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

Foreign Exchange Outlook

September 2012

Collective stimulus and liquidity injections by major central banks, decelerating growth in emerging-market economies, speculative moves in selected commodities and persistent Europe-centred financial stress currently dominate investor sentiment in foreign exchange markets. The USD offers a modest appreciating bias versus the EUR and JPY. Commodity-linked AUD and CAD will benefit from AAA-rating status and attractive yield differentials. The MXN remains a regional favourite whereas the BRL is in stable trading mode. The EUR will remain weak against all major currencies. The CHF value will be anchored versus the EUR by policy and the GBP outlook 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 a strengthening tone on the back of decisive policy action, injecting a favourable tone into Asian floating currencies such as KRW, THB and MYR. The INR retains a weak outlook.

Global Economic Research

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Foreign Exchange

Outlook

September 2012

Actual Q1a 12 Q2a 12 Q3 12 Q4 12 Q1 13 Q2 13 Q3 13 Q4 131.25 1.33 1.27 1.21 1.23 1.22 1.22 1.21 1.21

1.23 1.23 1.23 1.23 1.23 1.2478.6 83 80 78 80 84 85 86 87

79 79 80 81 82 831.58 1.60 1.57 1.55 1.59 1.62 1.63 1.64 1.64

1.56 1.55 1.55 1.55 1.56 1.570.99 1.00 1.02 1.02 0.99 0.98 0.97 0.97 0.97

1.03 1.01 1.01 1.00 1.00 0.991.03 1.03 1.02 1.02 1.02 1.04 1.04 1.05 1.05

1.01 1.01 1.00 1.00 1.00 1.0013.39 12.81 13.36 13.28 13.12 13.20 13.08 13.17 13.38

13.31 13.13 13.10 13.06 13.04 13.04

(*) Source: Consensus Economics Inc. August 2012

AUDUSD

USDMXN

AUDUSD USDMXN

EURUSD USDJPY

GBPUSD USDCAD

USDJPY

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

Consensus*

Mexican Peso

Consensus*GBPUSD

Consensus*

Consensus*

USDCADConsensus*Canadian Dollar

Australian Dollar

Global Foreign Exchange Outlook

Euro

Yen

Sterling

August 30, 2012EURUSD

Consensus*

74

81

88

95

102

109

116

123US D/ JPY

100 Day

200 Day

1.12

1.22

1.32

1.42

1.52

1.62EUR/USD

100 Day

200 Day

1.36

1.51

1.66

1.81

1.96

2.11 GBP/ USD

100 Day

200 Day

0.90

0.98

1.06

1.14

1.22

1.30

US D/CAD

100 Day

200 Day

0.59

0.67

0.74

0.82

0.89

0.97

1.04

1.12

AUD/USD

100 Day

200 Day

9.7

10.8

11.9

13.0

14.1

15.2USD/ MXN

100 Day

200 Day

Global Economic Research

3

Foreign Exchange

Outlook

September 2012

Central bank intervention, growth stimulus in China and Brazil, persistently strong European financial market stress, speculative trading dynamics in commodity mar-kets and uneven directional shifts in emerging-market assets are some of the primary factors swaying capital flows in foreign exchange markets. The US dollar (USD) has been under pressure following three consecutive months of gains versus other major currencies, with the exception of the Japanese yen (JPY). The US economy continues to struggle to address pro-longed weakness in employment conditions, despite timid improvement in leading job-market indicators over the past few months. Recent data on jobless claims and still-high unemployment levels indicate a relatively fragile out-look for consumption activity. The USD may be on the defensive as monetary authorities remain committed to maintaining a near-zero short-term interest rate environ-ment and to its large-scale asset (US Treasury and Mort-gage-based securities) purchase program aimed at de-pressing long-term funding costs for both the government and mortgage borrowers. Currency markets will be im-pacted materially by the mid-September Federal Reserve decision on further asset purchases (so-called QE3). The US fiscal outlook is complicated by the November elec-tion; however, market participants will demand clarity on key government policies before year-end. The other NAFTA zone currencies, the Canadian dollar (CAD) and the Mexican peso (MXN) have been immersed in a strengthening phase, supported by higher commodity prices, relatively better financial sector strength and, to an extent, interest rate differentials. Credit differentiation dy-namics continue to drive capital flows to assets issued by the best-rated sovereign borrowers. Following the recent downward revision to a “negative” outlook for Germany, Canada and Australia are the only major sovereign cred-its with a triple-A rating and a “stable” outlook. In brief, The Canadian dollar (CAD) appears comfortable close to parity and, though it should appreciate over time, we do not expect it to move dramatically away from parity. The combination of the Bank of Canada’s hawkish tone, a tri-ple-A rating, a large resource base and investor sentiment is supportive of a relatively strong CAD. The MXN is also receiving the benefits of the post-election premium and consolidating its position as a high-yield North American option. Meanwhile, the Brazilian real (BRL) remains within its spring and summer range, with a slight bias towards further weakness. The European economic landscape remains in a constant state of convulsion. Despite a temporary relief in the sell-off spree, the underlying structural weakness of the pe-

ripheral economies, coupled with the governance chal-lenges facing German and French leaders, should keep the euro (EUR) on the defensive for a prolonged period. The growing uncertainty about the future shape of the European currency union has triggered another round of credit rating revisions last month: Moody’s downgraded the rating outlook of Germany, the Netherlands and Lux-embourg to “negative”. This bearish outlook for EUR is tempered by the negative USD fundamentals noted above. Meanwhile, the Swiss authorities remain commit-ted to defending the policy-mandated ceiling of 1.20 francs (CHF) per EUR as a means of defending the coun-try’s export sector against damaging currency apprecia-tion. The outlook for the other European currencies is brighter; however the recent strength in the Swedish kro-na (SEK) seems to have overshot. The bullish outlook for the British pound (GBP) is temporarily damped as the UK struggles to meet its austerity plan and to address the economic contraction. The Bank of England maintains aggressive policy as the UK finds itself highly exposed to the European crisis; however, on a relative basis the GBP should fare better than EUR and rally against the USD in 2013. The Japanese yen (JPY) continues to be treated as a preferred safe-haven asset in times of global financial market stress. Against the euro, the JPY has been by far the world’s best-performing currency over the past five years. The slight devaluation of the Chinese renminbi (CNY) versus the USD this year has complicated JPY dynamics. However, the fundamental outlook for JPY is negative, as aggressive monetary policy, an anticipated deceleration in growth and demographics weigh on the currency. The CNY is enjoying a gradual revaluation (versus the USD) following three months of depreciation. Persistent correction in equity markets and a slowdown in both the manufacturing and export sectors were key fac-tors weighing on the CNY. The CNY should appreciate only modestly from its 2011 year-end levels as the funda-mental side has shifted and government policy also ap-pears to be in transition. The Indian rupee (INR) is enjoy-ing a stabilization phase following a period of acute cur-rency weakness; the INR lost 17% against the USD over the past 12 months. The underlying causes of such soft-ness remain in place. Australia’s enviable sovereign credit position, interest rate differentials and strong foreign de-mand for high-yield currencies drove up the value of Aus-tralian dollar (AUD) during the spring and early summer. However, loosening monetary policy, AUD’s high beta status and fears concerning the end of its mining boom weigh heavily on what would otherwise be a bullish out-look.

