Global Economic Research August 2010

Persistent USD weakness, increasing official intervention in

Asia, commodity market strength, strong demand for
emerging market assets and divergent interest rate
normalization patterns will shape the global currency outlook
in the near term.

The currency market in the Americas is dictated by asset

diversification dynamics from a weakening USD, and delayed
monetary tightening in the US in the context of fragile
employment and housing markets. Commodity-linked
currencies such as the CAD, MXN, BRL and CLP continue to
face solid demand.

The EUR maintains a strengthening tone. Stress tests

conducted on major European banks eased investors’
concerns about debt sustainability and systemic risk factors.
The GBP is on the rebound supported by improving growth
and monetary prospects. The RUB and TRY remain strong.

The Asian currency outlook is promising. The JPY strength

may prompt deeper intervention activity by major regional
central banks while the CNY will soon resume a gradual
appreciating path.

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 August 2010

Global Foreign Exchange Outlook

August 5, 2010 Actual Q1 10 Q2 10 Q3 10 Q4 10 Q1 11 Q2 11 Q3 11 Q4 11
EURUSD 1.32 1.35 1.22 1.22 1.24 1.26 1.28 1.29 1.30
Euro Consensus* 1.35 1.22 1.20 1.20 1.20 1.20 1.20 1.21
USDJPY 85.9 93.5 88 90 92 94 95 95 97
Yen Consensus* 93.5 88 94 95 97 99 99 99
GBPUSD 1.59 1.52 1.49 1.50 1.53 1.54 1.56 1.56 1.55
Sterling Consensus* 1.52 1.49 1.43 1.44 1.44 1.45 1.46 1.48
USDCAD 1.01 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 0.91 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 12.51 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

Fe 6
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

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 Sacha Tihanyi +1 416 862-3154
Increasing evidence of global economic deceleration, re-
newed US dollar (USD) weakness, heightened interven-
tion activity by central banks, deepening fiscal stabiliza-
tion measures, commodity market strength, divergent
monetary policy dynamics and gradual progress in global
financial sector stabilization remain, in aggregate, the key
global issues shaping near-term capital flows in foreign
exchange markets.
The US economy recovered centre stage in global inves-
tors’ minds. Measured through the trade-weighted DXY
index, the USD has lost almost 9% against major peer
currencies over the past two months. Negative USD senti-
ment is persisting, which could lead to further near term
USD downside. However, a period of consolidation may
follow as investors reassess their views on the global eco-
nomic recovery, European sovereign debt and banking
sector stress, and expected shifts in monetary conditions
in the most advanced economies. Official statements
made by the US Federal Reserve (Fed) reminded market
participants of the fragile conditions still present in US
labour and housing markets. Notwithstanding progress in
stabilizing the financial sector, the Fed highlighted the
persistence of asset quality troubles in certain segments
of the US banking sector. Investors are increasingly incor-
porating the likelihood of potential credit easing measures
(i.e., asset purchases) by the US monetary authorities.
Within the NAFTA zone, intensifying USD weakness cou-
pled with rising energy prices led to further appreciation of
the Canadian dollar (CAD) and the Mexican peso (MXN).
The CAD continues to receive a positive boost from the
outlook for widening interest rate differentials between
Canada the US, as the Fed is hinting that no hike in short-
term interest rates is in prospect in the near term. Official
rhetoric emphasized that containment of inflationary ex-
pectations is robust despite rallying energy prices.
In Europe, sovereign debt sustainability concerns (and
the adverse implications on growth prospects from fiscal
tightening measures) remain a critical issue shaping
global risk appetite/aversion. However, the outcome of
the stress tests conducted on the European financial sec-
tor moderated – not eliminated – investors’ concerns re-
garding the systemic health of the region’s major banking
institutions. The euro (EUR) has been a major beneficiary
of the relentless weakness in the USD; however, signs of
technical resistance may soon appear, leading to a proc-
ess of consolidation of recent gains and further stabiliza-
tion. The British pound (GBP) continues to enjoy positive
momentum, on the grounds of encouraging economic
prospects, widening interest rate differentials and signs of
systemic strengthening of major UK banks. We expect
GBPUSD’s gains, which has rebounded from its low of
1.4231 on May 20th, to moderate from here and hold a
year-end target of 1.53. The Russian ruble (RUB) and the
August 2010
Camilla Sutton +1 416 866-5470
Turkish lira (TRY) have enjoyed a period of sustained
gains whereas the Hungarian forint (HUF) adopted a de-
fensive tone against the EUR due to intensifying concerns
about fiscal sustainability and uncertainties regarding an
agreement with the International Monetary Fund.
The Asian currency outlook remains bright. Growth and
interest rate differentials (as top-tier developing countries
embrace a monetary tightening cycle) are intensifying
demand for Asian assets. The Japanese yen (JPY) has
re-emerged as a market favourite during periods of con-
certed USD stress; in fact, relentless strengthening of the
JPY – and the potential negative impact on the export
sector – has revived fears of outright intervention by the
Japanese authorities in currency markets to moderate the
pace of currency strength. From a macroeconomic funda-
mental perspective, persistently strong growth, yet some-
what moderating in China and India, coupled with a sur-
prisingly sharper recovery in Japan, has injected an ap-
preciating bias into virtually all regional floating currencies
such as the Korean won (KRW), Malaysian ringgit (MYR)
and the Taiwanese dollar (TWD). In all these jurisdictions,
official intervention has become the norm in an effort to
mitigate the adverse economic impact of a strengthening
currency environment. Even the Thai baht (THB), which
was affected by heightened socio-political tensions,
seems to be stabilizing in a trading range. The Chinese
renminbi (CNY) is immersed in a stabilization phase fol-
lowing the introduction of a more flexible currency ar-
rangement in late June; indeed, the Chinese central bank
counts on US$2.5 trillion in international reserves, thereby
strengthening its power to dictate exchange rate move-
ments at ease. We expect that the CNY will resume an
appreciating path and close the year at 6.60 per USD.
Commodity price strength has fuelled demand for energy-
rich and metals-sensitive currencies such as the Austra-
lian dollar (AUD), South African rand (ZAR), Chilean peso
(CLP) and the RUB. In addition, delayed interest rate nor-
malization in the US and Europe continue to drive capital
flows towards high-yielding emerging-market currencies.
In the context of relatively low global risk aversion, all de-
veloping-market jurisdictions have benefitted from in-
creasing foreign capital inflows. In Latin America, how-
ever, regional currencies, which continue in strengthening
mode versus the USD on the back of robust growth differ-
entials and supportive commodity markets, may soon
face a period of profit taking and technical resistance. The
Brazilian real (BRL) has consolidated itself as a leading
currency in the world economy and a key barometer of
global investor risk appetite for Latin American currencies.
Brazil has led – and activated – a regional monetary tight-
ening phase in South America, while Mexico remains
more influenced by US economic developments and
monetary policy dynamics.
3
Global Economic Research August 2010

