Global Economic Research June 2010

Prolonged EUR weakness, European credit market stress,

commodity price shifts, profit-taking in emerging markets,
emergence of geo-political tension in Asia, monetary
tightening dynamics and intensifying official intervention are
key issues shaping capital flows in foreign exchange
markets.

USD strength against the EUR remains intact. Interest rate

differentials will inject an appreciation bias into the CAD and
GBP. The JPY remains broadly stable against the USD, yet
maintains a strengthening bias vs. the EUR.

The CNY and China’s FX policy continue to act as a global

stabilizing factor. However, profit-taking headwinds and
heightened geo-political tensions are fuelling disruptive
volatility in selective Asian markets. The THB and the KRW
remain on the defensive despite mild recovery from sharp
losses.

Global risk aversion placed emerging-market currencies on

alert. A monetary tightening cycle is in place in Latin America.
Growth and interest rate differentials coupled with supportive
commodity prices will reignite a short-term strengthening
bias into the BRL, MXN, CLP, RUB and ZAR.

Index

Market Tone & Fundamental Focus ......................................................................................... 3

US/Canada.................................................................................................................................. 5
Europe/Japan (Majors) .............................................................................................................. 6
Asia/Oceania/Europe................................................................................................................. 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

Global Economic Research June 2010

Global Foreign Exchange Outlook

June 2, 2010 Actual Q1 10 Q2 10 Q3 10 Q4 10 Q1 11 Q2 11 Q3 11 Q4 11
EURUSD 1.23 1.35 1.20 1.17 1.19 1.21 1.22 1.24 1.26
Euro Consensus* 1.35 1.30 1.30 1.29 1.29 1.29 1.29 1.29
USDJPY 91.3 93 91 93 95 97 98 99 100
Yen Consensus* 93 93 95 96 98 99 99 99
GBPUSD 1.47 1.52 1.44 1.46 1.50 1.51 1.52 1.54 1.55
Sterling Consensus* 1.52 1.50 1.50 1.51 1.52 1.53 1.53 1.53
USDCAD 1.05 1.02 1.02 1.01 1.00 0.99 0.98 0.97 0.97
Canadian Dollar Consensus* 1.02 1.01 1.01 1.02 1.03 1.03 1.04 1.04
AUDUSD 0.84 0.92 0.87 0.88 0.90 0.91 0.92 0.93 0.94
Australian Dollar Consensus* 0.92 0.92 0.92 0.91 0.90 0.89 0.89 0.88
USDMXN 12.88 12.37 12.43 12.65 12.80 12.94 12.96 13.08 13.22
Mexican Peso Consensus* 12.33 12.31 12.38 12.43 12.49 12.55 12.64 12.72
Spot Price vs. 100 Day Moving Average vs. 200 Day Moving Average - (5yr Trend)
EURUSD USDJPY
1.62
121
EUR/ USD
1.52 100 Day 114
200 Day
1.42 107

1.32 100 USD/ JPY

100 Day
1.22 93 200 Day

1.12 86
8
D 7
05

10

10

05

06

07

08

09

10
Ap 5

06

07

M 7

Au 9

9
M 8

09
06

-0
l-0
-0

-0

-0

-0

-0

-0

-0

-0
-0
p-
n-

n-

n-

n-

n-

n-

n-

n-

n-
b-

g-
r-
ov

ec

ec

ec

ec

ec

ec
ay

ar
ct
Ju
Ju

Ja

Ju

Ju

Ju

Ju

Ju

Ju

Ju
Se

Fe

O
N

D
GBPUSD USDCAD
2.11
1.30
1.96
1.22
1.81 1.14

1.66 GBP/ USD 1.06 USD/ CAD

100 Day 100 Day
1.51 0.98
200 Day 200 Day

1.36 0.90
05

06

07

08

09

10
5

9
05

06

07

08

09

10
5

-0

-0

-0

-0

-0
-0

-0

-0

-0

-0

n-

n-

n-

n-

n-

n-
n-

n-

n-

n-

n-

n-

ec

ec

ec

ec

ec
ec

ec

ec

ec

ec

Ju

Ju

Ju

Ju

Ju

Ju
Ju

Ju

Ju

Ju

Ju

Ju

D
D

AUDUSD USDMXN
0.97 15.2
AUD/ USD
USD/ M XN
0.89 100 Day 14.1 100 Day
200 Day
200 Day
0.82 13.0

0.74 11.9

0.67 10.8

0.59 9.7
05

06

07

08

09

10
5

9
05

06

07

08

09

10
5

-0

-0

-0

-0

-0
-0

-0

-0

-0

-0

n-

n-

n-

n-

n-

n-
n-

n-

n-

n-

n-

n-

ec

ec

ec

ec

ec
ec

ec

ec

ec

ec

Ju

Ju

Ju

Ju

Ju

Ju
Ju

Ju

Ju

Ju

Ju

Ju

D
D

(*) Source: Consensus Economics Inc. May 2010

2
Global Economic Research
MARKET TONE & FUNDAMENTAL FOCUS
Pablo F.G. Bréard +1 416 862-3876
Europe is at the center of investors’ heated debate on the
global currency outlook. The fiscal erosion and deteriorat-
ing creditworthiness of southern European economies
have weakened the near-term outlook for the euro (EUR)
and triggered another round of disorderly currency adjust-
ments and heightened global risk aversion. The US dollar
(USD) has been the primary beneficiary of the increasing
bearish sentiment towards the EUR, revival in the flight-
to-liquidity bias, and the relative strengthening in US mac-
roeconomic fundamentals. The credit market distress
weakened the euro zone currency and economic outlook,
yet the process of diversification of international reserves
management remains intact; indeed, China was quick to
stress that the EUR remains a strategic (reserve cur-
rency) option. The Canadian dollar (CAD), underpinned
by the strength of its financial system, high energy prices,
and rising interests (Bank of Canada is the first G7 central
bank to raise rates), continues to be a market favourite
amongst global investors; a move back towards parity vs.
the USD is likely. Emerging-market currencies regained
an appreciating bias following the recent spike in market
volatility, supported by growth and interest rate differen-
tials and financial systemic strength. The European fiscal/
debt shock reinforces the relative position and weight of
developing countries in the new global financial map.
In response to heightened investor intolerance, European
leading nations joined forces with multilateral lending in-
stitutions and the US Federal Reserve (Fed) to bring sta-
bility to nervous financial markets. Collective action within
the 27-member European Union (EU) and the Interna-
tional Monetary Fund (IMF) gave birth to a comprehen-
sive financial assistance package of €860 billion
(including €110 billion in IMF support to Greece, a €60
billion EU Stabilization Fund, €440 billion in country loan
guarantees and up to €250 billion in IMF funds for the
region at large). The Fed reinstated the – already discon-
tinued – reciprocal currency arrangements with the
world’s influential central banks to address temporary
dysfunctions in short-term USD funding markets.
Market metrics imply a mixed reaction to the European
financial programme. The USD remains well bid; the
trade-weighted DXY index increased further over the past
weeks, accumulating a 17% gain since late November
2009. Currency trading dynamics in the weeks ahead will
dictate the degree of success of the European financial
package. The deepening of the bearish trend may soon
place EUR/USD closer to the 1.20 mark. The EUR is also
weakening against both the Japanese yen (JPY) and the
British pound (GBP). Although post-election policy shifts
in the UK might cause budget-related uncertainties, the
GBP should benefit from widening interest rate differen-
tials; indeed, EUR/GBP will continue to weaken as the
June 2010
Camilla Sutton +1 416 866-5470
Bank of England begins to tighten monetary policy.
Against the JPY, euro weakness has been more modest,
yet there is potential for consolidation within the 110-120
range in the near term; in fact, low growth, deflation and
demographic shifts continue to weigh on the JPY outlook.
Finally, as in previous global shock waves, the Chinese
leaders acted with prudence and maintained a stable cur-
rency trading environment. However, once financial mar-
ket stability is restored, we do expect that China will adopt
a more flexible exchange rate regime.
The unprecedented and coordinated multilateral official
intervention to bring calm to the European credit storm
and restore order to currency and securities markets is
showing some signs of success, yet the EUR outlook re-
mains grim. EUR/USD will likely approach the 1.17 mark
in the second half of 2010 before regaining moderate
strength in 2011. Although both the IMF and the OECD
do not expect a major decline in European economic ac-
tivity, we have downgraded our outlook for euro zone
GDP growth to 0.8% and 1% for 2010 and 2011, respec-
tively, on the grounds of deteriorating credit conditions
and adoption of sizable fiscal adjustments. Irrespective of
the European Financial Stabilization mechanism unveiled
on May 9th, some international rating agencies have
downgraded the rating (and/or outlook) of sovereign cred-
its such as Spain, Portugal, Greece and Ireland. More-
over, Standard and Poor’s (S&P) has maintained a
“negative outlook” on the United Kingdom’s sovereign
rating since May 2009.
The near-term risk of sovereign credit default in Southern
European countries has declined, yet the structural
(fiscal) deficiencies remain in place in Europe (and the
US) at large. EU leaders stressed the need to deepen
fiscal consolidation in Spain and Portugal, prompting the
introduction of tax reform and public expenditures adjust-
ments. Multi-country fiscal consolidation will end in slower
economic activity, triggering a reassessment of monetary
conditions within the euro zone; indeed, the European
Central Bank may keep short-term rates unchanged until
the last quarter of 2011. Top-tier emerging-market coun-
tries such as the BRIC group (Brazil, Russia, India and
China) and others (Mexico, South Africa, and Turkey to
name a few) continue to be recognized – financially and
politically – as new players of relevance in the global fi-
nancial map. Relatively buoyant view for commodity
prices coupled with widening interest rate and growth dif-
ferentials support currencies such as the Brazilian real,
the Mexican peso, and the South African rand. However,
escalating geo-political tensions in Thailand and the Ko-
rean peninsula remind global investors of the potential for
disrupting events in the developing world.
3
Global Economic Research June 2010

