44418460 db-fx-2011

Global

30 November 2010

Exchange Rate Perspectives

10 Lessons From 2010

Deutsche Bank AG/London

All prices are those current at the end of the previous trading session unless otherwise indicated. Prices are sourced from local exchanges via Reuters, Bloomberg and other vendors. Data is sourced from Deutsche Bank and subject companies. Deutsche Bank does and seeks to do business with companies covered in its research reports. Thus, investors should be aware that the firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their investment decision. DISCLOSURES AND ANALYST CERTIFICATIONS ARE LOCATED IN APPENDIX 1. MICA(P) 007/05/2010

Special Report

Research Team

Bilal Hafeez Strategist (+44) 20 754-70354 [email protected]

Alan Ruskin Macro strategist (+1) 212 250-8646 [email protected]

Henrik Gullberg Strategist (+44) 20 754-59847 [email protected]

George Saravelos Strategist (+44) 20 754-79118 [email protected]

Mirza Baig Strategist (+65) 64235930 [email protected]

Dennis Tan Strategist (+65) 6 423-5347 [email protected]

John Horner Strategist (+61) 2 8258 2130 [email protected]

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30 November 2010 Exchange Rate Perspectives


Table of Contents

Currency Forecasts............................................................................................................................................................ 3

FX Views ............................................................................................................................................................................ 5

The Big Picture:

12 Lessons From 2010 ...................................................................................................................................10

Monitors:

G G10 FX Valuation Monitor: Lines in the sand .........................................................................................26

Capital Flows and Basic Balances................................................................................................................29

Commodity Price and Currency Monitor. ...................................................................................................39

U.S. Trade Balance Monitor..........................................................................................................................44

Central Bank Reserves Currency Composition Monitor ............................................................................50



Currency Forecasts

Industrialized Countries Spot 3M 6M 12M

Currency RateUS $ Exchange RatesU.S. DB US$ Index 68 66 64 69

- - - -

Euro US$/Euro 1.31 1.38 1.45 1.30(Fwd. Rates) - 1.31 1.31 1.31

Japan Yen/US$ 84 80 75 78(Fwd. Rates) - 84 84 84

U.K. US$/£ 1.56 1.59 1.58 1.53(Fwd. Rates) - 1.55 1.55 1.55

Canada C$/US$ 1.02 1.03 1.05 1.10(Fwd. Rates) - 1.02 1.03 1.03

Australia US$/A$ 0.96 0.96 0.95 0.85(Fwd. Rates) - 0.95 0.94 0.92

N.Z. US$/NZ$ 0.75 0.75 0.72 0.67(Fwd. Rates) - 0.74 0.73 0.72

Switzerland Sfr/US$ 1.00 0.98 0.93 1.08(Fwd. Rates) - 1.00 1.00 1.00

Euro Cross RatesJapan Yen/Euro 110 110 109 101

(Fwd. Rates) - 110 110 109

U.K. £/Euro 0.84 0.87 0.92 0.85(Fwd. Rates) - 0.84 0.84 0.84

Switzerland Sfr/Euro 1.31 1.35 1.35 1.40(Fwd. Rates) - 1.31 1.31 1.30

Norway Nkr/Euro 8.11 8.00 7.80 7.60(Fwd. Rates) - 8.14 8.17 8.23

Sweden Skr/Euro 9.18 9.00 8.50 8.20(Fwd. Rates) - 9.20 10.17 10.16

Source: Datastream, Reuters, Bloomberg Finance LP, DB forecasts

Latin America Spot 3M 6M 12M

Currency RateArgentina ARS/USD 3.93 4.04 4.16 4.41

(Fwd. Rates) - 4.02 4.15 4.42

Brazil BRL/USD 1.72 1.65 1.70 1.75(Fwd. Rates) - 1.76 1.79 1.87

Chile CLP/USD 487 495 500 505(Fwd. Rates) - 491 495 502

Colombia COP/USD 1,922 1,810 1,790 1,780(Fwd. Rates) - 1,920 1,923 1,941

Mexico MXN/USD 12.5 12.6 12.7 12.8(Fwd. Rates) - 12.6 12.6 12.6

Venezuela VEF/USD 4.29 4.30 5.50 5.50(Fwd. Rates) - - - -


Asia Spot 3M 6M 12M

Currency RateChina CNY/USD 6.66 6.57 6.49 6.35

(Fwd. Rates) - 6.65 6.61 6.54

Hong Kong HKD/USD 7.77 7.80 7.80 7.80(Fwd. Rates) - 7.76 7.76 7.76

India INR/USD 45.9 43.6 43.0 42.4(Fwd. Rates) - 46.7 47.3 48.3

Indonesia IDR/USD 9,028 8,880 8,820 8,700(Fwd. Rates) - 9,091 9,209 9,403

Malaysia MYR/USD 3.16 3.05 3.02 2.95(Fwd. Rates) - 3.18 3.18 3.18

Philippines PHP/USD 44.31 42.0 42.0 41.5(Fwd. Rates) - 44.3 44.3 44.3

Singapore SGD/USD 1.32 1.27 1.26 1.23(Fwd. Rates) - 1.32 1.32 1.32

South Korea KRW/USD 1,165 1,110 1,070 1,050(Fwd. Rates) - 1,170 1,170 1,170

Taiwan TWD/USD 30.4 29.8 29.5 29.3(Fwd. Rates) - 30.3 30.1 29.8

Thailand THB/USD 30.3 29.5 29.3 29.0(Fwd. Rates) - 30.3 30.3 30.3


Emerging Europe

Spot 3M 6M 12MCurrency Rate

Czech Rep. Koruna/Euro 24.9 25.2 25.0 24.5(Fwd. Rates) - 24.9 24.9 24.9Koruna/US$ 19.0 18.7 18.5 18.3(Fwd. Rates) - 19.1 19.1 19.1

Hungary Forint/Euro 284 275 275 275(Fwd. Rates) - 287 290 295Forint/US$ 217 190 192 206(Fwd. Rates) - 219 221 225

Poland Zloty/Euro 4.11 3.87 3.82 3.72(Fwd. Rates) - 4.13 4.15 4.20Zloty/US$ 3.13 2.67 2.69 2.82(Fwd. Rates) - 3.15 3.17 3.21

Russia Ruble/US$ 31.36 30.3 29.8 28.7(Fwd. Rates) - 31.7 32.0 32.7

Turkey Lira/US$ * 1.51 1.45 1.55 1.60(Fwd. Rates) - 1.53 1.55 1.59

South Africa Rand/US$ 7.16 7.05 7.15 7.51(Fwd. Rates) - 7.26 7.35 7.54




G10 FX Forecasts: End of Quarter

Latest 2010 2012 201329 Nov, 10 end -Q4 end-Q1 end-Q4 end-Q4 end-Q4

USD-crosses

EUR/USD 1.31 1.38 1.45 1.30 1.25 1.20

USD/JPY 84 80 75 78 90 90

GBP/USD 1.56 1.59 1.58 1.53 1.49 1.45

USD/CHF 1.00 0.98 0.93 1.08 1.14 1.21

AUD/USD 0.96 0.96 0.95 0.85 0.73 0.70

NZD/USD 0.75 0.75 0.72 0.67 0.61 0.58

USD/CAD 1.02 1.03 1.05 1.10 1.10 1.18

USD/SEK 7.00 6.52 5.86 6.31 6.48 6.67

USD/NOK 6.19 5.65 5.31 5.85 6.00 6.25

EUR-crosses

EUR/JPY 110 110 109 101 113 108

EUR/GBP 0.84 0.87 0.92 0.85 0.84 0.83

EUR/CHF 1.31 1.35 1.35 1.40 1.42 1.45

EUR/SEK 9.18 9.00 8.50 8.20 8.10 8.00

EUR/NOK 8.11 8.00 7.80 7.60 7.50 7.50

2011

Source: Deutsche Bank



FX Views

G10 Views

Euro

The single currency has been weighed by continuous volatility in the Eurozone peripheral bond markets, reversing all the gains seen since the market began pricing quantitative easing from the Federal Reserve. With Ireland now having resorted to IMF/EU financing and European policymakers providing greater clarity on the European Stability Mechanism after 2013, our base case remains that peripheral worries will subside, allowing EUR/USD to regain some footing on the back of a supportive rate differential environment and aggregate fiscal fundamentals that exceed those of the US. The risks to our constructive EUR/USD view have clearly risen since the publication of our previous round of forecasts, and we will be re-evaluating our view more thoroughly in the last Exchange Rate Perspectives publication to be released before year-end.

Japan

We maintain our bullish yen stance. A back-up in US yields did occur over the past month, but has since stalled. Indeed, rate differentials now clearly point to a stronger yen. Japanese stock markets have also moved to new highs for the second half of the year. This may result in less Japanese buying of foreign bonds, which appears to be occurring and possibly more foreign interest in Japanese stocks, which is only happening very slowly so far.

United Kingdom

The autumn rally in EUR/GBP has been reversed helped by peripheral European worries and as UK data has been stronger than expected, reversing quantitative easing expectations from the Bank of England. On a head-to-head comparison with other G10 currencies sterling does not fare well, so we view next year's risks as skewed towards further sterling weakness before the cross eventually returns to levels more compatible with long-term fair value.

Canada

There has been a notable improvement in the US data in recent weeks, especially labour market indicators such as jobless claims. History would suggest the currency this should be most positive for is CAD (not surprisingly given over 70% of Canada's exports go to the US). For the near-term this should offset downside risks from concerns over policy tightening in China and resulting weakness seen in key commodity prices.

Australia and New Zealand

With the multi-month uptrend in many key commodity prices having broken down the near-term outlook for NZD, and especially AUD, has materially deteriorated in recent weeks. �We also see AUD as particularly vulnerable to concerns over policy tightening in China given Australia’s strong trade links with China and the common use of AUD as a “China play”. In contrast, the better numbers in the US in recent weeks, especially the improvement in the jobless claims data, should see CAD outperform NZD and especially AUD.

Switzerland

Our forecasts reflect a neutral view on EUR/CHF in the near-term. On the negative side, continued Eurozone peripheral worries and the strong performance of the Swiss economy will mean that the cross will struggle to rally beyond the highs seen earlier this summer. On the positive side, persistent strength below 1.30 is unlikely as it will likely delay any tightening from the Swiss National Bank and as valuation constraints become more of a headwind. Our long-term forecasts foresee EUR/CHF gradually returning to long-term fair value, aided by an easing of peripheral worries and a normalization of European-Swiss interest rate differentials which for now continue to remain at historical lows.



Norway

Norges Bank rhetoric/projections remain committed to maintaining policy stable over the near-term. This suggests there will be limited rate support for the NOK over the next couple of months, leaving the Norwegian unit at the vagaries of swings in risk appetite and oil. Though still constructive in terms of the risk outlook, the approaching year-end, ongoing peripheral concerns and Chinese policy tightening represent an initial barrier to a more significant risk rally, in turn limiting the upside in the NOK. Nonetheless, positioning is light, and there are prospects of favourable M&A flows, which should be sufficient to maintain a positive trajectory in the NOK. We move our year-end target up to 8.00 from 7.80 previously, but maintain end-Q1 and end-Q4 2011 forecasts at 7.70 and 7.60 respectively.

Sweden

Like the NOK, near-term gains in the SEK are undermined by a more fragile risk environment. However, the Riksbank remains committed to a gradual normalisation of policy going forward, in response to strong domestic growth dynamics and a desire to lean against rising property prices and further household indebtedness. External surpluses and strong fiscal finances (debt-to-GDP projected to fall to 21.1% in 2014, from 34.6% currently) add to the longer-term appeal of the SEK, with the re-elected centre-right government also committed to continued privatisations going forward, albeit dependent on market conditions. We continue to forecast a sustained appreciation in the SEK, and stick to our 9.00 end of year forecast for EUR/SEK, followed by 8.50 by the end of Q1 and 8.20 at the end of next year.

Asia Views

China

Economic activity and inflation have been stronger than expected, while policy tightening has also turned more aggressive in the past month. We expect PBoC to introduce further liquidity tightening measures as well as interest rate hikes over the next six months. Chinese authorities typically tighten macro-economic policies using four basic tools, broadly in this sequence: First, they use administrative hikes, second they use liquidity tightening measures (RRR hikes, aggressive sterilization), third they turn to interest rates, and finally they allow a faster currency appreciation. In that context, we think China may be willing to let the currency appreciate more readily in coming months, particularly vs. its NEER basket of currencies.

India

India is running a current account deficit, which, net of FDI, requires financing of roughly USD80-100m per day from portfolio and debt capital inflows. Not surprisingly, USD/INR is trading as a high beta play on global risk-sentiment. The positive factors for INR are: strong domestic growth (8.9% in 2010), and relatively high inflation that will likely force RBI to lift rates further early next year. In addition, the government has an ambitious privatization plan in place which will bring roughly USD9bn worth of deals to market in Q1 next year. There remains scope for further inflows to Indian corporate bonds. Finally, with offshore borrowing costs for Indian much lower than onshore, there is scope for External Commercial Borrowing to accelerate in coming months. On the negative side, rising oil prices could put a dent in India's Balance of Payments. And an ongoing political scandal that has gridlocked parliament may stall the government's reform agenda, including the privatization pipeline.

Indonesia

Indonesia is enjoying strong growth (6% in 2010), supported by robust trade, credit growth and strong investor/consumer confidence. However the asset markets' sharp rise and capital inflows have become key issues. Specifically, with bond and equity ownership by foreigners at an all time high, the main risk to the currency is of an externally driven rise in global risk-aversion which could trigger substantial capital outflows from local markets. However given the largely real-money nature of the investor base, we think most of the recent inflows will tend to be sticky and will not reverse in a disorderly manner. Bank Indonesia's comfort zone for USD/IDR is between 8900-9300 - and we would look to sell USD/IDR in the 9100-9200 range.



Korea

Geopolitical concerns, and global risk-aversion have weighed on the won in recent days. However Korea's strong current account surplus (USD35bn in 2010), cheap valuations and central bank tightening stance still argue in favor of a stronger won. Bank of Korea is likely to cap USD/KRW at 1200, but will also try to prevent the pair from falling below 1100 in the near-term. We would also be wary of a USD funding squeeze over the next couple of months coming from either an escalation of Europe's sovereign crisis, or Bank of Korea not fully rolling over roughly USD20bn worth of FX swaps that are maturing over the next 1-2 months.

Malaysia

Malaysia is running a strong current account surplus (12.2% of GDP). The export sector is well diversified between industrial products (chiefly electronics) and commodities. Partly thanks to the government's reform initiatives, the local stock market scene has also livened up of late, with 2010 seeing record IPOs, and 2011 likely to continue on that trajectory. Domestic fixed income also continues to receive inflows from EM real money investors. Recent government comments have also played down the prospects of imposing capital controls. Thus, a fundamentally bullish view on MYR is warranted in our view. A break of the key support level of 3.08 in USD/MYR may set the stage for another trend lower in the cross.

