The 2010 Euro Outlook January, 2010 Kathleen Stephansen Chief Economist
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Euro/USD: where to? Euro Reference Exchange Rate: US Dollar EOP, USD/EUR
1.6
1.6
1.5
1.5
1.4
1.4
1.3
1.3
1.2
1.2
1.1
1.1 06 07 Source: European Central Bank /Haver Analytics
08
09
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The Euro Outlook • The crisis underscored the non-sustainability of global imbalances. • Any adjustment should lead to an intensification of capital flows directed to emerging economies and to reserve diversification. • We believe the dollar is on a longer-term downward trend and the euro should benefit partially from this adjustment. • Near-term, the tension between positive and negative factors will keep the Euro-USD in a relatively tight range. We project it to end the year close to 1.50. • Historical perspective: The Euro has been a success. The challenge ahead is to restore growth without the benefit of the demand impulse from the peripheral countries.
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Much hinges on the CNY/USD. The end of the 2005 peg has benefited the euro and is the manifestation of a currency redistribution away from the dollar. Foreign Exchange Rate: European Monetary Union US$/Euro
Foreign Exchange Rate: People's Republic of China Yuan/US$
1.6
8.4
EUR-USD (LHS) USD-CNY (RHS)
1.5 8.0 1.4 7.6 1.3 7.2 1.2
1.1
6.8 04 05 06 07 Sources: Federal Reserve Board /Haver Analytics
08
09
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China’s contribution to global growth has risen steadily this past decade Chinese and US contribution to global growth in ppt (PPP weights) US Contribution
China Contribution
2
1.5
1
0.5
20 10 e
20 08 20 09 e
20 07
20 06
20 05
20 03 20 04
20 02
20 01
20 00
19 99
19 98
19 97
19 96
0
-0.5
-1
Sources: IMF/Haver Analytics
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‌ Reflecting the strength in exports but also in infrastructure build Sector contribution to real GDP growth Consumption
Fixed Investment
Net exports
14.0 12.0 10.0 8.0 6.0 4.0 2.0 0.0 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 -2.0
Sources: China National Bureau of Statistics/Haver Analytics
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Structural changes Structural changes bring tensions in currencies that reflects shifts in financing and capital flows. The near-term adjustments to credit restraint, de-leveraging and restructuring of debt, private demand in the G-2 (US & UK) could be a restraining factor to the positive multiplier effects of recovering trade flows, a negative for the euro. The longer-run de-emphasis of the US consumer implies a narrowing of the US current account deficit, a factor that should slow the pace of USD decline. The burden shifts to China to redirect its drivers of growth away from exports to domestic demand. This process has started already but will gain traction in years to come. This reduces the demand for dollars and benefits the EM space and currency diversification away from the dollar, a positive for currencies such as the euro.
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US: Consumer-led growth is set to change Sector contribution to real GDP growth
Consumption
Fixed Investment
Net Exports
6.00 5.00 4.00 3.00 2.00 1.00 0.00 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 -1.00 -2.00
Sources: BEA/Haver Analytics
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Marked decline in the share of industrial countries’ consumption to global consumption Shares of Regional Consumption to World Consumption NJA
LATAM
Industrials (rhs)
12%
84%
11% 82% 10% 80% 9% 8%
78%
7% 76% 6% 74% 5%
Sources: Bureau of Economic Analysis/Haver Analytics 4% 93
94
95
96
97
98
99
00
01
02
72% 03
04
05
06
07
08
Sources: DataStream International; IMF; OECD
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China’s current account surplus should decline, implying less aggressive purchases of US Treasuries, and a slowdown in demand for dollars China: BOP: Current Account Balance as a Percentage of GDP %
12
12
10
10
8
8
6
6
4
4
2
2
0
99 00 01 02 03 04 05 06 Source: State Administration of Foreign Exchange/Haver Analytics
07
08
0
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The expansion of Chinese domestic demand benefits NJA-ex China. NJA export share to China tripled over the period 19982009, jumping to 15.4% in 2009 from 4.8% in 1998 NJA Exports to ROW ($mln, LHS)
NJA Exports to China ($Mln, LHS)
Share of Exports to China (%, RHS)
15.0
1,415,000 1,215,000
13.0
1,015,000
11.0
815,000
9.0
615,000 7.0
415,000
5.0
215,000 15,000
3.0 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009
Note: 2009 statistics cover the first 10 months of the year Sources: Datastream
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A shift in trade flows should lead to FX reserve diversification. To date, upward pressures on Asian currencies against the USD implies intervention, thereby limiting the decline of the USD.
1500 1400
52
India Rupee-USD (RHS) Thai Baht-USD (RHS) Korea Won-USD (LHS)
48
1300
44
1200
40
1100
36
1000
32
900
06 07 Sources: BOK, BoT, RBI /Haver
08
09
28
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Near-term positive Euro factors
• Global FX diversification away from the USD; • Global liquidity; • Return to risk appetite; • The timing of the ECB monetary policy exit.
