GPS GMONTHLY

P S LOBAL OSITIONING TRATEGIES

March 17, 2011

Peter Buchanan
Economics
Coping With Uncertainty
(416) 594-7354
peter.buchanan@cibc.ca Economics (Buchanan): Risk aversion was on the rise due to higher oil prices, renewed
euro debt fears and emerging market policy restraint, even before the still not fully
Warren Lovely clear effects of the earthquake in Japan. The markets’ reaction to events there reflects a
Government Finance
(416) 594-8041
general distaste for uncertainty. Solid domestic Q1 growth prospects support our view
warren.lovely@cibc.ca that the Bank of Canada will end its pause at the May meeting. Fragile recoveries and
uncertainties will help keep major central banks elsewhere on hold (UK, US) or could
Katherine Spector see a delay in announced tightening plans (ECB).
Commodities
(212) 885-4339
katherine.spector@us.cibc.ca Foreign Exchange (Stretch): After a prolonged period of emergency monetary policy
it seemed, at least ahead of the Japanese tragedy, that policymakers were gearing up
Jeremy Stretch for normalization; FX dynamics being determined by monetary policy set against risk
Foreign Exchange appetite. If we do not face the worst case scenario in Japan then the prospect of an
+44 (0) 207-234-7232
jeremy.stretch@cibc.co.uk
ending of QEII, heavily skewed market positioning versus the USD, a deceleration in
global activity, led from Asia ex-Japan, points towards a broad based cyclical USD bounce
Joanna Zapior, CFA in the upcoming quarter.
Corporate Credit
416) 594-8498 Government Finance (Lovely): Budget season is in full flight and there’s plenty to
joanna.zapior@cibc.ca
watch out for. External risks have mounted, and we examine regional implications from
Japan’s disaster and high energy prices. In spite of global uncertainties, revised provincial
growth forecasts show a further improvement vs. our earlier call, adding extra revenue
to the fiscal plan and allowing some governments to more credibly trace a path back
to balance.

Credit (Zapior): We assess the strength of the spread rally of the last 10 months in
Canada and the US in an historical context, as well as within the framework of our
2011 spread forecast. Spreads are tracking the tight end of the range in the second
most optimistic forecast scenario, while key spread drivers are more closely fitting the
“meet expectations” scenario. Nevertheless, “priced for perfection” spreads should be
sustainable, even with economic headwinds, if the strong demand for credit product
continues.
Internet:
http://research.cibcwm.com/
Commodities (Spector): Most major crude grades—North American and otherwise—
economic_public/download/ have rallied hard this year to date. The strength we have seen recently in Brent has
gps_mar11.pdf been broadly reflected across sweet grades globally. But US benchmark West Texas
Intermediate has lagged other crudes, and we see this disconnect continuing at least
on Bloomberg:
through the end of the year.
WGPS <GO>

CIBC World Markets Inc., P.O. Box 500, 161 Bay Street, Brookfield Place, Toronto Canada M5J 2S8 (416) 594-7000
See “Legal Disclaimer” section at the end of this report for important disclosures, including potential conflicts of interest.
CIBC WORLD MARKETS INC. GPS Monthly - March 17, 2011

ECONOMICS
PETER BUCHANAN

New Headwinds Give Central Banks Reason Not to Tighten Hastily

Markets have regained a healthy respect for risk in recent
weeks. Fears of a double-dip recession eased as 2010
wore on, and there were hopes the momentum would
carry fully over into the new year. It didn’t take long
for those high, and in some cases overdone, hopes to
begin to fade. As we went to press, markets were still
trying to come to grips with the consequences of the
horrific tragedy in Japan. It will be some time before the
information is available to make a complete and accurate
assessment of the implications of events there, both for
Japan itself and other nations.
No country is an island—least of all Canada. The Bank’s
March 1st statement emphasized geopolitical uncertainties,
hinting at a broad risk category. That and still-contained
inflation readings are a reason not to look for an April
rate hike, although we still see the Bank pulling the rate
trigger at its May setting. While the ECB has struck a
hawkish chord recently, central bankers in both the US
and UK have also highlighted still fairly significant risks to
the recovery, reinforcing our view that it will be longer, if
anything, than the consensus now believes before policy
there edges back toward restraint.

Even before disaster hit that country, there were signs
that investors were starting to revisit some of their more
optimistic assumptions about just how well things would
turn out on the economic front in 2011, in the face of a
number of developments. Surging gasoline prices raise
questions about whether US consumer spending can
continue its healthier pace. With the focus on containing
red ink, governments in the industrialized world are
reaching for the spending ax. Moreover, monetary policy
in last year’s hot performers—the emerging markets—is
poised to tighten further, hampering growth as inflation
tops official targets.
Higher Oil Prices High on Global Worry List
Nosebleed oil prices are one reason why growth this
year may not match the barnburner pace some were
predicting with arguably a touch too much confidence
earlier. Libya accounts for just 2% of global crude supply,
but investors have been looking not just at events there,
but the (arguably) still relatively small chance of contagion
laying low a top-tier OPEC producer like Saudi Arabia or
Iran.
Oil has risen dramatically before, only to crash back to
earth, and there are still good reasons why history may

Table 1. Economic Update

CANADA 10Q4A 11Q1F 11Q2F 11Q3F 11Q4F 12Q1F 12Q2F 2010A 2011F 2012F
Real GDP Growth (AR) 3.3 4.0 2.5 2.0 1.9 2.3 3.1 3.1 2.8 2.8
Real Final Domestic Demand (AR) 4.7 2.5 2.5 1.9 1.8 2.3 3.0 4.4 3.0 2.7
All Items CPI Inflation (Y/Y) 2.3 2.4 2.5 2.1 1.9 1.7 2.0 1.8 2.2 2.1
Core CPI Ex Indirect Taxes (Y/Y) 1.6 1.4 1.8 1.9 1.8 1.8 1.9 1.7 1.7 2.0
Unemployment Rate (%) 7.7 7.7 7.5 7.6 7.8 7.7 7.5 8.0 7.6 7.4

U.S. 10Q4A 11Q1F 11Q2F 11Q3F 11Q4F 12Q1F 12Q2F 2010A 2011F 2012F
Real GDP Growth (AR) 2.8 3.8 2.3 1.8 1.9 2.3 2.5 2.8 2.7 2.3
Real Final Sales (AR) 6.7 2.1 2.8 2.3 2.2 2.1 2.5 1.4 2.9 2.4
All Items CPI Inflation (Y/Y) 1.3 1.7 1.7 2.1 2.2 1.9 2.0 1.6 1.9 2.0
Core CPI Inflation (Y/Y) 0.7 1.0 1.1 1.2 1.6 1.7 1.7 1.0 1.2 1.7
Unemployment Rate (%) 9.6 9.0 9.0 9.2 9.3 9.3 9.1 9.6 9.1 8.9

