Global Economic Research July 2010

Renewed USD weakness, evidence of global economic

slowdown, prolonged monetary stimulus in developed
economies, European banking sector audits, currency regime
shifts in China, and technical overvaluation in emerging
countries are swaying capital flows in global currency markets.

The USD is in retrenchment mode. NAFTA zone currencies are

on the defensive as global recovery uncertainties minimized the
premium linked to interest rate differentials. However, the CAD
should regain strength and reach parity vs. the USD, while the
MXN will be vulnerable to oil price swings.

Renewed EUR strength will be short-lived due to persistent

structural weaknesses in Europe linked to debt/fiscal
sustainability and banking sector auditing/restructuring activity.
The GBP has appreciated following the release of the UK
budget.

In Asia, a sharp JPY appreciation may revive Japan’s

intervention fears. A more flexible currency policy in China
instilled a positive tone into other floating currencies such as
the KRW and the MYR. Meanwhile, high-yield currencies such
as the BRL, ZAR and TRY are vulnerable to profit taking activity.

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 July 2010

Global Foreign Exchange Outlook

July 7, 2010 Actual Q1 10 Q2 10 Q3 10 Q4 10 Q1 11 Q2 11 Q3 11 Q4 11
EURUSD 1.27 1.35 1.22 1.17 1.19 1.21 1.22 1.24 1.26
Euro Consensus* 1.35 1.22 1.20 1.20 1.20 1.20 1.20 1.21
USDJPY 87.4 93.5 88 93 95 97 98 99 100
Yen Consensus* 93.5 88 94 95 97 99 99 99
GBPUSD 1.52 1.52 1.49 1.48 1.50 1.51 1.52 1.54 1.55
Sterling Consensus* 1.52 1.49 1.43 1.44 1.44 1.45 1.46 1.48
USDCAD 1.05 1.02 1.06 1.01 1.00 0.99 0.98 0.97 0.97
Canadian Dollar Consensus* 1.02 1.06 1.03 1.03 1.03 1.03 1.04 1.04
AUDUSD 0.86 0.92 0.84 0.88 0.90 0.91 0.92 0.93 0.94
Australian Dollar Consensus* 0.92 0.84 0.86 0.86 0.86 0.87 0.87 0.87
USDMXN 12.84 12.37 12.94 12.65 12.80 12.94 12.96 13.08 13.22
Mexican Peso Consensus* 12.37 12.94 12.48 12.44 12.40 12.35 12.57 12.78
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
N 5

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

-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

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. July 2010

2
Global Economic Research
MARKET TONE & FUNDAMENTAL FOCUS
Pablo F.G. Bréard +1 416 862-3876
Intensifying global risk aversion, reversal of US dollar
(USD) strength, increasing concerns about global eco-
nomic deceleration, commodity price shifts, systemic risk
management in the European financial sector, adjust-
ments to China’s exchange rate policy, ongoing risk re-
pricing in sovereign credit markets, and emerging mone-
tary policy adjustments in key emerging-market econo-
mies will shape capital flows in foreign exchange markets
in the near term.
The USD has adopted a defensive bias following six
months of steady appreciation versus major peer curren-
cies. Persistent weakness in labour and housing markets
as well as discouraging manufacturing activity instilled a
negative sentiment. In response to the intensifying stress
in short-term funding markets as a result of the deteriorat-
ing European fiscal situation, the US Federal Reserve
(Fed) reinstated a program of reciprocal currency ar-
rangements with major central banks. Within the NAFTA
zone, the Canadian dollar (CAD) and the Mexican peso
(MXN) were adversely affected by the renewed USD
weakness and commodity price shifts. Weak US eco-
nomic releases, combined with disappointing Canadian
April GDP data and soft Chinese PMI have all put down-
ward pressure on the global growth outlook. However, we
believe that USDCAD will move towards parity into year-
end, based on a relatively strong sovereign position,
global appetite for CAD-denominated assets, interest rate
differentials and relatively strong fundamentals. However
in the near term, the risks have shifted towards continuing
CAD softening during the summer. The regional monetary
outlook remains stable as the Fed is not hinting at an ad-
justment in the market-sensitive Fed funds. Banco de
Mexico does not seem to be in a hurry to follow Canada
in increasing its policy-setting rate.
Asian currency market dynamics are dominated by the
renewed strength of the Japanese yen (JPY) coupled with
potential deceleration in China’s economic activity and
recent adjustments to its currency regime. The JPY has
been a major beneficiary from the renewed USD weak-
ness despite Japan’s significant fiscal challenges. Japa-
nese policymakers traditionally become more cautious
when USD/JPY trades, as is currently the case, below the
90 mark. China introduced changes to its currency policy
in mid-June allowing a more flexible trading band which
pushed the renminbi (CNY) from 6.82 to 6.76 per USD.
We expect USDCNY to close at 6.60 and 6.20 in 2010
and 2011, respectively. The core group of floating Asian
currencies may receive a major boost from the appreciat-
ing forces in both Japan and China in the weeks ahead;
the South Korean won (KRW) and the Malaysian ringgit
(MYR) in particular may accelerate their revaluation pace
due to alignment to an appreciating CNY. However, a
July 2010
Camilla Sutton +1 416 866-5470
prolonged correction in Chinese equity securities as in-
vestors revisit potential overheating and property sector
bubble risks may limit currency gains in Asia.
The euro (EUR) is in recovery mode following six months
of steady weakening versus major currencies; indeed, the
EURUSD rate traded as low as 1.1877 in early June,
down from 1.5144 on November 25, 2009. At the heart of
the sudden move is the market realization that decisive
and collaborative European/IMF/US action would prevent
the emergence of a regional banking crisis as a result of
intensifying stress in European sovereign debt markets.
The process of regional financial stabilization is gathering
speed. Global investors are eagerly awaiting the results of
the stress tests being conducted on 25 major European
financial institutions. However, too many significant risks
weigh on the EUR outlook. Ongoing fears over the poten-
tial for a Greek debt restructuring, the European Central
Bank bond buying program, the upcoming bank stress
tests, European Union (EU) liquidity and general EUR
overhang should allow for at least another round of EUR
weakness in the third quarter. It seems that technical un-
dervaluation may have emerged in the EUR and other
impaired currencies in Europe; in fact, the British pound
(GBP) also entered a recovering phase against both the
USD and the EUR, with further relief in store for the GBP.
The budget released on June 22nd was as expected re-
moving market uncertainty. Inflation pressures in the
United Kingdom (UK) have eased, but remain elevated.
The Bank of England’s latest minutes proved more hawk-
ish than expected. Fiscally, the UK debt position is weak,
but because the maturity profile is long and most of the
debt is held domestically, market participants are less
concerned with the UK's profile than the rest of Europe.
We currently expect GBP/USD to close the year at 1.50.
Emerging-market currencies are vulnerable to asset real-
location shifts in commodity and equity securities mar-
kets. The Chinese currency shift is occurring in the midst
of a steady correction in Chinese share prices; indeed,
the benchmark CSI300 equity market index lost 30%
since the beginning of the year, injecting a cautious atti-
tude amongst emerging-market (equity) investors. Within
the universe of capital flows-sensitive emerging-market
currencies, the Brazilian real, the South African rand and
the Turkish lira are the most vulnerable to weakness
should China trigger a synchronized correction in the
emerging-market asset class. Energy-sensitive currencies
such as the MXN or the Russian ruble may be more af-
fected by shifts in crude oil prices. A major speculative
boost in favour of gold will continue to support the outlook
for the Chilean peso and the Peruvian sol.
3
Global Economic Research July 2010

