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HEDGEANALYST.COMTRANSCRIPT
Global
30 November 2010
Exchange Rate Perspectives
10 Lessons From 2010
Deutsche Bank AG/London
All prices are those current at the end of the previous trading session unless otherwise indicated. Prices are sourced from local exchanges via Reuters, Bloomberg and other vendors. Data is sourced from Deutsche Bank and subject companies. Deutsche Bank does and seeks to do business with companies covered in its research reports. Thus, investors should be aware that the firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their investment decision. DISCLOSURES AND ANALYST CERTIFICATIONS ARE LOCATED IN APPENDIX 1. MICA(P) 007/05/2010
Special Report
Research Team
Bilal Hafeez Strategist (+44) 20 754-70354 [email protected]
Alan Ruskin Macro strategist (+1) 212 250-8646 [email protected]
Henrik Gullberg Strategist (+44) 20 754-59847 [email protected]
George Saravelos Strategist (+44) 20 754-79118 [email protected]
Mirza Baig Strategist (+65) 64235930 [email protected]
Dennis Tan Strategist (+65) 6 423-5347 [email protected]
John Horner Strategist (+61) 2 8258 2130 [email protected]
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30 November 2010 Exchange Rate Perspectives
Page 2 Deutsche Bank AG/London
Table of Contents
Currency Forecasts............................................................................................................................................................ 3
FX Views ............................................................................................................................................................................ 5
The Big Picture:
12 Lessons From 2010 ...................................................................................................................................10
Monitors:
G G10 FX Valuation Monitor: Lines in the sand .........................................................................................26
Capital Flows and Basic Balances................................................................................................................29
Commodity Price and Currency Monitor. ...................................................................................................39
U.S. Trade Balance Monitor..........................................................................................................................44
Central Bank Reserves Currency Composition Monitor ............................................................................50
30 November 2010 Exchange Rate Perspectives
Deutsche Bank AG/London Page 3
Currency Forecasts
Industrialized Countries Spot 3M 6M 12M
Currency RateUS $ Exchange RatesU.S. DB US$ Index 68 66 64 69
- - - -
Euro US$/Euro 1.31 1.38 1.45 1.30(Fwd. Rates) - 1.31 1.31 1.31
Japan Yen/US$ 84 80 75 78(Fwd. Rates) - 84 84 84
U.K. US$/£ 1.56 1.59 1.58 1.53(Fwd. Rates) - 1.55 1.55 1.55
Canada C$/US$ 1.02 1.03 1.05 1.10(Fwd. Rates) - 1.02 1.03 1.03
Australia US$/A$ 0.96 0.96 0.95 0.85(Fwd. Rates) - 0.95 0.94 0.92
N.Z. US$/NZ$ 0.75 0.75 0.72 0.67(Fwd. Rates) - 0.74 0.73 0.72
Switzerland Sfr/US$ 1.00 0.98 0.93 1.08(Fwd. Rates) - 1.00 1.00 1.00
Euro Cross RatesJapan Yen/Euro 110 110 109 101
(Fwd. Rates) - 110 110 109
U.K. £/Euro 0.84 0.87 0.92 0.85(Fwd. Rates) - 0.84 0.84 0.84
Switzerland Sfr/Euro 1.31 1.35 1.35 1.40(Fwd. Rates) - 1.31 1.31 1.30
Norway Nkr/Euro 8.11 8.00 7.80 7.60(Fwd. Rates) - 8.14 8.17 8.23
Sweden Skr/Euro 9.18 9.00 8.50 8.20(Fwd. Rates) - 9.20 10.17 10.16
Source: Datastream, Reuters, Bloomberg Finance LP, DB forecasts
Latin America Spot 3M 6M 12M
Currency RateArgentina ARS/USD 3.93 4.04 4.16 4.41
(Fwd. Rates) - 4.02 4.15 4.42
Brazil BRL/USD 1.72 1.65 1.70 1.75(Fwd. Rates) - 1.76 1.79 1.87
Chile CLP/USD 487 495 500 505(Fwd. Rates) - 491 495 502
Colombia COP/USD 1,922 1,810 1,790 1,780(Fwd. Rates) - 1,920 1,923 1,941
Mexico MXN/USD 12.5 12.6 12.7 12.8(Fwd. Rates) - 12.6 12.6 12.6
Venezuela VEF/USD 4.29 4.30 5.50 5.50(Fwd. Rates) - - - -
Source: Datastream, Reuters, Bloomberg Finance LP, DB forecasts
Asia Spot 3M 6M 12M
Currency RateChina CNY/USD 6.66 6.57 6.49 6.35
(Fwd. Rates) - 6.65 6.61 6.54
Hong Kong HKD/USD 7.77 7.80 7.80 7.80(Fwd. Rates) - 7.76 7.76 7.76
India INR/USD 45.9 43.6 43.0 42.4(Fwd. Rates) - 46.7 47.3 48.3
Indonesia IDR/USD 9,028 8,880 8,820 8,700(Fwd. Rates) - 9,091 9,209 9,403
Malaysia MYR/USD 3.16 3.05 3.02 2.95(Fwd. Rates) - 3.18 3.18 3.18
Philippines PHP/USD 44.31 42.0 42.0 41.5(Fwd. Rates) - 44.3 44.3 44.3
Singapore SGD/USD 1.32 1.27 1.26 1.23(Fwd. Rates) - 1.32 1.32 1.32
South Korea KRW/USD 1,165 1,110 1,070 1,050(Fwd. Rates) - 1,170 1,170 1,170
Taiwan TWD/USD 30.4 29.8 29.5 29.3(Fwd. Rates) - 30.3 30.1 29.8
Thailand THB/USD 30.3 29.5 29.3 29.0(Fwd. Rates) - 30.3 30.3 30.3
Source: Datastream, Reuters, Bloomberg Finance LP, DB forecasts
Emerging Europe
Spot 3M 6M 12MCurrency Rate
Czech Rep. Koruna/Euro 24.9 25.2 25.0 24.5(Fwd. Rates) - 24.9 24.9 24.9Koruna/US$ 19.0 18.7 18.5 18.3(Fwd. Rates) - 19.1 19.1 19.1
Hungary Forint/Euro 284 275 275 275(Fwd. Rates) - 287 290 295Forint/US$ 217 190 192 206(Fwd. Rates) - 219 221 225
Poland Zloty/Euro 4.11 3.87 3.82 3.72(Fwd. Rates) - 4.13 4.15 4.20Zloty/US$ 3.13 2.67 2.69 2.82(Fwd. Rates) - 3.15 3.17 3.21
Russia Ruble/US$ 31.36 30.3 29.8 28.7(Fwd. Rates) - 31.7 32.0 32.7
Turkey Lira/US$ * 1.51 1.45 1.55 1.60(Fwd. Rates) - 1.53 1.55 1.59
South Africa Rand/US$ 7.16 7.05 7.15 7.51(Fwd. Rates) - 7.26 7.35 7.54
Source: Datastream, Reuters, Bloomberg Finance LP, DB forecasts
30 November 2010 Exchange Rate Perspectives
Page 4 Deutsche Bank AG/London
G10 FX Forecasts: End of Quarter
Latest 2010 2012 201329 Nov, 10 end -Q4 end-Q1 end-Q4 end-Q4 end-Q4
USD-crosses
EUR/USD 1.31 1.38 1.45 1.30 1.25 1.20
USD/JPY 84 80 75 78 90 90
GBP/USD 1.56 1.59 1.58 1.53 1.49 1.45
USD/CHF 1.00 0.98 0.93 1.08 1.14 1.21
AUD/USD 0.96 0.96 0.95 0.85 0.73 0.70
NZD/USD 0.75 0.75 0.72 0.67 0.61 0.58
USD/CAD 1.02 1.03 1.05 1.10 1.10 1.18
USD/SEK 7.00 6.52 5.86 6.31 6.48 6.67
USD/NOK 6.19 5.65 5.31 5.85 6.00 6.25
EUR-crosses
EUR/JPY 110 110 109 101 113 108
EUR/GBP 0.84 0.87 0.92 0.85 0.84 0.83
EUR/CHF 1.31 1.35 1.35 1.40 1.42 1.45
EUR/SEK 9.18 9.00 8.50 8.20 8.10 8.00
EUR/NOK 8.11 8.00 7.80 7.60 7.50 7.50
2011
Source: Deutsche Bank
30 November 2010 Exchange Rate Perspectives
Deutsche Bank AG/London Page 5
FX Views
G10 Views
Euro
The single currency has been weighed by continuous volatility in the Eurozone peripheral bond markets, reversing all the gains seen since the market began pricing quantitative easing from the Federal Reserve. With Ireland now having resorted to IMF/EU financing and European policymakers providing greater clarity on the European Stability Mechanism after 2013, our base case remains that peripheral worries will subside, allowing EUR/USD to regain some footing on the back of a supportive rate differential environment and aggregate fiscal fundamentals that exceed those of the US. The risks to our constructive EUR/USD view have clearly risen since the publication of our previous round of forecasts, and we will be re-evaluating our view more thoroughly in the last Exchange Rate Perspectives publication to be released before year-end.
Japan
We maintain our bullish yen stance. A back-up in US yields did occur over the past month, but has since stalled. Indeed, rate differentials now clearly point to a stronger yen. Japanese stock markets have also moved to new highs for the second half of the year. This may result in less Japanese buying of foreign bonds, which appears to be occurring and possibly more foreign interest in Japanese stocks, which is only happening very slowly so far.
United Kingdom
The autumn rally in EUR/GBP has been reversed helped by peripheral European worries and as UK data has been stronger than expected, reversing quantitative easing expectations from the Bank of England. On a head-to-head comparison with other G10 currencies sterling does not fare well, so we view next year's risks as skewed towards further sterling weakness before the cross eventually returns to levels more compatible with long-term fair value.
Canada
There has been a notable improvement in the US data in recent weeks, especially labour market indicators such as jobless claims. History would suggest the currency this should be most positive for is CAD (not surprisingly given over 70% of Canada's exports go to the US). For the near-term this should offset downside risks from concerns over policy tightening in China and resulting weakness seen in key commodity prices.
Australia and New Zealand
With the multi-month uptrend in many key commodity prices having broken down the near-term outlook for NZD, and especially AUD, has materially deteriorated in recent weeks. �We also see AUD as particularly vulnerable to concerns over policy tightening in China given Australia’s strong trade links with China and the common use of AUD as a “China play”. In contrast, the better numbers in the US in recent weeks, especially the improvement in the jobless claims data, should see CAD outperform NZD and especially AUD.
Switzerland
Our forecasts reflect a neutral view on EUR/CHF in the near-term. On the negative side, continued Eurozone peripheral worries and the strong performance of the Swiss economy will mean that the cross will struggle to rally beyond the highs seen earlier this summer. On the positive side, persistent strength below 1.30 is unlikely as it will likely delay any tightening from the Swiss National Bank and as valuation constraints become more of a headwind. Our long-term forecasts foresee EUR/CHF gradually returning to long-term fair value, aided by an easing of peripheral worries and a normalization of European-Swiss interest rate differentials which for now continue to remain at historical lows.
30 November 2010 Exchange Rate Perspectives
Page 6 Deutsche Bank AG/London
Norway
Norges Bank rhetoric/projections remain committed to maintaining policy stable over the near-term. This suggests there will be limited rate support for the NOK over the next couple of months, leaving the Norwegian unit at the vagaries of swings in risk appetite and oil. Though still constructive in terms of the risk outlook, the approaching year-end, ongoing peripheral concerns and Chinese policy tightening represent an initial barrier to a more significant risk rally, in turn limiting the upside in the NOK. Nonetheless, positioning is light, and there are prospects of favourable M&A flows, which should be sufficient to maintain a positive trajectory in the NOK. We move our year-end target up to 8.00 from 7.80 previously, but maintain end-Q1 and end-Q4 2011 forecasts at 7.70 and 7.60 respectively.
Sweden
Like the NOK, near-term gains in the SEK are undermined by a more fragile risk environment. However, the Riksbank remains committed to a gradual normalisation of policy going forward, in response to strong domestic growth dynamics and a desire to lean against rising property prices and further household indebtedness. External surpluses and strong fiscal finances (debt-to-GDP projected to fall to 21.1% in 2014, from 34.6% currently) add to the longer-term appeal of the SEK, with the re-elected centre-right government also committed to continued privatisations going forward, albeit dependent on market conditions. We continue to forecast a sustained appreciation in the SEK, and stick to our 9.00 end of year forecast for EUR/SEK, followed by 8.50 by the end of Q1 and 8.20 at the end of next year.
Asia Views
China
Economic activity and inflation have been stronger than expected, while policy tightening has also turned more aggressive in the past month. We expect PBoC to introduce further liquidity tightening measures as well as interest rate hikes over the next six months. Chinese authorities typically tighten macro-economic policies using four basic tools, broadly in this sequence: First, they use administrative hikes, second they use liquidity tightening measures (RRR hikes, aggressive sterilization), third they turn to interest rates, and finally they allow a faster currency appreciation. In that context, we think China may be willing to let the currency appreciate more readily in coming months, particularly vs. its NEER basket of currencies.
India
India is running a current account deficit, which, net of FDI, requires financing of roughly USD80-100m per day from portfolio and debt capital inflows. Not surprisingly, USD/INR is trading as a high beta play on global risk-sentiment. The positive factors for INR are: strong domestic growth (8.9% in 2010), and relatively high inflation that will likely force RBI to lift rates further early next year. In addition, the government has an ambitious privatization plan in place which will bring roughly USD9bn worth of deals to market in Q1 next year. There remains scope for further inflows to Indian corporate bonds. Finally, with offshore borrowing costs for Indian much lower than onshore, there is scope for External Commercial Borrowing to accelerate in coming months. On the negative side, rising oil prices could put a dent in India's Balance of Payments. And an ongoing political scandal that has gridlocked parliament may stall the government's reform agenda, including the privatization pipeline.
Indonesia
Indonesia is enjoying strong growth (6% in 2010), supported by robust trade, credit growth and strong investor/consumer confidence. However the asset markets' sharp rise and capital inflows have become key issues. Specifically, with bond and equity ownership by foreigners at an all time high, the main risk to the currency is of an externally driven rise in global risk-aversion which could trigger substantial capital outflows from local markets. However given the largely real-money nature of the investor base, we think most of the recent inflows will tend to be sticky and will not reverse in a disorderly manner. Bank Indonesia's comfort zone for USD/IDR is between 8900-9300 - and we would look to sell USD/IDR in the 9100-9200 range.
30 November 2010 Exchange Rate Perspectives
Deutsche Bank AG/London Page 7
Korea
Geopolitical concerns, and global risk-aversion have weighed on the won in recent days. However Korea's strong current account surplus (USD35bn in 2010), cheap valuations and central bank tightening stance still argue in favor of a stronger won. Bank of Korea is likely to cap USD/KRW at 1200, but will also try to prevent the pair from falling below 1100 in the near-term. We would also be wary of a USD funding squeeze over the next couple of months coming from either an escalation of Europe's sovereign crisis, or Bank of Korea not fully rolling over roughly USD20bn worth of FX swaps that are maturing over the next 1-2 months.
Malaysia
Malaysia is running a strong current account surplus (12.2% of GDP). The export sector is well diversified between industrial products (chiefly electronics) and commodities. Partly thanks to the government's reform initiatives, the local stock market scene has also livened up of late, with 2010 seeing record IPOs, and 2011 likely to continue on that trajectory. Domestic fixed income also continues to receive inflows from EM real money investors. Recent government comments have also played down the prospects of imposing capital controls. Thus, a fundamentally bullish view on MYR is warranted in our view. A break of the key support level of 3.08 in USD/MYR may set the stage for another trend lower in the cross.
Philippines
Steady growth in remittances and outsourcing income underpins the Balance of Payments. However, the central bank has engineered a sharp collapse in FX yields by not rolling over maturing FX swaps, which has made the currency less attractive from a carry perspective. We look to re-establish fresh PHP longs when money markets normalize. Meanwhile the economy is in a sweet spot, characterized by strong inflation and low growth. But there are key challenges ahead, particularly related to the potential impact of rising food prices, and the government's commitment to a fiscal reform agenda.
Singapore
The Singapore dollar is supported by several factors, including strong economic growth momentum (+16% YoY in 2010 - though this is likely to slow to a more modest trajectory next year), current account surplus (17% of GDP), perceived safe haven status of the currency, AAA sovereign rating and strong condition of public finances. Moreover, MAS' tightening bias of an estimated 3% per annum vs. NEER is not priced in its forward curve. Thus we would be keen to buy SGD NEER on dips.
Taiwan
CBC has become less aggressive in its FX intervention lately, and has allowed a modest appreciation of the exchange rate. And given its status as a funding currency for carry trades, TWD may benefit - or at least outperform - during the current conditions of risk-aversion. Fundamentally, a large current account surplus, rapid reserve accumulation, and cheap valuations argue strongly in favor of a stronger exchange rate.