CANADA Camilla Sutton +1 416 866-5470

Global risks have risen and the outlook for growth has been dampened; however, Canada’s strong story has not evapo-
rated. In fact on a relative currency basis, CAD’s star is still shining. USDCAD parity remains on the horizon. The auster-
ity measures being undertaken in Europe have dampened the outlook for global growth; yet for Europe this will be
somewhat offset by the 20% depreciation in the euro that has transpired since December 2009. The OECD estimates
that a 10% depreciation in the euro will cause a 0.2% increase in world growth in both the first and second year. Accord-
ingly, even though developments in Europe will dampen global growth, some of this will be offset by FX fluctuations. The
outlook for oil is also highly sensitive to changes in the outlook for global growth and in its circular way this too has a
large impact on the valuation for CAD. Worries over a drop in global growth have weighed on oil markets; however, the
increase in demand for oil stems largely from the developing world, whose growth prospects might have been tarnished
but continues to be fairly robust. Accordingly, though oil prices might not be as lofty as once hoped, the outlook remains
firm, which, in turn should keep a major driver of CAD anchored. On the domestic side, there are many hurdles ahead
for the Canadian economy. However, on a relative basis, the economy is well placed. The growth outlook is similar to
the US and above that of Europe and Japan. The Bank of Canada has entered its interest rate hiking cycle, which will
provide an additional rate advantage for CAD. Admittedly, both the fiscal and current accounts are in deficit; however, on
a relative basis these are still strong. In addition, global investor sentiment is favourable. The combination of ongoing
global diversification, rising fears in Europe and the untarnished reputation of the Canadian financial system bodes well
for foreign flows into Canada. Finally, speculative demand for the Canadian dollar is off its highs, but investors still hold
a net long CAD position. Recent turmoil in Europe has dampened the outlook for global growth, but not to the extent that
it has fundamentally changed CAD’s path. Spiking risk aversion remains the key risk and returning bouts of it will stop a
significant rally in the currency. Accordingly, CAD’s shine might have been temporarily tarnished, but parity is still on the
horizon.

Currency Trends
Going Back Spot Outlook
FX Rate FX Rate
12 m 6m 3m 2-Jun 3m 6m 12 m
AUDCAD 0.874 0.968 0.942 0.881 0.892 0.903 0.905 AUDCAD
CADJPY 87.3 81.8 84.6 87.1 91.1 94.0 99.3 CADJPY
EURCAD 1.545 1.585 1.434 1.288 1.196 1.187 1.196 EURCAD
USDCAD 1.092 1.056 1.052 1.048 1.013 1.003 0.983 USDCAD
AUDCAD CADJPY

0.98 94

0.97 92

0.95 90

0.94 88

0.92 85

0.90 83

0.89 81

0.87 79
Jun-09 Aug-09 Oct-09 De c-09 Fe b-10 Apr-10 Jun-10 Jun-09 Aug-09 Oct-09 De c-09 Fe b-10 Apr-10 Jun-10

EURCAD USDCAD

1.60 1.16

1.56 1.13

1.51 1.11
1.47
1.09
1.43
1.06
1.38
1.04
1.34
1.29 1.01

1.25 0.99
Jun-09 Aug-09 Oct-09 De c-09 Fe b-10 Apr-10 Jun-10 Jun-09 Aug-09 Oct-09 De c-09 Fe b-10 Apr-10 Jun-10

4
Global Economic Research
CANADA AND UNITED STATES
Fundamental Commentary
UNITED STATES - The impact of Europe's debt turmoil on
the US economic outlook is likely to be relatively small,
spreading through 2011. Even prior to pricing in the Greece
debacle, Europe was forecast to lag the global recovery,
and by a rather wide margin. Declining euro and weaker
demand in the region may hurt the competitiveness of US
exports, earnings of American companies abroad and re-
duce the number of European tourists. While over 20% of
US exports are destined for Europe, the peripheral euro
zone countries (Portugal, Italy, Greece, Spain) account for
under 3% of the overall US exports. Historically, even large
fluctuations in European trade have a limited impact on the
US economy. The 19% drop in US exports to the EU ex-
perienced in 2009 shaved only 0.4 percentage points from
the GDP headline, recording the biggest drag since at least
the 1980s. Estimates of the exchange rate fluctuation re-
quired to shave off 1% of the trade balance vary from 10%
to 30%, depending on the underlying factors. Moreover, the
lag between currency movements and trade balance ad-
justment could take over a year. The declining euro could
also put pressure on foreign direct investment (FDI). US
FDI in Europe represents over 50% of the country’s overall
investment abroad, while roughly 60% of European assets
are held in the US. Revived risk aversion increases the
volatility in the financial markets, with possible feed-through
effects on the real economy. This could put a dent in
household wealth and prompt banks to become more re-
luctant to lend, adversely affecting consumption and busi-
ness investment. Europe's debt crisis carries some hidden
benefits as well. Lower commodity prices are reducing
pipeline inflationary pressures, giving the Fed more flexibil-
ity. The euro’s continued weakness has reasserted the
USD as the global reserve currency of choice, while the
widening of the CDS spreads is reaffirming the US Treas-
uries’ status as the global ‘risk-free asset.’
MONETARY POLICY COMMENTARY Derek Holt +1 416 863-7707
UNITED STATES - While economic activity continues to
recover in the US after the worst recession since WWII, the
Fed has remained on the sidelines, keeping the Fed funds
rate at an emergency low of 0.25% despite some dissen-
tion amongst Fed members. By the end of June, however,
all of the unconventional measures will be complete, setting
the stage for the Fed to start tightening monetary policy
either through unwinding many of these measures or via a
hike in the fed funds rate and interest on reserves. None-
theless, the current European debt crisis, its adverse effect
on financial markets over the past few months, and the
prospect of rolling global fiscal shocks including future US
austerity measures will likely put downward pressure on US
growth over the next few years, pushing our own forecast
for the first fed hike into Q1 2011.
June 2010
Adrienne Warren +1 416 866-4315
Gorica Djeric +1 416 866-4214
CANADA - The country’s economic recovery is well en-
trenched, with most recent economic indicators coming in
above expectations. Real GDP increased at a 6.1% annu-
alized rate in the first quarter of the year, roughly double
the US Q1 GDP advance and topping all other G7 nations
over the same period. Importantly, the broad-based nature
of the recovery attests to its sustainability once fiscal and
monetary stimuli are withdrawn, and inventory adjustments
run their course. Our diffusion index of GDP is running
close to its highest level in two years, with a large majority
of industries back in expansion mode. As is typical of the
early stages of most cyclical rebounds, goods-producing
sectors are leading the advance, piggybacking on the
pickup in global trade and industrial production, and the
need to replenish depleted stockpiles. Rising export vol-
umes combined with a sharp improvement in the terms of
trade has lifted Canada’s merchandise trade balance,
which slipped into deficit last year, back into a modest sur-
plus position. Construction remains in high gear, as
strength in homebuilding and public infrastructure outlays
more than compensates for reduced commercial and in-
dustrial activity. Service sector activity is also gaining mo-
mentum. Retailers have been reporting a steady pickup in
sales volumes, and somewhat better profit margins. Home
sales remain at a historically high level, but are showing
signs of slowing as reduced affordability tempers demand.
Private sector hiring is on the rise again, with the economy
now having recouped fully two-thirds of the roughly
420,000 jobs lost over the course of the 2008-2009 reces-
sion. Statistics Canada’s leading composite index jumped
0.9% in April, representing a 11th straight monthly increase,
with eight of the 10 subcomponents posting advances. The
biggest driver of growth is shifting from housing to manu-
facturing.
Karen Cordes Woods +1 416 862-3080
CANADA - The Bank of Canada (BoC) hiked the overnight
rate on June 1st by 25 bps to 0.50% as we had been ex-
pecting and re-established the normal operating band of 50
bps. While the accompanying statement was neutral in its
bias as the BoC highlighted that there was “considerable
uncertainty surrounding the outlook”, we remain of the view
that the BoC will continue to tighten monetary policy and
take its overnight rate up to 1.25% by year end - including a
July hike of 25 bps - and 2.75% by end of 2011. This is
predicated on the argument that emergency rates are no
longer needed in Canada given stronger than expected
growth results which continue to threaten the BoC’s 2%
core inflation target in the medium term. While there are
downside risks to the current tensions in Europe, there are
also upside risks that are supportive for economic growth,
thereby balancing out the risks.
5
Global Economic Research June 2010

