.201.261.321.381.441.50

1.561.62

Mar

-03

Jun-03

Sep-03

Dec-0

3

Mar

-04

Jun-04

Sep-04

Dec-0

4

Mar

-05

Jun-05

Sep-05

Dec-0

5

Mar

-06

Jun-06

Sep-06

Dec-0

6

Mar

-07

Jun-07

Sep-07

Dec-07

USD/CAD

100 Day

200 Day

0.48

0.530.58

0.630.68

0.73

0.780.83

0.880.93

0.98

Mar

-03

Jun-0

3

Sep-03

Dec-03

Mar

-04

Jun-0

4

Sep-04

Dec-04

Mar

-05

Jun-0

5

Sep-05

Dec-05

Mar

-06

Jun-0

6

Sep-06

Dec-06

Mar

-07

Jun-0

7

Sep-07

Dec-07

AUD/USD

100 Day

200 Day

9.0

9.4

9.8

10.2

10.6

11.011.4

11.8

Mar

-03

Jun-03

Sep-03

Dec-03

Mar

-04

Jun-04

Sep-04

Dec-04

Mar

-05

Jun-05

Sep-05

Dec-05

Mar

-06

Jun-06

Sep-06

Dec-06

Mar

-07

Jun-07

Sep-07

Dec-07

USD/MXN

100 Day

200 Day


3/17



Foreign exchange markets will experience a period ofhigher volatility through the end of the first quarter of2008. The US dollar (USD) has again retreated from itsstable trading pattern (on a trade-weighted basis) and

has resumed a depreciating trend against most majorworld currencies on the back of unattractive interest ratesand deteriorating economic conditions in the UnitedStates. Of utmost importance to re-assess and/or confirmcurrent investors views are the monetary policy deci-sions to be adopted by the worlds key central banks,particularly by the US Federal Reserve (Fed) and theEuropean Central Bank (ECB). Geo-political-relatedevents, such as a renewed drive to impose sanctions onIran, shifts in US voting preferences ahead of the No-vember vote, elections in Russia and Spain, and a meet-ing of the Organization of Petroleum Exporting Countries(OPEC) scheduled to take place on March 5

thwill also

attract the attention of global portfolio investors andshape flows in currency markets. Global investors willkeenly monitor the ongoing asset-price adjustment takingplace in Chinese equity securities markets in search ofpotential contagion risk waves that may affect the coregroup of emerging-market economies.

The NAFTA zone currencies will remain heavily influ-enced by economic, monetary and financial sector devel-opments in the US. The US Federal Open Market Com-mittee will announce its decision on monetary policy onMarch 18th: a reduction in the Fed funds interest rate of25 basis points (bps) to 2.75% is fully discounted by fu-tures markets. The sharp deterioration of US housing

(and potentially labour) market conditions is also re-flected in market participants expectations of aggressivemonetary easing through the year, which will place theFed funds rate (according to current contract pricing pat-terns) at 2% by December. Both the Canadian dollar(CAD) and the Mexican peso will continue to benefit fromfavourable yield differentials vis--vis the US, further un-derpinned by a renewed upward bias in energy prices; oilprices, measured by the light-crude West Texas Interme-diate benchmark have, once again, achieved triple-digitlevels. The CAD has the potential to advance even fur-ther, as it realigns to the trend present in the euro (EUR)and the Japanese yen (JPY). Gold prices, which hit theUSD960 per ounce, also anticipate further US dollar dis-tress.

European currencies will receive an upward push on thegrounds of still-positive economic growth prospects, sup-portive interest rate differentials and renewed anti-USDinvestor sentiment. Senior ECB officials continue tostress that inflation containment remains the monetaryinstitutions primary objective. The policy-focused refi-nancing rate has been held at 4.0% since June 2007; nochange is anticipated at the March 6

th policy-settingmeeting. The inflation-focused ECB, coupled with fresh

evidence of business confidence in Germany (as recentlyreported in the investor-sensitive Ifo index), triggered arenewed appreciating bias in favour of the EUR, whichtraded over USD1.50 in late February, clearly breaking

through the technical resistance level established sincemid-November 2007. The British pound (GBP) re-sponded immediately to the renewed bullish sentimentenjoyed by the EUR and reversed a weakening trend inplace from November 2007 to February 2008: GBP/USDis poised to, once again, trade above the 2.00 mark inthe weeks ahead. Elsewhere in Europe, the Russian ru-ble (RUB) retained its strengthening bias, as emerging-market participants remained indifferent to the March 2election, when Dmitry Medvedev will be most likelyelected as the new Russian president, a result that willlikely lead to the appointment of Vladimir Putin as primeminister.

JPY, which remains in a stable trading pattern againstthe USD since the beginning of the year, has yet to adopta long-awaited move towards a strengthening path: weexpect USD/JPY to close the year at 103. The renewedphase of USD weakness and JPY strength will likelyaccelerate the realignment of the laggard Korean won tothe regional leaders pattern. Meanwhile, the Thai baht,the Taiwanese dollar and the Malaysian ringgitt remainwell entrenched in a strengthening path. China remainscommitted at least until the Beijing Olympic Games toa gradual and predictable pace of renminbi appreciationagainst the USD. Of increasing relevance to global inves-tors is the fact that inflationary pressures are escalating

in China and other key developing countries as a resultof unrelenting increases in food and energy costs, cou-pled with rising demand-driven pressures caused bygrowing access to local-credit financing.

Emerging-market currencies remain strongly influenced and supported by the growth differentials in key econo-mies such as China, India, Russia, Brazil and South Af-rica, as well as by attractive interest rate differentials,persistently high commodity prices and sustained appe-tite for carry-trade portfolio investment strategies(courtesy of cheap funding available in savings-rich Ja-pan). Brazils accelerating growth dynamics plus still-highreal interest rates act as a key magnet of intra-region andglobal capital investment inflows. The South African rand(ZAR), which suffered a sharp 15% depreciation versusthe USD in just one month on the back of a generalizedre-assessment of global risk aversion, has entered a re-covery phase, yet to be completed. The Turkish new liraremained broadly stable despite the escalating politicalrisk associated with its decisive military engagement inNorthern Iraq. Finally, metals-commodity-sensitive cur-rencies such as the Chilean peso, the Peruvian sol aswell as the ZAR have also benefited from resurgingprices and a pro-gold weakening USD.

