european monetary union in crisis

7/31/2019 European Monetary Union in Crisis

1/16

EUROPEANMONETARY

UNION

IN

CRISIS

CamillaSutton lChiefCurrencyStrategist

(416)8665470 [email protected]

DIALIN:

905

694

9451

(local

to

Toronto)

PASSCODE:865033782#

CONFERENCECALLCOMMANDS

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2/16

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SCOTIABANKSFORECAST

FX

USDperformance

is

mixed REAL

GDP

A

softened

growth

profile

2010 2011 2012f 2013f 0010 2011 2012f 2013f

USDCAD 1.00 1.02 0.98 0.96 US 1.8 1.7 2.3 2.4

CADUSD 1.00 0.98 1.02 1.04 Canada 2.2 2.5 2.1 2.2

AUDUSD 1.02 1.02 1.09 1.11 Mexico 2.1 3.9 3.6 3.7

EURUSD 1.34 1.30 1.25 1.29 EuroZone 1.4 1.5 (0.5) 0.9

GBPUSD 1.56 1.55 1.63 1.68 UK 2.0 0.7 0.5 1.8

USDJPY 81 77 85 87 Japan 0.9 (0.7) 2.0 1.7

USDCNY 6.61 6.30 6.18 6.05 China 9.5 9.3 8.4 8.9

INFLATION Expectedtoremaincontained I NTERESTRATES Remainaccomodative

US 3.3 2.4 2.2 Q411 Q412 Q413

Canada 2.7 2.2 2.1 FED 0.25 0.25 0.25

BoC 1.00 1.00 1.75

COMMODITIES

Yearlyaverages ECB 1.00

0.75

0.75

Oil(WTI) 95 105 105 BoE 0.50 0.50 0.50

Gold 1,569 1,650 1,600 BoJ 0.10 0.10 0.10

RBA 4.25 3.75 4.00


3/16


RISKAVERSIONSPIKESARETEMPORARYBUTVIOLENT

Riskaversionistemporary

Since2008,spikeshavebeenbetween2and5weeks(weareinweektwo).

Takessubstantialtimetoretrace


4/16


RISKAVERSION&FXLOSSES AREWETHEREYET?

Historymightnotrepeatbutprovidesaguideofpotentialimpact

Nothingcomparestothefallof2008

Epicenterofcrisisdoesntmatter.

AUDalwayshigherbetaandlargerlosses.

Comparedtoeither2010or2011itlookslikeweare1/2to2/3ofthewaythere.

AsofMay24


5/16


EUROPEANBONDANDCDSMARKETS

SPAINSCDSLEVELSRISETONEWHIGH;YIELDSELEVATED

SPAINSCDSRISESTONEWHIGH;YIELDSELEVATED

GERMANCDSLEVELSRISEASYIELDSFALLTOLOWS

ITALYSCDSLEVELSRISE;BUTYIELDSCONTAINED

CDS

10yrYIELDS

CDS

10yrYIELDS

CDS

10yrYIELDSSource:Bloomberg&ScotiaFXStrategy

Source:Bloomberg&ScotiaFXStrategy Source:Bloomberg&ScotiaFXStrategy

FRENCHCDSLEVELSRISEASYIELDSFALLTOLOWS

Source:Bloomberg&ScotiaFXStrategy

CDS

10yrYIELDS


6/16


TWOTHEMESTHISYEAR GLOBALGROWTHANDCENTRALBANKPOLICYCHANGING

Slowingglobalgrowthisbeingpricedintomarkets

RiskofFedQE3,ECBactionhasincreased;butnotthereyet

OECD

leading

indicators

(May

10)

more

bullish

than

market

perception

Sourceforallcharts:OECD


7/16


EUROPE HASAGLOBALIMPACT

IMPACTOF

AN

INTENSIFIED

EURO

AREA

CRISIS

ON

THE

WORLD

Verystrong(>3%)

Strong(23%)

Moderate(12%)

Limited(


8/16


EURUSD HISTORICALTRADINGPATTERNS

EURkeylevels:

1.2588:Historicalsupport/resistance

1.2500:Psychological(brokenintraday)

1.2152:Nextmajorsupport

1.1877:Majorsupportfrom2010low

EURSINCE

INCEPTION

EURs RECENTHISTORY

EUR

key

levels:1.21:Averagesinceinception

1.6038:Alltimehigh July2008

0.8230:Alltimelow October2000

Source:Bloomberg&ScotiabankFXStrategy

Source:Bloomberg&ScotiabankFXStrategy


9/16


EURUSD WHATPROTECTSEURFROMCOLLAPSE

Themesthat

support

EUR:

USeconomy needsaweakUSD;justlikeEurozoneneedsweakEUR.

USfiscalproblemsloom currentlaw suggestsfiscaldragof3.9%in2013;BoCestimatesitat2%.

