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Global Economic Research

Index

Market Tone & Fundamental Focus ......................................................................................... 3 US/Canada.................................................................................................................................. 5 Europe ........................................................................................................................................ 6 Asia/Oceania .............................................................................................................................. 8 Developing Asia....................................................................................................................... 10Developing Americas .............................................................................................................. 12Developing Europe/Africa....................................................................................................... 14 Global Currency Forecast....................................................................................................... 16

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

Foreign Exchange

Outlook

April 2011

Global recovery dynamics, the nuclear-related Japanese shock,coordinated official intervention, monetary policy shifts, oil-drivencommodity price adjustments and the quest for yield are factors drivingcapital flows in foreign exchange markets.

The USD is on the defensive despite gradual signs of recovery. TheCAD remains a market favourite on the basis of solid economic andfinancial sector strength. The MXN and BRL will be supported byfavourable terms of trade, growth differentials and interest rateattractiveness.

The EUR is immersed in a strengthening trend against both the USDand the GBP. Improved growth prospects and shifts in monetary policysupport the euro zone currency. Persistent sovereign debtsustainability concerns in the periphery economies may temporarilyweigh on the EUR.

The JPY is reacting to the G7 intervention to prevent disorderly gainscaused by repatriation flows. The Asian currency environment retains astrengthening bias, led by regional economic strength and risinginterest rates. The CNY, KRW and the THB will continue to appreciate.

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Foreign ExchangeOutlook

April 2011

Actual Q1 11 Q2 11 Q3 11 Q4 11 Q1 12 Q2 12 Q3 12 Q4 121.41 1.42 1.42 1.44 1.45 1.45 1.46 1.47 1.48

1.39 1.36 1.36 1.36 1.36 1.35 1.34 1.3384.3 83 79 82 84 86 87 89 90

82 84 85 86 88 88 89 901.60 1.60 1.60 1.61 1.63 1.65 1.67 1.69 1.70

1.61 1.60 1.61 1.63 1.64 1.64 1.64 1.630.97 0.97 0.97 0.96 0.95 0.95 0.94 0.93 0.92

0.98 0.98 0.99 0.99 0.99 1.00 1.01 1.011.04 1.03 1.05 1.06 1.08 1.07 1.08 1.09 1.10

1.00 0.99 0.98 0.96 0.95 0.94 0.93 0.9111.84 11.91 12.15 12.24 12.49 12.55 12.48 12.57 12.73

11.94 12.09 12.14 12.19 12.24 12.30 12.35 12.41

(*) Source: Consensus Economics Inc. March 2011

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

Consensus*

Mexican Peso

Canadian Dollar

Australian Dollar

Global Foreign Exchange Outlook

Euro

Yen

Sterling

AUDUSD USDMXN

EURUSD USDJPY

GBPUSD USDCAD

April 1, 2011EURUSD

Consensus*USDJPY

Consensus*GBPUSD

Consensus*

Consensus*

USDCADConsensus*

AUDUSD

USDMXN

79

86

93

100

107114

121

Mar-0

6Se

p-06

Mar-0

7Se

p-07

Mar-0

8Se

p-08

Mar-0

9Se

p-09

Mar-1

0Se

p-10

Mar-1

1

USD/JPY

100 Day

200 Day

1.12

1.22

1.32

1.42

1.52

1.62

Mar-0

6

Aug -0

6Ja

n-07

Jun-0

7No

v-07Ap

r-08

Sep-0

8Fe

b-09

Jul-0

9

Dec-0

9

May-1

0Oc

t-10Ma

r-11

EUR/USD

100 Day200 Day

1.36

1.51

1.66

1.81

1.96

2.11

Mar-0

6Se

p-06

Mar-0

7Se

p-07

Mar-0

8Se

p-08

Mar-0

9Se

p-09

Mar-1

0Se

p-10

Mar-1

1

GBP/USD

100 Day

200 Day

0.90

0.98

1.06

1.14

1.22

1.30

Mar-0

6Se

p-06

Mar-0

7Se

p-07

Mar-0

8Se

p-08

Mar-0

9Se

p-09

Mar-1

0Se

p-10

Mar-1

1

USD/CAD

100 Day

200 Day

0.59

0.67

0.74

0.82

0.890.97

Mar-0

6Se

p-06

Mar-0

7Se

p-07

Mar-0

8Se

p-08

Mar-0

9Se

p-09

Mar-1

0Se

p-10

Mar-1

1

AUD/USD

100 Day

200 Day

9.7

10.8

11.9

13.0

14.1

15.2

Mar-0

6Se

p-06

Mar-0

7Se

p-07

Mar-0

8Se

p-08

Mar-0

9Se

p-09

Mar-1

0Se

p-10

Mar-1

1

USD/MXN100 Day

200 Day

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April 2011

Global financial markets continue to absorb the multipleshocks caused by Japans natural disaster and ensuingnuclear crisis, intensifying geopolitical upheaval in North-

ern Africa and the Middle East, deteriorating sovereigndebt conditions in peripheral European countries, andsharp adjustments in commodity prices. Notwithstandingthe intensified volatility in securities and currency markets,the global economy remains in recovery mode. Increasingevidence of US economic gains adds to the strength cur-rently in place within the emerging-market universe, pro-longing a phase of global risk appetite. The combined ef-fect of strengthening demand and supply-side risks hasinjected upward pressure on energy prices with positiveeffects on oil-linked currencies. The severity of the com-modity price shocks is re-fuelling the inflation debateamongst global market participants, prompting the adop-

tion of conventional and unconventional policy action bythe worlds major central banks.

The NAFTA zone currencies are influenced by the USbusiness cycle, the moderation of credit easing measuresby the Federal Reserve (Fed), the direction of crude oilprices, and the relative health of the financial sector. TheUS dollar (USD) has maintained a defensive tone over thepast four months, as highlighted by the 7% decline in thetrade-weighted DXY index. Currency markets are fixatedon the outlook for interest rates, leaving the USD vulner-able to any shift in the stance emanating from the Fed.However, any USD rally is likely to prove temporary, asthe economic weight of a depressed housing market, highoil prices and improving but still elevated unemploymentlevels push out US interest rate hikes into 2012. Both theCanadian dollar (CAD) and the Mexican peso (MXN) arein synchronicity, appreciating against the USD on thegrounds of supportive commodity prices (mainly energy), arelatively healthier fiscal position, systemically strongerfinancial sectors and healthy recovery prospects. With alooming Federal election, Canadian political uncertainty ison many radar screens. However, Canadas enviable sov-ereign position, its exposure to rising commodity prices,widening interest rate spreads and favourable sentimentare just a few of the drivers that should help to support theCAD. The MXN also is benefitting from attractive(government bond) yield differentials, which continue toact as a magnet of intra-North American capital flows.

The currency outlook for Latin America remains favour-able. Robust economic performance, favourable terms oftrade, massive foreign capital flows and widening interestrate differentials as policymakers tackle the threat of infla-tionary pressures are injecting a positive tone into the re-gional foreign exchange market environment. The Brazil-ian real (BRL) is testing new technical resistance levels,prompting decisive government/central bank action to

moderate the pace of currency strength. Monetary policytightening in Brazil, Chile, Peru and Colombia is underway. Fiscal tightening measures will aim at addressing

excess demand risks. The commodity price shock is aboon for the core Latin American economies. Managingthe inflationary consequences of such market dynamicshas become a key policy priority.

