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GLOBAL ECONOMICS & FOREIGN EXCHANGE STRATEGY
| FOREIGN EXCHANGE OUTLOOK September 2016
CONTENTS
AMERICAS
Political and monetary policy developments in the USA will
shape market sentiment through the remainder of the year.
We maintain a bullish view for the USD on the grounds of
interest rate and growth differentials. Both CAD and MXN will
remain sensitive to USD gyrations, yet the latter might suffer
from profit-taking headwinds (like BRL) affecting emergingmarket currencies.
EUROPE
The resilience enjoyed by the EUR might face a fundamental
test as the euro zone adjusts to new realities shaped by postBrexit vote dynamics and US interest rate normalization. We
maintain a near-term bearish view for GBP on the back of
deteriorating growth prospects in the UK which may trigger
further aggressive action by the Bank of England. The RUB
might also be subject to temporary correction.
Market Tone & Fundamental Outlook
3
United States & Canada
4-5
G10
(Eurozone, United Kingdom,
Japan, Australia)
6-7
BRIC
(Brazil, Russia, India, China)
8-9
Pacific Alliance
(Mexico, Colombia, Chile, Peru)
10-11
Developing Economies
(South Korea, Thailand,
Taiwan, Malaysia)
12-13
Global Currency Forecast
Contacts & Contributors
14
15-16
ASIA-PACIFIC
China will gradually return to global investors’ radar screens
as the IMF prepares to welcome the RMB in the SDR
mechanism. We still expect a gradual depreciation of the
RMB to be guided by decisive (sometimes unconventional)
official intervention schemes. The JPY will likely recover a
gradual weakening tone as global capital flows jump into the
strengthening USD wagon.
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1
GLOBAL ECONOMICS & FOREIGN EXCHANGE STRATEGY
| FOREIGN EXCHANGE OUTLOOK September 2016
Core Exchange Rates
Global Foreign Exchange Outlook
September 6, 2016
EURUSD
USDJPY
GBPUSD
USDCAD
AUDUSD
USDMXN
1.50
Spot
Q1a
2016f
Q2a
1.12
103.4
1.34
1.29
0.76
18.50
1.14
113
1.44
1.30
0.77
17.28
1.11
103
1.33
1.29
0.75
18.28
EURUSD
123
Q3
Q4
Q1
1.05
105
1.25
1.30
0.75
18.67
1.05
105
1.25
1.30
0.75
18.98
1.05
110
1.27
1.28
0.73
18.88
2017f
Q2
1.07
110
1.27
1.28
0.73
18.40
Q3
Q4
1.10
115
1.30
1.25
0.72
18.31
1.12
115
1.35
1.25
0.72
18.54
USDJPY
115
1.40
107
1.30
99
1.20
91
1.10
83
1.00
Sep-11
1.72
Sep-12
Sep-13
Sep-14
Sep-15
Sep-16
GBPUSD
1.43
Sep-12
Sep-13
Sep-14
Sep-15
Sep-16
Sep-13
Sep-14
Sep-15
Sep-16
Sep-13
Sep-14
Sep-15
Sep-16
USDCAD
1.35
1.65
1.28
1.57
1.20
1.50
1.13
1.42
1.05
1.35
1.27
Sep-11
75
Sep-11
0.98
Sep-12
Sep-13
Sep-14
Sep-15
Sep-16
0.90
Sep-11
AUDUSD
Sep-12
USDMXN
18.5
1.05
17.3
0.95
16.0
14.8
0.85
13.5
0.75
12.3
0.65
Sep-11
Sep-12
Sep-13
Sep-14
Sep-15
Sep-16
11.0
Sep-11
Sep-12
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2
GLOBAL ECONOMICS & FOREIGN EXCHANGE STRATEGY
| FOREIGN EXCHANGE OUTLOOK September 2016
Market Tone & Fundamental Focus
Pablo Bréard, 1.416.862.3876
Scotiabank Economics
[email protected]
Shaun Osborne, 1.416.945.4538
Foreign Exchange Strategy
[email protected]
Growth and monetary policy divergence risks within the advanced economies are re-emerging as key themes that will shape the
trends in the major currencies over the remainder of 2016. After a somewhat disappointing first half of the year, US economic
activity appears to be strengthening again, supported by robust employment conditions. Renewed economic momentum may give
US Federal Reserve policy makers enough confidence in the outlook to consider that tighter monetary policy is necessary as a pre
-emptive tool against inflation build-up. Scotiabank expects the Fed to raise rates 25 basis points (bps) in December and to
implement three additional 25 bps increases in 2017. Markets have been reluctant to price in the potential for a small adjustment in
the Fed funds policy rate over the coming year. Indeed, we expect the consequent re-pricing of the short end of the US interest
rate curve to allow the US dollar (USD) to appreciate versus peer currencies in the near term.
In contrast, low Eurozone inflation data for August (+0.2% Y/Y) and sluggish growth momentum suggest that European Central
Bank (ECB) policymakers may have to consider additional policy easing steps shortly. Despite aggressive measures (such as rate
cuts and asset purchases) undertaken so far, the ECB is not reaching its policy mandate (close to, but below, 2% inflation). In July,
ECB President Draghi stressed the central bank’s “readiness, willingness, ability” to act, if warranted, to achieve its policy
objectives. The September 8th ECB meeting will allow central bankers to consider updated staff forecasts covering the Eurozone
outlook. We think additional easing measures are likely in the coming months. The contrast between tighter (albeit gradual)
monetary policy in the US and very loose (and likely looser) monetary policy in the Eurozone will drive the euro (EUR) lower. We
target EURUSD at 1.05 by year-end. Weakness below 1.11 in the near-term should see EURUSD losses accelerate.
Sterling (GBP) has out-performed broadly in the latter part of August. Recent UK data reports have reflected better than expected
housing, consumer confidence and activity trends in the wake of the Brexit decision, easing concerns about the immediate risk to
growth following the referendum. It remains very early in the process, however, and we note that the Bank of England (BoE)
responded quickly and aggressively to the shock with a broad array of policy accommodation last month. It also convinced market
participants that it would likely adopt more interventionist measures in the months ahead. Trade, investment and business
confidence issues remain potential challenges for the UK in the near-term and longer-term risks to the growth outlook remain
significant. However, GBPUSD’s recent strength may mean a delayed move to our current year-end target of 1.25 and could
trigger further GBP gains on the crosses in the short run as short GBP positions are forced to cover.
Commodity markets have reacted poorly to the heightened attention to Fed policy prospects. Commodity prices have fallen around
6% overall since mid-July and around half of that fall accumulated in the last week of August as focus on Fed policy intensified
following the Jackson Hole symposium where Fed Chair Yellen said the case for tighter policy had strengthened. The combination
of lower crude oil prices and modestly wider US-Canada short-term interest rate differentials has served to support USD gains
versus its Canadian counterpart (CAD). Canadian economic growth trends may improve modestly in the second half of the year
but the long-awaited pivot towards non-resource export-driven growth remains elusive. The Bank of Canada will retain a stable
monetary policy stance through 2017 as a consequence. We remain constructive on the near-term outlook for USDCAD and feel
there is a risk of an overshoot to our year-end target of 1.30 if crude oil prices fail to pick up as we expect. Tighter monetary policy
conditions in the US may also undermine the Australian and New Zealand dollars via commodity price channels as well as a
modest reduction in short-term interest rate spreads.
The Bank of Japan (BoJ) is currently undertaking a policy review to assess the best way to reach its 2% inflation target. This
suggests that, despite aggressive policy steps so far failing to reverse deflation (headline inflation was measured at -0.4% Y/Y in
August), the central bank is considering additional policy initiatives to reach its inflation target. We think further, non-conventional
measures are likely to be implemented in the next few months but it is unclear whether the September 21st meeting will see
stimulus expanded. The yen’s (JPY) exchange rate versus the USD remains a sensitive issue for Japan but USDJPY’s reversal
from just below 100 reached last month relieves some pressure for hasty action. BoJ data indicate there has been no direct
intervention in the markets by the Japanese authorities thus far. We continue to forecast USDJPY at 105 through year end.
