Global Economic Research April 2011

Foreign Exchange
Outlook
Global recovery dynamics, the nuclear-related Japanese shock,
coordinated official intervention, monetary policy shifts, oil-driven
commodity price adjustments and the quest for yield are factors driving
capital flows in foreign exchange markets.

The USD is on the defensive despite gradual signs of recovery. The

CAD remains a market favourite on the basis of solid economic and
financial sector strength. The MXN and BRL will be supported by
favourable terms of trade, growth differentials and interest rate
attractiveness.

The EUR is immersed in a strengthening trend against both the USD

and the GBP. Improved growth prospects and shifts in monetary policy
support the euro zone currency. Persistent sovereign debt
sustainability concerns in the periphery economies may temporarily
weigh on the EUR.

The JPY is reacting to the G7 intervention to prevent disorderly gains

caused by repatriation flows. The Asian currency environment retains a
strengthening bias, led by regional economic strength and rising
interest rates. The CNY, KRW and the THB will continue to appreciate.

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 Outlook is available on: www.scotiabank.com and Bloomberg at SCOE

Global Economic Research April 2011

Foreign Exchange
Outlook
Global Foreign Exchange Outlook
April 1, 2011 Actual Q1 11 Q2 11 Q3 11 Q4 11 Q1 12 Q2 12 Q3 12 Q4 12
EURUSD 1.41 1.42 1.42 1.44 1.45 1.45 1.46 1.47 1.48
Euro Consensus* 1.39 1.36 1.36 1.36 1.36 1.35 1.34 1.33
USDJPY 84.3 83 79 82 84 86 87 89 90
Yen Consensus* 82 84 85 86 88 88 89 90
GBPUSD 1.60 1.60 1.60 1.61 1.63 1.65 1.67 1.69 1.70
Sterling Consensus* 1.61 1.60 1.61 1.63 1.64 1.64 1.64 1.63
USDCAD 0.97 0.97 0.97 0.96 0.95 0.95 0.94 0.93 0.92
Canadian Dollar Consensus* 0.98 0.98 0.99 0.99 0.99 1.00 1.01 1.01
AUDUSD 1.04 1.03 1.05 1.06 1.08 1.07 1.08 1.09 1.10
Australian Dollar Consensus* 1.00 0.99 0.98 0.96 0.95 0.94 0.93 0.91
USDMXN 11.84 11.91 12.15 12.24 12.49 12.55 12.48 12.57 12.73
Mexican Peso Consensus* 11.94 12.09 12.14 12.19 12.24 12.30 12.35 12.41
Spot Price vs. 100 Day Moving Average vs. 200 Day Moving Average - (5yr Trend)
EURUSD USDJPY
USD/ JPY
1.62 121 100 Day
EUR/ USD 200 Day
1.52 100 Day 114
200 Day 107
1.42
100
1.32
93
1.22 86
1.12 79
0
D 9
07

07
Au 6

Ap 7

08

09

M 9

06

06

07

08

09

10

1
M 0
06

08

-1
l-0
-0

-0

-0

-1

-0

-0

-0

-1

-1
-1
p-

p-

p-

p-

p-

p-
n-

n-

b-

-
g-

r-
ov

ec

ay
ar

ar

ar

ar

ar

ar

ar

ar
ct
Ju
Ja

Ju

Se

Fe

Se

Se

Se

Se

Se
O
M

M
N

GBPUSD USDCAD
USD/ CAD
2.11 GBP/ USD
100 Day
100 Day
1.30
200 Day
1.96 200 Day
1.22
1.81 1.14

1.66 1.06

1.51 0.98

1.36 0.90
06

06

07

08

09

10

1
06

06

07

08

09

10

-0

-0

-0

-1

-1
-0

-0

-0

-1

-1

p-

p-

p-

p-

p-
-
p-

p-

p-

p-

p-
-

ar

ar

ar

ar

ar

ar
ar

ar

ar

ar

ar

ar

Se

Se

Se

Se

Se
Se

Se

Se

Se

Se

M
M

AUDUSD USDMXN

AUD/ USD 15.2

0.97 USD/ M XN
100 Day
0.89 200 Day 14.1 100 Day
200 Day
0.82 13.0

0.74 11.9

0.67 10.8

0.59 9.7
06

06

07

08

09

10

1
06

06

07

08

09

10

-0

-0

-0

-1

-1
-0

-0

-0

-1

-1

p-

p-

p-

p-

p-
-
p-

p-

p-

p-

p-
-

ar

ar

ar

ar

ar

ar
ar

ar

ar

ar

ar

ar

Se

Se

Se

Se

Se
Se

Se

Se

Se

Se

M
M

(*) Source: Consensus Economics Inc. March 2011

2
Global Economic Research
MARKET TONE & FUNDAMENTAL FOCUS
Pablo F.G. Bréard +1 416 862-3876
Global financial markets continue to absorb the multiple
shocks caused by Japan’s natural disaster and ensuing
nuclear crisis, intensifying geopolitical upheaval in North-
ern Africa and the Middle East, deteriorating sovereign
debt conditions in peripheral European countries, and
sharp adjustments in commodity prices. Notwithstanding
the intensified volatility in securities and currency markets,
the global economy remains in recovery mode. Increasing
evidence of US economic gains adds to the strength cur-
rently in place within the emerging-market universe, pro-
longing a phase of global risk appetite. The combined ef-
fect of strengthening demand and supply-side risks has
injected upward pressure on energy prices with positive
effects on oil-linked currencies. The severity of the com-
modity price shocks is re-fuelling the inflation debate
amongst global market participants, prompting the adop-
tion of conventional and unconventional policy action by
the world’s major central banks.
The NAFTA zone currencies are influenced by the US
business cycle, the moderation of credit easing measures
by the Federal Reserve (Fed), the direction of crude oil
prices, and the relative health of the financial sector. The
US dollar (USD) has maintained a defensive tone over the
past four months, as highlighted by the 7% decline in the
trade-weighted DXY index. Currency markets are fixated
on the outlook for interest rates, leaving the USD vulner-
able to any shift in the stance emanating from the Fed.
However, any USD rally is likely to prove temporary, as
the economic weight of a depressed housing market, high
oil prices and improving but still elevated unemployment
levels push out US interest rate hikes into 2012. Both the
Canadian dollar (CAD) and the Mexican peso (MXN) are
in synchronicity, appreciating against the USD on the
grounds of supportive commodity prices (mainly energy), a
relatively healthier fiscal position, systemically stronger
financial sectors and healthy recovery prospects. With a
looming Federal election, Canadian political uncertainty is
on many radar screens. However, Canada’s enviable sov-
ereign position, its exposure to rising commodity prices,
widening interest rate spreads and favourable sentiment
are just a few of the drivers that should help to support the
CAD. The MXN also is benefitting from attractive
(government bond) yield differentials, which continue to
act as a magnet of intra-North American capital flows.
The currency outlook for Latin America remains favour-
able. Robust economic performance, favourable terms of
trade, massive foreign capital flows and widening interest
rate differentials as policymakers tackle the threat of infla-
tionary pressures are injecting a positive tone into the re-
gional foreign exchange market environment. The Brazil-
ian real (BRL) is testing new technical resistance levels,
prompting decisive government/central bank action to
April 2011
Foreign Exchange
Outlook
Camilla Sutton +1 416 866-5470
moderate the pace of currency strength. Monetary policy
tightening in Brazil, Chile, Peru and Colombia is under
way. Fiscal tightening measures will aim at addressing
excess demand risks. The commodity price shock is a
boon for the core Latin American economies. Managing
the inflationary consequences of such market dynamics
has become a key policy priority.
The European currency environment presents a mixed
outlook. The prospects of an imminent increase in the
euro zone’s main refinancing rate highlight interest rate
differentials in favour of the EUR versus both the USD and
the British pound (GBP). In addition, signs of improving
economic conditions in the euro area also support a near-
term positive outlook for the EUR; indeed, after testing
recent resistance barriers against the USD, we view that
EURUSD will approach the 1.45 mark by the close of the
year. Nevertheless, the euro zone’s sovereign debt crisis
remains on global investors’ radar screens, now focused
on political and economic developments in Portugal. The
likelihood of a multilateral rescue package to address the
country’s sovereign debt distress has increased. Mean-
while, international rating agencies continue to downgrade
the ratings (and outlook) on the peripheral European sov-
ereign credits. Interest rate differentials, rising commodity
prices and investor sentiment support the Swedish krona
(SEK) and the Norwegian krone (NOK), while the Swiss
franc (CHF) offers an inter-Europe diversifying vehicle.
The pound sterling (GBP) has been supported by a weak
USD and rising expectations for an increasingly hawkish
Bank of England. However, the UK’s combination of low
growth, above target inflation and an uncertain path for
interest rates is likely to see the GBP underperform the
EUR this year.
The Asian currency environment remains promising de-
spite the tragic events affecting the Japanese economy.
The bias towards regional currency appreciation remains
intact as capital flows eye the fast-growing region. The
Chinese yuan (CNY) is in strengthening mode, yet we do
not expect any material change in the country’s currency
regime. The Japanese yen (JPY) is reacting to the joint
intervention by G7 countries, which was an effort to pre-
vent disruptive appreciation as a result of repatriation of
Japanese assets to finance reconstruction following the
earthquake/tsunami and ongoing nuclear crisis. After
touching the 76 per USD mark in intra-day trading on
March 16th, the JPY is entering the second quarter on a
weakening tone approaching the 85 mark. Elsewhere in
the region, top-tier regional currencies such as the South
Korean won (KRW), the Malaysian ringgit (MYR) and the
Thai baht (THB) continue in rallying (against the USD)
mode on the back of strong growth and widening interest
rate differentials.
3
Global Economic Research April 2011