MARKET TONE & FUNDAMENTAL FOCUS Pablo F.G. Bréard + 1 416 862-3876 Camilla Sutton +1 416 866-5470

Global Economic Research

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Foreign Exchange

Outlook

September 2012

CAD has traded in a relatively narrow 647 point spread in 2012, with the currency comfortable close to parity. We expect the 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 banking response. These, as well as domestic factors, are the same major themes that are likely to drive CAD’s valuation into year-end. The deterioration that took place in the global growth outlook early in the summer has stabilized in the major economies 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 and difficult 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 central banks, 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) stands out 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-A rating 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 in 2012 and $100 in 2013. However it is not just the level, but also the spread between where Canada exports and imports that is also important and this is expected to narrow; providing support for the Canadian economy and CAD. Finally the outlook 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 largest risks to our view are a further deterioration in global growth or a spike in risk aversion. Our year end targets are: 1.01 in 2012 and 1.03 in 2013, reflecting a strengthening CAD.

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

12 m 6 m 3 m 3 m 6 m 12 mA UD C A D 1.05 1 .06 1 .01 1 .02 1 .02 1 .02 A UD C A DC A D J P Y 78.75 81.97 74.94 79 .32 81.28 83.10 C A D J P YE URC A D 1.39 1 .32 1 .29 1 .22 1 .20 1 .18 E URC A DUS D C A D 0.98 0 .99 1 .04 1 .00 0 .98 0 .97 US D C A D

C u rre n c y T re n d sS pot

30-A ugOutlookGo ing B ac k

F X Rate F X Ra te

E U R C AD U S D C AD

1.02279.171 .2410.992

AU D C AD C AD J P Y

0.9 9

1 .0 1

1 .0 3

1 .0 5

1 .0 7

A u g -1 1 O c t- 11 D ec - 1 1 F e b -1 2 A p r-1 2 Ju n -1 2 A u g -1 2 7 2 .0

7 5 .0

7 8 .0

8 1 .0

8 4 .0

A u g -1 1 O c t- 1 1 D e c- 1 1 F e b -1 2 A p r-1 2 J u n -1 2 A u g -1 2

1 .21

1 .24

1 .27

1 .30

1 .33

1 .36

1 .39

1 .42

A u g -1 1 O c t- 1 1 D e c- 1 1 F e b -1 2 A p r-1 2 Ju n -1 2 A u g -1 20 .9 6

0 .9 8

1 .0 0

1 .0 2

1 .0 4

1 .0 6

A u g -1 1 O c t- 1 1 D e c - 11 F e b -1 2 A p r-1 2 Ju n -1 2 A u g -1 2

Global Economic Research

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Foreign Exchange

Outlook

September 2012

UNITED STATES - The economic deceleration in the Unit-ed States seems to be moderating in Q3, but the data re-main mixed. Industrial Production was up 8% annualized in July, led by motor vehicles & parts production, as well as defense & space equipment, materials and consumer goods production. Several measures of the housing sector – including prices, new and existing home sales, and build-ing permits – have been slowly trending upwards. Residen-tial investment will contribute positively to GDP in 2012 for the first time since 2005, although housing activity remains well below pre-crisis levels. In July employment data showed that 163,000 new jobs were created, which is a significant improvement on the Q2 monthly average of 73,000 jobs. However, July’s rate of increase is still insuffi-cient to lower the unemployment rate, which actually ticked-up to 8.3% as discouraged workers returned to the job market. The weak labour market, slow consumer credit growth and low confidence levels continue to restrain household consumption, hampering a more robust recov-ery. The Conference Board consumer confidence index was down sharply in August. Furthermore, rising food and gasoline prices will put a dent in consumer discretionary spending, at a time when business investment is also de-celerating. Total orders for durable goods, after stripping out military and aviation, confirms that demand for ‘core’ capital goods continues to decline. Trade data also demon-strate weak demand for imported industrial supplies and capital goods. Second quarter GDP figures show the low-est level of business investment since the beginning of 2011, confirming that firms are delaying hiring and outlays because of the uncertainty surrounding the ‘fiscal cliff’, and potential spending cuts and tax increases. Moreover, event risk in September is high because of several key develop-ments in the European debt crisis, which is further clouding the US outlook and depressing worldwide trade.

CANADA - Data continue to confirm slower Canadian growth in Q2, with output expected to have increased by only about 1.5% annualized. July employment data sug-gest that economic weakness could linger into the second half of the year as the global environment remains weak and domestic demand moderates. In July, the labour mar-ket lost 30,000 jobs – across a variety of sectors including natural resources, manufacturing, transportation and public administration – and the unemployment rate rose to 7.3%. Retail sales were down by 0.4% in June, likely influenced by increased duty-free limits which encouraged cross-border shopping. Retail sales contracted by 2% in Q2, as consumer cautiousness takes hold because of labour mar-ket softening, high household debt levels and the cooling housing market. Housing starts have flattened, though re-main above longer-term averages, and prices have begun to soften (down 2.2% y/y in July); however, there is consid-erable regional variation. Manufacturing shipments were down by 0.4% m/m in June, on par with average declines registered in the first half of 2012. Manufacturing data have been soft across a variety of sub-sectors, though the auto industry continues to perform well, both in production and sales. The weakness has been more pronounced in non-durable goods, with the manufacturing of durable goods performing better alluding to robust business investment on the back of strong corporate balance sheets. The trade deficit widened in June to an annualized C$21.7 billion as imports continued to grow, while exports remained flat af-fected by the ongoing euro zone crisis which has negative-ly impacted global trade. The slowdown in business invest-ment in the US, due to the approaching ‘fiscal cliff’, will also affect the Canadian economy at a time when domestic fac-tors such as the housing market and consumption are sof-tening. Canada should benefit from the rising price of oil and agricultural products, but without further pipeline export capacity, deep discounting of Canadian crude will continue as production increases.

CANADA AND UNITED STATES Fundamental Commentary Devin Kinasz +1 416 866-4214

MONETARY POLICY COMMENTARY Derek Holt +1 416 863-7707 Dov Zigler +1 416 862-3080

UNITED STATES - Scotiabank continues to expect that the Federal Reserve (Fed) will undertake quantitative easing during H2 2012 with high odds that it will commence its purchasing program at its September 13 meeting. We ex-pect further easing to come in the form of open-ended roll-ing purchases of a mix of treasury securities and MBS. The Fed’s rationale for undertaking further quantitative easing is slow economic growth (2% q/q in Q1, 1.7% q/q in Q2) and stubbornly high unemployment (8.3% in July, 8.3% in Janu-ary). Minutes from the August 1 FOMC meeting said that “Many members judged that additional monetary accom-modation would likely be warranted fairly soon unless in-coming information pointed to a substantial and sustainable strengthening in the pace of the economic recovery” – we do not see any change in the economic data that would reverse that view.

