FX Outlook- Perspectivas en tipos de cambio

8/8/2019 FX Outlook- Perspectivas en tipos de cambio

1/17

Global Economic Research December 2010

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

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

Disorderly currency adjustments are materializing. Fiscal/debtdistress in the US and Europe prompts the potential for intensifying official intervention in some non-major currencymarkets and multilateral financial emergency aid. The quest for yield remains as vivid as ever.

The USD will regain a defensive tone in the months to come.Floating currencies in the Americas will retain market-favouritestatus. The CAD and the BRL, solid outperformers, will alsoinfluence intra-regional alignments. Commodity prices supportthe non-USD Americas currency outlook.

Europe remains the focus of investors radar screens. The EURwill regain ground vs. the USD and experience a modestappreciation through 2011. Both the GBP and CHF will also benear-term outperformers. High-yielding European currencies(TRY, RUB) will also gain in the near term.

The Asian outlook continues to brighten. The JPYs role as areserve asset during volatile financial times remainsunchallenged. China will gradually allow a faster pace of CNYappreciation. The AUD will be a regional outperformer supported by growth/interest rate differentials.


2/17


Actual Q3 10 Q4 10 Q1 11 Q2 11 Q3 11 Q4 11 Q1 12 Q2 121.33 1.36 1.32 1.33 1.33 1.35 1.37 1.39 1.41

1.37 1.38 1.37 1.36 1.35 1.34 1.34 1.3382.9 83.5 82 82 83 84 84 86 87

83.5 82 84 86 87 89 89 901.57 1.57 1.57 1.58 1.60 1.61 1.63 1.65 1.67

1.58 1.59 1.60 1.60 1.61 1.61 1.61 1.611.01 1.03 1.00 1.00 0.99 0.98 0.96 0.96 0.95

1.03 1.02 1.02 1.02 1.02 1.02 1.02 1.030.99 0.97 1.01 1.03 1.05 1.06 1.08 1.07 1.08

0.97 0.98 0.96 0.95 0.94 0.93 0.92 0.9112.38 12.59 12.50 12.30 12.40 12.50 12.80 12.75 12.85

12.53 12.40 12.45 12.45 12.45 12.47 12.56 12.64

(*) Source: Consensus Economics Inc. November 2010

Consensus*GBPUSD

Consensus*

Consensus*

USDCADConsensus*

AUDUSD

USDMXN

December 6, 2010EURUSD

Consensus*USDJPY

AUDUSD USDMXN

EURUSD USDJPY

GBPUSD USDCAD

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

Consensus*

Mexican Peso

Canadian Dollar

Australian Dollar

Global Foreign Exchange Outlook

Euro

Yen

Sterling

79

86

93

100

107114

121

D e c - 0

5 J u

n - 0 6

D e c - 0

6 J u

n - 0 7

D e c - 0

7 J u

n - 0 8

D e c - 0

8 J u

n - 0 9

D e c - 0

9 J u

n - 1 0

D e c - 1

0

USD/JPY

100 Day

200 Day

1.12

1.22

1.32

1.42

1.52

1.62

D e c - 0

5

M a y - 0

6 O c

t - 0 6 M a

r - 0 7

A u g - 0

7 J a

n - 0 8

J u n - 0

8

N o v - 0

8

A p r - 0

9 S e

p - 0 9

F e b - 1

0 J u

l - 1 0

D e c - 1

0

EUR/USD

100 Day200 Day

1.36

1.51

1.66

1.81

1.96

2.11

D e c - 0

5 J u

n - 0 6

D e c - 0

6 J u

n - 0 7

D e c - 0

7 J u

n - 0 8

D e c - 0

8 J u

n - 0 9

D e c - 0

9 J u

n - 1 0

D e c - 1

0

GBP/USD

100 Day

200 Day

0.90

0.98

1.06

1.14

1.22

1.30

D e c - 0

5 J u

n - 0 6

D e c - 0

6 J u

n - 0 7

D e c - 0

7 J u

n - 0 8

D e c - 0

8 J u

n - 0 9

D e c - 0

9 J u

n - 1 0

D e c - 1

0

USD/CAD

100 Day

200 Day

0.59

0.67

0.74

0.82

0.89

0.97

D e c - 0

5 J u

n - 0 6

D e c - 0

6 J u

n - 0 7

D e c - 0

7 J u

n - 0 8

D e c - 0

8 J u

n - 0 9

D e c - 0

9 J u

n - 1 0

D e c - 1

0

AUD/USD100 Day

200 Day

9.7

10.8

11.9

13.0

14.1

15.2

D e c - 0

5 J u

n - 0 6

D e c - 0

6 J u

n - 0 7

D e c - 0

7 J u

n - 0 8

D e c - 0

8 J u

n - 0 9

D e c - 0

9 J u

n - 1 0

D e c - 1

0

USD/MXN100 Day

200 Day


3/17


4/17


The CAD was the top performing non-USD currency during November, ending the month with only a marginal lossagainst the USD, quite a feat considering the heavy volatility in risk assets. Once again it was the CADs status as oneof the worlds most fundamentally sound currencies that saved it from excessive downside pressures in the wake of the

