Research & Strategy, London

TD Securities Emerging Markets Q1 2011 Outlook

Fishing for golden yields

Cristian Maggio Emerging Markets Strategist
17 January 2011
1 See disclaimer at the end of this document

OVERVIEW EM Overview EM Forecasts & Recommendations COUNTRY OVERVIEW EMEA - Turkey - South Africa - Poland - Hungary - Romania - Russia LATAM - Brazil - Mexico ASIA - India - Indonesia

3-9 10-16

18-24 25-31 32-38 39-45 46-51 52-58

60-66 67-73

75-80 81-84

Note: Data as of 17 January 2011 unless otherwise noted


EM Overview
- EM versus DM and the inflation risk - Strong performance driven by capital inflows - The law of unintended consequences - Unorthodox monetary policies - Appreciation against the EUR - REER valuations more balanced now

EM versus DM and the inflation risk
Equity markets (rebased)
120 MSCI EM 115 110 105 100 95 90 85 Jan-10 Mar-10 MSCI World



Sep-10 Nov-10


Source: Bloomberg

Local vs External Debt (indices rebased)
120 EMBIG 115 110 105 100 95 90 Jan-10 Mar-10 ELMI+

The most pronounced divergence in growth, inflation, and the direction of policy is between emerging market (EM) economies and the large developed markets (DM). The US stands out from this latter group and faces the dual challenge of both a disadvantageous starting point and a relatively slower rate of recovery. On the contrary, as many EMs return to full capacity, policymakers must prepare for the next stage by withdrawing stimulus in order to balance rising inflation with a recovery in the DM that is not yet assured. The challenge facing EM central banks has been exacerbated by the Fed’s so-called QE2, which, by targeting risky assets, is increasing food and energy prices. Since these typically carry a larger weight in the EM CPI baskets, this is contributing to the rise of inflation across the emerging world.


14 January 2011 Pre-crisis Change Peak
1,160 1,309 527 382 1,338 1,682 418 374 -13.3% -22.2% 26.1% 2.2%



Sep-10 Nov-10


Source: Bloomberg

USD) 25 20 15 10 5 0 -5 -10 -15 -20 -25 Q1'10 Q2'10 Q3'10 Q4'10 2010 FX total return in 2010 (% vs. but many currencies stand above 10%.1%). USD) -10 ZAR BRL IDR MXN INR TRY RUB PLN RON HUF Source: Bloomberg Values as of 31 Dec 2010 -5 0 5 10 15 20 ZAR BRL IDR MXN INR TRY RUB PLN RON HUF Source: Bloomberg Values as of 31 Dec 2010 5 . followed by BRL (14.Strong performance driven by capital inflows 125 120 115 110 105 100 95 90 85 80 Jan-10 Mar-10 May-10 ELMI+ (rebased) Brazil Hungary Russia Mexico Turkey Indonesia Poland South Africa Jul-10 Sep-10 Nov-10 Jan-11 Source: Bloomberg. JPMorgan Most EM currencies posted spectacular total returns in 2010.9% TR in 2010. despite the somewhat sluggish performance in Q4’10. FX total return (% vs. The ZAR stands out with 18. this is partly due to anticipatory moves in Q3 and unorthodox monetary policies and capital controls introduced to curb hot money inflows. fixed income securities in particular. has attracted foreign capital in an almost uninterrupted fashion. The great appeal of EM yields. While the effect of QE2 has been less strong than expected in Q4’10.

flows are likely to exceed $830bn.9% in 2011 from 4. interventionism has become the norm. Nonetheless. TD Securities As central banks try to curb FX appreciation. net private flows into EM assets (excluding sovereign money) have been close to a whopping $825bn in 2010 from $581bn in 2009. Asian economies cooling down their growth and major EU countries (namely Germany) returning to trend growth are the main cause. 6 . world growth should decline to 3. In 2011. 2010/11 forecasts) FDI Portfolio Commercial The recovery in the US economy is poised to gain traction in 2011 and beyond. In 2010. 140 120 100 80 60 40 20 0 7 6 5 4 3 2 1 0 Reserves and debt (USDtr) Reserves External Debt Reserve/Debt (%. dwarfing the 2009 record of $83bn. lhs) 1995 1997 1999 2001 2003 2005 2007 2009 2011 Source: IIF. TD Securities EM Capital flows (USDbn. According to IIF estimates. It comes as no surprise that EMs are tryng to fend some flows off. Growing interest rate differentials continue to attract foreign capital into EMs.4% the previous year. with upside risks coming from the extra liquidity provided by QE2 in the DM. the speed of EM growth is also set to decelerate over the coming quarters. For similar reasons.The law of unintended consequences 500 400 300 200 100 0 -100 -200 1995 1997 1999 2001 2003 2005 2007 2009 2011 Source: IIF. with several EM policymakers expected to continue delivering measures to curtail inflation and fight against hot money inflows. investors have poured close to $90bn into EM equity funds alone.

The higher the FX appreciation. 7 Reserves increases (% of total ytd) 80 70 60 50 40 30 20 10 0 -10 Jan-09 Apr-09 Jul-09 Oct-09 Jan-10 Apr-10 Jul-10 Source: Bloomberg Brazil Indonesia Russia Romania . such as hiking the reserve requirements for banks. Hungary. central banks may be holding back on interest rate hikes and use macro-prudential measures instead. For this reason China. Unfortunately.400 1. and Indonesia. these actions only create an additional set of challenges for EM policymakers. Central banks are increasingly less keen to boost rate differentials. Against rising inflation. EcoWin India Brazil Mexico Turkey Russia Soaring inflation requires monetary tightening. increasing the minimum holding period for foreign held securities or other unorthodox policies mix. Malaysia. India. DM. Several central banks have already hiked rates in 2010.000 800 600 400 200 0 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 Source: Bloomberg. increasing the appeal of local yields vs.Unorthodox monetary policies FX reserves (USDbn) 1. for example Brazil. and more of this medicine will be required to face down inflation this year. Brazil. the more concrete these risks will be. have begun to introduce capital controls. Several other countries have subtly threatened to go the same route or even cut interest rates in order to weaken their currencies. we see few alternatives for EM policymakers but to deliver more tightening. just to name a few. In addition.200 1.

lhs) Ext debt / Exports (%. the EUR in 2011.000 1. Debt (% GDP) US Brazil India S. The euro correction could put some strains on emerging currencies in the mid-short term. The dynamics are clearly not dictated by capital repatriation or risk aversion (unless the EU debt crisis explodes).000 4.000 0 External indicators 160 140 120 100 Reserves (USDbn. 8 7. EM crosses should remain equally attractive. Africa Germany China Mexico Turkey UK Indonesia Russia 120 100 80 60 40 20 0 2007 2008 2009 2010E 2011E 2012E 2013E 2014E 2015E Source: IMF TD expects the USD to outperform the EUR in 2011. We prefer exposure vs.Appreciation against the EUR Gross Govt. we generally prefer exposure to the euro as this would imply higher returns by the end of 2011. rhs) 80 60 40 20 0 1995 1997 1999 2001 2003 2005 2007 2009 2011 Source: IIF . In a risk-on environment. the euro in particular this year. On the contrary.000 6.000 2. but interventionism could reduce the upside potential. Nevertheless.000 5. especially when rate differentials are increasing. However. EM crosses directly correlated to the dollar (Latam currencies for instance) are likely to benefit.000 3. while developing Asia should remain relatively insulated due to the regional growth dynamics. we note that EUR/USD depreciation will be the result of the expected US outperformance amidst global economic expansion. The combination of a more robust outlook for US economic growth and ongoing fiscal tensions in Europe is expected to underpin the US dollar against the developed market majors. EMEA is likely to suffer the most.

00 -1. While IDR and RUB also remained in the group of countries with REER appreciation.REER valuations more balanced now REER (Z-score on 5y avg) PHP EUR MYR HKD MAD KRW TRY ARS RON VEF PLN SKK HUF TWD MXN INR SGD CZK ECS BGN KWD COP CNY RUB PEN SAR IDR EGP CLP ILS NGN ZAR THB BRL PKR REER Cheap Currency corrections during Q4’10 have rebalanced REER valuations. Although this can not be considered a unique measure of FX valuation. We remain wary though of the negative effects on currencies that possible interventions would produce. the strong appreciation in REER terms denotes a structural change in emerging countries. 9 REER Rich -2.00 1. The z-score of the REER (Real Effective Exchange Rate) of the most important EM currencies (with the inclusion of the EUR) now accounts for an almost equal number of cheap and rich currencies. While we continue believing that REER appreciation of the BRL and the IDR is justified by the improvement of their fundamentals. TD Securities .00 2.00 Source: Bloomberg. and most eastern European currencies. the Q4 correction has compromised the real effective performance of the MYR. The BRL and ZAR have remained the strongest performers.00 3.00 0. the ZAR seems overvalued and subject to mean reversal. which also justifies a secular shift towards higher values. TRY.

EM Forecasts .Currency recommendations .Rate decision forecasts .Fixed Income recommendations (1) .Fixed Income recommendations (3) .Fixed Income recommendations (2) .Currency and rate forecasts .

75% 3.50% 5.00% 4.25% 1.50% 2.50% 4.25% 0.00% 6.Rate decision forecasts Current Turkey South Africa Hungary Poland Romania Brazil Mexico India Indonesia Malaysia FOMC ECB 6.00% 7.25% 6.75% 4.50% 3.25% 10.25% 1.50% 5.75% 0.50% 6.50% 6.50% 6.00% Q1 2011 -100bp +25bp +25bp +100bp +25bp +25bp - Q2 2011 +50bp +75bp +25bp +50bp - Q3 2011 +25bp +25bp +25bp +25bp - Q4 2011 +50bp -25bp +25bp - end-2011 5.00% 12.00% Source: Bloomberg.50% 6.50% 7. TD Securities 11 .

90 9.98 30.74 5.05 4.063 11.7 35.56 2.87 6.75% 43.00% 2.87 2.50% 1.750 11.58 1.62 12.25 3.02 15.8 59.05 * according to TD's EUR/USD forecast Source: Bloomberg.2 6.75% 28.02 3.40 7.50% 1.50% 6.75% 3.5 60.73 4.75% 3.68 2.20 1.25% 4.25% 4.34 6.98 3.54 6.6 6.33 7.28 12.50% 12.977 3.00% 275 250 4.416 2.06 4.50% 1.59 1.05 13.54 2.50% 8.730 9.94 8.12 7.18 3.12 14.24 6.75% 3.Currency and rate forecasts Spot Turkey Rates USD/TRY EUR/TRY S.10 16.10 1.80 3.25% 3.00% 42.50% 3.75% 1.26 3.81 9.00 4.12 1.27 4.82 4.4 274 206 9.58 6.75% 8.98 1.030 3.17 6.2 6.50% 1.20 1.86 1.50% 1.813 2.95 12.55 7.91 3.50% 11.10 1.1 6.75% 29.5 52.8 47.50% 43.55 1.52 6.05 EUR/USD* 1.50% 3.75% 29.8 45.50% 12.8 40. TD Securities Q1 2011 Q2 2011 Q3 2011 Q4 2011 Brazil Rates USD/BRL EUR/BRL Mexico Rates USD/MXN EUR/MXN India Rates USD/INR EUR/INR Indonesia Rates USD/IDR EUR/IDR Malaysia Rates USD/MYR EUR/MYR 11.26 7.50% 6.33 * according to TD's EUR/USD forecast 12 .05 7.50% 7.70 3.75 3.67 2.00% 278 232 4.00% 7.10 5.25% 4.1 7.8 30. Africa Rates USD/ZAR EUR/ZAR Russia Rates USD/RUB EUR/RUB Hungary Rates EUR/HUF USD/HUF Poland Rates EUR/PLN USD/PLN Romania Rates EUR/RON USD/RON EUR/USD* Q1 2011 Q2 2011 Q3 2011 Q4 2011 5.12 12.05 1.33 1.50% 1.0 39.06 4.603 3.50 1.00% 42.19 7.680 10.00% 274 261 4.35 5.3 32.35 1.75% 29.600 9.00% 4.2 6.25% 8.65 1.26 3.91 5.50% 12.50% 1.17 12.21 3.65 1.1 7.95 3.25% 2.00% 275 204 3.0 44.87 2.2 7.68 2.20 5.83 7.10 5.41 6.50% 8.

