Q4 2013 FX Market Monitor
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Transcript of Q4 2013 FX Market Monitor
CURRENCIES
Currency Market Monitor 4th Quarter 2013
JANUARY 6, 2014
John W. Labuszewski Sandra Ro Bluford Putnam
Managing Director Executive Director Chief Economist
Research & Product Development
312-466-7469
Research & Product Development
011 (44) 203-379-3789
Research & Product Development
212-299--2302
1 | Currency Market Monitor 4th Quarter 2013 | January 6, 2014 | © CME GROUP
An ongoing debate has long persisted in the global
currency or FX markets – is FX an “asset class” akin
to stocks and bonds? While practitioners and
academics may debate this point at length, perhaps
the most practical answer is – does it really matter
provided that investors may draw a return from
currency investments?
The performance of the currency or FX markets is
found in the exchange rates and cross-rates
associated with the world’s myriad currencies. The
total return associated with a currency is driven by
interest income associated with fixed income
instrument investment in the particular currency; as
well as pure price performance.
Many fundamental factors, including national
economic conditions, monetary and policies, current
and capital account flows, to name just a few,
impact the returns associated with the world’s
currencies.
This document represents a review of these factors
as they played out in the most recently completed
calendar quarter. We include consideration of the
so-called “carry trade” as well as a look at the
theory of “purchasing power parity” as it impacts FX
markets.
While we cover activity in a broad spectrum of
currencies, we focus on the currencies underlying
some of the most liquid of CME Group FX futures.
This includes the U.S. dollar (USD), Euro (EUR),
Japanese yen (JPY), British pound (GBP), Swiss
franc (CHF), Canadian dollar (CAD), Australian dollar
(AUD) and Mexican peso (MXN).
In addition, we have special interest in the
currencies of significant emerging market economies
including the Brazilian real (BRL), Russian ruble
(RUB), Indian rupee (INR) and Chinese yuan or
renminbi (CNY) – the so-called “BRIC” nations.
Finally, we highlight several CME Group FX Indexes
including a USD Index, a Carry Trade Index,
Commodity Country Index and BRIC Index.
Market Fundamentals
As a general rule, FX analysts will evaluate the
fundamental value of any particular currency by
reference to a number of national economic factors.
These factors including growth and inflation
prospects; monetary and fiscal policies; and, current
and capital account balances.
To illustrate, we include a brief discussion of the
economic situation prevailing in the United States as
of the conclusion of the most recently completed
calendar quarter. Of course, the U.S. dollar (USD)
may be just one side of any currency pair that may
be traded using CME FX futures.
A brief summary of economic conditions in various
nations, organized along similar lines, is included in
Appendix 1 of our document below. One may
compare and contrast these conditions as they exist
in the two countries whose currency pairing one may
be interested in to draw an appreciation of the
fundamental factors that impact currency markets.
Growth and Employment
We entered the 4th quarter 2013 on disappointment
surrounding the Fed’s announcement of September
18th that it will defer any possible “tapering” of its
quantitative easing (QE) programs, despite evidence
of economic growth.
Specifically, the Fed “decided to await more
evidence that [economic] progress will be sustained
before adjusting the pace of its purchases … these
actions should maintain downward pressure on
longer-term interest rates, support mortgage
markets, and help to make broader financial
conditions more accommodative, which in turn
should promote a stronger economic recovery and
help to ensure that inflation, over time, is at the rate
most consistent with the Committee’s dual
mandate.” 1
The Federal Reserve framed its concerns succinctly
suggesting that “labor market conditions have
shown further improvement in recent months, but
the employment rate remains elevated.” 2
But the 4th quarter brought more evidence of
economic recovery as 3rd quarter real GDP
reportedly grew by 4.1% and up nicely from the 3rd,
1 Federal Reserve Press Release dated September 18,
2013. 2 Ibid.
2 | Currency Market Monitor 4th Quarter 2013 | January 6, 2014 | © CME GROUP
2nd and 1st quarter marks of +2.5%, +1.1% and
+0.1%, respectively. This growth drove the
unemployment rate down to 7.0% by November
2013, down from the year’s high of 7.9% reported
for January 2013.
While recent reports are certainly encouraging, we
must still note that labor force participation was last
reported at a mere 63.0% in November 2013. This
represents an uptick from the trough of 62.8%
reported for October 2013.
But it nonetheless falls short of the 63.6% reported
at year’s end 2012 and remains near all-time lows.
This, of course, calls into question whether the
declining unemployment numbers represent healthy
growth or may be attributed to widespread
workplace dropout and a structural shift in the
employment paradigm.
Thus, the Fed observed, per its Press Release dated
December 18th, that “economic activity is expanding
at a moderate pace. Labor market conditions have
shown further improvement; the unemployment rate
has declined but remains elevated.” 3
The total number of employed remains less than the
peak of 138.056 million observed in January 2008
before the subprime mortgage crisis. Ranks of the
employed fell sharply before starting to recover and
stood at 136.765 million as of November 2013.
Thus, we have gone some 70 months and have yet
to recover to pre-crisis levels. This represents the
most extended recovery from recession during the
past 35 years.
The unemployment situation may be further
exacerbated as emergency unemployment insurance
benefits are curtailed as of December 28, 2013 as a
result of recent Federal budget agreements.
The Fed further suggests that “[h]ousehold spending
and business fixed investment advanced, while the
recovery in the housing sector slowed somewhat in
recent months.” 4 This is reflected in retail sales
figures which continued to grow to $184.837 billion
in November 2013 and up 3.3% on a year-on-year
basis from the previous November.
This consumer exuberance is driven perhaps by the
“wealth effect” associated with a buoyant equity
3 Federal Reserve Press Release dated December 18,
2013. 4 Ibid.
4%
5%
6%
7%
8%
9%
10%
11%
-10%
-8%
-6%
-4%
-2%
0%
2%
4%
6%
Q1 0
5
Q4 0
5
Q3 0
6
Q2 0
7
Q1 0
8
Q4 0
8
Q3 0
9
Q2 1
0
Q1 1
1
Q4 1
1
Q3 1
2
Q2 1
3
Unem
plo
ym
ent
Rate
Qtr
ly C
hange in G
DP
Growth and Employment
Real GDP (SA) Unemployment Rate
Source: Bureau of Economic Analysis (BEA) & Bureau of Labor Statistics (BLS)
62%
63%
64%
65%
66%
67%
68%
4%
5%
6%
7%
8%
9%
10%
11%
Jan-0
2
Jan-0
3
Jan-0
4
Jan-0
5
Jan-0
6
Jan-0
7
Jan-0
8
Jan-0
9
Jan-1
0
Jan-1
1
Jan-1
2
Jan-1
3
Labor
Forc
e P
art
icip
ation
Unem
plo
ym
ent
Rate
Employment Statistics
Unemployment Rate Labor Force Partcipation
Source: Bureau of Labor Statistics (BLS)
93%
94%
95%
96%
97%
98%
99%
100%
101%
1 5 9
13
17
21
25
29
33
37
41
45
49
53
57
61
65
69
NFPs a
s %
of Peak
Months Since Peak NFP
NFP Recovery from Recession
Apr - Dec-80 Aug-81 - Oct-83Jul-90 - Jan-93 Mar-01 - Jan-05Feb-08 - Jun-13
3 | Currency Market Monitor 4th Quarter 2013 | January 6, 2014 | © CME GROUP
market. The net worth of households and nonprofit
organizations was reported at a new all-time high of
$77.259 trillion as of the 3rd quarter 2013 and up
11.0% of a year-on-year basis.