2
CIBC WORLD MARKETS INC. GPS Monthly - March 17, 2011

repeat itself. Industrial-country inventories were adequate Chart 1. Oil Supply Shocks
when the Middle Eastern political pot began bubbling. 4.5 Rise in OECD countries' oil costs, % of GDP
OPEC likes firm prices, not sky-high, recession-inducing 4.0
ones that crush oil demand, and the Saudi’s recent output 3.5
hike suggest the cartel has at least some spare capacity, in 3.0
contrast to the situation when oil spiked three years ago. 2.5
A $10-15 pullback in oil prices isn’t implausable, given 2.0
this. But even if things don’t play out quite that way, the 1.5
historical evidence suggests that they would probably 1.0
have to climb a fair bit higher to undermine the recovery 0.5
on their own. 0.0
Iranian 1973 OPEC Iraq's Kuwait Since Start
Revolution Embargo Invasion of Recent
Oil prices did surge ahead of five of the last six US Turmoil
recessions. Most observers would argue, though, that
pricey oil was not the main reason growth floundered in a
number of these cases. The 2001 recession was arguably industrial economies, based on the increase in costs to
far more about the severe blow to investment spending oil consumers in those countries. Oil consumption costs
and consumer confidence from dot.com implosion, than rose by the equivalent of nearly 3% of GDP in the first
$1.60/gal gasoline, and oil’s gyrations certainly didn’t of these cases, and over 4% in the second (Chart 1).
blow up the US sub-prime mortgage market, later in the Given declining levels of oil intensity and other factors, oil
decade. prices would have to reach $160/bbl to match the first of
those two knockout punches and nearly $200 to match
The back-to-back recessions of the mid-1970s and early the second. The Fed’s uber-hawkish stance, moreover,
1980s were clearly much more an oil story. Both of those helped accentuate the US economy’s troubles in the early
episodes, however, involved a much harder blow to the 1980s. That’s not to say that the impact of the recent

Table 2. Interest and Exchange Rate Forecast

2011 2012
END OF PERIOD: 16-Mar Jun Sep Dec Mar Jun Sep Dec
CDA Overnight target rate 1.00 1.25 1.75 2.00 2.00 2.00 2.00 2.25
98-Day Treasury Bills 0.94 1.20 1.65 1.90 1.85 1.85 1.85 1.90
2-Year Gov't Bond 1.58 2.25 2.35 2.50 2.40 2.75 2.85 3.00
10-Year Gov't Bond 3.14 3.65 3.55 3.50 3.60 3.85 3.95 4.00
30-Year Gov't Bond 3.69 3.90 3.90 3.85 4.00 4.10 4.25 4.25
U.S. Federal Funds Rate 0.15 0.20 0.20 0.20 0.20 0.20 0.20 0.20
91-Day Treasury Bills 0.09 0.15 0.15 0.15 0.15 0.15 0.15 0.20
2-Year Gov't Note 0.55 0.65 0.65 0.65 0.85 0.90 0.90 1.00
10-Year Gov't Note 3.20 3.55 3.45 3.30 3.50 3.80 3.85 3.95
30-Year Gov't Bond 4.37 4.60 4.55 4.40 4.65 4.75 4.80 4.80
Canada - US T-Bill Spread 0.85 1.05 1.50 1.75 1.70 1.70 1.70 1.70
Canada - US 10-Year Bond Spread -0.06 0.10 0.10 0.20 0.10 0.05 0.10 0.05
Canada Yield Curve (30-Year — 2-Year) 2.11 1.65 1.55 1.35 1.60 1.35 1.40 1.25
US Yield Curve (30-Year — 2-Year) 3.81 3.95 3.90 3.75 3.80 3.85 3.90 3.80

EXCHANGE RATES CADUSD 1.01 0.96 0.99 1.01 1.01 1.02 1.02 1.03
USDCAD 0.99 1.04 1.01 0.99 0.99 0.98 0.98 0.97
USDJPY 80 84 87 89 88 90 92 94
EURUSD 1.39 1.29 1.31 1.32 1.33 1.35 1.34 1.32
GBPUSD 1.60 1.54 1.58 1.61 1.64 1.67 1.65 1.65
AUDUSD 0.99 0.94 0.95 0.96 0.97 0.98 0.99 0.97
USDCHF 0.92 0.97 0.97 1.00 1.01 1.01 1.03 1.06
USDBRL 1.67 1.70 1.66 1.63 1.62 1.62 1.61 1.62
USDMXN 12.04 11.75 11.85 12.00 12.00 12.00 11.85 11.50

3
CIBC WORLD MARKETS INC. GPS Monthly - March 17, 2011

Chart 2. Oil and the US Consumer Chart 4. World's Largest Net Oil Exporters (2009)
Personal Disposable Russian Federation
11.8
Income, $Tn SAAR Saudi Arabia
11.7 Iran
United Arab Emirates
11.6
Norway
11.5 Kuwait
Venezuela
11.4
Algeria
*CIBC estimate
11.3 Kazakhstan
Aug- Sep- Oct-10 Nov- Dec- Jan-11 Feb- Qatar
10 10 10 10 11* Mexico
As reported C anada MM Bbl/day
Left over after costlier gasoline & food 0 2 4 6 8
Source: US DOE, CIBC calculations

price run-up has been inconsequential. In the US, the rise
in food and gasoline prices since the start of the year has
effectively offset most of the benefit to consumers from
the recent tax stimulus (Chart 2).
Canada is divided between an oil consuming east
and producing west, and the provincial implications
of oil prices have typically overshadowed the national
macroeconomic ones. All signs are that the relationship
between growth and oil prices is a non-linear one—
meaning simply that some is good, a lot bad. The C$
followed crude north in the 2008 spike only until prices
hit $100/bbl. That would seem to suggest that for Canada
the negative effects of costlier oil, like weakness in trading
partners and auto sales, begin to increasingly outweigh
producer rents once prices reach triple digits.
We used a standard statistical modeling approach1 to
get a better handle on the impact of oil price changes
on the Canadian and US economies, and key variables
like the currency and rates. Our analysis suggests that
it takes about a year for the US economy to feel the full
pinch from an oil price shock (Chart 3). That suggests
one shouldn’t take too much comfort from the recent
resilience of energy-sensitive categories of demand like
auto sales.
Canada is one of the world’s top dozen net exporters
of oil and oil products (Chart 4). As that might suggest,
our analysis implies that in the near term higher crude
prices are a modest plus for the economy. A 25% rise,
approximating the recent increase, ordinarily lifts real GDP
growth by a couple of ticks in each of the two following
quarters. Beyond a couple of quarters, the negative effects
(Chart 5), including the drag on key trading partners and

