TD BANK JUL 14 Global Markets

8/9/2019 TD BANK JUL 14 Global Markets

1/18

LONDON TORONTO NEW YORK SINGAPORE

Global MarketsJuly 14, 2010

Rates & Foreign

Exchange Research

MANAGING LOW GROWTH AND RETURN

EXPECTATIONS IN A MORE VOLATILE WORLD

CONTENTS

Lead Article: Managing Low Growth and

Return Expectations in a More Volatile

World 1

US Fixed Income 5

Canadian Fixed Income 6

UK Fixed Income 7

Australian Fixed Income 8New Zealand Fixed Income 9

US Dollar 10

Canadian Dollar 11

Euro 12

Japanese Yen 13

UK Pound 14

Australian Dollar 15

New Zealand Dollar 16

Swiss Franc 17

Summary Foreign Exchange Table 18

Downside growth risks opening-up

The global economy is at a sensitive point in the cycle as it transitions

from policy driven expansion to sustained private demand. Global purchasing

managers surveys peaked in May, and the growth tailwind from the inventory

rebuild is blowing with less force. We are at that point in the recovery where

data surprises are no longer all to the upside, and signicant variation in growth

forecasts is distributed about the globe adding to forecast uncertainty.

Since the last edition ofGlobal Markets, surprises have been to the downside

and the G20 has signed-up to short-term, growth depressing, scal austerity.

Market based measures of ination expectations have fallen in response, and USten year yields have declined about 50 basis points to about 3.00% pulling-down

interest rates everywhere.

Yet, getting traction from lower interest rates is difcult with the worlds

banking system still in a state of disrepair and incomplete recovery, as monetary

policy is partially

disconnected from

both households and

small and medium

sized business. Faith

and confidence in

sustained economicrecovery is weak,

and an unwelcome

uncertainty has re-

turned to risk asset

markets, uncertainty

that will be slow to

dissipate.

We have made

much of the distinc-

tion between risk and

uncertainty, where the latter prevents investors from making well calibratedinvestment decisions. So, even as interest rates declined, risk asset markets have

struggled to hold onto their start-of-the-year levels. This uncertainty has been

reected in much higher volatility.

European mismanagement of the Greek scal challenge transformed a con-

tainable problem into an incipient banking system crisis. A negative conuence

of uncertainty owed to gut risk assets and raise fear of economic downside jus

at the time when the global industrial production recovery was peaking.

Guarding against downside risk means more quantitative easing

With bank credit barely available, debt market issuance unimpressive, and

risk assets trading in a volatile range, concern about the durability of the globa

HIGHLIGHTS

Growthissettlinginatasub-par

rate and downside risks domi-

nate

Quantitativeeasing is possible

but doubts about its effective-

ness make it unlikely now

Interestrateswilllikelybekept

lower for longer to facilitate

structural adjustment

Growthandreturnexpectations

should be kept low and reason-

able

Andwithmanydownsideeco-nomicandnancialriskslurking

beneath the surface

Financialvolatilityislikelytobe

high and range bound making

strategic investment decisions

difculttoembrace

Thepublication also includes

quarterly interest rate and ex-

change rate forecasts for the

US, Canada, UK, Australia, and

New Zealand, and also offers ad-

ditional exchange rate forecastsfor the Japanese yen, the euro,

the UK pound, and the Swiss

franc

MAJORGLOBALEQUITYMARKETS:STRUGGLING

TO HOLD START OF YEAR LEVELS

70

75

80

85

90

95

100

105

110

Jan.09 Feb.09 Mar.09 Apr.09 May.09

S&P 500

TSX

DAX

Nikkei

Source: Bloomberg

Index (Jan 6 2009 = 100)


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Rates & FX Research

2

recovery has put pressure on central banks to once again en-

join with quantitative easing, QE, potentially adding another

measure of cash to what is already abundant global liquidity.

The bar to delivering more QE at the Fed, the ECB andthe BoE is fairly high, both analytically and politically.

QE is not a near-term risk in the absence of another nega -

tive shock, as there are signicant reservations about how

effective a renewed round of QE would be either to keep

faith in the recovery alive, or to effectively boost demand

in response to any downside shock.

Casting doubt on the effectiveness of more

quantitative easing

Why doubt QEs effectiveness? First, commercial banks

in the most effected countries the US and the UK haveessentially hoarded the cash pushed into their balance sheets

by the Fed and the BoE, and higher reserve holdings have

deed our understanding of how the supply of money cre-

ates deposits and loans. Large reserves have not stimulated

renewed and strong loan growth. The desire to hold more

cash is shared by the nancial and non-nancial sectors

alike after the 2008 crisis temporarily disabled the banking

system, and holdings of cash seem in excess of precaution-

ary needs.

QE should depress benchmark government rates, mak-

ing spreads to risky assets more attractive, and by loweringinterest rates, entice precautionary savings to shift towards

current spending. But instead, we continue to see excessive

hoarding of cash that will not aid economic activity until it

is put fully to use.

The desire by commercial banks to hold big reserves at

the central bank seemed understandable when tightening

bank capital requirements and regulatory demands for more

liquidity were at their height after the 2008 crisis, but this

seems less pressing today as credit standards have broadly

ceased to tighten.

Nonetheless, global regulators seem set on much higher

capital requirements, lower leverage ratios, and high li-

quidity requirements all of which constrain top line credi

creation at a time when the economy needs access to credit

in order to grow. Structural headwinds remain intense, and

central banks and regulators appear not to have managed

well the conict between achieving structural stability and

facilitating strong near-term growth.

Secondly, QE also works through non-bank nancia

players, especially institutional investors. QE was expected

to induce a change in investor behaviour. Risk-free assets

VOLATILITY AND RISK SPREADS STILL

RELATIVELY HIGH

0

20

40

60

80

100

120

1/00 9/05 6/06 4/07 12/07 9/08 6/09 3/10

0

200

400

600

800

1000

1200

1400

1600

1800

2000

VIX (lhs)

MOVE Index* (lhs)

Corp-Spreads* (lhs)

CMBS Spread (rhs)

*MOVE Index (an index of US Treasury Volatility), indexed to VIX index in 2005; **Corp-

Spreads (BBB corp spreads over UST'S), indexed to VIX index in 2007; Source Bloomberg

AAA CMBS -Treasury SpreadIndex (March 16 2007 = 16.8)

COMPRESSION IN YIELDS HAS COME FROM

LOWER INFLATION EXPECTATIONS

1.0

1.5

2.0

2.5

3.0

3.5

4.0

Jul.09 Sep.09 Oct.09 Dec.09 Jan.10 Mar.10 May.10 Jun.10

10-Yr Real

10-Yr Break-Even

10-Yr Nominal

%

Source: Bloomberg

LOWER GROWTH AND INFLATION

EXPECTATIONS A COMMON FORCE FOR LOWER

RATES

2.0

2.5

3.0

3.5

4.0

Jan.09 Apr.09 Aug.09 Nov.09 Mar.10 Jun.10

Canada

U.S.

Germany

Source: Bloomberg

%


3/18


Rates & FX Research

3

essentially government bonds -- taken onto the central

banks balance sheet are paid for by creating reserves leav-

ing investors with cash.

The spring of 2009 was the ideal time to execute quantita-

tive easing and push cash into institutional investors, as the

preconditions to success were highly favourable. Long-run

measures of equity value, and other risk assets, such as price-

earnings ratios and price-to-book, showed unambiguous

value signalling that the risk of loss was likely to be low.