Emerging-market currencies enjoyed a steady rally since late February, with the exception of the Chinese renminbi (CNY) which
weakened broadly. The Russian ruble (RUB), primarily influenced by energy price dynamics and European growth prospects
seems to have found a period of stabilization after a steady six-month rally. The Brazilian real (BRL), influenced by excessive
global liquidity and ultra-low interest rates has also enjoyed a sustained rally (up 33% between late January and mid-August) but
might face profit-taking and a consolidation phase in September. Global investors will digest the outcome of the impeachment of
Dilma Rousseff and the chances of success of newly appointed President Michel Temer’s stabilization and adjustment policies.
Finally, the Mexican peso (MXN) remains strongly influenced by both the US monetary and business cycle and the prospects of
sudden capital outflows should the Federal Reserve adjust its policy stance after the November 8th presidential vote in the USA.
Visit our web site at scotiabank.com/economics or contact us by email at [email protected]
3
GLOBAL ECONOMICS & FOREIGN EXCHANGE STRATEGY
| FOREIGN EXCHANGE OUTLOOK September 2016
Canada
Shaun Osborne, 1.416.945.4538
Foreign Exchange Strategy
[email protected]
Currency Outlook
The outlook for the CAD remains challenging. While we continue to target USDCAD at 1.30 at the end of December, we think
near-term risks are geared towards a somewhat lower CAD (1.33/1.35) versus the USD and do not exclude the potential of an
overshoot relative to our year-end forecast. Domestic growth trends were slack in the first half of the year, even without the impact
of the Alberta wildfires, but may rebound in Q3. It seems unlikely that growth can match BoC expectations at this point, however,
and some downward adjustment to the official outlook may be made at the October meeting, just as the US economy appears to
be picking up, which will further delay the closing of the output gap.
The external side of the economy is struggling, with export volumes down more than 5% in the year through June. This is the
worst performance since 2009 and suggests the BoC’s narrative of improving export trends, especially in the non-resource sector,
supporting growth remains wide of the mark at this point. Moreover, business investment continues to soften (but the pace of
decline appears to be slowing), leaving growth dependent on domestic sources (consumers and housing) for a little
longer. Sluggish growth and weak exports suggest headwinds for the CAD in the next few months.
Renewed weakness in energy prices represents a more immediate threat to the CAD. Even if short-term market correlations
between the CAD and crude oil prices have softened in recent weeks, the linkage remains positive. Weaker crude prices will go
more or less hand in hand with a lower CAD. The turn lower in crude – after a 20% rise in WTI from the recent lows had
speculators thinking in terms of a new “bull market” – reflects the ongoing supply/demand imbalance that seems set to persist a
little longer, especially while price discipline remains absent among producers.
Canadian Dollar Cross-Currency Trends
Spot
6-Sep
0.98
80.0
1.44
1.29
FX Rate
AUDCAD
CADJPY
EURCAD
USDCAD
1.01
16Q1a
16Q2a
16Q3f
16Q4f
17Q1f
17Q2f
17Q3f
17Q4f
1.00
86.6
1.48
1.30
0.96
79.8
1.44
1.29
0.98
80.8
1.37
1.30
0.98
80.8
1.37
1.30
0.93
85.9
1.34
1.28
0.93
85.9
1.37
1.28
0.90
92.0
1.38
1.25
0.90
92.0
1.40
1.25
AUDCAD
96.0
CADJPY
93.0
0.99
90.0
87.0
0.96
84.0
81.0
0.94
78.0
0.91
Sep-15
Dec-15
Mar-16
Jun-16
Sep-16
1.63
75.0
Sep-15
1.47
EURCAD
1.58
1.42
1.54
1.37
1.49
1.32
1.45
1.27
1.40
Sep-15
Dec-15
Mar-16
Jun-16
Sep-16
Dec-15
Mar-16
Jun-16
Sep-16
USDCAD
1.22
Sep-15
Dec-15
Mar-16
Visit our web site at scotiabank.com/economics or contact us by email at [email protected]
Jun-16
Sep-16
4
GLOBAL ECONOMICS & FOREIGN EXCHANGE STRATEGY
| FOREIGN EXCHANGE OUTLOOK September 2016
United States and Canada
Fundamental Commentary
Adrienne Warren, 1.416.866.4315
Scotiabank Economics
[email protected]
UNITED STATES — The US economy appears to be gaining momentum after a weak first-half performance. Consumer spending
and housing activity are leading the way, underpinned by a robust job market, rising income gains, low gasoline prices, and low
borrowing costs. Labour market conditions remain solid, with monthly employment gains trending around 175,000 through August
and the unemployment rate holding below 5%. Motor vehicle purchases have softened, though retailers overall are reporting solid
sales growth. A gradual easing in lending conditions, low mortgage rates and strengthening household formation are underpinning
improving housing demand, with home sales and housing starts at their highest levels since 2007. Non-residential construction is
showing strength across commercial and institutional sectors. Services activity is expanding across a range of industries, including
retail & wholesale trade, real estate & leasing, construction, and health care. Industrial activity remains soft amid the sharp
retrenchment in oil & gas drilling, ongoing inventory adjustments and sluggish export sales, but has shown some recent signs of
improvement. Industrial production posted back-to-back gains in June and July, with a broad-based pickup in manufacturing and a
stabilization in mining. While US dollar strength and moderate global growth are weighing on exports, solid domestic sales should
support further expansion in manufacturing production. Business investment remains restrained, held back by cutbacks in the
energy and mining sectors, and weak export earnings. However, firmer capital goods orders point to some improvement in the
coming months. Core inflation pressures are stable, with rising services costs balanced by continuing deflation in imported goods
prices. Headline inflation remains muted at just 0.8% in July.
CANADA — The Canadian economy faltered in Q2, with real GDP contracting at a 1.6% annualized rate. Reduced oil production
in the wake of the May wildfires in Alberta accounted for much of the downturn. Even so, the economy’s overall growth momentum
has slowed after a solid start to the year. Excluding the impact of the wildfires, output was essentially flat in the quarter. While the
economy is expected to post a solid rebound in Q3 as oil shipments recover, the underlying trend in growth appears to be only
around 1-1½% y/y. Consumer spending and housing activity remain fairly resilient, notwithstanding weak employment and income
growth. Job growth has largely stalled this year, with strength in BC and Ontario offset by job losses in commodity-producing
regions. Hiring intentions remain modest, underscoring the continuing high degree of caution among businesses. Business
investment has contracted for six consecutive quarters, led by the capital-intensive energy sector. However, the pace of cutbacks
has slowed, and could begin to stabilize later in the year alongside firmer oil prices. Meanwhile, export activity outside of the
resource sector has continued to disappoint. Non-energy export volumes have contracted in four of the past six months, reversing
the strong gains seen at the turn of the year. Strengthening US demand and the lagged effects of Canadian dollar depreciation are
still expected to lead to some improvement in exports and manufacturing production in the latter half of the year. Meanwhile,
federal fiscal stimulus is providing increasing support. Core inflation is still trending around 2% y/y despite the inflationary
passthrough of a weaker Canadian dollar, while headline inflation is averaging 1½% y/y.
Monetary Policy Commentary
Derek Holt, 1.416.863.7707
Scotiabank Economics
[email protected]
UNITED STATES — It is likely that the nonfarm payrolls report was strong enough for the Fed to hike, but other complicating
factors may result in it keeping its powder dry later this month in favour of raising rates in December. They include the likelihood
that other central banks could ease before the September FOMC meeting such as the ECB and/or the BoE and BoJ, still subtarget inflation, and mixed growth signals including a weak ISM-manufacturing report and company guidance that softer vehicle
sales have “plateaued.” Further, markets are priced for a fairly modest probability of a hike this month, whereas we think the Fed
prefers to avoid market surprises and therefore has further work to do in order to convince markets that a hike is imminent. Toss in
the uncertainty surrounding the elections - and the tangible implications for the economy - and the case for rushing a rate hike is
soft. Indeed, a hike now could feed concern that the Fed could indeed hike again before year-end. Raising rates twice in three
meetings may run counter to the Fed’s goal of convincing markets that it intends to move at a gradual pace which could be
destabilizing to global markets.
