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2015 Global Outlook Rates, FX and Commodities Research 20 November 2014 | TD Securities CONTENTS Market Outlook View From the Top Summary of Trades United States Canada Europe Australia / New Zealand G10 Rates Emerging Markets Commodities Foreign Exchange Regional Risks Forecasts Research Team Disclaimer 2 3 4 5 7 8 9 10 11 13 15 17 18 21 22 2015 GLOBAL OUTLOOK The global disinflationary environment is likely to last longer than expected as Chinese, EM, and Eurozone growth remains soft and supply keeps oil prices low. This opens up a more uncertain macro and market environment and suggests limited scope for rates to rise globally. We have delayed our rate hike expectations for all G10 central banks outside of the Fed and BoC. This provides a bias to be long USD and short USTs, with the only questions being against what? We like owning NZ 3s and Canada and UK 5s versus US Treasuries. We like being long the USD versus JPY and CAD, as well as regional opportunities to be long AUD/NZD and MXN/COP and short EUR/GBP. But trading is likely to be a tale of two halves as we wait for the inflationary impulses to re-emerge much later in 2015. CORE VIEWS AREAS OF COVERAGE United States Canada Europe United Kingdom Australia New Zealand Emerging Markets Foreign Exchange Commodities G10 Rates https://www.tdsresearch.com/ currency-rates Bias Asset Allocation G10 Rates Low inflation keeps policy accommodative, but US divergence makes carry trades more attractive. Underweight duration Risk Assets Muted upside relative to 2014 with modest improvement in global growth, low inflation, low energy costs, and policy accommodation. Neutral/Overweight Equities Foreign Exchange Long USD even with a crowded consensus. But list of potential shorts grows: near-zero funding in EUR, JPY, and SEK and CAD, AUD, NZD central banks wary of strength. EM Adjustment continues as strong credit cycle of the last five years, especially in China and Asia broadly, needs time to deleverage. Commodities Flat oil profile with soft global growth and excess supply while silver to underperform gold before Fed hikes. Volatility Modestly higher as liquidity injections diminish, global rates drift higher, and Fed in play. LONG SHORT USD EUR JPY CAD Underweight vs USD. LONG SHORT Zn/Al, XAU/ XAG, Pt/Pd, Brent-WTI, Ni Mar15 natgas Overweight 2015 Global Outlook Rates, FX and Commodities Research 20 November 2014 | TD Securities THE TD VIEW Trading Bias Macro Outlook Rates FX Key Risks US The US economic recovery set to outperform its G7 peers, again. Odds of a 2.5% to 3.0% growth rate are high. Rates rise on Fed rate hikes (2). Cyclical bear flattening takes shape, may be more pronounced than usual. Monetary policy divergence and asymmetric growth prospects will support the USD versus its G10 peers in 2015. The weakening global economic backdrop and the fallout from the strong dollar are two key risks to the 2015 US outlook. Canada Weaker commodity prices to hurt terms of trade and investment, but offsets exist to support growth around its trend rate. Dovish BoC will anchor rates through H1 2015, with Canada outperforming versus US. We like 5s and 30s on the curve. Soft commodity prices and a lagging BoC tightening cycle provide upside impetus for USD/CAD. A further and sustained drop in commodity prices or a relapse in the US economy would undermine growth and slow inflation. Europe Eurozone to disappoint, with drag coming from core. UK to grow slightly above trend, but EZ uncertainty pushes back hikes. Look for belly to outperform in gilt 2s5s10s. Buy 3yr gilts vs NGBs. Wait for better levels to pay UK 2y2y forwards. Even delayed BoE tightening prospects leave the GBP at an advantage over the EUR and JPY later in 2015. ECB may struggle to expand balance sheet; Riksbank has reached end of easy easing; two-way risks for UK wage growth. Asia-Pac Antipodean growth and inflation has been revised down, selloff pushed deeper into 2015. No RBA hike priced vs TDs +50bps for 2015. TD’s forecast for 25bps RBNZ Sep hike is 90% priced in. AUD & NZD to lose ground vs the USD but a free fall is unlikely. We like long AUD/NZD, target 1.17. Aus: non-mining investment fails to pick up; NZ: net migration cools; China: growth stalls. Latam In Brazil, low growth, high inflation and fiscal challenges abound. In Mexico, growth picks up into the start of the year. BCB hiking earlier in order to hike less, but weaker currency may force their hand. Banxico on hold until mid-year. Bearish BRL, but hard to trade. Expect MXN to strengthen at the start of the year and be top Latam performer. Failure to deliver by Dilma could put Brazil’s investment grade rating at risk. Fed moving earlier than expected. EMEA Poland and Hungary keep growing, but risks are to downside. Lower oil reduces Turkey & SA inflation & Turkey CA deficit. NBH and NBP on hold with downside risks look to pay forwards. CBRT cuts in H1 as inflation falls - curve steepens. Weakening bias against USD but stable to firm vs EUR. If current status quo maintained, some recovery in RUB. A flare up of the conflict in Ukraine or a Eurozone recession would be negative for CE3 and RUB. Asia Best EM growth stories are in Asia. We like India and Indonesia with strong growth and reforming governments. With inflation under control RBI likely to cut in H2. BI has probably finished hiking in response to subsidy cuts. We like IDR and INR, particularly long INR/KRW, long IDR/KRW and short EUR/IDR positions. Further China slowdown. Reforms in India and Indonesia get stymied. Fed moving earlier than expected. Energy US output gains and a steadfast OPEC supply add to negatives from weaker demand; natgas storage tightness moderates. Long Brent/WTI ratio, short natgas. OPEC cuts targets materially, China economy strengthens or Ukraine tensions escalate, raising Brent relative to WTI. Precious metal Low inflation, global risks, subsiding USD rally and firmer physical demand are all modest positives for Au and Ag. Short Au/Ag ratio, long Pt/Pd ratio. US outlook strengthens materially, ECB unable to take balance sheet action and/or China deteriorates. Other metals Stable but weaker China growth and end to destocking should tighten industrial metals market, but upside limited near-term. Long Ni, long Zn/Al. China industrial and construction activity slows substantially, PBOC limits liquidity injections, SRB does not buy. G 1 0 E M C O M M O D I T Y CENTRAL BANK MONITOR Inflation Emerging Markets G10 Deviation from target* (% points) -4 -2 0 2 4 6 Below Target Above Target Sweden NZ EZ UK Norway US Australia Canada Japan China Hungary Poland Indonesia Malaysia Mexico S Africa Russia Brazil India Turkey Current Fcast for 2015 Central Bank Policy Rate Y/Y% As of Next Print Last Mtg Current Next Mtg Date Change % Date TD -0.1 1.0 0.4 1.3 2.0 1.7 2.3 2.0 3.2 1.6 -0.4 -0.6 4.8 2.6 4.3 5.9 8.3 6.6 5.5 9.0 Oct Sep Oct Oct Oct Oct Oct Sep Sep Oct Oct Oct Oct Sep Oct Oct Oct Oct Oct Oct 11 Dec 21 Jan 28 Nov 16 Dec 10 Dec 17 Dec 30 Nov 21 Nov 27 Nov 28 Oct 30 Oct 6 Nov 6 Nov 23 Oct 29 Oct 4 Nov 22 Oct 7 Oct -25bp +0bp +0bp +0bp +0bp +0bp +0bp +0bp +0bp 11 Dec 15 Dec 30 Nov 21 Nov 9 Dec 10 Dec 4 Dec 5 Dec 12 Dec 3 Dec 28 Oct 5 Nov 18 Nov 6 Nov 31 Oct 20 Nov 31 Oct 29 Oct 30 Sep 20 Nov +0bp +0bp +25bp +0bp +0bp +0bp +150bp +25bp +0bp +0bp 12m Fcast (bps∆ from spot) Mkt TD -100 0 0.00 3.50 0.05 0.50 1.50 0.25 2.50 1.00 0.10 16 Dec 11 Dec 4 Dec 4 Dec 11 Dec 19 Dec 1 Dec 3 Dec 19 Dec +0 +0 +0 +0 +0 +0 +0 +0 +0 2.10 2.00 7.75 3.25 3.00 5.75 9.50 11.25 8.00 8.25 25 Nov 3 Dec 11 Dec 28 Jan 5 Dec 29 Jan 11 Dec 3 Dec 2 Dec 24 Dec +0 +0 +0 +0 +0 +0 +0 +25 +0 +0 100 200 +0 +19 -6 +13 -30 +26 -8 +8 -4 +0 +25 +0 +0 +0 +25 +50 +25 +0 -12 +65 -19 +0 -91 +0 +7 +50 +16 +50 +44 +100 n.a. -50 +177 +125 -7 -25 n.a. +50 2015 Global Outlook Rates, FX and Commodities Research 20 November 2014 | TD Securities VIEW FROM THE TOP Is Disinflation Good or Bad? It is the nature of consensus to always be wrong. But the power of the herd is that it tends to be less wrong over longer periods of time than the savants and the psychics. There is a grain of truth to the current debate over secular stagnation, the idea that the global economy is incapable of sustaining strong growth without exceptionally low interest rates. This is reflected in a secular decline in the velocity of money, a predicament that most G10 countries share. The irony is that the fear of secular stagnation is not new, it was first proposed in 1939 as an explanation for why the Great Depression would never end. It ended shortly thereafter - owing in large part to WWII. Will the theory's resurrection prove equally untimely this time around on more peaceful grounds? What is more certain is that global growth prospects remain well below the pre-crisis pace. The decline in energy costs provides a fillip to aggregate demand and growth should accelerate modestly, but lingering growth concerns persist. Chinese growth will continue to slow and as financial repression there comes to an end, it is questionable whether the RMB can chase the USD higher. Japanese economic momentum is also faltering, and Eurozone growth prospects remain uneven. All three economic blocs are in a multi year transition of needed structural adjustments that are progressing slowly and unevenly. Many Eurozone economies replaced adjustment with carry trades. Those economies that did deliver reforms - Spain, Ireland, and even Greece - are seeing significant accelerations in growth. On balance, too little has been delivered. The same may be said of EM’s. Too many needed structural reforms have been postponed by rolling over debt at generationally low interest rates, and in dollars and FX to boot. Together, this reinforces a need for globally low interest rates and raises the odds that we are in a period of heightened risk for EM crises and debt restructurings. We believe the outlook for markets in 2015 will be defined by the outlook for emerging markets, the Eurozone, and oil prices. The first two we expect to continue to be weak, while the last is in part falling on the back of softer global demand, but also as a result of rising global supply. All three of these reinforce a story of lower for longer global inflationary pressures, a consensus view we agree with. All three of these reinforce the risk of central banks remaining lower for longer, a position which may have further room to run, at least over the near