Given that the returns to cash are deeply negative in realterms, this creates a push out of cash into risky assets in the

search for returns that are closer to investment hurdle rates

some distance from current cash rates, which in turn helps

shape an environment of rising condence through capital

gains and recovery of lost wealth. This push is powerful

when value is good, ination is expected to be positive, and

risk of loss is low. It is not so powerful when value is not so

good, and where expectations of deation create a positive

real return to cash should price changes turn south. The risk

of loss from exposure to risk assets is now comparatively

large, undermining the likelihood QE will be as effective.

ButifQEsinthecardsdoitswiftlyanddoalot

While it may be less effective than before, the asymmet-

ric risk of deation argues that QE might best be used sooner

rather than later and more rather than less in the hope that

it changes perceptions of the balance of risks and is trans-

mitted through the nancial and real economy through the

expectations channel. Quantifying how to proceed is hard

to calibrate precisely when the transmission mechanism is so

vague, so any action has to be decisive and impressive. No

central bank seems willing to take on this commitment now

If a period of deation settles-in, real interest rates ris

deterministically increasing the incentive to hold cash overisky assets, sapping an economys growth momentum. Thi

fear could potentially rise as the pace of economic growth

decelerates in the second half of 2010 and deation risk

slip into uncertain macro forecasts.

We believe QE will nd it harder to leverage the push

from cash today, and it is not clear that pushing asset price

excessively higher to compensate for a poorly performing

banking system justies the risks of a renewed asset price

bubble. Moreover, neither private nor public actors hav

the ability to absorb another negative shock.

Making liquidity abundant in the face of crisis wa

what QE was designed to do, and it did so to great effec

in secondary debt markets, which at the end of 2008 had

ceased to function. Corporate debt spreads were much wide

than the spread consistent with a reasonable probability o

default, even in an environment of considerable economi

and nancial distress, so the big issue was eliminating the

illiquidity premium.

The bank lending market and secondary debt market

are not substitutes: they are complements, so abundan

bank liquidity was a necessary condition to achieve relief in

secondary debt markets. The Feds acquisition of mortgag

backed securities introduced massive amounts of neede

liquidity into the system and kick-started the mortgag

market and brought mortgage spreads down.

Interest rate relief translated into household and corpo

rate cash-ow relief as mortgages and loans were re-priced

facilitating debt reduction or renewed expenditures. Thi

was very helpful in stabilizing the level of prices and output

However, the circumstances that allowed unconventiona

monetary policy to get solid traction in the spring of 2009

are now absent. Equity markets are close to long-run faivalue, suggesting that risk of loss is higher than it was in

March 2009 as the 12% Q2 decline in the S&P made clear

The push from cash is now much weaker.

With the initial conditions for QE less conducive, it i

not clear that a renewed round of QE can really help, so

we will just have to wait for the banking system to become

sufciently capitalized before we should expect a highe

rate of economic expansion and a sustained take up of spare

capacity.

CENTRAL BANK BALANCE SHEETS: TRYING

HARD NOT TO EXPAND

0.0

0.5

1.0

1.5

2.0

2.5

3.0

08 09 10

Federal Reserve

ECB

BoE

Source: Flow of Funds, Bloomberg, ECB

Index (Jan. 2008 = 1)


4/18


Rates & FX Research

4

A slow growth world is a low return world

Recoveries from nancial crisis are half-speed recover-

ies precisely because the demand for credit is slow, and the

nancial systems ability to supply credit is constrained. So,

we should expect recovery to be slow, disinationary slack

to remain, and interest rates to remain low. The post-war

policy power to reduce economic pain in the face of eco-

nomic distress is all but tapped-out, and expectations that

central banks and QE can provide a quick x are too high.

There are a few key risk events to clear over the summer

months, not least of which is the European bank stress test.

To earn some market credibility, some banks will be found

to be insolvent, and so the next hurdle will be how to resolve

identied insolvency: recapitalization or liquidation. Either

way, there will be some renewed nancial burden for already

over-burdened states. And, with scal drag just around the

corner, more unemployment could mean more bank losses

and more insolvency.

The round of credit rating agency downgrades is likely

not over, and the Euro remains sensitive to more bad scal

news. Moreover, the ECB continues to deny the Eurozones

liquidity needs, and the drag from peripheral Europe which

needs a private sector offset to harsh scal contraction has

barely got going. Meanwhile, signicant outperformance

by the German economy relative to peripheral Europe willraise the hurdle for intervention to stave off disinationary

or even deationary risks for parts of the Eurozone. There

are more negative surprises ahead.

And what about our hopes that Asia can sustain globa

demand to backstop structural drag from the developed

world? Dont bet on it. Asias development plan has devoted

capital to meeting the import needs of the developed worldand while developing Asia acknowledges that it needs to

absorb more of its own output, it cannot redirect productiv

capacity to home markets overnight. Any attempt to do so

would inevitably lead to slower global growth as resource

were redirected. Enterprises can disappear overnight, bu

it takes time for their replacements to emerge.

Correspondingly, investor return expectations likely

remain too high in a low ination world when real interes

rates need to remain abnormally low to achieve recovery

The returns to risk will also likely be low, and given tha

the systems capacity to absorb shocks is small at a vulnerable time, volatility should remain higher than we have

been used to.

When volatility is trading to the bottom end of recen

higher ranges, it remains time to buy insurance rather than

take on more exposure to squeeze-out a bit more return

Risk asset markets are likely to remain highly tactical in th

months ahead and navigating a period of slow economic

growth for those conditioned to high growth is going to b

a challenge.

Andrew Spence

Global Head, Rates and FX Research

416-308-460

EM EXPORTS STILL LAG DEVELOPED WORLD

DEMAND

-40

-30

-20

-10

0

10

20

30

40

5/105/095/085/075/065/05

-15

-10

-5

0

5

10

15

EM Exports* (rhs)

US ISM Import Data (lhs)

*Taiwan and South Korea; Source: Bloomberg

3-month 3m% chan e

JP MORGAN'S GLOBAL PMI

LIKELY PEAKED IN APRIL

30

35

40

45

50

55

60

1/08 5/08 9/08 1/09 5/09 9/09 1/10 5/10

Source: JP Morgan

Index


5/18


Rates & FX Research

5

US FIXED INCOME

Growth in the US is peaking and while we believe the

recovery remains in place, the pace of that recovery has be-

come less certain and policy efforts designed to encourage

more borrowing and more spending are at risk of failing.

Risk taking requires clarity and that remains elusive. The

key question is whether the deceleration in the real economy

will produce further downward pressure on core ination,

and how much of a slowdown is in the ofng. Thus far the

economic data has been pointing to little more than a mod-

eration in growth. However, broader support for growth is

fading. The inventory repletion cycle is leveling off, net

exports have transitioned to a net drag on growth, and scal

austerity in some form is fast approaching.

The overall mix of moderating economic activity anddisination continues to look positive for bonds and poor

for risk assets more broadly. Treasury yields have rallied as

real rates and ination expectations have fallen, and market

positioning remains favorable. Net short positions have been

squeezed, but bond portfolio managers have still not made

the adjustment from short to neutral. Real yields (deated

using core CPI or 10 ination swap) are not unsustainably

low and are actually above the 7yr rolling average. Further

real yield compression could therefore magnify the downside

in nominal yields as ination drifts lower. At the same time

net corporate borrowing remains in a steady downtrend,treasury issuance has rolled off its high, and core ination

poised to decelerate further over coming months.

