August September 2012 CURRENCY FORECAST

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Anthony Harmon
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1 August September 2012 CURRENCY FORECAST Foreign Exchange & Global Payments

2 MONTHLY CURRENCY FORECAST CHART GBP/USD EXCHANGE RATES JUL Avg Aug, Sep f 2012 Q4 f USD/CAD EUR/USD GBP/USD

3 USD / CAD The USD/CAD essentially range traded in the month of July with an average rate of It finally broke out of its range in the latter half of July on speculation of further quantitative easing from the US Federal Reserve, which put the USD under pressure and made the USD/CAD trend towards the psychological 1 USD = 1 CAD level. In August and September, Bank of Canada s monetary policy and chances of further stimulus from the US Federal Reserve will be the main driving forces for the USD/CAD, in addition to the risk-on and risk-off trade fuelled by news from the Euro zone. US Fed Announcements & QE3 The US Federal Reserve will announce interest rates on September 13th. With virtually all major central banks in neutral or easing mode in response to the global economic slowdown, the USD might not suffer much from further stimulus even if Ben Bernanke does announce a third round of quantitative easing, also dubbed as QE3. In any case, we expect a devaluation of the US Dollar of at most 3% vs. the CAD should QE3 be announced. If QE3 is not announced, the US dollar will still remain under pressure on the mere speculation of further Fed easing throughout August. Bank of Canada & Monetary Policy Even after cutting growth prospects for Canada and much of the world and noting that household debt remained worrisome, as did Europe, Mark Carney remained among the few voices not crying wolf at least not yet. The Bank of Canada governor still expects growth in the domestic economy along with other economies to eventually ramp up, and that the banking and debt problems to be contained in Europe. This rhetoric, which was announced after Bank of Canada released its monetary policy report in July, makes the Bank of Canada one of the most hawkish central banks amongst the G20 nations. This also strengthens the case for CAD strength in the coming months. European Union Problems Although the EUR nose-dived against its major currency counterparts in July, the Canadian dollar surprisingly held on to its gains against a strengthening US Dollar with temporary risk aversion causing loonie weakness during some trading sessions. Overall, the Canadian dollar outperformed compared to its major currency counterparts. We expect this trend to continue in August and September.

4 USD / CAD USD/CAD s Trading Range In August & September In summary, after taking into account US Fed policy, Bank of Canada s policy stance and the EU situation, we expect the USD/CAD to trade between and Sellers of the US Dollar will find it advantageous to sell into US Dollar strength against the CAD each time a risk-off tone grips the markets. USD/CAD TREND SINCE JUL 1, Jul 1, 2012 Jul 8, 2012 Jul 16, 2012 Jul 24, 2012

5 EUR/USD The EUR lost 5% of its value in the early half of July against the US dollar. The only savings grace for the EUR came in the form of new resolve shown by EU policy makers in the latter half of July when European Central Bank President Mario Draghi said that he will do whatever it takes to defend the EUR currency. German Chancellor Angela Merkel and French President Francois Hollande echoed Draghi s remarks and helped boost the EUR by 2% in the latter half of July. Despite these statements, we continue to expect ongoing EUR weakness and suggest selling into EUR strength against the US Dollar in the months of August and September. Here are a few reasons why EUR weakness is expected: Spain s bailout Although the Spanish banking system received a bailout, the fundamental flaw with bailouts remains that adding more debt to those who need to cut debt is simply a band aid solution and does not address the structural faults in EU sovereign nation s balance sheets. The European Financial Stability Funds (EFSF) The European Financial Stability Funds (EFSF) is too underfunded to inspire confidence and it may not be operational until Even if it becomes operational earlier, it s funding and powers are unclear. Greece Even if we assume that Spain and Italian defaults can be prevented, it is unclear how the EUR can avoid continued weakness. Greece, for example, has missed about 70% of the requirements set out in the last bailout and so in theory should not be eligible for any more cash, meaning that it will default in a matter of weeks. In other words, a weak Euro automatically pushes the USD higher. In this environment, we expect the EUR/USD to trade between and

6 EUR/USD EUR/USD TREND SINCE JUL 1, Jul 1, 2012 Jul 8, 2012 Jul 16, 2012 Jul 24, 2012

7 GBP/USD The drop seen in UK gross domestic product in July marked the third straight month of negative economic activity and lended credence to the view that the UK economy is in recession mode. While the United States attempts to stimulate its economy via QE3, policy makers at the Bank of England have used asset-purchase programs to boost their local economy. Asset purchases are another form of quantitative easing. The Bank of England increased its asset-purchase target by 50 billion pounds to 375 billion pounds and kept its key interest rate at 0.5 percent at its previous meeting on July 4-5. In the months of August and September, we expect further increases to the bank s asset purchase program in order to stimulate an ailing UK economy. Although asset purchase programs weaken the British Pound, the US dollar is expected to remain under pressure as well due to rumors of QE3 from the US Federal Reserve. In this environment, we expect the GBP/USD to trade close to its fair valuation price of with an expected trading range of to GBP/USD TREND SINCE JUL 1, Jul 1, 2012 Jul 8, 2012 Jul 16, 2012 Jul 24, 2012

8 th Avenue,Suite 306 Markham, Ontario,L3R 0B6 Quote Line (Tel) (Fax) ( ) info@mtfx.ca This Report is prepared by MTFX Inc. as a resource for the clients of MTFX Inc. and MTFX Global. While the information is from sources believed reliable, neither the information nor the forecast shall be taken as a representation for which MTFX or any of its employees incur any responsibility.

MTFX ANALYTICS OCTOBER 2012 CURRENCY FORECAST

MTFX ANALYTICS OCTOBER 2012 CURRENCY FORECAST Foreign Exchange & Global Payments MONTHLY CURRENCY FORECAST CHART GBP/USD EXCHANGE RATES SEP Avg OCT f 2012 Q4 f USD/CAD 0.9790 0.9600 1.0200 0.9800 EUR/USD