USD: Vicious Circle David Woo Head of Global FX Strategy, Barclays Capital
America is running both expansionary monetary and loose fiscal policies 15 Real Fed Funds rate
Budget balance as a share of GDP
percent
10
5
0
-5
2
Mar-07
Mar-05
Mar-03
Mar-01
Mar-99
Mar-97
Mar-95
Mar-93
Mar-91
Mar-89
Mar-87
Mar-85
Mar-83
Mar-81
Mar-79
Mar-77
Mar-75
Mar-73
-10
Periods of such policy stance were always characterized by a weak USD periods of negative real Fed Funds rate and budget balance<-3% of GDP real t rade-weight ed USD index against major currencies 140 130 120 110 100 90 80
3
Mar-07
Mar-05
Mar-03
Mar-01
Mar-99
Mar-97
Mar-95
Mar-93
Mar-91
Mar-89
Mar-87
Mar-85
Mar-83
Mar-81
Mar-79
Mar-77
Mar-75
Mar-73
70
Eurozone exporters may be suffering from the strengthening euroâ&#x20AC;Ś. US export to eurozone (USD, 6m/ 6m, SA, AR)
40
eurozone export to US (EUR, 6m/ 6m, SA, AR) 30
percent
20 10 0 -10 -20
4
Jan-08
Jan-07
Jan-06
Jan-05
Jan-04
Jan-03
Jan-02
Jan-01
Jan-00
Jan-99
Jan-98
Jan-97
Jan-96
Jan-95
-30
…but euro’s rise against the USD has been supported by evolving relative fundamentals 1.6
real eur/ usd
2.5
real int diff
1.6
real eur/ usd
3
fiscal diff
2
1.5
1.5
2
1.5 1.4 1 1.3 1.2
0.5
1.3
0
1.2
-0.5
1.1
1.4 1
0
1.1
-1
-1
5
Q1-08
Q1-07
Q1-06
Q1-05
-3 Q1-04
0.8 Q1-03
Q1-08
Q2-07
Q3-06
Q4-05
Q1-05
Q2-04
Q3-03
Q4-02
Q1-02
Q2-01
Q3-00
Q4-99
-2.5 Q1-99
0.8
Q1-02
-2
-2
0.9
Q1-01
0.9
1
Q1-00
-1.5
Q1-99
1
EUR/USD uptrend and oil uptrend are becoming mutually reinforcing EUR/ USD (left axis)
1.62
Brent crude 6-month futures (right axis)
120 110
40
1.57 100
1.47
90
1.42 80
1.37 1.32
70
20 USD per barrel
1.52
52 week rolling correlation between EUR/ USD and Brent futures
60
per cent
1.67
0
-20 -40
1.27
6
28/ 12/ 2007
28/ 12/ 2006
28/ 12/ 2005
28/ 12/ 2004
28/ 12/ 2003
28/ 12/ 2002
28/ 12/ 2001
28/ 12/ 2000
28/ 12/ 1999
2/ 4/ 08
2/ 1/ 08
2/ 10/ 07
2/ 7/ 07
2/ 4/ 07
2/ 1/ 07
2/ 10/ 06
2/ 7/ 06
2/ 4/ 06
50 2/ 1/ 06
1.17
-60 28/ 12/ 1998
60
1.22
USDâ&#x20AC;&#x2122;s vicious circle
7
This is the first time in twenty years that Eurozone inflation is rising while the Fed is cutting rates 5
Fed rate cut cycle
eurozone inflation (y/ y)
4.5 4 3.5 3 2.5 2 1.5 1 0.5
8
Jan-08
Jan-07
Jan-06
Jan-05
Jan-04
Jan-03
Jan-02
Jan-01
Jan-00
Jan-99
Jan-98
Jan-97
Jan-96
Jan-95
Jan-94
Jan-93
Jan-92
0
Increase in oil prices has prevented an improvement of US trade deficit, despite US slowdown and USD weakness Breakdown of US trade balance
10 0
-20 -30 -40 -50 -60
Industrial supplies, excl petroleum goods
Consumer goods
Auto and parts
Food, feeds, and beverages
Other goods Jan-08
Jan-07
Jan-06
Jan-05
Jan-04
Jan-03
Jan-02
Jan-01
Jan-00
Jan-99
Jan-98
Jan-97
Jan-96
Jan-95
Jan-94
Jan-93
Jan-90
Jan-92
petroleum goods
-70
9
Capital goods
Jan-91
bln of USD
-10
Preconditions for a sustainable USD recovery • Sharp slowdown in China: such an event would dampen global marginal demand for oil, and, by triggering a correction of oil prices, break the vicious circle. • Big correction of the US equity market: there are no signs of any decoupling of ROW from US financial markets. Synchronized equity sell-off would be followed by synchronized global economic slowdown • Visible negative knock-on effect of USD decline on US asset prices: If further USD decline were to reduce appetite for US assets and drive down US asset prices, then US policy makers may be forced to change their ways 10
But if China is slowing at all, it is slowing very gradually 100
sales of vehicles (y/ y)
80
China's crude oil imports (y/ y)
80
sales of vehicles (y/ y, 3-m MA)
3-m MA
60
60 40 percent
percent
40
20
20 0
0
-20 -20
-40
11
Jan-07
Jan-06
Jan-05
Jan-04
Jan-03
Jan-02
Jan-01
-60 Jan-00
Jan-08
Jan-07
Jan-06
Jan-05
Jan-04
