8/9/2019 ScotiaBank AUG 09 Daily FX Update

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GLOBAL FX STRATEGY

Daily Foreign Exchange UpdateCURRENCY STRATEGISTS

Camilla Sutton, CFA, CMT Sacha Tihanyi(416) 866-5470 (416) 862-3154

Camilla_Sutton@scotiacapital.com Sacha_Tihanyi@scotiacapMonday, August 9, 2010

US YIELDS SUPRESSED AHEAD OF TUESDAYS FOMC Fridays nonfarm raises policy uncertainty ahead of FOMC. USD net speculative short position surges to 8-month high.

German exports recover towards pre-crisis levels, while EUR holds awaiting the Fed.

Hurdles this week: Fed, BoJ, BoEs inflation report and Julys round of Chinese data.

FX Market Update - European equities are making strong gains today, generally upwell over 1%, though this is not providing enough of a positive sentiment boost topush North American equity futures as deep into the black. The residual impact of lastFridays weak employment data is still making its presence felt and weighing on USequity sentiment. The USD had been broadly weaker heading into North Americantrading, but EURUSD has pushed to a new intraday low to help give the greenback abit of a bid. Still, there lacks a tone of strength behind the USD today as most majorsare only marginally off against the currency. GBP and AUD have managed to hold mar-

ginal gains, while only the NZD is lagging. S.T.

All Eyes On The FOMC- Though the market will get US July inflation data on Friday,the main focus of the week for the FX market will certainly be tomorrows FOMC ratedecision. In light of continuingly uninspiring economic data, punctuated by Fridaysweaker than expected employment result, the uncertainty and even the stakes of theFOMC meeting seem to have risen. The question however remains how much is theFed concerned over the weakening economic data? Certainly the markets response tonew economic information has been one of disappointment, relative to how the re-bound got underway. That disappointment has reverberated all the way down to theview on the interest rate outlook as the yield on the US 2-year Treasury plungedto a new record low following Fridays employment data, pushing the tradeweighted USD to a new 3.5 month low . Has the Fed been surprised however?Based on the latest FOMC minutes we know that the central tendency of FOMC expec-

tations for 2010 growth (3.0% - 3.5% ) is in line with the consensus of 55 contributorspolled by Bloomberg (at 3.1%) as is the unemployment outlook. At a 9.5% unemploy-ment rate, there is not a large divergence between FOMC projections and reality, andFed Chief Bernankes rhetoric has told us not to expect jobs growth to be high enoughto substantially bring down the unemployment rate quickly. The same pattern holds forcore PCE inflation, at 1.1%, as it currently lies above the Feds central tendency projec-tion of 0.8% to 1%, currently suggesting no surprise relative to the Feds 2010 out-look. So is the Fed going to be incented to do something tomorrow, and if so, whatis the USD impact? The most popular bit of speculation in the market is that the FOMCwill announce that the funds from bonds maturing in their QE portfolio will be rein-vested in order to prevent its balance sheet from shrinking and keep policy stimuluswell maintained. It seems to be a no-win situation for the USD. Should the Fed easepolicy, that will likely send US short term yields lower. Should it remain on hold for,then the market is likely to punish the greenback for a central bank that is seemingly

indifferent to a wobbling US growth profile. Ultimately, what this means is that theUSD has ground to give yet on this most recent weakening move. S.T.

AmericasUSDCAD (1.0290) CAD is trading in a fairly tight range heading into the NorthAmerican day, down 0.2% against the USD. USDCAD broke downtrend resistance at1.0245 on Friday, as CAD was hit by the double whammy of weaker than expecteddata in both Canada and the US. However, resistance at USDCADs 100-day mov-ing average (at 1.0311 today) held and now constitutes the key upside re-sistance level. While the US economic data will be much more relevant for USDCADthis week, we do receive housing starts and house price index data on Tuesday, aheadof Wednesdays merchandise trade data. We look for USDCADs trading range to holdbetween 1.0230 and 1.0352 today. S.T.

