THE EURO, BIS SURVEY & GOLD CAMILLA SUTTON l CHIEF FX STRATEGIST l l October 2013

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1 THE EURO, BIS SURVEY & GOLD CAMILLA SUTTON l CHIEF FX STRATEGIST l l CAMILLA.SUTTON@SCOTIABANK.COM October 2013

2 AGENDA THREE TOPICS 1. Result of the latest BIS triennial central bank survey 2. Recent euro resilience against the US dollar 3. Overview of gold price developments 1

3 BIS TRIENNIAL CENTRAL BANK SURVEY TURNOVER GLOBAL FX TURNOVER in $bn 4,500 3,000 1, Source: BIS, Scotiabank FX Strategy Source: Bloomberg, Scotiabank FX Strategy Options & other Currency swaps FX swaps Forwards Spot GLOBAL FX DISTRIBUTION Currency 2013 Share Rank USD EUR JPY GBP AUD CHF CAD MXN CNY NZD Source: BIS FX TURNOVER CORE THEMES Daily FX turnover increased to $5.3trn in April 2013, from $4.0trn in April Daily FX turnover is rising at a faster pace of 35%; outpacing the 2007/2010 growth rate of 19%. USD is the dominant currency with an 87% share. AUD is the 5 th most actively traded currency, with a rising share. Share of turnover: importance of EM, with both MXN & CNY in top 10 most active. 2

BIS THE MAJORS SHIFTING TURNOVER THE MAJORS DISTRIBUTION OF GLOBAL FX TURNOVER (%) % Source: BIS, Scotiabank FX Strategy DISTRIBUTION OF GLOBAL FX TURNOVER USD is dominant and

4 BIS THE MAJORS SHIFTING TURNOVER THE MAJORS DISTRIBUTION OF GLOBAL FX TURNOVER (%) % Source: BIS, Scotiabank FX Strategy DISTRIBUTION OF GLOBAL FX TURNOVER USD is dominant and reclaiming share. EUR s share is falling accounts for 33% of all turnover. EUR 2010 volumes were likely impacted by the EURCHF floor. JPY is reclaiming lost share but also story of the year. 3

5 BIS TURNOVER BY EUR PAIR ($) VS SAME USD PAIR 1,200 $bn 1, $bn $bn $bn USD / JPY (L) EUR / JPY (R) USD / CHF EUR / CHF (R) $bn $bn ,400 $bn 1,200 1, USD / GBP (L) EUR / GBP (R) USD / EUR

BIS G10 CURRENCIES LOSE SHARE TO EMERGING MARKETS & OCEANIA SINCE 2001 THE ADVANCED ECONOMIES ARE LOSING SHARE TO EM Percentage point change in share 2001 to 2013 Source: BIS,

6 BIS G10 CURRENCIES LOSE SHARE TO EMERGING MARKETS & OCEANIA SINCE 2001 THE ADVANCED ECONOMIES ARE LOSING SHARE TO EM Percentage point change in share 2001 to 2013 Source: BIS, Scotiabank FX Strategy GEOGRAPHICAL DISTRIBUTION OF GLOBAL FX TURNOVER Drop in EUR share is a shift from G10 to EM (Europe, Latam & Asia) & Oceania. This is a G10 and less a EUR story. 5

BIS CONCENTRATION IN OTHER FINANCIAL INSTITUTIONS TURNOVER BY COUNTERPARTY HIGHLIGHTS IMPORTANT SHIFT TO HFT Most of growth in other financial institutions.

7 BIS CONCENTRATION IN OTHER FINANCIAL INSTITUTIONS TURNOVER BY COUNTERPARTY HIGHLIGHTS IMPORTANT SHIFT TO HFT Most of growth in other financial institutions. High frequency trading proves to be important component. Rising volumes do not equate to increased liquidity. Misunderstanding rising volumes could leave markets vulnerable when they need liquidity the most. 6

8 BIS CONCENTRATION OF GEOGRAPHY 40 % GEOGRAPHICAL DISTRIBUTION CONCENTRATED IN UK Source: BIS & Scotiabank FX Strategy UK US Asia: SG, JN & HK Europe* *Europe: France, Netherlands, Germany, Lux, Italy, Belg & Austria DISTRIBUTION OF GLOBAL FX TURNOVER Trading is increasingly concentrated in the major centers, particularly the UK. European trading centers are losing share. 7

9 BIS TRIENNIAL CENTRAL BANK SURVEY CORE THEMES 1. Turnover increased to $5.3trn but does not necessarily equate to higher liquidity. 2. Rising concentration in geography of trading activity. 3. Shifting importance of counterparties. 4. Increasing importance of high frequency and algorithmic trading. 5. EUR is losing share; but 2010 vs 2013 data magnifies overall trends. 6. G10 is losing share to EM and Oceania. 7. EM is gaining share with MXN & CNY in top 10 for the first time. 8

