2014 global out look

8/12/2019 2014 Global Out Look

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9 January 2014 | TD Securities

2014 Global OutlookRates, FX and Commodities Research

CONTENTS Market Outlook 2

View From the Top 3

Summary of Trades 4

United States 5

Canada 7

Europe 8

Australia / New Zealand 9

G10 Rates 10

Emerging Markets 11

Commodities 13Foreign Exchange 15

Regional Risks 17

Forecasts 18

Research Team 21

AREAS OF COVERAGE

United States

Canada

Europe

United Kingdom

Australia

New Zealand

Emerging Markets

Foreign Exchange

Commodities

G10 Rates

https://www.tdsresearch.com/currency-rates

2014 GLOBAL OUTLOOK

Financial markets enter 2014 with an outlook driven by a strengthening global economy,

reduced fiscal drag in the developed world, and the transition away from open-ended QE at

the world’s largest central bank. Tapering will continue to exert upward pressure on G7 term

premia ex-Japan, and tighter financial conditions present more unique challenges to EMs.

However, upward drift in rates will be constrained by a pervasive lack of inflation and ultra-loose policy rates, both of which set up well for risk assets more broadly. The US is well

positioned to outperform and relative to the rest of world, growth risks there are tilted to the

upside. This is USD-positive, especially against those economies more vulnerable to a

setback in growth, inflation, or both.

CORE VIEWS Bias Asset Allocation

G10 RatesLow inflation keeps policyaccommodative, but upward drift putspremium on curve plays, box trades.

Underweight

Risk Assets

Supported by stronger growth, lowinflation, policy accommodation butupside muted relative to outsizedgains in 2013.

Neutral/Overweight Equities

End of QE and stronger growthprospects favor the Anglo-Saxonbloc. US best positioned toaccommodate tighter financialconditions of tapering.

LONG SHORT

USD CAD

GBP JPY

EM Adjustment in rates and FX tocontinue. Selectively look for positivetotal returns.

Underweight vs USD.

Total return for bonds maystill be positive.

Commodities

Most industrial metals higher as

demand and risk appetite grow, golddown and energy facing downsideamid strong supply growth.

LONG SHORT

WTI Brent

Zn, Pd, Pb Au/Pt ratio

VolatilityLiquidity injections diminish, centralbanks happy to tolerate highervolatility as growth prospects rise.

Overweight

ForeignExchange

https://www.tdsresearch.com/currency-rates/







CENTRAL BANK MONITOR

Inflation Central Bank Policy RateDeviation from target* (% points) Y/Y% As of Next Last Mtg Current Next Mtg 12m Fcast (bps∆ from spot)

Print Date Change % Date TD Mkt TD

Below Target Above Target

*Deviation from avg since 2007 for India, which does not have an inflation target.

+20 +0

NZ 1.4 Sep 21 Jan 12 Dec +0bp 2.50 30 Jan

-25bp 0.75 13 Feb +0Sweden 0.1 Nov 14 Jan 17 Dec

0.25 6 Feb

+0bp 1.00 22 Jan

+120 +75+0

+0bp 0.25 29 Jan

+0 +3 +0

0.10 22 Jan

+0bp

Canada 0.9 Nov 24 Jan 4 Dec -5 +0+0

US 1.2 Nov 16 Jan 18 Dec +8 +0+0

EZ 0.8 Dec 31 Jan 5 Dec +0bp

-3 +0

Australia 2.4 Nov 19 Jan 3 Dec +3 +50+0

Japan 1.5 Nov 30 Jan 20 Dec +0bp

27 Mar

+0bp 2.50 3 Feb

+0

UK 2.1 Nov 14 Jan 5 Dec

Norway 2.5 Nov 10 Jan 5 Dec

+8 +0

E m e

r g i n g M a r k e t s

China 3.0 Dec

+0bp 0.50 6 Feb +0

G 1 0

-20

+0 -5 +01.50

+0bp 3.50 31 Jan

3.00 21 Jan -20

15 Jan 8 Jan +0bp 2.50 5 Feb +0

Hungary 0.9 Nov 15 Jan 17 Dec -20bp

Mexico 3.6 Nov 9 Jan 6 Dec

+50

Russia 6.5 Dec 9 Jan 13 Dec +0bp -505.50 14 Feb +0 n.a.

Poland 0.6 Nov

+0

S Africa 5.3 Nov 22 Jan 21 Nov +0bp +1005.00 29 Jan +0 +111

Malaysia 2.9 Nov 22 Jan 7 Nov +0bp 3.00 29 Jan +0

Brazil 5.8 Nov 10 Jan 27 Nov +50bp +2510.00 15 Jan +25 +184

Turkey 7.4 Dec 3 Feb 17 Dec +0bp

India 11.2 Nov 13 Jan 18 Dec +0bp

4.50 21 Jan +0 n.a.

-327.75 28 Jan +0

Indonesia 8.4 Dec 2 Feb 12 Dec +0bp 7.50 9 Jan +0

+16 +25

+38

+11

-35 +25

+150

+50

-12 +50

-4 -2 0 2 4

Fcast for 2014Current

-100 0 100 200

THE TD VIEW

Trading Bias

Macro Outlook Rates FX Key Risks

US

The outlook has brightened, and we expect

economic momentum to pick up

meaningful ly in 2014 wi th GDP growth

averaging 3.0%.

Despite QE tapering, the upward

adjustment in rates should remain modest

given the Fed's lower for even longer

commitment.

Position for broad USD gains. A disorderly rise in yields caused by anoverly aggressive QE3 wind-down presents

a key risk to this constructive outlook.

Canada

A modest acceleration in real GDP growth

al lows core inflation to carve out a trough

but will remain below the 2.0% target.

Front-end to remain anchored with a dovish

Bank of Canada, as longer-term yields drift

higher in tandem with Treasuries.

P os it ion for CAD underperformance,

particularly against USD and GBP.

A false start in the US would undermine the

forecasted recovery in Canadian exports

and put more pressure on domestic

demand.

Europe

Euroz one recovery to s urpris e t o t he

upside. UK test will come mid-year, when

investment and exports must bear some

burden.

By mid-2014 the market may begin pricing

in more ECB hikes into mid-2015 to early-

2016 favoring steepeners in Eonia forwards.

GBP to outperform EUR on growth

divergence.

Disappointing US growth, market overreach

on UK rec overy , wide unc ert aint y on

Scandie CB prospects.

Asia-Pac

Australia growth drivers are rotating, not

shrinking; strong data supports NZ

tightening but optics suit March 2014.

OIS pricing for the RBA is flat , now l it tle

appetite for 2014 tightening; NZ 12mth OIS

at +100bp matches our base case.

Underperformance of AUD in US tapering

bouts indicates value in short AUD/NZD.

Aussie non-mining investment and

employment s tagnates ; RB NZ delay

worsens housing bubble; China reform

stalls growth.

Latam

Brazil's finances under more scrutiny, with

rating downgrades possible on bad data.Mexico growth recovery kicks in at last.

Brazil's BCB will soon end tightening and

1y-2y PRE-DI should be good receivers.Mexico's curve to mimic USTs.

MXN remains our top pick for fundamental

reasons in the long-term. BRL to s tayweak, but short-term correction

overstretched.

More rate hikes in Brazil. Swings in

sentiment on Brazil election expectations.Negat ive impact of QE tapering on MXN

assets.

EMEA

EU recovery should drive stronger growth,

but near-term focus is on Turk ish and S

African imbalances. Less extreme inflation.

Rates l ikely to continue bear flattening in

Turkey. More stable in S. Afr ica, Poland,

Hungary. Steepening in Russia.

CEE FX remains overvalued vs. EMFX

peers. Likely to correct on EUR weakness.

Also TRY and ZAR to stay weak.

Pol it ical r isks in Turkey, pension reform

failure in Poland. S. African and Turkish

rating downgrades. Rising global rates.

Asia

India's data to continue improving, whi le

Indonesia's ore exports ban may raise near-

term deficits. Inflation to decline.

Indiais at risk of monetary tightening. Front-

end ND-OIS to stay inverted. Indonesia's

NDS to slowly normalize.

INR and MYR to remain relatively resilient

in 2014, but subject to general trends. IDR

should regain market confidence in 2H.

Continued IDR depreciation and volatility.

Newly elec ted government unable to

continue reforms in India.

Energy

Cont inued s trengt h in non-OPEC oil

production will keep the global oil market

more than amply supplied through 2014.

Geopolitical risks have the ability to send

oil prices sharply higher.

Precious

metal

QE tapering should see real yields continue

to increase along wi th the USD, making

gold a less attractive option in 2014.

US economy slows markedly and tapering

ceases, pushing easy monetary pol icy

further.

Other

metals

Now that monetary policy focus has

diminished, industrial precious and base

metals should refocus on fundamental

drivers.

Chinese economy falters or certain supply

side shortfall expectations fail to

materialize.

G

1

0

E

M

C

O

M

M

O

D

I

T

Y

Short Brent/Long WTI (Dec'14).

Long PD.

Long Pb; Long Zn.



3



Financial markets enter 2014 with an outlook driven by a

strengthening global economy, reduced fiscal drag in the

developed world, and the transition away from open-ended QE at

the world’s largest central bank. At the same time, key event risks

continue to fade. Budget politics in the US has receded sufficiently

that the risk of a fiscal meltdown is now diminished, and in Europe

few openly fret of a breakup of the Euro. None of this is to suggest

that downside risks have been eliminated. However, the

pervasive fear and doubt that governed much of the first five

years of this global recovery is giving way to more confidence in a

better outcome.

Tapering and US Ascendancy

G4 central bank balance sheets will continue to rise through 2014,

but the momentum toward ever greater dollar liquidity is now

rolling over. Volatility is set to creep higher. While tighter financial

market conditions will continue to be managed by aggressive

central bank forward guidance, risk assets look to be more

attractive relative to safe haven assets even if stronger growth

assumptions already look to be priced into global equity markets.

Tapering will continue to exert upward pressure on G7 term

premia and emerging markets will struggle more out of the gate to

manage through tighter financial conditions.

