FX OUTLOOK: MAKING PROGRESS CAMILLA SUTTON l CHIEF CURRENCY STRATEGIST l NOVEMBER 2012

Size: px

Start display at page:

Download "FX OUTLOOK: MAKING PROGRESS CAMILLA SUTTON l CHIEF CURRENCY STRATEGIST l NOVEMBER 2012"

Wendy Thompson
6 years ago
Views:

FX OUTLOOK: MAKING PROGRESS CAMILLA SUTTON l CHIEF CURRENCY STRATEGIST l 416 866 5470 NOVEMBER 2012 DIAL IN: 905 694 9451 (local to Toronto) PASSCODE: 336 571 076#

1 FX OUTLOOK: MAKING PROGRESS CAMILLA SUTTON l CHIEF CURRENCY STRATEGIST l NOVEMBER 2012 DIAL IN: (local to Toronto) PASSCODE: # CONFERENCE CALL COMMANDS Press 1 Skip backward 5 seconds; Press 3 Skip forward 5 seconds Press 4 Skip backward 5 minutes; Press 6 Skip forward 5 minutes Press 5 Pause the playback

2 SCOTIABANK S FORECAST FX USD performance is mixed REAL GDP A softened growth profile f 2013f 2014f f 2013f 2014f USDCAD US CADUSD Canada AUDUSD Mexico EURUSD Euro Zone 1.4 (0.6) GBPUSD UK USDJPY Japan USDCNY China INFLATION Expected to remain contained INTEREST RATES Remain accomodative US Q412 Q413 Q414 Canada FED BoC COMMODITIES Yearly averages ECB Oil (WTI) BoE Gold 1,690 1,800 1,700 BoJ RBA

3 SCOTIABANK FORECASTS TO Q High forecast Low forecast Scotiabank s forecast Forecasts USD weakens against CAD, AUD & GBP USD strengthens against EUR & JPY 2

FX THEMES YEAR TO DATE Main themes in 2012: 1. Europe 2. Global growth outlook 3. Central bank policy response Main themes in 2013 1.

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 and the US. Elections in Italy, Japan, Germany, etc. 3

5 GLOBALIZATION MAKES REGIONAL PROBLEMS GLOBAL CONCERNS Europe core problems: Bank solvency Euro exit Government debt levels Growth US core problems are: Fiscal cliff Politics Impact of Fed policies Growth CHINA core concerns are: Growth Shifting and stimulating growth INTENSIFICATION OF EURO CRISIS IMPACT ON GDP 0 % of GDP (2) (4) (6) EA UK ROW USA China Japan Source: IMF & Scotiabank FX Strategy IMPACT OF US FISCAL CLIFF (1) % of GDP (3) (5) (7) (9) Without policy response With policy response EA UK ROW USA China Japan Source: IMF & Scotiabank FX Strategy Without policy response With policy response 4

6 THEME 1: GLOBAL GROWTH WHERE THE ECONOMIES SIT GDP Evaluating the recession/recovery versus history All charts, data & information from the St. Louis Federal Reserve US GDP struggling GERMAN GDP above average CANADIAN GDP close to average UK GDP moving the wrong direction 5

7 THEME 1: GLOBAL GROWTH WHERE THE ECONOMIES SIT EXPORTS Evaluating the recession/recovery versus history All charts, data & information from the St. Louis Federal Reserve US REAL EXPORTS importance of USD weakness GERMAN REAL EXPORTS moving above average CANADA REAL EXPORTS close to but below average UK REAL EXPORTS close but below average 6

EURZONE 2013 GDP FORECAST 1 WORLD 2013 GDP 1.

8 THEME 1: GLOBAL GROWTH THE OUTLOOK IS STABILIZING US 2013 GDP FORECAST 1 CHINA S 2013 GDP FORECAST 1 Source: Bloomberg & Scotia FX Strategy Source: Bloomberg & Scotia FX Strategy EURZONE 2013 GDP FORECAST 1 WORLD 2013 GDP FORECAST 1 Source: Bloomberg & Scotia FX Strategy Source: Bloomberg & Scotia FX Strategy 1. Forecast is consensus estimate provided by Bloomberg 7

THEME 1: GLOGAL GROWTH CHINA ENGINEERS A SOFT LANDING Source: IMF China s growth is slowing but a soft landing is still supportive of commodity prices and currencies. Scotiabank forecasts 7.

