LONDON TORONTO SINGAPORE

May 8, 2009
Global Markets Currency and Fixed Income Research

HIGHLIGHTS
Stepping Back from the Brink
• There has been a somewhat more
positive (or at least less negative) Spring has brought with it not only the usual blossoms, but also slight signs
tone in the recent spate of eco- of revival in the global economy. In particular, the U.S. economy has shown some
nomic data, and there is further encouraging signs of stabilization which has underpinned a guardedly optimistic
evidence that the banking sector
view for the outlook. And as for the rest of the globe, other economies that just
is working through its troubles.
recently appeared on
• The recent decisions by a number the brink of disaster
of G20 central banks have fol- have also started INTERNATIONAL POLIcY INTEREST RATES
lowed the Fed’s lead as rates have
to show small im-
trended lower and in some cases %
provements in what 8
quantitative easing measures
have fallen into place. was previously a 7

plethora of abysmal 6
• But with so much stimulus in the data. Australia
U.S
5
global pipeline, the next hurdle is UK
to come up with a good exit strat- In addition to 4 Canada

egy. The concern about inflation a somewhat more 3

down the road is not without merit. positive (or at least Sweden
2 EU
Ultimately, we do not think that less negative) tone
runaway inflation is in the cards, in the recent spate 1

however. of economic data, 0

2005 2006 2007 2008 2009
• The publication also includes there is further
quarterly interest rate and ex- evidence that the Source: International Central Banks, Haver Analytics

change rate forecasts for the banking sector is

U.S., Canada, Australia, and New
Zealand, and also offers additional
exchange rate forecasts for the
Japanese yen, the euro, the U.K.
pound, and the Swiss franc.
CONTENTS
Lead Article: Stepping Back from the
Brink . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
U.S. Fixed Income . . . . . . . . . . . . . . . . . 5
Canadian Fixed Income . . . . . . . . . . . . 6
Australian Fixed Income . . . . . . . . . . . . 7
New Zealand Fixed Income . . . . . . . . . 8
U.S. Dollar . . . . . . . . . . . . . . . . . . . . . . . 9
Canadian Dollar . . . . . . . . . . . . . . . . . . 10
Japanese Yen . . . . . . . . . . . . . . . . . 11
Euro . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
U.K. Pound . . . . . . . . . . . . . . . . . . . . . . 13
Australian Dollar . . . . . . . . . . . . . . . . . 14
New Zealand Dollar . . . . . . . . . . . . . . . 15
Swiss Franc . . . . . . . . . . . . . . . . . . . . . 16
Summary Foreign Exchange Table . . 17
working through
its troubles. The raft of provisions delivered by the various global monetary
authorities and fiscal bodies seems to be getting some traction. In turn, this has
helped underpin an improvement in risk appetite, as a result of improved credit
spreads and overall optimism. Moreover, worries about swine flu and its impact
on the global economy seem to have receded as quickly as they emerged. That
said, global flu pandemics do tend to have a sneaky element of surprise and for
that reason a return of a stronger more virulent form of the flu should not be
ruled out entirely.
But despite the slow improvement in the economy and credit markets, there
is still much more downside than upside risk. Moreover, it is important to put
these so called “green shoots” into context. They are, in many cases, simply a
slowing in the pace of decline in the major macro economic indicators, though
in other cases some outright positive readings for the various global economies
have been recorded.
So in light of some improvements in the global economic data, plus the fact
that there have been unprecedented monetary and fiscal responses by the vari-
ous global authorities, there seems to be a groundswell of cautious optimism.
Certainly, the slow improvement in economic activity and sentiment has been
acknowledged by the global equity markets. All the major bourses have been
rallying since the beginning of March. Even in Japan, where conditions have
been the slowest to respond, there has been a bull run in the Nikkei. Perhaps the
worst really is in the rear view mirror. The question then becomes when can we

Global Markets
expect a recovery to get some traction? And the answer to
that might be a bit disappointing.
Global Central Banks Put Up a Good Fight
Through the course of this synchronized global reces-
sion, the monetary policy response has been impressive.
Across the G7, official central bank rates have been slashed
to historical lows. The Federal Reserve led the way and the
fed funds rate has been at 0.00%-0.25% for five months
now. The recent rhetoric, however, acknowledges that the
“economic outlook has improved modestly since the March
meeting, partly reflecting some easing of financial market
conditions.” But even so, the Fed conceded that “economic
conditions are likely to warrant exceptionally low levels of
the federal funds rate for an extended period.”
It seems as though the Fed is looking for further signs
that the “green shoots” turn into some blossoms before they
admit any significant changes to the economic outlook. That
is not an uncommon theme among global central bankers.
The recent decisions by the Bank of Canada, Swed-
ish Riksbank, Bank of England, European Central Bank,
Reserve Bank of Australia and the Reserve Bank of New
Zealand, among others, have followed the Fed’s lead as rates
have trended lower and in some cases quantitative easing
measures have fallen into place.
The Bank of Canada ended its easing cycle with one
last 25bps rate cut to leave the overnight rate at 0.25%. And
in a wholly unexpected move, they committed to keeping
rates steady until June 2010, but also they did not pursue a
quantitative easing path with any vigour.
In a similar fashion to the Bank of Canada, Sweden’s
Riksbank cut its repo rate to 0.5% recently and explicitly
noted that “the repo rate is expected to remain at a low level
until the beginning of 2011”. This of course, assumes the
Riskbank’s forecasts for growth are correct, but nonetheless
offers an astonishing amount of transparency.
The Bank of England has been equally, if not more ag-
gressive (though it recently kept its base rate at 0.50% at
the May meeting), committing to increasing its quantitative
easing program by £50 billion to buy back assets across a
spectrum of classes.
The Antipodeans have been cutting as well. The RBNZ
cut its cash rate to a record low of 2.5% and left the door
open for further easing, plus suggested the low cash rate will
persist until the end of 2010. The RBA recently kept its cash
rate at 3.00% and has taken a slightly more optimistic tone

May 8, 2009
Currency & Fixed Income Research
INTERNATIONAL PURchASING
mANAGERS INDEXES
Index
65
Expansion
60
55
50
45
Contraction
40
Germany Australia
35 Eurozone US
China
30
May-07 Aug-07 Nov-07 Feb-08 May-08 Aug-08 Nov-08 Feb-09
Source: Bloomberg
in its statement, citing the notable turning point in Chinese
economic growth and the contraction in credit spreads. But
the level of the cash rate is already sharply lower than it was
just a year ago. It would appear that the massive 4 trillion
yuan stimulus package that China’s government recently
implemented is getting some traction.
At 1.00%, the ECB’s refi rate is also plumbing the depths.
Moreover, the fact that the ECB has floated the idea of of-
fering banks longer term loans to tackle the crisis is in keep-
ing with the popularity of alternative policy tools to reflate
economies. In the ECB’s most recent statement, the ECB’s
governing council administered some alternative medicine,
extending refi operation maturities to 12 months. The ECB
also decided in principle to purchase as much as €60bn in
covered bonds, both of which will only take place in June
after the next policy meeting.
While the major developed economies are doing their
best to combat the recessionary forces, it will still take time
for the global economic slack to be fully absorbed. In our
view that will not happen until 2010 at the earliest, when
we still expect G7 GDP to post just a 0.7% rate of growth.
Global growth in 2010 is expected to post a 2.2% rate of
growth, but this is still below the historical average.
Draining the Pipeline When Necessary
But with so much stimulus in the global pipeline now,
and a confluence of nascent signs of a stabilization in the
global economy, the next hurdle is to come up with a good
exit strategy. The concern about inflation down the road is
not without merit. Basic economic theory tells us when too
 
May 8, 2009
Global Markets Currency & Fixed Income Research

much money chases too few goods, it can spark inflation.