This exuberance is also reflected in rising consumer
sentiment figures. The University of Michigan
Consumer Sentiment Survey was reported at 82.5 in
December 2013. This represents a nice uptick from
November’s 75.1 but remains below the year’s peak
of 85.1 reported in July.
Similarly the Index of Industrial Production rallied to
101.2825 by November 2013, representing a 3.2%
advance on a year-on-year basis from the prior
year’s November report. As such, the industrial
sector has now bounced back to levels in excess of
those observed prior to the subprime crisis, noting
that the Index of Industrial Production is calibrated
to 100 as of 2007.
Capacity utilization further climbed to 79.0% in
November 2013 compared to the prior October
report of 78.2%. Note that 80% is often regarded
as a key level, at which point economists generally
expect to see occasional labor or material shortages
or bottlenecks arise, possibly contributing to
inflationary pressures.
Further possible sources of future inflationary
pressures might be anticipated in the housing sector
where November 2013 building permits, housing
starts and housing completions were reported
+7.9%, +29.6% and +21.6% on a year-on-year
basis from the previous November.
This recovery is further reflected in the S&P/Case-
Shiller 10-City Composite Housing Index which was
reported +13.3% on a year-on-year basis from
September 2012 to September 2013; and, +22.92%
from the trough observed in March 2012.
1.20
1.25
1.30
1.35
1.40
1.45
1.50
$150
$155
$160
$165
$170
$175
$180
$185
$190
Jan-0
7
Aug-0
7
Mar-
08
Oct-
08
May-0
9
Dec-0
9
Jul-
10
Feb-1
1
Sep-1
1
Apr-
12
Nov-1
2
Jun-1
3
Invento
ry:S
ale
s R
atio
Reta
il S
ale
s (
Bil $
)
Retail Sector Activity
Real Retail Sales & Food Services SATotal Business Inventory:Sales Ratio
Source: U.S. Census Bureau
50
55
60
65
70
75
80
85
90
95
100
$50
$55
$60
$65
$70
$75
$80
Q4 0
4
Q3 0
5
Q2 0
6
Q1 0
7
Q4 0
7
Q3 0
8
Q2 0
9
Q1 1
0
Q4 1
0
Q3 1
1
Q2 1
2
Q1 1
3
Q4 1
3
Consum
er
Confidence I
ndex
Household
Net
Wort
h (
Trillio
ns) Net Worth & Consumer Sentiment
Household Net Worth Consumer Sentiment Index
Source: U.S. Federal Reserve & FRED Database
66%
68%
70%
72%
74%
76%
78%
80%
82%
80
85
90
95
100
105
Jan-0
7
Aug-0
7
Mar-
08
Oct-
08
May-0
9
Dec-0
9
Jul-
10
Feb-1
1
Sep-1
1
Apr-
12
Nov-1
2
Jun-1
3
Capacity U
tilization
Industr
ial Pro
duction I
ndex
Industrial Sector Activity
Index of Industrial Production Capacity Utilization
Source: St. Louis Federal Reserve FRED Database
0
500
1,000
1,500
2,000
2,500
Jan-0
4
Sep-0
4
May-0
5
Jan-0
6
Sep-0
6
May-0
7
Jan-0
8
Sep-0
8
May-0
9
Jan-1
0
Sep-1
0
May-1
1
Jan-1
2
Sep-1
2
May-1
3
000 U
nits
Housing Activity
Building Permits Housing Starts
Source: Dept. of Housing & Urban Development (HUD)
4 | Currency Market Monitor 4th Quarter 2013 | January 6, 2014 | © CME GROUP
Inflation
The Fed currently sees little evidence of inflationary
pressures. On the contrary, it “recognizes that
inflation persistently below its 2 percent objective
could pose risks to economic performance, and it is
monitoring inflation developments carefully for
evidence that inflation will move back toward its
objective over the medium term.” 5
Indeed, the Consumer Price Index (CPI) was
reported at +1.2% on a year-on-year basis in
November 2013 while the CPI excluding volatile food
and energy prices was reported at +1.7%. These
figures have generally been winding downward over
the last year or two, raising concerns in some
sectors of a possible deflationary spiral.
But as discussed above, we have seen capacity
utilization advance to 79.0%, along with anecdotal
reports of labor shortages in some industries notably
including construction. This is underscored by
evidence of housing recovery and price advances,
although it is noteworthy that housing activity
remains well below pre-crisis levels.
Further insight might be found by examining the
“Breakeven (B/E) Inflation Rate.” This is calculated
as Treasury yields minus the real yield on Treasury
Inflation Protected Securities (TIPs). This measure
generally reflects investor expectations regarding
future inflation prospects. Thus, the Fed closely
5 Ibid.
monitors the B/E Inflation Rate as an indication of
inflationary prospects.
It is interesting to note that the Fed had historically
announced various incarnations of its quantitative
easing (QE) programs on dips in the B/E Inflation
Rate. The Fed’s December 18th tapering
announcement was likely supported by the fact that
the B/E Inflation Rate now hovers just above 2%.
Monetary Policy
The 3rd quarter ended with disappointment that the
Fed had deferred on any possible tapering in its QE
programs per which they have purchased some $85
billion of Treasuries, agency debt and agency
mortgage backed securities (MBS) on a monthly
basis.
But by the conclusion of the 4th quarter, the Fed
acknowledged “improvement in economic activity
and labor market conditions … consistent with
growing underlying strength in the broader
economy. In light of the cumulative progress
toward maximum employment and the improvement
in the outlook for labor market conditions, the
Committee decided to modestly reduce the pace of
its asset purchases. Beginning in January, the
Committee will add to its holdings of agency
mortgage-backed securities at a pace of $35 billion
per month rather than $40 billion per month, and
will add to its holdings of longer-term Treasury
securities at a pace of $40 billion per month rather
than $45 billion per month.” 6
6 Ibid.
-3%
-2%
-1%
0%
1%
2%
3%
4%
5%
6%
Jan-0
4
Jan-0
5
Jan-0
6
Jan-0
7
Jan-0
8
Jan-0
9
Jan-1
0
Jan-1
1
Jan-1
2
Jan-1
3
Year-
on-Y
ear
Change
Consumer Price Index (CPI)
CPI - All Urban Consumers SA CPI ex-Food & Energy SA
Source: Bureau of Labor Statistics (BLS)
0.0%
0.5%
1.0%
1.5%
2.0%
2.5%
3.0%
Jan-0
7
Jul-
07
Jan-0
8
Jul-
08
Jan-0
9
Jul-
09
Jan-1
0
Jul-
10
Jan-1
1
Jul-
11
Jan-1
2
Jul-
12
Jan-1
3
Jul-
13
10-Year B/E Inflation Rate
5 | Currency Market Monitor 4th Quarter 2013 | January 6, 2014 | © CME GROUP
This aggregate $10 billion in tapering on a monthly
basis is consistent with expectations as reported in
this publication at the conclusion of the 3rd quarter.