CANADA — We forecast the Bank of Canada to remain on hold for the duration of this year. The Bank of Canada can rest
assured that its broad story of a pending economic rebound is likely to occur in the current quarter and therefore no policy change
or significant change in the accompanying story are required at this point. That still leaves open a vibrant debate on the policy risks
toward year-end and throughout our forecast horizon. Recent export growth has played to the expectations for a Q3 rebound, but
the durability of this ‘recovery’ from a massive 19% contraction in export volumes during Q2 over Q1 may be reassessed later in
the year and early next year. Even if export growth disappoints once again, arguments against further policy easing include
reliance upon fiscal policy, inflated housing markets, on-target core inflation, external developments, and the risks associated with
courting negative rates.
Visit our web site at scotiabank.com/economics or contact us by email at [email protected]
5
GLOBAL ECONOMICS & FOREIGN EXCHANGE STRATEGY
| FOREIGN EXCHANGE OUTLOOK September 2016
G10
Eric Theoret, 1.416.863.7030
Foreign Exchange Strategy
[email protected]
Currency Outlook
EUROZONE — EUR is entering September at the mid-point of its 18 month range with an ongoing consolidation around 1.12.
Monthly doji’s have followed the bearish outside reversal for May, suggesting uncertainty. Bearish CFTC positioning leaves it
vulnerable to adjustment and investors have covered EUR shorts throughout the month of August. Options markets continue to
price a slight premium for protection against EUR weakness and we look to a decline into year end with a Q4 forecast of 1.05.
UNITED KINGDOM — GBP delivered a higher monthly low in August, its completion of an inside range suggesting uncertainty
around 1.32. Weekly candles have been more decisively bullish with an outside reversal off the mid-August lows in the upper
1.28s. GBP is extremely vulnerable to short covering given record bearish CFTC positioning, and options markets continue to fade
the modest premium for protection against weakness. The clear break of the 50 day MA and resolution of the multi-month triangle
have shifted the balance of GBP risk to the upside. We acknowledge the risk to our Q4 GBP forecast of 1.25.
JAPAN — USDJPY is entering September at the upper end of its descending YTD trend channel, trading above its 50 day MA for
the first time since late July. The balance of risk appears balanced to further USDJPY upside and vulnerability is elevated as we
consider extended bearish USDJPY CFTC positioning. Measures of sentiment suggest a decisive shift, delivering a moderation in
the premium for protection against downside USDJPY risk and even pricing in a modest premium for protection against upside risk
at the shorter time horizons. We hold a Q4 USDJPY forecast of 105.
AUSTRALIA — AUD has entered September around 0.75 at the upper end of its range from June 2015. A pair of bearish weekly
shooting star candles suggest considerable resistance above 0.77, shifting the balance of risk to the downside following a failure to
reach the April highs above 0.78. CFTC positioning is bullish and relatively extended at the upper end of its three-year range,
leaving it vulnerable to adjustment. Options markets hint to a decisive turn in sentiment and a rise in the premium for protection
against AUD weakness. We hold a Q4 AUD forecast of 0.75.
Curre ncy Tre nds
Spot
6-Sep
1.12
1.34
103
0.73
FX Rate
EURUSD
GBPUSD
USDJPY
AUDUSD
1.18
16Q1a
16Q2a
16Q3f
16Q4f
17Q1f
17Q2f
17Q3f
17Q4f
1.14
1.44
113
0.77
1.11
1.33
103
0.75
1.05
1.25
105
0.75
1.05
1.25
105
0.75
1.05
1.27
110
0.73
1.07
1.27
110
0.73
1.10
1.30
115
0.72
1.12
1.35
115
0.72
EURUSD
GBPUSD
1.58
1.16
1.53
1.14
1.48
1.12
1.43
1.10
1.08
1.38
1.06
1.33
1.04
Sep-15
124
Dec-15
Mar-16
Jun-16
Sep-16
1.28
Sep-15
Dec-15
Mar-16
Jun-16
Sep-16
0.80
USDJPY
AUDUSD
0.78
119
0.76
114
0.74
109
0.72
104
99
Sep-15
0.70
Dec-15
Mar-16
Jun-16
Sep-16
0.68
Sep-15
Dec-15
Mar-16
Visit our web site at scotiabank.com/economics or contact us by email at [email protected]
Jun-16
Sep-16
6
GLOBAL ECONOMICS & FOREIGN EXCHANGE STRATEGY
| FOREIGN EXCHANGE OUTLOOK September 2016
G10
Fundamental Commentary
Alan Clarke, 44.207.826.5986
Fixed Income Strategy
[email protected]
Tuuli McCully, 65.6305.8313
Scotiabank Economics
[email protected]
Frédéric Prêtet, 33.1.703.77705
Fixed Income Strategy
[email protected]
EUROZONE — Business surveys across the Eurozone have eased over the past two months, reflecting the negative impact of the
Brexit vote. With a slowdown in real GDP growth already taking hold in the second quarter, this raises concerns on the pace of the
Eurozone recovery in H2 2016. Indeed, inflation data have proved to be weaker-than-expected during the summer months, with
the y/y trend remaining stable at 0.2% in August. While favourable base effect in energy prices should push headline inflation
higher in the months ahead, core inflation has been stuck at a low level, at 0.8% y/y in August. Therefore, underlying economic
momentum and price developments remain very muted in the Eurozone, challenging the European Central Bank’s (ECB) medium
term outlook on growth and inflation. As such, financial markets are increasingly questioning the ECB’s credibility in restoring price
stability; indeed, the 5y in 5y forward inflation swap is back near its historical low of below 1.3%. As a result, there is a growing
probability that the ECB will be forced to revise down its medium-term macroeconomic forecasts at the September meeting, with
projected inflation moving up towards the ECB’s target of 2.0% y/y likely to be once again postponed. We thus expect the ECB to
announce additional measures in order to prolong its QE program beyond 2017. The most likely outcome for us would be for the ECB
to increase the upper threshold of high rated government bonds/supra bonds that it can buy. Also, adopting a two-tiered system on the
deposit rate could be an option. Less likely could be a change in the capital key.
UNITED KINGDOM — The data released since the UK voted to leave the EU for the months leading up to the referendum have
been surprisingly resilient. Indeed, incoming economic indicators have shown that contrary to earlier fears that pre-Brexit jitters
would derail growth, economic activity and hiring actually improved ahead of the referendum. The dilemma is whether this is the
calm before the storm or just the collapse that never happened. We will have to wait until October before we have a full batch of
post-Brexit hard economic data. Given surveys result, we are bracing for a mild contraction in real GDP in the second half of the
year, declining 0.5% q/q in Q3, before a gradual recovery in the quarterly growth rate materializes through 2017. Even so, our
forecast is more pessimistic than the Bank of England’s (BoE); their forecast envisages close to 1% growth next year, some way
above our near-zero growth assumption for 2017. Inflation has begun to reaccelerate gradually and is likely to continue rising from
here. We expect UK inflation to increase by around ½% to slightly above 1% y/y by end-year before reaching 2% by mid-2017and
topping out just above that level through end-2017. The main reason for the acceleration is GBP weakness adding to import costs.
The BoE has hinted that another reduction in Bank Rate is likely in November. We expect a 15 basis point cut to 0.1% which will
be the low-point for rates. If Q3 GDP proves sufficiently disappointing, the Bank may also choose to extend its QE programme at
that point. Given our more pessimistic outlook for growth, we expect the QE purchase programme to be extended by a further 3
months, with purchases remaining at the same pace as in this initial phase.