Foreign Exchange
Outlook
CANADA Camilla Sutton +1 416 866-5470

As we move into April, the Canadian dollar (CAD) has gained 3% against the USD on a year-to-date basis. The combi-
nation of a broadly weaker USD, strong oil prices, favourable investor sentiment and Canada’s relative fundamental and
sovereign positions have all supported the sustained move through parity. Looking out to the spring and fall, most of the
factors that have supported the CAD are likely to remain intact. News that Canada will hold a federal election on May 2nd
has injected a potential uncertainty into the future. However, global investors are accustomed to Canadian elections,
minority governments and the limited difference between parties (at least with regards to how they would relate to cur-
rencies); accordingly, the CAD’s reaction has been somewhat muted. In addition, rising oil prices have helped to offset
the weight of a looming election. It is clear that part of the explanation for strong oil prices lies in developments in Libya
and the Middle East; however, ongoing demand growth, notably from the emerging nations, is also supporting prices. In
the months ahead tensions in the Middle East might lessen, but it is likely that supply fears will remain elevated, creating
more sustained upward pressure on oil prices. This is not particularly good for the US growth outlook; however a con-
tained rise in oil prices from here is likely to be a net benefit to Canada and positive for the CAD. On the flip side, any
sustained dramatic rise in oil prices would weigh on the US and global growth outlook and shift to a net negative for
Canada. Rising commodity prices are part of what is putting upward pressure on global inflation and leading to rising
central bank rates. In Canada it is likely that the Bank of Canada tightens policy later this year; nevertheless, in the US a
depressed housing sector, elevated unemployment and a lack of core inflationary pressures leaves the Federal Reserve
unlikely to increase interest rates until 2012. This should widen interest rate differentials in the CAD’s favour. US mone-
tary and fiscal policy combined with sentiment should keep medium-term downward pressure on the broader USD. Can-
ada’s strong sovereign position is likely to draw ongoing CAD favourable flows by global investors. Finally, market senti-
ment is favourable CAD. The main risk to our view is any shock that creates a temporary run to the USD as well as a
more sudden hawkish shift at the Federal Reserve than we expect. We hold 1.05 year-end CAD forecast.

Currency Trends
Going Back Spot Outlook
FX Rate FX Rate
12 m 6m 3m 1-Apr 3m 6m 12 m
AUDCAD 0.931 0.995 1.022 1.000 1.019 1.018 1.017 AUDCAD
CADJPY 92.05 81.14 81.30 87.29 81.44 85.42 90.53 CADJPY
EURCAD 1.372 1.403 1.336 1.365 1.377 1.382 1.378 EURCAD
USDCAD 1.015 1.029 0.998 0.965 0.970 0.960 0.950 USDCAD
AUDCAD CADJPY
1.03
93.1
1.00
90.9
0.98
88.8
0.95
86.6
0.93 84.5

0.90 82.3

0.88 80.2

0.85 78.0
Apr-10 Jun-10 Aug-10 Oct-10 De c-10 Feb-11 Apr-11 Apr-10 Jun-10 Aug-10 Oct-10 De c-10 Fe b-11 Apr-11

EURCAD USDCAD

1.44
1.07
1.41
1.05
1.37
1.03
1.34
1.01
1.30 1.00

1.27 0.98

1.23 0.96
Apr-10 Jun-10 Aug-10 Oct-10 De c-10 Feb-11 Apr-11 Apr-10 Jun-10 Aug-10 Oct-10 Dec-10 Fe b-11 Apr-11

4
Global Economic Research
CANADA AND UNITED STATES
Fundamental Commentary
UNITED STATES - The US economy is showing steady
progress along the recovery path, but underlying details
are more mixed. Manufacturing and services sectors con-
tinue to regain momentum, which points to a gradual pick-
up in private-sector hiring, but – alongside a depressed
housing market – the US consumer remains under pres-
sure from a still uncertain labour landscape and rising cost
of food and energy prices. According to the ISM manufac-
turing and services indices, activity in these industries has
been revving up for a string of months now, in part sup-
ported by export demand and business investment. This
has resulted in steady gains in private-sector employment,
averaging an addition of close to 130,000 jobs per month.
For the quarter as a whole, US consumer spending is
tracking a marked slowdown, providing less of a lift to first-
quarter GDP. Alongside tepid wage growth and an uncer-
tain labour market outlook, higher cost of basic goods –
food and energy prices in particular – may be crowding out
broader consumer spending and pushing Americans to
hoard stimulus gains. Despite higher commodity prices,
measures of underlying inflation remained subdued and
longer-run inflation expectations still well-anchored. From a
structural perspective, price sensitivity has been reduced
through improvement in monetary policy transparency and
reduced reliance of advanced economies on the manufac-
turing sector. From a cyclical perspective, the strength of
the impact of a commodity price-shock is dependent on
what stage of the economic cycle a country faces. Given
that the economic recovery in the United States is ex-
pected to be gradual, the crowding-out effect of costlier
basic goods, tepid wage pressures and excess capacity
are likely to hamper the price transmission mechanism.
MONETARY POLICY COMMENTARY Derek Holt +1 416 863-7707
UNITED STATES - In line with the broad consensus, the
FOMC decided to remain on the sidelines at its latest meet-
ing on March 15th. On balance, the accompanying state-
ment signaled no policy shift, but the slightly greater opti-
mism may have been oriented toward striking a balance
between the hawks and the doves. That said, there was no
change to key references and the Fed indicated, in its
strongest statement reference yet, that it is seeing through
inflation upsides as transitory – this aligns with our view.
Alongside our expectations for the Fed to remain on hold
through at least the remainder of the year, we do not antici-
pate any shift in tone at the next meeting, on April 27th.
This would reaffirm our view that the Fed will carry out the
QE2 program through to its scheduled completion. Manag-
ing Fed language will be key in keeping bond vigilantes at
bay, and we expect this will be achieved by underscoring
the Fed’s readiness to act should economic conditions
change substantially in either direction.
April 2011
Foreign Exchange
Outlook
Adrienne Warren +1 416 866-4315
Gorica Djeric +1 416 862-3080
CANADA - Canada’s economic recovery is continuing
apace. We expect output expanded at around a 4% annu-
alized rate in the first quarter of 2011, following a 3.3% ad-
vance in Q4. Consumer spending remains reasonably
healthy, supported by steady job growth. Nonetheless,
there are some signs of increasing consumer caution amid
rising gas and food prices and high household debt bur-
dens. Indeed, consumer confidence readings have recently
softened and the pace of consumer credit growth has
slowed. Looming public sector hiring and wage restraint
also reinforces a more temperate consumer outlook. Gov-
ernment stimulus spending is still providing a lift to overall
activity, but this support will fade later this year and into
2012 as fiscal shortfalls are addressed and current infra-
structure projects wind down. At the same time, the econ-
omy is benefitting from rising emerging market demand for
Canadian commodities and strengthening US industrial
activity. Exports are now making a solid contribution to
growth, despite the challenge of a persistently strong Ca-
nadian dollar for many manufacturers. Global supply chain
disruptions in the wake of Japan’s devastating earthquake/
tsunami are expected to result in some temporary produc-
tion disruptions domestically, primarily in the large motor
vehicle and parts sector, though reconstruction efforts will
in turn provide a lift to exports of lumber and other building
materials. Business investment remains a bright spot. Ca-
nadian firms have been taking advantage of a strong cur-
rency, healthy corporate balance sheets, firm commodity
prices and government incentives to invest in machinery &
equipment and resource-related exploration. Overall, cor-
porate outlays are expected to contribute over one percent-
age point to GDP growth this year and next, providing an
important offset to a more cautious consumer and increas-
ing public sector restraint.
Gorica Djeric +1 416 862-3080
CANADA - Perhaps the biggest market implication to the
Federal Budget and the announced federal election lies in
terms of what it means for the Bank of Canada (BoC). We
maintain our longstanding view that the BoC is on hold until
October on the back of recent fiscal, political and indicator
developments. Over the past twenty years, the BoC has
generally avoided starting a tightening campaign during an
election period, a good policy given the uncertainty facing
the fiscal regime. Regardless of the election results, it is
likely that fiscal drag will still lie significantly on the horizon
in a manner that tightens policy conditions. On the data
front, January’s disappointing retail sales figures also rein-
force our view on the BoC. What’s more, the recent trade
figures highlight the BoC’s legitimate concerns about Can-
ada’s ability to leverage the US recovery via export com-
petitiveness. Finally, the BoC can take its time in evaluating
inflation risk, as it is in no danger of breaching its inflation
target any time soon, unlike pressures being faced in Asia
and Europe.
5
Global Economic Research April 2011