resumption in euro zone sovereign risk concerns. Fiscally impenetrable and having accrued more marginal monetarypolicy support in 2010 than most other major currencies, with 75 basis points worth of policy rate hikes, it has provencostly to maintain a sustained core short CAD position not only through November, but for all of 2010. This fact is madeobvious when looking at speculative positioning data from the Chicago Futures Trading Commission, which indicatesthat the average gross CAD short over the past 11 months (as a proportion of average open interest) is at its lowestlevel in six years. However, it has also been difficult for the CAD to sustainably achieve parity despite multiple attemptsduring the year. Nevertheless, we feel that though we wont see a sustained trade through parity in the final month of 2010, our forecast for this to occur in 2011 is still well justified. Financial market volatility through the end of November 2010 was still rather elevated if we use the VIX index as a measuring stick, and though the index is maintaining its low-est annual average over the past three years, it still remains well above pre-2008 levels. Financial market conditionsaside, fundamentals still point to CAD support. Inflation remains much more buoyant relative to the US and most G10economies. While recent Q3 growth data was much less robust than expected, it obscures a solid domestic demanddynamic which is driving net exports into negative territory on the back of very robust imports, related to business invest-

ment in plant and equipment. This constitutes a positive for the future productive capacity of the country. We maintainour outlook for sustainable CAD strength against the USD, though at a very moderate pace over the coming quarters, asan apparent stabilization in US growth helps remove some uncertainty. We also believe that the US will still lag Cana-dian monetary tightening and that Canadian real and financial assets will continue to garner foreign interest, a key sup-port for the CAD.

CANADA Camilla Sutton +1 416 866-5470Sacha Tihanyi +1 416 862-3154

12 m 6 m 3 m 3 m 6 m 12 mAUDCAD 0.968 0.884 0.949 1.030 1.043 1.044 AUDCADCADJPY 81.8 87.4 79.0 82.0 83.2 86.9 CADJPYEURCAD 1.585 1.285 1.351 1.327 1.321 1.318 EURCADUSDCAD 1.056 1.045 1.066 1.000 0.993 0.967 USDCAD

Currency TrendsSpot

6-DecOutlookGoing Back

FX Rate FX Rate

0.99182.5

1.3411.006

AUDCAD CADJPY

EURCAD USDCAD

0.85

0.88

0.90

0.93

0.95

0.98

1.00

1.03

Dec-09 Feb-10 Apr-10 Jun-10 Aug-10 Oct-10 Dec-1078

80

82

84

87

89

91

93


1.23

1.28

1.33

1.37

1.42

1.47

1.52

1.57

Dec-09 Feb-10 Apr-10 Jun-10 Aug-10 Oct-10 Dec-101.00

1.01

1.02

1.03

1.05

1.06

1.07

1.08



5/17


UNITED STATES - The slowdown in the US economy ap-pears to be milder than expected, as a number of recenteconomic data releases surprised on the upside. Perhapsmost notably, US jobless claims have retreated in eleven of the past thirteen weeks. They are now at 407,000, their lowest since mid-2008, just before the crisis began. Cross-ing below the critical 400,000 threshold would be consis-tent with an acceleration in nonfarm payroll gains. Asidefrom jobless claims, other leading employment indicatorscontinue to recover. The demand for temporary hires, theaverage work week and overtime hours have all beengradually trending upward. While these developments haveyet to be fully reflected in consumer confidence and house-hold spending, there too we have seen some improvement.Household spending which accounts for two-thirds of theUS economy has been expanding for six straight monthsnow, moving slightly above its pre-recession peak in Sep-tember. Whats more, purchases of durable goods havepicked up over the past two months, hinting at stabilizationin consumer confidence. That said, manufacturing activityis showing signs of moderating, a trend we expect to ex-tend into next year, as stimulus measures, inventory re-stocking and automatic stabilizers around the world winddown and uncertain global economic prospects keep therecovery driving along, but at a cautious clip. Consumer spending and business investment in machinery and equip-ment are expected to remain key drivers of growth in 2011.The housing market is likely to continue to weigh on theeconomy well through next year, challenged by a heavysupply of distressed properties, lack of confidence in in-

come security and still restrained credit conditions.

CANADA - Canadas economic recovery has been rele-gated to the slow lane. Real GDP growth moderated to justa 1.0% annual rate in Q3, less than half the already moremuted second-quarter advance. Moreover, output edgeddown slightly in September, suggesting a weak hand-off tothe current quarter. Consumer spending remains reasona-bly robust, aided by aggressive price discounting and lowborrowing costs. Business investment also remains a brightspot. Canadian firms have been taking advantage of astrong currency, healthy corporate balance sheets, risingcapacity utilization rates and firm commodity prices to investin machinery & equipment and resource-related exploration.Yet the economy faces a number of headwinds that willkeep the recovery on a more modest track. For one, rela-tively sluggish US demand, combined with a strong Cana-dian dollar, is restraining export growth. Despite risingemerging market demand for Canadian industrial products,the US market still accounts for roughly three quarters of foreign sales. Alongside relatively firm domestic demand,the deterioration in net trade volumes has subtracted over 3percentage points from annualized GDP growth in each of the past two quarters. Even with a sharp improvement inthe terms-of-trade, owing to rising commodity prices and thecurrency, Canadas merchandise and current account bal-ances have shifted into sizeable deficit positions. Govern-ment stimulus spending is still providing a lift to overall ac-tivity, but this support will fade in 2011-12 as fiscal shortfallsare addressed and current infrastructure projects wind down.Public sector restraint, combined with the reduced wealtheffect of a softening housing market, high household debt

burdens and slowing job creation, will likely also temper con-sumer spending plans and overall output growth in the year ahead.

