Global Economic Research

Foreign Exchange
Outlook March 2008

The USD is resuming a depreciating trend against major currencies on

the back of aggressive monetary and fiscal policy easing and deterio-
rating US economic conditions. The CAD and the MXN will benefit from
widening intra-region yield differentials, further underpinned by a re-
newed upward bias in energy prices.

European currencies will receive a boost from supportive yield differen-

tials and renewed global portfolio diversification away from the USD.
The GBP will strengthen in alignment with the EUR lead. Global inves-
tors retain a bullish RUB tone ahead of the March presidential election.

The Asian FX bullish tone remains intact. The JPY, which remains in a
stable trading pattern against the USD since January, will adopt a long-
awaited strengthening path. China remains committed – at least until
the Beijing Olympic Games – to its gradual and predictable pace of
CNY appreciation.

Emerging-market currencies will find support from favourable growth

and interest rate differentials, high commodity prices and sustained ap-
petite for carry-trade portfolio investments. Investors will closely monitor
the asset-price adjustment taking place in Chinese stock markets. The
ZAR is entering a period of post-adjustment consolidation mode.

Index

Market Tone & Fundamental Focus.................................................................... 3

US/Canada.......................................................................................................... 5
Europe/Japan (Majors)........................................................................................ 6
Asia/Oceania/Europe.......................................................................................... 8
Developing Asia.................................................................................................. 10
Developing Americas.......................................................................................... 12
Developing Europe/Africa................................................................................... 14
Global Currency Forecast................................................................................... 16

Foreign Exchange Outlook is available on www.scotiabank.com, Bloomberg at SCOE and Reuters at SM1C
Foreign Exchange Outlook March 2008

Global Foreign Exchange Outlook

February 27, 2008 Actual Q1 08 Q2 08 Q3 08 Q4 08 Q1 09 Q2 09 Q3 09 Q4 09
EUR/USD 1.51 1.50 1.53 1.55 1.58 1.59 1.60 1.57 1.55
Euro Consensus* 1.48 1.46 1.44 1.42 1.40 1.39 1.37 1.36
USD/JPY 106.4 107 106 105 103 100 98 98 100
Yen Consensus* 106 106 107 107 107 107 107 106
GBP/USD 1.98 1.99 2.01 2.04 2.07 2.07 2.08 2.07 2.05
Sterling Consensus* 1.97 1.94 1.92 1.90 1.89 1.87 1.86 1.85
USD/CAD 0.98 0.99 0.98 0.97 0.96 0.94 0.95 0.96 0.97
Canadian Dollar Consensus* 1.01 1.03 1.04 1.05 1.05 1.06 1.06 1.07
AUD/USD 0.94 0.92 0.94 0.96 0.98 0.99 0.97 0.95 0.93
Australian Dollar Consensus* 0.89 0.88 0.87 0.86 0.85 0.83 0.82 0.80
USD/MXN 10.70 10.87 10.92 10.98 11.05 11.13 11.21 11.29 11.37
Mexican Peso Consensus* 10.92 10.97 11.03 11.10 11.17 11.24 11.32 11.40

Spot Price vs. 100 Day Moving Average vs. 200 Day Moving Average - (5yr Trend)
EUR/USD USD/JPY
1.57 130
1.50 USD/ JPY

1.42 125 100 Day

200 Day
1.35 120
1.27
1.20 115
1.12 EUR/ USD
1.05 100 Day
110
0.97 200 Day 105
0.90
0.82 100
O -03

O 4

O l-05

O 06

O l-07
p 3

p- 4

p 5

p- 6

p 7

Ap -0 4

Ap -0 5

Ap -0 6

Ap -0 7

08
Ju -03

D -03
ar 3
Ju -04

D 04
ar 4
Ju -05

D -05
ar 5
Ju -06

D 06
ar 6
Ju -07

D -07
7

Ja -03

Ja -04

Ja -05

Ja -06

Ja -07
Ju 4

Ju 5

Ju 6

Ju 7
l-0
M c-0

M c-0

M c-0

M c-0

-0
Se -0

Se -0

Se -0

Se -0

Se -0

0
-

n-
r-

r-

r-

r-
l

l
n

n
ec
ar

ct

ct

ct

ct

ct
Ju
e

e
M

GBP/USD USD/CAD
2.15 1.62
2.07 1.56
1.50 USD/ CAD
1.99
1.44 100 Day
1.91 1.38 200 Day
1.83 1.32
1.75 1.26
1.67
GBP/ USD 1.20
100 Day 1.14
1.59 200 Day 1.08
1.51 1.02
1.43 0.96
p- 3

p- 4

p- 5

p- 6

p- 7
Ju -03

D 03
M -03
Ju -04

D 04
ar 4
Ju -05

D 05
M -05
Ju -06

D 06
M -06
Ju -07

D 07
7
p- 3

p- 4

p- 5

p 6

p- 7
J u -03

D 03
ar 3
J u -04

D 04
ar 4
J u -05

D 05
ar 5
J u -06

D -06
ar 6
J u -07

D 07
7

M c-0

-0
Se -0

Se -0

Se -0

Se -0

Se -0
M c -0

M c -0

M c -0

M c -0

-0
Se -0

Se -0

Se -0

Se -0

Se -0

ec

n
ec

ec

ec
ar

ar

ar

ar
n

ec
ar

e
e

M
M

AUD/USD USD/MXN
0.98 11.8
0.93 11.4
0.88
0.83 11.0
0.78 10.6
0.73
0.68 10.2 USD/ M XN
0.63 AUD/ USD
9.8 100 Day
0.58 100 Day 200 Day
9.4
0.53 200 Day

