ScotiaBank JUL FX Outlook

8/9/2019 ScotiaBank JUL FX Outlook

1/17

Global Economic Research July 2010

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

Index

Market Tone & Fundamental Focus.........................................................................................3

US/Canada.................................................................................................................................. 5

Europe/Japan (Majors) .............................................................................................................. 6

Asia/Oceania/Europe................................................................................................................. 8

Developing Asia.......................................................................................................................10

Developing Americas .............................................................................................................. 12

Developing Europe/Africa.......................................................................................................14

Global Currency Forecast.......................................................................................................16

Renewed USD weakness, evidence of global economicslowdown, prolonged monetary stimulus in developedeconomies, European banking sector audits, currency regimeshifts in China, and technical overvaluation in emergingcountries are swaying capital flows in global currency markets.

The USD is in retrenchment mode. NAFTA zone currencies areon the defensive as global recovery uncertainties minimized thepremium linked to interest rate differentials. However, the CADshould regain strength and reach parity vs. the USD, while theMXN will be vulnerable to oil price swings.

Renewed EUR strength will be short-lived due to persistentstructural weaknesses in Europe linked to debt/fiscalsustainability and banking sector auditing/restructuring activity.The GBP has appreciated following the release of the UK

budget.

In Asia, a sharp JPY appreciation may revive Japansintervention fears. A more flexible currency policy in Chinainstilled a positive tone into other floating currencies such asthe KRW and the MYR. Meanwhile, high-yield currencies suchas the BRL, ZAR and TRY are vulnerable to profit taking activity.


2/17


Actual Q1 10 Q2 10 Q3 10 Q4 10 Q1 11 Q2 11 Q3 11 Q4 111.27 1.35 1.22 1.17 1.19 1.21 1.22 1.24 1.26

1.35 1.22 1.20 1.20 1.20 1.20 1.20 1.21

87.4 93.5 88 93 95 97 98 99 100

93.5 88 94 95 97 99 99 991.52 1.52 1.49 1.48 1.50 1.51 1.52 1.54 1.55

1.52 1.49 1.43 1.44 1.44 1.45 1.46 1.48

1.05 1.02 1.06 1.01 1.00 0.99 0.98 0.97 0.97

1.02 1.06 1.03 1.03 1.03 1.03 1.04 1.04

0.86 0.92 0.84 0.88 0.90 0.91 0.92 0.93 0.94

0.92 0.84 0.86 0.86 0.86 0.87 0.87 0.87

12.84 12.37 12.94 12.65 12.80 12.94 12.96 13.08 13.22

12.37 12.94 12.48 12.44 12.40 12.35 12.57 12.78

(*) Source: Consensus Economics Inc. July 2010

Consensus*GBPUSD

Consensus*

Consensus*

USDCAD

Consensus*

AUDUSD

USDMXN

July 7, 2010EURUSD

Consensus*

USDJPY

AUDUSD USDMXN

EURUSD USDJPY

GBPUSD USDCAD

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

86

93

100

107

114

121

Jun-

05

Dec-05

Jun-

06

Dec-06

Jun-

07

Dec-07

Jun-

08

Dec-08

Jun-

09

Dec-09

Jun-

10

USD/JPY

100 Day

200 Day

1.12

1.22

1.32

1.42

1.52

1.62

Jun-

05

Nov-

05

Apr-0

6

Sep-

06

Feb-

07

Jul-0

7

Dec-07

May

-08

Oct-

08

Mar

-09

Aug-

09

Jan-

10

Jun-

10

EUR/USD

100 Day

200 Day

1.36

1.51

1.66

1.81

1.96

2.11

Jun-

05

Dec-05

Jun-

06

Dec-06

Jun-

07

Dec-07

Jun-

08

Dec-08

Jun-

09

Dec-09

Jun-

10

GBP/USD

100 Day

200 Day

0.90

0.98

1.06

1.14

1.22

1.30

Jun-

05

Dec-05

Jun-

06

Dec-06

Jun-

07

Dec-07

Jun-

08

Dec-08

Jun-

09

Dec-09

Jun-

10

USD/CAD

100 Day

200 Day

0.59

0.67

0.74

0.82

0.89

0.97

Jun-

05

Dec-05

Jun-

06

Dec-06

Jun-

07

Dec-07

Jun-

08

Dec-08

Jun-

09

Dec-09

Jun-

10

AUD/USD100 Day

200 Day

9.7

10.8

11.9

13.0

14.1

15.2

Jun-

05

Dec-05

Jun-

06

Dec-06

Jun-

07

Dec-07

Jun-

08

Dec-08

Jun-

09

Dec-09

Jun-

10

USD/MXN

100 Day

200 Day


3/17


Intensifying global risk aversion, reversal of US dollar(USD) strength, increasing concerns about global eco-nomic deceleration, commodity price shifts, systemic risk

management in the European financial sector, adjust-ments to Chinas exchange rate policy, ongoing risk re-pricing in sovereign credit markets, and emerging mone-tary policy adjustments in key emerging-market econo-mies will shape capital flows in foreign exchange marketsin the near term.

The USD has adopted a defensive bias following sixmonths of steady appreciation versus major peer curren-cies. Persistent weakness in labour and housing marketsas well as discouraging manufacturing activity instilled anegative sentiment. In response to the intensifying stressin short-term funding markets as a result of the deteriorat-

ing European fiscal situation, the US Federal Reserve(Fed) reinstated a program of reciprocal currency ar-rangements with major central banks. Within the NAFTAzone, the Canadian dollar (CAD) and the Mexican peso(MXN) were adversely affected by the renewed USDweakness and commodity price shifts. Weak US eco-nomic releases, combined with disappointing CanadianApril GDP data and soft Chinese PMI have all put down-ward pressure on the global growth outlook. However, webelieve that USDCAD will move towards parity into year-end, based on a relatively strong sovereign position,global appetite for CAD-denominated assets, interest ratedifferentials and relatively strong fundamentals. Howeverin the near term, the risks have shifted towards continuingCAD softening during the summer. The regional monetaryoutlook remains stable as the Fed is not hinting at an ad-

justment in the market-sensitive Fed funds. Banco deMexico does not seem to be in a hurry to follow Canadain increasing its policy-setting rate.

Asian currency market dynamics are dominated by therenewed strength of the Japanese yen (JPY) coupled withpotential deceleration in Chinas economic activity andrecent adjustments to its currency regime. The JPY hasbeen a major beneficiary from the renewed USD weak-ness despite Japans significant fiscal challenges. Japa-nese policymakers traditionally become more cautious

when USD/JPY trades, as is currently the case, below the90 mark. China introduced changes to its currency policyin mid-June allowing a more flexible trading band whichpushed the renminbi (CNY) from 6.82 to 6.76 per USD.We expect USDCNY to close at 6.60 and 6.20 in 2010and 2011, respectively. The core group of floating Asiancurrencies may receive a major boost from the appreciat-ing forces in both Japan and China in the weeks ahead;the South Korean won (KRW) and the Malaysian ringgit(MYR) in particular may accelerate their revaluation pacedue to alignment to an appreciating CNY. However, a

prolonged correction in Chinese equity securities as in-vestors revisit potential overheating and property sectobubble risks may limit currency gains in Asia.