The European currency environment presents a mixedoutlook. The prospects of an imminent increase in theeuro zones main refinancing rate highlight interest ratedifferentials in favour of the EUR versus both the USD andthe British pound (GBP). In addition, signs of improvingeconomic conditions in the euro area also support a near-term positive outlook for the EUR; indeed, after testingrecent resistance barriers against the USD, we view that

EURUSD will approach the 1.45 mark by the close of theyear. Nevertheless, the euro zones sovereign debt crisisremains on global investors radar screens, now focusedon political and economic developments in Portugal. Thelikelihood of a multilateral rescue package to address thecountrys sovereign debt distress has increased. Mean-while, international rating agencies continue to downgradethe ratings (and outlook) on the peripheral European sov-ereign credits. Interest rate differentials, rising commodityprices and investor sentiment support the Swedish krona(SEK) and the Norwegian krone (NOK), while the Swissfranc (CHF) offers an inter-Europe diversifying vehicle.The pound sterling (GBP) has been supported by a weakUSD and rising expectations for an increasingly hawkishBank of England. However, the UKs combination of lowgrowth, above target inflation and an uncertain path forinterest rates is likely to see the GBP underperform theEUR this year.

The Asian currency environment remains promising de-spite the tragic events affecting the Japanese economy.The bias towards regional currency appreciation remainsintact as capital flows eye the fast-growing region. TheChinese yuan (CNY) is in strengthening mode, yet we donot expect any material change in the countrys currencyregime. The Japanese yen (JPY) is reacting to the jointintervention by G7 countries, which was an effort to pre-vent disruptive appreciation as a result of repatriation ofJapanese assets to finance reconstruction following theearthquake/tsunami and ongoing nuclear crisis. Aftertouching the 76 per USD mark in intra-day trading onMarch 16th, the JPY is entering the second quarter on aweakening tone approaching the 85 mark. Elsewhere inthe region, top-tier regional currencies such as the SouthKorean won (KRW), the Malaysian ringgit (MYR) and theThai baht (THB) continue in rallying (against the USD)mode on the back of strong growth and widening interestrate differentials.

MARKET TONE & FUNDAMENTAL FOCUS Pablo F.G. Brard +1 416 862-3876 Camilla Sutton +1 416 866-5470

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April 2011

As we move into April, the Canadian dollar (CAD) has gained 3% against the USD on a year-to-date basis. The combi-nation of a broadly weaker USD, strong oil prices, favourable investor sentiment and Canadas relative fundamental andsovereign positions have all supported the sustained move through parity. Looking out to the spring and fall, most of the

factors that have supported the CAD are likely to remain intact. News that Canada will hold a federal election on May 2nd

has injected a potential uncertainty into the future. However, global investors are accustomed to Canadian elections,minority governments and the limited difference between parties (at least with regards to how they would relate to cur-rencies); accordingly, the CADs reaction has been somewhat muted. In addition, rising oil prices have helped to offsetthe weight of a looming election. It is clear that part of the explanation for strong oil prices lies in developments in Libyaand the Middle East; however, ongoing demand growth, notably from the emerging nations, is also supporting prices. Inthe months ahead tensions in the Middle East might lessen, but it is likely that supply fears will remain elevated, creatingmore sustained upward pressure on oil prices. This is not particularly good for the US growth outlook; however a con-tained rise in oil prices from here is likely to be a net benefit to Canada and positive for the CAD. On the flip side, anysustained dramatic rise in oil prices would weigh on the US and global growth outlook and shift to a net negative forCanada. Rising commodity prices are part of what is putting upward pressure on global inflation and leading to risingcentral bank rates. In Canada it is likely that the Bank of Canada tightens policy later this year; nevertheless, in the US adepressed housing sector, elevated unemployment and a lack of core inflationary pressures leaves the Federal Reserve

unlikely to increase interest rates until 2012. This should widen interest rate differentials in the CADs favour. US mone-tary and fiscal policy combined with sentiment should keep medium-term downward pressure on the broader USD. Can-adas strong sovereign position is likely to draw ongoing CAD favourable flows by global investors. Finally, market senti-ment is favourable CAD. The main risk to our view is any shock that creates a temporary run to the USD as well as amore sudden hawkish shift at the Federal Reserve than we expect. We hold 1.05 year-end CAD forecast.

CANADA Camilla Sutton +1 416 866-5470

12 m 6 m 3 m 3 m 6 m 12 mAUDCAD 0.931 0.995 1.022 1.019 1.018 1.017 AUDCADCADJPY 92.05 81.14 81.30 81.44 85.42 90.53 CADJPYEURCAD 1.372 1.403 1.336 1.377 1.382 1.378 EURCADUSDCAD 1.015 1.029 0.998 0.970 0.960 0.950 USDCAD

AUDCAD CADJPY

EURCAD USDCAD

1.00087.291.3650.965

Currency TrendsSpot1-Apr

OutlookGoing BackFX Rate FX Rate

0.85

0.88

0.90

0.93

0.95

0.98

1.00

1.03

Apr-10 Jun-10 Aug-10 Oct-10 Dec-10 Feb-11 Apr-1178.0

80.2

82.3

84.5

86.6

88.8

90.9

93.1

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

1.23

1.27

1.30

1.34

1.37

1.41

1.44


0.98

1.00

1.01

1.03

1.05

1.07


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April 2011

UNITED STATES - The US economy is showing steadyprogress along the recovery path, but underlying detailsare more mixed. Manufacturing and services sectors con-tinue to regain momentum, which points to a gradual pick-up in private-sector hiring, but alongside a depressedhousing market the US consumer remains under pres-sure from a still uncertain labour landscape and rising costof food and energy prices. According to the ISM manufac-turing and services indices, activity in these industries hasbeen revving up for a string of months now, in part sup-ported by export demand and business investment. Thishas resulted in steady gains in private-sector employment,averaging an addition of close to 130,000 jobs per month.For the quarter as a whole, US consumer spending istracking a marked slowdown, providing less of a lift to first-quarter GDP. Alongside tepid wage growth and an uncer-tain labour market outlook, higher cost of basic goods food and energy prices in particular may be crowding outbroader consumer spending and pushing Americans tohoard stimulus gains. Despite higher commodity prices,measures of underlying inflation remained subdued andlonger-run inflation expectations still well-anchored. From astructural perspective, price sensitivity has been reducedthrough improvement in monetary policy transparency andreduced reliance of advanced economies on the manufac-turing sector. From a cyclical perspective, the strength ofthe impact of a commodity price-shock is dependent onwhat stage of the economic cycle a country faces. Giventhat the economic recovery in the United States is ex-pected to be gradual, the crowding-out effect of costlier

basic goods, tepid wage pressures and excess capacityare likely to hamper the price transmission mechanism.

CANADA - Canadas economic recovery is continuingapace. We expect output expanded at around a 4% annu-alized rate in the first quarter of 2011, following a 3.3% ad-vance in Q4. Consumer spending remains reasonablyhealthy, supported by steady job growth. Nonetheless,there are some signs of increasing consumer caution amidrising gas and food prices and high household debt bur-dens. Indeed, consumer confidence readings have recentlysoftened and the pace of consumer credit growth hasslowed. Looming public sector hiring and wage restraintalso reinforces a more temperate consumer outlook. Gov-ernment stimulus spending is still providing a lift to overallactivity, but this support will fade later this year and into2012 as fiscal shortfalls are addressed and current infra-structure projects wind down. At the same time, the econ-omy is benefitting from rising emerging market demand forCanadian commodities and strengthening US industrialactivity. Exports are now making a solid contribution togrowth, despite the challenge of a persistently strong Ca-nadian dollar for many manufacturers. Global supply chaindisruptions in the wake of Japans devastating earthquake/ tsunami are expected to result in some temporary produc-tion disruptions domestically, primarily in the large motorvehicle and parts sector, though reconstruction efforts willin turn provide a lift to exports of lumber and other buildingmaterials. Business investment remains a bright spot. Ca-nadian firms have been taking advantage of a strong cur-rency, healthy corporate balance sheets, firm commodityprices and government incentives to invest in machinery &equipment and resource-related exploration. Overall, cor-

porate outlays are expected to contribute over one percent-age point to GDP growth this year and next, providing animportant offset to a more cautious consumer and increas-ing public sector restraint.