CANADA AND UNITED S TATES Adrienne Warren +1 416 866-4315Fundamental Commentary Gorica Djeric +1 416 862-3080

MONETARY P OLICY COMMENTARY Derek Holt +1 416 863-7707 Gorica Djeric +1 416 862-3080

UNITED STATES - At the ECBs Central Banking Confer-ence, Fed Chairman Bernanke gave a keynote address. Init, he defended the Feds decision to boost its QE programby an additional US$600 billion, underscoring that some-thing had to be done, but also highlighting the importanceof fiscal policy in complementing the Fed. Bernanke is notthe only Board member who took defense of the Feds lat-

est decision in the aftermath of the anti-QE petition thatappeared in the WSJ. Aside from that, the Fed Chairmanemphasized the need for global coordination, underliningthat ongoing trade imbalances are unsustainable a pointadvocated by US Treasury Secretary Timothy Geithner.The Feds next meeting is scheduled for December 14 th.Alongside downwardly revised growth and inflation fore-casts and colour on internal QE debate, the latest FOMCminutes from the November 2-3 meeting continued to re-assert the low for long statement. The Scotia Economicsbase case forecast is for the Fed to be on hold until the endof next year.

CANADA - Since the last issue of the Foreign ExchangeOutlook, no Bank of Canada meetings have taken place or key publications been released. However, domestic andforeign risks reaffirm our view that the BoC is likely to re-main on hold until the latter half of 2011. Domestically, keyconcerns remain for the housing market and householdfinances, both of which are entering a softening environ-

ment. Externally, worries are concentrated on the sover-eign debt issues in Europes peripheral economies and theglobal growth outlook. Canadas economy advanced at amore sluggish than expected clip in Q3, largely due to asizeable trade drag. However, it was not only strong im-ports that played a key role; exports of goods and servicescontracted for the first time in a year. The BoC meets nexton December 7 th. While the market widely expects nochange in the overnight rate, the accompanying statementshould shed light on the Banks thoughts on the domesticand global economic outlook and clues to future policymoves.


6/17


EURO ZONE - An escalation of sovereign risk and the realization that private bond investors might bear some of the li-ability in a restructuring weighed heavily on EUR in November. Speculators moved quickly to cut long positions and in-crease shorts. However, as we move into December we are in a better position than we were in the spring. The combina-

tion of aid packages, policy support, a vulnerable USD and German led-growth should position EUR well from here. Wewould expect EUR to stabilize, closing the first quarter at US$1.33.

UNITED KINGDOM - Strict fiscal austerity, a subdued growth trajectory and a dovish central bank, even as inflation re-mains consistently above the upper limit are the themes that are shaping sterlings outlook. November did not prove anencouraging month for GBP bulls; however, as we look for European stresses to ease in December and January, wewould expect that the speculators who have shifted from short to long GBP will be rewarded. We hold a first a Q111 tar-get of US$1.58.

SWITZERLAND - As we move into December USDCHF is testing a break above its 100-day moving average of 1.0046;however, longer-term technicals continue to point to an appreciating CHF against both the USD and EUR. This combinedwith its safe haven status, strong economic and sovereign fundamentals as well as favourable speculative flows shouldpush CHF to outperform in 2011. We hold a Q111 target of 0.94 per USD.

NORWAY - The NOK had a disappointing November, dragged down by fears over Europe, weakening fundamentals andsofter oil prices. USDNOK broke above its 100 and 200-day moving averages (bearish for NOK); however, as we moveinto December the outlook appears to be stabilizing. We hold a Q111 target of 5.70 for USDNOK.

EUROPE Camilla Sutton +1 416 866-5470Currency Outlook Sacha Tihanyi +1 416 862-3154

12 m 6 m 3 m 3 m 6 m 12 mEURUSD 1.50 1.23 1.27 1.33 1.33 1.36 EURUSDGBPUSD 1.64 1.45 1.53 1.58 1.59 1.62 GBPUSDEURCHF 1.51 1.42 1.29 1.26 1.24 1.25 EURCHFUSDNOK 5.68 6.46 6.30 5.75 5.63 5.58 USDNOK

EURUSD GBPUSD

EURCHF USDNOK

1.331.571.316.02

Currency TrendsSpot


FX Rate FX Rate

1.18

1.23

1.27

1.32

1.36

1.41

1.45

1.50


1.44

1.48

1.52

1.56

1.60

1.64

1.68


1.28

1.32

1.36

1.39

1.43

1.47

1.51


5.70

5.90

6.10

6.30

6.50

6.70



7/17


8/17


JAPAN - USDJPY moved consistently higher in November, closing the month a full 5% above its open. This perform-ance in light of rising sovereign concerns in Europe hints that the importance of US-Japanese yield spreads has becomethe dominant theme in yen once again. Speculators continue to hold an extended long yen position. We hold a Q111

forecast of 82.00.

CHINA - Since policymakers agreed to allow additional flexibility in the yuan in June, the currency has appreciated by2.5%. Forward markets are currently pricing a further 2.5% over the next 13 months, a fairly moderate pace of apprecia-tion. We expect that the combination of broad-based USD weakness, global appetite for a stronger yuan and an ongoingChinese recovery will allow for a faster pace than markets are currently pricing. We hold a Q111 forecast of 6.40.

AUSTRALIA - After flirting briefly above par in November, the AUD has dropped materially lower. Speculators have cuttheir long positions to more sustainable levels. As we look out to 2011, we would expect that the countrys close ties tothe Asian growth story and commodities, combined with a strong economic and fiscal position should allow for a retestof parity. We hold a Q111 forecast of 1.03.

NEW ZEALAND - The NZD is currently trading between its 100 and 200-day moving average (0.7396 and 0.7588, re-

spectively). Speculative interest in the NZD has subsided as of late, but the market still views the NZD outlook as favour-able. Our bullish view of the Australian and Asian economies should help to support a strengthening NZD. Accordingly,we hold a Q111 target of 0.76.

