TORONTO, May 30, 2013 /CNW/ - The U.S. Federal Reserve System (the Fed) may soon start backing away from bond buying, which is likely to shift the course of foreign exchange (FX) markets according to a Scotiabank's FX Outlook report released today.

"Low inflationary pressures and disappointing growth in the world's largest countries laid the foundation for loose monetary policy. The resulting hunt for yield drove emerging market FX appreciation but this is beginning to abate as a strong USD has shifted near-term risks to capital outflows," said Pablo Breard, Vice President, International Economics, Scotiabank.

"The unwinding of global liquidity may trigger temporary financial market volatility (as we observed in these past weeks) but will not neutralize the long-term economic benefits of structural changes implemented by relevant emerging-market countries in Latin America and Asia/Pacific", he adds.

"A broadly stronger USD leaves CAD vulnerable to near-term weakness, but there is a lot of bad news priced into CAD, which should contain the currency within a 0.95 to parity range over the medium-term," suggest Camilla Sutton, Scotiabank's Chief Currency Strategist.

Meanwhile, the EUR, JPY and GBP are expected to weaken against the USD into year-end mainly on relative shifts in central bank policy and growth outlooks, according to the FX Outlook. Several other currencies, including CAD, MXN, THB and CHF are expected to be somewhat range bound; while AUD, NZD, NOK, PEN and KRW will appreciate.

The Foreign Exchange Outlook is a joint publication between Scotiabank Global Economics and FX Strategy. The monthly report includes: global FX forecasts, covering 33 currencies in the advanced economies, Latin America and emerging Asia; as well as a fundamental commentary on most major markets; consensus forecasts and charts; and a broad overview of major FX drivers.

Please read the full report below at http://www.scotiabank.com/ca/en/0,,3112,00.html.

Scotiabank provides clients with in-depth commentary on the factors shaping the outlook for Canada and the global economy, including macroeconomic developments, currency and capital market trends, commodity and industry performance, as well as monetary, fiscal and public policy issues.

Scotiabank is a leading multinational financial services provider and Canada's most international bank. With more than 83,000 employees, Scotiabank and its affiliates serve some 19 million customers in more than 55 countries around the world. Scotiabank offers a broad range of products and services including personal, commercial, corporate and investment banking. In December 2012, Scotiabank became the first Canadian bank to be named Global Bank of the Year and Bank of the Year in the Americas by The Banker magazine, a Financial Times publication. With assets of $754 billion (as at April 30, 2013), Scotiabank trades on the Toronto (BNS) and New York Exchanges (BNS). For more information please visit www.scotiabank.com.

SOURCE: Scotiabank