5% EUR/TRY 2. USD and 50% vs.2% 6.06 23.4% 6.87 4.8% EUR/MXN 15.7% UNDERWEIGHT (good fundamentals but EU risk exposure) ** * * *** Romania USD/RON 3.4% 14.8% 12.0 0.7% 7.2% 7.7% 3.063 5.3% 4.8% 25.8% 10.6% 26.3% 8.2% EUR/BRL 2.4% 12.06 3. *** high) 13 .2% OVERWEIGHT (high oil and currency undervalued) 3.2% 4.0% EUR/ZAR 9 19.23 22.2% 4.1% 31.2% EUR/RUB 39.8% NEUTRAL (correlation to US but intervention risk) 5.1% NEUTRAL (stable appreciation but low yields) 6.Currency recommendations Spot 17/1/2011 1 year Currency 1 year Carry Total Return Tail risk* ** Spot 17/1/2011 1 year Currency 1 year Carry Total Return Tail risk* * Turkey USD/TRY 1. TD Securities Weights are b ased on assumption of a currency portfolio 50% vs.2% 6.1% -20.05 23.5% 34.5% 15.54 2.1% 6.2% EUR/IDR 11. ** medium.977 24.3% UNDERWEIGHT (unclear fiscal effort and exposure to EU) Poland USD/PLN 2.2% 30.7% 7.1% 4.0% 25.0% NEUTRAL (rand still overvalued but attractive carry) Russia USD/RUB 30.26 1.0 3.2% EUR/INR 60.2% -18.4 27.0% 7.1% 12.5 7.4% 34.1% 7.68 1.3% EUR/HUF 274 0. EUR Tail risk in terms of extreme political or financial market outcomes (* low.9% LARGE OVERWEIGHT (very high yields despite intervention risk) Mexico USD/MXN 12.6% 7.0% 6.9 21.9% 6.8 24.7% LARGE OVERWEIGHT (fundamental backdrop and higher yields) Malaysia USD/MYR 3.2% 6.20 -24.8% 31.91 -21.0% UNDERWEIGHT (high political risk and EU risk but valuations attractive) Source: Bloomberg.9% ** ** ** 10.8% 6.2% Brazil USD/BRL 1.2% 6.1% EUR/MYR 4.3% -16.7% EUR/PLN 3.0% OVERWEIGHT (high carry but limited spot appreciation) South Africa USD/ZAR 7 -2.5% 3.8% ** Hungary USD/HUF 207 -26.1% EUR/RON 4.5% LARGE OVERWEIGHT (spot appreciation and high carry) Indonesia USD/IDR 9.3% *** India USD/INR 45.2% 8.

3 4.0 7.50% 4.2 12.5 7.5 10.70% 5.75% TD 5.3 7.4 7.50% 5.50% TD Market 10.0 11. TD Securities * Charts represent Interest Rate Swap curve Rates Recommendation: 2y5y flattener although TD’s rate profile is in line with market Bond Recommendation: Buy belly of the curve as the next big move will be curve flattening Rates Recommendation: Receive short rates as our expectations are rates unchanged Bond Recommendation: Buy mid-to-long maturities as the curve is still too steep Rates Recommendation: Receive belly of the curve although the market is less aggressively priced than TD in 6m Bond Recommendation: Buy belly of the curve for LT investors as we like BRL bonds 14 .4 0Y 5Y 10Y 15Y 20Y 25Y 30Y 5.Fixed income recommendations* (1) Turkey 10.6 11.3 6.3 5.4 12.50% 12.4 Jan-11 Oct-10 Jul-10 8.75% 5.50% 12.20% 4.8 12.0 9.50% 5.60% 5.2 Oct-10 Jul-10 Jan-11 Oct-10 8.5 8.9 7.8 5.6 12.9 South Africa Jul-10 8.5 9.9 5.8 7.4 8Y 10Y 12Y 14Y 16Y 18Y 20Y 22Y 11.0 0Y 1Y 2Y 3Y 4Y 5Y Market Now +6M 6.50% 11.8 0Y 2Y 4Y 6Y Jan-11 Mexico Oct-10 Jul-10 Brazil Jan-11 13.50% TD Market 5.8 11.80% 4.4 11.50% +12M 6.50% TD Market 4.0 12.0 10Y 0Y 1Y 2Y 3Y 4Y 5Y 6Y 7Y 8Y 9Y 6.50% 5.8 8.50% 6.0 6.50% 12.50% Rates Recommendation: Receive short rates as TD is forecasting additional repo rate cuts Bond Recommendation: Buy short-to-medium maturity bonds as the curve is likely to resteepen Source: Bloomberg.8 6.

5 6.Fixed income recommendations* (2) Poland 5.5 7.7 6.90% 6.50% 6.10% 6.8 5.00% n.0 5.4 7.6 6.0 6.2 6.0 6.25% 6.6 0Y 2Y 4Y 6Y 8Y 10Y 12Y 14Y 16Y 18Y 20Y Jan-11 Hungary Oct-10 Jul-10 7.0 3Y 4Y 5Y 6Y 7Y 8Y 9Y 10Y 0Y 1Y 2Y Jan-11 Russia Oct-10 Jul-10 3Y 4Y 5Y 6Y 7Y 8Y 9Y Market Now +6M 4.a.75% +12M 4.0 0Y 2Y 4Y 6Y 8Y 10Y 12Y 14Y 16Y 18Y 20Y Jan-11 Oct-10 Jul-10 7.5 4.5 6.8 4.6 5.1 7.0 4.2 4.75% 6.0 5.4 4.6 4.5 5.2 7.00% 7.4 6.2 7.25% n.3 7.0 4.75% TD 4.05% 3.8 5.0 6.6 6.a.25% TD Market 7. TD Securities * Charts represent Interest Rate Swap curve 15 10Y .8 6.5 8.4 0Y 1Y 2Y Jan-11 Romania Oct-10 Jul-10 8.75% TD Market 6. 7.0 7.9 6.2 5.00% 7.50% TD Market 5.25% 5.40% 4. 7.8 6.4 5.75% Rates Recommendation: Neutral although TD’s rate profile is marginally more aggressive Bond Recommendation: Buy mid-to-long maturities as is still too steep indeed and will flatten Rates Recommendation: Neutral as the market is pricing 25bp hike as TD Bond Recommendation: Buy mid-maturity bonds as curve is likely to normalize Rates Recommendation: Receive rates up to 1y as the market is too aggressively positioned for rate hikes Bond Recommendation: Buy short-end bonds as curve is likely to normalize Rates Recommendation: Neutral as TD is forecasting no rate hikes Bond Recommendation: Buy short-to-mid dated bonds as curve will remain steep Source: Bloomberg.

0 6.0 7.4 4. 7.a.0 4.0 0Y 1Y 2Y 3Y 4Y 5Y 6Y 7Y 8Y 9Y 10Y Jan-11 Oct-10 Jul-10 9.a. TD Securities * Charts represent Interest Rate Swap curve Rates Recommendation: Pay short rates but liquidity is distorting off-shore money market curve (yields too low) vs.5 6.0 4.0 0Y 1Y 2Y Jan-11 Malaysia Oct-10 Jul-10 3Y 4Y 5Y 6Y 7Y 8Y 9Y Market Now +6M 6.2 3.5 6.25% 7.5 5.0 3.4 3.0 5.50% TD Market 2.5 8.a.8 3.6 3.2 4.00% n.0 8. 2.0 5.25% (repo) 6.a.75% +12M 7.5 7. onshore Bond Recommendation: Long duration as we like IDR assets and think curve is too steep Rates Recommendation: Neutral or pay short-end as more rate hikes will be delivered Bond Recommendation: Buy mid to long maturities as curve remains quite steep 10Y 16 .75% TD 6.5 5.6 4.00% Rates Recommendation: Continue paying rates as more tightening will be delivered and the curve will continue flattening Bond Recommendation: Long duration as we like IGBs and curve is steeper than IRS Source: Bloomberg.50% n.50% n.0 6.75% TD Market 6.75% n.8 4. 6.5 0Y 1Y 2Y 3Y 4Y 5Y 6Y 7Y 8Y 9Y 10Y Jan-11 Indonesia Oct-10 Jul-10 5.Fixed income recommendations* (3) India 7. 3.0 4.5 4.

Turkey .EMEA .Hungary .South Africa .Romania .Russia .Poland .

Growth moderating .Lower rates and higher RRR .Lower inflation until end of Q1 .Lira under pressure BB / BB+ / Ba2 .Brisk widening of the C/A deficit .Turkey .Steep yield curve and good bond support .

2% the previous quarter.5%yoy in Q3 (a full percentage point below expectations) from 10.0% from 7. now losing momentum.5%. which suggests we will not see fiscal tightening at least until H2 2011. Economic Indicators Private Inv. However. but the CHP looks also stronger with 31% support after the change in leadership in May.Growth moderating Economic Growth (%yoy) 25 15 5 -5 -15 -25 00 01 GDP 02 03 04 05 06 07 08 09 Source: Reuters EcoWin 50 30 10 -10 -30 -50 Private Cons. as well as to that of the export sector. 19 IP WDA & SA (%yoy) IP NSA (%yoy) Composite leading indicator Source: TD Securities Source: Reuters EcoWin . General elections in June 2011 should not be a surprise for the AKP still firmly leading the polls. despite the sharp slowdown to 5. We have revised our 2010 growth projections higher at 8. The government may be tempted to reinforce their position increasing public spending ahead of the elections. Support for the AKP stands at 44% according to A&G.7%. Both domestic and external demand are reflected in the performance of the key manufacturing sector. we expect economic expansion to continue trending lower and possibly close 2011 at 4. 2010’s performance has been mostly linked to the strength of household and investment spending. Vote shares for the MHP stands at 10%. giving the ruling party only a moderate margin to the opposition. as positive base effects vanish. 25 15 5 -5 -15 -25 06 07 08 09 10 120 110 100 90 80 70 Turkish impressive growth is now decelerating on fading base effects.

Government commitment to a moderate budget deficit in 2011 (projected at 2. 20 Inflation Expectations 12 10 8 6 4 06 07 08 +12m 09 +24m Source: Reuters EcoWin 10 Current CPI . hence meeting CBRT’s 2010 target at 6. inflation should continue to decelerate.4% in Dec. Moreover. food and oil price pressures at the end of 2011. The 12m deficit already improved to TRY30bn in November from TRY56bn one year earlier on higher tax revenues. 2011 redemptions will be lighter and borrowing requirements substantially lower than in 2010.5% on closing output gap.2%yoy and printed 6. Inflation upside risks also lie on possible preelectoral spending.8% of GDP) is a reassuring signal while credit growth keeps expanding. especially when the tobacco tax falls out of the CPI calculations (the tax was introduced at the beginning of 2010 and added close to 2% to the headline). CPI came off the recent Sep ‘10 peak at 9. Inflation is likely to bottom out at around 5% in March though. During early 2011. A lax fiscal policy will likely add to inflationary pressure in H2’11.2% of GDP next year.5%.Lower inflation until end of Q1 Inflation (%yoy) 12 10 8 6 4 2 05 CPI 06 07 Core (H) 08 Core (I) Source: Reuters EcoWin 09 10 The favourable comparison base will push inflation lower in the coming months. before moving higher again to 6. However. as we expect some extra spending before the June elections. we forecast the budget deficit at 3.

As they together cover only 50% of the gap. 21 Current Account Trade Balance Source: Reuters EcoWin CA and Capital Flows (USDbn.8bn in October from $12. but the quality of its coverage is also alarming.6% of GDP in 2011.g.1bn (12m sum) covered less than 13%. the CBRT has started adopting a set of macro-prudential measures (e. The 12m CAD widened at $40. increasing the RRR). whereas the October reading at $5. sharply rising portfolio investment now provide 37% of the shortfall.Brisk widening of the C/A deficit External accounts (USDbn) 0 -20 -40 -60 -80 01 02 03 04 05 06 07 08 09 10 External account deterioration remains a major market concern. to curb domestic import demand without penalizing exports. Robust expansion of economic activities and lira strength until November 2010 have underpinned the steady worsening of the terms of trade. The current account deficit (CAD) is rapidly returning to pre-crisis levels. The CBRT is concerned about the CAD dynamics.7bn the previous year. To reduce Turkey’s exposure to risk appetite. 12m) 50 40 30 20 10 0 -10 04 FDI 05 06 Portfolio 07 08 CAD Source: Reuters EcoWin 09 10 . the remainder has been mostly compensated by increasing non-resident deposits and repatriation of banks’ assets held abroad. Not only the deficit is exploding again. On the contrary. FDI used to cover roughly 50% of the gap before the crisis. not so far off the August 2008 peak at $49bn and likely to reach and perhaps exceed 6.