The euro (EUR) is in recovery mode following six monthsof steady weakening versus major currencies; indeed, theEURUSD rate traded as low as 1.1877 in early Junedown from 1.5144 on November 25, 2009. At the heart othe sudden move is the market realization that decisiveand collaborative European/IMF/US action would preventhe emergence of a regional banking crisis as a result ointensifying stress in European sovereign debt marketsThe process of regional financial stabilization is gatheringspeed. Global investors are eagerly awaiting the results othe stress tests being conducted on 25 major Europeanfinancial institutions. However, too many significant risks

weigh on the EUR outlook. Ongoing fears over the poten-tial for a Greek debt restructuring, the European CentraBank bond buying program, the upcoming bank stresstests, European Union (EU) liquidity and general EURoverhang should allow for at least another round of EURweakness in the third quarter. It seems that technical undervaluation may have emerged in the EUR and otherimpaired currencies in Europe; in fact, the British pound(GBP) also entered a recovering phase against both theUSD and the EUR, with further relief in store for the GBPThe budget released on June 22nd was as expected removing market uncertainty. Inflation pressures in theUnited Kingdom (UK) have eased, but remain elevatedThe Bank of Englands latest minutes proved more hawkish than expected. Fiscally, the UK debt position is weakbut because the maturity profile is long and most of thedebt is held domestically, market participants are lessconcerned with the UK's profile than the rest of EuropeWe currently expect GBP/USD to close the year at 1.50.

Emerging-market currencies are vulnerable to asset reallocation shifts in commodity and equity securities markets. The Chinese currency shift is occurring in the midsof a steady correction in Chinese share prices; indeedthe benchmark CSI300 equity market index lost 30%since the beginning of the year, injecting a cautious attitude amongst emerging-market (equity) investors. Within

the universe of capital flows-sensitive emerging-markecurrencies, the Brazilian real, the South African rand andthe Turkish lira are the most vulnerable to weaknessshould China trigger a synchronized correction in theemerging-market asset class. Energy-sensitive currenciessuch as the MXN or the Russian ruble may be more affected by shifts in crude oil prices. A major speculativeboost in favour of gold will continue to support the outlookfor the Chilean peso and the Peruvian sol.

MARKET TONE & FUNDAMENTAL FOCUSPablo F.G. Brard +1 416 862-3876 Camilla Sutton +1 416 866-5470


4/17


The risks of a weakening Canadian dollar (CAD) have increased materially since our June FX Monthly report; howeverthe majority of the factors that underpin our bullish CAD outlook remain in place. Accordingly, we have made no changeto our CAD forecast and expect it to close this year at parity with the USD. Over the last month, there has been increas

ing evidence that the outlook for both US and global growth has deteriorated. We would characterize this as a downshifting in the expectations as opposed to a radical change in the outlook for growth. Scotia Economics is forecasting 2010US growth of 3.2% and Chinese growth of 10%. Though the outlook has weakened, the recovery is still progressing, jusat a more moderate pace. Changing growth expectations and ongoing risk aversion will continue to be a key risk foCAD over the summer months. On the more positive side, there are several themes that continue to support our outlookfor a strengthening CAD. These include: 1) the outlook for interest rates. The Bank of Canada (BoC) has entered its interest rate hiking cycle and the spread between the Canadian overnight rate and the US is expected to widen to 75bptsby year-end. 2) The economic backdrop has deteriorated over the last month, but Canada is still firmly in recoverymode. On a relative basis, the fundamental backdrop remains solid. 3) The commodity outlook has weakened along withglobal growth expectations; however Scotia Economics continues to look for crude oil prices to average US$79 per bar-rel in 2010, a level which is supportive of CAD. 4) Canadas sovereign debt position is strong compared to its G7 col-leagues, which has already driven CAD positive flows this year. We expect this trend to continue, which will keep buyersof CAD active in the market. 5) If the US fails to provide a credible fiscal plan by the late Fall we would expect sentimen

to turn against the USD, pressuring it materially lower. 6) The desire to diversify away from USD-based reserves com-bined with uncertainty over Europe has increased speculation that the CAD might become an attractive home for a smalpercentage of reserves. 7) Finally, speculative long CAD positions have decreased, but investors remain net long thecurrency, highlighting that CAD is still a currency of choice for investors. Accordingly, as we look out to year-end, weacknowledge that the risks have increased, but believe that a move to parity is fundamentally justified.

CANADA Camilla Sutton +1 416 866-5470Sacha Tihanyi +1 416 862-3154

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

AUDCAD 0.937 0.945 0.931 0.889 0.900 0.902 AUDCAD

CADJPY 82.9 88.3 92.1 92.1 95.0 100.0 CADJPY

EURCAD 1.631 1.508 1.372 1.182 1.190 1.196 EURCAD

USDCAD 1.162 1.053 1.015 1.010 1.000 0.980 USDCAD

Currency TrendsSpot

7-Jul

OutlookGoing BackFX Rate FX Rate

0.907

83.4

1.327

1.049

AUDCAD CADJPY

EURCAD USDCAD

0.87

0.89

0.90

0.92

0.94

0.95

0.97

0.98

Jul-09 Sep-09 Nov-09 Jan-10 Mar-10 May-10 Jul-10

79

81

83

85

88

90

92

94


1.25

1.29

1.34

1.38

1.43

1.47

1.51

1.56

1.60

Jul-09 Sep-09 Nov-09 Jan-10 M ar-10 M ay-10 Jul-10

0.99

1.01

1.04

1.06

1.09

1.11

1.13

1.16



5/17


UNITED STATES - There has been much debate regardingthe efficacy of leading economic indicators over time, butthat debate is intensifying once again as the economy has

approached a turning point away from a temporary Vshape toward less robust growth prints. At issue is whetherthe US economy faces a renewed downturn within atwelve-month horizon, based on readings from some lead-ing market and composite indicators of economic growth.Recall that leading indicators are guides that may be usedand interpreted with caution, as none is infallible. That ca-veat is particularly true at this juncture of the recoveryphase. Upon surveying four leading economic indicators one market determined and three constructed it appearsthat the likelihood of a US downturn in the next six totwelve months is remote, at least for now. To clarify, adownturn in this case is not defined on the basis of short-lived data blips that are likely to occur. It would be a mate-rial sustained slowdown characterized by back-to-backquarterly contractions in GDP or satisfying an NBER-styledefinition of a renewed dip. In the near term, GDP growthwill likely be supported by capital investment, inventorycontributions and a mild pace of consumer expansion.Abruptly softer two-handled growth later this year and intonext could well, however, further disappoint the risk tradeseven if a decline in GDP is temporarily avoided. Ongoinginvestors concerns about the US economy are on a differ-ent time frame. A renewed decline over the next two tothree years is still likely. Witdrawal of fiscal stimulus in2012-13 could shave about 3 percentage points off GDPgrowth in each of those years. Private demand would need

to grow by 5-6% to offset this effect and net out two-handled GDP growth. Such a rate of growth in private de-mand would be highly unusual that far into the recovery,especially given that fiscal drag will weigh against privatedemand.

CANADA - After posting a strong cyclical recovery over thefinal quarter of 2009 and the first quarter of 2010, Canadaseconomic expansion appears to be losing some momen

tum, with many recent indicators coming in below expecta-tions. Labour market conditions remain strong, with theeconomy having fully recouped 75% of its recession joblosses as of May, and hiring surveys pointing to furthergains in the months ahead. Nonetheless, consumer sentiment and big-ticket spending cooled somewhat through thespring, suggesting some trepidation among householdsover the sustainability of the global economic recoveryHousing activity too has come off the boil as high homeprices and tighter lending criteria temper home salesprices and residential construction intentions. On balancehowever, we expect continued, even if more moderateoutput growth through the latter half of the year and into2011. Resource-related exports, production and investmenare ramping up again amid the continuing strength oemerging market demand and profitable pricing, helping tooffset a winding down in public infrastructure spendingSimilarly, business investment in machinery & equipmenas well as industrial and commercial leasing activity are onthe rise, supported by increased capacity utilization andhealthy corporate balance sheets. Inventory restocking wilcontinue to add to production this year, given lean stockpiles at the manufacturing, wholesale and retail levelsLeading composite indictors are still showing a broadlybased expansion, as is our diffusion index of GDP, whichcontinues to trend around its highest level in over twoyears. While slowing global growth is expected to moderate

the increase in domestic export volumes in the latter half othe year and into 2011, Canadas relatively healthy fiscaand banking sector fundamentals should keep the nation athe top end of the G7 performance ladder.

