q4 2013 fx market monitor

CURRENCIES

Currency Market Monitor 4th Quarter 2013

JANUARY 6, 2014

John W. Labuszewski Sandra Ro Bluford Putnam

Managing Director Executive Director Chief Economist

Research & Product Development

312-466-7469

[email protected]


011 (44) 203-379-3789

[email protected]


212-299--2302

[email protected]

1 | Currency Market Monitor 4th Quarter 2013 | January 6, 2014 | © CME GROUP

An ongoing debate has long persisted in the global

currency or FX markets – is FX an “asset class” akin

to stocks and bonds? While practitioners and

academics may debate this point at length, perhaps

the most practical answer is – does it really matter

provided that investors may draw a return from

currency investments?

The performance of the currency or FX markets is

found in the exchange rates and cross-rates

associated with the world’s myriad currencies. The

total return associated with a currency is driven by

interest income associated with fixed income

instrument investment in the particular currency; as

well as pure price performance.

Many fundamental factors, including national

economic conditions, monetary and policies, current

and capital account flows, to name just a few,

impact the returns associated with the world’s

currencies.

This document represents a review of these factors

as they played out in the most recently completed

calendar quarter. We include consideration of the

so-called “carry trade” as well as a look at the

theory of “purchasing power parity” as it impacts FX

markets.

While we cover activity in a broad spectrum of

currencies, we focus on the currencies underlying

some of the most liquid of CME Group FX futures.

This includes the U.S. dollar (USD), Euro (EUR),

Japanese yen (JPY), British pound (GBP), Swiss

franc (CHF), Canadian dollar (CAD), Australian dollar

(AUD) and Mexican peso (MXN).

In addition, we have special interest in the

currencies of significant emerging market economies

including the Brazilian real (BRL), Russian ruble

(RUB), Indian rupee (INR) and Chinese yuan or

renminbi (CNY) – the so-called “BRIC” nations.

Finally, we highlight several CME Group FX Indexes

including a USD Index, a Carry Trade Index,

Commodity Country Index and BRIC Index.

Market Fundamentals

As a general rule, FX analysts will evaluate the

fundamental value of any particular currency by

reference to a number of national economic factors.

These factors including growth and inflation

prospects; monetary and fiscal policies; and, current

and capital account balances.

To illustrate, we include a brief discussion of the

economic situation prevailing in the United States as

of the conclusion of the most recently completed

calendar quarter. Of course, the U.S. dollar (USD)

may be just one side of any currency pair that may

be traded using CME FX futures.

A brief summary of economic conditions in various

nations, organized along similar lines, is included in

Appendix 1 of our document below. One may

compare and contrast these conditions as they exist

in the two countries whose currency pairing one may

be interested in to draw an appreciation of the

fundamental factors that impact currency markets.

Growth and Employment

We entered the 4th quarter 2013 on disappointment

surrounding the Fed’s announcement of September

18th that it will defer any possible “tapering” of its

quantitative easing (QE) programs, despite evidence

of economic growth.

Specifically, the Fed “decided to await more

evidence that [economic] progress will be sustained

before adjusting the pace of its purchases … these

actions should maintain downward pressure on

longer-term interest rates, support mortgage

markets, and help to make broader financial

conditions more accommodative, which in turn

should promote a stronger economic recovery and

help to ensure that inflation, over time, is at the rate

most consistent with the Committee’s dual

mandate.” 1

The Federal Reserve framed its concerns succinctly

suggesting that “labor market conditions have

shown further improvement in recent months, but

the employment rate remains elevated.” 2

But the 4th quarter brought more evidence of

economic recovery as 3rd quarter real GDP

reportedly grew by 4.1% and up nicely from the 3rd,

1 Federal Reserve Press Release dated September 18,

2013. 2 Ibid.


2nd and 1st quarter marks of +2.5%, +1.1% and

+0.1%, respectively. This growth drove the

unemployment rate down to 7.0% by November

2013, down from the year’s high of 7.9% reported

for January 2013.

While recent reports are certainly encouraging, we

must still note that labor force participation was last

reported at a mere 63.0% in November 2013. This

represents an uptick from the trough of 62.8%

reported for October 2013.

But it nonetheless falls short of the 63.6% reported

at year’s end 2012 and remains near all-time lows.

This, of course, calls into question whether the

declining unemployment numbers represent healthy

growth or may be attributed to widespread

workplace dropout and a structural shift in the

employment paradigm.

Thus, the Fed observed, per its Press Release dated

December 18th, that “economic activity is expanding

at a moderate pace. Labor market conditions have

shown further improvement; the unemployment rate

has declined but remains elevated.” 3

The total number of employed remains less than the

peak of 138.056 million observed in January 2008

before the subprime mortgage crisis. Ranks of the

employed fell sharply before starting to recover and

stood at 136.765 million as of November 2013.

Thus, we have gone some 70 months and have yet

to recover to pre-crisis levels. This represents the

most extended recovery from recession during the

past 35 years.

The unemployment situation may be further

exacerbated as emergency unemployment insurance

benefits are curtailed as of December 28, 2013 as a

result of recent Federal budget agreements.

The Fed further suggests that “[h]ousehold spending

and business fixed investment advanced, while the

recovery in the housing sector slowed somewhat in

recent months.” 4 This is reflected in retail sales

figures which continued to grow to $184.837 billion

in November 2013 and up 3.3% on a year-on-year

basis from the previous November.

This consumer exuberance is driven perhaps by the

“wealth effect” associated with a buoyant equity

3 Federal Reserve Press Release dated December 18,

2013. 4 Ibid.

4%

5%

6%

7%

8%

9%

10%

11%

-10%

-8%

-6%

-4%

-2%

0%

2%

4%

6%

Q1 0

5

Q4 0

5

Q3 0

6

Q2 0

7

Q1 0

8

Q4 0

8

Q3 0

9

Q2 1

0

Q1 1

1

Q4 1

1

Q3 1

2

Q2 1

3

Unem

plo

ym

ent

Rate

Qtr

ly C

hange in G

DP

Growth and Employment

Real GDP (SA) Unemployment Rate

Source: Bureau of Economic Analysis (BEA) & Bureau of Labor Statistics (BLS)

62%

63%

64%

65%

66%

67%

68%

4%

5%

6%

7%

8%

9%

10%

11%

Jan-0

2

Jan-0

3

Jan-0

4

Jan-0

5

Jan-0

6

Jan-0

7

Jan-0

8

Jan-0

9

Jan-1

0

Jan-1

1

Jan-1

2

Jan-1

3

Labor

Forc

e P

art

icip

ation

Unem

plo

ym

ent

Rate

Employment Statistics

Unemployment Rate Labor Force Partcipation

Source: Bureau of Labor Statistics (BLS)

93%

94%

95%

96%

97%

98%

99%

100%

101%

1 5 9

13

17

21

25

29

33

37

41

45

49

53

57

61

65

69

NFPs a

s %

of Peak

Months Since Peak NFP

NFP Recovery from Recession

Apr - Dec-80 Aug-81 - Oct-83Jul-90 - Jan-93 Mar-01 - Jan-05Feb-08 - Jun-13


market. The net worth of households and nonprofit

organizations was reported at a new all-time high of

$77.259 trillion as of the 3rd quarter 2013 and up

11.0% of a year-on-year basis.