MARKET TONE & FUNDAMENTAL FOCUSPablo F.G. Brard +1 416 862-3876


4/17



CANADA Stephen Malyon +1 416863-7719Currency Outlook Camilla Sutton +1 416 866-5470

USD/CAD remains range-bound, trading over the past month between its converging 100- and 200-day moving aver-ages. The USD remains on the defensive, with a deterioration in recent US economic figures and signs of intensifyinginflation pressure presenting a challenging environment for the Federal Reserve. However, the CAD has failed to exploithis situation. Part of the explanation is specific to the CAD. The US economic slowdown and CAD appreciation are put

ting pressure on Canadian manufacturers, fostering concerns over the Canadian economic outlook and pushing the Canadian current account towards deficit (newly sworn Bank of Canada Governor Mark Carney has responded by telegraphing further rate cuts). Another explanation is that the USD is showing some signs of stabilizing on a broader scalefollowing a significant multi-year depreciation. The US current account is in the midst of a noticeable improvement, and iis noteworthy that the Feds major currency USD index has failed to break to a new low despite a massive loss of interest rate support in recent months. The market appears reluctant to push the USD materially lower given mounting evidence that other economies are also undergoing a slowdown. Consequently, investors are uncertain whether aggres-sively lower US rates are USD-positive because they sow the seeds of an eventual economic revitalization, or USDnegative because they fan the embers of inflation (short USD futures market positions have been significantly curtailedas speculators await greater clarity). Amid such uncertainty, other relationships that came to influence market directionin 2007 have frayed. Indeed, the correlation between the CAD and commodities has weakened materially (crude oil re-cently returned to USD100/barrel, while the BoC commodity price index has soared to a record high). Barring a correc-tion in commodities perhaps prompted by a reassessment of the global growth outlook we think the CAD has some

catching up to do. A significant US inflation scare would also likely prove CAD-positive given the recent deceleration inCanadian inflation. Alternatively, should signs that the US slowdown is beginning to flow across the border accumulatewe would expect CAD to weaken against the USD. Consequently, we are modestly bearish USD/CAD (i.e. bullish theCanadian dollar) in the near term, but would not be surprised to see the recent range-trading environment endure for awhile longer.

12 m 6 m 3 m 3 m 6 m 12 m

AUD/CAD 0.922 0.863 0.883 0.921 0.931 0.931 AUD/CAD

CAD/JPY 101.3 109.7 111.4 108.2 108.2 106.4 CAD/JPY

EUR/CAD 1.548 1.439 1.461 1.499 1.504 1.495 EUR/CAD

USD/CAD 1.170 1.056 0.999 0.980 0.970 0.940 USD/CAD

AUD/CAD CAD/JPY

EUR/CAD USD/CAD

0.921

109.0

1.479

0.978

Currency TrendsSpot

27-Feb

OutlookGoing BackFX Rate FX Rate

0.835

0.855

0.875

0.895

0.915

0.935

Feb-07 Apr-07 Jun-07 Aug-07 Oct-07 Dec-07 Feb-08

97.5

100.0

102.5

105.0

107.5

110.0

112.5

115.0

117.5

120.0

122.5125.0


1.330

1.355

1.380

1.405

1.430

1.455

1.480

1.505

1.530

1.555


0.910

0.935

0.960

0.985

1.010

1.035

1.060

1.085

1.110

1.135

1.160

1.185



5/17



CANADAAND UNITED STATES Adrienne Warren +1 416 866-4315Fundamental Commentary Gorica Djeric +1 416 866-4214

UNITED STATES - As the economic fundamentals con-tinue to worsen, the minutes to the FOMCs January 29-30

thmeeting noted a further deterioration in sentiment for

the US economy, with downside sensitivities. The FOMC

lowered its GDP growth projections for 2008 from the1.8%-2.5% (Q4/Q4) central tendency range to 1.3-2.0% but marked up unemployment and core inflation forecasts.The housing and credit market travails continue to impingeon the US economy and financial markets, with clear signsof weakness emerging from the commercial real estatesector, retail space in particular. Banks are recording addi-tional writedowns and corporate earnings targets are be-coming more cautious. Januarys Senior Loan Officer Sur-vey revealed that banks tightened lending standards at thefastest pace in the seventeen-year history of the report.Deteriorating employment conditions, eroding confidence,falling home and equity values suggest that consumer

spending, particularly on big-ticket items, is losing consid-erable momentum. Manufacturing conditions continued toworsen, with Februarys state surveys pointing to the possibil-ity that the ISM Manufacturing Index might slip back into thered. After five consecutive years of record shortfalls, the UStrade deficit narrowed in 2007. While exports particularlycivilian aircraft sales remained firm, relatively more ex-pensive foreign goods & services supported import substi-tution. Despite the continuing weakness in the economy,inflation remains sticky because of soaring food, energyand other commodity prices. However, the PCE deflator the Feds inflation yardstick remained at 2.2% at yearend, for the fourth year in a row, suggesting that inflationary

pressures are still contained. Monetary policy adjustmentsand the fiscal stimulus package now signed into law areexpected to provide some economic relief in the secondhalf of 2008.

CANADA - The Canadian economy entered 2008 in reasonably good shape, with real GDP estimated to have ad-vanced at close to a 3% yearly rate in Q4 of 2007. The con-sumer remains the economic driver, supported by strong

job growth, price discounting and tax cuts. Retail sales rose0.6% m/m in December, the third increase in four monthsand near-record auto sales in January point to anothesolid gain last month. Meanwhile, the nations payrollsswelled by almost 50,000 in January, lifting the employ-ment rate to a record high and lowering the jobless rate toa 3-decade low. Housing activity also remains brisk, withtotal starts rebounding sharply after a weather-inducedslump in December. Home sales, however, are beginningto slow alongside the continuing deterioration in affordability. Maintaining a reasonably solid pace of domestic demand is essential to offset the growing drag from externatrade amid a stalling out in exports and rising imports

Manufacturing shipments plunged over 3% m/m in December, and were down more than 6% from a year earlier, asslumping US demand for consumer goods and buildingmaterials and the persistently strong Canadian dollatrimmed export sales. Canadas December merchandisetrade surplus narrowed to a 9-year low of CAD2.4 billiondespite higher prices for resource-based exports. Given aweakening US economy the destination of roughly 75%of Canadas merchandise exports external conditions wilremain extremely challenging for domestic manufacturersin coming months. This points to a further slowing in overalmomentum as consumer spending and housing activitybegin to moderate. Consumer confidence is faltering, a

harbinger of a more cautious retail sales trend, particularlywhen employment growth and/or home price appreciationfinally begin to slow. Business sentiment, too, has weak-ened, reflecting heightened concern over the continuingcredit market turmoil, the high CAD and soaring oil prices.

MONETARY POLICY COMMENTARY Karen Cordes +1 416 862-3080

UNITED STATES - Given the economic backdrop, the Fedmay have more room for maneuver in the months ahead.Indeed, we expect the FOMC to cut the target rate by 50bps on March 18

thand then remain on hold as the cumula-

tive 275 bps reduction in the Federal funds rate begins to

stimulate the economy. This will not preclude continuedweakness in the US economy in such areas as residentialconstruction and sales and consumer spending - althoughstrength in the international trade sector will likely continueto keep the US economy out of recession. In fact, the Fed-eral Reserve is projecting real GDP growth between 1.3and 2.0% in 2008, with only a modest acceleration in 2009and 2010. This persistent weakness is expected to offsetmuch of the recent rise in price pressures although the Fedwill continue to watch inflation expectations closely.

CANADA - As inflation continues to moderate in Canada with core CPI recently falling to 1.4% y/y in January, welbelow the Bank of Canadas (BoC) 2% target rate theBoC increasingly has room to move interest rates downfurther. And, in his first public speech since becoming BoC

Governor, Mark Carney reinforced the view that furthemonetary stimulus is indeed on its way. While the Canadian economy as a whole has thus far been relatively resilient to the deterioration in the US economy, Canadas for-eign trade sector is now substantially subtracting from reaGDP. As the spillover into the rest of the economy beginsto set in, we will start to see more widespread weaknessWhile Canadas economy will likely continue to outperformthe US economy, a prospective slowdown points to a 50bps cut in the overnight rate by the BoC on March 4

th. This

would bring the total reduction to 100 bps since December4

th.