MAJOR CURRENCIES
Currency Outlook Camilla Sutton +1 416 866-5470

EURO ZONE - On June 1st, the euro fell to a new four-year low of 1.2111, breaking below the 50% Fibonacci retracement
of the multi-year EUR rally. Speculators continue to short the currency in record numbers and the market is notably bear-
ish even after a 20% drop in the currency. Technically, most studies warn of further near-term downside. This, combined
with fundamental concerns over the region and its banking sector, negative flow and bearish sentiment should all work
against the euro. We expect EURUSD to bottom in Q310, closing the quarter at 1.17.

JAPAN - Since the beginning of 2010, USDJPY has been unable to break out of its 85 to 95 range. Japanese funda-
mentals are weak, the central bank is dovish, and technicals are bullish; all of which should keep upside pressure on
USDJPY. However, offsetting this has been significant spikes in risk aversion, which has kept USDJPY within its range.
We expect USDJPY to drift higher and close the year at 95.

UNITED KINGDOM - May was a difficult month for GBP traders; however, as we look out to June, the prospects appear
to be improving. Political uncertainty has eased, a new fiscal plan should be firmed on June 22 and it is increasingly evi-
dent that the central bank will be raising rates ahead of the ECB. Technically, there are early signs that the currency bot-
tomed in mid-May. However, speculators continue to hold large short positions.

SWITZERLAND - During May, USDCHF jumped higher as EURCHF was contained by SNB intervention. The Swiss
fundamental currency outlook is strong, however looming intervention will be a major weight for CHF to contend with.
Technically, we would expect EURCHF to push below 1.40. We hold a USDCHF year-end target of 1.09 and EURCHF
of 1.30.

Currency Trends
Going Back Spot Outlook
FX Rate FX Rate
12 m 6m 3m 2-Jun 3m 6m 12 m
EURUSD 1.42 1.50 1.36 1.23 1.18 1.18 1.22 EURUSD
USDJPY 95 86 89 91 92 94 98 USDJPY
GBPUSD 1.62 1.64 1.52 1.47 1.45 1.49 1.52 GBPUSD
EURCHF 1.51 1.51 1.46 1.42 1.32 1.30 1.31 EURCHF
EURUSD USDJPY

98
1.49
97
1.45
95
1.41

1.37 93

1.33 91

1.29 90

1.25 88

1.21 86
Jun-09 Aug-09 Oct-09 De c-09 Fe b-10 Apr-10 Jun-10 Jun-09 Aug-09 Oct-09 De c-09 Fe b-10 Apr-10 Jun-10

GBPUSD EURCHF

1.68 1.53

1.65 1.51

1.61 1.49

1.57 1.48

1.53 1.46

1.50 1.44

1.46 1.42

1.42 1.40
Jun-09 Aug-09 Oct-09 De c-09 Fe b-10 Apr-10 Jun-10 Jun-09 Aug-09 Oct-09 Dec-09 Fe b-10 Apr-10 Jun-10

6
Global Economic Research
MAJOR CURRENCIES
Fundamental Commentary
EURO ZONE - Concerns regarding the sustainability of
government finances in Greece and in other highly indebted
euro zone economies are weighing on the euro and on the
debt markets of the region’s peripheral economies. To re-
duce investor concerns, collective action within the Euro-
pean Union and the International Monetary Fund (IMF) re-
sulted in a comprehensive financial assistance package of
€860 billion (including €110 billion in country-specific IMF
support to Greece, a €60 billion EU Stabilization Fund, and
€440 billion in country loan guarantees as well as up to
€250 billion in IMF funds for the region at large). The signifi-
cantly cheaper euro is a welcome development for euro
zone exporters; export receipts rebounded to a 17-month
high of €134.9 billion in March. Regional industrial output
rose 1.2% m/m in March; new orders soared 5.3% m/m and
20% y/y, which should translate into increased production in
the coming months. The region-wide purchasing managers’
index for the services sector moved further into expansion
territory in May, while the manufacturing sector indicated
somewhat weaker business conditions, but remained in
growth mode. Meanwhile, the tough austerity measures
implemented in some European countries will dampen do-
mestic growth prospects; euro zone confidence indicators
dipped in May, reflecting the markets’ ongoing unease. We
expect the European Central Bank to maintain the current
monetary policy stance until the last quarter of 2011 due to
the ongoing turmoil and weakening growth prospects.
UNITED KINGDOM - The May 6th general elections re-
sulted in a coalition government of the Conservatives and
the Liberal Democrats, bringing an end to the 13 years of
Labour Party rule. The new administration acknowledges
the need for fiscal consolidation in the context of elevated
investor concerns regarding government finances in Europe
and the financial markets’ proven ability to punish for ineffi-
cient fiscal management; improving the budget deficit (£163
billion in 2010, equivalent to 11.1% of GDP) will be given
priority following the release of the June 22nd emergency
budget. At end-May, the Treasury announced a plan to cut
government spending by £6.2 billion in 2010-11. The Bank
of England (BoE) will be challenged by the task of finding a
balance between restoring growth and limiting inflationary
pressures; consumer price inflation increased to 3.7% y/y in
April. We expect the BoE to maintain the Bank Rate at 0.5%
until the second quarter of 2011. Gradual economic recov-
ery is taking hold with the manufacturing sector being the
driving force. The economy recorded a second consecutive
quarterly increase in output in the January-March period
when real GDP expanded by 0.3% q/q following a 0.4%
increase in the final quarter of 2009. Household consump-
tion remained flat while government spending and invest-
ment increased by 0.5% q/q and 1.5% q/q, respectively. The
external sector was a drag on GDP growth with exports re-
maining stable and imports increasing by 1.4% q/q.
June 2010
Tuuli McCully +1 416 863-2859
Oscar Sánchez +1 416 862-3174
JAPAN - The Japanese economic recovery is bound to be
affected by the weakening of the euro. Although evidence
of continued export growth through April is an initial solid
step into the second quarter, competitiveness losses vis-à-
vis German manufacturing goods are likely to dent some
momentum from Japanese foreign shipments. Export vol-
umes expanded at a brisk 6.5% monthly rate in April as
growing demand from China and developing Asia contin-
ued to bolster the outlook of Japanese conglomerates. The
trade figures provided an additional positive element which
could become more relevant subsequently, as import vol-
umes recovered from a retrenchment in March. Further
evidence of positive transmission to the local economy of
externally generated gains came from retail sales which
posted a 0.5% pickup in April, the fourth consecutive
monthly rise. With foreign sales driving most of the gains,
the Japanese economy grew at a 1.2% q/q rate during the
first quarter, the highest quarterly rate in a decade. Con-
sumer spending growth slowed to 0.3% q/q, after the previ-
ous quarter’s 0.7% rise, leaving the recovery in domestic
demand conditions still unclear. Post-first-quarter sales and
consumer confidence indicators have posed mixed signals
with willingness to buy durable goods rising to the highest
level in a year. The lukewarm recovery in locally oriented
sectors remains dominated by a downward trend in bank
lending which persisted through April for the fifth straight
month.
SWITZERLAND - The Swiss economy continues to enjoy a
robust recovery; output expanded by 0.4% q/q and 2.2% y/y
in the first three months of 2010. Moreover, with govern-
ment finances in a considerably better shape than the Euro-
pean norm (the Swiss 2009 budget was virtually balanced),
Switzerland has no immediate need for joining its regional
peers in their fiscal consolidation efforts. A stream of posi-
tive news is setting the stage for economic growth of around
1½% in 2010-11; the KOF Swiss Leading Indicator measur-
ing future trends of economic activity jumped in May to the
highest level since August 2006. In a similar fashion, con-
sumer consumption and confidence indicators point to fur-
ther increases in private spending, while employment condi-
tions are showing signs of improvement; the unemployment
rate decreased to 4.0% in April, a level previously seen in
August 2009. As inflationary pressures remain manageable,
we expect the Swiss National Bank’s policy committee to
leave the benchmark interest rate target at 0.25% until the
third quarter of 2010; the next quarterly monetary policy
meeting is scheduled for June 17th. Consumer price inflation
hovered at 1.4% y/y in April with higher energy costs from
the year before accountable for most of the price pressures.
We expect inflation to hover around 1% through 2011, sup-
ported by the strong franc that tends to appreciate along
with bouts of increased investor risk aversion.
7
Global Economic Research June 2010