ASIA /O CEANIA Camilla Sutton +1 416 866-5470Currency Outlook Sacha Tihanyi +1 416 862-3154

12 m 6 m 3 m 3 m 6 m 12 mUSDJPY 86.41 91.26 84.20 82.00 82.67 84.00 USDJPYUSDCNY 6.83 6.83 6.81 6.43 6.33 6.13 USDCNYAUDUSD 0.92 0.85 0.89 1.03 1.05 1.08 AUDUSDNZDUSD 0.72 0.68 0.70 0.76 0.77 0.78 NZDUSD

Currency TrendsSpot


FX Rate FX Rate

82.906.660.990.76

USDJPY USDCNY

AUDUSD NZDUSD

80.00

82.00

84.00

86.00

88.00

90.00

92.00

94.00


6.66

6.69

6.73

6.76

6.80

6.83

6.87


0.80

0.84

0.87

0.91

0.94

0.98

1.01


0.68

0.70

0.73

0.75

0.78

0.80



9/17


JAPAN - Economic activity in Japan is bound to slow incoming quarters on the back of weaker export performanceand downgraded fiscal support. The preliminary output esti-

mate for the third quarter displayed an expansion at a 0.9%quarter-over-quarter non-annualized rate, more than dou-ble the 0.4% q/q gain of the second. The gains camemainly on the back of the strongest household spendingadvance since the April-June period of 2009. Non-residential investment also added to growth, while net ex-ports were flat. The rise in consumer spending concen-trated on demand for durable goods which increased at adouble digit quarterly rate, and is explained in part by sub-sidies to consumers (mainly automobiles) which expired inSeptember. Spending is in for a downward correction, withmonthly vehicle sales for October already retracing to lev-els registered at the bottom of the recession. While a fall in

consumer dynamism is anticipated, household spendingand still solid machinery and equipment outlays will com-pensate at least in part for falling exports growth given thatlatest capital spending indicators continue to display sus-tained momentum. In order to reverse disinflationary pres-sures and prevent further contractions in spending, mone-tary authorities are bound to continue to provide liquidity tothe economy in the form of further expansion of the centralbanks balance sheet. The combination of deflation andyen strength has been a bad recipe for competitiveness,making recent yen weakening a welcomed development.

CHINA - Chinas growth momentum will remain intactthrough the turn of the year. The countrys manufacturingpurchasing managers index (PMI) for November evi-

denced resilient economic activity with an industrial basenow being propelled by both domestic and foreign demand.After hitting bottom last July, industrial output has in-creased persistently through October, with the PMI a reli-able guideline of future shipments as it has accuratelypointed to improved conditions in later months. The valueof Chinese industrial output trended down through mid-year, picking up during the third-quarter, with alternativeindicators also recovering from summer lows. Machineryand equipment outlays within the industrial sector in Octo-ber were the largest registered so far this year. Exportsinked the first seasonally adjusted expansion during thatsame month. These trends coincided with improving retail

sales, pointing to a final demand driven rebound as op-posed to inventory restocking. Momentum seems to bebuilding notwithstanding an evident loss of competitivenessas a result of real exchange rate appreciation. Mountingprice pressures have led to rising input costs, which com-pounded with a 2.5% nominal appreciation of the renminbi(CNY) so far in 2010. While we expect yearly inflation tocontinue to rise in the short run, driven mainly by food pricepressures, lapsing of base effects combined with persistentcredit tightening measures will likely lead to a peak in infla-tion by mid-year 2011.

AUSTRALIA - The Australian economic landscape is stillpromising notwithstanding the third quarter slowdown, as

the country is aligned to continue to reap the benefits of itsgeographical links to Asia. Gross domestic product ad-vanced in the July-September period at the slowest pacesince the end of 2008, with domestic demand as well asexports weakening. Foreign shipments subtracted fromgrowth as they fell 2.4% during the quarter, the steepestdrop in seven years on the back eroded competitiveness inpart a reflection of Australian dollar (AUD) strength. Al-though household spending added to growth a defensiveattitude on the part of consumers remains evident as retailsales and imports continued to slow through November.Rising borrowing costs have deteriorated the landscape notonly for consumption but also for capital spending by firms,

as industrial activity trended down for the third month in arow. Although favourable commodity prices continue tobolster the prospects for Australias external accounts andcurrency, they have also translated into higher local costs.The inflationary buildup seems to have lost some steam inthe latest readings, as headline inflation fell to 2.8% y/y.Core-goods price pressures, however, continue to increasealthough remained below service sector inflation, whichalso slowed slightly. The effects of monetary tightening bythe Reserve Bank of Australia (RBA) seem evident as do-mestic demand has slowed. The RBA increased the bench-mark cash rate seven times since October 2009.

NEW ZEALAND - Economic prospects in New Zealand willcontinue to improve as the country rips the benefits of prox-

imity to the Asian region. Exports rebounded significantly inthe past two months following a mid-year slump. Demandfrom China and other Asian nations has continued to buoycommodity prices resulting in rising shipment values. Al-though imports picked up as well, the trade balance hasbeen narrowing. The significant rebound in the demand for foreign products is symptomatic as domestic spending hasbeen uplifted. Retail sales during September printed thelargest monthly gain since March, with credit card spendinghaving already displayed an uptrend in the third-quarter that continued through November. The recovery in house-hold spending is underpinned by a falling unemploymentrate. The turn in the labour market bodes well for economic

activity down the road but will also raise inflationary con-cerns. Yearly inflation is running at 1.5%, down from the1.7% increase in the second quarter. Rising costs for localindustries resulted from this years sales tax increase. TheReserve Bank of New Zealand (RBNZ) left the benchmarkinterest rate unchanged at 3% after the past two monetarypolicy meetings. We expect the RBNZ to step off the side-lines sometime during the first quarter of 2011.