Thailand
Bank of Thailand continues to guide THB in line with movements in regional currencies. Capital inflows have weakened after the government imposed a 15% withholding tax on investment in government bonds, though history suggests these controls will not reverse the trajectory of capital flows. That said, the government has made it clear that if THB appreciates faster than its regional peers, then they would be willing to impose more restrictions on capital inflows, including measures like Tobin taxes.
30 November 2010 Exchange Rate Perspectives
Page 8 Deutsche Bank AG/London
EMEA Views
Czech Republic
As with the rest of CE-3, the Czech economy is benefitting from a strong German economy, but is less vulnerable to ongoing peripheral concerns than its neighbours, primarily due to a more conservative fiscal policy stance. While we continue to see a very gradual trend appreciation vs the EUR, we also anticipate underperformance relative to the PLN, reflecting more moderate growth dynamics in the Czech economy.
Hungary
Remains the most risk sensitive CE-3 currency, with the government's fiscal plans for the next few years underpinning adding to the risk bias. Political pressure on the central bank to raise its inflation target is also not helping the HUF, and although we continue to like valuation, cheap is currently not enough to continue to call for HUF appreciation.
Poland
Headline inflation picking up at the same time as core CPI is remaining subdued have led to a highly divided NBP board, split largely down the middle between hawks and doves. However, this will only impact on the timing of the Bank's tightening campaign, with strong growth dynamics and ongoing state privatisations adding to prospects of higher rates in Q1 to provide support for the PLN.
Russia
The underperformance over the past few months has materialised against a backdrop of relatively strong domestic growth dynamics, budget outperformance and more recently also intervention (verbally and directly) in support of the RUB. Despite this the Russian unit has struggled, in turn causing the CBR to request several commercial banks to disclose information about their FX operations in attempt to identify the source capital outflows. Regardless of whether the Bank's search for speculators is successful, the greater problem has been the lack of inflows. This is in stark contrast with the rest of the EM world, where authorities are trying to stem the tide of liquidity flowing in. While part of the explanation include factors such as minimal transparency and a highly politicised legal system, the lack of investable assets is key. However, the more detailed privatisation plan and Russia's accession to the WTO (possibly in 2011) should translate into a better investment climate and a stronger RUB.
Turkey
Strong domestic growth and rising inflation expectations are pressurising the CBT into a number of different measures in an attempt to tighten domestic liquidity. Meanwhile the Bank tries to avoid hiking its key policy rate in order to avoid attracting further capital inflows. In our view the CBT have two options, either tighten policy and accept nominal appreciation, or maintain policy at levels which are too expansionary for the economy, in turn generating an overheated domestic economy and real appreciation. A scenario in between the two is the more likely, ie that the CBT will fall behind the curve, but will have to start tighten policy earlier than what is currently signalled. The bottom line, carry will continue to be favourable, and consistent with continued appreciation.
South Africa
Authorities want a weaker currency in response to a moderation in growth and inflation prospects. However, with the capital account to a large extent made up of portfolio inflows, focus is less on controlling capital inflows, and more more on matching inflows with outflows. So far these measures have had a very limited impact, with the ZAR instead responding increasingly to swings in risk appetite. Policy wise focus very much on rate cuts, in contrast to much of the rest of EM, and combined with significant overvaluation, we continue to look for underperformance in the ZAR going forward.
30 November 2010 Exchange Rate Perspectives
Deutsche Bank AG/London Page 9
Israel
Trend appreciation (vs USD) has picked up from around 1% per month, to around 1.5% over the past 4-5 months. With reserves accumulation having slowed noticeably, the BoI might also be growing more comfortable with a continued appreciation, in particular with inflation picking up and with the economy projected to run above potential by 2012 (according to the IMF). On balance therefore we continue to see appreciation in ILS, underpinned by a need for continued tightening in response to signs of overheating in some segments of the economy.
LatAm Views
Brazil
The economy has been growing strongly (7.6% expected this year) on the back of solid domestic demand. Good monetary policy management has helped to control inflation and maintained large interest rate differentials. These factors have helped to attract sizable inflows, exerting considerable appreciation pressures on the BRL. The government reacted by increasing tax on fixed-income inflows and FX derivatives. While further exchange controls or quantitative constraints cannot be ruled out, we continue to favor a short USD/BRL position. We consider that those risks are more than compensated with attractive carry, which could likely increase if inflationary pressures materialize.
Chile
Strong domestic demand driven growth (7% YoY in 3Q10) paired with low inflation and high commodity receipts (copper back to pre-crisis peaks and rising) continue to attract inflows. Healthy government and banking institutions also help to reassure investors. The government recently announced measures aimed at broadening the capital account and increasing the competitiveness of the exporting sector, which could have only some mild effects in the long term equilibrium exchange rate but they are innocuous in short-term movements. There is a very low risk of low risk of exchange controls and the Central Bank is strongly against direct FX intervention; it would be the last resort after "verbal" intervention and moderation of monetary policy, but since both have already occurred, intervention cannot be completely ruled out if the currency appreciates considerable from current levels. We maintain a neutral position for the moment but would consider adding a short position if the currency gets closer to 500 due to global factors.
Mexico
Economic growth is still unimpressive (reflecting ties with US) but the sizable output gap helps to contain inflation. Mexico is singled out as one the countries in EM where exchange controls could be practically discarded. Additionally, the Central Bank would reluctantly intervene in the FX market, and only as a response to very strong, temporary, capital flows. This considerations, along with decent carry, makes the MXN relatively more attractive than other EM peers. We continue to be constructive on the MXN, and consider that the recent sell-off (originated in external conditions) offer an opportunity to enter a short USD/MXN position.
Bilal Hafeez London, +44 (20) 754-70354
George Saravelos London, +44 (20) 754-79118
John Horner Sydney, +61 (2) 8258-2130
Henrik Gullberg London, +44 (20) 754-70354
Mirza Baig Singapore, +65 6423-5930
Dennis Tan Singapore, +65 6423-5347
Mauro Roca New York, +1 (212) 250-8609
30 November 2010 Exchange Rate Perspectives
Page 10 Deutsche Bank AG/London
10 Lessons From 2010 Before writing our outlook for 2011 (we plan to in mid-December), we thought we would take stock of 2010 and draw out the 10 most important lessons we learnt (and two extra lessons we could not keep out):
Know The Herd, But Don't Follow It If Europe Goes Down, So Does EM AUD and JPY Can Rally Together Remember Latvia Inflation Dominos Have Started to Fall Small Perceived High-Beta FX Do the Best: MYR, THB, COP Extreme Positioning Matters Forget G20 Co-ordination, But Don't Under-Estimate Euro-Area Co-ordination Where Was the Fiscal Crisis in the UK and Japan? The True Star of 2010: Mongolia NOK: From Hero to Zero Anti-Climatic Parity Parties
1. Know The Herd, But Don’t Follow It Growth Surprises Were Seen Outside of the US 2010 was going to be the year when we would finally see the consequences of the extraordinary policies implemented by the Fed and others during the credit crunch in late 2008. Would we see a double-dip, hyperinflation or a return to boom? Well, we ended up with almost exactly what consensus was expecting for 2010 at the start of the year. US growth was expected by the Bloomberg survey of economists to be 2.6%for 2010, inflation was expected to be 2% and the unemployment rate was expected to settle at 10%. The actual outcomes (using consensus estimates for data not yet published) were 2.7%, 1.6% and 9.6%. So growth turned out very close to expectations, while inflation was lower, but so was unemployment. The surprise, though, was Fed policy, where easings occurred over 2010, rather than tightenings. In fact, across the developed world, central banks were more dovish than expected.
GDP Surprises Over 2010 C/A Surplus Countries Surprised Most on Growth
-2 -1 0 1 2
NorNZ
GreeceIreland
ItalySpain
USFrance
UKAusEuroCan
PortugalSwitz
GermanySwed
Jpn
GDP Surprises …
-15
-10
-5
0
5
10
15
20
-2 -1 0 1 2
Expe
cted
curr
ent
acco
unt
bala
nce
(% G
DP) f
or 2
010
GDP surprise for 2010
Nor
NZ
Gre
SweSwitz
Ger
Jpn
Source: Deutsche Bank; latest consensus estimates for 2010 GDP growth versus consensus estimates taken at the end of 2009
Source: Deutsche Bank. IMF.
On growth outside of the US (again using consensus estimates for data not yet published), the largest upsides surprises were seen in Japan, which turned out to have growth of over
30 November 2010 Exchange Rate Perspectives
Deutsche Bank AG/London Page 11
3% compared to expectations of 1.3%. Large upside surprises were also seen in Sweden and Germany (see first chart). At the other end, both Norway and New Zealand disappointed on growth. Despite the Euro-area bond crisis, Euro-area growth surprised to the upside. Interestingly, growth surprises appeared to follow current account balances, with surplus countries, except Norway, surprising to the upside, and deficit countries surprising the least (see second chart). This could reflect that deficits were a symptom of countries that were still grappling with the unwind of consumption binges from earlier years. In EM, growth surprised to the upside almost across the board. Singapore saw the largest upside surprise (16% versus an expected 6.5%), and there were no downside surprises in any of the major EM economies.
JPY, THB, MYR, ZAR Surprise Winners of 2010 On the currency front, the largest surprise in G10, was the strength in the yen, which was the second strongest G10 currency of the year. This came despite it being expected to be the worst performing currency of 2010 at the start of the year (see third chart). Both AUD and NZD were expected to perform well, but did even better than expectations. The Euro was not expected to do much over 2010, but turned out to be the worst performing currency of the year. Interestingly, the euro range for the year (17%) and the change over the year were both around the average since the inception of the euro in 1999, and this despite the crisis seen in the euro-area.
G10 FX Surprises Over 2010 EM FX Surprises
-10% -5% 0% 5% 10% 15%
Euro
NOK
GBP
SEK
CHF
CAD
NZD
JPY
AUD
Actual changes
Expected changes
-10% -5% 0% 5% 10% 15%
HUFPLNCZKHKDTWDCNYRUBKRWPEN
ILSINRCLPPHPSGDARSTRYBRL
MXNIDR
MYRCOPTHBZAR
Actual change
Expected change
Source: Deutsche Bank. Source: Deutsche Bank. IMF.
Peripheral Vision Needed There a few lessons to be learnt from analyzing consensus expectations. First, the areas of intense focus tend to deliver the smallest surprises. The focus on US and Chinese growth resulted in analysts missing the German and Japanese growth stories. The focus on the euro-area crisis and the euro resulted in an average range year for the euro, but missed the clear yen strengthening trend. In EM, there was a big focus on some of the Asian bellwethers, KRW and INR, yet it was THB and MYR that performed. And yet again, everyone missed the impressive ZAR gains. Second, some of the extreme outcomes contemplated by market participants over the past two years; hyperinflation, double-dip, Euro break-up, have not materialized. Instead, outcomes have been more benign; US growth this year was in line with its 20-year average, inflation has not spiraled out of control and the euro has traded in a normal range since its
30 November 2010 Exchange Rate Perspectives
Page 12 Deutsche Bank AG/London
inception. So it would appear to us that market participants having failed to anticipate the tail events of Lehmans and the associated credit crunch are now over-anticipating tail events.
Bilal Hafeez London, +44 (0)20 7547 0354 [email protected]
2. If Europe Goes Down, So Does EM
When European peripheral sovereign concerns began to escalate in late 2009, they first looked unlikely to spill over to rest of the world. Greece was on the verge of default, but there was hope that the core would step in and a (weakened) Eurozone would muddle through. Few EM countries (other then CE4) rely on Europe for growth or financing, and thus prospects for their currencies seemed unaffected. Short Euro vs. long EMFX became a popular trade in the macro community.
But by late April, the Greek crisis had spread to Portugal and even the hitherto stable Spanish bond spreads were widening. CE4 currencies came under pressure at this point, though the short EUR vs. Asia and high yielding EMFX trade continued to work.
EM was insulated from Europe… right until the crisis went global
Source: Deutsche Bank
The unravelling occurred in early May when the inter-bank money markets began to seize up. In a mini-run of the post-Lehman panic, USD LIBOR spiked as banks began to hoard liquidity
50
150
250
350
450
550
650
Jan-10 Mar-10 May-10 Jul-10 Sep-10 Nov-10
1.10
1.16
1.22
1.28
1.34
1.40
1.46
PIGS CDS (LHS)
EUR/USD (RHS)
5yr CDS (bps) EUR/USD (inverted)
96
101
106
111
116
121
Jan-10 Mar-10 May-10 Jul-10 Sep-10 Nov-10
ZR+TR+BR funded in EURAsia FX funded in EURCE 4 FX funded in EUR
Jan 2010=100
30 November 2010 Exchange Rate Perspectives
Deutsche Bank AG/London Page 13
due to an elevated perception of counterparty risk. Markets were gripped by fears of a systemic failure of the international financial system stemming from a feared collapse of Europe’s government bond markets and banking sector. It was 2008 deja’vu – the financial market equivalent of a “Minsky moment”, when no assets – even the good ones – are spared. Asia, LATAM and the high yielding ZAR and TRY all came under pressure as investors rushed for the exit.
The lesson here is that EM is not safe when European (or G3 for that matter) sovereign concerns escalate into fears of a systemic crisis. Investors should monitor global money markets – which are the plumbing of the financial system – for signs that contagion is spreading.
Mirza Baig Singapore, +65 6423-5930 [email protected]
3. AUD and JPY Can Rally Together
Because AUD/JPY is often considered the G10 currency bellwether for risk appetite, it is usually assumed that the Aussie and Yen historically move in opposite directions. The 2008 crisis left many scars, including the association that the AUD/USD collapse at the same time as a USD/JPY slide lower, was normal. Chalk this down as a popular misconceptions, for over the last 10 years, AUD/USD and USD/JPY have show a strong (-0.65) negative correlation, with the broader USD trend typically dominant, driving both the Aussie and Yen in the same direction. 3m Rolling Correlation of AUD/USD and USD/JPY
Source: Deutsche Bank
The 90 day rolling correlation for AUD/USD vs USD/JPY hit a peak of +0.96 in December 2008, but at the time of writing stands at -0.84. This correlation reflects more than the yen and Aussie being caught in the USD slipstream of late. Firstly, in 2010, Japan has tended to
30 November 2010 Exchange Rate Perspectives
Page 14 Deutsche Bank AG/London
hedge its portfolio outflows to major markets like the US, given USD/JPY forward rates that are very close to spot. The combination of near zero rates in the US limiting unhedged Japanese C/A recycling (yen positive), in combination with a global recovery (Aussie positive), provided some macro context for both Aussie and Yen going up in 2010. Secondly, there is some belief that at least now that the USD is more popular than the yen as a carry financing vehicle, it is logical that the USD rather than the yen is the anti-pole of the carry trade. This should impart more volatility on AUD/USD relative to AUD/JPY and explains much of the post crisis convergence in volatility as AUD/JPY has moved down toward AUD/USD (realized and implied) vol. History shows we have gone through long periods (for example in 2003-2006) when AUD/USD vol was far higher than AUD/JPY vol. We have just come through a similar period to 2003 where lower 10yr yields (after Bernanke’s first flirtation with deflation) and higher equities, are associated with increased global growth and a stronger Aussie. Because yields are more important than equities/risk for the yen, it has also been associated with a stronger yen. Back in H1 2004, the environment swung to a mix of higher bond yields and flattish equities, which is a more common environment, that hurt the yen, but hurt the Aussie even more. 2004 (or 1994) would be the kind of market we might expect when the Fed eventually exits QE2, which creates major headwinds for AUD/USD and AUD/JPY spot and marks the end of the convergence in AUD/USD and AUD/JPY vol because the yen starts to take over from the USD as a carry financing vehicle. Alan Ruskin New York, +1 (212) 250-8646 [email protected]
4. Remember Latvia Given all the pessimism regarding peripheral Eurozone's ability to grow themselves out of the recession it might be worth remembering Latvia. The country was seen as the economy with the biggest crisis earlier in this cycle, with the 5yr CDS widening out to a high around 1180bp. But things have improved, with the 5yr CDS now trading below 300bp in response to fiscal consolidation and a credible recovery in the Latvian economy. Also, Latvia managed to maintain the currency peg to the EUR, instead achieving the necessary improvement in competitiveness through [painful] internal devaluation. A good illustration of this is the development in net public sector wages, which contracted by more than 30% from the end of 2008 to the beginning of 2010, and the unemployment rate which rose from around 5% to 18% over that same period. Signs of life after fiscal pain While wages have rebounded somewhat and unemployment declined, they are still far away from pre-crisis levels. However, the economy has still been able to stage a recovery, with retail sales and industrial production currently running at 6.1% and 19% YoY, and Q3 GDP comfortably beating expectations at 2.7% YoY. The trade balance is back to pre-crisis levels, not due to depressed imports (around 30% YoY), but thanks to strong exports (also around 30% YoY), and in spite of no devaluation of the LAT. Sure, the 2011 budget will have to deliver further fiscal consolidation (budget bill to be submitted on Dec 9th), but so far in 2010 the budget has outperformed and seems largely on track for the targeted “below 8.5%” of GDP. Next year, and based on the government’s forecasts, the deficit will be reduced to 5.6%. Also, despite prospects of continued hardship the incumbent coalition government was re-elected on Oct 2, bringing political stability and a strong mandate for further consolidation.
