FX OUTLOOK CAMILLA SUTTON l CHIEF FX STRATEGIST l416 866 5470 l CAMILLA.SUTTON@SCOTIABANK.COM April 2014
SCOTIABANK: FORECAST FX USD a mixed path REAL GDP US outperforms Canada 2012 2013 2014f 2015f 00 12 2013f 2014f 2015f USDCAD 0.99 1.06 1.12 1.13 US 1.9 1.9 2.8 3.0 CADUSD 1.01 0.94 0.89 0.88 Canada 2.2 2.0 2.2 2.5 AUDUSD 1.04 0.89 0.88 0.89 Mexico 2.4 1.1 2.7 3.7 EURUSD 1.32 1.37 1.30 1.24 Euro Zone 1.3 (0.4) 1.0 1.3 GBPUSD 1.63 1.66 1.64 1.59 UK 1.7 1.9 2.5 2.0 USDJPY 87 105 109 113 Japan 0.9 1.5 1.4 1.2 USDCNY 6.23 6.05 5.98 5.86 China 9.3 7.7 7.3 7.0 INFLATION Expected to remain contained INTEREST RATES Looking towards rate hikes US 1.2 1.7 1.9 Q413 Q414 Q415 Canada 0.9 1.9 2.0 FED 0.25 0.25 1.00 BoC 1.00 1.00 1.25 COMMODITIES Yearly averages ECB 0.25 0.25 0.25 Oil (WTI) 98 97 92 BoE 0.50 0.50 1.50 Gold 1,410 1,320 1,375 RBA 2.50 2.75 3.50 1
SUMMARY ECONOMIC MACRO OUTLOOK SUMMARY US economy in recovery Fed to hike rates in Q2 2015 Canadian economy lagging BoC hikes rates in H2 2015 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
FX MARKETS YTD: THE FED, DOMESTIC BACKDROPS & TAIL RISK 8.0 6.0 FX RETURNS YEAR TO DATE to April 24th, 2014 4.0 2.0 0.0 2.0 4.0 6.0 8.0 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
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
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
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
CENTRAL BANK POLICY THE US INTEREST RATE OUTLOOK Expect US interest rate hikes Q2 2015 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 10 55 20 55 30 Apr 10 45 20 35 18 Jun 10 35 20 15 30 Jul 10 25 15 0 17 Sep 10 15 0 0 29 Oct 10 5 0 0 17 Dec 5 0 0 0 7
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 0.50 0.25 1 Apr 14 18 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 Q2 2015 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
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
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% 2002 2004 2006 2008 2010 2012 24% 22% 20% 4.0% Percent (L) $250 $200 3.0% $150 $100 2.0% $050 1.0% Source: IMF, Bloomberg, Scotiabank FX Strategy $000 2002 2004 2006 2008 2010 2012 2014 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 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
EUR NEAR TERM & LONG TERM SENTIMENT DIFFER EUR NEAR TERM SENTIMENT IS BULLISH EUR Q414 CONSENSUS FORECAST IS 1.30 15000 $mm 10000 NET EUR POSITION 1.45 1.40 Each bar represents one of the forecasts provided to Bloomberg together they represent consensus. Spot level 5000 0 5000 10000 15000 Source: CFTC, Bloomberg, Scotiabank FX Strategy Apr 13 Jun 13 Aug 13 Oct 13 Dec 13 Feb 14 1.35 1.30 1.25 1.20 1.15 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
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
GBP NEAR TERM & LONG TERM SENTIMENT DIFFER GBP NEAR TERM SENTIMENT IS BULLISH GBP Q414 CONSENSUS FORECAST IS 1.63 4000 $mm 2000 0 NET GBP POSITION 1.75 1.70 1.65 MARKET IS BEARISH GBP IN THE LONG TERM Each bar represents one of the forecasts provided to Bloomberg together they represent consensus. Spot level 2000 4000 6000 8000 Source: CFTC, Bloomberg, Scotiabank FX Strategy Jun 13 Aug 13 Oct 13 Dec 13 Feb 14 Apr 14 1.60 1.55 1.50 1.45 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 WEAKEST PRIMARY CURRENCY IN 2014 USDCAD 5 year average level = 1.0300 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
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: 1.1300 MARKET IS BEARISH CAD IN THE LONG TERM 5 1.15 20 35 1.10 Spot level 50 65 1.05 1.00 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 14 0.95 SCOTIABANK FX STRATEGY OUTLOOK Q414 Spot: 1.10 Target: 1.12 1.0660 1.1300 1.1725 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
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 0.9650 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 0.95. Australia is not part of G7, giving RBA more leeway to reference the currency. Expect RBA rate hike in late 2014; early 2015. 17
AUD NEAR TERM & LONG TERM SENTIMENT DIFFER AUDUSD NEAR TERM SENTIMENT TURNS BULLISH 20 0 NET AUD POSITION '000s of contracts 0.95 0.90 AUDUSD CONSENSUS FORECAST Q414: 0.88 MARKET IS BEARISH AUD IN THE LONG TERM Spotlevel 20 40 60 80 100 Source: CFTC, Bloomberg, Scotiabank FX Strategy Jun 13 Aug 13 Oct 13 Dec 13 Feb 14 Apr 14 0.85 0.80 0.75 0.70 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
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)866 5470 Camilla.Sutton@scotiabank.com Eduardo Suarez LATAM Senior Currency Strategist Eduardo.Suarez@scotiabank.com Sacha Tihanyi Emerging Asia Senior Currency Strategist Sacha.Tihanyi@scotiabank.com Eric Theoret G10 Currency Strategist Eric.Theoret@scotiabank.com 19
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