CANADAAND UNITED STATES Adrienne Warren +1 416 866-4315Fundamental Commentary Gorica Djeric +1 416 862-3080

MONETARY POLICY COMMENTARY Derek Holt +1 416 863-7707 Gorica Djeric +1 416 862-3080UNITED STATES - The FOMC kept rates unchanged in Juneand maintained its key buzzwords, supporting the view thatthe Fed will remain on hold until at least early next year. Kan-sas City Fed President Hoenig was still the sole dissenter.The statement was modestly more dovish, on developmentsabroad and the pace of economic recovery at home. Moreinsight will be available when the meeting minutes get re-leased on July 14. Should the Fed wait longer to start a hikingcampaign, it is unlikely that it would do so in late 2011-12,since 2012 is the year of maximum fiscal retrenchment, BaselIII and a Presidential election. Tightening monetary, fiscal andregulatory policy would imply a simultaneous adjustment that is a dicey game following political debate over Fed inde-pendence. The next most likely scenario would be to leaverates on hold until well into 2013-14, and thus skip the head-winds of 2012-13. The Fed has enormous other powers towithdraw liquidity (reverse repos, term deposit sales) and islikely to exercise them first.

CANADA - The Bank of Canada (BoC) hiked the overnighrate on June 1 by 25 bps to 0.50%, and re-established thenormal operating band of 50 bps. The BoC is holding a neutral bias, conveyed through repeated use of language such asnothing is pre-ordained. There are two possible explanations for such a stance. One, the BoC is leaving options openwhile trading off domestic strengths versus global fragilitiesUnder the second interpretation, the BoC is likely controllingthe curve and the loonie, as not to prematurely tighten. Keeping the markets convinced of this neutral bias will likely be-come a challenge later in the year. The BoC is expected totighten further in July and September taking the overnighrate to 1.0% before it takes a holiday in Q4. The risk thathe Bank pause in July is modest. Lower bond yields and aweaker loonie are more stimulative to Main Street than modest tightening in the near term. While economic growth mayshift into slightly lower gear through the second half of theyear, Canada is not returning to emergency-style conditions.


6/17


EURO ZONE - EUR/USD stabilized in June after reaching its lowest level since February 2006. A great deal of EURsstabilization has been driven by the rapid reduction in the markets historically extended short position. However, the mar-ket remains heavily short euros as the threat of sovereign debt stress and concerns over weakness in Euro zones bank

balance sheets keeps sentiment heavily skewed against EUR. Until both issues are settled with finality, speculative sentiment should remain negative for the currency.

JAPAN - The late June global equity sell-off, combined with the sharp deterioration in the yield advantage that USbonds have enjoyed over their Japanese counterparts, helped push JPY to its strongest level since late 2009. Our fun-damental outlook suggests that this trend will be temporary. JPY is expected to weaken as risk aversion eases andspeculators move back to net short against the yen as Japanese monetary dynamics leave it vulnerable to being usedas a funding currency.

UNITED KINGDOM - GBPs late May stabilization was followed in June by GBP/USDs best monthly performance sinceOctober 2009. This is consistent with a sharp improvement in GBP positioning as shorts have been pared back. A welreceived fiscal budget and a single dissent in favour of raising rates at the June Bank of England policy meeting havemade the market less willing to bet against the GBP on the threat of a sovereign credit downgrade or persistently loose

monetary policy.

SWITZERLAND - The burst of risk aversion in mid June combined with the reluctance of the Swiss National Bank toresist CHF appreciation helped to drive CHF to historical highs against EUR, and a one-month 9% gain against theUSD. The speculative community has failed to get fully behind this move however as the net CHF position remains inshort territory. We expect a much more gradual appreciation in CHF through to the end of the year, with a six month target of 1.27 in EURCHF.

MAJOR CURRENCIES Camilla Sutton +1 416 866-5470Currency Outlook Sacha Tihanyi +1 416 862-3154

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

EURUSD 1.40 1.43 1.35 1.17 1.19 1.22 EURUSD

USDJPY 96 93 93 93 95 98 USDJPY

GBPUSD 1.65 1.62 1.52 1.48 1.50 1.52 GBPUSD

EURCHF 1.52 1.48 1.42 1.29 1.27 1.24 EURCHF

EURUSD USDJPY

GBPUSD EURCHF

1.27

87

1.52

1.33

Currency TrendsSpot

7-Jul


1.21

1.25

1.29

1.33

1.37

1.41

1.45

1.49

Jul-09 Sep-09 Nov-09 Jan-10 Mar-10 M ay-10 Jul-10

86

88

90

91

93

95

97

98


1.42

1.46

1.50

1.53

1.57

1.61

1.65

1.68


1.32

1.35

1.38

1.40

1.43

1.46

1.49

1.51



7/17


EURO ZONE - Global investors await the release of thestress tests performed on 25 European financial institutionsscheduled for the second half of this month. In addition to

short-term volatility in investor sentiment, the ongoing debtsustainability crisis in Europe will also cause longer-termgrowth implications; tough austerity measures implementedin some European countries to restore fiscal credibility willdampen domestic demand prospects. Meanwhile, the sig-nificantly cheaper euro is providing a boost to exports, withbetter trade performance helping offset some of the eco-nomic effect from fiscal consolidation measures. Supportedby robust exports, industrial activity across the euro zone ison the mend. For the region as a whole, production rose0.8% m/m in April and 9.5% y/y though at the national levelthere were significant differences in performance betweenthe core countries and the euro zone periphery. The region-

wide purchasing managers indices for the manufacturingand services sectors showed mildly weaker readings inJune, indicating a growing, yet decelerating, business con-text. The headline consumer price inflation figure of 1.6% y/y for May remains comfortably within the European CentralBanks (ECB) target of below, but close to, 2%. We expectthe ECB to maintain the current monetary policy stance untilthe final quarter of 2011 due to the ongoing turmoil in theregion and uncertain growth prospects.

JAPAN - The change at the helm of the Democratic Partyof Japan (DPJ) has boosted its chances ahead of the Julyupper-house election. Japans incoming Prime Minister Mr

Naoto Kan (a former finance minister) has raised the possibility of increasing the controversial sales tax although thehike would be at least two years away with an aim of halving the public deficit by mid-decade. According to the mosrecent International Monetary Fund projections Japansbudget deficit is estimated to approach 10% of GDP in2010, taking gross public sector debt above 225% of GDPLatest external trade figures continue to support the coun-trys economic recovery. Export volumes increased at a 1%m/m rate in May following Aprils brisk 6.5% gain, takingthe average for the two months 9% over the correspondingfigure for the first-quarter. Foreign shipments have pickedup consistently since last October as growing demand from

China and developing Asia have bolstered the outlook oJapanese conglomerates. Foreign sales drove most of thefirst-quarter GDP gains when the economy grew at a 1.2%q/q rate, the highest expansion in a decade. An improve-ment in labour market indicators has been a by-product, asthe unemployment rate has fallen to 5.2%. Consumespending has yet to be re-ignited as evidenced by the 2%monthly fall in retail sales revenue during May. Euro weakness is bound to have an adverse effect in coming monthsas competitiveness losses vis--vis Germanys manufacturing products are likely to dent some momentum.