Further tapering, however, will be deferred “until the
outlook for the labor market has improved
substantially in a context of price stability. If
incoming information broadly supports the
Committee’s expectation of ongoing improvement in
labor market conditions and inflation moving back
toward its longer-termr objective, the Committee
will likely reduce the pace of asset purchases in
further measured steps at future meetings.” 7
Similar measured taperings are now expected
throughout calendar year 2014 although it may be a
meeting or two before further steps are taken.
Tapering was further supported by updated Fed
projections of 2.2-2.3% in 2013, upwardly revised
from previous projections of 2.0-2.3% growth.
Growth in 2014 was projected at 2.8-3.2%. 8
These updated policies and projections were greeted
enthusiastically as domestic equity values rallied
sharply to new all-time highs while Treasury yields
along the medium to longer-term portion of the
curve likewise advanced.
Target Fed Funds has, historically, been the primary
monetary policy tool. On that front, the Committee
“reaffirmed its expectation that the current
exceptionally low range for the federal funds rate of
7 Ibid.
8 See “Economic Projections of Federal Reserve Board Members and Federal Reserve Bank Presidents, December 2013” (December 18, 2013).
0 to ¼ percent will be appropriate at least as long as
the unemployment rate remains above 6-1/2
percent, inflation between one and two years ahead
is projected to be no more than a half percentage
point above the Committee’s 2 percent longer-run
goal, and longer-term inflation expectations continue
to be well anchored.” 9
The Fed further explains that “[i]n determining how
long to maintain a highly accommodative stance of
monetary policy, the Committee will also consider
other information, including additional measures of
labor market conditions, indicators of inflation
pressures and inflation expectations, and readings
on financial developments. The Committee now
anticipates … that it likely will be appropriate to
maintain the current target range for the federal
funds rate well past the time that unemployment
rate declines to 6-1/2 percent, especially if projected
inflation continues to run below the Committee’s 2
percent longer-term goal.” 10
Fiscal Policy
The Fed acknowledged that “[f]iscal policy is
restraining economic growth, although the extent of
restraint may be diminishing.” 11 The fiscal stimulus
implicit in the 2009 through 2012 Federal budget
deficits of $1.4, $1.3, $1.3 and $1.1 trillion,
respectively, shrunk to just $680 billion 2013.
Fiscal difficulties were much in evidence at the
beginning of the 4th quarter. In particular,
bipartisan disputes regarding the implementation of
President Obama’s Patient Protection and Affordable
Care Act boiled over on the commencement of the
Federal government’s fiscal year on October 1st.
The Continuing Appropriations Resolution, 2014,
which would provide for ongoing funding of Federal
operations became the focus of these disputes. The
Republican dominated House, led by Senator Cruz
attempted to attach riders to the Resolution which
would delay or deny funding to the “Obamacare”
programs. The Democratic dominated Senate
9 Op Cit., Federal Reserve Press Release dated December
18, 2013.
10 Ibid.
11 Ibid.
0%
1%
2%
3%
4%
5%
6%
Jan-0
7
Jun-0
7
Nov-0
7
Apr-
08
Sep-0
8
Feb-0
9
Jul-
09
Dec-0
9
May-1
0
Oct-
10
Mar-
11
Aug-1
1
Jan-1
2
Jun-1
2
Nov-1
2
Apr-
13
Sep-1
3
Benchmark U.S. Rates
Target Fed Funds 2-Yr Treasury5-Yr Treasury 10-Yr Treasury
30-Yr Treasury
6 | Currency Market Monitor 4th Quarter 2013 | January 6, 2014 | © CME GROUP
countered with measures that would continue
funding with no conditions attached.
Because Congress failed to appropriate requisite
funding, the Federal government shut down routine
operations from October 1st through the 16th. Some
800,000 Federal employees were furloughed with
another 1.3 million employees reporting to work
with uncertain payment dates.
These controversies were resolved, at least
temporarily, with the passage of a Continuing
Appropriations Act, 2014 late in the evening of
October 16th, ending the shutdown and suspending
application of the Federal debt ceiling until February
7, 2014.
By December 26th, President Obama signed into law
a 2-year budget package that would forestall the
potential for a subsequent government funding crisis
in early 2014 and which reverses some previous
spending cuts. Still, a further political showdown
looms with respect to the debt ceiling as we
approach February 7th.
These events will likely limit 4th quarter GDP growth,
possibly upwards to 0.5% per some economists.
Still, the market generally interpreted these
developments as a reduction in the political
brinksmanship of recent months and years.
Current & Capital Account Flows
More encouraging news was found in the 3rd quarter
2013 current account deficit of $94.840 billion, a
decline from the 2nd quarter’s report of $96.613
billion. This represents the best report since the 2nd
quarter of 2009 when the gap was reported at
$86.982 billion near the height of the subprime
crisis.
Another interesting source of flow of funds data may
be found in the U.S. Treasury Department’s
Treasury International Capital (or “TIC”) database.
This database tracks flows into and out of the U.S.
The data is broken into foreign stocks, foreign
bonds, U.S. stocks, U.S. corporate bonds, U.S.
government agencies and U.S. Treasuries.
U.S. vs. overseas capital flows have generally been
characterized over the past decade by substantial
influx of funds into U.S. Treasuries. This
phenomenon peaked in 2010 as overseas investors
purchased some $704 billion in U.S. Treasuries on a
-$1,600
-$1,400
-$1,200
-$1,000
-$800
-$600
-$400
-$200
$0
$200
$400
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
Federal Surplus/Deficit(Billions USD)
Source: Office of Management and Budget (OMB) -$250
-$200
-$150
-$100
-$50
$0
Q1 0
4Q
3 0
4Q
1 0
5Q
3 0
5Q
1 0
6Q
3 0
6Q
1 0
7Q
3 0
7Q
1 0
8Q
3 0
8Q
1 0
9Q
3 0
9Q
1 1
0Q
3 1
0Q
1 1
1Q
3 1
1Q
1 1
2Q
3 1
2Q
1 1
3
U.S. Current Account Deficit(Billions USD)
Source: Bureau of Economic Analysis (BEA)
-$800
-$300
$200
$700
$1,200
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
Thru
10/1
3
Net US/Foreign Capital Flows (Billions USD)
US Treasuries US Gov't Agencies US CorporatesUS Stocks Foreign Bonds Foreign Stocks
Source: U.S. Treasury TIC Database
7 | Currency Market Monitor 4th Quarter 2013 | January 6, 2014 | © CME GROUP
net basis. The figure tailed off to $433 and $417
billion in 2011 and 2012, respectively, but that still
represents sizable values.
But during the first ten months of 2013 through
October, foreign investors purchased a scant $46
billion of Treasuries on a net basis. Despite this
surprisingly low total, a rather substantial $500
billion in capital has flowed into the U.S. on a net
basis from January through October 2013.