Philippines

Steady growth in remittances and outsourcing income underpins the Balance of Payments. However, the central bank has engineered a sharp collapse in FX yields by not rolling over maturing FX swaps, which has made the currency less attractive from a carry perspective. We look to re-establish fresh PHP longs when money markets normalize. Meanwhile the economy is in a sweet spot, characterized by strong inflation and low growth. But there are key challenges ahead, particularly related to the potential impact of rising food prices, and the government's commitment to a fiscal reform agenda.

Singapore

The Singapore dollar is supported by several factors, including strong economic growth momentum (+16% YoY in 2010 - though this is likely to slow to a more modest trajectory next year), current account surplus (17% of GDP), perceived safe haven status of the currency, AAA sovereign rating and strong condition of public finances. Moreover, MAS' tightening bias of an estimated 3% per annum vs. NEER is not priced in its forward curve. Thus we would be keen to buy SGD NEER on dips.

Taiwan

CBC has become less aggressive in its FX intervention lately, and has allowed a modest appreciation of the exchange rate. And given its status as a funding currency for carry trades, TWD may benefit - or at least outperform - during the current conditions of risk-aversion. Fundamentally, a large current account surplus, rapid reserve accumulation, and cheap valuations argue strongly in favor of a stronger exchange rate.

Thailand

Bank of Thailand continues to guide THB in line with movements in regional currencies. Capital inflows have weakened after the government imposed a 15% withholding tax on investment in government bonds, though history suggests these controls will not reverse the trajectory of capital flows. That said, the government has made it clear that if THB appreciates faster than its regional peers, then they would be willing to impose more restrictions on capital inflows, including measures like Tobin taxes.



EMEA Views

Czech Republic

As with the rest of CE-3, the Czech economy is benefitting from a strong German economy, but is less vulnerable to ongoing peripheral concerns than its neighbours, primarily due to a more conservative fiscal policy stance. While we continue to see a very gradual trend appreciation vs the EUR, we also anticipate underperformance relative to the PLN, reflecting more moderate growth dynamics in the Czech economy.

Hungary

Remains the most risk sensitive CE-3 currency, with the government's fiscal plans for the next few years underpinning adding to the risk bias. Political pressure on the central bank to raise its inflation target is also not helping the HUF, and although we continue to like valuation, cheap is currently not enough to continue to call for HUF appreciation.

Poland

Headline inflation picking up at the same time as core CPI is remaining subdued have led to a highly divided NBP board, split largely down the middle between hawks and doves. However, this will only impact on the timing of the Bank's tightening campaign, with strong growth dynamics and ongoing state privatisations adding to prospects of higher rates in Q1 to provide support for the PLN.

Russia

The underperformance over the past few months has materialised against a backdrop of relatively strong domestic growth dynamics, budget outperformance and more recently also intervention (verbally and directly) in support of the RUB. Despite this the Russian unit has struggled, in turn causing the CBR to request several commercial banks to disclose information about their FX operations in attempt to identify the source capital outflows. Regardless of whether the Bank's search for speculators is successful, the greater problem has been the lack of inflows. This is in stark contrast with the rest of the EM world, where authorities are trying to stem the tide of liquidity flowing in. While part of the explanation include factors such as minimal transparency and a highly politicised legal system, the lack of investable assets is key. However, the more detailed privatisation plan and Russia's accession to the WTO (possibly in 2011) should translate into a better investment climate and a stronger RUB.

Turkey

Strong domestic growth and rising inflation expectations are pressurising the CBT into a number of different measures in an attempt to tighten domestic liquidity. Meanwhile the Bank tries to avoid hiking its key policy rate in order to avoid attracting further capital inflows. In our view the CBT have two options, either tighten policy and accept nominal appreciation, or maintain policy at levels which are too expansionary for the economy, in turn generating an overheated domestic economy and real appreciation. A scenario in between the two is the more likely, ie that the CBT will fall behind the curve, but will have to start tighten policy earlier than what is currently signalled. The bottom line, carry will continue to be favourable, and consistent with continued appreciation.

South Africa

Authorities want a weaker currency in response to a moderation in growth and inflation prospects. However, with the capital account to a large extent made up of portfolio inflows, focus is less on controlling capital inflows, and more more on matching inflows with outflows. So far these measures have had a very limited impact, with the ZAR instead responding increasingly to swings in risk appetite. Policy wise focus very much on rate cuts, in contrast to much of the rest of EM, and combined with significant overvaluation, we continue to look for underperformance in the ZAR going forward.



Israel

Trend appreciation (vs USD) has picked up from around 1% per month, to around 1.5% over the past 4-5 months. With reserves accumulation having slowed noticeably, the BoI might also be growing more comfortable with a continued appreciation, in particular with inflation picking up and with the economy projected to run above potential by 2012 (according to the IMF). On balance therefore we continue to see appreciation in ILS, underpinned by a need for continued tightening in response to signs of overheating in some segments of the economy.

LatAm Views

Brazil

The economy has been growing strongly (7.6% expected this year) on the back of solid domestic demand. Good monetary policy management has helped to control inflation and maintained large interest rate differentials. These factors have helped to attract sizable inflows, exerting considerable appreciation pressures on the BRL. The government reacted by increasing tax on fixed-income inflows and FX derivatives. While further exchange controls or quantitative constraints cannot be ruled out, we continue to favor a short USD/BRL position. We consider that those risks are more than compensated with attractive carry, which could likely increase if inflationary pressures materialize.

Chile

Strong domestic demand driven growth (7% YoY in 3Q10) paired with low inflation and high commodity receipts (copper back to pre-crisis peaks and rising) continue to attract inflows. Healthy government and banking institutions also help to reassure investors. The government recently announced measures aimed at broadening the capital account and increasing the competitiveness of the exporting sector, which could have only some mild effects in the long term equilibrium exchange rate but they are innocuous in short-term movements. There is a very low risk of low risk of exchange controls and the Central Bank is strongly against direct FX intervention; it would be the last resort after "verbal" intervention and moderation of monetary policy, but since both have already occurred, intervention cannot be completely ruled out if the currency appreciates considerable from current levels. We maintain a neutral position for the moment but would consider adding a short position if the currency gets closer to 500 due to global factors.

Mexico

Economic growth is still unimpressive (reflecting ties with US) but the sizable output gap helps to contain inflation. Mexico is singled out as one the countries in EM where exchange controls could be practically discarded. Additionally, the Central Bank would reluctantly intervene in the FX market, and only as a response to very strong, temporary, capital flows. This considerations, along with decent carry, makes the MXN relatively more attractive than other EM peers. We continue to be constructive on the MXN, and consider that the recent sell-off (originated in external conditions) offer an opportunity to enter a short USD/MXN position.

Bilal Hafeez London, +44 (20) 754-70354

George Saravelos London, +44 (20) 754-79118

John Horner Sydney, +61 (2) 8258-2130

Henrik Gullberg London, +44 (20) 754-70354

Mirza Baig Singapore, +65 6423-5930

Dennis Tan Singapore, +65 6423-5347

Mauro Roca New York, +1 (212) 250-8609



10 Lessons From 2010 Before writing our outlook for 2011 (we plan to in mid-December), we thought we would take stock of 2010 and draw out the 10 most important lessons we learnt (and two extra lessons we could not keep out):

Know The Herd, But Don't Follow It If Europe Goes Down, So Does EM AUD and JPY Can Rally Together Remember Latvia Inflation Dominos Have Started to Fall Small Perceived High-Beta FX Do the Best: MYR, THB, COP Extreme Positioning Matters Forget G20 Co-ordination, But Don't Under-Estimate Euro-Area Co-ordination Where Was the Fiscal Crisis in the UK and Japan? The True Star of 2010: Mongolia NOK: From Hero to Zero Anti-Climatic Parity Parties

1. Know The Herd, But Don’t Follow It Growth Surprises Were Seen Outside of the US 2010 was going to be the year when we would finally see the consequences of the extraordinary policies implemented by the Fed and others during the credit crunch in late 2008. Would we see a double-dip, hyperinflation or a return to boom? Well, we ended up with almost exactly what consensus was expecting for 2010 at the start of the year. US growth was expected by the Bloomberg survey of economists to be 2.6%for 2010, inflation was expected to be 2% and the unemployment rate was expected to settle at 10%. The actual outcomes (using consensus estimates for data not yet published) were 2.7%, 1.6% and 9.6%. So growth turned out very close to expectations, while inflation was lower, but so was unemployment. The surprise, though, was Fed policy, where easings occurred over 2010, rather than tightenings. In fact, across the developed world, central banks were more dovish than expected.

GDP Surprises Over 2010 C/A Surplus Countries Surprised Most on Growth

-2 -1 0 1 2

NorNZ

GreeceIreland

ItalySpain

USFrance

UKAusEuroCan

PortugalSwitz

GermanySwed

Jpn

GDP Surprises …

-15

-10

-5

0

5

10

15

20

-2 -1 0 1 2

Expe

cted

curr

ent

acco

unt

bala

nce

(% G

DP) f

or 2

010

GDP surprise for 2010

Nor

NZ

Gre

SweSwitz

Ger

Jpn

Source: Deutsche Bank; latest consensus estimates for 2010 GDP growth versus consensus estimates taken at the end of 2009

Source: Deutsche Bank. IMF.

On growth outside of the US (again using consensus estimates for data not yet published), the largest upsides surprises were seen in Japan, which turned out to have growth of over



3% compared to expectations of 1.3%. Large upside surprises were also seen in Sweden and Germany (see first chart). At the other end, both Norway and New Zealand disappointed on growth. Despite the Euro-area bond crisis, Euro-area growth surprised to the upside. Interestingly, growth surprises appeared to follow current account balances, with surplus countries, except Norway, surprising to the upside, and deficit countries surprising the least (see second chart). This could reflect that deficits were a symptom of countries that were still grappling with the unwind of consumption binges from earlier years. In EM, growth surprised to the upside almost across the board. Singapore saw the largest upside surprise (16% versus an expected 6.5%), and there were no downside surprises in any of the major EM economies.

JPY, THB, MYR, ZAR Surprise Winners of 2010 On the currency front, the largest surprise in G10, was the strength in the yen, which was the second strongest G10 currency of the year. This came despite it being expected to be the worst performing currency of 2010 at the start of the year (see third chart). Both AUD and NZD were expected to perform well, but did even better than expectations. The Euro was not expected to do much over 2010, but turned out to be the worst performing currency of the year. Interestingly, the euro range for the year (17%) and the change over the year were both around the average since the inception of the euro in 1999, and this despite the crisis seen in the euro-area.

G10 FX Surprises Over 2010 EM FX Surprises

-10% -5% 0% 5% 10% 15%

Euro

NOK

GBP

SEK

CHF

CAD

NZD

JPY

AUD

Actual changes

Expected changes

-10% -5% 0% 5% 10% 15%

HUFPLNCZKHKDTWDCNYRUBKRWPEN

ILSINRCLPPHPSGDARSTRYBRL

MXNIDR

MYRCOPTHBZAR

Actual change

Expected change

Source: Deutsche Bank. Source: Deutsche Bank. IMF.

Peripheral Vision Needed There a few lessons to be learnt from analyzing consensus expectations. First, the areas of intense focus tend to deliver the smallest surprises. The focus on US and Chinese growth resulted in analysts missing the German and Japanese growth stories. The focus on the euro-area crisis and the euro resulted in an average range year for the euro, but missed the clear yen strengthening trend. In EM, there was a big focus on some of the Asian bellwethers, KRW and INR, yet it was THB and MYR that performed. And yet again, everyone missed the impressive ZAR gains. Second, some of the extreme outcomes contemplated by market participants over the past two years; hyperinflation, double-dip, Euro break-up, have not materialized. Instead, outcomes have been more benign; US growth this year was in line with its 20-year average, inflation has not spiraled out of control and the euro has traded in a normal range since its



inception. So it would appear to us that market participants having failed to anticipate the tail events of Lehmans and the associated credit crunch are now over-anticipating tail events.

Bilal Hafeez London, +44 (0)20 7547 0354 [email protected]

2. If Europe Goes Down, So Does EM

When European peripheral sovereign concerns began to escalate in late 2009, they first looked unlikely to spill over to rest of the world. Greece was on the verge of default, but there was hope that the core would step in and a (weakened) Eurozone would muddle through. Few EM countries (other then CE4) rely on Europe for growth or financing, and thus prospects for their currencies seemed unaffected. Short Euro vs. long EMFX became a popular trade in the macro community.

But by late April, the Greek crisis had spread to Portugal and even the hitherto stable Spanish bond spreads were widening. CE4 currencies came under pressure at this point, though the short EUR vs. Asia and high yielding EMFX trade continued to work.

EM was insulated from Europe… right until the crisis went global


The unravelling occurred in early May when the inter-bank money markets began to seize up. In a mini-run of the post-Lehman panic, USD LIBOR spiked as banks began to hoard liquidity

50

150

250

350

450

550

650

Jan-10 Mar-10 May-10 Jul-10 Sep-10 Nov-10

1.10

1.16

1.22

1.28

1.34

1.40

1.46

PIGS CDS (LHS)

EUR/USD (RHS)

5yr CDS (bps) EUR/USD (inverted)

96

101

106

111

116

121

Jan-10 Mar-10 May-10 Jul-10 Sep-10 Nov-10

ZR+TR+BR funded in EURAsia FX funded in EURCE 4 FX funded in EUR

Jan 2010=100



due to an elevated perception of counterparty risk. Markets were gripped by fears of a systemic failure of the international financial system stemming from a feared collapse of Europe’s government bond markets and banking sector. It was 2008 deja’vu – the financial market equivalent of a “Minsky moment”, when no assets – even the good ones – are spared. Asia, LATAM and the high yielding ZAR and TRY all came under pressure as investors rushed for the exit.

The lesson here is that EM is not safe when European (or G3 for that matter) sovereign concerns escalate into fears of a systemic crisis. Investors should monitor global money markets – which are the plumbing of the financial system – for signs that contagion is spreading.