UNITED KINGDOM - The June 2010 Budget delivered bythe UKs new coalition government of the Conservativesand the Liberal Democrats contains austerity measuresthat will likely convince international credit rating agenciesof the determination of the UK administration to repair itsfinances, preventing a sovereign credit rating downgrade inthe foreseeable future.77% of the announced fiscal consoli-dation will take the form of spending cuts while the remain-ing 23% will consist of tax increases. The fiscal shortfall willbe reduced from 149 billion (10.1% of GDP) in FY-2010-11to 1.1% of GDP in FY2015-16. Public sector net debt is pro-

jected to peak at 70.3% of GDP in FY2014-15. The majortax change in the budget is the increase in the VAT to 20%from 17.5% (effective January 2011). Also, the governmentwill introduce a banking levy based on banks total liabilities

structured to encourage less risky funding profiles. To se-cure ongoing economic recovery, a majority of the austeritymeasures will take place in the latter half of the forecastperiod. The budgets underlying assumptions for economicgrowth are 1.2% this year, 2.3% in 2011 and 2.7-2.9% in2012-2015. Despite persistent inflationary pressures in theUK (CPI increased by 3.4% y/y in May), the budget in-creases the likelihood of an accommodative monetary pol-icy remaining in place for an extended period of time; weexpect the Bank of Englands benchmark short-term interestrate to remain unchanged at 0.5% until the second quarterof 2011.

SWITZERLAND - Deflationary risks are easing in Switzerland, according to the Swiss National Bank (SNB), implyingthat monetary authorities will be less likely to intervene inorder to stem an appreciation of the Swiss franc (CHFagainst the euro (EUR). Nevertheless, the SNBs policycommittee opted to maintain an expansionary monetarypolicy and leave the benchmark interest rate target a0.25% following its quarterly meeting on June 17th. The policymakers also noted the increased uncertainty in the financial markets related to the ongoing debt sustainability issuesin some euro zone countries; should these tensions lead toan appreciating bias of the CHF against the EUR and a re-newed threat of deflation, the authorities would be ready tointervene in the currency markets again. Consumer priceinflation was 1.1% y/y in May compared with the 1.4% rate

the month before; on a monthly basis, prices declined by0.1%. The next monetary policy meeting is scheduled foSeptember 16th. We anticipate an interest rate change inthe final quarter of 2010 in the midst of the steady stream opositive news that is setting the stage for economic growthof 2.0% in 2010, according to SNB projections. With government finances in a considerably better shape than the Euro-pean norm (the Swiss 2009 budget was virtually balanced)Switzerland has no immediate need for joining its regionapeers in their fiscal consolidation efforts.

MAJOR CURRENCIES Tuuli McCully +1 416 863-2859Fundamental Commentary Oscar Snchez +1 416 862-3174


8/17


AUSTRALIA - AUD has exhibited a high degree of volatility, something that has been reflected in speculative position-ing shifts. The net long AUD position plunged to its lowest level in over a year as speculators aggressively cut their longpositions, reflecting less conviction regarding the pace of the global growth expansion. Nevertheless, speculators remain

net long AUD, reestablishing longs on dips towards 0.8050. We support such positioning as we forecast AUDUSD toappreciate to 0.90 by the end of 2010.

NEW ZEALAND - NZD outperformed the other commodity currencies over the month of June thanks to rate support fromthe Reserve Bank of New Zealand. This helped reinforce a bottom in NZDUSD above 0.6570. Downtrend resistance offof the 2009 high poses a challenge at the 0.72 level, however we foresee a range trade for the pair with an appreciatorybias towards 0.70 by the end of the year.

TAIWAN - The Taiwanese dollar has recently been captured by the global risk aversion trend that interrupted its seculaappreciation evident through late April 2010. The recent policy shift away from extremely loose monetary conditionsChinese exchange rate flexibility, and the recently adopted trade agreement with the mainland will provide support forthe currency going forward.

NORWAY - NOK underperformed almost all majors in June, dragged lower by risk aversion and its proximity to negativeeuro zone sentiment. We target 6.35 in USDNOK by the end of Q3, though our end of year target of 6.30 will first haveto contend with the 2010 uptrend in the pair, formed off of the January and April lows. However, our constructive globagrowth and commodity outlook suggests that NOK weakness will only be temporary.

ASIA/OCEANIA/EUROPE Oscar Snchez +1 416 862-3174Currency Outlook Camilla Sutton +1 416 866-5470 Sacha Tihanyi +1 416 862-3154

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

AUDUSD 0.81 0.90 0.92 0.88 0.90 0.92 AUDUSD

NZDUSD 0.65 0.72 0.71 0.69 0.70 0.72 NZDUSD

USDTWD 32.8 32.0 31.8 31.0 30.0 29.2 USDTWD

USDNOK 6.43 5.79 5.94 6.35 6.30 6.20 USDNOK

Currency TrendsSpot

7-Jul


0.86

0.70

32.2

6.39

AUDUSD NZDUSD

USDTWD USDNOK

0.77

0.79

0.82

0.84

0.86

0.88

0.91

0.93


0.61

0.63

0.65

0.67

0.70

0.72

0.74

0.76


31.25

31.50

31.75

32.00

32.25

32.50

32.75

33.00


5.51

5.65

5.79

5.92

6.06

6.20

6.34

6.47

6.61



9/17


AUSTRALIA - A reshuffling within Australias Labour partyleadership resulted in Ms. Julia Gillard being sworn asprime minister on June 24th. Ms. Gillard takes over as

Primer Minister in the midst of an outstanding economicrebound, as most figures continue to point towards expan-sion. Last weeks publication of leading and coincident indi-cators displayed a continuation of the favorable outlook thathas been the norm since the turn of the year. On a similarnote, Australias statistics bureau reported 36,400 full-timeemployment positions were created in May, bringing thetotal number of full-time jobs added since August 2009 toover 170,000; 2.2% of the labour force. The unemploymentrate fell from 5.4% to 5.2%. With skilled job vacancies stillon the rise, the robust demand for workers will likely be in-creasingly reflected in higher wages, with positive ramifica-tions for consumer spending but potentially adverse implica-

tions for inflation. After its latest board meeting in early Junethe Reserve Bank of Australia kept the benchmark cashrate at 4.5% deeming that monetary conditions continue tobe appropriate for the near-term. The Australian centralbank has been a leader in the global monetary policy tight-ening cycle as it has raised the benchmark interest rate insix of the past nine policy meetings. The cash rate currentlystands at 4.5%, after being raised by 150 basis points sinceOctober. Monetary policy tightening will likely be resumedlater this year to prevent wage pressures from stoking infla-tion.

NEW ZEALAND - The policy committee of the Reservebank of New Zealand decided to increase the official cashrate by a quarter point to 2.75% on June 10th. Central bank

governor Allan Bollard stressed in a post-meeting statementhat he expected to continue to gradually remove monetarystimulus. Inflationary pressures remain muted, as the headline consumer price index rose just 0.4% q/q in the firsquarter of 2010 and is up 2% y/y (in the middle of the officiamedium-term target range of 1-3%), matching the advancein Q4 2009. However, the economy continues to propel for-ward at a reasonable pace after expanding during the firsquarter at a 0.6% quarterly rate on the back of exports andgovernment infrastructure spending. Improving terms otrade in Australia and persistent demand from China continue to support New Zealands agricultural exports. Latesindicators point towards growth becoming more broad

based as improving retail sales performance has beenbacked by consumer confidence gains and stronger laboumarket data. Although latest retail sales figures displayed afall during April, they remain on an upward trajectory for theyear with leading indicators for consumer spending pointingtowards a solid pickup in May. This is consistent with anenhanced labour market picture that shows the unemployment rate coming down to 6% so far in 2010 from 7.1% inthe last three months of 2009. We expect central bank tocontinue to move towards a less accommodative monetarypolicy stance during the second-half of 2010.