10 EUR: RECENT RESILIENCE AGAINST THE USD GETTING LOST IN THE NOISE 9

11 EUR RESILIENCE ACTUAL VERSUS FORECAST EUR SPOT VERSUS DECEMBER 2013 CONSENSUS FORECASTS EURUSD spot Source: Bloomberg, Scotiabank FX Strategy EURUSD forecast for December 2013 EUR RALLIES DEFYING BEARISH OUTLOOK EUR defies bearish forecasts and rallies 4.5% ytd (to October 22, 2013). As of Dec 2012, consensus forecast was for EUR to close Dec 2013 at 1.27 (a 4% depreciation). Forecasters did not waver in bearish outlook, even as spot rallied. Forecasters focused on EUR side of equation; but it was USD side that drove EUR in first three quarters. 10

EUR RESILIENCE ACTUAL VERSUS FORECAST EUR OR USD DOMINANCE EUR STORY USD STORY USD STORY EUR US$ trade wght Source: Bloomberg, Scotiabank FX Strategy USD, NOT EUR, PROVES DRIVER OF EURUSD IN 2013 EUR

12 EUR RESILIENCE ACTUAL VERSUS FORECAST EUR OR USD DOMINANCE EUR STORY USD STORY USD STORY EUR US$ trade wght Source: Bloomberg, Scotiabank FX Strategy USD, NOT EUR, PROVES DRIVER OF EURUSD IN 2013 EUR drove rally in late 2012 and early USD has driven EUR rally in summer and fall of 2013: Central bank policy, the growth outlook and politics have all weighed on USD. The bearish EUR side has been ignored. 11

13 EUR RESILIENCE RELATIVE CENTRAL BANK POLICY FED & ECB BALANCE SHEETS DIVERGE 3750 $bn 4250 $bn FED (L) ECB (R) Jan 09 Jan 11 Jan 13 Source: Bloomberg, Scotiabank FX Strategy 2000 RELATIVE MONETARY POLICY ECB as data improved, ECB tone was stable, rising EUR is not perceived as a threat (yet). ECB balance sheet declines on LTRO repayments. FED aggressive balance sheet growth continues. Flows have supported EUR side. 12

14 EUR RESILIENCE RELATIVE CENTRAL BANK POLICY EXPECTATIONS FOR QE TAPERING EXPECTATIONS FOR QE COMPLETION Forcasted date QE taperto begin Jun 14 Forcasted date QE to end Jun 14 QE End Mar 14 Dec 13 Taper Start USD POSITIVE Apr 14 USD POSITIVE Sep 13 Dec 12 Mar 13 Jun 13 Sep 13 Date of forecast (primary dealer survey) Source: New York Fed Primary Dealer Survey, Scotiabank FX Strategy Mar 14 Dec 12 Mar 13 Jun 13 Sep 13 Date of forecast (primary dealer survey) US FED POLICY PROVES USD NEGATIVE Fed expectations and how they have changed over the year. QE tapering volatile during year, at times supporting the USD and vice versa. QE completion was pushed out, weighing on USD. 13

15 EUR RESILIENCE GROWTH EUROPEAN AND US 2013 GDP FORECASTS* DIVERGE Germany France Eurozone * 2013 GDP forecast consensus by Bloomberg U.S. Source: Bloomberg, Scotiabank FX Strategy GROWTH FORECASTS SHIFT IN EUROPE S FAVOUR Eurozone in the early summer growth outlook undergoes positive shift. US in early summer growth outlook is still be revised lower. Diverging growth outlooks play into currency sentiment. 14

16 EUR RESILIENCE FROM CRISIS TO STABILITY 210 EURO CENTRIC UNCERTAIN FADES & SUPPORTS EUR 1.2 Higher policy uncertainty Economic Policy Uncertainty 50 EURUSD 1.6 Sep 07 Sep 09 Sep 11 Sep 13 Source: Scotiabank & Economic Policy Uncertainty Lower EURUSD EUROZONE UNCERTAIN FADES Economic policy uncertainty is an important market driver. Index: Newspaper coverage of policy related economic uncertainty. Disagreement among economic forecasters as a proxy for uncertainty. 15