Mirza Baig Singapore, +65 6423-5930 [email protected]

3. AUD and JPY Can Rally Together

Because AUD/JPY is often considered the G10 currency bellwether for risk appetite, it is usually assumed that the Aussie and Yen historically move in opposite directions. The 2008 crisis left many scars, including the association that the AUD/USD collapse at the same time as a USD/JPY slide lower, was normal. Chalk this down as a popular misconceptions, for over the last 10 years, AUD/USD and USD/JPY have show a strong (-0.65) negative correlation, with the broader USD trend typically dominant, driving both the Aussie and Yen in the same direction. 3m Rolling Correlation of AUD/USD and USD/JPY


The 90 day rolling correlation for AUD/USD vs USD/JPY hit a peak of +0.96 in December 2008, but at the time of writing stands at -0.84. This correlation reflects more than the yen and Aussie being caught in the USD slipstream of late. Firstly, in 2010, Japan has tended to



hedge its portfolio outflows to major markets like the US, given USD/JPY forward rates that are very close to spot. The combination of near zero rates in the US limiting unhedged Japanese C/A recycling (yen positive), in combination with a global recovery (Aussie positive), provided some macro context for both Aussie and Yen going up in 2010. Secondly, there is some belief that at least now that the USD is more popular than the yen as a carry financing vehicle, it is logical that the USD rather than the yen is the anti-pole of the carry trade. This should impart more volatility on AUD/USD relative to AUD/JPY and explains much of the post crisis convergence in volatility as AUD/JPY has moved down toward AUD/USD (realized and implied) vol. History shows we have gone through long periods (for example in 2003-2006) when AUD/USD vol was far higher than AUD/JPY vol. We have just come through a similar period to 2003 where lower 10yr yields (after Bernanke’s first flirtation with deflation) and higher equities, are associated with increased global growth and a stronger Aussie. Because yields are more important than equities/risk for the yen, it has also been associated with a stronger yen. Back in H1 2004, the environment swung to a mix of higher bond yields and flattish equities, which is a more common environment, that hurt the yen, but hurt the Aussie even more. 2004 (or 1994) would be the kind of market we might expect when the Fed eventually exits QE2, which creates major headwinds for AUD/USD and AUD/JPY spot and marks the end of the convergence in AUD/USD and AUD/JPY vol because the yen starts to take over from the USD as a carry financing vehicle. Alan Ruskin New York, +1 (212) 250-8646 [email protected]

4. Remember Latvia Given all the pessimism regarding peripheral Eurozone's ability to grow themselves out of the recession it might be worth remembering Latvia. The country was seen as the economy with the biggest crisis earlier in this cycle, with the 5yr CDS widening out to a high around 1180bp. But things have improved, with the 5yr CDS now trading below 300bp in response to fiscal consolidation and a credible recovery in the Latvian economy. Also, Latvia managed to maintain the currency peg to the EUR, instead achieving the necessary improvement in competitiveness through [painful] internal devaluation. A good illustration of this is the development in net public sector wages, which contracted by more than 30% from the end of 2008 to the beginning of 2010, and the unemployment rate which rose from around 5% to 18% over that same period. Signs of life after fiscal pain While wages have rebounded somewhat and unemployment declined, they are still far away from pre-crisis levels. However, the economy has still been able to stage a recovery, with retail sales and industrial production currently running at 6.1% and 19% YoY, and Q3 GDP comfortably beating expectations at 2.7% YoY. The trade balance is back to pre-crisis levels, not due to depressed imports (around 30% YoY), but thanks to strong exports (also around 30% YoY), and in spite of no devaluation of the LAT. Sure, the 2011 budget will have to deliver further fiscal consolidation (budget bill to be submitted on Dec 9th), but so far in 2010 the budget has outperformed and seems largely on track for the targeted “below 8.5%” of GDP. Next year, and based on the government’s forecasts, the deficit will be reduced to 5.6%. Also, despite prospects of continued hardship the incumbent coalition government was re-elected on Oct 2, bringing political stability and a strong mandate for further consolidation.



Latvia 5yr CDS vs Periphery – past 2yrs

L a tv ia G re e c e

Ire la n d P o rtu g a l

O c t0 8

J a n0 9

A p r J u l O c t J a n1 0

A p r J u l O c t

Basi

s po

int

01 0 02 0 03 0 04 0 05 0 06 0 07 0 08 0 09 0 0

1 0 0 01 1 0 01 2 0 0


Likely to continue to resist devaluation Apart from bringing down the deficit, it seems increasingly likely that its ability to tolerate pain means Latvia will be able to continue to resist devaluation. FX reserves currently more than cover M1 money supply (LATs in circulation & demand deposits), and the Finance Ministry have even suggested it can now stop drawing funds from bilateral lenders (Nordics, Estonia, Czech and Poland). This means only using funds from institutional lenders (IMF, EU and the WB). So far, Latvia has received some EUR4.2bn out of the EUR7.5bn programme, of which EUR1.1bn has been provided by the IMF and EUR2.7bn by the EU. The bottom line is that while it might still be too early to cry victory on Latvia, it potentially offers a template for a way out of the current crisis/imbalances in the Eurozone in our view Henrik Gullberg London, +44 (0)20 7549 9847 [email protected]

5. Inflation Dominos Have Started To Fall In 2009, inflation rates fell in most G10 and EM countries. However, in 2010, the picture was more mixed with around half seeing inflation rates pick up. In G10, core inflation rates picked up in Canada Australia, Japan and the Euro-area, while they fell in Switzerland, Sweden, US and Norway (a similar picture can be seen in headline inflation, see first and second charts). Both Norway and Switzerland have seen core inflation rates falling for two years in a row. In EM, China continued to see rising headline inflation rates, while Singapore, Turkey, Brazil and Korea saw inflation rates rise in contrast to the previous year. Meanwhile inflation rates fell in Russia, South Africa and India. Both Russia and South Africa have seen inflation rates fall two years in a row (see third chart). While we prefer to look at headline inflation for EM as food and energy form much larger weights in their price indices, core inflation trends look similar, though Turkey looks more disinflationary, while Russia looks more inflationary (see fourth chart).



Change in Headline Inflation Across G10 Change in Core Inflation Across G10

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-2.0

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Jpn Can. Eur Aus Swe UK Nor Swi NZ US

Change from 2008 to 2009


headline CPI rates

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Can. Aus Jpn Eur UK NZ Swi Swe US Nor



core CPI rates

Source: Deutsche Bank; Source: Deutsche Bank;

The first lesson from 2010 is that the global disinflationary trend of 2009 has ended and now inflation trends have become more regional. Indeed, it appears that countries still experiencing disinflationary forces are primarily in the EMEA region. This could be a result of the Euro-area crisis imparting a disinflationary shock to the region, much like the global disinflationary shock imparted by the US credit crunch of 2008/2009. The other lesson is that once crises are overcome as in the US, easy monetary policy may not result in domestic inflation, but may support inflation abroad. Indeed, neighbouring Mexico and Canada appear to be experiencing more inflationary pressures than the US. This also suggests that once the Euro-area crisis abates, EMEA could face a more inflationary shock from the Euro-area. Finally, China continues to see rising inflation rates. It would appear that relative inflation rates between the US and China may end up being as important as movements in the nominal exchange rate in bringing about an adjustment in the real exchange rate.

Change in Headline Inflation Across EM Change in Core Inflation Across EM

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-6.0

-4.0

-2.0

0.0

2.0

4.0

6.0

8.0

Chin Sing Tur Bra. Kor MexTaiw Pol Rus S. Afr

India



headline CPI rates

-7.0

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-4.0

-3.0

-2.0

-1.0

0.0

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Chin Bra Tai Rus Kor Mex Tur Pol S.Afr



core CPI rates

Source: Deutsche Bank; IMF Source: Deutsche Bank;




6. Small Perceived High-Beta FX Do the Best: MYR, THB, COP Risk-sensitive currencies like IDR, KRW, ZAR, BRL and CLP outperformed in 2009. The consensus expectation for 2010 was that these currencies would continue to do very well. As it turned out, these high beta plays haven’t quite lived up to their promise. By contrast, currencies like MYR, THB and COP, which were initially off investors’ radar screens are topping the league tables of EMFX performance. There are some common reasons for their outperformance: initial light positioning, exports/growth surprises, a shift in central bank behaviour and positive domestic catalysts that led to renewed foreign interest.

In Malaysia, the key trigger was Bank Negara’s rate hike in March. This made Malaysia the first EM central bank to embark on a rate hike cycle, sparking a whole new focus on the monetary policy divergence between the developed and developing world. Bond flows into Malaysia surged on anticipation of higher yields, while BNM’s surprising hands off approach to FX management meant that the ringgit had ample room to run. For the baht, the pains of the 2006 capital controls remain deep in the memories of foreign investors. Most prefer to shun the THB in their Asia reval trades, not to mention that the political situation at one point turned quite hairy. Nevertheless, the economic impact of the political chaos in Bangkok was short-lived. Trade and consumption remained robust and so foreign investors were caught underweight in both equities and bonds in H2 after having shunned the country earlier. Colombia was a virtuous re-rating story triggered by a favourable political outcome (presidential elections) which led to renewed FDI and portfolio inflows.

Interestingly, at this juncture, central banks in each of these countries are getting uncomfortable with currency strength. BoT has imposed a 15% withholding tax on bonds, Malaysia is holding the line of 3.08 in USD/MYR, while Colombia is looking to other measures to complement its dollar purchase program. The key lesson would be to NOT pick this year’s winners as next year’s trades.

Dennis Tan Singapore, +65 6423-5347 [email protected] Mirza Baig Singapore, +65 6423-5930 [email protected]

7. Extreme Positioning Matters The announcement of quantitative easing on November 3rd almost perfectly coincided with the bottom in the trade-weighted dollar for this year. While part of the dollar rally was aided by the re-emergence of peripheral Europe concerns, the strongest lesson one can draw from this is that - in the near-term at least - extreme positioning matters. The aggregate US dollar short as measured by our own internal positioning data had reached a record, while market opinion had universally turned – and for good reason – bearish US dollars. But with the Fed decision one of the most widely anticipated and talked about policy decisions in FOMC meeting history, the EUR/USD range on the day of the announcement was one of the narrowest of the year (2nd percentile), subsequently accompanied by an across-the-board rally in the USD. In contrast, the rally in EUR/USD in mid-summer is an example of the same dynamics played out in the opposite direction. Continued fears about a break-up of the Eurozone led to a sharp build-up in EUR shorts, which in absolute value reached the highest levels in the history on the IMM. Risk-reversals similarly saw extremes not seen since the peak of the financial crisis in 2008 (see chart). The combination of extreme sentiment and positioning was what marked the turn in the EUR rather than any fundamental policy developments in the Eurozone. The latter took place in May in the form of the EFSF mechanism and ECB bond purchase program, a month before EUR/USD eventually bottomed.



No Signs of Stress in European Financials

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-8

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-4

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0

2

4

6

8

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03 04 05 06 07 08 09 10-4-3

-3-2-2

-1-1

011

22IMM EUR/USD positions/open interest (lhs)

EUR/USD 1-m Risk Reversal (ths)


George Saravelos London, +44 (0)20 7547 9118 [email protected]

8. Forget G20 Co-ordination, But Don’t Under-Estimate Euro-Area Co-ordination Prior to most recent multilateral congregations (G7, G20, IMF/World Bank meetings) there has been speculation as to some form of coordinated response to the challenges facing the post –crisis recovery. In particular there has been talk of some form of coordinated currency response to ongoing global imbalances. In part these expectations are a result of the greater coordination that was seen in the depths of the global downturn, with the major economies coming together to agree to stimulus policies (see for instance the G20 statement following the November 2008 meeting). Given the global nature of the downturn such coordination was relatively easy to obtain, as it was in each country’s individual interest to try and stimulate their economies.

Variability of recoveries has meant global coordination on stimulus has ceased -

unemployment rates from pre-crisis lows

-1

0

1

2

3

4

5

6

US Ger UK Jpn Fr Chi

Nov-09

This year




Since then, however, the economic recoveries have been strongly varied, evidence of which can be seen in the chart above which shows the high variation in the changes in the unemployment rates since then, with Germany and China both having unemployment rates around their pre-crisis lows. Associated with this, and as was discussed in lesson 5, there has also been considerable variation in inflation outcomes. All this means that while those countries that have had sub-par recoveries would like to see the coordinated stimulus policies enacted at the depths of the crisis maintained or even expanded on, policy makers in those countries that have experienced stronger recoveries have felt unable to do so and have in contrast started taking back some of these stimulus measures. It could be argued that the differing outcomes in the major economies argue for a realignment of exchange rates. The US economy, with an ongoing deficiency of demand and persistent disinflationary pressures, would by this argument benefit from a lower exchange rate. China, which in contrast is confronting an overheating economy and strong inflationary pressures would benefit from a stronger exchange rate. In the longer run this should also help see a narrowing of the US current account deficit and Chinese current account surpluses. Indeed (as argued in 2005 by economists at the Australian Treasury, and more recently by economists such as Paul Krugman*) the situation in China may be neatly depicted by the Swan diagram developed by Australian economist Trevor Swan 50 yeas ago, with the US in the Northern most “triangle” and China in the southern most triangle. While this clearly argues for a higher real effective exchange rate for China, Chinese policy makers have a clear revealed preference for this to come via an increase in wage and prices rather than via a stronger nominal exchange rate. While the desirability of this approach can be argued, at the very least its more opaque nature does seem certain to lead to ongoing tensions on global imbalances for some time.

And while there is an argument for higher real effective exchange rates in surplus

countries facing excess demand, this is coming more from higher inflation

Excess Supply

Excess Demand

Internal Balance External Balance

BoP Surplus

BoP Deficit

REER

Domestic Demand

China (Surplus, inflation)

US (Defict, Disinflation)


The contrast with European policy makers in the past 12 months is interesting. Here there was likely little optimism about the prospect of any coordination, and indeed at times the process of getting this coordination has proved unappealing and led to considerable strains in markets,. Yet when we consider the broad reach of what has actually been achieved - the ESFM, EFSF and now the ESM – it has been quite remarkable. Of course whether these mechanisms are enough soothe market concerns about the ongoing discrepancies between growth in the core countries and strains in the periphery remains a significant question mark



as we write this, but the willingness of European policy makers to drop previously entrenched positions for the sake of the European integration project holds out some hope.

*Phil Garton and Jennifer Chang The Chinese currency: how undervalued and how much does it matter? Economic Roundup Spring 2005; Australian Treasury) Paul Krugman Swan Songs 17 November 2010 (http://krugman.blogs.nytimes.com/2010/11/17/swan-songs/) John Horner Sydney, +61 2 8258 2130 [email protected]

9. Where Was the Fiscal Crisis in the UK and Japan?

It is easy to forget that at the start of this year the Bund – Spain 10yr govt spread was narrower than the 10yr Bund – UK gilt spread. A year ago it was presumed that a fiscal funding crisis emerge in the UK or even Japan as readily as an EMU stalwart. So what happened?