term. We now see the RBA, RBNZ, and BoC not hiking until 2015H2 and do not expect the BoE, Riksbank, or Norges Bank to hike at all in 2015. Among the key easers, the BoJ has already announced a significant increase of QQE. We expect the ECB will announce new easing measures early in 2015 to include tweaks to the TLTROs, and at least one additional asset purchase program. We believe ETF buying is discounted too much by the Sources: Macrobond, TD Securities market, that sovereign bond buying is not discounted enough, and that corporate bond buying is just a drop in the illiquid bucket. The US looks the most resilient. The net export drag will be larger than expected but the boost to consumer spending from lower gasoline prices and low interest rates suggest the odds of growth shifting up into the 2.5% to 3.0% range remain high. It is why the Fed is the one central bank still on track for tightening in 2015, by as much as 50bps beginning in September. This leaves us with a trading environment in which we must go with the consensus trade to be long USD and short US Treasuries against most other markets. Long USD has a crowded speculative position. Nevertheless, it will be supported by a rotation out of lower yielding foreign assets, a trend already taking shape. This dynamic is a reason we think the scope for higher global rates next year is significantly muted - there is ongoing adjustment in some part of the world and ongoing desire to establish carry trades. The funding currencies are clear - EUR, JPY, and SEK the conglomerate of central banks fighting the risk of deflation with ZIRP, NIRP, and asset purchases. For those looking for the next 5% move in FX, we would highlight long USD/CAD, USD/JPY and AUD/NZD. If oil prices continue to decline, long EUR/NOK and USD/NOK look appealing while sterling may be the most at risk of a topsy-turvy trading environment in 2015. The latter is the cautionary tale to remember. Not too long ago, the market priced in a BoE hike into November 2014. We now see the BoE holding off tightening until February 2016. If there is a risk to the consensus trades for 2016, it would be that we have all been duped once again only to be bushwhacked by wage growth. Wage growth matters more than commodity-driven vagaries in headline inflation. We expect it to come through in the US. We are less certain in the UK, but if it did the BoE would look through exceptionally low headline inflation. Keep your eyes on the prize and remember consensus was made to be broken. 3 2015 Global Outlook Rates, FX and Commodities Research 20 November 2014 | TD Securities SUMMARY OF TRADE RECOMMENDATIONS United States ● 1s3s flatteners and short 5s10s30s fly: The flattening theme remains en vogue as the market prices a high probability of a Fed hike in 2015. However, with the hurdle rate to break even on flattening trades rising, we recommend moving away from the standard 2s5s and 5s10s flattening. ● BE5s10s flattener: Global energy prices are expected to stabilize at the start of the next year, with a relatively flat profile for crude oil prices expected into 2016. However, as wage dynamics pick up and base effects become more unfavorable, we expect the BE curve to begin flattening. Canada ● Buy 30y breakevens outright and versus US: Canadian breakevens are near their post-crisis lows amid the global wave of deflation concerns. With energy prices expected to stabilize and the BoC waiting on the sidelines until the end of 2015 we think RRBs are underestimating the path for CPI – especially with the CAD expected to depreciate substantially. Buy 30yr breakevens with a target of 205bps. ● Buy Canada 5s versus US: A second implication of the Bank of Canada hiking after the Fed is that Canadian bonds should outperform versus the US, particularly in H1 2015. We favor buying Canadian 5s versus Treasuries with a target of -25bps. Europe ● Buy belly of UK 2s5s10s fly and UK5s versus US: We don’t expect the BoE to raise rates until Feb 2016 and the gilt market still has to push rate hike pricing back, so 2s5s should flatten. Furthermore, as US growth holds up well and UST yields rise, 10yr gilt yields should rise. We therefore look to buy the belly of the 2s5s10s fly with a stop at 18.5bp and target of -10bp and target US/UK 5y spreads to widen to -55bp with a stop at -8bp. ● Buy 3y gilts versus NGBs: While the gilt market is pricing in a BoE hike too soon, the NGB market is pricing in cuts. We expect the Norges Bank to remain on hold and recommend buying 3yr gilts vs 3yr NGBs. ● UK 2y2y limit orders: In the short-term there is further room for 2y2y forwards to fall in the UK, but by end-2015 they should be higher as inflation concerns recede and rate hikes move closer once again. Australia / New Zealand ● NZ 3s10s swap curve steepener: For the RBA, we push back our Mar 2015 hike to Aug 2015, and target a year-end cash rate of 3%. For the RBNZ we have one 25bp hike in Sep 2015, with a year-end cash rate of 3.75%. Lower for longer should anchor short end yields. In contrast, long end yields directionally led higher on move up in UST yields, risks of lower AUD & NZD feeding into inflation. ● Buy NZ3 versus US: Cross market, we anticipate a narrowing in AU-US and NZ-US spreads. The RBA/RBNZ on hold while the BoJ/ECB expand scope for lower rates will provide ongoing demand for yield. A China slowdown should limit a backup in yields, providing further support for ACGBs and NZGBs. Emerging Markets ● Buy MXN/COP: Mexico stands out as the one reasonably bright spot in Latam. We like being long MXN/COP as an intra-regional trade as Mexico has hedged its oil exposure in 2015, but a deceleration in demand should weigh on Colombia next year. We buy MXN/COP at 159.5 with a target of 168 and a stop of 155 for a risk/reward ratio of 1.89. ● Buy basket of relative oil outperformers: The sharp fall in oil prices this year has produced its share of winners and losers within EM. If oil prices remain at current levels or fall further, we continue to like trading an equally-weighted basket of currencies that should outperform (THB, INR, PHP, and TRY) against under performers (COP, MXN, and BRL). ● Pay HUF 1y swaps 2y forward: In Poland and Hungary, both central banks will keep rates low for a considerable time, but we do expect rates to eventually start going up. We think the curves are too flat for too long and we recommend paying forward rates. In particular we like paying the 1y rate 2y forward in HUF at 2.28%, with a target of 2.90% and a stop of 2.10%, implying a risk reward ratio of 3.0. Commodities ● Long XAU/XAG and Pt/Pd ratios: Concerns ahead of Fed tightening will keep silver underperforming gold, but once tightening begins, we expect silver to appreciate more aggressively; Platinum has more upside than palladium as demand for auto catalysts recovers further in Europe. ● Long Nickel and Zn/Al ratio: We recommend an outright long position in nickel as recent stockpiling is expected to turn around in 2015 due to slowing supply and an Indonesian export ban that leads to lower grade ore stockpiles in China; Large scale zinc mine supply shutdowns to impact prices positively, but near-term global demand weakness can be hedged using our less positive view of aluminum. ● Long Brent-WTI spread and short Mar15 natgas: Enter a long Brent-WTI spread trade as US supply growth will prevent WTI from responding to global growth stabilization; Following a potential early-winter weather driven rally, which will stress supply, natgas prices will likely abate. Foreign Exchange ● Long USD/JPY and short EUR/GBP via options: The theme of divergent policy outlooks between the US on the one hand and the Eurozone and Japan on the other will almost surely play out over the coming year. We believe the USD is in the midst of a multi-year bull run that will see it gaining ground against both the EUR and JPY in 2015, we recommend getting long USD/JPY and short EUR/GBP through options. ● Long USD/CAD: A later start to BoC rate hikes well into year's end, in conjunction with lower commodity prices, will translate into further CAD weakness, we recommend going long USD/CAD at 1.12, targeting 1.19 and risking 1.09. ● Long AUD/NZD: Both will underperform against the USD, but slumping terms of trade for NZD and later RBNZ tightening should support cross higher. 4 2015 Global Outlook Rates, FX and Commodities Research 20 November 2014 | TD Securities UNITED STATES (Another) Year in Transition The US story remains one of transition. It was our predominant theme in 2014, and remains equally applicable to the coming year. Momentum in the recovery continues to firm, the Fed continues to pivot further away from emergency policy settings, and the US is set to outperform most of its G10 peers, many of whom such as Japan, China, and Europe among others suffer structural impediments notably absent in the US. To be sure, one cannot view the US in isolation. The US may be uniquely positioned to prosper with a strong currency owing to bulging energy production, but a strong USD married to a wobbly global recovery cannot be ignored. This was the cause celebre for a market inclined to doubt the Fed’s capacity to progress toward growth and inflation targets that had underpinned expectations for a rate hike in 2015. That pessimism is overdone. The mix of factors supporting growth has evolved, but the fundamental story has not. Export growth will slow, imports will accelerate and net exports will exert a larger drag on growth, but some of this is offset by falling energy prices that provide a fillip to domestic demand. This is a tax cut to energy consumers globally, but in a strong USD regime those benefits are disproportionately skewed to the US relative to G10 peers. Lower oil prices do undermine US oil production and investment. However, with 90% of shale production cost effective at around $65USD, that hit may be small and diffused over time. Total investment in shale production still amounts to less than 0.8% of GDP. Meanwhile, the economy will be supported by strong household and corporate balance sheets, state and local government spending that keeps public spending rising and a modest acceleration in residential and non-residential investment. Odds that the economy expands at a 2.5% to 3.0% pace, therefore, remain high. That pace is sufficient to erode excess slack in the labor market, support ongoing improvement in labor compensation, and effectively keep the Fed on track to raise