BALTIc DRY INDEX & GLOBAL GROWTh
Perhaps the most pertinent case study will be the U.S.,
as the Fed’s balance sheet has exploded recently. But we are 200
Y/Y % Change Y/Y % Change
5
not particularly concerned about runaway inflation for the
150 4
main reason that the link between the monetary base and the
actual money supply, which depends on the flow of credit, 100 3

has broken down as a result of the credit crunch. Further, 50 2

there is another disconnect between the money supply and
0 1
inflation. As such, there has been a massive deterioration
in both the velocity of money (the number of times a dollar -50 0

is turned over) and the money multiplier. -100

Moreover, inflation expectations as measured by survey
data and the bond market suggest inflation is still not on the
radar. Certainly, consumer and business behaviour has un-
derpinned this trend. Consumers have been actively seeking
out bargains and have scaled back their purchases, suggest-
ing robust demand will no longer push prices higher.
Lastly, although a withdrawal of the stimulus has never
really been done before on this scale, the potential to unwind
it quickly is there. Just as the Fed is printing money and then
using it to buy treasuries, MBS and agency debt, it could
then simply sell them to shrink the money supply. Similar
arguments can be made for the BoE and other countries that
have been active in their respective markets.
Manufacturing a Turnaround
Aside from the encouraging amount of monetary stimu-
lus put in place, some of the recent G7 data point to modest
signs of stabilization in some of the business confidence
surveys, and manufacturing data. This is indeed a light at
the end of the tunnel.
Perhaps the best spate of upside surprises has come from
the Fed’s regional PMI surveys. Specifically, the Phila-
delphia Fed, Empire Manufacturing and Chicago PMI all
posted larger than expected gains in their April PMIs. This
translated into the ISM manufacturing survey posting its
highest level since September 2008. However, at 40.1, the
ISM’s manufacturing index is still below the 50-threshold
denoting expansion and contraction. Still, it is a move in
the right direction.
Even China, the workhorse of the global economy, has
shown signs of stabilization in its manufacturing industry.
Its manufacturing PMI has staged its fourth consecutive
monthly increase to 53.5 in April, after hitting a low in No-
vember 2008. Not only is it encouraging that the headline
index exceeded the 50-expansion/contraction threshold, but
Baltic Dry Index (left)
-1
OECD G7 GDP (right)
-150 -2
89 91 94 97 00 02 05 08
Source: Bloomberg
it is equally encouraging that the new orders component of
the index, which is a precursor to future growth, also posted
an above-50 reading.
The laggard has been Europe, though it has produced
some improvements but at a much slower pace than else-
where. Factory orders in Germany rose 3.3% M/M in March,
in the first positive print since last October. And the pace of
decline in Europe’s manufacturing industries is easing. The
composite Euro-zone PMI is starting to rebound from its
trough in February, and in April was at 36.8. This is good
news only insofar as it suggests that Euro zone manufactur-
ing has turned a corner. There is still a long way back before
the economy is firing on all cylinders.
About the only disappointment in the collection of de-
veloped countries’ manufacturing data has been Australia.
Its PMI touched a low of 30.1 in April, though that could
have more to do with its exposure to Asian markets and the
relative lack of demand from its largest trading partners,
notwithstanding the gains in China.
Thus, there are signs that manufacturing across the major
economies has at least stabilized, and in some cases turned
a corner. What matters going forward is the liquidation of
inventories as well as a sustained improvement in the new
orders component of these various PMIs. Until such time,
there is little hope for the global economic recovery to get
traction.
Less Bad Still Isn’t Good
Talk of these ‘green shoots’ has become common and
with good reason. The global economic data is posting some

Global Markets
promising results. But one should not get too excited about
these signs of life. The prevailing theme in the data is that
it has become “less bad.” That is not the same as good. As
such, what has become obvious is that a bottoming process
has been put in place.
That said, in the near term there are still a number of
risk factors that suggest that the next few months contain
more downside risk than upside risk. Included in that litany
of possible risks is another financial market “event” such
as a struggling bank, which would certainly undo the gains
seen thus far.
Moreover, the deleveraging process is far from over and
the negative feedback loop from the lack of access to credit
to the real economy could still play a role. Recent survey
data from senior loan officers suggests that there has been
only a second derivate improvement in the extension of
credit. Credit is still overall quite tight.
Lastly, a resurgence of swine flu could easily test the
fortitude of the global economy. Economic conditions,
while encouraging, are still sufficiently fragile enough that
a global flu pandemic could easily prompt a reversal in any
gains made recently. The likelihood of this, in our view, is

May 8, 2009
Currency & Fixed Income Research
still relatively remote, as the flu fears have recently been
relegated to the back burner.
With signs of improvement popping up, but still mea-
surable risks around those green shoots, the outlook for the
currency and bond markets has changed a bit. To the degree
that some central banks, like the RBA and the RBNZ are
still ostensibly cutting rates, while others like the Fed, BoE
and perhaps the ECB are engaged in forms of credit and/or
quantitative easing, this still argues that bond yields could
have some further distance left to drop in the near term
before the much discussed green shoots take over.
In the currency market, it seems that a gradual unwind
in the risk aversion trade could continue. As the USD loses
its lustre as a safe haven and investors slowly embrace risk
once again, there is scope for the Euro, Canadian dollar and
Australian dollar to benefit in the near term.
All in all, there are pieces in place for a turnaround. It
is unlikely to be quick, but we hold to our view that by the
second half of 2009, we still start to see these ‘green shoots’
take root. Global output gaps, however, are unlikely to fully
close until much later in 2010 or early 2011. The lesson of
this recession then, is that slow and steady wins the race.
Charmaine Buskas, Senior Economics Strategist
416-982-3297
 
May 8, 2009
Global Markets Currency & Fixed Income Research

U.S. FIXED INCOME

The U.S. Treasury market has been defined over the last
month by a notable steepening of the yield curve, driven by
stagnant short-dated yields that are pinned to a fed funds
rate that is clearly locked in place, combined with a sharp
38 basis point increase in the U.S. 10-year yield. Simulta-
neously, risk aversion has faded – as measured by the TD
Risk Radar and also a myriad of other variables – and credit
spreads have pounded inwards.
These grand shifts were driven by a handful of impor-
tant factors. First, recent economic data has consistently
surprised in a positive fashion, leading to much discussion
over “green shoots” of growth. Second, the past month
has had a disproportionate number of U.S. bond auctions,
which has kept the bond market on its heels and yields thus
rising. Third, the U.S. Federal Reserve failed to announce
any major enhancements in its asset purchases at the most
recent rate decision.
Looking to the future, TD believes that this upward push
could abate, at least temporarily. This is because there is
still a sizeable risk that the recent economic improvement
may not persist. There are still plenty of potential negative
The specific implications for the bond market are as fol-
lows. The Treasury market may have overshot modestly,
and can afford to rally, with the 10-year yield back through
the 3.00% level and towards the 2.80% range. Admittedly,
government yields are likely to subsequently begin rising
sometime over the second half of the year and into 2010,
and TD looks for the Fed to begin hiking the fed funds rate
in the second half of 2010. The slope of the yield curve
looks set to flatten in the future, because inflation fears are
overblown, risk aversion may abate, and eventually short-
dated rates must begin to rise.
Eric Lascelles, Chief Economics and Rates Strategist
416-982-8979
U .S . 3-mONTh T-BILL RATES & 10-YEAR
GOVERNmENT BOND YIELDS
% %
6
forecast
6
10-yr Gov't Bond Yield
5 5
4 4

economic shocks lurking in the wings, and while there is

no certainty that they will hit, there are enough of them that
it seems unreasonable to anticipate otherwise. In addition,
the Fed may not be quite ready to roll over on the level of
government yields. It could afford to let government yields
slip recently as narrowing credit spreads managed to offset
the move and ensure that household and business borrowing
rates remain low. But in the event that credit conditions were
to halt or even slow their rate of improvement, government
3 3
2 2
1 1
3-mo . T-Bill yield
0 0
2001 2002 2003 2004 2005 2006 2007 2008 2009 2010
Actual data to: Q1 2009; Forecast by TD Economics as at May. 2009;
Source: Federal Reserve Board/Haver Analytics

yields would be back in the spotlight and there would be an

appetite to reduce them once again.

