FX OUTLOOK CAMILLA SUTTON l CHIEF FX STRATEGIST l l April 2014

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1 FX OUTLOOK CAMILLA SUTTON l CHIEF FX STRATEGIST l l CAMILLA.SUTTON@SCOTIABANK.COM April 2014

2 SCOTIABANK: FORECAST FX USD a mixed path REAL GDP US outperforms Canada f 2015f f 2014f 2015f USDCAD US CADUSD Canada AUDUSD Mexico EURUSD Euro Zone 1.3 (0.4) GBPUSD UK USDJPY Japan USDCNY China INFLATION Expected to remain contained INTEREST RATES Looking towards rate hikes US Q413 Q414 Q415 Canada FED BoC COMMODITIES Yearly averages ECB Oil (WTI) BoE Gold 1,410 1,320 1,375 RBA

3 SUMMARY ECONOMIC MACRO OUTLOOK SUMMARY US economy in recovery Fed to hike rates in Q Canadian economy lagging BoC hikes rates in H Global economy recovering pace of growth in EM is disappointing Inflationary pressures begin to build FX OUTLOOK SUMMARY CAD stabilizing EUR weakens materially by year end and continues to trend lower in 2015 JPY weakens materially by year end and continues to depreciate in 2015 GBP s outlook is the encouraging; but already priced to perfection 2

4 FX MARKETS YTD: THE FED, DOMESTIC BACKDROPS & TAIL RISK FX RETURNS YEAR TO DATE to April 24th, BRL NZD AUD JPY GBP INR NOK KRW THB CHF TRY EUR PEN MYR COP MXN ZAR PHP TWD CNY CAD CLP DM (G10+) EM FX RETURNS IN 2014 Advanced economies outperform emerging market currencies USD has not seen broad based strength all majors (except CAD) are up ytd CAD is worst performing primary advanced economy currency Domestic stories are key driver 3

US to outperform the advanced economies. UK & Japan lose momentum.

5 GLOBAL GROWTH RELATIVE GROWTH OUTLOOK SCOTIABANK S GDP GROWTH OUTLOOK 2014 and 2015 Source: Scotiabank GLOBAL GROWTH MODERATE AND UNCERTAIN US to outperform the advanced economies. UK & Japan lose momentum. Canada gains momentum year over year. Europe displays modest growth. 4

6 US BACKDROP FED YELLEN S FAVOURED LABOUR MARKET MEASURES ARE SOFT US UNEMPLOYMENT DURATION IN WEEKS Unemployed duration still elevated and a concern WORKING PART TIME FOR ECONOMIC REASONS Working part time for economic reasons still elevated but trending lower US PARTICIPATION RATE (%) US AVERAGE HOURLY EARNINGS Y/Y % Falling participation rate raises many questions Limited upward pressure on earnings 5

7 US BACKDROP BROAD MEASURES OF LABOUR MARKET ARE IMPROVING However, labour metrics are improving taking time to fully fill out Source: Atlanta Federal Reserve & Scotiabank FX Strategy 6

8 CENTRAL BANK POLICY THE US INTEREST RATE OUTLOOK Expect US interest rate hikes Q Interest rates to rise 6 month after QE completes Expected tapering pace is $10bn per meeting; completing in fall of 2014 Tapering is no longer FX driver attention shifts to interest rates FED TAPERING NO LONGER THE FOCUS POTENTIAL PACE OF TAPERING Taper by $10bn/mtg Taper by $20bn/mtg FOMC Mth Mth Taper Taper Meeting Date purchase buying 19 Mar Apr Jun Jul Sep Oct Dec

9 CENTRAL BANK POLICY THE US INTEREST RATE OUTLOOK MARKET PULLS FORWARD FED FUNDS HIKE EXPECTATIONS 0.75 Bpts priced into Fed funds futures FX HAS MIXED REACTION Returns against the USD March 18 th to April 1st Apr Mar 14 Source: Bloomberg & Scotiabank FX Strategy 0.00 Dec 2014 Apr 2015 Jul 2015 Oct 2015 Source: Bloomberg & Scotiabank FX Strategy EXPECTATIONS FOR FED RATE HIKES IS PULLED INTO Q March 19 th was the FOMC meeting where Chair Yellen suggested that the US would enter its rate hike cycle 6 months from when QE ends; essentially Q215. FX reaction is not uniformly USD positive as growth & commodity currencies outperform. If US economy is strong enough to sustain rate hikes in Q215 this is good for global growth. 8

