Foreign Exchange: Outlook

Global Economic Research
November 2011
Foreign Exchange Outlook

Heightened financial market volatility, intensifying political uncertainties and debt strains in Europe, softening global economic conditions, ongoing intervention in both Japan and Switzerland, systemically relevant asset purchase plans in the US and UK, the quest for yield in developing countries and commodity price shifts are fuelling financial contagion waves and volatile shifts in foreign exchange markets. Recurring European sovereign debt issues temporarily may direct flows to US-denominated assets. However, the USD remains in softening mode on the back of weak growth, labour and fiscal fundamentals and monetary policy status quo. The CAD and MXN offer relatively better potential for appreciation as shadow currencies within North America. The EUR remains a world reserve currency despite a deteriorating sovereign credit profile within the euro zone. Heightened implementation risk of fiscal adjustment plans in European peripheral countries coupled with slowing growth and systemic risk factors weigh on Europes currency outlook. The GBP is in stabilization mode. The regional environment in the Asia/Pacific region remains relatively bullish. The JPY and AUD continue to benefit from safe-haven and diversification trading activity. The currency regime affecting the CNY will remain unchanged for the time being. Growth and interest rate differentials support floating currencies in developing Asia.
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
November 2011
Global Foreign Exchange Outlook

November 2, 2011
Euro Yen Sterling Canadian Dollar Australian Dollar Mexican Peso
EURUSD Consensus* USDJPY Consensus* GBPUSD Consensus* USDCAD Consensus* AUDUSD Consensus* USDMXN Consensus*
Actual Q2a 11Q3a 11 Q4 11 Q1 12 Q2 12 Q3 12 Q4 12 Q1 13

1.38 78.1 1.60 1.01 1.04 13.50 1.45 81 1.61 0.96 1.07 11.71 1.34 77 1.56 1.05 0.97 13.90 1.40 1.33 80 77 1.60 1.55 1.02 1.02 1.00 0.98 12.93 12.78 1.42 1.33 82 77 1.61 1.55 1.00 1.01 1.02 0.98 12.94 12.67 1.42 1.35 83 79 1.62 1.56 0.99 1.01 1.04 0.99 12.71 12.60 1.40 1.36 84 80 1.63 1.60 0.98 1.00 1.06 1.00 12.67 12.53 1.40 1.36 85 80 1.64 1.61 0.98 1.00 1.08 0.99 12.71 12.54 1.38 1.35 87 81 1.65 1.62 0.97 1.01 1.08 0.98 12.40 12.59
Spot Price vs. 100 Day Moving Average vs. 200 Day Moving Average - (5yr Trend)
EURUSD
EUR/ USD
USDJPY
100 Day 200 Day
1.62 1.52 1.42 1.32 1.22 1.12
123 116 109 102 95 88 81 74
USD/ JPY 100 Day 200 Day
GBPUSD
2.11 1.96 1.81 1.66 1.51 1.36
GBP/ USD 100 Day 200 Day
N ov -0 6 M ay -0 7 N ov -0 7 M ay -0 8 N ov -0 8 M ay -0 9 N ov -0 9 M ay -1 0 N ov -1 0 M ay -1 1 N ov -1 1
AUDUSD
1.12 1.04 0.97 0.89 0.82
AUD/ USD
0.74 0.67 0.59
100 Day 200 Day
(*) Source: Consensus Economics Inc. October 2011
N ov -0 Ap 6 r07 Se p07 Fe b08 Ju l-0 D 8 ec -0 M 8 ay -0 9 O ct -0 M 9 ar -1 Au 0 g10 Ja n11 Ju n11 N ov -1 1
USDCAD
USD/ CAD
1.30 1.22 1.14 1.06 0.98 0.90
100 Day 200 Day
USDMXN
15.2
USD/ M XN
14.1 13.0 11.9 10.8 9.7
100 Day 200 Day
November 2011

MARKET TONE & FUNDAMENTAL FOCUS
Pablo F.G. Brard +1 416 862-3876 Camilla Sutton +1 416 866-5470
Global economic deceleration, an acute confidence crisis and ensuing systemic risk within the euro zone, multifaceted government intervention in advanced economies, volatile and directionless securities markets, excess global liquidity, commodity price gyrations, and the pursuit of high-yield investment options in emerging markets are the major drivers of intensified volatility in global foreign exchange markets. The NAFTA zone currency landscape continues to be shaped by domestic economic developments in the US and by the global financial market turmoil swaying the value of the US dollar (USD). The trade-weighted DXY index remains immersed in a highly volatile phase as the USD continues to be used as a world reserve currency whenever policy uncertainties regarding European debt markets lead to heightened stress. The US economic outlook continues to show evidence of modest, though sluggish, growth despite persistent fragility in housing and labour markets. The US Federal Reserve (Fed) continues to play a key role in shaping the near-term interest rate outlook due to its vast holdings and active risk re-profiling of US treasury debt assets. As for the remaining North American currencies, both the Canadian dollar (CAD) and the Mexican peso (MXN) enjoy relatively better underlying fundamentals. However, neither currency is immune to concerted moves in favour (or against) the USD. Economic and energy market developments in the United States will influence non-USD NAFTA currencies, while in addition, the MXN is supported by highly attractive interest rate differentials. Election-related dynamics in the US and Mexico may, at times, moderately influence investor sentiment. The combination of a weak USD, Canadas reasonable sovereign position and a rich commodity base lay the foundations for the CAD to have a volatile trading pattern in the last quarter of 2011 but to appreciate in 2012. Europe remains front and centre in global financial markets. The plan to enlarge the European Financial Stability Facility (EFSF), recapitalize the banking sector and restructure the Greek sovereign debt assets initially soothed markets; but as we enter November, there is increasing concern that support is waning. Financial contagion is rapidly spreading throughout the euro zone. Leadership succession uncertainties compound the heightened risk awareness in Italy and potentially Greece. A new president at the European Central bank (ECB) only serves to complicate the outlook. Credit market metrics highlight heightened financial anxiety leading to convulsive shifts in the euro (EUR) against peer currencies. Although the economic outlook has weakened in both Europe and the United States, we do believe that the EURUSD may converge towards the 1.40 rate. Uncertainty as to the path
ahead for Europe continues to plague the EUR and drive significant volatility. The trading pattern of the Pound sterling (GBP) has been volatile, but less so than EUR. Another round of asset purchases by the Bank of England, combined with a worrying growth outlook, is not the foundation that usually lays the path to a currency rally; however, considering the relative picture GBP still appears well supported close to 1.60. The Swiss franc's (CHF) outlook is muted by the central bank's maintenance of the EURCHF floor, which we believe is credible and will continue well into 2012. The Asian currency environment, though not immune to distressed global financial events, continues to offer a relatively more attractive outlook. Japans intervention in currency markets in late October introduced two-way risk back into USDJPY, but is widely expected to do little to materially change the path ahead. Japanese official rhetoric against a strong JPY remains alive. A floor, similar to EURCHF, is unlikely, but should USDJPY fall back to record levels we would expect authorities to act again. We do not anticipate any notable change in Chinas currency regime. In fact, as inflation and growth move towards a slower pace and global uncertainties intensify, the pace of Chinese renminbi (CNY) appreciation is expected to gradually slow. In the fourth quarter of 2011, we expect the pace of appreciation to slow to 0.6%, with USDCNY closing the year at 6.32. The possible participation of China in multilateral or bilateral European rescue initiatives has also injected further uncertainty into the global risk equation. Our view on the Australian dollar (AUD) remains unchanged following the recent decision by the Reserve Bank of Australia to ease monetary policy. Emerging-market currencies continue to behave in a volatile fashion despite stronger relative growth and debt fundamentals. The systemically relevant floating currencies in both developing Asia and Latin America were not immune to the global financial market stress that materialized in September. However, in October there has been a marked recovery in top-tier emerging-market currencies such as the Brazilian real (BRL) and the Mexican peso (MXN) in the Americas, and the South Korean won (KRW) and the Malaysian ringgit (MYR) in Asia. Countryspecific events also affected currency market behaviour in Thailand, where the baht (THB) was rather indifferent to the severe damage caused by intense flooding and Argentina, where the peso (ARS) was subject to sharp selloff pressure due to unilaterally imposed measures adopted by the recently reelected government. Currencies linked to metals prices such as the Chilean peso (CLP), the Peruvian sol (PEN) and the South African rand (ZAR) have regained some strength following price recovery trends.
November 2011