30 November 2010 Exchange Rate Perspectives
Deutsche Bank AG/London Page 15
Latvia 5yr CDS vs Periphery – past 2yrs
L a tv ia G re e c e
Ire la n d P o rtu g a l
O c t0 8
J a n0 9
A p r J u l O c t J a n1 0
A p r J u l O c t
Basi
s po
int
01 0 02 0 03 0 04 0 05 0 06 0 07 0 08 0 09 0 0
1 0 0 01 1 0 01 2 0 0
Source: Deutsche Bank
Likely to continue to resist devaluation Apart from bringing down the deficit, it seems increasingly likely that its ability to tolerate pain means Latvia will be able to continue to resist devaluation. FX reserves currently more than cover M1 money supply (LATs in circulation & demand deposits), and the Finance Ministry have even suggested it can now stop drawing funds from bilateral lenders (Nordics, Estonia, Czech and Poland). This means only using funds from institutional lenders (IMF, EU and the WB). So far, Latvia has received some EUR4.2bn out of the EUR7.5bn programme, of which EUR1.1bn has been provided by the IMF and EUR2.7bn by the EU. The bottom line is that while it might still be too early to cry victory on Latvia, it potentially offers a template for a way out of the current crisis/imbalances in the Eurozone in our view Henrik Gullberg London, +44 (0)20 7549 9847 [email protected]
5. Inflation Dominos Have Started To Fall In 2009, inflation rates fell in most G10 and EM countries. However, in 2010, the picture was more mixed with around half seeing inflation rates pick up. In G10, core inflation rates picked up in Canada Australia, Japan and the Euro-area, while they fell in Switzerland, Sweden, US and Norway (a similar picture can be seen in headline inflation, see first and second charts). Both Norway and Switzerland have seen core inflation rates falling for two years in a row. In EM, China continued to see rising headline inflation rates, while Singapore, Turkey, Brazil and Korea saw inflation rates rise in contrast to the previous year. Meanwhile inflation rates fell in Russia, South Africa and India. Both Russia and South Africa have seen inflation rates fall two years in a row (see third chart). While we prefer to look at headline inflation for EM as food and energy form much larger weights in their price indices, core inflation trends look similar, though Turkey looks more disinflationary, while Russia looks more inflationary (see fourth chart).
30 November 2010 Exchange Rate Perspectives
Page 16 Deutsche Bank AG/London
Change in Headline Inflation Across G10 Change in Core Inflation Across G10
-3.0
-2.0
-1.0
0.0
1.0
2.0
3.0
Jpn Can. Eur Aus Swe UK Nor Swi NZ US
Change from 2008 to 2009
Change from 2009 to 2010
headline CPI rates
-2.0
-1.5
-1.0
-0.5
0.0
0.5
1.0
1.5
2.0
Can. Aus Jpn Eur UK NZ Swi Swe US Nor
Change from 2008 to 2009
Change from 2009 to 2010
core CPI rates
Source: Deutsche Bank; Source: Deutsche Bank;
The first lesson from 2010 is that the global disinflationary trend of 2009 has ended and now inflation trends have become more regional. Indeed, it appears that countries still experiencing disinflationary forces are primarily in the EMEA region. This could be a result of the Euro-area crisis imparting a disinflationary shock to the region, much like the global disinflationary shock imparted by the US credit crunch of 2008/2009. The other lesson is that once crises are overcome as in the US, easy monetary policy may not result in domestic inflation, but may support inflation abroad. Indeed, neighbouring Mexico and Canada appear to be experiencing more inflationary pressures than the US. This also suggests that once the Euro-area crisis abates, EMEA could face a more inflationary shock from the Euro-area. Finally, China continues to see rising inflation rates. It would appear that relative inflation rates between the US and China may end up being as important as movements in the nominal exchange rate in bringing about an adjustment in the real exchange rate.
Change in Headline Inflation Across EM Change in Core Inflation Across EM
-8.0
-6.0
-4.0
-2.0
0.0
2.0
4.0
6.0
8.0
Chin Sing Tur Bra. Kor MexTaiw Pol Rus S. Afr
India
Change from 2008 to 2009
Change from 2009 to 2010
headline CPI rates
-7.0
-6.0
-5.0
-4.0
-3.0
-2.0
-1.0
0.0
1.0
2.0
3.0
Chin Bra Tai Rus Kor Mex Tur Pol S.Afr
Change from 2008 to 2009
Change from 2009 to 2010
core CPI rates
Source: Deutsche Bank; IMF Source: Deutsche Bank;
Bilal Hafeez London, +44 (0)20 7547 0354 [email protected]
30 November 2010 Exchange Rate Perspectives
Deutsche Bank AG/London Page 17
6. Small Perceived High-Beta FX Do the Best: MYR, THB, COP Risk-sensitive currencies like IDR, KRW, ZAR, BRL and CLP outperformed in 2009. The consensus expectation for 2010 was that these currencies would continue to do very well. As it turned out, these high beta plays haven’t quite lived up to their promise. By contrast, currencies like MYR, THB and COP, which were initially off investors’ radar screens are topping the league tables of EMFX performance. There are some common reasons for their outperformance: initial light positioning, exports/growth surprises, a shift in central bank behaviour and positive domestic catalysts that led to renewed foreign interest.
In Malaysia, the key trigger was Bank Negara’s rate hike in March. This made Malaysia the first EM central bank to embark on a rate hike cycle, sparking a whole new focus on the monetary policy divergence between the developed and developing world. Bond flows into Malaysia surged on anticipation of higher yields, while BNM’s surprising hands off approach to FX management meant that the ringgit had ample room to run. For the baht, the pains of the 2006 capital controls remain deep in the memories of foreign investors. Most prefer to shun the THB in their Asia reval trades, not to mention that the political situation at one point turned quite hairy. Nevertheless, the economic impact of the political chaos in Bangkok was short-lived. Trade and consumption remained robust and so foreign investors were caught underweight in both equities and bonds in H2 after having shunned the country earlier. Colombia was a virtuous re-rating story triggered by a favourable political outcome (presidential elections) which led to renewed FDI and portfolio inflows.
Interestingly, at this juncture, central banks in each of these countries are getting uncomfortable with currency strength. BoT has imposed a 15% withholding tax on bonds, Malaysia is holding the line of 3.08 in USD/MYR, while Colombia is looking to other measures to complement its dollar purchase program. The key lesson would be to NOT pick this year’s winners as next year’s trades.
Dennis Tan Singapore, +65 6423-5347 [email protected] Mirza Baig Singapore, +65 6423-5930 [email protected]
7. Extreme Positioning Matters The announcement of quantitative easing on November 3rd almost perfectly coincided with the bottom in the trade-weighted dollar for this year. While part of the dollar rally was aided by the re-emergence of peripheral Europe concerns, the strongest lesson one can draw from this is that - in the near-term at least - extreme positioning matters. The aggregate US dollar short as measured by our own internal positioning data had reached a record, while market opinion had universally turned – and for good reason – bearish US dollars. But with the Fed decision one of the most widely anticipated and talked about policy decisions in FOMC meeting history, the EUR/USD range on the day of the announcement was one of the narrowest of the year (2nd percentile), subsequently accompanied by an across-the-board rally in the USD. In contrast, the rally in EUR/USD in mid-summer is an example of the same dynamics played out in the opposite direction. Continued fears about a break-up of the Eurozone led to a sharp build-up in EUR shorts, which in absolute value reached the highest levels in the history on the IMM. Risk-reversals similarly saw extremes not seen since the peak of the financial crisis in 2008 (see chart). The combination of extreme sentiment and positioning was what marked the turn in the EUR rather than any fundamental policy developments in the Eurozone. The latter took place in May in the form of the EFSF mechanism and ECB bond purchase program, a month before EUR/USD eventually bottomed.
30 November 2010 Exchange Rate Perspectives
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No Signs of Stress in European Financials
-10
-8
-6
-4
-2
0
2
4
6
8
10
03 04 05 06 07 08 09 10-4-3
-3-2-2
-1-1
011
22IMM EUR/USD positions/open interest (lhs)
EUR/USD 1-m Risk Reversal (ths)
Source: Deutsche Bank
George Saravelos London, +44 (0)20 7547 9118 [email protected]
8. Forget G20 Co-ordination, But Don’t Under-Estimate Euro-Area Co-ordination Prior to most recent multilateral congregations (G7, G20, IMF/World Bank meetings) there has been speculation as to some form of coordinated response to the challenges facing the post –crisis recovery. In particular there has been talk of some form of coordinated currency response to ongoing global imbalances. In part these expectations are a result of the greater coordination that was seen in the depths of the global downturn, with the major economies coming together to agree to stimulus policies (see for instance the G20 statement following the November 2008 meeting). Given the global nature of the downturn such coordination was relatively easy to obtain, as it was in each country’s individual interest to try and stimulate their economies.
Variability of recoveries has meant global coordination on stimulus has ceased -
unemployment rates from pre-crisis lows
-1
0
1
2
3
4
5
6
US Ger UK Jpn Fr Chi
Nov-09
This year
Source: Deutsche Bank
30 November 2010 Exchange Rate Perspectives
Deutsche Bank AG/London Page 19
Since then, however, the economic recoveries have been strongly varied, evidence of which can be seen in the chart above which shows the high variation in the changes in the unemployment rates since then, with Germany and China both having unemployment rates around their pre-crisis lows. Associated with this, and as was discussed in lesson 5, there has also been considerable variation in inflation outcomes. All this means that while those countries that have had sub-par recoveries would like to see the coordinated stimulus policies enacted at the depths of the crisis maintained or even expanded on, policy makers in those countries that have experienced stronger recoveries have felt unable to do so and have in contrast started taking back some of these stimulus measures. It could be argued that the differing outcomes in the major economies argue for a realignment of exchange rates. The US economy, with an ongoing deficiency of demand and persistent disinflationary pressures, would by this argument benefit from a lower exchange rate. China, which in contrast is confronting an overheating economy and strong inflationary pressures would benefit from a stronger exchange rate. In the longer run this should also help see a narrowing of the US current account deficit and Chinese current account surpluses. Indeed (as argued in 2005 by economists at the Australian Treasury, and more recently by economists such as Paul Krugman*) the situation in China may be neatly depicted by the Swan diagram developed by Australian economist Trevor Swan 50 yeas ago, with the US in the Northern most “triangle” and China in the southern most triangle. While this clearly argues for a higher real effective exchange rate for China, Chinese policy makers have a clear revealed preference for this to come via an increase in wage and prices rather than via a stronger nominal exchange rate. While the desirability of this approach can be argued, at the very least its more opaque nature does seem certain to lead to ongoing tensions on global imbalances for some time.
And while there is an argument for higher real effective exchange rates in surplus
countries facing excess demand, this is coming more from higher inflation
Excess Supply
Excess Demand
Internal Balance External Balance
BoP Surplus
BoP Deficit
REER
Domestic Demand
China (Surplus, inflation)
US (Defict, Disinflation)
Source: Deutsche Bank
The contrast with European policy makers in the past 12 months is interesting. Here there was likely little optimism about the prospect of any coordination, and indeed at times the process of getting this coordination has proved unappealing and led to considerable strains in markets,. Yet when we consider the broad reach of what has actually been achieved - the ESFM, EFSF and now the ESM – it has been quite remarkable. Of course whether these mechanisms are enough soothe market concerns about the ongoing discrepancies between growth in the core countries and strains in the periphery remains a significant question mark
30 November 2010 Exchange Rate Perspectives
Page 20 Deutsche Bank AG/London
as we write this, but the willingness of European policy makers to drop previously entrenched positions for the sake of the European integration project holds out some hope.
*Phil Garton and Jennifer Chang The Chinese currency: how undervalued and how much does it matter? Economic Roundup Spring 2005; Australian Treasury) Paul Krugman Swan Songs 17 November 2010 (http://krugman.blogs.nytimes.com/2010/11/17/swan-songs/) John Horner Sydney, +61 2 8258 2130 [email protected]
9. Where Was the Fiscal Crisis in the UK and Japan?
It is easy to forget that at the start of this year the Bund – Spain 10yr govt spread was narrower than the 10yr Bund – UK gilt spread. A year ago it was presumed that a fiscal funding crisis emerge in the UK or even Japan as readily as an EMU stalwart. So what happened?
Sovereign Debt Risk Metrics
C/A Balance Fiscal Balance Net Interest Payments / GDP
Debt / GDP Foreign Debt Holding / Total Liabilities
Foreign Debt Holdings / GDP
Great Britain -2.6 -9.0 2.4 71.0 21.5 13.3
Japan 2.5 -6.5 0.9 189.3 8.4 13.2
Spain -5.3 -6.6 1.1 59.3 42.1 26.8
OECD Average -0.3 -4.4 1.6 70.2 38.3 31.8 Source: Deutsche Bank
By many measures the UK and Spain are equals when it comes to fiscal vulnerability. The UK wins on smaller non-resident holdings of debt, and a smaller external deficit. Spain wins marginally on underlying fiscal deficit and measures of general government debt. Where hiding under the umbrella of core EUR policy sobriety was once a virtue, it has now turned into a vice - literally strangling necessary policy flexibility. The UK owns the sterling printing press and has been brave enough to use it. It has currency flexibility and not been shy to let the exchange rate float. In other words the UK’s capacity for reflation through the exchange rate and/or money creation, may err on the side of inflation, but leaves the adjustment path in its own hands. The market’s resounding 2010 judgment, has been that Spain’s credit risk (in bps), far exceeds the UK’s long-term inflation risks from a potential resumption of quantitative easing. This is also evident in the indexed linked sector, with UK 10yr inflation breakevens almost exactly the same as the start of the year, despite some very disappointing price data. This is of course not the end of the story. It is still possible that a UK failure to deliver on promised fiscal cuts; or that the fiscal drag hits growth to the point where it undermines the banking sector ; and/or, for that matter EUR contagion hits the debt outlook as well. These are not the DB team’s central scenarios, not least because the currency should cushion the credit impact, and currency depreciation driving inflation in a vicious cycle is unlikely, given that the pound’s starting point is so weak.
30 November 2010 Exchange Rate Perspectives
Deutsche Bank AG/London Page 21
Debt/GDP across the G10 Gross Interest Payments on Debt (% GDP)
Source: Deutsche Bank; IMF Source: Deutsche Bank;
If it is too early to heave a sigh of relief when it comes to the UK, nowhere should the market be more reluctant to sound the all clear on the fiscal accounts than when it comes to Japan. In the summer, the IMF suggested that Japan would need to reduce its structural primary deficit by 1% every year for the next decade merely to stabilize net debt to GDP at 140% and gross debt to GDP at 240% - and this even with the assumption that such consolidation helps rather than hinders growth! That’s the bad news. The good news is that there is plenty of scope for higher taxes since government revenues as a share of GDP remain well below the OECD average. Nonetheless, Japan sits at a critical pivot point, vulnerable to both a deflationary and inflationary/reflationary environment. A deflationary scenario secures low funding costs at the price of increases in real debt and an inability to grow nominal GDP above nominal rates. For the moment that is still probably preferable to a higher rate environment, either because higher growth impacts inflation expectations and/or reduces bank demand for JGBS. One small source of comfort is that any debt crisis sparked by higher yields would presumably hurt growth again and drive yields back down, even if debt to GDP would continue to rise. The Japan debt crisis trade has many twists and turns left in it, but 2011 will likely prove again that this is not a trade for the impatient foreigner, who still holds less than 10% of the outstanding stock, and cannot bolt for the exit expecting the locals will follow. The UK Has the Largest Fiscal Consolidation Planned
-2 -1 0 1 2 3
Japan
Switzerland
Sweden
Australia
Canada
Euroland
Norway
US
UK
Fiscal Consolidation 2010 to 2011, % GDP
Source: Deutsche Bank
Alan Ruskin New York, +1 (212) 250-8646 [email protected]
30 November 2010 Exchange Rate Perspectives
Page 22 Deutsche Bank AG/London
10. The True Star of 2010: Mongolia While the Aussie has been shining bright this year, a smaller, but closer neighbor to China has been doing even better: The Mongolian Togrog is the best performing currency this year, appreciating more than 15% against the dollar. This excludes carry, which at more than 10% is one of the highest in the world. The currency is free-floating and the capital account is open, so these returns were realizable. When the financial crisis hit in 2008, the Mongolian economy was hit hard. The collapse in global commodity prices strained government finances and led to a sharp drop in exports. These are dominated by unprocessed natural resources (see chart), mainly directed to China. The country accounts for more than 60% of Mongolia’s exports. The IMF stepped in with a stand-by arrangement in 2009, and combined with a rise in foreign aid and a renewed boom in commodity prices has resulted in a rejuvenation for the Mongolian economy.