Chart 5. Impact of a 25% Oil Price Shock on Canadian

Chart 3. Impact of a 25% Oil Price Shock on US Real GDP Real GDP

% chg, SAAR Pre-shock = 100 0.3 % chg, SAAR Pre-shock = 100 100.1
0.1 100.0
0.2
0.0 99.9
100.0
0.1
-0.1 99.8
0.0 99.9
-0.2 99.7
-0.1
-0.3 99.6 99.8
-0.2
-0.4 99.5
-0.3
Growth (L) 99.7
-0.5 Growth (L) 99.4 -0.4
Level (R ) Level (R )
-0.6 99.3 -0.5 99.6
1 2 3 4 5 6 7 8 9 10 1 2 3 4 5 6 7 8 9 10
Quarters from start of shock Quarters from start of shock
Source: CIBC
4
CIBC WORLD MARKETS INC. GPS Monthly - March 17, 2011

Chart 6. Impact of a 25% Oil Price Shock on CADUSD (L), Chart 7. US Fiscal Outlook
and on 10-Year GoC Yields (R)
120 Publicly held debt without major policy
Pre-Shock = 100 basis-point deviation changes (% of GDP*)
100.8 from pre-shock
C$ Appreciation 14 100
100.7
12
80
100.6
10
100.5 60
100.4 8
100.3 40
6
100.2 20 *CBO Baseline with an extension
4 of Bush tax cuts beyond 2012, AMT indexation and
100.1
C$ Depreciation const. Medicare rates after 2011.
100.0 2 0

99.9

02

04

06

08

12

14

16

18
0

00

10

20
20

20

20
1 2 3 4 5 6 1 2 3 4 5 6
Quarters from start of shock Fiscal Years
Source: CIBC

auto sales begin to outweigh the positive, hurting GDP
growth. Beyond four to five quarters, the bad more than
cancels the good, and the level of GDP is actually lower
than it would otherwise have been. A further negative is
the increasing drag from induced C$ appreciation on the
country’s non-energy exports (Chart 6).
Spending Cuts Could Reverse Half of the Recent US
Tax Stimulus
Compounding the ill global growth consequences of
pricier oil is the drag from a couple of other sources. One
is fiscal restraint, particularly in the US. Federal spending
cuts have clearly moved to the front of the policy
burner. Although rising debt levels (Chart 7) will result in
dramatically higher interest payments over time, cutting
spending sharply while the economy is still recuperating
is not without risks. The blow from front-load spending
reduction is one reason we expected the US growth
numbers to sport a two- rather than three-handle moving
into 2011. Oil price hikes and government cutbacks have
also led us to pare a tick from our previous 2.8% forecast
for 2011 US GDP growth (Table 1). The headwinds from
fiscal restraint will intensify further in 2012 as measures
like the $120 billion social security tax cut expire. Federal
cuts come, moreover, just as state governments are also
going on a fiscal diet.
A third cloud on the global growth horizon is the fact that
while inflation still looks fairly tame in most developed
countries, emerging markets are likely to have to tighten
further to ensure long-term price stability. That will cool
performance in what, to this point, have been some of
the world’s hottest performers. While those economies
are unlikely to sink into recession, growth simply won’t
surprise to the upside the way it has in recent years.
China’s inflation rate remained stubbornly high at 4.9%
in February. Monetary tightening and other restraint
measures there will help to cool GDP growth to an 8.5%
pace this year, after last year’s over-10% advance.
After riding some strong tailwinds late last year, the
global economy finds itself buffeted by new and, in some
cases, completely unforeseen developments. While the
risk of outright recession would still appear to be quite
low, those developments have led to a scaling back of
earlier optimism and an increase, for now at least, in risk
aversion.
1
The approach is known formally as a vector autoregression, and involves
regressing each of a number of variables (Canadian and US real GDP growth,
CAD and 10-year government of Canada yields) on lagged values of each other.
Our model is thus able to capture how a rise in oil prices impacts Canadian GDP
directly and the induced effect from changes in the US economy’s performance,
and the exchange and interest rates.

5
CIBC WORLD MARKETS INC. GPS Monthly - March 17, 2011

FOREIGN EXCHANGE
JEREMY STRETCH

Risk Dynamics and Policymakers

Having endured a prolonged period of emergency Chart 1. USD Cumulative Net Shorts at All-time Highs
monetary policy strategies it seemed, at least ahead of * USD Basket
the tragic events in Japan, that policymakers and policy 150 90
direction was increasingly being geared towards a degree 100 88
of normalization. It is likely therefore that FX dynamics 50 86
are set to be determined by a combination of changing 0 84
monetary policy influences and the pace of global -50 82
recovery being set against market risk appetite; this as -100 80
factors such as the oil price have potentially significant -150 78
implications for the amount of USD to be re-cycled. The -200 76
benign by-product of a deceleration in global demand, -250 74
led through current events, being a potential ease in -300 72
commodity price inflation. -350 70
Jan-09 Jul-09 Feb-10 Aug-10 Mar-11

