Currency
OUTLOOKMurat ToprakFX Strategist, EMEAHSBC Bank plc+44 20 7991 [email protected]
Main contributors
Disclosures and Disclaimer This report must be read with the disclosures and analystcertifications in the Disclosure appendix, and with the Disclaimer, which forms part of it
Marjorie HernandezFX Strategist, Latin AmericaHSBC Securities (USA) Inc.+1 212 525 [email protected]
Joey ChewFX Strategist, AsiaThe Hongkong and Shanghai Banking Corporation Limited+852 2996 [email protected]
Clyde WardleEmerging Markets FX StrategistHSBC Securities (USA) Inc.+1 212 525 [email protected]
Dominic BunningFX Strategist, AsiaThe Hongkong and Shanghai Banking Corporation Limited+852 2822 [email protected]
Robert LynchHead of G10 FX Strategy, AmericasHSBC Securities (USA) Inc.+1 212 525 [email protected]
Ju WangFX Strategist, AsiaThe Hongkong and Shanghai Banking Corporation Limited+852 2822 [email protected]
David BloomGlobal Head of FX ResearchHSBC Bank plc+44 20 7991 [email protected]
Daragh MaherFX Strategist, G10HSBC Bank plc+44 20 7991 [email protected]
Stacy WilliamsHead of FX Quantitative StrategyHSBC Bank plc+44 20 7991 [email protected]
Paul MackelHead of Asian FX ResearchThe Hongkong and Shanghai Banking Corporation Limited+852 2996 [email protected]
Mark McDonaldFX Quantitative StrategistHSBC Bank plc+44 20 7991 [email protected]
The USD bull run has further to go in 2015. This should be largely positive, particularly for those developed economies facing a deflation threat. Yet markets will also need to be mindful of the risks of excessive USD strength. We address these two contrary but inter-related aspects of our bullish USD view – the two faces of USD strength.
2015 currency outlooks We provide single-page summaries of our 2015 outlook for the most actively traded currencies in G10, Asia, CEEMEA and LatAm as well as precious metals.
USD rally in 2015 – friend or foe
MacroCurrency Strategy
January 2015
Play Video with David Bloom and Daragh MaherIssuer of report: HSBC Bank plc
1
Macro Currency Strategy January 2015
abc
USD rally in 2015 – friend or foe (pg 3)
The USD bull run has further to go in 2015. This should be largely positive, particularly for those
developed economies facing a deflation threat. Yet markets will also need to be mindful of the risks of
excessive USD strength. We address these two contrary but inter-related aspects of our bullish USD view
– the two faces of USD strength. This is broken into two pieces: ‘Can a strong USD save the world?’ and
‘How extreme USD strength can destroy the world’.
What would it take to get a new currency accord? (pg 26)
International agreement on currency co-operation has been seen before. We explore the conditions that
led to the 1985 Plaza Accord to weaken the dollar to see what might be required to reach a new
agreement should the USD rise accelerate in 2015.
2015 Currency Outlooks (pg 32)
We provide single-page summaries of our 2015 outlook for the most actively traded currencies in G10,
Asia, CEEMEA and LatAm as well as precious metals.
G10 (pg 32) Asia (pg 40) CEEMEA (pg 44) LatAm (pg 48)
Precious metals (pg 50)
Summary
2
Macro Currency Strategy January 2015
abc
Key events
Date Event
09 January BoE rate announcement 09 January ECB rate announcement 21 January BoJ rate announcement 22 January BoC rate announcement 25 January BoJ release minutes from December meeting29 January FOMC rate announcement 29 January RBNZ rate announcement 04 February RBA rate announcement 06 February BoE rate announcement 07 February ECB rate announcement
Source: HSBC
Central Bank policy rate forecasts
Last Q2 2015(f) Q4 2015(f)
USD 0-0.25 0-0.25 0.50-0.75 EUR 0.05 0.05 0.05 JPY 0-0.10 0-0.10 0-0.10 GBP 0.50 0.50 0.50
Source: HSBC forecasts for Fed funds, Refi rate, Overnight Call rate and Base rate
Consensus forecasts for key currencies vs USD
3 months 12 months
EUR 1.224 1.189 JPY 119.6 122.0 GBP 1.565 1.545 CAD 1.144 1.148 AUD 0.838 0.810 NZD 0.763 0.725
Source: Consensus Economics Foreign Exchange Forecasts December 2014
3
Macro Currency Strategy January 2015
abc
USD rally in 2015 – friend or foe
The USD bull run has further to go. A year ago we
suggested that USD strength would be the dominant
theme in currency markets during 2014, a view
vindicated as the USD was the world’s best
performing currency. We expect a repeat
performance in 2015. For the rest of the world, this
should be a largely positive development,
particularly for those developed economies facing a
deflation threat. Yet markets will also need to be
mindful of the risks that any excessive USD strength
would create. In this report, we address these two
contrary but inter-related aspects of our bullish USD
view – the yin and yang of a strong USD.
Benevolent USD strength
In the first section of our report, we examine our
central case of helpful strength in the USD. A
weaker exchange rate has become a popular tool
in many developed markets to head off the
deflation threat. Some, such as Switzerland, have
directly targeted the exchange rate. Others,
notably Japan and the Eurozone, have sought
currency weakness indirectly through a loosening
of monetary policy, both actual and potential.
The success of this strategy relies upon the ability
of USD strength to act as the mirror to currency
weakness elsewhere. This is particularly the case
now given few currencies want to strengthen
against a declining EUR or JPY. The USD has to
remain the main safety valve.
In the past, this tolerance would be determined by
the impact of the rising USD on the US current
account deficit. But in today’s world where the
currency war is being fought to steal inflation
rather than exports, the constraint is whether the
US economy is strong enough to generate enough
inflation to withstand importing disinflation from
the likes of Japan and the Eurozone.
Strong US growth data during the second half of
2014 gives cause for confidence on this front, and
we continue to expect the US Fed to hike interest
rates later in 2015. Indeed, with the BoJ and the
ECB both likely to expand their balance sheet
further, the divergence in monetary policy will be
the key driver to USD gains this year.
Some will argue that much is already in the price
of the USD. However, the 10% rally in the USD
broad index since mid-2014 is rather modest when
compared to history. The ‘mega’ rallies of the
early 1980s and late 1990s saw the USD rise 90%
and 50%, respectively. Even stripping these out,
the average USD rally has been 20%.
Our forecast of additional USD gains may not be
enough to push inflation back to target in those
countries struggling with the deflation threat, but it
could buy them time and help prevent inflation
expectations becoming permanently detached from
target. Our forecast pace of USD strength suggests
it will be a helpful development for others.
The destructive dollar
The danger of this benevolent view of USD
appreciation is that it relies upon an assumption
that currency moves do not get out of hand. There
Executive Summary
4
Macro Currency Strategy January 2015
abc
are a number of routes to a swifter and potentially
more destructive rise in the USD. In the second
section of our report, we examine three – namely
that Japanese policymakers lose control of the
JPY, that the EUR slides on re-ignited break-up
fears, or that the resultant USD surge provokes an
EM FX crisis.
Rhetoric from Japan’s policymakers suggests a
comfort not only with the direction of the JPY,
but also the pace and volatility of the move. This
could change. Successive QE and expectations of
more to come could see the JPY retreat turn into a
rout. Any sign of fiscal largesse and associated
monetisation of the deficit could see a similar
debasing of the JPY. Alternatively, rising inflation
expectations on successful Abenomics could also
see a much weaker JPY.
A sliding JPY could change the nature of the
currency war in a destabilising way. Japanese
exporters might seek to expand market share
rather than simply expand margins, a move from
translational to transactional gains. This could
draw other currencies in the region into the
currency war.
The key would be whether JPY weakness was
sufficient to prompt a shift in China’s FX policy
towards a competitive devaluation. We believe the
bar would be extremely high to any such a retreat
from China’s current FX policy reform and
internationalisation. Nonetheless, the threat that
China could become embroiled in the currency
war, however low a probability, could be the real
significance of a rapid weakening of the JPY.
In Europe, break-up fears are already on the rise
again in Greece. But the issue is more wide-
spread given rising support for euro-sceptic
parties across the EU. Primary surpluses in much
of the periphery this year also reduce the potential
cost of exit. Our aim is not to suggest the EU or
the Eurozone is about to break up. It is simply a
reminder that the market cannot rule this risk out
entirely. Furthermore, with the ECB’s bond
buying programme in the wings to provide
support, it is the currency which will most swiftly
reflect any rising break-up risk premium.
A more rapid appreciation of the USD would be
the likely mirror to any excessive weakening of
the JPY or EUR. In turn, this could cause
problems for EM FX which has already shown its
vulnerability to a stronger USD in 2014. The
global situation is overwhelming local factors, and
if we see far more aggressive USD moves in
2015, the likelihood of de-stabilising knock on
effects for EM FX would grow.
From Plaza Accord to a new accord?
One way of avoiding the negative implications of
excessive USD strength would be for governments
to co-operate on currencies. However, as we argue
in the third section of our report, a new agreement is
very unlikely without first seeing a new crisis. In
addition, any accord would have to go beyond a
mere agreement to stem the USD’s rise. It would
also likely be more complicated to draft than the
1985 Plaza Accord given the wider group of
countries that would be involved, and the divergent
policies currently in play.
Conclusion
The final section of the report provides single-page
summaries of our 2015 outlook for the most actively
traded currencies, together with tables of spot
forecasts. For now, we continue to believe the pace
and extent of future USD gains will act as a positive
force on the global economy, but our forecasts also
incorporate some tail risk that the outcome may not
be so benevolent. The yin and yang of USD strength
will remain a key 2015 theme.
5
Macro Currency Strategy January 2015
abc
The USD bull run still has further to run in our
opinion. We believe this will ensure that it reign
supreme in 2015. Even though we have long been
advocates of a strong USD, we have revised many
of our forecasts further to reflect this expected
USD supremacy.
After all, the USD rally so far has been roughly
10% yet history shows a 20% rise would not be
implausible. USD weakness during the Fed’s QE1
and QE2 programmes was15-20%. US
policymakers may find it hard to push back against
similar tactics from other central banks. In any
event, it takes a 20% rally in the USD to trim US
inflation by 1.0%, so we are unlikely to be at the
point of policy push back from the US quite yet.
A stronger USD would help deliver a dose of
much needed inflation to those nations facing
excessively low inflation. While the scale of a
USD rally required to bring inflation all the way
back to target in the likes of the Eurozone would
likely be unpalatable to US policymakers, USD
strength will still help stave off the deflation
threat. The USD on its own may not be able to
save the world but it will certainly buy time.
In this report, we argue the nature of the current
USD rally is unlike any we have seen before.
True, expectations of US monetary tightening in
response to an accelerating US economy have
played their conventional part. But unusually,
much of this USD strength is the mirror of efforts
elsewhere to weaken currencies, not in a bid to
stimulate growth through exports, but to stave off
Can a strong USD save the world?
1. The USD's dominance is set to persist through 2015
-14.0
-12.0
-10.0
-8.0
-6.0
-4.0
-2.0
0.0
2.0
-14.0
-12.0
-10.0
-8.0
-6.0
-4.0
-2.0
0.0
2.0
BRL
PEN
NZD JP
YR
UB
KRW
CLP
GBP
EUR
CO
PIL
SC
HF
AUD
ZAR
CAD
RO
NTR
YC
ZKTH
BM
YRSG
DVN
DPH
PH
UF
IDR
TWD
HKD
MXN SE
KC
NY
INR
PLN
NO
K
Forecast spot return in 2015 %%
Source: Bloomberg, HSBC
6
Macro Currency Strategy January 2015
abc
deflation and prevent inflation expectations from
becoming unanchored. Reviving exports is a
secondary objective at best. This is a currency war
where stealing inflation rather than growth is the
goal. Therefore, unlike previous USD rallies, this
one will not be tripped up by US current account
deficit concerns. The new feature is whether the
US economy can generate sufficient inflation
internally to tolerate the deflationary impact of a
stronger USD.
1) This time it is different
In the lexicon of investment, the suggestion that
“this time it’s different” is perhaps the most
terrifying. One fear is that in fact nothing has
changed, and that we are simply being led down
the garden path in assuming we now face a new
paradigm. Alternatively, we fear that we are too
attached to our previous view of the world and
will fail to spot a seismic change, always
anticipating a return to the old world order. In the
end, we react too late.
We believe the greatest danger for markets and
forecasters now is that they fail to adjust their
behaviour fully to reflect what is a very different
world for currencies. At the start of 2014, we laid
out our vision for the year in ‘Currency Outlook:
USD rally to spread its wings’, January 2014. The
message was clear and in 2014 the USD indeed
rose against the world’s actively traded currencies.
In divining the likely scale and scope of the current
USD rally, it is first important to understand what is
driving it and whether history can therefore act as a
guide. If we look at the two major periods of USD
appreciation in the past (1980-1985, 1995-2001),
there are some common factors:-
US economic growth is relatively strong
compared to other countries
US monetary policy is relatively tight too
An overseas crisis adds to the USD bid
The rally falters when the US current account
deficit is viewed as unsustainable
The US drivers to the USD rally
The relative stance of monetary policy is also
clearly the key element in the current USD rise.
This feels most obvious in the earlier example of
the rise in USD-JPY and the more recent weakness
in EUR-USD perhaps, but GBP-USD is most
illustrative. Chart 3 shows the tight relationship
between GBP-USD and expectations for 3m
interest rate differential between the UK and US by
the end of 2015. There has been a clear narrowing
of the expected gap as UK data has generally
2. Upside surprises on US growth are helping to feed the USD rally
3. Shifting relative rate expectations have also played their part in the USD rally
-50.0
-40.0
-30.0
-20.0
-10.0
0.0
10.0
72
74
76
78
80
82
84
86
88
90
Jan-10 Jan-11 Jan-12 Jan-13 Jan-14 Jan-15
DXY (LHS) US Activity Surprise Index (RHS)
-0.5
-0.3
-0.1
0.1
0.3
0.5
0.7
0.9
1.45
1.50
1.55
1.60
1.65
1.70
1.75
Jan-13 Jun-13 Nov-13 Apr-14 Sep-14
GBP-USDExpected Dec'15 3M rate differentials (UK-US), RHS
Source: Bloomberg, HSBC Source: Bloomberg, HSBC
7
Macro Currency Strategy January 2015
abc
disappointed in contrast to the US. This, in turn,
has driven the USD stronger. It also means the only
other sizeable safety valve in global FX to release
pressure on the USD is now closed, leaving the
USD to do all the work on its own.
Crisis, what crisis?
Yet the drivers to this USD rally extend beyond
the racier outlook for US economic and monetary
policy. Past USD appreciations have been
augmented by crises outside of the US. The
Mexican crisis of 1982 curtailed the supply of
USD internationally, helping to strengthen the
USD. The 1997 Asian crisis saw the USD rise
sharply against many struggling emerging market
currencies. In the current USD rally, currency
weakness elsewhere is playing its role in driving
the USD higher, but the factors behind it are very
different and carry important implications as to
the likely longevity of the appreciation.
The potential crisis being faced by a number of
developed market economies is the deflation
threat. Charts 4-6 shows the current inflation and
the forecast for 2015 relative to the central bank’s
target (or assumed target where no official one is
available). The pattern is clear. For G10
currencies (chart 4), most central banks are facing
excessively low inflation. Our forecasts for 2016
suggest only 3 countries of the 34 we examine
globally are likely to see inflation above target.
Currency war moves to a new front
In many instances, the ability to reflate via interest
rates is totally exhausted with rates at or close to
zero. This has elevated the role of the exchange
rate as a tool in influencing inflation. For some,
earlier currency strength has been cast as the
villain in the story, the chief explanation for why
inflation has been lower than desired. With this
characterisation, preventing further currency
strength has become a popular strategy, most
overtly in Switzerland and the Czech Republic.
Others have used monetary policy to weaken their
currency, via whatever modest leeway still
remained on interest rates or by resorting to
unconventional easing. Japan and, more recently,
the ECB have been particularly notable adopters
of this strategy. They are replicating tactics used
by the US earlier in the cycle.
We created a framework to study the evolution of
the post-crisis currency war some time ago (see
‘Currency War, USD to soar: Turning bullish on
the USD’, May 2013), and we update the analysis
here. We grade 34 countries on how actively they
are seeking an economic advantage through their
exchange rate – or currency war appetite.
4. Projected inflation relative to target (G10)
-0.5
0.0
0.5
1.0
1.5
2.0
2.5
3.0
3.5
4.0
-0.5
0.0
0.5
1.0
1.5
2.0
2.5
3.0
3.5
4.0
USD GBP JPY SEK EUR CHF AUD NZD NOK CAD
2016 HSBC Inflation Forecast Central Bank Inflation Target% %
Source: Bloomberg, HSBC
8
Macro Currency Strategy January 2015
abc
Since that first report, the currency war appetite
‘score’ has risen considerably, reflecting the
increasingly interventionist global mood in FX
(Chart 7 shows how scores have changed for
individual countries). Interestingly, since May
2013, the overall score has been stable but this
hides some changes in terms of the countries at
the forefront of the battle. The US exit from QE
means its currency war appetite has declined, and
Japan has not been as aggressive in its efforts to
drive the JPY lower as in the past. By contrast, the
EUR score has jumped higher given the ECB’s
apparent determination to weaken the EUR via
ever looser monetary policy.
The scale of the deflationary pressures in the
Eurozone should not be underestimated. The
structural reforms being pushed through the
Eurozone emulate those of the Hartz reforms that
were enacted in Germany in the early 2000s (see
‘The deflationary consequences of Europe’s
swelling workforce… and comparisons with the
US’, September 2014). If successful this could
lead to massive growth of the Eurozone workforce
(indeed, twice the rate of growth of the US).
Without sufficient jobs we may be looking at a
decade of little or no wage inflation which will
continue to drag on overall inflation.
The deflation threat in the Eurozone and
elsewhere has created a new front for the currency
war. The motivation for those seeking currency
weakness is very different. Historically, currency
wars were a battle over market share in export
markets, designed to help support a country’s
balance of payments position and boost or
rebalance growth. In Australia and New Zealand,
this is still largely the case. The rhetoric and
intervention being used to push the AUD and
NZD lower reflects concern about what an
excessively strong currency might mean for the
trade balance. Australia wants a weaker AUD to
help with the economic rebalancing away from a
reliance on mining. New Zealand does not want
an excessively strong NZD to trip up the
economic recovery. This is the classical way we
thought about FX moves. However, we now need
to look at FX moves in a new light.
5. Projected inflation relative to target (Asia ex-Japan) 6. Projected inflation relative to target (LatAm and EMEA)
0.0
2.0
4.0
6.0
8.0
0.0
2.0
4.0
6.0
8.0
INR
VND
IDR
PHP
HKD
MYR
SGD
CNY
KRW
THB
TWD
2016 HSBC Inflation ForecastCentral Bank Inflation Target% %
0.0
1.0
2.0
3.0
4.0
5.0
6.0
7.0
0.0
1.0
2.0
3.0
4.0
5.0
6.0
7.0
TRY
BRL
RUB
ZAR
MXN
COP
CLP
RON
PEN
HUF
CZK
PLN
ILS
2016 HSBC Inflation Forecast
Central Bank Inflation Target% %
Source: Bloomberg, HSBC Source: Bloomberg, HSBC
9
Macro Currency Strategy January 2015
abc
From the ‘Old’ to the ‘New’
For many, currency weakness is now being used as a
tool to import inflation (or equivalently export
deflation) in order to bring inflation back closer to
target and head off the deflation threat. Central banks
do not want to allow inflation expectations to
become unanchored or, in the case of Japan where
deflation has been a long-running headache,
monetary policy is being used to try and re-engineer
inflation expectations higher. The exchange rate is
the tool of choice for fighting deflation.