0.48 9.0
p- 3

p 4

p- 5

p- 6

p- 7
Ju -03

D 03
M -03
Ju -04

D -04
M -04
Ju -05

D 05
M -05
Ju -06

D 06
M -06
Ju -07

D 07
7
p 3

p 6

p 7
Ju -03

D -03
ar 3
Ju -04

ec 4
M -04
Ju r-05

ec 5
M -05
Ju -06

D -06
ar 6
Ju -07

D -07
7

-0
Se -0

Se -0

Se -0

Se -0

Se -0
M -0

D p -0

D -0

M -0

-0
Sen-0

Se -0

Se -0

Sen-0

Sen-0

n
ec

ec

ec

ec

ec
ar

ar

ar

ar

ar
n

n
ec

ec

ec
p
ar

ar
a

M
M

(*) Source: Consensus Economics Inc. February 2008

Global Economic Research 2

Foreign Exchange Outlook
MARKET TONE & FUNDAMENTAL FOCUS
Pablo F.G. Bréard +1 416 862-3876
Foreign exchange markets will experience a period of
higher volatility through the end of the first quarter of
2008. The US dollar (USD) has again retreated from its
stable trading pattern (on a trade-weighted basis) and
has resumed a depreciating trend against most major
world currencies on the back of unattractive interest rates
and deteriorating economic conditions in the United
States. Of utmost importance to re-assess and/or confirm
current investors’ views are the monetary policy deci-
sions to be adopted by the world’s key central banks,
particularly by the US Federal Reserve (Fed) and the
European Central Bank (ECB). Geo-political-related
events, such as a renewed drive to impose sanctions on
Iran, shifts in US voting preferences ahead of the No-
vember vote, elections in Russia and Spain, and a meet-
ing of the Organization of Petroleum Exporting Countries
(OPEC) scheduled to take place on March 5th will also
attract the attention of global portfolio investors and
shape flows in currency markets. Global investors will
keenly monitor the ongoing asset-price adjustment taking
place in Chinese equity securities markets in search of
potential contagion risk waves that may affect the core
group of emerging-market economies.
The NAFTA zone currencies will remain heavily influ-
enced by economic, monetary and financial sector devel-
opments in the US. The US Federal Open Market Com-
mittee will announce its decision on monetary policy on
March 18th: a reduction in the Fed funds interest rate of
25 basis points (bps) to 2.75% is fully discounted by fu-
tures markets. The sharp deterioration of US housing
(and potentially labour) market conditions is also re-
flected in market participants’ expectations of aggressive
monetary easing through the year, which will place the
Fed funds rate (according to current contract pricing pat-
terns) at 2% by December. Both the Canadian dollar
(CAD) and the Mexican peso will continue to benefit from
favourable yield differentials vis-à-vis the US, further un-
derpinned by a renewed upward bias in energy prices; oil
prices, measured by the light-crude West Texas Interme-
diate benchmark have, once again, achieved triple-digit
levels. The CAD has the potential to advance even fur-
ther, as it realigns to the trend present in the euro (EUR)
and the Japanese yen (JPY). Gold prices, which hit the
USD960 per ounce, also anticipate further US dollar dis-
tress.
European currencies will receive an upward push on the
grounds of still-positive economic growth prospects, sup-
portive interest rate differentials and renewed anti-USD
investor sentiment. Senior ECB officials continue to
stress that inflation containment remains the monetary
institution’s primary objective. The policy-focused refi-
nancing rate has been held at 4.0% since June 2007; no
change is anticipated at the March 6th policy-setting
meeting. The inflation-focused ECB, coupled with fresh
Global Economic Research
March 2008
evidence of business confidence in Germany (as recently
reported in the investor-sensitive Ifo index), triggered a
renewed appreciating bias in favour of the EUR, which
traded over USD1.50 in late February, clearly breaking
through the technical resistance level established since
mid-November 2007. The British pound (GBP) re-
sponded immediately to the renewed bullish sentiment
enjoyed by the EUR and reversed a weakening trend in
place from November 2007 to February 2008: GBP/USD
is poised to, once again, trade above the 2.00 mark in
the weeks ahead. Elsewhere in Europe, the Russian ru-
ble (RUB) retained its strengthening bias, as emerging-
market participants remained indifferent to the March 2
election, when Dmitry Medvedev will be most likely
elected as the new Russian president, a result that will
likely lead to the appointment of Vladimir Putin as prime
minister.
JPY, which remains in a stable trading pattern against
the USD since the beginning of the year, has yet to adopt
a long-awaited move towards a strengthening path: we
expect USD/JPY to close the year at 103. The renewed
phase of USD weakness – and JPY strength – will likely
accelerate the realignment of the laggard Korean won to
the regional leaders’ pattern. Meanwhile, the Thai baht,
the Taiwanese dollar and the Malaysian ringgitt remain
well entrenched in a strengthening path. China remains
committed – at least until the Beijing Olympic Games – to
a gradual and predictable pace of renminbi appreciation
against the USD. Of increasing relevance to global inves-
tors is the fact that inflationary pressures are escalating
in China and other key developing countries as a result
of unrelenting increases in food and energy costs, cou-
pled with rising demand-driven pressures caused by
growing access to local-credit financing.
Emerging-market currencies remain strongly influenced –
and supported – by the growth differentials in key econo-
mies such as China, India, Russia, Brazil and South Af-
rica, as well as by attractive interest rate differentials,
persistently high commodity prices and sustained appe-
tite for carry-trade portfolio investment strategies
(courtesy of cheap funding available in savings-rich Ja-
pan). Brazil’s accelerating growth dynamics plus still-high
real interest rates act as a key magnet of intra-region and
global capital investment inflows. The South African rand
(ZAR), which suffered a sharp 15% depreciation versus
the USD in just one month on the back of a generalized
re-assessment of global risk aversion, has entered a re-
covery phase, yet to be completed. The Turkish new lira
remained broadly stable despite the escalating political
risk associated with its decisive military engagement in
Northern Iraq. Finally, metals-commodity-sensitive cur-
rencies such as the Chilean peso, the Peruvian sol as
well as the ZAR have also benefited from resurging
prices and a pro-gold weakening USD.
3
Foreign Exchange Outlook March 2008
CANADA Stephen Malyon +1 416 863-7719
Currency Outlook Camilla Sutton +1 416 866-5470

USD/CAD remains range-bound, trading over the past month between its converging 100- and 200-day moving aver-
ages. The USD remains on the defensive, with a deterioration in recent US economic figures and signs of intensifying
inflation pressure presenting a challenging environment for the Federal Reserve. However, the CAD has failed to exploit
this situation. Part of the explanation is specific to the CAD. The US economic slowdown and CAD appreciation are put-
ting pressure on Canadian manufacturers, fostering concerns over the Canadian economic outlook and pushing the Ca-
nadian current account towards deficit (newly sworn Bank of Canada Governor Mark Carney has responded by tele-
graphing further rate cuts). Another explanation is that the USD is showing some signs of stabilizing on a broader scale
following a significant multi-year depreciation. The US current account is in the midst of a noticeable improvement, and it
is noteworthy that the Fed’s major currency USD index has failed to break to a new low despite a massive loss of inter-
est rate support in recent months. The market appears reluctant to push the USD materially lower given mounting evi-
dence that other economies are also undergoing a slowdown. Consequently, investors are uncertain whether aggres-
sively lower US rates are USD-positive because they sow the seeds of an eventual economic revitalization, or USD-
negative because they fan the embers of inflation (short USD futures market positions have been significantly curtailed
as speculators await greater clarity). Amid such uncertainty, other relationships that came to influence market direction
in 2007 have frayed. Indeed, the correlation between the CAD and commodities has weakened materially (crude oil re-
cently returned to USD100/barrel, while the BoC commodity price index has soared to a record high). Barring a correc-
tion in commodities – perhaps prompted by a reassessment of the global growth outlook – we think the CAD has some
catching up to do. A significant US inflation scare would also likely prove CAD-positive given the recent deceleration in
Canadian inflation. Alternatively, should signs that the US slowdown is beginning to flow across the border accumulate,
we would expect CAD to weaken against the USD. Consequently, we are modestly bearish USD/CAD (i.e. bullish the
Canadian dollar) in the near term, but would not be surprised to see the recent range-trading environment endure for a
while longer.
Currency Trends
Going Back Spot Outlook
FX Rate FX Rate
12 m 6m 3m 27-Feb 3m 6m 12 m
AUD/CAD 0.922 0.863 0.883 0.921 0.921 0.931 0.931 AUD/CAD
CAD/JPY 101.3 109.7 111.4 109.0 108.2 108.2 106.4 CAD/JPY
EUR/CAD 1.548 1.439 1.461 1.479 1.499 1.504 1.495 EUR/CAD
USD/CAD 1.170 1.056 0.999 0.978 0.980 0.970 0.940 USD/CAD
AUD/CAD CAD/JPY
125.0
122.5
0.935
120.0
117.5
0.915
115.0
112.5
0.895
110.0
0.875 107.5
105.0
0.855 102.5
100.0
0.835 97.5
Fe b-07 Apr-07 Jun-07 Aug-07 Oct-07 De c-07 Fe b-08 Fe b-07 Apr-07 Jun-07 Aug-07 Oct-07 De c-07 Fe b-08

EUR/CAD USD/CAD
1.185
1.555 1.160
1.530 1.135
1.505 1.110
1.480 1.085
1.455 1.060
1.035
1.430
1.010
1.405
0.985
1.380 0.960
1.355 0.935
1.330 0.910
Fe b-07 Apr-07 Jun-07 Aug-07 Oct-07 De c-07 Fe b-08 Fe b-07 Apr-07 Jun-07 Aug-07 Oct-07 De c-07 Fe b-08