In terms of monetary policy direction, the next 2-3
month’s looks set to be a pivotal period. Central bankers
in general are increasingly aware of the need to begin
(ECB) or in some cases extend the normalization process
(BoC), this as emergency settings are increasingly seen to
be distorting behaviour. The by-product of such trends is
that one of the traditional dynamics of foreign exchange
performance, namely interest rate spreads, will see
increased importance. While that is the case it could well
be the ending of the one of the unconventional monetary
policies, namely US QEII, which has a profound impact on
FX markets.
The balance sheet of the US Federal Reserve has
ballooned over the last five months as the second round
of quantitative easing has seen a plentiful supply of cheap
USD flood the market. Having seen the Fed’s balance sheet
expand to more than US$2.5 trn, up around US$280 bn
since the start of Q4, the end of QEII is in sight as the
US$600 bn target and June end date come into view.
But it seems likely that the front end of the US curve is
set to remain locked for a considerable period, due to the
market not viewing significant risks of the Fed looking to
hike until at least well into 2012. But a market looking to
anticipate an end in the flood of ‘cheap’ USD into the end
of Q2 could trigger a reversal of broad USD negativity, this
as speculative positioning data into the start of March
6
Total Net Positions LHS DXY Index RHS
Source: Bloomberg
reveals cumulative USD net short positions at record levels
and thus ripe for correction.
Continued positive but unspectacular US GDP growth,
allied to an end of cheap USD liquidity, no longer seeing
the USD perpetually used as a cheap funding currency,
points towards a trough in USD negativity. This should
prove the case as structural risks in the eurozone remain
prevalent into Q2, especially banking related pressures.
But with little prospect of the Fed looking to tighten
policy until 2012 at the earliest, any USD reversal is likely
to be relatively short lived, not least when one considers
the longer term ramifications of US fiscal imbalances, that
being an issue which is likely to become more evident as
2012 US Presidential race proceeds.
While the end of US QEII is a potential pivotal event in Q2
it perhaps may not be the only changing dynamic from
the US side of the monetary equation. It seems there is
some dissent within the Fed as regards the perpetuation
of the ‘extended period’ language in the Fed statement.
It would seem that even though core inflation in the US
remains well behaved and labour markets fragile the
reference to keeping rates unchanged for an extended
period, i.e., the Fed keeping the front end locked
indefinitely, could be set for reassessment ahead of the
culmination of QEII in June.
CIBC WORLD MARKETS INC.
Chart 2. US Twin Track Deficit
1 4
0 2
-1
-2
-3
-4
-5
-6
-7
1980 1984 1988 1992 1996 2000 2004 2008
Current Account % GDP Fiscal Deficit % GDP
Source: Bloomberg, CIBC
Would any removal of the phrase mean any imminent
move? The answer is no, but it may see the market
looking to consider a pre-emptive bear flattening of the
US curve, in part as the markets attempt to front run
an end in the flow of cheap USD. Any rise in US short
end yields would be USD supportive, not least as broad
structural risks in Europe remain in terms of funding
pressures, economic weakness in the periphery, alongside
banking sector liquidity issues this as markets speculate
as to who is correct in terms of any euro bank capital
shortfalls, the ratings agencies or the central banks.
ECB Tunnel Vision
In Europe it seems that despite an increasingly two speed
economy the ECB is intent to repeat the monetary policy
mistake of 2008, hiking rates when economic conditions
are ‘far from easy.’ It does seem that although the ECB has
yet to cure the regions banks from their lending addiction
they wish to signal an attempt towards normalization
even if any move in April is more symbolic as opposed to
the start of a series of hikes. Moreover, should external
events prove to get in the way of the ECB, notably in
terms of Portugal likely facing pressure for a bailout in
upcoming weeks, dissension amongst euro politicians,
despite the apparent agreement at the March 11 informal
summit, or in terms of the impending EU bank stress
tests, results of which are due in June, any EUR short term
interest rate support could prove temporary.
Although the agreement following the March 11 summit
to enhance the funding ability of the EFSF to the full €440
bn was encouraging, prompting ratings agency Fitch to
state the initiative materially enhances the crisis policy
response, the process does nothing to alleviate the crisis
process being utilised. The burden remains on individual
states to stem the fiscal crisis through prolonged
GPS Monthly - March 17, 2011
austerity measures, despite the risks to domestic growth
or employment. The failure to agree to buy distressed
bonds in the secondary market, taking the burden from
0
the ECB, also remains a potential source of contention.
-2
With Portugal set to be further pressured by tightening
monetary policy the looming €4 bn bond redemption due
-4
on April 15 remains a major hurdle.
-6
-8
In terms of the banks, the upcoming bank stress tests
-10
appear to be once again open to question as the
-12 economic criteria appear not as strong as those of last
year, albeit the inclusion of an increase in short term
funding costs to replicate a funding crisis is welcomed.
But with no reference to the amount of assets held on
lenders books, allowing the exclusion of any write downs
on sizeable peripheral debt holdings, the credentials of
the test remains questionable.
Banking sector pressures remain a key negative for the
eurozone with the ratings agencies and the authorities
seemingly having very different assumptions of capital
shortfalls. The Bank of Spain estimates that the savings
banks have a potential liquidity shortfall of €15.15 bn,
the rating agencies at least €50 bn, which on the basis
of worst case scenarios could easily be double that. Who
is right, the answer to that will go some way to under
writing EUR performance. With the authorities consistently
having under estimated risks markets are likely to remain
somewhat circumspect in terms of official estimates.
Japanese Quake Concerns
While global policymakers have been increasingly looking
to normalize policy the horrific events in Japan have for
some proved to question the premise of the ability of
policymakers to normalise the global monetary stance.
Of course in the short term the market has attempted to
draw parallels with the Kobe earthquake. But in reality
the comparisons are not obviously compelling; the Kobe
region accounted for around 12% of Japanese GDP, the
current crisis zone accounts for around a quarter of the
GDP of Kobe. But of course the human tragedy is far
worse. But it is the prospect of nuclear fallout, energy
shortages and production shutdowns, impacting Japanese
exports, which potentially provide an aggressive economic
drag which could eventually prove more significant than
the Y10 trn impact in 1995, equivalent to 2.5% of GDP.
In terms of the parallels with Kobe monetary policy is
already loose, in contrast with 1995. In terms of the JPY
it could be argued there is little room for the currency to
appreciate against the USD, as a further slide in USD JPY
7
CIBC WORLD MARKETS INC.
would further compromise Japanese exports; thus we