JAPAN — The Bank of Japan (BoJ) will likely unveil additional monetary stimulus measures following the September 21st policy
meeting. BoJ Governor Haruhiko Kuroda recently pointed out that the BoJ would ease monetary policy “without hesitation” if it
assesses that such action is needed for achieving the 2% y/y price stability target. In our view, inflationary pressures will remain
virtually absent over the coming months given subdued wage growth and muted inflation expectations that reflect consumers’
persistent deflationary mindset. Safe-haven flows due to global uncertainties are supporting the yen, which in turn will pass
through to lower import prices. The consumer price index excluding fresh food declined by 0.5% y/y in July, compared with a 0.4%
drop a month before. We expect headline inflation to stay below 0.5% y/y at the end of this year and fail to surpass 1% in 2017.
According to preliminary estimates, Japan’s real GDP was flat in the second quarter of 2016 following a 0.5% q/q gain in the first
three months of the year. In year-over-year terms, the nation’s output was up by 0.6%. We expect the economy to advance by
0.6% in 2016 as a whole. Japan’s fiscal profile remains structurally weak, yet new stimulus measures, amounting to ¥13.5 trillion
(2⅔% of GDP), were approved by the Japanese cabinet in early August. Additional public spending will be focused on low-income
families and infrastructure. Despite bloated public finances, the government has no difficulty refinancing its debt obligations.
AUSTRALIA — Monetary conditions will likely continue to ease further in Australia. We have revised our forecast for the Reserve Bank
of Australia’s (RBA) benchmark interest rate; in our view, the cash rate will be lowered by 25 basis points to 1.25% in the first quarter of
2017. The most recent rate cut, taking the policy rate to the current level of 1.50%, took place in early August on the back of weak
inflationary pressures and easing concerns regarding Australia’s housing market imbalances. Inflation in Australia remains below the
RBA’s 2-3% y/y target. The headline inflation rate dropped to 1.0% y/y in the second quarter from 1.3% in the January-March period.
Given muted labour cost pressures, consumer price inflation will likely rise only slightly in the near term, hovering below 1½% y/y
through the first quarter of 2017 before approaching the central bank’s target range by end-2017. The Australian economy is going
through a structural adjustment as its prospects are challenged by three key factors: 1) decreasing mining investment; 2) low
commodity prices; and 3) China’s slowing economic growth. During the domestic transition process, the Australian economy is seeking
alternative sources of growth from non-resource investment, household spending, and the services sector while it is adjusting to weaker
terms of trade and diversifying its trading partners. We expect the nation’s real GDP growth to average 2.6% y/y in 2016-17.
Visit our web site at scotiabank.com/economics or contact us by email at [email protected]
7
GLOBAL ECONOMICS & FOREIGN EXCHANGE STRATEGY
| FOREIGN EXCHANGE OUTLOOK September 2016
BRIC
Erika Cain, 1.416.866.4205
Scotiabank Economics
[email protected]
Currency Outlook
Qi Gao, 65.6305.8396
Foreign Exchange Strategy
[email protected]
Eduardo Suárez, 5255.9179.5174
Foreign Exchange Strategy
[email protected]
BRAZIL — With President Rousseff’s impeachment out of the way, focus shifts to delivering results. Brazil’s balance sheet is a far
cry from rock-solid, in both the household sector (debt service to disposable income remains above 20%), and the public sector,
where gross debt is nearing 80% of GDP. If the Temer government does not deliver reforms soon, they risk either investor
disappointment (to BRL’s peril), or a log jam that blocks reforms as parties begin to avoid political risks in order to secure the
presidency in 2018 (necessary reforms likely won’t be very popular).
RUSSIA — The RUB has seen some improvement after experiencing renewed weakness between mid-July and early August on
the back of bearish oil market conditions. While the flare-up of tensions with Ukraine reversed some of rally, the RUB has
stabilized at around 65 per USD from a near-term low of 66.7 per USD on August 2nd. Oil prices and Fed monetary policy
expectations will continue to drive the RUB in the months ahead. We expect USDRUB to end 2016 at 68.5.
INDIA — India remains the fastest growing major economy in the world. The high-yielding INR is expected to benefit from the nation’s
solid fundamentals when market concerns over Fed rate hikes ease. USDINR is likely to trade in a range of 66.0 to 67.5 in September
amid about USD 20bn outflows arising from imminent FCNR(B) redemption. Weaker US August NFP data will see EM Asian
currencies recouping recent losses in the weeks ahead. The INR is likely to underperform regional peers given the RBI’s two-way
operations in the forex market.
CHINA — Weaker US August NFP print is expected to alleviate depreciation pressure on the yuan somewhat in the weeks ahead.
Shenzhen-Hong Kong Stock Connect scheme will be formally launched in the second half of November, improving the prospect of
CNH liquidity conditions. USDCNY is likely to head for 6.62 level in the coming week and is forecasted to trade between 6.60 and
6.70 in September. The yuan’s inclusion in the IMF’s SDR basket will take effect from October 1st, 2016.
Currency Trends
Spot
6-Sep
3.25
65
67
6.68
FX Rate
USDBRL
USDRUB
USDINR
USDCNY
16Q1a
16Q2a
16Q3f
16Q4f
17Q1f
17Q2f
17Q3f
17Q4f
3.59
67
66
6.45
3.21
64
68
6.65
3.30
68
67
6.68
3.40
69
68
6.70
3.50
68
68
6.70
3.50
68
68
6.75
3.60
67
67
6.75
3.70
67
67
6.75
84
USDBRL
USDRUB
4.30
79
4.00
74
3.70
69
3.40
3.10
Sep-15
69
64
Dec-15
Mar-16
Jun-16
Sep-16
USDINR
59
Sep-15
6.70
68
Dec-15
Mar-16
Jun-16
Sep-16
USDCNY
6.63
67
6.55
6.48
66
6.40
65
64
Sep-15
6.33
Dec-15
Mar-16
Jun-16
Sep-16
6.25
Sep-15
Dec-15
Visit our web site at scotiabank.com/economics or contact us by email at [email protected]
Mar-16
Jun-16
Sep-16
8
GLOBAL ECONOMICS & FOREIGN EXCHANGE STRATEGY
| FOREIGN EXCHANGE OUTLOOK September 2016
BRIC
Fundamental Commentary
Pablo Bréard, 1.416.862.3876
Scotiabank Economics
[email protected]
Erika Cain, 1.416.866.4205
Scotiabank Economics
[email protected]
Tuuli McCully, 65.6305.8313
Scotiabank Economics
[email protected]
BRAZIL — Brazil initiates a new political chapter with positive implications for the business environment. In a two-vote session, the
81-member Senate confirmed the impeachment of Dilma Rousseff (75% in favour) while allowing her to seek a new post in public
service (the request to ban her from becoming a public servant did not receive the two thirds required). Michel Temer was officially
assumed as the President of Brazil until the end of 2018. The political context will be shaped by a reform plan to be unveiled by the
Temer administration (pension reform, labour market reform, and fiscal adjustment are amongst the key areas subject to deep
structural change), municipal elections scheduled for October (which will serve as a gauge of popular support to the ousted PT
(labour) party, and potential trials against selected lawmakers on corruption allegations. On the macroeconomic front, official data
indicated that real GDP contracted by 3.8% y/y and by 0.6% (q/q) in the second quarter of the year. The latest consensus survey
conducted by the central bank points to a 2016 GDP decline of 3.2% before a modest growth of 1.2% for 2017. A key marketsensitive issue will be the beginning of the monetary normalization phase (monetary easing in the works) with a likely first cut in
the policy-setting SELIC rate in the fourth quarter of the year. The Brazilian real (BRL) may be subject to profit-taking forces in the
near term.