Global Economic Research 4

Foreign Exchange Outlook
CANADA AND UNITED STATES
Fundamental Commentary
UNITED STATES - As the economic fundamentals con-
tinue to worsen, the minutes to the FOMC’s January 29-
30th meeting noted a further deterioration in sentiment for
the US economy, with “downside” sensitivities. The FOMC
lowered its GDP growth projections for 2008 – from the
1.8%-2.5% (Q4/Q4) central tendency range to 1.3-2.0% –
but marked up unemployment and core inflation forecasts.
The housing and credit market travails continue to impinge
on the US economy and financial markets, with clear signs
of weakness emerging from the commercial real estate
sector, retail space in particular. Banks are recording addi-
tional writedowns and corporate earnings’ targets are be-
coming more cautious. January’s Senior Loan Officer Sur-
vey revealed that banks tightened lending standards at the
fastest pace in the seventeen-year history of the report.
Deteriorating employment conditions, eroding confidence,
falling home and equity values suggest that consumer
spending, particularly on ‘big-ticket’ items, is losing consid-
erable momentum. Manufacturing conditions continued to
worsen, with February’s state surveys pointing to the possibil-
ity that the ISM Manufacturing Index might slip back into the
red. After five consecutive years of record shortfalls, the US
trade deficit narrowed in 2007. While exports – particularly
civilian aircraft sales – remained firm, relatively more ex-
pensive foreign goods & services supported import substi-
tution. Despite the continuing weakness in the economy,
inflation remains sticky – because of soaring food, energy
and other commodity prices. However, the PCE deflator –
the Fed’s inflation yardstick – remained at 2.2% at year
end, for the fourth year in a row, suggesting that inflationary
pressures are still contained. Monetary policy adjustments
and the fiscal stimulus package – now signed into law – are
expected to provide some economic relief in the second
half of 2008.
MONETARY POLICY COMMENTARY
UNITED STATES - Given the economic backdrop, the Fed
may have more room for maneuver in the months ahead.
Indeed, we expect the FOMC to cut the target rate by 50
bps on March 18th and then remain on hold as the cumula-
tive 275 bps reduction in the Federal funds rate begins to
stimulate the economy. This will not preclude continued
weakness in the US economy in such areas as residential
construction and sales and consumer spending - although
strength in the international trade sector will likely continue
to keep the US economy out of recession. In fact, the Fed-
eral Reserve is projecting real GDP growth between 1.3
and 2.0% in 2008, with only a modest acceleration in 2009
and 2010. This persistent weakness is expected to offset
much of the recent rise in price pressures although the Fed
will continue to watch inflation expectations closely.
Global Economic Research 5
March 2008
Adrienne Warren +1 416 866-4315
Gorica Djeric +1 416 866-4214
CANADA - The Canadian economy entered 2008 in rea-
sonably good shape, with real GDP estimated to have ad-
vanced at close to a 3% yearly rate in Q4 of 2007. The con-
sumer remains the economic driver, supported by strong
job growth, price discounting and tax cuts. Retail sales rose
0.6% m/m in December, the third increase in four months,
and near-record auto sales in January point to another
solid gain last month. Meanwhile, the nation’s payrolls
swelled by almost 50,000 in January, lifting the employ-
ment rate to a record high and lowering the jobless rate to
a 3-decade low. Housing activity also remains brisk, with
total starts rebounding sharply after a weather-induced
slump in December. Home sales, however, are beginning
to slow alongside the continuing deterioration in afforda-
bility. Maintaining a reasonably solid pace of domestic de-
mand is essential to offset the growing drag from external
trade amid a stalling out in exports and rising imports.
Manufacturing shipments plunged over 3% m/m in Decem-
ber, and were down more than 6% from a year earlier, as
slumping US demand for consumer goods and building
materials and the persistently strong Canadian dollar
trimmed export sales. Canada’s December merchandise
trade surplus narrowed to a 9-year low of CAD2.4 billion
despite higher prices for resource-based exports. Given a
weakening US economy – the destination of roughly 75%
of Canada’s merchandise exports – external conditions will
remain extremely challenging for domestic manufacturers
in coming months. This points to a further slowing in overall
momentum as consumer spending and housing activity
begin to moderate. Consumer confidence is faltering, a
harbinger of a more cautious retail sales trend, particularly
when employment growth and/or home price appreciation
finally begin to slow. Business sentiment, too, has weak-
ened, reflecting heightened concern over the continuing
credit market turmoil, the high CAD and soaring oil prices.
Karen Cordes +1 416 862-3080
CANADA - As inflation continues to moderate in Canada –
with core CPI recently falling to 1.4% y/y in January, well
below the Bank of Canada’s (BoC) 2% target rate – the
BoC increasingly has room to move interest rates down
further. And, in his first public speech since becoming BoC
Governor, Mark Carney reinforced the view that further
monetary stimulus is indeed on its way. While the Cana-
dian economy as a whole has thus far been relatively resil-
ient to the deterioration in the US economy, Canada’s for-
eign trade sector is now substantially subtracting from real
GDP. As the spillover into the rest of the economy begins
to set in, we will start to see more widespread weakness.
While Canada’s economy will likely continue to outperform
the US economy, a prospective slowdown points to a 50
bps cut in the overnight rate by the BoC on March 4th. This
would bring the total reduction to 100 bps since December
4th.
Foreign Exchange Outlook March 2008
MAJOR CURRENCIES Stephen Malyon +1 416 863-7719
Currency Outlook Camilla Sutton +1 416 866-5470

EURO ZONE - The long-term technical outlook continues to be bullish, and the short-term outlook has recently improved
significantly. In late February, EUR succeeded in breaking above the November 2007 high of 1.4967, giving technical
traders a reason to go long. IMM / CFTC speculative position remains fairly modest, with a EUR1.8 billion net long posi-
tion, indicating that the market is still hesitant to move in either direction. However, we suspect these positions will be
rebuilt in the weeks ahead.
JAPAN - February saw USD/JPY trade in a relatively tight 1.7% range (106.50 to 108.12), with the overall down trend
remaining intact. The near-term technical outlook continues to call for further downside; however, the importance of the
correlation between USD/JPY and equity markets cannot be ignored. We expect the near-term impact from flow, equi-
ties and technicals to be fairly negative USD/JPY.
UNITED KINGDOM - The technical outlook for the GBP continues to be fairly bearish, as the currency has yet to break
above the six month downtrend. Over the past three months, it has traded within a relatively tight range (1.94 to 2.00).
Speculative positioning, from the CFTC, highlights that traders continue to hold a generally negative near-term outlook
on sterling as they hold a net short position of GBP760 million. However, this is a relatively small holding and highlights
that the market, though biased for downside risk, remains somewhat neutral on the overall outlook.
SWEDEN - The krona is currently testing the lower end of its six month trend, a break of which would foreshadow further
downside. EUR/SEK also dropped lower in February and continues to trade in the middle of its wide 9.10 to 9.50 range.
We think the market will need a substantial catalyst to break EUR/SEK out of this range.

Currency Trends
Going Back Spot Outlook
FX Rate FX Rate
12 m 6m 3m 27-Feb 3m 6m 12 m
EUR/USD 1.323 1.363 1.463 1.513 1.530 1.550 1.590 EUR/USD
USD/JPY 118.6 115.8 111.2 106.5 106.0 105.0 100.0 USD/JPY
GBP/USD 1.964 2.017 2.056 1.989 2.013 2.040 2.065 GBP/USD
EUR/SEK 9.254 9.397 9.357 9.332 9.268 9.205 9.083 EUR/SEK
EUR/USD USD/JPY
1.530
123.1
1.503
1.476 120.6

1.449 118.1
1.422 115.6
1.395
113.1
1.368
110.6
1.341
1.314 108.1

1.287 105.6
Feb-07 Apr-07 Jun-07 Aug-07 Oct-07 Dec-07 Feb-08 Feb-07 Apr-07 Jun-07 Aug-07 Oct-07 Dec-07 Feb-08

GBP/USD EUR/SEK
2.105
9.47
2.080
9.42
2.055
9.37
2.030
9.32
2.005
9.27
1.980 9.22
1.955 9.17
1.930 9.12
1.905 9.07
Feb-07 Apr-07 Jun-07 Aug-07 Oct-07 De c-07 Feb-07 Apr-07 Jun-07 Aug-07 Oct-07 Dec-07

