currencies 0211
DESCRIPTION
My presentation to DB\'s Global Investment Committee on the outlook for the FX marketTRANSCRIPT
Deutsche Bank
Private Wealth Management
FX Outlook
Marshall Gittler
Chief Strategist, EMEA
Place des Bergues 3
CH-1211 Geneve 1
Switzerland
+41 (0) 22 739 0463
February, 2011
Marshall Gittler, Chief Strategist EMEA
FX Outlook, Feb. 2011
Deutsche Bank
Private Wealth Management
005959.01/07/11
Currency Outlook: Our forecasts vs mkt, GM
2
We are somewhat more bullish on USD/bearish on EUR short-term
Mostly in line with market on majors GM is more bullish JPY, less bullish EUR
long-term
Source: Bloomberg Finance L.P.
Marshall Gittler, Chief Strategist EMEA
FX Outlook, Feb. 2011
Deutsche Bank
Private Wealth Management
005959.01/07/11
3
USD is within the normal range of valuation vs majors
Source: Bloomberg Finance LP, DB Global Investment Solutions
Currency outlook: USD PPP USD PPP valuation is not excessive either way
— USD is somewhat undervalued vis-a-vis EUR and JPY and fairly valued vis-a-vis GBP. The undervaluation is
not at the level that would usually trigger a counter move.
Marshall Gittler, Chief Strategist EMEA
FX Outlook, Feb. 2011
Deutsche Bank
Private Wealth Management
005959.01/07/11
4
USD cycle is largely on track
Source: Bloomberg Finance LP, DB Global Investment Solutions
Currency outlook: USD Cycle
Marshall Gittler, Chief Strategist EMEA
FX Outlook, Feb. 2011
Deutsche Bank
Private Wealth Management
005959.01/07/11
5
Market is already discounting a successful conclusion to Eurozone talks
Source: Bloomberg Finance LP
Currency outlook: EUR/USD We look for some EUR weakness in the near term
— The market is already discounting a successful conclusion to the Eurozone debt problem, as shown by the fact
that the EUR/USD basis swap curve is nearly back to where it was before the debt crisis began. Hence we
cannot expect much further positive impetus from that corner.
— On the contrary, the risks are that some hiccups occur in the process. The Irish elections for example or a failed
auction could knock confidence.
— Meanwhile, the improvement in the basis – and in the Eurozone CDS – may have stalled. This could presage
further EUR weakness.
Marshall Gittler, Chief Strategist EMEA
FX Outlook, Feb. 2011
Deutsche Bank
Private Wealth Management
005959.01/07/11
6
Stocks are also discounting a successful conclusion
Source: Bloomberg Finance LP
Currency outlook: EUR/USD We look for some EUR weakness in the coming three months
— We can see the same in the
equity market, where the largest
gainers in Europe this year have
been the peripheral countries.
Marshall Gittler, Chief Strategist EMEA
FX Outlook, Feb. 2011
Deutsche Bank
Private Wealth Management
005959.01/07/11
7
Market assumption that Fed lags behind ECB could be tested
Source: Bloomberg Finance LP
USD could get a boost from change in Fed expectations
6m to 1st
rate hike 11m to 1st
rate hike
13m to 1st
rate hike
15m so
far…
— The market is assuming that the ECB is likely to raise rates sooner than the Fed (an assumption that we would
agree with).
— Nonetheless, we would think it more likely that market brings forward its assumptions for the likely time of Fed
rate hikes than for ECB rate hikes. This is particularly the case if our forecast for a 7.8% US unemployment
rate at the end of this year is realized.
Currency outlook: EUR/USD
Marshall Gittler, Chief Strategist EMEA
FX Outlook, Feb. 2011
Deutsche Bank
Private Wealth Management
005959.01/07/11
8
On the other hand…Stronger US growth isn’t always good for USD
Source: Bloomberg Finance LP
— People often think of a currency
rate as the “stock price” of a
country and assume that a
country with relatively stronger
growth will have a relatively
stronger currency.
