Professional Documents
Culture Documents
Chris Turner
Head of Foreign Exchange Strategy London +44 20 7767 1610 christopher.turner@uk.ing.com
Tom Levinson
Foreign Exchange Strategist London +44 20 7767 8057 tom.levinson@uk.ing.com
FX Strategy
March 2012
Liquidity
Return
LATAM EMEA
Very few currencies demonstrate all the attributes of safety, liquidity and return
March 2012
Pillar I
Safety
The known unknowns Debt sustainability EMU break-up risk Oil Elections Dollar performance
March 2012
US elections/ protectionism
PROBABILITY
Fed QE3 Eurozone hard-landing Early Fed tightening Chinese hard landing Iran Conflict Eurozone breaks up Greece leaves EMU
Low 0% Low
March 2012
15% IMPACT
3
30% High
Financial sector reliant, indebted G10 transfer debt from private to public sector with the fiscal metrics of the Big 4 badly compromised vs. the rest of the G10 EZ 60% Maastricht Criteria a distant memory US 100% threshold fast approaching unlikely to turn before 2015 Deficit start points key determinant of fiscal scope & downgrade risk
March 2012
Big 4
Japan
(Feb01)
Asia/$-bloc
Canada
Australia
HK
Singapore
Europe
UK
Switz.
Sweden
Norway
Denmark
Germany
Nlands
Finland
Lbourg
Spain
(Jan09)
Ireland
(Mar09)
Austria
(Jan12)
France
(Jan12)
Eurozone
March 2012
Baseline
March 2012
Current Account Balance (% of GDP, 2008-2010 average) Change in C/A Balance 1998-2010 (% of GDP)
March 2012
REER (% Change 1999-2008, using export price deflator) REER (% Change, 1999-2008, using Unit Labour Costs) REER (% Change, 1999-2010, using Unit Labour Cost)
March 2012
100
100
80
80
Greek exit and a return of the Drachma is now on the table The implementation challenge huge We can only guess as to how it could be re-introduced ... but on arrival we would expect it to fall up to 80% vs. EUR generally at the lower end of performances of failed FX regimes
March 2012
60
60
40
40
20
20
0 1 51 101 151 201 251 301 351 401 451 501 Days after January 1st of crisis year
Rock solid Germany Almost safe 5-10% weakness vs. DEM Netherlands, Austria, Finland, Luxembourg On the edge 10-20% weakness vs. DEM France, Belgium Vulnerable 20-30% weakness vs. DEM Italy, Ireland Casualties 50% weakness vs. DEM Portugal, Spain Worst offender 80% weakness vs. DEM Greece
0.20 Jan12 0.40 0.60
0.80
0.80
0.50
0.50
0.40
0.30
0.20 Jan17
Vulnerable (25%)
March 2012
10
11
(US$/bbl)
4 50 2 30
15
10 0 -10 -2 70 75 80 85 90 95 00 05 10 -30
-5 -10 -15 Winners Losers Russia Norway Canada Mexico Brazil UK Indonesia Australia Switzerland Romania US NZ Sweden Turkey China Japan Hungary Czech Rep South Poland India Philippines Thailand Taiwan Korea Singapore
March 2012
12
Nigeria, 2.1
Venezuela, 2.4
UAE, 2.6
OPEC represents 1/3 of global oil production Oil prices are the highest since 1Q11 driven by Iran-related concern risk of supply side shock is a concern
Iraq, 2.7
Military conflict would result in a far higher oil price than Irans supply suggests Although Iraq is set to increase production 2m/bpd
March 2012
13
11 10 9 8 7 6 5 4 3 80 83
Reagan
11 10 9 8
Full EUR/USD %chg after Election Date President Senate House mandate 1mth 3mth 6mth 12mth 02-Nov-76 Carter (D) D D Yes 0.5 0.6 1.8 5.3 04-Nov-80 Reagan (R) R D No -2.3 -8.5 -13.3 -17.6 06-Nov-84 Reagan (R) R 08-Nov-88 Bush Sn (R) D 03-Nov-92 Clinton (D) D 05-Nov-96 Clinton (D) R 07-Nov-00 Bush Jn (R) Hung 02-Nov-04 Bush Jn (R) R 04-Nov-08 Obama (D) D 06-Nov-12 ??? D Yes = all 3 same party, No* - S D No -4.5 -8.9 -6.1 11.8 D No* 1.7 -4.9 -6.4 -5.5 D Yes -0.7 -5.1 -0.8 -9.3 R No* -1.8 -7.1 -10.9 -9.5 R No* 3.1 7.8 3.6 4.1 R Yes 3.9 1.3 0.9 -6.7 D Yes -0.8 0.6 2.9 15.7 R & H aligned, but not President, No = S & H different