This exuberance is also reflected in rising consumer

sentiment figures. The University of Michigan

Consumer Sentiment Survey was reported at 82.5 in

December 2013. This represents a nice uptick from

November’s 75.1 but remains below the year’s peak

of 85.1 reported in July.

Similarly the Index of Industrial Production rallied to

101.2825 by November 2013, representing a 3.2%

advance on a year-on-year basis from the prior

year’s November report. As such, the industrial

sector has now bounced back to levels in excess of

those observed prior to the subprime crisis, noting

that the Index of Industrial Production is calibrated

to 100 as of 2007.

Capacity utilization further climbed to 79.0% in

November 2013 compared to the prior October

report of 78.2%. Note that 80% is often regarded

as a key level, at which point economists generally

expect to see occasional labor or material shortages

or bottlenecks arise, possibly contributing to

inflationary pressures.

Further possible sources of future inflationary

pressures might be anticipated in the housing sector

where November 2013 building permits, housing

starts and housing completions were reported

+7.9%, +29.6% and +21.6% on a year-on-year

basis from the previous November.

This recovery is further reflected in the S&P/Case-

Shiller 10-City Composite Housing Index which was

reported +13.3% on a year-on-year basis from

September 2012 to September 2013; and, +22.92%

from the trough observed in March 2012.

1.20

1.25

1.30

1.35

1.40

1.45

1.50

$150

$155

$160

$165

$170

$175

$180

$185

$190

Jan-0

7

Aug-0

7

Mar-

08

Oct-

08

May-0

9

Dec-0

9

Jul-

10

Feb-1

1

Sep-1

1

Apr-

12

Nov-1

2

Jun-1

3

Invento

ry:S

ale

s R

atio

Reta

il S

ale

s (

Bil $

)

Retail Sector Activity

Real Retail Sales & Food Services SATotal Business Inventory:Sales Ratio

Source: U.S. Census Bureau

50

55

60

65

70

75

80

85

90

95

100

$50

$55

$60

$65

$70

$75

$80

Q4 0

4

Q3 0

5

Q2 0

6

Q1 0

7

Q4 0

7

Q3 0

8

Q2 0

9

Q1 1

0

Q4 1

0

Q3 1

1

Q2 1

2

Q1 1

3

Q4 1

3

Consum

er

Confidence I

ndex

Household

Net

Wort

h (

Trillio

ns) Net Worth & Consumer Sentiment

Household Net Worth Consumer Sentiment Index

Source: U.S. Federal Reserve & FRED Database

66%

68%

70%

72%

74%

76%

78%

80%

82%

80

85

90

95

100

105

Jan-0

7

Aug-0

7

Mar-

08

Oct-

08

May-0

9

Dec-0

9

Jul-

10

Feb-1

1

Sep-1

1

Apr-

12

Nov-1

2

Jun-1

3

Capacity U

tilization

Industr

ial Pro

duction I

ndex

Industrial Sector Activity

Index of Industrial Production Capacity Utilization

Source: St. Louis Federal Reserve FRED Database

0

500

1,000

1,500

2,000

2,500

Jan-0

4

Sep-0

4

May-0

5

Jan-0

6

Sep-0

6

May-0

7

Jan-0

8

Sep-0

8

May-0

9

Jan-1

0

Sep-1

0

May-1

1

Jan-1

2

Sep-1

2

May-1

3

000 U

nits

Housing Activity

Building Permits Housing Starts

Source: Dept. of Housing & Urban Development (HUD)


Inflation

The Fed currently sees little evidence of inflationary

pressures. On the contrary, it “recognizes that

inflation persistently below its 2 percent objective

could pose risks to economic performance, and it is

monitoring inflation developments carefully for

evidence that inflation will move back toward its

objective over the medium term.” 5

Indeed, the Consumer Price Index (CPI) was

reported at +1.2% on a year-on-year basis in

November 2013 while the CPI excluding volatile food

and energy prices was reported at +1.7%. These

figures have generally been winding downward over

the last year or two, raising concerns in some

sectors of a possible deflationary spiral.

But as discussed above, we have seen capacity

utilization advance to 79.0%, along with anecdotal

reports of labor shortages in some industries notably

including construction. This is underscored by

evidence of housing recovery and price advances,

although it is noteworthy that housing activity

remains well below pre-crisis levels.

Further insight might be found by examining the

“Breakeven (B/E) Inflation Rate.” This is calculated

as Treasury yields minus the real yield on Treasury

Inflation Protected Securities (TIPs). This measure

generally reflects investor expectations regarding

future inflation prospects. Thus, the Fed closely

5 Ibid.

monitors the B/E Inflation Rate as an indication of

inflationary prospects.

It is interesting to note that the Fed had historically

announced various incarnations of its quantitative

easing (QE) programs on dips in the B/E Inflation

Rate. The Fed’s December 18th tapering

announcement was likely supported by the fact that

the B/E Inflation Rate now hovers just above 2%.

Monetary Policy

The 3rd quarter ended with disappointment that the

Fed had deferred on any possible tapering in its QE

programs per which they have purchased some $85

billion of Treasuries, agency debt and agency

mortgage backed securities (MBS) on a monthly

basis.

But by the conclusion of the 4th quarter, the Fed

acknowledged “improvement in economic activity

and labor market conditions … consistent with

growing underlying strength in the broader

economy. In light of the cumulative progress

toward maximum employment and the improvement

in the outlook for labor market conditions, the

Committee decided to modestly reduce the pace of

its asset purchases. Beginning in January, the

Committee will add to its holdings of agency

mortgage-backed securities at a pace of $35 billion

per month rather than $40 billion per month, and

will add to its holdings of longer-term Treasury

securities at a pace of $40 billion per month rather

than $45 billion per month.” 6

6 Ibid.

-3%

-2%

-1%

0%

1%

2%

3%

4%

5%

6%

Jan-0

4

Jan-0

5

Jan-0

6

Jan-0

7

Jan-0

8

Jan-0

9

Jan-1

0

Jan-1

1

Jan-1

2

Jan-1

3

Year-

on-Y

ear

Change

Consumer Price Index (CPI)

CPI - All Urban Consumers SA CPI ex-Food & Energy SA

Source: Bureau of Labor Statistics (BLS)

0.0%

0.5%

1.0%

1.5%

2.0%

2.5%

3.0%

Jan-0

7

Jul-

07

Jan-0

8

Jul-

08

Jan-0

9

Jul-

09

Jan-1

0

Jul-

10

Jan-1

1

Jul-

11

Jan-1

2

Jul-

12

Jan-1

3

Jul-

13

10-Year B/E Inflation Rate


This aggregate $10 billion in tapering on a monthly

basis is consistent with expectations as reported in

this publication at the conclusion of the 3rd quarter.