6/17



MAJOR CURRENCIES Stephen Malyon +1 416 863-7719Currency Outlook Camilla Sutton +1 416 866-5470

EURO ZONE - The long-term technical outlook continues to be bullish, and the short-term outlook has recently improvedsignificantly. In late February, EUR succeeded in breaking above the November 2007 high of 1.4967, giving technicatraders a reason to go long. IMM / CFTC speculative position remains fairly modest, with a EUR1.8 billion net long posi

tion, indicating that the market is still hesitant to move in either direction. However, we suspect these positions will berebuilt in the weeks ahead.

JAPAN - February saw USD/JPY trade in a relatively tight 1.7% range (106.50 to 108.12), with the overall down trendremaining intact. The near-term technical outlook continues to call for further downside; however, the importance of thecorrelation between USD/JPY and equity markets cannot be ignored. We expect the near-term impact from flow, equi-ties and technicals to be fairly negative USD/JPY.

UNITED KINGDOM - The technical outlook for the GBP continues to be fairly bearish, as the currency has yet to breakabove the six month downtrend. Over the past three months, it has traded within a relatively tight range (1.94 to 2.00)Speculative positioning, from the CFTC, highlights that traders continue to hold a generally negative near-term outlookon sterling as they hold a net short position of GBP760 million. However, this is a relatively small holding and highlightsthat the market, though biased for downside risk, remains somewhat neutral on the overall outlook.

SWEDEN - The krona is currently testing the lower end of its six month trend, a break of which would foreshadow furthedownside. EUR/SEK also dropped lower in February and continues to trade in the middle of its wide 9.10 to 9.50 rangeWe think the market will need a substantial catalyst to break EUR/SEK out of this range.

12 m 6 m 3 m 3 m 6 m 12 m

EUR/USD 1.323 1.363 1.463 1.530 1.550 1.590 EUR/USD

USD/JPY 118.6 115.8 111.2 106.0 105.0 100.0 USD/JPY

GBP/USD 1.964 2.017 2.056 2.013 2.040 2.065 GBP/USD

EUR/SEK 9.254 9.397 9.357 9.268 9.205 9.083 EUR/SEK

Currency TrendsSpot

27-Feb


1.513

106.5

1.989

9.332

EUR/USD USD/JPY

GBP/USD EUR/SEK

1.287

1.314

1.341

1.368

1.395

1.422

1.449

1.476

1.503

1.530


105.6

108.1

110.6

113.1

115.6

118.1

120.6

123.1


1.905

1.930

1.955

1.980

2.005

2.030

2.055

2.080

2.105

Feb-07 Apr-07 Jun-07 Aug-07 Oct-07 Dec-07

9.07

9.12

9.17

9.22

9.27

9.32

9.37

9.42

9.47

Feb-07 Apr-07 Jun-07 Aug-07 Oct-07 Dec-07


7/17



MAJOR CURRENCIESFundamental Commentary Erik Nilsson +1 416 866-4205

EURO ZONE - Any lingering hopes that the European Cen-tral Bank (ECB) might soon follow the lead of the FederalReserve should be dashed with the report that Germanys

powerful IG Metall union has reached an agreement withthe nations major steel producers on a 5.2% wage in-crease. Labour costs across the euro zone had been in-creasing at an average annual rate of about 2% over thepast four years. President Jean-Claude Trichet has neverexplicitly defined the upper limit of the ECBs tolerance lev-els regarding wage increases; indeed, he has been carefulto emphasize that there is room for differences amongfirms and industries depending on productivity gains. Nev-ertheless, a 5%-plus settlement, with the risk of spillovereffects into other sectors (and countries) where the poten-tial for improved production efficiencies is less evident, willadd to concerns regarding the inflation outlook. As such,

monetary policymakers will await unequivocal signs of abroadly-based economic slowdown that will provide assur-ance of an abatement in domestic demand-side inflationarypressures. With growth averaging 0.6% q/q over the pastfour quarters (0.4% in the final quarter of 2007), centralbank officials will remain of the view that the economy isstill expanding at a pace that is either very close to - or mayeven be exceeding - capacity. The ECB may also privatelywelcome further EUR appreciation as a key factor in help-ing to contain price increases in the tradables sector.

JAPAN - The fourth quarter 2007 national accounts datahighlight the persistent imbalances - and hence the under-lying fragility - of the Japanese economy. The impressive

0.9% q/q increase in GDP (outpacing the euro zone andthe US by a wide margin) - triple the Q3 advance - wasdriven largely by a robust recovery in business investmenand by the ongoing strength in net trade. Consumer spending contributed a minimal 0.1 percentage point to the overall expansion; indeed, inventory accumulation contributedas much to growth as did household consumption. Busi-ness sentiment surveys and data on orders of capitagoods point to some easing in investment in the yeaahead, and the likelihood of an offsetting pickup in household spending is slim. Consumer confidence declined for afourth consecutive month in January, as the official indexslipped back to its most depressed level in more than fou

years. The deterioration was driven by fresh concernsabout employment prospects, which added to consumersreluctance to buy big-ticket items. Japans January tradedata point to renewed softening in overall growth, prompt-ing the government to warn of a possible lull in the economy. Foreign sales rose 0.5% m/m, the smallest gain infour months. At the same time, imports plunged 3.2%, inpart a result of the 4% appreciation of the yen against theUSD from the December trading average, but also a reflection of the ongoing sluggishness in domestic spending.

UNITED KINGDOM - The minutes of the Bank of EnglandsMonetary Policy Committee (MPC) meeting of February 6

th-

7th, when members voted 8-1 to reduce the Bank Rate by25 bps (the dissenter favoured a 50 basis point reduction)highlight the MPCs concerns regarding economic growthprospects, in light of the stressed conditions in financialmarkets. Committee members are expecting the rate ofexpansion to slow markedly through 2008 as tighter creditconditions and weaker real income growth bear down ondomestic demand. On balance, the minutes point to furthereasing through the year, but at a measured pace. MPCmembers will want to be confident that the anticipated nar-rowly-based rebound in the headline consumer inflationrate - perhaps to more than 3% y/y - does not becomemore deeply entrenched. UK consumers are proving sur-

prisingly resilient in the face of a softening in housing costs(though one mortgagor reported a sharp rebound in priceslast month), falling equity markets, and tighter credit condi-tions. Retail sales volumes rose a solid 0.8% m/m in Janu-ary, the biggest advance in almost a year. Admittedly salesin recent months have been sporadic, with gains inter-spersed with contractions. Nevertheless, last months re-sults establish a strong foundation for the first quarter, withpositive implications for near-term economic growth. As aresult, while acknowledging the downside risks, we con-tinue to anticipate that growth for the year will averageabout 2% (after two years of 3% growth).