So far, their efforts have been successful in
weakening their currency, reflecting the grip that
policymakers now have on financial markets.
There was a time when central bankers would
point to the power of the markets. But the global
financial crisis has shifted the balance, with a
sequence of massive policy initiatives and rescue
packages driving the centre of influence from
markets to policymakers. Now markets submit to
the power of central banks. The BoJ wanted a
weaker JPY and took steps to secure this outcome,
and the market gave it to them. The ECB has also
made it clear that a weaker EUR is a desirable
side-effect of their increasingly accommodative
monetary stance. In this iteration of the currency
war, the FX market has not put up a fight.
The limits of the currency war
But the challenge for policymakers is less with the
market than with each other. For example, the
ECB may want a weaker EUR to head off the
deflation threat, but other central banks in Europe
have similar hopes. The Riksbank will not want
the SEK to appreciate against a weakening EUR
or inflation in Sweden would move further away
from target, and a EUR-SEK floor to prevent this
happening remains a possibility. Switzerland and
Czech Republic already have floors in place to
reduce this risk.
USD the pressure valve
This is the crux of the problem. If no one is
willing to accept a stronger currency, then your
exchange rate goes nowhere. So far, the USD has
been the safety valve of currency strength that is
allowing these other currencies to weaken.
7. Central banks have become more activist in FX: January 2012 vs current
0
1
2
3
4
5
6
7
8
9
10
JPY
CHF
NZD
USD
AUD
GBP
EUR
SEK
NOK
CAD
ARS
COP
BRL
PEN
CLP
MXN
TRY
ILS
RON
CZK
RUB
HUF
PLN
ZAR
TWD
KRW
PHP
THB
CNY
MYR
SGD
IDR
INR
Jan-12
Mor
e A
ctiv
ist G10 Latam EMEA Asia
Less
Act
ivis
t
Source: HSBC
10
Macro Currency Strategy January 2015
abc
If a given currency is stable against other
currencies apart from the USD, then the drop
against the USD has to be particularly pronounced
for the overall impact on the trade-weighted
exchange rate to be significant. Take the example
of the EUR. The ECB clearly wants a weaker
currency to help stimulate inflation. But many
other nations either do not want their currencies to
strengthen against a weakening EUR, so they take
steps to depreciate their currencies also (e.g.
Sweden’s unexpectedly large 50bp interest rate
cut in July 2013), or they do not want their
currencies to weaken against the USD.
Those currencies in shades of blue would be
relatively intolerant of strength, and they add up
to 40% of the total. We assume that GBP will
move by roughly half the amount that the USD
does against the EUR. This means that if the
Eurozone wants a 15% depreciation of its
trade-weighted exchange rate (the same as the
USD did during QE1 and QE2), it effectively
must fall roughly 33% against the USD.
8. ECB has manufactured a lower EUR
1.18
1.23
1.28
1.33
1.38
1.18
1.23
1.28
1.33
1.38
Jan-14 Feb-14 Mar-14 Apr-14 May-14 Jun-14 Jul-14 Aug-14 Sep-14 Oct-14 Nov-14 Dec-14 Jan-15
EUR-USD
April 12 -Draghi: strengthof the EUR 'requires further monetary stimulus'
May 8 – ECB:the gov erningcouncil is‘comfortablew ith acting'in June
Sept 4: Policy rates cutby 10bp, taking depositrates further into the negativ e territory .
August 22 Draghi speaks at Jackson Holeand signalled a greater appetitefor additional easing
July 3 - policies werekept unchanged andDraghi once againspoke about thestrength of the EURbeing a ‘problem’
Source: Bloomberg, HSBC
9. A weaker trade-weighted EUR requires a much weaker EUR-USD as many currencies will not budge against EUR
United States
China
Russia
Turkey
IndiaUAESw itzerlandSouth Korea
JapanBrazil
Poland
Czech Republic
Sw eden
HungaryDenmark
Romania
Croatia
United KingdomAv erage share of exports and imports of selected countries
Source: Bloomberg, HSBC
11
Macro Currency Strategy January 2015
abc
Given this observation, we would not be surprised
to see forecasts of below-parity in the market.
However, we believe there will be a US reaction
well before this point. If the focus of policy is on
getting inflation higher, the exchange rate that
may matter most is the one measured against the
USD given this should have the biggest impact on
imported food and energy costs. Trade-weighted
exchange rates mattered more when currency
wars addressed the balance of payments. With
inflation in focus, it is now the USD that matters.
2) How far can the USD rally go?
So the USD is central to the likely success of anti-
deflation strategies elsewhere, but it is also
therefore the most likely threat to success. Where
might it end?
US trade deficit is no longer the USD referee
In the past, USD rallies were hindered by the
damage the currency would do to the balance of
payments. An excessively strong USD would
cause the current account deficit to widen to
uncomfortable levels, raising questions about the
ability of the US to finance the shortfall. In a
world fixated by trade flows, currency strength
was self-correcting. Chart 10 shows the US
current account balance. When the deficit got
stretched, the USD rally would come to an end.
Today, it is less likely that the US current account
will act as the self-correcting mechanism for the
USD. It is simply not a fixation for the market in
the current environment. The US deficit has
narrowed from 6% of GDP in 2006 to just over
2% currently, creating quite a bit of breathing
space before it could move back to a worrying
level. The lower reliance on energy imports
following the discovery of shale oil and gas in the
US has also made the external imbalance less of a
headache. It is possible the deficit could come
back to haunt a strong USD many years down the
road. But like the currency war driving it, the
more likely headwind to the USD rally will come
from inflation, not the balance of payments.
How big is a big USD move?
First of all, we should consider what would
represent a “big” USD move. Even if we ignore
the “mega-rallies” of 1980-1985 (+90%) and
1995-2001 (+50%), the average USD rally has
been 20% and has lasted roughly a year. Chart 11
shows these USD rallies shaded in grey with the
size of the USD move.
10. USD current account deterioration has stopped previous USD rallies
-7.0
-6.0
-5.0
-4.0
-3.0
-2.0
-1.0
0.0
1.0
2.0
-7.0
-6.0
-5.0
-4.0
-3.0
-2.0
-1.0
0.0
1.0
2.0
1961 1963 1966 1968 1971 1973 1976 1978 1981 1983 1986 1988 1991 1993 1996 1998 2001 2003 2006 2008 2011
US Current Account% GDP % GDP
Dollar rallies
Source: Bloomberg, HSBC
12
Macro Currency Strategy January 2015
abc
It would be hard for US policymakers to point to a
20% USD appreciation as a historical aberration.
In addition, currencies could fall quite far against
the USD before the US could justifiably
complain. After all, when the US conducted QE1,
the USD fell 15%. The USD also weakened in
anticipation of QE2 and during it too, falling 20%
in total. It would be disingenuous for the US to
carp about tactics of other central banks that it
employed only a few years earlier.
How much deflation can you take?
To be fair, so far there has not been much push-back
from US policymakers against USD strength. New
York Fed president William Dudley did observe
recently that “if the dollar were to strengthen a lot”
then it could affect growth and the “appropriateness
of a given monetary policy”. But we are still in the
realms of “if”, and so the question is what might
represent “a lot”? At what point might USD
strength begin to lower the US inflation outlook
sufficiently to delay Fed interest rates hikes, thereby
weakening the USD?
Much academic energy has been spent gauging
the pass-through effect of a currency move on
GDP growth and inflation. HSBC’s estimates on
this front for the USD suggest a 10% appreciation
would trim roughly 0.5% of CPI after one year.
This degree of sensitivity matches the ready
reckoners calculated by the OECD. In other
words, it might take a 20% move in the USD to
exact a sizeable hit on US inflation projections.
However, given the decline in oil prices, forecasts
for headline inflation are already on the retreat. So
while there is clearly some more room for the
USD to strengthen before it would begin to have a
sizeable impact on US core inflation projections,
it will become more of a consideration in terms of
the pace of US tightening.
How broad will the USD rally be?
If we believe that a 20% USD rally would not be
untoward in terms of the scale of the move, the
other consideration is how broad-based the rally
might be. Since the broader USD rally began to take
hold in July 2014, the greenback has risen against
all 33 of the world’s most actively currencies.
11. A 20% USD rally would not be extraordinary
60
70
80
90
100
110
120
130
140
150
160
170
60
70
80
90
100
110
120
130
140
150
160
170
Aug-70 Aug-73 Aug-76 Aug-79 Aug-82 Aug-85 Aug-88 Aug-91 Aug-94 Aug-97 Aug-00 Aug-03 Aug-06 Aug-09 Aug-12
DXY
19% 16% 24% 21% 19%24% 15% 25%95% 51%
Source: Bloomberg, HSBC
13
Macro Currency Strategy January 2015
abc
But while these currencies have fallen against the
USD, some have fallen relatively modestly. These
include the IDR and INR, currencies which were
traumatised in 2013 by the prospect of US
monetary tightening. Improvements in economic
and political fundamentals in India since then
might argue for greater resilience to the prospect
of higher US policy rates. However, it is likely
that the comparative stability in the US treasury
market this time has helped prevent too much
trauma for the IDR and INR, and emerging
market FX in general.
Chart 13 shows an index of the ‘fragile five’
currencies (INR, IDR, BRL, ZAR & TRY)
against the USD plotted against US 10Y Treasury
yields. The relationship had been fairly strong
from 2013 until September 2014 although it has
broken down recently. G10 currencies seem more
fixated on the differential at the very short end of
the curve, whereas EM FX seems more fixated on
10Y yields. We do not expect US 10Y Treasury
yields to rise over the next year, which should
limit the damage to EM FX. But if US yields rise
sharply, then EM FX will be very vulnerable, and
USD strength will change into a surge.
Of course, one side effect of a stronger USD
should be lower imported inflation. In turn, this
could help temper any upward pressure on US
yields, reducing the risk that EM FX will face the
same kind of trauma as in 2013.
Conclusion
The USD bull run has further to go. A year ago
we suggested that USD strength would be the
dominant theme in currency markets during 2014,
a view vindicated as the USD was the world’s
best performing currency. We expect a repeat
performance in 2015. Our forecast of additional
USD gains may not be enough to push inflation
back to target in those countries struggling with
the deflation threat, but it could buy them time
and help prevent inflation expectations becoming
permanently detached from target. Our forecast
pace of USD strength suggests it will be a helpful
development for others.
12. The USD's dominance has been absolute 13. EM FX is vulnerable to any rise in US yields
-45.0-40.0-35.0-30.0-25.0-20.0-15.0-10.0-5.00.0
-45.0-40.0-35.0-30.0-25.0-20.0-15.0-10.0-5.00.0
RUB
NOK
BRL
PLNH
UFJPYAU
DSEKILSM
XNC
ZKEU
RM
YRG
BPC
HFZARTRYN
ZDC
ADID
RSG
DKR
WTW
DIN
RAR
SC
NY
Performance v s USD since 1 July
EMEA Performance Asia PerformanceLatAm PerformanceG10 Performance
%%
1.5
1.7
1.9
2.1
2.3
2.5
2.7
2.9
3.1
96100104108112116120124128132
Jan-13 Jun-13 Nov-13 Apr-14 Sep-14
Weighted index of the "Fragile 5" since Jan 2013 (equally-weighted, 100=1 Jan 13) (LHS)US 10 Year Treasury Yield
%
Source: Bloomberg, HSBC Source: Bloomberg, HSBC
14
Macro Currency Strategy January 2015
abc
2015: The FX year of living dangerously
The FX market’s consensus view of the world is
that the JPY will weaken sufficiently to help bring
the Bank of Japan’s inflation rate closer to target,
but not so much as to de-stabilise wider
confidence in the JPY. Similarly, the EUR is
expected to depreciate, helping to head off the
Eurozone’s deflation threat, but without falling so
far or so quickly as to reignite questions over the
currency’s longer-run viability. The flipside to
this is a forecast of USD strength, but not
excessive appreciation that would prevent the Fed
from beginning the process of interest rate
normalisation in 2015, or that could prompt an
emerging market FX crisis. The suggestion that
the FX world can muddle through is one which
faces many challenges, and we believe some
account of the tail risks faced needs to be woven
into base case forecasts. This points to an even
stronger USD.
This report is divided into three sections:
1. The threats to the market’s “muddle
through” scenario
2. The argument for a policy accord with a
look at past currency accords
3. What does it mean for our forecasts?
1) The threats to the market’s “muddle through” scenario
The risks confronting the currency market now
carry particularly large consequences for the
levels of exchange rates. We are back to the era of
needing to contemplate tail risks. Even if we
believe the probability is small, some account has
to be taken in our forecasts for the possibility
these risks come to fruition. We examine three
potential sources of risk, first in Japan, then
Europe, and finally within emerging markets.
A) Japan loses control of the JPY
Since the emergence of ‘Abenomics’ at the end of
2012, the Yen has weakened by one-third on a
trade-weighted basis. It has been a currency
realignment driven by monetary policy, hopes for
structural reform, and occasional bouts of short-
term fiscal stimulus. The decline in the Yen has
been mostly orderly, and policymaker rhetoric
generally reflected an understandable comfort
with not only the direction but also the pace and
volatility of the shift. With a USD-JPY consensus
How extreme USD strength can destroy the world
15
Macro Currency Strategy January 2015
abc
projection of 124 for year-end 2015, this well-
mannered adjustment is anticipated to continue.
Yet it is entirely plausible that the Yen decline
becomes disorderly and swift. The flow diagram
in chart 1 shows the possible drivers and
outcomes. To begin, we consider three possible
catalysts that could challenge the consensus, and
drive a debasement of the Yen.
i) The BoJ loses its grip on the Yen as market
anticipates aggressive future QE:
Since the reflex reaction of the central bank to a
failure of QE to deliver sufficient inflation is to
throw ever more QE at the situation, the risk is
that investors will begin to value the Yen based on
a succession of anticipated additional aggressive
easing moves. This could see the currency weaken
swiftly as investors question the future value of
the Yen, prompting capital flight as investors buy
overseas assets, most likely in hard USD. The
central bank would fight to stop the rot, perhaps
even by reversing QE. This could succeed, but if
this failed, it could create an explosive move
higher in USD-JPY.
ii) Expectations for fiscal largesse and
monetisation drive a much weaker Yen:
An alternative policy over-shoot scenario could
come from the fiscal side of the equation. The
latest fiscal stimulus plan targets consumers. If
supporting household spending becomes the
favoured tactic, the temptation to drift towards
increasingly generous fiscal programmes could
grow. We do not expect a ‘helicopter drop’ of
income into every household, but the Yen would
react very badly to any sign that the government is
heading down a route of overt monetisation of
fiscal policy. There are many obstacles to this
outcome, including Kuroda’s likely resistance,
and it would likely require a change to the BoJ
law to reduce the central bank’s independence.
But in an economy where growth and inflation are
shy of expectations, the market cannot entirely
rule it out.
iii) Successful Abenomics drives market
expectations for ‘more of the same’ regarding
Yen weakness, while failure might drive
capital flight:
Our first two scenarios whereby the Yen weakens
excessively rely on the policy reaction to failure.
But it is possible the Yen weakens in response to
policy success. Wages growth could finally pick
up, supporting consumer spending in a lasting
way, and pushing underlying inflation higher,
1. How the decline in the Yen could become disorderly
Aggressive monetary ease Aggressive fiscal ease Successful Abenomics
JPY debased
Corporate Japan cuts export prices
Capital flight Stronger USD
TranslationTransaction/ market share
Currency war intensifies
China responds
Effective US response
No Yes
No
Cause
Result
Effect
Source: HSBC
16
Macro Currency Strategy January 2015
abc
which supports even swifter wages growth in
Japan’s tight labour market. This wage-inflation
spiral would likely be viewed as reflective of
Abenomics’ success, but it could still lead to a
view that the Yen should be weaker alongside
rising inflation expectations. Alternatively, one
could also argue that any ultimate failure of
Abenomics could also deliver Yen weakness if it
provoked a capital flight out of equity markets
and bonds. Might all roads lead to Yen weakness?
The repercussions of a debased Yen.
If there are three main channels through which we
could see a collapse in the Yen, there are also
three main channels through which it could
influence other currencies. All are tied to the
wider issue of currency war, and we examine each
in turn here.
i) Corporate Japan’s response:
One notable characteristic of Japan’s efforts to
weaken the Yen is that it has not drawn the rest of
Asia into the currency war. True, the KRW and
TWD have weakened against the USD, but not
because of direct efforts of their policymakers to
match Japan’s tactics. Both currencies have
appreciated significantly against the Yen since
the onset of Abenomics, the KRW by 60%, the
TWD by 45%.
2. Korea’s exports volumes have long outpaced Japan’s… 3. …even since the start of Abenomics
40
60
80
100
120
140
160
180
40
60
80
100
120
140
160
180
Jan-08 Jan-09 Jan-10 Jan-11 Jan-12 Jan-13 Jan-14
JapanKorea
Jan 2008=100,3 month MA (sa)
Jan 2008=100,3 month MA (sa)
96
98
100
102
104
106
108
96
98
100
102
104
106
108
Jan 13 May 13 Sep 13 Jan 14 May 14 Sep 14
KoreaJapan
Jan 2013=100, 3 month MA (sa)
Jan 2013=100,3 month MA (sa)
Source: CEIC, HSBC Source: CEIC, HSBC
4. There are already signs that Japan’s exporters are belatedly responding to the weaker Yen
96.0
96.5
97.0
97.5
98.0
98.5
99.0
99.5
100.0
100.5
101.0
96.0
96.5
97.0
97.5
98.0
98.5
99.0
99.5
100.0
100.5
101.0
Jan 13 Apr 13 Jul 13 Oct 13 Jan 14 Apr 14 Jul 14 Oct 14
Export prices Japan (local currency) Export prices Korea (local currency)Jan 2013=100 Jan 2013=100
Source: CEIC, HSBC
17
Macro Currency Strategy January 2015
abc
Yet as chart 2 and 3 show, this sizeable relative
currency shift has not resulted in a loss of
market share for Korean exporters, for example.
Export volumes continue to comfortably outpace
those of Japan.
In the early stages of the Yen’s decline, Japan’s
corporate sector chose not to cut export prices
(see chart 4). One explanation for this reticence
was reportedly that exporters were not confident
the Yen’s weakness would persist. As a result, the
benefit of a weaker Yen came through the
translation effects on Japan’s corporate sector’s
profit, rather than the transaction effect on rising
volumes and market share.
There are signs in the last few months that this
attitude is changing with Japanese export prices
falling. Perhaps the export sector is adjusting
belatedly to Yen weakness. In an environment of
a rapidly declining Yen, the temptation to boost
market share would be even greater.
This could change the nature of the currency war
in Asia. The need for policymakers elsewhere in
the region to fight a potential loss of market share,
in what is already a challenging export market,
would grow. Korea and Taiwan might become far
less tolerant of their currencies strengthening
against the Yen under these circumstances, and
the tentacles of the currency war would spread.
ii) China’s FX policy response:
The bigger question, however, is whether a more
combative Japanese export sector would draw
China into the currency war. China has not yet
joined the currency war, and we do not think it
likely. For this to change would require a very big
move in the Yen, and perhaps an explosive one.