USD/Togrog Tops Mongolia Exports Coal and Copper to China
0
200
400
600
800
1000
1200
1400
1600
1800
93 95 97 99 01 03 05 07 09
Mongolian Togrog per USD
Source: Deutsche Bank; Source: Deutsche Bank;
The Fund now views the outlook for Mongolia’s economy as “extremely” favorable. Mongolia has the largest undeveloped deposits of gold, copper, coal uranium and iron ore, and investment in the country’s vast mineral resources is just starting. The IMF cites the signing of an investment agreement in late 2009 to develop the Oyu Tolgoi mine in the South Gobi Dessert – referred by some as the biggest undeveloped copper-gold project in the world – as a “cornerstone for the development of Mongolia’s substantial mineral resources.” Further projects are in the pipeline, and Mongolia looks like China’s natural export partner to provide the latter with long-term energy and mineral security. With inflation on an upward trend, the export sector still looking bright and monetary policy likely to remain tight, the Togrog could be the true star of FX for a second year to come. George Saravelos London, +44 (0)20 7547 9118 [email protected]
30 November 2010 Exchange Rate Perspectives
Deutsche Bank AG/London Page 23
11. NOK: From Hero To Zero Rationalising NOK underperformance At the beginning of the year the NOK was the darling of the developed currency markets, with banks labeling it “the best currency in the world”, “the ultimate haven”, etc, and set for “sustained appreciation”. Strong fundamentals, tight labour markets, booming housing and core inflation stubbornly above 2% suggested ongoing policy tightening and strength. However, and while we anticipated further appreciation in the Norwegian unit, to a range between 7.70-7.90, we also projected NOK underperformance vs its peers. The latter scenario has fortunately largely materialized, helped by Norges Bank’s strong aversion towards rapid/excessive appreciation, which in turn was further reinforced thanks to the NOK’s strong performance in 2009 vs GBP and SEK (two currencies that represents a sizeable portion of total Norwegian goods and services exports). Also, Norway’s lack of investable assets has played a role, with a very small bond market and local equity counters strongly dominated by energy. What lessons can be learn?th What, if any, lessons can be learned from this? The most obvious is that outside of the majors, appreciation in smaller and relatively illiquid currencies is unlikely to persist unless 1) they are strongly undervalued, and/or 2) backed up by a significant yield differential or at least a continued policy normalization.
Trade-weighted NOK vs Brent crude: 1y rolling correlation
90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10
Per
cent
-0.2
-0.1
0.0
0.1
0.2
0.3
0.4
0.5
0.6
Source: Deutsche Bank
Also, in the case of Norway the fact that the NOK is not only closely, but also increasingly, correlated with energy/oil (see chart) explains a lot of the outperformance in 2009 (when USD/barrel moved from below $40 to $80) and the underperformance in 2010 (Brent now largely back to the levels of the beginning of the year). The bottom line here is that Norway needs high oil prices, not only to generate [fiscally driven] domestic growth in an economy with a diminishing export sector, but also to attract capital inflows. What does this mean for 2011? With no serious valuation gap it would suggest that closely monitoring Norges Bank policy thinking and the oil price should be sufficient to get a good idea of where the NOK is heading. Henrik Gullberg London, +44 (0)20 7549 9847 [email protected]
30 November 2010 Exchange Rate Perspectives
Page 24 Deutsche Bank AG/London
12. Anti-Climatic Parity Parties
Back in the period 2007-2008, USD/CAD, USD/CHF and AUD/USD all played with parity and in some cases actually breached it (CHF briefly, CAD for longer). 2010 saw all three currency pairs breach parity in the same year for the first time ever (see first chart). Yet, only USD/CHF appears to have been able to remain over the parity for any meaningful period of time at around 47 days compared to 6 days for AUD/USD and 2 days for USD/CAD. This begs the question as to whether there is anything special about parity. From a fundamental perspective, we do find that parity represents an overvaluation of at least 20% relative to PPP for each currency pair. In fact, AUD/USD has an overvaluation of 30% at parity (see second chart). So parity does represent an extreme overshoot, which should it make it a harder level to breach. From a market microstructure perspective, the parity level has typically seen a higher concentration of option barriers than other levels. This would have the effect of making the parity level much harder to breach as the hedging of option barriers by market makers would have them push the spot rate away from parity before it reaches it.
CAD, CHF, AUD All Breached Parity In 2010 Parity Equates To Overvaluation vs. PPP
0.40
0.60
0.80
1.00
1.20
1.40
1.60
1.80
2.00
86 88 90 92 94 96 98 00 02 04 06 08 10
USD/CADUSD/CHFAUD/USD
0%
5%
10%
15%
20%
25%
30%
35%
CAD CHF AUD
The deviation versus PPP if the currency trades at parity (vs dollar)
Source: Deutsche Bank; Source: Deutsche Bank;
To quantify this, we can look at how long each of these currency pairs traded in different figure intervals ahead of and after parity. Using the 2 figures ahead of parity as the reference duration, we find that both USD/CAD and USD/CHF spent around 80%of that duration one figure ahead of parity, but only 40% of the duration at the figure which breached parity (see third chart). The drop is not as sharp for AUD/USD, but that is likely due to the very small amount of time spent above parity. So there does appear to be something special about parity, which makes it a harder level to breach. Another angle would be to see how many attempts are needed before a more meaningful breach of parity occurs (in terms of time). For USD/CAD we find its first breach in 2007 saw a sustained period below parity, but it another six or seven attempts before another meaningful breach occurred. For USD/CHF, it took eight attempts before parity was meaningfully breached (see fourth chart). So based on our sample of two it would appear that it may take seven or eight attempts for AUD/USD to meaningfully breach parity – so far we have had one attempt. The lesson from 2010 would be not to get too excited about breaches of parity.
30 November 2010 Exchange Rate Perspectives
Deutsche Bank AG/London Page 25
Less Time Spent At Parity Than Figure Before Attempt #8 Typically Sees More Sustained Breach Of
Parity
0%
20%
40%
60%
80%
100%
120%
2 figures before parity
1 figure before parity
At figure breaking
parity
1 figure after parity
2 figures after parity
USD/CAD
USD/CHF
AUD/USD
days spent at level as a percentage of days spent 2 figures before parity
0
5
10
15
20
25
30
35
40
45
50
1 2 3 4 5 6 7 8 9 10 11 12
CAD
CHF
AUD
Attempt #
Duration of period beyond parity
Source: Deutsche Bank; IMF Source: Deutsche Bank;
Bilal Hafeez London, +44 (0)20 7547 0354 [email protected]
30 November 2010 Exchange Rate Perspectives
Page 26 Deutsche Bank AG/London
G10 FX Valuation Monitor: Lines in the Sand*
Figure 1: The euro is expensive and the dollar cheap
30.726.7
20.617.4
12.4 11.0 10.76.1
-4.0
-13.2-20-15-10-505
101520253035
AUD NZD CHF CAD EUR JPY NOK GBP SEK USD
Source: DB FX Research
Figure 3: EUR/USD: The euro is expensive …
0.6
0.7
0.8
0.9
1.0
1.1
1.2
1.3
1.4
1.5
1.6
0.6
0.7
0.8
0.9
1.0
1.1
1.2
1.3
1.4
1.5
1.6
73 77 81 85 89 93 97 01 05 09
EURUSDPPP EURUSD20 % Band
Source: DB FX Research
Figure 5: GBP/USD: as well as sterling …
1.00
1.50
2.00
2.50
3.00
3.50
1.00
1.50
2.00
2.50
3.00
3.50
73 77 81 85 89 93 97 01 05 09
GBP/USD
PPP GBP/USD
20% Band
Source: DB FX Research
Figure 2: The dollar is 13% cheap to market value
60
70
80
90
100
110
120
130
73 76 79 82 85 88 91 94 97 00 03 06 09
60
70
80
90
100
110
120
130USDTWI
PPP USDTWI
20% Band
Source: DB FX Research
Figure 4: USD/JPY: …as well as the Yen
50
100
150
200
250
300
350
73 77 81 85 89 93 97 01 05 09
50
100
150
200
250
300
350
20% Band
USD/JPY
PPP USD/JPY
Source: DB FX Research
Figure 6: USD/CHF: CHF is expensive
0.9
1.4
1.9
2.4
2.9
3.4
3.9
73 77 81 85 89 93 97 01 05 09
0.9
1.4
1.9
2.4
2.9
3.4
3.9
20% Band
USD/CHF
PPP USD/CHF
Source: DB FX Research
*Our measure of relative PPP is calculated using long-term averages from Jan-80 to Dec-04 and deflating by monthly CPI differentials. We refer to current spot rates as "cheap" or "expensive" with explicit reference to this measure of fair valuation; these statements are not intended in any way to be "buy" or "sell" recommendations.
30 November 2010 Exchange Rate Perspectives
Deutsche Bank AG/London Page 27
Figure 7: USD/CAD: CAD has moved above market
value and is now expensive
0.9
1.0
1.1
1.2
1.3
1.4
1.5
1.6
1.7
73 77 81 85 89 93 97 01 05 09
0.9
1.0
1.1
1.2
1.3
1.4
1.5
1.6
1.7
20% BandUSD/CADPPP USD/CAD
Source: DB FX Research
Figure 9: NZD/USD: .and so is NZD
0.4
0.6
0.8
1.0
1.2
1.4
1.6
0.4
0.6
0.8
1.0
1.2
1.4
1.6
73 77 81 85 89 93 97 01 05 09
NZD/USDPPP NZD/USD20 % Band
Source: DB FX Research
Figure 11: EUR/GBP: Sterling is cheap against the
euro
0.3
0.4
0.5
0.6
0.7
0.8
0.9
1.0
73 77 81 85 89 93 97 01 05 09
0.3
0.4
0.5
0.6
0.7
0.8
0.9
1.0
EUR/GBP
20% Band
PPP EUR/GBP
Source: DB FX Research
Figure 8: AUD/USD: AUD is very expensive…
0.4
0.6
0.8
1.0
1.2
1.4
1.6
0.4
0.6
0.8
1.0
1.2
1.4
1.6
73 77 81 85 89 93 97 01 05 09
AUD/USDPPP AUD/USD20 % Band
Source: DB FX Research
Figure 10: EUR/JPY: The euro is slightly expensive
against the yen
50
100
150
200
250
300
350
400
450
73 77 81 85 89 93 97 01 05 09
50
100
150
200
250
300
350
400
450
EUR/JPY
20% Band
PPP EUR/JPY
Source: DB FX Research
Figure 12: EUR/SEK: SEK is very cheap versus the
euro
4
5
6
7
8
9
10
11
12
73 77 81 85 89 93 97 01 05 09
4
5
6
7
8
9
10
11
12
EUR/SEK
20% Band
PPP EUR/SEK
Source: DB FX Research
30 November 2010 Exchange Rate Perspectives
Page 28 Deutsche Bank AG/London
Figure 13: EUR/CHF: CHF is expensive against the
euro
1.0
1.5
2.0
2.5
3.0
3.5
4.0
73 77 81 85 89 93 97 01 05 09
1.0
1.5
2.0
2.5
3.0
3.5
4.0
EUR/CHF
20% Band
PPP EUR/CHF
Source: DB FX Research
Figure 15: AUD/NZD: NZD is close to market value
against AUD….
0.6
0.8
1.0
1.2
1.4
1.6
1.8
73 77 81 85 89 93 97 01 05 090.6
0.8
1.0
1.2
1.4
1.6
1.8
AUD/NZD
20% Band
PPP AUD/NZD
Source: DB FX Research
Figure 17: JPY/NZD: NZD is expensive against the yen
0.000
0.005
0.010
0.015
0.020
0.025
73 77 81 85 89 93 97 01 05 09
0.000
0.005
0.010
0.015
0.020
0.025
JPY/NZD
20% Band
PPPJPY/NZD
Source: DB FX Research
Figure 14: EUR/CAD: so do CAD
0.9
1.1
1.3
1.5
1.7
1.9
73 77 81 85 89 93 97 01 05 09
0.9
1.1
1.3
1.5
1.7
1.9
EUR/CAD20% BandPPP EUR/CAD
Source: DB F X Research
Figure 16: CAD/NZD: ….and is expensive against CAD
0.4
0.6
0.8
1.0
1.2
1.4
1.6
1.8
73 77 81 85 89 93 97 01 05 09
0.4
0.6
0.8
1.0
1.2
1.4
1.6
1.8
CAD/NZD
20% band
PPP CAD/NZD
Source: DB FX Research
Figure 18: GBP/JPY: JPY is close to market value
against GBP
0
100
200
300
400
500
600
700
800
73 77 81 85 89 93 97 01 05 09
0
100
200
300
400
500
600
700
800GBP/JPY
20% Band
PPP GBP/JPY
Source: DB FX Research
30 November 2010 Exchange Rate Perspectives
Deutsche Bank AG/London Page 29
G10 Capital Flows and Basic Balance Monitor United States (USD bn)
Figure 1: The basic balance has been in a recovery
path over the last 1 year
-600
-500
-400
-300
-200
-100
0
100
200
95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10
4.20
4.25
4.30
4.35
4.40
4.45
4.50
4.55
4.60
4.65
4.70
4.75
Basic Balance
USD TWI (Rs)
USD Bn. Ln
Net foreign US inflows(excl. US Treasuries) minus the trade balance (bn, 12m accumalated )
Source: DB FX Research and US Treasury
Figure 3: The private basis balance has been driving
overall basic balance recently
-600
-500
-400
-300
-200
-100
0
100
200
93 94 95 96 97 97 98 99 00 01 02 02 03 04 05 06 07 07 08 09 10
-600
-500
-400
-300
-200
-100
0
100
200
Private Basis Balance
Overall Basic Balance
USD Bn.
Source: DB FX Research and US Treasury
Figure 5: Official inflows inversely correlated with
private inflows since the late 1990s
-80
20
120
220
320
420
520
620
79 81 83 85 87 89 91 93 95 97 99 01 03 05 07 09
-80
20
120
220
320
420
520
620
Net Official Flows
Net Private non Treasury Flows
USD Bn.
Source: DB FX Research and Haver
Figure 2: …as non treasury portfolio inflows gather
pace
-800
-600
-400
-200
0
200
400
600
800
95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10
-800
-600
-400
-200
0
200
400
600
800
Trade BalanceNet non-treasury portfolio flowsBasic Balance
Source: DB FX Research and US Treasury
Figure 4:…as official inflows were insignificant
-5
5
15
25
35
45
55
65
79 81 83 85 87 89 91 93 95 97 99 01 03 05 07 09
-150
-100
-50
0
50
100
150
Net Official Purchases of Corporate Bonds
Net Official Purchases of Agency Bonds (Rs)
USD Bn.