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

MONETARY P OLICY COMMENTARY Derek Holt +1 416 863-7707 Gorica Djeric +1 416 862-3080UNITED STATES - In line with the broad consensus, theFOMC decided to remain on the sidelines at its latest meet-ing on March 15 th. On balance, the accompanying state-ment signaled no policy shift, but the slightly greater opti-mism may have been oriented toward striking a balancebetween the hawks and the doves. That said, there was nochange to key references and the Fed indicated, in its

strongest statement reference yet, that it is seeing throughinflation upsides as transitory this aligns with our view.Alongside our expectations for the Fed to remain on holdthrough at least the remainder of the year, we do not antici-pate any shift in tone at the next meeting, on April 27 th.This would reaffirm our view that the Fed will carry out theQE2 program through to its scheduled completion. Manag-ing Fed language will be key in keeping bond vigilantes atbay, and we expect this will be achieved by underscoringthe Feds readiness to act should economic conditionschange substantially in either direction.

CANADA - Perhaps the biggest market implication to theFederal Budget and the announced federal election lies interms of what it means for the Bank of Canada (BoC). Wemaintain our longstanding view that the BoC is on hold untilOctober on the back of recent fiscal, political and indicatordevelopments. Over the past twenty years, the BoC hasgenerally avoided starting a tightening campaign during an

election period, a good policy given the uncertainty facingthe fiscal regime. Regardless of the election results, it islikely that fiscal drag will still lie significantly on the horizonin a manner that tightens policy conditions. On the datafront, Januarys disappointing retail sales figures also rein-force our view on the BoC. Whats more, the recent tradefigures highlight the BoCs legitimate concerns about Can-adas ability to leverage the US recovery via export com-petitiveness. Finally, the BoC can take its time in evaluatinginflation risk, as it is in no danger of breaching its inflationtarget any time soon, unlike pressures being faced in Asiaand Europe.

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April 2011

EURO ZONE - An increasingly hawkish ECB, a commitment from authorities to protect the monetary union, growing com-fort with the problems in the European periphery and a bearish stance towards the USD have all supported investor flowsinto the EUR. Our story continues to be that the EUR retraces some of its 2010 losses, but gains from the current 1.41

level are likely to be harder fought. We expect the EUR to close Q211 at 1.42 and 2011 at 1.45.

UNITED KINGDOM - Investors sentiment towards the GBP has been volatile, with the net exposure moving from net longto net short and back to net long. This is reflective of the conflicting pressures on the currency. High inflation, an uncertainpath for interest rates, low growth and strict austerity might prove a dangerous combination. Technically, it is encouragingthat the GBP reached a new 15-month high in March. We expect the GBP to be supported by a weak USD and interestrate differentials, closing Q211 at 1.60 and the year at 1.63.

SWITZERLAND - The CHF has been trending higher since last June on the back of its powerful position as a safe-haven, inter-Europe alternative to both the USD and EUR and its strong sovereign position. Technically, the outlook isbullish and investor sentiment favours further gains. The threat of SNB intervention will likely limit gains if EURCHFdrops to new lows. We expect USDCHF to close the year at 0.90 and EURCHF to close at 1.31.

NORWAY - Benefitting from oil prices, its sovereign position and an increasingly hawkish central bank, the NOK has ral-lied to a new 17-month high. Technically, 5.50 is going to prove a challenge to break, but bullish sentiment is working inits favour. We expect the NOK will close the year at 5.50.

EUROPE Currency Outlook Camilla Sutton +1 416 866-5470

12 m 6 m 3 m 3 m 6 m 12 mEURUSD 1.35 1.36 1.34 1.42 1.44 1.45 EURUSDGBPUSD 1.52 1.57 1.56 1.60 1.61 1.65 GBPUSDEURCHF 1.42 1.34 1.25 1.31 1.30 1.31 EURCHFUSDNOK 5.94 5.88 5.81 5.67 5.64 5.58 USDNOK



1.411.601.315.53

EURUSD GBPUSD

EURCHF USDNOK

1.18

1.23

1.27

1.32

1.36

1.41

1.45


1.44

1.48

1.52

1.56

1.60

1.64


1.22

1.26

1.30

1.33

1.37

1.41

1.45


5.65

5.85

6.05

6.25

6.45

6.65


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April 2011

EURO ZONE - The beginning of the European CentralBanks (ECB) monetary policy tightening cycle is imminent.ECB policymakers have become more concerned about

second round inflation impacts stemming from higher en-ergy and food prices. The central bank assesses that risksto the inflation outlook are "on the upside", and that infla-tion tracking persistently over the target of below, butclose to, 2% is a threat to the ECBs price stability man-date. Consumer prices increased by 2.6% y/y in March,according to a flash estimate. We expect the benchmarkinterest rate to be raised by 25 basis points in April, fol-lowed by adjustments of similar magnitude each quarteruntil the policy rate reaches 2.5% in the third quarter of2012. In the context of persistent turmoil in the euro zoneperiphery, ECB President Jean-Claude Trichet has pointedout that tighter monetary conditions can be accompanied

by non-standard liquidity measures. As the sovereign crisisis predominantly driven by investor sentiment, we assessthat the likelihood that Portugal might be forced to seekfunding from the European Union-International MonetaryFund financial assistance pool in the near term is relativelyhigh. We expect euro zone growth to slow modestly thisyear to around 1.4% on the back of widespread fiscal con-solidation efforts and slower export sector momentum.Nevertheless, as the euro zone periphery recovers in 2012,output will pick up again, expanding 1.7% in the year.

UNITED KINGDOM - Inflationary pressures continue to in-tensify in the UK, with the consumer price index increasingby 4.4% y/y in February, up from 4.0% in the prior month.

The headline inflation rate will likely continue to increase inthe coming months toward the 5.0% y/y threshold beforesubsiding to below 4.0% by the end of the year. As inflationexpectations and prices at the core level are also picking up(core inflation reached 3.4% y/y in February), British mone-tary authorities will be challenged to find a balance betweenpromoting price stability and supporting economic growthconditions. We expect that the Bank of England will begin agradual process of monetary policy normalization in thethird quarter of 2011, taking the Bank Rate to 1.0% by theend of the year and to 2.0% by end-2012. The 2011Budget, released on March 23 rd, remains committed to thegovernments fiscal consolidation plan in order to bring pub-

lic finances back onto a sustainable path. The budget defi-cit, after peaking at 11.1% of GDP in the FY2009-10 (April-March), is set to narrow to 9.9% of GDP in the ongoing fis-cal year, due in part to in-year spending cuts and the VAThike, and further to 7.9% of GDP in the FY2011-12. We as-sess that aggressive fiscal consolidation and slower exportsector momentum will limit the nations economic growth to1.4% in 2011 before picking up to around 1.7% in 2012.