We expect the CBRT to cut the repo by 100bp to 5.5% target in 2010 and will continue nudging lower in coming months before resuming an upward trend in Q2’11 or later. Governor Yilmaz reiterated policy rate and non-interest rate instruments will continue to be used jointly to ensure price and financial stability. hence CPI.0%. CPI has moved below the 6.5% and 5. The CBRT too optimistically expects 5.50% in Q1. With the last Dec cut. in particular to curb credit growth. respectively. The bank had suggested they would cut the repo rate and increase the RRR only shortly before the decision.Lower rates and higher RRR Inflation and Interest Rates (%) 25 20 15 10 5 0 04 CPI 05 06 07 08 09 10 o/n Borrowing Rate 1w Repo Rate Source: Reuters EcoWin A new strategy for the CBRT. but TRY is now substantially weaker (not in real terms though).4% of GDP in 2011 as a result of joint efforts with the government. The CBRT announced 2011 and 2012 inflation targets at 5.0%. 22 Policy and swap rates (%) 24 21 18 15 12 9 6 3 0 2006 2007 2008 2009 2010 2011 1yr Swap Rate Borrowing Rate 1w Repo Rate Source: Bloomberg . and also set for the first time the 2013 target at 5. The CBRT remains concerned that excessive TRY appreciation will soon drive the CAD to new all-time highs.00% “for a while”. Lira strength and credit growth remained the major concerns. the CBRT has scrapped its policy to leave rates unchanged at 7. Lower repo rate to tackle hot money inflows and higher RRR to contain credit expansion.

We expect the CBRT to cut another 100bp in steps of 50bp in Q1’11. but bonds continue to attract more capital on expectations of lower rates. we expect RRR for short-term TRY liabilities to increase at least to 12% from 8%. in Q1 the debt rollover ratio should remain constantly below 100%.5 10.0 7. The yield curve should remain relatively steep supported by low yields at its front end. TRY13bn and TRY2bn in Jan-Mar. Moreover. loan growth and TRY developments.5 9. While foreigners remain top equity investors holding 67% of the domestic stock market. with no external borrowing. the CBRT should compensate by hiking the RRR by no less than 3-4 times the amount of repo cuts. Hence. 23 Source: Bloomberg Foreign holding (% of total) 75 70 65 60 55 50 2005 Equities (lhs) Bonds (rhs) 45 40 35 30 25 20 15 10 2006 2007 2008 2009 2010 Source: Various National Sources . Both ratios remain below the 2007-2008 boom (72% and 39%). Bond holdings steadily on the rise supported by QE in developed countries. capitalizing on lower than expected CPI. We estimate the government will issue TRY24bn.0 9. Depending on inflation.0 8. which is positive for TURKGB.Steep yield curve and good bond support Interest Rate Swaps Jan-11 10.5 8.5 0Y 2Y 4Y 6Y 8Y 10Y Oct-10 Jul-10 Lower expected repo rate on CBRT to cut again. interest in bonds has sharply risen with 37% of government bonds now held by non-residents. To address the risk of higher CPI and deliver overall tightening. cuts could be even larger.

70 0.59 in Q2’11.65 0. The additional cuts to the policy rate the CBRT is likely to deliver should leave the TRY under pressure in H1’11.Lira under pressure Lira Performance 2. adding to bond positive momentum. A possible upgrade to investment grade next year (all three major rating agencies have Turkey on positive outlook) could improve the expected performance. 24 0.85 0. the bank will retain the flexibility to continue FX purchasing of pre-announced additional amounts on a weekly basis.1 1. The CBRT will purchase TRY2. However. global recovery and resurging inflationary pressures in H2’11 will increase the odds of rate hikes and push the TRY stronger to 1. Additionally. trimming more of the lira’s allure.3 1. Bloomberg .55 70 Jun-07 Dec-07 Jun-08 Dec-08 Jun-09 Dec-09 Jun-10 Dec-10 Source: CBRT.5bn of TURKGB in 2011 to replace maturing bonds in portfolio.7 1.50 by the end of 2011. All this points at the continuation of FX reserve build up and marginal lira weakening.60 CBRT’s unorthodox monetary policy should leave the Lira under pressure in H1 2011.90 0. Central bank to increase FX purchases in 2011.5 1.56 in Q1 and to 1.75 0. We expect USD/TRY to edge higher to 1. However.1 06 EUR/TRY 07 08 USD/TRY Source: Reuters EcoWin 09 10 Resident FX deposits 120 110 100 90 80 FX Deposits (USDbn) TRY/USD (rhs) 0. RRR hikes will limit growth potential.9 1. The CBRT announced they will increase daily auctions for FX purchases to $50m in 2011 from $40m in 2010 and discontinue the optional purchases.3 2.80 0.

South Africa
- Hesitant growth in 2011 - Disinflation is over - C/A deficit wider again - Rates unchanged until Q4’11 - Curve flattening, this time is for good - Weaker ZAR vs. dollar, better against euro

BBB+ / BBB+ / A3

Hesitant growth in 2011
Activity and GDP (%yoy) 20 10 0 -10 -20 -30 00 01

7 5 3 1 -1 -3 02 03 04 05 06 07 08 09

Manf. Production

Retail sales
Source: Reuters EcoWin

GDP and Business Confidence 65 7 5 3 1 -1 -3 01 02 03 04 05 06 07 08 09 10 60 55 50 45 40 35 30

Economic expansion lost momentum in H2’10 and we now expect slower growth this year. Downward revision of annualized GDP growth to 2.8% in Q2 and further slowdown to 2.6% in Q3’10 suggest 2010-2011 growth at 2.9%-3.4%, respectively, will be slower than previously expected (3.0% and 4.0%). Manufacturing production rebounded to 2.5% in Oct after plunging at 1.3%yoy in Sep, but failed to consolidate the World Cup boost. While an expansionary monetary policy lends support to private demand (which has also stabilized around 6% in Oct), high unemployment (25.3% in Q3), strong rand and more restrictive fiscal policy will keep the output gap wide for long. Hence growth should remain moderate until 2012. Stable political environment for now. But the government’s resolve to trimming fiscal deficits in the next three years could create tensions in the coalition. Instances to increase spending have been raised from within the ANC, communist allies and the unions in the past. Requests that rand float is abandoned or mines nationalized are unlikely to receive official backing, but political noise could increase ahead of the ANC conference in 2012, adding volatility to asset pricing.

GDP (%yoy)

Business Activity (3mma)
Source: Reuters EcoWin

Disinflation is over
Inflation (% yoy)
14 12 10 8 6 4 2 0 2002 2003 2004 2005 2006 2007 2008 2009 2010
Source: Bloomberg

Inflation pressures were easing sharply until Sep 2010. After bottoming out at 3.2%yoy and close to the lower end of the target band, CPI has rebounded to 3.6% in November. Higher global commodity prices will add to inflationary pressures, with the energy bill and
3%-6% target

food prices likely to weigh more in 2011. We estimate inflation at 3.6% at the end of 2010 and 4.9% in 2011. Increases in administered prices and nominal wages represent one of the major upside risks to our forecast. Rand weaker but still a concern for policymakers.
30 25 20 15 10 5 0 -5

Inflation Drivers (%yoy) 20.0 15.0 10.0 5.0 0.0 -5.0 05 PPI 06 07 08 09 10
Source: Reuters EcoWin

While a stronger rand helps containing imported inflation, authorities have shown concerns that exports may suffer. We expect a large widening of the CAD this year, which is likely to stem some currency appreciation pressure. However, if Rand strength continues we would not rule out the introduction of a Tobin tax, capital controls or other form of restriction to curb hot money inflows. With a weaker currency, however, CPI could push even higher.

Private Sector Credit

C/A deficit wider again
External balances (USDbn) 0 -10 -4 -20 -30 03 04 05 06 07 08 09 10 -6 -8 0 -2

C/A C/A, % of GDP

C/A, SA Trade Balance
Source: Reuters EcoWin

The improvement of the C/A deficit is most likely over. The 12m CAD has marginally increased to $11.3bn in Q3 from $11.0bn in Q2, but remained stable at 3.3% of GDP in the two quarters. Higher commodity prices (precious metals in particular) should support exports. However, as economic recovery advances and import demand accelerates we expect the terms of trade to deteriorate overall. We pencil in the CAD to widen to 3.5% in 2010 and to 4.8% next year. Negative outlooks are likely to be withdrawn, but no rating upgrade looming at the horizon. S&P and Fitch (both BBB+) continue to have S. Africa on negative outlook, noting that the external imbalances remain the major macroeconomic risk, while Moody’s (A3) is stable. The expected deterioration of external deficits should be compensated for by a tighter fiscal policy. However sharply rising portfolio flows mask the disappointing FDI performance. CAD coverage provided by the financial account remained at 150% in Q3, but volatility of portfolio flows leaves the country overly-exposed to market sentiment.

Financial Account (12m sum, ZARbn) 250 150 50 -50 -150 05 Other Portfolio 06 07 FDI Fin. acc. 08 CAD
Source: Reuters EcoWin



While a strong rand has definitely helped CPI to decelerate throughout 2010. inflation is already on the upside now and further FX weakness could worsen the CPI outlook even more. Downbeat inflation helped the bank to deliver what we consider to be the final easing in this cycle. The SARB surprised us one more time in November when they cut rates to an historically 5. Equity inflows have partially rebounded vs. lowering rates to 5.Rates unchanged until Q4’11 14 13 12 11 10 9 8 7 6 Policy rate (lhs) Real rate (rhs) 6 4 2 0 -2 -4 Nominal and Real Rates (% ) 10 8 The SARB delivered another 50bp cut in Q4’10. correcting bond flows. then hike 50bp in Q4 to 6. 12m net equity sales to foreigners improved to ZAR39bn in early Jan after bottoming at ZAR26bn in Oct.50% low to curb Rand strength. Reversal of market sentiment 5 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 Source: Bloomberg 100 80 60 40 20 0 -20 -40 -60 -80 2003 Portfolio flows (ZARbn. 12 month rolling) Bonds Equity 2004 2005 2006 2007 2008 2009 2010 2011 Source: Bloomberg remains a major threat to flows into both asset classes. On the contrary.50%. We expect the SARB to remain on hold until Q3’10. 29 .00%. the bond momentum seems to have interrupted with sales declining to ZAR64bn after a brisk rise to an all-time high of ZAR95bn in Sep.

We expect 2y10y spreads currently at 180bp to flatten 150bp over the course of 2011.8%/8.2%. respectively) against the wings that look too expensive. we remain convinced that the next big move will be a sharp flattening anticipating tighter rates in Q4’11. On the contrary. Maturities out to 5 Jul-10 USD/ZAR SAGB benchmark 2yr (%) Source: Reuters EcoWin Interest Rate Swaps Jan-11 8. however.8 6.Curve flattening.8 5. 30 . More so at the very short end of the curve.3 5.3 7. as stated by Governor Marcus after the last MPC meeting. Short-term yields have continued falling supported by a dovish monetary policy. On the fixed income side. Based on historical evidence. but does not seem inclined to further cut rates either. The SARB will not initiate the hiking cycle anytime soon. Consistently. the back-end has resteepened to reflect the SARB’s dovish monetary policy.3 0Y 5Y 10Y 15Y 20Y 25Y 30Y Source: Bloomberg Oct-10 years have exhibited additional yield compression in the final quarter of 2010.3 6. this time is for good Bonds and Currency 12 11 10 9 8 7 6 5 03 04 05 06 07 08 09 10 The swap curve is likely to remain steep for now. the swap curve is steeper than before.8 7. most of the value now lies on the belly of the curve (7y/16y SAGB yield 7.

Given TD’s EUR/USD forecast. dollar. we see scope for the ZAR to move stronger to 7. TD now expects the USD to strengthen substantially to the EUR over the course of 2011. is likely to experience some of the same type of reversal. The Rand looks overvalued to the dollar. External imbalances set to widen.25 vs. the USD until Q3 to 7. 31 09 10 . The Rand.12 and then lower at 7. we expect the rand to gradually lose strength vs.05 in Q4. Frequent and disruptive strikes are an additional risk factor. Hence. Before the tightening cycle kicks in. the local unit will not have the support of wider rate differentials and additional reserve build up could add to downside pressure. which outperformed other EM crosses with a total return of 19% in 2010.Weaker ZAR vs. but is a good deal against the euro. higher expected inflation on rising food prices and moderate growth rates compared to peers should over time all lead to nominal depreciation. Majors (rebased) 90 110 130 150 170 190 210 06 EUR/ZAR 07 08 USD/ZAR Source: Reuters EcoWin Rand appreciation in Q4’10 trailed EUR/USD moves. the SARB and the govt. the EUR in 2011. better against euro Nominal Effective Exchange Rate and CRB (%yoy) 40 30 20 10 0 -10 -20 -30 -40 96 CRB 98 00 NEER Source: Reuters EcoWin 02 04 06 08 10 ZAR vs. have both shown not very prone to accepting “excessive” FX strength. Moreover.