Source: DB FX Research and US Treasury
Figure 6: Relative to the private basic balance, the
dollar is expensive
-600
-500
-400
-300
-200
-100
0
100
200
93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10
4.00
4.10
4.20
4.30
4.40
4.50
4.60
4.70
4.80
Private Basic Balance
USTW$ (ls)
Fitted USTW$ with Private BasicBalance (Rs)
USD Bn. Ln
Source: DB FX Research and US Treasury
30 November 2010 Exchange Rate Perspectives
Page 30 Deutsche Bank AG/London
Figure 7: Net FDI outflows are accelerating recently
-400
-300
-200
-100
0
100
200
300
400
95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10
4th Qtr. sum
-400
-250
-100
50
200
350
FDI InflowsFDI Net flowsFDI Outflows
Source: DB FX Research and US Treasury
Figure 9: Official sector remain net buyers of US
bonds
-100
0
100
200
300
400
500
600
700
800
900
79 81 83 85 87 89 91 93 95 97 99 01 03 05 07 09
-100
0
100
200
300
400
500
600
700
800
900
Net Private Bond Flows
Net Official Bond Flows
12 mo. Sum
Source: DB FX Research and US Treasury
Figure 11: Inverse relationship between USD TWI and
UST purchases
-150
0
150
300
450
600
95 97 99 01 03 05 07 09
4.20
4.30
4.40
4.50
4.60
4.70
4.80
Treasuries (ls)USD TWI (Major, rs)
Ln
Source: DB FX Research and US Treasury
Figure 8: Portfolio flows were driven mostly by net
bond flows, while net equity flows remain modest
-200
0
200
400
600
800
1000
1200
80 82 84 86 88 90 92 94 96 98 00 02 04 06 08 10
-200
0
200
400
600
800
1000
1200
US Net Capital InflowsNet Bonds Inflows
Net Equity Inflows
12 mo. Sum
Source: DB FX Research and US Treasury
Figure 10: Treasury purchase seems to have picked
up, while purchase of agency bonds rise
-200
0
200
400
600
800
79 81 83 85 87 89 91 93 95 97 99 01 03 05 07 09
-200
0
200
400
600
800
Private Treasury PurchasesPrivate AgencyPrivate CorpUS Net Purchases of Foreign Bonds
Source: DB FX Research and US Treasury
Figure 12: Net equity flows remain low by past
standards
-180
-130
-80
-30
20
70
120
170
220
79 81 83 85 87 89 91 93 95 97 99 01 03 05 07 09
-180
-130
-80
-30
20
70
120
170
220
US StocksForeign StockNet Stocks
USD bn
Source: DB FX Research and US Treasury
30 November 2010 Exchange Rate Perspectives
Deutsche Bank AG/London Page 31
Figure 13: Equity flows tend to respond with a lag to
market performance
-170
-120
-70
-20
30
80
130
180
230
93 95 97 99 01 03 05 07 09
1.4
1.6
1.8
2.0
2.2
2.4
2.6
2.8
US StocksForeign Stocks
S&P 500 (Rs)
Ln
Source: Deutsche Bank, US Treasury and Bloomberg Finance LP
Figure 15: Generally inverse link between foreign
interest in USTs versus US equities
-100
40
180
320
460
600
95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10
-100
40
180
320
460
600Foreign Purchases of US TreasuriesForeign Purchases of US Equity
Source: Deutsche Bank and US Treasury
Figure 14: The dollar is following net equity flows less
and less
-100
-50
0
50
100
150
200
90 92 94 96 98 00 02 04 06 08 10
4.20
4.25
4.30
4.35
4.40
4.45
4.50
4.55
4.60
4.65
4.70
4.75Net Equity Flows (12M Sum)
USD TWI Major (Rs)
Ln
Correlation=50%
Correlation(6 mo lag)=58%
Source: Deutsche Bank, US Treasury and Bloomberg Finance LP
Figure 16: The dollar and agency & corp bond inflows
-200
-100
0
100
200
300
400
500
600
700
800
90 92 94 96 98 00 02 04 06 08 10
4.2
4.3
4.4
4.5
4.6
4.7
4.8
Corp and Agency Bonds(ls)
Corporate bonds(ls)
US TWI (Major,rs)
log
Source: Deutsche Bank, US Treasury and Bloomberg Finance LP
30 November 2010 Exchange Rate Perspectives
Page 32 Deutsche Bank AG/London
Canada (CAD bn)
Figure 1: The basic balance seems to be recovering
from its extreme lows
-80
-60
-40
-20
0
20
40
60
80
100
Mar-90 Mar-94 Mar-98 Mar-02 Mar-06 Mar-100.60
0.65
0.70
0.75
0.80
0.85
0.90
0.95
1.00
1.05Basic Balance 4Q
CAD/USD - Quarterly Average (rs)
Source: DB FX Research and Haver
Figure 3: Portfolio flows had been in an upsurge since
2008
-100
-50
0
50
100
150
Jun-91 Jun-95 Jun-99 Jun-03 Jun-070.60
0.65
0.70
0.75
0.80
0.85
0.90
0.95
1.00
1.05Portfolio Flows 12-monthBasic Balance 4Q rollingCAD/USD - Quarterly Average (rs)
Source: DB FX Research and Haver
Figure 5: Net equity flows have turned negative as
foreign equity inflows has come down
-80
-60
-40
-20
0
20
40
60
Jan-91 Jan-94 Jan-97 Jan-00 Jan-03 Jan-06 Jan-09
-80
-60
-40
-20
0
20
40
60
Canadian Flows AbroadForeign InflowsNet Equity Flows
Source: DB FX Research and Haver
Figure 2: net FDI flows remains small
-40
-20
0
20
40
60
-40
-20
0
20
40
60
Mar-90 Mar-94 Mar-98 Mar-02 Mar-06 Mar-10
Net FDIOutward Direct InvestmentsInward Direct Investments
Source: DB FX Research and Haver
Figure 4: …as foreign interest in Canadian securities is
at close to record highs
-150
-100
-50
0
50
100
150
Jan-91 Jan-94 Jan-97 Jan-00 Jan-03 Jan-06 Jan-09
-120-100-80-60-40-20020406080100120
Canadian Flows AbroadForeign InflowsNet Flows
Source: DB FX Research and Haver
Figure 6: .…while net debt inflows have risen to
record highs.
-75
-50
-25
0
25
50
75
100
125
Jan-91 Jan-94 Jan-97 Jan-00 Jan-03 Jan-06 Jan-09
-75
-50
-25
0
25
50
75
100
125
Canadian Flows Abroad
Foreign Inflows
Net Debt Flows
Source: DB FX Research and Haver
30 November 2010 Exchange Rate Perspectives
Deutsche Bank AG/London Page 33
Japan (JPY trillion)
Figure 1: .The Japanese basic balance turned up
recently helping the yen rally
0
2
4
6
8
10
12
14
16
18
20
Jan-91 Jan-94 Jan-97 Jan-00 Jan-03 Jan-06 Jan-09
80
90
100
110
120
130
140
150
160
Basic Balance 12Msum
USD/JPY (rightscale, inverted)
Source: DB FX Research, MOF, and Haver
Figure 3: Net capital outflows have moderated
-40
-30
-20
-10
0
10
20
96 97 98 99 00 01 02 03 04 05 06 07 08 09 10
12 mo. sum
-40
-30
-20
-10
0
10
20
Net Equity Flows
Net Bond & Notes Flows
Net Money Market Flows
Net Capital Flows
Source: DB FX Research and MOF
Figure 5: Net equity flows have moderated
-20
-15
-10
-5
0
5
10
15
20
97 98 99 00 01 02 03 04 05 06 07 08 09 10
12 mo. sum
-20
-15
-10
-5
0
5
10
15
20Japan FlowsForeign FlowsNet Equity Flows
Source: DB FX Research and MOF
Figure 2: .…as FDI outflows moderate
-14
-11
-8
-5
-2
1
4
Jan-91 Jan-94 Jan-97 Jan-00 Jan-03 Jan-06 Jan-09
-14
-11
-8
-5
-2
1
4
Net FDIDirect Investment in Japan by ForeignersDirect Investment Abroad by Residents
Source: DB FX Research and MOF
Figure 4: Net bond outflows seems to have broken
the uptrend recently
-30
-25
-20
-15
-10
-5
0
5
10
15
97 98 99 00 01 02 03 04 05 06 07 08 09 10
12 mo. sum
-30
-25
-20
-15
-10
-5
0
5
10
15
Japan Flows
Foreign Flows
Net Bonds & Notes Flows
Source: DB FX Research and MOF
Figure 6: Net money-market flows climb up
-20
-15
-10
-5
0
5
10
15
20
97 98 99 00 01 02 03 04 05 06 07 08 09 10
12 mo. sum
-20
-15
-10
-5
0
5
10
15
20
Japan Flows Foreign FlowsNet Money Market Flows
Source: DB FX Research and MOF
30 November 2010 Exchange Rate Perspectives
Page 34 Deutsche Bank AG/London
United Kingdom (GBP bn)
Figure 1: The basic balance remains slightly negative
-250
-180
-110
-40
30
100
Mar-91 Mar-94 Mar-97 Mar-00 Mar-03 Mar-06 Mar-09
1.3
1.4
1.5
1.6
1.7
1.8
1.9
2.0
2.1Basic Balance 4Q sum
GBP/USD (right scale, quarterly
Source: DB FX Research and Haver
Figure 3: Portfolio flows have turned remain positive
-300
-200
-100
0
100
200
300
400
Mar-91 Mar-94 Mar-97 Mar-00 Mar-03 Mar-06 Mar-09
-300
-200
-100
0
100
200
300
400Net Portfolio flowsPortfolio OutflowPortfolio Inflow
Source: DB FX Research and Haver
Figure 5: Net holdings of equities
-500
-300
-100
100
300
500
700
900
Mar-90 Mar-93 Mar-96 Mar-99 Mar-02 Mar-05 Mar-08
-300
-100
100
300
500
700
900Net UK Equity Holdingsby ForeignersNet Equity IIP
Net Foreign EquityHoldings by the UK
Source: DB FX Research and BoE
Figure 2: Both FDI inflows and outflows have
moderated
-250
-200
-150
-100
-50
0
50
100
150
Mar-91 Mar-94 Mar-97 Mar-00 Mar-03 Mar-06 Mar-09
-250
-200
-150
-100
-50
0
50
100
150
Net FDI
FDI Outflows
FDI Inflows
Source: DB FX Research and Haver
Figure 4: Net equity and net debt positions
-400
-300
-200
-100
0
100
200
Mar-90 Mar-93 Mar-96 Mar-99 Mar-02 Mar-05 Mar-08
1.3
1.4
1.5
1.6
1.7
1.8
1.9
2.0
2.1
Net Equity IIPNet Debt IIPGBP/USD (rs)
Source: DB FX Research and BoE
Figure 6: Net debt holdings
-400
-100
200
500
800
1100
1400
1700
Mar-90 Mar-93 Mar-96 Mar-99 Mar-02 Mar-05 Mar-08
-400
-100
200
500
800
1100
1400
1700Net UK Debt Holdings byForeignersNet Debt IIP
Net Foreign Debt Holdingsby the UK
Source: DB FX Research and BoE
30 November 2010 Exchange Rate Perspectives
Deutsche Bank AG/London Page 35
Euro area (EUR bn)
Figure 1: The moderation in negative basic balance
has taken a pause
-500
-400
-300
-200
-100
0
100
200
Feb-01
Feb-02
Feb-03
Feb-04
Feb-05
Feb-06
Feb-07
Feb-08
Feb-09
Feb-10
0.7
0.8
0.9
1.0
1.1
1.2
1.3
1.4
1.5
1.6
1.7
Basic Balance 12-month
USD/EUR (rs)
Source: DB FX Research and Eurostat
Figure 3: EUR/USD strongly correlated (0.88) with
bilateral basic balance with the US
-240
-190
-140
-90
-40
10
60
110
160
Jun-99
Jun-00
Jun-01
Jun-02
Jun-03
Jun-04
Jun-05
Jun-06
Jun-07
Jun-08
Jun-09
Jun-10
0.80
1.05
1.30
1.55
1.80
Bilateral BasicBalance,lagged(6m)EURUSD(rhs)
Correlation= -0.88
USD Bn
Source: DB FX Research and Eurostat
Figure 5: The bilateral basic balance with the US has
moved down recently
-200
-150
-100
-50
0
50
100
150
Dec-98 Dec-01 Dec-04 Dec-07 Dec-10
-200
-150
-100
-50
0
50
100
150Bilateral Basic BalanceNet Non Treasury FlowsBilateral Trade Balance
USD Bn
Source: DB FX Research and Eurostat
Figure 2: …as FDI outflows continue unabated
-300
-250
-200
-150
-100
-50
0
50
100
Jan-01
Jan-02
Jan-03
Jan-04
Jan-05
Jan-06
Jan-07
Jan-08
Jan-09
Jan-10
-300
-250
-200
-150
-100
-50
0
50
100
Current account 12-month
Net FDI 12 month
Source: DB FX Research and Eurostat
Figure 4: Bilateral basic balance explains 84% of
EUR/USD movements since inception of the euro
0.80
1.00
1.20
1.40
1.60
1.80
2.00
Jun-99 Jun-01 Jun-03 Jun-05 Jun-07 Jun-09
0.80
1.00
1.20
1.40
1.60
1.80
2.00
EURUSD
Fitted EURUSD
EURUSD(t)= -0.0036*Bilateral Basic Balance(t-6)+1.129 (-22.56) (168 .98)
Sample 1999M6-2007M4Observation:97Adjusted R-squared=0.8410
Source: DB FX Research and Eurostat
Figure 6:…as US purchases of euro area bonds have
continued to be replaced by sales
-100
-60
-20
20
60
100
Dec-77 Dec-81 Dec-85 Dec-89 Dec-93 Dec-97 Dec-01 Dec-05 Dec-09
-100
-60
-20
20
60
10012M Net Agency12M Net Corporate12M net US stock12M net foreign stocks12m Net Foreign Bond
USD Bn
Source: Deutsche Bank and US Treasury
30 November 2010 Exchange Rate Perspectives
Page 36 Deutsche Bank AG/London
Figure 7: Net portfolio flows continue to trend down
since mid-2009
-800
-600
-400
-200
0
200
400
600
800
1000
Jan-00 Jan-02 Jan-04 Jan-06 Jan-08 Jan-10
-800
-600
-400
-200
0
200
400
600
800
1000Portfolio OutflowsPortfolio InflowsNet Portfolio Flows
Source: Deutsche Bank and European Central Bank
Figure 9: Equity inflows have tracked the STOXX
-300
-200
-100
0
100
200
300
400
500
Jan-03
Jan-04
Jan-05
Jan-06
Jan-07
Jan-08
Jan-09
Jan-10
1700
2000
2300
2600
2900
3200
3500
3800
4100
4400Net Equity InflowsNet Equity OutflowsEuro STOXX 50 (rs)
Source: Deutsche Bank, Bloomberg and European Central Bank
Figure 8: Equity, bond and money market net flows
-150-100-50
050
100150200250300350
Jan-03
Jan-04
Jan-05
Jan-06
Jan-07
Jan-08
Jan-09
Jan-10
-150-100-50050100150200250300350
Net Bonds and Notes Flows
Net MM Flows
Net Equity Flows
Source: Deutsche Bank and European Central Bank
Figure 10: Foreign interest on the bond side boomed
in late 2006 and has slowed down now
-450-350-250-150-5050
150250350450550650
Jan-03
Jan-04
Jan-05
Jan-06
Jan-07
Jan-08
Jan-09
Jan-10
2.0
2.5
3.0
3.5
4.0
4.5
5.0Net Bond InflowsNet Bond Outflows
10Y Bunds Yield (rs)
Source: Deutsche Bank and European Central Bank
30 November 2010 Exchange Rate Perspectives
Deutsche Bank AG/London Page 37
Australia (AUD bn )
Figure 1: The basic balance remains quite volatile as…
-70
-60
-50
-40
-30
-20
-10
0
10
Mar-90 Mar-93 Mar-96 Mar-99 Mar-02 Mar-05 Mar-08
0.50
0.60
0.70
0.80
0.90
1.00Basic Balance 4Qsum
AUD/USD (rs)
Source: DB FX Research and RBA
Figure 3: Net Portfolio flows appear to have peaked
-120