Developed Markets Lead Global GDP Higher

In 2014 we expect global GDP to accelerate from 2.9% to 3.5%, a

move driven primarily, though not exclusively, by stronger growth

among G7 countries. Fiscal drag in the US and other G7

countries ex-Japan is receding and the Eurozone economy will

continue to strengthen off the recession of last year. Tax hikes in

Japan point to a moderation in growth later this year, but as a

group, all G7 countries will be in firm expansionary territory for the

first time since 2010. Growth in China is poised to hold steady in

the 6.5% to 7.5% range.

As a bloc, emerging market growth will accelerate only modestly

as prospects there look less robust over the coming year. Fiscal

drag is set to increase, financial conditions continue to tighten on

the back of Fed tapering, commodity prices are trading sideways,

and no obvious growth catalyst has emerged to replace the debt

driven growth model of past cycles. All emerging markets

benefitted from QE, but some will suffer more than others as

tapering proceeds over 2014. Those emerging market economies

that have stronger external fundamentals such as Taiwan and

even Brazil, which is close to the end of its tightening cycle, are

better positioned than others such as Turkey. As a group, risingglobal PMIs and IFO confidence measures point to a rebound in

trade flows that will provide underlying support to emerging

market growth prospects in a post-tapering world.

The US, however, is in the best position to outperform in a tighter

financial regime. This argues for a stronger USD, especially

against those economies most vulnerable to a setback. In the

case of the BoJ, economic math simply does not stack up and

more accommodation is forthcoming as growth and inflation slow

over 2014. In the case of Europe, inflation risks predominate.

Europe will avoid deflation but weak credit metrics, deleveraging

bank balance sheets, and downside momentum in wage growth

suggest the risk of further accommodation relative to the Anglo-

Saxon central banks cannot be ignored.

Low Inflation Drives Ongoing Accommodation

Highly accommodative and innovative central banks succeeded

in dampening volatility and providing a cushion to financial assets

during an extended period of sub-optimal growth. The good news

is that growth metrics are now starting to turn and these higher

rates of growth reduce the vulnerability to exogenous shocks.

However, the policy accommodation that underpinned economic

growth has yet to feed into more inflation volatility or more realized

inflation. Despite stronger growth prospects the risk of further

disinflation remains uncomfortably high across the G7 given rates

of inflation that remain near multi decade lows.

Stronger growth gives central banks latitude to tiptoe away from

emergency policy settings that characterized the first years of this

recovery, but low inflation will keep them both vigilant and inclined

to “let it run” with record low policy rates. The developed world

continues to suffer from an excessively high stock of debt. It

means policy must be especially vigilant against disinflation or

outright deflation, which would simply magnify that debt burden in

real terms. Policy must, therefore, remain firmly directed towards

more growth and more inflation.

In the coming year low inflation risks will be the primary drivers ofpolicy. It will require some fancy footwork in terms of forward

guidance. The BoE will be challenged first, followed by the Fed,

and eventually the ECB. BoC forward guidance is conspicuously

vague and an asteroid impact is more likely than a hike by the

BoJ.

VIEW FROM THE TOP

Sources: TD Securities, Bloomberg

G4 Central Bank Balance Sheets

3

4

5

6

7

8

9

10

11

12

-1500

-1000

-500

0

500

1000

1500

2000

2500

3000

04 05 06 07 08 09 10 11 12 13 14E 15E

T o t al G4 B al an c e S h e e t s ( $ T r i l l i on )

A n n u a l B a l a n c e S h e e t C h a n g e ( $ B i l l i o n )

BOE ECB BoJ Fed Total G4 (RHS)



4



SUMMARY OF TRADE RECOMMENDATIONS United States

Canada

● The long-term secular bear trend in the USD is looking long in the tooth as fundamental support for a stronger USD become more evident, and

with BoJ policy settings to remain loose or even loosen further our end-2014 forecast for USDJPY of 110 look very reasonable. However, the

short JPY trade already looks well-populated, so there is some risk in jumping in at this point. Given posit ioning and the gains in the USD seen

already, we prefer to get long via a USD call spread.

● Rising US yields and the BoC’s moderating policy outlook helped push the CAD to its lowest level versus the USD since 2008 in the past few

months. We think the trend towards a broadly softer CAD will extend into 2014. Buy USD/CAD at 1.0725, targeting a push to 1.13.

Foreign Exchange

Commodities

● Given improving economic growth prospects and a set course for the QE3 wind-down, a modest sell-off in Treasuries should be the main

theme in 2014. We are enticed into a short 2s5s30s butterfly trade. Our target is -50bp and a stop-loss of -95bp. The trade is motivated by ourexpectations for the long-end’s outperformance as it will benefit disproportionately from the benign inflationary backdrop and the prospect of

improving fiscal dynamics as well as having the front-end anchored by the Fed’s “lower for even longer” commitment.

● We also like buying the EDZ4Z6 butterfly to take advantage of the mispricing in expectations for fed funds hikes as we expect the Fed to

push the timing for the first rate hike further into the horizon. Enter at -40bp with a target of -100bp.

● A stronger global economy in 2014 is a particularly encouraging development for Canada. We recommend receiving in 1y/1y forwards. Entry

around 153bp with a target of 133bp and a stop-loss of 164bp. Hikes beginning in 2015Q3 would be consistent with a 1y/1y forward rate of

1.45%, but if the Bank shifts to an easing bias early this year we would not be surprised to see the 1-2 year area of the curve flatten

further—especially if inflation remains soft.

● We suspect by mid-2014, the market will be pricing in more ECB rate hike risk into end-2015 and early-2016 and recommend steepeners in

Eonia forwards. We recommend paying Eonia 1y1y and receiving Eonia 1y. Entry around 14bp with a target of 53bp and a stop-loss of 0bp.

● The normalization of the Eurozone with a lag, the attractive carry, and extreme levels make compression in spreads of bunds to US and

Swedish 10s likely a strong trade in 2014. We recommend buying US 10s and Swedish 10s and selling 10yr Bunds. Entry at 108bp/55bp with a

target at 50bp/2bp and a stop-loss at 127bp/68bp.

● For UK, we continue to short gilts and see a risk 2s5s may test as high as 160bp. We short the belly of 10s20s30s at 45bp (target 83bp) as

the area of the curve most in need of normalization. The market is moving to price in quarterly BoE hikes in 2015-2016, but that is slightly more

than we expect and is the maximum likely for 2015. We would take opportunities to buy Dec14 short sterling at 99.000 or Dec15 if it nears

98.000.

● The outlook for the Antipodean countries for 2014 is one of gently restoring the cash rate back to neutral after a year or more of a record low

cash rate setting.

● The ACBG curve is steeper than we expected as the financial markets are once again pricing in a material chance of another RBA cut to

2.25% by mid-year. We recommend taking advantage of current steepness in the ACGB curve to profit from a flatter 3s10s curve by year end

2014.

● With the UST 10yr expected to nudge higher, EMs should continue to be skewed towards weakness. In this process, however, velocity

remains as crucial as levels and shape of the curve. Orderly adjustments in UST yields will see orderly EM moves and prevalence of

idiosyncratic factors. Potentially even gains. But sharp UST adjustments will likely lead to synchronized EM selloffs. We continue to be focused

on EM RV trades.

● Based on the macroeconomic backdrop, valuations and likelihood of intervention from local authorities, we like being long a basket of

BRL/CLP, INR/PLN and IDR/KRW, equally weighted and rebased (Jan-2010=100). At the time of writing, however, the technical picture still

looks unfavorable, and there is nothing immediate suggesting an upside break from the downtrend. Therefore, to enter the trade, we wait for the

basket to test support at 75.0. We target 79.4 and place a stop loss at 73.4, implying a risk/reward ratio of 2.75.

● Supply constraints, likely deficits and rising industrial demand in China, recovering auto sector in the western world make zinc, platinum,

palladium and lead our favorite metals through 2015. Low benchmark policy rates for longer could boost base metals demand and limit dollar

upside, which is price positive for metals. Long Lead, Zinc and Palladium.

● We see significant downside risks to the oil market given that supply growth is expected to outpace demand growth over the next 12 months,

adding to the pre-existing surplus supply conditions. Short Brent/Long WTI.

Emerging Markets

Australia / New Zealand

Europe



5



UNITED STATES

A Year of Transition

Momentum is building in the US economy and with it Fedconfidence that a transition to a stronger growth profile is finally

taking shape. With reduced fiscal drag, decreased policy

uncertainty, favorable domestic private sector fundamentals

bolstered by strengthening balance sheets, and a more

supportive global economic backdrop, we expect the pace of

GDP growth to accelerate sharply. In 2014, growth is set to rise

at a 3.0% annual rate, 1% above potential. That compares

favorably to the 1.3% average in the four quarters leading up to

mid-2013, and the 2.3% average in the previous four years.

Inflation momentum is slowly tilting higher, but we still expect thecoming year to be defined by continued weak inflationary

pressures. Prices rising well below the Fed’s 2% target works at

cross purposes to long term sustainable growth in an economy

that remains highly levered, and this will provide the Fed every

justification to maintain its ultra-accommodative monetary policy

stance. The market better understands that tapering is not

tightening, but this will remain a lingering challenge for the Fed’s

forward guidance over the coming year. The Fed has provided

every signal that it will continue to err on the side of caution, and

will tighten later rather than sooner. In this regard, we see three

board themes emerging this year:

The shift in the Fed’s emphasis from balance sheet

operations to forward guidance will be complete this year,

and as the form of stimulus is transformed, the timing for

rate hikes will be pushed further into the horizon.

The front-end of the curve is well-anchored, with the 5yr

and 7yr sectors becoming the new pivot point for the

Treasury curve. However, as the Fed accelerates its QE3

wind-down this year, we expect this sector to

underperform the rest of the curve.

A sustained period of above-potential GDP growth should

begin to temper the persistent disinflationary impulse in

the US economy. Nevertheless, with the level of domestic

economic slack still substantial, it will be some time before

inflation becomes a concern. However, we suggest

positioning for this very outcome this year.