Sovereign Debt Risk Metrics

C/A Balance Fiscal Balance Net Interest Payments / GDP

Debt / GDP Foreign Debt Holding / Total Liabilities

Foreign Debt Holdings / GDP

Great Britain -2.6 -9.0 2.4 71.0 21.5 13.3

Japan 2.5 -6.5 0.9 189.3 8.4 13.2

Spain -5.3 -6.6 1.1 59.3 42.1 26.8

OECD Average -0.3 -4.4 1.6 70.2 38.3 31.8 Source: Deutsche Bank

By many measures the UK and Spain are equals when it comes to fiscal vulnerability. The UK wins on smaller non-resident holdings of debt, and a smaller external deficit. Spain wins marginally on underlying fiscal deficit and measures of general government debt. Where hiding under the umbrella of core EUR policy sobriety was once a virtue, it has now turned into a vice - literally strangling necessary policy flexibility. The UK owns the sterling printing press and has been brave enough to use it. It has currency flexibility and not been shy to let the exchange rate float. In other words the UK’s capacity for reflation through the exchange rate and/or money creation, may err on the side of inflation, but leaves the adjustment path in its own hands. The market’s resounding 2010 judgment, has been that Spain’s credit risk (in bps), far exceeds the UK’s long-term inflation risks from a potential resumption of quantitative easing. This is also evident in the indexed linked sector, with UK 10yr inflation breakevens almost exactly the same as the start of the year, despite some very disappointing price data. This is of course not the end of the story. It is still possible that a UK failure to deliver on promised fiscal cuts; or that the fiscal drag hits growth to the point where it undermines the banking sector ; and/or, for that matter EUR contagion hits the debt outlook as well. These are not the DB team’s central scenarios, not least because the currency should cushion the credit impact, and currency depreciation driving inflation in a vicious cycle is unlikely, given that the pound’s starting point is so weak.



Debt/GDP across the G10 Gross Interest Payments on Debt (% GDP)


If it is too early to heave a sigh of relief when it comes to the UK, nowhere should the market be more reluctant to sound the all clear on the fiscal accounts than when it comes to Japan. In the summer, the IMF suggested that Japan would need to reduce its structural primary deficit by 1% every year for the next decade merely to stabilize net debt to GDP at 140% and gross debt to GDP at 240% - and this even with the assumption that such consolidation helps rather than hinders growth! That’s the bad news. The good news is that there is plenty of scope for higher taxes since government revenues as a share of GDP remain well below the OECD average. Nonetheless, Japan sits at a critical pivot point, vulnerable to both a deflationary and inflationary/reflationary environment. A deflationary scenario secures low funding costs at the price of increases in real debt and an inability to grow nominal GDP above nominal rates. For the moment that is still probably preferable to a higher rate environment, either because higher growth impacts inflation expectations and/or reduces bank demand for JGBS. One small source of comfort is that any debt crisis sparked by higher yields would presumably hurt growth again and drive yields back down, even if debt to GDP would continue to rise. The Japan debt crisis trade has many twists and turns left in it, but 2011 will likely prove again that this is not a trade for the impatient foreigner, who still holds less than 10% of the outstanding stock, and cannot bolt for the exit expecting the locals will follow. The UK Has the Largest Fiscal Consolidation Planned

-2 -1 0 1 2 3

Japan

Switzerland

Sweden

Australia

Canada

Euroland

Norway

US

UK

Fiscal Consolidation 2010 to 2011, % GDP


Alan Ruskin New York, +1 (212) 250-8646 [email protected]



10. The True Star of 2010: Mongolia While the Aussie has been shining bright this year, a smaller, but closer neighbor to China has been doing even better: The Mongolian Togrog is the best performing currency this year, appreciating more than 15% against the dollar. This excludes carry, which at more than 10% is one of the highest in the world. The currency is free-floating and the capital account is open, so these returns were realizable. When the financial crisis hit in 2008, the Mongolian economy was hit hard. The collapse in global commodity prices strained government finances and led to a sharp drop in exports. These are dominated by unprocessed natural resources (see chart), mainly directed to China. The country accounts for more than 60% of Mongolia’s exports. The IMF stepped in with a stand-by arrangement in 2009, and combined with a rise in foreign aid and a renewed boom in commodity prices has resulted in a rejuvenation for the Mongolian economy.

USD/Togrog Tops Mongolia Exports Coal and Copper to China

0

200

400

600

800

1000

1200

1400

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1800

93 95 97 99 01 03 05 07 09

Mongolian Togrog per USD


The Fund now views the outlook for Mongolia’s economy as “extremely” favorable. Mongolia has the largest undeveloped deposits of gold, copper, coal uranium and iron ore, and investment in the country’s vast mineral resources is just starting. The IMF cites the signing of an investment agreement in late 2009 to develop the Oyu Tolgoi mine in the South Gobi Dessert – referred by some as the biggest undeveloped copper-gold project in the world – as a “cornerstone for the development of Mongolia’s substantial mineral resources.” Further projects are in the pipeline, and Mongolia looks like China’s natural export partner to provide the latter with long-term energy and mineral security. With inflation on an upward trend, the export sector still looking bright and monetary policy likely to remain tight, the Togrog could be the true star of FX for a second year to come. George Saravelos London, +44 (0)20 7547 9118 [email protected]



11. NOK: From Hero To Zero Rationalising NOK underperformance At the beginning of the year the NOK was the darling of the developed currency markets, with banks labeling it “the best currency in the world”, “the ultimate haven”, etc, and set for “sustained appreciation”. Strong fundamentals, tight labour markets, booming housing and core inflation stubbornly above 2% suggested ongoing policy tightening and strength. However, and while we anticipated further appreciation in the Norwegian unit, to a range between 7.70-7.90, we also projected NOK underperformance vs its peers. The latter scenario has fortunately largely materialized, helped by Norges Bank’s strong aversion towards rapid/excessive appreciation, which in turn was further reinforced thanks to the NOK’s strong performance in 2009 vs GBP and SEK (two currencies that represents a sizeable portion of total Norwegian goods and services exports). Also, Norway’s lack of investable assets has played a role, with a very small bond market and local equity counters strongly dominated by energy. What lessons can be learn?th What, if any, lessons can be learned from this? The most obvious is that outside of the majors, appreciation in smaller and relatively illiquid currencies is unlikely to persist unless 1) they are strongly undervalued, and/or 2) backed up by a significant yield differential or at least a continued policy normalization.

Trade-weighted NOK vs Brent crude: 1y rolling correlation

90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10

Per

cent

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Also, in the case of Norway the fact that the NOK is not only closely, but also increasingly, correlated with energy/oil (see chart) explains a lot of the outperformance in 2009 (when USD/barrel moved from below $40 to $80) and the underperformance in 2010 (Brent now largely back to the levels of the beginning of the year). The bottom line here is that Norway needs high oil prices, not only to generate [fiscally driven] domestic growth in an economy with a diminishing export sector, but also to attract capital inflows. What does this mean for 2011? With no serious valuation gap it would suggest that closely monitoring Norges Bank policy thinking and the oil price should be sufficient to get a good idea of where the NOK is heading. Henrik Gullberg London, +44 (0)20 7549 9847 [email protected]



12. Anti-Climatic Parity Parties

Back in the period 2007-2008, USD/CAD, USD/CHF and AUD/USD all played with parity and in some cases actually breached it (CHF briefly, CAD for longer). 2010 saw all three currency pairs breach parity in the same year for the first time ever (see first chart). Yet, only USD/CHF appears to have been able to remain over the parity for any meaningful period of time at around 47 days compared to 6 days for AUD/USD and 2 days for USD/CAD. This begs the question as to whether there is anything special about parity. From a fundamental perspective, we do find that parity represents an overvaluation of at least 20% relative to PPP for each currency pair. In fact, AUD/USD has an overvaluation of 30% at parity (see second chart). So parity does represent an extreme overshoot, which should it make it a harder level to breach. From a market microstructure perspective, the parity level has typically seen a higher concentration of option barriers than other levels. This would have the effect of making the parity level much harder to breach as the hedging of option barriers by market makers would have them push the spot rate away from parity before it reaches it.

CAD, CHF, AUD All Breached Parity In 2010 Parity Equates To Overvaluation vs. PPP

0.40

0.60

0.80

1.00

1.20

1.40

1.60

1.80

2.00

86 88 90 92 94 96 98 00 02 04 06 08 10

USD/CADUSD/CHFAUD/USD

0%

5%

10%

15%

20%

25%

30%

35%

CAD CHF AUD

The deviation versus PPP if the currency trades at parity (vs dollar)


To quantify this, we can look at how long each of these currency pairs traded in different figure intervals ahead of and after parity. Using the 2 figures ahead of parity as the reference duration, we find that both USD/CAD and USD/CHF spent around 80%of that duration one figure ahead of parity, but only 40% of the duration at the figure which breached parity (see third chart). The drop is not as sharp for AUD/USD, but that is likely due to the very small amount of time spent above parity. So there does appear to be something special about parity, which makes it a harder level to breach. Another angle would be to see how many attempts are needed before a more meaningful breach of parity occurs (in terms of time). For USD/CAD we find its first breach in 2007 saw a sustained period below parity, but it another six or seven attempts before another meaningful breach occurred. For USD/CHF, it took eight attempts before parity was meaningfully breached (see fourth chart). So based on our sample of two it would appear that it may take seven or eight attempts for AUD/USD to meaningfully breach parity – so far we have had one attempt. The lesson from 2010 would be not to get too excited about breaches of parity.



Less Time Spent At Parity Than Figure Before Attempt #8 Typically Sees More Sustained Breach Of

Parity

0%

20%

40%

60%

80%

100%

120%

2 figures before parity

1 figure before parity

At figure breaking

parity

1 figure after parity

2 figures after parity

USD/CAD

USD/CHF

AUD/USD

days spent at level as a percentage of days spent 2 figures before parity

0

5

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35

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1 2 3 4 5 6 7 8 9 10 11 12

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CHF

AUD

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G10 FX Valuation Monitor: Lines in the Sand*

Figure 1: The euro is expensive and the dollar cheap

30.726.7

20.617.4

12.4 11.0 10.76.1

-4.0

-13.2-20-15-10-505

101520253035

AUD NZD CHF CAD EUR JPY NOK GBP SEK USD

Source: DB FX Research

Figure 3: EUR/USD: The euro is expensive …

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EURUSDPPP EURUSD20 % Band


Figure 5: GBP/USD: as well as sterling …

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Figure 2: The dollar is 13% cheap to market value

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73 76 79 82 85 88 91 94 97 00 03 06 09

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Figure 4: USD/JPY: …as well as the Yen

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73 77 81 85 89 93 97 01 05 09

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Figure 6: USD/CHF: CHF is expensive

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73 77 81 85 89 93 97 01 05 09

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*Our measure of relative PPP is calculated using long-term averages from Jan-80 to Dec-04 and deflating by monthly CPI differentials. We refer to current spot rates as "cheap" or "expensive" with explicit reference to this measure of fair valuation; these statements are not intended in any way to be "buy" or "sell" recommendations.



Figure 7: USD/CAD: CAD has moved above market

value and is now expensive

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Figure 9: NZD/USD: .and so is NZD

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NZD/USDPPP NZD/USD20 % Band


Figure 11: EUR/GBP: Sterling is cheap against the

euro

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Figure 8: AUD/USD: AUD is very expensive…

0.4

0.6

0.8

1.0

1.2

1.4

1.6

0.4

0.6

0.8

1.0

1.2

1.4

1.6

73 77 81 85 89 93 97 01 05 09

AUD/USDPPP AUD/USD20 % Band


Figure 10: EUR/JPY: The euro is slightly expensive

against the yen

50

100

150

200

250

300

350

400

450

73 77 81 85 89 93 97 01 05 09

50

100

150

200

250

300

350

400

450

EUR/JPY

20% Band

PPP EUR/JPY


Figure 12: EUR/SEK: SEK is very cheap versus the

euro

4

5

6

7

8

9

10

11

12

73 77 81 85 89 93 97 01 05 09

4

5

6

7

8

9

10

11

12

EUR/SEK

20% Band

PPP EUR/SEK




Figure 13: EUR/CHF: CHF is expensive against the

euro

1.0

1.5

2.0

2.5

3.0

3.5

4.0

73 77 81 85 89 93 97 01 05 09

1.0

1.5

2.0

2.5

3.0

3.5

4.0

EUR/CHF

20% Band

PPP EUR/CHF


Figure 15: AUD/NZD: NZD is close to market value

against AUD….

0.6

0.8

1.0

1.2

1.4

1.6

1.8

73 77 81 85 89 93 97 01 05 090.6

0.8

1.0

1.2

1.4

1.6

1.8

AUD/NZD

20% Band

PPP AUD/NZD


Figure 17: JPY/NZD: NZD is expensive against the yen

0.000

0.005

0.010

0.015

0.020

0.025

73 77 81 85 89 93 97 01 05 09

0.000

0.005

0.010

0.015

0.020

0.025

JPY/NZD

20% Band

PPPJPY/NZD


Figure 14: EUR/CAD: so do CAD

0.9

1.1

1.3

1.5

1.7

1.9

73 77 81 85 89 93 97 01 05 09

0.9

1.1

1.3

1.5

1.7

1.9

EUR/CAD20% BandPPP EUR/CAD

Source: DB F X Research

Figure 16: CAD/NZD: ….and is expensive against CAD

0.4

0.6

0.8

1.0

1.2

1.4

1.6

1.8

73 77 81 85 89 93 97 01 05 09

0.4

0.6

0.8

1.0

1.2

1.4

1.6

1.8

CAD/NZD

20% band

PPP CAD/NZD


Figure 18: GBP/JPY: JPY is close to market value

against GBP

0

100

200

300

400

500

600

700

800

73 77 81 85 89 93 97 01 05 09

0

100

200

300

400

500

600

700

800GBP/JPY

20% Band

PPP GBP/JPY




G10 Capital Flows and Basic Balance Monitor United States (USD bn)

Figure 1: The basic balance has been in a recovery

path over the last 1 year

-600

-500

-400

-300

-200

-100

0

100

200

95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10

4.20

4.25

4.30

4.35

4.40

4.45

4.50

4.55

4.60

4.65

4.70

4.75

Basic Balance

USD TWI (Rs)

USD Bn. Ln

Net foreign US inflows(excl. US Treasuries) minus the trade balance (bn, 12m accumalated )

Source: DB FX Research and US Treasury

Figure 3: The private basis balance has been driving

overall basic balance recently

-600

-500

-400

-300

-200

-100

0

100

200

93 94 95 96 97 97 98 99 00 01 02 02 03 04 05 06 07 07 08 09 10

-600

-500

-400

-300

-200

-100

0

100

200

Private Basis Balance

Overall Basic Balance

USD Bn.


Figure 5: Official inflows inversely correlated with

private inflows since the late 1990s

-80

20

120

220

320

420

520

620

79 81 83 85 87 89 91 93 95 97 99 01 03 05 07 09

-80

20

120

220

320

420

520

620

Net Official Flows

Net Private non Treasury Flows

USD Bn.