CANADA Camilla Sutton +1 416 866-5470

Sacha Tihanyi +1 416 862-3154

The risks of a weakening Canadian dollar (CAD) have increased materially since our June FX Monthly report; however
the majority of the factors that underpin our bullish CAD outlook remain in place. Accordingly, we have made no change
to our CAD forecast and expect it to close this year at parity with the USD. Over the last month, there has been increas-
ing evidence that the outlook for both US and global growth has deteriorated. We would characterize this as a downshift-
ing in the expectations as opposed to a radical change in the outlook for growth. Scotia Economics is forecasting 2010
US growth of 3.2% and Chinese growth of 10%. Though the outlook has weakened, the recovery is still progressing, just
at a more moderate pace. Changing growth expectations and ongoing risk aversion will continue to be a key risk for
CAD over the summer months. On the more positive side, there are several themes that continue to support our outlook
for a strengthening CAD. These include: 1) the outlook for interest rates. The Bank of Canada (BoC) has entered its in-
terest rate hiking cycle and the spread between the Canadian overnight rate and the US is expected to widen to 75bpts
by year-end. 2) The economic backdrop has deteriorated over the last month, but Canada is still firmly in recovery
mode. On a relative basis, the fundamental backdrop remains solid. 3) The commodity outlook has weakened along with
global growth expectations; however Scotia Economics continues to look for crude oil prices to average US$79 per bar-
rel in 2010, a level which is supportive of CAD. 4) Canada’s sovereign debt position is strong compared to its G7 col-
leagues, which has already driven CAD positive flows this year. We expect this trend to continue, which will keep buyers
of CAD active in the market. 5) If the US fails to provide a credible fiscal plan by the late Fall we would expect sentiment
to turn against the USD, pressuring it materially lower. 6) The desire to diversify away from USD-based reserves com-
bined with uncertainty over Europe has increased speculation that the CAD might become an attractive home for a small
percentage of reserves. 7) Finally, speculative long CAD positions have decreased, but investors remain net long the
currency, highlighting that CAD is still a currency of choice for investors. Accordingly, as we look out to year-end, we
acknowledge that the risks have increased, but believe that a move to parity is fundamentally justified.

Currency Trends
Going Back Spot Outlook
FX Rate FX Rate
12 m 6m 3m 7-Jul 3m 6m 12 m
AUDCAD 0.937 0.945 0.931 0.907 0.889 0.900 0.902 AUDCAD
CADJPY 82.9 88.3 92.1 83.4 92.1 95.0 100.0 CADJPY
EURCAD 1.631 1.508 1.372 1.327 1.182 1.190 1.196 EURCAD
USDCAD 1.162 1.053 1.015 1.049 1.010 1.000 0.980 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
Jul-09 Se p-09 Nov-09 Jan-10 M ar-10 May-10 Jul-10 Jul-09 Se p-09 Nov-09 Jan-10 M ar-10 May-10 Jul-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
Jul-09 Sep-09 Nov-09 Jan-10 M ar-10 May-10 Jul-10 Jul-09 Se p-09 Nov-09 Jan-10 M ar-10 May-10 Jul-10

4
Global Economic Research
CANADA AND UNITED STATES
Fundamental Commentary
UNITED STATES - There has been much debate regarding
the efficacy of leading economic indicators over time, but
that debate is intensifying once again as the economy has
approached a turning point away from a temporary ‘V’
shape toward less robust growth prints. At issue is whether
the US economy faces a renewed downturn within a
twelve-month horizon, based on readings from some lead-
ing market and composite indicators of economic growth.
Recall that leading indicators are guides that may be used
and interpreted with caution, as none is infallible. That ca-
veat is particularly true at this juncture of the recovery
phase. Upon surveying four leading economic indicators –
one market determined and three constructed – it appears
that the likelihood of a US downturn in the next six to
twelve months is remote, at least for now. To clarify, a
downturn in this case is not defined on the basis of short-
lived data blips that are likely to occur. It would be a mate-
rial sustained slowdown characterized by back-to-back
quarterly contractions in GDP or satisfying an NBER-style
definition of a renewed dip. In the near term, GDP growth
will likely be supported by capital investment, inventory
contributions and a mild pace of consumer expansion.
Abruptly softer two-handled growth later this year and into
next could well, however, further disappoint the risk trades
even if a decline in GDP is temporarily avoided. Ongoing
investors’ concerns about the US economy are on a differ-
ent time frame. A renewed decline over the next two to
three years is still likely. Witdrawal of fiscal stimulus in
2012-13 could shave about 3 percentage points off GDP
growth in each of those years. Private demand would need
to grow by 5-6% to offset this effect and net out two-
handled GDP growth. Such a rate of growth in private de-
mand would be highly unusual that far into the recovery,
especially given that fiscal drag will weigh against private
demand.
MONETARY POLICY COMMENTARY Derek Holt +1 416 863-7707
UNITED STATES - The FOMC kept rates unchanged in June
and maintained its key buzzwords, supporting the view that
the Fed will remain on hold until at least early next year. Kan-
sas City Fed President Hoenig was still the sole dissenter.
The statement was modestly more dovish, on developments
abroad and the pace of economic recovery at home. More
insight will be available when the meeting minutes get re-
leased on July 14. Should the Fed wait longer to start a hiking
campaign, it is unlikely that it would do so in late 2011-12,
since 2012 is the year of maximum fiscal retrenchment, Basel
III and a Presidential election. Tightening monetary, fiscal and
regulatory policy would imply a simultaneous adjustment –
that is a dicey game following political debate over Fed inde-
pendence. The next most likely scenario would be to leave
rates on hold until well into 2013-14, and thus skip the head-
winds of 2012-13. The Fed has enormous other powers to
withdraw liquidity (reverse repos, term deposit sales) and is
likely to exercise them first.
July 2010
Adrienne Warren +1 416 866-4315
Gorica Djeric +1 416 862-3080
CANADA - After posting a strong cyclical recovery over the
final quarter of 2009 and the first quarter of 2010, Canada’s
economic expansion appears to be losing some momen-
tum, with many recent indicators coming in below expecta-
tions. Labour market conditions remain strong, with the
economy having fully recouped 75% of its recession job
losses as of May, and hiring surveys pointing to further
gains in the months ahead. Nonetheless, consumer senti-
ment and big-ticket spending cooled somewhat through the
spring, suggesting some trepidation among households
over the sustainability of the global economic recovery.
Housing activity too has come off the boil as high home
prices and tighter lending criteria temper home sales,
prices and residential construction intentions. On balance,
however, we expect continued, even if more moderate,
output growth through the latter half of the year and into
2011. Resource-related exports, production and investment
are ramping up again amid the continuing strength of
emerging market demand and profitable pricing, helping to
offset a winding down in public infrastructure spending.
Similarly, business investment in machinery & equipment
as well as industrial and commercial leasing activity are on
the rise, supported by increased capacity utilization and
healthy corporate balance sheets. Inventory restocking will
continue to add to production this year, given lean stock-
piles at the manufacturing, wholesale and retail levels.
Leading composite indictors are still showing a broadly
based expansion, as is our diffusion index of GDP, which
continues to trend around its highest level in over two
years. While slowing global growth is expected to moderate
the increase in domestic export volumes in the latter half of
the year and into 2011, Canada’s relatively healthy fiscal
and banking sector fundamentals should keep the nation at
the top end of the G7 performance ladder.
Gorica Djeric +1 416 862-3080
CANADA - The Bank of Canada (BoC) hiked the overnight
rate on June 1 by 25 bps to 0.50%, and re-established the
normal operating band of 50 bps. The BoC is holding a neu-
tral bias, conveyed through repeated use of language such as
“nothing is pre-ordained”. There are two possible explana-
tions for such a stance. One, the BoC is leaving options open,
while trading off domestic strengths versus global fragilities.
Under the second interpretation, the BoC is likely controlling
the curve and the loonie, as not to prematurely tighten. Keep-
ing the markets convinced of this neutral bias will likely be-
come a challenge later in the year. The BoC is expected to
tighten further in July and September – taking the overnight
rate to 1.0% – before it takes a holiday in Q4. The risk that
the Bank pause in July is modest. Lower bond yields and a
weaker loonie are more stimulative to Main Street than mod-
est tightening in the near term. While economic growth may
shift into slightly lower gear through the second half of the
year, Canada is not returning to emergency-style conditions.
5
Global Economic Research July 2010

