Currency Room. with American Express Bank

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2 October/November 2005 ANALYSIS Currency Room Currency Room with American Express Bank Welcome to Currency Room since The Moodie Report s launch one of our most popular sections. This edition s report is brought to you in association with American Express Bank (AEB), and produced by the bank s Global Economics Unit. For AEB s regular updates on this indispensable insight into the complex world of currency fluctuations, log onto Currency Room at Overview: The US Dollar s current rally may well continue for a while but it is a bounce that won t take it much stronger and probably won t last much beyond the next few weeks. In October/November we expect that the US Dollar will move to the weak end of the US$ trading range in place since May and by the end of 2005 we expect that the Dollar will be trading weaker than this range. The Swiss Franc should rally as well, but the best performer will probably be the Yen. The Fed is likely to raise US interest rates in November. US data will be wild for a time but Katrina s impact looks like being moderate and temporary. The Euro-zone should also continue to improve. Corporate restructuring is driving the better outlook for Germany and the Eurozone economy. The Yen has ignored all the good news coming out of Japan but the Bank of Japan is already putting markets on notice that deflation should end soon and that tighter monetary policies are on the way. This should be the trigger which (finally) sends the Yen stronger. Individual currency analysis East Asia Australian Dollar: The Dollar has stayed stronger for longer than we had expected but we still think it will weaken soon. Employment growth continues to surprise on the upside but consumer spending has slowed as the housing market remains soft and business investment will most likely slow as well in the second half of Chinese Renminbi: We expect another small revaluation soon. Economic growth has stayed strong; but weaker bank loans growth points to weaker investment later this year and in Retail sales rose % p.a. in July/August and the external accounts surplus looks likely to almost double in China will revalue on its own terms. Hong Kong Dollar: Hong Kong s upswing should stay in good shape but GDP growth is likely to slow as local rates move up. A reasonable estimate is that Disney s newlyopened theme park will add 0.5 percentage points or so to GDP growth over the next year. Indonesian Rupiah: The economy should withstand interest rate increases with only a moderate slowdown likely; +5 6% p.a. GDP growth in 2005/06 still looks achievable. Japanese Yen: Positive Japanese developments have failed to benefit the Yen. Q2 GDP growth was revised sharply higher to +3.3% p.a. and confirmed that the upswing is being led by domestic demand. PM Koizumi s landslide election victory is also good news. We still expect Yen appreciation, but the most likely trigger will be US Dollar-negative factors. New Zealand Dollar: The Dollar has rallied as economic activity has stayed stubbornly strong. But we continue to expect that the NZ Dollar will move weaker against both the Australian and US Dollars. Philippine Peso: The Peso will move stronger but it will most likely underperform other Asian currencies. Singapore Dollar: The Dollar weakened in August on high oil prices and regional currency slippage, but expect a renewed push as the economic upswing continues. South Korean Won: The Won has weakened on high oil prices but we still expect sustained appreciation. The country s upswing should survive high energy prices. Consumer confidence remains weak but exports, investment and employment are improving and GDP growth should accelerate to +4 5% p.a. in the second half of 2005 after +3% in the first. Taiwan Dollar: The Taiwan Dollar has fallen further. We think that the worst of Taiwan s economic slowdown is now over and that the currency will grind stronger. But the upswing will be sluggish. The Moodie Report 213

