Global Economic Research June 2011

Foreign Exchange
Outlook
Excess global liquidity, renewed USD weakness, consolidation in
commodity markets, interest rate differentials against advanced
economies, persistent US and Chinese intervention and bullish tone in
emerging markets are the key drivers of flows in currency markets.

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

The European Monetary Union remains intact, despite higher volatility and
stress caused by a weakening debt profile in selected countries in the
periphery. The EUR is poised to benefit from improved economic
performance in core European nations and widening interest rate
differentials.

The Asian currency outlook is promising. The JPY is supported by G7

intervention and asset-diversification waves. The CNY will accelerate its
pace of appreciation, yet no radical change to China’s currency regime is
in store. Developing Asian currencies retain a bullish tone.

Index

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

US/Canada.................................................................................................................................. 5
Europe ........................................................................................................................................ 6
Asia/Oceania .............................................................................................................................. 8
Developing Asia....................................................................................................................... 10
Developing Americas .............................................................................................................. 12
Developing Europe/Africa....................................................................................................... 14
Global Currency Forecast....................................................................................................... 16

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

Global Economic Research June 2011

Foreign Exchange
Outlook
Global Foreign Exchange Outlook
June 3, 2011 Actual Q1a 11 Q2 11 Q3 11 Q4 11 Q1 12 Q2 12 Q3 12 Q4 12
EURUSD 1.45 1.42 1.47 1.49 1.50 1.48 1.48 1.50 1.50
Euro Consensus* 1.44 1.43 1.42 1.41 1.40 1.39 1.37
USDJPY 80.1 83 79 82 84 86 87 89 90
Yen Consensus* 83 84 86 87 88 89 90
GBPUSD 1.63 1.60 1.64 1.64 1.65 1.65 1.67 1.69 1.70
Sterling Consensus* 1.63 1.64 1.65 1.65 1.66 1.66 1.66
USDCAD 0.98 0.97 0.95 0.94 0.93 0.94 0.94 0.93 0.92
Canadian Dollar Consensus* 0.96 0.97 0.98 0.98 0.99 1.00 1.00
AUDUSD 1.06 1.03 1.07 1.08 1.09 1.09 1.10 1.10 1.11
Australian Dollar Consensus* 1.04 1.02 1.01 0.99 0.98 0.96 0.95
USDMXN 11.71 11.90 11.60 11.77 12.03 12.11 12.04 12.13 12.31
Mexican Peso Consensus* 11.67 11.85 11.92 11.99 12.07 12.14 12.22
Spot Price vs. 100 Day Moving Average vs. 200 Day Moving Average - (5yr Trend)
EURUSD USDJPY
USD/ JPY
1.62 121 100 Day
EUR/ USD 200 Day
1.52 100 Day 114
200 Day 107
1.42
100
1.32
93
1.22 86
1.12 79
9
D 8
06

11

11

06

07

08

09

10

11
Ap 6

07

08

M 8

Au 0

0
M 9

10
07

-0
l-0
-0

-0

-1

-0

-0

-0

-0

-1
-0
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n-

n-

n-

n-

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ov

ec

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ec

ec
ay

ar
ct
Ju
Ju

Ja

Ju

Ju

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Ju

Ju

Ju

Ju
Se

Fe

O
N

D
GBPUSD USDCAD
USD/ CAD
2.11 GBP/ USD
100 Day
100 Day
1.30
200 Day
1.96 200 Day
1.22
1.81 1.14

1.66 1.06

1.51 0.98

1.36 0.90
06

07

08

09

10

11
6

0
06

07

08

09

10

11
6

-0

-0

-0

-0

-1
-0

-0

-0

-0

-1

n-

n-

n-

n-

n-

n-
n-

n-

n-

n-

n-

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ec

ec

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ec

ec
ec

ec

ec

ec

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Ju

Ju

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Ju

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Ju

Ju

Ju

Ju

Ju

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D
D

AUDUSD USDMXN

AUD/ USD 15.2

0.97 USD/ M XN
100 Day
0.89 200 Day 14.1 100 Day
200 Day
0.82 13.0

0.74 11.9

0.67 10.8

0.59 9.7
06

07

08

09

10

11
6

0
06

07

08

09

10

11
6

-0

-0

-0

-0

-1
-0

-0

-0

-0

-1

n-

n-

n-

n-

n-

n-
n-

n-

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n-

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ec

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ec
ec

ec

ec

ec

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Ju

Ju

Ju

Ju

Ju

Ju
Ju

Ju

Ju

Ju

Ju

Ju

D
D

(*) Source: Consensus Economics Inc. May 2011

2
Global Economic Research
MARKET TONE & FUNDAMENTAL FOCUS
Pablo F.G. Bréard +1 416 862-3876
Softening global growth prospects, excess global liquidity,
renewed US dollar (USD) weakness, consolidation in
commodity markets, persistent monetary accommodation
and gradual recovery in the US, intensifying volatility in
emerging debt markets due to a potential distressed debt
restructuring in Greece, and ongoing global diversification
away from US$-denominated securities portfolios have
become the key factors shaping market sentiment in
global foreign exchange markets.
The outlook for the Americas’ currency market remains
strongly influenced by the direction of the USD, which is
back on the defensive, affected by unattractive interest
rate differentials, persistent weakness in key labour-
intensive sectors (influencing the Fed’s behaviour), and
structurally imbalanced public sector finances. Neverthe-
less, there appears to be a strong sense of structural link-
ages amongst the core group of non-USD currencies in
the continent. The USD appreciated broadly in May as
early signs of a softening global growth trajectory shifted
investor flows back to the US market, a development that
was exacerbated when the market’s focus centered back
towards problems in periphery Europe. To date, June has
brought reassurance that global growth should re-
accelerate in the second half of the year and that Euro-
pean authorities will continue to support even the weak
countries within the monetary union. Accordingly, this
combined with softer US economic data, loose US mone-
tary policy and a still undefined fiscal plan has the USD
poised to retrace some of its recent gains.
The non-USD NAFTA zone currencies, which struggled in
May, are entering June on a firmer footing. The Canadian
dollar (CAD) should continue to be supported by a
broadly weaker USD, strong commodity prices, the out-
look for monetary policy and relatively strong sovereign
debt and local credit fundamentals. The Mexican peso
(MXN) has come off its recent highs but has outperformed
CAD. The fundamental outlook has softened and the cen-
tral bank appears in no rush to shift interest rates away
from 4.5%; however, MXN still benefits from favourable
flows that seek Latin American exposure, a reasonable
growth trajectory and improvements in Mexico’s debt and
fiscal position. The key risk for both non-USD NAFTA cur-
rencies is the outlook for US growth. Elsewhere in the
developing Americas, the trajectory of the Brazilian real
(BRL) continues to guide market trends in the Southern
Cone with positive spill over effects into the Chilean (CLP)
and Colombian (COP) pesos. However, the Peruvian Sol
(PEN) has been recently subject to damaging volatility
due to escalating political risk linked to the presidential
elections that are about to be completed.
June 2011
Foreign Exchange
Outlook
Camilla Sutton +1 416 866-5470
The euro (EUR) is well positioned to consolidate an ap-
preciating bias against both the USD and the Japanese
yen (JPY). The risks within the European monetary union
are large, the situation in peripheral economies in fiscal
distress is fragile and the problems are significant. More-
over, our base case remains that the issues are manage-
able. The combination of a multilateral response to fiscal
stress in highly indebted peripheral economies, a hawkish
central bank, and a commitment from authorities that the
currency and monetary union is not a failed experience
should position EUR favourably through the end of the
year as compared with the US outlook. Accordingly, we
are reaffirming our year-end 1.50 target for EUR/USD.
The growth outlook for the UK has deteriorated on the
back of a hesitant consumer who faces strict fiscal auster-
ity, rising inflation and an uncertain path for interest rates.
This fundamental backdrop should limit the ability for a
sustained British pound (GBP) rally. The other European
currencies, Swiss franc (CHF), the Swedish krona (SEK)
and the Norwegian krone (NOK), have rallied extensively
in 2011 and the prospect for further gains continues to be
favourable.
Japan is in the midst of a challenging period, highlighted
by a shift to negative watch by all three major credit rating
agencies due to a sharp deterioration in its sovereign debt
and fiscal profile. The near-term headwind is its recovery
from a major natural disaster; however, this is compli-
cated by the country’s large debt burden and hesitant in-
vestor sentiment. Still, in the near term the JPY is likely to
remain supported by potential repatriation flows, persis-
tent current account surpluses and its continued role as a
risk haven asset. It is worth noting that the JPY is a core
global currency in the ongoing process of structural eco-
nomic rebalancing and the associated diversification
away from US$-denominated financial assets. The rest of
Asia provides a very different backdrop. A vaguely softer
growth profile has not relieved inflationary pressures,
leaving most central banks in the midst of a hiking cycle,
which is supporting the Asian-growth currencies. We hold
bullish views on the Malaysian ringgit (MYR), the Singa-
pore dollar (SGD), the South Korean won (KRW), the
Philippine peso (PHP), and Thai baht (THB) (however the
latter could be adversely affected by domestic political
unrest). The outlook for the Indian rupee (INR) is less
positive. The Chinese Renminbi (CNY) has reached a
new high and authorities continue to support a more flexi-
ble currency regime, in part to help relieve inflationary
pressures in the country. Accordingly, we expect an
above consensus appreciation of the yuan, looking for
USDCNY to close this year at 6.25.
3
Global Economic Research June 2011

