Line in the Sand: Good and bad inflation

8/7/2019 Line in the Sand: Good and bad inflation

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LONDON TORONTO NEW YORK SINGAPORE

Global MarketsMarch 16, 2011Rates & ForeignExchange Research

THE LINE IN THE SAND: DISTINGUISHING BETWEEN

GOOD AND BAD INFLATION

CONTENTSLead Article: The Line in the Sand:Distinguishing Between Good and BadIn ation 1U S Fixed Income 4Canadian Fixed Income 5U K Fixed Income 6Australian Fixed Income 7New Zealand Fixed Income 8U S Dollar 9Canadian Dollar 10Euro 11Japanese Yen 12U K Pound 13Australian Dollar 14New Zealand Dollar 15Swiss Franc 16Summary Fixed Income Table 17Summary Foreign Exchange Table 18

The global economy is approaching the end of the rst quarter of 2011 withsigni cant momentum. With activity measures showing rates of growth not seenfor almost ve years, forecasters have responded by revising their expectationsfor economic output higher. Against this backdrop, the likelihood of de ationhas become increasingly remote and instead the balance of risk to the forecasthas shifted towards higher in ation. But the magnitude of the forecast revisionsto both growth and in ation also re ects a ne balance that is ultimately in u -enced by more than economics. The concurrent rise in geopolitical tensions inthe Middle East and North Africa (MENA) and in the price of oil has increasedthe pressure on poli -cymakers who mustprimarily limit itsimpact on infla-tion but also guardagainst the risk itposes to economicgrowth. The tragicearthquake in Japanhas helped to dimin-ish the magnitudeof the shockal-though the larger fall in crude oc -curred several daysearlierbut eventsin MENA continueto cast a long shad-ow over energy markets. By contrast, rising in ation caused by the steady ab -sorption of the resources that had lain idle during the recession is a much better problem for central banks to have. So once again, the nancial system is nowmore exposed to a policy surprise or error than it is to a nancial surprise, andthe scale of the macro-driven volatility could be signi cant if realized.

From Each According to His Ability to Fight In ation, To Each Accordingto His Willingness to Fight In ation

Just as all politics is local, so too is the impact of the jump in the price of crude oil, and ultimately the response of policymakers. The challenge is mostpressing for emerging market economies, where oil is just the latest in a longstring of in ationary shocks that speak to a level of monetary accommodationutterly at odds with conditions in the wider economy. A reluctance to accept astronger currencyinstead a combination of intervention and capital controlsremain the preferred optionsin the face of accelerating foreign demand onlyadds to the risk of higher in ation. The tentative steps taken by Brazil, Chile,

HIGHLIGHTS

The rise in the price of oil trig -gered by geopolitical develop-ments poses yet another head-wind to both the recovery in

nancial markets and the globaleconomy

Each economy will need to cus -tomize their response to higher energy prices which raises therisk for a policy error in an al -ready complicated environment

The publication also includesquarterly interest rate and ex-change rate forecasts for theU.S., Canada, U.K., Australia, andNew Zealand, and also offers ad -ditional exchange rate forecastsfor the Japanese yen, the euro,and the Swiss franc.

INFLATION'S STABLE SPINE

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1970 1975 1980 1985 1990 1995 2000 2005 2010

Core CPICPI - Energy

Y/Y % Chg.

Source: TD Economics, Bureau of Labor Statistics

Arab OilEmbargo

Iran/IraqWar

Gulf War

PalestinianUnrest

IraqInvasion

HurricaneKatrina

LehmanBrothers

Fails


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Global Markets March 16, 2011Rates & FX Research

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China, Columbia, Hungary, India, Indonesia, Korea, Peru,Thailand and Vietnam, re ect a growing recognition of thisrisk but the lack of conviction in an aggressive campaign of

stimulus withdrawal is palpable.For developed market economies, the analysis is more

nuanced. The impact of higher energy and food prices willrestrain growth, as the abundance of economic slack makes itless likely that there will be signi cant pass-through to other prices, costs, and wages. The market appears to share thisview. Real long term interest rates in the United States havedeclined. However, with nominal interest rates decliningproportionately less, the markets forecast of future in ationedged up a little, but remains within the range prevailingsince 2000 and is consistent with the 2.0% rate that most

developed market central banks have contracted to deliver.For central banks in developed market economies, lower

for longer is still a reasonable risk to take. So long as higher oil prices are not accompanied by signi cant monetarytightening, the oil price spike is unlikely to cause a reces -sion. While the earthquake in Japan will exact a heavy tolldomestically, the global recovery remains entrenched. Onthe margin it could stand to bene t from the pullback inenergy prices. It should therefore come as little surprise to

nd that nancial markets will continue to seek risk despitethe swing in concern towards in ation and the downside

hit to growth. The upside to risky asset markets remainssubstantial, especially as developed market equities areexpected to receive an earnings tailwind from the stronger growth, and the push from low cash rates remains strong.

The Tipping Point: From Curtailing In ationaryExcess to Demand Destruction

So in a manner of degree, the nancial markets have seenthe oil price shock as helpful in braking overall growthmomentum. Initial risk asset volatility re ected large inves -tor repositioning to take advantage of the rise in the price

of oil by selling assets and countries that must pay more for oil, and buying oil-producing assets and countries whoserevenues and pro ts will be boosted. But there is obviouslya deeper resonance that will become apparent should therecent move higher in energy prices be sustained.

There are ambiguities on the net impact of higher oilprices over a longer time horizon, and it is well understoodthat the rise in the price of oil potentially renders some of the capital stock unproductive. The macroeconomic man -agement issue could equally be one of supply rather thandemand management, and the implications on monetary

policy and risky asset markets are different depending on

the outcome.In central banking terms, the shock to the price of oil

could reduce the rate of potential GDP growth, raising therisk that the available disin ationary slack could be absorbedmore quickly than expected. But the lesson of the 1970sis clear: you do not accommodate a negative supply shock and policymakers everywhere are aware of this. As a con -sequence, successful in ation management is a function of how good of a forecaster you are. In this case, it dependson how accurately you forecast growth relative to theeconomys potential, and thus the rate of capacity depletion.

A negative supply shock would tend to give you growthlower than expectations and in ation higher than expecta -tions. In the United States, growth has surprised on theupside, but in ation has not. So it is not clear. Even if po -tential growth is a bit lower, the effective time that slack willprevail is roughly the same span of time over which demandand supply growth is judged to fall, leaving the overall USmonetary policy challenge unchanged. Despite remainingat an emergency setting when the emergency has long sincepassed, the Federal Reserve has indicated it sees no reasonto change its overall policy orientation at this point. Wehave made only minor changes to our Fed forecast mostlyin response to better growth momentum.