CANADA Camilla Sutton +1 416 866-5470

Sacha Tihanyi +1 416 862-3154

The average trading level of the Canadian dollar against the US dollar during the month of July was the weakest since
February of this year. Though Canadian economic fundamentals remain very solid, shorter term US economic indicators
continue to show a perceptible decline in the underlying growth momentum of the US economy. This led to a deteriora-
tion in what had been robust CAD-bullish speculative sentiment, leading to a noticeable increase in short CAD positions.
Though the market seems to be pricing the knock-on effect of a US growth slowdown into the CAD, we view the incom-
ing data as only marginally impacting the 2010/2011 growth outlook; we expect the Canadian economy to grow by 3.3%
in 2010 and 2.6% in 2011. With the release of the July monetary policy report, the Bank of Canada pushed out the date
for which it expects the Canadian output gap to close by two quarters (to the end of 2011). However, the Bank’s outlook
for Canada’s core inflation profile remained stable, at close to 2% through the end of 2012. The lack of any deflationary
concerns, along with the sustained strong performance of the Canadian labour market, justifies the Bank’s continued
tightening bent for monetary policy, a key supportive factor for the currency. However, we only expect another 25 basis
points of tightening in the short-term rate by the end of this year, before the Bank resumes increases in 2011. On the
external front, international capital flows into Canada have been highly robust. The most recent data from May shows a
record net $23.2 billion inflow of foreign money into Canada, predominantly focused on government fixed income securi-
ties, as Canada’s constructive fiscal profile continues to underscore CAD strength. Thus, even though we have ob-
served a weaker average CAD trading level over the month of July, its inability to retest 2010 lows implies that with such
a solid fundamental backdrop, periods of CAD weakness will be only temporary, rather than indicative of a trend. The
global macro outlook remains very positive with emerging Asia and Latin America continuing to lead growth. This will
ensure that commodity prices remain supportive and sustain global energy consumption. Additionally, speculative senti-
ment has improved over early July levels with net CAD longs stabilizing as short positions hit their lowest since April of
2004. This is consistent with our view that it is a risky prospect to be short such a fundamentally sound currency.

Currency Trends
Going Back Spot Outlook
FX Rate FX Rate
12 m 6m 3m 5-Aug 3m 6m 12 m
AUDCAD 0.901 0.946 0.941 0.926 0.906 0.907 0.908 AUDCAD
CADJPY 87.9 84.3 92.2 84.7 90.1 93.0 97.3 CADJPY
EURCAD 1.536 1.484 1.353 1.340 1.235 1.242 1.253 EURCAD
USDCAD 1.078 1.070 1.018 1.014 1.007 0.997 0.977 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
Aug-09 Oct-09 Dec-09 Fe b-10 Apr-10 Jun-10 Aug-10 Aug-09 Oct-09 De c-09 Fe b-10 Apr-10 Jun-10 Aug-10

EURCAD USDCAD

1.60 1.11

1.56
1.09
1.51
1.47 1.06
1.43
1.38 1.04

1.34
1.01
1.29
1.25 0.99
Aug-09 Oct-09 De c-09 Fe b-10 Apr-10 Jun-10 Aug-10 Aug-09 Oct-09 De c-09 Fe b-10 Apr-10 Jun-10 Aug-10

4
Global Economic Research
CANADA AND UNITED STATES
Fundamental Commentary
UNITED STATES - Our base case is that job growth will
accelerate into year-end and early next year, while inflation
will continue to moderate through 2010, before beginning
to rise towards 2% in the second half of 2011. As such, the
Fed will remain on hold before embarking on a gradual pol-
icy tightening in the first half of next year. The next six
months are key to our views on rates; if the job market con-
tinues to disappoint, then the Fed may further delay its
tightening cycle. The U.S. economy advanced at a slower
pace than expected in the second quarter, but still posted
the fourth consecutive quarterly increase. Real GDP ex-
panded by 2.4% q/q annualized, slightly below the consen-
sus forecast of 2.6%. While the top print may have disap-
pointed, the underlying data are stronger, with most of the
strength concentrated in domestic demand. The mix of
growth still looks reasonably solid, with final domestic de-
mand posting growth of 1.3% q/q annualized, up from 1.1%
in the previous quarter. As such, it added 4.1 percentage
points to the GDP headline, the most since the first quarter
of 2006, well before the onset of the recession. The in-
crease in real GDP in the second quarter primarily reflected
positive contributions from non-residential fixed investment
(1.6 percentage points), exports (1.2 percentage points),
personal consumption expenditures (1.1 percentage
points), private inventory investment (1.0 percentage
points), federal government spending (0.8 percentage
points), and residential fixed investment (0.6 percentage
points). Imports took away 3.9 percentage points from the
headline, as demand for foreign goods picked up in the
second quarter, business equipment in particular. Exclud-
ing international trade (both imports and exports), domestic
demand advanced 5.1% q/q annualized.
MONETARY POLICY COMMENTARY Derek Holt +1 416 863-7707
UNITED STATES - The outlook for the Fed is marked by
enormous uncertainties. If the Fed does not begin gently
lifting rates by Q2 of 2011, then it could remain sidelined
until as long as 2013-14. An in-between scenario seems
unlikely, as 2012 is the expected year of stepped-up fiscal
retrenchment, Basel III, and a presidential election. Hiking
at that time would have monetary, fiscal and regulatory pol-
icy all tightening simultaneously. Historically, the Fed has
hiked in seven of the past eleven Presidential election
years, but there has never been such a debate over Fed
independence occurring simultaneously to sharp downside
risks to growth by the next presidential election. The Fed is
unlikely to tempt controversy by commencing a hiking cam-
paign during the challenges of 2012 versus, at best, gently
lifting off the emergency floor. What’s more, the Fed has
enormous other powers (reverse repos, term deposit sales)
to withdraw liquidity, and is likely to exercise these first in a
process measured in years.
August 2010
Adrienne Warren +1 416 866-4315
Gorica Djeric +1 416 862-3080
CANADA - After a strong turn-over-the-year performance,
Canada’s economic expansion has lost some momentum,
mirroring the broader slowing trend in global growth. We
expect real GDP increased around a 2½% annualized rate
in the second quarter, less than half its first-quarter ad-
vance. Job creation has been one important area which
continues to outperform expectations. The economy has
recouped virtually all of its recession job losses as of June,
and hiring surveys pointing to further modest gains in the
months ahead. Nonetheless, consumer sentiment and big-
ticket spending have cooled over the summer, suggesting
some trepidation among households over the sustainability
of the global economic recovery. Housing activity too has
rapidly come off the boil as high home prices, tighter lend-
ing criteria and recent tax increases 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 commodity pric-
ing, 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 stockpiles at the manufacturing, wholesale and
retail levels. Leading composite indictors are still showing a
broadly based expansion. While slowing global growth is
expected to moderate the growth in domestic export vol-
umes 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 perform-
ance ladder.
Gorica Djeric +1 416 862-3080
CANADA - The Bank of Canada (BoC) raised its overnight
rate by 25 bps to 75% on July 20th; however, its latest pol-
icy statement was mildly more dovish. On global growth
expectations, the BoC generally flags more concern. The
consensus is calling for further tightening on September 8th,
after which views diverge. We expect the BoC to be on
hold for the last two meetings of 2010, October 19th and
December 7th. The key to the July Monetary Policy Report
was the BoC’s effort toward explaining why – despite push-
ing out, by two additional quarters to Q4 2011, the point at
which the capacity gap closes – it has chosen to leave its
inflation views largely unchanged. Downside influences
include lower commodity prices, fiscal repair, the transitory
effects of the HST and dissipating wage growth. Upside
factors comprise a weaker loonie, sticky price expectations
and rising inflationary pressures as the capacity gap nar-
rows. Overall, a fair balancing of projected influences that
supports further withdrawal of monetary stimulus.
5
Global Economic Research August 2010