Trade 1: Less tightening now, but more later

US monetary policy has been in transition for some time, as the

Fed’s modus operandi has slowly shifted away from the use of its

balance sheet to forward rate guidance as its preferred tool for

providing stimulus to the economy. This new policy paradigm has

been the defining contribution of Janet Yellen in her position as

Vice-Chair at the FRB. As she assumes her new role at the helm

of the FOMC this year, we expect ever greater emphasis to be

placed on communication strategy and the use of forward rateguidance. Moreover, armed with an optimal control policy

framework that argues for policy tightening further in the horizon,

we believe that the risks are tilted in favor of a later rather than an

earlier start for policy tightening.

Too much tightening priced into Dec 2015... Even at a time

when the Fed was signalling its tapering intentions, Yellen and

Bernanke both went to great lengths to disentangle balance sheet

policy from interest rate policy. In doing so the Fed has

succeeded in driving a wedge between these two policy

frameworks, and the dramatic flattening in the front-end of the

curve has been testament to the effectiveness of this initiative.

At the December FOMC meeting, the median fed funds rate

forecasts for 2015 and 2016 were lowered by 25bp, signalling a

shift in the timing for policy tightening further into the horizon.

Notwithstanding this, the market continues to price in 50bp to

75bp in tightening into December 2015. We believe this reflects a

greater level of tightening than the Fed might be willing to

deliver—even if they stick to the late-2015 timetable. And even

though our current forecast calls for 25bp in fed fund hikes by end

-2015, we believe that the risks are for the timing of the first hike

to drift into 2016.

… and too little into Dec 2016. A later start to policy tightening

will likely necessitate a more aggressive pace of stimulus

withdrawal when the Fed does embark on its rate hike cycle.


Lower for Longer, But Faster Hikes Later

Trade Recommendation: Buy EDZ4Z6 butterfly to take

advantage of the mispricing in expectations for fed funds hikes.

Enter: -40bp

Target: -100bp

Carry/Roll: +14bp/quarter

Stop: -10bp

0.0

0.5

1.0

1.5

2.0

2.5

3.0

3.5

%

FFR Liftoff Eurodollar Pricing

TD Securities' Forecast



6



Given this, as the market re-prices the timing on the first hike this

year, we see the potential for more tightening to be pushed into

2016, and see upside to the 125bp in hikes currently being pricedinto the market between the EDZ5 and EDZ6 Eurodollar

contracts. Our own expectation is for the Fed to deliver 175bp in

tightening.

The combination of these two legs offers some appeal, with a

positive roll-down of 14bp per quarter. The key risk to the trade is

a faster acceleration in economic growth momentum that forces a

quicker QE3 wind-down and an earlier start to stimulus withdrawal

by the Fed. This risk, however, is low.

Trade 2: Sell 2s5s30s butterfly

In this current environment of improving economic growth

prospects and a set course for the QE3 wind-down, we expect the

selloff in Treasuries to persist, though it is likely to remain modest.

The brunt of this selloff should be felt in the intermediate sector,

building on the underperformance in the lead-up to the tapering

announcement in December. The long-end of the curve, however,

should outperform on the down-trade as it will benefit

disproportionately from the benign inflationary backdrop and the

prospect of improving fiscal dynamics. And with the front-end of

the curve essentially anchored by the Fed’s “lower for even

longer” commitment, we see an opportunity in entering a short

2s5s30s butterfly trade.

Both legs of this trade offer some appeal. The potential for a

further steepening in the 2s5s curve from its current level of133bp is captured by our belief that any move by the Fed to

accelerate the current pace of tapering will be complemented with

enhanced low rate guidance. And while we see the risks being in

favor of a faster wind-down of QE versus a later end, the

incorporation of an inflation threshold or a lowering of the

unemployment threshold will be seen as an unequivocal signal by

the Fed of its intention to push the timing for rate hikes further into

the horizon. This will support our trade.

The back end of the trade also has some attraction. Given the

considerable amount of slack in the economy, we continue to see

little risk of an imminent upswing in core inflation pressures, even

with a sustained period of slack-absorbing growth. This augurs

well for the long-end of the curve, and over the course of this year

we see the potential for a flattening in this part of the curve. The

downside to this trade is the negative carry of 2.5bp/month.

Trade 3: Position for an eventual rise in mediumterm inflation expectations

The benign inflationary environment has provided a favorable

backdrop for the Fed’s accommodative policy stance. This theme

should remain intact this year. In fact, with the disinflationary

impulse persisting over the first few months of this year, the Fed

will continue to be faced with too little rather than too much

inflation. However, given the Fed’s willingness to tolerate a level

of inflation above the 2.0% target and its signal of a delay in the

start of policy tightening cycle for “a considerable time after the

asset purchase program ends and the economic recovery

strengthens”, we see some risks that the outlook for medium term

inflation expectations beginning to rise later this year even if ourexpectation for lower energy prices materializes.

To be clear, we continue to see a very low risk of a disorderly

eruption in inflation or inflation expectations over the next 2 to 3

years. Similarly, we have no reason to believe that the Fed’s

inflation fighting credentials will ever be questioned by the market,

suggesting that the back-end of the curve should remain well-

behaved. However, given the Fed’s unwavering commitment to

err on the side of caution on withdrawing policy stimulus, and their

expressed preference to tolerate some higher inflation before

acting, there is some risk that the Fed could be seen as falling

behind the inflation curve. This concern is likely to come into play

later this year, and we see some opportunity in scaling into this

potential trade.

Sources: TD Securities, Macrobond

Soft Inflation to Keep Rate Hikes at Bay

Trade Recommendation: Sell UST 2s5s30s butterfly asthe belly of the curve underperforms the wings.

Entry: -80bps

Target: -50bps

Carry/Roll: +2.5bps/month

Stop: -95bp

Trade suggestion: Look for the BE5s10s curve to flattenand BE2s5s to steepen as medium term inflationexpectations rise.



7



Will a Rising Global Tide Lift Canada’s Boat?

As a new year dawns, the prospect of a stronger global economy

in 2014 is a particularly encouraging development for Canada.

After relying on domestic demand to lead many of its developed

market peers in the early stages of the recovery from the Great

Recession, the persistent weakness in net exports has steadily

eroded the performance of the Canadian economy. But with manyof the fundamental headwinds that had restrained the United

States set to fade in the year ahead, Canadian real GDP is

forecast to accelerate from an annual average growth rate trough

of 1.7% in 2013 (which matches the 2012 outturn) to 2.3% this

year and to 2.4% in 2015. This growth trajectory will help to

gradually absorb the recent accumulation of economic slack, and

allow underlying inflation to recover from a prolonged period of

disinflation.

Wary of an economic recovery that has been littered with false

dawns, the key uncertainty in the year ahead will be the Bank of

Canada’s tolerance for subdued inflation and its patience in

waiting for the nascent momentum in the global economy to filter

through the export channel. In the tail end of the Carney era, the

Bank balanced the competing priorities of below-target inflation

and elevated household debt with the intention of raising the

overnight rate at some distant point in the future. Under Governor

Poloz, the focus has steadily shifted to paying more attention to

the risk posed by the persistent weakness in inflation, while the

responsibility for curtailing household leverage and preserving

financial stability has been pushed back to the Department of

Finance and its suite of macroprudential measures.

While many other developed market economies face a similar

inflation challenge, the Bank is in a rare position with the option to

use the traditional policy tool of cutting its overnight rate to

respond. We readily acknowledge that absent a further and

significant deterioration in economic growth that would ensnare

headline and core inflation, the bar to an actual cut in the

overnight rate remains exceptionally high (we expect the first hike

in Q3 2015 with a year-end forecast for the overnight rate of

1.50%). There is, however, little incentive to sound hawkish even

in the event that 2014 ends up being stronger than expected.

Instead, the Bank is expected to remain as dovish as possible

through ‘open mouth’ operations which could extend as far as the

adoption of an outright easing bias in an upcoming Fixed

Announcement Date (FAD). While nowhere as explicit as the

Reserve Bank of Australia in commenting on currency

movements, a steady stream of dovish rhetoric by the Bank does

have the benefit of weakening the CAD to provide an additional

tailwind to net exports. Paired with our longstanding view of

outright USD strength, we expect to see further weakness in the

Canadian dollar with USD/CAD forecast to reach 1.11 by the end

of 2014.

In contrast to previous instances of global stress or economic

vulnerability, where despite the Bank holding onto a hawkish tone,

the market was more than happy to price in a cut in the overnight

rate. For instance, 2yr yields have periodically traded through the

overnight rate by as much as 20bp since late 2011—the response

to the dovish tilt taken through the end of 2013 has been far more

muted. And while the Bank is not expected to cut, we see value in

the front-end of the Canadian curve given the Bank’s growing

unhappiness with what we forecast to be a sustained period of

below-target inflation. The very front-end of the curve looks fairly

priced, with 1yr OIS rates near 1.00%. The 1-2 year area of the

curve looks too steep for our taste, however, and we like receiving

on 1y1y forwards. Hikes beginning in Q3 2015 would be

consistent with a 1y1y forward rate of 1.45%, but if the Bank shifts

to an easing bias early this year, we would not be surprised to see

the 1-2 year area of the curve flatten further—especially if inflation

remains soft.

The backdrop of a stronger global economy expected to flow

through to the Canadian economy in the year ahead received an

explicit acknowledgement by the Federal Reserve, which

surprised the market by tapering its asset purchase program in

December. In typical fashion, longer-dated Canadian government

yields were able to outperform the selloff in US Treasuries. We

expect this dynamic to continue in the year ahead as US yields

are forecast to grind higher, steepening the curve in both

countries. The outperformance is expected to be particularly

pronounced in 5s, the sector in the US most vulnerable to the

Fed’s tapering.

CANADA

Sources: TD Securities, Bank of Canada Forecast by MPR

The Elusive Return of Core Inflation

0.0

0.5

1.0

1.5

2.0

2.5

%

Oct-13 Jul-13

Apr-13 Jan-13

Actual

Recommendation: Receive in 1y1y ForwardsEntry: 149bp

Target: 130bp

Roll: 1.8bp/month

Stop: 164bp



8



Normalcy Hedged by Overshoots

2013 marked the start of the normalization trades as Eurozone

fears abated and global macro expectations pulled out of a two

year slump. US and UK recoveries look likely to build while the

Chinese moderation is turning. If this proves true in 2014, then

the major remaining normalization will be Eurozone expectations

and data. Another major trend will be increased G10 central bank

independence and diversity, as local factors become more

important the more global trends improve, which should fuel UK

rate volatility around the ongoing steepening trend.