CANADA
Camilla Sutton +1 416 866-5470 Eric Theoret +1 416 863-7030
On a year-to-date basis, the Canadian dollar (CAD) is essentially flat, having lost just 1.5% as we enter November. However, this conceals the large ranges the currency has been subjected to on the back of general market volatility; from the beginning of September until the end of October, CAD traded within a notably wide 887 point range (from 0.9383 to 1.0270). Looking out to year-end we expect that intra-day and intra-month volatility will remain high; however by the end of the year CAD is unlikely to have moved materially from current levels. The main external risks for CAD traders currently outweigh the domestic factors and include: 1) Developments in Europe with any further deteriorating likely to drive risk aversion temporarily higher and weaken CAD; but as we look out to the medium term we would expect the impact on risk aversion fades and CAD is able to retrace any losses. 2) The global growth outlook, in particular China and the US. Our base case calls for close to 9% growth in China this year and next, which should help to support commodity prices and by default CAD. 3) The USD outlook, where the combination of loose monetary policy (including the potential of further rounds of asset buying) and the countrys fiscal position should weigh on the currency; however recurring spikes in risk aversion leave a more chaotic trading pattern in place than our forecasts suggest. The domestic drivers continue to point to CAD strength though on a more muted basis than they were at other times in recent history. On a relative basis, Canadas sovereign position is a strong one. The universe of true Triple A rated sovereigns is narrowing, leaving Canada as one of the handful with a developed bond market. Accordingly, on a flow basis CAD should be supported. The Bank of Canada is not expected to increase interest rates in the near term, however in the medium-term the spread between Canadian and US yields should widen in CADs favour. Finally, Canada is entering this period of uncertainty on better economic fundamental footing than most. However, the external risks are significantly clouding the outlook and will likely limit any material gains for CAD. Recognizing that the range is likely to prove far wider than our forecast suggest, we expect CAD to close this year at 0.9850 and next at 1.02.
Currency Trends
FX Rate AUDCAD CADJPY EURCAD USDCAD 12 m 1.003 78.87 1.422 1.019 Going Back 6m 1.037 85.91 1.399 0.945 3m 1.050 80.36 1.375 0.955 Spot 2-Nov 1.048 77.18 1.393 1.011 3m 1.030 79.85 1.421 1.010 Outlook 6m 1.037 82.61 1.415 0.997 12 m 1.058 86.05 1.372 0.980 FX Rate AUDCAD CADJPY EURCAD USDCAD
AUDCAD
1.07 1.05 1.03 1.01 1.00 0.98 0.96 Nov-10 89.0 86.0 83.0 80.0 77.0 74.0 71.0 Nov-10
CADJPY
Jan-11 Mar-11 May-11
Jul-11
Sep-11 Nov-11
Jan-11 Mar-11 M ay-11
Jul-11
Se p-11 Nov-11
EURCAD
1.45 1.42 1.39 1.36 1.33 1.30 1.27 Nov-10 1.06 1.04 1.02 1.00 0.98 0.96 0.94 Nov-10
USDCAD
Jul-11
Sep-11 Nov-11
Jul-11
Se p-11
Nov-11
November 2011

CANADA AND UNITED STATES
Fundamental Commentary Adrienne Warren +1 416 866-4315 Gorica Djeric +1 416 866-4214
UNITED STATES - Stronger economic growth in the third quarter provided some relief after the disappointing GDP results in the first half of the year. Better-than-expected consumption and business investment provided key support for the 2.5% q/q annualized headline gain. The advance would have been greater, were it not for a sharp slowdown in inventory accumulation led by motor vehicles & parts at the retail level and non-durables, particularly petroleum products, at the wholesale and manufacturing stages which subtracted just over a percentage point. The base effect offers upside potential for the fourth quarter. However, details are likely to reveal sluggish domestic demand, partly offset by continued business investment in machinery & equipment and solid foreign demand. Historically, three consecutive quarters of sub-2% growth tend to precede an economic downturn, so an above-2% advance in the third quarter serves as further evidence that a gradual recovery remains underway. The purchasing managers survey generally a robust proxy of GDP growth suggests that mid-cycle soft patches are not uncommon, and that manufacturing activity may show signs of improvement in the second half of next year, on the precondition that policy efforts can stabilize confidence over the next few months. This coincides with our projections for weaker growth through the first half of 2012, as structural and cyclical issues continue to weigh on the US economy, including the persistently high unemployment rate (9.1%), the ailing housing market and the budgetary gridlock. While the newly-announced European debt proposal represents a step toward resolving the regions financial issues providing a much-needed shot of confidence investors attention is now shifting back to the US fiscal imbalances and the super committee's ability to produce a debt-reduction agreement by its November-23 deadline.
CANADA - The Canadian economy appears to have posted a reasonably solid rebound after contracting slightly in the second quarter. Motor vehicle & parts assemblies are back on track after being sharply curtailed over the spring and summer by global supply disruptions. Energyrelated shipments too have recovered from earlier weatherand maintenance-related shutdowns. Overall, output likely expanded at close to a 2% annual rate in the third quarter. Looking ahead, the economy faces a number of headwinds, including a sluggish US recovery and intensifying sovereign debt sustainability concerns in Europe that are weighing on confidence and unnerving financial markets, and which will likely keep growth in the relative slow lane over the next several quarters. Fiscal stimulus is winding down, with public sector spending expected to act as a modest drag on growth next year. Consumers have become more reticent, especially with the pace of hiring showing some signs of slowing. Nonetheless, retailers continue to report modest sales growth, and home sales remain quite buoyant, with potential buyers taking advantage of historically low interest rates. Exports are being constrained by weak global demand, particularly from the United States, the destination of roughly 75% of Canadian international shipments, as well as by ongoing competitive challenges associated with the persistently strong Canadian dollar. Business investment should remain a bright spot. While sentiment surveys suggest businesses are becoming more cautious, tax incentives, healthy corporate balance sheets, favourable credit conditions and competitive pressures are still expected to support a solid pace of machinery & equipment spending. Prices of key commodities, while easing back from their early-year highs, remain at profitable levels and continue to attract sizeable longterm investments in the mining and oil & gas sectors.
Karen Cordes Woods +1 416 862-3080
MONETARY POLICY COMMENTARY
Derek Holt +1 416 863-7707
UNITED STATES - We continue to expect the Federal Reserve to keep the fed funds rate at 0.25% until Q3 2013, in line with the Feds loose commitment made in August. We also expect the Fed to hold off on any new unconventional policies until at least the New Year after loosely committing to keeping rates low until mid-2013 in August and extending the average maturity of the Feds holdings in September via Operation Twist. Indeed, the odds for additional quantitative easing have diminished as growth has reaccelerated while inflation levels still remain quite elevated. In addition, the current division amongst the voting FOMC members has raised the bar for further action. However, come the New Year, the shift in FOMC membership will bring four dovish Fed Presidents into voting positions with the three current hawkish dissenters moving into nonvoting positions. Having said that, should we witness an unanticipated event in Europe, we wouldnt be surprised to see the Fed step in to help ease financial market strains.
CANADA - The Bank of Canada (BoC) sounded a more dovish tune in its last rate announcement on October 25, signaling no change in monetary policy at least for the next year. Indeed, the biggest reason behind this view is the BoCs updated projections regarding its output gap which is now expected to close off later than previously anticipated at the end of 2013, after the BoC sharply lowered growth projections in both 2011 and 2012. The BoC also materially changed its inflation projection and now thinks core inflation will drop back below its 2% inflation target in Q1 2012 where it will remain through to Q4 2013. Headline inflation, on the other hand, is expected to fall to 1% in Q2 2012 before eventually returning to 2% by the end of 2013. This should keep the BoC parked at low rates but should also provide further breathing room should the BoC need to act in the wake of unanticipated events in Europe.
November 2011

