Global Economic Research                                                                                                  ...
Global Economic Research                                                                                          Septembe...
Global Economic Research                                                                                     September 201...
Global Economic Research                                                                                                  ...
Global Economic Research                                                                                        September ...
Global Economic Research                                                                                                  ...
Global Economic Research                                                                                       September 2...
Global Economic Research                                                                                                  ...
Global Economic Research                                                                                        September ...
Global Economic Research                                                                                               Sep...
Global Economic Research                                                                                           Septemb...
Global Economic Research                                                                                                  ...
Global Economic Research                                                                                       September 2...
Global Economic Research                                                                                                  ...
Global Economic Research                                                                                         September...
Forex outlook-scotia bank
Forex outlook-scotia bank
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Forex outlook-scotia bank

  1. 1. Global Economic Research September 2012 Foreign Exchange OutlookCollective stimulus and liquidity injections by major centralbanks, decelerating growth in emerging-market economies,speculative moves in selected commodities and persistentEurope-centred financial stress currently dominate investorsentiment in foreign exchange markets.The USD offers a modest appreciating bias versus the EUR andJPY. Commodity-linked AUD and CAD will benefit from AAA-rating status and attractive yield differentials. The MXN remains aregional favourite whereas the BRL is in stable trading mode.The EUR will remain weak against all major currencies. The CHFvalue will be anchored versus the EUR by policy and the GBPoutlook is bright. The RUB and TRY remain vulnerable to risk-aversion and oil price shifts.The JPY offers limited upside potential. The CNY will regain astrengthening tone on the back of decisive policy action, injectinga favourable tone into Asian floating currencies such as KRW,THB and MYR. The INR retains a weak outlook. 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
  2. 2. Global Economic Research September 2012 Foreign Exchange Outlook Global Foreign Exchange Outlook August 30, 2012 Actual Q1a 12 Q2a 12 Q3 12 Q4 12 Q1 13 Q2 13 Q3 13 Q4 13 EURUSD 1.25 1.33 1.27 1.21 1.23 1.22 1.22 1.21 1.21 Euro Consensus* 1.23 1.23 1.23 1.23 1.23 1.24 USDJPY 78.6 83 80 78 80 84 85 86 87 Yen Consensus* 79 79 80 81 82 83 GBPUSD 1.58 1.60 1.57 1.55 1.59 1.62 1.63 1.64 1.64 Sterling Consensus* 1.56 1.55 1.55 1.55 1.56 1.57 USDCAD 0.99 1.00 1.02 1.02 0.99 0.98 0.97 0.97 0.97 Canadian Dollar Consensus* 1.03 1.01 1.01 1.00 1.00 0.99 AUDUSD 1.03 1.03 1.02 1.02 1.02 1.04 1.04 1.05 1.05 Australian Dollar Consensus* 1.01 1.01 1.00 1.00 1.00 1.00 USDMXN 13.39 12.81 13.36 13.28 13.12 13.20 13.08 13.17 13.38 Mexican Peso Consensus* 13.31 13.13 13.10 13.06 13.04 13.04 Spot Price vs. 100 Day Moving Average vs. 200 Day Moving Average - (5yr Trend) EURUSD USDJPY EUR/ USD US D/ JPY 1.62 123 100 Day 100 Day 200 Day 116 200 Day 1.52 109 1.42 102 1.32 95 88 1.22 81 1.12 74 GBPUSD USDCAD US D/ CAD 2.11 GBP/ USD 100 Day 1.30 100 Day 1.96 200 Day 200 Day 1.22 1.81 1.14 1.66 1.06 1.51 0.98 1.36 0.90 AUDUSD USDMXN 1.12 US D/ MXN 15.2 1.04 100 Day 200 Day 0.97 14.1 0.89 13.0 0.82 AUD/ USD 11.9 0.74 100 Day 10.8 0.67 200 Day 0.59 9.7 (*) Source: Consensus Economics Inc. August 2012 2
  3. 3. Global Economic Research September 2012 Foreign Exchange Outlook MARKET TONE & FUNDAMENTAL FOCUSPablo F.G. Bréard + 1 416 862-3876 Camilla Sutton +1 416 866-5470Central bank intervention, growth stimulus in China and ripheral economies, coupled with the governance chal-Brazil, persistently strong European financial market lenges facing German and French leaders, should keepstress, speculative trading dynamics in commodity mar- the euro (EUR) on the defensive for a prolonged period.kets and uneven directional shifts in emerging-market The growing uncertainty about the future shape of theassets are some of the primary factors swaying capital European currency union has triggered another round offlows in foreign exchange markets. credit rating revisions last month: Moody’s downgraded the rating outlook of Germany, the Netherlands and Lux-The US dollar (USD) has been under pressure following embourg to “negative”. This bearish outlook for EUR isthree consecutive months of gains versus other major tempered by the negative USD fundamentals notedcurrencies, with the exception of the Japanese yen (JPY). above. Meanwhile, the Swiss authorities remain commit-The US economy continues to struggle to address pro- ted to defending the policy-mandated ceiling of 1.20longed weakness in employment conditions, despite timid francs (CHF) per EUR as a means of defending the coun-improvement in leading job-market indicators over the try’s export sector against damaging currency apprecia-past few months. Recent data on jobless claims and still- tion. The outlook for the other European currencies ishigh unemployment levels indicate a relatively fragile out- brighter; however the recent strength in the Swedish kro-look for consumption activity. The USD may be on the na (SEK) seems to have overshot. The bullish outlook fordefensive as monetary authorities remain committed to the British pound (GBP) is temporarily damped as the UKmaintaining a near-zero short-term interest rate environ- struggles to meet its austerity plan and to address thement and to its large-scale asset (US Treasury and Mort- economic contraction. The Bank of England maintainsgage-based securities) purchase program aimed at de- aggressive policy as the UK finds itself highly exposed topressing long-term funding costs for both the government the European crisis; however, on a relative basis the GBPand mortgage borrowers. Currency markets will be im- should fare better than EUR and rally against the USD inpacted materially by the mid-September Federal Reserve 2013.decision on further asset purchases (so-called QE3). TheUS fiscal outlook is complicated by the November elec- The Japanese yen (JPY) continues to be treated as ation; however, market participants will demand clarity on preferred safe-haven asset in times of global financialkey government policies before year-end. market stress. Against the euro, the JPY has been by far the world’s best-performing currency over the past fiveThe other NAFTA zone currencies, the Canadian dollar years. The slight devaluation of the Chinese renminbi(CAD) and the Mexican peso (MXN) have been immersed (CNY) versus the USD this year has complicated JPYin a strengthening phase, supported by higher commodity dynamics. However, the fundamental outlook for JPY isprices, relatively better financial sector strength and, to an negative, as aggressive monetary policy, an anticipatedextent, interest rate differentials. Credit differentiation dy- deceleration in growth and demographics weigh on thenamics continue to drive capital flows to assets issued by currency. The CNY is enjoying a gradual revaluationthe best-rated sovereign borrowers. Following the recent (versus the USD) following three months of depreciation.downward revision to a “negative” outlook for Germany, Persistent correction in equity markets and a slowdown inCanada and Australia are the only major sovereign cred- both the manufacturing and export sectors were key fac-its with a triple-A rating and a “stable” outlook. In brief, tors weighing on the CNY. The CNY should appreciateThe Canadian dollar (CAD) appears comfortable close to only modestly from its 2011 year-end levels as the funda-parity and, though it should appreciate over time, we do mental side has shifted and government policy also ap-not expect it to move dramatically away from parity. The pears to be in transition. The Indian rupee (INR) is enjoy-combination of the Bank of Canada’s hawkish tone, a tri- ing a stabilization phase following a period of acute cur-ple-A rating, a large resource base and investor sentiment rency weakness; the INR lost 17% against the USD overis supportive of a relatively strong CAD. The MXN is also the past 12 months. The underlying causes of such soft-receiving the benefits of the post-election premium and ness remain in place. Australia’s enviable sovereign creditconsolidating its position as a high-yield North American position, interest rate differentials and strong foreign de-option. Meanwhile, the Brazilian real (BRL) remains within mand for high-yield currencies drove up the value of Aus-its spring and summer range, with a slight bias towards tralian dollar (AUD) during the spring and early summer.further weakness. However, loosening monetary policy, AUD’s high beta status and fears concerning the end of its mining boomThe European economic landscape remains in a constant weigh heavily on what would otherwise be a bullish out-state of convulsion. Despite a temporary relief in the sell- look.off spree, the underlying structural weakness of the pe- 3
  4. 4. Global Economic Research September 2012 Foreign Exchange OutlookCANADA Camilla Sutton +1 416 866-5470 Eric Theoret +1 416 863-7030CAD has traded in a relatively narrow 647 point spread in 2012, with the currency comfortable close to parity. We expectthe fall to prove more volatile but that it closes both this year and next above parity. The global themes that have impact-ed currency markets this year are: 1) the outlook for global growth; 2) the European crisis and 3) the central bankingresponse. These, as well as domestic factors, are the same major themes that are likely to drive CAD’s valuation intoyear-end. The deterioration that took place in the global growth outlook early in the summer has stabilized in the majoreconomies of China and the US. We expect China to engineer a soft landing, which will help to support global growth,commodity prices and pro-cyclical currencies like CAD. With regards to Europe, we expect the process to be long anddifficult but do not foresee a collapse in the EMU or EUR. Accordingly, the impact on CAD is most likely through recur-ring spikes in risk aversion, which causes periods of temporary USD strength. Finally, with regards to global centralbanks, their commitment to do whatever it takes has decreased tail risk and crushed volatility; both are encouraging de-velopments for CAD traders. On the Canadian side, the fundamental story is mixed. The Bank of Canada (BoC) standsout as the most hawkish of the DM central banks even as the domestic economy has recently softened as it relies heavi-ly on the US and commodity prices. On the flow side, Canada is an increasingly rare combination with a solid triple-Arating and a developed bond market, which has sparked international investor interest and driven the net long CAD posi-tion higher and higher. Oil prices have rallied off their lows and Scotiabank forecasts that they will average US$95 in2012 and $100 in 2013. However it is not just the level, but also the spread between where Canada exports and importsthat is also important and this is expected to narrow; providing support for the Canadian economy and CAD. Finally theoutlook for the USD is weak. The combination of the US fiscal cliff, a challenging political framework and loose Fed poli-cy creates an environment where the USD should weaken, outside of temporary spikes in risk aversion. The largestrisks to our view are a further deterioration in global growth or a spike in risk aversion. Our year end targets are: 1.01 in2012 and 1.03 in 2013, reflecting a strengthening CAD. C urrency T rends G o in g B a c k Spot O u tlo o k F X R a te F X R a te 12 m 6 m 3 m 30-A ug 3 m 6 m 12 mA UD C A D 1 .0 5 1 .0 6 1 .0 1 1 .0 2 2 1 .0 2 1 .0 2 1 .0 2 A UD C A DCADJPY 7 8 .7 5 8 1 .9 7 7 4 .9 4 7 9 .1 7 7 9 .3 2 8 1 .2 8 8 3 .1 0 CADJPYE URC A D 1 .3 9 1 .3 2 1 .2 9 1 .2 4 1 1 .2 2 1 .2 0 1 .1 8 E URC A DUS D C A D 0 .9 8 0 .9 9 1 .0 4 0 .9 9 2 1 .0 0 0 .9 8 0 .9 7 US D C A D AU D C AD C AD J P Y 1.07 8 4 .0 1.05 8 1 .0 1.03 7 8 .0 1.01 7 5 .0 0.99 7 2 .0 A u g -1 1 O c t- 1 1 D ec-11 F e b -1 2 A p r -1 2 J u n -1 2 A u g -1 2 A u g -1 1 O c t- 1 1 D ec-11 F e b -1 2 A p r -1 2 J u n -1 2 A u g -1 2 E U R C AD U S D C AD 1.0 6 1.42 1.39 1.0 4 1.36 1.0 2 1.33 1.30 1.0 0 1.27 0.9 8 1.24 1.21 0.9 6 A u g -1 1 O c t- 1 1 D ec-11 F e b -1 2 A p r -1 2 J u n -1 2 A u g -1 2 A u g -1 1 O c t- 1 1 D ec-11 F e b -1 2 A p r -1 2 J u n -1 2 A u g -1 2 4
  5. 5. Global Economic Research September 2012 Foreign Exchange OutlookCANADA AND UNITED STATESFundamental Commentary Devin Kinasz +1 416 866-4214UNITED STATES - The economic deceleration in the Unit- CANADA - Data continue to confirm slower Canadianed States seems to be moderating in Q3, but the data re- growth in Q2, with output expected to have increased bymain mixed. Industrial Production was up 8% annualized in only about 1.5% annualized. July employment data sug-July, led by motor vehicles & parts production, as well as gest that economic weakness could linger into the seconddefense & space equipment, materials and consumer half of the year as the global environment remains weakgoods production. Several measures of the housing sector and domestic demand moderates. In July, the labour mar-– including prices, new and existing home sales, and build- ket lost 30,000 jobs – across a variety of sectors includinging permits – have been slowly trending upwards. Residen- natural resources, manufacturing, transportation and publictial investment will contribute positively to GDP in 2012 for administration – and the unemployment rate rose to 7.3%.the first time since 2005, although housing activity remains Retail sales were down by 0.4% in June, likely influencedwell below pre-crisis levels. In July employment data by increased duty-free limits which encouraged cross-showed that 163,000 new jobs were created, which is a border shopping. Retail sales contracted by 2% in Q2, assignificant improvement on the Q2 monthly average of consumer cautiousness takes hold because of labour mar-73,000 jobs. However, July’s rate of increase is still insuffi- ket softening, high household debt levels and the coolingcient to lower the unemployment rate, which actually ticked housing market. Housing starts have flattened, though re--up to 8.3% as discouraged workers returned to the job main above longer-term averages, and prices have begunmarket. The weak labour market, slow consumer credit to soften (down 2.2% y/y in July); however, there is consid-growth and low confidence levels continue to restrain erable regional variation. Manufacturing shipments werehousehold consumption, hampering a more robust recov- down by 0.4% m/m in June, on par with average declinesery. The Conference Board consumer confidence index registered in the first half of 2012. Manufacturing data havewas down sharply in August. Furthermore, rising food and been soft across a variety of sub-sectors, though the autogasoline prices will put a dent in consumer discretionary industry continues to perform well, both in production andspending, at a time when business investment is also de- sales. The weakness has been more pronounced in non-celerating. Total orders for durable goods, after stripping durable