Foreign Exchange Outlook

8/3/2019 Foreign Exchange Outlook

1/17

Global Economic Research

Index

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

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

Europe ........................................................................................................................................6

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

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

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

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

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

Foreign Exchange Outlookis available on: www.scotiabank.com and Bloomberg at SCOE

ForeignExchangeOutlook

September 2011

Rising concerns over the state of the global economy; divergentmonetary policies across the globe; limited scope for fiscalstimulus; persistent fiscal/debt distress across Europe; andgovernment support are the major themes that are driving globalFX markets.

Loose US monetary policy in the absence of a credible budgetary

adjustments plan leaves the USD exposed to near-termweakness. The CAD and the MXN remain vulnerable to shifts inthe global economic outlook, but should partially benefit frompositive capital flows.

The EUR has been supported by official flows and a weak USD;however, 2012 likely provides a different set of circumstances.The CHF remains a safe haven of choice, while the GBP istrading as a low beta currency, hugging the broader trend in theUSD.

The Asian currency outlook remains positive on a relative basis,but the pace of appreciation is likely to slow. The CNY isexpected to retain its accelerating appreciation. The positiveflows that led to JPY strength should begin to fade into 2012.


2/17


Foreign ExchangOutloo

September 201

Actual 2a 11 Q3 11 Q4 11 Q1 12 Q2 12 Q3 12 Q4 12 Q1 131.43 1.45 1.45 1.50 1.48 1.46 1.43 1.40 1.38

1.42 1.42 1.42 1.41 1.41 1.39 1.38

76.8 81 79 80 82 83 84 85 87

80 82 83 85 86 87 881.62 1.61 1.63 1.65 1.66 1.67 1.69 1.70 1.70

1.61 1.61 1.62 1.63 1.64 1.63 1.62

0.98 0.96 0.96 0.96 0.95 0.95 0.94 0.94 0.93

0.97 0.97 0.97 0.98 0.98 0.99 1.00

1.07 1.07 1.08 1.09 1.09 1.10 1.10 1.11 1.11

1.05 1.04 1.03 1.02 1.00 0.99 0.97

12.31 11.71 12.32 12.27 12.33 12.23 12.33 12.50 12.40

11.75 11.89 11.96 12.03 12.13 12.30 12.47

(*) Source: Consensus Economics Inc. August 2011

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

AUDUSD USDMXN

EURUSD USDJPY

GBPUSD USDCAD

September 1, 2011EURUSD

Consensus*

USDJPY

Consensus*GBPUSD

Consensus*

Consensus*

USDCAD

Consensus*

AUDUSD

USDMXN

75

82

89

96

103

110

117

124

Sep-06

Mar-07

Sep-07

Mar-08

Sep-08

Mar-09

Sep-09

Mar-10

Sep-10

Mar-11

Sep-11

USD/JPY

100 Day

200 Day

1.12

1.22

1.32

1.42

1.52

1.62

Sep-06

Feb-07

Jul-07

Dec-07

May-08

Oct-08

Mar-09

Aug-09

Jan-10

Jun-10

Nov-10

Apr-11

Sep-11

EUR/USD

100 Day

200 Day

1.36

1.51

1.66

1.81

1.96

2.11

Sep-06

Mar-07

Sep-07

Mar-08

Sep-08

Mar-09

Sep-09

Mar-10

Sep-10

Mar-11

Sep-11

GBP/USD

100 Day

200 Day

0.90

0.98

1.06

1.14

1.22

1.30

Sep-06

Mar-07

Sep-07

Mar-08

Sep-08

Mar-09

Sep-09

Mar-10

Sep-10

Mar-11

Sep-11

USD/CAD

100 Day

200 Day

0.59

0.67

0.74

0.82

0.89

0.97

1.04

1.12

Sep-06

Mar-07

Sep-07

Mar-08

Sep-08

Mar-09

Sep-09

Mar-10

Sep-10

Mar-11

Sep-11

AUD/USD

100 Day

200 Day

9.7

10.8

11.9

13.0

14.1

15.2

Sep-06

Mar-07

Sep-07

Mar-08

Sep-08

Mar-09

Sep-09

Mar-10

Sep-10

Mar-11

Sep-11

USD/MXN

100 Day

200 Day


3/17



September 201

Rising concerns over the state of the global economy; aweakened manufacturing outlook; a shift to looser mone-tary policy in some of the growth economies; limited

scope for monetary or fiscal policies in the advancedeconomies to provide relief; high levels of uncertaintyacross Europe; the complications of slowing growth onthe prospects for austerity; ongoing official intervention toslow currency appreciation are the major themes that aredriving currency markets as we enter September 2011.

Deteriorating US growth prospects combined with a spikein risk aversion have temporarily reversed the appreciat-ing trend of the non-USD NAFTA currencies of the Cana-dian dollar (CAD) and the Mexican peso (MXN). The fun-damental backdrops of the two currencies share a lot incommon heavily influenced by the reduced US and

global economic prospects, both central banks have re-cently shifted towards a more neutral tone, with marketsno longer pricing in interest rate increases this year. Inaddition, sentiment has shifted from notably bullish tomore neutral as the economic outlook for both countrieshas been downgraded. Finally, the appreciating technicaltrend has entered a period of retracement. As we look outto year-end, we expect the CAD to outperform the MXN.In part because the flows directed towards the CAD tendto be less volatile during spikes in risk aversion.

The Latin American currency outlook has becomes lessfavourable over the last few months as global growth hasslowed and commodity prices have come off their highs.In addition, an interest rate cut in Brazil on the back ofwhat the central bank views as a global scenario that iscreating disinflationary pressures has given market par-ticipants reason to pause. Accordingly, the shifting back-drop is likely to weigh on what has been a favourable out-look. We have made very few changes to our Latin Ameri-can FX outlook this month, expecting the Brazilian real(BRL), the Colombian peso (COP), the Chilean peso(CLP) and Peruvian sol (PEN) to be torn between bullishand bearish forces, leaving the currencies fairly rangebound into year-end.

European currencies have proved highly resilient in the

face of widespread uncertainty. The August spike in riskaversion pushed the German DAX 29% off of its recenthigh; however, the euro (EUR) was unwavering, huggingclosely to 1.44, which speaks volumes as to the power ofcurrency flows. The EUR appears to have benefited froman unwinding of short EURCHF trades, central bank di-versification flows and the belief that European authoritieswould do whatever necessary to protect the monetaryunion. As we enter September, many of the fundamentalshave weakened for the EUR. The European CentralBank (ECB) has shifted to a less hawkish stance and wenow expect the ECB to maintain neutrality until Q1 of

2013; uncertainty over Greeces aid package remains andpoliticians are under pressure across Europe over theleast painful future path of support and aid. However

there are two sides to the EURUSD equation and for nowthe USD side remains weaker. The absence of a crediblefiscal plan and loose monetary policy should continue toweigh on the USD into year-end. Accordingly, we havemade no change to our year-end 1.50 target.

In the faced of below trend growth, strict austerity, highinflation and loose monetary policy, the British pound(GBP) remains well supported. As we enter September, iis up over 4% on a year-to-date basis - an impressivefeat, considering the deterioration in its fundamental backdrop. We now expect the Bank of England to keep inter-est rates on hold at 0.5% until the first quarter of 2013

However, with the risk of another bout of risk aversionhigh and the outlook for the USD weak, we have pulledforward some strength in our GBP outlook and now expect it to close the year at 1.65. Typically, the Norwegiankrone (NOK) and the Swedish krona (SEK) weaken during periods of risk aversion; however, this was not thecase in August. We hold optimistic outlooks for both currencies into year-end. The strongest currency on a yearto-date basis is the Swiss franc (CHF), which reachedrecord highs in early August. However the central banks(SNB) policies aimed at negative carry (a disincentive tobe long CHF) introduced two-way risk and temporarilyreversed the appreciating trend. CHFs attractiveness asa safe haven and a so-called shadow currency in Europeshould continue. We hold a year-end USDCHF target o0.83 and EURCHF of 1.25.