/ A2 .Time to tighten has come ./ A.Inflation to stay above target A.Polish curve pricing in rate hikes .Polish growth running at potential .Poland .Stronger Zloty despite EU problems .Widening C/A deficit but FDI to pick up in 2011 .

1% faster compared to prior quarter. although exports have taken a breather in Q3’10 and remain exposed to EU debt spill-over risk. Major support came from the steady expansion of private domestic demand. while exports contributed negatively.5% in Q2. Real GDP growth at 1.0 -0. On the supply-side. Going forward. Cons. Acceleration of sold IP trailed the development of German new orders. should close 2010 up 3.0 1.Polish growth running at potential Growth Components (qoq. the economy. Exports Source: Reuters EcoWin Economic Activity (%yoy.5 02 03 04 05 06 07 08 09 10 15 10 5 0 -5 -10 -15 Private demand continues supporting economic growth. GDP should receive an extra boost from govtled infrastructure upgrading for the Euro 2012 football championship. 33 GDP Priv. now running at about potential.5 0.3%qoq in Q3’10 was 0.0 0. In annual terms. Investment came in substantially lower on the quarter. Led by domestic factors.6%yoy and further improve to 4. Investment Public Cons.2% in Q3’10 from 3. figures accelerated to 4. Infrastructure spending adds to growth potential.5 1. possibly improving growth prospects. SA) 2.5 2.2% in 2011. 6mma) 20 15 10 5 0 -5 -10 -15 03 04 05 06 07 08 09 10 30 20 10 0 -10 -20 -30 -40 Sold IP Retail Sales Germany New Orders Source: Reuters EcoWin . IP remains the major driver pushed by both domestic and external demand.

3% higher than our previous estimates. TD Securities Inflation has sharply re-accelerated in the last quarter of 2010. the general govt.0%yoy. TD Securities . while significant corrective measures are missing. 34 Wages Employment Unit Labour Costs Source: Reuters EcoWin. Parliamentary elections in 2011 won’t favour fiscal consolidation.0% in 2011.0 3. we expect a moderate Labour Market (%yoy) 12.5 5. In 2011.7%. Polish fiscal policy remains too lax compared to regional peers and the state of the economy.0 2. While steady growth warrant consolidation. deficit will reach 7.0 03 CPI Source: Reuters EcoWin.0 1. Cost-push factors (high food prices in particular).2% (official 2010 inflation).0 7.5% target set by the NBP.5 10.0 2. 0.5 0. but we doubt a better performance could be achieved during an electoral year.Inflation to stay above target Inflation (%yoy) 5.5 03 04 05 06 07 08 09 10 reduction of the gap to 6. which is widely above the 2.5% of GDP in 2010. Consumer prices have there since climbed to 3. mostly on lower revenues. 1% VAT hike starting in 04 05 06 07 08 09 10 Jan’10 and demand-side pressure due to improving labour conditions should maintain CPI at 3. The benign inflation trend recorded last year ended in July when the CPI bottomed out at 2.0 -2.0 0.0 4.

inverted) Source: Reuters EcoWin C/A and FDI (EURbn.4bn wider than the previous year). 35 C/A .0 The C/A deficit is running wider on strong demand for imports.0 -5 -15 -25 02 03 04 05 06 07 08 09 10 -200. However.Widening C/A deficit but FDI to pick up in 2011 12m Trade vs.9bn in Nov’10 and €1. The decline of FDI over the course of H2’10 has shrunk the CAD coverage to 40% in Nov’10 from close to 100% at the beginning of last year. its overall Exp. The 12m CAD widened to 2.8bn. exacerbated by the impact of the income deficit (€12.1% in Jan’10. Current Account 25 15 5 -300. the 12m trade deficit widened to €5.3% in 2011.0 -400. in 2011-2013 the government is expected to deliver an ambitious privatization plan capable of attracting more FDI. While exports and imports have increased by 20%yoy in Nov’10.0 -500. Though the CAD coverage does not raise concerns.0% of GDP in 2010 and 3. (%yoy) CA (% GDP.8% of GDP in Sep’10 from 2. (%yoy) Imp.0 -100. FDI flows have declined in 2010 but are likely to increase on privatization programme. The CAD is likely to reach 3. 12m) 15 10 5 0 -5 -10 -15 -20 01 02 FDI 03 04 05 Net Source: Reuters EcoWin 06 07 08 09 10 quality has clearly worsened. The gap is abundantly covered with over €35bn of less stable portfolio inflows. The CAD followed a similar trajectory.

0 3. the NBP has joined the club of countries fighting against the strength of their currencies.5%yoy stronger to the euro. We understand the NBP’s reluctance to increase rate differentials. The zloty has not appreciated as suggested by the fundamental backdrop. with rising CPI and a dovish monetary policy.50%) while inflation was breaking through their 2. Volatility has also been elevated. Negative Zloty performance last year. time to take action has come.0 1. While a strong zloty would help contain inflation.0 Real Broad Effective Exchange Rate (BIS) Real 3m Rate (%) Source: Reuters EcoWin .Time to tighten has come Money Market Rates 8 7 6 5 4 3 04 05 06 07 08 09 FRA9x12 Source: Reuters EcoWin 2 1 0 -1 -2 -3 10 Spread WIBOR3M Monetary Conditions The NBP is falling behind the curve. mostly due to EU debt woes and the spillover risk. the PLN was 3. We expect the cycle to start with 25bp on Jan-19.0 0.5% central target. 36 145 135 125 115 105 95 04 05 06 07 08 09 10 4. Compared to pre-crisis peaks.5% upper end of the target range.0 2. In addition. the NBP could deliver less hikes than necessary if the PLN gains too much. but less than 100bp tightening in 2011 would probably be ineffective. In Dec’10. We were surprised seeing the NBP comfortable with the current policy rate (3. Now that the CPI is threatening to leap above the 3. the unit is still 20% weaker to the euro and 15% weaker in REER terms.

As the market started aggressively pricing in rate hikes this year.6 5.8 5. Similarly. If our forecasts are validated by the NBP’s decisions. which are 325 Source: Bloomberg 10Y Bonds 7.2 4.6 4.0 3. instead.4 5.0 4.0 0Y 5Y 10Y 15Y 20Y Oct-10 Jul-10 Higher. Loose fiscal policy and rate hikes still the major risks for government bonds. The additional supply pressure on the bond market could cause yields to rise.0 4. 37 275 225 175 125 75 Spread (bp) . we see scope for yield compression at the front-end of the curve.4 4. Fiscal deterioration has led to sharply increased financing needs.2 5. FRAs are now pricing in +80bp in 3m. EU woes.0 6. flatter curve anticipates rate hikes. +75bp and +100bp. the whole curve shifted higher and flatter. respectively). our forecasts of +25bp. although the short-end of the swap and the FRA curve are already pricing more hikes than we expect in 2011. the perspective of rate hikes should also weigh on POLGBs.0 2. +110bp in 6m and +145bp in 12m (vs.8 4. are already priced in and spreads should not widen further unless the EU debt crisis escalates.0 06 PL 10yr 07 08 GE 10yr 09 10 Source: Reuters EcoWin unlikely to wane in the year of parliamentary elections.Polish curve pricing in rate hikes Interest Rate Swaps Jan-11 5.0 5.

the govt. In such circumstances. but would also stand behind the PLN in case of spikes above 4.05 by Q4’11. We expect EUR/PLN to move to 3.70 by the end of 2011.21% in total returns vs.20 to the EUR. the USD. However. we expect the appreciation trend to the EUR to continue as the fundamental backdrop and higher rate differentials stand behind stronger valuations. we are wary of the EU troubles and the zloty’s sensitivity to risk appetite.Stronger Zloty despite EU problems PLN vs. the Zloty gained 10. We recognize that the NBP could try to curb excessive zloty strength. the zloty should also perform badly against the greenback. As TD forecasts EUR/USD to plunge to 1. This is one of the worst performances in a basket of 24 EM currencies. The appreciation should be gradual and reflect the positive macroeconomic performance of Poland this year. Majors (rebased) 50 60 70 80 90 100 110 04 05 EUR/PLN 06 07 USD/PLN Source: Reuters EcoWin Disappointing Zloty performance last year should be compensated by appreciation in 2011. Since Jan’10. 38 Implied option volatilities (%) 45 35 25 15 5 04 05 06 07 08 09 10 EUR/PLN 3 Month PLN/USD 3 month Source: Reuters EcoWin . the EUR and 3% vs. 08 09 10 However. could also step in further supporting the currency.

Unclear monetary policy .High inflation and loose fiscal policy .Policy risk to weigh on bond yields ./ BBB.Hungary .Export-driven economic growth .Persistent Forint weakness BBB.Current Account going back in the hole ./ Baa3 .

Source: Reuters EcoWin 40 30 20 10 0 -10 -20 -30 Economic Activity (% yoy) 20 15 10 5 0 -40 2002 2003 2004 2005 2006 2007 2008 2009 2010 Source: Bloomberg Ind. are still leading the recovery. Real GDP growth accelerated to 1.0 10.0% in 2010 and further accelerate to 2. while private consumption has returned to a mild positive contribution. Investment Public Cons. the fragility of the latter is testified by almost three years of negative retail sales. Industrial production remains linked to growth of major trading partners.0 -10. Exp. but remains fragile and export driven. (lhs) Exports (lhs) Retail trade (rhs) -5 -10 .0 5. sluggish investment recovery could be hampered by special sector taxes.0% in Q2. Yet.0 0. accounting for almost 85% of GDP. Germany in particular (TD expects growth to slowdown by 1% to 2. The risk is that the output gap remains negative for long.5% in 2011. Household consumption should gain momentum in 2011 supported by tax reductions. we expect the economy to have expanded by 1. Exports. However. IP remains dangerously tied to the growth prospects of EU trading partners.0 -5. On these grounds. Cons.7%yoy in Q3’10 from 1. prod. 40 GDP Priv.0 02 03 04 05 06 07 08 09 10 30 20 10 0 -10 -20 Economic recovery is picking up.Export-driven economic growth Economic Growth (%yoy) 15. Moreover.3% in 2011).

Inflation closed 2010 at 4.5 . 41 Public sector balance and external debt 160 140 120 100 80 60 40 20 0 2002 2003 2004 2005 2006 2007 2008 2009 2010 Source: Bloomberg 0.7%yoy. TD Securities 06 07 08 09 10 Inflation accelerating faster than expected. The govt. introduced special taxes on the bank. rhs) -0. Government to achieve fiscal targets through special taxes and private pension raid.0 -2.9%. debt (EURbn. Mostly driven by food prices and supported by a weak HUF amidst rising commodity prices.0 -1.5 -2. after bottoming out at 3.7%yoy in Aug’10. crucially depending on the total magnitude of hikes.0 Ext. retail and energy sectors to finance the introduction of a flat tax for households and achieve the 3. the govt. telecom. the spike in CPI triggered two consecutive 25bp hikes from the NBH in Nov-Dec’10. While inflationary pressure is set to remain in place in 2011.High inflation and loose fiscal policy Inflation (%yoy) 10 8 6 4 2 0 02 03 Core CPI 04 05 CPI Source: Reuters EcoWin. but would be much higher in the absence of structural reforms) and reduce the stock of public debt netting it out with HGB held by the private funds.8% by year end. is also forcing the contributors of private pension funds back into the state pension scheme in order to finance the 2011 budget (estimated at 2. After the IMF’s SBA expired in Oct’10.8% of GDP budget target in 2010.5 -1. monetary tightening should contain it at 3. lhs) Budget balance (HUFtrl.