17 EUR RESILIENCE CONFIDENCE & SENTIMENT CONSUMER CONFIDENCE DIVERGES 80 EUR NET POSITION SHIFTING EC consumer confidence Eurozone 40 0 long short US Michigan consumer confidence Source: Bloomberg, Scotiabank FX Strategy 120 Source: Bloomberg, Scotiabank FX Strategy Nov 12 Feb 13 May 13 Aug 13 DIVERGING CONSUMER CONFIDENCE Consumer confidence diverges in Europe and the US. EUR sentiment shifts increasingly bullish in the spring. Powerful near term drivers. 16

18 EUR RESILIENCE FX RESERVES 1,600 $bn 1,500 1,400 1,300 GLOBAL FX RESERVES HELD IN EUR EUR reserves in $, (L) 29% 28% 27% 1,200 26% 1,100 25% 1, % % of reserves in EUR (R) 800 Source: Bloomberg, Scotiabank FX Strategy 23% Jun 07 Jun 09 Jun 11 Jun 13 FX RESERVE MANAGERS MAKE IMPORTANT BUYER OF EUR EUR allocations in $ are constant even as percentage falls. EUR percentage of reserves likely bottoming. Diversification of reserves is an important short term driver. 17

19 EUR: RECENT RESILIENCE AGAINST THE USD CORE THEMES 1. A lot of noise clouds the outlook. 2. Drivers of EUR: Relative central bank policy Growth outlook and changes in outlook Politics Level of uncertainty Sentiment 3. Market focused on USD side of equation. 18

20 GOLD: A DECLINE IN DEMAND, SUPPLY AND PRICES 1,800 GOLD DEMAND & PRICE FALL Price in $ Demand in tonnes 1,400 1, Source: Bloomberg, World Gold Council, Scotiabank FX Strategy Q2 '07 Q2 '09 Q2 '11 Q2 '13 GOLD PRICES LOSE THEIR SHINE Gold peak: $1,921 on September 6, Gold (mid October at $1325) is down 32% from its peak. Demand has been trending lower since Q

21 GOLD DEMAND SHIFTING DEMAND TRENDS 1200 tonnes HISTORICAL GOLD DEMAND 5 yr avg Official sector 800 Investment Technology 400 Jewellery 0 Source: World Gold Council, Scotiabank FX Strategy Q2 '09 Q2 '10 Q2 '11 Q2 '12 Q2 '13 5 yr avg BROAD DEMAND THEMES Largest demand: jewellery. Largest fall in demand: investment. Steady demand: technology (& official sector to lesser extent). 20

GOLD DEMAND JEWELLERY, THE IMPORTANCE OF INDIA & CHINA 200 tonnes JEWELLERY DEMAND IN Q213, 67% of TOTAL DEMAND 150 100 50 0 India Greater China Other Middle East Source: World Gold Council,

22 GOLD DEMAND JEWELLERY, THE IMPORTANCE OF INDIA & CHINA 200 tonnes JEWELLERY DEMAND IN Q213, 67% of TOTAL DEMAND India Greater China Other Middle East Source: World Gold Council, Scotiabank FX Strategy Europe USA Other Asia BROAD DEMAND THEMES Jewellery demand is rising as prices fall. China & India jewellery demand in Q213 accounted for 60% of total gold demand. Risks: India imposes gold import duties of 10% creating confusion & weighing on demand. Risks: China s demand has been strong, fears building that they are overstocked. 21

23 GOLD DEMAND INVESTORS DIVERGE GOLD INVESTOR DEMAND: ETF vs BAR & COIN Bar & coin demand Q2 '07 Q2 '09 Q2 '11 Q2 ' Source: World Gold Council, Scotiabank FX Strategy ETF demand GEOGRAPHY OF GOLD & DIVERING DEMAND ETF before crisis demand positively linked with bar/coin demand. NA & Europe: shift to other assets on changing safe haven demand, Fed policy & commodity super cycle. Asia: Gold as form of protection against currency depreciation. 22

24 GOLD DEMAND THE GEOGRAPHICAL SHIFT GEOGRAPHY OF PHYSICAL vs ETF DEMAND PHYSICAL DEMAND 12MTH ENDED Q2 13 ETF HOLDINGS AS OF Q1 13 ASIA EUROPE US / NA OTHER ASIA 62% North America 61% Source: World Gold Council, Scotiabank FX Strategy GEOGRAPHY & GOLD MARKETS Asia: physical demand is significant; ETF market less developed. North America (NA) & Europe well developed ETF markets. 23

25 GOLD FAILS TO RALLY WITH USD WEAKNESS USD, GOLD AND CORRELATIONS USD Trade wght GOLD Rolling 90 day correlation Source: Bloomberg, Scotiabank FX Strategy GOLD AND THE USD CORRELATION BREAKS DOWN USD trending lower 24