EUROPE
Currency Outlook Camilla Sutton +1 416 866-5470 Eric Theoret +1 416 863-7030
EURO ZONE - EURUSD has remained volatile despite a significant recovery following the late-summer selloff. Positive developments arising from the EU leaders summit have given way to renewed concerns over Greece. As a result, sentiment remains bearish with CFTC positioning net short EUR $13.3 billion. Resistance has been seen at 1.4200, while material levels of support have yet to be found in this volatile environment. Given these recent developments our forecast calls for EURUSD to end 2011 at 1.40. UNITED KINGDOM - GBP, which had recouped nearly all of its September losses amid increased confidence in Europe, is now under pressure. Initial resistance lies at 1.6150, the 200 day moving average. Technically, momentum has slowed, suggesting that gains from these levels are likely to be difficult. Positioning has recovered from oversold levels near the summer 2010 lows, though traders remain bearish GBP with a net short US$5 billion position. We have a fourth-quarter 2011 target of 1.60. SWITZERLAND - The SNB continues to maintain its EURCHF floor at 1.20, thus limiting the potential for CHF appreciation vs the EUR. Despite this, movement has ranged between 1.20 and 1.25, with traders CFTC positions revolving near flat. Ongoing FX intervention from the SNB continues to build central bank reserves and benefits CAD. We expect EURCHF to end 2011 at 1.23, a level consistent with recent movements. SWEDEN - EURSEK remains volatile despite having retraced most of the weakness from September. EURSEK has traded within a relatively wide range in the second half of 2011, bound by 8.85 and 9.40. The elevated volatility is largely the result of SEKs role as a higher-beta currency. As such, SEK remains vulnerable to shifts in risk-appetite. We expect SEK to perform vs the EUR into year end 2011 with a EURSEK forecast of 9.00.
Currency Trends
FX Rate EURUSD GBPUSD EURCHF EURSEK 12 m 1.39 1.60 1.37 9.30 Going Back 6m 1.48 1.67 1.28 8.95 3m 1.44 1.64 1.13 9.04 Spot 2-Nov 1.38 1.60 1.22 9.08 3m 1.41 1.60 1.23 8.97 Outlook 6m 1.42 1.61 1.22 8.90 12 m 1.40 1.63 1.20 8.75 FX Rate EURUSD GBPUSD EURCHF EURSEK
EURUSD
1.68 1.46 1.64 1.41 1.60 1.36 1.56
GBPUSD
1.31
1.26 Nov-10
Jan-11 M ar-11 M ay-11
Jul-11
Se p-11 Nov-11
1.52 Nov-10
Jan-11
M ar-11 M ay-11
Jul-11
Se p-11
Nov-11
EURCHF
1.38 1.30 1.23 1.15 1.08 1.00 Nov-10 9.45 9.30 9.15 9.00 8.85 8.70 Nov-10
EURSEK
Jan-11
M ar-11 M ay-11
Jul-11
Se p-11
Nov-11
Jan-11 M ar-11 M ay-11
Jul-11
Se p-11 Nov-11
November 2011

EUROPE
Fundamental Commentary Sarah Howcroft +1 416 863-2859
EURO ZONE - The outcome of last months European Union summit, the latest in a series of plans to resolve the debt crisis, delivered on minimum expectations. The resulting statement demonstrated that the regions leaders are offering limited detail on how the underlying structure of the currency union will be strengthened. The plans main elements include: a 50% write-down on privately-held Greek debt, a recapitalization of banks requiring tier one capital ratios of 9% by mid-2012, and a strengthening of the European Financial Stability Facility (EFSF), bringing its effective capacity to EUR 1 trillion. Furthermore, the European Central Bank (ECB) will continue its liquidity injection and bond-buying programs, the latter of which has seen a total of EUR 169.5 billion in troubled sovereign debt purchased in order to contain funding pressures. Regional economic performance through 2012 will continue to be diverse. Overall, continued expansion albeit at below-average rates in the northern countries, including Germany and France, will compensate for the retrenchment of the debtdistressed peripheral states under fiscal austerity and high unemployment. We now foresee consecutive quarterly output contractions in the fourth quarter of 2011 and the first quarter of 2012 in Italy and Spain, and in the region as a whole. In this environment, and with a sharp deceleration in inflation anticipated in the coming months, the ECB will likely ease monetary conditions, reversing the interest rate hikes implemented earlier this year. SWITZERLAND - Currency conditions remain stable in Switzerland, with the Swiss National Bank (SNB) reiterating its commitment to the Swiss franc (CHF) floor of 1.20 per euro, implemented in early September. Thus far, the floor appears to be having its intended economic effects. Exports rebounded 3.4% m/m in September from a 7.0% contraction in August, more than doubling the monthly trade surplus. Meanwhile, consumer prices (non-harmonized) posted a 0.3% m/m gain in September following three consecutive months of deflation, bringing the annual rate back up to 0.5% y/y. However, some observers, including a prominent coalition of Swiss trade unions, have called on the central bank to lift the floor higher, arguing that even with the franc at 1.20, job creation and export competitiveness are still in jeopardy. Indeed, the domestic economy continues to struggle, with the manufacturing PMI and retail sales continuing to deteriorate. We expect output growth to slow from 2% in 2011 to around 1% in 2012. General elections were held on October 23rd, in which the right-wing Swiss Peoples Party once again captured the largest voter share (25%), despite losing seats to the centrist parties, including the Green Liberals and the newly-formed Conservative Democratic Party. While no notable shift in policy is envisaged, the move to the centre may portend a more EU-friendly, less isolationist Switzerland. The nation will maintain strong fundamentals through 2012, with the current account surplus above 10% of GDP and the fiscal account roughly balanced.
UNITED KINGDOM - In light of the better-than-anticipated performance of the British economy in the third quarter GDP expanded 0.5% q/q according to preliminary estimates, versus expectations for a 0.3% gain we have adjusted our growth profile for the United Kingdom through 2012. Several key indicators, including industrial production, retail sales, housing and employment, surprised on the upside in the July-September period. However, signs of payback in the fourth quarter have already become apparent. The manufacturing PMI fell below the 50-point expansioncontraction threshold again in October, after rising briefly above in September. We anticipate a contraction in output in the fourth quarter, leading to growth of 0.8% for the year. Economic activity will remain weak in the beginning of 2012 on the back of continued public and private deleveraging and a slowing in exports, before receiving a boost from the London Summer Olympics in the latter half of the year. Overall, growth in 2012 is expected to average under 1%, remaining largely dependent on the situation in the rest of Europe. In a marked shift in sentiment among monetary authorities, in October the Monetary Policy Committee of the Bank of England (BoE) voted unanimously to restart its asset-purchase program, with GBP 75 billion in additional bond purchases aimed at stimulating the faltering economy. The BoE continues to look through inflation in excess of 5% y/y, as the rate is expected to fall dramatically in the coming months, and further securities purchases may be imminent. SWEDEN - Amid substantial uncertainty abroad which is expected to result in weaker domestic growth, Swedish monetary authorities will refrain from further tightening in the near term. In response to mounting inflationary and capacity pressures the benchmark interest rate was raised by a cumulative 175 basis points from mid-2010 to July of this year. However, in light of market developments since latesummer, the Executive Board of the Riksbank has since assessed that the lower projected profiles for growth and inflation justify leaving the repo rate unchanged at 2% until sometime in 2012. While headline inflation remains elevated relative to the Riksbanks 2% target at 3.2% y/y in September largely due to increased mortgage rates, underlying inflationary pressures are low. Advances in the CPI will moderate in the coming months with expected cooling in hiring activity and energy prices. The Swedish economy is set to expand by around 4% this year before slowing to 1 % in 2012 on the back of a deterioration in exports and confidence-dependent household spending. In response to the deteriorating outlook, the Swedish government introduced US$2.4 billion in new fiscal stimulus measures in the draft 2012 budget. Notwithstanding the new stimulus, we expect public sector accounts to remain healthy over the forecast horizon. The funds will be used to support the labour market, which could fuel wage pressures in the economy, though any affect on inflation will likely be offset by slowing economic activity. 7
November 2011