U .S . fIXED INcOmE OUTLOOk

Spot Rate 2008 2009 2010
06/05/09 Q1 Q2 Q3 Q4 Q1 Q2f Q3f Q4f Q1f Q2f Q3f Q4f
Fed Funds Target Rate (%) 0.00 2.25 2.00 2.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.50 1.00
3-mth T-Bill Rate (%) 0.17 1.37 1.81 0.75 0.09 0.18 0.20 0.30 0.30 0.30 0.40 1.00 1.60
2-yr Govt. Bond Yield (%) 0.95 1.58 2.62 1.96 0.76 0.80 0.90 1.05 1.15 1.35 1.60 1.80 2.00
5-yr Govt. Bond Yield (%) 2.04 2.44 3.33 2.98 1.55 1.66 1.85 1.95 2.05 2.20 2.40 2.60 2.80
10-yr Govt. Bond Yield (%) 3.15 3.41 3.97 3.82 2.21 2.66 2.80 2.90 2.95 3.10 3.25 3.45 3.65
30-yr Govt. Bond Yield (%) 4.09 4.29 4.52 4.31 2.68 3.53 3.60 3.65 3.60 3.75 3.85 4.05 4.20

10-yr-2-yr Govt. Spread (%) 2.20 1.83 1.35 1.86 1.45 1.86 1.90 1.85 1.80 1.75 1.65 1.65 1.65

f: Forecast by TD Bank Financial Group as at May 6 2009; All forecasts are for end of period. Source: Bloomberg, TDBFG
 
May 8, 2009
Global Markets Currency & Fixed Income Research

CANADIAN FIXED INCOME

The Canadian bond market had a nuanced performance
over the past month, with the yield curve steepening no-
tably – just like the U.S. – but a far less concerted push
upwards in the overall level of government yields. Specifi-
cally, although the Canadian 10-year bond yield rose by a
substantial 14 basis points, the 2-year yield declined by an
almost-as-large 8 basis points. Across the curve, Canadian
bonds outperformed their U.S. counterparts.
On the surface, this is a rather surprising outcome, as a
key development over the month was the Bank of Canada’s
decision not to wade directly into quantitative easing. In
turn, tentative market expectations for another major buyer
of government debt – the Bank of Canada – proved un-
founded for now.
However, there were other facets that kept Canadian
bond yields from rising too far. The short end, in particular,
was influenced by the Bank of Canada’s decision to cut the
overnight rate by 25 basis points. The market had partially
priced this in, but not fully. Canadian economic data has also
not been nearly as optimistic as the U.S., and this explains
much of the difference.
In the future, TD believes that government yields can
afford to fall a little further. At the short end, the motiva-
tion is that the Bank of Canada has signalled a firm inten-
the outlook over the next year and beyond must reasonably
expect the Canadian economy to get a little healthier – even
if it is in a zig-zag pattern – and this suggests that govern-
ment yields will eventually begin to rise again.
A flatter yield curve seems likely, because the current
curve is unnaturally steep, because inflation fears and risk
aversion may ultimately be overblown, and because an even-
tual normalization of rates logically translates into a flatter
curve. Relative to the U.S., there may be some scope for
Canadian bonds to outperform despite obviously intimate
economic linkages as the U.S. bond market tends to be more
volatile, and just as it outperformed on the way down it may
underperform Canada on the way up.
Eric Lascelles, Chief Economics and Rates Strategist
416-982-8979
cANADIAN 3-mONTh T-BILL RATES & 10-YEAR
GOVERNmENT BOND YIELDS
6
% %
6
10-yr Gov't Bond Yield
forecast
5 5
4 4
3 3

tion to keep rates low. Not only has it provided a tentative

2 2
commitment to leave the overnight rate at just 0.25% for 3-mo . T-Bill yield

the next year, but it has also mused that any hypothetical
quantitative easing would occur at the short end of the term
bond market. Towards the longer end of the curve, there
is also some room for yields to decline in the near term, as
optimism about “green shoots” in the U.S. fades. Of course,
1 1
0 0
2001 2002 2003 2004 2005 2006 2007 2008 2009 2010
Actual data to: Q1 2009; Forecast by TD Economics as at May. 2009;
Source: Bank of Canada/Haver Analytics

cANADIAN fIXED INcOmE OUTLOOk

Spot Rate 2008 2009 2010
06/05/09 Q1 Q2 Q3 Q4 Q1 Q2f Q3f Q4f Q1f Q2f Q3f Q4f
Overnight Target Rate (%) 0.25 3.50 3.00 3.00 1.50 0.50 0.25 0.25 0.25 0.25 0.25 0.75 1.25
3-mth T-Bill Rate (%) 0.18 1.97 2.52 1.79 0.80 0.35 0.20 0.20 0.30 0.30 0.60 1.20 1.75
2-yr Govt. Bond Yield (%) 1.04 2.62 3.25 2.78 1.10 1.08 0.90 1.00 1.10 1.30 1.55 1.75 1.95
5-yr Govt. Bond Yield (%) 2.03 2.91 3.46 3.16 1.69 1.75 1.80 1.85 1.95 2.05 2.25 2.40 2.55
10-yr Govt. Bond Yield (%) 3.07 3.44 3.73 3.76 2.68 2.78 2.75 2.75 2.80 2.85 3.00 3.10 3.20
30-yr Govt. Bond Yield (%) 3.87 3.94 4.08 4.23 3.46 3.56 3.45 3.40 3.30 3.30 3.40 3.45 3.50

10-yr-2-yr Govt. Spread (%) 2.03 0.82 0.48 0.98 1.58 1.70 1.85 1.75 1.70 1.55 1.45 1.35 1.25

canada-U .S . Spreads
3-mth T-Bill Rate (%) 0.01 0.60 0.71 1.04 0.71 0.17 0.00 -0.10 0.00 0.00 0.20 0.20 0.15
2-yr Govt. Bond Yield (%) 0.09 1.04 0.63 0.82 0.34 0.28 0.00 -0.05 -0.05 -0.05 -0.05 -0.05 -0.05
5-yr Govt. Bond Yield (%) -0.01 0.47 0.13 0.18 0.14 0.09 -0.05 -0.10 -0.10 -0.15 -0.15 -0.20 -0.25
10-yr Govt. Bond Yield (%) -0.08 0.03 -0.24 -0.06 0.47 0.12 -0.05 -0.15 -0.15 -0.25 -0.25 -0.35 -0.45
30-yr Govt. Bond Yield (%) -0.22 -0.35 -0.44 -0.08 0.78 0.03 -0.15 -0.25 -0.30 -0.45 -0.45 -0.60 -0.70
f: Forecast by TD Bank Financial Group as at May 6 2009; All forecasts are for end of period. Source: Bloomberg, TDBFG
 