9 THEME 1: GLOGAL GROWTH CHINA ENGINEERS A SOFT LANDING Source: IMF China s growth is slowing but a soft landing is still supportive of commodity prices and currencies. Scotiabank forecasts 7.7% GDP in 2012, 8.0% in 2013 and 8.3% in Growth is not driven by exports (already negative contribution to growth). Savings rate close to 50% need to rebalance towards domestic consumption. Monetary and fiscal stimulus is likely to see China engineer its soft landing. 8

10 THEME 1: GLOBAL GROWTH EUROPE REENTERS LOW GROWTH PHASE Europe does exit recession, accordingly headlines should improve. However growth is expected to remain moderate and complicated by demographics. 9

11 THEME 2: EUROPE MAKING SLOW AND IMPORTANT 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 10

12 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. 11

THEME 3: THE US BACKDROP LACK OF A CREDIBLE FISCAL PLAN US

of GDP US fundamentals are typically those associated with

foundation for temporary USD strength Medium term: lack of

central bank policy Moderate growth (just over 2% per

13 THEME 3: THE US BACKDROP LACK OF A CREDIBLE FISCAL PLAN US fiscal and debt path Fiscal drag in the US as pct points of GDP US fundamentals are typically those associated with a weak currency Short term: fiscal cliff uncertainty lays foundation for temporary USD strength Medium term: lack of credible fiscal plan should create USD weakness Loose central bank policy Moderate growth (just over 2% per year) & fragile economy Twin deficits of fiscal and current account 12

14 THEME 4: GLOBAL CENTRAL BANKS USD INDEX (DXY) HIGHLIGHTS IMPACT OF CENTRAL BANK POLICY Central banks have been the most important driver of FX in

THEME 4: CENTRAL BANK RESPONSE FX IMPACT Level, direction, what is priced in and QE are keys: Positive AUD as market is over pricing risk of RBA cuts & rates are highest in advanced economies.

15 THEME 4: CENTRAL BANK RESPONSE FX IMPACT Level, direction, what is priced in and QE are keys: Positive AUD as market is over pricing risk of RBA cuts & rates are highest in advanced economies. 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. Negative JPY risk of further QE is high, level and direction of interest rates with 1% inflation target. Mixed for EUR negative on level, negative on direction; but bond purchases are sterilized. 14

THEME 4: CENTRAL BANK RESPONSE QE IMPACT MATTERS

110bpts; while QE2 decreased them by 15 to 45bpts.

16 THEME 4: CENTRAL BANK RESPONSE QE IMPACT MATTERS Almost impossible to measure exact impact of QE programs. Most academic and central bank research suggest there has been an impact. Fed:QE1 decreased 10 year bond yields by 40 to 110bpts; while QE2 decreased them by 15 to 45bpts. Above charts suggest there is a clear impact over term of buying program. Expect QE3 to be expanded in December to include Treasurys. 15

THEME 4: CENTRAL BANK THE FED OUTLOOK Of 19 members the Fed funds rate will be above 0.25%: FEDERAL RESERVE FORECASTS 2012 2013 2014 2015 2016 1 4 6 18 19 Employment expected to fall between 8.0 to 8.

