2011 Scotia FX Outlook 06

8/6/2019 2011 Scotia FX Outlook 06

1/17

Global Economic Research

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 Outlookis available on: www.scotiabank.com and Bloomberg at SCOE

ForeignExchangeOutlook

June 2011

Excess global liquidity, renewed USD weakness, consolidation incommodity markets, interest rate differentials against advancedeconomies, persistent US and Chinese intervention and bullish tone inemerging markets are the key drivers of flows in currency markets.

The USD continues to suffer from the ongoing process of global economicrebalancing and currency diversification. The core group of non-USDcurrencies in the Americas maintains an appreciating tone on the back ofpositive growth differentials and supportive commodity markets.

The European Monetary Union remains intact, despite higher volatility andstress caused by a weakening debt profile in selected countries in theperiphery. The EUR is poised to benefit from improved economicperformance in core European nations and widening interest ratedifferentials.

The Asian currency outlook is promising. The JPY is supported by G7intervention and asset-diversification waves. The CNY will accelerate itspace of appreciation, yet no radical change to Chinas currency regime isin store. Developing Asian currencies retain a bullish tone.


2/17


Foreign ExchangOutloo

June 201

Actual 1a 11 Q2 11 Q3 11 Q4 11 Q1 12 Q2 12 Q3 12 Q4 121.45 1.42 1.47 1.49 1.50 1.48 1.48 1.50 1.50

1.44 1.43 1.42 1.41 1.40 1.39 1.37

80.1 83 79 82 84 86 87 89 90

83 84 86 87 88 89 901.63 1.60 1.64 1.64 1.65 1.65 1.67 1.69 1.70

1.63 1.64 1.65 1.65 1.66 1.66 1.66

0.98 0.97 0.95 0.94 0.93 0.94 0.94 0.93 0.92

0.96 0.97 0.98 0.98 0.99 1.00 1.00

1.06 1.03 1.07 1.08 1.09 1.09 1.10 1.10 1.11

1.04 1.02 1.01 0.99 0.98 0.96 0.95

11.71 11.90 11.60 11.77 12.03 12.11 12.04 12.13 12.31

11.67 11.85 11.92 11.99 12.07 12.14 12.22

(*) Source: Consensus Economics Inc. May 2011

Spot Price vs. 100 Day Moving Averagevs. 200 Day Moving Average -(5yr Trend)

Consensus*

Mexican Peso

Canadian Dollar

Australian Dollar

Global Foreign Exchange Outlook

Euro

Yen

Sterling

AUDUSD USDMXN

EURUSD USDJPY

GBPUSD USDCAD

June 3, 2011EURUSD

Consensus*

USDJPY

Consensus*GBPUSD

Consensus*

Consensus*

USDCAD

Consensus*

AUDUSD

USDMXN

79

86

93

100

107114

121

Jun-06

Dec-06

Jun-07

Dec-07

Jun-08

Dec-08

Jun-09

Dec-09

Jun-10

Dec-10

Jun-11

USD/JPY

100 Day

200 Day

1.12

1.22

1.32

1.42

1.52

1.62

Jun-06

Nov-06

Apr-07

Sep-07

Feb-08

Jul-08

Dec-08

May-09

Oct-09

Mar-10

Aug-10

Jan-11

Jun-11

EUR/USD

100 Day

200 Day

1.36

1.51

1.66

1.81

1.96

2.11

Jun-06

Dec-06

Jun-07

Dec-07

Jun-08

Dec-08

Jun-09

Dec-09

Jun-10

Dec-10

Jun-11

GBP/USD

100 Day

200 Day

0.90

0.98

1.06

1.14

1.22

1.30

Jun-06

Dec-06

Jun-07

Dec-07

Jun-08

Dec-08

Jun-09

Dec-09

Jun-10

Dec-10

Jun-11

USD/CAD

100 Day

200 Day

0.59

0.67

0.74

0.82

0.89

0.97

Jun-06

Dec-06

Jun-07

Dec-07

Jun-08

Dec-08

Jun-09

Dec-09

Jun-10

Dec-10

Jun-11

AUD/USD

100 Day

200 Day

9.7

10.8

11.9

13.0

14.1

15.2

Jun-06

Dec-06

Jun-07

Dec-07

Jun-08

Dec-08

Jun-09

Dec-09

Jun-10

Dec-10

Jun-11

USD/MXN

100 Day

200 Day


3/17



June 201

Softening global growth prospects, excess global liquidity,renewed US dollar (USD) weakness, consolidation incommodity markets, persistent monetary accommodation

and gradual recovery in the US, intensifying volatility inemerging debt markets due to a potential distressed debtrestructuring in Greece, and ongoing global diversificationaway from US$-denominated securities portfolios havebecome the key factors shaping market sentiment inglobal foreign exchange markets.

The outlook for the Americas currency market remainsstrongly influenced by the direction of the USD, which isback on the defensive, affected by unattractive interestrate differentials, persistent weakness in key labour-intensive sectors (influencing the Feds behaviour), andstructurally imbalanced public sector finances. Neverthe-

less, there appears to be a strong sense of structural link-ages amongst the core group of non-USD currencies inthe continent. The USD appreciated broadly in May asearly signs of a softening global growth trajectory shiftedinvestor flows back to the US market, a development thatwas exacerbated when the markets focus centered backtowards problems in periphery Europe. To date, June hasbrought reassurance that global growth should re-accelerate in the second half of the year and that Euro-pean authorities will continue to support even the weakcountries within the monetary union. Accordingly, thiscombined with softer US economic data, loose US mone-tary policy and a still undefined fiscal plan has the USDpoised to retrace some of its recent gains.

The non-USD NAFTA zone currencies, which struggled inMay, are entering June on a firmer footing. The Canadiandollar (CAD) should continue to be supported by abroadly weaker USD, strong commodity prices, the out-look for monetary policy and relatively strong sovereigndebt and local credit fundamentals. The Mexican peso(MXN) has come off its recent highs but has outperformedCAD. The fundamental outlook has softened and the cen-tral bank appears in no rush to shift interest rates awayfrom 4.5%; however, MXN still benefits from favourableflows that seek Latin American exposure, a reasonablegrowth trajectory and improvements in Mexicos debt and

fiscal position. The key risk for both non-USD NAFTA cur-rencies is the outlook for US growth. Elsewhere in thedeveloping Americas, the trajectory of the Brazilian real(BRL) continues to guide market trends in the SouthernCone with positive spill over effects into the Chilean (CLP)and Colombian (COP) pesos. However, the Peruvian Sol(PEN) has been recently subject to damaging volatilitydue to escalating political risk linked to the presidentialelections that are about to be completed.

The euro (EUR) is well positioned to consolidate an appreciating bias against both the USD and the Japaneseyen (JPY). The risks within the European monetary union

are large, the situation in peripheral economies in fiscadistress is fragile and the problems are significant. More-over, our base case remains that the issues are manageable. The combination of a multilateral response to fiscastress in highly indebted peripheral economies, a hawkishcentral bank, and a commitment from authorities that thecurrency and monetary union is not a failed experienceshould position EUR favourably through the end of theyear as compared with the US outlook. Accordingly, weare reaffirming our year-end 1.50 target for EUR/USDThe growth outlook for the UK has deteriorated on theback of a hesitant consumer who faces strict fiscal austerity, rising inflation and an uncertain path for interest rates

This fundamental backdrop should limit the ability for asustained British pound (GBP) rally. The other Europeancurrencies, Swiss franc (CHF), the Swedish krona (SEKand the Norwegian krone (NOK), have rallied extensivelyin 2011 and the prospect for further gains continues to befavourable.