In Europe the situation is less clear. The European Cen -tral Bank has decided that heady growth in the unions corecountriesmostly Germanyand an earlier than expectedmove up in core in ation means that the expected slack is smaller than they rst thought, so they are moving toshore-up in ation expectations consistent with their in a -tion mandate. This makes it more dif cult for the peripheral

OIL PRICE VS FED FUNDS RATE

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20$/Barrel* Percent

Fed Funds EffectiveRate (rhs) Nominal Oil

Price (lhs)

*West Texas Intermediate CushingSource: TD Economics, Wall Street Journal, Federal Reserve


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European countries that must manage a scal retrenchmentto cope, but this is beyond the mandate of the ECB. Liquid -ity issues for the euro-areas distressed banking systems will

be met through abundant nancing at the current xed-rate.Even with the scal challenges, and despite the Euro areasmany aws, the recent sovereign debt crisis has given theeuro area the fright it needed to achieve some sort of scalorder and resolution to its sovereign solvency woes.

Fiscal policy in the US, by contrast, is in a state of com -plete incoherency, with no popular acknowledgement of theproblems, and no political incentive to take corrective actiontoday. Consequently, the US dollar is feeling the heat. Our forecasts have been revised to re ect this.

In Canada, the absence of in ationary pressure contin -ues to afford the Bank of Canada the luxury of remainingaccommodative while assessing the various crosscurrentsimpacting the economy and the outlook for in ation. Pru -dence, however, must not engender apathy; action will berequired in the months ahead. In our assessment, the Bank has underestimated the strength of the US economy and thesupport it will provide to Canadian exports. With a domesticeconomy that has only begun to decelerate, the modest re -balancing in the overall economy towards stronger net tradewill leave the Bank facing a rapidly diminishing overhangof spare capacity. While the strength of the Canadian dol -

lar is an important ally in restraining in ation, it is not a

substitute for in ation management. We continue to holdour long-standing view that the Bank will take its overnightinterest rate higher in the second half of 2011.

Surprise + Vulnerability = Volatility

Set against a prolonged convalescence, the globaleconomy has stumbled from prospective crisis to prospective crisis, reminding us all that recoveries never move instraight lines. As each passing impediment fades but doesnot completely disappear, both the resistance of the privatesector and the resolve of policymakers is tested. The rise inthe price of oil has raised the stakes in macro managementby introducing potential for policy error into an alreadycomplicated mix. At this point we continue to think that risk

assets can do well in a world of still robust growth, whichhigher oil prices will merely temper for a while.

Volatility is the product of surprise and vulnerability. Themarkets limited generation of equity volatility in the face of the oil price surprise suggests that the overall system is notvery vulnerable nancially. Granted, the nancial systemremains signi cantly less levered than it was in 2007-2008.But the reduction in private sector nancial leverage hasbeen offset by signi cantly more leverage at the sovereignlevel; the vulnerabilities have been merely redistributed.Indeed, macro vulnerability has substituted for nancial

vulnerability. And this can be just as destabilizing.

Andrew Spence,Global Head, Rates and FX Research

416-308-4600

David Tulk,Chief Canada Macro Strategist

416-983-0445


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4

U S FIXED INCOME

The Fed is inclined to stay on message and remain oddman out until more certainty that labor demand is suf cientfor them to consider the recovery truly self-sustaining.In the March statement, optimism appears to be building.The key elements such as the commitment to QE2 andexceptionally low for extended period remained intact asexpected, and will do so for the foreseeable future. However,the tone of the statement is a clear indication that things aremoving their way as the committee takes more baby stepstoward taking us closer to an exit strategy.

Risks do evolve, often in an unpredictable fashion. TheJapan disaster will affect global growth momentum throughinterrupted trade linkages, idle domestic production, and

through a negative wealth effect to name a few. Commoditymarkets are down sharply since the earthquake contributingto the disin ationary impulse from this event and breakevensin the US hit their lowest level in three weeks. On the other side of this, however, the rebuilding efforts in Japan and whatis sure to be a more aggressive turn in the monetization of adisastrous debt predicament will likely fuel a more in ation -ary bias later this year. The extent of this move will dependon how extensive the damage and dislocations from thisearthquake prove to be. For now, the Fed has every incen -tive to stay on message. Economic momentum and in ation

are moving their way and events in Japan are not likely tomaterially change their fundamental outlook, or ours.Despite the geopolitical and natural disaster crosscur -

rents swirling through nancial markets, we have electedto pull forward our tightening in 2012 from Q3 to Q2 andhave raised our year-end forecast from 1.00% to 1.25%.With QE2 completed in June and the reinvestment of MBSrun-off likely to expire sometime in September, passivepolicy tightening will commence in the nal quarters of 2011. Real fed funds are not exceptionally low relative to thepivot points of prior tightening regimes, but when factoringfor QE, it clearly is. If a realistic policy prescription for theend of 2012 is a real rate closer to 0.25%, then taking the

U S FIXED INCOME OUTLOOKSpot Rate 2010 2011 20123/16/2011 Q1 Q2 Q3 Q4 Q1F Q2F Q3F Q4F Q1F Q2F Q3F Q4F

Fed Funds Target Rate (%) 0.25 0.25 0.25 0.25 0.25 0.25 0.25 0.25 0.25 0.25 0.50 1.00 1.25

3-mth T-Bill Rate (%) 0.09 0.16 0.18 0.16 0.12 0.10 0.15 0.20 0.20 0.30 0.55 0.80 1.35

2-yr Govt. Bond Yield (%) 0.58 1.02 0.61 0.42 0.59 0.60 0.75 0.80 0.90 1.15 1.30 1.70 1.95




10-yr-2-yr Govt. Spread (%) 2.68 2.81 2.32 2.09 2.70 2.80 3.00 3.10 3.05 2.90 2.80 2.50 2.30

f: Forecast by TD Bank Group as at Mar. 16, 2011; All forecasts are for end of period. Source: Bloomberg, TDBG

QE based real funds rate up almost 300bps from its currentlevel will take a combination of rate hikes (100bps in 2012)and a reduction in the balance sheet. Natural run-off (almost$500B from June 2011-Dec 2012) will accomplish 75bpto 100bp of tightening. Given these assumptions, and theability to lock up excess reserves through a variety of testedfacilities, policy will remain more than suf ciently accom -modative to help guard against a relapse in the recovery.

The Fed has a great deal of exibility in managing downtheir balance sheet. How they use that exibility will dependon the ability of the market to absorb the run-off, or sales,in the context of its objective of price stability and employ -ment. This debate is in its infancy. However, it will mature

over coming quarters as the Fed brings a timeline for trim -ming their loose accommodative policies into sharper focus.

Our outlook for rates is broadly unchanged from the prior two publications. Our Q1 end forecasts were changed in lightof the sharp rally in rates. However, we suspect that rallywill not endure in a post disin ation strong growth environ -ment. Neither are they likely to lurch higher. They will drifthigher over the course of the year and with the end of QE2well anticipated one must be careful to assume an immedi -ate sell-off should occur. We do believe that the cards areheavily stacked against lower rates, and our 3.95% year-end

forecast may ultimately prove to be modestly conservative.Perhaps the greatest risk to that view resides with energymarkets. An oil supply shock within a period of immenseeconomic slack should push yields lower. That has been thepattern in the past. It has been the pattern during the mostrecent period as well.