Foreign Exchange
Outlook
EUROPE
Currency Outlook Camilla Sutton +1 416 866-5470

EURO ZONE - An increasingly hawkish ECB, a commitment from authorities to protect the monetary union, growing com-
fort with the problems in the European periphery and a bearish stance towards the USD have all supported investor flows
into the EUR. Our story continues to be that the EUR retraces some of its 2010 losses, but gains from the current 1.41
level are likely to be harder fought. We expect the EUR to close Q211 at 1.42 and 2011 at 1.45.

UNITED KINGDOM - Investors sentiment towards the GBP has been volatile, with the net exposure moving from net long
to net short and back to net long. This is reflective of the conflicting pressures on the currency. High inflation, an uncertain
path for interest rates, low growth and strict austerity might prove a dangerous combination. Technically, it is encouraging
that the GBP reached a new 15-month high in March. We expect the GBP to be supported by a weak USD and interest
rate differentials, closing Q211 at 1.60 and the year at 1.63.

SWITZERLAND - The CHF has been trending higher since last June on the back of its powerful position as a safe-
haven, inter-Europe alternative to both the USD and EUR and its strong sovereign position. Technically, the outlook is
bullish and investor sentiment favours further gains. The threat of SNB intervention will likely limit gains if EURCHF
drops to new lows. We expect USDCHF to close the year at 0.90 and EURCHF to close at 1.31.

NORWAY - Benefitting from oil prices, its sovereign position and an increasingly hawkish central bank, the NOK has ral-
lied to a new 17-month high. Technically, 5.50 is going to prove a challenge to break, but bullish sentiment is working in
its favour. We expect the NOK will close the year at 5.50.

Currency Trends
Going Back Spot Outlook
FX Rate FX Rate
12 m 6m 3m 1-Apr 3m 6m 12 m
EURUSD 1.35 1.36 1.34 1.41 1.42 1.44 1.45 EURUSD
GBPUSD 1.52 1.57 1.56 1.60 1.60 1.61 1.65 GBPUSD
EURCHF 1.42 1.34 1.25 1.31 1.31 1.30 1.31 EURCHF
USDNOK 5.94 5.88 5.81 5.53 5.67 5.64 5.58 USDNOK
EURUSD GBPUSD
1.45 1.64

1.41 1.60

1.36 1.56

1.32 1.52

1.27 1.48

1.23 1.44

1.18 1.40
Apr-10 Jun-10 Aug-10 Oct-10 De c-10 Fe b-11 Apr-11 Apr-10 Jun-10 Aug-10 Oct-10 De c-10 Fe b-11 Apr-11

EURCHF USDNOK

1.45 6.65

1.41 6.45

1.37 6.25

1.33 6.05

1.30 5.85

1.26 5.65

1.22 5.45
Apr-10 Jun-10 Aug-10 Oct-10 De c-10 Fe b-11 Apr-11 Apr-10 Jun-10 Aug-10 Oct-10 De c-10 Fe b-11 Apr-11

6
Global Economic Research
EUROPE
Fundamental Commentary
EURO ZONE - The beginning of the European Central
Bank’s (ECB) monetary policy tightening cycle is imminent.
ECB policymakers have become more concerned about
second round inflation impacts stemming from higher en-
ergy and food prices. The central bank assesses that risks
to the inflation outlook are "on the upside", and that infla-
tion tracking persistently over the target of “below, but
close to, 2%” is a threat to the ECB’s price stability man-
date. Consumer prices increased by 2.6% y/y in March,
according to a “flash estimate”. We expect the benchmark
interest rate to be raised by 25 basis points in April, fol-
lowed by adjustments of similar magnitude each quarter
until the policy rate reaches 2.5% in the third quarter of
2012. In the context of persistent turmoil in the euro zone
periphery, ECB President Jean-Claude Trichet has pointed
out that tighter monetary conditions can be accompanied
by non-standard liquidity measures. As the sovereign crisis
is predominantly driven by investor sentiment, we assess
that the likelihood that Portugal might be forced to seek
funding from the European Union-International Monetary
Fund financial assistance pool in the near term is relatively
high. We expect euro zone growth to slow modestly this
year to around 1.4% on the back of widespread fiscal con-
solidation efforts and slower export sector momentum.
Nevertheless, as the euro zone periphery recovers in 2012,
output will pick up again, expanding 1.7% in the year.
SWITZWERLAND - Inflationary pressures remain virtually
absent in Switzerland on the back of the strength of the
Swiss franc (CHF). Despite elevated commodity prices, the
headline consumer price index increased by only 0.5% y/y
in February, compared with a rate of 0.2% in the previous
month. Not surprisingly, Swiss monetary authorities opted to
keep the key interest rate target unchanged at 0.25% fol-
lowing the quarterly monetary policy meeting on March 17th.
An expansionary policy stance will likely be maintained for
an extended period of time; we expect that policymakers will
begin a cautious process of monetary normalization in the
final quarter of 2011, raising the benchmark rate gradually
to 1.0% by the end of 2012. The next policy meeting is
scheduled for June 16th. Solid economic performance is not
feeding inflationary pressures, at least for the time being.
The KOF leading indicator, the purchasing managers’ index
together with robustly growing exports (despite the strength
of the CHF) point to promising industry prospects, while
household spending should be supported by relatively
healthy labour market conditions (the unemployment rate
decreased slightly to 3.4% in February from 3.5% the month
before). We expect the economy to grow by around 2.0%
this year, following a 2.6% expansion in 2010. The political
outlook is dominated by the approaching general elections,
scheduled for October 2011; nevertheless, the country con-
tinues to enjoy a high degree of political stability.
April 2011
Foreign Exchange
Outlook
Tuuli McCully +1 416 863-2859
UNITED KINGDOM - Inflationary pressures continue to in-
tensify in the UK, with the consumer price index increasing
by 4.4% y/y in February, up from 4.0% in the prior month.
The headline inflation rate will likely continue to increase in
the coming months toward the 5.0% y/y threshold before
subsiding to below 4.0% by the end of the year. As inflation
expectations and prices at the core level are also picking up
(core inflation reached 3.4% y/y in February), British mone-
tary authorities will be challenged to find a balance between
promoting price stability and supporting economic growth
conditions. We expect that the Bank of England will begin a
gradual process of monetary policy normalization in the
third quarter of 2011, taking the Bank Rate to 1.0% by the
end of the year and to 2.0% by end-2012. The 2011
Budget, released on March 23rd, remains committed to the
government’s fiscal consolidation plan in order to bring pub-
lic finances back onto a sustainable path. The budget defi-
cit, after peaking at 11.1% of GDP in the FY2009-10 (April-
March), is set to narrow to 9.9% of GDP in the ongoing fis-
cal year, due in part to in-year spending cuts and the VAT
hike, and further to 7.9% of GDP in the FY2011-12. We as-
sess that aggressive fiscal consolidation and slower export
sector momentum will limit the nation’s economic growth to
1.4% in 2011 before picking up to around 1.7% in 2012.
NORWAY - Norwegian monetary authorities are preparing
to resume the monetary tightening cycle that has been on
hold since June 2010. Though the key policy rate was kept
on hold at 2.0% following the Executive Board’s meeting on
March 16th, policymakers have since become more hawk-
ish, noting that the benchmark interest rate should be in-
creased before the end of the first half of 2011. The next
policy meeting is scheduled for May 12th. Consumer price
inflation eased to 1.2% y/y in February from 2.0% in the
prior month, while prices at the core level increased by
0.8% y/y. Meanwhile, the growth outlook for the Norwegian
economy is favourable, as indicated by improving consumer
confidence, rising credit demand, solid manufacturing sector
performance and elevated energy prices. Mainland real
GDP – which excludes volatile oil, gas and shipping – ex-
panded by 0.3% q/q in the final quarter of 2010 while the
whole economy’s output surged 2.4% q/q. Therefore, the
monetary authorities assess that a higher interest rate level
is justified in an effort to reduce the risk of future financial
imbalances. Norway has solid economic fundamentals as it
enjoys a strong external position (the current account sur-
plus will likely hover around 13% of GDP through 2012) and
healthy government finances (the fiscal surplus will average
10% of GDP in 2011-2012).
7
Global Economic Research April 2011