MAJOR CURRENCIES Camilla Sutton +1 416 866-5470

Currency Outlook Sacha Tihanyi +1 416 862-3154

EURO ZONE - EUR/USD stabilized in June after reaching its lowest level since February 2006. A great deal of EUR’s
stabilization has been driven by the rapid reduction in the market’s historically extended short position. However, the mar-
ket remains heavily short euros as the threat of sovereign debt stress and concerns over weakness in Euro zone’s bank
balance sheets keeps sentiment heavily skewed against EUR. Until both issues are settled with finality, speculative senti-
ment should remain negative for the currency.

JAPAN - The late June global equity sell-off, combined with the sharp deterioration in the yield advantage that US
bonds have enjoyed over their Japanese counterparts, helped push JPY to its strongest level since late 2009. Our fun-
damental outlook suggests that this trend will be temporary. JPY is expected to weaken as risk aversion eases and
speculators move back to net short against the yen as Japanese monetary dynamics leave it vulnerable to being used
as a funding currency.

UNITED KINGDOM - GBP’s late May stabilization was followed in June by GBP/USD’s best monthly performance since
October 2009. This is consistent with a sharp improvement in GBP positioning as shorts have been pared back. A well
received fiscal budget and a single dissent in favour of raising rates at the June Bank of England policy meeting have
made the market less willing to bet against the GBP on the threat of a sovereign credit downgrade or persistently loose
monetary policy.

SWITZERLAND - The burst of risk aversion in mid June combined with the reluctance of the Swiss National Bank to
resist CHF appreciation helped to drive CHF to historical highs against EUR, and a one-month 9% gain against the
USD. The speculative community has failed to get fully behind this move however as the net CHF position remains in
short territory. We expect a much more gradual appreciation in CHF through to the end of the year, with a six month tar-
get of 1.27 in EURCHF.
Currency Trends
Going Back Spot Outlook
FX Rate FX Rate
12 m 6m 3m 7-Jul 3m 6m 12 m
EURUSD 1.40 1.43 1.35 1.27 1.17 1.19 1.22 EURUSD
USDJPY 96 93 93 87 93 95 98 USDJPY
GBPUSD 1.65 1.62 1.52 1.52 1.48 1.50 1.52 GBPUSD
EURCHF 1.52 1.48 1.42 1.33 1.29 1.27 1.24 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
Jul-09 Se p-09 Nov-09 Jan-10 M ar-10 M ay-10 Jul-10 Jul-09 Se p-09 Nov-09 Jan-10 M ar-10 M ay-10 Jul-10

GBPUSD EURCHF

1.68 1.51
1.65 1.49
1.61 1.46
1.57 1.43

1.53 1.40
1.50 1.38

1.46 1.35

1.42 1.32
Jul-09 Se p-09 Nov-09 Jan-10 M ar-10 M ay-10 Jul-10 Jul-09 Se p-09 Nov-09 Jan-10 M ar-10 M ay-10 Jul-10

6
Global Economic Research
MAJOR CURRENCIES
Fundamental Commentary
EURO ZONE - Global investors await the release of the
stress tests performed on 25 European financial institutions
scheduled for the second half of this month. In addition to
short-term volatility in investor sentiment, the ongoing debt
sustainability crisis in Europe will also cause longer-term
growth implications; tough austerity measures implemented
in some European countries to restore fiscal credibility will
dampen domestic demand prospects. Meanwhile, the sig-
nificantly cheaper euro is providing a boost to exports, with
better trade performance helping offset some of the eco-
nomic effect from fiscal consolidation measures. Supported
by robust exports, industrial activity across the euro zone is
on the mend. For the region as a whole, production rose
0.8% m/m in April and 9.5% y/y though at the national level
there were significant differences in performance between
the core countries and the euro zone periphery. The region-
wide purchasing managers’ indices for the manufacturing
and services sectors showed mildly weaker readings in
June, indicating a growing, yet decelerating, business con-
text. The headline consumer price inflation figure of 1.6% y/
y for May remains comfortably within the European Central
Bank’s (ECB) target of “below, but close to, 2%”. We expect
the ECB to maintain the current monetary policy stance until
the final quarter of 2011 due to the ongoing turmoil in the
region and uncertain growth prospects.
UNITED KINGDOM - The June 2010 Budget – delivered by
the UK’s new coalition government of the Conservatives
and the Liberal Democrats – contains austerity measures
that will likely convince international credit rating agencies
of the determination of the UK administration to repair its
finances, preventing a sovereign credit rating downgrade in
the foreseeable future. 77% of the announced fiscal consoli-
dation will take the form of spending cuts while the remain-
ing 23% will consist of tax increases. The fiscal shortfall will
be reduced from £149 billion (10.1% of GDP) in FY-2010-11
to 1.1% of GDP in FY2015-16. Public sector net debt is pro-
jected to peak at 70.3% of GDP in FY2014-15. The major
tax change in the budget is the increase in the VAT to 20%
from 17.5% (effective January 2011). Also, the government
will introduce a banking levy based on banks’ total liabilities
structured to encourage less risky funding profiles. To se-
cure ongoing economic recovery, a majority of the austerity
measures will take place in the latter half of the forecast
period. The budget’s underlying assumptions for economic
growth are 1.2% this year, 2.3% in 2011 and 2.7-2.9% in
2012-2015. Despite persistent inflationary pressures in the
UK (CPI increased by 3.4% y/y in May), the budget in-
creases the likelihood of an accommodative monetary pol-
icy remaining in place for an extended period of time; we
expect the Bank of England’s benchmark short-term interest
rate to remain unchanged at 0.5% until the second quarter
of 2011.
July 2010
Tuuli McCully +1 416 863-2859
Oscar Sánchez +1 416 862-3174
JAPAN - The change at the helm of the Democratic Party
of Japan (DPJ) has boosted its chances ahead of the July
upper-house election. Japan’s incoming Prime Minister Mr.
Naoto Kan (a former finance minister) has raised the possi-
bility of increasing the controversial sales tax –although the
hike would be at least two years away– with an aim of halv-
ing the public deficit by mid-decade. According to the most
recent International Monetary Fund projections Japan’s
budget deficit is estimated to approach 10% of GDP in
2010, taking gross public sector debt above 225% of GDP.
Latest external trade figures continue to support the coun-
try’s economic recovery. Export volumes increased at a 1%
m/m rate in May following April’s brisk 6.5% gain, taking
the average for the two months 9% over the corresponding
figure for the first-quarter. Foreign shipments have picked
up consistently since last October as growing demand from
China and developing Asia have bolstered the outlook of
Japanese conglomerates. Foreign sales drove most of the
first-quarter GDP gains when the economy grew at a 1.2%
q/q rate, the highest expansion in a decade. An improve-
ment in labour market indicators has been a by-product, as
the unemployment rate has fallen to 5.2%. Consumer
spending has yet to be re-ignited as evidenced by the 2%
monthly fall in retail sales revenue during May. Euro weak-
ness is bound to have an adverse effect in coming months
as competitiveness losses vis-à-vis Germany’s manufactur-
ing products are likely to dent some momentum.
SWITZERLAND - Deflationary risks are easing in Switzer-
land, according to the Swiss National Bank (SNB), implying
that monetary authorities will be less likely to intervene in
order to stem an appreciation of the Swiss franc (CHF)
against the euro (EUR). Nevertheless, the SNB’s policy
committee opted to maintain an expansionary monetary
policy and leave the benchmark interest rate target at
0.25% following its quarterly meeting on June 17th. The poli-
cymakers also noted the increased uncertainty in the finan-
cial markets related to the ongoing debt sustainability issues
in some euro zone countries; should these tensions lead to
an appreciating bias of the CHF against the EUR and a re-
newed threat of deflation, the authorities would be ready to
intervene in the currency markets again. Consumer price
inflation was 1.1% y/y in May compared with the 1.4% rate
the month before; on a monthly basis, prices declined by
0.1%. The next monetary policy meeting is scheduled for
September 16th. We anticipate an interest rate change in
the final quarter of 2010 in the midst of the steady stream of
positive news that is setting the stage for economic growth
of 2.0% in 2010, according to SNB projections. 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.
7
Global Economic Research July 2010