Clinton Obam a
7 6
Bus h Sn Clinton
Bus h Bus h
5 4 3
86
89
92
95
98
01
04
07
10
13
14
March 2012
95
1.00 0.50
G10 - VIX correlation 2007+ Greece I (Apr-May10) GFC (Aug-Oct08) Greece II (Jul-Sep11)
90
0.00 -0.50
85
-1.00 EUR JPY GBP CHF NOK SEK CAD AUD NZD
80
0.00 -0.25
75
-0.50 -0.75
70
During crisis US asset demand surges Correlation between equity market volatility and FX increases Although signs of Greece-related fatigue
March 2012
Asia & Latam - VIX correlation 2007+ GFC (Aug-Oct08) Greece I (Apr-May10) Greece II (Jul-Sep11)
SGD
MYR
TWD
15
KRW
MXN
INR
IDR
THB
PHP
CNY
BRL
120
110
110
100
100
90
90
80
80
70 02 03 04 05 06 07 08 09 10 11 12
70
Crisis would seem to be the US dollars only friend It is simple but we see value in looking at the USD Index (DXY) 200 day moving average Breaches signal crisis and saw DXY rally 25% during the 2H08 GFC & 20% during the 1H10 Greek crisis DXY broke through the 200 day m.a. in September 2011
March 2012
16
Safety
Safety Liquidity
Return
AUD SEK NZD Vulnerable Safe CAD NOK EUR GBP CHF JPY USD
March 2012
17
Pillar II
Liquidity
Market characteristics DM vs. EM trade off Latest volume surveys FX reserve managers as a guide Too much liquidity is a problem
March 2012
18
35
35
In times of crisis the old rules still apply Emerging mkt volatility spikes far more than Developed mkt In calmer times increasingly liquid EM trades are similar to DM In 2011 EM volatility even traded below DM for a period This highlights that much of the worlds woes are concentrated in the EU17, US & Japan
30
G7 FX vol EM FX vol
30
25
25
20
20
15
15
10
10
5 08 09 10 11 12
March 2012
19
15 10
5 0
-5 -10
IMF forecasts
Norway
Switzerland
Mexico
Germany
Brazil
US
UK
EU17
Sweden
Japan
Indonesia
India
Italy
NZ
Argentina
S Africa
France
S Arabia
Canada
A current account deficit means a country is a net borrower and relies on inward foreign investment in the form of either of FDI or portfolio investment
March 2012
20
Australia
Turkey
China
Russia
Korea
USD/MXN
NZD/USD
USD/RUB
EUR/NOK
USD/SGD
USD/NOK
EUR/CAD
USD/CNY
USD/ZAR
EUR/PLN
EUR/AUD
USD/TRY
EUR/SEK
USD/SEK
USD/KRW
USD/BRL
USD/INR
EUR/USD and the G10 still dominate global FX trading Latest turnover surveys show AUD/USD activity surging taking it ahead of GBP/USD and USD/JPY Greater FX flexibility would help emerging market volume to increase
March 2012
21
Others
FX Liquidity 100 80
Eurozone breakdown
G3
EUR
60 Belgium 40 Italy 20 Finland 0 A+ AAAA AA+ AAA LT Debt Rating Spain France Germ any Neth.
AUD
S3
CHF CAD
4 HKD 2 BRL TRY INR 0 BB BB+ BBBRUB BBB BBB AMXN ZAR PLN A A+ AAAA KRW SEK NZD NOK AA+ SGD DKK AAA LT Debt Rating
March 2012
22
The Fed & BoE undertook large scale QE in early 2009 and the BoE continues to do so While the primary monetary objective was to address fears of deflation the by-product was large scale currency weakness Is the ECB undertaking QE? If ECB created money is used to buy sovereign debt even for a three year period then the answer is yes And even Japan has turned more aggressive this year adopting a 1% inflation target and increasing its own QE
23
March 2012
1.50
1.20
For a change, EU17 base money has been growing faster than the US Fed balance sheet has been flat since mid-2011 while ECBs is up 40% Greater base money expansion should ultimately prove a EUR negative Look for overnight Eurozone rates to drift to the 0.25% floor
March 2012
24
Liquidity
Safety Liquidity
Return
AUD CAD
Illiquid
Liquid
March 2012
25
Pillar III
Return
Identifying the investment environment Carry trade Policy mix in DM vs. EM space Identifying the returns Prospect for equity inflows Two versions of fair value
March 2012
26
2012?