Further tapering, however, will be deferred “until the

outlook for the labor market has improved

substantially in a context of price stability. If

incoming information broadly supports the

Committee’s expectation of ongoing improvement in

labor market conditions and inflation moving back

toward its longer-termr objective, the Committee

will likely reduce the pace of asset purchases in

further measured steps at future meetings.” 7

Similar measured taperings are now expected

throughout calendar year 2014 although it may be a

meeting or two before further steps are taken.

Tapering was further supported by updated Fed

projections of 2.2-2.3% in 2013, upwardly revised

from previous projections of 2.0-2.3% growth.

Growth in 2014 was projected at 2.8-3.2%. 8

These updated policies and projections were greeted

enthusiastically as domestic equity values rallied

sharply to new all-time highs while Treasury yields

along the medium to longer-term portion of the

curve likewise advanced.

Target Fed Funds has, historically, been the primary

monetary policy tool. On that front, the Committee

“reaffirmed its expectation that the current

exceptionally low range for the federal funds rate of

7 Ibid.

8 See “Economic Projections of Federal Reserve Board Members and Federal Reserve Bank Presidents, December 2013” (December 18, 2013).

0 to ¼ percent will be appropriate at least as long as

the unemployment rate remains above 6-1/2

percent, inflation between one and two years ahead

is projected to be no more than a half percentage

point above the Committee’s 2 percent longer-run

goal, and longer-term inflation expectations continue

to be well anchored.” 9

The Fed further explains that “[i]n determining how

long to maintain a highly accommodative stance of

monetary policy, the Committee will also consider

other information, including additional measures of

labor market conditions, indicators of inflation

pressures and inflation expectations, and readings

on financial developments. The Committee now

anticipates … that it likely will be appropriate to

maintain the current target range for the federal

funds rate well past the time that unemployment

rate declines to 6-1/2 percent, especially if projected

inflation continues to run below the Committee’s 2

percent longer-term goal.” 10

Fiscal Policy

The Fed acknowledged that “[f]iscal policy is

restraining economic growth, although the extent of

restraint may be diminishing.” 11 The fiscal stimulus

implicit in the 2009 through 2012 Federal budget

deficits of $1.4, $1.3, $1.3 and $1.1 trillion,

respectively, shrunk to just $680 billion 2013.

Fiscal difficulties were much in evidence at the

beginning of the 4th quarter. In particular,

bipartisan disputes regarding the implementation of

President Obama’s Patient Protection and Affordable

Care Act boiled over on the commencement of the

Federal government’s fiscal year on October 1st.

The Continuing Appropriations Resolution, 2014,

which would provide for ongoing funding of Federal

operations became the focus of these disputes. The

Republican dominated House, led by Senator Cruz

attempted to attach riders to the Resolution which

would delay or deny funding to the “Obamacare”

programs. The Democratic dominated Senate

9 Op Cit., Federal Reserve Press Release dated December

18, 2013.

10 Ibid.

11 Ibid.

0%

1%

2%

3%

4%

5%

6%

Jan-0

7

Jun-0

7

Nov-0

7

Apr-

08

Sep-0

8

Feb-0

9

Jul-

09

Dec-0

9

May-1

0

Oct-

10

Mar-

11

Aug-1

1

Jan-1

2

Jun-1

2

Nov-1

2

Apr-

13

Sep-1

3

Benchmark U.S. Rates

Target Fed Funds 2-Yr Treasury5-Yr Treasury 10-Yr Treasury

30-Yr Treasury


countered with measures that would continue

funding with no conditions attached.

Because Congress failed to appropriate requisite

funding, the Federal government shut down routine

operations from October 1st through the 16th. Some

800,000 Federal employees were furloughed with

another 1.3 million employees reporting to work

with uncertain payment dates.

These controversies were resolved, at least

temporarily, with the passage of a Continuing

Appropriations Act, 2014 late in the evening of

October 16th, ending the shutdown and suspending

application of the Federal debt ceiling until February

7, 2014.

By December 26th, President Obama signed into law

a 2-year budget package that would forestall the

potential for a subsequent government funding crisis

in early 2014 and which reverses some previous

spending cuts. Still, a further political showdown

looms with respect to the debt ceiling as we

approach February 7th.

These events will likely limit 4th quarter GDP growth,

possibly upwards to 0.5% per some economists.

Still, the market generally interpreted these

developments as a reduction in the political

brinksmanship of recent months and years.

Current & Capital Account Flows

More encouraging news was found in the 3rd quarter

2013 current account deficit of $94.840 billion, a

decline from the 2nd quarter’s report of $96.613

billion. This represents the best report since the 2nd

quarter of 2009 when the gap was reported at

$86.982 billion near the height of the subprime

crisis.

Another interesting source of flow of funds data may

be found in the U.S. Treasury Department’s

Treasury International Capital (or “TIC”) database.

This database tracks flows into and out of the U.S.

The data is broken into foreign stocks, foreign

bonds, U.S. stocks, U.S. corporate bonds, U.S.

government agencies and U.S. Treasuries.

U.S. vs. overseas capital flows have generally been

characterized over the past decade by substantial

influx of funds into U.S. Treasuries. This

phenomenon peaked in 2010 as overseas investors

purchased some $704 billion in U.S. Treasuries on a

-$1,600

-$1,400

-$1,200

-$1,000

-$800

-$600

-$400

-$200

$0

$200

$400

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

Federal Surplus/Deficit(Billions USD)

Source: Office of Management and Budget (OMB) -$250

-$200

-$150

-$100

-$50

$0

Q1 0

4Q

3 0

4Q

1 0

5Q

3 0

5Q

1 0

6Q

3 0

6Q

1 0

7Q

3 0

7Q

1 0

8Q

3 0

8Q

1 0

9Q

3 0

9Q

1 1

0Q

3 1

0Q

1 1

1Q

3 1

1Q

1 1

2Q

3 1

2Q

1 1

3

U.S. Current Account Deficit(Billions USD)

Source: Bureau of Economic Analysis (BEA)

-$800

-$300

$200

$700

$1,200

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

Thru

10/1

3

Net US/Foreign Capital Flows (Billions USD)

US Treasuries US Gov't Agencies US CorporatesUS Stocks Foreign Bonds Foreign Stocks

Source: U.S. Treasury TIC Database


net basis. The figure tailed off to $433 and $417

billion in 2011 and 2012, respectively, but that still

represents sizable values.

But during the first ten months of 2013 through

October, foreign investors purchased a scant $46

billion of Treasuries on a net basis. Despite this

surprisingly low total, a rather substantial $500

billion in capital has flowed into the U.S. on a net

basis from January through October 2013.

