GLOBAL FX STRATEGY CURRENCY STRATEGISTS

Daily Foreign Exchange Update Camilla Sutton, CFA, CMT

(416) 866-5470
Sacha Tihanyi
(416) 862-3154
Camilla_Sutton@scotiacapital.com Sacha_Tihanyi@scotiacapital.com
Thursday, August 5, 2010

ECB & BOE ARE ON HOLD; EXPECT CAUTIOUS TRICHET

USDCAD - NEXT SUPPORT LIES AT 1.0100
• CAD outperforms, driven by commodities, M&A rumours and technicals.
• The ECB, BoE and next Tuesday’s Fed, leave central banks as the primary focus. Today’s USDCAD
range should fall
• China to stress test banks for 50%-60% property price declines.
between
• Weak employment data hobbles NZD. 1.0065 &
1.0188.
FX Market Update - As we lead into the North American open, the USD is weak,
equities are strong, commodities and bond yields are mixed. CAD & CHF are outper-
forming, EUR and GBP are mid-performers and NZD & AUD are lagging. Yesterday, the
market took its cues from better than expected US data and news that China is under-
going a new round of bank stress test for a collapse in the property sector. Today, the
focus has turned to central banks (both the ECB and BoE left rates on hold), China
diversifying assets into Japanese and European debt markets and the upcoming US
payrolls and FOMC meeting. We would expect today’s currency markets to be domi-
nated by USD negative flows. C.S.
Source: TraderMade
US Non-Farm Payrolls and the Fed: There are two upcoming events that should
help to shape the near-term outlook for the USD. First is tomorrow’s nonfarm release,
expected to show a gain of 90k private payrolls. The recent USD drop was set off with BOND YIELD SPREADS HAVE PRESSURED THE USD
the release of the disappointing June employment data. Any major surprise tomorrow
could well prove the catalyst for additional pressure on the USD. The second major
upcoming event is Tuesday’s FOMC meeting. Interest rates, which played only a minor
role in the first half of the year, are now one of the most important drivers in FX. Ac-
cordingly, the market has become increasingly focused on the tone from the Fed and
the tools it has available in an environment of below trend growth and falling inflation.
Though we would expect the USD to have another round of strength before year-end,
the near-term drivers favour further weakness before the current move completes. The
DXY (USD index) is testing the 200-day moving average of 80.76 for the third day, a
significant break and close below this level would open up a test down to 79.72. C.S.

Americas
USDCAD (1.0119) • USDCAD has reached a new two and a half month low, falling
through support provided by the July 1.0139 low in the late European session. The
drop is supported by most technical studies, which have yet to show any warn-
ing signals. Today’s crossing of the 50-day moving average below the 200-day tends to
be a good indication of trend (1.0401 and 1.0403, respectively). Over the last five
sessions CAD has outperformed all the primary currencies, gaining 2.5%,
while NOK has gained 2%, GBP & AUD have gained 1.7% and EUR has rallied 1.0%. EUR IMPROVES WITH SPANISH YIELDS, GREECE STAGNANT
The move has been supported by commodity prices, with oil now trading above
$82 and the CRB index having jumped up to 278.98, an almost 6% increase in the last
six sessions. Surging wheat prices are helping to push the index higher, but ongoing
support from emerging market growth is supporting commodities more generally.
However, many of the other drivers of CAD have not kept pace. Interest rate
spreads, equities, currency vol and EUR have moved in CAD’s favour but not to the
same extent. This hints that there is also some flow helping to boost the cur-
rency - this morning’s rumours that there are new energy M&A transactions brewing
could also be helping to support CAD. In summary, the recent CAD rally has
mainly been driven by recovering commodity prices, flow and technicals.
Tomorrow’s US and Canadian jobs release will be an important input for USDCAD
traders. Consensus is looking for Canadian job gains of 12.5k in July, any weakness
will stem fears that a softening US economy is flowing into Canada. From here the next
level of support for USDCAD is provided by both the psychological and historical con-
gestion zone of 1.0100, followed by 1.0065; while resistance lies at 1.0180/90, also
historical congestion - see top chart. We expect today’s USDCAD range to be
between 1.0065 and 1.0188. C.S.
GLOBAL FX STRATEGY Thursday, August 05, 2010