ASIA/OCEANIA
Currency Outlook Camilla Sutton +1 416 866-5470 Eric Theoret +1 416 863-7030
JAPAN - Official intervention in late October highlights the vulnerability of USDJPY to sudden spikes higher. A new record low in USDJPY was what prompted authorities to act, however FX intervention tends to merely slow the established trend as oppose to reverse it. As we move into November there is some speculation that Japan might turn to a USDJPY floor, similar to Switzerland's EURCHF floor; however this does not form part of our base case. We expect USDJPY to be face ongoing bouts of intervention and hold a year-end forecast of 80. CHINA - As inflation and growth move towards a slower pace and global uncertainties remain high, the pace of CNY appreciation is expected to gradually slow. In the fourth quarter of 2011 we expect the pace of CNY appreciation to slow to 0.6%, but then expect the Chinese currency to resume on a stronger 1% quarterly appreciation pattern. Accordingly, we have revised our USDCNY forecast and now expect it to close this year at 6.32 and 2012 at 6.07. AUSTRALIA - AUD has found resistance at 1.075 for the second time in two months, while support is likely to be found at parity, where we expect AUDUSD to end 2011. While AUD benefitted from the risk rally in October and outperformed its peers gaining 9.7% vs the USD, performance has been dampened by the RBA entering a rate cutting cycle. NEW ZEALAND - Significant NZDUSD congestion near 0.80 that had been seen for most of October was broken in the post-EU summit risk rally, where NZD saw gains through 0.82 before falling back toward 0.80. Positioning in NZD has been less volatile in comparison to AUD, and has remained predominantly net long for most of 2011. We hold a year end NZDUSD forecast of 0.80.
Currency Trends
FX Rate USDJPY USDCNY AUDUSD NZDUSD 12 m 80.4 6.67 0.98 0.77 Going Back 6m 81.2 6.49 1.10 0.81 3m 76.8 6.44 1.10 0.88 Spot 2-Nov 78.1 6.36 1.04 0.79 3m 80.7 6.30 1.02 0.80 Outlook 6m 82.3 6.24 1.04 0.81 12 m 84.3 6.11 1.08 0.83 FX Rate USDJPY USDCNY AUDUSD NZDUSD
USDJPY
86.8 84.5 6.59 82.3 6.50 80.0 77.8 75.5 Nov-10 6.41 6.68
USDCNY
Jan-11 Mar-11 May-11 Jul-11
Se p-11 Nov-11
6.32 Nov-10
Jul-11
Se p-11 Nov-11
AUDUSD
1.11 1.07 1.04 1.00 0.97 0.93 Nov-10 0.89 0.85 0.81 0.77 0.73 0.69 Nov-10
NZDUSD
Jul-11
Se p-11 Nov-11
Jul-11
Sep-11 Nov-11
November 2011

ASIA/OCEANIA
Fundamental Commentary Oscar Snchez +1 416 862-3174
JAPAN - Safe heaven waves will continue to support the Japanese yen (JPY) as long as global uncertainty remains elevated. As the temporary effects of foreign exchange market intervention by the Bank of Japan (BoJ) die out, the interventionist policy tool is likely to remain in use given that JPY strength continues to be viewed as a constraining factor by Japanese manufacturers. The countrys industrial output displayed a remarkable rebound during the third quarter as it expanded at a 4% quarterly rate after an equivalent fall during previous three months. Along similar lines, after back-to-back contractions in the first and second quarters, the value of Japans exports advanced at a 9% q/q rate in the third quarter, leading to levels that now surpass the average registered in 2010, a year when the Japanese economy expanded at a stellar 3.9% y/y rate. While Japanese industrial output was affected once again due to re-emerging supply chain disruptions resulting from excessive flooding in Thailand, the effects are likely to be relatively minor and fleeting. The reconstruction effort within Japan is likely to gather momentum through the turn of the year, and we expect the economy to expand by 0.3% y/y in 2011, and 3.2% in 2012. While dependence on imported fuel, and a higher energy tally, will bring back supply-side price pressures, the BoJ will retain a loose monetary policy stance throughout the recovery, with unsterilized interventions aimed at preventing excessive JPY appreciation. AUSTRALIA - The outlook for the Australian dollar (AUD) remains well supported by record terms of trade gains as was demonstrated by its stellar rebound after the September sell-off. A return to the previous strengthening trend is anticipated on the back of persistent growth across Asia. While the Reserve Bank of Australia (RBA) now deems it possible for inflation to remain within target during 2012-13, weighing down the possibility of labour cost acceleration outside the resources sector, rising services costs remain a concern as headline inflation is still ahead of the RBAs 3% y/y target. Nevertheless, the RBA decided this week to lower the benchmark cash rate by 25 basis points on the basis of persistent global uncertainty and a more benign inflationary picture. The headline inflationary measure came down slightly to 3.5% y/y during the third quarter, with core inflation managing a fall to 2.3%. Local supply-side pressures persist, especially within the mining sector where investment spending is increasing at a strong pace. While labour market conditions in other sectors remain subdued, the countrys unemployment rate came down in September. Rising investment and cautious consumer spending support domestic demand stability, with moderate bank credit expansion and somewhat softer local asset price gains providing the background for cautious household borrowing. The economy rebounded in the second quarter from an earthquake induced contraction during the first, with a 3% average yearly gain expected for 2011-12.
CHINA - The Chinese renminbi (CNY) will strengthen at a more moderate pace from this point on as authorities grapple with the effects of slower economic growth. While monetary tightening and domestic market development remain key priorities, growth supportive policies will likely gain relevance going forward as export demand is threatened by an economic slowdown in Europe and the US. Chinas 9.1% y/y third quarter output advance marked a slowdown from the 9.7% pace of the first half of the year, as local demand shifted downwards and exports started to dwindle. While investment spending has yet to show clear signs of deceleration, a fall in household consumption is mainly explained by elevated inflation. On the external side, export growth slowed, with further near-term deceleration anticipated. While the annual inflation rate seems to have peaked at 6.5% y/y, it stands at a still elevated 6.1% level as of the latest reading. Price pressures remain a concern with the double-digit advance in food costs well ahead of a 3% y/y gain in non-food items. Retail sales have been dented by high inflation, with a rebound in consumer spending expected once stabilization at a more normal 3-4% inflationary level ensues. Bank reserve requirement increases have been the Peoples Bank of Chinas (PBoC) preferred tool to contain excess liquidity, with a relaxation of the PBoCs grip on this lever expected once inflation displays further evidence of moderation. We now expect CNY levels of 6.32 per US dollar for end-2011 and 6.07 for 2012. NEW ZEALAND - The New Zealand dollar (NZD) will pare back some of the losses brought about by the current wave of global uncertainty, with the economys underperformance likely to condition a return to early year heights. Weaker economic activity is resulting from both the domestic and external fronts. Export values slowed significantly in the third quarter, as foreign shipments to Australia, New Zealands main trading partner, failed to compensate for the fall in sales to the rest of Asia, Europe and North America. Local demand is being hurt by a slowdown in household spending and a murkier outlook for businesses. Indicators of consumer spending have displayed a contraction as weak income growth and wealth downgrades hurt purchasing power. Business confidence has taken a turn for the worse reaching levels observed only in the midst of the Christchurch earthquake that shook the country in the first quarter of 2011. Somewhat mimicking the lackluster pace of foreign demand, annual inflation came down significantly during the third quarter to 4.6% y/y, on the back of slower price gains in tradable items where NZD strength played a role. Non-tradable goods inflation displayed no change on a sequential basis, although the annual tally did come down on base effects. Overall, headline inflation remains above the Reserve Bank of New Zealands (RBNZ) 1-3% comfort zone, with the RBNZ still sanguine about rising price pressures as it continues to lean towards growth supportive policies. 9
November 2011