TAIWAN - Industrial output has expanded for nine con-secutive times on a yearly basis and is over 30% above

last years levels. The value of export shipments is equiva-lent to 70% of GDP, making it a principal driver of the coun-trys economic activity. After being among the hardest-hitby the global economic downturn Taiwanese exportershave been leading the economic recovery in Asia with for-eign shipments running at an over 30% y/y rate in the pastsix months. Looking ahead, although export orders duringApril and May fell on a monthly basis, they remain over10% above first quarter levels as demand from China con-tinues to propel ahead. Even orders coming out of theEuropean market about 17% of the total have in-creased in the second quarter. The export-led economicrebound has spilled over to domestic demand, where the

recovery in investment spending has been noteworthy. Jobmarket conditions have improved as the unemploymentrate came down in May to 5.2%, the lowest level in 17months. The improvement in labour market data has beenfollowing the persistent strengthening of industrial activity akey cyclical determinant of employment and incomegrowth. Inflationary concerns are yet to emerge with head-line consumer price inflation at 1% y/y. This, however, didnot stop the central bank from raising the rediscount rate by12.5 basis points after its monetary policy meeting in May,with the interest rate increase representing a normalizationof sorts as the benchmark rate was left still below 2%.

NORWAY - Norway is shifting to a less aggressive monetary tightening path. Following Norges Banks Executive

Board meeting on June 23rd

, the key policy rate was kepunchanged at 2.0%. The rate has been raised by 75 bpssince October 2009, with the most recent rate increase taking place in early May. In the official policy statementmonetary policymakers noted that the turmoil in global fi-nancial markets stemming from European debt sustainabil-ity issues is causing uncertainties for the countrys economic outlook. Substantial fiscal tightening in westernEuropean economies will dampen economic activity; theUK purchases almost a third of Norwegian exports. Therefore, the monetary authorities aim to keep the benchmarkinterest rate unchanged for a while with further tighteningoccurring later than previously envisaged. The policymak-

ers strategy is to keep the key rate within the 1-2%range until the October 27th Board meeting when the newpolicy outlines will be published. The next policy meeting isscheduled for August 11th. The headline inflation rate 2.5% y/y in May, down from 3.3% the month before is inline with the central banks 2.5% target. On a monthly ba-sis, prices decreased by 0.5%. The Norwegian economy ison solid footing; the general government budget as well asthe current account will remain comfortably in surplus in2010-11, averaging around 10% of GDP and 16% of GDPrespectively.

ASIA/OCEANIA/EUROPE Tuuli McCully +1 416 863-2859Fundamental Commentary Oscar Snchez +1 416 862-3174


10/17


CHINA - The lifting of the renminbi (CNY) peg against the US dollar announced by the Peoples Republic of China inJune will lead to a gradual appreciation in 2010-11. However, the prospect of a continuation of the downward trend inthe trade surplus, as growth in imports continues to outpace exports, leads us to not foresee a large appreciation of the

CNY in the next year and a half.

INDIA - We expect the Reserve Bank of India to continue tightening monetary conditions in the months ahead, a policythat will provide some near-term support to the Indian rupee. The exchange rate - currently 47 per US dollar - has barelyweakened by 1% this year; while moderate gains may be evident in the near-term, a reversal will eventually be requiredto compensate for Indias adverse inflation differential.KOREA - The South Korean won (KRW) has failed to regain the levels prior to the tensions that arose as a result of thebreaking of relations with the North. We anticipate the currency to remain supported by strong economic fundamentalsand a central bank switch towards monetary policy tightening in the coming months. The resumption of gradual appreciation of the RMB will also provide a strengthening tone to the KRW.

THAILAND - The Thai baht (THB) lost barely 1% reaching 32.67 in early June as a result of the countrys political tur-

moil. It currently trades at 32.49 remaining well supported as the countrys fundamentals are expected to revert to nor-mality in coming months. A recent downturn in inflationary pressures will prevent the central bank from joining the bandwagon of monetary tightening in the region.

DEVELOPING ASIACurrency Outlook Oscar Snchez +1 416 862-3174

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

USDCNY 6.83 6.83 6.83 6.75 6.60 6.40 USDCNY

USDINR 47.9 46.5 44.9 45.7 45.0 46.0 USDINR

USDKRW 1274 1164 1131 1170 1120 1084 USDKRW

USDTHB 34.1 33.4 32.3 32.5 32.5 32.7 USDTHB

USDCNY USDINR

USDKRW USDTHB

6.78

47.0

1223

32.5

Currency TrendsSpot

7-Jul


6.823

6.825

6.827

6.829

6.831

6.832

6.834

6.836


44.2

44.8

45.5

46.1

46.7

47.3

48.0

48.6


1100

1131

1163

1194

1225

1256

1288

1319


32.0

32.3

32.6

32.9

33.3

33.6

33.9

34.2



11/17


CHINA - Tighter credit conditions so far in 2010 as bankreserve requirements increases were complemented byofficial rhetoric discouraging excessive lending to rein in

goods and asset price pressures have resulted in a cooling-off in real estate activity. Moreover, no evident food costacceleration and the dissipation of base effects due in com-ing months could well support an ebbing of price pressuresnotwithstanding the recent uptick in the annual inflation rateto 3.2% in May. It was within this context that the PeoplesBank of China decided in June to allow the renminbi (RMB)to resume gradual appreciation. The announcement istherefore interpreted not as a strict monetary policy tighten-ing move, but more as a formal recognition by Chinese au-thorities of the end of the policy stimulus put in place tocounteract the global slump. Chinese policymakers havebecome more confident about the effects of moderate RMB

appreciation, in particular given the fact that export valuesincreased by over 30% y/y on average during the first fivemonths of the year. This has not prevented a fall in the Chi-nese trade surplus, which declined by almost 80% in thefirst four months of 2010, a trend that will likely be sup-ported by the exchange rate move as galloping imports con-tinue to surpass the rise in exports during 2010-11. Theexpansion in industrial output as measured by its year-over-year growth rate has moderated from the peak at the end of2009, and will likely become consistent with pre-crisisgrowth rates in coming months.

INDIA - Inflation in India is the highest among the majoglobal economies, as the wholesale price index rose 10.2%y/y in May. While food prices have begun to moderate from

elevated levels, nonfood inflation has picked up on theback of stronger manufacturing demand and higher fuecosts. The latter have come as a result of the governmentsreform of the administered domestic pricing mechanism fopetroleum products which linked petrol prices to global oicosts. Domestic spending gains and a recovery in foreignsales have been providing the foundation for output growthwith up trending price pressures in nonfood manufacturinga testament of the healthy economic pulse. Food pricepressures are expected to ease in coming months as aresult of an improved weather forecast for this years monsoon season, and due to the coming into play of high baseeffects. Notwithstanding the not too threatening inflationary

prospects, the Reserve Bank of India has been in monetarytightening mode for some time. The repo interest rate wasincreased for the third time this year to 5.5% after an un-scheduled announcement in early July. With Europe beingIndias main trade destination, monetary authorities haveunderlined the possible effects that public budget restraining measures in Europe could have on Indian exports. Sofar, however, no effect has been detected as the Indianeconomy is enjoying a combination of improved foreignshipments amid robust domestic growth. We expect IndianGDP to expand by 8% in 2010 and 7% in 2011.

