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1 FX Team Montreal Customer Service FX Team Toronto Customer Service Development Team Fixed Income & Commodity Major News this Week Much as was the case for the last few months, unfolding events in the U.S. have captured our attention, although this time it has not been the Federal Reserve influencing markets, but rather the recent conflicts in Washington. The U.S. government shut its doors last week, and the Republicans and Democrats have yet to reach an agreement that could pry them back open. The most likely scenario is that the politicians will put off the problem by raising the debt ceiling. The euro continued to gain strength as Mario Draghi, the President of the European Central Bank, declared that the eurozone economy was still fragile and the Bank would maintain its policy of monetary easing. On Friday the euro was trading 400 basis points higher than in September. Have a good week! Philippe Shebib Monday Canada Forecast Previous Building Permits for August; the last figure was stunning, with 20.7% growth in permits -7.4% 20.7% Tuesday Housing Starts for September Unemployment Rate for September 185, , % 7.1% Friday Job Creation for September; the statistic for August was very good, showing 59,200 jobs created, the 2 nd best figure of the year. 13,500 59,200 Tuesday United States Forecast Previous Job creation in September 180, ,000 Unemployment rate for September 7.3% 7.3% Wholesale Inventories of August (MoM) 0.3% 0.1% Wednesday FOMC minutes - - Thursday Initial Jobless Claims 310, ,000 Retail Sales for September (MoM) 0.1% 0.2% Friday Michigan Consumer Sentiment Index Thursday International Forecast Previous Australia s Unemployment Rate for September 5.87% 5.8% Australia s Job Creation for September 15,000-10,800 Bank of England s Key Rate Decision 0.5% 0.5% 1

2 The Loonie The optimist sees the rose and not its thorns; the pessimist stares at the thorns, oblivious of the rose. Kahlil Gibran The euro moved up significantly this week, approaching its peak of last February by almost 65 basis points, representing a two-year high against the greenback. Clearly the problems in Washington over the last few days have something to do with it, but it would appear that the trend began in the middle of the summer, long before the political wrangling in the U.S. became apparent. The rally in the EUR/USD since July has been nothing short of a remarkable turn of events. The figure was below , which was just above its lowest level for the year, when the wind suddenly changed direction, carrying the pair over this week. *Source: Bloomberg, National Bank of Canada, As shown by the above graph, the eurozone economy (represented by GDP, the blue line) was hard hit by the financial crisis and, until just recently, had struggled to maintain its momentum of However, some major economic indicators began to turn around in early This was true of Retail Sales (the green line) and Consumer Confidence (the pink line), both of which point to a recovery, even though there is still a long way to go. Retail Sales are still showing a slight decline YoY, but are growing MoM. This can also be said for GDP, which has slipped YoY but has grown QoQ. Ultimately what matters is the direction of these changes, and the data shows that the storms of the last few years are now behind us and that there are clearer skies ahead. Like it or not, the EUR/USD has to adjust to these new conditions. The Fed s decision to maintain monetary easing and the deadlock in the U.S. government have also played a role. However, not everything is going well in Europe. The unemployment rate (the white line) is still above 12%, and the situation among young people is even more troubling, with unemployment reaching 24%. The markets seem to have rose-tinted glasses at the moment Have a good week! Xavier Villemaire 2

3 Technical Analysis: (Monday 7, October, 2013) USDCAD: The USDCAD remained stuck between its 100-d and 200-d moving averages. The US deadlock over the budget and the looming fight over the debt ceiling could bring some uncertainties and a USD rebound is the level to break. US Job Market: The chart of the week highlights a very important phenomenon of the US job market. The upper chart shows a clear downtrend in the unemployment rate after the 10% high seen during the 2008 crisis. At the same time, we see a decrease in the weekly jobless claims. 2 very encouraging charts it seems! However, the lower chart brings a dark note to the picture: it is the participation rate, i.e. ratio of the active population over the total population. This rate is currently at 63.25, the lowest reading since Conclusion? Many active job seekers seem to have given up and are not looking for job anymore. They artificially lower the unemployment rate. This could explain, in part, why M. Bernanke is so reluctant to reduce its stimulus (quantitative easing). Olivier Cosialls, CMT USD/CAD Res. levels Supports levels