We expect global trends to begin to re-assert appreciatorypressures on many Asian currencies in the northern hemispheres fall and winter. The advanced economies aresuffering under the weight of deficit and debt burdensleaving their economies in a weakened state entering aperiod of renewed economic uncertainty. Asian Thegrowth economies are also vulnerable to a global slow-down; however, they are entering this period on firmefootings, which should bode well for them over our forecast horizon. Accordingly, we look for strength in the Aus

tralian dollar (AUD), the New Zealand dollar (NZD), theIndian rupee (INR), the Malaysian ringgit (MYR), the Thabaht (THB) and the Singaporean dollar (SGP), and amore stable trend for the Indonesian rupiah (IDR), thePhilippine peso (PHP), the Taiwanese dollar (TWD) andthe South Korean won (KRW). The Japanese yen (JPY)is a separate story, with weak medium term fundamentalsoffset by its safe haven status. We expect the JPY to remain historically strong, but to weaken off slightly intoyear-end, closing December at 80. The pace of apprecia-tion in the Chinese renminbi (CNY) is expected to continue, with USDCNY closing the year at 6.25.

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


4/17



September 201

The Canadian dollar (CAD) struggled in August, losing over 2% against both the USD and EUR. The combination of aspike in risk aversion, a weakening US growth trajectory, a less hawkish Bank of Canada (BoC) and a broadly strongeUSD all worked against the CAD. These are trends that might continue in the short-term but are unlikely to be the key

market drivers into year-end. Instead we would expect a broadly weaker USD to prove an important driver of CADstrength. Loose US monetary policy, with a conditional commitment to remain on hold until mid-2013 and a threat forfurther policy measures - combined with the fiscal side, which lacks both a credible plan and the political will to achieveone - should prove major weights against the USD. The BoC is expected to maintain fairly loose monetary policy; how-ever, over time the US-CDN interest rate spread should widen in the CADs favour, as the Bank of Canada hikes a fulyear before the Fed. On a relative basis, Canadas economic fundamental position is still favourable, even as it has deteriorated with a disappointing -0.4% second quarter GDP print. Finally, on the back of a relatively strong sovereign position, Canadian based assets have become increasingly attractive for those looking to diversify out of USD or EUR basedassets. This trend should be favourable for the CAD over the medium term. Balancing out these positive drivers are sev-eral factors and risks. The recent spike in global risk aversion has driven CAD weakness, and as we write it appears tobe declining. However, the uneven pattern of recovery, monetary policy and the fiscal response combined with bankingsector risks leaves the market vulnerable to further spikes. In addition, a softer growth profile for the US has weighed onthe outlook for oil prices. Scotia Economics is forecasting an average WTI price of US$94 this year (the current average

is at US$97) implying that oil prices are unlikely to rally back substantially. In addition, investor sentiment has recentlyshifted from bullish to neutral (with the CFTC reporting a net long CAD position of US$0.9 billion). This tends to be animportant near-term driver and suggests that portfolio managers are questioning their exposure to the CAD. Accordinglythe drivers of the CAD are less positive than they once were but still suggestive of a currency that is somewhat rangebound but with a slow bias for appreciation year-over-year, closing the year at 1.04 (USDCAD at 0.96).

CANADA Camilla Sutton +1 416 866-5470Eric Theoret +1 416 863-7030

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

AUDCAD 0.949 0.990 1.034 1.046 1.039 1.038 AUDCAD

CADJPY 79.02 84.17 84.17 82.98 85.31 88.69 CADJPY

EURCAD 1.351 1.341 1.394 1.424 1.417 1.358 EURCAD

USDCAD 1.066 0.972 0.969 0.960 0.953 0.943 USDCAD

AUDCAD CADJPY

EURCAD USDCAD

1.048

78.71

1.392

0.976

Currency TrendsSpot

1-Sep

OutlookGoing BackFX Rate FX Rate

0.91

0.95

0.98

1.02

1.05

Sep-10 Nov-10 Jan-11 Mar-11 May-11 Jul-11 Sep-11

76.5

79.0

81.5

84.0

86.5

89.0

Sep-10 Nov-10 Jan-11 M ar-11 May-11 Jul-11 Sep-11

1.27

1.31

1.34

1.38

1.41

1.45

Sep-10 Nov-10 Jan-11 M ar-11 M ay-11 Jul-11 Sep-11

0.94

0.96

0.98

1.00

1.02

1.04

1.06



5/17



September 201

UNITED STATES - Economic growth in the US is likely toremain modest for the remainder of the year with real GDPincreasing by 1.7% in 2011 as a whole. Recent economicdata have been mixed, with expectation surveys pointing toweaker consumer and business confidence. A bit of abounce-back is expected on a strong base effect pro-duced by the supply chain disruptions from Japans earth-quake government enhancements and some politicalclarity, but as fiscal constraints kick in, joblessness remainselevated and the housing market continues to struggle.Meanwhile, households are likely to remain financially con-servative, focusing on saving and reducing debt. Whilebusinesses might continue to exercise caution on the hiringfront, their record cash balances could translate into heavyinvestment in automation, much like in the aftermath of the1990s downturn. Although consumer price pressures at thecore level remain tame, peaking gasoline and food bills are

driving up the cost of living. Interestingly, owners' equiva-lent rent (OER) the cost of owning a home, which ac-counts for nearly a quarter of the consumer basket hasbeen contributing to the CPI gains at a stepped-up pace forthree straight months, posting its biggest monthly gain innearly three years in July. In this case, rising OER does notreflect improving demand in the housing market. In theUnited States the OER is implicitly priced off of the rentalmarket, representing the amount homeowners would re-ceive if they decided to rent their home out. With an in-creasing number of Americans opting to rent the rentalvacancy rate sits at its lowest since mid-2002 landlordsare experiencing an increase in pricing power, which is be-

ing captured by the OER.

CANADA - After a solid start to 2011, the Canadian economy contracted slightly in Q2. The stalling out in productionin part reflects temporary factors that should be reversed inthe second half of the year, including the impact of globasupply chain disruptions on domestic manufacturing activity. Business investment in capital equipment and nonresidential construction remains brisk, underpinned byhealthy corporate profitability, firm commodity prices andfavourable credit conditions. Housing conditions are stilquite buoyant, with low interest rates maintaining affordability in the face of record high home prices, but are noexpected to add significantly to growth going forwardMeanwhile, increased global economic uncertainty andvolatile financial markets have added to consumer cautionConsumers have become more reticent spenders, thougha still healthy job market combined with the boost to purchasing power from the drop in energy prices since the

spring should sustain some momentum through the lattehalf of the year. Export performance remains weak, reflecting soft demand in the US the destination of 75% of Canadian international shipments and the competitive pressures of a persistently strong CAD. Canadas merchandisetrade balance has slipped back into a modest deficit posi-tion, and may well remain in the red for the time being despite strong emerging market demand for Canadian resources, and highly favourable terms of trade. Canadasfiscal position compares favourably to most of its advancednation peers. Nonetheless, government stimulus spendingis winding down, and will be followed by increasing fiscarestraint in 2012 as budget shortfalls are addressed. Over

all, we expect the Canadian economy to experience moderate output growth averaging 2-2% in 2011-12.

