GLOBAL FX STRATEGY | DAILY FX UPDATE

1 GLOBAL FX STRATEGY | DAILY FX UPDATE . Tuesday, July 10, 2018. FOLLOW US ON TWITTER USD Recovers But Range Trading Persists Shaun Osborne USD reverses Monday's losses in quiet trade. Inflation data awaited. Chief FX Strategist CAD softer ahead of BoC decision but underlying fundamentals are positive. EUR slips back to , focus on ECB comments today. Eric Theoret, CFA, CMT. GBP volatile on domestic politics yesterday, should steady now. FX Strategist JPY softer as risk sentiment remains positive, USD tests AUD softens on broader USD rebound. MXN little changes after USD rebounds from area. FX Market UPDATE - The GBP's slide on domestic political concerns yesterday provided a bit of a lifeline for the broadly softer USD. The big dollar reversed broadly and is trading higher again versus its G-10 peers this morning. Movement is fairly limited, however, and broadly positive risk sentiment equities are mainly higher and major bond markets are modestly softer amid calming (for now, at least) trade fears are weighing on the JPY (under-performing broadly again).

2 The GBP, for its part, is more or less stable versus the USD and therefore a modest out-performer despite mixed data reports from the UK earlier. The CNY eased modestly, reflecting softness in the Asian FX space generally, while the MXN is trading flat on the day after the USD rebounded from the 200-day MA ( ). The US data schedule remains limited today (JOLTS data the NFIB small business sentiment index for Jun was just released and remains elevated at ) ahead of key US inflation data later in the week so incentives to participate remain relatively low at this point. We remain a bit more circumspect on the broader outlook for the USD from here, with good news largely priced in and firmer economic data emerging from Europe generally bolstering expectations that other central banks will be adjusting policy in the coming months. USDCAD ( ) USDCAD was making good progress lower yesterday before the slide stalled and the USD recovered broadly.

3 CAD-positive fundamentals remain intact, however, with spreads narrowing modestly ahead of the expected BoC rate hike tomorrow and crude oil prices remaining elevated (WCS traded at a $19. discount to WTI yesterday, the narrowest in three weeks). Our fair value model suggests equilibrium for USDCAD is today. A 25bps hike is now more or less 85% priced in, meaning the broader FX impact of the BoC policy decision will hinge on the MPR and how Gov. Poloz chooses to shape expectations for future policy decisions. We think he will leave the door open to a further, modest tightening in policy in the next few months. How the BoC assesses the impact of trade tensions remains to be seen. Canadian stocks rose to a record yesterday, led (according to Bloomberg) by stocks exposed to trade . USDCAD short-term technicals: Neutral/bearish USD gains from the area yesterday may have drawn a line under the slide in funds for the moment.

4 The broader outlook for USDCAD remains bearish, based on negative, weekly signals. Near-term trends may moderate, however, with the 40-day MA ( ) providing some underpinning for the market, as expected. We see minor resistance around and, stronger, at EURUSD ( ) ECB President Draghi sounded upbeat when addressing the EU. Parliament yesterday, expressing confidence that monetary policy was working and that inflation would converge with the central bank's 2% target. ECB policy makers are sounding confident, despite trade uncertainties, and comments from officials today (Angeloni at and Lautenschlaeger at ) might reinforce that 1. GLOBAL FX STRATEGY | DAILY FX UPDATE . Tuesday, July 10, 2018. message. Germany's ZEW investor sentiment index softened this month on trade tensions ( from ) but the index remains generally elevated. French industrial production fell a weaker than expected in May (+ M/M expected).

5 EURUSD short-term technicals: Neutral EUR gains stalled just below , leaving the short-term technical picture looking a little soft this morning. Spot has eased under short-term trend support around and is retesting the area formerly resistance as North American trade picks up. Sustained losses below here would rob the market of more of the constructive momentum that had developed in the past few days and leave spot back in the broader trading range. Weekly technical signals remain bullish, however, and longer term risks remain tilted higher. GBPUSD ( ) Despite all of yesterday's gnashing and wailing over Brexit policy and the future of PM May, the committee meeting of backbench MPs which could have triggered a leadership bid yesterday passed without event, If anything, MPs seemed supportive change the policy, not the Prime Minister, seems to be the MO for the Brexiteers at the moment. Political risks have diminished somewhat but have not disappeared.