Japan is in the midst of a challenging period, highlightedby a shift to negative watch by all three major credit ratingagencies due to a sharp deterioration in its sovereign deband fiscal profile. The near-term headwind is its recoveryfrom a major natural disaster; however, this is compli-cated by the countrys large debt burden and hesitant investor sentiment. Still, in the near term the JPY is likely toremain supported by potential repatriation flows, persistent current account surpluses and its continued role as arisk haven asset. It is worth noting that the JPY is a coreglobal currency in the ongoing process of structural eco-nomic rebalancing and the associated diversificationaway from US$-denominated financial assets. The rest oAsia provides a very different backdrop. A vaguely softegrowth profile has not relieved inflationary pressuresleaving most central banks in the midst of a hiking cyclewhich is supporting the Asian-growth currencies. We holdbullish views on the Malaysian ringgit (MYR), the Singapore dollar (SGD), the South Korean won (KRW), thePhilippine peso (PHP), and Thai baht (THB) (however the

latter could be adversely affected by domestic politicaunrest). The outlook for the Indian rupee (INR) is lesspositive. The Chinese Renminbi (CNY) has reached anew high and authorities continue to support a more flexible currency regime, in part to help relieve inflationarypressures in the country. Accordingly, we expect anabove consensus appreciation of the yuan, looking foUSDCNY to close this year at 6.25.

MARKET TONE & FUNDAMENTAL FOCUSPablo F.G. Brard +1 416 862-3876 Camilla Sutton +1 416 866-5470


4/17



June 201

The CAD underperformed in May, losing 2.5% against the USD. A spike in risk aversion, a softening global growth out-look and the pushing out of expectations for the next Bank of Canada interest rate hike were the main culprits. As weare coming to the end of the second quarter, the US economic outlook has begun to soften. What is negative for the US

economy is by default negative for Canada. Most have already priced in a lower second quarter growth trajectory, sowhat matters from here for CAD traders is the potential of a reacceleration in the third quarter. Should this fail to materialize the outlook for the CAD is likely to soften. However, our base case is that what the global economy is currently ex-periencing will prove temporary. The fundamentals of the Canadian economy remain strong, having posted a healthy3.9% Q1 growth rate. Still, supply chain issues from Japan are expected to weigh heavily on Q2 growth. Meanwhile,headline inflation is above 3% and core inflation is more subdued at 1.6%. With this back-drop, the Bank of Canada isexpected to re-enter its interest rate hiking cycle in the fall, which will widen the US-Canada spread in the CADs favour.In terms of commodities, Scotia Economics forecasts oil prices to average $100 in 2011, above the current average,which is considered to be supportive of the current strong CAD valuation. However, high oil prices driven by emergingmarket demand are not likely as supportive for the Canadian economy as historical episodes when strong oil priceswere driven by a strong US economy. Accordingly, the fundamentals are supportive of a strong CAD, but the stars whichat times have all been aligned in favour of the currency are no longer. Valuations are made up of two sides and when itcomes to USDCAD, the USD side of the equation is negative. The combination of loose US monetary policy, a softening

growth profile, the lack of a credible fiscal plan and negative investor sentiment all work in favour of a weaker USD. Ac-cordingly, combining both the US and Canadian sides of the currency backdrop should lead to ongoing strength in theCAD. The key risks to our view are a spike in risk aversion or unanticipated softening in the global economy. Barringthese, we have made no change to our year-end CAD forecast of 1.08 (USDCAD at 0.93).

CANADA Camilla Sutton +1 416 866-5470Eric Theoret +1 416 863-7030

12 m 6 m 3 m 3 m 6 m 12 m

AUDCAD 0.884 0.984 0.990 1.019 1.017 1.034 AUDCAD

CADJPY 87.38 81.54 84.17 85.85 89.28 92.20 CADJPY

EURCAD 1.285 1.333 1.341 1.399 1.397 1.391 EURCAD

USDCAD 1.045 1.026 0.972 0.943 0.933 0.940 USDCAD

AUDCAD CADJPY

EURCAD USDCAD

1.044

81.44

1.426

0.984

Currency TrendsSpot

3-Jun

OutlookGoing BackFX Rate FX Rate

0.86

0.89

0.93

0.96

1.00

1.04

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

78.0

81.0

84.0

87.0

90.0

93.0


1.23

1.27

1.30

1.34

1.37

1.41

1.44


0.95

0.97

0.98

1.00

1.02

1.04

1.06

1.07



5/17



June 201

UNITED STATES - The US economy is expanding at amore moderate pace than witnessed last year. The latestrevisions left Q1 headline GDP growth unchanged at 1.8%q/q annualized, the slowest pace since mid-2010. Theeconomy is expected to average growth around 2.5% in2011. Most of the strength will come from business invest-ment in machinery & equipment and exports, while along-side ongoing deleveraging higher prices of food and fuelsqueeze disposable income. Consumer sentiment deterio-rated noticeably in May, falling to a six-month low. Hiringactivity tracked its third straight month of above-200,000additions, a first since early 2006. However, the US jobspicture is measured by two separate surveys, which showthe sharpest deviation between what businesses andhouseholds are reporting since last November, highlightingthe emerging divergence between corporate and consumersentiment. As a result, and similarly to other advanced

economies, near-term indicators are posting softer resultsfor consumer-related sectors and strong prints for export-oriented industries, particularly those geared towardemerging economies. Residential construction activity con-tinues to move sideways along the floor. Sales of deeply-discounted distressed homes, and generally more low-priced resale properties, are siphoning demand from thenew home market. A more substantial pick-up in hiring ac-tivity is paramount for potential buyers to step off the side-lines. Commodity prices seem to have moderated since theend of April, and while suppliers continue to feel the pres-sure, the pass-through to core prices and expectations re-mains limited. Heavy rains, which inundated parts of the

Ohio and Mississippi valleys, and severe droughts in partsof the South will weigh on the agricultural sector this year.

CANADA - The Canadian economy has lost momentumheading into the spring. After expanding at a solid 3.9%annual rate in Q1, we expect output growth moderated toaround 1% in Q2. The slowdown in part reflects supplyshortages caused by Japans early year earthquaketsunami. These production disruptions are most notable inthe large motor vehicle and parts sector, and should berecouped in the latter half of the year. At the same timegovernment stimulus spending is winding down, and willikely act as a drag on growth in the latter half of this yeaand into 2012 as fiscal shortfalls are addressed. Meanwhileconsumers, facing sharply higher gas prices, rising foodcosts and high debt burdens, are moderating their spending. Discretionary retail sales (i.e. total outlays excludingfood, gasoline and health & personal care items) droppedbelow year-ago levels in March for the first time since the2008 recession, and early reports point to continued sof

conditions through May. Meanwhile, consumer sentimensurveys are showing a growing pessimism among households over the state of their finances and a reluctance tomake a major purchase. The slowing in retail sales mirrorsa cooling in housing market activity, and may mark the beginning of a transition from consumer-driven growth towarda greater reliance on businesses. Supported by a strongcurrency, healthy corporate balance sheets and firm commodity prices, firms are ramping up outlays on machinery &equipment as well as resource-related exploration. Exporperformance is mixed. While benefitting from high commodity prices and strong emerging market demand for Canadian resources, producers are being challenged by the

strength of the Canadian dollar and signs of slowing in USdemand/industrial activity.

