GLOBALFXSTRATEGY

DailyForeignExchangeUpdate
Wednesday,February29,2012 530bnINLTROSUPPORTSRISKASSETS
USDisonweakerfootingasrisktradeissupported.Bernankeisrisk. CADbreaksoutofitsrecentrangeandhitsanew5monthhigh.Cor relationsareshiftingsuggestingchangeisafoot. EUR 530bnin LTRO by 800 banks leaves EUR almost flat but the risktradesupportedastailriskcontinuestodwindle. GBPgainsdrivenbypositivemarketsentimentandBoEcomments. CHFSNBtonesuggestspotentialforincreasetoflooronMarch15. SEKslowinggrowthdrivenbyexportshighlightsneedforeasing. JPYflatdespitebetterindustrialproductiondata;PMIfallsto50.5. CNYChinatakingmeasurestoliberalizeyuanFXtransactions. MonthendflowssupportiveofCAD&AUD;weighingonJPYtoday. FX Market Update The highly anticipated ECB LTRO did not disap pointmarkets,as800banksbidforatotalof530bnin3yearloans. The number of banks suggest that participation was more widely dis persed across the banking sector and that the funds will be used for both funding requirements and carry trades, accordingly it is positive forriskassets.Aswemoveintotheopen,oilpricesremainelevated, withWTIat$106.80,equitiesareflat,Europeanbondyieldshavefallen and the USD is generally weak. Commodity and risk sensitive curren cies(NZD,AUD,CADandMXN)areoutperforming,upbetween0.5and 0.8%;whilemostoftheothersarefairlyclosetoyesterdaysNAclose. TodaysfocuswillbeChairBernankessemiannualtestimony.C.S.

CamillaSutton,CFA,CMTEricTheoret ChiefCurrencyStrategistCurrencyStrategist (416)8665470 (416)8637030

Camilla.Sutton@scotiabank.comEric.Theoret@scotiabank.com

RECENTRALLYINEURNOTSUPPORTEDBYYIELDS

ECBRATECUTSUNLIKELYWITHINFLATIONABOVE2%

Chair Bernanke delivers his semiannual testimony to the House at 10am EST. We do not expect a major shift in his recent dovish tone. Economicdatahasimproved,howeverwewouldexpectthatwewould needtoseeamuchbroaderandmoresustainedimprovementbefore the Fed would shift to a more neutral stance. Accordingly, we expect histestimonytocontinuetosupporttherisktrade.C.S.

Monthendflowscanleadtoawkwardchartpatternsaspassiveequity managers rebalance their equity holdings. In February, Canadian and Australian equities have underperformed, which could lead to some CADandAUDpositiveflowsaspositionsarebroughtbackuptobench mark; while Japanese equities have significantly outperformed, which couldweighonJPYasthesearesoldoff.Therewereonlyminordiffer encesbetweenequityperformanceintheUS,EuropeandtheUK.C.S.

GERMANYBENEFITSFROMAWEAKENEDEURO

Americas USDCAD(0.9900)CADreachedanewfourmonthhighinlateEuro peantrading,intandemwithAUDsnewsevenmonthhigh.TheEuro peanLTROisthoughttoincreaseriskappetiteandputdownwardpres sureontheUSD.TodaysriskisChairBernankestestimonyfollowedby thereleaseofChinasPMI(cons.50.9).SupportforUSDCADfromhere lies at the psychological 0.9850 followed by 0.9700; while resistance comesinattodaysopenof0.9953.C.S.

Correlationsareshifting,whichistypicallyanearlywarningsignalthat marketdynamicsarealsochanging.Therolling30daycorrelationbe tween CAD and equities has dropped from 0.92 in early February to

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GlobalFXResearch

Wednesday,February29,2012
GBPUSD(1.5946)GBPisup0.2%vsthe USD,allowingforabreakofresistanceat the 200 day MA (1.5902), following a positive reaction to the ECBs LTRO and commentary from the BoEs Governor Kingthatmutedexpectationsforfurther QE. GBP had been consolidating for most of February, with support at 1.5650andresistancejustabove1.5900. BoE Governor King was quoted, com menting to parliamentary officials, that hedidnotthinkthattherewasanyhard andfastexpectationoffurtherQE,and thatcurrentactionwasappropriate.E.T.