Europe ing PMI. Nevertheless, the trend in both PMI’s

EURUSD (1.3206) • EUR is up 0.3% against the USD after buying in the European session pushed EURUSD to indicates a slowing in momentum and it is
an intraday high just past the 1.32 level ahead of the ECB monetary policy announcement. The ECB left policy unlikely that Bank of England Governor Mervyn
on hold as widely expected; all eyes now shift to Mr. Trichet’s press conference. •The Spanish government King was any more likely to be swayed away
sold €3.5bn in three-year debt today at an average yield of 2.276%, a significant improvement over the last from his dovish policy stance, evident last week
three-year bond sale of €3.9bn in June which sold to yield over 100bps more than today’s auction. Spanish during his testimony before parliament. S.T.
and Greek 10-year yield spreads over German bunds have stabilized, though they remain well above histori-
cally normal levels, denoting a still very obvious risk premium priced into their sovereign credit Asia / Oceania
profile. The market’s impression of Spanish credit has moved in tandem with EURUSD’s improvement, how- USDJPY (86.14) • JPY is stronger against the
ever Greek bond spreads, despite the positive reports of Greece’s progress (the IMF has green-lighted USD today, up 0.2%. USDJPY gained sharply
Greece’s second aid tranche), have failed to come in any further (see graphic). This is an excellent embodi- yesterday on the back of better than expected
ment of the skepticism that we feel over the rally in EUR. The structural problems are all still there, and we are results on both the ADP employment data and
looking at an anemic growth / burdensome debt profile for the currency block as a whole. The best way to the non-manufacturing ISM index. The threat
rationalize EUR’s current performance is to realize that it owes a debt of gratitude to the United States’ slow- of the US joining Japan in a deflationary envi-
ing growth momentum and a renewed focus on deflation, two drivers of USD weakness that imply that EU- ronment has helped to keep US-Japan rate
RUSD can temporarily do better than what EUR’s fundamentals suggest in isolation. S.T. spreads on a downwards trajectory. Yester-
day’s data provided a reason for the US 2-year
GBPUSD (1.5911) • GBP was underperforming ahead of the Bank of England policy announcement, up only rate to tick higher, in line with an upwards
0.2% against the USD. The Bank of England elected to keep their target unchanged at 0.5% and move in USDJPY. Though not shifting in any
the asset purchase target on hold at £200bn, as widely expected. Cable has managed to hit a high shocking manner, the coincidental move be-
on the day post-BoE, though it is showing hesitance close to the 1.60 level following its meteoric surge higher tween rates and USDJPY did serve to remind
over the past two weeks. This week’s economic data has thus far provided more of a mixed bag for the cur- just what is the key driver of USDJPY’s weak-
rency as a weaker than expected service sector PMI played off against a stronger than expected manufactur- nes, as the correlation between USDJPY and
rate spread remains quite elevated at 0.86.
Key Pricing & Levels
S.T.
30 Day 1 Day 1 Week 100 Day 200 Day Pivot 1st Pivot 1st
Spot
Hist Vol Change Change MA MA Support Resistance NZDUSD (0.7281) • The NZD is by far the
USDCAD 12.1 1.0119 -0.0062 -0.0251 1.0308 1.0403 1.0063 1.0223 worst performing major currency today, down
EURUSD 11.7 1.3206 0.0045 0.0126 1.2827 1.3553 1.3137 1.3258 1% against the USD. NZD has already been
GBPUSD 10.6 1.5911 0.0028 0.0298 1.5051 1.5534 1.5833 1.5977 hobbled by a more dovish than expected cen-
USDCHF 11.9 1.0467 -0.0064 0.0056 1.0898 1.0653 1.0380 1.0555 tral bank, and the release of New Zealand’s Q2
USDJPY 9.5 86.14 -0.13 -0.65 90.82 90.46 85.50 86.62 employment data has further fuelled that fire.
AUDUSD 16.3 0.9148 -0.0018 0.0143 0.8860 0.8960 0.9101 0.9190 Employment was expected to gain 0.4%
USDMXN 10.5 12.48 - 0.04 - 0.23 12.62 12.75 12.44 12.57 in the quarter after a 1% gain in the
DXY (USD index) 8.2 80.67 - 0.28 - 0.97 83.70 80.76 80.41 81.03 previous period, however expectations
CRB Commodity 278.98 2.35 12.82 265.29 270.37 N/A N/A were rudely upset by the –0.3% q/q de-
Gold 1,195.55 0.60 27.30 1,187.06 1,152.78 1,185.94 1,204.12 cline. NZD has been a particular victim against
WT Crude (Nymex) 82.19 -0.28 3.83 78.30 77.90 81.55 82.90 AUD as AUDNZD is now testing resistance at
Nat Gas (Nymex) 4.74 -0.00 -0.09 4.38 4.74 4.65 4.80 the 1.26 level for the first time since mid-May,
BoC Noon Rate 1.0185 CAD (close from Bloomberg not BoC): 1.0181 with the upside in the pair tracking the evolu-
Pricing Source: Bloomberg 8/5/2010 tion in rate spreads as the market prices mone-
Today's Releases & Speakers tary policy aggressiveness out of the Reserve
Time Bank of New Zealand. S.T.
Country Release Period Cons Last Significance
(EST)
08:30 CA Building Permits MoM JUN 1.8% -10.8% Medium USDCNY (6.7714) • China’s banking regulator
08:30 US Initial Jobless Claims 455K 457K Medium has told financial institutions to stress their
08:30 US Continuing Claims 4515K 4565K Medium loan portfolios for worst-case scenarios of a
08:30 EC Trichet Speaks at ECB Monthly News Conference High 50%-60% drop in property prices, hurting
10:30 US ICSC Chain Store Sales YoY JUL -- 3.0% Medium Chinese equities as financial stocks led the
19:50 JN Official Reserve Assets JUL -- $1050.2B Medium Shanghai composite lower today. The market
01:00 JN Leading Index CI JUN P 98.7 98.6 Medium remains on the more tentative side of its out-
04:30 UK PPI Input and Output JUL Medium look for CNY appreciation as the 1-year NDF
04:30 UK Industrial Production (MoM) JUN 0.1% 0.7% Medium against the USD is pricing in a 1.3% apprecia-
04:30 UK Manufacturing Production (MoM) JUN 0.4% 0.3% Medium tion in CNY, well below the 2.2% average for
07:00 CA Net Change in Employment JUL 12.5K 93.2K High 2010. The threat of internal economic instabil-
07:00 CA Unemployment Rate JUL 7.9% 7.9% High ity in the country, relating to the risk of a prop-
erty price collapse, would certainly make the
Suggested Reading external environment more important as a
Job Growth Remains Weak in Private Sector, Sudeep Reddy, WSJ (August 4, 2010) supporter of Chinese growth and suggest a
Lessons on Fighting the Financial Crisis, David Wessel, WSJ (August 4, 2010) significant moderation in the expected pace of
Japan Faces Uphill Battle in Curbing Yen's Rise, Alex Frangos and Andrew Monahan, WSJ (August 4, 2010) renminbi appreciation. S.T.
Why America sees red in corporate China, David Piling, FT (August 4, 2010)