MAJOR CURRENCIES Camilla Sutton +1 416 866-5470

Currency Outlook Sacha Tihanyi +1 416 862-3154

EURO ZONE - EURUSD remains in a sharp bull channel since reaching a bottom in early June. Should the channel trend
hold, EURUSD is on track to close August somewhere within channel support and resistance at 1.3325 and 1.3850 re-
spectively. The combination of a dovish Fed and a softening economic outlook, risking a sudden revival of the USD
funded carry trade, are all supporting EUR’s push higher. Accordingly, a test up to 1.35 before the rally loses steam
seems increasingly likely. In the medium term, we would expect EUR to drop back below 1.30 as markets refocus on the
large risks that still overhang Europe.

JAPAN - JPY strengthened to its highest level against the USD since late November of 2009 as speculators continued
to rapidly reduce shorts and increase longs through the month. Government policymakers have yet to intervene in the
market, physically or verbally, though further sustained JPY strength may trigger a more forceful response. We expect
USDJPY to close the year at 92.

UNITED KINGDOM - GBP began August with a two month-plus recovery well underway. This constitutes the longest
GBPUSD uptrend in more than a year, though the pair remains well below post-recession highs. GBP speculative posi-
tioning has recovered, becoming less bearish, however the market remains net short pounds. Fundamentally, the combi-
nation of sticky inflation, below trend growth and a central bank that might be forced to tighten policy could stem GBP's
rally into year-end.

SWEDEN - SEK began August on a bid tone, with EURSEK breaking downside support at the 9.40 level. A sustained
trade through this price point brings EURSEK back in line with its pre-financial crisis range against EUR, generally hold-
ing in a 9.00 to 9.50 range.

Currency Trends
Going Back Spot Outlook
FX Rate FX Rate
12 m 6m 3m 5-Aug 3m 6m 12 m
EURUSD 1.43 1.39 1.33 1.32 1.23 1.25 1.28 EURUSD
USDJPY 95 90 94 86 91 93 95 USDJPY
GBPUSD 1.67 1.60 1.53 1.59 1.51 1.53 1.56 GBPUSD
EURSEK 10.25 10.24 9.64 9.40 8.99 9.49 9.41 EURSEK
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
Aug-09 Oct-09 Dec-09 Fe b-10 Apr-10 Jun-10 Aug-10 Aug-09 Oct-09 De c-09 Fe b-10 Apr-10 Jun-10 Aug-10

GBPUSD EURSEK

1.68 10.50

1.65 10.30
1.61
10.10
1.57
9.90
1.53
9.70
1.50

1.46 9.50

1.42 9.30
Aug-09 Oct-09 De c-09 Feb-10 Apr-10 Jun-10 Aug-10 Aug-09 Oct-09 De c-09 Fe b-10 Apr-10 Jun-10 Aug-10

6
Global Economic Research
MAJOR CURRENCIES
Fundamental Commentary
EURO ZONE - The process of financial stabilization in
Europe is gathering speed as concerns regarding fiscal sus-
tainability issues in some highly indebted euro zone coun-
tries are showing some signs of easing. Moreover, the July
23rd release of the European bank stress test results
showed no major systemic weaknesses in the banking sec-
tor’s health. The euro zone is well entrenched on a moder-
ate growth trajectory, at least for now. Investors’ percep-
tions of economic conditions are improving, with the euro
zone’s business and consumer confidence in July jumping
to its highest level in more than two years. Solid industrial
production and export performance point to robust output
growth in the second quarter of the year. While Germany
remains the regional engine of growth, there are significant
differences in economic performance between the core
countries and the euro zone periphery. Moreover, tough
austerity measures implemented in some European nations
to restore fiscal credibility will dampen domestic demand
prospects. We expect that the European Central Bank
(ECB) will maintain an accommodative monetary policy
stance for an extended period of time, maintaining the key
interest rate at 1.0% until the final quarter of 2011. More-
over, price pressures remain well contained. While inflation
picked up to 1.7% y/y in July (according to a ‘flash esti-
mate’) towards the ECB’s target of “below, but close to,
2%”, the rise was likely stemming from higher oil and food
prices, that cannot be directed by monetary policy.
UNITED KINGDOM - Economic recovery in the UK is prov-
ing stronger than previously anticipated – at least for now –
with the manufacturing sector being the driving force. The
preliminary data show that real GDP jumped by 1.1% q/q
(1.6% y/y) in the second quarter of the year following a
0.3% q/q growth rate (-0.2% y/y) in the January-March pe-
riod. Output details show a broad-based expansion across
the services, manufacturing and construction sectors; retails
sales depict a similar story. If output growth (in quarterly
terms) were to remain flat for the rest of the year, carry-over
effects from the first two quarters would take real GDP ex-
pansion to 1.2% this year; we expect the economy to reach
1.4% growth in 2010 as a whole. Nevertheless, forthcoming
fiscal consolidation in the form of tax increases and reduced
government spending will dampen growth prospects in the
medium-term; real GDP will likely expand by 1.2% in 2011.
Indeed, housing sector data are hinting that households are
already becoming more cautious. Accordingly, British mone-
tary policymakers will likely keep the benchmark interest
rate – the Bank Rate – unchanged at 0.5% until the second
quarter of 2011. While inflation eased for a second consecu-
tive month in June to 3.2%, it remains significantly above
the official medium-term target of 2% y/y - and will jump
higher once the 2½ percentage point hike in the value
added tax takes effect in January 2011.
August 2010
Tuuli McCully +1 416 863-2859
Oscar Sánchez +1 416 862-3174
JAPAN - Japanese exports contracted in the second quar-
ter after expanding at an extraordinary 12% q/q rate in the
previous two quarters. Up to this point, exports had been
the key economic driver; however, yen strength vis-à-vis
the euro seems to be withdrawing some wind from the ex-
port sector. The relative cost of capital intensive European
products has fallen with the 18.5% year-to-date apprecia-
tion of the yen. Japanese industrial output decreased in
tandem, 1.5% m/m in June, after a 0.1% previous month
gain. The fall in production contrasts with reports from
Japanese corporations –consumer electronics makers and
automobile manufacturers– that indicated improved earn-
ings projections. Japanese vehicle output reached 860,000
units in June, a 26% y/y rise, with all automakers increas-
ing monthly output. The slowdown in output contrasts with
an improved picture for consumers as real household
spending rose 2.8% m/m in June after a 0.7% pickup in
May; this is consistent with six consecutive increases in
retail sales and a 0.1% q/q increase in bank loan’s out-
standing to individuals during the three months to June.
Improving employment numbers have set the backdrop for
consumption with labour participation rates trending up in
the second quarter. Although the unemployment rate con-
tinued to increase through June to 5.3%, it still lies below
the 5.6% peak reached in July of 2009. We expect the
Japanese economy to expand by 2.5% in 2010 and by
1.3% in 2011.
SWEDEN - The Swedish economy continues to show
strength. Preliminary data indicate that real GDP expanded
by 1.2% q/q and 3.7% y/y in the second quarter of the year.
With industrial production, new orders and exports perform-
ing strongly, the country is well positioned to outpace the
major euro zone economies and the UK in 2010-11; Riks-
bank – the central bank – expects the economy to grow by
3.8% in 2010 followed by a slight cooling to 3.6% next year.
Though price pressures remain muted for now – inflation
was 0.9% y/y in June – Swedish monetary policymakers
assess that inflation will accelerate in the coming months as
economic activity strengthens; nevertheless, the rate will
likely remain near the 2.0% inflation target. On the back of
strong economic recovery, and the fact that household in-
debtedness has significantly increased in recent years,
Sweden began a monetary tightening phase following the
Executive Board’s meeting on July 1st, when the benchmark
interest rate was increased by 25 basis points to 0.5%.
Further gradual tightening can be expected in the coming
months; Riksbank forecasts that the benchmark interest
rate will be 0.9% by end-2010 and climb further to 2.1% by
the end of the third quarter of 2011. While Sweden’s gov-
ernment finances remain healthy (the fiscal deficit was 0.8%
of GDP in 2009), the monetary authorities see the depth of
fiscal consolidation elsewhere in Europe to create major
uncertainties for the country’s economic outlook.
7
Global Economic Research August 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 speculative longs have once again found their legs and shorts have retreated from the market, con-
tributing to a very bullish speculative sentiment shift back in favour of AUD. However, AUDUSD’s two month uptrend has
been turbulent, with waning momentum in the global economic recovery likely to limit AUDUSD’s upside into year-end
when we see the pair at 0.90.