rates in September. The Fed will raise rates to bring more balance to a policy regime that looks increasingly anachronistic. It will not be motivated by a budding inflation problem. Core inflation, our best measure of future inflation, will struggle to approach the 2.0% target over the next 12 months, and perhaps longer. The trend in headline inflation is lower, and will remain so until its trough in mid-2015. A key question for the Fed (and bond markets benefitting from lower inflation expectations) is the extent to which the US is immune to the broader global disinflationary forces that remain in play. Policy rates will not move higher if core inflation shows a renewed disinflationary trend. We do not expect that risk to materialize. The pass-through effects from a strong USD is limited and 80% of core prices are non-tradable services. If growth is firming, if wage inflation continues to trend higher, and domestic demand is buoyed by Sources: Bloomberg, Macrobond, TD Securities higher real incomes, odds are good the recent slip in core inflation will prove temporary. Breakevens will move the other way. Firming growth, Fed tightening, and a bottoming out in both actual and implied price momentum sets up what should be a cyclical bear flattening in Treasuries. At face value it suggests the long end of the curve is also vulnerable to a correction, a view amplified by reduced demand from banks close to fulfilling their HQLA requirements and of course, the end of QE. This is mitigated in part, however, by the high yielding allure of Treasuries in a world hungry for yield, a distinction magnified by further easing by both the BoJ and the ECB. Competing policy regimes do not challenge the flatter trend that will emerge in Treasuries, but could well provide added accelerant. The bias to longer term yields is still tilted to the upside over 2015, though the scope of any selloff looks to be limited. Trade Recommendation: 1s3s Flattener - Sell T 0.250% 11/30/15, Buy T 4.250% 11/15/17. Enter: 85bps Target: 45bps Stop: 95bps Carry/Roll: +13bp/quarter The market is too complacent in pricing in the timing of the first rate hike. As of mid-November the market was fully pricing in only one full 25bp rate hike for 2015 - almost 50bps less than was the case at the end of Q3. Market odds are still decent that the first rate hike comes before December 2015, but at 58% those odds still suggest a low level of conviction relative to just two months ago. If the market is too complacent the dots feel too aggressive, not just in 2015 with a year-end target of 1.0%, but in subsequent years as well. Trading opportunities exist in what is likely to be somewhere in between. Even if the Fed does deliver on 2 of the 4 rate hikes implied by the dots (which in fact is our base-case 5 expectation), the market could be caught off guard. 2015 Global Outlook Rates, FX and Commodities Research 20 November 2014 | TD Securities Curve flattening in 2015 is not a novel theme, both forwards and street rate projections point in that direction. However, with a market inadequately priced for the Fed, our view is that one should position for more flattening than is now expected. Given the crowded nature of the flattening trade, the standard 2s5s and 2s10s flatteners that would ordinarily be an attractive vehicle to position into the start of policy tightening have become less attractive. There is a high hurdle rate on the roll to breakeven. In the case of the 2s10s for example, the 3 month carry and roll cost is a significant 11.5bps. We recommend entering a 1s3s flattener. This is best expressed by selling the T 0.250% 11/30/15 and buying the T 4.250% 11/15/17. Both are relatively cheap against the curve. The net 3 month carry and roll for this trade is especially attractive at +13bps. Moreover, the high coupon for the 3yr note versus the low coupon 1yr offers the potential for some yield pickup. We recommend entering this trade at 85bps, with a stop at 95bps. The target is set at 45bps. Trade Recommendation: Sell 5s10s30s Fly as belly of the curve has become too rich relative to the wings. Enter: -1.5bps Target: 25bps Stop: -10bps Carry/Roll: 3bps/quarter The 7yr-10yr part of the Treasury curve has become expensive relative to both the spline and compared to fair value estimates. On the spline, the current on-the-run benchmark is 6.3bps rich versus the on-the-run 5s (at 2.6bps rich) and 30s (3.3bps). The securities around the benchmark 10yr also enjoy a level of richness that is not evident in other parts of the curve. Granted, the richness in this basket has been justified in part by the increasing investor preference to cluster in this bucket due to its higher liquidity relative to the rest of the curve. Even with this in mind, the 50bps+ wedge between the current yield on 10s and the fair value estimate is becoming somewhat stretched. The pricing in the forward curve suggests that the premium in this part of the curve could persist well into 2015. We recommend leaning against this by selling 10s on the 5s10s30s fly. This opportunity provides some upside given our presumption that Europe avoids a negative outcome, that the 30yr part of the curve will outperform, and that the Fed emphasis on low and slow will temper a rise in 5yr yields. The target of 25bps over coming months is still low relative to the peak of 35bps posted last December. This trade also benefits from a positive carry and roll-down of 2.6bps per quarter. Our projection is for the 5s10s30s curve to steepen from its current level to 25bps into the first rate hike in 2015. Comparatively, the forward curve is pricing in a further flattening to -18bp by end-2015. Sources: Macrobond, TD Securities Beyond the positive roll/carry and potential for the upward adjustment in 10s, this trade will also benefit from current longend outperformance as the global reach for yield persists. Trade Recommendation: Look for the BE5s10s curve to flatten as inflation momentum reverses early next year. Enter: 43bps Target: 15bps Stop: 55bps Carry/Roll: N/A US inflation momentum has drifted steadily lower since mid-2014 as the pass-through from the strong dollar, falling crude oil prices and base effects have dampened domestic price pressures. The subdued pace of wage growth has also contributed to the low inflationary backdrop. The persistent disinflationary impulse has been duly reflected in the collapse in the inflation outlook, with both survey- and market-based inflation expectations falling to their lowest levels since 2011. Given its relatively high correlation with energy prices, the 5yr part of the breakeven curve has been particularly hard-hit, resulting in the BE5s10s curve steepening from 17bps mid-June peak in crude prices to 33bps currently. Over the near term this dynamic has more room to run as the fallout from falling crude prices makes it way to the pump. However, with both forward and street expectations looking to some stabilisation in crude prices by early-2015, we expect the steepening in the BE5s10s curve to run it course by January. We recommend scaling into a BE5s10s flattening at 43bps. The stoploss should be set at 55bps, with a target of 15bps. 6 2015 Global Outlook Rates, FX and Commodities Research 20 November 2014 | TD Securities CANADA The Canary in the Coal Mine The base case assumption for the year ahead is that US growth will be solid but not spectacular. With the Canadian dollar forecast to push lower over the course of the year—reaching 1.19 by the end of Q3—demand for a wider range of Canadian exports will provide a potent offset to lower commodity prices. With interest rates not expected to move higher for most of 2015, the domestic economy will continue to contribute to growth. An upward drift in the housing market—additional macroprudential measures tightening mortgage regulations are unlikely ahead of a federal election—and continued job growth accompanied by higher wages will support consumer spending and provide an offset to a slower pace of investment activity across Western Canada. Taken together, real GDP growth will bounce along at a sufficiently robust pace to steadily absorb what remains of economic slack in the wider economy. Recommendation: Buy 30yr Breakevens (CAN 1.5% Dec 2044s vs CAN 3.5% Dec 2045s) Entry: 183bps Target: 205bps Roll: -0.3bp/quarter Stop: 178bps Diminished slack and greater exchange rate pass-through from the weaker CAD will keep core inflation around its target, though weaker headline inflation will give the Bank of Canada ample ammunition to sound cautious. When relying on exports and by extension the currency to drive the next stage of the recovery, there is absolutely no incentive for the Bank to sound prematurely upbeat. This will force the Bank to tolerate more inflation while waiting for the Fed to lead the way before following through with a modest hike in overnight rate by the end of the year. Correlation Between Canadian GDP and Developed Market Economies (1995-2014) Contemporanous Correlation Facing a global outlook shrouded with uncertainty and dripping with downside risk, economic proximity to the one region expected to perform reasonably well is fortuitous. This is not the first time we have expected net exports to assume the mantle of growth from a stretched household sector. Over the course of 2013 nascent signs that exports were finally contributing to growth amid a firming in US growth and a weaker Canadian dollar were undermined by the pronounced downdraft in commodity prices. With commodity prices expected to remain weak, it will fall to wider US demand and additional currency weakness to support growth in the year ahead. If the US economy is able to diverge from growing stagnation elsewhere, the Canadian economy will be well positioned. However, if the US stumbles, Canada will need to rely again on low interest rates to provide more support to its domestic economy and prevent a more sustained downturn in activity. In straddling this divide, Canada in 2015 becomes the canary in the secular stagnation coal mine. 0.6 0.4 0.2 0.0 US Sweden Germany Spain Italy Norway Australia Sources: Haver Analytics, TD Securities The global push lower in market-based inflation expectations seeped into Canada in H2 2014, with breakevens moving within a few bps of their post-crisis lows. Moreover, prior to the 2008-2009 financial crisis, 30yr breakevens had not fallen below 180bps since the onset of the 2001 recession (and the journey into the 170s was brief). Energy prices are expected to stabilize next year, and continued above trend growth in North America also argues for higher inflation. Taken in tandem with an inflation tolerant central bank and a depreciating currency, we think RRBs are underestimating the likely path for CPI. Seasonal factors will continue to weigh on RRBs over the next few weeks, but these are nonetheless attractive entry points to own breakevens— especially if core CPI proves to be stickier than anticipated. That said, the Bank of Canada’s credibility as an inflation targeter is still well entrenched, so we would target 205bps rather than betting on inflation expectations becoming untethered. Recommendation: Buy Canada 5s vs US (CAN 1.75% Sep 2019s vs 1.75% T Sep 2019s) Entry: -9.5bps Target: -25bps Carry/Roll: -4.8bp/quarter Stop: -2bps With every passing month, the Bank of Canada seems to describe a higher threshold for hikes; the discussion around the labor gap at the October MPR essentially ensures that the Bank will let the Fed tighten before they do, and the Bank will continue to sound as dovish as possible. The combination of earlier hikes from the Fed and the lack of any sort of guidance from the Bank of Canada suggests that Canadian bonds will outperform versus the US. However, with the front-end of the Canada curve already extremely expensive, we prefer to express our long Canada-short US view in the 5yr segment of the curve. 