Financial Account (4Q rolling. an expansionary fiscal policy will exacerbate the correction we have pencilled in for this year. While imports have also risen.2bn in Q3’10). has supported a massive rebound of exports. In 2010.3% higher than our prior forecast. together with a substantially weaker Forint compared to pre-crisis levels.4bn in Jan’10.4bn in Nov’10 from €4.3% of GDP. 12m) Exports (%yoy 6mma) in the black (€1.0% of GDP. The performance of the external accounts is also reflecting the weakness of domestic demand. . as we expect the C/A to revert to a deficit of 1. As the recovery gets more entrenched in domestic drivers. the C/A surplus has likely accounted for 1. demand for import is also likely to accelerate and outpace that of exports. The C/A correction is likely to reverse in 2011. EURbn) 25 20 15 10 5 0 -5 -10 02 03 Other Portfolio 04 05 06 07 08 C/A Source: Reuters EcoWin 09 10 However. The positive impact of a stronger trade balance also pushed the C/A Source: Reuters EcoWin Trade balance (EURbn. The economic recovery of Hungary’s major trading partners. acc. 0.Current Account going back in the hole Trade Balance and Exports 5 3 1 -1 -3 -5 02 03 04 05 06 07 08 09 10 20 10 0 -10 -20 -30 The C/A returned to surplus on sharp export rise. the 12m trade surplus has exhibited steady growth to €5. 42 FDI Fin.

the parliament will re-appoint 4 out of 7 MPC members in March and the likelihood of further hikes looks very limited at that point. we expect the NBH to become more accommodative on govt. Thereafter. From the current level of 5. 43 12 10 8 6 4 2 05 CPI 06 07 BUBOR 3M Source: Reuters EcoWin 08 09 10 .75% with a moderate upside risk in Q1. We would expect the NBH to remain on a tightening bias and deliver no less than 25bp of hikes in the next three months. We expect the NBH to increase rates to 6.25%. with a largely new MPC.75%. FRAs are pricing in approximately 50bp of additional hikes in 12m which would increase the policy rate to 6. while risks are definitely skewed to the downside in the remainder of 2011. The bank resumed monetary tightening to contain inflation overshooting the bank’s 3% medium-term target. policies. However. we think tightening should be entirely delivered before the March meeting. we see risk of easing in H2’11 unless the HUF collapses vs. If any. the CHF. While we consider this a possible scenario.00% from 5.Unclear monetary policy Money market rates (%) 2 12 10 8 6 4 05 06 Spread 07 08 09 10 Source: Reuters EcoWin 1 0 -1 -2 -3 -4 FRA9x12 CPI & 3M Rate BUBOR3M The NBH hiked twice in Nov and Dec’10. The market is still pricing in 35bp of hikes in 6 months and 45bp in 12 months.

Swap rates have moved higher all across the Fitch on Dec 23.Policy risk to weigh on bond yields Interest Rate Swaps Jan-11 7.4 6.6tn in Jan’10 compared to a peak of HUF3.6 0Y 5Y 10Y 15Y Source: Bloomberg Oct-10 Jul-10 20Y Higher rates reflect market hawkishness on monetary policy.6 6. we remain concerned of the lack of clarity on the monetary policy.0 6. 44 10Y Bonds and Spread to Germany 13 12 11 10 9 8 7 6 06 07 08 09 10 Source: Reuters EcoWin 1000 800 600 400 200 Spread (bp) 10Y Bonds (%) .4% and 7.0%. respectively. while the slope has also increased (2y5y spreads stood at 44bp in Jan’10).4tn in Sep’08.4 7.0 5. as investors remain concerned of a possible spillover of the EU debt crisis to Hungary.8 6. EU troubles and policy risk premium have pushed spreads higher in Q4’10 and early 2011.2 6.2 7. while the long ones do not pay enough duration premium. event risks including possible further downgrades to junk status (all three rating agencies have Hungary on negative outlook now) will likely deter sustained capital inflows. 1yr and 5yr IRS are now yielding 6. Foreign holdings of HGB remained soft at HUF2. triggering a downgrade to BBB. At the front-end of the curve. While they could easily rise further.8 5. Yields of HGB appear attractive in the maturities out to 5y. The Orban administration has also created uncertainty on the fiscal front.

The NBH should hike further.5 3. troubles of EU peripherals will keep pressure elevated on the HUF. We expect the forint to receive good support from the market in the absence of major external or domestic news. Any sharp and prolonged depreciation of the HUF to the CHF and Foreign HGB Holdings (HUFtn) 3. but this scenario is 09 10 already priced in and should not have great influence on EUR/HUF from this point on.3 2.3 3. HUF downside remains limited by possible NBH intervention. The NBH remains largely concerned with market stability given the huge exposure of Hungarian households to FX loans (especially in CHF). However.Persistent Forint weakness EUR/CEE Performance (rebased) 80 90 100 110 120 130 07 RON 08 PLN HUF Source: Reuters EcoWin Despite economic improvements.8 2.0 2. We expect the forint to hover around 275-278 to the euro throughout 2011 and to close the year at 274. On the other hand. 45 Source: Reuters EcoWin . the risk of unorthodox monetary policy once the MPC is reshuffled gives scope for downside risks for the unit.5 2. uncertainties on Hungary remain high.0 04 05 06 07 08 09 10 to the EUR would likely determine the NBH to buy HUF or to deliver emergency hikes.

Inflation to remain elevated in H1’11 .Leu volatility and appreciation potential BB+ / BB+ / Baa3 .The NBR to cut 25bp in H2’11 .The light at the end of the tunnel .Political risk still not abating .Romania .

Private consumption still growing negative.5%yoy in Q3.9%yoy in Nov’10 from 2. Seasonallyadjusted IP growth quickened to 3.5% expected). Household consumption is still hampered by the unsupportive economic backdrop.5% fall in Q2’10. Retail sales sank another 7. Contraction is going to remain in place for another 2-3 quarters. 6mma) 25 15 5 -5 -15 04 05 06 07 08 09 10 the good performance of the export sector.0% in Sep on a NSA basis. Real GDP continued contracting by 2. most likely closing 2010 at -2. The main culprit remains the package of austerity measures introduced last year. 47 Industrial Production Retail Sales Source: Reuters EcoWin .6%yoy in Nov’10 after a temporary improvement at -2.6% previously. SA (%yoy.0% before economic expansion kicks in in 2011 (+1. relative resilience of industrial production owes to GDP Private Cons. worse than the 0. Trade Balance Source: Reuters EcoWin Activity. Private Inv. SA data exhibited less bad performance though. On a positive note.The light at the end of the tunnel Economic Growth (%yoy) 20 15 10 5 0 -5 -10 -15 03 04 05 06 07 08 09 10 100 75 50 25 0 -25 -50 -75 Austerity measures have deepened and prolonged the recession though its end is near. including a 25% public wage cut and 5% VAT hike.

Surprisingly enough. 48 Net Wage (3mma) Source: Reuters EcoWin. As a result. a pick up in real wages will support the economic rebound in 2011. Credit activity moderately to the upside. The 2010 inflation spike to 8. putting severe pressure on economic activity. but only for EUR loans. Adjustments to administered prices skew the balance of risk for our forecast to the upside though. While the budget cuts have induced more pain to Romanian households.Inflation to remain elevated in H1’11 Inflation and Wages (%yoy) 13 11 9 7 5 3 1 04 CPI 05 06 07 08 09 10 25 20 15 10 5 0 -5 Inflationary pressure remains in place on negative base effects and cost-push factors. TD Securities Credits to households (%yoy) 125 100 75 50 25 0 -25 Jan May Sep Jan 08 EUR RON May Sep 09 Jan May Sep 10 Source: Reuters EcoWin . purchasing power of households has sharply deteriorated. Positive base effects will materialize only in H2’11 with CPI dropping to 4.0% by year end. FX (mostly EUR) loans to households have returned to a moderate growth in April and have continued to expand in the following months. However.0% reflects a 24% VAT hike in July and a negative underlying trend. credit in Lei has kept shrinking since August 2009. The impact of the comparison base is magnified by rising commodity prices (chiefly food and fuel). A dysfunctional local money market has complicated financing in RON.

2% the 6.3% of GDP (€6. Fiscal consolidation is key to receiving the final IMF payment and to roll over the SBA programme for another two years.2%. Snap elections remain a risk threatening our 4. the govt.5% by the 09 10 end of the year.8% fiscal deficit forecast in 2011. The CAD has stabilized at 5.8% fiscal target for 2010.Political risk still not abating Current Account and FDI (EURbn) 10 5 0 -5 -10 -15 -20 02 FDI 03 04 05 06 07 08 Net Source: Reuters EcoWin The correction of the external imbalances is likely to reverse with domestic demand recovering. recently survived a second noconfidence vote and will continue to face opposition even from within the coalition. But this is as far as the improvement will go. However. implemented all the harsh measures required to slash public spending and should overshoot only by a marginal 0.3bn) in Sep’10. With the domestic consumption picking up. The govt. 49 Current Account External Accounts (% of GDP) -2 -5 -8 -11 -14 -17 -20 00 01 02 03 04 05 06 07 08 09 10 Trade Balance Current Account Source: Reuters EcoWin . We expect both conditions to be met. but political risks remain. trailing the amelioration of the trade balance and will probably close 2010 at 5. the CAD should re-widen to 5. Fiscal policy on the right track.

its transitory nature should convince the NBR not to hike either.4 7.2 6.0 6. Yields of ROMGB are currently trading in a narrow range hovering at around 7%.6 6. Note that many of these bonds were trading in yields north of 10% at the time of the political crisis in late 2009.8 6.2 7. 50 Loans and savings rates (%) 18 15 12 9 6 3 0 06 Savings 07 08 Loans EUR 09 Loans RON Source: Reuters EcoWin 10 . As demand-side pressure will be absent for long and the output gap remain negative for the whole 2011.4 6. Positive base effects will materialize from July ’11 on and the NBR could consider delivering a minor 25bp cut in Q4’11. we believe rates could be lowered to 6. The curve is inverted in the maturities beyond 4yr where liquidity is particularly scarce.The NBR to cut 25bp in H2’11 Interest Rate Swaps Jan-11 7. Local markets continue to be affected by limited liquidity especially on long maturities. unless the CPI remains strongly skewed to the upside. short-maturity bonds remain more attractive.00%. As we expect rates to remain unchanged until Q4’11. While current inflation does not warrant any possible cut. then to deliver moderate easing .0 0Y 5Y 10Y 15Y 20Y Source: Bloomberg Oct-10 Jul-10 The NBR likely to remain on hold until H2’11.

However. Moreover. domestic troubles and political instability. in 2010. We forecast EUR/RON at 4. USD Source: Reuters EcoWin The RON was battered by EU debt worries. reserves still cover its 40 30 20 10 0 -10 -20 -30 -40 2004 Debt and Reserves (EURbn) Reserves 2005 2006 Ext.18 by year-end 2011. In the small and illiquid Romanian market. we expect the economy to turn around and the RON to reflect better growth prospects. 51 . this is enough to keep the currency stable.26 in Q2’11. majors (rebased) 80 90 100 110 120 130 140 150 07 vs. then to creep lower to 4.7%) and the USD (-1. The ongoing recession and high CPI have not helped to improve risk appetite 09 10 for the Leu. The NBR has been dominating the small FX market with its sizeable reserves. we think the NBR would not need to defend the currency if the environment remains risk on 2010 and unless the depreciation is sharp and persistent.3%) out of 24 EM crosses. while the external public debt is increasing. EUR 08 vs. The NBR enlarged its FX reserves by additional €5bn to €36bn in 2010. the currency was the secondworst performer against the EUR (+5.Leu volatility and appreciation potential RON vs. debt 2007 2008 2009 Source: Bloomberg entirety. In total return terms. however. In 2011.

Russia .Upside risk for inflation .Curve potentially steeper .Faster growth in 2011 .Rouble remains undervalued BBB / BBB / Baa1 .A slow transition to inflation targeting .Hefty current account surplus .

5 -12. while retail sales decelerated to 4. We expect GDP to have grown only 3.9% in July.7%yoy in Q3’10 from 5.5 2.5% in 2010.5 -2.7%. Surging manufacturing production has led the expansion. but now stabilizing.1%yoy on a 12m basis in Nov’10 and almost constantly in double-digits since Jan’10. but performance should improve to 4. Industrial production rebounded to 6. if our oil price assumptions are validated.6%yoy in Nov’10. The government has supported a number of key firms as well as ailing cities and towns across the country.9%yoy in 2009.Faster growth in 2011 Economic Growth (%yoy) 40 7.7%yoy in Nov’10 from a low 5.5 -7. Economic activities eased to 2. 6mma) 15 10 5 0 -5 -10 -15 -20 -25 04 05 06 07 08 09 10 Source: Reuters EcoWin 15 10 5 0 -5 -10 Retail Sales Manufacturing . Growth in 2011 will be further supported by the rebound in investment and by accelerating domestic consumption buoyed by credit expansion and public spending on social benefits (mostly pensions). returning to growth only last year. 53 Economic Activity (%yoy.8%yoy in 2010. The economy shrunk by 7. The unemployment rate kept improving at 6. The economic rebound has been chiefly tied to the surge in manufacturing production. up 10.2% in Q2.5 04 05 GDP 06 07 08 09 10 30 20 10 0 -10 -20 -30 Investments Consumption Source: Reuters EcoWin Russia’s growth has been below expectations in 2010.