NEW ZEALAND - NZD longs have rebounded in line with those in AUD. However, a surprisingly dovish Reserve Bank of
New Zealand may now serve to restrain NZD’s uptrend. Despite this, NZDUSD has broken through the May topside lev-
els in late July and early August (near 0.7325), opening up an attempt at the 2010 highs near 0.7450.

TAIWAN - The Taiwanese dollar (TWD) is currently undergoing a strengthening phase after being captured by global
risk aversion trends earlier in the second-quarter. Continued strength in export orders will lead to further gains as the
country is well positioned to exploit its proximity to China and the recently adopted trade agreement with the mainland.
The central bank already began a normalization of monetary conditions providing further support to the TWD.

NORWAY - USDNOK traded below its 200-day moving average for the first time in over three months at the beginning
of August, nullifying the potential hurdle that support at 6.00 would hold. In early 2010, the 5.80 to 6.00 range proved to
be an area of congestion, with buyers providing support at 5.80. We are looking for NOK strength to push USDNOK
lower to 5.60 by the end of 2011. A relatively strong economy, interest rate differentials, and strong oil prices should
keep the currency supported.

Currency Trends
Going Back Spot Outlook
FX Rate FX Rate
12 m 6m 3m 5-Aug 3m 6m 12 m
AUDUSD 0.84 0.88 0.92 0.91 0.90 0.91 0.93 AUDUSD
NZDUSD 0.66 0.70 0.73 0.73 0.71 0.70 0.72 NZDUSD
USDTWD 32.8 31.9 31.3 31.8 30.8 29.9 29.1 USDTWD
USDNOK 6.12 5.93 5.90 5.97 5.87 5.78 5.68 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
Aug-09 Oct-09 Dec-09 Fe b-10 Apr-10 Jun-10 Aug-10 Aug-09 Oct-09 De c-09 Fe b-10 Apr-10 Jun-10 Aug-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
Aug-09 Oct-09 De c-09 Fe b-10 Apr-10 Jun-10 Aug-10 Aug-09 Oct-09 De c-09 Fe b-10 Apr-10 Jun-10 Aug-10

8
Global Economic Research
ASIA/OCEANIA/EUROPE
Fundamental Commentary
AUSTRALIA - Prime Minister Julia Gillard called a general
election for August 21st. The move came less than a month
after Ms. Gillard’s appointment that revived Labor’s stand-
ing, as showed by recent voter intention polls. Popularity
gains reflect Ms. Gillard’s efforts to resolve the policy blun-
ders that resulted in Mr. Rudd becoming the first prime
minister to be ousted by his own party during an initial term
in office. The Reserve Bank of Australia has recently per-
ceived that the economy is entering a period in which pri-
vate demand will strengthen offsetting the scaling back in
public spending. Measures of private firms’ investment in-
tentions have increased strongly, with a persistent rise in
capital goods imports leading the staff to expect that further
growth in private investment demand provided continued
commodity price support. Business credit rose for the first
time in eighteen months during May. At the last policy
meeting, members of the monetary board judged that the
recent decisions to increase the cash rate, which resulted
in interest rates returning to around average levels, allowed
the central bank to maintain steady settings in the face of
increased international uncertainty. The central bank has
thus left the door open to further increases as inflation ap-
pears likely to remain in the upper half of the 2-3% target
zone over the coming year. Hiring has remained strong,
with the outlook of a 2.5% rise in employment for 2010 still
prevalent. Full-time job gains continue to be the driver, with
the unemployment rate having fallen to 5.2%.
TAIWAN - Industrial production rose for a 10th straight
month in June underpinned by persistent manufacturing
output increases. The value of export shipments is a princi-
pal driver of the country’s economic activity equivalent to
70% of GDP. After being among the hardest-hit by the
global downturn, Taiwanese exporters have been leading
the recovery in Asia with foreign shipments running at an
over 30% y/y rate in the past six months. Production of
electronic parts and computer equipment remained on an
upward trend through June grapping up double-digit quar-
terly gains. Export orders have so far proved immune to
slower momentum in Chinese economic growth and the
loss in competitiveness in the European market. In fact,
June shipment orders topped expectations once again as
external demand for Taiwan’s electronic products picks up
as stores build inventory in advance of the start of the
school year in September. The so-far prevalent strength in
exports and industrial output has led to continuous gains in
labour market indicators, with the jobless rate falling now
for nine straight months. The seasonally adjusted unem-
ployment rate reached 5.2% in June. Inflationary concerns
are yet to emerge with headline 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 in-
crease representing a normalization of sorts as the bench-
mark rate was left still below 2%.
August 2010
Tuuli McCully +1 416 863-2859
Oscar Sánchez +1 416 862-3174
NEW ZEALAND - The Reserve bank of New Zealand de-
cided to increase the official cash rate for a second time by
a quarter point to 3% in July. Central bank governor Allan
Bollard stressed in a statement that the pace and extent of
future cash rate increases is likely to be more moderate.
He pointed to the continuation of a fragile world economic
recovery with trading partner growth moving stronger than
predicted, leaving commodity prices elevated. New Zea-
land’s commodity export prices eased in June from the pre-
vious month’s record high. Inflationary pressures in New
Zealand remain contained, as the headline consumer price
index picked up just 0.3% q/q in the three months through
June, up only 1.8% on a yearly basis (well within the official
1-3% target range). Although domestic demand remains
subdued, non-tradable price growth accelerated once more
in the second quarter, while tradable goods inflation de-
creased. The household situation has shown mixed sig-
nals; retail sales excluding motor vehicles and fuel declined
for a second consecutive month in May, while credit card
spending continued to display gains through June. The
country’s unemployment rate declined –for the first time in
over two years– in the first quarter to 6%, from 7.1% in the
previous three months, marking the biggest quarterly fall on
record. Adding to signs of growing labour demand, 13% of
companies surveyed last month said they expected to hire
more workers in the next six months, the highest reading
since February 2005.
NORWAY - The Norwegian economic outlook is relatively
promising, with healthy government finances – the fiscal
surplus will average 10% of GDP through 2011 – and a
strong external position – the current account surplus will
hover at 16% of GDP in 2010-2011 – providing a solid foot-
ing for economic recovery. We expect output to expand by
around 1½-2% through 2011, supported by solid household
consumption and the offshore petroleum sector. Neverthe-
less, fiscal tightening in western European economies will
limit growth prospects; the UK purchases almost a third of
Norwegian exports. We expect Norwegian monetary au-
thorities to keep the benchmark interest rate unchanged at
2.0% following the August 11th policy meeting; neverthe-
less, a gradual tightening bias remain in place as the poli-
cymakers remain concerned about future domestic eco-
nomic imbalances in the context of an ongoing recovery,
very low interest rates, rising house prices (up 3.7% q/q in
Q2 2010) and fairly strong household credit growth (lending
increased by 4.6% y/y in June). The policy rate has been
raised by 75 bps since October 2009, with the most recent
increase taking place in early May. The policymakers’ strat-
egy is to keep the rate within the 1½-2½% range until the
October 27th Board meeting when new policy outlines will
be published. The inflation rate − 1.9% y/y in June, down
from 2.5% the month before − has fallen below the central
bank’s 2.5% target for the first time this year.
9
Global Economic Research August 2010