— However the history of EUR/USD
shows that generally, when US
growth has exceeded that of
Eurozone growth, the euro has
tended to strengthen against the
dollar. This may be because a
strong US economy tends to suck
in imports and hence the current
account deficit widens.
Currency outlook: EUR/USD
Marshall Gittler, Chief Strategist EMEA
FX Outlook, Feb. 2011
Deutsche Bank
Private Wealth Management
005959.01/07/11
9
Market looking for UK rate hikes, but weak growth may delay them
Source: Bloomberg Finance LP
Much depends on tightening expectations
— Inflation in the UK is rising, as are inflationary expectations. As a result, the market is now fully pricing in a rate
hike by June.
— However, we believe that the market is getting ahead of itself. On the contrary, we have moved back our
forecast for the first rate hike to August, due to weak growth and dovish comments by BoE Gov. King.
— We believe there could be some disappointment in the market and GBP could come under pressure again as a
result.
Currency outlook: GBP
Marshall Gittler, Chief Strategist EMEA
FX Outlook, Feb. 2011
Deutsche Bank
Private Wealth Management
005959.01/07/11
10
UK budget deficit may also be a drag on the currency
Source: Bloomberg Finance LP
— While the government has pledged to reduce the budget deficit, so far it has continued to creep higher as a %
of GDP. This means the government will have to cut spending further, which would put pressure on the BoE to
refrain from hiking rates even longer.
Currency outlook: GBP
Marshall Gittler, Chief Strategist EMEA
FX Outlook, Feb. 2011
Deutsche Bank
Private Wealth Management
005959.01/07/11
11
Rate differential isn’t enough to look for a much weaker JPY now
Source: Bloomberg Finance LP
We look for a modestly weaker JPY
— The rate differential between JPY and USD is current not enough to expect a major move out of JPY assets
and into USD assets.
— Historically, USD/JPY has tended to decline (i.e., the yen has strengthened) when the 2yr swap spread is
below 250 bps. Currently it is only 83 bps.
Currency outlook: JPY
Marshall Gittler, Chief Strategist EMEA
FX Outlook, Feb. 2011
Deutsche Bank
Private Wealth Management
005959.01/07/11
12
But the picture should change in 2H
Source: Bloomberg Finance LP
We look for a modestly weaker JPY
— We expect though that eventually the market will start to discount a rise in rates in other countries and go back
to funding carry trades via JPY instead of USD.
Currency outlook: JPY
Marshall Gittler, Chief Strategist EMEA
FX Outlook, Feb. 2011
Deutsche Bank
Private Wealth Management
005959.01/07/11
13
Weaker Japanese economy may cause upward pressure on USD/JPY
Source: Bloomberg Finance LP
We look for a modestly weaker JPY
— We think this is especially so since Japan’s economic indicators are starting to surprise less on the upside,
while US indicators are surprising more on the upside. That too should lead to JPY weakness over time.
Currency outlook: JPY
Marshall Gittler, Chief Strategist EMEA
FX Outlook, Feb. 2011
Deutsche Bank
Private Wealth Management
005959.01/07/11
14
Falling C/A surplus may also put pressure on the currency
Source: Bloomberg Finance LP
We look for a modestly weaker JPY
— The other potential concern for the yen is the current account surplus. As China tightens policy and activity
there slows, Japan’s exports may struggle.
— Japan is the one major exporting country whose exports have not yet recovered back to the level before the
crash. This may be because of JPY strength. We think further JPY strength would be damaging for the
economy and therefore the government is likely to take steps to prevent it if it starts happening.
Currency outlook: JPY
% yoy % yoy
Marshall Gittler, Chief Strategist EMEA
FX Outlook, Feb. 2011
Deutsche Bank
Private Wealth Management
005959.01/07/11
15
SNB intervention kept CHF from strengthening vs EUR
Source: Bloomberg Finance LP
We look for a modestly weaker CHF
— The impact of the SNB’s intervention can be seen clearly in these graphs. USD/CHF followed the risk aversion
index fairly closely, but EUR/CHF has diverged from it considerably – particularly when the market was risk
averse and therefore one would expect buying CHF against EUR such as in late 2009.