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

MONETARY POLICY COMMENTARY Derek Holt +1 416 863-7707 Karen Cordes Woods +1 416 862-3080

UNITED STATES - We now expect the Federal Reserve tokeep its fed funds target rate on hold until Q3 2013, in linewith the Feds loose commitment made in the most recentFOMC statement. US real GDP growth in the first half ofthe year came in much below expectations as Q1 real GDPwas revised down to 0.4% q/q annualized while economicactivity in Q2 only expanded by 1.0% q/q annualized. Withonly modest growth expected for the second half of theyear and an increased risk of recession as weaker thanexpected data continue to be reported, this has also in-creased the likelihood that the FOMC may provide addi-tional monetary policy accommodation. While we think thatthe effectiveness of the three final policy options outlinedby the Fed - additional asset purchases (QE3), reducinginterest on reserves, and maturity extension of its balancesheet - as well as other proposed options is quite muted,the recent FOMC minutes suggest that there is still thechance that one of these measures could be implemented,perhaps at the September FOMC but more likely later inthe year or into 2012 once the current dissenters rotate offthe voting panel and more dovish members come back in.

CANADA - We have pushed out our Bank of Canada(BoC) call, expecting the BoC to now start to raise the overnight rate in late Q3 2012, one quarter later than previouslyexpected. Part of the reason behind our new rate calstems from our revised projections for the Fed and a muchweaker U.S. economic outlook, but it also reflects weakeeconomic conditions in Canada. Indeed, Q2 real GDPcame in weaker than expected at -0.4% q/q annualizedcontrasting sharply with the BoCs downwardly revisedforecast for a 1.5% q/q annualized expansion in Q2. Thedetails were considerably worse as inventory stockpilingsingle handedly contributed 2.5 percentage points to headline growth in Q2 after adding a revised 2.2 percentagepoints to Q1 growth. With such heavy contributions togrowth coming from undesired stockpiling, production andemployment growth will likely slow, suggesting overalgrowth in Q3 may only be modest at best. Inflation alsoremains relatively well contained. This should keep theBoC on the sidelines for at least a year and points to a fatail risk of an even later and lower BoC rate call than oucurrent forecast.


6/17



September 201

EURO ZONE - The August spike in risk aversion registered with a wider intra-day range and higher vols in the EUR, bufailed to push the currency lower. The resilience of the EUR over the month suggests that positive near-term flows havebalanced out the more fundamentally driven weights. Flows are rumoured to have come from central bank diversification

closing of short EURCHF trades and a rebuilding of long EUR positions. Risks remain high but we expect that the bearishside of the USD part of the equation should support the EUR. We hold a Q3 target of 1.45 and a year-end target of 1.50.

UNITED KINGDOM - August proved volatile for the GBP, however the currency is closing the month essentially where iopened. Sentiment has shifted rapidly from bullish to bearish and back again. The GBP has benefitted on the back of diversification flows and some hope that the UKs monetary and fiscal policies will position the country better in the future.We hold a year-end GBP target of 1.65.

SWITZERLAND - The CHF reached record highs against most currencies in early August. However the central banks(SNB) policies aimed at negative carry (a disincentive to be long CHF) introduced more two-way risk and for the firstime since January saw the CHF depreciate on a month over month basis. CHFs attractiveness as a safe haven shouldcontinue, however this is likely to be offset by a slowing global economy, the economic impact of a strong CHF andSNBs policies. We hold a year-end USDCHF target of 0.77 and EURCHF of 1.16.

SWEDEN - The notably high beta SEK was relatively stable in August. A tighter monetary policy and an improving em-ployment trend that support the currency are being somewhat offset by market volatility, declining consumer confidenceweak retail sales and soft exports. Technically, both EURSEK and USDSEK look temporarily range bound. We hold ayear-end EURSEK target of 8.80.

EUROPE Camilla Sutton +1 416 866-5470Currency Outlook Eric Theoret +1 416 863-7030

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

EURUSD 1.27 1.38 1.44 1.48 1.49 1.44 EURUSD

GBPUSD 1.53 1.63 1.64 1.64 1.66 1.68 GBPUSD

EURCHF 1.29 1.28 1.23 1.16 1.15 1.10 EURCHF

EURSEK 9.36 8.73 8.89 8.88 8.77 8.67 EURSEK

Currency TrendsSpot

1-Sep


1.43

1.62

1.13

9.13

EURUSD GBPUSD

EURCHF EURSEK

1.25

1.30

1.35

1.40

1.45


1.52

1.56

1.60

1.64

1.68


1.00

1.08

1.15

1.23

1.30

1.38

Sep-10 Nov-10 Jan-11 M ar-11 May-11 Jul-11 Sep-11

8.50

8.75

9.00

9.25

9.50



7/17



September 201

EURO ZONE - The euro zones outlook remains fragile,fuelling uncertainties regarding the policy frameworkneeded to place the region back onto a sustainable growth

path. The fiscal adjustment underway in many of the eurozone countries is expected to dampen economic growththrough 2013. While large differences in economic perform-ance within the region remain the norm, we expect the eurozones aggregate output to grow by 1.7% in 2011, followedby a 1.4% expansion next year. Inflation will likely remainelevated through 2011, before starting to ease towards theEuropean Central Banks (ECB) target of below, but closeto, 2% in 2012. Sensitive to developing price pressureswithin the euro zone, the ECB initiated the process of inter-est rate normalization five months ago. The main refinanc-ing rate has been raised by a cumulative 50 bps to 1.50%following two years of stable conditions. Nevertheless, on

the back of uncertain global economic growth prospectsand an easing inflation outlook, the ECB will likely refrainfrom further monetary tightening through 2012. Securingsovereign debt sustainability remains the most pressingissue in order to restore confidence within the euro zone,with the ECB continuing its emergency bond-purchase pro-gramme to protect Spain and Italy as the confidence crisisspreads throughout the region. Yet, the achievement offiscal sustainability extends well beyond maintaining ac-cess to global sources of finance, due to the structuralroots of the long-standing fiscal imbalances.

UNITED KINGDOM - The British economy continues tostruggle to regain a sustainable growth path given persistent weakness in its financial services industry, meagre em

ployment creation, a fragile real estate market, and the dragfrom inflation on household real disposable income. Thesefactors are expected to limit the nations real GDP expansion to 1.2% for the year as a whole. Economic growthshould pick up modestly to 1.5% in 2012 as the domesticrecovery becomes more broadly-based. An improvement inprivate consumption will likely take hold towards the end othe year, counterbalancing some of the impact of reducedgovernment spending. The annual rate of headline consumer price inflation, currently 4.4% y/y, will continue tohover around 4% in the second half of 2011, remainingsignificantly above the official target of 2%. Neverthelessinflation will likely embark on a solid downward trajectory in

early 2012, easing to just over 2% by the end of next yearGiven the uncertain growth outlook and the expected easing in inflationary pressures, the Bank of England will likelymaintain its accommodative monetary policy stance for anextended period of time, keeping the Bank Rate currentlyat 0.5% unchanged until the first quarter of 2013 when agradual process of monetary policy normalization will likelybegin. In fact, British monetary authorities may consideextending the debt-purchase initiatives if economic conditions continue to deteriorate, despite persistently elevated

inflation in the near term.