Eric Green, Chief U.S. Strategist 212-827-7156


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5

CANADIAN FIXED INCOME

As the rst quarter of 2011 draws to a close, risk aver -sion is once again in the ascendency, causing yields acrossthe Canadian curve to retreat dramatically. The rst waveaccompanied the rise of geopolitical tensions the MiddleEast and North Africa (MENA), where the concurrent in -crease in the price of oil threatened to undermine what wasbecoming a durable recovery in global growth. In recentdays, the aftermath of the tragic earthquake and tsunami inJapan has arrested the rise in the price of oil but has donelittle to prevent a second wave of risk aversion from fuel -ling additional demand for the safety of government bonds.Without these two developments, yields across the curvewere unfolding largely as expected. And given that events

in MENA and Japan are not expected to have a tremendousimpact on Canada, we are reluctant to chase what couldprove to be transitory factors driving yields lower. As such,most of the revisions to our forecast in March are cosmeticin nature. However, we do acknowledge a downside risk to yields should the turmoil in the global economist persist.

The cornerstone of the forecast is our longstanding callthat the Bank of Canada remains on the sidelines until Julybefore proceeding with four 25 basis point hikes to end theyear with an overnight rate of 2.00%. The market has alsopivoted around a July start date until recently where events

in Japan have pushed the expected start date for hikes fur -ther into the second half of the year. This move is likely anoverreaction, and instead we would point to the recoveryin Canadian exports and US employment as evidence thatthe Bank will be compelled to resume withdrawing stimulusin July.

In the short end of the curve, we have made a modest

concession to bring the 2 year yield closer to market pricingin Q1 but have pushed the yield higher over the balance of 2011. In Q2 this forecast is driven by the expectation of hawkish rhetoric by the Bank as they lay the groundwork for a July hike, while actual hikes combined with limitedissuance will contribute to higher yields over the balanceof the year. Yields on 5s are also expected to increase over 2011, due to both Bank hikes and seasonal weakness in themortgage market.

The outlook for 10 year yields remains largely un -changed, and when combined with the revisions to 2scontributes to a atter curve over 2011. After steepening to160 bps in Q2, the curve will atten to 145 bps by the end

of the year and to 95 bps by the end of 2012.The clear risk to this forecast is if events in the geopoliti -

cal arena contribute to additional risk aversion and cause afurther ight to quality. Although yields across the curveare utterly inconsistent with conditions in the Canadianeconomy, we have a tremendous amount of respect for thedegree of fear providing a bid. There is a difference betweenwhat markets should do and what they will do. And in theextreme event that the recovery in the global economy isthreatened, the Bank of Canada will also elect to remain onhold for longer than we currently expect and the curve will

steepen as a result.

CANADIAN FIXED INCOME OUTLOOKSpot Rate 2010 2011 20123/16/2011 Q1 Q2 Q3 Q4 Q1F Q2F Q3F Q4F Q1F Q2F Q3F Q4F

Overnight Target Rate (%) 1.00 0.25 0.50 1.00 1.00 1.00 1.00 1.50 2.00 2.25 2.50 2.75 3.00

3-mth T-Bill Rate (%) 0.94 0.29 0.51 0.88 1.04 1.00 1.05 1.50 2.00 2.25 2.50 2.80 3.052-yr Govt. Bond Yield (%) 1.59 1.74 1.39 1.38 1.68 1.85 2.15 2.45 2.60 2.75 3.10 3.50 3.45




10-yr-2-yr Govt. Spread (%) 1.55 1.83 1.69 1.38 1.53 1.55 1.60 1.55 1.45 1.45 1.25 0.90 0.95

Canada-U S Spreads3-mth T-Bill Rate (%) 0.85 0.13 0.33 0.72 0.80 0.85 0.90 1.35 1.80 1.95 2.15 2.20 1.85



10-yr Govt. Bond Yield (%) -0.12 -0.26 0.15 0.25 -0.05 0.00 0.00 0.10 0.10 0.15 0.25 0.20 0.15

30-yr Govt. Bond Yield (%) -0.74 -0.59 -0.24 -0.32 -0.70 -0.80 -0.95 -0.80 -0.70 -0.55 -0.55 -0.50 -0.50


David Tulk, Chief Canada Macro Strategist 416-983-0445

Ian Pollick, Portfolio & Rates Strategist 416-983-7184


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U K FIXED INCOMEWe are in a holding pattern for UK xed income as we

await the rst rate hike from the Bank of England. Fearsthat high oil prices would weigh on growth helped to pushyields lower since the end of February, and this was further reinforced by the damage in Japan, with 5s signi cantlyunderperforming. We do not see either of these events asshocks with permanent effects, and as a result, while wehave adjusted our forecasts for yields lower for end-Q1, our remaining forecasts remain virtually unchanged.

The MPC was in a four-way split as of February so theprospects are certainly not clear cut. While one member voted to increase asset purchases and add more stimulus tothe economy, two voted for a 25 basis point hike, one voted

for a 50 basis point hike, and the remaining ve voted tokeep rates unchanged for now. One of the biggest decidingfactors among those voting to keep rates unchanged wassimply not wanting to give the impression that the BoE wasracing for the exit. This would also give the MPC a chanceto ensure data was indeed looking better, which it is in our opinion. But the shock would now would be getting to Au -gust without a rate hike, and we expect it will come in May.

BoE Governor Mervyn King in March described UK real rates as unsustainably low. This does provide an outfor the MPC on delivering rate hikes. Real rates can rise

through an increase in Bank rate, as we expect to start inMay, or through a fall in in ation expectations, as MervynKing may hope. 10-year breakevens are 9bps lower thanthey were at the time of our last Global Markets, but nominal10-year yields have fallen 32bps so lower real yields is notwhat the MPC wants.

The one confounding factor in gilts has been the inabilityof the curve to atten. At the front end, the market seemsto only be half-heartedly pricing in hikes. Once the rst isdelivered in May, the market should get the message. Also,as we move into the end of the year, the forecast that in ation

will indeed fall back to the 2% target in January next year will reassure the market that 4% in ation is not a permanentfeature, and allow the long end to support attening, as well.Over the next month, the new budget is likely to show thatbetter growth has lowered borrowing requirements and helpyields fall slightly further, but tightening is coming and thecurve will ultimately atten aggressively on the back of that.

Richard KellyHead of European Rates & FX Research

+44 20 7786 8448

UK 3-MONTH T-BILL RATES & 10-YEARGOVERNMENT BOND YIELDS

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2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 20120

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Actual data to Q4 2010; Forecast by TDBG as at March 2011Source: Bank of England/Bloomberg

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10-yr Gov't Bond Yield

3-mo T-Bill yield

%

Forecast

U K FIXED INCOME OUTLOOKSpot Rate 2010 2011 20123/16/2011 Q1 Q2 Q3 Q4 Q1F Q2F Q3F Q4F Q1F Q2F Q3F Q4F

Bank Rate Target (%) 0.50 0.50 0.50 0.50 0.50 0.50 0.75 1.00 1.25 1.50 2.00 2.50 3.003-mth T-Bill Rate (%) 0.62 0.57 0.54 0.57 0.57 0.65 1.00 1.20 1.45 1.70 2.20 2.70 3.20

2-yr Gilt Yield (%) 1.23 1.16 0.75 0.65 1.10 1.25 1.85 2.10 2.35 2.45 2.70 3.10 3.505-yr Gilt Yield (%) 2.29 2.71 2.07 1.61 2.20 2.35 3.05 3.25 3.50 3.65 3.80 4.00 4.25

