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2015 Global Outlook
Rates, FX and Commodities Research
20 November 2014 | TD Securities
CONTENTS
Market Outlook
View From the Top
Summary of Trades
United States
Canada
Europe
Australia / New Zealand
G10 Rates
Emerging Markets
Commodities
Foreign Exchange
Regional Risks
Forecasts
Research Team
Disclaimer
2
3
4
5
7
8
9
10
11
13
15
17
18
21
22
2015 GLOBAL OUTLOOK
The global disinflationary environment is likely to last longer than expected as Chinese, EM,
and Eurozone growth remains soft and supply keeps oil prices low. This opens up a more
uncertain macro and market environment and suggests limited scope for rates to rise
globally. We have delayed our rate hike expectations for all G10 central banks outside of the
Fed and BoC. This provides a bias to be long USD and short USTs, with the only questions
being against what? We like owning NZ 3s and Canada and UK 5s versus US Treasuries.
We like being long the USD versus JPY and CAD, as well as regional opportunities to be
long AUD/NZD and MXN/COP and short EUR/GBP. But trading is likely to be a tale of two
halves as we wait for the inflationary impulses to re-emerge much later in 2015.
CORE VIEWS
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
Bias
Asset Allocation
G10 Rates
Low
inflation
keeps
policy
accommodative, but US divergence
makes carry trades more attractive.
Underweight duration
Risk Assets
Muted upside relative to 2014 with
modest improvement in global
growth, low inflation, low energy
costs, and policy accommodation.
Neutral/Overweight Equities
Foreign
Exchange
Long USD even with a crowded
consensus. But list of potential shorts
grows: near-zero funding in EUR,
JPY, and SEK and CAD, AUD, NZD
central banks wary of strength.
EM
Adjustment continues as strong credit
cycle of the last five years, especially
in China and Asia broadly, needs
time to deleverage.
Commodities
Flat oil profile with soft global growth
and excess supply while silver to
underperform gold before Fed hikes.
Volatility
Modestly higher as liquidity injections
diminish, global rates drift higher, and
Fed in play.
LONG
SHORT
USD
EUR
JPY
CAD
Underweight vs USD.
LONG
SHORT
Zn/Al, XAU/
XAG, Pt/Pd,
Brent-WTI, Ni
Mar15 natgas
Overweight
2015 Global Outlook
Rates, FX and Commodities Research
20 November 2014 | TD Securities
THE TD VIEW
Trading Bias
Macro Outlook
Rates
FX
Key Risks
US
The US economic recovery set to
outperform its G7 peers, again. Odds of a
2.5% to 3.0% growth rate are high.
Rates rise on Fed rate hikes (2). Cyclical
bear flattening takes shape, may be more
pronounced than usual.
Monetary
policy
divergence
and
asymmetric growth prospects will support
the USD versus its G10 peers in 2015.
The weakening global economic backdrop
and the fallout from the strong dollar are
two key risks to the 2015 US outlook.
Canada
Weaker commodity prices to hurt terms of
trade and investment, but offsets exist to
support growth around its trend rate.
Dovish BoC will anchor rates through H1
2015, with Canada outperforming versus
US. We like 5s and 30s on the curve.
Soft commodity prices and a lagging BoC
tightening cycle provide upside impetus for
USD/CAD.
A further and sustained drop in commodity
prices or a relapse in the US economy
would undermine growth and slow inflation.
Europe
Eurozone to disappoint, with drag coming
from core. UK to grow slightly above trend,
but EZ uncertainty pushes back hikes.
Look for belly to outperform in gilt 2s5s10s.
Buy 3yr gilts vs NGBs. Wait for better
levels to pay UK 2y2y forwards.
Even delayed BoE tightening prospects
leave the GBP at an advantage over the
EUR and JPY later in 2015.
ECB may struggle to expand balance
sheet; Riksbank has reached end of easy
easing; two-way risks for UK wage growth.
Asia-Pac
Antipodean growth and inflation has been
revised down, selloff pushed deeper into
2015.
No RBA hike priced vs TDs +50bps for
2015. TD’s forecast for 25bps RBNZ Sep
hike is 90% priced in.
AUD & NZD to lose ground vs the USD but
a free fall is unlikely. We like long
AUD/NZD, target 1.17.
Aus: non-mining investment fails to pick up;
NZ: net migration cools; China: growth
stalls.
Latam
In Brazil, low growth, high inflation and
fiscal challenges abound. In Mexico, growth
picks up into the start of the year.
BCB hiking earlier in order to hike less, but
weaker currency may force their hand.
Banxico on hold until mid-year.
Bearish BRL, but hard to trade. Expect
MXN to strengthen at the start of the year
and be top Latam performer.
Failure to deliver by Dilma could put
Brazil’s investment grade rating at risk. Fed
moving earlier than expected.
EMEA
Poland and Hungary keep growing, but
risks are to downside. Lower oil reduces
Turkey & SA inflation & Turkey CA deficit.
NBH and NBP on hold with downside risks look to pay forwards. CBRT cuts in H1 as
inflation falls - curve steepens.
Weakening bias against USD but stable to
firm vs EUR. If current status quo
maintained, some recovery in RUB.
A flare up of the conflict in Ukraine or a
Eurozone recession would be negative for
CE3 and RUB.
Asia
Best EM growth stories are in Asia. We
like India and Indonesia with strong growth
and reforming governments.
With inflation under control RBI likely to cut
in H2. BI has probably finished hiking in
response to subsidy cuts.
We like IDR and INR, particularly long
INR/KRW, long IDR/KRW and short
EUR/IDR positions.
Further China slowdown. Reforms in India
and Indonesia get stymied. Fed moving
earlier than expected.
Energy
US output gains and a steadfast OPEC
supply add to negatives from weaker
demand;
natgas
storage
tightness
moderates.
Long Brent/WTI ratio, short natgas.
OPEC cuts targets materially, China
economy strengthens or Ukraine tensions
escalate, raising Brent relative to WTI.
Precious
metal
Low inflation, global risks, subsiding USD
rally and firmer physical demand are all
modest positives for Au and Ag.
Short Au/Ag ratio, long Pt/Pd ratio.
US outlook strengthens materially, ECB
unable to take balance sheet action and/or
China deteriorates.
Other
metals
Stable but weaker China growth and end to
destocking should tighten industrial metals
market, but upside limited near-term.
Long Ni, long Zn/Al.
China industrial and construction activity
slows substantially, PBOC limits liquidity
injections, SRB does not buy.
G
1
0
E
M
C
O
M
M
O
D
I
T
Y
CENTRAL BANK MONITOR
Inflation
Emerging Markets
G10
Deviation from target* (% points)
-4
-2
0
2
4
6
Below Target
Above Target
Sweden
NZ
EZ
UK
Norway
US
Australia
Canada
Japan
China
Hungary
Poland
Indonesia
Malaysia
Mexico
S Africa
Russia
Brazil
India
Turkey
Current
Fcast for 2015
Central Bank Policy Rate
Y/Y%
As of
Next
Print
Last Mtg
Current
Next Mtg
Date
Change
%
Date
TD
-0.1
1.0
0.4
1.3
2.0
1.7
2.3
2.0
3.2
1.6
-0.4
-0.6
4.8
2.6
4.3
5.9
8.3
6.6
5.5
9.0
Oct
Sep
Oct
Oct
Oct
Oct
Oct
Sep
Sep
Oct
Oct
Oct
Oct
Sep
Oct
Oct
Oct
Oct
Oct
Oct
11 Dec
21 Jan
28 Nov
16 Dec
10 Dec
17 Dec
30 Nov
21 Nov
27 Nov
28 Oct
30 Oct
6 Nov
6 Nov
23 Oct
29 Oct
4 Nov
22 Oct
7 Oct
-25bp
+0bp
+0bp
+0bp
+0bp
+0bp
+0bp
+0bp
+0bp
11 Dec
15 Dec
30 Nov
21 Nov
9 Dec
10 Dec
4 Dec
5 Dec
12 Dec
3 Dec
28 Oct
5 Nov
18 Nov
6 Nov
31 Oct
20 Nov
31 Oct
29 Oct
30 Sep
20 Nov
+0bp
+0bp
+25bp
+0bp
+0bp
+0bp
+150bp
+25bp
+0bp
+0bp
12m Fcast (bps∆ from spot)
Mkt
TD
-100 0
0.00
3.50
0.05
0.50
1.50
0.25
2.50
1.00
0.10
16 Dec
11 Dec
4 Dec
4 Dec
11 Dec
19 Dec
1 Dec
3 Dec
19 Dec
+0
+0
+0
+0
+0
+0
+0
+0
+0
2.10
2.00
7.75
3.25
3.00
5.75
9.50
11.25
8.00
8.25
25 Nov
3 Dec
11 Dec
28 Jan
5 Dec
29 Jan
11 Dec
3 Dec
2 Dec
24 Dec
+0
+0
+0
+0
+0
+0
+0
+25
+0
+0
100 200
+0
+19
-6
+13
-30
+26
-8
+8
-4
+0
+25
+0
+0
+0
+25
+50
+25
+0
-12
+65
-19
+0
-91
+0
+7
+50
+16
+50
+44 +100
n.a.
-50
+177 +125
-7
-25
n.a.
+50
2015 Global Outlook
Rates, FX and Commodities Research
20 November 2014 | TD Securities
VIEW FROM THE TOP
Is Disinflation Good or Bad?
It is the nature of consensus to always be wrong. But the power of
the herd is that it tends to be less wrong over longer periods of
time than the savants and the psychics. There is a grain of truth to
the current debate over secular stagnation, the idea that the
global economy is incapable of sustaining strong growth without
exceptionally low interest rates. This is reflected in a secular
decline in the velocity of money, a predicament that most G10
countries share. The irony is that the fear of secular stagnation is
not new, it was first proposed in 1939 as an explanation for why
the Great Depression would never end. It ended shortly thereafter
- owing in large part to WWII. Will the theory's resurrection prove
equally untimely this time around on more peaceful grounds?
What is more certain is that global growth prospects remain well
below the pre-crisis pace. The decline in energy costs provides a
fillip to aggregate demand and growth should accelerate
modestly, but lingering growth concerns persist. Chinese growth
will continue to slow and as financial repression there comes to an
end, it is questionable whether the RMB can chase the USD
higher. Japanese economic momentum is also faltering, and
Eurozone growth prospects remain uneven. All three economic
blocs are in a multi year transition of needed structural
adjustments that are progressing slowly and unevenly. Many
Eurozone economies replaced adjustment with carry trades.