Safety/Liquidity
March 2012
Return
27
Sweden Switzerland
Norway
8
Germany Italy Brazil Canada Spain
EU17
121%
China Australia NZ SA
6
EU17
-4 -6
Portugal France
189%
4
France Spain
China
India
UK US
Greece
-8 -10 0 20
2 Portugal
Japan 240%
0 -4
40
60
80
100
120
-2
Japan US
10
The Big 4 of the US, Japan, EU17 & UK In terms of interest rates the developed have unfavourable debt/deficit dynamics market offers very little The BRIC nations look good as do Sweden, Norway & the $-bloc
March 2012
but where there is yield it is away from the QE/zero rate dependent Big 4
28
105
105
100
100
95
95
85
Switzerland 10 11
Sep-05
Jun-06
Mar-07
Dec-07
Sep-08
Jun-09
Mar-10
Dec-10
Sep-11
Fed pledge to maintain current interest rates until at late 2014 is no guarantee the FOMC most divided since 1992 (3 dissenters on 9 Aug) If/when the Fed signals an end to zero interest rates Treasury yields will move sharply higher probably triggering strong USD appreciation
March 2012
30
04
06
08
10
12
Carry trade strategies are high return and high risk 50% of gains between 2002-09 were wiped out in a matter of weeks
March 2012
31
If the risk environment does allow investors to chase yield Australia could attract the lions share of the flows
Both in terms of nominal yields and yields adjusted by expected volatility AUD stands out Closer to home and in a European world of low returns, NOK & SEK are our high yielders
March 2012
32
170
India
08
09
10
11
March 2012
33
Nominal and risk adjusted yields: Latam 10 9 8 7 6 5 4 3 2 1 0 BRL COP CLP MXN Risk-adjusted yields PEN 3 month implied yields
March 2012
0.8 0.7 0.6 0.5 0.4 0.3 0.2 0.1 0
34
MSCI EM Weightings
INDIA 7%
KOREA 15%
Russia
Colombia
March 2012
35
S. Africa
Romania
Brazil
Turkey
Poland
Czech Rep.
Hungary
EMEA
30
(YoY%) -2 0 2 4 6 8
LATAM ASIA
5
20
20
0
10 10
-5 -10 -15 06 07 Net inflow into EM Asia equity funds China CPI (rhs, inverted) 08 09 10 11 12
-10 07 08 09 10 11 12
-10
10
Higher growth rates in Asia have typically attracted the lions share of global emerging market equity portfolio flows but not in 2011
March 2012
Typically higher inflation in China (and presumably the rest of Asia) has discouraged equity inflows A decline in China CPI to 3.5% this year and looser PBOC policy should help
36
March 2012
37
With the exception of JPY, the Big 4 of USD, EUR & GBP are weak
March 2012
38
March 2012
Baskets purchased per 100 0.6 Mexico Poland Bulgaria Hungary China Ukraine Romania India South Africa Czech Rep Mar-11 Russia Slovakia Philippines Indonesia Kazakhstan Brazil Turkey Singapore Argentina South Korea Expensive End-11 Cheap 0.7 0.8 0.9 1.0 1.1 1.2 1.3
EM average
Return
Safety Liquidity
Return
CHF
JPY
USD
EUR
GBP
CAD
SEK NOK
NZD
AUD
QE
Return
March 2012
40
Appendix
March 2012
41
9 8
9 8 7 6 5 4 3 2 1 0
140
140
7 6
120
120
5 4
100
100
3 2
80
80
1 0 08 09
GBP NOK
10
USD CAD
11
CHF
12
SEK
13
AUD
14
NZD
60 08 09 10 11 12
60
EUR JPY
Safety, liquidity, return all important since 2008 crisis hence varied characteristics of top performers over last 5 years But whatever way we slice it GBP is the worst performer constantly misfires and too many false dawns
March 2012
42
14 12 10 8 6 4 2 0 ZAR
Since 2008 the very low yielding CZK has been the top EMEA performer
March 2012
43
100% 90% Exports/G D P (2010) 80% 70% 60% 50% 40% 30% 20% 10% 0% 0% 20% 40% 60% 80% Private Sector FX loans/ Total loans (end-08) 100% Russia Turkey Czech Rep. Kazakh. Poland Bulgaria Ukraine Romania Latvia Hungary Most Vulnerable
