Global Economic Research

Foreign Exchange Outlook

March 2008

The USD is resuming a depreciating trend against major currencies on the back of aggressive monetary and fiscal policy easing and deteriorating US economic conditions. The CAD and the MXN will benefit from widening intra-region yield differentials, further underpinned by a renewed upward bias in energy prices. European currencies will receive a boost from supportive yield differentials and renewed global portfolio diversification away from the USD. The GBP will strengthen in alignment with the EUR lead. Global investors retain a bullish RUB tone ahead of the March presidential election. The Asian FX bullish tone remains intact. The JPY, which remains in a stable trading pattern against the USD since January, will adopt a longawaited strengthening path. China remains committed – at least until the Beijing Olympic Games – to its gradual and predictable pace of CNY appreciation. Emerging-market currencies will find support from favourable growth and interest rate differentials, high commodity prices and sustained appetite for carry-trade portfolio investments. Investors will closely monitor the asset-price adjustment taking place in Chinese stock markets. The ZAR is entering a period of post-adjustment consolidation mode.

Index Market Tone & Fundamental Focus.................................................................... US/Canada.......................................................................................................... Europe/Japan (Majors)........................................................................................ Asia/Oceania/Europe.......................................................................................... Developing Asia.................................................................................................. Developing Americas.......................................................................................... Developing Europe/Africa................................................................................... Global Currency Forecast................................................................................... 3 5 6 8 10 12 14 16

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

Foreign Exchange Outlook

March 2008

Global Foreign Exchange Outlook
February 27, 2008
Euro Yen Sterling Canadian Dollar Australian Dollar Mexican Peso
EUR/USD Consensus* USD/JPY Consensus* GBP/USD Consensus* USD/CAD Consensus* AUD/USD Consensus* USD/MXN Consensus*

Actual
1.51 106.4 1.98 0.98 0.94 10.70

Q1 08 Q2 08 Q3 08 Q4 08 Q1 09 Q2 09 Q3 09 Q4 09
1.50 1.48 107 106 1.99 1.97 0.99 1.01 0.92 0.89 10.87 10.92 1.53 1.46 106 106 2.01 1.94 0.98 1.03 0.94 0.88 10.92 10.97 1.55 1.44 105 107 2.04 1.92 0.97 1.04 0.96 0.87 10.98 11.03 1.58 1.42 103 107 2.07 1.90 0.96 1.05 0.98 0.86 11.05 11.10 1.59 1.40 100 107 2.07 1.89 0.94 1.05 0.99 0.85 11.13 11.17 1.60 1.39 98 107 2.08 1.87 0.95 1.06 0.97 0.83 11.21 11.24 1.57 1.37 98 107 2.07 1.86 0.96 1.06 0.95 0.82 11.29 11.32 1.55 1.36 100 106 2.05 1.85 0.97 1.07 0.93 0.80 11.37 11.40

Spot Price vs. 100 Day Moving Average vs. 200 Day Moving Average - (5yr Trend)

EUR/USD
1.57 1.50 1.42 1.35 1.27 1.20 1.12 1.05 0.97 0.90 0.82 130 125 120 115
EUR/ USD 100 Day 200 Day

USD/JPY
USD/ JPY 100 Day 200 Day

110 105 100

M ar Ju -03 n Se -0 p 3 D -03 e M c-0 ar 3 Ju -04 n Se -0 p- 4 D 04 e M c-0 ar 4 Ju -05 n Se -0 p 5 D -05 e M c-0 ar 5 Ju -06 n Se -0 p- 6 D 06 e M c-0 ar 6 Ju -07 n Se -0 p 7 D -07 ec -0 7

GBP/USD
2.15 2.07 1.99 1.91 1.83 1.75 1.67 1.59 1.51 1.43 1.62 1.56 1.50 1.44 1.38 1.32 1.26 1.20 1.14 1.08 1.02 0.96

GBP/ USD 100 Day 200 Day

M ar J u -03 n Se -0 p- 3 D 03 e M c -0 ar 3 J u -04 n Se -0 p- 4 D 04 e M c -0 ar 4 J u -05 n Se -0 p- 5 D 05 e M c -0 ar 5 J u -06 n Se -0 p 6 D -06 e M c -0 ar 6 J u -07 n Se -0 p- 7 D 07 ec -0 7

AUD/USD
0.98 0.93 0.88 0.83 0.78 0.73 0.68 0.63 0.58 0.53 0.48 11.8 11.4 11.0 10.6 10.2
AUD/ USD 100 Day 200 Day

(*) Source: Consensus Economics Inc. February 2008

Global Economic Research

M ar Ju -03 Sen-0 p 3 D -03 ec M -0 ar 3 Ju -04 n Se -0 4 D p -0 ec 4 M -04 a Ju r-05 n Se -0 p- 5 D 0 ec 5 M -05 ar Ju -06 Sen-0 p 6 D -06 ec M -0 ar 6 Ju -07 Sen-0 p 7 D -07 ec -0 7

2

M ar Ju -03 n Se -0 p- 3 D 03 ec M -03 ar Ju -04 n Se -0 p 4 D -04 ec M -04 ar Ju -05 n Se -0 p- 5 D 05 ec M -05 ar Ju -06 n Se -0 p- 6 D 06 ec M -06 ar Ju -07 n Se -0 p- 7 D 07 ec -0 7

M ar Ju -03 n Se -0 p- 3 D 03 ec M -03 ar Ju -04 n Se -0 p- 4 D 04 e M c-0 ar 4 Ju -05 n Se -0 p- 5 D 05 ec M -05 ar Ju -06 n Se -0 p- 6 D 06 ec M -06 ar Ju -07 n Se -0 p- 7 D 07 ec -0 7

Ju l O -03 ct Ja -03 n Ap -0 4 r0 Ju 4 l-0 O 4 ct Ja -04 n Ap -0 5 r0 Ju 5 O l-05 ct Ja -05 n Ap -0 6 r0 Ju 6 l-0 O 6 ct Ja -06 n Ap -0 7 r0 Ju 7 O l-07 ct Ja -07 n08