Those economies that did deliver reforms - Spain, Ireland, and
even Greece - are seeing significant accelerations in growth. On
balance, too little has been delivered. The same may be said of
EM’s. Too many needed structural reforms have been postponed
by rolling over debt at generationally low interest rates, and in
dollars and FX to boot. Together, this reinforces a need for
globally low interest rates and raises the odds that we are in a
period of heightened risk for EM crises and debt restructurings.
We believe the outlook for markets in 2015 will be defined by the
outlook for emerging markets, the Eurozone, and oil prices. The
first two we expect to continue to be weak, while the last is in part
falling on the back of softer global demand, but also as a result of
rising global supply. All three of these reinforce a story of lower for
longer global inflationary pressures, a consensus view we agree
with. All three of these reinforce the risk of central banks
remaining lower for longer, a position which may have further
room to run, at least over the near term.
We now see the RBA, RBNZ, and BoC not hiking until 2015H2
and do not expect the BoE, Riksbank, or Norges Bank to hike at
all in 2015. Among the key easers, the BoJ has already
announced a significant increase of QQE. We expect the ECB will
announce new easing measures early in 2015 to include tweaks
to the TLTROs, and at least one additional asset purchase
program. We believe ETF buying is discounted too much by the
Sources: Macrobond, TD Securities
market, that sovereign bond buying is not discounted enough, and
that corporate bond buying is just a drop in the illiquid bucket.
The US looks the most resilient. The net export drag will be larger
than expected but the boost to consumer spending from lower
gasoline prices and low interest rates suggest the odds of growth
shifting up into the 2.5% to 3.0% range remain high. It is why the
Fed is the one central bank still on track for tightening in 2015, by
as much as 50bps beginning in September. This leaves us with a
trading environment in which we must go with the consensus
trade to be long USD and short US Treasuries against most other
markets. Long USD has a crowded speculative position.
Nevertheless, it will be supported by a rotation out of lower
yielding foreign assets, a trend already taking shape.
This dynamic is a reason we think the scope for higher global
rates next year is significantly muted - there is ongoing adjustment
in some part of the world and ongoing desire to establish carry
trades. The funding currencies are clear - EUR, JPY, and SEK the conglomerate of central banks fighting the risk of deflation with
ZIRP, NIRP, and asset purchases. For those looking for the next
5% move in FX, we would highlight long USD/CAD, USD/JPY
and AUD/NZD. If oil prices continue to decline, long EUR/NOK
and USD/NOK look appealing while sterling may be the most at
risk of a topsy-turvy trading environment in 2015.
The latter is the cautionary tale to remember. Not too long ago,
the market priced in a BoE hike into November 2014. We now
see the BoE holding off tightening until February 2016. If there is a
risk to the consensus trades for 2016, it would be that we have all
been duped once again only to be bushwhacked by wage growth.
Wage growth matters more than commodity-driven vagaries in
headline inflation. We expect it to come through in the US. We are
less certain in the UK, but if it did the BoE would look through
exceptionally low headline inflation. Keep your eyes on the prize
and remember consensus was made to be broken.
3
2015 Global Outlook
Rates, FX and Commodities Research
20 November 2014 | TD Securities
SUMMARY OF TRADE RECOMMENDATIONS
United States
● 1s3s flatteners and short 5s10s30s fly: The flattening theme remains en vogue as the market prices a high probability of a Fed hike in 2015. However,
with the hurdle rate to break even on flattening trades rising, we recommend moving away from the standard 2s5s and 5s10s flattening.
● BE5s10s flattener: Global energy prices are expected to stabilize at the start of the next year, with a relatively flat profile for crude oil prices expected
into 2016. However, as wage dynamics pick up and base effects become more unfavorable, we expect the BE curve to begin flattening.
Canada
● Buy 30y breakevens outright and versus US: Canadian breakevens are near their post-crisis lows amid the global wave of deflation concerns. With
energy prices expected to stabilize and the BoC waiting on the sidelines until the end of 2015 we think RRBs are underestimating the path for CPI –
especially with the CAD expected to depreciate substantially. Buy 30yr breakevens with a target of 205bps.
● Buy Canada 5s versus US: A second implication of the Bank of Canada hiking after the Fed is that Canadian bonds should outperform versus the US,
particularly in H1 2015. We favor buying Canadian 5s versus Treasuries with a target of -25bps.
Europe
● Buy belly of UK 2s5s10s fly and UK5s versus US: We don’t expect the BoE to raise rates until Feb 2016 and the gilt market still has to push rate hike
pricing back, so 2s5s should flatten. Furthermore, as US growth holds up well and UST yields rise, 10yr gilt yields should rise. We therefore look to buy
the belly of the 2s5s10s fly with a stop at 18.5bp and target of -10bp and target US/UK 5y spreads to widen to -55bp with a stop at -8bp.
● Buy 3y gilts versus NGBs: While the gilt market is pricing in a BoE hike too soon, the NGB market is pricing in cuts. We expect the Norges Bank to
remain on hold and recommend buying 3yr gilts vs 3yr NGBs.
● UK 2y2y limit orders: In the short-term there is further room for 2y2y forwards to fall in the UK, but by end-2015 they should be higher as inflation
concerns recede and rate hikes move closer once again.
Australia / New Zealand
● NZ 3s10s swap curve steepener: For the RBA, we push back our Mar 2015 hike to Aug 2015, and target a year-end cash rate of 3%. For the RBNZ
we have one 25bp hike in Sep 2015, with a year-end cash rate of 3.75%. Lower for longer should anchor short end yields. In contrast, long end yields
directionally led higher on move up in UST yields, risks of lower AUD & NZD feeding into inflation.
● Buy NZ3 versus US: Cross market, we anticipate a narrowing in AU-US and NZ-US spreads. The RBA/RBNZ on hold while the BoJ/ECB expand scope
for lower rates will provide ongoing demand for yield. A China slowdown should limit a backup in yields, providing further support for ACGBs and NZGBs.
Emerging Markets
● Buy MXN/COP: Mexico stands out as the one reasonably bright spot in Latam. We like being long MXN/COP as an intra-regional trade as Mexico has
hedged its oil exposure in 2015, but a deceleration in demand should weigh on Colombia next year. We buy MXN/COP at 159.5 with a target of 168 and a
stop of 155 for a risk/reward ratio of 1.89.
● Buy basket of relative oil outperformers: The sharp fall in oil prices this year has produced its share of winners and losers within EM. If oil prices
remain at current levels or fall further, we continue to like trading an equally-weighted basket of currencies that should outperform (THB, INR, PHP, and
TRY) against under performers (COP, MXN, and BRL).
● Pay HUF 1y swaps 2y forward: In Poland and Hungary, both central banks will keep rates low for a considerable time, but we do expect rates to
eventually start going up. We think the curves are too flat for too long and we recommend paying forward rates. In particular we like paying the 1y rate 2y
forward in HUF at 2.28%, with a target of 2.90% and a stop of 2.10%, implying a risk reward ratio of 3.0.
Commodities
● Long XAU/XAG and Pt/Pd ratios: Concerns ahead of Fed tightening will keep silver underperforming gold, but once tightening begins, we expect silver
to appreciate more aggressively; Platinum has more upside than palladium as demand for auto catalysts recovers further in Europe.
● Long Nickel and Zn/Al ratio: We recommend an outright long position in nickel as recent stockpiling is expected to turn around in 2015 due to slowing
supply and an Indonesian export ban that leads to lower grade ore stockpiles in China; Large scale zinc mine supply shutdowns to impact prices
positively, but near-term global demand weakness can be hedged using our less positive view of aluminum.
● Long Brent-WTI spread and short Mar15 natgas: Enter a long Brent-WTI spread trade as US supply growth will prevent WTI from responding to
global growth stabilization; Following a potential early-winter weather driven rally, which will stress supply, natgas prices will likely abate.
Foreign Exchange
● Long USD/JPY and short EUR/GBP via options: The theme of divergent policy outlooks between the US on the one hand and the Eurozone and
Japan on the other will almost surely play out over the coming year. We believe the USD is in the midst of a multi-year bull run that will see it gaining
ground against both the EUR and JPY in 2015, we recommend getting long USD/JPY and short EUR/GBP through options.
● Long USD/CAD: A later start to BoC rate hikes well into year's end, in conjunction with lower commodity prices, will translate into further CAD
weakness, we recommend going long USD/CAD at 1.12, targeting 1.19 and risking 1.09.
● Long AUD/NZD: Both will underperform against the USD, but slumping terms of trade for NZD and later RBNZ tightening should support cross higher.
4
2015 Global Outlook
Rates, FX and Commodities Research
20 November 2014 | TD Securities
UNITED STATES
(Another) Year in Transition
The US story remains one of transition. It was our predominant
theme in 2014, and remains equally applicable to the coming
year. Momentum in the recovery continues to firm, the Fed
continues to pivot further away from emergency policy settings,
and the US is set to outperform most of its G10 peers, many of
whom such as Japan, China, and Europe among others suffer
structural impediments notably absent in the US. To be sure, one
cannot view the US in isolation. The US may be uniquely
positioned to prosper with a strong currency owing to bulging
energy production, but a strong USD married to a wobbly global
recovery cannot be ignored. This was the cause celebre for a
market inclined to doubt the Fed’s capacity to progress toward
growth and inflation targets that had underpinned expectations for
a rate hike in 2015. That pessimism is overdone.
The mix of factors supporting growth has evolved, but the
fundamental story has not. Export growth will slow, imports will
accelerate and net exports will exert a larger drag on growth, but
some of this is offset by falling energy prices that provide a fillip to
domestic demand. This is a tax cut to energy consumers globally,
but in a strong USD regime those benefits are disproportionately
skewed to the US relative to G10 peers. Lower oil prices do
undermine US oil production and investment. However, with 90%
of shale production cost effective at around $65USD, that hit may
be small and diffused over time. Total investment in shale
production still amounts to less than 0.8% of GDP. Meanwhile,
the economy will be supported by strong household and
corporate balance sheets, state and local government spending
that keeps public spending rising and a modest acceleration in
residential and non-residential investment. Odds that the
economy expands at a 2.5% to 3.0% pace, therefore, remain
high. That pace is sufficient to erode excess slack in the labor
market, support ongoing improvement in labor compensation,
and effectively keep the Fed on track to raise rates in September.