SWEDEN - The January inflation data should reinforce theRiksbanks confidence in the appropriateness of the February 12th decision to raise its benchmark interest rate 25basis points to a 5-year high of 4.25% by a vote of 4-2. Inannouncing the rate hike, the central bank also indicatedthat it will remain at roughly the same level over the com-ing year. While the monetary authorities are anticipatingsome slowing in economic growth, resource utilization inthe economy will nevertheless be higher than normalpointing to a relatively slow easing in inflationary pressuresLabour market conditions continue to improve, though at amore subdued pace than in 2007. The January jobless ratedeclined by a half percentage point from a year earlier to6.4%, as employment rose by 1.2% (compared with year-on-year gains averaging 2.2% through the final three

months of 2007). The headline inflation rate remainedabove 3.0% y/y for a third consecutive month in Januarywhile the underlying rate accelerated to a 4-year high o2.1%. As is the case across most of the world, higher en-ergy and food costs are a key factor in the pickup in head-line inflation, reinforced by rising housing/utilities costs andincreases in indirect taxes (on alcohol and tobacco). Whilethe majority of these components are not interest rate-sensitive, concerns about possible spillover effects at atime when the economy may still be straining its capacitylimits provided ample justification for precautionary policytightening.


8/17



ASIA/OCEANIA/EUROPE Erik Nilsson +1 416 866-4205 Tuuli McCully +1 416 863-2859Currency Outlook Stephen Malyon +1 416 863-7719 Camilla Sutton +1 416 866-5470

AUSTRALIA - February was a solid month for the AUD as it proved to be the strongest performing primary currency (atthe time of writing). A key technical test is imminent as the currency will need to break above the November 2007 high o0.9400 for enough conviction to really push the AUD substantially higher. However, as we go to press speculators and

technicals remain bullish, which should bode well for AUD in March and April.

NEW ZEALAND - The speculative community has been fairly quiet with regards to the NZD, even as the currency hasbroken to a new 26-year high of 0.8213 against the USD. The near-term technical outlook continues to be favourable, asthe market has yet to reach overbought levels and the force behind the up move remains solid.

TAIWAN - We anticipate that the TWD will maintain a mild appreciating bias vis--vis the USD through 2008, as the impact of large balance of payments surpluses and the prospect of improved relations with the Peoples Republic of Chinaare offset by official doubts regarding the strength of domestic spending.

ICELAND - The Icelandic krona (ISK) will continue to be closely linked to investor sentiment and remains vulnerable to atightening of global credit conditions. However, substantial - and in some cases widening - positive interest rate differentials between Iceland and abroad should provide support to the ISK in the near term.

12 m 6 m 3 m 3 m 6 m 12 m

AUD/USD 0.79 0.82 0.88 0.94 0.96 0.99 AUD/USD

NZD/USD 0.70 0.70 0.76 0.83 0.84 0.85 NZD/USD

USD/TWD 32.99 33.00 32.26 31.41 30.87 29.83 USD/TWD

USD/ISK 66.2 63.6 61.3 66.2 67.3 69.7 USD/ISK

AUD/USD NZD/USD

USD/TWD USD/ISK

0.94

0.82

30.92

65.2

Currency TrendsSpot

27-Feb


0.75

0.78

0.80

0.83

0.85

0.88

0.90

0.93

0.95


0.66

0.68

0.70

0.72

0.74

0.76

0.78

0.80

0.82


30.50

31.00

31.50

32.00

32.50

33.00

33.50


58.0

60.0

62.0

64.0

66.0

68.0

70.0



9/17



ASIA/OCEANIA/EUROPE Erik Nilsson +1 416 866-4205Fundamental Commentary Tuuli McCully +1 416 863-2859

AUSTRALIA - The Reserve Bank of Australias (RBA) de-cision to push the benchmark interest rate up another 25basis points to 7.0% in early February highlights the central

banks ongoing disquiet regarding inflation. Subsequently-released wages data will reinforce those concerns. Thewage price index rose 1.1% q/q in the final quarter of 2007,leaving the annual rate of increase unchanged from theprevious quarter at 4.2%. With the jobless rate falling to a3-decade-plus low of 4.1%, there is considerable risk of arenewed acceleration in labour costs. Monetary policy com-mittee members described price pressures as broadlybased, and were expected to intensify in the current quar-ter. Moreover, inflation expectations were also tending torise. Importantly, the committee noted that staff projectionsindicated that inflation would remain above the 3% targetceiling at least over the next two years in the absence of

corrective measures. Indeed, there was some discussionregarding the possibility of a 50 basis point increase in viewof the need for a strong signal of the RBAs determinationto address the inflation problem. However, policymakersopted for a more gradual response, a decision that wasfinely balanced in part because the run-up in borrowingcosts since mid-2007 had outpaced the rise in the cashrate, and the impact of the higher price of credit was stillworking its way through the system. The RBAs next policymeeting will be held on March 4

th.

NEW ZEALAND - The prospect of monetary policy easingin New Zealand continues to be pushed further into thefuture. The national unemployment rate declined anothe

0.1 percentage point to a record-low 3.4% in the final quar-ter of 2007. Employment rose an impressive 1.1% q/q(2.5% y/y), with the gains entirely attributable to a furtherincrease in full-time positions. The Reserve Bank of NewZealand (RBNZ) has maintained its official cash rate (OCRat a record-high 8.25% since July 2007. There is some evi-dence that high interest rates are beginning to make themselves felt - January housing prices were up just 4.0% y/yand credit card usage is stabilizing. However, exports areproving surprisingly resilient alongside buoyant demand foNew Zealand dairy products. Moreover, price pressuresremain unacceptably high; the headline CPI jumped 1.2%q/q in Q4 2007. The RBNZ now expects consumer inflation

to remain above 3% in 2008, though it continues to expressconfidence that the current level of the OCR remains consistent with future inflation outcomes of 1 to 3 percent onaverage over the medium term. Under these conditionsthere is no reason to anticipate an early shift in the currenmonetary policy stance. Indeed, with wages (excludingovertime) rising by 1.0% q/q (3.3% y/y) in the fourth quarte(private sector wages rose 1.1% q/q, according to the offi-cial labour cost index), the possibility of another rate hikecannot be entirely dismissed.

TAIWAN - Economic growth in Taiwan remains heavilydependent on external trade. The current account surplus

last year reached a record USD31.7 billion, equivalent to8% of GDP. Real growth of 6.4% y/y in the final quarter of2007 was driven by a 12.9% y/y surge in exports of goodsand services - the second consecutive double-digit gain -more than double the 6.3% increase in imports. In contrast,domestic demand rose a minimal 1.3% y/y, as a modest2.2% increase in consumer spending was partially offset bya 1.6% drop in investment, the worst performance in sixquarters. Taiwans strong trade ties with the Peoples Re-public of China (PRC) - which we expect to register eco-nomic growth of more than 10% again this year - and amoderate depreciation of the New Taiwan dollar vis--visthe yuan will help to ensure another solid export perform-

ance this year. However, the momentum that was evidentin the second half of 2007 is unlikely to be sustained. Whilewe do expect some strengthening in domestic spending,gains are unlikely to be sufficient to offset some narrowingof the trade gap. As a result, the pace of economic expan-sion will likely fall back below the 5% threshold - more inline with Taiwans longer-term norm. The March 22

ndpresi-

dential election may set the stage for a less confrontationalstance vis--vis the issue of formal independence, pointingto improved political relations with the PRC, a developmentthat would boost domestic investor confidence.