— We expect that over the next year, as concerns about the global economy and the Eurozone’s problems
continue to fade, risk aversion will recede and EUR/CHF can move up somewhat.
— The risk in the short term however is that the hopes for the Eurozone to solve its problems are already in the
market and there could be some disappointment if there are any bumps in the process.
Currency outlook: CHF
Risk averse/ CHF
strengthening Risk averse CHF
strengthening
Risk seeking
CHF weakening Risk seeking
CHF weakening
% %
Marshall Gittler, Chief Strategist EMEA
FX Outlook, Feb. 2011
Deutsche Bank
Private Wealth Management
005959.01/07/11
16
CHF already overvalued vs USD
Source: Bloomberg Finance LP
We look for a modestly weaker CHF
— We think it will be difficult for CHF to gain further on USD as it is already 25% overvalued (taking an average of
PPP valuation based on CPI and PPI).
— EUR/CHF is fairly valued on that basis, but only after massive intervention in the FX market by the Swiss
National Bank.
Currency outlook: CHF
25% undervalued
25% overvalued
Marshall Gittler, Chief Strategist EMEA
FX Outlook, Feb. 2011
Deutsche Bank
Private Wealth Management
005959.01/07/11
17
Commodity currencies are moving more with rates than commodities
Source: Bloomberg Finance LP
— Two major factors support the commodity currencies: commodities, of course, but also interest rates.
— The currencies seem to be tracking rate expectations more closely nowadays than commodity prices.
— The fact that AUD and NZD rate differentials are starting to turn down while CAD differentials remain stable
makes us expect that CAD is likely to be the best performer among the three commodity currencies.
Currency outlook: Commodity currencies
Marshall Gittler, Chief Strategist EMEA
FX Outlook, Feb. 2011
Deutsche Bank
Private Wealth Management
005959.01/07/11
18
We expect CAD to outperform AUD
Source: Bloomberg Finance LP
— AUD tends to follow economic activity in China. We expect the Chinese economy to slow as the government
fights inflation. That may weigh on AUD.
— On the other hand, the improving employment picture in Canada should allow the Bank of Canada to keep on
its modest tightening trend.
Currency outlook: Commodity currencies
Marshall Gittler, Chief Strategist EMEA
FX Outlook, Feb. 2011
Deutsche Bank
Private Wealth Management
005959.01/07/11
19
EM countries are adjusting via inflation, not FX revaluation
Source: Bloomberg Finance LP, DB Global Investment Solutions
Currency outlook: EM
— EM countries are resisting FX appreciation and instead are intervening in the market to keep their currencies
from rising vs USD.
— The increase in the money supply arising from the intervention is one reason why inflation in these countries is
rising so much. This is causing further adjustment nonetheless, because even if the nominal rate stays stable, it
is effectively an appreciation of the currency with the higher inflation rate.
Marshall Gittler, Chief Strategist EMEA
FX Outlook, Feb. 2011
Deutsche Bank
Private Wealth Management
005959.01/07/11
20
We expect carry to continue to perform
Source: Bloomberg Finance LP, DB Global Investment Solutions
Currency outlook: DB Currency Indices
— Looking at the three DB currency indices,
carry has done fairly well since bottoming
out in late August (+7.1%) but momentum
has not really done anything since mid-
2009, and valuation is down 7.3% from its
peak in June.
— As a result, the overall index was fairly
steady last year (+0.7%) and is up only
slightly (+0.3%) this year.
— We feel the outlook for carry is good. Risk
aversion is on the wane and with inflation
rising in EM countries, we expect they are
likely to raise their interest rates further.
— Valuation however does not seem
compelling to us right now as several of
the major currencies are relatively near
fair value against each other.
Marshall Gittler, Chief Strategist EMEA
FX Outlook, Feb. 2011
Deutsche Bank
Private Wealth Management
005959.01/07/11
21
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