Most of this inflow has come into U.S. equities with
an influx of some $544 billion on a net basis as a
result of strong U.S. equity performance and a
widespread anticipation of rising rates and falling
bond prices.
Mutual Fund Flows
The flow of equity and fixed income investments
may be examined per data published by the
Investment Company Institute (ICI) which tracks
activity in the mutual fund industry. 12
Investors added some $156.5 billion into equity
funds during the first eleven months of 2013
through November. Interestingly, only $27.1 billion
was directed into domestic equity funds, despite
their generally strong performance while another
$129.4 billion was added to foreign equity funds.
12 These indicators are often highly correlated with price
action as retail investors may “chase” the market by buying in response to a bull trend. Or, they may exhibit a “herd mentality” by liquidating investments in response to significant market breaks.
Funds had generally been flowing into bond funds
through May 2013. But June saw the reversal of
this trend as investors began to believe that interest
rate advances, fueled by economic growth and
expectations of tapering of Fed easing programs. By
the conclusion of October, some $57.9 billion had
been withdrawn from bond funds on a year-to-date
basis.
USD Price Performance
The factors discussed above exert an obvious impact
upon the price performance of the U.S. dollar vis-à-
vis other world currencies. In order to monitor this
price impact, CME Group has developed the “CME
-$40
-$30
-$20
-$10
$0
$10
$20
$30
$40
Jan-1
2
Mar-
12
May-1
2
Jul-
12
Sep-1
2
Nov-1
2
Jan-1
3
Mar-
13
May-1
3
Jul-
13
Sep-1
3
Nov-1
3
Equity Fund Cash Flows (Billions USD)
Domestic Equities Foreign EquitiesSource: Investment Company Institute (ICI)
-$80
-$60
-$40
-$20
$0
$20
$40
Jan-1
2
Mar-
12
May-1
2
Jul-
12
Sep-1
2
Nov-1
2
Jan-1
3
Mar-
13
May-1
3
Jul-
13
Sep-1
3
Nov-1
3
Equity & Bond Fund Cash Flows (Billions USD)
Equity Funds Bond Funds
Source: Investment Company Institute (ICI)
900
950
1,000
1,050
1,100
1,150
1,200
1,250
Jan-0
7
Jul-
07
Jan-0
8
Jul-
08
Jan-0
9
Jul-
09
Jan-1
0
Jul-
10
Jan-1
1
Jul-
11
Jan-1
2
Jul-
12
Jan-1
3
Jul-
13
CME USD Index
Long Short14.3% EUR 100% USD14.3% JPY14.3% GBP 14.3% CHF 14.3% CAD14.3% AUD14.3% CNY
8 | Currency Market Monitor 4th Quarter 2013 | January 6, 2014 | © CME GROUP
USD Index” as one in a family of similarly
constructed FX Indexes. 13
The CME USD Index ended the year at a value of
1,042.66. This represents an advance of the 3rd
quarter’s ending mark of 1,027.22 and well over the
year-end 2012 figure of 992.19.
Global Economic Performance
Emerging market (EM) economies have been the
stars of the investment world for some years now.
Still, it was the developed market (DM) economies
that provided some of the most positive growth
surprises in 2013. While the EM countries generally
exhibit higher growth rates than DM countries, that
growth has generally decelerated relative to DM
economies in recent years.
Actual and Forecast GDP Growth
2010 2011 2012 2013
2014
-19
(f)
2020
-25
(f)
Developed Markets (DMs)
Australia 2.6% 2.4% 3.7% 2.7% 2.3% 2.2%
Canada 3.2% 2.6% 1.8% 1.4% 2.0% 1.8%
France 1.7% 2.0% 0.0% 0.2% 1.4% 0.9%
Germany 4.2% 3.0% 0.7% 0.4% 1.6% 1.4%
Japan 4.7% -0.6% 2.0% 0.8% 1.0% 0.6%
UK 1.8% 1.0% 0.3% 0.6% 1.9% 1.1%
US 2.5% 1.8% 2.8% 1.6% 2.4% 1.7%
Emerging Markets (DMs)
Brazil 6.9% 2.7% 0.9% 2.0% 2.9% 2.8%
Mexico 5.3% 3.9% 3.9% 2.5% 2.9% 3.1%
Russia 4.5% 4.3% 3.4% 2.9% 1.8% 1.2%
India 9.3% 6.2% 5.0% 4.2% 4.8% 3.6%
China 10.4% 9.3% 7.7% 7.5% 5.9% 3.5%
Source: The Conference Board Global
Economic Outlook 2014 (November 2013)
NOTE: (f) = forecast data
According to the Conference Board’s Global
Economic Outlook, growth in Germany is expected
to run at a very moderate +1.6% on an annual basis
from 2014-19. Similarly modest growth is expected
in much of the developed world including Japan
13 The CME USD Index represents a basket of equally
weighted positions (as of December 31, 2010) of the USD vs. the Euro (EUR), Japanese yen (JPY), British pound (GBP), Swiss franc (CHF), Canadian dollar (CAD), Australian dollar (AUD) and Chinese yuan (CNY). It is (arbitrarily) established at a value of 1,000.00 as of December 31, 2010.
(+1.0%), the United Kingdom (+1.9%) and the
United States (+2.4%). Note that the Euro (EUR)
posted a total return vs. the U.S. dollar (USD) in
2014 of +4.31%; the British pound (GBP) was seen
at +2.36% while the Japanese yen brought up the
rear at -17.52%.
While GDP growth has slowed in many of the
emerging economies, such growth has nonetheless
generally surpassed that of the DMs. This is
expected to continue, according to Conference Board
forecasts, albeit the gaps may narrow.
Note that the Chinese yuan or renminbi rallied by
7.07% relative to the USD in 2014. The Indian
rupee (INR) was off 2.51%; the Brazilian real (BRL)
was down some 6.73% while the Russian ruble
(RUB) was off 0.55%. Still, GDP in these nations is
anticipated to be relatively strong with China
expected to grow in 2014-19 by +5.9% with India
-1%
0%
1%
2%
3%
4%
5%
2010
2011
2012
2013
2014-1
9
2020-2
5
Select DM GDP Growth
Germany Japan
UK US
Source: The Conference Board
0%
2%
4%
6%
8%
10%
12%
2010
2011
2012
2013
2014-1
9
2020-2
5
Select EM GDP Growth
Brazil Russia
India China
Source: The Conference Board
9 | Currency Market Monitor 4th Quarter 2013 | January 6, 2014 | © CME GROUP
(+4.8%), Brazil (+2.9%) and Russia (+1.8%)
following behind.
Abenomics
Certainly Prime Minister Shinzo Abe’s aggressive
efforts to revitalize the Japanese economy played a
prominent role in the large scale decline of the
Japanese yen vs. the U.S. dollar and other
currencies in 2014. The so-called Abenomics
program features a target of 2% inflation, negative
real interest rates, a form of quantitative easing with
asset buybacks and heightened fiscal stimuli.
A massive increase in the Japanese sales tax from
5% to 8% is scheduled to be put into effect in April
2014. This action is likely to boost domestic
demand in Japan in the short-run at the risk of
diminished long-term demand. These funds are
slated to be used for further fiscal stimulus.