There are some grounds to argue that China
would join the currency war and devalue the
RMB if currency moves elsewhere became
disorderly. Activity has been softer than expected,
and inflation is currently running at only half its
target level. If other currencies in the region were
to become unanchored from the USD by virtue of
a rapidly declining Yen, it would complicate
economic policy choices for China. The RMB’s
nominal effective exchange rate would appreciate
more rapidly than before, creating a further
headwind to inflation. Lower nominal GDP
growth could raise questions over debt
sustainability, while the corporate sector could
feel squeezed by higher real rates. The temptation
to realign the RMB would be greater.
5. China’s REER and NEER
80
85
90
95
100
105
110
115
120
125
80
85
90
95
100
105
110
115
120
125
Jan-05 Jan-06 Jan-07 Jan-08 Jan-09 Jan-10 Jan-11 Jan-12 Jan-13 Jan-14
CNY NEER CNY REER2010=100 2010=100
Source: BIS, HSBC
18
Macro Currency Strategy January 2015
abc
However, we believe the hurdle to any such
reaction in China is very high. China’s FX policy
is centred on reform and rebalancing the economy
alongside the internationalisation of the currency.
A competitive devaluation would be very
damaging to this process. In addition, China also
recognises its role as an anchor for the region, and
a big shift in the RMB would be extremely
destabilising for Asia’s economy.
A much weaker RMB could also trigger hot
money outflows from China, complicating
management of the balance of payments. Thus,
devaluation would be a last resort, with rate cuts,
reductions in the reserve requirement, and maybe
QE more likely to be tried first.
Nonetheless, the threat that China could become
embroiled in the currency war, however low a
probability one chooses to attach to it, could be the
real significance of a rapid weakening of the Yen.
In the world of trade, China’s involvement or not
in the global currency war is of far greater
significance than that of Japan (chart 6). For more
see ‘Asian FX Focus: 2015 Outlook: The pressure
cooker’, 08 December 2014.
iii) The US response
The flipside to our scenario of pronounced Yen
weakness would be a stronger USD. If Yen
weakness was the result of a loss of control of the
currency by Japan’s policymakers, the most likely
destination for the capital flight out of Japan would
be the US. The EUR would be an alternative insofar
as it offered the same kind of scale and liquidity as
the USD, but given its central bank would likely be
in the middle of a QE programme of its own, its
appeal to investors fleeing monetary excess in Japan
would be limited.
We have argued previously that the tolerance of
US authorities for USD strength would hinge on
the ability of the US economy to generate enough
inflation internally to withstand importing
deflation from elsewhere. But in an environment
of a rapidly declining Yen, it is questionable
whether the US could fight against the
appreciation of the USD successfully. If the RMB
were also to weaken against the USD, USD
strength could be even more problematic given
the US’s far greater exposure to China trade than
to Japan’s trade. The RMB’s share of the USD
broad index is 21%, compared to 7% for the Yen.
6. China’s policy matters far more than Japan’s in the context of the currency war
0.0
2.0
4.0
6.0
8.0
10.0
12.0
14.0
0.0
2.0
4.0
6.0
8.0
10.0
12.0
14.0
Jan-95 Jan-97 Jan-99 Jan-01 Jan-03 Jan-05 Jan-07 Jan-09 Jan-11 Jan-13
Korea China Germany Japan
% %Global export market share
Source: UNCPAD, HSBC
19
Macro Currency Strategy January 2015
abc
The US has not named a country as a currency manipulator for 20 years
The US Treasury is responsible for determining whether foreign economies manipulate their currencies against the USD, “for
purposes of preventing effective balance of payments adjustments or gaining unfair competitive advantage in international
trade,” according to Section 3004 of the Omnibus Trade and Competitiveness Act of 1998. The Treasury has designated several
countries as currency manipulators since the statue took effect, including Taiwan (1988-89, 1992), Korea (1988-89) and China
(1992-94). No country has been named since 1994, but there have been several periods since when countries were deemed at
greater risk of being named, including Japan in the mid-1990’s, and China at various times since 2000.
There are a host of factors that Treasury considers in the decision to designate a county a currency manipulator but the key tenets
of the authorizing statute focus on balance of payment adjustments and competitiveness. Two key benchmarks are the country’s
overall current account balance and its bilateral trade balance with the US. Hence, countries with large current account
surpluses, which run large trade surpluses with the US, and which employ policies that can specifically impact the exchange rate
(FX intervention or other) are more likely to be considered. Economic conditions as well as capital flow analysis, are also
considered. These all form the basis for the Treasury’s semi-annual report to Congress on exchange rates.
In reality, naming a country as a currency manipulator has political considerations. US firms and industries who feel they are
being disadvantaged by the exchange rate or trade policies of other countries often bring those concerns to Congress and/or the
Treasury. Indeed, from 2004 until as recently as 2011, there have been a number of Congressional efforts to advance legislation
that would impose various putative tariffs on China if it did not allow the RMB to appreciate more against the USD. In effect,
they represented an effort to circumvent the Treasury’s authority in exchange rate policy, and were deemed necessary by their
Congressional sponsors because Treasury had failed to name China a currency manipulator.
Those past legislative efforts never became law. But similar efforts in the future are likely to be an important feature of an
increase in currency tensions between the US and other countries, for several reasons. First, the authorizing statue for the
Treasury does not define specific consequences for countries named as manipulators. Instead, it stipulates that Treasury, “take
action to initiate negotiations…on an expedited basis…for the purpose of ensuring that such countries regularly and promptly
adjust the rate of exchange between their currencies and the US dollar to permit effective balance of payments adjustments and
to eliminate the unfair advantage.” In China’s case, such negotiations have been going on for years, and have included a
permanent Treasury attaché to China, and the US-China Strategic and Economic Dialogue. Moreover, no country has been
named a currency manipulator for 20 years, demonstrating that the bar is high. Congress has attempted to act when Treasury has
not. It can define and authorize specific penalties if a country is designated a manipulator. Or, as past legislation has attempted,
it can define the action required by China (the degree of currency appreciation versus the dollar) and the penalties to be applied
if that did not occur.
Some members of Congress claim that these legislative efforts, even without passing, were more effective than Treasury’s
actions in encouraging China allow the RMB to appreciate since 2005, in large part because of their punitive nature. That is a
somewhat simplistic assessment of a very complicated matter. But it suggests that in the future, if certain interests in the US
become less comfortable with USD strength, stepped up legislative efforts in Congress as well as increased scrutiny by the
Treasury will be the initial responses.
It is also important to differentiate the considerations and policy responses between the Federal Reserve and the US Treasury to
dollar strength. The Treasury determines dollar policy and the discussion above centres on the US political response to USD
strength. But the Federal Reserve could alter its policy path in response to a stronger USD, which might involve limiting or
delaying rate hikes to offset the tightening in monetary conditions associated with the currency’s appreciation. In that respect,
the Fed policy response is a reaction to its assessment of the economic fallout and impact on monetary conditions from USD
strength, rather than the more politicized considerations of the Treasury and Congress.
20
Macro Currency Strategy January 2015
abc
For the US Federal Reserve, the immediate
implication would be to delay the start of the rate
tightening cycle, but the real concern would be
whether a fresh bout of quantitative easing would
be adopted. The idea of QE4 may sound peculiar
for a market currently gauging when interest rates
are about to go up, but it is worth remembering
that when QE1 finished, QE2 was not expected.
When QE2 finished, further QE was also not
anticipated. QE4 could be a legitimate reaction to
excessive USD strength.
But even QE4 might not stem the rally in the USD
if the Yen were sliding uncontrollably. Lower
rates for longer in the US would be positive for
US growth, potentially supporting US assets.
It is also questionable whether the US Treasury
would be able to mount an effective counter-
offensive. It has long argued the merits of a strong
USD, and we suspect the administration in its last
two years would struggle to define and implement
an about-face on this mantra. There could be
official criticism of China as a currency
manipulator were Beijing to join the currency war
(see box on previous page) but the impact on the
USD would be minimal.
B) Reignited European break-up fears
There is an alternative route to excessive USD
strength, but one which is rooted in Europe rather
than Asia. The commitment of Draghi to “do
whatever it takes” provided the circuit breaker to
prevent the sovereign crisis in the Eurozone
feeding on itself. Given the resultant OMT
remains in place, the assumption is that the threat
of a peripheral crisis or EUR break-up is now
consigned to the past.
The danger, however, is that the threat of a
flare-up of sovereign concerns is non-zero. This
comes from two potential sources:
i) A more Eurosceptic political landscape
ii) Reduced economic downside of exit
Any heightened concerns about break-up, either
of the Eurozone or the wider EU, will be most
acutely reflected in the exchange rate rather than
the bond market, where ECB buying could still
cap yields. EUR weakness would be the safety
valve through which market concerns would be
expressed (see chart 7).
7. The flare-up of Eurozone sovereign concerns could play out like this
UK EU/EUR
May 2015 General Election Rising euro-scepticismStronger fiscal position in
periphery
EU in-out referendum Political will for unity declines Ability to leave rises
EUR USD JPY
Asian FX war?
Source: HSBC
21
Macro Currency Strategy January 2015
abc
1) A more Eurosceptic political landscape
The political popularity of the EU and Eurozone
has been waning recently, illustrated by the rise of
the Eurosceptic parties in the 2014 elections.
Chart 8 illustrates the rise of some of these parties
since the 2009 elections. The UKIP in the UK, the
National Front in France, and SYRIZA in Greece
all came out on top in their respective elections
with an average increase in vote of 16.8%.
This swing illustrates the disillusion many are
feeling about the EU. The biannual Euro-barometer
survey echoes the decline in perception of the EU.
Respondents were asked “In general, does the EU
conjure up for you a very positive, fairly positive,
neutral, fairly negative or very negative image?”
The percentage of those polled ‘positive’ about the
EU has fallen from its high of 52% in 2007 to its
current level of 35% (see chart 9).
It is a shift in mood that carries implications for
the mainstream parties also, as they have to bear
this euro-scepticism in mind when drafting their
own manifesto. In the UK, for example, this rise
in Eurosceptism has led to the Conservatives
announcing there would be an EU ‘in-out’
referendum in 2017 if they are re-elected as
government in the May 2015 election. The
implications for GBP of this political uncertainty
could be very negative (see ‘Currency Weekly:
The ABC of further GBP weakness’,
27 November 2014), but it would also have
potential repercussions for the wider stability of
the EU and the euro project. Were the UK to be at
risk of leaving, it would remind markets that
membership of the EU and the euro project is not
necessarily a one-way street.
In addition, the political support across the
Eurozone for Draghi’s promise to protect the euro
project is a central part of its legitimacy. In many
respects, the firepower thrown at defending the
single currency was driven by political rather than
economic considerations. The threat for 2015 is
that the shifting political landscape towards
greater euro scepticism will raise questions over
the extent of that support.
2) Reduced economic downside of exit
The first risk is that the political will to protect
EU and Eurozone unity may be on the retreat. The
second risk is that the cost of leaving may not be
so onerous now as it was in 2012. For example, in
the case of Greece, the central bank warned that
per-capita income would fall by more than half,
unemployment would soar, and inflation would
push to 30%. Some of these projections could still
hold today, but one factor that held back ‘exit’ is
not so prominent.
8. Eurosceptic parties are enjoying a greater following 9. The EU population is less enthusiastic about the EU
0
5
10
15
20
25
30
0
5
10
15
20
25
30
UKIP(United
Kingdom)
NationalFront
(France)
SYRIZA(Greece)
Five StarMovement
* (Italy)
Alternativefor
Germany *
2009 European Election 2014 European Election% of v ote % of v ote
25
30
35
40
45
50
55
25
30
35
40
45
50
55
Apr-06 Apr-08 Apr-10 Apr-12 Apr-14
% of population who view EU as positive% %
Source: Wikipedia, HSBC (* New party so did not take part in 2009 elections) Source: Standard Eurobarometer 81 Spring 2014, HSBC
22
Macro Currency Strategy January 2015
abc
In 2012, the peripheral countries of the Eurozone
ran sizeable primary fiscal deficits. This meant
that even if they reneged on their debts had they
left the Euro and therefore did not have to pay any
interest on their loans, they would still not have
enough revenue to run the government. Given that
capital markets would most likely be closed to
them in this scenario, it suggested the state would
not be able to operate. Italy and Portugal already
ran a primary surplus in 2013. Ireland is expected
to run a primary surplus in 2014, and Greece
expects to run a primary budget surplus of 3% of
GDP in 2015. Only Spain still falls short.
The EUR would be the safety valve
Our aim here is not to suggest the EU or the
Eurozone is about to break-up. It is simply a
reminder that the market cannot rule this tail risk
out entirely just because the ECB has put the
OMT in place. But the presence of the ECB’s
bond back-stop programme means that any
heightened risk of break-up is unlikely to be
reflected in a blow-out in peripheral bond yields
in the manner seen during 2012. Any ongoing QE
programme would add to the compression of
yields. Instead, the currency is likely to be the first
point of least resistance when factoring in any
break-up risk. The EUR needs to reflect the exit
risk in 2015, and additional USD strength is again
the likely echo of this EUR weakness.
EUR exit fears would heighten the risk of an
Asian currency war
The USD bid that any break-up fears in Europe
might conjure up would presumably be echoed in a
higher USD-JPY rate. In turn, this could foster the
descent into a more destabilising currency war in
Asia, the risk of which we detailed in section A of
this report. The two risks are therefore inter-twined.
C) Excessive USD strength provokes an EM FX crisis
If the risk of European break-up and an Asian
currency war are related, so too is the possibility
of an emerging market FX crisis. While we think
the bar is very high before China would be
tempted to devalue its currency, any such move
would have massive repercussions not just for the
rest of Asia but for EM FX in general. It could
prompt a race to the bottom through competitive
devaluations, or a retreat from risk assets in
general amid heighted market uncertainty.
Similarly, elevated fears of break-up in Europe
could prompt risk aversion with damaging
implications for EM FX. The market would also
need to cope with the spectre of an excessive USD
10. Much of the periphery now runs a primary budget surplus
-30
-25
-20
-15
-10
-5
0
5
-30
-25
-20
-15
-10
-5
0
5
Greece Ireland Italy Portugal Spain
2010 2015 (projected)% of GDP % of GDP
Source: European Commission, HSBC
23
Macro Currency Strategy January 2015
abc
bull run triggered either by the debasement of the
JPY, or questions over the longevity of the EUR.
Of course, it is not all doom and gloom for EM
FX. US short-term rates would likely remain low
for longer were the USD on an uncontrollable bull
run. Long-term Treasury yields would presumably
be compressed by safe haven inflows, reduced US
inflation and the allure of an appreciating USD.
Unconventional policy easing in Europe and
Japan would add to the liquidity pool available to
EM, as could any QE4 initiative from the US in
response to a stronger USD.
Nonetheless, EM FX has shown it is not
impervious to a bullish USD in 2014, whatever
local merits an economy might offer. The global
situation is largely overwhelming local factors,
even if some occasional relative opportunities
become apparent. If the global backdrop were to
transform into far more aggressive USD moves in
2015, the possibility of de-stabilising knock-on
effects for EM FX would grow. It is another risk
that investors will need to account for.
2) The argument for a policy accord
Reaching the limit of currency policy
In section 1, we outlined three of the key
vulnerabilities we see for the global currency
market in 2015.
In part at least, these problems stem from the fact
that monetary policy is reaching its limits. At the
outset of the crisis, interest rate cuts were
delivered to try and stem the rot. In cases where
the zero bound was met, central banks were
forced down the route of unconventional easing in
its various forms. The initial aim of this strategy
varied somewhat, but in general it sought to keep
interest rates low and help the transmission of
monetary policy. But with yields now at multi-
year lows in many countries, it is clear that we
may have reached the limits of QE also.
This has fostered a renewed focus on currencies
as the transmission mechanism of monetary
policy. The ECB might argue that it does not have
an exchange rate target, but it is clear that EUR
weakness is a key element of its current easing
strategy. Japan’s policymakers have been far more
overt in their push for a weaker JPY. With the
exception of the US, other developed nations have
also expressed a preference for currency
weakness. But the danger for 2015 is that, like
interest rate cuts and QE before it, the use of
currency as a tool of economic management may
be reaching its limit.
From Plaza to Louvre to the new accord?
“I come now to talk of new and different battles
we must fight together, to speak of a global
economy in crisis and a planet imperilled. I say
we should seize the moment, because never
before have I seen a world so willing to come
together. Never before has that been more
needed, and never before have the benefits of
co-operation been so far reaching.”
UK Prime Minister Gordon Brown in the run-up to the G20 London Summit 2009
Our three vulnerabilities point to a potential
unravelling of the currency market. The
possibility that Japan could lose control of the
Yen and trigger a destabilising intensification of
the currency war, or that Europe could lose
control of the EUR through heightened break-up
fears, or that EM FX could face fresh trauma all
argue for some co-operation to head off the threat.
Currency markets have shown themselves adept at
co-operation. The Plaza Accord of 1985
successfully reversed the earlier rise of the USD,
so much so that a subsequent Louvre Accord was
required in 1987 to arrest the USD’s decline.
These were examples of direct intervention in the
FX market to achieve a co-operative solution.
Given the risk of a destabilised currency market in
2015, the case for collaboration has returned.
24
Macro Currency Strategy January 2015
abc
Perhaps a Honda Accord could be the vehicle to
deliver this teamwork.
One radical co-operative step could be a
programme of debt monetisation. The Fed could
agree to write off a portion of the Treasuries it
holds, the BoJ likewise with its JGBs and the
ECB with its balance sheet also. This
monetisation would leave governments more free
to offer fiscal stimulus. The impact on G3
currencies relative to each other would be
contained as each economy would be adopting a
similar tactic. Only those outside of the accord
would see their currencies sharply appreciate. It
could incentivise others to co-operate also. For a
more detailed look at historic accords see ‘What
would it take to get a new currency accord?’.
Clearly, there are many political and possibly legal
obstacles to any such accord. We address these in
more detail later in this document. But the threat of
an unravelling FX market warrants something
radical. In all likelihood, however, policymakers
are unlikely to act to head off a currency market
crisis. An accord might prevent a crisis, but a crisis
may first be needed to force an accord.
3) What does it mean for our forecasts? There will inevitably be differences of opinion as
to the likelihood that the risks we have
highlighted actually occur. However, it is clear
that some account should be taken of these tail
risks, as their potential impacts could be so large.
In the case of EUR break-up, the market has some
recent precedent about how to approach this
possibility. News that increased the likelihood of
‘Grexit’ in 2012 and 2013 would encourage you
to sell the EUR even if, ultimately, you believed
the EUR would remain intact. It was simply that
the probability of disaster had risen.
A similar mind-set can be adopted this time around
for our three risks of European break-up, an
unravelling of the currency war, or fresh ordeals for
EM FX. The repercussions of all three risks are
generally for a stronger USD, and the forecast
revisions we have made over the last month have
been for a stronger USD to reflect these tail risks.
We were bullish on the USD in 2014 and it
proved to be the best performing currency. For
2015, Chart 11 shows the result of our various
forecast changes. The pattern is clear. We once
again expect the USD to be the dominant
performer, outstripping all comers.