CANADA - Scotiabank anticipates that the Bank of Canada (BoC) will remain on hold through our 2013 economic fore-cast horizon and into 2014. Our forecast is based on our view that spare capacity in the Canadian economy will in-crease in the coming quarters as actual growth under-performs potential growth in no small part due to cool ex-ports and expected softness in housing and consumer spending. Subdued inflation (CPI came in at 1.3% y/y in July) and slow GDP growth (Scotia forecasts 1.4% q/q growth in Q2) are further signs of slack in the economy. Combined with the likelihood that US monetary policy will remain accommodative through our forecast horizon, they round out our rationale for anticipating that the BoC will not hike rates. We do not expect rate cuts absent a global li-quidity and funding crisis (neither Scotia’s base case nor the BoC’s).

Global Economic Research

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Foreign Exchange

Outlook

September 2012

EURO ZONE - Event risk in the Eurozone looms and has skewed the risk return profile of EUR. Sentiment has improved but 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, we do 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 vulnerable to the European crisis. To date, GBP has been supported by its triple-A rating, which could come under threat. Technicals suggest 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 rare and 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 USD and 6.6% against EUR. The country’s triple-A rating and relative fundamentals have supported the currency, even as the market is pricing in 50bpts points of central bank easing over the next year. We expect EURSEK’s appreciating trend to moderate, targeting a Q412 rate of 8.45.

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

12 m 6 m 3 m 3 m 6 m 12 mE URUS D 1.43 1.33 1.24 1.22 1.22 1.21 E URUS DGB P US D 1.62 1.59 1.54 1.58 1.61 1.64 GB P US DE URC HF 1.13 1.21 1.20 1.20 1.25 1.25 E URC HFE URS E K 9.15 8.82 9.01 8.47 8.45 8.40 E URS E K

E U R U S D G B P U S D

E U R C H F E U R S E K

1.251.581.208.37

C u rre n c y T re n d s

FX Rate FX RateS pot

30-A ugOutlookGoing B ac k

1 .20

1 .25

1 .30

1 .35

1 .40

1 .45

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 21 .5 3

1 .5 6

1 .5 8

1 .6 1

1 .6 3

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

G B P U S D

1.0 8

1 .1 3

1 .1 8

1 .2 3

1 .2 8

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 8 .10

8 .35

8 .60

8 .85

9 .10

9 .35

9 .60

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

Global Economic Research

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Foreign Exchange

Outlook

September 2012

EURO ZONE - September is loaded with European event risk which may affect both the euro and the growth outlook, including the likely announcement of details regarding Euro-pean Central Bank (ECB) bond purchases, a German Con-stitutional Court ruling on the European Stability Mechanism (ESM), Dutch elections and, possibly, a report on Greece from the Troika. In light of the considerable remaining un-certainties in the region, the somewhat better-than-expected performance of the euro area economy in the first half of 2012 (driven mainly by Germany and France) is ex-pected to be offset by a more protracted slump through mid-2013. We maintain our expectation for a output decline of 0.7% in 2012, though we now anticipate growth of just 0.2% in 2013. Sub-50 PMIs continue to portray contractionary conditions across the region, as fiscal austerity bites deeper in the periphery and unemployment climbs higher. Expecta-tions are mounting for additional bailout requirements, which would weigh on the ratings of the remaining triple-A credits and the ESM. The ECB will resume purchases of distressed government securities, likely complemented by a quarter-point reduction in the policy rate before year-end, in order to facilitate the process of debt refinancing and to im-prove the functioning of interbank markets. Inflationary pressures have returned in the form of higher food and oil prices, and we have accordingly lifted our year-end inflation forecast to 1.9% y/y. Ultimately, we do not anticipate that this development will dissuade the ECB from easing policy.

UNITED KINGDOM - Despite nagging concerns on the fis-cal, economic, and inflation fronts, the pound sterling strengthened through August as markets were buoyed by expectations of imminent action by global central banks. Notwithstanding the mild upward revision to the second-quarter GDP estimate at the second reading (to -0.5% q/q from -0.7%) and the anticipated boost from a successful Olympic games, the fundamental growth story in the UK remains weak. The PMIs drifted lower again in July, with the manufacturing and services indexes reaching their lowest levels since May 2009 and December 2010, respectively. The nation’s public finances have also deteriorated; four months into this fiscal year, government borrowing is GBP 9.3 billion higher than the same period last year, on track to exceed the official full-year target by a notable margin. With the nation’s triple-A credit rating under close scrutiny, au-thorities are now under pressure to either tighten spending, or loosen the fiscal plan so as to support growth, and in-crease borrowing even further. Meanwhile, rising food and energy costs have revived near-term inflationary concerns. The chances for additional policy easing by the Bank of England have receded, though we consider the door still open for expanded asset purchases. In stark contrast to the headline GDP data, the labour market appears remarkably resilient. In the three months to June, 201,000 jobs were added, the most in two years. This trend should continue in July given the 5,900 drop in jobless claims that month.

SWITZERLAND – Swiss authorities maintain a firm commit-ment to the exchange rate floor, which is now approaching its first anniversary, and which the market views as credible. Deflation remains a prime concern for the Swiss National Bank (SNB); the headline price index dropped 0.7% y/y in July, marking the tenth straight decline, albeit at the slowest pace since December. The SNB also continues to monitor the domestic property market which, although still flourish-ing, has recently shown signs of moderation. The UBS Real Estate Bubble index eased slightly in the second quarter, backing off from the 10-year high registered in the prior quarter, while the SNB’s single family home price index posted a 0.5% q/q contraction in the same period, its first quarterly drop in five years. These developments supported the SNB’s recent decision to shelve a proposal for capital buffers on banks’ mortgage books. With the central bank continuing to intervene in foreign exchange markets in de-fense of the EURCHF floor, international reserves have sky-rocketed, reaching a record CHF 406.5 billion in July. As a share of GDP, forex reserves now measure 68%, up from 9% prior to the global recession (and higher than the shares of China and Japan, the largest reserve holders). Neverthe-less, the SNB Chairman has asserted that there is no limit to the amount of reserves the bank can buy. The economy continues to hold up relatively well. The KOF Leading Indi-cator posted a 12-month high in August and the trade sur-plus touched its highest level since last May in July.

SWEDEN – The Swedish krona maintains a strong safe-haven position, backed by a resilient economy, healthy public finances, a stable triple-A credit rating and a large current account surplus. The economy posted an impres-sive 1.4% q/q gain (seasonally adjusted) in the second quarter, following the 0.8% expansion of the first quarter, bringing the average annual growth pace to 1.9% for the first half of the year. As evidenced by the moderation in private consumption and investment in the second-quarter GDP report, the hitherto resilient domestic side of the econ-omy is beginning to suffer the knock-on confidence effects of the European crisis. Meanwhile, the external sector re-mains supportive of growth (partly because Sweden’s top trading partners are those in northern Europe which contin-ue to grow, albeit slowly). Nevertheless, the boost from net exports will likely fade as export competitiveness is eroded by persistent krona strength (the currency reached a near-12-year high vis-à-vis the euro on August 10th), limiting growth in 2012 overall to slightly under 1%. At the last poli-cy-setting meeting of the Riksbank in July, the Executive Board voted by a majority to leave the benchmark repo rate unchanged at 1.50%. Though the central bank sees down-side risks to inflation (currently well below target at 0.7% y/y) from persistent uncertainties in the euro zone and krona strength, lingering concerns related to high household debt, an overvalued property market and domestic financial sec-tor risks may preclude any further monetary easing.