The budget deficit in 2010 was most likely contained to 3.Upside risk for inflation Inflation (%yoy) 35 25 15 5 -5 -15 05 06 07 08 09 10 Source: Reuters EcoWin 15 13 11 9 7 5 Consumer Prices Producer Prices Wage Developments (%yoy. Better fiscal outlook in 2011.8% in 2010 matched 2009 rates. although assuming some monetary tightening in 2011. The government has scaled back the aid provided to the economy during the crisis. but non-oil deficit getting worryingly large. which. while priority was granted to social spending.5%yoy. total Source: Reuters EcoWin . total Nominal average monthly wages. 54 06 07 08 09 10 Real average monthly wages. This is above the CBR’s ambitious 6-7% target. Accelerating domestic demand and a narrowing output gap (yet to remain negative for a while) should maintain inflationary pressure high and push headline figures to 7.9% of GDP and should further shrink to 3. will get close to 10% in 2011. infrastructure spending has been delayed. In particular. the CPI has quickened on surging commodity prices and weak rouble. In particular. From the Jul’10 low at 5.3% in 2011. especially pensions. What raises concerns though is the size of the non-oil budget deficit. when the summer drought and wildfire emergency disrupted wheat crops across the country.5% in 2011. uncapped. 3mma) 30 20 10 0 -10 05 Higher inflation at 8. food prices have played a major role last year. thanks to increasing tax revenues.

as imports have started picking up in H2. In the same period. reflecting a still unattractive investment environment. On the financing side. Instead. RUB weakness in Q4’10. 12m portfolio flows have stabilized around $16bn after a sharp rise in the early stage of 2010.2% of GDP. may have anticipated a resumption of speculative money outflows.7bn in Q2.1% at the end of Q3’10 and will likely close 2010 lower at 5. 55 Current Account. we expect the correction to continue and the C/A to shrink to 3. Capital outflows stemming from unattractive rates.Hefty current account surplus Trade and Oil 200 175 150 125 100 75 50 25 0 02 03 04 05 06 07 08 09 10 Trade Balance (USDbn) Oil (USD) Source: Reuters EcoWin The current account correction is over. i. the C/A surplus also widened to 6. however.0%. the C/A surplus declined to 5. However.0% of GDP. Crude oil 130 110 90 70 50 30 10 prices around $75/bbl until mid 2010 and subdued imports allowed the 12m surplus on the trade balance to advance to $154bn in Jun’10. the FDI outflow increased to $11. In 2011. FDI & Portfolio Flows (USDbn 12m) 100 80 60 40 20 0 -20 -40 -60 00 01 02 03 04 05 06 FDI 07 08 09 10 30 20 10 0 -10 -20 -30 -40 -50 Current Account Portfolio Source: Reuters EcoWin .9bn in Q3’10 from $9. non-strategic investors have also pulled money out of the country.e.

more volatility on the RUB is now allowed. but no hikes to the refinancing rate. we believe the CBR will leave the refinancing rate unchanged in 2011 but will increase the RRR to address CPI and liquidity issues. $497bn in Oct’10).A slow transition to inflation targeting FX Reserves and Oil 600 500 400 300 200 100 0 00 01 02 03 04 05 06 07 08 09 10 Reserves (USDbn) Oil (USD) Source: Reuters EcoWin 130 110 90 70 50 30 10 The CBR slowly moving to RUB floating regime. For these reasons. as the real deposit rate is already negative with CPI running close to 9%. the CBR should also increase reliance of banks on the refinancing rate and reduce the excess liquidity in the system. including possible hikes to the deposit rate. To strengthen the transmission mechanism. as the CBR is scaling down its role in the FX market and has widened the intervention band. Tighter monetary policy in 2011. In fact. 56 Interest rates Refinancing rate 15 13 11 9 7 5 3 1 -1 2007 2008 2009 2010 Source: Bloomberg o/n Deposit rate Repo rate peak at 30 2011 . The rebound in oil prices to around $90/bbl has not been accompanied by additional accumulation of FX reserves ($479bn at the end of 2010 vs. The CBR has nonetheless used some of its reserves to limit the large outflows that took place in Q4’10. The slow transition to the inflation targeting regime means that the CBR will have to undergo technical adjustments to their policy rates.

The front-end of the curve should receive more support in the ST as the CBR is unlikely to hike the refinancing rate for the whole of 2011.2 7.7 5. The bank has been able to cut rates by 525bp to 7. However. dragged lower by the CBR’s monetary easing. 1yr yields have already started reflecting this scenario.Curve potentially steeper Interest Rate Swaps Jan-11 8. As the inflation outlook is rapidly worsening.75% until May’10. 1yr swap rates soared approximately 85bp to 5. Indeed.2 6. 57 .2 0Y 2Y 4Y 6Y 8Y 10Y Source: Bloomberg Oct-10 Jul-10 Higher yields and steep curve. as implementation of macro-prudential measures should reduce the impact of expected inflation.2 4. the CBR will have to deliver some form of monetary tightening in order to meet the 6-7% CPI target in 2011.7 4.2 5. while the slope of the curve has remained mostly unaffected CDS spreads (USD 5y) 1600 1400 1200 1000 800 600 400 200 0 2003 2004 2005 2006 2007 2008 2009 2010 2011 Russia Turkey S Africa (2s5s at around 130bp) after the sharp steepening occurred in Jan-Mar’10.3% since the mid Oct’10 lows.7 7. the slope of Source: Bloomberg the curve should increase only marginally from now on.7 6. rates remain a large 215bp lower than they were at the end of 2009.

lhs) RUB/basket (rhs.5 42. which translates into a sharp appreciation of the RUB vs. We believe the RUB will strengthen to 29.80 in Q4.5 27. 58 Reserve and the Rouble 650 600 550 500 450 400 Reserves (USDbn.May.Jan08 08 08 09 09 09 10 10 10 11 Source: Bloomberg .5 37.5% in order to move to CPI targeting. the RUB looks undervalued also in the perspective of stronger economic activity in 2011 and a potential upside surprise on this front.45.Sep. Yet. Faster growth will support a stronger RUB in 2011.Rouble remains undervalued Rouble performance 47. the traditional patterns have somewhat weakened and we sense this will be an ongoing issue going forward.5 22. However.37 and 29.May.Jan. the Dollar in Q3.Sep.5 32. While the larger band has determined higher volatility (which is cheered by the CBR and the govt. The CBR continues to manage the Rouble against a basket of 55% USD and 45% EUR. respectively. it could also hold the RUB weak for longer. given it deters speculative inflows). Commodity prices (oil prices in particular) remain crucially relevant to rouble’s valuations. However. the intervention band was recently widened by 3% to 11.May.Jan. the basket to 32.5 05 06 07 08 09 Basket Source: Reuters EcoWin 10 EUR/RUB USD/RUB The Rouble has lost ground to the Euro and rangetraded vs. inverted) 27 29 31 33 35 37 39 41 350 43 Jan.Sep. according to valuations based on historical oil-price assumptions.70 to the dollar in Q2 and to 28.

Latin America .Brazil .Mexico .

Aggressive tightening ahead .Brazil .Inflation threats BCB’s target .Inverted curve favours belly receivers .CAD widening but coverage not an issue .Slower GDP growth ahead .Interventionism against Real strength BBB./ Baa3 ./ BBB.

Risk is that growth in social security spending comes in higher than expected if minimum wages (impacting almost 50% of budget spending) are renegotiated above R$540 (provisional budget in Congress already authorized R$560). Though supported by strong growth in domestic demand pushing tax revenues higher. In general. Growth slowed down to 6.7%yoy in October.2% the previous quarter and Q4’10 results should have closed the year at 7. SA Private Consumption Exports Investments Source: Reuters EcoWin Economic Activity (%yoy. IP headed further south to 4. We see the consolidated deficit increasing to 3. 61 Industrial Production Retail Sales Source: Reuters EcoWin .3% of GDP in 2011.6%.5% in 2010. is unlikely to meet the primary surplus target of 3. while retail sales eased at 9.0% of GDP in 2011 from 2. we expect 2011 GDP growth to moderate at or close to 4. spending growth should moderate too much. as the comparison basis becomes less favourable.1%yoy in Nov (comparable with the 2004-2008 average).5%. Household consumption remains one of the main contributors to economic expansion.Slower GDP growth ahead Economic Growth (%yoy) 9 7 5 3 1 -1 -3 00 01 02 03 04 05 06 07 08 09 35 25 15 5 -5 -15 -25 GDP. Budget unlikely to meet primary target in 2011. The govt. but it will also lose steam going forward. 3mma) 20 15 10 5 0 -5 -10 -15 -20 01 02 03 04 05 06 07 08 09 10 GDP growth will continue decelerating. Net exports are progressively declining too.7%yoy in Q3’10 from 9.

50% in H1.5 2.5% central target during 2011. starting on 20 Jan.15% in Q3’10. with 12m expected CPI peaking at 5. accelerating in the four months through December.5 12.5 -7. Most notably. 62 600 500 400 300 200 100 09 10 Trade Balance (USDbn) .5 04 CRB 05 06 CPI 07 08 Food Source: Reuters EcoWin 450 400 350 300 250 200 09 10 Trade and Commodities 50 40 30 20 10 0 02 03 04 05 06 07 08 CRB Source: Reuters EcoWin Inflationary pressure back on rising commodity prices. Dilma Rousseff was sworn in on Jan 1 as Brazil’s first female President. Dilma appointed Alexandre Tombini (a senior BCB officer and former MPC member) as the central bank’s new governor. Despite monetary unorthodoxy. strong domestic demand also boosting services prices is likely to maintain the CPI above BCB’s 4. In the effort to match the successful legacy of her predecessor. IPCA inflation closed 2010 at 5. The increase is mostly related to higher food prices as agricultural commodities remain on the rise.35% in Jan from 5. a token of continuity with Meirelles-run BCB’s policies. Expectations are also worrisome.9%yoy.5 -2. A difficult legacy for Dilma.5 7. we expect the BCB will resolve to hike Selic rates by a total 175bp to 12. Dilma also confirmed Mantega as FinMin. However.Inflation threats BCB’s target Inflation (%yoy) 17. which leaves us more sceptical on this cabinet’s real commitment to fiscal discipline. we do not expect significant policy shifts and only minor reforms on the first year of mandate.

12m portfolio inflows should decline. The 12m sum also climbed to $38.2bn from $25. 63 CAD Coverage (% of GDP) 5 3 1 -1 -3 -5 02 C/A 03 04 FDI 05 06 07 08 09 10 Portfolio Source: Reuters EcoWin . the deterioration of the CAD pushed by soaring imports will likely post a 2. Local authorities fighting hot moneys.0% in 2011.CAD widening but coverage not an issue Shrinking trade balance leading to a wider C/A deficit. but with strong domestic demand.5% in December 2009.4% of GDP in November 2010 from 1. but when the $14bn net inflows from Petrobras share offering will fall off the calculation base. We expect these measures to fail in the LT.8bn in the previous three. after briefly touching a new all-time high at $72.3% call. In the 3 months through Nov 2010. Rebounding commodity prices have helped to improve the external deficits until yearend 2009. are deterring hot money inflows through capital controls and unorthodox monetary policy. concerned about BRL strength. On the contrary. net FDI totalled $15. slightly less than our previous 3. exceeding 2.5bn in June ’10. The 12m CAD kept increasing in Q4’10. Local authorities.6bn in June. reflecting a reacceleration of LT strategic inflows.9bn compared to $5. booming portfolio flows stabilized just below $72bn (Nov). while FDI accelerate.5% deficit in 2010 and advance to 3.

while S&P remains stable. However. we expect rates 175bp higher to 12. 64 08 09 10 . Fitch and Moody’s already have Brazil on positive outlook. as inflation should creep higher and threaten the tolerance band. But the Dec RRR hike was also meant to address price growth. Brazil is rated at the lower-end of the investment grade status. 1ppt more than our Q4 forecast.Aggressive tightening ahead Inflation and SELIC 9 8 7 6 5 4 3 2 04 05 06 CPI Source: Reuters EcoWin 20 18 16 14 12 10 8 07 08 09 10 SELIC Real Interest Rate (12m . we think the BCB will have no option but to resume monetary tightening soon. although the administration change is a mild risk factor.50%. with hikes starting on the Jan 20 meeting. The BCB has paused for the whole Q4’10 although inflation moved substantially higher. In 2011. The bank remained on the sidelines because of the elections first and strong BRL concerns after. Brazil’s performance fully warrants for the advancement. but is set to improve its ratings.75% still is the highest among leading EMs. yet too accommodative for a CPI running at 6%. We see scope for rating upgrades in 2011.CPI) 13 11 9 7 5 3 1 -1 06 Brazil 07 Mexico Source: Reuters EcoWin BCB ready to deliver monetary tightening. The market is ahead of the curve. already pricing Brazilian CDS inside Mexico’s curve. The Selic rate at 10.