0.77,whiletherelationshipwithinterestratespreadshascollapsedto0.1,suggestingthetwo assets are not moving in tandem, even the correlation with EUR has fallen from its mid February level of 0.9 down to 0.7. However the correlation between AUD and CAD has re mainedstrong,currentlyat0.95;whilethecorrelationwithoilisrisingoffitsrecentlows.C.S.

Europe EURUSD(1.3435)EURisjust0.2%weakerfromwhereitclosedyesterday,withtheminimal downsideallgeneratedafterthereleaseoftheLTROandlikelyhavingtodowithclosingout longpositions.SpanishandItalian2yearyieldshavedroppedtonew16monthlows.Support forEURcomesinat1.3301,bothcongestionandthe100dayMA;resistanceliesat1.35.C.S.

TodaysLTROcameinclosetoconsensusat530bn,with800bankssubmittingbids;thiscom paresto489bnand523banksintheDecembertreeyearLTRO.Theuseofthefundsismulti fold,withevidencethattheyhavebeenusedtoeasefundingrequirementsforthebanks,but alsoaspartofsovereigncarrytrade.AsreportedbytheFT,datasuggeststhattherewasasig nificantincreaseinsovereignexposureafterthefirstLTROinDecember,bytheendofJanuary Italianbankshadincreasedtheirexposureby13%(280bn)andSpanishbankshadboughtan additional29%(230bn).Thequestionthistimeiswhatthe800bankswhoreceivedfundswill dowithit.Wewouldexpectmoreofthesameandthatthisinturnwillsupportriskandmini mizetailrisksintheEuropeanbankingsector.C.S.

InotherEuropean newsIrelandistoholdareferendumonthefiscalcompact,withthebig gestimpactofanovotemeaningthatIrelandcouldnotaccessfundingprovidedbytheESM. Eurozoneinflationcameinbelowexpectationswithcorefallingto1.5%andheadlinefallingto 2.6%;thisprovidesabitmoreroomfortheECBtocutinterestratesevenasoilpricesrise.The Germanunemploymentrateroseto6.8%;butinthecontextofEurope,itremainsarelatively low rate. Finally, ISDA will rule later today as to whether they will proceed with the request they have had for Greece. With a net CDS exposure of just $3.2bn now, it is widely believed thattheriskismanageable.C.S.
KeyPricing&Levels
USDCAD EURUSD GBPUSD USDCHF USDJPY AUDUSD USDMXN DXY(USDindex) CRBCommodity Gold WTCrude(Nymex) NatGas(Nymex) BoCNoonRate 30Day HistVol 5.0 7.7 6.2 7.3 8.8 8.5 9.5 6.0 Spot 0.9881 1.3446 1.5944 0.8963 80.43 1.0836 12.78 78.17 323.12 1,786.57 107.07 2.52 0.9956 largest 1Day% 1Week 100Day 200Day Pivot1st Chg %Chg MA MA Support 0.73 1.18 1.0142 0.9991 0.9840 0.09 1.49 1.3302 1.3722 1.3395 0.26 1.75 1.5709 1.5902 1.5843 0.09 1.53 0.9180 0.8773 0.8932 0.04 0.17 77.57 77.97 80.04 0.64 1.85 1.0345 1.0409 1.0758 0.48 0.48 13.42 12.86 12.73 0.10 1.32 78.85 77.12 77.97 0.61 0.21 312.85 323.32 N/A 0.13 0.58 1,693.07 1,674.57 1,771.45 0.47 0.72 97.44 94.60 105.92 0.04 4.65 3.13 3.65 2.48 CAD(closefromBloombergnotBoC): loss gain Pivot1st Resistance 0.9957 1.3492 1.6002 0.8998 80.81 1.0885 12.87 78.48 N/A 1,796.22 108.51 2.59 0.9953
2/29/2012

EURCHF (1.2051) CHF remains flat vs EUR despite an escalation in currency relatedrhetoricfromtheSNBthatcame ahead of todays CPI release, in which deflationary pressures continue to be seen;inadditiontothestillnegativeKoF leading indicator, suggesting that the Swisseconomyremainschallenged.CPI hasfallento0.9%onay/ybasisandhas remained negative since October 2011 as continued CHF strength allows for fallingimportprices.E.T.