EUROPE Fundamental Commentary Sarah Howcroft +1 416 863-2859

Global Economic Research

8

Foreign Exchange

Outlook

September 2012

JAPAN - From a currency perspective, the Japanese fundamentals are notably weak, and marked by a disappointing growth trajectory, a large debt burden and an aggressive central bank. However, low volatility, US-JN 2 year spreads and flows continue to support JPY well above its fundamental valuation. We expect USDJPY to remain relatively range bound in 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 path into year-end. A narrowing current account surplus, some relief on the political front, a shifting domestic policy towards the currency and sentiment has removed much of the immediate pressure for appreciation. We hold a year-end USDCNY target 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 sector boom 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 sentiment have supported NZD. However, the currency remains vulnerable, particularly as its economy is far from balanced and particularly 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.

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

12 m 6 m 3 m 3 m 6 m 12 mUS D J P Y 76.93 81.15 78.02 79.33 82.67 85.00 US D J P YUS D C NY 6.38 6.29 6.37 6.27 6.25 6.17 US D C NYA UD US D 1.07 1.07 0.97 1.02 1.03 1.05 A UD US DNZD US D 0.85 0.83 0.75 0.77 0.78 0.79 NZD US D

78.6

C u rren c y T ren d sS pot

30-A ugOutlookGoing B ac k

FX Rate FX Rate

6.35

U S D J P Y U S D C N Y

AU D U S D N ZD U S D

1.030.80

75 .5

77 .5

79 .5

81 .5

83 .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 6 .26

6 .29

6 .31

6 .34

6 .36

6 .39

6 .41

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

0 .93

0 .97

1 .00

1 .04

1 .07

1 .11

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 20.7 3

0.7 6

0.7 8

0.8 1

0.8 3

0.8 6

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

Global Economic Research

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Foreign Exchange

Outlook

September 2012

JAPAN - The Japanese yen (JPY) continues to be treated as a preferred safe-haven asset in times of global financial market stress. Against the euro (EUR), the JPY has been by far the world’s best-performing currency over the past five years. The devaluation of the Chinese renminbi (CNY) versus the USD in the last 12 months added further fuel to the appreciating fire. Nevertheless, it is worth highlighting that the value of Japanese equity securities (as measured by the benchmark Nikkei 225 index) has been in synchro-nized decline during the same period that the JPY was ap-preciating, hinting that earnings growth potential (linked to expected economic growth) will decline irrespective of JPY strength. Moreover, the Bank of Japan has stressed that the European debt crisis and recession is having a material adverse impact on Japan through the dual effect of re-duced export activity and sustained currency strength. Un-doubtedly, a strong JPY hurts the export-oriented Japa-nese economy. Looking ahead, we believe that the sup-portive effect of the massive stimulus put together in re-sponse to the tsunami/earthquake/nuclear shock will grad-ually unwind and that the real economy will adjust to the new realities of decelerating global growth dynamics. Ja-pan will expand by 2.3% this year before decelerating to a 1.5% rate in 2013. In brief, we estimate that the JPY will reverse some gains and marginally depreciate versus the USD through the end of 2013.

CHINA - The Chinese renminbi (CNY) is enjoying a gradu-al revaluation (versus the USD) following three months of depreciation (USDCNY found strong resistance to trade above the 6.40 mark in late July). Persistent correction in equity markets and evidence of a slowdown in the manu-facturing and export sectors were key factors weighing on the CNY. Chinese policy makers are not indifferent to the damaging effects of Europe’s recession. As a result, a pro-growth bias in currency markets sensitive to export sector weakness was mostly welcomed by the authorities, allow-ing a weaker CNY. While a material change to the existing currency regime is not imminent, increased flexibility to per-mit market-induced exchange rate moves within a wider intervention band (+/- 1% off the daily fixing rate) translated into a directional shift towards CNY weakness in both spot and forward markets. Nevertheless, we are of the view that the CNY will regain an appreciating tone once stimulus measures are unveiled and uncertainties regarding mone-tary policy actions by the US and European central banks dissipate. It is a political transition year for both the US and China; therefore, leadership succession will be of material relevance at the time of implementing swift changes to the existing exchange rate arrangement to prevent disorderly currency alignments and execute labour-intensive fiscal stimulus measures. In brief, joint monetary and fiscal stimu-lus will help China maintain robust growth supporting a stronger currency in the near term.

AUSTRALIA - After rebounding 9% between June and ear-ly August, the Australian dollar (AUD) has lost some ground against the US dollar in recent weeks in response to lower prices for key commodities and evidence of a slowing pace of investment activity in the mining sector. The mining investment boom, which has been a major driv-er of growth for several years, may be near its peak given the apparent stabilization of demand conditions in emerg-ing Asia and the more uncertain global growth outlook in general. The recent drop in the spot prices for iron ore and coal has had an adverse effect on Australia’s terms of trade and, if sustained, could also impact the government’s fiscal consolidation plans through lower resource revenues. Sev-eral large mining projects have recently been canceled or deferred in the face of reduced commercial viability. None-theless, economic activity remains relatively buoyant; the Reserve Bank of Australia (RBA) estimates that output growth overall is running close to trend, while employment growth is modest and signs suggest that the property mar-ket has finally bottomed out. Inflation is currently low due to earlier currency appreciation, but is expected to rise as a result of the newly-introduced carbon tax, before returning to the middle of the 2-3% target range by end-2013. Both monetary and fiscal authorities retain scope for further poli-cy accommodation should downside risks to growth or in-flation – primarily, with respect to China and commodity prices – dampen the outlook materially.

NEW ZEALAND - New Zealand’s economy began to show some optimistic -albeit modest- signs of recovery by the end of the second quarter; though we expect the improvement to be more evident by year-end. Local demand remains subdued; however, second-quarter retail sales volumes ex-panded 1.3% q/q, a higher rate than the contraction of 0.6% in the first quarter. Motor vehicle sales were the major driver of the retail sales performance; nonetheless, excluding this sector, sales in the pharmaceutical sector and electronic goods also presented significant advances. Additionally, positive signs in the construction sector point towards a re-bound in the coming months. Building consents have been posting positive rates of expansion in June and July, which, together with an improvement in residential building inten-tions (a component of the business confidence survey), suggests that earthquake reconstruction efforts may pick up in the third and fourth quarter of the year. Nonetheless, we maintain our view that the New Zealand economy will post a mild GDP growth in 2012 as household spending remains restrained and foreign demand, particularly coming from China and Australia moderates. In the second quarter, headline inflation reached its lowest rate in 12 years, while inflation expectations also remain near the lower limit of the central bank’s tolerance range. Accordingly, the central bank has left the reference rate unchanged at 2.5% for more than a year. We do not anticipate any change in the monetary policy stance for the remainder of the year.