11. USD to be an outperformer in 2015
-14.0
-12.0
-10.0
-8.0
-6.0
-4.0
-2.0
0.0
2.0
-14.0
-12.0
-10.0
-8.0
-6.0
-4.0
-2.0
0.0
2.0
BRL
PEN
NZD JP
YR
UB
KRW
CLP
GBP
EUR
CO
PIL
SC
HF
AUD
ZAR
CAD
RO
NTR
YC
ZKTH
BM
YRSG
DVN
DPH
PH
UF
IDR
TWD
HKD
MXN SE
KC
NY
INR
PLN
NO
K
Forecast spot return in 2015 %%
Source: Bloomberg, HSBC
25
Macro Currency Strategy January 2015
abc
Conclusion
The consensus view of the FX world is
understandably fixated on the monetary tug of war
currently in play in developed markets. It is also
the dominant element to our forecasts for USD
strength. However, the consensus projections
suggest all currencies can muddle through this
monetary transmission, the EUR and JPY a little
weaker, the USD a little stronger. But the risks of
destabilising moves in the currency market are
growing on a number of fronts, both in Asia and
in Europe. It could drive a surge higher in the
USD that US policymakers would be powerless to
prevent. The implications for EM FX would be
potentially problematic.
Cooperation via an economic accord could head
off these risks to the currency market, but it is
more likely that a crisis will first have to happen
before policymakers are forced into action. In the
meantime, we believe it prudent to factor in some
element of these FX tail risks to our central case
forecasts for 2015 and 2016.
26
Macro Currency Strategy January 2015
abc
As we have described in the previous part of this
document, there is a risk that the dollar rally
accelerates in 2015 either because the yen falls
rapidly as Japan intensifies Abenomics or because
the long-term future of the euro comes under
renewed scrutiny, or both. In either case dollar
strength could also be exacerbated by an EM
currency crisis.
The economic consequences of a further slow and
modest dollar rally may well be beneficial for global
growth, as it would help revive activity in Japan and
the Eurozone without undermining the US recovery
too much. However, a very large and rapid further
dollar rise could be malign in that it would
undermine the US economy while being driven by a
loss of confidence in Europe and/or Asia.
One way of avoiding this negative outcome would
be for major governments to come to an agreement
to act to prevent the rise in the dollar becoming too
extreme. International agreement on currency
cooperation has been seen before and we explore the
conditions that led to the 1985 Plaza Accord to
weaken the dollar to see what might be required to
reach a new agreement should the dollar rise
accelerate in 2015.
Our conclusions are that a new agreement on
currency cooperation is very unlikely without a
new crisis, and that any new accord would have to
consist of more than merely an agreement to
intervene in the FX market to try to stem the
dollar’s rise. Reaching any new accord will likely
be much more difficult than it was in 1985 given
divergent policies and the much wider group of
What would it take to get a new currency accord?
1. The dollar rose by 90% between 1980 and 1985 2. Tight monetary policy pushed short and long term US rates above other major countries
80
90
100
110
120
130
140
150
160
170
80
90
100
110
120
130
140
150
160
170
Jan-80 Jan-81 Jan-82 Jan-83 Jan-84 Jan-85
DXY
-4.0
-2.0
0.0
2.0
4.0
6.0
8.0
-4.0
-2.0
0.0
2.0
4.0
6.0
8.0
Jan-
80
Jul-8
0
Jan-
81
Jul-8
1
Jan-
82
Jul-8
2
Jan-
83
Jul-8
3
Jan-
84
Jul-8
4
Jan-
85
Jul-8
5
Jan-
86
Short term money spread10 year bond spread %%
Interest rates spreads - USD versus other major currencies
Source: Bloomberg, HSBC Source: US Treasury, OECD, HSBC
27
Macro Currency Strategy January 2015
abc
countries that would now be involved in
negotiating an agreement.
The rise of the dollar 1980-1985
Between 1980 and 1985 the dollar rose by about
90% on an index basis (chart 1), with USD-JPY
moving from about 200 to a high of 280, and
USD-DEM rising from 1.75 to 3.45. The high for
the dollar against the yen came well before the
high for the dollar against European currencies, so
the overall move in the dollar was not as great as
the moves against individual currencies. The
move also included periods of severe EM
weakness, especially in Latin America.
The rise in the dollar was driven by three main
factors:
1. Tight monetary policy
In October 1979 new Fed Chairman Volker
announced that the Fed would now target bank
reserve growth (and hence money supply growth)
rather than the Fed funds rate. Fed control was
enhanced by the Monetary Control Act of 1980
which imposed reserve requirements on all
deposit takers, not just banks. US short-term
interest rates surged and the oil price induced
recession of 1980 became the deep ‘double dip’
recession of 1981/82. Inflation fell, and by 1983,
it was back below 5%.
Chart 2 shows US short and long-term interest
rates relative to a basket of rates in other major
economies (Japan, Germany, UK and Canada).
US short-term rates went as much as 700bp above
the basket in 1981 and both long and short-term
rates averaged about 300bp above the basket until
late 1982. The scale of the interest rate advantage
enjoyed by the dollar was probably the major
driving factor in the early part of the dollar’s rally.
2. The Latin-American debt crisis
The oil price rises of the 1970s transferred
resources from oil consumers to oil producers.
The newly rich oil exporters looked to invest their
wealth and US banks saw a big increase in
overseas deposits. They, in turn, were encouraged
to recycle these ‘petro-dollars’ by lending to Latin
American governments who were building their
domestic infrastructure (chart 3). By the early
1980s, however, with much higher US interest
rates many of the loans were being used to pay
interest on existing loans rather than to invest in
infrastructure. Total outstanding debt from all
sources in Latin America increased from USD
29bn in 1970 to USD 159bn in 1978 and to USD
327bn in 1982.
In June 1982 Mexico announced that it would no
longer be able to service its debt of USD 80bn.
Other countries quickly followed suit and
3. The LatAm Debt crisis reduced the supply of dollars 4. Fiscal expansion supported US activity
30
35
40
45
50
55
60
65
30
35
40
45
50
55
60
65
1977 1979 1981 1983 1985 1987 1989
Total Outstanding LDC Loans by the 8 largest US Banks USD bn USD bn
-6.0
-5.0
-4.0
-3.0
-2.0
-1.0
0.0
-6.0
-5.0
-4.0
-3.0
-2.0
-1.0
0.0
1977 1978 1979 1980 1981 1982 1983 1984 1985 1986
US Federal Budget Balance (% of GDP)
Source: US FDIC, HSBC Source: White House, HSBC
28
Macro Currency Strategy January 2015
abc
ultimately 16 Latin American countries sought to
reschedule their debts. As a result of this US
banks effectively stopped lending overseas and
the supply of dollars in the international markets
was severely reduced. This gave the dollar
additional strength as non-dollar assets were sold
to obtain the dollars needed for debt servicing.
3. Expansionary fiscal policy
With the Fed’s tight monetary policy an important
driver of the 1981/82 recession, President Reagan
significantly eased fiscal policy in 1982 and 1983
by cutting marginal tax rates to try to revive
growth. The US fiscal deficit increased from
about 2% of GDP in 1981 to nearly 6% of GDP in
1983 (chart 4).
The impact on US activity was very powerful.
After a fall of 1.9% in 1982, GDP grew by 4.6%
in 1983 and by 7.3% in 1984. The short and long
term interest rate advantage enjoyed by the dollar
began to rise again and stood at nearly 400bp in
mid-1984 (chart 2 again).
The consequences of the strong dollar
The rise in the dollar put the US manufacturing
sector under great strain as it was increasingly
unable to compete against goods imported from
overseas, especially Japan. There was also
concern that the inflow of overseas investment
risked the ownership of important US assets going
abroad. An increasingly vocal campaign made
Congress consider protectionist legislation, and
because of this President Reagan began
negotiations with Japan and Europe to weaken the
dollar through joint intervention in the FX market.
By the time the agreement was reached (the Plaza
Accord of September 1985) the dollar had already
peaked as the market became less willing to
finance the then record US current account deficit
of 3.5% of GDP. The agreement was a success in
the sense that it accelerated the decline in the
dollar, though it did little to reduce the US trade
deficit with Japan which was the main concern of
the lobbyists.
The communique issued by the G5 finance
ministers and central bank governors included the
following two sentences:
“They believe that agreed policy actions must be
implemented and reinforced to improve the
fundamentals further, and that in view of the
present and prospective changes in fundamentals,
some further orderly appreciation of the main non-
dollar currencies against the dollar is desirable.
They stand ready to cooperate more closely to
encourage this when to do so would be helpful.”
This was the only new agreement; the rest was a
restatement of policies already put in place by the
respective governments. However, it was certainly
very effective in that the dollar unwound all of its
1980-85 rise over the next two years.
How far are we from a currency accord?
Three main factors can be identified which led to
the Plaza Accord. We now look at each of these in
turn to see how close we are to conditions that
may lead to a new accord.
1. The dollar’s rise was extreme and protracted
The 90% rise in the dollar against other currencies
between 1980 and 1985 was unprecedented in the
floating exchange rate era and confounded the
conventional wisdom of the time that the
widening US current account deficit would see it
fall back. This time round the dollar has so far
risen about 10% since its rally started and about
20% from its 2011 low, so the move has not yet
been as protracted or as extreme. In terms of price
levels we would need to see USD-JPY at 150 and
EUR-USD below parity for the current rally to be
on the same scale as the 1980-1985 rise. We are
therefore probably still a long way away from a
currency accord in both time and price.
29
Macro Currency Strategy January 2015
abc
2. The rise in the dollar had a significant
negative economic impact on the US
The main motivation behind the Plaza Accord from
the US side was concern that the US Congress was
becoming much more vocal about the damage
being done to domestic industry from imports and
was preparing protectionist legislation. As can be
seen in chart 6, the US balance of trade in goods
had been in only a small deficit in the early 1980s,
but by 1984 it was running at an unprecedented
USD 30bn per quarter. Significant damage had
been done to US manufacturing by the 1981/82
recession and the strong dollar was seen as another
major damaging factor.
The rise in the dollar since 2011 has not yet had a
discernible negative effect on the US economy.
The current account deficit has actually been
shrinking despite the outperformance of the US
economy as the shale oil boom reduces oil
imports and the surplus on the trade in services
has grown.
A further sharp rise in the dollar could undermine
the US recovery, but the US authorities would
probably first prefer to use domestic policy
options (such as delaying rate increases, or even
QE4) before trying to get international agreement
on a new currency accord.
3. There was sufficient international policy
agreement that all could benefit from a
lower dollar
A crucial factor behind the Plaza Accord was that
there was sufficient international agreement that
all could benefit from a lower dollar. While the
US would obviously hope to see its trade balance
improve as a result of a weaker currency, Japan
and Europe expected that a rise in their currencies
would bear down on inflation and allow lower
interest rates which would encourage growth in
the domestic economy even if exports weakened.
In the event, short-term interest rates outside the
US did fall significantly in the two years after the
accord. Chart 7 shows short term interest rates in
the US and in a weighted basket of overseas
economies (Japan, Germany, France, Italy,
Canada and the UK) between 1985 and 1987.
From around 7.5% in mid-1985, short-term rates
outside the US fell to around 5.5% by mid-1987.
5. Since the 2011 low, the USD has risen by only 20% so far 6. The US trade deficit widened sharply in the early 1980s
100
110
120
130
140
150
160
170
100
110
120
130
140
150
160
170
0 200 400 600 800 1000 1200
1980-1985 2011-2015USD Index (Fed measure, major currencies)
low =100 low =100
-40.0-35.0-30.0-25.0-20.0-15.0-10.0-5.00.05.0
-40.0-35.0-30.0-25.0-20.0-15.0-10.0-5.00.05.0
1970:I 1972:III 1975:I 1977:III 1980:I 1982:III 1985:I
US Trade balance in goodsUSD bn USD bn
Source: Bloomberg, HSBC Source: US Treasury, OECD, HSBC
30
Macro Currency Strategy January 2015
abc
In the current circumstances there are not the
opportunities to offset currency strength with
domestic policies that there were in 1985. With
both fiscal and monetary policies at or near their
limits in many countries, the exchange rate has
itself become a policy instrument. Exchange rates
are now much closer to a zero sum game – the
country with the falling exchange rate exports
deflationary pressures to the country with the
rising exchange rate.
As long as there is perceived to be little
opportunity to offset currency strength with
domestic policies it will be difficult to get
international agreement on a currency accord
unless there is a severe crisis.
The Plaza Accord of 1985 was possible because
the US had a strong incentive to negotiate it, and
the other countries could see the benefits of it
being put in place. As things currently stand we
are a long way from either of these conditions
being fulfilled, so, in the absence of a severe
crisis, it is very difficult to see a new accord on
exchange rates being reached.
What might a new accord look like?
Should the rise in the dollar be rapid and extreme
enough to endanger global economic stability,
then there would certainly be an incentive for
governments to try to coordinate policies to halt
or reverse it. However, any such new agreement
would have to be very different form the Plaza
Accord. That agreement was essentially no more
than to intervene in the FX market and the dollar
was already beginning to decline by the time the
agreement was reached.
This time an agreement to intervene would almost
certainly not be enough for two reasons.
1. Domestic monetary policy is very different in the
US to those in Europe and Japan and intervention
would run counter to existing policies.
2. As we have already argued, foreign exchange
moves are now much more of a zero sum game
than they were in 1985, so it would be much more
difficult to get agreement on moves to reverse the
dollar’s rise.
Any new agreement would have to include
measures other than FX intervention and would
probably have to cover financial stability, trade
policy and market regulation. However, reaching
any sort of agreement is likely to be much more
difficult now than it was in 1985. The forum for
international agreements is now much larger than
it was in 1985. The G5 has become the G20, and
it automatically become much harder to get
7. The Plaza Accord allowed significant cuts in overseas interest rates
5.0
5.5
6.0
6.5
7.0
7.5
8.0
8.5
9.0
9.5
5.0
5.5
6.0
6.5
7.0
7.5
8.0
8.5
9.0
9.5
Jan-85 Apr-85 Jul-85 Oct-85 Jan-86 Apr-86 Jul-86 Oct-86 Jan-87 Apr-87 Jul-87 Oct-87
Short term interest rates 1985-1987(%)US Basket %%
Source: OECD, US Treasury, HSBC
31
Macro Currency Strategy January 2015
abc
agreement amongst a larger group of countries
each with its own agenda.
The problems of reaching a new international
agreement can be illustrated by the outcome of the
London G20 summit in April 2009. Even amidst the
financial crisis and the deep recession that followed,
it was not possible to reach agreement on the fiscal
stimulus wanted by the US and UK because
Germany and France were against it and the main
outcome was additional resources for the IMF to
lend money to countries in financial difficulty.
Conclusion
Consensus expectations are for a continued
gradual appreciation of the dollar in 2015 which,
if realised, would probably be beneficial to the
world economy in that it might allow Europe and
Japan to recover more quickly without doing
much damage to US growth. However, there is a
risk of a much more aggressive dollar rise which
would be damaging to world growth.
Unfortunately the likelihood of a new
international agreement to prevent this damaging
outcome is quite small as we are still a long way
from the extremes of exchange rates that might
provoke discussions of a new agreement and the
challenges of reaching an agreement are now
much greater given the divergence of policies and
the much wider group of countries involved in
negotiating such an agreement.
32
Macro Currency Strategy January 2015
abc
USD dominance to persist
The USD is expected to be the best performing
currency in the world in 2015. Much of its strength
will be an echo of currency weakness elsewhere, but
the start of the US Fed’s tightening cycle will be
another key element of the USD’s allure. In fact, the
risk to our forecast of USD dominance is that the
currency could be even stronger than we envisage if
problems abroad were to intensify.
The USD story is largely one of relative monetary
policy, in particular the divergence between the
prospective tightening cycle in the US and the likely
additional easing from the Bank of Japan and the
European Central Bank. This parting of ways is
highly unusual as, more typically, the major central
banks tend to move in the same direction if not at
the same pace and magnitude. The Bank of
England, for example, may be destined to be some
distance later than the Fed in its next move, but it
will at least likely be a hike. For the BoJ and ECB,
the monetary tug of war has already exerted a
powerful influence over exchange rates, with both
the EUR and JPY weaker against the USD. With
the divergence in policy likely to continue, so too
will the currency adjustment.
History suggests that we may still be in the early
stages of the USD rally. The mega-rallies of the
early 1980s and late 1990s saw the USD
strengthen roughly 90% and 50%, respectively.
Even stripping out these two big moves, the
average USD rally has been 20%. So far, the USD
broad index has not even risen 10% since the start
of its upswing in mid-2014. History is no
constraint for now.
The more meaningful headwind to USD gains in
2015 will be any sign that US inflation is coming
in lower than expected. EUR and JPY weakness is
aimed at staving off the deflation threat. This
effectively means exporting deflation to the US. If
the US economic growth is strong enough to
generate sufficient inflation, then policymakers
will be relaxed about USD strength and the
downward pressure this puts on inflation.
However, if US growth falters or inflation dips,
then the tolerance for USD upside would fade,
and interest rate hikes could be delayed. US
inflation, not the US current account deficit, will
be the pinch point for this USD rally.
Overall, we expect the USD’s strong run during
H2 14 to extend throughout 2015. In fact, we
believe the risks to our USD forecast are skewed
towards even greater strength. If the Yen were to
slide alongside any erosion of policy credibility,
or the EUR were to wobble on fresh break-up
fears, the USD would capitalise. EM FX fallout
also holds scope to drive the USD higher.
G10
USD
33
Macro Currency Strategy January 2015
abc
Draghi’d lower
We expect the EUR to weaken further during
2015, with EUR-USD forecast to finish the year at
1.15. The main driver to the decline will be the
contrast between the ECB’s additional monetary
easing and the start of the Fed’s tightening
campaign, however modest the latter proves.
However, the EUR will also face potential
downward pressure from political risk given the
rise of Euro-scepticism in many parts of the
Eurozone and wider EU.
The path of the EUR during the early part of 2015
will be determined by whether and when the ECB
enlarges its current monetary expansion. So far,
its efforts to boost the size of its balance sheet by
roughly a trillion euros have come up short. We
expect the central bank to embark on full-blown
QE during Q1 15. Although many expect such a
step from the ECB, the reality of this step being
taken would still be likely to provoke additional
EUR weakness. A sufficiently large-scale
programme would also foster additional EUR
selling, and while the ECB could be accused of
being rather slow to act, in general its
programmes have delivered in terms of size.
The downside path for EUR will also be driven by
ECB rhetoric as well as action. Although the ECB
has argued that it does not have an exchange rate
target, it has also made it clear that a weaker EUR
is helpful in pushing inflation higher towards
target. Given we expect inflation to average just
0.2% YoY during 2015, and dip beneath zero
during the year, the central bank will want
whatever help it can get via a weaker currency.
The rhetoric advocating a weaker EUR should
remain prevalent.
Politics could also play their part in pushing the
EUR lower. Although EUR break-up remains an
unlikely prospect, 2015 could be the year when
such fears are resurrected. The EUR remained
intact in the face of peripheral pressures in 2012
in large part because of the political backing for
the project. The ECB’s OMT programme has
provided the policy underpinning to the project,
but political support is the key element. The rise
of Euro-sceptic parties in recent years could raise
concerns that this wider commitment to the euro
project could be threatened by populism. Such
parties have significant positions in Greece,
France, Italy and Spain for example. Outside of
the Eurozone, the UK’s drift towards a possible
“in-out” referendum on EU membership may
further undermine the view that European
integration is a one-way process.
So the EUR will have to deal with an expanding
ECB balance sheet, anaemic growth, temporarily
negative inflation and heightened political
uncertainty. 2015 will be a testing year
EUR G10
34
Macro Currency Strategy January 2015
abc
If at first you don’t succeed…
The story for the JPY in 2015 looks destined to
remain largely unchanged from 2014, namely
weakness engineered by aggressive monetary
easing. With the Fed likely moving in the opposite
direction, we expect USD-JPY to finish the year
at 128, a forecast which partly encompasses the
small but potentially costly tail risk that JPY
weakness gets out of control.