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

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

AUSTRALIA - AUD has exhibited a high degree of volatility, something that has been reflected in speculative position-
ing shifts. The net long AUD position plunged to its lowest level in over a year as speculators aggressively cut their long
positions, reflecting less conviction regarding the pace of the global growth expansion. Nevertheless, speculators remain
net long AUD, reestablishing longs on dips towards 0.8050. We support such positioning as we forecast AUDUSD to
appreciate to 0.90 by the end of 2010.

NEW ZEALAND - NZD outperformed the other commodity currencies over the month of June thanks to rate support from
the Reserve Bank of New Zealand. This helped reinforce a bottom in NZDUSD above 0.6570. Downtrend resistance off
of the 2009 high poses a challenge at the 0.72 level, however we foresee a range trade for the pair with an appreciatory
bias towards 0.70 by the end of the year.

TAIWAN - The Taiwanese dollar has recently been captured by the global risk aversion trend that interrupted its secular
appreciation evident through late April 2010. The recent policy shift away from extremely loose monetary conditions,
Chinese exchange rate flexibility, and the recently adopted trade agreement with the mainland will provide support for
the currency going forward.

NORWAY - NOK underperformed almost all majors in June, dragged lower by risk aversion and its proximity to negative
euro zone sentiment. We target 6.35 in USDNOK by the end of Q3, though our end of year target of 6.30 will first have
to contend with the 2010 uptrend in the pair, formed off of the January and April lows. However, our constructive global
growth and commodity outlook suggests that NOK weakness will only be temporary.

Currency Trends
Going Back Spot Outlook
FX Rate FX Rate
12 m 6m 3m 7-Jul 3m 6m 12 m
AUDUSD 0.81 0.90 0.92 0.86 0.88 0.90 0.92 AUDUSD
NZDUSD 0.65 0.72 0.71 0.70 0.69 0.70 0.72 NZDUSD
USDTWD 32.8 32.0 31.8 32.2 31.0 30.0 29.2 USDTWD
USDNOK 6.43 5.79 5.94 6.39 6.35 6.30 6.20 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
Jul-09 Se p-09 Nov-09 Jan-10 Mar-10 May-10 Jul-10 Jul-09 Se p-09 Nov-09 Jan-10 Mar-10 May-10 Jul-10

USDTWD USDNOK

33.00 6.61
32.75 6.47
32.50 6.34
6.20
32.25
6.06
32.00
5.92
31.75
5.79
31.50 5.65
31.25 5.51
Jul-09 Se p-09 Nov-09 Jan-10 Mar-10 M ay-10 Jul-10 Jul-09 Se p-09 Nov-09 Jan-10 Mar-10 May-10 Jul-10

8
Global Economic Research
ASIA/OCEANIA/EUROPE
Fundamental Commentary
AUSTRALIA - A reshuffling within Australia’s Labour party
leadership resulted in Ms. Julia Gillard being sworn as
prime minister on June 24th. Ms. Gillard takes over as
Primer Minister in the midst of an outstanding economic
rebound, as most figures continue to point towards expan-
sion. Last week’s publication of leading and coincident indi-
cators displayed a continuation of the favorable outlook that
has been the norm since the turn of the year. On a similar
note, Australia’s statistics bureau reported 36,400 full-time
employment positions were created in May, bringing the
total number of full-time jobs added since August 2009 to
over 170,000; 2.2% of the labour force. The unemployment
rate fell from 5.4% to 5.2%. With skilled job vacancies still
on the rise, the robust demand for workers will likely be in-
creasingly reflected in higher wages, with positive ramifica-
tions for consumer spending but potentially adverse implica-
tions for inflation. After its latest board meeting in early June
the Reserve Bank of Australia kept the benchmark cash
rate at 4.5% deeming that monetary conditions continue to
be “appropriate for the near-term”. The Australian central
bank has been a leader in the global monetary policy tight-
ening cycle as it has raised the benchmark interest rate in
six of the past nine policy meetings. The cash rate currently
stands at 4.5%, after being raised by 150 basis points since
October. Monetary policy tightening will likely be resumed
later this year to prevent wage pressures from stoking infla-
tion.
TAIWAN - Industrial output has expanded for nine con-
secutive times on a yearly basis and is over 30% above
last year’s levels. The value of export shipments is equiva-
lent to 70% of GDP, making it a principal driver of the coun-
try’s economic activity. After being among the hardest-hit
by the global economic downturn Taiwanese exporters
have been leading the economic recovery in Asia with for-
eign shipments running at an over 30% y/y rate in the past
six months. Looking ahead, although export orders during
April and May fell on a monthly basis, they remain over
10% above first quarter levels as demand from China con-
tinues to propel ahead. Even orders coming out of the
European market —about 17% of the total— have in-
creased in the second quarter. The export-led economic
rebound has spilled over to domestic demand, where the
recovery in investment spending has been noteworthy. Job
market conditions have improved as the unemployment
rate came down in May to 5.2%, the lowest level in 17
months. The improvement in labour market data has been
following the persistent strengthening of industrial activity a
key cyclical determinant of employment and income
growth. Inflationary concerns are yet to emerge with head-
line consumer price inflation at 1% y/y. This, however, did
not stop the central bank from raising the rediscount rate by
12.5 basis points after its monetary policy meeting in May,
with the interest rate increase representing a normalization
of sorts as the benchmark rate was left still below 2%.
July 2010
Tuuli McCully +1 416 863-2859
Oscar Sánchez +1 416 862-3174
NEW ZEALAND - The policy committee of the Reserve
bank of New Zealand decided to increase the official cash
rate by a quarter point to 2.75% on June 10th. Central bank
governor Allan Bollard stressed in a post-meeting statement
that he expected to continue to gradually remove monetary
stimulus. Inflationary pressures remain muted, as the head-
line consumer price index rose just 0.4% q/q in the first
quarter of 2010 and is up 2% y/y (in the middle of the official
medium-term target range of 1-3%), matching the advance
in Q4 2009. However, the economy continues to propel for-
ward at a reasonable pace after expanding during the first
quarter at a 0.6% quarterly rate on the back of exports and
government infrastructure spending. Improving terms of
trade in Australia and persistent demand from China con-
tinue to support New Zealand’s agricultural exports. Latest
indicators point towards growth becoming more broad-
based as improving retail sales performance has been
backed by consumer confidence gains and stronger labour
market data. Although latest retail sales figures displayed a
fall during April, they remain on an upward trajectory for the
year with leading indicators for consumer spending pointing
towards a solid pickup in May. This is consistent with an
enhanced labour market picture that shows the unemploy-
ment rate coming down to 6% so far in 2010 from 7.1% in
the last three months of 2009. We expect central bank to
continue to move towards a less accommodative monetary
policy stance during the second-half of 2010.
NORWAY - Norway is shifting to a less aggressive mone-
tary tightening path. Following Norges Bank’s Executive
Board meeting on June 23rd, the key policy rate was kept
unchanged at 2.0%. The rate has been raised by 75 bps
since October 2009, with the most recent rate increase tak-
ing place in early May. In the official policy statement,
monetary policymakers noted that the turmoil in global fi-
nancial markets stemming from European debt sustainabil-
ity issues is causing uncertainties for the country’s eco-
nomic outlook. Substantial fiscal tightening in western
European economies will dampen economic activity; the
UK purchases almost a third of Norwegian exports. There-
fore, the monetary authorities aim to keep the benchmark
interest rate unchanged for a while with further tightening
occurring later than previously envisaged. The policymak-
ers’ strategy is to keep the key rate within the 1½-2½%
range until the October 27th Board meeting when the new
policy outlines will be published. The next policy meeting is
scheduled for August 11th. The headline inflation rate −
2.5% y/y in May, down from 3.3% the month before − is in
line with the central bank’s 2.5% target. On a monthly ba-
sis, prices decreased by 0.5%. The Norwegian economy is
on solid footing; the general government budget as well as
the current account will remain comfortably in surplus in
2010-11, averaging around 10% of GDP and 16% of GDP,
respectively.
9
Global Economic Research July 2010