CANADAAND UNITED STATES Adrienne Warren +1 416 866-4315Fundamental Commentary Gorica Djeric +1 416 866-4214

MONETARY POLICY COMMENTARY Derek Holt +1 416 863-7707

UNITED STATES - We remain of the view that the FederalReserve will be on hold until 2012Q1, with the tail riskskewed toward later rather than sooner. Additional quanti-tative easing is not expected in the absence of unlikely de-flation risk. Another round of QE would ultimately raisemarket inflation expectations and would be significantlybearish for the curve after the very short-run effects dueto concerns surrounding long-run policy exits; key bench-marks like the 30-year fixed mortgage rate would rise at a

bad time for US housing markets and the broader econ-omy. Chairman Bernanke has noted that ending couponreinvestment resulting from purchased securities would bethe first sign of policy tightening, as it would reverse expan-sion of the Fed's balance sheet; we think this occurs muchlater in the year at the earliest. We believe that the outputgap will take years to close such that the Feds full employ-ment mandate will remain challenged while markets arecounseled to look through near-term inflation risks. Thus,should the Fed begin to raise interest rates as per our fore-cast, it is likely to do so at a tepid pace toward a lower neu-tral rate than during prior cycles.

CANADA - Markets took the Bank of Canada (BoC)sstatement as relatively more hawkish than expected, buthats relative to having largely priced out rate hikesthrough to year end. We dont view the statement as supportive of the July hike scenario since critical language onhow such a reduction wouldneed to be carefully considered was left intact. Rather, webelieve the statement supports our longstanding Octobecall. That said, the BoC hedged its bets somewhat. On the

one hand, it turned slightly more dovish on global growthHowever, what markets took as a hawkish signal is the following reference: To the extent that the expansion continues and the current material excess supply in the economyis gradually absorbed, some of the considerable monetarypolicy stimulus currently in place will be eventually withdrawn, consistent with achieving the 2 per cent inflationtarget. We think all the BoC intended here was to halt themarket trend to perpetually taking out rate hikes, versussignaling a nearer term threat to the curve.


6/17



June 201

EURO ZONE - Turmoil in Europe has resurfaced, injecting the market with unwanted uncertainty. Considering the envi-ronment the EUR has held up well, entering June just 3% below its year-to-date 1.4940 high. Technically, the near-termoutlook has turned favourable while market positioning is still long, but far more balanced than the early spring. The USD

side of the equation is not a positive one weighed down by the lack of a fiscal plan, a deteriorating economic backdropand loose monetary policy. We expect the EUR to remain volatile, but that the risk is to further upside. We hold a Q211forecast of 1.47 and a year-end forecast of 1.50.

UNITED KINGDOM - The combination of low growth, strict austerity, a hesitant consumer, a dangerous balancing act athe Bank of England and increasingly bearish market sentiment are weighing on the outlook for the GBP. We expect it tounderperform the EUR and hold fairly steady against the USD and hold a GBPUSD Q211 target of 1.64 with a year-endforecast of 1.65.

SWITZERLAND - Positive CHF momentum has driven the currency to new highs against the USD and the EUR. It is amarket darling as it is a desirable intra-Europe diversification vehicle, a safe-haven favourite, has a strong fundamentaand fiscal backdrop and the SNB appears to have stepped away from intervention at least temporarily. The medium-term outlook is favourable, but some near-term retracement is likely. We have USDCHF Q211 and year-end forecast of

0.85.

NORWAY - A relatively strong fundamental backdrop, a central bank hiking cycle, commodity exposure and favourablesentiment have helped NOK outperform on a year-to-date basis. Technically, the NOK appears poised to make furthegains. We hold a USDNOK Q211 forecast of 5.44 and a year-end forecast of 5.25.

EUROPE Camilla Sutton +1 416 866-5470Currency Outlook Eric Theoret +1 416 863-7030

12 m 6 m 3 m 3 m 6 m 12 m

EURUSD 1.23 1.30 1.38 1.48 1.50 1.48 EURUSD

GBPUSD 1.45 1.56 1.63 1.64 1.65 1.66 GBPUSD

EURCHF 1.42 1.30 1.28 1.27 1.28 1.26 EURCHF

USDNOK 6.46 6.21 5.60 5.38 5.28 5.21 USDNOK

Currency TrendsSpot

3-Jun


1.45

1.63

1.21

5.40

EURUSD GBPUSD

EURCHF USDNOK

1.18

1.23

1.28

1.33

1.38

1.43

1.48


1.43

1.47

1.51

1.55

1.59

1.63

1.67


1.20

1.24

1.28

1.31

1.35

1.39


5.20

5.50

5.80

6.10

6.40

6.70



7/17



June 201

EURO ZONE - Euro zone policymakers will likely continueto take a break from further monetary tightening in June.As expected, the European Central Banks Governing

Council left the main refinancing rate unchanged at 1.25%in early May following a hike in April. Gradual monetarynormalization will likely continue in the third quarter of theyear, taking the benchmark interest rate to 1.75% by theend of the year. While headline inflation eased in May to2.7% y/y according to a flash estimate from 2.8% themonth before, inflationary pressures will likely continue torebuild, taking the inflation rate to 3% in the coming monthsbefore easing to 2.5% by the end of the year. The eurozone experienced exceptional economic growth in the firstquarter of 2011 with real GDP expanding by 0.8% q/q (non-annualized) and 2.5% y/y. Germany and France continueto be the engines of growth in the region, registering Q1

output gains of 1.5% q/q (4.8% y/y) and 1.0% q/q (2.2% y/y), respectively. Accordingly, we have revised our real GDPgrowth forecasts, and now expect the euro zone to expandby 1.8% this year, followed by a 1.7% expansion in 2012.The German economy will likely record a 3.4% advancethis year, followed by a slowdown to 2.3% in 2012, whileFrench output is set to increase by 2.0% in 2011 and 1.4%next year. Nevertheless, major differences in economicperformance remain in place between the core economiesand the periphery, which continues to suffer from debt sus-tainability issues.

UNITED KINGDOM - The economic outlook for the UKthrough 2012 continues to be challenging. The first quarte2011 real GDP growth of 0.5% q/q (non-annualized) was

supported by net exports while the British consumer remained very cautious; consumer spending which accounts for two-thirds of GDP decreased by 0.6% q/q inthe January-March period, reflecting households continueddeleveraging efforts, an increased tax burden and persistently challenging employment conditions. Aggressive fiscaconsolidation and slower export sector momentum throughthe rest of the year will limit the nations economic growth to1.4% in 2011, with the UK continuing to underperform theeuro zone. Output expansion should pick up to 1.7% in2012, as both the global and domestic recoveries becomemore broadly-based. Consumer price inflation acceleratedto 4.5% y/y in April from 4.0% the month before, highlighting

the challenge of monetary authorities to find a balance be-tween promoting price stability and supporting economicgrowth. Further pressures on prices are likely, with theheadline inflation rate expected to approach the 5.0% markin the coming months before embarking on a more soliddownward trajectory towards the end of 2011. Although ma

jor divergences remain among the Bank of Englands policymakers, the central bank will likely begin a gradual process of monetary policy normalization towards the end of thethird quarter of 2011, taking the Bank Rate currently a0.5% to 1.0% by year-end, and to 2.0% by end-2012.