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

CHINA - The Chinese renminbi (CNY) has been appreciating slowly against the US dollar since the lifting of the peg an-
nounced by the People’s Bank of China in mid-June. Although the CNY is expected to reference to an unannounced
basket of currencies, we anticipate a 2.5% appreciation vis-à-vis the US dollar by year end.

INDIA - The Reserve Bank of India will continue to tighten monetary conditions in the months ahead, with the policy pro-
viding some near-term support for the Indian rupee (INR). The INR has weakened by barely 0.8% so far this year; while
moderate gains may be evident in the near-term, a reversal will eventually be required to compensate for India’s ad-
verse inflation differential.

KOREA - The South Korean won (KRW) has already regained the levels observed prior to the geo-political turmoil aris-
ing from the breaking of relations with the North. The recent central bank switch to a monetary tightening stance along
with strong economic fundamentals will provide further support to the KRW. We expect the currency to close 2010 at
1120 per US dollar.

THAILAND - The Thai baht (THB) has regained all the losses resulting from the country’s political turmoil during April-
May. It trades currently at its strongest level in over two years, remaining well supported as the country's economic re-
covery has barely been affected by the political uncertainty. Notwithstanding moderated inflationary pressures, the cen-
tral bank has already joined the bandwagon of monetary tightening, a trend that is expected to continue in coming
months.
Currency Trends
Going Back Spot Outlook
FX Rate FX Rate
12 m 6m 3m 5-Aug 3m 6m 12 m
USDCNY 6.83 6.83 6.83 6.77 6.70 6.57 6.36 USDCNY
USDINR 47.9 46.2 44.4 46.2 45.6 45.2 46.2 USDINR
USDKRW 1228 1162 1108 1166 1145 1114 1079 USDKRW
USDTHB 34.0 33.2 32.4 32.1 32.4 32.5 32.8 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
Aug-09 Oct-09 Dec-09 Feb-10 Apr-10 Jun-10 Aug-10 Aug-09 Oct-09 Dec-09 Feb-10 Apr-10 Jun-10 Aug-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
Aug-09 Oct-09 Dec-09 Feb-10 Apr-10 Jun-10 Aug-10 Aug-09 Oct-09 Dec-09 Feb-10 Apr-10 Jun-10 Aug-10

10
Global Economic Research
DEVELOPING ASIA
Fundamental Commentary
CHINA - Economic momentum has moderated. However,
we continue to expect output to expand at a 10% y/y rate in
2010 and 9% in 2011. Real GDP growth slowed in the sec-
ond quarter for the first time in over a year to 10.3% y/y,
less than the near-three-year high of 11.9% in January-
March. While detailed figures on the sources of the expan-
sion have not been released, high frequency data display a
moderation in domestic spending: June retail sales were up
18.3% y/y and fixed asset investment 25.5% y/y, both a
touch lower from May readings, with the trade balance
likely pulling headline GDP up in the second quarter, as a
downward trend that prevailed in the first was reversed.
The modest loss of dynamism relies in a return to a more
sustainable pace of expansion and an investment slow-
down due to the credit tightening measures implemented
through the first-half of 2010. Consumer and producer price
inflation fell for the first time in four months in June, with the
CPI now growing at 2.9% y/y. Lower food costs are mostly
responsible, although real estate prices came down on a
monthly basis for the first time in also in June. The overall
economic picture for China remains favourable given that
the reduction in the credit impulse implemented at the out-
set of 2010 seems to have effectively cooled-off demand
pressures, opening the door for additional monetary stimu-
lus. Moreover, a war chest in the form of close to US$2.5
trillion in international reserves can be deployed in order to
counteract any significant economic slowdown.
KOREA - The ongoing economic recovery in South Korea
has remained on a solid footing notwithstanding geo-
political uncertainty brought about by continued stringent
relations with its northern neighbour. Korean exports figures
have displayed persistent gains, with consumer confidence
finally improving in May for the first time in seven months.
Industrial production has been the main beneficiary of the
export-led recovery, rising for the 5th straight month in June.
Manufacturing output displayed resilience from global risks
climbing 5% q/q in seasonally adjusted figures during the
second quarter. This picture is consistent with Korean cor-
porations reporting record earnings on the back of an econ-
omy that expanded 1.5% q/q in the three months through
June. Economic activity gains have spilled to the job mar-
ket, as unemployment fell to 3.5% in June from a 10-year
4.8% high in January. This has translated into favourable
domestic demand prospects with consumer spending indi-
cators recovering recently. Retail sales picked up at a 2.9%
y/y average rate in the April-June period pointing to an im-
provement in private consumption, that has so far been the
missing link as it edged up a sub-par 0.7% q/q in Q1. The
outlook for inflation has recently turned unfavourable with
consumer prices rising 2.7% y/y in May breaking the down-
ward trend prevalent since the start of the year. The uptrend
prompted the Bank of Korea to raise the benchmark interest
rate to 2.25% in July; in the same instance the central bank
uplifted the country’s growth forecast for 2010 to 5.9%.
August 2010
Oscar Sánchez +1 416 862-3174
INDIA - The Reserve Bank of India (RBI) announced a
fourth interest rate increase in July, raising the repo and
reverse repo rates by 25 and 50 basis points to 5.75% and
4.5% respectively; so far in 2010 the benchmark rates have
been uplifted by 100 and 125 bps, respectively. As two of
the decisions have been made between meetings, the RBI
also recognized the need to release statements more often
(every six weeks, as opposed to once a quarter). Whole-
sale prices accelerated to a 10.5% y/y rate in June, as fuel
cost increases have reignited pressures notwithstanding
downward trending food inflation. In an implicit recognition
of the effect of the elimination of fuel subsidies, the RBI
revised its inflation forecast to 6% from the original 5.5%
for FY2011 (ending in March). The RBI also boosted its
expectation of GDP growth to 8.5% GDP, up from the origi-
nal 8%. The RBI recognized, however, that capacity con-
straints are visible in several sectors. Domestic spending
gains have been providing a strong growth foundation, with
upward price pressures in non-food manufacturing a testa-
ment of the healthy economic pulse. Food prices are ex-
pected to ease further as a result of an improved monsoon
season. Such a scenario would generate a pickup in con-
sumer spending, a laggard in the recovery, complementing
the so far investment propelled domestic demand gains.
We continue to expect the Indian economy to expand at an
8% rate in 2010 and 7% in 2011.
THAILAND - The Bank of Thailand raised its policy rate by
25 basis points to 1.5% in July for the first time in over a
year. Although yearly inflation at 3.3% slowed in June, there
is scant evidence that the social unrest retrieved any eco-
nomic momentum built up to that point. Export growth re-
mains the backbone of the recovery with shipment orders
already rebounding in June. Exports account for two-thirds
of the economy and remain supported by strong regional
demand. Consumption and tourism were most affected, as
tourist arrivals fell significantly in April and May. Partly as a
result of the stressful political environment, Thailand’s in-
dustrial output eased as well, as the imposition of curfews
disrupted night shifts and product shipments. Manufacturing
output contracted by 1% in April-May vis-à-vis the first quar-
ter, though the slowdown has proved temporary as produc-
tion recovered most of the lost ground in June. Although a
pre-turmoil pickup in consumer spending failed to persist, a
comeback is anticipated as labour market conditions remain
supportive of income gains and consumer confidence re-
bounded in June within a whisker of the pre-political-crisis
level. Business sentiment has already recovered significant
ground, as policy efforts by the Thai government offering
incentives to local firms and foreign investors have sup-
ported an expedite comeback. 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.
11
Global Economic Research August 2010