10 CENTRAL BANK INTEREST RATE OUTLOOK 3 Policy rate % CENTRAL BANK RATES AND EXPECATIONS Central banks engaged in asset purchases or aggressive policy Central banks not engaged in QE '14 '14 2 '14: rate hike expected in 2014 '15: rate hike expected in 2015 '15 1 '15 '15 '15 '15 0 Switzerland Japan US Euro UK Sweden Canada Norway Australia NZ FED S MESSAGE RATES ARE ON HOLD FOR AN EXTENDED PERIOD NZD positive: RBNZ was first to enter hiking cycle AUD & GBP positive: RBA and BoE expected to be next to hike rates USD positive against G4: Fed expected to hike in Q215 CAD neg: BoC expected to lag the US & other commodity currency central banks 9

11 FX RESERVE FLOWS AWAY FROM USD; TOWARDS EUR AND OTHERS FX RESERVES: DIVERSIFYING AWAY FROM USD 74% 72% 70% EUR (R) 28% 26% 7.0% 6.0% 5.0% FX RESERVES: ALLOCATIO TO OTHER, CAD & AUD $450 bn CAD (bn) $400 AUD (bn) $350 All other (bn) $300 68% 66% 64% USD (L) 62% Source: Scotiabank FX Strategy, IMF 60% % 22% 20% 4.0% Percent (L) $250 $ % $150 $ % $ % Source: IMF, Bloomberg, Scotiabank FX Strategy $ FX RESERVE MANAGEMENT AWAY FROM USD, TOWARDS EUR AND OTHERS FX reserves diversifying away from USD Allocating back into EUR and maintaining other core positions FX reserves allocated to other currencies stabilizes but still important allocation. FX reserve buying is long term trend. 10

EUR IMPROVING GROWTH & DISINFLATION A COMPLICATED BACKDROP GDP and PMI in EXPANSION BUT MODERATE INFLATION TRENDING LOWER NO BOTTOM YET Headline y/y% Core y/y % EUR S ONE YEAR CLIMB ECB S INCREASING

12 EUR IMPROVING GROWTH & DISINFLATION A COMPLICATED BACKDROP GDP and PMI in EXPANSION BUT MODERATE INFLATION TRENDING LOWER NO BOTTOM YET Headline y/y% Core y/y % EUR S ONE YEAR CLIMB ECB S INCREASING CONCERN WITH EUR EUR important in how it feeds into ECB price stability mandate. Strong EUR will be met with conventional policy action most likely through interest rate action. QE only used to combat downward pressure on medium term inflation expectations. For ECB improving PMIs are awkward against disinflationary environment. 11

13 EUR NEAR TERM & LONG TERM SENTIMENT DIFFER EUR NEAR TERM SENTIMENT IS BULLISH EUR Q414 CONSENSUS FORECAST IS $mm NET EUR POSITION Each bar represents one of the forecasts provided to Bloomberg together they represent consensus. Spot level Source: CFTC, Bloomberg, Scotiabank FX Strategy Apr 13 Jun 13 Aug 13 Oct 13 Dec 13 Feb SCOTIABANK FX STRATEGY OUTLOOK Near term: EUR likely to be limited above 1.40 as ECB will step in. Med term: EUR expected to depreciate, closing year at 1.30 on ECB policy, stabilization in both ECB and Fed balance sheets, relative fundamentals clues to turn will come from shifting sentiment & capital flows 12

BOE: GBP DOESN T PROVE A FOCUS BoE sees strong GBP as: a result of strong domestic fundamentals &