It is little surprise that real rate expectations continue to

recede in this environment. In April, the market was pricing

in almost two rate hikes by Feb 2011. The market has since

pushed out those two rate hikes to December 2011, as the

prevailing view of lower for longer has gained more trac-

tion. Given the entire cross currents in this recovery, we also

expect the Fed will remain more rather than less cautious.

We have modestly pushed back the beginning of the

tightening regime to Q2 2011 and expect year end 2011

fed funds to come in around 1.00%, an expectation that

US 3-MONTH T-BILL RATES & 10-YEAR

GOVERNMENT BOND YIELDS

0

1

2

3

4

5

6

2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011

0

1

2

3

4

5

6

Actual data to: Q2 2010; Forecast by TDBFG as at July 2010;Source: Federal Reserve Board/Haver Analytics

%

10-yr Gov't Bond Yield

3-mo T-Bill yield

%

Forecast

US FIXED INCOME OUTLOOK

Spot Rate 2009 2010 2011

12/07/10 Q1 Q2 Q3 Q4 Q1 Q2 Q3F Q4F Q1F Q2F Q3F Q4F

Fed Funds Target Rate (%) 0.25 0.25 0.25 0.25 0.25 0.25 0.25 0.25 0.25 0.25 0.50 0.75 1.00

3-mth T-Bill Rate (%) 0.14 0.18 0.18 0.11 0.05 0.16 0.18 0.25 0.35 0.35 0.70 1.05 1.25

2-yr Govt. Bond Yield (%) 0.64 0.80 1.11 0.95 1.14 1.02 0.61 0.70 0.80 1.05 1.30 1.50 1.70




10-yr-2-yr Govt. Spread (%) 2.40 1.86 2.42 2.36 2.70 2.81 2.32 2.35 2.20 2.35 2.30 2.20 2.10

f: Forecast by TD Bank Financial Group as at July 12, 2010; All forecasts are for end of period. Source: Bloomberg, TDBFG

remains slightly more aggressive than is currently priced in

the market. This expectation is premised by what we expec

will be an upward sloping growth and ination prole a

that time, one that will warrant a move off the zero bound

Quantitative easing is another, though admittedly, contrary

consideration. While we recognize the growing case for such

actions, there is simply not sufcient evidence thus far to

endorse such a move in our forecast prole. Moreover, the

hurdles at the FOMC given its current composition sugges

a pretty high threshold in 2010.

The 10 year treasury yield is expected to hold around

3% at the end of Q3, driven by ongoing uncertainty, falling

ination, and in an August month which is normally the mos

bullish for rates in the calendar year. In Q4 it moves lower inyield owing to these considerations and on technical factors

but closes out the quarter at 3.0 %. Thereafter, rates move

higher and the curve bear attens. The year end 2011 targe

of 3.8% is achieved as the deation scare and term premium

are unwound and higher real rate expectations gain traction

Eric Green, Chief U.S. Strategist, 212-827-7156


6/18


Rates & FX Research

6

CANADIAN FIXED INCOME

Canadian bonds have rallied by 20-30bps across the

yield curve since the last Global Markets in mid-June, par-

roting a similar shift elsewhere in the world. Primarily, this

has reected a souring of attitudes towards global growth

prospects and the ination outlook, speculation that some

central banks might re-engage quantitative easing, and gen-

eral risk-aversion. Despite the rally, Canadas 10-year yield

is still more than 60bps above its early 2009 low, indicating

that current concerns are an order of magnitude less severe

than during the worst of the credit crunch.

In fact, notwithstanding the substantial rally in Cana-

dian bonds, it is fair to argue that Canada continues to waft

blissfully above the fray, barely affected by the weighty

reality of global events below. In contrast to much of theworld, Canadian credit is owing, jobs are being created at

a blistering pace, and the housing market is booming. Ac-

cordingly, Canadian monetary policy has diverged from the

global trend, with the Bank of Canada initiating its tighten-

ing sequence by adding 25bps to the overnight rate on June

1st. At present, the market anticipates another rate increase

in late July, but has serious reservations about aggressively

pricing in further hikes. In turn, the short end of the Canadian

curve has an unsustainably low yield.

TD believes that the Bank of Canada has more scope for

rate increases than the market imagines. Domestic condi-tions argue for an overnight rate discernibly higher than it

is right now, closer to 1.00% according to various simple

monetary policy rules, and destined to rise further as the re-

covery progresses. What (rightly) keeps the Bank of Canada

from immediately seeking out this destiny are several global

risks that skew to the downside. It is this precarious balance

that ultimately denes the Bank of Canadas actions.

While TD remains comfortably on the high side of the

market consensus for the Bank of Canada, we have none-

theless scaled back our hiking expectations to reect the

aforementioned global risks and slowing second half growth

removing one hike from late 2010, and another from late

2011. Nonetheless, the prospect of a Bank of Canada over-

night rate at 2.50% at the end of 2011 still argues forcefully

for higher yields, and while the near term will continue to be

coloured by ckle shifts in risk appetite, the medium term

and beyond should reveal a period of rising yields in Canada

and a attening curve. Given our newly downgraded U.S

forecast, we expect Canadian bonds to underperform the

U.S. across the curve into year-end 2010.

CANADIAN 3-MONTH T-BILL RATES & 10-YEAR


0

1

2

3

4

5

6

2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011

0

1

2

3

4

5

6

Actual data to: Q2 2010; Forecast by TDBFG as at July 2010;

Source: Bank of Canada/Haver Analytics

%


3-mo T-Bill yield

%

Forecast

CANADIAN FIXED INCOME OUTLOOK

Spot Rate 2009 2010 2011


Overnight Target Rate (%) 0.50 0.50 0.25 0.25 0.25 0.25 0.25 1.00 1.25 1.75 2.00 2.25 2.50

3-mth T-Bill Rate (%) 0.51 0.35 0.25 0.23 0.19 0.29 0.51 1.10 1.35 1.85 2.10 2.35 2.55





10-yr-2-yr Govt. Spread (%) 1.53 1.70 2.15 2.04 2.13 1.83 1.69 1.40 1.35 1.30 1.20 1.10 0.95

Canada-US Spreads

3-mth T-Bill Rate (%) 0.37 0.17 0.07 0.12 0.14 0.13 0.33 0.85 1.00 1.50 1.40 1.30 1.30


5-yr Govt. Bond Yield (%) 0.67 0.09 -0.08 0.24 0.09 0.36 0.55 0.80 0.85 0.75 1.00 1.05 0.95

10-yr Govt. Bond Yield (%) 0.16 0.12 -0.17 0.00 -0.23 -0.26 0.15 0.30 0.40 0.20 0.20 0.20 0.15

30-yr Govt. Bond Yield (%) -0.30 0.03 -0.47 -0.21 -0.56 -0.59 -0.24 -0.15 0.00 -0.35 -0.25 -0.20 -0.25


Eric Lascelles, Chief Canada Macro Strategist

416-982-8979


7/18


Rates & FX Research

7

UK FIXED INCOME

A dash of European stability and a pinch of a credible

budget can make a big difference. While European yields

have been marching higher as the ECB normalizes liquidity,

gilt yields are slightly lower than one month ago and 8-13

basis points lower on 2s and 10s since the release of the UK

budget. The June 22nd budget forecasts net debt to GDP

peaking at 70% of GDP by the 2013/14 scal year one year

earlier and four percentage points lower than the previous

budget. The risk of a rating downgrade will continue to

lurk over the market, but the message appears to be that if

the government can implement the budget as is, even if the

economy is slightly weaker than expected, then the U.K.

should be able to retain its AAA rating.