Source: DB FX Research and Haver

Figure 2: …as non treasury portfolio inflows gather

pace

-800

-600

-400

-200

0

200

400

600

800

95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10

-800

-600

-400

-200

0

200

400

600

800

Trade BalanceNet non-treasury portfolio flowsBasic Balance


Figure 4:…as official inflows were insignificant

-5

5

15

25

35

45

55

65

79 81 83 85 87 89 91 93 95 97 99 01 03 05 07 09

-150

-100

-50

0

50

100

150

Net Official Purchases of Corporate Bonds

Net Official Purchases of Agency Bonds (Rs)

USD Bn.


Figure 6: Relative to the private basic balance, the

dollar is expensive

-600

-500

-400

-300

-200

-100

0

100

200

93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10

4.00

4.10

4.20

4.30

4.40

4.50

4.60

4.70

4.80

Private Basic Balance

USTW$ (ls)

Fitted USTW$ with Private BasicBalance (Rs)

USD Bn. Ln




Figure 7: Net FDI outflows are accelerating recently

-400

-300

-200

-100

0

100

200

300

400

95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10

4th Qtr. sum

-400

-250

-100

50

200

350

FDI InflowsFDI Net flowsFDI Outflows


Figure 9: Official sector remain net buyers of US

bonds

-100

0

100

200

300

400

500

600

700

800

900

79 81 83 85 87 89 91 93 95 97 99 01 03 05 07 09

-100

0

100

200

300

400

500

600

700

800

900

Net Private Bond Flows

Net Official Bond Flows

12 mo. Sum


Figure 11: Inverse relationship between USD TWI and

UST purchases

-150

0

150

300

450

600

95 97 99 01 03 05 07 09

4.20

4.30

4.40

4.50

4.60

4.70

4.80

Treasuries (ls)USD TWI (Major, rs)

Ln


Figure 8: Portfolio flows were driven mostly by net

bond flows, while net equity flows remain modest

-200

0

200

400

600

800

1000

1200

80 82 84 86 88 90 92 94 96 98 00 02 04 06 08 10

-200

0

200

400

600

800

1000

1200

US Net Capital InflowsNet Bonds Inflows

Net Equity Inflows

12 mo. Sum


Figure 10: Treasury purchase seems to have picked

up, while purchase of agency bonds rise

-200

0

200

400

600

800

79 81 83 85 87 89 91 93 95 97 99 01 03 05 07 09

-200

0

200

400

600

800

Private Treasury PurchasesPrivate AgencyPrivate CorpUS Net Purchases of Foreign Bonds


Figure 12: Net equity flows remain low by past

standards

-180

-130

-80

-30

20

70

120

170

220

79 81 83 85 87 89 91 93 95 97 99 01 03 05 07 09

-180

-130

-80

-30

20

70

120

170

220

US StocksForeign StockNet Stocks

USD bn




Figure 13: Equity flows tend to respond with a lag to

market performance

-170

-120

-70

-20

30

80

130

180

230

93 95 97 99 01 03 05 07 09

1.4

1.6

1.8

2.0

2.2

2.4

2.6

2.8

US StocksForeign Stocks

S&P 500 (Rs)

Ln

Source: Deutsche Bank, US Treasury and Bloomberg Finance LP

Figure 15: Generally inverse link between foreign

interest in USTs versus US equities

-100

40

180

320

460

600

95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10

-100

40

180

320

460

600Foreign Purchases of US TreasuriesForeign Purchases of US Equity

Source: Deutsche Bank and US Treasury

Figure 14: The dollar is following net equity flows less

and less

-100

-50

0

50

100

150

200

90 92 94 96 98 00 02 04 06 08 10

4.20

4.25

4.30

4.35

4.40

4.45

4.50

4.55

4.60

4.65

4.70

4.75Net Equity Flows (12M Sum)

USD TWI Major (Rs)

Ln

Correlation=50%

Correlation(6 mo lag)=58%


Figure 16: The dollar and agency & corp bond inflows

-200

-100

0

100

200

300

400

500

600

700

800

90 92 94 96 98 00 02 04 06 08 10

4.2

4.3

4.4

4.5

4.6

4.7

4.8

Corp and Agency Bonds(ls)

Corporate bonds(ls)

US TWI (Major,rs)

log




Canada (CAD bn)

Figure 1: The basic balance seems to be recovering

from its extreme lows

-80

-60

-40

-20

0

20

40

60

80

100

Mar-90 Mar-94 Mar-98 Mar-02 Mar-06 Mar-100.60

0.65

0.70

0.75

0.80

0.85

0.90

0.95

1.00

1.05Basic Balance 4Q

CAD/USD - Quarterly Average (rs)


Figure 3: Portfolio flows had been in an upsurge since

2008

-100

-50

0

50

100

150

Jun-91 Jun-95 Jun-99 Jun-03 Jun-070.60

0.65

0.70

0.75

0.80

0.85

0.90

0.95

1.00

1.05Portfolio Flows 12-monthBasic Balance 4Q rollingCAD/USD - Quarterly Average (rs)


Figure 5: Net equity flows have turned negative as

foreign equity inflows has come down

-80

-60

-40

-20

0

20

40

60

Jan-91 Jan-94 Jan-97 Jan-00 Jan-03 Jan-06 Jan-09

-80

-60

-40

-20

0

20

40

60

Canadian Flows AbroadForeign InflowsNet Equity Flows


Figure 2: net FDI flows remains small

-40

-20

0

20

40

60

-40

-20

0

20

40

60

Mar-90 Mar-94 Mar-98 Mar-02 Mar-06 Mar-10

Net FDIOutward Direct InvestmentsInward Direct Investments


Figure 4: …as foreign interest in Canadian securities is

at close to record highs

-150

-100

-50

0

50

100

150


-120-100-80-60-40-20020406080100120

Canadian Flows AbroadForeign InflowsNet Flows


Figure 6: .…while net debt inflows have risen to

record highs.

-75

-50

-25

0

25

50

75

100

125


-75

-50

-25

0

25

50

75

100

125

Canadian Flows Abroad

Foreign Inflows

Net Debt Flows




Japan (JPY trillion)

Figure 1: .The Japanese basic balance turned up

recently helping the yen rally

0

2

4

6

8

10

12

14

16

18

20


80

90

100

110

120

130

140

150

160

Basic Balance 12Msum

USD/JPY (rightscale, inverted)

Source: DB FX Research, MOF, and Haver

Figure 3: Net capital outflows have moderated

-40

-30

-20

-10

0

10

20

96 97 98 99 00 01 02 03 04 05 06 07 08 09 10

12 mo. sum

-40

-30

-20

-10

0

10

20

Net Equity Flows

Net Bond & Notes Flows

Net Money Market Flows

Net Capital Flows

Source: DB FX Research and MOF

Figure 5: Net equity flows have moderated

-20

-15

-10

-5

0

5

10

15

20

97 98 99 00 01 02 03 04 05 06 07 08 09 10

12 mo. sum

-20

-15

-10

-5

0

5

10

15

20Japan FlowsForeign FlowsNet Equity Flows


Figure 2: .…as FDI outflows moderate

-14

-11

-8

-5

-2

1

4


-14

-11

-8

-5

-2

1

4

Net FDIDirect Investment in Japan by ForeignersDirect Investment Abroad by Residents


Figure 4: Net bond outflows seems to have broken

the uptrend recently

-30

-25

-20

-15

-10

-5

0

5

10

15

97 98 99 00 01 02 03 04 05 06 07 08 09 10

12 mo. sum

-30

-25

-20

-15

-10

-5

0

5

10

15

Japan Flows

Foreign Flows

Net Bonds & Notes Flows


Figure 6: Net money-market flows climb up

-20

-15

-10

-5

0

5

10

15

20

97 98 99 00 01 02 03 04 05 06 07 08 09 10

12 mo. sum

-20

-15

-10

-5

0

5

10

15

20

Japan Flows Foreign FlowsNet Money Market Flows




United Kingdom (GBP bn)

Figure 1: The basic balance remains slightly negative

-250

-180

-110

-40

30

100

Mar-91 Mar-94 Mar-97 Mar-00 Mar-03 Mar-06 Mar-09

1.3

1.4

1.5

1.6

1.7

1.8

1.9

2.0

2.1Basic Balance 4Q sum

GBP/USD (right scale, quarterly


Figure 3: Portfolio flows have turned remain positive

-300

-200

-100

0

100

200

300

400


-300

-200

-100

0

100

200

300

400Net Portfolio flowsPortfolio OutflowPortfolio Inflow


Figure 5: Net holdings of equities

-500

-300

-100

100

300

500

700

900


-300

-100

100

300

500

700

900Net UK Equity Holdingsby ForeignersNet Equity IIP

Net Foreign EquityHoldings by the UK

Source: DB FX Research and BoE

Figure 2: Both FDI inflows and outflows have

moderated

-250

-200

-150

-100

-50

0

50

100

150


-250

-200

-150

-100

-50

0

50

100

150

Net FDI

FDI Outflows

FDI Inflows


Figure 4: Net equity and net debt positions

-400

-300

-200

-100

0

100

200


1.3

1.4

1.5

1.6

1.7

1.8

1.9

2.0

2.1

Net Equity IIPNet Debt IIPGBP/USD (rs)


Figure 6: Net debt holdings

-400

-100

200

500

800

1100

1400

1700


-400

-100

200

500

800

1100

1400

1700Net UK Debt Holdings byForeignersNet Debt IIP

Net Foreign Debt Holdingsby the UK




Euro area (EUR bn)

Figure 1: The moderation in negative basic balance

has taken a pause

-500

-400

-300

-200

-100

0

100

200

Feb-01

Feb-02

Feb-03

Feb-04

Feb-05

Feb-06

Feb-07

Feb-08

Feb-09

Feb-10

0.7

0.8

0.9

1.0

1.1

1.2

1.3

1.4

1.5

1.6

1.7

Basic Balance 12-month

USD/EUR (rs)

Source: DB FX Research and Eurostat

Figure 3: EUR/USD strongly correlated (0.88) with

bilateral basic balance with the US

-240

-190

-140

-90

-40

10

60

110

160

Jun-99

Jun-00

Jun-01

Jun-02

Jun-03

Jun-04

Jun-05

Jun-06

Jun-07

Jun-08

Jun-09

Jun-10

0.80

1.05

1.30

1.55

1.80

Bilateral BasicBalance,lagged(6m)EURUSD(rhs)

Correlation= -0.88

USD Bn


Figure 5: The bilateral basic balance with the US has

moved down recently

-200

-150

-100

-50

0

50

100

150

Dec-98 Dec-01 Dec-04 Dec-07 Dec-10

-200

-150

-100

-50

0

50

100

150Bilateral Basic BalanceNet Non Treasury FlowsBilateral Trade Balance

USD Bn


Figure 2: …as FDI outflows continue unabated

-300

-250

-200

-150

-100

-50

0

50

100

Jan-01

Jan-02

Jan-03

Jan-04

Jan-05

Jan-06

Jan-07

Jan-08

Jan-09

Jan-10

-300

-250

-200

-150

-100

-50

0

50

100

Current account 12-month

Net FDI 12 month


Figure 4: Bilateral basic balance explains 84% of

EUR/USD movements since inception of the euro

0.80

1.00

1.20

1.40

1.60

1.80

2.00

Jun-99 Jun-01 Jun-03 Jun-05 Jun-07 Jun-09

0.80

1.00

1.20

1.40

1.60

1.80

2.00

EURUSD

Fitted EURUSD

EURUSD(t)= -0.0036*Bilateral Basic Balance(t-6)+1.129 (-22.56) (168 .98)

Sample 1999M6-2007M4Observation:97Adjusted R-squared=0.8410


Figure 6:…as US purchases of euro area bonds have

continued to be replaced by sales

-100

-60

-20

20

60

100

Dec-77 Dec-81 Dec-85 Dec-89 Dec-93 Dec-97 Dec-01 Dec-05 Dec-09

-100

-60

-20

20

60

10012M Net Agency12M Net Corporate12M net US stock12M net foreign stocks12m Net Foreign Bond

USD Bn

Source: Deutsche Bank and US Treasury



Figure 7: Net portfolio flows continue to trend down

since mid-2009

-800

-600

-400

-200

0

200

400

600

800

1000

Jan-00 Jan-02 Jan-04 Jan-06 Jan-08 Jan-10

-800

-600

-400

-200

0

200

400

600

800

1000Portfolio OutflowsPortfolio InflowsNet Portfolio Flows

Source: Deutsche Bank and European Central Bank

Figure 9: Equity inflows have tracked the STOXX

-300

-200

-100

0

100

200

300

400

500

Jan-03

Jan-04

Jan-05

Jan-06

Jan-07

Jan-08

Jan-09

Jan-10

1700

2000

2300

2600

2900

3200

3500

3800

4100

4400Net Equity InflowsNet Equity OutflowsEuro STOXX 50 (rs)

Source: Deutsche Bank, Bloomberg and European Central Bank

Figure 8: Equity, bond and money market net flows

-150-100-50

050

100150200250300350

Jan-03

Jan-04

Jan-05

Jan-06

Jan-07

Jan-08

Jan-09

Jan-10

-150-100-50050100150200250300350

Net Bonds and Notes Flows

Net MM Flows

Net Equity Flows


Figure 10: Foreign interest on the bond side boomed

in late 2006 and has slowed down now

-450-350-250-150-5050

150250350450550650

Jan-03

Jan-04

Jan-05

Jan-06

Jan-07

Jan-08

Jan-09

Jan-10

2.0

2.5

3.0

3.5

4.0

4.5

5.0Net Bond InflowsNet Bond Outflows

10Y Bunds Yield (rs)




Australia (AUD bn )

Figure 1: The basic balance remains quite volatile as…

-70

-60

-50

-40

-30

-20

-10

0

10


0.50

0.60

0.70

0.80

0.90

1.00Basic Balance 4Qsum

AUD/USD (rs)

Source: DB FX Research and RBA

Figure 3: Net Portfolio flows appear to have peaked

-120

-80

-40

0

40

80

120

160

200


-120

-80

-40

0

40

80

120

160

200Net Portfolio flows

Portfolio Outflow

Portfolio Inflow


Figure 5: …and to a lesser extent equities

0

50

100

150

200

250

300

350

400


0

50

100

150

200

250

300

350

400

450Net Equity Liabilities for AU

Net AU Equity Holdings byForeigners

Net Foreign Equity Holdings byAustralia


Figure 2: …there have been large shifts in FDI flows

-50

-30

-10

10

30

50

70


-50

-30

-10

10

30

50

70

Net FDIFDI OutflowsFDI Inflows


Figure 4: Foreign investors have favored Australian

debt (negative IIP a liability for AU)