Global Economic Research 6

Foreign Exchange Outlook
MAJOR CURRENCIES
Fundamental Commentary
EURO ZONE - Any lingering hopes that the European Cen-
tral Bank (ECB) might soon follow the lead of the Federal
Reserve should be dashed with the report that Germany’s
powerful IG Metall union has reached an agreement with
the nation’s major steel producers on a 5.2% wage in-
crease. Labour costs across the euro zone had been in-
creasing at an average annual rate of about 2½% over the
past four years. President Jean-Claude Trichet has never
explicitly defined the upper limit of the ECB’s tolerance lev-
els regarding wage increases; indeed, he has been careful
to emphasize that there is room for differences among
firms and industries depending on productivity gains. Nev-
ertheless, a 5%-plus settlement, with the risk of spillover
effects into other sectors (and countries) where the poten-
tial for improved production efficiencies is less evident, will
add to concerns regarding the inflation outlook. As such,
monetary policymakers will await unequivocal signs of a
broadly-based economic slowdown that will provide assur-
ance of an abatement in domestic demand-side inflationary
pressures. With growth averaging 0.6% q/q over the past
four quarters (0.4% in the final quarter of 2007), central
bank officials will remain of the view that the economy is
still expanding at a pace that is either very close to - or may
even be exceeding - capacity. The ECB may also privately
welcome further EUR appreciation as a key factor in help-
ing to contain price increases in the tradables sector.
UNITED KINGDOM - The minutes of the Bank of England’s
Monetary Policy Committee (MPC) meeting of February 6th-
7th, when members voted 8-1 to reduce the Bank Rate by
25 bps (the dissenter favoured a 50 basis point reduction)
highlight the MPC’s concerns regarding economic growth
prospects, in light of the “stressed” conditions in financial
markets. Committee members are expecting the rate of
expansion to “slow markedly through 2008 as tighter credit
conditions and weaker real income growth bear down on
domestic demand”. On balance, the minutes point to further
easing through the year, but at a measured pace. MPC
members will want to be confident that the anticipated nar-
rowly-based rebound in the headline consumer inflation
rate - perhaps to more than 3% y/y - does not become
more deeply entrenched. UK consumers are proving sur-
prisingly resilient in the face of a softening in housing costs
(though one mortgagor reported a sharp rebound in prices
last month), falling equity markets, and tighter credit condi-
tions. Retail sales volumes rose a solid 0.8% m/m in Janu-
ary, the biggest advance in almost a year. Admittedly sales
in recent months have been sporadic, with gains inter-
spersed with contractions. Nevertheless, last month’s re-
sults establish a strong foundation for the first quarter, with
positive implications for near-term economic growth. As a
result, while acknowledging the downside risks, we con-
tinue to anticipate that growth for the year will average
about 2% (after two years of 3% growth).
Global Economic Research 7
March 2008
Erik Nilsson +1 416 866-4205
JAPAN - The fourth quarter 2007 national accounts data
highlight the persistent imbalances - and hence the under-
lying fragility - of the Japanese economy. The impressive
0.9% q/q increase in GDP (outpacing the euro zone and
the US by a wide margin) - triple the Q3 advance - was
driven largely by a robust recovery in business investment
and by the ongoing strength in net trade. Consumer spend-
ing contributed a minimal 0.1 percentage point to the over-
all expansion; indeed, inventory accumulation contributed
as much to growth as did household consumption. Busi-
ness sentiment surveys and data on orders of capital
goods point to some easing in investment in the year
ahead, and the likelihood of an offsetting pickup in house-
hold spending is slim. Consumer confidence declined for a
fourth consecutive month in January, as the official index
slipped back to its most depressed level in more than four
years. The deterioration was driven by fresh concerns
about employment prospects, which added to consumers’
reluctance to buy ‘big-ticket’ items. Japan’s January trade
data point to renewed softening in overall growth, prompt-
ing the government to warn of a possible “lull in the econ-
omy”. Foreign sales rose 0.5% m/m, the smallest gain in
four months. At the same time, imports plunged 3.2%, in
part a result of the 4% appreciation of the yen against the
USD from the December trading average, but also a reflec-
tion of the ongoing sluggishness in domestic spending.
SWEDEN - The January inflation data should reinforce the
Riksbank’s confidence in the appropriateness of the Febru-
ary 12th decision to raise its benchmark interest rate 25
basis points to a 5-year high of 4.25% by a vote of 4-2. In
announcing the rate hike, the central bank also indicated
that “it will remain at roughly the same level over the com-
ing year”. While the monetary authorities are anticipating
some slowing in economic growth, “resource utilization in
the economy will nevertheless be higher than normal”,
pointing to a relatively slow easing in inflationary pressures.
Labour market conditions continue to improve, though at a
more subdued pace than in 2007. The January jobless rate
declined by a half percentage point from a year earlier to
6.4%, as employment rose by 1.2% (compared with year-
on-year gains averaging 2.2% through the final three
months of 2007). The headline inflation rate remained
above 3.0% y/y for a third consecutive month in January,
while the underlying rate accelerated to a 4½-year high of
2.1%. As is the case across most of the world, higher en-
ergy and food costs are a key factor in the pickup in head-
line inflation, reinforced by rising housing/utilities costs and
increases in indirect taxes (on alcohol and tobacco). While
the majority of these components are not interest rate-
sensitive, concerns about possible spillover effects at a
time when the economy may still be straining its capacity
limits provided ample justification for precautionary policy
tightening.
Foreign Exchange Outlook March 2008
ASIA/OCEANIA/EUROPE Erik Nilsson +1 416 866-4205 Tuuli McCully +1 416 863-2859
Currency Outlook Stephen Malyon +1 416 863-7719 Camilla Sutton +1 416 866-5470

AUSTRALIA - February was a solid month for the AUD as it proved to be the strongest performing primary currency (at
the time of writing). A key technical test is imminent as the currency will need to break above the November 2007 high of
0.9400 for enough conviction to really push the AUD substantially higher. However, as we go to press speculators and
technicals remain bullish, which should bode well for AUD in March and April.
NEW ZEALAND - The speculative community has been fairly quiet with regards to the NZD, even as the currency has
broken to a new 26-year high of 0.8213 against the USD. The near-term technical outlook continues to be favourable, as
the market has yet to reach overbought levels and the force behind the up move remains solid.
TAIWAN - We anticipate that the TWD will maintain a mild appreciating bias vis-à-vis the USD through 2008, as the im-
pact of large balance of payments surpluses and the prospect of improved relations with the People’s Republic of China
are offset by official doubts regarding the strength of domestic spending.
ICELAND - The Icelandic krona (ISK) will continue to be closely linked to investor sentiment and remains vulnerable to a
tightening of global credit conditions. However, substantial - and in some cases widening - positive interest rate differen-
tials between Iceland and abroad should provide support to the ISK in the near term.

Currency Trends
Going Back Spot Outlook
FX Rate FX Rate
12 m 6m 3m 27-Feb 3m 6m 12 m
AUD/USD 0.79 0.82 0.88 0.94 0.94 0.96 0.99 AUD/USD
NZD/USD 0.70 0.70 0.76 0.82 0.83 0.84 0.85 NZD/USD
USD/TWD 32.99 33.00 32.26 30.92 31.41 30.87 29.83 USD/TWD
USD/ISK 66.2 63.6 61.3 65.2 66.2 67.3 69.7 USD/ISK
AUD/USD NZD/USD
0.95 0.82

0.93 0.80

0.90 0.78

0.88 0.76

0.85 0.74

0.83 0.72

0.80 0.70

0.78 0.68

0.75 0.66
Feb-07 Apr-07 Jun-07 Aug-07 Oct-07 Dec-07 Feb-08 Feb-07 Apr-07 Jun-07 Aug-07 Oct-07 Dec-07 Feb-08

USD/TWD USD/ISK
33.50 70.0

33.00 68.0

32.50 66.0

32.00 64.0

31.50 62.0

31.00 60.0

30.50 58.0
Feb-07 Apr-07 Jun-07 Aug-07 Oct-07 Dec-07 Feb-08 Feb-07 Apr-07 Jun-07 Aug-07 Oct-07 Dec-07 Feb-08