17 THEME 4: CENTRAL BANK THE FED OUTLOOK Of 19 members the Fed funds rate will be above 0.25%: FEDERAL RESERVE FORECASTS Employment expected to fall between 8.0 to 8.2% 7.6% to 7.9% 6.7% to 7.3% 6.0% to 6.8% 5.2% to 6.0% GDP expected to fall between 1.7% to 2.0% 2.5% to 3.0% 3.0% to 3.8% 3.0% to 3.8% 2.3% to 2.5% Source: Federal Reserve & Scotiabank FX Strategy Expect Fed to expand QE3 to include Treasurys in December

18 THEME 4: CENTRAL BANKS THE FED S TIMELINE SEEMS USD BULLISH 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 Q

19 THEME 4: CENTRAL BANKS THE GLOBAL CONTEXT IS LESS USD POSITIVE 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 & Indonesia Q2 13 Brazil and Chile QE3 Fed signals end of QE Q3 13 Korea & Thailand Q4 13 Australia, Norway & Columbia Q1 14 Canada & China Q2 14 Halt reinvestment of MBS Q3 14 India Halt reinvestment of Treasurys Q4 14 Q1 15 UK (BoE) Fed hikes rates Q2 15 Europe (ECB) Q3 15 Source: Scotiabank FX Strategy & Economics 18

20 THEME 4: THE CHANGING COMPOSITION OF THE FED Source: Scotiabank FX Strategy & the Federal Reserve The changes at the Fed in January 2013 still leave the voting members as overwhelmingly dovish. 19

CAD MACRO DRIVERS USDCAD FORECAST Q4 2012: 0.97 Q4 2013: 0.

04 CAD outperforms USD on central bank, sovereign, sentiment and stable

Economy: Tied into US outlook, large resource base, risk is household debt.

21 CAD MACRO DRIVERS USDCAD FORECAST Q4 2012: 0.97 Q4 2013: 0.96 Trend: CAD strengthens against USD CADUSD FORECAST Q4 2012: 1.03 Q4 2013: 1.04 CAD outperforms USD on central bank, sovereign, sentiment and stable government. Economy: Tied into US outlook, large resource base, risk is household debt. Monetary policy: BoC most hawkish of advanced economies central banks. Sovereign: Triple A rated, reserve inflows all bullish CAD. Sentiment: bullish CAD, but off highs. 20

EUR MACRO DRIVERS EURUSD FORECAST Q4 2012: 1.27 Q4 2013: 1.

20 Trend: EUR weakens against CAD THE EURO CRISIS EUR trends lower but does not collapse.

Low growth, loose monetary policy, strict austerity and political uncertainties all weigh on

22 EUR MACRO DRIVERS EURUSD FORECAST Q4 2012: 1.27 Q4 2013: 1.25 Trend: EUR weakens against USD EURCAD FORECAST Q4 2012: 1.23 Q4 2013: 1.20 Trend: EUR weakens against CAD THE EURO CRISIS EUR trends lower but does not collapse. USD side of equation is weak, with loose monetary policy and fiscal uncertainty. Low growth, loose monetary policy, strict austerity and political uncertainties all weigh on EUR. Expect end result is closer fiscal ties (debt mutulization) but road there is volatile for EUR. ECB: bond buying positive for stability but medium term negative for EUR. 21

GBP MACRO DRIVERS GBPUSD FORECAST Q4 2012: 1.62 Q4 2013: 1.

57 Trend: GBP flat against CAD GBP outperforms USD but not CAD.

Monetary policy: BoE dovish however likely to prove less dovish than FED and ECB going

23 GBP MACRO DRIVERS GBPUSD FORECAST Q4 2012: 1.62 Q4 2013: 1.64 Trend: GBP strengthens against USD GBPCAD FORECAST Q4 2012: 1.57 Q4 2013: 1.57 Trend: GBP flat against CAD GBP outperforms USD but not CAD. Economy: UK exits recession; inflationary pressure is easing; failing to meet austerity plans. Monetary policy: BoE dovish however likely to prove less dovish than FED and ECB going forward. Sovereign & other: Triple A rated, large developed bond market & inter European diversification. Sentiment both CFTC and risk reversals suggest support for GBP upside. 22

JPY MACRO DRIVERS USDJPY FORECAST Q4 2012: 80 Q4 2013: 87 Trend: JPY weakens against USD CADJPY FORECAST Q4 2012: 82 Q4 2013: 91 Trend: JPY weakens against CAD JPY expected

1% of GDP Safe haven status: can raise taxes, stable domestic investor base & issues in own currency.