Eurozone: I’m Not Dead Yet

ECB easing remains a risk, but just as last year, is largely

focused on half-hearted measures that we think present more

opportunities to trade the inevitable market overreaction. The risk

of a refi rate cut would make receiving Eonia attractive, while a

negative deposit rate cut in a slow but ongoing disinflationary

environment would extend that attractiveness to Euribor.

However, if there is a major growth scare, it would be LTROs and

asset purchases, focussed on private sector assets, that would

be the likely tools. Meanwhile, the ECB’s stress tests and AQR

are likely to increase the differentiation in European credit. A

muddled toolbox that makes for muddled trading risks.

But the UK shows how quickly the market can move to price in a

normal central bank cycle, and as we warned at the time, the

ECB’s refi rate cut in November has been all but priced out of

forwards. It is highly inconceivable that the ECB raises rates in

2014, and even 2015 remains only a minor risk.

But we suspect that by mid-2014, the market will be pricing in

more ECB rate hike risk into end-2015 and early-2016 and

recommend steepeners in Eonia forwards. That same likelihood

of normalization, attractive carry, and extreme levels makes

compression in spreads of bunds to US and Swedish 10s a likely

strong trade for 2014.

UK: Tis But a Scratch

Unlike the Eurozone, UK normalization is well underway. We

continue to short gilts and see a risk 2s5s may test as high as

160bp. We short the belly of 10s20s30s at 45bp (target 83bp) asthe area of the curve most in need of normalization. The market is

moving to price in quarterly BoE hikes in 2015-2016, but that is

slightly more than we expect and is the maximum likely for 2015,

with the market itching to price risks into 2014. That is too much

and something the BoE will quash sooner rather than later.

We recommend buying Dec 14 short sterling with any hike priced

in and Dec 15 when the market prices more than 75-100bp of

hikes. The BoE will likely hit their 7% unemployment threshold by

mid-2014 – as early as February – which should mark the initial

peak in hawkish sentiment. At that point, there is a risk that H2

2014 sees weaker housing or a weaker than expected handoff to

business investment on top of the tail risk from the Scottish

independence vote. We see only a 1/3 chance that the BoE

lowers their unemployment rate threshold, but it is possible, which

would imply a limited risk of a 2014 hike. And even “normal

communication” implies limited risk of 2014 tightening as wages

would need a significant acceleration.

This is part hedge on the road to Castle Aaargh, part positioning

on market overreach. On any major disappointment to global

growth, we would also be quick to receive Sonia 1y1y and 1y2y

given the full reflation there. A similar hedge for the Eurozone,where peripheral spreads should continue to narrow as the

funding onus is shifted from sovereigns to markets, would be

shorting bonos versus BTPs, as the Spanish fiscal deficit around

6% leaves them more leveraged to the global recovery.

EUROPE


Bund-UST Spread Points to EZ Macro Outperformance

Recommendation: Long US and Swedish 10s / Shortbunds as Eurozone normalizes with a lag.Entry: 108bp / 55bp

Target: 50bp / 2bp

Carry/Roll: +8.5bp/month / +4.5bp/month

Stop: 127bp / 68bp

Recommendation: Pay Eonia 1y1y, receive Eonia 1yEntry: 14bp

Target: 53bp

Carry/Roll: -1.4bp/monthStop: 0bp

Recommendation: Short belly of Gilt 2Q23/4H34/3Q44.Entry: 45bp

Target: 83bp

Carry/Roll: -3bp/month

Stop: 38bp



9



Steep Now, Flatter Later

The outlook for the Antipodean countries for 2014 is one of

gently restoring the cash rate back to neutral after a year or

more of a record low cash rate settings of 2.5%. While weexpect the timing of the RBA and RBNZ tightening cycles to

differ, our expectation for 100bp of tightening for the RBNZ is

already well priced into the markets. In contrast, our 50bp of

tightening expected for the RBA, even if deep into 2014, is not

priced at all, presenting a stronger trading opportunity for 2014.

Above-trend growth for 2014

In Australia, the hand-wringing over the end of the mining

investment boom is overdone, as consumption and housing –

the traditional interest rate sensitive sectors - are already

taking up some of the growth slack. Our 3% GDP growth

forecast for 2014, along with only a modest pickup in core

inflation, allows for a steady 2.5% cash rate to persist until our

expected 50bp hike to 3.0% deep in 2014. In New Zealand,

GDP growth in late 2013 is already being driven by the

traditional domestic demand growth drivers of consumption

and investment, plus the earthquake reconstruction effort has

spread to the major cities. Subsequently, we can see GDP

reaching 3.5% in 2014, the highest annual growth rate in a

decade.

The Chinese GDP growth slowdown is not an issue for the

outlook for Antipodean exports. While Chinese GDP growth

has eased from 12% a few years ago to a likely 7.5% in 2014,

over that timeframe imports from Australia (iron ore, coal) have

increased three-fold, while imports from New Zealand (dairy)

have doubled, the latter aided by the 2009 free trade

agreement between China and New Zealand. Subsequently, a

further growth slowdown to 6-7% over the medium term in

China does not threaten exports as long as quality growth is

achieved and wealth is created.

It’s down to timing

We expect the RBNZ to start withdrawing stimulus in March,

for 100bp of overall tightening. In contrast, the RBA is likely to

pause for several months as the burgeoning recovery in

housing and consumption builds up more steam, before the

RBA starts preparing the markets for a withdrawal of

extraordinary stimulus in the final months of the year.

Defying our dollar bloc house view

Can the Australian and New Zealand yield curves defy the anti

-gravitational steepening global yields we expect for 2014?

Not in the first half. The ACBG curve is steeper than we

expected as financial markets are once again pricing in a

material chance of another RBA cut to 2.25% by mid-year,

while the longer end remains more or less unchanged. This

could see the curve remain at around 130bp to 140bp and is

our entry level for the flattening trade.

However, as 2014 unfolds, and Australia’s GDP growth gains

traction via consumption and housing, we expect the RBA to

not only drop its soft easing bias, but to begin signaling that the

economy no longer requires a record low cash rate. We

believe the first modest withdrawal can be in November, with a25bp hike, followed by a similar lift in December for a year-end

cash rate of 3.0%. For the RBNZ, there is more urgency to lift

the cash rate sooner rather than later, and we expect

tightening to start in March, for a year-end target of 3.5% given

the persistent housing bubble there. Indeed, the risks for the

RBNZ lie towards doing more tightening than our 100bp

forecast, not less.

Neutral cash rates are 4.25%-4.5% for both countries, so our

year-end targets remain accommodative.

Subsequently, we expect the Antipodean yield curves to flatten

over 2014, compared with our U.S. and Canadian colleagues

expecting further steepening.

AUSTRALIA / NEW ZEALAND


Bear Flattener on the Way

Recommendation: ACGB: take advantage of currentcurve steepness to profit from a flatter 3s10s curve byyear end 2014.

Entry: +133bpTarget: +105bpCarry/Roll: -0.7bp/monthStop: +145bp

2.0

2.5

3.0

3.5

4.0

4.5

5.0

14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29

%

Maturities

3mth range

Today

TD end-2014 target

3y

5y

10y



10



G10 RATES

Slowly Back to Normal

The mildly surprising taper decision in December set the stage

nicely for 2014. Even with bonds selling off sharply through the

second half of 2013, yields in most countries are at historically low

levels across the curve. With the global economy finding itself on

an increasingly more stable footing—we look for faster growth

across most of the G7—the broad trend in fixed income will be

towards higher yields. The gradual end to quantitative easing in

the US will reinforce the rise in yields, as the selloff in the

Treasury market will lift rates in other advanced economies.

QE Will End, But Low Policy Rates Here to Stay...The Fed will probably be relieved to see the end of QE, but they

have been adamant that the fed funds rate will need to remain

very low for a prolonged period of time. We expect the fed funds

rate to remain at its current level until the end of 2015 (consistent

with the Fed’s most recent Summary of Economic Projections),

and the balance of risks skewed toward even later tightening.

Persistently low policy rates will be a key theme in Europe and

Canada as well. The Eurozone recovery is still too fragile to

consider increasing rates in 2014—especially with the most

recent cut occurring just last November. In Canada, the outlook

for economic activity is fairly positive; the economy likely grew

faster than its potential rate in H2 2013, but inflation has been

stubbornly low. Thus far, the Bank of Canada has focused on

softer inflation and downplayed the stronger growth.

Furthermore, the BoC appears more comfortable with current

household leverage levels under Governor Poloz, and it is clear

that they are in no rush to tighten. We think the most likely

scenario is for the overnight rate to remain unchanged throughout

2014, but easing looks like an increasingly plausible risk scenario.

Accommodative policy across the globe points to broadly steeper

curves by the end of 2014.

…Except in the Antipodes

New Zealand and Australia will be the major outliers in 2014. We

expect to see the RBNZ tightening in the current quarter, with

hikes from the RBA expected in Q4 2014. Although markets

already incorporate hikes to a certain extent (in New Zealand, at

least), we nonetheless look for front-end bonds to sell off with the

curve flattening in those markets. This stands in stark contrast to

the Canadian outlook, where more dovish language from the

Bank of Canada should keep the front-end well bid. Look for the

Canadian front-end to outperform through 2014.

Big Shifts Coming for Germany and the UK

This trade should also work if replacing Australia with the UK.

While the Bank of England will probably not begin tightening in

2014, we nonetheless expect to see the BoE hike before the BoC.

UK rates have moved higher in response to the string of positive

economic surprises, but we do not think that the gilt market has

fully adjusted to the improving outlook. To that end, we look for

2yr and 5yr rates to finish the year 60-70bp higher with 10yr yields

rising by more than 80bp.

At first glance, our yield profile for the UK looks broadly similar toCanada, the US, and Germany. Policy rates will be unchanged

but yields will be higher across the curve, with 2s10s steepening.