10-yr Gilt Yield (%) 3.53 3.94 3.36 2.95 3.40 3.50 3.90 4.10 4.30 4.30 4.45 4.70 4.8030-yr Gilt Yield (%) 4.28 4.53 4.17 3.90 4.19 4.30 4.70 4.80 4.90 4.95 4.95 4.85 4.70

10-yr-2-yr Gilt Spread (%) 2.30 2.78 2.61 2.30 2.30 2.25 2.05 2.00 1.95 1.85 1.75 1.60 1.30

f: Forecast by TD Bank Group as at Mar. 16, 2011; All forecasts are for end of period. Source: Bloomberg, TD Bank Group


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AUSTRALIAN FIXED INCOME

Although data continue to be consistent with trendgrowth and full employment, and the RBA is not likely toraise rates any time soon, ACGB 10-year yields have ral -lied 30bp in the past month, to 5.4%. The bond market hasbene ted from rising geopolitical risks in the Middle Eastand now Japans disaster.

Domestic demand-supply dynamics are also supportivefor bonds. In contrast to the forthcoming surge in G20government bond issuance, Australian bond supply is likelyto fall well short of demand. Adding to future demandprospects, the Australian Prudential Regulation Authority(APRA) recently proposed a very narrow range of assets thatbanks can hold to satisfy Basel III minimum liquid asset re -

quirements; just cash, ACGBs and semi-government bonds.While favourable for sovereign bonds, supra-national paper (AAA-rated AUD denominated kangaroo bonds) is left ata relative disadvantage. To ll the gap, the RBA is propos -ing a committed liquidity facility which will accept suprasand other securities in ful llment of Basel requirements,but at a cost to banks. This has seen the kangaroo marketunderperform since the APRA announcement.

The timing of the proposed introduction of Basel liquid -ity requirements is also somewhat problematic, coming intoeffect on 1 January 2015. By then, supply of Commonwealth

bonds will be limited as the budget is forecast to be intosurplus two years prior.Outsized demand for ACGBs has been re ected in recent

primary market tenders achieving bid-to-cover ratios of 4-5(the 2010 average was 3.8). To us, that signals that yields insecondary markets across the curve are too low and thereforeAussie bonds are expensive again. 2 year yields are 4.76%and 3 year yields are 4.91%, the latter well below our mid-year target of 5.30%.

We expect the RBA to remain on hold at 4.75% for some time as evidence gathers that outside of the ood-impacted spike of fresh produce prices, in ation remainssubdued. Hence our May RBA tightening call has a 50/50

AUSTRALIA FIXED INCOME OUTLOOKSpot Rate 2010 2011 2012

3/16/11 Q1 Q2 Q3 Q4 Q1F Q2F Q3F Q4F Q1F Q2F Q3F Q4FCash Target Rate (%) 4.75 4.00 4.50 4.50 4.75 4.75 5.00 5.25 5.75 5.75 6.00 6.00 6.00

3-mth Bank Bill Rate (%) 4.93 4.43 4.91 4.89 4.98 5.00 5.25 5.50 5.75 6.00 6.00 6.00 6.00




10-yr-3-yr Govt. Spread (%) 0.49 0.51 0.68 0.21 0.27 0.55 0.40 0.30 0.05 0.05 0.00 0.00 0.00


AUSTRALIAN 3-MONTH T-BILL RATES & 10-YEARGOVERNMENT BOND YIELDS

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2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 20120

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2

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Actual data to Q4 2010; Forecast by TDBG as at March 2011Source: Reserve Bank of Australia/Haver Analytics

%


3-mo T-Bill yield

%

Forecast

probability ahead of our March TD-MI Monthly In ationGauge, released at the end of this month. If the In ationGauge continues to be tame, we will modestly adjust our RBA tightening pro le from +100bp by year end to +75bpby year end. Either way, the OIS market is well short of pricing in this scenario (currently it is predicting a CashRate of 4.71% by year-end!), but strategies to capitalize onthis mispricing (pay OIS 12 month or curve attening) canwait for another month or two.

Annette Beacher, Head of Asia-Paci c Research+65 6500 8047


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NEW ZEALAND FIXED INCOME

There have certainly been some signi cant events im -pacting New Zealands xed income market over the pastmonth. Most signi cant was the Christchurch earthquakeon 22 February. After the quake, the curve steepened 11bp,with the 3-10 year spread widening from 173bp before thetragic event to 184bp afterwards. Swap market pricing of end-2011 OCR expectations fell 35bp from 3.35% (i.e. 35bpover cash) to 3.00%.

Over the weeks that followed the earthquake and led upto the RBNZs OCR decision and Monetary Policy Statementon 10 March, the market not surprisingly steepened further.10 year yields rose another 4bp to 5.63% while 3-year yieldspared 19bp to 5.56%. This caused the 3/10 spread to widen

a further 23bp to 207bp. Swaps fully priced a 25bp cut, inthe event, RBNZ cut 50bp to 2.5%.

The next day (11 March), it was Japans turn to suffer an enormous earthquake. While the 9.0 magnitude shake,subsequent tsunami and potential nuclear contaminationare together a much bigger event on most metrics than theNew Zealand earthquake (6.3 magnitude), the impact in NZ

xed income markets has so far been much less. The curvehas remained steep and there has been a rally of about 17bpacross the curve. Swaps are not expecting any adjustmentto the OCR for at least six months and a full 25bp hike is

priced in only12 months from now.The economy is expected to limp along. Theres a mate -rial risk of negative GDP prints for 4Q 2010 and 1Q 2011.We have revised 2011 GDP from 2% to 1% on very poor data so far and a weak domestic demand outlook.

Given that annual GDP had already fallen over both 2008and 2009, the output gap is wide and in ationary pressurescompletely absent. Furthermore, beginning reconstructionmay be delayed many months as it cannot start until theongoing aftershocks stop.

We think all this is suf cient for RBNZ to leave the OCR at 2.5% until early next year, before delivering 100bp of tightening to 3.5% by end-2012, a reduction from our prior

forecast of 4%. The cleanest trading strategy from theseprojections is to pay 12 month OIS, as the Bank plans toreduce extreme monetary stimulus as soon as rebuildingcommences. We still prefer long AUDNZD for all the rea -sons weve listed in prior publications, but now the yielddifferential is even more skewed towards the AUD.

