Us Dollar Outlook

transcript

US Dollar Outlook

Kathy Lien and Boris Schlossberg

Directors of Currency Research

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Agenda

Big Moves in the FX Market

Headed to ZIRP

Outlook for the US Economy

China: Obama’s New Strategy

Eurozone Stress

UK Mess

No Yen for Japan

Who will bounce back first?

Outlook for EUR/USD, GBP/USD, USD/JPY

The US Dollar

Skyrocketing since July 2008

EUR/USD

KSource: Dealbook

GBP/USD

KSource: Dealbook

EUR/JPY

KSource: Dealbook

GBP/JPY

KSource: Dealbook

USD/JPY

KSource: Dealbook

Relative Performance - USD

Source: Bloomberg

Relative Performance - JPY

Revenge of the Low Yielders

Source: Bloomberg

Volatility Has Surged

Source: Bloomberg

PPP - CPI

Source: Bloomberg

What happened?

The Path Towards Global ZIRP

BSource: GFT

Because price levels are collapsing.

Oil vs. CPI

BSource: GFT

What are the Drivers?

CPI Case-Shiller Used Instead of Owners Equivalent Rent source http://globaleconomicanalysis.blogspot.com/

BSource: GFT

What are the Drivers?

Yield No Longer Matters

The only question for FX:who will rebound first?

Recession vs. Depression

Recession: When your neighbor loses his job

Depression: When you lose your job

Great Depression of 1929

1. Unemployment at 25% (now 7.5%)

2. GDP at $7.5 trillion (now $13T)

3. Deflation - CPI at -10% (now +0.1%)

4. House prices dropped 25% (now -10%)

5. World trade declined 65%

6. Stocks dropped 40% from Sept to Oct and down 90% by 1932

(down 43% since 2007)

US Economy

Recession

1. Defined as when GDP growth slows, businesses stop expanding, unemployment rises and house prices decline.

2. Managed contraction in GDP.

3. Brought on by tight interest rates, ends when CB eases

4. Lower rates help boost liquidity

Depression

1. Defined as a downturn that lasts several years

2. Unmanaged economic contraction where monetary policy ceases to work as rates hit zero

3. Further rate cuts impossible

4. Prices drop as demand falls

5. Deflationary expectations set in

6. Cannot self-correct since they are structural problems

US Economy

How long do recessions last?

Protectionism

Buy American Bill:Allows companies to buy only

US-manufactured steel and iron

Source: berklube.com

US Economy

Can we spend our way out of a recession?

• $900B Stimulus Package - Keynesian Economics

• Focused on energy, education and health care

• How will we pay for it? > Raise taxes and/or print money

• Raise Taxes – Robbing Peter to pay Paul

• Print Money – Rob Paul to Pay Paul back with devalued $

• What we need is INNOVATION

US Economy

Can we spend our way out of a recession?

Source: Bianco Research / East Coast Economics

• Consequences of branding China as a currency manipulator

• China has $1.94 Trillion in FX Reserves- $900 B estimated to be in US Treasuries

Agencies Have

Government

Backing

Source: Brad Setser

Growth

• Q4 growth was 6.8%,

• 2008 growth was 9% (7-year low)

• Can China make its 8% growth target?

• Minimum that China needs to create enough jobs

Source: National Bureau of Statistics of China

Ramifications for the US Dollar

• In past recessions, $ tends to fall in first six months, rises in next six months

• No pattern beyond 12 months

• 1980s recession

Source: Bloomberg

Euro Stress

Is Trichet too slow?

Source: DealBook

Euro Stress

Part of dollar’s strength is due to the fact that Euro is losing viability.

Can a currency without a country survive a steep economic

downturn?

UK Mess

The hedge fund economy blows up…

Source: Bloomberg

UK Mess

…but maybe it’s hit bottom.

Source: Bloomberg

UK Mess

Has EUR/GBP topped?

Source: Dealbook

No Yen For Japan

Industrial Production Falls at Fastest Pace Since Great Depression

Source: Bloomberg

No Yen For Japan

Toxic combination of strong Yen and collapsing global demand.

Will BOJ Intervene?Will it Work?

No Yen For Japan

Source: Dealbook

Carry Trades

Is Mrs. Watanabe turning short?

Source: Tokyo Financial Exchange

Key question: Who will bounce back first?

Recovery

Outlook for the Majors

EUR/USD Up-Down?

UP DOWN

EZ economy stabilizes as North/South nations create a coordinated plan of action and faith in the currency is restored.

US economy responds to stimulus, first to rebound from

global recession.

US Treasury Auction fails as investors refuse to absorb any more US Sovereign debt capital flight ensues.

EZ union nears collapse as economic stress creates

political backlash, member sovereign credits come under

assault.

Global capita markets rally, risk assumption returns as doomsday fears dissipate.

Dollar remains repository of safe haven funds as global

economy remains mired in a protracted recession.

GBP/USD Up-Down?

UP DOWN

UK economy stabilizes – PMI’s a clue? Quick monetary and fiscal response, lower pound yield positive results.

UK economy remains stuck at very low production rates as demand is curbed due to persistently high jobless rate and growing debt burdens.

Global capital markets stage a rally. London resumes its role as the financial intermediary to the world.

Global capital markets remain bearish – BOTH equities and fixed income continue to fall.

Capital leaves the dollar on US financial concerns.

High leverage of UK consumers and massive

issuance of sovereign debt trigger capital flight.

USD/JPY Up-Down?

UP DOWN

US economy bounces, Dow rises, US 2-year rates increase to 3.5% reviving demand for carry and yield.

Risk Aversion reigns supreme, Dow dives to 6000

or lower.

Japanese economy recovers slightly prompting return of risk appetite.

US economic fortunes do not improve, credit contraction

creates massive deflation of US assets.

BOJ intervenes as strong yen hurts exporters.

Repatriation of Japanese funds continues unabated as

world sits at ZIRP.

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