SWITZERLAND - Swiss monetary authorities are intensify-ing their fight against the Swiss francs (CHF) appreciation,as they consider the currency to be massively overvalued.In early-August, the Swiss National Bank cut the target ratefor the three-month Libor to as close to zero as possiblefrom 0.25%. Furthermore, in mid-August the policymakersdecided to expand again significantly the supply of liquidityto the Swiss franc money market. Switzerlands solid eco-nomic fundamentals provide the framework for the cur-rencys safe-haven status. Indeed, the economy continuesto offer remarkable resilience to multiple shocks originatingin both advanced and developing economies. We expectthe countrys real GDP to expand by around 2% through2012. Domestic demand remains supported by healthy bal-ance sheets, an accommodative monetary policy environ-

ment and improving labour market conditions (the unem-ployment rate decreased to 2.8% in July from 3.8% at thebeginning of the year). Despite the positive growth outlook,inflationary pressures remain virtually absent, mainly owingto the strong CHF and softening commodity prices; the har-monized consumer price index increased by 0.3% y/y inJuly. We expect inflation to hover around 1.0% through2012. Swiss monetary policymakers will likely keep mone-tary conditions unchanged until the third quarter of 2012when a symbolic rate hike to 0.25% is expected to takeplace, indicating a return to a more normal monetary policystance.

SWEDEN - Swedish monetary policymakers will likely refrain from further monetary policy normalization in the neaterm due to the heightened uncertainty regarding the globaeconomic outlook and the persistent sovereign credit turmoiin Europe. In order to stabilize inflation and to prevent excessive resource utilization, Swedish authorities have increased the benchmark repo rate by 175 basis points sincemid-2010 to the current level of 2.0%, with the most recenhike taking place in early July. The next monetary policymeeting is scheduled for September 7th. Inflation will likelyremain relatively high in the coming months due to wagepressures and limited spare capacity in the economy. Nev-ertheless, inflationary pressures should ease towards thecentral banks 2% target in 2012. The consumer price indexincreased by 3.3% y/y in July following a 3.1% rise in June

Swedish economic fundamentals are strong, with the econ-omy remaining in robust growth territory, though signs odeceleration are emerging. Real GDP growth accelerated to1.0% q/q (5.3% y/y) in the second quarter of the year from a0.8% (6.4% y/y) expansion in the January-March periodEconomic performance was broadly-based across the external sector, investment and private consumption. We expect Swedish output to advance by around 4% this yeabefore decelerating significantly to a 1% pace in 2012Public finances are solid, with Swedish gross governmendebt hovering below 40% of GDP and the governmentsfiscal account remaining in a balanced position.

EUROPEFundamental Commentary Tuuli McCully +1 416 863-2859


8/17



September 201

JAPAN - USDJPY was stable between 76 and 78 for most of August, but remains at historical lows. It has been driven byrisk aversion, dropping US-JN 2-year yields and diversification flows. According to the CFTC, investors hold a significan$7.7bn net long yen position. The medium-term fundamental outlook for the currency is fairly negative; however, near

term flows are expected to remain favourable. We hold a year-end target of 80.

CHINA - The pace of appreciation of the Chinese yuan accelerated in August, with the currency gaining 0.9% over Julysclose. However, on a year-to date basis CNY is up 3.6% in line with official guidance of a year-over-year currency appreciation between 5 and 6%. We hold a year-end USDCNY target of 6.25.

AUSTRALIA - The AUD has spent the latter half of August retracing half of its dramatic 8% five session collapse. According to the CFTC, investors were relatively unfazed by the sudden drop and have maintained their long AUD positions. Aswe move into September, markets are pricing in 125 bps of RBA interest cuts over the next 12-months, something weexpect will prove far too aggressive. This combined with a relatively strong outlook for Chinas economic path leave usbullish the AUD, holding a 1.09 year-end forecast.

NEW ZEALAND - The NZDs chart pattern is similar to the AUD, with the currency spending most of August attempting to

retrace its early month losses. Supporting an investor bias to be long, the CFTC reports that the net long NZD positionhas been fairly stable at US$1.4 billion. Technically, the currency is above its trend and the outlook is turning bullish. Wehold a year-end forecast of 0.87.

ASIA/OCEANIA Camilla Sutton +1 416 866-5470Currency Outlook Eric Theoret +1 416 863-7030

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

USDJPY 84.2 81.8 81.5 79.7 81.3 83.7 USDJPY

USDCNY 6.81 6.57 6.48 6.28 6.19 6.00 USDCNY

AUDUSD 0.89 1.02 1.07 1.09 1.09 1.10 AUDUSD

NZDUSD 0.70 0.75 0.82 0.87 0.87 0.88 NZDUSD

USDJPY USDCNY

AUDUSD NZDUSD

76.8

6.38

1.07

0.85

Currency TrendsSpot

1-Sep


75.5

78.0

80.5

83.0

85.5


6.35

6.44

6.52

6.61

6.69

6.78

Sep-10 Nov-10 Jan-11 Mar-11 M ay-11 Jul-11 Sep-11

0.87

0.93

0.98

1.04

1.09


0.68

0.71

0.74

0.78

0.81

0.84

0.87



9/17



September 201

JAPAN - Safe haven waves will remain an element in sup-port of the Japanese yen (JPY). The countrys industrialoutput expanded for the fourth straight month in July, accu-

mulating a 12.2% four-month rebound from the 15.5% m/mcollapse in March. Similarly, the value of Japans exportshave already returned to pre-earthquake levels after solidgains through July led to a four-month average that isbarely 2% below the level of the first quarter. Further im-provement is expected as business surveys continue topoint to firms being able to deal with the adverse effect ofinput scarcity faster than originally anticipated. The possi-bility of an expedited economic recovery still hinges on theprevalence of a trade-competitive JPY, with further cur-rency intervention a persistent risk. Household spendingdisplayed back-to-back gains in June and July, under-pinned by firm labour market indicators, with unemploy-

ment close to record lows. Although GDP contracted forthe third quarter in a row in the second quarter, the recon-struction effort is likely to gather momentum during thecomplementary part of 2011 and through 2012. We expectoutput to advance by a meager 0.3% this year, following anextraordinary 3.9% y/y gain in 2010, and a 3.5% rebound isanticipated for 2012. While dependence on imported fueland a higher energy tally will bring back supply-side pricepressures, the Bank of Japan will retain a loose monetarypolicy stance throughout the recovery, with unsterilizedinterventions preventing excessive JPY appreciation.

CHINA - The Chinese renminbi (CNY) will continue tostrengthen at a moderate pace, as CNY appreciation fulfillsboth the short-term objective of monetary tightening and the

medium-term goal of domestic market development. Inflationary pressures remain a concern with the double-digiadvance in food prices well ahead of the 3% y/y gain innon-food items costs. A slowdown in domestic spendinghas yet to become evident, notwithstanding persistenmoves by Chinese authorities to rein in credit growth, withthe latest move unveiled on August 29th when a widening othe base for the calculation of central bank required reserves was announced. Signs of a soft patch in global demand have yet to find an echo within China where investment and retail sales continue to portray well supported local demand conditions, while exports have grown at an average 23% y/y so far in 2011. Imports are advancing at a

quicker 27% yearly pace on the back of local income gainsand a double-digit expansion in investment outlays. Thelatter has been supported by lending by state controlledbanks, which continues to imply the prevalence of ampleliquidity conditions supporting growth. The Chinese economy expanded at a 2.2% quarterly rate during the threemonths to June 2011, accelerating from the 2% q/q pace othe first quarter. We expect a 9.3% y/y output advance thisyear, to be followed by a 9.5% increase in 2012 as the newgeneration of leaders throws its support behind an aggressive program of affordable housing development.

