For Required Conflicts Disclosures, please see page 5. David Watt Senior Currency Strategist RBC Dominion Securities Inc. +1 416 842 4328 Paul Borean Associate RBC Dominion Securities Inc. +1 416 842 2809 Global FX Strategy 21 October 2010 CAD Pulse: Global I m balan c es — What Canada Can Teach t he Wor ld Market Summary Currencies Level 1 wk chg USD /CAD 1.0242 0.0201 EUR /CAD 1.4313 0.0170 GBP /CAD 1.6118 0.0040 CAD /JPY 79.28 -1.8700 USD/C AD RBC F Forwards 1M 1.0200 1.0249 3M 1.0400 1.0265 6M 1.0100 1.0290 CAD cash rates Level 1 wk chg (bp) BO C target 1.00 0 1m 1.18 -1 3m 1.28 -1 6m 1.36 -3 12m 1.65 -4 Govt bonds Yield 1 wk chg (bp) 2yr 1.38 -3 5yr 1.92 -6 10yr 2.75 -1 30yr 3.44 -2 CA-US spread (bp) Level 1 wk chg 2yr 103 0 5yr -4 14 10yr 22 -3 30yr -49 -3 Equity markets Level 1 wk chg Canada TSX comp. 12,624 4 US S&P500 1,183 9 Source: Bloomberg USD/CAD Options USD/CAD volatility (%, annualised) Historical Implied 1w 16.57 10.91 1m 11.14 12.10 3m 10.96 12.39 6m 13.64 12.89 12m 12.33 13.20 1m R.R 0.3c Source: Bloomberg USD/CAD Technicals 1.0679 Triple top 1.0350 Congestive resistance level 1.0242 Spot 1.0111 Double bottom 0.9931 The 2010 low Source: Bloomberg FX Bottom-line: The renewed focus on global imbalances highlights that Canada is already far down the road to adjustment, even as other countries have made only modest progress. While Canada remains the US largest trading partner, and the second largest source of US imports, Canada has moved away from an economic model of being “orie nted toward export rather than consuming at home,” a model tha t was chastised by Treasury Secretary Geithner ahead of G20 meetings. CAD won’t be front and centre if there is a focus on currency changes to encourage adjustment. Nonetheless, the BoC could conceivably be left persistently concerned about persistent CAD strength (versus USD). RBC’s Canadian Dollar Valuations Fundamentals Comment Impact on USD/CAD Quarterly fair value US D/CA D is fairly valued Weekly fair value USD /CAD is fairly valued Canadian Econom ic Surprise Index 0 and is neutral U SD/CAD Canadian Data Risk Barometer Neutral USD /CAD Market P ositions and M&A Activ ity 1-month, 25-delta risk reversals Neutral USD /CAD Trend M&A inflows into Canada Net inflow of US$0.4bn and is neutral USD/CAD 1. Improved terms of trade and the shift from exports to consumption 9 7 9 9 1 0 1 1 0 3 10 5 1 0 7 1 0 9 0 2 0 3 0 4 0 5 0 6 0 7 0 8 0 9 1 0 1 1 0 .8 0 .9 1.0 1 .1 1.2 1 .3 1.4 1 .5 1.6 1 .7 Gross Domestic Income-to-GDP Ratio (2000 = 100) LHS USD /CAD (inv erted) RHS 9 5 1 0 0 1 0 5 1 1 0 11 5 1 2 0 1 2 5 1 3 0 1 3 5 0 2 0 3 0 4 0 5 0 6 0 7 0 8 0 9 1 0 Canada's Terms of Trade LHS USD /CAD (inverted) RHS Rising terms of trade place upward pressure on currency … …and both help boost aggregate dom estic income (how much an economy can purchase), aiding a shift from exports and toward consumption 9 7 9 9 1 0 1 1 0 3 10 5 1 0 7 1 0 9 0 2 0 3 0 4 0 5 0 6 0 7 0 8 0 9 1 0 1 1 0 .8 0 .9 1.0 1 .1 1.2 1 .3 1.4 1 .5 1.6 1 .7 Gross Domestic Income-to-GDP Ratio (2000 = 100) LHS USD /CAD (inv erted) RHS 9 5 1 0 0 1 0 5 1 1 0 11 5 1 2 0 1 2 5 1 3 0 1 3 5 0 2 0 3 0 4 0 5 0 6 0 7 0 8 0 9 1 0 Canada's Terms of Trade LHS USD /CAD (inverted) RHS Rising terms of trade place upward pressure on currency … …and both help boost aggregate dom estic income (how much an economy can purchase), aiding a shift from exports and toward consumption Source: RBC Capital Markets, Statistics Canada, Bloomberg, Haver