If the BCB wants to limit overall tightening. but have widened thereafter. but risk is more is delivered.2 12. The risk to our forecast. Futures indicate 50bp hike on each of the next three Copom meetings (Jan. Mar. If inflation falls lower in H2’11. The DI futures curve has recently shifted higher to reflect aggressive expectations on the tightening cycle.6 12. is skewed to the upside.4 11. the BCB could even consider easing next year. we prefer exposure to the belly of the curve (2yr-3yr maturities) for receiver positions. however. The front-end of the curve has moved sharply higher (2yr rates now trading at 12. Futures yield compression could be 55bp on 1yr maturities as we expect only 175bp of tightening. they will have to act quickly and frontload most of hikes.2 11.4%) while the mid-long end remains inverted. We expect tightening to be done by H1.0 0Y 1Y 2Y 3Y 4Y 5Y Source: Bloomberg Oct-10 Jul-10 6Y Swaps and SELIC 20 18 16 14 12 10 8 04 05 06 07 08 09 10 The front-end of the yield curve remains under pressure.8 12.6 11. wary that aggressive tightening could push the curve higher.4 12.0 11. 65 1Y Swap SELIC Source: Reuters EcoWin . Swaps pricing in less hikes. Apr) and a total of 230bp until Jan’12. Swap yields remained fairly flat until November.Inverted curve favours belly receivers Interest Rate Swaps Jan-11 12. Consistently.8 11.

Very attractive yields will be even more so after the upcoming tightening.70 since mid Nov. 20% RRR for banks’ cash deposits.2 0 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 Source: Bloomberg .68 in Q1’11 and slightly stronger at 1. Under such pressure the real has clearly suffered.00 2. lhs) BRL/USD (rhs) 0.50 2.7 0. USD/BRL gained 4.5 0. Yet. Stronger BRL reflects the sound fundamental backdrop foreign investors want to have exposure to.00 3.3% in spot return and 13.50 00 02 03 04 05 06 07 08 09 10 EUR/BRL USD/BRL Source: Reuters EcoWin Reserves and Real 350 300 250 200 150 100 50 0. While the BCB continues accumulating reserves.50 3.65 in Q4’11. minimum holding periods) if the target of a weaker real is not achieved.Interventionism against Real strength Real Developments 4.g. we see USD/BRL hovering at around 1. the possibility for the SWF to trade FX derivatives and reintroduction of the reverse FX swaps. more could come (e.00 1.6% in TR in 2010. They comprise a higher IOF tax at 6% on FI securities. volatility has increased while the USD/BRL 50dma has been hovering around 1. Attempts to deter capital inflows are likely to fail in the long term. 60% compulsory deposit on spot USD short positions.4 Reserves (USDbn. BCB and FinMin have introduced several restrictions and measures to curb speculative capital inflows.3 0. 66 0.6 Brazilian authorities fighting against Real strength.

Inflation to overshoot target .Back to steepness .Slower but steady growth in 2011 .Banxico on hold for whole 2011 .Peso appreciation continues BBB / BBB / Baa1 .CAD still improving .Mexico .

5 7. while the 12m sum reached $41bn and $253bn.6% and a still buoyant 5.5 94 96 98 00 02 04 06 08 10 75 65 55 45 35 25 Mexico Manufacturing (%yoy) ISM New Orders (6m lead) Source: Reuters EcoWin/TD Securities . With the US economy expected to accelerate in 2011.6%yoy in Q2’10. Weakness in domestic demand has finally started phasing out.4%yoy in Oct’10 from 1. Most of Mexican exports go the US. In fact.8% our GDP growth estimates for last year.0 -7.Slower but steady growth in 2011 Economic Growth (%yoy) 10. The reason is a sharp rebound of Mexican GDP to 7. we expect Mexico’s GDP to expand by 3.5 -2. in November. We have revised higher to 5. with retail sales also quickening to 4.5 -7.9% in 2011.0 7.5 -12. 68 US New Orders and Mexico Manufacturing 12.5 2. the upward revision of Q1 data to 4.5 -10.5 0.0 -2.5%yoy in June.0 04 GDP 05 06 07 08 09 10 20 15 10 5 0 -5 -10 -15 Investment Retail Sales Source: Reuters EcoWin Mexico’s growth to show positive surprise in 2010.3% expansion in Q3. Mexico should receive extra boost. TD’s positive outlook on US growth (3. The US-led external sector remains the major support factor.1% expected) should translate in a stronger driver for the industrial sector in Mexico.0 2.5 -5. both oil and non-oil exports kept rising by 32%yoy and 25%yoy.2% from prior 4. such as credit growth and further amelioration of the unemployment rate. Additionally supported by the steady improvement of domestic factors.5 5. respectively.

The last available survey shares a similar view and expects 3.9 4. with the US most likely on hold for the rest of the year. TD Securities 08 09 10 Core CPI Annual inflation quickened in Q4’10 and closed the year at 4.0 3. MXN appreciation vs.5 4.Inflation to overshoot target Inflation (%yoy) 7.8% in 2011 and 3. In particular. Going forward.0 5. we believe the bank will not react over the course of 2011. USD should help contain inflation at 3.7 4.9 3. 2011-2014 Avg.3 05 06 07 08 09 10 4. But risks to our forecasts are skewed to the upside.0 05 06 07 CPI Source: Reuters EcoWin.1 3.9% by year-end 2011. Which means headline CPI overshot Banxico’s 3% target after bottoming in Jul’10. In particular. As Banxico is more sensitive to LT expectations.3 4. it will remain dangerously close to the 4% upper-end of the target corridor. credit growth provided by well-capitalized Mexican banks. CPI Ex.0 1.6% in the latter part of the year.1 Wages.0 6. Core inflation instead stabilized around 3. Inflation threatening the upper-end of target range. 6mma 2011 CPI Ex.7 3.4%. the narrowing output gap (although set to remain negative until 2012) and the high commodity price environment should maintain inflation under pressure.5 3.0 4.6% as the 2011-2014 average. Positive base effects and stronger expected peso will mitigate those factors. 69 Wages and Inflation Expectations (%yoy) 4. Although we expect the CPI to improve marginally over Q4’11. Source: Reuters EcoWin .0 2. Banxico should not be pressured to hike either.

margins to agree on common reforms would be strained. Yet.3% of GDP in Q3’10. (3mma %yoy) Source: Reuters EcoWin 20 0 -20 -40 External accounts (% of GDP) 0. Quality of CAD coverage also remains high by EM standards.0bn (0. in particular.5 03 04 05 06 07 08 09 10 In contrast with the general trend in EMs. Violence escalation also remains a significant drag on Mexico’s growth.0bn in Q3’10 and covering the CAD almost five times) and portfolio flows already booming at $15. while the trade deficit stabilized at $2.0 -10.CAD still improving Trade.0 -15. The 12m CAD has further narrowed to $3. we forecast the CAD at 1. Mexican CAD is still shrinking.1%.5 -1. with FDI to continue rising (up to $17. Thus. 2011 is a preelectoral year. Yearend 2010 figures should see a further improvement of the CAD to -0.0 00 01 02 03 04 05 06 07 08 09 10 Trade Bal. with political parties to enter a confrontational phase soon. We reckon this coalition may not be repeated in 2012. Politics coming back to the fore.0 -2.2bn. ($bn) Imp.3bn or 0. from $5.2% of GDP) in Q3. 12m rolling 0.0 40 -5.0 -20. gubernatorial elections in the State of Mexico will be an opportunity to test alliances between Calderon’s ruling PAN and leftish PRD against the PRI.5% of GDP in Q2’10. with presidential elections scheduled in 2012.5 -2. (3mma %yoy) Exp.5bn or about 0. 70 Current Account Trade Balance Source: Reuters EcoWin .0 -0. Good news is the coverage remains ample.0 -1. However. we expect both deficits to rewiden and.2% of GDP in 2011.

50% for more than a year and is not willing to increase rate differentials now. Mexican CPI will remain moderately above target in the next quarters. But crucially.CPI) 5 4 3 2 1 0 -1 06 07 08 09 10 Source: Reuters EcoWin Bank Lending (USDbn) 20 Consumer Mortgages Corporate 18 16 14 12 10 8 6 4 2 0 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 Source: Bloomberg/TD Securities With rate differentials likely to remain unchanged in 2011. 71 . allowing Banxico to delay rate hikes. Risks to our forecast (rates unchanged in 2011) are to the upside. CPI expectations and core inflation will weigh on future decisions. Banxico can hold for long. On the other hand. but the Fed shouldn’t hike until 2012. Bank lending is gaining momentum.Banxico on hold in 2011 Real Rate (3M TIIE . favourable US growth prospects will have a positive impact on Mexico. i. Consumer and mortgage lending will both accelerate in 2011 thanks to solid banks that have completed the balance-sheet cleanup. However. On the one hand. US growth is likely to accelerate this year. The bank has left the official o/n rate on hold at 4.e. with the two largest commercial banks subsidiaries of Spanish banks and accounting for more than a third of the asset and loans in the industry. supported by beneficial external conditions and well entrenched domestic growth. hikes already in Q4’11. the banking system is dominated by a few banks and remains exposed to European troubles.

8 0Y 5Y 10Y 15Y 20Y 25Y Oct-10 Jul-10 Mexican 5Y Bonds 1000 800 600 400 200 0 06 07 08 09 10 Source: Reuters EcoWin Medium-long term yields have re-steepened on delay in monetary tightening.3 5. Recent moves from local pension funds (Siefores). Pension funds shifting duration. TIIE futures price in 25bp of hikes in the next 6m and 75bp in 12m. which we consider too much.0 5.8 7. have put pressure on the longend of the curve.3 4. However. Risks of further steepening are related to worsening CPI or easing threat. interest of external investors remains high as the inclusion in the WGBI (Oct’10) and strong portfolio flows (up to $15bn in Q3’10) testify. Yet. The front-end of the TIIE curve should move lower as implied market expectations are rolled over and the start of the hiking cycle gets delayed.3 7.0 9. The front-end of the curve has barely reacted.8 8.0 7. involved in technical shortening of durations.8 6.Back to steepness Interest Rate Swaps Jan-11 8.8 5.3 6.0 5Y MBono (%) Spread to US 5Y (bp) . 72 10. Mid-long yields are likely to remain high. we see limited scope for further easing. but stronger moves were recorded on longer maturities as inflation has been creeping higher while an imminent change to monetary conditions seems unlikely.0 8. unless the peso appreciates briskly and despite Banxico’s recent dovish rhetoric.0 6.

while Banxico will continue building FX reserves. BRL 06 07 vs. We forecast USD/MXN at 11. USD Source: Reuters EcoWin The Peso continued to appreciate against the dollar during Q4’10 . With oil revenues.Peso appreciation continues MXN Performance (rebased) 80 100 120 140 160 180 04 05 vs. a new 2yr $72bn FCL from the IMF. 12m rolling) 60 50 40 30 20 10 0 -10 00 01 02 03 04 05 06 07 08 09 10 scope for such measures if appreciation remains moderate.8%). the MXN outperformed EM currencies. save the TWD. 73 Remittances Oil exports revenues FDI Portfolio Source: Reuters EcoWin . major risk factors are related to the US outlook and possible – but unlikely – measures to curb MXN strength. The result was partly due to the peso still being a laggard. in terms of spot return (3. USD performance. ample coverage for the 08 09 10 moderate C/A and budget deficits. unchanged monetary policy and rate differentials over the next 12m. FDI and remittances upbeat now. all support an extension of the positive MXN vs. there’s limited Inflows (USDbn. In the past quarter. Major risks remain unorthodox monetary policy and slower US growth. Yet.95 in Q4’11.8%) and total return (4. about 23% weaker to the dollar compared to pre-crisis peaks. Positive growth outlook.

Indonesia .India .Asia .

Monetary tightening close to the end .India ./ BBB.Growth near pre-crisis levels .Rupee on slow appreciation trajectory BBB./ Baa3 .WPI to accelerate on commodity prices .Booming portfolio flows but weak FDI .