ICELAND - Tight monetary conditions will remain in placein Iceland; the nations central bank kept its benchmark

interest rate unchanged at a record-high of 13.75% follow-ing the Board of Governors meeting on February 14

th

Monetary authorities deem that the earlier justification of anunchanged policy rate through mid-2008 is still valid despite the fact that the short-term inflation outlook is nowless favourable due to the recent depreciation of the kronaThe next monetary policy meeting is scheduled for Apri10

th. Consumer price inflation, which rebounded to a 1-yea

high of 6.8% y/y in February,continues to exceed the central banks 2.5% inflation target by a substantial margin onthe back of tight labour conditions, a strong housing markeand the governments expansionary fiscal policy. Howeverpolicymakers expect real estate prices to decline, which

should bring the inflation rate down accordingly. While themonetary authorities noted that uncertainty is greater thanbefore regarding the impact of deteriorating global financial conditions on Icelandic demand and inflation, they alsoobserved that the krona may lose ground concurrent witha reduction in the supply of foreign capital. Indeed, despiteimprovement in the external accounts, the countrys currenaccount deficit remains substantial - close to 15% of GDPin 2007 - entailing a long-term inflationary risk through thepossibility of currency depreciation alongside rising deficifunding costs should global financial conditions becomeless hospitable.


10/17



DEVELOPING ASIACurrency Outlook Erik Nilsson +1 416 866-4205

CHINA - We expect the authorities to countenance CNY appreciation of at least 10% against the USD in 2008 as part oa more comprehensive effort to curb inflationary impulses. Uncertainties regarding the export outlook and the squeezeon manufacturing profitability will be constraining factors on the currency.

INDIA - The period of INR appreciation vis--vis the USD may be near an end alongside a slowing in domestic industriaactivity. With output gains slowing and inflation still below target, we anticipate that the Reserve Bank of India will makea more determined effort to resist further INR strengthening in an attempt to sustain industrial and employment growth.

KOREA - Until the Bank of Korea is more confident about the sustainability of growth in domestic demand, it will likelylean against any rapid strengthening of the Korean won, though we expect some appreciation against the US dollar aspart of the central banks anti-inflation policy stance.

MALAYSIA - The upcoming general election on March 8th

is unlikely to prove disruptive to the ringgits gentle, persistenappreciating trend. Solid economic fundamentals, large balance of payments surpluses and a broader regional bias towards currency strengthening vis--vis the USD will remain supportive factors.

12 m 6 m 3 m 3 m 6 m 12 m

USD/CNY 7.74 7.55 7.40 6.98 6.83 6.51 USD/CNY

USD/INR 44.3 40.9 39.6 39.8 39.9 40.2 USD/INR

USD/KRW 943 939 925 928 917 896 USD/KRW

USD/MYR 3.50 3.51 3.36 3.19 3.19 3.15 USD/MYR

Currency TrendsSpot

27-Feb


7.14

39.8

938

3.19

USD/CNY USD/INR

USD/KRW USD/MYR

7.10

7.25

7.40

7.55

7.70


39.0

40.0

41.0

42.0

43.0

44.0

45.0


900

910

920

930

940

950


3.15

3.20

3.25

3.30

3.35

3.40

3.45

3.50

3.55



11/17



DEVELOPING ASIAFundamental Commentary Erik Nilsson +1 416 866-4205

CHINA - The internal debate regarding the appropriatepace of yuan appreciation is undoubtedly intense as infla-tionary pressures build and the trade surpluses continue to

widen. The January gap increased by 23% from a year ear-lier to USD19.5 billion, though imports outpaced exports bya narrow margin (28% y/y versus 27%). Some moderatequickening in yuan strengthening has clearly been en-dorsed to help address the burgeoning imbalance anddampen inflationary pressures: the currency has gained2.2% this year compared with 6.8% for the entirety of thepast year. Nevertheless, to alleviate some of the pressureon the yuan, the authorities have announced plans to easerestrictions on investment outflows by individuals and bylocal companies. Food remains the driving force behindconsumer inflation in China. Led by a 41.2% y/y increase inmeat costs, the consumer price index jumped 7.1% y/y in

January - the biggest advance since September 1996. Ex-cluding this component, pressures appear reasonably well-contained. However, recent official efforts to cap prices - inboth the public and private sector - make it difficult to drawfirm conclusions. The January figures may also have beendistorted by the impact of the severely disruptive weatherconditions and by preparations for the celebration of theLunar New Year. Nevertheless, it is clear that massive in-creases in domestic production capacity continue to limitthe potential for price increases across a wide range ofconsumer goods.

INDIA - Indias industrial sector continues to register solidgains, but some deceleration - to a more sustainable pace is evident. Output rose 7.6% y/y in December, an improve

ment from Novembers modest 5.1% gain, but still belowthe 6-month average of 8.5%. Manufacturing activity rose8.4% y/y, led by a 16.6% increase in capital goods; however, this represented the smallest advance in machineryand equipment production in five months. This suggeststhat some cooling in the rate of expansion in business investment is under way alongside a noticeable softening indemand for big-ticket consumer goods: output of consumedurables products was up a minimal 2.2% y/y in Decembeand had been below year-earlier levels in three of the previous four months. The persistent softness prompted the finance minister to direct state-owned banks to lower theiprime rate. However, inflationary pressures are once again

on the rise. The wholesale price index was up 4.35% y/y inearly February, a 6-month high; all major components othe index were up by more than 4.0%. Under these conditions, we expect the Reserve Bank of India to maintain itscurrent monetary policy stance. The February 29

thfedera

budget for fiscal year 2008-09 (beginning April 1st) should

prove relatively neutral for the rupee, as the governmenwill likely maintain its current overall fiscal stance of limitedannual reductions in the deficit/GDP ratio (this yearsbudget shortfall is expected to be just over 3% of GDP).

KOREA - A second consecutive monthly decline in Koreasjobless rate to a 5-year low of 3.0% reinforces our view that

the nation will enjoy another solid, though unspectacularyear of economic growth. We expect output to rise by 4-4% in 2008 following a 5% gain last year. While centralbank concerns about the extent of economic decelerationmay prompt intermittent intervention to stem excessiveKRW appreciation, we expect the Bank of Korea to toleratesome currency strengthening; the headline consumer priceindex rose by 3.9% y/y in January, a 3-year high andwholesale prices jumped 5.9%. The monetary authoritiesare having mixed success in curbing lending growth. Nev-ertheless, as was widely anticipated, policymakers opted tomaintain the benchmark interest rate at 5.0% following theirFebruary policy meeting and an adjustment in the near-

term is unlikely. Earlier concerns regarding the build-up inmortgage debt - and rapid increases in house prices - areabating alongside the marked easing in mortgage lendingto a minimal 2.1% y/y in January. With consumer confi-dence slipping back to a 7-month low, a significantstrengthening in household borrowing (and spending) inthe near-term is unlikely. However, business borrowing -largely by small- and medium-sized firms - is still growing ata 20%-plus annual pace, raising concerns about the risk ofa possible deterioration in business balance sheets at atime of increasing economic uncertainty.