SWITZWERLAND - Inflationary pressures remain virtuallyabsent in Switzerland on the back of the strength of theSwiss franc (CHF). Despite elevated commodity prices, theheadline consumer price index increased by only 0.5% y/yin February, compared with a rate of 0.2% in the previousmonth. Not surprisingly, Swiss monetary authorities opted tokeep the key interest rate target unchanged at 0.25% fol-lowing the quarterly monetary policy meeting on March 17 th.An expansionary policy stance will likely be maintained foran extended period of time; we expect that policymakers willbegin a cautious process of monetary normalization in thefinal quarter of 2011, raising the benchmark rate graduallyto 1.0% by the end of 2012. The next policy meeting isscheduled for June 16 th. Solid economic performance is notfeeding inflationary pressures, at least for the time being.The KOF leading indicator, the purchasing managers indextogether with robustly growing exports (despite the strengthof the CHF) point to promising industry prospects, whilehousehold spending should be supported by relativelyhealthy labour market conditions (the unemployment ratedecreased slightly to 3.4% in February from 3.5% the monthbefore). We expect the economy to grow by around 2.0%this year, following a 2.6% expansion in 2010. The politicaloutlook is dominated by the approaching general elections,scheduled for October 2011; nevertheless, the country con-tinues to enjoy a high degree of political stability.

NORWAY - Norwegian monetary authorities are preparingto resume the monetary tightening cycle that has been onhold since June 2010. Though the key policy rate was kepton hold at 2.0% following the Executive Boards meeting onMarch 16 th, policymakers have since become more hawk-ish, noting that the benchmark interest rate should be in-creased before the end of the first half of 2011. The nextpolicy meeting is scheduled for May 12 th. Consumer priceinflation eased to 1.2% y/y in February from 2.0% in theprior month, while prices at the core level increased by0.8% y/y. Meanwhile, the growth outlook for the Norwegianeconomy is favourable, as indicated by improving consumerconfidence, rising credit demand, solid manufacturing sectorperformance and elevated energy prices. Mainland realGDP which excludes volatile oil, gas and shipping ex-panded by 0.3% q/q in the final quarter of 2010 while thewhole economys output surged 2.4% q/q. Therefore, themonetary authorities assess that a higher interest rate levelis justified in an effort to reduce the risk of future financialimbalances. Norway has solid economic fundamentals as itenjoys a strong external position (the current account sur-plus will likely hover around 13% of GDP through 2012) andhealthy government finances (the fiscal surplus will average10% of GDP in 2011-2012).

EUROPE Fundamental Commentary Tuuli McCully +1 416 863-2859

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April 2011

JAPAN - A national disaster, coordinated G7 intervention and weak fundamentals have led to a volatile March for yentraders. As we enter April, there appears to be new-found stability. The near-term risk is that repatriation flows support theyen, but the medium-term outlook has only worsened over the last month. We expect USDJPY to drift higher and close

the year at 84.

CHINA - The yuan continues to trend slowly higher and reached a new post-(quasi) float high in March. The NDF marketis pricing in a further 1.3% appreciation this year, though wed expect a more aggressive return profile. A weaker USDcombined with the commitment to an increasingly flexible foreign exchange regime on behalf of Chinese authoritiesshould all be supportive of a stronger CNY. We hold a USDCNY6.1 year-end target.

AUSTRALIA - The AUD reached a new 28-year high in March, suggesting that upward momentum in the currency re-mains strong. Investor sentiment, technicals and fundamentals are all working in the currencys favour and a rebuilding ofthe carry trade is putting additional upward pressure on the AUD. As long as emerging Asia growth remains strong, so toodoes the outlook for the AUD. We hold a Q2 2011 target of 1.05 and a year-end forecast of 1.08.

NEW ZEALAND - The outlook for NZD is still marred and pales in comparison to the AUD. Investor sentiment is weak,

the fundamentals have deteriorated and the RBNZ recently cut interest rates by a surprising 50 basis points. We expectthe NZD to retrace some of its recent losses and hold a Q2 2011 forecast of 0.76 and a year-end forecast of 0.78.

ASIA/OCEANIA Currency Outlook Camilla Sutton +1 416 866-5470

12 m 6 m 3 m 3 m 6 m 12 mUSDJPY 93.5 83.5 81.2 79.0 82.0 86.0 USDJPYUSDCNY 6.83 6.69 6.59 6.40 6.25 6.01 USDCNYAUDUSD 0.92 0.97 1.02 1.05 1.06 1.07 AUDUSDNZDUSD 0.71 0.73 0.78 0.77 0.77 0.78 NZDUSD

USDJPY USDCNY

AUDUSD NZDUSD

84.36.551.040.77



78.0

80.5

83.0

85.5

88.0

90.5

93.0

95.5


6.58

6.62

6.67

6.71

6.76

6.80

6.85


0.81

0.84

0.88

0.91

0.95

0.98

1.02


0.68

0.70

0.73

0.75

0.78

0.80


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April 2011

JAPAN - Near-term Japanese yen (JPY) volatility will re-main in place with the Bank of Japan (BoJ) battling exces-sive appreciation. Initial strengthening forces will be coun-

tered by the blow to the countrys infrastructure and uncer-tainty about the capacity for a quick recovery, leading to aweakening profile. The economy will remain in recoverymode as authorities grapple with the aftermath of the March11 th earthquake/tsunami and lingering nuclear reactor crisis.Government estimates of the damage place the loss ataround US$300 billion, or 5.5% of the countrys GDP. Theviability of an expeditious recovery hinges not only on re-storing a reliable electricity grid and transportation network,but also on the level of the JPY, given export dependence.The JPY rebound post-G7 intervention is maintaining oper-ability for exporters, and further intervention is likely if sig-nificant appreciation resumes. A second quarter contraction

will be followed by the reconstruction effort gathering mo-mentum in the second half of 2011 and through 2012. Afterlast years record 3.9% y/y gain, GDP is expected to ex-pand 1% in 2011 and 2.9% in 2012. The BoJ will likely re-tain a loose monetary policy stance, as export dependenceraises the relevance of unsterilized currency interventions toprevent excessive appreciation. While the setback resultingfrom recent disasters will exacerbate deflationary forces,cost push inflation could emerge as the recovery gatherspace, given dependence on imported fuel amid persistentglobal oil market uncertainty and the higher energy tally.

CHINA - Yuan (CNY) strength will continue through 2012.CNY appreciation is viewed as a policy to tighten monetaryconditions while promoting domestic market development.

Chinas condition as the global growth pace-setter will inten-sify as domestic demand momentum balances exportgrowth. We expect yearly economic growth to average9.5% y/y in 2011-12. Output expansion accelerated to 9.8%in the final quarter of 2010, taking the yearly advance to10.3% alongside a credit easing-inspired 25% rise in fixed-asset investment. Recent economic reports reaffirm thecountrys relevance worldwide, as imports continue to out-pace exports thereby pulling the global recovery forward.Credit abundance underpins double-digit investment gains,while consumer spending supported by real wage improve-ments is associated with rising productivity. Inflation re-mains a concern. The pickup in food prices behind the re-

cent buildup in headline inflation has combined with ele-vated raw material costs looming in the background. Agradual rise in the CNY would help contain their inflationaryimpacts. Although a rebound in inflation is not impossible,transmission to non-food items has yet to become evident,with real wage adjustments still consistent with productivityadvances. Rising bank reserve requirement constraintshave been the main tool to contain excess liquidity, whileinterest rate increases have been aimed at deflating expec-tations of rising asset valuations. Recent property pricegains are way off early-2010 double-digit advances.