SWITZWERLAND - Debt sustainability concerns in the eurozone periphery continue to highlight the Swiss francs (CHF)role as a safe-haven currency, with appreciating pressuresvis--vis the euro persisting. On the back of the strong CHF,inflationary pressures remain virtually absent: the harmo-nized consumer price index increased by 0.1% y/y in April.Accordingly, an expansionary monetary policy stance willlikely be maintained for an extended period of time; we ex-pect the Swiss National Bank to begin a cautious process ofmonetary normalization in the final quarter of 2011, raisingthe benchmark rate gradually from the current level of0.25% to 1.0% by the end of 2012. The next policy meetingis scheduled for June 16th. The economy is showing signsof a modest slowdown, with real GDP expanding by 0.3%q/q (and 2.4% y/y) in the first quarter of 2011, compared

with an advance of 0.8% q/q (3.1% y/y) in the final quarterof 2010. Household spending continues to be supported byaccommodative monetary policy and relatively healthy la-bour market conditions (the unemployment rate decreasedto 3.1% in April). While exports continue to record solid per-formance (up 5.7% q/q in Q1) despite currency strength,momentum will likely decelerate in the coming months re-flecting a slow down in activity in the rest of Europe. Thepolitical outlook of Switzerland is dominated by the ap-proaching general elections, scheduled for October 23rd;nevertheless, the country continues to enjoy a high degreeof political stability.

NORWAY - Norwegian monetary authorities have embarked on a path of policy tightening. Following the May 12t

Executive Board meeting, the key policy rate was raised by25 basis points to 2.25%, marking the first interest rate hikesince May 2010. Policymakers assess that the upturn in theNorwegian economy has gained a firm footing with capacity utilization close to a normal level. The mainland reaGDP which excludes the volatile oil, gas and shippingsectors expanded by 0.6% q/q (non-annualized) in thefirst quarter of 2011, compared with a 0.3% advance in theprevious quarter. We expect the nations output to increaseby around 2% through 2012. Consumer price inflation accelerated to 1.3% y/y in April from 1.0% the month beforewith prices at the core level increasing at the same paceWith inflation on an upward trajectory and the real estate

sector booming, further monetary tightening is likely in themonths to come as authorities aim to stabilize headline in-flation close to the target level of 2.5% in the medium termand to reduce the risk of future financial imbalances. Norway has solid economic fundamentals as it enjoys a strongexternal position (the current account surplus will likelyhover around 13% of GDP this year) and healthy government finances (we expect the fiscal surplus to exceed 10%of GDP in 2011-2012).

EUROPEFundamental Commentary Tuuli McCully +1 416 863-2859


8/17



June 201

JAPAN - Weak fundamentals have done little to decrease positive yen flows as investors look for safe-haven alternativesand deep bond markets. In addition, a significant drop in US yields has pushed the US-Japanese bond yield spread intoyens favour. Based on this momentum we expect USDJPY to end Q211 at 79, but weaken into year-end as markets

grow wary of the fundamental picture. We hold a year-end target of 84.

CHINA - This year the yuan has appreciated by two percent; since June 2010 it has appreciated by 5.5%, almost exactlythe pace that Chinese authorities have suggested they are comfortable with on a year over year basis. We hold a moreaggressive than consensus target of 6.25 for the end of 2011, equivalent to a year-over-year gain of 5.4%.

AUSTRALIA - The combination of strong fundamentals and favourable investor sentiment have helped support the AUDthis year. The currencys high beta properties leave it vulnerable in periods of volatility; however, barring another surge inrisk aversion the outlook for the AUD is positive. Technically the biggest hurdle will be its all time high of 1.1012. We holda Q211 target of 1.07 and a year-end forecast of 1.09.

NEW ZEALAND - The NZD is trading at all time highs against the USD, leaving momentum working in the currencys favour. Investor sentiment is positive, highlighted by a new year-to-date high in the net long NZD position. Technically, the

currency has yet to reach overbought levels, leaving further upside an important risk to our fundamentally based Q211forecast of 0.82 and a year-end target of 0.78.

ASIA/OCEANIA Camilla Sutton +1 416 866-5470Currency Outlook Eric Theoret +1 416 863-7030

12 m 6 m 3 m 3 m 6 m 12 m

USDJPY 91.3 83.7 81.8 81.0 83.3 86.7 USDJPY

USDCNY 6.83 6.67 6.57 6.38 6.28 6.09 USDCNY

AUDUSD 0.85 0.96 1.02 1.08 1.09 1.10 AUDUSD

NZDUSD 0.68 0.74 0.75 0.80 0.79 0.79 NZDUSD

USDJPY USDCNY

AUDUSD NZDUSD

80.1

6.48

1.06

0.81

Currency TrendsSpot

3-Jun


78.0

80.5

83.0

85.5

88.0

90.5

93.0


6.46

6.52

6.57

6.63

6.68

6.74

6.79


0.81

0.86

0.91

0.96

1.01

1.06

1.11


0.65

0.68

0.71

0.75

0.78

0.81



9/17



June 201

JAPAN - Near-term Japanese yen (JPY) volatility will re-main in place with the Bank of Japan battling excessiveappreciation. Strengthening forces will be countered by

uncertainty about a quick recovery, with downside risk lim-ited by the availability of a vast pool of domestic funds tofinance the reconstruction effort. We expect the JPY toreach 84 per US dollar at end-2011 and 90 at end-2012.The possibility for further government intervention remainsin place in case significant appreciation resumes. TheJapanese economy will initiate a gradual recovery in thesecond-half of the year as authorities grapple with the af-termath of the March 11th earthquake/tsunami. After theGDP fall of the first quarter, output is expected to contractin the second with the reconstruction effort gathering mo-mentum in the second half of the year and through 2012.The viability of an expedited recovery hinges not only on

restoring a reliable electricity grid and transportation net-work, but also on the prevalence of a trade-competitiveJapanese yen given the economys export dependence.After the record 3.9% y/y gain of 2010, GDP will expand ata 0.3% y/y rate in 2011 followed by a 3.5% advance in2012. The Bank of Japan is expected to retain a loosemonetary policy stance, with unsterilized currency interven-tions preventing excessive JPY appreciation. A higher en-ergy tally and dependence on imported fuel, amid global oilmarket uncertainty, will bring back supply-side price pres-sures.

CHINA - Renmimbi (CNY) strength will remain the rulethrough 2012, as gradual CNY appreciation is a primarycomponent of a concerted policy to tighten monetary condi

tions while promoting domestic market development. Whileno material structural change in Chinas currency regime isforeseen, we anticipate accelerating CNY appreciation withyear-end rates of CNY6.25 per USD for 2011 and CNY5.88for 2012. China has become the worlds second largeseconomy measured in purchasing power parity terms, withits condition as the global growth pace-setter intensifyingwith the countrys rising domestic demand balanced by stilsolid export growth. We expect GDP growth to exceed 9.3%in 2011-12. Elevated lending by state-controlled banks underpins double-digit gains in investment spending, whileconsumption remains supported by real wage gains associated with productivity improvements. Inflation will remain a

primary concern in 2011. While rising food prices have beenbehind the recent buildup in headline inflation, elevated rawmaterial costs loom in the background with the gradual risein the CNY helping to contain the inflationary impact. Weexpect headline CPI inflation to average 5.5% y/y in 2011Although an inflationary rebound is not discarded in themonths ahead, spillovers have been limited as non-foodinflation remains below 3%. We expect three more tighten-ing adjustments by the Peoples Bank of China to take thebenchmark interest rate to 7.06% by the end of 2011.