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4 October/November 2005 ANALYSIS Currency Room Thai Baht: We expect further Baht appreciation. The Thai economy has rebounded with Q2 GDP growth up +7.9% p.a. on improved exports and investment. But Thailand s sensitivity to energy prices is taking its toll; consumer confidence is down and spending is lower as households cut back. Individual currency analysis Sub-continent Bangladesh Taka: We expect further depreciation, but more slowly than the 10 12% pace of the past 12 months. Indian Rupee: The recent weakness reflects India s worsening trade deficit as oil prices stay high, but a number of factors should support the Rupee. Foreign investor demand is boosting the stock market and lifting capital inflow. Pakistan Rupee: Should strengthen again soon. The economy is generally holding up reasonably well. Private investment is still picking up and the government s public sector development programme is boosting growth. Individual currency analysis The Americas Argentinean Peso: The government remains determined to stop Peso appreciation and continues to play hardball with the IMF. Argentina will also probably allow a stronger Peso to get inflation back under control. Brazilian Real: We expect sustained but moderate Real depreciation. Rates should fall further by year-end. Inflation is slowing and looks on track to meet government targets for the end of Canadian Dollar: The Dollar is expected to top out over the next few months as we think that energy prices will also peak. Continued Bank of Canada rate hikes however will limit any downside. High oil prices are squeezing manufacturing, but the rest of the economy is holding up well. Chilean Peso: We expect the Peso to rally further during the rest of 2005 but it is likely to weaken in GDP growth should stay strong, around +6% p.a., for a while. Mexican Peso: Has fallen back as expected and should slip further as the yield pick-up continues to narrow. We expect some GDP pick-up but it looks set to only rise around +3% p.a. in 2005 and 2006, down on 2004 s +4.4%. Individual currency analysis Europe Euro: The Euro-zone s economic pick-up is still in place though there are signs that higher oil prices are hurting domestic demand. But exports are doing well and factory orders (especially in Germany) are strong, pointing to activity picking up in coming months. The next move in rates is likely to be up, although not until UK Pound: Sterling has benefited from the recent firmer tone of UK economic activity data but we expect renewed GBP weakness against the Euro soon. A likely further downleg in housing should keep consumer spending and GDP growth on a slow track. Swiss Franc: The economic signs are positive. Higher oil prices and the fragile Euro-zone economy remain key risks, but the outlook on both should improve. As the Euro-zone improvement becomes more visible the Euro should move stronger against the Swiss Franc. Czech Koruna: The economy is doing well despite the rise in oil prices and sluggish German growth. The outlook for the rest of the year is also good. Good fundamentals and sustained FDI inflows should underpin the Koruna. Hungarian Forint: Inflation continues to fall and further rate cuts are on the cards. The Forint should hold steady vs. the Euro over the next few months, supported by improving basics (strong growth and a shrinking trade deficit). Polish Zloty: The Zloty should hold on to recent gains. Rates still compare well with Euro and Czech Koruna rates and economic fundamentals are sound. Russian Rouble: The economy is picking up on stronger oil output and stronger consumer spending. Booming oil export revenues continue to underpin the Rouble. The authorities will tolerate further appreciation. The Rouble should strengthen vs the US Dollar as the Euro recovers. Turkish Lira: The Lira should benefit now that uncertainty over the EU has been removed. But the currency remains vulnerable to worries over the widening current account deficit and uncertainty over Iraq/ Kurdish terrorism. Individual currency analysis Africa Egyptian Pound: We expect the Pound to appreciate very gradually, with the government intervening to keep it competitive. The economy is doing well with GDP growth likely to pick up. South African Rand: The Rand has firmed against the Dollar on higher gold prices and expectations that interest rates will not fall further this year. The authorities will intervene to prevent a sharp appreciation, but we expect some more Rand upside. See page 216 for currency forecast summary. The Moodie Report 215

5 ANALYSIS Currency Room October/November 2005 American Express Bank currency relationship forecast summary (vs US Dollar) East Asia Japanese Yen/US$ % % Japanese Yen/Euro % % Australian Dollar % % Chinese Renminbi % % Hong Kong Dollar % % Indonesian Rupiah 10, , % 9, % Korean Won 1, , % % New Zealand Dollar % % Philippine Peso % % Singapore Dollar % % Taiwan Dollar % % Thai Baht % % The Subcontinent Bangladesh Taka % % Indian Rupee % % Pakistan Rupee % % The Americas Canadian Dollar % % Argentinean Peso % % Brazilian Real % % Chilean Peso % % Mexican Peso % % Europe/Middle East/Africa Spot price on 3 month Change 12 month Change 15 Sept 2005 forecast forecast Euro % % UK Pound/US$ % % UK Pound/Euro % % Swiss Franc % % Swiss Franc/Euro % % Czech Koruna % % Hungarian Forint % % Polish Zloty % % Russian Rouble % % Turkish Lira % % Egyptian Pound % % South African Rand % % All values are vs US Dollar unless otherwise stated. Source: American Express Bank 216 The Moodie Report

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