USD/CAD
USD/ CAD 100 Day 200 Day

USD/MXN

USD/ M XN 100 Day 200 Day

9.8 9.4 9.0

Foreign Exchange Outlook

March 2008

MARKET TONE & FUNDAMENTAL FOCUS
Pablo F.G. Bréard +1 416 862-3876

Foreign exchange markets will experience a period of higher volatility through the end of the first quarter of 2008. The US dollar (USD) has again retreated from its stable trading pattern (on a trade-weighted basis) and has resumed a depreciating trend against most major world currencies on the back of unattractive interest rates and deteriorating economic conditions in the United States. Of utmost importance to re-assess and/or confirm current investors’ views are the monetary policy decisions to be adopted by the world’s key central banks, particularly by the US Federal Reserve (Fed) and the European Central Bank (ECB). Geo-political-related events, such as a renewed drive to impose sanctions on Iran, shifts in US voting preferences ahead of the November vote, elections in Russia and Spain, and a meeting of the Organization of Petroleum Exporting Countries (OPEC) scheduled to take place on March 5th will also attract the attention of global portfolio investors and shape flows in currency markets. Global investors will keenly monitor the ongoing asset-price adjustment taking place in Chinese equity securities markets in search of potential contagion risk waves that may affect the core group of emerging-market economies. The NAFTA zone currencies will remain heavily influenced by economic, monetary and financial sector developments in the US. The US Federal Open Market Committee will announce its decision on monetary policy on March 18th: a reduction in the Fed funds interest rate of 25 basis points (bps) to 2.75% is fully discounted by futures markets. The sharp deterioration of US housing (and potentially labour) market conditions is also reflected in market participants’ expectations of aggressive monetary easing through the year, which will place the Fed funds rate (according to current contract pricing patterns) at 2% by December. Both the Canadian dollar (CAD) and the Mexican peso will continue to benefit from favourable yield differentials vis-à-vis the US, further underpinned by a renewed upward bias in energy prices; oil prices, measured by the light-crude West Texas Intermediate benchmark have, once again, achieved triple-digit levels. The CAD has the potential to advance even further, as it realigns to the trend present in the euro (EUR) and the Japanese yen (JPY). Gold prices, which hit the USD960 per ounce, also anticipate further US dollar distress. European currencies will receive an upward push on the grounds of still-positive economic growth prospects, supportive interest rate differentials and renewed anti-USD investor sentiment. Senior ECB officials continue to stress that inflation containment remains the monetary institution’s primary objective. The policy-focused refinancing rate has been held at 4.0% since June 2007; no change is anticipated at the March 6th policy-setting meeting. The inflation-focused ECB, coupled with fresh

evidence of business confidence in Germany (as recently reported in the investor-sensitive Ifo index), triggered a renewed appreciating bias in favour of the EUR, which traded over USD1.50 in late February, clearly breaking through the technical resistance level established since mid-November 2007. The British pound (GBP) responded immediately to the renewed bullish sentiment enjoyed by the EUR and reversed a weakening trend in place from November 2007 to February 2008: GBP/USD is poised to, once again, trade above the 2.00 mark in the weeks ahead. Elsewhere in Europe, the Russian ruble (RUB) retained its strengthening bias, as emergingmarket participants remained indifferent to the March 2 election, when Dmitry Medvedev will be most likely elected as the new Russian president, a result that will likely lead to the appointment of Vladimir Putin as prime minister. JPY, which remains in a stable trading pattern against the USD since the beginning of the year, has yet to adopt a long-awaited move towards a strengthening path: we expect USD/JPY to close the year at 103. The renewed phase of USD weakness – and JPY strength – will likely accelerate the realignment of the laggard Korean won to the regional leaders’ pattern. Meanwhile, the Thai baht, the Taiwanese dollar and the Malaysian ringgitt remain well entrenched in a strengthening path. China remains committed – at least until the Beijing Olympic Games – to a gradual and predictable pace of renminbi appreciation against the USD. Of increasing relevance to global investors is the fact that inflationary pressures are escalating in China and other key developing countries as a result of unrelenting increases in food and energy costs, coupled with rising demand-driven pressures caused by growing access to local-credit financing. Emerging-market currencies remain strongly influenced – and supported – by the growth differentials in key economies such as China, India, Russia, Brazil and South Africa, as well as by attractive interest rate differentials, persistently high commodity prices and sustained appetite for carry-trade portfolio investment strategies (courtesy of cheap funding available in savings-rich Japan). Brazil’s accelerating growth dynamics plus still-high real interest rates act as a key magnet of intra-region and global capital investment inflows. The South African rand (ZAR), which suffered a sharp 15% depreciation versus the USD in just one month on the back of a generalized re-assessment of global risk aversion, has entered a recovery phase, yet to be completed. The Turkish new lira remained broadly stable despite the escalating political risk associated with its decisive military engagement in Northern Iraq. Finally, metals-commodity-sensitive currencies such as the Chilean peso, the Peruvian sol as well as the ZAR have also benefited from resurging prices and a pro-gold weakening USD.

Global Economic Research

3

Foreign Exchange Outlook

March 2008
Stephen Malyon +1 416 863-7719 Camilla Sutton +1 416 866-5470

CANADA
Currency Outlook

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

3m 0.921 108.2 1.499 0.980

Outlook 6m 0.931 108.2 1.504 0.970

12 m 0.931 106.4 1.495 0.940

FX Rate AUD/CAD CAD/JPY EUR/CAD USD/CAD

AUD/CAD

CAD/JPY

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

USD/CAD

Jun-07 Aug-07

Oct-07

De c-07

Fe b-08

Global Economic Research

4

Foreign Exchange Outlook

March 2008
Adrienne Warren +1 416 866-4315 Gorica Djeric +1 416 866-4214

CANADA AND UNITED STATES
Fundamental Commentary

UNITED STATES - As the economic fundamentals continue to worsen, the minutes to the FOMC’s January 2930th meeting noted a further deterioration in sentiment for the US economy, with “downside” sensitivities. The FOMC lowered its GDP growth projections for 2008 – from the 1.8%-2.5% (Q4/Q4) central tendency range to 1.3-2.0% – but marked up unemployment and core inflation forecasts. The housing and credit market travails continue to impinge on the US economy and financial markets, with clear signs of weakness emerging from the commercial real estate sector, retail space in particular. Banks are recording additional writedowns and corporate earnings’ targets are becoming more cautious. January’s Senior Loan Officer Survey revealed that banks tightened lending standards at the fastest pace in the seventeen-year history of the report. Deteriorating employment conditions, eroding confidence, falling home and equity values suggest that consumer spending, particularly on ‘big-ticket’ items, is losing considerable momentum. Manufacturing conditions continued to worsen, with February’s state surveys pointing to the possibility that the ISM Manufacturing Index might slip back into the red. After five consecutive years of record shortfalls, the US trade deficit narrowed in 2007. While exports – particularly civilian aircraft sales – remained firm, relatively more expensive foreign goods & services supported import substitution. Despite the continuing weakness in the economy, inflation remains sticky – because of soaring food, energy and other commodity prices. However, the PCE deflator – the Fed’s inflation yardstick – remained at 2.2% at year end, for the fourth year in a row, suggesting that inflationary pressures are still contained. Monetary policy adjustments and the fiscal stimulus package – now signed into law – are expected to provide some economic relief in the second half of 2008.