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

The CAD underperformed in May, losing 2.5% against the USD. A spike in risk aversion, a softening global growth out-
look and the pushing out of expectations for the next Bank of Canada interest rate hike were the main culprits. As we
are coming to the end of the second quarter, the US economic outlook has begun to soften. What is negative for the US
economy is by default negative for Canada. Most have already priced in a lower second quarter growth trajectory, so
what matters from here for CAD traders is the potential of a reacceleration in the third quarter. Should this fail to materi-
alize the outlook for the CAD is likely to soften. However, our base case is that what the global economy is currently ex-
periencing will prove temporary. The fundamentals of the Canadian economy remain strong, having posted a healthy
3.9% Q1 growth rate. Still, supply chain issues from Japan are expected to weigh heavily on Q2 growth. Meanwhile,
headline inflation is above 3% and core inflation is more subdued at 1.6%. With this back-drop, the Bank of Canada is
expected to re-enter its interest rate hiking cycle in the fall, which will widen the US-Canada spread in the CAD’s favour.
In terms of commodities, Scotia Economics forecasts oil prices to average $100 in 2011, above the current average,
which is considered to be supportive of the current strong CAD valuation. However, high oil prices driven by emerging
market demand are not likely as supportive for the Canadian economy as historical episodes when strong oil prices
were driven by a strong US economy. Accordingly, the fundamentals are supportive of a strong CAD, but the stars which
at times have all been aligned in favour of the currency are no longer. Valuations are made up of two sides and when it
comes to USDCAD, the USD side of the equation is negative. The combination of loose US monetary policy, a softening
growth profile, the lack of a credible fiscal plan and negative investor sentiment all work in favour of a weaker USD. Ac-
cordingly, combining both the US and Canadian sides of the currency backdrop should lead to ongoing strength in the
CAD. The key risks to our view are a spike in risk aversion or unanticipated softening in the global economy. Barring
these, we have made no change to our year-end CAD forecast of 1.08 (USDCAD at 0.93).

Currency Trends
Going Back Spot Outlook
FX Rate FX Rate
12 m 6m 3m 3-Jun 3m 6m 12 m
AUDCAD 0.884 0.984 0.990 1.044 1.019 1.017 1.034 AUDCAD
CADJPY 87.38 81.54 84.17 81.44 85.85 89.28 92.20 CADJPY
EURCAD 1.285 1.333 1.341 1.426 1.399 1.397 1.391 EURCAD
USDCAD 1.045 1.026 0.972 0.984 0.943 0.933 0.940 USDCAD
AUDCAD CADJPY

93.0
1.04

90.0
1.00

0.96 87.0

0.93 84.0

0.89 81.0

0.86 78.0
Jun-10 Aug-10 Oct-10 De c-10 Fe b-11 Apr-11 Jun-11 Jun-10 Aug-10 Oct-10 De c-10 Fe b-11 Apr-11 Jun-11

EURCAD USDCAD
1.07
1.44
1.06
1.41
1.04
1.37
1.02
1.34
1.00
1.30
0.98

1.27 0.97

1.23 0.95
Jun-10 Aug-10 Oct-10 De c-10 Fe b-11 Apr-11 Jun-11 Jun-10 Aug-10 Oct-10 De c-10 Fe b-11 Apr-11 Jun-11