DEVELOPING AMERICAS Pablo Bréard +1 416 862-3876

Currency Outlook Oscar Sánchez +1 416 862-3174

BRAZIL - Monetary policy tightening by the Brazilian central bank will continue to support the currency in coming months.
The Brazilian real (BRL) has been strengthening on the back of an improved global scenario after European sovereign
credit uncertainty has been resolved at least for the time being. Although recent commodity price shifts have favoured the
BRL, the widening of the country’s current account deficit will start to play a role towards the end of the year limiting further
currency gains. We expect the BRL to close the year at 1.80.

MEXICO - The Mexican peso (MXN) has recently adopted a strengthening tone weathering favourably uncertainties
about the continuation of the US economic recovery. The MXN currently trades at 12.5 per US dollar, with support
standing close to the 12.50 mark. The country’s economic recovery has been recently reignited as domestic demand
indicators have finally started to show definitive gains. Although Banco de Mexico is nowhere near switching to a mone-
tary tightening stance, the rise in the WTI oil price above US$80 per barrel has provided further wings to the MXN.

CHILE - The Chilean peso (CLP) may be facing a technical support point at around 510 per USD after an appreciating
trend in place since late June strongly influenced by rallying copper prices. The monetary outlook now incorporates a
bias towards further tightening in line with the trend now led by Brazil, although the CLP is less sensitive to monetary
policy shifts than other South American currencies. We expect USDCLP to close the year at 530.

ARGENTINA - The Argentine peso (ARS) continues to be subject to the active official intervention of the government-
controlled central bank. Dangerous signs of overvaluation continue to be accumulated amidst a strong sense of investor
complacency. A Venezuelan-style currency adjustment is not imminent, yet it should be incorporated in long-term finan-
cial and strategic planning exercises. Meanwhile, we expect USDARS to close the year at 4.25.
Currency Trends
Going Back Spot Outlook
FX Rate FX Rate
12 m 6m 3m 5-Aug 3m 6m 12 m
USDBRL 1.87 1.90 1.74 1.75 1.78 1.81 1.86 USDBRL
USDMXN 13.19 13.10 12.31 12.51 12.70 12.85 13.00 USDMXN
USDCLP 541 525 519 516 526 532 542 USDCLP
USDARS 3.83 3.83 3.89 3.93 4.12 4.29 4.56 USDARS
USDBRL USDMXN
13.9
1.92
13.6
1.87
13.4

1.83 13.1

12.9
1.78
12.6
1.74
12.4

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

USDCLP USDARS
3.95
556

545
3.90
534

522 3.85

511
3.80
499

488 3.75
Aug-09 Oct-09 De c-09 Fe b-10 Apr-10 Jun-10 Aug-10 Aug-09 Oct-09 De c-09 Fe b-10 Apr-10 Jun-10 Aug-10