MALAYSIA - Prime Minister Abdullah Ahmad Badawi hasdissolved parliament and Malaysia will hold a general elec

tion on March 8th, more than a year ahead of the expirationof the governments five-year term. The coalition is widelyexpected to maintain its five-decade hold on power andmajor shifts in economic policy are unlikely. Abdullahs ownpolitical future will largely depend on the margin of victoryFavouring the government is the fact that the economy hasproven relatively resilient to the global slowdown, thoughsome deceleration will be evident. The pickup in industriagrowth to 5.7% y/y in December - a 12-month high - mayprove temporary. Industrial activity is heavily driven by exports - indeed, the value of manufactured exports is equivalent to more than 90% of Malaysian GDP - and the prospect of a slowing in global growth in 2008 points to broadly

based easing in demand for Malaysian products; foreignsales (in USD terms) rose by close to 10% in 2007. Consumer inflation remains low, a trend that will be supportedby ongoing appreciation of the ringgit. Although we do noexpect any early shift in monetary policy, a still relativelysubdued price performance - the headline consumer priceindex rose 2.3% y/y in January - gives the central banksome leeway to lower its benchmark interest rate, whichhas been held at 3.5% since April 2006, in the event of anysignificant weakening in domestic economic activity.


12/17



DEVELOPING AMERICASCurrency Outlook Pablo F.G. Brard +1 416 862-3876

BRAZIL - The Brazilian real (BRL) closed the week on a very bullish tone: the central bank announced that the countryhas achieved for the first time net external creditor status. Market participants reacted positively to the news, as the at-tainment of full investment-grade status is getting closer. The BRL traded below 1.70 per USD on Friday (please note

that the USD/BRL reached an all-time high of 3.95 in October 2002).MEXICO - The Mexican peso (MXN) seems to be trapped in a wide, yet well entrenched, trading pattern between 10.70and 11 per USD. The increase in government bond yields in local-currency markets has instilled a sense of comfortamongst emerging-market investors. Crude oil prices and a resilient economy are also factors supporting a stable, if noappreciating, trend for the MXN.

CHILE - The Chilean peso remains strongly influenced by a recovery in relevant commodity prices and by widening interest rate differentials. The next monetary-policy setting meeting is scheduled to take place on March 13

th: further tight

ening cannot be entirely ruled out. At present, the monetary policy reference rate is set at 6%.ARGENTINA - The Argentine peso is gradually losing its value, as a means of payment and as a reserve asset. Theadministration dictates the pace of devaluation, fuelling currency-related inflation. The stubbornly implemented unorthodox currency policy will lead to a more intense depreciation should China undergo any sizable correction in its financia(debt and equity) markets.

12 m 6 m 3 m 3 m 6 m 12 m

USD/BRL 2.12 1.96 1.80 1.77 1.78 1.82 USD/BRL

USD/MXN 11.17 11.03 10.92 10.90 10.96 11.10 USD/MXN

USD/CLP 540 524 506 470 473 482 USD/CLP

USD/ARS 3.10 3.16 3.15 3.20 3.23 3.33 USD/ARS

USD/BRL USD/MXN

USD/CLP USD/ARS

1.66

10.74

463

3.16

Currency TrendsSpot

27-Feb


1.60

1.70

1.80

1.90

2.00

2.10

2.20


10.60

10.70

10.80

10.90

11.00

11.10

11.20


460

470

480

490

500

510

520

530

540

550


3.07

3.09

3.11

3.13

3.15

3.17

3.19



13/17



DEVELOPING AMERICASFundamental Commentary Pablo F.G. Brard +1 416 862-3876

BRAZIL - Brazilian financial markets are showing remark-able resilience to collapsing US interest rates and an oilprice at almost triple digits. At the same time, however, we

caution that the vulnerability of neighbouring economies(and financial markets) to a severe asset-price adjustmentin Brazilian securities (perhaps as a result of a correction inChina-led equity markets) has emerged as one of the mostrelevant risk factors to monitor in 2008. Status quo inmonetary policy seems to dominate the thinking in financialmarket participants ahead of the decision to be adopted atthe COPOM (monetary policy committee) meeting onMarch 5

th: the government-administered reference SELIC

rate remains at 11.25%. The minutes of the January 22nd

COPOM meeting highlighting that IPCA-based consumerprice inflation has been less remarkably benign than thatobserved in previous quarters. At the same time, the re-

port focused on the solid performance of domestic demandand industrial output: in the past 12 months, industrial pro-duction and retail sales grew by 5.5% and 9.2%, respec-tively. The government also noted that the external sectorremains a major contributor to growth, although there aretentative signs of deceleration in net export activity: the cur-rent account surplus was USD3.6 billion in 2007, equivalentto 0.3% of GDP on the back of solid export performance:foreign sales totalled USD161 billion.

MEXICO - Mexico continues to weather the aftershocks othe US-led sub-prime crisis and global credit crunch relatively well. Although a sizable downturn in the US economy

will affect the pace of economic expansion south of the border, the administration of President Felipe CalderonHinojosa will inject the necessary fiscal stimuli to compensate for the loss of US momentum. At the heart of this implied sense of decoupling/resilience enjoyed by Mexico area solid domestic financial sector and the orderly and adequately supervised development of a local-currency fixedincome market. The latest monetary policy decision tomaintain the status quo last week did not cause any material shift in local investors portfolios. Financial markets remained broadly stable this month, despite the sporadic gyrations caused by developments outside of Mexican territory: USD/MXN averaged 10.78 in February, and the IPC

equity index consolidated the gains achieved since midJanuary. Data on economic activity show a pattern of expansion: though manufacturing slowed considerably, reaGDP grew by 3.8% y/y in the fourth quarter of 2007. Theservices-based sectors transportation, financial servicesand retail trade showed the best economic performancesFor the year as a whole, the economy increased by 3.3%not a bad figure considering the storm of disruptive eventsnorth of the border. In a recent official forecast revision, theministry of finance calls for a mild slowdown this year to2.8%.

CHILE - The world is focused on the possibility of a severeeconomic downturn in the United States, already felt in the

distressed housing market. Yet, commodity prices haverecouped a directional upward trend of late, with positiveimplications for Andean metal-exporting economies, andassociated floating currencies. As for the effect of monetarypolicy trends and interest rate differentials, Chilean local-currency securities have clearly received support fromhigher government-administered short-term interest rates,as the central bank embarks on a decisive, somewhat over-due, strategy to contain inflationary expectations. Chile isalways fighting its own inflation specters. The monetaryauthorities caught off-guard by the price pressures thatemerged over the past 12 months. Consumer price inflationreached 7.5% y/y in January. Now, with a new leadership

in charge, the central bank is resorting to aggressive ortho-dox mechanisms, that is higher interest rates, to try to con-tain and reverse the current trend. In doing so, the pace ofeconomic expansion will continue to slow, prompting globalanalysts and investors to downgrade their economic growthprojections for this year and next. Meanwhile, the Chileanpeso has attained a very stable trading range between 460and 480 per USD, shrugging off the recent escalation in oilprices. Undoubtedly, widening interest rate differentials andcopper prices in ascendancy have instilled strong supportto the Chilean currency.