The Fed will raise rates to bring more balance to a policy regime
that looks increasingly anachronistic. It will not be motivated by a
budding inflation problem. Core inflation, our best measure of
future inflation, will struggle to approach the 2.0% target over the
next 12 months, and perhaps longer. The trend in headline
inflation is lower, and will remain so until its trough in mid-2015. A
key question for the Fed (and bond markets benefitting from lower
inflation expectations) is the extent to which the US is immune to
the broader global disinflationary forces that remain in play. Policy
rates will not move higher if core inflation shows a renewed
disinflationary trend.
We do not expect that risk to materialize. The pass-through
effects from a strong USD is limited and 80% of core prices are
non-tradable services. If growth is firming, if wage inflation
continues to trend higher, and domestic demand is buoyed by
Sources: Bloomberg, Macrobond, TD Securities
higher real incomes, odds are good the recent slip in core inflation
will prove temporary. Breakevens will move the other way.
Firming growth, Fed tightening, and a bottoming out in both actual
and implied price momentum sets up what should be a cyclical
bear flattening in Treasuries. At face value it suggests the long
end of the curve is also vulnerable to a correction, a view
amplified by reduced demand from banks close to fulfilling their
HQLA requirements and of course, the end of QE. This is
mitigated in part, however, by the high yielding allure of
Treasuries in a world hungry for yield, a distinction magnified by
further easing by both the BoJ and the ECB. Competing policy
regimes do not challenge the flatter trend that will emerge in
Treasuries, but could well provide added accelerant. The bias to
longer term yields is still tilted to the upside over 2015, though the
scope of any selloff looks to be limited.
Trade Recommendation: 1s3s Flattener - Sell T 0.250%
11/30/15, Buy T 4.250% 11/15/17.
Enter: 85bps
Target: 45bps
Stop: 95bps
Carry/Roll: +13bp/quarter
The market is too complacent in pricing in the timing of the first
rate hike. As of mid-November the market was fully pricing in only
one full 25bp rate hike for 2015 - almost 50bps less than was the
case at the end of Q3. Market odds are still decent that the first
rate hike comes before December 2015, but at 58% those odds
still suggest a low level of conviction relative to just two months
ago. If the market is too complacent the dots feel too aggressive,
not just in 2015 with a year-end target of 1.0%, but in subsequent
years as well. Trading opportunities exist in what is likely to be
somewhere in between. Even if the Fed does deliver on 2 of the 4
rate hikes implied by the dots (which in fact is our base-case
5
expectation), the market could be caught off guard.
2015 Global Outlook
Rates, FX and Commodities Research
20 November 2014 | TD Securities
Curve flattening in 2015 is not a novel theme, both forwards and
street rate projections point in that direction. However, with a
market inadequately priced for the Fed, our view is that one
should position for more flattening than is now expected. Given
the crowded nature of the flattening trade, the standard 2s5s and
2s10s flatteners that would ordinarily be an attractive vehicle to
position into the start of policy tightening have become less
attractive. There is a high hurdle rate on the roll to breakeven. In
the case of the 2s10s for example, the 3 month carry and roll cost
is a significant 11.5bps.
We recommend entering a 1s3s flattener. This is best expressed
by selling the T 0.250% 11/30/15 and buying the T 4.250%
11/15/17. Both are relatively cheap against the curve. The net 3
month carry and roll for this trade is especially attractive at
+13bps. Moreover, the high coupon for the 3yr note versus the
low coupon 1yr offers the potential for some yield pickup. We
recommend entering this trade at 85bps, with a stop at 95bps.
The target is set at 45bps.
Trade Recommendation: Sell 5s10s30s Fly as belly of the
curve has become too rich relative to the wings.
Enter: -1.5bps
Target: 25bps
Stop: -10bps
Carry/Roll: 3bps/quarter
The 7yr-10yr part of the Treasury curve has become expensive
relative to both the spline and compared to fair value estimates.
On the spline, the current on-the-run benchmark is 6.3bps rich
versus the on-the-run 5s (at 2.6bps rich) and 30s (3.3bps). The
securities around the benchmark 10yr also enjoy a level of
richness that is not evident in other parts of the curve. Granted,
the richness in this basket has been justified in part by the
increasing investor preference to cluster in this bucket due to its
higher liquidity relative to the rest of the curve. Even with this in
mind, the 50bps+ wedge between the current yield on 10s and
the fair value estimate is becoming somewhat stretched. The
pricing in the forward curve suggests that the premium in this part
of the curve could persist well into 2015.
We recommend leaning against this by selling 10s on the
5s10s30s fly. This opportunity provides some upside given our
presumption that Europe avoids a negative outcome, that the
30yr part of the curve will outperform, and that the Fed emphasis
on low and slow will temper a rise in 5yr yields. The target of
25bps over coming months is still low relative to the peak of
35bps posted last December. This trade also benefits from a
positive carry and roll-down of 2.6bps per quarter. Our projection
is for the 5s10s30s curve to steepen from its current level to
25bps into the first rate hike in 2015. Comparatively, the forward
curve is pricing in a further flattening to -18bp by end-2015.
Sources: Macrobond, TD Securities
Beyond the positive roll/carry and potential for the upward
adjustment in 10s, this trade will also benefit from current longend outperformance as the global reach for yield persists.
Trade Recommendation: Look for the BE5s10s curve to
flatten as inflation momentum reverses early next year.
Enter: 43bps
Target: 15bps
Stop: 55bps
Carry/Roll: N/A
US inflation momentum has drifted steadily lower since mid-2014
as the pass-through from the strong dollar, falling crude oil prices
and base effects have dampened domestic price pressures. The
subdued pace of wage growth has also contributed to the low
inflationary backdrop. The persistent disinflationary impulse has
been duly reflected in the collapse in the inflation outlook, with
both survey- and market-based inflation expectations falling to
their lowest levels since 2011. Given its relatively high correlation
with energy prices, the 5yr part of the breakeven curve has been
particularly hard-hit, resulting in the BE5s10s curve steepening
from 17bps mid-June peak in crude prices to 33bps currently.
Over the near term this dynamic has more room to run as the
fallout from falling crude prices makes it way to the pump.
However, with both forward and street expectations looking to
some stabilisation in crude prices by early-2015, we expect the
steepening in the BE5s10s curve to run it course by January. We
recommend scaling into a BE5s10s flattening at 43bps. The stoploss should be set at 55bps, with a target of 15bps.
6
2015 Global Outlook
Rates, FX and Commodities Research
20 November 2014 | TD Securities
CANADA
The Canary in the Coal Mine
The base case assumption for the year ahead is that US growth
will be solid but not spectacular. With the Canadian dollar forecast
to push lower over the course of the year—reaching 1.19 by the
end of Q3—demand for a wider range of Canadian exports will
provide a potent offset to lower commodity prices. With interest
rates not expected to move higher for most of 2015, the domestic
economy will continue to contribute to growth. An upward drift in
the housing market—additional macroprudential measures
tightening mortgage regulations are unlikely ahead of a federal
election—and continued job growth accompanied by higher
wages will support consumer spending and provide an offset to a
slower pace of investment activity across Western Canada. Taken
together, real GDP growth will bounce along at a sufficiently
robust pace to steadily absorb what remains of economic slack in
the wider economy.
Recommendation: Buy 30yr Breakevens (CAN 1.5% Dec
2044s vs CAN 3.5% Dec 2045s)
Entry: 183bps
Target: 205bps
Roll: -0.3bp/quarter
Stop: 178bps
Diminished slack and greater exchange rate pass-through from
the weaker CAD will keep core inflation around its target, though
weaker headline inflation will give the Bank of Canada ample
ammunition to sound cautious. When relying on exports and by
extension the currency to drive the next stage of the recovery,
there is absolutely no incentive for the Bank to sound prematurely
upbeat. This will force the Bank to tolerate more inflation while
waiting for the Fed to lead the way before following through with a
modest hike in overnight rate by the end of the year.
Correlation Between Canadian GDP and
Developed Market Economies (1995-2014)
Contemporanous Correlation
Facing a global outlook shrouded with uncertainty and dripping
with downside risk, economic proximity to the one region
expected to perform reasonably well is fortuitous. This is not the
first time we have expected net exports to assume the mantle of
growth from a stretched household sector. Over the course of
2013 nascent signs that exports were finally contributing to growth
amid a firming in US growth and a weaker Canadian dollar were
undermined by the pronounced downdraft in commodity prices.
With commodity prices expected to remain weak, it will fall to
wider US demand and additional currency weakness to support
growth in the year ahead. If the US economy is able to diverge
from growing stagnation elsewhere, the Canadian economy will
be well positioned. However, if the US stumbles, Canada will
need to rely again on low interest rates to provide more support to
its domestic economy and prevent a more sustained downturn in
activity. In straddling this divide, Canada in 2015 becomes the
canary in the secular stagnation coal mine.
0.6
0.4
0.2
0.0
US
Sweden Germany Spain
Italy
Norway Australia
Sources: Haver Analytics, TD Securities
The global push lower in market-based inflation expectations
seeped into Canada in H2 2014, with breakevens moving within a
few bps of their post-crisis lows. Moreover, prior to the 2008-2009
financial crisis, 30yr breakevens had not fallen below 180bps
since the onset of the 2001 recession (and the journey into the
170s was brief). Energy prices are expected to stabilize next year,
and continued above trend growth in North America also argues
for higher inflation. Taken in tandem with an inflation tolerant
central bank and a depreciating currency, we think RRBs are
underestimating the likely path for CPI. Seasonal factors will
continue to weigh on RRBs over the next few weeks, but these
are nonetheless attractive entry points to own breakevens—
especially if core CPI proves to be stickier than anticipated. That
said, the Bank of Canada’s credibility as an inflation targeter is still
well entrenched, so we would target 205bps rather than betting on
inflation expectations becoming untethered.
Recommendation: Buy Canada 5s vs US (CAN 1.75%
Sep 2019s vs 1.75% T Sep 2019s)
Entry: -9.5bps
Target: -25bps
Carry/Roll: -4.8bp/quarter
Stop: -2bps
With every passing month, the Bank of Canada seems to
describe a higher threshold for hikes; the discussion around the
labor gap at the October MPR essentially ensures that the Bank
will let the Fed tighten before they do, and the Bank will continue
to sound as dovish as possible. The combination of earlier hikes
from the Fed and the lack of any sort of guidance from the Bank
of Canada suggests that Canadian bonds will outperform versus
the US. However, with the front-end of the Canada curve already
extremely expensive, we prefer to express our long Canada-short
US view in the 5yr segment of the curve.