May 8, 2009
Global Markets Currency & Fixed Income Research

AUSTRALIAN FIXED INCOME

Earlier this month, the RBA surprised no-one by leaving
the cash rate unchanged at 3%. However, despite a barrage
of weak local data leading up to the decision (falling credit,
house prices, and business conditions) the Bank was instead
firmly focused on the stabilization of global economic data,
and was particularly optimistic about the outlook for China,
and therefore commodity prices.
The pause appeared justified a day or so later, as retail
sales bounced in March and full-time employment surged in
April. Subsequently, yields across the curve have ratcheted
20-30bp higher since the last Global Markets, and the prob-
ability of RBA easing 25bp by year-end has been shaved
back dramatically to 67%.
We do not share this view, and believe the risks of further
easing are much greater.
Preliminary data for March qtr GDP (released early June)
are mixed: dwelling investment will be a major drag; private
consumption a modest boost; imports slumped, suggesting
that net exports will add to GDP. Our current forecast is
-0.7%/qtr, the highlight a substantial contraction in business
10yr spread compression against US Treasuries, forecasting
+125bp for early 2010.
The AOFM continue to issue bonds at the rate of $A1-
1.4b per week, with tenders well absorbed to date. The CEO
claimed that there was “room” for an additional $A50-70b of
issuance next financial year, to cover the ballooning Budget
deficit. We get an update on the Government fiscal books
on May 12, where deficits of around $A70b or -5¾% of
GDP cannot be ruled out. While this is explosive compared
with a string of recent surpluses, the net debt to GDP ratio
is expected to a fraction of the OECD average.
Annette Beacher, Senior ����������
Strategist
+65 6500 8047
AUSTRALIAN 3-mONTh T-BILL RATES & 10-YEAR
GOVERNmENT BOND YIELDS
% %
9 9
8
3-mo . T-Bill yield
8

investment. Construction and business investment surveys 7 7

are released at the end of the month. 6 6

We find it difficult to believe that the RBA will in- 5 5

definitely stand firm on 3% cash rates, awaiting a Chinese 4 10-yr Gov't Bond Yield 4
recovery to “save” the Australian recession. Subsequently, 3 3
while we remain of the view that easing remains on the 2 2
cards, the timing has been delayed, reaching 2% in the 1 1
fourth quarter. 0 0
As we expect delayed RBA easing, we have also pushed 2001 2002 2003 2004 2005 2006 2007 2008 2009
out and trimmed the forecast 10yr bond rally, the curve re- Actual data to: Q1 2009;
mains steeper near-term for longer, and we have delayed the Source: Reserve Bank of Australia/Haver Analytics

AUSTRALIA fIXED INcOmE OUTLOOk

Spot Rate 2008 2009 2010
07/05/2009 Q1 Q2 Q3 Q4 Q1 Q2f Q3f Q4f Q1f Q2f Q3f Q4f
Cash Target Rate (%) 3.00 7.25 7.25 7.00 4.25 3.25 3.00 2.50 2.00 2.00 2.00 2.00 2.00
3-yr Govt. Bond Yield (%) 3.86 6.14 6.71 5.10 3.21 3.02 3.40 3.00 3.00 3.00 3.25 3.50 3.75
5-yr Govt. Bond Yield (%) 4.42 6.10 6.57 5.20 3.51 3.25 3.70 3.55 3.50 3.60 3.75 4.00 4.25
10-yr Govt. Bond Yield (%) 4.72 6.04 6.45 5.40 3.99 4.26 4.60 4.35 4.35 4.40 4.50 4.70 5.00

10-yr-3-yr Govt. Spread (%) 0.86 -0.10 -0.26 0.30 0.78 1.24 1.20 1.35 1.35 1.40 1.25 1.20 1.25

Forecast by TD Bank Financial Group as at May 2009; All forecasts are for end of period. Source: Bloomberg, TDBFG
 
May 8, 2009
Global Markets Currency & Fixed Income Research

NEW ZEALAND FIXED INCOME

In contrast to the RBA, the RBNZ slashed the cash rate with reasonable success. However, given the explosion
by 50bp to 2.5% in late April, surprising the markets that of bond supply, the DMO has just upgraded the full year
had all-but lost interest in aggressive easing heading into requirement from $NZ4.5b to $NZ5.5b, given $NZ4.1b has
the decision. already been issued.
At the time of writing, the OIS market has barely any
easing priced in the next twelve months, no doubt affected Annette Beacher, Senior ����������
Strategist
by recent strong Australian data, as well as general market +65 6500 8047
optimism that the global economy has passed the worst. We
do not share these views, and believe the risks of further
easing are much greater. NEW ZEALAND 3-mONTh T-BILL RATES & 10-
When assessing our bond forecasts, we have also trimmed YEAR GOVERNmENT BOND YIELDS
% %
the magnitude of the rally after our expected further reduc- 10 10

tion in the cash rate to 2% in June. Whether this reduction 9 3-mo . T-Bill yield 9

is in June or July matters little to the big picture. As the 8 8

market is digesting accelerating supply and easing cycles 7 7

draw to a close globally, it is difficult to forecast a strong 6 6

bond market rally from here. 5 10-yr Gov't Bond Yield 5

Looking further out, we have forecast an underperfor- 4 4

3 3
mance of New Zealand bonds against Australian bonds, as
2 2
we suspect that the S&P “negative outlook” will eventually
1 1
weigh on yields; indeed we are more confident that the
0 0
Australian Budget update will demonstrate a return to fiscal 2001 2002 2003 2004 2005 2006 2007 2008 2009
responsibility faster than New Zealand. Actual data to: Q1 2009;
The DMO continues to offer small parcels of a range of Source: Reserve Bank of New Zealand/Haver Analytics
bonds every week, recently tapping a 2021 long bond, all

NEW ZEALAND fIXED INcOmE OUTLOOk

Spot Rate 2008 2009 2010
07/05/2009 Q1 Q2 Q3 Q4 Q1 Q2f Q3f Q4f Q1f Q2f Q3f Q4f
Cash Target Rate (%) 2.50 8.25 8.25 7.50 5.00 3.00 2.00 2.00 2.00 2.00 2.00 2.00 2.00
3-yr Govt. Bond Yield (%) 3.70 6.68 6.07 5.51 4.48 3.88 3.25 3.25 3.50 3.75 4.00 4.25 4.25
5-yr Govt. Bond Yield (%) 4.51 6.68 6.45 5.77 4.58 4.50 3.80 4.00 4.00 4.25 4.50 4.75 4.75
10-yr Govt. Bond Yield (%) 5.65 6.36 6.42 5.82 4.88 5.23 4.80 4.90 4.95 5.10 5.25 5.45 5.65

10-yr-3-yr Govt. Spread (%) 1.95 -0.32 0.35 0.31 0.40 1.35 1.55 1.65 1.45 1.35 1.25 1.20 1.40
Forecast by TD Bank Financial Group as at May 2009; All forecasts are for end of period. Source: Bloomberg, TDBFG
 