While prices continue to slip in Japan, most analysts
anticipate that “Abenomics” will likely succeed in
combating the deflationary pressures that have
plagued the Japanese economy since the early
1990s.
Total Return
One of the most popular long-term FX trading
strategies over the past decade is known simply as
the “carry trade.” This practice simply suggests
that one might exploit “cost of carry” by borrowing
in countries with low nominal interest rates to invest
in countries with high nominal interest rates. Thus,
one might sell the “low-rate” currency and buy the
“high-rate” currency.
Carry trade � Sell low-rate currency & buy high-rate currency
By so doing, one hopes to capitalize on discrepant
interest rates, and by implication, divergent
investment opportunities, in the two countries. This
strategy further recognizes that total currency return
consists of 2 components, specifically, exchange rate
or price movement plus the accrual of interest.
The implicit assumption is that these interest rate
relationships will endure. As such, carry traders
implicitly discount classical exchange rate theories
by assuming that the interest rate relationships may
endure over extended periods of time. This
suggests that low-yielding currencies that are sold
will not advance; and, that high-yielding currencies
that are purchased will not decline.
Total Currency
Return =
Price Movement + Interest
Historically, such relationships have been known to
endure for extended periods of time, reinforcing
interest in the carry trade. In particular, vast sums
of money totaling in the trillions of U.S. dollars were
invested in the carry trade prior to the outbreak of
the subprime crisis, specifically by shorting the
Japanese yen (JPY) and investing in other currencies
including the Icelandic krona (ISK).
Appendix 2 depicts the total return associated with
various currencies, relative to the U.S. dollar, during
the most recently completed calendar quarter. The
Icelandic krona (ISK) turned in the best return
(+6.11%) for the quarter. This was followed by the
700
750
800
850
900
950
1,000
1,050
1,100
1,150
Jan-0
7
Jul-
07
Jan-0
8
Jul-
08
Jan-0
9
Jul-
09
Jan-1
0
Jul-
10
Jan-1
1
Jul-
11
Jan-1
2
Jul-
12
Jan-1
3
Jul-
13
CME JPY Index
Long Short14.3% EUR 100% JPY14.3% USD14.3% GBP 14.3% CHF 14.3% CAD14.3% AUD14.3% CNY
-8%
-6%
-4%
-2%
0%
2%
4%
6%
8%
USD-JPYUSD-TRYUSD-BRLUSD-ZARAUD-USDUSD-CLPUSD-CADUSD-COPUSD-TWDNZD-USD
USDUSD-RUBUSD-MXNUSD-CHFEUR-USDUSD-CNYGBP-USDUSD-KRWUSD-ARSUSD-INRUSD-ISK
Carry Return (Q4 2013)
10 | Currency Market Monitor 4th Quarter 2013 | January 6, 2014 | © CME GROUP
Indian rupee (INR) at +3.68%, the Argentine peso
(ARS) at +3.54%, the South Korean won (KRW) at
+3.06% and the British pound (GBP) at +2.43%.
On the negative side of the ledger, the Japanese yen
(JPY) posted a return of -6.66%, the Turkish lira
(TRY) checked in at -4.08% with the Brazilian real
(BRL) at -3.93%, the South African rand (ZAR) at -
3.81% and the Chilean peso (CLP) at -2.80%.
Because the carry trade has become such an
important and widely followed transaction in the
global FX markets, CME Group has developed the
CME FX Carry Index.
This novel index is designed to follow the
performance of a basket of currencies that offer
relatively high interest rates and have, at least on
an historical basis, generated favorable total returns. 14 The CME FX Carry Index closed the 4th quarter at
808.21 and off 4.2% from its 3rd quarter ending
value of 843.70. The Index was further down
12.4% from its ending 2012 value of 922.27. This
reflects the general poor performance of EM
currencies vs. the USD and EUR during 2013.
14 The CME FX Carry Index represents a basket of equally
weighted positions (as of December 31, 2010) which is effectively long a basket including the Australian dollar (AUD), Brazilian real (BRL), Mexican peso (MXN), New Zealand dollar (NZD), South African rand (ZAR) and Turkish lira (TRY) vs. short positions in the USD and EUR. It is (arbitrarily) established at a value of 1,000.00 as of December 31, 2010. The long components of the CME FX Carry Index were selected in light of the high local interest rates that prevailed in those countries during the post-financial crisis era through 2010. The short components of the index were identified because of the low interest rates offered.
Purchasing Power Parity
The theory of purchasing power parity (PPP) dates to
the 16th century and the School of Salamanca but
was further developed in the early 20th century by
economist Gustav Cassel. 15 The theory is based
upon the assumption that exchange rates are in
equilibrium when purchasing power is equivalent in
the two countries.
On a granular level, PPP is based on the “law of one
price” or the notion that identical products should be
priced at the same level in different national markets
adjusted for exchange rates. Typically, this law is
qualified by the absence of significant trade barriers
or other artificial constraints on commerce.
But the theory of PPP expands the application of the
law of one price from any single good or product to
generalized prices in any particular economy as
measured by inflation indexes, e.g., Consumer Price
Index (CPI) or Producer Price Index (PPI). The
implication of this theory is that inflation rates and
exchange rates should exhibit negative correlation.
If inflation increases
� Currency value should decline
If inflation decreases
� Currency value should advance
Thus, if inflation as measured by an inflation index
increases, the value of the currency should generally
decline to maintain price equilibrium. Similarly, if
inflation declines, the value of the currency should
advance.
The theory of PPP is closely related to another
classic theory that addresses exchange rate values
known as the International Fisher Effect (IFE). This
theory suggests that the disparity between nominal
interest rates in two countries drive the future path
of exchange rates.
Per this theory, one might expect that the value of a
currency with a low nominal interest rate might
increase into the future. Or that the value of a
currency with high nominal rate might decline.
15 See Cassel, Gustav, “Abnormal Deviations in
International Exchanges” (December 1918).
700
750
800
850
900
950
1,000
1,050
Jan-0
7
Jul-
07
Jan-0
8
Jul-
08
Jan-0
9
Jul-
09
Jan-1
0
Jul-
10
Jan-1
1
Jul-
11
Jan-1
2
Jul-
12
Jan-1
3
Jul-
13
CME FX Carry Index
Long Short16.7% BRL 50% USD16.7% AUD 50% EUR16.7% ZAR 16.7% NZD16.7% TRY16.7% MXN
11 | Currency Market Monitor 4th Quarter 2013 | January 6, 2014 | © CME GROUP
IFE further assumes that real interest rates (i.e., the
risk-free interest rate less inflation) should generally
be equal across countries. This implies that nominal
interest rates and inflation are positively correlated.
If inflation increases
� Rates
increase �
Currency value should decline
If inflation decreases
� Rates
decrease �
Currency value should advance
The IFE suggests interest rates and exchange
negatively correlated. Similarly, PPP suggests
inflation and exchange rates are negatively
correlated. As such, the IFE theory is generally
consistent with the PPP theory.