7
2015 Global Outlook
Rates, FX and Commodities Research
20 November 2014 | TD Securities
EUROPE
Inflation is Key
We expect the Bank of England to remain on hold throughout
2015 and to begin hiking interest rates in 2016. Money markets
have pushed back expectations of the first BoE hike to November
2015 but we look for an even later start in February 2016 and
think that the gilt market is yet to push pricing this far out.
One of the main factors underpinning our call is the expectation
that inflationary pressures are likely to remain subdued,
particularly through the first half of 2015. Indeed, we see a nonnegligible chance that inflation temporarily falls below 1.0%. In
this scenario, it is very unlikely that the MPC will be able to hike or
even strike a moderately hawkish tone and we expect markets to
continue to push back expectations of when the first hike will
occur even if growth doesn’t slow and wages do start to edge up.
In this environment, 2yr gilt yields can only suffer a limited fall and
it is the medium-term tenors that should see the biggest fall in
yields, so we should see 2s5s flatten. However, against this
backdrop we also look for UST yields to rise as US economic
data manages to shake off global concerns, which should pull
10yr yields higher across the globe, including gilt yields (although
we look for gilts to outperform USTs). With 5yr yields falling due
to expectations of later BoE hikes, this favors 5s10s steepeners.
Rather than express our view as either 2s5s flatteners or 5s10s
steepeners, we think that there is better risk/reward in buying the
belly of a 2s5s10s gilt fly. This is not a trade we think will
outperform across the whole of 2015, but rather a trade which we
expect to make money as the market remains uber-pessimistic
about the BoE pushing back rate hikes, and so the majority of the
return should be in the first half of 2015. Entering the trade as a
fly also neutralises the carry and roll.
Recommendation: Buy 3yr Gilts vs NGBs
Entry: -38bps
Target: -60bps
Carry/Roll: 13bps/quarter
Stop: -32bps
We see value in buying 3yr gilts vs NGBs. As we have already
discussed, we think the market will push back expectations of a
BoE hike further and that this is not fully expressed in the gilt
curve at present. In contrast, the market is pricing in expectations
of rate cuts in Norway, and we don’t expect these to be delivered.
This is not something that we expect to be corrected immediately,
2s5s10s Gilt Fly to Fall to -10bps
35
30
25
Basis Points
Recommendation: Buy the belly of 2s5s10s gilt fly
Entry: 12.3bps
Target: -10bps
Carry/Roll: 0bps/quarter
Stop: 18.5bps
20
15
10
5
0
-5
Mar-14
May-14
Jul-14
Sep-14
Nov-14
Sources: Bloomberg, TD Securities
but as commodity prices stabilise, markets should begin to price
out rate cut expectations. Inflation in Norway has been holding up
well given the hits to oil prices in the past few months and with
Norway less exposed to Eurozone issues and stimulus from NOK
depreciation, we think the chance of a rate cut is low.
The part of the curve where this can be expressed best is the 3yr
sector. The forward curve only prices in a 6bp pickup in the next
six months for 3yr NGBs while pricing 3yr gilt yields 23bps higher.
We expect 3yr gilt yields to remain around current levels over the
next six months while there is scope for 3yr NGB yields to pickup
if oil prices stabilise. This sets up a pretty good risk/reward for this
trade, particularly when compared to the forwards.
Recommendation: Buy UK 2y2y forward
Entry: Limit order: 1.74%
Target: 2.10%
Stop: 1.6250%
Although we think in the short-term there is further for 2y2y
forwards to fall in the UK, but by end-2015 they should be higher
as inflation concerns recede and rate hikes move closer once
again. We would therefore recommend waiting for better entry
levels and then looking for more normalization in these metrics. In
the short-term there may be more value in looking for breakevens
to fall. There has been remarkably little movement in UK
breakevens despite large moves in oil prices recently and the
decent fall in spot inflation, and we think that as inflation remains
low, breakevens could be due for a catch-up.
In both Sweden and Germany, fixed income opportunities are
rather limited at present. In Sweden the forward curve is pricing in
very little movement over the next six months while in Germany,
we expect bund yields to pickup to 1.20% by year-end, but the
forward curve is only pricing in a move up to 0.95%. This move is
likely to be driven by lower expectations of further ECB easing in
H2 2015 and also higher global yields due to Fed tightening.
8
2015 Global Outlook
Rates, FX and Commodities Research
20 November 2014 | TD Securities
AUSTRALIA / NEW ZEALAND
Exercising Patience
Recommendation: NZ 3s10s swap curve steepeners
We have revised down our GDP forecasts for Australia and New
Zealand for 2015, and with China slowing we see the Antipodean
central banks keeping the cash rate at current levels for much
longer.
Entry: +30bps
Target: +55bps
Carry/Roll: +2.2bps/quarter
Stop: +20bps
We forecast above-trend GDP growth in New Zealand, at around
2.7% for 2015, but concede that the peak has likely passed. In its
October OCR Review communiqué, the RBNZ signaled that it
had shifted sidelines after lifting the cash rate by a relatively
aggressive +100 bps over March-July 2014. As the sharp fall in
the key dairy price this year foreshadows a decent slide in the
terms of trade, we believe the RBNZ has ample time to restore
the cash rate towards neutral, currently estimated at 4½%, by
early 2017.
As for China, we forecast a period of continued decelerating
growth from 7.7% in 2013, to 7.4% in 2014, 7% in 2015 and 6.7%
in 2016. We believe the risks to these forecasts remain to the
downside, particularly after President Xi’s comments at the
November 2014 APEC meeting that 7% growth would still be too
rapid. That said we do not expect a ’Chinese hard landing’ to
materialize, remaining a tail risk in our view.
For now, we view the weaker reads across a number of Chinese
data points reflecting the deliberate actions taken by officials to
address overcapacity in property, investment and credit markets.
We expect these sectors to remain as headwinds throughout
2015 (and we do not expect a rebound in property investment)
and strict regulation of off-balance sheet lending is expected to
persist, so broad based monetary easing remains unlikely. With
targeted measures to boost infrastructure and the government’s
focus on increasing the share of consumption an outright growth
recession remains a tail risk. We see retail spending as is holding
up reasonably well despite stronger anti-graft measures, and this
should reassure policymakers that the slowdown in property and
heavy industry is not spilling over into other sectors.
Taking all these factors into account, we have pushed back our
March 2015 RBA hike to August, targeting a year-end cash rate of
3%. For the RBNZ, we pencil in 25bps in September 2015,
leaving the year end cash rate at 3.75%. Our ’delayed’ RBA and
RBNZ projections to keep the cash rate on hold for longer should
anchor short end yields. In contrast, our US team’s forecast for
UST yields to grind higher and the risk that the weaker AUD and
NZD result in price pressures should pressure the ACGB and
NZGB long ends by mid-2015. Over this period, TD forecasts the
NZGB 3/10s curve to steepen around 25bps, vs 20bps in
Australia. What may drive a steeper curve in Australia is a
deterioration in its fiscal position should savings measures from
this year’s budget not be passed.
NZ 3s10s Swaps Curve Near 5yr Lows
200
160
Basis Points
For Australia we forecast a period of sub-trend growth, easing
from the expected 3.2% in 2014 to 2.5% in 2015. The lower
growth profile is a result of trade, consumption and construction
filling the gap left by mining investment at a slower rate than we
initially expected. Although the RBA has indicated that it sees
signs of a turnaround, the Bank has displayed a willingness to
exercise patience.
120
80
40
0
2009
2010
2011
2012
2013
2014
Sources: Bloomberg, TD Securities
We recommend a 3s10s steepener in NZD. The scope for
greater steepening in NZ is consistent with our forecasts. We
would recommend investors consider trading this view via the
swap market that on our core view, should see corporates and
retail paying interest to lock in low rates. The 2.2bps of positive
carry via NZ swaps vs flat via Australian swaps is also supportive.
The risk to our base case is for a bond market rally fuelled by
fresh global growth concerns, or Australia/New Zealand price and
activity data argue for a further easing in monetary policy. Under
this alternative scenario we expect the NZGB short end to
outperform, as the perception grows that the RBNZ ‘overtightened’ in 2014. The OIS market is pricing some chance that
the next move is down for the RBA, while it is close to pricing in
25bps by the RBNZ by September 2015 hence the NZGB front
end has the most scope to outperform. More broadly, should
global disinflationary pressures and prospects for deleveraging
emerge, higher yielding ACGBs and NZGBs can be expected to
draw significant investor interest, also supporting our preferred NZ
-US 3yr spread compression trade.
9
2015 Global Outlook
Rates, FX and Commodities Research
20 November 2014 | TD Securities
G10 RATES
USDCAD vs Canada-US Breakeven
Differentials
Abnormal Normalization Process
The year-long strengthening of disinflationary forces has spilled
over into FX markets as the best outlet for stress in a zero-bound
global monetary policy landscape. The desire for devaluation
began with US QE2, ramped up several notches with the BOJ’s
QQE, and was reinforced by the ECB’s begrudging shift to
expand its balance sheet as a de facto weak EUR policy is meant
to stimulate when 200yr low yields in the periphery failed to induce
growth or stop creeping disinflation. This will only be exacerbated
with the Fed and BoC our only unchanged conviction on central
bank tightening in the G10. The ongoing slowdown in EMs,
especially with diminished expectations for Chinese growth and
deleveraging in the domestic credit and housing market in full
swing, is likely to maintain the EM dollar addiction. Overall, this
dynamic is likely to limit the scope for a broad selloff in global
bond markets, drive compression risks between the hikes and the
‘hike nots’ as carry trades bring additional allure in a lower vol
rates world, as well as make inflation products much more active
if the current balance of risks shifts. The ultimate cross-country
question is what to be short US Treasuries against?
Recommendation: NZ-US 10yr spread compression
Entry: 185bps
Target: 160bps
Carry/Roll: -4bps/quarter
Stop: 195bps
Recommendation: US/UK 5yr spread widening
Entry: -21bps
Target: -55bps
Carry/Roll: +0.6bps/quarter
Stop: -8bps
NZGBs stand out in such a world as having limited upside in
rates. They are already the ultimate G10 high yielder and already
struggle with a tight supply, with a central bank now much more
concerned about FX strength than domestic data strength—and
we have shifted our first hike to September 2015—and at more
risk from a China slowdown than non-Asian G10 markets. That
makes it a first choice for being long versus Treasuries.