May 8, 2009
Global Markets Currency & Fixed Income Research

U.S. DOLLAR
The outlook for the USD remains broadly negative, in
U .S . DOLLAR
our opinion, and we retain a generally bearish (and weaker USD per EUR JPY per USD
than consensus) view of the prospects for the USD over the 1.24 132
course of the next 12 months or so. 1.28
1.32 124
The USD has derived some short term benefit from the
1.36
financial and economic turmoil as global investors have 1.40
116
sought the safety of deep and liquid US capital markets 1.44
108
during times of uncertainty. Reflecting this trend, the USD 1.48
retained a strong, negative correlation with equity markets 1.52
USD per EUR 100
1.56
through the early part of this year (weaker equities went JPY per USD
1.60 92
mostly hand in hand with a stronger USD). With equity 1.64
markets up strongly since early March, the USD has tended 1.68 84
to fall back, however. More broadly, we note that our own Jan-07 Aug-07 Mar-08 Oct-08 May-09

quantitative work suggests that while some economic fun- Source: Federal Reserve Bank of New York/Haver Analytics
damental inputs have moved in the USD’s favour recently,
the USD remains significantly (between 10-13% on a trade-
weighted basis) over-valued relative to our assessment of
TRADE-WEIGhTED U .S . DOLLAR
its fundamental fair value. The main drag on the USD’s
fundamental fair value is the significant deterioration in the 115
Index: 2000 = 100

US’ fiscal position over the past year. The level of net public 110
debt is rising strongly as the US administration utilizes fiscal 105
policy aggressively to offset the domestic slowdown and we
100
think this will ultimately weigh on the USD.
95
Global reserve managers are concerned about the im-
90
pact of US policies on US asset markets and the USD. The
85
People’s Bank of China – China’s central bank – noted that
the Fed’s announcement in March that it would buy Treasury 80

bonds “resulted in a fall in the dollar”. It also remarked 75

that as more central banks resort to non-standard monetary 70

00 01 02 03 04 05 06 07 08 09
policy moves, “risks of major currency depreciation may
*Real broad effective exchange rate. Last plotted: April 2009
grow”. We think major investors, sovereign wealth funds Source: Haver Analytics/JP Morgan
and central bank reserve managers especially will remain
cautious about adding to USD exposure while non conven-
tional monetary policies remain in place and the US fiscal U .S . DOLLAR fUNDAmENTALS
outlook remains weak. Interest Rate Spreads – Business cycle –
Shaun Osborne, Chief Currency Strategist Inflation Differential – fiscal Balances –
416-983-2629 current Account – Politics N
Legend: - is negative, + is positive, N is neutral for currency

U .S . DOLLAR OUTLOOk
Spot Price 2008 2009 2010
07/05/2009 Q1 Q2 Q3 Q4 Q1 Q2f Q3f Q4f Q1f Q2f Q3f Q4f
Trade-wtd. USD 109.0 95.6 95.8 101.4 107.4 111.2 107.8 105.9 103.8 103.0 104.2 104.5 106.7
JPY per USD 99.0 104 106 106 91 99 96 95 92 90 95 96 100
USD per EUR 1.338 1.562 1.576 1.409 1.397 1.325 1.400 1.450 1.500 1.500 1.450 1.400 1.300
USD per GBP 1.501 1.987 1.993 1.781 1.463 1.432 1.538 1.611 1.667 1.685 1.648 1.609 1.494

f: Forecast by TDBFG as at May 7, 2009; All forecasts are for end of period; Source: Federal Reserve Bank of New York, Bloomberg, TDBFG
 10
May 8, 2009
Global Markets Currency & Fixed Income Research

CANADIAN DOLLAR
While the Canadian dollar was one of the laggards lead-
cANADIAN DOLLAR
ing up to the last issue of Global Markets, this time the roles
USD per CAD CAD per USD
have been reversed and CAD has been the top performing 1.12 0.893
major currency over the last few weeks. Although the Bank 1.08 0.926
of Canada has effectively cut its policy rate to zero at only 1.04 0.962
0.25%, it expressed clear reluctance toward entering into 1.00 1.000
quantitative easing (QE), and set the bar very high for what 0.96 1.041
it would take to push the Bank into such aggressive action. 0.92 1.087
Ever since that announcement in April, USD/CAD has 0.88 1.136
moved in a nearly straight line lower, breaking below its 0.84 1.190
200-day MA for the first time in nearly a year, and setting 0.80 1.250
new lows for 2009. 0.76 1.316
We remain bullish on CAD in the medium term, and Jan-07 Aug-07 Mar-08 Oct-08 May-09

expect to see further strength through 2009. Currencies tend Source: Federal Reserve Bank of New York/Haver Analytics

to be rewarded these days for not engaging in quantitative

easing, evidenced by the fact the SEK has been the number
two performer after CAD since the last issue of Global TRADE-WEIGhTED cANADIAN DOLLAR
Markets (Sweden’s central bank also decided not to imple- 125
Index: 2000 = 100
ment QE at its last meeting in April), and the rally in EUR
120
yesterday after the ECB announced that it would sterilize all
115
of its asset purchases. We’ve already heard China’s central
110
bank express concern that quantitative easing measures
105
introduced by some central banks around the world means
that currency “devaluation risks may rise”. With the Federal 100

Reserve fully immersed in QE, and with a ballooning fiscal 95

deficit, we think that the USD should and will weaken over 90

the next few quarters. We’re forecasting a year-end rate of 85

1.15 for USD/CAD (or 87 US cents) , but we think that the 80

risks lie squarely to the downside, and that the recent break 00 01 02 03 04 05 06 07 08 09

lower in USD/CAD opens up the possibility of an eventual *Real broad effective exchange rate. Last plotted: April 2009
move down to 1.05-1.10. Source: Haver Analytics/JP Morgan

Jacqui Douglas, Currency Strategist cANADIAN DOLLAR fUNDAmENTALS

416-982-7784
Interest Rate Spreads N Business cycle –
Inflation Differential + fiscal Balances N
current Account N Politics N
Legend: - is negative, + is positive, N is neutral for currency

cANADIAN DOLLAR OUTLOOk

Spot Price 2008 2009 2010
07/05/2009 Q1 Q2 Q3 Q4 Q1 Q2f Q3f Q4f Q1f Q2f Q3f Q4f
CAD per USD 1.172 1.008 1.021 1.064 1.219 1.260 1.170 1.160 1.149 1.149 1.136 1.136 1.124
USD per CAD 0.853 0.992 0.979 0.940 0.820 0.794 0.855 0.862 0.870 0.870 0.880 0.880 0.890

JPY per CAD 84 103 104 100 75 79 82 82 80 78 84 84 89

CAD per EUR 1.569 1.575 1.609 1.500 1.703 1.670 1.637 1.682 1.724 1.724 1.648 1.591 1.461
CAD per GBP 1.76 2.003 2.035 1.895 1.784 1.804 1.799 1.869 1.916 1.937 1.872 1.829 1.679

f: Forecast by TDBFG as at May 7, 2009; All forecasts are for end of period; Source: Federal Reserve Bank of New York, Bloomberg, TDBFG
 11
May 8, 2009
Global Markets Currency & Fixed Income Research