Putting the classic theory of purchasing power parity
into practice requires a measurement of inflation in
order to calculate the proportion by which any
particular currency is (theoretically) over- or under-
valued relative to the norm. There are three popular
methodologies that have been referenced in this
regard.
• OECD - The Organization for Economic Co-
operation and Development (OECD) provides data
that is useful in this regard by comparing price
changes in a representative basket of goods in
various countries.
• Bloomberg - Bloomberg offers an analytical tool
that is grounded in a very long-term assessment
of inflation, as measured by either CPI or PPI in
various countries extending from January 1982
through June 2000.
• Big Mac - Finally, the Economist’s “Big Mac PPP”
methodology compares the price of a (almost)
universally available product with verifiable pricing
in the form of the McDonald’s Big Mac hamburger
in various countries.
Actually, all three methodologies may readily be
referenced on Bloomberg quotation devices.
Appendix 3 below provides data from all three
methods. Further, we have taken the average of
the three assessments (where available) for a
variety of national currencies and rank-ordered the
set from most over-valued to most under-valued.
The Swiss franc (CHF) at 34.85% is identified as the
most over-valued currency, per these
methodologies, relative to the USD. Other highly
valued currencies include the Norwegian krone
(NOK) at +29.27%; the Danish krone at +18.76%;
the New Zealand dollar (NZD) at +18.11% and the
Australian dollar (AUD) at +14.71%.
The Brazilian real (BRL) was once again a “big
mover” in this regard as its purchasing power has
fallen from +17.51% to +6.19% to +0.84% from
the 2nd to 3rd to 4th quarters per these measures.
Under-valued currencies, per our analysis, include
the South African rand (ZAR) at -65.42%; the
Turkish lira (TRY) at -56.04%; the Polish zloty (PLN)
at -54.97%; the Mexican peso at -53.51%; and, the
Malaysian ringgit at -52.52%.
One might recommend creating “baskets” of several
currencies to buy and sell on the basis of this
analysis in order to diversify risks to a certain
extent. However, it is important to recognize that
currencies might remain in apparent states of over-
or under-valuation for extended periods of time. In
fact, the carry trade as discussed above, takes a
completely opposite approach to the classic PPP
theory by buying high-rate currencies and shorting
low-rate currencies.
Impact of Commodities
As a general rule, the nations whose currencies have
remained top performers over the past decade may
be identified as those whose national income is tied
heavily to commodity production.
Commodity prices had generally advanced, often
sharply, over the past decade as seen in the rise in
the value of energy, grain, livestock, precious metals
and industrial metals. These price advances have
largely been driven by emerging market demand in
nations including China and India.
However, those trends have, if not reversed,
certainly corrected over the past year. Gold values
fell sharply during 2013 to the extent that economic
recovery in the developed economies led to much
reduced economic anxiety. Note, of course, that
gold is much valued, particularly during periods of
heightened economic stress as a monetary surrogate
of sorts. West Texas Intermediate (WTI) crude oil
closed the year at $100.32 per barrel and up from
12 | Currency Market Monitor 4th Quarter 2013 | January 6, 2014 | © CME GROUP
its year-end 2012 value of $90.80 but nonetheless
off its September 2013 peak of $110.53.
Grain values including corn, soybeans and wheat
generally fell a bit on a productive growing season
coupled with moderating global demands.
CME Group has developed the CME FX Commodity
Country Index to follow the performance of a basket
of currencies from nations that rely heavily upon the
exportation of commodities and other raw materials.
To the extent that commodities have been in great
demand over much of the past decade, these
currencies have, on a historical basis, generated
favorable total returns. 16
16 The CME Commodity Country Index is constructed to be
effectively long Australian dollar (AUD), Brazilian real (BRL), Canadian dollar (CAD), Norwegian krone (NOK),
The CME FX Commodity Country Index fell to 857.91
and off 3.2% from its 3rd quarter value of 886.53.
This represents a decline of 10.0% decline for the
year 2013 from its year-end 2012 value of 953.60.
This performance is a reflection of the generally
tepid performance of commodity markets in 2013.
CME Group has further developed the CME FX BRIC
Index to follow the performance of select “emerging
market” economies and their national currencies,
namely the Brazilian real (BRL), Russian ruble
(RUB), Indian rupee (INR) and Chinese yuan (CNY),
New Zealand dollar (NZD) and South African rand (ZAR) vs. a short position in the U.S. dollar (USD). It is (arbitrarily) established at a value of 1,000.00 as of December 31, 2010.
$600
$800
$1,000
$1,200
$1,400
$1,600
$1,800
$2,000
$20
$40
$60
$80
$100
$120
$140
$160
Jan-0
7
Aug-0
7
Mar-
08
Oct-
08
May-0
9
Dec-0
9
Jul-
10
Feb-1
1
Sep-1
1
Apr-
12
Nov-1
2
Jun-1
3
Gold
($ p
er
troy o
z)
Cru
de O
il (
$ p
er
Bbl
Crude Oil & Gold
Crude Oil Gold
Source: Bloomberg
$2
$4
$6
$8
$10
$12
$14
$16
$18
Jan-0
7
Jul-
07
Jan-0
8
Jul-
08
Jan-0
9
Jul-
09
Jan-1
0
Jul-
10
Jan-1
1
Jul-
11
Jan-1
2
Jul-
12
Jan-1
3
Jul-
13
$ p
er
Bushel
Grains
Corn Soybeans Wheat
Source: Bloomberg
650
700
750
800
850
900
950
1,000
1,050
1,100
Jan-0
7
Jul-
07
Jan-0
8
Jul-
08
Jan-0
9
Jul-
09
Jan-1
0
Jul-
10
Jan-1
1
Jul-
11
Jan-1
2
Jul-
12
Jan-1
3
Jul-
13
CME FX Commodity Country Index
Long Short16.7% AUD 100% USD16.7% BRL 16.7% CAD 16.7% NOK16.7% NZD16.7% ZAR
800
840
880
920
960
1,000
1,040
1,080
1,120
Jan-0
7
Jun-0
7
Nov-0
7
Apr-
08
Sep-0
8
Feb-0
9
Jul-
09
Dec-0
9
May-…
Oct-
10
Mar-
11
Aug-1
1
Jan-1
2
Jun-1
2
Nov-1
2
Apr-
13
Sep-1
3
CME FX BRIC Index
Long Short25% BRL 100% USD25% RUB 25% INR 25% CNY
13 | Currency Market Monitor 4th Quarter 2013 | January 6, 2014 | © CME GROUP
that have created much of the demand for
commodities in the world today. 17
The CME FX BRIC Index ended the year 2013 at
858.26 and off 1.46% from its 3rd quarter mark of
870.99. This represents a decline of 6.8% from its
year-end 2012 value of 920.65. These negative
results further reflect the general deceleration of
emerging market growth.
Conclusion
CME offers a broad array of currency futures and
option contracts covering a wide range of currency
pairings (where one side is the U.S. dollar) and
cross-rate pairings (which do not involve the U.S.
dollar).
These products provide facile and liquid vehicles
with which one may express a view on prospective
market movements. Or, to manage the risks
associated with currency holdings or international
investments during turbulent times.