AUSTRALIA - The Australian dollar (AUD) will remain wellsupported in the medium-term. Notwithstanding the natural

disasters and the effects of the Japanese catastrophe, theAUD has reclaimed its strengthening trend as improvingfiscal and solid external account fundamentals, strong tiesto Asia and exposure to highly bid commodities all work inits favour. An eventual resumption of monetary tighteningwill further support the currency towards the end of 2011.Australias economic expansion will average over 3.2% y/yin 2011-12. Although GDP contracted during the first quar-ter of 2011, local demand remained steady on the back ofrising investment and consumer spending underpinned byfalling unemployment. Although recent extreme weatherdented consumer confidence, employment prospects re-main supportive. The initial unfavorable effect from the ex-

pected slowdown in Japan should be compensated for byhigher demand during reconstruction. Inflation will continueto challenge the central banks 2-3% target range as globalraw material costs are added to local supply-side pressuresresulting from crop destruction and labour displacements.Annual inflation picked up to 3.3% y/y in the first quarter,with underlying pressures accentuating as services costsunderpinned a rise in core inflation with goods price gainsfalling on the back of AUD strength. We expect the ReserveBank of Australia to resume tightening sometime in 2011Q3after keeping the status quo for five straight meetings.

NEW ZEALAND - The New Zealand dollar (NZD) is supported by favourable terms of trade as the countrys ex-

ports remain the bright spot in the midst of the downshifcaused by regional disasters. Foreign sales of agriculturaproducts remained steady through April, with exports toJapan and South Korea picking up opportunistically. Business activity retained a solid up-tone through May, withagri-business investment increasing on the back of externaaccount improvements. While consumer sentiment remainsdowntrodden as a result of the Christchurch earthquake inFebruary, a slight downtick in the unemployment rate dur-ing the first quarter could be the start of an improvement asthe outlook for corporations improved on the back of lowecredit costs. Inflation remains well above the central banks1-3% comfort zone, after picking up to 4.5% y/y during the

first quarter. Signs of improving domestic demand conditions emerged as non-tradable goods prices advancedahead of the headline, consistent with rising services costsand a somewhat tighter labour market. The central bankremains sanguine about price pressures as it attempts tosupport the economic rebound, having left the benchmarkofficial cash rate unchanged at 2.5% after the March 50basis point reduction. While output must have been adversely affected during January-March period, we anticipate a rebound in the second quarter as New Zealand con-tinues to rip the benefits of a still dynamic Asian region.

ASIA/OCEANIAFundamental Commentary Oscar Snchez +1 416 862-3174


10/17



June 201

INDIA - USDINRs temporary push back above 45.00 reflected not only the forces of risk aversion, but also the lack osupport from Indias macro fundamentals. While the INR was not the worst EM Asian FX performer in May, it is set to underperform the currency group on an easing in risk aversion, despite an ability to recover against the USD. The late May

break of the one-month uptrend in USDINR should be a catalyst for a retracement lower. We look for USDINR at 44.80 asof Q4 2011.

KOREA - The Bank of Koreas decision to pause monetary tightening in May undermined the KRW vs. the rest of EMAsia, with KRW weakness further enhanced by large scale foreign selling of Korean equities. The ability of the KRW tooutperform into the end of the month with an equity rebound is encouraging, and brings KRW performance back in linewith the supportive fundamental trends in robust external balances and monetary policy. We target 1060 for Q4 2011 inUSDKRW.

THAILAND - The THB weakened in May, though at a fairly stable and measured pace, outperforming much of EM Asiawhich speaks to the low volatility nature of the baht. Despite this, the topside of the multi-month bear channel that hadbeen in place for USDTHB was broken, though 30.50 remains a key point of topside resistance. We look for USDTHB toreassert its downside trajectory on proactive monetary policy and very THB-supportive financial and current account dy-

namics. We target 29.0 for USDTHB by Q4 2011.

HONG KONG - The HKD slipped to a one and a half month low against the USD during May, though USDHKD re-mained within the lower end of its 7.75-7.85 convertibility range. Renminbi deposits in Hong Kong continue to build at avery rapid pace, driven predominantly by trade flows. The HKMA has nonetheless reiterated that there is no intention to(and no danger of a) shift away from a USD peg in Hong Kong. We expect USDHKD to trade towards 7.75 by Q4 2011.

DEVELOPING ASIACurrency Outlook Sacha Tihanyi +1 416 862-3154

12 m 6 m 3 m 3 m 6 m 12 m

USDINR 46.37 45.89 45.27 44.95 44.84 44.25 USDINR

USDKRW 1202 1159 1129 1071 1063 1035 USDKRW

USDTHB 32.52 30.21 30.60 29.75 29.18 28.58 USDTHB

USDHKD 7.79 7.77 7.79 7.77 7.75 7.75 USDHKD

Currency TrendsSpot

3-Jun


44.82

1080

30.35

7.78

USDINR USDKRW

USDTHB USDHKD

44.00

44.60

45.20

45.80

46.40

47.00

47.60


1065

1095

1125

1155

1185

1215

1245


29.40

29.95

30.50

31.05

31.60

32.15

32.70


7.750

7.760

7.770

7.780

7.790

7.800

7.810



11/17



June 201

INDIA - Widening interest rate and growth differentials willfurther support the Indian rupee (INR) through 2011 despitea spike in volatility during the second quarter. Rising portfo-

lio investment flows and the prospect of further monetarytightening will reinforce a strengthening trend for the INR.Indias economic expansion will average over 8.3% y/y in2011-12. The economy continued to expand at a solid pacethrough the first quarter of 2011 after an 8.3% gain in 2010,with private local spending on an upturn. Up-trending dis-cretionary spending will compensate for the downtrend ingovernment outlays with public infrastructure projects stillfanning the economic expansion. Exports have remained onan expansionary trend with monthly purchasing managersurveys continuing to point to expanding orders. With sup-port from domestic demand for consumer goods, severalindustrial sectors have turned the corner with leading indi-

cators on the upside contrasting regional trends. Inflationremains a key concern as yearly price gains continue to topAsian economies. Rising food and fuel costs continue tounderpin wholesale price gains which read 8.7% y/y in lat-est data. Agricultural prices rose at the slowest pace in 18months (7.5% y/y). However, accelerating manufacturingcosts evidence spillovers of rising raw material and fuelcosts. The Reserve Bank of Indias main concern is abuildup in inflation expectations leaving it compelled to raiseinterest rates in coming months until there is clear evidenceof stabilization.

KOREA - The Korean won (KRW) will keep a strengtheningtone through 2011-12 on the back of sustained economicgrowth and monetary policy skewed towards inflation con

tainment. While the Bank of Korea (BoK) stands ready todampen excessive appreciation, the healthy economic rebalancing underway will continue to attract foreign capitaflows. While the BoK is in interest rate normalization modea slow in the pace of tightening is envisaged as activityshifts down. The Korean economy will converge towardsmedium term speed in 2011. GDP advanced at a solid 5.6%quarterly annualized rate during the first quarter on the backof net export gains. Although foreign sales have exhibitedpersistent momentum we do not foresee outperformancethis year. Domestic demand slowed on the back of waninggovernment stimulus amid expiring durable goods subsidies, with evidence of rising credit costs starting to bite on

highly indebted households. With consumption and investment spending accounting for 60% and 30% of GDP, respectively, the softer tone on the external trade front wiltranslate into slower spending at home. We expect theeconomy to expand at an average 5% in 2011-12. Headlineinflation has surpassed the central banks 3% 1% targetwith core already over 3%. Falling unemployment has coupled with recently declining real wages, signaling a diminished threat of an inflationary spiral.