That said, with the BoE expected to hike in early-2015 the

increase in yields will likely be larger in the UK than in North

America. German fixed income should also stand out as a notable

laggard. Bund-Treasury spreads are currently at multi-year wides,

and we think markets have priced in too much bad news.

We look for 10s to be the weakest performers on the curve in the

UK, which is also the case in Canada. However, in the US we

have seen 5s10s flatten considerably following the taperingdecision, and as the US unwinds its asset purchase program we

expect to see 5s10s flatten further on the Treasury curve. We like

playing 5s10s steepeners in the UK versus flatteners in the US.


Expected Change in 10yr Yields in 2014

Recommendation: Buy CAN F17s versus ACGB F17s.

Entry: -161bp

Target: -210bp

Carry/Roll: 0bp/month

Stop: -140bp

Recommendation: US-UK Box Trade: US 5s10s Flattener(1.375% July 18s versus 2.5% Aug 23s) versus UK 5s10sSteepener (1Q18s versus 2Q23s).

Entry: -21bp

Target: 5bp

Carry/Roll: -1.0bp/monthStop: -29bp

0

25

50

75

100

Australia NZ Canada US Germany UK Norway

B a s i s P o i n t s



11



Continue to Brace for High Volatility

With the UST 10yr yield expected to nudge to 3.35% by the end

of 2014 from just around 3.00% now, we expect most of the US

rates adjustment to be behind us, but EMs should continue to be

skewed toward weakness. Recent adjustments have been lessabrupt than the May-August 2013 move, especially given the

limited reaction to the Fed’s December 18 decision to begin

tapering. But with a 100bp rise since May, 10yr rates may still

have a long way to go before stabilizing, or be prone to overshoot

as US data improves and Fed Treasury buying dissipates. Market

expectations, therefore, remain crucial and will continue to adjust

in line with the guidance provided by the Fed and the US

macroeconomic picture.

In this process, velocity remains as crucial as levels and shape of

the curve. If the upside adjustment is orderly, we will see orderly

EM moves driven by idiosyncratic EM factors. Potentially even

gains on selective assets. But sharp UST adjustments will likely

lead to synchronized EM selloffs.

Accordingly, we continue to hold onto our view that the

consequences of tapering (the upside adjustment in the long-end

of the UST curve, in particular) remains negative for emerging

markets.

Positive correlations across EM assets

Some investors believe that 2014 will be a year of shifting asset

allocations out of EMs. Those who believe that the fixed income

space may continue to suffer the consequences of rising UST

yields may also be tempted to believe that EM equities will take

advantage. This is usually true for DMs, where equity and rate

performances typically exhibit a negative correlation. In the EM

universe, however, correlations tend to be positive for longer

periods of time. Thus, more often than not, what tends to be

negative for rates and bonds, turns out being negative for equities

and FX, as well.

This conclusion is not definitive. Nor does it apply to an

undetermined time horizon. In particular, it does not factor in the

structural change in the way markets treat EMs. The main caveat

is still that the market is likely to react and adjust to two primary

DM factors: UST rates and EUR/USD. When the adjustment is

complete, we can consider the conditions to be in place for EM

assets to rally again. Yet, with USTs grinding higher and the dollar

possibly regaining strength, there is little hope that EM rates and

FX can escape the correction. This will not be undifferentiated,

though, as different curves have had extremely varied

performances last year. Likewise, EMFX is a mixed bag of

weakness and strength. Some is fundamentally justified, other is

not. And again, a few central banks tightened monetary policy to

respond to market volatility and elevated inflation. These Banks

have an advantage as they will not be forced into further rate

tightening to the same extent as those who are behind the curve.

There is still value in select EMs

We reiterate our main message. In the absence of substantial

moves in US Treasury rates, the underlying bias for EM curves is

mostly favourable. In countries such as Brazil and Indonesia,

where the immediate tightening cycle is almost complete, double-

digit rates are an attractive proposition. In India there is some

upside risk due to inflation. We think a currency selloff there would

increase the chances of monetary tightening going forward. But

on balance, Indian rates are attractive vis-à-vis other curves.

These three markets may stage positive performances during the

course of 2014 relative to other EMs. In particular, their currencies

already exhibit attractive carry trades that make short positions

expensive to hold for long. Further upside moves in the forwards

would add even more to their attractiveness.

Black swans

In Turkey, rates continue to grind higher as external conditions

have melded into a domestic political crisis, the outcome of whichis unpredictable. Despite the adjustment that has already taken

place, rates remain too low to withstand the double impact of

external and domestic pressures. The Turkish situation is the one

EMERGING MARKETS


EM Asset Classes Show Positive Correlation

Recommendation: Long an equally-weighted basket ofthree rebased (Jan-2010=100) crosses (BRL/CLP, INR/PLNand IDR/KRW)

Entry: 75.0

Target: 79.4

Stop: 73.4

Risk/reward: 2.75

-1.0

-0.5

0.0

0.5

1.0

01/04 01/06 01/08 01/10 01/12 01/14

C o r r e l a t i o n C o e f f i c i e n t

Recession

EMFX vs. GBI

MSCI vs. GBI

UST 10yr vs. GBI



12



case where assets would exhibit poor returns in any market

environment. This perfect storm requires rates to move higher

before they can reach a new equilibrium. We have long sustainedthat this can be reached with average CBRT funding cost

somewhere between 9% and 10%, which implies that the

overnight lending rate should be raised to that region as well. The

most recent developments and the CBRT’s inertia have likely

lifted this threshold into the double digits, adding upside risk to

USD/TRY.

The rand also continues to be a major vent of market pessimism

over investors’ concerns on further potential downgrades and

macroeconomic imbalances.

Trade a basket of select EM crosses

In conclusion, UST rates and EUR/USD are not the only drivers of

EM asset performance, but they represent the strongest catalysts

when moves are sharp and unexpected. Capital flows to EMs are

likely to stabilize after the initial outflow, but with a $73B withdrawn

by investors in May-September 2013 (IIF data), we suspect there

could be more in store in the first half of 2014.

Many EMs allowed credit to expand sizeably through the

extended subpar DM growth in recent years and will now need

more time to absorb the realities of lower for longer external

demand.

For these reasons, we continue to pursue a relative value strategy

among EM currencies. Based on the macroeconomic backdrop,

valuations and likelihood of intervention from local authorities, we

like being long a basket of BRL/CLP, INR/PLN and IDR/KRW,

equally weighted and rebased (Jan-2010 = 100). At the time of

writing, however, the technical picture still looks unfavourable, and

there is nothing immediate suggesting an upside break from the

downtrend. Therefore, to enter the trade, we wait for the basket to

test support at 75.0. We target 79.4 and place a stop loss at 73.4,

implying a risk/reward ratio of 2.75.


Wait for Favorable Technicals to Long EMFX Basket

70

75

80

85

90

95

100

105

110

115

2010 2011 2012 2013 2014

EMFX long-short basket

SMAVG (50)

SMAVG (200)

0.0%(110.5970)

23.6%(104.7779)

38.2%(101.1780)

50.0%(98.2684)

61.8%(95.3589)

76.4%(91.7589)

100.0%(85.9398)

123.6%(80.1207)

138.2%(76.5208)

150.0%(73.6112)



13



Fundamentals Back in Driver’s Seat

At first glance, the recent macroeconomic trends suggest that

taking indiscriminate broad long positions in base metals, PGMs

and oil going into 2014 is a great idea, with the same signals

suggesting that positioning short in gold and silver should also be

a money maker. But this is unlikely to be the case as markets

become less correlated in the aftermath of the Fed’s decision to

taper its QE asset purchasing program. Investors will need to be

very mindful of the physical fundamentals at different times of the

year, in order to make the right commodity market calls in the next

twelve months.

In sharp contrast to the dominant commodity market dynamics

found in 2013, where changing timelines surrounding the Fed’s

QE taper determined the direction of the entire base metals,

energy and precious metals complexes, the commodity market

movements in the coming year should increasingly be driven by

supply/demand fundamentals.

Supply constraints, likely deficits and rising industrial demand in

China, (which may include more intensive use of galvanization in

the nation’s automotive sector), recovering auto sector in Europe

and increasingly but more modestly in the western world make

zinc, platinum, palladium and lead our favorite metals through2015. While copper is expected to be above the current levels in

early-2014 following the recent rally, we do see downside risk in

the latter part of 2014 if supply starts outpacing demand as

projected. In sharp contrast and despite an improved demand

environment, large inventories and projected surpluses for the

next two years prompt us not to get overly enthusiastic about

entering long aluminum and nickel positions.

Notwithstanding a steadily improving global consumption profile

this year, the price of oil is not expected to show a lot of strength

due to a sharp rise in US production, more crude availability fromIran and Iraq and less geopolitical risk in the Middle East.

Meanwhile, gold and silver are likely to still suffer in the first part of

2014, but could start to bounce from the lows, despite rising

Treasury yields, amid strong Asian demand and potential inflation

concerns later in the year.

China, US and Even Europe Fueling Metal andEnergy Consumption Next Year

Base metals have very badly underperformed other risk assets

like US and global equities last year, but this year looks set to

place base metals in a better light. With the very robust

performance of the copper market in the final days of 2013 and in

the first hours of the New Year, and a rebound in most LME

metals, we are off to a good start.

Our relative optimism is driven by signs that the Chinese, US, and

some emerging market economies are picking up, with

construction and auto sectors posting very respectable growth

statistics. After three years of being a negative influence on

demand for metals like copper, even Europe looks set to add to

global consumption in the coming year, which should help propel

average base metals demand some 5.5% y/y.

On the supply side, a poor base metals price environment, trouble

on the labor front in Chile and South Africa, the dismal state of

equity valuations for virtually all miners, and the resulting cost

cutting maneuvers, which typically include high-grading, should

see production levels disappoint. Mining firms are preserving

capital, cutting costs, excavating higher grades and find it difficult

to secure necessary capital to develop new and expand

brownfield projects. This likely mean less metal availability than

many expect, which adds to market tightness generated by

stronger demand.