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

CHINA - The lifting of the renminbi (CNY) peg against the US dollar announced by the People’s Republic of China in
June will lead to a gradual appreciation in 2010-11. However, the prospect of a continuation of the downward trend in
the trade surplus, as growth in imports continues to outpace exports, leads us to not foresee a large appreciation of the
CNY in the next year and a half.

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 per US dollar - has barely
weakened by 1% this year; while moderate gains may be evident in the near-term, a reversal will eventually be required
to compensate for India’s adverse inflation differential.

KOREA - The South Korean won (KRW) has failed to regain the levels prior to the tensions that arose as a result of the
breaking of relations with the North. We anticipate the currency to remain supported by strong economic fundamentals
and a central bank switch towards monetary policy tightening in the coming months. The resumption of gradual appre-
ciation of the RMB will also provide a strengthening tone to the KRW.

THAILAND - The Thai baht (THB) lost barely 1% reaching 32.67 in early June as a result of the country’s political tur-
moil. It currently trades at 32.49 remaining well supported as the country’s fundamentals are expected to revert to nor-
mality in coming months. A recent downturn in inflationary pressures will prevent the central bank from joining the band-
wagon of monetary tightening in the region.
Currency Trends
Going Back Spot Outlook
FX Rate FX Rate
12 m 6m 3m 7-Jul 3m 6m 12 m
USDCNY 6.83 6.83 6.83 6.78 6.75 6.60 6.40 USDCNY
USDINR 47.9 46.5 44.9 47.0 45.7 45.0 46.0 USDINR
USDKRW 1274 1164 1131 1223 1170 1120 1084 USDKRW
USDTHB 34.1 33.4 32.3 32.5 32.5 32.5 32.7 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
Jul-09 Sep-09 Nov-09 Jan-10 Mar-10 May-10 Jul-10 Jul-09 Sep-09 Nov-09 Jan-10 Mar-10 May-10 Jul-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
Jul-09 Sep-09 Nov-09 Jan-10 Mar-10 May-10 Jul-10 Jul-09 Sep-09 Nov-09 Jan-10 Mar-10 May-10 Jul-10

10
Global Economic Research
DEVELOPING ASIA
Fundamental Commentary
CHINA - Tighter credit conditions so far in 2010 —as bank
reserve requirements increases were complemented by
official rhetoric discouraging excessive lending— to rein in
goods and asset price pressures have resulted in a cooling-
off in real estate activity. Moreover, no evident food cost
acceleration and the dissipation of base effects due in com-
ing months could well support an ebbing of price pressures
notwithstanding the recent uptick in the annual inflation rate
to 3.2% in May. It was within this context that the People’s
Bank of China decided in June to allow the renminbi (RMB)
to resume gradual appreciation. The announcement is
therefore interpreted not as a strict monetary policy tighten-
ing move, but more as a formal recognition by Chinese au-
thorities of the end of the policy stimulus put in place to
counteract the global slump. Chinese policymakers have
become more confident about the effects of moderate RMB
appreciation, in particular given the fact that export values
increased by over 30% y/y on average during the first five
months of the year. This has not prevented a fall in the Chi-
nese trade surplus, which declined by almost 80% in the
first four months of 2010, a trend that will likely be sup-
ported by the exchange rate move as galloping imports con-
tinue to surpass the rise in exports during 2010-11. The
expansion in industrial output as measured by its year-over-
year growth rate has moderated from the peak at the end of
2009, and will likely become consistent with pre-crisis
growth rates in coming months.
KOREA - Industrial output increased for the eight consecu-
tive month in May surpassing the level reached at the peak
of the previous business cycle. Merchandise exports have
played a prominent role in the recovery with overseas ship-
ments increasing at an over 30% yearly rate. The pickup in
economic activity has spilled to the job market as the unem-
ployment rate has come down to 3.2% in May, from a 10-
year high of 4.8% in January. The improvement in labour
market data follow a strengthening of Korean real GDP
growth to 2.1% q/q in the first quarter of 2010, up from an
average of 1.5% q/q in the previous four quarters. Although
domestic demand has remained moderate, with private con-
sumption edging up a sub-par 0.7% q/q in the first quarter,
latest sales reports show persistent gains through May, sig-
naling already improved prospects for consumer spending
for the second quarter. Although investment expanded for
the fifth consecutive term at the outset of 2010, it did so at a
diminishing rate as investment in construction has lagged
machinery and equipment outlays. The outlook for inflation
has recently taken a turn for the worse as consumer prices
rose 2.7% y/y in May breaking the downward trend preva-
lent since the start of 2010. Rising food and fuel costs were
mainly to blame for accelerating price pressures. The Bank
of Korea kept the overnight call rate unchanged for the 16th
month in a row at a 2% record low in early June. We expect
a switch to a monetary tightening stance after the central
bank’s forthcoming July 8th meeting.
July 2010
Oscar Sánchez +1 416 862-3174
INDIA - Inflation in India is the highest among the major
global economies, as the wholesale price index rose 10.2%
y/y in May. While food prices have begun to moderate from
elevated levels, nonfood inflation has picked up on the
back of stronger manufacturing demand and higher fuel
costs. The latter have come as a result of the government’s
reform of the administered domestic pricing mechanism for
petroleum products which linked petrol prices to global oil
costs. Domestic spending gains and a recovery in foreign
sales have been providing the foundation for output growth,
with up trending price pressures in nonfood manufacturing
a testament of the healthy economic pulse. Food price
pressures are expected to ease in coming months as a
result of an improved weather forecast for this year’s mon-
soon season, and due to the coming into play of high base
effects. Notwithstanding the not too threatening inflationary
prospects, the Reserve Bank of India has been in monetary
tightening mode for some time. The repo interest rate was
increased for the third time this year to 5.5% after an un-
scheduled announcement in early July. With Europe being
India’s main trade destination, monetary authorities have
underlined the possible effects that public budget restrain-
ing measures in Europe could have on Indian exports. So
far, however, no effect has been detected as the Indian
economy is enjoying a combination of improved foreign
shipments amid robust domestic growth. We expect Indian
GDP to expand by 8% in 2010 and 7% in 2011.
THAILAND - Partly as a result of the stressful political envi-
ronment Thailand’s industrial output eased in April and May.
The imposition of curfews up until mid-May disrupted night
shifts and product shipments with some factories suspend-
ing work amid the country’s worst political violence in two
decades. Manufacturing output contracted by 1% in April-
May vis-à-vis the first quarter, with the slowdown likely to
prove temporary as export orders have recovered through
May. Consumption and tourism were also affected by the
turmoil, as tourist arrivals fell by 18% month-over-month in
April with figures for May likely to prove worse. Although a
pickup in consumer spending failed to persist through April,
a comeback is anticipated as labour market conditions re-
main supportive of income gains. Business sentiment has
yet to come back to pre-turmoil levels as it dipped in the
midst of the April uncertainty but recovered significant
ground in May. Policy efforts by the Thai government has
supported the comeback offering incentives to local busi-
nesses and foreign investors. Contrary to global trends, the
fiscal policy agenda has also been tilted towards expansion
as government spending will take the 2010-11 public deficit
all the way to the maximum allowed under the constitution.
Yearly inflation of 3.3% in June displayed a favourable slow-
down, leading us to expect the central bank to keep its
benchmark interest rate unchanged at 1.25% during its July
14th policy meeting. We anticipate the economy to grow by
4.5% in 2010 followed by 4% in 2011.
11
Global Economic Research July 2010