CANADA - The Canadian economy entered 2008 in reasonably good shape, with real GDP estimated to have advanced at close to a 3% yearly rate in Q4 of 2007. The consumer remains the economic driver, supported by strong job growth, price discounting and tax cuts. Retail sales rose 0.6% m/m in December, the third increase in four months, and near-record auto sales in January point to another solid gain last month. Meanwhile, the nation’s payrolls swelled by almost 50,000 in January, lifting the employment rate to a record high and lowering the jobless rate to a 3-decade low. Housing activity also remains brisk, with total starts rebounding sharply after a weather-induced slump in December. Home sales, however, are beginning to slow alongside the continuing deterioration in affordability. Maintaining a reasonably solid pace of domestic demand is essential to offset the growing drag from external trade amid a stalling out in exports and rising imports. Manufacturing shipments plunged over 3% m/m in December, and were down more than 6% from a year earlier, as slumping US demand for consumer goods and building materials and the persistently strong Canadian dollar trimmed export sales. Canada’s December merchandise trade surplus narrowed to a 9-year low of CAD2.4 billion despite higher prices for resource-based exports. Given a weakening US economy – the destination of roughly 75% of Canada’s merchandise exports – external conditions will remain extremely challenging for domestic manufacturers in coming months. This points to a further slowing in overall momentum as consumer spending and housing activity begin to moderate. Consumer confidence is faltering, a harbinger of a more cautious retail sales trend, particularly when employment growth and/or home price appreciation finally begin to slow. Business sentiment, too, has weakened, reflecting heightened concern over the continuing credit market turmoil, the high CAD and soaring oil prices.
Karen Cordes +1 416 862-3080

MONETARY POLICY COMMENTARY
UNITED STATES - Given the economic backdrop, the Fed may have more room for maneuver in the months ahead. Indeed, we expect the FOMC to cut the target rate by 50 bps on March 18th and then remain on hold as the cumulative 275 bps reduction in the Federal funds rate begins to stimulate the economy. This will not preclude continued weakness in the US economy in such areas as residential construction and sales and consumer spending - although strength in the international trade sector will likely continue to keep the US economy out of recession. In fact, the Federal Reserve is projecting real GDP growth between 1.3 and 2.0% in 2008, with only a modest acceleration in 2009 and 2010. This persistent weakness is expected to offset much of the recent rise in price pressures although the Fed will continue to watch inflation expectations closely.

CANADA - As inflation continues to moderate in Canada – with core CPI recently falling to 1.4% y/y in January, well below the Bank of Canada’s (BoC) 2% target rate – the BoC increasingly has room to move interest rates down further. And, in his first public speech since becoming BoC Governor, Mark Carney reinforced the view that further monetary stimulus is indeed on its way. While the Canadian economy as a whole has thus far been relatively resilient to the deterioration in the US economy, Canada’s foreign trade sector is now substantially subtracting from real GDP. As the spillover into the rest of the economy begins to set in, we will start to see more widespread weakness. While Canada’s economy will likely continue to outperform the US economy, a prospective slowdown points to a 50 bps cut in the overnight rate by the BoC on March 4th. This would bring the total reduction to 100 bps since December 4th.

Global Economic Research

5

Foreign Exchange Outlook

March 2008
Stephen Malyon +1 416 863-7719 Camilla Sutton +1 416 866-5470

MAJOR CURRENCIES
Currency Outlook

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

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

EUR/USD
1.530 1.503 1.476 1.449 1.422 1.395 1.368 1.341 1.314 1.287 Feb-07 Apr-07 Jun-07 Aug-07 Oct-07 Dec-07 Feb-08 123.1 120.6 118.1 115.6 113.1 110.6 108.1 105.6 Feb-07 Apr-07

USD/JPY

Jun-07 Aug-07

Oct-07

Dec-07

Feb-08

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

EUR/SEK

9.07 Feb-07 Apr-07 Jun-07 Aug-07 Oct-07

Dec-07

Global Economic Research

6

Foreign Exchange Outlook

March 2008
Erik Nilsson +1 416 866-4205

MAJOR CURRENCIES
Fundamental Commentary

EURO ZONE - Any lingering hopes that the European Central Bank (ECB) might soon follow the lead of the Federal Reserve should be dashed with the report that Germany’s powerful IG Metall union has reached an agreement with the nation’s major steel producers on a 5.2% wage increase. Labour costs across the euro zone had been increasing at an average annual rate of about 2½% over the past four years. President Jean-Claude Trichet has never explicitly defined the upper limit of the ECB’s tolerance levels regarding wage increases; indeed, he has been careful to emphasize that there is room for differences among firms and industries depending on productivity gains. Nevertheless, a 5%-plus settlement, with the risk of spillover effects into other sectors (and countries) where the potential for improved production efficiencies is less evident, will add to concerns regarding the inflation outlook. As such, monetary policymakers will await unequivocal signs of a broadly-based economic slowdown that will provide assurance of an abatement in domestic demand-side inflationary pressures. With growth averaging 0.6% q/q over the past four quarters (0.4% in the final quarter of 2007), central bank officials will remain of the view that the economy is still expanding at a pace that is either very close to - or may even be exceeding - capacity. The ECB may also privately welcome further EUR appreciation as a key factor in helping to contain price increases in the tradables sector. UNITED KINGDOM - The minutes of the Bank of England’s Monetary Policy Committee (MPC) meeting of February 6th7th, when members voted 8-1 to reduce the Bank Rate by 25 bps (the dissenter favoured a 50 basis point reduction) highlight the MPC’s concerns regarding economic growth prospects, in light of the “stressed” conditions in financial markets. Committee members are expecting the rate of expansion to “slow markedly through 2008 as tighter credit conditions and weaker real income growth bear down on domestic demand”. On balance, the minutes point to further easing through the year, but at a measured pace. MPC members will want to be confident that the anticipated narrowly-based rebound in the headline consumer inflation rate - perhaps to more than 3% y/y - does not become more deeply entrenched. UK consumers are proving surprisingly resilient in the face of a softening in housing costs (though one mortgagor reported a sharp rebound in prices last month), falling equity markets, and tighter credit conditions. Retail sales volumes rose a solid 0.8% m/m in January, the biggest advance in almost a year. Admittedly sales in recent months have been sporadic, with gains interspersed with contractions. Nevertheless, last month’s results establish a strong foundation for the first quarter, with positive implications for near-term economic growth. As a result, while acknowledging the downside risks, we continue to anticipate that growth for the year will average about 2% (after two years of 3% growth).