JAPANESE YEN
We have been negative on the JPY in the past few
JAPANESE YEN
months, reflecting a concern that the global trade slowdown,
JPY per USD JPY per EUR
and the weakening in Japan’s trade position in particular, 84 110

would weigh on the currency. USD/JPY’s recent rally 88

JPY per USD
115
92 120
through to the 101 area largely completes a move that we JPY per EUR 125
96
had expected to unfold through the second half of 2009, 100
130
however, and we now expect the JPY to stabilize and im- 104
135
140
prove modestly from current levels. 108
145
While Japan’s export sector remains weak, recent data 112
150
116
have indicated that the slide in the country’s trade balance 155
120 160
may have stabilized. Signs that China’s manufacturing 124 165
sector is picking up momentum should spill over into the re- 128 170
gional (Asian) economy and hopes that the global economic Jan-07 Aug-07 Mar-08 Oct-08 May-09

trough may be just around the corner should be encouraging Source: Federal Reserve Bank of New York/Haver Analytics

for Japan’s exporters more broadly. We note that domestic

legislation exempting dividends paid by overseas units of
Japanese companies from tax may favour significant JPY TRADE-WEIGhTED YEN
repatriation later this year. Also, Japanese investors appear
Index: 2000 = 100
to be increasingly keen on keeping investments at home,
with global yields converging at very low rates currently 100
and currency risks high. A survey conducted by Reuters in
April indicated that several of Japan’s largest life insurers 90
planned to invest “defensively” in JPY bonds rather than
domestic stocks or “foreign assets” over the next year. 80
Less investment outflow and the potential for significant
repatriation inflow should lift the JPY from current levels,
70
we think.
We have revised our targets higher for the JPY generally
60
this year and now look for USD/JPY to fall to JPY92 by 00 01 02 03 04 05 06 07 08 09
the end of this year. *Real broad effective exchange rate. Last plotted: April 2009
Source: Haver Analytics/JP Morgan
Shaun Osborne, Chief Currency Strategist
416-983-2629
YEN fUNDAmENTALS
Interest Rate Spreads – Business cycle –
Inflation Differential – fiscal Balances –
current Account + Politics N
Legend: - is negative, + is positive, N is neutral for currency

JAPANESE YEN OUTLOOk

Spot Price 2008 2009 2010
07/05/2009 Q1 Q2 Q3f Q4f Q1 Q2f Q3f Q4f Q1f Q2f Q3f Q4f
JPY per USD 99 104 106 106 91 99 96 95 92 90 95 96 100
JPY per EUR 132 162 167 150 127 131 134 138 138 135 138 134 130
JPY per GBP 149 206 212 189 133 142 148 153 153 152 157 154 149
JPY per CAD 84 103 104 100 75 79 82 82 80 78 84 84 89

f: Forecast by TDBFG as at May 7, 2009; All forecasts are for end of period; Source: Federal Reserve Bank of New York, Bloomberg, TDBFG
 12
May 8, 2009
Global Markets Currency & Fixed Income Research

EURO
Some euro zone economic data are showing the same
EURO
“green shoots” that are observable in other parts of the global
USD per EUR JPY per EUR
economy. It remains too early to say for sure that growth has 1.62 170
troughed – and certainly, many risks remain – but prospects 1.58 165
160
do look a little better from the current vantage point. That 1.54
155
perhaps helps explain the European Central Bank’s (ECB) 1.50
150
decision to reduce interest rates modestly (25 basis points, 1.46 145
taking the benchmark interest rate to 1.00%) and refrain 1.42 140
135
from following the Bank of England, Swiss National bank 1.38
130
and the Federal Reserve down the quantitative easing road 1.34
USD per EUR 125
1.30
at the May policy meeting. JPY per EUR 120
1.26
ECB policy makers did announce a plan to buy covered 115
1.22 110
bonds (similar to asset backed securities) but details remain Jan-07 Aug-07 Mar-08 Oct-08 May-09
sketchy and it would seem that the total amount of assets Source: Federal Reserve Bank of New York/Haver Analytics
to be purchased (EUR60bn, the ECB suggested) is rela-
tively small (the euro zone covered bond market is around
EUR1.5tn and the total purchase equates to less than 1% of TRADE-WEIGhTED EURO
euro zone GDP). Undertaking policies which might stoke
Index: 2000 = 100
inflation or debase the EUR are clearly unpalatable for the 140

ECB and the central bank’s apparent rejection of quantitative

easing measures (while at the same time, taking action to 130

try and free up the covered bond market) proved supportive

for the EUR. 120

With credit markets stabilizing, recent intra-euro zone

tensions are abating and sovereign spreads are narrowing. 110

While we remain of the opinion that the euro zone may face
100
renewed internal pressures in the future, speculation of a
euro zone break up has – correctly – dropped off the radar
90
for now. We think the EUR stands to benefit in the medium 00 01 02 03 04 05 06 07 08 09
term from investor concerns about the over valued USD and *Real broad effective exchange rate. Last plotted: April 2009
we look for the EUR/USD exchange rate to continue grind- Source: Haver Analytics/JP Morgan
ing higher towards the 1.50 level by the turn of the year.

EURO fUNDAmENTALS
Shaun Osborne, Chief Currency Strategist
416-983-2629 Interest Rate Spreads + Business cycle –
Inflation Differential + fiscal Balances N
current Account + Politics N
Legend: - is negative, + is positive, N is neutral for currency

EURO OUTLOOk
Spot Price 2008 2009 2010
07/05/2009 Q1 Q2 Q3 Q4 Q1 Q2f Q3f Q4f Q1f Q2f Q3f Q4f
USD per EUR 1.338 1.562 1.576 1.409 1.397 1.325 1.400 1.450 1.500 1.500 1.450 1.400 1.300
JPY per EUR 132 162 167 150 127 131 134 138 138 135 138 134 130
GBP per EUR 0.891 0.786 0.791 0.791 0.955 0.926 0.910 0.900 0.900 0.890 0.880 0.870 0.870
CAD per EUR 1.569 1.575 1.609 1.500 1.703 1.670 1.637 1.682 1.724 1.724 1.648 1.591 1.461

f: Forecast by TDBFG as at May 7, 2009; All forecasts are for end of period; Source: Federal Reserve Bank of New York, Bloomberg, TDBFG
 13
May 8, 2009
Global Markets Currency & Fixed Income Research

U.K. POUND
While we have expected GBP/USD to reflect generalized
BRITISh POUND
USD weakness in the next few quarters, the UK authori- GBP per EUR USD per GBP
0.65 2.20
ties may well be laying the groundwork for a broader (and
perhaps sharper) GBP rebound in the medium term, even 0.69 2.10

if an extensive Bank of England (BoE) quantitative easing 0.73 2.00

(QE) programme does make investors a little cautious on 0.77 1.90

the GBP outlook in the near-term. 0.81 1.80

The BoE announced a plan to buy GBP75bn of corporate 0.85 1.70

and government bonds in March as a first step in its QE pro- 0.89 GBP per EUR 1.60
cess, with the government sanctioning a further GBP75bn in 0.93 USD per GBP 1.50
asset purchases if needed. The decision to utilize GBP50bn 0.97 1.40
of that “option” at the May policy meeting was a surprise 1.01 1.30
for the markets but indicates a strong conviction among Jan-07 Aug-07 Mar-08 Oct-08 May-09