Most of this inflow has come into U.S. equities with

an influx of some $544 billion on a net basis as a

result of strong U.S. equity performance and a

widespread anticipation of rising rates and falling

bond prices.

Mutual Fund Flows

The flow of equity and fixed income investments

may be examined per data published by the

Investment Company Institute (ICI) which tracks

activity in the mutual fund industry. 12

Investors added some $156.5 billion into equity

funds during the first eleven months of 2013

through November. Interestingly, only $27.1 billion

was directed into domestic equity funds, despite

their generally strong performance while another

$129.4 billion was added to foreign equity funds.

12 These indicators are often highly correlated with price

action as retail investors may “chase” the market by buying in response to a bull trend. Or, they may exhibit a “herd mentality” by liquidating investments in response to significant market breaks.

Funds had generally been flowing into bond funds

through May 2013. But June saw the reversal of

this trend as investors began to believe that interest

rate advances, fueled by economic growth and

expectations of tapering of Fed easing programs. By

the conclusion of October, some $57.9 billion had

been withdrawn from bond funds on a year-to-date

basis.

USD Price Performance

The factors discussed above exert an obvious impact

upon the price performance of the U.S. dollar vis-à-

vis other world currencies. In order to monitor this

price impact, CME Group has developed the “CME

-$40

-$30

-$20

-$10

$0

$10

$20

$30

$40

Jan-1

2

Mar-

12

May-1

2

Jul-

12

Sep-1

2

Nov-1

2

Jan-1

3

Mar-

13

May-1

3

Jul-

13

Sep-1

3

Nov-1

3

Equity Fund Cash Flows (Billions USD)

Domestic Equities Foreign EquitiesSource: Investment Company Institute (ICI)

-$80

-$60

-$40

-$20

$0

$20

$40

Jan-1

2

Mar-

12

May-1

2

Jul-

12

Sep-1

2

Nov-1

2

Jan-1

3

Mar-

13

May-1

3

Jul-

13

Sep-1

3

Nov-1

3

Equity & Bond Fund Cash Flows (Billions USD)

Equity Funds Bond Funds

Source: Investment Company Institute (ICI)

900

950

1,000

1,050

1,100

1,150

1,200

1,250

Jan-0

7

Jul-

07

Jan-0

8

Jul-

08

Jan-0

9

Jul-

09

Jan-1

0

Jul-

10

Jan-1

1

Jul-

11

Jan-1

2

Jul-

12

Jan-1

3

Jul-

13

CME USD Index

Long Short14.3% EUR 100% USD14.3% JPY14.3% GBP 14.3% CHF 14.3% CAD14.3% AUD14.3% CNY


USD Index” as one in a family of similarly

constructed FX Indexes. 13

The CME USD Index ended the year at a value of

1,042.66. This represents an advance of the 3rd

quarter’s ending mark of 1,027.22 and well over the

year-end 2012 figure of 992.19.

Global Economic Performance

Emerging market (EM) economies have been the

stars of the investment world for some years now.

Still, it was the developed market (DM) economies

that provided some of the most positive growth

surprises in 2013. While the EM countries generally

exhibit higher growth rates than DM countries, that

growth has generally decelerated relative to DM

economies in recent years.

Actual and Forecast GDP Growth

2010 2011 2012 2013

2014

-19

(f)

2020

-25

(f)

Developed Markets (DMs)

Australia 2.6% 2.4% 3.7% 2.7% 2.3% 2.2%

Canada 3.2% 2.6% 1.8% 1.4% 2.0% 1.8%

France 1.7% 2.0% 0.0% 0.2% 1.4% 0.9%

Germany 4.2% 3.0% 0.7% 0.4% 1.6% 1.4%

Japan 4.7% -0.6% 2.0% 0.8% 1.0% 0.6%

UK 1.8% 1.0% 0.3% 0.6% 1.9% 1.1%

US 2.5% 1.8% 2.8% 1.6% 2.4% 1.7%

Emerging Markets (DMs)

Brazil 6.9% 2.7% 0.9% 2.0% 2.9% 2.8%

Mexico 5.3% 3.9% 3.9% 2.5% 2.9% 3.1%

Russia 4.5% 4.3% 3.4% 2.9% 1.8% 1.2%

India 9.3% 6.2% 5.0% 4.2% 4.8% 3.6%

China 10.4% 9.3% 7.7% 7.5% 5.9% 3.5%

Source: The Conference Board Global

Economic Outlook 2014 (November 2013)

NOTE: (f) = forecast data

According to the Conference Board’s Global

Economic Outlook, growth in Germany is expected

to run at a very moderate +1.6% on an annual basis

from 2014-19. Similarly modest growth is expected

in much of the developed world including Japan

13 The CME USD Index represents a basket of equally

weighted positions (as of December 31, 2010) of the USD vs. the Euro (EUR), Japanese yen (JPY), British pound (GBP), Swiss franc (CHF), Canadian dollar (CAD), Australian dollar (AUD) and Chinese yuan (CNY). It is (arbitrarily) established at a value of 1,000.00 as of December 31, 2010.

(+1.0%), the United Kingdom (+1.9%) and the

United States (+2.4%). Note that the Euro (EUR)

posted a total return vs. the U.S. dollar (USD) in

2014 of +4.31%; the British pound (GBP) was seen

at +2.36% while the Japanese yen brought up the

rear at -17.52%.

While GDP growth has slowed in many of the

emerging economies, such growth has nonetheless

generally surpassed that of the DMs. This is

expected to continue, according to Conference Board

forecasts, albeit the gaps may narrow.

Note that the Chinese yuan or renminbi rallied by

7.07% relative to the USD in 2014. The Indian

rupee (INR) was off 2.51%; the Brazilian real (BRL)

was down some 6.73% while the Russian ruble

(RUB) was off 0.55%. Still, GDP in these nations is

anticipated to be relatively strong with China

expected to grow in 2014-19 by +5.9% with India

-1%

0%

1%

2%

3%

4%

5%

2010

2011

2012

2013

2014-1

9

2020-2

5

Select DM GDP Growth

Germany Japan

UK US

Source: The Conference Board

0%

2%

4%

6%

8%

10%

12%

2010

2011

2012

2013

2014-1

9

2020-2

5

Select EM GDP Growth

Brazil Russia

India China

Source: The Conference Board


(+4.8%), Brazil (+2.9%) and Russia (+1.8%)

following behind.

Abenomics

Certainly Prime Minister Shinzo Abe’s aggressive

efforts to revitalize the Japanese economy played a

prominent role in the large scale decline of the

Japanese yen vs. the U.S. dollar and other

currencies in 2014. The so-called Abenomics

program features a target of 2% inflation, negative

real interest rates, a form of quantitative easing with

asset buybacks and heightened fiscal stimuli.

A massive increase in the Japanese sales tax from

5% to 8% is scheduled to be put into effect in April

2014. This action is likely to boost domestic

demand in Japan in the short-run at the risk of

diminished long-term demand. These funds are

slated to be used for further fiscal stimulus.