ASIA /O CEANIA Fundamental Commentary Oscar Snchez +1 416 862-3174


10/17


INDIA - The Indian rupee (INR) will regain a strengthening bias once global risk aversion settles down. The INR weak-ened by about 4% during the past month and a half, undoing most year-to-date gains through mid-October. Monetarynormalization is expected to resume early in 2011 as authorities pursue a lift in real interest rates back to historical stan-

dards.

KOREA - Bond spreads and growth differentials will continue to support the Korean won (KRW) in coming months. Thecurrency has gained almost 6% vis--vis the USD so far in the second-half of 2010, as export-led growth is comple-mented by domestic demand momentum. Inflationary concerns are likely to keep the central bank on alert further tiltingthe odds in favour of KRW strength. We expect the KRW to close the year at 1120.

THAILAND - The Thai baht (THB) will continue to be supported by favourable interest rate spreads and the countrysattractiveness as a manufacturing hub within Asia. The THB currently trades at 30 per US dollar, having appreciated by9.5% so far in 2010. THB strength led to the central banks recent reinsertion of the 15% tax on foreign investors capitalgains from government or state owned enterprises bond holdings. We expect the THB to close the year at 29 and tradeat 27.5 at end-2011.

MALAYSIA - Malaysia is on track to grow close to 7% this year, following a relatively moderate 1.7% contraction in2009. With interest rates likely trending higher and economic conditions on the mend, we expect the ringgits appreciat-ing bias to persist, taking the exchange rate to 3.0 by end-2010 and 2.85 by end-2011.

DEVELOPING ASIA Currency Outlook Oscar Snchez +1 416 862-3174

12 m 6 m 3 m 3 m 6 m 12 mUSDINR 46.52 46.37 47.08 42.48 41.72 40.24 USDINRUSDKRW 1163 1202 1199 1113 1103 1083 USDKRWUSDTHB 33.22 32.52 31.27 28.74 28.37 27.62 USDTHBUSDMYR 3.39 3.26 3.15 2.97 2.94 2.86 USDMYR

USDINR USDKRW

USDTHB USDMYR

45.11113930.033.15

Currency TrendsSpot


FX Rate FX Rate

44.00

44.60

45.20

45.80

46.40

47.00

47.60

48.20


1125

1150

1175

1200

1225

1250

1275


29.40

30.05

30.70

31.35

32.00

32.65

33.30


3.13

3.20

3.28

3.35

3.43

3.50



11/17


INDIA - Economic growth in India is bound to accelerate asindustrial output remains propelled by domestic spendingand further inroads in foreign markets. A downtrend in

manufacturing growth is coming to an end during the fourthquarter, as inflation is back in single digits and the ReserveBank of India (RBI) finally signaled a pause in the monetarytightening cycle. This has clarified the outlook for creditcosts improving corporate profit prospects as domestic de-mand continues to propel forward. The key to the currentunleashing of economic momentum was the fall in inflation-ary pressures. The wholesale price index (most widelyused measure of price pressures) fell to 8.6% in October after remaining in double digits through July of 2010. Fal-ling food costs explain most of the down trend althoughmonetary tightening was clearly effective in limiting thebuild up of inflationary expectations. This years favourable

harvest season (monsoon) aided in reducing annual foodinflation. As the cost of non-food items also started to pickup, on the back of both wage pressures and rising fuel lev-ies, monetary tightening impeded further contamination of expectations. The RBI decreed a 150 basis points rise inthe benchmark repo rate to 6.25% so far in 2010. Tighter monetary conditions were complemented by Indian rupee(INR) appreciation, as the currency strengthened by over 5% through mid-October. While the RBI is looking for fur-ther gains in the disinflationary front, we expect monetaryactions to be resumed in the first quarter of 2011.

KOREA - Inflationary concerns finally eased in South Ko-rea. Price pressures took a favourable turn as yearly infla-tion fell to 3.3% y/y in November after having risen steadily

the past six months. Core inflation, an indirect measure of underlying monetary trends, also came down to 1.9% y/y.While the economy is not displaying signs of overheating,momentum is transitioning from foreign to domestic de-mand, with third-quarter output growth propelled by house-hold consumption and investment. Indeed, although GDPgrowth during the July-September period advanced 0.7%,a slowdown from the 1.4% pace of the previous quarter,the rise in private consumer spending is indicative of thetransition from export-led/government supported economicactivity, with overall investment spending also slowingslightly. This is consistent with building momentum inprices of locally oriented industries. Hints of a slowdown in

industrial activity appeared in October notwithstanding theacceleration in exports which expanded at an over 27% y/yrate in the month. This was in line with the pickup in thepurchasing managers index for November, which signaledrising future industrial shipments. The monetary normaliza-tion process initiated back in July, continued during Octo-ber as the monetary authority raised interest rates by 25basis points to 2%. Evidence of a downward trend in infla-tion is likely to leave monetary authorities on the sidelinesin coming months as they weight economic growth pros-pects in 2011.