Given the expected relatively better demand environment and the

likely disappointments on the production side of the global supply-

demand base metals equation, TD Securities expects prices to be

higher from current levels in 2013. But, not all metals are created

COMMODITIES

Sources: TD Securities, Wood Mac

China Biggest Incremental Consumer

Recommendation: Long Zinc

Entry: $2,030/tonne

Target: $2,400/tonneStop: $1,863/tonne

Recommendation: Long Lead

Entry: $2,139/tonne

Target: $2,380/tonne

Stop: $2,057/tonne

Recommendation: Long Palladium

Entry: $736.80/oz

Target: $930/oz

Stop: $692/oz

36%

38%

40%

42%

44%

46%

48%

50%

0%

25%

50%

75%

100%

125%

150%

175%

200%

225%

Aluminum Copper Nickel Zinc Lead

2008-2012 China Demand Growth, % of Total

2012 China Demand, % of Total (rhs)



14



equal and will have differing performances throughout the year—

supply/demand fundamentals the differentiator.

Low benchmark policy rates for longer could boost base metalsdemand and limit dollar upside, which is price positive for metals.

Besides the obvious demand support, low short term rates for

longer should help base metals forward bets and various carry

trades to stay viable as funding costs on the short end of the

deferred price curve are unlikely to go up sharply.

Downside Risks Abound for Oil

After taking a backseat to demand-side dynamics in recent years,

oil markets are once again going to see price action dominated by

supply-side dynamics in 2014. This, in our view, presents

significant downside risks to the oil market given that supply

growth is expected to outpace demand growth over the next 12

months, adding to the pre-existing surplus supply conditions. For

2014, we are forecasting global oil demand growth of 1.2MMbbls/

day and non-OPEC supply growth to come in at 1.5MMbbls/day.

With non-OPEC supply growth more than covering the expected

growth in demand, something will have to give, and that will come

in the form of a decrease in the call-on OPEC supply.

Timing is everything, and a reduction in the call-on OPEC couldn’t

come at a worse time with output from such OPEC producers as

Iran, Iraq and Libya expected to increase in 2014. We are already

seeing evidence of increasing competition amongst OPEC

producers, with discounts being offered to East of Suez buyers in

order to gain market share. In this environment refineries and

consumers should benefit with potentially lower feedstock costs

for refiners and better pricing at the pump for consumers.

Ongoing surplus conditions should weigh on the oil complex in

2014, with Brent feeling more of the downside pressure as

returning OPEC supply fights for market share in a market already

well supplied. While the downside risks look to be dominant, we

are not forecasting an oil price collapse, as many supply-side

dynamics stand in the way of a rout. A relatively high marginal

cost of production and geopolitical risk are two supply-side factors

that should protect against a significant move lower.

Nevertheless, we expect WTI and Brent to average $3/bbl and $6/

bbl lower, respectively, this year versus last year.

Conversely, recent strength in natgas is likely to have a ripple

effect on prices in 2014, generating better netbacks as the

fundamental balance tightens. Despite near-record high US

domestic production, the recent weather-driven demand has

caused gas-in-storage to decline rapidly, which will have a lasting

impact if demand continues to stay elevated. With so much focus

on oil production growth in North America, investment into gas

has waned, making it more difficult for the supply-side to respond

to the tightening balance. While we are not expecting a significant

jump higher, we do see NYMEX natgas averaging $4/MMBtu in

2014 versus $3.73/MMBtu in 2013.

Zero-Rate Policy to Serve as Partial Gold Offset toQE

Now that the FOMC has started to taper its QE asset purchasingprogram and at the same time it will keep short term rates low for

longer, we feel increasingly comfortable to say that the

environment for gold is likely to get worse before it gets better.

However, since much of the QE Taper impact has been already

priced in, only a modest additional decline is expected as long-

dated Treasury yields migrate higher. Higher real yields along with

strong US equity markets and a firm US dollar should continue to

increase the opportunity cost of holding zero-yielding assets such

as gold. This will likely continue to prompt investors to reduce their

gold ETF holdings in the early part of the year. With coin and

bullion demand also moderating, the positive impact of strongChinese physical demand is likely to be offset.

However, once the spec and physical investment market stabilize

in the aftermath of the end to the Fed’s asset purchase program,

the outlook for the yellow metal should improve in the latter half of

2014. Under the market’s consideration of the Fed’s near-zero

policy rates for longer (possibly stretching well into 2016), gold

should move slowly higher amid strong Asian demand, and

renewed investment demand in reaction to higher price

expectations—we expect core inflation to increase along with the

US economic recovery. The US Fed is likely to keep rates lower

even as headline inflation moves higher and the economy firms,

which is likely to keep real yields subdued, giving a boost to

investment demand.

Sources: TD Securities, IEA

Less Reliance on OPEC Thanks to Non-OPEC Growth

Recommendation: Short Brent/Long WTI (Dec 2014)

Entry: $14.65/bbl

Target: $7/bblStop: $20/bbl

-3.0

-2.0

-1.0

0.0

1.0

2.0

3.0

2002 2004 2006 2008 2010 2012 2014

Y / Y C h a n g e ( M M b b l s / d a y )

Non-OPEC Supply

Call-On OPEC



15



2014—Policy Divergence Drives FX

As was the case in 2013, we feel the long-term secular bear trend

in the USD is looking long in the tooth. Now, however, the

reversal process is starting to look more obvious. Fundamental

support for a stronger USD should become even more evident as

we progress through the coming year. Positive US growth

momentum, improving structural imbalances, the Fed’s first steps

away from extreme policy accommodation and rising long-term

yields augur positively for the USD overall in 2014.

Buy USDJPY

Central banks are in motion again and 2014 should see some

more obvious policy divergences open up within the G10 FX

space, driving movement in the majors. Fed tapering and rising

longer-term yields in the US are a core expectation for 2014.

In contrast, we expect BoJ policy settings to remain loose or even

loosen further. The Japanese government’s reflation efforts have

met some successes but headwinds remain and theimplementation of the proposed sales tax hike in April might

represent a stumbling block for the economy, requiring more

assistance via balance sheet expansion from the central bank.

Based on TD forecasts for US 10yr yields and consensus

expectations for 10yr JGB yields, the nominal spread will widen

an additional 25bp from current levels (225bp) through early-

2015. Negative, real long-term yields in Japan (-0.50% for 10yr

notes) as a consequence of the pick up in domestic inflation leave

US long-term yields looking more attractive in real terms (+1.80%

for 10yr Treasury notes).

The spread outlook makes our end-2014 forecast for USD/JPY of

110 look very reasonable. A simple regression model of the

exchange rate versus 10yr US-Japan spreads (utilizing the above

-mentioned forecasts and expectations) suggests a year-end

2014 spot rate of 107 (with a 10 yen standard deviation band

around that point). The model has an R2 of 0.68 using data since

2012.

The short JPY trade already looks well-populated, however, so

there is some risk in jumping in at this point. The latest snapshot

of positioning from the IMM CFTC data suggests that speculativeaccounts are already aggressively short JPY, leaving the JPY

vulnerable to a squeeze in the event of an adverse shock which

drives investors back to safe havens. Given that developed

market fundamentals are improving and financial risks are

reduced, tail risks look significantly skinnier now than last year.

Reflation and the potential for more BoJ stimulus should be

supportive for Japanese equities and the consensus call for a

(roughly) 10% rise in the Nikkei 225 this year (after a banner 56%

gain in 2013) should add additional support to the USD/JPY rally.

Any setback for USD/JPY in early-2014 should be temporary and

provide better USD buying opportunities, we feel.

Technically, we think the USD/JPY bull trend has a lot of positive

momentum behind it. November’s close above the JPY100 level

was a bullish medium/long-term signal and suggests that the main

directional risk is geared to the upside over the coming year.

That will not prevent a correction in the short-term, if there is any

sort of squeeze on short JPY positions but it should mean that

USD weakness is limited in scale and short-lived.

USD/JPY spent much of the second-half of 2013 consolidating

the 77/103 rally seen from late 2012 onwards. The breakout from

the neat consolidation triangle that followed the initial rally impliesthat the market is poised for a repeat of the 26 big figure rally from

the breakout point just above 99, putting 125 on the radar within

the next 12 months.

The rally in spot through the latter part of 2013 has put USD/JPY

well on the way to our 2014 target already, and to some extent,

the market has already discounted some of the spread widening

that we expect to support the USD in the months ahead. Still,

technical factors suggest that if there is a risk to the forecast, it lies

to the upside, especially considering the bullish alignment of

medium-term signals. Our formal end-2014 target is currently 110but we think an overshoot into the mid-teens could be seen this

year. Given positioning and the gains in the USD seen already,

we prefer to get long via a USD call spread.

FOREIGN EXCHANGE


Wider Spread to Underpin USD/JPY Rise

Recommendation: Long USD/JPY via options

Entry: Buy a 9m JPY110-115 USD Call Spread

Premium: 0.9% of USD notional



16



Buy USD/CAD

Rising US yields and the BoC’s moderating policy outlook helped

push the CAD to its lowest level versus the USD since 2008 in the

past few months. We think the trend toward a broadly softer CAD

will extend into 2014.

The Canadian economy remains in relatively slow growth mode,

helping keep inflation pinned back against the lower end of the

BoC’s comfort zone. This has ensured that any potential policytightening in Canada has been pushed even further into the

future, effectively putting the BoC policy outlook in neutral.

Moreover, if inflation continues to moderate, there is a real risk

that the BoC adopts an outright easing bias, possibly driving the

CAD lower more quickly than we are currently forecasting. The

BoC remains, after all, an inflation-targeting central bank and,

under Governor Poloz, the primacy of the inflation objective over

other considerations (such as household leverage) has been

made very clear.

The biggest risk to our bearish CAD view probably lies here. The

CAD has priced in a neutral-leaning BoC but soft or softer inflation

data is needed to help sustain the bear track through 2014. If, on

the other hand, Canadian inflation data picks up in early 2014 the

accumulation of CAD shorts already in place will be squeezed.

A low growth/low inflation macro-economic backdrop and the

contrasting monetary policy directions at the BoC and Fed are

sufficient enough reasons to be somewhat cautious on the

outlook for the CAD. But there are other issues at play which

suggest a lower CAD is warranted.