7 2015 Global Outlook Rates, FX and Commodities Research 20 November 2014 | TD Securities EUROPE Inflation is Key We expect the Bank of England to remain on hold throughout 2015 and to begin hiking interest rates in 2016. Money markets have pushed back expectations of the first BoE hike to November 2015 but we look for an even later start in February 2016 and think that the gilt market is yet to push pricing this far out. One of the main factors underpinning our call is the expectation that inflationary pressures are likely to remain subdued, particularly through the first half of 2015. Indeed, we see a nonnegligible chance that inflation temporarily falls below 1.0%. In this scenario, it is very unlikely that the MPC will be able to hike or even strike a moderately hawkish tone and we expect markets to continue to push back expectations of when the first hike will occur even if growth doesn’t slow and wages do start to edge up. In this environment, 2yr gilt yields can only suffer a limited fall and it is the medium-term tenors that should see the biggest fall in yields, so we should see 2s5s flatten. However, against this backdrop we also look for UST yields to rise as US economic data manages to shake off global concerns, which should pull 10yr yields higher across the globe, including gilt yields (although we look for gilts to outperform USTs). With 5yr yields falling due to expectations of later BoE hikes, this favors 5s10s steepeners. Rather than express our view as either 2s5s flatteners or 5s10s steepeners, we think that there is better risk/reward in buying the belly of a 2s5s10s gilt fly. This is not a trade we think will outperform across the whole of 2015, but rather a trade which we expect to make money as the market remains uber-pessimistic about the BoE pushing back rate hikes, and so the majority of the return should be in the first half of 2015. Entering the trade as a fly also neutralises the carry and roll. Recommendation: Buy 3yr Gilts vs NGBs Entry: -38bps Target: -60bps Carry/Roll: 13bps/quarter Stop: -32bps We see value in buying 3yr gilts vs NGBs. As we have already discussed, we think the market will push back expectations of a BoE hike further and that this is not fully expressed in the gilt curve at present. In contrast, the market is pricing in expectations of rate cuts in Norway, and we don’t expect these to be delivered. This is not something that we expect to be corrected immediately, 2s5s10s Gilt Fly to Fall to -10bps 35 30 25 Basis Points Recommendation: Buy the belly of 2s5s10s gilt fly Entry: 12.3bps Target: -10bps Carry/Roll: 0bps/quarter Stop: 18.5bps 20 15 10 5 0 -5 Mar-14 May-14 Jul-14 Sep-14 Nov-14 Sources: Bloomberg, TD Securities but as commodity prices stabilise, markets should begin to price out rate cut expectations. Inflation in Norway has been holding up well given the hits to oil prices in the past few months and with Norway less exposed to Eurozone issues and stimulus from NOK depreciation, we think the chance of a rate cut is low. The part of the curve where this can be expressed best is the 3yr sector. The forward curve only prices in a 6bp pickup in the next six months for 3yr NGBs while pricing 3yr gilt yields 23bps higher. We expect 3yr gilt yields to remain around current levels over the next six months while there is scope for 3yr NGB yields to pickup if oil prices stabilise. This sets up a pretty good risk/reward for this trade, particularly when compared to the forwards. Recommendation: Buy UK 2y2y forward Entry: Limit order: 1.74% Target: 2.10% Stop: 1.6250% Although we think in the short-term there is further for 2y2y forwards to fall in the UK, but by end-2015 they should be higher as inflation concerns recede and rate hikes move closer once again. We would therefore recommend waiting for better entry levels and then looking for more normalization in these metrics. In the short-term there may be more value in looking for breakevens to fall. There has been remarkably little movement in UK breakevens despite large moves in oil prices recently and the decent fall in spot inflation, and we think that as inflation remains low, breakevens could be due for a catch-up. In both Sweden and Germany, fixed income opportunities are rather limited at present. In Sweden the forward curve is pricing in very little movement over the next six months while in Germany, we expect bund yields to pickup to 1.20% by year-end, but the forward curve is only pricing in a move up to 0.95%. This move is likely to be driven by lower expectations of further ECB easing in H2 2015 and also higher global yields due to Fed tightening. 8 2015 Global Outlook Rates, FX and Commodities Research 20 November 2014 | TD Securities AUSTRALIA / NEW ZEALAND Exercising Patience Recommendation: NZ 3s10s swap curve steepeners We have revised down our GDP forecasts for Australia and New Zealand for 2015, and with China slowing we see the Antipodean central banks keeping the cash rate at current levels for much longer. Entry: +30bps Target: +55bps Carry/Roll: +2.2bps/quarter Stop: +20bps We forecast above-trend GDP growth in New Zealand, at around 2.7% for 2015, but concede that the peak has likely passed. In its October OCR Review communiqué, the RBNZ signaled that it had shifted sidelines after lifting the cash rate by a relatively aggressive +100 bps over March-July 2014. As the sharp fall in the key dairy price this year foreshadows a decent slide in the terms of trade, we believe the RBNZ has ample time to restore the cash rate towards neutral, currently estimated at 4½%, by early 2017. As for China, we forecast a period of continued decelerating growth from 7.7% in 2013, to 7.4% in 2014, 7% in 2015 and 6.7% in 2016. We believe the risks to these forecasts remain to the downside, particularly after President Xi’s comments at the November 2014 APEC meeting that 7% growth would still be too rapid. That said we do not expect a ’Chinese hard landing’ to materialize, remaining a tail risk in our view. For now, we view the weaker reads across a number of Chinese data points reflecting the deliberate actions taken by officials to address overcapacity in property, investment and credit markets. We expect these sectors to remain as headwinds throughout 2015 (and we do not expect a rebound in property investment) and strict regulation of off-balance sheet lending is expected to persist, so broad based monetary easing remains unlikely. With targeted measures to boost infrastructure and the government’s focus on increasing the share of consumption an outright growth recession remains a tail risk. We see retail spending as is holding up reasonably well despite stronger anti-graft measures, and this should reassure policymakers that the slowdown in property and heavy industry is not spilling over into other sectors. Taking all these factors into account, we have pushed back our March 2015 RBA hike to August, targeting a year-end cash rate of 3%. For the RBNZ, we pencil in 25bps in September 2015, leaving the year end cash rate at 3.75%. Our ’delayed’ RBA and RBNZ projections to keep the cash rate on hold for longer should anchor short end yields. In contrast, our US team’s forecast for UST yields to grind higher and the risk that the weaker AUD and NZD result in price pressures should pressure the ACGB and NZGB long ends by mid-2015. Over this period, TD forecasts the NZGB 3/10s curve to steepen around 25bps, vs 20bps in Australia. What may drive a steeper curve in Australia is a deterioration in its fiscal position should savings measures from this year’s budget not be passed. NZ 3s10s Swaps Curve Near 5yr Lows 200 160 Basis Points For Australia we forecast a period of sub-trend growth, easing from the expected 3.2% in 2014 to 2.5% in 2015. The lower growth profile is a result of trade, consumption and construction filling the gap left by mining investment at a slower rate than we initially expected. Although the RBA has indicated that it sees signs of a turnaround, the Bank has displayed a willingness to exercise patience. 120 80 40 0 2009 2010 2011 2012 2013 2014 Sources: Bloomberg, TD Securities We recommend a 3s10s steepener in NZD. The scope for greater steepening in NZ is consistent with our forecasts. We would recommend investors consider trading this view via the swap market that on our core view, should see corporates and retail paying interest to lock in low rates. The 2.2bps of positive carry via NZ swaps vs flat via Australian swaps is also supportive. The risk to our base case is for a bond market rally fuelled by fresh global growth concerns, or Australia/New Zealand price and activity data argue for a further easing in monetary policy. Under this alternative scenario we expect the NZGB short end to outperform, as the perception grows that the RBNZ ‘overtightened’ in 2014. The OIS market is pricing some chance that the next move is down for the RBA, while it is close to pricing in 25bps by the RBNZ by September 2015 hence the NZGB front end has the most scope to outperform. More broadly, should global disinflationary pressures and prospects for deleveraging emerge, higher yielding ACGBs and NZGBs can be expected to draw significant investor interest, also supporting our preferred NZ -US 3yr spread compression trade. 