THAILAND - Domestic demand improvement continues inThailand as local spending takes the economic baton from

exports. The Thai economy grew 6.7% y/y in the threemonths to September after having expanded 9.2% and12% in the previous two quarters. While GDP contractedslightly on a quarterly basis (-0.2% and -0.6% q/q, respec-tively), the earlier in the year advance continues to com-pensate. More importantly, both consumer and investmentspending continue to expand at rates of over 5% y/y bal-ancing the loss of dynamism in the external sector. Whileexport growth has fallen from the brisk rhythm of the firsthalf, quarterly flows in value terms remain at record levelsthrough September. We anticipate further domestic de-mand inroads up ahead as gains in household spendingare being pared by a double-digit comeback in capital and

equipment outlays by firms, and accompanying infrastruc-ture investment by the government. Although currencystrength will continue to condition export performance, theeconomys fundamentals remain well-supported. Thepickup in domestic spending has yet to generate further inflationary pressures as headline consumer price gainshave decelerated during the second half, with inflation hov-ering currently at 2.8%, and core inflation at 1% y/y, wellwithin the target range of 0.5% - 3%. The Bank of Thailandstarted normalizing monetary conditions last July, with sofar three 25 basis point increases in the benchmark interestrate to the current 2%.

MALAYSIA - Price pressures remain an issue of concernfor Malaysian monetary authorities. Inflationary trends took

an unfavourable turn as yearly inflation climbed back to 2%y/y in October. Although inflation remains relatively sub-dued, as it still lies below the August peak, the recent risewill likely put monetary authorities on edge as Bank NegaraMalaysia (BNM) has been one of the regions most activecentral banks this year. Monetary authorities have beenmainly concerned with contamination of inflation expecta-tions from the withdrawal of fuel subsidies earlier in 2010.Evidence of a slowdown in economic activity materializedin the third-quarter as output contracted on a quarterly ba-sis. However, latest data point to a rebound in exports after a two month slump. Gains in Singapore, the US and Japa-nese markets, three of Malaysias main trading partners,

underpinned the recovery in shipments. While foreign salesto China remained on a downward trend, an improved out-look for manufacturing activity in the mainland is likely tofavour peripheral country growth in coming months. Theeffects of a stronger currency on export performance haveclearly been present as the Malaysian ringgit (MYR) hasstrengthened close to 10% year to date. The monetary pol-icy committee of BNM has raised interest rates three timesso far this year, with the overnight policy rate standing cur-rently at 2.75%. Although further monetary tighteningmoves are a possibility in coming months BNM concernsover instigating further currency gains remain.

DEVELOPING ASIA Fundamental Commentary Oscar Snchez +1 416 862-3174


12/17


BRAZIL - The Brazilian real (BRL) is, once again, in strengthening mode. Following the Europe-induced volatility in globalcurrency markets, a period of normalization is under way. Latin American floating currencies regained an appreciatingbias. Strong economic fundamentals, attractive interest rate differentials and massive capital flows support a stronger

BRL in the near term. We expect the currency to close the year at 1.70 and revalue further to 1.65 by end-2011.

MEXICO - The Mexican peso (MXN) regained, in line with other top emerging market currencies, a strengthening trend.Reduced investor anxiety at least in the near term regarding the fiscal health and leverage position within Europehelped instill a bullish tone into Latin American currencies. The MXN also received an added push from rising crude oilprices and widening interest rate differentials. We expect USDMXN to close the year at 12.50.

CHILE - The Chilean peso (CLP) continues in range-trading mode, supported by strong growth prospects, large-scaleinvestment inflows and favourable commodity prices. We do not expect any significant deviation from current tradingpatterns in the near term. Chiles connection with the thriving Asian region coupled with a stable policy/political environ-ment act as a natural shield to contain sharp currency movements. We expect USDCLP to close the year at 480.

COLOMBIA - The Colombian peso (COP) will regain an appreciating trend versus the USD in the near term. The steady

appreciation of the COP is a key issue of concern to the government. At the core of the public debate is the need to im-plement structural reforms to improve the competitiveness and seek the diversification of the Colombian economy. Weexpect USDCOP to close the year at 1,880.

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

12 m 6 m 3 m 3 m 6 m 12 mUSDBRL 1.76 1.82 1.76 1.69 1.68 1.65 USDBRLUSDMXN 12.93 12.93 13.20 12.37 12.37 12.70 USDMXNUSDCLP 497 530 503 488 486 481 USDCLPUSDCOP 2003 1972 1826 1875 1867 1852 USDCOP

Currency TrendsSpot


FX Rate FX Rate

1.6912.38

4821908

USDBRL USDMXN

USDCLP USDCOP

1.65

1.68

1.72

1.75

1.78

1.81

1.85

1.88


12.3

12.5

12.6

12.8

13.0

13.2

13.3


473

485

497

509

521

533

545


1810

1870

1930

1990

2050

2110



13/17


14/17


RUSSIA - The Russian ruble (RUB) remains vulnerable to profit-taking activity stemming from a renewed bout of riskaversion. An approaching electoral cycle may add to currency volatility. The robust foreign exchange reserves positionallows the central bank to intervene in the market to moderate speculative exchange rate swings.

TURKEY - The Turkish lira (TRY) is undergoing a correction phase, reflecting elevated risk aversion related to the sov-ereign credit turmoil in the euro zone. Approaching parliamentary elections in the summer of 2011 and a widening cur-rent account deficit may introduce TRY selling pressures in 2011. We expect the TRY to close the year at 1.45 per USD.

CZECH REPUBLIC - The governments commitment to fiscal prudence should help prevent a contagion of risk aversionfrom neighbouring countries into the Czech Republic. We expect the CZK to remain relatively stable through 2011, hover-ing close to 25 per euro.

SOUTH AFRICA - Strong capital inflows are supporting the South African rand (ZAR); South African authorities consider the ZAR to be overvalued, and stand ready to alleviate further appreciation pressures. We expect the ZAR to close theyear at 6.9 per USD.