Canada certainly remains an attractive investment destination as

an AAA sovereign credit. But central bank reserve accumulation

has slowed and, as the US economy reflects some of the best

structural fundamentals in a number of years and the Fed starts

the slow process of normalizing monetary policy, diversification

flows away from US Treasuries may decline.

That could accentuate the evident trend towards weaker foreign

investment inflows into Canadian assets—which became more

pronounced in 2013 as developing market central bank reserve

accumulation slowed—leaving Canada struggling just a little more

obviously to fund what will remain a fairly significant current

account deficit in 2014 (around 3%/GDP for the year, we expect).

Canada’s trade position remains relatively weak and while a

rebound in US growth may help the Canadian export sector, it is

clear that a loss of competiveness will make it hard for Canadian

exports to regain lost ground in the global trade space quickly. A

somewhat weaker currency will help boost exports and facilitate

the long-anticipated rotation away from domestic consumption as

a source of support for growth.

Fed tapering will tighten global USD liquidity, boosting the USD,

and may prompt some headwinds for commodity prices as QE

liquidity, which has spilled over into other assets, becomes less

abundant. Increasing supply (US and Middle East) plus reducedgeopolitical risks suggest that our forecast of slight declines for

WTI in 2014 are perhaps conservative. Lower crude (and

commodity prices overall) will be a further drag on the CAD via a

further weakening in Canada’s terms of trade.

From a positioning perspective, the markets have embraced the

short CAD trade already so the risk of a shakeout is high. We

think near-term corrections will be limited, however, and look to

buy into modest USD weakness.

Bullish medium and long-term trend momentum and USD-positive

seasonal factors through Q1 of the calendar year suggest that thescope for USD/CAD weakness should remain limited in the next

few weeks at least. We target a rise to 1.11 by the end of the year

formally but think the risk of an overshoot is high.

Our bullish USD/bearish JPY and CAD are not exactly off

consensus—though there is hardly a universally bullish view on

the outlook for the USD either. Still, we are not uncomfortable to

be running with a sizeable pack on our core views as momentum

counted for a lot last year (neither USD/CAD nor USD/JPY traded

below their January 2013 lows over the rest of the year) and will

count for a lot in 2014 again. If our bullish USD/JPY and bullishUSD/CAD views are correct, an alternative, all-embracing

strategy would be to short CAD/JPY vol.


Inflation Flirts With Lower End of BoC Band

Recommendation: Buy USD/CAD

Entry: 1.0725

Target: 1.13

Stop: 1.05



17



REGIONAL RISKS

● A false start in the US would undermine the forecastedrecovery in Canadian exports and put more pressure ondomestic demand. Weaker commodity prices would alsoweigh on business investment. Taken together, aprolonged period of below-trend growth would cause theoutput gap to widen further and keep prevent coreinflation from carving out a trough and returning totarget. With scope to use conventional monetary policy,the Bank of Canada may feel compelled to cut itsovernight rate to support therecovery and preventinflation expectations fromfalling.

● A stronger-than anticipatedrebound in global growthpushes bond yields markedlyhigher, imperiling domesticdemand. Weakness in thehousing market and relatedspending would act as anoffset to export growth andchoke the recovery.

● The Chinese Third Plenum detailed the push for ruralhousehold formation, via construction and creatingwealth, as well as allowing the ‘markets’ to set pricesand better allocate resources. Unfortunately there wasscant detail on how the SOE sector will be exposed tosuch competition and the only timeline offered to ‘judge’how effective the reforms will be was 2020, and financial

markets tend to be impatient.

● Our longstanding tail riskevent continues to simmer inthe background, withairspace issues over thedisputed islands the latestdevelopment. The PBoC hasrecently stabilised both thecurrency and interest rates,likely as the policy planswere revealed.

● The largest risk to theregion will come from theUS. The Eurozone lacks astrong domestic growthengine while the UKrecovery must eventuallyrely on some foreign

demand. Another weak yearfor US growth would openrisks to substantial ECBeasing and remove nascentBoE tightening risks. On theother side, stronger growth in the US would improve theEZ recovery which would support EM manufacturing.

● The largest risk from within the region is the Eurozonebecoming stuck in a deflationary trap. It is too soon totrade this risk, but 2014 reform progress will be key forprospects in 2015.

● European politics will also continue to add potential

volatility. The European Parliamentary elections on May22 will provide a stage for Eurosceptics while local UKelections on the same date and Scottish independencevote on September 18 may add caution to marketsentiment heading into the 2015 general election.

● Tapering is on, but marketexpectations may continue toshift hawkishly on strong USdata. If US Treasury yields

continue to climb as a result,EMs will hardly escape anadjustment in rates. Thecorrection is likely to occur inthe equity and FX space, as

well. The corporate sector has allowed credit to expandsizeably during the years of declining interest rates.Thus, rising yields mean higher borrowing costs for theprivate and public sector, and lower GDP growth.

● Against the prospects of prolonged subpar growth,rising yields and underperforming equities, globalinvestors may reduce exposure to EM assets and investin the recovering DMs. Outflows due to repatriation or

reallocation of capital can keep the bearish EMFX biasalive for an extended period of time.

Economic growth momentum is about to shiftdecisively higher this year, with annual GDP growthaveraging around 3.0%, up from 2.0% in 2013. Thetransition to a more sustained recovery will besupported by strong private sector fundamentals,waning fiscal drag and uncertainty, and a moresupportive global environment. Notwithstanding thisencouraging outlook, with the inflationary backdropremaining benign, monetary policy is expected toremain ultra-accommodative as the Fed continues to

manage the upward adjustment in yields. The keyrisks to this outlook are as follow:

● A faster wind-down in QE3 purchases this year notoffset by more qualitative easing could unnerve themarkets and result in a disorderly backup in rates.This outcome could put a brake on the housingmarket recovery—which has been a key driver forthe rebound in consumer spending activity.

● GDP growth will initially be flattered higher by thereduction in fiscal drag. However, for the higher levelof growth to be sustained, private sector spendingmust also shift higher. An uptick in capital investmentwill be especially important, and an absence of apickup in business investment could temper growthmomentum.

CANADA ASIA-PACIFIC

EMS EUROPE

UNITED STATES



18



FORECASTS

GDP 2014 2015 Q1 F Q2 F Q3 F Q4 F Q1 F Q2 F Q3 F Q4 F

US 2.8 3.1 2.7 2.9 3.2 3.0 3.1 3.4 3.2 3.1

Japan 1.7 1.6 1.2 0.8 0.8 0.6 1.2 1.2 1.2 1.1

Euro-zone 1.0 1.3 1.0 1.0 1.2 1.2 1.3 1.3 1.3 1.3

Germany 1.6 1.5 1.4 1.4 1.5 1.5 1.5 1.5 1.5 1.4

France 0.8 1.1 0.9 0.9 0.9 0.9 1.2 1.1 1.1 1.2

Italy 0.5 0.8 0.7 0.7 0.7 0.8 0.8 0.9 0.9 0.9

UK 2.6 2.3 2.6 2.5 1.9 1.8 2.6 2.5 2.2 2.2

Canada 2.3 2.4 2.1 2.4 2.5 2.4 2.3 2.4 2.5 2.4

China 7.4 7.1 7.0 6.8 6.6 7.1 7.3 7.2 7.2 7.2

Inflation 2014 2015 Q1 F Q2 F Q3 F Q4 F Q1 F Q2 F Q3 F Q4 F

US 1.7 2.3 1.2 1.8 1.7 2.1 2.3 2.3 2.3 2.4

Japan 1.3 1.4 1.5 1.5 1.1 1.1 1.2 1.4 1.5 1.6

Euro-zone 1.2 1.3 1.2 1.0 1.3 1.3 1.4 1.3 1.3 1.3

Germany 1.7 1.8 1.8 1.7 1.6 1.7 1.8 1.8 1.8 1.9

France 1.7 1.6 1.6 1.9 1.7 1.5 1.6 1.6 1.7 1.7

Italy 1.3 1.7 0.8 1.3 1.3 1.8 1.8 1.8 1.7 1.5

UK 2.1 2.2 2.0 2.1 2.0 2.3 2.0 2.1 2.3 2.4

Canada 1.6 2.2 1.4 1.6 1.7 1.9 2.0 2.1 2.2 2.3

China 3.2 3.2 3.2 3.2 3.2 3.3 3.2 3.2 3.2 3.2

* GDP fi ures are ann rates. Inflation fi ures are headline rates.

Annual Average 2014 2015

Spot

Jan 9, 2014 Q1 F Q2 F Q3 F Q4 F Q1 F Q2 F Q3 F Q4 F

Gold * 1230 1195 1125 1150 1225 1250 1275 1300 1300

Silver * 19.62 19.00 17.25 17.50 18.90 19.50 19.50 20.00 20.25

Platinum * 1420 1600 1600 1650 1675 1725 1750 1775 1750

Palladium * 738 800 800 825 850 825 850 825 825

Copper ** 3.34 3.36 3.26 3.20 3.10 3.00 3.00 2.80 2.80

Zinc ** 0.92 0.98 1.02 1.03 1.04 1.08 1.10 1.16 1.16

Lead ** 0.96 1.02 1.04 1.06 1.08 1.10 1.12 1.12 1.16

Nickel ** 6.11 6.95 7.75 7.50 7.50 7.75 7.75 7.25 7.25 Aluminum ** 0.78 0.84 0.85 0.84 0.84 0.84 0.82 0.82 0.80

Molybdenum + 9.80 10.00 11.00 11.00 12.00 13.00 13.00 14.00 14.00

Iron Ore *+ 135 138 132 130 130 125 120 115 110

Nymex Crude Oil +- 93 95 93 97 95 98 95 102 98

Brent Crude Oil +- 108 103 100 105 102 105 103 108 105

Heating Oil -+ 2.97 2.90 2.75 2.80 2.90 3.05 2.95 2.80 2.95

Gasoline -+ 2.68 2.85 2.75 2.65 2.60 2.70 3.15 2.95 2.75

Natural Gas -- 4.17 4.05 4.00 3.75 3.95 3.85 4.20 4.00 4.10

AECO Natural Gas -- 3.69 3.60 3.40 3.25 3.30 3.05 3.60 3.40 3.50

Uranium ++ 35 36 38 38 38 40 42 44 48

Hard Coking Coal Spot +* … 170 170 175 175 175 175 170 170Newcastle Thermal Coal- 84 90 90 85 85 85 85 85 85