-80
-40
0
40
80
120
160
200
Jan-91 Jan-94 Jan-97 Jan-00 Jan-03 Jan-06 Jan-09
-120
-80
-40
0
40
80
120
160
200Net Portfolio flows
Portfolio Outflow
Portfolio Inflow
Source: DB FX Research and RBA
Figure 5: …and to a lesser extent equities
0
50
100
150
200
250
300
350
400
Mar-90 Mar-94 Mar-98 Mar-02 Mar-06 Mar-10
0
50
100
150
200
250
300
350
400
450Net Equity Liabilities for AU
Net AU Equity Holdings byForeigners
Net Foreign Equity Holdings byAustralia
Source: DB FX Research and RBA
Figure 2: …there have been large shifts in FDI flows
-50
-30
-10
10
30
50
70
Jan-91 Jan-94 Jan-97 Jan-00 Jan-03 Jan-06 Jan-09
-50
-30
-10
10
30
50
70
Net FDIFDI OutflowsFDI Inflows
Source: DB FX Research and RBA
Figure 4: Foreign investors have favored Australian
debt (negative IIP a liability for AU)
-550
-450
-350
-250
-150
-50
50
Mar-90 Mar-94 Mar-98 Mar-02 Mar-06 Mar-10
0.50
0.60
0.70
0.80
0.90
1.00
Net Equity IIP
Net Debt IIP
AUD/USD (rs)
Source: DB FX Research and RBA
Figure 6: …with relatively modest purchases by
Australians of foreign debt
0
100
200
300
400
500
600
700
Mar-90 Mar-94 Mar-98 Mar-02 Mar-06 Mar-10
0
100
200
300
400
500
600
700Net Debt Liabilities for AU
Net AU Debt Holdings byForeignersNet Foreign Debt Holdings byAustralia
Source: DB FX Research and RBA
30 November 2010 Exchange Rate Perspectives
Page 38 Deutsche Bank AG/London
New Zealand (NZD bn )
Figure 1: The basic balance
-20
-15
-10
-5
0
5
10
Jan-01
Jan-02
Jan-03
Jan-04
Jan-05
Jan-06
Jan-07
Jan-08
Jan-09
Jan-10
0.3
0.4
0.5
0.6
0.7
0.8
0.9Basic Balance 4Q sum
NZD/USD (rs)
Source: DB FX Research and Haver
Figure 3: net Portfolio inflows have been in an
upsurge
-20
-15
-10
-5
0
5
10
15
20
Mar-96 Mar-99 Mar-02 Mar-05 Mar-08
-20
-15
-10
-5
0
5
10
15
20Net Portfolio flows
Portfolio Outflow
Portfolio Inflow
Source: DB FX Research and Haver
Figure 2: FDI flows
-10
-5
0
5
10
15
Mar-01
Mar-02
Mar-03
Mar-04
Mar-05
Mar-06
Mar-07
Mar-08
Mar-09
Mar-10
-10
-5
0
5
10
15
Net FDI
FDI Outflows
FDI Inflows
Source: DB FX Research and Haver
Figure 4: Foreign appetite for government bonds
0
10
20
30
40
50
Jan-93 Jan-96 Jan-99 Jan-02 Jan-05 Jan-08
-15
10
35
60
85
110Government Bonds Held by Foreigners
Treasury Bills held by Foreigners
Share held by Foreigners of Total (right scale)
Source: DB FX Research and NZ FinMin
30 November 2010 Exchange Rate Perspectives
Deutsche Bank AG/London Page 39
Commodity Price and Currency Monitor
Figure 1: CRB Commodity Prices and components
100
300
500
700
900
1100
03-J
an-0
2
01-J
ul-0
2
30-D
ec-0
2
26-J
un-0
3
22-D
ec-0
3
23-J
un-0
4
16-D
ec-0
4
16-J
un-0
5
27-D
ec-0
5
26-J
un-0
6
22-D
ec-0
6
21-J
un-0
7
17-D
ec-0
7
13-J
un-0
8
09-D
ec-0
8
09-J
un-0
9
02-D
ec-0
9
02-J
un-1
0100
200
300
400
500
600Raw industrialFoodstuffsMetalsLivestock and products,(rhs)Fats and Oil,(rhs)CRB Commodity Prices,(rhs)
Source: DB FX Research, Haver
Figure 3: Precious metals
0
500
1000
1500
2000
2500
2-Ja
n-02
23-J
an-0
3
11-F
eb-0
4
2-M
ar-0
5
21-M
ar-0
6
10-A
pr-0
7
28-A
pr-0
8
18-M
ay-0
9
4-Ju
n-10
4
9
14
19
24
29Gold Price (US$/Troy oz)Platinum Price ($/Troy oz)Palladium Price ($/Troy oz)Silver Price ($/Troy oz) ,(rhs)
Source: Deutsche Bank, Haver
Figure5: Commodity Currencies and Prices
0.35
0.50
0.65
0.80
0.95
1.10
86 88 90 92 94 96 98 00 02 04 06 08 10
200
250
300
350
400
450
500
AUD/USD CAD/USD
NZD/USD CRB (Rs)
Source: Deutsche Bank, Haver
Figure 2: Energy prices
0
20
40
60
80
100
120
140
160
Jan-02
Jan-03
Jan-04
Jan-05
Jan-06
Jan-07
Jan-08
Jan-09
Jan-10
0
2
4
6
8
10
12
14
16
18
20Oil Price(WTI, $/barrel)
Natural Gas ($/mmbtu),(rhs)
Source: Deutsche Bank, Haver
Figure-4: Industrial metals
0
2000
4000
6000
8000
100002-
Jan-
02
23-J
an-
03
11-F
eb-
04
2-M
ar-0
5
21-M
ar-
06
10-A
pr-
07
28-A
pr-
08
18-M
ay-
09
4-Ju
n-10
0
10000
20000
30000
40000
50000
60000
Aluminium Price ($/Metric Tonne) Copper Price ($/Metric Tonne)
Lead Price ($/Metric Tonne) Zinc Price ($/Metric Tonne)
Nickel Price ($/Metric Tonne),(rhs) Tin Price ($/Metric Tonne),(rhs)
Source: Deutsche Bank, Haver
Figure 6: The dollar cycle and global growth cycle
-0.15
-0.10
-0.05
0.00
0.05
0.10
0.15
Jan-81
Jan-84
Jan-87
Jan-90
Jan-93
Jan-96
Jan-99
Jan-02
Jan-05
Jan-08
yoy,%4.2
4.3
4.4
4.5
4.6
4.7
4.8
4.9
5
World IP
USTW$, inverted,(rhs)
Correlation over entire sample = -0.07Correlation from May 2000 = -0.01 Ln
Source: Deutsche Bank, Haver
30 November 2010 Exchange Rate Perspectives
Page 40 Deutsche Bank AG/London
Figure-7: Nominal CRB and World IP Growth
5.2
5.3
5.4
5.5
5.6
5.7
5.8
5.9
6
6.1
6.2
Jan-86 Jan-89 Jan-92 Jan-95 Jan-98 Jan-01 Jan-04 Jan-07 Jan-10
-15
-10
-5
0
5
10
15
Nominal CRB Index
World industrial Production(rhs)
Ln yoy,%
Source: Deutsche Bank, Haver
Figure 9: Long-run Relationship- Nominal CRB
4.8
5.1
5.4
5.7
6.0
6.3
6.6
Jan-86 Jan-89 Jan-92 Jan-95 Jan-98 Jan-01 Jan-04 Jan-07 Jan-10
4.8
5.1
5.4
5.7
6.0
6.3
6.6
Nominal CRB Index
Fitted Nominal CRB Index
LnLong-run elasticities:TWI: -1.88, World IP: 5.81Real Interest Rate: -0.03
Source: Deutsche Bank, Haver
Figure 11: RBA Commodity Price Index (Nominal) and
AUD/USD
0.49
0.59
0.69
0.79
0.89
0.99
86 88 90 92 94 96 98 00 02 04 06 08 10
25
50
75
100
125
150AUD (lhs)
RBA Commoditiy Price Index (rhs)
Source: Deutsche Bank, Haver
Figure-8: Nominal CRB and the Dollar
5.3
5.4
5.5
5.6
5.7
5.8
5.9
6
6.1
6.2
Jan-86 Jan-89 Jan-92 Jan-95 Jan-98 Jan-01 Jan-04 Jan-07 Jan-10
4.20
4.30
4.40
4.50
4.60
4.70
Nominal CRB Index
USTW$,inverted,(rhs)Ln Ln
Source: Deutsche Bank, Haver
Figure 12: Long-run Relationship-AUD/USD
-0.7
-0.5
-0.3
-0.1
0.1
0.3
88 90 92 94 96 98 00 02 04 06 08 10
-0.7
-0.5
-0.3
-0.1
0.1
0.3AUD
Long Run Relationship
Long-run elasticities:Commodity Price: 0.41US GDP: -0.48
Source: Deutsche Bank, Haver
Figure 10: Long-run Relationship- Oil
2.8
3.4
4
4.6
5.2
May-00 May-02 May-04 May-06 May-08 May-10
Ln
2.8
3.4
4
4.6
5.2
Oil Price
Fitted Oil Price
Elasticities:Major TWI: -2.56 World IP: 0.03R-square: 0.80
Source: Deutsche Bank, Haver
30 November 2010 Exchange Rate Perspectives
Deutsche Bank AG/London Page 41
Figure 13: ANZ Commodity Price Index (Nominal) and
NZD/USD
0.35
0.40
0.45
0.50
0.55
0.60
0.65
0.70
0.75
0.80
0.85
86 88 90 92 94 96 98 00 02 04 06 08 10
50
100
150
200
250NZD (lhs)ANZ Commodity Prices Index (rhs)
Source: Deutsche Bank, Haver
Figure 15: BoC Commodity Price Index (Nominal) and
CAD/USD
0.60
0.70
0.80
0.90
1.00
1.10
86 88 90 92 94 96 98 00 02 04 06 08 10
200
300
400
500
600
700
800
900
1000CAD (lhs)
BoC Commodity Price Index
Source: Deutsche Bank, Haver
Figure 17: BoC Non-Energy Commodity Price Index
(Nominal) and CAD/USD
0.60
0.65
0.70
0.75
0.80
0.85
0.90
0.95
1.00
1.05
86 88 90 92 94 96 98 00 02 04 06 08 10
100
200
300
400
500
600CAD (lhs)
BoC Non-Energy Commodity Price Index (rhs)
Source: Deutsche Bank, Haver
Figure 14: Long-run Relationship-NZD/USD
-0.9
-0.7
-0.5
-0.3
-0.1
0.1
88 90 92 94 96 98 00 02 04 06 08 10
-0.9
-0.7
-0.5
-0.3
-0.1
0.1NZD Long Run Relationship
Long-run elasticities:Commodity Price: 0.77GDP: 1.08
Source: Deutsche Bank, Haver
Figure 16: Long-run Relationship-CAD/USD
-0.50
-0.30
-0.10
0.10
88 90 92 94 96 98 00 02 04 06 08 10
-0.40
-0.30
-0.20
-0.10
0.00CAD Long Run Relationship
Long-run elasticities:Commodity Price: 0.13GDP: 1.32
Source: Deutsche Bank, Haver
Figure 18: BoC Energy Commodity Price Index
(Nominal) and CAD/USD
0.60
0.65
0.70
0.75
0.80
0.85
0.90
0.95
1.00
1.05
86 88 90 92 94 96 98 00 02 04 06 08 10
100
600
1100
1600
2100
2600CAD (lhs)
BoC Energy Commodity Price Index (rhs)
Source: Deutsche Bank, Haver
30 November 2010 Exchange Rate Perspectives
Page 42 Deutsche Bank AG/London
Figure 19: RBA Commodity Price (Nominal)
25
50
75
100
125
86 88 90 92 94 96 98 00 02 04 06 08 10
25
50
75
100
125
RBA Commodity Price Index (Nominal)
Average
Source: Deutsche Bank, Haver
Figure 21: ANZ Commodity Price (Nominal)
90
110
130
150
170
190
210
230
250
86 88 90 92 94 96 98 00 02 04 06 08 10
90
110
130
150
170
190
210
230
250
ANZ Commodity Price Index (Nominal)
Average
Source: Deutsche Bank, Haver
Figure 23: BoC Commodity Price (Nominal)
0
200
400
600
800
1000
86 88 90 92 94 96 98 00 02 04 06 08 10
0
200
400
600
800
1000
BoC Commodity Price Index (Nominal)
Average
Source: Deutsche Bank, Haver
Figure 20: RBA Commodity Price (Real)
y = -2E-07x + 3.3484
R2 = 6E-062.5
2.75
3
3.25
3.5
3.75
4
4.25
4.5
86 88 90 92 94 96 98 00 02 04 06 08 10
2.5
2.75
3
3.25
3.5
3.75
4
4.25
4.5RBA Commodity Price Index(Real)Average
Linear Trendline
Source: Deutsche Bank, Haver
Figure 22: ANZ Commodity Price (Real)
y = -2E-05x + 5.0558
R2 = 0.1422
4
4.2
4.4
4.6
4.8
86 88 90 92 94 96 98 00 02 04 06 08 10
4
4.2
4.4
4.6
4.8
ANZ Commodity Price Index (Real)
Average
Linear Trendline
Source: Deutsche Bank, Haver
Figure 24: BoC Commodity Price (Real)
y = -3E-05x + 6.5748
R2 = 0.2745
4.8
5
5.2
5.4
5.6
5.8
6
6.2
72 74 76 78 80 82 84 86 88 90 92 94 96 98 00 02 04 06 08 10
4.8
5
5.2
5.4
5.6
5.8
6
6.2BoC Commodity Price Index(Real)
Average
Linear Trendline
Source: Deutsche Bank, Haver
30 November 2010 Exchange Rate Perspectives
Deutsche Bank AG/London Page 43
Figure 25: BoC Non-Energy Commodity Price
(Nominal)
100
150
200
250
300
350
400
450
500
72 74 76 78 80 82 84 86 88 90 92 94 96 98 00 02 04 06 08 10
100
150
200
250
300
350
400
450
500
BoC Non-Energy Commodity Price Index
Average
Source: Deutsche Bank, Haver
Figure 27: BoC Energy Commodity Price (Nominal)
0
500
1000
1500
2000
2500
72 74 76 78 80 82 84 86 88 90 92 94 96 98 00 02 04 06 08 10
0
500
1000
1500
2000
2500
BoC Energy Commodity Price Index
Average
Source: Deutsche Bank, Haver
Figure 29: Commodity Price Indices
80
140
200
260
320
380
86 88 90 92 94 96 98 00 02 04 06 08 10
80
140
200
260
320
380RBA Commodity Price Index (Nominal)
ANZ Commodity Price Index (Nominal)
BoC Commodity Price Index (Nominal)
Jan 1986 =100
Source: Deutsche Bank, Haver
Figure 26: BoC Non- Energy Commodity Prices (Real)
y = -6E-05x + 7.1121
R2 = 0.7254
4.5
4.8
5.1
5.4
5.7
6
72 74 76 78 80 82 84 86 88 90 92 94 96 98 00 02 04 06 08 10
4.5
4.8
5.1
5.4
5.7
6BoC Non- Energy CommodityPrice Index (Real)
Average
Linear Trendline
Source: Deutsche Bank, Haver
Figure 28: BoC Energy Commodity Price (Real)
y = 5E-06x + 5.9191
R2 = 0.0022
5
5.5
6
6.5
7
7.5
72 74 76 78 80 82 84 86 88 90 92 94 96 98 00 02 04 06 08 10
55.25.45.65.866.26.46.66.877.27.4BoC Energy Commodity
Price Index (Real)Average
Linear Trendline
Source: Deutsche Bank, Haver
Figure 30: Ratio of Commodity Price Indices
0.7
1.1
1.5
1.9
2.3
86 88 90 92 94 96 98 00 02 04 06 08 10
0.7
1.2
1.7
2.2Ratio of Australia to NZ Commodity PriceIndicies (Nominal)
Ratio of Canada to NZ Commodity PriceIndicies (Nominal)
Source: Deutsche Bank, Haver
30 November 2010 Exchange Rate Perspectives
Page 44 Deutsche Bank AG/London
U.S. Trade Balance Monitor
Figure 1: The US trade deficit has started widening
recently
-900
-800
-700
-600
-500
-400
-300
-200
-100
0
Jan-92
Jan-94
Jan-96
Jan-98
Jan-00
Jan-02
Jan-04
Jan-06
Jan-08
Jan-10
-900
-800
-700
-600
-500
-400
-300
-200
-100
0
Annualized Trade Balance
Annualized Trade Balance,3mSumAnnualized TradeBalance,12m Sum
USD Bn
Source: DataStream, Deutsche Bank.0
Figure 3: The widening in the deficit reflected a
bigger recovery in import growth than in export
growth
-35
-25
-15
-5
5
15
25
Jan-93
Jan-95
Jan-97
Jan-99
Jan-01
Jan-03
Jan-05
Jan-07
Jan-09
-40
-30
-20
-10
0
10
20
30
Export Value Growth
Import Value Growth
Source: DataStream, Deutsche Bank
Figure 5: Export prices tend to follow the dollar
-12
-8
-4
0
4
8
12
Jan-94
Jan-96
Jan-98
Jan-00
Jan-02
Jan-04
Jan-06
Jan-08
Jan-10
4.40
4.45
4.50
4.55
4.60
4.65
4.70
4.75
4.80
Export Price
USTRBROA,inverted(rhs)
yoy,% Ln
Source: DataStream, Deutsche Bank
Figure 2: US and world growth have been recovering
-15
-10
-5
0
5
10
15
Jan-92
Jan-94
Jan-96
Jan-98
Jan-00
Jan-02
Jan-04
Jan-06
Jan-08
Jan-10
-15
-10
-5
0
5
10
15
World IP ex US IP (YoY)
US IP (YoY)
yoy,%
Source: DataStream, Deutsche Bank
Figure 4: Export volume growth and export price
inflation have both been recovering
-20
-15
-10
-5
0
5