The Bank of Japan’s surprise acceleration of its
QE programme in October 2014 underlined the
central bank’s zealousness to achieve its inflation
target. Despite aggressive monetary easing we
believe the inflation target of 2% by March 2016
remains overly ambitious. The slide in commodity
prices adds to the downside risks to inflation, and
may limit the extent to which wages growth can
be invigorated. Further monetary stimulus is
therefore likely, possibly as early as April 2015.
It is also clear that whatever costs might be
associated with a weak JPY, notably for some
smaller enterprises, policymakers still believe
they are outweighed by the benefits. There is no
evidence that the tolerance for JPY weakness has
reached its limit within Japan policy, or will act as
a constraint on future easing.
Some may hope that structural reform might
provide additional impetus to the local stock
market, and thereby drive USD-JPY ever higher.
While the recent election result gave PM Abe a
fresh mandate, we do not expect any material
progress anytime soon as the legislative calendar
is already rather full. It is likely the pace of
structural reform will remain rather
underwhelming through the early part of 2015.
Once again, this will put the onus on monetary
policy to deliver the required stimulus.
The danger for the JPY is that current efforts to
engineer higher inflation largely through a weaker
exchange rate could spiral out of control. The
failure of earlier QE to deliver the desired level of
inflation did not prompt thoughts that this may be
the incorrect strategy. Rather, it merely
encouraged even more QE. If markets believe the
BoJ could simply throw ever more liquidity at a
failing inflation target, the risk that the currency
will be viewed as debased will grow. It is a risk
we believe should be at least partly factored into
base case forecast, especially as the implications
of a much weaker JPY on the region’s currency
war could be onerous.
The JPY’s decline in 2015 will not be a straight
line. Sporadic bouts of global unease may foster a
safe haven bid at times for the JPY, but in the end
the currency should succumb to the BoJ’s
monetary largesse and finish the year weaker. The
danger is that it weakens too much.
JPY G10
35
Macro Currency Strategy January 2015
abc
Pounded lower
2014 proved a game of two halves for GBP, but
we expect 2015 to be rather more uniform with
relentless GBP weakness the likely theme. We
continue to see cyclical, political and structural
headwinds to GBP that we believe will see it
finish the year at 1.48 against the USD. Although
the factors behind its decline are somewhat
different from those affecting the EUR, we expect
both to suffer to a roughly similar extent. We
forecast EUR-GBP at 0.78 by year-end 2015.
UK interest rate hike expectations have already
retreated quite far into the future, with the first
hike not now expected by the market until early
2016. This retreat has been echoed in the
currency, and arguably much is already in the
price. Yet, GBP still has to face some headaches
on the cyclical front. What recovery we have seen
remains unbalanced, overly reliant on consumer
demand, with net exports and (more recently)
business investment now acting as a drag. We
expect the economy to slow further in H1 15.
With inflation expected to only average 1% in
2015, dipping below 1% in Q1 15, and requiring a
letter from the BoE’s governor to the Chancellor.
It is not an environment where cyclical forces will
be acting to support GBP.
If cyclical forces were GBP’s only headache, then
perhaps GBP could hope to outperform the EUR.
But GBP, like the EUR, also has to incorporate
rising political risk. There will be uncertainty
about the make-up of the government following
the May 2015 general election. The possibility of
another coalition remains in the UK’s more
fractured political party system. In addition, the
Euro-sceptic UKIP party has made strong gains in
recent elections. They will ensure the EU debate
remains prominent, and the possibility of a
Conservative Party sponsored EU “in-out”
referendum will stay firmly in the market’s mind
in the run-up to the election, and potentially for
some time thereafter depending on the election
outcome. It is a political risk premium that the
market needs to price in early having failed to do
so efficiently ahead of the Scottish independence
referendum in 2014.
The third vulnerability for the UK remains its
twin deficits. The unbalanced nature of the
recovery has exacerbated the current account
deficit which is expected to remain close to 5% of
GDP in 2015. Meanwhile, the UK fiscal deficit is
forecast at 3.3% of GDP despite more austerity. A
metric based on a simplistic combination of these
two short-falls would rank GBP amongst the
worst of the world’s currencies.
GBP has fallen a long way against the USD. We
believe it has further to fall, but it may be able to
match the beleaguered EUR and JPY in 2015.
GBP G10
36
Macro Currency Strategy January 2015
abc
If it ain’t broke, don’t fix it
Our forecast profile for EUR-CHF of 1.20
throughout 2015 may not be the most dramatic of
profiles, but it remains the most plausible in our
view. To hold any other forecast would require
either a view that the CHF could weaken
independently against a EUR that is already
expected to be depreciating on the back of ECB
QE, or that the EUR-CHF floor is about to break.
We expect neither.
The case for retaining the EUR-CHF floor at 1.20
remains compelling. Admittedly, there are grounds
to anticipate an improvement in domestic demand,
with robust job creation and lower interest rates
driving consumption, in turn encouraging
investment growth. But overall GDP growth is
expected only to match the pace set in 2014, with
net trade offsetting that domestic demand upswing.
As a result, Swiss inflation which has averaged
close to zero throughout 2014, is not expected to
move far from this level in 2015.
With no shift in the inflation outlook, there is no
reason to anticipate any shift in the EUR-CHF
floor policy. The SNB can defend the floor
without limit so long as they are happy to
accumulate additional foreign exchange reserves.
The ‘gold referendum’ which sought to compel
the SNB to hold more reserves in gold reflected a
concern that the central bank was holding too
many assets in the EUR. Yet this referendum was
roundly defeated suggesting Switzerland’s voters
are not so unnerved that reserves are being parked
in fiat currencies like the EUR. So the political
objection to intervention is negligible, and with
inflation close to zero, so too is the economic
objection to unsterilized intervention. The SNB’s
promise to intervene in an unlimited way remains
as potent as ever.
The floor is now also being defended via negative
interest rates, and the SNB has pointed to other
options still being open if required. They may
need to be used if the ECB’s QE programme
prompts widespread EUR selling, but maintaining
the floor will remain the imperative.
Given our forecast that the floor will remain
intact, the low range for any profile therefore
becomes 1.20 for 2015. The remaining question is
whether EUR-CHF could push higher through the
year. This feels unlikely given our expectation for
a QE programme from the ECB, potential
heightened break-up fears in the Eurozone,
Switzerland’s continued current account surplus
and Switzerland’s lower inflation rate than the
Eurozone. It is not a combination which points to
higher EUR-CHF. As a result, we retain our view
that EUR-CHF will flat-line at 1.20.
CHF G10
37
Macro Currency Strategy January 2015
abc
Weakness only temporary
The weakness of the NOK in the latter part of
2014 was far more pronounced than we were
expecting, as the central bank responded to the
drop in oil prices by delivering a surprise cut in
the policy interest rate. They also left the door
open to a further easing. This was somewhat
surprising given the robust GDP growth and
falling unemployment rate. It seems the
policymakers believe the spill-over effect from
the drag in the oil sector will be sizeable enough
to justify some support for the non-oil sector.
The combination of lower oil prices and the
dovish Norges Bank will make it hard for the
NOK to rally substantially anytime soon.
However, we expect this to be the end of the rate
cut cycle in Norway as we believe the mainland
economy will fare better than some expect, and
core inflation will remain robust. Rising wages
and house prices also argue against further easing.
As a result, we expect EUR-NOK to fall during
2015, but the move back to a more reasonable
level will first require the rout in oil prices to stop.
We see NOK appreciating gradually against the
EUR through 2015 as the robustness of the
Norwegian economy comes to the fore compared
to the Eurozone.
The SEK has also remained on the defensive as
the economy battles weakness in growth and an
inflation rate which remains uncomfortably low.
The one reprieve for policymakers is that the SEK
has continued to depreciate against the EUR,
helping to fend off at least one source of deflation.
However, the danger is that EUR-SEK begins to
push lower if the ECB embarks on full-blown QE
early in 2015 as we are expecting.
The policy options for the Riksbank to respond to
unwanted SEK strength are limited. The path of
rate hikes could be pushed out further into the
future, but it is unclear that this would have a
potent impact on the currency. Credit easing could
be constrained by the high level of household
debt, QE by the relatively small government bond
market. We are forecasting a rate cut in the April
meeting to -0.25% as the Riksbank tries to fend
off deflation.
We continue to believe policymakers will be keen
to prevent EUR-SEK falling far in response to
ECB QE, and a floor on EUR-SEK remains a
possibility.
NOK & SEKG10
38
Macro Currency Strategy January 2015
abc
Still on the ropes
The CAD remained on the defensive for the latter
part of 2014, pressured by continued USD
strength and the sharp decline in oil prices. The
latest Bank of Canada statement was modestly
more upbeat on Canadian growth, but cautious on
the global growth outlook and the effects of lower
oil prices. We expect the firmer bias in USD-CAD
to persist.
The dramatic decline in oil prices has, not
surprisingly, been associated with weaker levels
of CAD. But despite the Canadian economy’s
sensitivity to oil—energy and energy-related
products account for roughly a quarter of
Canada’s exports—the fallout on the CAD itself
has been somewhat contained relative to that of
other currencies. We noted in last month’s update
that the CAD had outperformed most other G10
currencies versus the USD since the decline in oil
prices began last July, and that continues to be the
case into the end of 2014.
But there are some other factors to consider in
terms of the impact of lower oil prices on the
CAD. Canada imports refined oil products, and it
benefits from a reduction in those prices. In
addition, the discount of Canadian-produced
Western Canada Select oil to US-produced West
Texas Intermediate oil is relatively small by
historic standards. That suggests that Canadian oil
continues to be exported to the US, contrary to the
reduced US demand for crude oil imports from
other countries. Along those same lines, Canada’s
concentration of exports to the US leaves it less
exposed to diminished demand in some other key
commodity consuming economies (i.e. China).
And in the medium term, to the extent that lower
oil prices support increased US demand and
overall growth, it will have positive spill over
effects on Canada. However, that will likely only
mitigate some of the negative impact of lower oil
prices on the CAD.
Importantly, the BoC does not appear to be in any
hurry to start to normalize policy, and financial
markets have also remained largely of the same
opinion. 2-year Canada overnight index swaps, an
indication of where the market expects the
overnight interest rate to be in two years’ time, are
trading at 1.13%, near the middle of the
approximate 1.0%-1.25% range they have held for
most of this year, and implying only a very
limited prospect for BoC rate increases over that
two-year horizon. In other words, the CAD is not
getting any obvious support from BoC policy
speculation, and we expect that condition to
persist for the foreseeable future.
The anticipated outperformance of the USD, and
perhaps more immediately some further effects of
lower commodity prices, keep us bullish on USD-
CAD in both the near and medium terms.
CAD G10
39
Macro Currency Strategy January 2015
abc
Caught in the USD bull run
Both the AUD and the NZD fell victim to the USD
bull run in 2014, which gathered pace in Q4.
Looking into 2015, we see a similar story; both the
AUD and NZD will continue to fall, finishing the
year at 0.78 and 0.73 respectively against the USD.
There are however differing reasons for the
respective falls. We expect New Zealand to see
strong growth in 2015 and so the weakness is a
USD-strength story. By contrast, Australia has
seen slowing growth as rebalancing occurs, albeit
at a restrained pace. We expect this to continue
through 2015.
For the AUD, two of the ‘3Cs’ (China,
Commodities and Carry) will continue to be
fundamental through 2015. Our economists have
recently revised down their growth forecasts in
China and we are now forecasting 7.3% growth
YoY in 2015. They also see further monetary
policy easing in China to try and stimulate growth.
The second C, commodities, was crucial in the final
quarter of 2014 and will continue to be so during
2015. Commodity prices have fallen across the
board. Whilst in recent months much of the attention
has been on the large decline in oil prices, key
commodities for Australia, such as iron ore, have
seen a similarly large decline, with iron ore falling
30% since the start of July 2014. This problem may
persist through 2015 due to Australia’s large reliance
on exports of raw materials.
On carry, there is some divergence with rate hike
expectations in 2015. Rate hike expectations in
Australia have been consistently pushed back
through 2014 and it has now comes to the stage
that it is not hikes but instead cuts that are being
anticipated by the market. We disagree, expecting
a hike during Q4 15, a factor which should ease
some of the selling pressure on the AUD.
In contrast, the market sees no movement from
the RBNZ until H2 2015 when the direction is
likely to be up – a view we agree with. Other
factors may be more pertinent to NZD fortunes.
In New Zealand, the main commodity of interest
is dairy. A clear risk is the continued softness in
dairy prices which has put pressure on farming
incomes in the 2014-15 season. Whilst one bad
season should not put the sector under severe
strain, continued low dairy prices could weigh on
the currency. Construction projects will continue
to boost the New Zealand economy as the
rebuilding of Canterbury continues through 2015.
AUD & NZDG10
40
Macro Currency Strategy January 2015
abc
Prepare for higher volatility
2014 ended as the first year of RMB spot
depreciation against the USD since 2005’s de-peg,
even though there has been an acceleration of
RMB internationalisation.
In 2014, China announced a broader agenda of
economic reforms and rebalancing. This has
important implications for FX policy and the
RMB in 2015, most notably that:
The PBoC will steer further away from
accumulating sizable FX reserves
It will internationalise the RMB and promote
the RMB as a reserve currency
China will try to remain on the side-lines of
global currency tensions seen elsewhere
There are some key events on the calendar this
year that could affect the RMB’s performance and
internationalisation. For example, the expected
review of the IMF’s Special Drawing Rights
could see the RMB included in this currency
basket. Also, China A-shares may be included in
the MSCI EM index.
We believe the RMB will continue to outperform
other Asian currencies in 2015, although the room
for this is narrowing in line with China’s
economic rebalancing. We are looking for modest
RMB depreciation against the USD in 2015.
More importantly, USD-RMB volatility will
likely rise in both the spot and FX forwards
markets. This will be a function of further reforms
to make the RMB more market driven. But higher
volatility will also emerge due to monetary policy
divergence between the US and other major
central banks, including the PBoC.In fact, there is
a significant risk of USD-RMB overshooting our
year-end forecast of 6.22 in Q1: Fed tightening
concerns and/or further easing measures by the
BoJ and the ECB could coincide with rate cuts by
the PBoC, as well as higher USD-CNY fixings
and capital outflows ("hot money", services trade
deficits, outward direct investments) on the back
of seasonally thinner trade surpluses.
Indeed, the current demand-supply picture still
suggests a long USD bias in the onshore market –
the USD170bn of estimated "hot money" outflows
(importer hedging flows) between May and
November is only half of the USD310bn of
inflows seen during the September 2013 - April
2014 period. We may see more outflows before
corporates fully cover their FX exposures.
There is a risk that spot USD-CNY could touch
the upper bound of the daily trading band. In that
event, the PBoC would have to resume spot USD
selling, raise the USD-CNY fix significantly
higher and/or widen the band. Band widening
would be consistent with China's commitment to
FX reforms.
Given USD-CNH and onshore USD-CNY
forward curves are steep and have priced in
modest spot RMB depreciation, we prefer to look
for opportunities to position for higher spot
volatility via FX forward curve flatteners.
RMB Asia
41
Macro Currency Strategy January 2015
abc
In a tough spot
In the latter part of 2014, the KRW was weighed
down by large outflows reflecting, initially,
increased FX intervention, and subsequently,
portfolio outflows by both locals and foreigners, a
surge in RMB deposits (of which only a fifth was
converted from USD deposits), as well as a record
amount of USD-KRW NDF purchases by
foreigners from banks in Korea.
The outflows stem from competitive concerns due
to a weak JPY and persistent BoK rate cut
expectations, as a result of additional BoJ
monetary easing (see Asian FX Focus: KRW:
What goes up must come down, 3 October 2014).
The positive correlation between USD-KRW and
USD-JPY is at its highest since the start of
Abenomics as: (i) the KRW, by some measures,
can no longer be regarded as under-valued;
(ii) Korean assets have become lower yielding;
(iii) Japanese exporters have started to lower their
contract prices; and (iv) the urgency for Korea
policymakers to boost exports has risen amid
sluggish domestic demand.
We expect the outflows to persist and USD-KRW
to stay elevated in 2015, especially if both the BoJ
and the BoK ease further. Portfolio liabilities
accumulated over the last five years are large, at
35% of FX reserves, and could be FX hedged
more than in the past. Newly acquired portfolio
assets are also less likely to be currency hedged,
given the sharp drop in FX swap rates.
While there are expectations a stronger dividend
policy by the government could encourage foreign
equity inflows, this is balanced by a risk of
portfolio rebalancing outflows in the event that
China A-shares are included in the MSCI index,
and outflows on the back of downward revisions
in earnings growth.
Exporters could further increase their FX deposits,
in anticipation of a stronger USD and higher
yields. Moreover, the authorities are aggressively
developing the offshore RMB market in Seoul,
aiming for direct RMB-KRW trading and greater
utilisation of the RQFII quota. Offshore RMB
deposits could continue growing in Korea.
Nevertheless, we believe the BoK will tread
cautiously in a ‘currency war’, given the high
level of household debt (which could constrain the
rate cut cycle) and since Korea remains a net
debtor from an international investment position
perspective (despite the decline in short-term
external debt). A sharp rise in USD-KRW could
cause excessive market volatility and uncertainty
that would actually weigh on growth.
The KRW will also be supported by a large
current account surplus (USD82bn in Jan-Nov
2014). In our view, the downside risk to this from
a weak JPY is more than offset by the upside risk
from the sharp decline in oil prices (note: oil
comprises 25% of Korea’s imports). The BoK is
currently assuming an oil price of USD99/bbl and
a current account surplus of USD40bn in 2015 but
this would most certainly change in its January
economic outlook.
KRW Asia
42
Macro Currency Strategy January 2015
abc
Fast forward in 2015
The INR has help up relatively well versus other
Asia currencies in recent months, supported by
strong portfolio inflows and reform optimism,
while improving macro data also helped. This
story should continue in 2015, in our view.
Although foreign equity inflows moderated
slightly in early Q4 2014, and foreign institutional
investors have nearly exhausted their USD25bn
limit in government bonds, the improvement in
the current account deficit and the real interest
rate profile will likely sustain the INR’s steady
performance in 2015. This is partly due to a
timely decline in global commodity prices (note:
India is a large net crude importer; see
Economics: India and oil: Relief on all fronts,
20 October 2014), but also a result of reforms and
a more credible mix of monetary and FX policies.
Indeed, we believe the INR’s long-term outlook
has improved (see Asian FX Focus: INR: Fast
forward to 2015, 29 October 2014). We are
particularly encouraged by recent measures aimed
at attracting investment and controlling the twin
current account and fiscal deficits.
That said, the crucial winter session of Parliament,
which concluded on 23 December, added little
cheer to markets. Out of 37 proposed bills, only
12 were passed by both houses of Parliament. In
addition, key bills involving coal mines and FDI
in insurance were not passed in the upper house,
where the BJP is in minority. The government
pushed these via the ordinance route, by which
they will be deemed laws for now, but need to be
ratified in the upcoming budget session of
Parliament in February.
Meanwhile, on a brighter note, the important
Goods and Services Tax (GST) bill was tabled in
this session, likely paving way for its
implementation in April 2016. We await more
concrete reforms in the coming months, including
changes to land acquisition, more government
divestment plans, and an increase in FII limits.
We also expect the RBI’s monetary and FX policy
to manage INR volatility. The RBI’s commitment
to achieving its 6% inflation target by January
2016 will likely keep real rates in the positive
territory, even if it does cut policy rates in 2015.