NEW ZEALAND FIXED INCOME OUTLOOKSpot Rate 2010 2011 2012

3/16/11 Q1 Q2 Q3 Q4 Q1F Q2F Q3F Q4F Q1F Q2F Q3F Q4FCash Target Rate (%) 2.50 2.50 2.75 3.00 3.00 2.50 2.50 2.50 2.50 2.75 3.00 3.25 3.50

3-mth T-Bill Rate (%) 2.57 3.90 2.70 3.00 3.25 2.70 2.70 2.70 2.70 2.95 3.20 3.45 3.70




10-yr-3-yr Govt. Spread (%) 2.14 1.43 1.17 1.20 1.88 2.10 2.00 1.90 1.75 1.65 1.20 0.95 0.95


NEW ZEALAND 3-MONTH T-BILL RATES & 10-YEAR GOVERNMENT BOND YIELDS

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9

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2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 20120

1

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5

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9

10

Actual data to Q4 2010; Forecast by TDBG as at March 2011Source: Reserve Bank of New Zealand/Haver Analytics

%


3-mo T-Bill yield

%Forecast

Roland Randall, Senior Strategist +65 6500 8047


9/18


10/18


10

CANADIAN DOLLAR

Since the last issue of Global Markets, we have revisedour pro le for the Canadian dollar, building in more strengththrough the remainder of 2011. We had always thought thatCAD had good fundamentals, but that some sort of crisisin the euro zone would weigh on the currency temporarily.Since the crisis that we were expecting seems to have beenpushed off into the future, it looks like CAD fundamentalswill prevail, and USD/CAD should continue to trade below1.0 for the bulk of the next year.

However, we do still see the risk of periodic bursts higher in USD/CAD, as the recent market turmoil around develop -ments in Japan has shown. The latest weekly Commitmentof Traders report data showed that CAD net longs are still at

extreme levels, raising the risk of a short squeeze for USD/CAD and possibly exacerbating any move higher. The morethe market moves toward a one-way bet (weaker USD), thehigher the risk that we see a correction.

But outside these bouts of risk aversion, we do think thatCAD will do quite well for the next year or so. The Bank of Canada is likely to begin another series of rate hikes in themiddle of this year, and while it wont be the only centralbank raising rates in the next few months, it will be just aboutthe only one raising rates because the output gap is closing,not because headline in ation is looking toasty. We expect

CAD to remain well-supported while the Bank is raisingrates, but if the currency gains too much ground, it does risk pushing the Bank back onto the sidelines. We think that thisrelationship will help to put a oor under USD/CAD, andkeep CAD from getting too far ahead of itself.

CANADIAN DOLLAR

0.76

0.80

0.84

0.88

0.92

0.96

1.00

1.04

1.08

1.12

Jan-07 Aug-07 Mar-08 Oct-08 May-09 Dec-09 Jul-10 Feb-11

USD per CAD CAD per USD

Source: Federal Reserve Bank of New York/Haver Analytics

1.316

1.250

1.190

1.136

1.041

1.087

0.893

1.000

0.962

0.926

TRADE-WEIGHTED CANADIAN DOLLAR

80

90

100

110

120

130

140

150

160

03 04 05 06 07 08 09 10 11

Index: 2000 = 100

*Nominal broad effective exchange rateSource: Haver Analytics/JP Morgan

CANADIAN DOLLAR OUTLOOKSpot Price 2010 2011 2012

3/16/2011 Q1 Q2 Q3 Q4 Q1F Q2F Q3F Q4F Q1F Q2F Q3F Q4F

CAD per USD 0.982 1.015 1.064 1.029 0.998 0.971 0.971 0.962 0.962 0.971 0.980 1.020 1.064

USD per CAD 1.018 0.985 0.940 0.972 1.002 1.030 1.030 1.040 1.040 1.030 1.020 0.980 0.940

JPY per CAD 82 92 83 81 81 88 93 96 99 101 100 98 94

CAD per EUR 1.369 1.371 1.302 1.403 1.336 1.340 1.311 1.250 1.202 1.214 1.206 1.235 1.277

CAD per GBP 1.58 1.541 1.590 1.617 1.558 1.576 1.618 1.582 1.561 1.618 1.652 1.691 1.749

f: Forecast by TD Bank Group as at Mar. 16, 2011; All forecasts are for end of period; Source: Federal Reserve, Bloomberg, TDBG

CANADIAN DOLLAR FUNDAMENTALSInterest Rate Spreads + Business Cycle +

Inflation Differential + Fiscal Balances +

Current Account N Politics NLegend: - is negative, + is positive, N is neutral for currency

Jacqui Douglas, Senior FX & Macro Strategist 416-982-7784


11/18


11

EURO

The EUR has performed much better than we had fore -cast so far in 2011, forcing us to abandon our call for theEUR/USD to reach parity in the next year, and pushingthe big drop in the EUR further into the forecast horizon.European of cials appear to have done enough to satisfythe markets for now, although we think that there are stillsome serious aws with their plan. Greece still looks to beinsolvent to us, but that issue may not rear its head untilcloser to 2013, when Greece will be forced to start borrow -ing in the markets again.

ECB President Trichets most recent press conferencealso helped to support the EUR, as he used the seriousvigilance (with respect to in ation) wording that typically

signals a rate hike in the next meeting or two. German-US2-year rate spreads pushed through 100bps this month for the

rst time since the very beginning of 2009 as markets pulledforward rate hike timing for the ECB. Despite the pull-back in energy prices from their peaks earlier this month, withBrent crude oil prices still well north of $100/bbl, the ECBlooks almost certain to hike rates in April or May.

Through the remainder of 2011 and 2012 we still seeEUR/USD falling, just not quite a steeply as we did before.There are still a lot of things that could go wrong in the eurozone, from the nal details of the euro area deal at the end of

March to the stress tests later this spring to Ireland imposinghaircuts on its senior bank debt at some point. And the listgoes on. However, having the ECB deliver a couple of ratehikes this year (while the Fed is on hold) should limit theextent of the EURs losses, with EUR/USD falling to 1.25by the end of 2011.

EURO

1.18

1.22

1.26

1.30

1.34

1.38

1.42

1.46

1.50

1.54

1.58

1.62


USD per EUR

JPY per EUR

USD per EUR JPY per EUR


TRADE-WEIGHTED EURO

110

115

120

125

130

135

140

145

150

03 04 05 06 07 08 09 10 11

Index: 2000 = 100


EURO FUNDAMENTALSInterest Rate Spreads N Business Cycle N

Inflation Differential N Fiscal Balances Current Account + Politics Legend: - is negative, + is positive, N is neutral for currency

EURO OUTLOOKSpot Price 2010 2011 2012


USD per EUR 1.394 1.351 1.224 1.363 1.338 1.380 1.350 1.300 1.250 1.250 1.230 1.210 1.200

JPY per EUR 112 126 108 114 109 117 122 120 119 123 121 121 120

GBP per EUR 0.867 0.890 0.819 0.868 0.857 0.850 0.810 0.790 0.770 0.750 0.730 0.730 0.730

CAD per EUR 1.369 1.371 1.302 1.403 1.336 1.340 1.311 1.250 1.202 1.214 1.206 1.235 1.277




12/18


12

JAPANESE YEN

The JPY has been relatively steady to start 2011, withUSD/JPY trading in an 80.50 to 84 range so far this year.However, what happens going forward has become muchmore dif cult to predict after the recent natural disaster inJapan, with the full scope of the disaster still unclear.

Markets are focusing at the moment on the upside risksto the yen, with USD/JPY having fallen from a high of 83.30last week to around 80.50 at time of writing, approaching theearly November low of 80.22. After the Kobe earthquake in1995, USD/JPY fell from around 100 to a low of just below80 (its all-time low) on repatriation ows and insurancepayments from foreign insurance companies. However, withUSD/JPY already so close to its all-time low of 79.75, we

doubt that of cials will allow much more of a move lower in USD/JPY in the wake of the most recent earthquakewithout putting up a ght. We think that currency interven -tion becomes a much bigger risk around current levels of USD/JPY, as the last thing the Japanese economy needs asit attempts to recover is a stronger currency.