17 The CME BRIC Index is constructed of equal weightings
of long Brazilian real (BRL), Russian ruble (RUB), Indian rupee (INR) and Chinese yuan (CNY) vs. a short position in the U.S. dollar (USD). Like other CME FX indexes discussed above, the BRIC Index was equally weighted and calibrated to equal an arbitrary 1,000.00 as of December 31, 2010.
14 | Currency Market Monitor 4th Quarter 2013 | January 6, 2014 | © CME GROUP
Appendix 1: Summary of World Economic Conditions
Australia Brazil Canada
Growth,
Inflation
& Fiscal
Policy
Australia’s economy has weakened since the days of the commodity boom. Problems may
persist into 2014 with low gold prices potentially leading to mine closures.
Economic growth may move incrementally higher in 2014. Risks remain due to public
unrest surrounding a lack of perceived progress with many government services
against a backdrop of hosting the World Cup and the Olympics.
Canada is benefiting from the continued jobs expansion in the US. On the negative side, the domestic oil sector has some challenges
and delays in the US decision on the Keystone pipeline are not helping economic confidence.
Monetary
Policy
Short-term interest rates have been lowered to cushion economic growth without fear of
inflation pressures accelerating. Further rate declines could keep the currency on a
weakening path.
The short-term SELIC rate has been raised to help stabilize the currency. Any currency
strength that might emerge in 2014 could be met with rate cuts.
Canada’s rates are low. There are no inflation pressures. The Bank of Canada seems
comfortable with the current set of policies, at least so long as the US keeps its federal funds
rate near zero.
Special
Factors
The Australian dollar was once a favorite for the long-side of the carry trade. With lower rates, China risk, weak-to-stable commodity
prices, and less than favorable comparisons to New Zealand, the bloom may remain off the
Aussie dollar.
Brazil hosts the World Cup in 2014 and the Olympics in 2016. How political uncertainties
are resolved ahead of these high profile events is the major risk factor for the currency.
Rate differentials with the US are too small to support the Canadian dollar. The big risks are in the energy sector. Weaker oil prices or a US decision against the Keystone pipeline
would probably hurt the currency.
China European Union India
Growth,
Inflation
& Fiscal
Policy
Economic growth in 2013 ran about 7.6% in real GDP terms. China may squeeze out 6.5%
to 7% real GDP growth in 2014, as the economy avoids a hard landing but continues
to face challenges in its transition to a domestic demand growth model.
Europe appears to have stabilized and may even show some incremental economic growth
in 2014. Challenges remain with an under-capitalized banking sector holding back a return to more robust economic activity.
Like China and Brazil, India saw a rapid deceleration of economic growth in 2012 and 2013. To tackle the current account deficit,
tariffs have been raised on gold imports. Large energy and food subsidies, though,
remain a big challenge for the Government.
Monetary
Policy
Monetary policy remains in flux as China tries to curtail past rapid expansion of credit while also pushing for more rapid development of
financial institutions, including derivative markets.
The ECB may become more aggressive in supervising banks in 2014 as it is pushed into taking the lead in EU-wide financial reform. Rates are likely to remain on hold. Liquidity will be made available to banks as needed.
India has installed a new head of the central bank with a mission to reform the financial
sector. Only time will tell, but the new direction is a welcome change for the currency
markets.
Special
Factors
China’s new leadership has moved to relax the one-child policy and make moving from the
rural to the urban sector easier. For 2014 and 2015, China may speed up the pace toward
normalizing the currency.
Leadership in the European Union is weak. Germany held elections in September, but it
took three months for Chancellor Merkel to put together a coalition Government. France’s
President ranks extremely low in the opinion polls. The Euro carries considerable political
risk going into 2014.
The Indian rupee was very weak in the second and third quarters of 2013, before stabilizing in the fourth quarter. With the trade balance
potentially narrowing a little and financial reforms on the way, the rupee has a chance to
reverse course and appreciate, but only if global markets embrace greater risk taking.
15 | Currency Market Monitor 4th Quarter 2013 | January 6, 2014 | © CME GROUP
Appendix 1: Summary of World Economic Conditions, cont.
Japan Mexico Russia
Growth,
Inflation
& Fiscal
Policy
Japan faces a big hike in its national sales tax in April 2014. This is expected to lead to
anticipatory spending in the January-March 2014 quarter, and then negative real GDP
afterwards.
With economic growth in the US economy continuing at a healthy pace, Mexico should
benefit from increased trade with its partner to the north.
Elevated crude oil prices have benefitted Russia’s economy, but an aging population and a difficult
environment for foreign investment suggest slower economic growth in the years to come. There are key recent signs, though, of Russia
attempting to become friendlier to foreign investment.
Monetary
Policy
The Bank of Japan is pursuing the largest quantitative easing (asset purchase) program
relative to GDP ever attempted to raise inflation and economic growth. Inflation is
ticking upward, mostly in response to past yen weakness.
Currency strength in 2012 helped to reduce inflation pressures. Recent currency weakness in 2013, however, threatens the progress on inflation. Central bank policy is probably on
hold for now.
Russia has accumulated a large quantity of foreign reserves giving the authorities some firepower to counter any ruble weakness, if they so choose,
during periods of oil market weakness.
Special
Factors
A 2% inflation target by the Bank of Japan is not likely to be achieved in a short time frame unless there is further yen depreciation toward the 120-140 yen/dollar rate. Nothing moves
in a straight line, though, and the coming sales tax hike adds considerable risks to the timing
of any scenario.
Mexico’s currency emerged as one of the favorites for the long-side of the carry trade
versus the Japanese yen, but only in “risk-on” markets. Conditions in 2014 suggest the
possibility for a peso rebound if a “risk-on” climate returns to global markets.
Russia’s energy supply dominance of Europe is being challenged by increased oil and natural gas supplies around the globe. If the link in Europe
between natural gas pricing and Brent oil is broken, this could hit Russian government
revenues quite hard.
Switzerland United Kingdom United States
Growth,
Inflation
& Fiscal
Policy
Switzerland will benefit in 2014 from Europe’s stabilization. Moreover, stronger growth in the
US may also help exports.
The UK has a very strong housing market and prospects for solid economic growth in 2014. Fiscal policy is less restrictive than in the past few years as the Government looks ahead to
elections in 2015.
The US economy appears poised for robust growth in 2014 as the post-crisis deleveraging fades into history and fiscal stability is achieved faster than expected. The Federal budget deficit may decline below 3% of GDP in FY2014 and be balanced on
an operating basis in FY2015.
Monetary
Policy
As the EU debt crisis has morphed into a long-term banking capital adequacy problem, the
Swiss have little flexibility, and they are likely continue to keep a lid on the Swiss franc
relative to the euro.
The Bank of England has indicated it plans to keep rates low and focus its efforts on financial
supervision. A stronger economy than expected by the BoE and some emerging
inflation pressure could change that guidance during 2014.
The Federal Reserve has announced that the US economy no longer needs emergency life support, and the tapering of QE has begun. Even with a
declining unemployment rate, the Fed has made it clear it will keep its zero federal funds rate policy in place until it sees some inflation pressure, and
there is none in sight yet.