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EM countries, whose currencies are under upward pressure, incur FX reserves accumulation that is set to continue Intl Liquidity: EM Foreign Exchange (NSA, EOP, Tril.US$) 4.000 3.500 3.000 2.500 2.000 1.500 1.000 0.500
Ja n00 Ju l-0 Ja 0 n0 Ju 1 l-0 Ja 1 n02 Ju l-0 Ja 2 n03 Ju l-0 Ja 3 n04 Ju l-0 Ja 4 n05 Ju l-0 Ja 5 n0 Ju 6 l-0 Ja 6 n07 Ju l-0 Ja 7 n08 Ju l-0 Ja 8 n09 Ju l-0 9
0.000
Sources: Bloomberg Financial Markets/Haver Analytics/
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‌ which is linked to the rise in global liquidity and risk appetite Quantitative Liquidity Measures (percent of G3 GDP) Base Money Plus Reserves
Reserves
Base Money
12 10 8 6 4 2 0 2000Q1 2001Q1 2002Q1 2003Q1 2004Q1 2005Q1 2006Q1 2007Q1 2008Q1 2009Q1 -2
Sources: IMF/ Eurostat/Haver Analytics
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Synchronized growth brings a return to risk appetite VIX and PMIs Global PMI (LHS)
VIX (Inv. Scale- RHS)
60.00
10.00 9.00
55.00 8.00 50.00
7.00 6.00
45.00 5.00 40.00
4.00 3.00
35.00 2.00 30.00 Jan-06 May-06Sep-06 Jan-07 May-07Sep-07 Jan-08 May-08Sep-08 Jan-09 May-09Sep-09
1.00
Source: WSJ; Markit/Haver Analytics
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‌ A positive for the Euro US$/EUR
VIX (Inv. Scale RHS)
1.5800
10.00 9.00
1.5300 8.00 1.4800 1.4300 1.3800 1.3300
7.00 6.00 5.00 4.00 3.00
1.2300
2.00
1.1800
1.00
Ja n: 20 06 M ay :2 00 6 S ep :2 00 6 Ja n: 20 07 M ay :2 00 7 S ep :2 00 7 Ja n: 20 08 M ay :2 00 8 S ep :2 00 8 Ja n: 20 09 M ay :2 00 9 S ep :2 00 9
1.2800
Source: WSJ; Markit/Haver Analytics
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Foreign appetite for US assets has slowed Net foreign purchases of US assets, 12-monthmovv12m<LT001GN> moving average, $ Mil. movv12m<LT001KN> movv12m<LT001MN> movv12m<LT001PN> 100000 80000
100000
Net Foreign Purchase of US Fedral Agencies Net foreign Purchase of US Stocks Net Foreign Purchase of US Treasurys Total
80000
60000
60000
40000
40000
20000
20000
0
0
-20000
-20000 99 00 01 02 03 04 05 06 Sources: TREASURY, TREASURY, TREASURY, TREAS /Haver
07
08
09
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European appetite for US assets has slowed the most Net European (including the UK) purchases of US assets, 12-month moving average, $ Mil.
Europe: Net Fgn Transactions of Long-Term Securities 12-month MovingAverage
Mil.$
45000
45000
37500
37500
30000
30000
22500
22500
15000
15000
7500
7500 00 01 02 03 04 05 Source: Department of Treasury /Haver Analytics
06
07
08
09
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Will the ECB exit QE ahead of the Fed? We believe so, and it should lead to a gradual widening pressure on Europe-US yield spreads UK Japan US Euro
BOE
6
6
5
5
4
4
3
3
2
2
1
1
0
0 07 08 Sources: BoE, BoJ, FRB, ECB /Haver
09
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Near-term negative Euro Factors
• Euro area growth differentials with the US; • Euro area needs rebalancing of growth; • Perceived Sovereign Risk fears.
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Growth differentials between the US and the Euro area favor the USD, replacing the risk aversion/USD relationship US Real Gross Domestic Product (SAAR, Bil.Chn.2005$) Change - Annual Rate
%
Euro area Real Gross Domestic Product (Mil.Chn.00.Euros) Change Y/Y
%
7.00%
4
6.00% 5.00%
3
4.00%
2
3.00%
1
2.00%
0 1.00%
1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 -1
0.00% 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 -1.00%
-2
-2.00%
-3
-3.00%
-4
Note: Aladdin projections in Red Sources: Bureau of Economic Analysis/Statistical Office of the European Communities/Haver Analytics
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Collapse in growth in smaller countries GDP year-on-year % change
6
Euro Area Portugal Spain
4
6
12
Euro Area Greece Ireland
4 8
2
2
0
0
-2
-2
-4 -6
01
12
8
4
4
0
0
-4
-4
-4
-6 02 03 04 05 06 07 08 09 10 11 Sources: Statistical Office of the European Communities /Haver Analytics
-8
01
-8 02 03 04 05 06 07 08 09 10 11 Sources: Statistical Office of the European Communities /Haver Analytics
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Loss of competitivenessâ&#x20AC;Ś Business Sector: Unit Labor Cost
% Change - Year to Year
SA, 1992=100
EA 16: Unit Labor Costs
% Change - Year to Year 6
SA, 2000=100 6
US Euro Area
4
4
2
2
0
0
-2
-2
-4
99 00 01 02 Sources: BLS, ECB /Haver
03
04
05
06
07
08
09
-4
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…And deterioration in the Euro area fiscal outlook… Euro area General Government Balance-to-GDP 2008
2009 (est.)