12
Global Economic Research
DEVELOPING AMERICAS
Fundamental Commentary
BRAZIL - Monetary tightening remains the norm; the Bra-
zilian central bank decreed a third rise in the benchmark
SELIC interest rate by 50 basis points (bps) to 10.75%.
The central bank recognized that the risks to the inflation-
ary outlook have fallen as a result of the recent evolution of
domestic and external demand factors. Economic activity in
Brazil is showing signs of peaking after being on an upward
trend for a year and a half. The central bank’s economic
activity index inked a 0% change during May, the first non-
expansionary mark since January 2009. Consistent with
this picture industrial output contracted in the three months
through June. Readings on inflationary pressures have
also been somewhat tamer with inflation –as measured by
the IPCA-15 index– falling 0.1% in the month through the
second week of July. Retail sales data showed a softer
uptick during May as well, although lower vehicle sales
were due to expiring government incentives. The slowdown
can be sourced at the lapsing fiscal stimulus and a shift in
the monetary policy stance. However, the business outlook
continues to be propelled forward by elevated public
spending, bank credit flows, and a supportive external envi-
ronment. Employment generation has shown no sign of
stalling, as the unemployment rate fell to a record 7% low
in June. The Brazilian economy grew 8.5% y/y in the first
quarter, and although we expect the loss in momentum to
continue in coming months, the persistent fiscal and credit
stimulus will still drive to a 7.5% GDP expansion in 2010.
CHILE - The Chilean economy is rebounding remarkably
from the weak stage originated by the devastating effects
caused by the earthquake/tsunami activity of the first quar-
ter of the year. In fact, we have revised our real GDP
growth projection upwards (to 4.8%) for this year, but still
keep intact our 5.8% growth rate for the year 2011 on the
back of sizable fiscal stimulus injected by the newly elected
administration of President Sebastián Piñera. On the
monetary front, interest rate normalization seems to be the
preferred course of action by the Chilean authorities in the
months ahead; indeed, the policy-setting monetary policy
rate has been increased by 50 basis points to 1.50% in mid
July, marking a second consecutive monthly rate hike. We
do expect headline inflation to close this year at or above
the 3.5% threshold. The commodity-sensitive CLP remains
strongly influenced by metal price developments: copper
prices have been in ascendancy since early June (275 US
cents per pound), approaching the 340 mark early in Au-
gust. Increasing export receipts have helped the central
bank boost international reserves which reached US$25.2
billion. Clearly, signs of economic deceleration in the US
have not been discounted in copper prices, as Chinese and
Indian economic activity continue to show steady signs of
strengthening. The recovery in the EUR has also reflected
eased concerns regarding European sovereign debt sus-
tainability, boosting demand for commodity-linked emerging
market currencies.
August 2010
Oscar Sánchez +1 416 862-3174
Pablo Bréard +1 416 862-3876
MEXICO - Local demand is climbing out of last year’s
slump. Notwithstanding the stellar recovery in foreign sales
–which has led to a rebound in the manufacturing sector
back to pre-crisis levels– activity in domestically oriented
sectors had been lagging. While latest industrial output fig-
ures already show manufacturing returning within a whisker
of the peak of the previous cycle in mid-2008, the domesti-
cally oriented construction sector still lies about 10% below.
This has been changing painstakingly with output in con-
struction slowly creeping up by 2% so far in 2010. This has
manifested in investment figures as well, with edification
rising over 2% so far this year, as the recovery retraces
more than half the loss resulting from the 2009 collapse in
capital formation. Retail sales follow a similar script, with
high frequency data for May displaying a fourth expansion
reported so far in 2010. Consumer confidence gauges
have lagged with perceived future employment and income
prospects improving only slowly. This, however, is finally
being balanced given recent monthly increases in personal
bank credit flows which had been contracting for over a
year. Inflation indicators also provide indirect support of a
recent spring in domestic demand factors as an upward
trend in core-services inflation is detected since May. We
thus expect the economy to continue to gear back towards
a sustainable recovery path (we expect real GDP to ex-
pand by 4.8% this year) with spare capacity still condition-
ing the inflationary outlook.
ARGENTINA - Unmanageable inflationary pressures, unre-
liable official statistics (like in Greece), Brazilian currency
dynamics and election-related politics shape the Argentine
business environment. The rate of inflation (and more im-
portantly, inflationary expectations) is the most relevant
macroeconomic issue affecting the investment outlook.
There is still a major discrepancy between the government-
controlled central bank survey and private sector surveys
regarding the inflation outlook. Indeed, the expected head-
line (average) inflation rate is estimated at 32% for the next
12 months, a sharp contrast with the 11.5% rate for 2011
reflected in the central bank survey. A better gauge of a
genuine inflation rate has recently been the negotiation
(between the government and powerful trade unions) of
wage adjustments averaging 25-30%. Meanwhile, the ap-
preciating bias present in the Brazilian real (BRL) is also
acting as a stabilizing factor in favour of the ARS; any ma-
jor adjustment in the USDBRL will be immediately reflected
in the value of the ARS. The central bank survey projects a
real GDP growth rate of 4.2% and 2.4% for 2010 and 2011,
respectively; however, given the lack of trustworthy (or in-
ternationally audited) official statistics, the data might be
masking a more adverse economic reality. Another source
of investor concern is the level of international reserves,
which, official data places at US$51 billion. Again, un-
audited creative accounting may overstate the amount of
reserves in the event of a speculative attack on the peso.
13
Global Economic Research August 2010

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

RUSSIA - The Russian currency is poised to continue an appreciating trend in the near term despite narrowing interest
rate differentials. While Russian authorities are committed to increasing exchange rate flexibility, the central bank will con-
tinue its attempts to prevent excessive appreciation of the Russian ruble (RUB) in the short-term, as strong currency gains
would challenge the export-led economic recovery. We expect USDRUB to close the year at 30.

TURKEY - The Turkish lira (TRY) is in recovery mode following marked currency volatility in the midst of European debt
sustainability concerns. While prospects for monetary policy normalization and robust economic recovery should provide
support to the Turkish lira, a widening current account deficit together with investors’ concerns regarding delayed fiscal
discipline legislation will likely take the currency to 1.55 per USD by year-end.

SOUTH AFRICA - Interest rate differentials between South Africa and advanced economies have attracted capital in-
flows into South-Africa, providing support to the South African rand (ZAR). Nevertheless, deteriorating government fi-
nances and a large current account deficit point towards modest depreciation vis-à-vis the USD. We expect USDZAR to
close the year at 7.50.

HUNGARY – Uncertainty regarding Hungary’s fiscal policy direction is causing increased short-term volatility for the forint
(HUF). The HUF will likely continue to face some selling pressures against the euro through 2011 on the back of the
country’s relatively weak economic fundamentals and persistent debt sustainability concerns. We expect EURHUF to
close the year at 285.
Currency Trends
Going Back Spot Outlook
FX Rate FX Rate
12 m 6m 3m 5-Aug 3m 6m 12 m
USDRUB 31.5 30.3 29.3 29.8 30.1 30.1 30.9 USDRUB
USDTRY 1.47 1.50 1.49 1.50 1.53 1.56 1.61 USDTRY
USDZAR 7.76 7.63 7.39 7.24 7.42 7.54 7.79 USDZAR
EURHUF 266.10 271.36 269.09 279.59 284.59 286.22 293.66 EURHUF
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
Aug-09 Oct-09 Dec-09 Feb-10 Apr-10 Jun-10 Aug-10 Aug-09 Oct-09 Dec-09 Feb-10 Apr-10 Jun-10 Aug-10

USDZAR EURHUF
8.37 290

8.18
285
8.00
280
7.82
275
7.63
270
7.45

7.26 265

7.08 260
Aug-09 Oct-09 Dec-09 Feb-10 Apr-10 Jun-10 Aug-10 Aug-09 Oct-09 Dec-09 Feb-10 Apr-10 Jun-10 Aug-10