9 2015 Global Outlook Rates, FX and Commodities Research 20 November 2014 | TD Securities G10 RATES USDCAD vs Canada-US Breakeven Differentials Abnormal Normalization Process The year-long strengthening of disinflationary forces has spilled over into FX markets as the best outlet for stress in a zero-bound global monetary policy landscape. The desire for devaluation began with US QE2, ramped up several notches with the BOJ’s QQE, and was reinforced by the ECB’s begrudging shift to expand its balance sheet as a de facto weak EUR policy is meant to stimulate when 200yr low yields in the periphery failed to induce growth or stop creeping disinflation. This will only be exacerbated with the Fed and BoC our only unchanged conviction on central bank tightening in the G10. The ongoing slowdown in EMs, especially with diminished expectations for Chinese growth and deleveraging in the domestic credit and housing market in full swing, is likely to maintain the EM dollar addiction. Overall, this dynamic is likely to limit the scope for a broad selloff in global bond markets, drive compression risks between the hikes and the ‘hike nots’ as carry trades bring additional allure in a lower vol rates world, as well as make inflation products much more active if the current balance of risks shifts. The ultimate cross-country question is what to be short US Treasuries against? Recommendation: NZ-US 10yr spread compression Entry: 185bps Target: 160bps Carry/Roll: -4bps/quarter Stop: 195bps Recommendation: US/UK 5yr spread widening Entry: -21bps Target: -55bps Carry/Roll: +0.6bps/quarter Stop: -8bps NZGBs stand out in such a world as having limited upside in rates. They are already the ultimate G10 high yielder and already struggle with a tight supply, with a central bank now much more concerned about FX strength than domestic data strength—and we have shifted our first hike to September 2015—and at more risk from a China slowdown than non-Asian G10 markets. That makes it a first choice for being long versus Treasuries. 0 -5 -10 Canada-US 30yr BE Spread USD/CAD, RHS Basis Points -15 1.16 1.14 1.12 -20 -25 1.10 -30 -35 -40 USD/CAD The key to 2014 performance was to identify as early as possible that the assumption of tapering as tightening was more than fully priced to start the year. The fixation on tapering in 2013 left US long-term rates at cycle highs on December 31, providing a backdrop for lower rates in 2014, especially as those higher rates fed a backwash into the US mortgage market. We now move into the end of 2014 at the 50% retracement of the 2013-2014 range for 10yr Treasury yields with global disinflation clearly front and center on the market’s mind. 1.08 1.06 -45 -50 1.04 Nov-13 Dec-13 Mar-14 Apr-14 Jun-14 Aug-14 Oct-14 Sources: Bloomberg, TD Securities For the UK, we have shifted our view to be one of the most dovish in the market on when the BoE is now likely to tighten, having pushed that off to February 2016. We also see limited risk of a hawkish pivot from the MPC over the coming six months at least. This puts this message shift likely well past the FOMC’s pivot, which we see likely to come incrementally in March and June, followed by the first hike in September. There are two-way risks to this view, given the very low inflation environment likely to persist in the UK and if FOMC pricing is pushed out further, we would expect BoE pricing to move even further. Recommendation: Long 30yr CAD BEs, Short 30yr US BEs Entry: -19bps Target: 10bps Carry/Roll: +4bps/quarter Stop: -30bps Collapsing energy prices have been a product of oversupply, a strong USD and global demand weakness, which has significantly increased downside risks to headline inflation in the near-term, but has less clear implications for core. In fact, for the US, the stimulatory impact for consumers could even support more core price pressures down the road. But for Canada, we see even more forces at play supporting higher breakevens. Stabilizing energy prices and the tendency of breakevens to compress in a low nominal yield environment provides similar drivers for both. But a depreciating CAD and the BoC’s willingness to overshoot the 2% inflation target provides a driver for compression in breakevens. From this standpoint, we like buying inflation protection in 30yr Canada, versus selling 30yr TIPs breakevens. 10 2015 Global Outlook Rates, FX and Commodities Research 20 November 2014 | TD Securities EMERGING MARKETS Waiting for Growth Therefore, next year we expect to see the trend of EM FX weakening against the US dollar continuing. However, with growth in the Eurozone remaining feeble, we expect EM FX to weaken less, or possibly even appreciate, against the euro, as has been the case this year. EM yields will continue to be driven by a combination of domestic factors (namely the local monetary policy response) and market expectations ahead of the first Fed hike. In the absence of brisk moves in the US Treasury curve, we can expect local factors to remain in the driver’s seat, which means we should not see particularly sharp changes in EM yields. Several risk factors continue to make the environment particularly unpredictable. Global political risks and low oil prices are major sources of uncertainty. But risks also continue to stem from an uneven global recovery that sees the US growing at a strong pace, against the lacklustre recovery in the Eurozone and risks of a hard landing in China. There is the clear risk that the US, rather than dragging up the rest of the world through its strong growth, is itself dragged down. EM Regional Divergence Latam continues to lag in the EMs in terms of growth. With a few exceptions (e.g. Colombia and Mexico), the region’s weak economic activity is exemplified by the performance of its largest economy – Brazil, where we expect a continuation of high inflation and low growth amidst policy concerns and fiscal challenges. EMEA’s recovery is patchy with the Eurozone acting as a drag on the region, and even the best performing economies so far (Poland, Hungary, Turkey) are at risk of hitting the brakes. Asia stands out, with India and Indonesia set to re-accelerate on the back of a favourable political backdrop. But China’s performance and the large private credit leverage in the continent are potential liabilities. Mexico stands out in Latam In Latam, we are struggling to find a compelling story in the region for next year. Consequently we favor being underweight Latam, and being long dollars. 7 GDP Growth Differential, % 2015 will be another challenging year for emerging markets. As in 2014 and most of 2013, external forces will likely add negative pressure to EM rates and currencies, while the macro backdrop is likely to continue to suffer from a structural lack of growth. The differential between US growth and EM growth is expected to remain narrow next year. With the US offering the deepest and most liquid capital markets in the world, and with the prospects of higher rates later next year, the incentive for investors to move money into EM stays low. EM vs US and Eurozone Growth 8 6 5 4 EM - US 3 EM - Eurozone 2 1 0 2006 2009 Sources: IMF, TD Securities 2012 2015 *2014 & 2015 are forecasts Recommendation: Long MXN/COP Entry: 159.5 Target: 168 Stop: 155 Risk/reward: 1.89 We remain bearish BRL over the course of next year, but think this can only be traded opportunistically given the volatility and carry. A real risk for Brazil, and consequently Latam, is the outlook for its sovereign rating. The failure of Dilma to deliver credible fiscal reform would put Brazil’s investment grade rating in jeopardy. While we see an actual downgrade to speculative grade as unlikely next year, a move to negative watch by S&P would put tremendous pressure on Brazilian assets, including the currency. As such, the progression of the fiscal announcements and fiscal data releases need to be watched carefully as the year progresses. We think Mexico is one Latam name that stands out with room to strengthen from current levels, particularly at the start of the year. We like being long MXN/COP as an intra-regional trade. At current levels, MXN already reflects concerns about oil prices, and we know the Mexican government is hedged below $70/ barrel for 2015. Over the longer term, low oil prices would be problematic for Mexico in terms of both the fiscal accounts and expected FDI on the back of energy reform. However, Mexico has largely insulated itself from weaker oil in 2015. In contrast to this, as low oil prices and a deceleration in domestic demand weigh on the outlook for Colombia next year, we feel that USD/COP could move higher still. FX Oil Basket Trade The sharp fall in oil prices this year has produced its share of winners and losers within EM. Obviously large oil exporters like 11 2015 Global Outlook Rates, FX and Commodities Research 20 November 2014 | TD Securities Therefore, if oil prices remain at current levels or fall further, we continue to like trading a basket of currencies that should outperform (THB, INR, PHP, and TRY) against underperformers (COP, MXN, and BRL, the latter being included as a short not because of Brazil’s exposure to lower oil prices, but rather because of the negative fundamentals). The basket is currently trading at 89.2 (with Jan 2007 = 100) and we target 92, with a stop at 88.2. An extension of the downfall of Brent oil prices from $78/barrel at the time of writing, would lead us to look for a more ambitious target. Curves too flat in Hungary and Poland Recommendation: Pay HUF 1yr swaps 2yr forward Entry: 2.28% Target: 2.9% Stop: 2.10% Risk/reward: 3.0 Poland and Hungary are currently both experiencing negative levels of headline inflation while maintaining healthy levels of growth. We expect both central banks to keep rates on hold for a considerable time, with a risk of further cuts if growth data disappoints to the downside. However, we do expect rates to eventually start going up—in H2 2015 for Hungary and some time in 2016 for Poland. However, the short end of Hungary and Poland curves are very flat, with forward swap rates implying rates will be on hold for much longer than this. There are a lot of possible trades that can be constructed around