In EMEA, the most open economies are suffering from the Eurozone slow down although so far it is mild in Germany (which accounts for up to 1/3 exports from Czech Rep, Hungary and Poland) Those countries that have more foreign bank and FX loan exposure may suffer a continued draw down of loan books. Russia & Turkey are relatively insulated
March 2012
44
UAH
PROBABILITY
TRY
PM leans on CBT
15%
Bank asset sell-off by owners Pension fund assets grab
CZK BGN
Deposit run on Greece
PLN
RON
Low
30% High
March 2012
120
14 12
14 12 10 8 6 4 2 0
110
110
10
100 100
8 6 4 2
90
90
80
80
70 08
MXN
70 09
CLP
10
COP
11
BRL
12
ARS
0
08
MXN
09
CLP
10
COP
11
BRL
12
Ongoing attempts to prevent BRL appreciation leaves USD/BRL little altered since 2008
March 2012
46
10 9 8 7 6 5 4 3 2 1 0
08 09 10 11 12
110
8 7
100
80
6 5
90
60
4 3 2
40
70
20
1 0
60
0 11 12
HKD THB
IDR PHP
KRW CNY
MYR INR
TW D
March 2012
Source: FT
March 2012
To tal Greek debt: 352bn euro Total Greek debt (352bn) o thers 20% IM F 6%
Greek debt by private sector (205bn) Greek debt held held by private secto r: 205bn euro Euro bailo ut 1 5% o thers 34% o ther lo ans 5%
Greek banks 1 4%
March 2012
49
6 5 4 3 2 1 0
(bp)
(%)
1 0 -1 -2 -3
-4 -5
09
10
11
12
(bp) 1600
US
1200
1200
Europe
800
800
400
400
0 08
March 2012
0 09 10 11 12
50
10
11
12
Turkey
Turkmenistan
Syria Tunisia Morocco Algeria 1.2m/bpd Libya 1.0m/bpd Egypt 0.8m/bpd Lebanon Israel Jordan Kuwait 2.8m/bpd Bahrain Saudi Arabia 9.6m/bpd Qatar 0.9m/bpd Mali Niger Chad Sudan Eritrea Nigeria 2.1m/bpd Yemen 0.3m/bpd UAE 2.6m/bpd Pakistan Iraq 2.7m/bpd Iran 3.5m/bpd Afghanistan
Mauritania
Oman 0.8m/bpd
March 2012
51
US CPI - MoM% vs. YoY% 0.7 0.6 0.5 0.4 0.3 0.2 0.1 0.0 -0.1 -0.2 -0.3 Jan-11 5 F'casts 4 3 2 1 0 MoM% YoY%, (rhs) Jul-11 Jan-12 Jul-12 Jan-13 Jul-13 -1 -2
The Fed has is now releasing individual member interest rate projections added transparency probably forced the exceptionally low rates pledge to be moved from mid-2013 to late 2014 This looks merely like an exercise in expectations management.
March 2012
However, the Feds inflation-fighting credentials look safe for 1H2012. Base effects from last years energy surge look set to drag headline CPI below 2% this summer. The Feds position may be tougher to hold if inflation picks up towards year-end.
52
200
0 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11
0 10
Sw Ne Sz
No Fi Ca
Ge UK Au 11 12
In an ever decreasing AAA sovereign world GBP is attractive especially when liquidity/safety takes precedent over return Foreign investors have shifted European demand from EU17 to UK
53
March 2012
PROBABILITY
Collapse in Swiss exports Severe deflation & SNB raises floor Greece leaves EMU Government curtails SNB powers
Eurozone breaks up
Low 0% Low
March 2012
10% IMPACT
54
20% High
Economic Calendar Published each week, the calendar tells you whats due when and what we expect. MONTHLY ECONOMIC FORECAST UPDATES Each month we update our main forecasts on the major economies of the US, Eurozone, UK, Japan and China in our Monthly Forecast Update. This serves as a base to update forecasts on the other markets we cover, which is published shortly after in ING Economic Forecasts.
Prophet OUR GLOBAL DAILY Co-published with our Developed and Emerging Markets team, provides daily analysis of upcoming economic releases and recent data.