On FX policy, we note that the RBI’s ability to
curb excessive INR weakness is now at its
strongest since 2008.The RBI has accumulated
large amounts of spot FX reserves and has
neutralised its previous net short FX forward
position. However, the RBI will also be wary of
significant INR appreciation on a REER basis,
given that its own such measure is showing signs
of over-valuation. The central bank has been
buying USD at higher spot levels in recent months.
In sum, we believe the INR will be one of the
more resilient currencies in EM Asia in 2015,
provided the domestic policy framework does not
disappoint. Apart from stronger fundamentals, we
also believe the external backdrop – low core
bond yields – will be favourable to high-yielding
currencies. But we see more room to position for
a further moderation in FX forward points than
through the spot rate, given the RBI’s likely
curbing of appreciation.
INR Asia
43
Macro Currency Strategy January 2015
abc
IDR – a reformed character?
The modest weakness of the IDR in the latest
round of USD strength is in contrast to what
happened during the ‘taper tantrum’ in mid-2013.
This change is partly a function of a more credible
mix of monetary, FX and macro-prudential
policies in Indonesia starting from late last year
(see Asian FX Focus: IDR: Better but not enough,
9 October 2014).
Bank Indonesia (BI) has maintained prudent
monetary policy, which forms a sizable real yield
buffer against the fuel price hike implemented in
November 2014 and the backdrop of a more
hawkish Fed. Indeed, BI pre-emptively raised the
policy rate by 25bp the very same evening the fuel
subsidy cut was announced.
Meanwhile, the central bank also adopted a more
flexible FX policy (i.e. allowing the IDR to adjust
to market forces), and encouraged state-owned
enterprises to conduct FX hedging. The OJK
(Financial Services Authority) have also
implemented measures to address tight banking
system liquidity, which, over time, will increase
BI’s flexibility in handling potential capital
outflow risks.
This combination of prudent monetary policy,
flexible FX policy and macro-prudential policies
has contributed to an important delinking of credit
growth and movements of the IDR, which signals
a likelihood of a soft landing for the credit cycle.
The previous tight relationship between the two
had contributed to simultaneous banking and
balance of payment shocks in the past.
Another key factor that has been supporting the
IDR is reform optimism surrounding the newly
elected president. Despite not having a majority in
parliament at the moment and having to make
some compromises in his cabinet line-up,
President Jokowi is popular and expected to
unleash some key structural reforms.
This reform agenda was kicked off by the cut of
fuel subsidies in November 2014, followed by the
scrapping of gasoline subsidies and a fixed diesel
subsidy, effective from 1 January 2015. The
government will likely use the funds saved on
subsidy spending to help launch an ambitious
infrastructure plan that ranges from building
urban road and rail systems, making Indonesia a
maritime hub, as well as developing the
manufacturing sector.
Such plans, if properly implemented, could help the
economy rebalance away from commodities
towards higher value-added exports, and keep FDI
inflows relatively strong. This is necessary to
counter the broader BoP challenges, including a
less than robust terms of trade and wide income
and service deficits. We still look for the IDR to
weaken slightly versus the USD as part of a BoP
adjustment; however, reforms should help limit the
amount of required currency weakness compared to
historical adjustments seen by the IDR.
IDR Asia
44
Macro Currency Strategy January 2015
abc
Limited upside potential
We retain a moderately constructive view on the
PLN in 2015. Our forecast is based on the
assumption that the key policy rate in Poland is
likely to remain stable, whilst the ECB will
continue its monetary easing. However, we think
that the upside is limited as the currency does not
display any particular sign of misalignment
relative to important macro variables. We see
EUR-PLN ending the year at 4.05.
The Polish central bank is reluctant to reduce its
policy rate below 2%. Part of the lacklustre
performance of the zloty against the EUR and its
regional peers in 2014 has been due to
expectations of substantive cuts from the NBP in
the face of excessively low inflation. However,
the central bank’s reaction function has changed.
Monetary policy is now more determined by GDP
growth than inflation. The central bank’s policy
bias for easing may remain given the
undershooting of the inflation target, but it would
take another shift down in GDP growth for the
MPC to cut rates to new lows. We expect GDP
growth to remain around 3%, leading the NBP to
keep its policy rate unchanged. This stance is
likely to support the PLN.
A policy rate floored at 2% should also be put in
the European context with the ECB easing
underway. We expect ECB to deliver more via
full-blown QE in Q1. This is likely to create a
boost to a PLN offering 2% yield and a
historically high real interest rate. Even with the
return of Polish inflation into positive territory in
the coming months, the real policy rate will stay
high in absolute terms and also from a historical
perspective. This is an important element
increasing the PLN attractiveness vs both the
EUR and relative to its regional peers.
Nevertheless, we do not think that the PLN has a
large upside potential. Contrary to some Polish
MPC members, we do not see any clear evidence
of PLN undervaluation. Some metrics send
conflicting signals but our overall assessment is
that the PLN is rather fairly valued. Moreover, in
the past two years, the PLN nominal effective
exchange rate has been very stable. This stability
was unexpected given the relative strength of the
Polish economy, the historical reduction of the
current account deficit and the improvement in the
terms of trade. Admittedly, when capital inflows
were large during 2011-2012 period, the current
account deficit was still sizeable. One factor offset
the other, so the impact on the PLN was mild.
Similarly, the rapid narrowing of the current
account deficit since mid-2012 has coincided with
a reduction in capital inflows with the same tepid
consequence on the currency. Looking ahead, it is
difficult to envisage the PLN recording significant
gains with none of these factors expected to vary
significantly in coming quarters.
The main risk to this mild PLN bullish view is a
change in NBP’s stance and further rate cuts.
Economic growth unexpectedly decelerating
towards 2% would be a strong case for a cut. It is
also worth emphasising that a PLN appreciation
may lead to rate cuts as some MPC members sees
this risk as a reason to ease further.
PLN CEEMEA
46
Macro Currency Strategy January 2015
abc
Caught between improving macro-mix and strong USD Turkey’s macro mix will improve in 2015. Inflation
will decelerate significantly in coming months
towards 6% after having hovered above 9% during
most of 2014. This improvement of the inflation
panorama is not only due to lower energy prices but
also to an underlying improvement of the inflation
momentum due to the effects of the past tightening
of the monetary policy.
Oil prices will have a significant impact on
Turkey’s main macro vulnerability, namely its
current account deficit. There is no doubt that the
deficit will narrow in 2015 to a level unseen in the
past 10 years if we exclude 2009 when the
economy contracted by almost 5%. The
substantive reduction of Turkey’s energy bill is
likely to bring the current account deficit to 5% of
GDP. This forecast is very conservative given the
big drop oil price recorded in recent weeks. If
sustained, the deficit could be 1-2pp lower. A
USD10 fall in oil price has indeed an impact of
USD3.2bn on the current account.
This combination of falling inflation and narrowing
current account deficit is TRY-supportive. The TRY
should also benefit from a mechanical improvement
of the country’s terms of trade, whilst the real
effective exchange rate will be less under upside
pressure thanks to lower inflation, leaving more
room for a nominal TRY appreciation.
Overall, Turkey’s macro variables point to an
appreciation of the TRY in 2015. However, there
are two important variables to add to the macro
equation. First, the Turkish central bank’s
temptation to cut its interest rates in a context of
falling inflation. Keeping policy rates unchanged
anchors inflation expectations and solidifies the
credibility of the inflation targeting policy. This is
clearly the best option. However, we cannot rule
out a moderate loosening of the monetary policy
that could have a negative impact on the TRY.
Second, USD strength could be another obstacle
to a TRY’s appreciation. Rising US interest rates
would certainly be detrimental to the lira even
though Turkey’s macro & financial fundamentals
have improved compared to 2013 when the
Fed announced the end of the super loose
monetary policy.
Overall, we believe that USD-TRY is likely to
remain under upside pressure in 2015 mainly as a
consequence of a strong USD. However, we do
not expect a large depreciation of the TRY
because of an improving domestic macro-mix.
This improvement may transpire via an
outperformance against its regional peers or vs the
EUR. There is indeed a possibility to see a de-
correlation between USD-TRY and EUR-TRY if
as we expect the ECB delivers a full-blown QE
driving the EUR lower. In other words, EUR-
TRY trend lower in 2015 even if USD-TRY ends
the year at 2.40. In the relative-value space, the
better macro Turkish panorama could be also
express via a long TRY-ZAR position.
TRY CEEMEA
47
Macro Currency Strategy January 2015
abc
USD hostage
The sharp fall in the oil price brings positives to
South Africa’s macro picture. Similarly to
Turkey, the lower energy bill will ease
inflationary pressures and improve the current
account balance. However, there are uncertainties
to what extent the ZAR can benefit from better
macro fundamentals. A continual rise of the USD
in 2015 on the back of Fed policy normalisation is
likely to push USD-ZAR to new multiple year-
highs. A reduction of some macro vulnerabilities
would only limit the ZAR’s depreciation.
It is also worth emphasising that uncertainties
remain on the scale of the macro improvement
expected for 2015. South Africa continues to face
numerous structural issues and risks. The energy
constraints (shortages and rationing of electricity)
could undermine part of the positive implications
of lower oil price and consequently GDP growth
prospects. Although the situation has improved in
the labour market since the end of summer 2014,
strikes and instability remain important risks in
2015. Wage negotiations in the public and gold
sector may create new disruption in production.
On the current account balance side, which is the
key variable for the currency, a certain degree of
cautiousness prevails. Despite a substantial FX
depreciation, a rebalancing has not materialised.
The trade deficit has continued to widen to record
levels and the current account was about 6% of
GDP in 2014. A reduction is likely to take place
in 2015 thanks to a recovery in some export
sectors impacted by strikes last year, but a lot will
depend on imports. Subdued domestic demand
and falling oil prices should curtail import growth.
Would it be enough to significantly reduce the
trade deficit, particularly when the price of other
commodities that South Africa exports are also
weak? The jury is out.
The only genuinely ZAR-positive country-
specific element is the central bank’s adequate
policy. The SARB does not target the exchange
rate but adjusts its policy to its potential
consequences when it varies. Lower energy prices
offer some space for the SARB to keep a neutral
bias in the first months of the year but we believe
that a cumulative 75bp rate hike to 6.50% will be
delivered later in the year. The SARB will
respond to sticky core inflation but also to the Fed
tightening. This appropriate policy should limit
the downside pressures on the ZAR.
Overall, we expect a mild ZAR depreciation in
2015 with USD-ZAR reaching 12 by year-end.
However, the cross could record wide fluctuations
during the course this year.
ZAR CEEMEA
48
Macro Currency Strategy January 2015
abc
Recommended strategy
Current USD-MXN strength may be a
temporary over-shoot; look to play MXN
bounce vs EUR and JPY.
Medium-term, we are more neutral on MXN
but remain significantly more bearish than
consensus, looking for USD-MXN at 14.80
year-end vs 13.50 consensus.
Key drivers
Oil
Lower oil prices threaten Mexico’s fiscal accounts
and represent a drag on growth. Sentiment on
Mexico had already been slipping on security
concerns and delays to infrastructure investment
projects and the oil drop is taking Mexico into the
‘vulnerable EM’ camp, in our view. From a trade
balance perspective, Mexico is not a major oil
exporter, but its reliance on oil for roughly 30% of
fiscal revenues still places the country in the
cross-hairs as oil prices decline.
Domestic growth
Growth is finally showing signs of picking up,
mainly thanks to public sector spending finally
kicking in. This will be an important driver of
sentiment in 2015 and, assuming growth can keep
accelerating, could enable the MXN to resist some
of the USD’s strength in 2015.
FX policy
Mexico’s Foreign Exchange Commission (FEC)
re-introduced their FX volatility-reducing
mechanism on 9th December, involving selling
USD200m should the MXN weaken by 1.5%
from the prior day’s fixing rate. The decision
signals that the authorities are not entirely
comfortable with the pace of the MXN’s recent
sell-off, but are not necessarily looking to stop or
reverse the MXN’s decline. We expect the policy
to help stabilise the MXN, as it did in 2012 when
last employed. See ‘MXN: Authorities re-
introduce volatility control USD sales’, 8 Dec.
Key risks
Security, corruption and social protests
Security issues have been simmering on the back
burner for many years now, but recent events have
raised more concerns. President Pena Nieto has
announced a series of measures aimed at
improving security, including unifying the multi-
layered police forces and boosting growth in
economically troubled areas.
Lower oil prices and FDI to oil sector
Also, foreign oil companies are gearing up to
channel significant investment flows into
Mexico's oil industry. The first round of bidding,
involving 171 blocks with 110 exploration blocks
and 60 production blocks will commence in 1H
2015, with initial contracts awarded by 21 August,
2015. The drop in oil has raised some concerns
regarding the likely competitiveness of bids.
Portfolio outflows
Portfolio inflows have been the dominant factor
within Mexico’s balance of payments in recent
years. These have slowed in recent months, but
have not yet seen any significant reversals. This is
one of the key risks for the currency in 2015.
MXN LatAm
49
Macro Currency Strategy January 2015
abc
Recommended strategy
We are bearish on the BRL, but prefer to buy
on dips due to high carry
We see USD-BRL moving up to 3.00 by
year-end, vs consensus forecasts of 2.71
Key drivers
Fiscal/debt/growth dynamics
The main focus of the government in 2015 is to
ensure that public debt as a percent of GDP
remains on a downward trajectory in order to
reduce the risk of a credit downgrade. A
successful fiscal adjustment will improve Brazil’s
medium-term outlook but the adjustments will be
an additional drag on the economy. Growth
slowed down much faster than anticipated in
2014, and HSBC is now forecasting a contraction
of -0.5% in 2015 (see: ‘Brazil Multi-asset views:
Lowering growth and BRL forecasts’,
1 December, 2014).
FX intervention policy
We expect the BCB to continue intervening
(currently at the reduced rate of selling USD2bn
per month), but further adjustments are possible.
In our view, the main objective of the intervention
is to dampen volatility and to satisfy FX demand
in the system. FX stability will be important for
the implementation of the adjustment agenda.
Balance of payments
We see another year of balance of payments
deterioration due to a) a persistent current account
deficit, and b) worsening in the quality of capital
flows financing the deficit. The current account
deficit has hovered around USD80bn (or 3.6% of
GDP) in 2013-2014, in spite of the 25%
depreciation of the BRL REER from the highs.
Since 2010, FDI has plateaued around USD65-
70bn, and HSBC looks for it to fall to USD45bn
this year. Moreover, the quality of FDI has
declined as the proportion of debt or
intercompany loans, which is more cyclical, has
risen relative to new equity investments.
This leaves a gap of around USD35bn for this
year in FX funding and is another reason that we
expect the BCB to remain engaged supplying
USDs in the market in 2015.
Key risks
Policy mistakes or inconsistencies could further
unsettle investors. Lower global growth and
commodity prices could impair the effectiveness
of the adjustments, testing political resolve to stay
the course.
The ongoing corruption investigations into
Petrobras also increases uncertainty for
investment and business activity in sectors
affected (i.e. in construction and infrastructure).
And once again electricity rationing will be a risk
to our economic outlook in 2015.
There are also positive risks. In particular, we think
any period of calm in global markets could see BRL
benefiting from renewed interest for carry, given the
general deflationary mood in the global economy.
This would not necessarily solve the BRL’s
structural issues, but it could delay the adjustment.
BRL LatAm
50
Macro Currency Strategy January 2015
abc
Gold to make modest gains
We are raising our average gold price forecast for
2015 to USD1,234/oz and introduce a 2017
forecast. We leave our 2016 and long term prices
unchanged, as shown in the table below. We
estimate a trading range of USD1,120/oz to
USD1,305/oz for 2015.
After falling sharply in 2013, the year that also
marked the end of a more than decade old bull
market gold moved largely sideways in 2014.
Starting 2014 at USD1,205/oz and ending the year
at USD1,188/oz. A strong USD, disinflation,
lower demand for safe havens and US monetary
policy shifts created the climate for further
investor liquidation. Holdings in in the gold-
exchange traded funds (ETFs) dropped but net
long positions on the Comex were rebuilt from
historically low levels which helped support
prices towards year end – see chart 1.
Gold as a currency
As a surrogate or alternative currency, gold is
sensitive to movements in the foreign exchange
markets. Gold has a traditional inverse correlation
to the USD, in large part because the USD is
widely regarded as the world’s principal reserve
currency and gold as the world’s principal hard
asset, it is logical that the two would be inversely
correlated. The case for the inverse relationship
rests largely on gold’s being traded primarily in
US dollars. USD strength played an important, if
not key role in gold’s inability to rally in 2014.
This relationship has broken down periodically,
sometimes for extended periods, most notably
during the last economic crisis, although in the
long run, the relationship has always been re-
established. We think this may happen again in
2015. The possibility that the forex market is
under-estimating the risk of destabilizing currency
moves is an important element in our view that
gold prices may gain modestly in 2015, even in
the face of a stronger USD. Should extreme USD
Precious Metals
We raise our 2015 gold forecast based on the possibility that
further USD strength could trigger safe haven demand for bullion;
We lower our PGM forecasts; silver should gain on good industrial
demand and lower mine output
We introduce a 2017 forecast for gold and the PGMs
HSBC gold price forecast (USD/oz)
_________ 2015f ___________ ___________ 2016f ____________ __________ 2017f ___________ _______ Long term ________ Old New Old New Old New Old New
1,175 1,234 1,275 unch 1,300 1,325 Unch
Source: HSBC
51
Macro Currency Strategy January 2015
abc
strength lead to dislocation in the currency
markets in combination with enhanced
geopolitical risk, gold demand could increase as
investors seek safe havens. Gains however, may
be constrained by the negative impact of
disinflation. There is also the possibility that
further USD gains will not prove to be disorderly
and therefore not gold bullish. Less
accommodative US monetary policy should also
act to limit gains.
Supply and demand
That said, gold prices will not be entirely
determined by USD direction and Fed policy. We
expect tight supply and improving physical
demand to buoy gold later in 2015. The bulk of
physical demand is located in the emerging world
and EM demand will be key in influencing prices,
helping to set both the floor and ceiling of the
market. We expect any significant price drop to
near cUSD1,120/oz to spur jewellery and coin and
bar purchases in lower income nations. There is
also the possibility that high tariffs aimed at
curbing India’s gold imports will be relaxed this
year. Conversely, rallies near USD1,300/oz are
likely to reduce EM demand and act to cap prices.
Based on low prices and likely income growth we
believe EM demand in general and Chinese
demand in particular will be fairly price positive.
Low prices will help keep supply tight in part by
discouraging scrap supplies from the recycling
markets, as holders have reduced incentive to
hand in gold for reprocessing. Although average
costs of production are generally well below
current levels, prices below USD1,200/oz have
also discouraged long term increases in output
from higher cost producers. Should prices drop
closer to USD1,100/oz producers may be further
compelled to close and/or restructure high cost
mines. We expect the combination of tight
supplies and good physical demand to help
promote a price recovery later this year.
Silver, a rising star
We are keeping our forecasts unchanged, as
shown in the table. For 2015 we expect an
average price of USD17.65/oz with a
USD15.25-21.25 range.