KOREA - Industrial output increased for the eight consecu-tive month in May surpassing the level reached at the peak

of the previous business cycle. Merchandise exports haveplayed a prominent role in the recovery with overseas ship-ments increasing at an over 30% yearly rate. The pickup ineconomic activity has spilled to the job market as the unem-ployment rate has come down to 3.2% in May, from a 10-year high of 4.8% in January. The improvement in labourmarket data follow a strengthening of Korean real GDPgrowth to 2.1% q/q in the first quarter of 2010, up from anaverage of 1.5% q/q in the previous four quarters. Althoughdomestic demand has remained moderate, with private con-sumption edging up a sub-par 0.7% q/q in the first quarter,latest sales reports show persistent gains through May, sig-naling already improved prospects for consumer spending

for the second quarter. Although investment expanded forthe fifth consecutive term at the outset of 2010, it did so at adiminishing rate as investment in construction has laggedmachinery and equipment outlays. The outlook for inflationhas recently taken a turn for the worse as consumer pricesrose 2.7% y/y in May breaking the downward trend preva-lent since the start of 2010. Rising food and fuel costs weremainly to blame for accelerating price pressures. The Bankof Korea kept the overnight call rate unchanged for the 16thmonth in a row at a 2% record low in early June. We expecta switch to a monetary tightening stance after the centralbanks forthcoming July 8th meeting.

THAILAND - Partly as a result of the stressful political environment Thailands industrial output eased in April and May

The imposition of curfews up until mid-May disrupted nighshifts and product shipments with some factories suspending work amid the countrys worst political violence in twodecades. Manufacturing output contracted by 1% in AprilMay vis--vis the first quarter, with the slowdown likely toprove temporary as export orders have recovered throughMay. Consumption and tourism were also affected by theturmoil, as tourist arrivals fell by 18% month-over-month inApril with figures for May likely to prove worse. Although apickup in consumer spending failed to persist through Aprila comeback is anticipated as labour market conditions remain supportive of income gains. Business sentiment hasyet to come back to pre-turmoil levels as it dipped in the

midst of the April uncertainty but recovered significanground in May. Policy efforts by the Thai government hassupported the comeback offering incentives to local businesses and foreign investors. Contrary to global trends, thefiscal policy agenda has also been tilted towards expansioas government spending will take the 2010-11 public deficiall the way to the maximum allowed under the constitutionYearly inflation of 3.3% in June displayed a favourable slowdown, leading us to expect the central bank to keep itsbenchmark interest rate unchanged at 1.25% during its July14th policy meeting. We anticipate the economy to grow by4.5% in 2010 followed by 4% in 2011.

DEVELOPING ASIAFundamental Commentary Oscar Snchez +1 416 862-3174


12/17


BRAZIL - The Brazilian real (BRL) will remain in volatile trading in the months to come. Robust economic growth, aggres-sive interest rate hikes, steady accumulation of foreign exchange reserves, risk re-pricing in European sovereign credimarkets, widening twin (current account and fiscal) deficits and commodity price shifts are the key factors shaping the

outlook for the Brazilian real. . We expect USD/BRL to close the year at 1.80.

MEXICO - The Mexican peso (MXN) has adopted a defensive tone. Expectations of decelerating global growth, delayedmonetary tightening at home, persistently weak employment conditions in the US, increasing global risk aversion triggered by debt sustainability concerns in Europe and volatile shifts in energy commodity markets have been the key issues shaping the outlook for the Mexican currency. We expect USD/MXN to close the year at 12.8.

CHILE - The Chilean peso (CLP) is in consolidation mode, trading in a range between 530 and 550 per USD. Chinesegrowth prospects, a devaluing USD, stabilizing (metals) commodity prices, domestic monetary policy shifts, acceleratingeconomic growth prospects and inflation, and persistent tensions in European sovereign debt markets are the key driv-ers affecting the outlook for the Chilean currency. We expect USD/CLP to close the year at 540.

PERU - The Peruvian Sol (PEN) remains in strengthening mode vis--vis the USD. A strong broad-based growth pat-

tern, intensifying (foreign and local) investment activity, ongoing de-dollarization of the financial sector, increasing ac-cess to domestic credit, interest rate normalization, intensifying demand for local-currency debt securities, sporadic offi-cial intervention and a stable policy/political environment are key issues supporting the local currency outlook. We expect USD/PEN to close the year at 2.75.

DEVELOPING AMERICASCurrency Outlook Pablo Brard +1 416 862-3876

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

USDBRL 1.95 1.74 1.78 1.80 1.80 1.85 USDBRL

USDMXN 13.19 13.09 12.37 12.65 12.80 12.96 USDMXN

USDCLP 534 507 524 543 540 545 USDCLP

USDPEN 3.01 2.89 2.84 2.79 2.75 2.75 USDPEN

Currency TrendsSpot

7-Jul


1.76

12.84

536

2.82

USDBRL USDMXN

USDCLP USDPEN

1.69

1.74

1.78

1.83

1.87

1.92

1.96

2.01

Jul-09 Sep-09 Nov-09 Jan-10 M ar-10 M ay-10 Jul-10

12.1

12.4

12.6

12.9

13.1

13.4

13.6

13.9


488

499

511

522

534

545

556

568


2.82

2.85

2.88

2.90

2.93

2.96

2.99

3.01



13/17


BRAZIL - The Brazilian economy is immersed in a strongand broad-based growth trajectory; the latest survey con-ducted by the central bank points to a 7% rate of economic

expansion for this year. Strong lending growth, despite in-creasing interest rates, is also fuelling a high-growth envi-ronment which is leading to potential overheating risks.Inflationary pressures are also on the rise, as indicated byrecent trends; indeed, the IPCA-based consumer price in-flation rate is approaching the 5% mark. The combined fastgrowth-higher inflation scenario is prompting a reassess-ment of the interest rate cycle, following a 150 bps ratehike in two consecutive moves by the central bank. Thenext monetary policy committee decision will take place onJuly 21st, and a 75 bps rate increase to 11% is amply dis-counted. Moreover, the government-administered short-term target SELIC rate may close the year at 12%, reinforc-

ing a strong-currency environment for local-currency de-nominated assets. Meanwhile, the widening current ac-count and fiscal deficits have placed the Brazilian investorcommunity on alert; the external gap is estimated to closeat US$47 billion and US$57 billion in 2010 and 2011, re-spectively. The 12-month consolidated public sector deficitincreased to 3.3% of GDP at the end of May 2010. Despitea solid foreign exchange reserve position (US$250 billion),the intensifying global risk aversion as a result of risk-repricing activity in European sovereign credit markets hasadversely affected Latin American bond markets.

MEXICO - The weakening trend affecting the USD in therecent past has fuelled increasing volatility in the MXNwhich moved from 12.40 to 13 per USD in a short time

frame. Intensifying corrective waves in place in equity securities markets in developing countries (primarily in Chinahave also instilled a bearish tone into the core group oLatin American stock markets since late April. The energysensitive Mexican currency has also been adversely affected by a downward adjustment in crude oil prices. In-deed, the light-crude WTI benchmark price traded as los asUS$71 per barrel (down from almost US$80) over the pasfew weeks. Finally, interest rate differentials remain another factor shaping currency moves in Mexico. At theshort end of the yield curve, prolonged status quo by theUS Federal Reserve (Fed) is also preventing Mexico fromincreasing its short-term monetary policy rate (currently se

at 4.5%) despite tightening moves already executed by thecentral banks of Brazil, Peru and Chile. In fact, derivativesmarkets do not discount a rate hike until the second quarteof 2011. Intensifying global risk aversion has also fuelled acautious tone amongst global fixed-income portfolio investors, with the 10-year Mexico-US government bond spreadwidening to a level close to 400 basis points (bps), an at-tractive investment alternative in the context of abnormallylow long-term interest rates in advanced economies.