March 2012
55
Tradewise This weekly flagship publication analyses credit trends in conjunction with economic data releases, and is tailored towards the implications for local fixedincome markets.
Our US Economics Team headed by Rob Carnell has been ranked by Bloomberg as the most accurate forecasters of US GDP for 2006/7 and 2007/8 and in 2008/9 came in second.
Other ad hoc reports, weeklies, and dailies provide more in-depth analysis on specific markets.
March 2012
56
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Rated No.1 Firm in the high profile Thomson Extel survey of equity investors in the EMEA Economics and Macro category for 2010.
Covering Russia, Ukraine, Kazakhstan, Turkey, Hungary, Poland, Czech Republic, Slovakia, Bulgaria, Romania, Croatia
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March 2012
57
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March 2012
58
Regular Research
Dailies:
Prophet Market snaps/reactions Daily FX Strategy Technical Trend Monitor Credit Morning Notes Rates Strategy Good Morning Asia EM Debt Closing Prices Romania Daily Snapshot Ukraine Market Snapshot
Monthlies:
Global Monthly Economic Update
Weeklies:
Financial Markets Outlook Global Economic Calendar Tradewise EM debt fund flows Emerging Markets Biweekly Report
Included in the EMBR but also published separately -- Local currency and debt products strategy -- External debt strategy
ING Global Economic Forecasts FX talkING European Debt Supply Update Fed Preview ECB Preview Bulgaria Monthly Ukraine Monthly
EMBR Quantitative Supplement EMEA Weekly Outlook Slovakia Local Focus Turkey Local Focus Talking Korea
March 2012
59
Disclaimer
All charts sourced from EcoWin or Bloomberg unless stated otherwise.
Certain of the statements contained in this release are statements of future expectations and other forward-looking statements. These expectations are based on managements current views and assumptions and involve known and unknown risks and uncertainties. Actual results, performance or events may differ materially from those in such statements due to, among other things, (i) general economic conditions, in particular economic conditions in INGs core markets, (ii) changes in the availability of, and costs associated with, sources of liquidity such as interbank funding, as well as conditions in the credit markets generally, including changes in borrower and counterparty creditworthiness, (iii) the frequency and severity of insured loss events, (iv) mortality and morbidity levels and trends, (v) persistency levels, (vi) interest rate levels, (vii) currency exchange rates, (viii) general competitive factors, (ix) changes in laws and regulations, and (x) changes in the policies of governments and/or regulatory authorities. ING assumes no obligation to update any forward-looking information contained in this document. This presentation is intended for general information purposes. It does provide basic information concerning individual Commercial Banking products, insurance products or related services. However none of the information should be interpreted as an offer to sell securities or as investment advice of any kind. Queries concerning these topics should be addressed to the individual business units and/or companies of ING Groep N.V. ("ING Group"). No warranty or representation, express or implied, is given as to the accuracy or completeness of that information. In no event will ING Group, nor any of its directors, employees or advisors accept any liability with regard to the information contained in the individual ING companies', business unit or product group's presentation. ING Group comprises a broad spectrum of companies (the "ING companies"), many of them operating under their own brand names. Almost every ING company, business unit or product group, has its own website on the internet where it offers information about its products and services. Reference is made to those websites for further details and hyperlinks have been provided from this website to those ING companies, business units and product groups, if available. It is prohibited to modify, copy, distribute, transmit, display, publish, sell, license, create derivative works or use any content for any other purposes than that of this presentation, i.e. providing information about ING Group and its lines of business. No Liability While ING Group and ING companies use reasonable efforts to include accurate and up-to-date information in this presentation, errors or omissions sometimes occur. ING Group and ING companies expressly disclaim any liability, whether in contract, tort, strict liability or otherwise, for any direct, indirect, incidental, consequential, punitive or special damages arising out of or in any way connected with your access to or use of this presentation, and/or any other ING companies' presentations whether or not ING Group and/or ING companies were aware of the possibility of such damages. All information in this presentation, including but not limited to graphics, text and links to other communication means, is provided "as is" and is subject to change without prior notice. Such information is provided, to the fullest extent permissible pursuant to applicable law, without warranty of any kind express or implied, including but not limited to implied warranties of merchantability, fitness for a particular purpose, non-infringement from disabling devices. ING Group does not warrant the adequacy, accuracy or completeness of any information in this presentation and expressly disclaim any liability for errors or omissions therein. Users are responsible for evaluating the accuracy, completeness or usefulness of any information or other content available in this presentation.
March 2012
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