0
-5
-10
Canada-US 30yr BE Spread
USD/CAD, RHS
Basis Points
-15
1.16
1.14
1.12
-20
-25
1.10
-30
-35
-40
USD/CAD
The key to 2014 performance was to identify as early as possible
that the assumption of tapering as tightening was more than fully
priced to start the year. The fixation on tapering in 2013 left US
long-term rates at cycle highs on December 31, providing a
backdrop for lower rates in 2014, especially as those higher rates
fed a backwash into the US mortgage market. We now move into
the end of 2014 at the 50% retracement of the 2013-2014 range
for 10yr Treasury yields with global disinflation clearly front and
center on the market’s mind.
1.08
1.06
-45
-50
1.04
Nov-13 Dec-13 Mar-14 Apr-14 Jun-14 Aug-14 Oct-14
Sources: Bloomberg, TD Securities
For the UK, we have shifted our view to be one of the most dovish
in the market on when the BoE is now likely to tighten, having
pushed that off to February 2016. We also see limited risk of a
hawkish pivot from the MPC over the coming six months at least.
This puts this message shift likely well past the FOMC’s pivot,
which we see likely to come incrementally in March and June,
followed by the first hike in September. There are two-way risks to
this view, given the very low inflation environment likely to persist
in the UK and if FOMC pricing is pushed out further, we would
expect BoE pricing to move even further.
Recommendation: Long 30yr CAD BEs, Short 30yr US BEs
Entry: -19bps
Target: 10bps
Carry/Roll: +4bps/quarter
Stop: -30bps
Collapsing energy prices have been a product of oversupply, a
strong USD and global demand weakness, which has significantly
increased downside risks to headline inflation in the near-term, but
has less clear implications for core. In fact, for the US, the
stimulatory impact for consumers could even support more core
price pressures down the road. But for Canada, we see even
more forces at play supporting higher breakevens. Stabilizing
energy prices and the tendency of breakevens to compress in a
low nominal yield environment provides similar drivers for both.
But a depreciating CAD and the BoC’s willingness to overshoot
the 2% inflation target provides a driver for compression in
breakevens. From this standpoint, we like buying inflation
protection in 30yr Canada, versus selling 30yr TIPs breakevens.
10
2015 Global Outlook
Rates, FX and Commodities Research
20 November 2014 | TD Securities
EMERGING MARKETS
Waiting for Growth
Therefore, next year we expect to see the trend of EM FX
weakening against the US dollar continuing. However, with
growth in the Eurozone remaining feeble, we expect EM FX to
weaken less, or possibly even appreciate, against the euro, as
has been the case this year.
EM yields will continue to be driven by a combination of domestic
factors (namely the local monetary policy response) and market
expectations ahead of the first Fed hike. In the absence of brisk
moves in the US Treasury curve, we can expect local factors to
remain in the driver’s seat, which means we should not see
particularly sharp changes in EM yields.
Several risk factors continue to make the environment particularly
unpredictable. Global political risks and low oil prices are major
sources of uncertainty. But risks also continue to stem from an
uneven global recovery that sees the US growing at a strong
pace, against the lacklustre recovery in the Eurozone and risks of
a hard landing in China. There is the clear risk that the US, rather
than dragging up the rest of the world through its strong growth, is
itself dragged down.
EM Regional Divergence
Latam continues to lag in the EMs in terms of growth. With a few
exceptions (e.g. Colombia and Mexico), the region’s weak
economic activity is exemplified by the performance of its largest
economy – Brazil, where we expect a continuation of high inflation
and low growth amidst policy concerns and fiscal challenges.
EMEA’s recovery is patchy with the Eurozone acting as a drag on
the region, and even the best performing economies so far
(Poland, Hungary, Turkey) are at risk of hitting the brakes. Asia
stands out, with India and Indonesia set to re-accelerate on the
back of a favourable political backdrop. But China’s performance
and the large private credit leverage in the continent are potential
liabilities.
Mexico stands out in Latam
In Latam, we are struggling to find a compelling story in the region
for next year. Consequently we favor being underweight Latam,
and being long dollars.
7
GDP Growth Differential, %
2015 will be another challenging year for emerging markets. As in
2014 and most of 2013, external forces will likely add negative
pressure to EM rates and currencies, while the macro backdrop is
likely to continue to suffer from a structural lack of growth. The
differential between US growth and EM growth is expected to
remain narrow next year. With the US offering the deepest and
most liquid capital markets in the world, and with the prospects of
higher rates later next year, the incentive for investors to move
money into EM stays low.
EM vs US and Eurozone Growth
8
6
5
4
EM - US
3
EM - Eurozone
2
1
0
2006
2009
Sources: IMF, TD Securities
2012
2015
*2014 & 2015 are forecasts
Recommendation: Long MXN/COP
Entry: 159.5
Target: 168
Stop: 155
Risk/reward: 1.89
We remain bearish BRL over the course of next year, but think
this can only be traded opportunistically given the volatility and
carry. A real risk for Brazil, and consequently Latam, is the outlook
for its sovereign rating. The failure of Dilma to deliver credible
fiscal reform would put Brazil’s investment grade rating in
jeopardy. While we see an actual downgrade to speculative grade
as unlikely next year, a move to negative watch by S&P would put
tremendous pressure on Brazilian assets, including the currency.
As such, the progression of the fiscal announcements and fiscal
data releases need to be watched carefully as the year
progresses.
We think Mexico is one Latam name that stands out with room to
strengthen from current levels, particularly at the start of the year.
We like being long MXN/COP as an intra-regional trade. At
current levels, MXN already reflects concerns about oil prices,
and we know the Mexican government is hedged below $70/
barrel for 2015. Over the longer term, low oil prices would be
problematic for Mexico in terms of both the fiscal accounts and
expected FDI on the back of energy reform. However, Mexico has
largely insulated itself from weaker oil in 2015. In contrast to this,
as low oil prices and a deceleration in domestic demand weigh on
the outlook for Colombia next year, we feel that USD/COP could
move higher still.
FX Oil Basket Trade
The sharp fall in oil prices this year has produced its share of
winners and losers within EM. Obviously large oil exporters like
11
2015 Global Outlook
Rates, FX and Commodities Research
20 November 2014 | TD Securities
Therefore, if oil prices remain at current levels or fall further, we
continue to like trading a basket of currencies that should
outperform (THB, INR, PHP, and TRY) against underperformers
(COP, MXN, and BRL, the latter being included as a short not
because of Brazil’s exposure to lower oil prices, but rather
because of the negative fundamentals). The basket is currently
trading at 89.2 (with Jan 2007 = 100) and we target 92, with a
stop at 88.2. An extension of the downfall of Brent oil prices from
$78/barrel at the time of writing, would lead us to look for a more
ambitious target.
Curves too flat in Hungary and Poland
Recommendation: Pay HUF 1yr swaps 2yr forward
Entry: 2.28%
Target: 2.9%
Stop: 2.10%
Risk/reward: 3.0
Poland and Hungary are currently both experiencing negative
levels of headline inflation while maintaining healthy levels of
growth. We expect both central banks to keep rates on hold for a
considerable time, with a risk of further cuts if growth data
disappoints to the downside. However, we do expect rates to
eventually start going up—in H2 2015 for Hungary and some time
in 2016 for Poland. However, the short end of Hungary and
Poland curves are very flat, with forward swap rates implying
rates will be on hold for much longer than this. There are a lot of
possible trades that can be constructed around this observation,
but our preferred trade is in Hungary where we like paying the 1yr
rate 2yrs forward at 2.28%, just 24bp above spot.
What happens when the Fed hikes?
When the Fed hikes, we expect the market to reassess the real
stance of monetary policy in the US. There is a possibility that the
resumption of tightening is accompanied by balanced guidance
for the future, suggesting a gradual cycle with the terminal Fed
60
70
Brent futures (inverted)
EMFX Oil Basket (no RUB)
80
90
96
94
92
90
88
100
110
Index
Russia are hit hardest and big oil importers like Turkey get a
boost. However, we do not think that lower oil prices are
necessarily fully discounted in market prices as they are only
gradually reflected in the economic data, impacting inflation rates,
CA balances and fiscal balances.
EM Oil Basket and Oil Prices
$/barrel (inverted)
Recommendation: Long an equally-weighted basket of
THB, INR, PHP and TRY against short COP, MXN and BRL
Entry: 89.2
Target: 92.0
Stop: 88.2
Risk/reward: 2.80
86
84
120
82
130
Apr-09 Apr-10 Apr-11 Apr-12 Apr-13 Apr-14
80
Sources: Bloomberg, TD Securities
funds rate at a relatively low level (we forecast 3.25%). In such a
case, we may see only a modest response from EM curves.
EM currencies are likely to suffer the upside adjustment, as higher
rates in the US become a catalyst for EM outflows. This will be
partly offset by the ECB and BoJ QE programs, but we think the
strongest reaction will nonetheless follow decisions from the Fed.
The initial move, however, could represent an attractive
opportunity to reposition in the EM FX space, if higher US rates
anticipate better global growth. If global growth lags and EMs
continue to exhibit negative output potential, EM FX weakness is
likely to be protracted in time, with most EMEA names likely to
underperform their Asian peers. Latam FX may continue to suffer
from low oil and commodity prices, but Mexico could be a positive
surprise as a more favorable outlook for US growth stands to
benefit Mexican manufactured exports.
East Ukraine remains a significant risk
Our central expectation is that the smouldering conflict in East
Ukraine will continue to smoulder and that Russian sanctions are
unlikely to be lifted any time soon. However, there is the clear risk
that the conflict could flare up again, leading to more sanctions
being imposed by the West and counter-sanctions being imposed
by Russia. The biggest losers from renewed conflict would be
Ukraine and Russia, but it would almost certainly impact the
Eastern European economies and Western Europe. Of course
there is also the possibility of the conflict in East Ukraine being
resolved and sanctions being gradually removed, although we
feel that this scenario is less likely than an escalation of the
conflict.
12
2015 Global Outlook
Rates, FX and Commodities Research
20 November 2014 | TD Securities
COMMODITIES
In Dollar Terms Both Long and Short Specs
Have Plenty of Room to Get More Bearish
As such, we see silver continuing to underperform (maintain our
long XAU/XAG ratio) gold in the short-term as markets digest US
economic numbers to mean that the Fed will indeed start
removing some monetary accommodation. The higher yields and
accompanying rise in opportunity cost to hold or carry gold and
silver should pressure prices lower. Additionally, the risk that the
ECB undertakes more aggressive asset purchase action should
see the US dollar rise sharply. Shorts that have recently covered
could get back in and longs could liquidate again—there is still
plenty of room. The lack of physical demand from Asia suggests
that there would be little to stop any spec initiated selloff today, as
was the case during the sharp selloff in H1 2013.