goods, with the manufacturing of durable goodsout military and aviation, confirms that demand for ‘core’ performing better alluding to robust business investment oncapital goods continues to decline. Trade data also demon- the back of strong corporate balance sheets. The tradestrate weak demand for imported industrial supplies and deficit widened in June to an annualized C$21.7 billion ascapital goods. Second quarter GDP figures show the low- imports continued to grow, while exports remained flat af-est level of business investment since the beginning of fected by the ongoing euro zone crisis which has negative-2011, confirming that firms are delaying hiring and outlays ly impacted global trade. The slowdown in business invest-because of the uncertainty surrounding the ‘fiscal cliff’, and ment in the US, due to the approaching ‘fiscal cliff’, will alsopotential spending cuts and tax increases. Moreover, event affect the Canadian economy at a time when domestic fac-risk in September is high because of several key develop- tors such as the housing market and consumption are sof-ments in the European debt crisis, which is further clouding tening. Canada should benefit from the rising price of oilthe US outlook and depressing worldwide trade. and agricultural products, but without further pipeline export capacity, deep discounting of Canadian crude will continue as production increases.MONETARY POLICY COMMENTARY Derek Holt +1 416 863-7707 Dov Zigler +1 416 862-3080UNITED STATES - Scotiabank continues to expect that the CANADA - Scotiabank anticipates that the Bank of CanadaFederal Reserve (Fed) will undertake quantitative easing (BoC) will remain on hold through our 2013 economic fore-during H2 2012 with high odds that it will commence its cast horizon and into 2014. Our forecast is based on ourpurchasing program at its September 13 meeting. We ex- view that spare capacity in the Canadian economy will in-pect further easing to come in the form of open-ended roll- crease in the coming quarters as actual growth under-ing purchases of a mix of treasury securities and MBS. The performs potential growth in no small part due to cool ex-Fed’s rationale for undertaking further quantitative easing is ports and expected softness in housing and consumerslow economic growth (2% q/q in Q1, 1.7% q/q in Q2) and spending. Subdued inflation (CPI came in at 1.3% y/y instubbornly high unemployment (8.3% in July, 8.3% in Janu- July) and slow GDP growth (Scotia forecasts 1.4% q/qary). Minutes from the August 1 FOMC meeting said that growth in Q2) are further signs of slack in the economy.“Many members judged that additional monetary accom- Combined with the likelihood that US monetary policy willmodation would likely be warranted fairly soon unless in- remain accommodative through our forecast horizon, theycoming information pointed to a substantial and sustainable round out our rationale for anticipating that the BoC will notstrengthening in the pace of the economic recovery” – we hike rates. We do not expect rate cuts absent a global li-do not see any change in the economic data that would quidity and funding crisis (neither Scotia’s base case norreverse that view. the BoC’s). 5
  6. 6. Global Economic Research September 2012 Foreign Exchange OutlookEUROPE Camilla Sutton +1 416 866-5470Currency Outlook Eric Theoret +1 416 863-7030EURO ZONE - Event risk in the Eurozone looms and has skewed the risk return profile of EUR. Sentiment has improvedbut remains bearish with both risk reversals and CFTC positioning suggesting there has been significant short covering.Historically, September has proven the most volatile month of the year, averaging an absolute return of 4%. Fundamen-tally, the outlook is weak; however it is also a challenge to build in a sustainably stronger USD profile. Accordingly, wedo not expect EUR to collapse, but instead for it to trend lower, closing year-end at 1.23.UNITED KINGDOM - The domestic fundamentals continue to deteriorate as the UK struggles to meet its austerity plan,growth falters and the Bank of England turns to increasingly aggressive policy. The economy is exposed and vulnerableto the European crisis. To date, GBP has been supported by its triple-A rating, which could come under threat. Technicalssuggest GBP is ranging, while the option market has positioned itself increasingly for GBP upside. Sentiment has im-proved, but the net position is only modestly long. We hold a Q412 forecast of 1.59.SWITZERLAND - The Swiss National Bank has intervened heavily in order to enforce its 1.20 EURCHF floor. FX re-serves are growing, should the current pace continue, they will be larger than the Swiss economy by year-end; a rareand politically sensitive development. We expect authorities to maintain the floor until there are signs of inflationary pres-sures. Accordingly, we hold a Q312 target of 1.20.SWEDEN - On a year-to-date basis, SEK is the strongest performing DM currency, having rallied 3.3% against the USDand 6.6% against EUR. The country’s triple-A rating and relative fundamentals have supported the currency, even as themarket is pricing in 50bpts points of central bank easing over the next year. We expect EURSEK’s appreciating trend tomoderate, targeting a Q412 rate of 8.45. C u rrency T ren ds G o in g B a c k S pot O u tlo o k F X Ra te F X Ra te 12 m 6 m 3 m 30-A ug 3 m 6 m 12 mE U RUS D 1 .4 3 1 .3 3 1 .2 4 1 .2 5 1 .2 2 1 .2 2 1 .2 1 E U RUS DGB P US D 1 .6 2 1 .5 9 1 .5 4 1 .5 8 1 .5 8 1 .6 1 1 .6 4 GB P US DE U RC HF 1 .1 3 1 .2 1 1 .2 0 1 .2 0 1 .2 0 1 .2 5 1 .2 5 E U RC HFE U RS E K 9 .1 5 8 .8 2 9 .0 1 8 .3 7 8 .4 7 8 .4 5 8 .4 0 E U RS E K EURUSD G BPUSD GB P US D 1.45 1.6 3 1.40 1.6 1 1.35 1.5 8 1.30 1.5 6 1.25 1.20 1.5 3 A u g -1 1 O c t- 1 1 D ec- 11 F e b -1 2 A p r -1 2 J u n -1 2 A u g -1 2 A u g -1 1 O c t- 1 1 D ec-11 F e b -1 2 A p r -1 2 J u n -1 2 A u g -1 2 EURCHF EURSEK 9.60 1.2 8 9.35 1.2 3 9.10 8.85 1.1 8 8.60 1.1 3 8.35 1.0 8 8.10 A u g -1 1 O c t- 1 1 D ec-11 F e b -1 2 A p r -1 2 J u n -1 2 A u g -1 2 A u g -1 1 O c t- 1 1 D ec-11 F e b -1 2 A p r -1 2 J u n -1 2 A u g -1 2 6
  7. 7. Global Economic Research September 2012 Foreign Exchange OutlookEUROPEFundamental Commentary Sarah Howcroft +1 416 863-2859EURO ZONE - September is loaded with European event UNITED KINGDOM - Despite nagging concerns on the fis-risk which may affect both the euro and the growth outlook, cal, economic, and inflation fronts, the pound sterlingincluding the likely announcement of details regarding Euro- strengthened through August as markets were buoyed bypean Central Bank (ECB) bond purchases, a German Con- expectations of imminent action by global central banks.stitutional Court ruling on the European Stability Mechanism Notwithstanding the mild upward revision to the second-(ESM), Dutch elections and, possibly, a report on Greece quarter GDP estimate at the second reading (to -0.5% q/qfrom the Troika. In light of the considerable remaining un- from -0.7%) and the anticipated boost from a successfulcertainties in the region, the somewhat better-than- Olympic games, the fundamental growth story in the UKexpected performance of the euro area economy in the first remains weak. The PMIs drifted lower again in July, with thehalf of 2012 (driven mainly by Germany and France) is ex- manufacturing and services indexes reaching their lowestpected to be offset by a more protracted slump through mid- levels since May 2009 and December 2010, respectively.2013. We maintain our expectation for a output decline of The nation’s public finances have also deteriorated; four0.7% in 2012, though we now anticipate growth of just 0.2% months into this fiscal year, government borrowing is GBPin 2013. Sub-50 PMIs continue to portray contractionary 9.3 billion higher than the same period last year, on track toconditions across the region, as fiscal austerity bites deeper exceed the official full-year target by a notable margin. Within the periphery and unemployment climbs higher. Expecta- the nation’s triple-A credit rating under close scrutiny, au-tions are mounting for