6 UK data reports earlier were mixed a wider trade balance and weaker than expected industrial production data (despite a solid gain in construction output) were offset by better growth momentum (GDP. increased in the 3 months through May) and stronger services sector activity in May. GBPUSD short-term technicals: Neutral/bearish The GBP traded sharply lower yesterday and closed net lower on the day having failed to secure a break above the 40-day MA ( ) - a barrier that we expected to provide firm resistance to the GBP's recent advance. The GBP's tumble was significant and technically bearish as price formed a negative outside range session. Weakness under should see spot drop back to the USDJPY ( ) The JPY is soft as positive risk sentiment continues to simmer under the markets broadly. USDJPY gains above (May high) would open the door for the USD to advance towards the Dec 2017 congestion range between Japan releases core machinery orders data ( gain over the year expected), PPI and BoJ outright bond purchases this evening TECHNICALS: BUY/SELL SIGNALS AND PIVOT LEVELS Jul 10, 2018.

7 30 Day 9 & 21- Pivot 1st Pivot 1st Spot MACD DMI RSI. Hist Vol day MA Support Resist. USDCAD sell sell buy 46 EURUSD buy buy buy 57 GBPUSD buy sell buy 54 USDCHF sell buy sell 45 USDJPY sell buy buy 54 AUDUSD buy sell sell 53 USDMXN sell sell sell 32 DXY (USD index) sell na sell 44 EURCAD sell sell buy 55 GBPCAD sell sell buy 51 AUDCAD sell sell sell 51 CADMXN sell sell sell 32 BoC Noon Rate #N/A Use Formula Conversion ToolSource: Scotiabank & Bloomberg 2. GLOBAL FX STRATEGY | DAILY FX UPDATE . Tuesday, July 10, 2018. IMPORTANT NOTICE and DISCLAIMER: This report is prepared by Scotiabank as a resource for clients of Scotiabank for information and discussion purposes only. This report should be considered a marketing communication and has not been prepared by a member of the research department of Scotiabank, it is solely for the use of sophisticated institutional investors, and this report does not constitute investment advice or any personal recommendation to invest in a financial instrument or investment research as defined by the UK Prudential Regulation Authority or UK Financial Conduct Authority.

8 This document has not been prepared in accordance with EU legal requirements designed to promote the independ- ence of investment research and the information contained in this publication is not subject to any prohibition in the EU on dealing ahead of the dissemination of investment research. Opinions, estimates and projections contained herein are our own as of the date hereof and are subject to change without notice. The information and opinions contained herein have been compiled or arrived at from publically available sources believed reliable but no representation or warranty, express or implied, is made as to their accuracy or completeness and neither the information nor the forecast shall be taken as a representation for which Scotiabank or any of its employees incur any re- sponsibility. Neither Scotiabank nor its representatives accept any liability whatsoever for any loss arising from any use of this report or its contents.

9 This report is not, and is not constructed as, an offer to sell or solicitation of any offer to buy any financial instruments and has no regard to the specific investment objectives, financial situation or particular needs of any recipient. It is not intended to provide legal, tax, accounting or other advice. Scotiabank and/or its respective officers, directors or employees may from time to time take positions in the products mentioned herein as principal or agent. Directors, officers or employees of Scotiabank may serve as directors of corporations referred to herein. Scotiabank may have acted as financial advisor and/or underwriter for certain of the corporations mentioned herein and may have received and may receive remuneration for same. This report may include forward-looking statements about the objectives and strategies of Scotiabank. Such forward-looking statements are inherently subject to uncertainties beyond the control of Scotiabank including but not limited to economic and financial conditions globally, regulatory development in Canada and elsewhere, technological developments and competition.

10 The reader is cautioned that the member's actual performance could differ materially from such forward- looking statements. Past performance or simulated past performance is not a reliable indicator of future results. Forecasts are not a reliable indicator of future performance. You should note that the manner in which you implement any of strategies set out in this report may expose you to significant risk and you should carefully consider your ability to bear such risks through consultation with your legal, accounting and other advisors. Information in this report regarding services and products of Scotiabank is applicable only in jurisdictions where such services and products may lawfully be offered for sale and is void where prohibited by law. If you access this report from outside of Canada, you are responsible for compliance with local, national and international laws. Not all products and services are available across Canada or in all countries.