However, once the market prices in the first few Fed hikes and
gold and silver drop to new cyclical lows, both metals should
move higher. The FOMC is unlikely to get too restrictive given the
headwinds from external sources, implying real rates should not
rise very much. If inflation moves higher along with a reduction in
the US output gap in H1 2015, the cost of carry for gold and silver
may not rise as much as many real money traders and specs
think. This should bring investors into gold and silver again, with
silver outperforming due to volatility and the expected increase in
industrial restocking and demand.
Recommendation: Stay long XAU/XAG ratio (Oct 30th
recommendation) but take profit and short the ratio at:
Entry: 78.0x
Target: 63.0x
Stop: 83.0x
Long Platinum/Palladium Ratio
Platinum has greatly underperformed palladium this year, even
though both metals have similar fundamentals and are seen to be
in deep deficits for the next several years. Concerns about export
reductions of palladium from Russia due to the Ukraine crisis and
decent US and China demand for gasoline engine auto catalysts
was a key reason why palladium has done so well compared to
platinum. Conversely, a much weaker than expected Europe,
Recommendation: Long Pt/Pd ratio
Entry: 1.54x
Target: 1.82x
Stop: 1.45x
70%
60%
Non-commercial Gold Shorts
Non-commercial Gold Longs
Gold Price (rhs)
1600
50%
800
40%
30%
400
20%
$/oz [log scale]
The precious metals market is likely to strengthen materially in the
latter part of 2015, but there will be considerable weakness into
the next quarter or so. Typically, a weak precious metals market
implies silver underperformance due to its significantly higher
volatility and its strong links to industrial activity. Conversely,
recovering precious metals markets suggest that gold will recover
less robustly relative to silver.
$value as % of total $value open interest
Long Gold/Silver Ratio; Then Reverse
10%
0%
1998
200
2001
2004
2007
2010
2013
Sources: Bloomberg, TD Securities
which is the largest industrial user of platinum, was the driving
force behind the platinum underperformance.
As it stands now, platinum prices are much too low to incentivize
producers to increase capex in order to grow supply to match
expected demand growth. We believe that once the European
economic situation stabilizes and current inventories held by
industrial users are whittled down, the price of platinum will
materially outpace the expected gains made by palladium as we
move deeper into 2015. As such, taking a long platinum/palladium
position is a winning strategy for 2015.
Long Nickel
Recommendation: Long Nickel
Entry: $16,145/tonne
Target: $22,000/tonne
Stop: $14,000/tonne
Growing LME exchange inventories and stockpiles of nickel ore in
China remain surprisingly high, along with a downgrade of global
demand growth expectations, have conspired to erase early-2014
price gains. However, even with our projections of a weaker-thanexpected global demand environment in 2015, we expect that the
coming supply side dynamics will be enough to push nickel prices
much higher over the next year. Mine supply growth will not
increase enough to meet a still growing US demand, a slower, but
still impactful, China and an eventual stabilization in Europe.
Additionally, the Indonesian export ban has remained in place, as
restrictive as initially announced, which is longer than we originally
expected. If this continues to be the case, the ore grades of the
stockpiled nickel will continue to decline, as lower grade Philippine
ore has been added to supplement the drawdowns. Therefore, in
2015, the weaker grade of ore stockpiles will begin to impact the
supply side along with slowing mine supply, and leads us to
project a deficit situation. With prices at low levels today, we see
13
2015 Global Outlook
Rates, FX and Commodities Research
20 November 2014 | TD Securities
little downside risk left in the metal and recommend an outright
long position for 2015.
$130
Long Zinc/Aluminum Ratio
$120
For the short leg we prefer aluminum, due to the likely surplus
situation that we anticipate in 2015 and currently high prices that
seem to have been temporarily squeezed higher, due to some
kind of position liquidation in a physically tight market. This
artificial tightness in the physical space has impacted premiums
immensely and has been written about ad nausem. We see this
recent sharp move into LME backwardation abating and prices
lagging any move higher. Therefore, we recommend a long zinc/
short aluminum trade for 2015.
Long Brent-WTI Spread (widening)
Recommendation: Long Brent-WTI spread
Entry: $3.7/bbl
Target: $10/bbl
Stop: $0/bbl
The global energy complex will move lower into 2015, as
increasing oil supply struggles to find a market amid a weakening
global growth outlook. Crude oil and petroleum products have
grown at unprecedented speeds due to the adoption of tight-oil
technology and newly developed resource plays. With global
growth expectations weakening for 2015 we do not foresee much
deviation from the current supply and demand growth trajectory in
2015. Consequently, our forward guidance for crude oil prices is
down in the near term, dragging the broader energy market lower.
The WTI-Brent spread compressed largely as a result of the
return of Libyan volumes, expectations for a global growth
slowdown, and waning geopolitical risk that affected the North
Sea benchmark moreso than the Cushing, Oklahoma barrel.
Meanwhile, the US has represented the fastest growth in crude oil
production volumes and exhibits declining domestic consumption.
We expect refinery utilization to remain elevated as the complex
$5
$-
$110
Oil Price ($/bbl)
Zinc has been a favored base metal for TD Securities due to the
anticipated poor mine supply trends and improving global
demand, which we expect will translate into continued deficits and
higher prices. We are quite bullish on zinc, even as we recognize
the choppy nature of the global recovery in the near-term, with
China still in slowing mode, Europe teetering on the brink of
further weakness, and a US recovery that is not assured. Thus,
due to this weaker demand outlook we prefer to have exposure to
zinc from a ratio perspective in the event that the near-term
downside impacts the base metals generally in a weaker way.
$10
$(5)
$100
$(10)
$90
$(15)
$80
$(20)
WTI-Brent
WTI
Brent
$70
$60
2010
2011
2012
2013
WTI-Brent Spread ($/bbl)
Recommendation: Long Zn/Al ratio
Entry: 1.115x
Target: 1.225x
Stop: 1.06x
Brent-WTI Spread to Widen
$(25)
$(30)
2014
Sources: Bloomberg, TD Securities
continues to export large quantities of refined products from lowerpriced and domestically sourced crude oil, displacing refinery
demand in competing markets. As distillate stocks build
elsewhere, declining refined product prices will negatively impact
WTI contracts. Aside from domestic production growth, two other
regions representing significant export volume growth (Brazil and
Canada) are closely located to the US in comparison to demand
markets, which will compete and weigh on potential import pricing.
Consequently, as global growth stabilizes, Brent should better (i.e.
not as bad) relative to WTI. We recommend a long Brent-short
WTI spread trade, as we expect a widening of the WTI-Brent
discount to levels observed in more recent years.
Sell Near-term Natural Gas Rallies
Recommendation: Short Mar’15 natgas
Entry: Wait until $5/MMBtu
Target: $4/MMBtu
Stop: $5.25/MMBtu
Natural gas futures prices have climbed at an almost breakneck
pace due to a three-standard deviation colder-than-normal
weather event early in the winter season pushing eastward from
the Mid-con to the Midwest and lingering in the Northeast. We do
not expect this trend to continue indefinitely. In fact, as weather
patterns normalize, the market will likely observe significantly
smaller than normal storage withdraws in the following weeks.
An incremental +21 Bcf/w of domestic production y/y, increased
pipeline interconnectivity across the aforementioned weatheraffected region, and a ramp-up in seasonal LNG will weigh on
prices. For now, prices will be supported higher as unseasonal,
extreme weather dictates storage into December. Once weather
normalizes and ensuing storage withdraws surprise to the upside,
excess supply from production and storage economics will weigh
on the latter-half of Q1 and forward pricing. Sell the rallies.
14
2015 Global Outlook
Rates, FX and Commodities Research
20 November 2014 | TD Securities
FOREIGN EXCHANGE
Rinse, Repeat
growth outlook that has driven the 2014 gains in the USD will
become more pronounced in 2015, pushing the USD higher still.
Six years on from the Great Financial Crisis, the outlook for the
currency market in the year ahead is not that much clearer than in
years past when we have tried to outline the themes and issues
that would likely drive the markets over the coming 12 months.
Slow global growth, low inflation, and rising risks around the
prospects for developing market economies are evident themes in
our macroeconomic outlook, suggesting that this is still not an
environment for high-conviction calls on the year ahead.
We feel that the positive, cyclical USD story is backed up by
structural improvements (debt, external deficit and energy) and
technical factors (the USD appears to be about mid-way through
a multi-year secular bull run). Reduced US fiscal and external
imbalances alongside the halt to the Fed's QE programme imply
that the supply of global USD liquidity will tighten in the year
ahead while the BoJ and ECB run very easy policies,
underpinning the path higher in the USD against the majors.
The good news is that it is not an entirely useless exercise. A year
or so ago, a key feature of our outlook was that the USD would
strengthen and we shaded our views and forecasts accordingly.
Last year, we expected EUR/USD to end 2014 at 1.22 versus a
consensus call for 1.28, USD/JPY to end the year at 111 (109)
and USD/CAD to close out December 2014 at 1.11 whilst flagging
the high risk of an overshoot (versus the market consensus of
1.08), for example.
We think the USD will find it easier to rally this year – which may
lead to deeper overshoots of our forecasts. EUR bearishness is
nothing new and many of the structural challenges that have hung
over the EUR in recent years remain intact. Now, however,
bearish EUR calls are not clashing with the central bank or capital
inflows into the Eurozone.
As we sort through the key issues raised by our macroeconomic
forecasts, we find ourselves in familiar territory as far as the
implications for the G10 FX space are concerned. We remain
broadly constructive on the USD for 2015 – almost by default –
and we have upgraded our outlook for the USD in 2015 against
the EUR, JPY, and CAD as a result of recent developments. We
are again more bullish than the consensus for the USD versus
these currencies.
In fact, ECB President Draghi is implicitly encouraging a weaker
EUR by highlighting the divergence between and ECB and Fed
policy stances. Meanwhile, peripheral bonds look much less
appealing for foreign investors after the sharp appreciation since
mid-2012 and accumulation of FX reserves by EMs has
slackened, weakening diversification demand for the EUR.
Bullish USD/JPY
Recommendation: Long USD/JPY via options
Entry: Buy a 12m JPY125-140 USD call spread
Premium: 1.8% of USD notional
Our forecasts suggest that USD/JPY offers better potential returns
for USD long positions, however. Although similar factors are
driving our expectations of USD strength (growth and central bank
policy divergence), the economy's surprising slide back into
recession in Q3 2014 suggests Japanese policy makers may
have to try and leverage the exchange rate even more to boost
domestic growth and avert deflationary pressures.