Global Economic Research 8

Foreign Exchange Outlook
ASIA/OCEANIA/EUROPE
Fundamental Commentary
AUSTRALIA - The Reserve Bank of Australia’s (RBA) de-
cision to push the benchmark interest rate up another 25
basis points to 7.0% in early February highlights the central
bank’s ongoing disquiet regarding inflation. Subsequently-
released wages data will reinforce those concerns. The
wage price index rose 1.1% q/q in the final quarter of 2007,
leaving the annual rate of increase unchanged from the
previous quarter at 4.2%. With the jobless rate falling to a
3-decade-plus low of 4.1%, there is considerable risk of a
renewed acceleration in labour costs. Monetary policy com-
mittee members described price pressures as “broadly
based”, and were expected to intensify in the current quar-
ter. Moreover, “inflation expectations were also tending to
rise”. Importantly, the committee noted that staff projections
indicated that inflation would remain above the 3% target
ceiling at least over the next two years in the absence of
corrective measures. Indeed, there was some discussion
regarding the possibility of a 50 basis point increase in view
of the need for a strong signal of the RBA’s determination
to address the inflation problem. However, policymakers
opted for a more gradual response, a decision that was
“finely balanced” in part because the run-up in borrowing
costs since mid-2007 had outpaced the rise in the cash
rate, and the impact of the higher price of credit was still
working its way through the system. The RBA’s next policy
meeting will be held on March 4th.
TAIWAN - Economic growth in Taiwan remains heavily
dependent on external trade. The current account surplus
last year reached a record USD31.7 billion, equivalent to
8% of GDP. Real growth of 6.4% y/y in the final quarter of
2007 was driven by a 12.9% y/y surge in exports of goods
and services - the second consecutive double-digit gain -
more than double the 6.3% increase in imports. In contrast,
domestic demand rose a minimal 1.3% y/y, as a modest
2.2% increase in consumer spending was partially offset by
a 1.6% drop in investment, the worst performance in six
quarters. Taiwan’s strong trade ties with the People’s Re-
public of China (PRC) - which we expect to register eco-
nomic growth of more than 10% again this year - and a
moderate depreciation of the New Taiwan dollar vis-à-vis
the yuan will help to ensure another solid export perform-
ance this year. However, the momentum that was evident
in the second half of 2007 is unlikely to be sustained. While
we do expect some strengthening in domestic spending,
gains are unlikely to be sufficient to offset some narrowing
of the trade gap. As a result, the pace of economic expan-
sion will likely fall back below the 5% threshold - more in
line with Taiwan’s longer-term norm. The March 22nd presi-
dential election may set the stage for a less confrontational
stance vis-à-vis the issue of formal independence, pointing
to improved political relations with the PRC, a development
that would boost domestic investor confidence.
Global Economic Research 9
March 2008
Erik Nilsson +1 416 866-4205
Tuuli McCully +1 416 863-2859
NEW ZEALAND - The prospect of monetary policy easing
in New Zealand continues to be pushed further into the
future. The national unemployment rate declined another
0.1 percentage point to a record-low 3.4% in the final quar-
ter of 2007. Employment rose an impressive 1.1% q/q
(2.5% y/y), with the gains entirely attributable to a further
increase in full-time positions. The Reserve Bank of New
Zealand (RBNZ) has maintained its official cash rate (OCR)
at a record-high 8.25% since July 2007. There is some evi-
dence that high interest rates are beginning to make them-
selves felt - January housing prices were up just 4.0% y/y
and credit card usage is stabilizing. However, exports are
proving surprisingly resilient alongside buoyant demand for
New Zealand dairy products. Moreover, price pressures
remain unacceptably high; the headline CPI jumped 1.2%
q/q in Q4 2007. The RBNZ now expects consumer inflation
to remain above 3% in 2008, though it continues to express
confidence that “the current level of the OCR remains con-
sistent with future inflation outcomes of 1 to 3 percent on
average over the medium term”. Under these conditions,
there is no reason to anticipate an early shift in the current
monetary policy stance. Indeed, with wages (excluding
overtime) rising by 1.0% q/q (3.3% y/y) in the fourth quarter
(private sector wages rose 1.1% q/q, according to the offi-
cial labour cost index), the possibility of another rate hike
cannot be entirely dismissed.
ICELAND - Tight monetary conditions will remain in place
in Iceland; the nation’s central bank kept its benchmark
interest rate unchanged at a record-high of 13.75% follow-
ing the Board of Governors meeting on February 14th.
Monetary authorities deem that the earlier justification of an
unchanged policy rate through mid-2008 is still valid de-
spite the fact that the short-term inflation outlook is now
less favourable due to the recent depreciation of the krona.
The next monetary policy meeting is scheduled for April
10th. Consumer price inflation, which rebounded to a 1-year
high of 6.8% y/y in February, continues to exceed the cen-
tral bank’s 2.5% inflation target by a substantial margin on
the back of tight labour conditions, a strong housing market
and the government’s expansionary fiscal policy. However,
policymakers expect real estate prices to decline, which
should bring the inflation rate down accordingly. While the
monetary authorities noted that “uncertainty is greater than
before” regarding the impact of deteriorating global finan-
cial conditions on Icelandic demand and inflation, they also
observed that the krona may lose ground “concurrent with
a reduction in the supply of foreign capital”. Indeed, despite
improvement in the external accounts, the country’s current
account deficit remains substantial - close to 15% of GDP
in 2007 - entailing a long-term inflationary risk through the
possibility of currency depreciation alongside rising deficit
funding costs should global financial conditions become
less hospitable.
Foreign Exchange Outlook March 2008
DEVELOPING ASIA
Currency Outlook Erik Nilsson +1 416 866-4205

CHINA - We expect the authorities to countenance CNY appreciation of at least 10% against the USD in 2008 as part of
a more comprehensive effort to curb inflationary impulses. Uncertainties regarding the export outlook and the squeeze
on manufacturing profitability will be constraining factors on the currency.
INDIA - The period of INR appreciation vis-à-vis the USD may be near an end alongside a slowing in domestic industrial
activity. With output gains slowing and inflation still below target, we anticipate that the Reserve Bank of India will make
a more determined effort to resist further INR strengthening in an attempt to sustain industrial and employment growth.
KOREA - Until the Bank of Korea is more confident about the sustainability of growth in domestic demand, it will likely
lean against any rapid strengthening of the Korean won, though we expect some appreciation against the US dollar as
part of the central bank’s anti-inflation policy stance.
MALAYSIA - The upcoming general election on March 8th is unlikely to prove disruptive to the ringgit’s gentle, persistent
appreciating trend. Solid economic fundamentals, large balance of payments surpluses and a broader regional bias to-
wards currency strengthening vis-à-vis the USD will remain supportive factors.

Currency Trends
Going Back Spot Outlook
FX Rate FX Rate
12 m 6m 3m 27-Feb 3m 6m 12 m
USD/CNY 7.74 7.55 7.40 7.14 6.98 6.83 6.51 USD/CNY
USD/INR 44.3 40.9 39.6 39.8 39.8 39.9 40.2 USD/INR
USD/KRW 943 939 925 938 928 917 896 USD/KRW
USD/MYR 3.50 3.51 3.36 3.19 3.19 3.19 3.15 USD/MYR
USD/CNY USD/INR
45.0

7.70 44.0

7.55 43.0

42.0
7.40
41.0

7.25
40.0

7.10 39.0
Feb-07 Apr-07 Jun-07 Aug-07 Oct-07 Dec-07 Feb-08 Feb-07 Apr-07 Jun-07 Aug-07 Oct-07 Dec-07 Feb-08

USD/KRW USD/MYR
3.55
950
3.50

940 3.45
3.40
930
3.35

920 3.30

3.25
910
3.20
900 3.15
Feb-07 Apr-07 Jun-07 Aug-07 Oct-07 Dec-07 Feb-08 Feb-07 Apr-07 Jun-07 Aug-07 Oct-07 Dec-07 Feb-08