4
Global Economic Research
CANADA AND UNITED STATES
Fundamental Commentary
UNITED STATES - The US economy is expanding at a
more moderate pace than witnessed last year. The latest
revisions left Q1 headline GDP growth unchanged at 1.8%
q/q annualized, the slowest pace since mid-2010. The
economy is expected to average growth around 2.5% in
2011. Most of the strength will come from business invest-
ment in machinery & equipment and exports, while – along-
side ongoing deleveraging – higher prices of food and fuel
squeeze disposable income. Consumer sentiment deterio-
rated noticeably in May, falling to a six-month low. Hiring
activity tracked its third straight month of above-200,000
additions, a first since early 2006. However, the US jobs
picture is measured by two separate surveys, which show
the sharpest deviation between what businesses and
households are reporting since last November, highlighting
the emerging divergence between corporate and consumer
sentiment. As a result, and similarly to other advanced
economies, near-term indicators are posting softer results
for consumer-related sectors and strong prints for export-
oriented industries, particularly those geared toward
emerging economies. Residential construction activity con-
tinues to move sideways along the floor. Sales of deeply-
discounted distressed homes, and generally more low-
priced resale properties, are siphoning demand from the
new home market. A more substantial pick-up in hiring ac-
tivity is paramount for potential buyers to step off the side-
lines. Commodity prices seem to have moderated since the
end of April, and while suppliers continue to feel the pres-
sure, the pass-through to core prices and expectations re-
mains limited. Heavy rains, which inundated parts of the
Ohio and Mississippi valleys, and severe droughts in parts
of the South will weigh on the agricultural sector this year.
MONETARY POLICY COMMENTARY
UNITED STATES - We remain of the view that the Federal
Reserve will be on hold until 2012Q1, with the tail risk
skewed toward later rather than sooner. Additional quanti-
tative easing is not expected in the absence of unlikely de-
flation risk. Another round of QE would ultimately raise
market inflation expectations and would be significantly
bearish for the curve after the very short-run effects due
to concerns surrounding long-run policy exits; key bench-
marks like the 30-year fixed mortgage rate would rise at a
bad time for US housing markets and the broader econ-
omy. Chairman Bernanke has noted that ending coupon
reinvestment resulting from purchased securities would be
the first sign of policy tightening, as it would reverse expan-
sion of the Fed's balance sheet; we think this occurs much
later in the year at the earliest. We believe that the output
gap will take years to close such that the Fed’s full employ-
ment mandate will remain challenged while markets are
counseled to look through near-term inflation risks. Thus,
should the Fed begin to raise interest rates as per our fore-
cast, it is likely to do so at a tepid pace toward a lower neu-
tral rate than during prior cycles.
June 2011
Foreign Exchange
Outlook
Adrienne Warren +1 416 866-4315
Gorica Djeric +1 416 866-4214
CANADA - The Canadian economy has lost momentum
heading into the spring. After expanding at a solid 3.9%
annual rate in Q1, we expect output growth moderated to
around 1% in Q2. The slowdown in part reflects supply
shortages caused by Japan’s early year earthquake/
tsunami. These production disruptions are most notable in
the large motor vehicle and parts sector, and should be
recouped in the latter half of the year. At the same time,
government stimulus spending is winding down, and will
likely act as a drag on growth in the latter half of this year
and into 2012 as fiscal shortfalls are addressed. Meanwhile,
consumers, facing sharply higher gas prices, rising food
costs and high debt burdens, are moderating their spend-
ing. Discretionary retail sales (i.e. total outlays excluding
food, gasoline and health & personal care items) dropped
below year-ago levels in March for the first time since the
2008 recession, and early reports point to continued soft
conditions through May. Meanwhile, consumer sentiment
surveys are showing a growing pessimism among house-
holds over the state of their finances and a reluctance to
make a major purchase. The slowing in retail sales mirrors
a cooling in housing market activity, and may mark the be-
ginning of a transition from consumer-driven growth toward
a greater reliance on businesses. Supported by a strong
currency, healthy corporate balance sheets and firm com-
modity prices, firms are ramping up outlays on machinery &
equipment as well as resource-related exploration. Export
performance is mixed. While benefitting from high com-
modity prices and strong emerging market demand for Ca-
nadian resources, producers are being challenged by the
strength of the Canadian dollar and signs of slowing in US
demand/industrial activity.
Derek Holt +1 416 863-7707
CANADA - Markets took the Bank of Canada (BoC)’s
statement as relatively more hawkish than expected, but
that’s relative to having largely priced out rate hikes
through to year end. We don’t view the statement as sup-
portive of the July hike scenario since critical language on
how “such a reduction <ed. in monetary stimulus > would
need to be carefully considered” was left intact. Rather, we
believe the statement supports our longstanding October
call. That said, the BoC hedged its bets somewhat. On the
one hand, it turned slightly more dovish on global growth.
However, what markets took as a hawkish signal is the fol-
lowing reference: “To the extent that the expansion contin-
ues and the current material excess supply in the economy
is gradually absorbed, some of the considerable monetary
policy stimulus currently in place will be eventually with-
drawn, consistent with achieving the 2 per cent inflation
target.” We think all the BoC intended here was to halt the
market trend to perpetually taking out rate hikes, versus
signaling a nearer term threat to the curve.
5
Global Economic Research June 2011

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

EURO ZONE - Turmoil in Europe has resurfaced, injecting the market with unwanted uncertainty. Considering the envi-
ronment the EUR has held up well, entering June just 3% below its year-to-date 1.4940 high. Technically, the near-term
outlook has turned favourable while market positioning is still long, but far more balanced than the early spring. The USD
side of the equation is not a positive one – weighed down by the lack of a fiscal plan, a deteriorating economic backdrop
and loose monetary policy. We expect the EUR to remain volatile, but that the risk is to further upside. We hold a Q211
forecast of 1.47 and a year-end forecast of 1.50.

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

SWITZERLAND - Positive CHF momentum has driven the currency to new highs against the USD and the EUR. It is a
market darling as it is a desirable intra-Europe diversification vehicle, a safe-haven favourite, has a strong fundamental
and fiscal backdrop and the SNB appears to have stepped away from intervention – at least temporarily. The medium-
term outlook is favourable, but some near-term retracement is likely. We have USDCHF Q211 and year-end forecast of
0.85.

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

Currency Trends
Going Back Spot Outlook
FX Rate FX Rate
12 m 6m 3m 3-Jun 3m 6m 12 m
EURUSD 1.23 1.30 1.38 1.45 1.48 1.50 1.48 EURUSD
GBPUSD 1.45 1.56 1.63 1.63 1.64 1.65 1.66 GBPUSD
EURCHF 1.42 1.30 1.28 1.21 1.27 1.28 1.26 EURCHF
USDNOK 6.46 6.21 5.60 5.40 5.38 5.28 5.21 USDNOK
EURUSD GBPUSD
1.67
1.48
1.63
1.43
1.59
1.38

1.55
1.33

1.28 1.51

1.23 1.47

1.18 1.43
Jun-10 Aug-10 Oct-10 De c-10 Fe b-11 Apr-11 Jun-11 Jun-10 Aug-10 Oct-10 De c-10 Fe b-11 Apr-11 Jun-11

EURCHF USDNOK

6.70
1.39
6.40
1.35
6.10
1.31

5.80
1.28

1.24 5.50

1.20 5.20
Jun-10 Aug-10 Oct-10 De c-10 Fe b-11 Apr-11 Jun-11 Jun-10 Aug-10 Oct-10 De c-10 Fe b-11 Apr-11 Jun-11