DEVELOPING ASIA
Currency Outlook Sacha Tihanyi +1 416 862-3154
INDIA - USDINR broke temporarily above 50.00 in October, but has been generally consolidating in the 49-50 range. After its October rate hike, the RBI essentially signaled an end to policy tightening. This will help stabilize growth sentiment, though global currents remain challenging for INR. We are targeting 47.5 for USDINR by the end of the year, however such a view is dependent on a significant reduction in market volatility in order to support the resumption of financial inflows. KOREA - KRWs massive October rebound appears to be based on very optimistic assumptions regarding global growth and financial markets conditions. We remain cautious and look for USDKRW to trade around 1,130 by the end of December. A trade below 1,100 on a sustained basis would require a shift in global growth momentum combined with financial market stability, both of which appear a ways off at the current juncture. THAILAND - The outlook in Thailand has deteriorated significantly due to the impact of flooding on the manufacturing and agriculture sectors. The central bank has cut its growth forecast, with additional downgrades possible, and opened the door to potential rate cuts should matters deteriorate. Though these factors have restrained THB performance, we believe that 30.50 by the end of the year is still achievable as net equity flows into Thailand remained supported during Octobers volatility, a constructive signal for THB. MALAYSIA - MRY remains highly subject to global financial market volatility, with the correlation between MYR and measures of negative equity market volatility (risk aversion) remaining persistent at multi-month highs. The volatility towards the end of October and beginning of November show MYRs vulnerability in both directions, however we see 3.10 as an achievable target by the end of the year for USDMYR.
Currency Trends
FX Rate USDINR USDKRW USDTHB USDMYR 12 m 44.43 1125 29.94 3.11 Going Back 6m 44.22 1072 29.88 2.96 3m 44.19 1054 29.76 2.97 Spot 2-Nov 49.19 1122 30.79 3.13 3m 47.37 1125 30.34 3.09 Outlook 6m 46.99 1110 29.85 3.07 12 m 46.25 1080 28.91 3.02 FX Rate USDINR USDKRW USDTHB USDMYR
USDINR
49.95 48.70 47.45 46.20 44.95 43.70 Nov-10 1195 1165 1135
USDKRW
1105 1075 1045 Nov-10
Jul-11
Sep-11 Nov-11
Jan-11
Mar-11 May-11
Jul-11
Se p-11
Nov-11
USDTHB
3.22 31.15 3.17 30.80 3.12 30.45 30.10 29.75 29.40 Nov-10 3.07 3.02 2.97 2.92 Nov-10
USDMYR
Jul-11
Sep-11 Nov-11
Jan-11
Mar-11 May-11
Jul-11
Se p-11
Nov-11
10
November 2011

DEVELOPING ASIA
Fundamental Commentary Oscar Snchez +1 416 862-3174
INDIA - The Indian rupee (INR) will regain some of the recent losses as interest rate and growth differentials still favour the regional giant. Inflation continues to top large Asian economies, with inflationary expectations still the main concern for the Reserve Bank of India (RBI). Within the context of some moderation in core inflation and in food price gains, the RBI decided to increase the administered reference repo rate by 25 basis points (bps), to 8.5% on October 25th. The RBI has hiked the benchmark rate 11 times since March 2010, totaling a 375 bps rise. We expect inflation to enter into a downward trend during the final quarter of 2011 on the back of falling fuel and food cost gains, with the latter supported by already encouraging prospects for the fall harvest. While no further monetary tightening is envisaged for the coming months, the economic backdrop continues to support a restrictive stance. The Indian economy has been slowing, partially as a result of persistent monetary tightening. Slower growth in consumption and investment outlays has resulted both from high inflation and tighter credit conditions. However, net exports account for some of the slowdown as well, given a deteriorating trade balance, which points to still solid domestic demand conditions. The eventual fall in inflation will lead to further gains in discretionary consumer spending, with double-digit export growth complementing an expansionary picture that has been characterized by dwindling public sector outlays. We expect Indian GDP to expand at a solid 8.1% y/y rate in 2011-12. THAILAND - The Thai baht (THB) will remain range-bound until uncertainty regarding the effects of the overextended monsoon settles. Economic activity will experience an accentuated setback, with the countrys GDP likely to decelerate significantly through the turn of the year, though decisive fiscal stimulus measures should facilitate a rebound in the first half of next year. With export values advancing at a 20% y/y average rate during the third quarter, the country had been leading the regional recovery following the supplychain disruptions that reverberated throughout Asia earlier this year. The effects of the flooding will combine with a slowdown in demand from Europe and the US, likely resulting in a subdued expansion over the coming months, and leading to a retraction in manufacturing output (which accounts for 35% of GDP). Consumer and investment spending were running alongside foreign sales, though damage to the communications infrastructure has already provoked a slowdown. We now expect Thailands GDP to grow by 3% y/y during 2011, and 3.5% in 2012. Price pressures remain intense, with core inflation still elevated at 2.9% y/y, but still within the Bank of Thailands (BoT) 0.5-3% target range. As food costs stabilize, we expect inflation to capitulate in the coming months, helped by capped increases in fuel costs and a softer commodity cost mix. In the midst of an uncertain global scenario, and given the ongoing emergency, the BoT might move towards an easing monetary policy stance in the coming quarters.
KOREA - The Korean won (KRW) will continue on a strengthening trend toward levels recorded prior to the September spate of global uncertainty, as economic activity remains solid on the back of resilient domestic demand conditions and steady export performance. Latest data on factory output showed levels near the turn-of-the-year peak, highlighting a rebound from the effect of supply-chain disruptions that resulted from the Japanese shock in March. Export volumes expanded during the third quarter as shipments to China and Japan dominated the fall in sales to the US and Europe. Import growth also remained steady mirroring resilient domestic demand conditions. The highly-open South Korean economy (exports account for 60% of GDP) is drifting sideways as output expanded at a 0.7% quarterly rate in the third quarter of 2011, a similar pace to the 0.8% gain of the previous quarter. While headline inflation is finally displaying signs of moderation on the back of more muted food price increases, it has surpassed the Bank of Koreas (BoK) 3% 1% target each month this year. Credit conditions remain steady, with household demand supported by historically low unemployment. We expect the BoK to remain on the sidelines through the turn of the year notwithstanding persistent above-target inflationary readings, with the current 3.25% benchmark administered interest rate offering the central bank some leeway in case of a slowdown in domestic conditions. MALAYSIA - The Malaysian ringgit (MYR) will regain some of the losses that resulted from continued global uncertainty, when most Asian currencies weakened in tandem. The appreciation of the MYR after the global recession remains the strongest within Southeast Asia. Malaysias industrial production regained most of the momentum lost as a result of the Japanese shock, with manufacturing (accounting for 63% of Malay industrial output) continuing to grow through August. The sector has been hard pressed in recent months as foreign sales directed towards North Atlantic economies have dwindled across Asia, with the losses somewhat compensated by the fact that the region continues to consolidate as a trading block. Relatively elevated global oil prices will also remain supportive of Malay foreign shipment values. Inflationary trends are still driven by supply factors causing an acceleration of price gains in the September reading. The pickup to 3.4% y/y in the annual headline inflation rate is underpinned by faster advances in food prices and still elevated fuel costs, as the phasing out of price controls and subsidies continues. Bank Negara Malaysia is likely to keep interest rates on hold as local transmission of lower global commodity prices leads to falling inflation through 2012. The economy advanced 4% y/ y during the second quarter, significantly less than the 7.3% gain of 2010. We anticipate growth of 6.5% during 2011, and a 5.2% advance in 2012.
11
November 2011