Global Economic Research 10

Foreign Exchange Outlook
DEVELOPING ASIA
Fundamental Commentary
CHINA - The internal debate regarding the appropriate
pace of yuan appreciation is undoubtedly intense as infla-
tionary pressures build and the trade surpluses continue to
widen. The January gap increased by 23% from a year ear-
lier to USD19.5 billion, though imports outpaced exports by
a narrow margin (28% y/y versus 27%). Some moderate
quickening in yuan strengthening has clearly been en-
dorsed to help address the burgeoning imbalance and
dampen inflationary pressures: the currency has gained
2.2% this year compared with 6.8% for the entirety of the
past year. Nevertheless, to alleviate some of the pressure
on the yuan, the authorities have announced plans to ease
restrictions on investment outflows by individuals and by
local companies. Food remains the driving force behind
consumer inflation in China. Led by a 41.2% y/y increase in
meat costs, the consumer price index jumped 7.1% y/y in
January - the biggest advance since September 1996. Ex-
cluding this component, pressures appear reasonably well-
contained. However, recent official efforts to cap prices - in
both the public and private sector - make it difficult to draw
firm conclusions. The January figures may also have been
distorted by the impact of the severely disruptive weather
conditions and by preparations for the celebration of the
Lunar New Year. Nevertheless, it is clear that massive in-
creases in domestic production capacity continue to limit
the potential for price increases across a wide range of
consumer goods.
KOREA - A second consecutive monthly decline in Korea’s
jobless rate to a 5-year low of 3.0% reinforces our view that
the nation will enjoy another solid, though unspectacular
year of economic growth. We expect output to rise by 4¼-
4½% in 2008 following a 5% gain last year. While central
bank concerns about the extent of economic deceleration
may prompt intermittent intervention to stem excessive
KRW appreciation, we expect the Bank of Korea to tolerate
some currency strengthening; the headline consumer price
index rose by 3.9% y/y in January, a 3½-year high and
wholesale prices jumped 5.9%. The monetary authorities
are having mixed success in curbing lending growth. Nev-
ertheless, as was widely anticipated, policymakers opted to
maintain the benchmark interest rate at 5.0% following their
February policy meeting and an adjustment in the near-
term is unlikely. Earlier concerns regarding the build-up in
mortgage debt - and rapid increases in house prices - are
abating alongside the marked easing in mortgage lending
to a minimal 2.1% y/y in January. With consumer confi-
dence slipping back to a 7-month low, a significant
strengthening in household borrowing (and spending) in
the near-term is unlikely. However, business borrowing -
largely by small- and medium-sized firms - is still growing at
a 20%-plus annual pace, raising concerns about the risk of
a possible deterioration in business balance sheets at a
time of increasing economic uncertainty.
Global Economic Research 11
March 2008
Erik Nilsson +1 416 866-4205
INDIA - India’s industrial sector continues to register solid
gains, but some deceleration - to a more sustainable pace -
is evident. Output rose 7.6% y/y in December, an improve-
ment from November’s modest 5.1% gain, but still below
the 6-month average of 8.5%. Manufacturing activity rose
8.4% y/y, led by a 16.6% increase in capital goods; how-
ever, this represented the smallest advance in machinery
and equipment production in five months. This suggests
that some cooling in the rate of expansion in business in-
vestment is under way alongside a noticeable softening in
demand for big-ticket consumer goods: output of consumer
durables products was up a minimal 2.2% y/y in December
and had been below year-earlier levels in three of the previ-
ous four months. The persistent softness prompted the fi-
nance minister to direct state-owned banks to lower their
prime rate. However, inflationary pressures are once again
on the rise. The wholesale price index was up 4.35% y/y in
early February, a 6-month high; all major components of
the index were up by more than 4.0%. Under these condi-
tions, we expect the Reserve Bank of India to maintain its
current monetary policy stance. The February 29th federal
budget for fiscal year 2008-09 (beginning April 1st) should
prove relatively neutral for the rupee, as the government
will likely maintain its current overall fiscal stance of limited
annual reductions in the deficit/GDP ratio (this year’s
budget shortfall is expected to be just over 3% of GDP).
MALAYSIA - Prime Minister Abdullah Ahmad Badawi has
dissolved parliament and Malaysia will hold a general elec-
tion on March 8th, more than a year ahead of the expiration
of the government’s five-year term. The coalition is widely
expected to maintain its five-decade hold on power and
major shifts in economic policy are unlikely. Abdullah’s own
political future will largely depend on the margin of victory.
Favouring the government is the fact that the economy has
proven relatively resilient to the global slowdown, though
some deceleration will be evident. The pickup in industrial
growth to 5.7% y/y in December - a 12-month high - may
prove temporary. Industrial activity is heavily driven by ex-
ports - indeed, the value of manufactured exports is equiva-
lent to more than 90% of Malaysian GDP - and the pros-
pect of a slowing in global growth in 2008 points to broadly-
based easing in demand for Malaysian products; foreign
sales (in USD terms) rose by close to 10% in 2007. Con-
sumer inflation remains low, a trend that will be supported
by ongoing appreciation of the ringgit. Although we do not
expect any early shift in monetary policy, a still relatively-
subdued price performance - the headline consumer price
index rose 2.3% y/y in January - gives the central bank
some leeway to lower its benchmark interest rate, which
has been held at 3.5% since April 2006, in the event of any
significant weakening in domestic economic activity.
Foreign Exchange Outlook March 2008
DEVELOPING AMERICAS
Currency Outlook Pablo F.G. Bréard +1 416 862-3876

BRAZIL - The Brazilian real (BRL) closed the week on a very bullish tone: the central bank announced that the country
has achieved for the first time net external creditor status. Market participants reacted positively to the news, as the at-
tainment of full investment-grade status is getting closer. The BRL traded below 1.70 per USD on Friday (please note
that the USD/BRL reached an all-time high of 3.95 in October 2002).
MEXICO - The Mexican peso (MXN) seems to be trapped in a wide, yet well entrenched, trading pattern between 10.70
and 11 per USD. The increase in government bond yields in local-currency markets has instilled a sense of comfort
amongst emerging-market investors. Crude oil prices and a resilient economy are also factors supporting a stable, if not
appreciating, trend for the MXN.
CHILE - The Chilean peso remains strongly influenced by a recovery in relevant commodity prices and by widening in-
terest rate differentials. The next monetary-policy setting meeting is scheduled to take place on March 13th: further tight-
ening cannot be entirely ruled out. At present, the monetary policy reference rate is set at 6¼%.
ARGENTINA - The Argentine peso is gradually losing its value, as a means of payment and as a reserve asset. The
administration dictates the pace of devaluation, fuelling currency-related inflation. The stubbornly implemented unortho-
dox currency policy will lead to a more intense depreciation should China undergo any sizable correction in its financial
(debt and equity) markets.

Currency Trends
Going Back Spot Outlook
FX Rate FX Rate
12 m 6m 3m 27-Feb 3m 6m 12 m
USD/BRL 2.12 1.96 1.80 1.66 1.77 1.78 1.82 USD/BRL
USD/MXN 11.17 11.03 10.92 10.74 10.90 10.96 11.10 USD/MXN
USD/CLP 540 524 506 463 470 473 482 USD/CLP
USD/ARS 3.10 3.16 3.15 3.16 3.20 3.23 3.33 USD/ARS
USD/BRL USD/MXN
2.20
11.20
2.10
11.10
2.00
11.00
1.90
10.90

1.80
10.80

1.70 10.70

1.60 10.60
Feb-07 Apr-07 Jun-07 Aug-07 Oct-07 Dec-07 Feb-08 Feb-07 Apr-07 Jun-07 Aug-07 Oct-07 Dec-07 Feb-08

USD/CLP USD/ARS
550 3.19
540
3.17
530
520 3.15
510
3.13
500
490 3.11
480
3.09
470
460 3.07
Feb-07 Apr-07 Jun-07 Aug-07 Oct-07 Dec-07 Feb-08 Feb-07 Apr-07 Jun-07 Aug-07 Oct-07 Dec-07 Feb-08

Global Economic Research 12

Foreign Exchange Outlook
DEVELOPING AMERICAS
Fundamental Commentary
BRAZIL - Brazilian financial markets are showing remark-
able resilience to collapsing US interest rates and an oil
price at almost triple digits. At the same time, however, we
caution that the vulnerability of neighbouring economies
(and financial markets) to a severe asset-price adjustment
in Brazilian securities (perhaps as a result of a correction in
China-led equity markets) has emerged as one of the most
relevant risk factors to monitor in 2008. Status quo in
monetary policy seems to dominate the thinking in financial
market participants ahead of the decision to be adopted at
the COPOM (monetary policy committee) meeting on
March 5th: the government-administered reference SELIC
rate remains at 11.25%. The minutes of the January 22nd
COPOM meeting highlighting that IPCA-based consumer
price inflation “has been less remarkably benign than that
observed in previous quarters”. At the same time, the re-
port focused on the solid performance of domestic demand
and industrial output: in the past 12 months, industrial pro-
duction and retail sales grew by 5.5% and 9.2%, respec-
tively. The government also noted that the external sector
remains a major contributor to growth, although there are
tentative signs of deceleration in net export activity: the cur-
rent account surplus was USD3.6 billion in 2007, equivalent
to 0.3% of GDP on the back of solid export performance:
foreign sales totalled USD161 billion.
CHILE - The world is focused on the possibility of a severe
economic downturn in the United States, already felt in the
distressed housing market. Yet, commodity prices have
recouped a directional upward trend of late, with positive
implications for Andean metal-exporting economies, and
associated floating currencies. As for the effect of monetary
policy trends and interest rate differentials, Chilean local-
currency securities have clearly received support from
higher government-administered short-term interest rates,
as the central bank embarks on a decisive, somewhat over-
due, strategy to contain inflationary expectations. Chile is
always fighting its own inflation specters. The monetary
authorities caught off-guard by the price pressures that
emerged over the past 12 months. Consumer price inflation
reached 7.5% y/y in January. Now, with a new leadership
in charge, the central bank is resorting to aggressive ortho-
dox mechanisms, that is higher interest rates, to try to con-
tain and reverse the current trend. In doing so, the pace of
economic expansion will continue to slow, prompting global
analysts and investors to downgrade their economic growth
projections for this year and next. Meanwhile, the Chilean
peso has attained a very stable trading range between 460
and 480 per USD, shrugging off the recent escalation in oil
prices. Undoubtedly, widening interest rate differentials and
copper prices in ascendancy have instilled strong support
to the Chilean currency.
Global Economic Research 13
March 2008
Pablo F.G. Bréard +1 416 862-3876
MEXICO - Mexico continues to weather the aftershocks of
the US-led sub-prime crisis and global credit crunch rela-
tively well. Although a sizable downturn in the US economy
will affect the pace of economic expansion south of the bor-
der, the administration of President Felipe Calderon-
Hinojosa will inject the necessary fiscal stimuli to compen-
sate for the loss of US momentum. At the heart of this im-
plied sense of decoupling/resilience enjoyed by Mexico are
a solid domestic financial sector and the orderly and ade-
quately supervised development of a local-currency fixed-
income market. The latest monetary policy decision to
maintain the status quo last week did not cause any mate-
rial shift in local investors’ portfolios. Financial markets re-
mained broadly stable this month, despite the sporadic gy-
rations caused by developments outside of Mexican terri-
tory: USD/MXN averaged 10.78 in February, and the IPC
equity index consolidated the gains achieved since mid-
January. Data on economic activity show a pattern of ex-
pansion: though manufacturing slowed considerably, real
GDP grew by 3.8% y/y in the fourth quarter of 2007. The
services-based sectors – transportation, financial services
and retail trade – showed the best economic performances.
For the year as a whole, the economy increased by 3.3%,
not a bad figure considering the storm of disruptive events
north of the border. In a recent official forecast revision, the
ministry of finance calls for a mild slowdown this year to
2.8%.
ARGENTINA - Argentina continues to embrace a de-facto
policy of international isolation. Government policies imple-
mented by the Kirchner(s) administration continue to gener-
ate capital flight, food and (transport) fuel shortages and, of
increasingly alarming relevance, emerging signs of hidden
(hyper) inflation. The apparent comfort amongst Argentine
policymakers would be abruptly overturned should Brazil
face a major equity market correction and currency depre-
ciation. The ghost of hyperinflation is slowly reappearing in
the memory (and business plans) of the commercial and
corporate sector in Argentina. Government authorities re-
main in a state of disruptive denial. Of course, neither union
leaders nor households believe the official figures (8.2% y/y
in January 2008). Social tensions – and wage demands –
are brewing, putting at risk the period of sustained eco-
nomic expansion and putting into doubt this sense of artifi-
cial price stability. At the heart of the unmanageable price
pressures lies the current policy of price controls (transport
fuels) and subsidies to inefficiently run organizations (public
transport services, for example) as well as the perceived
strategy of re-nationalization of corporations which were
transferred to private hands during the nineties. Any seri-
ous corporate business with a long-term strategic commit-
ment to Argentina is now incorporating inflation scenarios
into its business plans which exceed the official numbers
by a factor of three or four.
Foreign Exchange Outlook March 2008
DEVELOPING EUROPE/AFRICA Pablo F.G. Bréard +1 416 862-3876
Currency Outlook Tuuli McCully +1 416 863-2859