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

BRAZIL - The Brazilian real (BRL) will remain in volatile trading in the months to come. Robust economic growth, aggres-
sive interest rate hikes, steady accumulation of foreign exchange reserves, risk re-pricing in European sovereign credit
markets, widening twin (current account and fiscal) deficits and commodity price shifts are the key factors shaping the
outlook for the Brazilian real. . We expect USD/BRL to close the year at 1.80.

MEXICO - The Mexican peso (MXN) has adopted a defensive tone. Expectations of decelerating global growth, delayed
monetary tightening at home, persistently weak employment conditions in the US, increasing global risk aversion trig-
gered by debt sustainability concerns in Europe and volatile shifts in energy commodity markets have been the key is-
sues shaping the outlook for the Mexican currency. We expect USD/MXN to close the year at 12.8.

CHILE - The Chilean peso (CLP) is in consolidation mode, trading in a range between 530 and 550 per USD. Chinese
growth prospects, a devaluing USD, stabilizing (metals) commodity prices, domestic monetary policy shifts, accelerating
economic growth prospects and inflation, and persistent tensions in European sovereign debt markets are the key driv-
ers affecting the outlook for the Chilean currency. We expect USD/CLP to close the year at 540.

PERU - The Peruvian Sol (PEN) remains in strengthening mode vis-à-vis the USD. A strong broad-based growth pat-
tern, intensifying (foreign and local) investment activity, ongoing de-dollarization of the financial sector, increasing ac-
cess to domestic credit, interest rate normalization, intensifying demand for local-currency debt securities, sporadic offi-
cial intervention and a stable policy/political environment are key issues supporting the local currency outlook. We ex-
pect USD/PEN to close the year at 2.75.

Currency Trends
Going Back Spot Outlook
FX Rate FX Rate
12 m 6m 3m 7-Jul 3m 6m 12 m
USDBRL 1.95 1.74 1.78 1.76 1.80 1.80 1.85 USDBRL
USDMXN 13.19 13.09 12.37 12.84 12.65 12.80 12.96 USDMXN
USDCLP 534 507 524 536 543 540 545 USDCLP
USDPEN 3.01 2.89 2.84 2.82 2.79 2.75 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
Jul-09 Sep-09 Nov-09 Jan-10 Mar-10 M ay-10 Jul-10 Jul-09 Se p-09 Nov-09 Jan-10 M ar-10 May-10 Jul-10

USDCLP USDPEN

568 3.01
556 2.99
545 2.96
534 2.93
522 2.90
511 2.88
499 2.85

488 2.82
Jul-09 Se p-09 Nov-09 Jan-10 Mar-10 May-10 Jul-10 Jul-09 Se p-09 Nov-09 Jan-10 M ar-10 May-10 Jul-10