ASIA/OCEANIA/EUROPE Oscar Sánchez +1 416 862-3174

Currency Outlook Camilla Sutton +1 416 866-5470

AUSTRALIA - Widening short-term interest rate differentials vis-à-vis other developed economies is providing a solid
foundation for renewed Australian dollar appreciation. The currency has gained almost 30% against the USD over the
past year and we expect the exchange rate to appreciate to 0.94 vs. the USD by the end of 2011.

NEW ZEALAND - NZDUSD dropped to a 10-month low of 0.6561 in May, but appears to have stabilized temporarily. Like
AUD and CAD, NZD is vulnerable to further spikes in risk aversion. Technically, the outlook has improved but is still weak.
We hold a 0.70 year-end target for NZD.

TAIWAN - Central bank intervention will continue to underpin the relative stability of the New Taiwan dollar (TWD). Ex-
pectations for a lower pace of adjustment in the exchange rate policy stance of the People’s Republic of China (Taiwan’s
leading trading partner) will also imply a modest quickening in the pace of appreciation of the TWD vis-à-vis the USD.

NORWAY - After breaking temporarily above 6.60; USDNOK has fallen back towards 6.40 as we enter June. Like many
of the other commodity currencies, spikes in risk aversion have significantly increased volatility. Technically, several
studies are on the verge of turning bearish and the spike to 6.67 on May 25 could prove to be the top; however, as of yet
the risk is still temporarily to the upside.

Currency Trends
Going Back Spot Outlook
FX Rate FX Rate
12 m 6m 3m 2-Jun 3m 6m 12 m
AUDUSD 0.80 0.92 0.90 0.84 0.88 0.90 0.92 AUDUSD
NZDUSD 0.64 0.72 0.70 0.68 0.69 0.70 0.72 NZDUSD
USDTWD 32.6 32.2 32.1 32.2 31.1 30.3 29.4 USDTWD
USDNOK 6.29 5.68 5.91 6.44 6.37 6.32 6.22 USDNOK
AUDUSD NZDUSD
0.76
0.93
0.74
0.91
0.72
0.88
0.70
0.86
0.67
0.84

0.82 0.65

0.79 0.63

0.77 0.61
Jun-09 Aug-09 Oct-09 Dec-09 Feb-10 Apr-10 Jun-10 Jun-09 Aug-09 Oct-09 Dec-09 Feb-10 Apr-10 Jun-10

USDTWD USDNOK

33.00
6.47
32.75
6.34
32.50
6.20
32.25 6.06
32.00 5.92
31.75 5.79
31.50 5.65

31.25 5.51
Jun-09 Aug-09 Oct-09 Dec-09 Feb-10 Apr-10 Jun-10 Jun-09 Aug-09 Oct-09 Dec-09 Feb-10 Apr-10 Jun-10

8
Global Economic Research
ASIA/OCEANIA/EUROPE
Fundamental Commentary
AUSTRALIA - The Reserve Bank of Australia has taken the
lead in the global monetary policy tightening cycle, raising
its benchmark interest rate by 150 bps since October. The
cash rate lies currently at 4.5%. Although central bank gov-
ernor Glenn Stevens has noted that the recovery in global
economic activity continues to favour the outlook for Austra-
lian growth and the improvement in domestic credit condi-
tions, he decided to leave the benchmark cash rate un-
changed after the June 1st monetary policy meeting. The
authorities further stressed that borrowing costs may be
kept steady as their impact is assessed in coming months.
However, if inflation trends continue to rise towards the up-
per half of the 2-3% target zone, further rate hikes cannot
be discounted in coming months, as the central bank has
recognized in previous announcements. Latest data on la-
bour market conditions revealed that job growth accelerated
in April, with 37,500 added to the full-time employment rolls,
bringing full-time gains over the past seven months to
136,500 - an increase of 1.8%, with the unemployment rate
remaining steady at 5.4%. With skilled job vacancies still on
the rise, the strength of labour demand will likely be increas-
ingly reflected in higher wages in 2010, with positive ramifi-
cations for consumer spending and potentially adverse im-
plications for inflation. Australian authorities expect GDP
growth to accelerate from 3.25% in 2010 to 3.75% in 2011
and 4% in 2012.
TAIWAN - Taiwan’s economy grew in the first quarter at
the fastest pace in more than three decades. GDP ex-
panded at a 13.3% year-over-year rate on the back of surg-
ing exports, which have picked up at a 31% y/y rate during
the past six months. The rise in foreign sales was matched
by an increase in private investment which displayed a
37% yearly gain in the first quarter, more than 3 times the
initial rebound registered during the final three months of
2009 that broke a contracting trend. Taiwanese exporters
have been leading the economic recovery in Asia after be-
ing among the hardest-hit by the global economic down-
turn. As a result, industrial output jumped close to 50% y/y
in the first quarter of 2010. Demand from China and Hong
Kong - now Taiwan’s most relevant market - accounted for
44% of Taiwanese exports in April, compared with about
10% for both the US and Europe. In what would be an ini-
tial indication of an effect from the European sovereign
debt crisis, Taiwan’s export orders, which signal prospec-
tive shipments in the next one to three months, declined on
a monthly basis in April. In the event that this downward
correction materializes in actual sales, it will likely affect
production in later months. The so-far prevalent rebound in
industrial output has led to continuous improvement in la-
bour market conditions; the jobless rate fell for an eighth
consecutive month to 5.4%.
June 2010
Tuuli McCully +1 416 863-2859
Oscar Sánchez +1 416 862-3174
NEW ZEALAND - The most recent economic data emerg-
ing from New Zealand give the Reserve Bank some addi-
tional leeway to consider the timing of its first interest rate
hike in the upcoming monetary policy tightening cycle. Infla-
tionary pressures remain muted. The headline consumer
price index rose just 0.4% q/q in the first quarter of 2010
and was up 2.0% y/y (in the middle of the official medium-
term target range of 1-3%). Although the unemployment
rate fell to 6% in the first quarter, as companies hired about
22000 workers, consumer confidence measures of current
conditions remain subdued. This has reflected in weak
spending indicators as retail sales (adjusted for inflation)
increased 0.2% in the three months to March, the slowest
pace in a year. Under these conditions, there is clearly no
need for an early adjustment in interest rates, though we
still anticipate that the central bank will adhere to its previ-
ously announced target and shift to a less accommodative
stance around the middle of 2010. Central bank governor
Allan Bollard anticipated in March that the economy would
expand at a 3.2% yearly rate in 2010, after contracting by
1.6% in 2009. In a late April commentary, Mr. Bollard recog-
nized that “households were not spending and the housing
market remained subdued”. We do not expect the monetary
policy committee to take any action at its upcoming meeting
on June 10th; rather, we anticipate that the first rate increase
will be announced on July 29th.
NORWAY - Norwegian monetary conditions continue to be
normalized; following Norges Bank’s Executive Board meet-
ing on May 5th, the key policy rate was increased by 25 ba-
sis points to 2.0%. The rate has been raised by 75 bps
since October 2009, when Norges Bank became the first
central bank in Europe to start a monetary tightening cycle.
In the official policy statement, monetary policymakers
noted that developments regarding government finances in
Europe increase the uncertainty surrounding the Norwegian
economic outlook, and that they had considered leaving the
benchmark rate unchanged. On balance, however, the au-
thorities stressed the importance of guarding against the
risk of future domestic economic imbalances in the context
of an ongoing recovery, very low interest rates, rising house
prices and fairly strong household credit growth (lending
increased by 4.0% y/y in April). The next monetary policy
meeting is scheduled for June 23rd. The Norwegian krona’s
recent appreciation vis-à-vis the euro should ease inflation-
ary pressures in the coming months. Consumer price infla-
tion, hovering at 3.3% y/y in April, continued to exceed the
central bank’s 2.5% target for a third consecutive month.
Activity in the mainland economy expanded by 0.1% q/q in
the first three months of 2010; nevertheless, lower energy
sector output weighted on overall economic performance,
bringing real GDP down by 0.1% q/q in Q1 2010.
9
Global Economic Research June 2010