HSBC silver price forecast (USD/oz)
_________ 2015f ___________ ___________ 2016f ____________ __________ 2017f ___________ ________Long term _________ Old New Old New Old New Old New
17.65 Unch 20.50 unch 21.00 Unch 24.00 unch
Source: HSBC
1. USD to be the outperformer in 2015
0
20
40
60
80
100
120
140
300
500
700
900
1,100
1,300
1,500
1,700
1,900
2,100
2,300
Aug-06 Apr-07 Dec-07 Aug-08 Apr-09 Dec-09 Aug-10 Apr-11 Dec-11 Aug-12 Apr-13 Dec-13 Aug-14
Gold in ETFs (RHS) Spec position in COMEX (RHS) Gold Price USD/oz (LHS)Moz
Source: Bloomberg, HSBC
52
Macro Currency Strategy January 2015
abc
Our positive price outlook is based on a likely
easing in mine production after a decade of
increases. Also, low prices are constricting scrap
supplies. Industrial demand, which comprises half
of total silver consumption, is expected to be
buoyant based on HSBC macroeconomic
industrial production forecasts. Holdings in silver
ETFs have been steady. This plus recovering
jewellery and coin sales should buoy prices.
PGMs deficits are supportive
We are lowering our platinum 2015 and 2016
price forecasts and leaving our long term forecast
unchanged. We forecast average prices for
platinum for 2015 at USD1,337/oz. We lower our
palladium price forecast for 2015 to USD837/oz
and leave our 2016, and long term prices
unchanged. We expect a wide trading range this
year for platinum of USD1,180/oz to
USD1,430/oz and for palladium of USD755/oz to
USD925/oz.
We attribute much of platinum’s poor price
performance in 2014 to the negative influence of
low gold prices. If platinum can decouple from
gold this year, we would expect a more robust
price performance. We anticipate ongoing
structural production/consumption deficits in both
PGM markets this year will support prices. Gains
may be capped however as in the case of platinum
above ground stocks may be adequate to service
near term deficits. Also low lease rates imply
there is no shortage of available metal for either
metal. Platinum and to a lesser degree palladium
mine output is expected to recover further from
the impact of last year’s South African mining
strike. This should ease but not eliminate the
deficits. Growing auto and mixed industrial
demand in 2015 is also support the PGMs.
Palladium is likely to benefit from the end of
Russian stockpile exports.
HSBC PGMs price forecasts (USD/oz)
________ 2015f _________ ________ 2016f _________ ________ 2017f _________ _____ Long term _______ Old New Old New Old New Old New
Platinum 1,505 1,337 1,600 1,510 1,600 1,675 unch Palladium 855 837 880 Unch 890 900 unch
Source: HSBC
53
Macro Currency Strategy January 2015
abc
For full details of the construction methodology of
the HSBC REERs, please see “HSBC’s New
Volume-Weighted REERs” Currency Outlook
April 2009.
The value of a currency
Since FX prices are always given as the amount of
one currency that can be bought with another, the
inherent value of a currency is not defined. For
example, if EUR-USD goes up, this could be
because the EUR has increased in value, the USD
has decreased in value, or a combination of both.
One possible method for getting some insight into
changes in the value of a currency is to look at
movements in the value of a basket of other
currencies against the currency of interest. For
example, if EUR-USD increased over some time
period, one could see how EUR had performed
against a range of other currencies to determine
whether EUR has become generally more valuable
or whether this was simply a USD-based move. An
effective exchange rate is an attempt to do this and to
represent the moves in index form.
There are two main approaches to building an
effective exchange rate: Nominal Effective
Exchange Rates (NEERs) and Real Effective
Exchange Rates (REERs). NEERs simply track
the weighted average returns of a basket of other
currencies against the currency being investigated;
REERs deflate the returns in an attempt to
compensate for the differing rates of inflation in
different countries. The reason for doing this is
that, particularly over long time frames, inflation
can have a large impact on the purchasing power
of a currency.
How should we weight the basket?
If we are trying to create an index for the change
in value of a currency against a basket of other
currencies, we now need to decide on how to
weight our basket. One possible solution would be
to simply have an equally-weighted basket. The
rationale for this would be that there is no a priori
reason for choosing to put more emphasis on any
one exchange rate. However, this could clearly
lead to the situation where a large move in a
relatively small currency can strongly influence
the REERs and NEERs for all other currencies.
To avoid this, the indices are generally weighted
so that more “important” currencies get higher
weighting. This, of course, begs the question of
how “importance” is defined.
Trade Weights
Weighting the basket by bilateral trade-weights is
the most common weighting procedure for
creating an effective exchange rate index. This is
because the indices are often used to measure the
likely impact of exchange rate moves on a
country’s international trade performance.
Volume Weights
The daily volume traded in the FX market
dwarves the global volume of physical trade.
From this it is possible to make a convincing
argument that the weighting which would be
really important would be to weight the currency
basket by financial market flows, rather than
bilateral trade.
HSBC Volume-Weighted REERs
Mark McDonald FX StrategistHSBC Bank plc+44 20 7991 [email protected]
54
Macro Currency Strategy January 2015
abc
To do this properly would require us to have
accurate FX volumes for all currency pairs
considered in the index. However, these are not
available. The BIS triennial survey of FX volumes
only gives data for a small number of bilateral
exchange rates. However, the volumes are split by
currency for over 30 currencies. From these
volumes we can estimate financial weightings for
each currency. We believe that this gives another
plausible definition for “importance”, and one
which may be more relevant for financial
investors than trade weights. We call this
procedure volume weighting and the indices
produced through this procedure we call the
HSBC volume-weighted REERs.
We would argue that if you are a financial market
investor, the effective value of a currency you
would be exposed to is more accurately
represented by the HSBC volume-weighted index
rather than the trade-weighted index.
Data Frequency
This is something which is rarely considered
when constructing REERs – inflation data is
generally released at monthly frequency at best so
the usual procedure is to simply create monthly
indices by default. However, some countries
release their inflation data only quarterly. The
usual procedure for these countries is to simply
pro-rata the change over the period. Here there is
an implicit assumption that the rate of inflation
changes slowly. We take this assumption one step
further and assume that it is valid to spread the
inflation out equally over every day in the month.
55
Macro Currency Strategy January 2015
abc
USD REER index EUR REER index
80
100
120
140
160
80
100
120
140
160
Jul-95 Jul-98 Jul-01 Jul-04 Jul-07 Jul-10 Jul-13
USD Trade-Weighted REER USD Volume-Weighted REER
1996=1001996=100
60
70
80
90
100
110
120
60
70
80
90
100
110
120
Jul-95 Jul-98 Jul-01 Jul-04 Jul-07 Jul-10 Jul-13
EUR Volume-Weighted REER EUR Trade-Weighted REER
1996=1001996=100
Source: HSBC Source: HSBC
JPY REER index GBP REER index
55
65
75
85
95
105
115
55
65
75
85
95
105
115
Jul-95 Jul-98 Jul-01 Jul-04 Jul-07 Jul-10 Jul-13
JPY Trade-Weighted REER JPY Volume-Weighted REER
1996=1001996=100
80
90
100
110
120
130
140
80
90
100
110
120
130
140
Jul-95 Jul-98 Jul-01 Jul-04 Jul-07 Jul-10 Jul-13
GBP Trade-Weighted REER GBP Volume-Weighted REER
1996=1001996=100
Source: HSBC Source: HSBC
HSBC Volume – Weighted REERs
56
Macro Currency Strategy January 2015
abc
CAD REER index CHF REER index
80
90
100
110
120
130
140
150
80
90
100
110
120
130
140
150
Jul-95 Jul-98 Jul-01 Jul-04 Jul-07 Jul-10 Jul-13
CAD Trade-Weighted REER CAD Volume-Weighted REER
1996=1001996=100
60
70
80
90
100
110
120
130
60
70
80
90
100
110
120
130
Jul-95 Jul-98 Jul-01 Jul-04 Jul-07 Jul-10 Jul-13
CHF Volume-Weighted REER CHF Trade-Weighted REER
1996=1001996=100
Source: HSBC Source: HSBC
AUD REER index NZD REER index
60
80
100
120
140
160
60
80
100
120
140
160
Jul-95 Jul-98 Jul-01 Jul-04 Jul-07 Jul-10 Jul-13
AUD Trade-Weighted REER AUD Volume-Weighted REER
1996=1001996=100
60
80
100
120
140
60
80
100
120
140
Jul-95 Jul-98 Jul-01 Jul-04 Jul-07 Jul-10 Jul-13
NZD Volume-Weighted REER NZD Trade-Weighted REER
1996=1001996=100
Source: HSBC Source: HSBC
SEK REER index NOK REER index
60
70
80
90
100
110
60
70
80
90
100
110
Jul-95 Jul-98 Jul-01 Jul-04 Jul-07 Jul-10 Jul-13
SEK Trade-Weighted REER SEK Volume-Weighted REER
1996=100 1996=100
70
80
90
100
110
120
130
70
80
90
100
110
120
130
Jul-95 Jul-98 Jul-01 Jul-04 Jul-07 Jul-10 Jul-13
NOK Trade-Weighted REER NOK Volume-Weighted REER
1996=1001996=100
Source: HSBC Source: HSBC
57
Macro Currency Strategy January 2015
abc
EUR-USD vs forwards EUR-CHF vs forwards
0.80
0.90
1.00
1.10
1.20
1.30
1.40
1.50
1.60
0.80
0.90
1.00
1.10
1.20
1.30
1.40
1.50
1.60
Jan-00 Jan-02 Jan-04 Jan-06 Jan-08 Jan-10 Jan-12 Jan-14 Jan-16
EUR-USDEUR-USD Forward Forecast
1.00
1.10
1.20
1.30
1.40
1.50
1.60
1.70
1.00
1.10
1.20
1.30
1.40
1.50
1.60
1.70
Jan-00 Jan-02 Jan-04 Jan-06 Jan-08 Jan-10 Jan-12 Jan-14 Jan-16
EUR-CHFEUR-CHF Forward Forecast
Source: Thomson Financial Datastream, Reuters, HSBC Source: Thomson Financial Datastream, Reuters, HSBC
GBP-USD vs forwards EUR-GBP vs forwards
1.30
1.40
1.50
1.60
1.70
1.80
1.90
2.00
2.10
1.30
1.40
1.50
1.60
1.70
1.80
1.90
2.00
2.10
Jan-00 Jan-02 Jan-04 Jan-06 Jan-08 Jan-10 Jan-12 Jan-14 Jan-16
GBP-USDGBP-USD Forward Forecast
0.55
0.60
0.65
0.70
0.75
0.80
0.85
0.90
0.95
1.00
0.55
0.60
0.65
0.70
0.75
0.80
0.85
0.90
0.95
1.00
Jan-00 Jan-02 Jan-04 Jan-06 Jan-08 Jan-10 Jan-12 Jan-14 Jan-16
EUR-GBPEUR-GBP Forward Forecast
Source: Thomson Financial Datastream, Reuters, HSBC Source: Thomson Financial Datastream, Reuters, HSBC
USD-JPY vs forwards EUR-JPY vs forwards
60
70
80
90
100
110
120
130
140
60
70
80
90
100
110
120
130
140
Jan-00 Jan-02 Jan-04 Jan-06 Jan-08 Jan-10 Jan-12 Jan-14 Jan-16
USD-JPYUSD-JPY Forward Forecast
85
95
105
115
125
135
145
155
165
175
85
95
105
115
125
135
145
155
165
175
Jan-00 Jan-02 Jan-04 Jan-06 Jan-08 Jan-10 Jan-12 Jan-14 Jan-16
EUR-JPYEUR-JPY Forward Forecast
Source: Thomson Financial Datastream, Reuters, HSBC Source: Thomson Financial Datastream, Reuters, HSBC
HSBC forecasts vs forwards
58
Macro Currency Strategy January 2015
abc
3 Month Money
2012 2013 2014 2015end period Q4 Q3 Q4 Q1 Q2 Q3 Q4 Q1f Q2f Q3fNorth America x
x US (USD) 0.4 0.2 0.2 0.2 0.2 0.2 0.2 0.2 0.3 0.5
x Canada (CAD) 1.3 1.2 1.2 1.2 1.2 1.2 1.2 1.2 1.2 1.2Latin America x x x x x x x x x x x
x Mex ico (MXN) 4.4 3.7 3.4 3.3 3.0 3.0 3.0 3.0 3.0 3.2
x Brazil (BRL) 7.1 9.4 10.1 10.8 10.8 10.9 11.8 12.0 12.0 12.0
x Chile (CLP) 4.9 4.8 4.9 4.0 3.9 3.2 2.9 2.9 2.9 2.9Western Europe x x x x x x x x x x x
Eurozone x 0.1 0.1 0.3 0.2 0.2 0.2 0.1 0.1 0.1 0.1Other Western Europe x x x x x x x x x x x
x UK (GBP) 0.9 0.5 0.5 0.6 0.6 0.6 0.6 0.6 0.7 0.7
Norw ay (NOK) 1.9 1.7 1.7 1.7 1.8 1.7 1.9 1.9 2.0 2.0
x Sw eden (SEK) 1.3 1.2 0.9 0.9 0.7 0.5 0.3 0.3 0.1 0.1
x Sw itzerland (CHF) 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0EMEA
Hungary (HUF) 5.8 3.6 3.0 2.7 2.3 2.1 2.1 1.8 1.7 1.7
Poland (PLN) 4.1 2.7 2.7 2.7 2.7 2.4 2.1 2.1 2.1 2.1
Russia (RUB)* 7.5 6.8 7.2 9.1 9.5 10.6 28.0 20.0 18.5 16.0
Turkey (TRY) 5.5 6.9 7.8 11.5 8.3 9.3 8.5 8.5 8.5 8.5
South Africa (ZAR) 5.2 5.4 5.2 5.6 5.6 6.0 5.9 5.9 5.9 6.4Asia/Pacific x x x x x x x x x x x
x Japan (JPY) 0.2 0.2 0.2 0.1 0.1 0.1 0.1 0.1 0.1 0.1
x Australia (AUD) 3.0 2.6 2.6 2.7 2.7 2.7 2.7 2.8 3.0 3.3
x New Zealand (NZD) 2.6 2.7 2.9 3.2 3.6 3.7 3.7 3.7 3.9 4.1
North AsiaChina (CNY) 5.5 5.6 5.6 5.5 4.7 4.5 4.2 3.5 3.4 3.3
x Hong Kong (HKD) 0.4 0.4 0.4 0.4 0.4 0.4 0.4 0.6 0.8 0.9
x Taiw an (TWD) 0.9 0.9 0.9 0.9 1.9 1.9 0.9 1.0 1.1 1.2
x South Korea (KRW) 2.9 2.7 2.7 2.6 2.6 2.4 2.1 1.9 1.9 1.9
South AsiaIndia (INR) 8.5 9.7 8.7 8.9 8.6 8.5 8.7 8.6 8.4 8.1
x Indonesia (IDR) 5.0 7.2 7.8 8.1 8.2 8.1 7.2 7.0 6.8 6.8
x Malay sia (MYR) 3.2 3.2 3.3 3.3 3.5 3.7 3.8 3.9 3.7 3.7
x Philippines (PHP) 1.4 0.5 0.3 1.0 1.0 1.2 1.8 1.2 1.4 1.6
x Singapore (SGD) 0.4 0.4 0.4 0.4 0.4 0.4 0.5 0.6 0.8 1.0
x Thailand (THB) 2.9 2.6 2.4 2.2 2.2 2.2 2.2 1.6 1.6 1.8
x South Africa (ZAR) 5.2 5.4 5.2 5.6 5.6 6.0 5.9 5.9 5.9 6.4
Notes: * 1-month money. Source: HSBC
Important note
This table represents three month money rates. Due to the dislocation in the three month money markets, these rates may not give a
good indication of policy rates.