ASIA/OCEANIA Pablo F.G. Bréard + 1 416 862-3876 Fundamental Commentary Daniela Blancas +1 416 862-3908 Sarah Howcroft + 1 416 863-2859

Global Economic Research

10

Foreign Exchange

Outlook

September 2012

INDIA - 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 to deteriorate, while industrial production still shows a lack of recovery. Combined with an uptick in core WPI inflation, the fundamental 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, a dovish monetary policy stance remains in effect until the uncertainty posed by Europe dissipates. Indeed, as the export sector still weighs on the overall economy, monetary authorities will resist KRW appreciation. Monetary easing from the Federal 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 for Thailand’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 policy authority that has yet to ease rates. There is risk in that domestic post-flood rebound production is looking soft, which may 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. Bank Negara is unlikely to provide monetary accommodation, adding to fundamental support to counteract periods of financial market volatility that leads to MYR underperformance due to its “higher-beta” nature. However, strong domestic demand combined with weak external demand may pressure MYR via the trade account. We target USDMYR at 3.10 in Q4.

DEVELOPING ASIA Currency Outlook Sacha Tihanyi + 852-2861-4770

12 m 6 m 3 m 3 m 6 m 12 mUSDINR 46.10 49.02 55.59 55.67 55.33 54.83 USDINRUSDKRW 1061 1119 1178 1163 1153 1129 USDKRWUSDTHB 29.99 30.46 31.76 31.17 30.83 30.33 USDTHBUSDMYR 2.96 2.99 3.19 3.10 3.08 3.05 USDMYR

1134

USDINR USDKRW

USDTHB USDMYR

31.383.13

55.63

Currency TrendsSpot

30-AugOutlookGoing Back

FX Rate FX Rate

44.70

46.70

48.70

50.70

52.70

54.70

56.70

Aug-11 Oct-11 Dec-11 Feb-12 Apr-12 Jun-12 Aug-121045

1075

1105

1135

1165

1195

Aug-11 Oct-11 Dec-11 Feb-12 Apr-12 Jun-12 Aug-12

29.75

30.10

30.45

30.80

31.15

31.50

31.85

Aug-11 Oct-11 Dec-11 Feb-12 Apr-12 Jun-12 Aug-122.95

3.00

3.05

3.10

3.15

3.20

3.25

Aug-11 Oct-11 Dec-11 Feb-12 Apr-12 Jun-12 Aug-12

Global Economic Research

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Foreign Exchange

Outlook

September 2012

INDIA - The Indian rupee (INR) is enjoying a stabilization phase following a period of acute currency weakness; the INR lost 17% against the USD over the past 12 months. The underlying causes of such softness remain in place. A sizable twin (fiscal and current account) deficit position, still-high inflation (6.9% y/y in July) and evident economic growth deceleration (GDP advanced only 5.3% y/y in the first quarter) led to a material correction in local financial markets. India is about to lose its investment-grade rating: both Standard and Poor’s and Fitch have placed India’s rating on review for possible downgrade. Inflation remains an issue of concern, as proven by the central bank’s deci-sion to keep its monetary policy rate unchanged at 8.0% in July despite the need for further stimulus on the growth front. Moreover, the Reserve Bank of India highlighted that the government may not reach its deficit-reduction target during the current fiscal year. Without visible progress on fiscal consolidation, a rating downgrade seems inevitable. India may soon become the first BRIC member to regain speculative-grade rating status. We are of the view that, given the structural nature of current macroeconomic imbal-ances, the INR will remain on the defensive and subject to further depreciation risk. At best, the economy will expand by 6% in 2012-13. Increased sensitivity to Europe-induced global risk aversion may exacerbate a process of credit dif-ferentiation amongst core emerging-market economies.

KOREA - The South Korean economic and currency mar-ket environment continues to improve despite the adverse external shocks emanating from the European debt crisis, Chinese economic slowdown and persistent US fiscal weakness. The South Korean won (KRW) has been the best performing Asian currency over the past three months, appreciating by close to 5% against the USD in this period. A period of consolidation may follow after this rebound from the weakness seen in May 2012. Although we are of the view that the KRW is well positioned to regain a strength-ening tone, the monetary authorities will try to prevent a significant currency appreciation. It has become clear that the Korean won will become a major beneficiary of increas-ing foreign inflows into Asia as a result of prolonged low interest rates and continued official intervention in US and European debt markets. On the monetary front, the central bank has been very successful in pursuing its inflation-control policy; indeed, the headline inflation rate reached a five-year low level of 1.5 % y/y in July 2012. Accordingly, the monetary authorities are in a comfortable position to inject liquidity through lowering interest rates to reinforce the economic recovery if need be. The Bank of Korea re-duced its administered rate by 25 basis points (bps) to 3.0% last July, and we anticipate that the authorities will cut at least 25 bps at the next monetary policy meeting.

THAILAND - The Thai Baht (THB) is enjoying a positive trend on the back of supportive macroeconomic fundamen-tals at home and the growing likelihood that US monetary and Chinese fiscal stimulus measures will trigger demand for Asian assets in the near term. We are of the view that the THB will maintain its current strengthening phase well into the New Year, allowing the central bank to continue to accumulate foreign exchange reserves, which reached US$175 billion in August. On the growth front, the Thai economy surprised by posting a faster than expected rate of expansion in the second quarter: real GDP grew by 4.2% y/y versus the same period in 2011. Irrespective of the cur-rent bullish tone, the Thai economy is not immune to the negative effects caused by the European crisis and the deceleration of global demand as portrayed in a weaker export sector performance. In this context, the government continues to cooperate with the central bank to engineer a pro-growth policy mix, something that has been welcomed by global financial market participants. At present, non-deliverable forward (NDF) contracts are discounting curren-cy stability over the next 12 months; however, there is a risk that exogenous events (i.e., Fed plus China stimuli) may cause a sharp rally in Asian floating currencies through the remainder of the year with positive conse-quences for the THB. We maintain our current view for fur-ther THB strength.

MALAYSIA - Malaysia is showing continued evidence of macroeconomic strength on multiple fronts, with positive spillover effects on the exchange rate environment, which has displayed a bullish tone since early July. The Malaysi-an ringgit (MYR) is positioned to extend gains into the latter part of this year. The Malaysian economy recorded better than anticipated growth figures in the second quarter, ex-panding by 5.6% y/y. The improved economic performance materialized in the context of well-contained price pres-sures and a persistently robust current account surplus equivalent to 10% of GDP. The economy is showing signs of acceleration with GDP growth rates estimated to aver-age 4.5-5% in 2013-13. The country’s well-entrenched in-vestment-grade position together with attractive interest rate differentials reinforces a bullish tone in the Malaysian currency. Additionally, the ringgit will benefit from a surge in funds into emerging-market assets as a result of prolonged monetary policy accommodation in the United States. On the political front, the country is immersed in an electoral cycle ahead of the general elections that will take place in early 2013, an event that will encourage the current gov-ernment to step up government expenditures in an attempt to win popular support. The central bank remains commit-ted to maintaining its existing currency regime based on a managed float against a trade-weighted basket of curren-cies. Undoubtedly, any shift in China’s currency policy will incite an adjustment in Malaysia’s currency mix.