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

CHINA - Chinese policymakers have increased bank reserve requirements three times in 2010. Together with an offi-
cially restrictive lending mandate, these measures have successfully resulted in slowing credit growth. Although we con-
tinue to expect further credit tightening measures in China, and a gradual flexibilization of the Chinese yuan (CNY) peg
against the US dollar, a more balanced monetary policy picture for China has already emerged.

INDIA - We expect the Reserve Bank of India to continue tightening monetary conditions in the months ahead, a policy
that will provide some near-term support to the Indian rupee. The exchange rate - currently 47.15 per US dollar - has
depreciated by 1.4% this year; while further moderate gains may be evident in the near-term, a reversal will eventually
materialize to compensate for India’s adverse inflation differential.

KOREA - The Korean won (KRW) has lost over 10% during the past two weeks reflecting investor concerns regarding
ongoing tensions between South and North Korea. Korean CDS spreads increased by over 60 basis points to 166 on
May 25th. We expect USD/KRW to close the year at 1120.

THAILAND - The Thai baht (THB) reached an eight-week low of 32.83 vis-à-vis the US dollar on May 30th. The currency
continues on the defensive. Notwithstanding the political turmoil, the THB has gained 2.6% so far in 2010, as export
flows remained undisrupted through the political crisis.

Currency Trends
Going Back Spot Outlook
FX Rate FX Rate
12 m 6m 3m 2-Jun 3m 6m 12 m
USDCNY 6.83 6.83 6.83 6.83 6.75 6.65 6.34 USDCNY
USDINR 47.1 46.5 46.1 47.2 45.8 45.2 45.8 USDINR
USDKRW 1255 1163 1160 1216 1166 1131 1090 USDKRW
USDTHB 34.3 33.2 33.1 32.6 32.5 32.5 32.9 USDTHB
USDCNY USDINR

6.836
48.6
6.834
48.0
6.832 47.3
6.831 46.7
6.829 46.1
6.827 45.5

6.825 44.8

6.823 44.2
Jun-09 Aug-09 Oct-09 Dec-09 Feb-10 Apr-10 Jun-10 Jun-09 Aug-09 Oct-09 Dec-09 Feb-10 Apr-10 Jun-10

USDKRW USDTHB
1319
34.2
1288
33.9
1256
33.6
1225
33.3
1194 32.9
1163 32.6

1131 32.3

1100 32.0
Jun-09 Aug-09 Oct-09 Dec-09 Feb-10 Apr-10 Jun-10 Jun-09 Aug-09 Oct-09 Dec-09 Feb-10 Apr-10 Jun-10

10
Global Economic Research
DEVELOPING ASIA
Fundamental Commentary
CHINA - Export gains have coupled with ongoing domestic
spending strength underpinning a vibrant economic recov-
ery in China. GDP expanded at a brisk 11.9% y/y pace dur-
ing the first quarter of 2010, with solid 30% y/y growth in
the value of foreign shipments continuing to play an inte-
gral part in the economic rebound. As a testament to the
agility of domestic spending, however, imports have out-
paced exports, translating into a down-trending trade sur-
plus. We anticipate this trend to be supported in coming
months by the strengthening of the Chinese yuan (CNY)
vis-à-vis the euro (EUR), as Europe accounts for a signifi-
cant share of Chinese exports (15% in 2008). Although the
effect on export values will clearly be felt in coming months,
the effect on shipment volumes remains an open question
as Chinese products tend not to compete with European
manufactures, but with goods from other Asian countries.
Notwithstanding the necessary adjustment in trade flows,
all in all, we deem the overall consequence of the Euro-
pean crisis on the outlook for the Chinese economy as
positive, as the urgency for CNY appreciation against the
US dollar has been greatly reduced. Tighter monetary con-
ditions within China, because of the implicit revaluation of
the CNY, will also aid local authorities in their drive to con-
trol both asset and goods inflation. Yearly goods inflation is
on an upward trend, having reached 2.8% in April, with pro-
ducer prices jumping at a 6.8% yearly rate, the fastest pace
in 19 months.
KOREA - The re-emergence of geo-political tensions in the
Korean peninsula has yet to put a dent on the South Ko-
rean economic recovery. Although the curbing of trade ties
between the two countries, with the exception of the Kae-
song manufacturing complex, will have an unfavourable
effect, the cusp of the adverse shock will jeopardize coun-
try risk impairing the accessibility of foreign funds for South
Korean conglomerates. So far, however, the economic re-
covery continues on a solid footing (we expect annual GDP
growth of 5.2% this year), with April trade figures displaying
persistent export gains. Merchandise exports have played
a prominent role in GDP growth strengthening 1.8% q/q in
the first three months of 2010, up from an average of 1.5%
q/q in the previous four quarters. Notwithstanding a 6% q/q
rise in government outlays, the contribution of domestic
demand has remained moderate. Private consumption
edged up a sub-par 0.6% q/q in Q1, following a 0.4% ex-
pansion in the preceding quarter. Although investment ex-
panded for a fifth consecutive time at the outset of 2010, it
did so at a diminishing rate. Employment conditions have
started to respond to the pickup in economic activity raising
the likelihood of improving consumer spending prospects in
coming months. The jobless rate in April decreased to
3.7%, from a 10-year high of 4.8% in January, but remains
above the pre-crisis unemployment rate of 3.2-3.4%. Addi-
tionally, consumer confidence improved in May for the first
time in seven months.
June 2010
Oscar Sánchez +1 416 862-3174
INDIA - Solid gains in domestic spending and a recovery in
foreign sales are providing a strong foundation for industrial
growth in India. GDP expanded at an 8.6% yearly rate in
the first quarter, evidencing accelerating economic condi-
tions after the upwardly revised 6.5% y/y pickup of the pre-
vious three months. Output of capital goods increased at
an annual rate of more than 18% in the three months
through March, with production of consumer durables in-
creasing at a double-digit pace. Exports made an encour-
aging recovery expanding by 14% y/y and breaking the
series of contractions in the previous three quarters. Pri-
vate consumption growth slowed to 2.6% y/y from 5.3% in
the final quarter of 2009. Part of the explanation for the
disappointing household consumption figures can be linked
to the surge in inflation as it has reduced people’s spending
power. Inflation in India has so far outpaced all other major
economies, as the closely-followed wholesale price index
rose 9.6% y/y in April, a slight reduction from the 9.9%
March print. Food prices are leading the way, but the cost
of manufactured goods is also rising at a double-digit pace,
suggesting that inflationary pressures are becoming more
deeply embedded in the Indian economy. The outlook for
inflation hinges materially on weather conditions as last
year’s weak harvests caused food prices to rise sharply.
Should expectations of an improved monsoon season ma-
terialize this year, inflation should moderate in the second
half of 2010.
THAILAND - Thailand is still positioned to expand by at
least 4.5% in 2010, though a deceleration appears inevita-
ble as tourism arrivals plunged by one-third between March
and April. Tourism accounts for 6% of GDP and 15% of
employment. Thailand’s economic recovery was confirmed
by a healthy 3.8% q/q GDP expansion in the first quarter of
2010 as a major recovery in exports, which account for two
thirds of the economy, remains at the core of the economic
rebound. The domestic political environment remains under
stress. The ruling six-party coalition, led by Prime Minister
Abhisit Vejjajiva, was put under severe pressure as it was
forced to crack down large-scale demonstrations in Bang-
kok unable to reach a concerted agreement to the country’s
political crisis. Although a decision by the government to
forcibly remove protesters was followed by gun battles in
the city centre, the risk of a spreading of the conflict to the
countryside subsided as both parties sought talks. While
officially general elections will not be held until the end of
2011, calls for early elections remain a contested issue with
protesters. At the height of confrontations the central bank
was forced to intervene in the foreign exchange market,
though the potential for official intervention still supports
that the exchange rate will remain trading within a narrow
range through the balance of the year. International re-
serves stand currently at US$139 billion (53% of GDP),
having fallen by around US$4 billion during May, after
peaking in late April.
11
Global Economic Research June 2010