this observation, but our preferred trade is in Hungary where we like paying the 1yr rate 2yrs forward at 2.28%, just 24bp above spot. What happens when the Fed hikes? When the Fed hikes, we expect the market to reassess the real stance of monetary policy in the US. There is a possibility that the resumption of tightening is accompanied by balanced guidance for the future, suggesting a gradual cycle with the terminal Fed 60 70 Brent futures (inverted) EMFX Oil Basket (no RUB) 80 90 96 94 92 90 88 100 110 Index Russia are hit hardest and big oil importers like Turkey get a boost. However, we do not think that lower oil prices are necessarily fully discounted in market prices as they are only gradually reflected in the economic data, impacting inflation rates, CA balances and fiscal balances. EM Oil Basket and Oil Prices $/barrel (inverted) Recommendation: Long an equally-weighted basket of THB, INR, PHP and TRY against short COP, MXN and BRL Entry: 89.2 Target: 92.0 Stop: 88.2 Risk/reward: 2.80 86 84 120 82 130 Apr-09 Apr-10 Apr-11 Apr-12 Apr-13 Apr-14 80 Sources: Bloomberg, TD Securities funds rate at a relatively low level (we forecast 3.25%). In such a case, we may see only a modest response from EM curves. EM currencies are likely to suffer the upside adjustment, as higher rates in the US become a catalyst for EM outflows. This will be partly offset by the ECB and BoJ QE programs, but we think the strongest reaction will nonetheless follow decisions from the Fed. The initial move, however, could represent an attractive opportunity to reposition in the EM FX space, if higher US rates anticipate better global growth. If global growth lags and EMs continue to exhibit negative output potential, EM FX weakness is likely to be protracted in time, with most EMEA names likely to underperform their Asian peers. Latam FX may continue to suffer from low oil and commodity prices, but Mexico could be a positive surprise as a more favorable outlook for US growth stands to benefit Mexican manufactured exports. East Ukraine remains a significant risk Our central expectation is that the smouldering conflict in East Ukraine will continue to smoulder and that Russian sanctions are unlikely to be lifted any time soon. However, there is the clear risk that the conflict could flare up again, leading to more sanctions being imposed by the West and counter-sanctions being imposed by Russia. The biggest losers from renewed conflict would be Ukraine and Russia, but it would almost certainly impact the Eastern European economies and Western Europe. Of course there is also the possibility of the conflict in East Ukraine being resolved and sanctions being gradually removed, although we feel that this scenario is less likely than an escalation of the conflict. 12 2015 Global Outlook Rates, FX and Commodities Research 20 November 2014 | TD Securities COMMODITIES In Dollar Terms Both Long and Short Specs Have Plenty of Room to Get More Bearish As such, we see silver continuing to underperform (maintain our long XAU/XAG ratio) gold in the short-term as markets digest US economic numbers to mean that the Fed will indeed start removing some monetary accommodation. The higher yields and accompanying rise in opportunity cost to hold or carry gold and silver should pressure prices lower. Additionally, the risk that the ECB undertakes more aggressive asset purchase action should see the US dollar rise sharply. Shorts that have recently covered could get back in and longs could liquidate again—there is still plenty of room. The lack of physical demand from Asia suggests that there would be little to stop any spec initiated selloff today, as was the case during the sharp selloff in H1 2013. However, once the market prices in the first few Fed hikes and gold and silver drop to new cyclical lows, both metals should move higher. The FOMC is unlikely to get too restrictive given the headwinds from external sources, implying real rates should not rise very much. If inflation moves higher along with a reduction in the US output gap in H1 2015, the cost of carry for gold and silver may not rise as much as many real money traders and specs think. This should bring investors into gold and silver again, with silver outperforming due to volatility and the expected increase in industrial restocking and demand. Recommendation: Stay long XAU/XAG ratio (Oct 30th recommendation) but take profit and short the ratio at: Entry: 78.0x Target: 63.0x Stop: 83.0x Long Platinum/Palladium Ratio Platinum has greatly underperformed palladium this year, even though both metals have similar fundamentals and are seen to be in deep deficits for the next several years. Concerns about export reductions of palladium from Russia due to the Ukraine crisis and decent US and China demand for gasoline engine auto catalysts was a key reason why palladium has done so well compared to platinum. Conversely, a much weaker than expected Europe, Recommendation: Long Pt/Pd ratio Entry: 1.54x Target: 1.82x Stop: 1.45x 70% 60% Non-commercial Gold Shorts Non-commercial Gold Longs Gold Price (rhs) 1600 50% 800 40% 30% 400 20% $/oz [log scale] The precious metals market is likely to strengthen materially in the latter part of 2015, but there will be considerable weakness into the next quarter or so. Typically, a weak precious metals market implies silver underperformance due to its significantly higher volatility and its strong links to industrial activity. Conversely, recovering precious metals markets suggest that gold will recover less robustly relative to silver. $value as % of total $value open interest Long Gold/Silver Ratio; Then Reverse 10% 0% 1998 200 2001 2004 2007 2010 2013 Sources: Bloomberg, TD Securities which is the largest industrial user of platinum, was the driving force behind the platinum underperformance. As it stands now, platinum prices are much too low to incentivize producers to increase capex in order to grow supply to match expected demand growth. We believe that once the European economic situation stabilizes and current inventories held by industrial users are whittled down, the price of platinum will materially outpace the expected gains made by palladium as we move deeper into 2015. As such, taking a long platinum/palladium position is a winning strategy for 2015. Long Nickel Recommendation: Long Nickel Entry: $16,145/tonne Target: $22,000/tonne Stop: $14,000/tonne Growing LME exchange inventories and stockpiles of nickel ore in China remain surprisingly high, along with a downgrade of global demand growth expectations, have conspired to erase early-2014 price gains. However, even with our projections of a weaker-thanexpected global demand environment in 2015, we expect that the coming supply side dynamics will be enough to push nickel prices much higher over the next year. Mine supply growth will not increase enough to meet a still growing US demand, a slower, but still impactful, China and an eventual stabilization in Europe. Additionally, the Indonesian export ban has remained in place, as restrictive as initially announced, which is longer than we originally expected. If this continues to be the case, the ore grades of the stockpiled nickel will continue to decline, as lower grade Philippine ore has been added to supplement the drawdowns. Therefore, in 2015, the weaker grade of ore stockpiles will begin to impact the supply side along with slowing mine supply, and leads us to project a deficit situation. With prices at low levels today, we see 13 2015 Global Outlook Rates, FX and Commodities Research 20 November 2014 | TD Securities little downside risk left in the metal and recommend an outright long position for 2015. $130 Long Zinc/Aluminum Ratio $120 For the short leg we prefer aluminum, due to the likely surplus situation that we anticipate in 2015 and currently high prices that seem to have been temporarily squeezed higher, due to some kind of position liquidation in a physically tight market. This artificial tightness in the physical space has impacted premiums immensely and has been written about ad nausem. We see this recent sharp move into LME backwardation abating and prices lagging any move higher. Therefore, we recommend a long zinc/ short aluminum trade for 2015. Long Brent-WTI Spread (widening) Recommendation: Long Brent-WTI spread Entry: $3.7/bbl Target: $10/bbl Stop: $0/bbl The global energy complex will move lower into 2015, as increasing oil supply struggles to find a market amid a weakening global growth outlook. Crude oil and petroleum products have grown at unprecedented speeds due to the adoption of tight-oil technology and newly developed resource plays. With global growth expectations weakening for 2015 we do not foresee much deviation from the current supply and demand growth trajectory in 2015. Consequently, our forward guidance for crude oil prices is down in the near term, dragging the broader energy market lower. The WTI-Brent spread compressed largely as a result of the return of Libyan volumes, expectations for a global growth slowdown, and waning geopolitical risk that affected the North Sea benchmark moreso than the Cushing, Oklahoma barrel. Meanwhile, the US has represented the fastest growth in crude oil production volumes and exhibits declining domestic consumption. We expect refinery utilization to remain elevated as the complex $5 $- $110 Oil Price ($/bbl) Zinc has been a favored base metal for TD Securities due to the anticipated poor mine supply trends and improving global demand, which we expect will translate into continued deficits and higher prices. We are quite bullish on zinc, even as we recognize the choppy nature of the global recovery in the near-term, with China still in slowing mode, Europe teetering on the brink of further weakness, and a US recovery that is not assured. Thus, due to this weaker demand outlook we prefer to have exposure to zinc from a ratio perspective in the event that the near-term downside impacts the base metals generally in a weaker way. $10 $(5) $100 $(10) $90 $(15) $80 $(20) WTI-Brent WTI Brent $70 $60 2010 2011 2012 2013 WTI-Brent Spread ($/bbl) Recommendation: Long Zn/Al ratio Entry: 1.115x Target: 1.225x Stop: 1.06x Brent-WTI Spread to Widen $(25) $(30) 2014 Sources: Bloomberg, TD Securities continues to export large quantities of refined products from lowerpriced and domestically sourced crude oil, displacing refinery demand in competing markets. As distillate stocks build