While prices continue to slip in Japan, most analysts

anticipate that “Abenomics” will likely succeed in

combating the deflationary pressures that have

plagued the Japanese economy since the early

1990s.

Total Return

One of the most popular long-term FX trading

strategies over the past decade is known simply as

the “carry trade.” This practice simply suggests

that one might exploit “cost of carry” by borrowing

in countries with low nominal interest rates to invest

in countries with high nominal interest rates. Thus,

one might sell the “low-rate” currency and buy the

“high-rate” currency.

Carry trade � Sell low-rate currency & buy high-rate currency

By so doing, one hopes to capitalize on discrepant

interest rates, and by implication, divergent

investment opportunities, in the two countries. This

strategy further recognizes that total currency return

consists of 2 components, specifically, exchange rate

or price movement plus the accrual of interest.

The implicit assumption is that these interest rate

relationships will endure. As such, carry traders

implicitly discount classical exchange rate theories

by assuming that the interest rate relationships may

endure over extended periods of time. This

suggests that low-yielding currencies that are sold

will not advance; and, that high-yielding currencies

that are purchased will not decline.

Total Currency

Return =

Price Movement + Interest

Historically, such relationships have been known to

endure for extended periods of time, reinforcing

interest in the carry trade. In particular, vast sums

of money totaling in the trillions of U.S. dollars were

invested in the carry trade prior to the outbreak of

the subprime crisis, specifically by shorting the

Japanese yen (JPY) and investing in other currencies

including the Icelandic krona (ISK).

Appendix 2 depicts the total return associated with

various currencies, relative to the U.S. dollar, during

the most recently completed calendar quarter. The

Icelandic krona (ISK) turned in the best return

(+6.11%) for the quarter. This was followed by the

700

750

800

850

900

950

1,000

1,050

1,100

1,150

Jan-0

7

Jul-

07

Jan-0

8

Jul-

08

Jan-0

9

Jul-

09

Jan-1

0

Jul-

10

Jan-1

1

Jul-

11

Jan-1

2

Jul-

12

Jan-1

3

Jul-

13

CME JPY Index

Long Short14.3% EUR 100% JPY14.3% USD14.3% GBP 14.3% CHF 14.3% CAD14.3% AUD14.3% CNY

-8%

-6%

-4%

-2%

0%

2%

4%

6%

8%

USD-JPYUSD-TRYUSD-BRLUSD-ZARAUD-USDUSD-CLPUSD-CADUSD-COPUSD-TWDNZD-USD

USDUSD-RUBUSD-MXNUSD-CHFEUR-USDUSD-CNYGBP-USDUSD-KRWUSD-ARSUSD-INRUSD-ISK

Carry Return (Q4 2013)


Indian rupee (INR) at +3.68%, the Argentine peso

(ARS) at +3.54%, the South Korean won (KRW) at

+3.06% and the British pound (GBP) at +2.43%.

On the negative side of the ledger, the Japanese yen

(JPY) posted a return of -6.66%, the Turkish lira

(TRY) checked in at -4.08% with the Brazilian real

(BRL) at -3.93%, the South African rand (ZAR) at -

3.81% and the Chilean peso (CLP) at -2.80%.

Because the carry trade has become such an

important and widely followed transaction in the

global FX markets, CME Group has developed the

CME FX Carry Index.

This novel index is designed to follow the

performance of a basket of currencies that offer

relatively high interest rates and have, at least on

an historical basis, generated favorable total returns. 14 The CME FX Carry Index closed the 4th quarter at

808.21 and off 4.2% from its 3rd quarter ending

value of 843.70. The Index was further down

12.4% from its ending 2012 value of 922.27. This

reflects the general poor performance of EM

currencies vs. the USD and EUR during 2013.

14 The CME FX Carry Index represents a basket of equally

weighted positions (as of December 31, 2010) which is effectively long a basket including the Australian dollar (AUD), Brazilian real (BRL), Mexican peso (MXN), New Zealand dollar (NZD), South African rand (ZAR) and Turkish lira (TRY) vs. short positions in the USD and EUR. It is (arbitrarily) established at a value of 1,000.00 as of December 31, 2010. The long components of the CME FX Carry Index were selected in light of the high local interest rates that prevailed in those countries during the post-financial crisis era through 2010. The short components of the index were identified because of the low interest rates offered.

Purchasing Power Parity

The theory of purchasing power parity (PPP) dates to

the 16th century and the School of Salamanca but

was further developed in the early 20th century by

economist Gustav Cassel. 15 The theory is based

upon the assumption that exchange rates are in

equilibrium when purchasing power is equivalent in

the two countries.

On a granular level, PPP is based on the “law of one

price” or the notion that identical products should be

priced at the same level in different national markets

adjusted for exchange rates. Typically, this law is

qualified by the absence of significant trade barriers

or other artificial constraints on commerce.

But the theory of PPP expands the application of the

law of one price from any single good or product to

generalized prices in any particular economy as

measured by inflation indexes, e.g., Consumer Price

Index (CPI) or Producer Price Index (PPI). The

implication of this theory is that inflation rates and

exchange rates should exhibit negative correlation.

If inflation increases

� Currency value should decline

If inflation decreases

� Currency value should advance

Thus, if inflation as measured by an inflation index

increases, the value of the currency should generally

decline to maintain price equilibrium. Similarly, if

inflation declines, the value of the currency should

advance.

The theory of PPP is closely related to another

classic theory that addresses exchange rate values

known as the International Fisher Effect (IFE). This

theory suggests that the disparity between nominal

interest rates in two countries drive the future path

of exchange rates.

Per this theory, one might expect that the value of a

currency with a low nominal interest rate might

increase into the future. Or that the value of a

currency with high nominal rate might decline.

15 See Cassel, Gustav, “Abnormal Deviations in

International Exchanges” (December 1918).

700

750

800

850

900

950

1,000

1,050

Jan-0

7

Jul-

07

Jan-0

8

Jul-

08

Jan-0

9

Jul-

09

Jan-1

0

Jul-

10

Jan-1

1

Jul-

11

Jan-1

2

Jul-

12

Jan-1

3

Jul-

13

CME FX Carry Index

Long Short16.7% BRL 50% USD16.7% AUD 50% EUR16.7% ZAR 16.7% NZD16.7% TRY16.7% MXN


IFE further assumes that real interest rates (i.e., the

risk-free interest rate less inflation) should generally

be equal across countries. This implies that nominal

interest rates and inflation are positively correlated.

If inflation increases

� Rates

increase �

Currency value should decline

If inflation decreases

� Rates

decrease �

Currency value should advance

The IFE suggests interest rates and exchange

negatively correlated. Similarly, PPP suggests

inflation and exchange rates are negatively

correlated. As such, the IFE theory is generally

consistent with the PPP theory.