DEVELOPING AMERICAS
Currency Outlook Pablo F.G. Brard +1 416 862-3876
BRAZIL - Brazil continues to be a key magnet for foreign capital flows due to its attractive interest rate environment. Despite the intensifying market volatility affecting European and US assets, Brazil remains a favorite destination as it still counts on the highest short-term interest rates within the worlds top-10 largest economies. Government authorities will not hesitate to step up intervention measures to moderate Brazilian real (BRL) volatility. We expect the USDBRL rate to close the year at 1.80. MEXICO - The Mexican peso (MXN) will face strong headwinds in connection with market swings and economic developments in the United States. The Mexican economic and business outlook remains influenced by global financial market developments, US economic recovery dynamics, and capital flows in search of high yielding investment alternatives in emerging markets. We expect USDMXN to close the year at 12.93. CHILE - The Chilean peso (CLP) regained moderate strength after the sharp sell off last September. The impact of global economic deceleration on commodity prices, global risk appetite for emerging-market assets and domestic demand dynamics will be major factors shaping investor sentiment towards Chilean currency and securities markets. The CLP recovery is aligned to regional trends, yet it remains sensitive to external market developments. We expect USDCLP to close 2011 at 510. COLOMBIA - The Colombian peso (COP), supported by a robust economic environment, attractive interest rate differentials and positive terms of trade, will remain vulnerable to sudden waves of market volatility caused by policy developments in Europe and the US as well as potential corrective forces in emerging markets . We expect USDCOP to close the year at 1,890, before appreciating towards 1,850 by the end of 2012.
Currency Trends
FX Rate USDBRL USDMXN USDCLP USDCOP 12 m 1.70 12.35 489 1839 Going Back 6m 1.58 11.50 460 1767 3m 1.55 11.74 458 1778 Spot 2-Nov 1.74 13.50 502 1887 3m 1.80 12.93 509 1887 Outlook 6m 1.78 12.86 507 1877 12 m 1.76 12.68 502 1857 FX Rate USDBRL USDMXN USDCLP USDCOP
USDBRL
1.90 1.82 1.75 1.67 12.1 1.60 1.52 Nov-10 11.6 11.1 Nov-10 14.1 13.6 13.1 12.6
USDMXN
Jul-11
Sep-11 Nov-11
Jul-11
Se p-11 Nov-11
USDCLP
545 530 515 500 485 470 455 Nov-10 2045 1995 1945 1895 1845 1795 1745 Nov-10
USDCOP
Jan-11
Mar-11 May-11
Jul-11
Se p-11
Nov-11
Jul-11
Se p-11 Nov-11
12
November 2011

DEVELOPING AMERICAS
Fundamental Commentary Pablo F.G. Brard +1 416 862-3876
BRAZIL - The BRL has regained some strength following the sharp depreciation endured in September. Nevertheless, the country remains vulnerable to shifts in investor sentiment towards emerging markets, in particular, to economic and financial market developments in China. On a positive note, Chinese equity securities have regained a modest appreciating tone after six consecutive months of contraction. Declining agricultural commodity prices also compounded the negative market tone in September, although there is evidence of price consolidation during the month of October. It is worth noting that inflationary pressures remain high in Brazil: the IPCA-based headline inflation rate reached a 7.3% year-over-year rate in September, registering the sixth straight month above the established 4.5% +/- 2% inflation target. Despite higher inflation dynamics, the monetary policy committee (COPOM) lowered its reference SELIC rate by 50 basis points to 11.50% on October 19th; further easing is likely when the COPOM next meets on November 30th. The October decision hints at an increasing policy focus on reviving growth even at the expense of tolerating a higher inflation rate. We estimate that economic activity will regain strength in 2012 as the public and private sector join forces to boost investment needed to address the infrastructure deficit. In brief, Brazil is not immune to disruptive global financial and economic events, yet it will remain a market favourite amongst yield-hungry global portfolio investments. CHILE - Improving terms of trade have been a visible support to the recent performance of the CLP. Local market trends are very sensitive to global developments affecting the copper market; indeed, following a sharp decline from 450 to 300 US cents per pound in August/September, copper prices have steadily recovered to the present level of 360. The persistent use of gold as a safe-haven asset during times of intensified global financial market volatility is also a CLP supporting factor. Gold prices trading slightly above the US$1,700 per troy ounce still inject a positive tone into commodity-linked currencies such as the CLP. On the domestic economic front, deceleration dynamics at bay will slow growth rates in 2012, yet they will remain relatively strong by regional standards. We estimate that Chilean real GDP will increase by 4.8% in 2012 after 6.5% growth in 2011. Successful consolidation of price stability will encourage the monetary authorities to gradually ease monetary conditions in 2012. The central bank left the reference rate unchanged at 5.25% on October 13, mainly influenced by a sharp spike in financial market volatility in September. The rate of consumer price inflation recorded in September (3.30% y/y) remains within the 2-4% target range. The central bank is scheduled to complete its international reserves accumulation programme at the end of the year; FX reserves reached US$37.8 billion in September, marking a 43% increase over the preceding 12 months.
MEXICO - The MXN is still subject to intensifying volatility mainly triggered by exogenous factors, chiefly linked to euro zone sovereign debt sustainability. Following a steep depreciation, which sent USDMXN from 11.50 to over 14 between July and September, the Mexican peso will be trading in a relatively wide trading range (12.8-14.0) through the remainder of the year. Maintaining status quo was the policy option of choice by the monetary authorities in October. Banco de Mexico left the reference rate unchanged at 4.5% defying (some) market participants views that an easing was in store. Looking ahead, we anticipate that monetary conditions will remain unchanged through the first half of 2012 on the back relatively well-contained price pressures and persistent evidence of global economic deceleration. The progress in inflation control is highlighted by the 3.14% year over year headline rate recorded in September. In contrast with the financial headwinds originating in Europe, energy commodity prices are a supportive factor for the MXN; indeed, the light crude WTI price has been appreciating from the low level of US$75 per barrel recorded in early October, trading close to the US$90 mark at present. Another MXN supportive factor is that Mexican bonds have become an attractive carry-trade investment alternative for global fixed-income investors. Finally, election-related events will gradually gain relevance in the country/market risk equation as we approach the presidential elections scheduled for July 2012. COLOMBIA - The Colombian landscape is promising despite mounting global market volatility and economic deceleration in the advanced economies. The economy is well positioned to grow by 5% in 2012 following an estimated 6% (if not higher) expansion in 2011. Strong bank lending (averaging annual rates of 30%) is fuelling consumption and retail sales activity. Local financial institutions are taking advantage of ample liquidity conditions to boost new bond issuance in local-currency markets, providing an additional support to the COP. Colombias government debt securities, like Mexicos, offer an investment-grade highyield investment alternative. The recently signed preferential trade agreement between the US and Colombia, Panama and South Korea is a positive development for the South American nation. As a major crude oil exporter, Colombia is also benefitting from supportive energy prices and of the energy investments planned to boost growth prospects. Sustained economic performance is also aggravating price pressures, yet at 3.7% y/y in September, inflation remains manageable. Although monetary conditions remained unchanged following the October 28th monetary policy meeting, we expect the central bank to lift its administered interest rate to ensure the attainment of its inflation target in 2012. The administration of President Juan Manuel Santos continues to enjoy high popular support which, combined with a well-developed domestic capital market, is supportive of investor confidence in Colombia. 13
November 2011