THAILAND - Thai baht (THB) appreciation will characterizethe foreign exchange environment in 2011-12. On the back

of intensifying political turmoil and corrective forces in Asianequity markets, the THB entered a soft phase in early Mayafter three months of appreciation versus the US dollar.While the first-half of 2011 will remain politically chargeddue to the July elections, the government will not hesitate touse a sizable international reserve stock to support the cur-rency. The economy will continue to reap the benefits of aprivileged geographical location in Southeast Asia, with ac-tivity supported by balanced growth as domestic demandmomentum runs alongside still sound foreign sales. GDPexpanded at a solid 2% q/q rate during the first threemonths of 2011 on the back of net export gains. Some re-trenchment in manufacturing output is expected during the

second quarter as a result of spillovers from the Japanesecatastrophe. Consumer and investment spending are cur-rently advancing at an over 5% yearly rate, attesting to thesolidity of the domestic demand picture. Inflationary pres-sures have intensified as a result of the upbeat tone in localactivity and the imported rise in food and fuel costs. Head-line consumer inflation is on an upward trend, standing cur-rently at 3.1% y/y, with core inflation also picking up recentlyto 1.6%, well within the Bank of Thailands 0.5 3% targetrange. Looking ahead, further interest rate adjustments areexpected as monetary normalization is pursued.

HONG KONG - The Hong-Kong dollar (HKD) will retain itspeg with the US dollar for the foreseeable future. A shif

towards the Chinese renmimbi (CNY) is unlikely until capitaaccount convertibility is satisfied, and the growth of a robusand multi-faceted offshore CNY market is realized in HongKong. Economic activity is steadily improving as domesticconsumption continues to outperform on the back of fallinglocal unemployment. GDP growth accelerated to a 2.8% q/q(non-annualized) rate in the first quarter, as surging household spending combined favourably with booming exportsLatest foreign sales data suggest, however, an adverse effect from the supply-chain disruptions rooted in Japan. Labour market conditions continue to tighten significantly, withthe jobless rate still hovering around historical lows, under-pinning Hong Kongs solid domestic spending profile. Activ

ity has been supported by a combination of loose monetaryconditions imported from the US and a somewhat expansionary local fiscal stance. Rising inflation in the mainlandHKD weakness and accelerating import costs are feedinglocal price pressures. Headline and core inflation have bothtrended upwards reaching 4.6% y/y and 3.2% in April, respectively. The uptick in inflation is the result of rising foodand fuel prices as well as local rental costs, with minimumwages lifted in May in tandem with further subsidies onelectricity and housing. In turn, negative real interest ratesunderpin asset price gains, further supporting domesticspending.

DEVELOPING ASIAFundamental Commentary Oscar Snchez +1 416 862-3174


12/17



June 201

BRAZIL - The Brazilian real (BRL) continues to test new levels of strength. Widening interest rate differentials, positivecommodity market dynamics, strong (yet decelerating) growth prospects, robust investment flows, and a weakening USDphase are the main factors supportive of global demand for the BRL in the months to come. The government will not hesi

tate to intervene to moderate the pace of currency strength.

MEXICO - The Mexican peso (MXN) is in a strengthening mode on the back of solid growth and credit fundamentals, supportive energy price direction, wide interest rate differentials and strong demand for relative-value trades within theemerging-market world. The MXN has become a favourite currency for global portfolio investors. We expect the currentbullish phase to transition to a stabilization phase in the coming months.

CHILE - The Chilean peso (CLP) has recovered a strengthening bias following a brief period of consolidation of long-term gains. The external (financial and trade) environment continues to be CLP supportive, reinforced by a clear biastowards tightening monetary policy to contain ill-desired inflationary pressures and currency gains. The central bankremains committed to its strategy of international reserves accumulation.

PERU - The Peruvian Sol (PEN) continues to be influenced by investors heightened awareness of political risk linked to

the presidential electoral cycle. Elections aside, Peru continues to offer a favourable economic growth outlook due to thecombination of sizable investment activity coupled with robust trade demand and local consumption. Widening interestrate differentials and central bank intervention will also be factors affecting PEN trends in the near term.

DEVELOPING AMERICASCurrency Outlook Pablo F.G. Brard +1 416 862-3876

12 m 6 m 3 m 3 m 6 m 12 m

USDBRL 1.82 1.71 1.66 1.59 1.60 1.64 USDBRL

USDMXN 12.93 12.49 12.10 11.71 11.94 12.06 USDMXN

USDCLP 530 487 476 471 478 484 USDCLP

USDPEN 2.85 2.83 2.77 2.75 2.73 2.69 USDPEN

USDBRL USDMXN

USDCLP USDPEN

1.58

11.71

468

2.76

Currency TrendsSpot

3-Jun


1.55

1.60

1.64

1.69

1.73

1.78

1.821.87

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

11.5

11.7

12.0

12.2

12.5

12.7

13.0

13.2


459

473

487

501

515

529

543


2.75

2.76

2.78

2.79

2.81

2.82

2.84

2.85

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


13/17



June 201

BRAZIL - Brazil continues to benefit from a sound policyframework, outstanding global trade conditions, an attrac-tive high-yield environment, improving employment condi-

tions and sustainable credit growth. A persistent weakeningphase affecting the USD is a powerful magnet attractingcapital flows to Brazil, the G10 country with the most ap-pealing domestic interest rate environment. The centralbank of Brazil has earmarked the fight against inflation asthe single most relevant policy priority. To achieve its infla-tion control goal, defined by the COPOM team as guidingthe IPCA-based consumer price inflation rate towards theofficial target (4.5% +/- 2%) some time in 2012, the centralbank remains in aggressive tightening mode. The bench-mark SELIC rate will be, again, increased at the next CO-POM meeting scheduled to take place on June 8th. Brazilwill continue to offer global investors an outstanding carry-

trade investment option with a target SELIC rate at 12.25%,that is, 1,200 bps over the US Fed Funds rate. Recentofficial rhetoric has hinted that the tightening cycle is not yetover, despite the clear deceleration in domestic economicactivity; according to the most recent survey conducted bythe central bank, the economy will expand by 4% this year,down from 7.5% in 2010. The monetary authorities, highlysensitive to the pace of local credit expansion, will continueto uses as many policy tools as possible to prevent an ex-cessive increase in inflation-sensitive credit.

MEXICO - Mexico is enjoying a positive momentum despitethe intensified volatility caused in fixed-income securitiesmarkets as a result of the deteriorating conditions in

Greece. Foreign capital flows continue to eye Mexican deband equity securities markets on the back of multiple supporting factors such as interest rate differentials, crude oiprice strength, US economic recovery dynamics, persistendemand for emerging market assets and relative-value attractiveness within Latin America. The US Federal Reserve(Fed) continues to influence the government bond yieldcurve through its vast holdings of treasury debt securitiesThe global benchmark 10-year bond is now offering a yieldbelow the 3% threshold, fuelling demand for high-yieldingalternatives in emerging market economies. Mexico is anatural candidate to receive such foreign flows; in fact, theMexico-US government bond yield spread, at 390 basis

points (bps), remain a magnet for foreign investors, feedingdemand for the MXN. Energy prices retain a strengtheningbias despite modest adjustments occurring recently as areassessment of global growth conditions; the benchmarkWTI is trading at a price of US$100 per barrel after touchingthe 115 mark at the end of April. Regional trade dynamicscontinue to be another factor supporting a bullish tone in theMXN; despite persistent weakness in some Fed-sensitiveeconomic sectors in the US, the recovery in the manufacturing sector is a positive factor for Mexico given the degree ointerdependence between the two economies.