-550

-450

-350

-250

-150

-50

50


0.50

0.60

0.70

0.80

0.90

1.00

Net Equity IIP

Net Debt IIP

AUD/USD (rs)


Figure 6: …with relatively modest purchases by

Australians of foreign debt

0

100

200

300

400

500

600

700


0

100

200

300

400

500

600

700Net Debt Liabilities for AU

Net AU Debt Holdings byForeignersNet Foreign Debt Holdings byAustralia




New Zealand (NZD bn )

Figure 1: The basic balance

-20

-15

-10

-5

0

5

10

Jan-01

Jan-02

Jan-03

Jan-04

Jan-05

Jan-06

Jan-07

Jan-08

Jan-09

Jan-10

0.3

0.4

0.5

0.6

0.7

0.8

0.9Basic Balance 4Q sum

NZD/USD (rs)


Figure 3: net Portfolio inflows have been in an

upsurge

-20

-15

-10

-5

0

5

10

15

20

Mar-96 Mar-99 Mar-02 Mar-05 Mar-08

-20

-15

-10

-5

0

5

10

15

20Net Portfolio flows

Portfolio Outflow

Portfolio Inflow


Figure 2: FDI flows

-10

-5

0

5

10

15

Mar-01

Mar-02

Mar-03

Mar-04

Mar-05

Mar-06

Mar-07

Mar-08

Mar-09

Mar-10

-10

-5

0

5

10

15

Net FDI

FDI Outflows

FDI Inflows


Figure 4: Foreign appetite for government bonds

0

10

20

30

40

50

Jan-93 Jan-96 Jan-99 Jan-02 Jan-05 Jan-08

-15

10

35

60

85

110Government Bonds Held by Foreigners

Treasury Bills held by Foreigners

Share held by Foreigners of Total (right scale)

Source: DB FX Research and NZ FinMin



Commodity Price and Currency Monitor

Figure 1: CRB Commodity Prices and components

100

300

500

700

900

1100

03-J

an-0

2

01-J

ul-0

2

30-D

ec-0

2

26-J

un-0

3

22-D

ec-0

3

23-J

un-0

4

16-D

ec-0

4

16-J

un-0

5

27-D

ec-0

5

26-J

un-0

6

22-D

ec-0

6

21-J

un-0

7

17-D

ec-0

7

13-J

un-0

8

09-D

ec-0

8

09-J

un-0

9

02-D

ec-0

9

02-J

un-1

0100

200

300

400

500

600Raw industrialFoodstuffsMetalsLivestock and products,(rhs)Fats and Oil,(rhs)CRB Commodity Prices,(rhs)

Source: DB FX Research, Haver

Figure 3: Precious metals

0

500

1000

1500

2000

2500

2-Ja

n-02

23-J

an-0

3

11-F

eb-0

4

2-M

ar-0

5

21-M

ar-0

6

10-A

pr-0

7

28-A

pr-0

8

18-M

ay-0

9

4-Ju

n-10

4

9

14

19

24

29Gold Price (US$/Troy oz)Platinum Price ($/Troy oz)Palladium Price ($/Troy oz)Silver Price ($/Troy oz) ,(rhs)

Source: Deutsche Bank, Haver

Figure5: Commodity Currencies and Prices

0.35

0.50

0.65

0.80

0.95

1.10

86 88 90 92 94 96 98 00 02 04 06 08 10

200

250

300

350

400

450

500

AUD/USD CAD/USD

NZD/USD CRB (Rs)


Figure 2: Energy prices

0

20

40

60

80

100

120

140

160

Jan-02

Jan-03

Jan-04

Jan-05

Jan-06

Jan-07

Jan-08

Jan-09

Jan-10

0

2

4

6

8

10

12

14

16

18

20Oil Price(WTI, $/barrel)

Natural Gas ($/mmbtu),(rhs)


Figure-4: Industrial metals

0

2000

4000

6000

8000

100002-

Jan-

02

23-J

an-

03

11-F

eb-

04

2-M

ar-0

5

21-M

ar-

06

10-A

pr-

07

28-A

pr-

08

18-M

ay-

09

4-Ju

n-10

0

10000

20000

30000

40000

50000

60000

Aluminium Price ($/Metric Tonne) Copper Price ($/Metric Tonne)

Lead Price ($/Metric Tonne) Zinc Price ($/Metric Tonne)

Nickel Price ($/Metric Tonne),(rhs) Tin Price ($/Metric Tonne),(rhs)


Figure 6: The dollar cycle and global growth cycle

-0.15

-0.10

-0.05

0.00

0.05

0.10

0.15

Jan-81

Jan-84

Jan-87

Jan-90

Jan-93

Jan-96

Jan-99

Jan-02

Jan-05

Jan-08

yoy,%4.2

4.3

4.4

4.5

4.6

4.7

4.8

4.9

5

World IP

USTW$, inverted,(rhs)

Correlation over entire sample = -0.07Correlation from May 2000 = -0.01 Ln




Figure-7: Nominal CRB and World IP Growth

5.2

5.3

5.4

5.5

5.6

5.7

5.8

5.9

6

6.1

6.2

Jan-86 Jan-89 Jan-92 Jan-95 Jan-98 Jan-01 Jan-04 Jan-07 Jan-10

-15

-10

-5

0

5

10

15

Nominal CRB Index

World industrial Production(rhs)

Ln yoy,%


Figure 9: Long-run Relationship- Nominal CRB

4.8

5.1

5.4

5.7

6.0

6.3

6.6


4.8

5.1

5.4

5.7

6.0

6.3

6.6

Nominal CRB Index

Fitted Nominal CRB Index

LnLong-run elasticities:TWI: -1.88, World IP: 5.81Real Interest Rate: -0.03


Figure 11: RBA Commodity Price Index (Nominal) and

AUD/USD

0.49

0.59

0.69

0.79

0.89

0.99

86 88 90 92 94 96 98 00 02 04 06 08 10

25

50

75

100

125

150AUD (lhs)

RBA Commoditiy Price Index (rhs)


Figure-8: Nominal CRB and the Dollar

5.3

5.4

5.5

5.6

5.7

5.8

5.9

6

6.1

6.2


4.20

4.30

4.40

4.50

4.60

4.70

Nominal CRB Index

USTW$,inverted,(rhs)Ln Ln


Figure 12: Long-run Relationship-AUD/USD

-0.7

-0.5

-0.3

-0.1

0.1

0.3

88 90 92 94 96 98 00 02 04 06 08 10

-0.7

-0.5

-0.3

-0.1

0.1

0.3AUD

Long Run Relationship

Long-run elasticities:Commodity Price: 0.41US GDP: -0.48


Figure 10: Long-run Relationship- Oil

2.8

3.4

4

4.6

5.2

May-00 May-02 May-04 May-06 May-08 May-10

Ln

2.8

3.4

4

4.6

5.2

Oil Price

Fitted Oil Price

Elasticities:Major TWI: -2.56 World IP: 0.03R-square: 0.80




Figure 13: ANZ Commodity Price Index (Nominal) and

NZD/USD

0.35

0.40

0.45

0.50

0.55

0.60

0.65

0.70

0.75

0.80

0.85

86 88 90 92 94 96 98 00 02 04 06 08 10

50

100

150

200

250NZD (lhs)ANZ Commodity Prices Index (rhs)


Figure 15: BoC Commodity Price Index (Nominal) and

CAD/USD

0.60

0.70

0.80

0.90

1.00

1.10

86 88 90 92 94 96 98 00 02 04 06 08 10

200

300

400

500

600

700

800

900

1000CAD (lhs)

BoC Commodity Price Index


Figure 17: BoC Non-Energy Commodity Price Index

(Nominal) and CAD/USD

0.60

0.65

0.70

0.75

0.80

0.85

0.90

0.95

1.00

1.05

86 88 90 92 94 96 98 00 02 04 06 08 10

100

200

300

400

500

600CAD (lhs)

BoC Non-Energy Commodity Price Index (rhs)


Figure 14: Long-run Relationship-NZD/USD

-0.9

-0.7

-0.5

-0.3

-0.1

0.1

88 90 92 94 96 98 00 02 04 06 08 10

-0.9

-0.7

-0.5

-0.3

-0.1

0.1NZD Long Run Relationship

Long-run elasticities:Commodity Price: 0.77GDP: 1.08


Figure 16: Long-run Relationship-CAD/USD

-0.50

-0.30

-0.10

0.10

88 90 92 94 96 98 00 02 04 06 08 10

-0.40

-0.30

-0.20

-0.10

0.00CAD Long Run Relationship

Long-run elasticities:Commodity Price: 0.13GDP: 1.32


Figure 18: BoC Energy Commodity Price Index

(Nominal) and CAD/USD

0.60

0.65

0.70

0.75

0.80

0.85

0.90

0.95

1.00

1.05

86 88 90 92 94 96 98 00 02 04 06 08 10

100

600

1100

1600

2100

2600CAD (lhs)

BoC Energy Commodity Price Index (rhs)




Figure 19: RBA Commodity Price (Nominal)

25

50

75

100

125

86 88 90 92 94 96 98 00 02 04 06 08 10

25

50

75

100

125

RBA Commodity Price Index (Nominal)

Average


Figure 21: ANZ Commodity Price (Nominal)

90

110

130

150

170

190

210

230

250

86 88 90 92 94 96 98 00 02 04 06 08 10

90

110

130

150

170

190

210

230

250

ANZ Commodity Price Index (Nominal)

Average


Figure 23: BoC Commodity Price (Nominal)

0

200

400

600

800

1000

86 88 90 92 94 96 98 00 02 04 06 08 10

0

200

400

600

800

1000

BoC Commodity Price Index (Nominal)

Average


Figure 20: RBA Commodity Price (Real)

y = -2E-07x + 3.3484

R2 = 6E-062.5

2.75

3

3.25

3.5

3.75

4

4.25

4.5

86 88 90 92 94 96 98 00 02 04 06 08 10

2.5

2.75

3

3.25

3.5

3.75

4

4.25

4.5RBA Commodity Price Index(Real)Average

Linear Trendline


Figure 22: ANZ Commodity Price (Real)

y = -2E-05x + 5.0558

R2 = 0.1422

4

4.2

4.4

4.6

4.8

86 88 90 92 94 96 98 00 02 04 06 08 10

4

4.2

4.4

4.6

4.8

ANZ Commodity Price Index (Real)

Average

Linear Trendline


Figure 24: BoC Commodity Price (Real)

y = -3E-05x + 6.5748

R2 = 0.2745

4.8

5

5.2

5.4

5.6

5.8

6

6.2

72 74 76 78 80 82 84 86 88 90 92 94 96 98 00 02 04 06 08 10

4.8

5

5.2

5.4

5.6

5.8

6

6.2BoC Commodity Price Index(Real)

Average

Linear Trendline




Figure 25: BoC Non-Energy Commodity Price

(Nominal)

100

150

200

250

300

350

400

450

500

72 74 76 78 80 82 84 86 88 90 92 94 96 98 00 02 04 06 08 10

100

150

200

250

300

350

400

450

500

BoC Non-Energy Commodity Price Index

Average


Figure 27: BoC Energy Commodity Price (Nominal)

0

500

1000

1500

2000

2500

72 74 76 78 80 82 84 86 88 90 92 94 96 98 00 02 04 06 08 10

0

500

1000

1500

2000

2500

BoC Energy Commodity Price Index

Average


Figure 29: Commodity Price Indices

80

140

200

260

320

380

86 88 90 92 94 96 98 00 02 04 06 08 10

80

140

200

260

320

380RBA Commodity Price Index (Nominal)

ANZ Commodity Price Index (Nominal)

BoC Commodity Price Index (Nominal)

Jan 1986 =100


Figure 26: BoC Non- Energy Commodity Prices (Real)

y = -6E-05x + 7.1121

R2 = 0.7254

4.5

4.8

5.1

5.4

5.7

6

72 74 76 78 80 82 84 86 88 90 92 94 96 98 00 02 04 06 08 10

4.5

4.8

5.1

5.4

5.7

6BoC Non- Energy CommodityPrice Index (Real)

Average

Linear Trendline


Figure 28: BoC Energy Commodity Price (Real)

y = 5E-06x + 5.9191

R2 = 0.0022

5

5.5

6

6.5

7

7.5

72 74 76 78 80 82 84 86 88 90 92 94 96 98 00 02 04 06 08 10

55.25.45.65.866.26.46.66.877.27.4BoC Energy Commodity

Price Index (Real)Average

Linear Trendline


Figure 30: Ratio of Commodity Price Indices

0.7

1.1

1.5

1.9

2.3

86 88 90 92 94 96 98 00 02 04 06 08 10

0.7

1.2

1.7

2.2Ratio of Australia to NZ Commodity PriceIndicies (Nominal)

Ratio of Canada to NZ Commodity PriceIndicies (Nominal)




U.S. Trade Balance Monitor

Figure 1: The US trade deficit has started widening

recently

-900

-800

-700

-600

-500

-400

-300

-200

-100

0

Jan-92

Jan-94

Jan-96

Jan-98

Jan-00

Jan-02

Jan-04

Jan-06

Jan-08

Jan-10

-900

-800

-700

-600

-500

-400

-300

-200

-100

0

Annualized Trade Balance

Annualized Trade Balance,3mSumAnnualized TradeBalance,12m Sum

USD Bn

Source: DataStream, Deutsche Bank.0

Figure 3: The widening in the deficit reflected a

bigger recovery in import growth than in export

growth

-35

-25

-15

-5

5

15

25

Jan-93

Jan-95

Jan-97

Jan-99

Jan-01

Jan-03

Jan-05

Jan-07

Jan-09

-40

-30

-20

-10

0

10

20

30

Export Value Growth

Import Value Growth

Source: DataStream, Deutsche Bank

Figure 5: Export prices tend to follow the dollar

-12

-8

-4

0

4

8

12

Jan-94

Jan-96

Jan-98

Jan-00

Jan-02

Jan-04

Jan-06

Jan-08

Jan-10

4.40

4.45

4.50

4.55

4.60

4.65

4.70

4.75

4.80

Export Price

USTRBROA,inverted(rhs)

yoy,% Ln


Figure 2: US and world growth have been recovering

-15

-10

-5

0

5

10

15

Jan-92

Jan-94

Jan-96

Jan-98

Jan-00

Jan-02

Jan-04

Jan-06

Jan-08

Jan-10

-15

-10

-5

0

5

10

15

World IP ex US IP (YoY)