DEVELOPING ASIA Fundamental Commentary Pablo F.G. Bréard + 1 416 862-3876

Global Economic Research

12

Foreign Exchange

Outlook

September 2012

BRAZIL - In line with a less dovish tone from the central bank, initial signs of an economic recovery –which is expected to be more evident by the end of the year– and the effect of government stimulus, mainly in the industrial sector, open the door for a modest strengthening in the Brazilian real (BRL) in the coming quarters. We anticipate that the BRL will close 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-vis the US dollar. Flows to MXN-denominated assets continue to be supportive for the currency, together with a solid local economic outlook, strong oil prices and a generally weaker US dollar against major currencies. We expect USDMXN to close the year at around 13.10. CHILE - Chile remains one of the strongest economies in Latin America, showing still solid local demand conditions, a stable 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 moderation and loose monetary policy in a low-inflation environment, offsetting the positive impact from Standard and Poor’s recent revision to the credit rating outlook from “stable” to “positive”. We maintain our view that the USDCOP rate will close the year near the 1,800 mark; however, we do not discount the possibility of further intervention coming from the central bank or the government, which would put more pressure on the currency in the short-term.

DEVELOPING AMERICAS Currency Outlook Daniela Blancas +1 416 862-3908

12 m 6 m 3 m 3 m 6 m 12 mUS D B RL 1.62 1.72 2.04 1.97 1.93 1.88 US D B RLUS D M X N 12.29 12.86 14.31 13.17 13.17 13.14 US D M X NUS D C LP 459 479 518 501 504 511 US D C LPUS D C OP 1779 1767 1831 1803 1807 1833 US D C OP

C u rre n c y T re n d sS pot

30-A ugOutlookGoing B ac k

F X Rate F X Rate

2 .05

U S D C L P U S D C O P

13.39481

1830

U S D B R L U S D M X N

1.52

1 .60

1 .67

1 .75

1 .82

1 .90

1 .97

2 .05

2 .12

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 -1 212 .1

12 .6

13 .1

13 .6

14 .1

14 .6

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

45 5

47 0

48 5

50 0

51 5

53 0

54 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 -1 217 45

17 95

18 45

18 95

19 45

19 95

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

Global Economic Research

13

Foreign Exchange

Outlook

September 2012

BRAZIL - The Brazilian Real (BRL) continues to trade with-in a very stable range against the US dollar, seesawing around the 2.0-mark since the beginning of July. Clear messages from authorities refusing to allow further curren-cy appreciation, together with a loose monetary policy stance, sluggish output performance and government ef-forts to boost economic activity, set a weaker -although stable- tone for the BRL in the short-term. In June, the eco-nomic activity index showed the strongest monthly pace of recovery in more than a year; expanding by 0.8% against May. Retail sales also expanded in the same month, partic-ularly in durable goods and car sales, reflecting govern-ment stimulus in the auto sector. This will not be enough to contribute significantly to second-quarter GDP growth; however, we anticipate the boost to be more evident in the third and fourth quarters. The export sector remains weak, as exports to the European Union and Argentina continue to decelerate, offsetting the positive effect of higher trade with China and the US. In late August, the central bank cut the administrated rate for its ninth consecutive time in one year to a new record low of 7.5%. We anticipate that the central bank is reaching the end of its easing cycle, given that headline inflation increased for the first time in eleven months from 4.9% y/y in June to 5.2% in July as a result of higher food prices, and signs of economic revival are start-ing to emerge.

MEXICO - The Mexican peso (MXN), subject to internation-al risk appetite, has been stabilizing around the 13.15 mark against the US dollar, accumulating a 5.6% gain year-to-date. Robust domestic economic activity, a solid advance in the local equity market, a stable monetary policy and higher oil prices have been supporting MXN’s stabilization phase. The Mexican economy remains on a solid trajecto-ry. The country’s output expanded by 4.1% y/y in the se-cond-quarter, slightly below the 4.5% rate observed in the first three months of the year. Trade, construction and ser-vices were accountable for this strength; while the industri-al sector has been decelerating as a result of the close links to foreign demand and US economic cycles. Accord-ingly, we are revising our 2012 GDP forecast up to 3.9% from 3.7%, previously. Inflationary pressures are building, with headline inflation surpassing the central bank’s toler-ance range for the second consecutive month in July to 4.4% y/y. Food and merchandise prices have been driving inflation higher; however, we expect inflation to decelerate to within the official target range by the end of the year. Despite the recent spike in inflation, the central bank has left its monetary policy rate unchanged at 4.5%, where we expect it to be held for the remainder of the year. The 10-year bond yield has returned to around 5.4%, after reach-ing record low levels slightly below the 5.0% mark. Never-theless, foreign appetite for (and possession of) Mexican peso-denominated-assets remains high .

CHILE - The Chilean peso (CLP) remains among the strongest currencies in Latin America, with a year-to-date return above 8.0% against the US dollar and 4.5% on a quarter-to-date basis. Amid global economic slowing and the effect it has had in countries such as Brazil and, to a lesser extent Colombia, the Chilean economy posted a strong second-quarter GDP growth rate of 5.5% y/y, slightly higher than the first quarter rate of 5.3% (revised from 5.6% y/y). Local demand, which expanded by 7.1% y/y in the second quarter, has been driving the Chilean economy, with retail sales, services, construction and imports posting significant advances. Headline inflation is trending down, reaching 2.5% y/y in July (the lowest rate since the end of 2010 and its fifth consecutive decrease). With a resilient economy and no evidence of mounting inflationary pres-sures, the central bank maintains a neutral monetary policy stance, leaving its reference rate unchanged at 5.0%. The central bank has stated that the output gap is almost zero and that the economy has reached full-employment capaci-ty, supporting the view of no changes in the monetary poli-cy tone. The state-owned copper mining company recently revised lower the expected average copper prices. Never-theless, we do not anticipate any significant shocks that could derail Chilean economic growth or compromised the country’s fiscal position; however, the currency could suffer from higher volatility.