Foreign Exchange
Outlook
ASIA/OCEANIA
Currency Outlook Camilla Sutton +1 416 866-5470

JAPAN - A national disaster, coordinated G7 intervention and weak fundamentals have led to a volatile March for yen
traders. As we enter April, there appears to be new-found stability. The near-term risk is that repatriation flows support the
yen, but the medium-term outlook has only worsened over the last month. We expect USDJPY to drift higher and close
the year at 84.

CHINA - The yuan continues to trend slowly higher and reached a new post-(quasi) float high in March. The NDF market
is pricing in a further 1.3% appreciation this year, though we’d expect a more aggressive return profile. A weaker USD
combined with the commitment to an increasingly flexible foreign exchange regime on behalf of Chinese authorities
should all be supportive of a stronger CNY. We hold a USDCNY6.1 year-end target.

AUSTRALIA - The AUD reached a new 28-year high in March, suggesting that upward momentum in the currency re-
mains strong. Investor sentiment, technicals and fundamentals are all working in the currency’s favour and a rebuilding of
the carry trade is putting additional upward pressure on the AUD. As long as emerging Asia growth remains strong, so too
does the outlook for the AUD. We hold a Q2 2011 target of 1.05 and a year-end forecast of 1.08.

NEW ZEALAND - The outlook for NZD is still marred and pales in comparison to the AUD. Investor sentiment is weak,
the fundamentals have deteriorated and the RBNZ recently cut interest rates by a surprising 50 basis points. We expect
the NZD to retrace some of its recent losses and hold a Q2 2011 forecast of 0.76 and a year-end forecast of 0.78.

Currency Trends
Going Back Spot Outlook
FX Rate FX Rate
12 m 6m 3m 1-Apr 3m 6m 12 m
USDJPY 93.5 83.5 81.2 84.3 79.0 82.0 86.0 USDJPY
USDCNY 6.83 6.69 6.59 6.55 6.40 6.25 6.01 USDCNY
AUDUSD 0.92 0.97 1.02 1.04 1.05 1.06 1.07 AUDUSD
NZDUSD 0.71 0.73 0.78 0.77 0.77 0.77 0.78 NZDUSD
USDJPY USDCNY
95.5 6.85

93.0 6.80

90.5 6.76

88.0 6.71

85.5 6.67

83.0 6.62

80.5 6.58

78.0 6.53
Apr-10 Jun-10 Aug-10 Oct-10 De c-10 Fe b-11 Apr-11 Apr-10 Jun-10 Aug-10 Oct-10 De c-10 Fe b-11 Apr-11

AUDUSD NZDUSD
0.80
1.02
0.78
0.98
0.75
0.95
0.73
0.91
0.70
0.88

0.84 0.68

0.81 0.65
Apr-10 Jun-10 Aug-10 Oct-10 Dec-10 Fe b-11 Apr-11 Apr-10 Jun-10 Aug-10 Oct-10 De c-10 Fe b-11 Apr-11

8
Global Economic Research
ASIA/OCEANIA
Fundamental Commentary
JAPAN - Near-term Japanese yen (JPY) volatility will re-
main in place with the Bank of Japan (BoJ) battling exces-
sive appreciation. Initial strengthening forces will be coun-
tered by the blow to the country’s infrastructure and uncer-
tainty about the capacity for a quick recovery, leading to a
weakening profile. The economy will remain in recovery
mode as authorities grapple with the aftermath of the March
11th earthquake/tsunami and lingering nuclear reactor crisis.
Government estimates of the damage place the loss at
around US$300 billion, or 5.5% of the country’s GDP. The
viability of an expeditious recovery hinges not only on re-
storing a reliable electricity grid and transportation network,
but also on the level of the JPY, given export dependence.
The JPY rebound post-G7 intervention is maintaining oper-
ability for exporters, and further intervention is likely if sig-
nificant appreciation resumes. A second quarter contraction
will be followed by the reconstruction effort gathering mo-
mentum in the second half of 2011 and through 2012. After
last year’s record 3.9% y/y gain, GDP is expected to ex-
pand 1% in 2011 and 2.9% in 2012. The BoJ will likely re-
tain a loose monetary policy stance, as export dependence
raises the relevance of unsterilized currency interventions to
prevent excessive appreciation. While the setback resulting
from recent disasters will exacerbate deflationary forces,
cost push inflation could emerge as the recovery gathers
pace, given dependence on imported fuel amid persistent
global oil market uncertainty and the higher energy tally.
AUSTRALIA - The Australian dollar (AUD) will remain well
supported in the medium-term. Notwithstanding recent natu-
ral disasters, improving fiscal and solid external account
fundamentals as well as exposure to highly-bid commodities
all bode in favour of the AUD. An eventual resumption of
monetary tightening will further support the currency to-
wards the end of 2011. Australia’s economic expansion will
average 3.5% y/y in 2011-12. Notwithstanding the unfavor-
able effects of the Queensland floods, the economy will
continue to expand at trend growth with performance re-
maining supported by terms of trade improvements. Growth
acceleration during the fourth quarter on the back of rising
investment spending continues to translate into falling un-
employment, with firms in the mining and energy sectors
boosting output levels to meet demand from China and In-
dia. While consumer confidence was dented by recent ex-
treme weather events, employment prospects and durable
goods buying intentions remain above average. An initially
unfavorable effect from the expected slowdown in Japan
should be compensated for by higher commodity demand
during the reconstruction phase. Japan was surpassed by
China in 2009 as the main destination for Australian ex-
ports. Inflation will remain within the central bank’s 2-3%
target, as some pressures emerge with supply constraints
due to crop destruction and labour displacements. Inflation
fell to 2.7% y/y in Q4, with core inflation falling to 1.6% on
the back of a significant retrenchment in services costs.
April 2011
Foreign Exchange
Outlook
Oscar Sánchez +1 416 862-3174
CHINA - Yuan (CNY) strength will continue through 2012.
CNY appreciation is viewed as a policy to tighten monetary
conditions while promoting domestic market development.
China’s condition as the global growth pace-setter will inten-
sify as domestic demand momentum balances export
growth. We expect yearly economic growth to average
9.5% y/y in 2011-12. Output expansion accelerated to 9.8%
in the final quarter of 2010, taking the yearly advance to
10.3% alongside a credit easing-inspired 25% rise in fixed-
asset investment. Recent economic reports reaffirm the
country’s relevance worldwide, as imports continue to out-
pace exports thereby pulling the global recovery forward.
Credit abundance underpins double-digit investment gains,
while consumer spending supported by real wage improve-
ments is associated with rising productivity. Inflation re-
mains a concern. The pickup in food prices behind the re-
cent buildup in headline inflation has combined with ele-
vated raw material costs looming in the background. A
gradual rise in the CNY would help contain their inflationary
impacts. Although a rebound in inflation is not impossible,
transmission to non-food items has yet to become evident,
with real wage adjustments still consistent with productivity
advances. Rising bank reserve requirement constraints
have been the main tool to contain excess liquidity, while
interest rate increases have been aimed at deflating expec-
tations of rising asset valuations. Recent property price
gains are way off early-2010 double-digit advances.
NEW ZEALAND - The New Zealand dollar (NZD) will re-
main on the sidelines on the back of loosening monetary
conditions and an economy in recovery mode after the
Christchurch earthquake in late February, which was the
second in the past six months and the country’s worst natu-
ral disaster in 80 years. The fiscal effects of the earthquake
will be significantly higher than the NZ$4 billion tally of the
previous Canterbury tremor, and will fall on an already
weakened government balance. The economy avoided a
recession in the final quarter of 2010 with GDP expanding
by 0.8% y/y. While the setback from the recent catastrophe
could be significant, the outlook is not totally grim as exports
performed solidly through February. Business confidence
has firmed up as well on the back of improvements in the
external accounts, as the country continues to exploit prox-
imity to Australia and the dynamic Asian region. Housing
outlays however could be severely dented with confidence
and credit card spending indicators already displaying a
retrenchment. Although annual inflation closed 2010 at 4%,
well above the Reserve Bank of New Zealand’s (RBNZ) 1-
3% comfort zone, the central bank appears relaxed with
regard to price pressures as it attempts to support a re-
bound in activity. In March, the RBNZ decided to lower its
benchmark interest rate by 50 basis points to a record low
of 2.5%. A downtrend in unemployment is reflected in do-
mestic demand conditions; accordingly, non-tradable goods
prices are advancing faster than headline inflation.
9
Global Economic Research April 2011