elsewhere, declining refined product prices will negatively impact WTI contracts. Aside from domestic production growth, two other regions representing significant export volume growth (Brazil and Canada) are closely located to the US in comparison to demand markets, which will compete and weigh on potential import pricing. Consequently, as global growth stabilizes, Brent should better (i.e. not as bad) relative to WTI. We recommend a long Brent-short WTI spread trade, as we expect a widening of the WTI-Brent discount to levels observed in more recent years. Sell Near-term Natural Gas Rallies Recommendation: Short Mar’15 natgas Entry: Wait until $5/MMBtu Target: $4/MMBtu Stop: $5.25/MMBtu Natural gas futures prices have climbed at an almost breakneck pace due to a three-standard deviation colder-than-normal weather event early in the winter season pushing eastward from the Mid-con to the Midwest and lingering in the Northeast. We do not expect this trend to continue indefinitely. In fact, as weather patterns normalize, the market will likely observe significantly smaller than normal storage withdraws in the following weeks. An incremental +21 Bcf/w of domestic production y/y, increased pipeline interconnectivity across the aforementioned weatheraffected region, and a ramp-up in seasonal LNG will weigh on prices. For now, prices will be supported higher as unseasonal, extreme weather dictates storage into December. Once weather normalizes and ensuing storage withdraws surprise to the upside, excess supply from production and storage economics will weigh on the latter-half of Q1 and forward pricing. Sell the rallies. 14 2015 Global Outlook Rates, FX and Commodities Research 20 November 2014 | TD Securities FOREIGN EXCHANGE Rinse, Repeat growth outlook that has driven the 2014 gains in the USD will become more pronounced in 2015, pushing the USD higher still. Six years on from the Great Financial Crisis, the outlook for the currency market in the year ahead is not that much clearer than in years past when we have tried to outline the themes and issues that would likely drive the markets over the coming 12 months. Slow global growth, low inflation, and rising risks around the prospects for developing market economies are evident themes in our macroeconomic outlook, suggesting that this is still not an environment for high-conviction calls on the year ahead. We feel that the positive, cyclical USD story is backed up by structural improvements (debt, external deficit and energy) and technical factors (the USD appears to be about mid-way through a multi-year secular bull run). Reduced US fiscal and external imbalances alongside the halt to the Fed's QE programme imply that the supply of global USD liquidity will tighten in the year ahead while the BoJ and ECB run very easy policies, underpinning the path higher in the USD against the majors. The good news is that it is not an entirely useless exercise. A year or so ago, a key feature of our outlook was that the USD would strengthen and we shaded our views and forecasts accordingly. Last year, we expected EUR/USD to end 2014 at 1.22 versus a consensus call for 1.28, USD/JPY to end the year at 111 (109) and USD/CAD to close out December 2014 at 1.11 whilst flagging the high risk of an overshoot (versus the market consensus of 1.08), for example. We think the USD will find it easier to rally this year – which may lead to deeper overshoots of our forecasts. EUR bearishness is nothing new and many of the structural challenges that have hung over the EUR in recent years remain intact. Now, however, bearish EUR calls are not clashing with the central bank or capital inflows into the Eurozone. As we sort through the key issues raised by our macroeconomic forecasts, we find ourselves in familiar territory as far as the implications for the G10 FX space are concerned. We remain broadly constructive on the USD for 2015 – almost by default – and we have upgraded our outlook for the USD in 2015 against the EUR, JPY, and CAD as a result of recent developments. We are again more bullish than the consensus for the USD versus these currencies. In fact, ECB President Draghi is implicitly encouraging a weaker EUR by highlighting the divergence between and ECB and Fed policy stances. Meanwhile, peripheral bonds look much less appealing for foreign investors after the sharp appreciation since mid-2012 and accumulation of FX reserves by EMs has slackened, weakening diversification demand for the EUR. Bullish USD/JPY Recommendation: Long USD/JPY via options Entry: Buy a 12m JPY125-140 USD call spread Premium: 1.8% of USD notional Our forecasts suggest that USD/JPY offers better potential returns for USD long positions, however. Although similar factors are driving our expectations of USD strength (growth and central bank policy divergence), the economy's surprising slide back into recession in Q3 2014 suggests Japanese policy makers may have to try and leverage the exchange rate even more to boost domestic growth and avert deflationary pressures. Bullish USD/CAD Recommendation: Buy USD/CAD Entry: 1.12 Target: 1.19 Stop: 1.09 Sources: Macrobond, TD Securities A growing US economy and Fed resolve to get the policy normalization process underway later in 2015 are two prime supports for an extension of the positive USD view we held through 2014. Central bank policy divergence and the asymmetric We have downgraded our call on the CAD. The domestic economy is gaining some momentum from the US recovery and there are tentative signs that the long-awaited rotation towards trade and investment and away from domestic consumption may be gaining a little traction. But a sustained slide in oil prices risks putting a large wrench in the domestic growth works. 15 2015 Global Outlook Rates, FX and Commodities Research 20 November 2014 | TD Securities Terms of trade support the AUD over the NZD in the medium-term 20 ToT %/yr 15 1.35 10 1.30 5 1.25 0 1.20 -5 -10 1.15 -15 -20 -25 Mar-06 Sources: Macrobond, TD Securities The drop in crude oil prices reflects supply, rather than demand issues, so slow (or slower) global growth may only compound the broader drop in commodities seen in recent months. For Canada, this could impinge on trade and undermine investment in the oil patch, hampering growth prospects more broadly. Messaging from the Bank of Canada suggests no rush to raise rates as there is still ample slack in the domestic economy. We expect short-term spreads to widen through the first half of the year as the Fed approaches rate liftoff. Hence, we expect wider US-Canada short-term rate spreads and soft commodities to drive USD/CAD toward 1.19 later this year before the trend stabilizes. Current levels are nearing more attractive risk/reward parameters for long USD/CAD positions we think. Bullish AUD/NZD Recommendation: Buy AUD/NZD Entry: 1.10 Target: 1.17 Stop: 1.08 Among the commodity bloc, we expect less pressure on the AUD, however, and relatively more on the NZD in the coming year. The AUD will edge lower against a generally stronger USD but domestic yields will remain attractive for foreign investors and the RBA is likely to raise rates earlier (August) than the RBNZ (September). 1.10 Terms of trade (AU-NZ) AUDNZD - RHS Mar-09 Mar-12 1.05 Mar-15 Sources: ABS, StatsNZ, TD Securities (TD forecasts Q3) Source: ABS; StatsNZ; TD Securities (TD after f/c after Q3) Bearish EUR/GBP We have tempered our near-term optimism on the outlook for the GBP following the morose BoE Quarterly Inflation Report, and we Recommendation: Short EUR/GBP via options Entry: Buy a 12m EUR/GBP put 0.7650 strike with 2m 0.78KO Premium: 0.5% of EUR notional now think the BoE does not hike until 2016. We still expect the BoE to raise rates well before the ECB or the BoJ, but long sterling positions on the crosses are not attractive now. Later in 2015 should be a much different story, but sterling crosses enter 2015 with a wide margin of error. Wages matter much more than inflation so it is possible the market is caught off guard by the MPC if we finally see pay pressures. But overall GDP growth has not really started to disappoint at this stage, so a stumble on that at the start of the year could drive some significant GBP weakness. We still expect that somewhere in H2, the story should pivot back to preparations for tightening. And all along, the risks are still biased for more, not less asset purchases from the ECB. For that reason and to reduce the cost substantially, we choose to express a bearish EUR/bullish GBP view via a partial barrier knock-out. We expect a slump in NZD terms of trade to provide a good deal of the impetus behind the NZD's relative underperformance versus the AUD in the coming year, however. AUD/NZD's recent dip leaves the cross looking quite attractive for medium and longer-term buyers. 16 2015 Global Outlook Rates, FX and Commodities Research 20 November 2014 | TD Securities REGIONAL RISKS CANADA ASIA-PACIFIC ● Growth will balance headwinds from lower commodity prices with greater demand from the US that will be supported by a weaker currency. The largest downside risk is if the US economy stumbles. Canadian exports would not provide a sufficient offset to weakness in the energy sector that will impair business investment and curtail the terms of trade. ● China is heading for its slowest full year expansion since 1990. Most recent data illustrate a progressive slowdown, with TD and consensus forecasting 7% GDP growth in 2015. The risk is for fixed asset investment and property, already drags on the economy, to deteriorate further before officials respond. ● For Australia the risk is for ‘animal spirits’ to remain ● While lower rates will continue to underpin the muted, for non-mining household sector, growing investment to lag or for a imbalances will lead to a NITED TATES downturn in mining larger medium term investment to accelerate. adjustment. If global growth ● The US economy has been a standout Commodity prices remain ends up being stronger performer among its global peers in 2014. And at depressed despite talk of than expected, a limited a time when the Japanese economy has slipped ECB /BoJ easing, so a degree of spare capacity in back into another economic recession, and terms of trade shock the economy will push slowing growth momentum in Europe, China, and remains a risk. underlying inflation higher EMs beginning to cast a dark shadow over the and place pressure on the outlook for the global economic