AUSTRALIA - The Australian dollar (AUD) will remain wellsupported in the medium-term. Notwithstanding recent natu-

ral disasters, improving fiscal and solid external accountfundamentals as well as exposure to highly-bid commoditiesall bode in favour of the AUD. An eventual resumption ofmonetary tightening will further support the currency to-wards the end of 2011. Australias economic expansion willaverage 3.5% y/y in 2011-12. Notwithstanding the unfavor-able effects of the Queensland floods, the economy willcontinue to expand at trend growth with performance re-maining supported by terms of trade improvements. Growthacceleration during the fourth quarter on the back of risinginvestment spending continues to translate into falling un-employment, with firms in the mining and energy sectorsboosting output levels to meet demand from China and In-

dia. While consumer confidence was dented by recent ex-treme weather events, employment prospects and durablegoods buying intentions remain above average. An initiallyunfavorable effect from the expected slowdown in Japanshould be compensated for by higher commodity demandduring the reconstruction phase. Japan was surpassed byChina in 2009 as the main destination for Australian ex-ports. Inflation will remain within the central banks 2-3%target, as some pressures emerge with supply constraintsdue to crop destruction and labour displacements. Inflationfell to 2.7% y/y in Q4, with core inflation falling to 1.6% onthe back of a significant retrenchment in services costs.

NEW ZEALAND - The New Zealand dollar (NZD) will re-main on the sidelines on the back of loosening monetary

conditions and an economy in recovery mode after theChristchurch earthquake in late February, which was thesecond in the past six months and the countrys worst natu-ral disaster in 80 years. The fiscal effects of the earthquakewill be significantly higher than the NZ$4 billion tally of theprevious Canterbury tremor, and will fall on an alreadyweakened government balance. The economy avoided arecession in the final quarter of 2010 with GDP expandingby 0.8% y/y. While the setback from the recent catastrophecould be significant, the outlook is not totally grim as exportsperformed solidly through February. Business confidencehas firmed up as well on the back of improvements in theexternal accounts, as the country continues to exploit prox-

imity to Australia and the dynamic Asian region. Housingoutlays however could be severely dented with confidenceand credit card spending indicators already displaying aretrenchment. Although annual inflation closed 2010 at 4%,well above the Reserve Bank of New Zealands (RBNZ) 1-3% comfort zone, the central bank appears relaxed withregard to price pressures as it attempts to support a re-bound in activity. In March, the RBNZ decided to lower itsbenchmark interest rate by 50 basis points to a record lowof 2.5%. A downtrend in unemployment is reflected in do-mestic demand conditions; accordingly, non-tradable goodsprices are advancing faster than headline inflation.

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

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April 2011

INDIA - In March, the INR temporarily deviated from a 1.5 month strengthening trend due to risk aversion driven off ofJapans natural disaster. This proved to be only temporary as in late March, the INR appreciated to its strongest levelsince November of 2010, reflecting a normalization in market conditions and a refocusing on Indias hawkish monetary

policy bent and strong growth. External factors, such as the current account deficit, will render the INR vulnerable duringtimes of global financial market volatility. We hold a year-end forecast of 43.75.

KOREA - Frequent government intervention has not prevented USDKRW from moving lower (KRW strength) as financialmarkets rebounded in mid-March. The government is likely to continue to resist too rapid a strengthening in the KRW, butmonetary policy dynamics favour additional appreciation off of a widening KRW yield differential vs. the USD. 1100 hasbeen a key level of support for USDKRW, but a sustained move past this point would signify government ease with astronger KRW. We hold a year-end forecast of 1060.

THAILAND - The THB has been more hesitant to test higher in March, though it temporarily managed to reach a new twomonth high against the USD. Policymakers have signaled that inflation is the key concern, which means the THB will notsuffer on a forward looking basis from a lag on the policy front. Wed look for USDTHBs 200-day moving average to holdthe topside, while 30.00 and 29.50 remain supportive to the downside. We hold a year-end forecast of 28.50.

HONG KONG - USDHKD, for the most part of March, remained below the 7.78 level, well away from the endpoints of the7.75 to 7.85 band. There is no hint of any plan to shift away from the USD peg, and there is unlikely to be any such shifttowards the CNY until capital account convertibility is satisfied, and the growth of a robust and multi-faceted offshore ren-minbi market is realized in Hong Kong. We hold a year-end forecast of 7.75 for the HKD.

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

12 m 6 m 3 m 3 m 6 m 12 mUSDINR 44.95 44.97 44.71 44.31 44.03 43.05 USDINRUSDKRW 1132 1138 1125 1087 1073 1045 USDKRWUSDTHB 32.34 30.35 30.03 29.67 29.08 28.20 USDTHBUSDHKD 7.76 7.76 7.77 7.77 7.76 7.75 USDHKD



44.59108930.307.78

USDINR USDKRW

USDTHB USDHKD

44.00

44.60

45.20

45.80

46.40

47.00

47.60


1110

1135

1160

1185

1210

1235


29.40

29.95

30.50

31.05

31.60

32.15

32.70


7.759

7.767

7.776

7.784

7.793

7.801


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April 2011

INDIA - Favourable interest rate and growth differentials willsupport the Indian rupee (INR) through 2011. While foreignportfolio flows have slowed so far this year and the inflation-

ary outlook has deteriorated, support for INR strength re-mains in place. Indias economic expansion will averageover 8.5% y/y in 2011-12. The economy recorded a solid8.7% gain in 2010 with private spending on an upturn, un-derpinned by abundant bank credit availability. Rising dis-cretionary spending compensated for a downtrend in gov-ernment outlays while public infrastructure outlays still con-tributed to the expansion. Rural incomes improved during2010 as rainfall returned to normal and this factor offersfurther support to discretionary spending. Inflation remainsa key concern. A downward trend in wholesale price gainsthrough the end of 2010 has been reverted as global foodand fuel costs continue to erode purchasing power. While

double-digit gains in food values have trended down, risingfuel costs are now the main inflation driver. The pervasiveeffect of elevated oil prices is evidenced by the reversion ofthe downward trend in manufacturing costs. The ReserveBank of India (RBI) has hiked the benchmark repo rateseven times in the past twelve months for a cumulative 200basis points to 6.75%. The RBIs main concern is a buildupin inflation expectations with the economy operating closeto full capacity. The central bank will likely feel obliged toraise rates at least once more in 2011 as it awaits clearersigns of inflation abatement.

KOREA - The Korean won (KRW) will maintain a strength-ening tone through 2011-12 on the back of sustained eco-nomic growth. While the Bank of Korea (BoK) stands ready

to dampen excessive appreciation, the healthy rebalancingof the economy currently underway will continue to attractforeign capital. GDP picked up at a 6.1% y/y pace in 2010,and we expect the economy to converge back to a mediumterm speed of 5% y/y on average in 2011-12. Waning fiscalimpulse and expiring subsidies, having brought forwardconsumption in 2010, resulted in a slowdown in spendingtowards the end of 2010, though exports remained a brightspot. The BoK is in interest rate normalization mode aimingto rein in inflation expectations. Although the Korean econ-omy is highly vulnerable to commodity price fluctuations,the main focus has been on averting a wage/price spiral.Headline inflation hit 4.5% y/y in February on the back of

food and oil price increases. Core inflation moved higher aswell to 3.1% y/y. Although headline pressures could in-crease in coming months, we expect core inflation to trenddown during the rest of the year, on the back of slower do-mestic demand and a relatively strong KRW. While unem-ployment remains on a downward trend, real wage in-creases have recently eased, signaling a diminished threatof an inflationary spiral. While the size of the oil import bill inKorea is large at 5.5% of GDP, there is plenty of maneuver-ing room as the countrys fiscal accounts remain solid, withno current subsidies on fuel costs.