AUSTRALIA - Record terms of trade gains compounded bylocally generated inflationary pressures are likely to lead to

a rebound in the Australian dollar (AUD) in the comingmonths. The eventual resumption of monetary tightening bythe Reserve Bank of Australia (RBA) will further support theAUD towards the end of 2011. Annual inflation picked up toa 3.5% y/y pace in the second quarter, with underlying pres-sures accentuating as services costs underpinned a rise incore inflation, while goods inflation fell on the back of AUDstrength. Recent AUD weakening combined favourably withterms of trade gains, although is likely to be reversed asgrowth in Asia remains unabated. Inflation will continue tochallenge the RBAs 2-3% target range as local supply-sidepressures persist on the back of the mining boom. Afterkeeping the status quo for six straight meetings, we expect

the RBA to resume monetary tightening sometime in2011Q4.GDP growth likely accelerated in the second quar-ter on the back of a rebound in materials exports after theadverse effects provoked by fleeting weather-related eventsand the Japanese March catastrophe. Rising investmentand cautious consumer spending support domestic demandsteadiness, with moderate bank credit expansion and some-what softer local asset prices providing the background forcautious household borrowing. Australias output advancewill average 3.2% y/y in 2011-12, with fiscal consolidationexpected to be a drag on growth as the government aimsfor a fiscal surplus by 2012-13.

NEW ZEALAND - New Zealand dollar (NZD) strength wilremain the norm as terms of trade gains combine with a

change in monetary conditions as the economy displayssigns of healing. Household spending recorded back-toback advances in June-July underpinned by rising confidence after the initial adverse shock of the Christchurchearthquake. While business confidence fell in August, corporate activity has retained a solid uptrend, with investmenincreasing on the back of lower borrowing costs and external account gains. New Zealands exports of agriculturaproducts have been a clear winner from the adverse shocksthat hit the Asian region at the start of 2011. Output disrup-tions during the first quarter had a minor effect on growthas the economy expanded at a 0.8% rate over the previousquarter. We anticipate a second quarter pickup as retai

sales and capital stock improvements signal domestic demand strength. Annual inflation, at 5.3%, remains welabove the Reserve Bank of New Zealands (RBNZ) 1-3%comfort zone, with tradable goods prices now leading theadvance. Non-tradable goods inflation has finally shown arespite, although rising services costs and a somewhatighter labour market still have prices running at an over 5%yearly rate. The RBNZ remains sanguine about rising pricepressures having left the benchmark official cash rate unchanged at 2.5% after the 50 basis point reduction decreedlast March. We expect the RBNZ to resume monetary tightening sometime in 2011Q4.

ASIA/OCEANIAFundamental Commentary Oscar Snchez +1 416 862-3174


10/17



September 201

INDIA - Indias sizable and persistent current account deficit exacerbated the INR-negative impact of intense Augustportfolio outflows from the country. This helped to pressure the INR to its weakest level in nearly one year, and leave itas the worst performing Asian currency during the month. The INR will find it difficult to make sustained gains so long as

financial market volatility remains elevated, and global growth momentum remains challenged. We target 44.8 in US-DINR by the end of 2011.

KOREA - August was not kind to the KRW, as it was one of the weakest currencies in Asia over the month. Market volatility likely spurred a pause in monetary tightening from the Bank of Korea, but inflationary pressures remain and suggestthe maintenance of a hawkish stance which is supportive of the currency. The trend pace of KRW appreciation has beeninterrupted only temporarily as we expect relative fundamentals to remain amenable to KRW gains, and target 1030 foUSDKRW by Q4 2011.

THAILAND - Thailand is another Asian country that faced some of the heaviest foreign portfolio outflows during AugustFortunately, near term net trade flows have been recovering from a softening in the first half of the year, providing aTHB-supportive counter-weight against portfolio driven currency weakness. Still, the external demand environment remains a risk for the THB considering capital/financial account vulnerability. We target 29.1 in USDTHB by the end of the

year.

MALAYSIA - The ringgit underperformed modestly as financial market volatility in August was met by central bank ef-forts to dampen volatility in the currency. However, the reactionary low in the MYR against the USD remained well awayfrom any such price point that would suggest a shift in our view on the currencys fundamental valuation vs. the USDWe remain bullish MYR from current levels and see USDMYR at 2.91 by Q4 2011.

DEVELOPING ASIACurrency Outlook Sacha Tihanyi +1 416 862-3154

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

USDINR 47.08 45.27 45.06 45.12 44.58 43.93 USDINR

USDKRW 1199 1129 1079 1039 1025 1010 USDKRW

USDTHB 31.27 30.60 30.32 29.31 29.00 28.70 USDTHB

USDMYR 3.15 3.05 3.01 2.93 2.91 2.89 USDMYR

Currency TrendsSpot

1-Sep


46.10

1061

29.98

2.96

USDINR USDKRW

USDTHB USDMYR

43.70

44.30

44.90

45.50

46.10

46.70


1045

1075

1105

1135

1165

1195


29.40

29.75

30.10

30.45

30.80

31.15


2.90

2.95

3.00

3.05

3.10

3.15



11/17



September 201

INDIA - The Indian rupee (INR) will regain at least some ofits recent losses as interest rate and growth differentials stillfavour the Asian giant. Annual price gains in India continue

to top other Asian economies, with prospects for furthermonetary tightening still hinging on performance on the in-flationary front. Mounting inflationary expectations remainthe main concern of the Reserve Bank of India (RBI), leav-ing it compelled to persist in its anti-inflationary stance evenin the midst of uncertainties regarding the growth outlook indeveloped countries. While a slowdown in the pace ofmonetary tightening is envisaged for the coming months,the economic backdrop continues to support a restrictivestance. Indian GDP expanded at a robust 7.7% y/y rate dur-ing the second quarter, with solid service sector activity(60% of GDP) leading with a 10% y/y advance. We expectinflation to embark on a downward trend during the comple-

mentary half of 2011 on the back of falling fuel and foodcost gains, with prospects for the fall harvest key to deter-mine the extent of the moderation of agricultural prices. Theexpected disinflation will lead to further gains in discretion-ary consumer spending, with double-digit growth in exportscomplementing a growth picture that has been character-ized by dwindling public sector spending. The RBI hasraised the benchmark repo rate a cumulative 275 basispoints (bps) to 8%, and increased the reserve ratio forbanks by 100 bps since October 2009. We expect at mostone more 25 bps hike for the current year.

KOREA - The Korean won will continue to rebound towardlevels recorded prior to the recent spate of global uncertainty, as economic activity remains solid on the back o

firm industrial performance. Factory output remains closeto the turn-of-the-year peak, as it rebounds from supplychain disruptions suffered across Asia. Economic performance was conditioned by this shock during the secondquarter as a slowdown in export volumes resulted in a GDPadvance of only 0.8% q/q, coming below the solid 1.3%gain of the first quarter. The value of foreign shipments felfrom a 29% y/y advance during the first quarter to a 19%y/y gain in the second, with yearly growth in import valuesaccelerating and thus dragging overall output gains. A re-bound in foreign sales is already in the cards as the yearlyadvance in exports backed to an over 25% y/y print in Julyevidence that production lines have returned to normal

which supports our anticipation of a 5% y/y GDP advancein 2011. Headline inflation has surpassed the Bank of Koreas (BoK) 3% 1% target each month so far this yearwith core inflation on a persistent uptrend, reaching 3.7% yy in June. Notwithstanding the slowdown in credit, eco-nomic conditions remain solid as the unemployment ratehovers close to the all time low of 3.3% in June. While theBoK remains in inflation containment mode, a slowdown inthe pace of monetary tightening is envisaged, as the economy converges towards medium-term speed and globaconditions remain uncertain.