CHILE - Chile continues to offer a promising economic (andcurrency) outlook despite a recent erosion in the countrys

terms of trade. The CLP has been relatively immune to thedual negative effect caused by rallying crude oil prices andcorrecting copper prices. The trade-intensive Chilean econ-omy continues to benefit from positive momentum in globaltrade fed primarily by persistent demand from Asia. Thelargest Asian economies are major consumers of Chileanproducts. In addition, there is a high degree of regionaliza-tion of currency market dynamics led by dominant econo-mies such as Brazil. The technical correlation between theBRL and the CLP has been growing of late, making the CLPvulnerable to higher event risk stemming from unexpecteddevelopments in Brazil. Nevertheless, for now, the increas-ing currency convergence within Latin America is a positive

factor reinforcing CLP strength. Inflation has also been influ-encing the currency outlook; consumer prices increased by4.3% y/y last May. The Central Bank of Chile has been ad-

justing its monetary policy rate consistently over the past 12months, offering another CLP-supportive factor; indeed, thetightening cycle under way has pushed the reference ratefrom 0.50% (June 2010) to 5% (today). The next monetarypolicy meeting is scheduled for June 14th. In line with theestablished process of intervention, the central bank is ac-cumulating international reserves (currently at US$32 bil-lion); they are up 25% over the past 12 months.

PERU - Election-related political risk has become the dominant piece affecting Perus outlook. Peruvians will elect a

new presidential administration on June 5th

. The tight raceand erratic messages delivered during the campaign periodhave instilled a degree of financial market volatility not seenin previous years. From a purely macroeconomic perspective, Peru still offers a promising growth outlook, in the absence of radical shifts in government policies affecting business and consumer confidence. The volatility observed inlocal currency markets during May is also a vivid reminderof the developing nature of political institutions in LatinAmerica; indeed, in March and April, the PEN abruptly de-coupled from the appreciating trend in place in other re-gional floating currencies but has recently recovered someof the lost value, trading at a rate of 2.77 per USD. Despite

a renewed sense of market nervousness and uncertaintiesregarding the policy environment, the consensus of bothmarket participants and economists continues to discount aperiod of exchange rate stability in the months ahead. Onthe monetary front, the Peruvian central bank remains - inline with the regional trend - embarked on a process omonetary tightening which over the past 12 months hasseen a cumulative 300 bps hike in the reference rate to4.25%. Structurally speaking, Peru is immersed in a virtu-ous path which will be hard to deviate from, irrespective owho wins the presidency.

DEVELOPING AMERICASFundamental Commentary Pablo F.G. Brard +1 416 862-3876


14/17



June 201

RUSSIA - Elevated oil prices will continue to provide support to the Russian ruble (RUB); nevertheless, approachingparliamentary and presidential elections will likely introduce periods of currency volatility. We expect USDRUB to close theyear at 28.

TURKEY - A rapidly deteriorating current account will likely continue to put pressure on the Turkish lira (TRY). Nevertheless, monetary tightening prospects should provide some support to the currency. We expect the TRY to close the year a1.60 per USD.

HUNGARY - The Hungarian forint (HUF) will continue to be subject to short-term volatility, reflecting market participantsconcerns regarding the countrys fiscal management. We expect the currency to close the year at 270 per euro.

SOUTH AFRICA - The South African rand (ZAR) will continue to reflect fluctuations in commodity prices and rapidchanges in investor sentiment. A widening current account deficit will point to a depreciating bias of the ZAR vis--visthe US dollar in 2011 and 2012. We expect the ZAR to close the year at 7.0 per USD.

DEVELOPING EUROPE/AFRICACurrency Outlook Tuuli McCully +1 416 863-2859

12 m 6 m 3 m 3 m 6 m 12 m

USDRUB 30.9 31.5 28.9 28.0 28.0 28.4 USDRUB

USDTRY 1.57 1.50 1.60 1.60 1.60 1.59 USDTRY

EURHUF 275 281 271 268 269 268 EURHUF

USDZAR 7.67 7.10 6.97 6.89 6.97 7.12 USDZAR

Currency TrendsSpot

3-Jun


27.9

1.59

265

6.74

USDRUB USDTRY

EURHUF USDZAR

27.1

27.9

28.6

29.4

30.1

30.9

31.6


1.38

1.44

1.49

1.55

1.60

1.66


260

265

270

275

280

285

290


6.50

6.75

7.00

7.25

7.50

7.75

8.00



15/17



June 201

RUSSIA - Domestic politics will be at the centre of investorattention in the next 12 months as parliamentary electionsare scheduled for December, followed by a presidential bal-

lot a few months later. Both President Medvedev and PrimeMinister Putin are considering running for presidency; how-ever, an official decision regarding who is the ruling UnitedRussia partys candidate has not yet been made. Russianeconomic activity cooled somewhat in the first quarter of2011, with real GDP expanding by 4.1% y/y compared with4.5% in the final quarter of 2010. While developments incrude oil and natural gas prices will significantly impact theRussian economic outlook, household spending remainsweak on the back of high inflation and challenging labourmarket conditions (the unemployment rate was 7.2% inApril). Exports remained strong during the January-Marchperiod, though some cooling can be expected in the months

ahead. We expect the countrys real GDP growth to aver-age 4% through 2012 following a 4.0% expansion in2010. Inflation accelerated to 9.6% y/y in April from 9.5%the month before. Accordingly, the Russian central banktightened monetary conditions on May 30th by raising theovernight deposit rate by 25 basis points to 3.5% whilekeeping the benchmark refinancing rate unchanged at8.25%. Policymakers will likely take a break from furthermonetary tightening in the near term in order to assess theimpact of recent measures.

TURKEY - Turkish general elections will be held on June12th and the ruling Justice and Development Party will likelyremain in office for a third consecutive term as the robustly

growing economy offers a favourable background for theincumbents re-election. We expect real GDP to grow by 5%this year, following an 8.9% expansion in 2010. Strong domestic demand is reflected in rapid credit expansion(currently around 35% y/y), which the Turkish central bankis attempting to curb through higher reserve requirementsauthorities aim to ease credit growth to 25% y/y by the endof the year. We assess that policymakers will start raisingthe key interest rate in the second half of the year as infla-tion expectations continue to rise and further efforts by thecentral bank are required to limit soaring credit growth. Fol-lowing the Monetary Policy Committee meeting on May25th, the benchmark interest rate was kept on hold at 6.25%

for the fourth consecutive month.Inflationary pressures arerebuilding, with the consumer price index increasing by4.3% y/y in April following a print of 4.0% the month beforewe expect the inflation rate to rebound to around 6% y/yby the end of 2011. Despite the authorities efforts to easecapital inflows by keeping the interest rate level low, thecurrent account deficit continues to widen rapidly, reachingaround 8% of GDP in 2011 compared with 6.7% in 2010.

HUNGARY - Hungarian monetary authorities will likely con-tinue to sit on the sidelines in the coming months. Following

the May 16th

Monetary Council meeting, the benchmarkinterest rate was kept unchanged at 6.0% for the fifth con-secutive month. While inflationary pressures are intensify-ing on the back of elevated commodity prices (the headlineinflation rate accelerated to 4.7% y/y in April from 4.5% themonth before), still-weak domestic demand and weak em-ployment conditions (the unemployment rate was 11.4% inApril) should alleviate any demand-driven pressure onprices. We expect inflation to close the year at 4.0% y/y,before easing towards the central banks 3.0% target by theend of 2012. Economic growth is supported by strong ex-ternal demand. Real GDP expanded by 0.7% q/q (2.4% y/y) in the first quarter of the year, accelerating from the 0.2%

q/q (1.9% y/y) pace recorded in the final quarter of 2010.We expect the countrys output to grow by 2% this yearand to accelerate to 3% in 2012 as the recovery becomesmore broadly-based. Hungary remains in fiscal consolida-tion mode as it aims to restore investor confidence in thesustainability of public finances. Nevertheless, market par-ticipants remain somewhat wary of the governments com-mitment to the implementation of planned structural re-forms. Public accounts will show a surplus of around 2.0%of GDP this year (compared with a deficit of 4.2% in 2010)due to one-off private sector pension transfers.