RUSSIA — The worst of Russia’s economic crisis has passed, with the contraction in Q2 real GDP easing to its lowest rate since the
country slipped into recession in early 2015. Industrial production, transport and agriculture output were credited for the improvement,
while construction and retail sales continue to prove weak. The Russian economy looks poised to eke out of recession this year,
however, strong evidence of a turnaround has yet to materialize, with oil prices still at relatively low levels and Western sanctions
following Russia’s annexation of Crimea likely to remain in place through year-end at a minimum. Indeed, tensions between Russia
and Ukraine have flared up again last month after Russian President Vladimir Putin accused the Ukrainian government of plotting
terrorist attacks on the Black Sea peninsula, which killed two servicemen in Crimea in August. Medium-term growth prospects will also
continue to suffer absent of structural reforms and measures to improve the business climate. As such, we expect that Russian real
GDP will decline by -1% this year before returning to growth of 1½% in 2017. After cutting its benchmark repo rate by 50 basis points
to 10.5%in June, the Central Bank of Russia (CBR) has refrained from further monetary easing amid concerns over elevated mediumterm inflation expectations and above target inflation. However, with headline inflation in Russia continuing to ease to 7.2% y/y in July
from 7.5% in June, the CBR could consider another rate cut at its next meeting on September 16th.
INDIA — Mr. Urjit Patel took charge of the Reserve Bank of India (RBI) after Governor Rajan stepped down on September 4th. Dr.
Patel, the former Deputy Governor for monetary policy, will likely advocate inflation targeting, supporting policy credibility and
investor confidence. The RBI’s next bi-monthly meeting will take place on October 4th. For the first time, the interest rate decision
will be made by a 6-member monetary policy committee instead of by the governor alone. We assess that the RBI has policy
space to lower the key repo rate by 25 basis points to 6.25% by year-end. The most recent rate cut took place in April. Price gains
accelerated to above the RBI’s long-term target of 4% ±2% in July, reaching 6.1% y/y on the back of higher food prices.
Nevertheless, inflation will likely return to the target range in the near term once the impact of the above-average monsoon rainfall
feeds into food costs. India’s real GDP growth decelerated to 7.1% y/y in the second quarter from 7.9% in the January-March
period. We expect the economy to advance by 7½% this year as a whole. In August, India’s upper house of parliament approved a
constitutional amendment that allows a nationwide Goods and Services Tax to be rolled out. The bill had stalled for years due to
difficulties in reaching policy consensus. This important tax reform will transform the economy into a single market and improve
India’s business environment.
CHINA — Momentum of the Chinese economy will continue to decelerate gradually as implied by the maintained downward trend
in fixed asset investment and industrial production growth. Large-scale factory closures during the G-20 Summit in Hangzhou will
reinforce this trend. Accordingly, we assess that China’s real GDP growth will slow from the 6.7% y/y pace recorded in the first half
of 2016, with output gains averaging 6½% in 2016 as a whole. Additional fiscal stimulus measures are expected to be unveiled
over the course of 2016 in order to counteract the strong decelerating forces the Chinese economy is facing. Moreover, further
cautious monetary easing will likely be implemented over the coming months, particularly in the form of targeted policy measures.
China’s inflation outlook remains manageable and allows for further injections of stimulus; we expect consumer price gains to
hover near 2% y/y through 2017. The headline consumer price index rose by 1.8% y/y in July. The International Monetary Fund
released the 2016 Article IV Consultation on China in mid-August. The Fund noted that China is progressing on economic
rebalancing, especially moving from industry to services and from investment to consumption. Meanwhile, it pointed out that
reforms in some other areas are falling behind, such as strengthening SOE and financial governance and containing rapid credit
growth.
Visit our web site at scotiabank.com/economics or contact us by email at [email protected]
9
GLOBAL ECONOMICS & FOREIGN EXCHANGE STRATEGY
| FOREIGN EXCHANGE OUTLOOK September 2016
Pacific Alliance
Eduardo Suárez, 5255.9179.5174
Foreign Exchange Strategy
[email protected]
Currency Outlook
MEXICO — The political scandals in Mexico are mounting, but don’t yet seem to have hurt prices. If they do, the channel could be
a tougher political environment for reforms due to a weakened presidency. Working against this backdrop political concern, there
seems to be declining risks of a major shock to the NAFTA. Whereas early US campaign talk included an “end of NAFTA”, both of
the leading candidates now seem to discuss an update of the treaty, which may even be positive. Lesser NAFTA risk looks like
good MXN news.
COLOMBIA — COP was a top 6 EM FX performer during August, with our sense being that large flows into the local bond market
were part of the reason for the recent strength in the peso. The increased bullishness regarding Colombia is manifold, but
includes: an apparent floor for oil prices, optimism that the government is doing its fiscal homework, as well as high nominal yields
in the local curve.
CHILE — CLP had a fairly quiet month of August, gaining 0.3% vs the greenback throughout the month. So far, uncertainty over
the government’s plans for potential increases In pension contributions – and especially for a government run fund, have yet to hit
local assets, but we are increasingly getting questions. Concerns over the plans are on two fronts: the impact on growth that
raising contributions would have, and the creation of a state run fund, which some worry could be used for quasi policy investment.
PERU — Despite arguably being the sexy story in LATAM from a macro-political stand point at the moment (robust growth, still
high investment, and a market darling new president), Peruvian markets look less appealing than the fundamentals behind them.
On the FX front, the BCRP looks like to remain hyper active to prevent additional sol appreciation, while local yields (5.85% for
10yrs) don’t look that great when you factor in the liquidity you give up by stepping into them. We expect fairly sideways trading for
both FI and FX.
Currency Trends
Spot
6-Sep
18.50
2917
673
3.40
FX Rate
USDMXN
USDCOP
USDCLP
USDPEN
16Q1a
16Q2a
16Q3f
16Q4f
17Q1f
17Q2f
17Q3f
17Q4f
17.28
3002
668
3.31
18.28
2920
663
3.29
18.67
3050
675
3.35
18.98
3050
681
3.35
18.88
3075
687
3.36
18.40
3100
686
3.32
18.31
3125
685
3.33
18.54
3150
684
3.25
3,550
USDMXN
USDCOP
19.00
3,350
18.25
3,150
17.50
2,950
16.75
16.00
Sep-15
741
Dec-15
Mar-16
Jun-16
Sep-16
2,750
Sep-15
3.56
USDCLP
Dec-15
Mar-16
Jun-16
Sep-16
Mar-16
Jun-16
Sep-16
USDPEN
3.49
716
3.41
3.34
691
3.26
666
3.19
641
Sep-15
Dec-15
Mar-16
Jun-16
Sep-16
3.11
Sep-15
Dec-15
Visit our web site at scotiabank.com/economics or contact us by email at [email protected]
10
GLOBAL ECONOMICS & FOREIGN EXCHANGE STRATEGY
| FOREIGN EXCHANGE OUTLOOK September 2016
Pacific Alliance
Fundamental Commentary
Pablo Bréard, 1.416.862.3876
Scotiabank Economics
[email protected]
MEXICO — The Mexican economy remains strongly influenced by the business cycle in the United States (USA), whose domestic
-led economy remains very supportive to both NAFTA zone partners. Real GDP is positioned to expand at a modestly higher rate
in 2017 following an estimated advance of 2.4% in 2016. Mexico continues to benefit from high support from foreign portfolio
investment inflows. The persistent quest for (higher) yield by high-quality long-term foreign investors coupled with positive boost
from remittances activity remain supportive factors for the Mexican peso (MXN). Despite a moderation in foreign investors’
exposure to the short end of the local-currency bond yield curve (i.e., investments in short-dates treasury bills), there has been
renewed appetite for Mexican long-term debt securities by foreign institutional investors with a longer term focus. Banco de Mexico
has executed pre-emptive and surprise actions to tighten monetary conditions in response to potential inflationary pressures that
might unfold in the coming months. So far, the headline inflation rate (averaging 2.5% y/y over the past 12 months) has been a
major policy success of Banco de Mexico. The country’s twin (fiscal and current account) position has emerged as a key priority in
the government’s policy adjustment agenda. The Mexican sovereign debt rating remains on “negative” credit watch (by two rating
agencies) on the back of persistent fiscal strain and insufficient economic growth to prevent an erosion of sovereign debt metrics.