additional bailout requirements, thorities are now under pressure to either tighten spending,which would weigh on the ratings of the remaining triple-A or loosen the fiscal plan so as to support growth, and in-credits and the ESM. The ECB will resume purchases of crease borrowing even further. Meanwhile, rising food anddistressed government securities, likely complemented by a energy costs have revived near-term inflationary concerns.quarter-point reduction in the policy rate before year-end, in The chances for additional policy easing by the Bank oforder to facilitate the process of debt refinancing and to im- England have receded, though we consider the door stillprove the functioning of interbank markets. Inflationary open for expanded asset purchases. In stark contrast to thepressures have returned in the form of higher food and oil headline GDP data, the labour market appears remarkablyprices, and we have accordingly lifted our year-end inflation resilient. In the three months to June, 201,000 jobs wereforecast to 1.9% y/y. Ultimately, we do not anticipate that added, the most in two years. This trend should continue inthis development will dissuade the ECB from easing policy. July given the 5,900 drop in jobless claims that month.SWITZERLAND – Swiss authorities maintain a firm commit- SWEDEN – The Swedish krona maintains a strong safe-ment to the exchange rate floor, which is now approaching haven position, backed by a resilient economy, healthyits first anniversary, and which the market views as credible. public finances, a stable triple-A credit rating and a largeDeflation remains a prime concern for the Swiss National current account surplus. The economy posted an impres-Bank (SNB); the headline price index dropped 0.7% y/y in sive 1.4% q/q gain (seasonally adjusted) in the secondJuly, marking the tenth straight decline, albeit at the slowest quarter, following the 0.8% expansion of the first quarter,pace since December. The SNB also continues to monitor bringing the average annual growth pace to 1.9% for thethe domestic property market which, although still flourish- first half of the year. As evidenced by the moderation ining, has recently shown signs of moderation. The UBS Real private consumption and investment in the second-quarterEstate Bubble index eased slightly in the second quarter, GDP report, the hitherto resilient domestic side of the econ-backing off from the 10-year high registered in the prior omy is beginning to suffer the knock-on confidence effectsquarter, while the SNB’s single family home price index of the European crisis. Meanwhile, the external sector re-posted a 0.5% q/q contraction in the same period, its first mains supportive of growth (partly because Sweden’s topquarterly drop in five years. These developments supported trading partners are those in northern Europe which contin-the SNB’s recent decision to shelve a proposal for capital ue to grow, albeit slowly). Nevertheless, the boost from netbuffers on banks’ mortgage books. With the central bank exports will likely fade as export competitiveness is erodedcontinuing to intervene in foreign exchange markets in de- by persistent krona strength (the currency reached a near-fense of the EURCHF floor, international reserves have sky- 12-year high vis-à-vis the euro on August 10th), limitingrocketed, reaching a record CHF 406.5 billion in July. As a growth in 2012 overall to slightly under 1%. At the last poli-share of GDP, forex reserves now measure 68%, up from cy-setting meeting of the Riksbank in July, the Executive9% prior to the global recession (and higher than the shares Board voted by a majority to leave the benchmark repo rateof China and Japan, the largest reserve holders). Neverthe- unchanged at 1.50%. Though the central bank sees down-less, the SNB Chairman has asserted that there is no limit side risks to inflation (currently well below target at 0.7% y/to the amount of reserves the bank can buy. The economy y) from persistent uncertainties in the euro zone and kronacontinues to hold up relatively well. The KOF Leading Indi- strength, lingering concerns related to high household debt,cator posted a 12-month high in August and the trade sur- an overvalued property market and domestic financial sec-plus touched its highest level since last May in July. tor risks may preclude any further monetary easing. 7
  8. 8. Global Economic Research September 2012 Foreign Exchange OutlookASIA/OCEANIA Camilla Sutton +1 416 866-5470Currency Outlook Eric Theoret +1 416 863-7030JAPAN - From a currency perspective, the Japanese fundamentals are notably weak, and marked by a disappointinggrowth trajectory, a large debt burden and an aggressive central bank. However, low volatility, US-JN 2 year spreads andflows continue to support JPY well above its fundamental valuation. We expect USDJPY to remain relatively range boundin the near-term and hold a Q412 target of 80.CHINA - Entering September the renminbi is down 0.8% year-to-date, while forwards are pricing in an essentially flat pathinto year-end. A narrowing current account surplus, some relief on the political front, a shifting domestic policy towardsthe currency and sentiment has removed much of the immediate pressure for appreciation. We hold a year-end USDCNYtarget of 6.25.AUSTRALIA - Entering September AUD is up a modest 1.5% year-to-date. Investors continue to hold net long positions,but we fear these are vulnerable to profit taking. The RBA is apt to cut rates, fears are growing that the mining sectorboom is waning, the outlook for China is challenging, positions are stretched and technicals have shifted against AUD.We expect it to be a relatively volatile ride and hold a Q412 forecast of 1.02.NEW ZEALAND - A neutral stance at the RBNZ, a broadly weaker USD, low volatility and improving investor sentimenthave supported NZD. However, the currency remains vulnerable, particularly as its economy is far from balanced andparticularly exposed to softening dairy prices. We favour NZD less than a currency like AUD. Accordingly, we hold a rela-tively bearish outlook, expecting NZDUSD to close the quarter at 0.77. C u rren cy T ren d s G o in g B a c k S pot O u tlo o k F X Ra te F X R a te 12 m 6 m 3 m 30-A ug 3 m 6 m 12 mUS D J P Y 7 6 .9 3 8 1 .1 5 7 8 .0 2 7 8 .6 7 9 .3 3 8 2 .6 7 8 5 .0 0 US D J P YUS D C NY 6 .3 8 6 .2 9 6 .3 7 6 .3 5 6 .2 7 6 .2 5 6 .1 7 US D C NYA UD US D 1 .0 7 1 .0 7 0 .9 7 1 .0 3 1 .0 2 1 .0 3 1 .0 5 A UD US DNZD US D 0 .8 5 0 .8 3 0 .7 5 0 .8 0 0 .7 7 0 .7 8 0 .7 9 N ZD U S D USDJPY USDCNY 6.41 8 3 .5 6.39 8 1 .5 6.36 6.34 7 9 .5 6.31 7 7 .5 6.29 7 5 .5 6.26 A u g -1 1 O c t- 1 1 D ec-11 F e b -1 2 A p r-1 2 J u n -1 2 A u g -1 2 A u g -1 1 O c t- 1 1 D ec-11 F e b -1 2 A p r-1 2 J u n -1 2 A u g -1 2 AU D U S D N ZD U S D 1.11 0.8 6 1.07 0.8 3 1.04 0.8 1 1.00 0.7 8 0.97 0.7 6 0.93 0.7 3 A u g -1 1 O c t- 1 1 D ec-11 F e b -1 2 A p r-1 2 J u n -1 2 A u g -1 2 A u g -1 1 O c t- 1 1 D ec-11 F e b -1 2 A p r-1 2 J u n -1 2 A u g -1 2 8