CHILE - The Chilean economy is strongly influenced byglobal trade dynamics. Renewed investor focus on the

pace of international economic deceleration (with a specialfocus on the US and China) will affect demand for Chileanexport products and currency-sensitive copper prices.Meanwhile, reconstruction efforts following the devastatingearthquake/tsunami of the first quarter are paying off; in-deed, the monthly indicator of economic activity expandedby 7.1% (year over year) in May and that industrial produc-tion also showed a 4.2% gain. The latest consensus indi-cates that the Chilean economy would expand by 4.5% thisyear and accelerate above 5.5% in 2011. In response torecovery evidence, the central bank began the process ofinterest rate normalization to guide inflation towards theofficially established 3% +/- 1% range. Following a 50 bps

rate hike last June, a move to 1.50% is likely on July 15

th

.Technical trading dynamics also affect demand for localcurrency assets; the reversal of USD strength as the EURrecovers injected a positive tone into the CLP over the pastfew weeks. Moreover, the high dose of speculative tradingdynamics shaping demand for gold as a safe-haven assetalso helped boost prices in precious and base metals; in-deed, the price of gold touched a high mark of 1,264 UScents per pound before correcting below 1,200. Volatility incopper and crude oil prices usually translate into exchangerate swings in Chile.

PERU - Peru enjoys a bright economic outlook ahead othe April 2011 elections. Government policy continuity is

amply discounted irrespective of who becomes presidentThe economy is experiencing a sharp and broad-basedexpansionary phase. Domestic and foreign investment ison the rise and the systemically strong domestic bankingsector is allowing a healthy expansion of local credit. In itslatest inflation report, the central bank adjusted its projection for real GDP growth upwards to 6.6% and 6.0% fo2010 and 2011, respectively. The monetary authorities wilensure an orderly normalization of monetary conditions asthe strong-growth phase fuels a manageable increase ininflationary expectations. Following an increase of 25 bpsto 1.75%, market participants expect further moderate rateadjustments in the months to come. The authorities treated

this last policy adjustment as a preventive mechanism inthe absence of visible price pressures. A low interest rateenvironment is deepening the process of de-dollarizationwithin the local banking sector. Although the relatively illiquid Peruvian stock market has not been immune to theprofit-taking phase in place in the largest emerging markets, domestic institutional investors (primarily private pension fund management firms) are boosting demand for soldenominated debt securities, thereby accelerating the dedollarization process and contributing to the developmenof local capital markets. Meanwhile, the central bank wilnot hesitate to intervene in the currency market to preven

DEVELOPING AMERICASFundamental Commentary Pablo Brard +1 416 862-3876


14/17


RUSSIA - The Russian Ruble (RUB) is consolidating a trading range between 30.5 and 32 per USD after the April-Mayweakness caused by oil price decline and European debt sustainability concerns. Recovery dynamics, ongoing interesrate normalization, shifts in commodity energy prices, steady accumulation of international reserves and potential cor-

rection in equity securities markets due to Chinas deceleration will shape the view on the RUB. We expect USD/RUB toclose the year at 31.

TURKEY - Following marked currency volatility in the midst of European debt sustainability concerns, prospects for nor-malization in the monetary policy stance in Turkey amid robust economic recovery should provide support to the Turkishlira (TRY). We expect the currency to close the year at 1.55 per USD.

SOUTH AFRICA - The South African Rand (ZAR) is in stabilization mode following the market stress caused by theEuropean sovereign credit shock and correction in commodity prices. Shifts in metal prices, interest rate differentials,post-world cup recovery dynamics and global risk aversion will be the key factors affecting the outlook for the South African rand in the near term. We do expect USD/ZAR to close the year at 7.80.

POLAND - The Polish zloty (PLN) will be supported by expectations for relatively strong economic performance through

2011 and by prospects regarding Poland being the leader in monetary tightening in the region. A new one-year successoarrangement for Poland under the International Monetary Funds Flexible Credit Line approved in early July providesa useful insurance against external risks and supports the PLN.

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

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

USDRUB 31.2 30.0 29.4 31.1 31.0 31.5 USDRUB

USDTRY 1.54 1.50 1.52 1.59 1.60 1.65 USDTRY

USDZAR 7.71 7.40 7.29 7.74 7.80 8.00 USDZAR

EURPLN 4.45 4.10 3.86 4.12 4.10 4.14 EURPLN

USDRUB USDTRY

USDZAR EURPLN

31.1

1.55

7.62

4.09

Currency TrendsSpot

7-Jul


28.5

29.1

29.7

30.2

30.8

31.4

32.0

32.5


1.43

1.45

1.48

1.50

1.52

1.54

1.57

1.59

1.61


7.08

7.26

7.45

7.63

7.82

8.00

8.18

8.37


3.80

3.90

4.00

4.10

4.20

4.30

4.40

4.50



15/17


RUSSIA - The oil-sensitive Russian economy remainsstrongly influenced by gyrations in energy markets. Crudeoil prices, currently trading at US$72 per dollar (WTI

based), have somewhat recovered from the early-May highvolatility and subsequent price adjustments. As the worldslargest oil producer, Russia is immediately affected by sud-den directional shifts in crude oil and natural gas prices.Growing investors concerns about decelerating Chineseand US economic activity may have an adverse impact onRussian investor sentiment in the months ahead; however,the Russian central bank has continued to accumulate for-eign exchange reserves, which are, once again, approach-ing the US$500 billion mark. The robust foreign exchangereserves position allows the central bank to intervene in themarket to moderate ill-justified speculative exchange rateswings. The Russian economy returned to positive growth,

expanding by 2.9% y/y in Q1 2010; additionally, recentdata indicated that Russia reversed the loss from the firstquarter and received US$4.5 billion in foreign capital in-flows during the second quarter. The monetary outlook isimproving; indeed, on the grounds of a steady process ofdisinflation (consumer prices increased by 5.8% y/y in June2010), the monetary authorities have aggressively pursueda process of interest rate normalization: the policy-settingrefinancing rate is currently set at 7.75%. The RUB has notbeen materially affected by interest rate cuts, but remainsvulnerable to profit-taking activity in equity markets.

TURKEY - Monetary conditions remain on hold in Turkeyfor now, while policymakers are implementing first steps othe central banks exit strategy. Following the Monetary

Policy Committee meeting on June 17th

, the Turkish monetary authorities maintained the new policy rate, the oneweek repo rate, at 7.0% due to persistent uncertaintiesaround global economic prospects. We expect that amonetary tightening cycle will be commenced by the end o2010. As noted by the monetary policymakers, economicactivity is recovering. Output expanded by 0.1% q/q in thefirst quarter of the year; however, in annual terms the economy ballooned by 11.7% due to a low comparison base in2009. The growth was supported by household spendingand investment. Diminishing joblessness the unemployment rate decreasing to 13.7% in March from 14.4% themonth before is boosting consumer confidence. While

industrial output, business confidence indicators and purchasing managers indices remain firmly in expansionaryterritory, slightly weaker perceptions regarding businessconditions reflect the persistent uncertainties in the externaoutlook. Inflationary pressures continued to ease in Junethe consumer price index increased by 8.4% y/y comparedwith 9.1% the month before. On a monthly basis, pricesdecreased by 0.6%. Next general elections, due in July2011, will likely contribute to currency volatility in the me-dium-term.