Short rates
59
Macro Currency Strategy January 2015
abc
7-Jan-15 2014 2015 2016
last Q3 Q4 Q1f Q2f Q3f Q4f Q1f Q2f Q3f Q4f
Latin America vs USD x x x x x x x x x x x x x
Argentina (ARS) 8.55 8.45 8.46 9.00 9.50 10.00 10.50 11.00 11.50 12.00 12.50
Brazil (BRL) 2.70 2.45 2.65 2.70 2.80 2.90 3.00 3.05 3.10 3.15 3.15
Chile (CLP) 617 598 607 618 625 633 640 640 640 640 640
Mex ico (MXN) 14.90 13.43 14.75 14.25 14.50 14.75 14.80 14.85 14.90 14.95 15.00
Colombia (COP) 2450 2025 2377 2300 2400 2450 2500 2525 2550 2575 2600
Peru (PEN) 2.99 2.89 2.98 3.01 3.08 3.14 3.20 3.24 3.28 3.31 3.35
Venezuala (VEF) 6.29 6.29 6.29 23.00 23.00 23.00 42.00 50.00 58.00 66.00 75.00
Eastern Europe vs EUR
Czech Republic (CZK) 27.7 27.5 27.7 27.6 27.3 27.0 27.0 26.5 26.5 26.5 26.5
Hungary (HUF) 320 311 316 310 305 305 305 305 305 305 305
Russia v s USD (RUB) 63.4 39.6 58.3 59.3 61.3 62.1 62.0 62.0 63.4 64.1 64.5
Romanian (RON) 4.50 4.41 4.48 4.40 4.40 4.40 4.40 4.40 4.40 4.40 4.40
Turkey v s USD (TRY) 2.33 2.28 2.34 2.35 2.37 2.40 2.40 2.40 2.40 2.40 2.40
Simple rate
Poland (PLN) 4.31 4.18 4.28 4.10 4.10 4.05 4.05 4.05 4.05 4.05 4.05
Middle East vs USD x x x x x x x x x x x x
Egy pt (EGP) 7.15 7.15 7.15 7.50 7.50 7.50 7.70 7.70 7.70 7.70 7.70
Israel (ILS) 3.97 3.69 3.90 3.95 4.00 4.10 4.10 3.95 3.95 3.95 3.95
Africa vs USD
South Africa (ZAR) 11.74 11.30 11.55 11.70 11.80 12.00 12.00 12.00 12.00 12.00 12.00
Interest rates
Source: HSBC
Emerging markets forecast table
60
Macro Currency Strategy January 2015
abc
end period 2013 2014 2015 2016Q4 Q1 Q2 Q3 Q4 Q1f Q2f Q3f Q4f Q1f Q2f Q3f Q4f
Americas x
x Canada (CAD) 1.06 1.10 1.07 1.12 1.16 1.15 1.17 1.19 1.20 1.20 1.20 1.20 1.20
x Mex ico (MXN) 13.09 13.06 12.99 13.43 14.75 14.25 14.50 14.75 14.80 14.85 14.90 14.95 15.00
x Brazil (BRL) 2.34 2.26 2.20 2.45 2.65 2.70 2.80 2.90 3.00 3.05 3.10 3.15 3.15
x Argentina (ARS) 6.52 8.00 8.13 8.45 8.46 9.00 9.50 10.00 10.50 11.00 11.50 12.00 12.50x
Western Europe x x x x x x x x x x
Eurozone (EUR*) 1.38 1.38 1.37 1.26 1.21 1.21 1.19 1.17 1.15 1.14 1.13 1.12 1.12
Other Western Europe x x x x x x x x x x
x UK (GBP*) 1.66 1.67 1.71 1.62 1.56 1.54 1.51 1.49 1.48 1.47 1.46 1.45 1.45
x Sw eden (SEK) 6.43 6.48 6.69 7.22 7.80 7.44 7.56 7.69 7.83 7.89 7.96 8.04 8.04
x Norw ay (NOK) 6.06 5.99 6.13 6.43 7.49 7.27 7.31 7.35 7.39 7.37 7.43 7.50 7.50
x Sw itzerland (CHF) 0.89 0.88 0.89 0.95 0.99 0.99 1.01 1.03 1.04 1.05 1.06 1.07 1.07x
Emerging Europe x x x x x x x x x x
x Russia (RUB) 32.7 35.7 33.6 39.6 58.3 59.3 61.3 62.1 62.0 62.0 63.4 64.1 64.5
x Poland (PLN) 3.01 3.02 3.04 3.31 3.54 3.39 3.45 3.46 3.52 3.55 3.58 3.62 3.62
x Hungary (HUF) 216 223 226 246 261 256 256 261 265 268 270 272 272
x Czech Republic (CZK) 19.8 19.9 20.0 21.8 22.9 22.8 22.9 23.1 23.5 23.2 23.5 23.7 23.7x
Asia/Pacific x
x Japan (JPY) 105 103 101 110 120 122 124 126 128 128 129 129 130
x Australia (AUD*) 0.89 0.93 0.94 0.87 0.82 0.82 0.80 0.79 0.78 0.77 0.76 0.75 0.75
x New Zealand (NZD*) 0.82 0.87 0.87 0.78 0.78 0.76 0.75 0.74 0.73 0.73 0.72 0.71 0.71
North Asia x x x x x x x x x x x x x x
x China (CNY) 6.05 6.22 6.20 6.14 6.21 6.16 6.18 6.20 6.22 6.24 6.26 6.28 6.30
x Hong Kong (HKD) 7.75 7.76 7.75 7.76 7.75 7.80 7.80 7.80 7.80 7.80 7.80 7.80 7.80
x Taiw an (TWD) 29.8 30.5 29.9 30.4 31.6 31.1 31.3 31.7 32.0 32.1 32.2 32.3 32.4
x South Korea (KRW) 1056 1065 1011 1058 1093 1120 1140 1150 1160 1160 1170 1170 1180x South Asia x x x x x x x x x x x x x x
India (INR) 61.8 60.0 60.1 61.9 63.2 62.0 62.5 63.0 63.0 63.5 63.5 64.0 64.0
x Indonesia (IDR) 12170 11360 11855 12175 12430 12300 12400 12500 12600 12700 12700 12800 12800
x Malay sia (MYR) 3.28 3.26 3.21 3.28 3.50 3.42 3.47 3.52 3.57 3.59 3.61 3.63 3.65
x Philippines (PHP) 44.4 44.8 43.7 44.9 44.7 44.8 45.0 45.2 45.4 45.6 45.7 45.8 45.9
x Singapore (SGD) 1.26 1.26 1.25 1.28 1.32 1.32 1.33 1.34 1.35 1.36 1.37 1.38 1.38
x Thailand (THB) 32.8 32.4 32.5 32.4 32.9 32.8 33.1 33.4 33.7 33.8 33.9 34.0 34.1
Vietnam (VND) 21080 21080 21329 21205 21380 21250 21500 21500 21750 22000 22000 22000 22000
Africa x x x x x x x x x x x x x
x South Africa (ZAR) 9.24 10.52 10.63 11.30 11.55 11.70 11.80 12.00 12.00 12.00 12.00 12.00 12.00
Source HSBC
Exchange rates vs USD
61
Macro Currency Strategy January 2015
abc
end period 2013 2014 2015 2016
Q4 Q1 Q2 Q3 Q4 Q1f Q2f Q3f Q4f Q1f Q2f Q3f Q4fVs euro xAmericas x
x US (USD) 1.38 1.38 1.37 1.26 1.21 1.21 1.19 1.17 1.15 1.14 1.13 1.12 1.12
x Canada (CAD) 1.47 1.52 1.46 1.42 1.41 1.39 1.39 1.39 1.38 1.37 1.36 1.34 1.34Europe x
x UK (GBP) 0.83 0.83 0.80 0.78 0.78 0.79 0.79 0.79 0.78 0.78 0.78 0.77 0.77
x Sw eden (SEK) 8.86 8.92 9.16 9.11 9.44 9.00 9.00 9.00 9.00 9.00 9.00 9.00 9.00
x Norw ay (NOK) 8.36 8.25 8.40 8.12 9.06 8.80 8.70 8.60 8.50 8.40 8.40 8.40 8.40
x Sw itzerland (CHF) 1.23 1.22 1.21 1.21 1.20 1.20 1.20 1.20 1.20 1.20 1.20 1.20 1.20
x Russia (RUB) 45.1 49.1 46.0 50.0 70.5 71.8 72.9 72.7 71.3 70.7 71.6 71.8 72.2
x Poland (PLN) 4.16 4.17 4.16 4.18 4.28 4.10 4.10 4.05 4.05 4.05 4.05 4.05 4.05
x Hungary (HUF) 297 307 310 311 316 310 305 305 305 305 305 305 305
x Czech Republic (CZK) 27.3 27.4 27.4 27.5 27.7 27.6 27.3 27.0 27.0 26.5 26.5 26.5 26.5Asia/Pacific x x x x x x x x x x x x x x
x Japan (JPY) 145 142 139 138 145 148 148 147 147 146 146 144 146
x Australia (AUD) 1.54 1.49 1.45 1.45 1.48 1.48 1.49 1.48 1.47 1.48 1.49 1.49 1.49
x New Zealand (NZD) 1.67 1.59 1.56 1.62 1.55 1.59 1.59 1.58 1.58 1.56 1.57 1.58 1.58
Vs sterling x x x x x x x x x x x x x xAmericas x x x x x x x x x x x x x x
x US (USD) 1.66 1.67 1.71 1.62 1.56 1.54 1.51 1.49 1.48 1.47 1.46 1.45 1.45
x Canada (CAD) 1.76 1.84 1.82 1.82 1.81 1.77 1.77 1.77 1.77 1.76 1.75 1.74 1.74Europe x x x x x x x x x x x x x x
x Eurozone (EUR) 0.83 0.83 0.80 0.78 0.78 0.79 0.79 0.79 0.78 0.78 0.78 0.77 0.77x
x Sw eden (SEK) 10.65 10.80 11.44 11.71 12.15 11.46 11.41 11.46 11.55 11.60 11.60 11.64 11.64
x Norw ay (NOK) 10.05 9.99 10.49 10.43 11.66 11.20 11.03 10.95 10.91 10.82 10.82 10.87 10.87
x Sw itzerland (CHF) 1.47 1.48 1.52 1.55 1.55 1.53 1.52 1.53 1.54 1.55 1.55 1.55 1.55Asia/Pacific x x x x x x x x x x x x x x
x Japan (JPY) 174 172 173 178 187 188 187 188 189 188 188 187 188
x Australia (AUD) 1.86 1.80 1.81 1.86 1.91 1.88 1.89 1.89 1.89 1.91 1.92 1.93 1.93
x New Zealand (NZD) 2.01 1.92 1.96 2.08 2.00 2.03 2.01 2.01 2.02 2.01 2.02 2.04 2.04
Source: HSBC
Exchange rates vs EUR & GBP
62
Macro Currency Strategy January 2015
abc
Notes
63
Macro Currency Strategy January 2015
abc
Disclosure appendix Analyst Certification The following analyst(s), economist(s), and/or strategist(s) who is(are) primarily responsible for this report, certifies(y) that the opinion(s) on the subject security(ies) or issuer(s) and/or any other views or forecasts expressed herein accurately reflect their personal view(s) and that no part of their compensation was, is or will be directly or indirectly related to the specific recommendation(s) or views contained in this research report: David Bloom, Daragh Maher, Paul Mackel, Robert Lynch, Clyde Wardle, Stacy Williams, Mark McDonald, Murat Toprak, Marjorie Hernandez, Dominic Bunning, Ju Wang, Joey Chew, James Steel and Howard Wen
Important Disclosures This document has been prepared and is being distributed by the Research Department of HSBC and is intended solely for the clients of HSBC and is not for publication to other persons, whether through the press or by other means.
This document is for information purposes only and it should not be regarded as an offer to sell or as a solicitation of an offer to buy the securities or other investment products mentioned in it and/or to participate in any trading strategy. Advice in this document is general and should not be construed as personal advice, given it has been prepared without taking account of the objectives, financial situation or needs of any particular investor. Accordingly, investors should, before acting on the advice, consider the appropriateness of the advice, having regard to their objectives, financial situation and needs. If necessary, seek professional investment and tax advice.
Certain investment products mentioned in this document may not be eligible for sale in some states or countries, and they may not be suitable for all types of investors. Investors should consult with their HSBC representative regarding the suitability of the investment products mentioned in this document and take into account their specific investment objectives, financial situation or particular needs before making a commitment to purchase investment products.
The value of and the income produced by the investment products mentioned in this document may fluctuate, so that an investor may get back less than originally invested. Certain high-volatility investments can be subject to sudden and large falls in value that could equal or exceed the amount invested. Value and income from investment products may be adversely affected by exchange rates, interest rates, or other factors. Past performance of a particular investment product is not indicative of future results.
HSBC and its affiliates will from time to time sell to and buy from customers the securities/instruments (including derivatives) of companies covered in HSBC Research on a principal or agency basis.
Analysts, economists, and strategists are paid in part by reference to the profitability of HSBC which includes investment banking revenues.
Whether, or in what time frame, an update of this analysis will be published is not determined in advance.
For disclosures in respect of any company mentioned in this report, please see the most recently published report on that company available at www.hsbcnet.com/research.
Additional disclosures 1 This report is dated as at 07 January 2015. 2 All market data included in this report are dated as at close 06 January 2015, unless otherwise indicated in the report. 3 HSBC has procedures in place to identify and manage any potential conflicts of interest that arise in connection with its
Research business. HSBC's analysts and its other staff who are involved in the preparation and dissemination of Research operate and have a management reporting line independent of HSBC's Investment Banking business. Information Barrier procedures are in place between the Investment Banking and Research businesses to ensure that any confidential and/or price sensitive information is handled in an appropriate manner.
64
Macro Currency Strategy January 2015
abc
Disclaimer * Legal entities as at 30 May 2014 ‘UAE’ HSBC Bank Middle East Limited, Dubai; ‘HK’ The Hongkong and Shanghai Banking Corporation Limited, Hong Kong; ‘TW’ HSBC Securities (Taiwan) Corporation Limited; 'CA' HSBC Bank Canada, Toronto; HSBC Bank, Paris Branch; HSBC France; ‘DE’ HSBC Trinkaus & Burkhardt AG, Düsseldorf; 000 HSBC Bank (RR), Moscow; ‘IN’ HSBC Securities and Capital Markets (India) Private Limited, Mumbai; ‘JP’ HSBC Securities (Japan) Limited, Tokyo; ‘EG’ HSBC Securities Egypt SAE, Cairo; ‘CN’ HSBC Investment Bank Asia Limited, Beijing Representative Office; The Hongkong and Shanghai Banking Corporation Limited, Singapore Branch; The Hongkong and Shanghai Banking Corporation Limited, Seoul Securities Branch; The Hongkong and Shanghai Banking Corporation Limited, Seoul Branch; HSBC Securities (South Africa) (Pty) Ltd, Johannesburg; HSBC Bank plc, London, Madrid, Milan, Stockholm, Tel Aviv; ‘US’ HSBC Securities (USA) Inc, New York; HSBC Yatirim Menkul Degerler AS, Istanbul; HSBC México, SA, Institución de Banca Múltiple, Grupo Financiero HSBC; HSBC Bank Brasil SA – Banco Múltiplo; HSBC Bank Australia Limited; HSBC Bank Argentina SA; HSBC Saudi Arabia Limited; The Hongkong and Shanghai Banking Corporation Limited, New Zealand Branch incorporated in Hong Kong SAR; The Hongkong and Shanghai Banking Corporation Limited, Bangkok Branch
Issuer of report
HSBC Bank plc 8 Canada Square, London
E14 5HQ, United Kingdom
Telephone: +44 20 7991 8888
Telex: 888866
Fax: +44 20 7992 4880
Website: www.research.hsbc.com
This document is issued and approved in the United Kingdom by HSBC Bank plc for the information of its Clients (as defined in the Rules of FCA) and those of its affiliates only. If this research is received by a customer of an affiliate of HSBC, its provision to the recipient is subject to the terms of business in place between the recipient and such affiliate. In Australia, this publication has been distributed by The Hongkong and Shanghai Banking Corporation Limited (ABN 65 117 925 970, AFSL 301737) for the general information of its “wholesale” customers (as defined in the Corporations Act 2001). Where distributed to retail customers, this research is distributed by HSBC Bank Australia Limited (AFSL No. 232595). These respective entities make no representations that the products or services mentioned in this document are available to persons in Australia or are necessarily suitable for any particular person or appropriate in accordance with local law. No consideration has been given to the particular investment objectives, financial situation or particular needs of any recipient. The document is distributed in Hong Kong and Japan by The Hongkong and Shanghai Banking Corporation Limited and has been prepared for the New York office of HSBC Bank USA, National Association. In Korea, this publication is distributed by either The Hongkong and Shanghai Banking Corporation Limited, Seoul Securities Branch ("HBAP SLS") or The Hongkong and Shanghai Banking Corporation Limited, Seoul Branch ("HBAP SEL") for the general information of professional investors specified in Article 9 of the Financial Investment Services and Capital Markets Act (“FSCMA”). This publication is not a prospectus as defined in the FSCMA. It may not be further distributed in whole or in part for any purpose. Both HBAP SLS and HBAP SEL are regulated by the Financial Services Commission and the Financial Supervisory Service of Korea. Each of the companies listed above (the “Participating Companies”) is a member of the HSBC Group of Companies, any member of which may trade for its own account as Principal, may have underwritten an issue within the last 36 months or, together with its Directors, officers and employees, may have a long or short position in securities or instruments or in any related instrument mentioned in the document. Brokerage or fees may be earned by the Participating Companies or persons associated with them in respect of any business transacted by them in all or any of the securities or instruments referred to in this document. This publication isdistributed in New Zealand by The Hongkong and Shanghai Banking Corporation Limited, New Zealand Branch incorporated in Hong Kong SAR. The information in this document is derived from sources the Participating Companies believe to be reliable but which have not been independently verified. The Participating Companies make no guarantee of its accuracy and completeness and are not responsible for errors of transmission of factual or analytical data, nor shall the Participating Companies be liable for damages arising out of any person’s reliance upon this information. All charts and graphs are from publicly available sources or proprietary data. The opinions in this document constitute the present judgement of the Participating Companies, which is subject to change without notice. This document is neither an offer to sell, purchase or subscribe for any investment nor a solicitation of such an offer. HSBC Securities (USA) Inc. accepts responsibility for the content of this research report prepared by its non-US foreign affiliate. All US persons receiving and/or accessing this report and intending to effect transactions in any security discussed herein should do so with HSBC Securities (USA) Inc. in the United States and not with its non-US foreign affiliate, the issuer of this report. In Singapore, this publication is distributed by The Hongkong and Shanghai Banking Corporation Limited, Singapore Branch for the general information of institutional investors or other persons specified in Sections 274 and 304 of the Securities and Futures Act (Chapter 289) (“SFA”) and accredited investors and other persons in accordance with the conditions specified in Sections 275 and 305 of the SFA. This publication is not a prospectus as defined in the SFA. It may not be further distributed in whole or in part for any purpose. The Hongkong and Shanghai Banking Corporation Limited Singapore Branch is regulated by the Monetary Authority of Singapore. Recipients in Singapore should contact a "Hongkong and Shanghai Banking Corporation Limited, Singapore Branch" representative in respect of any matters arising from, or in connection with this report. HSBC México, S.A., Institución de Banca Múltiple, Grupo Financiero HSBC is authorized and regulated by Secretaría de Hacienda y Crédito Público and Comisión Nacional Bancaria y de Valores (CNBV). HSBC Bank (Panama) S.A. is regulated by Superintendencia de Bancos de Panama. Banco HSBC Honduras S.A. is regulated by Comisión Nacional de Bancos y Seguros (CNBS). Banco HSBC Salvadoreño, S.A. is regulated by Superintendencia del Sistema Financiero (SSF). HSBC Colombia S.A. is regulated by Superintendencia Financiera de Colombia. Banco HSBC Costa Rica S.A. is supervised by Superintendencia General de Entidades Financieras (SUGEF). Banistmo Nicaragua, S.A. is authorized and regulated by Superintendencia de Bancos y de Otras Instituciones Financieras (SIBOIF). The document is intended to be distributed in its entirety. Unless governing law permits otherwise, you must contact a HSBC Group member in your home jurisdiction if you wish to use HSBC Group services in effecting a transaction in any investment mentioned in this document. HSBC Bank plc is registered in England No 14259, is authorised by the Prudential Regulation Authority and regulated by the Financial Conduct Authority and the Prudential Regulation Authority and is a member of the London Stock Exchange. (070905) In Canada, this document has been distributed by HSBC Bank Canada and/or its affiliates. Where this document contains market updates/overviews, or similar materials (collectively deemed “Commentary” in Canada although other affiliate jurisdictions may term “Commentary” as either “macro-research” or “research”), the Commentary is not an offer to sell, or a solicitation of an offer to sell or subscribe for, any financial product or instrument (including, without limitation, any currencies, securities, commodities or other financial instruments). © Copyright 2015, HSBC Bank plc, ALL RIGHTS RESERVED. No part of this publication may be reproduced, stored in a retrieval system, or transmitted, on any form or by any means, electronic, mechanical, photocopying, recording, or otherwise, without the prior written permission of HSBC Bank plc. MICA (P) 157/06/2014, MICA (P) 171/04/2014 and MICA (P) 077/01/2014
[442705]
Currency
OUTLOOKMurat ToprakFX Strategist, EMEAHSBC Bank plc+44 20 7991 [email protected]
Main contributors
Disclosures and Disclaimer This report must be read with the disclosures and analystcertifications in the Disclosure appendix, and with the Disclaimer, which forms part of it
Marjorie HernandezFX Strategist, Latin AmericaHSBC Securities (USA) Inc.+1 212 525 [email protected]
Joey ChewFX Strategist, AsiaThe Hongkong and Shanghai Banking Corporation Limited+852 2996 [email protected]
Clyde WardleEmerging Markets FX StrategistHSBC Securities (USA) Inc.+1 212 525 [email protected]
Dominic BunningFX Strategist, AsiaThe Hongkong and Shanghai Banking Corporation Limited+852 2822 [email protected]
Robert LynchHead of G10 FX Strategy, AmericasHSBC Securities (USA) Inc.+1 212 525 [email protected]
Ju WangFX Strategist, AsiaThe Hongkong and Shanghai Banking Corporation Limited+852 2822 [email protected]
David BloomGlobal Head of FX ResearchHSBC Bank plc+44 20 7991 [email protected]
Daragh MaherFX Strategist, G10HSBC Bank plc+44 20 7991 [email protected]
Stacy WilliamsHead of FX Quantitative StrategyHSBC Bank plc+44 20 7991 [email protected]
Paul MackelHead of Asian FX ResearchThe Hongkong and Shanghai Banking Corporation Limited+852 2996 [email protected]
Mark McDonaldFX Quantitative StrategistHSBC Bank plc+44 20 7991 [email protected]
The USD bull run has further to go in 2015. This should be largely positive, particularly for those developed economies facing a deflation threat. Yet markets will also need to be mindful of the risks of excessive USD strength. We address these two contrary but inter-related aspects of our bullish USD view – the two faces of USD strength.
2015 currency outlooks We provide single-page summaries of our 2015 outlook for the most actively traded currencies in G10, Asia, CEEMEA and LatAm as well as precious metals.
USD rally in 2015 – friend or foe
MacroCurrency Strategy
January 2015
Play Video with David Bloom and Daragh MaherIssuer of report: HSBC Bank plc