On the other hand, weve seen Japanese governmentbonds (JGBs) underperform the last few days, as marketsseem to be wondering how the already highly-indebtedJapanese government is going to pay for the clean-up fromthe earthquake and tsunami. As estimates for the nancial

toll of the earthquake begin to roll in, markets may nallyput a little more attention on Japans weak scal position,putting downward pressure on the JPY.

Overall were still happy with our forecast for USD/JPY, as rate differentials are likely to continue to move inthe USDs favour, particularly in the second half of the year as markets start to pay more attention to the timing of theFeds rst rate hike. We see USD/JPY climbing into themid-90s by the end of 2011.

JAPANESE YEN

8084889296

100104108112116120124

100106112118124130136142148154160166172


JPY per USD

JPY per EUR

JPY per USD JPY per EUR


TRADE-WEIGHTED YEN

75

80

85

90

95

100

105

110

115

120

03 04 05 06 07 08 09 10 11

Index: 2000 = 100


JAPANESE YEN OUTLOOKSpot Price 2010 2011 20123/16/2011 Q1 Q2 Q3 Q4 Q1F Q2F Q3F Q4F Q1F Q2F Q3F Q4F

JPY per USD 81 93 88 84 81 85 90 92 95 98 98 100 100JPY per EUR 112 126 108 114 109 117 122 120 119 123 121 121 120JPY per GBP 130 142 132 131 127 138 150 151 154 163 165 166 164JPY per CAD 82 92 83 81 81 88 93 96 99 101 100 98 94


YEN FUNDAMENTALSInterest Rate Spreads Business Cycle N

Inflation Differential Fiscal Balances Current Account + Politics

Legend: - is negative, + is positive, N is neutral for currency



13/18


13

U K POUND

GBP action over the last few weeks has been choppy, asmarkets continue to go back and forth over just how soon theBank of England is likely to raise rates. The UK recoveryis progressing well, with the survey data pointing to stronggrowth ahead. The manufacturing PMI has been sitting ata record high for the last two months now, and the servicesPMI has moved back decisively above 50 after some weaker readings at the end of 2010. We think theres some goodmomentum here, and expect to see a nice rebound in Q1GDP from the weakness seen in Q4.

The Bank of Englands February In ation Report sug -gested that the UK is only one upside in ation surprise awayfrom raising rates, as its in ation projections now point to an

equal chance of CPI being above target as below target at theend of the monetary-policy relevant forecast horizon. Thismeans that a rate hike from the BoE will be coming in May(with the next In ation Report) if not sooner. While GBP/USD has pulled back in the last few days on risk aversion,we think that it should turn around when uncertainty diesdown, rising further into the 1.60s by the middle of the year.

The EUR/GBP call is a little more uncertain in our view,given that the ECB is also going to be raising rates sometimeover the next meeting or two. However, we think that GBPwill be the bigger bene ciary this year from rising rates as

GBP is still looking rather undervalued after getting hit quitehard during the 2008-2009 recession. Furthermore, the UK has a concrete plan to bring its government nances under control, while the euro zone is still dealing with credit ratingdowngrades and questions over solvency. We expect to seeEUR/GBP move lower through the course of 2011 as GBPcontinues to recoup some of its recession losses.

BRITISH POUND

0.65

0.69

0.73

0.77

0.81

0.85

0.89

0.93

0.97

1.01 1.30

1.40

1.50

1.60

1.70

1.80

1.90

2.00

2.10

2.20


GBP per EUR

USD per GBP

GBP per EUR USD per GBP


TRADE-WEIGHTED POUND

70

75

8085

90

95

100

105

110

115

03 04 05 06 07 08 09 10 11

Index: 2000 = 100


UNITED KINGDOM POUNDSpot Price 2010 2011 2012


USD per GBP 1.607 1.518 1.495 1.571 1.561 1.624 1.667 1.646 1.623 1.667 1.685 1.658 1.644

GBP per EUR 0.867 0.890 0.819 0.868 0.857 0.850 0.810 0.790 0.770 0.750 0.730 0.730 0.730

CAD per GBP 1.58 1.54 1.59 1.62 1.56 1.58 1.62 1.58 1.56 1.62 1.65 1.69 1.75


POUND FUNDAMENTALSInterest Rate Spreads N Business Cycle N

Inflation Differential + Fiscal Balances Current Account Politics Legend: - is negative, + is positive, N is neutral for currency



14/18


14

AUSTRALIAN DOLLAR

AUSTRALIAN DOLLAR

0.58

0.66

0.74

0.82

0.90

0.98

1.06


60

70

80

90

100

110

120

USD per AUD

JPY per AUD

JPY per AUDUSD per AUD

Source: Federal Reserve Bank of New York/Haver Anal tics

TRADE-WEIGHTED AUSTRALIAN DOLLAR

70

80

90

100

110

120

130

140

150

160

03 04 05 06 07 08 09 10 11

Index: 2000 = 100


AUSTRALIAN DOLLAR OUTLOOKSpot Price 2010 2011 2012


USD per AUD 0.992 0.917 0.841 0.967 1.023 0.990 0.980 0.970 0.960 0.920 0.880 0.840 0.800

JPY per AUD 80.03 85.65 74.35 80.78 83.01 84.15 88.20 89.24 91.20 90.16 86.24 84.00 80.00

AUD per CAD 1.026 1.074 1.118 1.005 0.979 1.040 1.051 1.072 1.083 1.120 1.159 1.167 1.175

NZD per AUD 1.352 1.292 1.228 1.317 1.312 1.338 1.380 1.426 1.455 1.438 1.419 1.400 1.379


AUSTRALIAN DOLLAR FUNDAMENTALSInterest Rate Spreads + Business Cycle +Inflation Differential + Fiscal Balances +

Current Account N Politics NLegend: - is negative, + is positive, N is neutral for currencyRoland Randall, Senior Strategist +65 6500 8047

In forecasting AUD movements we need to distinguishbetween risk sentiment and Australian macro fundamentals.

On sentiment, the AUD is traded as a risk proxy andafter the Japan disaster had been pushed to the bottom of the $US0.98-1.02 range traded for the last quarter. Everytime the news gets worse in Japan we are likely to see moreselling. In addition, Japanese are large holders of AUD andwill be adding selling pressure by repatriating funds for sen -timent/safe haven/need reasons. This will go on for months,although it may already have been partially priced in.

On macro fundamentals, the AUD outlook hasntchanged signi cantly as a result of Japans problems, at leastnot so far. Australia has exposure to Japan, but less than at

the time of the Kobe earthquake in 1995; and that had nolong term impact on AUD/USD. Australias exports to Japanare mostly resources, which may fall but then will reboundon reconstruction; and goods imported from Japan (mostlyvehicles) can be sourced elsewhere or purchases deferred.

If nuclear fallout were to shutter Tokyo, a city of 36mpeople at the heart of Japans services sector which accountsfor 70% of GDP, then global growth prospects would dimand the AUD would be lower for longer. But its too earlyto forecast such an event.