COLOMBIA - Central bank and government intervention in the currency market, aimed at preventing further apprecia-tion of the currency, a moderation in local economic activity and narrower spreads have influenced the Colombian peso (COP) in recent weeks. The currency traded for the most part of the month within a stable range; however, the an-nouncement that the government was buying US$300 mil-lion in mid-August and the central bank’s increase in its daily purchases have finally weighed on the currency. De-spite the recent drop in the COP vis-à-vis the US dollar; the currency maintains a year-to-date gain of 6.0%, the second highest among its Latin American peers. For the second consecutive month, the central bank cut the reference rate by 25 basis points (to 4.75%), as a result of a negative ef-fect coming from weak international demand. We expect the central bank to cut the reference rate once more before the easing cycle is complete. Headline inflation continues to trend lower, reaching 3.0% y/y in July. As a result of fis-cal reforms and the accurate management of economic policies that aim to make the Colombian economy more resilient to external shocks, S&P changed Colombia’s sov-ereign debt outlook to “positive” from “stable”, leaving the credit rating at “BBB-”. Colombia’s possible impending credit upgrade could be enhanced by the government’s recent confirmation that a peace negotiation has been initi-ated with the guerrilla group, which, if successful, will repre-sent higher confidence among international investors.

DEVELOPING AMERICAS Fundamental Commentary Daniela Blancas +1 416 862-3908

Global Economic Research

14

Foreign Exchange

Outlook

September 2012

RUSSIA - The Russian ruble (RUB) continued to trade in a well contained range over the last month, though at a slightly stronger level than in July. The currency has benefitted from the recovery in oil prices since late June, though not to the same 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 monetary conditions are gradually loosened by the central bank. We expect the lira to close the year around 1.85 per US dollar. The currency 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 cut by the central bank), the Czech koruna (CSK) will remain critically dependent upon developments in the European debt crisis. Though the economy is currently mired in recession, underlying fundamentals remain sound, and the currency should 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 remain constrained by South Africa’s ongoing political uncertainty, social tensions and considerable twin deficits.

DEVELOPING EUROPE/AFRICA Currency Outlook Sarah Howcroft +1 416 863-2859

12 m 6 m 3 m 3 m 6 m 12 mUSDRUB 28.97 29.17 33.67 32.44 32.67 33.17 USDRUBUSDTRY 1.72 1.75 1.86 1.84 1.84 1.79 USDTRYEURCZK 24.16 24.90 25.79 25.07 24.87 24.47 EURCZKUSDZAR 7.01 7.51 8.58 8.29 8.32 8.37 USDZAR

EURCZK USDZAR

1.8324.888.48

USDRUB USDT RY

Currency T rendsSpot

30-AugOutlookGoing Back

FX Rate FX Rate

32.56

28 .3 5

29 .6 0

30 .8 5

32 .1 0

33 .3 5

A ug-1 1 O c t-11 D ec-11 Fe b-1 2 A pr-1 2 Ju n-1 2 A ug-1 21.6 9

1.7 4

1.7 9

1.8 4

1.8 9

A ug-1 1 O c t-11 D ec-11 Fe b-1 2 A pr-1 2 Ju n-1 2 A ug-1 2

24 .00

24 .50

25 .00

25 .50

26 .00

A ug-1 1 O c t-11 D ec-11 Fe b-1 2 A pr-1 2 Ju n-1 2 A ug-1 26.9 5

7.2 0

7.4 5

7.7 0

7.9 5

8.2 0

8.4 5

8.7 0

A ug-1 1 O c t-11 D ec-11 Fe b-1 2 A pr-1 2 Ju n-1 2 A ug-1 2

Global Economic Research

15

Foreign Exchange

Outlook

September 2012

RUSSIA - After a strong start to the year, the Russian econ-omy has begun to moderate as the global deceleration be-gins to weigh on exports and private investment, more than offsetting still sturdy domestic consumer and infrastructure spending. A 4.7% y/y drop in exports in June brought the trade surplus to its lowest level since November 2010. The Russian Economic Ministry projects an average GDP growth rate of 2.8% y/y in the second half of 2012, a signifi-cant slowdown from the 4.5% pace set in the first six months. Nevertheless, being one of the world’s top energy producers and exporters, Russia will benefit from the re-newed uptick in commodity prices, particularly in Urals blend oil, which has risen roughly 30% since the EU ban on Iranian oil came into effect on July 1st. We continue to ex-pect growth to average around 3¾% in 2012-13. Mean-while, inflationary pressures have intensified in recent months on the back of the drought which has affected this year’s grain harvest, as well as the implementation of regu-lated price and tariff increases. In July the consumer price index grew 1.2% over the prior month, the largest monthly gain since last January, boosting the annual inflation rate to 5.6% y/y from 4.3% in June. We do not anticipate any major monetary policy changes in the next six months; however, upside inflation risks will be monitored closely. Russia offi-cially acceded to the World Trade Organization in late July. The agreement implies a gradual reduction of tariffs, though the near-term impact is expected to be small.

TURKEY - Turkish monetary authorities are expected to ease lending conditions in the coming months. With the me-dium-term inflation projection pointed lower, material pro-gress on the economic rebalancing from consumption to external demand, evidence of slowing growth both domesti-cally and globally, and the recent stability displayed by the lira, the central bank has signaled an imminent reduction in the upper margin of the overnight interest rate corridor (currently at 11.5%). Given that further monetary accommo-dation is expected from the major global central banks, Turkish officials are now less concerned about inciting a lira sell-off, though they will likely employ alternative policy tools (i.e., reserve requirements, foreign exchange transactions) as needed to insulate the currency until the economy recov-ers a stronger growth trajectory and domestic interest rates begin to move higher. The benchmark one-week repo rate will likely be left at 5.75% until the first half of 2013. The next rate-setting meeting will be held on September 18th. With exports maintaining a strong pace (up 13.4% y/y year-to-date), the current account deficit continues to narrow – a shortfall of US$4.2 billion in June was the lowest since last August and was easily covered by foreign capital inflows. While this improvement has contributed to reduced lira vola-tility in recent months, investors remain cautious of Turkey’s still significant external financing needs and resulting vulner-ability to shifts in global risk appetite. We expect the econo-my to grow by 2¾% in 2012, accelerating to 4½% next year.

CZECH REPUBLIC - Growth prospects in the Czech Re-public have deteriorated as the crisis in the euro zone dampens both exports and confidence in the private sector. After shedding 0.8% q/q in seasonally adjusted terms in the first quarter, GDP dipped another 0.2% in the April-June period, marking the fourth straight quarter without growth. In light of the expected further descent of the euro area econo-my through the remainder of the year (in Germany in partic-ular, where almost 30% of Czech exports are sent), the re-cession will likely extend into the coming quarters, resulting in a contraction of almost 1% in 2012 overall. The nation should, however, fare better than some of its emerging Eu-ropean peers, such as Hungary, given the profitability of its banks and their low reliance on wholesale and external funding, its (limited) scope to ease the pace of fiscal consol-idation, and its lower dependence on export markets in the depressed peripheral nations of the currency union. Reflect-ing these relative strengths, the yield on the government’s 10-year bond has trended consistently lower this year, and now measures just 2.3% (versus 7.3% for Hungary and 4.9% for Poland). The government should be able to bring the fiscal deficit below the EU-mandated threshold of 3% of GDP by 2013, as planned. Headline inflation, at 3.1% y/y in July, is currently above the central bank’s 2% target, bol-stered by indirect tax increases and commodity prices. Un-derlying price pressures are low, however, and we antici-pate another policy rate cut before year-end.