COLOMBIA — The Colombian peso (COP) has benefitted from US dollar (USD) adjustments, recovering oil prices and increased
risk appetite for emerging-market assets. Nevertheless, the extremely favourable and benign global financial market environment
might be subject to disrupting headwinds through the end of the year as electoral noise and monetary policy uncertainties escalate
in the USA. Technically speaking, the COP may enjoy a period real appreciation in the months ahead, after a sharp currency
devaluation materialized in 2015-16. Financial market metrics indicate a sharp improvement in the global investors’ perception of
Colombia’s sovereign credit risk. Indeed, the five-year USD-based credit default swap (CDS) premium has consistently declined
since mid-February implying very favourable market conditions for sovereign debt issuance. However, progress on fiscal
consolidation will be key to restore a stable rating outlook according to most credit agencies and global investors. We estimate that
real GDP will expand by 2.3% in 2016 as a whole (marking a third consecutive year of output growth slowdown) before
accelerating to 2.8% y/y in 2017. The necessary structural adjustment in the context of still high unemployment (at 8.9%) to restore
fiscal sustainability might weigh on the economic outlook in 2017. The combat against inflation is a key priority of the government.
The consumer price inflation rate has been above the upper band of the official 3%±1% target range for 18 consecutive months
(edging 9% y/y in July).
CHILE — The Chilean peso (CLP) is being strongly influenced by global investors’ view on the US dollar (USD); global risk
aversion towards emerging markets (China and Brazil in sight); the direction of copper prices (and to a lesser degree crude oil);
and, finally, by the intervention policy of the central bank. In broad terms currency trading dynamics are beyond the control of
national authorities. The relatively benign reaction of the euro (EUR) to the UK referendum vote last June in the context of the ultra
-low global interest rate environment (led by the USA) extended a supporting tone into Latin American currencies. Copper prices,
however, have not been a major driver of such appreciating trend and crude oil prices recovered an upward trend; both
developments are CLP negative factors that are not factored in current pricing patterns. The Chilean peso has averaged a 672 per
USD rate over the past six months, touching as low as 642 on August 11th. Technically speaking, non-deliverable forward
contracts imply an end-year of USDCLP at 686 (2016) and 704 (2017). The Chilean economy remains trapped in a fragile
economic cycle with below-potential growth dynamics for the next 18 months. Official technical analyses point towards a potential
growth rate of 3.5%, highlighting persistent slack in the economy. Real GDP is estimated to expand by 1.7% y/y this year before
modestly accelerating to 2% y/y in 2017.
PERU — The Peruvian sol (PEN) is well positioned to enjoy a period of stability in inflation-adjusted terms over the next 18
months. The prospects of a gradual improvement in the country’s terms of trade, despite lackluster performance in copper prices,
coupled with persistently vibrant economic activity will contribute to a phase of real exchange rate appreciation in the coming
months. In addition, a context of a very slow pace of monetary policy normalization in the USA will reinforce a period of PEN
stability (and subsequently lower central bank intervention) in the months to come. Central bank international reserves total
US$61.5 billion, equivalent to 32% of GDP and 21 months of imports. Peru continues to offer the best economic growth prospects
within the four-member Pacific Alliance group in the developing Americas. The Peruvian economy is poised to expand at a rate
near 4% (if not higher) in 2017, following an estimated output increase of 3.8% for this year. The central bank of Peru has claimed
a great victory in reducing price pressures and inflationary expectations by placing the headline rate back into the 1-3% target
range. Consumer prices increased by 2.96% in the 12 months to July (up 2.87% y/y excluding food and energy costs). A period of
exchange rate stability following the January-February financial market volatility coupled with lower impact from food price inflation
and administered price adjustments were key factors reinforcing a disinflationary trend.
Visit our web site at scotiabank.com/economics or contact us by email at [email protected]
11
GLOBAL ECONOMICS & FOREIGN EXCHANGE STRATEGY
| FOREIGN EXCHANGE OUTLOOK September 2016
Developing Economies
Qi Gao, 65.6305.8396
Foreign Exchange Strategy
[email protected]
Currency Outlook
SOUTH KOREA — Korea’s largest container-shipping company, Hanjin Shipping, has applied for court receivership. It is expected to
dampen the nation’s private consumption together with sluggish exports and prompt the BoK to deliver another 25 bps rate cut in Q4 as
early as October. USDKRW is likely to retreat and trade lower on account of fading odds of a Fed rate rise in September and continued
portfolio inflows. We expect USDKRW to trade between 1,075 and 1,150 in September.
THAILAND — The BoT is likely to stay on the sidelines in the months ahead as the inflation is anticipated to fall within the forecast
range in H2. The THB advanced in August on improving economic growth and the “yes” result of the constitutional referendum.
However, we note the excess strength of the THB is not in local regulators’ interest. BoT Governor said recently that the THB
gains are not supportive of recovery. USDTHB is expected to trade in a range of 34.00-35.00 in September.
TAIWAN — Taiwan’s benign inflation outlook will provide scope for further monetary easing. Taiwan's export orders fell for the 16th
straight month in July. As the likelihood of a Fed rate hike in September declines, the TWD is expected to reverse some recent
losses and advance in the coming weeks amid continued equity inflows. In September, USDTWD is anticipated to trade between
31.00 and 32.00.
MALAYSIA — We believe external factors driving cross-border portfolio flows will continue to play a decisive role in influencing the
MYR exchange rate in the months ahead as Malaysia’s domestic political uncertainty has subsided markedly. The MYR has been
running a significant correlation of about 80% with the KLCI share index on the basis of weekly percentage change this year.
Fluctuating oil prices remain an important market mover. USDMYR is likely to trade towards 4.00 level in the coming weeks, while
staying below the 200-day MA resistance line.
Currency Trends
Spot
6-Sep
1105
34.7
31.4
4.08
FX Rate
USDKRW
USDTHB
USDTWD
USDMYR
1230
16Q1a
16Q2a
16Q3f
16Q4f
17Q1f
17Q2f
17Q3f
17Q4f
1143
35.1
32.2
3.90
1152
35.1
32.3
4.03
1140
35.0
32.0
4.00
1180
35.5
32.5
4.15
1180
35.5
32.5
4.15
1180
35.5
32.5
4.15
1160
35.0
32.0
4.05
1160
35.0
32.0
4.05
37.0
USDKRW
USDTHB
36.5
1190
36.0
1150
35.5
1110
35.0
1070
Sep-15
34.0
Dec-15
Mar-16
Jun-16
Sep-16
34.5
Sep-15
4.65
USDTWD
Mar-16
Jun-16
Sep-16
Mar-16
Jun-16
Sep-16
USDMYR
4.45
33.3
32.5
4.25
31.8
4.05
31.0
Sep-15
Dec-15
Dec-15
Mar-16
Jun-16
Sep-16
3.85
Sep-15
Dec-15
Visit our web site at scotiabank.com/economics or contact us by email at [email protected]
12
GLOBAL ECONOMICS & FOREIGN EXCHANGE STRATEGY
| FOREIGN EXCHANGE OUTLOOK September 2016
Developing Economies
Fundamental Commentary
Tuuli McCully, 65.6305.8313
Scotiabank Economics
[email protected]
SOUTH KOREA — South Korea’s perceived creditworthiness is improving. On August 8th, Standard and Poor’s (S&P) upgraded
the country’s long-term sovereign credit rating by one notch to “AA” (with a “stable” outlook). The rating agency noted that South
Korea's strong record of steady output growth has generated a prosperous economy, greater fiscal and monetary flexibility, and
improvements in external metrics. S&P believes that South Korea’s prospects are superior to those of most developed
economies. Following the August 11th monetary policy meeting, the Bank of Korea (BoK) left the benchmark interest rate
unchanged at 1.25%. The most recent cut took place in June. The central bank pointed out that uncertainties surrounding South
Korea’s economic growth path are high, implying readiness to ease monetary policy further should economic conditions
deteriorate. We believe that the BoK will lower the key rate by 25 basis points by the end of the year. Headline inflation eased
significantly in August, dropping to 0.4% y/y from 0.7% y/y in July. Inflation is set to remain well below the BoK’s 2% target over the
coming months; while we assess that the inflation rate is currently near its low point, it will likely remain below 1%y/y through the
rest of the year. We expect South Korea’s real GDP to expand by 2.7% y/y in 2016-17. The economy advanced by 3.3% y/y in the
second quarter, following a 2.8% gain the first three months of the year.