UK policy makers to go the “extra mile” to help revive Source: Federal Reserve Bank of New York/Haver Analytics

growth. With interest rates at zero (effectively), Sterling

down sharply (18% on a trade weighted basis since the
start of 2008 – note the old BoE “rule of thumb” that a four TRADE-WEIGhTED POUND
percentage point fall in the trade weighted exchange rate
Index: 2000 = 100
was the equivalent of a one percentage point cut in interest 106

rates) and the BoE undertaking GBP125bn in QE (roughly 102

13% of UK GDP, compared with the Fed’s programme 98
which equals around 10% of US GDP), conditions in the 94
UK look very expansive. While weak domestic conditions 90
warrant a lot of support from the authorities – and the BoE 86
is gaining a reputation for its unflinching policy response
82
to the downturn – there are some signs that the local hous-
78
ing sector is steadying while the manufacturing sector may
74
have troughed at the end of last year.
70
While interest rate increases remain a long way off for 00 01 02 03 04 05 06 07 08 09
the major central banks, we think that the BoE may well be *Real broad effective exchange rate. Last plotted: April 2009
among the first having to contemplate an exit strategy for Source: Haver Analytics/JP Morgan
its very easy monetary policy settings currently. Stronger
growth and higher rates could propel the GBP sharply higher
in the medium to longer term. POUND fUNDAmENTALS
Interest Rate Spreads – Business cycle –
Shaun Osborne, Chief Currency Strategist
416-983-2629 Inflation Differential + fiscal Balances –
current Account – Politics N
Legend: - is negative, + is positive, N is neutral for currency

UNITED kINGDOm POUND

Spot Price 2008 2009 2010
07/05/2009 Q1 Q2 Q3 Q4 Q1 Q2f Q3f Q4f Q1f Q2f Q3f Q4f
USD per GBP 1.501 1.987 1.993 1.781 1.463 1.432 1.538 1.611 1.667 1.685 1.648 1.609 1.494
GBP per EUR 0.891 0.786 0.791 0.791 0.955 0.926 0.910 0.900 0.900 0.890 0.880 0.870 0.870
CAD per GBP 1.76 2.00 2.04 1.90 1.78 1.80 1.80 1.87 1.92 1.94 1.87 1.83 1.68

f: Forecast by TDBFG as at May 7, 2009; All forecasts are for end of period; Source: Federal Reserve Bank of New York, Bloomberg, TDBFG
 14
May 8, 2009
Global Markets Currency & Fixed Income Research

AUSTRALIAN DOLLAR
It has been a one-way ride for the AUD since the last
Global Market, currently trading $US0.74-0.75. The main AUSTRALIAN DOLLAR

triggers for the AUD rebound were the RBA decision to USD per AUD JPY per AUD
1.06 120
take an optimistic stance on the Chinese economic recov-
ery, some slightly better-than-expected domestic and global 0.98 110

data; and a general feeling that the USD was overdue for 100
0.90
a correction.
90
The RBA’s pervasive optimism - in the accompanying 0.82
statement to pausing at a 3% cash rate - placed a significant 80

emphasis on what the Bank judged to be a notable turning 0.74

USD per AUD 70
point in Chinese economic growth and contraction in credit 0.66 JPY per AUD
60
spreads. Indeed, the Bank appeared to overlook or downplay
the worsening local outlook. 0.58 50
Jan-07 Aug-07 Mar-08 Oct-08 May-09
We believe the RBA will not be able to sit on 3% cash
rates when GDP prints negative again (early June), and the Source: Federal Reserve Bank of New York/Haver Analytics

unemployment rate soars through 7% (probably late Q3),

hence look for the AUD to resettle around $US0.70 late in
the third quarter when the RBA is compelled to cut. TRADE-WEIGhTED AUSTRALIAN DOLLAR
In the interim, with Australia having the highest yields
Index: 2000 = 100
in the industrialized world and the market taking the RBA 160

at face value, the AUD could spike in the next month or two 150
– in our minds a temporary blip to US$0.75. 140

130
Annette Beacher, Senior ����������
Strategist
120
+65 6500 8047
110

100

90

80
00 01 02 03 04 05 06 07 08 09
*Real broad effective exchange rate. Last plotted: April 2009
Source: Haver Analytics/JP Morgan

AUSTRALIAN DOLLAR fUNDAmENTALS

Interest Rate Spreads + Business cycle –
Inflation Differential N fiscal Balances N
current Account N Politics N
Legend: - is negative, + is positive, N is neutral for currency

AUSTRALIAN DOLLAR OUTLOOk

Spot Price 2008 2009 2010
07/05/2009 Q1 Q2 Q3 Q4 Q1 Q2f Q3f Q4f Q1f Q2f Q3f Q4f
USD per AUD 0.753 0.944 0.959 0.792 0.703 0.691 0.750 0.700 0.710 0.710 0.710 0.700 0.700
JPY per AUD 74.60 98.08 101.80 84.08 63.94 68.41 72.00 66.50 65.32 63.90 67.45 67.20 70.00
AUD per CAD 1.132 1.051 1.021 1.186 1.167 1.148 1.140 1.231 1.225 1.225 1.239 1.257 1.271
NZD per AUD 1.275 1.201 1.258 1.183 1.213 1.236 1.364 1.273 1.291 1.291 1.315 1.296 1.296
f: Forecast by TDBFG as at May 7, 2009; All forecasts are for end of period; Source: Federal Reserve Bank of New York, Bloomberg, TDBFG
 15
May 8, 2009
Global Markets Currency & Fixed Income Research

NEW ZEALAND DOLLAR

Of no doubt great frustration to the RBNZ, the NZD
NEW ZEALAND DOLLAR
has similarly rallied on green shoot optimism. There was
a welcome correction last Thursday from $US0.5750 to 0.84
USD per NZD JPY per NZD
100
$NZ0.5650 following the RBNZ decision to slash the cash
rate from 3% to 2.5%, but this has been reversed – and 0.78 90

more – since. 0.72 80

Clearly, global optimism is completely swamping local
data and events. On almost no economic justification should 0.66 70

the NZD be trading above $US0.58, and we remain with USD per NZD
0.60 60
our three month target of $US0.55 with downside risks, and JPY per NZD
this call is based on general USD weakness. The NZD is 0.54 50
prone to a large fall on the crosses.
0.48 40
Unfortunately in the lead-up to the RBNZ decision, the Jan-07 Aug-07 Mar-08 Oct-08 May-09
market had completely lost interest in RBNZ easing, and our
Source: Federal Reserve Bank of New York/Haver Analytics
AUD/NZD stop of 1.25 was briefly triggered. We are still
a strong believer of the AUD/NZD trade, but the resistance
level of 1.29 appears very strong and there may be a better
level to get set. Upcoming data on house prices and retail TRADE-WEIGhTED NEW ZEALAND DOLLAR
sales will help form a view on the size of the next rate cut
Index: 2000 = 100
from the RNBZ, and hopefully again have a strong influ- 160

ence on NZD trends. 150

140
Annette Beacher, Senior ����������
Strategist
130
+65 6500 8047
120

110

100

90
00 01 02 03 04 05 06 07 08 09
*Real broad effective exchange rate. Last plotted: April 2009
Source: Haver Analytics/JP Morgan

NEW ZEALAND DOLLAR fUNDAmENTALS

Interest Rate Spreads + Business cycle –
Inflation Differential N fiscal Balances N
current Account – Politics N
Legend: - is negative, + is positive, N is neutral for currency

NEW ZEALAND DOLLAR OUTLOOk

Spot Price 2008 2009 2010
07/05/2009 Q1 Q2 Q3 Q4 Q1 Q2f Q3f Q4f Q1f Q2f Q3f Q4f
USD per NZD 0.591 0.786 0.762 0.670 0.579 0.560 0.550 0.550 0.550 0.550 0.540 0.540 0.540
JPY per NZD 58.51 81.66 80.95 71.07 52.71 55.37 52.80 52.25 50.60 49.50 51.30 51.84 54.00
NZD per CAD 1.443 1.262 1.284 1.403 1.416 1.418 1.555 1.567 1.582 1.582 1.630 1.630 1.648
NZD per AUD 1.275 1.201 1.258 1.183 1.213 1.236 1.364 1.273 1.291 1.291 1.315 1.296 1.296
f: Forecast by TDBFG as at May 7, 2009; All forecasts are for end of period; Source: Federal Reserve Bank of New York, Bloomberg, TDBFG
 16
May 8, 2009
Global Markets Currency & Fixed Income Research