PricingSource:Bloomberg

Today'sReleases&Speakers Time Country Release Period Cons Last Significance (EST) 08:30 US GDPQoQ(Annualized) 4QS 2.8% 2.8% Medium 09:45 US ChicagoPurchasingManager FEB 61.0 60.2 Medium 10:00 US FedChairBernanke(dove)DeliversSemiAnnualMonetaryPolicyReport High 10:00 US NAPMMilwaukee FEB 58.8 58.4 Medium 10:25 US Fed'sFisher(nonvotinghawk)SpeaksonfiscalreformsinMexicoCity;Q&A Medium 13:00 US Fed'sPlosser(nonvotinghawk)SpeaksonEconomyinNewYork;Q&A Medium 14:00 US FedReleasesBeigeBookEconomicSurvey Medium 20:00 CH PMIManufacturing FEB 50.9 50.5 High 03:55 PMIManufacturing:Germany,EU,UK;EZUnemployment High

Asia/Oceania USDCNY(6.2938)CNYisflatvstheUSD ahead of the NA session as it continues to trade within a limited range in 2012. Since February 1st, movement in USDCNY has been bound between 6.2892 and 6.3144 as the previous downwardtrendhaspaused.Thestabil ityintheexchangerateislikelyareflec tion of policymakers concerns over the recent shift in capital flows, in addition to worries about demand growth in Europe. The official manufacturing PMI is set to be released following todays NA close, with expectations of a slight increasefrom50.5to50.9.Chinascen tralbank,thePBOC,hasannouncedad ditionalmeasurestointernationalizethe yuan, and is now allowing banks in the city of Shenzhen to provide individuals with the ability to engage in cross border yuan transactions. The measure followsonetakenin2009inwhichbusi nesses were allowed to settle trade in yuan, an endeavor that was expanded acrossallofChinain2011.E.T.

SuggestedReading BewareSovereignStressifECBBackdoorBetBackfires,J.Plender,FT(February29,2012) LowRatesAidCongressionalCanKickers,S.Jakab,WSJ(February29,2012) ChinaTakesNewSteponYuanLiberalization,L.Wei,WSJ(February29,2012) ChinaisRighttoOpenUpSlowly,M.Wolf,FT(February29,2012)

GlobalFXResearch

Wednesday,February29,2012

PleasejoinusinourFXStrategyConferencecall,availableforthenext30days Dial:9056949451 Passcode:505774261# The20minutecallishostedbyCamillaSutton,ChiefCurrencyStrategist,anddiscusses: WhathaschangedsinceDecembertospurtheriskrallyandwillitlast? Theimpacttheoutlookforgrowth,centralbankpolicy,volatilityandtheEuropeanbondmarkethavehadoncurrencies. EURisundergoingaretracementofpreviouslosses;butweexpectittotrendlowerintoyearend2012. TheoutlookforCADintoyearend2012isrelativelystrong. AnoverviewofourotherFXforecast Thepresentationcanbefoundat: http://www.scotiafx.com/conference/index.htm

CONTACTSGLOBALFXSTRATEGY THEMAJORS&PRIMARYCURRENCIES CamillaSutton ChiefCurrencyStrategist 4168665470 Camilla.Sutton@scotiabank.com EricTheoret CurrencyStrategist 4168637030 Eric.Theoret@scotiabank.com LATAM EduardoSuarez SeniorCurrencyStrategist 4169454538 Eduardo.Suarez@scotiabank.com ASIA SachaTihanyi SeniorCurrencyStrategist 85261176070 Sacha.Tihanyi@scotiabank.com Shouldyouwishtobeaddedtoanyoneofourthreedistributionlists,pleasereachouttooneoftheaboveauthors.

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