6
Global Economic Research
EUROPE
Fundamental Commentary
EURO ZONE - Euro zone policymakers will likely continue
to take a break from further monetary tightening in June.
As expected, the European Central Bank’s Governing
Council left the main refinancing rate unchanged at 1.25%
in early May following a hike in April. Gradual monetary
normalization will likely continue in the third quarter of the
year, taking the benchmark interest rate to 1.75% by the
end of the year. While headline inflation eased in May to
2.7% y/y – according to a flash estimate – from 2.8% the
month before, inflationary pressures will likely continue to
rebuild, taking the inflation rate to 3% in the coming months
before easing to 2.5% by the end of the year. The euro
zone experienced exceptional economic growth in the first
quarter of 2011 with real GDP expanding by 0.8% q/q (non-
annualized) and 2.5% y/y. Germany and France continue
to be the engines of growth in the region, registering Q1
output gains of 1.5% q/q (4.8% y/y) and 1.0% q/q (2.2% y/
y), respectively. Accordingly, we have revised our real GDP
growth forecasts, and now expect the euro zone to expand
by 1.8% this year, followed by a 1.7% expansion in 2012.
The German economy will likely record a 3.4% advance
this year, followed by a slowdown to 2.3% in 2012, while
French output is set to increase by 2.0% in 2011 and 1.4%
next year. Nevertheless, major differences in economic
performance remain in place between the core economies
and the periphery, which continues to suffer from debt sus-
tainability issues.
SWITZWERLAND - Debt sustainability concerns in the euro
zone periphery continue to highlight the Swiss franc’s (CHF)
role as a safe-haven currency, with appreciating pressures
vis-à-vis the euro persisting. On the back of the strong CHF,
inflationary pressures remain virtually absent: the harmo-
nized consumer price index increased by 0.1% y/y in April.
Accordingly, an expansionary monetary policy stance will
likely be maintained for an extended period of time; we ex-
pect the Swiss National Bank to begin a cautious process of
monetary normalization in the final quarter of 2011, raising
the benchmark rate gradually from the current level of
0.25% to 1.0% by the end of 2012. The next policy meeting
is scheduled for June 16th. The economy is showing signs
of a modest slowdown, with real GDP expanding by 0.3%
q/q (and 2.4% y/y) in the first quarter of 2011, compared
with an advance of 0.8% q/q (3.1% y/y) in the final quarter
of 2010. Household spending continues to be supported by
accommodative monetary policy and relatively healthy la-
bour market conditions (the unemployment rate decreased
to 3.1% in April). While exports continue to record solid per-
formance (up 5.7% q/q in Q1) despite currency strength,
momentum will likely decelerate in the coming months re-
flecting a slow down in activity in the rest of Europe. The
political outlook of Switzerland is dominated by the ap-
proaching general elections, scheduled for October 23rd;
nevertheless, the country continues to enjoy a high degree
of political stability.
June 2011
Foreign Exchange
Outlook
Tuuli McCully +1 416 863-2859
UNITED KINGDOM - The economic outlook for the UK
through 2012 continues to be challenging. The first quarter
2011 real GDP growth of 0.5% q/q (non-annualized) was
supported by net exports while the British consumer re-
mained very cautious; consumer spending – which ac-
counts for two-thirds of GDP – decreased by 0.6% q/q in
the January-March period, reflecting households’ continued
deleveraging efforts, an increased tax burden and persis-
tently challenging employment conditions. Aggressive fiscal
consolidation and slower export sector momentum through
the rest of the year will limit the nation’s economic growth to
1.4% in 2011, with the UK continuing to underperform the
euro zone. Output expansion should pick up to 1.7% in
2012, as both the global and domestic recoveries become
more broadly-based. Consumer price inflation accelerated
to 4.5% y/y in April from 4.0% the month before, highlighting
the challenge of monetary authorities to find a balance be-
tween promoting price stability and supporting economic
growth. Further pressures on prices are likely, with the
headline inflation rate expected to approach the 5.0% mark
in the coming months before embarking on a more solid
downward trajectory towards the end of 2011. Although ma-
jor divergences remain among the Bank of England’s poli-
cymakers, the central bank will likely begin a gradual proc-
ess of monetary policy normalization towards the end of the
third quarter of 2011, taking the Bank Rate – currently at
0.5% – to 1.0% by year-end, and to 2.0% by end-2012.
NORWAY - Norwegian monetary authorities have em-
barked on a path of policy tightening. Following the May 12th
Executive Board meeting, the key policy rate was raised by
25 basis points to 2.25%, marking the first interest rate hike
since May 2010. Policymakers assess that the upturn in the
Norwegian economy has “gained a firm footing” with capac-
ity utilization close to a normal level. The mainland real
GDP – which excludes the volatile oil, gas and shipping
sectors – expanded by 0.6% q/q (non-annualized) in the
first quarter of 2011, compared with a 0.3% advance in the
previous quarter. We expect the nation’s output to increase
by around 2¼% through 2012. Consumer price inflation ac-
celerated to 1.3% y/y in April from 1.0% the month before,
with prices at the core level increasing at the same pace.
With inflation on an upward trajectory and the real estate
sector booming, further monetary tightening is likely in the
months to come as authorities aim to stabilize headline in-
flation close to the target level of 2.5% in the medium term,
and to reduce the risk of future financial imbalances. Nor-
way has solid economic fundamentals as it enjoys a strong
external position (the current account surplus will likely
hover around 13% of GDP this year) and healthy govern-
ment finances (we expect the fiscal surplus to exceed 10%
of GDP in 2011-2012).
7
Global Economic Research June 2011

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

JAPAN - Weak fundamentals have done little to decrease positive yen flows as investors look for safe-haven alternatives
and deep bond markets. In addition, a significant drop in US yields has pushed the US-Japanese bond yield spread into
yen’s favour. Based on this momentum we expect USDJPY to end Q211 at 79, but weaken into year-end as markets
grow wary of the fundamental picture. We hold a year-end target of 84.

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

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

NEW ZEALAND - The NZD is trading at all time highs against the USD, leaving momentum working in the currency’s fa-
vour. Investor sentiment is positive, highlighted by a new year-to-date high in the net long NZD position. Technically, the
currency has yet to reach overbought levels, leaving further upside an important risk to our fundamentally based Q211
forecast of 0.82 and a year-end target of 0.78.

Currency Trends
Going Back Spot Outlook
FX Rate FX Rate
12 m 6m 3m 3-Jun 3m 6m 12 m
USDJPY 91.3 83.7 81.8 80.1 81.0 83.3 86.7 USDJPY
USDCNY 6.83 6.67 6.57 6.48 6.38 6.28 6.09 USDCNY
AUDUSD 0.85 0.96 1.02 1.06 1.08 1.09 1.10 AUDUSD
NZDUSD 0.68 0.74 0.75 0.81 0.80 0.79 0.79 NZDUSD
USDJPY USDCNY
93.0

6.79
90.5
6.74
88.0
6.68
85.5
6.63
83.0
6.57

80.5 6.52

78.0 6.46
Jun-10 Aug-10 Oct-10 Dec-10 Fe b-11 Apr-11 Jun-11 Jun-10 Aug-10 Oct-10 De c-10 Fe b-11 Apr-11 Jun-11

AUDUSD NZDUSD
1.11
0.81
1.06
0.78
1.01

0.75
0.96

0.91 0.71

0.86 0.68

0.81 0.65
Jun-10 Aug-10 Oct-10 Dec-10 Feb-11 Apr-11 Jun-11 Jun-10 Aug-10 Oct-10 Dec-10 Feb-11 Apr-11 Jun-11