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

12 m 6 m 3 m 3 m 6 m 12 mUSDRUB 29.3 30.9 30.8 31.2 31.6 32.4 USDRUBUSDTRY 1.53 1.57 1.53 1.46 1.47 1.50 USDTRYEURCZK 26.1 25.5 24.8 24.9 24.8 24.5 EURCZKUSDZAR 7.40 7.67 7.37 7.00 7.14 7.45 USDZAR

USDRUB USDTRY

EURCZK USDZAR

31.21.4825.06.87

Currency TrendsSpot


FX Rate FX Rate

28.5

28.9

29.4

29.8

30.3

30.7

31.1

31.6


1.44

1.47

1.51

1.54

1.58

1.61


24.00

24.50

25.00

25.50

26.00

26.50

27.00


6.95

7.15

7.35

7.55

7.75

7.95



15/17


RUSSIA - Russian monetary authorities will likely maintaina neutral policy stance through the balance of the year, asglobal economic prospects remain uncertain. The bench-

mark interest rate was kept unchanged at 7.75% for a sixthconsecutive month following a monetary policy meeting onNovember 26 th. Nevertheless, with real interest rates aboutto turn negative, the beginning of a monetary tightening cy-cle is gradually approaching. Inflationary pressures intensifyin Russia, reflecting the drought and wild fires last summer that are feeding food costs; consumer prices increased by7.5% y/y in October, with further price increases likely push-ing the year-end inflation rate to 8.5%. Economic growthslowed to 2.7% y/y in the third quarter following a 5.7% ad-vance in the April-June period as last summers adverseevents impacted export sector performance. While remain-ing sensitive to global energy (demand and pricing) market

dynamics, we expect the country to record relatively solidreal GDP growth rates of around 4% through 2011; never-theless, the pace of expansion remains well below the aver-age annual growth of nearly 7% experienced in the decadeleading to the recession. Higher oil prices are contributing toan improvement in government finances, with the fiscal defi-cit likely to narrow from 5.9% of GDP in 2009 to 4% thisyear, less than the governments target of 5.3%.

TURKEY - The Turkish economy continues perform well,driven by strong domestic demand. Real GDP is set to ex-pand by 7% in 2010; output expansion will return to a

more sustainable level of around 5% in 2011 as interestrates normalize and the external sector is impacted by agrowth moderation in the major advanced economies. Fol-lowing a recent surge, inflationary pressures continued todecline in November for the second consecutive month,with the consumer price index increasing by 7.3% y/y; weexpect inflation to remain above 6% y/y through 2012.Monetary conditions remain on hold for now; following theMonetary Policy Committee meeting on November 11 th

Turkish policymakers maintained the policy interest rate,the one-week repo rate, at 7.0%. We expect the centralbank to start normalizing monetary conditions in the com-ing months; however, by historical standards interest rates

are set to remain at low levels for an extended period of time. The monetary authorities acknowledge the risks tofinancial stability stemming from rapid credit growth andincreasing import demand that widens the current accountdeficit. In order to limit such risks, the central bank in-creased reserve requirements in mid-November. We ex-pect the current account shortfall to widen to over 5% of GDP in 2010. On November 24 th, Fitch Ratings revisedTurkeys sovereign credit rating outlook to positive on theback of positive fiscal developments.

CZECH REPUBLIC - The export-oriented Czech economyis recovering on the back of a solid industrial sector; more-

over, improving confidence indicators point to a pickup inhousehold demand. The countrys output growth acceler-ated in the third quarter, expanding by 1.1% q/q (3.4% y/y)following a 0.9% q/q (2.4% y/y) increase in the April-Juneperiod; we expect the economy to grow by 2 % in 2010.Planned public spending cuts together with a slowdown inmajor advanced economies will decelerate growth to 1%in 2011. The Czech National Bank will likely start normaliz-ing monetary conditions in the first half of 2011; in Novem-ber, monetary authorities voted 5-1 to keep the benchmarkinterest rate at the current level of 0.75%, with one policy-maker voting for a 25 basis point hike. Consumer pricesincreased by 2.0% y/y in October in line with the central

banks inflation target. The new coalition government thathas a solid parliamentary majority has proven strong com-mitment to improving government finances; in particular, aplanned large pension reform would significantly ease pub-lic expenditure pressures stemming from the aging popula-tion. Faster than expected economic growth will allow the2010 fiscal deficit to narrow to 5.1% of GDP, somewhatsmaller than the governments target of 5.3%. The admini-stration plans to reach the Maastricht limit of 3% of GDP by2013.

SOUTH AFRICA - The strength of the South African rand(ZAR) and an improved inflation outlook allowed the South

Africa Reserve Bank (SARB) to ease monetary conditionsfurther in order to support the economic recovery; followingthe Monetary Policy Committee meeting on November 18 th

the benchmark interest rate was cut by 50 basis points to5.50%, marking the third rate reduction this year. Neverthe-less, monetary authorities assess that the scope for further easing is limited in the context of a pickup in consumer spending and credit extension. Nevertheless, while privatesector credit growth has showed signs of acceleration inrecent months (up by 5.1% y/y in October), high levels of household debt and unemployment limit household spend-ing prospects. The economy expanded by 2.6% y/y in thethird quarter of the year following a 3.1% advance in the

April-June period. We expect the countrys output to in-crease by around 3.0% through 2011. Consumer price infla-tion remained well-contained at 3.4% y/y in October (upfrom 3.2% the month before), and will likely continue tohover within the SARBs 3-6% inflation target range through2011. As the policymakers have become more concernedabout an overvalued currency, the recent trend of a higher paced reserve accumulation will likely continue. A wideningcurrent account deficit points to modest selling pressures of the ZAR in 2011.