14
Global Economic Research
DEVELOPING EUROPE/AFRICA
Fundamental Commentary
RUSSIA - The Russian economy is on solid growth trajec-
tory on the back of a revival in the energy-rich export sector
and a recent pick-up in domestic demand; output is set to
grow by nearly 5% through 2011. As the world’s largest oil
producer, Russia is immediately affected by directional
shifts in energy prices; crude oil prices, currently trading at
US$82 per dollar (WTI based), have recovered from the
early-May high volatility and subsequent price adjustments.
Following an aggressive monetary policy easing process −
which reduced the benchmark interest rate by 525 basis
points between April 2009 and May 2010 − we expect that
the policy-setting refinancing rate has now reached its bot-
tom at 7.75%. Price pressures continued to ease in June,
with the consumer price index increasing by 5.8% y/y; nev-
ertheless, we expect base effects and higher food prices
resulting from a recent draught to bring an end to the disin-
flation process in the coming months, with the inflation rate
hovering near 7% at year-end. Reflecting recent currency
appreciation pressures and interventions by monetary au-
thorities, the central bank’s reserves continue to accumu-
late; official reserve assets are approaching the US$500
billion mark. While the Russian ruble remains vulnerable to
profit-taking activity in equity markets, the robust foreign
exchange reserves position allows the central bank to inter-
vene in the market to moderate speculative exchange rate
swings.
SOUTH AFRICA - The South African economy is on a
moderate recovery path; output is poised to expand by
around 3% in 2010, having received a boost from the 2010
FIFA World Cup. The recovery has so far been driven by
the manufacturing and mining sectors; consumer spending
remains constrained by high unemployment and household
indebtedness. Meanwhile, improving business confidence
is reflected in private sector credit growth (particularly
among corporations) that turned positive in May for the first
time since the recovery took hold. The gold price, which
hovers near the US$1,200 per ounce mark, is strongly in-
fluenced by speculative investment flows as investors reas-
sess their views on the global economic recovery and the
fiscal position of key euro zone countries. Monetary condi-
tions will likely remain on hold for the time being, with the
policy rate at 6.5%, as policymakers remain concerned
about rapidly changing investor risk aversion and the un-
certainty surrounding the strength of global recovery; the
policy-setting rate was reduced by 550 basis points be-
tween December 2009 and March 2010. Price pressures
weakened to 4.2% y/y in June (from 4.6% the month be-
fore), remaining within the South African Reserve Bank’s 3-
6% inflation target range. Due to recent wage settlements
and higher administered prices, inflationary pressures will
likely start creeping higher in the coming months though
inflation will likely remain contained within the central banks
target range through 2011.
August 2010
Tuuli McCully +1 416 863-2859
TURKEY - The Turkish economy is immersed in a robust
growth path, with output poised to expand by 5½% this
year. Diminishing joblessness − the unemployment rate
decreased to 12% in April from 14.5% in January − is
boosting consumer confidence. While exports, industrial
output, business confidence indicators and purchasing
managers’ indices remain firmly in expansionary territory,
slightly weaker perceptions regarding business conditions
reflect persistent uncertainties in the external outlook. Real
GDP growth will likely slow to around 4% in 2011 as some
European economies adopt fiscal-consolidation measures,
dampening demand for Turkish exports, and as domestic
demand slows in response to gradual monetary tightening.
Following the Monetary Policy Committee meeting on July
15th, Turkish policymakers maintained the new benchmark
interest rate, the one-week repo rate, at 7.0%. As risks re-
garding the global outlook remain in place while the coun-
try’s inflation outlook is becoming somewhat more favour-
able, we expect the central bank to delay the beginning of
the monetary tightening cycle until the final months of
2010. Inflationary pressures continued to ease in July; the
consumer price index increased by 7.6% y/y compared
with 8.4% the month before. We expect inflation to hover
near the current level at the end of 2010. The robust eco-
nomic recovery accompanied by strong import growth will
cause the current account deficit to widen to around 5% of
GDP by end-2010 from 2.3% in 2009.
HUNGARY - Hungary’s new Fidesz-led government contin-
ues to cause fiscal sustainability uncertainties. The Fidesz
party seems to be resuming its pre-election policy stance
when it campaigned for a speedy economic recovery, em-
phasizing that restoring economic growth should have a pri-
ority over improving government finances. Hungary’s nega-
tions with the International Monetary Fund (IMF) and the
European Union stalled in mid-July following disagreements
regarding the country’s fiscal deficit targets; while the gov-
ernment has since confirmed its commitment to bringing the
budget shortfall to 3.8% of GDP in 2010 (as was agreed un-
der the country’s IMF-supervised economic program), its is
not planning to implement any new austerity measures, but
aims to introduce a bank tax. Elevated uncertainty in July
triggered sovereign credit rating implications; Moody’s
placed Hungary’s “Baa1” rating under review for a possible
downgrade while Standard & Poor’s assigned the country’s
“BBB-” rating a “negative” outlook, with Hungary potentially
dropping out of the “investment grade” category. As uncer-
tainties regarding the economic outlook persist, Hungarian
monetary authorities left their policy rate unchanged at
5.25% in July for a third consecutive month after reducing it
on a monthly basis since July 2009. The authorities ex-
pressed concerns regarding the recent credibility losses of
the country’s fiscal policy. The economy has started to re-
cover, led by exports; we expect output to grow by around
½% this year before picking up to close to 3% in 2011.
15
Global Economic Research August 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 92 97 93 88 90 92 94 95 95 97
Euro zone EURUSD 1.40 1.43 1.24 1.30 1.35 1.22 1.22 1.24 1.26 1.28 1.29 1.30
EURJPY 127 133 114 126 126 108 110 114 118 122 123 126
UK GBPUSD 1.46 1.62 1.53 1.55 1.52 1.49 1.50 1.53 1.54 1.56 1.56 1.55
EURGBP 0.96 0.89 0.81 0.84 0.89 0.82 0.81 0.81 0.82 0.82 0.83 0.84
Switzerland USDCHF 1.07 1.04 1.05 1.01 1.05 1.08 1.06 1.05 1.03 1.02 1.01 1.01
EURCHF 1.49 1.48 1.30 1.31 1.42 1.32 1.29 1.30 1.30 1.31 1.30 1.31

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 4.06 4.25 4.38 4.52 4.66 4.80
Brazil USDBRL 2.31 1.74 1.80 1.90 1.78 1.80 1.77 1.80 1.82 1.85 1.87 1.90
Chile USDCLP 639 507 530 550 524 546 525 530 535 540 545 550
South

Colombia USDCOP 2249 2044 1900 1950 1920 1900 1866 1900 1912 1925 1937 1950
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 7.75 7.76 7.79 7.76 7.75 7.75 7.75 7.75 7.75
India USDINR 48.8 46.5 45.0 47.0 44.9 46.5 45.8 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 9.07 9.25 9.31 9.37 9.44 9.50
Malaysia USDMYR 3.47 3.43 3.15 3.20 3.26 3.24 3.17 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 0.72 0.70 0.71 0.72 0.73 0.74
Philippines USDPHP 47.5 46.2 44.0 46.0 45.2 46.4 44.9 44.0 44.5 45.0 45.5 46.0
Singapore USDSGD 1.43 1.40 1.36 1.30 1.40 1.40 1.36 1.36 1.34 1.33 1.31 1.30
South Korea USDKRW 1260 1164 1120 1050 1131 1222 1157 1120 1102 1084 1067 1050
Thailand USDTHB 34.7 33.4 32.5 33.0 32.3 32.5 32.3 32.5 32.6 32.7 32.9 33.0
Taiwan USDTWD 32.8 32.0 30.0 28.5 31.8 32.1 31.2 30.0 29.6 29.2 28.9 28.5

EUROPE / AFRICA
Czech Rep. EURCZK 26.9 26.4 25.0 25.0 25.4 25.7 24.9 25.0 25.0 25.0 25.0 25.0
Iceland USDISK 121 126 125 120 127 128 122 125 124 122 121 120
Hungary EURHUF 266 270 285 300 265 285 284 285 289 292 296 300
Norway USDNOK 6.95 5.79 5.80 5.60 5.94 6.50 5.90 5.80 5.75 5.70 5.65 5.60
Poland EURPLN 4.15 4.10 4.05 4.15 3.86 4.15 4.03 4.05 4.07 4.10 4.12 4.15
Russia USDRUB 29.4 30.0 30.0 31.5 29.4 31.2 30.1 30.0 30.4 30.7 31.1 31.5
South Africa USDZAR 9.53 7.40 7.50 8.00 7.29 7.67 7.38 7.50 7.62 7.75 7.87 8.00
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 1.55 1.65 1.52 1.58 1.52 1.55 1.57 1.60 1.62 1.65

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 August 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.