RUSSIA - The Russian ruble (RUB) maintains a stable tone. Global energy prices, sizable – and growing – foreign ex-
change reserves, an accelerating economy and the expected removal of election-related uncertainties are all key factors
instilling a positive market mood into Russia. USD/RUB will likely maintain a trading range between 24.2 and 24.8
through the remainder of the quarter.
TURKEY - The Turkish lira (TRY) is well-positioned to maintain a stable trading pattern through the remainder of the
quarter, despite the adverse effects caused by the global credit crunch in advanced economies. However, we expect
USD/TRY to close the year at 1.30, as investors incorporate the weakening external sector environment and a higher
degree of global risk aversion.
SOUTH AFRICA - The South African rand (ZAR) is entering a period of stabilization. The heavy corrective forces affect-
ing the ZAR will moderate in the coming months, paving the way for a period of consolidation and, perhaps, mild recov-
ery. Precious metal prices trends remain ZAR-supportive: gold prices have recently traded above USD950/ounce.
POLAND - Strong – albeit slowing – economic growth prospects and a bias towards monetary policy tightening should
provide support to the Polish zloty vis-à-vis the euro through the first half of 2008. The new reform-oriented government
also improves the zloty outlook on the back of increased potential for an improved business climate and robust fiscal
consolidation. A widening current account deficit, however, may limit the prospects of further appreciation towards end-
2008.

Currency Trends
Going Back Spot Outlook
FX Rate FX Rate
12 m 6m 3m 27-Feb 3m 6m 12 m
USD/RUB 26.1 25.7 24.5 24.1 24.3 24.5 24.9 USD/RUB
USD/TRY 1.41 1.30 1.18 1.18 1.21 1.24 1.32 USD/TRY
USD/ZAR 7.23 7.15 6.80 7.44 7.60 7.75 8.08 USD/ZAR
EUR/PLN 3.91 3.82 3.61 3.52 3.56 3.54 3.52 EUR/PLN
USD/RUB USD/TRY
26.3

26.0 1.43

25.7 1.38

25.4 1.33

25.1 1.28

24.8 1.23

24.5 1.18

24.2 1.13
Feb-07 Apr-07 Jun-07 Aug-07 Oct-07 Dec-07 Feb-08 Feb-07 Apr-07 Jun-07 Aug-07 Oct-07 De c-07 Feb-08

USD/ZAR EUR/PLN
3.95
7.68 3.90
3.85
7.48
3.80
7.28
3.75
7.08 3.70
3.65
6.88
3.60
6.68
3.55
6.48 3.50
Feb-07 Apr-07 Jun-07 Aug-07 Oct-07 Dec-07 Feb-08 Feb-07 Apr-07 Jun-07 Aug-07 Oct-07 Dec-07 Feb-08

Global Economic Research 14

Foreign Exchange Outlook
DEVELOPING EUROPE/AFRICA
Fundamental Commentary
RUSSIA - Russian stocks (as measured by the MICEX10
index) have suffered a substantial downward adjustment
since the beginning of the year, the most acute sell-off
within the so-called BRIC (Brazil, Russia, India and China)
group. The Russian ruble has also adopted a somewhat
defensive tone; however, oil and natural gas prices to-
gether with massive foreign exchange reserves remain
very RUB supportive. Indeed, the government counts on
more than USD600 billion in reserves and stabilization
funds to influence the exchange rate, and investors have
no market-induced mechanism to alter the policy-guided
exchange rate. On the political front, Mr. Dmitry Medvedev,
appointed by Vladimir Putin to succeed him as Russian
president is almost sure to win the March 2 election, provid-
ing a sense of policy continuity (and some tacit comfort) to
investors exposed to Russian local-currency assets. The
monetary front remains most challenging, as highlighted by
the central bank’s decision to increase its discount rate by
25 bps to 10¼% and hike reserve requirements on Febru-
ary 4th in response to escalating price pressures; headline
inflation reached 12.6% y/y in January, sharply exceeding
the official target. In brief, a decisive strategy to cool the
economy will need to be implemented to curb the current
adverse inflation trend and restore expectations to normal
levels; until then, investors will likely exert a more cautious
tone in their portfolio allocation decisions.
SOUTH AFRICA - Global market participants severely pun-
ished the South African currency on the grounds of increas-
ing evidence of an imminent energy crisis, sharp economic
deceleration and persistently high consumer price inflation.
To make matters worse, a period of global credit re-pricing
was activated as portfolio investors differentiated amongst
emerging-market credits and currencies. The country’s still
wide current account deficit, coupled with renewed political
uncertainties and a period of sustained securities markets
gains prompted an abrupt adjustment in securities valua-
tions with adverse consequences to the ZAR. The ex-
change rate ignored the bullish trend in precious metal
markets and sharply depreciated from 6.70 to 7.93 per
USD in a matter of days; nevertheless, a process of recov-
ery has recently taken shape. Looking ahead, domestic
interest rates will remain high, acting as a constraining
mechanism against capital flight and foreign capital repa-
triation. The prospect of a more severe equity market cor-
rection in China may in the near future instil a negative
view in South Africa and other emerging-market econo-
mies. The outlook for the utility sector is grim, as electricity
shortages will be in place in the coming months. It seems
that a prolonged period of neglect on the part of the gov-
ernment and the state-run Eskom organization has blocked
an adequate investment plan to meet rising energy de-
mand, a pattern that is also increasingly evident in other
developing countries.
Global Economic Research
March 2008
Pablo F.G. Bréard +1 416 862-3876
Tuuli McCully +1 416 863-2859
TURKEY - Resilience to global financial shocks and inves-
tors’ indifference to escalating military confrontation in
northern Iraq continue to shape sentiment in Turkish secu-
rities markets. The administration of President Recep Tay-
yip Erdogan deepened its military offensive to contain the
insurgency in northern Iraq, further increasing the country’s
political risk component. Investors have, for now, shrugged
off the heightened security risks. On the monetary policy
front, the central bank opted to reduce its benchmark short-
term interest rates by 25 basis points on February 14th: the
borrowing overnight rate to 15.25% and the lending rate to
19.25%. When discounting expected inflation in the next 12
months, real short-term interest rates continue to be very
supportive to the TRY. In fact, trading patterns have been
quite stable since the beginning of the year: USD/TRY
seems to be trapped in a 1.15-1.25 range. The central bank
remains committed to its primary objective, which is “to
achieve and maintain price stability”. The latest official
communiqué of the monetary authorities signals that the
Turkish economy maintains a moderate pace of expansion
and that the key factors shaping the inflation outlook re-
main high energy and food costs. Consumer prices in-
creased by 8.2% y/y in January; the central bank stressed
that monetary conditions aim at supporting the process of
disinflation, yet monetary policy remains restrictive despite
the recent interest rate reductions.
POLAND - Poland will remain among the growth leaders in
central Europe. Spurred on by solid gains in investment
and consumer spending, the nation’s output expanded by
6½% in 2007 – the fastest growth in a decade. We expect
the economy to stay on a favourable track in 2008, though
the pace is set to slow slightly to around 5½% due to higher
domestic interest rates and some cooling in European de-
mand for Polish exports. The new pro-business govern-
ment aims to lower taxes and push through economic re-
forms, which should provide support to Poland’s investment
and growth outlook. Inflationary pressures continue their
upward trend of recent months. Consumer price inflation
accelerated for a fifth consecutive month in January to
4.3% y/y – the highest in more than three years – from
4.0% the month before, continuing to exceed the central
bank’s 2.5% inflation target by a substantial margin. De-
spite the fact that price pressures are driven mainly by high
food and energy costs, the National Bank of Poland tight-
ened monetary conditions in the Monetary Policy Council
meeting on February 26th-27th, taking the benchmark inter-
est rate to 5.50%. The decision reflects the fact that price
pressures persist amid expansionary demand conditions.
We expect further modest monetary tightening in the com-
ing months, as Poland will likely remain relatively resilient
in the face of the euro zone’s economic slowdown .
15
Foreign Exchange Outlook March 2008