Note: *London PM Fix $/oz., **LME $/lb., +Molybdenum equivalent to moly oxide, FOB USA,

*+CFR China, 62% Fe, dry $/tonnes, +- $/bb l, -+ $/gal., -- $/mmb tu, ++pre-2011 Uranium price is Ux Consulting spot price

indicator post 2011 is NYMEX, +* Japan-Australia Spot, $/tonne FOB, -Japan CIF steam coal marker -Newcastle, $/tonne

E n e r g y

SUMMARY COMMODITIES FORECASTS

P r e c i o u s

m e t a l s

O t h e r m

e t a l s

2014 2015



19



FORECASTS

Spot


Fed Funds Rate 0.25 0.25 0.25 0.25 0.25 0.25 0.25 0.25 0.50

3m 0.04 0.15 0.15 0.20 0.20 0.25 0.50 0.80 1.00

2y 0.43 0.45 0.50 0.60 0.70 0.95 1.00 1.25 1.65

5y 1.77 1.80 1.95 2.10 2.25 2.50 2.60 2.80 3.05

10y 2.99 3.00 3.10 3.25 3.35 3.60 3.65 3.70 3.75

30y 3.89 4.05 4.20 4.35 4.40 4.60 4.60 4.60 4.60

Overnight Rate 1.00 1.00 1.00 1.00 1.00 1.00 1.00 1.50 1.50

3m 0.90 0.95 0.95 0.95 0.95 0.95 1.05 1.40 1.40

2y 1.11 1.10 1.15 1.20 1.35 1.50 1.70 1.95 2.05 5y 1.90 2.00 2.05 2.15 2.25 2.50 2.60 2.75 2.90

10y 2.71 2.90 2.95 3.00 3.10 3.25 3.35 3.45 3.55

30y 3.21 3.30 3.35 3.45 3.55 3.70 3.75 3.80 3.95

Cash Target Rate 2.50 2.50 2.50 2.50 3.00 3.25 3.50 3.50 3.50

3m 2.64 2.60 2.60 2.75 3.10 3.40 3.65 3.65 3.65

3y 3.04 3.15 3.20 3.35 3.50 3.65 3.85 3.85 3.85

5y 3.55 3.50 3.60 3.75 3.90 4.05 4.20 4.20 4.20

10y 4.32 4.30 4.35 4.45 4.55 4.85 4.85 4.85 4.85

Cash Target Rate 2.50 2.75 3.00 3.25 3.50 3.75 4.00 4.00 4.00 3m 2.87 3.00 3.25 3.55 3.75 4.00 4.25 4.25 4.25

2y 3.23 3.30 3.50 3.80 4.00 4.25 4.40 4.40 4.40

5y 4.25 4.40 4.40 4.45 4.60 4.75 4.85 4.85 4.85

9y 4.74 4.80 4.85 4.95 5.05 5.25 5.25 5.25 5.25


ECB Refi Rate 0.25 0.25 0.25 0.25 0.25 0.25 0.25 0.25 0.25

3m 0.04 0.05 0.05 0.05 0.10 0.15 0.20 0.25 0.30

2y 0.22 0.30 0.35 0.50 0.65 0.70 0.80 0.90 1.00

5y 0.90 1.15 1.30 1.55 1.75 1.85 2.05 2.15 2.30 10y 1.91 2.05 2.20 2.45 2.65 2.75 2.80 2.90 2.95

30y 2.75 2.80 2.95 3.15 3.35 3.40 3.45 3.55 3.55

Bank Rate 0.50 0.50 0.50 0.50 0.50 0.75 0.75 1.00 1.00

3m 0.40 0.55 0.55 0.55 0.55 0.80 0.80 1.05 1.05

2y 0.56 0.60 0.80 0.95 1.20 1.55 1.70 2.00 2.15

5y 1.84 1.75 1.95 2.15 2.45 2.75 2.95 3.20 3.30

10y 2.98 3.00 3.30 3.70 3.85 3.95 4.00 4.15 4.20

30y 3.64 3.70 3.90 4.30 4.50 4.55 4.60 4.70 4.70

Deposit Rate 1.50 1.50 1.50 1.50 1.50 1.50 1.75 2.00 2.25 3m 1.35 1.60 1.60 1.60 1.60 1.60 1.85 2.15 2.40

3y 1.76 2.15 2.30 2.50 2.70 2.90 3.20 3.50 3.80

5y 2.26 2.50 2.80 3.10 3.35 3.55 3.80 4.00 4.20

9y 2.89 3.20 3.40 3.60 3.85 4.10 4.30 4.50 4.65

E U R O P E

G e r m a n y

U K

N o r w a y

SUMMARY G10 RATES FORECASTS

2014 2015

D O L L A R B L O C

U n i t e d S t a t e s

C a n a d

a

A u s t r a l i a

N e w

Z e a l a n d



20



FORECASTS

Spot


USD/JPY 105.0 105 107 108 110 112 112 115 115

EUR/USD 1.36 1.33 1.27 1.24 1.22 1.22 1.20 1.20 1.20

GBP/USD 1.65 1.55 1.54 1.55 1.56 1.61 1.60 1.60 1.58

USD/CHF 0.91 0.98 1.02 1.05 1.07 1.07 1.08 1.08 1.08

USD/CAD 1.09 1.07 1.08 1.09 1.11 1.12 1.12 1.13 1.13

AUD/USD 0.89 0.88 0.88 0.87 0.87 0.86 0.85 0.85 0.84

NZD/USD 0.83 0.81 0.80 0.78 0.77 0.76 0.74 0.73 0.72

EUR/NOK 8.41 8.40 8.40 8.35 8.30 8.25 8.15 8.10 8.05

EUR/SEK 8.93 8.80 8.70 8.60 8.50 8.40 8.30 8.20 8.20

DXY 81.0 84.1 87.3 89.0 90.2 90.2 91.2 91.5 91.7

SUMMARY G10 FX FORECASTS

2014 2015

Spot


Brazil 10.00 10.25 10.25 10.25 10.25 10.25 10.25 10.75 11.00

Mexico 3.50 3.50 3.50 3.50 3.75 4.00 4.25 4.75 5.00

India 7.75 8.25 8.25 8.25 8.25 8.25 8.25 8.25 8.25

Indonesia 7.50 7.75 7.75 7.75 7.75 7.75 7.75 7.75 7.75

Malaysia 3.00 3.00 3.25 3.50 3.50 3.50 3.50 3.50 3.50

Poland 2.50 2.50 2.50 2.75 3.00 3.50 3.50 4.00 4.25Hungary 3.00 2.60 2.50 2.50 2.80 3.25 3.75 4.50 5.25

Russia 5.50 5.50 5.50 5.00 5.00 5.00 5.00 5.25 5.50

Turkey 4.50 5.00 5.50 5.50 6.00 6.00 6.50 7.00 7.00

South Africa 5.00 5.00 5.00 5.50 6.00 6.00 6.00 6.50 7.00

USD/BRL 2.40 2.35 2.37 2.38 2.35 2.35 2.40 2.41 2.43

USD/MXN 13.13 13.19 13.14 13.08 12.95 12.90 12.80 12.83 12.89

USD/INR 62.08 63.30 63.60 63.20 62.50 62.00 62.00 62.30 62.60

USD/IDR 12193 11360 11365 11330 11290 11200 11200 11280 11360

USD/MYR 3.28 3.22 3.22 3.21 3.24 3.26 3.26 3.27 3.28

USD/PLN 3.08 3.12 3.26 3.33 3.36 3.36 3.40 3.42 3.44USD/HUF 220 224 236 237 232 235 240 241 243

USD/RUB 33.22 33.40 33.60 33.70 33.60 33.89 34.06 33.93 33.85

USD/TRY 2.18 2.21 2.15 2.16 2.18 2.22 2.22 2.24 2.26

USD/ZAR 10.81 10.28 10.39 10.42 10.46 10.45 10.40 10.50 10.60

EUR/BRL 3.26 3.13 3.01 2.95 2.87 2.87 2.88 2.89 2.92

EUR/MXN 17.82 17.54 16.69 16.22 15.80 15.74 15.36 15.40 15.47

EUR/INR 84.45 84.19 80.77 78.37 76.25 75.64 74.40 74.76 75.12

EUR/IDR 16587 15109 14434 14049 13774 13664 13440 13536 13632

EUR/MYR 4.46 4.28 4.09 3.98 3.95 3.98 3.91 3.92 3.94

EUR/PLN 4.18 4.15 4.14 4.13 4.10 4.10 4.08 4.10 4.13EUR/HUF 299 298 300 294 283 287 288 290 291

EUR/RUB 45.08 44.42 42.67 41.79 40.99 41.34 40.87 40.72 40.62

EUR/TRY 2.97 2.94 2.73 2.68 2.66 2.70 2.66 2.69 2.71

EUR/ZAR 14.68 13.67 13.20 12.92 12.76 12.75 12.48 12.60 12.72

E M

v s E U R

SUMMARY EMERGING MARKET FORECASTS

C a n t r a l B a n k R a t e s

E M

v s U S D

2014 2015





This report has been prepared solely for informational purposes only and is not intended to provide financial, legal, accounting or tax advice and should not be relied upon in thatregard. Information provided in this report is believed to be accurate and reliable, but we cannot guarantee it is accurate or complete or current at all times and no representation ismade in this regard. Conclusions and opinions do not guarantee any future event or performance. Neither The Toronto-Dominion Bank nor any of its subsidiaries or affiliates areliable for any errors or omissions in the information or for any loss or damage suffered. Trade-mark of The Toronto-Dominion Bank. TD Securities Inc. is a licensed user.“TD Securities” is a trade-mark of The Toronto-Dominion Bank and represents TD Securities Inc TD Securities (USA) LLC TD Securities Ltd and certain investment banking activi-

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2014 global out look

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