SOUTH AFRICA - The fuzz of the FIFA World Cup is ebb-ing and the South African economy will be returning to a

normal environment. The authorities believe that the econ-omy may receive a boost equivalent to 0.4% of GDP frominvestment and tourism flows. The economy remains af-fected by conditions in commodity (primarily metal) mar-kets. The gold price, which traded above the US$1,200 perounce mark earlier in the month, is strongly influenced byspeculative investment flows as investors reassess theirviews on the global economic recovery and the structuralfiscal position of key countries in the euro zone. Monetarystatus quo will remain in place for the time being; the pol-icy-setting rate has been reduced to 6.5% from 12% sinceDecember 2008. In fact, the central bank believes that theinflation rate will remain within the 3-6% target range

through 2011, yet inflation dynamics will be influenced byshifts in government-administered prices. Technical datashows a strong correlation between the value of the ZARand copper (not necessarily gold) prices. Moreover, thelinkage between South African equity securities and theircounterparts within the BRIC group is also high, increasingthe vulnerability of South African investments to portfoliocapital in/outflows in China. Non-deliverable forward (NDF)markets point towards a modest depreciation of the ZAR bythe end of the year. Technical trends indicate a tradingrange of USD/ZAR 7.40-7.80 in the near term.

POLAND - Bronislaw Komorowski is Polands new president; the second round of the presidential election took

place on July 4th

with Mr. Komorowski claiming 53% of thevote. The fact that the pro-business Civic Platform partynow has control of both the government and the presidencyreduces the likelihood of a presidential veto on reforms. Polish central bankers maintain a neutral policy stance, as thefiscal crisis in Greece and euro area fiscal consolidationefforts create uncertainties for the regional economic outlook. Following the Monetary Policy Council meeting onJune 29th-30th, the authorities left the reference rate unchanged at 3.50% for a 12th consecutive month. Economicrecovery is firmly underway in Poland with industrial andconstruction output increasing and improving labour markeconditions providing support to private spending prospects

The unemployment rate decreased to 11.9% in May from12.3% the month before while retail sales increased by3.1% m/m and 4.3% y/y. The inflation outlook is promisingwith the consumer price index increasing by 2.2% y/y inMay, running below the central banks target of 2.5%. Themonetary authorities expect that inflation will hover within a2.3-2.9% range in 2010, while real GDP is projected to increase by 2.5-3.9%. The policymakers reiterated their viewthat fiscal tightening is important for macroeconomic stability. Nevertheless, with parliamentary elections scheduled totake place next year, aggressive fiscal consolidation is noin sight.

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


16/17


GLOBAL CURRENCY FORECAST (end of period)2008 2009 2010f 2011f

Q1a Q2a Q3 Q4 Q1 Q2 Q3 Q4

MAJOR CURRENCIES

Japan USDJPY 91 93 95 100 93 88 93 95 97 98 99 100

Euro zone EURUSD 1.40 1.43 1.19 1.26 1.35 1.22 1.17 1.19 1.21 1.22 1.24 1.26

EURJPY 127 133 113 126 126 108 109 113 117 120 123 126

UK GBPUSD 1.46 1.62 1.50 1.55 1.52 1.49 1.48 1.50 1.51 1.52 1.54 1.55

EURGBP 0.96 0.89 0.79 0.81 0.89 0.82 0.79 0.79 0.80 0.80 0.81 0.81

Switzerland USDCHF 1.07 1.04 1.07 1.01 1.05 1.08 1.10 1.07 1.05 1.02 1.01 1.01

EURCHF 1.49 1.48 1.27 1.27 1.42 1.32 1.29 1.27 1.27 1.24 1.25 1.27

AMERICAS

Canada USDCAD 1.22 1.05 1.00 0.97 1.02 1.06 1.01 1.00 0.99 0.98 0.97 0.97

CADUSD 0.82 0.95 1.00 1.03 0.98 0.94 0.99 1.00 1.01 1.02 1.03 1.03

Mexico USDMXN 13.7 13.1 12.8 13.2 12.4 12.9 12.7 12.8 12.9 13.0 13.1 13.2

CADMXN 11.2 12.4 12.8 13.6 12.2 12.2 12.5 12.8 13.1 13.2 13.5 13.6

Argentina USDARS 3.45 3.80 4.25 4.80 3.88 3.93 4.09 4.25 4.38 4.52 4.66 4.80

Brazil USDBRL 2.31 1.74 1.80 1.90 1.78 1.80 1.80 1.80 1.82 1.85 1.87 1.90

Chile USDCLP 639 507 540 550 524 546 543 540 542 545 547 550

Colombia USDCOP 2249 2044 1950 2000 1920 1900 1925 1950 1962 1975 1987 2000

Peru USDPEN 3.13 2.89 2.75 2.75 2.84 2.83 2.79 2.75 2.75 2.75 2.75 2.75

Venezuela 1/ USDVEB 2.15 2.15 4.30 4.30 4.30 4.30 4.30 4.30 4.30 4.30 4.30 4.30

ASIA / OCEANIA

Australia AUDUSD 0.70 0.90 0.90 0.94 0.92 0.84 0.88 0.90 0.91 0.92 0.93 0.94

China USDCNY 6.83 6.83 6.60 6.20 6.83 6.83 6.75 6.60 6.50 6.40 6.30 6.20

Hong Kong USDHKD 7.75 7.75 7.75 7.70 7.76 7.79 7.77 7.75 7.74 7.72 7.71 7.70

India USDINR 48.8 46.5 45.0 47.0 44.9 46.5 45.7 45.0 45.5 46.0 46.5 47.0

Indonesia 2/ USDIDR 11.12 9.40 9.25 9.50 9.10 9.07 9.16 9.25 9.31 9.37 9.44 9.50

Malaysia USDMYR 3.47 3.43 3.15 3.20 3.26 3.24 3.19 3.15 3.16 3.17 3.19 3.20

New Zealand NZDUSD 0.58 0.72 0.70 0.74 0.71 0.68 0.69 0.70 0.71 0.72 0.73 0.74

Philippines USDPHP 47.5 46.2 44.0 46.0 45.2 46.4 45.2 44.0 44.5 45.0 45.5 46.0

Singapore USDSGD 1.43 1.40 1.36 1.30 1.40 1.40 1.38 1.36 1.34 1.33 1.31 1.30

South Korea USDKRW 1260 1164 1120 1050 1131 1222 1170 1120 1102 1084 1067 1050

Thailand USDTHB 34.7 33.4 32.5 33.0 32.3 32.5 32.5 32.5 32.6 32.7 32.9 33.0

Taiwan USDTWD 32.8 32.0 30.0 28.5 31.8 32.1 31.0 30.0 29.6 29.2 28.9 28.5

EUROPE / AFRICA

Czech Rep. EURCZK 26.9 26.4 25.5 25.0 25.4 25.7 25.6 25.5 25.4 25.2 25.1 25.0

Iceland USDISK 121 126 130 125 127 128 129 130 129 127 126 125

Hungary EURHUF 266 270 285 300 265 285 285 285 289 292 296 300

Norway USDNOK 6.95 5.79 6.30 5.80 5.94 6.50 6.35 6.30 6.25 6.20 6.00 5.80

Poland EURPLN 4.15 4.10 4.10 4.18 3.86 4.15 4.12 4.10 4.12 4.14 4.16 4.18

Russia USDRUB 29.4 30.0 31.0 32.0 29.4 31.2 31.1 31.0 31.2 31.5 31.7 32.0

South Africa USDZAR 9.53 7.40 7.80 8.20 7.29 7.67 7.74 7.80 7.90 8.00 8.10 8.20

Sweden EURSEK 10.94 10.25 9.50 9.35 9.75 9.54 9.55 9.50 9.46 9.42 9.39 9.35

Turkey USDTRY 1.54 1.50 1.60 1.70 1.52 1.58 1.59 1.60 1.62 1.65 1.67 1.70

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

2011f

North

South

2010f


17/17


This Report is prepared by Scotia Economics as a resource for the

clients of Scotiabank and Scotia Capital. While the information is from

sources believed reliable, neither the information nor the forecast shall

b t k t ti f hi h Th B k f N S ti

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