12
Global Economic Research
DEVELOPING AMERICAS
Fundamental Commentary
BRAZIL - The Brazilian economy is immersed in a strong
and broad-based growth trajectory; the latest survey con-
ducted by the central bank points to a 7% rate of economic
expansion for this year. Strong lending growth, despite in-
creasing interest rates, is also fuelling a high-growth envi-
ronment which is leading to potential overheating risks.
Inflationary pressures are also on the rise, as indicated by
recent trends; indeed, the IPCA-based consumer price in-
flation rate is approaching the 5% mark. The combined fast
growth-higher inflation scenario is prompting a reassess-
ment of the interest rate cycle, following a 150 bps rate
hike in two consecutive moves by the central bank. The
next monetary policy committee decision will take place on
July 21st, and a 75 bps rate increase to 11% is amply dis-
counted. Moreover, the government-administered short-
term target SELIC rate may close the year at 12%, reinforc-
ing a strong-currency environment for local-currency de-
nominated assets. Meanwhile, the widening current ac-
count and fiscal deficits have placed the Brazilian investor
community on alert; the external gap is estimated to close
at US$47 billion and US$57 billion in 2010 and 2011, re-
spectively. The 12-month consolidated public sector deficit
increased to 3.3% of GDP at the end of May 2010. Despite
a solid foreign exchange reserve position (US$250 billion),
the intensifying global risk aversion as a result of risk-
repricing activity in European sovereign credit markets has
adversely affected Latin American bond markets.
CHILE - The Chilean economy is strongly influenced by
global trade dynamics. Renewed investor focus on the
pace of international economic deceleration (with a special
focus on the US and China) will affect demand for Chilean
export products and currency-sensitive copper prices.
Meanwhile, reconstruction efforts following the devastating
earthquake/tsunami of the first quarter are paying off; in-
deed, the monthly indicator of economic activity expanded
by 7.1% (year over year) in May and that industrial produc-
tion also showed a 4.2% gain. The latest consensus indi-
cates that the Chilean economy would expand by 4.5% this
year and accelerate above 5.5% in 2011. In response to
recovery evidence, the central bank began the process of
interest rate normalization to guide inflation towards the
officially established 3% +/- 1% range. Following a 50 bps
rate hike last June, a move to 1.50% is likely on July 15th.
Technical trading dynamics also affect demand for local
currency assets; the reversal of USD strength as the EUR
recovers injected a positive tone into the CLP over the past
few weeks. Moreover, the high dose of speculative trading
dynamics shaping demand for gold as a safe-haven asset
also helped boost prices in precious and base metals; in-
deed, the price of gold touched a high mark of 1,264 US
cents per pound before correcting below 1,200. Volatility in
copper and crude oil prices usually translate into exchange
rate swings in Chile.
July 2010
Pablo Bréard +1 416 862-3876
MEXICO - The weakening trend affecting the USD in the
recent past has fuelled increasing volatility in the MXN,
which moved from 12.40 to 13 per USD in a short time
frame. Intensifying corrective waves in place in equity se-
curities markets in developing countries (primarily in China)
have also instilled a bearish tone into the core group of
Latin American stock markets since late April. The energy-
sensitive Mexican currency has also been adversely af-
fected by a downward adjustment in crude oil prices. In-
deed, the light-crude WTI benchmark price traded as los as
US$71 per barrel (down from almost US$80) over the past
few weeks. Finally, interest rate differentials remain an-
other factor shaping currency moves in Mexico. At the
short end of the yield curve, prolonged status quo by the
US Federal Reserve (Fed) is also preventing Mexico from
increasing its short-term monetary policy rate (currently set
at 4.5%) despite tightening moves already executed by the
central banks of Brazil, Peru and Chile. In fact, derivatives
markets do not discount a rate hike until the second quarter
of 2011. Intensifying global risk aversion has also fuelled a
cautious tone amongst global fixed-income portfolio inves-
tors, with the 10-year Mexico-US government bond spread
widening to a level close to 400 basis points (bps), an at-
tractive investment alternative in the context of abnormally
low long-term interest rates in advanced economies.
PERU - Peru enjoys a bright economic outlook ahead of
the April 2011 elections. Government policy continuity is
amply discounted irrespective of who becomes president.
The economy is experiencing a sharp and broad-based
expansionary phase. Domestic and foreign investment is
on the rise and the systemically strong domestic banking
sector is allowing a healthy expansion of local credit. In its
latest inflation report, the central bank adjusted its projec-
tion for real GDP growth upwards to 6.6% and 6.0% for
2010 and 2011, respectively. The monetary authorities will
ensure an orderly normalization of monetary conditions as
the strong-growth phase fuels a manageable increase in
inflationary expectations. Following an increase of 25 bps
to 1.75%, market participants expect further moderate rate
adjustments in the months to come. The authorities treated
this last policy adjustment as a preventive mechanism in
the absence of visible price pressures. A low interest rate
environment is deepening the process of de-dollarization
within the local banking sector. Although the relatively illiq-
uid Peruvian stock market has not been immune to the
profit-taking phase in place in the largest emerging mar-
kets, domestic institutional investors (primarily private pen-
sion fund management firms) are boosting demand for sol-
denominated debt securities, thereby accelerating the de-
dollarization process and contributing to the development
of local capital markets. Meanwhile, the central bank will
not hesitate to intervene in the currency market to prevent
13
Global Economic Research July 2010

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

Currency Outlook Tuuli McCully +1 416 863-2859

RUSSIA - The Russian Ruble (RUB) is consolidating a trading range between 30.5 and 32 per USD after the April-May
weakness caused by oil price decline and European debt sustainability concerns. Recovery dynamics, ongoing interest
rate normalization, shifts in commodity energy prices, steady accumulation of international reserves and potential cor-
rection in equity securities markets due to China’s deceleration will shape the view on the RUB. We expect USD/RUB to
close the year at 31.

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 in stabilization mode following the market stress caused by the
European sovereign credit shock and correction in commodity prices. Shifts in metal prices, interest rate differentials,
post-world cup recovery dynamics and global risk aversion will be the key factors affecting the outlook for the South Afri-
can rand in the near term. We do expect USD/ZAR to close the year at 7.80.

POLAND - The Polish zloty (PLN) 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. A new one-year successor
arrangement for Poland under the International Monetary Fund’s Flexible Credit Line – approved in early July – provides
a useful insurance against external risks and supports the PLN.
Currency Trends
Going Back Spot Outlook
FX Rate FX Rate
12 m 6m 3m 7-Jul 3m 6m 12 m
USDRUB 31.2 30.0 29.4 31.1 31.1 31.0 31.5 USDRUB
USDTRY 1.54 1.50 1.52 1.55 1.59 1.60 1.65 USDTRY
USDZAR 7.71 7.40 7.29 7.62 7.74 7.80 8.00 USDZAR
EURPLN 4.45 4.10 3.86 4.09 4.12 4.10 4.14 EURPLN
USDRUB USDTRY

1.61
32.5
1.59
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
Jul-09 Sep-09 Nov-09 Jan-10 Mar-10 May-10 Jul-10 Jul-09 Sep-09 Nov-09 Jan-10 Mar-10 May-10 Jul-10

USDZAR EURPLN
8.37 4.50

8.18 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
Jul-09 Sep-09 Nov-09 Jan-10 Mar-10 May-10 Jul-10 Jul-09 Sep-09 Nov-09 Jan-10 Mar-10 May-10 Jul-10