8
Global Economic Research
ASIA/OCEANIA
Fundamental Commentary
JAPAN - Near-term Japanese yen (JPY) volatility will re-
main in place with the Bank of Japan battling excessive
appreciation. Strengthening forces will be countered by
uncertainty about a quick recovery, with downside risk lim-
ited by the availability of a vast pool of domestic funds to
finance the reconstruction effort. We expect the JPY to
reach 84 per US dollar at end-2011 and 90 at end-2012.
The possibility for further government intervention remains
in place in case significant appreciation resumes. The
Japanese economy will initiate a gradual recovery in the
second-half of the year as authorities grapple with the af-
termath of the March 11th earthquake/tsunami. After the
GDP fall of the first quarter, output is expected to contract
in the second with the reconstruction effort gathering mo-
mentum in the second half of the year and through 2012.
The viability of an expedited recovery hinges not only on
restoring a reliable electricity grid and transportation net-
work, but also on the prevalence of a trade-competitive
Japanese yen given the economy’s export dependence.
After the record 3.9% y/y gain of 2010, GDP will expand at
a 0.3% y/y rate in 2011 followed by a 3.5% advance in
2012. The Bank of Japan is expected to retain a loose
monetary policy stance, with unsterilized currency interven-
tions preventing excessive JPY appreciation. A higher en-
ergy tally and dependence on imported fuel, amid global oil
market uncertainty, will bring back supply-side price pres-
sures.
AUSTRALIA - The Australian dollar (AUD) will remain well
supported in the medium-term. Notwithstanding the natural
disasters and the effects of the Japanese catastrophe, the
AUD has reclaimed its strengthening trend as improving
fiscal and solid external account fundamentals, strong ties
to Asia and exposure to highly bid commodities all work in
its favour. An eventual resumption of monetary tightening
will further support the currency towards the end of 2011.
Australia’s economic expansion will average over 3.2% y/y
in 2011-12. Although GDP contracted during the first quar-
ter of 2011, local demand remained steady on the back of
rising investment and consumer spending underpinned by
falling unemployment. Although recent extreme weather
dented consumer confidence, employment prospects re-
main supportive. The initial unfavorable effect from the ex-
pected slowdown in Japan should be compensated for by
higher demand during reconstruction. Inflation will continue
to challenge the central bank’s 2-3% target range as global
raw material costs are added to local supply-side pressures
resulting from crop destruction and labour displacements.
Annual inflation picked up to 3.3% y/y in the first quarter,
with underlying pressures accentuating as services costs
underpinned a rise in core inflation with goods price gains
falling on the back of AUD strength. We expect the Reserve
Bank of Australia to resume tightening sometime in 2011Q3
after keeping the status quo for five straight meetings.
June 2011
Foreign Exchange
Outlook
Oscar Sánchez +1 416 862-3174
CHINA - Renmimbi (CNY) strength will remain the rule
through 2012, as gradual CNY appreciation is a primary
component of a concerted policy to tighten monetary condi-
tions while promoting domestic market development. While
no material structural change in China’s currency regime is
foreseen, we anticipate accelerating CNY appreciation with
year-end rates of CNY6.25 per USD for 2011 and CNY5.88
for 2012. China has become the world’s second largest
economy measured in purchasing power parity terms, with
its condition as the global growth pace-setter intensifying
with the country’s rising domestic demand balanced by still
solid export growth. We expect GDP growth to exceed 9.3%
in 2011-12. Elevated lending by state-controlled banks un-
derpins double-digit gains in investment spending, while
consumption remains supported by real wage gains associ-
ated with productivity improvements. Inflation will remain a
primary concern in 2011. While rising food prices have been
behind the recent buildup in headline inflation, elevated raw
material costs loom in the background with the gradual rise
in the CNY helping to contain the inflationary impact. We
expect headline CPI inflation to average 5.5% y/y in 2011.
Although an inflationary rebound is not discarded in the
months ahead, spillovers have been limited as non-food
inflation remains below 3%. We expect three more tighten-
ing adjustments by the People’s Bank of China to take the
benchmark interest rate to 7.06% by the end of 2011.
NEW ZEALAND - The New Zealand dollar (NZD) is sup-
ported by favourable terms of trade as the country’s ex-
ports remain the bright spot in the midst of the downshift
caused by regional disasters. Foreign sales of agricultural
products remained steady through April, with exports to
Japan and South Korea picking up opportunistically. Busi-
ness activity retained a solid up-tone through May, with
agri-business investment increasing on the back of external
account improvements. While consumer sentiment remains
downtrodden as a result of the Christchurch earthquake in
February, a slight downtick in the unemployment rate dur-
ing the first quarter could be the start of an improvement as
the outlook for corporations improved on the back of lower
credit costs. Inflation remains well above the central bank’s
1-3% comfort zone, after picking up to 4.5% y/y during the
first quarter. Signs of improving domestic demand condi-
tions emerged as non-tradable goods prices advanced
ahead of the headline, consistent with rising services costs
and a somewhat tighter labour market. The central bank
remains sanguine about price pressures as it attempts to
support the economic rebound, having left the benchmark
official cash rate unchanged at 2.5% after the March 50
basis point reduction. While output must have been ad-
versely affected during January-March period, we antici-
pate a rebound in the second quarter as New Zealand con-
tinues to rip the benefits of a still dynamic Asian region.
9
Global Economic Research June 2011

Foreign Exchange
Outlook
DEVELOPING ASIA
Currency Outlook Sacha Tihanyi +1 416 862-3154

INDIA - USDINR’s temporary push back above 45.00 reflected not only the forces of risk aversion, but also the lack of
support from India’s macro fundamentals. While the INR was not the worst EM Asian FX performer in May, it is set to un-
derperform the currency group on an easing in risk aversion, despite an ability to recover against the USD. The late May
break of the one-month uptrend in USDINR should be a catalyst for a retracement lower. We look for USDINR at 44.80 as
of Q4 2011.

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

THAILAND - The THB weakened in May, though at a fairly stable and measured pace, outperforming much of EM Asia
which speaks to the low volatility nature of the baht. Despite this, the topside of the multi-month bear channel that had
been in place for USDTHB was broken, though 30.50 remains a key point of topside resistance. We look for USDTHB to
reassert its downside trajectory on proactive monetary policy and very THB-supportive financial and current account dy-
namics. We target 29.0 for USDTHB by Q4 2011.

HONG KONG - The HKD slipped to a one and a half month low against the USD during May, though USDHKD re-
mained within the lower end of its 7.75-7.85 convertibility range. Renminbi deposits in Hong Kong continue to build at a
very rapid pace, driven predominantly by trade flows. The HKMA has nonetheless reiterated that there is no intention to
(and no danger of a) shift away from a USD peg in Hong Kong. We expect USDHKD to trade towards 7.75 by Q4 2011.
Currency Trends
Going Back Spot Outlook
FX Rate FX Rate
12 m 6m 3m 3-Jun 3m 6m 12 m
USDINR 46.37 45.89 45.27 44.82 44.95 44.84 44.25 USDINR
USDKRW 1202 1159 1129 1080 1071 1063 1035 USDKRW
USDTHB 32.52 30.21 30.60 30.35 29.75 29.18 28.58 USDTHB
USDHKD 7.79 7.77 7.79 7.78 7.77 7.75 7.75 USDHKD
USDINR USDKRW
47.60
1245
47.00
1215

46.40
1185

45.80 1155

45.20 1125

44.60 1095

44.00 1065
Jun-10 Aug-10 Oct-10 De c-10 Fe b-11 Apr-11 Jun-11 Jun-10 Aug-10 Oct-10 De c-10 Fe b-11 Apr-11 Jun-11

USDTHB USDHKD
32.70 7.810

32.15 7.800

31.60 7.790

31.05 7.780

30.50 7.770

29.95 7.760

29.40 7.750
Jun-10 Aug-10 Oct-10 De c-10 Fe b-11 Apr-11 Jun-11 Jun-10 Aug-10 Oct-10 De c-10 Fe b-11 Apr-11 Jun-11