can expect the authorities to remain mindful of currency
performance, with the threat of official action where
necessary. But in REER terms the JPY is not as strong as
USD JPY would suggest, while Japanese corporates have
outsourced a lot of productive capacity and exported
currency risks down the price chain, thus mitigating part
of the impact of the external value of the JPY.
Chart 3. USD JPY and Real Equilibrium Exchange Rates
160
150
140
130
120
110
100
90
80
70
60
Jan- Jan- Jan- Jan- Jan- Jan- Jan- Jan- Jan-
95 97 99 01 03 05 07 09 11
JAPANESE YEN REAL EFFECTIVE EXCHANGE RATE INDEX
JPY USD (RH Scale)
Source: Reuters Datastream
In terms of risk aversion trades the traditional beneficiaries
remain the USD, CHF and JPY, although of course the
scenario for the latter is confused by the aftermath of
the earthquake and subsequent economic disruption. In
the short term we are likely to see JPY inflows, especially
as domestic investors reverse carry trades, previously
buying higher yielding currencies such as the AUD.
Indeed it would suggest that uridashi demand is likely to
be compromised with a potential reversal of flows which
has potentially negative implications for currencies such
as the Rand where there has been much issuance. Thus
we are likely to see short term JPY upside as positions are
squared, re-insurance flows arrive or are anticipated, while
there could be some concerns over the unwinding of
Japanese holdings of US Treasuries to fund reconstruction,
a factor which could impact USD sentiment.
Over the medium to longer run the parlous state of
Japanese government finances is likely to prove a longer
run drag upon the JPY. With national debt at 225% of
GDP and with a fiscal deficit of near 8% the ability of
Japan to finance its debt mountain remains challenging.
Until now Japan has financed its debt almost exclusively
through domestic debt purchases, approximately 90%
of JGB’s are held on shore, such demand allowing Japan
GPS Monthly - March 17, 2011
to run such deficits without facing ratings pressures
commensurate with nominal debt levels.
Should the current crisis and restructuring lead to a
reduction in domestic buying, likely bringing forward
an inflection point due to an aging population, this risks
negatively pressuring the credit rating over time, a point
highlighted by Moody’s, risking long run JPY negativity.
Moreover, the more assets taken onto the BoJ’s balance
sheet, the greater the risk that asset purchases are
deemed to be monetising debt. Thus it could be argued
that current events while providing short term upside JPY
80 impetus increase long run depreciation pressures.
90
100 Chart 4. Japanese Debt Dynamics
110 2 300
1
120 250
0
130 -1 200
140 -2
-3 150
150
-4
100
-5
-6 50
-7
-8 0
Jun-90 Jun-95 Jun-00 Jun-05 Jun-10 Jun-15
Japanese Structural Balance as % of GDP IMF (RHS)
Japanese Gross Govt Debt % GDP IMF
Source: IMF, CIBC
Over recent weeks it has been risk appetite or risk
aversion, driven by exogenous geopolitical and commodity
shocks which have been key drivers of currency
performance. Looking forward to Q2 it appeared likely
that monetary policy determination would prove to be
significant influence. But in addition to rising geo-political
risks in MENA we have to add a natural and a potential
man-made disaster to the list of risk criteria.
The perpetuation of such risks could prove to drive
policy makers off course once more, which from a risk
perspective would favour the USD and CHF, although that
depends on the extent and duration of the negatives in
Japan. But if we are not faced with a worst case scenario
in Japan then the prospect of an ending of QEII, heavily
skewed market positioning versus the USD, a deceleration
in global activity, led from Asia ex-Japan (in the wake of
monetary tightening policy), points towards a broad based
cyclical bounce in the USD in the upcoming quarter, not
least against those currencies impacted by growth and
or commodity valuations. But any rebound has to be set
against longer term structural fiscal negatives which are
set to become increasingly problematic for the USD.
8
CIBC WORLD MARKETS INC.
Budgeting in an Age of Uncertainty
It’s show time. We’ve already had a couple of early
movers, but for Canadian governments, the 2011 budget
season really gets rolling in the coming days and weeks.
And once again, the most important policy document
of the year is being drafted at a time of extreme
uncertainty.
The World’s a Scary Place
For Canadian policy makers, the view outside provincial or
national borders is a little disheartening, with a number
of external risks yet to be defused.
As we went to press, the situation is Japan remained fluid,
with ongoing uncertainty regarding efforts to stave off
a nuclear catastrophe. While it’s still early to judge, the
overall impact on Canada looks to be limited. Japan may
rank as Canada’s fourth largest export market, but is the
target for little more than 2% of Canadian exports.
Provincial exposure to Japan nonetheless varies. Given
geographic proximity, Japan is British Columbia’s second
largest export market, accounting for nearly 15% of
provincial exports last year (Chart 1). While seeing a
greater near-term hit to its trade, BC stands to benefit
from Japanese rebuilding efforts, including added demand
for provincial lumber. Damage to Japan’s transportation
Chart 1. Provincial Trade Exposure to Japan Varies
Japan's Share of Cdn International Trade, % (2010)
16
coal, copper, lumber
14
12
agricultural products
10
8 from Canadian markets in the wake of the 1995 Kobe
vehicles / parts,
machinery & equip.
6
4
2
0 Turmoil in the Middle East and North Africa may have
Cda BC Alta Sask Man Ont Qué NB NS PEI N&L
Exports Imports
9
GPS Monthly - March 17, 2011
GOVERNMENT FINANCE
WARREN LOVELY
infrastructure could temporarily delay shipments of
Canadian wheat and other agricultural products, but
underlying demand for Canadian food products won’t
go away.
Meanwhile, shutdowns in Japan’s auto industry will
reverberate in North America, disrupting global supply
chains and temporarily crimping production at related
plants in Ontario. A draw down of inventories and the
substitution of non-Japanese models should limit the hit
to auto sales, however.
Notably, a shift away from nuclear power would translate
into demand for thermal coal and natural gas, resources
Canada has in abundance. Indeed, an expected surge in
Japan LNG imports could incent development of North
American shale gas deposits.
Of course, global concerns over nuclear safety would
negatively impact Saskatchewan’s uranium industry,
which is the world’s largest producer. Switzerland and
Germany have put the brakes on the nuclear industry,
and others could follow. For its part, Ontario has banked
on a growing fleet of nuclear reactors to meet its long-
term energy needs. And while the government may still
press ahead, recent developments signal greater public
opposition, with an added focus on safety translating into
potential delays and added costs.
As for the repatriation effect, Canada looks to be much
less impacted. Japanese investors hold $44 billion of
Canadian long-term debt, equivalent to 2.8% of GDP.
That’s one-third the relative exposure in the US (Chart 2),
where Japan held $1.1 bn of long-term debt as of mid-
2010. Nor was there a notable exodus of Japanese capital
quake.
Oil Remains a Threat
been bumped from the front page by Japan’s disaster,
but the situation in a number of countries remains
CIBC WORLD MARKETS INC. GPS Monthly - March 17, 2011

