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Currency markets • Dagmara Fijalkowski, MBA, CFA The Currency Outlook: Key Factors EURO 1.62SAMPLE Supportive Negative Short term Short term • Reduced stress in European banking system thanks to • Increased uncertainty after elections in France and LTRO. Greece. • Italy and Spain prefunded over half of their 2012 • Foreign-exchange reserve managers have lower appetite financing needs. for European assets and no interest in peripheral-country debt. • Sentiment extremely negative, making large short positions vulnerable. • ECB may be forced to cut rates or increase its balance sheet even more. • Eurozone banks repatriating foreign assets to shore up capital. Long term • The ECB, in wait-and-see mode, has been reluctant to • LTRO took care of liquidity, not solvency. pursue further quantitative easing. • Austerity measures to suppress growth. Long term • Global rebalancing decreasing current-account surpluses. • Bunds are a safe-haven alternative. • Lack of population growth. • Eurozone fiscal picture better than in the U.S. • The ECB’s inability to tighten for a long time. • Current account roughly in balance for Eurozone. • On PPP terms, the euro remains expensive versus the U.S. dollar. • Technical indicators show well established downtrend since late 2008. 12-Month Forecast: 1.20 POUND STERLING Supportive Negative Short Term Short term • Pre-Olympics appreciation. • High vulnerability to renewed stress in global financial • Safe-haven buying interest from reserve managers after system. currency intervention by the Japanese and the Swiss. • Expectations of post-Olympics weakness. • Increase in real yields, with inflation falling since September 2011. Long term • Housing market weakness (outside London). Long Term • Persistently high inflation continues to reduce • Relatively sane politics (versus the U.S. and EMU). purchasing power of GBP versus other G10 countries. • IMF and OECD debt-to-GDP forecasts improving fiscal • Fiscal malaise (debt/GDP, fiscal deficit) similar to the outlook thanks to a meaningful head-start. U.S. • Improving current-account deficit. • Mix of tight fiscal policy and easy monetary policy. 52 I The global investment outlook <strong>RBC</strong> INVESTMENT Strategy coMMITTEE Summer 2012
Currency markets • Dagmara Fijalkowski, MBA, CFA 82SAMPLE CANADIAN DOLLAR Supportive Negative Short term Short term • BOC is concerned more about household leverage than • Positioning very long. currency strength, and is expected to hike before other • Drag from a weaker-than-expected U.S. economy. central banks. • Oil prices vulnerable due to growth slowdown, massive • Speculative inflows as commodity currencies are inventory levels, ebbing of Iran risk. benefiting from central-bank reserve diversification. Long term Long term • Extreme overvaluation on PPP basis. • Commodity-rich. • Near-record current-account deficit makes currency • Demographics positive thanks to immigration. vulnerable to slowing purchases of Canadian bonds by • Reserve-diversification inflows. foreigners. • Fiscal situation much better than peers. • Manufacturing losing out to cheaper production abroad. • Healthy banking sector. • Canadian-dollar strength is outpacing improvement in terms of trade. • Excessive household leverage. • Potential for U.S. to find other sources of energy. 12-Month Forecast: 1.04 YEN Supportive Negative Short term Short term • Safe haven during times of risk aversion. • Substantial threat of BOJ/MOF intervention. • Income surplus offsets trade deficit. • BOJ stepping up easier monetary policy by increasing • Surprisingly good economic data since January. asset purchases. • Positioning is broadly short. • Trade deficit for most of 2011 expected to continue due to higher energy imports. Long term Long term • Bond market depth makes Japan an attractive destination for reserve diversification. • Worst public debt/GDP of any major economy. • Lower inflation continues to increase purchasing power • Worst demographic profile of any major economy over of yen versus other G10 countries. the next 40 years. • Right neighbourhood: growing economic links to Asia. • BOJ will be the last central bank to hike rates. • Ultra-low global short-term rates make foreign assets attractive even on a currency-hedged basis. 12-Month Forecast: The global investment outlook <strong>RBC</strong> INVESTMENT Strategy coMMITTEE Summer 2012 I 53
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The Global Investment Outlook RBC I
Page 3 and 4: Contents Executive Summary 2 The Gl
Page 5 and 6: Executive summary • Sarah Riopell
Page 7 and 8: Recommended Asset Mix Asset mix - t
Page 9 and 10: Recommended Asset Mix Balanced Asse
Page 11 and 12: Capital markets performance • Mil
Page 13 and 14: Global Investment Outlook Eric Lasc
Page 15 and 16: Global Investment Outlook • Eric
Page 37 and 38: Global Fixed income markets • Soo
Page 45 and 46: Currency Markets Dagmara Fijalkowsk
Page 47 and 48: Currency markets • Dagmara Fijalk
Page 53: Currency markets • Dagmara Fijalk
Page 57 and 58: Regional outlook - U.S. • Ray Maw
Page 59 and 60: Regional outlook - CANADA • Stuar
Page 61 and 62: Regional outlook - Europe • Domin
Page 63 and 64: Regional outlook - Asia • Yoji Ta
Page 65 and 66: Regional outlook - emerging markets
Page 67 and 68: Eric Lascelles Chief Economist RBC
Page 69 and 70: This report has been provided by RB
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