DEVELOPING AMERICAS
Currency Outlook Pablo Bréard +1 416 862-3876

BRAZIL - The Brazilian real (BRL) is regaining strength as global investors re-assess the risks linked to the European
debt crisis and fears of potential overheating in Chinese property and equity markets. The relative bullish view on the BRL
is underpinned by an aggressive monetary tightening effort by the central bank to pre-emptively contain inflationary pres-
sures. We expect USD/BRL to close the year at 1.80.

MEXICO - The Mexican peso (MXN) seems to be consolidating after a period of high stress and volatility caused by dis-
orderly adjustments amongst major currencies connected with risk re-pricing activity in European sovereign credit mar-
kets. The Mexican currency outlook is well supported by still attractive interest rate differentials and relatively high crude
oil prices. We expect USD/MXN to close the year at 12.8.

CHILE - The Chilean peso (CLP) remains a commodity-linked currency highly dependent on growth prospects, capital
flows movements in metal markets and trade flows in the Asian region. The CLP is in recovery mode after a sustained
adjustment caused by a correction in commodity prices and intensifying stress in European debt markets. On the back
of a major stimulus effort, growth is accelerating. We expect USD/CLP to close the year at 530.

PERU - The Peruvian Sol (PEN) continues to show a remarkable period of stability and resilience to global financial
shocks. The combined effect of supportive commodity prices, broad-based economic growth dynamics, robust investment
flows and well-timed and effective official intervention are the main factors supporting the Peruvian currency market out-
look. We expect USD/PEN to close the year at 2.75.

Currency Trends
Going Back Spot Outlook
FX Rate FX Rate
12 m 6m 3m 2-Jun 3m 6m 12 m
USDBRL 1.97 1.76 1.81 1.82 1.81 1.80 1.84 USDBRL
USDMXN 13.15 12.93 12.77 12.88 12.58 12.75 12.95 USDMXN
USDCLP 562 497 525 532 530 530 534 USDCLP
USDPEN 2.99 2.88 2.85 2.84 2.80 2.76 2.75 USDPEN
USDBRL USDMXN
13.9
2.01
13.6
1.96
13.4
1.92
13.1
1.87

1.83 12.9

1.78 12.6

1.74 12.4

1.69 12.1
Jun-09 Aug-09 Oct-09 De c-09 Fe b-10 Apr-10 Jun-10 Jun-09 Aug-09 Oct-09 De c-09 Fe b-10 Apr-10 Jun-10

USDCLP USDPEN

568 3.01

556 2.99
545 2.96
534 2.94
522 2.91
511 2.88
499 2.86

488 2.83
Jun-09 Aug-09 Oct-09 De c-09 Feb-10 Apr-10 Jun-10 Jun-09 Aug-09 Oct-09 De c-09 Fe b-10 Apr-10 Jun-10

12
Global Economic Research
DEVELOPING AMERICAS
Fundamental Commentary
BRAZIL - Strong growth, presidential elections and rate
hikes will shape the country’s near-term economic outlook
– though Brazilians will rather be focused on the World Cup
which begins on June 11th. Brazil continues to show evi-
dence of strong economic performance ahead of the (two
rounds of) presidential elections which are scheduled to
take place in the fourth quarter of 2010. The latest survey
of macroeconomic projections conducted by the central
bank highlights an economic expansion of 6.5% in 2010. In
its latest assessment of global economic conditions, the
OECD also calls for a similar pace of growth, and a decel-
eration to 5% in 2011. Domestic credit continues to show
signs of strength; the central bank reported that overall
credit expanded by 17.6% in the 12-month period ending in
April 2010. Residential real estate lending increased by
almost 50% over the same period, following a month-to-
month gain of 3.3%, according to a recent document re-
leased by the central bank. The same report highlighted
that the monetary base increased by 21% in 12 months,
heightening investors’ awareness of potential overheating
risks. As a result, market participants are widely anticipat-
ing an increase of 75 basis points in the short-term policy-
setting SELIC interest rate to 10.25% at the monetary pol-
icy committee (COPOM) meeting scheduled for June 9th.
Widening interest rate differentials will continue to underpin
relative currency strength in Brazil.
CHILE - Despite the estimated slowdown in the world
economy for the year 2011, China will continue to grow at a
rapid pace providing a boost to metal markets. More re-
cently, copper prices reversed a depreciating phase
(trading now at 314 US cents per pound), instilling a posi-
tive effect into the CLP. Additionally, the Chilean economy
is also adapting well to the new business cycle, as proven
by recent data on industrial production (down 1.3% y/y in
April). In swift response to the natural disaster caused by
the earthquake/tsunami of late February and early March,
the government has intensified reconstruction efforts by
increasing infrastructure-related public spending. Although
the Chilean markets are not immune to negative develop-
ments in Europe linked to sovereign debt and fiscal sus-
tainability concerns, the contagion effect in Chilean finan-
cial markets has been negligible at best. Looking ahead,
the combination of supply-side inflationary pressures and
post-earthquake price distortions has placed the central
bank on alert and ready to initiate a moderate phase of rate
hikes. The next monetary-policy setting meeting is sched-
uled for June 15th and a 25 bps rate increase to 0.75% is
fully discounted by market participants. Chile will follow
other central banks in the region such as Brazil and Peru in
adjusting interest rates upwards. We do not expect that the
tightening phase will substantially impair the economic ex-
pansion that is forecast at 4% in 2010.
June 2010
Pablo Bréard +1 416 862-3876
MEXICO - Geographic proximity does matter. The recovery
trend currently in place in the US is underpinning trade-
related economic activity south of the border, despite lack-
lustre progress in the US employment outlook. The Mexi-
can economy is benefiting from the dual effect of increas-
ing economic (and manufacturing) activity in the US and
still supportive (for energy exporters) crude oil prices
(averaging US$74 per barrel over the past 12 months).
There is a generalized expectation that consumer price
inflation, which is estimated to fall towards the 3% target in
2011, does not pose, at present, any threat to an orderly
economic recovery. In fact, the country’s monetary authori-
ties have not provided any rhetorical evidence that a rate
increase is in prospect; market participants are eagerly
monitoring any signal that the Federal Reserve may pro-
vide as to the timing of the first rate hike in the US. Futures
markets imply that Banco de Mexico will keep its accom-
modative monetary stance unchanged through the remain-
der of the year. The Mexican economy will likely grow close
to 5% in 2010 before decelerating to a more sustainable
3.5% rate next year in alignment to the US slowdown. Mex-
ico still offers an attractive high-yield investment alternative
within the universe of investment-grade sovereign credits.
Interest rate differentials and strong energy prices are
causing a recovery in the Mexican peso following the spike
in volatility caused by the European debt shock.
PERU - Currency market volatility remains very low thanks
to the effective and transparent intervention by the central
bank in times of stress and the relatively bullish macroeco-
nomic environment. The PEN has been barely affected by
the recent downward adjustment in local equity securities
valuations; indeed, the Lima Stock exchange index accu-
mulated a 10% decline over the past month primarily influ-
enced by corrective headwinds in emerging markets. Peru
is experiencing a strong economic performance; indeed,
the monthly indicator of economic activity showed that the
Peruvian economy expanded by 8.8% in March (versus the
same month in 2009) and by 5.9% versus the previous
month. The recovery of the economy is broad based with
clear evidence of expansion in public infrastructure invest-
ment, residential construction, retail trade and power gen-
eration. The robust economic performance provided
enough justification to the monetary authorities to com-
mence a monetary tightening cycle, which was activated on
May 6th when the central bank raised its monetary policy
rate by 50 bps to 1.50%. The Finance Ministry, focused on
spending cuts (to manage a potential international shock),
is estimating that the economy will grow by 5.5% this year
and that the rate of consumer price inflation will range be-
tween 2 and 2.5%. The central bank will remain in mone-
tary stimulus withdrawal mode; the end-year government-
administered short-term rate may range between 2.5% and
3% depending on inflation trends.
13
Global Economic Research June 2010