THAILAND - Thai baht (THB) appreciation will characterizethe foreign exchange environment in 2011-12. The Bank of

Thailand accumulated US$27 billion in foreign assets lastyear, taking its total stock to US$166 billion (55% of GDP).While 2011 will remain a politically charged year, the sizablereserve stock is more than enough to support the currency.Attenuation of political uncertainty, solid export growth andrising interest rates triggered a surge in foreign portfolio in-flows to the point that a 15% withholding tax on foreign in-vestors capital gains was reinstated. No such further meas-ures are anticipated. The economy will continue to reap thebenefits of a privileged geographical location in SoutheastAsia, with activity supported by domestic demand momen-tum running alongside rising foreign sales. Manufacturingactivity improved during the three months to December,

reversing a mid-year soft spot, underpinning the impressive7.8% y/y GDP advance of 2010. A recovery in exports(which account for two thirds of the economy) remains atthe core of the rebound, with positive implications for manu-facturers. Consumer and investment spending are advanc-ing at an over 5% y/y rate, attesting to the solidity of the do-mestic demand picture. Inflationary concerns have come tothe fore given the upbeat tone in local activity and the rise infood and fuel costs. Headline consumer inflation has yet todisplay a definitive upward trend, standing at 3% y/y, withcore inflation coming down recently to 1.3% y/y.

HONG KONG - The exchange rate band around the HongKong dollar (HKD) will remain well supported with few risks

of realignment as the HKD trades close to the middle of theband. Economic activity appears poised for further improve-ment with domestic consumption and exports continuing tooutperform on the back of added momentum on themainland and falling local unemployment. Labour marketconditions have tightened significantly, as the jobless ratefell to a record low of 3.6% in February, the lowest sinceNovember 2008. A strong labour market has been under-pinning a solid domestic spending profile displayed by dou-ble-digit annual retail sales growth. We expect GDP to ex-pand at a 4.9% y/y average rate in 2011-12. Activity hasalso been supported by loose monetary conditions importedfrom the US and a somewhat pro-cyclical fiscal stance,

which point to a possible buildup in price pressures. Head-line and core inflation have both trended upward reaching3.7% y/y and 3.2% in February, respectively. HKD weak-ness, rising Chinese inflation and accelerating import costsare feeding price pressures. Accordingly, negative real in-terest rates already underpin asset price gains, supportingdomestic spending. The government abandoned severalkey politically sensitive budget initiatives -aimed at fightinginflation. In particular, a controversial one-off tax rebate(capped at HK$6000) benefiting around 1.4 million taxpay-ers is likely to provoke higher inflationary pressures withminor effects on growth.

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

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April 2011

BRAZIL - The Brazilian real (BRL) remains stable and strong, firmly supported by large-scale foreign capital inflows,highly attractive interest-rate differentials, favourable commodity prices and a prudential macroeconomic policy environ-ment. Absent strong fiscal tightening, the BRL could appreciate even further. However, we do expect the BRL to close the

year at 1.65 and modestly depreciate in nominal terms in 2012.

MEXICO - The Mexican peso (MXN) has become a market favourite currency in the context of growing financial uncer-tainties linked to European debt sustainability shocks, political tension in Northern African and Middle Eastern nations andcommodity market shocks. US recovery dynamics, high oil prices, attractive yields and domestic demand growth are thekey factors shaping a bullish tone in Mexicos currency and economic outlook. We expect USDMXN to close the year at12.70.

CHILE - The Chilean peso (CLP) has adopted an appreciating bias in the context of a volatile price environment triggeredby sharp price adjustment in relevant commodity markets. The CLP continues to be influenced by the direction of copper(export) and crude oil (import) prices. The central bank remains committed to further rate hikes to normalize monetaryconditions. We expect USDCLP to close the year at 480.

COLOMBIA - The Colombian peso (COP) remains in range-trading mode despite signs of ongoing support for furtherappreciation versus the USD due to accelerating economic activity, widening interest rate differentials (and short-termrate increases), increasing crude oil prices, surging domestic demand (and local credit) and massive capital inflows. Weexpect USDCOP to close the year at 1,860.

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

12 m 6 m 3 m 3 m 6 m 12 mUSDBRL 1.78 1.69 1.66 1.64 1.64 1.67 USDBRLUSDMXN 12.36 12.59 12.36 12.15 12.24 12.55 USDMXNUSDCLP 524 484 468 478 479 482 USDCLPUSDCOP 1920 1800 1920 1867 1864 1867 USDCOP

USDBRL USDMXN

USDCLP USDCOP

1.6211.84

4771861



1.62

1.66

1.69

1.73

1.76

1.80

1.831.87


12.0

12.2

12.4

12.6

12.8

13.013.2


460

474

488

502

516

530

544


1800

1850

1900

1950

2000

2050


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April 2011

BRAZIL - Brazil is weathering the triple global events(Japan nuclear crisis, political upheaval in Africa and theMiddle East and the commodity price shock) relatively well.

The government is not indifferent to the deteriorating infla-tion outlook and the widening current account deficit whichseem to be emerging within the context of a deceleratingeconomy. We are now estimating that the economy willslow down the pace of expansion and grow by 4-4.5% in2011-12, from the 7.5% increase recorded in 2010. Infla-tionary pressures and expectations have been on the risefor months now, prompting the central bank to adopt ahawkish monetary stance and increase the policy-settingSELIC rate by 300 bps to 11.75% since October 2009. Mar-ket participants are now expecting that the central bank willcomplete its tightening cycle by raising the SELIC rate byanother 50 bps and keep it at 12.25% for the rest of the

year. In an effort to tackle the dual policy concerns of robustcredit growth and rapid currency appreciation, the govern-ment recently announced the imposition of a 6% tax on in-ternational lending and bond issuance activity by Brazilianbanks. Recent data indicated that total domestic credit ex-panded at a 21% rate in the 12-month period ending in Feb-ruary 2011. The central bank also reported that public sec-tor financial institutions account for 42% of the total stock ofBrazilian credit.

MEXICO - Mexico offers a favourable business and marketenvironment, characterized by accelerating economicgrowth, contained inflation and a domestic credit expansion

phase. The year 2010 was earmarked as a period of sharprecovery, as reflected by the 5.5% growth rate following acontraction of 6.9% in 2009. Looking ahead, Mexicos realGDP is well positioned to expand by 4% this year and next.In sharp contrast with other top-tier emerging-marker coun-tries, consumer price inflation (at 3.5%) has not been anissue of policymaker/investor concern so far. Futures mar-kets indicate, however, that the Mexican monetary authori-ties may gradually and moderately begin a tightening cyclesome time during the fourth quarter of the year. At present,the government-administered policy rate is set at 4.5% (asharp difference with the 11.75% in Brazil). Due to its per-ceived technical undervaluation, rising crude oil prices (the

benchmark WTI light crude oil price has approached theUS$110 per barrel at the end of March) and attractive peso-dollar bond yield spreads, the MXN attained investor-favourite status. Without aggressively intervening in finan-cial markets, the central bank has continued to accumulateinternational reserves which reached US$125 billion by theend of March. Credit market metrics also point towards asteady improvement in Mexicos sovereign creditworthi-ness. All international agencies maintain a stable outlookon Mexicos sovereign credit ratings. A visible improvementon fiscal reform is at the core of potential rating revisions.