The more pressing driver on the short end of the curvecontinues to be the strong three-way risks for the Bank of

England. While ination is easing towards the 2% target

by year-end, it also continues to surprise consensus to the

upside. Ination expectations remain elevated, survey evi-

dence suggests there is not as much slack in the economy

as the fall in GDP purports, and the BoE has at least one

dissenter looking for rates to move higher.

But demand data continues to disappoint on the down-

side, GDP in the second half of the year is unlikely to breach

a 2% annualized pace, and one-off factors of currency

depreciation and tax increases, as well as scal tightening,continue to be cited by doves as reasons to look through the

current pressures. We see the BoE beginning to raise rates

in the rst quarter of 2011, and even see a good tail risk this

comes a quarter earlier, but OIS markets have yet to fully

price in even one rate hike over the next 12 months. As the

move from the BoE is priced in by the market in the second

half of the year, we see the currency and short-end yields

being supported from their lows.

Nevertheless, the normalization in rates will be quite

gradual. Real 2-year yields will struggle to turn positive as

nominal yields just touch 2.50% by end-2011. As 10-year

yields move towards 4.25% by end-2011, this will still leave

the 2s10s spread at a historically steep 175 basis points

GBP strength against the EUR will have to do most of the

work in reining in ination as U.K. yields are held back by

a sluggish domestic recovery and the gravitational pull of

U.S. yields only slowly traipsing off the oor.

Richard Kelly, Senior Strategis

+44 20 7786 8448

UK 3-MONTH T-BILL RATES & 10-YEAR


0

1

2

3

4

5

6

Mar.03 Mar.05 Mar.07 Mar.09 Mar.11


Source: Bank of Canada/Haver Analytics

%


3-mo T-Bill yield

%

Forecast

UK FIXED INCOME OUTLOOK

Spot Rate 2009 2010 2011


Bank Rate Target (%) 0.50 0.50 0.50 0.50 0.50 0.50 0.50 0.50 0.50 0.75 1.00 1.25 1.50

3-mth T-Bill Rate (%) 0.49 0.67 0.55 0.41 0.46 0.57 0.54 0.65 0.70 1.05 1.30 1.45 1.70

2-yr Gilt Yield (%) 0.78 1.19 1.33 0.88 1.32 1.16 0.75 1.10 1.25 1.95 2.10 2.35 2.50

5-yr Gilt Yield (%) 2.06 2.36 2.88 2.64 2.81 2.71 2.07 2.20 2.25 2.65 2.90 3.25 3.50

10-yr Gilt Yield (%) 3.38 3.17 3.69 3.59 4.02 3.94 3.36 3.50 3.55 3.80 3.90 4.15 4.25

30-yr Gilt Yield (%) 4.19 4.17 4.40 4.09 4.42 4.53 4.17 4.10 4.15 4.20 4.35 4.45 4.50

10-yr-2-yr Gilt Spread (%) 2.60 1.97 2.36 2.71 2.70 2.78 2.61 2.40 2.30 1.85 1.80 1.80 1.75



8/18


Rates & FX Research

8

AUSTRALIAN FIXED INCOME

The RBA left the cash rate unchanged at 4.5% for both

the June and July RBA Board meetings, citing that prevail-

ing average lending rates are appropriate for now. Thosedecisions were widely expected. However, with ongoing

risk aversion and concerns that a sluggish Europe and US

will spillover into Asian growth prospects, there has been

a near-indenite shelving of expectations for higher cash

rates in Australia. Responding to global matters more

than domestic, bonds yields continued to plummet in the

last month: 3-year yields down 18bp to 4.58% and 10-year

yields down 23bp to 5.18%. In other words, 3-year yields

are practically at to cash (sometimes yields are sub-cash

in the more risk-off trading days) and there is next to no

term premium priced.Nevertheless, safe-haven appetite for Australian AAA-

rated/high-yield bonds is ongoing, with auctions attracting

a bid/cover ratio of over 3 in recent weeks. There are hits

and misses, such as a recent ination-linked bond attract-

ing a bid/cover of nearly 6, but a new mid-curve maturity

(Jun 16) attracted a thin bid/cover of 1.9. We suspect the

4.75% coupon of the 16s is relatively unattractive compared

with its mid-curve neighbours of 6.25% for the Apr 15s and

6.00% for the Feb 17s.

The RBAs most recent communiqu in early July stated

that growth in Asia was very strong, ination appearslikely to be at or above the 3% upper tolerance level, and

the terms of trade are approaching their peak of two years

ago. We believe restrictive monetary policy is appropri-

ate for Australia given strong economic ties to the fastest

growing region in the world; the economy is already fully

employed; and ination is already at the top of the RBAs

2-3% target band. However, acknowledging ongoing uncer-

tainty about global growth prospects, we reluctantly pushed

out 50bp of tightening, so that the cash rate is forecast to

be 5% by year end and 6% by end-2011.

The OIS market in the last month has oscillated between

AUSTRALIA FIXED INCOME OUTLOOK

Spot Rate 2009 2010 2011


Cash Target Rate (%) 4.50 3.25 3.00 3.00 3.75 4.00 4.50 4.75 5.00 5.25 5.75 6.00 6.00

3-mth Bank Bill Rate (%) 4.87 3.78 3.20 3.20 4.00 4.45 4.40 5.25 5.50 5.75 6.20 6.20 6.20




10-yr-3-yr Govt. Spread (%) 0.60 1.24 1.45 0.66 0.98 0.51 0.68 0.40 0.25 0.25 0.20 0.00 0.00

Forecast by TDBFG as at July 14, 2010; All forecasts are for end of period. Source: Bloomberg, TDBFG

AUSTRALIAN 3-MONTH T-BILL RATES & 10-YEAR


0

1

2

3

4

5

6

7

8

9

2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011

0

1

2

3

4

5

6

7

8

9


Source: Reserve Bank of Australia/Haver Analytics

%


3-mo T-Bill yield

%

Forecast

pricing 20% chance of a 25bp cut in the cash rate to 20%

chance of a 25bp hike in the cash rate by year end literally

swaying with the risk on/risk off breeze. This is unhelpful

and best ignored for now.

We have dramatically shaved down our bond yield

forecasts, primarily due to our US colleagues forecasting

later and lesser tightening by the US Federal Reserve and

subsequent slashing of bond yield forecasts. We still expec

the Australian curve to underperform the US yield curve due

to higher ination and interest rate expectations.

The 3-10 year curve is currently +60bp, and we expec

attening to continue to around +25bp heading into year

end. Into 2011 we have the unusual forecast of a zero

yield curve, with the short end beholden to higher domes-tic interest rates, but the long-end beholden to lower bond

yields globally due to excess capacity and weak inationary

pressures.

Annette Beacher, Senior Strategist

+65 6500 8047


9/18


Rates & FX Research

9

NEW ZEALAND FIXED INCOME

New Zealand bond yields in the last month have dramati-

cally underperformed their Australian cousins, primarily due

to the RBNZ only just embarking on the normalization of

the cash rate. The cash rate was at last lifted by 25bp to

2.75% last month and the RBNZ is widely tipped to fol -

low up with +25bp to 3% later this month. While all cash

rate increases have been priced out of the Australian curve,

the New Zealand curve has priced additional tightening at

each opportunity for quite some time. Subsequently, while

3-year and 10-year yields have rallied in the past month on

overall safe-haven trading, yields have only fallen by 9bp

and 10bps respectively, and spot yields are well above the

prevailing cash rate.

