Foreign Exchange Outlook. Making Progress

Transcription

1 Foreign Exchange Outlook Making Progress Camilla Sutton Chief Currency Strategist

2 2012 Forecast vs Performance SCOTIABANK FORECASTS VS ACTUAL RETURNS (2012) 8 4 % return 0 JPY CAD GBP AUD EUR -4-8 SCOTIA'S FORECAST ACTUAL RETURNS YTD FORECASTING ACCURACY SUMMARY FROM 2012 (to November 29) CAD direction and magnitude JPY direction and magnitude GBP direction and magnitude AUD direction but over estimated rise EUR failed on both direction and estimate; as we had forecasted weakness & EUR is flat

3 Scotiabank s Forecast FX - USD performance is mixed f 2013f 2014f USDCAD CADUSD AUDUSD EURUSD GBPUSD USDJPY USDCNY

4 FX Themes Year-to-Date Main themes in 2012: 1. Europe 2. Global growth outlook 3. Central bank policy response Main themes in Global growth outlook 2. Europe 3.The US backdrop 4. Central bank policy 5. Politics: new leadership in China; Elections in Italy, Japan, Germany, etc.

5 THEME 1: Growth US & China vs EU & Japan Can growth in China and the US offset weakness in Europe and Japan? A soft landing in China with 2013 GDP of 8.0%.

6 THEME 1: Growth European Recession Ends Europe exits recession; headlines should improve. Growth remains moderate at best and complicated by demographics.

7 THEME 2: Europe Making Progress Problem Developments to date Still needed Remaining tail risk Bank Solvency 1. LTRO - provided liquidity 2. Banking union plans Resolution fund & deposit guarantee facility decreasing Euro exit OMT - fiscal burden sharing Politics: A framework for a closer fiscal union decreasing Government debt Growth Austerity Decelerating faster than expected; most countries in or entering recession Balance between growth & austerity a challenging one This is biggest risk unchanged increasing

8 THEME 3: The US Backdrop Source: Bloomberg & Scotia FX Strategy The fundamental USD story is not a strong one. US economy needs a weak USD; just like Eurozone needs a weak EUR.

9 THEME 3: The US Lacks A Fiscal Plan US FISCAL & DEBT FORECAST FORECASTED US FISCAL DRAG As % of GDP US fundamentals are typically those associated with a weak currency Short-term: fiscal cliff uncertainty lays foundation for temporary USD strength 2013 fiscal drag is expected to be between 1 and 2% --assumes agreement Medium term: lack of credible fiscal plan should create USD weakness

10 THEME 4: Central Bank Response FX Impact Positive CAD BoC has one of few hawkish central bank bias in advanced economies. Negative USD QE3, rates on hold until mid 2015 & threat of QE3 expansion.

11 THEME 4: Central Bank Response QE Difficult to measure exact impact of QE programs. Fed: QE1 decreased 10-year bond yields by 40 to 110bpts; while QE2 decreased them by 15 to 45bpts. Expect QE3 to be expanded in December to include Treasurys.

12 THEME 4: Central Banks The Fed s Timeline FED'S TIMELINE QE3 launched - $40bn MBS/mth Q4 12 QE3 expasion - $20 to 45bn Treasurys / mth Q4 12 Q1 13 Q2 13 QE3 - Fed signals end of QE Q3 13 Q4 13 Q1 14 Q2 14 Halt reinvestment of MBS Q3 14 Halt reinvestment of Treasurys Q4 14 Q1 15 Fed hikes rates Q2 15 Source: Scotiabank FX Strategy & Economics Q3 15

13 THEME 4: Central Banks Global Timelines FED'S TIMELINE GLOBAL CENTRAL BANK RATE HIKES QE3 launched - $40bn MBS/mth Q4 12 QE3 expasion - $20 to 45bn Treasurys / mth Q4 12 Q1 13 Mexico Q2 13 Chile QE3 - Fed signals end of QE Q3 13 Korea & Thailand & Indonesia Q4 13 Australia, Norway & Columbia Q1 14 Canada & China Q2 14 Brazil Halt reinvestment of MBS Q3 14 Halt reinvestment of Treasurys Q4 14 India Q1 15 UK (BoE) Fed hikes rates Q2 15 Europe (ECB) Source: Scotiabank FX Strategy & Economics

14 CAD Drivers & Outlook Central banks Growth Sovereign Flows Oil CAD FORECAST: STRENGTHENS TO 1.04 IN 2013 CAD STRENGTH FED's QE program juxtaposed against neutral to hawkish BoC China expected to have a soft landing (GDP, %; %; %) US moving into stronger recovery Triple A rated with a credible fiscal plan CAD positive flows - Triple A rating; FX reserves; M&A Oil (Scotiabank Economics forecasts WTI oil to average $95 in 2013) Source: Bloomberg & Scotia FX Strategy CAD WEAKNESS Domestic risks: housing market, household debt, slowing employment growth Oil risks: Brent-WTI spread & US self reliance Politics Stable government until October 2015 Sentiment Risks Sentiment is bullish with traders holding CAD net long - however moderating CAD vol at decade lows External risks: Europe, US fiscal cliff & geopolitics - but none are our base case

15 Scotiabank s Forecast FX - USD performance is mixed f 2013f 2014f USDCAD CADUSD AUDUSD EURUSD GBPUSD USDJPY USDCNY

16 Major Risks MAJOR RISKS TO FORECAST Fiscal cliff no compromise major global growth consequences Global growth China fails to engineer soft landing Inflation central bank policy stems significant inflationary pressures Oil geopolitical tensions rise; oil rallies and threatens global economy Europe Escalates beyond current expectations

17 Disclaimer TM Trademark of The Bank of Nova Scotia. Used under license, where applicable. This report has been prepared by Scotiabank Economics as a resource for the 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. Neither Scotiabank nor its affiliates accepts any liability whatsoever for any loss arising from any use of this report or its contents. 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'sactual performance could differ materially from such forward-looking statements. You should note that the manner in which youimplement 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 ofscotiabank 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 anymanner 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.