JAPAN - The fourth quarter 2007 national accounts data highlight the persistent imbalances - and hence the underlying fragility - of the Japanese economy. The impressive 0.9% q/q increase in GDP (outpacing the euro zone and the US by a wide margin) - triple the Q3 advance - was driven largely by a robust recovery in business investment and by the ongoing strength in net trade. Consumer spending contributed a minimal 0.1 percentage point to the overall expansion; indeed, inventory accumulation contributed as much to growth as did household consumption. Business sentiment surveys and data on orders of capital goods point to some easing in investment in the year ahead, and the likelihood of an offsetting pickup in household spending is slim. Consumer confidence declined for a fourth consecutive month in January, as the official index slipped back to its most depressed level in more than four years. The deterioration was driven by fresh concerns about employment prospects, which added to consumers’ reluctance to buy ‘big-ticket’ items. Japan’s January trade data point to renewed softening in overall growth, prompting the government to warn of a possible “lull in the economy”. Foreign sales rose 0.5% m/m, the smallest gain in four months. At the same time, imports plunged 3.2%, in part a result of the 4% appreciation of the yen against the USD from the December trading average, but also a reflection of the ongoing sluggishness in domestic spending. SWEDEN - The January inflation data should reinforce the Riksbank’s confidence in the appropriateness of the February 12th decision to raise its benchmark interest rate 25 basis points to a 5-year high of 4.25% by a vote of 4-2. In announcing the rate hike, the central bank also indicated that “it will remain at roughly the same level over the coming year”. While the monetary authorities are anticipating some slowing in economic growth, “resource utilization in the economy will nevertheless be higher than normal”, pointing to a relatively slow easing in inflationary pressures. Labour market conditions continue to improve, though at a more subdued pace than in 2007. The January jobless rate declined by a half percentage point from a year earlier to 6.4%, as employment rose by 1.2% (compared with yearon-year gains averaging 2.2% through the final three months of 2007). The headline inflation rate remained above 3.0% y/y for a third consecutive month in January, while the underlying rate accelerated to a 4½-year high of 2.1%. As is the case across most of the world, higher energy and food costs are a key factor in the pickup in headline inflation, reinforced by rising housing/utilities costs and increases in indirect taxes (on alcohol and tobacco). While the majority of these components are not interest ratesensitive, concerns about possible spillover effects at a time when the economy may still be straining its capacity limits provided ample justification for precautionary policy tightening.

Global Economic Research

7

Foreign Exchange Outlook

March 2008
Erik Nilsson +1 416 866-4205 Stephen Malyon +1 416 863-7719 Tuuli McCully +1 416 863-2859 Camilla Sutton +1 416 866-5470

ASIA/OCEANIA/EUROPE
Currency Outlook

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

Currency Trends
FX Rate AUD/USD NZD/USD USD/TWD USD/ISK 12 m 0.79 0.70 32.99 66.2 Going Back 6m 0.82 0.70 33.00 63.6 3m 0.88 0.76 32.26 61.3 Spot 27-Feb 0.94 0.82 30.92 65.2
0.82 0.80 0.78 0.76 0.74 0.72 0.70 0.68 Dec-07 Feb-08 0.66 Feb-07 Apr-07 Jun-07 Aug-07 Oct-07 Dec-07 Feb-08

3m 0.94 0.83 31.41 66.2

Outlook 6m 0.96 0.84 30.87 67.3

12 m 0.99 0.85 29.83 69.7

FX Rate AUD/USD NZD/USD USD/TWD USD/ISK

AUD/USD
0.95 0.93 0.90 0.88 0.85 0.83 0.80 0.78 0.75 Feb-07 Apr-07 Jun-07 Aug-07 Oct-07

NZD/USD

USD/TWD
33.50 33.00 32.50 32.00 31.50 31.00 30.50 Feb-07 Apr-07 Jun-07 Aug-07 Oct-07 Dec-07 Feb-08 70.0 68.0 66.0 64.0 62.0 60.0 58.0 Feb-07 Apr-07

USD/ISK

Jun-07 Aug-07

Oct-07

Dec-07

Feb-08

Global Economic Research

8

Foreign Exchange Outlook

March 2008
Erik Nilsson +1 416 866-4205 Tuuli McCully +1 416 863-2859

ASIA/OCEANIA/EUROPE
Fundamental Commentary

AUSTRALIA - The Reserve Bank of Australia’s (RBA) decision to push the benchmark interest rate up another 25 basis points to 7.0% in early February highlights the central bank’s ongoing disquiet regarding inflation. Subsequentlyreleased wages data will reinforce those concerns. The wage price index rose 1.1% q/q in the final quarter of 2007, leaving the annual rate of increase unchanged from the previous quarter at 4.2%. With the jobless rate falling to a 3-decade-plus low of 4.1%, there is considerable risk of a renewed acceleration in labour costs. Monetary policy committee members described price pressures as “broadly based”, and were expected to intensify in the current quarter. Moreover, “inflation expectations were also tending to rise”. Importantly, the committee noted that staff projections indicated that inflation would remain above the 3% target ceiling at least over the next two years in the absence of corrective measures. Indeed, there was some discussion regarding the possibility of a 50 basis point increase in view of the need for a strong signal of the RBA’s determination to address the inflation problem. However, policymakers opted for a more gradual response, a decision that was “finely balanced” in part because the run-up in borrowing costs since mid-2007 had outpaced the rise in the cash rate, and the impact of the higher price of credit was still working its way through the system. The RBA’s next policy meeting will be held on March 4th. TAIWAN - Economic growth in Taiwan remains heavily dependent on external trade. The current account surplus last year reached a record USD31.7 billion, equivalent to 8% of GDP. Real growth of 6.4% y/y in the final quarter of 2007 was driven by a 12.9% y/y surge in exports of goods and services - the second consecutive double-digit gain more than double the 6.3% increase in imports. In contrast, domestic demand rose a minimal 1.3% y/y, as a modest 2.2% increase in consumer spending was partially offset by a 1.6% drop in investment, the worst performance in six quarters. Taiwan’s strong trade ties with the People’s Republic of China (PRC) - which we expect to register economic growth of more than 10% again this year - and a moderate depreciation of the New Taiwan dollar vis-à-vis the yuan will help to ensure another solid export performance this year. However, the momentum that was evident in the second half of 2007 is unlikely to be sustained. While we do expect some strengthening in domestic spending, gains are unlikely to be sufficient to offset some narrowing of the trade gap. As a result, the pace of economic expansion will likely fall back below the 5% threshold - more in line with Taiwan’s longer-term norm. The March 22nd presidential election may set the stage for a less confrontational stance vis-à-vis the issue of formal independence, pointing to improved political relations with the PRC, a development that would boost domestic investor confidence.