While we were wrong expecting the RBNZ to be more pro-active in restoring the stance of monetary policy to

more neutral levels like the RBA, it is now unfortunate that

the RBNZ are embarking on a tightening course just as the

economy appears to have stalled. Recent activity data have

stagnated such as retail sales, home sales and house prices.

The OIS market has priced most of our near-term cash

rate view, with a cash rate of 3.5% by year end (TD 4%),

but stalls thereafter. We remain of the view that cash rates

are highly unlikely to sit at a still-accommodative 4% by the

end of next year and expect further tightening by the RBNZ

next year back to more neutral levels.As with Australia, we have lowered our New Zealand

bond yield forecasts due to much reduced US yield forecasts.

We still expect the New Zealand yield curve to underperform

the US curve (due to higher ination and interest rates as

well as reecting risk of holding AA+ paper) with spreads to

the US expected to continue rising from the current +230bp

to +285bp by year end. We also expect underperformance

against AAA-rated Australia, with the current spread of

+25bp expected to trade closer to +55bp by year-end.

The 3-10 year curve is currently +114bp, and we expec

attening to continue to around +65bp heading into year

end. Into 2011 we have a similar situation to Australiapublishing the unusual forecast of a zero yield curve by

the second half of next year, with the short end beholden to

higher domestic interest rates, but the long-end beholden to

lower bond yields globally due to excess capacity and weak

inationary pressures.

NEW ZEALAND FIXED INCOME OUTLOOK

Spot Rate 2009 2010 2011


Cash Target Rate (%) 2.75 3.00 2.50 2.50 2.50 2.50 2.75 3.25 4.00 5.00 6.00 6.50 6.50

3-mth T-Bill Rate (%) 2.87 3.00 2.78 2.80 2.90 3.90 2.70 3.50 4.50 5.50 6.30 6.60 6.60




10-yr-2-yr Govt. Spread (%) 1.14 1.35 2.38 1.59 0.81 1.43 1.17 0.90 0.65 0.35 0.35 0.00 0.00

Forecast by TDBFG as at July 14, 2010; All forecasts are for end of period. Source: Bloomberg, TDBFG

NEW ZEALAND 3-MONTH T-BILL RATES & 10-

YEAR GOVERNMENT BOND YIELDS

0

1

2

3

4

5

6

7

8

9

10

2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011

0

1

2

3

4

5

6

7

8

9

10


Source: Reserve Bank of New Zealand/Haver Analytics

%


3-mo T-Bill yield

%

Forecast

Annette Beacher, Senior Strategis

+65 6500 804


10/18


Rates & FX Research

10

The USD has stabilized over the course of the past

month or so but the underlying trend remains favourable

and we continue to look for broader USD gains through the

remainder of the year even as US fundamental challenges

remain apparent.

The US economic recovery has stumbled, with labour

market gains remaining weak and the housing sector still

soft. At the same time, inationary pressures remain very

benign. These factors will keep the Fed on hold for longer

than we had previously expected. With US interest rates

remaining depressed while yields have risen elsewhere,

interest rate differentials have become less USD supportive

than they were in May and June. Fortunately for the USD,

the market appears to have become somewhat less sensitiveto interest rate spreads since April.

However, the economic outlook is not entirely incon-

sistent with our expectations and the US economy is still

expected to produce decent growth in 2011 (at a time when

the rest of the developed world is likely to be experienc-

ing a sub-par expansion still). Growth of just under 3%

should compare favourably with weak expansions in other

developed jurisdictions around the world and underpin an

extension of the recent USD recovery.

While central banks appear to be continuing to diversify

exposure away from the USD (albeit perhaps at a muchslower pace than in 2009), the USD and USD-denominated

assets generally retain a premium over the alternatives in

times of uncertainty or nancial market anxiety. The USD

remains the primary global reserve currency and will con-

tinue to attract signicant support from global investors

during phases of market uncertainty.

The stabilization in the USD over the past month may

delay slightly our expectations for a fairly rapid rise in the

currency against the likes of the EUR and GBP in the second

half of this year. But we still anticipate the USD appreciating

from a trend point of view as the secular USD bear trend ofthe past eight years unwinds.

US DOLLAR

US DOLLAR

1.16

1.20

1.24

1.28

1.32

1.36

1.40

1.44

1.48

1.52

1.56

1.60

1.64

1.68 84

92

100

108

116

124

132

140

Jan-07 Jul-07 Jan-08 Jul-08 Jan-09 Jul-09 Jan-10 Jul-10

USD per EUR

JPY per USD

JPY per USD

Source: Federal Reserve Bank of New York/Haver Analytics

USD per EUR

TRADE-WEIGHTED US DOLLAR

70

75

80

85

90

95

100

105

110

03 04 05 06 07 08 09 10

Index: 2000 = 100

*Nominal broad effective exchange rate

Source: Haver Analytics/JP Morgan

US DOLLAR OUTLOOK

Spot Price 2009 2010 2011


Trade-wtd. USD 103.7 111.2 105.4 102.7 102.4 102.7 105.1 107.8 107.3 107.9 108.7 107.9 108.2

JPY per USD 88.7 99 96 90 93 93 88 90 91 95 100 102 105

USD per EUR 1.272 1.325 1.403 1.464 1.432 1.351 1.224 1.130 1.080 1.050 1.030 1.020 1.000

USD per GBP 1.518 1.432 1.646 1.598 1.616 1.518 1.495 1.345 1.317 1.280 1.288 1.275 1.282

f: Forecast by TDBFG as at July 13, 2010; All forecasts are for end of period; Source: Federal Reserve, Bloomberg, TDBFG

US DOLLAR FUNDAMENTALS

Interest Rate Spreads Business Cycle +

Inflation Differential Fiscal Balances

Current Account N Politics N

Legend: - is negative, + is positive, N is neutral for currencyShaun Osborne, Chief FX Strategist

416-983-2629


11/18


Rates & FX Research

11

CANADIAN DOLLAR

While CAD may have largely kept pace with the USD

over the last month, trading mostly in a tight 94-98 US

cent range, CAD joins the USD at the bottom of the overall

performance league against the other major currencies since

the last issue of Global Markets. And this is despite Canada

experiencing some of the strongest job growth and GDP

growth of any major country over the rst half of the year.

With growing fears of a double-dip recession in the US,

CAD seems to be getting punished because of the Canadian

economys tight links with the US. And we cant really argue

with that logic, since a stalling out of the US economy would

be a big hit not only to the Canadian economic recovery,

but to the global recovery as well.

At the moment, risk sentiment is still the biggest driverfor currency markets, and we think that the current calm

may be too good to last. There are still too many unan-

swered questions about the sustainability of the recovery,

and how the global economy is going to fare in the face of

scal contraction. Additionally, Canada in the process of

transitioning from a period of sharp recovery with well

above-trend GDP and employment growth, to a period of

slower, more sustainable growth. This will likely lead to a

lot more downside surprises to the economic data than what

weve seen recently, as markets take some time to adjust to

the new reality.Even with the Bank of Canada raising interest rates, it

looks like the bigger risk for CAD in the next couple of

months is another move lower as some shock causes another

ight toward the safety of the USD. We still expect to see

CAD slip to around 90 cents US before rebounding, once

the US economic recovery nally becomes more apparent.