Relativemonetarypolicy ECBnotmovingtowardsQE;FedhasdooropentoQE3.

Germany hasvaluewhetheryoubelieveinEMUornot.

Repatriation IMF deleveragingwilltotal$2.6trn

with75%ofthisexpectedtocomefromsalesofsubsidiaries,noncoreassetsandsecurities



10/16


EURUSD WHYTHECURRENCYSHOULDSTRUGGLE

EURtrends

lower

in

2012,

closing

at

1.25

but

does

not

collapse

as:

Fundingcurrency:EURbecomescarryfundingpotential.

Sentimentisbearish:evenifshortsarefrustratedandtired.

Centralbankpolicy:supportsEURinneartermbutECBtostaydovishlongerthanFED.

Politics:lackofwilltomovetowardscloserfiscalties;butfewother choices.

Growthoutlook:stillfalling austerity/growthbalance.

Riskaversion repeatedspikesasconfusionreignsforEurope.

Uncertainty:

membership,

politics,

future,

contagion

potential.



11/16


USDCAD WHATRISKCOULDMEANFORUSDCADTEMPORARILY

1.0853

1.0658

1.0790

1.1335

1.0500

1.0000

0.9500

USDCADHISTORYANDPOTENTIAL



12/16


USDCAD RISKAVERSIONINTERUPTSBUTDOESNTCHANGEATREND

USDCAD

RISKAVERSION

IS

AN

INTERUPTION

AND

TEMPORARY


13/16


CADDRIVERS&OUTLOOK

DRIVERS

OF

CAD USDvsCADrelativepicture

Globalgrowthoutlook(US&China)

Europe

Domesticfundamentals

Bank ofCanadapolicyvsFedpolicy

Oilandcommodities

Flow

TripleAstatus

Riskaversion

Sentiment

Technicals

Outlook CADmaintainsitsappreciatingtrend

USDCADcloses2012at0.98(strongerCADthantheendof2011)

USDCADcloses2013at0.96(strongerCADthantheendof2012)

USDCAD

MOVE

UP

TEMPORARY




14/16


SCOTIABANKSGLOBALFORECASTANDOUTLOOK

MEDIUMTERMOUTLOOKINTOYEAREND2012

Bullish CAD: Benefits from BoC vs Fed (and global) policy, sentiment, risk on, weak USD, relatively

strongCanadian

economic

and

sovereign

fundamentals;

risk

is

global

growth

outlook.

Bearish EUR: Confusion, uncertainty, no political will for solution, funding side of carry all weigh on

EUR;buteachleglowerisfollowedbyperiodofretracement.USDcannotstrengthenforever.

Bearish JPY: Drivers that support JPY are spikes in risk aversion and alternatives to USD; but

fundamentals,

sentiment

and

monetary

policy

no

longer

support

a

strong

currency.

BullishGBP:IncreasinglyseenasanalternativetoUSDandEUR;mediumtermproblemsstillaweight.

BullishCNY: Authoritiesallowmeasuredpaceofappreciation;butslowerthanpreviouslythought.

BullishAUD:SupportedbytiestoAsia,carrytrade,interestrates,investor sentiment&USDweakness.

FXOutlook

2010 2011 2012f 2013f USDCAD 1.00 1.02 0.98 0.96

CADUSD 1.00 0.98 1.02 1.04

EURUSD 1.34 1.30 1.25 1.29

GBPUSD 1.56 1.55 1.63 1.68

AUDUSD 1.02 1.02 1.09 1.11

USDJPY 81 77 85 87


15/16


SCOTIABANK FXSTRATEGY

FXSTRATEGY

SUMMARY

OF

DOCUMENTS

DailyFXUpdate Publishedat7:45am(EST)

DailyLatAM Update Publishedat7:45am(EST)

DailyAsianUpdate Publishedat10:00pm(EST)

CurrencySentiment

CFTC

Report

Published

every

Friday

SpecialReports Activetradestrategies;intradaymarket

movingevents;monetarypolicy,etc.

FXSTRATEGY

JOINT

PUBLICATIONS

WITH

ECONOMICS

GlobalViews Weeklyupdateacrossassetclasses

FXMonthly Reviewofglobalcurrenciesandforecasts

FXOUTLOOKCONFERENCECALL

TwentyminuteupdateonFXstrategy(USDCADoutlook)

FXSTRATEGY

GLOBAL

COVERAGE

CamillaSutton,CFA,CMT

ChiefCurrencyStrategist

(416)8665470

[email protected]

EricTheoret

CurrencyStrategist

(416)8637030

[email protected]

SachaTihanyi EmergingAsia

SeniorCurrency

Strategist

[email protected]

EduardoSuarez LatAM

SeniorCurrencyStrategist

[email protected]


16/16

european monetary union in crisis

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