Jan-03
Jan-02
Jan-01
Jan-00
Jan-99
Jan-98
-40
Meanwhile, global oil inventory remains tight 360
US crude inventory
240
US gasoline stock
350 2008
230
340 330
2007
2006
2005
220
320 210
310 300
200
290 2008
2007
2006
2005
190
280 180
270 1
12
7
13
19
25 31 week
37
43
49
1
5
9 13 17 21 25 29 33 37 41 45 49 week
Bond vigilantes are suppressed by inelastic demand from reserve managers 80
140
160
Spread between 1 year IRS 9 year forward and 1 year IRS 4 year forward
140
Foreign official sector accumulation of USD assets (4Q-MA, left axis) 120
Foreign official sector accumulation of USD assets/ Current account (4Q-MA, right axis)
120 100
60 50
60 40
80
percent
80
bln of USD
basis points
100
70
40 60
30
20 40
20
0
13
Q3-07
Q4-06
Q1-06
Q2-05
Q3-04
Q4-03
Q1-03
0 Q2-02
0 Q3-01
10
Q4-00
20
Q1-00
01/ 05/ 2008
01/ 01/ 2008
01/ 09/ 2007
01/ 05/ 2007
01/ 01/ 2007
01/ 09/ 2006
01/ 05/ 2006
01/ 01/ 2006
01/ 09/ 2005
01/ 05/ 2005
01/ 01/ 2005
01/ 09/ 2004
01/ 05/ 2004
01/ 01/ 2004
-20
Positioning and sentiment indicate scope for further USD rally in the short-term is limited
14
Disclaimer This presentation has been prepared by Barclays Capital – the investment banking division of Barclays Bank PLC and its affiliates worldwide (‘Barclays Capital’). This publication is provided to you for information purposes, any pricing in this report is indicative and is not intended as an offer or solicitation for the purchase or sale of any financial instrument. The information contained herein has been obtained from sources believed to be reliable but Barclays Capital does not represent or warrant that it is accurate and complete. The views reflected herein are those of Barclays Capital and are subject to change without notice. Barclays Capital and its respective officers, directors, partners and employees, including persons involved in the preparation or issuance of this document, may from time to time act as manager, comanager or underwriter of a public offering or otherwise deal in, hold or act as market-makers or advisors, brokers or commercial and/or investment bankers in relation to the securities or related derivatives which are the subject of this report. Neither Barclays Capital, nor any officer or employee thereof accepts any liability whatsoever for any direct or consequential loss arising from any use of this publication or its contents. Any securities recommendations made herein may not be suitable for all investors. Past performance is no guarantee of future returns. Any modelling or back-testing data contained in this document is not intended to be a statement as to future performance. Investors should seek their own advice as to the suitability of any investments described herein for their own financial or tax circumstances. This communication is being made available in the UK and Europe to persons who are investment professionals as that term is defined in Article 19 of the Financial Services and Markets Act 2000 (Financial Promotion Order) 2001. It is directed at persons who have professional experience in matters relating to investments. The investments to which is relates are available only to such persons and will be entered into only with such persons. Barclays Capital – the investment banking division of Barclays Bank PLC, authorised and regulated by the Financial Services Authority (‘FSA’) and member of the London Stock Exchange. Copyright in this report is owned by Barclays Capital (© Barclays Bank PLC, 2005) – no part of this report may be reproduced in any manner without the prior written permission of Barclays Capital. Barclays Bank PLC is registered in England No. 1026167. Registered office 1 Churchill Place, London, E14 5HP.
15