2010 (f)
5
0 BE
DE
IE
GR
ES
FR
IT
CY
LU
MT
NL
AT
PT
SI
SK
FI
-5
-10
-15
Sources: OECD/Haver Analytics
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â&#x20AC;Ś Have led to sovereign fears, a negative for the Euro Greece: 10-Year Government Bond Yield %
Germany: 10-Year Government Bond Yield %
6.00
6.00
Greece Germany
5.25
5.25
4.50
4.50
3.75
3.75
3.00
3.00
2.25
2.25 02 03 04 05 Sources: Financial Times /Haver Analytics
06
07
08
09
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The fiscal situation has deteriorated in the US as well, dampening the negative effect on the Euro/USD Budget deficits (-)/surpluses (+) by fiscal year (as a percentage of gross domestic product)
2.0
20 10 (f)
20 08
20 06
20 04
20 02
20 00
19 98
19 96
19 94
-2.0
19 92
19 90
0.0
-4.0 -6.0 -8.0 -10.0 -12.0 Source: Congressional Budget Office
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â&#x20AC;Ś With the accumulation of debt at both the Federal Federal Government: Liabilities: Credit Market Instruments SA, Bil$
8000
8000
7000
7000
6000
6000
5000
5000
4000
4000
3000
03 04 05 06 Source: Federal Reserve Board /Haver Analytics
07
08
09
3000
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â&#x20AC;Ś And State and Local Government Levels State & Local Govt: Liabilities: Credit Market Instruments SA, Bil$
2400
2400
2200
2200
2000
2000
1800
1800
1600
1600
1400
03 04 05 06 Source: Federal Reserve Board /Haver Analytics
07
08
09
1400
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Historical Perspective
â&#x20AC;˘ The success story
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Euro declines rapidly against the USD, then rebounds strongly USD/EUR 1.6 From 1999-2002 the Euro was trading in electronic markets and the FX market
1.5 1.4 1.3 1.2
Jan-09
Jan-08
Jan-07
Jan-06
Jan-05
Jan-03
Jan-02
Jan-01
Jan-00
Jan-99
After 2002 the Euro was fully deployed and national currencies were withdrawn from circulation
Jan-98
Jan-97
Jan-96
Jan-95
Jan-94
0.8
Jan-91
0.9
Jan-93
1
Jan-92
The European Currency Unit (ECU), a theoretical "basket" currency, is used as a proxy for the Euro when calculating the USD/EUR exchange rate, pre-1999
Jan-04
1.1
Sources: Bloomberg/Cumberland Advisors
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The Euroâ&#x20AC;&#x2122;s success measured by its rapid expansion: After ten years, 11 became 16 1999
2001 - 2009
2011 - 2015
Original M e m be r Countrie s Late r Entrie s
Le gally Oblige d to Join in Future
Austria Belgium Finland France Germany Ireland Italy Luxembourg Netherlands Portugal Spain
Estonia (2011) Lithuania (20 11) Latv ia (2012) Poland (2013) Czech. Republic (2013) Hungary (2013) Bulgaria (2015) Romania (2015)
Greece (2001) Slov enia (2007) Cy prus (2008) Malta (2008) Slov akia (2009)
Sources: The Euro Area, European Central Bank, ww w.ecb.int/euro/intro/html/map.en.html; Where Eastern Europeans Stand on Euro Adoption, Thompson Financial, www.forbes.com/feeds/afx/2009/01/22/afx5951139.html; January 2009 Reuters poll of analysts on euro adoption dates
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International debt issued in Euros and USD is roughly equal Amounts outstanding of international bonds and notes, by type, sector and currency (in billions of US dollars) 14000 Euro
12000
US dollar
USD billions
10000 8000 6000 4000 2000 0 1993
1995
1997
1999
2001
2003
2005
2007
Sources: BIS Quarterly Review: 'June 2009
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Global cash outstanding in Euros Is Greater than in USD 1090 990 Euro Circulation in USD 890
USD Circulation
US Dollar
790 690 590 490 390 290 190 Jan-02
Jan-03
Jan-04
Jan-05
Jan-06
Jan-07
Jan-08
Jan-09
Note: Euro area (changing composition) - Net Circulation - number of banknotes/coins in circulation (for banknotes it has to be calculated, and equals created notes less destroyed notes less stocks of the NCB) - Banknotes - All denominations - 1st design Stock - denominated in Euro. Sources: Federal Reserve Bank of St. Louis, European Central Bank, and Cumberland Advisors
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