24 JPY MACRO DRIVERS USDJPY FORECAST Q4 2012: 80 Q4 2013: 87 Trend: JPY weakens against USD CADJPY FORECAST Q4 2012: 82 Q4 2013: 91 Trend: JPY weakens against CAD JPY expected to weaken Sovereign side a concern: 2013 net debt 145% of GDP; fiscal balance 9.1% of GDP Safe haven status: can raise taxes, stable domestic investor base & issues in own currency. Monetary policy: BoJ aggressively adding to asset purchases until inflation at 1% target. Government: election likely to favour opposition and see new more aggressive BoJ head. Sentiment is balanced; but shifts with risk appetite. JAPAN: PLAGUED BY DEFLATION % % Real GDP q/q (L) CPI y/y (R) Source: Scotiabank FX Strategy & Bloomberg 23

CHINA AND THE RENMINBI MODERATELY UNDERVALUED CNY REAL VS NOMINAL APPRECIATION Rebased 100 as of June 2005 Real CNY Nominal CNY Source: Scotiabank FX Strategy & Bloomberg Source: IMF CNY a slower

25 CHINA AND THE RENMINBI MODERATELY UNDERVALUED CNY REAL VS NOMINAL APPRECIATION Rebased 100 as of June 2005 Real CNY Nominal CNY Source: Scotiabank FX Strategy & Bloomberg Source: IMF CNY a slower pace of appreciation. Forecast: Q412 at 6.25 Forecast: Q413 at 6.10 (further 2.4% apprec.) Factors underpinning more moderate appreciation: CNY appreciation since 2005 on real & nominal basis. Narrowing current account balance. Slower accumulation of FX reserves. 24

26 SCOTIABANK S GLOBAL FORECAST AND OUTLOOK FX Outlook f 2013f 2014f USDCAD CADUSD EURUSD GBPUSD AUDUSD USDJPY MEDIUM TERM OUTLOOK INTO MID YEAR 2013 Bullish CAD: Benefits from BoC vs Fed (and global) policy, sentiment, risk on, weak USD, relatively strong Canadian economic and sovereign fundamentals. Risk is global growth outlook. Bullish AUD: Supported by ties to Asia, carry trade, investor sentiment & USD weakness. Risk is RBA and global growth outlook. Bullish GBP: Triple A status & credible fiscal plan are bullish but ties to Europe &BoE are weights. Bearish EUR: Confusion, uncertainty, no political will for solution, funding side of carry all weigh on EUR; but each leg lower is followed by period of retracement. USD cannot weaken sustainably forever. Bearish JPY: Drivers that support JPY are spikes in risk aversion and alternatives to USD; but fundamentals, debt, sentiment and monetary policy do not support a strong currency. Bullish CNY: Authorities allow measured pace of appreciation. 25

27 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 10:00pm (EST) Currency Sentiment CFTC Report Published every Friday Special Reports Active trade strategies; intraday market moving event, 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 strategy (USDCAD outlook) FX STRATEGY GLOBAL COVERAGE Camilla Sutton, CFA, CMT G10 Chief Currency Strategist (416) Sacha Tihanyi Emerging Asia Senior Currency Strategist Eduardo Suarez LatAM Senior Currency Strategist Eric Theoret G10 Currency Strategist 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. 26

2011 2010 2009 2008 2007 2006 2005 PERU 2012 2011 2010 2009

28 SCOTIABANK FOREIGN EXCHANGE Scotiabank s FX team has been ranked #1 in Canada for eight years in a row CANADA PERU JAMAICA COSTA RICA

Foreign Exchange Outlook. Making Progress

Foreign Exchange Outlook. Making Progress 2013-14 Foreign Exchange Outlook Making Progress Camilla Sutton Chief Currency Strategist 2012 Forecast vs Performance SCOTIABANK FORECASTS VS ACTUAL RETURNS (2012) 8 4 % return 0 JPY CAD GBP AUD EUR -4-8