NEW ZEALAND - The prospect of monetary policy easing in New Zealand continues to be pushed further into the future. The national unemployment rate declined another 0.1 percentage point to a record-low 3.4% in the final quarter of 2007. Employment rose an impressive 1.1% q/q (2.5% y/y), with the gains entirely attributable to a further increase in full-time positions. The Reserve Bank of New Zealand (RBNZ) has maintained its official cash rate (OCR) at a record-high 8.25% since July 2007. There is some evidence that high interest rates are beginning to make themselves felt - January housing prices were up just 4.0% y/y and credit card usage is stabilizing. However, exports are proving surprisingly resilient alongside buoyant demand for New Zealand dairy products. Moreover, price pressures remain unacceptably high; the headline CPI jumped 1.2% q/q in Q4 2007. The RBNZ now expects consumer inflation to remain above 3% in 2008, though it continues to express confidence that “the current level of the OCR remains consistent with future inflation outcomes of 1 to 3 percent on average over the medium term”. Under these conditions, there is no reason to anticipate an early shift in the current monetary policy stance. Indeed, with wages (excluding overtime) rising by 1.0% q/q (3.3% y/y) in the fourth quarter (private sector wages rose 1.1% q/q, according to the official labour cost index), the possibility of another rate hike cannot be entirely dismissed. ICELAND - Tight monetary conditions will remain in place in Iceland; the nation’s central bank kept its benchmark interest rate unchanged at a record-high of 13.75% following the Board of Governors meeting on February 14th. Monetary authorities deem that the earlier justification of an unchanged policy rate through mid-2008 is still valid despite the fact that the short-term inflation outlook is now less favourable due to the recent depreciation of the krona. The next monetary policy meeting is scheduled for April 10th. Consumer price inflation, which rebounded to a 1-year high of 6.8% y/y in February, continues to exceed the central bank’s 2.5% inflation target by a substantial margin on the back of tight labour conditions, a strong housing market and the government’s expansionary fiscal policy. However, policymakers expect real estate prices to decline, which should bring the inflation rate down accordingly. While the monetary authorities noted that “uncertainty is greater than before” regarding the impact of deteriorating global financial conditions on Icelandic demand and inflation, they also observed that the krona may lose ground “concurrent with a reduction in the supply of foreign capital”. Indeed, despite improvement in the external accounts, the country’s current account deficit remains substantial - close to 15% of GDP in 2007 - entailing a long-term inflationary risk through the possibility of currency depreciation alongside rising deficit funding costs should global financial conditions become less hospitable.

Global Economic Research

9

Foreign Exchange Outlook

March 2008
Erik Nilsson +1 416 866-4205

DEVELOPING ASIA
Currency Outlook

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

Currency Trends
FX Rate USD/CNY USD/INR USD/KRW USD/MYR 12 m 7.74 44.3 943 3.50 Going Back 6m 7.55 40.9 939 3.51 3m 7.40 39.6 925 3.36 Spot 27-Feb 7.14 39.8 938 3.19
45.0 7.70 44.0 43.0 42.0 7.40 41.0 7.25 40.0 39.0 Feb-07 Apr-07

3m 6.98 39.8 928 3.19

Outlook 6m 6.83 39.9 917 3.19

12 m 6.51 40.2 896 3.15

FX Rate USD/CNY USD/INR USD/KRW USD/MYR

USD/CNY

USD/INR

7.55

7.10 Feb-07 Apr-07

Jun-07 Aug-07 Oct-07

Dec-07

Feb-08

Jun-07 Aug-07

Oct-07

Dec-07

Feb-08

USD/KRW
3.55 950 940 930 920 910 900 Feb-07 Apr-07 Jun-07 Aug-07 3.50 3.45 3.40 3.35 3.30 3.25 3.20 Oct-07 Dec-07 Feb-08 3.15 Feb-07 Apr-07

USD/MYR

Jun-07 Aug-07

Oct-07

Dec-07

Feb-08

Global Economic Research

10

Foreign Exchange Outlook

March 2008
Erik Nilsson +1 416 866-4205

DEVELOPING ASIA
Fundamental Commentary

CHINA - The internal debate regarding the appropriate pace of yuan appreciation is undoubtedly intense as inflationary pressures build and the trade surpluses continue to widen. The January gap increased by 23% from a year earlier to USD19.5 billion, though imports outpaced exports by a narrow margin (28% y/y versus 27%). Some moderate quickening in yuan strengthening has clearly been endorsed to help address the burgeoning imbalance and dampen inflationary pressures: the currency has gained 2.2% this year compared with 6.8% for the entirety of the past year. Nevertheless, to alleviate some of the pressure on the yuan, the authorities have announced plans to ease restrictions on investment outflows by individuals and by local companies. Food remains the driving force behind consumer inflation in China. Led by a 41.2% y/y increase in meat costs, the consumer price index jumped 7.1% y/y in January - the biggest advance since September 1996. Excluding this component, pressures appear reasonably wellcontained. However, recent official efforts to cap prices - in both the public and private sector - make it difficult to draw firm conclusions. The January figures may also have been distorted by the impact of the severely disruptive weather conditions and by preparations for the celebration of the Lunar New Year. Nevertheless, it is clear that massive increases in domestic production capacity continue to limit the potential for price increases across a wide range of consumer goods. KOREA - A second consecutive monthly decline in Korea’s jobless rate to a 5-year low of 3.0% reinforces our view that the nation will enjoy another solid, though unspectacular year of economic growth. We expect output to rise by 4¼4½% in 2008 following a 5% gain last year. While central bank concerns about the extent of economic deceleration may prompt intermittent intervention to stem excessive KRW appreciation, we expect the Bank of Korea to tolerate some currency strengthening; the headline consumer price index rose by 3.9% y/y in January, a 3½-year high and wholesale prices jumped 5.9%. The monetary authorities are having mixed success in curbing lending growth. Nevertheless, as was widely anticipated, policymakers opted to maintain the benchmark interest rate at 5.0% following their February policy meeting and an adjustment in the nearterm is unlikely. Earlier concerns regarding the build-up in mortgage debt - and rapid increases in house prices - are abating alongside the marked easing in mortgage lending to a minimal 2.1% y/y in January. With consumer confidence slipping back to a 7-month low, a significant strengthening in household borrowing (and spending) in the near-term is unlikely. However, business borrowing largely by small- and medium-sized firms - is still growing at a 20%-plus annual pace, raising concerns about the risk of a possible deterioration in business balance sheets at a time of increasing economic uncertainty.

