Currency Market Outlook 1
Currency Markets Outlook certainly one lesson is that we should get used to periods of higher volatility Mario Draghi President of the European Central Bank ECB Press Conference 3 June 2015 Source: https://www.ecb.europa.eu/press/pressconf/2015/html/is150603.en.html 2
Global Policy Uncertainty is rising Politics is making the world more uncertain Fiscal policy is more complex than monetary Source: Source: policyuncertainty.com: Global EPU calculated as the GDP-weighted average of monthly EPU index values for the US, Canada, Brazil, UK, Ireland, Germany, Spain, France, Netherlands, Italy, Russia, India, China, South Korea, Japan, and Australia using GDP data fromthe IMF s World Economic Outlook Database. National EPU index values are from www.policyuncertainty.com and Baker, Bloom and Davis(2016). Each national EPU Index is renormalised to a mean of 100 from 1997 to 2015 before calculating the Global EPU Index. Source: Goldman Sachs Global Investment Research 3
1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 GBP EU exit concerns remain the key concern The economic data post-brexit vote was surprisingly good, but now expectations have caught up with reality Large current account deficit (~6%/GDP) could drag the UK into a balance of payment crisis Substantially weaker pound will lead to import price inflation, likely leaving the Bank of England little room for manoeuvre Headline Economic Surprises have caught up to reality* 200 150 100 50 0-50 -100-150 -200-250 Economic Surprise Index Data Index Consensus Index Large and Deteriorating Current Account Deficit** 0-1 -2-3 -4-5 -6 * Source: Citigroup as of 30 December 2016 ** Source: Bloomberg, UK Office for National Statistics (ONS) as of 30 September 2016 UK Current Account Balance as a Percent of GDP EMPRES-7214 4
1973 1975 1976 1978 1979 1981 1982 1984 1986 1987 1989 1990 1992 1994 1995 1997 1998 2000 2001 2003 2005 2006 2008 2009 2011 2013 2014 2016 The US Dollar The US dollar rally is unlikely to have run its course based on history The Chair of the Federal Reserve, Janet Yellen s term expires February 2018 who will Trump replace her with? US Dollar Cycles After the Bretton Woods System 160 150 140 From To Duration (Yrs) Return (%) 130 120 110 100 90 80 70 60? Oct 78 Mar 85 6.4 56 Mar 85 Apr 95 10.1-44 Apr 95 Feb 02 6.8 40 Feb 02 Aug 11 9.5-38 Average 8.2 +/- 45 Current Aug 11 Sep 16 5.1 31 USD Trade Weighted Effective Exchange Rate Index Average Source: Bloomberg Finance L.P., SSGA as of 30 December 2016. Past performance is not an indication of future results. EMPRES-7214 5
The Euro The economic picture remains mixed some improvement in growth and employment, but inflation expectations are trending lower Significant political risk with elections this year in the Netherlands, France and Germany and potentially Italy Greece s bailout still not finalised while the European Central Bank must decide later this year whether to extend its QE programme can it be sure that deflation is no longer on the horizon? Some Signs of Improvement, if slow* 14.00 12.00 10.00 8.00 6.00 4.00 2.00 0.00-2.00-4.00-6.00-8.00 Market Inflation Expectations ** * Source: Bloomberg Finance L.P., Eurostat as of 30 December 2016. ** Source: SSGA, Bloomberg Finance L.P., as of 30 December 2016. The expectations above are estimates based on certain assumptions and analysis. There is no guarantee that the estimates will be achieved. 3.00 2.80 2.60 2.40 2.20 2.00 1.80 1.60 1.40 1.20 Euro Area Real GDP (%) Euro Area Unemployment (%) 1.00 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 EUR Inflation Swap 5y5y Forward EMPRES-7214 6
Japanese Yen In September 2016, the Bank of Japan announced a shift of focus from rate cuts and QE to yield targeting aiming to achieve a yield close to 0% on the 10-year JGB This helped inflation expectations turn higher By keeping interest rates in a tight range, the currency could operate as the pressure valve for the economy The yen remains undervalued, limiting Japan s ability to conduct additional monetary easing, unless domestic conditions deteriorate Japanese Bond Yields and Inflation Expectations 0.6 0.5 0.4 0.3 0.2 0.1 0-0.1-0.2-0.3-0.4 10yr JGB yield Japan 5y5y fwd inflation swap Source: Bloomberg Finance L.P., SSGA as of 30 December 2016. Past performance is not an indication of future results. The expectations above are estimates based on certain assumptions and analysis. There is no guarantee that the estimates will be achieved. 7