SPECULATIVE EUR POSITIONING IS MORE BALA

GERMAN EXPORT & IMPORT VOLUMES IMPROV

FED EXPECTATIONS INCREASINGLY MUTED

8/9/2019 ScotiaBank AUG 09 Daily FX Update

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LOBAL FX STRATEGY Monday, August 09, 201

Suggested ReadingGerman Export Surge Points to Rebound, Daniel Schafer, FT (August 9, 2010)Quarterbacks Get Out Hail Mary Economy Passes, Jon Hilsenrath, WSJ (August 9, 2010)Future Generations Will Curse Us for Cutting in a Slump, R. Skidelsky & M. Kennedy, FT (August 9, 2010)Some Firms Struggle to Fill Jobs Despite High Unemployment, Mark Whitehouse, WSJ (August 9. 2010)

GBPUSD (1.5960) GBP has had a quiet Aand European session, and is enteringNorth American session having gained 0against the USD. There were no data relein the UK today as the focus is the releof Wednesdays BoE Quarterly InflaReport. With inflation still elevated (abov3% upper band on both core and headand not showing signs of dropping back

the targeted range, the BoE is increasfinding themselves in a difficult position.potential of having to raise interest rates wgrowth is still subdued, will be not be adium term positive for the currency.week, the 50-day moving avercrossed above the 100-day (1.5137 1.5069), which is a bullish developmFor now 1.60 has held well as resistancbreak and close above this level would oup a test to historical congestion at 1.6230however the failure to break above 1.60 innear-term would put downward pressurthe currency. C.S.

Asia / OceaniaUSDJPY (85.60) USDJPY is essentially flFridays close, but off of Fridays new 8-mlow of 85.02. Tomorrow, the BoJ will nounce its decision on monetary poWith the drop in the US-JN interest rate sphaving pressured USDJPY lower, there is likely increasing government pressure foBoJ to act to deter yen strength. Accorditomorrows decision is an important hurdmarkets this week. However, consideEURJPY has not mirrored the drop

USDJPY and the well documented dculties associated with interventionthink we are not yet at a level wheregovernment (though the BoJ) will phcally step into markets. C.S.

USDCNY (6.7674) USDCNY dropped new low of 6.7641 in the Asian sessbringing the total drop to 1% since early Jwhen additional yuan flexibility was nounced. Diversification of reserves coues to be an overarching theme in the ywith some focus on further buying of sterm Japanese debt by China revealed in

latest MoF stats. This week we will gfresh round of Chinese economic data stats), which will be important for commprices and currencies. C.S.

CommoditiesOil ($81.58) Oil is trading within Fridrange and holding up well consideringdisappointing US employment data. Therent rolling 30-day correlation between and oil is strong at 0.85. C.S.

EuropeEURUSD (1.3260) EUR has lost 0.2% since Fridays close, having had a narrow range in the Asian and Euro-pean sessions. On Friday, EUR rallied to a high of 1.3334 on the back of the disappointing USemployment report. With the focus firmly on the outlook for US monetary policy there is fur-ther room for USD weakness (the next important level is 1.3510, which would mark the re-tracement of 50% of the November 2009 to June 2010 collapse). Europe, itself, lacks the fundamen-als to push EUR sustainably above 1.35. A strengthening EUR will soon shift the market's focus back to thencreased economic struggles that will face the Eurozone with a strengthening EUR and the longer-term sol-vency of some of the weaker EU members. Accordingly, we would expect a test up to 1.35 before EUR re-

races some of its recent gains. This weeks speculative IMM/CFTC data reported that the net shortEUR position shrank again and now stands at just -$1.2bn. The change came from both a reduction ingross shorts and an addition to gross longs - see middle chart on page 1. The EUR position is now far morebalanced, which implies that for EUR to rally above 1.35 it will need a significant fundamental catalyst andwill not be driven simply by short covering. Today, Germany released strong exports and importsdata, with its trade balance widening to 14.1bn. In euros, German exports volumes continue to re-cover towards pre-crisis levels, while imports have exceeded these in both euros and volumes - see bottomchart on page 1. Near term resistance lies at Fridays high of 1.3334, while support lies at the 9-day movingaverage of 1.3161. C.S.