14 GBP: IMPROVING FUNDAMENTALS BUT NO PRESSURE FROM INFLATION UK: RISING GDP & FALLING UNEMPLOYMENT Unemployment rate % INFLATION TRENDING LOWER Headline y/y% Core y/y % GDP y/y % GBP S CLIMBS TO FIVE HIGHS BOE: GBP DOESN T PROVE A FOCUS BoE sees strong GBP as: a result of strong domestic fundamentals & depreciation in EM FX as reducing likelihood of CPI above 2.5% BoE expected to hike interest rates in Q115; supporting GBP. 13

15 GBP NEAR TERM & LONG TERM SENTIMENT DIFFER GBP NEAR TERM SENTIMENT IS BULLISH GBP Q414 CONSENSUS FORECAST IS $mm NET GBP POSITION MARKET IS BEARISH GBP IN THE LONG TERM Each bar represents one of the forecasts provided to Bloomberg together they represent consensus. Spot level Source: CFTC, Bloomberg, Scotiabank FX Strategy Jun 13 Aug 13 Oct 13 Dec 13 Feb 14 Apr SCOTIABANK FX STRATEGY OUTLOOK Near term: GBP likely to make new highs on fundamental backdrop and BoE policy Medium term: GBP likely to stabilize as market has it priced to perfection 14

CAD DOMESTIC FUNDAMENTALS IMPROVE & BOC IS NEUTRAL CAD: RISING GDP & FALLING UNEMPLOYMENT GDP q/q ann INFLATION TURNS HIGHER BUT WELL CONTAINED Headline y/y% Trimmed mean y/y % Unempl rate % CAD IS

16 CAD DOMESTIC FUNDAMENTALS IMPROVE & BOC IS NEUTRAL CAD: RISING GDP & FALLING UNEMPLOYMENT GDP q/q ann INFLATION TURNS HIGHER BUT WELL CONTAINED Headline y/y% Trimmed mean y/y % Unempl rate % CAD IS WEAKEST PRIMARY CURRENCY IN 2014 USDCAD 5 year average level = USDCAD BOC HAS NEUTRAL TONE BUT Governor Poloz seems favours a weak CAD. Reference to CAD has increased materially both with regards to its importance for exports as well as how it feeds into inflation. As Canadian data improves, Governor Poloz has fine balancing act stabilizing CAD. Expect BoC to lag Fed interest rate hikes. 15

17 CAD MARKET IS BEARISH IN SHORT AND LONG TERM 10 CAD: MARKET IS BEARISH IN THE SHORT TERM NET CAD POSITION '000 of contracts 1.20 USDCAD CONSENSUS FORECAST Q414: MARKET IS BEARISH CAD IN THE LONG TERM Spot level Each bar represents one of the forecasts provided to Bloomberg together they represent consensus. 80 Source: CFTC, Bloomberg, Scotiabank FX Strategy Apr 13 Jun 13 Aug 13 Oct 13 Dec 13 Feb SCOTIABANK FX STRATEGY OUTLOOK Q414 Spot: 1.10 Target: Downside Upside Extreme scenario scenario upside Expect USDCAD to trade in narrow range of 1.08 to 1.12 Until backdrop is strong enough for a BoC/Poloz turn 16

9650 RBA: A FICKLE FX WATCHER Initially concerned with level of AUD as it approached 0.

18 AUD DOMESTIC FUNDAMENTALS PROVE UNEVEN & RBA IS NEUTRAL AUS: RISING GDP & UNEMPLOYMENT Unemployment rate % GDP y/y % INFLATION TURNS HIGHER Headline y/y% Trimmed mean y/y % AUD S TRADES BELOW 5YR AVERAGE OF RBA: A FICKLE FX WATCHER Initially concerned with level of AUD as it approached 0.90 however with firming inflation AUD rhetoric has subsided. RBA likely to increase concern with level of AUD at Australia is not part of G7, giving RBA more leeway to reference the currency. Expect RBA rate hike in late 2014; early

19 AUD NEAR TERM & LONG TERM SENTIMENT DIFFER AUDUSD NEAR TERM SENTIMENT TURNS BULLISH 20 0 NET AUD POSITION '000s of contracts AUDUSD CONSENSUS FORECAST Q414: 0.88 MARKET IS BEARISH AUD IN THE LONG TERM Spotlevel Source: CFTC, Bloomberg, Scotiabank FX Strategy Jun 13 Aug 13 Oct 13 Dec 13 Feb 14 Apr Each bar represents one of the forecasts provided to Bloomberg together they represent consensus. SCOTIABANK FX STRATEGY OUTLOOK Near term: risk is further upside towards 0.95 Medium term: limited gains above 0.95 Official year end target for year end is: 0.88 but risk to view is higher 18