CHILE - Chile is experiencing a period of robust economicactivity aided by surging domestic consumption and strong

investment flows linked to the thriving export markets. Theeconomy is positioned to expand by 6.5% this year in linewith strong momentum enjoyed by Southern Cone coun-tries. Monthly indicators of economic activity continue tohighlight an expansionary phase: in January, the IMACECindex increased by 6.8% y/y, up from 5.9% in December.Retail sales trends also portray an expansionary phase inChile. Inflation is not, for now, an issue of concern; in fact,consumer prices increased by 2.70% in February on a year-over-basis. However, recent official rhetoric stressed thatdue to the geo-political crisis taking place in Northern Africaand the Middle East, inflationary expectations may suffer anupward adjustment. The central bank continues to stress

the need to tighten monetary conditions; indeed, the mone-tary authorities increased its short-term policy rate by 50bps to 4% on March 17 th. Of course, higher interest ratesmay be counterproductive if the authorities are somewhatconcerned by a potential rate of currency appreciation asstressed by the decision to purchase US$12 billion earlier inthe year. As of the end of March, the central bank countedon US$28.5 billion in international reserves. Beyond theplan to accumulate reserves, the government is relaxingrules for Chilean institutional investments in foreign assetsin order to allow an orderly exchange rate adjustment.COLOMBIA - The Colombian economic outlook remains

promising. The economy is showing signs of steady accel-eration on the back of surging domestic demand, increasing

access to domestic credit, favourable terms of trade, a pru-dent macroeconomic framework and sizable foreign capitalinflows. The government of President Santos has not beenshy in stressing policy concerns regarding the potential forsteady appreciation of the peso as the country receives vo-luminous amount of foreign direct equity flows linked to thethriving energy (and mining) sector. The domestic financialsector remains strongly capitalized and adequately regu-lated leading to a phase of expanding domestic lending ac-tivity in the new phase of economic expansion. The Colom-bian economy is well positioned to grow by 6% in 2011 aftera healthy 4.3% expansion in 2010. Robust consumerspending and construction growth was at the core of the

4.6% growth rate during the last quarter of 2010. In recogni-tion of major structural advances achieved over the past fewyears and, in line with a pro-development policy environ-ment, Standard and Poors rewarded Colombia with a sov-ereign credit rating upgrade revision to investment gradestatus on March 16 th; moreover, both Fitch and Moodys stillmaintain a positive outlook on the countrys debt assetsimplying that the country is nearing full investment gradestatus. Meanwhile, the central bank remains committed tonormalize monetary conditions, i.e., increase short-terminterest rates from its current level of 3.50%.

DEVELOPING AMERICAS Fundamental Commentary Pablo F.G. Brard +1 416 862-3876

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April 2011

RUSSIA - Elevated oil prices and the outlook for higher interest rates will continue to provide support to the Russian ru-ble (RUB) despite increased risk aversion stemming from events in the Middle East and Japan. Approaching parliamen-tary and presidential elections, we will likely see periods of currency volatility. We expect USDRUB to close the year at 28.

TURKEY - The Turkish lira (TRY) is embarking on a period of stabilization following four months of marked selling pres-sures from November through February. Widening external imbalances together with June general elections may reintro-duce a modest weakening trend later on this year. We expect the TRY to close the year at 1.60 per USD.

CZECH REPUBLIC - The Czech governments commitment to fiscal prudence should help prevent a contagion of riskaversion from neighbouring countries into the Czech Republic. We expect the CZK to remain relatively stable through2012, hovering close to 24.0 per the euro.

SOUTH AFRICA - The South African rand (ZAR) will continue to reflect rapid changes in investor sentiment. A wideningcurrent account deficit will point to a depreciating bias of the ZAR vis--vis the US dollar in 2011 and 2012. We expectthe ZAR to close the year at 7.10 per USD.

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

12 m 6 m 3 m 3 m 6 m 12 mUSDRUB 29.4 30.6 30.5 28.3 28.1 28.2 USDRUBUSDTRY 1.52 1.45 1.54 1.56 1.58 1.59 USDTRYEURCZK 25.4 24.6 25.1 24.4 24.2 24.0 EURCZKUSDZAR 7.28 6.97 6.63 6.88 6.99 7.20 USDZAR



28.41.5424.56.74

USDRUB USDTRY

EURCZK USDZAR

28.0

28.7

29.5

30.2

31.0

31.7


1.44

1.49

1.55

1.60

1.66


23.75

24.25

24.75

25.25

25.75

26.25


6.80

7.10

7.40

7.70

8.00


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April 2011

RUSSIA - Domestic politics will dominate investor attentionin the coming two years as the next parliamentary electionsare scheduled for late 2011, followed by a presidential ballot

in 2012. Russia will continue its fight against rising inflation-ary pressures in the coming months. At the March 25 th monetary policy meeting, the countrys monetary authoritiesopted to leave the refinancing rate unchanged at 8.0% fol-lowing a hike the month before. Nevertheless, the centralbank continued its monetary tightening policy by raisingbank reserve requirements further. The consumer price in-dex increased 9.5% y/y in February, being the highest rateamong the BRIC countries. The prospects for further bench-mark interest rate increases together with shifting dynamicsin global energy markets (demand and pricing) will makeRussia an attractive destination for capital inflows, therebyproviding support to the Russian ruble (RUB) through 2011.

Developments in crude oil and natural gas prices will signifi-cantly impact the Russian economic outlook; we expect thecountrys real GDP growth to average 4% through 2012,following a 4.0% expansion in 2010. Similarly, elevated en-ergy prices will be favourably reflected in Russian publicfinances; the fiscal deficit will likely narrow to 3% of GDPthis year from slightly over 4% in 2010.

TURKEY - Turkish general elections will be held on June12 th, 2011 and the robustly growing economy offers a fa-vourable background for the ruling Justice and Develop-

ment Partys campaign. Real GDP growth is being boostedby strong expansion in household consumption and invest-ment. With the industrial sector on the mend and consumerconfidence improving, we expect the countrys output togrow by around 5% through 2012. Following the MonetaryPolicy Committee meeting on March 23 rd, the Turkishbenchmark interest rate was kept on hold at 6.25% for thesecond consecutive month, while reserve requirementswere raised in order to limit rapid credit expansion and en-hance financial stability. Further increases in reserve re-quirements are likely. Despite the authorities efforts to easecapital inflows by keeping interest rates low, the current ac-count deficit continues to widen. On the back of booming

domestic demand, increasing inflation expectations andelevated commodity prices, we assess that policymakers donot have any further room to cut the benchmark rate; in-stead, a period of monetary policy normalization is ap-proaching. While Turkeys inflation continued to ease inFebruary on the back of base effects, reaching 4.2% y/y,inflationary pressures are rebuilding further up the distribu-tion chain with producer prices increasing by 10.9% y/y.Consumer price inflation will likely rebound to around 6%y/y by the end of 2011.

CZECH REPUBLIC - Monetary conditions in the CzechRepublic are set to remain on hold in the near term, as de-

mand-led inflationary pressures remain virtually absent.Headline inflation continues to hover below the centralbanks 2.0% target; the consumer price index increased by1.8% y/y in February. The Czech National Bank has keptthe benchmark interest rate unchanged at 0.75% sinceMay 2010 and policymakers have indicated that a gradualprocess of monetary policy tightening will likely begin to-ward the end of 2011. The export-oriented Czech economyexpanded by 0.3% q/q (2.6% y/y) in the final quarter of2010, showing some signs of waning momentum partly dueto adverse weather conditions. Output growth was drivenby investment in inventories and net exports. We expectthe economy to grow by around 2% this year and by 2%

in 2012, following a 2.2% expansion in 2010. Public fi-nances of the Czech Republic compare favourably withmany of its European peers. The government aims to nar-row the fiscal deficit to 4.6% of GDP in 2011 from 4.8% lastyear, and further to 3% of GDP by 2013. In particular, aplanned large pension reform would significantly ease pub-lic expenditure pressures stemming from the aging popula-tion. Meanwhile, public sector debt is low in regional terms,hovering below 40% of GDP in 2010.