Putting the classic theory of purchasing power parity

into practice requires a measurement of inflation in

order to calculate the proportion by which any

particular currency is (theoretically) over- or under-

valued relative to the norm. There are three popular

methodologies that have been referenced in this

regard.

• OECD - The Organization for Economic Co-

operation and Development (OECD) provides data

that is useful in this regard by comparing price

changes in a representative basket of goods in

various countries.

• Bloomberg - Bloomberg offers an analytical tool

that is grounded in a very long-term assessment

of inflation, as measured by either CPI or PPI in

various countries extending from January 1982

through June 2000.

• Big Mac - Finally, the Economist’s “Big Mac PPP”

methodology compares the price of a (almost)

universally available product with verifiable pricing

in the form of the McDonald’s Big Mac hamburger

in various countries.

Actually, all three methodologies may readily be

referenced on Bloomberg quotation devices.

Appendix 3 below provides data from all three

methods. Further, we have taken the average of

the three assessments (where available) for a

variety of national currencies and rank-ordered the

set from most over-valued to most under-valued.

The Swiss franc (CHF) at 34.85% is identified as the

most over-valued currency, per these

methodologies, relative to the USD. Other highly

valued currencies include the Norwegian krone

(NOK) at +29.27%; the Danish krone at +18.76%;

the New Zealand dollar (NZD) at +18.11% and the

Australian dollar (AUD) at +14.71%.

The Brazilian real (BRL) was once again a “big

mover” in this regard as its purchasing power has

fallen from +17.51% to +6.19% to +0.84% from

the 2nd to 3rd to 4th quarters per these measures.

Under-valued currencies, per our analysis, include

the South African rand (ZAR) at -65.42%; the

Turkish lira (TRY) at -56.04%; the Polish zloty (PLN)

at -54.97%; the Mexican peso at -53.51%; and, the

Malaysian ringgit at -52.52%.

One might recommend creating “baskets” of several

currencies to buy and sell on the basis of this

analysis in order to diversify risks to a certain

extent. However, it is important to recognize that

currencies might remain in apparent states of over-

or under-valuation for extended periods of time. In

fact, the carry trade as discussed above, takes a

completely opposite approach to the classic PPP

theory by buying high-rate currencies and shorting

low-rate currencies.

Impact of Commodities

As a general rule, the nations whose currencies have

remained top performers over the past decade may

be identified as those whose national income is tied

heavily to commodity production.

Commodity prices had generally advanced, often

sharply, over the past decade as seen in the rise in

the value of energy, grain, livestock, precious metals

and industrial metals. These price advances have

largely been driven by emerging market demand in

nations including China and India.

However, those trends have, if not reversed,

certainly corrected over the past year. Gold values

fell sharply during 2013 to the extent that economic

recovery in the developed economies led to much

reduced economic anxiety. Note, of course, that

gold is much valued, particularly during periods of

heightened economic stress as a monetary surrogate

of sorts. West Texas Intermediate (WTI) crude oil

closed the year at $100.32 per barrel and up from


its year-end 2012 value of $90.80 but nonetheless

off its September 2013 peak of $110.53.

Grain values including corn, soybeans and wheat

generally fell a bit on a productive growing season

coupled with moderating global demands.

CME Group has developed the CME FX Commodity

Country Index to follow the performance of a basket

of currencies from nations that rely heavily upon the

exportation of commodities and other raw materials.

To the extent that commodities have been in great

demand over much of the past decade, these

currencies have, on a historical basis, generated

favorable total returns. 16

16 The CME Commodity Country Index is constructed to be

effectively long Australian dollar (AUD), Brazilian real (BRL), Canadian dollar (CAD), Norwegian krone (NOK),

The CME FX Commodity Country Index fell to 857.91

and off 3.2% from its 3rd quarter value of 886.53.

This represents a decline of 10.0% decline for the

year 2013 from its year-end 2012 value of 953.60.

This performance is a reflection of the generally

tepid performance of commodity markets in 2013.

CME Group has further developed the CME FX BRIC

Index to follow the performance of select “emerging

market” economies and their national currencies,

namely the Brazilian real (BRL), Russian ruble

(RUB), Indian rupee (INR) and Chinese yuan (CNY),

New Zealand dollar (NZD) and South African rand (ZAR) vs. a short position in the U.S. dollar (USD). It is (arbitrarily) established at a value of 1,000.00 as of December 31, 2010.

$600

$800

$1,000

$1,200

$1,400

$1,600

$1,800

$2,000

$20

$40

$60

$80

$100

$120

$140

$160

Jan-0

7

Aug-0

7

Mar-

08

Oct-

08

May-0

9

Dec-0

9

Jul-

10

Feb-1

1

Sep-1

1

Apr-

12

Nov-1

2

Jun-1

3

Gold

($ p

er

troy o

z)

Cru

de O

il (

$ p

er

Bbl

Crude Oil & Gold

Crude Oil Gold

Source: Bloomberg

$2

$4

$6

$8

$10

$12

$14

$16

$18

Jan-0

7

Jul-

07

Jan-0

8

Jul-

08

Jan-0

9

Jul-

09

Jan-1

0

Jul-

10

Jan-1

1

Jul-

11

Jan-1

2

Jul-

12

Jan-1

3

Jul-

13

$ p

er

Bushel

Grains

Corn Soybeans Wheat

Source: Bloomberg

650

700

750

800

850

900

950

1,000

1,050

1,100

Jan-0

7

Jul-

07

Jan-0

8

Jul-

08

Jan-0

9

Jul-

09

Jan-1

0

Jul-

10

Jan-1

1

Jul-

11

Jan-1

2

Jul-

12

Jan-1

3

Jul-

13

CME FX Commodity Country Index

Long Short16.7% AUD 100% USD16.7% BRL 16.7% CAD 16.7% NOK16.7% NZD16.7% ZAR

800

840

880

920

960

1,000

1,040

1,080

1,120

Jan-0

7

Jun-0

7

Nov-0

7

Apr-

08

Sep-0

8

Feb-0

9

Jul-

09

Dec-0

9

May-…

Oct-

10

Mar-

11

Aug-1

1

Jan-1

2

Jun-1

2

Nov-1

2

Apr-

13

Sep-1

3

CME FX BRIC Index

Long Short25% BRL 100% USD25% RUB 25% INR 25% CNY


that have created much of the demand for

commodities in the world today. 17

The CME FX BRIC Index ended the year 2013 at

858.26 and off 1.46% from its 3rd quarter mark of

870.99. This represents a decline of 6.8% from its

year-end 2012 value of 920.65. These negative

results further reflect the general deceleration of

emerging market growth.

Conclusion

CME offers a broad array of currency futures and

option contracts covering a wide range of currency

pairings (where one side is the U.S. dollar) and

cross-rate pairings (which do not involve the U.S.

dollar).

These products provide facile and liquid vehicles

with which one may express a view on prospective

market movements. Or, to manage the risks

associated with currency holdings or international

investments during turbulent times.

