June & July 2012 CURRENCY FORECAST

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Barnard Collins
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1 June & July 2012 CURRENCY FORECAST Foreign Exchange & Global Payments

2 CURRENCY FORECAST CHART GBP/USD EXCHANGE RATES MAY Avg. JUNE & JULY f 2012 Q4 f USD/CAD EUR/USD GBP/USD

3 USD / CAD The USD/CAD was trading at 1 USD = 0.98 CAD when last month s report was put to print. As we publish this report, the pair trades at 1 USD = 1.03 CAD, demonstrating a 5 cent drop in the Canadian dollar. May Mayhem May mayhem has taken over financial markets, resulting in a flight to the relative safety of the greenback. The US dollar was sent on an upward trajectory against almost all major currencies as concerns surrounding the European sovereign crisis and a slowing of Chinese growth resurfaced in May. The Canadian Dollar s near-term fortunes are being determined by external events that are weighing on commodities. Therefore, we could see the CAD easing slightly further, before strengthening through parity again towards the end of Q3. Declining Oil Prices To Pressure Loonie As a commodity-rich economy, the Canadian dollar has a strong correlation to oil prices which are on the decline. If historical trading patterns are any indication, U.S. crude-oil prices should continue to fall in addition to the 18% plunge seen in May. The price currently sits at USD a barrel and a further decline in oil prices suggests further weakness in the Canadian dollar.

4 USD / CAD Lower Likelihood Of US Quantitative Easing Another factor that will determine the USD/CAD s direction will be the chances of quantitative easing from the US Federal Reserve. The probability of QE 3 is low since the US economy is expected to continue moving forward at a moderate pace. Despite disappointing employment numbers from the US, other data (such as GDP, the ISM non-manufacturing index and housing starts) show that the US economy has stabilized. No QE 3 will in turn will help keep the US Dollar well supported in June. Weak Data From China Will Keep Commodities Lower In May, softer-than-expected figures from China dented commodity prices and related currencies such as the CAD. In this light, the next batch of Chinese data, June 9-10, will be even more closely watched than usual. Analysts expect weak numbers from China which will pressure the CAD lower. In light of a lower chance of QE 3 from the United States, a Bank of Canada which is reluctant to raise rates and a soft landing in China, we expect the USD/CAD to weaken further to before reverting to a target price of USD/CAD TREND SINCE MAY 1, May 1, 2012 May 8, 2012 May 16, 2012 May 24, 2012 Jun1, 2012

5 EUR/USD Political events in Europe have once again plunged investors into uncertainty. Instead of advancing toward a lasting solution, the situation has deteriorated. The Greek election results show the extent to which hard times have undermined popular support for austerity. The same phenomenon is illustrated by French voters replacement of their government, even though its austerity had been less drastic. As if this were not enough, the global economy, while still in expansion, has recently disappointed. While the EUR has already fallen sharply over recent weeks to approach and break the most conservation of bearish estimates (1.24 was the original expected low), the political impasse in Greece and Spanish banking concerns make a near-term turnaround in fortune unlikely. Therefore, we now expect the EUR/USD to weaken further to a target price of The two major reasons behind further EUR depreciation are the elections in Greece and the stance of the European Central Bank (ECB) on interest rates. Greek Elections & Its Banking System Greek elections are due on June 17. A new Greek government may not automatically lead to an immediate departure of Greece from the Eurozone as some fear, but will at minimum raise uncertainty as austerity plans are renegotiated. The Greek elections could well see anti-bailout party Syriza (now ahead in some opinion polls) come out on top. In addition, continued depositor flight threatens the Greek banking system. Already we have seen four banks deemed to be not sufficiently capitalized to be funded by the ECB, placing them back into the Emergency Liquidity Assistance programme. Further deterioration in the banking system could trigger an early Greek EMU exit, although we do not believe this to be the most likely scenario.

6 EUR/USD European Central Bank Interest Rate Decision We expect the ECB to keep rates unchanged. A heavy calendar of events throughout June could help determine how the euro zone crisis unfolds and may encourage Europe's key monetary policymakers to hold interest rates for now. In addition to Greek elections on June 17, the heads of the G20 group of nations will hold a summit on June 18 and 19, while Europe's leaders will gather at the end of the month to decide their next response to the crisis. Elevated risk aversion favours ongoing USD outperformance and EUR weakness. The fact that the field of those already shorting the euro is so crowded might, however, limit the euro s downside. Overall, we look to maintain our bearish stance and amidst another summer of uncertainty would not rule out a test towards the 2010 lows of EUR/USD TREND SINCE MAY 1, May 1, 2012 May 8, 2012 May 16, 2012 May 24, 2012 Jun 1, 2012

7 GBP/USD The Pound Sterling may have depreciated against the US dollar in recent weeks, reflecting a flight back to the relative safety of the greenback, but it has held up remarkably well compared to many other major currencies. Some of the reasons why the GBP has fared better is because investors seem to be favouring the liquidity of sterling in the European time zone. A change in voting pattern among the UK s Monetary Policy Committee has also been a partial catalyst for sterling s relative strength, as Adam Posen, previously a strong enthusiast for QE, has moved away from calling for further stimulus. Nonetheless, QE cannot be ruled out completely given the recent spate of weak UK data and the turmoil in Europe. Although chances of QE will be keep the GBP under pressure, the general trend for GBP strengthremains intact since the Pound Sterling is viewed as an inter-diversification play currency in the Euro zone. If we see the GBP/USD break out of its broad range, it suggests a deviation from fair valuation measures. The GBP/USD currently trades at and we expect the Sterling to correct towards the mid-point of its fair valuation (1.5500). GBP/USD TREND SINCE APR 1, May 1, 2012 May 8, 2012 May 16, 2012 May 24, 2012 Jun1, 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