THAILAND - The Thai baht (THB) will maintain a strength-ening trend backed by favourable growth and interest rates

spreads. Thailands economy will continue to reap the bene-fits of its privileged location within Southeast Asia, with localdemand momentum running alongside solid foreign sales.Manufacturing output already surpassed pre-Japaneseshock levels, with a seasonally adjusted reading just in linewith the turn-of-the-year peak. Latest data on exports alsopoint to a solid rebound with values well ahead of pre-Marchaverages. Up-trending credit growth has supported a backin investment to over 20% as a share of GDP after theglobal crisis slump. The THB is in line to regain all of theweakness brought about by both local political and globaluncertainty, having appreciated by 2.6% vis--vis since theJuly 3rd elections. Price pressures have continued to inten-

sify, partly as a result of the upbeat tone in local activity,with core inflation climbing to 2.9% y/y in August, just insidethe Bank of Thailands (BoT) 0.5-3% target range. Foodcosts, a leading item in the inflationary process, reboundedin the latest reading on the back of rising meat prices afterhaving stabilized somewhat in previous months. As foodcosts continue to come down, we expect inflation to capitu-late in the coming months, helped by a cap on increases infuel costs and a softer commodity cost mix. The BoT islikely to stay on the sidelines through the rest of 2011.

MALAYSIA - The Malaysian ringgit (MYR) will remain on astrengthening path on the back of growth and inflationary

dynamics. The appreciation of the MYR after the global re-cession has been the strongest within Southeast Asia, depicting currency gains second only to the Japanese yen andthe Australian and New Zealand dollars. Inflationary trendscontinue to be driven by supply factors, as there remainslimited evidence of excess demand pressures. The countrys inflation rate fell slightly to 3.4% y/y at the latest reading, remaining elevated on the back of rising food and fuecosts. Bank Negara Malaysia (BNM) decided to keep thebenchmark rate fixed at 3% after the latest monetary policymeeting, in contrast with the situation in India and Thailandwhere benchmark rates were lifted. The BNM is likely tokeep interest rates on hold as the local transmission o

lower global commodity prices leads to falling inflationthrough 2012. Malaysias industrial production rebounded inJune on the back of improved conditions in Japan combinedwith stable industrial growth out of China. Given that manufacturing accounts for 63% of industrial output in Malaysiathis supports our expectation of a return to growth in thecomplementary half of the year. The countrys GDP expanded at an estimated 0.6% on a quarterly basis duringthe second quarter, an implied 4% yearly gain, which standssignificantly lower than the 7.3% y/y advance of 2010. Weanticipate a 4.8% y/y GDP advance in 2011.

DEVELOPING ASIAFundamental Commentary Oscar Snchez +1 416 862-3174


12/17



September 201

BRAZIL - After trading as high as 1.658 per USD at the beginning of August, the Brazilian real has stabilized close to the1.60 mark. Financial markets volatility, downwards revisions to global economic outlook, equities selloff and the new easeon local monetary policy have weighted in the BRL. The Brazilian economy has entered to a new phase of economic

slowdown, prompting the central bank to change their monetary policy stance and cut rates by 50 basis points in late August.

MEXICO - The Mexican peso (MXN) has been significantly affected by the August turmoil in financial markets, taking thecurrency to its weakest levels in 11 months, above 12.50 per USD. The MXNs recovery has lagged the rest of the floatingcurrencies in the region, posting the biggest monthly loss of around 5.5%. A downward revision to US economic activitywill adversely affect Mexicos economy; as a result, we are revising our year-end MXN forecasts to 12.3 per USD for 2011and 12.5 for 2012.

CHILE - Less optimistic forecasts for global economic growth that have dampened copper prices, together with capitamarkets volatility weigh on the Chilean peso (CLP) vis--vis the US dollar. However, the currency has stabilized andentered a new channel towards appreciation. The main risks for the CLP rely on the potential correction for copperprices due to global economic deceleration.

PERU - The Peruvian new sol (PEN) has been one of the best performers in the region, despite August volatility, asconfidence in the newly elected government has improved. The PEN has entered a new phase towards appreciationhowever, upside risks linger on the commodity prices side due to the global economic slowdown.

DEVELOPING AMERICASCurrency Outlook Daniela Blancas +1 416 862-3908

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

USDBRL 1.76 1.66 1.58 1.60 1.61 1.63 USDBRL

USDMXN 13.20 12.10 11.57 12.29 12.31 12.30 USDMXN

USDCLP 503 476 465 468 472 480 USDCLP

USDPEN 2.80 2.77 2.77 2.71 2.69 2.67 USDPEN

USDBRL USDMXN

USDCLP USDPEN

1.62

12.31

459

2.73

Currency TrendsSpot

1-Sep


1.52

1.57

1.61

1.66

1.70

1.75

Sep-10 Nov-10 Jan-11 M ar-11 M ay-11 Jul-11 Sep-11

11.5

11.8

12.1

12.4

12.7

13.0


455

465

475

485

495


2.72

2.74

2.76

2.78

2.80

2.82

2.84



13/17



September 201

BRAZIL - Financial market volatility, a sell-off in equities(the benchmark Bovespa Index fell 17% in 5 days at thebeginning of August) and global economic concerns

weighed on the Brazilian real (BRL), in line with the rest ofthe emerging markets in August. The pace of recovery hasbeen uneven for FX markets. The BRL regained more thanhalf of its losses from its peak and stabilized around the1.60 mark. However, the currency remains in bullish terri-tory, accumulating a 3.5% appreciation year-to-date. Re-cent information suggests that the Brazilian economy ismoderately decelerating, with industrial production decliningon a yearly basis, affected by the global economic slow-down and BRL strength. Employment gains supported bystrong local demand continue to pressure labour costs. Inthe meantime, the inflation outlook remains of concern, withconsumer prices increasing by 6.87% y/y in July, slightly

above the official target range. In response, the MonetaryPolicy Committee increased the reference rate in July to12.50% but then unexpectedly reversed its tone in Augustcutting the benchmark rate by 50 basis points (bps) on theback of a deceleration in the local economy caused by amore intense slowdown in the global economy. Nonethe-less, the Brazil-US yield spread is still (1200 bps) supportivefor the BRL. The authorities maintain their commitment to atighter fiscal policy. The government has announced that itplans to increase the 2011 primary surplus as a measure tocontain inflation and local demand.

MEXICO - Recent negative economic data in the US, itscredit rating downgrade, less risk appetite in capital markets and revisions in global growth prospects together with

lower oil prices have significantly dented the Mexican peso(MXN) against the USD. After trading below 12.0 pesos pedollar in four straight months, the MXN reached highsabove 12.60, posting the biggest monthly loss (4.6%among its Latin American peers. Risk aversion in financiamarkets (equities selloff) caused by US uncertainty remains the MXNs main risk factor. However, the Mexicancentral bank has been building up foreign reserves (USD$137 billion), which are expected to be a shield in the caseof speculative attacks against the currency. The inflationrate still remains close to the official target range; howeveron the back of the US economic slowdown the monetaryauthorities have opened the possibility to a more dovish

policy stance. We expect the central bank to maintain itsneutral bias; nonetheless, Banco de Mexico has signaledto be ready to act if necessary. Mexicos yield benchmarkcurve shifted downwards by 25 basis points on averagefrom the 6 month point and onwards in August in line withUS yield curve decline, lower inflation expectations in Mexico and poorer economic outlook. We expect the FX stabili-zation process to be slower in MXN-denominated securitiescaused by Mexican interdependence with the US economyespecially on the industrial and tourism sectors.