US IP (YoY)

yoy,%


Figure 4: Export volume growth and export price

inflation have both been recovering

-20

-15

-10

-5

0

5

10

15

20

Jan-93

Jan-95

Jan-97

Jan-99

Jan-01

Jan-03

Jan-05

Jan-07

Jan-09

-12

-6

0

6

12

Export Volume

Export Price(rhs)

yoy,%


Figure 6: Export volume growth closely follows

external demand and has started rising

-20

-15

-10

-5

0

5

10

15

20

Jan-94

Jan-96

Jan-98

Jan-00

Jan-02

Jan-04

Jan-06

Jan-08

Jan-10

-15

-5

5

15

Export Volume

World IP ex US IP(rhs)

yoy,%




Figure 7: Export volumes have remained below trend

since 2001

4.4

4.5

4.6

4.7

4.8

4.9

Mar

-80

Mar

-84

Mar

-88

Mar

-92

Mar

-96

Mar

-00

Mar

-04

Mar

-08

Ln

5.5

6.0

6.5

7.0

7.5LnReal Broad TWI

Export Volumes(rhs)


Figure 9: But the extended period of robust export

volume growth appeared not to have been affected

by the moves in the dollar

-20

-10

0

10

20

Jan-94

Jan-96

Jan-98

Jan-00

Jan-02

Jan-04

Jan-06

Jan-08

Jan-10

4.40

4.45

4.50

4.55

4.60

4.65

4.70

4.75

4.80

Export Volume

USTRBROA,inverted(rhs)yoy,% Ln


Figure 11: Import price inflation has followed the

dollar

-20

-15

-10

-5

0

5

10

15

20

25

Jan-94

Jan-96

Jan-98

Jan-00

Jan-02

Jan-04

Jan-06

Jan-08

Jan-10

-12

-7

-2

3

8

13

Import Price

USTRBROA,inverted(rhs)

yoy,%


Figure 8: Export volume deviations from trend

strongly correlated with moving average of dollar

valuation

-0.20

-0.15

-0.10

-0.05

0.00

0.05

0.10

0.15

0.20

Dec

-81

Dec

-85

Dec

-89

Dec

-93

Dec

-97

Dec

-01

Dec

-05

Dec

-09

-0.25

-0.20

-0.15

-0.10

-0.05

0.00

0.05

0.10

0.15

0.20

0.25USDTWI,Deviations from Trend (8 QuarterMA),invertedReal Exports,Deviation from Trend (rhs)

Correlation = - 0.67

Ln


Figure 10: The fall –off in import growth reflected a

steep decline in volumes and more recently a sharp

decline in import price inflation with oil price declines

-20

-15

-10

-5

0

5

10

15

20


-18

-13

-8

-3

2

7

12

17

22

Import Volume

Import Price (rhs)

yoy,%


Figure 12: Import volume growth has generally been

highly correlated with US domestic demand growth

-25

-20

-15

-10

-5

0

5

10

15

20

Jan-94

Jan-96

Jan-98

Jan-00

Jan-02

Jan-04

Jan-06

Jan-08

Jan-10

-15

-10

-5

0

5

10

Import Volume

US IP(rhs)

yoy,%




Figure 13: U.S. Exports and Imports of Goods and Services (Balance of Payments Basis) (last 13 months) Sep Oct Nov Dec Jan Feb Mar Apr May Jun Jul Aug Sep

Units 2009 2009 2009 2009 2010 2010 2010 2010 2010 2010 2010 2010 2010

Exports (US$ bn.) 134.2 138.1 139.0 143.4 144.5 144.4 150.0 148.8 152.6 150.6 153.5 153.6 154.1Imports (US$ bn.) 169.3 170.4 174.3 180.5 179.4 184.3 189.7 188.9 194.4 200.3 196.1 200.1 198.1

Trade Balance (US$ bn.) -35.2 -32.3 -35.3 -37.1 -34.8 -39.9 -39.7 -40.0 -41.8 -49.8 -42.6 -46.5 -44.0

Export & Import GrowthExports (y-o-y%) -12.2% -8.0% -1.5% 8.7% 15.2% 13.7% 19.1% 19.9% 21.2% 17.8% 18.5% 17.8% 14.8%Imports (y-o-y%) -20.4% -18.7% -5.8% 4.4% 11.0% 20.2% 23.2% 23.8% 29.0% 29.2% 20.5% 23.9% 17.0%

Growth Differential 8.1% 10.7% 4.3% 4.3% 4.2% -6.5% -4.1% -3.9% -7.7% -11.5% -2.1% -6.1% -2.1%

Figure 14: U.S. Export and Import Orders (ISM Survey) (last 13 months) Oct Nov Dec Jan Feb Mar Apr May Jun Jul Aug Sep Oct

Units 2009 2009 2009 2010 2010 2010 2010 2010 2010 2010 2010 2010 2010

Export Orders (index) 55.5 56.0 54.5 58.5 56.5 61.5 61.0 62.0 56.0 56.5 55.5 54.5 60.5Import Orders (index) 51.0 51.5 55.0 56.5 56.0 57.0 58.0 56.5 56.5 52.5 56.5 56.5 51.5

Exp.-Imp. Orders 4.5 4.5 -0.5 2.0 0.5 4.5 3.0 5.5 -0.5 4.0 -1.0 -2.0 9.0

Figure 15: Regional Breakdown of U.S. Trade Balance (US$ bn.) (1997-2009)

1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009

Canada -15.5 -16.7 -32.1 -51.9 -52.8 -48.2 -51.7 -66.5 -78.5 -71.8 -68.2 -78.3 -20.2Mexico -14.5 -15.9 -22.8 -24.6 -30.0 -37.1 -40.6 -45.1 -49.7 -64.5 -74.8 -64.7 -47.5Brazil 6.3 5.0 1.9 1.5 1.4 -3.4 -6.7 -7.3 -9.1 -7.1 -1.0 1.9 6.1

Western Europe -19.4 -30.2 -47.9 -59.4 -64.8 -88.4 -98.9 -111.5 -124.5 -116.5 -106.4 -92.1 -60.4Germany -18.7 -23.2 -28.4 -29.1 -29.1 -35.9 -39.3 -45.8 -50.6 -47.8 -44.5 -42.9 -28.0U.K. 3.8 4.2 -0.8 -1.8 -0.7 -7.5 -9.0 -10.3 -12.5 -8.1 -6.9 -5.0 -1.8

Japan -56.1 -64.0 -73.4 -81.6 -69.0 -70.0 -66.0 -75.6 -83.3 -89.7 -84.3 -74.1 -44.8China -49.7 -56.9 -68.7 -83.8 -83.1 -103.1 -124.1 -162.3 -202.3 -234.1 -258.5 -268.0 -226.8Hong Kong 4.8 2.4 2.1 3.1 4.4 3.3 4.7 6.5 7.5 9.8 13.1 15.0 17.6South Korea 1.9 -7.5 -8.2 -12.5 -13.0 -13.0 -13.2 -19.8 -16.0 -13.4 -13.2 -13.4 -10.6Singapore -2.4 -2.7 -1.9 -1.4 2.7 1.4 1.4 4.2 5.5 6.9 7.2 12.0 6.6Taiwan -12.3 -15.0 -16.1 -16.1 -15.3 -13.8 -14.2 -12.9 -12.8 -15.2 -12.4 -11.4 -9.9

U.S. Total -209.9 -260.5 -363.6 -477.4 -450.1 -507.1 -578.3 -706.7 -829.1 -881.4 -857.9 -882.0 -546.9 Source: DataStream, Deutsche Bank



U.S Exports-Imports by Commodity

Figure 16: U.S. Trade Balance Excluding China &

Petroleum (Monthly & Annual Balance)

Figure 17: U.S. Trade Balance – Advanced Technology

-3 5

-3 0

-2 5

-2 0

-1 5

-1 0

-5

0

1 9 9 4 1 9 9 6 1 9 9 8 2 0 0 0 2 0 0 2 2 0 0 4 2 0 0 6 2 0 0 8 2 0 1 0

-4 0 0

-3 5 0

-3 0 0

-2 5 0

-2 0 0

-1 5 0

-1 0 0

-5 0

0M o n th ly (U S $ b n .) (ba rs ) A n n u a l (U S $ bn .) ( lin e )

- 1 0

- 8

- 6

- 4

- 2

0

2

4

6

1 9 9 4 1 9 9 6 1 9 9 8 2 0 0 0 2 0 0 2 2 0 0 4 2 0 0 6 2 0 0 8 2 0 1 0

- 1 0 0

- 8 0

- 6 0

- 4 0

- 2 0

0

2 0

4 0

6 0M o n t h ly ( U S $ b n . ) ( b a r s ) A n n u a l ( U S $ b n . ) ( l in e )

Source: DataStream Source: DataStream

Figure 18: U.S. Trade Balance – Petroleum Products Figure 19: U.S. Trade Balance – Consumer Goods

- 4 5

- 4 0

- 3 5

- 3 0

- 2 5

- 2 0

- 1 5

- 1 0

- 5

0

1 9 9 4 1 9 9 6 1 9 9 8 2 0 0 0 2 0 0 2 2 0 0 4 2 0 0 6 2 0 0 8 2 0 1 0

- 5 0 0

- 4 5 0

- 4 0 0

- 3 5 0

- 3 0 0

- 2 5 0

- 2 0 0

- 1 5 0

- 1 0 0

- 5 0

0M o n t h l y ( U S $ b n . ) ( b a r s ) A n n u a l ( U S $ b n . ) ( l i n e )

- 3 5

- 3 0

- 2 5

- 2 0

- 1 5

- 1 0

- 5

0

1 9 9 4 1 9 9 6 1 9 9 8 2 0 0 0 2 0 0 2 2 0 0 4 2 0 0 6 2 0 0 8 2 0 1 0

- 4 0 0

- 3 5 0

- 3 0 0

- 2 5 0

- 2 0 0

- 1 5 0

- 1 0 0

- 5 0

0M o n t h l y ( U S $ b n . ) ( b a r s ) A n n u a l ( U S $ b n . ) ( l i n e )


Figure 20: U.S. Trade Balance – Capital Goods Figure 21: U.S. Trade Balance – Industrial Supplies

- 4

-2

0

2

4

6

1 9 9 4 1 9 9 6 1 9 9 8 2 0 0 0 2 0 0 2 2 0 0 4 2 0 0 6 2 0 0 8 2 0 1 0

-3 0

-2 0

-1 0

0

1 0

2 0

3 0

4 0

5 0M o n t h ly (U S $ b n . ) (b a r s ) A n n u a l (U S $ b n . ) ( l in e )

-4 5

-4 0

-3 5

-3 0

-2 5

-2 0

-1 5

-1 0

-5

0

1 9 9 4 1 9 9 6 1 9 9 8 2 0 0 0 2 0 0 2 2 0 0 4 2 0 0 6 2 0 0 8 2 0 1 0

-4 5 0

-4 0 0

-3 5 0

-3 0 0

-2 5 0

-2 0 0

-1 5 0

-1 0 0

-5 0

0

M o n th ly (U S $ b n . ) (b a r s ) A n n u a l (U S $ b n . ) ( l in e )


Figure 22: U.S. Trade Balance – Automotive Figure 23: U.S. Trade Balance – Food & Beverages

- 1 6

- 1 4

- 1 2

- 1 0

- 8

- 6

- 4

- 2

0

1 9 9 4 1 9 9 6 1 9 9 8 2 0 0 0 2 0 0 2 2 0 0 4 2 0 0 6 2 0 0 8 2 0 1 0

- 1 8 0

- 1 6 0

- 1 4 0

- 1 2 0

- 1 0 0

- 8 0

- 6 0

- 4 0

- 2 0

0

M o n t h l y ( U S $ b n . ) ( b a r s ) A n n u a l ( U S $ b n . ) ( l in e )

- 1 . 5

- 1

- 0 . 5

0

0 . 5

1

1 . 5

2

2 . 5

3

1 9 9 4 1 9 9 6 1 9 9 8 2 0 0 0 2 0 0 2 2 0 0 4 2 0 0 6 2 0 0 8 2 0 1 0

- 1 5

- 1 0

- 5

0

5

1 0

1 5

2 0

2 5

M o n t h ly ( U S $ b n . ) ( b a r s ) A n n u a l ( U S $ b n . ) ( l i n e )




U.S. Bilateral Trade Balances by Country & Region

Figure 24: U.S. Trade Balance with China Figure 25: U.S. Trade Balance with Japan

- 3 0

-2 5

-2 0

-1 5

-1 0

-5

0

1 9 9 4 1 9 9 6 1 9 9 8 2 0 0 0 2 0 0 2 2 0 0 4 2 0 0 6 2 0 0 8 2 0 1 0

-2 7 0

-2 2 0

-1 7 0

-1 2 0

-7 0

-2 0

M o n t h ly (U S $ b n . )(b a r s )

A n n u a l (U S $ b n . )( l in e )

-1 0

-9

-8

-7

-6

-5

-4

-3

-2

-1

0

1 9 9 4 1 9 9 6 1 9 9 8 2 0 0 0 2 0 0 2 2 0 0 4 2 0 0 6 2 0 0 8 2 0 1 0

-9 5

-8 5

-7 5

-6 5

-5 5

-4 5

-3 5

-2 5

-1 5

-5

M o n th ly (U S $ b n . ) (b a r s ) A n n u a l (U S $ b n . ) ( l in e )


Figure 26: U.S. Trade Balance with the Pacific Rim (Asia excluding China and Japan)

Figure 27: U.S. Trade Balance with OPEC

-9

-8

-7

-6

-5

-4

-3

-2

-1

0

1 9 9 4 1 9 9 6 1 9 9 8 2 0 0 0 2 0 0 2 2 0 0 4 2 0 0 6 2 0 0 8 2 0 1 0

-8 5

-7 5

-6 5

-5 5

-4 5

-3 5

-2 5

-1 5

-5

M o n th ly (U S $ b n . ) (b a rs ) A n n u a l (U S $ b n . ) ( l in e )

-3 0

-2 5

-2 0

-1 5

-1 0

-5

0

5

1 9 9 4 1 9 9 6 1 9 9 8 2 0 0 0 2 0 0 2 2 0 0 4 2 0 0 6 2 0 0 8 2 0 1 0

-2 0 0

-1 6 0

-1 2 0

-8 0

-4 0

0M o n th ly (U S $ b n . ) (b a rs ) A n n u a l (U S $ b n .) ( l in e )


Figure 28: U.S. Trade Balance with Western Europe Figure 29: U.S. Trade Balance with Canada

-1 4

-1 2

-1 0

-8

-6

-4

-2

0

1 9 9 4 1 9 9 6 1 9 9 8 2 0 0 0 2 0 0 2 2 0 0 4 2 0 0 6 2 0 0 8 2 0 1 0

-1 4 0

-1 2 0

-1 0 0

-8 0

-6 0

-4 0

-2 0

0

M o n th ly (U S $ b n .) (b a rs ) A n n u a l (U S $ b n .) ( lin e )