recovery in 2015, ● In NZ, the key risk is for a BoC to tighten policy, who our expectation is for the US recovery to continue reversal in record net are otherwise unwilling to to outperform its developed world counterparts migration flows with the risk move ahead of the Federal albeit with a relatively subdued 2.5% to 3.0% GDP the RBNZ may have Reserve. growth pace. overtightened. U EUROPE ● Eurozone deflation fears will carry through at least H1 2015 as countries that have not completed structural reforms (France, Italy) stagnate. Downside risks from EMs mean that Germany’s export-oriented economy will not be able to carry the region. S ● This will be modestly higher than the 2.2% pace in 2014, and the pickup in growth momentum should reflect the favorable underlying domestic fundamentals that should provide the platform for the recovery to transition to a self-sustaining path next year. And with inflation momentum stalling, we expect the Fed to stay the course on policy tightening with the first rate hike shifting to September 2015. However, given the unsupportive global backdrop and the implied tightening caused by the strong dollar, the risks to this constructive outlook are unusually higher, and are tilted to the downside. ● The ECB will struggle to expand its balance sheet, and we look for piecemeal additional stimulus via tweaking TLTROs (constant 4yr maturity, potential to extend to 5yrs, and increased allotments from 3x lending to 6x), plus a significant risk of adding corporate bonds, ETFs or sovereign debt to the mix in Q1. ● For the UK, wage growth will be a key two-way risk, with downside from higher labour supply and more low-paying jobs, but upside from diminishing slack. Politics will be in focus with parliamentary elections in May and a potential EU in/out referendum in 2016. EMS ● The Fed is trying to very gradually ease the markets into a world where rates are being hiked, but the risk of a new “tantrum” is significant. We see a risk of Brazil being put on negative outlook by S&P, which would put it a hair’s breadth above speculative grade. This would be negative for Brazilian assets. There is a small risk of a default by Venezuela, which would worsen sentiment towards Latam as a whole. ● In East Ukraine the conflict has the potential to flare up again, which would hit Russia and Eastern Europe. We do not expect the Hungarian and Polish economies to weaken further, but with Eurozone growth weak there is a clear risk to the downside. Some of the best growth stories in EM are in Asia, but a further slowdown in China could undermine this view. 17 2015 Global Outlook Rates, FX and Commodities Research 20 November 2014 | TD Securities FORECASTS United States Fed Funds Rate 3m 2y 5y 10y 30y 0.25 0.00 0.50 1.60 2.30 3.02 0.25 0.10 0.65 1.80 2.65 3.35 0.25 0.15 0.95 2.00 2.80 3.40 0.50 0.40 1.15 2.15 2.90 3.40 0.75 0.65 1.40 2.30 2.90 3.40 1.00 0.85 1.65 2.50 3.10 3.55 1.25 1.10 1.90 2.70 3.30 3.70 1.50 1.30 2.15 2.85 3.40 3.80 1.75 1.55 2.35 2.95 3.50 3.85 Canada Overnight Rate 3m 2y 5y 10y 30y 1.00 0.90 1.05 1.50 1.99 2.57 1.00 0.95 1.15 1.65 2.25 2.75 1.00 0.95 1.30 1.80 2.45 2.90 1.00 1.05 1.50 2.10 2.75 3.20 1.50 1.40 1.80 2.35 2.95 3.35 1.50 1.40 1.90 2.55 3.10 3.50 1.50 1.55 2.05 2.75 3.20 3.60 1.50 1.85 2.20 2.90 3.40 3.75 2.00 1.95 2.45 3.05 3.50 3.80 Australia Cash Target Rate 3m 3y 5y 10y 2.50 2.75 2.53 2.77 3.27 2.50 2.75 2.65 3.00 3.50 2.50 2.75 2.75 3.25 3.70 2.75 3.00 3.00 3.50 3.85 3.00 3.25 3.35 3.75 4.15 3.00 3.40 3.75 4.10 4.35 3.50 3.75 4.00 4.35 4.60 3.75 4.00 4.15 4.45 4.65 4.00 4.20 4.25 4.50 4.75 New Zealand Cash Target Rate 3m 3y 4y 10y 3.50 3.67 3.73 3.80 4.06 3.50 3.70 3.70 3.85 4.10 3.50 3.70 3.75 4.00 4.35 3.75 3.95 3.95 4.20 4.50 3.75 3.95 4.00 4.25 4.65 4.00 4.20 4.15 4.50 4.85 4.00 4.20 4.30 4.65 5.10 4.25 4.45 4.50 4.75 5.15 4.25 4.45 4.50 4.80 5.20 Germany Q4 F ECB Refi Rate 3m 2y 5y 10y 30y 0.05 -0.09 -0.02 0.14 0.79 1.71 0.05 -0.10 -0.05 0.15 0.90 1.85 0.05 -0.10 0.00 0.25 0.95 1.85 0.05 -0.10 0.10 0.40 1.10 1.95 0.05 -0.10 0.20 0.55 1.20 2.00 0.05 -0.10 0.25 0.65 1.40 2.15 0.05 -0.10 0.35 0.80 1.60 2.30 0.05 -0.10 0.50 0.95 1.80 2.40 0.05 0.05 0.60 1.45 2.05 2.65 UK SUMMARY G10 RATES FORECASTS 2015 2016 Q2 F Q3 F Q4 F Q1 F Q2 F Q3 F Bank Rate 3m 2y 5y 10y 30y 0.50 0.46 0.55 1.37 2.07 2.86 0.50 0.45 0.55 1.35 2.25 3.00 0.50 0.45 0.65 1.50 2.45 3.10 0.50 0.50 0.75 1.85 2.60 3.20 0.50 0.65 0.90 2.05 2.80 3.30 0.75 0.90 1.20 2.40 3.05 3.40 1.00 1.00 1.50 2.60 3.20 3.50 1.00 1.00 1.60 2.70 3.30 3.55 1.00 1.10 1.70 2.80 3.40 3.60 Norway EUROPE DOLLAR BLOC Spot Nov 20, 2014 Q1 F Deposit Rate 3m 2y 5y 10y 1.50 1.28 1.29 1.47 1.99 1.50 1.20 1.30 1.55 2.00 1.50 1.40 1.50 1.65 2.05 1.50 1.50 1.70 1.75 2.15 1.50 1.50 1.90 2.00 2.35 1.50 1.50 2.10 2.25 2.55 1.50 1.60 2.40 2.55 2.70 1.75 1.90 2.70 2.85 3.00 2.00 2.10 3.00 3.10 3.25 18 2015 Global Outlook Rates, FX and Commodities Research 20 November 2014 | TD Securities FORECASTS USD/JPY EUR/USD GBP/USD USD/CHF USD/CAD AUD/USD NZD/USD EUR/NOK EUR/SEK DXY Cantral Bank Rates EM vs USD 118.0 1.25 1.57 0.96 1.13 0.86 0.79 8.47 9.28 87.7 Q1 F SUMMARY G10 FX FORECASTS 2015 Q2 F Q3 F Q4 F Q1 F Q2 F Q3 F Q4 F 120.0 1.23 1.56 0.98 1.15 0.88 0.78 8.65 9.20 89.1 122.0 1.22 1.55 0.98 1.18 0.85 0.74 8.60 9.15 89.9 125.0 1.22 1.63 1.00 1.14 0.82 0.68 8.10 9.05 89.4 120.0 1.24 1.68 0.98 1.12 0.81 0.67 8.00 8.95 87.6 120.0 1.24 1.68 0.98 1.12 0.80 0.65 7.95 8.95 87.6 Q4 F 125.0 1.18 1.53 1.03 1.19 0.85 0.73 8.50 9.10 92.4 125.0 1.18 1.57 1.03 1.18 0.84 0.72 8.40 9.05 92.0 125.0 1.20 1.60 1.02 1.14 0.83 0.70 8.20 9.05 90.6 2016 Spot Nov 19, 2014 Q1 F SUMMARY EMERGING MARKET FORECASTS 2015 2016 Q2 F Q3 F Q4 F Q1 F Q2 F Q3 F 11.25 12.00 12.50 12.50 12.50 12.50 12.50 12.50 12.50 Mexico 3.00 3.00 3.00 3.50 3.75 4.00 4.00 4.50 4.75 India 8.00 8.00 8.00 7.75 7.75 7.50 7.50 7.25 7.25 Indonesia 7.75 7.75 7.75 7.75 7.75 7.75 7.75 7.75 7.75 Malaysia 3.25 3.50 3.50 3.75 3.75 3.75 4.00 4.25 4.25 Poland 2.00 2.00 2.00 2.00 2.00 2.25 2.75 3.00 3.25 Hungary 2.10 2.10 2.10 2.50 2.75 3.00 3.50 3.75 4.00 Russia 9.50 10.00 10.00 9.50 9.00 8.50 8.50 8.50 8.50 Turkey 8.25 7.75 7.75 8.25 8.75 8.75 9.25 9.75 9.75 South Africa 5.75 6.00 6.25 6.50 6.75 7.00 7.25 7.25 7.25 Brazil EM vs EUR Spot Nov 20, 2014 USD/BRL 2.58 2.50 2.60 2.80 2.80 2.80 2.80 2.80 2.80 USD/MXN 13.58 13.30 13.30 13.40 13.40 13.20 13.20 13.20 13.20 USD/INR 61.96 60.50 60.87 61.00 60.50 60.30 59.70 59.70 59.70 USD/IDR 12142 11760 11764 11820 11780 11750 11725 11725 11725 USD/MYR 3.36 3.24 3.26 3.28 3.27 3.26 3.25 3.25 3.25 USD/PLN 3.37 3.41 3.43 3.53 3.53 3.46 3.39 3.34 3.35 USD/HUF 243 249 247 251 247 246 244 242 244 USD/RUB 46.96 46.00 45.00 44.00 43.00 42.00 42.00 42.00 42.00 USD/TRY 2.23 2.25 2.26 2.27 2.28 2.28 2.30 2.28 2.26 USD/ZAR 11.05 11.15 11.49 11.60 11.65 11.50 11.49 11.39 11.40 EUR/BRL 3.24 3.08 3.17 3.30 3.30 3.36 3.42 3.47 3.47 EUR/MXN 17.03 16.36 16.23 15.81 15.81 15.84 16.10 16.37 16.37 EUR/INR 77.71 74.42 74.26 71.98 71.39 72.36 72.83 74.03 74.03 EUR/IDR 15232 14465 14352 13948 13900 14100 14305 14539 14539 EUR/MYR 4.22 3.99 3.98 3.87 3.86 3.91 3.97 4.03 4.03 EUR/PLN 4.22 4.19 4.18 4.17 4.16 4.15 4.13 4.14 4.15 EUR/HUF 305 306 301 296 291 295 297 300 303 EUR/RUB 58.85 56.58 54.90 51.92 50.74 50.40 51.24 52.08 52.08 EUR/TRY 2.80 2.77 2.76 2.68 2.69 2.74 2.81 2.83 2.80 EUR/ZAR 13.85 13.71 14.02 13.69 13.75 13.80 14.02 14.12 14.14 19 2015 Global Outlook Rates, FX and Commodities Research 20 November 2014 | TD Securities FORECASTS 1190 16.17 1205 768 1200 17.00 1375 875 1225 18.50 1525 850 1250 18.75 1600 825 1275 19.50 1700 825 1275 19.50 1775 850 1275 19.50 1775 850 1300 19.75 1775 950 1300 19.75 1775 950 Copper ** Zinc ** Lead ** Nickel ** Aluminum ** Molybdenum + Iron Ore *+ 3.06 1.02 0.92 7.30 0.92 9.30 73 3.06 1.06 0.99 8.12 0.88 13.00 82 3.03 1.08 1.04 9.00 0.88 14.00 84 2.94 1.10 1.06 9.75 0.90 14.50 88 2.95 1.10 1.06 10.00 0.90 14.50 88 2.96 1.25 1.15 11.00 0.90 15.00 90 2.94 1.25 1.15 12.00 0.90 15.00 90 3.25 1.60 1.25 12.50 1.00 15.00 85 3.25 1.66 1.25 12.50 1.00 15.00 85 Nymex Crude Oil +Brent Crude Oil +Heating Oil -+ Gasoline -+ Natural Gas -AECO Natural Gas -Newcastle Thermal Coal- 75 79 2.38 2.03 4.33 3.85 62 73 80 2.30 2.15 3.90 3.40 65 72 80 2.25 2.10 3.50 2.90 70 72 82 2.25 2.10 3.50 2.90 75 77 87 2.40 2.05 3.70 3.00 75 78 88 2.40 2.30 3.80 3.10 78 81 91 2.50 2.40 3.40 2.70 78 83 93 2.50 2.35 3.50 2.80 80 87 97 2.65 2.30 3.70 3.00 80 Precious metals Gold * Silver * Platinum * Palladium * Other metals Q4 F Energy SUMMARY COMMODITIES FORECASTS Spot 2015 2016 Nov 20, 2014 Q1 F Q2 F Q3 F Q4 F Q1 F Q2 F Q3 F Note: *London PM Fix $/oz., **LME $/lb ., +Molyb denum equivalent to moly oxide, FOB USA, *+CFR China, 62% Fe, dry $/tonnes, +- $/b b l, -+ $/gal., -- $/mmb tu, ++pre-2011 Uranium price is Nymex U308 Swap indicator post 2011 is NYMEX, +* Japan-Australia Spot, $/tonne FOB, -Japan CIF steam coal marker -Newcastle, $/tonne 20 2015 Global Outlook Rates, FX and Commodities Research 20 November 2014 | TD Securities GLOBAL RATES, FX AND COMMODITIES RESEARCH TEAM New York Eric Green Head, US Rates & Research Strategy 1 212 827 7156 Millan Mulraine Deputy Head, US Rates & Research Strategy 1 212 827 7186 Richard Gilhooly Senior Global Rates Strategist 1 212 827 7187 Blue Macellari Director, Latin America Strategy 1 212 827 7182 Cheng Chen US Strategist 1 212 827 7183 Gennadiy Goldberg US Strategist 1 212 827 7180 Shaun Osborne Chief FX Strategist 1 416 983 2629 David Tulk Chief Canada Macro Strategist 1 416 983 0445 Bart Melek Head of Commodity Strategy 1 416 983 9288 Andrew Kelvin Senior Fixed Income Strategist 1 416 983 7184 Mazen Issa Senior Canada Macro Strategist 1 416 983 0859 Mike Dragosits Senior Commodity Strategist 1 416 983 8075 Martin Schwerdtfeger FX Strategist 1 416 982 7784 Michael Loewen Commodity Strategist 1 416 982 5816 Toronto London Richard Kelly Head of Global Strategy 44 20 7786 8448 Cristian Maggio Head of Emerging Markets Research 44 20 7786 8436 Jacqui Douglas Senior Global Strategist 44 20 7786 8439 Paul Fage Senior Emerging Markets Strategist 44 20 7786 8424 Tim Davis Global Strategist 44 20 7786 8441 Singapore TD Rates, FX & Commodities Research United States Canada Europe United Kingdom Australia New Zealand Emerging Markets Foreign Exchange Commodities Annette Beacher Head of Asia-Pacific Research 65 6500 8047 Prashant Newnaha Asia-Pacific Macro Strategist 65 6500 8047 Research Home Page: 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