SOUTH AFRICA - Price stability in South Africa is threatened by higher administered prices, wage settlements and

elevated commodity prices. Consumer price inflation accelerated to 4.2% y/y in April from 4.1% the month before; nevertheless, it remains comfortably within the South AfricanReserve Banks (SARB) 3-6% target inflation range. Weexpect inflation to approach the upper limit of the range to-ward the end of 2011. Regardless, because inflationarypressures are not demand-driven, the SARB opted to keepthe benchmark interest rate unchanged at 5.5% followingthe Monetary Policy Committee meeting on May 12th. Wedo not foresee any changes to the monetary policy stancein the near term.South African economic performance continues to improve gradually. Real GDP growth acceleratedto 4.8% q/q (annualized) in the first quarter of 2011 from

4.5% in the October-December period, with the robusmanufacturing sector together with finance, real estate andbusiness services being the main contributors to economicactivity. We expect the countrys real GDP growth to aver-age 3% through 2012. With the trade balance movingfrom a surplus position to a deficit, the current account is seto widen significantly from 2.6% of GDP in 2010 to around5% of GDP in 2012. In the context of the countrys low savings rate and its dependence on volatile portfolio investmeninflows, the shortfall points to modest selling pressures othe ZAR in the next two years.

DEVELOPING EUROPE/AFRICAFundamental Commentary Tuuli McCully +1 416 863-2859


16/17



June 201

GLOBAL CURRENCY FORECAST (end of period)2009 2010 2011f 2012f

Q1a Q2 Q3 Q4 Q1 Q2 Q3 Q4

MAJOR CURRENCIES

Japan USDJPY 93 81 84 90 83 79 82 84 86 87 89 90

Euro zone EURUSD 1.43 1.34 1.50 1.50 1.42 1.47 1.49 1.50 1.48 1.48 1.50 1.50

EURJPY 133 109 126 135 118 116 122 126 127 129 134 135

UK GBPUSD 1.62 1.56 1.65 1.70 1.60 1.64 1.64 1.65 1.65 1.67 1.69 1.70

EURGBP 0.89 0.86 0.91 0.88 0.88 0.90 0.91 0.91 0.90 0.89 0.89 0.88

Switzerland USDCHF 1.04 0.93 0.85 0.84 0.92 0.85 0.86 0.85 0.85 0.85 0.84 0.84

EURCHF 1.48 1.25 1.28 1.26 1.30 1.25 1.28 1.28 1.26 1.26 1.26 1.26

AMERICAS

Canada USDCAD 1.05 1.00 0.93 0.92 0.97 0.95 0.94 0.93 0.94 0.94 0.93 0.92

CADUSD 0.95 1.00 1.08 1.09 1.03 1.05 1.06 1.08 1.06 1.06 1.08 1.09

Mexico USDMXN 13.1 12.3 12.0 12.3 11.9 11.6 11.8 12.0 12.1 12.0 12.1 12.3

CADMXN 12.4 12.4 12.9 13.4 12.3 12.2 12.5 12.9 12.9 12.8 13.0 13.4

Argentina USDARS 3.80 3.98 4.40 5.00 4.05 4.13 4.26 4.40 4.54 4.69 4.84 5.00

Brazil USDBRL 1.74 1.66 1.60 1.70 1.63 1.58 1.59 1.60 1.62 1.65 1.67 1.70

Chile USDCLP 507 468 480 490 477 467 474 480 482 485 487 490

Colombia USDCOP 2044 1908 1800 1880 1871 1790 1795 1800 1820 1840 1860 1880

Peru USDPEN 2.89 2.81 2.72 2.64 2.80 2.76 2.74 2.72 2.70 2.68 2.66 2.64

Venezuela 1/ USDVEB 2.15 4.29 4.30 5.15 4.29 4.29 4.29 4.30 4.50 4.70 4.92 5.15

ASIA / OCEANIA

Australia AUDUSD 0.90 1.02 1.09 1.11 1.03 1.07 1.08 1.09 1.09 1.10 1.10 1.11

China USDCNY 6.83 6.61 6.25 5.88 6.55 6.45 6.35 6.25 6.16 6.06 5.97 5.88

Hong Kong USDHKD 7.75 7.77 7.75 7.75 7.78 7.77 7.76 7.75 7.75 7.75 7.75 7.75India USDINR 46.5 44.7 44.8 43.5 44.6 45.0 44.9 44.8 44.5 44.1 43.8 43.5

Indonesia 2/ USDIDR 9.40 9.00 8.54 8.40 8.71 8.54 8.54 8.54 8.50 8.47 8.43 8.40

Malaysia USDMYR 3.43 3.06 2.89 2.78 3.03 2.99 2.94 2.89 2.86 2.83 2.81 2.78

New Zealand NZDUSD 0.72 0.78 0.78 0.80 0.76 0.82 0.80 0.78 0.78 0.79 0.79 0.80

Philippines USDPHP 46.2 43.8 42.0 40.0 43.4 43.1 42.5 42.0 41.5 41.0 40.5 40.0

Singapore USDSGD 1.40 1.28 1.21 1.20 1.26 1.23 1.22 1.21 1.21 1.21 1.20 1.20

South Korea USDKRW 1164 1126 1060 1000 1097 1076 1068 1060 1045 1030 1015 1000

Thailand USDTHB 33.4 30.1 29.0 28.0 30.3 30.1 29.6 29.0 28.7 28.5 28.2 28.0

Taiwan USDTWD 32.0 29.3 27.8 26.5 29.4 28.5 28.2 27.8 27.5 27.1 26.8 26.5

EUROPE / AFRICA

Czech Rep. EURCZK 26.4 25.0 24.0 24.0 24.5 24.5 24.2 24.0 24.0 24.0 24.0 24.0Iceland USDISK 126 115 115 110 114 115 115 115 114 112 111 110

Hungary EURHUF 270 279 270 265 266 267 268 270 269 267 266 265

Norway USDNOK 5.79 5.82 5.25 5.15 5.54 5.44 5.35 5.25 5.23 5.20 5.18 5.15

Poland EURPLN 4.10 3.96 3.90 3.80 4.02 3.94 3.92 3.90 3.87 3.85 3.82 3.80

Russia USDRUB 30.0 30.5 28.0 29.0 28.4 28.0 28.0 28.0 28.2 28.5 28.7 29.0

South Africa USDZAR 7.40 6.63 7.00 7.30 6.77 6.83 6.91 7.00 7.07 7.15 7.22 7.30

Sweden EURSEK 10.25 8.99 8.70 8.60 8.95 8.86 8.78 8.70 8.67 8.65 8.62 8.60

Turkey USDTRY 1.50 1.54 1.60 1.57 1.55 1.59 1.60 1.60 1.59 1.58 1.58 1.57

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

South

2012f2011f

North


17/17

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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 sha

be taken as a representation for which The Bank of Nova Scotia o

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2011 Scotia FX Outlook 06

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