10
15
20
Jan-93
Jan-95
Jan-97
Jan-99
Jan-01
Jan-03
Jan-05
Jan-07
Jan-09
-12
-6
0
6
12
Export Volume
Export Price(rhs)
yoy,%
Source: DataStream, Deutsche Bank
Figure 6: Export volume growth closely follows
external demand and has started rising
-20
-15
-10
-5
0
5
10
15
20
Jan-94
Jan-96
Jan-98
Jan-00
Jan-02
Jan-04
Jan-06
Jan-08
Jan-10
-15
-5
5
15
Export Volume
World IP ex US IP(rhs)
yoy,%
Source: DataStream, Deutsche Bank
30 November 2010 Exchange Rate Perspectives
Deutsche Bank AG/London Page 45
Figure 7: Export volumes have remained below trend
since 2001
4.4
4.5
4.6
4.7
4.8
4.9
Mar
-80
Mar
-84
Mar
-88
Mar
-92
Mar
-96
Mar
-00
Mar
-04
Mar
-08
Ln
5.5
6.0
6.5
7.0
7.5LnReal Broad TWI
Export Volumes(rhs)
Source: DataStream, Deutsche Bank
Figure 9: But the extended period of robust export
volume growth appeared not to have been affected
by the moves in the dollar
-20
-10
0
10
20
Jan-94
Jan-96
Jan-98
Jan-00
Jan-02
Jan-04
Jan-06
Jan-08
Jan-10
4.40
4.45
4.50
4.55
4.60
4.65
4.70
4.75
4.80
Export Volume
USTRBROA,inverted(rhs)yoy,% Ln
Source: DataStream, Deutsche Bank
Figure 11: Import price inflation has followed the
dollar
-20
-15
-10
-5
0
5
10
15
20
25
Jan-94
Jan-96
Jan-98
Jan-00
Jan-02
Jan-04
Jan-06
Jan-08
Jan-10
-12
-7
-2
3
8
13
Import Price
USTRBROA,inverted(rhs)
yoy,%
Source: DataStream, Deutsche Bank
Figure 8: Export volume deviations from trend
strongly correlated with moving average of dollar
valuation
-0.20
-0.15
-0.10
-0.05
0.00
0.05
0.10
0.15
0.20
Dec
-81
Dec
-85
Dec
-89
Dec
-93
Dec
-97
Dec
-01
Dec
-05
Dec
-09
-0.25
-0.20
-0.15
-0.10
-0.05
0.00
0.05
0.10
0.15
0.20
0.25USDTWI,Deviations from Trend (8 QuarterMA),invertedReal Exports,Deviation from Trend (rhs)
Correlation = - 0.67
Ln
Source: DataStream, Deutsche Bank
Figure 10: The fall –off in import growth reflected a
steep decline in volumes and more recently a sharp
decline in import price inflation with oil price declines
-20
-15
-10
-5
0
5
10
15
20
Jan-93 Jan-95 Jan-97 Jan-99 Jan-01 Jan-03 Jan-05 Jan-07 Jan-09
-18
-13
-8
-3
2
7
12
17
22
Import Volume
Import Price (rhs)
yoy,%
Source: DataStream, Deutsche Bank
Figure 12: Import volume growth has generally been
highly correlated with US domestic demand growth
-25
-20
-15
-10
-5
0
5
10
15
20
Jan-94
Jan-96
Jan-98
Jan-00
Jan-02
Jan-04
Jan-06
Jan-08
Jan-10
-15
-10
-5
0
5
10
Import Volume
US IP(rhs)
yoy,%
Source: DataStream, Deutsche Bank
30 November 2010 Exchange Rate Perspectives
Page 46 Deutsche Bank AG/London
Figure 13: U.S. Exports and Imports of Goods and Services (Balance of Payments Basis) (last 13 months) Sep Oct Nov Dec Jan Feb Mar Apr May Jun Jul Aug Sep
Units 2009 2009 2009 2009 2010 2010 2010 2010 2010 2010 2010 2010 2010
Exports (US$ bn.) 134.2 138.1 139.0 143.4 144.5 144.4 150.0 148.8 152.6 150.6 153.5 153.6 154.1Imports (US$ bn.) 169.3 170.4 174.3 180.5 179.4 184.3 189.7 188.9 194.4 200.3 196.1 200.1 198.1
Trade Balance (US$ bn.) -35.2 -32.3 -35.3 -37.1 -34.8 -39.9 -39.7 -40.0 -41.8 -49.8 -42.6 -46.5 -44.0
Export & Import GrowthExports (y-o-y%) -12.2% -8.0% -1.5% 8.7% 15.2% 13.7% 19.1% 19.9% 21.2% 17.8% 18.5% 17.8% 14.8%Imports (y-o-y%) -20.4% -18.7% -5.8% 4.4% 11.0% 20.2% 23.2% 23.8% 29.0% 29.2% 20.5% 23.9% 17.0%
Growth Differential 8.1% 10.7% 4.3% 4.3% 4.2% -6.5% -4.1% -3.9% -7.7% -11.5% -2.1% -6.1% -2.1%
Figure 14: U.S. Export and Import Orders (ISM Survey) (last 13 months) Oct Nov Dec Jan Feb Mar Apr May Jun Jul Aug Sep Oct
Units 2009 2009 2009 2010 2010 2010 2010 2010 2010 2010 2010 2010 2010
Export Orders (index) 55.5 56.0 54.5 58.5 56.5 61.5 61.0 62.0 56.0 56.5 55.5 54.5 60.5Import Orders (index) 51.0 51.5 55.0 56.5 56.0 57.0 58.0 56.5 56.5 52.5 56.5 56.5 51.5
Exp.-Imp. Orders 4.5 4.5 -0.5 2.0 0.5 4.5 3.0 5.5 -0.5 4.0 -1.0 -2.0 9.0
Figure 15: Regional Breakdown of U.S. Trade Balance (US$ bn.) (1997-2009)
1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009
Canada -15.5 -16.7 -32.1 -51.9 -52.8 -48.2 -51.7 -66.5 -78.5 -71.8 -68.2 -78.3 -20.2Mexico -14.5 -15.9 -22.8 -24.6 -30.0 -37.1 -40.6 -45.1 -49.7 -64.5 -74.8 -64.7 -47.5Brazil 6.3 5.0 1.9 1.5 1.4 -3.4 -6.7 -7.3 -9.1 -7.1 -1.0 1.9 6.1
Western Europe -19.4 -30.2 -47.9 -59.4 -64.8 -88.4 -98.9 -111.5 -124.5 -116.5 -106.4 -92.1 -60.4Germany -18.7 -23.2 -28.4 -29.1 -29.1 -35.9 -39.3 -45.8 -50.6 -47.8 -44.5 -42.9 -28.0U.K. 3.8 4.2 -0.8 -1.8 -0.7 -7.5 -9.0 -10.3 -12.5 -8.1 -6.9 -5.0 -1.8
Japan -56.1 -64.0 -73.4 -81.6 -69.0 -70.0 -66.0 -75.6 -83.3 -89.7 -84.3 -74.1 -44.8China -49.7 -56.9 -68.7 -83.8 -83.1 -103.1 -124.1 -162.3 -202.3 -234.1 -258.5 -268.0 -226.8Hong Kong 4.8 2.4 2.1 3.1 4.4 3.3 4.7 6.5 7.5 9.8 13.1 15.0 17.6South Korea 1.9 -7.5 -8.2 -12.5 -13.0 -13.0 -13.2 -19.8 -16.0 -13.4 -13.2 -13.4 -10.6Singapore -2.4 -2.7 -1.9 -1.4 2.7 1.4 1.4 4.2 5.5 6.9 7.2 12.0 6.6Taiwan -12.3 -15.0 -16.1 -16.1 -15.3 -13.8 -14.2 -12.9 -12.8 -15.2 -12.4 -11.4 -9.9
U.S. Total -209.9 -260.5 -363.6 -477.4 -450.1 -507.1 -578.3 -706.7 -829.1 -881.4 -857.9 -882.0 -546.9 Source: DataStream, Deutsche Bank
30 November 2010 Exchange Rate Perspectives
Deutsche Bank AG/London Page 47
U.S Exports-Imports by Commodity
Figure 16: U.S. Trade Balance Excluding China &
Petroleum (Monthly & Annual Balance)
Figure 17: U.S. Trade Balance – Advanced Technology
-3 5
-3 0
-2 5
-2 0
-1 5
-1 0
-5
0
1 9 9 4 1 9 9 6 1 9 9 8 2 0 0 0 2 0 0 2 2 0 0 4 2 0 0 6 2 0 0 8 2 0 1 0
-4 0 0
-3 5 0
-3 0 0
-2 5 0
-2 0 0
-1 5 0
-1 0 0
-5 0
0M o n th ly (U S $ b n .) (ba rs ) A n n u a l (U S $ bn .) ( lin e )
- 1 0
- 8
- 6
- 4
- 2
0
2
4
6
1 9 9 4 1 9 9 6 1 9 9 8 2 0 0 0 2 0 0 2 2 0 0 4 2 0 0 6 2 0 0 8 2 0 1 0
- 1 0 0
- 8 0
- 6 0
- 4 0
- 2 0
0
2 0
4 0
6 0M o n t h ly ( U S $ b n . ) ( b a r s ) A n n u a l ( U S $ b n . ) ( l in e )
Source: DataStream Source: DataStream
Figure 18: U.S. Trade Balance – Petroleum Products Figure 19: U.S. Trade Balance – Consumer Goods
- 4 5
- 4 0
- 3 5
- 3 0
- 2 5
- 2 0
- 1 5
- 1 0
- 5
0
1 9 9 4 1 9 9 6 1 9 9 8 2 0 0 0 2 0 0 2 2 0 0 4 2 0 0 6 2 0 0 8 2 0 1 0
- 5 0 0
- 4 5 0
- 4 0 0
- 3 5 0
- 3 0 0
- 2 5 0
- 2 0 0
- 1 5 0
- 1 0 0
- 5 0
0M o n t h l y ( U S $ b n . ) ( b a r s ) A n n u a l ( U S $ b n . ) ( l i n e )
- 3 5
- 3 0
- 2 5
- 2 0
- 1 5
- 1 0
- 5
0
1 9 9 4 1 9 9 6 1 9 9 8 2 0 0 0 2 0 0 2 2 0 0 4 2 0 0 6 2 0 0 8 2 0 1 0
- 4 0 0
- 3 5 0
- 3 0 0
- 2 5 0
- 2 0 0
- 1 5 0
- 1 0 0
- 5 0
0M o n t h l y ( U S $ b n . ) ( b a r s ) A n n u a l ( U S $ b n . ) ( l i n e )
Source: DataStream Source: DataStream
Figure 20: U.S. Trade Balance – Capital Goods Figure 21: U.S. Trade Balance – Industrial Supplies
- 4
-2
0
2
4
6
1 9 9 4 1 9 9 6 1 9 9 8 2 0 0 0 2 0 0 2 2 0 0 4 2 0 0 6 2 0 0 8 2 0 1 0
-3 0
-2 0
-1 0
0
1 0
2 0
3 0
4 0
5 0M o n t h ly (U S $ b n . ) (b a r s ) A n n u a l (U S $ b n . ) ( l in e )
-4 5
-4 0
-3 5
-3 0
-2 5
-2 0
-1 5
-1 0
-5
0
1 9 9 4 1 9 9 6 1 9 9 8 2 0 0 0 2 0 0 2 2 0 0 4 2 0 0 6 2 0 0 8 2 0 1 0
-4 5 0
-4 0 0
-3 5 0
-3 0 0
-2 5 0
-2 0 0
-1 5 0
-1 0 0
-5 0
0
M o n th ly (U S $ b n . ) (b a r s ) A n n u a l (U S $ b n . ) ( l in e )
Source: DataStream Source: DataStream
Figure 22: U.S. Trade Balance – Automotive Figure 23: U.S. Trade Balance – Food & Beverages
- 1 6
- 1 4
- 1 2
- 1 0
- 8
- 6
- 4
- 2
0
1 9 9 4 1 9 9 6 1 9 9 8 2 0 0 0 2 0 0 2 2 0 0 4 2 0 0 6 2 0 0 8 2 0 1 0
- 1 8 0
- 1 6 0
- 1 4 0
- 1 2 0
- 1 0 0
- 8 0
- 6 0
- 4 0
- 2 0
0
M o n t h l y ( U S $ b n . ) ( b a r s ) A n n u a l ( U S $ b n . ) ( l in e )
- 1 . 5
- 1
- 0 . 5
0
0 . 5
1
1 . 5
2
2 . 5
3
1 9 9 4 1 9 9 6 1 9 9 8 2 0 0 0 2 0 0 2 2 0 0 4 2 0 0 6 2 0 0 8 2 0 1 0
- 1 5
- 1 0
- 5
0
5
1 0
1 5
2 0
2 5
M o n t h ly ( U S $ b n . ) ( b a r s ) A n n u a l ( U S $ b n . ) ( l i n e )
Source: DataStream Source: DataStream
30 November 2010 Exchange Rate Perspectives
Page 48 Deutsche Bank AG/London
U.S. Bilateral Trade Balances by Country & Region
Figure 24: U.S. Trade Balance with China Figure 25: U.S. Trade Balance with Japan
- 3 0
-2 5
-2 0
-1 5
-1 0
-5
0
1 9 9 4 1 9 9 6 1 9 9 8 2 0 0 0 2 0 0 2 2 0 0 4 2 0 0 6 2 0 0 8 2 0 1 0
-2 7 0
-2 2 0
-1 7 0
-1 2 0
-7 0
-2 0
M o n t h ly (U S $ b n . )(b a r s )
A n n u a l (U S $ b n . )( l in e )
-1 0
-9
-8
-7
-6
-5
-4
-3
-2
-1
0
1 9 9 4 1 9 9 6 1 9 9 8 2 0 0 0 2 0 0 2 2 0 0 4 2 0 0 6 2 0 0 8 2 0 1 0
-9 5
-8 5
-7 5
-6 5
-5 5
-4 5
-3 5
-2 5
-1 5
-5
M o n th ly (U S $ b n . ) (b a r s ) A n n u a l (U S $ b n . ) ( l in e )
Source: DataStream Source: DataStream
Figure 26: U.S. Trade Balance with the Pacific Rim (Asia excluding China and Japan)
Figure 27: U.S. Trade Balance with OPEC
-9
-8
-7
-6
-5
-4
-3
-2
-1
0
1 9 9 4 1 9 9 6 1 9 9 8 2 0 0 0 2 0 0 2 2 0 0 4 2 0 0 6 2 0 0 8 2 0 1 0
-8 5
-7 5
-6 5
-5 5
-4 5
-3 5
-2 5
-1 5
-5
M o n th ly (U S $ b n . ) (b a rs ) A n n u a l (U S $ b n . ) ( l in e )
-3 0
-2 5
-2 0
-1 5
-1 0
-5
0
5
1 9 9 4 1 9 9 6 1 9 9 8 2 0 0 0 2 0 0 2 2 0 0 4 2 0 0 6 2 0 0 8 2 0 1 0
-2 0 0
-1 6 0
-1 2 0
-8 0
-4 0
0M o n th ly (U S $ b n . ) (b a rs ) A n n u a l (U S $ b n .) ( l in e )
Source: DataStream Source: DataStream
Figure 28: U.S. Trade Balance with Western Europe Figure 29: U.S. Trade Balance with Canada
-1 4
-1 2
-1 0
-8
-6
-4
-2
0
1 9 9 4 1 9 9 6 1 9 9 8 2 0 0 0 2 0 0 2 2 0 0 4 2 0 0 6 2 0 0 8 2 0 1 0
-1 4 0
-1 2 0
-1 0 0
-8 0
-6 0
-4 0
-2 0
0
M o n th ly (U S $ b n .) (b a rs ) A n n u a l (U S $ b n .) ( lin e )
-1 2
-1 0
-8
-6
-4
-2
0
1 9 9 4 1 9 9 6 1 9 9 8 2 0 0 0 2 0 0 2 2 0 0 4 2 0 0 6 2 0 0 8 2 0 1 0
-9 0
-8 0
-7 0
-6 0
-5 0
-4 0
-3 0
-2 0
-1 0
0M o n th ly (U S $ b n . ) (b a rs ) A n n u a l (U S $ b n . ) ( l in e )
Source: DataStream Source: DataStream
Figure 30: U.S. Trade Balance with Mexico Figure 31: U.S. Trade Balance with Latin America
-8
-7
-6
-5
-4
-3
-2
-1
0
1
1 9 9 4 1 9 9 6 1 9 9 8 2 0 0 0 2 0 0 2 2 0 0 4 2 0 0 6 2 0 0 8 2 0 1 0
-9 0-8 0-7 0
-6 0-5 0
-4 0-3 0-2 0
-1 00
1 0M o n th ly (U S $ b n .) (b a rs ) A n n u a l (U S $ b n . ) ( l in e )
- 6
- 5
- 4
- 3
- 2
- 1
0
1
2
1 9 9 4 1 9 9 6 1 9 9 8 2 0 0 0 2 0 0 2 2 0 0 4 2 0 0 6 2 0 0 8 2 0 1 0
- 5 0
- 4 0
- 3 0
- 2 0
- 1 0
0
1 0
2 0
M o n t h ly ( U S $ b n . ) ( b a r s ) A n n u a l (U S $ b n . ) ( l i n e )
Source: DataStream Source: DataStream
30 November 2010 Exchange Rate Perspectives
Deutsche Bank AG/London Page 49
U.S Current-Account Balance Monitor
Figure 1: U.S. Current-Account Balance (1980-2009)
-7
-5
-3
-1
1
Sep-80 Sep-84 Sep-88 Sep-92 Sep-96 Sep-00 Sep-04 Sep-08
-7
-5
-3
-1
1Annualized Current Account as % of GDP
Source: DataStream
Figure 2: U.S. Savings and Investment (Private & Government Sector Savings-Investment)
-1800
-1200
-600
0
600
1200
Mar-80 Mar-84 Mar-88 Mar-92 Mar-96 Mar-00 Mar-04 Mar-08
-1800
-1200
-600
0
600
1200Private Sector Balance Gov't Sector Balance
Source: DataStream
Figure 3: U.S. Current-Account Balance (last 13 quarters) (US$ Billions)
Q2 07 Q3 07 Q4 07 Q1 08 Q2 08 Q3 08 Q4 08 Q1 09 Q2 09 Q3 09 Q4 09 Q1 10 Q2 10
Balance on Goods -205.6 -204.5 -209.8 -215.6 -222.7 -222.3 -174.1 -121.2 -113.5 -132.1 -140.1 -151.3 -169.6Balance on Services 26.4 31.4 37.1 34.1 37.2 34.7 29.8 30.8 33.1 32.8 35.4 36.9 38.0
Bal on Goods & Services -179.2 -173.1 -172.7 -181.5 -185.4 -187.6 -144.3 -90.4 -80.4 -99.3 -104.7 -114.5 -131.6Investment Income 13.9 30.3 43.9 42.4 38.4 45.4 25.8 24.6 26.3 35.5 35.1 40.2 41.2Unilateral Transfers -26.4 -28.1 -28.8 -32.9 -29.7 -30.2 -29.2 -29.7 -30.3 -33.6 -31.3 -34.9 -34.9
Bal on Current Account -191.7 -170.9 -157.6 -172.0 -176.8 -172.4 -147.6 -95.6 -84.4 -97.5 -100.9 -109.2 -123.3(annualized, as % of GDP) -5.5% -4.8% -4.4% -4.8% -4.9% -4.8% -4.2% -2.7% -2.4% -2.8% -2.8% -3.0% -3.4%
Figure 4: U.S. Current-Account Balance (1997-2009) (US$ Billions) 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009
Ba lance on Goods -198.4 -248.2 -336.3 -446.2 -422.0 -475.3 -541.5 -665.6 -783.8 -839.5 -823.2 -834.7 -506.9Ba lance on Serv ices 90.2 82.1 72.1 67.5 57.6 54.8 47.4 56.3 69.6 80.2 121.1 135.9 132.0
Ba l on Goods & Serv ices -108.3 -166.1 -264.2 -378.8 -364.4 -420.5 -494.2 -609.3 -714.2 -759.2 -702.1 -698.8 -374.9Inves tm ent Incom e 12.6 4.3 13.9 21.1 31.7 27.4 45.3 67.2 72.4 48.1 99.6 152.0 121.4Unila tera l Trans fers -45.1 -53.2 -50.4 -58.6 -64.5 -64.9 -71.8 -88.4 -105.8 -91.5 -115.6 -122.0 -124.9