  9. 9. Global Economic Research September 2012 Foreign Exchange OutlookASIA/OCEANIA Pablo F.G. Bréard + 1 416 862-3876Fundamental Commentary Daniela Blancas +1 416 862-3908 Sarah Howcroft + 1 416 863-2859JAPAN - The Japanese yen (JPY) continues to be treated CHINA - The Chinese renminbi (CNY) is enjoying a gradu-as a preferred safe-haven asset in times of global financial al revaluation (versus the USD) following three months ofmarket stress. Against the euro (EUR), the JPY has been depreciation (USDCNY found strong resistance to tradeby far the world’s best-performing currency over the past above the 6.40 mark in late July). Persistent correction infive years. The devaluation of the Chinese renminbi (CNY) equity markets and evidence of a slowdown in the manu-versus the USD in the last 12 months added further fuel to facturing and export sectors were key factors weighing onthe appreciating fire. Nevertheless, it is worth highlighting the CNY. Chinese policy makers are not indifferent to thethat the value of Japanese equity securities (as measured damaging effects of Europe’s recession. As a result, a pro-by the benchmark Nikkei 225 index) has been in synchro- growth bias in currency markets sensitive to export sectornized decline during the same period that the JPY was ap- weakness was mostly welcomed by the authorities, allow-preciating, hinting that earnings growth potential (linked to ing a weaker CNY. While a material change to the existingexpected economic growth) will decline irrespective of JPY currency regime is not imminent, increased flexibility to per-strength. Moreover, the Bank of Japan has stressed that mit market-induced exchange rate moves within a widerthe European debt crisis and recession is having a material intervention band (+/- 1% off the daily fixing rate) translatedadverse impact on Japan through the dual effect of re- into a directional shift towards CNY weakness in both spotduced export activity and sustained currency strength. Un- and forward markets. Nevertheless, we are of the view thatdoubtedly, a strong JPY hurts the export-oriented Japa- the CNY will regain an appreciating tone once stimulusnese economy. Looking ahead, we believe that the sup- measures are unveiled and uncertainties regarding mone-portive effect of the massive stimulus put together in re- tary policy actions by the US and European central bankssponse to the tsunami/earthquake/nuclear shock will grad- dissipate. It is a political transition year for both the US andually unwind and that the real economy will adjust to the China; therefore, leadership succession will be of materialnew realities of decelerating global growth dynamics. Ja- relevance at the time of implementing swift changes to thepan will expand by 2.3% this year before decelerating to a existing exchange rate arrangement to prevent disorderly1.5% rate in 2013. In brief, we estimate that the JPY will currency alignments and execute labour-intensive fiscalreverse some gains and marginally depreciate versus the stimulus measures. In brief, joint monetary and fiscal stimu-USD through the end of 2013. lus will help China maintain robust growth supporting a stronger currency in the near term.AUSTRALIA - After rebounding 9% between June and ear- NEW ZEALAND - New Zealand’s economy began to showly August, the Australian dollar (AUD) has lost some some optimistic -albeit modest- signs of recovery by the endground against the US dollar in recent weeks in response of the second quarter; though we expect the improvementto lower prices for key commodities and evidence of a to be more evident by year-end. Local demand remainsslowing pace of investment activity in the mining sector. subdued; however, second-quarter retail sales volumes ex-The mining investment boom, which has been a major driv- panded 1.3% q/q, a higher rate than the contraction of 0.6%er of growth for several years, may be near its peak given in the first quarter. Motor vehicle sales were the major driverthe apparent stabilization of demand conditions in emerg- of the retail sales performance; nonetheless, excluding thising Asia and the more uncertain global growth outlook in sector, sales in the pharmaceutical sector and electronicgeneral. The recent drop in the spot prices for iron ore and goods also presented significant advances. Additionally,coal has had an adverse effect on Australia’s terms of trade positive signs in the construction sector point towards a re-and, if sustained, could also impact the government’s fiscal bound in the coming months. Building consents have beenconsolidation plans through lower resource revenues. Sev- posting positive rates of expansion in June and July, which,eral large mining projects have recently been canceled or together with an improvement in residential building inten-deferred in the face of reduced commercial viability. None- tions (a component of the business confidence survey),theless, economic activity remains relatively buoyant; the suggests that earthquake reconstruction efforts may pick upReserve Bank of Australia (RBA) estimates that output in the third and fourth quarter of the year. Nonetheless, wegrowth overall is running close to trend, while employment maintain our view that the New Zealand economy will post agrowth is modest and signs suggest that the property mar- mild GDP growth in 2012 as household spending remainsket has finally bottomed out. Inflation is currently low due to restrained and foreign demand, particularly coming fromearlier currency appreciation, but is expected to rise as a China and Australia moderates. In the second quarter,result of the newly-introduced carbon tax, before returning headline inflation reached its lowest rate in 12 years, whileto the middle of the 2-3% target range by end-2013. Both inflation expectations also remain near the lower limit of themonetary and fiscal authorities retain scope for further poli- central bank’s tolerance range. Accordingly, the centralcy accommodation should downside risks to growth or in- bank has left the reference rate unchanged at 2.5% forflation – primarily, with respect to China and commodity more than a year. We do not anticipate any change in theprices – dampen the outlook materially. monetary policy stance for the remainder of the year. 9
  10. 10. Global Economic Research September 2012 Foreign Exchange OutlookDEVELOPING ASIACurrency Outlook Sacha Tihanyi + 852-2861-4770INDIA - Compressed range trading held as the rule for USDINR over the past month, with the pair unable to break sus-tainably below 55.00. Confidence has yet to return to India in terms of the overall macro picture, despite reasonably ro-bust portfolio inflows continuing through August as the SENSEX rallied. It is likely that the export sector has continued todeteriorate, while industrial production still shows a lack of recovery. Combined with an uptick in core WPI inflation, thefundamental picture for INR remains negative. We target USDINR at 55.50 in Q4.KOREA - The won experienced one of its most stable months in some time during August. With inflation repressed, adovish monetary policy stance remains in effect until the uncertainty posed by Europe dissipates. Indeed, as the exportsector still weighs on the overall economy, monetary authorities will resist KRW appreciation. Monetary easing from theFederal Reserve and ECB in September would stand to provide the won the only real supportive counterweight to eco-nomic weakness until external demand stabilizes. We target USDKRW at 1160 in Q4.THAILAND - Strong domestic demand coupled with global economic weakness has resulted in a deterioration forThailand’s external accounts. However, the impact on THB has been muted by fact that Thailand’s trajectory has di-verged from the region thanks to the post-flood recovery (Q2 actually saw a growth acceleration) and a monetary policyauthority that has yet to ease rates. There is risk in that domestic post-flood rebound production is looking soft, whichmay incent monetary easing should Europe not recover. We target USDTHB at 31 in Q4.MALAYSIA - MYR is backed by an economy buoyed by solid domestic demand, thanks in great part to an ongoing in-frastructure investment program. This helps offset the external weakness plaguing many regional economies. BankNegara is unlikely to provide monetary accommodation, adding to fundamental support to counteract periods of financialmarket volatility that leads to MYR underperformance due to its “higher-beta” nature. However, strong domestic demandcombined with weak external demand may pressure MYR via the trade account. We target USDMYR at 3.10 in Q4. Currency T rends Going Back Spot Outlook FX Rate FX Rate 12 m 6 m 3 m 30-Aug 3 m 6 m 12 mUSDINR 46.10 49.02 55.59 55.63 55.67 55.33 54.83 USDINRUSDKRW 1061 1119 1178 1134 1163 1153 1129 USDKRWUSDTHB 29.99 30.46 31.76 31.38 31.17 30.83 30.33 USDTHBUSDMYR 2.96 2.99 3.19 3.13 3.10 3.08 3.05 USDMYR USDINR USDKRW 56.70 1195 54.70 1165 52.70 1135 50.70 1105 48.70 1075 46.70 44.70 1045 Aug-11 Oct-11 Dec-11 Feb-12 Apr-12 Ju n-12 Aug-12 Aug-11 Oct-11 Dec-11 Feb-12 Apr-12 Ju n-12 Aug-12 USDT HB USDMYR 3.25 31.85 3.20 31.50 3.15 31.15 30.80 3.10 30.45 3.05 30.10 3.00 29.75 2.95 Aug-11 Oct-11 Dec-11 Feb-12 Apr-12 Ju n-12 Aug-12 Aug-11 Oct-11 Dec-11 Feb-12 Apr-12 Ju n-12 Aug-12 10