10
Global Economic Research
DEVELOPING ASIA
Fundamental Commentary
INDIA - Widening interest rate and growth differentials will
further support the Indian rupee (INR) through 2011 despite
a spike in volatility during the second quarter. Rising portfo-
lio investment flows and the prospect of further monetary
tightening will reinforce a strengthening trend for the INR.
India’s economic expansion will average over 8.3% y/y in
2011-12. The economy continued to expand at a solid pace
through the first quarter of 2011 after an 8.3% gain in 2010,
with private local spending on an upturn. Up-trending dis-
cretionary spending will compensate for the downtrend in
government outlays with public infrastructure projects still
fanning the economic expansion. Exports have remained on
an expansionary trend with monthly purchasing manager
surveys continuing to point to expanding orders. With sup-
port from domestic demand for consumer goods, several
industrial sectors have turned the corner with leading indi-
cators on the upside contrasting regional trends. Inflation
remains a key concern as yearly price gains continue to top
Asian economies. Rising food and fuel costs continue to
underpin wholesale price gains which read 8.7% y/y in lat-
est data. Agricultural prices rose at the slowest pace in 18
months (7.5% y/y). However, accelerating manufacturing
costs evidence spillovers of rising raw material and fuel
costs. The Reserve Bank of India’s main concern is a
buildup in inflation expectations leaving it compelled to raise
interest rates in coming months until there is clear evidence
of stabilization.
THAILAND - Thai baht (THB) appreciation will characterize
the foreign exchange environment in 2011-12. On the back
of intensifying political turmoil and corrective forces in Asian
equity markets, the THB entered a soft phase in early May
after three months of appreciation versus the US dollar.
While the first-half of 2011 will remain politically charged
due to the July elections, the government will not hesitate to
use a sizable international reserve stock to support the cur-
rency. The economy will continue to reap the benefits of a
privileged geographical location in Southeast Asia, with ac-
tivity supported by balanced growth as domestic demand
momentum runs alongside still sound foreign sales. GDP
expanded at a solid 2% q/q rate during the first three
months of 2011 on the back of net export gains. Some re-
trenchment in manufacturing output is expected during the
second quarter as a result of spillovers from the Japanese
catastrophe. Consumer and investment spending are cur-
rently advancing at an over 5% yearly rate, attesting to the
solidity of the domestic demand picture. Inflationary pres-
sures have intensified as a result of the upbeat tone in local
activity and the imported rise in food and fuel costs. Head-
line consumer inflation is on an upward trend, standing cur-
rently at 3.1% y/y, with core inflation also picking up recently
to 1.6%, well within the Bank of Thailand’s 0.5 – 3% target
range. Looking ahead, further interest rate adjustments are
expected as monetary normalization is pursued.
June 2011
Foreign Exchange
Outlook
Oscar Sánchez +1 416 862-3174
KOREA - The Korean won (KRW) will keep a strengthening
tone through 2011-12 on the back of sustained economic
growth and monetary policy skewed towards inflation con-
tainment. While the Bank of Korea (BoK) stands ready to
dampen excessive appreciation, the healthy economic re-
balancing underway will continue to attract foreign capital
flows. While the BoK is in interest rate normalization mode,
a slow in the pace of tightening is envisaged as activity
shifts down. The Korean economy will converge towards
medium term speed in 2011. GDP advanced at a solid 5.6%
quarterly annualized rate during the first quarter on the back
of net export gains. Although foreign sales have exhibited
persistent momentum we do not foresee outperformance
this year. Domestic demand slowed on the back of waning
government stimulus amid expiring durable goods subsi-
dies, with evidence of rising credit costs starting to bite on
highly indebted households. With consumption and invest-
ment spending accounting for 60% and 30% of GDP, re-
spectively, the softer tone on the external trade front will
translate into slower spending at home. We expect the
economy to expand at an average 5% in 2011-12. Headline
inflation has surpassed the central bank’s 3% ±1% target,
with core already over 3%. Falling unemployment has cou-
pled with recently declining real wages, signaling a dimin-
ished threat of an inflationary spiral.
HONG KONG - The Hong-Kong dollar (HKD) will retain its
peg with the US dollar for the foreseeable future. A shift
towards the Chinese renmimbi (CNY) is unlikely until capital
account convertibility is satisfied, and the growth of a robust
and multi-faceted offshore CNY market is realized in Hong
Kong. Economic activity is steadily improving as domestic
consumption continues to outperform on the back of falling
local unemployment. GDP growth accelerated to a 2.8% q/q
(non-annualized) rate in the first quarter, as surging house-
hold spending combined favourably with booming exports.
Latest foreign sales data suggest, however, an adverse ef-
fect from the supply-chain disruptions rooted in Japan. La-
bour market conditions continue to tighten significantly, with
the jobless rate still hovering around historical lows, under-
pinning Hong Kong’s solid domestic spending profile. Activ-
ity has been supported by a combination of loose monetary
conditions imported from the US and a somewhat expan-
sionary local fiscal stance. Rising inflation in the mainland,
HKD weakness and accelerating import costs are feeding
local price pressures. Headline and core inflation have both
trended upwards reaching 4.6% y/y and 3.2% in April, re-
spectively. The uptick in inflation is the result of rising food
and fuel prices as well as local rental costs, with minimum
wages lifted in May in tandem with further subsidies on
electricity and housing. In turn, negative real interest rates
underpin asset price gains, further supporting domestic
spending.
11
Global Economic Research June 2011

Foreign Exchange
Outlook
DEVELOPING AMERICAS
Currency Outlook Pablo F.G. Bréard +1 416 862-3876

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

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

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

PERU - The Peruvian Sol (PEN) continues to be influenced by investors’ heightened awareness of political risk linked to
the presidential electoral cycle. Elections aside, Peru continues to offer a favourable economic growth outlook due to the
combination of sizable investment activity coupled with robust trade demand and local consumption. Widening interest
rate differentials and central bank intervention will also be factors affecting PEN trends in the near term.

Currency Trends
Going Back Spot Outlook
FX Rate FX Rate
12 m 6m 3m 3-Jun 3m 6m 12 m
USDBRL 1.82 1.71 1.66 1.58 1.59 1.60 1.64 USDBRL
USDMXN 12.93 12.49 12.10 11.71 11.71 11.94 12.06 USDMXN
USDCLP 530 487 476 468 471 478 484 USDCLP
USDPEN 2.85 2.83 2.77 2.76 2.75 2.73 2.69 USDPEN
USDBRL USDMXN
13.2
1.87
13.0
1.82

1.78 12.7

1.73 12.5

1.69 12.2

1.64 12.0

1.60 11.7

1.55 11.5
Jun-10 Aug-10 Oct-10 De c-10 Fe b-11 Apr-11 Jun-10 Aug-10 Oct-10 De c-10 Fe b-11 Apr-11 Jun-11

USDCLP USDPEN

543 2.85

529 2.84

515 2.82

2.81
501
2.79
487
2.78
473
2.76
459 2.75
Jun-10 Aug-10 Oct-10 De c-10 Feb-11 Apr-11 Jun-11 Jun-10 Aug-10 Oct-10 De c-10 Fe b-11 Apr-11