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


16/17


G LOBAL C URRENCY FORECAST (end of period)2008 2009 2010f 2011f

Q1a Q2a Q3a Q4 Q1 Q2 Q3 Q4

MAJOR CURRENCIESJapan USDJPY 91 93 82 84 93 88 84 82 82 83 84 84

Euro zone EURUSD 1.40 1.43 1.32 1.37 1.35 1.22 1.36 1.32 1.33 1.33 1.35 1.37

EURJPY 127 133 108 115 126 108 114 108 109 110 113 115

UK GBPUSD 1.46 1.62 1.57 1.63 1.52 1.49 1.57 1.57 1.58 1.60 1.61 1.63

EURGBP 0.96 0.89 0.84 0.84 0.89 0.82 0.87 0.84 0.84 0.83 0.84 0.84

Switzerland USDCHF 1.07 1.04 0.96 0.91 1.05 1.08 0.98 0.96 0.94 0.93 0.92 0.91

EURCHF 1.49 1.48 1.27 1.25 1.42 1.32 1.34 1.27 1.25 1.24 1.24 1.25

AMERICASCanada USDCAD 1.22 1.05 1.00 0.96 1.02 1.06 1.03 1.00 1.00 0.99 0.98 0.96

CADUSD 0.82 0.95 1.00 1.04 0.98 0.94 0.97 1.00 1.00 1.01 1.02 1.04

Mexico USDMXN 13.7 13.1 12.5 12.8 12.4 12.9 12.6 12.5 12.3 12.4 12.5 12.8

CADMXN 11.2 12.4 12.5 13.3 12.2 12.2 12.2 12.5 12.3 12.5 12.8 13.3

Argentina USDARS 3.45 3.80 4.00 4.50 3.88 3.93 3.96 4.00 4.12 4.24 4.37 4.50

Brazil USDBRL 2.31 1.74 1.70 1.65 1.78 1.80 1.69 1.70 1.69 1.67 1.66 1.65

Chile USDCLP 639 507 490 480 524 546 484 490 487 485 482 480

Colombia USDCOP 2249 2044 1880 1850 1920 1900 1802 1880 1872 1865 1857 1850

Peru USDPEN 3.13 2.89 2.78 2.67 2.84 2.83 2.79 2.78 2.75 2.72 2.70 2.67

Venezuela 1/ USDVEB 2.15 2.15 4.30 4.30 4.30 4.30 4.30 4.30 4.30 4.30 4.30 4.30

ASIA / OCEANIAAustralia AUDUSD 0.70 0.90 1.01 1.08 0.92 0.84 0.97 1.01 1.03 1.05 1.06 1.08

China USDCNY 6.83 6.83 6.50 6.10 6.83 6.78 6.69 6.50 6.40 6.30 6.20 6.10

Hong Kong USDHKD 7.75 7.75 7.75 7.75 7.76 7.79 7.76 7.75 7.75 7.75 7.75 7.75

India USDINR 48.8 46.5 43.0 40.0 44.9 46.5 44.9 43.0 42.2 41.5 40.7 40.0

Indonesia 2/ USDIDR 11.12 9.40 8.90 8.85 9.10 9.07 8.91 8.90 8.89 8.87 8.86 8.85

Malaysia USDMYR 3.47 3.43 3.00 2.85 3.26 3.24 3.09 3.00 2.96 2.92 2.89 2.85

New Zealand NZDUSD 0.58 0.72 0.76 0.78 0.71 0.68 0.73 0.76 0.76 0.77 0.77 0.78

Philippines USDPHP 47.5 46.2 42.0 40.0 45.2 46.4 43.9 42.0 41.5 41.0 40.5 40.0

Singapore USDSGD 1.43 1.40 1.32 1.29 1.40 1.40 1.32 1.32 1.31 1.30 1.30 1.29

South Korea USDKRW 1260 1164 1120 1080 1131 1222 1140 1120 1110 1100 1090 1080

Thailand USDTHB 34.7 33.4 29.0 27.5 32.3 32.5 30.4 29.0 28.6 28.2 27.9 27.5

Taiwan USDTWD 32.8 32.0 30.0 29.0 31.8 32.1 31.2 30.0 29.7 29.5 29.2 29.0

EUROPE / AFRICACzech Rep. EURCZK 26.9 26.4 25.0 24.5 25.4 25.7 24.6 25.0 24.9 24.7 24.6 24.5

Iceland USDISK 121 126 115 120 127 128 113 115 116 117 119 120

Hungary EURHUF 266 270 275 285 265 285 276 275 277 280 282 285

Norway USDNOK 6.95 5.79 5.85 5.60 5.94 6.50 5.88 5.85 5.70 5.60 5.55 5.60

Poland EURPLN 4.15 4.10 3.95 3.80 3.86 4.15 3.96 3.95 3.91 3.87 3.84 3.80

Russia USDRUB 29.4 30.0 31.0 32.5 29.4 31.2 30.5 31.0 31.4 31.7 32.1 32.5

South Africa USDZAR 9.53 7.40 6.90 7.50 7.29 7.67 6.96 6.90 7.05 7.19 7.35 7.50

Sweden EURSEK 10.94 10.25 9.30 9.00 9.75 9.54 9.19 9.30 9.22 9.15 9.07 9.00

Turkey USDTRY 1.54 1.50 1.45 1.50 1.52 1.58 1.45 1.45 1.46 1.47 1.49 1.50

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

2011f

N o r t

h

S o u

t h

2010f


17/17


This Report is prepared by Scotia Economics as a resource for theclients of Scotiabank and Scotia Capital. While the information is fromsources believed reliable, neither the information nor the forecast shallb k i f hi h Th B k f N S i

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FX Outlook- Perspectivas en tipos de cambio

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