Jacqui Douglas, FX Strategist

416-982-7784

CANADIAN DOLLAR

0.76

0.80

0.84

0.88

0.92

0.96

1.00

1.04

1.08

1.12


USD per CAD CAD per USD


1.316

1.250

1.190

1.136

1.041

1.087

0.893

1.000

0.962

0.926

TRADE-WEIGHTED CANADIAN DOLLAR

80

90

100

110

120

130

140

150

160

03 04 05 06 07 08 09 10

Index: 2000 = 100



CANADIAN DOLLAR OUTLOOK

Spot Price 2009 2010 2011


CAD per USD 1.031 1.260 1.162 1.069 1.052 1.015 1.064 1.124 1.053 1.031 1.020 1.010 1.000

USD per CAD 0.970 0.794 0.860 0.935 0.951 0.985 0.940 0.890 0.950 0.970 0.980 0.990 1.000

JPY per CAD 86 79 83 84 88 92 83 80 86 92 98 101 105

CAD per EUR 1.312 1.670 1.631 1.566 1.507 1.371 1.302 1.270 1.137 1.082 1.051 1.030 1.000

CAD per GBP 1.57 1.804 1.913 1.709 1.700 1.541 1.590 1.512 1.386 1.320 1.314 1.288 1.282


CANADIAN DOLLAR FUNDAMENTALS

Interest Rate Spreads + Business Cycle +

Inflation Differential + Fiscal Balances +


Legend: - is negative, + is positive, N is neutral for currency


12/18


Rates & FX Research

12

EURO

Although the EUR has recovered a little poise over the

past month, the single currency remains the worst perform-

ing major currency over the course of the year so far, hav-

ing lost 12% against the USD and nearly 14% against the

CAD. We think there is more EUR pain to come over the

balance of the year.

The EURs current rebound versus the USD merely

reects an adjustment in market positioning, we feel. After

an extremely rapid fall earlier this year and a sharp build

up in short EUR positions among speculators and investors,

a pause in the underlying trend down is hardly a surprise.

We remain concerned by the scal challenges facing the

euro zone as governments attempt to stabilize borrowing

and the European Central Bank (ECB) expands its balancesheet. We are unconvinced at least in the near-term by

the argument advanced by ECB President Trichet that budget

consolidation will boost condence and growth. Rather,

growth may slow in the second half of the year and the

outlook for the euro zone remains rather weak (expansion

of around 1% perhaps at best for 2011).

While sovereign bond spreads have stabilized and the

Greek government successfully returned to the capital

markets for short-term funding, the scal crisis facing

Europe remains unresolved. Sovereign credit spreads

remain elevated. Ten-year Greek government bond yieldsare trading some 780bps over German bunds. The level

of Greek sovereign spreads (and sovereign credit default

swaps) continues to suggest that the market is anticipating

a Greek government debt restructuring at some point in the

next few years.

Meanwhile, commercial bank stress tests which are due

to be conducted in late July may inuence short-term EUR

sentiment. If the tests are viewed as a stringent examina-

tion of capital adequacy and the majority of banks pass, the

EUR may continue to rally towards USD1.30. A weak test

of banks ability to deal with potential losses may convincethe markets that the EU leadership is avoiding, rather than

confronting, crisis and will undermine the EUR, however.

EURO

1.18

1.22

1.26

1.30

1.34

1.38

1.42

1.46

1.50

1.54

1.58

1.62


105

110

115

120

125

130

135

140

145

150

155

160

165

170

175

USD per EUR

JPY per EUR

USD per EUR JPY per EUR


TRADE-WEIGHTED EURO

110

115

120

125

130

135

140

145

150

03 04 05 06 07 08 09 10

Index: 2000 = 100



EURO FUNDAMENTALS

Interest Rate Spreads N Business Cycle N

Inflation Differential N Fiscal Balances

Current Account + Politics


EURO OUTLOOK

Spot Price 2009 2010 2011


USD per EUR 1.272 1.325 1.403 1.464 1.432 1.351 1.224 1.130 1.080 1.050 1.030 1.020 1.000

JPY per EUR 113 131 135 131 133 126 108 102 98 100 103 104 105

GBP per EUR 0.838 0.926 0.852 0.916 0.886 0.890 0.819 0.840 0.820 0.820 0.800 0.800 0.780

CAD per EUR 1.312 1.670 1.631 1.566 1.507 1.371 1.302 1.270 1.137 1.082 1.051 1.030 1.000


Shaun Osborne, Chief FX Strategist, 416-983-2629


13/18


Rates & FX Research

13

JAPANESE YEN

Despite a number of problems confronting Japan on a

number of fronts, the JPY has been the best performing ma-

jor currency so far this year. Low yields, more deation, a

stumbling recovery in the export sector, political uncertainty

and very signicant long-term scal and demographic chal-

lenges have not prevented the JPY from racking up a 5.5%

gain versus the USD this year.

The JPY retains a signicant safe-haven premium in

times of nancial market volatility, due to Japans status as

a current account surplus-generating economy. With major

national equity markets mostly losing ground so far this

year, the JPY has found strong support in times of extreme

market volatility.

Although leverage has been leaking out of the nancialsystem this year, the JPYs status as a low yielding fund-

ing currency for carry trades in commodities, equities and

currencies has also prompted some short-covering driven

gains in times of market uncertainty.

We expect the JPY to retain a relatively rm undertone

in the near-term (and accept that the JPY may continue to

outperform if nancial market uncertainty persists). How-

ever, with export growth faltering and domestic deation-

ary pressures continuing to strengthen, we suspect that the

Japanese monetary authorities would be intolerant of the

JPY rising signicantly beyond the high reached againstthe USD in May (just under JPY85).

In the longer-run, we expect Japans large scal imbal-

ance, ageing population and depleting domestic savings to

spell trouble for the JPY. PM Kans DPJ lost signicant

ground in the recent Upper House elections and will need

support from the smaller parties to pass legislation. The

chances of pushing through meaningful scal reforms in

the near future appear fairly slim.

Shaun Osborne, Chief FX Strategist

416-983-2629

JAPANESE YEN

84

88

92

96

100

104

108

112

116

120

124

128

105

110

115

120

125

130

135

140

145

150

155

160

165

170

175


JPY per USD

JPY per EUR

JPY per USD JPY per EUR


TRADE-WEIGHTED YEN

75

80

85

90

95

100

105

110

115

120

03 04 05 06 07 08 09 10

Index: 2000 = 100



JAPANESE YEN OUTLOOK

Spot Price 2009 2010 2011


JPY per USD 89 99 96 90 93 93 88 90 91 95 100 102 105

JPY per EUR 113 131 135 131 133 126 108 102 98 100 103 104 105

JPY per GBP 135 142 159 143 150 142 132 121 120 122 129 130 135

JPY per CAD 86 79 83 84 88 92 83 80 86 92 98 101 105


YEN FUNDAMENTALS

Interest Rate Spreads Business Cycle N

Inflation Differential Fiscal Balances

Current Account + Politics



14/18


Rates & FX Research

14

UK POUND

Sterling has stabilized in the aftermath of the UK gen-

eral election and last months tough budget. The coalition

Conservative/Liberal governments intention of delivering

approximately GBP40 bn in decit reductions per year

through 2015 appears to have reassured the ratings agen-

cies, for the moment, while not spooking investors unduly.