2
GLOBAL FX STRATEGY Thursday, August 05, 2010

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

Dial: 416-695-5800
Passcode: 77386016#

This month's 20-minute call is hosted by Sacha Tihanyi and discusses:

1) Economic and FX forecast update - less tightening for the Fed and BoC
2) USD decline - factors driving the downturn

The presentation can be found at:

http://www.scotiafx.com/conference/index.htm

Conference call commands

Press 1 – Skip backward 5 seconds
Press 3 – Skip forward 5
Press 4 – Skip backward 5 minutes
Press 6 – Skip forward 5 minutes
Press 5 – Pause the playback

If you have any questions, please contact:

Camilla Sutton at (416)866-5470, camilla_sutton@scotiacapital.com or
Sacha Tihanyi at (416)862-3154, sacha_tihanyi@scotiacapital.com

This report is prepared by The Bank of Nova Scotia (Scotiabank) as a resource for the clients of Scotiabank and Scotia Capital. Opinions, estimates and projections con-
tained 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 The Bank or its affiliates or any of their employees incur any responsibility. Neither Scotiabank or its affiliates
accept any liability whatsoever for any loss arising from any use of this report or its contents. This report is not, and is not constructed
as, an offer to sell or solicitation of any offer to buy any of the currencies referred to in this report. 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. Directors, officers or employees of Scotiabank and its affiliates
may serve as directors of corporations referred to herein. Scotiabank and/or its affiliates may have acted as financial advisor and/or underwriter for certain
of the corporations mentioned herein and may have received and may receive remuneration for same. This report may include forward-looking statements about
the objectives and strategies of members of the Scotiabank Group. Such forward-looking statements are inherently subject to uncertainties beyond the control of
the members of the Scotiabank Group including but not limited to economic and financial conditions globally, regulatory development in Canada and elsewhere, technologi-
cal developments and competition. The reader is cautioned that the member's actual performance could differ materially from such forward-looking statements. You should
note that the manner in which you implement any of strategies set out in this report may expose you to significant risk and you should carefully consider your ability to bear
such risks through consultation with your legal, accounting and other advisors. Information in this report regarding services
and products of Scotiabank is applicable only in jurisdictions where such services and products may lawfully be offered for sale and is void where prohibited by
law. If you access this report from outside of Canada, you are responsible for compliance with local, national and international laws. Not all products and services
are available across Canada or in all countries. All Scotiabank products and services are subject to the terms of applicable agreements. This research and all information,
opinions and conclusions contained in it are protected by copyright. This report 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 in each case the prior express consent of Scotiabank.
Scotiabank is a Canadian chartered bank. The Scotia Capital trademark represents the corporate and investment banking businesses of The Bank of Nova Scotia,
Scotia Capital Inc. and Scotia Capital (USA) Inc. - all members of the Scotiabank Group. TM Trademark of The Bank of Nova Scotia.