CHILE - The CLP has stabilized after the financial turmoilof early August; however, it has only recovered partially its

initial losses vis--vis the US dollar, posting a net loss of1.5% in August. A less optimistic global economic growthoutlook has dampened copper prices, which have alsoweighed on the CLP. Local economic conditions have en-tered a period of economic slowdown (recent industrial pro-duction data increased by only 0.7% y/y in July), while theinflation rate has moved slightly below the center of theofficial target range (inflation was 2.9% y/y in July), causingthe central bank to maintain the pause in its monetary tight-ening cycle for the third consecutive month in August. Thebenchmark interest rate currently stands at 5.25%. Expec-tations for a shift in the monetary policy stance towards amore dovish tone have been building up; however, authori-

ties have stressed that monetary policy is now more neutraland that any change will depend on economic conditions.The central bank is well prepared to face any disruption inChilean markets, holding almost USD$35 billion in foreignreserves. In line with the rest of the region, the cost of as-suring Chilean debt, measured by the 5-year CDS, in-creased by around 30 basis points (bps) in August; how-ever, it remains the regions lowest, at slightly above 100bps.

PERU - Following the volatility caused by the presidentiaelection, the Peruvian new sol (PEN) entered a new phase

of appreciation, reacting to positive local conditions. Financial market volatility early in August had a temporary negative effect on the PEN, from which it has completely recov-ered. Investors confidence in the newly elected government has improved significantly in recent months, giventhat the new cabinet recognizes the importance of stablemacroeconomic policies, and an agreement has beenachieved between the mining companies and the govern-ment to raise royalties to finance capital spending projectsand social programs. In addition, President Humalas gov-ernment has called for increased participation of privateinvestment in public infrastructure. Standard & Poors upgraded Perus long-term foreign currency rating from BBB-

to BBB with a stable outlook, on the back of the expecta-tions that the new government will support growth with amoderate budget. Meanwhile, monetary authorities havemaintained the reference rate unchanged at 4.25% sinceMay as the inflation rate has remained within the officiatarget range. However, authorities highlighted that anychange in the interest rate will be subject to the economicenvironment. We expect Perus real GDP to expand at anaverage rate of 5.9% in the 2011-2012 period.

DEVELOPING AMERICASFundamental Commentary Daniela Blancas +1 416 862-3908


14/17



September 201

RUSSIA - Volatile energy prices and approaching parliamentary and presidential elections together with a delayednomination of the ruling partys official candidate for the presidency will likely continue to be reflected in the Russianruble (RUB). We expect USDRUB to close the year at 28.

TURKEY - The Turkish lira (TRY) remains vulnerable to downside risks as global investor sentiment continues to changerapidly and the central bank maintains historically loose monetary conditions. Large financing needs resulting from a rapidly widening current account deficit are placing market participants on alert. We expect USDTRY to close the year at1.73.

HUNGARY - Investor uncertainty regarding the implementation of recent fiscal reform plans as well as heightened instability generated by the euro zone debt crisis will continue to confound the Hungarian forint (HUF). Nevertheless, the HUFhas reclaimed some of its mid-year losses. We expect the HUF to close the year at 270 per euro.

SOUTH AFRICA - The South African rand (ZAR) will continue to reflect fluctuations in commodity prices and investorisk aversion. Potential changes to the foreign investor business climate in the countrys mining industry may have anadverse impact on investor sentiment towards South Africa. A widening current account deficit will point to a modest de-

preciating bias of the ZAR vis-vis the US dollar through 2012. We expect the ZAR to close the year at 7.0 per USD.

DEVELOPING EUROPE/AFRICACurrency Outlook Tuuli McCully +1 416 863-2859

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

USDRUB 30.8 28.9 28.0 28.2 28.2 28.7 USDRUB

USDTRY 1.53 1.60 1.59 1.73 1.72 1.70 USDTRY

EURHUF 286.88 271.06 266.45 270.34 269.16 266.66 EURHUF

USDZAR 7.37 6.97 6.80 7.00 7.05 7.20 USDZAR

Currency TrendsSpot

1-Sep


29.0

1.72

273.68

7.01

USDRUB USDTRY

EURHUF USDZAR

27.1

27.9

28.6

29.4

30.1

30.9

31.6


1.38

1.45

1.52

1.59

1.66

1.73

1.80


260

265

270

275

280

285

290


6.50

6.75

7.00

7.25

7.50



15/17



September 201

RUSSIA - The Russian central bank will likely maintainmonetary conditions unchanged in the coming months onthe back of downside risks related to global economic un-

certainty, keeping the benchmark refinancing rate at thecurrent level of 8.25%. In the statement from the August 4thmeeting, monetary authorities asserted that inflationarypressures, namely food prices, had cooled and were likelyto further ease with the expected favourable harvest. In-deed, consumer price inflation eased to 9.0% y/y in Julyfrom 9.4% the month before. Domestic politics will remainthe centre of investor attention in the near term as parlia-mentary elections are scheduled for December, followed bya presidential ballot in March 2012. Both President Medve-dev and Prime Minister Putin are considering running forthe presidency; however, an official decision regarding whowill be the ruling United Russia partys candidate has not

yet been made. The Russian economic outlook remainsdependent on energy prices and the corresponding exportsector performance. Scotia Economics forecast for BrentOil, US$113/bbl in 2011 and US$118/bbl in 2012, shouldcontinue to support economic growth; we expect Russianreal GDP to expand by around 3% through 2012. Simi-larly, government finances are on the mend on the back ofelevated energy prices, despite increased spending aheadof the elections. The fiscal deficit will likely narrow to 1%of GDP this year from 4% in 2010.

TURKEY - A deteriorating current account position formsan area of weakness in the Turkish economy. Due to mas-sive import growth, the current account shortfall will likely

reach nearly 10% of GDP in 2011, following a 6% gap in2010. Should eroding investor sentiment prompt a reversain volatile capital inflows (Turkey relies heavily on portfolioinvestments rather than FDI inflows to finance its currenaccount deficit), the TRY may become subject to depreciation, fuelling inflationary pressures and a monetary tightening response. As a result, the nation could see a markedincrease in non-performing loans should domestic activitycool down. At a surprise interim monetary policy meetingon August 4th, the central bank announced a reduction inthe one-week repo rate of 50 basis points, bringing thebenchmark rate to 5.75%. The decision was prompted byfast-growing concerns over an impending global slowdown

and the destabilizing financial and external demand impacts of the euro zone debt crisis. Given the recent depreciation of the TRY combined with persistent inflationarypressures, nascent fears of economic overheating, andexternal financing strains related to the current accoungap, the monetary authorities will likely start normalizingmonetary conditions in early 2012. We anticipate that inflation will continue to pick up through the second half of 2011from the current level of 6.3% y/y to 7.2% by year-end, asthe depressed TRY, low interest rates and still elevatedcommodity prices maintain upward pressure on prices.