SOUTH AFRICA - South African monetary authorities arebecoming somewhat more concerned about the inflation

outlook, assessing that the risks to price stability are onthe upside due to pressures stemming from administeredprices, wage settlements and higher global energy andfood prices. Though showing some signs of a pickup, con-sumer price inflation remained well-contained at 3.7% y/y inFebruary. We expect inflation to approach the upper limit ofthe South African Reserve Banks (SARB) 3-6% inflationtarget range in 2012. As inflationary pressures are not de-mand-driven, the SARB opted to keep the benchmark inter-est rate unchanged at 5.5% following the Monetary PolicyCommittee meeting on March 24 th. The next policy meetingis scheduled for May 12 th. South African economic pros-pects continue to improve gradually, with the manufacturing

and mining sectors on the mend and improving retail salespointing towards a modest pickup in household spending.Following an expansion of 2.8% in 2010 as a whole, weexpect the countrys real GDP growth to average 3%through 2012. Nevertheless, these rates of economic ex-pansion are not enough to materially reduce the high un-employment rate of 24%. With the trade balance movingfrom a surplus position to a deficit, the current account isset to widen significantly from 3.9% of GDP in 2010 toclose to 6% of GDP in 2012; the shortfall points to modestselling pressures of the ZAR in the next two years.

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

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April 2011

G LOBAL C URRENCY FORECAST (end of period)2009 2010 2011f 2012f

Q1a Q2 Q3 Q4 Q1 Q2 Q3 Q4

MAJOR CURRENCIESJapan USDJPY 93 81 84 90 83 79 82 84 86 87 89 90

Euro zone EURUSD 1.43 1.34 1.45 1.48 1.42 1.42 1.44 1.45 1.45 1.46 1.47 1.48

EURJPY 133 109 122 133 118 112 118 122 125 127 131 133

UK GBPUSD 1.62 1.56 1.63 1.70 1.60 1.60 1.61 1.63 1.65 1.67 1.69 1.70

EURGBP 0.89 0.86 0.89 0.87 0.88 0.89 0.89 0.89 0.88 0.87 0.87 0.87

Switzerland USDCHF 1.04 0.93 0.90 0.86 0.92 0.92 0.90 0.90 0.90 0.89 0.87 0.86

EURCHF 1.48 1.25 1.31 1.27 1.30 1.31 1.30 1.31 1.31 1.30 1.28 1.27

AMERICASCanada USDCAD 1.05 1.00 0.95 0.92 0.97 0.97 0.96 0.95 0.95 0.94 0.93 0.92

CADUSD 0.95 1.00 1.05 1.09 1.03 1.03 1.04 1.05 1.05 1.06 1.08 1.09

Mexico USDMXN 13.1 12.4 12.5 12.7 11.9 12.2 12.2 12.5 12.6 12.5 12.6 12.7CADMXN 12.4 12.4 13.1 13.8 12.3 12.5 12.8 13.1 13.2 13.3 13.5 13.8

Argentina USDARS 3.80 3.98 4.40 5.00 4.06 4.17 4.28 4.40 4.54 4.69 4.84 5.00

Brazil USDBRL 1.74 1.66 1.65 1.75 1.63 1.64 1.64 1.65 1.67 1.70 1.72 1.75

Chile USDCLP 507 468 480 490 478 478 479 480 482 485 487 490

Colombia USDCOP 2043 1920 1860 1890 1871 1867 1864 1860 1867 1875 1882 1890

Peru USDPEN 2.89 2.81 2.68 2.60 2.80 2.76 2.72 2.68 2.66 2.64 2.62 2.60

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 / OCEANIAAustralia AUDUSD 0.90 1.02 1.08 1.10 1.03 1.05 1.06 1.08 1.07 1.08 1.09 1.10

China USDCNY 6.83 6.59 6.10 5.75 6.55 6.40 6.25 6.10 6.01 5.92 5.84 5.75

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 7.75India USDINR 46.5 44.7 43.8 41.0 44.6 44.8 44.3 43.8 43.0 42.4 41.7 41.0

Indonesia 2/ USDIDR 9.48 8.98 8.54 8.40 8.71 8.65 8.60 8.54 8.50 8.47 8.43 8.40

Malaysia USDMYR 3.44 3.06 2.89 2.78 3.02 2.98 2.93 2.89 2.86 2.83 2.81 2.78

New Zealand NZDUSD 0.72 0.78 0.78 0.80 0.76 0.77 0.77 0.78 0.78 0.79 0.79 0.80

Philippines USDPHP 46.1 43.6 42.0 40.0 43.4 43.5 42.9 42.0 41.5 41.0 40.5 40.0

Singapore USDSGD 1.40 1.28 1.24 1.21 1.26 1.25 1.24 1.24 1.23 1.22 1.21 1.21

South Korea USDKRW 1158 1125 1060 1000 1100 1090 1075 1060 1050 1040 1028 1000

Thailand USDTHB 33.4 30.0 28.5 27.3 30.3 29.7 29.1 28.5 28.2 27.9 27.6 27.3

Taiwan USDTWD 32.0 29.2 27.8 26.5 29.4 28.9 28.3 27.8 27.5 27.1 26.8 26.5

EUROPE / AFRICA

Czech Rep. EURCZK 26.4 25.1 24.0 24.0 24.5 24.4 24.2 24.0 24.0 24.0 24.0 24.0Iceland USDISK 126 115 120 115 114 116 118 120 119 117 116 115

Hungary EURHUF 271 279 275 265 266 269 272 275 272 270 267 265

Norway USDNOK 5.78 5.81 5.50 5.30 5.54 5.67 5.64 5.50 5.58 5.55 5.53 5.30

Poland EURPLN 4.11 3.96 3.90 3.80 4.02 3.98 3.94 3.90 3.87 3.85 3.82 3.80

Russia USDRUB 30.0 30.5 28.0 29.0 28.4 28.3 28.1 28.0 28.2 28.5 28.7 29.0

South Africa USDZAR 7.39 6.63 7.10 7.50 6.77 6.88 6.99 7.10 7.20 7.30 7.40 7.50

Sweden EURSEK 10.24 8.99 8.70 8.60 8.95 8.87 8.78 8.70 8.67 8.65 8.62 8.60

Turkey USDTRY 1.50 1.54 1.60 1.55 1.55 1.56 1.58 1.60 1.59 1.57 1.56 1.55

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

South

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Scotia EconomicsScotia Plaza 40 King Street West, 63rd FloorToronto, Ontario Canada M5H 1H1Tel: (416) 866-6253 Fax: (416) 866-2829

This Report is prepared by Scotia Economics as a resource for theclients of Scotiabank and Scotia Capital. While the information is fromsources believed reliable, neither the information nor the forecast shallbe taken as a representation for which The Bank of Nova Scotia or

INTERNATIONAL RESEARCH GROUP

Pablo F.G. Brard, [email protected]

Daniela [email protected]

Tuuli [email protected]

Estela [email protected]

Oscar [email protected]

CANADIAN & U.S. ECONOMIC RESEARCH

Gorica [email protected]

Derek [email protected]

Adrienne [email protected]

FOREIGN EXCHANGE RESEARCHCamilla Sutton

[email protected]

Sacha [email protected]



April 2011

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