DEVELOPING EUROPE/AFRICA
Currency Outlook Sarah Howcroft +1 416 863-2859
RUSSIA - The Russian ruble (RUB) lost roughly 17% against the US dollar from early August to early October, and has since corrected by slightly over 6%. Though the short-term path will likely be marked by volatility, as risk aversion recedes and capital outflows from Russia begin to decelerate, the currency should regain a gradual appreciation bias, underpinned by high oil prices and healthy external and fiscal accounts. We see USDRUB closing the year at 30. TURKEY - Persistent concern related to the nations large external imbalances, combined with ongoing volatility in investors risk preferences, will continue to weigh on the Turkish lira (TRY) toward year-end. The recent depreciation borne by TRY was less pronounced than that of some emerging market peers, largely due to US dollar selling and reserve requirement increases by the central bank in order to stabilize the currency. We anticipate a year-end TRY rate of 1.78 per USD. CZECH REPUBLIC - The Czech Republics economic fundamentals remain strong and should support a gradual appreciation of the Czech koruna (CZK) against the euro through 2012. In tandem with other emerging market currencies, however, CZK will remain subject in the near term to indiscriminate financial market pressure and volatile swings in risk appetite stemming from the euro area crisis. We expect CZK to close 2011 at 25 versus the euro. SOUTH AFRICA - As risk aversion gradually subsides the South African rand (ZAR) should regain some ground lost during the third-quarter bout of severe financial turmoil, buoyed by a favourable interest rate differential versus developed markets. Nevertheless, further near-term currency vulnerability is anticipated, with the rand continuing to mirror developments in global sentiment. We expect USDZAR to end the year around 7.4 before depreciating slightly in 2012.
Currency Trends
FX Rate USDRUB USDTRY EURCZK USDZAR 12 m 30.8 1.43 24.62 7.00 Going Back 6m 27.4 1.52 24.18 6.57 3m 27.6 1.69 24.18 6.69 Spot 2-Nov 30.6 1.78 25.13 7.99 3m 30.3 1.77 24.92 7.41 Outlook 6m 29.9 1.76 24.66 7.43 12 m 29.2 1.73 24.16 7.48 FX Rate USDRUB USDTRY EURCZK USDZAR
USDRUB
33.35 1.86 32.10 1.76 30.85 1.67 29.60 28.35 27.10 Nov-10 Jan-11 Mar-11 May-11 Jul-11 1.57 1.48 1.38 Nov-10
USDTRY
Sep-11 Nov-11
Jul-11
Sep-11 Nov-11
EURCZK
25.35 8.30 24.95 7.85 24.55
USDZAR
7.40
24.15
6.95
23.75 Nov-10
Jul-11
Sep-11 Nov-11
6.50 Nov-10
Jul-11
Sep-11 Nov-11
14
November 2011

DEVELOPING EUROPE/AFRICA
Fundamental Commentary Sarah Howcroft +1 416 863-2859
RUSSIA - Faced with easing inflationary pressures and fading economic momentum internally and abroad, the Central Bank of Russia (CBR) will likely opt for an expansionary monetary stance in the next year. According to the monetary authority, the annual pace of inflation touched a recordlow 6.9% y/y in late October, down from 7.2% y/y in September and 8.2% in August, driven down by falling prices for food and some services. Further disinflation is expected, supported by a freeze on state-controlled prices until July 2012, though the central bank notes the upside risk of passthrough effects from recent ruble depreciation. Certain domestic sectors, including household demand and investment spending, appear resilient thus far to the external developments reverberating throughout Europe, supported by modest unemployment, expanding credit and real wage growth. Nonetheless, the Russia economy will cool in line with the global slowdown over the next few quarters; we anticipate a moderation from an growth pace of near 4% this year to 3% in 2012. Investor confidence will continue to be tested by uncertainty related to political developments, including Mr. Putins commitment to needed economic reforms, liberalization and diversification. Russias public finances are sound, with the government now looking to a balanced budget in 2011 as a result of unplanned oil revenue early in the year. Official projections depict a shortfall of 1.5% of GDP in 2012, though this estimation is dependent on an optimistic oil price forecast. CZECH REPUBLIC In line with the global slowdown, and particularly given the nations export reliance on Germany, the economic outlook for the Czech Republic has weakened. After driving the nations recovery in 2010 and early 2011, net exports are now set to decelerate significantly. Fiscal consolidation will continue to drag on growth through 2012, while private domestic demand will gradually accelerate as labour market conditions improve. We now expect the Czech economy to slow in 2012, expanding by 2% on average in 2011-2012. Price pressures remain muted, as the yearly inflation rate has remained below the central banks 2% target for most of 2011. Inflation will rise temporarily above 3% on the back of a January 2012 value-added tax increase, and could remain elevated if CZK weakness intensifies. While we do not anticipate any rate moves in the near term, the path for the benchmark interest rate currently the lowest in the EU at 0.75% is largely dependent on CZK developments. The Czech Republics long-term foreign currency rating was upgraded two notches to AA- by Standard & Poors in August, and is now in line with those of China and Spain, and above Italys. The upgrade reflects the nations healthy public finances and banking sector, and the governments commitment to fiscal reform. Although the administration may just miss its fiscal deficit target of 4.2% of GDP for 2011 (down from 4.7% in 2010), the shortfall will continue to narrow over the medium term while the public debt will likely remain below 45% of GDP.
TURKEY - In addition to the tragic loss of human life, the 7.2-magnitude earthquake that struck eastern Turkey on October 23rd will also have an impact on the nations growth profile. Compared to the Izmit earthquake of 1999, which hit the nations densely-populated and industry-intensive region near Istanbul and generated a recession, the direct economic effects of this disaster, centred in one of the poorest regions of the country, are like to be smaller. Prior to the recent catastrophe, domestic demand in Turkey had already begun to show signs of deceleration in line with global developments. The annual pace of industrial production growth slowed from 6.9% in August to 3.8% y/y in September, down considerably from the double-digit gains of early 2011. Imports have also moderated, suggesting that households will become more cautious spenders as authorities attempt to restrain credit expansion and lower the current account deficit (which narrowed to US$4 billion in August, its lowest level since October 2010). We expect output growth to slow from almost 7% in 2011 to around 4% next year. Turkeys central bank estimates that yearly inflation currently at 6.2% y/y will accelerate over the coming months on the back of lira depreciation, a rebound in food price gains, and increases in taxes and administered prices. In response, the Monetary Policy Committee has widened the band for the overnight lending rate, aiming to restrict lira liquidity and tame inflation while leaving the benchmark policy rate unchanged at a record-low level of 5.75%. SOUTH AFRICA - Available indicators point to a further softening in the South African economy in the third quarter. However, the nations expanding trade relationship with China its leading trade partner since 2009 should partially offset the impact of the developed-world slowdown next year. Manufacturing output contracted in July for the first time since late-2009 and performance in the mining sector has also recently disappointed, with both industries being tested by widespread strikes. Unemployment in the range of 25% and low levels of borrowing will continue to restrain household spending, limiting GDP growth to 3% this year. We anticipate a subsequent output acceleration to 3.5% in 2012, underpinned by monetary and fiscal stimuli and improvements in domestic demand, particularly private investment. As imports continue to outpace exports, the current account deficit will widen from 2.8% of GDP in 2010 to close to 5% in 2012, notwithstanding a slight a competitive boost to exports afforded by recent rand weakness. Year-to-date the ZAR has lost roughly 15% versus the US dollar, contributing to accelerating price pressures. Headline inflation is expected to reach the upper bound of the central banks 3-6% target range before year-end and to continue to climb before moderating in the second half of 2012. While economic uncertainty is likely to preclude any monetary policy tightening by the South African Reserve Bank in the near term, we expect the central bank to initiate a gradual process of rate normalization by mid-2012. 15
November 2011
GLOBAL CURRENCY FORECAST (end of period)