Chart 2. Canadian Bond Market Less Exposed to Japan Chart 4. Oil Rich Provinces Take Lead Once More
Real GDP Growth, Y/Y %
Japanese Holdings of US / Cdn Bonds (mid-2010) 6
18 Energy rich provinces lead
15.9
16 4

14 US
2
Canada
12
0
10
8.2
7.5 -2
8
6 -4
* Alta, Sask, N&L
4 2.8
-6
2
2000 01 02 03 04 05 06 07 08 09 10E 11F 12F
0
Oil-Rich Provinces* Rest of Canada
% of Foreign Owned Bonds % of GDP

unsettled. And while the Japan demand shock, and There are other risks to be sure, including sovereign debt
associated risk-off trade, has seen crude give back some crises and pronounced fiscal austerity across Europe, as
ground, elevated energy prices remain a risk for the global well as emerging market tightening to cool overheated
economy. As noted on pages 2-5, higher energy prices are economies.
not the unambiguous plus for Canada that some might
think, with the hit to US consumer purchasing power and Provincial Growth Forecasts Boosted
lagged impact on the auto industry chief concerns.
In spite of external pressures, Canada’s economy has
But for a few Canadian provinces, higher energy prices strengthened of late. The economy regained important
represent a positive terms-of-trade adjustment, creating momentum in the latter stages of 2010, with the
disproportionate wealth and triggering superior rates of country’s full-year growth rate topping 3%. A nice hand
real economic growth. Consistent with their strong energy off and strong first half have seen us up our 2011 real
trade surpluses, growth in Alberta, Saskatchewan and GDP forecast once more. At 2.8%, the national growth
Newfoundland & Labrador will notably outstrip that in pace is nearly a percentage point stronger than we once
the rest of the country this year and next (Charts 3 and 4). foresaw back in the fall.
More investment dollars are flowing into these regions
and, as we’ve seen recently, underlying credit quality in While acknowledging global economic risks, we’ve upped
these provinces will continue to improve relative to most our provincial forecasts to be consistent with the national
others. pace, with revised growth tallies presented in Table 1.
Canada’s stronger economic backdrop is welcome news
Chart 3. Provincial Trade in Oil for Canadian finance ministers, with more GDP translating
into extra revenue. Next week’s federal budget will show
Nominal Trade Surplus in Oil, % of GDP (2010)
20 Ottawa’s revenue on a stronger plane. And collectively,
the provinces could take in an extra $5 billion or more
15
15 13 in 2011/12, compared to what was envisioned only a
11 few months ago. Don’t expect extra federal or provincial
10 revenue to be fully applied against the fiscal bottom
line.
5
Canada (2%) 2
0 0
0
External risks and some concerns on the domestic
0 economy—including record household debt burden
-1
-5 -4 and currency-related pressures—argue for caution in
-4
2011 budgets. Building more of a cushion into growth
-10 forecasts and spending assumptions would eat up some
Qué NS BC Ont PEI Man NB N&L Sask Alta of the extra revenue, but insulate against unwelcome
10
CIBC WORLD MARKETS INC. GPS Monthly - March 17, 2011

Table 1. Revised Provincial Real GDP Forecasts Table 2. What to Watch For in 2011 Budgets
CIBC Forecasts Reference Periods Economy
Outlook for real, nominal GDP and other key indicators
2012F Pre-Crisis Recession Recovery
1 2 3
Y/Y % Chg 2010E 2011F
Where is economic growth coming from
BC 3 .5 2 .9 3 .1 3 .5 -0 .9 3 .2 How has economic outlook changed vs. prior forecast
Alta 3 .5 3 .9 4 .0 4 .1 -2 .3 3 .8 Degree of prudence / buffer applied to consensus growth forecast
Sas k 2 .4 4 .3 3 .8 2 .9 -2 .0 3 .5 Allowance for higher interest rates and associated fiscal sensitivities
Ma n 2 .7 2 .9 2 .9 2 .5 0 .0 2 .8 Key energy price assumptions and associated revenue sensitivities
Ont 2 .9 2 .7 2 .6 2 .2 -1 .8 2 .7 Trajectory for the C$
Assumed strength of global economy and implied demand for key exports
Qué 2 .9 2 .4 2 .5 1 .9 -0 .2 2 .6
Acknowledgement of risk factors
NB 2 .4 2 .0 2 .3 2 .1 -0 .2 2 .2
Budget Balance
NS 2 .3 1 .8 2 .2 1 .1 -0 .1 2 .1 Relative scale of budget balance (i.e., as % of GDP or revenue)
PEI 2 .5 2 .2 2 .2 2 .3 0 .0 2 .3 Change in balance vs. (a) original plan and (b) latest estimates (e.g., Mid-
N &L 5 .5 5 .7 3 .1 3 .8 -5 .3 4 .8 Year Update)
Cda 3.1 2.8 2.8 2.6 -1.2 2.9 Change to timeline for deficit elimination, if applicable
1. 'Pre-Crisis' refers to five-year average annual growth rate for 2003 to 2007 Transfers to and from stabilization funds to address shortfalls
2. 'Recession' refers to two-year average annual growth rate for 2008 to 2009 Details of Fiscal Plan
Own-source revenue growth vs. (a) trend and (b) nominal GDP projections
3. 'Recovery' refers to three-year average annual growth rate for 2010 to 2012
Reliance on volatile resource revenues
Changes in key tax rates or other revenue measures
Federal transfer share of total revenue
Expectation for federal transfers beyond 2013/14
developments. British Columbia remains the gold standard
How much extra revenue is consumed by incremental spending
for fiscal prudence, and look for others to emulate (to a How does future pace of program spending compare to trend
degree) its cautious stance. Is government counting on unidentified or unrealized savings
How much of the budget is consumed by health care outlays
While elections loom in many corners, governments need Size of forecast allowance / contingency reserve
Are other contingencies built into spending plan
to remain focused on restraint. On its own, stronger Scope of new spending measures
growth may not be sufficient to eliminate structural Wage growth assumptions for future collective bargaining agreements
deficits, but extra revenue would imply less aggressive Reductions in public sector headcount (i.e., layoffs, attrition)
cutbacks to meet a given fiscal target. That could add Contribution from Crowns
Are asset sales planned
important credibility to long-term fiscal plans and lessen Changes to accounting methodology
anxiety around the ability of governments to dramatically Other special items
slow spending in the face of health-related spending Debt/Borrowing
pressures. After all, credit ratings and spreads hinge on Relationship between budget balance and net change in debt
How is government debt defined
the credibility of fiscal projections. Trajectory for debt-to-ratio
Interest charges vs. revenue
There will be plenty to digest in the days and weeks Pension funded status
ahead, and a number of key elements to watch for in Drivers of net financing requirements (i.e., budget balance, capital outlays,
special pension payments, other entities, other adjustments)
2011 budgets (Table 2). Risks are elevated and the political Role of pre-funding in reducing underlying funding requirements
environment remains uncertain, with a high likelihood of Refinancing requirements
a near-term federal election and five provincial elections Availability of sinking funds
scheduled for the fall. Still, 2011 should usher in Size and orientation of borrowing program (i.e., domestic vs. international)
Reliance on short-term markets
important progress on Canadian fiscal healing, slowing Interest rate reset risk
the growth in government debt and setting the stage Foreign currency exposure
for an important step lower on net government funding
requirements—supportive for provincial spreads in today’s
volatile environment. Stay tuned for our complete post-
budget recap.