INDIA - India’s industrial sector continues to register solid gains, but some deceleration - to a more sustainable pace is evident. Output rose 7.6% y/y in December, an improvement from November’s modest 5.1% gain, but still below the 6-month average of 8.5%. Manufacturing activity rose 8.4% y/y, led by a 16.6% increase in capital goods; however, this represented the smallest advance in machinery and equipment production in five months. This suggests that some cooling in the rate of expansion in business investment is under way alongside a noticeable softening in demand for big-ticket consumer goods: output of consumer durables products was up a minimal 2.2% y/y in December and had been below year-earlier levels in three of the previous four months. The persistent softness prompted the finance minister to direct state-owned banks to lower their prime rate. However, inflationary pressures are once again on the rise. The wholesale price index was up 4.35% y/y in early February, a 6-month high; all major components of the index were up by more than 4.0%. Under these conditions, we expect the Reserve Bank of India to maintain its current monetary policy stance. The February 29th federal budget for fiscal year 2008-09 (beginning April 1st) should prove relatively neutral for the rupee, as the government will likely maintain its current overall fiscal stance of limited annual reductions in the deficit/GDP ratio (this year’s budget shortfall is expected to be just over 3% of GDP). MALAYSIA - Prime Minister Abdullah Ahmad Badawi has dissolved parliament and Malaysia will hold a general election on March 8th, more than a year ahead of the expiration of the government’s five-year term. The coalition is widely expected to maintain its five-decade hold on power and major shifts in economic policy are unlikely. Abdullah’s own political future will largely depend on the margin of victory. Favouring the government is the fact that the economy has proven relatively resilient to the global slowdown, though some deceleration will be evident. The pickup in industrial growth to 5.7% y/y in December - a 12-month high - may prove temporary. Industrial activity is heavily driven by exports - indeed, the value of manufactured exports is equivalent to more than 90% of Malaysian GDP - and the prospect of a slowing in global growth in 2008 points to broadlybased easing in demand for Malaysian products; foreign sales (in USD terms) rose by close to 10% in 2007. Consumer inflation remains low, a trend that will be supported by ongoing appreciation of the ringgit. Although we do not expect any early shift in monetary policy, a still relativelysubdued price performance - the headline consumer price index rose 2.3% y/y in January - gives the central bank some leeway to lower its benchmark interest rate, which has been held at 3.5% since April 2006, in the event of any significant weakening in domestic economic activity.

Global Economic Research

11

Foreign Exchange Outlook

March 2008
Pablo F.G. Bréard +1 416 862-3876

DEVELOPING AMERICAS
Currency Outlook

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

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

USD/BRL
2.20 11.20 2.10 2.00 1.90 1.80 1.70 1.60 Feb-07 Apr-07 Jun-07 Aug-07 Oct-07 Dec-07 11.10 11.00 10.90 10.80 10.70

USD/MXN

Feb-08

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

Feb-08

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

USD/ARS

Jun-07 Aug-07

Oct-07

Dec-07

Feb-08

Global Economic Research

12

Foreign Exchange Outlook

March 2008
Pablo F.G. Bréard +1 416 862-3876

DEVELOPING AMERICAS
Fundamental Commentary

BRAZIL - Brazilian financial markets are showing remarkable resilience to collapsing US interest rates and an oil price at almost triple digits. At the same time, however, we caution that the vulnerability of neighbouring economies (and financial markets) to a severe asset-price adjustment in Brazilian securities (perhaps as a result of a correction in China-led equity markets) has emerged as one of the most relevant risk factors to monitor in 2008. Status quo in monetary policy seems to dominate the thinking in financial market participants ahead of the decision to be adopted at the COPOM (monetary policy committee) meeting on March 5th: the government-administered reference SELIC rate remains at 11.25%. The minutes of the January 22nd COPOM meeting highlighting that IPCA-based consumer price inflation “has been less remarkably benign than that observed in previous quarters”. At the same time, the report focused on the solid performance of domestic demand and industrial output: in the past 12 months, industrial production and retail sales grew by 5.5% and 9.2%, respectively. The government also noted that the external sector remains a major contributor to growth, although there are tentative signs of deceleration in net export activity: the current account surplus was USD3.6 billion in 2007, equivalent to 0.3% of GDP on the back of solid export performance: foreign sales totalled USD161 billion.

MEXICO - Mexico continues to weather the aftershocks of the US-led sub-prime crisis and global credit crunch relatively well. Although a sizable downturn in the US economy will affect the pace of economic expansion south of the border, the administration of President Felipe CalderonHinojosa will inject the necessary fiscal stimuli to compensate for the loss of US momentum. At the heart of this implied sense of decoupling/resilience enjoyed by Mexico are a solid domestic financial sector and the orderly and adequately supervised development of a local-currency fixedincome market. The latest monetary policy decision to maintain the status quo last week did not cause any material shift in local investors’ portfolios. Financial markets remained broadly stable this month, despite the sporadic gyrations caused by developments outside of Mexican territory: USD/MXN averaged 10.78 in February, and the IPC equity index consolidated the gains achieved since midJanuary. Data on economic activity show a pattern of expansion: though manufacturing slowed considerably, real GDP grew by 3.8% y/y in the fourth quarter of 2007. The services-based sectors – transportation, financial services and retail trade – showed the best economic performances. For the year as a whole, the economy increased by 3.3%, not a bad figure considering the storm of disruptive events north of the border. In a recent official forecast revision, the ministry of finance calls for a mild slowdown this year to 2.8%. ARGENTINA - Argentina continues to embrace a de-facto policy of international isolation. Government policies implemented by the Kirchner(s) administration continue to generate capital flight, food and (transport) fuel shortages and, of increasingly alarming relevance, emerging signs of hidden (hyper) inflation. The apparent comfort amongst Argentine policymakers would be abruptly overturned should Brazil face a major equity market correction and currency depreciation. The ghost of hyperinflation is slowly reappearing in the memory (and business plans) of the commercial and corporate sector in Argentina. Government authorities remain in a state of disruptive denial. Of course, neither union leaders nor households believe the official figures (8.2% y/y in January 2008). Social tensions – and wage demands – are brewing, putting at risk the period of sustained economic expansion and putting into doubt this sense of artificial price stability. At the heart of the unmanageable price pressures lies the current policy of price controls (transport fuels) and subsidies to inefficiently run organizations (public transport services, for example) as well as the perceived strategy of re-nationalization of corporations which were transferred to private hands during the nineties. Any serious corporate business with a long-term strategic commitment to Argentina is now incorporating inflation scenarios into its business plans which exceed the official numbers by a factor of three or four.