THAILAND — Near term prospects for political stability have improved in Thailand. A referendum on a new constitution was held
on August 7th, with Thai citizens voting in favour of the draft charter. Following the result, Prime Minister Prayuth Chan-ocha
announced that a general election will be held in November 2017. Monetary authorities in Thailand will maintain an
accommodative monetary policy stance over the coming months. At the August policy meeting, the Bank of Thailand (BoT)
confirmed the need to preserve monetary policy space on the back of an uncertain global economic backdrop. We expect the
BoT’s benchmark interest rate be kept at 1.50% over the coming quarters barring any unforeseen economic shocks. Thailand’s
inflation outlook remains muted; the consumer price index recorded only a small 0.3% y/y gain in August. We expect mild
inflationary pressures to emerge over the coming months, taking the headline rate toward the lower end of the central bank’s
medium-term target of 2½% ±1½% in early 2017. Thailand’s real GDP growth accelerated to 3.5% y/y in the second quarter from
the 3.2% pace recorded in the January-March period. Economic activity is driven by the tourism industry as well as the military
administration’s fiscal spending. We expect Thailand’s output growth to average slightly over 3% y/y in 2016.
TAIWAN — Monetary conditions in Taiwan will ease further over the coming months in order to underpin the economy’s nascent
recovery. At the end of June, the Taiwanese central bank loosened monetary policy, reducing the benchmark interest rate by
12.50 basis points to 1.375%. We expect monetary authorities to cut the policy rate to 1.25% following the next quarterly meeting
at the end of September. Inflationary pressures remain weak in Taiwan, providing room for further monetary stimulus. Consumer
price gains decelerated to 0.6% y/y in August from the 1.2% reading a month earlier. We expect annual inflation to close 2016
near the 1% mark. Taiwanese real GDP expanded by 0.7% y/y in the second quarter of 2016 following three consecutive quarters
of decreasing output. Activity was driven by household and government spending, while investment continued to contract. The
export sector is starting to show modest signs of recovery. We expect Taiwan’s real GDP to increase by close to 1.0% in 2016 as
a whole before accelerating to 2% in 2017. While the New Taiwan dollar is in principle determined by market forces, Taiwanese
monetary authorities are prepared to intervene if they believe that excess volatility poses a threat to economic and financial
stability.
MALAYSIA — Malaysian economic growth momentum remains reasonably sound despite persistently low energy prices that are
adversely impacting the country’s energy sector. Real GDP is on track to expand by slightly over 4% this year. The economy’s
output grew by 4.0% y/y in the second quarter following a 4.2% gain in first three months of 2016. Activity is driven by domestic
demand, while net exports remain a drag on growth. Consumer spending is supported by employment gains as well as higher
disposable incomes on the back of solid wage growth and government measures. Investment will continue to be underpinned by
private sector outlays in the manufacturing and services industries, partially compensating for the muted export sector
performance. Malaysian monetary authorities will meet on September 7th and we expect that the benchmark overnight rate will be
left unchanged at 3.0%. Most recently, the key interest rate was lowered by 25 basis points on July 13th. In our view, the rate
reduction was largely a pre-emptive action to ensure the economy remains on a stable growth path given an uncertain global
economic environment. Accordingly, we do not foresee any further monetary easing over the coming quarters. Price pressures in
Malaysia are weakening; inflation decelerated to 1.1% y/y in July from 1.6% the month before. We expect the headline inflation
rate to close 2016 at 1.3% y/y.
Visit our web site at scotiabank.com/economics or contact us by email at [email protected]
13
GLOBAL ECONOMICS & FOREIGN EXCHANGE STRATEGY
| FOREIGN EXCHANGE OUTLOOK September 2016
Global Currency Forecast (end of period)
2015 2016f 2017f
M ajor Currencies
2016f
Q1a
Q2a
2017f
Q3
Q4
Q1
Q2
Q3
Q4
Japan
USDJPY
120
105
115
113
103
105
105
110
110
115
115
Euro zone
EURUSD
1.09
1.05
1.12
1.14
1.11
1.05
1.05
1.05
1.07
1.10
1.12
EURJPY
131
110
129
128
115
110
110
116
118
127
129
GBPUSD
1.47
1.25
1.35
1.44
1.33
1.25
1.25
1.27
1.27
1.30
1.35
EURGBP
0.74
0.84
0.83
0.79
0.83
0.84
0.84
0.83
0.84
0.85
0.83
USDCHF
1.00
1.05
1.00
0.96
0.98
1.05
1.05
1.06
1.04
1.02
1.00
EURCHF
1.09
1.10
1.12
1.09
1.08
1.10
1.10
1.11
1.11
1.12
1.12
USDCAD
1.38
1.30
1.25
1.30
1.29
1.30
1.30
1.28
1.28
1.25
1.25
0.72
0.77
0.80
0.77
0.77
0.77
0.78
0.80
0.80
UK
Sw itzerland
Americas
Canada
0.77
0.78
Mexico
CADUSD
USDMXN
17.21 18.98 18.54
17.28 18.28 18.67 18.98
18.88
18.40 18.31 18.54
CADMXN
12.44 14.60 14.83
13.29 14.15 14.36 14.60
14.75
14.38 14.65 14.83
Brazil
USDBRL
3.96
3.40
3.70
3.59
3.21
3.30
3.40
3.50
3.50
3.60
3.70
Chile
USDCLP
709
681
684
668
663
675
681
687
686
685
684
Colombia
USDCOP
3175
3050
3150
3002
2920
3050
3050
3075
3100
3125
3150
Peru
USDPEN
3.41
3.35
3.25
3.31
3.29
3.35
3.35
3.36
3.32
3.33
3.25
Uruguay
USDUYU
29.9
32.0
35.0
31.7
30.6
32.0
32.0
33.5
34.0
34.5
35.0
Australia
AUDUSD
0.73
0.75
0.72
0.77
0.75
0.75
0.75
0.73
0.73
0.72
0.72
China
USDCNY
6.49
6.70
6.75
6.45
6.65
6.68
6.70
6.70
6.75
6.75
6.75
Hong Kong
USDHKD
7.75
7.76
7.76
7.76
7.76
7.76
7.76
7.76
7.76
7.76
7.76
India
USDINR
66.2
68.0
67.0
66.2
67.5
67.0
68.0
68.0
68.0
67.0
67.0
Indonesia
USDIDR
Malaysia
USDMYR
4.29
4.15
4.05
3.90
4.03
4.00
4.15
4.15
4.15
4.05
4.05
New Zealand
NZDUSD
0.68
0.70
0.66
0.69
0.71
0.71
0.70
0.68
0.68
0.66
0.66
Philippines
USDPHP
46.9
47.5
47.0
46.0
47.2
46.8
47.5
47.5
47.5
47.0
47.0
Singapore
USDSGD
1.42
1.38
1.37
1.35
1.35
1.34
1.38
1.38
1.38
1.37
1.37
South Korea
USDKRW
1175
1180
1160
1143
1152
1140
1180
1180
1180
1160
1160
Taiw an
USDTWD
32.9
32.5
32.0
32.2
32.3
32.0
32.5
32.5
32.5
32.0
32.0
Thailand
USDTHB
36.0
35.5
35.0
35.1
35.1
35.0
35.5
35.5
35.5
35.0
35.0
27.0
25.0
25.0
27.0
27.1
24.8
25.0
25.0
25.1
25.0
25.0
Asia-Pacific
13788 13500 13500
13239 13210 13100 13500
13500 13550 13500 13500
Europe / Africa
Czech Rep.