HUNGARY - Hungary remains in fiscal consolidation modeas it aims to retain investor confidence in the sustainability

of its public finances. The government is targeting a fiscaldeficit of 2.5% of GDP next year, according to the 2012draft budget that was approved by the administration at theend of August. Public accounts will show a surplus ofaround 2.0% of GDP this year (compared with a deficit of4.2% in 2010) due to one-off private sector pension trans-fers. Hungarian monetary authorities will likely maintain thecurrent monetary policy stance for an extended period oftime due to increased uncertainties regarding the globaleconomic outlook. Following the August 23 rd MonetaryCouncil meeting, the benchmark interest rate was kept un-changed at 6.0%. While headline inflation eased to 3.1%y/y in July from 3.5% the month before, price pressures at

the core level continued to intensify, reflecting the laggedpass-through of higher commodity prices. Hungarian realGDP remained flat in q/q terms in the second quarter of theyear with output growth decelerating from the 2.5% y/ypace in the first quarter to 1.5% in the April-June period.The external sector has recently been driving economicactivity as domestic demand remains weak. We have re-vised our 2011 forecast for Hungarian economic growth,and now expect output to advance by 1.9%, followed by a1% expansion in 2012.

SOUTH AFRICA - South African economic activity is cooling in line with the global trend, reflecting subdued perform

ance in the manufacturing, mining and agricultural sectorsReal GDP grew by 1.3% q/q annualized, (3.0% y/y) in thesecond quarter of 2011, following a 4.5% q/q (3.5% y/yexpansion in the first three months of the year. We haverevised our real GDP forecast for South Africa, and nowexpect output to increase by 3% this year, followed by a3.5% advance in 2012 as domestic demand improves. Inflation continues to accelerate, climbing to 5.3% y/y in Julyfrom 5.0% the month before; regardless, it remains comfortably within the South African Reserve Banks (SARB) 36% target range. As price pressures further up the distribution chain have continued to intensify as well, we expecinflation to approach the upper limit of the range toward the

end of 2011. With the economy showing signs of coolingcombined with the fact that inflationary pressures are nodemand-driven, the SARB will likely keep the benchmarkinterest rate unchanged at 5.5% in the coming monthsWith the countrys trade balance moving from a surplusposition to a deficit, the current account is set to widen significantly from 2.8% of GDP in 2010 to around 5% of GDPin 2012. In the context of the countrys low savings rate andits dependence on volatile portfolio investment inflows, theshortfall points to modest selling pressures for the ZAR inthe next two years.

DEVELOPING EUROPE/AFRICAFundamental Commentary Tuuli McCully +1 416 863-2859


16/17



September 201

GLOBAL CURRENCY FORECAST (end of period)2009 2010 2011f 2012f

Q1a Q2a Q3 Q4 Q1 Q2 Q3 Q4

MAJOR CURRENCIES

Japan USDJPY 93 81 80 85 83 81 79 80 82 83 84 85

Euro zone EURUSD 1.43 1.34 1.50 1.40 1.42 1.45 1.45 1.50 1.48 1.46 1.43 1.40

EURJPY 133 109 120 119 118 117 115 120 121 121 120 119

UK GBPUSD 1.62 1.56 1.65 1.70 1.60 1.61 1.63 1.65 1.66 1.67 1.69 1.70

EURGBP 0.89 0.86 0.91 0.82 0.88 0.90 0.89 0.91 0.89 0.87 0.85 0.82

Switzerland USDCHF 1.04 0.93 0.77 0.75 0.92 0.84 0.79 0.77 0.77 0.76 0.76 0.75

EURCHF 1.48 1.25 1.16 1.05 1.30 1.22 1.15 1.16 1.14 1.11 1.09 1.05

AMERICAS

Canada USDCAD 1.05 1.00 0.96 0.94 0.97 0.96 0.96 0.96 0.95 0.95 0.94 0.94

CADUSD 0.95 1.00 1.04 1.06 1.03 1.04 1.04 1.04 1.05 1.05 1.06 1.06

Mexico USDMXN 13.1 12.3 12.3 12.5 11.9 11.7 12.3 12.3 12.3 12.2 12.3 12.5

CADMXN 12.4 12.4 12.8 13.3 12.3 12.2 12.8 12.8 13.0 12.9 13.1 13.3

Argentina USDARS 3.80 3.98 4.40 5.00 4.05 4.11 4.25 4.40 4.54 4.69 4.84 5.00

Brazil USDBRL 1.74 1.66 1.60 1.65 1.63 1.56 1.59 1.60 1.61 1.62 1.64 1.65

Chile USDCLP 507 468 470 485 477 467 463 470 474 477 481 485

Colombia USDCOP 2044 1908 1790 1840 1871 1771 1781 1790 1802 1815 1827 1840

Peru USDPEN 2.89 2.81 2.70 2.65 2.80 2.75 2.79 2.70 2.69 2.67 2.66 2.65

Venezuela 1/ USDVEB 2.15 4.29 4.30 5.15 4.29 4.29 4.29 4.30 4.50 4.70 4.92 5.15

ASIA / OCEANIA

Australia AUDUSD 0.90 1.02 1.09 1.11 1.03 1.07 1.08 1.09 1.09 1.10 1.10 1.11

China USDCNY 6.83 6.61 6.25 5.88 6.55 6.46 6.35 6.25 6.16 6.06 5.97 5.88

Hong Kong USDHKD 7.75 7.77 7.75 7.75 7.78 7.78 7.78 7.75 7.75 7.75 7.75 7.75India USDINR 46.5 44.7 44.8 43.5 44.6 44.7 45.8 44.8 44.5 44.1 43.8 43.5

Indonesia 2/ USDIDR 9.40 9.00 8.54 8.40 8.71 8.58 8.54 8.54 8.50 8.47 8.43 8.40

Malaysia USDMYR 3.43 3.06 2.92 2.87 3.03 3.02 2.96 2.92 2.91 2.89 2.88 2.87

New Zealand NZDUSD 0.72 0.78 0.87 0.88 0.76 0.83 0.86 0.87 0.87 0.87 0.88 0.88

Philippines USDPHP 46.2 43.8 42.0 41.0 43.4 43.4 42.2 42.0 41.7 41.5 41.2 41.0

Singapore USDSGD 1.40 1.28 1.19 1.17 1.26 1.23 1.20 1.19 1.18 1.18 1.17 1.17

South Korea USDKRW 1164 1126 1030 1000 1097 1068 1057 1030 1022 1015 1007 1000

Thailand USDTHB 33.4 30.1 29.1 28.5 30.3 30.7 29.7 29.1 28.9 28.8 28.6 28.5

Taiwan USDTWD 32.0 29.3 28.5 27.8 29.4 28.7 28.9 28.5 28.3 28.1 27.9 27.8

EUROPE / AFRICA

Czech Rep. EURCZK 26.4 25.0 24.0 23.8 24.5 24.3 24.1 24.0 23.9 23.9 23.8 23.8Iceland USDISK 126 115 115 110 114 114 114 115 114 112 111 110

Hungary EURHUF 270 279 270 265 266 266 271 270 269 267 266 265

Norway USDNOK 5.79 5.82 5.25 5.15 5.54 5.39 5.32 5.25 5.23 5.20 5.18 5.15

Poland EURPLN 4.10 3.96 4.00 3.90 4.02 3.98 4.10 4.00 3.97 3.95 3.92 3.90

Russia USDRUB 30.0 30.5 28.0 29.0 28.4 27.9 28.6 28.0 28.2 28.5 28.7 29.0

South Africa USDZAR 7.40 6.63 7.00 7.30 6.77 6.77 6.99 7.00 7.07 7.15 7.22 7.30

Sweden EURSEK 10.25 8.99 8.80 8.60 8.95 9.18 9.04 8.80 8.75 8.70 8.65 8.60

Turkey USDTRY 1.50 1.54 1.73 1.68 1.55 1.62 1.72 1.73 1.72 1.70 1.69 1.68

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

South

2012f2011f

North


17/17

Scotia Economics

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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 sha

be taken as a representation for which The Bank of Nova Scotia o

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