4 Fixed Income Last week was awfully quiet in the North American interest rate market. As a matter of fact, volatility was scarce and little impact was observed from the partial shutdown of the American government. Many government entities were forced to close their doors and consequently, some statistics scheduled on the economic calendar were not release. Swap rates of maturities of 5 years and 10 years traded in a very narrow range of 5 bps and 7bps, respectively. Accordingly, Canadian bonds with similar maturities traded in similar ranges. It is hard to predict which economic news will be released, if any, in the U.S. this week. In Canada, employment numbers are expected on Friday. Wishing you a great week! Rana Karim Canada Key short-term rates Overnight Rate % % % 0.0-3M Bill (Federal) % % % month CDOR % % % 0.5 Prime rate % % % Government bonds United States 2 year 1.193% 1.203% % year 1.886% 1.876% % year 2.580% 2.557% % year 3.120% 3.082% % 75.2 Key short-term rates Fed Funds target 0.250% 0.250% % 0.0-3M Tbill 0.020% 0.010% % month LIBOR 0.173% 0.180% % -4.5 Prime rate 3.250% 3.250% % Government bonds 2 year 0.331% 0.334% % year 1.410% 1.402% % year 2.646% 2.625% % year 3.720% 3.687% % 83.0 % /7/13 8/21/13 9/4/13 9/18/13 10/2/13 % yr CAD Goverment Bond Yield 5 yr US Government Bond Yield 1.1 8/7/13 8/21/13 9/4/13 9/18/13 10/2/13 4

5 CAD/Liter $USD / Baril WEEKLY PUBLICATION Commodities Fears for the economy due to the shutdown of the U.S. government and the raising of its debt ceiling could weigh on energy prices over the next few weeks. Since fuel consumption is closely tied to economic activity, the current situation could generate good opportunities for businesses that are waiting for a drop in prices to lock in their fuel expenditures at the lower prices. We expect the current downward trend to continue over the next few weeks, with good opportunities following in the fall. The arrival of tropical storm Karen should not have a major impact on oil production in the Gulf of Mexico. It should be remembered that the region is responsible for over 20% of U.S. oil production and 45% of its refining capacity. In 2005, hurricanes Rita and Katrina proved to be catastrophic for the North American oil markets. TransCanada mentioned last week that the portion of the Keystone pipeline that will transport Cushing oil to the refineries in the Gulf of Mexico is 95% complete. The oil should begin flowing between now and the end of the year, at a pace that will reach over 700,000 barrels per day. This should support the price of U.S. oil and help narrow the price gap between Brent and WTI. This gap is now just over $5 per barrel, compared to $25 in November Now is the time to leave orders with our team. Have a great week! Emmanuel Tessier-Fleury Open 7-Oct-13 Prior 30-Sep-13 WTI Crude Oil (USD/Barrel) % 15.80% Brent Crude Oil (USD/Barrel) % 1.52% Heating Oil % 1.52% Rack Diesel Quebec Rack Diesel, Toronto Rack Diesel, Vancouver Gasoline, Nymex Variation Year to date % -4.81% % -2.73% % -4.81% % -4.30% Natural Gas (Usd/Mmbtu) % 7.40% Energy charts Brent Crude Oil WTI Crude Oil Swap Heating Oil (CAD/Liter) Gasoline (CAD/Liter) WTI Crude Oil (CAD/Liter) Brent Crude Oil (CAD/Liter) 3 Months Months Months Months Months Rack Diesel Heating Oil 5

6 This document is based on public information, obtained from sources deemed to be reliable. National Bank of Canada, its subsidiaries or one of its employees (the Bank ) makes no representation as to the accuracy or completeness of this information. This document is provided for information purposes only and does not constitute a buy or sell offer or solicitation. At no time may it be considered an undertaking of the Bank, and the Bank cannot be held liable for the consequences of a decision made on the basis of information contained in this document. The prices and rates presented are provided for information purposes only, as they can vary at any time depending on market conditions. Past returns do not guarantee future performance, and the Bank is not offering advice on investments or financial products. If you access this report outside Canada, you are responsible for complying with local, national and international laws. The content of this document is the property of the Bank and may not be reproduced or distributed in any manner, in whole or in part, without the express written consent of the Bank. 6

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