Ba l on Current Account -140.7 -215.1 -300.8 -416.4 -397.2 -458.1 -520.7 -630.5 -747.6 -802.6 -718.1 -668.9 -378.4(annua lized, as % of GDP) -1.7% -2.4% -3.2% -4.2% -3.9% -4.3% -4.7% -5.3% -5.9% -6.0% -5.1% -4.6% -2.7%
Figure 5: U.S. Savings-Investment & Net Foreign Investment (1997-2009) (US$ Billions) 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009
P r iv a te S a v ings 1375.4 1395.0 1380.2 1376.2 1466.5 1656.8 1749.9 1880.1 1909.9 2057.8 1964.5 2195.9 2427.0P r iv a te Inv es tm ent 1388.6 1510.8 1641.5 1772.2 1661.9 1646.9 1729.7 1968.5 2172.2 2327.1 2288.5 2136.0 1628.8P r iv a te-S ec tor Ba la nc e -13.2 -115.8 -261.3 -396.0 -195.4 9.9 20.2 -88.4 -262.3 -269.3 -324.0 59.9 798.2
G ov 't S a v ings 150.3 259.4 327.8 423.9 229.2 -95.9 -197.1 -155.9 -6.5 116.5 75.6 -371.8 -918.6G ov 't Inv es tm ent 252.4 262.8 287.4 304.3 322.0 343.5 355.8 372.3 392.0 425.1 461.5 496.3 513.8G ov 't -S ec tor Ba la nc e -102.1 -3.4 40.4 119.6 -92.8 -439.4 -552.9 -528.2 -398.5 -308.6 -385.9 -868.1 -1432.4
G ros s S a v ings 1525.7 1654.4 1708.0 1800.2 1695.7 1560.9 1552.7 1724.2 1903.4 2174.4 2040.2 1824.1 1508.4G ros s Inv es tm ent 1641.0 1773.6 1928.8 2076.5 1984.0 1990.4 2085.5 2340.9 2564.2 2752.2 2750.0 2632.4 2142.6S a v ings -Inv es tm ent -115.3 -119.2 -220.8 -276.3 -288.3 -429.5 -532.8 -616.7 -660.8 -577.8 -709.8 -808.3 -634.2
S ta t is t ica l D is c repa nc y -14.0 -85.3 -71.1 -134.0 -103.3 -22.1 16.6 -7.8 -79.7 -220.6 -14.8 101.0 209.1
Net Foreign Inv es tm ent -129.3 -204.5 -291.9 -410.4 -391.6 -451.6 -516.1 -624.6 -740.5 -798.4 -724.6 -707.2 -425.0 Source: DataStream
30 November 2010 Exchange Rate Perspectives
Page 50 Deutsche Bank AG/London
Central Bank Reserves Currency Composition Monitor
Figure 1: Official FX reserves have quadrupled reflecting
primarily the growth of EM holdings
Figure 2: Mature market (MM) reserves have grown only
modestly reflecting valuation & interest
0
2,000
4,000
6,000
8,000
10,000
1999Q1
2000Q1
2001Q1
2002Q1
2003Q1
2004Q1
2005Q1
2006Q1
2007Q1
2008Q1
2009Q1
2010Q1
USD Bn.
0
2,000
4,000
6,000
8,000
10,000
Total FX Reserves
MM FX Reserves
EM FX Reserves
0
500
1000
1500
2000
2500
3000
1999Q1
2000Q1
2001Q1
2002Q1
2003Q1
2004Q1
2005Q1
2006Q1
2007Q1
2008Q1
2009Q1
2010Q1
USD Bn.
0
500
1000
1500
2000
2500
3000
Total MM Reserves
Japanese Reserves
Non Japanese Reserves
Source: FRB, Census, BEA, DB Global Markets Research Source: FRB, Census, BEA, DB Global Markets Research
Figure 3: Many countries report the currency
composition of reserves to the IMF, which publishes
them in aggregate form
Figure 4: The advanced countries (MM) all report
the composition of reserves to the IMF…
0
2,500
5,000
7,500
10,000
1999Q1
2000Q1
2001Q1
2002Q1
2003Q1
2004Q1
2005Q1
2006Q1
2007Q1
2008Q1
2009Q1
2010Q1
USD Bn.
0
2,500
5,000
7,500
10,000
Total Foreign Exchange Holdings
Allocated Reserves
Unallocated Reserves
0
500
1,000
1,500
2,000
2,500
3,000
1999Q1
2000Q1
2001Q1
2002Q1
2003Q1
2004Q1
2005Q1
2006Q1
2007Q1
2008Q1
2009Q1
2010Q1
USD Bn.
0
500
1,000
1,500
2,000
2,500
3,000
MM FX Reserves
MM Allocated Reserves
MM Unallocated Reserves
Source: COFER, IMF, DB FX Research Source: COFER, IMF, DB FX Research
Figure 5: …while about half of emerging markets
report the currency composition of their reserves
Figure 6: The currency composition of (114 reporting
countries) total FX reserves: levels
0
1,000
2,000
3,000
4,000
5,000
6,000
1999Q1
2000Q1
2001Q1
2002Q1
2003Q1
2004Q1
2005Q1
2006Q1
2007Q1
2008Q1
2009Q1
2010Q1
USD Bn.
0
1,000
2,000
3,000
4,000
5,000
6,000
EM FX Reserves
EM Allocated Reserves
EM Unallocated Reserves
0
500
1,000
1,500
2,000
2,500
3,000
1999Q1
2000Q1
2001Q1
2002Q1
2003Q1
2004Q1
2005Q1
2006Q1
2007Q1
2008Q1
2009Q1
2010Q1
USD Bn.
0
500
1,000
1,500
2,000
2,500
3,000
US DollarsEurosYenSterlingSwiss FrancOther Currencies
Source: COFER, IMF, DB FX Research Source:, COFER, IMF, DB FX Research
30 November 2010 Exchange Rate Perspectives
Deutsche Bank AG/London Page 51
Figure 7: The USD share in world reserves fell during
2002-04; then stabilized and has now started falling
again
Figure 8: Advanced country FX reserve holdings…
0
10
20
30
40
50
60
70
80
1999Q1
2000Q1
2001Q1
2002Q1
2003Q1
2004Q1
2005Q1
2006Q1
2007Q1
2008Q1
2009Q1
2010Q1
%
0
10
20
30
40
50
60
70
80
US DollarsEurosYenSterlingSwiss FrancOther Currencies
0
300
600
900
1,200
1,500
1,800
1999Q1
2000Q1
2001Q1
2002Q1
2003Q1
2004Q1
2005Q1
2006Q1
2007Q1
2008Q1
2009Q1
2010Q1
USD Bn.
0
300
600
900
1,200
1,500
1,800
US dollarsEurosYenSterlingSwiss FrancOther Currencies
Source COFER, IMF, DB FX Research Source:, COFER, IMF, DB FX Research
Figure 9: …the dollar share in industrial country
reserves has been relatively stable
Figure 10: Ex-Japan (our estimate) industrial country
dollar and euro holdings have both risen
0
10
20
30
40
50
60
70
80
1999Q1
2000Q1
2001Q1
2002Q1
2003Q1
2004Q1
2005Q1
2006Q1
2007Q1
2008Q1
2009Q1
2010Q1
%
0
10
20
30
40
50
60
70
80
US dollarsEurosYenSterlingSwiss FrancOther Currencies
0
200
400
600
800
1999Q1
2000Q1
2001Q1
2002Q1
2003Q1
2004Q1
2005Q1
2006Q1
2007Q1
2008Q1
2009Q1
2010Q1
USD Bn.
0
200
400
600
800
Non Japan US DollarsNon Japan EurosYenSterlingSwiss FrancOther Currencies
Source: COFER, IMF, DB FX Research Source:, COFER, IMF, DB FX Research
Figure 11: The share of euros and dollars is not very
different
Figure 12: EM holdings of dollars had climbed steadily
and have been falling recently
0
10
20
30
40
50
60
70
1999Q1
2000Q1
2001Q1
2002Q1
2003Q1
2004Q1
2005Q1
2006Q1
2007Q1
2008Q1
2009Q1
2010Q1
%
0
10
20
30
40
50
60
70
Non Japan US DollarsNon Japan EurosYenSterlingSwiss FrancOther Currencies
0
300
600
900
1200
1500
1999Q1
2000Q1
2001Q1
2002Q1
2003Q1
2004Q1
2005Q1
2006Q1
2007Q1
2008Q1
2009Q1
2010Q1
USD Bn.
0
300
600
900
1200
1500
US dollarsEurosYenSterlingSwiss FrancOther Currencies
Source: COFER, IMF, DB FX Research Source: COFER, IMF, DB FX Research
30 November 2010 Exchange Rate Perspectives
Page 52 Deutsche Bank AG/London
Figure 13: In EM, the main driver of reserve growth has
been intervention (in USD bn)
Figure 14: In EM, the dollar share fell steadily during
2002-04 then stabilized
-100
400
900
1400
1900
2400
1999Q4
2000Q4
2001Q4
2002Q4
2003Q4
2004Q4
2005Q4
2006Q4
2007Q4
2008Q4
2009Q4
-100
400
900
1400
1900
2400Total growth in EM reserves since 1995
Total quantity change
Total valuation change
0
10
20
30
40
50
60
70
80
1999Q1
2000Q1
2001Q1
2002Q1
2003Q1
2004Q1
2005Q1
2006Q1
2007Q1
2008Q1
2009Q1
2010Q1
%
0
10
20
30
40
50
60
70
80
US dollarsEurosYenSterlingSwiss FrancOther Currencies
Diversification Leaningagainst the
wind
Source: DB FX Research Source: COFER, IMF, DB FX Research
Figure 15: First active diversification, then leaning
against the wind
Figure 16: China has steadily diversified away from USD
since 2004 (our estimates)
-15
-10
-5
0
5
10
15
2000Q2
2001Q1
2001Q4
2002Q3
2003Q2
2004Q1
2004Q4
2005Q3
2006Q2
2007Q1
2007Q4
2008Q3
2009Q2
2010Q1
-150
-100
-50
0
50
100
150
Change in EUR/USD rate (in %)
EUR share in net purchases - EUR share of stock,(Rhs)
Diversification Leaningagainst the
wind
0
10
20
30
40
50
60
70
80
Jun-98 Sep-99 Dec-00 Mar-02 Jun-03 Sep-04 Dec-05 Mar-07 Jun-08 Sep-09
0
700
1400
2100
2800
Share of USD in China FXReserves FX Reserves in USD bn (Rs)
%USD Bn
Source: COFER, IMF, DB FX Research Source: US TIC data DB FX Research
30 November 2010 Exchange Rate Perspectives
Deutsche Bank AG/London Page 53
Appendix 1 Important Disclosures
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Analyst Certification
The views expressed in this report accurately reflect the personal views of the undersigned lead analyst(s). In addition, the undersigned lead analyst(s) has not and will not receive any compensation for providing a specific recommendation or view in this report. Bilal Hafeez
Deutsche Bank debt rating key
CreditBuy (“C-B”): The total return of the Reference Credit Instrument (bond or CDS) is expected to outperform the credit spread of bonds / CDS of other issuers operating in similar sectors or rating categories over the next six months. CreditHold (“C-H”): The credit spread of the Reference Credit Instrument (bond or CDS) is expected to perform in line with the credit spread of bonds / CDS of other issuers operating in similar sectors or rating categories over the next six months. CreditSell (“C-S”): The credit spread of the Reference Credit Instrument (bond or CDS) is expected to underperform the credit spread of bonds / CDS of other issuers operating in similar sectors or rating categories over the next six months. CreditNoRec (“C-NR”): We have not assigned a recommendation to this issuer. Any references to valuation are based on an issuer’s credit rating. Reference Credit Instrument (“RCI”): The Reference Credit Instrument for each issuer is selected by the analyst as the most appropriate valuation benchmark (whether bonds or Credit Default Swaps) and is detailed in this report. Recommendations on other credit instruments of an issuer may differ from the recommendation on the Reference Credit Instrument based on an assessment of value relative to the Reference Credit Instrument which might take into account other factors such as differing covenant language, coupon steps, liquidity and maturity. The Reference Credit Instrument is subject to change, at the discretion of the analyst.
30 November 2010 Exchange Rate Perspectives
Page 54 Deutsche Bank AG/London
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Risks to Fixed Income Positions
Macroeconomic fluctuations often account for most of the risks associated with exposures to instruments that promise to pay fixed or variable interest rates. For an investor that is long fixed rate instruments (thus receiving these cash flows), increases in interest rates naturally lift the discount factors applied to the expected cash flows and thus cause a loss. The longer the maturity of a certain cash flow and the higher the move in the discount factor, the higher will be the loss. Upside surprises in inflation, fiscal funding needs, and FX depreciation rates are among the most common adverse macroeconomic shocks to receivers. But counterparty exposure, issuer creditworthiness, client segmentation, regulation (including changes in assets holding limits for different types of investors), changes in tax policies, currency convertibility (which may constrain currency conversion, repatriation of profits and/or the liquidation of positions), and settlement issues related to local clearing houses are also important risk factors to be considered. The sensitivity of fixed income instruments to macroeconomic shocks may be mitigated by indexing the contracted cash flows to inflation, to FX depreciation, or to specified interest rates – these are common in emerging markets. It is important to note that the index fixings may -- by construction -- lag or mis-measure the actual move in the underlying variables they are intended to track. The choice of the proper fixing (or metric) is particularly important in swaps markets, where floating coupon rates (i.e., coupons indexed to a typically short-dated interest rate reference index) are exchanged for fixed coupons. It is also important to acknowledge that funding in a currency that differs from the currency in which the coupons to be received are denominated carries FX risk. Naturally, options on swaps (swaptions) also bear the risks typical to options in addition to the risks related to rates movements.
GRCM2010PROD020501
David Folkerts-Landau Managing Director
Global Head of Research
Stuart Parkinson Associate Director Company Research
Marcel Cassard Global Head Fixed Income Research
Europe Asia-Pacific Germany Americas
Guy Ashton Regional Head
Fergus Lynch Regional Head
Andreas Neubauer Regional Head
Steve Pollard Regional Head
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