On a trade-weighted basis, the GBP is actually little

changed since the start of the year, whilst losing modest

ground against the EUR and gaining against the USD in

nominal terms. This is probably not a bad result for the

UK economy considering the challenges that policy mak-

ers are facing.

On the one hand, many of the indicators that have

been in strong recovery mode since late 2008/early 2009 manufacturing output, consumer sentiment, house prices

are now starting to show signs of attening out and scal

tightening is about to bite. The fact that the GBP remains

relatively competitive will help foster the recovery. The

trade weighted GBP is still some 20% below the level pre-

vailing at the start of 2007.

On the other hand, policy makers may not want to see

that much more weakness in the exchange rate due to the

persistent upward pressure on domestic prices. The rise

in core ination to 3.1% in the June year reects some

temporary factors and most policy makers are inclined tolook through the current strength in prices due to still

weak overall activity. One, Andrew Sentence, is not and

voted for a rate increase at the June policy meeting, however.

We think a tightening in UK monetary policy is unlikely

until at least late this year or early next year and feel that

the GBP is unlikely to pick up signicant ground versus

the EUR while the economic outlook remains dubious. We

expect EUR/GBP to hold around 0.84 in Q3 while the GBP

should lose ground to a stronger USD.

Shaun Osborne, Chief FX Strategist

416-983-2629

BRITISH POUND

0.65

0.69

0.73

0.77

0.81

0.85

0.89

0.93

0.97

1.01 1.30

1.40

1.50

1.60

1.70

1.80

1.90

2.00

2.10

2.20


GBP per EUR

USD per GBP

GBP per EUR USD per GBP


TRADE-WEIGHTED POUND

70

75

80

85

90

95

100

105

110

115

03 04 05 06 07 08 09 10

Index: 2000 = 100



UNITED KINGDOM POUND

Spot Price 2009 2010 2011


USD per GBP 1.518 1.432 1.646 1.598 1.616 1.518 1.495 1.345 1.317 1.280 1.288 1.275 1.282

GBP per EUR 0.838 0.926 0.852 0.916 0.886 0.890 0.819 0.840 0.820 0.820 0.800 0.800 0.780

CAD per GBP 1.57 1.80 1.91 1.71 1.70 1.54 1.59 1.51 1.39 1.32 1.31 1.29 1.28


POUND FUNDAMENTALS

Interest Rate Spreads N Business Cycle N

Inflation Differential + Fiscal Balances

Current Account Politics



15/18


Rates & FX Research

15

AUSTRALIAN DOLLAR

AUSTRALIAN DOLLAR

0.58

0.66

0.74

0.82

0.90

0.98

1.06


50

60

70

80

90

100

110

120

USD per AUD

JPY per AUD

JPY per AUDUSD per AUD


TRADE-WEIGHTED AUSTRALIAN DOLLAR

70

80

90

100

110

120

130

140

150

03 04 05 06 07 08 09 10

Index: 2000 = 100



AUSTRALIAN DOLLAR OUTLOOK

Spot Price 2009 2010 2011


USD per AUD 0.883 0.691 0.806 0.883 0.898 0.917 0.841 0.900 0.880 0.860 0.840 0.820 0.790

JPY per AUD 78.27 68.41 77.70 79.19 83.53 85.65 74.35 81.00 80.08 81.70 84.00 83.64 82.95

AUD per CAD 1.098 1.148 1.067 1.059 1.059 1.074 1.118 0.989 1.080 1.128 1.167 1.207 1.266

NZD per AUD 1.226 1.236 1.249 1.221 1.242 1.292 1.228 1.286 1.294 1.284 1.292 1.323 1.317


AUSTRALIAN DOLLAR FUNDAMENTALS

Interest Rate Spreads + Business Cycle +

Inflation Differential + Fiscal Balances +



Roland Randall, Strategist

+65 6500 8047

Australia looks once again a stand out amongst devel-

oped economies. After signicant volatility due to ongoing

debate over whether risk and commodity currencies are out

of favour, another round of better than expected economic

data as well as a not-dovish RBA Board meeting commu-

niqu all reassured markets that Australias economic per-

formance is not yet being derailed by gathering headwinds

to global growth.

After the RBA and the employment report xed income

markets capitulated, taking out expectations for a cut to the

Cash Rate (that were, mind you, always unrealistic) and the

AUD outperformed its dollar bloc peers. Indeed, the AUD

was languishing around $US0.84 by late June, but after

the RBA and employment combination the AUD swiftlypunched past $US0.87 and has been trading convincingly

above that level since.

The relatively low correlation of Australias economic

fundamentals to those of the US and Europe is a point worth

repeating, and one that should see the AUD outperform the

more closely tied CAD as the US picture weakens further

over 2H 2010.

Further local data surprises at a time when global markets

have come to expect macro indicators to weaken will only

iname expectations for tighter monetary policy and push

the AUD higher, toward our $0.90 end-September quartertarget. Australia is not, of course, completely immune to

the fortunes of the US and Europe but for now is somewhat

insulated by its much stronger trade ties with Asia.

While we are comfortable with our September target,

more immediate trading conditions will be dominated by

thin and whippy summer volumes for which funds have

already positioned themselves. Net longs in AUD non-

commercial futures are close to zero and at their lowest level

since 1Q 2009, providing few clues about which direction

the market is betting the AUD will move from here.


16/18


Rates & FX Research

16

NEW ZEALAND DOLLAR

Like its trans-Tasman neighbour Australia, the NZD/

USD strengthened by nearly 3% over the past month before

dipping in late June on anti-commodity currency sentiment.

A subsequent revival in risk sentiment pushed commodity

currencies stronger from the beginning of July, likely driven

by a combination of positive sentiment factors including the

resumption of exibility for the Yuan peg. Periods of risk

on do, however, feel tenuous as headwinds to US growth

appear to be strengthening again.

In terms of the immediate outlook, currency markets are

now rmly positioned for the northern hemisphere sum-

mer vacation, which means that no one is overweight risk

currencies. The NZD is no exception. Net positions in non-

commercial NZD futures are never large but have fallen toalmost zero recently, the rst time they have been this low

since 1H 2009. Clearly, traders would rather not bet on the

direction of the NZD for the next month or so. More than

likely the NZD will be directionless for a while.

The fact that the RBNZ is tightening when few others are

while ination outcomes remain moderate appears fully

priced in New Zealand markets. There is a good chance that

the RBNZ will disappoint by delaying monetary tightening

(while the RBA is more likely to surprise by tightening more

and/or sooner than consensus predicts). This explains why

the AUD sits below our near-term forecasts with room toappreciate but the NZD remains above our forecasts and we

expect it to depreciate. Of the two antipodean currencies,

the NZD is more likely to sell off in coming months and we

forecast $0.70 by 30 September. On the other hand, further

appreciation is likely to be capped by the fact that risk will

be off more than it is on if we are right that G7 data will

contain more disappointments than upside surprises over

the next quarter.