  11. 11. Global Economic Research September 2012 Foreign Exchange OutlookDEVELOPING ASIAFundamental Commentary Pablo F.G. Bréard + 1 416 862-3876INDIA - The Indian rupee (INR) is enjoying a stabilization KOREA - The South Korean economic and currency mar-phase following a period of acute currency weakness; the ket environment continues to improve despite the adverseINR lost 17% against the USD over the past 12 months. external shocks emanating from the European debt crisis,The underlying causes of such softness remain in place. A Chinese economic slowdown and persistent US fiscalsizable twin (fiscal and current account) deficit position, still- weakness. The South Korean won (KRW) has been thehigh inflation (6.9% y/y in July) and evident economic best performing Asian currency over the past three months,growth deceleration (GDP advanced only 5.3% y/y in the appreciating by close to 5% against the USD in this period.first quarter) led to a material correction in local financial A period of consolidation may follow after this rebound frommarkets. India is about to lose its investment-grade rating: the weakness seen in May 2012. Although we are of theboth Standard and Poor’s and Fitch have placed India’s view that the KRW is well positioned to regain a strength-rating on review for possible downgrade. Inflation remains ening tone, the monetary authorities will try to prevent aan issue of concern, as proven by the central bank’s deci- significant currency appreciation. It has become clear thatsion to keep its monetary policy rate unchanged at 8.0% in the Korean won will become a major beneficiary of increas-July despite the need for further stimulus on the growth ing foreign inflows into Asia as a result of prolonged lowfront. Moreover, the Reserve Bank of India highlighted that interest rates and continued official intervention in US andthe government may not reach its deficit-reduction target European debt markets. On the monetary front, the centralduring the current fiscal year. Without visible progress on bank has been very successful in pursuing its inflation-fiscal consolidation, a rating downgrade seems inevitable. control policy; indeed, the headline inflation rate reached aIndia may soon become the first BRIC member to regain five-year low level of 1.5 % y/y in July 2012. Accordingly,speculative-grade rating status. We are of the view that, the monetary authorities are in a comfortable position togiven the structural nature of current macroeconomic imbal- inject liquidity through lowering interest rates to reinforceances, the INR will remain on the defensive and subject to the economic recovery if need be. The Bank of Korea re-further depreciation risk. At best, the economy will expand duced its administered rate by 25 basis points (bps) toby 6% in 2012-13. Increased sensitivity to Europe-induced 3.0% last July, and we anticipate that the authorities will cutglobal risk aversion may exacerbate a process of credit dif- at least 25 bps at the next monetary policy meeting.ferentiation amongst core emerging-market economies.THAILAND - The Thai Baht (THB) is enjoying a positive MALAYSIA - Malaysia is showing continued evidence oftrend on the back of supportive macroeconomic fundamen- macroeconomic strength on multiple fronts, with positivetals at home and the growing likelihood that US monetary spillover effects on the exchange rate environment, whichand Chinese fiscal stimulus measures will trigger demand has displayed a bullish tone since early July. The Malaysi-for Asian assets in the near term. We are of the view that an ringgit (MYR) is positioned to extend gains into the latterthe THB will maintain its current strengthening phase well part of this year. The Malaysian economy recorded betterinto the New Year, allowing the central bank to continue to than anticipated growth figures in the second quarter, ex-accumulate foreign exchange reserves, which reached panding by 5.6% y/y. The improved economic performanceUS$175 billion in August. On the growth front, the Thai materialized in the context of well-contained price pres-economy surprised by posting a faster than expected rate sures and a persistently robust current account surplusof expansion in the second quarter: real GDP grew by 4.2% equivalent to 10% of GDP. The economy is showing signsy/y versus the same period in 2011. Irrespective of the cur- of acceleration with GDP growth rates estimated to aver-rent bullish tone, the Thai economy is not immune to the age 4.5-5% in 2013-13. The country’s well-entrenched in-negative effects caused by the European crisis and the vestment-grade position together with attractive interestdeceleration of global demand as portrayed in a weaker rate differentials reinforces a bullish tone in the Malaysianexport sector performance. In this context, the government currency. Additionally, the ringgit will benefit from a surge incontinues to cooperate with the central bank to engineer a funds into emerging-market assets as a result of prolongedpro-growth policy mix, something that has been welcomed monetary policy accommodation in the United States. Onby global financial market participants. At present, non- the political front, the country is immersed in an electoraldeliverable forward (NDF) contracts are discounting curren- cycle ahead of the general elections that will take place incy stability over the next 12 months; however, there is a early 2013, an event that will encourage the current gov-risk that exogenous events (i.e., Fed plus China stimuli) ernment to step up government expenditures in an attemptmay cause a sharp rally in Asian floating currencies to win popular support. The central bank remains commit-through the remainder of the year with positive conse- ted to maintaining its existing currency regime based on aquences for the THB. We maintain our current view for fur- managed float against a trade-weighted basket of curren-ther THB strength. cies. Undoubtedly, any shift in China’s currency policy will incite an adjustment in Malaysia’s currency mix. 11
  12. 12. Global Economic Research September 2012 Foreign Exchange OutlookDEVELOPING AMERICASCurrency Outlook Daniela Blancas +1 416 862-3908BRAZIL - In line with a less dovish tone from the central bank, initial signs of an economic recovery –which is expectedto be more evident by the end of the year– and the effect of government stimulus, mainly in the industrial sector, openthe door for a modest strengthening in the Brazilian real (BRL) in the coming quarters. We anticipate that the BRL willclose the year at 1.95 against the USD, an appreciation of less that 5% from current levels in the second half of 2012.MEXICO - In August, the Mexican peso (MXN) entered a stabilization phase, trading in a 13.05 to 13.25 range vis-à-visthe US dollar. Flows to MXN-denominated assets continue to be supportive for the currency, together with a solid localeconomic outlook, strong oil prices and a generally weaker US dollar against major currencies. We expect USDMXN toclose the year at around 13.10.CHILE - Chile remains one of the strongest economies in Latin America, showing still solid local demand conditions, astable monetary policy and low inflation, despite lower foreign demand. However, commodity prices –particularly copper-continue to be a factor of volatility for the currency. We anticipate a slight rebound in the USDCLP by year-end from cur-rent levels, to close 2012 around the 500 mark.COLOMBIA - The Colombian peso (COP) has been negatively affected by official intervention, economic moderationand loose monetary policy in a low-inflation environment, offsetting the positive impact from Standard and Poor’s recentrevision to the credit rating outlook from “stable” to “positive”. We maintain our view that the USDCOP rate will close theyear near the 1,800 mark; however, we do not discount the possibility of further intervention coming from the centralbank or the government, which would put more pressure on the currency in the short-term. C u rren cy T ren ds G o in g B a c k S pot O u tlo o k F X R a te F X R a te 12 m 6 m 3 m 30-A ug 3 m 6 m 12 mUS D B RL 1 .6 2 1 .7 2 2 .0 4 2 .0 5 1 .9 7 1 .9 3 1 .8 8 US D B RLUS D M X N 12.29 1 2 .8 6 1 4 .3 1 13.39 1 3 .1 7 1 3 .1 7 1 3 .1 4 US D M X NUS D C LP 459 479 518 481 501 504 511 US D C LPUS D C OP 1779 1767 1831 1830 1803 1807 1833 US D C OP USDBRL USDM XN 2.12 14 .6 2.05 1.97 14 .1 1.90 13 .6 1.82 1.75 13 .1 1.67 12 .6 1.60 1.52 12 .1 A u g -1 1 O c t- 1 1 D ec-11 F e b -1 2 A p r -1 2 J u n -1 2 A u g -1 2 A u g -1 1 O c t- 1 1 D ec-11 F e b -1 2 A p r -1 2 J u n -1 2 A u g -1 2 USDCLP USDCO P 54 5 19 95 53 0 19 45 51 5 18 95 50 0 18 45 48 5 17 95 47 0 45 5 17 45 A u g -1 1 O c t- 1 1 D ec-11 F e b -1 2 A p r -1 2 J u n -1 2 A u g -1 2 A u g -1 1 O c t- 1 1 D ec-11 F e b -1 2 A p r -1 2 J u n -1 2 A u g -1 2 12