2009 2010 2011f 2012f Q1a 2011f Q2a Q3a Q4 Q1 2012f Q2 Q3 Q4
MAJOR CURRENCIES
Japan Euro zone UK Switzerland
USDJPY EURUSD EURJPY GBPUSD EURGBP USDCHF EURCHF 93 1.43 133 1.62 0.89 1.04 1.48 81 1.34 109 1.56 0.86 0.93 1.25 80 1.40 112 1.60 0.88 0.88 1.23 85 1.40 119 1.64 0.85 0.86 1.20 83 1.42 118 1.60 0.88 0.92 1.30 81 1.45 117 1.61 0.90 0.84 1.22 77 1.34 103 1.56 0.86 0.91 1.22 80 1.40 112 1.60 0.88 0.88 1.23 82 1.42 116 1.61 0.88 0.86 1.22 83 1.42 118 1.62 0.88 0.86 1.22 84 1.40 118 1.63 0.86 0.86 1.20 85 1.40 119 1.64 0.85 0.86 1.20
AMERICAS Canada North

Mexico Argentina Brazil South Chile Colombia Peru Venezuela
USDCAD CADUSD USDMXN CADMXN USDARS USDBRL USDCLP USDCOP USDPEN USDVEB
1.05 0.95 13.1 12.4 3.80 1.74 507 2044 2.89 2.15
1.00 1.00 12.3 12.4 3.98 1.66 468 1908 2.81 4.29
1.02 0.99 12.9 12.7 4.50 1.80 510 1890 2.68 4.30
0.98 1.02 12.7 13.0 5.50 1.75 500 1850 2.63 5.15
0.97 1.03 11.9 12.3 4.05 1.63 477 1871 2.80 4.29
0.96 1.04 11.7 12.2 4.11 1.56 467 1771 2.75 4.29
1.05 0.95 13.9 13.2 4.20 1.88 520 1932 2.79 4.29
1.02 0.99 12.9 12.7 4.50 1.80 510 1890 2.68 4.30
1.00 1.00 12.9 12.9 4.73 1.79 507 1880 2.67 4.50
0.99 1.01 12.7 12.8 4.97 1.77 505 1870 2.65 4.70
0.98 1.02 12.7 12.9 5.23 1.76 502 1860 2.64 4.92
0.98 1.02 12.7 13.0 5.50 1.75 500 1850 2.63 5.15
ASIA / OCEANIA
Australia China Hong Kong India Indonesia 1/ Malaysia Philippines Singapore South Korea Thailand Taiwan
AUDUSD USDCNY USDHKD USDINR USDIDR USDMYR 0.90 6.83 7.75 46.5 9.40 3.43 0.72 46.2 1.40 1164 33.4 32.0 1.02 6.61 7.77 44.7 9.00 3.06 0.78 43.8 1.28 1126 30.1 29.3 1.00 6.32 7.75 47.5 8.75 3.10 0.80 43.5 1.26 1130 30.5 30.0 1.08 6.07 7.75 46.0 8.50 3.00 0.84 41.5 1.22 1070 28.6 29.0 1.03 6.55 7.78 44.6 8.71 3.03 0.76 43.4 1.26 1097 30.3 29.4 1.07 6.46 7.78 44.7 8.58 3.02 0.83 43.4 1.23 1068 30.7 28.7 0.97 6.38 7.79 49.0 8.95 3.19 0.76 43.8 1.31 1178 31.2 30.5 1.00 6.32 7.75 47.5 8.75 3.10 0.80 43.5 1.26 1130 30.5 30.0 1.02 6.26 7.75 47.1 8.69 3.07 0.81 43.0 1.25 1115 30.0 29.7 1.04 6.19 7.75 46.7 8.62 3.05 0.82 42.5 1.24 1100 29.5 29.5 1.06 6.13 7.75 46.4 8.56 3.02 0.83 42.0 1.23 1085 29.1 29.2 1.08 6.07 7.75 46.0 8.50 3.00 0.84 41.5 1.22 1070 28.6 29.0
New Zealand NZDUSD

USDPHP USDSGD USDKRW USDTHB USDTWD
EUROPE / AFRICA
Czech Rep. Iceland Hungary Norway Poland Russia South Africa Sweden Turkey
EURCZK USDISK EURHUF USDNOK EURPLN USDRUB USDZAR EURSEK USDTRY 26.4 126 270 5.79 4.10 30.0 7.40 10.25 1.50 25.0 115 279 5.82 3.96 30.5 6.63 8.99 1.54 25.0 116 285 5.60 4.15 30.4 7.40 9.00 1.78 24.0 110 275 5.30 4.00 29.0 7.50 8.70 1.72 24.5 114 266 5.54 4.02 28.4 6.77 8.95 1.55 24.3 114 266 5.39 3.98 27.9 6.77 9.18 1.62 24.7 118 293 5.87 4.42 32.2 8.10 9.20 1.86 25.0 116 285 5.60 4.15 30.4 7.40 9.00 1.78 24.7 114 282 5.53 4.11 30.0 7.42 8.92 1.76 24.5 113 280 5.45 4.07 29.7 7.45 8.85 1.75 24.2 111 277 5.38 4.04 29.3 7.47 8.77 1.73 24.0 110 275 5.30 4.00 29.0 7.50 8.70 1.72
f: forecast; 1/ in thousands
16
November 2011
INTERNATIONAL RESEARCH GROUP

Pablo F.G. Brard, Head pablo_breard@scotiacapital.com Daniela Blancas daniela_blancas@scotiacapital.com Sarah Howcroft sarah_howcroft@scotiacapital.com Estela Ramrez estela_ramirez@scotiacapital.com Oscar Snchez oscar_sanchez@scotiacapital.com
CANADIAN & U.S. ECONOMIC RESEARCH

Karen Cordes Woods karen_woods@scotiacapital.com Gorica Djeric gorica_djeric@scotiacapital.com Derek Holt derek_holt@scotiacapital.com Adrienne Warren adrienne_warren@scotiacapital.com
FOREIGN EXCHANGE STRATEGY

Eduardo Surez eduardo_suarez@scotiacapital.com Camilla Sutton
camilla_sutton@scotiacapital.com
Eric Theoret eric_theoret@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.

Foreign Exchange: Outlook

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