CHILE - The world is focused on the possibility of a severe economic downturn in the United States, already felt in the distressed housing market. Yet, commodity prices have recouped a directional upward trend of late, with positive implications for Andean metal-exporting economies, and associated floating currencies. As for the effect of monetary policy trends and interest rate differentials, Chilean localcurrency securities have clearly received support from higher government-administered short-term interest rates, as the central bank embarks on a decisive, somewhat overdue, strategy to contain inflationary expectations. Chile is always fighting its own inflation specters. The monetary authorities caught off-guard by the price pressures that emerged over the past 12 months. Consumer price inflation reached 7.5% y/y in January. Now, with a new leadership in charge, the central bank is resorting to aggressive orthodox mechanisms, that is higher interest rates, to try to contain and reverse the current trend. In doing so, the pace of economic expansion will continue to slow, prompting global analysts and investors to downgrade their economic growth projections for this year and next. Meanwhile, the Chilean peso has attained a very stable trading range between 460 and 480 per USD, shrugging off the recent escalation in oil prices. Undoubtedly, widening interest rate differentials and copper prices in ascendancy have instilled strong support to the Chilean currency.

Global Economic Research

13

Foreign Exchange Outlook

March 2008
Pablo F.G. Bréard +1 416 862-3876 Tuuli McCully +1 416 863-2859

DEVELOPING EUROPE/AFRICA
Currency Outlook

RUSSIA - The Russian ruble (RUB) maintains a stable tone. Global energy prices, sizable – and growing – foreign exchange reserves, an accelerating economy and the expected removal of election-related uncertainties are all key factors instilling a positive market mood into Russia. USD/RUB will likely maintain a trading range between 24.2 and 24.8 through the remainder of the quarter. TURKEY - The Turkish lira (TRY) is well-positioned to maintain a stable trading pattern through the remainder of the quarter, despite the adverse effects caused by the global credit crunch in advanced economies. However, we expect USD/TRY to close the year at 1.30, as investors incorporate the weakening external sector environment and a higher degree of global risk aversion. SOUTH AFRICA - The South African rand (ZAR) is entering a period of stabilization. The heavy corrective forces affecting the ZAR will moderate in the coming months, paving the way for a period of consolidation and, perhaps, mild recovery. Precious metal prices trends remain ZAR-supportive: gold prices have recently traded above USD950/ounce. POLAND - Strong – albeit slowing – economic growth prospects and a bias towards monetary policy tightening should provide support to the Polish zloty vis-à-vis the euro through the first half of 2008. The new reform-oriented government also improves the zloty outlook on the back of increased potential for an improved business climate and robust fiscal consolidation. A widening current account deficit, however, may limit the prospects of further appreciation towards end2008.

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

USD/RUB
26.3 26.0 25.7 25.4 25.1 24.8 24.5 24.2 Feb-07 Apr-07 Jun-07 Aug-07 Oct-07 Dec-07 1.43 1.38 1.33 1.28 1.23 1.18 1.13 Feb-07 Apr-07

USD/TRY

Feb-08

Jun-07 Aug-07

Oct-07

De c-07

Feb-08

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

EUR/PLN

Jun-07 Aug-07

Oct-07

Dec-07

Feb-08

Global Economic Research

14

Foreign Exchange Outlook

March 2008
Pablo F.G. Bréard +1 416 862-3876 Tuuli McCully +1 416 863-2859

DEVELOPING EUROPE/AFRICA
Fundamental Commentary

RUSSIA - Russian stocks (as measured by the MICEX10 index) have suffered a substantial downward adjustment since the beginning of the year, the most acute sell-off within the so-called BRIC (Brazil, Russia, India and China) group. The Russian ruble has also adopted a somewhat defensive tone; however, oil and natural gas prices together with massive foreign exchange reserves remain very RUB supportive. Indeed, the government counts on more than USD600 billion in reserves and stabilization funds to influence the exchange rate, and investors have no market-induced mechanism to alter the policy-guided exchange rate. On the political front, Mr. Dmitry Medvedev, appointed by Vladimir Putin to succeed him as Russian president is almost sure to win the March 2 election, providing a sense of policy continuity (and some tacit comfort) to investors exposed to Russian local-currency assets. The monetary front remains most challenging, as highlighted by the central bank’s decision to increase its discount rate by 25 bps to 10¼% and hike reserve requirements on February 4th in response to escalating price pressures; headline inflation reached 12.6% y/y in January, sharply exceeding the official target. In brief, a decisive strategy to cool the economy will need to be implemented to curb the current adverse inflation trend and restore expectations to normal levels; until then, investors will likely exert a more cautious tone in their portfolio allocation decisions. SOUTH AFRICA - Global market participants severely punished the South African currency on the grounds of increasing evidence of an imminent energy crisis, sharp economic deceleration and persistently high consumer price inflation. To make matters worse, a period of global credit re-pricing was activated as portfolio investors differentiated amongst emerging-market credits and currencies. The country’s still wide current account deficit, coupled with renewed political uncertainties and a period of sustained securities markets gains prompted an abrupt adjustment in securities valuations with adverse consequences to the ZAR. The exchange rate ignored the bullish trend in precious metal markets and sharply depreciated from 6.70 to 7.93 per USD in a matter of days; nevertheless, a process of recovery has recently taken shape. Looking ahead, domestic interest rates will remain high, acting as a constraining mechanism against capital flight and foreign capital repatriation. The prospect of a more severe equity market correction in China may in the near future instil a negative view in South Africa and other emerging-market economies. The outlook for the utility sector is grim, as electricity shortages will be in place in the coming months. It seems that a prolonged period of neglect on the part of the government and the state-run Eskom organization has blocked an adequate investment plan to meet rising energy demand, a pattern that is also increasingly evident in other developing countries.