Bullish USD/CAD
Recommendation: Buy USD/CAD
Entry: 1.12
Target: 1.19
Stop: 1.09
Sources: Macrobond, TD Securities
A growing US economy and Fed resolve to get the policy
normalization process underway later in 2015 are two prime
supports for an extension of the positive USD view we held
through 2014. Central bank policy divergence and the asymmetric
We have downgraded our call on the CAD. The domestic
economy is gaining some momentum from the US recovery and
there are tentative signs that the long-awaited rotation towards
trade and investment and away from domestic consumption may
be gaining a little traction. But a sustained slide in oil prices risks
putting a large wrench in the domestic growth works.
15
2015 Global Outlook
Rates, FX and Commodities Research
20 November 2014 | TD Securities
Terms of trade support the AUD over the
NZD in the medium-term
20
ToT %/yr
15
1.35
10
1.30
5
1.25
0
1.20
-5
-10
1.15
-15
-20
-25
Mar-06
Sources: Macrobond, TD Securities
The drop in crude oil prices reflects supply, rather than demand
issues, so slow (or slower) global growth may only compound the
broader drop in commodities seen in recent months. For Canada,
this could impinge on trade and undermine investment in the oil
patch, hampering growth prospects more broadly.
Messaging from the Bank of Canada suggests no rush to raise
rates as there is still ample slack in the domestic economy. We
expect short-term spreads to widen through the first half of the
year as the Fed approaches rate liftoff.
Hence, we expect wider US-Canada short-term rate spreads and
soft commodities to drive USD/CAD toward 1.19 later this year
before the trend stabilizes. Current levels are nearing more
attractive risk/reward parameters for long USD/CAD positions we
think.
Bullish AUD/NZD
Recommendation: Buy AUD/NZD
Entry: 1.10
Target: 1.17
Stop: 1.08
Among the commodity bloc, we expect less pressure on the AUD,
however, and relatively more on the NZD in the coming year. The
AUD will edge lower against a generally stronger USD but
domestic yields will remain attractive for foreign investors and the
RBA is likely to raise rates earlier (August) than the RBNZ
(September).
1.10
Terms of trade (AU-NZ)
AUDNZD - RHS
Mar-09
Mar-12
1.05
Mar-15
Sources:
ABS,
StatsNZ,
TD Securities
(TD forecasts
Q3)
Source:
ABS;
StatsNZ;
TD Securities
(TD after
f/c after
Q3)
Bearish EUR/GBP
We have tempered our near-term optimism on the outlook for the
GBP following the morose BoE Quarterly Inflation Report, and we
Recommendation: Short EUR/GBP via options
Entry: Buy a 12m EUR/GBP put 0.7650 strike with 2m 0.78KO
Premium: 0.5% of EUR notional
now think the BoE does not hike until 2016. We still expect the
BoE to raise rates well before the ECB or the BoJ, but long
sterling positions on the crosses are not attractive now. Later in
2015 should be a much different story, but sterling crosses enter
2015 with a wide margin of error. Wages matter much more than
inflation so it is possible the market is caught off guard by the
MPC if we finally see pay pressures.
But overall GDP growth has not really started to disappoint at this
stage, so a stumble on that at the start of the year could drive
some significant GBP weakness. We still expect that somewhere
in H2, the story should pivot back to preparations for tightening.
And all along, the risks are still biased for more, not less asset
purchases from the ECB. For that reason and to reduce the cost
substantially, we choose to express a bearish EUR/bullish GBP
view via a partial barrier knock-out.
We expect a slump in NZD terms of trade to provide a good deal
of the impetus behind the NZD's relative underperformance
versus the AUD in the coming year, however. AUD/NZD's recent
dip leaves the cross looking quite attractive for medium and
longer-term buyers.
16
2015 Global Outlook
Rates, FX and Commodities Research
20 November 2014 | TD Securities
REGIONAL RISKS
CANADA
ASIA-PACIFIC
● Growth will balance headwinds from lower
commodity prices with greater demand from the US
that will be supported by a weaker currency. The
largest downside risk is if the US economy stumbles.
Canadian exports would not provide a sufficient offset
to weakness in the energy sector that will impair
business investment and curtail the terms of trade.
● China is heading for its slowest full year expansion
since 1990. Most recent data illustrate a progressive
slowdown, with TD and consensus forecasting 7%
GDP growth in 2015. The risk is for fixed asset
investment and property, already drags on the
economy, to deteriorate further before officials
respond.
● For Australia the risk is for ‘animal spirits’ to remain
● While lower rates will continue to underpin the
muted,
for
non-mining
household sector, growing
investment
to
lag
or for a
imbalances will lead to a
NITED TATES
downturn
in
mining
larger
medium
term
investment
to
accelerate.
adjustment. If global growth
● The US economy has been a standout
Commodity prices remain
ends up being stronger
performer among its global peers in 2014. And at
depressed despite talk of
than expected, a limited
a time when the Japanese economy has slipped
ECB /BoJ easing, so a
degree of spare capacity in
back into another economic recession, and
terms of trade shock
the economy will push
slowing growth momentum in Europe, China, and
remains a risk.
underlying inflation higher
EMs beginning to cast a dark shadow over the
and place pressure on the
outlook for the global economic recovery in 2015,
● In NZ, the key risk is for a
BoC to tighten policy, who
our expectation is for the US recovery to continue
reversal in record net
are otherwise unwilling to
to outperform its developed world counterparts migration flows with the risk
move ahead of the Federal
albeit with a relatively subdued 2.5% to 3.0% GDP
the RBNZ may have
Reserve.
growth pace.
overtightened.
U
EUROPE
● Eurozone deflation fears
will carry through at least
H1 2015 as countries that
have
not
completed
structural reforms (France,
Italy) stagnate. Downside
risks from EMs mean that
Germany’s export-oriented
economy will not be able
to carry the region.
S
● This will be modestly higher than the 2.2% pace
in 2014, and the pickup in growth momentum
should reflect the favorable underlying domestic
fundamentals that should provide the platform for
the recovery to transition to a self-sustaining path
next year. And with inflation momentum stalling,
we expect the Fed to stay the course on policy
tightening with the first rate hike shifting to
September
2015.
However,
given
the
unsupportive global backdrop and the implied
tightening caused by the strong dollar, the risks to
this constructive outlook are unusually higher, and
are tilted to the downside.
● The ECB will struggle to expand its balance sheet,
and we look for piecemeal additional stimulus via
tweaking TLTROs (constant 4yr maturity, potential to
extend to 5yrs, and increased allotments from 3x
lending to 6x), plus a significant risk of adding
corporate bonds, ETFs or sovereign debt to the mix in
Q1.
● For the UK, wage growth will be a key two-way risk,
with downside from higher labour supply and more
low-paying jobs, but upside from diminishing slack.
Politics will be in focus with parliamentary elections in
May and a potential EU in/out referendum in 2016.
EMS
● The Fed is trying to very
gradually ease the markets
into a world where rates are
being hiked, but the risk of a
new “tantrum” is significant.
We see a risk of Brazil
being put on negative
outlook by S&P, which
would put it a hair’s breadth
above speculative grade.
This would be negative for Brazilian assets. There is
a small risk of a default by Venezuela, which would
worsen sentiment towards Latam as a whole.
● In East Ukraine the conflict has the potential to flare
up again, which would hit Russia and Eastern
Europe. We do not expect the Hungarian and Polish
economies to weaken further, but with Eurozone
growth weak there is a clear risk to the downside.
Some of the best growth stories in EM are in Asia, but
a further slowdown in China could undermine this
view.