EURCZK
Hungary
EURHUF
315
290
290
314
316
285
290
295
296
292
290
Norw ay
USDNOK
8.84
8.30
7.80
8.27
8.36
8.30
8.30
8.20
8.20
7.80
7.80
Poland
EURPLN
4.26
4.05
4.07
4.24
4.38
3.95
4.05
4.08
4.10
4.08
4.07
Russia
USDRUB
72.5
68.5
66.5
66.9
63.9
67.5
68.5
68.0
67.5
67.0
66.5
South Africa
USDZAR
14.77 14.73 14.50 14.75
15.00
Sw eden
EURSEK
9.17
9.24
9.02
9.24
9.39
9.24
9.24
9.14
9.04
9.02
9.02
Turkey
USDTRY
2.92
3.05
3.00
2.82
2.88
3.00
3.05
3.06
3.10
3.05
3.00
15.47 14.75 15.25
15.25 15.35 15.25
f : f orecast a: actual
Visit our web site at scotiabank.com/economics or contact us by email at [email protected]
14
GLOBAL ECONOMICS & FOREIGN EXCHANGE STRATEGY
| FOREIGN EXCHANGE OUTLOOK September 2016
INTERNATIONAL ECONOMICS GROUP
Pablo F.G. Bréard, Head
[email protected]
Erika Cain
[email protected]
Tuuli McCully
[email protected]
Estela Molina
[email protected]
CANADIAN & U.S. ECONOMICS
Derek Holt
[email protected]
Neil Tisdall
[email protected]
Adrienne Warren
[email protected]
This report has been prepared by Scotiabank Economics as a resource for the clients of Scotiabank. Opinions, estimates and projections
contained herein are our own as of the date hereof and are subject to change without notice. The information and opinions contained herein
have been compiled or arrived at from sources believed reliable but no representation or warranty, express or implied, is made as to their
accuracy or completeness. Neither Scotiabank nor any of its officers, directors, partners, employees or affiliates accepts any liability
whatsoever for any direct or consequential loss arising from any use of this report or its contents.
These reports are provided to you for informational purposes only. This report is not, and is not constructed as, an offer to sell or solicitation of
any offer to buy any financial instrument, nor shall this report be construed as an opinion as to whether you should enter into any swap or
trading strategy involving a swap or any other transaction. The information contained in this report is not intended to be, and does not
constitute, a recommendation of a swap or trading strategy involving a swap within the meaning of U.S. Commodity Futures Trading
Commission Regulation 23.434 and Appendix A thereto. This material is not intended to be individually tailored to your needs or characteristics
and should not be viewed as a “call to action” or suggestion that you enter into a swap or trading strategy involving a swap or any other
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directors and employees of Scotiabank and its affiliates may serve as directors of corporations.
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Scotiabank, together with “Global Banking and Markets”, is a marketing name for the global corporate and investment banking and capital
markets businesses of The Bank of Nova Scotia and certain of its affiliates in the countries where they operate, including, Scotiabanc Inc.;
Citadel Hill Advisors L.L.C.; The Bank of Nova Scotia Trust Company of New York; Scotiabank Europe plc; Scotiabank (Ireland) Limited;
Scotiabank Inverlat S.A., Institución de Banca Múltiple, Scotia Inverlat Casa de Bolsa S.A. de C.V., Scotia Inverlat Derivados S.A. de C.V. – all
members of the Scotiabank group and authorized users of the Scotiabank mark. The Bank of Nova Scotia is incorporated in Canada with
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authorised by the UK Prudential Regulation Authority and is subject to regulation by the UK Financial Conduct Authority and limited regulation
by the UK Prudential Regulation Authority. Details about the extent of The Bank of Nova Scotia's regulation by the UK Prudential Regulation
Authority are available from us on request. Scotiabank Europe plc is authorised by the UK Prudential Regulation Authority and regulated by the
UK Financial Conduct Authority and the UK Prudential Regulation Authority.
Scotiabank Inverlat, S.A., Scotia Inverlat Casa de Bolsa, S.A. de C.V., and Scotia Derivados, S.A. de C.V., are each authorized and regulated
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Not all products and services are offered in all jurisdictions. Services described are available in jurisdictions where permitted by law.
Visit our web site at scotiabank.com/economics or contact us by email at [email protected]
15
GLOBAL ECONOMICS & FOREIGN EXCHANGE STRATEGY
| FOREIGN EXCHANGE OUTLOOK September 2016
FOREIGN EXCHANGE STRATEGY
Shaun Osborne
[email protected]
Eduardo Suárez
[email protected]
Eric Theoret
[email protected]
Qi Gao
[email protected]
Foreign Exchange Strategy
This publication has been prepared by The Bank of Nova Scotia (Scotiabank) for informational and marketing purposes only. Opinions,
estimates and projections contained herein are our own as of the date hereof and are subject to change without notice. The information and
opinions contained herein have been compiled or arrived at from sources believed reliable, but no representation or warranty, express or
implied, is made as to their accuracy or completeness and neither the information nor the forecast shall be taken as a representation for which
Scotiabank, its affiliates or any of their employees incur any responsibility. Neither Scotiabank nor its affiliates accept any liability whatsoever
for any loss arising from any use of this information. This publication is not, and is not constructed as, an offer to sell or solicitation of any offer
to buy any of the currencies referred to herein, nor shall this publication be construed as an opinion as to whether you should enter into any
swap or trading strategy involving a swap or any other transaction. The general transaction, financial, educational and market information
contained herein is not intended to be, and does not constitute, a recommendation of a swap or trading strategy involving a swap within the
meaning of U.S. Commodity Futures Trading Commission Regulation 23.434 and Appendix A thereto. This material is not intended to be
individually tailored to your needs or characteristics and should not be viewed as a “call to action” or suggestion that you enter into a swap or
trading strategy involving a swap or any other transaction. You should note that the manner in which you implement any of the strategies set
out in this publication may expose you to significant risk and you should carefully consider your ability to bear such risks through consultation
with your own independent financial, legal, accounting, tax and other professional advisors. Scotiabank, its affiliates and/or their respective
officers, directors or employees may from time to time take positions in the currencies mentioned herein as principal or agent, and may have
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of Scotiabank and its affiliates may serve as directors of corporations referred to herein. All Scotiabank products and services are subject to
the terms of applicable agreements and local regulations. This publication and all information, opinions and conclusions contained in it are
protected by copyright. This information may not be reproduced in whole or in part, or referred to in any manner whatsoever nor may the
information, opinions and conclusions contained in it be referred to without the prior express written consent of Scotiabank.
™ Trademark of The Bank of Nova Scotia. Used under license, where applicable. Scotiabank, together with “Global Banking and Markets”, is a
marketing name for the global corporate and investment banking and capital markets businesses of The Bank of Nova Scotia and certain of its
affiliates in the countries where they operate, all members of the Scotiabank group and authorized users of the mark. The Bank of Nova Scotia
is incorporated in Canada with limited liability and is authorised and regulated by the Office of the Superintendent of Financial Institutions
Canada. The Bank of Nova Scotia and Scotiabank Europe plc are authorised by the UK Prudential Regulation Authority. The Bank of Nova
Scotia is subject to regulation by the UK Financial Conduct Authority and limited regulation by the UK Prudential Regulation Authority.
Scotiabank Europe plc is authorised by the UK Prudential Regulation Authority and regulated by the UK Financial Conduct Authority and the
UK Prudential Regulation Authority. Details about the extent of The Bank of Nova Scotia's regulation by the UK Prudential Regulation Authority
are available on request. Scotiabank Inverlat, S.A., Scotia Inverlat Casa de Bolsa, S.A. de C.V., and Scotia Inverlat Derivados, S.A. de C.V.,
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described are available in jurisdictions where permitted by law.
Visit our web site at scotiabank.com/economics or contact us by email at [email protected]
16