  13. 13. Global Economic Research September 2012 Foreign Exchange OutlookDEVELOPING AMERICASFundamental Commentary Daniela Blancas +1 416 862-3908BRAZIL - The Brazilian Real (BRL) continues to trade with- MEXICO - The Mexican peso (MXN), subject to internation-in a very stable range against the US dollar, seesawing al risk appetite, has been stabilizing around the 13.15 markaround the 2.0-mark since the beginning of July. Clear against the US dollar, accumulating a 5.6% gain year-to-messages from authorities refusing to allow further curren- date. Robust domestic economic activity, a solid advancecy appreciation, together with a loose monetary policy in the local equity market, a stable monetary policy andstance, sluggish output performance and government ef- higher oil prices have been supporting MXN’s stabilizationforts to boost economic activity, set a weaker -although phase. The Mexican economy remains on a solid trajecto-stable- tone for the BRL in the short-term. In June, the eco- ry. The country’s output expanded by 4.1% y/y in the se-nomic activity index showed the strongest monthly pace of cond-quarter, slightly below the 4.5% rate observed in therecovery in more than a year; expanding by 0.8% against first three months of the year. Trade, construction and ser-May. Retail sales also expanded in the same month, partic- vices were accountable for this strength; while the industri-ularly in durable goods and car sales, reflecting govern- al sector has been decelerating as a result of the closement stimulus in the auto sector. This will not be enough to links to foreign demand and US economic cycles. Accord-contribute significantly to second-quarter GDP growth; ingly, we are revising our 2012 GDP forecast up to 3.9%however, we anticipate the boost to be more evident in the from 3.7%, previously. Inflationary pressures are building,third and fourth quarters. The export sector remains weak, with headline inflation surpassing the central bank’s toler-as exports to the European Union and Argentina continue ance range for the second consecutive month in July toto decelerate, offsetting the positive effect of higher trade 4.4% y/y. Food and merchandise prices have been drivingwith China and the US. In late August, the central bank cut inflation higher; however, we expect inflation to deceleratethe administrated rate for its ninth consecutive time in one to within the official target range by the end of the year.year to a new record low of 7.5%. We anticipate that the Despite the recent spike in inflation, the central bank hascentral bank is reaching the end of its easing cycle, given left its monetary policy rate unchanged at 4.5%, where wethat headline inflation increased for the first time in eleven expect it to be held for the remainder of the year. The 10-months from 4.9% y/y in June to 5.2% in July as a result of year bond yield has returned to around 5.4%, after reach-higher food prices, and signs of economic revival are start- ing record low levels slightly below the 5.0% mark. Never-ing to emerge. theless, foreign appetite for (and possession of) Mexican peso-denominated-assets remains high .CHILE - The Chilean peso (CLP) remains among the COLOMBIA - Central bank and government intervention instrongest currencies in Latin America, with a year-to-date the currency market, aimed at preventing further apprecia-return above 8.0% against the US dollar and 4.5% on a tion of the currency, a moderation in local economic activityquarter-to-date basis. Amid global economic slowing and and narrower spreads have influenced the Colombian pesothe effect it has had in countries such as Brazil and, to a (COP) in recent weeks. The currency traded for the mostlesser extent Colombia, the Chilean economy posted a part of the month within a stable range; however, the an-strong second-quarter GDP growth rate of 5.5% y/y, slightly nouncement that the government was buying US$300 mil-higher than the first quarter rate of 5.3% (revised from 5.6% lion in mid-August and the central bank’s increase in itsy/y). Local demand, which expanded by 7.1% y/y in the daily purchases have finally weighed on the currency. De-second quarter, has been driving the Chilean economy, spite the recent drop in the COP vis-à-vis the US dollar; thewith retail sales, services, construction and imports posting currency maintains a year-to-date gain of 6.0%, the secondsignificant advances. Headline inflation is trending down, highest among its Latin American peers. For the secondreaching 2.5% y/y in July (the lowest rate since the end of consecutive month, the central bank cut the reference rate2010 and its fifth consecutive decrease). With a resilient by 25 basis points (to 4.75%), as a result of a negative ef-economy and no evidence of mounting inflationary pres- fect coming from weak international demand. We expectsures, the central bank maintains a neutral monetary policy the central bank to cut the reference rate once more beforestance, leaving its reference rate unchanged at 5.0%. The the easing cycle is complete. Headline inflation continuescentral bank has stated that the output gap is almost zero to trend lower, reaching 3.0% y/y in July. As a result of fis-and that the economy has reached full-employment capaci- cal reforms and the accurate management of economicty, supporting the view of no changes in the monetary poli- policies that aim to make the Colombian economy morecy tone. The state-owned copper mining company recently resilient to external shocks, S&P changed Colombia’s sov-revised lower the expected average copper prices. Never- ereign debt outlook to “positive” from “stable”, leaving thetheless, we do not anticipate any significant shocks that credit rating at “BBB-”. Colombia’s possible impendingcould derail Chilean economic growth or compromised the credit upgrade could be enhanced by the government’scountry’s fiscal position; however, the currency could suffer recent confirmation that a peace negotiation has been initi-from higher volatility. ated with the guerrilla group, which, if successful, will repre- sent higher confidence among international investors. 13