14
Global Economic Research
DEVELOPING EUROPE/AFRICA
Fundamental Commentary
RUSSIA - The oil-sensitive Russian economy remains
strongly influenced by gyrations in energy markets. Crude
oil prices, currently trading at US$72 per dollar (WTI
based), have somewhat recovered from the early-May high
volatility and subsequent price adjustments. As the world’s
largest oil producer, Russia is immediately affected by sud-
den directional shifts in crude oil and natural gas prices.
Growing investors’ concerns about decelerating Chinese
and US economic activity may have an adverse impact on
Russian investor sentiment in the months ahead; however,
the Russian central bank has continued to accumulate for-
eign exchange reserves, which are, once again, approach-
ing the US$500 billion mark. The robust foreign exchange
reserves position allows the central bank to intervene in the
market to moderate ill-justified speculative exchange rate
swings. The Russian economy returned to positive growth,
expanding by 2.9% y/y in Q1 2010; additionally, recent
data indicated that Russia reversed the loss from the first
quarter and received US$4.5 billion in foreign capital in-
flows during the second quarter. The monetary outlook is
improving; indeed, on the grounds of a steady process of
disinflation (consumer prices increased by 5.8% y/y in June
2010), the monetary authorities have aggressively pursued
a process of interest rate normalization: the policy-setting
refinancing rate is currently set at 7.75%. The RUB has not
been materially affected by interest rate cuts, but remains
vulnerable to profit-taking activity in equity markets.
SOUTH AFRICA - The fuzz of the FIFA World Cup is ebb-
ing and the South African economy will be returning to a
normal environment. The authorities believe that the econ-
omy may receive a boost equivalent to 0.4% of GDP from
investment and tourism flows. The economy remains af-
fected by conditions in commodity (primarily metal) mar-
kets. The gold price, which traded above the US$1,200 per
ounce mark earlier in the month, is strongly influenced by
speculative investment flows as investors reassess their
views on the global economic recovery and the structural
fiscal position of key countries in the euro zone. Monetary
status quo will remain in place for the time being; the pol-
icy-setting rate has been reduced to 6.5% from 12% since
December 2008. In fact, the central bank believes that the
inflation rate will remain within the 3-6% target range
through 2011, yet inflation dynamics will be influenced by
shifts in government-administered prices. Technical data
shows a strong correlation between the value of the ZAR
and copper (not necessarily gold) prices. Moreover, the
linkage between South African equity securities and their
counterparts within the BRIC group is also high, increasing
the vulnerability of South African investments to portfolio
capital in/outflows in China. Non-deliverable forward (NDF)
markets point towards a modest depreciation of the ZAR by
the end of the year. Technical trends indicate a trading
range of USD/ZAR 7.40-7.80 in the near term.
July 2010
Pablo Bréard +1 416 862-3876
Tuuli McCully +1 416 863-2859
TURKEY - Monetary conditions remain on hold in Turkey
for now, while policymakers are implementing first steps of
the central bank’s exit strategy. Following the Monetary
Policy Committee meeting on June 17th, the Turkish mone-
tary authorities maintained the new policy rate, the one-
week repo rate, at 7.0% due to persistent uncertainties
around global economic prospects. We expect that a
monetary tightening cycle will be commenced by the end of
2010. As noted by the monetary policymakers, economic
activity is recovering. Output expanded by 0.1% q/q in the
first quarter of the year; however, in annual terms the econ-
omy ballooned by 11.7% due to a low comparison base in
2009. The growth was supported by household spending
and investment. Diminishing joblessness − the unemploy-
ment rate decreasing to 13.7% in March from 14.4% the
month before − is boosting consumer confidence. While
industrial output, business confidence indicators and pur-
chasing managers’ indices remain firmly in expansionary
territory, slightly weaker perceptions regarding business
conditions reflect the persistent uncertainties in the external
outlook. Inflationary pressures continued to ease in June;
the consumer price index increased by 8.4% y/y compared
with 9.1% the month before. On a monthly basis, prices
decreased by 0.6%. Next general elections, due in July
2011, will likely contribute to currency volatility in the me-
dium-term.
POLAND - Bronislaw Komorowski is Poland’s new presi-
dent; the second round of the presidential election took
place on July 4th with Mr. Komorowski claiming 53% of the
vote. The fact that the pro-business Civic Platform party
now has control of both the government and the presidency
reduces the likelihood of a presidential veto on reforms. Pol-
ish central bankers maintain a neutral policy stance, as the
fiscal crisis in Greece and euro area fiscal consolidation
efforts create uncertainties for the regional economic out-
look. Following the Monetary Policy Council meeting on
June 29th-30th, the authorities left the reference rate un-
changed at 3.50% for a 12th consecutive month. Economic
recovery is firmly underway in Poland with industrial and
construction output increasing and improving labour market
conditions providing support to private spending prospects.
The unemployment rate decreased to 11.9% in May from
12.3% the month before while retail sales increased by
3.1% m/m and 4.3% y/y. The inflation outlook is promising,
with the consumer price index increasing by 2.2% y/y in
May, running below the central bank’s target of 2.5%. The
monetary authorities expect that inflation will hover within a
2.3-2.9% range in 2010, while real GDP is projected to in-
crease by 2.5-3.9%. The policymakers reiterated their view
that fiscal tightening is important for macroeconomic stabil-
ity. Nevertheless, with parliamentary elections scheduled to
take place next year, aggressive fiscal consolidation is not
in sight.
15
Global Economic Research July 2010

GLOBAL CURRENCY FORECAST (end of period)

2008 2009 2010f 2011f 2010f 2011f
Q1a Q2a Q3 Q4 Q1 Q2 Q3 Q4
MAJOR CURRENCIES
Japan USDJPY 91 93 95 100 93 88 93 95 97 98 99 100
Euro zone EURUSD 1.40 1.43 1.19 1.26 1.35 1.22 1.17 1.19 1.21 1.22 1.24 1.26
EURJPY 127 133 113 126 126 108 109 113 117 120 123 126
UK GBPUSD 1.46 1.62 1.50 1.55 1.52 1.49 1.48 1.50 1.51 1.52 1.54 1.55
EURGBP 0.96 0.89 0.79 0.81 0.89 0.82 0.79 0.79 0.80 0.80 0.81 0.81
Switzerland USDCHF 1.07 1.04 1.07 1.01 1.05 1.08 1.10 1.07 1.05 1.02 1.01 1.01
EURCHF 1.49 1.48 1.27 1.27 1.42 1.32 1.29 1.27 1.27 1.24 1.25 1.27

AMERICAS
Canada USDCAD 1.22 1.05 1.00 0.97 1.02 1.06 1.01 1.00 0.99 0.98 0.97 0.97
North

CADUSD 0.82 0.95 1.00 1.03 0.98 0.94 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 12.9 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 3.93 4.09 4.25 4.38 4.52 4.66 4.80
Brazil USDBRL 2.31 1.74 1.80 1.90 1.78 1.80 1.80 1.80 1.82 1.85 1.87 1.90
Chile USDCLP 639 507 540 550 524 546 543 540 542 545 547 550
South

Colombia USDCOP 2249 2044 1950 2000 1920 1900 1925 1950 1962 1975 1987 2000
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 0.84 0.88 0.90 0.91 0.92 0.93 0.94
China USDCNY 6.83 6.83 6.60 6.20 6.83 6.83 6.75 6.60 6.50 6.40 6.30 6.20
Hong Kong USDHKD 7.75 7.75 7.75 7.70 7.76 7.79 7.77 7.75 7.74 7.72 7.71 7.70
India USDINR 48.8 46.5 45.0 47.0 44.9 46.5 45.7 45.0 45.5 46.0 46.5 47.0
Indonesia 2/ USDIDR 11.12 9.40 9.25 9.50 9.10 9.07 9.16 9.25 9.31 9.37 9.44 9.50
Malaysia USDMYR 3.47 3.43 3.15 3.20 3.26 3.24 3.19 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 46.4 45.2 44.0 44.5 45.0 45.5 46.0
Singapore USDSGD 1.43 1.40 1.36 1.30 1.40 1.40 1.38 1.36 1.34 1.33 1.31 1.30
South Korea USDKRW 1260 1164 1120 1050 1131 1222 1170 1120 1102 1084 1067 1050
Thailand USDTHB 34.7 33.4 32.5 33.0 32.3 32.5 32.5 32.5 32.6 32.7 32.9 33.0
Taiwan USDTWD 32.8 32.0 30.0 28.5 31.8 32.1 31.0 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 25.7 25.6 25.5 25.4 25.2 25.1 25.0
Iceland USDISK 121 126 130 125 127 128 129 130 129 127 126 125
Hungary EURHUF 266 270 285 300 265 285 285 285 289 292 296 300
Norway USDNOK 6.95 5.79 6.30 5.80 5.94 6.50 6.35 6.30 6.25 6.20 6.00 5.80
Poland EURPLN 4.15 4.10 4.10 4.18 3.86 4.15 4.12 4.10 4.12 4.14 4.16 4.18
Russia USDRUB 29.4 30.0 31.0 32.0 29.4 31.2 31.1 31.0 31.2 31.5 31.7 32.0
South Africa USDZAR 9.53 7.40 7.80 8.20 7.29 7.67 7.74 7.80 7.90 8.00 8.10 8.20
Sweden EURSEK 10.94 10.25 9.50 9.35 9.75 9.54 9.55 9.50 9.46 9.42 9.39 9.35
Turkey USDTRY 1.54 1.50 1.60 1.70 1.52 1.58 1.59 1.60 1.62 1.65 1.67 1.70

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 July 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

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.