20 SCOTIABANK FX STRATEGY FX STRATEGY SUMMARY OF DOCUMENTS Daily FX Update Published at 7:45am (EST) Daily LatAM Update Published at 7:45am (EST) Daily Asian Update Published at 11:00pm (EST) Currency Sentiment CFTC Report Published every Friday Special Reports Active trade strategies; interesting readings, etc. FX STRATEGY JOINT PUBLICATIONS WITH ECONOMICS Global Views Weekly update across asset classes FX Monthly Review of global currencies and forecasts FX OUTLOOK CONFERENCE CALL Twenty minute update on FX outlook FX STRATEGY GLOBAL COVERAGE Camilla Sutton, CFA, CMT G10 Chief Currency Strategist (416) Eduardo Suarez LATAM Senior Currency Strategist Sacha Tihanyi Emerging Asia Senior Currency Strategist Eric Theoret G10 Currency Strategist 19

21 DISCLAIMER IMPORTANT NOTICE and DISCLAIMER: This publication has been prepared by The Bank of Nova Scotia (Scotiabank) for informational and marketing purposes only. 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 Scotiabank, its affiliates or any of their employees incur any responsibility. Neither Scotiabank nor its affiliates accept any liability whatsoever for any loss arising from any use of this information. This publication is not, and is not constructed as, an offer to sell or solicitation of any offer to buy any of the currencies referred to herein, nor shall this publication be construed as an opinion as to whether you should enter into any swap or trading strategy involving a swap or any other transaction. 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 within the meaning of U.S. Commodity Futures Trading Commission Regulation and Appendix A thereto. 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 or any other transaction. This publication may include forward looking statements about the objectives and strategies of members of Scotiabank that are inherently subject to uncertainties beyond the control of the members of Scotiabank. 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 the strategies set out in this publication may expose you to significant risk and you should carefully consider your ability to bear such risks through consultation with your own independent financial, legal, accounting, tax and other professional advisors. 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, and may have received remuneration as financial advisor and/or underwriter for certain of the corporations mentioned herein. Directors, officers or employees of Scotiabank and its affiliates may serve as directors of corporations referred to herein. All Scotiabank products and services are subject to the terms of applicable agreements and local regulations. This publication and all information, opinions and conclusions contained in it are protected by copyright. This information 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 the prior express consent of Scotiabank. 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, all members of the Scotiabank group and authorized users of the mark. The Bank of Nova Scotia is incorporated in Canada with limited liability and is authorised and regulated by the Office of the Superintendent of Financial Institutions Canada. The Bank of Nova Scotia and Scotiabank Europe plc are authorised by the UK Prudential Regulation Authority. The Bank of Nova Scotia is subject to regulation by the UK Financial Conduct Authority and limited regulation by the UK Prudential Regulation Authority. Scotiabank Europe plc is authorised by the UK Prudential Regulation Authority and regulated by the UK Financial Conduct Authority and the UK Prudential Regulation Authority. Details about the extent of The Bank of Nova Scotia's regulation by the UK Prudential Regulation Authority are available on request. Scotiabank Inverlat, S.A., Scotia Inverlat Casa de Bolsa, S.A. de C.V., and Scotia Inverlat Derivados, S.A. de C.V., are each authorized and regulated by the Mexican financial authorities.not all products and services are offered in all jurisdictions. Services described are available in jurisdictions where permitted by law. 20

CAD: THE STORY FROM WORST TO BEST CAMILLA SUTTON l CHIEF FX STRATEGIST l l July 2014

CAD: THE STORY FROM WORST TO BEST CAMILLA SUTTON l CHIEF FX STRATEGIST l416 866 5470 l CAMILLA.SUTTON@SCOTIABANK.COM July 2014 SCOTIABANK: FORECAST FX USD a mixed path REAL GDP US outperforms Canada 2012