ARGENTINA - Argentina continues to embrace a de-factopolicy of international isolation. Government policies imple

mented by the Kirchner(s) administration continue to generate capital flight, food and (transport) fuel shortages and, oincreasingly alarming relevance, emerging signs of hidden(hyper) inflation. The apparent comfort amongst Argentinepolicymakers would be abruptly overturned should Brazface a major equity market correction and currency depreciation. The ghost of hyperinflation is slowly reappearing inthe memory (and business plans) of the commercial andcorporate sector in Argentina. Government authorities remain in a state of disruptive denial. Of course, neither unionleaders nor households believe the official figures (8.2% y/yin January 2008). Social tensions and wage demands are brewing, putting at risk the period of sustained eco

nomic expansion and putting into doubt this sense of artificial price stability. At the heart of the unmanageable pricepressures lies the current policy of price controls (transporfuels) and subsidies to inefficiently run organizations (publictransport services, for example) as well as the perceivedstrategy of re-nationalization of corporations which weretransferred to private hands during the nineties. Any serious corporate business with a long-term strategic commitment to Argentina is now incorporating inflation scenariosinto its business plans which exceed the official numbersby a factor of three or four.


14/17



DEVELOPING EUROPE/AFRICA Pablo F.G. Brard +1 416 862-3876Currency Outlook Tuuli McCully +1 416 863-2859

RUSSIA - The Russian ruble (RUB) maintains a stable tone. Global energy prices, sizable and growing foreign ex-change reserves, an accelerating economy and the expected removal of election-related uncertainties are all key factorsinstilling a positive market mood into Russia. USD/RUB will likely maintain a trading range between 24.2 and 24.8

through the remainder of the quarter.

TURKEY - The Turkish lira (TRY) is well-positioned to maintain a stable trading pattern through the remainder of thequarter, despite the adverse effects caused by the global credit crunch in advanced economies. However, we expecUSD/TRY to close the year at 1.30, as investors incorporate the weakening external sector environment and a highedegree of global risk aversion.

SOUTH AFRICA - The South African rand (ZAR) is entering a period of stabilization. The heavy corrective forces affecting the ZAR will moderate in the coming months, paving the way for a period of consolidation and, perhaps, mild recovery. Precious metal prices trends remain ZAR-supportive: gold prices have recently traded above USD950/ounce.

POLAND - Strong albeit slowing economic growth prospects and a bias towards monetary policy tightening shouldprovide support to the Polish zloty vis--vis the euro through the first half of 2008.The new reform-oriented governmenalso improves the zloty outlook on the back of increased potential for an improved business climate and robust fiscaconsolidation. A widening current account deficit, however, may limit the prospects of further appreciation towards end2008.

12 m 6 m 3 m 3 m 6 m 12 m

USD/RUB 26.1 25.7 24.5 24.3 24.5 24.9 USD/RUB

USD/TRY 1.41 1.30 1.18 1.21 1.24 1.32 USD/TRY

USD/ZAR 7.23 7.15 6.80 7.60 7.75 8.08 USD/ZAR

EUR/PLN 3.91 3.82 3.61 3.56 3.54 3.52 EUR/PLN

Currency TrendsSpot

27-Feb


24.1

1.18

7.44

3.52

USD/RUB USD/TRY

USD/ZAR EUR/PLN

24.2

24.5

24.8

25.1

25.4

25.7

26.0

26.3


1.13

1.18

1.23

1.28

1.33

1.38

1.43


6.48

6.68

6.88

7.08

7.28

7.48

7.68


3.50

3.55

3.60

3.65

3.70

3.75

3.80

3.85

3.90

3.95



15/17



DEVELOPING EUROPE/AFRICA Pablo F.G. Brard +1 416 862-3876Fundamental Commentary Tuuli McCully +1 416 863-2859

RUSSIA - Russian stocks (as measured by the MICEX10index) have suffered a substantial downward adjustmentsince the beginning of the year, the most acute sell-off

within the so-called BRIC (Brazil, Russia, India and China)group. The Russian ruble has also adopted a somewhatdefensive tone; however, oil and natural gas prices to-gether with massive foreign exchange reserves remainvery RUB supportive. Indeed, the government counts onmore than USD600 billion in reserves and stabilizationfunds to influence the exchange rate, and investors haveno market-induced mechanism to alter the policy-guidedexchange rate. On the political front, Mr. Dmitry Medvedev,appointed by Vladimir Putin to succeed him as Russianpresident is almost sure to win the March 2 election, provid-ing a sense of policy continuity (and some tacit comfort) toinvestors exposed to Russian local-currency assets. The

monetary front remains most challenging, as highlighted bythe central banks decision to increase its discount rate by25 bps to 10% and hike reserve requirements on Febru-ary 4

thin response to escalating price pressures; headline

inflation reached 12.6% y/y in January, sharply exceedingthe official target. In brief, a decisive strategy to cool theeconomy will need to be implemented to curb the currentadverse inflation trend and restore expectations to normallevels; until then, investors will likely exert a more cautioustone in their portfolio allocation decisions.

TURKEY - Resilience to global financial shocks and investors indifference to escalating military confrontation innorthern Iraq continue to shape sentiment in Turkish securities markets. The administration of President Recep Tayyip Erdogan deepened its military offensive to contain theinsurgency in northern Iraq, further increasing the countryspolitical risk component. Investors have, for now, shruggedoff the heightened security risks. On the monetary policyfront, the central bank opted to reduce its benchmark shortterm interest rates by 25 basis points on February 14

th: the

borrowing overnight rate to 15.25% and the lending rate to19.25%. When discounting expected inflation in the next 12months, real short-term interest rates continue to be verysupportive to the TRY. In fact, trading patterns have beenquite stable since the beginning of the year: USD/TRYseems to be trapped in a 1.15-1.25 range. The central bank

remains committed to its primary objective, which is toachieve and maintain price stability. The latest officiacommuniqu of the monetary authorities signals that theTurkish economy maintains a moderate pace of expansionand that the key factors shaping the inflation outlook remain high energy and food costs. Consumer prices increased by 8.2% y/y in January; the central bank stressedthat monetary conditions aim at supporting the process odisinflation, yet monetary policy remains restrictive despitethe recent interest rate reductions.

SOUTH AFRICA - Global market participants severely pun-ished the South African currency on the grounds of increas-

ing evidence of an imminent energy crisis, sharp economicdeceleration and persistently high consumer price inflation.To make matters worse, a period of global credit re-pricingwas activated as portfolio investors differentiated amongstemerging-market credits and currencies. The countrys stillwide current account deficit, coupled with renewed politicaluncertainties and a period of sustained securities marketsgains prompted an abrupt adjustment in securities valua-tions with adverse consequences to the ZAR. The ex-change rate ignored the bullish trend in precious metalmarkets and sharply depreciated from 6.70 to 7.93 perUSD in a matter of days; nevertheless, a process of recov-ery has recently taken shape. Looking ahead, domestic

interest rates will remain high, acting as a constrainingmechanism against capital flight and foreign capital repa-triation. The prospect of a more severe equity market cor-rection in China may in the near future instil a negativeview in South Africa and other emerging-market econo-mies. The outlook for the utility sector is grim, as electricityshortages will be in place in the coming months. It seemsthat a prolonged period of neglect on the part of the gov-ernment and the state-run Eskom organization has blockedan adequate investment plan to meet rising energy de-mand, a pattern that is also increasingly evident in otherdeveloping countries.