17
2015 Global Outlook
Rates, FX and Commodities Research
20 November 2014 | TD Securities
FORECASTS
United States
Fed Funds Rate
3m
2y
5y
10y
30y
0.25
0.00
0.50
1.60
2.30
3.02
0.25
0.10
0.65
1.80
2.65
3.35
0.25
0.15
0.95
2.00
2.80
3.40
0.50
0.40
1.15
2.15
2.90
3.40
0.75
0.65
1.40
2.30
2.90
3.40
1.00
0.85
1.65
2.50
3.10
3.55
1.25
1.10
1.90
2.70
3.30
3.70
1.50
1.30
2.15
2.85
3.40
3.80
1.75
1.55
2.35
2.95
3.50
3.85
Canada
Overnight Rate
3m
2y
5y
10y
30y
1.00
0.90
1.05
1.50
1.99
2.57
1.00
0.95
1.15
1.65
2.25
2.75
1.00
0.95
1.30
1.80
2.45
2.90
1.00
1.05
1.50
2.10
2.75
3.20
1.50
1.40
1.80
2.35
2.95
3.35
1.50
1.40
1.90
2.55
3.10
3.50
1.50
1.55
2.05
2.75
3.20
3.60
1.50
1.85
2.20
2.90
3.40
3.75
2.00
1.95
2.45
3.05
3.50
3.80
Australia
Cash Target Rate
3m
3y
5y
10y
2.50
2.75
2.53
2.77
3.27
2.50
2.75
2.65
3.00
3.50
2.50
2.75
2.75
3.25
3.70
2.75
3.00
3.00
3.50
3.85
3.00
3.25
3.35
3.75
4.15
3.00
3.40
3.75
4.10
4.35
3.50
3.75
4.00
4.35
4.60
3.75
4.00
4.15
4.45
4.65
4.00
4.20
4.25
4.50
4.75
New Zealand
Cash Target Rate
3m
3y
4y
10y
3.50
3.67
3.73
3.80
4.06
3.50
3.70
3.70
3.85
4.10
3.50
3.70
3.75
4.00
4.35
3.75
3.95
3.95
4.20
4.50
3.75
3.95
4.00
4.25
4.65
4.00
4.20
4.15
4.50
4.85
4.00
4.20
4.30
4.65
5.10
4.25
4.45
4.50
4.75
5.15
4.25
4.45
4.50
4.80
5.20
Germany
Q4 F
ECB Refi Rate
3m
2y
5y
10y
30y
0.05
-0.09
-0.02
0.14
0.79
1.71
0.05
-0.10
-0.05
0.15
0.90
1.85
0.05
-0.10
0.00
0.25
0.95
1.85
0.05
-0.10
0.10
0.40
1.10
1.95
0.05
-0.10
0.20
0.55
1.20
2.00
0.05
-0.10
0.25
0.65
1.40
2.15
0.05
-0.10
0.35
0.80
1.60
2.30
0.05
-0.10
0.50
0.95
1.80
2.40
0.05
0.05
0.60
1.45
2.05
2.65
UK
SUMMARY G10 RATES FORECASTS
2015
2016
Q2 F
Q3 F
Q4 F
Q1 F
Q2 F
Q3 F
Bank Rate
3m
2y
5y
10y
30y
0.50
0.46
0.55
1.37
2.07
2.86
0.50
0.45
0.55
1.35
2.25
3.00
0.50
0.45
0.65
1.50
2.45
3.10
0.50
0.50
0.75
1.85
2.60
3.20
0.50
0.65
0.90
2.05
2.80
3.30
0.75
0.90
1.20
2.40
3.05
3.40
1.00
1.00
1.50
2.60
3.20
3.50
1.00
1.00
1.60
2.70
3.30
3.55
1.00
1.10
1.70
2.80
3.40
3.60
Norway
EUROPE
DOLLAR BLOC
Spot
Nov 20, 2014 Q1 F
Deposit Rate
3m
2y
5y
10y
1.50
1.28
1.29
1.47
1.99
1.50
1.20
1.30
1.55
2.00
1.50
1.40
1.50
1.65
2.05
1.50
1.50
1.70
1.75
2.15
1.50
1.50
1.90
2.00
2.35
1.50
1.50
2.10
2.25
2.55
1.50
1.60
2.40
2.55
2.70
1.75
1.90
2.70
2.85
3.00
2.00
2.10
3.00
3.10
3.25
18
2015 Global Outlook
Rates, FX and Commodities Research
20 November 2014 | TD Securities
FORECASTS
USD/JPY
EUR/USD
GBP/USD
USD/CHF
USD/CAD
AUD/USD
NZD/USD
EUR/NOK
EUR/SEK
DXY
Cantral Bank Rates
EM vs USD
118.0
1.25
1.57
0.96
1.13
0.86
0.79
8.47
9.28
87.7
Q1 F
SUMMARY G10 FX FORECASTS
2015
Q2 F
Q3 F
Q4 F
Q1 F
Q2 F
Q3 F
Q4 F
120.0
1.23
1.56
0.98
1.15
0.88
0.78
8.65
9.20
89.1
122.0
1.22
1.55
0.98
1.18
0.85
0.74
8.60
9.15
89.9
125.0
1.22
1.63
1.00
1.14
0.82
0.68
8.10
9.05
89.4
120.0
1.24
1.68
0.98
1.12
0.81
0.67
8.00
8.95
87.6
120.0
1.24
1.68
0.98
1.12
0.80
0.65
7.95
8.95
87.6
Q4 F
125.0
1.18
1.53
1.03
1.19
0.85
0.73
8.50
9.10
92.4
125.0
1.18
1.57
1.03
1.18
0.84
0.72
8.40
9.05
92.0
125.0
1.20
1.60
1.02
1.14
0.83
0.70
8.20
9.05
90.6
2016
Spot
Nov 19, 2014
Q1 F
SUMMARY EMERGING MARKET FORECASTS
2015
2016
Q2 F
Q3 F
Q4 F
Q1 F
Q2 F
Q3 F
11.25
12.00
12.50
12.50
12.50
12.50
12.50
12.50
12.50
Mexico
3.00
3.00
3.00
3.50
3.75
4.00
4.00
4.50
4.75
India
8.00
8.00
8.00
7.75
7.75
7.50
7.50
7.25
7.25
Indonesia
7.75
7.75
7.75
7.75
7.75
7.75
7.75
7.75
7.75
Malaysia
3.25
3.50
3.50
3.75
3.75
3.75
4.00
4.25
4.25
Poland
2.00
2.00
2.00
2.00
2.00
2.25
2.75
3.00
3.25
Hungary
2.10
2.10
2.10
2.50
2.75
3.00
3.50
3.75
4.00
Russia
9.50
10.00
10.00
9.50
9.00
8.50
8.50
8.50
8.50
Turkey
8.25
7.75
7.75
8.25
8.75
8.75
9.25
9.75
9.75
South Africa
5.75
6.00
6.25
6.50
6.75
7.00
7.25
7.25
7.25
Brazil
EM vs EUR
Spot
Nov 20, 2014
USD/BRL
2.58
2.50
2.60
2.80
2.80
2.80
2.80
2.80
2.80
USD/MXN
13.58
13.30
13.30
13.40
13.40
13.20
13.20
13.20
13.20
USD/INR
61.96
60.50
60.87
61.00
60.50
60.30
59.70
59.70
59.70
USD/IDR
12142
11760
11764
11820
11780
11750
11725
11725
11725
USD/MYR
3.36
3.24
3.26
3.28
3.27
3.26
3.25
3.25
3.25
USD/PLN
3.37
3.41
3.43
3.53
3.53
3.46
3.39
3.34
3.35
USD/HUF
243
249
247
251
247
246
244
242
244
USD/RUB
46.96
46.00
45.00
44.00
43.00
42.00
42.00
42.00
42.00
USD/TRY
2.23
2.25
2.26
2.27
2.28
2.28
2.30
2.28
2.26
USD/ZAR
11.05
11.15
11.49
11.60
11.65
11.50
11.49
11.39
11.40
EUR/BRL
3.24
3.08
3.17
3.30
3.30
3.36
3.42
3.47
3.47
EUR/MXN
17.03
16.36
16.23
15.81
15.81
15.84
16.10
16.37
16.37
EUR/INR
77.71
74.42
74.26
71.98
71.39
72.36
72.83
74.03
74.03
EUR/IDR
15232
14465
14352
13948
13900
14100
14305
14539
14539
EUR/MYR
4.22
3.99
3.98
3.87
3.86
3.91
3.97
4.03
4.03
EUR/PLN
4.22
4.19
4.18
4.17
4.16
4.15
4.13
4.14
4.15
EUR/HUF
305
306
301
296
291
295
297
300
303
EUR/RUB
58.85
56.58
54.90
51.92
50.74
50.40
51.24
52.08
52.08
EUR/TRY
2.80
2.77
2.76
2.68
2.69
2.74
2.81
2.83
2.80
EUR/ZAR
13.85
13.71
14.02
13.69
13.75
13.80
14.02
14.12
14.14
19
2015 Global Outlook
Rates, FX and Commodities Research
20 November 2014 | TD Securities
FORECASTS
1190
16.17
1205
768
1200
17.00
1375
875
1225
18.50
1525
850
1250
18.75
1600
825
1275
19.50
1700
825
1275
19.50
1775
850
1275
19.50
1775
850
1300
19.75
1775
950
1300
19.75
1775
950
Copper **
Zinc **
Lead **
Nickel **
Aluminum **
Molybdenum +
Iron Ore *+
3.06
1.02
0.92
7.30
0.92
9.30
73
3.06
1.06
0.99
8.12
0.88
13.00
82
3.03
1.08
1.04
9.00
0.88
14.00
84
2.94
1.10
1.06
9.75
0.90
14.50
88
2.95
1.10
1.06
10.00
0.90
14.50
88
2.96
1.25
1.15
11.00
0.90
15.00
90
2.94
1.25
1.15
12.00
0.90
15.00
90
3.25
1.60
1.25
12.50
1.00
15.00
85
3.25
1.66
1.25
12.50
1.00
15.00
85
Nymex Crude Oil +Brent Crude Oil +Heating Oil -+
Gasoline -+
Natural Gas -AECO Natural Gas -Newcastle Thermal Coal-
75
79
2.38
2.03
4.33
3.85
62
73
80
2.30
2.15
3.90
3.40
65
72
80
2.25
2.10
3.50
2.90
70
72
82
2.25
2.10
3.50
2.90
75
77
87
2.40
2.05
3.70
3.00
75
78
88
2.40
2.30
3.80
3.10
78
81
91
2.50
2.40
3.40
2.70
78
83
93
2.50
2.35
3.50
2.80
80
87
97
2.65
2.30
3.70
3.00
80
Precious
metals
Gold *
Silver *
Platinum *
Palladium *
Other metals
Q4 F
Energy
SUMMARY COMMODITIES FORECASTS
Spot
2015
2016
Nov 20, 2014 Q1 F
Q2 F
Q3 F
Q4 F
Q1 F
Q2 F
Q3 F
Note: *London PM Fix $/oz., **LME $/lb ., +Molyb denum equivalent to moly oxide, FOB USA,
*+CFR China, 62% Fe, dry $/tonnes, +- $/b b l, -+ $/gal., -- $/mmb tu, ++pre-2011 Uranium price is Nymex U308 Swap
indicator post 2011 is NYMEX, +* Japan-Australia Spot, $/tonne FOB, -Japan CIF steam coal marker -Newcastle, $/tonne
20
2015 Global Outlook
Rates, FX and Commodities Research
20 November 2014 | TD Securities
GLOBAL RATES, FX AND COMMODITIES RESEARCH TEAM
New York
Eric Green
Head, US Rates & Research Strategy
1 212 827 7156
Millan Mulraine
Deputy Head, US Rates & Research Strategy
1 212 827 7186
Richard Gilhooly
Senior Global Rates Strategist
1 212 827 7187
Blue Macellari
Director, Latin America Strategy
1 212 827 7182
Cheng Chen
US Strategist
1 212 827 7183
Gennadiy Goldberg
US Strategist
1 212 827 7180
Shaun Osborne
Chief FX Strategist
1 416 983 2629
David Tulk
Chief Canada Macro Strategist
1 416 983 0445
Bart Melek
Head of Commodity Strategy
1 416 983 9288
Andrew Kelvin
Senior Fixed Income Strategist
1 416 983 7184
Mazen Issa
Senior Canada Macro Strategist
1 416 983 0859
Mike Dragosits
Senior Commodity Strategist
1 416 983 8075
Martin Schwerdtfeger
FX Strategist
1 416 982 7784
Michael Loewen
Commodity Strategist
1 416 982 5816
Toronto
London
Richard Kelly
Head of Global Strategy
44 20 7786 8448
Cristian Maggio
Head of Emerging Markets Research
44 20 7786 8436
Jacqui Douglas
Senior Global Strategist
44 20 7786 8439
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Senior Emerging Markets Strategist
44 20 7786 8424
Tim Davis
Global Strategist
44 20 7786 8441
Singapore
TD Rates, FX &
Commodities Research
United States
Canada
Europe
United Kingdom
Australia
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Emerging Markets
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65 6500 8047
Research Home Page: https://www.tdsresearch.com/currency-rates
Bloomberg Page: TDGR<GO>
21
2015 Global Outlook
Rates, FX and Commodities Research
20 November 2014 | TD Securities
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