SWISS FRANC
With EUR/CHF back down to the low-1.50s, markets are
SWISS fRANc
wondering whether the Swiss National Bank is a one-trick
CHF per EUR CHF per USD
pony, or if it’s going to intervene again to push EUR/CHF 1.42 0.97

higher. Over the last few weeks, while we’ve seen some 1.46
CHF per EUR 1.00

degree of “green shoots” in most of the global economy, CHF per USD 1.03

Switzerland has seen no such thing. Retail sales have tum- 1.50 1.06

bled, exports have continued to fall, and the KOF leading 1.54
1.09

indicator continues to deteriorate, hitting a new record low 1.58

1.12
1.15
in April.
1.62 1.18
Earlier this week SNB Chairman Roth attempted to talk
1.21
down the Swiss franc, saying that the SNB will resolutely 1.66
1.24
fight a rise in CHF to keep the economy out of deflation. 1.70 1.27
With the Swiss economy still not looking much healthier, Jan-07 Aug-07 Mar-08 Oct-08 May-09
the SNB needs to become a little more aggressive, and we Source: Federal Reserve Bank of New York/Haver Analytics
think that further currency intervention is in the cards. And
although the SNB is characterizing currency intervention
as merely a tool to fend off deflation, much like buying
government bonds in the US and the UK, it certainly can’t
hurt Switzerland’s export performance, which accounts for
more than half of its economy. We continue to believe that
EUR/CHF will hit 1.55 by mid-year, as the SNB becomes
more aggressive, and as the EUR benefits from investor
concerns over an over-valued USD.

Jacqui Douglas, Currency Strategist

416-982-7784

SWISS fRANc OUTLOOk

Spot Price 2008 2009 2010
07/05/2009 Q1 Q2 Q3 Q4 Q1 Q2f Q3f Q4f Q1f Q2f Q3f Q4f
CHF per USD 1.131 1.034 1.021 1.122 1.069 1.140 1.107 1.097 1.080 1.080 1.117 1.143 1.215
CHF per EUR 1.513 1.616 1.609 1.581 1.493 1.510 1.550 1.590 1.620 1.620 1.620 1.600 1.580
CHF per CAD 0.964 1.026 1.000 1.054 0.877 0.904 0.947 0.945 0.940 0.940 0.983 1.006 1.082
f: Forecast by TDBFG as at May 7, 2009; All forecasts are for end of period; Source: Federal Reserve Bank of New York, Bloomberg, TDBFG
 17
May 8, 2009
Global Markets Currency & Fixed Income Research

SUmmARY fOREIGN EXchANGE TABLE

Spot Price 2008 2009 2010
07/05/2009 Q1 Q2 Q3 Q4 Q1 Q2f Q3f Q4f Q1f Q2f Q3f Q4f
Exchange rate to U .S . dollar
Japanese yen JPY per USD 99.0 104 106 106 91 99 96 95 92 90 95 96 100
Euro USD per EUR 1.338 1.562 1.576 1.409 1.397 1.325 1.400 1.450 1.500 1.500 1.450 1.400 1.300
U.K. pound USD per GBP 1.501 1.987 1.993 1.781 1.463 1.432 1.550 1.611 1.667 1.685 1.648 1.609 1.494
Swiss franc CHF per USD 1.131 1.034 1.021 1.122 1.069 1.140 1.107 1.097 1.080 1.080 1.117 1.143 1.215
Canadian dollar CAD per USD 1.172 1.008 1.021 1.064 1.219 1.260 1.170 1.160 1.149 1.149 1.136 1.136 1.124
Australian dollar USD per AUD 0.753 0.944 0.959 0.792 0.703 0.691 0.750 0.700 0.710 0.710 0.710 0.700 0.700
NZ dollar USD per NZD 0.591 0.786 0.762 0.670 0.579 0.560 0.550 0.550 0.550 0.550 0.540 0.540 0.540

Exchange rate to Euro

U.S. dollar USD per EUR 1.338 1.562 1.576 1.409 1.397 1.325 1.400 1.450 1.500 1.500 1.450 1.400 1.300
Japanese yen JPY per EUR 132 162 167 150 127 131 134 138 138 135 138 134 130
U.K. pound GBP per EUR 0.891 0.786 0.791 0.791 0.955 0.926 0.910 0.900 0.900 0.890 0.880 0.870 0.870
Swiss franc CHF per EUR 1.513 1.616 1.609 1.581 1.493 1.510 1.550 1.590 1.620 1.620 1.620 1.600 1.580
Canadian dollar CAD per EUR 1.569 1.575 1.609 1.500 1.703 1.670 1.637 1.682 1.724 1.724 1.648 1.591 1.461
Australian dollar AUD per EUR 1.776 1.655 1.644 1.778 1.988 1.917 1.867 2.071 2.113 2.113 2.042 2.000 1.857
NZ dollar NZD per EUR 2.265 1.988 2.067 2.104 2.412 2.368 2.545 2.636 2.727 2.727 2.685 2.593 2.407

Exchange rate to Japanese yen

U.S. dollar JPY per USD 99.0 104 106 106 91 99 96 95 92 90 95 96 100
Euro JPY per EUR 132.5 162 167 150 127 131 134 138 138 135 138 134 130
U.K. pound JPY per GBP 149 206 212 189 133 142 149 153 153 152 157 154 149
Swiss franc JPY per CHF 87.6 100.4 104.0 94.6 85.2 86.8 86.7 86.6 85.2 83.3 85.0 84.0 82.3
Canadian dollar JPY per CAD 84.5 103.1 104.0 99.7 74.6 78.5 82.1 81.9 80.0 78.3 83.6 84.5 89.0
Australian dollar JPY per AUD 74.6 98.1 101.8 84.1 63.9 68.4 72.0 66.5 65.3 63.9 67.5 67.2 70.0
NZ dollar JPY per NZD 58.5 81.7 80.9 71.1 52.7 55.4 52.8 52.3 50.6 49.5 51.3 51.8 54.0

Exchange rate to canadian dollar

U.S. dollar USD per CAD 0.853 0.992 0.979 0.940 0.820 0.794 0.855 0.862 0.870 0.870 0.880 0.880 0.890
Japanese yen JPY per CAD 84 103 104 100 75 79 82 82 80 78 84 84 89
Euro CAD per EUR 1.569 1.575 1.609 1.500 1.703 1.670 1.637 1.682 1.724 1.724 1.648 1.591 1.461
U.K. pound CAD per GBP 1.76 2.00 2.04 1.90 1.78 1.80 1.81 1.87 1.92 1.94 1.87 1.83 1.68
Swiss franc CHF per CAD 0.964 1.026 1.000 1.054 0.877 0.904 0.947 0.945 0.940 0.940 0.983 1.006 1.082
Australian dollar AUD per CAD 1.132 1.051 1.021 1.186 1.167 1.148 1.140 1.231 1.225 1.225 1.239 1.257 1.271
NZ dollar NZD per CAD 1.443 1.262 1.284 1.403 1.416 1.418 1.555 1.567 1.582 1.582 1.630 1.630 1.648

f: Forecast by TD Bank Financial Group as at May 7, 2009; All forecasts are for end of period
Source: Federal Reserve Bank of New York, Bloomberg, TDBFG

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