As the US improves, we expect investors to turn to USD

at the expense of AUD. Despite a strong economy and likelyrising policy rate differentials later this year, the AUD/USDwill steadily fall over 2011-2012. We target $US0.96 and0.85 for 2011 and 2012 respectively.

As well as the outcome of Japans crisis, other knownunknowns that could see the AUD fall below its recenttrading range include China (a slump in Chinese importsset alarms ringing but we think it was the Lunar New Year effect) as well as the outcomes of MENA political and EUR solvency crises.


15/18


15

NEW ZEALAND DOLLAR

On the day that the RBNZ cut its policy interest rate by50bp (more than the market expected) raising Australiascash yield advantage over New Zealands to +225bp, theAUD/NZD cross rate actually fell. The policy rate was cut inresponse to the Christchurch earthquake because an alreadyweak economy, weakened further by the earthquake, desper -ately needed help. But FX markets are always a step aheadand were already betting on when the cut would be reversedwith a hike; and was evidently pleased at the strong actiontaken by RBNZ, doing its bit to resurrect economic growth.

So why do we still forecast AUD/NZD to reach a post-oat high of $NZ1.45? First, NZD now has that substantially

bigger (225bp) cash yield disadvantage to AUD. Further,

while markets have priced both RBNZ and RBA to raiserates by 25bp over the coming year, we think that 25bpand 100bp respectively is more likely; and that would puta further 75bp between the two policy interest rates.

Second, we think that the market will soon enoughre-focus on the fact that nearer-term prospects for NZ arematerially worse than for Australias commodity-price-supercharged economy. NZ likely entered a recession at theend of 2010, whereas Australia faces full employment. Wagegrowth, credit growth, consumer con dence and businesscon dence are polls apart in these two nations. The dif cult

reality of New Zealand in 2011 seems to have been passedover for now.While both AUD and NZD are likely to weaken against

the USD over 2011, it is lining up to be a year that stronglyfavours AUD outperformance relative to NZD. We continueto like our AUD/NZD $NZ1.45 and NZD/USD $US0.66forecasts for year-end. Further out, 2012 is, hopefully, awholly positive story for NZD; the economy should beginto boom on the reconstruction effort and interest rates rise.

TRADE-WEIGHTED NEW ZEALAND DOLLAR

70

80

90

100

110

120

130

140

150

160

03 04 05 06 07 08 09 10 11

Index: 2000 = 100


NEW ZEALAND DOLLAR

0.48

0.54

0.60

0.66

0.72

0.78

0.84


50

60

70

80

90

100

USD per NZD

JPY per NZD

JPY per NZDUSD per NZD

Source: Federal Reserve Bank of New York/Haver Anal tics

NEW ZEALAND DOLLAR OUTLOOKSpot Price 2010 2011 2012


USD per NZD 0.734 0.710 0.685 0.734 0.780 0.740 0.710 0.680 0.660 0.640 0.620 0.600 0.580

JPY per NZD 59.20 66.31 60.55 61.34 63.29 62.90 63.90 62.56 62.70 62.72 60.76 60.00 58.00

NZD per CAD 1.388 1.387 1.373 1.323 1.284 1.392 1.451 1.529 1.576 1.609 1.645 1.633 1.621

NZD per AUD 1.352 1.292 1.228 1.317 1.312 1.338 1.380 1.426 1.455 1.438 1.419 1.400 1.379


NEW ZEALAND DOLLAR FUNDAMENTALSInterest Rate Spreads + Business Cycle N

Inflation Differential + Fiscal Balances N

Current Account Politics NLegend: - is negative, + is positive, N is neutral for currency

Roland Randall, Senior Strategist

+65 6500 8047


16/18


16

SWISS FRANC

The Swiss franc has been the top-performing currencysince the last issue of global markets, gaining more than 5%against the USD. This move has been based on risk aversion,with developments in the Middle East and North Africa plusthe situation in Japan creating strong demand for the safe-haven currency, particularly one that does not belong to acountry recovering from once in a lifetime natural disaster.

USD/CHF has continued to hit fresh cyclical lows inrecent days, but EUR/CHF is still a couple of big guresaway from the all-time lows reached in December-January.EUR/CHF has completely ignored the gapping out inGerman-Swiss spreads since the middle of February, as thesafe-haven demand for CHF has been the dominant driver.

But once the tensions fade away, rate spreads may comeback into focus, and tomorrows SNB meeting should giveus a better idea of what to expect for Swiss rates. The latestReuters poll showed that the median forecast is currentlyfor the rst rate hike to come in September, although asigni cant minority (13 of 34 analysts) expect the rst raterise to come in June.

Our EUR/CHF forecast has been revised along with our forecast for a stronger EUR/USD pro le. We now expect tosee EUR/CHF remain in a 1.30-1.35 range for the bulk of 2011, although the risk remains that we see bursts lower in

EUR/CHF on any increases in market volatility.

SWISS FRANC OUTLOOKSpot Price 2010 2011 2012


CHF per USD 0.917 1.051 1.077 0.983 0.934 0.942 1.000 1.031 1.056 1.040 1.057 1.058 1.050

CHF per EUR 1.278 1.420 1.318 1.340 1.251 1.300 1.350 1.340 1.320 1.300 1.300 1.280 1.260

CHF per CAD 0.934 1.036 1.013 0.955 0.936 0.970 1.030 1.072 1.098 1.071 1.078 1.037 0.987


SWISS FRANC

1.201.241.281.321.361.401.441.481.521.561.601.641.68

0.900.930.960.991.02

1.051.081.111.141.171.20

1.231.26


CHF per EURCHF per USD

CHF per EUR CHF per USD




17/18


17

SUMMARY FIXED INCOME TABLESpot Price 2010 2011 2012

3/16/2011 Q1 Q2 Q3 Q4 Q1F Q2F Q3F Q4F Q1F Q2F Q3F Q4FUnited States

Fed Funds Target Rate (%) 0.25 0.25 0.25 0.25 0.25 0.25 0.25 0.25 0.25 0.25 0.50 1.00 1.25

3-mth T-Bill Rate (%) 0.09 0.16 0.18 0.16 0.12 0.10 0.15 0.20 0.20 0.30 0.55 0.80 1.35





10-yr-2-yr Govt. Spread (%) 2.68 2.81 2.32 2.09 2.70 2.80 3.00 3.10 3.05 2.90 2.80 2.50 2.30

CanadaOvernight Target Rate (%) 1.00 0.25 0.50 1.00 1.00 1.00 1.00 1.50 2.00 2.25 2.50 2.75 3.00

3-mth T-Bill Rate (%) 0.94 0.29 0.51 0.88 1.04 1.00 1.05 1.50 2.00 2.25 2.50 2.80 3.05


5-yr Govt. Bond Yield (%) 2.49 2.90 2.33 2.03 2.42 2.70 2.90 3.30 3.50 3.55 3.65 3.85 3.8010-yr Govt. Bond Yield (%) 3.14 3.57 3.08 2.76 3.12 3.40 3.75 4.00 4.05 4.20 4.35 4.40 4.40