Foreign Exchange
Outlook
DEVELOPING ASIA
Currency Outlook Sacha Tihanyi +1 416 862-3154

INDIA - In March, the INR temporarily deviated from a 1.5 month strengthening trend due to risk aversion driven off of
Japan’s natural disaster. This proved to be only temporary as in late March, the INR appreciated to its strongest level
since November of 2010, reflecting a normalization in market conditions and a refocusing on India’s hawkish monetary
policy bent and strong growth. External factors, such as the current account deficit, will render the INR vulnerable during
times of global financial market volatility. We hold a year-end forecast of 43.75.
KOREA - Frequent government intervention has not prevented USDKRW from moving lower (KRW strength) as financial
markets rebounded in mid-March. The government is likely to continue to resist too rapid a strengthening in the KRW, but
monetary policy dynamics favour additional appreciation off of a widening KRW yield differential vs. the USD. 1100 has
been a key level of support for USDKRW, but a sustained move past this point would signify government ease with a
stronger KRW. We hold a year-end forecast of 1060.
THAILAND - The THB has been more hesitant to test higher in March, though it temporarily managed to reach a new two
month high against the USD. Policymakers have signaled that inflation is the key concern, which means the THB will not
suffer on a forward looking basis from a lag on the policy front. We’d look for USDTHB’s 200-day moving average to hold
the topside, while 30.00 and 29.50 remain supportive to the downside. We hold a year-end forecast of 28.50.

HONG KONG - USDHKD, for the most part of March, remained below the 7.78 level, well away from the endpoints of the
7.75 to 7.85 band. There is no hint of any plan to shift away from the USD peg, and there is unlikely to be any such shift
towards the CNY until capital account convertibility is satisfied, and the growth of a robust and multi-faceted offshore ren-
minbi market is realized in Hong Kong. We hold a year-end forecast of 7.75 for the HKD.

Currency Trends
Going Back Spot Outlook
FX Rate FX Rate
12 m 6m 3m 1-Apr 3m 6m 12 m
USDINR 44.95 44.97 44.71 44.59 44.31 44.03 43.05 USDINR
USDKRW 1132 1138 1125 1089 1087 1073 1045 USDKRW
USDTHB 32.34 30.35 30.03 30.30 29.67 29.08 28.20 USDTHB
USDHKD 7.76 7.76 7.77 7.78 7.77 7.76 7.75 USDHKD
USDINR USDKRW

47.60
1235
47.00 1210

46.40 1185

45.80 1160

45.20 1135

44.60 1110

44.00 1085
Apr-10 Jun-10 Aug-10 Oct-10 De c-10 Feb-11 Apr-11 Apr-10 Jun-10 Aug-10 Oct-10 Dec-10 Fe b-11 Apr-11

USDTHB USDHKD
32.70
7.801
32.15
7.793
31.60
7.784
31.05
7.776
30.50 7.767

29.95 7.759

29.40 7.750
Apr-10 Jun-10 Aug-10 Oct-10 De c-10 Feb-11 Apr-11 Apr-10 Jun-10 Aug-10 Oct-10 De c-10 Fe b-11 Apr-11

10
Global Economic Research
DEVELOPING ASIA
Fundamental Commentary
INDIA - Favourable interest rate and growth differentials will
support the Indian rupee (INR) through 2011. While foreign
portfolio flows have slowed so far this year and the inflation-
ary outlook has deteriorated, support for INR strength re-
mains in place. India’s economic expansion will average
over 8.5% y/y in 2011-12. The economy recorded a solid
8.7% gain in 2010 with private spending on an upturn, un-
derpinned by abundant bank credit availability. Rising dis-
cretionary spending compensated for a downtrend in gov-
ernment outlays while public infrastructure outlays still con-
tributed to the expansion. Rural incomes improved during
2010 as rainfall returned to normal and this factor offers
further support to discretionary spending. Inflation remains
a key concern. A downward trend in wholesale price gains
through the end of 2010 has been reverted as global food
and fuel costs continue to erode purchasing power. While
double-digit gains in food values have trended down, rising
fuel costs are now the main inflation driver. The pervasive
effect of elevated oil prices is evidenced by the reversion of
the downward trend in manufacturing costs. The Reserve
Bank of India (RBI) has hiked the benchmark repo rate
seven times in the past twelve months for a cumulative 200
basis points to 6.75%. The RBI’s main concern is a buildup
in inflation expectations with the economy operating close
to full capacity. The central bank will likely feel obliged to
raise rates at least once more in 2011 as it awaits clearer
signs of inflation abatement.
THAILAND - Thai baht (THB) appreciation will characterize
the foreign exchange environment in 2011-12. The Bank of
Thailand accumulated US$27 billion in foreign assets last
year, taking its total stock to US$166 billion (55% of GDP).
While 2011 will remain a politically charged year, the sizable
reserve stock is more than enough to support the currency.
Attenuation of political uncertainty, solid export growth and
rising interest rates triggered a surge in foreign portfolio in-
flows to the point that a 15% withholding tax on foreign in-
vestors’ capital gains was reinstated. No such further meas-
ures are anticipated. The economy will continue to reap the
benefits of a privileged geographical location in Southeast
Asia, with activity supported by domestic demand momen-
tum running alongside rising foreign sales. Manufacturing
activity improved during the three months to December,
reversing a mid-year soft spot, underpinning the impressive
7.8% y/y GDP advance of 2010. A recovery in exports
(which account for two thirds of the economy) remains at
the core of the rebound, with positive implications for manu-
facturers. Consumer and investment spending are advanc-
ing at an over 5% y/y rate, attesting to the solidity of the do-
mestic demand picture. Inflationary concerns have come to
the fore given the upbeat tone in local activity and the rise in
food and fuel costs. Headline consumer inflation has yet to
display a definitive upward trend, standing at 3% y/y, with
core inflation coming down recently to 1.3% y/y.
April 2011
Foreign Exchange
Outlook
Oscar Sánchez +1 416 862-3174
KOREA - The Korean won (KRW) will maintain a strength-
ening tone through 2011-12 on the back of sustained eco-
nomic growth. While the Bank of Korea (BoK) stands ready
to dampen excessive appreciation, the healthy rebalancing
of the economy currently underway will continue to attract
foreign capital. GDP picked up at a 6.1% y/y pace in 2010,
and we expect the economy to converge back to a medium
term speed of 5% y/y on average in 2011-12. Waning fiscal
impulse and expiring subsidies, having brought forward
consumption in 2010, resulted in a slowdown in spending
towards the end of 2010, though exports remained a bright
spot. The BoK is in interest rate normalization mode aiming
to rein in inflation expectations. Although the Korean econ-
omy is highly vulnerable to commodity price fluctuations,
the main focus has been on averting a wage/price spiral.
Headline inflation hit 4.5% y/y in February on the back of
food and oil price increases. Core inflation moved higher as
well to 3.1% y/y. Although headline pressures could in-
crease in coming months, we expect core inflation to trend
down during the rest of the year, on the back of slower do-
mestic demand and a relatively strong KRW. While unem-
ployment remains on a downward trend, real wage in-
creases have recently eased, signaling a diminished threat
of an inflationary spiral. While the size of the oil import bill in
Korea is large at 5.5% of GDP, there is plenty of maneuver-
ing room as the country’s fiscal accounts remain solid, with
no current subsidies on fuel costs.
HONG KONG - The exchange rate band around the Hong
Kong dollar (HKD) will remain well supported with few risks
of realignment as the HKD trades close to the middle of the
band. Economic activity appears poised for further improve-
ment with domestic consumption and exports continuing to
outperform on the back of added momentum on the
mainland and falling local unemployment. Labour market
conditions have tightened significantly, as the jobless rate
fell to a record low of 3.6% in February, the lowest since
November 2008. A strong labour market has been under-
pinning a solid domestic spending profile displayed by dou-
ble-digit annual retail sales growth. We expect GDP to ex-
pand at a 4.9% y/y average rate in 2011-12. Activity has
also been supported by loose monetary conditions imported
from the US and a somewhat pro-cyclical fiscal stance,
which point to a possible buildup in price pressures. Head-
line and core inflation have both trended upward reaching
3.7% y/y and 3.2% in February, respectively. HKD weak-
ness, rising Chinese inflation and accelerating import costs
are feeding price pressures. Accordingly, negative real in-
terest rates already underpin asset price gains, supporting
domestic spending. The government abandoned several
key politically sensitive budget initiatives -aimed at fighting
inflation. In particular, a controversial one-off tax rebate
(capped at HK$6000) benefiting around 1.4 million taxpay-
ers is likely to provoke higher inflationary pressures with
minor effects on growth.
11
Global Economic Research April 2011