17 The CME BRIC Index is constructed of equal weightings

of long Brazilian real (BRL), Russian ruble (RUB), Indian rupee (INR) and Chinese yuan (CNY) vs. a short position in the U.S. dollar (USD). Like other CME FX indexes discussed above, the BRIC Index was equally weighted and calibrated to equal an arbitrary 1,000.00 as of December 31, 2010.


Appendix 1: Summary of World Economic Conditions

Australia Brazil Canada

Growth,

Inflation

& Fiscal

Policy

Australia’s economy has weakened since the days of the commodity boom. Problems may

persist into 2014 with low gold prices potentially leading to mine closures.

Economic growth may move incrementally higher in 2014. Risks remain due to public

unrest surrounding a lack of perceived progress with many government services

against a backdrop of hosting the World Cup and the Olympics.

Canada is benefiting from the continued jobs expansion in the US. On the negative side, the domestic oil sector has some challenges

and delays in the US decision on the Keystone pipeline are not helping economic confidence.

Monetary

Policy

Short-term interest rates have been lowered to cushion economic growth without fear of

inflation pressures accelerating. Further rate declines could keep the currency on a

weakening path.

The short-term SELIC rate has been raised to help stabilize the currency. Any currency

strength that might emerge in 2014 could be met with rate cuts.

Canada’s rates are low. There are no inflation pressures. The Bank of Canada seems

comfortable with the current set of policies, at least so long as the US keeps its federal funds

rate near zero.

Special

Factors

The Australian dollar was once a favorite for the long-side of the carry trade. With lower rates, China risk, weak-to-stable commodity

prices, and less than favorable comparisons to New Zealand, the bloom may remain off the

Aussie dollar.

Brazil hosts the World Cup in 2014 and the Olympics in 2016. How political uncertainties

are resolved ahead of these high profile events is the major risk factor for the currency.

Rate differentials with the US are too small to support the Canadian dollar. The big risks are in the energy sector. Weaker oil prices or a US decision against the Keystone pipeline

would probably hurt the currency.

China European Union India

Growth,

Inflation

& Fiscal

Policy

Economic growth in 2013 ran about 7.6% in real GDP terms. China may squeeze out 6.5%

to 7% real GDP growth in 2014, as the economy avoids a hard landing but continues

to face challenges in its transition to a domestic demand growth model.

Europe appears to have stabilized and may even show some incremental economic growth

in 2014. Challenges remain with an under-capitalized banking sector holding back a return to more robust economic activity.

Like China and Brazil, India saw a rapid deceleration of economic growth in 2012 and 2013. To tackle the current account deficit,

tariffs have been raised on gold imports. Large energy and food subsidies, though,

remain a big challenge for the Government.

Monetary

Policy

Monetary policy remains in flux as China tries to curtail past rapid expansion of credit while also pushing for more rapid development of

financial institutions, including derivative markets.

The ECB may become more aggressive in supervising banks in 2014 as it is pushed into taking the lead in EU-wide financial reform. Rates are likely to remain on hold. Liquidity will be made available to banks as needed.

India has installed a new head of the central bank with a mission to reform the financial

sector. Only time will tell, but the new direction is a welcome change for the currency

markets.

Special

Factors

China’s new leadership has moved to relax the one-child policy and make moving from the

rural to the urban sector easier. For 2014 and 2015, China may speed up the pace toward

normalizing the currency.

Leadership in the European Union is weak. Germany held elections in September, but it

took three months for Chancellor Merkel to put together a coalition Government. France’s

President ranks extremely low in the opinion polls. The Euro carries considerable political

risk going into 2014.

The Indian rupee was very weak in the second and third quarters of 2013, before stabilizing in the fourth quarter. With the trade balance

potentially narrowing a little and financial reforms on the way, the rupee has a chance to

reverse course and appreciate, but only if global markets embrace greater risk taking.


Appendix 1: Summary of World Economic Conditions, cont.

Japan Mexico Russia

Growth,

Inflation

& Fiscal

Policy

Japan faces a big hike in its national sales tax in April 2014. This is expected to lead to

anticipatory spending in the January-March 2014 quarter, and then negative real GDP

afterwards.

With economic growth in the US economy continuing at a healthy pace, Mexico should

benefit from increased trade with its partner to the north.

Elevated crude oil prices have benefitted Russia’s economy, but an aging population and a difficult

environment for foreign investment suggest slower economic growth in the years to come. There are key recent signs, though, of Russia

attempting to become friendlier to foreign investment.

Monetary

Policy

The Bank of Japan is pursuing the largest quantitative easing (asset purchase) program

relative to GDP ever attempted to raise inflation and economic growth. Inflation is

ticking upward, mostly in response to past yen weakness.

Currency strength in 2012 helped to reduce inflation pressures. Recent currency weakness in 2013, however, threatens the progress on inflation. Central bank policy is probably on

hold for now.

Russia has accumulated a large quantity of foreign reserves giving the authorities some firepower to counter any ruble weakness, if they so choose,

during periods of oil market weakness.

Special

Factors

A 2% inflation target by the Bank of Japan is not likely to be achieved in a short time frame unless there is further yen depreciation toward the 120-140 yen/dollar rate. Nothing moves

in a straight line, though, and the coming sales tax hike adds considerable risks to the timing

of any scenario.

Mexico’s currency emerged as one of the favorites for the long-side of the carry trade

versus the Japanese yen, but only in “risk-on” markets. Conditions in 2014 suggest the

possibility for a peso rebound if a “risk-on” climate returns to global markets.

Russia’s energy supply dominance of Europe is being challenged by increased oil and natural gas supplies around the globe. If the link in Europe

between natural gas pricing and Brent oil is broken, this could hit Russian government

revenues quite hard.

Switzerland United Kingdom United States

Growth,

Inflation

& Fiscal

Policy

Switzerland will benefit in 2014 from Europe’s stabilization. Moreover, stronger growth in the

US may also help exports.

The UK has a very strong housing market and prospects for solid economic growth in 2014. Fiscal policy is less restrictive than in the past few years as the Government looks ahead to

elections in 2015.

The US economy appears poised for robust growth in 2014 as the post-crisis deleveraging fades into history and fiscal stability is achieved faster than expected. The Federal budget deficit may decline below 3% of GDP in FY2014 and be balanced on

an operating basis in FY2015.

Monetary

Policy

As the EU debt crisis has morphed into a long-term banking capital adequacy problem, the

Swiss have little flexibility, and they are likely continue to keep a lid on the Swiss franc

relative to the euro.

The Bank of England has indicated it plans to keep rates low and focus its efforts on financial

supervision. A stronger economy than expected by the BoE and some emerging

inflation pressure could change that guidance during 2014.

The Federal Reserve has announced that the US economy no longer needs emergency life support, and the tapering of QE has begun. Even with a

declining unemployment rate, the Fed has made it clear it will keep its zero federal funds rate policy in place until it sees some inflation pressure, and

there is none in sight yet.