TRADE-WEIGHTED NEW ZEALAND DOLLAR

70

80

90

100

110

120

130

140

150

160

03 04 05 06 07 08 09 10

Index: 2000 = 100



NEW ZEALAND DOLLAR

0.48

0.54

0.60

0.66

0.72

0.78

0.84


40

50

60

70

80

90

100

USD per NZD

JPY per NZD

JPY per NZDUSD per NZD

Source: Federal Reserve Bank of New York/Haver Anal tics

NEW ZEALAND DOLLAR OUTLOOK

Spot Price 2009 2010 2011


USD per NZD 0.720 0.560 0.646 0.723 0.723 0.710 0.685 0.700 0.680 0.670 0.650 0.620 0.600

JPY per NZD 63.85 55.37 62.22 64.87 67.23 66.31 60.55 63.00 61.88 63.65 65.00 63.24 63.00

NZD per CAD 1.346 1.418 1.333 1.293 1.315 1.387 1.373 1.271 1.397 1.448 1.508 1.597 1.667

NZD per AUD 1.226 1.236 1.249 1.221 1.242 1.292 1.228 1.286 1.294 1.284 1.292 1.323 1.317


NEW ZEALAND DOLLAR FUNDAMENTALS

Interest Rate Spreads + Business Cycle N

Inflation Differential + Fiscal Balances N

Current Account Politics N


Roland Randall, Strategist

+65 6500 8047


17/18


Rates & FX Research

17

SWISS FRANC

The Swiss franc has been the top performing currency

over the last month, as the Swiss National Bank (SNB)

nally threw in the towel on its attempts at intervening in

the foreign exchange market. Specically, the SNB said

that the deationary risk in Switzerland has largely dis-

appeared, and that only in the case of a renewed threat

of deation would it take all the measures necessary to

ensure price stability.

The latest Swiss ination report was admittedly pretty

soft, and well be keeping a close eye on those gures going

forward. But assuming that ination does evolve roughly

in line with what the SNB is expecting, we think that EUR/

CHF will be allowed to drift lower as the EUR continues to

depreciate (according to our forecasts). Were forecastinga series of fresh all-time lows in EUR/CHF going forward,

falling to 1.25 by the end of 2010, and 1.20 at the end of

2011.

Jacqui Douglas, FX Strategist

416-982-7784

SWISS FRANC OUTLOOK

Spot Price 2009 2010 2011


CHF per USD 1.054 1.140 1.086 1.036 1.036 1.051 1.077 1.150 1.157 1.171 1.184 1.186 1.200CHF per EUR 1.341 1.510 1.524 1.517 1.484 1.420 1.318 1.300 1.250 1.230 1.220 1.210 1.200

CHF per CAD 1.022 0.904 0.935 0.969 0.985 1.036 1.013 1.024 1.100 1.136 1.161 1.174 1.200


SWISS FRANC

1.30

1.34

1.38

1.42

1.46

1.50

1.54

1.58

1.62

1.66

1.70

0.97

1.00

1.03

1.06

1.09

1.12

1.15

1.18

1.21

1.24

1.27


CHF per EUR

CHF per USD

CHF per EUR CHF per USD



18/18


Rates & FX Research

18

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information contained in this report has been drawn from sources believed to be reliable, but is not guaranteed to be accurate or complete

The report contains economic analysis and views, including about future economic and nancial markets performance. These are based

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i i i th i f ti l i i t i d i thi t f l d ff d

SUMMARY FOREIGN EXCHANGE TABLE

Spot Price 2009 2010 2011


Exchange rate to US dollar

Japanese yen JPY per USD 88.65 99 96 90 93 93 88 90 91 95 100 102 105

Euro USD per EUR 1.272 1.325 1.403 1.464 1.432 1.351 1.224 1.130 1.080 1.050 1.030 1.020 1.000

U.K. pound USD per GBP 1.518 1.432 1.550 1.598 1.616 1.518 1.495 1.345 1.317 1.280 1.288 1.275 1.282

Swiss franc CHF per USD 1.054 1.140 1.086 1.036 1.036 1.051 1.077 1.150 1.157 1.171 1.184 1.186 1.200

Canadian dollar CAD per USD 1.031 1.260 1.162 1.069 1.052 1.015 1.064 1.124 1.053 1.031 1.020 1.010 1.000

Australian dollar USD per AUD 0.883 0.691 0.806 0.883 0.898 0.917 0.841 0.900 0.880 0.860 0.840 0.820 0.790

NZ dollar USD per NZD 0.720 0.560 0.646 0.723 0.723 0.710 0.685 0.700 0.680 0.670 0.650 0.620 0.600

Exchange rate to Euro

U.S. dollar USD per EUR 1.272 1.325 1.403 1.464 1.432 1.351 1.224 1.130 1.080 1.050 1.030 1.020 1.000

Japanese yen JPY per EUR 113 131 135 131 133 126 108 102 98 100 103 104 105

U.K. pound GBP per EUR 0.838 0.926 0.852 0.916 0.886 0.890 0.819 0.840 0.820 0.820 0.800 0.800 0.780

Swiss franc CHF per EUR 1.341 1.510 1.524 1.517 1.484 1.420 1.318 1.300 1.250 1.230 1.220 1.210 1.200

Canadian dollar CAD per EUR 1.312 1.670 1.631 1.566 1.507 1.371 1.302 1.270 1.137 1.082 1.051 1.030 1.000

Australian dollar AUD per EUR 1.441 1.917 1.740 1.658 1.595 1.473 1.456 1.256 1.227 1.221 1.226 1.244 1.266

NZ dollar NZD per EUR 1.766 2.368 2.173 2.024 1.981 1.903 1.787 1.614 1.588 1.567 1.585 1.645 1.667

Exchange rate to Japanese yen

U.S. dollar JPY per USD 88.65 99 96 90 93 93 88 90 91 95 100 102 105

Euro JPY per EUR 112.8 131 135 131 133 126 108 102 98 100 103 104 105

U.K. pound JPY per GBP 135 142 149 143 150 142 132 121 120 122 129 130 135

Swiss franc JPY per CHF 84.1 86.8 88.7 86.6 89.8 88.8 82.1 78.2 78.6 81.1 84.4 86.0 87.5

Canadian dollar JPY per CAD 86.0 78.5 82.9 83.9 88.4 92.0 83.1 80.1 86.5 92.2 98.0 101.0 105.0

Australian dollar JPY per AUD 78.3 68.4 77.7 79.2 83.5 85.6 74.4 81.0 80.1 81.7 84.0 83.6 83.0

NZ dollar JPY per NZD 63.9 55.4 62.2 64.9 67.2 66.3 60.5 63.0 61.9 63.7 65.0 63.2 63.0

Exchange rate to Canadian dollar

U.S. dollar USD per CAD 0.970 0.794 0.860 0.935 0.951 0.985 0.940 0.890 0.950 0.970 0.980 0.990 1.000

Japanese yen JPY per CAD 86 79 83 84 88 92 83 80 86 92 98 101 105

Euro CAD per EUR 1.312 1.670 1.631 1.566 1.507 1.371 1.302 1.270 1.137 1.082 1.051 1.030 1.000

U.K. pound CAD per GBP 1.57 1.80 1.80 1.71 1.70 1.54 1.59 1.51 1.39 1.32 1.31 1.29 1.28

Swiss franc CHF per CAD 1.022 0.904 0.935 0.969 0.985 1.036 1.013 1.024 1.100 1.136 1.161 1.174 1.200

Australian dollar AUD per CAD 1.098 1.148 1.067 1.059 1.059 1.074 1.118 0.989 1.080 1.128 1.167 1.207 1.266

NZ dollar NZD per CAD 1.346 1.418 1.333 1.293 1.315 1.387 1.373 1.271 1.397 1.448 1.508 1.597 1.667

f: Forecast by TDBFG as at July 13, 2010; All forecasts are for end of period

Source: Federal Reserve Bank of New York, Bloomberg, TDBFG

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