  14. 14. Global Economic Research September 2012 Foreign Exchange OutlookDEVELOPING EUROPE/AFRICACurrency Outlook Sarah Howcroft +1 416 863-2859RUSSIA - The Russian ruble (RUB) continued to trade in a well contained range over the last month, though at a slightlystronger level than in July. The currency has benefitted from the recovery in oil prices since late June, though not to thesame extent as was seen in the early part of the year. The RUB remains constrained, however, by persistent capital out-flows and the still fragile global risk environment. We hold a year-end USDRUB target of 32.5.TURKEY - After exhibiting considerable stability in recent weeks, the Turkish lira (TRY) is set to weaken as monetaryconditions are gradually loosened by the central bank. We expect the lira to close the year around 1.85 per US dollar. Thecurrency will regain an appreciating bias in 2013 in response to a pick-up in economic activity and accompanying normali-zation of interest rates, which will lead those of most global central banks.CZECH REPUBLIC – Having strengthened considerably versus the euro since late June (in spite of an interest rate cutby the central bank), the Czech koruna (CSK) will remain critically dependent upon developments in the European debtcrisis. Though the economy is currently mired in recession, underlying fundamentals remain sound, and the currencyshould resume an appreciating trend in 2013. We anticipate a year-end EURCZK rate around 25.SOUTH AFRICA - The South African rand (ZAR) continues to fluctuate in a wide trading range around our year-end tar-get of 8.3 per US dollar. The path of the currency depends to a large degree on changes in the global risk environment,particularly with respect to the euro crisis and commodity prices. Over the medium term, the currency is likely to remainconstrained by South Africa’s ongoing political uncertainty, social tensions and considerable twin deficits. C u rre n c y T re n d s Going B ac k S pot Outlook FX Rate FX Rate 12 m 6 m 3 m 30-A ug 3 m 6 m 12 mUS D RUB 28.97 29.17 33.67 32.56 32.44 32.67 33.17 US D RUBUS D TRY 1.72 1.75 1.86 1.83 1.84 1.84 1.79 US D TRYE URC ZK 24.16 24.90 25.79 24.88 25.07 24.87 24.47 E URC ZKUS D ZA R 7.01 7.51 8.58 8.48 8.29 8.32 8.37 US D ZA R USDRUB USDT RY 33 .3 5 1.8 9 32 .1 0 1.8 4 30 .8 5 1.7 9 29 .6 0 1.7 4 28 .3 5 1.6 9 A u g -1 1 O c t- 11 D ec- 11 F e b -1 2 A p r-1 2 Ju n -1 2 A u g -1 2 A u g -1 1 O c t- 11 D ec- 11 F e b -1 2 A p r-1 2 Ju n -1 2 A u g -1 2 E U R C ZK U S D ZAR 8.7 026 .00 8.4 5 8.2 025 .50 7.9 525 .00 7.7 0 7.4 524 .50 7.2 024 .00 6.9 5 A u g -1 1 O c t- 11 D ec- 11 F e b -1 2 A p r-1 2 Ju n -1 2 A u g -1 2 A u g -1 1 O c t- 11 D ec- 11 F e b -1 2 A p r-1 2 Ju n -1 2 A u g -1 2 14
  15. 15. Global Economic Research September 2012 Foreign Exchange OutlookDEVELOPING EUROPE/AFRICAFundamental Commentary Sarah Howcroft +1 416 863-2859RUSSIA - After a strong start to the year, the Russian econ- TURKEY - Turkish monetary authorities are expected toomy has begun to moderate as the global deceleration be- ease lending conditions in the coming months. With the me-gins to weigh on exports and private investment, more than dium-term inflation projection pointed lower, material pro-offsetting still sturdy domestic consumer and infrastructure gress on the economic rebalancing from consumption tospending. A 4.7% y/y drop in exports in June brought the external demand, evidence of slowing growth both domesti-trade surplus to its lowest level since November 2010. The cally and globally, and the recent stability displayed by theRussian Economic Ministry projects an average GDP lira, the central bank has signaled an imminent reduction ingrowth rate of 2.8% y/y in the second half of 2012, a signifi- the upper margin of the overnight interest rate corridorcant slowdown from the 4.5% pace set in the first six (currently at 11.5%). Given that further monetary accommo-months. Nevertheless, being one of the world’s top energy dation is expected from the major global central banks,producers and exporters, Russia will benefit from the re- Turkish officials are now less concerned about inciting a liranewed uptick in commodity prices, particularly in Urals sell-off, though they will likely employ alternative policy toolsblend oil, which has risen roughly 30% since the EU ban on (i.e., reserve requirements, foreign exchange transactions)Iranian oil came into effect on July 1st. We continue to ex- as needed to insulate the currency until the economy recov-pect growth to average around 3¾% in 2012-13. Mean- ers a stronger growth trajectory and domestic interest rateswhile, inflationary pressures have intensified in recent begin to move higher. The benchmark one-week repo ratemonths on the back of the drought which has affected this will likely be left at 5.75% until the first half of 2013. Theyear’s grain harvest, as well as the implementation of regu- next rate-setting meeting will be held on September 18th.lated price and tariff increases. In July the consumer price With exports maintaining a strong pace (up 13.4% y/y year-index grew 1.2% over the prior month, the largest monthly to-date), the current account deficit continues to narrow – again since last January, boosting the annual inflation rate to shortfall of US$4.2 billion in June was the lowest since last5.6% y/y from 4.3% in June. We do not anticipate any major August and was easily covered by foreign capital inflows.monetary policy changes in the next six months; however, While this improvement has contributed to reduced lira vola-upside inflation risks will be monitored closely. Russia offi- tility in recent months, investors remain cautious of Turkey’scially acceded to the World Trade Organization in late July. still significant external financing needs and resulting vulner-The agreement implies a gradual reduction of tariffs, though ability to shifts in global risk appetite. We expect the econo-the near-term impact is expected to be small. my to grow by 2¾% in 2012, accelerating to 4½% next year.CZECH REPUBLIC - Growth prospects in the Czech Re- SOUTH AFRICA - Though inflationary pressures havepublic have deteriorated as the crisis in the euro zone moderated in South Africa (at 4.9% y/y in July, the headlinedampens both exports and confidence in the private sector. rate is now well within the official target range), monetaryAfter shedding 0.8% q/q in seasonally adjusted terms in the authorities will be kept on alert going forward, given thefirst quarter, GDP dipped another 0.2% in the April-June weakened trajectory of the rand and possible pass throughperiod, marking the fourth straight quarter without growth. In from rising global food prices. After a half-point reduction inlight of the expected further descent of the euro area econo- July, the benchmark interest rate currently stands at a rec-my through the remainder of the year (in Germany in partic- ord-low 5.0%. Domestic activity remains relatively buoyant;ular, where almost 30% of Czech exports are sent), the re- retail and vehicle sales continue to expand at a robust pace,cession will likely extend into the coming quarters, resulting and the prolonged slump in the mining sector appears to bein a contraction of almost 1% in 2012 overall. The nation over – mining production grew in yearly terms for a secondshould, however, fare better than some of its emerging Eu- straight month in June following 11 months of retrenchment.ropean peers, such as Hungary, given the profitability of its On the other hand, manufacturing activity has begun tobanks and their low reliance on wholesale and external weaken as demand for exports is depressed by adversefunding, its (limited) scope to ease the pace of fiscal consol- external developments. In fact, South Africa is on track toidation, and its lower dependence on export markets in the post its largest merchandise trade deficit on record thisdepressed peripheral nations of the currency union. Reflect- year. GDP growth measured 3.0% y/y in the second quar-ing these relative strengths, the yield on the government’s ter, up from 2.1% in the prior three months. We expect the10-year bond has trended consistently lower this year, and economy to expand by 2½% this year, a comparativelynow measures just 2.3% (versus 7.3% for Hungary and weak performance by historical standards. The South Afri-4.9% for Poland). The government should be able to bring can Reserve Bank (SARB) estimates that the output gapthe fiscal deficit below the EU-mandated threshold of 3% of currently measures roughly -3½% and is likely to remainGDP by 2013, as planned. Headline inflation, at 3.1% y/y in negative over the medium term. Chief among the longer-July, is currently above the central bank’s 2% target, bol- term issues of concern to the SARB are high structural un-stered by indirect tax increases and commodity prices. Un- employment, inadequate electricity provision and feeblederlying price pressures are low, however, and we antici- private investment. The twin fiscal and current account defi-pate another policy rate cut before year-end. cits also continue to generate unease among investors. 15

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