26 GOLD PRICE DEVELOPMENTS General Drivers Safe haven demand Inflation fears Central bank policy unconventional The US dollar / currency devaluation Portfolio diversification into commodities Supply Drivers Official sector sales expected to remain well below their ceiling Mine production uncertain Demand Drivers Jewellery trend is positive but at risk Investment dependent on unconventional policy developments Official & technology demand stable 25

27 DISCLAIMER DISCLAIMER: This report is prepared by The Bank of Nova Scotia (Scotiabank) as a resource for clients of Scotiabank. Opinions, estimates and projections contained herein are our own as of the date hereof and are subject to change without notice. The information and opinions contained herein have been compiled or arrived at from sources believed reliable but no representation or warranty, express or implied, is made as to their accuracy or completeness and neither the information nor the forecast shall be taken as a representation for which The Bank or its affiliates or any of their employees incur any responsibility. Neither Scotiabank or its affiliates accept any liability whatsoever for any loss arising from any use of this report or its contents. This report is not, and is not constructed as, an offer to sell or solicitation of any offer to buy any of the currencies referred to in this report. Scotiabank, its affiliates and/or their respective officers, directors or employees may from time to time take positions in the currencies mentioned herein as principal or agent. Directors, officers or employees of Scotiabank and its affiliates may serve as directors of corporations referred to herein. Scotiabank and/or its affiliates may have acted as financial advisor and/or underwriter for certain of the corporations mentioned herein and may have received and may receive remuneration for same. This report may include forward looking statements about the objectives and strategies of members of the Scotiabank Group. Such forward looking statements are inherently subject to uncertainties beyond the control of the members of the Scotiabank Group including but not limited to economic and financial conditions globally, regulatory development in Canada and elsewhere, technological developments and competition. The reader is cautioned that the member's actual performance could differ materially from such forward looking statements. You should note that the manner in which you implement any of strategies set out in this report may expose you to significant risk and you should carefully consider your ability to bear such risks through consultation with your legal, accounting and other advisors. Information in this report regarding services and products of Scotiabank is applicable only in jurisdictions where such services and products may lawfully be offered for sale and is void where prohibited by law. If you access this report from outside of Canada, you are responsible for compliance with local, national and international laws. Not all products and services are available across Canada or in all countries. All Scotiabank products and services are subject to the terms of applicable agreements. This research and all information, opinions and conclusions contained in it are protected by copyright. This report may not be reproduced in whole or in part, or referred to in any manner whatsoever nor may the information, opinions and conclusions contained in it be referred to without in each case the prior express consent of Scotiabank. Scotiabank is a Canadian chartered bank. TM Trademark of The Bank of Nova Scotia. Used under license, where applicable. Scotiabank, together with Global Banking and Markets, is a marketing name for the global corporate and investment banking and capital markets businesses of The Bank of Nova Scotia and certain of its affiliates in the countries where they operate, including, Scotia Capital Inc. and Scotia Capital (USA) Inc. all members of the Scotiabank Group. Dodd Frank Act Disclaimer: This material has been prepared and distributed by The Bank of Nova Scotia for informational and marketing purposes only and should not be construed as an opinion as to whether you should enter into any swap or trading strategy involving a swap. The general transaction, financial, educational and market information contained herein is not intended to be, and does not constitute, a recommendation of a swap or trading strategy involving a swap. This material is not intended to be individually tailored to your needs or characteristics and should not be viewed as a call to action or suggestion that you enter into a swap or trading strategy involving a swap. You need to exercise independent judgment in evaluating this material, and you should consult with your own independent financial, legal, accounting, tax and other professional advisors as to whether any swap or trading strategy involving a swap is suitable or advisable for you. 26

28 APPENDIX: EUR RESILIENCE BUT OUTLOOK IS STILL WEAK ISSUE DEVELOPMENTS TO DATE STILL NEEDED CHANGE IN TAIL RISK REMAINING TAIL RISK Bank Solvency / Fragmentation 1. LTRO provided liquidity 2. Banking union plans SSM, SRM & deposit insurance fund increasing high Euro exit / bail outs 1. OMT 2. Ireland, Portugal & Greece A framework for a closer fiscal union decreased medium Politics Italy, Germany, France Solid political base across Europe stable medium Government debt Austerity Balance between growth & austerity stable medium Growth Improving growth outlook Balance between growth & austerity stable low UPCOMING KNOWN RISKS Q risks: AQR, parliament approval of SRM, Ireland program concludes. Q risks: Council to approve SRM, EBA stress tests. Q3 2014: ECB & SSM, Portuguese program concludes. Q4 2014: Greece program concludes. 27

Foreign Exchange Outlook. Making Progress

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