-1 2

-1 0

-8

-6

-4

-2

0

1 9 9 4 1 9 9 6 1 9 9 8 2 0 0 0 2 0 0 2 2 0 0 4 2 0 0 6 2 0 0 8 2 0 1 0

-9 0

-8 0

-7 0

-6 0

-5 0

-4 0

-3 0

-2 0

-1 0

0M o n th ly (U S $ b n . ) (b a rs ) A n n u a l (U S $ b n . ) ( l in e )


Figure 30: U.S. Trade Balance with Mexico Figure 31: U.S. Trade Balance with Latin America

-8

-7

-6

-5

-4

-3

-2

-1

0

1

1 9 9 4 1 9 9 6 1 9 9 8 2 0 0 0 2 0 0 2 2 0 0 4 2 0 0 6 2 0 0 8 2 0 1 0

-9 0-8 0-7 0

-6 0-5 0

-4 0-3 0-2 0

-1 00

1 0M o n th ly (U S $ b n .) (b a rs ) A n n u a l (U S $ b n . ) ( l in e )

- 6

- 5

- 4

- 3

- 2

- 1

0

1

2

1 9 9 4 1 9 9 6 1 9 9 8 2 0 0 0 2 0 0 2 2 0 0 4 2 0 0 6 2 0 0 8 2 0 1 0

- 5 0

- 4 0

- 3 0

- 2 0

- 1 0

0

1 0

2 0

M o n t h ly ( U S $ b n . ) ( b a r s ) A n n u a l (U S $ b n . ) ( l i n e )




U.S Current-Account Balance Monitor

Figure 1: U.S. Current-Account Balance (1980-2009)

-7

-5

-3

-1

1

Sep-80 Sep-84 Sep-88 Sep-92 Sep-96 Sep-00 Sep-04 Sep-08

-7

-5

-3

-1

1Annualized Current Account as % of GDP

Source: DataStream

Figure 2: U.S. Savings and Investment (Private & Government Sector Savings-Investment)

-1800

-1200

-600

0

600

1200

Mar-80 Mar-84 Mar-88 Mar-92 Mar-96 Mar-00 Mar-04 Mar-08

-1800

-1200

-600

0

600

1200Private Sector Balance Gov't Sector Balance

Source: DataStream

Figure 3: U.S. Current-Account Balance (last 13 quarters) (US$ Billions)

Q2 07 Q3 07 Q4 07 Q1 08 Q2 08 Q3 08 Q4 08 Q1 09 Q2 09 Q3 09 Q4 09 Q1 10 Q2 10

Balance on Goods -205.6 -204.5 -209.8 -215.6 -222.7 -222.3 -174.1 -121.2 -113.5 -132.1 -140.1 -151.3 -169.6Balance on Services 26.4 31.4 37.1 34.1 37.2 34.7 29.8 30.8 33.1 32.8 35.4 36.9 38.0

Bal on Goods & Services -179.2 -173.1 -172.7 -181.5 -185.4 -187.6 -144.3 -90.4 -80.4 -99.3 -104.7 -114.5 -131.6Investment Income 13.9 30.3 43.9 42.4 38.4 45.4 25.8 24.6 26.3 35.5 35.1 40.2 41.2Unilateral Transfers -26.4 -28.1 -28.8 -32.9 -29.7 -30.2 -29.2 -29.7 -30.3 -33.6 -31.3 -34.9 -34.9

Bal on Current Account -191.7 -170.9 -157.6 -172.0 -176.8 -172.4 -147.6 -95.6 -84.4 -97.5 -100.9 -109.2 -123.3(annualized, as % of GDP) -5.5% -4.8% -4.4% -4.8% -4.9% -4.8% -4.2% -2.7% -2.4% -2.8% -2.8% -3.0% -3.4%

Figure 4: U.S. Current-Account Balance (1997-2009) (US$ Billions) 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009

Ba lance on Goods -198.4 -248.2 -336.3 -446.2 -422.0 -475.3 -541.5 -665.6 -783.8 -839.5 -823.2 -834.7 -506.9Ba lance on Serv ices 90.2 82.1 72.1 67.5 57.6 54.8 47.4 56.3 69.6 80.2 121.1 135.9 132.0

Ba l on Goods & Serv ices -108.3 -166.1 -264.2 -378.8 -364.4 -420.5 -494.2 -609.3 -714.2 -759.2 -702.1 -698.8 -374.9Inves tm ent Incom e 12.6 4.3 13.9 21.1 31.7 27.4 45.3 67.2 72.4 48.1 99.6 152.0 121.4Unila tera l Trans fers -45.1 -53.2 -50.4 -58.6 -64.5 -64.9 -71.8 -88.4 -105.8 -91.5 -115.6 -122.0 -124.9

Ba l on Current Account -140.7 -215.1 -300.8 -416.4 -397.2 -458.1 -520.7 -630.5 -747.6 -802.6 -718.1 -668.9 -378.4(annua lized, as % of GDP) -1.7% -2.4% -3.2% -4.2% -3.9% -4.3% -4.7% -5.3% -5.9% -6.0% -5.1% -4.6% -2.7%

Figure 5: U.S. Savings-Investment & Net Foreign Investment (1997-2009) (US$ Billions) 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009

P r iv a te S a v ings 1375.4 1395.0 1380.2 1376.2 1466.5 1656.8 1749.9 1880.1 1909.9 2057.8 1964.5 2195.9 2427.0P r iv a te Inv es tm ent 1388.6 1510.8 1641.5 1772.2 1661.9 1646.9 1729.7 1968.5 2172.2 2327.1 2288.5 2136.0 1628.8P r iv a te-S ec tor Ba la nc e -13.2 -115.8 -261.3 -396.0 -195.4 9.9 20.2 -88.4 -262.3 -269.3 -324.0 59.9 798.2

G ov 't S a v ings 150.3 259.4 327.8 423.9 229.2 -95.9 -197.1 -155.9 -6.5 116.5 75.6 -371.8 -918.6G ov 't Inv es tm ent 252.4 262.8 287.4 304.3 322.0 343.5 355.8 372.3 392.0 425.1 461.5 496.3 513.8G ov 't -S ec tor Ba la nc e -102.1 -3.4 40.4 119.6 -92.8 -439.4 -552.9 -528.2 -398.5 -308.6 -385.9 -868.1 -1432.4

G ros s S a v ings 1525.7 1654.4 1708.0 1800.2 1695.7 1560.9 1552.7 1724.2 1903.4 2174.4 2040.2 1824.1 1508.4G ros s Inv es tm ent 1641.0 1773.6 1928.8 2076.5 1984.0 1990.4 2085.5 2340.9 2564.2 2752.2 2750.0 2632.4 2142.6S a v ings -Inv es tm ent -115.3 -119.2 -220.8 -276.3 -288.3 -429.5 -532.8 -616.7 -660.8 -577.8 -709.8 -808.3 -634.2

S ta t is t ica l D is c repa nc y -14.0 -85.3 -71.1 -134.0 -103.3 -22.1 16.6 -7.8 -79.7 -220.6 -14.8 101.0 209.1

Net Foreign Inv es tm ent -129.3 -204.5 -291.9 -410.4 -391.6 -451.6 -516.1 -624.6 -740.5 -798.4 -724.6 -707.2 -425.0 Source: DataStream



Central Bank Reserves Currency Composition Monitor

Figure 1: Official FX reserves have quadrupled reflecting

primarily the growth of EM holdings

Figure 2: Mature market (MM) reserves have grown only

modestly reflecting valuation & interest

0

2,000

4,000

6,000

8,000

10,000

1999Q1

2000Q1

2001Q1

2002Q1

2003Q1

2004Q1

2005Q1

2006Q1

2007Q1

2008Q1

2009Q1

2010Q1

USD Bn.

0

2,000

4,000

6,000

8,000

10,000

Total FX Reserves

MM FX Reserves

EM FX Reserves

0

500

1000

1500

2000

2500

3000

1999Q1

2000Q1

2001Q1

2002Q1

2003Q1

2004Q1

2005Q1

2006Q1

2007Q1

2008Q1

2009Q1

2010Q1

USD Bn.

0

500

1000

1500

2000

2500

3000

Total MM Reserves

Japanese Reserves

Non Japanese Reserves

Source: FRB, Census, BEA, DB Global Markets Research Source: FRB, Census, BEA, DB Global Markets Research

Figure 3: Many countries report the currency

composition of reserves to the IMF, which publishes

them in aggregate form

Figure 4: The advanced countries (MM) all report

the composition of reserves to the IMF…

0

2,500

5,000

7,500

10,000

1999Q1

2000Q1

2001Q1

2002Q1

2003Q1

2004Q1

2005Q1

2006Q1

2007Q1

2008Q1

2009Q1

2010Q1

USD Bn.

0

2,500

5,000

7,500

10,000

Total Foreign Exchange Holdings

Allocated Reserves

Unallocated Reserves

0

500

1,000

1,500

2,000

2,500

3,000

1999Q1

2000Q1

2001Q1

2002Q1

2003Q1

2004Q1

2005Q1

2006Q1

2007Q1

2008Q1

2009Q1

2010Q1

USD Bn.

0

500

1,000

1,500

2,000

2,500

3,000

MM FX Reserves

MM Allocated Reserves

MM Unallocated Reserves

Source: COFER, IMF, DB FX Research Source: COFER, IMF, DB FX Research

Figure 5: …while about half of emerging markets

report the currency composition of their reserves

Figure 6: The currency composition of (114 reporting

countries) total FX reserves: levels

0

1,000

2,000

3,000

4,000

5,000

6,000

1999Q1

2000Q1

2001Q1

2002Q1

2003Q1

2004Q1

2005Q1

2006Q1

2007Q1

2008Q1

2009Q1

2010Q1

USD Bn.

0

1,000

2,000

3,000

4,000

5,000

6,000

EM FX Reserves

EM Allocated Reserves

EM Unallocated Reserves

0

500

1,000

1,500

2,000

2,500

3,000

1999Q1

2000Q1

2001Q1

2002Q1

2003Q1

2004Q1

2005Q1

2006Q1

2007Q1

2008Q1

2009Q1

2010Q1

USD Bn.

0

500

1,000

1,500

2,000

2,500

3,000

US DollarsEurosYenSterlingSwiss FrancOther Currencies

Source: COFER, IMF, DB FX Research Source:, COFER, IMF, DB FX Research



Figure 7: The USD share in world reserves fell during

2002-04; then stabilized and has now started falling

again

Figure 8: Advanced country FX reserve holdings…

0

10

20

30

40

50

60

70

80

1999Q1

2000Q1

2001Q1

2002Q1

2003Q1

2004Q1

2005Q1

2006Q1

2007Q1

2008Q1

2009Q1

2010Q1

%

0

10

20

30

40

50

60

70

80

US DollarsEurosYenSterlingSwiss FrancOther Currencies

0

300

600

900

1,200

1,500

1,800

1999Q1

2000Q1

2001Q1

2002Q1

2003Q1

2004Q1

2005Q1

2006Q1

2007Q1

2008Q1

2009Q1

2010Q1

USD Bn.

0

300

600

900

1,200

1,500

1,800

US dollarsEurosYenSterlingSwiss FrancOther Currencies

Source COFER, IMF, DB FX Research Source:, COFER, IMF, DB FX Research

Figure 9: …the dollar share in industrial country

reserves has been relatively stable

Figure 10: Ex-Japan (our estimate) industrial country

dollar and euro holdings have both risen

0

10

20

30

40

50

60

70

80

1999Q1

2000Q1

2001Q1

2002Q1

2003Q1

2004Q1

2005Q1

2006Q1

2007Q1

2008Q1

2009Q1

2010Q1

%

0

10

20

30

40

50

60

70

80


0

200

400

600

800

1999Q1

2000Q1

2001Q1

2002Q1

2003Q1

2004Q1

2005Q1

2006Q1

2007Q1

2008Q1

2009Q1

2010Q1

USD Bn.

0

200

400

600

800

Non Japan US DollarsNon Japan EurosYenSterlingSwiss FrancOther Currencies

Source: COFER, IMF, DB FX Research Source:, COFER, IMF, DB FX Research

Figure 11: The share of euros and dollars is not very

different

Figure 12: EM holdings of dollars had climbed steadily

and have been falling recently

0

10

20

30

40

50

60

70

1999Q1

2000Q1

2001Q1

2002Q1

2003Q1

2004Q1

2005Q1

2006Q1

2007Q1

2008Q1

2009Q1

2010Q1

%

0

10

20

30

40

50

60

70

Non Japan US DollarsNon Japan EurosYenSterlingSwiss FrancOther Currencies

0

300

600

900

1200

1500

1999Q1

2000Q1

2001Q1

2002Q1

2003Q1

2004Q1

2005Q1

2006Q1

2007Q1

2008Q1

2009Q1

2010Q1

USD Bn.

0

300

600

900

1200

1500


Source: COFER, IMF, DB FX Research Source: COFER, IMF, DB FX Research



Figure 13: In EM, the main driver of reserve growth has

been intervention (in USD bn)

Figure 14: In EM, the dollar share fell steadily during

2002-04 then stabilized

-100

400

900

1400

1900

2400

1999Q4

2000Q4

2001Q4

2002Q4

2003Q4

2004Q4

2005Q4

2006Q4

2007Q4

2008Q4

2009Q4

-100

400

900

1400

1900

2400Total growth in EM reserves since 1995

Total quantity change

Total valuation change

0

10

20

30

40

50

60

70

80

1999Q1

2000Q1

2001Q1

2002Q1

2003Q1

2004Q1

2005Q1

2006Q1

2007Q1

2008Q1

2009Q1

2010Q1

%

0

10

20

30

40

50

60

70

80


Diversification Leaningagainst the

wind

Source: DB FX Research Source: COFER, IMF, DB FX Research

Figure 15: First active diversification, then leaning

against the wind

Figure 16: China has steadily diversified away from USD

since 2004 (our estimates)

-15

-10

-5

0

5

10

15

2000Q2

2001Q1

2001Q4

2002Q3

2003Q2

2004Q1

2004Q4

2005Q3

2006Q2

2007Q1

2007Q4

2008Q3

2009Q2

2010Q1

-150

-100

-50

0

50

100

150

Change in EUR/USD rate (in %)

EUR share in net purchases - EUR share of stock,(Rhs)

Diversification Leaningagainst the

wind

0

10

20

30

40

50

60

70

80

Jun-98 Sep-99 Dec-00 Mar-02 Jun-03 Sep-04 Dec-05 Mar-07 Jun-08 Sep-09

0

700

1400

2100

2800

Share of USD in China FXReserves FX Reserves in USD bn (Rs)

%USD Bn

Source: COFER, IMF, DB FX Research Source: US TIC data DB FX Research



Appendix 1 Important Disclosures

Additional information available upon request

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GRCM2010PROD020501

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