Foreign Exchange
Outlook
DEVELOPING AMERICAS
Currency Outlook Pablo F.G. Bréard +1 416 862-3876

BRAZIL - The Brazilian real (BRL) remains stable and strong, firmly supported by large-scale foreign capital inflows,
highly attractive interest-rate differentials, favourable commodity prices and a prudential macroeconomic policy environ-
ment. Absent strong fiscal tightening, the BRL could appreciate even further. However, we do expect the BRL to close the
year at 1.65 and modestly depreciate in nominal terms in 2012.

MEXICO - The Mexican peso (MXN) has become a market favourite currency in the context of growing financial uncer-
tainties linked to European debt sustainability shocks, political tension in Northern African and Middle Eastern nations and
commodity market shocks. US recovery dynamics, high oil prices, attractive yields and domestic demand growth are the
key factors shaping a bullish tone in Mexico’s currency and economic outlook. We expect USDMXN to close the year at
12.70.

CHILE - The Chilean peso (CLP) has adopted an appreciating bias in the context of a volatile price environment triggered
by sharp price adjustment in relevant commodity markets. The CLP continues to be influenced by the direction of copper
(export) and crude oil (import) prices. The central bank remains committed to further rate hikes to normalize monetary
conditions. We expect USDCLP to close the year at 480.

COLOMBIA - The Colombian peso (COP) remains in range-trading mode despite signs of ongoing support for further
appreciation versus the USD due to accelerating economic activity, widening interest rate differentials (and short-term
rate increases), increasing crude oil prices, surging domestic demand (and local credit) and massive capital inflows. We
expect USDCOP to close the year at 1,860.
Currency Trends
Going Back Spot Outlook
FX Rate FX Rate
12 m 6m 3m 1-Apr 3m 6m 12 m
USDBRL 1.78 1.69 1.66 1.62 1.64 1.64 1.67 USDBRL
USDMXN 12.36 12.59 12.36 11.84 12.15 12.24 12.55 USDMXN
USDCLP 524 484 468 477 478 479 482 USDCLP
USDCOP 1920 1800 1920 1861 1867 1864 1867 USDCOP
USDBRL USDMXN

1.87 13.2

1.83 13.0

1.80 12.8

1.76 12.6

1.73 12.4

1.69 12.2

1.66 12.0

1.62 11.8
Apr-10 Jun-10 Aug-10 Oct-10 De c-10 Feb-11 Apr-11 Apr-10 Jun-10 Aug-10 Oct-10 De c-10 Fe b-11 Apr-11

USDCLP USDCOP
2050
544
2000
530
1950
516

502 1900

488 1850

474 1800

460 1750
Apr-10 Jun-10 Aug-10 Oct-10 Dec-10 Fe b-11 Apr-11 Apr-10 Jun-10 Aug-10 Oct-10 De c-10 Feb-11 Apr-11

12
Global Economic Research
DEVELOPING AMERICAS
Fundamental Commentary
BRAZIL - Brazil is weathering the triple global events
(Japan nuclear crisis, political upheaval in Africa and the
Middle East and the commodity price shock) relatively well.
The government is not indifferent to the deteriorating infla-
tion outlook and the widening current account deficit which
seem to be emerging within the context of a decelerating
economy. We are now estimating that the economy will
slow down the pace of expansion and grow by 4-4.5% in
2011-12, from the 7.5% increase recorded in 2010. Infla-
tionary pressures and expectations have been on the rise
for months now, prompting the central bank to adopt a
hawkish monetary stance and increase the policy-setting
SELIC rate by 300 bps to 11.75% since October 2009. Mar-
ket participants are now expecting that the central bank will
complete its tightening cycle by raising the SELIC rate by
another 50 bps and keep it at 12.25% for the rest of the
year. In an effort to tackle the dual policy concerns of robust
credit growth and rapid currency appreciation, the govern-
ment recently announced the imposition of a 6% tax on in-
ternational lending and bond issuance activity by Brazilian
banks. Recent data indicated that total domestic credit ex-
panded at a 21% rate in the 12-month period ending in Feb-
ruary 2011. The central bank also reported that public sec-
tor financial institutions account for 42% of the total stock of
Brazilian credit.
CHILE - Chile is experiencing a period of robust economic
activity aided by surging domestic consumption and strong
investment flows linked to the thriving export markets. The
economy is positioned to expand by 6.5% this year in line
with strong momentum enjoyed by Southern Cone coun-
tries. Monthly indicators of economic activity continue to
highlight an expansionary phase: in January, the IMACEC
index increased by 6.8% y/y, up from 5.9% in December.
Retail sales trends also portray an expansionary phase in
Chile. Inflation is not, for now, an issue of concern; in fact,
consumer prices increased by 2.70% in February on a year-
over-basis. However, recent official rhetoric stressed that
due to the geo-political crisis taking place in Northern Africa
and the Middle East, inflationary expectations may suffer an
upward adjustment. The central bank continues to stress
the need to tighten monetary conditions; indeed, the mone-
tary authorities increased its short-term policy rate by 50
bps to 4% on March 17th. Of course, higher interest rates
may be counterproductive if the authorities are somewhat
concerned by a potential rate of currency appreciation as
stressed by the decision to purchase US$12 billion earlier in
the year. As of the end of March, the central bank counted
on US$28.5 billion in international reserves. Beyond the
plan to accumulate reserves, the government is relaxing
rules for Chilean institutional investments in foreign assets
in order to allow an orderly exchange rate adjustment.
COLOMBIA - The Colombian economic outlook remains
April 2011
Foreign Exchange
Outlook
Pablo F.G. Bréard +1 416 862-3876
MEXICO - Mexico offers a favourable business and market
environment, characterized by accelerating economic
growth, contained inflation and a domestic credit expansion
phase. The year 2010 was earmarked as a period of sharp
recovery, as reflected by the 5.5% growth rate following a
contraction of 6.9% in 2009. Looking ahead, Mexico’s real
GDP is well positioned to expand by 4% this year and next.
In sharp contrast with other top-tier emerging-marker coun-
tries, consumer price inflation (at 3.5%) has not been an
issue of policymaker/investor concern so far. Futures mar-
kets indicate, however, that the Mexican monetary authori-
ties may gradually and moderately begin a tightening cycle
some time during the fourth quarter of the year. At present,
the government-administered policy rate is set at 4.5% (a
sharp difference with the 11.75% in Brazil). Due to its per-
ceived technical undervaluation, rising crude oil prices (the
benchmark WTI light crude oil price has approached the
US$110 per barrel at the end of March) and attractive peso-
dollar bond yield spreads, the MXN attained investor-
favourite status. Without aggressively intervening in finan-
cial markets, the central bank has continued to accumulate
international reserves which reached US$125 billion by the
end of March. Credit market metrics also point towards a
steady improvement in Mexico’s sovereign creditworthi-
ness. All international agencies maintain a “stable” outlook
on Mexico’s sovereign credit ratings. A visible improvement
on fiscal reform is at the core of potential rating revisions.
promising. The economy is showing signs of steady accel-
eration on the back of surging domestic demand, increasing
access to domestic credit, favourable terms of trade, a pru-
dent macroeconomic framework and sizable foreign capital
inflows. The government of President Santos has not been
shy in stressing policy concerns regarding the potential for
steady appreciation of the peso as the country receives vo-
luminous amount of foreign direct equity flows linked to the
thriving energy (and mining) sector. The domestic financial
sector remains strongly capitalized and adequately regu-
lated leading to a phase of expanding domestic lending ac-
tivity in the new phase of economic expansion. The Colom-
bian economy is well positioned to grow by 6% in 2011 after
a healthy 4.3% expansion in 2010. Robust consumer
spending and construction growth was at the core of the
4.6% growth rate during the last quarter of 2010. In recogni-
tion of major structural advances achieved over the past few
years and, in line with a pro-development policy environ-
ment, Standard and Poor’s rewarded Colombia with a sov-
ereign credit rating upgrade revision to investment grade
status on March 16th; moreover, both Fitch and Moody’s still
maintain a “positive” outlook on the country’s debt assets
implying that the country is nearing “full investment grade
status”. Meanwhile, the central bank remains committed to
normalize monetary conditions, i.e., increase short-term
interest rates from its current level of 3.50%.
13
Global Economic Research April 2011