12
Global Economic Research
DEVELOPING AMERICAS
Fundamental Commentary
BRAZIL - Brazil continues to benefit from a sound policy
framework, outstanding global trade conditions, an attrac-
tive high-yield environment, improving employment condi-
tions and sustainable credit growth. A persistent weakening
phase affecting the USD is a powerful magnet attracting
capital flows to Brazil, the G10 country with the most ap-
pealing domestic interest rate environment. The central
bank of Brazil has earmarked the fight against inflation as
the single most relevant policy priority. To achieve its infla-
tion control goal, defined by the COPOM team as guiding
the IPCA-based consumer price inflation rate towards the
official target (4.5% +/- 2%) “some time” in 2012, the central
bank remains in aggressive tightening mode. The bench-
mark SELIC rate will be, again, increased at the next CO-
POM meeting scheduled to take place on June 8th. Brazil
will continue to offer global investors an outstanding carry-
trade investment option with a target SELIC rate at 12.25%,
that is, “1,200 bps” over the US Fed Funds rate. Recent
official rhetoric has hinted that the tightening cycle is not yet
over, despite the clear deceleration in domestic economic
activity; according to the most recent survey conducted by
the central bank, the economy will expand by 4% this year,
down from 7.5% in 2010. The monetary authorities, highly
sensitive to the pace of local credit expansion, will continue
to uses as many policy tools as possible to prevent an ex-
cessive increase in inflation-sensitive credit.
CHILE - Chile continues to offer a promising economic (and
currency) outlook despite a recent erosion in the country’s
terms of trade. The CLP has been relatively immune to the
dual negative effect caused by rallying crude oil prices and
correcting copper prices. The trade-intensive Chilean econ-
omy continues to benefit from positive momentum in global
trade fed primarily by persistent demand from Asia. The
largest Asian economies are major consumers of Chilean
products. In addition, there is a high degree of regionaliza-
tion of currency market dynamics led by dominant econo-
mies such as Brazil. The technical correlation between the
BRL and the CLP has been growing of late, making the CLP
vulnerable to higher event risk stemming from unexpected
developments in Brazil. Nevertheless, for now, the increas-
ing currency convergence within Latin America is a positive
factor reinforcing CLP strength. Inflation has also been influ-
encing the currency outlook; consumer prices increased by
4.3% y/y last May. The Central Bank of Chile has been ad-
justing its monetary policy rate consistently over the past 12
months, offering another CLP-supportive factor; indeed, the
tightening cycle under way has pushed the reference rate
from 0.50% (June 2010) to 5% (today). The next monetary
policy meeting is scheduled for June 14th. In line with the
established process of intervention, the central bank is ac-
cumulating international reserves (currently at US$32 bil-
lion); they are up 25% over the past 12 months.
June 2011
Foreign Exchange
Outlook
Pablo F.G. Bréard +1 416 862-3876
MEXICO - Mexico is enjoying a positive momentum despite
the intensified volatility caused in fixed-income securities
markets as a result of the deteriorating conditions in
Greece. Foreign capital flows continue to eye Mexican debt
and equity securities markets on the back of multiple sup-
porting factors such as interest rate differentials, crude oil
price strength, US economic recovery dynamics, persistent
demand for emerging market assets and relative-value at-
tractiveness within Latin America. The US Federal Reserve
(Fed) continues to influence the government bond yield
curve through its vast holdings of treasury debt securities.
The global benchmark 10-year bond is now offering a yield
below the 3% threshold, fuelling demand for high-yielding
alternatives in emerging market economies. Mexico is a
natural candidate to receive such foreign flows; in fact, the
Mexico-US government bond yield spread, at 390 basis
points (bps), remain a magnet for foreign investors, feeding
demand for the MXN. Energy prices retain a strengthening
bias despite modest adjustments occurring recently as a
reassessment of global growth conditions; the benchmark
WTI is trading at a price of US$100 per barrel after touching
the 115 mark at the end of April. Regional trade dynamics
continue to be another factor supporting a bullish tone in the
MXN; despite persistent weakness in some Fed-sensitive
economic sectors in the US, the recovery in the manufactur-
ing sector is a positive factor for Mexico given the degree of
interdependence between the two economies.
PERU - Election-related political risk has become the domi-
nant piece affecting Peru’s outlook. Peruvians will elect a
new presidential administration on June 5th. The tight race
and erratic messages delivered during the campaign period
have instilled a degree of financial market volatility not seen
in previous years. From a purely macroeconomic perspec-
tive, Peru still offers a promising growth outlook, in the ab-
sence of radical shifts in government policies affecting busi-
ness and consumer confidence. The volatility observed in
local currency markets during May is also a vivid reminder
of the “developing” nature of political institutions in Latin
America; indeed, in March and April, the PEN abruptly de-
coupled from the appreciating trend in place in other re-
gional floating currencies but has recently recovered some
of the lost value, trading at a rate of 2.77 per USD. Despite
a renewed sense of market nervousness and uncertainties
regarding the policy environment, the consensus of both
market participants and economists continues to discount a
period of exchange rate stability in the months ahead. On
the monetary front, the Peruvian central bank remains - in
line with the regional trend - embarked on a process of
monetary tightening which over the past 12 months has
seen a cumulative 300 bps hike in the reference rate to
4.25%. Structurally speaking, Peru is immersed in a virtu-
ous path which will be hard to deviate from, irrespective of
who wins the presidency.
13
Global Economic Research June 2011

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

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

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

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

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

Currency Trends
Going Back Spot Outlook
FX Rate FX Rate
12 m 6m 3m 3-Jun 3m 6m 12 m
USDRUB 30.9 31.5 28.9 27.9 28.0 28.0 28.4 USDRUB
USDTRY 1.57 1.50 1.60 1.59 1.60 1.60 1.59 USDTRY
EURHUF 275 281 271 265 268 269 268 EURHUF
USDZAR 7.67 7.10 6.97 6.74 6.89 6.97 7.12 USDZAR
USDRUB USDTRY

31.6 1.66

30.9
1.60

30.1
1.55
29.4
1.49
28.6

27.9 1.44

27.1 1.38
Jun-10 Aug-10 Oct-10 Dec-10 Feb-11 Apr-11 Jun-11 Jun-10 Aug-10 Oct-10 Dec-10 Feb-11 Apr-11 Jun-11

EURHUF USDZAR
8.00
290

7.75
285

280 7.50

275 7.25

270 7.00

265 6.75

260 6.50
Jun-10 Aug-10 Oct-10 Dec-10 Feb-11 Apr-11 Jun-11 Jun-10 Aug-10 Oct-10 Dec-10 Feb-11 Apr-11 Jun-11

14
Global Economic Research
DEVELOPING EUROPE/AFRICA
Fundamental Commentary
RUSSIA - Domestic politics will be at the centre of investor
attention in the next 12 months as parliamentary elections
are scheduled for December, followed by a presidential bal-
lot a few months later. Both President Medvedev and Prime
Minister Putin are considering running for presidency; how-
ever, an official decision regarding who is the ruling United
Russia party’s candidate has not yet been made. Russian
economic activity cooled somewhat in the first quarter of
2011, with real GDP expanding by 4.1% y/y compared with
4.5% in the final quarter of 2010. While developments in
crude oil and natural gas prices will significantly impact the
Russian economic outlook, household spending remains
weak on the back of high inflation and challenging labour
market conditions (the unemployment rate was 7.2% in
April). Exports remained strong during the January-March
period, though some cooling can be expected in the months
ahead. We expect the country’s real GDP growth to aver-
age 4¼% through 2012 following a 4.0% expansion in
2010. Inflation accelerated to 9.6% y/y in April from 9.5%
the month before. Accordingly, the Russian central bank
tightened monetary conditions on May 30th by raising the
overnight deposit rate by 25 basis points to 3.5% while
keeping the benchmark refinancing rate unchanged at
8.25%. Policymakers will likely take a break from further
monetary tightening in the near term in order to assess the
impact of recent measures.
HUNGARY - Hungarian monetary authorities will likely con-
tinue to sit on the sidelines in the coming months. Following
the May 16th Monetary Council meeting, the benchmark
interest rate was kept unchanged at 6.0% for the fifth con-
secutive month. While inflationary pressures are intensify-
ing on the back of elevated commodity prices (the headline
inflation rate accelerated to 4.7% y/y in April from 4.5% the
month before), still-weak domestic demand and weak em-
ployment conditions (the unemployment rate was 11.4% in
April) should alleviate any demand-driven pressure on
prices. We expect inflation to close the year at 4.0% y/y,
before easing towards the central bank’s 3.0% target by the
end of 2012. Economic growth is supported by strong ex-
ternal demand. Real GDP expanded by 0.7% q/q (2.4% y/
y) in the first quarter of the year, accelerating from the 0.2%
q/q (1.9% y/y) pace recorded in the final quarter of 2010.
We expect the country’s output to grow by 2½% this year
and to accelerate to 3% in 2012 as the recovery becomes
more broadly-based. Hungary remains in fiscal consolida-
tion mode as it aims to restore investor confidence in the
sustainability of public finances. Nevertheless, market par-
ticipants remain somewhat wary of the government’s com-
mitment to the implementation of planned structural re-
forms. Public accounts will show a surplus of around 2.0%
of GDP this year (compared with a deficit of 4.2% in 2010)
due to one-off private sector pension transfers.
June 2011
Foreign Exchange
Outlook
Tuuli McCully +1 416 863-2859
TURKEY - Turkish general elections will be held on June
12th and the ruling Justice and Development Party will likely
remain in office for a third consecutive term as the robustly
growing economy offers a favourable background for the
incumbent’s re-election. We expect real GDP to grow by 5%
this year, following an 8.9% expansion in 2010. Strong do-
mestic demand is reflected in rapid credit expansion
(currently around 35% y/y), which the Turkish central bank
is attempting to curb through higher reserve requirements;
authorities aim to ease credit growth to 25% y/y by the end
of the year. We assess that policymakers will start raising
the key interest rate in the second half of the year as infla-
tion expectations continue to rise and further efforts by the
central bank are required to limit soaring credit growth. Fol-
lowing the Monetary Policy Committee meeting on May
25th, the benchmark interest rate was kept on hold at 6.25%
for the fourth consecutive month. Inflationary pressures are
rebuilding, with the consumer price index increasing by
4.3% y/y in April following a print of 4.0% the month before;
we expect the inflation rate to rebound to around 6½% y/y
by the end of 2011. Despite the authorities’ efforts to ease
capital inflows by keeping the interest rate level low, the
current account deficit continues to widen rapidly, reaching
around 8% of GDP in 2011 compared with 6.7% in 2010.
SOUTH AFRICA - Price stability in South Africa is threat-
ened by higher administered prices, wage settlements and
elevated commodity prices. Consumer price inflation accel-
erated to 4.2% y/y in April from 4.1% the month before; nev-
ertheless, it remains comfortably within the South African
Reserve Bank’s (SARB) 3-6% target inflation range. We
expect inflation to approach the upper limit of the range to-
ward the end of 2011. Regardless, because inflationary
pressures are not demand-driven, the SARB opted to keep
the benchmark interest rate unchanged at 5.5% following
the Monetary Policy Committee meeting on May 12th. We
do not foresee any changes to the monetary policy stance
in the near term. South African economic performance con-
tinues to improve gradually. Real GDP growth accelerated
to 4.8% q/q (annualized) in the first quarter of 2011 from
4.5% in the October-December period, with the robust
manufacturing sector together with finance, real estate and
business services being the main contributors to economic
activity. We expect the country’s real GDP growth to aver-
age 3¾% through 2012. With the trade balance moving
from a surplus position to a deficit, the current account is set
to widen significantly from 2.6% of GDP in 2010 to around
5% of GDP in 2012. In the context of the country’s low sav-
ings rate and its dependence on volatile portfolio investment
inflows, the shortfall points to modest selling pressures of
the ZAR in the next two years.
15
Global Economic Research June 2011