DEVELOPING EUROPE/AFRICA Pablo Bréard +1 416 862-3876

Currency Outlook Tuuli McCully +1 416 863-2859

RUSSIA - The Russian Ruble (RUB) is recovering a sense of stability following a period of high volatility in May which
pushed USD/RUB to 31.68. Energy prices, European debt sustainability concerns, economic growth dynamics and inter-
est rate differentials will remain the major drivers affecting the value of the Russian ruble in the near term. We expect
USD/RUB to close the year 2010 at 30.

TURKEY - Following marked currency volatility in the midst of European debt sustainability concerns, prospects for nor-
malization in the monetary policy stance in Turkey amid robust economic recovery should provide support to the Turkish
lira (TRY). We expect the currency to close the year at 1.55 per USD.

SOUTH AFRICA - The South African Rand (ZAR) is immersed in a modest weakening trend against the USD. Renewed
signs of economic recovery, mostly linked to the World Cup, have not outweighed investors’ concerns regarding the
country’s twin-deficit position, persistently high unemployment and narrowing interest rate differentials. The ZAR has not
benefited from recent gold price gains. We do expect USD/ZAR to close the year at 7.80.

POLAND - Strong fundamentals of the Polish economy and prospects for being among the first regional economies to
reverse monetary policy direction continue to provide support to the Polish zloty (PLN). Nevertheless, rapidly changing
investor risk aversion will cause periods of currency volatility.

Currency Trends
Going Back Spot Outlook
FX Rate FX Rate
12 m 6m 3m 2-Jun 3m 6m 12 m
USDRUB 31.0 29.3 29.9 31.0 30.5 30.1 30.8 USDRUB
USDTRY 1.53 1.53 1.55 1.58 1.56 1.55 1.57 USDTRY
USDZAR 7.94 7.40 7.72 7.68 7.73 7.78 7.98 USDZAR
EURPLN 4.51 4.16 3.94 4.10 4.04 4.01 3.96 EURPLN
USDRUB USDTRY

1.59
32.5

32.0 1.57

31.4 1.54

30.8 1.52

30.2 1.50

29.7 1.48

29.1 1.45

28.5 1.43
Jun-09 Aug-09 Oct-09 Dec-09 Feb-10 Apr-10 Jun-10 Jun-09 Aug-09 Oct-09 Dec-09 Feb-10 Apr-10 Jun-10

USDZAR EURPLN
8.37

8.18 4.50

4.40
8.00
4.30
7.82
4.20
7.63
4.10
7.45
4.00
7.26 3.90
7.08 3.80
Jun-09 Aug-09 Oct-09 Dec-09 Feb-10 Apr-10 Jun-10 Jun-09 Aug-09 Oct-09 Dec-09 Feb-10 Apr-10 Jun-10

14
Global Economic Research
DEVELOPING EUROPE/AFRICA
Fundamental Commentary
RUSSIA - We are anticipating a pick up in crude oil prices
for 2010-11 as global economic activity continues in place,
primarily fuelled by a recovery in the US economy and per-
sistently strong emerging-market performance. As the
world’s largest producer of crude oil and natural gas, Rus-
sia will receive the positive effect from trade-related oil
revenue. Crude oil prices will tend to average US$80 per
barrel in 2011. However, our global forecast implies a
downward adjustment in the pace of economic growth in
Europe through the end of 2011, with mitigating effects on
the Russian economic outlook. As a key member of the
BRIC group (together with Brazil, China and India), Rus-
sian equity securities have been adversely affected by the
sell-off triggered by China and exacerbated by the Euro-
pean debt-related shocks last month. A potential reversal
of capital flows to the BRIC group as investors fear over-
heating risks in China may cause sporadic bouts of market
volatility in Russia. Notwithstanding the linkage between
the Russian and the European economic outlook, the RUB
continues to benefit from massive foreign capital inflows
that continue to target the core group of emerging-market
economies. It is worth noting that market perception of
Russian risk is, nowadays, better than that of Southern
European sovereign credits. On May 31st, the central bank
reduced its refinancing rate by 25 bps to 7.75%, continuing
the easing strategy in place since April 2009.
SOUTH AFRICA - The South African economy is showing
signs of a moderate recovery from the 2009 recession; we
expect growth to edge the 3% rate this year and accelerate
further in 2011 on the back of a major stimulus provided by
the investment associated with the World Cup that is about
to commence. Consumer price inflation has been trending
downwards and, at a 4.8% rate, now stands within the 3-
6% target range established by the Reserve Bank of South
Africa. The monetary authorities may opt to take a break in
the process of rate adjustments following a 550 bps rate
reduction to the current level of 6.5%. Unfortunately, recov-
ery dynamics also incorporate a high level of unemploy-
ment in excess of 25% which is limiting the contribution of
domestic consumption. Both credit growth dynamics and
consumer confidence remain fragile. Investor sentiment
vis-à-vis South African financial markets have been ad-
versely influenced by the European debt distress; in fact,
the rally in gold prices did not have a material positive ef-
fect on the value of the ZAR, implying a temporary shield
against global financial instability. Data for the first quarter
of the year showed that the economy expanded at an an-
nualized rate of 4.6% with strong activity shown in mining
production, hospitality and manufacturing sectors. A still
wide current account deficit weighs on the South African
currency outlook.
June 2010
Pablo Bréard +1 416 862-3876
Tuuli McCully +1 416 863-2859
TURKEY - The central bank of Turkey is preparing for
monetary policy normalization as price pressures are build-
ing. Nevertheless, following the monetary policy meeting
on May 18th, Turkish authorities maintained monetary con-
ditions on hold for now due to persistent uncertainties
around global economic prospects. However, the monetary
authorities took initial steps towards policy normalization –
outlined in the central bank’s “Monetary Policy Exit Strat-
egy”, published on April 14th – and established the one-
week repo tender as the new benchmark interest rate, cur-
rently set at 7.0%. The old policy rate, the overnight bor-
rowing rate, was maintained at 6.5%. Inflation is accelerat-
ing; the CPI increased by 10.2% y/y in April from 9.6% the
month before, with costs increasing further up the distribu-
tion chain as well (producer price inflation jumped to 10.4%
y/y in April from 8.6% in March). As noted by the monetary
policymakers, economic activity is recovering, with indus-
trial output, confidence indicators and purchasing manag-
ers’ indices pointing to continuing improvements in busi-
ness conditions. Meanwhile, the unemployment rate edged
down in February to 14.4%. Following the Article IV consul-
tation with Turkey in May, the International Monetary Fund
assesses that the rebound in growth continues, accompa-
nied by a rising current account deficit and above target
inflationary pressures in the near term. The Fund estimates
Turkish output to expand by 6¼% in 2010 (from a weak
base) and around 4% thereafter.
POLAND - In the midst of global uncertainties, Polish cen-
tral bankers maintain a neutral policy stance. Following the
Monetary Policy Council meeting on May 24th-25th, the au-
thorities left the reference rate unchanged at 3.50% for an
eleventh consecutive month. Economic recovery is firmly
underway; according to fresh OECD calculations, GDP
growth will average 3½% in 2010-11, with exports, public
spending - particularly infrastructure investment - and inven-
tory rebuilding leading the way. The Polish economy ex-
panded by 3.0% y/y in the first quarter of 2010 with the in-
dustrial sector being the growth driver. Improving labour
market conditions are providing support to private spending
prospects; the unemployment rate decreased to 12.3% in
April after peaking at 13% in February. The Polish govern-
ment seems to be in no rush to join its European Union
peers in fiscal tightening to reduce the budget deficit from
the 7.1% of GDP recorded in 2009. While a forthcoming
electoral cycle (a presidential ballot will take place on June
20th and parliamentary elections next year) will partly ex-
plain the lack of specific fiscal consolidation measures, a
pick up in economic activity will likely help reduce the
budget shortfall this year. The Polish zloty will be supported
by expectations for relatively strong economic performance
through 2011 and by prospects regarding Poland being the
leader in monetary tightening in the region.
15
Global Economic Research June 2010