POLAND - Poland will remain among the growth leaders incentral Europe. Spurred on by solid gains in investmen

and consumer spending, the nations output expanded by6% in 2007 the fastest growth in a decade. We expecthe economy to stay on a favourable track in 2008, thoughthe pace is set to slow slightly to around 5% due to highedomestic interest rates and some cooling in European demand for Polish exports. The new pro-business government aims to lower taxes and push through economic reforms, which should provide support to Polands investmenand growth outlook. Inflationary pressures continue theiupward trend of recent months. Consumer price inflationaccelerated for a fifth consecutive month in January to4.3% y/y the highest in more than three years from4.0% the month before, continuing to exceed the centra

banks 2.5% inflation target by a substantial margin. Despite the fact that price pressures are driven mainly by highfood and energy costs, the National Bank of Poland tightened monetary conditions in the Monetary Policy Councmeeting on February 26

th-27

th, taking the benchmark inter

est rate to 5.50%.The decision reflects the fact that pricepressures persist amid expansionary demand conditionsWe expect further modest monetary tightening in the coming months, as Poland will likely remain relatively resilienin the face of the euro zones economic slowdown .


16/17



GLOBAL CURRENCY FORECAST (end of period)2006 2007 2008f 2009f

Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4

MAJOR CURRENCIES

Japan USD / JPY 119 112 103 100 107 106 105 103 100 98 98 100

Euro zone EUR / USD 1.32 1.46 1.58 1.55 1.50 1.53 1.55 1.58 1.59 1.60 1.57 1.55

EUR / JPY 157 163 163 155 161 162 163 163 159 157 154 155

UK GBP / USD 1.96 1.98 2.07 2.05 1.99 2.01 2.04 2.07 2.07 2.08 2.07 2.05

EUR / GBP 0.67 0.74 0.77 0.75 0.75 0.76 0.76 0.77 0.77 0.77 0.76 0.75

Switzerland USD / CHF 1.22 1.13 1.00 1.00 1.07 1.04 1.03 1.00 0.99 0.98 0.99 1.00

EUR / CHF 1.61 1.65 1.58 1.55 1.61 1.59 1.59 1.58 1.57 1.56 1.55 1.55

AMERICAS

Canada USD / CAD 1.17 1.00 0.96 0.97 0.99 0.98 0.97 0.96 0.94 0.95 0.96 0.97

CA D / USD 0.86 1.00 1.04 1.03 1.01 1.02 1.03 1.04 1.06 1.05 1.04 1.03

MexicoUSD / MXN 10.82 10.91 11.05 11.37 10.83 10.80 10.89 11.05 11.14 11.12 11.20 11.37

CAD / MXN 9.28 10.93 11.51 11.72 10.98 11.14 11.32 11.51 11.84 11.80 11.76 11.72

Argentina USD / ARS 3.06 3.15 3.30 3.50 3.17 3.21 3.25 3.30 3.35 3.40 3.45 3.50

Brazil USD / BRL 2.14 1.78 1.80 1.90 1.77 1.78 1.79 1.80 1.82 1.85 1.87 1.90

Chile USD / CLP 533 498 480 490 467 471 475 480 482 485 487 490

Colombia USD / COP 2240 2018 2025 2150 1865 1912 1960 2025 2056 2087 2118 2150

Peru USD / PEN 3.20 3.00 2.90 2.85 2.93 2.92 2.91 2.90 2.89 2.87 2.86 2.85

Venezuela 1/ USD / VEB 2.15 2.15 2.58 3.00 2.18 2.29 2.41 2.58 2.68 2.78 2.89 3.00

ASIA / OCEANIA

Australia AUD / USD 0.79 0.88 0.98 0.93 0.92 0.94 0.96 0.98 0.99 0.97 0.95 0.93

China USD / CNY 7.81 7.30 6.60 6.10 7.08 6.93 6.79 6.60 6.47 6.35 6.22 6.10

Hong Kong USD / HKD 7.78 7.80 7.73 7.70 7.79 7.77 7.75 7.73 7.72 7.71 7.71 7.70

India USD / INR 44.3 39.4 40.0 41.0 39.8 39.9 39.9 40.0 40.2 40.5 40.7 41.0

Indonesia 2/ USD / IDR 8.99 9.40 9.50 9.70 9.09 9.21 9.33 9.50 9.55 9.60 9.65 9.70

Malaysia USD / MYR 3.53 3.31 3.18 3.00 3.19 3.19 3.19 3.18 3.13 3.09 3.04 3.00

New Zealand NZD / USD 0.70 0.77 0.86 0.80 0.82 0.83 0.84 0.86 0.84 0.83 0.81 0.80

Philippines USD / PHP 49.0 41.2 41.0 42.0 40.4 40.6 40.7 41.0 41.2 41.5 41.7 42.0

Singapore USD / SGD 1.53 1.44 1.39 1.37 1.41 1.41 1.40 1.39 1.38 1.38 1.37 1.37

South Korea USD / KRW 930 936 900 875 935 924 914 900 894 887 881 875

Thailand USD / THB 35.5 29.8 30.0 30.5 29.9 29.9 30.0 30.0 30.1 30.2 30.4 30.5

Taiwan USD / TWD 32.6 32.4 30.0 29.0 31.8 31.2 30.7 30.0 29.7 29.5 29.2 29.0

EUROPE / AFRICA

Czech Rep. EUR/CZK 27.5 26.5 25.0 25.2 25.8 25.6 25.3 25.0 25.0 25.1 25.1 25.2

Iceland USD/ISK 71.0 62.8 69.0 73.0 65.6 66.6 67.6 69.0 70.0 71.0 72.0 73.0

Hungary EUR/HUF 251 253 260 270 258 259 259 260 262 265 267 270

Poland EUR/PLN 3.83 3.60 3.50 3.60 3.58 3.56 3.53 3.50 3.52 3.55 3.57 3.60

Russia USD / RUB 26.3 24.6 24.8 25.5 24.2 24.3 24.5 24.8 25.0 25.1 25.3 25.5

South Africa USD / ZAR 7.01 6.86 8.00 8.50 7.51 7.65 7.80 8.00 8.12 8.25 8.37 8.50

Sweden EUR / SEK 9.04 9.44 9.10 9.00 9.31 9.25 9.18 9.10 9.07 9.05 9.02 9.00

Turkey USD / TRY 1.42 1.17 1.30 1.45 1.19 1.22 1.26 1.30 1.34 1.37 1.41 1.45

a: actual; f: f orecast; 1/ a new "strong bolivar" w as announced on January 1st, 2008, equivalent to 1000 bolivars; 2/ in thousands

North

South

2008f 2009f


17/17

Foreign Exchange Outlook

International Research Group

Pablo F.G. Brard, [email protected]

Tuuli [email protected]

Erik [email protected]

Estela [email protected]

Oscar Snchez

[email protected]

Canadian & U.S. Economic Research

Karen [email protected]

Gorica [email protected]

Adrienne Warren

[email protected]

Foreign Exchange Research

Stephen [email protected]

Camilla [email protected]

Scotia Economics

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Email: [email protected]

This Report is prepared by Scotia Economics as a resource for the clients of Scotiabank and Scotia Capital. While theinformation is from sources believed reliable, neither the information nor the forecast shall be taken as a representation for which

The Bank of Nova Scotia or Scotia Capital Inc. or any of their employees incur any responsibility.

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Forex Outlook