Special

Factors

The post-2008 financial crisis has led to increased regulation of financial institutions all

over the world. On net, this increased regulation poses additional challenges for the

traditional model of Swiss secrecy and the overall role of Switzerland in the world’s

financial system.

Tensions between the UK and the European Union are likely to intensify, especially over

the push by the EU to impose financial transaction taxes. As the UK outperforms the Euro-zone economically, the possible scenario for pound strength versus the euro may come

into play in 2014.

The US dollar is not a strong currency, but other major currencies are challenged as well. Markets may start to focus as 2014 progresses on which country might raise rates first in 2015. For now,

the UK is the leading contender, the US and Eurozone in the middle, with little probability of

rate rises in Japan for a much longer time.


Appendix 2: Select Currency Performance (4th Quarter 2013)

Currency Ticker Spot Quote

(12/31/13) Quote

Convention 3-Mth Rates

(12/31/13)

4th Quarter 2014 2014 Year-to-Date

Total

Return1

Spot

Return2

Interest

Return3

Total

Return1

Spot

Return2

Interest

Return3

Argentine Peso USD-ARS 6.5197 USD per 1 ARS 20.20% 3.54% -11.17% 16.56% 19.70% -24.61% 58.77%

Australian Dollar AUD-USD 0.8918 AUD per 1 USD 2.64% -3.65% -4.29% 0.67% -11.72% -14.21% 2.90%

Brazilian Real USD-BRL 2.3621 USD per 1 BRL -3.93% -6.14% 2.36% -6.73% -13.15% 7.39%

British Pound GBP-USD 1.6556 GBP per 1 USD 0.50% 2.43% 2.30% 0.12% 2.36% 1.86% 0.49%

Canadian Dollar USD-CAD 1.0623 USD per 1 CAD 1.21% -2.68% -2.96% 0.29% -5.55% -6.61% 1.13%

Chilean Peso USD-CLP 525.45 USD per 1 CLP -2.80% -3.95% 1.20% -3.85% -8.80% 5.43%

China Renminbi USD-CNY 6.0556 USD per 1 CNY 7.50% 1.81% 1.10% 0.71% 7.07% 2.91% 4.04%

Colombian Peso USD-COP 1,923.00 USD per 1 COP -0.41% -1.22% 0.82% -5.13% -8.42% 3.59%

Euro EUR-USD 1.3743 EUR per 1 USD 0.23% 1.64% 1.60% 0.05% 4.31% 4.17% 0.14%

Icelandic Krona USD-ISK 115.18 USD per 1 ISK 5.95% 6.11% 4.51% 1.52% 17.71% 11.15% 5.90%

Indian Rupee USD-INR 61.8000 USD per 1 INR 8.90% 3.68% 1.32% 2.33% -2.51% -11.01% 9.55%

Japanese Yen USD-JPY 105.31 USD per 100 JPY 0.11% -6.66% -6.69% 0.03% -17.52% -17.62% 0.12%

Mexico Peso USD-MXN 13.0453 USD per 1 MXN 3.79% 1.18% 0.42% 0.76% 1.98% -1.41% 3.43%

New Zealand Dollar NZD-USD 0.8210 NZD per 1 USD 2.93% -0.33% -1.04% 0.71% 1.95% -0.89% 2.87%

Russian Ruble USD-RUB 32.9000 USD per 1 RUB 7.00% 0.21% -1.46% 1.69% -0.55% -7.13% 7.09%

South Africa Rand USD-ZAR 10.4925 USD per 1 ZAR 5.15% -3.81% -4.43% 0.65% -17.12% -19.24% 2.62%

South Korean Won USD-KRW 1,052.85 USD per 1 KRW 2.58% 3.06% 2.37% 0.68% 3.74% 1.39% 2.32%

Swiss Franc USD-CHF 0.8922 USD per 1 CHF -0.04% 1.33% 1.34% -0.01% 2.50% 2.52% -0.02%

Taiwanese Dollar USD-TWD 29.830 USD per 1 TWN 0.87% -0.38% -0.60% 0.22% -1.76% -2.60% 0.86%

Turkish Lira USD-TRY 2.1480 USD per 1 TRY 9.48% -4.08% -6.04% 2.09% -10.76% -16.97% 7.90%

United States Dollar USD 1.0000 USD 0.23% 0.06% - 0.06% 0.27% - 0.27%

Notes

(1) Return from price movement and interest (2) Return from currency price movement vs. USD as “base currency”

(3) Return from interest at prevailing 3-month rates or implied NDF rate

Source: Bloomberg


Appendix 3: Purchasing Power Parity (“PPP”) Analysis (as of 12/31/13)

% Over/Under Valued

Currency ISO

Code Average OECD

Bloomberg

(CPI)

Bloomberg

(PPI) Big Mac

Swiss Franc CHF 29.57% 34.85% 23.14% 9.96% 50.32%

Norwegian Krone NOK 29.27% 30.10% 8.35% 49.35%

Danish Krone DKK 18.76% 28.09% 18.63% 18.11% 10.21%

New Zealand Dollar NZD 18.11% 15.02% 29.17% 36.64% -8.40%

Australian Dollar AUD 14.71% 25.87% 25.06% 19.94% -12.04%

Swedish Krona SEK 12.37% 24.75% -5.78% -3.34% 33.85%

Icelandic Krona ISK 11.72% 11.72%

Euro EUR 10.13% 4.76% 17.39% 13.87% 4.49%

Canadian Dollar CAD 8.07% 14.33% 10.38% -0.29% 7.87%

British Pound GBP 5.11% 11.41% 15.12% 3.49% -9.58%

Brazilian Real BRL 0.84% 0.84%

Colombian Peso COP -9.93% -9.93%

Japanese Yen JPY -16.77% 2.14% -16.71% -13.59% -38.93%

Singapore Dollar SGD -20.85% -20.85%

Chilean Peso CLP -23.45% -23.45%

South Korean Won KRW -24.44% -24.80% -24.07%

Czech Koruna CZK -26.95% -26.95%

Argentina Peso ARS -31.41% -31.41%

Thai Baht THB -41.43% -41.43%

Chinese Renminbi CNY -41.51% -41.51%

Phillipines Peso PHP -45.85% -45.85%

Russian Ruble RUB -47.13% -47.13%

Hungarian Forint HUF -47.70% -77.57% -17.82%

Indonesian Rupiah IDR -49.45% -49.45%

Hong Kong Dollar HKD -51.90% -51.90%

Malaysian Ringgit MYR -52.52% -52.52%

Mexican Peso MXN -53.51% -67.80% -39.22%

Polish Zloty PLN -54.97% -70.23% -39.70%

Turkish Lira TRY -56.04% -95.63% -16.44%

South African Rand ZAR -65.42% -65.42%

Notes

Please note that data regarding all countries is not generally available.

Source: Bloomberg


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q4 2013 fx market monitor

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