Current FX Market ThemesCurrent FX Market Themes

20092009

•• Global credit market turmoil Global credit market turmoil –– risk appetiterisk appetite

•• Coordinated central bankCoordinated central bank gov’tgov’t actionaction•• Coordinated central bank, Coordinated central bank, gov tgov t action action 

•• Global economic slowdown Global economic slowdown ‐‐ commoditiescommodities

•• Risk aversion vs. US asset aversionRisk aversion vs. US asset aversion

•• Central bank FX reserve diversificationCentral bank FX reserve diversification

•• Market focus shifts back to growth fundamentals from extreme risk aversionMarket focus shifts back to growth fundamentals from extreme risk aversion

Fundamental Analysis of Major CurrenciesFundamental Analysis of Major Currencies

USDUSD

•• Wall Street in turmoilWall Street in turmoil

•• NBER declared recessionNBER declared recession –– Dec 2007Dec 2007NBER declared recession NBER declared recession  Dec 2007Dec 2007

•• Soft economy Soft economy –– employment, housingemployment, housing

•• Twin deficitsTwin deficits

•• Flood of USD debt issuanceFlood of USD debt issuance

•• CNY acting as escape valveCNY acting as escape valve

•• ZIRP and quantitative easing ZIRP and quantitative easing ‐‐ steepeningsteepening

Fundamental Analysis of Major CurrenciesFundamental Analysis of Major Currencies

EUREUR

•• A global epidemic A global epidemic ‐‐ financial instabilityfinancial instability

•• Softening economic picture in the euro zoneSoftening economic picture in the euro zone

•• Inflation no longer a concern Inflation no longer a concern –– TrichetTrichet –– 50 bps?50 bps?

•• Central Bank FX reserve diversificationCentral Bank FX reserve diversification

•• Price action overshootingPrice action overshooting –– overbought against GBPoverbought against GBPPrice action overshooting Price action overshooting  overbought against GBPoverbought against GBP

•• Narrowing yield differential Narrowing yield differential –– further rate cuts further rate cuts aheadahead

Fundamental Analysis of Major CurrenciesFundamental Analysis of Major Currencies

CADCAD•• ShortShort‐‐term correction in commoditiesterm correction in commodities

•• Positive trade surplusPositive trade surplus –– fiscal environmentfiscal environmentPositive trade surplus Positive trade surplus  fiscal environmentfiscal environment

•• Country (political) riskCountry (political) risk

•• Employment growth and domestic demandEmployment growth and domestic demand

•• Narrowing yield spreadsNarrowing yield spreadsNarrowing yield spreadsNarrowing yield spreads

•• Investment climate Investment climate –– bearish bearish –– likely entered recession in Q4 2008likely entered recession in Q4 2008

•• OIS still implying 50OIS still implying 50‐‐75 bps 75 bps –– as much as 100 in further easingas much as 100 in further easing

CAD DailyCAD Daily

F t f 2009 USD R ll L StF t f 2009 USD R ll L StForecasts for 2009: USD Rally Loses SteamForecasts for 2009: USD Rally Loses Steam

PAIR SPOT H1 2009 H2 2009

EURUSD 1.3100 1.2800 1.3300

USDCAD 1 2600 1 2900 1 2400USDCAD 1.2600 1.2900 1.2400

EURCAD 1.6500 1.6350 1.6150

Canadian Small Cap EquitiesCanadian Small Cap Equities

•• Risk appetite Risk appetite –– surprising performance of small capssurprising performance of small caps

•• Attractive valuations?Attractive valuations?

•• Short/mediumShort/medium‐‐term correction in commoditiesterm correction in commodities

•• Trouble ahead for the highly leveragedTrouble ahead for the highly leveraged

•• Overpaid for drilling rights?  Produce able reserves?Overpaid for drilling rights?  Produce able reserves?

•• Bargain hunting for assets, propertiesBargain hunting for assets, properties

•• Currency riskCurrency risk

Outlook for Canadian Small CapsOutlook for Canadian Small Caps

• Global risk appetite 

• Commodities

S C di i d i i l di• USDCAD – commodities and equities leading