SOUTH AFRICA - Though inflationary pressures have moderated in South Africa (at 4.9% y/y in July, the headline rate is now well within the official target range), monetary authorities will be kept on alert going forward, given the weakened trajectory of the rand and possible pass through from rising global food prices. After a half-point reduction in July, the benchmark interest rate currently stands at a rec-ord-low 5.0%. Domestic activity remains relatively buoyant; retail and vehicle sales continue to expand at a robust pace, and the prolonged slump in the mining sector appears to be over – mining production grew in yearly terms for a second straight month in June following 11 months of retrenchment. On the other hand, manufacturing activity has begun to weaken as demand for exports is depressed by adverse external developments. In fact, South Africa is on track to post its largest merchandise trade deficit on record this year. GDP growth measured 3.0% y/y in the second quar-ter, up from 2.1% in the prior three months. We expect the economy to expand by 2½% this year, a comparatively weak performance by historical standards. The South Afri-can Reserve Bank (SARB) estimates that the output gap currently measures roughly -3½% and is likely to remain negative over the medium term. Chief among the longer-term issues of concern to the SARB are high structural un-employment, inadequate electricity provision and feeble private investment. The twin fiscal and current account defi-cits also continue to generate unease among investors.

DEVELOPING EUROPE/AFRICA Fundamental Commentary Sarah Howcroft +1 416 863-2859

Global Economic Research

16

Foreign Exchange

Outlook

September 2012

GLOBAL CURRENCY FORECAST (end of period)

2010 2011 2012f 2013f

Q1a Q2a Q3 Q4 Q1 Q2 Q3 Q4

MAJOR CURRENCIESJapan USDJPY 81 77 80 87 83 80 78 80 84 85 86 87

Euro zone EURUSD 1.34 1.30 1.23 1.21 1.33 1.27 1.21 1.23 1.22 1.22 1.21 1.21

EURJPY 108 100 98 105 111 101 94 98 102 104 104 105

UK GBPUSD 1.56 1.55 1.59 1.64 1.60 1.57 1.55 1.59 1.62 1.63 1.64 1.64

EURGBP 0.86 0.83 0.77 0.74 0.83 0.81 0.78 0.77 0.75 0.75 0.74 0.74

Switzerland USDCHF 0.94 0.94 1.02 1.03 0.90 0.95 0.99 1.02 1.02 1.02 1.03 1.03

EURCHF 1.25 1.22 1.25 1.25 1.20 1.20 1.20 1.25 1.25 1.25 1.25 1.25

AMERICAS

Canada USDCAD 1.00 1.02 0.99 0.97 1.00 1.02 1.02 0.99 0.98 0.97 0.97 0.97

CADUSD 1.00 0.98 1.01 1.03 1.00 0.98 0.98 1.01 1.02 1.03 1.03 1.03

Mexico USDMXN 12.34 13.94 13.12 13.38 12.81 13.36 13.28 13.12 13.20 13.08 13.17 13.38

CADMXN 12.37 13.65 13.25 13.79 12.83 13.14 13.02 13.25 13.47 13.48 13.58 13.79

Argentina USDARS 3.98 4.30 6.00 6.50 4.38 4.53 5.15 6.00 6.13 6.25 6.38 6.50

Brazil USDBRL 1.66 1.87 1.95 1.90 1.83 2.01 2.02 1.95 1.92 1.87 1.88 1.90

Chile USDCLP 468 520 502 515 488 501 500 502 505 508 512 515

Colombia USDCOP 1908 1939 1800 1850 1789 1784 1810 1800 1810 1820 1840 1850

Peru USDPEN 2.81 2.70 2.61 2.55 2.67 2.67 2.62 2.61 2.62 2.58 2.58 2.55

Venezuela USDVEF 4.29 4.29 5.15 5.15 4.29 4.29 4.64 5.15 5.15 5.15 5.15 5.15

ASIA / OCEANIAAustralia AUDUSD 1.02 1.02 1.02 1.05 1.03 1.02 1.02 1.02 1.04 1.04 1.05 1.05

China USDCNY 6.61 6.30 6.25 6.10 6.30 6.35 6.30 6.25 6.25 6.20 6.15 6.10

Hong Kong USDHKD 7.77 7.77 7.75 7.75 7.77 7.76 7.75 7.75 7.75 7.75 7.75 7.75

India USDINR 44.7 53.1 55.5 54.3 50.9 55.6 56.0 55.5 55.3 55.0 54.8 54.3

Indonesia USDIDR 8996 9069 9400 9200 9146 9433 9500 9400 9350 9325 9250 9200

Malaysia USDMYR 3.06 3.17 3.10 3.02 3.06 3.18 3.11 3.10 3.07 3.06 3.04 3.02

New Zealand NZDUSD 0.78 0.78 0.77 0.82 0.82 0.80 0.77 0.77 0.78 0.78 0.80 0.82

Philippines USDPHP 43.8 43.8 42.5 41.5 42.9 42.1 43.0 42.5 42.3 42.0 41.8 41.5

Singapore USDSGD 1.28 1.30 1.25 1.21 1.26 1.27 1.25 1.25 1.25 1.24 1.23 1.21

South Korea USDKRW 1126 1152 1160 1110 1133 1145 1170 1160 1150 1138 1125 1110

Thailand USDTHB 30.1 31.6 31.0 30.0 30.8 31.6 31.5 31.0 30.8 30.5 30.3 30.0

Taiwan USDTWD 29.3 30.3 29.5 29.0 29.5 29.9 29.8 29.5 29.4 29.3 29.1 29.0

EUROPE / AFRICACzech Rep. EURCZK 25.0 25.6 25.0 24.2 24.8 25.5 25.2 25.0 24.8 24.6 24.4 24.2

Iceland USDISK 115 123 118 116 127 125 120 118 118 117 117 116

Hungary EURHUF 279 315 295 285 294 286 287 295 293 290 288 285

Norway USDNOK 5.82 5.98 5.75 5.30 5.69 5.96 5.90 5.75 5.60 5.50 5.40 5.30

Poland EURPLN 3.96 4.47 4.25 4.00 4.15 4.22 4.17 4.25 4.19 4.13 4.06 4.00

Russia USDRUB 30.54 32.1 32.5 33.5 29.3 32.4 32.3 32.5 32.8 33.0 33.3 33.5

South Africa USDZAR 6.63 8.09 8.30 8.40 7.67 8.16 8.28 8.30 8.33 8.35 8.38 8.40

Sweden EURSEK 8.99 8.92 8.45 8.30 8.83 8.77 8.50 8.45 8.45 8.40 8.40 8.30

Turkey USDTRY 1.54 1.89 1.85 1.76 1.78 1.81 1.82 1.85 1.83 1.81 1.78 1.76

f: forecast

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Global Economic Research

Foreign Exchange Outlook

September 2012

Scotia Economics

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International Research Group Daniela Blancas daniela.blancas@scotiabank.com Pablo F.G. Bréard pablo.breard@scotiabank.com Sarah Howcroft sarah.howcroft@scotiabank.com Estela Ramírez estela.ramirez@scotiabank.com

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