TURKEY - Resilience to global financial shocks and investors’ indifference to escalating military confrontation in northern Iraq continue to shape sentiment in Turkish securities markets. The administration of President Recep Tayyip Erdogan deepened its military offensive to contain the insurgency in northern Iraq, further increasing the country’s political risk component. Investors have, for now, shrugged off the heightened security risks. On the monetary policy front, the central bank opted to reduce its benchmark shortterm interest rates by 25 basis points on February 14th: the borrowing overnight rate to 15.25% and the lending rate to 19.25%. When discounting expected inflation in the next 12 months, real short-term interest rates continue to be very supportive to the TRY. In fact, trading patterns have been quite stable since the beginning of the year: USD/TRY seems to be trapped in a 1.15-1.25 range. The central bank remains committed to its primary objective, which is “to achieve and maintain price stability”. The latest official communiqué of the monetary authorities signals that the Turkish economy maintains a moderate pace of expansion and that the key factors shaping the inflation outlook remain high energy and food costs. Consumer prices increased by 8.2% y/y in January; the central bank stressed that monetary conditions aim at supporting the process of disinflation, yet monetary policy remains restrictive despite the recent interest rate reductions. POLAND - Poland will remain among the growth leaders in central Europe. Spurred on by solid gains in investment and consumer spending, the nation’s output expanded by 6½% in 2007 – the fastest growth in a decade. We expect the economy to stay on a favourable track in 2008, though the pace is set to slow slightly to around 5½% due to higher domestic interest rates and some cooling in European demand for Polish exports. The new pro-business government aims to lower taxes and push through economic reforms, which should provide support to Poland’s investment and growth outlook. Inflationary pressures continue their upward trend of recent months. Consumer price inflation accelerated for a fifth consecutive month in January to 4.3% y/y – the highest in more than three years – from 4.0% the month before, continuing to exceed the central bank’s 2.5% inflation target by a substantial margin. Despite the fact that price pressures are driven mainly by high food and energy costs, the National Bank of Poland tightened monetary conditions in the Monetary Policy Council meeting on February 26th-27th, taking the benchmark interest rate to 5.50%. The decision reflects the fact that price pressures persist amid expansionary demand conditions. We expect further modest monetary tightening in the coming months, as Poland will likely remain relatively resilient in the face of the euro zone’s economic slowdown .

Global Economic Research

15

Foreign Exchange Outlook

March 2008

GLOBAL CURRENCY FORECAST (end of period)
2006 2007 2008f 2009f Q1 Q2 106 1.53 162 2.01 0.76 1.04 1.59 2008f Q3 105 1.55 163 2.04 0.76 1.03 1.59 Q4 103 1.58 163 2.07 0.77 1.00 1.58 Q1 100 1.59 159 2.07 0.77 0.99 1.57 Q2 98 1.60 157 2.08 0.77 0.98 1.56 2009f Q3 98 1.57 154 2.07 0.76 0.99 1.55 Q4 100 1.55 155 2.05 0.75 1.00 1.55

MAJOR CURRENCIES
Japan Euro zone UK Switzerland
USD / JPY EUR / USD EUR / JPY GBP / USD EUR / GBP USD / CHF EUR / CHF 119 1.32 157 1.96 0.67 1.22 1.61 112 1.46 163 1.98 0.74 1.13 1.65 103 1.58 163 2.07 0.77 1.00 1.58 100 1.55 155 2.05 0.75 1.00 1.55 107 1.50 161 1.99 0.75 1.07 1.61

AMERICAS Canada North
Mexico Argentina Brazil South Chile Colombia Peru

USD / CAD CAD / USD USD / MXN CAD / MXN USD / ARS USD / BRL USD / CLP USD / COP USD / PEN

1.17 0.86 10.82 9.28 3.06 2.14 533 2240 3.20 2.15

1.00 1.00 10.91 10.93 3.15 1.78 498 2018 3.00 2.15

0.96 1.04 11.05 11.51 3.30 1.80 480 2025 2.90 2.58

0.97 1.03 11.37 11.72 3.50 1.90 490 2150 2.85 3.00

0.99 1.01 10.83 10.98 3.17 1.77 467 1865 2.93 2.18

0.98 1.02 10.80 11.14 3.21 1.78 471 1912 2.92 2.29

0.97 1.03 10.89 11.32 3.25 1.79 475 1960 2.91 2.41

0.96 1.04 11.05 11.51 3.30 1.80 480 2025 2.90 2.58

0.94 1.06 11.14 11.84 3.35 1.82 482 2056 2.89 2.68

0.95 1.05 11.12 11.80 3.40 1.85 485 2087 2.87 2.78

0.96 1.04 11.20 11.76 3.45 1.87 487 2118 2.86 2.89

0.97 1.03 11.37 11.72 3.50 1.90 490 2150 2.85 3.00

Venezuela 1/ USD / VEB

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

New Zealand NZD / USD
USD / PHP USD / SGD USD / KRW USD / THB USD / TWD

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

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

Global Economic Research

16

Foreign Exchange Outlook

International Research Group
Pablo F.G. Bréard, Head pablo_breard@scotiacapital.com Tuuli McCully tuuli_mccully@scotiacapital.com Erik Nilsson erik_nilsson@scotiacapital.com Estela Ramírez estela_ramirez@scotiacapital.com Oscar Sánchez oscar_sanchez@scotiacapital.com

Canadian & U.S. Economic Research
Karen Cordes karen_cordes@scotiacapital.com Gorica Djeric gorica_djeric@scotiacapital.com Adrienne Warren adrienne_warren@scotiacapital.com

Foreign Exchange Research
Stephen Malyon stephen_malyon@scotiacapital.com Camilla Sutton camilla_sutton@scotiacapital.com

Scotia Economics
40 King Street West, 63rd Floor Scotia Plaza Toronto, Ontario Canada M5H 1H1 Tel: (416) 866-6253 Fax: (416) 866-2829 Website: www.scotiabank.com Email: scotia_economics@scotiacapital.com This Report is prepared by Scotia Economics as a resource for the clients of Scotiabank and Scotia Capital. While the information is from sources believed reliable, neither the information nor the forecast shall be taken as a representation for which The Bank of Nova Scotia or Scotia Capital Inc. or any of their employees incur any responsibility.

Global Economic Research