GLOBAL CURRENCY FORECAST (end of period)

2008 2009 2010f 2011f 2010f 2011f
Q1a Q2 Q3 Q4 Q1 Q2 Q3 Q4
MAJOR CURRENCIES
Japan USDJPY 91 93 95 100 93 91 93 95 97 98 99 100
Euro zone EURUSD 1.40 1.43 1.19 1.26 1.35 1.20 1.17 1.19 1.21 1.22 1.24 1.26
EURJPY 127 133 113 126 126 109 109 113 117 120 123 126
UK GBPUSD 1.46 1.62 1.50 1.55 1.52 1.44 1.46 1.50 1.51 1.52 1.54 1.55
EURGBP 0.96 0.89 0.79 0.81 0.89 0.83 0.80 0.79 0.80 0.80 0.81 0.81
Switzerland USDCHF 1.07 1.04 1.09 1.05 1.05 1.13 1.11 1.09 1.09 1.07 1.06 1.05
EURCHF 1.49 1.48 1.30 1.32 1.42 1.36 1.30 1.30 1.32 1.31 1.31 1.32

AMERICAS
Canada USDCAD 1.22 1.05 1.00 0.97 1.02 1.02 1.01 1.00 0.99 0.98 0.97 0.97
North

CADUSD 0.82 0.95 1.00 1.03 0.98 0.98 0.99 1.00 1.01 1.02 1.03 1.03
L Mexico USDMXN 13.7 13.1 12.8 13.2 12.4 12.4 12.7 12.8 12.9 13.0 13.1 13.2
CADMXN 11.2 12.4 12.8 13.6 12.2 12.2 12.5 12.8 13.1 13.2 13.5 13.6
Argentina USDARS 3.45 3.80 4.25 4.80 3.88 3.95 4.10 4.25 4.38 4.52 4.66 4.80
Brazil USDBRL 2.31 1.74 1.80 1.90 1.78 1.82 1.81 1.80 1.82 1.85 1.87 1.90
Chile USDCLP 639 507 530 540 524 530 530 530 532 535 537 540
South

Colombia USDCOP 2249 2044 2020 2080 1920 1979 1999 2020 2035 2050 2065 2080
Peru USDPEN 3.13 2.89 2.75 2.75 2.84 2.83 2.79 2.75 2.75 2.75 2.75 2.75
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 / OCEANIA
Australia AUDUSD 0.70 0.90 0.90 0.94 0.92 0.87 0.88 0.90 0.91 0.92 0.93 0.94
China USDCNY 6.83 6.83 6.60 6.00 6.83 6.83 6.75 6.60 6.44 6.29 6.14 6.00
Hong Kong USDHKD 7.75 7.75 7.75 7.70 7.76 7.78 7.77 7.75 7.74 7.72 7.71 7.70
India USDINR 48.8 46.5 45.0 47.0 44.9 46.2 45.6 45.0 45.5 46.0 46.5 47.0
Indonesia 2/ USDIDR 11.12 9.40 9.25 9.50 9.10 9.19 9.22 9.25 9.31 9.37 9.44 9.50
Malaysia USDMYR 3.47 3.43 3.15 3.20 3.26 3.25 3.20 3.15 3.16 3.17 3.19 3.20
New Zealand NZDUSD 0.58 0.72 0.70 0.74 0.71 0.68 0.69 0.70 0.71 0.72 0.73 0.74
Philippines USDPHP 47.5 46.2 44.0 46.0 45.2 45.9 45.0 44.0 44.5 45.0 45.5 46.0
Singapore USDSGD 1.43 1.40 1.36 1.30 1.40 1.39 1.38 1.36 1.34 1.33 1.31 1.30
South Korea USDKRW 1260 1164 1120 1050 1131 1190 1155 1120 1102 1084 1067 1050
Thailand USDTHB 34.7 33.4 32.5 33.5 32.3 32.5 32.5 32.5 32.7 33.0 33.2 33.5
Taiwan USDTWD 32.8 32.0 30.0 28.5 31.8 31.7 30.8 30.0 29.6 29.2 28.9 28.5

EUROPE / AFRICA
Czech Rep. EURCZK 26.9 26.4 25.5 25.0 25.4 25.5 25.5 25.5 25.4 25.2 25.1 25.0
Iceland USDISK 121 126 130 125 127 129 129 130 129 127 126 125
Hungary EURHUF 266 270 275 270 265 275 275 275 274 272 271 270
Norway USDNOK 6.95 5.79 6.30 5.80 5.94 6.40 6.35 6.30 6.25 6.20 6.00 5.80
Poland EURPLN 4.15 4.10 4.00 3.90 3.86 4.06 4.03 4.00 3.97 3.95 3.92 3.90
Russia USDRUB 29.4 30.0 30.0 32.0 29.4 30.8 30.4 30.0 30.5 31.0 31.5 32.0
South Africa USDZAR 9.53 7.40 7.80 8.25 7.29 7.69 7.74 7.80 7.91 8.02 8.14 8.25
Sweden EURSEK 10.94 10.25 9.50 9.30 9.75 9.51 9.20 9.50 9.45 9.40 9.35 9.30
Turkey USDTRY 1.54 1.50 1.55 1.60 1.52 1.57 1.56 1.55 1.56 1.57 1.59 1.60

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

16
Global Economic Research June 2010

INTERNATIONAL RESEARCH GROUP

Pablo F.G. Bréard, Head

pablo_breard@scotiacapital.com

Tuuli McCully
tuuli_mccully@scotiacapital.com

Estela Ramírez
estela_ramirez@scotiacapital.com

Oscar Sánchez
oscar_sanchez@scotiacapital.com

CANADIAN & U.S. ECONOMIC RESEARCH

Karen Cordes Woods

karen_woods@scotiacapital.com

Gorica Djeric
gorica_djeric@scotiacapital.com

Derek Holt
derek_holt@scotiacapital.com

Adrienne Warren
adrienne_warren@scotiacapital.com

FOREIGN EXCHANGE RESEARCH

Camilla Sutton
camilla_sutton@scotiacapital.com

Sacha Tihanyi
sacha_tihanyi@scotiacapital.com

Scotia Economics
Scotia Plaza 40 King Street West, 63rd Floor
Toronto, Ontario Canada M5H 1H1
Tel: (416) 866-6253 Fax: (416) 866-2829
Email: scotia_economics@scotiacapital.com
This Report is prepared by Scotia Economics as a resource for the
clients of Scotiabank and Scotia Capital. While the information is from
sources believed reliable, neither the information nor the forecast shall
be taken as a representation for which The Bank of Nova Scotia or
Scotia Capital Inc. or any of their employees incur any responsibility.