30 Day

Hist Vol

Spot1 Day

Change

1 Week

Change

100 Day

MA

200 Day

MA

Pivot 1st

Support

Pivot 1st

ResistanceSDCAD 10.9 1.0294 0.0020 0.0058 1.0311 1.0398 1.0192 1.0352

URUSD 11.1 1.3256 -0.0024 0.0087 1.2822 1.3538 1.3165 1.3341

BPUSD 10.5 1.5968 0.0026 0.0075 1.5069 1.5529 1.5872 1.6031

SDCHF 12.0 1.0394 0.0006 0.0008 1.0894 1.0654 1.0315 1.0491

SDJPY 9.4 85.60 0.09 -0.93 90.72 90.42 85.02 86.19

UDUSD 13.6 0.9188 0.0006 0.0054 0.8860 0.8962 0.9142 0.9228

SDMXN 10.1 12.67 0.02- 0.08 12.62 12.75 12.55 12.77

XY (USD index) 7.8 80.48 0.07 0.47- 83.69 80.80 80.06 80.92

RB Commodity 274.71 -2.96 0.36 265.30 270.37 N/A N/A

old 1,206.90 1.50 23.45 1,189.08 1,154.31 1,195.90 1,214.50

WT Crude (Nymex) 81.58 0.88 0.26 78.28 77.91 80.19 82.82

at Gas (Nymex) 4.48 0.01 -0.21 4.38 4.73 4.39 4.60

oC Noon Rate 1.0273 CAD (close from Bloomberg not BoC): 1.0274

ricing Source: Bloomberg 8/9/2010

Key Pricing & Levels

oday's Releases & Speakers Period Cons Last Significance

10:00 AM MX Consumer Prices (MoM) JUL 0.2% 0.0% High

10:00 AM MX Trade Balance JUN F - - -340.5M Medium

7:01 PM UK BRC July Retail Sales Monitor Medium

7:01 PM UK RICS House Price Balance JUL 5.0% 9.0% Medium

7:50 PM JN Housing Loans YoY 2Q - - 1.0% Medium

9:30 PM AU NAB Business Confidence JUL - - 4 Medium

NA CH Trade Balance (USD) JUL $19.60B $20.02B High

NA CH Exports YoY% JUL 35.0% 43.9% High

NA CH Imports YoY% JUL 30.0% 34.1% High

NA JN BOJ Target Rate 0.1% 0.1% High

2:00 AM GE CPI - EU Harmonised (MoM) JUL F 0.3% 0.3% High

2:45 AM FR Industrial Production (YoY) JUN 7.3% 8.2% Medium

4:30 AM UK Total Trade Balance (GBP/Mln) JUN -3650 -3817 Medium

4:30 AM UK DCLG UK House Prices (YoY) JUN 9.8% 11.0% Low

5:15 AM EC ECB Announces Allotment in 7-Day and 1-month Refinancing Tender Medium

8/9/2019 ScotiaBank AUG 09 Daily FX Update

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LOBAL FX STRATEGY Monday, August 09, 201

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Our July Monthly FX Strategy Call is now available, please dial in at your convenience.

Dial: 416-695-5800

Passcode: 77386016#

This month's 20-minute call is hosted by Sacha Tihanyi and discusses:1) Economic and FX forecast update - less tightening for the Fed and BoC

2) USD decline - factors driving the downturn

The presentation can be found at:http://www.scotiafx.com/conference/index.htm

Conference call commandsPress 1 Skip backward 5 secondsPress 3 Skip forward 5Press 4 Skip backward 5 minutesPress 6 Skip forward 5 minutesPress 5 Pause the playback

f you have any questions, please contact:Camilla Sutton at (416)866-5470, camilla_sutton@scotiacapital.com or

Sacha Tihanyi at (416)862-3154, sacha_tihanyi@scotiacapital.com