0 -5. in Q3.5 5.0 15. falling at 2.8%) and government expenditure (9.5 10.1% from 19.5 9. but still the major driver) has reversed in October. Industrial production not as bad as it looks.5 6.3% in Q1.5 5. 3mma) 17.0 05 06 Total 07 08 09 10 Source: Reuters EcoWin Recent rebound in industrial production reduces negative growth prospects.0%).0 0. As anticipated by robust PMI.0 GDP Agriculture Construction Services Manufacturing Source: Reuters EcoWin Industrial Production (%yoy.5 15.0 12.5 0. while services accelerated to 12. buoyant private consumption (9. Real GDP growth has recovered to almost pre-crisis levels with Q2 and Q3 expansion at 8.0%) compensated for decelerating investment expenditure (11.Growth near pre-crisis levels Growth Composition (%yoy) 10. 76 Infrastructure industries . On the expenditure side.9%yoy.5 8.8%yoy in Q3 from 16. We still forecast 2010 growth at 8.5%. IP posted a marked slowdown. partially related to the trend in the infrastructure sector.5 7.3%.0 2.0 10.4% (fiscal year starts in April).2% from 9.7% in November from prior 11.1%. while 2011 economic activity is likely to expand by 8.0 5. the highest rate since Q4 2007.3% from 7.0 7. we expect the industrial sector to post better performance going forward and support growth. Manufacturing weakness (to 9.5 05 06 07 08 09 10 20. Construction also lost momentum but remained close to double digits.

WPI to accelerate on commodity prices Wholesale Prices Inflation (%yoy) 11 9 7 5 3 1 -1 06 WPI 07 08 Fuel and power 09 10 Food articles Source: Reuters EcoWin 25 20 15 10 5 0 -5 -10 -15 400 300 200 100 0 -100 -200 -300 2003 External position (USDbn) Reserves Ext debt Price pressure stemming from global commodities will push the WPI higher than previously thought. External debt position solid and extra revenues on telecom auctions. However. this remains one-off and govt.6% of GDP in FY 2010.4%yoy in December.0% April highs. fuel and food remain a concern as they make up more than 60% of the basket and high correlation between WPI and commodities (which we expect higher this year) suggests that prices will rebound in 2011. still below the 11.4% higher than previously forecasted. 77 2004 2005 2006 2007 2008 2009 2010 Source: Bloomberg .7% and 1.0% in 2011.2%yoy in 2010 and 7. respectively. The benign trend in WPI inflation continued in Q4 but rebounded to 8.8% in 2011 despite fiscal consolidation. should expand again the deficit to 7. The net external position is positive as the FX reserves ($296bn on 3 Dec) fully cover all external debt ($262bn). The telecom auctions provided a windfall worth about 1% of GDP that will compress consolidated govt. Accordingly. expenditures (including fuel subsidies). we revise our year-end (March/March) expectations to 6. deficit close to 7. 0. Yet. Positive base effects should help the WPI to lose additional steam in the coming months.

78 50 40 30 20 10 0 -10 -20 2003 Capital Inflows (12m USDbn) FDI Portfolio 2004 2005 2006 2007 2008 2009 2010 Source: Bloomberg . 12m FDI stood at $20.3bn in November from the September peak of $125. flows have been resilient during the downturn. Strong services surplus and steadily improving remittances flowing in the current transfers account mean that the C/A deficit.Booming portfolio flows but weak FDI Current Account (USDbn. The 12m trade deficit improved to $123. 12m rolling) 100 50 0 -50 -100 -150 02 03 04 05 06 07 08 09 C/A Source: Reuters EcoWin 10 Income Trade Balance Services Transfers External account deficits are stabilizing. The impressive pace of portfolio inflows has continued and reached a new alltime record of $40. However.6bn in November. Money inflows are likely to continue fuelled by QE in developed markets.5bn.5bn. in line with the previous month. rebounding slightly higher in 2009. In November. is only about 40% of the trade deficit. Hot money inflows booming while FDI coverage remains disappointing. India’s trade balance started widening again in 2010 on sustained import growth. but the trend remains downbeat for now. which ballooned to a new high of $53.5bn. On the FDI side.1bn in Q3’10. likely backstopping the widening C/A deficit. but have hitherto failed to gain momentum. twice as high the October 2007 peak at $20.

The front-end of the curve should still not pay off in the current environment. but the cycle is closer to the end.5 6.0 3. respectively.5 5. raising the repo and reverse repo rates by a total of 75bp to 7. The interim pause in December signals that the MPC is becoming more cautious now.0 6.00%. but commodity prices could easily reverse the trend.25% until November.5 4. the 75bp of extra hikes should reinforce the yield curve’s bear flattening. Inflation has come off recent peaks. 79 Oct-10 Jul-10 .0 4. The reverse repo has been raised 200bp to 5. We expect the bank to deliver hikes for another 25bp on each quarter until Q3 2011. The RBI has maintained their focus on inflation and hiked six consecutive times to 6.Monetary tightening close to the end Monetary Policy Instruments (%) 10 9 8 7 6 5 4 3 05 Repo 06 07 08 09 10 Source: Reuters EcoWin Reverse Repo Cash Reserve Interest Rate Swaps Jan-11 7.0 5.5 0Y 2Y 4Y 6Y 8Y 10Y Source: Bloomberg The RBI has hiked the repo rate six times for total 150bp this year.25%. We continue to prefer longer durations as we like INR-denominated assets. The curve has moved sharply higher and should retain its bias for flattening in the coming quarter.00% and 6. As we expect the WPI to remain substantially above the 4% target and the RBI to resume tightening.

000 20. We think the RBI feels less pressured to cap the Rupee’s upside now.34% against the dollar have made the Rupee one of the most attractive currencies in the EM spectrum.80 in Q1’11 end to 42. at current levels there’s 1. Large inflows to the Indian equity market have lent great support to the INR.000 Stock market Sensex (lhs) S&P500 (rhs) 1. total returns of 10. We see USD/INR appreciating to 43. On the contrary. In 2010.g. 80 1.200 EUR/INR USD/INR Source: Reuters EcoWin 25.000 10. virtually limiting the losses.800 1. Hot capital inflows to improve the Rupee outlook but we are wary of possible countermeasures.400 room for further appreciation.000 5. increasing the RRR instead of hiking rates).600 1.000 0 2004 800 600 2011 2005 2006 2007 2008 2009 2010 Source: Bloomberg .00 by end Q4’11. the large cushion provided by the FX reserves also allows the RBI to support the unit in case of sharp capital flow inversion.000 15. Although the RBI may try to limit the strength of the Rupee.Rupee on slow appreciation trajectory Rupee Performance 75 70 65 60 55 50 45 40 35 00 01 02 03 04 05 06 07 08 09 10 November and December corrections have alleviated some appreciation concerns. A major risk remains the possible adoption of measures to contain inflation while curbing capital inflows (e.

Indonesia .BI is already behind the curve .Tough measures against Rupiah strength BB/ BB+ / Ba1 .Robust growth momentum .

82 Exports Investment Private Cons.Robust growth momentum Economic Growth (%yoy) 7. The most surprising aspect of Indonesia’s growth is the stability during the crisis. provided limited stimulus and has already withdrawn part of it. Subsidy reduction remains crucial to consolidate the small budget deficit (we expect 1. Source: Reuters EcoWin Industrial Production and Exports (%yoy) 60 40 20 0 -20 -40 00 01 02 03 04 05 06 07 08 09 10 Exports Manufacturing Production Source: Reuters EcoWin 35 25 15 5 -5 -15 .5 3. it has remained in double digits. banks and public sector allows for further credit growth and infrastructure spending.5 2. while investment has also nudged higher attracted by the favourable domestic environment.5 5.5 02 03 GDP Govt. Govt.5 6.6% in 2011).5 4. despite below-expectation 5. Private demand has accelerated throughout last year. Real GDP growth is likely to have risen 6% in 2010. we expect the economy to advance by another strong 6% even if base effects are waning. Economic progress entrenched in new structural patterns.4% of GDP in 2010 and 1. In 2011. 04 05 06 07 08 09 10 30 20 10 0 -10 -20 Strong domestic-based economic growth. The conclusion is risky but Indonesia does really seem on new structural patterns. Although export growth lost momentum.8%yoy growth in Q3’10. The limited leverage of households.

BI may introduce longer holding periods on SBI and IDR-denominated govt. Due to the strong rise of imports. Interest rates have been held at an all-time low 6.5% in 2011. due to the history of sharp inflation spikes.0 15. but Bank Indonesia has remained on the sidelines. This is above the 6% upper target. TD Securities . 83 12m rolling CA and capital inflows (USDbn) 30 25 20 15 10 5 0 -5 2004 2005 2006 2007 2008 2009 2010 FDI Portfolio C/A Source: Bloomberg.50% for 18 straight months.8bn in Q3’10. To curb the related rupiah strength.0 5. however.0 0. Interest Rates 20. and rising core inflation are now threatening to push CPI higher. BI has already increased banks’ RRR by 3% to 10. food in particular.2bn in Q1. Indonesia still running a C/A surplus.0 02 03 04 05 06 07 08 09 10 Policy rate CPI (%yoy) Core (%yoy) Source: Reuters EcoWin 14 12 10 8 6 Inflation has accelerated throughout 2010 and stood at 7. In a scenario in which the bank tightens 100bp in 2011. Higher commodity prices. however.0% in Dec’10. Portfolio flows have also surged to $16. but likely to narrow in 2011.BI is already behind the curve Inflation vs. BI should act soon.5%.7bn in Q3’10 from $10. we expect Dec’11 CPI to come in at 7. If the trend continues. bonds.0 10. The 12m C/A surplus kept declining to $8. the surplus is likely to shrink from around 1% of GDP expected in 2010 to 0.2%yoy. and caps on total foreign capitals local banks can hold.

although the Yudhoyono administration hasn’t delivered meaningful reforms yet.0 4. the IDR would continue appreciating if it were free to move stronger.5 5.5 8.5 6.0 5.0 6. authorities will try to prevent any strong move.0 8. limited fiscal deficit and a C/A surplus. the risk for wider yields is now material.5 0Y 2Y 4Y 6Y 8Y 10Y Source: Bloomberg Oct-10 Jul-10 the curve.50% in 2011. Indonesia remains very attractive to foreign investors. We think.0% remains low by historical standards) and the disruption of the positive targets achieved in recent years (including rating upgrades in 2011).0 7.5 7. to continue with another 50bp in Q2 and a final 25bp in Q3.Tough measures against Rupiah strength Exchange Rates 12500 11500 10500 9500 8500 06 07 08 JPY/IDR Source: Reuters EcoWin 140 130 120 110 100 90 80 70 09 10 The Rupiah remains attractive on a fundamental basis. To avoid the risk of high inflation (CPI at 7. With a sound growth outlook.600 in Q4’11. however. As not all the tightening we expect is priced in in USD/IDR Interest Rate Swaps Jan-11 9. while allowing only a gradual strengthening vs. we expect BI to start monetary tightening in Q1’11 with 25bp. the dollar. We see USD/IDR at 8. 84 . With BI’s rates soon to rise. BI should hike the reference rate by 100bp to 7.

Junior Strategist + 44 20 7786 8439 + 44 20 7786 8448 + 44 20 7786 8436 + 44 20 7786 8437 London Osman Wahid.budkiewicz@tdsecurities. Head of Asia-Pacific Research. Vice President & Singapore Annette Beacher. Managing Director. Senior Global Strategist Cristian Maggio.douglas@tdsecurities.spence@tdsecurities. European Head of Rates & FX Research Richard shaun. Currency & Fixed Income Research + 65 6500 8047 + 65 6500 8047 New York Eric roland. Senior Macro Strategist + 1 212 827 7156 + 1 212 827 7187 + 1 212 827 7186 Emerging Markets Strategist Marcin Budkiewicz. Portfolio Strategist Jacqui Douglas. Chief Currency Strategist David Tulk. Vice President & Director. Senior jacqueline. Senior Macro Strategist Adnann Syed. Chief US Rates Research & Strategy Richard richard. FX and Rates Strategy Roland 85 . Managing richard.gilhooly@tdsecurities. Senior Portfolio Strategist Ian adnann. Rates Strategy Millan Mulraine. Global Head of Research Shaun david. Commodity Strategist + 1 403 299 8649 david. Calgary David millan. Canada Macro Strategist + 1 416 308 4600 + 1 416 983 2629 + 1 416 983 0445 + 1 416 982 3297 + 1 416 307 7184 + 1 416 982 7784 + 1 416 983 0859 cristian.wahid@tdsecurities.maggio@tdsecurities.tulk@tdsecurities. FX Strategist Mazen Issa.TD Research & Strategy Toronto Andrew Spence.randall@tdsecurities.

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