11
CIBC WORLD MARKETS INC. GPS Monthly - March 17, 2011

CORPORATE CREDIT
JOANNA ZAPIOR

How Are We Tracking?

North American credit spreads have enjoyed a rally since

June of last year, albeit interrupted by a few bumps Spread Rally in US Investment Grade (5-yr CDS index)
which were mostly driven by episodes of sovereign
Spread (bps)
130
risk. By and large, the rally has been justified by the
modestly improving economic outlook, good corporate 120
fudamentals, and strong demand for credit products.
So what now? When we analyze the spread rally in the 110

context of both historical performance and the spread 100

forecast that we had made for 2011 at the end of the
previous year, we conclude that current spreads may 90

have “priced to perfection”. This is fine if the recovery is 80

not interrupted and demand continues strong. However,
when we consider, as our Economics Team does on 70
A pr-10 Jun-10 A ug-10 Oc t-10 Dec -10 Feb-11
pages 2-5, that headwinds have increased for the global
economy, pricing to perfection may come up for a test.
Spread Rally in US High Yield (5-yr CDS index)
Spread (bps)
Without a Doubt, This Has Been a Rally 700

650
North American credit spreads, whether cash or CDS,
whether investment grade or high yield, have enjoyed a 600

rally since June of last year (Chart 1). US high yield CDS 550
generated best spread performance with its spread 44%
500
tighter since June. US investment grade spread is 37%
tighter. Against this performance, Canadian cash bond 450
spreads may at first blush appear to lag, having tightened 400
“only” 22%.
350
A pr-10 Jun-10 A ug-10 Oc t-10 Dec -10 Feb-11

Chart 1. Sustained Credit Rally Putting the Rally in Its Historical Context
Spread Rally In Canada (5-yr cash spread)
From a historical perspective, current spread levels are
140 Spread (bps)
not the tightest ever (Chart 2). Nor would we expect
135
them to be. The tightest pre-crisis levels generally are
130
not considered attainable. It is, however, noteworthy
125
that the bellweather investment grade US CDX index,
120
115
as well as the Canadian investment grade spread, are
110
just about equal to their respective average spread for
105 the entire period since May 2006, when one excludes
100 from calculations the deepest part of the financial crisis
95 (September 2008 – September 2009). The high yield
90 index spread has cut through that average late last year.
A pr-10 May -10 Jul-10 A ug-10 Oc t-10 Dec -10

12
CIBC WORLD MARKETS INC. GPS Monthly - March 17, 2011

Chart 2. Still a Big Gap to the Tightest-Ever Spreads off the tights towards the median forecast spread.
Spread (bps) C$ Cas h Spread However, inputs into our spread model (namely rates,
240
equities, and their volatilities) have been more mixed and
generally gravitated towards the “meet expectations”
190 A v erage s pread scenario. This suggests to us that spreads may be
ex c luding the c ris is
“priced to perfection”, which would be justified only by
continued upbeat economic news. If, as CIBC’s Economics
140
Team argues, headwinds have increased for the global
economy, credit spreads might have reached their lows
Current 109 bps
90 A v erage 156 bps (116 bps ex c ris is ) for this part of the cycle. However, if the currently strong
Max 455 bps demand for credit product continues, it will be offsetting
Min 50 bps any spread widening pressures.
40
May -06 Feb-07 Nov -07 A ug-08 May -09 Feb-10 Nov -10
Chart 3. How Are We Tracking?
Spread (bps) CDX Investm ent 110 CDX IG spread in bps
210 Grade YTD
105

A c tual CDX s pread (light line) is s how n as trac ked by

160 100 our model s pread (dark line). The red & green c urv es
A v erage s pread delineate a 1 s tandard-dev iation “env elope” f or the
ex c luding the c ris is 95 “ex c eed ex pec tations ” s c enario, & the blue line s how s
110 the median s pread antic ipated in that s c enario.
90

Current 84 bps
60 85
A v erage 100 bps (80 bps ex c ris is )
Max 131 bps
Min 76 bps 80 CDX Obs erv ed
10
CDX Model w ith ev ent adjus ted
May -06 Dec -06 Jul-07 Feb-08 Sep-08 A pr-09 Nov -09 Jun-10 Jan-11
75
11/24/2010 12/19/2010 1/13/2011 2/7/2011 3/4/2011
Spread (bps) CDX High Yield LTM
950
What Does This Mean for Canadian Credit
850 Spreads?
750 A v erage s pread
ex c luding the c ris is A relatively weaker spread rally in Canada compared to the
650
US market suggests that the Canadian market has been
550 pricing in the recovery more conservatively, thus leaving
450 itself less exposed to a potential correction. Remember,
Current 405 bps however, that the correlation between Canadian and
350
A v erage 613 bps (471 bps ex c ris is ) US credit spreads since mid-2006 has exceeded 90%
250 Max 1925 bps
Min 185 bps
(with Canadian cash spreads 93% correlated with US
150 investment grade CDX spreads in that period, as we
May -06 Dec -06 Jul-07 Feb-08 Sep-08 A pr-09 Nov -09 Jun-10 Jan-11 wrote in this report on November 10, 2010). Assuming
the two markets remain highly correlated, Canadian
spreads would also likely see a correction if US credit
Rally in the Context of Our Forecast: We Are Tracking
spreads correct, even though the Canadian rally has not
Optimistic
been as enthusiastic as that in the US credit markets.
To put things in the context of our 2011 forecast, 1
At the end of November 2010, we produced a US CDS spread forecast for
CDS spreads so far has been tracking the second- the following 250 trading days. We modeled the CDX index spread in relation
most optimistic scenario, which we had dubbed “beat to swap yields, equity index returns, and their volatilities, and included an
adjustment for credit events. Our forecast was probabilistic – we analyzed
expectations”1 (Chart 3). In fact, spreads have been the spreads and their drivers in five possible scenarios. Scenario parameters
initially hugging the lower (tighter) boundary of the and our forecast results are detailed in a report published on December 8,
2010 and available on the Macro Strategy website as “Corporate Credit 2011
spread range in that scenario, though they have backed
Outlook”.