Special
Factors
The post-2008 financial crisis has led to increased regulation of financial institutions all
over the world. On net, this increased regulation poses additional challenges for the
traditional model of Swiss secrecy and the overall role of Switzerland in the world’s
financial system.
Tensions between the UK and the European Union are likely to intensify, especially over
the push by the EU to impose financial transaction taxes. As the UK outperforms the Euro-zone economically, the possible scenario for pound strength versus the euro may come
into play in 2014.
The US dollar is not a strong currency, but other major currencies are challenged as well. Markets may start to focus as 2014 progresses on which country might raise rates first in 2015. For now,
the UK is the leading contender, the US and Eurozone in the middle, with little probability of
rate rises in Japan for a much longer time.
16 | Currency Market Monitor 4th Quarter 2013 | January 6, 2014 | © CME GROUP
Appendix 2: Select Currency Performance (4th Quarter 2013)
Currency Ticker Spot Quote
(12/31/13) Quote
Convention 3-Mth Rates
(12/31/13)
4th Quarter 2014 2014 Year-to-Date
Total
Return1
Spot
Return2
Interest
Return3
Total
Return1
Spot
Return2
Interest
Return3
Argentine Peso USD-ARS 6.5197 USD per 1 ARS 20.20% 3.54% -11.17% 16.56% 19.70% -24.61% 58.77%
Australian Dollar AUD-USD 0.8918 AUD per 1 USD 2.64% -3.65% -4.29% 0.67% -11.72% -14.21% 2.90%
Brazilian Real USD-BRL 2.3621 USD per 1 BRL -3.93% -6.14% 2.36% -6.73% -13.15% 7.39%
British Pound GBP-USD 1.6556 GBP per 1 USD 0.50% 2.43% 2.30% 0.12% 2.36% 1.86% 0.49%
Canadian Dollar USD-CAD 1.0623 USD per 1 CAD 1.21% -2.68% -2.96% 0.29% -5.55% -6.61% 1.13%
Chilean Peso USD-CLP 525.45 USD per 1 CLP -2.80% -3.95% 1.20% -3.85% -8.80% 5.43%
China Renminbi USD-CNY 6.0556 USD per 1 CNY 7.50% 1.81% 1.10% 0.71% 7.07% 2.91% 4.04%
Colombian Peso USD-COP 1,923.00 USD per 1 COP -0.41% -1.22% 0.82% -5.13% -8.42% 3.59%
Euro EUR-USD 1.3743 EUR per 1 USD 0.23% 1.64% 1.60% 0.05% 4.31% 4.17% 0.14%
Icelandic Krona USD-ISK 115.18 USD per 1 ISK 5.95% 6.11% 4.51% 1.52% 17.71% 11.15% 5.90%
Indian Rupee USD-INR 61.8000 USD per 1 INR 8.90% 3.68% 1.32% 2.33% -2.51% -11.01% 9.55%
Japanese Yen USD-JPY 105.31 USD per 100 JPY 0.11% -6.66% -6.69% 0.03% -17.52% -17.62% 0.12%
Mexico Peso USD-MXN 13.0453 USD per 1 MXN 3.79% 1.18% 0.42% 0.76% 1.98% -1.41% 3.43%
New Zealand Dollar NZD-USD 0.8210 NZD per 1 USD 2.93% -0.33% -1.04% 0.71% 1.95% -0.89% 2.87%
Russian Ruble USD-RUB 32.9000 USD per 1 RUB 7.00% 0.21% -1.46% 1.69% -0.55% -7.13% 7.09%
South Africa Rand USD-ZAR 10.4925 USD per 1 ZAR 5.15% -3.81% -4.43% 0.65% -17.12% -19.24% 2.62%
South Korean Won USD-KRW 1,052.85 USD per 1 KRW 2.58% 3.06% 2.37% 0.68% 3.74% 1.39% 2.32%
Swiss Franc USD-CHF 0.8922 USD per 1 CHF -0.04% 1.33% 1.34% -0.01% 2.50% 2.52% -0.02%
Taiwanese Dollar USD-TWD 29.830 USD per 1 TWN 0.87% -0.38% -0.60% 0.22% -1.76% -2.60% 0.86%
Turkish Lira USD-TRY 2.1480 USD per 1 TRY 9.48% -4.08% -6.04% 2.09% -10.76% -16.97% 7.90%
United States Dollar USD 1.0000 USD 0.23% 0.06% - 0.06% 0.27% - 0.27%
Notes
(1) Return from price movement and interest (2) Return from currency price movement vs. USD as “base currency”
(3) Return from interest at prevailing 3-month rates or implied NDF rate
Source: Bloomberg
17 | Currency Market Monitor 4th Quarter 2013 | January 6, 2014 | © CME GROUP
Appendix 3: Purchasing Power Parity (“PPP”) Analysis (as of 12/31/13)
% Over/Under Valued
Currency ISO
Code Average OECD
Bloomberg
(CPI)
Bloomberg
(PPI) Big Mac
Swiss Franc CHF 29.57% 34.85% 23.14% 9.96% 50.32%
Norwegian Krone NOK 29.27% 30.10% 8.35% 49.35%
Danish Krone DKK 18.76% 28.09% 18.63% 18.11% 10.21%
New Zealand Dollar NZD 18.11% 15.02% 29.17% 36.64% -8.40%
Australian Dollar AUD 14.71% 25.87% 25.06% 19.94% -12.04%
Swedish Krona SEK 12.37% 24.75% -5.78% -3.34% 33.85%
Icelandic Krona ISK 11.72% 11.72%
Euro EUR 10.13% 4.76% 17.39% 13.87% 4.49%
Canadian Dollar CAD 8.07% 14.33% 10.38% -0.29% 7.87%
British Pound GBP 5.11% 11.41% 15.12% 3.49% -9.58%
Brazilian Real BRL 0.84% 0.84%
Colombian Peso COP -9.93% -9.93%
Japanese Yen JPY -16.77% 2.14% -16.71% -13.59% -38.93%
Singapore Dollar SGD -20.85% -20.85%
Chilean Peso CLP -23.45% -23.45%
South Korean Won KRW -24.44% -24.80% -24.07%
Czech Koruna CZK -26.95% -26.95%
Argentina Peso ARS -31.41% -31.41%
Thai Baht THB -41.43% -41.43%
Chinese Renminbi CNY -41.51% -41.51%
Phillipines Peso PHP -45.85% -45.85%
Russian Ruble RUB -47.13% -47.13%
Hungarian Forint HUF -47.70% -77.57% -17.82%
Indonesian Rupiah IDR -49.45% -49.45%
Hong Kong Dollar HKD -51.90% -51.90%
Malaysian Ringgit MYR -52.52% -52.52%
Mexican Peso MXN -53.51% -67.80% -39.22%
Polish Zloty PLN -54.97% -70.23% -39.70%
Turkish Lira TRY -56.04% -95.63% -16.44%
South African Rand ZAR -65.42% -65.42%
Notes
Please note that data regarding all countries is not generally available.
Source: Bloomberg
18 | Currency Market Monitor 4th Quarter 2013 | January 6, 2014 | © CME GROUP
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