Foreign Exchange
Outlook

GLOBAL CURRENCY FORECAST (end of period)

2009 2010 2011f 2012f 2011f 2012f
Q1a Q2 Q3 Q4 Q1 Q2 Q3 Q4
MAJOR CURRENCIES
Japan USDJPY 93 81 84 90 83 79 82 84 86 87 89 90
Euro zone EURUSD 1.43 1.34 1.50 1.50 1.42 1.47 1.49 1.50 1.48 1.48 1.50 1.50
EURJPY 133 109 126 135 118 116 122 126 127 129 134 135
UK GBPUSD 1.62 1.56 1.65 1.70 1.60 1.64 1.64 1.65 1.65 1.67 1.69 1.70
EURGBP 0.89 0.86 0.91 0.88 0.88 0.90 0.91 0.91 0.90 0.89 0.89 0.88
Switzerland USDCHF 1.04 0.93 0.85 0.84 0.92 0.85 0.86 0.85 0.85 0.85 0.84 0.84
EURCHF 1.48 1.25 1.28 1.26 1.30 1.25 1.28 1.28 1.26 1.26 1.26 1.26

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

CADUSD 0.95 1.00 1.08 1.09 1.03 1.05 1.06 1.08 1.06 1.06 1.08 1.09
Mexico USDMXN 13.1 12.3 12.0 12.3 11.9 11.6 11.8 12.0 12.1 12.0 12.1 12.3
CADMXN 12.4 12.4 12.9 13.4 12.3 12.2 12.5 12.9 12.9 12.8 13.0 13.4
Argentina USDARS 3.80 3.98 4.40 5.00 4.05 4.13 4.26 4.40 4.54 4.69 4.84 5.00
Brazil USDBRL 1.74 1.66 1.60 1.70 1.63 1.58 1.59 1.60 1.62 1.65 1.67 1.70
Chile
South

USDCLP 507 468 480 490 477 467 474 480 482 485 487 490
Colombia USDCOP 2044 1908 1800 1880 1871 1790 1795 1800 1820 1840 1860 1880
Peru USDPEN 2.89 2.81 2.72 2.64 2.80 2.76 2.74 2.72 2.70 2.68 2.66 2.64
Venezuela 1/ USDVEB 2.15 4.29 4.30 5.15 4.29 4.29 4.29 4.30 4.50 4.70 4.92 5.15

ASIA / OCEANIA
Australia AUDUSD 0.90 1.02 1.09 1.11 1.03 1.07 1.08 1.09 1.09 1.10 1.10 1.11
China USDCNY 6.83 6.61 6.25 5.88 6.55 6.45 6.35 6.25 6.16 6.06 5.97 5.88
Hong Kong USDHKD 7.75 7.77 7.75 7.75 7.78 7.77 7.76 7.75 7.75 7.75 7.75 7.75
India USDINR 46.5 44.7 44.8 43.5 44.6 45.0 44.9 44.8 44.5 44.1 43.8 43.5
Indonesia 2/ USDIDR 9.40 9.00 8.54 8.40 8.71 8.54 8.54 8.54 8.50 8.47 8.43 8.40
Malaysia USDMYR 3.43 3.06 2.89 2.78 3.03 2.99 2.94 2.89 2.86 2.83 2.81 2.78
New Zealand NZDUSD 0.72 0.78 0.78 0.80 0.76 0.82 0.80 0.78 0.78 0.79 0.79 0.80
Philippines USDPHP 46.2 43.8 42.0 40.0 43.4 43.1 42.5 42.0 41.5 41.0 40.5 40.0
Singapore USDSGD 1.40 1.28 1.21 1.20 1.26 1.23 1.22 1.21 1.21 1.21 1.20 1.20
South Korea USDKRW 1164 1126 1060 1000 1097 1076 1068 1060 1045 1030 1015 1000
Thailand USDTHB 33.4 30.1 29.0 28.0 30.3 30.1 29.6 29.0 28.7 28.5 28.2 28.0
Taiwan USDTWD 32.0 29.3 27.8 26.5 29.4 28.5 28.2 27.8 27.5 27.1 26.8 26.5

EUROPE / AFRICA
Czech Rep. EURCZK 26.4 25.0 24.0 24.0 24.5 24.5 24.2 24.0 24.0 24.0 24.0 24.0
Iceland USDISK 126 115 115 110 114 115 115 115 114 112 111 110
Hungary EURHUF 270 279 270 265 266 267 268 270 269 267 266 265
Norway USDNOK 5.79 5.82 5.25 5.15 5.54 5.44 5.35 5.25 5.23 5.20 5.18 5.15
Poland EURPLN 4.10 3.96 3.90 3.80 4.02 3.94 3.92 3.90 3.87 3.85 3.82 3.80
Russia USDRUB 30.0 30.5 28.0 29.0 28.4 28.0 28.0 28.0 28.2 28.5 28.7 29.0
South Africa USDZAR 7.40 6.63 7.00 7.30 6.77 6.83 6.91 7.00 7.07 7.15 7.22 7.30
Sweden EURSEK 10.25 8.99 8.70 8.60 8.95 8.86 8.78 8.70 8.67 8.65 8.62 8.60
Turkey USDTRY 1.50 1.54 1.60 1.57 1.55 1.59 1.60 1.60 1.59 1.58 1.58 1.57

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

16
Global Economic Research June 2011

Foreign Exchange
Outlook

INTERNATIONAL RESEARCH GROUP

Pablo F.G. Bréard, Head

pablo_breard@scotiacapital.com

Daniela Blancas
daniela_blancas@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

Eric Theoret
eric_theoret@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.