13
CIBC WORLD MARKETS INC. GPS Monthly - March 17, 2011

COMMODITIES
KATHERINE SPECTOR

West Texas Intermediate: Crude’s Odd Man Out

Any casual observer of oil markets will have noticed the Chart 2. Price Change Since Jan. 1 (Price Level on Mar. 14)
sharp divergence between US benchmark West Texas 30%
[114.92]
Intermediate and European benchmark Brent since the 25% [116.59] [115.94]
beginning of the year—Brent’s premium to WTI has [115.04]
20%
recently narrowed to around $11/bbl, but had traded as
15%
wide as $20 in February (Chart 1). Brent is not the outlier [101.19]
here. In fact, WTI has lagged most other crude grades 10%

with the exception of equally PADD 2-handicapped 5%

Western Canadian Blend. 0%
[80.99] [113.49] [116.44] [106.19]
-5%
Most major crude grades—North American and

HLS
LLS

Tapis
Dubai
Dated

Bonny
Ekofisk
Cushing

W. Can
WTI
otherwise—have rallied hard this year to date. The
strength we have seen recently in Brent has been broadly
reflected across sweet grades globally (Chart 2). CIBC Commodities Strategy

Comparing the term structures of WTI and Brent shows

the stark contrast between the two crudes (Chart 3). In
the long-dated part of the curve, WTI currently trades
at a $4+ discount to Brent (historically, a $1.50-$2
WTI premium was typical). At the front of the curve,
the transatlantic spread is $11+ thanks to the deeper
contango in WTI and comparatively flat Brent structure.
Strengthening global crude fundamentals, particularly
since the Libyan production outages, have now even
flattened the WTI curve significantly, but not as much as
Brent.
NYMEX crack spreads give a similarly exaggerated view of
broader refinery economics, compared to margins earned
by refiners running crudes that are not WTI-related. Case
in point, since the beginning of the year, the spread
between NYMEX gasoline and WTI has increased nearly
$23 per barrel, whereas the NYMEX gasoline crack to
Brent has increased by $10. The NYMEX heating oil crack
to WTI is up over $26 but against Brent is just shy of $15
(Chart 4-5).

Chart 1. M1 NYMEX WTI Minus Dated Brent Chart 3. WTI & Brent Curves, Today and Month Ago

$/bbl $/bbl Brent Today Brent Month Ago

$10 $115
WTI Today WTI Month Ago

$5 $110

$- $105

$(5) $100

$(10) $95

$(15) $90

$(20) $85
'88 '90 '92 '94 '96 '98 '00 '02 '04 '06 '08 '10 1 6 11 16 21 26 31 36 41 46 51 56
CIBC Commodities Strategy CIBC Commodities Strategy

14
CIBC WORLD MARKETS INC.
Chart 4. NYMEX Heating Oil Crack (Left),
Chart 5. NYMEX Gasoline Crack (Right)
$/bbl C rack to WTI $/bbl C rack to WTI
$35 $30
C rack to Brent C rack to Brent
$30
$25
$25
$20
$20
$15
$15
$10
$10
$5 $5
$0 $0
Jan-10 Jul-10 Jan-11 Jan-10 Jul-10 Jan-11
CIBC Commodities Strategy CIBC Commodities Strategy
WTI’s structural problems as a benchmark are not
news. The contract’s landlocked physical delivery point
—Cushing, Oklahoma—means that the crude trades
on a very regionally specific set of supply/demand
fundamentals. Limited infrastructure to move crude
beyond Cushing, to the US Gulf refining centre, means
that there are only so many moving parts in the WTI
balance.
Crude supply into Cushing (or PADD II more broadly) is
on the rise, from both Canada and North Dakota. Last
year saw a particularly sizable annual increase in those
volumes. At the same time, operating refining capacity
in the Midwest has been largely unchanged for the
past three years. Refiner demand for barrels into PADD
II increases and decreases in response to planned and
unplanned maintenance and refinery economics, but on
average is not apt to increase in a significant way going
forward. Storage capacity at Cushing, on the other hand,
has increased in response to widening WTI spreads. Some
10 million bbl of capacity was added in 2009-10, and
more than that is expected online this year.
But at the end of the day, a structural shift in WTI spreads
is not likely to occur without additional infrastructure
to move barrels beyond Cushing to the US Gulf. At the
moment, pipeline capacity additions are exacerbating the
Cushing problem; the second phase of TransCanada’s
Keystone project—the Cushing extension—is bringing
additional barrels into Cushing from Steele City, Nebraska.
What the market is waiting for is the third (‘XL’) phase
of TransCanada’s Keystone pipeline, which will not only
bring more barrels into the US from Canada, but will also
extend down from Cushing to Texas. While Keystone XL
may not solve the midcontinent dynamic completely, it
will go some way in alleviating it.
15
GPS Monthly - March 17, 2011
As a trans-border pipeline, Keystone XL requires State
Department approval to proceed. The approval process
has taken longer than most had anticipated; the initial
Environmental Impact Statement for the project was
deemed insufficient, and a second EIS has been submitted
but no decisions have been made. While TransCanada
had initially given optimistic guidance on the timeline for
the project, the State Department has been quite clear
that, while a decision one way or another is expected
this calendar year, a more precise schedule for approval
cannot be assumed. As part of the Keystone XL project,
the Cushing-Texas leg of the project is subject to the State
Department approval even though that leg is not itself
international.
Our expectation is that Keystone XL will ultimately move
forward. Guidance from TransCanada confirms that
construction of the Cushing-Texas line could take about
nine months. As such, it is hard to see this capacity online
before the middle of 2012, and virtually impossible to see
it online this calendar year.
Recent market events have strengthened crude markets
globally, even so far as to move the lagging WTI curve
into backwardation beyond this calendar year. If
geopolitics settle into a status quo, WTI spreads stand
to weaken significantly—particularly in the Sep-Oct
period when planned PADD II refinery maintenance
looks heavy by historical standards (Chart 6). Granted,
schedules are subject to revision—especially if economics
at these refineries are still disproportionately favourable
come fall—but at the moment the data suggest heavy
turnarounds. Short of severe, incremental supply-side
disruptions, we still see it as unlikely that the Dec’11
contract expires higher than the Dec’12 contract given
the expected Keystone XL timeline.
Chart 6. CDU Planned Maintenance - Total PADD II
kbd offline
700 2007 2008 2009 2010 2011
600
500
400
300
200
100
0
Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec
CIBC Commodities Strategy, Industrial Information Resources
CIBC WORLD MARKETS INC. GPS Monthly - March 17, 2011

Analyst Certification: Each CIBC World Markets research analyst named on the front page of this research report, or at the beginning
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16