Foreign Exchange
Outlook
DEVELOPING EUROPE/AFRICA
Currency Outlook Tuuli McCully +1 416 863-2859

RUSSIA - Elevated oil prices and the outlook for higher interest rates will continue to provide support to the Russian ru-
ble (RUB) despite increased risk aversion stemming from events in the Middle East and Japan. Approaching parliamen-
tary and presidential elections, we will likely see periods of currency volatility. We expect USDRUB to close the year at 28.

TURKEY - The Turkish lira (TRY) is embarking on a period of stabilization following four months of marked selling pres-
sures from November through February. Widening external imbalances together with June general elections may reintro-
duce a modest weakening trend later on this year. We expect the TRY to close the year at 1.60 per USD.

CZECH REPUBLIC - The Czech government’s commitment to fiscal prudence should help prevent a contagion of risk
aversion from neighbouring countries into the Czech Republic. We expect the CZK to remain relatively stable through
2012, hovering close to 24.0 per the euro.

SOUTH AFRICA - The South African rand (ZAR) will continue to reflect rapid changes in investor sentiment. A widening
current account deficit will point to a depreciating bias of the ZAR vis-à-vis the US dollar in 2011 and 2012. We expect
the ZAR to close the year at 7.10 per USD.

Currency Trends
Going Back Spot Outlook
FX Rate FX Rate
12 m 6m 3m 1-Apr 3m 6m 12 m
USDRUB 29.4 30.6 30.5 28.4 28.3 28.1 28.2 USDRUB
USDTRY 1.52 1.45 1.54 1.54 1.56 1.58 1.59 USDTRY
EURCZK 25.4 24.6 25.1 24.5 24.4 24.2 24.0 EURCZK
USDZAR 7.28 6.97 6.63 6.74 6.88 6.99 7.20 USDZAR
USDRUB USDTRY
31.7 1.66

31.0 1.60

30.2 1.55

29.5 1.49

28.7 1.44

28.0 1.38
Apr-10 Jun-10 Aug-10 Oct-10 Dec-10 Feb-11 Apr-11 Apr-10 Jun-10 Aug-10 Oct-10 Dec-10 Feb-11 Apr-11

EURCZK USDZAR
26.25 8.00

25.75 7.70

25.25 7.40

24.75 7.10

24.25 6.80

23.75 6.50
Apr-10 Jun-10 Aug-10 Oct-10 Dec-10 Feb-11 Apr-11 Apr-10 Jun-10 Aug-10 Oct-10 Dec-10 Feb-11 Apr-11

14
Global Economic Research
DEVELOPING EUROPE/AFRICA
Fundamental Commentary
RUSSIA - Domestic politics will dominate investor attention
in the coming two years as the next parliamentary elections
are scheduled for late 2011, followed by a presidential ballot
in 2012. Russia will continue its fight against rising inflation-
ary pressures in the coming months. At the March 25th
monetary policy meeting, the country’s monetary authorities
opted to leave the refinancing rate unchanged at 8.0% fol-
lowing a hike the month before. Nevertheless, the central
bank continued its monetary tightening policy by raising
bank reserve requirements further. The consumer price in-
dex increased 9.5% y/y in February, being the highest rate
among the BRIC countries. The prospects for further bench-
mark interest rate increases together with shifting dynamics
in global energy markets (demand and pricing) will make
Russia an attractive destination for capital inflows, thereby
providing support to the Russian ruble (RUB) through 2011.
Developments in crude oil and natural gas prices will signifi-
cantly impact the Russian economic outlook; we expect the
country’s real GDP growth to average 4½% through 2012,
following a 4.0% expansion in 2010. Similarly, elevated en-
ergy prices will be favourably reflected in Russian public
finances; the fiscal deficit will likely narrow to 3½% of GDP
this year from slightly over 4% in 2010.
CZECH REPUBLIC - Monetary conditions in the Czech
Republic are set to remain on hold in the near term, as de-
mand-led inflationary pressures remain virtually absent.
Headline inflation continues to hover below the central
bank’s 2.0% target; the consumer price index increased by
1.8% y/y in February. The Czech National Bank has kept
the benchmark interest rate unchanged at 0.75% since
May 2010 and policymakers have indicated that a gradual
process of monetary policy tightening will likely begin to-
ward the end of 2011. The export-oriented Czech economy
expanded by 0.3% q/q (2.6% y/y) in the final quarter of
2010, showing some signs of waning momentum partly due
to adverse weather conditions. Output growth was driven
by investment in inventories and net exports. We expect
the economy to grow by around 2% this year and by 2½%
in 2012, following a 2.2% expansion in 2010. Public fi-
nances of the Czech Republic compare favourably with
many of its European peers. The government aims to nar-
row the fiscal deficit to 4.6% of GDP in 2011 from 4.8% last
year, and further to 3% of GDP by 2013. In particular, a
planned large pension reform would significantly ease pub-
lic expenditure pressures stemming from the aging popula-
tion. Meanwhile, public sector debt is low in regional terms,
hovering below 40% of GDP in 2010.
April 2011
Foreign Exchange
Outlook
Tuuli McCully +1 416 863-2859
TURKEY - Turkish general elections will be held on June
12th, 2011 and the robustly growing economy offers a fa-
vourable background for the ruling Justice and Develop-
ment Party’s campaign. Real GDP growth is being boosted
by strong expansion in household consumption and invest-
ment. With the industrial sector on the mend and consumer
confidence improving, we expect the country’s output to
grow by around 5¼% through 2012. Following the Monetary
Policy Committee meeting on March 23rd, the Turkish
benchmark interest rate was kept on hold at 6.25% for the
second consecutive month, while reserve requirements
were raised in order to limit rapid credit expansion and en-
hance financial stability. Further increases in reserve re-
quirements are likely. Despite the authorities’ efforts to ease
capital inflows by keeping interest rates low, the current ac-
count deficit continues to widen. On the back of booming
domestic demand, increasing inflation expectations and
elevated commodity prices, we assess that policymakers do
not have any further room to cut the benchmark rate; in-
stead, a period of monetary policy normalization is ap-
proaching. While Turkey’s inflation continued to ease in
February on the back of base effects, reaching 4.2% y/y,
inflationary pressures are rebuilding further up the distribu-
tion chain with producer prices increasing by 10.9% y/y.
Consumer price inflation will likely rebound to around 6½%
y/y by the end of 2011.
SOUTH AFRICA - South African monetary authorities are
becoming somewhat more concerned about the inflation
outlook, assessing that the risks to price stability are “on
the upside” due to pressures stemming from administered
prices, wage settlements and higher global energy and
food prices. Though showing some signs of a pickup, con-
sumer price inflation remained well-contained at 3.7% y/y in
February. We expect inflation to approach the upper limit of
the South African Reserve Bank’s (SARB) 3-6% inflation
target range in 2012. As inflationary pressures are not de-
mand-driven, the SARB opted to keep the benchmark inter-
est rate unchanged at 5.5% following the Monetary Policy
Committee meeting on March 24th. The next policy meeting
is scheduled for May 12th. South African economic pros-
pects continue to improve gradually, with the manufacturing
and mining sectors on the mend and improving retail sales
pointing towards a modest pickup in household spending.
Following an expansion of 2.8% in 2010 as a whole, we
expect the country’s real GDP growth to average 3¾%
through 2012. Nevertheless, these rates of economic ex-
pansion are not enough to materially reduce the high un-
employment rate of 24%. With the trade balance moving
from a surplus position to a deficit, the current account is
set to widen significantly from 3.9% of GDP in 2010 to
close to 6% of GDP in 2012; the shortfall points to modest
selling pressures of the ZAR in the next two years.
15
Global Economic Research April 2011