GLOBAL CURRENCY FORECAST (end of period)

2006 2007 2008f 2009f 2008f 2009f
Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4
MAJOR CURRENCIES
Japan USD / JPY 119 112 103 100 107 106 105 103 100 98 98 100
Euro zone EUR / USD 1.32 1.46 1.58 1.55 1.50 1.53 1.55 1.58 1.59 1.60 1.57 1.55
EUR / JPY 157 163 163 155 161 162 163 163 159 157 154 155
UK GBP / USD 1.96 1.98 2.07 2.05 1.99 2.01 2.04 2.07 2.07 2.08 2.07 2.05
EUR / GBP 0.67 0.74 0.77 0.75 0.75 0.76 0.76 0.77 0.77 0.77 0.76 0.75
Switzerland USD / CHF 1.22 1.13 1.00 1.00 1.07 1.04 1.03 1.00 0.99 0.98 0.99 1.00
EUR / CHF 1.61 1.65 1.58 1.55 1.61 1.59 1.59 1.58 1.57 1.56 1.55 1.55

AMERICAS
Canada USD / CAD 1.17 1.00 0.96 0.97 0.99 0.98 0.97 0.96 0.94 0.95 0.96 0.97
North

CAD / USD 0.86 1.00 1.04 1.03 1.01 1.02 1.03 1.04 1.06 1.05 1.04 1.03
Mexico USD / MXN 10.82 10.91 11.05 11.37 10.83 10.80 10.89 11.05 11.14 11.12 11.20 11.37
CAD / MXN 9.28 10.93 11.51 11.72 10.98 11.14 11.32 11.51 11.84 11.80 11.76 11.72
Argentina USD / ARS 3.06 3.15 3.30 3.50 3.17 3.21 3.25 3.30 3.35 3.40 3.45 3.50
Brazil USD / BRL 2.14 1.78 1.80 1.90 1.77 1.78 1.79 1.80 1.82 1.85 1.87 1.90
Chile USD / CLP 533 498 480 490 467 471 475 480 482 485 487 490
South

Colombia USD / COP 2240 2018 2025 2150 1865 1912 1960 2025 2056 2087 2118 2150
Peru USD / PEN 3.20 3.00 2.90 2.85 2.93 2.92 2.91 2.90 2.89 2.87 2.86 2.85
Venezuela 1/ USD / VEB 2.15 2.15 2.58 3.00 2.18 2.29 2.41 2.58 2.68 2.78 2.89 3.00

ASIA / OCEANIA
Australia AUD / USD 0.79 0.88 0.98 0.93 0.92 0.94 0.96 0.98 0.99 0.97 0.95 0.93
China USD / CNY 7.81 7.30 6.60 6.10 7.08 6.93 6.79 6.60 6.47 6.35 6.22 6.10
Hong Kong USD / HKD 7.78 7.80 7.73 7.70 7.79 7.77 7.75 7.73 7.72 7.71 7.71 7.70
India USD / INR 44.3 39.4 40.0 41.0 39.8 39.9 39.9 40.0 40.2 40.5 40.7 41.0
Indonesia 2/ USD / IDR 8.99 9.40 9.50 9.70 9.09 9.21 9.33 9.50 9.55 9.60 9.65 9.70
Malaysia USD / MYR 3.53 3.31 3.18 3.00 3.19 3.19 3.19 3.18 3.13 3.09 3.04 3.00
New Zealand NZD / USD 0.70 0.77 0.86 0.80 0.82 0.83 0.84 0.86 0.84 0.83 0.81 0.80
Philippines USD / PHP 49.0 41.2 41.0 42.0 40.4 40.6 40.7 41.0 41.2 41.5 41.7 42.0
Singapore USD / SGD 1.53 1.44 1.39 1.37 1.41 1.41 1.40 1.39 1.38 1.38 1.37 1.37
South Korea USD / KRW 930 936 900 875 935 924 914 900 894 887 881 875
Thailand USD / THB 35.5 29.8 30.0 30.5 29.9 29.9 30.0 30.0 30.1 30.2 30.4 30.5
Taiwan USD / TWD 32.6 32.4 30.0 29.0 31.8 31.2 30.7 30.0 29.7 29.5 29.2 29.0

EUROPE / AFRICA
Czech Rep. EUR/CZK 27.5 26.5 25.0 25.2 25.8 25.6 25.3 25.0 25.0 25.1 25.1 25.2
Iceland USD/ISK 71.0 62.8 69.0 73.0 65.6 66.6 67.6 69.0 70.0 71.0 72.0 73.0
Hungary EUR/HUF 251 253 260 270 258 259 259 260 262 265 267 270
Poland EUR/PLN 3.83 3.60 3.50 3.60 3.58 3.56 3.53 3.50 3.52 3.55 3.57 3.60
Russia USD / RUB 26.3 24.6 24.8 25.5 24.2 24.3 24.5 24.8 25.0 25.1 25.3 25.5
South Africa USD / ZAR 7.01 6.86 8.00 8.50 7.51 7.65 7.80 8.00 8.12 8.25 8.37 8.50
Sweden EUR / SEK 9.04 9.44 9.10 9.00 9.31 9.25 9.18 9.10 9.07 9.05 9.02 9.00
Turkey USD / TRY 1.42 1.17 1.30 1.45 1.19 1.22 1.26 1.30 1.34 1.37 1.41 1.45

a: actual; f : forecast; 1/ a new "strong bolivar" w as announced on January 1st, 2008, equivalent to 1000 bolivars; 2/ in thousands

Global Economic Research 16

Foreign Exchange Outlook

International Research Group

Pablo F.G. Bréard, Head
pablo_breard@scotiacapital.com

Tuuli McCully
tuuli_mccully@scotiacapital.com

Erik Nilsson
erik_nilsson@scotiacapital.com

Estela Ramírez
estela_ramirez@scotiacapital.com

Oscar Sánchez
oscar_sanchez@scotiacapital.com

Canadian & U.S. Economic Research

Karen Cordes
karen_cordes@scotiacapital.com

Gorica Djeric
gorica_djeric@scotiacapital.com

Adrienne Warren
adrienne_warren@scotiacapital.com

Foreign Exchange Research

Stephen Malyon
stephen_malyon@scotiacapital.com

Camilla Sutton
camilla_sutton@scotiacapital.com

Scotia Economics
40 King Street West, 63rd Floor Scotia Plaza
Toronto, Ontario Canada M5H 1H1
Tel: (416) 866-6253 Fax: (416) 866-2829
Website: www.scotiabank.com
Email: scotia_economics@scotiacapital.com

This Report is prepared by Scotia Economics as a resource for the clients of Scotiabank and Scotia Capital. While the
information is from sources believed reliable, neither the information nor the forecast shall be taken as a representation for which
The Bank of Nova Scotia or Scotia Capital Inc. or any of their employees incur any responsibility.

Global Economic Research