10-yr-2-yr Govt. Spread (%) 1.55 1.83 1.69 1.38 1.44 1.55 1.60 1.55 1.45 1.45 1.25 0.90 0.95

United Kingdom

Bank Rate Target (%) 0.50 0.50 0.50 0.50 0.50 0.50 0.75 1.00 1.25 1.50 2.00 2.50 3.00

3-mth T-Bill Rate (%) 0.62 0.57 0.54 0.57 0.57 0.65 1.00 1.20 1.45 1.70 2.20 2.70 3.20

2-yr Gilt Yield (%) 1.23 1.16 0.75 0.65 1.10 1.25 1.85 2.10 2.35 2.45 2.70 3.10 3.50

5-yr Gilt Yield (%) 2.29 2.71 2.07 1.61 2.20 2.35 3.05 3.25 3.50 3.65 3.80 4.00 4.25

10-yr Gilt Yield (%) 3.53 3.94 3.36 2.95 3.40 3.50 3.90 4.10 4.30 4.30 4.45 4.70 4.80

30-yr Gilt Yield (%) 4.28 4.53 4.17 3.90 4.19 4.30 4.70 4.80 4.90 4.95 4.95 4.85 4.70

10-yr-2-yr Gilt Spread (%) 2.30 2.78 2.61 2.30 2.30 2.25 2.05 2.00 1.95 1.85 1.75 1.60 1.30

Australia

Cash Target Rate (%) 4.75 4.00 4.50 4.50 4.75 4.75 5.00 5.25 5.75 5.75 6.00 6.00 6.003-mth Bank Bill Rate (%) 4.93 4.43 4.91 4.89 4.98 5.00 5.25 5.50 5.75 6.00 6.00 6.00 6.00




10-yr-3-yr Govt. Spread (%) 0.49 0.51 0.68 0.21 0.27 0.55 0.40 0.30 0.05 0.05 0.00 0.00 0.00

New Zealand

Cash Target Rate (%) 2.50 2.50 2.75 3.00 3.00 2.50 2.50 2.50 2.50 2.75 3.00 3.25 3.50

3-mth T-Bill Rate (%) 2.57 3.90 2.70 3.00 3.25 2.70 2.70 2.70 2.70 2.95 3.20 3.45 3.70




10-yr-3-yr Govt. Spread (%) 2.14 1.43 1.17 1.20 1.88 2.10 2.00 1.90 1.75 1.65 1.20 0.95 0.95



18/18


18

SUMMARY FOREIGN EXCHANGE TABLESpot Price 2010 2011 20123/16/2011 Q1 Q2 Q3 Q4 Q1F Q2F Q3F Q4F Q1F Q2F Q3F Q4F

Exchange rate to U S dollar Japanese yen JPY per USD 80.67 93 88 84 81 85 90 92 95 98 98 100 100

Euro USD per EUR 1.394 1.351 1.224 1.363 1.338 1.380 1.350 1.300 1.250 1.250 1.230 1.210 1.200

U.K. pound USD per GBP 1.607 1.518 1.495 1.571 1.561 1.624 1.667 1.646 1.623 1.667 1.685 1.658 1.644

Swiss franc CHF per USD 0.917 1.051 1.077 0.983 0.934 0.942 1.000 1.031 1.056 1.040 1.057 1.058 1.050

Canadian dollar CAD per USD 0.982 1.015 1.064 1.029 0.998 0.971 0.971 0.962 0.962 0.971 0.980 1.020 1.064

Australian dollar USD per AUD 0.992 0.917 0.841 0.967 1.023 0.990 0.980 0.970 0.960 0.920 0.880 0.840 0.800

NZ dollar USD per NZD 0.734 0.710 0.685 0.734 0.780 0.740 0.710 0.680 0.660 0.640 0.620 0.600 0.580

Exchange rate to EuroU.S. dollar USD per EUR 1.394 1.351 1.224 1.363 1.338 1.380 1.350 1.300 1.250 1.250 1.230 1.210 1.200

Japanese yen JPY per EUR 112 126 108 114 109 117 122 120 119 123 121 121 120

U.K. pound GBP per EUR 0.867 0.890 0.819 0.868 0.857 0.850 0.810 0.790 0.770 0.750 0.730 0.730 0.730

Swiss franc CHF per EUR 1.278 1.420 1.318 1.340 1.251 1.300 1.350 1.340 1.320 1.300 1.300 1.280 1.260Canadian dollar CAD per EUR 1.369 1.371 1.302 1.403 1.336 1.340 1.311 1.250 1.202 1.214 1.206 1.235 1.277

Australian dollar AUD per EUR 1.405 1.473 1.456 1.410 1.308 1.394 1.378 1.340 1.302 1.359 1.398 1.440 1.500

NZ dollar NZD per EUR 1.899 1.903 1.787 1.857 1.715 1.865 1.901 1.912 1.894 1.953 1.984 2.017 2.069

Exchange rate to Japanese yenU.S. dollar JPY per USD 80.67 93 88 84 81 85 90 92 95 98 98 100 100

Euro JPY per EUR 112.4 126 108 114 109 117 122 120 119 123 121 121 120

U.K. pound JPY per GBP 130 142 132 131 127 138 150 151 154 163 165 166 164

Swiss franc JPY per CHF 88.0 88.8 82.1 85.0 86.8 90.2 90.0 89.3 90.0 94.2 92.7 94.5 95.2

Canadian dollar JPY per CAD 82.1 92.0 83.1 81.2 81.3 87.6 92.7 95.7 98.8 100.9 100.0 98.0 94.0

Australian dollar JPY per AUD 80.0 85.6 74.4 80.8 83.0 84.2 88.2 89.2 91.2 90.2 86.2 84.0 80.0

NZ dollar JPY per NZD 59.2 66.3 60.5 61.3 63.3 62.9 63.9 62.6 62.7 62.7 60.8 60.0 58.0

Exchange rate to Canadian dollar U.S. dollar USD per CAD 1.018 0.985 0.940 0.972 1.002 1.030 1.030 1.040 1.040 1.030 1.020 0.980 0.940

Japanese yen JPY per CAD 82 92 83 81 81 88 93 96 99 101 100 98 94

Euro CAD per EUR 1.369 1.371 1.302 1.403 1.336 1.340 1.311 1.250 1.202 1.214 1.206 1.235 1.277

U.K. pound CAD per GBP 1.58 1.54 1.59 1.62 1.56 1.58 1.62 1.58 1.56 1.62 1.65 1.69 1.75

Swiss franc CHF per CAD 0.934 1.036 1.013 0.955 0.936 0.970 1.030 1.072 1.098 1.071 1.078 1.037 0.987

Australian dollar AUD per CAD 1.026 1.074 1.118 1.005 0.979 1.040 1.051 1.072 1.083 1.120 1.159 1.167 1.175

NZ dollar NZD per CAD 1.388 1.387 1.373 1.323 1.284 1.392 1.451 1.529 1.576 1.609 1.645 1.633 1.621

f: Forecast by TD Bank Group as at Mar. 16, 2011; All forecasts are for end of period

Source: Federal Reserve Bank of New York, Bloomberg, TDBG

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Line in the Sand: Good and bad inflation