Foreign Exchange
Outlook

GLOBAL CURRENCY FORECAST (end of period)

2009 2010 2011f 2012f 2011f 2012f
Q1a Q2 Q3 Q4 Q1 Q2 Q3 Q4
MAJOR CURRENCIES
Japan USDJPY 93 81 84 90 83 79 82 84 86 87 89 90
Euro zone EURUSD 1.43 1.34 1.45 1.48 1.42 1.42 1.44 1.45 1.45 1.46 1.47 1.48
EURJPY 133 109 122 133 118 112 118 122 125 127 131 133
UK GBPUSD 1.62 1.56 1.63 1.70 1.60 1.60 1.61 1.63 1.65 1.67 1.69 1.70
EURGBP 0.89 0.86 0.89 0.87 0.88 0.89 0.89 0.89 0.88 0.87 0.87 0.87
Switzerland USDCHF 1.04 0.93 0.90 0.86 0.92 0.92 0.90 0.90 0.90 0.89 0.87 0.86
EURCHF 1.48 1.25 1.31 1.27 1.30 1.31 1.30 1.31 1.31 1.30 1.28 1.27

AMERICAS
Canada USDCAD 1.05 1.00 0.95 0.92 0.97 0.97 0.96 0.95 0.95 0.94 0.93 0.92
North

CADUSD 0.95 1.00 1.05 1.09 1.03 1.03 1.04 1.05 1.05 1.06 1.08 1.09
Mexico USDMXN 13.1 12.4 12.5 12.7 11.9 12.2 12.2 12.5 12.6 12.5 12.6 12.7
CADMXN 12.4 12.4 13.1 13.8 12.3 12.5 12.8 13.1 13.2 13.3 13.5 13.8
Argentina USDARS 3.80 3.98 4.40 5.00 4.06 4.17 4.28 4.40 4.54 4.69 4.84 5.00
Brazil USDBRL 1.74 1.66 1.65 1.75 1.63 1.64 1.64 1.65 1.67 1.70 1.72 1.75
Chile
South

USDCLP 507 468 480 490 478 478 479 480 482 485 487 490
Colombia USDCOP 2043 1920 1860 1890 1871 1867 1864 1860 1867 1875 1882 1890
Peru USDPEN 2.89 2.81 2.68 2.60 2.80 2.76 2.72 2.68 2.66 2.64 2.62 2.60
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 1.08 1.10 1.03 1.05 1.06 1.08 1.07 1.08 1.09 1.10
China USDCNY 6.83 6.59 6.10 5.75 6.55 6.40 6.25 6.10 6.01 5.92 5.84 5.75
Hong Kong USDHKD 7.75 7.77 7.75 7.75 7.78 7.77 7.76 7.75 7.75 7.75 7.75 7.75
India USDINR 46.5 44.7 43.8 41.0 44.6 44.8 44.3 43.8 43.0 42.4 41.7 41.0
Indonesia 2/ USDIDR 9.48 8.98 8.54 8.40 8.71 8.65 8.60 8.54 8.50 8.47 8.43 8.40
Malaysia USDMYR 3.44 3.06 2.89 2.78 3.02 2.98 2.93 2.89 2.86 2.83 2.81 2.78
New Zealand NZDUSD 0.72 0.78 0.78 0.80 0.76 0.77 0.77 0.78 0.78 0.79 0.79 0.80
Philippines USDPHP 46.1 43.6 42.0 40.0 43.4 43.5 42.9 42.0 41.5 41.0 40.5 40.0
Singapore USDSGD 1.40 1.28 1.24 1.21 1.26 1.25 1.24 1.24 1.23 1.22 1.21 1.21
South Korea USDKRW 1158 1125 1060 1000 1100 1090 1075 1060 1050 1040 1028 1000
Thailand USDTHB 33.4 30.0 28.5 27.3 30.3 29.7 29.1 28.5 28.2 27.9 27.6 27.3
Taiwan USDTWD 32.0 29.2 27.8 26.5 29.4 28.9 28.3 27.8 27.5 27.1 26.8 26.5

EUROPE / AFRICA
Czech Rep. EURCZK 26.4 25.1 24.0 24.0 24.5 24.4 24.2 24.0 24.0 24.0 24.0 24.0
Iceland USDISK 126 115 120 115 114 116 118 120 119 117 116 115
Hungary EURHUF 271 279 275 265 266 269 272 275 272 270 267 265
Norway USDNOK 5.78 5.81 5.50 5.30 5.54 5.67 5.64 5.50 5.58 5.55 5.53 5.30
Poland EURPLN 4.11 3.96 3.90 3.80 4.02 3.98 3.94 3.90 3.87 3.85 3.82 3.80
Russia USDRUB 30.0 30.5 28.0 29.0 28.4 28.3 28.1 28.0 28.2 28.5 28.7 29.0
South Africa USDZAR 7.39 6.63 7.10 7.50 6.77 6.88 6.99 7.10 7.20 7.30 7.40 7.50
Sweden EURSEK 10.24 8.99 8.70 8.60 8.95 8.87 8.78 8.70 8.67 8.65 8.62 8.60
Turkey USDTRY 1.50 1.54 1.60 1.55 1.55 1.56 1.58 1.60 1.59 1.57 1.56 1.55

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

16
Global Economic Research April 2011

Foreign Exchange
Outlook

INTERNATIONAL RESEARCH GROUP

Pablo F.G. Bréard, Head

pablo_breard@scotiacapital.com

Daniela Blancas
daniela_blancas@scotiacapital.com

Tuuli McCully
tuuli_mccully@scotiacapital.com

Estela Ramírez
estela_ramirez@scotiacapital.com

Oscar Sánchez
oscar_sanchez@scotiacapital.com

CANADIAN & U.S. ECONOMIC RESEARCH

Gorica Djeric
gorica_djeric@scotiacapital.com

Derek Holt
derek_holt@scotiacapital.com

Adrienne Warren
adrienne_warren@scotiacapital.com

FOREIGN EXCHANGE RESEARCH

Camilla Sutton
camilla_sutton@scotiacapital.com

Sacha Tihanyi
sacha_tihanyi@scotiacapital.com

Scotia Economics
Scotia Plaza 40 King Street West, 63rd Floor
Toronto, Ontario Canada M5H 1H1
Tel: (416) 866-6253 Fax: (416) 866-2829
Email: scotia_economics@scotiacapital.com
This Report is prepared by Scotia Economics as a resource for the
clients of Scotiabank and Scotia Capital. While the information is from
sources believed reliable, neither the information nor the forecast shall
be taken as a representation for which The Bank of Nova Scotia or
Scotia Capital Inc. or any of their employees incur any responsibility.